false--12-31FY2019false00000405458702227000870222700087022270008738434000873843400087384340001300000000070000000000.06750.1600.6500.4700.1350.0600.2100.3000.035320000005370000003100000033500000011500000029000000260000004100000035500000098000000600000032000000593987559398755939875593987559398755939875P40YP10YP20YP8YP1YP4YP20YP20YP35YP20YP40YP15YP15YP15YP15YP1Y11110000005430000002800000081000000261000000089000000400000060000008520000009000000200000011000000P3Y120000000006500000000
United States Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-K
☑Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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(Mark One) |
| For the fiscal year ended December 31, 2019 Commission file number 001-00035 GENERAL ELECTRIC COMPANY þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 2018 |
or |
¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from ___________to ___________ |
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Commission file number 001-00035 |
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General Electric Company
(Exact name of registrant as specified in its charter)
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| New York | | | | 14-0689340 |
| (State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
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41 Farnsworth5 Necco Street, | Boston | MA | | 02210 | | (617) 443-3000 |
| (Address of principal executive offices) | | (Zip Code) | | (Telephone No.) |
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(Registrant’s telephone number, including area code)(617) 443-3000
Securities Registered Pursuant to Section 12(b) of the Act: |
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock, par value $0.06 per share | GE | New York Stock Exchange |
| Floating Rate Notes due 2020 | GE 20E | New York Stock Exchange |
| 0.375% Notes due 2022 | GE 22A | New York Stock Exchange |
| 1.250% Notes due 2023 | GE 23E | New York Stock Exchange |
| 0.875% Notes due 2025 | GE 25 | New York Stock Exchange |
| 1.875% Notes due 2027 | GE 27E | New York Stock Exchange |
| 1.500% Notes due 2029 | GE 29 | New York Stock Exchange |
| 7 1/2% Guaranteed Subordinated Notes due 2035 | GE /35 | New York Stock Exchange |
| 2.125% Notes due 2037 | GE 37 | New York Stock Exchange |
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| Securities Registered Pursuant to Section 12(g) of the Act: |
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| (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesþ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨Noþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10‑K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerþ | ☑ | Accelerated filer ¨ | ☐ |
Non-accelerated filer ¨ | ☐ | Smaller reporting company ¨ | ☐ |
Emerging growth company ¨ | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No þ
The aggregate market value of the outstanding common equity of the registrant not held by affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was at least $116.2$90.1 billion. There were 8,705,080,1008,740,232,000 shares of voting common stock with a par value of $0.06 outstanding at January 31, 2019.2020.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant’s Annual Meeting of Shareowners,Shareholders, to be held May 8, 2019,5, 2020, is incorporated by reference into Part III to the extent described therein.
TABLE OF CONTENTS
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| TABLE OF CONTENTS | |
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Forward-Looking StatementsAbout General Electric | |
About General Electric | |
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| Capital Resources and Liquidity | |
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| Non-GAAP Financial Measures | |
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| Risk Factors | |
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| Management and Auditor's Reports | |
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| Statement of Earnings (Loss) | |
| Statement of Financial Position | |
| Statement of Cash Flows | |
| Statement of Comprehensive Income (Loss) | |
| Statement of Changes in Shareholders' Equity | |
| Note 1 Basis of Presentation and Summary of Significant Accounting Policies | |
| Note 2 Businesses Held for Sale and Discontinued Operations | |
| Note 3 Investment Securities | |
| Note 4 Current and Long-term Receivables | |
| Note 5 Financing Receivables and Allowances | |
| Note 6 Inventories | |
| Note 7 Property, Plant and Equipment and Operating Leases | |
| Note 8 Goodwill and Other Intangible Assets | |
| Note 9 Contract and Other Deferred Assets & Progress Collections and Deferred Income | |
| Note 10 All Other Assets | |
| Note 11 Borrowings | |
| Note 12 Insurance Liabilities and Annuity Benefits | |
| Note 13 Postretirement Benefit Plans | |
| All Other Liabilities | |
| Note 15 Income Taxes | |
| Note 16 Shareholders’ Equity | |
| Note 17 Share-Based Compensation | |
| Note 18 Earnings Per Share Information | |
| Note 19 Other Income | |
| Note 20 Fair Value Measurements | |
| Note 21 Financial Instruments | |
| Note 22 Variable Interest Entities | |
| Note 23 Commitments, Guarantees, Product Warranties and Other Loss Contingencies | |
| Note 24 Cash Flows Information | |
| Note 25 Intercompany Transactions | |
| Note 26 Operating Segments | |
| Note 27 Guarantor Financial Information | |
| Note 28 Baker Hughes Summarized Financial Information | |
| Note 29 Quarterly Information (unaudited) | |
| Forward-Looking Statements | |
| Directors, Executive Officers and Corporate Governance | |
Exhibits and Financial Statement Schedules | |
| Form 10-K Cross Reference Index | |
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FORWARD-LOOKING STATEMENTS | | |
FORWARD-LOOKING STATEMENTS
Our public communications and SEC filings may contain "forward-looking statements" - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "estimate," "forecast," "target," "preliminary," or "range."
Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about potential business or asset dispositions, including the planned sale of our BioPharma business within our Healthcare segment and plans to exit our equity ownership positions in Baker Hughes, a GE company (BHGE) and Wabtec, and the expected benefits to GE; our strategy and plans for the remaining portion of our Healthcare business, and the characteristics of that business in the future; capital allocation plans; GE’s and GE Capital’s capital structure, liquidity and access to funding; our de-leveraging plans, including leverage ratios and targets, the timing and nature of specific actions to reduce indebtedness, credit ratings and credit outlooks; divestiture proceeds expectations; future charges and capital contributions that may be required in connection with GE Capital’s run-off insurance operations or other GE Capital portfolio actions; revenues; organic growth; cash flows and cash conversion, including the impact of working capital, contract assets and pension funding contributions; earnings per share; future business growth and productivity gains; profit margins; the benefits of restructuring and other transformational internal actions; our businesses’ cost structures and plans to reduce costs; restructuring, goodwill impairment or other financial charges; tax rates; or returns on capital and investment.
For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
our success in executing and completing, including obtaining regulatory approvals and satisfying other closing conditions for, announced GE Industrial and GE Capital business or asset dispositions or other transactions, including the planned sale of our BioPharma business within our Healthcare segment and plans to exit our equity ownership positions in BHGE and Wabtec, the timing of closing for those transactions and the expected proceeds and benefits to GE;
our strategy and plans for the remaining portion of our Healthcare business, including the structure, form, timing and nature of potential actions with respect to that business in the future and the characteristics of the business going forward;
our capital allocation plans, as such plans may change including with respect to de-leveraging actions, the timing and amount of GE dividends, organic investments, and other priorities;
further downgrades of our current short- and long-term credit ratings or ratings outlooks, or changes in rating application or methodology, and the related impact on our liquidity, funding profile, costs and competitive position;
GE’s liquidity and the amount and timing of our GE Industrial cash flows and earnings, which may be impacted by customer, competitive, contractual and other dynamics and conditions;
GE Capital's capital and liquidity needs, including in connection with GE Capital’s run-off insurance operations, the amount and timing of required capital contributions, strategic actions that we may pursue, WMC-related claims, liabilities and payments, the impact of conditions in the financial and credit markets on GE Capital's ability to sell financial assets, GE Capital’s leverage and credit ratings, the availability and cost of GE Capital funding and GE Capital's exposure to counterparties;
customer actions or market developments such as secular and cyclical pressures in our Power business, pricing pressures in the renewable energy market, other shifts in the competitive landscape for our products and services, changes in economic conditions, including oil prices, early aircraft retirements and other factors that may affect the level of demand and financial performance of the major industries and customers we serve;
operational execution by our businesses, including our ability to improve the operations and execution of our Power business, and the continued strength of our Aviation business;
changes in law, economic and financial conditions, including the effect of enactment of U.S. tax reform or other tax law changes, trade policy and tariffs, interest and exchange rate volatility, commodity and equity prices and the value of financial assets;
our decisions about investments in new products, services and platforms, and our ability to launch new products in a cost-effective manner;
our ability to increase margins through implementation of operational changes, restructuring and other cost reduction measures;
the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including the impact of WMC, Alstom, SEC and other investigative and legal proceedings;
our success in integrating acquired businesses and operating joint ventures, and our ability to realize revenue and cost synergies from announced transactions, acquired businesses and joint ventures;
the impact of potential product failures and related reputational effects;
the impact of potential information technology, cybersecurity or data security breaches;
the other factors that are described in "Forward-Looking Statements" in BHGE’s most recent earnings release or SEC filings; and
the other factors that are described in the Risk Factors section of this Form 10-K report.
These or other uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements. This document includes certain forward-looking projected financial information that is based on current estimates and forecasts. Actual results could differ materially.
We areGeneral Electric Company (General Electric or the Company) is a leading global high-tech industrial company. Withcompany that operates worldwide through its four industrial segments, Power, Renewable Energy, Aviation and Healthcare, and its financial services segment, Capital. The Power segment offers technologies, solutions, and services related to energy production, including gas and steam turbines, generators, and power generation services. The Renewable Energy segment provides wind turbine platforms, hardware and software, offshore wind turbines, solutions, products and services ranging fromto hydropower industry, blades for onshore and offshore wind turbines, and high voltage equipment. The Aviation segment provides jet engines and turboprops for commercial and military airframes, maintenance, component repair, and overhaul services, as well as replacement parts, additive machines and materials, and engineering services. The Healthcare segment provides healthcare technologies in medical imaging, digital solutions, patient monitoring and diagnostics, drug discovery, biopharmaceutical manufacturing technologies and performance enhancement solutions. The Capital segment leases and finances aircraft, aircraft engines power generation and oilhelicopters, provides financial and gas production equipment to medical imaging, financingunderwriting solutions, and industrial products, we serve customers in over 180 countries and employ approximately 283,000 people worldwide. Manufacturing operations are carried out at 162 manufacturing plants located in 34 states inmanages our run-off insurance operations. See the United States and Puerto Rico and at 297 manufacturing plants located in 41 other countries. Since our incorporation in 1892, we have developed or acquired new technologies and services that have considerably broadened and changed the scopeConsolidated Results section of our activities.
OUR INDUSTRIAL OPERATING SEGMENTS
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| Power | | Oil & Gas | | Lighting |
| Renewable Energy | | Healthcare | | |
| Aviation | | Transportation | | |
OUR FINANCIAL SERVICES OPERATING SEGMENT
Business, operation and financial overviews for our operating segments are provided in the Segment Operations section within the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section.and Note 2 to the consolidated financial statements for information regarding our recent business portfolio actions.
We serve customers in over 170 countries. Manufacturing and service operations are carried out at 94 manufacturing plants located in 30 states in the United States and Puerto Rico and at 190 manufacturing plants located in 37 other countries.
In all of our global business activities, we encounter aggressive and able competition. In many instances, the competitive climate is characterized by changing technology that requires continuing research and development. With respect to manufacturing operations, we believe that, in general, we are one of the leading firms in most of the major industries in which we participate. The businesses in which GE Capital engages are subject to competition from various types of financial institutions.
As a diverse global company, we are affected by world economies, instability in certain regions, commodity prices, such as the price of oil, foreign currency volatility and policies regarding trade and imports. See the Segment Operations section within Management's Discussion and Analysis (MD&A) for further information. Other factors impacting our business include:
product development cycles for many of our products are long and product quality and efficiency are critical to success,
research and development expenditures are important to our business,
many of our products are subject to a number of regulatory standards and
changing end markets, including shifts in energy sources and demand and the impact of technology changes. In particular, Power markets have been particularly challenging as significant overcapacity in the industry has resulted in decreased utilization of our power equipment, lower market penetration, increased price concessions, uncertain timing of deal closures due to financing and the complexities of working in emerging markets as well as increasing energy efficiency and renewable energy penetration. See the Power segment section within MD&A for further information.
At year-end 2018,2019, General Electric Company and consolidated affiliates employed approximately 283,000205,000 people, of whom approximately 97,00070,000 were employed in the United States. Our Power, Renewable Energy, Aviation, Healthcare, and Capital segments employed approximately 38,000, 43,000, 52,000, 56,000 and 2,000 people, respectively. Our Corporate business employed approximately 13,000 employees.
Approximately 9,9006,750 GE and GE affiliate manufacturing and service employees in the United States (U.S.)are represented for collective bargaining purposes by a union. A majority of such employees are represented by union locals that are affiliated with the IUE-CWA, The Industrial Division of the Communication Workers of America, AFL-CIO, CLC.
In June 2015, GE negotiated four-year collective bargaining agreements withAugust 2019, most of itsGE's U.S. unions, (includingincluding the IUE-CWA) and theseIUE-CWA, ratified new four-year labor agreements are scheduled to terminate in June 2019. GE will hold negotiations to enter into new agreements that month. Whilereplace the outcome of the 2019 negotiations cannot be predicted, GE’s recent past negotiations have resulted in agreements that provide employees with good wages and benefits while addressing the competitive realities facing GE.current agreements.
General Electric’s address is 1 River Road, Schenectady, NY 12345-6999; we also maintain executive offices at 41 Farnsworth5 Necco Street, Boston, MA 02210.
GE’s Internet address at www.ge.com, Investor Relations website at www.ge.com/investor-relations and our corporate blog at www.gereports.com, as well as GE’s Facebook page, Twitter accounts and other social media, including @GE_Reports, contain a significant amount of information about GE, including financial and other information for investors. GE encourages investors to visit these websites from time to time, as information is updated and new information is posted. Additional information on non-financial matters, including environmental and social matters and our integrity policies, is available at www.ge.com/sustainability. Website references in this report are provided as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, the websites. Therefore, such information should not be considered part of this report.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on our website, www.ge.com/investor-relations/events-reports, as soon as reasonably practicable after they are filed electronically with the U.S. Securities and Exchange Commission (SEC). Copies are also available, without charge, from GE Corporate Investor Communications, 41 Farnsworth Street, Boston, MA 02210.Communications. Reports filed with the SEC may be viewed at www.sec.gov.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
The consolidated financial statements of General Electric Company (the Company) combine the industrial manufacturing and services businesses of General Electric Company (GE) with the financial services businesses of GE Capital Global Holdings, LLC (GE Capital or Financial Services) and are prepared in conformity with U.S. generally accepted accounting principles (GAAP).
We believe that investors will gain a better understanding of our company if they understand how we measure and talk about our results. Because of the diversity in our businesses, we present our financial statements in a three-column format, which allows investors to see our GE Industrial operations separately from our Financial Services operations. We believe that this provides useful information to investors. When used in this report, unless otherwise indicated by the context, we use the terms to mean the following:
General Electric or the Company – the parent company, General Electric Company.
GE – the adding together of all affiliates except GE Capital, whose continuing operations are presented on a one-line basis, giving effect to the elimination of transactions among such affiliates. As GE presents the continuing operations of GE Capital on a one-line basis, certain intercompany profits resulting from transactions between GE and GE Capital have been eliminated at the GE level. We present the results of GE in the center column of our consolidated Statements of Earnings (loss), Financial Position and Cash Flows. An example of a GE metric is GE Industrial free cash flows (Non-GAAP).
General Electric Capital Corporation or GECC – predecessor to GE Capital Global Holdings, LLC.
GE Capital Global Holdings, LLC or GECGH – the adding together of all affiliates of GECGH, giving effect to the elimination of transactions among such affiliates.
GE Capital or Financial Services – refers to GECGH and is the adding together of all affiliates of GE Capital giving effect to the elimination of transactions among such affiliates. We present the results of GE Capital in the right-side column of our consolidated Statements of Earnings (Loss), Financial Position and Cash Flows.
GE consolidated – the adding together of GE and GE Capital, giving effect to the elimination of transactions between the two. We present the results of GE consolidated in the left-side column of our consolidated Statements of Earnings (Loss), Financial Position and Cash Flows.
GE Industrial – GE excluding the continuing operations of GE Capital. We believe that this provides investors with a view as to the results of our industrial businesses and corporate items. An example of a GE Industrial metric is GE Industrial free cash flows (Non-GAAP).
Industrial segment – the sum of our seven industrial reporting segments, without giving effect to the elimination of transactions among such segments and between these segments and our financial services segment. This provides investors with a view as to the results of our industrial segments, without inter-segment eliminations and corporate items. An example of an industrial segment metric is industrial segment revenue growth.
Baker Hughes, a GE company or BHGE – following the combination of our Oil & Gas business with Baker Hughes Incorporated, our Oil & Gas segment comprises our ownership interest of approximately 50.4% in the new company formed in the transaction, Baker Hughes, a GE company (BHGE). We consolidate 100% of BHGE's revenues and cash flows, while our Oil & Gas segment profit and net income are derived net of minority interest of approximately 49.6% attributable to BHGE's Class A shareholders. References to "Baker Hughes" represent legacy Baker Hughes Incorporated operating activities which, in certain cases, have been excluded from our results for comparative purposes.
Total segment – the sum of our seven industrial segments and one financial services segment, without giving effect to the elimination of transactions between such segments. This provides investors with a view as to the results of all of our segments, without inter-segment eliminations and corporate items.
ORGANICMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
We integrate acquisitions as quickly as possible. RevenuesThe consolidated financial statements of General Electric Company combine the industrial manufacturing and earnings fromservices businesses of GE with the date we complete the acquisition through the endfinancial services businesses of the fourth quarter following the acquisitionGE Capital and are considered the acquisition effect of such businesses. However,prepared in the case of BHGE, which was acquired on July 3, 2017, we consider the results to be organic as of the third quarter of 2018.
ROUNDING
Amounts reported in billions in graphs within this report are computed based on the amounts in millions. As a result, the sum of the components reported in billions may not equal the total amount reported in billions due to rounding.conformity with U.S. generally accepted accounting principles (GAAP). Certain columns and rows within the tables may not add due to the use of rounded numbers. Percentages presented in this report are calculated from the underlying numbers in millions. Discussions throughout this MD&A are based on continuing operations unless otherwise noted. The MD&A should be read in conjunction with the Financial Statements and Notes to the consolidated financial statements.
OTHER TERMS USED BY GE
FINANCIAL TERMS
Continuing earnings – we refer to the caption “earnings from continuing operations attributable to GE common shareowners” as continuing earnings.
Continuing earnings per share (EPS) – when we refer to continuing earnings per share, it is the diluted per-share amount of “earnings from continuing operations attributable to GE common shareowners.”
GE Cash Flows from Operating Activities (GE CFOA) - unless otherwise indicated, GE CFOA is from continuing operations.
GE Industrial profit margin(GAAP) – GE total revenues plus other income minus GE total costs and expenses divided by GE total revenues.
Net earnings (loss) – we refer to the caption “net earnings attributable to GE common shareowners” as net earnings.
Net earnings (loss) per share (EPS) – when we refer to net earnings per share, it is the diluted per-share amount of “net earnings attributable to GE common shareowners.”
Non-GAAP Financial Measures – In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial data but not presented in our financial statements prepared in accordance with GAAP. Certain of these data are considered “non-GAAP financial measures” under SEC rules. See the Non-GAAP Financial measures section within this MD&A for reconciliations.
Segment profit – refers to the profit of the industrial segments, which includes other income, and the net earnings of the financial services segment. See the Segment Operations section within the MD&A for a description of the basis for segment profits.
OPERATIONAL TERMS
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• | Digital revenues – revenues related to internally developed software (including PredixTM) and associated hardware, and software solutions that improve our customers’ asset performance. These revenues are largely generated from our operating businesses and are included in their segment results. Revenues of "Non-GE Verticals" refer to GE Digital revenues from customers operating in industries where GE does not have a presence.
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Equipment leased to others (ELTO) – rental equipment we own that is available to rent and is stated at cost less accumulated depreciation.
Global Growth Organization (GGO) – The GGO provides leadership in global markets, particularly within emerging and developing markets. GGO provides regional commercial finance capabilities and customer financing solutions, in collaboration with certain of our GE Capital businesses, and works to build the GE brand and protect GE’s reputation.
GE Capital Exit Plan - our plan, announced on April 10, 2015, to reduce the size of our financial services businesses through the sale of most of the assets of GE Capital, and to focus on continued investment and growth in our industrial businesses.
Orders, backlog and remaining performance obligation (RPO) – orders are contractual commitments with customers to provide specified goods For services for an agreed upon price. Backlog is unfilled customer orders for products and product services (expected life of contract sales for product services). RPO, a defined term under GAAP, is backlog excluding any purchase order that provides the customer with the ability to cancel or terminate without incurring a substantive penalty, even if the likelihood of cancellation is remote based on historical experience. We plan to continue reporting backlog as we believe that it is a useful metric for investors, given its relevance to total orders.
Product services agreements – contractual commitments, with multiple-year terms, to provide specified services for products in our Power, Renewable Energy Aviation, Oil & Gas and Transportation installed base – for example, monitoring, maintenance, service and spare parts for a gas turbine/generator set installed in a customer’s power plant. See Revenues from Services section within Note 1 to the consolidated financial statements for further information.
Services – for purposes of the financial statement display of sales and costs of sales in our consolidated Statement of Earnings (Loss), “goods” is required by SEC regulations to include all sales of tangible products, and "services" must include all other sales, including other services activities. In our MD&A section of this report, we refer to sales under product services agreements and sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “services,” which is an important part of our operations.
Shared Services – sharingWe believe investors will gain a better understanding of business processesour company if they understand how we measure and talk about our results. Because of the diversity in orderour businesses, we present our financial statements in a three-column format, which allows investors to standardize and consolidatesee our GE industrial operations separately from our financial services operations. We believe that this provides useful information to provide valueinvestors. When used in this report, unless otherwise indicated by the context, we use these terms to mean the businesses in the form of simplified processes, reduced overall costs and increased service performance.following:
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MD&A• | KEY PERFORMANCE INDICATORS | |
KEY PERFORMANCE INDICATORS
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| REVENUES PERFORMANCE | 2018 versus 2017 |
| 2017 versus 2016 |
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| Industrial Segment (GAAP) | 2 | % | 1 | % |
| Industrial Segment Organic (Non-GAAP) | — | % | (2 | )% |
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GE INDUSTRIAL ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
| 2016 |
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| Orders | | | |
| Equipment | $ | 61.9 |
| $ | 57.7 |
| $ | 54.9 |
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| Services(a) | 62.1 |
| 59.1 |
| 54.8 |
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| Total | $ | 124.0 |
| $ | 116.8 |
| $ | 109.7 |
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| Backlog | | | |
| Equipment | $ | 88.8 |
| $ | 85.1 |
| $ | 83.9 |
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| Services(a) | 302.2 |
| 286.6 |
| 264.0 |
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| Total | $ | 391.0 |
| $ | 371.7 |
| $ | 347.9 |
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(a) Includes spare parts.
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GE INDUSTRIAL COSTS (In billions) | 2018 |
| 2017 |
| 2016 |
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| GE total costs and expenses (GAAP) | $ | 135.7 |
| $ | 111.7 |
| $ | 105.8 |
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| GE Industrial structural costs (Non-GAAP) | $ | 23.7 |
| $ | 25.2 |
| $ | 25.0 |
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| GE INDUSTRIAL PROFIT MARGIN | 2018 |
| 2017 |
| 2016 |
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| GE Industrial profit margin (GAAP) | (17.4 | )% | 1.3 | % | 8.2 | % |
| Adjusted GE Industrial profit margin (Non-GAAP) | 9.0 | % | 10.1 | % | 12.5 | % |
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EARNINGS (In billions; per-share in dollars and diluted) | 2018 |
| 2017 |
| 2016 |
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| Continuing earnings (loss) (GAAP) | $ | (21.1 | ) | $ | (8.6 | ) | $ | 7.8 |
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| Net earnings (loss) (GAAP) | (22.8 | ) | (8.9 | ) | 6.8 |
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| Adjusted earnings (loss) (Non-GAAP) | 5.7 |
| 8.7 |
| 9.4 |
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| Continuing earnings (loss) per share (GAAP) | $ | (2.43 | ) | $ | (0.99 | ) | $ | 0.85 |
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| Net earnings (loss) per share (GAAP) | (2.62 | ) | (1.03 | ) | 0.75 |
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| Adjusted earnings (loss) per share (Non-GAAP) | 0.65 |
| 1.00 |
| 1.03 |
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GE CFOA AND GE INDUSTRIAL FREE CASH FLOWS (In billions) | 2018 |
| 2017 |
| 2016 |
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| GE CFOA (GAAP) | $ | 2.3 |
| $ | 11.0 |
| $ | 30.0 |
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| GE Industrial free cash flows (Non-GAAP) | 4.8 |
| 4.3 |
| 7.1 |
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| Adjusted GE Industrial free cash flows (Non-GAAP) | 4.5 |
| 5.6 |
| 7.1 |
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FIVE-YEAR PERFORMANCE GRAPH |
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The annual changes for the five-year period shown in the above graph are based on the assumption that $100 had been invested in General Electric common stock, the Standard & Poor’s 500 Stock Index (S&P 500) and the Dow Jones Industrial Average (DJIA) on December 31, 2013, and that all quarterly dividends were reinvested. The cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31 for each year indicated.
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MD&A• | KEY PERFORMANCE INDICATORS | GE – the adding together of all affiliates except GE Capital, whose continuing operations are presented on a one-line basis, giving effect to the elimination of transactions among such affiliates. As GE presents the continuing operations of GE Capital on a one-line basis, any intercompany profits resulting from transactions between GE and GE Capital are eliminated at the GE level. We present the results of GE in the center column of our consolidated Statements of Earnings (Loss), Financial Position and Cash Flows. |
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| • | GE Capital – the adding together of all affiliates of GE Capital giving effect to the elimination of transactions among such affiliates. We present the results of GE Capital in the right-side column of our consolidated Statements of Earnings (Loss), Financial Position and Cash Flows. |
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| • | GE Industrial – GE excluding the continuing operations of GE Capital. We believe that this provides investors with a view as to the results of our industrial businesses and corporate items. |
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| • | Industrial segment – the sum of our four industrial reportable segments, without giving effect to the elimination of transactions among such segments or between these segments and our financial services segment. This provides investors with a view as to the results of our industrial segments, without inter-segment eliminations and corporate items. |
This document contains “forward-looking statements” - for details about the uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements, see the Risk Factors and Forward-Looking Statements sections.
With respect to “Market Information,” in the United States, General Electric common stock is listed on the New York Stock Exchange under the ticker symbol "GE" (its principal market). General Electric common stock is also listed on the London Stock Exchange, Euronext Paris, the SIX Swiss Exchange and the Frankfurt Stock Exchange.
As of January 31, 2019, there were approximately 397,000 shareowner accounts of record.
On February 15, 2019, our Board of Directors approved a quarterly dividend of $0.01 per share of common stock, which is payable April 25, 2019, to shareowners of record at close of business on March 11, 2019.
General Electric's 2019 Annual Meeting of Shareowners will be held on May 8, 2019 in Tarrytown, NY.
CONSOLIDATED RESULTS
2018 2019SIGNIFICANT DEVELOPMENTS
On April 25, 2018, 12 directors were electedDEVELOPMENTS.In October 2019, we announced changes to the BoardU.S. GE Pension Plan and the U.S. GE Supplementary Plan. As a result of Directors (the Board) with increased focus on relevant industry expertise, capital allocationthese actions, we recognized a pre-tax increase in non-operating benefit costs of $0.6 billion in the fourth quarter of 2019. See Note 13 to the consolidated financial statements for further information.
We performed this year’s premium deficiency testing in the aggregate across our run-off insurance portfolio in the third quarter of 2019. As a result of our testing, we identified a premium deficiency resulting in a $1.0 billion pre-tax ($0.8 billion after-tax) charge to earnings. See the Other Items - Insurance section within MD&A and accountingNote 12 to the consolidated financial statements for further information.
In the third quarter of 2019, we completed a tender offer to purchase $4.8 billion of GE senior unsecured debt. The total cash consideration paid for these purchases was $5.0 billion, resulting in a pre-tax loss of $0.3 billion (including fees and financial reporting, including three new directors, H. Lawrence Culp, Jr., Thomas W. Horton and Leslie F. Seidman.
On June 26, 2018, we announced Mr. Culp, former CEO of Danaher, was elected as lead director effective that same date, succeeding John J. Brennan, who was completing his last term on the Board. Mr. Culp was also selected to chair the Board’s Management Development and Compensation Committee.
On July 26, 2018, we announced Jan R. Hauser, GE's Vice President, Controller and Chief Accounting Officer, had communicated her intention to retire from GE. Thomas S. Timko, formerly the Chief Accounting Officer of General Motors Company, was appointed as her successor, effective September 10, 2018.
On October 1, 2018, we announced Mr. Culp was named Chairman and Chief Executive Officer (CEO), succeeding John L. Flannery, effective September 30, 2018. Additionally, Mr. Horton was elected as lead director, succeeding Mr. Culp, effective that same date.
On December 10, 2018, we announced Mr. Brennan retired from the Board after six years of service, effective December 7, 2018. In addition, the Board elected Paula Rosput Reynolds as a director to fill the resulting vacancy, effective on that date.
On October 30, 2018 we announced plans to reduce our quarterly dividend from $0.12 cents to $0.01 cent per share beginningother costs associated with the dividend declared in December 2018, which was paid on January 25, 2019. This change will allow us to retain approximately $4 billion of cash per year comparedtender). See Note 11 to the prior payout level.consolidated financial statements for further information.
DuringIn September 2019, we sold a total of 144.1 million shares in Baker Hughes for $3.0 billion in cash (net of certain deal related costs) which reduced our ownership interest from 50.2% to 36.8%. As a result, we have deconsolidated our Baker Hughes segment and reclassified its results to discontinued operations for all periods presented, and recorded a loss of $8.7 billion ($8.2 billion after-tax) in discontinued operations. See Notes 2 and 3 to the consolidated financial statements for further information.
In the second halfand third quarters of 2018,2019, we recognized non-cash pre-tax goodwill impairment charges of $22.1$0.7 billion and $0.7 billion related to goodwill at our Power Generation and Grid Solutions equipment and services reporting units within our Power segmentunit and at our Hydro reporting unit, respectively, both within our Renewable Energy segment. These charges were recorded within earnings from continuing operations at Corporate. See Note 8 to the consolidated financial statements for further information.
On November 13, 2017,
In February 2019, we completed the Company announced its intention to exit approximately $20 billionspin-off and subsequent merger of assets over the next one to two years. Since this announcement, GE has classified various businesses at Corporate and across our Power, Lighting, Aviation and Healthcare segments as held for sale. To date, we have recorded a cumulative pre-tax loss on the planned disposals of $1.7 billion ($1.5 billion after-tax), of which $0.6 billion was recorded in 2018. Through the fourth quarter of 2018, we closed several of these transactions within our Power, Healthcare, and Lighting segments for total net proceeds of $6.4 billion, recognized a pre-tax gain of $1.2 billion in the caption "Other income" in our consolidated Statement of Earnings (Loss). These transactions are subject to customary working capital and other post-close adjustments. See Note 2 to the consolidated financial statements for further information. We also expect to generate net cash proceeds of at least $30 billion from the following transactions:
On May 21, 2018, we announced an agreement to spin- or split-off and merge our Transportation segment with Wabtec Corporation, a U.S. rail equipment manufacturer. The agreement was subsequently amended on January 25, 2019. On February 25,As a result, we reclassified our Transportation segment to discontinued operations in the first quarter of 2019, we completedfor all periods presented, and recorded a gain of $3.5 billion ($2.5 billion after-tax) in discontinued operations. Total proceeds from the spin-off and subsequent merger. Insale of the transaction, participating GE shareholders received sharesbusiness, including the sale of Wabtec common stock representing an approximately 24.3% ownership interestduring 2019 were $6.2 billion. See Notes 2 and 3 to the consolidated financial statements for further information.
Also in Wabtec common stock. GE received approximately $2.9 billion in cash as well as shares of Wabtec common stock and Wabtec non-voting convertible preferred stock that, together, represent an approximately 24.9% ownership interest in Wabtec. In addition, GE is entitled to additional cash consideration up to $0.5 billion for tax benefits that Wabtec realizes from the transaction.
In June 2018, we announced a plan to separate GE Healthcare into a standalone company. On February 25, 2019, we announced an agreement to sell our BioPharma business within our Healthcare segment to Danaher Corporation for total consideration of approximately $21.4 billion subject to certain adjustments. The transaction is expectedCorrespondingly, we classified BioPharma as a business held for sale. We expect to closecomplete the sale in the fourthfirst quarter of 2019,2020, subject to regulatory approvals and customary closing conditions. We intend to retain the remaining portion of our Healthcare business which providesapproval, providing us full flexibility for growth and optionality with respect to the business.
Pursuant to our announced plan of an orderly separation from BHGE over time, BHGE completed an underwritten public offering in which we sold 101.2 million shares of BHGE Class A common stock. BHGE also repurchased 65 million BHGE LLC units from us. The total consideration received by us from these transactions was $3.7 billion. The transaction closed in November 2018 and, as a result, our economic interest in BHGE reduced from 62.5% to 50.4% and we recognized a pre-tax loss in equity of $2.2 billion.remaining Healthcare businesses. See Note 152 to the consolidated financial statements for further information.
Additional significant transactions that closed in 2018 include the following:
The sale of our Industrial Solutions business within our Power segment for approximately $2.3 billion to ASEA Brown Boveri (ABB), a Swiss-based engineering company. We recognized a resulting pre-tax gain of $0.3 billion in the second quarter of 2018.
The sale of our GE Lighting business in Europe, the Middle East, Africa and Turkey and our Global Automotive Lighting business to a company controlled by a former GE executive in the region. We closed substantially all of this transaction in the second quarter of 2018.
In 2018, the Company announced its intention to exit approximately $25 billion in energy and industrial finance assets within our Capital segment by 2020. With respect to this announcement, we completed $15 billion of asset reduction during 2018 including:
The sale of Energy Financial Services' (EFS) debt origination business within our Capital segment for proceeds of approximately $2.0 billion to Starwood Property Trust, Inc. and recognized a pre-tax gain of approximately $0.3 billion. In addition, we completed the sale of various EFS investments for proceeds of approximately $4.7 billion and recognized an insignificant pre-tax loss.
The sale of Healthcare Equipment Finance (HEF) financing receivables within our Capital segment for proceeds of approximately $1.6 billion to various buyers, including $1.4 billion to TIAA Bank, a U.S. lender and recognized an insignificant pre-tax loss.
SUMMARY OF 2018 RESULTS
2019 RESULTS. Consolidated revenues were $121.6$95.2 billion, up $3.4down $1.8 billion or 3%,(2%) for the year. The increase in revenues was largely a result of incremental Baker Hughes revenues of $5.4 billion through the first half of 2018, partially offset by the absence of Water following the sale in September 2017 and Industrial Solutions following the sale in June 2018. Industrial segment organic revenues* increased $0.1 billion driven principally by our Aviation, Healthcare, Renewable Energy and Oil & Gas segments, partially offset by our Power, Transportation and Lighting segments.
Continuing earnings per share was $(2.43) primarily due to non-cash after-tax impairment charges of $22.4 billion recorded in the second half of 2018 related to goodwill in our Power Generation, Grid Solutions and Hydro reporting units as well as decreased Industrial segment profit of $1.4 billion. Excluding the goodwill impairment charge and other items, Adjusted earnings per share* was $0.65.
As previously disclosed, the Power market as well as its operating environment continues to be challenging. Our outlook for Power has continued to deteriorate driven by the significant overcapacity in the industry resulting in decreased utilization of our power equipment, lower market penetration, increased price concessions on certain long-term contracts as well as the uncertain timing of deal closures due to financing and the complexities of working in emerging markets. In addition, our near-term earnings outlook has been negatively impacted by project execution and our own underlying operational challenges. Finally, market factors such as increasing energy efficiency and renewable energy penetration continue to impact our view of long-term demand. These conditions have resulted in downward revisions of our forecasts on current and future projected earnings and cash flows at these businesses. As a result, during the second half of the year we recorded a non-cash pre-tax impairment loss of $22.0 billion related to goodwill in our Power Generation and Grid Solutions reporting units. Included in this amount is a non-cash impairment loss of $0.8 billion related to goodwill recorded at Corporate associated with our Digital acquisitions that was previously allocated to our Power Generation and Grid Solutions reporting units. The aforementioned charges were all recorded at Corporate and have significantly impacted operating results. See the Corporate Items and Eliminations section within this MD&A and Note 8 to the consolidated financial statements for further information.
For the year ended December 31, 2018, GE Industrial loss was $19.8 billion and GE Industrial profit margins were (17.4)%, down $21.2 billion, driven by increased non-cash goodwill impairment charges of $21.0 billion, partially offset by decreased adjusted Corporate operating costs* of $0.4 billion, increased net gains from disposed or held for sale businesses of $0.4 billion and decreased restructuring and other costs of $0.4 billion. Industrial segment profit decreased $1.4 billion, or 12%, primarily due to lower results within our Power, Renewable Energy and Transportation segments, partially offset by the performance of our Aviation, Oil & Gas, Healthcare and Lighting segments.
GE CFOA was $2.3 billion and $11.0 billion for the years ended December 31, 2018 and 2017, respectively. The decline in GE CFOA is primarily due to GE Pension Plan contributions of $6.0 billion in 2018, compared to $1.7 billion in 2017 as well as a $4.0 billion decrease in common dividends from GE Capital. GE did not receive a common dividend distribution from GE Capital in 2018, and it does not expect to receive such dividend distributions from GE Capital for the foreseeable future. See the Capital Resources and Liquidity - Statement of Cash Flows section within this MD&A for further information.
*Non-GAAP Financial Measure
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REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
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| | | | |
| Consolidated revenues | $ | 121.6 |
| $ | 118.2 |
| $ | 119.5 |
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| | | | |
| Industrial segment revenues | $ | 115.7 |
| $ | 113.2 |
| $ | 112.3 |
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| Corporate revenues and Industrial eliminations | (2.0 | ) | (1.9 | ) | (1.7 | ) |
| GE Industrial revenues | $ | 113.6 |
| $ | 111.3 |
| $ | 110.6 |
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| | | | |
| Financial services revenues | $ | 9.6 |
| $ | 9.1 |
| $ | 10.9 |
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REVENUES COMMENTARY: 2018 – 2017 |
Consolidated revenues increased $3.4 billion, or 3%, primarily driven by increased industrial segment revenues of $2.5 billion and increased Financial Services revenues of $0.5 billion. The overall foreign currency impact on consolidated revenues was an increase of $0.6 billion.
GE Industrial revenues increased $2.4 billion, or 2%.
Industrial segment revenues increased $2.5 billion, or 2%, as increases at Oil & Gas, Aviation, Healthcare and Renewable Energy were partially offset by decreases at Power, Lighting and Transportation. This increase was driven by the net effects of acquisitions of $5.5 billion, primarily attributable to Baker Hughes through the first half of 2018, and the effects of a weaker U.S. dollar of $0.6 billion, partially offset by the net effects of dispositions of $3.7 billion, primarily attributable to the absence of Water following its sale in the third quarter of 2017 and Industrial Solutions following its sale in the second quarter of 2018. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic revenues* increased $0.1 billion.
Financial Services revenues increased $0.5 billion, or 5%, primarily due to lower impairments and volume growth, partially offset by lower gains.
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REVENUES COMMENTARY: 2017 – 2016 |
Consolidated revenues decreased $1.2 billion, or 1%, primarily driven by decreased Financial ServicesCorporate revenues of $1.8$1.0 billion, partially offset by increased industrial segmentlargely attributable to the sale of our Current business in November 2018 and decreased GE Capital revenues of $0.8 billion. The overall foreign currency impact on consolidated revenues was an increasea decrease of $0.6$1.4 billion.
GE Industrial revenues increased $0.6 billion, or 1%.
Industrial segment revenuesorganic revenues* increased $0.8$4.6 billion or 1%, as increases at Oil & Gas,(5.5%) driven by our Aviation, Renewable Energy and Healthcare and Aviation weresegments, partially offset by decreases at Lighting,our Power Transportationsegment.
Continuing earnings per share was $(0.01). Excluding non-operating benefit costs, gains (losses) on business dispositions, restructuring and Renewable Energy. This increaseother charges, goodwill impairments, unrealized gains (losses) on investments, BioPharma deal taxes, debt extinguishment costs, U.S. tax reform enactment and an insurance premium deficiency test charge, Adjusted earnings per share* was $0.65.
For the year ended December 31, 2019, GE Industrial profit was $1.8 billion and profit margins were 2.1%, up $22.4 billion, driven by the net effects of acquisitions of $6.0 billion, primarily attributable to the acquisition of Baker Hughes in the third quarter of 2017, and the effects of a weaker U.S. dollar of $0.6 billion, partially offset by the net effects of dispositions of $3.5 billion, primarily attributable to the absence of Appliances following its sale in the second quarter of 2016. Excluding the effects of acquisitions, dispositions and translational currency exchange, industrial segment organic revenues* decreased $2.3 billion.
Financial Services revenues decreased $1.8 billion, or 17%, primarily due to higher impairments and volume declines.
*Non-GAAP Financial Measure
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EARNINGS (LOSS) AND EARNINGS (LOSS) PER SHARE (In billions; per-share in dollars and diluted) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Continuing earnings (loss) | $ | (21.1 | ) | $ | (8.6 | ) | $ | 7.8 |
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| Continuing earnings (loss) per share | $ | (2.43 | ) | $ | (0.99 | ) | $ | 0.85 |
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EARNINGS COMMENTARY: 2018 – 2017 |
Consolidated continuing earnings decreased $12.5 billion, due to increasednon-cash goodwill impairment charges of $21.0$20.6 billion, increased non-operating benefit costs of $0.4 billion and decreased GE Industrial continuing earnings of $0.2 billion, partially offset by decreased Financial Services losses of $6.3 billion and decreased provision for GE Industrial income taxes of $2.7 billion.GE Industrial continuing earnings decreased $0.2 billion, or 2%.
Corporate items and eliminations increased $1.3 billion primarily attributable to decreased adjusted Corporate operating costs* of $0.4 billion, increased net gains from disposed or held for sale businesses of $0.4 billion and decreased restructuring and other costs of $0.4 billion.
Industrial segment profit decreased $1.4 billion, or 12%, with decreases at Power, Renewable Energy and Transportation, partially offset by higher profit at Aviation, Oil & Gas, Healthcare and Lighting. This decrease in industrial segment profit was driven in part by the net effects of dispositions of $0.5 billion, primarily associated with the absence of Water following its sale in the third quarter of 2017 and Industrial Solutions following its sale in the second quarter of 2018, partially offset by the net effects of acquisitions of $0.3 billion, largely associated with Baker Hughes through the first half of the year, and lower restructuring and business development costs related to Baker Hughes of $0.1 billion. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic profit* decreased $1.3 billion, primarily driven by negative variable cost productivity, lower volume and pricing pressure at Power.
Financial Services continuing losses decreased $6.3 billion, or 93%,primarily due to the nonrecurrence of the 2017 charges associated with the GE Capital insurance premium deficiency review and EFS strategic actions, partially offset by the nonrecurrence of 2017 tax benefits.
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EARNINGS COMMENTARY: 2017 – 2016 |
Consolidated continuing earnings decreased $16.4 billion driven by decreased GE Industrial continuing earnings of $5.6 billion, increased Financial Services losses of $5.5 billion, increased provision for GE Industrial income taxes of $3.4 billion, increased goodwill impairment charges of $1.2$1.5 billion and increaseddecreased interest and other financial charges of $0.7 billion.
GE Industrial continuing earnings decreased $5.6 billion, or 41%.
Corporate items and eliminations decreased $2.0 billion primarily attributable to decreased net gains from disposed or held for sale businesses of $2.6$0.3 billion, partially offset by decreased adjusted Corporate operating costs* of $0.4 billion and decreased restructuring and otherincreased non-operating benefit costs of $0.2$0.1 billion.
Industrial segment profit decreased $3.6increased $0.8 billion or 23%, with decreases at(8%) primarily due to higher results within our Power, Oil & Gas, Transportation,Healthcare and Aviation segments, partially offset by the performance of our Renewable Energy segment. Industrial segment organic profit* increased $1.0 billion (11%).
GE cash flows from operating activities (CFOA) from continuing operations was $4.6 billion and Lighting,$0.7 billion for the years ended December 31, 2019 and 2018, respectively. GE CFOA increased primarily due to no GE Pension Plan contributions in 2019 compared to $6.0 billion in 2018 and lower net disbursements for equipment project costs, partially offset by higher earnings at Healthcare and Aviation. This decrease in industrial segment profit was driven in part by restructuring and business development costs relatedcash used for working capital compared to Baker Hughes of $0.72018. GE Industrial free cash flows (FCF)* were $2.3 billion and $4.3 billion for the net effects of dispositions of $0.3 billion, primarily associated with the absence of Appliances following its sale in the second quarter of 2016, partially offset by the net effects of acquisitions $0.3 billion, largely associated with the acquisition of Baker Hughes in the third quarter of 2017. Excluding the effects of acquisitions, dispositionsyears ended December 31, 2019 and foreign currency translation, industrial segment organic profit* decreased $2.8 billion, primarily driven by negative variable cost productivity, pricing pressure and lower volume at Power.
Financial Services continuing losses increased $5.5 billion,2018, respectively. The decrease was primarily due to a $6.2 billion after-tax charge relatedhigher cash used for working capital compared to the completion of GE Capital's insurance premium deficiency review, as well as EFS strategic actions resulting in $1.8 billion of after-tax charges in addition to higher impairments,2018, partially offset by lower headquarters and treasury operation expenses associated with the GE Capital Exit Plan, higher tax benefits including the effects of U.S. tax reform and lower preferred dividend expenses associated with the January 2016 preferred equity exchange.
GE DIGITAL
GE Digital's activities are focused on assisting in the market development of our digital product offerings through software design, fulfillment and product management, while also interfacing with our customers. Digital revenues include internally developed software and associated hardware, including PredixTM and software solutions that improve our customers’ asset performance. These revenues and associatednet disbursements for equipment project costs are largely generated from our operating businesses and are included in their segment results.
On December 13, 2018, we announced our intention to establish a new, GE-owned, independently operated business to bring together GE Digital’s core software business including the PredixTM platform, Asset Performance Management, Historian, Automation (HMI/SCADA), Manufacturing Execution Systems and Operations Performance Management with the GE Power Digital and Grid Software Solutions businesses. The new business will be established with its own brand, equity structure and Board of Directors and will deliver software for the power, renewable energy, aviation, oil and gas, food and beverage, chemicals, consumer packaged goods and mining markets.
*Non-GAAP Financial Measure
On February 1, 2019, we sold a majority stake in ServiceMax for approximately $0.4 billion to Silver Lake, a global technology investment firm, a private equity firm focused on technology investments. Under the agreement, GE will retain a 10% equity ownership in ServiceMax. We expect to recognize a resulting pre-tax gain of $0.2 billion during the first quarter of 2019.
Revenues were $3.9 billion for the year ended December 31, 2018, a decrease of $0.1 billion or 2% compared to revenues2018. See the Capital Resources and Liquidity - Statement of $4.0 billionCash Flows section for the year ended December 31, 2017. This decrease was principally driven by Power. Revenues were $4.0 billion for the year ended December 31, 2017, an increase of $0.4 billion or 12% compared to revenues of $3.6 billion for the year ended December 31, 2016. These increases were principally driven by Power and Non-GE Verticals.further information.
Orders were $4.2 billionare contractual commitments with customers to provide specified goods or services for the year ended December 31, 2018, a decrease of $1.0 billion or 19% compared to orders of $5.2 billion for the year ended December 31, 2017. This decrease was principally driven by Power and Oil & Gas. Orders were $5.2 billion for the year ended December 31, 2017, an increase of $1.1 billion or 27% compared to orders of $4.1 billion for the year ended December 31, 2016. These increases were principally driven by Oil & Gas, Non-GE Verticals, Power and Renewable Energy.
SEGMENT OPERATIONS
REVENUES AND PROFIT
Segment revenues include sales of products and services related to the segment.
Industrial segment profitagreed upon price. Backlog is determined based on internal performance measures used by the Chief Executive Officer (CEO) to assess the performance of each business in a given period. In connection with that assessment, the CEO may exclude matters, such as charges for restructuring, rationalization and other similar expenses, acquisition costs and other related charges, technology and product development costs, certain gains and losses from acquisitions or dispositions, [and litigation settlements or other charges, for which responsibility preceded the current management team]. Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment. See the Corporate Items and Eliminations section within this MD&A for additional information about costs excluded from segment profit.
Segment profit excludes results reported as discontinued operations and material accounting changes other than those applied retrospectively. Segment profit also excludes the portion of earnings or loss attributable to noncontrolling interests of consolidated subsidiaries, and as such only includes the portion of earnings or loss attributable to our share of the consolidated earnings or loss of consolidated subsidiaries.
Segment profit excludes or includes interest and other financial charges, non-operating benefit costs, income taxes, and preferred stock dividends according to how a particular segment’s management is measured:
Interest and other financial charges, income taxes, non-operating benefit costs and GE goodwill impairments are excluded in determining segment profit for the industrial segments.
Interest and other financial charges, income taxes, non-operating benefit costs and GE Capital preferred stock dividends are included in determining segment profit (which we sometimes refer to as “net earnings”) for the Capital segment.
Other income is included in segment profit for the industrial segments.
Certain corporate costs, such as shared services, employee benefits, and information technology, are allocated to our segments based on usage. A portion of the remaining corporate costs is allocated based on each segment’s relative net cost of operations.
BACKLOG AND REMAINING PERFORMANCE OBLIGATION
Backlog represents unfilled customer orders for products and product services (expected life of contract sales for product services).
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| | | | | | | | | |
| (In billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Equipment | $ | 79.0 |
| $ | 77.1 |
| $ | 75.1 |
|
| Services | 325.6 |
| 273.5 |
| 256.8 |
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| Total backlog | $ | 404.6 |
| $ | 350.6 |
| $ | 331.9 |
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|
| | | | | | | | | |
| Equipment | $ | 45.0 |
| $ | 49.3 |
| $ | 48.8 |
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| Services | 45.3 |
| 45.5 |
| 46.5 |
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| Total orders | $ | 90.3 |
| $ | 94.8 |
| $ | 95.3 |
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As of December 31, 2019, backlog increased $53.9 billion (15%) from the prior year due to an increase in services backlog of $48.4 billion at Aviation and $1.9 billion at Renewable Energy and an increase in equipment backlog of $1.9 billion at Renewable Energy.
For the year ended December 31, 2019, orders decreased $4.5 billion (5%) on a reported basis and increased $0.6 billion (1%) organically driven by an increase in services orders of $1.5 billion primarily at Aviation, partially offset by Renewable Energy, and a decrease in equipment orders of $0.9 billion, primarily at Power and Aviation, partially offset by Renewable Energy.
As of December 31, 2018, backlog increased $18.8 billion (6%), primarily due to an increase in services backlog of $16.7 billion primarily at Aviation and an increase in equipment backlog of $2.1 billion, also primarily at Aviation.
For the year ended December 31, 2018, orders decreased $0.5 billion (1%) on a reported basis and increased $2.9 billion (3%) organically driven by an increase in equipment orders of $2.5 billion, primarily at Aviation, partially offset by Power and Renewable Energy, and an increase in services orders of $0.5 billion, primarily at Aviation and Renewable Energy, partially offset by Power.
*Non-GAAP Financial Measure
Remaining performance obligation is(RPO), a defined term under GAAP, and representsis backlog excluding any purchase ordersorder that provideprovides the customer with the ability to cancel or terminate without incurring a substantive penalty, even if the likelihood of cancellation is remote based on historical experience. We plan to continue reporting backlog as we believe that it is a useful metric for investors, given its relevance to total orders. See Note 26 to the consolidated financial statements for further information.
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| | | | | | | | | |
| RECONCILIATION OF INDUSTRIAL BACKLOG TO REMAINING PERFORMANCE OBLIGATION |
| | December 31, 2018 |
| (In billions) | Equipment |
| Services |
| Total |
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| | | | |
| Backlog | $ | 88.8 |
| $ | 302.2 |
| $ | 391.0 |
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| Adjustments | (37.0 | ) | (100.9 | ) | (137.9 | ) |
| Remaining Performance Obligation | $ | 51.9 |
| $ | 201.3 |
| $ | 253.2 |
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December 31, 2019 (In billions) | Equipment |
| Services |
| Total |
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| | | | |
| Backlog | $ | 79.0 |
| $ | 325.6 |
| $ | 404.6 |
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| Adjustments | (30.5 | ) | (128.7 | ) | (159.1 | ) |
| Remaining performance obligation | $ | 48.5 |
| $ | 196.9 |
| $ | 245.4 |
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Adjustments to reported backlog of $(137.9)$159.1 billion as of December 31, 20182019 are largely driven by adjustments of $(122.0)$149.5 billion in our Aviation segment: (1) backlog includes engine contracts for which we have received purchase orders that are cancelable. We have included these in backlog as our historical experience has shown no net cancellations, as any canceled engines are typically moved by the airframer to other program customers; (2) our services backlog includes contracts that are cancelable without substantive penalty, primarily time and materials contracts; (3) backlog includes engines contracted under long-term service agreements, even if the engines have not yet been put into service. These adjustments to reported backlog are expected to be satisfied beyond one year. See Note 9
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| (In billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Consolidated revenues | $ | 95.2 |
| $ | 97.0 |
| $ | 99.3 |
|
| | | | |
| Equipment | 42.9 |
| 42.4 |
| 48.0 |
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| Services | 43.9 |
| 44.4 |
| 41.7 |
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| Industrial segment revenues | $ | 86.8 |
| $ | 86.8 |
| $ | 89.8 |
|
| Corporate items and Industrial eliminations | 0.9 |
| 2.3 |
| 2.5 |
|
| GE Industrial revenues | $ | 87.7 |
| $ | 89.0 |
| $ | 92.2 |
|
| GE Capital revenues | $ | 8.7 |
| $ | 9.6 |
| $ | 9.1 |
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For the year ended December 31, 2019, consolidated revenues decreased $1.8 billion (2%) primarily driven by decreased Corporate revenues of $1.0 billion, largely attributable to the sale of our Current business in November 2018, and decreased GE Capital revenues of $0.8 billion. The overall foreign currency impact on consolidated financial statements for further information.revenues was a decrease of $1.4 billion.
Industrial segment revenues remained flat as a decrease at Power was offset by increases at Aviation, Renewable Energy and Healthcare. This was driven by the net effects of dispositions of $3.3 billion, primarily attributable to the sales of Industrial Solutions, Value-Based Care and Distributed Power in 2018 and the effects of a stronger U.S. dollar of $1.4 billion, partially offset by the net effects of acquisitions of $0.1 billion. Industrial segment organic revenues* (excluding the effects of acquisitions, dispositions and foreign currency) increased $4.6 billion (5.5%).
SUMMARY OF OPERATING SEGMENTSGE Capital revenues decreased $0.8 billion (8%), primarily due to volume declines and lower gains, partially offset by lower impairments.
For the year ended December 31, 2018, consolidated revenues decreased $2.3 billion (2%), primarily driven by decreased industrial segment revenues of $3.0 billion, partially offset by increased GE Capital revenues of $0.5 billion. The overall foreign currency impact on consolidated revenues was $0.5 billion.
Industrial segment revenues decreased $3.0 billion (3%) as a decrease at Power was partially offset by increases at Healthcare and Aviation. This decrease was driven in part by the net effects of dispositions of $3.5 billion, partially offset by the effects of a weaker U.S. dollar of $0.5 billion. Industrial segment organic revenues* remained flat.
GE Capital revenues increased $0.5 billion (5%) primarily due to lower impairments and volume growth, partially offset by lower gains.
|
| | | | | | | | | |
| | General Electric Company and consolidated affiliates |
| (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Revenues | | | |
| Power | $ | 27,300 |
| $ | 34,878 |
| $ | 35,835 |
|
| Renewable Energy | 9,533 |
| 9,205 |
| 9,752 |
|
| Aviation | 30,566 |
| 27,013 |
| 26,240 |
|
| Oil & Gas | 22,859 |
| 17,180 |
| 12,938 |
|
| Healthcare | 19,784 |
| 19,017 |
| 18,212 |
|
| Transportation | 3,898 |
| 3,935 |
| 4,585 |
|
| Lighting(a) | 1,723 |
| 1,941 |
| 4,762 |
|
| Total industrial segment revenues | 115,664 |
| 113,168 |
| 112,324 |
|
| Capital | 9,551 |
| 9,070 |
| 10,905 |
|
| Total segment revenues | 125,215 |
| 122,239 |
| 123,229 |
|
| Corporate items and eliminations | (3,600 | ) | (3,995 | ) | (3,760 | ) |
| Consolidated revenues | $ | 121,615 |
| $ | 118,243 |
| $ | 119,469 |
|
| | | | |
| Segment profit | | | |
| Power | $ | (808 | ) | $ | 1,947 |
| $ | 4,187 |
|
| Renewable Energy | 287 |
| 583 |
| 631 |
|
| Aviation | 6,466 |
| 5,370 |
| 5,324 |
|
| Oil & Gas(b) | 429 |
| 158 |
| 1,302 |
|
| Healthcare | 3,698 |
| 3,488 |
| 3,210 |
|
| Transportation | 633 |
| 641 |
| 966 |
|
| Lighting(a) | 70 |
| 27 |
| 165 |
|
| Total industrial segment profit | 10,774 |
| 12,213 |
| 15,785 |
|
| Capital | (489 | ) | (6,765 | ) | (1,251 | ) |
| Total segment profit | 10,285 |
| 5,448 |
| 14,534 |
|
| Corporate items and eliminations | (2,796 | ) | (4,060 | ) | (2,064 | ) |
| GE goodwill impairments | (22,136 | ) | (1,165 | ) | — |
|
| GE interest and other financial charges | (2,708 | ) | (2,753 | ) | (2,026 | ) |
| GE non-operating benefit costs | (2,764 | ) | (2,385 | ) | (2,349 | ) |
| GE benefit (provision) for income taxes | (957 | ) | (3,691 | ) | (298 | ) |
| Earnings (loss) from continuing operations | | | |
| attributable to GE common shareowners | (21,076 | ) | (8,605 | ) | 7,797 |
|
| Earnings (loss) from discontinued operations, net of taxes | (1,726 | ) | (309 | ) | (954 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | — |
| 6 |
| (1 | ) |
| Earnings (loss) from discontinued operations, | | | |
| net of taxes and noncontrolling interests | (1,726 | ) | (315 | ) | (952 | ) |
| Consolidated net earnings (loss) | | | |
attributable to GE common shareowners | $ | (22,802 | ) | $ | (8,920 | ) | $ | 6,845 |
|
| |
(a) | Lighting segment included Appliances through its disposition in the second quarter of 2016. |
| |
(b) | Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment. Oil & Gas segment profit excluding restructuring and other charges* was $1,045 million and $837 million for the years ended December 31, 2018 and 2017, respectively. |
|
| | | | | | | | | |
| (In billions; per-share amounts in dollars and diluted) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Continuing earnings (loss) attributable to GE common shareholders | $ | — |
| $ | (21.4 | ) | $ | (8.7 | ) |
| Continuing earnings (loss) per share | $ | (0.01 | ) | $ | (2.47 | ) | $ | (1.00 | ) |
For the year ended December 31, 2019, consolidated continuing losses decreased $21.4 billion, due to decreased GE goodwill impairment charges of $20.6 billion, increased GE Industrial segment profit of $0.8 billion, decreased corporate items and eliminations of $0.6 billion and decreased GE interest and other financial charges of $0.3 billion, partially offset by increased provision for GE Industrial income taxes of $0.8 billion and increased GE non-operating benefit costs of $0.1 billion.
GE Industrial segment profit increased $0.8 billion (8%) with higher profit at Power, Aviation and Healthcare partially offset by lower profit at Renewable Energy. Industrial segment profit was also driven in part by the net effects of dispositions of $0.3 billion, primarily associated with the sales of Industrial Solutions, Value-Based Care and Distributed Power in 2018, offset by the effects of a weaker U.S. dollar of $0.1 billion. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic profit* increased $1.0 billion (11%). Corporate items and eliminations decreased $0.6 billion primarily attributable to decreased restructuring and other costs of $1.6 billion, increased net unrealized gains on investments of $0.8 billion, partially offset by decreased net gains from disposed or held for sale businesses of $1.4 billion and increased adjusted Corporate operating costs* of $0.4 billion.
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 13 6
GE Capital continuing losses were flat primarily due to a $1.0 billion pre-tax charge identified through the completion of our annual insurance premium deficiency review, lower gains, lower tax benefits and volume declines, offset by lower impairments, lower excess interest costs and tax law changes. Gains were $0.7 billion and $0.8 billion in 2019 and 2018, respectively, which primarily related to sales of GE Capital Aviation Services (GECAS) aircraft and engines resulting in gains of $0.4 billion and $0.3 billion in 2019 and 2018, respectively, as well as the sale of equity method investments resulting in gains of $0.2 billion in 2019 at Energy Financial Services (EFS) and the sale of EFS’ debt origination business and equity investments resulting in gains of $0.4 billion in 2018.
For the year ended December 31, 2018, consolidated continuing losses increased $12.7 billion driven by increased GE goodwill impairment charges of $21.0 billion, decreased GE Industrial segment profit of $1.8 billion and increased GE non-operating benefit costs of $0.3 billion, partially offset by decreased GE Capital losses of $6.3 billion, decreased provision for GE Industrial income taxes of $3.0 billion, decreased corporate items and eliminations of $1.0 billion and decreased GE interest and other financial charges of $0.1 billion.
GE Industrial segment profit decreased $1.8 billion (16%) with decreases at Power and Renewable Energy, partially offset by higher earnings at Aviation and Healthcare. Industrial segment profit was also driven in part by the net effects of dispositions of $0.4 billion, primarily associated with the absence of Water following its sale in the third quarter of 2017 and Industrial Solutions following its sale in the second quarter of 2018. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic profit* decreased $1.4 billion. Corporate items and eliminations decreased $1.0 billion primarily attributable to higher net gains from disposed or held for sale businesses of $0.4 billion, decreased adjusted Corporate operating costs* of $0.4 billion and decreased restructuring and other costs of $0.1 billion.
GE Capital continuing losses decreased $6.3 billion (93%) primarily due to the nonrecurrence of the 2017 charges associated with the GE Capital insurance premium deficiency review and EFS strategic actions, partially offset by the nonrecurrence of 2017 tax benefits.
GEOGRAPHIC INFORMATION.Our global activities span all geographic regions and primarily encompass manufacturing for local and export markets, import and sale of products produced in other regions, leasing of aircraft, sourcing for our plants domiciled in other global regions and provisioning of financial services within these regional economies. Thus, when countries or regions experience currency and/or economic stress, we often have increased exposure to certain risks, but also often have new opportunities that include, among other things, expansion of industrial activities through purchases of companies or assets at reduced prices and lower U.S. debt financing costs.
Financial results of our non-U.S. activities reported in U.S. dollars are affected by currency exchange. We use a number of techniques to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. Such principal currencies are the euro, the pound sterling, the Brazilian real and the Chinese renminbi.
Revenues are classified according to the region to which products and services are sold. For purposes of this analysis, the U.S. is presented separately from the remainder of the Americas.
|
| | | | | | | | | | | | | | |
| | | | | V% |
| (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
| 2019-2018 | | 2018-2017 |
| | | | | | | |
| U.S. | $ | 39.4 |
| $ | 40.0 |
| $ | 41.5 |
| (2) | % | | (4) | % |
| Non-U.S. | | | | | | |
| Europe | 19.1 |
| 19.8 |
| 18.7 |
| | | |
| Asia | 20.2 |
| 19.3 |
| 18.3 |
| | | |
| Americas | 6.3 |
| 7.9 |
| 7.8 |
| | | |
| Middle East and Africa | 10.3 |
| 10.1 |
| 13.0 |
| | | |
| Total Non-U.S. | $ | 55.8 |
| $ | 57.1 |
| $ | 57.8 |
| (2) | % | | (1) | % |
| Total geographic revenues | $ | 95.2 |
| $ | 97.0 |
| $ | 99.3 |
| (2) | % | | (2) | % |
| Non-U.S. revenues as a % of consolidated revenues | 59 | % | 59 | % | 58 | % | | | |
The decrease in non-U.S. revenues in 2019 was primarily due to a decrease of 20% in Americas, partially offset by an increase of 4% in Asia.
The decrease in non-U.S. revenues in 2018 was primarily due to a decrease of 22% in Middle East and Africa, partially offset by increases of 6% in Europe and 5% in Asia.
The effects of currency fluctuations on reported results were as follows:
Decreased revenues by $1.4 billion in 2019, primarily driven by the euro ($0.7 billion), the Chinese renminbi ($0.2 billion), the Brazilian real ($0.1 billion), the pound sterling ($0.1 billion), and the Australian dollar ($0.1 billion).
Increased revenues by $0.5 billion in 2018, primarily driven by the euro ($0.3 billion).
*Non-GAAP Financial Measure
AVIATION AND GECAS 737 MAX. Aviation develops, produces, and sells LEAP aircraft engines through CFM International (CFM), a company jointly owned by GE and Safran Aircraft Engines, a subsidiary of the Safran Group of France. The LEAP-1B engine is the exclusive engine for the Boeing 737 MAX. In March 2019, global regulatory authorities ordered a temporary fleet grounding of the Boeing 737 MAX. During the second quarter of 2019, Boeing announced a temporary reduction in the 737 MAX production rate, and CFM reduced its production rate for the LEAP-1B to meet Boeing's revised aircraft build rate. In December 2019, Boeing announced that it would temporarily suspend production of the 737 MAX beginning in January 2020. CFM is working closely with Boeing to align production rates for 2020 and ensure a successful reentry into service, with a strong commitment to safety while navigating near-term industry disruption. As a result of the 737 MAX grounding, GE CFOA was adversely affected by approximately $1.4 billion for the year ended December 31, 2019, which primarily represents the growth in receivables, net of progress collections, and lower collections on new purchase orders. Within Aviation, this effect was more than offset by: higher commercial aftermarket earnings and higher long-term service agreement billings of $0.6 billion; cash receipts from contract modifications of $0.3 billion; a new spare parts distribution deal for a legacy engine program of $0.3 billion; and lower customer allowance payments of $0.4 billion. Other Aviation working capital cash flows, excluding the impact of the 737 MAX grounding, largely offset. Any impact to GE CFOA in 2020 is dependent on the timing of the 737 MAX return to service and engine production rates.
At December 31, 2019, GECAS owned 29 737 MAX aircraft, 26 of which are contracted for lease to airlines that remain obligated to make contractual rental payments. In addition, GECAS has made pre-delivery payments to Boeing related to 144 of these aircraft on order and has made financing commitments to acquire a further 18 aircraft under purchase and leaseback contracts with airlines.
As of December 31, 2019, we have approximately $2.5 billion of net assets ($4.8 billion of assets and $2.3 billion of liabilities) related to the 737 MAX program that primarily comprise accounts receivable, pre-delivery payments and owned aircraft subject to lease offset by progress collections. No impairment charges were incurred related to the 737 MAX aircraft and related balances in 2019 as we continue to believe these assets are fully recoverable. We continue to monitor these developments with our airline customers, lessees and Boeing.
LEAP continues to be a strong engine program for us, and we delivered 1,736 LEAP engines for Boeing and Airbus platforms in the year.
SEGMENT OPERATIONS.Segment revenues include sales of products and services by the segment. Industrial segment profit is determined based on performance measures used by our Chief Operating Decision Maker (CODM), who is our Chief Executive Officer (CEO), to assess the performance of each business in a given period. In connection with that assessment, the CEO may exclude matters, such as charges for impairments, restructuring, rationalization and other similar expenses, acquisition costs and other related charges, certain gains and losses from acquisitions or dispositions, and certain litigation settlements. See the GE Corporate Items and Eliminations section within MD&A for additional information about costs excluded from segment profit.
Segment profit excludes results reported as discontinued operations and the portion of earnings or loss attributable to noncontrolling interests of consolidated subsidiaries, and as such only includes the portion of earnings or loss attributable to our share of the consolidated earnings or loss of consolidated subsidiaries.
Interest and other financial charges, income taxes and non-operating benefit costs are excluded in determining segment profit for the industrial segments. Interest and other financial charges, income taxes, non-operating benefit costs and GE Capital preferred stock dividends are included in determining segment profit (which we sometimes refer to as net earnings) for the Capital segment. Other income is included in segment profit for the industrial segments.
Certain corporate costs, such as those related to shared services, employee benefits, and information technology, are allocated to our segments based on usage. A portion of the remaining corporate costs is allocated based on each segment’s relative net cost of operations.
|
| | |
| MD&A | SEGMENT OPERATIONS | POWER | |
POWER |
| |
|
Power serves power generation, industrial, government and other customers worldwide with products and services related to energy production and water reuse. Our products and technologies harness resources such as oil, gas, coal, diesel, nuclear and water to produce electric power and include gas and steam turbines, full balance of plant, upgrade and service solutions, as well as data-leveraging software. We employ approximately 59,700 people, serve customers in 150+ countries, and our headquarters is located in Schenectady, NY.
|
During the fourth quarter |
| | | | | | | | | |
SUMMARY OF REPORTABLE SEGMENTS (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Power | $ | 18,625 |
| $ | 22,150 |
| $ | 29,426 |
|
| Renewable Energy | 15,337 |
| 14,288 |
| 14,321 |
|
| Aviation | 32,875 |
| 30,566 |
| 27,013 |
|
| Healthcare | 19,942 |
| 19,784 |
| 19,017 |
|
| Total industrial segment revenues | 86,778 |
| 86,789 |
| 89,776 |
|
| Capital | 8,741 |
| 9,551 |
| 9,070 |
|
| Total segment revenues | 95,519 |
| 96,339 |
| 98,847 |
|
| Corporate items and eliminations | (305 | ) | 673 |
| 433 |
|
| Consolidated revenues | $ | 95,214 |
| $ | 97,012 |
| $ | 99,279 |
|
| | | | |
| Power | $ | 386 |
| $ | (808 | ) | $ | 1,894 |
|
| Renewable Energy | (666 | ) | 292 |
| 728 |
|
| Aviation | 6,820 |
| 6,466 |
| 5,370 |
|
| Healthcare | 3,896 |
| 3,698 |
| 3,488 |
|
| Total industrial segment profit | 10,436 |
| 9,647 |
| 11,479 |
|
| Capital | (530 | ) | (489 | ) | (6,765 | ) |
| Total segment profit | 9,906 |
| 9,158 |
| 4,714 |
|
| Corporate items and eliminations | (2,212 | ) | (2,837 | ) | (3,798 | ) |
| GE goodwill impairments | (1,486 | ) | (22,136 | ) | (1,165 | ) |
| GE interest and other financial charges | (2,115 | ) | (2,415 | ) | (2,538 | ) |
| GE non-operating benefit costs | (2,828 | ) | (2,740 | ) | (2,409 | ) |
| GE benefit (provision) for income taxes | (1,309 | ) | (467 | ) | (3,493 | ) |
| Earnings (loss) from continuing operations attributable to GE common shareholders | (44 | ) | (21,438 | ) | (8,689 | ) |
| Earnings (loss) from discontinued operations, net of taxes | (5,335 | ) | (1,363 | ) | (312 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | 60 |
| 1 |
| (81 | ) |
| Earnings (loss) from discontinued operations, net of taxes and noncontrolling interests | (5,395 | ) | (1,364 | ) | (231 | ) |
| Consolidated net earnings (loss) attributable to GE common shareholders | $ | (5,439 | ) | $ | (22,802 | ) | $ | (8,920 | ) |
POWER
Products & Services. Power serves power generation, industrial, government and other customers worldwide with products and services related to energy production. Our products and technologies harness resources such as oil, gas, fossil, diesel, nuclear and water to produce electric power and include gas and steam turbines, full balance of 2018,plant, upgrade and service solutions, as well as data-leveraging software.
In 2019, we announced our intention to reorganizereorganized the businesses within our Power segment into GE Gas Power and Power Portfolio, and effectively eliminatewe completed the reorganization of our Grid Solutions equipment and services business into our Renewable Energy segment and our Grid Solutions software and Power headquarters structureDigital businesses into Corporate for all periods presented. Power Portfolio's 2018 and 2017 results also include our former Industrial Solutions and Distributed Power businesses which were sold in order to reduce costsJune 2018 and improve operations. Upon completion, GE November 2018, respectively.
Gas Power will be a unified gas life cycle business combining our Gas Power Systems and Power Services businesses, while Power Portfolio will comprise our Steam Power Systems (including services currently reported in Power Services), Power Conversion and GE Hitachi Nuclear businesses. We anticipate the reorganization to be completed by the second half of 2019.
Gas Power Systems –offers a wide spectrum of heavy-duty and aeroderivative gas turbines for utilities, independent power producers and numerous industrial applications, ranging from small, mobile power to utility scale power plants.
Gas Power also delivers maintenance, service and upgrade solutions across total plant assets and over their operational lifecycle. Our gas turbine installed base was approximately 7,700 units as of December 31, 2019.Steam Power SystemsPortfolio –offers steam power technology for coalfossil and nuclear applications including boilers, generators, steam turbines and Air Quality Control Systems (AQCS) to help efficiently produce power and provide performance over the life of a power plant.
Power Services –delivers maintenance, service and upgrade solutions across total plant assets and over their operational lifecycle, leveraging the Industrial Internet to improve the performance of such solutions. Long-term service agreements for both Gas Power Systems and Steam Power Systems are collectively managed in Power Services.
Grid Solutions - offers products and services, such as high voltage equipment, power electronics, automation and protection equipment and software solutions, and serves industries such as generation, transmission, distribution, oil and gas, telecommunication, mining and water. We announced our intention to reorganize Grid Solutions into our Renewable Energy segment.
Power Conversion -Portfolio also applies the science and systems of power conversion to provide motors, generators, automation and control equipment and drives for energy intensive industries such as marine, oil and gas, renewable energy, mining, rail, metals, test systems and water.
Automation & Controls- serves as the Controls Center of Excellence for GE and partners with GE Digital, the Global Research Center, and GE businesses around the world to provide control solutions to help customers become more productive and efficient. We announced our intention to reorganize Automation & Controls into our Grid Solutions, Steam Power Systems and Gas Power Systems businesses.
GE Hitachi Nuclear– It also offers advanced reactor technologies solutions, including reactors, fuels and support services for boiling water reactors, through joint ventures with Hitachi and Toshiba for safety, reliability and performance for nuclear fleets.
Competition & Regulation. Worldwide competition for power generation products and services is intense. Demand for power generation is global, and as a result, is sensitive to the economic and political environments of each country in which we do business. Our products and services sold to end customers are often subject to a number ofmany regulatory specificationrequirements and performance standards under different federal, state, foreign and energy industry standards.
|
|
Significant Trends & Developments |
In September 2017, we announced an agreement to sell our Industrial Solutions business for approximately $2.2 billion (net of cash transferred) to ASEA Brown Boveri (ABB), a Swiss-based engineering company. On June 29, 2018, we completed the sale and recognized a pre-tax gain of $0.3 billion in the second quarter of 2018. This gain was recorded within Corporate.
In June 2018, we announced an agreement to sell our Distributed Power business to Advent International, a global private equity investor, for approximately $2.8 billion (net of cash transferred). On November 6, 2018, we completed the sale and recognized a pre-tax gain of $0.7 billion. This gain was recorded within Corporate.
During the second half of 2018, we recognized non-cash pre-tax goodwill impairment charges of $22.0 billion related to our Power Generation and Grid Solutions reporting units. These charges were all recorded within Corporate. See Note 8 to the consolidated financial statements for further information.
Significant Trends & Developments. The Powerpower market as well as its operating environment continuescontinue to be challenging, andchallenging. Over the past several quarters, our outlook for Power has continued to deterioratewas driven by the significant overcapacity in the industry, resulting in decreased utilization of our power equipment, lower market penetration, increased price concessionspressure from competition on certain long-term contracts as well asservicing the installed base, and the uncertain timing of deal closures due to financing and the complexities of working in emerging markets. In addition, our near-term earnings outlook has been negatively impacted by project execution and our own underlying operational challenges.
markets. Market factors such as increasing energy efficiency and renewable energy penetration, the growth in global supply of liquefied natural gas, as well as the cost-competitiveness of different sources of power generation continue to impact our view ofhow we evaluate long-term demand. We believe the overall market for annual heavy-duty gas orders will be between 25 and 30 gigawatts for 2019 and the foreseeable future.demand.
GE20182019 FORM 10-K 14
9
|
| | |
| MD&A | SEGMENT OPERATIONS | POWER | |
Advanced Gas Path (AGP) upgrades have also experienced decreased market demand as well as saturation in the North American market given previous penetration; however, we expect upgrade demand to continue in the Middle East, Africa and Southeast Asia markets.
During the third quarter of 2018, Gas Power Systems recorded a $0.2 billion pre-tax charge related to an oxidation issue within the HA and 9FB Stage 1 turbine blades, resulting in increased warranty and maintenance reserves. In addition, Power recognized pre-tax charges of approximately $0.4 billion associated with an increase in issues on our existing projects driven by execution as well as partner and customer challenges.
During the fourth quarter of 2018, we recorded pre-tax charges of $0.8 billion, of which $0.4 billion was related to various assumption updates for unfavorable pricing, lower utilization, and cost updates on our long-term service agreements and $0.4 billion related to execution issues resulting in liquidated damages and partner execution issues on our long-term equipment projects at Gas Power Systems.
In 2018, we reduced structural costs* by $0.9 billion, excluding the effects of acquisition and disposition activity, for the year, and we expect restructuring efforts to continue into 2019.
We have made significant changes and are heavilywill continue to take actions to right size our business for the current market conditions and our long-term outlook, including restructuring our operations to dispose of non-core businesses, resizing our remaining businesses to better align with market demand and driving these businesses with an operational rigor and discipline that is focused on improving our operationalcustomers’ lifecycle experience. We are building a cost structure to support an average 25 to 30 gigawatt new unit gas turbine market; however, actual orders in a given year can vary. As a result of these actions and project execution across everyoverall market conditions, we believe the business in Power.is showing early signs of stabilization. We expect operations to stabilizeincremental improvements in 2019,2020 with improving execution, a refocused services strategyfurther acceleration in 2021 and strong execution on cost reduction.beyond.
Digital offerings have been developed to further complement our equipment and services business and drive value and better outcomes for our customers.
The business has continuedWe continue to invest in new product development, such as our HA-Turbines, advancedincluding upgrades, substation automation, connected controls, micro-grids, energy storageas these are critical to our customers and digital solutions, to expand our equipment and services offerings. Subsequent to the large investment needed to develop our HA-Turbines, we expect overall research and development costs to decrease going forward to better align with the economic realitieslong-term strategy of the end demand markets.business.
|
| | | | | | |
GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
|
| | | |
| U.S. | $ | 8.2 |
| $ | 10.9 |
|
| Non-U.S. | | |
| Europe | 5.8 |
| 6.3 |
|
| Asia | 5.5 |
| 6.4 |
|
| Americas | 3.3 |
| 3.5 |
|
| Middle East and Africa | 4.6 |
| 7.8 |
|
| Total Non-U.S. | $ | 19.1 |
| $ | 24.0 |
|
| Total Segment Revenues | $ | 27.3 |
| $ | 34.9 |
|
| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 70 | % | 69 | % |
|
| | | | | | | | | |
| | Orders | | Sales |
| (In units) | 2019 |
| 2018 |
| | 2019 |
| 2018 |
|
| | | | | | |
| GE Gas Turbines | 74 |
| 52 |
| | 53 |
| 59 |
|
| Heavy-Duty Gas Turbines(a) | 63 |
| 43 |
| | 38 |
| 42 |
|
| HA-Turbines(b) | 18 |
| 10 |
| | 11 |
| 12 |
|
| Aeroderivatives(a) | 11 |
| 9 |
| | 15 |
| 17 |
|
| GE Gas Turbine Gigawatts(c) | 13.6 |
| 8.0 |
| | | |
(a) Heavy-Duty Gas Turbines and Aeroderivatives are subsets of GE Gas Turbines. (b) HA-Turbines are a subset of Heavy-Duty Gas Turbines. (c) Gigawatts reported associated with financial orders in the periods presented. |
|
| | | | | | |
SUB-SEGMENT REVENUES(a) (In billions) | 2018 |
| 2017 |
|
| | | |
| Gas Power Systems(b) | $ | 5.2 |
| $ | 8.0 |
|
| Steam Power Systems | 1.9 |
| 2.2 |
|
| Power Services | 11.8 |
| 12.9 |
|
| Other(c) | 8.4 |
| 11.8 |
|
| Total Segment Revenues | $ | 27.3 |
| $ | 34.9 |
|
|
| | | | | | | | | |
| (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Equipment | $ | 17.7 |
| $ | 18.8 |
| $ | 19.3 |
|
| Services | 67.6 |
| 66.2 |
| 70.4 |
|
| Total backlog | $ | 85.3 |
| $ | 85.0 |
| $ | 89.7 |
|
| | | | |
| Equipment | $ | 5.2 |
| $ | 9.3 |
| $ | 13.0 |
|
| Services | 11.7 |
| 13.3 |
| 17.0 |
|
| Total orders | $ | 16.9 |
| $ | 22.6 |
| $ | 30.0 |
|
|
|
(a) Upon completion of our announced reorganization, Gas Power Systems and Power Services will comprise GE Gas Power, while Steam Power
Systems (including services currently reported in Power Services), Power Conversion and GE Hitachi Nuclear will comprise Power Portfolio.
(b) Includes Distributed Power until its disposition in the fourth quarter of 2018.
(c) Includes Grid Solutions, Power Conversion, Automation & Controls, GE Hitachi Nuclear, Water & Process Technologies until its disposition in the
third quarter of 2017 and Industrial Solutions until its disposition in the second quarter of 2018. |
|
| | | | | | | | | |
| Gas Power | $ | 13.1 |
| $ | 13.3 |
| $ | 17.1 |
|
| Power Portfolio | 5.5 |
| 8.9 |
| 12.3 |
|
| Total segment revenues | $ | 18.6 |
| $ | 22.1 |
| $ | 29.4 |
|
|
| | | | | | |
ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
|
| | | |
| Orders | | |
| Equipment | $ | 13.1 |
| $ | 17.6 |
|
| Services | 14.4 |
| 18.0 |
|
| Total | $ | 27.5 |
| $ | 35.7 |
|
| | | |
| Backlog | | |
| Equipment | $ | 24.3 |
| $ | 26.3 |
|
| Services | 67.6 |
| 71.8 |
|
| Total | $ | 91.9 |
| $ | 98.1 |
|
*Non-GAAP Financial Measure
|
| | | | | | | | | |
| U.S. | $ | 6.0 |
| $ | 7.5 |
| $ | 9.9 |
|
| Non-U.S. | | | |
| Europe | 3.1 |
| 4.5 |
| 5.1 |
|
| Asia | 4.0 |
| 4.1 |
| 5.0 |
|
| Americas | 1.9 |
| 2.5 |
| 2.6 |
|
| Middle East and Africa | 3.6 |
| 3.5 |
| 6.8 |
|
| Total Non-U.S. | $ | 12.6 |
| $ | 14.7 |
| $ | 19.5 |
|
| Total segment revenues | $ | 18.6 |
| $ | 22.1 |
| $ | 29.4 |
|
| Non-U.S. revenues as a % of segment revenues | 68 | % | 66 | % | 66 | % |
|
| | | | | | | | | |
| Equipment | $ | 6.2 |
| $ | 8.1 |
| $ | 12.9 |
|
| Services | 12.4 |
| 14.1 |
| 16.5 |
|
| Total segment revenues(a) | $ | 18.6 |
| $ | 22.1 |
| $ | 29.4 |
|
| | | | |
| Segment profit(b) | $ | 0.4 |
| $ | (0.8 | ) | $ | 1.9 |
|
| Segment profit margin | 2.1 | % | (3.6 | )% | 6.4 | % |
(a) Power segment revenues represent 21% and 19% of total industrial segment revenues and total segment revenues, respectively, for the year ended December 31, 2019.
(b) Power segment profit represents 4% of total industrial segment profit for the year ended December 31, 2019.
GE20182019 FORM 10-K 15 10
|
| | |
| MD&A | SEGMENT OPERATIONS | POWER | |
For the year ended December 31, 2019, segment orders were down $5.7 billion (25%), segment revenues were down $3.5 billion (16%) and segment profit was up $1.2 billion. |
| | | | | | |
| GAS TURBINES | 2018 |
| 2017 |
| V |
|
| Unit Orders | 43 |
| 75 |
| (32 | ) |
| Unit Sales | 42 |
| 102 |
| (60 | ) |
Orders decreased $2.5 billion (13%) organically mainly due to a decrease in Steam orders at Power Portfolio, partially offset by 20 more heavy duty gas turbine orders. |
| | | | | | | | | |
SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Revenues | | | |
| Equipment | $ | 12.3 |
| $ | 17.5 |
| $ | 17.4 |
|
| Services | 15.0 |
| 17.4 |
| 18.5 |
|
| Total(a) | $ | 27.3 |
| $ | 34.9 |
| $ | 35.8 |
|
| | | | |
SEGMENT PROFIT AND PROFIT MARGIN (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Segment profit(b) | $ | (0.8 | ) | $ | 1.9 |
| $ | 4.2 |
|
| Segment profit margin | (3.0 | )% | 5.6 | % | 11.7 | % |
| |
(a) | Power segment revenues represent 24% and 22% of total industrial segment revenues and total segment revenues, respectively, for the year ended December 31, 2018. |
| |
(b) | Power segment profit represents (7)% of total industrial segment profit for the year ended December 31, 2018. |
Revenues decreased $0.2 billion (1%) organically* primarily due to a decrease in services revenue at Power Portfolio. Segment revenues down $7.6Profit increased $1.4 billion (22%);
Segment profit down $2.8 billion:
The Power marketorganically* due to improved variable cost productivity driven by the absence of significant warranty and project cost updates, as well as its operating environment continuesliquidated damages recognized in 2018.
For the year ended December 31, 2018, segment orders were down $7.4 billion (25%), segment revenues were down $7.3 billion (25%) and segment profit was down $2.7 billion.
Backlog as of December 31, 2018 decreased $4.7 billion (5%) primarily due to be challenging driven bya reduction in services backlog of $4.2 billion attributable to Gas Power and due to the significant overcapacity in the industry, decreased utilizationabsence of our power equipment, increased price concessions, uncertain timing of deal closuresDistributed Power and Industrial Solutions businesses in Power Portfolio.
Orders decreased $4.0 billion (15%) organically mainly due to financing and the complexities of working in emerging markets, as well as increasing energy efficiency and renewable energy penetration.
During the third quarter of 2018, Gas Power Systems recorded a $0.2lower gas turbine and services orders.
Revenues decreased $4.5 billion pre-tax charge related to an oxidation issue within the HA and 9FB Stage 1 turbine blades, resulting in increased warranty and maintenance reserves. In addition, we recognized pre-tax charges of approximately $0.4 billion associated with an increase in issues on our existing projects driven by execution as well as partner and customer challenges. During the fourth quarter of 2018, we recorded pre-tax charges of $0.8 billion, of which $0.4 billion was related to various assumption updates for unfavorable pricing, lower utilization, and cost updates on our long-term service agreements and $0.4 billion related to execution issues resulting in liquidated damages and partner execution issues on our long-term equipment projects at Gas Power Systems.
(17%) organically*. Equipment revenues decreased primarily at Gas Power, Systems by $2.7 billion due to lower unit sales, including 60 fewer gas turbines, 26 fewer Heat Recovery Steam Generators and 23 fewer aeroderivative units. Services revenues also decreased $1.1 billion at Power Services primarily due to 27 fewer AGP upgrades. In addition, revenues
Profit decreased due to the absence of Industrial Solutions which contributed $1.4$2.4 billion in the second half of 2017 that did not recur in 2018 following the sale in June 2018 as well as the absence of Water which contributed $1.5 billion in 2017 prior to the sale in September 2017. Revenues further decreased due to price pressure, partially offset by the effects of a weaker U.S. dollar versus certain currencies.
The decrease in profit wasorganically* due to negative variable cost productivity driven by warranty, and project cost updates as well as liquidated damages, and various assumption updates for unfavorable pricing, lower utilization, and cost updates on our long-term service agreements recognized by Gas Power Systems, lower volume including the absence of Industrial Solutions $0.1 billionPower.
RENEWABLE ENERGY
Products & Services. Renewable Energy engineers and Water $0.1 billion, lower pricesmanufactures energy equipment and negative mix inprojects, grid solutions and digital services that create industry-leading value for our long-term service contracts compared to the prior year. These decreases were partially offset by favorable business mixcustomers globally. Combining onshore and cost reduction efforts, excluding the effects of acquisitionoffshore wind, blades, hydro and disposition activity and foreign exchange.
Segment revenues down $1.0 billion (3%);
Segment profit down $2.2 billion (53%):
The power market continues to be challenged by the increasing penetration of renewable energy, fleet penetration for AGPs, lower capacity payments, utilization, and service outages which decreased 8% from the prior year. In addition, excess capacity in developed markets, continued pressure in oil and gas applications and macroeconomic and geopolitical environments have created uncertainty in the industry.
Services revenues decreased primarily at Power Services by $0.8 billion due to 65 fewer AGP upgrades. Equipment revenues increased primarily at Gas Power Systems by $0.4 billion due to higher balance of plantgrid solutions, as well as 46hybrid renewables and digital services offerings, we have installed more Heat Recovery Steam Generator shipments, partially offset by two fewer gas turbinethan 400 gigawatts of clean renewable energy equipment and 55 fewer aeroderivative units. Revenues further decreased due to the absencemore than 90 percent of Water which contributed $0.6 billion in the fourth quarter of 2016 that did not recur following the sale in September 2017 and price pressure, partially offset by the effects of a weaker U.S. dollar versus certain currencies.
utilities worldwide with our grid solutions.The decrease in profit was partially driven by $0.9 billion of charges in the fourth quarter primarily related to slow moving and obsolete inventory in Power Services, Gas Power Systems, and Power Conversion, a litigation settlement and a bankruptcy of a distributor. Profit further declined due to negative variable cost productivity, unfavorable business mix due to higher revenues from lower margin balance of plant volume and fewer higher margin aeroderivative units, and price pressure. These decreases were partially offset by positive base cost productivity.
|
| | |
MD&A | SEGMENT OPERATIONS | RENEWABLE ENERGY |
RENEWABLE ENERGY |
| |
| GE Renewable Energy makes renewable power sources affordable, accessible and reliable for the benefit of people everywhere. With one of the broadest technology portfolios in the industry, Renewable Energy creates value for customers with solutions from onshore and offshore wind, hydro and its wind turbine blade manufacturing business. With operations in over 80 countries around the world, Renewable Energy can deliver solutions to where its customers need them most. We employ approximately 22,900 people, serve customers in 80+ countries, and our headquarters is located in Paris, France. |
Onshore Wind –delivers technology and services for the onshore wind power industry by providing smart turbines that are uniquely situated for a variety of wind turbine platforms and hardware and software to optimize wind resources.environments. Wind services help customers improve availability and value of their assets over the lifetime of the fleet. The Digital Wind Farm is a site level solution, creating a dynamic, connected and adaptable ecosystem that improves our customers’ fleet operations.
Our Onshore Wind turbine installed base was approximately 45,000 units as of December 31, 2019.Offshore Wind–offers its high-yieldleads the industry in offshore wind turbine,power technologies to be used in offshore wind farm development with the Haliade X-12MW prototype, the most powerful offshore wind turbine commercially available, driving down offshore wind’s levelized costin the world.
Grid Solutions Equipment and Services (Grid) – equips power utilities and industries worldwide to bring power reliably and efficiently from the point of energy with an industry leadinggeneration to end customers through offering products, such as high voltage equipment, power electronics, automation and protection equipment, and servicing the generation, transmission, distribution, oil and gas, telecommunication, mining and water industries. In the second quarter of 2019, we completed the reorganization of our Grid business into our Renewable Energy segment for all periods presented.
Hydro – represents more than 25 percent of the total installed hydropower capacity factor and digital capabilities to help customers succeed in an increasingly competitive environment
Hydro – providesworldwide through a full rangeportfolio of solutions products and services, to serveincluding the hydropower industry from initial design, to final commissioning, from Low Head / Medium / High Head hydropower plants to pumped storagemanagement, construction, installation, maintenance and operation of both large hydropower plants and small hydropower plants.
solutions, as well as offering a comprehensive asset management program to hydro power plant operators.LM Wind Power - designs and manufactures blades for onshore and offshore wind turbines. LM became part of GE after a $1.7 billion acquisition in April 2017 and serves both GE and external customers worldwide, through advanced rotor solutions, improved blade efficiency, increased rotor swept-area, proven reliability and a global manufacturing footprint on or close to all major markets for wind.
Renewable energy is now mainstream and able to compete subsidy-free with other sources of power generation. Competition & Regulation. While many factors, including government incentives and specific market rules, affect how renewable energy can deliver outcomes for customers in a given region, renewable energy is increasingly able to compete with fossil fuels in terms of levelized cost of electricity. However, continued competitive pressure from other wind and hydro turbine manufacturers as well as from other energy sources, such as solar photovoltaic, reinforced by a general move to electricity auction mechanisms, increaseshave increased price pressure and the need for innovation.
As a result, we are investingWe continue to keep renewable energy competitive byinvest in exploring new ways of further improving the efficiency and flexibility of our hydropower technology with digital solutions and by moving forward within generating wind turbine product improvements, including larger rotors, taller towers and higher nameplate ratings that continue to drive down the cost of wind energy. As industry models continue to evolve, our digital strategy and investments in technical innovation will position us to add value for customers looking for clean, renewable energy.
|
|
Significant Trends & Developments |
During the fourth quarter of 2018, we recognized non-cash pre-tax goodwill impairment charges of $0.1 billion related to our Hydro reporting unit. This charge was recorded within Corporate. See Note 8 to the consolidated financial statements for further information.
Significant Trends & Developments. Renewable energy is in a rapid transition period and is on track to become a fully commercialized, unsubsidized source of energy, successfullynow competing in the marketplace against existing and new conventional energy sources. Wind energy is nowcurrently the second-largest contributor to renewable capacity growth whilewith hydropower is projected to remain the largest renewable electricity source through 2023.
Influential businesses like Apple, Google, Microsoft and Amazon are increasingly committing to renewable energy, typically contracting for output from various renewable sources directly using Power Purchase Agreements (PPAs). GE’s EFS business has enabled several deals of this nature that use wind turbines from GE Renewable Energy’s Onshore Wind unit.
Consequently,
*Non-GAAP Financial Measure
|
| | |
| MD&A | SEGMENT OPERATIONS | RENEWABLE ENERGY |
During 2019, the renewable energy market is highly competitive, particularly in onshore wind resultingmarket in significantthe U.S. continued to see the positive impact from the Production Tax Credit (PTC) cycle and customer preference shifting to larger, more efficient units to drive down costs and compete with other power generation options. Despite the competitive nature of the market, onshore wind order pricing pressure. Pricing for our Onshore Wind business was downstabilized in 20182019 due to demand caused by the impactprogressive phase-down of auctionsPTCs in manythe U.S. starting in 2020 and auction stabilization in international marketsmarkets. The phase-down of PTCs in the U.S. has recently been extended by a year such that certain projects completed through 2024 could qualify for these credits and the competitive environment across all renewable sources.
we expect to continue high levels of production for 2020 deliveries at Onshore Wind. We believe that North America will continue to be a solid market in the near term with two main dynamics at play. First, we expect a ramp-up in 2019-2020 leading upclosely monitor our execution during this period including risks of delivery delays due to the expiration of the PTC at 100% value in 2020. PTC credits will be phased out after 2020 which we anticipate may have an adverse impact on the U.S. market. Second, wecustomer site readiness issues and possible project postponements.
We expect additional opportunities to “repower”repower existing wind turbines. Repowering allows customers to increase the annual energy output of their installed base, provides more competitively priced energy and extends the life of their assets. The repower market remains robust, and we expect continued strong demand through 2019in 2020 and beyond. To date,
The grid market continues to be challenging as we have commissioned over 1,000 repowered turbines,experienced current year order declines in the High Voltage Direct Current (HVDC) and we are seeing excellent operating performance of those turbines throughout our broad customer base.
|
| | |
MD&A | SEGMENT OPERATIONS | RENEWABLE ENERGY |
High Voltage (HV) product lines. Given price pressure, the need for grid flexibility to accommodate more renewable energy, and the diversification of energy players, the hydropower industry continues to maximize value with new small-scale and pumped storage projects to support both wind and solar expansion. The Grid and Hydro businesses are executing their turnaround plans and we are expecting improvements in contribution margin in 2020.
The onshore wind market continues to see megawatt (MW) growth in turbines as customer preference has shifted from 1.X-2.X models to larger, more efficient units. In 2018, more than 40% of global turbine sales consisted of machines with 3.0MW or higher ratings.
New Product Introductions (NPIs)product introductions continue to be a key lever asimportant to our customers show awho are demonstrating the willingness to invest inadopt the new technology of larger turbines that decreasesdecrease the levelized cost of energy. In September 2018, we launched our new onshore wind turbine platform Cypress, and the next model from that platform, GE’s 5.3-158 wind turbine. Designed to scale over time to meet customer needs through the 5MW range, Cypress enables significant Annual Energy Production (AEP) improvements, increased efficiency in serviceability and improved logistics and siting potential. We also introduced our next generation Haliade-X offshore wind turbine with a 12 MW generator rating and a 220-meter rotor (107-meter blade designed by LM Wind Power) to meet the needs of customers facing “zero-subsidy” auctions. Looking ahead, we are continuingcontinue to focus on taking cost outreduction initiatives of our NPI machines,products, in-sourcing blade production and developing larger, more efficient turbines like the Haliade-X (Offshore Wind) and Cypress.
Cypress (Onshore Wind). During the first quarter of 2019, we announcedsigned our intentionlargest Cypress order to reorganize our Grid Solutions, Solardate, and storage assets in our Energy Connections business within our Power segment into our Renewable Energy segment, creating an end-to-end offering for Renewable Energy customerswere selected as the demandpreferred supplier for renewable power generationtwo Offshore wind projects in the U.S. and grid integration continues to grow globally.United Kingdom (U.K.), an important commercial milestone for the Haliade-X. In October 2019, the prototype for the Haliade-X was successfully installed with final certification expected by the middle of 2020.
|
| | | | | | |
GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
|
| | | |
| U.S. | $ | 4.3 |
| $ | 4.8 |
|
| Non-U.S. | | |
| Europe | 1.9 |
| 1.6 |
|
| Asia | 1.6 |
| 0.8 |
|
| Americas | 1.5 |
| 1.5 |
|
| Middle East and Africa | 0.2 |
| 0.5 |
|
| Total Non-U.S. | $ | 5.2 |
| $ | 4.4 |
|
| Total Segment Revenues | $ | 9.5 |
| $ | 9.2 |
|
| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 54 | % | 48 | % |
|
| | | | | | | | | |
| | Orders | | Sales |
| (In units) | 2019 |
| 2018 |
| | 2019 |
| 2018 |
|
| | | | | | |
| Wind Turbines | 4,325 |
| 3,198 |
| | 3,424 |
| 2,491 |
|
| Wind Turbine Megawatts | 12,758 |
| 8,591 |
| | 9,525 |
| 6,823 |
|
| Repower | 1,269 |
| 1,621 |
| | 1,057 |
| 1,160 |
|
|
| | | | | | |
SUB-SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
|
| | | |
| Onshore Wind | $ | 8.3 |
| $ | 8.1 |
|
| Offshore Wind | 0.4 |
| 0.3 |
|
| Hydro | 0.8 |
| 0.9 |
|
| Total Segment Revenues | $ | 9.5 |
| $ | 9.2 |
|
|
| | | | | | | | | |
| (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Equipment | $ | 16.3 |
| $ | 14.4 |
| $ | 15.0 |
|
| Services | 11.2 |
| 9.3 |
| 7.4 |
|
| Total backlog | $ | 27.5 |
| $ | 23.7 |
| $ | 22.5 |
|
| | | | |
| Equipment | $ | 14.0 |
| $ | 11.8 |
| $ | 12.8 |
|
| Services | 2.9 |
| 3.5 |
| 2.6 |
|
| Total orders | $ | 16.9 |
| $ | 15.3 |
| $ | 15.4 |
|
|
| | | | | | |
ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
|
| | | |
| Orders | | |
| Equipment | $ | 7.9 |
| $ | 8.2 |
|
| Services | 3.0 |
| 2.2 |
|
| Total | $ | 10.9 |
| $ | 10.4 |
|
| | | |
| Backlog | | |
| Equipment | $ | 8.5 |
| $ | 7.9 |
|
| Services | 8.7 |
| 6.9 |
|
| Total | $ | 17.3 |
| $ | 14.8 |
|
|
| | | | | | | | | |
| Onshore Wind | $ | 10.4 |
| $ | 8.2 |
| $ | 8.1 |
|
| Grid Solutions equipment and services | 4.1 |
| 4.8 |
| 5.1 |
|
| Other | 0.9 |
| 1.3 |
| 1.1 |
|
| Total segment revenues | $ | 15.3 |
| $ | 14.3 |
| $ | 14.3 |
|
|
| | | | | | |
| WIND TURBINES | 2018 |
| 2017 |
| V |
|
| Unit Orders | 3,198 |
| 3,017 |
| 181 |
|
| Unit Sales | 2,491 |
| 2,604 |
| (113 | ) |
|
| | | | | | | | | |
| U.S. | $ | 7.4 |
| $ | 4.9 |
| $ | 5.6 |
|
| Non-U.S. | | | |
| Europe | 2.9 |
| 3.2 |
| 3.0 |
|
| Asia | 2.7 |
| 2.9 |
| 2.1 |
|
| Americas | 1.1 |
| 2.2 |
| 2.4 |
|
| Middle East and Africa | 1.2 |
| 1.1 |
| 1.2 |
|
| Total Non-U.S. | $ | 7.9 |
| $ | 9.4 |
| $ | 8.7 |
|
| Total segment revenues | $ | 15.3 |
| $ | 14.3 |
| $ | 14.3 |
|
| | | | |
| Non-U.S. revenues as a % of segment revenues | 52 | % | 66 | % | 61 | % |
GE20182019 FORM 10-K 18 12
|
| | |
| MD&A | SEGMENT OPERATIONS | RENEWABLE ENERGY |
| | SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
| |
| (Dollars in billions) | | 2019 |
| 2018 |
| 2017 |
|
| | | |
| Revenues | | |
| Equipment | $ | 7.0 |
| $ | 7.0 |
| $ | 8.9 |
| $ | 12.3 |
| $ | 11.4 |
| $ | 14.0 |
|
| Services | 2.5 |
| 2.2 |
| 0.9 |
| 3.1 |
| 2.9 |
| 0.4 |
|
| Total(a) | $ | 9.5 |
| $ | 9.2 |
| $ | 9.8 |
| |
| | | |
SEGMENT PROFIT AND PROFIT MARGIN (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
| |
| | | |
| Total segment revenues(a) | | $ | 15.3 |
| $ | 14.3 |
| $ | 14.3 |
|
| Segment profit(b) | $ | 0.3 |
| $ | 0.6 |
| $ | 0.6 |
| $ | (0.7 | ) | $ | 0.3 |
| $ | 0.7 |
|
| Segment profit margin | 3.0 | % | 6.3 | % | 6.5 | % | (4.3 | )% | 2.0 | % | 5.1 | % |
| |
| (a) | Renewable Energy segment revenues represent 8%18% and 16% of both total industrial segment revenues and total segment revenues, respectively, for the year ended December 31, 2018.2019. |
| |
| (b) | Renewable Energy segment profit represents 3%(6)% of total industrial segment profit for the year ended December 31, 2018.2019. |
For the year ended December 31, 2019, segment orders were up $1.6 billion (10%), segment revenues were up $1.0 billion (7%) and segment profit was down $1.0 billion.
Segment revenues up $0.3Backlog as of December 31, 2019 increased $3.9 billion (4%(16%);
Segment profit down $0.3 primarily driven by increases at Onshore Wind of $3.0 billion (51%):
The renewable energy market remains competitive, particularly in onshore wind. The onshore wind market continuesdue to experience megawatt growth as customer preference has shifted from 1.X-2.X models to larger, more efficient units. However, overcapacity in the industry, the move to auctions in international markets and U.S. tax reform contributed to continued pricing pressure during 2018. In addition, uncertainty at the end of 2017 related to the impact of U.S. tax reform caused a temporary delay in project work, resulting in lower volume during the first half of the year. From the third quarter of 2018 onward, we expect project build and shipments to increaseincreased demand in anticipation of the expiration of Production Tax Credits (PTCs)U.S. PTC phase-down, increased services backlog due to the larger installed equipment base and a large scale 6MW turbine order in Offshore Wind.
Orders increased $1.9 billion (12%) organically due to increased demand in domestic and international Onshore Wind markets, partially offset by lower repower unit orders and lower orders at Grid and Hydro.
Revenues increased $1.6 billion (11%) organically*. Equipment revenues increased due to 933 more wind turbine units shipped, or 40% more megawatts, than in the prior year, partially offset by decreases in Offshore Wind due to the nonrecurrence of a project completed in the prior year and due to lower HVDC and Automated Control Systems (ACS) project revenues and HV product shipments at Grid. Services revenues increased primarily due to an increase in repower units pricing and volume at Onshore Wind.
Profit decreased $1.0 billion organically* due to $0.3 billion higher losses in Grid, Hydro and Offshore Wind resulting from no longer allocating losses to noncontrolling interest holders following the buy-out of those joint venture interests from Alstom in the fourth quarter of 2018. The lower profit was also due to $0.2 billion related to project execution challenges, primarily on legacy contracts as well as price pressure and execution challenges at Grid, increased research and development spend, depreciation on capitalized expenditures for Haliade-X and Cypress and the impact of U.S.-China tariffs.
For the year ended December 31, 2018, segment orders were down $0.1 billion (1%), segment revenues were flat and segment profit was down $0.4 billion (60%).
Backlog increased $1.2 billion (5%) primarily driven by Onshore Wind due to increased demand associated with U.S. PTCs, partially offset by a decrease in Grid ACS and HVDC and non-repeat of a 6MW turbine order in Offshore Wind.
Orders decreased $0.2 billion (1%) organically due to lower ACS and HVDC orders at 100% valueGrid, partially offset by an increase in 2020.Onshore Wind due to the U.S. PTC cycle compared to the prior year.
Revenues were flat organically*. Services volume increased due to a larger installed base resulting in increased contractual revenues as well as 50and more repower units at Onshore Wind than in the prior year. Equipment volume remained flat with 113 fewer wind turbine shipments on a unit basis, offsetdecreased driven by 9% more megawatts shipped, than in the prior year. Revenues also increased due to the acquisition of LM Wind in April 2017, which contributed $0.1lower Grid ACS and HVDC activity.
Profit decreased $0.4 billion of inorganic revenue growth in the first half of 2018, partially offset by pricing pressure and the effects of a stronger U.S. dollar versus certain currencies.
The decrease in profit was(60%) organically* due to pricing pressure, unfavorable business mix as well as liquidated damages related to partner execution and project delays, and higher losses in Hydro and Offshore as we began fully consolidating these entities in the fourth quarter, partially offset by materials deflation and positive base cost productivity.
Segment revenues down $0.5 billion (6%);
Segment profit down 8%:
The renewable energy market remains competitive, particularly in onshore wind. The onshore wind market continues to see megawatt growth as customer preference has shifted from 1.X models to larger, more efficient units. However, there is significant competitive pricing pressure driven by onshore turbines.
Equipment volume decreased due to 785 fewer wind turbine shipments on a unit basis, including the nonrecurrence of certain orders in Europe and ASEAN, or 17% fewer megawatts shipped than in the prior year. Services volume increased due to 975 more repower units at Onshore Wind. Revenues also increased due to the acquisition of LM Wind in April 2017 which contributed $0.3 billion of inorganic revenue growth in 2017 and the effects of a weaker U.S. dollar versus certain currencies, partially offset by pricing pressure.
The decrease in profit was due to negative base cost productivity and price pressure, partially offset by positive variable cost productivity, material deflation and increased other income including a reduction in foreign exchange transactional losses.
AVIATION
|
| | |
MD&A | SEGMENT OPERATIONS | AVIATION |
AVIATION |
| |
| Aviation designs and produces commercial and military aircraft engines, integrated digital components, electric power and mechanical aircraft systems. We also provide aftermarket services to support our products. We employ approximately 48,000 people, serve customers in 120+ countries, and our headquarters is located in Cincinnati, OH. |
Commercial Engines– manufactures jet engines and turboprops for commercial airframes. Our commercial engines power aircraft in all categories; regional, narrowbody and widebody. We also manufacture engines and components for business and general aviation segments, and we produce and market engines through CFM International, a company jointly owned by GE and Safran Aircraft Engines, a subsidiary of thejoint ventures with Safran Group of France and Engine Alliance, LLC, a company jointly owned by GE and the Pratt & Whitney division of United Technologies Corporation. New engines are also being designed and marketed in a joint venture with Honda Aero, Inc., a division of Honda Motor Co., Ltd.
Commercial Services – provides maintenance, component repair and overhaul services (MRO), including sales of replacement parts.
Our commercial engine installed base was approximately 37,800 units as of December 31, 2019.Military – manufactures jet engines for military airframes. Our military engines power a wide variety of military aircraft including fighters, bombers, tankers, helicopters and surveillance aircraft, as well as marine applications. We provide maintenance, component repair and overhaul services, including sales of replacement parts.
Our military engine installed base was approximately 26,600 units as of December 31, 2019.Systems& Other – provides engines components, systems and services for commercial and military segments. This includes engines and components for business and general aviation segments, along with avionics systems, aviation electric power systems, flight efficiency and intelligent operation services, aircraft structures and Avio Aero. Additionally, we provide a wide variety of products and services including additive machines from Concept Laser and Arcam EBM, additive materials (including metal powders from AP&C), and additive engineering services through our consultancy brand AddWorksTM.
*Non-GAAP Financial Measure
| |
• | Additive– provides a wide variety of products and services including additive machines from Concept Laser and Arcam EBM, additive materials (including metal powders from AP&C), and additive engineering services through our consultancy brand AddWorksTM. In November 2017, GE Additive also acquired software simulation company GeonX.
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| | |
Competition & RegulationMD&A | SEGMENT OPERATIONS | |
Competition & Regulation. The global businesses for aircraft jet engines, maintenance component repair and overhaul services (including parts sales) are highly competitive. Both U.S. and non-U.S. markets are important to the growth and success of the business. Product development cycles are long and product quality and efficiency are critical to success. Research and development expenditures are important in this business, as are focused intellectual property strategies and protection of key aircraft engine design, manufacture, repair and product upgrade technologies. Aircraft engine orders and systems tend to follow civil air travel and demand and military procurement cycles.
Our product, services and activities are subject to a number of regulators such as by the U.S. Federal Aviation Administration (FAA), European Aviation Safety Agency (EASA) and other regulatory bodies.
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|
Significant Trends & Developments |
On January 2, 2018, GE purchased additional shares of Arcam, AB to bring GE’s total ownership to 96%. On January 11, 2018, Arcam applied to the Nasdaq Stockholm exchange to commence delisting of the remaining shares. The last day of trading was January 26, 2018, and GE announced the delisting on January 30, 2018.
In September 2018, we announced an agreement to sell our Middle River Aircraft Systems business within our Aviation segment to Singapore Technologies Engineering, a global technology, defense and engineering group, for $0.6 billion. The deal is expected to close early 2019, subject to customary closing conditions and regulatory approvals.
Significant Trends & Developments. Global passenger air travel continued to grow during the year. In 2018,(measured in revenue passenger kilometers (RPKs)(RPK)) at 4.2%* in the current year. Oil prices remained stable, and global traffic growth outpacedwas broad-based across global regions. We expect this trend to drive continued demand in the ten-year average, increasing 6.6%* with strong growth both domesticallyinstalled base of commercial engines and internationally. In addition, passenger loadincreased focus on newer, more fuel-efficient aircraft. Industry-load factors globally remainedfor airlines remain at all-time high levels above 80%*.
In 2018, air Air freight volume continueddecreased, particularly in international markets driven by economic conditions and slowing global trade.
As it relates to grow,the military environment, the U.S. Department of Defense has increased its budget and freight ton kilometers (FTKs)foreign governments have increased spending to upgrade and modernize their existing fleets, creating future opportunities. Military shipments grew 3.9%*.to 717 engines in 2019 from 674 engines in 2018. In 2019, the United States Army awarded Aviation a contract for its T901 engine as the replacement engine for the Army's Apache and Black Hawk helicopters, and in 2018 the United States Air Force selected Boeing as the contractor to produce 351 new advanced T-7A Red Hawk trainer aircraft powered by Aviation's F404 engine.
The installed base continues to grow with new product launches. We announced record commercial wins at the Paris Air Show in June 2019, some of which contributed to backlog growth of 22% from December 31, 2018. We continue to expect future orders as a result of these wins. In 2018, we shipped the first Passport engines, powering the Bombardier Global 7000 business jet. We are also continuing development on the Advanced Turbo Prop program and the GE9X engine, incorporating the latest technologies for application in the widebody aircraft space.
During 2018, we delivered 1,118 LEAP engines, meeting
Total engineering, comprised of both company and customer funded spending, remained consistent with 2018. Company funded research and development spend has decreased compared to prior year. However, customer funded engineering efforts, primarily in our ramp commitments for the year with cost reductions in line with production cost curve expectations. LEAP reliability and performance specification remain on track. While we are behind on production as a result of delays in materials, we are actively working with our customers and airframers to mitigate impacts to their aircraft build schedule, and weMilitary business, continue to see improvement in our supplier yields and our overall output on a week to week basis. We plan to produce more than 2,000 engines by 2020.
* Based on the latest available information from the International Air Transport Association
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| | |
MD&A | SEGMENT OPERATIONS | AVIATION |
Military shipments grew to 674 engines from 617 engines in 2017. 2018 was a critical year for the contract decision on the next generation combat engine, and the United States Air Force selected Boeing as the contractor to produce 351 new advanced T-X trainer aircraft powered by our F404 engine.
increase. Our digital initiatives, including analytics on flight operations, technical operations, and advanced manufacturing, are enabling our customers, internal operations and suppliers to reduce costs, cycle time and improve quality.
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| | | | | | |
GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
|
| | | |
| U.S. | $ | 12.5 |
| $ | 10.8 |
|
| Non-U.S. | | |
| Europe | 7.0 |
| 6.3 |
|
| Asia | 5.8 |
| 5.2 |
|
| Americas | 1.5 |
| 1.1 |
|
| Middle East and Africa | 3.8 |
| 3.6 |
|
| Total Non-U.S. | $ | 18.0 |
| $ | 16.3 |
|
| Total Segment Revenues | $ | 30.6 |
| $ | 27.0 |
|
| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 59 | % | 60 | % |
Refer to the Aviation and GECAS 737 MAX discussion in Consolidated Results for information regarding the Company's exposure related to the temporary fleet grounding of the Boeing 737 MAX.
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| | | | | | |
SUB-SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
|
| | | |
| Commercial Engines & Services | $ | 22.7 |
| $ | 19.7 |
|
| Military | 4.1 |
| 4.0 |
|
| Systems & Other | 3.7 |
| 3.3 |
|
| Total Segment Revenues | $ | 30.6 |
| $ | 27.0 |
|
|
| | | | | | | | | | | |
| | Orders | | Sales |
| (In units, except where noted) | 2019 |
| 2018 |
| | 2019 |
| 2018 |
|
| | | | | | |
| Commercial Engines | 2,390 |
| 4,772 |
| | 2,863 |
| 2,825 |
|
| GEnx Engines(a) | 164 |
| 407 |
| | 296 |
| 251 |
|
| LEAP Engines(a) | 1,568 |
| 3,637 |
| | 1,736 |
| 1,118 |
|
| Military Engines | 801 |
| 751 |
| | 717 |
| 674 |
|
| Spares Rate(b) | | | | $ | 31.0 |
| $ | 27.5 |
|
(a) GEnx and LEAP engines are subsets of Commercial Engines
(b) Commercial externally shipped spares and spares used in time & material shop visits in millions of dollars per day. |
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| | | | | | |
ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
|
| | | |
| Orders | | |
| Equipment | $ | 15.3 |
| $ | 10.6 |
|
| Services | 20.2 |
| 18.5 |
|
| Total | $ | 35.5 |
| $ | 29.1 |
|
| | | |
| Backlog | | |
| Equipment | $ | 37.8 |
| $ | 34.1 |
|
| Services | 185.7 |
| 166.1 |
|
| Total | $ | 223.5 |
| $ | 200.2 |
|
|
| | | | | | | | | |
| (In billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Equipment | $ | 39.1 |
| $ | 37.8 |
| $ | 34.1 |
|
| Services | 234.1 |
| 185.7 |
| 166.1 |
|
| Total backlog | $ | 273.2 |
| $ | 223.5 |
| $ | 200.2 |
|
| | | | |
| Equipment | $ | 14.5 |
| $ | 15.3 |
| $ | 10.6 |
|
| Services | 22.3 |
| 20.2 |
| 18.5 |
|
| Total orders | $ | 36.7 |
| $ | 35.5 |
| $ | 29.1 |
|
|
| | | | | | |
| UNIT ORDERS | 2018 |
| 2017 |
| V |
|
| Commercial Engines | 4,772 |
| 2,565 |
| 2,207 |
|
| LEAP Engines(a) | 3,637 |
| 1,418 |
| 2,219 |
|
| Military Engines | 751 |
| 522 |
| 229 |
|
| (a) LEAP engines are a subset of commercial engines |
|
| | | | | | | | | |
| Commercial | $ | 24.2 |
| $ | 22.7 |
| $ | 19.7 |
|
| Military | 4.4 |
| 4.1 |
| 4.0 |
|
| Systems & Other | 4.3 |
| 3.7 |
| 3.3 |
|
| Total segment revenues | $ | 32.9 |
| $ | 30.6 |
| $ | 27.0 |
|
* Based on the latest available information from the International Air Transport Association
|
| | | | | | | | | |
| UNIT SALES | 2018 |
| 2017 |
| V |
|
| Commercial Engines | 2,825 |
| 2,630 |
| 195 |
|
| LEAP Engines(a) | 1,118 |
| 459 |
| 659 |
|
| Military Engines | 674 |
| 617 |
| 57 |
|
| Spares Rate(b) | $ | 27.5 |
| $ | 23.5 |
| $ | 4.0 |
|
(a) LEAP engines are a subset of commercial engines (b) Commercial externally shipped spares and spares used in time & material shop visits in millions of dollars per day |
GE20182019 FORM 10-K 21 14
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| | |
| MD&A | SEGMENT OPERATIONS | AVIATION | |
|
| | | | | | | | | |
SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Revenues | | | |
| Equipment | $ | 11.5 |
| $ | 10.2 |
| $ | 11.4 |
|
| Services | 19.1 |
| 16.8 |
| 14.9 |
|
| Total(a) | $ | 30.6 |
| $ | 27.0 |
| $ | 26.2 |
|
| | | | |
SEGMENT PROFIT AND PROFIT MARGIN (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Segment profit(b) | $ | 6.5 |
| $ | 5.4 |
| $ | 5.3 |
|
| Segment profit margin | 21.2 | % | 19.9 | % | 20.3 | % |
|
| | | | | | | | | |
| (Dollars in billions) | 2019 | 2018 | 2017 |
| | | | |
| U.S. | $ | 13.4 |
| $ | 12.5 |
| $ | 10.8 |
|
| Non-U.S. | | | |
| Europe | 7.5 |
| 7.0 |
| 6.3 |
|
| Asia | 6.6 |
| 5.8 |
| 5.2 |
|
| Americas | 1.6 |
| 1.5 |
| 1.1 |
|
| Middle East and Africa | 3.8 |
| 3.8 |
| 3.6 |
|
| Total Non-U.S. | $ | 19.5 |
| $ | 18.0 |
| $ | 16.3 |
|
| Total segment revenues | $ | 32.9 |
| $ | 30.6 |
| $ | 27.0 |
|
| | | | |
| Non-U.S. revenues as a % of segment revenues | 59 | % | 59 | % | 60 | % |
|
| | | | | | | | | |
| Equipment | $ | 12.8 |
| $ | 11.5 |
| $ | 10.2 |
|
| Services | 20.1 |
| 19.1 |
| 16.8 |
|
| Total segment revenues(a) | $ | 32.9 |
| $ | 30.6 |
| $ | 27.0 |
|
| Segment profit(b) | $ | 6.8 |
| $ | 6.5 |
| $ | 5.4 |
|
| Segment profit margin | 20.7 | % | 21.2 | % | 19.9 | % |
| |
| (a) | Aviation segment revenues represent 26%38% and 24%34% of total industrial segment revenues and total segment revenues, respectively, for the year ended December 31, 2018.2019. |
| |
| (b) | Aviation segment profit represents 60%65% of total industrial segment profit for the year ended December 31, 2018.2019. |
For the year ended December 31, 2019, segment orders were up $1.2 billion (3%), segment revenues were up $2.3 billion (8%) and segment profit was up $0.4 billion (5%).
Backlog as of December 31, 2019 increased $49.7 billion (22%) primarily due to an increase in long-term service agreements.
SegmentOrders increased $1.4 billion (4%) organically primarily driven by $1.9 billion of orders in the fourth quarter of 2019 for our newly formed Aeroderivatives joint venture between GE Power and Baker Hughes. Excluding the Aeroderivatives orders, total orders decreased $0.9 billion mainly due to a decline in LEAP engine orders as a result of the 737 MAX grounding, partially offset by services orders with continued strength in materials.
Revenues increased $2.6 billion (9%) organically*. Equipment revenues increased primarily due to 43 more military engine shipments and 38 more commercial units, including 618 more LEAP units, versus the prior year, partially offset by lower legacy commercial output in the CFM product line. Services revenues also increased primarily due to increased price, a higher commercial spare parts shipment rate and increased revenues on long-term service agreements.
Profit increased $0.4 billion (6%) organically* mainly due to services increased volume and increased price on commercial spare parts, and increased profitability on long-term service agreements. Profit also increased due to higher volume of commercial spares engines, including LEAP 1-B spare engines sold to our GECAS business to have an appropriate level of spare engines available in the market to meet customer needs in anticipation of the Boeing 737 MAX aircraft recertification, partially offset by continued negative mix from commercial engines, primarily the CFM to LEAP engine transition and Passport engine shipments. Additionally, we recorded a charge during the year related to the uncertainty of collection for an airline customer in a challenging financial position.
For the year ended December 31, 2018, segment orders were up $6.4 billion (22%), segment revenues were up $3.6 billion (13%);
Segment and segment profit was up $1.1 billion (20%):.
Backlog as of December 31, 2018 increased $23.4 billion (12%) primarily due to an increase in services backlog of $19.6 billion.
Global passenger air travel continuedOrders increased $6.4 billion (22%) organically mainly due to grow with revenue passenger kilometers (RPK) growth outpacing the ten-year average. Industry-load factors remained above 80%*an increase in commercial and military equipment orders of $4.7 billion.
Revenues increased $3.5 billion (13%) organically*. Air freight volume also increased, particularly in international markets. Freight capacity additions slightly exceeded freight volume growth during the year.
We shipped 1,118 LEAP engines during the year, meeting our commitment to ship 1,100-1,200 engines in 2018.
Services revenues increased primarily due to a higher commercial spares shipment rate, as well as increased price. Equipment revenues increased primarily due to 57 more military engine shipments and 195 more commercial units, including 659 more LEAP units, versus the prior year, partially offset by lower legacy commercial output in the CFM and GE90 product lines.
The increase in profit wasProfit increased $1.1 billion (21%) organically* mainly due to increased price, increased volume, higher spare engine shipments and product and base cost productivity. These increases were partially offset by an unfavorable business mix driven by negative LEAP margin as well as higher overhaul shop costs due to increased volume and mix.
Segment revenues up $0.8 billion (3%);
Segment profit up 1%:
Global passenger air travel continued to grow with RPK growth outpacing the five-year average. Air freight volume rebounded, particularly in international markets, with FTK demand also exceeding capacity for the year.
Services revenues increased primarily due to a higher commercial and military spares shipment rate, as well as higher prices. Equipment revenues decreased due to lower legacy and GEnx Commercial engine shipments, partially offset by more LEAP and Military engine shipments. Revenues also increased due to the acquisitions of Arcam AB and Concept Laser GmbH in the fourth quarter of 2016 which contributed $0.2 billion of inorganic revenue growth in 2017.
The increase in profit was mainly due to higher cost productivity driven by structural cost reductions, as well as material deflation, higher services volume and higher prices. These increases were partially offset by an unfavorable business mix driven by negative LEAP margin impact.
* Based on the latest available information from the International Air Transport AssociationNon-GAAP Financial Measure
GE20182019 FORM 10-K 22
15
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| MD&A | SEGMENT OPERATIONS | OIL & GAS | |
OILHEALTHCAREProducts & GAS
|
| |
| Oil & Gas, which represents our 50.4% consolidated interest in BHGE, is a fullstream oilfield technology provider that has a unique mix of integrated oilfield products, services and digital solutions. We operate through our four business segments: Oilfield Services, Oilfield Equipment, Turbomachinery & Processing Solutions and Digital Solutions. We employ approximately 65,800 people, serve customers in 120+ countries, and our headquarters are located in London, UK and Houston, TX. |
Oilfield Services –Services. Healthcare provides equipmentessential healthcare technologies to developed and services ranging from well evaluation to decommissioning.emerging markets and has expertise in medical imaging, digital solutions, patient monitoring and diagnostics, drug discovery, biopharmaceutical manufacturing technologies and performance improvement solutions that are the building blocks of precision health. Products and services include diamondare sold worldwide primarily to hospitals, medical facilities, pharmaceutical and tri-cone drill bits, drilling services (including directional drilling technology, measurement while drillingbiotechnology companies, and logging while drilling), downhole completion tools and systems, wellbore intervention tools and services, wireline services, drilling and completions fluids, oilfield and industrial chemicals, pressure pumping and artificial lift technologies (including electrical submersible pumps).
Oilfield Equipment –provides a broad portfolio of products and services required to facilitate the safe and reliable flow of hydrocarbons from the subsea wellhead to the surface. Products and services include pressure control equipment and services, subsea production systems and services, drilling equipment and flexible pipeline systems. Oilfield Equipment operation designs and manufactures onshore and offshore drilling and production systems and equipment for floating production platforms and provides a full range of services related to onshore and offshore drilling activities.
life science research market.Turbomachinery & Process Solutions – provides equipment and related services for mechanical-drive, compression and power-generation applications across the oil and gas industry as well as products and services to serve the downstream segments of the industry including refining, petrochemical, distributed gas, flow and process control and other industrial applications. The Turbomachinery & Process Solutions portfolio includes drivers (aero-derivative gas turbines, heavy-duty gas turbines and synchronous and induction electric motors), compressors (centrifugal and axial, direct drive high speed, integrated, subsea compressors, turbo expanders and reciprocating), turn-key solutions (industrial modules and waste heat recovery), pumps, valves and compressed natural gas (CNG) and small-scale liquefied natural gas (LNG) solutions used primarily for shale oil and gas field development.
Digital Solutions –provides equipment and services for a wide range of industries, including oil & gas, power generation, aerospace, metals and transportation. The offerings include sensor-based measurement, non-destructive testing and inspection, turbine, generator and plant controls and condition monitoring, as well as pipeline integrity solutions.
Demand for oil and gas equipment and services is global and, as a result, is sensitive to the economic and political environment of each country in which we do business. We are subject to the regulatory bodies of the countries in which we operate. Our products are subject to regulation by U.S. and non-U.S. energy policies.
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|
Significant Trends & Developments |
In June 2018, we announced our plan to pursue an orderly separation from BHGE over time. The business has not met the accounting criteria for held for sale classification. That classification will depend on the nature and timing of the transaction.
Pursuant this announcement, BHGE completed an underwritten public offering in which we sold 101.2 million shares of BHGE Class A common stock. BHGE also repurchased 65.0 million BHGE LLC units from us. The total consideration received by us from these transactions was $3.7 billion. The transaction closed in November 2018 and, as a result, our economic interest in BHGE reduced from 62.5% to 50.4% and we recognized a pre-tax loss in equity of $2.2 billion. See Note 15 to the consolidated financial statements for further information.
On November 13, 2018, we entered into a Master Agreement and a series of related ancillary agreements and binding term sheets with BHGE (collectively, the “Master Agreement Framework”) designed to further solidify the commercial and technological collaborations between BHGE and GE. In particular, the Master Agreement Framework contemplates long-term agreements between us and BHGE on technology, fulfillment and other key areas.
Market weakness in recent years including lower oil prices has led to reductions in customers’ forecasted capital expenditures and lower convertible orders, creating industry challenges, the effects of which are uncertain. In addition, decreased U.S. rig count and lower drilling activity versus prior peaks in the early 2000s has reduced the need for new wells, rigs, and replacement equipment.
We are also impacted by volatility in foreign currency exchange rates mainly due to a high concentration of non-U.S. dollar denominated business as well as long-term contracts denominated in multiple currencies.
2018 demonstrated the volatility of the oil and gas market. Through the first three quarters of 2018, we experienced stability in the North American and international markets. However, in the fourth quarter of 2018, commodity prices dropped nearly 40%, resulting in increased customer uncertainty. From an offshore standpoint, through most of 2018, we saw multiple large offshore projects reach positive final investment decision, and expect customers to continue to evaluate final investment decisions timing, in light of increased commodity price volatility.
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MD&A | SEGMENT OPERATIONS | OIL & GAS |
The liquified natural gas (LNG) market and outlook improved throughout 2018, driven by increased demand globally. In 2018, the first large North American LNG positive final investment decision was reached. Looking to 2019, we expect a significant number of LNG million tons per annum (MTPA) to reach positive final investment decisions.
In 2018, total rig count increased 9% to an average of 2,211 from an average of 2,030 in 2017. This increase was driven by an increase in North American rig count from 1,082 in 2017 to 1,223 in 2018, primarily driven by U.S. rig count, partially offset with a decline in Canadian rig count.
Oil prices generally increased throughout 2018, but sharply declined in the fourth quarter driven by global economic growth forecast revisions, higher than expected production in the U.S., and lower than anticipated production cuts from OPEC.
In North America, customer spending is highly driven by WTI oil prices which on average increased throughout the year. Average WTI oil prices increased to $65.23/Bbl in 2018 from $50.80/Bbl in 2017 and ranged from a low of $44.48/Bbl in December 2018 to a high of $77.41/Bbl in June 2018.
Outside of North America, customer spending is influenced by Brent oil prices, which also increased on average throughout the year. Average Brent oil prices increased to $71.34/Bbl in 2018 from $54.12/Bbl in 2017 and ranged from a low of $50.57/Bbl in December 2018 to a high of $86.07/Bbl in October 2018.
Given the commodity price decline in the fourth quarter of 2018, we continue to expect activity to remain volatile and final investment decisions to remain fluid due to continued oil price volatility.
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| | | | | | |
GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
|
| | | |
| U.S. | $ | 6.6 |
| $ | 4.4 |
|
| Non-U.S. | | |
| Europe | 4.0 |
| 3.0 |
|
| Asia | 3.2 |
| 2.5 |
|
| Americas | 3.3 |
| 2.5 |
|
| Middle East and Africa | 5.8 |
| 4.8 |
|
| Total Non-U.S. | $ | 16.3 |
| $ | 12.8 |
|
| Total Segment Revenues | $ | 22.9 |
| $ | 17.2 |
|
| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 71 | % | 74 | % |
|
| | | | | | |
SUB-SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
|
| | | |
| Turbomachinery & Process Solutions (TPS) | $ | 6.0 |
| $ | 6.3 |
|
| Oilfield Services (OFS)(a) | 11.6 |
| 5.9 |
|
| Oilfield Equipment (OFE)(b) | 2.6 |
| 2.7 |
|
| Digital Solutions | 2.6 |
| 2.3 |
|
| Total Segment Revenues | $ | 22.9 |
| $ | 17.2 |
|
|
|
(a) Previously referred to as Surface
(b) Previously referred to as Subsea Systems & Drilling
|
|
| | | | | | |
ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
|
| | | |
| Orders | | |
| Equipment | $ | 9.9 |
| $ | 6.9 |
|
| Services | 13.9 |
| 10.3 |
|
| Total | $ | 23.9 |
| $ | 17.1 |
|
| | | |
| Backlog | | |
| Equipment | $ | 5.7 |
| $ | 5.5 |
|
| Services | 15.8 |
| 16.4 |
|
| Total | $ | 21.5 |
| $ | 21.9 |
|
|
| | |
MD&A | SEGMENT OPERATIONS | OIL & GAS |
|
| | | | | | | | | |
SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Revenues | | | |
| Equipment | $ | 9.3 |
| $ | 7.2 |
| $ | 6.1 |
|
| Services | 13.6 |
| 10.0 |
| 6.9 |
|
| Total(a) | $ | 22.9 |
| $ | 17.2 |
| $ | 12.9 |
|
| | | | |
SEGMENT PROFIT AND PROFIT MARGIN (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Segment profit(b) | $ | 0.4 |
| $ | 0.2 |
| $ | 1.3 |
|
| Segment profit margin | 1.9 | % | 0.9 | % | 10.1 | % |
| |
(a) | Oil & Gas segment revenues represent 20% and 18% of total industrial segment revenues and total segment revenues, respectively, for the year ended December 31, 2018. |
| |
(b) | Oil & Gas segment profit represents 4% of total industrial segment profit for the year ended December 31, 2018. |
Segment revenues up $5.7 billion (33%);
Segment profit up $0.3 billion:
The oil and gas market experienced stability through the first three quarters of 2018 leading to continuous improvements. However, in the fourth quarter, commodity prices dropped nearly 40%, demonstrating the volatility of the market and resulting in increased customer uncertainty. From an offshore and liquefied natural gas (LNG) perspective, in 2018, major equipment projects were awarded in the Oilfield Equipment and TPS businesses.
The Baker Hughes acquisition in July 2017 contributed $5.4 billion of inorganic revenue growth in the first half of 2018 compared to the first half of 2017. In addition, Oil & Gas revenues increased due to increased services revenues, primarily resulting from higher OFS activity of $0.3 billion in North America and international markets. Equipment revenues decreased primarily at TPS by $0.3 billion as a result of lower opening backlog, partially offset by the effects of a weaker U.S. dollar versus certain currencies.
The increase in profit was primarily driven by synergies delivered from combining our Oil & Gas business with Baker Hughes Incorporated and lower restructuring and other charges, partially offset by unfavorable business mix and decreased other income including increased equity income losses in affiliates.
Segment revenues up $4.2 billion (33%);
Segment profit down $1.1 billion (88%):
The oil and gas market remained challenging in 2017. Despite some improvements in activity, there were no significant increases in customer capital commitments, and oil prices remained volatile for the majority of the year. While oil prices stabilized towards the end of 2017 and North American rig count increased, major equipment project awards continued to be pushed out in the Oilfield Equipment and TPS businesses.
The Baker Hughes acquisition in July 2017 contributed $5.2 billion of inorganic revenue growth in 2017. Legacy equipment revenues decreased due to lower volume primarily at OFE of $0.8 billion as a result of the market conditions and lower opening backlog. Revenues further decreased due to lower oil prices, partially offset by the effects of a weaker U.S. dollar versus certain currencies.
The decrease in profit was primarily driven by negative variable cost productivity, restructuring and other charges, lower prices and lower organic volume, partially offset by increased volume from Baker Hughes, deflation and increased other income including a reduction in foreign exchange transactional losses.
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MD&A | SEGMENT OPERATIONS | HEALTHCARE |
HEALTHCARE |
| |
| Healthcare provides essential healthcare technologies to developed and emerging markets and has expertise in medical imaging, digital solutions, patient monitoring and diagnostics, drug discovery, biopharmaceutical manufacturing technologies and performance improvement solutions that are the building blocks of precision health. Products and services are sold worldwide primarily to hospitals, medical facilities, pharmaceutical and biotechnology companies, and to the life science research market. We employ approximately 53,800 people, serve customers in 140+ countries, and our headquarters is located in Chicago, IL. |
Healthcare Systems – develops, manufactures, markets and services a broad suite of products and solutions used in the diagnosis, treatment and monitoring of patients that is encompassed in imaging, ultrasound, life care solutions and enterprise software and solutions. Imaging includes magnetic resonance, computed tomography, molecular imaging, x-ray systems and complementary software and services, for use in general diagnostics, Women’s Health and image-guided therapies. Ultrasound includes high-frequency soundwave systems, and complementary software and services, for use in diagnostics tailored to a wide range of clinical settings. Life Care Solutions (“LCS”)(LCS) includes clinical monitoring and acute care systems, and complementary software and services, for use in intensive care, anesthesia delivery, diagnostic cardiology and perinatal care. Enterprise Software & Solutions (“ESS”)(ESS) includes enterprise digital, consulting and healthcare technology management offerings designed to improve efficiency in healthcare delivery and expand global access to advanced health care.
Life Sciences –delivers products, services and manufacturing solutions for drug discovery, the biopharmaceutical industry, and cellular and gene therapy technologies, so that scientists and specialists can discover new ways to predict, diagnose and treat disease. It also researches, manufactures and markets innovative imaging agents used during medical scanning procedures to highlight organs, tissue and functions inside the human body, to aid physicians in the early detection, diagnosis and management of disease through advanced in-vivo diagnostics.
Competition & Regulation. Healthcare competes with a variety of U.S. and non-U.S. manufacturers and services providers. Customers require products and services that allow them to provide better access to healthcare, improve the affordability of care and improve the quality of patient outcomes. Technology and solution innovation to provide products that meet these customer requirements and competitive pricing are among the key factors affecting competition for these products and services. New technologies and solutions could make our products and services obsolete unless we continue to develop new and improved offerings.
Our products are subject to regulation by numerous government agencies, including the U.S. Food and Drug Administration (U.S. FDA), as well as various laws and regulations that apply to claims submitted under Medicare, Medicaidvarious reimbursement schemes or other government funded healthcare programs.
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Significant Trends & Developments |
Significant Trends & Developments. In April 2018, we announced an agreement to sell our Enterprise Financial Management, Ambulatory Care Management and Workforce Management assets, comprising our Healthcare segment’s Value-Based Care Division, to Veritas Capital, a private equity investment firm, for approximately $1.0 billion (net of cash transferred). This transaction closed on July 10, 2018 and resulted in the recognition of a pre-tax gain of approximately $0.7 billion in the third quarter of 2018. This gain was recorded within Corporate.
In June 2018, we announced a plan to separate GE Healthcare into a standalone company. On February 25, 2019, we announced an agreement to sell our BioPharma business within our Healthcare segment to Danaher Corporation for total consideration of approximately $21.4 billion subject to certain adjustments. The transaction is expected to close inIn the fourthfirst quarter of 2019, we classified BioPharma as a business held for sale. We expect to complete the sale in the first quarter of 2020, subject to regulatory approvals and customary closing conditions. We intend to retain the remaining portion of our Healthcare business which providesapproval, providing us full flexibility for growth and optionality with respect to the business.
In 2018, we sold our remaining shares in NeogenomicsHealthcare businesses.
Effective January 1, 2019, the Healthcare Equipment Finance (HEF) financing business within our Capital segment was transferred to our Healthcare segment and received proceeds of approximately $200 million.is presented within Healthcare Systems.
The Healthcare Systems global healthcare market continueshas continued to expand, at low single digit rates, driven by strengthmacro trends relating to growing and aging populations, increasing chronic and lifestyle-related disease, accelerating demand for healthcare in emerging markets, as these economies continue to expand their population’s access to healthcare, and slower growth in developed markets. The Life Sciences market continues to be strong with the Bioprocess market growing at a high single digit rate, driven by growth inincreasing demand for biologic drugs and the imaging agents market growing at low single digit rates.
We continueinsulin, and increasing use of diagnostic imaging. Technological innovation that makes it possible to leadaddress an increasing number of diseases, conditions and patients in technology innovation with greater focus on productivity-based technology, services and IT/cloud-based solutions as healthcare providers seek greater productivity and better outcomes.
In 2018, we launched a varietymore cost-effective manner has also driven growth across each of new products including our ultra-premium radiology ultrasound system, LOGIQ E10, and our AIR technology coil suite. We also enhanced our MR portfolio with SIGNA™ Premier and upgraded our portfolio of premium high power mobile Surgery C-arms featuring CMOS detectors.
Emerging markets are expected to grow over the long-term with short-term volatility, driven by the long-term trend of expanding access to healthcare in theseglobal markets.
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MD&A | SEGMENT OPERATIONS | HEALTHCARE |
As expected, theThe China market was a source of growth in 2018 with strong fundamentals in both the public market and an expanding private market. While we expectmarkets. Dynamics related to tariffs tempered this growth to continue in 2019, new U.S.2019. The impact of tariffs on certain types of medical equipment and components that we import from China have resulted in increased product costs. We are takingcontinue to take mitigating actions to mitigate this cost impact including moving our sourcing and manufacturing for these parts outside of China.
In the U.S., the underlying market remains stable, with a trend toward customers looking for more complete solutions that offer greater capacity and productivity. However, the market continues to face uncertainties driven by the increasing cost of providing healthcare that has led to a trend of increasing hospital and provider consolidation.
Underlying
The Healthcare Systems equipment market continues to expand at low single-digit rates or better, while demand continues for biopharmaceuticalsservices on new equipment as well as on our existing installed base. However, there is short-term variation driven by market-specific political and economic cycles. Growth in emerging markets is driven by long-term trends of expanding demand and access to healthcare. Developed markets are expected to remain steady in the near term driven by macro trends in the healthcare industry.
The Life Sciences market, which encompasses Bioprocess and Pharmaceutical diagnostics, continues to be strong. The Bioprocess market is growing at a high single-digit rate, driven by growth in biologic drugs. The Pharmaceutical diagnostics business is positioned in the contrast agent and nuclear tracer markets. This market is expected to continuegrow, driven by continued diagnostic imaging procedure growth and increasing contrast and tracer-enhancement of these same procedures, as these products help to expand with new product introductions complemented by growing accessincrease the precision of the diagnostic information provided to these treatments in emerging markets. These trends continue to support the underlying growth of our Life Sciences franchise which has significant exposure to these end markets.clinicians.
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GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
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| | | |
| U.S. | $ | 8.6 |
| $ | 8.4 |
|
| Non-U.S. | | |
| Europe | 4.1 |
| 3.9 |
|
| Asia | 5.2 |
| 4.9 |
|
| Americas | 1.0 |
| 1.0 |
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| Middle East and Africa | 0.9 |
| 0.9 |
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| Total Non-U.S. | $ | 11.2 |
| $ | 10.6 |
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| Total Segment Revenues | $ | 19.8 |
| $ | 19.0 |
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| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 57 | % | 56 | % |
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SUB-SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
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| | | |
| Healthcare Systems(a) | $ | 14.9 |
| $ | 14.5 |
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| Life Sciences | 4.9 |
| 4.6 |
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| Total Segment Revenues | $ | 19.8 |
| $ | 19.0 |
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(a) Given the sale of Value-Based Care in the third quarter of 2018, Healthcare Digital is now presented within Healthcare Systems.
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ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
|
| | | |
| Orders | | |
| Equipment | $ | 12.6 |
| $ | 12.2 |
|
| Services | 8.3 |
| 8.2 |
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| Total | $ | 20.9 |
| $ | 20.4 |
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| | | |
| Backlog | | |
| Equipment | $ | 6.3 |
| $ | 6.4 |
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| Services | 11.2 |
| 11.7 |
|
| Total | $ | 17.4 |
| $ | 18.1 |
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GE20182019 FORM 10-K 27 16
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| MD&A | SEGMENT OPERATIONS | HEALTHCARE | |
We continue focusing on creating new products and solutions as well as expanding uses of existing offerings that are tailored to the different needs of our global customers. We strive to introduce technology innovation that enables our customers to improve their patient and operational outcomes as they diagnose, treat and monitor an increasing number of medical conditions and patients. GE Senographe Pristina with Dueta was named to TIME magazine’s list of 2019’s Best Inventions for its patient-assisted mammography exam feature. Additionally, we launched Revolution Maxima CT, the latest addition to the GE Revolution family of intelligent CT scanners during the quarter. Designed to maximize productivity in the CT workflow, Revolution Maxima offers a variety of applications and services to improve efficiency, including its new, AI-based Auto Positioning solution (cleared for sale in all planned major worldwide markets in January 2020).
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SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
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| | | | |
| Revenues | | | |
| Equipment | $ | 11.4 |
| $ | 10.8 |
| $ | 10.2 |
|
| Services | 8.4 |
| 8.2 |
| 8.0 |
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| Total(a) | $ | 19.8 |
| $ | 19.0 |
| $ | 18.2 |
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SEGMENT PROFIT AND PROFIT MARGIN (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Segment profit(b) | $ | 3.7 |
| $ | 3.5 |
| $ | 3.2 |
|
| Segment profit margin | 18.7 | % | 18.3 | % | 17.6 | % |
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| (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Equipment | $ | 7.0 |
| $ | 6.3 |
| $ | 6.4 |
|
| Services | 11.5 |
| 11.2 |
| 11.7 |
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| Total backlog | $ | 18.5 |
| $ | 17.4 |
| $ | 18.1 |
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| | | | |
| Equipment | $ | 13.0 |
| $ | 12.6 |
| $ | 12.2 |
|
| Services | 8.2 |
| 8.3 |
| 8.2 |
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| Total orders | $ | 21.2 |
| $ | 20.9 |
| $ | 20.4 |
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| | | | | | | | | |
| Healthcare Systems | $ | 14.6 |
| $ | 14.9 |
| $ | 14.5 |
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| Life Sciences | 5.3 |
| 4.9 |
| 4.6 |
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| Total segment revenues | $ | 19.9 |
| $ | 19.8 |
| $ | 19.0 |
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| | | | | | | | | |
| U.S. | $ | 8.5 |
| $ | 8.6 |
| $ | 8.4 |
|
| Non-U.S. | | | |
| Europe | 4.1 |
| 4.2 |
| 3.9 |
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| Asia | 5.4 |
| 5.2 |
| 4.9 |
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| Americas | 1.1 |
| 1.0 |
| 1.0 |
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| Middle East and Africa | 0.8 |
| 0.8 |
| 0.9 |
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| Total Non-U.S. | $ | 11.4 |
| $ | 11.2 |
| $ | 10.6 |
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| Total segment revenues | $ | 19.9 |
| $ | 19.8 |
| $ | 19.0 |
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| | | | |
| Non-U.S. revenues as a % of segment revenues | 57 | % | 57 | % | 56 | % |
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| | | | | | | | | |
| Equipment | $ | 11.6 |
| $ | 11.4 |
| $ | 10.8 |
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| Services | 8.4 |
| 8.4 |
| 8.2 |
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| Total segment revenues(a) | $ | 19.9 |
| $ | 19.8 |
| $ | 19.0 |
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| Segment profit(b) | $ | 3.9 |
| $ | 3.7 |
| $ | 3.5 |
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| Segment profit margin | 19.5 | % | 18.7 | % | 18.3 | % |
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| (a) | Healthcare segment revenues represent 17%23% and 16%21% of total industrial segment revenues and total segment revenues, respectively, for the year ended December 31, 2018.2019. |
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| (b) | Healthcare segment profit represents 34%37% of total industrial segment profit for the year ended December 31, 2018.2019. |
For the year ended December 31, 2019, segment orders were up $0.3 billion (1%), segment revenues were up $0.2 billion (1%) and segment profit was up $0.2 billion (5%).
Backlog as of December 31, 2019 increased $1.0 billion (6%) primarily due to an increase in equipment backlog of $0.7 billion primarily driven by Healthcare Systems.
Orders increased $0.9 billion (4%) organically, primarily attributable to continued strength in Life Sciences.
Revenues increased $0.7 billion (3%) organically* due to higher volume in Life Sciences, driven by BioPharma and Pharmaceutical Diagnostics, as well as higher volume in Healthcare Systems.
Profit increased $0.3 billion (7%) organically* primarily driven by volume growth and cost productivity due to cost reduction actions, including sourcing and logistic initiatives, design engineering and restructuring actions. These increases were partially offset by inflation, the impact of U.S.-China tariffs, and investments in programs including digital product innovations and Healthcare Systems new product introductions.
*Non-GAAP Financial Measure
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2018 – 2017 COMMENTARY:MD&A | SEGMENT OPERATIONS | |
Segment
For the year ended December 31, 2018, segment orders were up $0.5 billion (2%), segment revenues were up $0.8 billion (4%);
Segment and segment profit was up $0.2 billion (6%):.
Backlog as of December 31, 2018 decreased $0.7 billion (4%), primarily due to a decrease in services backlog of $0.5 billion.
TheOrders increased $0.6 billion (3%) organically, primarily due to Life Sciences up 8%, while Healthcare Systems global market continues to expand at low single digit rates, driven by strength in emerging markets, as these economies continue to expand their population’s access to healthcare, and slower growth in developed markets. The Life Sciences market continues to be strong, with the Bioprocess market growing at a high single digit rate, driven by growth in biologic drugs, and the contrast agents market growing at low single digit rates.was up 1%.
Services and equipment revenuesRevenues increased $0.9 billion (5%) organically* due to higher volume in Healthcare Systems, of $0.4 billion attributable to global growth in Imaging and Ultrasound in both developed regions such as the U.S. and Europe as well as developing regions such as China and emerging markets. Volume also increased in Life Sciences, by $0.3 billion, driven by Bioprocess and Pharmaceutical Diagnostics. In addition, revenues increased due to the effects of a weaker U.S. dollar versus certain currencies,Diagnostics, partially offset by price pressure at Healthcare Systems and the absence of the Value-Based Care Division following the sale in July 2018.
Systems.The increase in profit wasProfit increased $0.3 billion (8%) organically*, primarily driven by volume growth and cost productivity due to cost reduction actions, including increasing digital automation, sourcing and logistic initiatives, design engineering and prior year restructuring actions. These increases were partially offset by price pressure at Healthcare Systems, inflation, investments in programs including digital product innovations and Healthcare Systems new product introductions and the nonrecurrence of a small gain on the disposition of a non-strategic operation in Life Sciences and the absence of the Value-Based Care Division following the sale in July 2018.
Sciences.Segment revenues up $0.8 billion (4%);
Segment profit up $0.3 billion (9%):
The Healthcare Systems global market continued to expand, predominately in emerging markets, including China, driven by Ultrasound as well as Imaging across most modalities. In addition, Healthcare Systems launched 26 new products in 2017, and Life Sciences continued to expand its business through product launches, organic investments and acquisitions.
Services and equipment revenues increased due to higher volume in Healthcare Systems of $0.5 billion attributable to growth in Imaging and Ultrasound supported by new product launches and growth in developing regions such as China and emerging markets. Volume also increased in Life Sciences by $0.3 billion, driven by Bioprocess and Pharmaceutical Diagnostics. This growth was partially offset by price pressure at Healthcare Systems.
The increase in profit was primarily driven by strong volume growth and cost productivity due to cost reduction actions including increasing digital automation, sourcing and logistic initiatives, design engineering and prior year restructuring actions. In addition, profit further increased due to the recognition of small gains on the disposition of nonstrategic operations. These increases were partially offset by price pressure at Healthcare Systems and investments in programs including digital product innovations and new product offerings.
CAPITAL
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MD&A | SEGMENT OPERATIONS | TRANSPORTATION |
TRANSPORTATION |
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| Transportation is a global technology leader and supplier to the railroad, mining, marine, stationary power and drilling industries. Products and services offered by Transportation are detailed below. We employ approximately 9,400 people, serve customers in approximately 60 countries, and our headquarters is located in Chicago, IL. |
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• | Locomotives – provides freight and passenger locomotives as well as rail services to help solve rail challenges. We manufacture high-horsepower, diesel-electric locomotives including the Evolution SeriesTM, which meets or exceeds the U.S. Environmental Protection Agency��s (EPA) Tier 4 requirements for freight and passenger applications.
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Services – develops partnerships that support advisory services, parts, integrated software solutions and data analytics. Our comprehensive offerings include tailored service programs, high-quality parts for GE and other locomotive platforms, overhaul, repair and upgrade services and wreck repair. Our portfolio provides the people, partnerships and leading software to optimize operations and asset utilization.
Digital Solutions– offers a suite of software-enabled solutions to help our customers lower operational costs, increase productivity and improve service quality and reliability.
Mining –provides mining equipment and services. The portfolio includes drive systems for off-highway vehicles, mining equipment, mining power and productivity.
Marine, Stationary & Drilling –offers marine diesel engines and stationary power diesel engines and motors for land and offshore drilling rigs.
The competitive environment for locomotives and mining equipment and services consists of large global competitors. A number of smaller competitors compete in a limited-size product range and geographic regions. North America will remain a focus of the industry due to the EPA Tier 4 emissions standard that went into effect in 2015.
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Significant Trends & Developments |
On May 21, 2018, we announced an agreement to spin- or split-off and merge our Transportation segment with Wabtec Corporation, a U.S. rail equipment manufacturer. The agreement was subsequently amended on January 25, 2019. On February 25, 2019, we completed the spin-off and subsequent merger. In the transaction, participating GE shareholders received shares of Wabtec common stock representing an approximately 24.3% ownership interest in Wabtec common stock. GE received approximately $2.9 billion in cash as well as shares of Wabtec common stock and Wabtec non-voting convertible preferred stock that, together, represent an approximately 24.9% ownership interest in Wabtec. In addition, GE is entitled to additional cash consideration up to $0.5 billion for tax benefits that Wabtec realizes from the transaction.
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• | North American rail carloads increased 3.4% in 2018, driven primarily by an increase in intermodal(a) traffic.
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Despite improving carload volume, parked locomotives began to increase in the second half of 2018. This increase of 4.7% from the prior year is attributable to some fleet overcapacity and constrained spending by the railroads limiting fleet expansion.
Global locomotive deliveries were down from 433 units in 2017 to 272 units in 2018 driven primarily by the optimization of existing fleets in North America.
In addition, price increases associated with additional U.S. tariffs imposed on China could negatively affect demand and reduce rail volumes, particularly those linked to farm exports, auto exports, and intermodal flows.
(a) Defined as when at least two modes of transportation are used to move freight.
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MD&A | SEGMENT OPERATIONS | TRANSPORTATION |
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GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
|
| | | |
| U.S. | $ | 2.2 |
| $ | 2.2 |
|
| Non-U.S. | | |
| Europe | 0.3 |
| 0.2 |
|
| Asia | 0.4 |
| 0.3 |
|
| Americas | 0.7 |
| 0.6 |
|
| Middle East and Africa | 0.2 |
| 0.7 |
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| Total Non-U.S. | $ | 1.7 |
| $ | 1.7 |
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| Total Segment Revenues | $ | 3.9 |
| $ | 3.9 |
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| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 43 | % | 44 | % |
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SUB-SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
|
| | | |
| Locomotives | $ | 0.9 |
| $ | 1.3 |
|
| Services | 2.1 |
| 1.9 |
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| Mining | 0.6 |
| 0.4 |
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| Other(a) | 0.4 |
| 0.4 |
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| Total Segment Revenues | $ | 3.9 |
| $ | 3.9 |
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(a) Includes Marine, Stationary, Drilling and Digital
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ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
|
| | | |
| Orders | | |
| Equipment | $ | 2.8 |
| $ | 2.1 |
|
| Services | 2.9 |
| 2.8 |
|
| Total | $ | 5.7 |
| $ | 4.9 |
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| | | |
| Backlog | | |
| Equipment | $ | 6.0 |
| $ | 4.8 |
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| Services | 12.9 |
| 13.3 |
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| Total | $ | 18.9 |
| $ | 18.1 |
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| LOCOMOTIVES | 2018 |
| 2017 |
| V |
|
| Unit Orders | 1,072 |
| 438 |
| 634 |
|
| Unit Sales | 272 |
| 433 |
| (161 | ) |
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MD&A | SEGMENT OPERATIONS | TRANSPORTATION |
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| | | | | | | | | |
SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Revenues | | | |
| Equipment | $ | 1.4 |
| $ | 1.7 |
| $ | 2.3 |
|
| Services | 2.5 |
| 2.2 |
| 2.3 |
|
| Total(a) | $ | 3.9 |
| $ | 3.9 |
| $ | 4.6 |
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SEGMENT PROFIT AND PROFIT MARGIN (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Segment profit(b) | $ | 0.6 |
| $ | 0.6 |
| $ | 1.0 |
|
| Segment profit margin | 16.2 | % | 16.3 | % | 21.1 | % |
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(a) | Transportation segment revenues represent 3% of both total industrial segment revenues and total segment revenues for the year ended December 31, 2018. |
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(b) | Transportation segment profit represents 6% of total industrial segment profit for the year ended December 31, 2018. |
Segment revenues down 1%;
Segment profit down 1%:
North American carload volume increased 3.4% during 2018, driven primarily by an increase in intermodal traffic. Despite improving carload volume, the number of parked locomotives began to increase in the second half of 2018. The increase in parked locomotives of 4.7% from the prior year is attributable to some fleet overcapacity and constrained spending by the railroads limiting fleet expansion.
Equipment volume decreased primarily driven by 161 fewer locomotive shipments. This decrease was primarily offset by growth in mining of $0.2 billion and an increase in services revenues of $0.2 billion as railroads are running their locomotives longer. In addition, unparkings did occur in the first half of the year, and these unparked locomotives tend to be older units in higher need of servicing and replacement parts, driving an increase in services volume and parts shipped.
The decrease in profit was driven by lower locomotive shipments and cost pressure from material inflation and the impact of tariffs, offset by favorable business mix from a higher proportion of services volume.
Segment revenues down $0.7 billion (14%);
Segment profit down $0.3 billion (34%):
The North American market continues to see overcapacity and spending budget cuts by the railroads limiting fleet expansion. However, carload volume increased 4.8% during the year driven by an increase in coal. With improving carload volume, the number of parked locomotives has decreased 18% from the prior year.
Equipment volume decreased primarily driven by 266 fewer locomotive shipments in North America due to continuing challenging market conditions. Services revenues also decreased driven by lower transactional services volume.
The decrease in profit was driven by lower equipment volume, partially offset by favorable business mix from a higher proportion of services volume including an increase in earnings in our long-term service contracts. Additionally, cost reduction actions including restructuring, supply chain initiatives and work transfers to more cost-competitive locations continued during the year.
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MD&A | SEGMENT OPERATIONS | LIGHTING |
LIGHTING |
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Lighting includes the GE Lighting business, which is primarily focused on consumer lighting applications in the U.S. and Canada, and Current, powered by GE (Current), which is focused on providing energy efficiency and productivity solutions for commercial, industrial and municipal customers. We employ approximately 3,000 people, serve customers in 97 countries, and our headquarters are located in East Cleveland, OH for GE Lighting and Boston, MA for Current.
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GE Lighting – focused on driving innovation and growth in light emitting diode (LED) and connected home technology. The business offers LEDs in a variety of shapes, sizes, wattages and color temperatures. It is also investing in the growing smart home category, offering a suite of connected lighting products with simple connection points that offer new opportunities to do more at home.
Current–combines advanced LED technology with networked sensors and software to make commercial buildings, retail stores, industrial facilities and cities more energy efficient and productive.
Lighting faces competition from businesses operating with global presence and with deep energy domain expertise. Our products and services sold to end customers are often subject to a number of regulatory specification and performance standards under different federal, state, foreign and energy industry standards.
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Significant Trends & Developments |
We classified the substantial majority of our Lighting segment as held for sale in the fourth quarter of 2017. In February 2018, we entered into an agreement to sell our GE Lighting business in Europe, the Middle East, Africa and Turkey and our Global Automotive Lighting business to a company controlled by a former GE executive in the region.
In November 2018, we announced an agreement to sell our Current, powered by GE business within our Lighting segment to American Industrial Partners (AIP), a New York-based private equity firm. The deal is expected to close in early 2019, subject to customary closing conditions and regulatory approval.
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GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
|
| | | |
| U.S. | $ | 1.4 |
| $ | 1.5 |
|
| Non-U.S. | | |
| Europe | 0.1 |
| 0.2 |
|
| Asia | — |
| — |
|
| Americas | 0.2 |
| 0.2 |
|
| Middle East and Africa | — |
| 0.1 |
|
| Total Non-U.S. | $ | 0.3 |
| $ | 0.5 |
|
| Total Segment Revenues | $ | 1.7 |
| $ | 1.9 |
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| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 17 | % | 25 | % |
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| | | | | | |
SUB-SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
|
| | | |
| Current | $ | 1.0 |
| $ | 1.0 |
|
GE Lighting
| 0.7 |
| 0.9 |
|
| Total Segment Revenues | $ | 1.7 |
| $ | 1.9 |
|
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ORDERS AND BACKLOG (In billions) | 2018 |
| 2017 |
|
| | | |
| Orders | | |
| Equipment | $ | 0.9 |
| $ | 1.1 |
|
| Services | — |
| 0.1 |
|
| Total | $ | 1.0 |
| $ | 1.2 |
|
| | | |
| Backlog | | |
| Equipment | $ | 0.2 |
| $ | 0.2 |
|
| Services | — |
| — |
|
| Total | $ | 0.2 |
| $ | 0.2 |
|
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| | |
MD&A | SEGMENT OPERATIONS | LIGHTING |
|
| | | | | | | | | |
SEGMENT REVENUES (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Revenues | | | |
| Equipment | $ | 1.6 |
| $ | 1.9 |
| $ | 4.6 |
|
| Services | 0.1 |
| 0.1 |
| 0.2 |
|
| Total(a)(b) | $ | 1.7 |
| $ | 1.9 |
| $ | 4.8 |
|
| | | | |
SEGMENT PROFIT AND PROFIT MARGIN(a) (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Segment profit(c) | $ | 0.1 |
| $ | — |
| $ | 0.2 |
|
| Segment profit margin | 4.1 | % | 1.4 | % | 3.5 | % |
| |
(a) | Lighting segment included Appliances through its disposition in the second quarter of 2016. |
| |
(b) | Lighting segment revenues represent 1% of both total industrial segment revenues and total segment revenues for the year ended December 31, 2018. |
| |
(c) | Lighting segment profit represents 1% of total industrial segment profit for the year ended December 31, 2018. |
Segment revenues down $0.2 billion (11%);
Segment profit flat:
The traditional lighting market continued to decline in 2018 with corresponding growth in LED lighting as the market shifts away from traditional lighting products in favor of more energy efficient, cost-saving options.
Revenues decreased due to the disposition of our GE Lighting business in Europe, the Middle East, Africa and Turkey and our Global Automotive Lighting business in the second quarter of 2018. Excluding the impact of these dispositions, equipment revenues increased due to higher LED volume and Digital sales, partially offset by lower traditional lighting and solar sales and lower LED prices.
The increase in profit was driven by savings from restructuring and decreased investment and controllable spending, partially offset by regional exits and lower prices.
Segment revenues down $2.8 billion (59%);
Segment profit down $0.1 billion (84%):
The traditional lighting market continued to be challenging due to continued U.S. energy efficiency regulations and market shifts away from traditional lighting products in favor of more energy-efficient, cost-saving options.
The main driver of the decrease in revenues was the Appliances disposition which contributed $2.6 billion in the first half of 2016 that did not recur in 2017 following the sale in June 2016. For the remaining Lighting business, equipment revenues decreased due to lower traditional lighting product sales and LED price pressure, partially offset by LED and solar growth in Current. In addition, revenues further decreased due to Lighting regional exits outside of North America.
The decrease in profit was due to lower volume driven by the Appliances disposition in June 2016. Excluding this disposition, profit increased for the remaining Lighting business driven by savings from restructuring, regional exits and decreased investment and controllable spending. These increases were partially offset by pressure in North America from declining traditional lighting product sales being only partially offset by increasing LED sales.
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| | |
MD&A | SEGMENT OPERATIONS | CAPITAL |
CAPITALServices. Capital is the financial services division of GE focused on customers and markets aligned with GE’s industrial businesses across developed and emerging markets. We provide financial products and services around the globe that build on GE’s industry specific expertise in aviation, power, renewables, healthcare and other activities to capitalize on market-specific opportunities. While there are customer benefits and knowledge sharing advantages linking GE’s industrial and capital businesses, the financial and operational relationships are maintained with arms-length terms as though the businesses were independent. We employ approximately 2,300 people, our headquarters is located in Norwalk, CT, and our businesses include:
GE Capital Aviation Services (GECAS) - is an aviation lessor and financier with over 50 years of experience. GECAS provides a wide range of assets including narrow- or widebody aircraft, regional jets, turboprops, freighters, engines, helicopters, financing and materials. GECAS offers a broad array of financing products and services on these assets including operating leases, sale-leasebacks, secured debt financing, asset trading and servicing, and airframe parts management. GECAS owns, services or has on order more than 1,8501,700 aircraft plus provides loans collateralized by approximately 320 aircraft. GECASand serves approximately 250225 customers in over 75 countries from a network of 2420 offices around the world. GECAS acquired Milestone Aviation Group (Milestone) in January 2015, adding helicopter leasing and financing. Milestone provides financing options to operators in the offshore oil & gas industries, search & rescue, EMS, police surveillance, mining and other utility missions. Its current fleet and forward order book of medium and heavy helicopter models include models from AgustaWestland, Airbus and Sikorsky available for lease. Its adjacency businesses - GECAS Engine Leasing and Asset Management Services (Parts) - offer customers solutions and services for spare engine leasing, spare parts financing/management, and aviation consulting services.
Energy Financial Services (EFS) - a global energy investor that provides financial solutions and underwriting capabilities for Power and Renewable Energy and Oil & Gas to meet rising demand and sustainability imperatives.
Industrial Finance (IF) - its Working Capital Solutions (WCS) business provides working capital services to GE and through December 31, 2018, it also provided healthcare equipment financing.
Insurance -Refer to the Other Items - Insurance section within this MD&A for a detailed business description.
Competition & Regulation. The businesses in which we engage are highly competitive and are subject to competition from various types of financial institutions including banks, equity investors, leasing companies, finance companies associated with manufacturers and insurance and reinsurance companies. For our GECAS operations, competition is based on lease rate financing terms, aircraft delivery dates, condition and availability, as well as available capital demand for financing. For our EFS operations, competition is primarily based on deal structure and terms. As we compete globally, EFS’ success is sensitive to project execution and merchant electricity prices, as well as the economic and political environment of each country in which we do business.
The businesses in which we engage are subject to a variety of U.S. federal and state laws and regulations. Our insurance operations are regulated by the insurance departments in the states in which they are domiciled or licensed, with the Kansas Insurance Department (KID) being our primary state regulator.
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|
Significant Trends & Developments |
Significant Trends & Developments.In 2018, we announced plans to take actions to make GE Capital smaller and more focused, including a substantial reduction in the size of GE Capital’s EFS and IF businesses (GE Capital strategic shift).businesses. With respect to this announcement, we completed $15 billion of asset reductions during 2018 and approximately $12 billion of asset reductions during 2019, including approximately $8 billion during the fourth quarter of 2019. In August 2019, we announced that we entered into a definitive agreement for Apollo Global Management, LLC and Athene Holding Ltd. to purchase PK AirFinance, an aviation lending business, from GECAS and we completed the sale of a substantial portion of the business for a small premium in the fourth quarter of 2019. We expect to complete the sale of the remaining assets in the first half of 2020. We continue to evaluate strategic options to accelerate the further reduction in the size of GE Capital. CertainCapital, some of these optionswhich could have a material financial charge depending on the timing, negotiated terms and conditions of any ultimate arrangements.
In 2018, we completed the sale of EFS' debt origination business, various EFS investments and HEF financing receivables within our Capital segment for proceeds of approximately $8.3 billion and recognized a net pre-tax gain of approximately $0.2 billion. These sales, along with net collections of financing receivables and maturities of liquidity investments primarily provided the cash necessary to reduce the GE Capital balance sheet through net repayment of borrowings of $21.1 billion.
GE Capital paid no common dividendsreceived $1.5 billion and $2.5 billion in 2018capital contributions from GE in the second quarter and does not expectfourth quarter of 2019, respectively.
We annually perform premium deficiency testing in the aggregate across our run-off insurance portfolio. We performed this year's testing in the third quarter of 2019, and, as a result, identified a premium deficiency resulting in a $1.0 billion pre-tax ($0.8 billion after-tax) charge to make a common dividend distribution to GE for the foreseeable future. GE Capital paid common dividends of $4.0 billion to GE during the year ended December 31, 2017.
Refer toearnings. See the Other Items - Insurance section within this MD&A for further discussion of the accounting estimates and assumptions in our insurance reserves and their sensitivity to change. Also, see Notes 1 andNote 12 to the consolidated financial statements for further information.
GE Capital made capital contributions to its insurance subsidiaries of $2.0 billion and $1.9 billion in the first quarters of 2020 and 2019, respectively, and expects to provide further capital contributions of approximately $7 billion through 2024. See the Capital Resources and Liquidity section within MD&A for further information.
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 34 18
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| | |
| MD&A | SEGMENT OPERATIONS | CAPITAL | |
Effective January 1, 2019, the HEF business was transferred from our Capital segment to our Healthcare segment.
Refer to the Aviation and GECAS 737 MAX discussion in Consolidated Results within MD&A for information regarding the Company's exposure related to the temporary fleet grounding of the Boeing 737 MAX.
| | SUB-SEGMENT ASSETS (In billions) | 2018 |
| 2017 |
| |
| (Dollars in billions) | | 2019 |
| 2018 |
|
| | | |
| GECAS | $ | 41.7 |
| $ | 40.0 |
| $ | 38.0 |
| $ | 41.7 |
|
| EFS | 3.0 |
| 9.9 |
| 1.8 |
| 3.0 |
|
| Industrial Finance and WCS(a) | 15.8 |
| 25.8 |
| |
| IF and WCS | | 9.0 |
| 15.8 |
|
| Insurance | 40.3 |
| 39.9 |
| 46.3 |
| 40.3 |
|
| Other continuing operations | 18.6 |
| 35.3 |
| 22.5 |
| 18.6 |
|
| Total segment assets | $ | 119.3 |
| $ | 150.8 |
| $ | 117.5 |
| $ | 119.3 |
|
|
| | |
(a)GE Capital debt to equity ratio | In the second quarter of 2018, management of our Working Capital Solutions (WCS) business was transferred to our Treasury operations.3.86:1 | 5.74:1 |
|
| | | | | | |
GEOGRAPHIC REVENUES (Dollars in billions) | 2018 |
| 2017 |
|
| U.S. | $ | 5.3 |
| $ | 4.4 |
|
| Non-U.S. | | |
| Europe | 1.4 |
| 1.5 |
|
| Asia | 1.4 |
| 1.4 |
|
| Americas | 0.6 |
| 0.8 |
|
| Middle East and Africa | 0.9 |
| 1.0 |
|
| Total Non-U.S. | 4.3 |
| 4.7 |
|
| Total | $ | 9.6 |
| $ | 9.1 |
|
| | | |
| Non-U.S. Revenues as a % of Segment Revenues | 45 | % | 52 | % |
|
| | |
| RATIO | 2018 | 2017 |
| GE Capital debt to equity | 5.74:1 | 7.06:1 |
| | SUB-SEGMENT REVENUES(a) (In billions) | 2018 |
| 2017 |
| 2016 |
| |
| (In billions) | | 2019 |
| 2018 |
| 2017 |
|
| | | |
| GECAS | $ | 4.9 |
| $ | 5.1 |
| $ | 5.4 |
| $ | 4.9 |
| $ | 4.9 |
| $ | 5.1 |
|
| EFS | 0.1 |
| (0.5 | ) | 0.7 |
| 0.1 |
| 0.1 |
| (0.5 | ) |
| Industrial Finance and WCS | 1.5 |
| 1.5 |
| 1.2 |
| |
| IF and WCS | | 0.8 |
| 1.5 |
| 1.5 |
|
| Insurance | 2.9 |
| 2.9 |
| 2.9 |
| 2.9 |
| 2.9 |
| 2.9 |
|
| Other continuing operations | 0.1 |
| — |
| 0.7 |
| — |
| 0.1 |
| — |
|
| Total segment revenues | $ | 9.6 |
| $ | 9.1 |
| $ | 10.9 |
| |
| Total segment revenues(a) | | $ | 8.7 |
| $ | 9.6 |
| $ | 9.1 |
|
| | | |
| GECAS | | $ | 1.0 |
| $ | 1.2 |
| $ | 2.1 |
|
| EFS | | 0.1 |
| 0.1 |
| (1.5 | ) |
| IF and WCS | | 0.2 |
| 0.3 |
| 0.5 |
|
| Insurance | | (0.6 | ) | (0.2 | ) | (7.2 | ) |
| Other continuing operations(b) | | (1.3 | ) | (1.9 | ) | (0.7 | ) |
| Total segment profit | | $ | (0.5 | ) | $ | (0.5 | ) | $ | (6.8 | ) |
| |
| (a) | Capital segment revenues represent 8%9% of total segment revenues for the year ended December 31, 2018.2019. |
|
| | | | | | | | | |
SUB-SEGMENT PROFIT(a) (In billions) | 2018 |
| 2017 |
| 2016 |
|
| GECAS | $ | 1.2 |
| $ | 2.1 |
| $ | 1.4 |
|
| EFS | 0.1 |
| (1.5 | ) | 0.4 |
|
| Industrial Finance and WCS | 0.3 |
| 0.5 |
| 0.4 |
|
| Insurance | (0.2 | ) | (7.2 | ) | (0.1 | ) |
| Other continuing operations(b) | (1.9 | ) | (0.7 | ) | (3.3 | ) |
| Total segment profit | $ | (0.5 | ) | $ | (6.8 | ) | $ | (1.3 | ) |
| |
(a) | Interest and other financial charges, income taxes, non-operating benefit costs and GE Capital preferred stock dividends are included in determining segment profit for the Capital segment, which is included in continuing operations. See Note 2 to the consolidated financial statements for further information on discontinued operations. |
| |
| (b) | Other continuing operations in 2018 is primarily driven bycomprised excess interest costs from debt previously allocated to assets that have been sold as part of the GE Capital Exit Plan, preferred stock dividend costs and interest costs not allocated to GE Capital segments, which are driven by GE Capital’s interest allocation process. Interest costs are allocated to GE Capital segments based on the tenor of their assets using the market rate at the time of origination. Debt onorigination, which differs from the GE Capital balance sheetasset profile when the debt was issued based on the profile of our balance sheet prior to the decision in 2015 to strategically shrink GE Capital. It included long dated maturities that are no longer consistent with a much smaller business.originated. As a result, actual interest expense is higher than interest expense allocated to the remaining GE Capital segments. PreferredSubstantially all preferred stock dividend costs will become a GE obligation in 2021 asJanuary 2021. See Note 16 to the intercompany securities convert into common equity andconsolidated financial statements for further information. The excess interest costs from debt previously allocated to assets that have been sold are expected to run off by 2020. In addition, we anticipate unallocated interest costs to gradually decline gradually as debt matures and/or is refinanced. |
|
| | | | | | | | | |
| (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| U.S. | $ | 4.1 |
| $ | 5.3 |
| $ | 4.4 |
|
| Non-U.S. | | | |
| Europe | 1.6 |
| 1.4 |
| 1.5 |
|
| Asia | 1.5 |
| 1.4 |
| 1.4 |
|
| Americas | 0.7 |
| 0.6 |
| 0.8 |
|
| Middle East and Africa | 0.8 |
| 0.9 |
| 1.0 |
|
| Total Non-U.S. | 4.6 |
| 4.3 |
| 4.7 |
|
| Total segment revenues | $ | 8.7 |
| $ | 9.6 |
| $ | 9.1 |
|
| | | | |
| Non-U.S. revenues as a % of segment revenues | 53 | % | 45 | % | 52 | % |
For the year ended December 31, 2019, segment revenues decreased $0.8 billion (8%) and segment losses were flat.
Capital revenues decreased primarily due to volume declines and lower gains, partially offset by lower impairments. Capital losses were flat primarily due to a $1.0 billion pre-tax charge identified through the completion of our annual insurance premium deficiency review, lower gains, lower tax benefits and volume declines, offset by lower impairments, lower excess interest costs and tax law changes. Gains were $0.7 billion and $0.8 billion in 2019 and 2018, respectively, which primarily related to sales of certain GECAS aircraft and engines resulting in gains of $0.4 billion and $0.3 billion in 2019 and 2018, respectively, as well as the sale of equity method investments resulting in gains of $0.2 billion in 2019 at EFS and the sale of EFS’ debt origination business and equity investments resulting in gains of $0.4 billion in 2018.
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2018 – 2017 COMMENTARY:MD&A | SEGMENT OPERATIONS | |
Capital
For the year ended December 31, 2018, segment revenues increased $0.5 billion or 5%,(5%) and segment losses decreased $6.3 billion (93%).
Capital revenues increased primarily due to lower impairments and volume growth, partially offset by lower gains.
Capital losses decreased $6.3 billion, or 93%, primarily due to the nonrecurrence of the 2017 charges associated with the GE Capital insurance premium deficiency review and EFS strategic actions, partially offset by the nonrecurrence of 2017 tax benefits. Capital revenues decreased $1.8 billion, or 17%, primarily due to higher impairments and volume declines.
Capital losses increased $5.5 billion, primarily due to the completion of our insurance premium deficiency review, EFS strategic actions and higher impairments, partially offset by lower headquarters and treasury operations expenses associated with the GE Capital Exit Plan, higher tax benefits including the effects of U.S. tax reform and lower preferred dividend expenses associated with the January 2016 preferred equity exchange.
|
| | |
MD&A | CORPORATE ITEMS AND ELIMINATIONS |
GE CORPORATE ITEMS AND ELIMINATIONS
GE ELIMINATIONS. Corporate Items and Eliminations is a caption used in the Segment Operations – Summary of Operating SegmentReportable Segments table to reconcile the aggregated results of our segments to the consolidated results of the Company. As such, it includes corporate activities, including certain GE Digital activities, and the elimination of inter-segment activities. Specifically, the GEThe Corporate Items and Eliminations amounts related to revenues and earnings include the results of disposed businesses, certain amounts not included in industrial operating segment results because they are excluded from measurement of their operating performance for internal and external purposes and the elimination of inter-segment activities. In addition, the GE Corporate Items and Eliminations amounts related to earnings include certain costs of our principal retirement plans, restructuring and other costs reported in Corporate, and the unallocated portion of certain corporate costs (such as research and development spending and costs related to our Global Growth Organization).
Corporate items and eliminations includes the results of our Lighting segment and GE Digital business for all periods presented.
|
| | | | | | | | | | |
REVENUES AND OPERATING PROFIT (COST) (In millions) | 2018 |
| 2017 |
| 2016 |
|
| Revenues | | | |
| | Eliminations and other | $ | (3,600 | ) | $ | (3,995 | ) | $ | (3,760 | ) |
| Total Corporate Items and Eliminations | $ | (3,600 | ) | $ | (3,995 | ) | $ | (3,760 | ) |
| | | | | |
| Operating profit (cost) | | | |
| | Gains (losses) on disposals(a) | $ | 1,350 |
| $ | 926 |
| $ | 3,480 |
|
| | Restructuring and other charges(b) | (2,958 | ) | (3,351 | ) | (3,544 | ) |
| | Goodwill impairments | (22,136 | ) | (1,165 | ) | — |
|
| | Eliminations and other | (1,187 | ) | (1,636 | ) | (2,000 | ) |
| Total Corporate Items and Eliminations | $ | (24,931 | ) | $ | (5,225 | ) | $ | (2,064 | ) |
| |
(a) | Includes gains (losses) on disposed or held for sale businesses. The total amount realized in the second half of 2018 amounted to $161 million related to the sale of our Pivotal software equity investment. Any fair value adjustments recorded through the date of sale were considered unrealized. |
| |
(b) | Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment. |
|
| | | | | | | | | |
| (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Revenues | | | |
| Corporate revenues | $ | 1,791 |
| $ | 2,783 |
| $ | 2,897 |
|
| Eliminations and other | (2,096 | ) | (2,110 | ) | (2,464 | ) |
| Total Corporate Items and Eliminations | $ | (305 | ) | $ | 673 |
| $ | 433 |
|
| | | | |
| Operating profit (cost) | | | |
| Gains (losses) on disposals and held for sale businesses | $ | 4 |
| $ | 1,370 |
| $ | 926 |
|
| Restructuring and other charges | (1,315 | ) | (2,952 | ) | (3,023 | ) |
| Unrealized gains (losses)(a) | 793 |
| — |
| — |
|
| Goodwill impairments (Note 8) | (1,486 | ) | (22,136 | ) | (1,165 | ) |
| Adjusted total corporate operating costs (Non-GAAP) | (1,693 | ) | (1,255 | ) | (1,701 | ) |
| Total Corporate Items and Eliminations (GAAP) | $ | (3,698 | ) | $ | (24,973 | ) | $ | (4,963 | ) |
| Less: gains (losses), impairments and restructuring & other | (2,004 | ) | (23,719 | ) | (3,262 | ) |
| Adjusted total corporate operating costs (Non-GAAP) | $ | (1,693 | ) | $ | (1,255 | ) | $ | (1,701 | ) |
(a) Related to mark-to-market impact on our Baker Hughes shares for 2019. See Notes 2, 3 and 19 to the consolidated financial statements for further information.
|
| | | | | | | | | |
| Functions & operations | $ | (1,252 | ) | $ | (1,362 | ) | $ | (2,007 | ) |
| Eliminations | (184 | ) | (61 | ) | 9 |
|
| Environmental, health & safety (EHS) and other items | (258 | ) | $ | 169 |
| $ | 297 |
|
| Adjusted total corporate operating costs (Non-GAAP) | $ | (1,693 | ) | $ | (1,255 | ) | $ | (1,701 | ) |
Adjusted total corporate operating costs* excludes gains (losses) on disposals and held for sale businesses, restructuring and other charges, unrealized gains (losses) and goodwill impairments. We believe that adjusting operating corporate costs*costs to exclude the effects of items that are not closely associated with ongoing corporate operations (see reconciliation below), such as earnings of previously divested businesses, gains and losses on disposed and held for sale businesses, restructuring and other charges provides management and investors with a meaningful measure that increases the period-to-period comparability of our ongoing corporate costs.
|
| | | | | | | | | | |
CORPORATE COSTS (OPERATING) (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | | |
| Total Corporate Items and Eliminations (GAAP) | $ | (24,931 | ) | $ | (5,225 | ) | $ | (2,064 | ) |
| Less: restructuring and other charges | (2,958 | ) | (3,351 | ) | (3,544 | ) |
| Less: gains (losses) on disposals | 1,350 |
| 926 |
| 3,480 |
|
| Less: goodwill impairments | (22,136 | ) | (1,165 | ) | — |
|
| Adjusted total corporate costs (operating) (Non-GAAP) | $ | (1,187 | ) | $ | (1,636 | ) | $ | (2,000 | ) |
Corporate costs decreased by $21.3 billion primarily as the result of $20.6 billion lower goodwill impairment charges (see Note 8 to the consolidated financial statements). Corporate costs also decreased due to $0.8 billion of higher net unrealized gains primarily due to our mark-to-market impact on our Baker Hughes shares in 2019 and $1.6 billion of lower restructuring costs in 2019. These decreases were partially offset by $1.4 billion of lower net gains from disposed or held for sale businesses, which was primarily related to a $0.7 billion gain from the sale of our Value-Based Care business in 2018, a $0.7 billion gain from the sale of our Distributed Power business in 2018, $0.3 billion gain from the sale of our Industrial Solutions business in 2018 and a $0.2 billion gain from the sale of our Pivotal Software investment in 2018. These realized gains were partially offset by $0.3 billion of lower held for sale losses in 2019 primarily related to our Lighting and Aviation segments and a $0.2 billion gain from the sale of our Digital ServiceMax business in 2019.
2018 – 2017 COMMENTARY
RevenuesAdjusted total corporate operating costs* increased by $0.4 billion in 2019 primarily as a result of:of a $0.2 billion increase in costs associated with existing environmental, health and safety matters in 2019 and $0.2 billion due to the non-recurrence of gains associated with the sale of intangible assets in 2018. In addition, there was $0.1 billion of higher intercompany profit eliminations primarily as the result of $0.2 billion higher volume of spare LEAP 1-B engines sold from our Aviation segment to our GECAS business to provide an appropriate level of spare engines available in the market to meet customer needs in anticipation of the Boeing 737 MAX aircraft recertification. These increases were partially offset by $0.1 billion of lower costs due to restructuring and cost out actions in our functions and operating businesses.
Decrease in inter-segment eliminations
Operating costs*Non-GAAP Financial Measure
|
| | |
| MD&A | CORPORATE ITEMS AND ELIMINATIONS |
For the year ended December 31, 2018, revenues increased by $19.7$0.2 billion, primarily as a result of:of a $0.4 billion decrease in inter-segment eliminations partially offset by a $0.1 billion decrease in Corporate revenues primarily related to our Current & Lighting segment.
$21.0Corporate costs increased by $20.0 billion, primarily as a result of $21.0 billion of higher goodwill impairment charges due(see Note 8 to $22.0 billion of goodwill impairments in our Power business and a $0.1 billion goodwill impairment in our Renewable business in 2018 compared to a $1.2 billion charge for the impairment of Power Conversion goodwill in 2017.
$0.4 billion of lower restructuring and other charges primarily driven by $0.7 billion of lower restructuring costs across all GE industrial segments during 2018 and $0.2 billion of lower charges in 2018 for the impairment of a power plant asset.consolidated financial statements). These decreasesincreases were partlypartially offset by $0.6 billion of impairments within our Power business in 2018.
$0.4$0.4 billion of higher net gains from disposed or held for sale businesses, which is primarily related to the $0.7 billion gain from the sale of our Distributed Power business to Advent International in 2018, a $0.7 billion gain from the sale of our Value BasedValue-Based Care business to Veritas Capital in 2018, a $0.3 billion gain from the sale of our Industrial Solutions business to ABB in 2018, a $0.2 billion gain from the sale of our Pivotal Software investment in 2018 and $0.4 billion of lower held for salesales losses in 2018 primarily related to our Lighting and Aviation segments. These increases were partly offset by a $1.9 billion gain from the sale of our Water business to Suez in 2017.
$0.4 billion of lower Corporate costs from restructuring and cost reduction actions.
*Non-GAAP Financial Measure
|
| | |
MD&A | CORPORATE ITEMS AND ELIMINATIONS |
2017 – 2016 COMMENTARY
Revenues decreased $0.2 billion, primarily a result of:
Increase in inter-segment eliminations.
Operating costs increased $3.2 billion, primarily as a result of:
$2.6 billion of lower netrealized gains from disposed or held for sale businesses, which is primarily related to the $3.1 billion gain from the sale of our Appliances business to Haier in 2016, $0.4 billion gain from the sale of GE Asset Management to State Street Corporation in 2016 and $1.0 billion of held for sale losses in 2017 related to our Lighting and Aviation businesses. These decreases were partially offset by a $1.9 billion gain from the sale of our Water business to Suez in 2017.
$1.2 billion of higher goodwill charges related Corporate costs further decreased due to the impairment of Power Conversion goodwill in 2017.
$0.2$0.1 billion of lower restructuring and other chargescharges.
Adjusted total corporate operating costs* decreased by $0.4 billion primarily driven by a decreaseas the result of $0.5 billion of Oil & Gas related charges recorded at Corporate, partially offset by a charge of $0.3 billion for the impairment of a power plant asset.
$0.4$0.6 billion of lower Corporate costs fromdue to restructuring and cost reductionout actions in 2017.our functions and operating businesses. These decreases were partly offset by $0.1 billion of higher intercompany profit eliminations and $0.1 billion of higher EHS and other items in 2018.
RESTRUCTURING
RESTRUCTURING.Restructuring actions are an essential component ofto our cost improvement efforts tofor both existing operations and those recently acquired. Restructuring and other charges relate primarily to workforce reductions, facility exit costs associated with the consolidation of sales, service and manufacturing facilities, the integration of recent acquisitions, including Alstom, the Baker Hughes transaction, and certain other asset write-downs.write-downs such as those associated with product line exits. We continue to closely monitor the economic environment and mayexpect to undertake further restructuring actions to more closely align our cost structure with earnings and cost reduction goals.
|
| | | | | | | | | |
RESTRUCTURING & OTHER CHARGES (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Workforce reductions | $ | 0.9 |
| $ | 1.2 |
| $ | 1.3 |
|
| Plant closures & associated costs and other asset write-downs | 1.8 |
| 1.9 |
| 1.3 |
|
| Acquisition/disposition net charges | 0.8 |
| 0.8 |
| 0.6 |
|
| Other | 0.1 |
| 0.2 |
| 0.3 |
|
| Total(a) | $ | 3.6 |
| $ | 4.1 |
| $ | 3.5 |
|
| |
(a) | Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment. |
|
| | | | | | | | | |
| (In billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Workforce reductions | $ | 0.8 |
| $ | 0.9 |
| $ | 1.0 |
|
| Plant closures & associated costs and other asset write-downs | 0.3 |
| 1.4 |
| 1.5 |
|
| Acquisition/disposition net charges | 0.2 |
| 0.6 |
| 0.5 |
|
| Other | — |
| — |
| 0.1 |
|
| Total restructuring and other charges | $ | 1.3 |
| $ | 3.0 |
| $ | 3.0 |
|
For 2018, restructuring and other charges were $3.6 billion of which approximately $1.4 billion was reported in cost of products/services and $2.1 billion was reported in selling, general and administrative expenses (SG&A). These activities were primarily at Power, Corporate and Oil & Gas. |
| | | | | | | | | |
| Cost of product/services | $ | 0.4 |
| $ | 1.1 |
| $ | 1.8 |
|
| Selling, general and administrative expenses | 1.0 |
| 1.7 |
| 1.2 |
|
| Other income | — |
| 0.1 |
| 0.1 |
|
| Total restructuring and other charges | $ | 1.3 |
| $ | 3.0 |
| $ | 3.0 |
|
|
| | | | | | | | | |
| Power | $ | 0.4 |
| $ | 1.3 |
| $ | 0.9 |
|
| Renewable Energy | 0.2 |
| 0.3 |
| 0.3 |
|
| Aviation | — |
| — |
| 0.1 |
|
| Healthcare | 0.2 |
| 0.2 |
| 0.3 |
|
| Corporate | 0.6 |
| 1.1 |
| 1.5 |
|
| Total restructuring and other charges by business | $ | 1.3 |
| $ | 3.0 |
| $ | 3.0 |
|
Cash expenditures for restructuring and other charges were approximately $2.0$1.2 billion, $1.5 billion and $1.5 billion for the twelve monthsyears ended December 31, 2018. Of the total $3.6 billion restructuring2019, 2018 and other charges, $0.7 billion was recorded in the Oil & Gas segment, which amounted to $0.5 billion net of noncontrolling interest.2017, respectively.
For 2017, restructuring and other charges were $4.1 billion of which approximately $2.4 billion was reported in cost of products/services and $1.6 billion was reported in selling, general and administrative expenses (SG&A). These activities were primarily at Corporate, Power and Oil & Gas. Cash expenditures for restructuring and other charges were approximately $2.0 billion for the twelve months ended December 31, 2017. Of the total $4.1 billion restructuring and other charges, $0.8 billion was recorded in the Oil & Gas segment, which amounted to $0.7 billion net of noncontrolling interest.
For 2016, restructuring & other charges were $3.5 billion of which approximately $2.3 billion was reported in cost of products/services and $1.1 billion was reported in other costs and expenses (SG&A). These activities were primarily at Power, Oil & Gas and Healthcare. Cash expenditures for restructuring were approximately $1.7 billion in 2016.
|
| | |
MD&A | CORPORATE ITEMS AND ELIMINATIONS |
COSTS AND GAINS NOT INCLUDED IN SEGMENT RESULTS
RESULTS.As discussed in the Segment Operations section within this MD&A, certain amounts are not included in industrial operating segment results because they are excluded from measurement of their operating performance for internal and external purposes. The amount ofThese costs relate primarily to goodwill impairment charges, restructuring and gains (losses) not included in segment results follows.acquisition and disposition activities.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| COSTS AND GAINS NOT INCLUDED IN | Costs | | Gains (Losses) | |
SEGMENT RESULTS (In billions) | 2018 |
| | 2017 |
| | 2016 |
| | 2018 |
| | 2017 |
| | 2016 |
| |
| | | | | | | | | | | | | |
| Power | $ | 23.5 |
| (a) | $ | 2.0 |
| (a) | $ | 1.5 |
| (a) | $ | 1.0 |
| | $ | 1.9 |
| (b) | $ | — |
| |
| Renewable Energy | 0.2 |
| (c) | 0.3 |
| | 0.3 |
| | — |
| | — |
| | — |
| |
| Aviation | — |
| | 0.1 |
| | 0.1 |
| | (0.1 | ) | (d) | (0.3 | ) | (d) | (0.1 | ) | |
| Oil & Gas(e) | — |
| | 0.2 |
| | 0.8 |
| | — |
| | — |
| | — |
| |
| Healthcare | 0.2 |
| | 0.3 |
| | 0.5 |
| | 0.8 |
| | — |
| | — |
| |
| Transportation | 0.1 |
| | 0.2 |
| | 0.2 |
| | — |
| | — |
| | — |
| |
| Lighting(f) | 0.1 |
| | 0.2 |
| | 0.3 |
| | (0.5 | ) | (d) | (0.7 | ) | (d) | 3.1 |
| (g) |
| Total | $ | 24.1 |
| | $ | 3.3 |
| | $ | 3.7 |
| | $ | 1.2 |
| | $ | 0.9 |
| | $ | 3.0 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Costs | | Gains (Losses) |
| (In billions) | 2019 |
| | 2018 |
| | 2017 |
| | 2019 |
| | 2018 |
| | 2017 |
|
| | | | | | | | | | | | |
| Power | $ | 0.4 |
| | $ | 20.5 |
| | $ | 2.0 |
| | $ | — |
| | $ | 1.0 |
| | $ | 1.9 |
|
| Renewable Energy | 1.7 |
| | 3.3 |
| | 0.3 |
| | — |
| | — |
| | — |
|
| Aviation | — |
| | — |
| | 0.1 |
| | — |
| | (0.1 | ) | | (0.3 | ) |
| Healthcare | 0.2 |
| | 0.2 |
| | 0.3 |
| | — |
| | 0.8 |
| | — |
|
| Total segments | $ | 2.2 |
| | $ | 24.0 |
| | $ | 2.7 |
| | $ | — |
| | $ | 1.7 |
| | $ | 1.6 |
|
| Corporate Items and Eliminations | 0.6 |
| | 1.1 |
| | 1.5 |
| | 0.8 |
| | (0.3 | ) | | (0.7 | ) |
| Total Industrial | $ | 2.8 |
| | $ | 25.1 |
| | $ | 4.2 |
| | $ | 0.8 |
| | $ | 1.4 |
| | $ | 0.9 |
|
*Non-GAAP Financial Measure
|
| | |
(a)MD&A | Included a charge of $22.0 billion for the impairment of Power goodwill in 2018, $1.2 billion for the impairment of Power Conversion goodwill in 2017 and $0.9 billion of Alstom-related restructuring and other charges in 2016.OTHER CONSOLIDATED INFORMATION |
| |
(b) | Related to the sale of our Water business in the third quarter of 2017. |
| |
(c) | Included a charge of $0.1 billion for the impairment of our Hydro business within Renewable Energy in 2018. |
| |
(d) | Related to held for sale charges in our Lighting and Aviation businesses in 2017 and 2018. |
| |
(e) | Subsequent to the Baker Hughes transaction restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment. |
| |
(f) | The Lighting segment included the Appliances business through its disposition in the second quarter of 2016. |
| |
(g) | Related to the sale of our Appliances business in the second quarter of 2016. |
OTHER CONSOLIDATED INFORMATION
INTEREST AND OTHER FINANCIAL CHARGESConsolidated interest and other financial charges amounted to $5.1 billion, $4.9 billion and $5.0 billion |
| | | | | | | | | |
INTEREST AND OTHER FINANCIAL CHARGES (In billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| GE | $ | 2.1 |
| $ | 2.4 |
| $ | 2.5 |
|
| GE Capital | 2.5 |
| 3.0 |
| 3.1 |
|
| Consolidated | $ | 4.2 |
| $ | 4.8 |
| $ | 4.7 |
|
The decrease in 2018, 2017 and 2016, respectively. See the Capital Resources and Liquidity section within this MD&A for a discussion of liquidity, borrowings and interest rate risk management.
GE interest and other financial charges (excludingfor the year ended December 31, 2019 was driven primarily by lower expenses on sales of GE current and long-term receivables as well as the reversal of $0.1 billion of accrued interest on assumed debt) amountedtax liabilities due to $2.7the completion of the 2012-2013 Internal Revenue Service (IRS) audit in June 2019, partially offset by the $0.3 billion $2.8 billionloss resulting from the completion of a tender offer to purchase GE senior notes (including fees and $2.0 billion in 2018, 2017 and 2016, respectively.other costs associated with the tender). The primary components of GE interest and other financial charges are interest on short- and long-term borrowings and financing costs on sales of receivables. Total GE interest and other financial charges of $1.3 billion and $1.5 billion were recorded at Corporate and $0.8 billion and $0.9 billion were recorded by GE segments for the years ended December 31, 2019 and 2018, respectively.
The decrease in 2018 compared to 2017 was primarily due to lower financing costs on sales of receivables, lower average rates on senior notes due to the $4.0 billion maturity in December 2017 of higher interest rate notes, and lower average short-term borrowings balances, partially offset by higher interest on borrowings issued by BHGE, interest on a higher balance of intercompany loans from GE Capital, and higher interest rates on short-term borrowings. See Notes 4 and 11 to the consolidated financial statements for more information regarding sales of GE receivables and interest rates on GE borrowings, respectively.
GE Capital interest and other financial charges (including interest on debt assumed by GE), was $3.0 billion, $3.1 billion and $3.8 billion in 2018, 2017 and 2016, respectively. The decrease in 2018 compared to 2017 wasfor the year ended December 31, 2019 were primarily due to lower average borrowings balances due to maturities and lower net interest on assumed debt resulting from an increase in intercompany loans to GE which bear the right of offset (see the Borrowings section of Capital Resources and Liquidity within this MD&A for an explanation of assumed debt and right-of-offset loans), partially offset by an increase in average interest rates due to changes in market rates. GE Capital average borrowings were $61.8 billion, $78.7 billion and $103.8 billion in 2019, 2018 and $145.0 billion in 2018, 2017, and 2016, respectively. The GE Capital average composite effective interest rate (including interest allocated to discontinued operations) was 4.2%, 3.9% in 2018,and 3.1% in 2019, 2018 and 2017, and 3.0% in 2016.respectively.
POSTRETIREMENT BENEFIT PLANS |
| | | | | | | | | |
BENEFIT PLANS COST (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Principal pension plans | $ | 4.3 |
| $ | 3.7 |
| $ | 3.6 |
|
| Other pension plans | (0.1 | ) | 0.3 |
| 0.4 |
|
| Principal retiree benefit plans | (0.1 | ) | — |
| 0.1 |
|
| Total | $ | 4.1 |
| $ | 4.0 |
| $ | 4.1 |
|
|
| | |
MD&A | OTHER CONSOLIDATED INFORMATION |
|
| | | | | | |
| PRINCIPAL PENSION PLANS(a) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Discount rates | 3.64 | % | 4.11 | % | 4.38 | % |
| Expected rate of return | 6.75 | % | 7.50 | % | 7.50 | % |
(a) Our principal pension plans are the GE Pension Plan and the GE Supplementary Pension Plan.
2018 – 2017 COMMENTARY
Postretirement benefit plan cost increased $0.1 billion as lower service cost resulting from fewer active plan participants was offset by effects of lower discount rates and higher loss amortization related to our principal pension plans.
2017–2016 COMMENTARY
Postretirement benefit plans cost decreased $0.1 billion as lower service cost resulting from fewer active principal pension plan participants and earnings from pension plan assets, and the effects of lower discount rates were essentially offset by higher loss amortization related to our principal pension plans.
Looking forward, our key assumptions affecting 2019 postretirement benefits cost are as follows:
Discount rate at 4.34% for our principal pension plans, reflecting current long-term interest rates.
Assumed long-term return on our principal pension plan assets of 6.75%, unchanged from 2018.
We expect 2019 postretirement benefit plans cost to be about $3.2 billion which is a decrease of about $0.9 billion from 2018.
The table below presents the funded status of our benefit plans. The funded status represents the fair value of plan assets less benefit obligations.
|
| | | | | | |
FUNDED STATUS (In billions) | 2018 |
| 2017 |
|
| | | |
| GE Pension Plan | $ | (12.4 | ) | $ | (17.9 | ) |
| GE Supplementary Pension Plan | (6.1 | ) | (6.7 | ) |
| Other pension plans | (3.9 | ) | (4.1 | ) |
| Principal retiree benefit plans | (4.8 | ) | (5.5 | ) |
| Total | $ | (27.2 | ) | $ | (34.2 | ) |
Our principal pension plans are the GE Pension Plan and the GE Supplementary Pension Plan.
2018 – 2017 COMMENTARY
The GE Pension Plan deficit decreased in 2018 primarily due to higher discount rates and employer contributions, partially offset by investment performance and the growth in pension liabilities.
The decrease in the deficit of our other pension plans was primarily attributable to higher discount rates and employer contributions, partially offset by investment performance.
The decrease in the principal retiree benefit plans deficit was primarily attributable to employer contributions, higher discount rates and favorable cost trends, partially offset by the growth in retiree benefit liabilities.
PLANS.The Employee Retirement Income Security Act (ERISA) determines minimum pension funding requirements in the U.S. We made $6.0 billion and $1.7 billion in contributions to the GE Pension Plan in 2018 and 2017, respectively.2018. On an ERISA basis, our preliminary estimate is that the GE Pension Plan was approximately 91%93% funded at January 1, 2019.2020. The ERISA funded status is higher than the GAAP funded status (80%(81% funded) primarily because the ERISA prescribed interest rate is calculated using an average interest rate. As a result, the ERISA interest rate is higher than the year-end GAAP discount rate. The higher ERISA interest rate lowers pension liabilities for ERISA funding purposes. Our 2018 contributions satisfysatisfied our minimum ERISA funding requirement of $1.5 billion and the remaining $4.5 billion was a voluntary contribution to the plan. We currently expect thisThis voluntary contribution will beis sufficient to satisfy our minimum ERISA funding requirement for 2019 and 2020. In October 2019, we announced our intent to contribute approximately $4 to $5 billion to the GE Pension Plan in 2020. We expect this amount to equal our estimated future minimum ERISA funding requirements at least through 2022.
We expect 2020 postretirement benefit plans cost to be about $3.2 billion, which is a decrease of approximately $0.6 billion from 2019.
We expect to contribute in 2020 approximately $0.8$0.5 billion and $0.4 billion to our other pension plans in 2019, as compared to $0.5 billion in 2018 and $0.9 billion in 2017.
We also expect to contribute approximately $0.4 billion to our principal retiree benefit plans, in 2019 similar to our actual contributions of $0.4 billion in both 2018 and 2017.respectively.
The funded status of our postretirement benefit plans and future effects on operating results depend on economic conditions, interest rates and investment performance. See the Critical Accounting Estimates section within this MD&A and Note 13 to the consolidated financial statements for further information about our benefit plans, pension actions and the effects of this activity on our financial statements.
|
| | | | | | | | | |
CONSOLIDATED (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Effective tax rate (ETR) | 63.2 | % | (0.4 | )% | 24.8 | % |
| Provision (benefit) for income taxes | $ | 0.7 |
| $ | 0.1 |
| $ | (2.8 | ) |
| Cash income taxes paid(a) | 2.2 |
| 1.9 |
| 2.4 |
|
(a) Included taxes paid related to discontinued operations.
For the year endedDecember 31, 2019, the consolidated income tax provision was $0.7 billion. The increase in the tax provision for 2019 was primarily due to tax expense associated with the preparatory internal restructuring for the planned BioPharma sale and the effect of higher pre-tax income excluding non-deductible impairment charges, partially offset by the benefit from the completion of the IRS audit of the 2012-2013 consolidated U.S. income tax returns.
In June 2019, the IRS completed the audit of our consolidated U.S. income tax returns for 2012-2013, which resulted in a decrease in our balance of unrecognized tax benefits (i.e., the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements). The Company recognized a resulting non-cash continuing operations tax benefit of $0.4 billion plus an additional net interest benefit of $0.1 billion. Of these amounts, GE recorded $0.4 billion of tax benefits and $0.1 billion of net interest benefits, and GE Capital recorded insignificant amounts of tax and net interest benefits. GE Capital also recorded a non-cash benefit in discontinued operations of $0.3 billion of tax benefits and an insignificant amount of net interest benefits. See Notes 2 and 15 to the consolidated financial statements for further information.
GE20182019 FORM 10-K 39 22
|
| | |
| MD&A | OTHER CONSOLIDATED INFORMATION |
INCOME TAXES
GE paysFor the income taxes it owes in every country in which it does business. Many factors impact our income tax expense and cash tax payments. The most significant factor is that we conduct business in over 180 countries and the majority of our revenue is earned outside the U.S. Our tax liability is also affected by U.S. and foreign tax incentives designed to encourage certain investments, like research and development; and by acquisitions, dispositions and tax law changes. Onyear ended December 22, 2017, 31, 2018, the U.S. enacted legislation commonly known as the Tax Cuts and Jobs Act (U.S. tax reform) that lowers the statutory tax rate on U.S. earnings, taxes historic foreign earnings at a reduced rate of tax, creates a territorial tax system and enacts new taxes associated with global operations. Finally, our tax returns are routinely audited, and settlements of issues raised in these audits sometimes affect our tax rates.
|
| | | | | | | | | |
CONSOLIDATED (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Effective tax rate (ETR) | (2.9 | )% | 23.4 | % | (16.1 | )% |
| Provision (benefit) for income taxes | $ | 0.6 |
| $ | (2.6 | ) | $ | (1.1 | ) |
| Cash income taxes paid(a) | 1.9 |
| 2.4 |
| 7.5 |
|
| |
(a) | Includes taxes paid related to discontinued operations. |
2018 – 2017 COMMENTARY
The consolidated income tax rate for 2018 provision was (2.9)%.The negative$0.1 billion. The effective tax rate was negative for 2018 reflectsreflecting a tax expense on a consolidated pre-tax loss.
The 2018 effective tax rate included an insignificant charge associated with the adjustment of the provisional estimate of the impact of the 2017 enactment of U.S. tax reform. As discussed in Note 14 to the consolidated financial statements, the 2017 impact of U.S. tax reform on the revaluation of deferred taxes and the transition tax on historic earnings was recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Additional guidance may be issued after 2018 and any resulting effect will be recorded in the quarter of issuance.
The increase in the consolidated provision for income taxes for 2018 was primarily attributable to the decrease in benefit from global operations including an increase in valuation allowances on non-U.S. deferred tax assets and the decrease in pre-tax loss (excluding non-deductible goodwill impairments) with a tax benefit above the average tax rate and the decrease in benefit from global operations including an increase in valuation allowances on the non-U.S. deferred tax assets of the Power business and the decision to execute internal restructuring for separation actions related to the Healthcare business.
rate. Partially offsetting this increase was the decrease in the consolidated provision for income taxes attributable to thean insignificant charge in 2018 charge to adjust the provisional estimate of the impact of the 2017 enactment of U.S. tax reform compared to the $4.5 billion charge in 2017 for the estimated impact of enactment.
2017 – 2016 COMMENTARY
The consolidated income tax rate for 2017 was 23.4%. This effective tax rate reflects a tax benefit on a consolidated pre-tax loss.
The effective tax rate included a provisional charge of $4.5 billion associated with the enactment of U.S. tax reform.
The consolidated tax rate excluding the effect of U.S. tax reform was 63.9%. This effective tax rate was also a tax benefit on a consolidated pre-tax loss. The tax benefit excluding the impact of tax reform was larger than 35% because of the benefit from lower-taxed international income compared to losses taxed at higher than the average rate and the benefit of the lower-taxed disposition of the Water business.
The decrease in the consolidated provision for income taxes was primarily attributable to the increase in the pre-tax loss with a tax benefit above the average tax rate including the one-time charge to revalue insurance reserves partially offset by the tax charge associated with the enactment of U.S. tax reform.
Absent the effects of U.S. tax reform and non-U.S. losses without a tax benefit, our consolidated income tax provision is generally reduced because of the benefits of lower-taxed global operations. The benefit from non-U.S. rates below the U.S. statutory rate was significant prior to the decrease in the U.S. statutory rate to 21% beginning in 2018. While reduced, there is still generally a benefit as certain non-U.S. income is subject to local country tax rates that are below the new U.S. statutory tax rate.
The rate of tax on our profitable non-U.S. earnings is below the U.S. statutory tax rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GE funds certain non-U.S. operations through foreign companies that are subject to low foreign taxes. Most of these earnings have been reinvested in active non-U.S. business operations and as of December 31, 2018,2019, we have not decided to repatriate these earnings to the U.S. Given U.S. tax reform, substantially all of our prior unrepatriated earnings were subject to U.S. tax and accordingly we expect to have the ability to repatriate available non-U.S. cash from these earnings without additional U.S. federal tax cost and any foreign withholding taxes on a repatriation to the U.S. would potentially be partially offset by a U.S. foreign tax credit.
|
| | |
MD&A | OTHER CONSOLIDATED INFORMATION |
A substantial portion of the benefit for lower-taxed non-U.S. earnings related to business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate is derived from our GECAS aircraft leasing operations located in Ireland where the earnings are taxed at 12.5%, from our Power operations located in Switzerland and Hungary where the earnings are taxed at between 9% and 18.6%, and our Healthcare operations in Europe where tax deductions are allowed for certain intangible assets and earnings are taxed below the historic U.S. statutory rate.
The rate of tax on non-U.S. operations is increased, however, because we also incur losses in foreign jurisdictions where it is not likely that the losses can be utilized and no tax benefit is provided for those losses and valuation allowances against loss carryforwards are provided when it is no longer likely that the losses can be utilized. In addition, as part of U.S. tax reform, the U.S. has enacted a tax on “base eroding” payments from the U.S. We are continuing to evaluate the impact of this provision on our operations and are undertakingundertake restructuring actions to mitigate the impact from this provision. The U.S. has also enacted a minimum tax on foreign earnings (“global(global intangible low tax income”)income). Because we have tangible assets outside the U.S. and pay a rate ofsignificant foreign tax above the minimum tax rate,taxes, we generally do not expect a significant increase in tax liability from this new U.S. minimum tax. Overall, these newly enacted provisions increase the rate of tax on our non-U.S. operations.
|
| | | | | | | | | |
BENEFITS FROM LOWER-TAXED GLOBAL OPERATIONS (In billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Benefit/(detriment) of lower foreign tax rate on non-U.S. earnings | $ | (0.6 | ) | $ | 0.7 |
| $ | 0.8 |
|
| Benefit of audit resolutions | 0.2 |
| — |
| 0.2 |
|
| Other | (0.9 | ) | 2.8 |
| 1.1 |
|
| Total benefit/(detriment) | $ | (1.3 | ) | $ | 3.5 |
| $ | 2.1 |
|
|
| | | | | | | | | |
BENEFIT/(EXPENSE) FROM GLOBAL OPERATIONS (In billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Benefit/(expense) of foreign tax rate difference on non-U.S. earnings | $ | — |
| $ | (0.3 | ) | $ | 0.5 |
|
| Benefit of audit resolutions | 0.1 |
| 0.2 |
| — |
|
| Other | (1.1 | ) | (0.9 | ) | 2.9 |
|
| Total benefit/(expense) | $ | (1.0 | ) | $ | (1.0 | ) | $ | 3.4 |
|
The amounts reported above exclude the impact of U.S. tax reform which is reported as a separate line in the reconciliation of the U.S. federal statutory income tax rate to the actual tax rate in Note 1415 to the consolidated financial statements.
2018 – 2017 COMMENTARYFor the year ended December 31, 2019, the increase in expense from global operations reflects the tax expense associated with the preparatory internal restructuring for the planned BioPharma sale and an increase in valuation allowances on non-U.S. deferred tax assets offset by a benefit from change in foreign rate and by a tax benefit from additional guidance on provisions enacted as part of U.S. tax reform.
The
For the year ended December 31, 2018, the decrease in benefit from lower-taxed global operations reflects the lower U.S. statutory tax rate and losses without tax benefit. The decrease in other benefits reflects increases in incremental valuation allowances on non-U.S. deferred tax assets and for 2018 newly enacted taxes on non-U.S. earnings and the nonrecurrence of 2017 benefits associated with repatriation of foreign earnings.
2017 – 2016 COMMENTARY
Included in "other" was an increase in the benefit from 2016 to 2017 from planning at GE Capital to reduce the tax cost of repatriations of foreign cash and to repatriate high-taxed foreign earnings at GE, partially offset by a decrease in the benefit from repatriation of GE non-U.S. earnings due to the nonrecurrence of the benefit of integrating our existing services business with Alstom’s services business.
See Note 14 to the consolidated financial statements for information on the tax charges associated with the enactment of U.S. tax reform. The cash impact of the transition tax on historic foreign earnings was largely offset by accelerated use of deductions and tax credits and was substantially incurred with the filing of the 2017 tax return with no amount subject to the deferred payment provision provided under law.
The tax effect from non-U.S. income taxed at a local country rate rather than the U.S. statutory tax rate is reported in the caption “Tax on global activities including exports” in the effective tax rate reconciliation in Note 14 to the consolidated financial statements.
A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated effective rate, as well as other information about our income tax provisions, is provided in the Critical Accounting Estimates section within this MD&A and Note 1415 to the consolidated financial statements. The nature of business activities and associated income taxes differ for GE and for GE Capital; therefore, a separate analysis of each is presented in the paragraphs that follow.
We believe that the GE effective tax rate and provision for income taxes are best analyzed in relation to GE earnings before income taxes excluding the GE Capital net earnings from continuing operations, as GE tax expense does not include taxes on GE Capital earnings. See the Non-GAAP Financial Measures section within this MD&A, for further information on this calculation.
|
| | | | | | | | | |
GE EFFECTIVE TAX RATE (EXCLUDING GE CAPITAL EARNINGS) (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| GE ETR, excluding GE Capital earnings* | (4.8 | )% | 248.9 | % | 3.3 | % |
| GE provision for income taxes | $ | 1.0 |
| $ | 3.7 |
| $ | 0.3 |
|
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 41 23
|
| | |
| MD&A | OTHER CONSOLIDATED INFORMATION |
|
| | | | | | | | | |
GE EFFECTIVE TAX RATE (EXCLUDING GE CAPITAL EARNINGS) (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| GE ETR, excluding GE Capital earnings* | 72.7 | % | (2.3 | )% | 271.0 | % |
| GE provision for income taxes | $ | 1.3 |
| $ | 0.5 |
| $ | 3.5 |
|
For the year ended December 31, 2019, the GE provision for income taxes increased compared to 2018 – 2017 COMMENTARYprimarily due to tax expense associated with the preparatory internal restructuring for the planned BioPharma sale and the effect of higher pre-tax income excluding non-deductible impairment charges, partially offset by the benefit from the completion of the IRS audit of the 2012-2013 consolidated U.S. income tax returns.
The
For the year ended December 31, 2018, the GE provision for income taxes decreased in 2018compared to 2017 because of the nonrecurrence of the $4.9 billion charge for the provisional charge associated with the enactment of U.S. tax reform.
Excluding the 2017 charge associated with U.S. tax reform, the GE tax provision increased by $2.3$1.9 billion. The increase was primarily due to the decrease in benefit from global operations including an increase in valuation allowances on the non-U.S. deferred tax assets partially offset by the effect of lower pretax income excluding non-deductible impairment charges.
|
| | | | | | | | | |
GE CAPITAL EFFECTIVE TAX RATE (Dollars in billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| GE Capital ETR | 89.3 | % | 99.7 | % | 49.9 | % |
| GE Capital provision (benefit) for income taxes | $ | (0.6 | ) | $ | (0.4 | ) | $ | (6.3 | ) |
For the Power business and year ended December 31, 2019,the decisionincrease in the tax benefit at GE Capital from a benefit of $0.4 billion in 2018 to execute internal restructuring for separation actions relateda benefit of $0.6 billion in 2019 is primarily due to the Healthcare business.
2017 – 2016 COMMENTARY
The GE provision for income taxes increased in 2017 because of the $4.9 billion charge for the provisional estimate ofa benefit from additional guidance on the transition tax on historic foreign earnings ($2.9 billion) and effectenacted as part of revaluing our deferred taxes ($2.0 billion).
Excluding theU.S. tax reform, compared to a charge associated with the enactment of U.S. tax reform during 2018.
For the GE tax provision decreased by $1.5 billion. The decrease was due primarily to a decrease in pre-tax income, excluding non-deductible held-for-sale and impairment losses, which is taxed at above year ended December 31, 2018, the average tax rate.
|
| | | | | | | | | |
GE CAPITAL EFFECTIVE TAX RATE (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| GE Capital ETR | 99.7 | % | 49.9 | % | 70.3 | % |
| GE Capital provision (benefit) for income taxes | $ | (0.4 | ) | $ | (6.3 | ) | $ | (1.4 | ) |
2018 – 2017 COMMENTARY
The decrease in the tax benefit at GE Capital from a benefit of $6.3 billion in 2017 to a benefit of $0.4 billion in 2018 is primarily due to the decrease in the pre-tax loss with a tax benefit above the average tax rate including the nonrecurrence inof the one-time charge to revalue insurance reserves.
2017 – 2016 COMMENTARYRESEARCH AND DEVELOPMENT.We conduct research and development (R&D) activities to continually enhance our existing products and services, develop new products and services to meet our customers’ changing needs and requirements, and address new market opportunities. R&D expenses are classified in cost of goods and services sold in our consolidated Statement of Earnings (Loss). In addition, R&D funding from customers, principally the U.S. government, is recorded as an offset to such costs.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | GE funded | Customer and Partner funded(b) | Total R&D |
| (In millions) | 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
|
| | | | | | | | | | |
| Power | $ | 310 |
| $ | 407 |
| $ | 641 |
| $ | 16 |
| $ | 7 |
| $ | 35 |
| $ | 327 |
| $ | 414 |
| $ | 676 |
|
| Renewable Energy | 522 |
| 413 |
| 448 |
| 9 |
| 11 |
| 3 |
| 531 |
| 424 |
| 451 |
|
| Aviation | 906 |
| 950 |
| 907 |
| 911 |
| 564 |
| 586 |
| 1,817 |
| 1,514 |
| 1,492 |
|
| Healthcare | 994 |
| 968 |
| 908 |
| 25 |
| 23 |
| 26 |
| 1,019 |
| 991 |
| 934 |
|
| Corporate(a) | 382 |
| 675 |
| 1,271 |
| 89 |
| 48 |
| 65 |
| 471 |
| 722 |
| 1,336 |
|
| Total | $ | 3,115 |
| $ | 3,414 |
| $ | 4,175 |
| $ | 1,049 |
| $ | 652 |
| $ | 715 |
| $ | 4,164 |
| $ | 4,065 |
| $ | 4,890 |
|
(a) Includes Global Research Center and Digital.
(b) Customer funded is principally U.S. Government funded in the tax benefit at GE Capital from a benefit of $1.4 billion in 2016 to a benefit of $6.3 billion is primarily due to the increase in the pre-tax loss with a tax benefit above the average tax rate including the one-time charge to revalue insurance reserves.our Aviation segment. R&D funded through consolidated partnerships was immaterial for all periods presented.
The GE Capital tax provision included a benefit of $0.4 billion for the provisional estimate of the transition tax on historic foreign earnings ($1.8 billion benefit) partially offset by the effect of revaluing our deferred taxes ($1.4 billion charge).
DISCONTINUED OPERATIONS
OPERATIONS.Discontinued operations primarily relate toinclude our financial services businesses as a result of the GE Capital Exit PlanBaker Hughes and were previously reportedTransportation segments, our mortgage portfolio in the Capital Segment. These discontinued operations primarily comprisePoland, residual assets and liabilities related to our exited U.S. mortgage business (WMC), our mortgage portfolioas discussed in Poland, indemnificationNotes 2 and 23 to the consolidated financial statements, and trailing liabilities associated with the sale of our GE Capital businesses,businesses.
In September 2019, we sold a total of 144.1 million shares in Baker Hughes for $3.0 billion in cash (net of certain deal related costs) which reduced our ownership interest from 50.2% to 36.8%. As a result, we have deconsolidated our Baker Hughes segment and other litigationreclassified its results to discontinued operations for all periods presented. In addition, as disclosed in prior filings, including our 2018 Form 10-K, we expected to record a significant loss upon deconsolidation. In 2019, we recorded a loss of $8.7 billion ($8.2 billion after-tax) in discontinued operations.
In February 2019, as a result of the spin-off and tax matters.
Duringsubsequent merger of our Transportation business with Wabtec, we reclassified our Transportation segment to discontinued operations for all periods presented. In the first quarter of 2018,2019, we recorded a reservegain of $1.5$3.5 billion ($2.5 billion after-tax) in discontinued operations in connection withoperations. See Notes 2 and 3 to the DOJ ongoing investigation regarding potential violations of FIRREA by WMC and consolidated financial statements for further information.
*Non-GAAP Financial Measure
GE Capital. On January 31,2019 FORM 10-K 24
|
| | |
| MD&A | OTHER CONSOLIDATED INFORMATION |
In June 2019, GE Capital recorded $0.3 billion of tax benefits and an insignificant amount of net interest benefits due to a decrease in our balance of unrecognized tax benefits. See the Consolidated Income Tax section above and Note 15 to the consolidated financial statements for further information.
In January 2019, we announced that it had reached an agreement in principle with the DOJUnited States to settle the investigation by the U.S. Department of Justice (DOJ) regarding potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by WMC and GE Capital, and in April 2019, the parties entered into a definitive settlement agreement. Under the agreement, which concludes this investigation, under which GE, will paywithout admitting liability or wrongdoing, paid the United States a civil penalty of $1.5 billion, consistent with the $1.5 billion reserve recorded for this matter in the first quarter 2018.billion. See Legal Proceedings and Note 2223 to the consolidated financial statements for further information.
The mortgage portfolio in Poland (Bank BPH) comprises floating rate residential mortgages, with approximately 86% of which approximately 84% arethe portfolio indexed to or denominated in foreign currencies (primarily Swiss Francsfrancs) and the remainderremaining 14% denominated in the local currency.currency in Poland. At December 31, 2018,2019, the total portfolio had a carrying value of $2.7$2.5 billion with a 1.4% 90-day delinquency rate and an average loan to value ratio of 71%approximately 65%. The portfolio is recorded at fair value less cost to sell and includes a $0.3 billion impairment, which consideredreflects our best estimate of the effecteffects of potential legislative relief to borrowers.
At December 31, 2018, we have provided specific indemnitiesborrowers and of ongoing litigation in Poland related to buyers of GE Capital’s assets that,foreign currency-denominated mortgages. Future adverse developments in the aggregate, represent a maximum potential claim of $1.9 billion. The majority offor legislative relief or in litigation across the Polish banking industry could result in further impairment or other losses related to these indemnifications relateloans in future reporting periods. See Note 23 to the sale of businesses and assets under the GE Capital Exit Plan. We have recorded related liabilities of $0.3 billion, which incorporates our evaluation of risk and the likelihood of making payments under the indemnities. The recognized liabilities represent the estimated fair value of the indemnities when issued as adjustedconsolidated financial statements for any subsequent probable and estimable losses. Approximately 15% of these exposures are expected to be resolved within the next five years, while substantially all indemnifications are expected to be resolved within the next ten years. During the fourth quarter of 2018, we received a favorable court ruling related to an indemnity we provided in connection with the sale of a GE Capital business, which, if not subject to further extrajudicial action, would reduce the amount of the maximum potential claim by $0.7 billion.
Also, in connection with the 2015 public offering and sale of Synchrony Financial, GE Capital indemnified Synchrony Financial and its directors, officers, and employees against the liabilities of GECC's businesses other than historical liabilities of the businesses that are part of Synchrony Financial's ongoing operations.
information.
|
| | |
MD&A | OTHER CONSOLIDATED INFORMATION |
|
| | | | | | | | | |
FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS (In billions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Earnings (loss) of discontinued operations, net of taxes | $ | 0.3 |
| $ | (1.4 | ) | $ | (0.4 | ) |
| Gain (loss) on disposal, net of taxes | (5.7 | ) | — |
| 0.1 |
|
| Earnings (loss) from discontinued operations, net of taxes | $ | (5.3 | ) | $ | (1.4 | ) | $ | (0.3 | ) |
Included within discontinued operations at December 31, 2018 are an estimated $1.9 billion of exposure related to tax audits and tax litigation matters for which we have recorded a reserve of $0.5 billion. Additionally, ongoing lawsuits and other litigation matters represent exposures of $1.3 billion for which we have recorded reserves of $0.1 billion.
See NotesNote 2 and 22 to the consolidated financial statements for further information related tofor our businesses in discontinued operations.
GEOGRAPHIC INFORMATION
Our global activities span all geographic regions and primarily encompass manufacturing for local and export markets, import and sale of products produced in other regions, leasing of aircraft, sourcing for our plants domiciled in other global regions and provision of financial services within these regional economies. Thus, when countries or regions experience currency and/or economic stress, we often have increased exposure to certain risks, but also often have new opportunities that include, among other things, expansion of industrial activities through purchases of companies or assets at reduced prices and lower U.S. debt financing costs.
Financial results of our non-U.S. activities reported in U.S. dollars are affected by currency exchange. We use a number of techniques to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. Such principal currencies are the euro, the pound sterling, the Brazilian real and the Chinese renminbi.
REVENUES
Revenues are classified according to the region to which products and services are sold. For purposes of this analysis, the U.S. is presented separately from the remainder of the Americas.
|
| | | | | | | | | | | | | | |
| GEOGRAPHIC REVENUES | | | | V% |
| (Dollars in billions) | 2018 |
| 2017 |
| 2016 |
| 2018-2017 | | 2017-2016 |
| | | | | | | |
| U.S. | $ | 46.8 |
| $ | 44.3 |
| $ | 49.3 |
| 6 | % | | -10 | % |
| Non-U.S. | | | | | | |
| Europe | 23.9 |
| 23.2 |
| 21.3 |
| | | |
| Asia | 22.9 |
| 20.8 |
| 20.4 |
| | | |
| Americas | 11.8 |
| 11.0 |
| 10.7 |
| | | |
| Middle East and Africa | 16.3 |
| 18.9 |
| 17.7 |
| | | |
| Total Non-U.S. | 74.9 |
| 74.0 |
| 70.1 |
| 1 | % | | 5 | % |
| Total | $ | 121.6 |
| $ | 118.2 |
| $ | 119.5 |
| 3 | % | | (1 | )% |
| | | | | | | |
| Non-U.S. Revenues as a % of Consolidated Revenues | 62 | % | 63 | % | 59 | % | | | |
NON-U.S. REVENUES AND EARNINGS
The increase in non-U.S. revenues in 2018 was primarily due to increases of 10% in Asia and 12% in Latin America, offset by a decrease of 14% in the Middle East and Africa.
The increase in non-U.S. revenues in 2017 was primarily due increases of 9% in Europe (primarily due to Baker Hughes) and 7% in the Middle East and Africa.
The effects of currency fluctuations on reported results were as follows:
Increased revenues by $0.6 billion in 2018, primarily driven by the euro ($0.9 billion), the pound sterling ($0.1 billion) and the Chinese renminbi ($0.1 billion), partially offset by decreases in revenue driven by the Brazilian real ($0.4 billion) and the Indian rupee ($0.1 billion).
Increased revenues by $0.6 billion in 2017, primarily driven by the euro ($0.4 billion), the Brazilian real ($0.3 billion) and the Indian rupee ($0.1 billion), partially offset by decreases in revenue driven by the pound sterling ($0.2 billion).
The effects of foreign currency fluctuations decreased earnings by $0.1 billion and an insignificant amount in 2018 and 2017, respectively.
|
| | |
MD&A | OTHER CONSOLIDATED INFORMATION |
ASSETS
We classify certain assets that cannot meaningfully be associated with specific geographic areas as “Other Global” for this purpose.
|
| | | | | | |
TOTAL ASSETS (CONTINUING OPERATIONS) December 31 (In billions) | 2018 |
| 2017 |
|
| | | |
| U.S. | $ | 159.8 |
| $ | 181.6 |
|
| Non-U.S. | | |
| Europe | 82.4 |
| 117.8 |
|
| Asia | 22.9 |
| 23.6 |
|
| Americas | 18.0 |
| 21.3 |
|
| Other Global | 21.4 |
| 18.9 |
|
| Total Non-U.S. | $ | 144.7 |
| $ | 181.7 |
|
| Total | $ | 304.5 |
| $ | 363.3 |
|
The decrease in total assets includes $22.1 billion of impairment related to goodwill in our Power Generation, Grid Solutions and Hydro reporting units and the effects of various portfolio dispositions. See the Consolidated Results section within this MD&A for further information.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL POLICY
POLICY.We intend to maintain a disciplined financial policy, targeting a sustainable long-term credit rating in the Single-A range with a GE industrialIndustrial net debt*/EBITDA-to-EBITDA ratio of less than 2.5x and a dividend in line with our peers over time, as well as a less than 4-to-1 debt-to-equity ratio for GE Capital. We expectBoth GE and GE Capital are on track to make significant progress toward ourmeet their respective leverage goals over the next two years.
For GE, over the next two yearsin 2020. In addition to net debt*-to-EBITDA, we expectalso evaluate other measures, including gross debt-to-EBITDA, and we will ultimately size our deleveraging actions across a range of measures to have significant sources that can be used to de-lever and de-riskensure we are operating the Company including the proceeds from the February 2019 closing of the merger of our Transportation business with Wabtec, the sale of our BioPharma business within our Healthcare segmentbased on a strong balance sheet. We will evaluate additional potential actions based on deleveraging impact, economics, risk mitigation and the monetization of our remaining stakes in BHGE and Wabtec. GE industrial net debt* was $55.2 billion at December 31, 2018.target capital structure while also monitoring key risks.
For GE Capital, in addition to $15.0 billion of liquidity at December 31, 2018, over the next two years we expect to generate additional sources of cash from asset sales, including approximately $10 billion in 2019 from the completion of its $25 billion asset reduction plan, as well as cash from repayments of most of the $13.7 billion of intercompany loans from GE. In addition, in 2019, GE Capital expects to receive approximately $4 billion of capital contributions from GE.
LIQUIDITY
POLICY.We maintain a strong focus on liquidity and define our liquidity risk tolerance based on sources and uses to maintain a sufficient liquidity position to meet our obligations under both normal and stressed conditions. At both GE and GE Capital, we manage our liquidity to provide access to sufficient funding to meet our business needs and financial obligations, throughout business cycles.
Our liquidity plans are established within the context of our financial and strategic planning processes and consider the liquidity necessary to fund our operating commitments, which include purchase obligations for inventory and equipment, payroll and general expenses (including pension funding). We also consider ouras well as capital allocation and growth objectives, including funding debt maturitiesthroughout business cycles.
CONSOLIDATED LIQUIDITY.Following is a summary of cash, cash equivalents and insurance obligations, investingrestricted cash at December 31, 2019.
|
| | | | | | | | |
| (In billions) | December 31, 2019 |
| | | December 31, 2019 |
|
| | | | | |
| GE | $ | 17.6 |
| | U.S. | $ | 14.9 |
|
| GE Capital | 18.8 |
| | Non-U.S. | 21.4 |
|
| Consolidated | $ | 36.4 |
| | Consolidated | $ | 36.4 |
|
Cash held in researchnon-U.S. entities has generally been reinvested in active foreign business operations; however, substantially all of our unrepatriated earnings were subject to U.S. federal tax and, development,if there is a change in reinvestment, we would expect to be able to repatriate available cash (excluding amounts held in countries with currency controls) without additional federal tax cost. Any foreign withholding tax on a repatriation to the U.S. would potentially be partially offset by a U.S. foreign tax credit.
Following is an overview of the primary sources of liquidity for GE and dividend payments.GE Capital. See the Statement of Cash Flows section within MD&A for information regarding GE and GE Capital cash flow results.
GE LIQUIDITY.GE's primary sources of liquidity consist of cash and cash equivalents, free cash flows from our operating businesses, monetization of receivables, proceeds from announced dispositions, and short-term borrowing facilities (described below).facilities. Cash generation can be subject to variability based on many factors, including seasonality, receipt of down payments on large equipment orders, timing of billings on long-term contracts, the effects of changes in end markets and our ability to execute dispositions. See the Statement of Cash Flows section within this MD&A for further information regarding
GE cash flow results.
As mentioned above, GEalso has available a variety of short-term borrowing facilities to fund its operations, including a commercial paper program, revolving credit facilities and short-term intercompany loans from GE Capital, which are generally repaid within the same quarter. FollowingSee the fourth quarter 2018 downgradesBorrowings section for details of our credit facilities and borrowing activity in our external short-term credit ratings, GE has transitioned from a tier-1 to a tier-2 commercial paper issuer, which has substantially reduced our borrowing capacity in the commercial paper markets. To accommodate GE’s short-term liquidity needs, in the fourth quarter of 2018 we increased utilization of our revolving credit facilities. See the Liquidity Sources and Credit Ratings sections for further information.
In 2018, GE generated approximately $5.9 billion of cash proceeds (net of taxes) related to business dispositions, primarily Industrial Solutions, Healthcare’s Value-Based Care division, and Distributed Power. In addition, we realized total proceeds of approximately $4.4 billion from BHGE in 2018, comprised of a $2.3 billion public share offering in the fourth quarter as well as $2.1 billion of other buybacks during the year.
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 44
25
|
| | |
| MD&A | CAPITAL RESOURCES AND LIQUIDITY |
In 2018, GE Capital loaned cash, cash equivalents and restricted cash totaled $17.6 billion at December 31, 2019, including $2.6 billion of cash held in countries with currency control restrictions and $0.5 billion of restricted use cash. Cash held in countries with currency controls represents amounts held in countries which may restrict the transfer of funds to the U.S. or limit our ability to transfer funds to the U.S. without incurring substantial costs. Restricted use cash represents amounts that are not available to fund operations, and primarily comprised collateral for receivables sold and funds restricted in connection with certain ongoing litigation matters.
GE realized a total of $6.5approximately $10.3 billion (utilizingof disposition proceeds for the year ended December 31, 2019, comprising $4.7 billion in the third quarter of 2019, primarily from the sale of a portion of our stake in Baker Hughes and our remaining stake in Wabtec, $2.2 billion in the second quarter of 2019 primarily from the sale of a portion of our stake in Wabtec, and $3.4 billion in the first quarter of 2019 primarily from the completion of the merger of our Transportation business with Wabtec and the sale of our Digital ServiceMax business.
In the first quarter of 2020, GE Capital's excess unsecured term debt)expects to fund its $6receive approximately $20 billion contributionof proceeds from the sale of our BioPharma business within our Healthcare segment, subject to regulatory approval. GE expects to use these proceeds as well as existing liquidity to repay the remaining $12.2 billion of intercompany loans from GE Capital, to contribute approximately $4 to $5 billion to the GE Pension Plan, which will equal our future minimum ERISA funding requirements through at least 2022, and to refinance $0.5 billionexecute additional deleveraging actions of other intercompany loans. These loans are priced at market terms and bear the rightapproximately $5 billion. Additionally, GE expects to receive proceeds from an orderly sale of offset against amounts owed by our remaining stake in Baker Hughes.
GE Capital to GE under the assumed debt agreement, effectively resulting in the transfer of that portion of assumed debt obligation from GE Capital to GE. The $6.5 billion of intercompany loans executed in 2018 have a weighted average interest rate and term of 3.6% and approximately six years, respectively. At December 31, 2018, the total balance of all such intercompany loans with right of offset was $13.7 billion, with a collective weighted average interest rate and term of 3.5% and approximately 10 years, respectively. These loans can be prepaid by GE at any time, in whole or in part, without premium or penalty. See the Borrowings section for additional information on assumed debt and right-of-offset loans.
In the fourth quarter of 2018, GE completed the funding of $3.1 billion for Alstom redemption rights related to certain consolidated joint ventures. See Note 15 to the consolidated financial statements for further information.
In the fourth quarter of 2018, we announced plans to reduce our quarterly dividend from $0.12 cents to $0.01 cent per share beginning with the dividend declared in December 2018, which was paid in January 2019. This reduction will allow us to retain approximately $4 billion of cash per year compared to the prior payout level.
In 2019, GE will pay the United States a $1.5 billion civil penalty to settle the DOJ investigation of potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 by WMC. See Legal Proceedings and Note 22 to the consolidated financial statements for further information.
CAPITAL LIQUIDITY.GE Capital’s primary sources of liquidity consist of cash and cash equivalents, cash generated from dispositionsasset sales and cash flows from our businesses. Based on asset and liability management actions we have taken, GE Capital does not plan to issue any incremental GE Capital senior unsecured term debt until at least 2021. We expect to maintain an adequate liquidity position to fund our insurance obligations and debt maturities primarily as a result of cash generatedflows from asset reductions and dispositions, as well as fromour businesses, GE repayments of intercompany loans and capital contributions. Additionally, while we maintain adequate liquidity levels, we may engage in liability management actions, such as buying back debt, based on market and economic conditions in order to reduce our unallocated interest expense.contributions from GE. See the Segment Operations - Capital section within this MD&A for further information regarding allocation of GE Capital interest expense to the GE Capital businesses.
GE Capital cash, cash equivalents and restricted cash totaled $18.8 billion at December 31, 2019, including $0.9 billion which was subject to regulatory restrictions, primarily in insurance entities.
GE Capital generated proceeds of approximately $12 billion from asset reductions for the year ended December 31, 2019, including $3.6 billion from the sale of a substantial portion of the assets and liabilities of PK AirFinance in the fourth quarter of 2019, exceeding our plan to execute total asset reductions of approximately $10 billion in 2019 and our overall $25 billion target, and completing our asset reduction plan. GE Capital also received an additional capital contribution of $2.5 billion from GE in the fourth quarter of 2019, totaling $4.0 billion for 2019.
GE Capital provided capital contributions to its insurance subsidiaries of approximately $3.5$2.0 billion, $1.9 billion and $1.9$3.5 billion in the first quarterquarters of 2020, 2019 and 2018, respectively, and 2019, respectively. GE Capital or GE expects to provide further capital contributions of approximately $9$7 billion through 2024. These contributions are subject to ongoing monitoring by KID, and the total amount to be contributed could increase or decrease, or the timing could be accelerated, based upon the results of reserve adequacy testing or a decision by KID to modify the schedule of contributions set forth in January 2018. GE maintains specified capital levels at these insurance subsidiaries under capital maintenance agreements. See Other Items - Insurance section within this MD&A and Note 12 to the consolidated financial statementsGoing forward, we anticipate funding any capital needs for further information.
In conjunction with theinsurance through a combination of GE Capital Exit Plan, in 2016liquidity, GE Capital exchanged its preferred stock into GE preferred stock with the amount and terms mirroring the GE preferred stock held by external investors ($5,573 million carrying value at December 31, 2018). On July 1, 2018,asset sales, GE Capital future earnings and GE exchanged the existing Series D preferred stock issued to GE for new GE Capital Series D preferred stock that is mandatorily convertible into GE Capital common stock on January 21, 2021. After this conversion, GE Capital will no longer pay preferred dividends tocapital contributions from GE. The terms of the existing GE Series D preferred stock remain unchanged. See Note 15 to the consolidated financial statements for further information.
LIQUIDITY SOURCES
GE cash, cash equivalentsBORROWINGS.Consolidated total borrowings were $90.9 billion and restricted cash totaled $20.5$103.6 billion at December 31, 2019 and December 31, 2018, including $3.7respectively. The reduction was driven primarily by completion of a tender offer to purchase GE long-term debt of $4.8 billion and net repayments of GE Capital debt of $9.5 billion (including $9.3 billion of long-term debt maturities), partially offset by an increase of $0.8 billion in BHGE that can only be accessed byfair value adjustments for GE through the declaration of a dividend by BHGE's Board of Directors, our pro-rata share of BHGE stock buybacks, and settlements of any intercompany positions. AsCapital debt in fair value hedge relationships as a result of these restrictions, lower interest rates.
GE does not consider BHGE cashIndustrial net debt* was $47.9 billion and $55.1 billion at December 31, 2019 and 2018, respectively. The reduction was driven primarily by the completion of a freely available sourcetender offer to purchase GE long-term debt of liquidity for its purposes.$4.8 billion in the third quarter of 2019 and total repayments of $1.5 billion of intercompany loans from GE Capital, as well as a higher ending cash cash equivalentsbalance.
In 2015, senior unsecured notes and restricted cash totaled $15.0 billion,commercial paper were assumed by GE upon its merger with GE Capital. Under the conditions of which $14.5 billion was classified within continuing operationsthe 2015 assumed debt agreement, GE Capital agreed to continue making required principal and $0.5 billion was classified within discontinued operations.interest payments on behalf of GE, resulting in the establishment of an intercompany receivable and payable between GE and GE Capital. In addition, GE Capital has periodically made intercompany loans to GE with maturity terms that mirror the assumed debt. As these loans qualify for right-of-offset presentation, they reduce the assumed debt intercompany receivable and payable between GE and GE Capital, as noted in the table below.
*Non-GAAP Financial Measure
|
| | | | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH (In billions) | December 31, 2018 |
| | | December 31, 2018 |
|
| | | | | |
| GE(a) | $ | 20.5 |
| | U.S. | $ | 18.0 |
|
| GE Capital(b) | 14.5 |
| | Non-U.S. | 17.0 |
|
| |
(a) | At December 31, 2018, $4.1 billion of GE cash, cash equivalents and restricted cash was held in countries with currency controls that may restrict the transfer of funds to the U.S. or limit our ability to transfer funds to the U.S. without incurring substantial costs. These funds are available to fund operations and growth in these countries and we do not currently anticipate a need to transfer these funds to the U.S. Included in this amount was $1.2 billion of BHGE cash and equivalents, which is subject to similar restrictions. |
| |
(b) | Excluded $0.5 billion classified within discontinued operations. Included $0.7 billion held in insurance and banking entities which are subject to regulatory restrictions. |
GE20182019 FORM 10-K 45 26
|
| | |
| MD&A | CAPITAL RESOURCES AND LIQUIDITY |
Excluding cash held in countriesThe following table provides a reconciliation of total short- and long-term borrowings as reported on the respective GE and GE Capital Statements of Financial Position to borrowings adjusted for assumed debt and intercompany loans: |
| | | | | | | | | |
December 31, 2019 (In billions) | GE |
| GE Capital |
| Consolidated(a) |
|
| | | | |
| Total short- and long-term borrowings | $ | 52.1 |
| $ | 39.9 |
| $ | 90.9 |
|
| | | | |
| Debt assumed by GE from GE Capital | (31.4 | ) | 31.4 |
| — |
|
| Intercompany loans with right of offset | 12.2 |
| (12.2 | ) | — |
|
| Total intercompany payable (receivable) between GE and GE Capital | (19.1 | ) | 19.1 |
| — |
|
| | | | |
| Total borrowings adjusted for assumed debt and intercompany loans | $ | 32.9 |
| $ | 59.0 |
| $ | 90.9 |
|
| |
| (a) | Included elimination of other GE borrowings from GE Capital, primarily related to timing of cash settlements associated with GE receivables monetization programs. |
When measuring the individual financial positions of GE and GE Capital, assumed debt should be considered a GE Capital debt obligation, and the intercompany loans with currency controlsthe right of offset mentioned above should be considered a GE debt obligation and cash at BHGE,a reduction of GE Capital’s total debt obligations. The following table illustrates the primary components of GE cash, cash equivalents and restricted cash was $13.9GE Capital borrowings, adjusted for assumed debt and intercompany loans.
|
| | | | | | | | | | | | | | |
GE (In billions) | December 31, 2019 |
| December 31,
2018 |
| | GE Capital (In billions) | December 31, 2019 |
| December 31, 2018 |
|
| Commercial paper | $ | 3.0 |
| $ | 3.0 |
| | Commercial paper | $ | — |
| $ | — |
|
| GE senior notes | 15.5 |
| 20.4 |
| | Senior and subordinated notes | 36.5 |
| 39.1 |
|
Intercompany loans from GE Capital | 12.2 |
| 13.7 |
| | Senior and subordinated notes assumed by GE | 31.4 |
| 36.3 |
|
| Other GE borrowings | 2.2 |
| 2.6 |
| | Intercompany loans to GE | (12.2 | ) | (13.7 | ) |
| | | | | Other GE Capital borrowings(a) | 3.4 |
| 3.9 |
|
| | | | | Total GE Capital | | |
| Total GE adjusted borrowings | $ | 32.9 |
| $ | 39.7 |
| | adjusted borrowings | $ | 59.0 |
| $ | 65.5 |
|
(a) Included $1.7 billion and $1.9 billion at December 31, 2018.2019 and December 31, 2018, respectively, of non-recourse borrowings of consolidated securitization entities where GE Capital has securitized financial assets as an alternative source of funding.
The intercompany loans from GE Capital to GE bear the right of offset against amounts owed by GE Capital to GE under the assumed debt agreement and can be prepaid by GE at any time, in whole or in part, without premium or penalty. These loans are priced at market terms and have a collective weighted average interest rate of 3.5% and term of approximately 11.7 years at December 31, 2019. In 2019, GE repaid a total of $1.5 billion of intercompany loans from GE Capital.
GE has in place committed credit lines which it may use from time to time to meet its short-term liquidity needs. The following table provides a summary of the committed and available credit lines at December 31, 2018.lines.
| | GE COMMITTED AND AVAILABLE CREDIT FACILITIES (In billions) | December 31, 2018 | December 31, 2019 | December 31, 2018 |
| | | |
Unused back-up revolving credit facility(a) | $ | 20.0 |
| $ | 20.0 |
| $ | 20.0 |
|
Revolving credit facilities (exceeding one year)(b) | 23.9 |
| 18.9 |
| 23.9 |
|
Bilateral revolving credit facilities (364-day)(c) | 3.6 |
| 3.1 |
| 3.6 |
|
| Total committed credit facilities | $ | 47.5 |
| $ | 42.0 |
| $ | 47.5 |
|
Less offset provisions(d) | (6.7 | ) | 6.7 |
| 6.7 |
|
| Total net available credit facilities | $ | 40.8 |
| $ | 35.3 |
| $ | 40.8 |
|
Included in our credit facilities is an unused $20.0 billion back-up revolving syndicated credit facility extended by 36 banks, expiring in 2021, and an unused $14.8 billion revolving syndicated credit facility extended by six banks, expiring on December 31, 2020. The commitments under these syndicated credit facilities may be reduced by up to $6.7 billion due to offset provisions for any bank that holds a commitment to lend under both facilities.
|
| | |
(a)MD&A | Consisted of a $20 billion syndicated credit facility extended by 36 banks, expiring in 2021.CAPITAL RESOURCES AND LIQUIDITY |
| |
(b) | Included a $19.8 billion syndicated credit facility extended by six banks, expiring in 2020. |
| |
(c) | Consisted of credit facilities extended by seven banks, with expiration dates ranging from February 2019 to May 2019. |
| |
(d) | Commitments under certain credit facilities in (a) and (b) may be reduced by up to $6.7 billion due to offset provisions for any bank that holds a commitment to lend under both syndicated credit facilities. |
In 2019 and 2020, the
The amount committed and available under the $19.8 billion syndicated credit facility expiring inon December 31, 2020 will periodically be reduced by the greater of specified contractual commitment reductions or a mandatory prepayment amount,calculated commitment reductions, which is determined based on any potential specified issuances of equity and incurrences of incremental debt by GE or its subsidiaries, as well as a portion of industrial business disposition proceeds. Contractual commitment reductions are $5.0 billion inIn the first quarter of 2019, the amount committed and available under this facility was reduced by the calculated commitment reduction of $5.0 billion to $14.8 billion. Pursuant to an amendment entered into in the first quarter 2019, further commitment reductions (other than those related to incremental debt issuances or equity issuances) are deferred until the earlier of the closing of the BioPharma transaction or September 30, 2020. If the BioPharma transaction closes prior to June 30, 2020, the commitments under the facility are reduced by the greater of $7.4 billion inor the fourth quartercalculated commitment reductions through the BioPharma closing date (including all deferred reductions). If the BioPharma transaction closes on or after June 30, 2020, the commitments under the facility are reduced by the greater of 2019, $2.5$9.9 billion inor the second quarter of 2020, and $5.0 billion incalculated commitment reductions through the fourth quarter of 2020. BioPharma closing date (including all deferred reductions). The $20$20.0 billion syndicated back-up revolving credit facility expiring in 2021 does not contain any contractual commitment reduction features.
Under the terms of an agreement between GE Capital and GE, GE Capital has the right to compel GE to borrow under certain of theseall credit linesfacilities except the syndicated facility expiring on December 31, 2020 and transfer the proceeds to GE Capital as intercompany loans, which would be subject to the same terms and conditions as those between GE and the lending banks. GE Capital has not exercised this right.
The following table provides a summary of the activity in the primary external sources of short-term liquidityborrowings for GE in the fourth quarters of 2019 and 2018.
|
| | | | | | | | | |
| (In billions) | GE Commercial Paper |
| Revolving Credit Facilities |
| Total |
|
| | | | |
| 2019 | | | |
| Average borrowings during the fourth quarter | $ | 3.0 |
| $ | 1.3 |
| $ | 4.3 |
|
| Maximum borrowings outstanding during the fourth quarter | 3.2 |
| 1.5 |
| 4.7 |
|
| Ending balance at December 31 | 3.0 |
| — |
| 3.0 |
|
| | | | |
| 2018 | | | |
| Average borrowings during the fourth quarter | $ | 7.9 |
| $ | 2.5 |
| $ | 10.4 |
|
| Maximum borrowings outstanding during the fourth quarter | 10.7 |
| 5.1 |
| 14.8 |
|
| Ending balance at December 31 | 3.0 |
| — |
| 3.0 |
|
Total average and maximum borrowings in the table above are calculated based on the daily outstanding balance of the sum of commercial paper and revolving credit facilities.
The reduction in total GE average and maximum short-term borrowings during the fourth quarter of 2019 compared to the fourth quarter of 2018 was driven by holding higher cash balances and 2017.improvements in our global funding and cash management operations.
|
| | | | | | | | | |
| (In billions) | Commercial Paper(a) | Revolving Credit Facilities(b) | Total(a)(c) |
| | | | |
| 2018 | | | |
| Average borrowings during the fourth quarter | $ | 7.9 |
| $ | 2.5 |
| $ | 10.4 |
|
| Maximum borrowings outstanding during the fourth quarter | $ | 10.7 |
| $ | 5.1 |
| $ | 14.8 |
|
| Ending balance at December 31 | $ | 3.0 |
| $ | — |
| $ | 3.0 |
|
| | | | |
| 2017 | | | |
| Average borrowings during the fourth quarter | $ | 17.3 |
| $ | 0.1 |
| $ | 17.4 |
|
| Maximum borrowings outstanding during the fourth quarter | $ | 19.7 |
| $ | 0.3 |
| $ | 19.7 |
|
| Ending balance at December 31 | $ | 3.0 |
| $ | — |
| $ | 3.0 |
|
| |
(a) | Excluded GE Capital commercial paper, which in the fourth quarter of 2018 had average, maximum and ending balances of $0.6 billion, $3.0 billion, and an insignificant amount, respectively. GE Capital does not expect to issue any new commercial paper in the foreseeable future. |
| |
(b) | Consisted of activity in the revolving credit facilities exceeding one year and the bilateral revolving credit facilities (364-day). There was no activity in the $20 billion back-up revolving credit facility, which remains unused. |
| |
(c) | Total average and maximum borrowings are calculated based on the daily outstanding balance of the sum of commercial paper and revolving credit facilities. |
In addition to its external liquidity sources, GE may from time to time enter into short-term intercompany loans from GE Capital to utilize GE Capital’s excess cash as an efficient source of liquidity. These loans are repaid within the same quarter.
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MD&A | CAPITAL RESOURCES AND LIQUIDITY |
BORROWINGS
Consolidated total borrowings No such loans were $110.0 billion and $134.6 billion at December 31, 2018 and 2017, respectively. The reduction from 2017 to 2018 was driven primarily by net repayments atmade in 2019. GE Capital of $21.1 billion, net repayments of borrowings at BHGE of $0.8 billion, and the effects of currency exchange of $1.8 billion.
In 2015, senior unsecured notes anddid not issue any commercial paper were assumed by GE upon its merger with GE Capital. Under the conditions of the 2015 assumed debt agreement, GE Capital agreed to continue making required principal and interest paymentsor draw on behalf of GE, resultingany revolving credit facilities in the establishment of an intercompany receivable and payable between GE and GE Capital. On the GE Statement of Financial Position, assumed debt is presented within borrowings with an offsetting receivable from GE Capital, and on the GE Capital Statement of Financial Position, assumed debt is reflected as an intercompany payable to GE within borrowings. In addition, GE Capital has periodically made intercompany loans to GE with maturity terms that mirror the assumed debt; accordingly, these loans qualify for right-of-offset presentation, and therefore reduce the assumed debt intercompany receivable and payable between GE and GE Capital, as noted in the table below.2019.
The following table provides a reconciliation of total short- and long-term borrowings as reported on the respective GE and GE Capital Statements of Financial Position to borrowings adjusted for assumed debt and intercompany loans.
|
| | | | | | | | | |
| December 31, 2018 (in billions) | GE |
| GE Capital |
| Consolidated(a) |
|
| | | | |
| Total short- and long-term borrowings | $ | 68.6 |
| $ | 43.0 |
| $ | 110.0 |
|
| | | | |
| Debt assumed by GE from GE Capital | (36.3 | ) | 36.3 |
| — |
|
| Intercompany loans with right of offset | 13.7 |
| (13.7 | ) | — |
|
| Total intercompany payable (receivable) between GE and GE Capital | (22.5 | ) | 22.5 |
| — |
|
| | | | |
| Total borrowings adjusted for assumed debt and intercompany loans | $ | 46.1 |
| $ | 65.5 |
| $ | 110.0 |
|
| |
(a) | Included $1.6 billion elimination of other GE borrowings from GE Capital, primarily related to timing of cash cutoff associated with the GE receivables monetization program. This amount was $2.3 billion in 2017.
|
When measuring the individual financial positions of GE and GE Capital, assumed debt should be considered a GE Capital debt obligation, and the intercompany loans with right-of-offset mentioned above should be considered a GE debt obligation and a reduction of GE Capital’s total debt obligations. The following table illustrates the primary components of GE and GE Capital borrowings, adjusted for assumed debt and intercompany loans.
|
| | | | | | | | | | | | | | |
| | GE | | | GE Capital |
| December 31 (Dollars in billions) | 2018 |
| 2017 |
| | December 31 (Dollars in billions) | 2018 |
| 2017 |
|
| Commercial paper | $ | 3.0 |
| $ | 3.0 |
| | Commercial paper | $ | — |
| $ | 5.0 |
|
| GE Senior notes | 20.5 |
| 21.0 |
| | Senior and subordinated notes | 39.1 |
| 46.4 |
|
| Intercompany loans from GE Capital(a) | 13.7 |
| 7.3 |
| | Senior and subordinated notes assumed by GE | 36.3 |
| 47.1 |
|
| Other GE borrowings | 2.5 |
| 3.2 |
| | Intercompany loans to GE(a) | (13.7 | ) | (7.3 | ) |
| Total GE adjusted borrowings excluding BHGE | $ | 39.7 |
| $ | 34.5 |
| | Other GE Capital borrowings(b) | 3.9 |
| 3.9 |
|
| Total BHGE borrowings | 6.3 |
| 7.2 |
| | | | |
| Total GE adjusted borrowings | $ | 46.1 |
| $ | 41.7 |
| | Total GE Capital adjusted borrowings | $ | 65.5 |
| $ | 95.2 |
|
| |
(a) | The intercompany loans from GE Capital to GE bear the right of offset against amounts owed by GE Capital to GE under the assumed debt agreement. |
| |
(b) | Included $1.9 billion and $2.0 billion at December 31, 2018 and 2017, respectively, of non-recourse borrowings of consolidated securitization entities.
|
In addition to long-term borrowings, GE Capital securitizes financial assets as an alternative source of funding. During 2018, we completed $1.3 billion of non-recourse issuances and $1.4 billion of non-recourse borrowings matured. At December 31, 2018, consolidated non-recourse securitization borrowings were $1.9 billion.
CREDIT RATINGS AND CONDITIONS
CONDITIONS.We have relied, and may continue to rely, on the short- and long-term debt capital markets to fund, among other things, a significant portion of our operations and significant acquisitions.operations. The cost and availability of debt financing is influenced by our credit ratings. Moody’s Investors Service (Moody’s), Standard and Poor’s Global Ratings (S&P), and Fitch Ratings (Fitch) currently issue ratings on GE and GE Capital short- and long-term debt.
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MD&A | CAPITAL RESOURCES AND LIQUIDITY |
The credit ratings of GE and GE Capital as of the date of this filing are set forth in the table below.
|
| | | |
| | Moody's | S&P | Fitch |
| | | | |
| GE | | | |
| Outlook | Stable | Stable | Negative |
| Short term | P-2 | A-2 | F2 |
| Long term | Baa1 | BBB+ | BBB+ |
| | | |
| GE Capital | | | |
| Outlook | Stable | Stable | Negative |
| Short term | P-2 | A-2 | F2 |
| Long term | Baa1 | BBB+ | BBB+ |
On February 7, 2019, Fitch changed its outlook forThere were no changes in GE andor GE Capital short- and long-term debtratings from Stable to Negative.
On November 2, 2018, Fitch lowered the credit ratingsend of GE and GE Capital short- and long-term debt from F1 to F2 and from A to BBB+, respectively, with a Stable outlook.
On October 31, 2018, Moody’s lowered the credit ratings of GE and GE Capital short- and long-term debt from P-1 to P-2 and from A2 to Baa1, respectively.
On October 2, 2018, S&P lowered the credit ratings of GE and GE Capital short- and long-term debt from A-1 to A-2 and from A to BBB+, respectively, with a Stable outlook.
As previously mentioned, these downgrades resulted in GE transitioning from a tier-1 to tier-2 commercial paper issuer in the fourthfirst quarter of 2018, substantially reducing our borrowing capacity in2019 through the commercial paper markets. This transition did not have a material impact to our access to liquidity or to our interest costs, and these downgrades did not have any other material impact to our liquidity.date of this filing.
We are disclosing our credit ratings and any current quarter updates to these ratings to enhance understanding of our sources of liquidity and the effects of our ratings on our costs of funds. Our ratings may be subject to a revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. For a description of some of the potential consequences of a reduction in our credit ratings, see the Financial Risks section of Risk Factors.Factors in this report.
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| | |
| MD&A | CAPITAL RESOURCES AND LIQUIDITY |
The following table provides a summary of the estimated potential liquidity impact in the event of further downgrades with regards to the most significant contractual credit ratings conditions of the Company based on their proximity to our current ratings.
|
| | | | |
| (In billions) | Triggers Below | At December 31, 2019 |
|
| | | |
| Derivatives | | |
| Terminations | BBB/Baa2 | $ | (0.2 | ) |
| Cash margin posting | BBB/Baa2 | (0.5 | ) |
| Receivables Sales Programs | | |
| Loss of cash commingling | A-2/P-2/F2 | $ | (0.3 | ) |
| Alternative funding sources | A-2/P-2/F2 | (1.1 | ) |
The timing within the quarter of the potential liquidity impact of these areas may differ, as described in the following sections which provide additional details regarding the significant credit rating conditions forof the Company in the event of further downgrades.Company.
DEBT CONDITIONS
CONDITIONS.Substantially all of our debt agreements do not contain material credit rating covenants.
If our short-term credit ratings were to fall below A-2/P-2,P-2/F2, it is possible that we would no longer havelose all or part of our access to the tier-2 commercial paper market, and thereforemarkets, which would reduce our borrowing capacity in the commercial paper market would likely be further reduced.those markets. This may result in increased utilization of our revolving credit facilities to fund our intra-quarter operations.
DERIVATIVE CONDITIONS
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our standard master agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we offset our exposures with that counterparty and apply the value of collateral posted to us to determine the net exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
CONDITIONS.Swap, forward and option contracts are executed under standard master agreements that typically contain mutual downgrade provisions that provide the ability of the counterparty to require termination if the credit ratings of the applicable GE entity were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability subject to such termination provisions, after consideration of collateral posted by us and outstanding interest payments was $0.7$0.2 billion at December 31, 2018.2019. This excludes exposure related to embedded derivatives, which doare not havesubject to these provisions.
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MD&A | CAPITAL RESOURCES AND LIQUIDITY |
In addition, certain of our derivatives, primarily interest rate swaps, are subject to additional cash margin posting requirements if our credit ratings were to fall below BBB/Baa2. The amount of additional margin will vary based on, among other factors, market movements and changes in our positions. At December 31, 2018,2019, the amount of additional margin that we could be required to post in cash if we fell below these ratings levels was approximately $0.4$0.5 billion.
See Note 2021 to the consolidated financial statements for further information about our risk exposures, our use of derivatives, and the effects of this activity on our financial statements.
OTHER CONDITIONS
CONDITIONS.Where we provide servicing for third-party investors under certain of our receivable sales programs, GE is contractually permitted to commingle cash collected from customers on financing receivables sold to third-party investors with our own cash prior to payment to third-party investors, provided our short-term credit rating does not fall below A-2/P-2/F2. In the event any of our ratings were to fall below such levels, we may be required to segregate certain of these cash collections owed to third-party investors into restricted bank accounts and would lose the short-term liquidity benefit of commingling with respect to such collections. The financial impact to our intra-quarter liquidity would vary based on collections activity for a given quarter and may result in increased utilization of our revolving credit facilities. The loss of cash commingling would have resulted in aan estimated maximum reduction of approximately $1$0.3 billion to GE intra-quarter liquidity during the fourth quarter of 2018.2019.
In addition, we have relied, and may continue to rely, on securitization programs to provide alternative funding for sales of GE receivables to third-party investors. If any of our short-term credit ratings were to fall below A-2/P-2/F2, the timing or amount of liquidity generated by these programs could be adversely impacted. In the fourth quarter of 2018,2019, the estimated maximum reduction to our ending liquidity had our credit ratings fallen below these levels was approximately $2$1.1 billion.
FOREIGN EXCHANGE AND INTEREST RATE RISKS
Exchange rate and interest rate risks are managed with a variety of techniques, including selective use of derivatives. We use derivatives to mitigate or eliminate certain financial and market risks because we conduct business in diverse markets around the world and local funding is not always efficient. In addition, we use derivatives to adjust the debt we are issuing to match the fixed or floating nature of the assets we are originating. We apply strict policies to manage each of these risks, including prohibitions on speculative activities. Following is an analysis of the potential effects of changes in interest rates and currency exchange rates using so-called “shock” tests that seek to model the effects of shifts in rates. Such tests are inherently limited based on the assumptions used (described further below) and should not be viewed as a forecast; actual effects would depend on many variables, including market factors and the composition of the Company’s assets and liabilities at that time.
It is our policy to minimize exposure to interest rate changes and their impact to interest and other financial charges. We fund our financial investments using debt or a combination of debt and hedging instruments so that the interest rates of our borrowings match the expected interest rate profile on our assets. To test the effectiveness of our hedging actions, we assumed that, on January 1, 2019, interest rates decreased by 100 basis points across the yield curve (a “parallel shift” in that curve) and further assumed that the decrease remained in place for the next 12 months. Based on the year-end 2018 portfolio and holding all other assumptions constant, we estimated that our consolidated net earnings for the next 12 months, starting in January 1, 2019, would decline by less than $0.1 billion as a result of this parallel shift in the yield curve. Additionally, refer to the Critical Accounting Estimates section within this MD&A for further interest rate sensitivities related to pension and insurance reserve assumptions.
It is our policy to minimize currency exposures and to conduct operations either within functional currencies or using the protection of hedge strategies. We analyzed year-end 2018 consolidated currency exposures, including derivatives designated and effective as hedges, to identify assets and liabilities denominated in other than their relevant functional currencies. For such assets and liabilities, we then evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar, holding all other assumptions constant. This analysis indicated that our 2018 consolidated net earnings would decline by less than $0.1 billion as a result of such a shift in exchange rates. This analysis excludes any translation impact from changes in exchange rates on our financial results and any offsetting effect from the forecasted future transactions that are economically hedged.
FOREIGN CURRENCY
RISKS.As a result of our global operations, we generate and incur a significant portion of our revenues and expenses in currencies other than the U.S. dollar. Such principal currencies areinclude the euro, the pound sterling,Australian dollar, the Brazilian real and the Chinese renminbi. The results of operating entities reported in currencies other than U.S. dollar are translated to the U.S. dollar at the applicable exchange rate for inclusion in the financial statements. We use a number of techniques to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. The foreign currency effect arising from operating activities outside of the U.S., including the remeasurement of derivatives, can result in significant transactional foreign currency fluctuations at points in time, but will generally be offset as the underlying hedged item is recognized in earnings.renminbi, among others. The effects of foreign currency fluctuations on earnings, excluding the earnings impact of the underlying hedged item, decreased net earningswas less than $0.1 billion, $0.3 billion, and $0.1 billion for the yearyears ended December 31, 2019, 2018 by less than $0.3 billion.and 2017, respectively. This analysis excludes any offsetting effect from the forecasted future transactions that are economically hedged.
See Note 20 to the consolidated financial statements for further information about our risk exposures, our use of derivatives, and the effects of this activity on our financial statements.
GE20182019 FORM 10-K 49 29
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| MD&A | CAPITAL RESOURCES AND LIQUIDITY |
Exchange rate and interest rate risks are managed with a variety of techniques, including selective use of derivatives. We apply policies to manage each of these risks, including prohibitions on speculative activities. Following is an analysis of the potential effects of changes in interest rates and currency exchange rates.
| |
| • | It is our policy to minimize exposure to interest rate changes and their impact to interest and other financial charges. We fund our financial investments using a combination of debt and hedging instruments so that the interest rates of our borrowings match the expected interest rate profile on our assets. It is our policy to minimize currency exposures and to conduct operations either within functional currencies or using the protection of hedge strategies. To test the effectiveness of our hedging actions, for interest rate risk we assumed that, on January 1, 2020, interest rates decreased by 100 basis points and the decrease remained in place for the next 12 months and for currency risk of assets and liabilities denominated in other than their functional currencies, we evaluated the effect of a 10% shift in exchange rates against the U.S. dollar. The analyses indicated that our 2019 consolidated net earnings would decline by less than $0.1 billion for interest rate risk and approximately $0.1 billion for foreign exchange risk. |
LIBOR REFORM.In connection with the potential transition away from the use of the London interbank offered rate (LIBOR) as an interest rate benchmark, we are currently in the process of identifying and managing the potential impact to the Company. The majority of the Company’s exposure to LIBOR relates to debt securities issued by GE Capital, for which contractual fallback language exists, as well as preferred stock issued by GE, substantially all of which converts to LIBOR in January 2021. Additionally, with respect to our derivatives portfolio, we will review industry-wide LIBOR reform efforts and expect that such efforts will provide guidance on how to manage the transition from LIBOR for derivatives.
STATEMENT OF CASH FLOWS – OVERVIEW FROM 20162017 THROUGH 2018
2019.We manage the cash flow performance of our industrial and financial services businesses separately. We therefore believe it is useful to report separate GE and GE Capital columns in our Statement of Cash Flows because it enables us and our investors to evaluate the cash from operating activities of our industrial businesses (the principal source of cash generation for our industrial businesses) separately from the financing cash flows of our financial services business, as well as to evaluate the cash flows between our industrial businesses and GE Capital.
In preparing our Statement of Cash Flows, we make certain adjustments to reflect cash flows that cannot otherwise be calculated by changes in our Statement of Financial Position. These adjustments may include, but are not limited to, the effects of currency exchange, acquisitions and dispositions of businesses, businesses classified as held for sale, the timing of settlements to suppliers for property, plant and equipment, non-cash gains/losses and other balance sheet reclassifications.
All other operating activities reflect cash sources and uses as well as non-cash adjustments to net earnings (loss). See Note 2324 to the consolidated financial statements for further information regarding All other operating activities, All other investing activities and All other financing activities for both GE and GE Capital.
The following investing and financing activities affected recognized assets or liabilities but did not result in cash receipts or payments in 2019: the ownership interest received and tax benefits receivable as a result of the spin-off and subsequent merger of our Transportation segment with Wabtec; our retained ownership interest in Baker Hughes; additional non-cash deferred purchase price received by GE CASH FLOWSCapital related to sales of current receivables; and right-of-use assets obtained in operating leases. See Notes 2, 4 and 7, respectively, to the consolidated financial statements.
With respect
See the Intercompany Transactions between GE and GE Capital section within MD&A and Notes 4 and 25 to GE CFOA, we believe that it is useful to supplementthe consolidated financial statements for further information regarding certain transactions affecting our GEconsolidated Statement of Cash Flows and to examine in a broader context the business activities that provide and require cash.Flows.
GE CASH FLOWS FROM CONTINUING OPERATIONS.The most significant source of cash in GE CFOA is customer-related activities, the largest of which is collecting cash resulting from product or services sales. The most significant operating use of cash is to pay our suppliers, employees, tax authorities, contribute to post retirement plans and pay others for a wide range of material, services and services. Dividends from taxes.
GE Capital represent the distribution ofmeasures itself on a portion of GE Capital retained earnings, and are distinct fromIndustrial free cash from continuing operations within the GE Capital businesses.
In the following discussion, Net earnings for cash flows represents the adding together of Net earnings (loss), (Earnings) loss from discontinued operations and (Earnings) loss from continuing operations retained by GE Capital, excluding GE Capital common dividends paid to GE, if any.
See the Intercompany Transactions between GE and GE Capital section within this MD&A and Notes 4 and 24 to the consolidated financial statements for further information regarding certain transactions affecting our consolidated Statement of Cash Flows.
2018 – 2017 COMMENTARY:
GE cash from operating activities was $2.3 billion in 2018 compared with $11.0 billion in 2017. The decrease of $8.8 billion was primarily due to the following:
No common dividends were paid by GE Capital to GE in 2018 compared with $4.0 billion in 2017.
Cash generated fromflows* basis. This metric includes GE CFOA (excluding commonplus investments in property, plant and equipment and additions to internal-use software; this metric excludes any dividends received from GE Capital in 2017) amounted to $2.3 billion in 2018 (including $1.8 billionand any cash received from Oil & Gas CFOA) and $7.0 billion in 2017 (including $0.5 billion used for Oil & Gas CFOA), primarily due to the following:
Net earnings for cash flows plus depreciation and amortizationdispositions of property, plant and equipment, amortizationequipment. We believe that investors may also find it useful to compare GE's Industrial free cash flows* performance without the effects of intangible assets, goodwill impairments, gains oncash used for taxes related to business sales of business interests and provisions for income taxes of $7.1 billion in 2018 compared with $6.7 billion in 2017. Net earnings for cash flows included pre-tax restructuring and other charges of $2.9 billion in 2018 compared with $3.9 billion in 2017.
Principal pension plan contributions of $6.3 billion (including $6.0 billion related to the GE Pension Plan) in 2018 compared with $2.0 billion (including $1.7 billion relatedPlan. We believe that this measure better allows management and investors to evaluate the GE Pension Plan) in 2017.capacity of our industrial operations to generate free cash flows.
*Non-GAAP Financial Measure
Lower taxes paid of $1.8 billion in 2018 compared with $2.7 billion in 2017.
Lower growth in contract and other deferred assets of $0.1 billion in 2018 compared with $1.9 billion in 2017, primarily due to the timing of revenue recognized relative to the timing of billings and collections on our long-term equipment agreements, primarily in our Power and Oil & Gas segments, partially offset by our Aviation and Healthcare segments and lower cash used for deferred inventory, primarily in our Power segment.
Cash generated from working capital of an insignificant amount in 2018 compared with $2.8 billion in 2017. This was primarily due: to an increase in cash used for inventories of $2.1 billion, mainly in our Oil & Gas, Aviation, Transportation and Healthcare segments, partially offset by our Power segment; an increase in cash used from progress collections of $2.1 billion, mainly in our Power and Aviation segments, partially offset by our Renewable Energy segment; and an increase in cash used for current receivables of $1.5 billion across all segments excluding Oil & Gas. These increases in cash used for working capital were partially offset by an increase in cash generated from accounts payable of $3.0 billion, mainly in our Aviation, Oil & Gas and Renewable Energy segments.
The effects of the BHGE Class B shareholder dividends of $0.5 billion and $0.3 billion received in 2018 and 2017, respectively, are eliminated from GE CFOA.
GE20182019 FORM 10-K 50 30
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| MD&A | CAPITAL RESOURCES AND LIQUIDITY |
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| | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 CFOA (GAAP) AND FREE CASH FLOWS (FCF) BY SEGMENT (NON-GAAP) | | | |
| (In millions) | | Power | | Renewable Energy | | Aviation | | Healthcare | | Corporate & Eliminations | | GE Industrial |
| | | | | | | | | | | | | |
| CFOA (GAAP) | | $ | (1,200 | ) | | $ | (512 | ) | | $ | 5,552 |
| | $ | 3,024 |
| | $ | (2,250 | ) | | $ | 4,614 |
|
| Add: gross additions to property, plant and equipment | | (277 | ) | | (455 | ) | | (1,031 | ) | | (395 | ) | | (59 | ) | | (2,216 | ) |
| Add: gross additions to internal-use software | | (46 | ) | | (14 | ) | | (107 | ) | | (79 | ) | | (28 | ) | | (274 | ) |
| Less: GE Pension Plan funding | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Less: taxes related to business sales | | — |
| | — |
| | — |
| | — |
| | (198 | ) | | (198 | ) |
| Free cash flows (Non-GAAP) | | $ | (1,523 | ) | | $ | (980 | ) | | $ | 4,415 |
| | $ | 2,550 |
| | $ | (2,139 | ) | | $ | 2,322 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 CFOA (GAAP) AND FREE CASH FLOWS (FCF) BY SEGMENT (NON-GAAP) | | | |
| (In millions) | | Power | | Renewable Energy | | Aviation | | Healthcare | | Corporate & Eliminations | | GE Industrial |
| | | | | | | | | | | | | |
| CFOA (GAAP) | | $ | (1,849 | ) | | $ | 406 |
| | $ | 5,373 |
| | $ | 3,485 |
| | $ | (6,714 | ) | | $ | 701 |
|
| Add: gross additions to property, plant and equipment | | (358 | ) | | (297 | ) | | (1,070 | ) | | (378 | ) | | (131 | ) | | (2,234 | ) |
| Add: gross additions to internal-use software | | (66 | ) | | (11 | ) | | (73 | ) | | (90 | ) | | (67 | ) | | (306 | ) |
| Less: GE Pension Plan funding | | — |
| | — |
| | — |
| | — |
| | (6,000 | ) | | (6,000 | ) |
| Less: taxes related to business sales | | — |
| | — |
| | — |
| | — |
| | (180 | ) | | (180 | ) |
| Free cash flows (Non-GAAP) | | $ | (2,273 | ) | | $ | 98 |
| | $ | 4,230 |
| | $ | 3,018 |
| | $ | (731 | ) | | $ | 4,341 |
|
GE cash from operating activitieswas $4.6 billion in 2019 compared with $0.7 billion in 2018 (including $0.3 billion and $0.5 billion cash received for Baker Hughes Class B shareholder dividends in 2019 and 2018, respectively). The $3.9 billion increase was primarily due to: the nonrecurrence of GE Pension Plan contributions of $6.0 billion in 2018 (which are excluded from GE Industrial free cash flows*); a decrease in payments of equipment project cost accruals of $0.6 billion; a net decrease in payments of Aviation-related customer allowance accruals of $0.4 billion; and an increase in cash generated from contract & other deferred assets of $0.1 billion, primarily due to higher billings on our long-term service agreements, partially offset by lower liquidations of deferred inventory.
These increases in cash were partially offset by: an increase in cash used for working capital of $2.6 billion; and an increase in cash paid for income taxes of $0.6 billion.
The increase in cash used for working capital was due to: an increase in cash used for current receivables of $2.9 billion, primarily driven by lower sales of receivables and receivables growth resulting from the 737 MAX grounding; a decrease in cash from accounts payable of $0.9 billion; and higher inventory build of $0.5 billion, mainly as a result of the expected timing of deliveries in 2020. These increases in cash used for working capital were partially offset by higher progress collections of $1.8 billion, mainly as a result of higher utilization of collections in 2018, including the impact of the timing of progress collections received in the fourth quarter of 2017.
As discussed in the Aviation and GECAS 737 MAX section within the Consolidated Results section of MD&A, the 737 MAX grounding had an adverse net effect on GE CFOA of approximately $1.4 billion in 2019. Within Aviation, this effect was more than offset by: higher commercial aftermarket earnings and higher long-term service agreement billings of $0.6 billion; cash receipts from contract modifications of $0.3 billion; a new spare parts distribution deal for a legacy engine program of $0.3 billion; and lower customer allowance payments of $0.4 billion as discussed above. Other Aviation working capital cash flows, excluding the impact of the 737 MAX grounding, largely offset.
GE cash from investing activities was $2.3$4.1 billion in 20182019 compared with cash used for investing activities of $8.3$3.1 billion in 2017.2018. The $10.6$0.9 billion increase in cash generated was primarily due toto: proceeds from the following:
Business acquisitionsspin-off of $0.1our Transportation business of $6.2 billion (including the secondary offerings of Wabtec common stock shares in 2018, compared with $6.1 billionthe second and third quarters of 2019), the sale of a portion of our stake in 2017, mainly driven by the Baker Hughes transaction for $3.4of $3.0 billion ($7.5 billion cash consideration, less $4.1 billion of cash assumed), LM Wind Power for $1.7 billion (net of cash acquired) and ServiceMax for $0.9 billion (net of cash acquired).
Proceeds from other business dispositions in Aviation, Corporate and Power (net of cash transferred) of $6.5$1.1 billion in 2019, compared with total proceeds of $6.0 billion in 2018, primarily from the sale of our Distributedbusinesses at Power businessand Healthcare; a decrease in net cash paid for $2.8 billion, our Industrial Solutions business for $2.2 billion and our Value-Based Care business for $1.0 billion, compared with $3.1settlements of derivative hedges of $0.9 billion; the nonrecurrence of the purchase of an aviation technology joint venture of $0.6 billion in 2017, mainly driven2018; partially offset by the sale2019 capital contribution to GE Capital of $4.0 billion; business acquisitions of $0.4 billion, primarily related to the transfer of the HEF business from GE Capital to our Water businessHealthcare segment in 2019; and an increase in cash used related to net settlements between our continuing operations and discontinued operations of $0.4 billion. Cash used for $2.9 billion.
Lower additions to property, plant and equipment and internal-use software, which is a component of $3.6GE Industrial free cash flows*, was $2.5 billion in 2018 (including $1.0 billion at Oil & Gas), compared with $4.7 billion in 2017 (including $0.5 billion at Oil & Gas). both 2019 and 2018.
*Non-GAAP Financial Measure
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| MD&A | CAPITAL RESOURCES AND LIQUIDITY |
GE cash used for financing activities was $2.3$7.7 billion in 20182019 compared with cash from financing activities of $4.6$1.5 billion in 2017.2018. The $6.9$9.1 billion increase in cash used was primarily due toto: the following:
A net increase in borrowingsnonrecurrence of $3.6 billion in 2018, mainly driven by intercompany loans from GE Capital to GE of $6.5 billion in 2018 (including $6.0 billion to fund contributions to the GE Pension Plan),; completion of a tender offer to purchase GE long-term debt of $4.8 billion in 2019; the nonrecurrence of dispositions of noncontrolling interests in Baker Hughes of $4.4 billion in 2018; the repayment of GE Capital intercompany loans by GE of $1.5 billion in 2019; partially offset by net repaymentsa decrease in common dividends paid to shareholders of debt of $2.9 billion (including $0.8 billion at BHGE), compared with a net increase in borrowings of $16.0 billion in 2017, mainly driven by the issuance of long-term debt of $12.5 billion (including $4.0 billion at BHGE), primarily to fund acquisitions, and long-term loans from GE Capital to GE of $7.3 billion, partially offset by maturity of long-term debt of $4.0 billion$3.8 billion; and the settlementnonrecurrence of the remaining portion of a 2016 short-term loan from GE Capital to GE of $1.3 billion.
The acquisition of Alstom's interest in grid technology, renewable energy, and global nuclear and French steam power joint ventures for $3.1 billion in 2018.
BHGE net stock repurchases and dividends to noncontrolling interests ofGE cash from operating activities was $0.7 billion in 2018 compared with $0.3 billion in 2017.
These increases in cash used were partially offset by the following decreases:
Common dividends paid to shareowners of $4.2 billion in 2018, compared with $8.4 billion in 2017.
An insignificant amount of net repurchases of GE treasury shares in 2018, compared with net repurchases of $2.6 billion in 2017.
Proceeds from BHGE's public share offering of $2.3 billion in 2018.
2017 – 2016 COMMENTARY:
GE cash from operating activities was $11.0$11.5 billion in 2017 compared with $30.0(including $0.5 billion and $0.3 billion cash received for Baker Hughes Class B shareholder dividends in 2016.2018 and 2017, respectively). The $10.8 billion decrease of $18.9 billion was primarily due toto: an increase in GE Pension Plan contributions (which are excluded from GE Industrial free cash flows*) of $4.3 billion; the following:
GE Capital paid common dividends to GE totaling $4.0 billion in 2017 compared with $20.1 billion in 2016.
Cash generated from GE CFOA (excludingnonrecurrence of common dividends received from GE Capital) amounted to $7.0Capital (which are excluded from GE Industrial free cash flows*) of $4.0 billion in 2017 (including $0.5 billion2017; an increase in cash used for Oilworking capital of $3.4 billion; and an increase in payments of equipment project cost accruals of $0.7 billion.
These decreases in cash were partially offset by: a decrease in cash used for contract & Gas CFOA) and $9.9 billion in 2016, primarily due to the following:
Net earnings for cash flows plus depreciation and amortization of property, plant and equipment, amortization of intangible assets, goodwill impairments, gains on sales of business interests and provisions for income taxes of $6.7 billion in 2017 compared with $9.9 billion in 2016. Net earnings for cash flows included pre-tax restructuring and other charges of $3.9 billion in 2017 compared with $3.4 billion in 2016.
Principal pension plan contributions of $2.0 billion (including $1.7 billion related to the GE Pension Plan) in 2017 compared with $0.6 billion (including $0.3 billion related to the GE Pension Plan) in 2016.
Lower growth in contract and other deferred assets of $1.9$1.2 billion, in 2017 compared with $2.6 billion in 2016, primarily due to the timing of revenue recognized relative to the timing of billings and collections on our long-term serviceequipment agreements mainlyand lower cash used for deferred inventory; and a decrease in our Aviation segment.
cash paid for income taxes of $0.8 billion.
Cash generated from working capital of $2.8 billion in 2017 compared with $3.7 billion in 2016. This was primarily due to: anThe increase in cash used for accounts payable of $2.2 billion, mainly in our Power, Aviation and Renewable Energy segments; a decrease in cash generated from current receivables of $0.6 billion, mainly in our Oil & Gas segment (primarilyworking capital was due to the cessation of sales of current receivables to GE Capital in the fourth quarter of 2017), partially offset by our Renewable Energy segment; and a decrease into: lower progress collections of an insignificant amount, driven by our Power segment, offset by$2.4 billion, mainly as a result of net utilization in 2018, including the benefit fromimpact of the timing of progress collections received in the fourth quarter of 20172017; an increase in cash used for current receivables of approximately$2.0 billion, primarily driven by lower sales of receivables; and higher inventory build of $0.7 billion, (primarilymainly as a result of expected deliveries in our Aviation segment).2019. These decreasesincreases in cash used for working capital were partially offset by an increase in cash generated from inventoriesaccounts payable of $2.0$1.6 billion, mainly in our Power, Aviation, Healthcare and Oil & Gas segments and in our Appliances business, due toprimarily driven by inventory build and improved payment terms.
GE cash from investing activities was $3.1 billion in 2018 compared with cash used for investing activities of $11.7 billion in 2017. The increase in cash of $14.9 billion was primarily due to: a decrease in cash used related to net settlements between our continuing operations and discontinued operations of $6.6 billion, primarily related to funding in the first half of 2016 which did not reoccur2017 in order to complete the Baker Hughes acquisition; an increase in proceeds from business dispositions (net of cash transferred) of $3.0 billion, primarily from the sale of businesses at Power and Healthcare; a decrease in cash used for business acquisitions (net of cash acquired) of $2.7 billion, primarily driven by the acquisitions of LM Wind Power and ServiceMax in 2017; lower cash used for additions to property, plant and equipment and internal-use software (which is a component of GE Industrial free cash flows*) of $1.3 billion; and the provision of a promissory note to Baker Hughes in the third quarter of 2017 of $1.1 billion; partially offset by the purchase of an aviation technology joint venture of $0.6 billion in 2018.
GE cash from financing activities was $1.5 billion in 2018 compared with $1.9 billion in 2017. The $0.4 billion decrease was primarily due to: a decrease in net borrowings of $7.9 billion, mainly as a result of the saleissuance of long-term euro debt, primarily to fund acquisitions in 2017; and the acquisition of Alstom's interest in grid technology, renewable energy, and global nuclear and French steam power joint ventures for $3.1 billion in 2018. These decreases in cash were partially offset by: a decrease in common dividends paid to shareholders of $4.2 billion; an increase in dispositions of noncontrolling interests in Baker Hughes of $4.1 billion; and a decrease in net repurchases of GE treasury shares of $2.5 billion.
GE CASH FLOWS FROM DISCONTINUED OPERATIONS.GE cash used for operating activities of discontinued operations was an insignificant amount in 2019 compared with cash generated of $2.1 billion in 2018. The $2.1 billion decrease was primarily as a result of the businessdispositions of Baker Hughes in the secondthird quarter of 2016.
2019 and our Transportation segment in the first quarter of 2019, due to the nonrecurrence of operating cash generated in 2018, primarily in the fourth quarter.
GE cash used for investing activitiesof discontinued operations was $3.4 billion in 2019 compared with $0.7 billion in 2018. The effect$2.8 billion increase in cash used was primarily due to the deconsolidation of BHGE Class B shareholder dividendsBaker Hughes cash of $3.1 billion as a result of the reduction in our ownership interest in the third quarter of 2019.
GE cash used for financing activitiesof discontinued operations was $0.4 billion in 2019 compared with $4.5 billion in 2018. The $4.1 billion decrease of cash used was primarily due to: the nonrecurrence of Baker Hughes share repurchases of $2.5 billion in 2018; and an increase in Baker Hughes borrowings of $0.3 billion in 2019 compared with net repayments of Baker Hughes borrowings of $1.1 billion in 2018.
GE cash from operating activities of discontinued operations was $2.1 billion in 2018 compared with cash used of $0.2 billion in 2017. The $2.2 billion increase in cash was primarily as a result of better operating performance at Baker Hughes.
GE cash used for investing activitiesof discontinued operations was $0.7 billion in 2018 compared with cash generated of $2.3 billion in 2017. The $3.0 billion increase in cash used was primarily due to: a decrease in net cash received from continuing operations of $6.6 billion, primarily related to funding in the first half of 2017 is eliminated from GE CFOA.
in order to complete the Baker Hughes acquisition; partially offset by the nonrecurrence of net cash paid for the Baker Hughes acquisition of $3.4 billion in 2017.
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 51 32
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GE cash used for investing activities was $8.3 billion in 2017 compared with $1.7 billion in 2016. The increase of $6.6 billion was primarily due to the following:
Business acquisition activities of $6.1 billion in 2017, primarily driven by the Baker Hughes transaction for $3.4 billion ($7.5 billion cash consideration, less $4.1 billion of cash assumed), LM Wind Power for $1.7 billion (net of cash acquired) and ServiceMax for $0.9 billion (net of cash acquired), compared with business acquisitions of $2.3 billion in 2016, which included two European 3-D printing companies in our Aviation segment for $1.1 billion (net of cash acquired).
Business disposition proceeds of $3.1 billion in 2017, primarily driven by the sale of our Water business for $2.9 billion (net of cash transferred) in 2017, compared with proceeds of $5.4 billion in 2016, primarily driven by the sale of our Appliances business for $4.8 billion and the sale of GEAM for $0.4 billion.
Net cash paid for settlements of derivative hedges of $1.1 billion in 2017.
GE cash from financing activitiesof discontinued operations was $4.6$4.5 billion in 2018 compared with cash used for financing activitiesgenerated of $27.4$3.5 billion in 2016.2017. The $31.9$8.0 billion increase in cash generatedused was primarily due to the following:
Net repurchasesto: net repayments of GE treasury sharesBaker Hughes borrowings of $2.6$1.1 billion and $21.4in 2018 compared with net new debt of $4.7 billion in 2017, and 2016, respectively.
A net increase in borrowings of $16.0 billion in 2017, mainly driven byincluding the issuance of long-term debt of $12.5 billion, (including $4.0 billion at BHGE) and long-terma promissory note received from GE of $1.1 billion; and an increase in Baker Hughes share repurchases of $2.0 billion.
GE CAPITAL CASH FLOWS FROM CONTINUING OPERATIONS.GE Capital cash from operating activities was $1.9 billion in 2019 compared with $1.6 billion in 2018. The increase of $0.3 billion was primarily due to: a net increase in cash collateral received and settlements paid from counterparties on derivative contracts of $2.0 billion; partially offset by a general decrease in cash generated from earnings (loss) from continuing operations.
GE Capital cash from investing activities was $9.5 billion in 2019 compared with $11.8 billion in 2018. The decrease of $2.3 billion was primarily due to: lower collections of financing receivables of $6.6 billion; an increase of net purchases of investment securities of $4.2 billion; lower net sales of equity investments of $3.1 billion; and an increase in cash used related to net settlements between our continuing operations (primarily our Corporate function) and businesses in discontinued operations (primarily WMC) of $2.4 billion; partially offset by the nonrecurrence of intercompany loans from GE Capital to GE of $7.3$6.5 billion partially offsetin 2018; an increase in cash related to our current receivables and supply chain finance programs with GE of $4.4 billion; higher proceeds from business dispositions $1.9 billion; and the repayment of GE Capital intercompany loans by maturityGE of long-term$1.5 billion in 2019.
GE Capital cash used for financing activities was $7.0 billion in 2019 compared with $23.9 billion in 2018. The decrease of $16.9 billion was primarily due to lower net repayments of borrowings of $11.4 billion; a capital contribution from GE to GE Capital of $4.0 billion; and lower cash settlements on derivatives hedging foreign currency debt of $4.0 billion and the settlement of the remaining portion of a 2016 short-term loan from GE Capital to GE of $1.3 billion, compared with a net increase in borrowings of $2.8 billion in 2016, including a short-term loan from GE Capital to GE of $1.3$1.4 billion.
GE CAPITAL CASH FLOWS
2018 – 2017 COMMENTARY:
GE Capital cash from operating activities was $1.6 billion in 2018 compared with $2.4 billion in 2017. The decrease of $0.8 billion was primarily due to the following:
Netto:a net increase in cash collateral and settlements paid to counterparties on derivative contracts of $1.5 billionbillion; partially offset by a general increase in cash generated from earnings (loss) from continuing operations.
GE Capital cash from investing activities was $11.8 billion in 2018 compared with $8.2 billion in 2017. The increase of $3.5 billion was primarily due to the following:
Higherto: higher collections of financing receivables of $7.1 billion.
Proceedsbillion and proceeds from the sales of EFS' debt origination business and EFS equity investments of $6.1 billion in 2018.
These increases in cash were2018; partially offset by the following decreases:
Aa decrease in net investment securities of $4.6 billion:$4.6 billion: $2.5 billion in 2018 compared with $7.1 billion in 2017.
An2017; an increase in net additions to property, plant and equipment of $1.6 billion.
Netbillion; net proceeds from sales of discontinued operations of an insignificant amount in 2018 compared with $1.5 billion in 2017.
An2017; an increase in net intercompany loans from GE Capital to GE of $6.5 billion in 2018 compared with $5.9 billion in 2017.
A2017 and a general reduction in funding related to discontinued operations.
GE Capital cash used for financing activitieswas $23.9 billion in 2018 compared with $23.6 billion in 2017. The increase of $0.3 billion was primarily due to the following:
Higherto: higher net repayments of borrowings of $21.1 billion in 2018 compared with $19.0 billion in 2017.
A2017 and a net increase in derivative cash settlements paid of $2.0 billion.
These increases in cash used werebillion partially offset by the following decrease:
no GE Capital paid no common dividends paid to GE in 2018 compared with $4.0 billion in 2017.
2017 – 2016 COMMENTARY:
GE Capital cash from operating activities was $2.4 billion in 2017 compared with cash used for operating activities of $0.2 billion in 2016. The $2.6 billion increase in cash generated was primarily due to the following:
Lower cash paid for income taxes and interest of $2.3 billion.
Net increase in cash collateral and settlements received from counterparties on derivative contracts of $1.2 billion and a general decrease in cash generated from earnings (loss) from continuing operations.
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MD&A | CAPITAL RESOURCES AND LIQUIDITY |
GE Capital cash from investing activities was $8.2 billion in 2017 compared with $59.8 billion in 2016. The decrease of $51.5 billion was primarily due to the following:
Net proceeds from the sales of our discontinued operations of $1.5 billion in 2017 compared to $59.9 billion in 2016.
Maturities of $10.4 billion related to interest bearing time deposits in 2016.
Long-term loans from GE Capital to GE of $7.3 billion, partially offset by the settlement of the remaining portion of 2016 short-term loan from GE Capital to GE of $1.3 billion in 2017, compared to the issuance of a short-term loan from GE Capital to GE of $1.3 billion in 2016.
Net cash paid for derivative settlements of an insignificant amount in 2017 compared to net cash received from derivative settlements of $0.4 billion in 2016.
These decreases were partially offset by the following increases:
Net investment securities of $18.4 billion related to net maturities of $7.1 billion in 2017 compared to net purchases of investment securities of $11.2 billion in 2016.
Higher collections of financing receivables of $4.2 billion in 2017.
A general reduction in funding related to discontinued operations.
GE Capital cash used for financing activities was $23.6 billion in 2017 compared with $81.7 billion in 2016. The decrease of $58.0 billion was primarily due to the following:
Lower net repayments of borrowings of $19.0 billion in 2017 compared to $58.8 billion in 2016.
GE Capital paid common dividends to GE totaling $4.0 billion in 2017 compared to $20.1 billion in 2016.
INTERCOMPANY TRANSACTIONS BETWEEN GE AND GE CAPITAL
GE Capital, the financial arm of GE, provides financial and intellectual capital to GE’s industrial businesses and its customers. GE Capital enables GE orders by either providing direct financing for a GE transaction or by bringing market participants together that result in industrial sales. On January 16, 2018, we announced plans to take actions to make GE Capital smaller and more focused, including a substantial reduction in the size of GE Capital's EFS and IF businesses over the next 24 months. We will retain origination capabilities to support our industrial businesses, however, we will transition to more funding by the capital markets, including export credit agencies and financial institutions. The transactions where GE and GE Capital are directly involvedCAPITAL.Transactions between related companies are made on arm's length terms and are reported in the GE and GE Capital columns of our financial statements, which we believe provide useful supplemental information to our consolidated financial statements. See Note 25 to the consolidated columnfinancial statements for further information.
Sales of our Statement of Cash Flows.Receivables. In order to manage short-term liquidity and credit exposure, GE may sell current customer receivables to GE Capital and other third parties. These transactions include, but are not limitedmade on arm's length terms and any discount related to time value of money, is recognized within the respective GE Industrial business in the period these receivables were sold to GE Capital or third parties. See Note 4 to the following:consolidated financial statements for further information.
Supply Chain Finance Programs. GE Capital dividends to GE,
GE Capital working capital services to GE, including trade receivables andfacilitates voluntary supply chain finance programs
with third parties which provide participating GE suppliers the opportunity to sell their GE receivables to third parties at the sole discretion of both the suppliers and the third parties. The terms of these programs do not alter GE’s obligations to its suppliers which arise from independently negotiated contractual supply agreements. GE's obligation remains limited to making payment on its supplier invoices on the terms originally negotiated with its suppliers, regardless of whether the supplier sells its receivable to a third party. GE has guaranteed the program providers that its participating affiliates will pay their supplier invoices on the terms originally negotiated with their suppliers.GE Capital enabled GE industrial orders, including related GE guarantees to GE Capital,
GE Capital financingAt December 31, 2019 and 2018, included in GE's accounts payable is $2.4 billion and $0.4 billion, respectively, of GE long-term receivables, and
Aircraft engines, power equipment, renewable energy equipment and healthcare equipment manufactured by GEsupplier invoices that are installed on GE Capital investments, including leased equipment.
In additionsubject to the above transactions that primarily enable growththird-party programs. GE accounts for all payments made under the programs as reductions to CFOA. Total GE supplier invoices paid through these third-party programs were $1.4 billion and an insignificant amount for the GE businesses, there are routine related party transactions, which include, but are not limited to, the following:years ended December 31, 2019 and 2018, respectively.
Expenses related to parent-subsidiary pension plans,
Buildings and equipment leased between GE and GE Capital, including sale-leaseback transactions,
Information technology (IT) and other services sold to GE Capital by GE,
Settlements of tax liabilities, and
Various investments, loans and allocations of GE corporate overhead costs.
CASH FLOWS
DIVIDENDS
GE did not receive a common dividend distribution from GE Capital in 2018 and it does not expect to for the foreseeable future. GE Capital paid $4.0 billion and $20.1 billion of common dividends to GE in 2017 and 2016, respectively.
GE20182019 FORM 10-K 53 33
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SALE OF RECEIVABLES
In order to manage short-term liquidity and credit exposure, GE sells current receivables toPreviously, GE Capital and other third parties in part to fund the growth of our industrial businesses. During any given period, GE receives cash from the sale of receivables to GE Capital and other third parties, and it therefore forgoes the future collections of cash on receivables sold, as GE Capital and the other third parties are entitled to receive the cash from the customer. GE also leverages GE Capital for its expertise in receivables collection services and sales of receivables to GE Capital are made on arm’s length terms. These transactions can result in cash generation or cash use in our consolidated Statement of Cash Flows. The incremental amount of cash received from sales of receivables in excess of the cash GE would have otherwise collected had these receivables not been sold represents the cash generated or used in the period relating to this activity. The impact from current receivables sold to GE Capital, including current receivables subsequently sold to third parties, decreased GE’s CFOA by $3.6 billion and $2.0 billion in 2018 and 2017, respectively and increased GE's CFOA by $2.1 billion in 2016.
As of December 31, 2018, including the deferred purchase price on our receivables facility, GE Capital had approximately $4.9 billion recorded on its balance sheet related to current receivables purchased from GE. Of the current receivables purchased and retained by GE Capital, approximately 31% had been sold by GE to GE Capital with full or limited recourse (i.e., GE retains all or some risk of default). The evaluation of whether recourse transactions qualify for accounting derecognition is based, in part, upon the legal jurisdiction of the sale; as such, the majority of recourse transactions outside the U.S. qualify for sale treatment. The effect on GE CFOA of claims by GE Capital on receivables sold with full or limited recourse to GE has not been significant for the years ended December 31, 2018, 2017 and 2016.
In December 2016, GE Capital entered into a receivables facility with members of a bank group, designed to provide extra liquidity to
GE. The receivables facility allows us to sell eligible current receivables on a non-recourse basis for cash and a deferred purchase
price to members of the bank group. The purchase commitment of the bank group reduced from $3.8 billion in 2017 to $3.6 billion in 2018. See Note 4 to the consolidated financial statements for further information.
On December 21, 2018, GE Capital entered into a new revolving current receivables facility with a third-party securitization entity. This facility, whose maximum size is $1.5 billion, will expire in one year unless extended. In contrast to the aforementioned receivables facility, the Company has no remaining risk in respect of current receivables purchased by the third-party entity. Borrowings of $0.6 billion were repaid concurrently with the first sale to the third-party securitization. See Note 4 to the consolidated financial statements for further information.
In certain circumstances, GE provided customers primarily within our Power, Renewable Energy and Aviation businesses with extended payment terms for the purchase of new equipment, purchases of significant upgrades and for fixed billings within our long-term service agreements. Similar to current receivables, GE sold these long-term receivables to GE Capital to manage short-term liquidity and fund growth. These transactions were made on arm's length terms and any fair value adjustments, primarily related to time value of money, were recognized within the respective GE Industrial business in the period these receivables were sold to GE Capital. GE Capital accretes financing income over the life of the receivables. Financing income is eliminated in our consolidated results. In addition, the long-term portion of any remaining outstanding receivables as of the end of the period are reflected in "All other assets" within our consolidated Statement of Financial Position. Related to GE long-term customer receivables outstanding, assets at GE Capital included $1.0 billion, $2.1 billion and $1.9 billion, net of deferred income of approximately $0.1 billion, $0.3 billion and $0.3 billion recorded in its balance sheet at December 31, 2018, 2017 and 2016, respectively. The effect of cash generated from the sale of these long-term receivables to GE Capital decreased GE's CFOA by $0.9 billion in 2018, and increased GE's CFOA by $0.3 billion and $1.6 billion in 2017 and 2016, respectively.
SUPPLY CHAIN FINANCE PROGRAMS
GE’s industrial businesses participate inoperated a supply chain finance program with GE Capital wherefor suppliers to GE’s industrial businesses. Under that program, GE Capital may settle GE’s industrial businesses supplier invoices early in return for early pay discounts. In turn, GE settlessettled invoices with GE Capital in accordance with the original supplier payment terms. TheOn February 28, 2019, GE liability associated withCapital sold the funded participation in the program is presented as accounts payable and amounted to $5.4 billion and $5.2 billion at December 31, 2018 and 2017, respectively.
At December 31, 2018, $0.4 billion of the GE accounts payable balance is subject to supply chain finance programs with third parties. The terms of these arrangements do not alter our obligation to our suppliers and service providers which arise from our contractual supply agreements with them. Our payment obligation to suppliers and service providers continues to exist until we settle our obligation on the contractual payment dates and terms specified in the underlying supply contracts.
On January 16, 2019 we announced the sale of GE Capital’s supply chain finance program platform to MUFG Union Bank, N.A. (MUFG) and our intent to startis transitioning our existing programGE’s suppliers to a MUFG supply chain finance program. Information for suppliers which have already transitioned from GE Capital to MUFG is included within the third-party supply chain finance program with that party. data presented above. For the year ended December 31, 2019, there was not a significant effect on GE CFOA related to the MUFG transition.
The GE funded participation in the GE Capital program will continue to be settled following the original invoice payment terms with an expectation that the majoritytransition be completed by the end of 2020. The GE liability associated with the transition will occur over 18funded participation in the program is presented as accounts payable and amounted to 24 months. $2.1 billion and $4.4 billion at December 31, 2019 and 2018, respectively.
GE CFOA could be adversely affected should certain suppliers not transition to the new third-party program and we elect to take advantage of early pay discounts on trade payables offered by those suppliers.
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MD&A | CAPITAL RESOURCES AND LIQUIDITY |
ENABLED ORDERS
Enabled orders represent the act of introducing, elevating and influencing customers and prospects that result in industrial sales, potentially coupled with captive financing or incremental products or services. Capital Finance Transactions. During the years ended December 31, 20182019 and 2017, GE Capital enabled $10.1 billion and $14.4 billion of GE industrial orders, respectively. In 2018, orders are primarily with our Renewable Energy ($3.8 billion), Power ($2.4 billion) and Healthcare ($2.1 billion) businesses. Most of the financing for these enabled orders is through third-parties including export credit agencies and financial institutions.
AVIATION
During the years ended December 31, 2018 and 2017, GE Capital acquired from third parties 51 aircraft with a list price totaling $6.4 billion and 64 aircraft (listwith a list price totaling $7.8 billion) and 50 aircraft (list price totaling $6.6 billion),billion, respectively, from third parties that will be leased to others whichand are powered by engines that were manufactured by GE Aviation and affiliates andaffiliates. GE Capital also made payments to GE Aviation and affiliates related to spare engines and engine parts to GE Aviationof $0.7 billion and affiliates of $0.4 billion, which included $0.6 billion and $0.1$0.2 billion to CFM International, during the years ended December 31, 2019 and 2018, respectively. Additionally, GE Capital had $2.0 billion and $1.2 billion of net book value of engines, originally manufactured by GE Aviation and affiliates and subsequently leased back to GE Aviation and affiliates at both December 31, 2019 and 2018, and 2017. respectively.
PENSIONS
GE Capital is a member of certain GE Pension Plans. As a result of the GE Capital Exit Plan, GE Capital will have additional funding obligations for these pension plans. These obligations are recognized as an expense in GE Capital’s other continuing operations when they become probable and estimable. The additional funding obligations recognized by GE Capital were zero, $0.2 billion and $0.6 billion forAlso, during the years ended December 31, 2019 and 2018, 2017GE recognized equipment revenues of $1.6 billion and 2016, respectively.
On a consolidated basis, the additional required pension funding$1.0 billion, respectively, from customers within our Power and any related assumption fees do not affect current period earnings. Any additional required pension funding will be reflected as a reduction of the pension liability when paid.
GE GUARANTEE OF GE CAPITAL THIRD-PARTY TRANSACTIONS
In certain instances, GE provides guarantees forRenewable Energy segments in which GE Capital transactions with third parties primarilyhas been an investee or is committed to be an investee in connection with enabled orders. Inthe underlying projects.
For certain of these investments, in order to meet its underwriting criteria, GE Capital may obtain a direct guarantee from GE related to the performance of the third party. GE guarantees can take many forms and may include but not be limited to, direct performance or payment guarantees, return on investment guarantees and asset value guarantees and loss pool arrangements.guarantees. As of December 31, 2018,2019, GE had outstanding guarantees to GE Capital on $1.4$0.9 billion of funded exposure and $0.9$1.0 billion of unfunded commitments.commitments, which included guarantees issued by industrial businesses. The recorded contingent liability for these guarantees was $0.1 billioninsignificant as of December 31, 20182019 and is based on individual transaction level defaults, losses and/or returns.
GE GUARANTEE OF CERTAIN GE CAPITAL DEBT
GE provides implicit and explicit support to GE Capital through commitments, capital contributions and operating support. As previously discussed, GE debt assumed from GE Capital in connection with the merger of GE Capital into GE was $36.3 billion and GE guaranteed $37.7 billion of GE Capital debt at December 31, 2018. See Note 11 to the consolidated financial statements for further information.
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MD&A | CAPITAL RESOURCES AND LIQUIDITY |
CONTRACTUAL OBLIGATIONS
OBLIGATIONS.As defined by reporting regulations, our contractual obligations for estimated future payments as of December 31, 2018,2019, follow.
| | | | Payments due by period | |
| | | 2024 and |
| | | | | | | | | | | |
| (In billions) | Total |
| 2019 |
| 2020-2021 |
| 2022-2023 |
| thereafter |
| Total |
| 2020 |
| 2021-2022 |
| 2023-2024 |
| Thereafter |
|
| | | |
| Borrowings (Note 11) | $ | 110.0 |
| $ | 13.1 |
| $ | 27.2 |
| $ | 17.1 |
| $ | 52.6 |
| $ | 90.9 |
| $ | 23.6 |
| $ | 15.9 |
| $ | 8.4 |
| $ | 42.9 |
|
| Interest on borrowings | 31.8 |
| 3.3 |
| 4.9 |
| 3.9 |
| 19.7 |
| 24.8 |
| 2.5 |
| 3.9 |
| 3.1 |
| 15.3 |
|
| Purchase obligations(a)(b) | 62.3 |
| 26.7 |
| 19.5 |
| 12.5 |
| 3.6 |
| 57.8 |
| 18.4 |
| 20.2 |
| 15.1 |
| 4.2 |
|
| Insurance liabilities (Note 12)(c) | 35.4 |
| 2.6 |
| 4.1 |
| 4.2 |
| 24.5 |
| |
| Operating lease obligations (Note 26) | 5.6 |
| 1.1 |
| 1.7 |
| 1.2 |
| 1.6 |
| |
| Other liabilities(d) | 67.0 |
| 7.9 |
| 8.6 |
| 9.6 |
| 40.9 |
| |
| Contractual obligations of discontinued operations(e) | 2.9 |
| 2.2 |
| 0.4 |
| 0.1 |
| 0.2 |
| |
| Insurance liabilities (Note 12) | | 39.7 |
| 2.4 |
| 4.1 |
| 4.1 |
| 29.0 |
|
| Operating lease obligations (Note 7) | | 3.7 |
| 0.8 |
| 1.2 |
| 0.8 |
| 0.9 |
|
| Other liabilities(c) | | 45.3 |
| 10.1 |
| 6.7 |
| 5.1 |
| 23.4 |
|
| Contractual obligations of discontinued operations(d) | | 0.6 |
| 0.3 |
| 0.1 |
| 0.1 |
| 0.1 |
|
| |
| (a) | Included all take-or-pay arrangements, capital expenditures, contractual commitments to purchase equipment that will be leased to others, software acquisition/license commitments, contractual minimum programming commitments and any contractually required cash payments for acquisitions.other purchase commitments. |
| |
| (b) | Excluded funding commitments entered into in the ordinary course of business. See Notes 20 and 2223 to the consolidated financial statements for further information on these commitments and other guarantees. |
| |
| (c) | Included all contracts associated with our run-off insurance operations and represents the present value of future policy benefit and claim reserves. |
| |
(d) | Included an estimate of future expected funding requirements related to our postretirement benefit plans and included liabilities for unrecognized tax benefits. Because their future cash outflows are uncertain, the following non-current liabilities are excluded from the table above: derivatives, deferred income and other sundry items. See Notes 13, 1415 and 2021 to the consolidated financial statements for further information on certain of these items. |
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(e)(d) | Included payments for other liabilities. |
CRITICAL ACCOUNTING ESTIMATES
ESTIMATES.Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. Many of these estimates include determining fair value. All of these estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their potential effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of investment securities, goodwill, intangibles and long-lived assets, revisions to estimated profitability on long-term service agreements, incremental losses on financing receivables, increases in reserves for contingencies and insurance, establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other effects. Also seeSee Note 1 to the consolidated financial statements which discussesfor further information on our most significant accounting policies.
REVENUE RECOGNITION ON LONG-TERM SERVICES AGREEMENTS
AGREEMENTS.We have long-term service agreements with our customers predominately within our Power and Aviation Transportation and Oil & Gas segments. These agreementssegments that require us to maintain the customers’ assets over the contract term. Contract terms, arewhich generally range from 5 to 25 years. However, contract modifications that extend or revise contracts are not uncommon.
We recognize revenue as we perform under the arrangements using the percentage of completion method which is based uponon our costs incurred at the estimated margin rateto date relative to our estimate of the contract. Revenue recognition on long-term services agreementstotal expected costs. This requires us to make estimates of both customer payments expected to be received over the contract term as well as the costs to perform required maintenance services.
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| MD&A | CRITICAL ACCOUNTING ESTIMATES |
Customers generally pay us based on the utilization of the asset (per hour of usage for example) or upon the occurrence of a major event within the contract such as an overhaul. As a result, a significant estimate in determining expected revenues of a contract is estimating how customers will utilize their assets over the term of the agreement. The estimate of utilization, will impactwhich can change over the contract life, impacts both the amount of customer payments we expect to receive and our estimate of costs to complete the agreement asfuture contract costs. Customers’ asset utilization will influence the timing and extent of overhauls and other service events over the life of the contract. We generally use a combination of both historical utilization trends as well as forward-looking information such as market conditions and potential asset retirements in developing our revenue estimates.
To develop our cost estimates, we consider the timing and extent of future maintenance and overhaul events, including the amount and cost of labor, spare parts and other resources required to perform the services. In developing our cost estimates, we utilize a combination of our historical cost experience and expected cost improvements. Cost improvements are only included in future cost estimates after savings have been observed in actual results or proven effective through an extensive regulatory or engineering approval process.
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MD&A | CRITICAL ACCOUNTING ESTIMATES |
We routinely review estimates under long-term services agreements and regularly revise them to adjust for changes in outlook. These revisions are based on objectively verifiable information that is available at the time of the review. Contract modifications that change the rights and obligations, as well as the nature, timing and extent of future cash flows, are evaluated for potential price concessions, contract asset impairments and significant financing to determine if adjustments of earnings are required before effectively accountedaccounting for modified contract as a new contract.
The difference between the timing of our revenue recognition and cash received from our customers results in either a contract asset (revenue in excess of billings) or a contract liability (billing in excess of revenue). As of December 31, 2018, and 2017, we are in a net contract asset position of $6.8 billion and $6.9 billion, including contracts in liability position totaling $5.2 billion and $5.5 billion, respectively.
We regularly assess expected billings adjustments and customer credit risk inherent in the carrying amounts of receivables and contract assets, and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated investment in the event of customer termination. We gain insight into future utilization and cost trends, as well as credit risk, through our knowledge of the installed base of equipment and the close interaction with our customers that comes with supplying critical services and parts over extended periods. Revisions may affect a long-term services agreement’s total estimated profitability resulting in an adjustment of earnings; such adjustments decreased earnings by $(0.2) billion in 2018 and increased earnings by $0.5 billion and $0.7 billion in 2017 and 2016, respectively.earnings.
On December 31, 2018,2019, our net long-term service agreements balance of $6.8$5.1 billion represents approximately 3.8%2.9% of our total estimated life of contract billings of $180.3$176.7 billion. Our contracts (on average) are approximately 20.1%22.2% complete based on costs incurred to date and our estimate of future costs. Revisions to our estimates of future billings or costs that increase or decrease total estimated contract profitability by one percentage point would increase or decrease the long-term service agreements balance by $0.4 billion. Cash billings collected on these contracts were $11.9$11.5 billion and $11.6$10.2 billion during the years ended December 31, 2019 and 2018, and 2017, respectively.
See Notes 1 and 109 to the consolidated financial statements for further information.
FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value every reporting period include investments in debt and equity securities and derivatives. Other assets and liabilities are subject to fair value measurements only in certain circumstances, including purchase accounting applied to assets and liabilities acquired in a business combination, impaired loans that have been reduced based on the fair value of the underlying collateral, equity securities without readily determinable fair value and equity method investments and long-lived assets that are written down to fair value when they are impaired. Upon closing an acquisition, we estimate the fair values of assets and liabilities acquired and integrate the acquisition as soon as practicable. The size, scope and complexity of an acquisition will affect the time it takes to obtain the necessary information to record the acquired assets and liabilities at fair value. It may take up to one year to finalize the initial fair value estimates used in the preliminary purchase accounting. Accordingly, it is reasonably likely that our initial estimates will be subsequently revised, which could affect carrying amounts of goodwill, intangibles and potentially other assets and liabilities in our financial statements. Assets that are written down to fair value, less cost to sell when impaired are not subsequently adjusted to fair value unless further impairment occurs.
A fair value measurement is determined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. The determination of fair value often involves significant judgments about assumptions such as determining an appropriate discount rate that factors in both risk and liquidity premiums, identifying the similarities and differences in market transactions, weighting those differences accordingly and then making the appropriate adjustments to those market transactions to reflect the risks specific to our asset being valued.
See Notes 1, 3, 8, 19 and 20 to the consolidated financial statements for further information on fair value measurements and related matters.
ASSET IMPAIRMENT
Asset impairment assessment involves various estimates and assumptions that may leverage the fair value measurements described above and include:
INVESTMENTS
We regularly review investment securities for impairment using both quantitative and qualitative criteria. For debt securities, if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of our amortized cost, we evaluate other qualitative criteria to determine whether a credit loss exists, such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. Quantitative criteria include determining whether there has been an adverse change in expected future cash flows. Our other-than-temporary impairment reviews involve our finance, risk and asset management functions as well as the portfolio management and research capabilities of our internal and third-party asset managers.
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MD&A | CRITICAL ACCOUNTING ESTIMATES |
See Notes 1 and 3 to the consolidated financial statements for further information about the determination of fair value for investment securities and actual and potential impairment losses.
LONG-LIVED ASSETS
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We derive the required undiscounted cash flow estimates from our historical experience and our internal business plans. To determine fair value, we use quoted market prices when available, our internal cash flow estimates discounted at an appropriate discount rate and independent appraisals, as appropriate.
Our operating lease portfolio of commercial aircraft is a significant concentration of assets in Capital, and is particularly subject to market fluctuations. Therefore, we test recoverability of each aircraft in our operating lease portfolio at least annually. Additionally, we perform quarterly evaluations in circumstances such as when aircraft are re-leased, current lease terms have changed or a specific lessee’s credit standing changes. We consider market conditions, such as global demand for commercial aircraft. Estimates of future rentals and residual values are based on historical experience and information received routinely from independent appraisers. Estimated cash flows from future leases are reduced for expected downtime between leases and for estimated costs required to prepare aircraft to be redeployed. Fair value used to measure impairment is based on management's best estimates which are benchmarked against third-party appraiser current market values for aircraft of similar type and age. See Notes 7 and 22 to the consolidated financial statements for further information on impairment losses and our exposure to the commercial aviation industry.
OF GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS
We test. During 2019, and in order to improve alignment of our annual goodwill for impairment annually intesting and strategic planning process, we changed our annual testing date from the third quarter of each year using data as of July 1 of that year. The impairment test consists of two steps: in step one,to the carrying value of the reporting unit is compared with its fair value; in step two, which is applied when the carrying value is more than itsfourth quarter. We determine fair value the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately.
Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our annual reporting unit valuations ranged from 9.5%8.9% to 23.0%22.0%.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results.results, internal forecasts, market observable pricing multiples of similar businesses and comparable transactions, possible control premiums, determining the appropriate discount rate and long-term growth rate assumptions, and, if multiple approaches are being used, determining the appropriate weighting applied to each approach. It is reasonably possible that the judgments and estimates described above could change in future periods.
We review identified intangible assets with defined useful lives and subject to amortization for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss has occurred requires comparing the carrying amountuse of our internal forecast to the sum of undiscountedestimate future cash flows expected to be generated byand the asset. We test intangible assets with indefinite lives annually for impairment using auseful life over which these cash flows will occur. To determine fair value, method such aswe use our internal cash flow estimates discounted cash flows.at an appropriate discount rate.
See Notes 1 and 8 to the consolidated financial statements for further information.
BUSINESSES AND ASSETS HELD FOR SALE
Businesses and assets held for sale represent components that meet the accounting requirements to be classified as held for sale and are presented as single asset and liability amounts in our financial statements with a valuation allowance, if necessary, to recognize the net carrying amount at the lower of cost or fair value, less cost to sell. Financing receivables that no longer qualify to be presented as held for investment must be classified as assets held for sale and recognized in our financial statements at the lower of cost or fair value, less cost to sell, with that amount representing a new cost basis at the date of transfer.
GE20182019 FORM 10-K 58
35
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| MD&A | CRITICAL ACCOUNTING ESTIMATES |
The determination of fair valueINSURANCE AND INVESTMENT CONTRACTS.Refer to the Other Items - Insurance section within MD&A for businesses and assets held for sale involves significant judgments and assumptions. Development of estimates of fair values in this circumstance is complex and is dependent upon, among other factors, the naturefurther discussion of the potential sales transaction (for example, asset sale versus sale of legal entity), composition of assets and/or businessesaccounting estimates and assumptions in our insurance reserves and their sensitivity to change. Also see Notes 1 and 12 to the disposal group, the comparability of the disposal group to market transactions, negotiations with third-party purchasers, etc. Such factors bear directlyconsolidated financial statements for further information.
PENSION ASSUMPTIONS. Our defined benefit pension plans are accounted for on the range of potential fair values andan actuarial basis, which requires the selection of the best estimates. Keyvarious assumptions, are developed based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use inincluding a hypothetical transaction.
We review all businesses and assets held for sale each reporting period to determine whether the existing carrying amounts are fully recoverable in comparison to estimated fair values.
PENSION ASSUMPTIONS
Pension assumptions are significant inputs to the actuarial models that measure pension benefit obligations and related effects on operations. Two assumptions – discount rate, andan expected return on assets, – are important elementsmortality rates of plan expenseparticipants and asset/liability measurement.expectation of mortality improvement. We evaluate these critical assumptions at least annually on a plan and country-specific basis. We periodically evaluate other assumptions involving demographic factors such as retirement age mortality and turnover, and update them to reflect our experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
Projected benefit obligations are measured as the present value of expected payments. We discount those cash payments using the weighted average of market-observed yields for high-quality fixed-income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and generally increase subsequent-year pension expense; higher discount rates decrease present values and generally reduce subsequent-year pension expense.
Our discount rates for principal pension plans at December 31, 2019, 2018 and 2017 were 3.36%, 4.34% and 2016 were 4.34%, 3.64% and 4.11%, respectively, reflecting market interest rates.
To determine the expected long-term rate of return on pension plan assets, we consider our asset allocation, as well as historical and expected returns on various categories of plan assets. In developing future long-term return expectations for our principal benefit plans’ assets, we formulate views on the future economic environment, both in the U.S. and abroad. We evaluate general market trends and historical relationships among a number of key variables that impact asset class returns such as expected earnings growth, inflation, valuations, yields and spreads, using both internal and external sources. We also take into account expected volatility by asset class and diversification across classes to determine expected overall portfolio results given our asset allocation. Assets in our principal pension plans declined 5.4%earned 17.8% in 2018,2019, and had annualized returns of 4.1%6.3%, 6.9%7.7% and 7.5%8.2% in the 5-, 10- and 25-year periods ended December 31, 2018,2019, respectively. Based on our analysis of future expectations of asset performance, past return results, and our asset allocation, we have assumed a 6.75%6.25% long-term expected return on those assets for cost recognition in 2019 and 20182020, as compared to 7.50%6.75% in 20172019 and 2016.2018.
The Society of Actuaries issued new base and improvement mortality tables in 2019 and we updated mortality assumptions in the U.S. accordingly. These changes in assumptions decreased the December 31, 2019 U.S. pension and retiree benefit plans' obligations by $0.5 billion.
Changes in key assumptions for our principal pension plans would have the following effects.
Discount rate – A 25 basis point increasedecrease in discount rate would decreaseincrease pension cost in the following year by about $0.2 billion and would decreaseincrease the pension benefit obligation at year-end by about $2.0$2.3 billion.
Expected return on assets – A 50 basis point decrease in the expected return on assets would increase pension cost in the following year by about $0.3 billion.
See Other Consolidated Information – Postretirement Benefit Plans section within this MD&A and Note 13 to the consolidated financial statements for further information on our pension plans.information.
INCOME TAXES
TAXES.Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rate on our global operations. In addition to local country tax laws and regulations, this rate can depend on the extent earnings are indefinitely reinvested outside the U.S. Historically U.S. taxes were due upon repatriation of foreign earnings. Due to the enactment of U.S. tax reform, most repatriations of foreign earnings will be free of U.S. federal income tax but may incur withholding or state taxes. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. Most of these earnings have been reinvested in active non-U.S. business operations. At December 31, 2018,2019, we have not changed our indefinite reinvestment decision as a result of tax reform but will reassess this on an ongoing basis.
GE20182019 FORM 10-K 59 36
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| MD&A | CRITICAL ACCOUNTING ESTIMATES |
Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight. Further, our global and diversified business portfolio gives us the opportunity to employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. Amounts recorded for deferred tax assets related to non-U.S. net operating losses, net of valuation allowances, were $3.1$2.2 billion and $3.7$3.1 billion at December 31, 2019 and 2018, including $0.2 billion related to held for sale assets at December 31, 2019 and 2017, including $0.3$0.2 billion and $0.3$0.5 billion at December 31, 2019 and 2018, and 2017, respectively, of deferred tax assets, net of valuation allowances, associated with losses reported in discontinued operations, primarily related to our Real Estate and Consumerlegacy financial services businesses and for 2018, our loss on the sale of GE Money Japan.Baker Hughes segment. Such year-end 20182019 amounts are expected to be fully recoverable within the applicable statutory expiration periods. To the extent we consider it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is established.
The 2017 impact of U.S. tax reform was recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax on historic foreign earnings. This amount was adjusted in 2018 based on guidance issued during the year. Additional guidance may be issued after 2018 and any resulting effect will be recorded in the quarter of issuance.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on “base eroding” payments from the U.S. We are continuing to evaluate the impact of this new provision on our operations and are taking restructuring actions to mitigate the impact from this provision. The U.S. has also enacted a minimum tax on foreign earnings (“global intangible low tax income”). Because we have tangible assets outside the U.S. and pay a rate of foreign tax above the minimum tax rate, we are not expecting a significant increase in tax liability from this new U.S. minimum tax. We have not made an accrual for the deferred tax effects of this tax.
See Other Consolidated Information – Income Taxes section within this MD&A and Note 14 to the consolidated financial statements for further information on income taxes.
DERIVATIVES AND HEDGING
We use derivatives to manage a variety of risks, including risks related to interest rates, foreign exchange and commodity prices. Accounting for derivatives as hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. The rules and interpretations related to derivatives accounting are complex. Failure to apply this complex guidance correctly will result in all changes in the fair value of the derivative being reported in earnings, without regard to the offsetting changes in the fair value of the hedged item.
In evaluating whether a particular relationship qualifies for hedge accounting, we test effectiveness at inception and each reporting period thereafter by determining whether changes in the fair value of the derivative offset, within a specified range, changes in the fair value of the hedged item. If fair value changes fail this test, we discontinue applying hedge accounting to that relationship prospectively. Fair values of both the derivative instrument and the hedged item are calculated using internal valuation models incorporating market-based assumptions, subject to third-party confirmation, as applicable.
See Notes 1, 19 and 20 to the consolidated financial statements for further information about our use of derivatives.
INSURANCE AND INVESTMENT CONTRACTS
Refer to the Other Items - Insurance section within this MD&A for further discussion of the accounting estimates and assumptions in our insurance reserves and their sensitivity to change. Also see Notes 1 and 1215 to the consolidated financial statements for further information.
OTHER LOSS CONTINGENCIES
Other lossCONTINGENCIES.Loss contingencies are uncertain and unresolved matters that arise in the ordinary course of business and result from events or actions by others that have the potential to result in a future loss. Such contingencies include, but are not limited to, environmental obligations, litigation, regulatory investigations and proceedings, product quality and losses resulting from other events and developments.
When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low-end of such range. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and negotiations with or decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss.
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MD&A | CRITICAL ACCOUNTING ESTIMATES |
Disclosure is provided for material loss contingencies when a loss is probable but a reasonable estimate cannot be made, and when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We regularly review all contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.
See Note 2223 to the consolidated financial statements for further information.
OTHER ITEMS
INSURANCE
INSURANCE.The run-off insurance operations of North American Life and Health (NALH) primarily include Employers Reassurance Corporation (ERAC) and Union Fidelity Life Insurance Company (UFLIC). ERAC was formerly part of Employers Reinsurance Corporation (ERC) until the sale of ERC to Swiss Re in 2006. UFLIC was formerly part of Genworth Financial Inc. (Genworth) but was retained by GE after Genworth’s initial public offering in 2004.
ERAC primarily assumes long-term care insurance and life insurance from numerous cedents under various types of reinsurance
treaties and stopped accepting new policies after 2008. UFLIC primarily assumes long-term care insurance, structured settlement
annuities with and without life contingencies and variable annuities from Genworth and has been closed to new business since 2004.
The vast majority of NALH’s reinsurance exposures are long-duration arrangements that still involve substantial levels of premium
collections and benefit payments even though ERAC and UFLIC have not entered into new reinsurance treaties in about a decade.
Our run-off These long-duration arrangements involve a number of direct writers and contain a range of risk transfer provisions and other contractual elements. In many instances, these arrangements do not transfer to ERAC or to UFLIC 100 percent of the risk embodied in the encompassed underlying policies issued by the direct writers. Furthermore, we cede insurance liabilitiesrisk to third-party reinsurers for a portion of our insurance contracts, primarily relate to individualon long-term care insurance structured settlement annuities and life insurance products. Long-term care insurance provides defined benefit levels of protection against the cost of long-term care services provided in the insured’s home or in assisted living or nursing home facilities. Structured settlement annuities typically provide fixed monthly or annual annuity payments for a set period of time or, in the case of a life-contingent structured settlement, for the life of the annuitant and may include a guaranteed minimum number of payments. Traditional life insurance triggers a payment in the event of death of a covered life.policies.
In addition to NALH, Electric Insurance Company (EIC) is a property and casualty insurance company primarily providing insurance to GE and its employees with net claim reserves of $0.3 billion at December 31, 2018.
Insurance liabilities and annuity benefits amounted to $35.6 billion and $38.1 billion and as further described below, are primarily supported by investment securities of $32.9 billion and $32.4 billion and commercial mortgage loans of $1.7 billion and $1.5 billion at December 31, 2018 and 2017, respectively. Additionally, we expect to purchase approximately $11 billion of new assets through 2024 in conjunction with expected capital contributions from GE Capital to our insurance subsidiaries, of which approximately $1.9 billion was received in the first quarter of 2019. TheOur run-off insurance liabilities and annuity benefits primarily comprise a liability for future policy benefits for those insurance contract claims not yet incurred and claim reserves for claims that have been incurred or are estimated to have been incurred but not yet reported. PresentedThe insurance liabilities and annuity benefits amounted to $39.8 billion and $35.6 billion and primarily relate to individual long-term care insurance reserves of $21.0 billion and $20.0 billion and structured settlement annuities and life insurance reserves of $11.1 billion and $11.2 billion, at December 31, 2019 and December 31, 2018, respectively. The increase in insurance liabilities and annuity benefits of $4.2 billion from December 31, 2018 to December 31, 2019, is primarily due to an adjustment of $3.4 billion resulting from an increase in unrealized gains on investment securities that would result in a premium deficiency should those gains be realized and a $1.0 billion adjustment arising from the table below are the reserve balances byannual premium deficiency testing completed in third quarter 2019, as discussed further below.
In addition to NALH, Electric Insurance Company (EIC) is a property and casualty insurance product.company primarily providing insurance to GE and its employees with net claim reserves of $0.3 billion at December 31, 2019.
|
| | | | | | | | | | | | | | | |
| December 31, 2018 (In millions) | Long-term care insurance contracts | Structured settlement annuities & life insurance contracts | Other contracts | Other adjustments | Total |
| | | | | | |
| Future policy benefit reserves | $ | 16.0 |
| $ | 9.5 |
| $ | 0.2 |
| $ | 2.2 |
| $ | 27.9 |
|
| Claim reserves(a) | 3.9 |
| 0.2 |
| 1.2 |
| — |
| 5.3 |
|
| Investment contracts(b) | — |
| 1.2 |
| 1.1 |
| — |
| 2.4 |
|
| Unearned premiums and other | — |
| 0.2 |
| 0.1 |
| — |
| 0.3 |
|
| | 20.0 |
| 11.2 |
| 2.6 |
| 2.2 |
| 36.0 |
|
| Eliminations | — |
| — |
| (0.4 | ) | — |
| (0.4 | ) |
| Total | $ | 20.0 |
| $ | 11.2 |
| $ | 2.2 |
| $ | 2.2 |
| $ | 35.6 |
|
| Percent of total | 56 | % | 31 | % | 6 | % | 6 | % | 100 | % |
GE20182019 FORM 10-K 61 37
|
| | | | | | | | | | | | | | | |
| December 31, 2017 (In millions) | Long-term care insurance contracts | Structured settlement annuities & life insurance contracts | Other contracts | Other adjustments | Total |
| | | | | | |
| Future policy benefit reserves | $ | 16.5 |
| $ | 9.3 |
| $ | 0.2 |
| $ | 4.6 |
| $ | 30.6 |
|
| Claim reserves(a) | 3.6 |
| 0.3 |
| 1.2 |
| — |
| 5.1 |
|
| Investment contracts(b) | — |
| 1.3 |
| 1.2 |
| — |
| 2.6 |
|
| Unearned premiums and other | — |
| 0.2 |
| 0.1 |
| — |
| 0.4 |
|
| | 20.2 |
| 11.1 |
| 2.8 |
| 4.6 |
| 38.6 |
|
| Eliminations | — |
| — |
| (0.5 | ) | — |
| (0.5 | ) |
| Total | $ | 20.2 |
| $ | 11.1 |
| $ | 2.3 |
| $ | 4.6 |
| $ | 38.1 |
|
| Percent of total | 53 | % | 29 | % | 6 | % | 12 | % | 100 | % |
| |
(a) | Other contracts included claim reserves of $0.3 billion and $0.4 billion related to short-duration contracts at EIC, net of eliminations, at December 31, 2018 and December 31, 2017, respectively. |
| |
(b) | Investment contracts are contracts without significant mortality or morbidity risks. |
We regularly monitor emerging experience in our run-off insurance operations and industry developments to identify trends that may help us refine our reserve assumptions and evaluate opportunities to reduce our insurance risk profile and improve the results of our run-off insurance operations. These opportunities may include the pursuit of future premium rate increases and benefit reductions on long-term care insurance contracts with our ceding companies; recapture and reinsurance transactions to reduce risk where economically justified; investment strategies to improve asset and liability matching and enhance investment portfolio yields; and managing our expense levels; and improving our financial and actuarial analytical capabilities.levels.
KEY PORTFOLIO CHARACTERISTICSKey Portfolio Characteristics
Long-term care insurance contracts
contracts. The long-term care insurance contracts we reinsure provide coverage at varying levels of benefits to policyholders and may include attributes that could result in claimants being on claim for longer periods or at higher daily claim costs, or alternatively limiting the premium paying period.period, compared to contracts with a lower level of benefits. For example, policyholders with a lifetime benefit period could receive coverage up to the specified daily maximum as long as the policyholder is claim eligible and receives care for covered services; inflation protection options increase the daily maximums to protect the policyholder from the rising cost of care with some options providing automatic annual increases of 3% to 5% or policyholder elected inflation-indexed increases for increased premium; joint life policies provide coverage for two lives which permit either life under a single contract to receive benefits at the same time or separately; and premium payment options may limit the period over which the policyholder pays premiums while still receiving coverage after premium payments cease, which may limit the impact of our benefit from future premium rate increases.
The ERAC long-term care insurance portfolio comprises aboutmore than two-thirds of our total long-term care insurance reserves and is assumed from approximately 30 ceding companies through various types of reinsurance and retrocession contracts having complex terms and conditions. Compared to the overall long-term care insurance block, it has a lower average attained age with a larger number of policies (and covered lives, as over one-third of the policies are joint life policies), with lifetime benefit periods and/or with inflation protection options which may result in a higher potential for future claims.
The UFLIC long-term care insurance block comprises the remainder of our total long-term care insurance reserves and is more mature with policies that are more uniform, as it is assumed from a single ceding company, Genworth, and has fewer policies with lifetime benefit periods, no joint life policies and slightly more policies with inflation protection options.
Long-term care insurance policies allow the issuing insurance entity to increase premiums, or alternatively allow the policyholder the option to decrease benefits, with approval by state regulators, should actual experience emerge significantly worse than what was projected when such policies were initially underwritten. As a reinsurer, we are unable to directly or unilaterally pursue long-term care insurance premium rate increases. However, we engage actively with our ceding company clients in pursuing allowed long-term care insurance premium rate increases. The amount of times that rate increases have occurred varies by ceding company.
As further described within the Premium Deficiency Testing section below, we reconstructed our future claim cost projections in 2017 utilizing trends observed in our emerging experience for older claimant ages and later duration policies. Also described within that section are key assumption changes in 2018.2019.
Presented in the table below are GAAP and statutory reserve balances and key attributes of our long-term care insurance portfolio.
| | | December 31, 2018 (Dollars in billions, except where noted) | ERAC | UFLIC | Total | |
December 31, 2019 (Dollars in billions, except where noted) | | ERAC | UFLIC | Total |
| | | |
| Gross GAAP future policy benefit reserves and claim reserves | $ | 14.1 |
| $ | 5.9 |
| $ | 19.9 |
| $ | 15.2 |
| $ | 5.8 |
| $ | 21.0 |
|
| Gross statutory future policy benefit reserves and claim reserves(a) | 23.2 |
| 7.2 |
| 30.4 |
| 23.7 |
| 7.1 |
| 30.8 |
|
| Number of policies in force | 202,000 |
| 72,000 |
| 274,000 |
| 196,000 |
| 67,000 |
| 263,000 |
|
| Number of covered lives in force | 270,000 |
| 72,000 |
| 342,000 |
| 261,000 |
| 67,000 |
| 328,000 |
|
| Average policyholder attained age | 75 |
| 82 |
| 77 |
| 75 |
| 83 |
| 77 |
|
| Gross GAAP future policy benefit reserve per policy (in actual dollars) | $ | 60,000 |
| $ | 56,000 |
| $ | 59,000 |
| $ | 66,500 |
| $ | 56,000 |
| $ | 64,000 |
|
| Gross GAAP future policy benefit reserve per covered life (in actual dollars) | 45,000 |
| 56,000 |
| 47,000 |
| 50,000 |
| 56,000 |
| 51,000 |
|
| Gross statutory future policy benefit reserve per policy (in actual dollars)(a) | 105,000 |
| 72,000 |
| 96,000 |
| 109,000 |
| 74,000 |
| 100,000 |
|
| Gross statutory future policy benefit reserve per covered life (in actual dollars)(a) | 79,000 |
| 72,000 |
| 77,000 |
| 81,000 |
| 74,000 |
| 80,000 |
|
| Percentage of policies with: | | |
| Lifetime benefit period | 70 | % | 35 | % | 60 | % | 70 | % | 35 | % | 61 | % |
| Inflation protection option | 81 | % | 91 | % | 84 | % | 81 | % | 91 | % | 84 | % |
| Joint lives | 34 | % | — | % | 25 | % | 34 | % | — | % | 25 | % |
| Percentage of policies that are premium paying | 74 | % | 83 | % | 76 | % | 73 | % | 82 | % | 75 | % |
| Policies on claim | 10,000 |
| 9,200 |
| 19,200 |
| 10,700 |
| 9,300 |
| 20,000 |
|
| |
| (a) | Statutory balances reflect recognition of the estimated remaining statutory increase in reserves of approximately $9$7 billion through 2023 under the permitted accounting practice discussed further below and in Note 12 to our consolidated financial statements. |
Structured settlement annuities and life insurance contracts
contracts.We reinsure approximately 33,00031,000 structured settlement annuities with an average attained age of 50.52. These structured settlement annuities were primarily underwritten on impaired lives (i.e., shorter-than-average life expectancies) at origination and have projected payments extending decades into the future. Our primary risks associated with these contracts include mortality (i.e., life expectancy or longevity), mortality improvement (i.e., assumed rate that mortality is expected to reduce over time), which may extend the duration of payments on life contingent contracts beyond our estimates, and reinvestment risk (i.e., a low interest rate environment may reduce our ability to achieve our targeted investment margins). Unlike long-term care insurance, structured settlement annuities offer no ability to require additional premiums or reduce benefits.
Our life reinsurance business typically covers the mortality risk associated with various types of life insurance policies that we reinsure from approximately 150 ceding company relationships where we pay a benefit based on the death of a covered life. Across our U.S. and Canadian life insurance blocks, we reinsure approximately $115$100 billion of net amount at risk (i.e., difference between the death benefit and any accrued cash value) from approximately 2.72.2 million policies with an average attained age of 57.58. In 2018,2019, our incurred claims were approximately $0.7$0.5 billion with an average individual claim of approximately $55,000.$48,000. The largest product types covered are 20-year level term policies which represent approximately 45%40% of the net amount at risk and are anticipated to lapse (i.e., the length of time a policy will remain in force) over the next 32 to 54 years as the policies reach the end of their 20-year level premium period.
Investment portfolio and other adjustments
. Our insurance liabilities and annuity benefits are primarily supported by investment securities of $32.9$38.0 billion and $32.4$32.9 billion and commercial mortgage loans of $1.7$1.9 billion and $1.5$1.7 billion at December 31, 2019 and 2018, and 2017, respectively. Additionally, we expect to purchase approximately $9 billion of new assets through 2024 in conjunction with expected capital contributions from GE Capital to our insurance subsidiaries, of which $2.0 billion was received in the first quarter of 2020. Our investment securities are classified as available-for-sale and comprise mainly investment-grade debt securities. The portfolio includes $2.2$5.7 billion of net unrealized gains that are recorded within Other comprehensive income, net of applicable taxes and other adjustments.
In calculating our future policy benefit reserves, we are required to consider the impact of net unrealized gains and losses on our available-for-sale investment securities supporting our insurance contracts as if those unrealized amounts were realized. To the extent that the realization of gains would result in a premium deficiency, a shadowan adjustment is recorded to increase future policy benefit reserves with an after-tax offset to Other comprehensive income. At December 31, 2018,2019, the entire $2.2$5.7 billion balance of net unrealized gains on our investment securities required a related increase to future policy benefit reserves. This adjustment decreasedincreased from $4.6 billion in 2017 to $2.2 billion in 2018 to $5.7 billion in 2019 primarily from lowerhigher unrealized gains within the investment security portfolio supporting our insurance contracts in response to increaseddecreased market yields. See Note 3 to our consolidated financial statements for further information about our investment securities.
We manage the investments in our run-off insurance operations under strict investment guidelines, including limitations on asset class concentration, single issuer exposures, asset-liability duration variances, and other factors to meet credit quality, yield, liquidity and diversification requirements associated with servicing our insurance liabilities under reasonable circumstances. Investing in these assets exposes us to both credit risk (i.e., debtor’s ability to make timely payments of principal and interest) and interest rate risk (i.e., market price, cash flow variability, and reinvestment risk due to changes in market interest rates). We regularly review investment securities for impairment using both quantitative and qualitative criteria.
Additionally, our run-off insurance operations have approximately $0.7 billion of assets held by states or other regulatory bodies in statutorily required deposit accounts, and approximately $26.3$28.6 billion of assets held in trust accounts associated with reinsurance contracts in place between either ERAC or UFLIC as the reinsuring entity and a number of ceding insurers. Assets in these reinsurance trusts are held by an independent trustee for the benefit of the ceding insurer, and are subject to various investment guidelines as set forth in the respective reinsurance contacts.
We have studied and analyzed various options, along with several external investment advisors, to improve our investment yield subject to maintaining our ability to satisfy insurance liabilities when due, as well as considering our risk-based capital requirements, regulatory constraints, and tolerance for surplus volatility. With the expected capital contributions of $11 billion from GE Capital through 2024, of which approximately $1.9 billion was received in the first quarter of 2019, we intend to add new asset classes to further diversify our portfolio, including private equity, senior secured loans and infrastructure debt, among others. We also hired a new Chief Investment Officer in 2018 to oversee our entire investment process and will be adding further investment managers.
CRITICAL ACCOUNTING ESTIMATES
Critical Accounting Estimates. Our insurance reserves include the following key accounting estimates and assumptions described below.
Future policy benefit reserves
. Future policy benefit reserves represent the present value of future policy benefits less the present value of future gross premiums based on actuarial assumptions including, but not limited to, morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates); morbidity improvement (i.e., assumed rate of improvement in morbidity in the future); mortality (i.e., life expectancy or longevity); mortality improvement (i.e., assumed rate that mortality is expected to reduce over time); policyholder persistency or lapses (i.e., the length of time a policy will remain in force); anticipated premium increases or benefit reductions associated with future in-force rate actions, including actions that are: (a) approved and not yet implemented, (b) filed but not yet approved, and (c) estimated on future filings through 2028, on long-term care insurance policies; and interest rates. Assumptions are locked-in throughout the remaining life of a contract unless a premium deficiency develops.
Claim reserves
. Claim reserves are established when a claim is incurred or is estimated to have been incurred and represents our best estimate of the present value of the ultimate obligations for future claim payments and claim adjustment expenses. Key inputs include actual known facts about the claim, such as the benefits available and cause of disability of the claimant, as well as assumptions derived from our actual historical experience and expected future changes in experience factors. Claim reserves are evaluated periodically for potential changes in loss estimates with the support of qualified actuaries, and any changes are recorded in earnings in the period in which they are determined.
Reinsurance recoverables
recoverables. We cede insurance risk to third-party reinsurers for a portion of our insurance contracts, primarily on long-term care insurance policies. Aspolicies, and record receivables as we are not relieved from our primary obligation to policyholders or cedents, we recordcedents. These receivables that are estimated in a manner consistent with the future policy benefit reserves and claim reserves. Reserves ceded to reinsurers, net of allowance, were $2.3$2.4 billion and $2.5$2.3 billion at December 31, 20182019 and 2017,December 31, 2018, respectively, and are included in the caption “Other GE Capital receivables” on our consolidated Statement of Financial Position.
PREMIUM DEFICIENCY TESTING
Premium Deficiency Testing. We annually perform premium deficiency testing in the third quarter in the aggregate across our run-off insurance portfolio. The premium deficiency testing assesses the adequacy of future policy benefit reserves, net of unamortized capitalized acquisition costs, using current assumptions without provision for adverse deviation. A comprehensive review of premium deficiency assumptions is a complex process and depends on a number of factors, many of which are interdependent and require evaluation individually and in the aggregate across all insurance products. The vast majority of our run-off insurance operations consists of reinsurance from multiple ceding insurance entities with underlyingpursuant to treaties having complex terms and conditions. Premium deficiency testing relies on claim and policy information provided by these ceding entities and considers the reinsurance treaties and underlying treaties.policies. In order to utilize that information for purposes of completing experience studies covering all key assumptions, we perform detailed procedures to conform and validate the data received from the ceding entities. Our long-term care insurance business includes coverage where credible claim experience for higher attained ages is still emerging, and to the extent that future experience deviates from current expectations, new projections of claim costs extending over the expected life of the policies may be required. Significant uncertainties exist in making current projections for these long-term care insurance contracts, which requires that include consideration ofwe consider a wide range of possible outcomes.
The primary assumptions used in the premium deficiency tests include:
Morbidity. Morbidity assumptions used in estimating future policy benefit reserves are based on estimates of expected incidences of disability among policyholders and claimthe costs associated with these policyholders asserting claims under their contracts, and include consideration ofthese estimates account for any expected future morbidity and mortality improvement. For long-term care exposures, estimating expected future costs includes assessments of incidence (probability of having a claim), utilization (amount of available benefits expected to be incurred) and continuance (how long the claim will last). Prior to 2017, premium deficiency assumptions considered the risk of anti-selection by including issue age adjustments to morbidity based on an actuarial assumption that long-term care policies issued to younger individuals would exhibit lower expected incidences and claim costs than those issued to older policyholders. Recent claim experience and the development of reconstructed claim cost curves indicated minimal issue age differences impactinghad minimal impact on claim cost projections, and, accordingly, beginning in 2017, issue age adjustments were no longer assumedeliminated in developing morbidity assumptions. Higher morbidity increases, while higherlower morbidity improvement decreases, the present value of expected future benefit payments.
Rate of Change in Morbidity. Our annual premium deficiency testing incorporates our best estimates of projected future changes in the morbidity rates reflected in our base cost curves. These estimates draw upon a number of inputs, some of which are subjective, and all of which are interpreted and applied in the exercise of professional actuarial judgment in the context of the characteristics specific to our portfolios. This exercise of judgment considers factors such as the work performed by internal and external independent actuarial experts engaged to advise us in our annual testing, the observed actual experience in our portfolios measured against our base projections, industry developments, and other trends, including advances in the state of medical care and health-care technology development. With respect to industry developments, we take into account that there are differences between and among industry peers in portfolio characteristics (such as demographic features of the insured populations), the aggregate effect of improvement or deterioration as applied to base claim cost projections, the extent to which such base cost projections reflect the most current experience, and the accepted diversity of practice in actuarial professional judgment. We assess the potential for any change in morbidity with reference to our existing base claim cost projections, reconstructed in 2017. Projected improvement or deterioration in morbidity can have a material impact on our future claim cost projections, both on a stand-alone basis and also by virtue of influencing other variables such as discount rate and premium rate increases.
Mortality. Mortality assumptions used in estimating future policy benefit reserves are based on published mortality tables as adjusted for the results of our experience studies and estimates of expected future mortality improvement. For life insurance products, higher mortality increases the present value of expected future benefit payments, while for annuity and long-term care insurance contracts, higher mortality decreases the present value of expected future benefit payments.
Discount rate. Interest rate assumptions used in estimating the present value of future policy benefit reserves are based on expected investment yields, net of related investment expenses and expected defaults. In estimating future yields, we consider the actual yields on our current investment securities held by our run-off insurance operations and the future rates at which we expect to reinvest any proceeds from investment security maturities, net of other operating cash flows, and the projected future capital contributions into our run-off insurance operations. HigherLower future yields result in a higherlower discount rate and a lowerhigher present value of future policy benefit reserves.
Future long-term care premium rate increases. As a reinsurer, we rely upon the primary insurers that underwriteissued the underlying policies to file proposed premium rate increases toon those policies with the relevant state insurance regulatorregulators, as we have no ability to seek or to institute such premium rate increases on the policyholders themselves.increases. We consider recent experience of rate increase filings made by our ceding companies along with state insurance regulatory processes and precedents in establishing our current expectations. Higher future premium rate increases lower the present value of future policy benefit reserves.
DuringTerminations. Terminations refers to the rate at which the underlying policy is canceled due to either mortality, lapse (non-payment of premiums by a policyholder), or, in the case of long-term care insurance, benefit exhaustion. Termination rate assumptions used in estimating the present value of future policy benefit reserves are based on the results of our experience studies and reflect actuarial judgment. Lower termination rates increase, while higher termination rates decrease, the present value of expected future benefit payments.
In 2017, in response tobased on elevated claim experience for a portion of our long-term care insurance contracts, that was most pronounced for policyholders with higher attained ages, we initiated a comprehensive review of all premium deficiency testing assumptions across all insurance products, which included reconstructingresulting in a reconstruction of our future claim cost projections for long-term care contracts utilizing trends observedinsurance products. Our internal claim experience has been consistent with those reconstructed projections, although the extent of actual experience since 2017 to date is limited in the context of a long-tailed, multi-decade portfolio.
2019 Premium Deficiency Testing. We annually perform premium deficiency testing in the aggregate across our emerging experience for older claimant ages and later duration policies. Certainrun-off insurance portfolio. We performed this year’s testing in the third quarter of 2019, consistent with our long-term care policyholders only recently startedhistorical practice prior to reach the prime claim paying period and2017 when we reconstructed our new claim cost assumptions considered the emerging credibility of this claim data. In addition to the adverse impact from the revised future claim cost projections over a long-term horizon,curves. These procedures included updating experience studies since our premium deficiency assumptions considered mortality, length of time a policy will remainlast test completed in force and both near-term and longer-term investment return expectations. Future investment yields estimated in 2017 were lower than in previous premium deficiency tests, primarily due to the effect of near-term yields on approximately $14.5 billion of future expected capital contributions, as discussed below. The capital contributions will be invested at the current market yields which had the impact of lowering the average long-term investment yield used to calculate the discount rate and, as such, further adversely impacted the estimated premium deficiency. Our discount rate assumption for purposes of performing the 2017 premium deficiency assessments resulted in a weighted-average rate of approximately 5.67% compared to approximately 6.17% in 2016.
The 2017 test indicated a premium deficiency requiring the unlocking of reserves and resetting of actuarial assumptions to current assumptions. This resulted in a $9.5 billion pre-tax charge to earnings in 2017, which included a $0.4 billion impairment of deferred acquisition costs, a $0.2 billion impairment of present value of future profits, and an $8.9 billion increase in future policy benefit reserves. During 2018, we integrated these new assumptions into our systems and processes embedded in our framework of internal controls over financial reporting.
In connection with our premium deficiency test in 2017, additions to reinsurance recoverables of $2.4 billion were largely offset by an allowance for losses of $2.2 billion based upon our assessment of collectability that would otherwise have reduced the earnings impact of the premium deficiency. The vast majority of our remaining net reinsurance recoverables are secured by assets held in a trust for which we are the beneficiary.
During the fourth quarter of 2018, we completed our annual premium deficiency test. Thisindependent actuarial analysis and review included updated experience studies based on up to four quarters of additional data since the 2017 test and considered updated external input based on industry trends and adjustments to assumptions as a result.benchmarks. As we experienced a premium deficiency in 2017,2018, our 20182019 premium deficiency testtesting started with a zero margin and, accordingly, any net adverse developmentsdevelopment would result in a future charge to earnings. Based on this analysis, usingUsing our most recent future policy benefit reserve assumptions, including changes to our assumptions related to discount rate and future premium rate increases, we identified a premium deficiency which resultedresulting in a $0.1$1.0 billion pre-tax charge to earnings in 2018.the third quarter 2019. The increase to future policy benefit reserves resulting from our 2019 testing was primarily attributable to the following key assumption changes:
Increased discount rate assumptionssignificant decline in 2018 compared to our original estimate. Our revised reinvestment plan incorporates the remaining projected capital contribution of approximately $11 billion through 2024, ofmarket interest rates we observed this year, which approximately $1.9 billion was received in the first quarter of 2019, and introduction of strategic initiatives for the investment into new higher-yielding asset classes while maintaining an overall A-rated fixed income portfolio. These initiatives are the result of an extensive review in 2018 of our investment management opportunities including the engagement of external investment advisors. Our discount rate assumption for purposes of performing the premium deficiency assessmentshas resulted in a weighted-average rate of approximately 6.04%, compared to approximately 5.67% in 2017. The increasedlower discount rate favorably impacted our reserve margin by $1.9 billion;
Lower long-term care insurance morbidity improvement assumptions indicating less long-term improvement (1.25% per year) over shorter durations (between 12 and 20 years based on the average attained age of the underlying books of business) which adversely impacted our reserve margin by $1.2 billion;
Higher interest rates leading to$1.3 billion, and higher inflation which increased projected utilization on long-term care insurance policies which adversely impacted our reserve margin by $0.3 billion;
Lower policy terminations on long-term care insurance policies and revisions to assumptions of future mortality primarily for older attained ages, based on experience analysis of internal and industry data, on life insurance products which adversely impacted our reserve margin by $0.2 billion and $0.3 billion, respectively; and
Higher levels of projected long-term care premium rate increases due to larger rate filings by some ceding companies than previously planned, which favorably impacted our reserve margin by $0.2$0.3 billion.
Our 2018discount rate assumption for purposes of performing the premium deficiency test includes approximately $1.7 billionassessment resulted in a weighted average rate of anticipated5.74% compared to 6.04% in 2018. This decline in the discount rate from 2018 to 2019 reflected a lower reinvestment rate increasing to an expected long-term average investment yield over a longer period, lower prospective expected returns on higher yielding assets classes introduced with our 2018 strategic initiatives, and slightly lower actual yields on our investment security portfolio.
As noted above, our observed claim experience in the period since the 2017 reconstruction of our future long-term care claim cost projections has been consistent with those projections. Based on the application of professional actuarial judgment to the factors discussed above, we have made no substantial change to our assumptions concerning morbidity, morbidity improvement, mortality, mortality improvement, or terminations in 2019.
As with all assumptions underlying our premium increases or benefit reductions associated withdeficiency testing, we will continue to monitor these factors, which may result in future in-force rate actions, including actions that are: (a) approved and not implemented, (b) filed but not yet approved and (c) estimatedchanges in our assumptions. See Note 12 to the consolidated financial statements for further information on future filings through 2028.the results of our 2019 premium deficiency testing.
GAAP RESERVE SENSITIVITIES
Reserve Sensitivities.The results of our premium deficiency testing are sensitive to the assumptions described above. Certain future adverse changes in our assumptions could result in the unlocking of reserves, resetting of actuarial assumptions to current assumptions, an increase to future policy benefit reserves and a charge to earnings. Considering the results of the 20182019 premium deficiency test which reset our margin to zero, any future net adverse changes in our assumptions couldwill result in an increase to future policy benefit reserves. For example, adverse changes in key assumptions to our future policy benefits reserves, holding all other assumptions constant, would have the following effects as presented in the table below. Any favorable changes to these assumptions could result in additional margin in our premium deficiency test and higher income over the remaining duration of the portfolio, including higher investment income. The assumptions within our future policy benefit reserves are subject to significant uncertainties, including those inherent in the complex nature of our reinsurance treaties. Many of our assumptions are interdependent and require evaluation individually and in the aggregate across all insurance products. Small changes in the amounts used in the sensitivities or the use of different factors could result in materially different outcomes from those reflected below.
|
| | | | |
| 2017 assumption | 2018 assumption | Hypothetical change in 2018 assumption | Estimated increase to future policy benefit reserves
(In billions, pre-tax)
|
Long-term care insurance morbidity improvement(a) | 1.6% per year over 16 to 20 years | 1.25% per year over 12 to 20 years | 25 basis point reduction
No morbidity improvement
| $0.7
$3.7
|
Long-term care insurance morbidity | Based on company experience | Based on company experience | 5% increase in dollar amount of paid claims | $1.0 |
Long-term care insurance mortality improvement | 0.5% per year for 10 years with annual improvement graded to 0% over next 10 years | 0.5% per year for 10 years with annual improvement graded to 0% over next 10 years | 1.0% per year for 10 years with annual improvement graded to 0% over next 10 years | $0.4 |
Total terminations: | | | Reduce total terminations by 10% | $1.0 |
Long-term care insurance mortality | Based on company experience | Based on company experience | | |
Long-term care insurance lapse rate | Varies by block, attained age and benefit period; average 0.7 - 1.0% | Varies by block, attained age and benefit period; average 0.5 - 1.15% | | |
Long-term care insurance benefit exhaustion | Based on company experience | Based on company experience | | |
Long-term care insurance future premium rate increases | Varies by block based on filing experience | Varies by block based on filing experience | 25% adverse change in premium rate increase success rate | $0.4 |
Discount rate | Approximately 5.67% | Approximately 6.04% | 25 basis point reduction | $1.0 |
Structured settlement annuity mortality | Based on company experience | Based on company experience | 5% decrease in mortality | $0.1 |
Life insurance mortality | Based on company experience | Based on company experience | 5% increase in mortality | $0.3 |
| |
(a) | In both 2017 and 2018, these morbidity improvement assumptions are applied to the future claim cost curves that were reconstructed in 2017 and do not include any issue-age adjustments. |
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| | | | |
| | 2018 assumption | 2019 assumption | Hypothetical change in 2019 assumption | Estimated increase to future policy benefit reserves (In billions, pre-tax) |
| | | | | |
| Long-term care insurance morbidity improvement | 1.25% per year over 12 to 20 years | 1.25% per year over 12 to 20 years | 25 basis point reduction
No morbidity improvement | $0.7 $3.7 |
| Long-term care insurance morbidity | Based on company experience | Based on company experience | 5% increase in dollar amount of paid claims | $1.1 |
| Long-term care insurance mortality improvement | 0.5% per year for 10 years with annual improvement graded to 0% over next 10 years | 0.5% per year for 10 years with annual improvement graded to 0% over next 10 years | 1.0% per year for 10 years with annual improvement graded to 0% over next 10 years | $0.4 |
| Total terminations: | | | | |
| Long-term care insurance mortality | Based on company experience | Based on company experience | Any change in termination assumptions that reduce total terminations by 10% | $1.0 |
| Long-term care insurance lapse rate | Varies by block, attained age and benefit period; average 0.5 - 1.15% | Varies by block, attained age and benefit period; average 0.5 - 1.15% |
| Long-term care insurance benefit exhaustion | Based on company experience | Based on company experience |
| Long-term care insurance future premium rate increases | Varies by block based on filing experience | Varies by block based on filing experience | 25% adverse change in premium rate increase success rate | $0.5 |
| Discount rate: | | | | |
| Overall discount rate | 6.04% | 5.74% | 25 basis point reduction | $1.0 |
| Reinvestment rate | 4.35%; grading to a long-term average investment yield of 6.0% | 3.05%; grading to a long-term average investment yield of 5.9% | 25 basis point reduction; grading to long-term investment yield of 5.9% | Less than $0.1 |
| Structured settlement annuity mortality | Based on company experience | Based on company experience | 5% decrease in mortality | $0.1 |
| Life insurance mortality | Based on company experience | Based on company experience | 5% increase in mortality | $0.3 |
Statutory Considerations.Our run-off insurance subsidiaries are required to prepare statutory financial statements in accordance with statutory accounting practices. Statutory accounting practices, not GAAP, determine the required statutory capital levels of our insurance legal entities and, therefore, may affect the amount or timing of capital contributions from GE Capital to the insurance legal entities.
Statutory accounting practices are set forth by the National Association of Insurance Commissioners (NAIC) as well as state laws, regulation and general administrative rules and differ in certain respects from GAAP. Under statutory accounting practices, base formulaic reserve assumptions typically do not change unless approved by our primary regulator, KID. In addition to base reserves, statutory accounting practices require additional actuarial reserves (AAR) be established based on results of asset adequacy testing reflecting moderately adverse conditions (i.e., assumptions include a provision for adverse deviation (PAD) rather than current assumptions without a PAD as required for premium deficiency testing under GAAP). As a result, our statutory asset adequacy testing assumptions reflect less long-term care insurance morbidity improvement and for shorter durations, restrictions on future long-term care insurance premium rate increases, no life insurance mortality improvement and a lower discount rate. As a result, several of the sensitivities described in the table above would be less impactful on our statutory reserves.
The adverse impact on our statutory AAR arising from our revised assumptions in 2017, including the collectability of reinsurance recoverables, is expected to require GE Capital to contribute approximately $14.5 billion additional capital, to its run-off insurance operations in 2018-2024. For statutory accounting purposes, KID approved our request for a permitted accounting practice to recognize the 2017 AAR increase over a seven-year period. GE Capital provided capital contributions to its insurance subsidiaries of approximately $3.5$2.0 billion, $1.9 billion and $1.9$3.5 billion in the first quarter of 20182020, 2019 and 2019,2018, respectively. GE Capital expects to provide further capital contributions of approximately $9$7 billion through 2024, subject to ongoing monitoring by KID. GE is a party to capital maintenance agreements with ERAC and UFLIC whereby GE will maintain their minimum statutory capital levels at 300% of their year-end Authorized Control Level risk-based capital requirements as defined from time to time by the NAIC.
If our future policy benefit reserves established under GAAP are realized over the estimated remaining life of our run-off insurance obligations, we would expect the $14.5 billion of capital contributed to the run-off insurance operations over the 2018 to 2024 period to be considered statutory capital surplus at the end of the period with no additional charge to GAAP earnings. However, should the more conservative statutory assumptions be realized, we would be required to record the difference between GAAP assumptions and statutory assumptions as a charge to GAAP earnings in the future periods.
See Other Items - New Accounting Standards within this MD&A and Notes 1 and 12 to the consolidated financial statements for further information.
NEW ACCOUNTING STANDARDS
STANDARDS.In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The ASU isIn October 2019, the FASB affirmed its decision to defer the effective fordate to periods beginning after December 15, 2020,31, 2021, with an election to adopt early. We are evaluating the effect of the standard on our consolidated financial statements and anticipate that its adoption will significantly change the accounting for measurements of our long-duration insurance liabilities. The ASU requires cash flow assumptions used in the measurement of various insurance liabilities to be reviewed at least annually and updated if actual experience or other evidence indicates previous assumptions need to be revised with any required changes recorded in earnings. Under the current accounting guidance, the discount rate is based on expected investment yields, while under the ASU the discount rate will be equivalent to the upper-medium grade (i.e.(e.g., single A) fixed-income instrument yield reflecting the duration characteristics of the liability and is required to be updated in each reporting period with changes recorded in accumulated other comprehensive income. In measuring the insurance liabilities under the new standard, contracts shall not be grouped together from different issue years. These changes result in the elimination of premium deficiency testing and shadow adjustments. While we continue to evaluate the effect of the standard on our ongoing financial reporting, we anticipate that the adoption of the ASU will materially affect our financial statements. As the ASU is only applicable to the measurements of our long-duration insurance liabilities under GAAP, it will not affect the accounting for our insurance reserves or the levels of capital and surplus under statutory accounting practices.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU is effective for periods beginning after December 15, 2018, with an election to adopt early. The ASU requires certain changes to the presentation of hedge accounting in the financial statements and some new or modified disclosures. The ASU also simplifies the application of hedge accounting and expands the strategies that qualify for hedge accounting. The ASU will not have a material effect to our financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU is effective for periods beginning after December 15, 2019, with an election to adopt early. The ASU requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value. It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. As the ASU is to be applied prospectively, it will not impact our previously reported financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We plan to elect the new transition method approved by the FASB on July 30, 2018, which allows companies to apply the provisions of the new leasing standard as of January 1, 2019, without adjusting the comparative periods presented by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. As we finalize our system solutions and adoption processes, we estimate the adoption of the ASU will result in the recognition of a right-of-use asset and related lease liability in the range of approximately $4 billion to $5 billion with an estimated immaterial effect to our retained earnings. Cash received by GE Capital on financing leases is classified as Cash from investing activities for the three year period ended December 31, 2018. After adoption, such cash receipts will be classified as Cash from operating activities.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also applyapplies to receivables arising from revenue transactions such as contract assets and accounts receivables, as well as reinsurance recoverables at GE Capital's run-off insurance operations and is effective for fiscal years beginning after December 15, 2019. We continueThe standard will be applied prospectively with an adjustment to evaluateretained earnings. As we finalize our process, we expect the adoption of the ASU to have an effect of the standard on our consolidated financial statements.
MINE SAFETY DISCLOSURES
Our barite mining operations, in support of our drilling fluids products and services business, are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this annual report.
IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT OF 2012
The Company is making the following disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934. Under Section 13(r) of the Securities Exchange Act of 1934, enacted in 2012, GE is required to disclose in its periodic reports if it or any of its affiliates knowingly engaged in business activities relating to Iran, even if those activities are conducted in accordance with authorizations subsequently issued by the U.S. Government. Reportable activities include investments that significantly enhance Iran’s ability to develop petroleum resources valued at $20 million or more in the aggregate during a twelve-month period. Reporting is also required for transactions related to Iran’s domestic production of refined petroleum products or Iran’s ability to import refined petroleum products valued at $5 million or more in the aggregate during a twelve-month period.
In January 2016, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License H authorizing U.S.-owned or controlled foreign entities to engage in transactions with Iran if these entities meet the requirements of the general license. On May 8, 2018, President Trump announced that the United States will cease participation in the Joint Comprehensive Plan of Action (JCPOA) and begin re-imposing the U.S. nuclear-related sanctions. On June 27, 2018, OFAC revoked General License H and added Section 560.537 to the Iranian Transactions and Sanctions Regulations (ITSR), which authorized all transactions and activities that are ordinarily incident and necessary to the winding down of activities previously approved under General License H through November 4, 2018. Prior to May 8, 2018, certain non-U.S. affiliates of GE conducted limited activities as described below in accordance with General License H. As of November 5, 2018, non-U.S. affiliates of GE have concluded all activity previously conducted under General License H in Iran. These activities were conducted in accordance with all applicable laws and regulations.
During the year ending December 31, 2018, but prior to the expiration of the wind down period for General License H, non-U.S. affiliates of GE conducted the following reportable activities:
A non-U.S. affiliate of GE’s Oil & Gas business received 5 purchase orders and attributed €31.4 million ($36.0 million) in gross revenues and €8.6 million ($9.9 million) in net profits related to the sale of valves and parts for industrial machinery and equipment used in gas plants, petrochemical plants and gas production projects in Iran.
A second non-U.S. affiliate of GE’s Oil & Gas business received 12 purchase orders and attributed €0.1 million ($0.1 million) in gross revenues and less than €0.1 million ($0.1 million) in net profits to the sale of valves and other spare parts for use in the petrochemical industry in Iran.
A third non-U.S. affiliate of GE’s Oil & Gas business attributed €0.3 million ($0.3 million) in gross revenues and €0.1 million ($0.1 million) in net profits to transactions involving the sale of films used in the inspection of pipelines in Iran.
A non-U.S. affiliate of GE’s Power business received one purchase order and attributed €0.1 million ($0.1 million) in gross revenues and €0.1 million ($0.1 million) in net profits related to the sale of compressor parts to a petrochemical company in Iran.
A second non-U.S. affiliate of GE’s Power business attributed €0.4 million ($0.5 million) in gross revenues and €0.2 million ($0.2 million) in net profits to a services contract with an Iranian petrochemical plant.
A third non-U.S. affiliate of GE's Power business received three purchase orders and attributed €0.6 million ($0.6 million) in gross revenues and €0.2 million ($0.2 million) in net profits for the sale of protection relays to oil refineries in Iran.
A fourth non-U.S. affiliate of GE’s Power business received two purchase orders for the sale of spare parts to petrochemical companies in Iran but attributed no gross revenues to this activity. The non-U.S. affiliate recognized less than €0.1 million ($0.1 million) in losses due to costs incurred.
These non-U.S. affiliates do not intend to continue the activities described above. The Company has ended all of these activities in full compliance with U.S. sanctions and at this time does not intend to seek specific U.S. Government authorization to collect revenues associated with previously reported projects.
For additional information on business activities related to Iran, please refer to the Other Items section within MD&A in our quarterly report on Form 10-Q for the quarter ended September 30, 2018.
ENVIRONMENTAL MATTERS
Our operations, like operations of other companies engaged in similar businesses, involve the use, disposal and cleanup of substances regulated under environmental protection laws. We are involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws, including the Housatonic River matter discussed in Legal Proceedings. Such statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site. Expenditures for site remediation actions amounted to approximately $0.1 billion, $0.2 billion and $0.2 billion for the years ended December 31, 2018, 2017, and 2016, respectively. We presently expect that such remediation actions will require average annual expenditures of about $0.2 billion in 2019 and 2020, respectively.to retained earnings.
OTHER
OTHER.We own, or hold licenses to use, numerous patents. New patents are continuously being obtained through our research and development activities as existing patents expire. Patented inventions are used both within the Company and are licensed to others.
GE is a trademark and service mark of General Electric Company.
Because of the diversity of our products and services, as well as the wide geographic dispersion of our production facilities, we use numerous sources for the wide variety of raw materials needed for our operations. We have not been adversely affected by our inability to obtain raw materials.
NON-GAAP FINANCIAL MEASURES. We believe that presenting non-GAAP financial measures provides management and servicesinvestors useful measures to agenciesevaluate performance and trends of the U.S. Government as a percentage of GE revenues follow.total company and its businesses. This includes adjustments in recent periods to GAAP financial measures to increase period-to-period comparability following actions to strengthen our overall financial position and how we manage our business.
|
| | | | | | |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Total sales to U.S. Government agencies | 4 | % | 4 | % | 3 | % |
| Aviation segment defense-related sales | 3 | % | 3 | % | 3 | % |
|
| | |
MD&A | NON-GAAP FINANCIAL MEASURES | |
FINANCIAL MEASURES THAT SUPPLEMENT U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES MEASURES (NON-GAAP FINANCIAL MEASURES)
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial data but not presented in our financial statements prepared in accordance with GAAP. Certain of these data are considered “non-GAAP financial measures”addition, management recognizes that certain non-GAAP terms may be interpreted differently by other companies under SEC rules. Specifically, we have referred, indifferent circumstances. In various sections of this report to:
we have made reference to the following non-GAAP financial measures in describing our (1) revenues, specifically GE Industrial segment organic revenues – revenues excluding the effects of acquisitions, dispositionsrevenues; and translational foreign currency exchange.
GE Industrial structural costs – organic revenues, (2) profit, specifically GE Industrial structural costs include segment structural costs excluding the impact of restructuring and other charges, business acquisitions and dispositions, foreign exchange, plus total Corporate operating profit excluding restructuring and other charges and gains. The Baker Hughes acquisition is represented on a pro-forma basis, which means we calculated our structural costs by including legacy Baker Hughes results for the first six months of 2017.
Power structural costs - Power structural costs include segment structural costs excluding the impact of restructuring and other charges, business acquisitions and dispositions and foreign exchange.
Adjusted earnings (loss) – continuing earnings excluding the impact of non-operating benefit costs, gains (losses) andimpairments for disposed or held for sale businesses, restructuring and other, goodwill impairments and GE Capital EFS impairments and insurance charge in 2017 after-tax, excluding the effects of U.S. tax reform enactment adjustment.
Adjusted earnings (loss) per share (EPS) – when we refer to adjusted earnings per share, it is the diluted per-share amount of “adjusted earnings.”
organic profit; Adjusted GE Industrial profit and profit margin (excluding certain items) – GE Industrial profit margin excluding interest and other financial charges, non-operating benefit costs, gains (losses), restructuring and other charges and goodwill impairment plus noncontrolling interests.
margin; Adjusted GE Industrial organic profit – and profit excluding the effects of acquisitions, business dispositionsmargin; Adjusted earnings (loss); and translational foreign currency exchange.
Adjusted Oil & Gas segment profit – Reported Oil & Gas segment profit less GE'searnings (loss) per share of restructuring & other charges.
(EPS), (3) taxes, specifically GE effective tax rates, excluding GE Capital earnings –earnings; and reconciliation of U.S. federal statutory income tax rate to GE provision for income taxes divided by GE pre-tax earnings from continuing operations,effective tax rate excluding GE Capital earnings, (loss) from continuing operations.
GE Industrial Free Cash Flows (FCF) and Adjusted GE Industrial FCF –(4) cash flows, specifically GE Industrial free cash flows is GE CFOA adjusted for gross GE additions to property, plant(FCF), and equipment and internal-use software, which are included in cash flows from investing activities, and excluding dividends from GE Capital, GE Pension Plan funding, and taxes related to business sales. Adjusted GE Industrial free cash flows (Non-GAAP) is GE Industrial free cash flows adjusted for Oil & Gas CFOA, gross Oil & Gas additions to property, plant and equipment and internal-use software, and including the BHGE Class B shareholder dividend.
(5) debt balances, specifically GE Industrial net debt – GE Industrial net debt reflects the total of gross debt excluding BHGE, after-tax net pension and retiree benefit plan liabilities, adjustments for operating lease obligations excluding BHGE, and adjustments for 50% of preferred stock, less 75% of GE’s cash balance excluding BHGE.
debt. The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures follow.
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| | |
| MD&A | NON-GAAP FINANCIAL MEASURES | |
|
| | | | | | | | |
GE INDUSTRIAL SEGMENT ORGANIC REVENUES (NON-GAAP) (In millions) | 2018 |
| 2017 |
| V% |
|
| | | | |
| GE Industrial segment revenues (GAAP) | $ | 115,664 |
| $ | 113,168 |
| 2 | % |
| Adjustments: | | | |
| Less: acquisitions | 5,589 |
| 92 |
| |
| Less: business dispositions (other than dispositions acquired for investment) | 138 |
| 3,857 |
| |
| Less: currency exchange rate(a) | 597 |
| — |
| |
| GE Industrial segment organic revenues (Non-GAAP) | $ | 109,340 |
| $ | 109,220 |
| — | % |
| | | | |
| | 2017 |
| 2016 |
| V% |
|
| | | | |
| GE Industrial segment revenues (GAAP) | $ | 113,168 |
| $ | 112,324 |
| 1 | % |
| Adjustments: | | | |
| Less: acquisitions | 6,061 |
| 37 |
| |
| Less: business dispositions (other than dispositions acquired for investment) | 9 |
| 3,478 |
| |
| Less: currency exchange rate(a) | 557 |
| — |
| |
| GE Industrial segment organic revenues (Non-GAAP) | $ | 106,540 |
| $ | 108,808 |
| (2 | )% |
| | | | |
| (a) Translational foreign exchange | | | |
| Organic revenues* measure revenues excluding the effects of acquisitions, business dispositions and currency exchange rates. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and currency exchange, which activities are subject to volatility and can obscure underlying trends. We also believe that presenting organic revenues* separately for our industrial businesses provides management and investors with useful information about the trends of our industrial businesses and enables a more direct comparison to other non-financial businesses and companies. Management recognizes that the term "organic revenues" may be interpreted differently by other companies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of the respective businesses or companies and may therefore be a useful tool in assessing period-to-period performance trends. |
| When comparing revenue growth between periods excluding the effects of acquisitions, business dispositions and currency exchange rates, those effects are different when comparing results for different periods. Revenues from acquisitions are considered inorganic from the date we complete an acquisition through the end of the fourth quarter following the acquisition and are therefore reflected as an adjustment to reported revenue to derive organic revenue for the period following the acquisition. In subsequent periods, the revenues from the acquisition become organic as these revenues are included for all periods presented. |
| Additionally, when comparing the calculation of Industrial segment organic revenues* with 2018 in the first table, there is no adjustment to the 2017 GAAP revenues for currency exchange rates while in the calculation of 2017 organic revenues* compared to 2016 in the second table there is an adjustment to 2017 reported revenues of $557 million for currency exchange rates. This is the case because in the comparison of 2017 to 2016 we are adjusting the 2017 reported revenues to exclude the effect of currency exchange rates to provide a more direct comparison to the 2016 results. That is, we are adjusting 2017 reported revenues to eliminate the effects of changes in foreign currency had on 2017 revenues. Additionally, when comparing 2017 to 2016, we adjust the 2017 revenue amount for the effects of currency exchange to enable a more direct comparison to 2016. |
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| | | | | | | | | | | | | | | | | | | | | | | |
| GE INDUSTRIAL ORGANIC REVENUES, PROFIT (LOSS) AND PROFIT MARGIN BY SEGMENT (NON-GAAP) |
| | Revenues | | Segment profit (loss) | | Profit margin |
| (Dollars in millions) | 2019 |
| 2018 |
| V% |
| | 2019 |
| 2018 |
| V% |
| | 2019 |
| 2018 |
| V pts |
| | | | | | | | | | | | |
| Power (GAAP) | $ | 18,625 |
| $ | 22,150 |
| (16 | )% | | $ | 386 |
| $ | (808 | ) | F |
| | 2.1 | % | (3.6 | )% | 5.7pts |
| Less: acquisitions | 25 |
| — |
| | | (1 | ) | — |
| | | | | |
| Less: business dispositions | 10 |
| 2,805 |
| | | (2 | ) | 237 |
| | | | | |
| Less: foreign currency effect | (508 | ) | — |
| | | 47 |
| — |
| | | | | |
| Power organic (Non-GAAP) | $ | 19,098 |
| $ | 19,345 |
| (1 | )% | | $ | 342 |
| $ | (1,046 | ) | F |
| | 1.8 | % | (5.4 | )% | 7.2pts |
| | | | | | | | | | | | |
| Renewable Energy (GAAP) | $ | 15,337 |
| $ | 14,288 |
| 7 | % | | $ | (666 | ) | $ | 292 |
| U |
| | (4.3 | )% | 2.0 | % | (6.3)pts |
| Less: acquisitions | 3 |
| — |
| | | 6 |
| — |
| | | | | |
| Less: business dispositions | — |
| — |
| | | — |
| (2 | ) | | | | | |
| Less: foreign currency effect | (532 | ) | — |
| | | 60 |
| — |
| | | | | |
| Renewable Energy organic (Non-GAAP) | $ | 15,866 |
| $ | 14,288 |
| 11 | % | | $ | (731 | ) | $ | 294 |
| U |
| | (4.6 | )% | 2.1 | % | (6.7)pts |
| | | | | | | | | | | | |
| Aviation (GAAP) | $ | 32,875 |
| $ | 30,566 |
| 8 | % | | $ | 6,820 |
| $ | 6,466 |
| 5 | % | | 20.7 | % | 21.2 | % | (0.5)pts |
| Less: acquisitions | — |
| — |
| | | — |
| — |
| | | | | |
| Less: business dispositions | 25 |
| 317 |
| | | 6 |
| 39 |
| | | | | |
| Less: foreign currency effect | (24 | ) | — |
| | | 30 |
| — |
| | | | | |
| Aviation organic (Non-GAAP) | $ | 32,874 |
| $ | 30,250 |
| 9 | % | | $ | 6,784 |
| $ | 6,427 |
| 6 | % | | 20.6 | % | 21.2 | % | (0.6)pts |
| | | | | | | | | | | | |
| Healthcare (GAAP) | $ | 19,942 |
| $ | 19,784 |
| 1 | % | | $ | 3,896 |
| $ | 3,698 |
| 5 | % | | 19.5 | % | 18.7 | % | 0.8pts |
| Less: acquisitions | 83 |
| — |
| | | (19 | ) | — |
| | | | | |
| Less: business dispositions | 2 |
| 235 |
| | | (27 | ) | 22 |
| | | | | |
| Less: foreign currency effect | (359 | ) | — |
| | | (1 | ) | — |
| | | | | |
| Healthcare organic (Non-GAAP) | $ | 20,216 |
| $ | 19,549 |
| 3 | % | | $ | 3,944 |
| $ | 3,676 |
| 7 | % | | 19.5 | % | 18.8 | % | 0.7pts |
| | | | | | | | | | | | |
| GE Industrial segment (GAAP) | $ | 86,778 |
| $ | 86,789 |
| — | % | | $ | 10,436 |
| $ | 9,647 |
| 8 | % | | 12.0 | % | 11.1 | % | 0.9pts |
| Less: acquisitions | 111 |
| — |
| | | (15 | ) | — |
| | | | | |
| Less: business dispositions(a) | 38 |
| 3,357 |
| | | (24 | ) | 295 |
| | | | | |
| Less: foreign currency effect(b) | (1,424 | ) | — |
| | | 136 |
| — |
| | | | | |
GE Industrial segment organic (Non-GAAP) | $ | 88,053 |
| $ | 83,432 |
| 5.5 | % | | $ | 10,338 |
| $ | 9,351 |
| 11 | % | | 11.7 | % | 11.2 | % | 0.5pts |
| | | | | | | | | | | | |
| (a) Dispositions impact in 2018 primarily related to our Industrial Solutions and Distributed Power businesses within our Power segment, with revenues of $1,257 million and $1,274 million, respectively, and Value-Based Care within our Healthcare segment, with revenues of $222 million. |
| (b) Primarily the euro, Japanese yen and Brazilian real. |
| We believe these measures provide management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and foreign currency, as these activities can obscure underlying trends. We also believe presenting organic revenues* and organic profit* separately for our industrial businesses provides management and investors with useful information about the trends of our industrial businesses and enables a more direct comparison to other non-financial companies. |
| When comparing revenues and profit growth between periods excluding the effects of acquisitions, business dispositions and currency exchange rates, those effects are different when comparing results for different periods. Revenues and profit from acquisitions are considered inorganic from the date we complete an acquisition through the end of the fourth quarter following the acquisition and are therefore reflected as adjustments to reported revenues and profit to derive organic revenues* and organic profit* for the period following the acquisition. In subsequent periods, the revenues and profit from the acquisition become organic as these revenues and profit are included for all periods presented. |
*Non-GAAPNon-GAAP Financial Measure
GE20182019 FORM 10-K 71 44
|
| | |
| MD&A | NON-GAAP FINANCIAL MEASURES | |
|
| | | | | | | | | |
GE INDUSTRIAL STRUCTURAL COSTS (NON-GAAP) (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| GE total costs and expenses (GAAP) | $ | 135,656 |
| $ | 111,710 |
| $ | 105,774 |
|
| Less: GE interest and other financial charges (GAAP) | 2,708 |
| 2,753 |
| 2,026 |
|
| Less: goodwill impairments (GAAP) | 22,136 |
| 1,165 |
| — |
|
| Less: non-operating benefit costs (GAAP) | 2,764 |
| 2,385 |
| 2,349 |
|
| GE Industrial costs excluding interest and other financial charges, goodwill impairments and non-operating benefit costs (Non-GAAP) | 108,048 |
| 105,407 |
| 101,399 |
|
| Less: Segment variable costs | 81,661 |
| 77,986 |
| 73,647 |
|
| Less: Segment restructuring & other | 834 |
| 792 |
| — |
|
| Less: Segment acquisitions/dispositions structural costs and impact from foreign exchange | 518 |
| (102 | ) | 548 |
|
| Less: Corporate restructuring & other charges | 2,958 |
| 3,350 |
| 3,544 |
|
| Add: Corporate revenue (ex. GE-GE Capital eliminations), other income and noncontrolling interests | 280 |
| 852 |
| (2,155 | ) |
| Less: Corporate (gains) losses(a) | (1,350 | ) | (926 | ) | (3,480 | ) |
| Less: Corporate unrealized (gains) losses | — |
| — |
|
|
|
| GE Industrial structural costs (Non-GAAP) | $ | 23,707 |
| $ | 25,159 |
| $ | 24,984 |
|
| | | | |
| (a) Includes (gains) losses on disposed or held for sale businesses. | | | |
| | | | |
| Industrial structural costs* include segment structural costs excluding the impact of restructuring and other charges, business acquisitions and dispositions, foreign exchange, plus total Corporate operating profit excluding restructuring and other charges and gains. The Baker Hughes acquisition is represented on a pro-forma basis, which means we calculated our structural costs by including legacy Baker Hughes results for the first six months of 2017. |
| Segment variable costs are those costs within our industrial segments that vary with volume. The most significant variable costs would be material and direct labor costs incurred to produce our products and deliver our services that are recorded in the captions "Cost of goods" and "Cost of services sold" in our consolidated Statement of Earnings (Loss). |
| We believe that Industrial structural costs* is a meaningful measure as it is broader than selling, general and administrative costs and represents the total costs in the Industrial segments and Corporate that generally do not vary with volume and excludes the effect of segment acquisitions, dispositions, and foreign exchange movements. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| GE INDUSTRIAL ORGANIC REVENUES, PROFIT (LOSS) AND PROFIT MARGIN BY SEGMENT (NON-GAAP) |
| | Revenues | | Segment profit (loss) | | Profit margin |
| (Dollars in millions) | 2018 |
| 2017 |
| V% |
| | 2018 |
| 2017 |
| V% |
| | 2018 |
| 2017 |
| V pts |
| | | | | | | | | | | | |
| Power (GAAP) | $ | 22,150 |
| $ | 29,426 |
| (25 | )% | | $ | (808 | ) | $ | 1,894 |
| U |
| | (3.6 | )% | 6.4 | % | (10)pts |
| Less: acquisitions | 70 |
| 9 |
| | | (2 | ) | — |
| | | | | |
| Less: business dispositions | 125 |
| 3,359 |
| | | 4 |
| 291 |
| | | | | |
| Less: foreign currency effect | 368 |
| — |
| | | (11 | ) | — |
| | | | | |
| Power organic (Non-GAAP) | $ | 21,587 |
| $ | 26,058 |
| (17 | )% | | $ | (799 | ) | $ | 1,602 |
| U |
| | (3.7 | )% | 6.1 | % | (9.8)pts |
| | | | | | | | | | | | |
| Renewable Energy (GAAP) | $ | 14,288 |
| $ | 14,321 |
| — | % | | $ | 292 |
| $ | 728 |
| (60 | )% | | 2.0 | % | 5.1 | % | (3.1)pts |
| Less: acquisitions | 143 |
| 80 |
| | | 45 |
| 1 |
| | | | | |
| Less: business dispositions | — |
| — |
| | | — |
| — |
| | | | | |
| Less: foreign currency effect | (75 | ) | — |
| | | (41 | ) | — |
| | | | | |
| Renewable Energy organic (Non-GAAP) | $ | 14,220 |
| $ | 14,242 |
| — | % | | $ | 288 |
| $ | 727 |
| (60 | )% | | 2.0 | % | 5.1 | % | (3.1)pts |
| | | | | | | | | | | | |
| Aviation (GAAP) | $ | 30,566 |
| $ | 27,013 |
| 13 | % | | $ | 6,466 |
| $ | 5,370 |
| 20 | % | | 21.2 | % | 19.9 | % | 1.3pts |
| Less: acquisitions | 4 |
| 2 |
| | | (1 | ) | — |
| | | | | |
| Less: business dispositions | — |
| — |
| | | — |
| — |
| | | | | |
| Less: foreign currency effect | 28 |
| — |
| | | (29 | ) | — |
| | | | | |
| Aviation organic (Non-GAAP) | $ | 30,534 |
| $ | 27,010 |
| 13 | % | | $ | 6,496 |
| $ | 5,370 |
| 21 | % | | 21.3 | % | 19.9 | % | 1.4pts |
| | | | | | | | | | | | |
| Healthcare (GAAP) | $ | 19,784 |
| $ | 19,017 |
| 4 | % | | $ | 3,698 |
| $ | 3,488 |
| 6 | % | | 18.7 | % | 18.3 | % | 0.4pts |
| Less: acquisitions | 6 |
| 1 |
| | | (4 | ) | (2 | ) | | | | | |
| Less: business dispositions | 13 |
| 267 |
| | | (1 | ) | 123 |
| | | | | |
| Less: foreign currency effect | 152 |
| — |
| | | 52 |
| — |
| | | | | |
| Healthcare organic (Non-GAAP) | $ | 19,613 |
| $ | 18,748 |
| 5 | % | | $ | 3,650 |
| $ | 3,367 |
| 8 | % | | 18.6 | % | 18.0 | % | 0.6pts |
| | | | | | | | | | | | |
| GE Industrial segment (GAAP) | $ | 86,789 |
| $ | 89,776 |
| (3 | )% | | $ | 9,647 |
| $ | 11,479 |
| (16 | )% | | 11.1 | % | 12.8 | % | (1.7)pts |
| Less: acquisitions(a) | 224 |
| 92 |
| | | 38 |
| (1 | ) | | | | | |
| Less: business dispositions(b) | 138 |
| 3,626 |
| | | 3 |
| 414 |
| | | | | |
| Less: foreign currency effect(c) | 473 |
| — |
| | | (29 | ) | — |
| | | | | |
GE Industrial segment organic (Non-GAAP) | $ | 85,955 |
| $ | 86,059 |
| — | % | | $ | 9,634 |
| $ | 11,066 |
| (13 | )% | | 11.2 | % | 12.9 | % | (1.7)pts |
| | | | | | | | | | | | |
| (a) Acquisition impact primarily related to LM Wind within our Renewable Energy segment, with $142 million and $80 million of revenues in 2018 and 2017, respectively. |
| (b) Dispositions impact in 2017 primarily related to Industrial Solutions, Distributed Power and Water businesses within our Power segment, with $1,368 million, $408 million and $1,516 million of revenues, respectively, and Value-Based Care within our Healthcare segment, with $213 million of revenues. |
| (c) Primarily the Brazilian real and the Euro. |
| We believe these measures provide management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and foreign currency, as these activities can obscure underlying trends. We also believe presenting organic revenues* and organic profit* separately for our industrial businesses provides management and investors with useful information about the trends of our industrial businesses and enables a more direct comparison to other non-financial companies. |
| When comparing revenues and profit growth between periods excluding the effects of acquisitions, business dispositions and currency exchange rates, those effects are different when comparing results for different periods. Revenues and profit from acquisitions are considered inorganic from the date we complete an acquisition through the end of the fourth quarter following the acquisition and are therefore reflected as adjustments to reported revenues and profit to derive organic revenues* and organic profit* for the period following the acquisition. In subsequent periods, the revenues and profit from the acquisition become organic as these revenues and profit are included for all periods presented. |
|
| | | | | | | | | |
POWER STRUCTURAL COSTS (NON-GAAP) (In millions) | 2018 |
| 2017 |
| V$ |
|
| | | | |
| Power total costs and expenses (GAAP) | $ | 28,494 |
| $ | 33,912 |
| $ | (5,418 | ) |
| Less: Power interest and other financial charges | 267 |
| 653 |
| (386 | ) |
| Less: non-operating benefit costs | (75 | ) | (10 | ) | (65 | ) |
| Power costs excluding interest and other financial charges and non-operating benefit costs (Non-GAAP) | 28,302 |
| 33,269 |
| (4,967 | ) |
| Less: Segment variable costs | 21,245 |
| 24,805 |
| (3,560 | ) |
| Less: Segment restructuring & other | 116 |
| — |
| 116 |
|
| Less: Segment acquisitions/dispositions structural costs and impact from foreign exchange | 178 |
| 791 |
| (613 | ) |
| Power structural costs (Non-GAAP) | $ | 6,763 |
| $ | 7,673 |
| $ | (910 | ) |
| | | | |
| Power structural costs* include segment structural costs excluding the impact of restructuring and other charges, business acquisitions and dispositions and foreign exchange. |
| Segment variable costs are those costs within our industrial segments that vary with volume. The most significant variable costs would be material and direct labor costs incurred to produce our products and deliver our services that are recorded in the captions "Cost of goods" and "Cost of services sold" in our consolidated Statement of Earnings (Loss). |
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 72
45
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| | |
| MD&A | NON-GAAP FINANCIAL MEASURES | |
|
| | | | | | | | | |
ADJUSTED GE INDUSTRIAL PROFIT AND PROFIT MARGIN (Dollars in millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| GE total revenues (GAAP) | $ | 87,719 |
| $ | 89,038 |
| $ | 92,229 |
|
| | | | |
| GE total costs and expenses (GAAP) | 88,118 |
| 111,967 |
| 92,834 |
|
| Less: GE interest and other financial charges | 2,115 |
| 2,415 |
| 2,538 |
|
| Less: non-operating benefit costs | 2,828 |
| 2,740 |
| 2,409 |
|
| Less: restructuring & other(a) | 1,351 |
| 2,832 |
| 2,914 |
|
| Less: goodwill impairments(b) | 1,486 |
| 22,136 |
| 1,165 |
|
| Add: noncontrolling interests | 6 |
| (130 | ) | (280 | ) |
| Adjusted GE Industrial costs (Non-GAAP) | 80,343 |
| 81,714 |
| 83,527 |
|
| | | | |
| GE other income (GAAP) | 2,200 |
| 2,317 |
| 1,893 |
|
| Less: unrealized gains (losses)(c) | 793 |
| — |
| — |
|
| Less: restructuring & other | 36 |
| (120 | ) | (109 | ) |
| Less: gains (losses) and impairments for disposed or held for sale businesses(c) | 4 |
| 1,370 |
| 926 |
|
| Adjusted GE other income (Non-GAAP) | 1,367 |
| 1,068 |
| 1,076 |
|
| | | | |
| GE Industrial profit (GAAP) | $ | 1,801 |
| $ | (20,612 | ) | $ | 1,288 |
|
| GE Industrial profit margin (GAAP) | 2.1 | % | (23.1 | )% | 1.4 | % |
| | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 8,743 |
| $ | 8,392 |
| $ | 9,778 |
|
| Adjusted GE Industrial profit margin (Non-GAAP) | 10.0 | % | 9.4 | % | 10.6 | % |
| | | | |
| (a) See the GE Corporate Items and Eliminations - Restructuring section within MD&A for further information. |
| (b) Related to our Renewable Energy segment in 2019, Power and Renewable Energy segments in 2018 and our Power segment in 2017. See Note 8 to the consolidated financial statements for further information. |
| (c) See the Corporate Items and Eliminations section within MD&A for further information. |
| We believe GE Industrial profit and profit margins adjusted for the items included in the above reconciliation are meaningful measures because they increase the comparability of period-to-period results. |
|
| | | | | | | | |
GE INDUSTRIAL ORGANIC REVENUES (NON-GAAP) (Dollars in millions) | 2019 |
| 2018 |
| V% |
|
| | | | |
| GE total revenues (GAAP) | $ | 87,719 |
| $ | 89,038 |
| (1 | )% |
| Adjustments: |
|
|
|
| Less: acquisitions | 111 |
| — |
|
|
| Less: business dispositions(a) | 45 |
| 4,233 |
|
|
| Less: foreign currency effect(b) | (1,442 | ) | — |
|
|
| GE Industrial organic revenues (Non-GAAP) | $ | 89,004 |
| $ | 84,805 |
| 5 | % |
| | | | |
| | 2018 |
| 2017 |
| V% |
|
| | | | |
| GE total revenues (GAAP) | $ | 89,038 |
| $ | 92,229 |
| (3 | )% |
| Adjustments: | | | |
| Less: acquisitions(c) | 245 |
| 106 |
| |
| Less: business dispositions(d) | 138 |
| 3,815 |
| |
| Less: foreign currency effect(e) | 479 |
| — |
| |
| GE Industrial organic revenues (Non-GAAP) | $ | 88,177 |
| $ | 88,308 |
| — | % |
| | | | |
| (a) Dispositions impact in 2018 primarily related to our Industrial Solutions and Distributed Power businesses within our Power segment, with revenues of $1,257 million and $1,274 million, respectively, and Value-Based Care within our Healthcare segment, with revenues of $222 million, and Current with revenues of $727 million. |
| (b) Primarily the euro, Japanese yen and Brazilian real. |
| (c) Acquisitions in 2018 primarily related to LM Wind within our Renewable Energy segment, which was acquired in 2017 and contributed $142 million in revenues. |
| (d) Dispositions impact in 2017 primarily related to Industrial Solutions, Distributed Power and Water businesses within our Power segment, with $1,368 million, $408 million and $1,516 million of revenues, respectively, Value-Based Care within our Healthcare segment with $213 million of revenues, and Current with $189 million of revenues. |
| (e) Primarily the Brazilian real and the Euro. |
| We believe this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and foreign currency, as these activities can obscure underlying trends. |
|
| | | | | | | | | |
ADJUSTED EARNINGS (LOSS) (NON-GAAP) (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Consolidated earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | $ | (21,076 | ) | $ | (8,605 | ) | $ | 7,797 |
|
| Less: GE Capital earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | (489 | ) | (6,765 | ) | (1,251 | ) |
| GE Industrial earnings (loss) (Non-GAAP) | (20,587 | ) | (1,841 | ) | 9,048 |
|
| | | | |
| Non-operating benefits costs (pre-tax) (GAAP) | (2,764 | ) | (2,385 | ) | (2,349 | ) |
| Tax effect on non-operating benefit costs(a) | 581 |
| 835 |
| 822 |
|
| Less: non-operating benefit costs (net of tax) | (2,184 | ) | (1,550 | ) | (1,527 | ) |
| Gains (losses) and impairments for disposed or held for sale businesses (pre-tax) | 1,350 |
| 926 |
| 3,480 |
|
| Tax effect on gains (losses) and impairments for disposed or held for sale businesses(b) | (375 | ) | (62 | ) | (1,106 | ) |
| Less: gains (losses) and impairments for disposed or held for sale businesses (net of tax) | 974 |
| 864 |
| 2,374 |
|
| Restructuring & other (pre-tax) | (3,440 | ) | (4,030 | ) | (3,544 | ) |
| Tax effect on restructuring & other(b) | 492 |
| 1,252 |
| 1,061 |
|
| Less: restructuring & other (net of tax) | (2,948 | ) | (2,778 | ) | (2,483 | ) |
| Goodwill impairments (pre-tax) | (22,136 | ) | (1,165 | ) | — |
|
| Tax effect on goodwill impairments(b) | (235 | ) | 9 |
| — |
|
| Less: goodwill impairments (net of tax) | (22,371 | ) | (1,156 | ) | — |
|
| Less: GE Industrial U.S. tax reform enactment adjustment | (38 | ) | (4,905 | ) | — |
|
| Adjusted GE Industrial earnings (loss) (Non-GAAP) | $ | 5,980 |
| $ | 7,685 |
| $ | 10,684 |
|
| | | | |
| GE Capital earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | (489 | ) | (6,765 | ) | (1,251 | ) |
| EFS impairments and insurance charge (pre-tax) | — |
| (11,444 | ) | — |
|
| Tax effect on EFS impairments and insurance charge(b) | — |
| 3,501 |
| — |
|
| Less: EFS impairments and insurance charge (net of tax) | — |
| (7,943 | ) | — |
|
| Less: GE Capital U.S. tax reform enactment adjustment | (173 | ) | 206 |
| — |
|
| Adjusted GE Capital earnings (loss) (Non-GAAP) | $ | (316 | ) | $ | 972 |
| $ | (1,251 | ) |
| | | | |
| Adjusted GE Industrial earnings (loss) (Non-GAAP) | $ | 5,980 |
| $ | 7,685 |
| $ | 10,684 |
|
| Add: Adjusted GE Capital earnings (loss) (Non-GAAP) | (316 | ) | 972 |
| (1,251 | ) |
| Adjusted earnings (loss) (Non-GAAP) | $ | 5,664 |
| $ | 8,657 |
| $ | 9,433 |
|
| | | | |
| (a) The tax effect was calculated using a 21% and 35% U.S. federal statutory tax rate in 2018 and 2017, respectively, based on its applicability to such cost. |
| (b) The tax effect presented includes both the rate for the relevant item as well as other direct and incremental tax charges. |
| |
| Adjusted earnings (loss)* excludes non-operating benefit costs, gains (losses) and impairments for disposed or held for sale businesses, restructuring and other, goodwill impairments and GE Capital EFS impairments and insurance charge in 2017, after-tax, excluding the effects of U.S. tax reform enactment adjustment. The service cost of our pension and other benefit plans are included in adjusted earnings*, which represents the ongoing cost of providing pension benefits to our employees. The components of non-operating benefit costs are mainly driven by capital allocation decisions and market performance, and we manage these separately from the operational performance of our businesses. Gains and restructuring and other items are impacted by the timing and magnitude of gains associated with dispositions, and the timing and magnitude of costs associated with restructuring activities. Prior to the third quarter of 2018, goodwill impairment was included as a component of restructuring and other charges; beginning in the third quarter of 2018, on a comparable basis, we reported it separately in our consolidated Statement of Earnings (Loss) because of the significance of the charge that quarter, and Adjusted earnings (loss)* continues to exclude amounts related to goodwill impairment separate from the ongoing operations of our businesses. We believe that the retained costs in Adjusted earnings (loss)* provides management and investors a useful measure to evaluate the performance of the total company, and increases period-to-period comparability. We believe that presenting Adjusted Industrial earnings (loss)* separately from our financial services businesses also provides management and investors with useful information about the relative size of our industrial and financial services businesses in relation to the total company. |
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 73 46
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| | |
| MD&A | NON-GAAP FINANCIAL MEASURES | |
|
| | | | | | | | | |
| ADJUSTED EARNINGS (LOSS) PER SHARE (NON-GAAP) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Consolidated EPS from continuing operations attributable to GE common shareowners (GAAP) | $ | (2.43 | ) | $ | (0.99 | ) | $ | 0.85 |
|
| Less: GE Capital EPS from continuing operations attributable to GE common shareowners (GAAP) | (0.06 | ) | (0.78 | ) | (0.14 | ) |
| GE Industrial EPS (Non-GAAP) | (2.37 | ) | (0.21 | ) | 0.99 |
|
| | | | |
| Non-operating benefits costs (pre-tax) (GAAP) | (0.32 | ) | (0.27 | ) | (0.26 | ) |
| Tax effect on non-operating benefit costs(a) | 0.07 |
| 0.10 |
| 0.09 |
|
| Less: non-operating benefit costs (net of tax) | (0.25 | ) | (0.18 | ) | (0.17 | ) |
| Gains (losses) and impairments for disposed or held for sale businesses (pre-tax) | 0.16 |
| 0.11 |
| 0.38 |
|
| Tax effect on gains (losses) and impairments for disposed or held for sale businesses(b) | (0.04 | ) | (0.01 | ) | (0.12 | ) |
| Less: gains (losses) and impairments for disposed or held for sale businesses (net of tax) | 0.11 |
| 0.10 |
| 0.26 |
|
| Restructuring & other (pre-tax) | (0.40 | ) | (0.46 | ) | (0.39 | ) |
| Tax effect on restructuring & other(b) | 0.06 |
| 0.14 |
| 0.12 |
|
| Less: restructuring & other (net of tax) | (0.34 | ) | (0.32 | ) | (0.27 | ) |
| Goodwill impairments (pre-tax) | (2.55 | ) | (0.13 | ) | — |
|
| Tax effect on goodwill impairments(b) | (0.03 | ) | — |
| — |
|
| Less: goodwill impairments (net of tax) | (2.57 | ) | (0.13 | ) | — |
|
| Less: GE Industrial U.S. tax reform enactment adjustment | — |
| (0.56 | ) | — |
|
| Adjusted GE Industrial EPS (Non-GAAP) | $ | 0.69 |
| $ | 0.88 |
| $ | 1.17 |
|
| | | | |
| GE Capital EPS from continuing operations attributable to GE common shareowners (GAAP) | (0.06 | ) | (0.78 | ) | (0.14 | ) |
| EFS impairments and insurance charge (pre-tax) | — |
| (1.32 | ) | — |
|
| Tax effect on EFS impairments and insurance charge(b) | — |
| 0.40 |
| — |
|
| Less: EFS impairments and insurance charge (net of tax) | — |
| (0.91 | ) | — |
|
| Less: GE Capital U.S. tax reform enactment adjustment | (0.02 | ) | 0.02 |
| — |
|
| Adjusted GE Capital EPS (Non-GAAP) | $ | (0.04 | ) | $ | 0.11 |
| $ | (0.14 | ) |
| | | | |
| Adjusted GE Industrial EPS (Non-GAAP) | $ | 0.69 |
| $ | 0.88 |
| $ | 1.17 |
|
| Add: Adjusted GE Capital EPS (Non-GAAP) | (0.04 | ) | 0.11 |
| (0.14 | ) |
| Adjusted EPS (Non-GAAP)(c) | $ | 0.65 |
| $ | 1.00 |
| $ | 1.03 |
|
| | | | |
| (a) The tax effect was calculated using a 21% and 35% U.S. federal statutory tax rate in 2018 and 2017, respectively, based on its applicability to such cost. |
| (b) The tax effect presented includes both the rate for the relevant item as well as other direct and incremental tax charges. |
| (c) Earnings-per-share amounts are computed independently. As a result, the sum of per-share amounts may not equal the total. |
| Adjusted EPS* excludes non-operating benefit costs, gains (losses) and impairments for disposed or held for sale businesses, restructuring and other, goodwill impairments and GE Capital EFS impairments and insurance charge in 2017, after-tax, excluding the effects of U.S. tax reform enactment adjustment. The service cost of our pension and other benefit plans are included in adjusted earnings*, which represents the ongoing cost of providing pension benefits to our employees. The components of non-operating benefit costs are mainly driven by capital allocation decisions and market performance, and we manage these separately from the operational performance of our businesses. Gains and restructuring and other items are impacted by the timing and magnitude of gains associated with dispositions, and the timing and magnitude of costs associated with restructuring activities. Prior to the third quarter of 2018, goodwill impairment was included as a component of restructuring and other charges; beginning in the third quarter of 2018, on a comparable basis, we reported it separately in our consolidated Statement of Earnings (loss) because of the significance of the charge that quarter, and Adjusted EPS* continues to exclude amounts related to goodwill impairment separate from the ongoing operations of our businesses. We believe that the retained costs in Adjusted EPS* provides management and investors a useful measure to evaluate the performance of the total company, and increases period-to-period comparability. We also use Adjusted EPS* as a performance metric at the company level for our annual executive incentive plan for 2018. We believe that presenting Adjusted EPS* separately from our financial services businesses also provides management and investors with useful information about the relative size of our industrial and financial services businesses in relation to the total company. |
|
| | | | | | | | |
ADJUSTED GE INDUSTRIAL ORGANIC PROFIT (NON-GAAP) (Dollars in millions) | 2019 |
| 2018 |
| V% |
|
| | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 8,743 |
| $ | 8,392 |
| 4 | % |
| Adjustments: |
|
|
|
| Less: acquisitions | (15 | ) | — |
|
|
| Less: business dispositions | (32 | ) | 284 |
|
|
| Less: foreign currency effect | 144 |
| — |
|
|
| Adjusted GE Industrial organic profit (Non-GAAP) | $ | 8,646 |
| $ | 8,107 |
| 7 | % |
| | | | |
| Adjusted GE Industrial profit margin (Non-GAAP) | 10.0 | % | 9.4 | % | 0.6 | pts |
| Adjusted GE Industrial organic profit margin (Non-GAAP) | 9.7 | % | 9.6 | % | 0.1 | pts |
| | | | |
| | 2018 |
| 2017 |
| V% |
|
| | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 8,392 |
| $ | 9,778 |
| (14 | )% |
| Adjustments: | | | |
| Less: acquisitions | 49 |
| (19 | ) | |
| Less: business dispositions | (3 | ) | 420 |
| |
| Less: foreign currency effect | (64 | ) | — |
| |
| Adjusted GE Industrial organic profit (Non-GAAP) | $ | 8,410 |
| $ | 9,377 |
| (10 | )% |
| | | | |
| Adjusted GE Industrial profit margin (Non-GAAP) | 9.4 | % | 10.6 | % | (1.2 | )pts |
| Adjusted GE Industrial organic profit margin (Non-GAAP) | 9.5 | % | 10.6 | % | (1.1 | )pts |
| | | | |
| We believe this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and foreign currency, as these activities can obscure underlying trends. |
|
| | | | | | | | | |
GE EFFECTIVE TAX RATES, EXCLUDING GE CAPITAL EARNINGS (NON-GAAP) (Dollars in millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| GE earnings (loss) from continuing operations before income taxes (GAAP) | $ | 1,271 |
| $ | (21,101 | ) | $ | (5,476 | ) |
| Less: GE Capital earnings (loss) from continuing operations | (530 | ) | (489 | ) | (6,765 | ) |
| Total | $ | 1,801 |
| $ | (20,612 | ) | $ | 1,289 |
|
| | | | |
| GE provision for income taxes (GAAP) | $ | 1,309 |
| $ | 467 |
| $ | 3,493 |
|
| GE effective tax rate, excluding GE Capital earnings (Non-GAAP) | 72.7 | % | (2.3) | % | 271.0 | % |
|
| | | | | | |
| RECONCILIATION OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO | | | |
| GE EFFECTIVE TAX RATE EXCLUDING GE CAPITAL EARNINGS (NON-GAAP) | 2019 |
| 2018 |
| 2017 |
|
| U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | 35.0 | % |
| Reduction in rate resulting from: | | | |
| Tax on global activities including exports | 61.0 |
| (5.1 | ) | (146.9 | ) |
| U.S. business credits | (6.4 | ) | 0.4 |
| (6.4 | ) |
| Goodwill impairments | 16.6 |
| (21.9 | ) | 31.1 |
|
| Tax Cuts and Jobs Acts enactment | 5.6 |
| 0.5 |
| 380.5 |
|
| All other – net | (25.1 | ) | 2.8 |
| (22.3 | ) |
| | 51.7 |
| (23.3 | ) | 236.0 |
|
| GE effective tax rate, excluding GE Capital earnings (Non-GAAP) | 72.7 | % | (2.3) | % | 271.0 | % |
| | | | |
| We believe the GE effective tax rate, excluding GE Capital earnings*, is best analyzed in relation to GE earnings before income taxes excluding the GE Capital net earnings from continuing operations, as GE tax expense does not include taxes on GE Capital earnings. Management believes in addition to the Consolidated and GE Capital tax rates shown in Note 15 to the consolidated financial statements, this supplemental measure provides investors with useful information as it presents the GE effective tax rate that can be used in comparing the GE results to other non-financial services businesses. |
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 74
47
|
| | |
| MD&A | NON-GAAP FINANCIAL MEASURES | |
|
| | | | | | | | | |
ADJUSTED GE INDUSTRIAL PROFIT AND PROFIT MARGIN (EXCLUDING CERTAIN ITEMS) (NON-GAAP) (Dollars in millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| GE total revenues (GAAP) | $ | 113,642 |
| $ | 111,255 |
| $ | 110,615 |
|
| | | | |
| Costs | | | |
| GE total costs and expenses (GAAP) | 135,656 |
| 111,710 |
| 105,774 |
|
| Less: GE interest and other financial charges | 2,708 |
| 2,753 |
| 2,026 |
|
| Less: non-operating benefit costs | 2,764 |
| 2,385 |
| 2,349 |
|
| Less: restructuring & other | 3,487 |
| 3,923 |
| 3,544 |
|
| Less: goodwill impairments | 22,136 |
| 1,165 |
| — |
|
| Add: noncontrolling interests | (129 | ) | (368 | ) | (278 | ) |
| Adjusted GE Industrial costs (Non-GAAP) | 104,432 |
| 101,116 |
| 97,577 |
|
| | | | |
| Other Income | | | |
| GE other income (GAAP) | 2,255 |
| 1,937 |
| 4,227 |
|
| Less: restructuring & other | (87 | ) | (107 | ) | — |
|
| Less: gains (losses) and impairments for disposed or held for sale businesses | 1,350 |
| 926 |
| 3,480 |
|
| Adjusted GE other income (Non-GAAP) | 992 |
| 1,118 |
| 748 |
|
| | | | |
| GE Industrial profit (GAAP) | $ | (19,759 | ) | $ | 1,482 |
| $ | 9,068 |
|
| GE Industrial profit margin (GAAP) | (17.4 | )% | 1.3 | % | 8.2 | % |
| | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 10,203 |
| $ | 11,257 |
| $ | 13,786 |
|
| Adjusted GE Industrial profit margin (Non-GAAP) | 9.0 | % | 10.1 | % | 12.5 | % |
| | | | |
| We have presented our Adjusted GE Industrial profit* and profit margin* excluding interest and other financial charges, non-operating benefit costs, restructuring & other, goodwill impairments, non-controlling interests and gains (losses) and impairments for disposed or held for sale businesses. We believe that GE Industrial profit and profit margins adjusted for these items are meaningful measures because they increase the comparability of period-to-period results. |
|
| | | | | | | | | | | | | | | | | | |
| ADJUSTED EARNINGS (LOSS) AND ADJUSTED EPS | 2019 | 2018 | 2017 |
(NON-GAAP) (In millions, per-share amounts in dollars) | Earnings |
| EPS |
| Earnings |
| EPS |
| Earnings |
| EPS |
|
| | | | | | | |
Consolidated earnings (loss) from continuing operations
attributable to GE common shareholders (GAAP) | $ | (44 | ) | $ | (0.01 | ) | $ | (21,438 | ) | $ | (2.47 | ) | $ | (8,689 | ) | $ | (1.00 | ) |
Less: GE Capital earnings (loss) from continuing operations
attributable to GE common shareholders (GAAP) | (530 | ) | (0.06 | ) | (489 | ) | (0.06 | ) | (6,765 | ) | (0.78 | ) |
| GE Industrial earnings (loss) (Non-GAAP) | 486 |
| 0.06 |
| (20,949 | ) | (2.41 | ) | (1,924 | ) | (0.22 | ) |
| Non-operating benefits costs (pre-tax) (GAAP) | (2,828 | ) | (0.32 | ) | (2,740 | ) | (0.32 | ) | (2,409 | ) | (0.28 | ) |
| Tax effect on non-operating benefit costs | 594 |
| 0.07 |
| 575 |
| 0.07 |
| 843 |
| 0.10 |
|
| Less: non-operating benefit costs (net of tax) | (2,234 | ) | (0.26 | ) | (2,165 | ) | (0.25 | ) | (1,566 | ) | (0.18 | ) |
| Gains (losses) and impairments for disposed or held for sale businesses (pre-tax)(a) | 4 |
| — |
| 1,370 |
| 0.16 |
| 926 |
| 0.11 |
|
| Tax effect on gains (losses) and impairments for disposed or held for sale businesses | 34 |
| — |
| (380 | ) | (0.04 | ) | (62 | ) | (0.01 | ) |
Less: gains (losses) and impairments for disposed or held for sale businesses (net of tax) | 39 |
| — |
| 990 |
| 0.11 |
| 864 |
| 0.10 |
|
| Restructuring & other (pre-tax)(b) | (1,315 | ) | (0.15 | ) | (2,952 | ) | (0.34 | ) | (3,024 | ) | (0.35 | ) |
| Tax effect on restructuring & other | 277 |
| 0.03 |
| 338 |
| 0.04 |
| 893 |
| 0.10 |
|
| Less: restructuring & other (net of tax) | (1,039 | ) | (0.12 | ) | (2,614 | ) | (0.30 | ) | (2,131 | ) | (0.25 | ) |
| Goodwill impairments (pre-tax)(c) | (1,486 | ) | (0.17 | ) | (22,136 | ) | (2.55 | ) | (1,165 | ) | (0.13 | ) |
| Tax effect on goodwill impairments | (55 | ) | (0.01 | ) | (235 | ) | (0.03 | ) | 9 |
| — |
|
| Less: goodwill impairments (net of tax) | (1,541 | ) | (0.18 | ) | (22,371 | ) | (2.57 | ) | (1,156 | ) | (0.13 | ) |
| Unrealized gains (losses) (pre-tax) | 793 |
| 0.09 |
| — |
| — |
| — |
| — |
|
| Tax effect on unrealized gains (losses) | (114 | ) | (0.01 | ) | — |
| — |
| — |
| — |
|
| Less: unrealized gains (losses) (net of tax) | 679 |
| 0.08 |
| — |
| — |
| — |
| — |
|
| Debt extinguishment costs | (255 | ) | (0.03 | ) | — |
| — |
| — |
| — |
|
| Tax effect on debt extinguishment costs | 53 |
| 0.01 |
| — |
| — |
| — |
| — |
|
| Less: Debt extinguishment costs (net of tax) | (201 | ) | (0.02 | ) | — |
| — |
| — |
| — |
|
| BioPharma deal expense (pre-tax) | — |
| — |
| — |
| — |
| — |
| — |
|
| Tax on BioPharma deal expense | (647 | ) | (0.07 | ) | — |
| — |
| — |
| — |
|
| Less: BioPharma deal expense (net of tax) | (647 | ) | (0.07 | ) | — |
| — |
| — |
| — |
|
| Less: GE Industrial U.S. tax reform enactment adjustment | (101 | ) | (0.01 | ) | (38 | ) | — |
| (4,905 | ) | (0.56 | ) |
| Adjusted GE Industrial earnings (loss) (Non-GAAP) | $ | 5,531 |
| $ | 0.63 |
| $ | 5,249 |
| $ | 0.60 |
| $ | 6,970 |
| $ | 0.80 |
|
| | |
|
| |
|
| | |
GE Capital earnings (loss) from continuing operations attributable
to GE common shareholders (GAAP) | (530 | ) | (0.06 | ) | (489 | ) | (0.06 | ) | (6,765 | ) | (0.78 | ) |
| Insurance charges and EFS impairments (pre-tax) | (972 | ) | (0.11 | ) | — |
| — |
| (11,444 | ) | (1.32 | ) |
| Tax effect on insurance charges and EFS impairments | 204 |
| 0.02 |
| — |
| — |
| 3,501 |
| 0.40 |
|
| Less: Insurance charges and EFS impairments (net of tax) | (768 | ) | (0.09 | ) | — |
| — |
| (7,943 | ) | (0.91 | ) |
| Less: GE Capital U.S. tax reform enactment adjustment | 99 |
| 0.01 |
| (173 | ) | (0.02 | ) | 206 |
| 0.02 |
|
| Adjusted GE Capital earnings (loss) (Non-GAAP) | $ | 139 |
| $ | 0.02 |
| $ | (316 | ) | $ | (0.04 | ) | $ | 972 |
| $ | 0.11 |
|
| |
|
|
|
|
|
|
|
| | |
| Adjusted GE Industrial earnings (loss) (Non-GAAP) | $ | 5,531 |
| $ | 0.63 |
| $ | 5,249 |
| $ | 0.60 |
| $ | 6,970 |
| $ | 0.80 |
|
| Add: Adjusted GE Capital earnings (loss) (Non-GAAP) | 139 |
| 0.02 |
| (316 | ) | (0.04 | ) | 972 |
| 0.11 |
|
| Adjusted earnings (loss) (Non-GAAP) | $ | 5,671 |
| $ | 0.65 |
| $ | 4,933 |
| $ | 0.57 |
| $ | 7,942 |
| $ | 0.91 |
|
| | | | | | | |
| (a) See the Corporate Items and Eliminations section within MD&A for further information. |
| (b) See the GE Corporate Items and Eliminations - Restructuring section within MD&A for further information. |
| (c) Related to our Renewable Energy segment in 2019, Power and Renewable Energy segments in 2018 and our Power segment in 2017. See Note 8 to the consolidated financial statements for further information. |
| The service cost for our pension and other benefit plans are included in adjusted earnings*, which represents the ongoing cost of providing pension benefits to our employees. The components of non-operating benefit costs are mainly driven by capital allocation decisions and market performance. We believe the retained costs in Adjusted earnings* and Adjusted EPS* provides management and investors a useful measure to evaluate the performance of the total company, and increases period-to-period comparability. We also use Adjusted EPS* as a performance metric at the company level for our annual executive incentive plan for 2019. We believe presenting Adjusted Industrial earnings* and Adjusted Industrial EPS* separately for our financial services businesses also provides management and investors with useful information about the relative size of our industrial and financial services businesses in relation to the total company. |
|
| | | | | | | | |
GE INDUSTRIAL ORGANIC PROFIT (NON-GAAP) (In millions) | 2018 |
| 2017 |
| V% |
|
| | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 10,203 |
| $ | 11,257 |
| (9 | )% |
| Adjustments: | | | |
| Less: acquisitions | 291 |
| (19 | ) | |
| Less: business dispositions (other than dispositions acquired for investment) | (4 | ) | 453 |
| |
| Less: currency exchange rate(a) | (67 | ) | — |
| |
| Adjusted GE Industrial organic profit (Non-GAAP) | $ | 9,983 |
| $ | 10,823 |
| (8 | )% |
| | | | |
| | 2017 |
| 2016 |
| V% |
|
| | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 11,257 |
| $ | 13,786 |
| (18 | )% |
| Adjustments: | | | |
| Less: acquisitions | 127 |
| (11 | ) | |
| Less: business dispositions (other than dispositions acquired for investment) | 55 |
| 418 |
| |
| Less: currency exchange rate(a) | 41 |
|
| |
| Adjusted GE Industrial organic profit (Non-GAAP) | $ | 11,034 |
| $ | 13,378 |
| (18 | )% |
| | | | |
| (a) Translational foreign exchange | | | |
| GE Industrial organic profit* measures profit excluding the effects of acquisitions, business dispositions and currency exchange rates. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and currency exchange, which activities are subject to volatility and can obscure underlying trends. Management recognizes that the term "organic profit" may be interpreted differently by other companies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of our Industrial businesses and may therefore be a useful tool in assessing period-to-period performance trends. |
|
| | | | | | |
ADJUSTED OIL & GAS SEGMENT PROFIT (NON-GAAP) (In millions) | 2018 |
| 2017 |
|
| | | |
| Reported Oil & Gas segment profit (GAAP) | $ | 429 |
| $ | 158 |
|
| Less: restructuring & other (GE share) | (616 | ) | (679 | ) |
| Adjusted Oil & Gas segment profit (Non-GAAP) | $ | 1,045 |
| $ | 837 |
|
| | | |
| Adjusted GE Oil & Gas segment profit* measures Oil & Gas reported segment profit excluding the effects of restructuring and other charges. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations of our Oil & Gas segment. |
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 75 48
|
| | |
| MD&A | NON-GAAP FINANCIAL MEASURES | |
|
| | | | | | | | | |
GE EFFECTIVE TAX RATES, EXCLUDING GE CAPITAL EARNINGS (NON-GAAP) (Dollars in millions) | 2018 |
| 2017 |
| 2016 |
|
| GE earnings (loss) from continuing operations before income taxes (GAAP) | $ | (20,248 | ) | $ | (5,282 | ) | $ | 7,817 |
|
| Less: GE Capital earnings (loss) from continuing operations | (489 | ) | (6,765 | ) | (1,251 | ) |
| Total | $ | (19,759 | ) | $ | 1,483 |
| $ | 9,068 |
|
| | | | |
| GE provision for income taxes (GAAP) | $ | 957 |
| $ | 3,691 |
| $ | 298 |
|
| GE effective tax rate, excluding GE Capital earnings (Non-GAAP) | (4.8) | % | 248.9 | % | 3.3 | % |
|
| | | | | | | | | |
GE INDUSTRIAL FREE CASH FLOWS (FCF) (NON-GAAP) (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| GE CFOA (GAAP) | $ | 4,614 |
| $ | 701 |
| $ | 11,479 |
|
| Add: gross additions to property, plant and equipment | (2,216 | ) | (2,234 | ) | (3,403 | ) |
| Add: gross additions to internal-use software | (274 | ) | (306 | ) | (423 | ) |
| Less: common dividends from GE Capital | — |
| — |
| 4,016 |
|
| Less: GE Pension Plan funding | — |
| (6,000 | ) | (1,717 | ) |
| Less: taxes related to business sales | (198 | ) | (180 | ) | (229 | ) |
| GE Industrial free cash flows (Non-GAAP) | $ | 2,322 |
| $ | 4,341 |
| $ | 5,582 |
|
| | | | |
| We believe investors may find it useful to compare GE's Industrial free cash flows* performance without the effects of cash used for taxes related to business sales and contributions to the GE Pension Plan. We believe this measure will better allow management and investors to evaluate the capacity of our industrial operations to generate free cash flows. |
|
| | | | | | |
| RECONCILIATION OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO | | | |
| GE EFFECTIVE TAX RATE EXCLUDING GE CAPITAL EARNINGS (NON-GAAP) | 2018 |
| 2017 |
| 2016 |
|
| U.S. federal statutory income tax rate | 21.0 | % | 35.0 | % | 35.0 | % |
| Reduction in rate resulting from: | | | |
| Tax on global activities including exports | (6.8 | ) | (130.2 | ) | (22.0 | ) |
| U.S. business credits | 0.5 |
| (6.1 | ) | (1.0 | ) |
| Goodwill impairments | (22.9 | ) | 27.0 |
| — |
|
| Tax Cuts and Jobs Acts enactment | 0.5 |
| 330.7 |
| — |
|
| All other – net | 2.9 |
| (7.5 | ) | (8.7 | ) |
| | (25.8 | ) | 213.9 |
| (31.7 | ) |
| GE effective tax rate, excluding GE Capital earnings (Non-GAAP) | (4.8) | % | 248.9 | % | 3.3 | % |
| | | | |
| We believe that the GE effective tax rate, excluding GE Capital earnings*, is best analyzed in relation to GE earnings before income taxes excluding the GE Capital net earnings from continuing operations, as GE tax expense does not include taxes on GE Capital earnings. Management believes that in addition to the Consolidated and GE Capital tax rates shown in Note 14 to the consolidated financial statements, this supplemental measure provides investors with useful information as it presents the GE effective tax rate that can be used in comparing the GE results to other non-financial services businesses. |
|
| | | | | | |
GE INDUSTRIAL NET DEBT (NON-GAAP) (In millions) | December 31, 2019 |
| December 31, 2018 |
|
| | | |
| Total GE short- and long-term borrowings (GAAP) | $ | 52,059 |
| $ | 62,212 |
|
| Less: GE Capital short- and long-term debt assumed by GE | 31,368 |
| 36,262 |
|
| Add: intercompany loans from GE Capital | 12,226 |
| 13,749 |
|
| Total adjusted GE borrowings | $ | 32,917 |
| $ | 39,700 |
|
| Total pension and principal retiree benefit plan liabilities (pre-tax)(a) | 27,773 |
| 26,836 |
|
| Less: taxes at 21% | 5,832 |
| 5,636 |
|
| Total pension and principal retiree benefit plan liabilities (net of tax) | $ | 21,941 |
| $ | 21,200 |
|
| GE operating lease liabilities | 3,369 |
| 3,868 |
|
| GE preferred stock | 5,738 |
| 5,573 |
|
| Less: 50% of GE preferred stock | 2,869 |
| 2,787 |
|
| 50% of preferred stock | $ | 2,869 |
| $ | 2,787 |
|
| Deduction for total GE cash, cash equivalents and restricted cash | (17,613 | ) | (16,632 | ) |
| Less: 25% of GE cash, cash equivalents and restricted cash | (4,403 | ) | (4,158 | ) |
| Deduction for 75% of GE cash, cash equivalents and restricted cash | $ | (13,210 | ) | $ | (12,474 | ) |
| Total GE Industrial net debt (Non-GAAP) | $ | 47,886 |
| $ | 55,081 |
|
| | | |
| (a) Represents the total net deficit status of principal pension plans, other pension plans and retiree benefit plans. See Note 13 to the consolidated financial statements for further information. |
| In this document we use GE Industrial net debt*, which is calculated based on rating agency methodologies. We are including the calculation of GE industrial net debt* to provide investors more clarity regarding how the credit rating agencies measure GE Industrial leverage. |
OTHER FINANCIAL DATA
|
| | | | | | | | | |
GE INDUSTRIAL FREE CASH FLOWS (FCF) AND ADJUSTED GE INDUSTRIAL FCF (NON-GAAP) (In millions) | 2018 |
| 2017 |
| 2016 |
|
| GE CFOA (GAAP) | $ | 2,258 |
| $ | 11,033 |
| $ | 29,972 |
|
| Add: gross additions to property, plant and equipment | (3,302 | ) | (4,132 | ) | (3,758 | ) |
| Add: gross additions to internal-use software | (347 | ) | (518 | ) | (740 | ) |
| Less: common dividends from GE Capital | — |
| 4,016 |
| 20,095 |
|
| Less: GE Pension Plan funding | (6,000 | ) | (1,717 | ) | (347 | ) |
| Less: taxes related to business sales | (180 | ) | (229 | ) | (1,398 | ) |
| GE Industrial Free Cash Flows (Non-GAAP) | $ | 4,789 |
| $ | 4,313 |
| $ | 7,124 |
|
| Less: Oil & Gas CFOA | 1,763 |
| (477 | ) | — |
|
| Less: Oil & Gas gross additions to property, plant and equipment | (964 | ) | (488 | ) | — |
|
| Less: Oil & Gas gross additions to internal-use software | (31 | ) | (34 | ) | — |
|
| Add: BHGE Class B shareholder dividend | 494 |
| 251 |
| — |
|
| Adjusted GE Industrial Free Cash Flows (Non-GAAP) | $ | 4,515 |
| $ | 5,562 |
| $ | 7,124 |
|
| | | | |
| In 2018, GE transitioned from reporting an Adjusted GE Industrial CFOA metric to measuring itself on a GE Industrial Free Cash Flows basis*. This metric includes GE CFOA plus investments in property, plant and equipment and additions to internal-use software; this metric excludes any dividends received from GE Capital and any cash received from dispositions of property, plant and equipment. |
| We believe that investors may also find it useful to compare GE’s Industrial free cash flows* performance without the effects of cash used for taxes related to business sales and contributions to the GE Pension Plan. We believe that this measure will better allow management and investors to evaluate the capacity of our industrial operations to generate free cash flows. In addition, we report Adjusted GE Industrial Free Cash Flows* in order to provide a more fair representation of the cash that we are entitled to utilize in a given period. We also use Adjusted GE Industrial Free Cash Flows* as a performance metric at the company-wide level for our annual executive incentive plan for 2018. |
| Management recognizes that the term "free cash flows" may be interpreted differently by other companies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of the respective businesses or companies and may therefore be a useful tool in assessing period-to-period performance trends. |
|
| | | | | | | | | | | | | | | |
General Electric Company (In millions; per-share amounts in dollars) | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
|
| | | | | | |
| Revenues | $ | 95,214 |
| $ | 97,012 |
| $ | 99,279 |
| $ | 103,297 |
| $ | 94,494 |
|
| Earnings (loss) from continuing operations attributable to the Company | 416 |
| (20,991 | ) | (8,253 | ) | 7,454 |
| (7 | ) |
| Earnings (loss) from discontinued operations, net of taxes, attributable to the Company | (5,395 | ) | (1,364 | ) | (231 | ) | 47 |
| (5,068 | ) |
| Net earnings (loss) attributable to the Company | (4,979 | ) | (22,355 | ) | (8,484 | ) | 7,500 |
| (5,074 | ) |
| Dividends declared | 810 |
| 3,669 |
| 7,741 |
| 9,054 |
| 9,161 |
|
| Preferred stocks dividends | 460 |
| 447 |
| 436 |
| 656 |
| 18 |
|
| Per common share: | | | | | |
| Earnings (loss) from continuing operations – diluted | $ | (0.01 | ) | $ | (2.47 | ) | $ | (1.00 | ) | $ | 0.74 |
| $ | (0.13 | ) |
| Earnings (loss) from discontinued operations – diluted | (0.62 | ) | (0.16 | ) | (0.03 | ) | — |
| (0.51 | ) |
| Net earnings (loss) – diluted | (0.62 | ) | (2.62 | ) | (1.03 | ) | 0.75 |
| (0.64 | ) |
| Earnings (loss) from continuing operations – basic | (0.01 | ) | (2.47 | ) | (1.00 | ) | 0.75 |
| (0.13 | ) |
| Earnings (loss) from discontinued operations – basic | (0.62 | ) | (0.16 | ) | (0.03 | ) | 0.01 |
| (0.51 | ) |
| Net earnings (loss) – basic | (0.62 | ) | (2.62 | ) | (1.03 | ) | 0.76 |
| (0.64 | ) |
| Dividends declared | 0.04 |
| 0.37 |
| 0.84 |
| 0.93 |
| 0.92 |
|
| Total assets | 266,048 |
| 311,072 |
| 371,099 |
| 361,014 |
| 491,109 |
|
| Short-term borrowings | 22,072 |
| 12,776 |
| 23,087 |
| 30,519 |
| 49,540 |
|
| Non-recourse borrowings of consolidated securitization entities | 1,655 |
| 1,875 |
| 1,980 |
| 417 |
| 3,083 |
|
| Long-term borrowings | 67,155 |
| 88,949 |
| 102,263 |
| 105,192 |
| 144,594 |
|
*Non-GAAP Financial Measure
GE20182019 FORM 10-K 76
49
|
| | |
MD&A | NON-GAAP FINANCIAL MEASURES | |
|
| | | |
GE INDUSTRIAL NET DEBT (NON-GAAP) (Dollars in millions) | December 31, 2018 |
|
| Total GE short- and long-term borrowings (GAAP) | $ | 68,570 |
|
| Less: GE Capital short- and long-term debt assumed by GE | 36,262 |
|
| Less: BHGE total borrowings | 6,330 |
|
| Add: intercompany loans from GE Capital | 13,749 |
|
| Total adjusted GE borrowings | 39,727 |
|
| Total pension and retiree benefit plan liabilities (pre-tax)(a) | 27,159 |
|
| Less: taxes at 21% | 5,703 |
|
| Total pension and retiree benefit plan liabilities (net of tax) | 21,456 |
|
| GE rental expense for the year ended December 31, 2018 | 1,850 |
|
| Multiply by 3 | 3 |
|
| Total operating lease obligations | 5,550 |
|
| Less: BHGE rental expense for the year ended December 31, 2018 multiplied by 3 | 1,682 |
|
| Total operating lease obligations excluding BHGE | 3,868 |
|
| GE preferred stock | 5,573 |
|
| Less: 50% of GE preferred stock | 2,787 |
|
| 50% of preferred stock | 2,787 |
|
| Deduction for total GE cash, cash equivalents and restricted cash | (20,528 | ) |
| Less: BHGE cash, cash equivalents and restricted cash | (3,723 | ) |
| Deduction for total GE cash, cash equivalents and restricted cash, excluding BHGE | (16,805 | ) |
| Less: 25% of GE cash, cash equivalents and restricted cash, excluding BHGE | (4,201 | ) |
| Deduction for 75% of GE cash, cash equivalents and restricted cash, excluding BHGE | (12,604 | ) |
| Total GE Industrial net debt (Non-GAAP) | $ | 55,233 |
|
| | |
| (a) Represents the total underfunded status of Principal pension plans ($18,491 million), Other pension plans ($3,877 million), and Retiree health and life benefit plans ($4,791 million). |
| |
| In this document we use GE industrial net debt*, which is calculated based on rating agency methodologies. There is significant uncertainty around the timing and events that could give rise to items included in the determination of this metric, including the timing of pension funding, proceeds from dispositions, and the impact of interest rates on our pension assets and liabilities. We are including the calculation of GE industrial net debt* to provide investors more clarity regarding how the credit rating agencies measure GE industrial leverage. |
*Non-GAAP Financial Measure
OTHER FINANCIAL DATA
|
| | | | | | | | | | | | | | | |
| (In millions, except total employees; per-share amounts in dollars) | 2018 |
| 2017 |
| 2016 |
| 2015 |
| 2014 |
|
| General Electric Company and Consolidated Affiliates | | | | | |
| Revenues | $ | 121,615 |
| $ | 118,243 |
| $ | 119,469 |
| $ | 115,159 |
| $ | 116,407 |
|
| Earnings (loss) from continuing operations attributable to the Company | (20,629 | ) | (8,169 | ) | 8,453 |
| 1,488 |
| 9,447 |
|
| Earnings (loss) from discontinued operations, net of taxes, attributable to the Company | (1,726 | ) | (315 | ) | (952 | ) | (7,807 | ) | 5,698 |
|
| Net earnings (loss) attributable to the Company | (22,355 | ) | (8,484 | ) | 7,500 |
| (6,320 | ) | 15,145 |
|
| Dividends declared(a) | 3,669 |
| 7,741 |
| 9,054 |
| 9,161 |
| 8,949 |
|
| Per common share | | | | | |
| Earnings (loss) from continuing operations – diluted | $ | (2.43 | ) | $ | (0.99 | ) | $ | 0.85 |
| $ | 0.15 |
| $ | 0.93 |
|
| Earnings (loss) from discontinued operations – diluted | (0.20 | ) | (0.04 | ) | (0.10 | ) | (0.78 | ) | 0.56 |
|
| Net earnings (loss) – diluted | (2.62 | ) | (1.03 | ) | 0.75 |
| (0.63 | ) | 1.49 |
|
| Earnings (loss) from continuing operations – basic | (2.43 | ) | (0.99 | ) | 0.86 |
| 0.15 |
| 0.94 |
|
| Earnings (loss) from discontinued operations – basic | (0.20 | ) | (0.04 | ) | (0.11 | ) | (0.78 | ) | 0.57 |
|
| Net earnings (loss) – basic | (2.62 | ) | (1.03 | ) | 0.76 |
| (0.64 | ) | 1.51 |
|
| Dividends declared | 0.37 |
| 0.84 |
| 0.93 |
| 0.92 |
| 0.89 |
|
| Total assets | 309,129 |
| 369,245 |
| 359,122 |
| 489,115 |
| 654,018 |
|
| Short-term borrowings | 12,849 |
| 24,036 |
| 30,714 |
| 49,860 |
| 70,402 |
|
| Non-recourse borrowings of consolidated securitization entities | 1,875 |
| 1,980 |
| 417 |
| 3,083 |
| 4,403 |
|
| Long-term borrowings | 95,234 |
| 108,575 |
| 105,080 |
| 144,659 |
| 185,832 |
|
| Redeemable noncontrolling interests | $ | 382 |
| $ | 3,391 |
| $ | 3,017 |
| $ | 2,962 |
| $ | 98 |
|
| Total employees | 283,000 |
| 313,000 |
| 295,000 |
| 333,000 |
| 305,000 |
|
Transactions between GE and GE Capital have been eliminated from the consolidated information.
| |
(a) | Included $447 million, $436 million, $656 million and $18 million of preferred stock dividends in 2018 , 2017, 2016 and 2015, respectively. |
|
| | | | | | | |
| PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
| Period | Total number of shares purchased |
| Average price paid per share |
| Total number of shares purchased as part of our share repurchase program(a) |
|
| (Shares in thousands) | | | |
| | | | |
| 2018 | | | |
| October | 1,428 |
| $ | 11.74 |
| 1,428 |
|
| November | 3,870 |
| 8.32 |
| 3,870 |
|
| December | 2,302 |
| 7.26 |
| 2,302 |
|
| Total | 7,600 |
| $ | 8.64 |
| 7,600 |
|
| |
(a) | Shares were repurchased through the GE Share Repurchase Program that we announced on April 10, 2015 (the Program). Under the program, we were authorized to repurchase up to $50.0 billion of our common stock through December 31, 2018. As of December 31, 2018, we had repurchased a total of approximately $29.3 billion under the Program. The Program was flexible and shares were acquired with a combination of borrowings and free cash flows from the public markets and other sources, including GE Stock Direct, a stock purchase plan that is available to the public. |
|
|
| FIVE-YEAR PERFORMANCE GRAPH |
RISK FACTORS | | |
The annual changes for the five-year period shown in the above graph are based on the assumption that $100 had been invested in General Electric common stock, the Standard & Poor’s 500 Stock Index (S&P 500) and the Dow Jones Industrial Average (DJIA) on December 31, 2014, and that all quarterly dividends were reinvested. The cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31 for each year indicated.
With respect to “Market Information,” in the United States, General Electric common stock is listed on the New York Stock Exchange under the ticker symbol "GE" (its principal market). General Electric common stock is also listed on the London Stock Exchange, Euronext Paris, the SIX Swiss Exchange and the Frankfurt Stock Exchange.
As of January 31, 2020, there were approximately 379,000 shareholder accounts of record.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.GE did not repurchase any equity securities during the three months ended December 31, 2019, and no repurchase program has been authorized.
RISK FACTORS
The following discussion of risk factors contains "forward-looking statements," as discussed in the Forward-Looking Statements section. These risk factors may be important to understanding any statement in this Form 10-K report or elsewhere. The risks described below should not be considered a complete list of potential risks that we may face. The following information should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)MD&A section and the consolidated financial statements and related notes. We also incorporate the risks described in BHGE’s Form 10-K report and other SEC filings. The risks we describe in this Form 10-K report or in our other SEC filings could have a material adverse effect on our business, reputation, financial position and results of operations.
Our businesses routinely encounteroperations, and address risks, some of which willthey could cause our future results to be different - sometimes materially different - than we presently anticipate. Below, we describe certain important strategic, operational, financial, and legal and compliance risks. Our reactions to material future developments as well as our competitors' reactions to those developments will affect our future results.
STRATEGIC RISKS
RISKS. Strategic risk relates to the Company's future business plans and strategies, including the risks associated with: the global macro-environment; our portfolio of businesses and capital allocation decisions; dispositions, mergers and acquisitions, joint ventures and restructuring activity; the global macro-environment in which we operate; intellectual property; and other risks, includingcompetitive threats, the demand for our products and services competitive threats and the success of our investments in our technology and innovation; intellectual property; and other productrisks.
Global macro-environment - Our growth is subject to global economic, political and service innovations. geopolitical risks.We operate in virtually every part of the world, serve customers in over 170 countries and received 59% of our revenues for 2019 from outside the United States. Our operations and the execution of our business plans and strategies are subject to the effects of global economic trends, competition and geopolitical risks and demand or supply shocks from war, natural disaster, a health pandemic or other events. They are also affected by local and regional economic environments and policies in the U.S. and other markets that we serve, including interest rates, monetary policy, inflation, economic growth, recession, commodity prices, currency volatility, currency controls or other limitations on the ability to expatriate cash, debt levels and actual or anticipated defaults on sovereign debt. For example, changes in local economic conditions or outlooks, such as lower rates of investment or economic growth in China, Europe or other key markets, affect the demand for or profitability of our products and services outside the U.S., and the impact on the Company could be significant given the extent of our activities outside the United States. Political changes and trends such as populism, protectionism, economic nationalism and sentiment toward multinational companies and resulting changes to trade, tax or other laws and policies (including tariffs) have been and may continue to be disruptive and costly to our businesses, and can interfere with our global operating model, supply chain, production costs, customer relationships and competitive position. Further escalation of specific trade tensions, such as those between the U.S. and China, or in global trade conflict more broadly could lead to a significant deterioration of global growth, and related decreases in confidence or investment activity in the global markets would adversely affect our business performance. We also do business in many emerging market jurisdictions where economic, political and legal risks are heightened. While some types of these economic risks can be hedged using derivatives or other financial instruments and some are insurable, such attempts to mitigate these risks are costly and not always successful.
Portfolio strategy execution - Our success depends on achieving our strategic and financial objectives, including through dispositions or other business separations.
As previously announced, wedispositions. We are pursuing a variety of dispositions, including the planned sale of our BioPharma business within our Healthcare segment and plans to exitexiting our remaining equity ownership positionsposition in BHGE and Wabtec.Baker Hughes. The proceeds that we expect to receive from such actions are an important source of cash flow for the Company as part of our strategic and financial planning. As we seek to sell or separate certain assets,businesses, equity interests or businesses,assets, we may encounter difficulty in finding buyers, managing interdependencies across multiple transactions and other Company initiatives or implementing separation plans, or executing alternative exit strategies on acceptable terms, which could delay or prevent the accomplishment of our strategic and financial objectives, including our goal of reducing the Company’s leverage to targeted levels over time. In particular, some of the sale and disposition strategies that we are considering or may consider will depend on favorable conditions in the capital markets or private acquisition financing markets for execution, on our preferred timeline, and declines in market valuations that adversely impact the values of equity interests (such as our remaining interest in Baker Hughes) or other assets that we sell willcan diminish the cash proceeds that we can realize through such sales.realize. We may dispose of assetsbusinesses or businessesassets at a price or on terms that are less favorable than we had anticipated, or with purchase price adjustments or the exclusion of assets or liabilities that must be divested, managed or run off separately. We mayare also facesubject to limitations in the form of regulatory or governmental approvals that may prevent certain prospective purchasers from completing transactions with us or delay us from executing transactions on our preferred timeline, or arising from our debt or other contractual obligations that limit our ability to complete certain assetbusiness or businessasset dispositions. Moreover, recent and planned dispositions have the effecteffects of planned transactions over time will reducereducing the Company’s cash flow and earnings capacity, and resultresulting in a less diversified portfolio of businesses and we will have a greaterincreasing our dependency on remaining businesses for our financial results.results from ongoing operations. Executing on these transactions can divert senior management time and resources from other pursuits, particularly with transaction structures that result in partial GE ownership and continuing governance or oversight rights in separate companies.pursuits. Dispositions or other business separations may also often involve continued financial involvement in the divested business, such as through continuing equity ownership, retained assets or liabilities, transition serviceservices agreements, commercial agreements, guarantees, indemnities or other current or contingent financial obligations or liabilities. Under these arrangements, performance by the divested businesses or other conditions outside our control could materially affect our future financial results.
With respect to past and potential future acquisitions, joint ventures and business integrations, we may not achieve expected returns and other benefits as a result of changes in strategy or separation/integration and collaboration challenges related to personnel, IT systems or other factors. For example, the anticipated returns from the combination of our Oil & Gas business with Baker Hughes that we completed in July 2017 included cost and growth synergy benefits over a multi-year period that we may not fully realize, or that we may realize to a lesser extent than originally projected as we execute on our announced plan of an orderly separation from BHGE. In addition, in connection with mergers and acquisitions over time, we have recorded significant goodwill and other intangible assets on our balance sheet, and if we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets. We also participate in a number of joint ventures with other companies or government enterprises in various markets around the world, including joint ventures where we may have a lesser degree of control over the business operations, which may expose us to additional operational, financial, legal or compliance risks. risks.
Competitive environment - We are dependent on the maintenance of existing product lines and service relationships, market acceptance of new product and service introductions and technology and innovation leadership for revenue and earnings growth. The markets in which we operate are highly competitive in terms of pricing, product and service quality, product development and introduction time, customer service, financing terms and shifts in market demand, and competitors are increasingly offering services for our installed base. Our long-term operating results and competitive position depend substantially upon our ability to continually develop, introduce, and market new and innovative products, services and platforms, to modify existing products and services, to customize products and services, to increase our productivity as we perform on long-term service agreements, and to anticipate and respond to market and technological changes driven by trends such as increased digitization or automation or by developments such as climate change that present both risks and opportunities for our businesses. A failure to appropriately plan for future customer demand and industry trends may adversely affect our delivery of products, services and outcomes in line with our projected financial performance or cost estimates, and ultimately may result in excess costs, build-up of inventory that becomes obsolete, lower profit margins and an erosion of our competitive position. For example, the significant decreases in recent years in the levelized cost of renewable sources of power generation (such as wind and solar), along with ongoing changes in investor and consumer preferences and considerations related to climate change, affect the demand for and the competitiveness of our products and services related to fossil fuel-based power generation and further changes over time could have a material adverse effect on the performance of those businesses and our consolidated results. These trends and the relative competitiveness of different types of product and service offerings will continue to be impacted in ways that are uncertain by factors such as the pace of technological developments and related cost considerations, the levels of economic growth in different markets around the world and the adoption of climate change-related policies (such as carbon taxes, cap and trade regimes, increased efficiency standards or incentives or mandates for particular types of energy) at the national and sub-national levels or by private actors.
Our businesses are also subject to technological change and require us to continually attract and retain skilled talent. The introduction of innovative and disruptive technologies in the markets in which we operate also poses risks in the form of new competitors (including new entrants from outside our traditional industries), market consolidation, substitutions of existing products, services or solutions, niche players, new business models and competitors that are faster to market with new or more cost-effective products or services. Because the research and development cycle involved in bringing products in our businesses to market is often lengthy, it is inherently difficult to predict the economic conditions and competitive dynamics that will exist when any new product is complete, and our investments may generate weaker returns than we anticipated at the outset. Our capacity to invest in research and development efforts to pursue advancement in a wide range of technologies, products and services also depends on the financial resources that we have available for such investment relative to other capital allocation priorities, and under-investment could lead to the loss of sales of our products and services. The amounts that we do invest in research and development divert resources from other potential investments in our businesses, and our efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of our customers as fully as competitive offerings.
GE20182019 FORM 10-K 79 51
Restructuring & personnel - We arehave been undertaking extensive cost reduction and restructuring efforts; these efforts may have adverse effects on our operations, employee retention, results and resultsreputation and may not achieve the expected benefits.
We arecontinue undertaking extensive restructuring actions that include workforce reductions, global facility consolidations and other cost reduction initiatives. These actions are a central component of our ongoing efforts to improve operational and financial performance. The periodextent of substantial change across our organizational structure, senior leadership, culture, functional alignment, outsourcing and other areas that we are in the midst of poses risks in the form of personnel capacity constraints and institutional knowledge loss that could lead to missed performance or financial targets, loss of key personnel and harm to our reputation. The risk of capacity constraints is also heightened with the number of interdependent and transformational business portfolio and internal actions that we arehave been undertaking during a period of significant restructuring and cost reduction across the Company. Moreover, if we do not successfully manage our restructuring and other transformational activities, expectedthe anticipated operational improvements, efficiencies benefits and operational improvementsother benefits might be delayed or not realized, and our operations and business could be disrupted. Risks associated with these actions include unforeseen delays in implementation of workforce reductions, additional unexpected costs, adverse effects on employee morale, loss of key employees or other retention issues, inability to attract and hire talented professionals or the failure to meet operational targets due to the loss of employees or work stoppages, any of which may impair our ability to achieve anticipated cost reductions or may otherwise harm our business or reputation and have an adverse effect on our competitive position or financial performance. performance.
Global macro-environment - Our growth is subject to global economic and political risks.
We operate in virtually every part of the world and serve customers in over 180 countries. In 2018, 62% of our revenue was attributable to activities outside the United States. Our operations and the execution of our business plans and strategies are subject to the effects of global competition and geopolitical risks. They are also affected by local and regional economic environments, including interest rates, monetary policy, inflation, recession, currency volatility, currency controls or other limitations on the ability to expatriate cash and actual or anticipated default on sovereign debt. For example, changes in local economic conditions, such as an economic slowdown in China or other key markets, or fluctuations in exchange rates may affect demand for or the profitability of our products and services outside the U.S., and the impact on the Company could be significant given the extent of our activities outside the U.S. Political changes and trends such as populism, protectionism, economic nationalism and sentiment toward multinational companies and resulting changes to trade, tax or other laws and policies may be disruptive, and can interfere with our global operating model, our supply chain, our customer relationships and competitive position. An increase in trade conflict could lead to a significant deterioration of global growth, and related decreases in confidence or investment activity in the global markets would adversely affect our business performance. We also do business in many emerging markets jurisdictions where economic, political and legal risks are heightened. While some types of these economic risks can be hedged using derivatives or other financial instruments and some are insurable, such attempts to mitigate these risks are costly and not always successful, and our ability to engage in such mitigation may decrease or become even more costly as a result of more volatile market conditions.
Competitive environment - We are dependent on the maintenance of existing product lines and service relationships, market acceptance of new product and service introductions and innovations for revenue and earnings growth.
The markets in which we operate are highly competitive in terms of pricing, product and service quality, product development and introduction time, customer service, financing terms and shifts in market demands, and competitors are increasingly offering services for our installed base. Our businesses are also subject to technological change and require us to continually attract and retain skilled talent. Our long-term operating results and competitive position depend substantially upon our ability to continually develop, introduce, and market new and innovative products, services and platforms, to modify existing products and services, to customize products and services, to increase our productivity as we perform on long-term service agreements, to anticipate and respond to market and technological changes driven by trends such as increased digitization or automation, or by developments such as climate change that present both risks and opportunities for our businesses. A failure to be adequately market-based, or to accurately forecast customer demand and industry trends, may adversely affect our delivery of products, services and outcomes in line with our projected financial performance or cost estimates, and ultimately may result in excess costs, build-up of inventory that becomes obsolete, lower profit margins and an erosion of our competitive position. For example, our Aviation business is in the midst of increasing the production volume for its LEAP engine, and a successful ramp in engine commitments over the next few years will require significant coordination across supply chains, systems, materials, training, logistics and other areas to achieve expected levels of cost and profitability. In addition, increased use of alternative energy sources due to greater cost competitiveness of such sources, or changes in technology or consumer preferences, could adversely affect the demand for our products and related services that are used in power generation or other applications that use oil or natural gas as energy sources, and as a result could have a material adverse effect on the performance of our businesses or our consolidated results. The introduction of innovative and disruptive technologies in the markets in which we operate can also pose risks in the form of new competitors, substitutions of existing products, services or solutions, niche players, new business models and competitors that are faster to market with new products or services than we are. Our capacity to invest in research and development efforts to pursue advancement in a wide range of technologies, products and services depends on the financial resources that we have available for such investment relative to other capital allocation priorities, and under-investment could lead to the loss of market share for our products and services. The amounts that we do invest in research and development divert resources from other potential investments in our businesses, and our efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of our customers as fully as competitive offerings.
Intellectual property - Our intellectual property portfolio may not prevent competitors from independently developing products and services similar to or duplicative to ours, and the value of our intellectual property may be negatively impacted by external dependencies.
Our patents and other intellectual property may not prevent competitors from independently developing or selling products and services similar to or duplicative of ours, and there can be no assurance that the resources invested by us to protect our intellectual property will be sufficient or that our intellectual property portfolio will adequately deter misappropriation or improper use of our technology. In the context of the Company’s recent performance and planned portfolio actions, the value of the GE brand may be negatively impacted, and we may offer multiple long-term and concurrent trademarkTrademark licenses of the GE brand in connection with dispositions that may negatively impact the overall value of the brand in the future. As a result of increased numbers of employee exits due to restructuring activities or otherwise, we also face heightened risks related to the loss or unauthorized use of the Company’s intellectual property or other protected data. We could also face competition in some countries where we have not invested in an intellectual property portfolio. If we are not able to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected. We also face attempts to gain unauthorized access to our IT systems or products for the purpose of improperly acquiring our trade secrets or confidential business information. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development. In addition, we may beare subject to the target of enforcement of patents or other intellectual property by third parties, including aggressive and opportunistic enforcement claims by non-practicing entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming. If GE is found to infringe any third-party rights, we could be required to pay substantial damages or we could be enjoined from offering some of our products and services. The value of, or our ability to use, our intellectual property may also be negatively impacted by dependencies on third parties, such as our ability to obtain or renew on reasonable terms licenses that we need in the future, or our ability to secure or retain ownership or rights to use data in certain software analytics or services offerings. offerings.
OPERATIONAL RISKS
RISKS. Operational risk relates to risks arising from systems, processes, people and external events that affect the operation of our businesses. It includes risks related to product and service life cyclelifecycle and execution; product safety and performance; information management and data protection and security, including cybersecurity; and supply chain and business disruption.
Operational execution - We may face operationalOperational challenges that could have a material adverse effect on our business, reputation, financial position and results of operations.
The Company’s financial results depend on the successful execution of our businesses’ operating plans across all steps of the product and service development, production, marketing, sales, servicing and cash collections lifecycle. For example, we arecontinue working to improve the operations and execution of our Power business,and Renewable Energy businesses, and our ability to effect anthe desired operational turnaroundturnarounds will be a significant factor in determining the financial performance of the Company as a whole. In addition, we have dependency on the continued strength and successful operating plan execution of our other businesses, particularly Aviation, business and its successful plan execution, becauseduring this period of both the continued weakness in Power as well as the planned dispositions that will result in our portfolio of businesses, earnings and sources of operating cash flows becoming less diversified. Organizational changes, including as a result of restructuring actions that lead to employee attrition or declining labor relations, could adversely affect our ability to manage operational challenges.improvement. Operational failures couldthat result in quality problems or potential product, laborenvironmental, health or safety or environmental risks, which could have a material adverse effect on our business, reputation, financial position and results of operations. In addition, a portion of our business, particularly within our Power and Renewable Energy businesses, involves large projects where we take on, or are members of a consortium responsible for, the full scope of engineering, procurement, construction or other services. These types of projects canoften pose unique risks related to their location, scale, complexity, duration and duration.pricing or payment structure. Performance issues or schedule delays can arise due to inadequate technical expertise, unanticipated project modifications, developments at project sites, environmental, health and safety issues, execution by or coordination with suppliers, subcontractors or consortium partners, andfinancial difficulties of our customers or significant partners or compliance with government regulations, and these can lead to cost overruns, contractual penalties, liquidated damages and other adverse consequences. AsWhere GE is a member of a consortium, we are typically subject to claims based on joint and several liability, and claims can extend to aspects of the Company’s portfolio evolves,project or costs that are not directly related or limited to the extent that such projects represent a larger shareGE’s scope of GE’s business than they did in the past, the risk will become greater that operational,work. Operational, quality or other issues at particularlarge projects, couldor across our projects portfolio more broadly, can adversely affect GE’s business, reputation or results of operations. operations.
Product safety - Our products and services are highly sophisticated and specialized, and a major product failure or similar event couldaffecting our products or third-party products with which our products are integrated can adversely affect our business, reputation, financial position and results of operations.
We produce highly sophisticated products and provide specialized services for both our own and third-party products that incorporate or use complex or leading-edge technology, including both hardware and software. Many of our products and services involve complex industrial machinery or infrastructure projects, such as commercial jet engines, gas turbines, onshore and offshore oil and gas drillingwind turbines or nuclear power generation, and accordingly the impact of a catastrophic product failure or similar event could be significant. In particular, actual or perceived design or production issues related to new product introductions or relatively new product lines can result in significant reputational harm to our businesses, in addition to direct warranty, maintenance and other costs that may arise, and a morearise. A significant product issue resulting in injuries or death, widespread outages, a fleet grounding or similar systemic consequences could have a material adverse effect on our business, reputation, financial position and results of operations. We may also incur increased costs, delayed payments or lost equipment or services revenue in connection with a significant issue with a third party’s product with which our products are integrated. For example, the LEAP-1B engine that our Aviation business develops, produces and sells through CFM is the exclusive engine for the Boeing 737 MAX, which has been subject to a global fleet grounding since March 2019 following two fatal crashes that were unrelated to the LEAP engine. The 737 MAX grounding had an adverse effect on GE CFOA in 2019, and uncertainties related to the timing for the 737 MAX return to service and future engine production rates pose material risk for our Aviation business and GE’s overall financial outlook and results. For further information regarding the effect of the 737 MAX grounding on GE CFOA, see the Aviation and GECAS 737 MAX section in Consolidated Results within MD&A. While we have built operational processes to ensure that our product design, manufacture, performance and servicing meet rigorous quality standards, there can be no assurance that we or our customers or other third parties will not experience operational process or product failures and other problems, including through manufacturing or design defects, process or other failures of contractors or third-party suppliers, cyber-attacks or other intentional acts, that could result in potential product, safety, quality, regulatory or environmental risks.
Cybersecurity - Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions, services and data.
Increased global cybersecurity vulnerabilities, threats, computer viruses and more sophisticated and targeted cyber-related attacks, as well as cybersecurity failures resulting from human error and technological errors, pose a risk to the security of GE's and its customers', partners', suppliers' and third-party service providers' infrastructure, products, systems and networks and the confidentiality, availability and integrity of GE's and its customers' data. As the perpetrators of such attacks become more capable (including sophisticated state or state-affiliated actors), and as critical infrastructure is increasingly becoming digitized, the risks in this area continue to grow. While we attempt to mitigate these risks by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, we remain potentially vulnerable to additional known or unknown threats, and there is no assurance that the impact from such threats will not be material. In addition to existing risks, the adoption of new technologies in the future may also increase our exposure to cybersecurity breaches and failures. We also may have access to sensitive, confidential or personal data or information in certain of our businesses that is subject to privacy and security laws, regulations or customer-imposed controls. Despite our use of reasonable and appropriate controls to protect our systems and sensitive, confidential or personal data or information, we may be vulnerablehave vulnerability to material security breaches, theft, misplaced, lost or corrupted data, programming errors, employee errors and/or malfeasance (including misappropriation by departing employees) that could potentially lead to thematerial compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions. Data privacy and protection laws are evolving, can vary significantly by country and present increasing compliance challenges, which increase our costs, affect our competitiveness and can expose us to substantial fines or other penalties. In addition, a significant cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action.
Supply chain - Significant raw material shortages, supplier capacity constraints, supplier or customer production disruptions, supplier quality and sourcing issues or price increases couldcan increase our operating costs and adversely impact the competitive positions of our products.
Our reliance on third-party suppliers, contract manufacturers and service providers, and commodity markets to secure raw materials, parts, components and sub-systems used in our products exposes us to volatility in the prices and availability of these materials, parts, components, systems and services. SomeAs our supply chains extend into many different countries and regions around the world, we are also subject to global economic and geopolitical dynamics and risks associated with exporting components manufactured in particular countries for incorporation into finished products completed in other countries. In addition, some of theseour suppliers or their sub-suppliers are limited- or sole-source suppliers. We also have internal dependencies on certain key GE manufacturing or other facilities. A disruptionDisruptions in deliveries from a key GE facility or from our third-party suppliers, contract manufacturers or outsourced or other service providers, capacity constraints, production disruptions up- or down-stream, price increases, or decreased availability of raw materials or commodities, including as a result of catastrophicwar, natural disaster, health pandemic or other business continuity events, could have an adverse effectadversely affect our operations and, depending on the length and severity of the disruption, can limit our ability to meet our commitments to customers or increasesignificantly impact our operating costs.profit or cash flows. For example, we are monitoring the impact across our businesses of the recent coronavirus outbreak, which has already caused disruption to production facilities and activities in China, and the severity of the operational and financial impact will depend on how long and widespread the disruption proves to be. Quality, capability, compliance and sourcing issues experienced by third-party providers can also adversely affect our costs, margin rates and the quality and effectiveness of our products and services and result in liability and reputational harm. In addition, while we require our suppliers to implement and maintain reasonable and appropriate controls to protect information we provide to them, they may be the victim of a cyber-related attack that could potentially lead to the compromise of the Company’s intellectual property, personal data or other confidential information, or to production downtimes and operational disruptions that could have an adverse effect on our ability to meet our commitments to customers. customers.
FINANCIAL RISKS
RISKS. Financial risk relates to our ability to meet financial obligations and mitigate exposure to broad market risks, including funding and liquidity risks, such as risk related to our credit ratings and our availability and cost of funding; credit risk; and volatility in foreign currency exchange rates, interest rates and commodity prices. Liquidity risk refers to the potential inability to meet contractual or contingent financial obligations (whether on- or off-balance sheet) as they arise, and could potentially impact an institution's financial condition or overall safety and soundness. Credit risk is the risk of financial loss arising from a customer or counterparty failure to meet its contractual obligations, and we face credit risk arising from both our industrial businesses and from GE Capital.
Leverage & borrowings - Our indebtedness levels could limit the flexibility of our businesses, and we could face further constraints as a result of failing to decrease our leverage over time, further downgrades of our credit ratings or adverse market conditions.
Our ability to decrease our leverage as planned is dependent on the proceeds that we generate from business and asset dispositions, as well as our cash flows from operations. De-leveraging and servicing our debt will require a significant amount of cash, and if we are unable to generate cash flows in accordance with our plans we may be required to adopt one or more alternatives such as increasing borrowing under credit lines, further reducing or delaying investments or capital expenditures, selling other businesses or assets, refinancing debt or raising additional equity capital. In particular, we have significant pension and run-off insurance liabilities that are sensitive to numerous factors and assumptions that we use in our pension liability, GAAP insurance reserve and insurance statutory calculations. For example, the impact of low or declining market interest rates on the discount rates that we use to calculate these long-term liabilities (holding other variables constant) can adversely affect our earnings and cash flows, as well as the pace of progress toward our leverage goals for GE and for GE Capital. Lower than expected disposition proceeds or cash generation by our businesses over time could also adversely affect our progress toward our leverage goals. Our indebtedness could put us at a competitive disadvantage compared to competitors with lower debt levels that may have greater financial flexibility to secure additional funding for their operations, pursue strategic acquisitions, finance long-term projects or take other actions. Continuing to have substantial indebtedness could also have the consequencesconsequence of increasing our vulnerability to adverse general economic conditions, such as slowing economic growth or recession. It could also increase our vulnerability to adverse industry-specific conditions or to increases in the capital or liquidity needs at the GE or GE Capital levels, and it could limit our flexibility in planning for, or reacting to, changes in the economy and the industries in which we compete.
In addition, our existing levels of indebtedness may impair our ability to obtain additional debt financing on favorable terms in the future, particularly if coupled with further downgrades of our credit ratings or a deterioration of capital markets conditions more generally. External conditions in the financial and credit markets may limit the availability of funding at particular times or increase the cost of funding, which could adversely affect our business, financial position and results of operations. Factors that may affect the availability of funding or cause an increase in our funding costs include disruptions in the funding markets, and potential market impactsdisruptions arising in the United States, Europe, China, emerging markets or emergingother markets, currency movements or other potential market disruptions. If our cost of funding were to increase, it may adversely affect our competitive position and result in lower net interest margins, earnings and cash flows as well as lower returns on shareowners' equity and invested capital. factors.
Liquidity - Failure to meet our cash flow targets, or additional credit downgrades, could adversely affect our liquidity, funding costs and related margins.
We rely on cash from operations and proceeds from business and asset dispositions, as well as access to the short- and long-term debt markets, to fund our operations, maintain a contingency buffer of liquidity and meet our financial obligations and capital allocation priorities. In particular, we have historically relied on significant short-term borrowings in the commercial paper market to fund our operations on an intra-quarter basis. If we do not meet our cash flow objectives, whether through both improved cash performance in our businesses or successful execution of dispositionsbusiness and other portfolio actions,asset dispositions, our financial condition could be adversely affected. Our access to the debt markets, and to the commercial paper markets in particular, depends on our credit ratings. As a result of fourth quarter 2018 ratings actions by Moody’s, S&P and Fitch in 2018, GE has transitioned to a tier-2 commercial paper issuer, which reduced our borrowing capacity in the commercial paper markets.markets that we historically relied on significantly to fund our operations on an intra-quarter basis. To accommodate GE’s short-term liquidity needs, we arehave been increasing utilization of our revolving credit facilities as a substitute for commercial paper borrowings, which will resultresults in an overall increase to our cost of funds. A significant increase in our cost of capital could require us to consider changes to our capital allocation plans, such as our planned dividend levels.
There can also be no assurance that we will not face additional credit downgrades as a result of factors such as our progress in decreasing our leverage, the performance of our businesses, the failure to execute on dispositions and other portfolio actions or changes in rating application or methodology. Future downgrades could further adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets, and a significant downgrade could have an adverse commercial impact on our industrial businesses. For example, if our short-term credit ratings were to fall below A-2/P-2,P-2/F2, it is possible that we would no longer havelose all or part of our access to the tier-2 commercial paper market,markets, and therefore our borrowing capacity in the commercial paper marketmarkets would likely be further reduced. Further, we have relied, and may continue to rely, on securitization programs to provide alternative funding for sales of GE receivables to third-party investors. If any of our short-term credit ratings were to fall below A-1/A-2/P-2/F-2,F2, the timing or amount of liquidity generated by these programs could be adversely affected. In addition, in certain securitization transactions where we provide servicing for third-party investors, we are contractually permitted to commingle cash collected from customers on financing receivables sold or pledged to third-party investors with our own cash prior to making required payments to third-party investors, provided our short-term credit rating does not fall below A-2/P-2/F-2.F2. In the event our ratings were to fall below such levels, we would be required to segregate certain of these cash collections owed to third-party investors into restricted bank accounts and would lose the short-term liquidity benefit of commingling with respect to such collections. In addition, under various debt and derivative instruments, guarantees and covenants, we could be required to post additional capital or collateral in the event of a ratings downgrade, which would increase the impact of a ratings downgrade on our liquidity and capital position. Swap, forward and option contracts are executed under standard master agreements that typically contain mutual downgrade provisions that provide the ability of the counterparty to require termination if the credit ratings of the applicable GE entity were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. For additional discussion about our current credit ratings and related considerations, refer to the Capital Resources and Liquidity - Credit Ratings and Conditions section of this report. within MD&A.
Economy, customers & counterparties - A deteriorationDeterioration in conditions in the global economy, the major industries we serve or the financial markets, or in the soundness of financial institutions, governments or customers we deal with, maycan adversely affect our business and results of operations.
The business and operating results of our industrial businesses have been, and will continue to be, affected by worldwide economic conditions, including conditions in the air transportation, power generation, oil and gas, renewables,renewable energy, healthcare and other major industries we serve. Existing or potential customers may delay or cancel plans to purchase our products and services, including large infrastructure projects, and may not be able to fulfill their obligations to us in a timely fashion as a result of business deterioration, cash flow shortages low oil prices or difficulty obtaining financing for particular projects or due to macroeconomic conditions, geopolitical disruptions, changes in law or other unexpected challenges affecting the strength of the global economy. The airline industry, for example, is highly cyclical, and the level of demand for air travel is correlated to the strength of the U.S. and international economies. An extended disruption of regional or international travel, such as a disruption followingin connection with a terrorist incident, health pandemic or a recessionary economic environment that results in the loss of business and leisure traffic, could have a material adverse effect on our airline customers, and the viability of their business. business and their demand for our products and services. Such effects would be particularly significant for GE in the current environment, in which we have dependency on the continued strength of our Aviation business as we execute on planned dispositions and continue working to improve the operations and execution of other GE businesses. Secular, cyclical and competitive pressures facing customers across our overall portfolio ofenergy businesses earningscan also have a significant impact on the operating results and sources of operating cash flows becomes less diversified. Service contract cancellations or customer dynamicsoutlooks for our businesses. These include pressures such as early aircraft retirements, reducedlower demand in our Power business than in the past as a result of increased cost competitiveness and market penetration by renewables and other secular or cyclical pressures, reduced demandrenewable sources of power generation; the effects of changes in the wind energy market from the elimination of production or other tax credits for new wind energy projects, or declinesand significant price competition among wind equipment manufacturers and consolidation in orders, project commencement delaysthe industry; and pricing pressures at BHGE from low oil prices could affect our ability to fully recover our contract costsshifts in the availability of financing for certain types of projects as investors, governments, regulators and estimated earnings. other market participants develop plans for addressing climate change. In particular, our ability to effect an operational turnaround in our Power business will be more challenging to the extent that markets for our products and services remain lower for longer than expected. Further, our vendors may experience similar conditions, which may impact their ability to fulfill their obligations to us. We may also at times face greater challenges collecting on receivables with customers that are sovereign governments or located in emerging markets. If there is significant deterioration in the global economy, our results of operations, financial position and cash flows could be materially adversely affected. affected.
GE Capital - A smaller GE Capital continues to have exposure to insurance, credit and other risks and, in the event of future adverse developments, may not be able to meet its business and financial objectives without further actions at GE Capital or additional capital contributions by GE.
GE.To fund the statutory capital contributions that it expects to make to its insurance subsidiaries over the next several years, as well as to meet its debt maturities and other obligations, GE Capital plansexpects to rely on its existing liquidity, cash generated from asset reductions, cash flows from its businesses, and generating additional cash through dispositions, including substantially reducing the sizeGE repayments of its Energy Financial Servicesintercompany loans and Industrial Finance businesses. We are also planning approximately $4 billion of capital contributions from GE to GE Capital in 2019.GE. However, as GE Capital’s excess liquidity from past disposition proceeds runs off, and as its future earnings may beare reduced as a result of business or otherand asset sales, thethere is a risk will increase that future adverse developments could cause liquidity or funding stress for GE Capital. For example, it is possible that future requirements for capital contributions to the insurance subsidiaries will be greater than currently estimated or could be accelerated by regulators. For example, if ourOur annual testing of insurance reserves resultsis subject to a variety of assumptions, including assumptions about the discount rate (which is sensitive to changes in amarket interest rates), morbidity, mortality and future long-term care premium deficiency, we are required to unlock and update the assumptions for our future policy benefit reserves, and anyincreases. Any future adverse changes to these assumptions (to the extent not offset by any favorable changes to these assumptions) could result in an increase to future policy benefit reserves and, potentially, to the amount of capital we are required to contribute to the insurance subsidiaries.subsidiaries (as discussed in the Other Items - Insurance section within MD&A). We also anticipate that the adoption of recent changes tonew insurance accounting standardsstandard scheduled to be effective after 2021 (as discussed in the Other Items - New Accounting Standards section within MD&A) will alsosignificantly change the accounting for measurements of our long-duration insurance liabilities under GAAP and will materially affect our financial statements. In addition, we continue to evaluate strategic options to accelerate the further reduction in the size of GE Capital. CertainSome of these options could have a material financial charge depending on the timing, negotiated terms and conditions of any ultimate arrangements. It is also possible that contingent liabilities and loss estimates from GE Capital’s continuing or discontinued operations (see the Other Consolidated Information - Discontinued Operations section within MD&A) will need to be recognized or will increase in the future and will become payable. If GE Capital's credit ratings are downgraded because of inadequate increases in its capital levels over time, changes in rating application or methodology or other factors, GE Capital may also face increased interest costs and limitations on its ability to access external funding in the future. We anticipate funding any insurance capital requirements or strategic options through a combination of GE Capital earnings, asset sales, liquidity and GE parent support.
GE Capital also has exposure to many different industries and counterparties, including sovereign governments, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. Many of these transactions expose GE Capital to credit risk in the event of default of its counterparty or client. If conditions in the financial markets deteriorate, they may adversely affect the business and results of operations of GE Capital, as well as the soundness of financial institutions, governments and other counterparties we deal with. In addition, GE Capital's credit risk may be increased when the value of collateral held cannot be realized through sale or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to it. There can be no assurance that future liabilities, losses or impairments to the carrying value of financial assets would not materially and adversely affect GE Capital's business, financial position, results of operations and capacity to provide financing to support orders from GE's industrial businesses, or that factors causing sufficiently severe stress at GE Capital would not require GE to make larger than expected capital contributions to GE Capital in the future.
Social costsPostretirement benefit plans - Sustained increasesIncreases in pension and healthcare benefits obligations and costs may reducecan adversely affect our profitability.
earnings, cash flows and progress toward our leverage goals.Our results of operations may be positively or negatively affected by the amount of income or expense we record for our defined benefit pension plans. GAAP requires that we calculate income or expense for the plans using actuarial valuations. These valuations, which reflect assumptions about financial marketmarkets, interest rates and other economic conditions which may change based on changes in key economic indicators. The most significant year-end assumptions we use to estimate pension expense for 2019 aresuch as the discount rate and the expected long-term rate of return on the plan assets. In addition, weWe are also required to make an annual measurement of plan assets and liabilities, which may result in a significant reduction or increase to equity. AtThe factors that impact our pension calculations are subject to changes in key economic indicators, and future decreases in the end of 2018, the GE Pension Plan was underfunded,discount rate or low returns on a GAAP basis, by $12.4 billion,plan assets can increase our funding obligations and the GE Supplementary Pension Plan, an unfunded plan, had a projected benefit obligation of $6.1 billion. We made contributions of $6.0 billion to the GE Pension Plan in 2018. The 2018 contributions satisfyadversely impact our minimum ERISA funding requirement of $1.5 billion, and the remaining $4.5 billion was a voluntary contribution to the plan, a portion of which will be used to satisfy our minimum ERISA funding requirement for 2019. Althoughfinancial results. In addition, although GAAP expense and pension funding contributions are not directly related, key economic factors that affect GAAP expense would also likely affect the amount of cash we would be required to contribute to pension plans as required under ERISA. Failure to achieve expected returns on plan assets driven by various factors, which could include a continued environment of low interest rates or sustained market volatility, could also result in an increase to the amount of cash we would be required to contribute to pension plans. In addition, there may be upward pressure on the cost of providing healthcare benefits to current employees and retirees. Although we have actively sought to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce our profitability. For a discussion regarding how our financial statements have been and can be affected by our pension and healthcare benefit obligations, see the Other Consolidated Information - Postretirement Benefit Plans sectionand the Critical Accounting Estimates - Pension Assumptions sections within MD&A and Note 13 to the consolidated financial statements. See also the Critical Accounting Estimates - Pension Assumptions section within MD&A for a discussion regarding how our financial statements can be affected by our pension plan accounting policies. .
LEGAL & COMPLIANCE RISKS
RISKS. Legal and compliance risk relates to risks arising from the government and regulatory environment and action and from legal proceedings and compliance with integrity policies and procedures, including those relating to financial reporting and environmental, health and safety.safety matters. Government and regulatory risk includes the risk that the government or regulatory actions will impose additional cost on us or require us to make adverse changes to our business models or practices.
Regulatory - We are subject to a wide variety of laws, regulations and government policies that may change in significant ways.
Our businesses are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and policies. There can be no assurance that laws, regulations and policies will not be changed in ways that will require us to modify our business models and objectives or affect our returns on investments by restricting existing activities and products, subjecting them to escalating costs or prohibiting them outright. In particular, recent trends globally toward increased protectionism, import and export controls and the use of tariffs and other trade barriers can result in actions by governments around the world that have been and may continue to be disruptive and costly to our businesses, and can interfere with our global operating model and weaken our competitive position. Other legislative and regulatory or other areas of significance for our businesses that U.S. and non-U.S. governments have focused and continue to focus on include cybersecurity, data privacy and sovereignty, trade controls andimproper payments, competition law, compliance with complex economic sanctions, improper payments, competition law,climate change and greenhouse gas emissions, foreign exchange intervention in response to currency volatility and currency controls that could restrict the movement of liquidity from particular jurisdictions, tariffs on imports and exports in the U.S. or other countries, and potentialjurisdictions. Potential further changes to tax laws, including additional guidance concerning the enactment of the recent U.S. tax reform, may have an effect on GE's, GE Capital's or other regulated subsidiaries' structure, operations, sales, liquidity, capital requirements, effective tax rate and performance. For example, legislative or regulatory measures by states or non-U.S. governments in response to the recent U.S. federal tax reform or otherwise, or rules, and interpretations or audits under the new or existing tax laws, could increase our costs or tax rate. In addition, efforts by public and private sectors to control the growth of healthcare costs may lead to lower reimbursements and increased utilization controls related to the use of our products by healthcare providers. Regulation or government scrutiny may impact the requirements for marketing our products and slow our ability to introduce new products, resulting in an adverse impact on our business. Furthermore, we have been, and expect to continue, participating in U.S. and international governmental programs, which require us to comply with strict governmental regulations. Inability to comply with these regulations could adversely affect our status in these projects and could have collateral consequences such as limitingdebarment. Debarment, depending on the entity involved and length of time, can limit our ability to participate in other projects involving multilateral development banks and adversely affect our results of operations, financial position and cash flows. flows.
Legal proceedings - We are subject to legal proceedings, investigations and legal compliance risks, including trailing liabilities from businesses that we dispose of or that are inactive.
We are subject to a variety of legal proceedings, legal compliance risks and legalenvironmental, health and safety compliance risks in virtually every part of the world, including the matters described in the Legal Proceedings section and the Other Items - Environmental Matters section within MD&A.world. We, our representatives, and the industries in which we operate are subject to continuing scrutiny by regulators, other governmental authorities and private sector entities or individuals in the U.S., the European Union, China and other jurisdictions, which have led or may, in certain circumstances, lead to enforcement actions, adverse changes to our business practices, fines and penalties, required remedial actions such as contaminated site clean-up or the assertion of private litigation claims, and damages that could be material. For example, following our acquisition of Alstom's Thermal, Renewables and Grid businesses in 2015, we are subject to legacy legal proceedings and legal compliance risks that relate to claimed anti-competitive conduct or improper payments by Alstom in the pre-acquisition period, and payments for settlements, judgments, penalties or other liabilities in connection with those matters will result in cash outflows. In addition, since late 2017 we have been subject to a range of shareholder lawsuits and inquiries from governmental authorities related to the Company's financial performance, accounting and disclosure practices and related matters, as described inmatters. We have observed that these proceedings related to claims about past financial performance and reporting pose particular reputational risks for the Legal Proceedings section.
Company that can cause new allegations about past or current misconduct, even if unfounded, to have a more significant impact on our reputation and how we are viewed by investors, customers and others than they otherwise would. We have established reserves for legal matters when and as appropriate; however, the estimation of legal reserves or possible losses involves significant judgment and may not reflect the full range of uncertainties and unpredictable outcomes inherent in litigation and investigations, and the actual losses arising from particular matters may exceed our current estimates and adversely affect our results of operations. While we believe that we have adopted appropriate risk management and compliance programs, the global and diverse nature of our operations and the current enforcement environment mean that legal and compliance risks will continue to exist with respect to our continuing and discontinued operations, and we mayare also be subject to material trailing legal liabilities from businesses that we dispose of or that are inactive. We also expect that additional legal proceedings and other contingencies the outcome of which cannot be predicted with certainty, will arise from time to time. Moreover, we are increasingly sellingsell products and services in growth markets where claims arising from a catastrophic product failure, alleged violations of law, product failures or other incidents involving our products and services may beare adjudicated within legal systems that are less developed and less reliable than those of the U.S. or other more developed markets, and this can create additional uncertainty about the outcome of proceedings before courts or other governmental bodies in such markets. See the Legal Proceedings section and Note 2223 to the consolidated financial statements for further information about legal proceedings and other loss contingencies. contingencies.
LEGAL PROCEEDINGS
In additionRefer to the legal matters described below, we also incorporate the information reported under "Legal Proceedings"Legal Matters and Environmental, Health and Safety Matters in BHGE's Form 10-K report.
WMC. At December 31, 2018, there was one pending lawsuit in which our discontinued U.S. mortgage business, WMC, is a party. The lawsuit is pending in the United States District Court for the District of Connecticut. TMI Trust Company (TMI), as successor to Law Debenture Trust Company of New York, is asserting claims on approximately $800 million of mortgage loans, and alleges losses on these loans in excess of $425 million. Trial in this case commenced in January 2018. The parties concluded their presentation of evidence and delivered closing arguments in June 2018. Based on a joint application by the parties, the District Court ordered a 30-day stay of proceedings on February 8, 2019, in light of ongoing settlement negotiations. The amount of the claim at issue in the TMI case reflects the purchase price or unpaid principal balances of the mortgage loans at issue at the time of purchase and does not give effect to pay downs, accrued interest or fees, or potential recoveries based upon the underlying collateral. All of the mortgage loans involved in this lawsuit are included in WMC’s reported claims at December 31, 2018. See Note 2223 to the consolidated financial statements for further information.
In December 2015, we learned that, as part of continuing industry-wide investigation of subprime mortgages, the Civil Division of the U.S. Department of Justice (DOJ) had initiated an investigation of potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) by WMC and its affiliates arising out of the origination, purchase or sale of residential mortgage loans between January 1, 2005 and December 31, 2007. On January 31, 2019, GE announced that it had reached an agreement in principle with the DOJ to settle this investigation, under which GE will pay the United States a civil penalty of $1,500 million, consistent with the $1,500 million reserve recorded for this matter in the first quarter 2018, as described in Note 22 to the consolidated financial statements. The parties are negotiating the definitive settlement agreement, which will contain no admission of any allegation or liability and will conclude this investigation.
Alstom legacy matters. In connection with our acquisition of Alstom’s Thermal, Renewables and Grid businesses in November 2015, we are subject to legacy legal proceedings and legal compliance risks that relate to claimed anti-competitive conduct or improper payments by Alstom in the pre-acquisition period, including the previously reported matters described below. See Note 22 to the consolidated financial statements for further information.
In September 2013, the Israeli Antitrust Authority issued a decision whereby Alstom, Siemens AG and ABB Ltd. were held liable for an alleged anti-competitive arrangement in the gas-insulated switchgears market in Israel. While there was no fine in connection with that decision, claimants brought civil actions in 2013 seeking damages of approximately $950 million and $600 million, respectively, related to the alleged conduct underlying the decision that are pending before the Central District Court in Israel. The parties have been working to finalize a settlement, which will be subject to the Israeli Attorney General’s approval and is expected to be scheduled for a hearing in the first half of 2019.
In connection with alleged improper payments by Alstominformation relating to contracts won in 2006 and 2008 for work on a state-owned power plant in Šoštanj, Slovenia, the power plant owner in January 2017 filed an arbitration claim for damages of approximately $430 million before the International Chamber of Commerce Court of Arbitration in Vienna, Austria. In February 2017, a government investigation in Slovenia of the same underlying conduct proceeded to an investigative phase overseen by a judge of the Celje District Court.legal proceedings.
EC merger notification objections.In July 2017, the European Commission (EC) issued a statement of objections with its preliminary conclusion that GE provided incorrect or misleading information about its research and development activities regarding high-power offshore wind turbines during the EC’s review of GE’s planned acquisition of LM Wind. We filed a reply in April 2018 setting forth our position on the EC's statement of objections, and after consideration of the reply we anticipate that the EC will issue a decision that we could appeal to the General Court of the European Union. If the EC concludes that GE’s alleged violation of the merger notification rules was intentional or negligent, it could impose a fine of up to 1% of GE’s annual revenues.
Shareholder and related lawsuits. Since November 2017, several putative shareholder class actions under the federal securities laws have been filed against GE and certain affiliated individuals and consolidated into a single action currently pending in the U.S. District Court for the Southern District of New York (the Hachem case). In October 2018, the lead plaintiff filed a fourth amended consolidated class action complaint naming as defendants GE and current and former GE executive officers. It alleges violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 related to insurance reserves and accounting for long-term service agreements and seeks damages on behalf of shareowners who acquired GE stock between February 27, 2013 and January 23, 2018. GE has filed a motion to dismiss, and briefing on that motion concluded in October 2018.
Since February 2018, multiple shareholder derivative lawsuits have also been filed against current and former GE executive officers and members of GE’s Board of Directors and GE (as nominal defendant). Four of these lawsuits are currently pending: the Gammel case, the Trueblood case and the Cuker case, which were filed in New York state court, and the Bennett case, which was filed in Massachusetts state court. The lawsuits allege violations of securities laws, breaches of fiduciary duties, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The specific matters underlying the allegations vary among the pending lawsuits, but they primarily relate to substantially the same facts as those underlying the securities class action described above, as well as the oversight of past GE practices regarding the use of its corporate aircraft, the goodwill charge related to GE’s Power business announced in October 2018 and alleged corruption in China. The Bennett complaint also includes a claim for professional negligence and accounting malpractice against GE’s auditor, KPMG. The plaintiffs seek unspecified damages and improvements in GE’s corporate governance and internal procedures. In June 2018, January 2019 and February 2019, respectively, GE filed motions to dismiss the Gammel, Trueblood and Cuker cases. The Bennett case has been stayed pending resolution of the motion to dismiss in the Gammel case.
In June 2018, a lawsuit (the Bezio case) was filed in New York state court derivatively on behalf of participants in GE’s 401(k) plan (the GE Retirement Savings Plan (RSP)), and alternatively as a class action on behalf of shareowners who acquired GE stock between February 26, 2013 and January 24, 2018, alleging violations of Section 11 of the Securities Act of 1933 based on alleged misstatements and omissions related to insurance reserves and performance of GE’s business segments in a GE RSP registration statement and documents incorporated therein by reference. In November 2018, the plaintiffs filed an amended derivative complaint naming as defendants GE, former GE executive officers and Fidelity Management Trust Company, as trustee for the GE RSP. In January 2019, GE filed a motion to dismiss.
In July 2018, a putative class action (the Mahar case) was filed in New York state court naming as defendants GE, former GE executive officers, a former member of GE’s Board of Directors and KPMG. It alleged violations of Sections 11, 12 and 15 of the Securities Act of 1933 based on alleged misstatements related to insurance reserves and performance of GE’s business segments in GE Stock Direct Plan registration statements and documents incorporated therein by reference and seeks damages on behalf of shareowners who acquired GE stock between July 20, 2015 and July 19, 2018 through the GE Stock Direct Plan. In February 2019, this case was dismissed.
In October 2018, a putative class action (the Houston case) was filed in New York state court naming as defendants GE, certain GE subsidiaries and current and former GE executive officers and employees. It alleges violations of Sections 11, 12 and 15 of the Securities Act of 1933 and seeks damages on behalf of purchasers of senior notes issued in 2016 and rescission of transactions involving those notes. We are in the process of negotiating an agreement to stay this case pending resolution of the motion to dismiss the Hachem case.
In December 2018, a putative class action (the Varga case) was filed in the U.S. District Court for the Northern District of New York naming GE and a former GE executive officer as defendants in connection with the oversight of the GE RSP. It alleges that the defendants breached fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by failing to advise GE RSP participants that GE Capital insurance subsidiaries were allegedly under-reserved and continued to retain a GE stock fund as an investment option in the GE RSP. The plaintiffs seek unspecified damages on behalf of a class of GE RSP participants and beneficiaries from January 1, 2010 through January 19, 2018 or later.
In February 2019, a putative class action (the Birnbaum case) was filed in the U.S. District Court for the Southern District of New York naming as defendants GE and our current CEO. It alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on alleged misstatements in connection with GE’s October 2018 announcement that the reporting of its third quarter financial results would be delayed for five days and seeks damages on behalf of shareowners who acquired GE stock between October 12 and October 29, 2018.
In February 2019, a putative class action (the Sheet Metal Workers Local 17 Trust Funds case) was filed in the U.S. District Court for the Southern District of New York naming as defendants GE and current and former GE executive officers. It alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on alleged misstatements regarding GE’s H-Class turbines and the disclosure in October 2018 about the goodwill impairment charge related to GE’s Power business. The lawsuit seeks damages on behalf of shareowners who acquired GE stock between December 27, 2017 and October 29, 2018.
These cases are at an early stage; we believe we have defenses to the claims and are responding accordingly.
SEC investigation. In late November 2017, staff of the Boston office of the U.S. Securities & Exchange Commission (SEC) notified us that they are conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. Following our investor update in January 2018 about the increase in future policy benefit reserves for GE Capital’s run-off insurance operations, the SEC staff expanded the scope of its investigation to encompass the reserve increase and the process leading to the reserve increase. Following our announcement in October 2018 about the expected non-cash goodwill impairment charge related to GE’s Power business, as discussed further in Note 8 to the consolidated financial statements, the SEC expanded the scope of its investigation to include that charge as well. We are providing documents and other information requested by the SEC staff, and we are cooperating with the ongoing investigation. Staff from the DOJ are also investigating these matters, and we are providing them with requested documents and information as well.
Other GE Retirement Savings Plan class actions.Since September 2017, four putative class action lawsuits have been filed regarding the oversight of the GE RSP, and those class actions have been consolidated into a single action in the U.S. District Court for the District of Massachusetts. The consolidated complaint names as defendants GE, GE Asset Management, current and former GE and GE Asset Management executive officers and employees who served on fiduciary bodies responsible for aspects of the GE RSP during the class period and current and former members of GE's Board of Directors. Like similar lawsuits that have been brought against other companies in recent years, this action alleges that the defendants breached their fiduciary duties under ERISA in their oversight of the GE RSP, principally by retaining five proprietary funds that plaintiffs allege were underperforming as investment options for plan participants and by charging higher management fees than some alternative funds. The plaintiffs seek unspecified damages on behalf of a class of GE RSP participants and beneficiaries from October 30, 2011 through the date of any judgment. In August and December 2018, the court issued orders dismissing one count of the complaint and denying GE's motion to dismiss the remaining counts. We believe we have defenses to the claims and are responding accordingly.
Environmental matters. As previously reported, in 2000, GE and the Environmental Protection Agency (EPA) entered into a consent decree relating to PCB cleanup of the Housatonic River in Massachusetts. Following EPA’s release in September 2015 of an intended final remediation decision, GE and EPA engaged in mediation and the first step of the dispute resolution process contemplated by the consent decree. In October 2016, the EPA issued its final decision pursuant to the consent decree, which GE and several other interested parties appealed to EPA’s Environmental Appeals Board (EAB). The EAB issued its decision in January 2018, affirming parts of EPA’s decision and granting relief to GE on certain significant elements of its challenge. The EAB remanded the decision back to EPA to address those elements and reissue a revised final remedy, and EPA has convened a mediation process with GE and interested stakeholders. The revised final remedy may be appealed to the EAB and ultimately the U.S. Court of Appeals for the First Circuit. The full remedy will not be implemented until any appeals of the revised decision are resolved. As of December 31, 2018, and based on its assessment of current facts and circumstances and its defenses, GE believes that it has recorded adequate reserves to cover future obligations associated with an expected final remedy. See Note 22 to the consolidated financial statements for further information.
MANAGEMENT AND AUDITOR’S REPORTS
MANAGEMENT’S DISCUSSION OF FINANCIAL RESPONSIBILITYRESPONSIBILITY.Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with U.S generally accepted accounting principles.
Members of our corporate leadership team review each of our businesses routinely on matters that range from overall strategy
The Company designs and financial performance to staffingmaintains accounting and compliance. Our business leaders monitor financial and operating systems, enabling us to identify potential opportunities and concerns at an early stage and positioning us to respond rapidly. Our Board of Directors oversees management’s business conduct, and our Audit Committee, which consists entirely of independent directors, oversees our internal control oversystems to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, and that the financial reporting. We continually examine our governance practices inrecords are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are enhanced by policies and procedures, an effort to enhance investor trustorganizational structure providing division of responsibilities, careful selection and improve the Board’s overall effectiveness. The Boardtraining of qualified personnel, and its committees annually conduct a performance self-evaluation and recommend improvements. Our lead director chaired four meetings of our independent directors this year, helping us sharpen our full Board meetings to better cover significant topics. Compensation policies for our executives are aligned with the long-term interests of GE investors.
We strive to maintain a dynamic systemprogram of internal controls and procedures-including internal control over financial reporting- designed to ensure reliable financial recordkeeping, transparent financial reporting and disclosure, and protection of physical and intellectual property. We recruit, develop and retain a world-class financial team. Our internal audit function (Corporate Audit Staff) conducts financial, compliance and process improvement audits each year. Our Audit Committee oversees the scope and evaluates the overall results of these audits, and in 2018, members of that Committee attended GE Corporate Audit Staff and Controllership Council meetings.audits.
We are keenly aware of the importance of full and open presentation of our financial position and operating results, and rely for this purpose on our disclosure controls and procedures, including our Disclosure Committee, which comprises senior executives with detailed knowledge of our businesses and the related needs of our investors. We ask this committee to review our compliance with accounting and disclosure requirements, to evaluate the fairness of our financial and non-financial disclosures, and to report their findings to us. In 2018, we further ensured strong disclosure by holding approximately 100 analyst and investor meetings with GE leadership present.
We welcome the strong oversight of our financial reporting activities by ourThe Company engaged KPMG LLP, an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB). In March 2019, the PCAOB announced the effectiveness of a new requirement for auditors to communicate critical audit matters (CAMs) in the audit opinion, and the KPMG LLP, engaged by and reporting directly to the Audit Committee.audit opinion that follows includes this discussion of CAMs. In December 2018, we announced our intention to conduct an auditor tender process. process, which is currently underway.
The effective date for the auditBoard of Directors, through its Audit Committee, which consists entirely of independent directors, meets periodically with management, internal auditors, and our independent registered public accounting firm appointment followingto ensure that process will be based on the progress toward completing the Company’s previously announced portfolio actions.
U.S. legislation requires managementeach is meeting its responsibilities and to report ondiscuss matters concerning internal control overcontrols and financial reporting and for auditors to render an opinion on such controls. Our reportreporting. KPMG LLP and the KPMG LLP report for 2018 follow.internal auditors each have full and free access to the Audit Committee.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORTING.Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2018,2019, based on the framework and criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2018.2019.
Our independent registered public accounting firm has issued an audit report on our internal control over financial reporting. Their report follows.
|
| | |
| /s/ H. Lawrence Culp, Jr. | | /s/ Jamie S. Miller |
H. Lawrence Culp, Jr.
| | Jamie S. Miller |
Chairman of the Board and Chief Executive Officer
| | Senior Vice President and Chief Financial Officer
|
February 26, 201924, 2020 | | |
DISCLOSURE CONTROLS
CONTROLS.Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of December 31, 2018.
2019. There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2018,2019, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
GE20182019 FORM 10-K 90 58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners
of General Electric Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated statementstatements of financial position of General Electric Company and consolidated affiliates (the Company) as of December 31, 20182019 and 2017,2018, the related consolidated statements of earnings (loss), comprehensive income (loss), changes in shareowners’ equity and cash flows for each of the years in the three-year period ended December 31, 2018,2019, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018,2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition in 2018 due to the adoption of ASU 2014-09, Revenue from Contracts with Customers and the related amendments.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Accompanying Supplemental Information
The accompanying consolidating information appearing on pages 95, 99,63, 65, and 101 (“67 (the supplemental information”)information) has been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of revenue recognition on certain long-term service agreements
As discussed in Note 1 to the consolidated financial statements, the Company enters into long-term service agreements with some of its customers. Certain long-term service agreements require the Company to provide maintenance services that may include levels of assurance regarding asset performance and uptime throughout the contract period. Revenue for such long-term service agreements is recognized using the percentage of completion method, based on costs incurred relative to total expected costs.
We identified the evaluation of revenue recognition on certain long-term service agreements as a critical audit matter because of the complex auditor judgment required in evaluating some of the long-term estimates in such arrangements. Such estimates include the amount of customer payments expected to be received over the contract term, which are generally based on a combination of both historical customer utilization of the covered assets as well as forward-looking information such as market conditions. In addition, these estimates include the total costs expected to be incurred to perform required maintenance services over the contract term and include estimates of expected cost improvements when such cost improvements are supported by actual results or have been proven effective. Further, contract modifications that extend or revise contract terms are not uncommon and require judgment in evaluating the related revisions of the long-term estimates.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s revenue recognition process for long-term service agreements, including controls related to estimating customer payments and costs expected to be incurred to perform required maintenance services over the contract term. We evaluated the estimated customer payments by comparing the estimated customer utilization of the covered assets to historical utilization and industry utilization data, where available. We evaluated the estimated costs expected to be incurred to perform required maintenance services over the contract term by:
comparing estimated labor and part costs to historical labor and parts costs,
comparing the estimated useful life, which is referred to as part life, of certain component parts to historical data and regulatory limits on part life, where applicable,
inspecting evidence underlying the inclusion of cost improvements in estimated costs, including regulatory and engineering approvals and actual reductions in production costs to date, and
ascertaining if major overhauls of covered assets are included in the cost estimates on a basis consistent with the estimated customer utilization of the assets that is used in estimating customer payments.
In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in testing certain cost estimates, including assessing statistical models used by the Company to estimate the part life of certain component parts of the covered assets.
Evaluation of premium deficiency testing to assess the adequacy of future policy benefit reserves
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company performs premium deficiency testing to assess the adequacy of future policy benefit reserves. This testing is performed on an annual basis, or whenever events and changes in circumstances indicate that a premium deficiency event may have occurred. Significant uncertainties exist in testing cash flow projections in the premium deficiency testing for these insurance contracts, including consideration of a wide range of possible outcomes of future events over the life of the underlying contracts that can extend for long periods of time.
We identified the evaluation of premium deficiency testing to assess the adequacy of future policy benefit reserves as a critical audit matter. Specifically, the evaluation of the following key assumptions in the premium deficiency testing required subjective auditor judgment and specialized skills and knowledge: long-term care morbidity and mortality, long-term care morbidity improvement and mortality improvement, discount rates, and long-term care premium rate increases.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s premium deficiency testing process, including controls to develop the key assumptions described above. In addition, we involved actuarial professionals with specialized skills and knowledge, who assisted in:
challenging the Company’s key assumptions and results by evaluating the relevance, reliability, and consistency of the assumptions with each other, the underlying data, relevant historical data, and industry data,
assessing the summary experience data and the corresponding actuarial assumptions for conformity with generally accepted actuarial principles,
performing recalculations to assess that the key assumptions were reflected in the cash flow projections, and
comparing the current year and prior year cash flow projections to analyze the impact of the updated key assumptions to the cash flows.
We evaluated projected future long-term premium rate increases by comparing the proposed, attained, denied, and approved premium rate increases to underlying source documentation. We also compared the current year premium rate increase projection to actual historical rate increase experience.
Evaluation of projected revenue and operating profit used in the assessment of the carrying value of goodwill in the Grid Solutions equipment and services and Hydro reporting units
As discussed in Note 8 to the consolidated financial statements, the Company performs a goodwill impairment test on an annual basis or whenever events or changes in circumstances indicate that the carrying value of a reporting unit might exceed its fair value. Projected revenue and operating profit are important elements of the estimated future cash flows used by the Company in determining the fair value of each reporting unit and the amount of related goodwill impairment losses.
In the second quarter of 2019, the Company reorganized its Grid Solutions reporting unit to separate the Grid Solutions software business and the Grid Solutions equipment and services business. As a result of this reorganization, the Company allocated goodwill to the Grid Solutions businesses based on their relative fair values, and performed a goodwill impairment test. The goodwill allocated to the Grid Solutions equipment and services business was determined to be impaired, and an impairment loss of $744 million was recorded. In the third quarter of 2019, the Company performed its annual goodwill impairment test, and recorded an impairment loss of $742 million in its Hydro reporting unit.
We identified the evaluation of projected revenue and operating profit used in the assessment of the carrying value of goodwill, including the determination of related goodwill impairment losses, for the Grid Solutions equipment and services and Hydro reporting units as a critical audit matter. Specifically, the evaluation of projected revenue and operating profit required the application of subjective auditor judgment because these projections involve assumptions about future events.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment process, including controls over the development of projected financial information, and the Company’s review of the projections and comparison to historical results. We evaluated the projected revenue and operating profit assumptions by comparing the projected amounts to the past performance of the reporting units, including historical results and growth rates, and relevant and reliable industry benchmark data related to future events. We also considered evidence obtained in other areas of the audit, including information that might be contrary to the assumptions used by the Company in preparing its projections. We evaluated the Company’s ability to accurately prepare projections by comparing the projected revenues and operating profit to actual results for the same period. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
comparing the projected amounts to industry benchmark data, and
evaluating sensitivity analyses related to key inputs, including long-term revenue growth rates and projected operating profit.
Evaluation of the effects of particular tax positions
As discussed in Note 15 to the consolidated financial statements, the Company’s annual tax rate is based on the Company’s income, statutory tax rates, and the effects of tax positions taken in the various jurisdictions in which the Company operates. Tax laws are complex and subject to different interpretations by taxpayers and respective government taxing authorities.
We identified the evaluation of the effects of particular tax positions as a critical audit matter. Complex auditor judgment was involved in evaluating the Company’s interpretation of applicable tax laws and regulations for these tax positions, including the evaluation of income tax uncertainties related to the tax positions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s income tax process for particular tax positions, including controls related to the Company’s interpretation of applicable tax laws and regulations and the evaluation of income tax uncertainties. We inspected relevant documentation related to particular tax positions, including correspondence between the Company and taxing authorities. In addition, we involved tax professionals with specialized skills and knowledge, who assisted in:
evaluating the Company’s interpretation and application of relevant tax laws and regulations related to the tax positions, including income tax uncertainties, and
assessing the Company’s computation of the effects of the tax positions.
|
|
| /s/ KPMG LLP |
KPMG LLP
We have served as the Company's auditor since 1909.
Boston, Massachusetts |
February 26, 201924, 2020 |
GE20182019 FORM 10-K 91 61
[PAGE INTENTIONALLY LEFT BLANK]
AUDITED FINANCIAL STATEMENTS AND NOTES
|
| | | |
| Statement of Earnings (Loss) | |
| Consolidated Statement of Comprehensive Income (Loss) | |
| Statement of Financial Position | |
| Statement of Cash Flows | |
| Notes to Consolidated Financial Statements | |
| 1 | | Basis of Presentation and Summary of Significant Accounting Policies | |
| 2 | | Businesses Held for Sale and Discontinued Operations | |
| 3 | | Investment Securities | |
| 4 | | Current Receivables | |
| 5 | | Inventories | |
| 6 | | GE Capital Financing Receivables and Allowance for Losses on Financing Receivables | |
| 7 | | Property, Plant and Equipment | |
| 8 | | Acquisitions, Goodwill and Other Intangible Assets | |
| 9 | | Revenues | |
| 10 | | Contract & Other Deferred Assets and Progress Collections & Deferred Income | |
| 11 | | Borrowings | |
| 12 | | Investment Contracts, Insurance Liabilities and Insurance Annuity Benefits | |
| 13 | | Postretirement Benefit Plans | |
| 14 | | Income Taxes | |
| 15 | | Shareowners’ Equity | |
| 16 | | Other Stock-related Information | |
| 17 | | Earnings Per Share Information | |
| 18 | | Other Income | |
| 19 | | Fair Value Measurements | |
| 20 | | Financial Instruments | |
| 21 | | Variable Interest Entities | |
| 22 | | Commitments, Guarantees, Product Warranties and Other Loss Contingencies | |
| 23 | | Cash Flows Information | |
| 24 | | Intercompany Transactions | |
| 25 | | Operating Segments | |
| 26 | | Cost Information | |
| 27 | | Guarantor Financial Information | |
| 28 | | Quarterly Information (unaudited) | |
|
| | | | | | | | | |
| STATEMENT OF EARNINGS (LOSS) | Consolidated |
| (In millions; per-share amounts in dollars) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Sales of goods | $ | 58,949 |
| $ | 60,148 |
| $ | 62,709 |
|
| Sales of services | 28,538 |
| 28,792 |
| 29,233 |
|
| GE Capital revenues from services | 7,728 |
| 8,072 |
| 7,337 |
|
| Total revenues (Note 26) | 95,214 |
| 97,012 |
| 99,279 |
|
| | | | |
| Cost of goods sold | 48,406 |
| 50,244 |
| 52,483 |
|
| Cost of services sold | 21,622 |
| 22,574 |
| 23,110 |
|
| Selling, general and administrative expenses | 13,949 |
| 14,643 |
| 14,257 |
|
| Interest and other financial charges | 4,227 |
| 4,766 |
| 4,655 |
|
| Insurance losses and annuity benefits (Note 12) | 3,294 |
| 2,790 |
| 12,168 |
|
| Goodwill impairments (Note 8) | 1,486 |
| 22,136 |
| 2,550 |
|
| Non-operating benefit costs | 2,844 |
| 2,753 |
| 2,423 |
|
| Other costs and expenses | 458 |
| 414 |
| 1,060 |
|
| Total costs and expenses | 96,287 |
| 120,320 |
| 112,707 |
|
| | | | |
| Other income (Note 19) | 2,222 |
| 2,321 |
| 2,083 |
|
| GE Capital earnings (loss) from continuing operations | — |
| — |
| — |
|
| | | | |
Earnings (loss) from continuing operations before income taxes | 1,149 |
| (20,987 | ) | (11,345 | ) |
| Benefit (provision) for income taxes (Note 15) | (726 | ) | (93 | ) | 2,808 |
|
| Earnings (loss) from continuing operations | 423 |
| (21,080 | ) | (8,536 | ) |
Earnings (loss) from discontinued operations, net of taxes (Note 2) | (5,335 | ) | (1,363 | ) | (312 | ) |
| Net earnings (loss) | (4,912 | ) | (22,443 | ) | (8,849 | ) |
Less net earnings (loss) attributable to noncontrolling interests | 66 |
| (89 | ) | (365 | ) |
| Net earnings (loss) attributable to the Company | (4,979 | ) | (22,355 | ) | (8,484 | ) |
| Preferred stock dividends | (460 | ) | (447 | ) | (436 | ) |
Net earnings (loss) attributable to GE common shareholders | $ | (5,439 | ) | $ | (22,802 | ) | $ | (8,920 | ) |
| | | | |
| Amounts attributable to GE common shareholders | | | |
| Earnings (loss) from continuing operations | $ | 423 |
| $ | (21,080 | ) | $ | (8,536 | ) |
Less net earnings (loss) attributable to noncontrolling interests, continuing operations | 7 |
| (90 | ) | (283 | ) |
Earnings (loss) from continuing operations attributable to the Company | 416 |
| (20,991 | ) | (8,253 | ) |
| Preferred stock dividends | (460 | ) | (447 | ) | (436 | ) |
Earnings (loss) from continuing operations attributable to GE common shareholders | (44 | ) | (21,438 | ) | (8,689 | ) |
Earnings (loss) from discontinued operations, net of taxes | (5,335 | ) | (1,363 | ) | (312 | ) |
Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | 60 |
| 1 |
| (81 | ) |
Net earnings (loss) attributable to GE common shareholders | $ | (5,439 | ) | $ | (22,802 | ) | $ | (8,920 | ) |
| | | | |
| Per-share amounts (Note 18) | | | |
| Earnings (loss) from continuing operations | | | |
| Diluted earnings (loss) per share | $ | (0.01 | ) | $ | (2.47 | ) | $ | (1.00 | ) |
| Basic earnings (loss) per share | $ | (0.01 | ) | $ | (2.47 | ) | $ | (1.00 | ) |
| | | | |
| Net earnings (loss) | | | |
| Diluted earnings (loss) per share | $ | (0.62 | ) | $ | (2.62 | ) | $ | (1.03 | ) |
| Basic earnings (loss) per share | $ | (0.62 | ) | $ | (2.62 | ) | $ | (1.03 | ) |
| | | | |
| Dividends declared per common share | $ | 0.04 |
| $ | 0.37 |
| $ | 0.84 |
|
GE20182019 FORM 10-K 93 62
FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| STATEMENT OF EARNINGS (LOSS) (CONTINUED) | GE(a) | | GE Capital |
| (In millions) | 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
|
| | | | | | | | |
| Sales of goods | $ | 59,138 |
| $ | 60,147 |
| $ | 62,786 |
| | $ | 79 |
| $ | 121 |
| $ | 130 |
|
| Sales of services | 28,581 |
| 28,891 |
| 29,443 |
| | — |
| — |
| — |
|
| GE Capital revenues from services | — |
| — |
| — |
| | 8,662 |
| 9,430 |
| 8,940 |
|
| Total revenues (Note 26) | 87,719 |
| 89,038 |
| 92,229 |
| | 8,741 |
| 9,551 |
| 9,070 |
|
| | | | | | | | |
| Cost of goods sold | 48,620 |
| 50,265 |
| 52,588 |
| | 61 |
| 95 |
| 102 |
|
| Cost of services sold | 19,665 |
| 20,611 |
| 21,062 |
| | 2,019 |
| 2,089 |
| 2,196 |
|
| Selling, general and administrative expenses | 13,404 |
| 13,851 |
| 13,094 |
| | 931 |
| 1,341 |
| 1,662 |
|
| Interest and other financial charges | 2,115 |
| 2,415 |
| 2,538 |
| | 2,532 |
| 2,982 |
| 3,145 |
|
| Insurance losses and annuity benefits (Note 12) | — |
| — |
| — |
| | 3,353 |
| 2,849 |
| 12,213 |
|
| Goodwill impairments (Note 8) | 1,486 |
| 22,136 |
| 1,165 |
| | — |
| — |
| 1,386 |
|
| Non-operating benefit costs | 2,828 |
| 2,740 |
| 2,409 |
| | 16 |
| 12 |
| 14 |
|
| Other costs and expenses | — |
| (51 | ) | (22 | ) | | 480 |
| 558 |
| 986 |
|
| Total costs and expenses | 88,118 |
| 111,967 |
| 92,834 |
| | 9,392 |
| 9,926 |
| 21,703 |
|
| | | | | | | | |
| Other income (Note 19) | 2,200 |
| 2,317 |
| 1,893 |
| | — |
| — |
| — |
|
| GE Capital earnings (loss) from continuing operations | (530 | ) | (489 | ) | (6,765 | ) | | — |
| — |
| — |
|
| | | | | | | | |
Earnings (loss) from continuing operations before income taxes | 1,271 |
| (21,101 | ) | (5,476 | ) | | (652 | ) | (375 | ) | (12,633 | ) |
| Benefit (provision) for income taxes (Note 15) | (1,309 | ) | (467 | ) | (3,493 | ) | | 582 |
| 374 |
| 6,302 |
|
| Earnings (loss) from continuing operations | (38 | ) | (21,568 | ) | (8,970 | ) | | (69 | ) | (1 | ) | (6,331 | ) |
Earnings (loss) from discontinued operations, net of taxes (Note 2) | (5,335 | ) | (1,363 | ) | (319 | ) | | 192 |
| (1,670 | ) | (312 | ) |
| Net earnings (loss) | (5,373 | ) | (22,931 | ) | (9,288 | ) | | 123 |
| (1,672 | ) | (6,643 | ) |
Less net earnings (loss) attributable to noncontrolling interests | 66 |
| (129 | ) | (368 | ) | | 1 |
| 40 |
| 4 |
|
| Net earnings (loss) attributable to the Company | (5,439 | ) | (22,802 | ) | (8,920 | ) | | 122 |
| (1,712 | ) | (6,647 | ) |
| Preferred stock dividends | — |
| — |
| — |
| | (460 | ) | (447 | ) | (436 | ) |
| Net earnings (loss) attributable to GE common shareholders | $ | (5,439 | ) | $ | (22,802 | ) | $ | (8,920 | ) | | $ | (338 | ) | $ | (2,159 | ) | $ | (7,083 | ) |
| | | | | | | | |
| Amounts attributable to GE common shareholders: | | | | | | | |
| Earnings (loss) from continuing operations | $ | (38 | ) | $ | (21,568 | ) | $ | (8,970 | ) | | $ | (69 | ) | $ | (1 | ) | $ | (6,331 | ) |
Less net earnings (loss) attributable to noncontrolling interests, continuing operations | 6 |
| (130 | ) | (280 | ) | | 1 |
| 40 |
| (3 | ) |
Earnings (loss) from continuing operations attributable to the Company | (44 | ) | (21,438 | ) | (8,689 | ) | | (70 | ) | (42 | ) | (6,328 | ) |
| Preferred stock dividends | — |
| — |
| — |
| | (460 | ) | (447 | ) | (436 | ) |
Earnings (loss) from continuing operations attributable to GE common shareholders | (44 | ) | (21,438 | ) | (8,689 | ) | | (530 | ) | (489 | ) | (6,765 | ) |
Earnings (loss) from discontinued operations, net of taxes | (5,335 | ) | (1,363 | ) | (319 | ) | | 192 |
| (1,670 | ) | (312 | ) |
Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | 60 |
| 1 |
| (88 | ) | | — |
| — |
| 6 |
|
Net earnings (loss) attributable to GE common shareholders | $ | (5,439 | ) | $ | (22,802 | ) | $ | (8,920 | ) | | $ | (338 | ) | $ | (2,159 | ) | $ | (7,083 | ) |
(a) Represents the adding together of all GE Industrial affiliates and GE Capital continuing operations on a one-line basis. See Note 1.
|
| | | | | | | | | |
| STATEMENT OF EARNINGS (LOSS) | General Electric Company and consolidated affiliates |
| For the years ended December 31 (In millions; per-share amounts in dollars) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Revenues | | | |
| Sales of goods | $ | 74,855 |
| $ | 74,990 |
| $ | 76,721 |
|
| Sales of services | 38,689 |
| 35,977 |
| 33,450 |
|
| GE Capital revenues from services | 8,072 |
| 7,276 |
| 9,297 |
|
| Total revenues (Note 9) | 121,615 |
| 118,243 |
| 119,469 |
|
| | | | |
| Costs and expenses | | | |
| Cost of goods sold | 63,116 |
| 63,075 |
| 62,605 |
|
| Cost of services sold | 29,555 |
| 27,808 |
| 25,047 |
|
| Selling, general and administrative expenses | 18,111 |
| 17,569 |
| 17,756 |
|
| Interest and other financial charges | 5,059 |
| 4,869 |
| 5,025 |
|
Investment contracts, insurance losses and insurance annuity benefits | 2,790 |
| 12,168 |
| 2,797 |
|
| Goodwill impairments (Note 8) | 22,136 |
| 2,550 |
| — |
|
| Non-operating benefit costs | 2,777 |
| 2,399 |
| 2,365 |
|
| Other costs and expenses | 464 |
| 1,082 |
| 982 |
|
| Total costs and expenses | 144,008 |
| 131,520 |
| 116,577 |
|
| | | | |
| Other income (Note 18) | 2,259 |
| 2,126 |
| 4,140 |
|
| GE Capital earnings (loss) from continuing operations | — |
| — |
| — |
|
| | | | |
Earnings (loss) from continuing operations before income taxes | (20,134 | ) | (11,151 | ) | 7,031 |
|
| Benefit (provision) for income taxes (Note 14) | (583 | ) | 2,611 |
| 1,133 |
|
| Earnings (loss) from continuing operations | (20,717 | ) | (8,540 | ) | 8,165 |
|
Earnings (loss) from discontinued operations, net of taxes (Note 2) | (1,726 | ) | (309 | ) | (954 | ) |
| Net earnings (loss) | (22,443 | ) | (8,849 | ) | 7,211 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (89 | ) | (365 | ) | (289 | ) |
| Net earnings (loss) attributable to the Company | (22,355 | ) | (8,484 | ) | 7,500 |
|
| Preferred stock dividends | (447 | ) | (436 | ) | (656 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | (22,802 | ) | $ | (8,920 | ) | $ | 6,845 |
|
| | | | |
| Amounts attributable to GE common shareowners | | | |
| Earnings (loss) from continuing operations | $ | (20,717 | ) | $ | (8,540 | ) | $ | 8,165 |
|
Less net earnings (loss) attributable to noncontrolling interests, continuing operations | (89 | ) | (371 | ) | (288 | ) |
Earnings (loss) from continuing operations attributable to the Company | (20,629 | ) | (8,169 | ) | 8,453 |
|
| Preferred stock dividends | (447 | ) | (436 | ) | (656 | ) |
Earnings (loss) from continuing operations attributable to GE common shareowners | (21,076 | ) | (8,605 | ) | 7,797 |
|
| Earnings (loss) from discontinued operations, net of taxes | (1,726 | ) | (309 | ) | (954 | ) |
Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | — |
| 6 |
| (1 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | (22,802 | ) | $ | (8,920 | ) | $ | 6,845 |
|
| | | | |
| Per-share amounts (Note 17) | | | |
| Earnings (loss) from continuing operations | | | |
| Diluted earnings (loss) per share | $ | (2.43 | ) | $ | (0.99 | ) | $ | 0.85 |
|
| Basic earnings (loss) per share | $ | (2.43 | ) | $ | (0.99 | ) | $ | 0.86 |
|
| | | | |
| Net earnings (loss) | | | |
| Diluted earnings (loss) per share | $ | (2.62 | ) | $ | (1.03 | ) | $ | 0.75 |
|
| Basic earnings (loss) per share | $ | (2.62 | ) | $ | (1.03 | ) | $ | 0.76 |
|
| | | | |
| Dividends declared per common share | $ | 0.37 |
| $ | 0.84 |
| $ | 0.93 |
|
Amounts may not add due to rounding.
See accompanying notes.
|
| | | | | | |
| STATEMENT OF FINANCIAL POSITION | Consolidated |
| December 31 (In millions, except share amounts) | 2019 |
| 2018 |
|
| | | |
| Cash, cash equivalents and restricted cash | $ | 36,394 |
| $ | 31,124 |
|
| Investment securities (Note 3) | 48,521 |
| 33,508 |
|
| Current receivables (Note 4) | 16,769 |
| 14,645 |
|
| Financing receivables – net (Note 5) | 3,134 |
| 7,699 |
|
| Inventories (Note 6) | 14,104 |
| 13,803 |
|
| Other GE Capital receivables | 7,144 |
| 7,143 |
|
| Property, plant and equipment – net (Note 7) | 43,290 |
| 43,611 |
|
| Operating lease assets (Note 7) | 2,896 |
| — |
|
| Receivable from GE Capital | — |
| — |
|
| Investment in GE Capital | — |
| — |
|
| Goodwill (Note 8) | 26,734 |
| 33,974 |
|
| Other intangible assets – net (Note 8) | 10,653 |
| 12,178 |
|
| Contract and other deferred assets (Note 9) | 16,801 |
| 17,431 |
|
| All other assets (Note 10) | 16,461 |
| 18,357 |
|
| Deferred income taxes (Note 15) | 9,889 |
| 12,117 |
|
| Assets of businesses held for sale (Note 2) | 9,149 |
| 1,629 |
|
| Assets of discontinued operations (Note 2) | 4,109 |
| 63,853 |
|
| Total assets | $ | 266,048 |
| $ | 311,072 |
|
|
|
|
| Short-term borrowings (Note 11) | $ | 22,072 |
| $ | 12,776 |
|
| Short-term borrowings assumed by GE (Note 11) | — |
| — |
|
| Accounts payable, principally trade accounts | 15,926 |
| 13,826 |
|
| Progress collections and deferred income (Note 9) | 20,508 |
| 18,983 |
|
| Other GE current liabilities (Note 14) | 15,753 |
| 14,866 |
|
| Non-recourse borrowings of consolidated securitization entities (Note 11) | 1,655 |
| 1,875 |
|
| Long-term borrowings (Note 11) | 67,155 |
| 88,949 |
|
| Long-term borrowings assumed by GE (Note 11) | — |
| — |
|
| Operating lease liabilities (Note 7) | 3,162 |
| — |
|
| Insurance liabilities and annuity benefits (Note 12) | 39,826 |
| 35,562 |
|
| Non-current compensation and benefits | 31,687 |
| 31,928 |
|
| All other liabilities (Note 14) | 16,583 |
| 20,839 |
|
| Liabilities of businesses held for sale (Note 2) | 1,658 |
| 708 |
|
| Liabilities of discontinued operations (Note 2) | 203 |
| 19,281 |
|
| Total liabilities | 236,187 |
| 259,591 |
|
|
|
|
Preferred stock (5,939,875 shares outstanding at both December 31, 2019 and December 31, 2018) | 6 |
| 6 |
|
Common stock (8,738,434,000 and 8,702,227,000 shares outstanding at December 31, 2019 and December 31, 2018, respectively) | 702 |
| 702 |
|
| Accumulated other comprehensive income (loss) – net attributable to GE | (11,732 | ) | (14,414 | ) |
| Other capital | 34,405 |
| 35,504 |
|
| Retained earnings | 87,732 |
| 93,109 |
|
| Less common stock held in treasury | (82,797 | ) | (83,925 | ) |
| Total GE shareholders’ equity | 28,316 |
| 30,981 |
|
| Noncontrolling interests (Note 16) | 1,545 |
| 20,500 |
|
| Total equity | 29,861 |
| 51,481 |
|
| Total liabilities and equity | $ | 266,048 |
| $ | 311,072 |
|
|
| | | | | | | | | | | | | | | | | | | |
STATEMENT OF EARNINGS (LOSS) (CONTINUED) For the years ended December 31 | GE(a) | | Financial Services (GE Capital) |
| (In millions; per-share amounts in dollars) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | |
| Revenues | | | | | | | |
| Sales of goods | $ | 74,854 |
| $ | 75,068 |
| $ | 76,887 |
| | $ | 121 |
| $ | 130 |
| $ | 115 |
|
| Sales of services | 38,788 |
| 36,187 |
| 33,729 |
| | — |
| — |
| — |
|
| GE Capital revenues from services | — |
| — |
| — |
| | 9,430 |
| 8,940 |
| 10,790 |
|
| Total revenues (Note 9) | 113,642 |
| 111,255 |
| 110,615 |
| | 9,551 |
| 9,070 |
| 10,905 |
|
| | | | | | | | |
| Costs and expenses | | | | | | | |
| Cost of goods sold | 63,137 |
| 63,180 |
| 62,793 |
| | 95 |
| 102 |
| 93 |
|
| Cost of services sold | 27,591 |
| 25,822 |
| 23,088 |
| | 2,089 |
| 2,196 |
| 2,238 |
|
| Selling, general and administrative expenses | 17,319 |
| 16,406 |
| 15,518 |
| | 1,341 |
| 1,662 |
| 2,931 |
|
| Interest and other financial charges | 2,708 |
| 2,753 |
| 2,026 |
| | 2,982 |
| 3,145 |
| 3,790 |
|
Investment contracts, insurance losses and insurance annuity benefits | — |
| — |
| — |
| | 2,849 |
| 12,213 |
| 2,861 |
|
| Goodwill impairments (Note 8) | 22,136 |
| 1,165 |
| — |
| | — |
| 1,386 |
| — |
|
| Non-operating benefit costs | 2,764 |
| 2,385 |
| 2,349 |
| | 12 |
| 14 |
| 16 |
|
| Other costs and expenses | — |
| — |
| — |
| | 558 |
| 986 |
| 1,013 |
|
| Total costs and expenses | 135,656 |
| 111,710 |
| 105,774 |
| | 9,926 |
| 21,703 |
| 12,942 |
|
| | | | | | | | |
| Other income (Note 18) | 2,255 |
| 1,937 |
| 4,227 |
| | — |
| — |
| — |
|
| GE Capital earnings (loss) from continuing operations | (489 | ) | (6,765 | ) | (1,251 | ) | | — |
| — |
| — |
|
| | | | | | | | |
Earnings (loss) from continuing operations before income taxes | (20,248 | ) | (5,282 | ) | 7,817 |
| | (375 | ) | (12,633 | ) | (2,037 | ) |
| Benefit (provision) for income taxes (Note 14) | (957 | ) | (3,691 | ) | (298 | ) | | 374 |
| 6,302 |
| 1,431 |
|
| Earnings (loss) from continuing operations | (21,205 | ) | (8,973 | ) | 7,519 |
| | (1 | ) | (6,331 | ) | (606 | ) |
Earnings (loss) from discontinued operations, net of taxes (Note 2) | (1,726 | ) | (315 | ) | (952 | ) | | (1,670 | ) | (312 | ) | (954 | ) |
| Net earnings (loss) | (22,931 | ) | (9,288 | ) | 6,567 |
| | (1,672 | ) | (6,643 | ) | (1,560 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | (129 | ) | (368 | ) | (278 | ) | | 40 |
| 4 |
| (12 | ) |
| Net earnings (loss) attributable to the Company | (22,802 | ) | (8,920 | ) | 6,845 |
| | (1,712 | ) | (6,647 | ) | (1,548 | ) |
| Preferred stock dividends | — |
| — |
| — |
| | (447 | ) | (436 | ) | (656 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | (22,802 | ) | $ | (8,920 | ) | $ | 6,845 |
| | $ | (2,159 | ) | $ | (7,083 | ) | $ | (2,204 | ) |
| | | | | | | | |
| Amounts attributable to GE common shareowners: | | | | | | | |
| Earnings (loss) from continuing operations | $ | (21,205 | ) | $ | (8,973 | ) | $ | 7,519 |
| | $ | (1 | ) | $ | (6,331 | ) | $ | (606 | ) |
Less net earnings (loss) attributable to noncontrolling interests, continuing operations | (129 | ) | (368 | ) | (278 | ) | | 40 |
| (3 | ) | (10 | ) |
Earnings (loss) from continuing operations attributable to the Company | (21,076 | ) | (8,605 | ) | 7,797 |
| | (42 | ) | (6,328 | ) | (595 | ) |
| Preferred stock dividends | — |
| — |
| — |
| | (447 | ) | (436 | ) | (656 | ) |
Earnings (loss) from continuing operations attributable to GE common shareowners | (21,076 | ) | (8,605 | ) | 7,797 |
| | (489 | ) | (6,765 | ) | (1,251 | ) |
| Earnings (loss) from discontinued operations, net of taxes | (1,726 | ) | (315 | ) | (952 | ) | | (1,670 | ) | (312 | ) | (954 | ) |
Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | — |
| — |
| — |
| | — |
| 6 |
| (1 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | (22,802 | ) | $ | (8,920 | ) | $ | 6,845 |
| | $ | (2,159 | ) | $ | (7,083 | ) | $ | (2,204 | ) |
| |
(a) | Represents the adding together of all affiliated companies except GE Capital, which is presented on a one-line basis. See Note 1. |
Amounts may not add due to rounding.
In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital” means GE Capital Global Holdings, LLC (GECGH) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page.
GE20182019 FORM 10-K 95 64
|
| | | | | | | | | | | | | |
| STATEMENT OF FINANCIAL POSITION (CONTINUED) | GE(a) |
| GE Capital |
| December 31 (In millions, except share amounts) | 2019 |
| 2018 |
| | 2019 |
| 2018 |
|
| | | | | | |
| Cash, cash equivalents and restricted cash | $ | 17,613 |
| $ | 16,632 |
|
| $ | 18,781 |
| $ | 14,492 |
|
| Investment securities (Note 3) | 10,008 |
| 187 |
|
| 38,514 |
| 33,393 |
|
| Current receivables (Note 4) | 13,883 |
| 10,262 |
|
| — |
| — |
|
| Financing receivables – net (Note 5) | — |
| — |
|
| 6,979 |
| 13,628 |
|
| Inventories (Note 6) | 14,104 |
| 13,803 |
|
| — |
| — |
|
| Other GE Capital receivables | — |
| — |
|
| 11,767 |
| 15,361 |
|
| Property, plant and equipment – net (Note 7) | 14,370 |
| 14,828 |
|
| 29,649 |
| 29,510 |
|
| Operating lease assets (Note 7) | 3,077 |
| — |
| | 237 |
| — |
|
| Receivable from GE Capital | 19,142 |
| 22,513 |
|
| — |
| — |
|
| Investment in GE Capital | 15,299 |
| 11,412 |
|
| — |
| — |
|
| Goodwill (Note 8) | 25,895 |
| 33,070 |
|
| 839 |
| 904 |
|
| Other intangible assets – net (Note 8) | 10,461 |
| 11,942 |
|
| 192 |
| 236 |
|
| Contract and other deferred assets (Note 9) | 16,833 |
| 17,431 |
|
| — |
| — |
|
| All other assets (Note 10) | 8,399 |
| 8,578 |
|
| 8,648 |
| 9,869 |
|
| Deferred income taxes (Note 15) | 8,189 |
| 10,176 |
|
| 1,700 |
| 1,936 |
|
| Assets of businesses held for sale (Note 2) | 8,626 |
| 1,524 |
|
| 241 |
| — |
|
| Assets of discontinued operations (Note 2) | 202 |
| 59,169 |
|
| 3,907 |
| 4,610 |
|
| Total assets | $ | 186,100 |
| $ | 231,526 |
|
| $ | 121,454 |
| $ | 123,939 |
|
| |
|
|
|
|
|
| Short-term borrowings (Note 11) | $ | 5,606 |
| $ | 5,147 |
| | $ | 12,030 |
| $ | 4,999 |
|
| Short-term borrowings assumed by GE (Note 11) | 5,473 |
| 4,207 |
| | 2,104 |
| 2,684 |
|
| Accounts payable, principally trade accounts | 17,702 |
| 17,579 |
|
| 886 |
| 1,171 |
|
| Progress collections and deferred income (Note 9) | 20,694 |
| 19,239 |
|
| — |
| — |
|
| Other GE current liabilities (Note 14) | 16,833 |
| 16,444 |
|
| — |
| — |
|
| Non-recourse borrowings of consolidated securitization entities (Note 11) | — |
| — |
|
| 1,655 |
| 1,875 |
|
| Long-term borrowings (Note 11) | 15,085 |
| 20,804 |
| | 26,175 |
| 36,154 |
|
| Long-term borrowings assumed by GE (Note 11) | 25,895 |
| 32,054 |
| | 17,038 |
| 19,828 |
|
| Operating lease liabilities (Note 7) | 3,369 |
| — |
| | 238 |
| — |
|
| Insurance liabilities and annuity benefits (Note 12) | — |
| — |
|
| 40,232 |
| 35,994 |
|
| Non-current compensation and benefits | 31,208 |
| 31,461 |
|
| 472 |
| 459 |
|
| All other liabilities (Note 14) | 12,787 |
| 14,881 |
|
| 5,040 |
| 7,562 |
|
| Liabilities of businesses held for sale (Note 2) | 1,620 |
| 748 |
|
| 52 |
| — |
|
| Liabilities of discontinued operations (Note 2) | 106 |
| 17,481 |
|
| 97 |
| 1,800 |
|
| Total liabilities | 156,379 |
| 180,045 |
|
| 106,016 |
| 112,527 |
|
| |
|
|
|
|
|
Preferred stock (5,939,875 shares outstanding at both
December 31, 2019 and December 31, 2018) | 6 |
| 6 |
|
| 6 |
| 6 |
|
Common stock (8,738,434,000 and 8,702,227,000 shares outstanding
at December 31, 2019 and December 31, 2018, respectively) | 702 |
| 702 |
|
| — |
| — |
|
| Accumulated other comprehensive income (loss) – net attributable to GE | (11,732 | ) | (14,414 | ) |
| (852 | ) | (783 | ) |
| Other capital | 34,405 |
| 35,504 |
|
| 17,001 |
| 12,883 |
|
| Retained earnings | 87,732 |
| 93,109 |
|
| (857 | ) | (694 | ) |
| Less common stock held in treasury | (82,797 | ) | (83,925 | ) |
| — |
| — |
|
| Total GE shareholders’ equity | 28,316 |
| 30,981 |
|
| 15,299 |
| 11,412 |
|
| Noncontrolling interests (Note 16) | 1,406 |
| 20,499 |
|
| 139 |
| 1 |
|
| Total equity | 29,721 |
| 51,480 |
|
| 15,438 |
| 11,412 |
|
| Total liabilities and equity | $ | 186,100 |
| $ | 231,526 |
|
| $ | 121,454 |
| $ | 123,939 |
|
|
| | | | | | | | | |
| GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES | | | |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the years ended December 31 (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Net earnings (loss) | $ | (22,443 | ) | $ | (8,849 | ) | $ | 7,211 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (89 | ) | (365 | ) | (289 | ) |
| Net earnings (loss) attributable to the Company | $ | (22,355 | ) | $ | (8,484 | ) | $ | 7,500 |
|
| | | | |
| Other comprehensive income (loss) | | | |
| Investment securities | $ | 64 |
| $ | (776 | ) | $ | 203 |
|
| Currency translation adjustments | (1,664 | ) | 2,178 |
| (1,298 | ) |
| Cash flow hedges | (51 | ) | 51 |
| 93 |
|
| Benefit plans | 1,416 |
| 2,782 |
| (1,068 | ) |
| Other comprehensive income (loss) | (235 | ) | 4,236 |
| (2,070 | ) |
| Less other comprehensive income (loss) attributable to noncontrolling interests | (225 | ) | 51 |
| (14 | ) |
| Other comprehensive income (loss) attributable to the Company | $ | (10 | ) | $ | 4,184 |
| $ | (2,056 | ) |
| | | | |
| Comprehensive income (loss) | $ | (22,678 | ) | $ | (4,613 | ) | $ | 5,141 |
|
| Less comprehensive income (loss) attributable to noncontrolling interests | (314 | ) | (314 | ) | (303 | ) |
| Comprehensive income (loss) attributable to the Company | $ | (22,364 | ) | $ | (4,300 | ) | $ | 5,444 |
|
Amounts presented net of taxes.
Amounts may not add due to rounding.
See accompanying notes.
GE20182019 FORM 10-K 96
65
[PAGE INTENTIONALLY LEFT BLANK]
|
| | | | | | | | | |
| STATEMENT OF CASH FLOWS | Consolidated |
| For the years ended December 31 (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Net earnings (loss) | $ | (4,912 | ) | $ | (22,443 | ) | $ | (8,849 | ) |
| (Earnings) loss from discontinued operations | 5,335 |
| 1,363 |
| 312 |
|
Adjustments to reconcile net earnings (loss) to cash provided from operating activities: | | | |
| Depreciation and amortization of property, plant and equipment (Note 7) | 4,026 |
| 4,419 |
| 4,332 |
|
| Amortization of intangible assets (Note 8) | 1,569 |
| 2,163 |
| 1,862 |
|
| Goodwill impairments (Note 8) | 1,486 |
| 22,136 |
| 2,550 |
|
| (Earnings) loss from continuing operations retained by GE Capital | — |
| — |
| — |
|
| (Gains) losses on purchases and sales of business interests (Note 19) | (53 | ) | (1,522 | ) | (1,024 | ) |
| Principal pension plans cost (Note 13) | 3,878 |
| 4,226 |
| 3,687 |
|
| Principal pension plans employer contributions (Note 13) | (298 | ) | (6,283 | ) | (1,978 | ) |
| Other postretirement benefit plans (net) (Note 13) | (1,228 | ) | (1,033 | ) | (888 | ) |
| Provision (benefit) for income taxes (Note 15) | 726 |
| 93 |
| (2,808 | ) |
| Cash recovered (paid) during the year for income taxes | (1,950 | ) | (1,404 | ) | (1,924 | ) |
| Decrease (increase) in contract and other deferred assets | 62 |
| (81 | ) | (1,243 | ) |
| Decrease (increase) in GE current receivables | (2,851 | ) | (358 | ) | (3,902 | ) |
| Decrease (increase) in inventories | (1,109 | ) | (356 | ) | 324 |
|
| Increase (decrease) in accounts payable | 2,977 |
| 1,545 |
| 169 |
|
| Increase (decrease) in GE progress collections | 1,373 |
| (571 | ) | 1,912 |
|
| All other operating activities | 1,388 |
| 1,317 |
| 13,308 |
|
| Cash from (used for) operating activities – continuing operations | 10,419 |
| 3,210 |
| 5,840 |
|
| Cash from (used for) operating activities – discontinued operations | (1,647 | ) | 1,768 |
| 714 |
|
| Cash from (used for) operating activities | 8,772 |
| 4,978 |
| 6,554 |
|
| | | | |
| Additions to property, plant and equipment | (5,813 | ) | (6,627 | ) | (6,642 | ) |
| Dispositions of property, plant and equipment | 3,718 |
| 4,093 |
| 5,530 |
|
| Additions to internal-use software | (282 | ) | (320 | ) | (454 | ) |
| Net decrease (increase) in GE Capital financing receivables | 1,117 |
| 1,796 |
| 805 |
|
| Proceeds from sale of discontinued operations | 5,864 |
| 29 |
| 1,464 |
|
| Proceeds from principal business dispositions | 4,683 |
| 8,425 |
| 3,208 |
|
| Net cash from (payments for) principal businesses purchased | (68 | ) | (1 | ) | (2,722 | ) |
| Capital contribution from GE to GE Capital | — |
| — |
| — |
|
| All other investing activities | 1,466 |
| 11,530 |
| 5,538 |
|
| Cash from (used for) investing activities – continuing operations | 10,684 |
| 18,925 |
| 6,728 |
|
| Cash from (used for) investing activities – discontinued operations | (1,745 | ) | (645 | ) | (1,349 | ) |
| Cash from (used for) investing activities | 8,939 |
| 18,280 |
| 5,379 |
|
| | | | |
| Net increase (decrease) in borrowings (maturities of 90 days or less) | 280 |
| (4,343 | ) | 1,699 |
|
| Newly issued debt (maturities longer than 90 days) | 2,185 |
| 3,120 |
| 10,879 |
|
| Repayments and other reductions (maturities longer than 90 days) | (16,567 | ) | (20,319 | ) | (25,220 | ) |
| Capital contribution from GE to GE Capital | — |
| — |
| — |
|
| Net dispositions (purchases) of GE shares for treasury | 29 |
| (17 | ) | (2,550 | ) |
| Dividends paid to shareholders | (649 | ) | (4,474 | ) | (8,650 | ) |
| All other financing activities | (1,043 | ) | (1,312 | ) | (85 | ) |
| Cash from (used for) financing activities – continuing operations | (15,764 | ) | (27,345 | ) | (23,927 | ) |
| Cash from (used for) financing activities – discontinued operations | (368 | ) | (4,462 | ) | 5,443 |
|
| Cash from (used for) financing activities | (16,133 | ) | (31,807 | ) | (18,484 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | (50 | ) | (628 | ) | 891 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | 1,529 |
| (9,176 | ) | (5,659 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 35,548 |
| 44,724 |
| 50,384 |
|
| Cash, cash equivalents and restricted cash at end of year | 37,077 |
| 35,548 |
| 44,724 |
|
Less cash, cash equivalents and restricted cash of discontinued operations at end of year | 638 |
| 4,424 |
| 7,901 |
|
Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 36,439 |
| $ | 31,124 |
| $ | 36,823 |
|
| Supplemental disclosure of cash flows information | | | |
| Cash paid during the year for interest | $ | (3,816 | ) | $ | (4,409 | ) | $ | (4,211 | ) |
GE20182019 FORM 10-K 97 66
|
| | | | | | |
| STATEMENT OF FINANCIAL POSITION | General Electric Company
and consolidated affiliates
|
| December 31 (In millions, except share amounts) | 2018 |
| 2017 |
|
| | | |
| Assets | | |
| Cash, cash equivalents and restricted cash(a) | $ | 35,020 |
| $ | 43,967 |
|
| Investment securities (Note 3) | 33,835 |
| 38,696 |
|
| Current receivables (Note 4) | 19,874 |
| 24,209 |
|
| Inventories (Note 5) | 19,271 |
| 19,419 |
|
| Financing receivables – net (Note 6) | 7,699 |
| 10,336 |
|
| Other GE Capital receivables | 6,218 |
| 6,301 |
|
| Property, plant and equipment – net (Note 7) | 50,749 |
| 53,874 |
|
| Receivable from GE Capital | — |
| — |
|
| Investment in GE Capital | — |
| — |
|
| Goodwill (Note 8) | 59,614 |
| 83,968 |
|
| Other intangible assets – net (Note 8) | 18,159 |
| 20,273 |
|
| Contract and other deferred assets (Note 10) | 20,000 |
| 20,356 |
|
| All other assets | 20,018 |
| 28,949 |
|
| Deferred income taxes (Note 14) | 12,432 |
| 8,819 |
|
| Assets of businesses held for sale (Note 2) | 1,630 |
| 4,164 |
|
| Assets of discontinued operations (Note 2) | 4,610 |
| 5,912 |
|
| Total assets(b) | $ | 309,129 |
| $ | 369,245 |
|
|
|
|
| Liabilities and equity |
|
|
| Short-term borrowings (Note 11) | $ | 12,849 |
| $ | 24,036 |
|
| Short-term borrowings assumed by GE (Note 11) | — |
| — |
|
| Accounts payable, principally trade accounts | 17,153 |
| 15,172 |
|
| Progress collections and deferred income (Note 10) | 20,895 |
| 22,117 |
|
| Dividends payable | 95 |
| 1,052 |
|
| Other GE current liabilities | 16,345 |
| 16,919 |
|
| Non-recourse borrowings of consolidated securitization entities (Note 11) | 1,875 |
| 1,980 |
|
| Long-term borrowings (Note 11) | 95,234 |
| 108,575 |
|
| Long-term borrowings assumed by GE (Note 11) | — |
| — |
|
| Investment contracts, insurance liabilities and insurance annuity benefits (Note 12) | 35,562 |
| 38,136 |
|
| Non-current compensation and benefits | 33,783 |
| 41,630 |
|
| All other liabilities | 20,892 |
| 20,784 |
|
| Liabilities of businesses held for sale (Note 2) | 708 |
| 1,248 |
|
| Liabilities of discontinued operations (Note 2) | 1,875 |
| 706 |
|
| Total liabilities(b) | 257,266 |
| 292,355 |
|
|
|
|
| Redeemable noncontrolling interests (Note 15) | 382 |
| 3,391 |
|
|
|
|
Preferred stock (5,939,875 shares outstanding at both December 31, 2018 and December 31, 2017) | 6 |
| 6 |
|
Common stock (8,702,227,000 and 8,680,571,000 shares outstanding at December 31, 2018 and December 31, 2017, respectively) | 702 |
| 702 |
|
| Accumulated other comprehensive income (loss) – net attributable to GE(c) |
|
|
| Investment securities | (39 | ) | (102 | ) |
| Currency translation adjustments | (6,134 | ) | (4,661 | ) |
| Cash flow hedges | 13 |
| 62 |
|
| Benefit plans | (8,254 | ) | (9,702 | ) |
| Other capital | 35,504 |
| 37,384 |
|
| Retained earnings | 93,109 |
| 117,245 |
|
| Less common stock held in treasury | (83,925 | ) | (84,902 | ) |
| Total GE shareowners’ equity | 30,981 |
| 56,030 |
|
| Noncontrolling interests(d) (Note 15) | 20,500 |
| 17,468 |
|
| Total equity (Note 15) | 51,481 |
| 73,498 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 309,129 |
| $ | 369,245 |
|
| |
(a) | Included restricted cash of $492 million and $668 million at December 31, 2018 and December 31, 2017, respectively. |
| |
(b) | Our consolidated assets at December 31, 2018 included total assets of $5,475 million of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs. These assets included current receivables and net financing receivables of $3,158 million and investment securities of $35 million within continuing operations and assets of discontinued operations of $133 million. Our consolidated liabilities at December 31, 2018 included liabilities of certain VIEs for which the VIE creditors do not have recourse to GE. These liabilities included non-recourse borrowings of consolidated securitization entities (CSEs) of $1,875 million within continuing operations. See Note 21. |
| |
(c) | The sum of accumulated other comprehensive income (loss) (AOCI) attributable to the Company was $(14,414) million and $(14,404) million at December 31, 2018 and December 31, 2017, respectively. |
| |
(d) | Included AOCI attributable to noncontrolling interests of $(451) million and $(226) million at December 31, 2018 and December 31, 2017, respectively. |
Amounts may not add due to rounding. |
| | | | | | | | | | | | | | | | | | | |
| STATEMENT OF CASH FLOWS (CONTINUED) | GE(a) | | GE Capital |
| For the years ended December 31 (In millions) | 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
|
| | | | | | | | |
| Net earnings (loss) | $ | (5,373 | ) | $ | (22,931 | ) | $ | (9,288 | ) | | $ | 123 |
| $ | (1,672 | ) | $ | (6,643 | ) |
| (Earnings) loss from discontinued operations | 5,335 |
| 1,363 |
| 319 |
| | (192 | ) | 1,670 |
| 312 |
|
Adjustments to reconcile net earnings (loss) to cash provided from operating activities: | | | | | | | |
| Depreciation and amortization of property, plant and equipment (Note 7) | 2,001 |
| 2,290 |
| 2,050 |
| | 2,026 |
| 2,110 |
| 2,277 |
|
| Amortization of intangible assets | 1,512 |
| 2,109 |
| 1,796 |
| | 57 |
| 53 |
| 65 |
|
| Goodwill impairments (Note 8) | 1,486 |
| 22,136 |
| 1,165 |
| | — |
| — |
| 1,386 |
|
| (Earnings) loss from continuing operations retained by GE Capital | 530 |
| 489 |
| 10,781 |
| | — |
| — |
| — |
|
| (Gains) losses on purchases and sales of business interests (Note 19) | (3 | ) | (1,234 | ) | (1,024 | ) | | (50 | ) | (288 | ) | — |
|
| Principal pension plans cost (Note 13) | 3,878 |
| 4,226 |
| 3,687 |
| | — |
| — |
| — |
|
| Principal pension plans employer contributions (Note 13) | (298 | ) | (6,283 | ) | (1,978 | ) | | — |
| — |
| — |
|
| Other postretirement benefit plans (net) (Note 13) | (1,213 | ) | (1,015 | ) | (865 | ) | | (15 | ) | (18 | ) | (23 | ) |
| Provision (benefit) for income taxes (Note 15) | 1,309 |
| 467 |
| 3,493 |
| | (582 | ) | (374 | ) | (6,302 | ) |
| Cash recovered (paid) during the year for income taxes | (1,904 | ) | (1,343 | ) | (2,188 | ) | | (46 | ) | (61 | ) | 264 |
|
| Decrease (increase) in contract and other deferred assets | 62 |
| (81 | ) | (1,243 | ) | | — |
| — |
| — |
|
| Decrease (increase) in GE current receivables | (3,904 | ) | (966 | ) | 1,040 |
| | — |
| — |
| — |
|
| Decrease (increase) in inventories | (877 | ) | (364 | ) | 339 |
| | — |
| — |
| — |
|
| Increase (decrease) in accounts payable | 684 |
| 1,595 |
| (46 | ) | | (44 | ) | 2 |
| (75 | ) |
| Increase (decrease) in GE progress collections | 1,317 |
| (433 | ) | 1,938 |
| | — |
| — |
| — |
|
| All other operating activities (Note 24) | 72 |
| 676 |
| 1,504 |
| | 605 |
| 158 |
| 11,114 |
|
| Cash from (used for) operating activities – continuing operations | 4,614 |
| 701 |
| 11,479 |
| | 1,881 |
| 1,582 |
| 2,374 |
|
| Cash from (used for) operating activities – discontinued operations | (49 | ) | 2,051 |
| (195 | ) | | (1,917 | ) | (415 | ) | (968 | ) |
| Cash from (used for) operating activities | 4,565 |
| 2,752 |
| 11,284 |
| | (35 | ) | 1,166 |
| 1,407 |
|
| | | | | | | | |
| Additions to property, plant and equipment | (2,216 | ) | (2,234 | ) | (3,403 | ) | | (3,830 | ) | (4,569 | ) | (3,680 | ) |
| Dispositions of property, plant and equipment | 371 |
| 271 |
| 1,186 |
| | 3,348 |
| 3,853 |
| 4,579 |
|
| Additions to internal-use software | (274 | ) | (306 | ) | (423 | ) | | (8 | ) | (14 | ) | (31 | ) |
| Net decrease (increase) in GE Capital financing receivables (Note 24) | — |
| — |
| — |
| | 3,389 |
| 9,986 |
| 2,897 |
|
| Proceeds from sale of discontinued operations | 5,864 |
| — |
| — |
| | — |
| 29 |
| 1,464 |
|
| Proceeds from principal business dispositions | 1,083 |
| 6,047 |
| 3,086 |
| | 3,938 |
| 2,011 |
| — |
|
| Net cash from (payments for) principal businesses purchased | (447 | ) | (1 | ) | (2,722 | ) | | — |
| — |
| — |
|
| Capital contribution from GE to GE Capital | (4,000 | ) | — |
| — |
| | — |
| — |
| — |
|
| All other investing activities (Note 24) | 3,675 |
| (640 | ) | (9,439 | ) | | 2,617 |
| 482 |
| 3,013 |
|
| Cash from (used for) investing activities – continuing operations | 4,056 |
| 3,138 |
| (11,715 | ) | | 9,453 |
| 11,777 |
| 8,242 |
|
| Cash from (used for) investing activities – discontinued operations | (3,449 | ) | (698 | ) | 2,312 |
| | 2,023 |
| 186 |
| (1,784 | ) |
| Cash from (used for) investing activities | 607 |
| 2,439 |
| (9,403 | ) | | 11,476 |
| 11,964 |
| 6,458 |
|
| | | | | | | | |
| Net increase (decrease) in borrowings (maturities of 90 days or less) | (595 | ) | (987 | ) | 1,808 |
| | (256 | ) | (4,308 | ) | 69 |
|
| Newly issued debt (maturities longer than 90 days) | 31 |
| 6,570 |
| 16,267 |
| | 2,154 |
| 3,045 |
| 1,909 |
|
| Repayments and other reductions (maturities longer than 90 days) | (6,458 | ) | (1,023 | ) | (5,579 | ) | | (11,632 | ) | (19,836 | ) | (21,007 | ) |
| Capital contribution from GE to GE Capital | — |
| — |
| — |
| | 4,000 |
| — |
| — |
|
| Net dispositions (purchases) of GE shares for treasury (Note 24) | 29 |
| (17 | ) | (2,550 | ) | | — |
| — |
| — |
|
| Dividends paid to shareholders | (352 | ) | (4,179 | ) | (8,355 | ) | | (455 | ) | (371 | ) | (4,311 | ) |
| All other financing activities (Note 24) | (312 | ) | 1,107 |
| 290 |
| | (819 | ) | (2,408 | ) | (280 | ) |
| Cash from (used for) financing activities – continuing operations | (7,658 | ) | 1,470 |
| 1,881 |
| | (7,007 | ) | (23,878 | ) | (23,619 | ) |
| Cash from (used for) financing activities – discontinued operations | (368 | ) | (4,462 | ) | 3,534 |
| | (1 | ) | — |
| 1,909 |
|
| Cash from (used for) financing activities | (8,026 | ) | (2,992 | ) | 5,415 |
| | (7,008 | ) | (23,878 | ) | (21,710 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | (56 | ) | (494 | ) | 444 |
| | 6 |
| (134 | ) | 447 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | (2,911 | ) | 1,706 |
| 7,739 |
| | 4,439 |
| (10,882 | ) | (13,399 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 20,528 |
| 18,822 |
| 11,083 |
| | 15,020 |
| 25,902 |
| 39,301 |
|
| Cash, cash equivalents and restricted cash at end of year | 17,617 |
| 20,528 |
| 18,822 |
| | 19,460 |
| 15,020 |
| 25,902 |
|
Less cash, cash equivalents and restricted cash of discontinued operations at end of year | 4 |
| 3,896 |
| 7,144 |
| | 633 |
| 528 |
| 757 |
|
Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 17,613 |
| $ | 16,632 |
| $ | 11,678 |
| | $ | 18,826 |
| $ | 14,492 |
| $ | 25,145 |
|
| Supplemental disclosure of cash flows information | | | | | | | |
| Cash paid during the year for interest | $ | (1,975 | ) | $ | (2,201 | ) | $ | (2,347 | ) | | $ | (2,632 | ) | $ | (2,883 | ) | $ | (2,793 | ) |
(a) Represents the adding together of all GE Industrial affiliates and the impact of GE Capital dividends on a one-line basis. See accompanying notes.Note 1.
GE20182019 FORM 10-K 98
67
|
| | | | | | | | | | | | | |
| STATEMENT OF FINANCIAL POSITION (CONTINUED) | GE(a) |
| Financial Services (GE Capital) |
| December 31 (In millions, except share amounts) | 2018 |
| 2017 |
|
| 2018 |
| 2017 |
|
| | | | | | |
| Assets | | | | | |
| Cash, cash equivalents and restricted cash(b) | $ | 20,528 |
| $ | 18,822 |
|
| $ | 14,492 |
| $ | 25,145 |
|
| Investment securities (Note 3) | 514 |
| 569 |
|
| 33,393 |
| 38,231 |
|
| Current receivables (Note 4) | 15,418 |
| 14,638 |
|
| — |
| — |
|
| Inventories (Note 5) | 19,222 |
| 19,344 |
|
| 50 |
| 75 |
|
| Financing receivables – net (Note 6) | — |
| — |
|
| 13,628 |
| 21,967 |
|
| Other GE Capital receivables | — |
| — |
|
| 15,361 |
| 16,945 |
|
| Property, plant and equipment – net (Note 7) | 21,967 |
| 23,963 |
|
| 29,510 |
| 30,595 |
|
| Receivable from GE Capital(c)(d) | 22,513 |
| 39,844 |
|
| — |
| — |
|
| Investment in GE Capital | 11,412 |
| 13,493 |
|
| — |
| — |
|
| Goodwill (Note 8) | 58,710 |
| 82,985 |
|
| 904 |
| 984 |
|
| Other intangible assets – net (Note 8) | 17,923 |
| 20,014 |
|
| 236 |
| 259 |
|
| Contract and other deferred assets (Note 10) | 20,000 |
| 20,356 |
|
| — |
| — |
|
| All other assets | 10,288 |
| 13,627 |
|
| 9,819 |
| 15,606 |
|
| Deferred income taxes (Note 14) | 10,491 |
| 7,815 |
|
| 1,936 |
| 999 |
|
| Assets of businesses held for sale (Note 2) | 1,525 |
| 3,799 |
|
| — |
| — |
|
| Assets of discontinued operations (Note 2) | — |
| — |
|
| 4,610 |
| 5,912 |
|
| Total assets | $ | 230,510 |
| $ | 279,267 |
|
| $ | 123,939 |
| $ | 156,716 |
|
| |
|
|
|
|
|
| Liabilities and equity |
|
|
|
|
|
| Short-term borrowings(d) (Note 11) | $ | 5,220 |
| $ | 6,237 |
| | $ | 4,999 |
| $ | 11,291 |
|
| Short-term borrowings assumed by GE(c) (Note 11) | 4,207 |
| 8,310 |
| | 2,684 |
| 8,310 |
|
| Accounts payable, principally trade accounts | 22,972 |
| 21,851 |
|
| 1,612 |
| 1,853 |
|
| Progress collections and deferred income (Note 10) | 21,151 |
| 22,221 |
|
| — |
| — |
|
| Dividends payable | 95 |
| 1,052 |
|
| — |
| — |
|
| Other GE current liabilities | 16,345 |
| 16,919 |
|
| — |
| — |
|
| Non-recourse borrowings of consolidated securitization entities (Note 11) | — |
| — |
|
| 1,875 |
| 1,980 |
|
| Long-term borrowings(d) (Note 11) | 27,089 |
| 28,236 |
| | 36,154 |
| 42,081 |
|
| Long-term borrowings assumed by GE(c)(d) (Note 11) | 32,054 |
| 38,804 |
| | 19,828 |
| 31,533 |
|
| Investment contracts, insurance liabilities and insurance annuity benefits (Note 12) | — |
| — |
|
| 35,994 |
| 38,587 |
|
| Non-current compensation and benefits | 32,918 |
| 40,820 |
|
| 856 |
| 801 |
|
| All other liabilities | 15,772 |
| 16,873 |
|
| 6,724 |
| 5,886 |
|
| Liabilities of businesses held for sale (Note 2) | 748 |
| 1,248 |
|
| — |
| — |
|
| Liabilities of discontinued operations (Note 2) | 76 |
| 23 |
|
| 1,800 |
| 683 |
|
| Total liabilities | 178,648 |
| 202,595 |
|
| 112,527 |
| 143,007 |
|
| |
|
|
|
|
|
| Redeemable noncontrolling interests (Note 15) | 382 |
| 3,391 |
|
| — |
| — |
|
| |
|
|
|
|
|
Preferred stock (5,939,875 shares outstanding at both December 31, 2018 and December 31, 2017) | 6 |
| 6 |
|
| 6 |
| 6 |
|
Common stock (8,702,227,000 and 8,680,571,000 shares outstanding at December 31, 2018 and December 31, 2017, respectively) | 702 |
| 702 |
|
| — |
| — |
|
| Accumulated other comprehensive income (loss) – net attributable to GE |
|
|
|
|
|
| Investment securities | (39 | ) | (102 | ) |
| (32 | ) | (99 | ) |
| Currency translation adjustments | (6,134 | ) | (4,661 | ) |
| (162 | ) | (225 | ) |
| Cash flow hedges | 13 |
| 62 |
|
| 53 |
| 54 |
|
| Benefit plans | (8,254 | ) | (9,702 | ) |
| (642 | ) | (524 | ) |
| Other capital | 35,504 |
| 37,384 |
|
| 12,883 |
| 12,806 |
|
| Retained earnings | 93,109 |
| 117,245 |
|
| (694 | ) | 1,476 |
|
| Less common stock held in treasury | (83,925 | ) | (84,902 | ) |
| — |
| — |
|
| Total GE shareowners’ equity | 30,981 |
| 56,030 |
|
| 11,412 |
| 13,493 |
|
| Noncontrolling interests (Note 15) | 20,499 |
| 17,252 |
|
| 1 |
| 217 |
|
| Total equity (Note 15) | 51,480 |
| 73,282 |
|
| 11,412 |
| 13,709 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 230,510 |
| $ | 279,267 |
|
| $ | 123,939 |
| $ | 156,716 |
|
|
| | | | | | | | | |
| GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES | | | |
STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the years ended December 31 (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Net earnings (loss) | $ | (4,912 | ) | $ | (22,443 | ) | $ | (8,849 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | 66 |
| (89 | ) | (365 | ) |
| Net earnings (loss) attributable to the Company | $ | (4,979 | ) | $ | (22,355 | ) | $ | (8,484 | ) |
| | | | |
| Investment securities | $ | 100 |
| $ | 64 |
| $ | (776 | ) |
| Currency translation adjustments | 1,275 |
| (1,664 | ) | 2,178 |
|
| Cash flow hedges | 36 |
| (51 | ) | 51 |
|
| Benefit plans | 1,229 |
| 1,416 |
| 2,782 |
|
| Other comprehensive income (loss) | 2,641 |
| (235 | ) | 4,236 |
|
| Less other comprehensive income (loss) attributable to noncontrolling interests | (40 | ) | (225 | ) | 51 |
|
| Other comprehensive income (loss) attributable to the Company | $ | 2,681 |
| $ | (10 | ) | $ | 4,184 |
|
| | | | |
| Comprehensive income (loss) | $ | (2,272 | ) | $ | (22,678 | ) | $ | (4,613 | ) |
| Less comprehensive income (loss) attributable to noncontrolling interests | 26 |
| (314 | ) | (314 | ) |
| Comprehensive income (loss) attributable to the Company | $ | (2,297 | ) | $ | (22,364 | ) | $ | (4,300 | ) |
|
| | | | | | | | | | | |
| GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES |
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (In millions) | 2019 |
| | 2018 |
| | 2017 |
|
| | | | | | |
| Preferred stock issued | $ | 6 |
| | $ | 6 |
| | $ | 6 |
|
| Common stock issued | $ | 702 |
| | $ | 702 |
| | $ | 702 |
|
| | | | | | |
| Beginning balance | (14,414 | ) | | (14,404 | ) | | (18,588 | ) |
| Investment securities | 100 |
| | 63 |
| | (777 | ) |
| Currency translation adjustments | 1,315 |
| | (1,472 | ) | | 2,145 |
|
| Cash flow hedges | 35 |
| | (49 | ) | | 50 |
|
| Benefit plans | 1,231 |
| | 1,448 |
| | 2,766 |
|
| Accumulated other comprehensive income (loss) ending balance | $ | (11,732 | ) | | $ | (14,414 | ) | | $ | (14,404 | ) |
| Beginning balance | 35,504 |
| | 37,384 |
| | 37,224 |
|
| Gains (losses) on treasury stock dispositions | (925 | ) | | (759 | ) | | (304 | ) |
| Stock-based compensation | 475 |
| | 413 |
| | 358 |
|
| Other changes | (649 | ) | | (1,534 | ) | | 106 |
|
| Other capital ending balance | $ | 34,405 |
| | $ | 35,504 |
| | $ | 37,384 |
|
| Beginning balance | 93,109 |
| | 117,245 |
| | 133,857 |
|
| Net earnings (loss) attributable to the Company | (4,979 | ) | | (22,355 | ) | | (8,484 | ) |
| Dividends and other transactions with shareholders | (766 | ) | | (4,042 | ) | | (8,130 | ) |
| Changes in accounting (Note 1) | 368 |
| | 2,261 |
| | 2 |
|
| Retained earnings ending balance | $ | 87,732 |
| | $ | 93,109 |
| | $ | 117,245 |
|
| Beginning balance | (83,925 | ) | | (84,902 | ) | | (83,038 | ) |
| Purchases | (57 | ) | | (268 | ) | | (3,849 | ) |
| Dispositions | 1,186 |
| | 1,244 |
| | 1,985 |
|
| Common stock held in treasury ending balance | $ | (82,797 | ) | | $ | (83,925 | ) | | $ | (84,902 | ) |
| GE shareholders' equity balance | 28,316 |
| | 30,981 |
| | 56,031 |
|
| Noncontrolling interests balance (Note 16) | 1,545 |
| | 20,500 |
| | 17,468 |
|
| Total equity balance at December 31(a) | $ | 29,861 |
| | $ | 51,481 |
| | $ | 73,499 |
|
| |
| (a) | Represents the adding togetherTotal equity balance decreased by $(43,638) million from December 31, 2017, primarily due to non-cash after-tax goodwill impairment charge of all affiliated companies except GE Capital, which is presented on a one-line basis. See Note 1. |
| |
(b) | GE restricted cash was $459$(22,371) million and $611in 2018, reduction of noncontrolling interest balance of $(15,836) million attributable to Baker Hughes Class A shareholders at December 31, 20182017 and December 31, 2017, respectively,after-tax loss of $(8,238) million in discontinued operations due to deconsolidation of Baker Hughes in 2019, partially offset by after-tax gain of $2,508 million in discontinued operations due to spin-off and GE Capital restricted cash was $33 million and $57 million at December 31, 2018 and December 31, 2017, respectively. |
| |
(c) | At December 31, 2018, the remaining GE Capital borrowings that had been assumed by GE as partsubsequent merger of the GE Capital Exit Plan was $36,262 million ($4,207 million short term and $32,054 million long term), for which GE has an offsetting Receivable from GE Capital of $22,513 million. The difference of $13,749 million represents the amount of borrowings GE Capital had fundedour Transportation business with available cash to GE via an intercompany loanWabtec in lieu of GE issuing borrowings externally. See Note 11 and the Borrowings section of Capital Resources and Liquidity within MD&A for further information. |
| |
(d) | At December 31, 2018, total GE borrowings is comprised of GE-issued borrowings of $32,309 million ($5,220 million short term and $27,089 million long term) and the $13,749 million of borrowings from GE Capital as described in note (c) above for a total of $46,058 million (including $6,330 million BHGE borrowings). See Note 11 and the Borrowings section of Capital Resources and Liquidity within MD&A for further information.2019. |
Amounts may not add due to rounding.
In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital” means GE Capital Global Holdings, LLC (GECGH) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page.
GE20182019 FORM 10-K 99 68
|
| | | | | | | | | |
| STATEMENT OF CASH FLOWS | General Electric Company and consolidated affiliates |
| For the years ended December 31 (In millions) | 2018 |
| 2017 |
| 2016 |
|
| Cash flows – operating activities | | | |
| Net earnings (loss) | $ | (22,443 | ) | $ | (8,849 | ) | $ | 7,211 |
|
| (Earnings) loss from discontinued operations | 1,726 |
| 309 |
| 954 |
|
Adjustments to reconcile net earnings (loss) to cash provided from operating activities: | | | |
| Depreciation and amortization of property, plant and equipment (Note 7) | 5,562 |
| 5,139 |
| 4,997 |
|
| Amortization of intangible assets (Note 8) | 2,662 |
| 2,290 |
| 2,073 |
|
| Goodwill impairments (Note 8) | 22,136 |
| 2,550 |
| — |
|
| (Earnings) loss from continuing operations retained by GE Capital | — |
| — |
| — |
|
| (Gains) losses on purchases and sales of business interests (Note 18) | (1,582 | ) | (1,021 | ) | (3,731 | ) |
| Principal pension plans cost (Note 13) | 4,260 |
| 3,687 |
| 3,623 |
|
| Principal pension plans employer contributions (Note 13) | (6,283 | ) | (1,978 | ) | (552 | ) |
| Other postretirement benefit plans (net) (Note 13) | (1,101 | ) | (888 | ) | (716 | ) |
| Provision (benefit) for income taxes (Note 14) | 583 |
| (2,611 | ) | (1,133 | ) |
| Cash recovered (paid) during the year for income taxes | (1,864 | ) | (2,436 | ) | (7,280 | ) |
| Decrease (increase) in contract and other deferred assets | (92 | ) | (1,898 | ) | (2,617 | ) |
| Decrease (increase) in GE current receivables | (430 | ) | (2,846 | ) | 1,460 |
|
| Decrease (increase) in inventories | (902 | ) | 1,183 |
| (815 | ) |
| Increase (decrease) in accounts payable | 2,199 |
| (394 | ) | 1,228 |
|
| Increase (decrease) in GE progress collections | (502 | ) | 1,737 |
| 1,725 |
|
| All other operating activities | 735 |
| 13,027 |
| 1,078 |
|
| Cash from (used for) operating activities – continuing operations | 4,662 |
| 7,000 |
| 7,503 |
|
| Cash from (used for) operating activities – discontinued operations(a) | (416 | ) | (968 | ) | (6,343 | ) |
| Cash from (used for) operating activities | 4,246 |
| 6,032 |
| 1,160 |
|
| | | | |
| Cash flows – investing activities | | | |
| Additions to property, plant and equipment | (7,695 | ) | (7,371 | ) | (7,199 | ) |
| Dispositions of property, plant and equipment | 4,519 |
| 5,746 |
| 4,424 |
|
| Additions to internal-use software | (361 | ) | (549 | ) | (749 | ) |
| Net decrease (increase) in GE Capital financing receivables | 1,796 |
| 805 |
| 200 |
|
| Proceeds from sale of discontinued operations | 29 |
| 1,464 |
| 59,890 |
|
| Proceeds from principal business dispositions | 8,884 |
| 3,228 |
| 5,357 |
|
| Net cash from (payments for) principal businesses purchased | (90 | ) | (6,087 | ) | (2,271 | ) |
| All other investing activities | 10,969 |
| 11,112 |
| 2,913 |
|
| Cash from (used for) investing activities – continuing operations | 18,052 |
| 8,348 |
| 62,566 |
|
| Cash from (used for) investing activities – discontinued operations | 187 |
| (1,784 | ) | (13,431 | ) |
| Cash from (used for) investing activities | 18,239 |
| 6,564 |
| 49,135 |
|
| | | | |
| Cash flows – financing activities | | | |
| Net increase (decrease) in borrowings (maturities of 90 days or less) | (4,436 | ) | 1,794 |
| (1,135 | ) |
| Newly issued debt (maturities longer than 90 days) | 3,201 |
| 14,876 |
| 1,492 |
|
| Repayments and other reductions (maturities longer than 90 days) | (21,166 | ) | (25,622 | ) | (58,768 | ) |
| Net dispositions (purchases) of GE shares for treasury | (17 | ) | (2,550 | ) | (21,429 | ) |
| Dividends paid to shareowners | (4,474 | ) | (8,650 | ) | (8,806 | ) |
| All other financing activities | (4,141 | ) | (903 | ) | (2,607 | ) |
| Cash from (used for) financing activities – continuing operations | (31,033 | ) | (21,055 | ) | (91,253 | ) |
| Cash from (used for) financing activities – discontinued operations | — |
| 1,909 |
| 789 |
|
| Cash from (used for) financing activities | (31,033 | ) | (19,146 | ) | (90,464 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | (628 | ) | 891 |
| (1,146 | ) |
| Increase (decrease) in cash, cash equivalents and restricted cash | (9,176 | ) | (5,660 | ) | (41,315 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 44,724 |
| 50,384 |
| 91,698 |
|
| Cash, cash equivalents and restricted cash at end of year | 35,548 |
| 44,724 |
| 50,384 |
|
Less cash, cash equivalents and restricted cash of discontinued operations at end of year | 528 |
| 757 |
| 1,601 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 35,020 |
| $ | 43,967 |
| $ | 48,783 |
|
| Supplemental disclosure of cash flows information | | | |
| Cash paid during the year for interest | $ | (4,409 | ) | $ | (4,211 | ) | $ | (5,779 | ) |
| |
(a) | Included cash recovered (paid) during the year for income taxes of $(4) million, an insignificant amount and $(188) million for the years ended December 31, 2018, 2017 and 2016, respectively. |
Amounts may not add due to rounding.
See accompanying notes.
|
| | | | | | | | | | | | | | | | | | | |
| STATEMENT OF CASH FLOWS (CONTINUED) | GE(a) | | Financial Services (GE Capital) |
| For the years ended December 31 (In millions) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| Cash flows – operating activities | | | | | | | |
| Net earnings (loss) | $ | (22,931 | ) | $ | (9,288 | ) | $ | 6,567 |
| | $ | (1,672 | ) | $ | (6,643 | ) | $ | (1,560 | ) |
| (Earnings) loss from discontinued operations | 1,726 |
| 315 |
| 952 |
| | 1,670 |
| 312 |
| 954 |
|
| Adjustments to reconcile net earnings (loss) to cash provided from operating activities: | | | | | | | |
| Depreciation and amortization of property, plant and equipment (Note 7) | 3,433 |
| 2,857 |
| 2,597 |
| | 2,110 |
| 2,277 |
| 2,384 |
|
| Amortization of intangible assets | 2,608 |
| 2,225 |
| 1,942 |
| | 53 |
| 65 |
| 131 |
|
| Goodwill impairments (Note 8) | 22,136 |
| 1,165 |
| — |
| | — |
| 1,386 |
| — |
|
| (Earnings) loss from continuing operations retained by GE Capital(b) | 489 |
| 10,781 |
| 21,345 |
| | — |
| — |
| — |
|
| (Gains) losses on purchases and sales of business interests (Note 18) | (1,294 | ) | (1,021 | ) | (3,731 | ) | | (288 | ) | — |
| — |
|
| Principal pension plans cost (Note 13) | 4,260 |
| 3,687 |
| 3,623 |
| | — |
| — |
| — |
|
| Principal pension plans employer contributions (Note 13) | (6,283 | ) | (1,978 | ) | (552 | ) | | — |
| — |
| — |
|
| Other postretirement benefit plans (net) (Note 13) | (1,084 | ) | (865 | ) | (715 | ) | | (18 | ) | (23 | ) | (1 | ) |
| Provision (benefit) for income taxes (Note 14) | 957 |
| 3,691 |
| 298 |
| | (374 | ) | (6,302 | ) | (1,431 | ) |
| Cash recovered (paid) during the year for income taxes | (1,803 | ) | (2,700 | ) | (2,547 | ) | | (61 | ) | 264 |
| (4,734 | ) |
| Decrease (increase) in contract and other deferred assets | (92 | ) | (1,898 | ) | (2,617 | ) | | — |
| — |
| — |
|
| Decrease (increase) in GE current receivables | (1,233 | ) | 310 |
| 875 |
| | — |
| — |
| — |
|
| Decrease (increase) in inventories | (941 | ) | 1,200 |
| (762 | ) | | 31 |
| (2 | ) | (10 | ) |
| Increase (decrease) in accounts payable | 2,548 |
| (429 | ) | 1,746 |
| | 2 |
| (75 | ) | 17 |
|
| Increase (decrease) in GE progress collections | (364 | ) | 1,763 |
| 1,803 |
| | — |
| — |
| — |
|
| All other operating activities (Note 23) | 125 |
| 1,221 |
| (851 | ) | | 127 |
| 11,115 |
| 4,032 |
|
| Cash from (used for) operating activities – continuing operations | 2,258 |
| 11,033 |
| 29,972 |
| | 1,582 |
| 2,374 |
| (219 | ) |
| Cash from (used for) operating activities – discontinued operations | — |
| (1 | ) | (90 | ) | | (415 | ) | (968 | ) | (6,253 | ) |
| Cash from (used for) operating activities | 2,257 |
| 11,033 |
| 29,882 |
| | 1,166 |
| 1,407 |
| (6,472 | ) |
| | | | | | | | |
| Cash flows – investing activities | | | | | | | |
| Additions to property, plant and equipment | (3,302 | ) | (4,132 | ) | (3,758 | ) | | (4,569 | ) | (3,680 | ) | (3,769 | ) |
| Dispositions of property, plant and equipment | 698 |
| 1,401 |
| 1,080 |
| | 3,853 |
| 4,579 |
| 3,637 |
|
| Additions to internal-use software | (347 | ) | (518 | ) | (740 | ) | | (14 | ) | (31 | ) | (8 | ) |
| Net decrease (increase) in GE Capital financing receivables (Note 23) | — |
| — |
| — |
| | 9,986 |
| 2,897 |
| (1,279 | ) |
| Proceeds from sale of discontinued operations | — |
| — |
| — |
| | 29 |
| 1,464 |
| 59,890 |
|
| Proceeds from principal business dispositions | 6,507 |
| 3,106 |
| 5,357 |
| | 2,011 |
| — |
| — |
|
| Net cash from (payments for) principal businesses purchased | (90 | ) | (6,087 | ) | (2,271 | ) | | — |
| — |
| — |
|
| All other investing activities (Note 23) | (1,190 | ) | (2,061 | ) | (1,349 | ) | | 482 |
| 3,013 |
| 1,297 |
|
| Cash from (used for) investing activities – continuing operations | 2,276 |
| (8,291 | ) | (1,681 | ) | | 11,777 |
| 8,242 |
| 59,769 |
|
| Cash from (used for) investing activities – discontinued operations | — |
| 1 |
| 90 |
| | 186 |
| (1,784 | ) | (13,521 | ) |
| Cash from (used for) investing activities | 2,277 |
| (8,291 | ) | (1,592 | ) | | 11,964 |
| 6,458 |
| 46,248 |
|
| | | | | | | | |
| Cash flows – financing activities | | | | | | | |
| Net increase (decrease) in borrowings (maturities of 90 days or less) | (1,197 | ) | 1,704 |
| 1,655 |
| | (4,308 | ) | 69 |
| (1,655 | ) |
| Newly issued debt (maturities longer than 90 days) | 6,651 |
| 20,264 |
| 5,307 |
| | 3,045 |
| 1,909 |
| 1,174 |
|
| Repayments and other reductions (maturities longer than 90 days) | (1,870 | ) | (5,981 | ) | (4,155 | ) | | (19,836 | ) | (21,007 | ) | (58,285 | ) |
| Net dispositions (purchases) of GE shares for treasury (Note 23) | (17 | ) | (2,550 | ) | (21,429 | ) | | — |
| — |
| — |
|
| Dividends paid to shareowners | (4,179 | ) | (8,355 | ) | (8,474 | ) | | (371 | ) | (4,311 | ) | (20,427 | ) |
| All other financing activities (Note 23) | (1,723 | ) | (528 | ) | (273 | ) | | (2,408 | ) | (280 | ) | (2,460 | ) |
| Cash from (used for) financing activities – continuing operations | (2,334 | ) | 4,554 |
| (27,371 | ) | | (23,878 | ) | (23,619 | ) | (81,653 | ) |
| Cash from (used for) financing activities – discontinued operations | — |
| — |
| — |
| | — |
| 1,909 |
| 789 |
|
| Cash from (used for) financing activities | (2,334 | ) | 4,554 |
| (27,371 | ) | | (23,878 | ) | (21,710 | ) | (80,864 | ) |
| Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | (494 | ) | 444 |
| (392 | ) | | (134 | ) | 447 |
| (754 | ) |
| Increase (decrease) in cash, cash equivalents and restricted cash | 1,706 |
| 7,739 |
| 527 |
| | (10,882 | ) | (13,399 | ) | (41,842 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 18,822 |
| 11,083 |
| 10,556 |
| | 25,902 |
| 39,301 |
| 81,143 |
|
| Cash, cash equivalents and restricted cash at end of year | 20,528 |
| 18,822 |
| 11,083 |
| | 15,020 |
| 25,902 |
| 39,301 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at end of year | — |
| — |
| — |
| | 528 |
| 757 |
| 1,601 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 20,528 |
| $ | 18,822 |
| $ | 11,083 |
| | $ | 14,492 |
| $ | 25,145 |
| $ | 37,700 |
|
| Supplemental disclosure of cash flows information | | | | | | | |
| Cash paid during the year for interest | $ | (2,201 | ) | $ | (2,347 | ) | $ | (1,753 | ) | | $ | (2,883 | ) | $ | (2,793 | ) | $ | (4,982 | ) |
| |
(a) | Represents the adding together of all affiliated companies except GE Capital, which is presented on a one-line basis. |
| |
(b) | Represents GE Capital earnings/loss from continuing operations attributable to the Company, net of GE Capital dividends paid to GE. |
Amounts may not add due to rounding. In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital” means GE Capital Global Holdings, LLC (GECGH) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “Consolidated” columns and are discussed in Note 24.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
Our financial statements consolidate all of our affiliates – entities in which we have a controlling financial interest, most often because we hold a majority voting interest. To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (VIE) model to the entity; otherwise, the entity is evaluated under the voting interest model.
Where we hold current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in that VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally. When changes occur to the design of an entity, we reconsider whether it is subject to the VIE model. We continuously evaluate whether we have a controlling financial interest in a VIE.
We hold a controlling financial interest in other entities where we currently hold, directly or indirectly, more than 50% of the voting rights or where we exercise control through substantive participating rights or as a general partner. Where we are a general partner, we consider substantive removal rights held by other partners in determining if we hold a controlling financial interest. We reevaluate whether we have a controlling financial interest in these entities when our voting or substantive participating rights change.
Associated companies are unconsolidated VIEs and other entities in which we do not have a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of 20% to 50%. Associated companies are accounted for as equity method investments. Our share of the results of associated companies are presented on a one-line basis. Investments in, and advances to, associated companies are presented on a one-line basis in the caption “All other assets” in our consolidated Statement of Financial Position, net of allowance for losses, which represents our best estimate of probable losses inherent in such assets.
FINANCIAL STATEMENT PRESENTATION
PRESENTATION.We have reclassified certain prior-year amounts to conform to the current-year’s presentation. Certain columns and rows may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in millions.
Upon closing an acquisition, we consolidate the acquired business as soon as practicable. The size, scope and complexity of an acquisition can affect the time necessary to adjust the acquired company’s accounting policies, procedures, and books and records to our standards. Accordingly, it is possible that changes will be necessary to the carrying amounts and presentation of assets and liabilities inpresent our financial statements asin a three-column format, which allows investors to see our GE industrial operations separately from our financial services operations. We believe that this provides useful supplemental information to our consolidated financial statements. To the acquired company is fully assimilated.
Financial data and related measurements are presented in the following categories:
GE.This represents the adding together of all affiliates except GE Capital, whose continuing operations are presented on a one-line basis, giving effect to the elimination of transactions among such affiliates.
GE Capital. This refers to GE Capital Global Holdings, LLC (GECGH), and represents the adding together of all affiliates of GE Capital giving effect to the elimination of transactions among such affiliates.
Consolidated. This represents the adding together of GE and GE Capital, giving effect to the elimination ofextent that we have transactions between GE and GE Capital.
Operating Segments. These compriseCapital, these transactions are made on arm's length terms, are reported in the respective columns of our eight businesses, focused on the broad markets they serve: Power, Renewable Energy, Aviation, Oil & Gas, Healthcare, Transportation, Lighting and Capital.
Unless otherwise indicated, information in these notes to consolidated financial statements relates to continuing operations. Certain of our operations have been presented as discontinued. We present businesses that represent components as discontinued operations when the components meet the criteria for held for sale,and are sold, or spun-off and their disposal represents a strategic shift that has, or will have, a major effect on our operations and financial results. eliminated in consolidation. See Note 2.25 for further information.
The effects of translating to U.S. dollars the financial statements of non-U.S. affiliates whose functional currency is other than the U.S. dollar are included in shareowners’ equity. Asset and liability accounts are translated at period-end exchange rates, while revenues and expenses are translated at average rates for the respective periods.
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP), which requires us to make estimates based on assumptions about current, and for some estimates, future, economic and market conditions which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current conditions and how we expect them to change in theexpected future as appropriate,conditions, it is reasonably possible that actual conditions could be worse than anticipated in those estimates,differ from our expectations, which could materially affect our results of operations and financial position. Among other effects, such changes could result
We have reclassified certain prior-year amounts to conform to the current-year’s presentation. Certain columns and rows may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in future impairmentsmillions. Unless otherwise indicated, information in these notes to consolidated financial statements relates to continuing operations. Certain of investment securities, goodwill, intangiblesour operations have been presented as discontinued. We present businesses whose disposal represents a strategic shift that has, or will have, a major effect on our operations and long-lived assets, revisions to estimated profitability on long-term service agreements, incremental losses on financing receivables, establishment of valuation allowances on deferred tax assets, incremental fair value marks on businesses and assetsfinancial results as discontinued operations when the components meet the criteria for held for sale, carried at lowerare sold, or spun-off. See Note 2 for further information.
CONSOLIDATION.Our financial statements consolidate all of costour affiliates, entities where we have a controlling financial interest, most often because we hold a majority voting interest, or market less costwhere we are required to sell, increased tax liabilitiesapply the variable interest entity (VIE) model
because we have the power to direct the most economically significant activities of entities. We reevaluate whether we have a controlling financial interest in all entities when our rights and loss contingency and insurance reserves.interests change.
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REVENUES FROM THE SALE OF EQUIPMENT
PERFORMANCE OBLIGATIONS SATISFIED OVER TIME
Performance Obligations Satisfied Over Time. We recognize revenue on agreements for the sale of customized goods including power generation equipment, larger oil drilling equipmentlong-term construction projects and military development contracts locomotive units, and long-term construction projects on an over time basis. over-time basis as we customize the customer's equipment during the manufacturing or integration process and obtain right to payment for work performed.
We recognize revenue as we perform under the arrangements using the percentage of completion method which is based on our costs incurred to date relative to our estimate of total expected costs. Our estimate of costs to be incurred to fulfill our promise to a customer is based on our history of manufacturing or constructing similar assets for customers and is updated routinely to reflect changes in quantity or pricing of the inputs. We recognize revenue as we customize the customer's equipment during the manufacturing or integration process and obtain right to payment for work performed. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.
Our billing terms for these over-time contracts vary, but are generally based on achieving specified milestones. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions (seepositions. See Note 109 for further information).information.
PERFORMANCE OBLIGATIONS SATISFIED AT A POINT IN TIME
Performance Obligations Satisfied at a Point in Time. We recognize revenue on agreements for non-customized equipment including commercial aircraft engines, healthcare equipment, resource extraction equipment and other goods we manufacture on a standardized basis for sale to the market at a point in time. We recognize revenue at the point in time that the customer obtains control of the good, which is generally no earlier than when the customer has physical possession of the product. We use proof of delivery for certain large equipment with more complex logistics, whereas the delivery of other equipment is estimated based on historical averages of in-transit periods (i.e., time between shipment and delivery).
In situations whereWhere arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer has control of the goods and that acceptance is likely to occur. We generally do not provide for anticipated losses on point-in-time transactions prior to transferring control of the equipment to the customer.
Our billing terms for these point-in-time equipment contracts vary and generally coincide with delivery to the customer; however, within certain businesses, we receive progress paymentscollections from customers for large equipment purchases, which isto generally to reserve production slots.
REVENUES FROM THE SALE OF SERVICES
SERVICES.Consistent with our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) discussion in the MD&A and the way we manage our businesses, we refer to sales under servicesservice agreements, and sales ofwhich includes both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “services,” which is an important part of our operations.We sometimes offer our customers financing discounts for the purchase of certain GE products when sold in contemplation of long-term service agreements. These sales are accounted for as financing arrangements when payments for the products are collected through higher usage-based fees from servicing the equipment. See Note 9 for further information.
PERFORMANCE OBLIGATIONS SATISFIED OVER TIME
Performance Obligations Satisfied Over Time. We enter into long-term service agreements with our customers primarily within our Aviation Power, Oil & Gas and TransportationPower segments. These agreements require us to provide preventative maintenance, overhauls, and standby "warranty-type" services that include certain levels of assurance regarding asset performance and uptime throughout the contract periods, which generally range from 5 to 25 years.years. We account for items that are integral to the maintenance of the equipment as part of our service related performance obligation, unless the customer has a substantive right to make a separate purchasing decision (e.g., equipment upgrade).
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We recognize revenue as we perform under the arrangements using the percentage of completion method which is based on our costs incurred to date relative to our estimate of total expected costs. Throughout the life of a contract, this measure of progress captures the nature, timing and extent of our underlying performance activities as our stand-ready services often fluctuate between routine inspections and maintenance, unscheduled service events and major overhauls at pre-determined usage intervals. We provide for potential losses on any of these agreements when it is probable that we will incur the loss. Contract modifications that extend or revise contract terms are not uncommon and generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract (i.e., effectively like a new contract).
Our billing terms for these arrangements are generally based on the utilization of the asset (e.g., per hour of usage) or upon the occurrence of a major maintenance event within the contract, such as an overhaul. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions (seepositions. See Note 109 for further information).information.
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Changes in customer utilization can influence the timing and extent of overhauls and other service events over the life of the contract. As a result, the revenue recognized each period is dependent on our estimate of how customers will utilize their assets over the term of the agreement. We generally use a combination of both historical utilization trends as well as forward-looking information such as market conditions and potential asset retirements in developing our revenue estimates. This estimate of customer utilization will impact both the total contract billings and costs to satisfy our obligation to maintain the equipment. In developing our cost estimates, we utilize a combination of our historical cost experience and expected cost improvements. Cost improvements are generally only included in future cost estimates after savings have been observed in actual results or proven to be effective through an extensive regulatory engineering approval process.
We also enter into long-term services agreements in our Healthcare and Renewable Energy segments. Revenues are recognized for these arrangements on a straight-line basis consistent with the nature, timing and extent of our services, which primarily relate to routine maintenance and as needed product repairs. Our billing terms for these contracts vary, but weWe generally invoice periodically as services are provided.
PERFORMANCE OBLIGATIONS SATISFIED AT A POINT IN TIME
Performance Obligations Satisfied at a Point in Time. We sell certain tangible products, largely spare equipment,parts, through our services businesses. We recognize revenues and bill our customers for this equipment at the point in time that the customer obtains control of the good, which is at the point in time we deliver the spare part to the customer.customer.
COLLABORATIVE ARRANGEMENTS. Our Aviation business enters into collaborative arrangements and joint ventures with manufacturers and suppliers of components used to build and maintain certain engines. Under these arrangements, GE and its collaborative partners share in the risks and rewards of these programs through various revenue, cost and profit sharing payment structures. GE recognizes revenue and costs for these arrangements based on the scope of work GE is responsible for transferring to its customers. GE’s payments to participants are primarily recorded as either cost of services sold ($1,939 million, $1,809 million and $1,884 million for the years ended December 31, 2019, 2018 and 2017, respectively) or as cost of goods sold ($2,974 million, $3,097 million and $2,806 million for the years ended December 31, 2019, 2018 and 2017, respectively). Our most significant collaborative arrangement is with Safran Aircraft engines, a subsidiary of Safran Group of France, which sells LEAP and CFM56 engines through CFM International, a jointly owned company. GE makes substantial sales of parts and services to CFM International based on arm's length terms.
GE CAPITAL REVENUES FROM SERVICES (EARNED INCOME)
SERVICES. We use the interest method to recognize income on loans. Interest on loans includes origination, commitment and other non-refundable fees related to funding (recorded in earned income on the interest method). We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due. Previously recognized interest income that was accrued but not collected from the borrower is reversed, unless the terms of the loan agreement permit capitalization of accrued interest to the principal balance.Payments received on nonaccrual loans are applied to reduce the principal balance of the loan. We resume accruing interest on nonaccrual loans only when payments are brought current according to the loan’s original terms and future payments are reasonably assured.
We recognize financing lease income on the interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values are based upon management's best estimates of the value of the leased asset at the end of the lease term. We use various sources of data in determining these estimates, including information obtained from third parties, which is adjusted for the attributes of the specific asset under lease. Guarantees of residual values by unrelated third parties are included within minimum lease payments. Significant assumptions we use in estimating residual values include estimated net cash flows over the remaining lease term, anticipated results of future remarketing, and estimated future component part and scrap metal prices, discounted at an appropriate rate.
We recognize operating lease income on a straight-line basis over the terms of underlying leases.
BUSINESSES AND ASSETS HELD FOR SALE
Businesses and assets held for sale represent components that meet accounting requirements to be classified as held for sale and are presented as single asset and liability amounts in our financial statements with a valuation allowance, if necessary, to recognize the net carrying amount at the lower of cost or fair value, less cost to sell. Financing receivables that no longer qualify to be presented as held for investment must be classified as assets held for sale and recognized in our financial statements at the lower of cost or fair value, less cost to sell, with that amount representing a new cost basis at the date of transfer.
The determination of fair value for businesses and assets held for sale involves significant judgments and assumptions. Development of estimates of fair values in this circumstance is complex and is dependent upon, among other factors, the nature of the potential sales transaction (for example, asset sale versus sale of legal entity), composition of assets and/or businesses in the disposal group, the comparability of the disposal group to market transactions and negotiations with third-party purchasers. Such factors bear directly on the range of potential fair values and the selection of the best estimates. Key assumptions were developed based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction.
We review all businesses and assets held for sale each reporting period to determine whether the existing carrying amounts are fully recoverable in comparison to estimated fair values, less cost to sell.
DEPRECIATION AND AMORTIZATION
The cost of GE property, plant and equipment is generally depreciated on a straight-line basis over its estimated economic life. The cost of GE Capital equipment leased to others on operating leases is depreciated on a straight-line basis to estimated residual value over the lease term or over the estimated economic life of the equipment.
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LOSSES ON FINANCING RECEIVABLES
Our financing receivables portfolio consists of a variety of loans and leases, including both larger-balance, non-homogeneous loans and leases and smaller-balance homogeneous loans and leases. We routinely evaluate our entire portfolio for potential specific credit or collection issues that might indicate an impairment.
Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of losses depends on the size, type and risk characteristics of the related financing receivable. Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values, and the present and expected future levels of interest rates. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible that we will experience credit losses that are different from our current estimates. Write-offs are deducted from the allowance for losses when we judge the principal to be uncollectible and subsequent recoveries are added to the allowance at the time cash is received on a written-off account.
PARTIAL SALES OF BUSINESS INTERESTS IN WHICH WE LOSE CONTROL. Gains or losses on sales of affiliate shares that result in our loss of a controlling financial interest are recorded in earnings. If we retain a noncontrolling interest in our former affiliate, we initially record our investment at fair value, and any subsequent adjustments to the carrying value of the investment are recorded in earnings.
SALES OF BUSINESS INTERESTS IN WHICH WE RETAIN CONTROL. Gains or losses on sales of affiliate shares where we retain a controlling financial interest are recorded in equity. Gains or losses on sales that result in our loss of a controlling financial interest are recorded in earnings along with remeasurement gains or losses on any investments in the entity that we retained.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH. Debt securities and money market instruments with original maturities of three months or less are included in cash, cash equivalents and restricted cash unless designatedclassified as available-for-sale and classified as investment securities. Restricted cash primarily comprised collateral for receivables sold and funds restricted in connection with certain ongoing litigation matters and amounted to $589 million and $388 million at December 31, 2019 and December 31, 2018, respectively.
INVESTMENT SECURITIES
SECURITIES. We report investments in available-for-sale debt and marketable equity securities and certain other equity securities at fair value. See Note 19 for further information on fair value. Unrealized gains and losses on available-for-sale debt securities are included in shareowners’ equity,recorded to other comprehensive income, net of applicable taxes and other adjustments.adjustments related to our insurance liabilities. Unrealized gains and losses on equity securities with readily determinable fair values are recorded to earnings.
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Although we generally do not have the intent to sell any specific debt securities in the ordinary course of managing our portfolio, we may sell debt securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders.
We regularly review investment securities for impairment using both quantitative and qualitative criteria.impairment. For debt securities, if we do not intend to sell the security or it is not more likely than not that we will be required to sell the security before recovery of our amortized cost, we evaluate other qualitative criteria, such as the financial health of and specific prospects for the issuer, to determine whether we do not expect to recover the amortized cost basis of the security, such as the financial health of and specific prospects for the issuer.security. We also evaluate quantitative criteria including determining whether there has been an adverse change in expected future cash flows. If we do not expect to recover the entire amortized cost basis of the security, we consider the security to be other-than-temporarily impaired (OTTI), and we record the difference between the security’s amortized cost basis and its recoverable amount in earnings and the difference between the security’s recoverable amount and fair value in other comprehensive income. If we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, the security is also considered OTTI, and we recognize the entire difference between the security’s amortized cost basis and its fair value in earnings. See Note 3 for further information.
Realized gainsCURRENT RECEIVABLES.Amounts due from customers arising from the sales of products and services are recorded at the outstanding amount, less allowance for losses. We regularly monitor the recoverability of our receivables. See Note 4 for further information.
FINANCING RECEIVABLES. Our financing receivables portfolio consists of a variety of loans and leases, including both larger-balance, non-homogeneous loans and leases and smaller-balance homogeneous loans and leases. We routinely evaluate our entire portfolio for potential specific credit or collection issues that might indicate an impairment. Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses are accountedinherent in the portfolio. See Note 5 for on the specific identification method. Unrealized gains and losses on investment securities classified as trading are included in earnings.further information.
INVENTORIES
INVENTORIES. All inventories are stated at lower of cost or realizable values. Effective January 1, 2018, we voluntarily changed the cost methodCost of the GE U.S. inventories that were previously measuredis primarily determined on a last-in, first-out (LIFO) basis to first-in, first-out (FIFO) basis. See Accounting Changes sectionNote 6 for further information.
PROPERTY, PLANT AND EQUIPMENT. The cost of GE property, plant and equipment is generally depreciated on a straight-line basis over its estimated economic life. The cost of GE Capital equipment leased to others on operating leases is depreciated on a straight-line basis to estimated residual value over the lease term or over the estimated economic life of the equipment. See Note 7 for further information.
LEASE ACCOUNTING. We determine if an arrangement is a lease or a service contract at inception. Where an arrangement is a lease we determine if it is an operating lease or a finance lease. Subsequently, if the arrangement is modified we reevaluate our classification.
Lessee.At lease commencement, we record a lease liability and corresponding right-of-use (ROU) asset. Lease liabilities represent the present value of our future lease payments over the expected lease term which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. We have elected to include lease and non-lease components in determining our lease liability for all leased assets except our vehicle leases. Non-lease components are generally services that the lessor performs for the Company associated with the leased asset. For those leases with payments based on an index, the lease liability is determined using the index at lease commencement. Lease payments based on increases in the index subsequent to lease commencement are recognized as variable lease expense as they occur. The present value of our lease liability is determined using our incremental collateralized borrowing rate at lease inception. ROU assets represent our right to control the use of the leased asset during the lease and are recognized in an amount equal to the lease liability. Over the lease term we use the effective interest rate method to account for the lease liability as lease payments are made and the ROU asset is amortized to earnings in a manner that results in a straight-line expense recognition in the Statement of Earnings. A ROU asset and lease liability is not recognized for leases with an initial term of 12 months or less and we recognize lease expense for these leases on a straight-line basis over the lease term. We test ROU assets at least annually for impairment or whenever events or changes in circumstance indicate that the asset may be impaired.
Lessor. Equipment leased to others under operating leases are included in Property, plant and equipment and leases classified as finance leases are included in Financing receivables on our Statement of Financial Position. Finance lease receivables are tested for impairment as described in the Financing Receivables section above. See Notes 5 and 7 for further information.
GOODWILL AND OTHER INTANGIBLE ASSETS
ASSETS. We do not amortizetest goodwill but test it at least annually for impairment at the reporting unit level. A reporting unit is the operating segment, or one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We recognize an impairment charge if the carrying amount of a reporting unit exceeds its fair value and the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill. We use a market approach, when available and appropriate, or the income approach, or a combination of both to establish fair values. When a portion of a reporting unit is disposed, goodwill is allocated to the gain or loss on disposition based on the relative fair values of the business or businesses disposed and the portion of the reporting unit that will be retained.
GE20182019 FORM 10-K 105 71
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We amortize the cost ofFor other intangibles over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets that are not deemed indefinite-lived, cost is generally amortized on a straight-line basis over the asset’s estimated economic life, except thatfor individually significant customer-related intangible assets that are amortized in relation to total related sales. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. In these circumstances, they are tested for impairment based on undiscounted cash flows and, if impaired, written down to estimated fair value based on either discounted cash flows or appraised values. IntangibleSee Note 8 for further information.
ASSOCIATED COMPANIES. For unconsolidated entities over which we have significant influence and have not elected the fair value option, we account for our interest as equity method investments, and our investments in, and advances to, associated companies are presented on a one-line basis in All other assets with indefinite lives are tested annuallyin our consolidated Statement of Financial Position, net of any impairment. We evaluate our equity method investments for impairment and written downwhenever events or changes in circumstance indicate that the carrying amounts of such investments may not be recoverable. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. Our share of the results of associated companies are presented on a one-line basis in Other income within continuing operations in our consolidated Statement of Earnings (Loss). See Note 10 for further information.
Where we adopt the fair value option for our investment in an associated company, our investment in and any advances to are recorded in Investment securities in our consolidated Statement of Financial Position and any subsequent changes in fair value are recognized in Other income within continuing operations in our consolidated Statement of Earnings (Loss). See Note 3 for further information.
DERIVATIVES AND HEDGING. We use derivatives to manage a variety of risks, including risks related to interest rates, foreign exchange and commodity prices. Accounting for derivatives as required.hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. In evaluating whether a particular relationship qualifies for hedge accounting, we test effectiveness at inception and each reporting period thereafter by determining whether changes in the fair value of the derivative offset, within a specified range, changes in the fair value of the hedged item. If fair value changes fail this test, we discontinue applying hedge accounting to that relationship prospectively. Fair values of both the derivative instrument and the hedged item are calculated using internal valuation models incorporating market-based assumptions, subject to third-party confirmation, as applicable. See Note 21 for further information.
DEFERRED INCOME TAXES.Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when those taxes are paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we consider it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is established. Deferred taxes, as needed, are provided for our investment in affiliates and associated companies when we plan to remit those earnings. See Note 15 for further information.
BUSINESSES AND ASSETS HELD FOR SALE. Businesses and assets held for sale represent components that meet accounting requirements to be classified as held for sale and are presented as single asset and liability amounts in our financial statements with a valuation allowance, if necessary, to recognize the net carrying amount at the lower of cost or fair value, less cost to sell. Financing receivables that no longer qualify to be presented as held for investment are classified as assets held for sale and recognized in our financial statements at the lower of cost or fair value, less cost to sell, with that amount representing a new cost basis at the date of transfer.
The determination of fair value for businesses and assets held for sale involves significant judgments and assumptions. Development of estimates of fair values in this circumstance is complex and is dependent upon, among other factors, the nature of the potential sales transaction (for example, asset sale versus sale of legal entity), composition of assets and/or businesses in the disposal group, the comparability of the disposal group to market transactions and negotiations with third-party purchasers. Such factors bear directly on the range of potential fair values and the selection of the best estimates. Key assumptions were developed based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction. We review all businesses and assets held for sale each reporting period to determine whether the existing carrying amounts are fully recoverable in comparison to estimated fair values, less cost to sell. See Note 2 for further information.
INVESTMENT CONTRACTS, INSURANCE LIABILITIES AND INSURANCE ANNUITY BENEFITS
BENEFITS. Our run-off insurance operations include providing insurance and reinsurance for life and health risks and providing certain annuity products. Primary product types include long-term care, structured settlement annuities, life and disability insurance contracts and investment contracts. Insurance contracts are contracts with significant mortality and/or morbidity risks, while investment contracts are contracts without such risks.
For traditional long-duration insurance contracts, we report premiums as revenue when due. Premiums received on non-traditional long-duration insurance contracts and investment contracts, (includingincluding annuities without significant mortality risk)risk, are not reported as revenues but rather as deposit liabilities. We recognize revenues for charges and assessments on these contracts, mostly for mortality, contract initiation, administration and surrender. Amounts credited to policyholder accounts are charged to expense.
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Liabilities for traditional long-duration insurance contracts includes both future policy benefit reserves and claims reserves. Future policy benefit reserves represent the present value of future policy benefits less the present value of future gross premiums based on actuarial assumptions. These assumptions include, but are not limited to, morbidity, mortality, the length of time a policy will remain in force, anticipated future premium increases from future in-force rate actions and interest rates. Assumptions are locked-in throughout the life of a contract unless a premium deficiency develops at which time we change these assumptions to reflect our most recent assumptions. Our annual premium deficiency testing assesses the adequacy of future policy benefit reserves, net of capitalized acquisition costs, using our most recent assumptions. Liabilities for investment contracts equal the account value, that is, the amount that accrues to the benefit of the contract or policyholder including credited interest and assessments through the financial statement date.
Claim reserves are established when a claim is incurred or is estimated to have been incurred and represents our best estimate of the present value of the ultimate obligations for future claim payments and claim adjustments expenses. Key inputs include actual known facts about the claims, such as the benefits available and cause of disability of the claimant, as well as assumptions derived from our actual historical experience and expected future changes in experience factors. Claim reserves are evaluated periodically for potential changes in loss estimates with the support of qualified actuaries, and any changes are recorded in earnings in the period in which they are determined.
FAIR VALUE MEASUREMENTS
The following sections describe the valuation methodologies we use to measure financial and non-financial instruments accounted for at fair value including certain assets within our pension plans and retiree benefit plans.
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
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Level 1 – | Quoted prices for identical instruments in active markets.
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Level 2 – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
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Level 3 – | Significant inputs to the valuation model are unobservable.
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We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we have risk management teams that review valuation, including independent price validation for certain instruments. With regard to Level 3 valuations (including instruments valued by third parties), we perform a variety of procedures to assess the reasonableness of the valuations. Such reviews include an evaluation of instruments whose fair value change exceeds predefined thresholds (and/or does not change) and consider the current interest rate, currency and credit environment, as well as other published data, such as rating agency market reports and current appraisals. This detailed review may include the use of a third-party valuation firm.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
RECURRING FAIR VALUE MEASUREMENTS
The following sections describe the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis.
Investments in Debt and Equity Securities. When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly traded equity securities.
For large numbers of debt securities for which market prices are observable for identical or similar investment securities but not readily accessible for each of those investments individually (that is, it is difficult to obtain pricing information for each individual investment security at the measurement date), we obtain pricing information from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the methodology of the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The pricing vendor considers available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2 and primarily comprise our portfolio of corporate fixed income, and government, mortgage and asset-backed securities. Our pricing vendors may provide us with valuations that are based on significant unobservable inputs, and in those circumstances we classify the investment securities in Level 3.
Annually, we conduct reviews of our primary pricing vendor to validate that the inputs used in that vendor’s pricing process are deemed to be market observable as defined in the standard. While we are not provided access to proprietary models of the vendor, our reviews have included on-site walk-throughs of the pricing process, methodologies and control procedures for each asset class and level for which prices are provided. Our reviews also include an examination of the underlying inputs and assumptions for a sample of individual securities across asset classes, credit rating levels and various durations. In addition, the pricing vendor has an established challenge process in place for all security valuations, which facilitates identification and resolution of potentially erroneous prices. We believe that the prices received from our pricing vendor are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy.
We use non-binding broker quotes and other third-party pricing services as our primary basis for valuation when there is limited, or no, relevant market activity for a specific instrument or for other instruments that share similar characteristics. We have not adjusted the prices we have obtained. Investment securities priced using non-binding broker quotes and other third-party pricing services are included in Level 3. As is the case with our primary pricing vendor, third-party brokers and other third-party pricing services do not provide access to their proprietary valuation models, inputs and assumptions. Accordingly, we conduct reviews of vendors, as applicable, similar to the reviews performed of our primary pricing vendor. In addition, we conduct internal reviews of pricing for all such investment securities quarterly to ensure reasonableness of valuations used in our financial statements. These reviews are designed to identify prices that appear stale, those that have changed significantly from prior valuations, and other anomalies that may indicate that a price may not be accurate. Based on the information available, we believe that the fair values provided by the brokers and other third-party pricing services are representative of prices that would be received to sell the assets at the measurement date (exit prices).
Equity investments with readily determinable fair values are valued using market observable data such as quoted prices.
Derivatives. The majority of our derivatives are valued using internal models. The models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts.
Derivative assets and liabilities included in Level 3 primarily represent equity derivatives and interest rate products that contain embedded optionality or prepayment features.
NONRECURRING FAIR VALUE MEASUREMENTS
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, equity securities without readily determinable fair value and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
The following sections describe the valuation methodologies we use to measure financial and non-financial instruments accounted for at fair value on a nonrecurring basis and for certain assets within our pension plans and retiree benefit plans at each reporting period, as applicable.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Financing Receivables and Loans Held for Sale. When available, we use observable market data, including pricing on recent closed market transactions, to value loans that are included in Level 2. When this data is unobservable, we use valuation methodologies using current market interest rate data adjusted for inherent credit risk, and such loans are included in Level 3. When appropriate, loans may be valued using collateral values (see Long-lived Assets below).
Equity investments without readily determinable fair value and Equity Method Investments. Equity investments without readily determinable fair value and equity method investments are valued using market observable data such as transaction prices when available. When market observable data is unavailable, investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate and other third-party pricing sources. These investments are generally included in Level 3.
Investments in private equity, real estate and collective funds held within our pension plans, are generally valued using the net asset value (NAV) per share as a practical expedient for fair value provided certain criteria are met. The NAVs are determined based on the fair values of the underlying investments in the funds. Investments that are measured at fair value using the NAV practical expedient are not required to be classified in the fair value hierarchy.
Long-lived Assets. Fair values of long-lived assets, including aircraft, are primarily derived internally and are based on observed sales transactions for similar assets. In other instances, for example, collateral types for which we do not have comparable observed sales transaction data, collateral values are developed internally and corroborated by external appraisal information. Adjustments to third-party valuations may be performed in circumstances where market comparables are not specific to the attributes of the specific collateral or appraisal information may not be reflective of current market conditions due to the passage of time and the occurrence of market events since receipt of the information.
Retained Investments in Formerly Consolidated Subsidiaries. Upon a change in control that results in deconsolidation of a subsidiary, the fair value measurement of our retained noncontrolling stake is valued using market observable data such as quoted prices when available, or if not available, an income approach, a market approach, or a combination of both approaches as appropriate. In applying these methodologies, we rely on a number of factors, including actual operating results, future business plans, economic projections, market observable pricing multiples of similar businesses and comparable transactions, and possible control premium. These investments are generally included in Level 1 or Level 3, as appropriate, determined at the time of the transaction.
ACCOUNTING CHANGES
On October 1, 2018, we adopted Accounting Standards Update (ASU) No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides that the stranded tax effects from the Tax Cuts and Jobs Act (U.S. Tax Reform) on the balance of accumulated other comprehensive income (AOCI) may be reclassified to retained earnings. The stranded tax effects relate primarily to pension and other employee benefit plans and absent the ASU, our policy is to release stranded tax effects on plan termination. We elected to early adopt the standard and reclassified the tax effect recorded within AOCI associated primarily with the change in tax rate under U.S tax reform to retained earnings. The adoption resulted in a decrease to AOCI and an increase to retained earnings of $1,815 million.
On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, and the related amendments (ASC 606), which supersedes most previous GAAP revenue guidance. We elected to adopt the new standard on a retrospective basis to ensure a consistent basis of presentation within our consolidated financial statements for all periods reported. In addition, we elected the practical expedient for contract modifications, which essentially means that the terms of the contract that existed at the beginning of the earliest period presented can be assumed to have been in place since the inception of the contract (i.e., not practical to separately evaluate the effects of all prior contract modifications).
ASC 606 requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfers to a customer. As a result of the adoption of the standard, we recorded significant changes in the timing of revenue recognition and in the classification between revenues and costs. The financial statement effect of the adoption was a decrease to our previously reported retained earnings as of January 1, 2016 of $4,240 million and a decrease to our previously reported revenues and earnings (loss) from continuing operations of $2,224 million and $2,668 million, respectively, for the year ended December 31, 2017 and $220 million and $1,182 million, respectively, for the year ended December 31, 2016. The effect on our consolidated Statement of Financial Position was principally comprised of changes to our contract assets, inventories, deferred taxes, deferred income and progress collections balances resulting in an $8,317 million decrease to previously reported total assets as of December 31, 2017.
As discussed in prior filings, the impact of adopting the ASC 606 includes:
Long-Term Service Agreements. For our long-term service agreements, we will continue to recognize revenue over time using percentage of completion based on costs incurred relative to total expected costs. We will also continue to record cumulative effect adjustments resulting from changes to our estimated contract billings or costs (excluding those resulting from contract modifications as discussed below). Our accounting was impacted by various changes in the new revenue standard including (1) accounting for contract modifications and their related impacts, and (2) changes in the accounting scope and term of our contracts.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Modifications. Under the new revenue standard, contract modifications are generally accounted for as if we entered into a new contract, resulting in prospective recognition of changes to our estimates of contract billings and costs. That is, cumulative effect adjustments will generally no longer be recognized in the period that modifications occur.
There was limited guidance for accounting for contract modifications under prior GAAP. As a result, our previous method of accounting for contract modifications was developed with the objective of accounting for the nature of the contract modifications. Generally, contract modifications were accounted for as cumulative effect adjustments, which reflected an update to the contract margin for the impact of the modification (i.e., changes to estimates of future contract billings and costs); however, modifications that substantially changed the economics of the arrangement were effectively accounted for as a new contract.
Scope and term. The new revenue standard provides more prescriptive guidance on identifying the elements of long-term service type contracts that should be accounted for as separate performance obligations. Application of this guidance, which focuses on understanding the nature of the arrangement, including our customers' discretion in purchasing decisions, has resulted in changes to the scope of elements included in our accounting model for long-term service agreements. For example, significant equipment upgrades offered as part of our long-term service agreements are generally accounted for as separate performance obligations under the new revenue standard.
Also, the term of our contracts is now defined as the shorter of the stated term or the term not subject to customer termination without substantive penalty. Over this contract term, we estimate our revenues and related costs, including estimates of fixed and variable payments related to asset utilization and related costs to fulfill our performance obligations. Historically, our accounting for long-term contracts did not reflect an expectation that a contract would be terminated prior to the stated term, particularly when the probability of termination was considered remote. Under prior GAAP, while termination rights were considered, more emphasis was placed on expected outcomes (i.e., use of best estimates). For example, we used historical experience with similar types of contracts as well as other evidence (e.g., customer intent, economic compulsion and future plans for operating the asset) to determine the contract term for application of our accounting model.
These changes to our long-term service agreement accounting have significantly impacted all of our industrial businesses except for Renewable Energy, Healthcare, and Lighting and were some of the drivers in the reduction of the related contract asset balance of $8,255 million as of December 31, 2017. While these contract asset balances have been reduced due to the accounting changes, the economics and cash impact of these contracts remain unchanged.
Aviation Commercial Engines. For Aviation Commercial engines our previous method applied contract-specific estimated margin rates, which included the effect of estimated cost improvements over time, to costs incurred to determine the amount of revenue that should be recognized. The new revenue standard resulted in a significant change from our previous long-term contract accounting model. While we will continue to recognize revenue at delivery, each engine is now accounted for as a separate performance obligation, reflecting the contractually stated price and manufacturing cost of each engine. The most significant effect of this change is on our new engine launches, where the cost of earlier production units is higher than the cost of later production units driven by expected cost improvements over the life of the engine program, which generally resulted in lower earnings or increased losses on our early program engine deliveries to our customers. The effect of this change reduced the related contract asset balance by $1,755 million as of December 31, 2017.
All Other Large Equipment. For the remainder of our equipment businesses, the new revenue standard’s emphasis on transfer of control rather than risks and rewards has resulted in an accelerated timing of revenue recognition versus our previous accounting for certain products. While this change impacts all our businesses, our Renewable Energy business was most significantly impacted on a year over year basis with certain of their products recognized at an earlier point in time compared to historical standards. Our policy under ASC 605 was to defer recognition until all risk had transferred to the customer, which was generally upon product installation or customer acceptance. For these equipment contracts, the customer has control of the equipment in advance of the related installation or acceptance event based on our evaluation of the indicators provided in ASC 606. Consistent with our industry peers, certain of our businesses’ products have transitioned either to a point in time or over time recognition based on the nature of the arrangement. This change in timing of revenue had an effect on inventory, contract assets and progress collections to reflect the transfer of control at an earlier point in time.
On January 1, 2018, we adopted ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires the service cost component of the net periodic costs for pension and postretirement plans to be presented in the same line item in the statement of earnings as other employee-related compensation costs. The non-service related costs are now required to be presented separately from the service cost component. This change to our consolidated Statement of Earnings (Loss) has been reflected on a retrospective basis and had no effect on continuing or net income. The new standard also added guidance requiring entities to exclude these non-service related costs from capitalization in inventory or other internally-developed assets on a prospective basis, which did not have a significant effect.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
On January 1, 2018 we adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The ASU requires the changes in the total of cash and restricted cash to be presented in the statement of cash flows. In addition, when cash and restricted cash are presented on separate lines on the balance sheet, an entity is required to reconcile the totals in the statement of cash flows to the related line items in the balance sheet. While not a direct effect of the adoption of the standard, to simplify the reconciliation of the statement of cash flows to the cash balances presented in our consolidated Statement of Financial Position, we have elected to present cash and restricted cash as a single line on the balance sheet, which resulted in an increase of $668 million and $654 million to our previously reported December 31, 2017 and December 31, 2016 cash balances, respectively. The change to our cash balances and cash flows has been reflected on a retrospective basis for all periods presented.
On January 1, 2018, we adopted ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory and was required to be adopted on a modified retrospective basis. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized as they are eliminated in consolidation. This change to our income tax provision has been reflected as a $410 million cumulative catch up adjustment to increase retained earnings as of January 1, 2018 and is not reflected in periods prior to this date.
On January 1, 2018, we adopted ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The ASU is required to be reflected on a retrospective basis and provides guidance on the classification of certain cash receipts and cash payments, including requiring payments received on beneficial interests in securitization transactions be classified as investing activities.
Our GE Industrial businesses sell whole current receivables to GE Capital in normal course sale transactions and report those transactions as operating cash flows in the GE Statement of Cash Flows. In contrast, GE Capital, in one of its receivables facilities, sells current receivables daily to third parties, predominantly commercial paper conduits, for cash and a beneficial interest in the previously sold receivables (the Deferred Purchase Price or DPP). GE Capital reports all cash flows associated with the purchase and sale of current receivables from the GE Industrial businesses as investing cash flows. On a consolidated basis we eliminate the transactions between GE and GE Capital and account only for the external transaction and the resulting DPP, therefore we recorded the adoption impact in our consolidated Statement of Cash Flows.
In adopting the ASU, we determined the investing cash flows associated with the DPP based on the contractual payments on the DPP that we received monthly and reclassified $553 million and $184 million from cash inflows from operating activities to cash inflows from investing activities for the years ended December 31, 2017 and 2018, respectively, in our consolidated Statement of Cash Flows.
In the third quarter of 2018, we learned of an interpretation of the ASU that requires a daily computation of both non-cash activities and cash flows associated with the DPP when receivables are sold daily that is different from the monthly computation of the DPP we used in our previously reported accounting, which was based on the timing of settlements.
We completed our evaluation of this interpretation in the fourth quarter of 2018 and determined that a change in the method of presenting our cash flows in a manner consistent with this interpretation required us to reclassify an incremental $5,008 million and $3,858 million from cash inflows from operating activities to cash inflows from investing activities for the years ended December 31, 2018 and 2017, respectively, in our consolidated Statement of Cash Flows.
In December 2018, we modified the terms of the receivables facility affected so that future sales of receivables will occur at each monthly settlement date as opposed to daily. There was no change to the economic terms of the arrangement as a result of this modification. The $5,008 million and $3,858 million reclassifications described above were a consequence of the timing difference between our daily sales and the monthly settlement. The renegotiated terms remove this timing difference. Accordingly, in future periods, applying the ASU to the revised terms will result in our calculating consolidated cash flows in a manner similar to those reported prior to the incremental reclassifications described above.
On January 1, 2018 we adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires that equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in earnings. The adoption had an insignificant impact to retained earnings and other comprehensive income.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Effective January 1, 2018, we voluntarily changed the cost method of the GE U.S. inventories that were previously measured on a last-in, first-out (LIFO) basis to first-in, first-out (FIFO) basis. We believe the FIFO method is a preferable measure for our inventories as it is expected to better reflect the current value of inventory reported in our consolidated Statement of Financial Position, improve the matching of costs of goods sold with related revenue, and provide for greater consistency and uniformity across our operations with respect to the method of inventory valuation. While this change will also require us to make a conforming change for U.S. income tax purposes, all GE businesses previously using LIFO are expected to be in a deflationary cost environment due to the manufacturing life cycle of the products and continuous reduction in the manufacturing costs due to better efficiencies, which would significantly decrease the tax benefit that LIFO would otherwise provide. Prior to the change and as reported in our 2017 Annual Report on Form 10-K, LIFO was used for approximately 32% of GE inventories as of December 31, 2017.
As required by GAAP, we have reflected this change in accounting principle on a retrospective basis resulting in changes to the
historical periods presented. The retrospective application of the change resulted in a decrease to our January 1, 2016 retained
earnings of $105 million and a decrease to our results from continuing operations by $124 million and $147 million for the years ended December 31, 2017 and December 31, 2016, respectively. This change did not affect our previously reported cash flows from operating, investing or financing activities.
NOTE 2. BUSINESSES HELD FOR SALE AND DISCONTINUED OPERATIONS
ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE
In 2018, we signed an agreement to sell Energy Financial Services' (EFS) debt origination business within our Capital segment, to Starwood Property Trust, Inc. The sale was completed for proceeds of $2,011 million and we recognized a pre-tax gain of $288 million.
On November 13, 2017, the Company announced its intention to exit approximately $20 billion of assets over the next one to two years. Since this announcement, GE has classified various businesses at Corporate and across our Power, Lighting, Aviation and Healthcare segments as held for sale. As these businesses met the criteria for held for sale, we presented these businesses as a single asset and liability in our financial statements and recognized a valuation allowance, if necessary, to recognize the net carrying amount at the lower of cost or fair value, less cost to sell. To date, we have recorded a cumulative pre-tax loss on the planned disposals of $1,657 million ($1,535 million after-tax), of which $625 million was recorded in 2018. Through the fourth quarter of 2018, we closed certain of these transactions within our Power, Healthcare, and Lighting segments for total net proceeds of $6,389 million, recognized a pre-tax gain of $1,150 million in the caption "Other income" in our consolidated Statement of Earnings (Loss) and liquidated $546 million of our previously recorded valuation allowance. These transactions are subject to customary working capital and other post-close adjustments.
On February 25, 2019, we announced an agreement to sell our BioPharma business within our Healthcare segment to Danaher Corporation for total consideration of approximately $21.4 billion, subject to certain adjustments, and we completed the spin-off and subsequent merger of our Transportation business with Wabtec. These transactions as well as our anticipated exit of our equity ownership position in BHGE had not met the accounting criteria for held for sale classification as of December 31, 2018.
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FINANCIAL INFORMATION FOR ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE
December 31 (In millions) | 2018 |
| 2017 |
|
| Assets |
|
|
|
| Current receivables(a) | $ | 184 |
| $ | 612 |
|
| Inventories | 529 |
| 931 |
|
| Property, plant, and equipment – net | 423 |
| 931 |
|
| Goodwill | 514 |
| 1,619 |
|
| Other intangible assets – net | 370 |
| 403 |
|
| Contract and other deferred assets | 562 |
| 619 |
|
| Valuation allowance on disposal group classified as held for sale(b) | (1,013 | ) | (1,000 | ) |
| Other | 60 |
| 49 |
|
| Assets of businesses held for sale | $ | 1,630 |
| $ | 4,164 |
|
|
|
|
| Liabilities |
|
|
| Accounts payable(a) | $ | 344 |
| $ | 602 |
|
| Progress collections and price adjustments accrued | 84 |
| 179 |
|
| Non-current compensation and benefits | 152 |
| 162 |
|
| Other liabilities | 128 |
| 305 |
|
| Liabilities of businesses held for sale | $ | 708 |
| $ | 1,248 |
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(a) | Included transactions in our industrial businesses that were made on arm's length terms with GE Capital, including GE current receivables sold to GE Capital of $105 million and $366 million at December 31, 2018 and December 31, 2017, respectively, and amounts due to GE Capital associated with the supply chain finance program of $40 million at December 31, 2018. These intercompany balances included within our held for sale businesses are reported in the GE and GE Capital columns of our financial statements, but are eliminated in deriving our consolidated financial statements.
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(b) | We adjusted the carrying value to fair value less cost to sell for certain held for sale businesses.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DISCONTINUED OPERATIONS
Discontinued operations primarily relate to our financial services businesses as a result of the GE Capital Exit Plan and were previously reported in the Capital segment. These discontinued operations primarily comprise residual assets and liabilities related to our exited U.S. mortgage business (WMC), our mortgage portfolio in Poland, indemnification liabilities associated with the sale of our GE Capital businesses, and other litigation and tax matters. Results of operations, financial position and cash flows for these businesses are separately reported as discontinued operations for all periods presented. See Note 22 for further information about indemnifications and further discussion on WMC.
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FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | |
| Operations | | | |
| Total revenues and other income (loss) | $ | (1,347 | ) | $ | 182 |
| $ | 2,968 |
|
| | | |
| Earnings (loss) from discontinued operations before income taxes | $ | (1,811 | ) | $ | (731 | ) | $ | (162 | ) |
| Benefit (provision) for income taxes(a) | 82 |
| 295 |
| 460 |
|
| Earnings (loss) from discontinued operations, net of taxes | $ | (1,729 | ) | $ | (437 | ) | $ | 298 |
|
| | | |
| Disposals | | | |
| Gain (loss) on disposals before income taxes | $ | 4 |
| $ | 306 |
| $ | (750 | ) |
| Benefit (provision) for income taxes(a) | (1 | ) | (178 | ) | (502 | ) |
| Gain (loss) on disposals, net of taxes | $ | 3 |
| $ | 128 |
| $ | (1,252 | ) |
| | | |
| Earnings (loss) from discontinued operations, net of taxes | $ | (1,726 | ) | $ | (309 | ) | $ | (954 | ) |
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(a) | GE Capital’s total tax benefit (provision) for discontinued operations and disposals included current tax benefit (provision) of $201 million, $(299) million and $945 million for the years ended December 31, 2018, 2017 and 2016, respectively, including current U.S. Federal tax benefit (provision) of $91 million, $(402) million and $1,224 million and deferred tax benefit (provision) of $(120) million, $416 million and $(988) million for the years ended December 31, 2018, 2017 and 2016, respectively.
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| December 31 (In millions) | 2018 |
| 2017 |
|
| | |
| Assets |
|
|
| Cash, cash equivalents and restricted cash | $ | 528 |
| $ | 757 |
|
| Investment securities | 195 |
| 647 |
|
| Deferred income taxes | 872 |
| 951 |
|
| Financing receivables held for sale | 2,745 |
| 3,215 |
|
| Other assets | 270 |
| 342 |
|
| Assets of discontinued operations | $ | 4,610 |
| $ | 5,912 |
|
|
|
|
| Liabilities |
|
|
| Accounts payable | $ | 43 |
| $ | 51 |
|
| All other liabilities | 1,833 |
| 655 |
|
| Liabilities of discontinued operations | $ | 1,875 |
| $ | 706 |
|
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 3. INVESTMENT SECURITIES
Substantially all of our investment securities are classified as available-for-sale and comprise mainly investment-grade debt securities supporting obligations to annuitants and policyholders in our run-off insurance operations. We do not have any securities classified as held-to-maturity.
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| | 2018 | | 2017 |
| December 31 (In millions) | Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value |
|
| Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value |
|
| | | | | | | | | | |
| Debt | | | | | | | | | |
| U.S. corporate | $ | 21,306 |
| $ | 2,257 |
| $ | (357 | ) | $ | 23,206 |
| | $ | 20,104 |
| $ | 3,775 |
| $ | (35 | ) | $ | 23,843 |
|
| Non-U.S. corporate | 1,906 |
| 53 |
| (76 | ) | 1,883 |
| | 5,455 |
| 86 |
| (13 | ) | 5,528 |
|
| State and municipal | 3,320 |
| 367 |
| (54 | ) | 3,633 |
| | 3,775 |
| 534 |
| (40 | ) | 4,269 |
|
| Mortgage and asset-backed | 3,325 |
| 51 |
| (54 | ) | 3,322 |
| | 2,820 |
| 81 |
| (23 | ) | 2,878 |
|
| Government and agencies | 1,603 |
| 63 |
| (20 | ) | 1,645 |
| | 1,927 |
| 75 |
| (2 | ) | 2,000 |
|
| Equity(a) | 146 |
| — |
| — |
| 146 |
| | 166 |
| 12 |
| — |
| 178 |
|
| Total | $ | 31,605 |
| $ | 2,792 |
| $ | (561 | ) | $ | 33,835 |
| | $ | 34,246 |
| $ | 4,564 |
| $ | (114 | ) | $ | 38,696 |
|
| |
(a) | These securities have readily determinable fair values and subsequently to the adoption of ASU 2016-01 on January 1, 2018, changes in fair value are recorded to earnings. Net unrealized gains (losses) recorded to earnings were$(3) million, $29 million and $(2) million for the years ended December 31, 2018, 2017 and 2016, respectively.
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The estimated fair value and gross unrealized losses of available-for-sale debt securities in a loss position for less than 12 months were $7,231 million and $(310) million, and $3,093 million and $(23) million for the years ended December 31, 2018 and 2017, respectively. The estimated fair value and gross unrealized losses of available-for-sale debt securities in a loss position for 12 months or more were $3,856 million and $(251) million, and $4,949 million and $(91) million for the years ended December 31, 2018 and 2017, respectively. Unrealized losses are not indicative of the amount of credit loss that would be recognized and are primarily due to increases in market yields subsequent to our purchase of the securities. The decline in gross unrealized gains and increase in gross unrealized losses at December 31, 2018 relative to December 31, 2017 is primarily due to increased market yields in 2018. We presently do not intend to sell those debt securities that are in unrealized loss positions and believe that it is not more likely than not that we will be required to sell the vast majority of these securities before anticipated recovery of our amortized cost.
Total pre-tax, other-than-temporary impairments on investment securities recognized in earnings were an insignificant amount, $8 million and $31 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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CONTRACTUAL MATURITIES OF INVESTMENT IN AVAILABLE-FOR-SALE DEBT SECURITIES (EXCLUDING MORTGAGE AND ASSET-BACKED SECURITIES) (In millions) | Amortized cost |
| Estimated fair value |
|
| | | |
| Due | | |
| Within one year | $ | 534 |
| $ | 536 |
|
| After one year through five years | 2,870 |
| 2,963 |
|
| After five years through ten years | 6,116 |
| 6,527 |
|
| After ten years | 18,676 |
| 20,412 |
|
We expect actual maturities to differ from contractual maturities because borrowers have the right to call or prepay certain obligations.
Although we generally do not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders. Gross realized gains on available-for-sale investment securities were $251 million, $244 million and $61 million, and gross realized losses were $(41) million, $(24) million and $(55) million for the years ended 2018, 2017 and 2016, respectively.
Proceeds from investment securities sales and early redemptions by issuers totaled $3,239 million, $3,241 million, and $1,718 million for the years ended December 31, 2018, 2017, and 2016, respectively.
In addition to equity securities with readily determinable fair value, we hold $1,085 million of equity securities without readily determinable fair value at the year ended December 31, 2018 that are classified as "All other assets" in our consolidated Statement of Financial Position that are originally recorded at cost and adjusted for observable price changes for identical or similar instruments less any impairment. We recorded fair value increases of $55 million to those securities based on observable transactions and impairments of $(48) million for the year ended December 31, 2018.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 4. CURRENT RECEIVABLES
|
| | | | | | | | | | | | | |
| Consolidated(a) |
| GE(b) |
| December 31 (In millions) | 2018 |
| 2017 |
|
| 2018 |
| 2017 |
|
| Power | $ | 6,982 |
| $ | 9,735 |
|
| $ | 4,325 |
| $ | 4,664 |
|
| Renewable Energy | 1,333 |
| 1,687 |
|
| 1,181 |
| 962 |
|
| Aviation | 2,973 |
| 3,722 |
|
| 2,562 |
| 1,859 |
|
| Oil & Gas | 5,643 |
| 5,953 |
|
| 5,645 |
| 5,832 |
|
| Healthcare | 2,888 |
| 3,487 |
|
| 1,721 |
| 1,814 |
|
| Transportation | 375 |
| 289 |
|
| 307 |
| 184 |
|
| Lighting | 85 |
| 105 |
|
| 50 |
| 36 |
|
| Corporate and eliminations | 598 |
| 304 |
|
| 623 |
| 342 |
|
| 20,878 |
| 25,282 |
|
| 16,415 |
| 15,693 |
|
| Less Allowance for losses | (1,004 | ) | (1,073 | ) |
| (997 | ) | (1,055 | ) |
| Total | $ | 19,874 |
| $ | 24,209 |
|
| $ | 15,418 |
| $ | 14,638 |
|
| |
(a) | The consolidated total included a DPP receivable of $468 million and $388 million at December 31, 2018 and 2017, respectively, related to the Receivables facility (described below). During the years ended December 31, 2018 and 2017, GE Capital received additional non-cash DPP related to the sale of new current receivables of $5,272 million and $4,292 million, respectively and received cash payments on the DPP of $5,192 million and $4,411 million, respectively.
|
| |
(b) | GE current receivables balances at December 31, 2018 and 2017, before allowance for losses, included $11,491 million and $10,452 million, respectively, from sales of goods and services to customers. The remainder of the balances primarily relates to supplier advances, revenue sharing programs and other non-income based tax receivables.
|
SALES OF GE CURRENT RECEIVABLES
During the years ended December 31, 2018 and 2017, GE sold approximately 55% and 63%, respectively, of its current receivables to GE Capital or third parties to manage GE short-term liquidity and credit exposure. The performance of sold current receivables are similar to the performance of our other GE current receivables, delinquencies are not expected to be significant. Any difference between the carrying value of receivables sold and total cash collected is recognized as financing costs by GE in “Interest and other financial charges” in our consolidated Statement of Earnings (Loss). Costs of $655 million were recognized for the year ended December 31, 2018.
The following table summarizes the ownership and outstanding balances of current receivables previously sold by GE as of December 31, 2018 and 2017: |
| | | | | | |
| (In millions) | 2018 |
| 2017 |
|
| Retained by GE Capital(a) | $ | 4,455 |
| $ | 9,982 |
|
| Sold to Receivables facilities and others(b) | 7,900 |
| 5,763 |
|
| Total | $ | 12,355 |
| $ | 15,745 |
|
| |
(a) | Of these amounts, approximately 31% and 40% at December 31, 2018 and 2017, respectively, GE provided GE Capital with full or limited recourse (i.e., GE retains all or some risk of default).
|
| |
(b) | Other than the DPP held by GE Capital described below, the Company has no substantive risk of loss with respect to these sold receivables.
|
RECEIVABLES FACILITIES
The Company has two revolving receivables facilities, with a total program size of $5,100 million, under which receivables are sold to third-party entities by GE Capital. In one of our facilities, upon the sale of receivables, we receive proceeds of cash and DPP. The DPP is an interest in specified assets of the purchaser entities (the sold receivables) that entitles the Company to the residual cash flows of those specified assets. The Company’s remaining risk with respect to the sold receivables is limited to the balance of the DPP, collection of which is dependent on collection of the previously sold current receivables. In our other receivables facility, established on December 21, 2018, upon sale of the receivables, we receive proceeds of cash only and therefore the Company has no remaining risk with respect to current receivables sold under this facility.
For the year ended December 31, 2018, GE sold current receivables of $23,508 million to GE Capital, which GE Capital then sold to third parties under the receivables facilities. GE Capital services the current receivables sold in exchange for a market-based fee. The Company received total cash collections of $22,540 million on previously sold current receivables owed to the purchasing entities. The purchasing entities invested $18,102 million including $14,798 million of collections to purchase newly originated current receivables from the Company.
SOLD TO OTHERS
In addition to receivables sold under the receivables facilities, during the year ended December 31, 2018, GE and GE Capital sold $12,577 million of current receivables to third parties in exchange for cash proceeds of $12,402 million.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 5. INVENTORIES
|
| | | | | | |
| December 31 (In millions) | 2018 |
| 2017 |
|
| | |
| Raw materials and work in process | $ | 10,665 |
| $ | 10,131 |
|
| Finished goods | 8,387 |
| 8,847 |
|
| Unbilled shipments | 219 |
| 441 |
|
| Total inventories | $ | 19,271 |
| $ | 19,419 |
|
NOTE 6. GE CAPITAL FINANCING RECEIVABLES AND ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
|
| | | | | | |
FINANCING RECEIVABLES – NET December 31 (In millions) | 2018 |
| 2017 |
|
| | |
| Loans, net of deferred income | $ | 10,834 |
| $ | 17,404 |
|
| Investment in financing leases, net of deferred income | 2,822 |
| 4,614 |
|
| 13,656 |
| 22,018 |
|
| Allowance for losses | (28 | ) | (51 | ) |
| Financing receivables – net | $ | 13,628 |
| $ | 21,967 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| NET INVESTMENT IN FINANCING LEASES | Total financing leases |
| Direct financing leases |
| Leveraged leases |
| December 31 (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | |
| Total minimum lease payments receivable | $ | 2,719 |
| $ | 4,637 |
| | $ | 1,421 |
| $ | 2,952 |
| | $ | 1,298 |
| $ | 1,685 |
|
| Less principal and interest on third-party non-recourse debt | (474 | ) | (638 | ) | | — |
| — |
| | (474 | ) | (638 | ) |
| Net rentals receivable | 2,245 |
| 3,999 |
| | 1,421 |
| 2,952 |
| | 824 |
| 1,047 |
|
| Estimated unguaranteed residual value of leased assets | 1,295 |
| 1,590 |
| | 571 |
| 743 |
| | 724 |
| 847 |
|
| Less deferred income | (718 | ) | (975 | ) | | (437 | ) | (614 | ) | | (282 | ) | (361 | ) |
| Investment in financing leases, net of deferred income(a) | $ | 2,822 |
| $ | 4,614 |
| | $ | 1,556 |
| $ | 3,081 |
| | $ | 1,266 |
| $ | 1,533 |
|
| |
(a) | See Note 14 for deferred tax amounts related to financing leases.
|
|
| | | | | | |
CONTRACTUAL MATURITIES (In millions) | Total
loans |
| Net rentals
receivable |
|
| Due in | | |
| 2019 | $ | 5,932 |
| $ | 446 |
|
| 2020 | 1,371 |
| 391 |
|
| 2021 | 1,208 |
| 334 |
|
| 2022 | 753 |
| 247 |
|
| 2023 | 796 |
| 329 |
|
| 2024 and later | 773 |
| 497 |
|
| Total | $ | 10,834 |
| $ | 2,245 |
|
We expect actual maturities to differ from contractual maturities, primarily as a result of prepayments.
We manage our GE Capital financing receivables portfolio using delinquency and nonaccrual data as key performance indicators. At December 31, 2018, 2.4%, 1.8% and 0.9% of financing receivables were over 30 days past due, over 90 days past due and on nonaccrual, respectively. At December 31, 2017, 2.5%, 0.6% and 1.1% of financing receivables were over 30 days past due, over 90 days past due and on nonaccrual, respectively.
The GE Capital financing receivables portfolio includes $1,387 million and $4,148 million of current receivables at December 31, 2018 and 2017, respectively, which are purchased from GE with full or limited recourse. These receivables are classified within current receivables at a consolidated level and are excluded from the calculation of GE Capital delinquency and nonaccrual data. The portfolio also includes $688 million and $1,141 million of financing receivables that are guaranteed by GE, of which $96 million and $239 million of these loans are on nonaccrual at a GE consolidated level at December 31, 2018 and 2017, respectively. Additional allowance for loan losses of $43 million and $161 million are recorded at GE and on a consolidated level for these guaranteed loans at December 31, 2018 and 2017, respectively. In the fourth quarter of 2018, GE settled its guarantee with GE Capital on $135 million of past due financing receivables, for which GE had previously recorded $112 million in allowance for loan losses and reclassified those financing receivables to held for sale at fair value, less cost to sell.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
|
| | | | | | | | | | | | | | | |
| Depreciable lives-new |
| Original Cost |
| Net Carrying Value |
| December 31 (Dollars in millions) | (in years) |
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
|
|
|
|
|
|
|
|
|
| GE |
|
|
|
|
|
|
|
| Land and improvements | 8 | (a) | $ | 1,148 |
| $ | 1,175 |
|
| $ | 1,113 |
| $ | 1,154 |
|
| Buildings, structures and related equipment | 8-40 |
| 11,557 |
| 11,486 |
|
| 6,479 |
| 6,913 |
|
| Machinery and equipment | 4-20 |
| 27,088 |
| 26,702 |
|
| 11,828 |
| 12,734 |
|
| Leasehold costs and manufacturing plant under construction | 1-10 |
| 3,289 |
| 3,862 |
|
| 2,546 |
| 3,162 |
|
|
|
| $ | 43,082 |
| $ | 43,225 |
|
| $ | 21,967 |
| $ | 23,963 |
|
|
|
|
|
|
|
|
|
| GE Capital(b) |
|
|
|
|
|
|
|
| Land and improvements, buildings, structures and related equipment | 1-40 | (a) | $ | 153 |
| $ | 171 |
|
| $ | 32 |
| $ | 45 |
|
| Equipment leased to others |
|
|
|
|
|
|
|
| Aircraft | 15-20 |
| 44,944 |
| 46,296 |
|
| 29,352 |
| 30,067 |
|
| All other | 4-34 |
| 205 |
| 718 |
|
| 126 |
| 483 |
|
|
|
| $ | 45,302 |
| $ | 47,185 |
|
| $ | 29,510 |
| $ | 30,595 |
|
| Eliminations |
|
| (909 | ) | (802 | ) |
| (728 | ) | (684 | ) |
| Total |
|
| $ | 87,475 |
| $ | 89,608 |
|
| $ | 50,749 |
| $ | 53,874 |
|
| |
(a) | Depreciable lives exclude land. |
| |
(b) | Included $1,397 million and $1,414 million of original cost of assets leased to GE with accumulated amortization of $241 million and $193 million at December 31, 2018 and 2017, respectively.
|
Consolidated depreciation and amortization related to property, plant and equipment was $5,562 million, $5,139 million and $4,997 million in 2018, 2017 and 2016, respectively. Amortization of GE Capital equipment leased to others was $2,089 million, $2,190 million and $2,231 million in 2018, 2017 and 2016, respectively.
Noncancellable future rentals due from customers for equipment on operating leases at December 31, 2018, are as follows:
|
| | | |
| (In millions) | |
| |
| Due in | |
| 2019 | $ | 3,054 |
|
| 2020 | 2,800 |
|
| 2021 | 2,418 |
|
| 2022 | 2,063 |
|
| 2023 | 1,599 |
|
| 2024 and later | 5,921 |
|
| Total | $ | 17,855 |
|
NOTE 8. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
ACQUISITIONS
On April 20, 2017, we acquired LM Wind Power, the Danish maker of rotor blades for approximately $1,700 million. The purchase price allocation resulted in goodwill of $1,593 million and amortizable intangible assets of $206 million.
On January 10, 2017, we acquired the remaining 96% of ServiceMax, a leader in cloud-based field service management solutions, for $867 million, net of cash acquired of $91 million. Upon gaining control, we fair valued the business including our previously held 4% equity interest. The purchase price allocation resulted in goodwill of $686 million and amortizable intangible assets of $279 million.
BAKER HUGHES
On July 3, 2017, GE completed the combination of GE’s Oil & Gas business (GE Oil & Gas) with Baker Hughes Incorporated (Baker Hughes). As part of the transaction, GE contributed GE Oil & Gas and $7,498 million in cash in exchange for an ownership interest of approximately 62.5% in the new combined company. The operating assets of the new combined company are held through a partnership named Baker Hughes, a GE company, LLC (BHGE LLC). At the time of the acquisition, GE held an economic interest of approximately 62.5% in this partnership, and Baker Hughes’ former shareholders held an ownership interest of approximately 37.5% through a newly NYSE listed corporation, Baker Hughes, a GE company (BHGE), which controls the partnership. In turn, GE held a controlling, voting interest of approximately 62.5% in BHGE through Class B Common Stock, which grants voting rights but no economic rights. Baker Hughes’ former shareholders received one share of BHGE Class A Common Stock and a special one-time cash dividend of $17.50 per share at closing. Total consideration was $24,798 million, including the $7,498 million cash contribution.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The Baker Hughes acquisition has been accounted for as a business combination, using the acquisition method. The net assets of Baker Hughes’ contributed businesses were recorded at their fair value, and GE Oil & Gas continues at its historical or carryover basis. At the time of the acquisition, we recorded noncontrolling interest of $16,238 million for the approximate 37.5% ownership interest in the combined company held by BHGE’s Class A shareholders. The noncontrolling interest is recorded at fair value for the portion attributable to Baker Hughes and at our historical cost for the portion attributable to GE Oil & Gas. The fair value of the noncontrolling interest associated with the acquired net assets was determined by the publicly traded share price of Baker Hughes at the close of the transaction. The impact of recognizing the noncontrolling interest in GE Oil & Gas resulted in an increase to additional paid in capital of $94 million. In the prior year, we disclosed that the impact of recognizing the noncontrolling interest was a decrease to additional paid in capital of $126 million. The primary reason for the change from prior year is the adoption of ASC 606 in the first quarter of 2018.
The tables below present the fair value of the consideration exchanged and the allocation of purchase price to the major classes of assets and liabilities of the acquired Baker Hughes business and the associated fair value of preexisting noncontrolling interest related to the acquired net assets of Baker Hughes.
|
| | | |
PURCHASE PRICE (In millions) | July 3, 2017 |
|
| | |
| Cash consideration | $ | 7,498 |
|
| Fair value of the Class A Shares in BHGE issued to Baker Hughes shareholders | 17,300 |
|
| Total consideration for Baker Hughes | $ | 24,798 |
|
|
| | | |
IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES ASSUMED (In millions) | July 3, 2017 |
|
| | |
| Cash and cash equivalents | $ | 4,133 |
|
| Accounts receivable | 2,342 |
|
| Inventories | 1,712 |
|
| Property, plant, and equipment - net | 4,514 |
|
| Other intangible assets - net | 4,005 |
|
| All other assets | 1,335 |
|
| Accounts payable | (1,245 | ) |
| Borrowings | (3,370 | ) |
| Deferred taxes(a) | (249 | ) |
| All other liabilities | (2,487 | ) |
| Total identifiable net assets(b) | 10,690 |
|
| Fair value of existing noncontrolling interest | (35 | ) |
| Goodwill(c) | 14,143 |
|
| Total allocated purchase price | $ | 24,798 |
|
| |
(a) | Includes an increase of approximately $806 million primarily related to fair value adjustments to identifiable assets and liabilities (excluding goodwill) partially offset by a tax asset of approximately $553 million associated with the recognition of foreign tax credits.
|
| |
(b) | Through the end of the purchase accounting window in 2018, measurement period adjustments increased goodwill by $787 million primarily due to reductions in the fair value of property, plant and equipment of $362 million, equity method investments of $228 million, intangible assets of $123 million, and an increase to other liabilities of $315 million, partially offset by deferred tax adjustments of $251 million. Certain of these adjustments resulted in a cumulative decrease to depreciation and amortization expense of $33 million. In addition, we reclassified certain legacy Baker Hughes business balances to conform to our presentation. |
| |
(c) | Goodwill represents future economic benefits expected to be recognized from combining the operations of GE Oil & Gas and Baker Hughes, including expected future synergies and operating efficiencies. Goodwill resulting from the acquisition has been allocated to our Oil & Gas reporting units, of which $67 million is deductible for tax purposes. |
The fair value of intangible assets and related useful lives in the preliminary purchase price allocation included:
|
| | | | |
| (Dollars in millions) | Estimated fair value |
| Estimated useful life (in years) |
| Trademarks - Baker Hughes | $ | 2,100 |
| Indefinite life |
| Customer-related | 1,240 |
| 24 |
| Patents and technology | 465 |
| 4-8 |
| Trademarks - Other | 45 |
| 10 |
| Capitalized software | 64 |
| 3-7 |
| In-process research and development | 70 |
| Indefinite life |
| Favorable lease contracts | 21 |
| 10 |
| Total | $ | 4,005 |
| |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
As we have previously announced, we plan an orderly separation of our ownership interest in BHGE over time. In November 2018, BHGE completed an underwritten public offering in which we sold 101.2 million shares of BHGE Class A common stock. BHGE also repurchased 65 million BHGE LLC units from us. As a result, our economic interest in BHGE reduced from 62.5% to 50.4%. See Note 15 for further information.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CHANGES IN GOODWILL BALANCES |
| 2018 |
| 2017 |
| (In millions) | Balance at
January 1 |
| Acquisitions |
| Impairments |
| Dispositions,
currency
exchange
and other |
| Balance at
December 31 |
|
| Balance at
January 1 |
| Acquisitions |
| Impairments |
| Dispositions,
currency
exchange
and other |
| Balance at
December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Power | $ | 25,269 |
| $ | — |
| $ | (21,209 | ) | $ | (2,289 | ) | $ | 1,772 |
| | $ | 26,403 |
| $ | 37 |
| $ | (1,165 | ) | $ | (6 | ) | $ | 25,269 |
|
| Renewable Energy | 4,093 |
| — |
| (94 | ) | (28 | ) | 3,971 |
| | 2,507 |
| 1,503 |
| — |
| 83 |
| 4,093 |
|
| Aviation | 10,008 |
| — |
| — |
| (170 | ) | 9,839 |
| | 9,455 |
| 25 |
| — |
| 529 |
| 10,008 |
|
| Oil & Gas | 23,943 |
| 68 |
| — |
| 444 |
| 24,455 |
| | 10,363 |
| 13,364 |
| — |
| 216 |
| 23,943 |
|
| Healthcare | 17,306 |
| — |
| — |
| (80 | ) | 17,226 |
| | 17,424 |
| 60 |
| — |
| (178 | ) | 17,306 |
|
| Transportation | 902 |
| — |
| — |
| (18 | ) | 884 |
| | 899 |
| — |
| — |
| 3 |
| 902 |
|
| Lighting | — |
| — |
| — |
| — |
| — |
| | 281 |
| — |
| — |
| (281 | ) | — |
|
| Capital | 984 |
| — |
| — |
| (80 | ) | 904 |
| | 2,368 |
| — |
| (1,386 | ) | 2 |
| 984 |
|
| Corporate | 1,463 |
| — |
| (833 | ) | (66 | ) | 563 |
| | 739 |
| 727 |
| — |
| (3 | ) | 1,463 |
|
| Total | $ | 83,968 |
| $ | 68 |
| $ | (22,136 | ) | $ | (2,286 | ) | $ | 59,614 |
| | $ | 70,438 |
| $ | 15,716 |
| $ | (2,550 | ) | $ | 365 |
| $ | 83,968 |
|
Goodwill balances decreased primarily as a result of impairments (discussed below), the sale of the Distributed Power business within our Power segment and currency effects of a stronger U.S. dollar, partially offset by adjustments to the allocation of purchase price associated with our acquisitions of Baker Hughes and LM Wind Power.
We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year. The impairment test consists of two steps: in step one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied when the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately.
Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our annual reporting unit valuations ranged from 9.5% to 23.0%.
Based on the results of our annual impairment test, the fair values of each of our reporting units exceeded their carrying values except for the Power Generation and Grid Solutions reporting units, within our Power segment. The majority of the goodwill in our Power segment was recognized as a result of the Alstom acquisition, at which time approximately $15,800 million of goodwill was attributed to our Power Generation and Grid Solutions reporting units. As previously disclosed, the power market as well as its operating environment continues to be challenging. Our outlook for Power has continued to deteriorate driven by the significant overcapacity in the industry, lower market penetration, uncertain timing of deal closures due to deal financing, and the complexities of working in emerging markets. In addition, our near-term earnings outlook has been negatively impacted by project execution and our own underlying operational challenges. Finally, market factors such as increasing energy efficiency and renewable energy penetration continue to impact our view of long-term demand. These conditions resulted in downward revisions of our forecasts on current and future projected earnings and cash flows at these businesses.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Therefore, we conducted step two of the goodwill impairment test for the Power Generation and Grid Solutions reporting units. Step two requires that we allocate the fair value of the reporting unit to identifiable assets and liabilities of the reporting unit, including previously unrecognized intangible assets. Any residual fair value after this allocation is compared to the goodwill balance and any excess goodwill is charged to expense.
In performing the second step, we identified significant unrecognized intangible assets primarily related to customer relationships, backlog, technology, and trade name. The value of these unrecognized intangible assets is driven by high customer retention rates in our Power business, our contractual backlog, the value of internally created technology, and the GE trade name. The combination of these unrecognized intangibles, adjustments to the carrying value of other assets and liabilities, and reduced reporting unit fair values calculated in step one, resulted in an implied fair value of goodwill substantially below the carrying value of goodwill for the Power Generation and Grid Solutions reporting units. Therefore, in the third quarter of 2018, we recorded our best estimate of a non-cash impairment loss of $21,973 million. We recorded the estimated impairment losses in the caption "Goodwill impairments" in our consolidated Statement of Earnings (Loss). During the fourth quarter of 2018, we finalized step two of the impairment analysis, and increased the impairment charge by $69 million resulting in a final impairment charge of $22,042 million. The impairment loss included $833 million of goodwill recorded at Corporate associated with our Digital acquisitions that was previously allocated to our Power Generation and Grid solutions reporting units for goodwill testing purposes.
In the fourth quarter of 2018, due to a decline in order growth and increased project costs, we updated projected cash flows at our Hydro reporting unit within our Renewable Energy segment. As a result of these revised cash flow projections, we performed an impairment test as of October 1, 2018, which resulted in the fair value of our Hydro reporting unit to be less than its carrying value. Therefore, we performed a step two analysis which resulted in a non-cash goodwill impairment loss of $94 million. We recorded the impairment loss in the caption “Goodwill impairments” in our consolidated Statement of Earnings (Loss). All of the goodwill in our Hydro reporting unit was recognized as a result of the Alstom acquisition.
After the impairment charges, the fair values of our Grid solutions and Hydro reporting units were in excess of their carrying values by approximately 21% and 25%, respectively. While the remaining goodwill at our Grid Solutions and Hydro reporting units is not currently impaired, if the power markets continue to decline or we do not meet our cash flow forecasts, there could be an impairment in the future. We will continue to monitor the power markets and the impact it may have on these reporting units. There is no remaining goodwill associated with our Power Generation reporting unit.
In addition, the fair value of our Additive reporting unit in our Aviation segment was in excess of its carrying value by approximately 23%. Additive was formed in fourth quarter of 2016 after the acquisition of two businesses. At the time of the acquisition, fair value equaled carrying value. We will continue to measure our ability to meet our cash flow forecasts and to monitor the operating results of the Additive business, which could impact the fair value of this reporting unit in the future.
While the fair value of each of the reporting units in our Oil & Gas segment are in excess of their carrying values, our basis in BHGE’s shares exceed its publicly traded share price. While the goodwill of our Oil & Gas reporting units is not currently impaired, there can be no assurances that further sustained declines in BHGE’s share price or any future declines in macroeconomic or business conditions affecting the oil and gas industry will not occur. If they were to occur, this could result in impairments in future periods.
In the second quarter of 2018, we classified a significant portion of Healthcare Equipment Finance’s financing receivables as assets held for sale. In the fourth quarter of 2018, we completed the sale transaction and as a result, we wrote off goodwill of $85 million in our Industrial Finance reporting unit within our Capital segment.
In 2017, we recognized a total non-cash goodwill impairment loss in our Power Conversion and Energy Financial Services reporting units of $1,165 million and $1,386 million, respectively. After the impairment loss, there was no remaining goodwill in our Power Conversion and our Energy Financial Services reporting units.
Determining the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
|
| | | | | | |
OTHER INTANGIBLE ASSETS – NET December 31 (In millions) | 2018 |
| 2017 |
|
| | |
| Intangible assets subject to amortization | $ | 15,937 |
| $ | 18,056 |
|
| Indefinite-lived intangible assets(a) | 2,222 |
| 2,217 |
|
| Total | $ | 18,159 |
| $ | 20,273 |
|
| |
(a) | Indefinite-lived intangible assets principally comprise trademarks and in-process research and development.
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION December 31 (In millions) | Gross carrying
amount |
| Accumulated
amortization |
| Net |
|
| Gross carrying
amount |
| Accumulated
amortization |
| Net |
|
| | | | | | | |
| Customer-related(a) | $ | 10,214 |
| $ | (3,722 | ) | $ | 6,494 |
| | $ | 10,614 |
| $ | (3,095 | ) | $ | 7,521 |
|
| Patents and technology | 10,332 |
| (4,528 | ) | 5,804 |
| | 10,271 |
| (3,899 | ) | 6,372 |
|
| Capitalized software | 7,437 |
| (4,617 | ) | 2,820 |
| | 8,064 |
| (4,974 | ) | 3,089 |
|
| Trademarks | 1,137 |
| (524 | ) | 613 |
| | 1,280 |
| (421 | ) | 859 |
|
| Lease valuations | 150 |
| (84 | ) | 66 |
| | 170 |
| (80 | ) | 89 |
|
| All other | 242 |
| (103 | ) | 139 |
| | 218 |
| (92 | ) | 125 |
|
| Total | $ | 29,513 |
| $ | (13,578 | ) | $ | 15,937 |
| | $ | 30,617 |
| $ | (12,561 | ) | $ | 18,056 |
|
| |
(a) | Balance includes payments made to our customers, primarily within our Aviation business. |
Intangible assets subject to amortization decreased by $2,120 million in the twelve months ended December 31, 2018, primarily as a result of amortization, impairments, currency effects of a stronger U.S. dollar and the sale of the Distributed Power business, partially offset by the acquisition of a technology intangible asset of $632 million at our Aviation business and the capitalization of new software across several business platforms. Due to the continued decline in the Power industry, we determined that certain intangible assets, primarily technology and customer relationships, were impaired. Therefore, included within amortization expense for the twelve months ended December 31, 2018, was a $428 million non-cash impairment charge recorded by our Power Conversion business within our Power segment. This charge was recorded within the caption "Selling, general and administrative expense" caption in our consolidated Statement of Earnings (Loss).
GE consolidated amortization expense related to intangible assets subject to amortization was $2,662 million, $2,290 million and $2,073 million in 2018, 2017 and 2016, respectively. Estimated GE Consolidated annual pre-tax amortization for intangible assets over the next five calendar years are as follows:
|
| | | | | | | | | | | | | | | |
ESTIMATED 5 YEAR CONSOLIDATED AMORTIZATION (In millions) | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
|
| | | | | |
| Estimated annual pre-tax amortization | $ | 2,108 |
| $ | 1,973 |
| $ | 1,810 |
| $ | 1,641 |
| $ | 1,506 |
|
During 2018, we recorded additions to intangible assets subject to amortization of $1,395 million. The components of finite-lived intangible assets acquired during 2018 and their respective weighted-average amortizable periods are as follows: |
| | | | |
COMPONENTS OF FINITE-LIVED INTANGIBLE ASSETS ACQUIRED DURING 2018
(Dollars in millions) | Gross
carrying value |
| Weighted-average
amortizable period
(in years) |
| | |
| Customer-related | $ | 23 |
| 20 |
| Patents and technology | 662 |
| 19.5 |
| Capitalized software | 686 |
| 4.7 |
| Trademarks | 1 |
| 10 |
| All other | 23 |
| 11 |
| Total gross carrying value | $ | 1,395 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DISAGGREGATED EQUIPMENT | Years ended December 31 |
| AND SERVICES REVENUES(a) | 2018 | | 2017 | | 2016 |
| (In millions) | Equipment Revenues | Services Revenues | Total Revenues | | Equipment Revenues | Services Revenues | Total Revenues | | Equipment Revenues | Services Revenues | Total Revenues |
| | | | | | | | | | | | |
| Power | $ | 12,296 |
| $ | 15,004 |
| $ | 27,300 |
| | $ | 17,477 |
| $ | 17,401 |
| $ | 34,878 |
| | $ | 17,359 |
| $ | 18,476 |
| $ | 35,835 |
|
| | | | | | | | | | | | |
| Renewable Energy | 7,036 |
| 2,497 |
| 9,533 |
| | 7,036 |
| 2,169 |
| 9,205 |
| | 8,861 |
| 891 |
| 9,752 |
|
| | | | | | | | | | | | |
| Aviation | 11,499 |
| 19,067 |
| 30,566 |
| | 10,215 |
| 16,797 |
| 27,013 |
| | 11,357 |
| 14,883 |
| 26,240 |
|
| | | | | | | | | | | | |
| Oil & Gas | 9,251 |
| 13,608 |
| 22,859 |
| | 7,188 |
| 9,992 |
| 17,180 |
| | 6,083 |
| 6,855 |
| 12,938 |
|
| | | | | | | | | | | | |
| Healthcare | 11,422 |
| 8,363 |
| 19,784 |
| | 10,771 |
| 8,246 |
| 19,017 |
| | 10,206 |
| 8,006 |
| 18,212 |
|
| | | | | | | | | | | | |
| Transportation | 1,363 |
| 2,535 |
| 3,898 |
| | 1,686 |
| 2,248 |
| 3,935 |
| | 2,279 |
| 2,306 |
| 4,585 |
|
| | | | | | | | | | | | |
| Lighting | 1,630 |
| 93 |
| 1,723 |
| | 1,887 |
| 55 |
| 1,941 |
| | 4,583 |
| 179 |
| 4,762 |
|
| | | | | | | | | | | | |
| Total Industrial Segment Revenues | $ | 54,497 |
| $ | 61,167 |
| $ | 115,664 |
| | $ | 56,260 |
| $ | 56,909 |
| $ | 113,168 |
| | $ | 60,728 |
| $ | 51,596 |
| $ | 112,324 |
|
(a) Revenues classification consistent with our MD&A defined Services revenue.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Years ended December 31 |
(In millions) | 2018 |
| | 2017 |
| | 2016 |
|
| | | | | | |
| Power(a) | | | | | |
| Gas Power Systems | $ | 5,186 |
| | $ | 7,990 |
| | $ | 7,594 |
|
| Steam Power Systems | 1,912 |
| | 2,176 |
| | 1,793 |
|
| Power Services | 11,793 |
| | 12,930 |
| | 13,748 |
|
| Other | 8,409 |
| | 11,782 |
| | 12,700 |
|
| Power revenues | $ | 27,300 |
| | $ | 34,878 |
| | $ | 35,835 |
|
| | | | | | |
| Renewable Energy | | | | | |
| Onshore Wind | $ | 8,258 |
| | $ | 8,056 |
| | $ | 8,576 |
|
| Offshore Wind | 447 |
| | 296 |
| | 249 |
|
| Hydro | 827 |
| | 853 |
| | 927 |
|
| Renewable Energy revenues | $ | 9,533 |
| | $ | 9,205 |
| | $ | 9,752 |
|
| | | | | | |
| Aviation | | | | | |
| Commercial Engines & Services | $ | 22,724 |
| | $ | 19,709 |
| | $ | 19,521 |
|
| Military | 4,103 |
| | 3,991 |
| | 3,585 |
|
| Systems & Other | 3,740 |
| | 3,314 |
| | 3,135 |
|
| Aviation revenues | $ | 30,566 |
| | $ | 27,013 |
| | $ | 26,240 |
|
| | | | | | |
| Oil & Gas | | | | | |
| Turbomachinery & Process Solutions (TPS) | $ | 5,999 |
| | $ | 6,298 |
| | $ | 6,525 |
|
| Oilfield Services (OFS) | 11,617 |
| | 5,881 |
| | 788 |
|
| Oilfield Equipment (OFE) | 2,641 |
| | 2,661 |
| | 3,541 |
|
| Digital Solutions | 2,603 |
| | 2,340 |
| | 2,084 |
|
| Oil & Gas revenues | $ | 22,859 |
| | $ | 17,180 |
| | $ | 12,938 |
|
| | | | | | |
| Healthcare | | | | | |
| Healthcare Systems | $ | 14,886 |
| | $ | 14,460 |
| | $ | 13,975 |
|
| Life Sciences | 4,898 |
| | 4,557 |
| | 4,237 |
|
| Healthcare revenues | $ | 19,784 |
| | $ | 19,017 |
| | $ | 18,212 |
|
| | | | | | |
| Transportation | | | | | |
| Locomotives | $ | 867 |
| | $ | 1,309 |
| | $ | 2,071 |
|
| Services | 2,087 |
| | 1,888 |
| | 1,853 |
|
| Mining | 571 |
| | 387 |
| | 334 |
|
| Other | 373 |
| | 351 |
| | 328 |
|
| Transportation revenues | $ | 3,898 |
| | $ | 3,935 |
| | $ | 4,585 |
|
| | | | | | |
| Lighting | | | | | |
| Current | $ | 980 |
| | $ | 1,042 |
| | $ | 1,044 |
|
| GE Lighting | 743 |
| | 899 |
| | 1,136 |
|
| Appliances | — |
| | — |
| | 2,582 |
|
| Lighting revenues | $ | 1,723 |
| | $ | 1,941 |
| | $ | 4,762 |
|
| | | | | | |
| Total industrial segment revenues | $ | 115,664 |
| | $ | 113,168 |
| | $ | 112,324 |
|
| Capital revenues(b) | 9,551 |
| | 9,070 |
| | 10,905 |
|
| Corporate items and eliminations | (3,600 | ) | | (3,995 | ) | | (3,760 | ) |
| Consolidated revenues(b) | $ | 121,615 |
| | $ | 118,243 |
| | $ | 119,469 |
|
| |
(a) | Upon completion of our announced reorganization, GE Gas Power will comprise Gas Power Systems and Power Services, while Power Portfolio will comprise Steam Power Systems (including services currently reported in Power Services) as well as Power Conversion and GE Hitachi Nuclear, which are reported within Other. |
| |
(b) | Included $9,314 million, $8,886 million and $10,356 million for the years ended December 31, 2018, 2017 and 2016, respectively, of revenues at GE Capital outside of the scope of ASC 606. |
REMAINING PERFORMANCE OBLIGATION
As of December 31, 2018, the aggregate amount of the contracted revenues allocated to our unsatisfied (or partially unsatisfied) performance obligations was $253,165 million. We expect to recognize revenue as we satisfy our remaining performance obligations as follows:
Equipment - total remaining performance obligation of $51,873 million of which 51%, 72% and 95% is expected to be satisfied within 1, 2 and 5 years, respectively, and the remaining thereafter.
Service - total remaining performance obligation of $201,292 million of which 18%, 53%, 76% and 87% is expected to be recognized within 1, 5, 10 and 15 years, respectively, and the remaining thereafter.
Contract modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 10. CONTRACT & OTHER DEFERRED ASSETS AND PROGRESS COLLECTIONS & DEFERRED INCOME
CONTRACT & OTHER DEFERRED ASSETS
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 (In millions) | Power | Aviation | Oil & Gas | Renewable Energy | Transportation | Other(a) | Total |
| | | | | | | | |
| GE | | | | | | | |
| Revenues in excess of billings | $ | 5,368 |
| $ | 5,412 |
| $ | 703 |
| $ | — |
| $ | 590 |
| $ | — |
| $ | 12,072 |
|
| Billings in excess of revenues | (1,693 | ) | (3,297 | ) | (187 | ) | — |
| (56 | ) | — |
| (5,232 | ) |
| Long-term service agreements(b) | $ | 3,675 |
| $ | 2,115 |
| $ | 516 |
| $ | — |
| $ | 534 |
| $ | — |
| $ | 6,840 |
|
| Equipment contract revenues(c) | 3,899 |
| 352 |
| 1,085 |
| 287 |
| 101 |
| 551 |
| 6,275 |
|
| Total contract assets | 7,574 |
| 2,468 |
| 1,600 |
| 287 |
| 635 |
| 551 |
| 13,115 |
|
| | | | | | | | |
| Deferred inventory costs(d) | 1,012 |
| 673 |
| 179 |
| 1,258 |
| 34 |
| 365 |
| 3,522 |
|
| Nonrecurring engineering costs(e) | 124 |
| 1,916 |
| 22 |
| 22 |
| 100 |
| 34 |
| 2,217 |
|
| Customer advances and other | — |
| 1,146 |
| — |
| — |
| 1 |
| — |
| 1,147 |
|
| Contract and other deferred assets | $ | 8,709 |
| $ | 6,204 |
| $ | 1,800 |
| $ | 1,567 |
| $ | 769 |
| $ | 951 |
| $ | 20,000 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 (In millions) | Power | Aviation | Oil & Gas | Renewable Energy | Transportation | Other(a) | Total |
| | | | | | | | |
| GE | | | | | | | |
| Revenues in excess of billings | $ | 6,294 |
| $ | 4,556 |
| $ | 721 |
| $ | 1 |
| $ | 827 |
| $ | — |
| $ | 12,400 |
|
| Billings in excess of revenues | (2,937 | ) | (1,942 | ) | (204 | ) | — |
| (414 | ) | — |
| (5,498 | ) |
| Long-term service agreements(b) | $ | 3,357 |
| $ | 2,614 |
| $ | 517 |
| $ | 1 |
| $ | 413 |
| $ | — |
| $ | 6,902 |
|
| Equipment contract revenues(c) | 4,757 |
| 280 |
| 1,095 |
| 295 |
| 76 |
| 371 |
| 6,874 |
|
| Total contract assets | 8,115 |
| 2,893 |
| 1,612 |
| 296 |
| 488 |
| 371 |
| 13,775 |
|
| | | | | | | | |
| Deferred inventory costs(d) | 1,304 |
| 564 |
| 358 |
| 950 |
| 43 |
| 359 |
| 3,579 |
|
| Nonrecurring engineering costs(e) | 122 |
| 1,696 |
| — |
| — |
| 87 |
| — |
| 1,905 |
|
| Customer advances and other | — |
| 1,098 |
| — |
| — |
| — |
| — |
| 1,098 |
|
| Contract and other deferred assets | $ | 9,539 |
| $ | 6,251 |
| $ | 1,971 |
| $ | 1,246 |
| $ | 619 |
| $ | 729 |
| $ | 20,356 |
|
| |
(a) | Primarily includes our Healthcare segment.
|
| |
(b) | On our consolidated Statement of Financial Position, long-term service agreement balances are presented net of related billings in excess of revenues of $5,232 million and $5,498 million at December 31, 2018 and 2017, respectively.
|
| |
(c) | Included in this balance are amounts due from customers for the sale of service upgrades, which we collect through higher fixed or usage-based fees from servicing the equipment under long-term service agreements. Amounts due from these arrangements totaled $883 million and $748 million as of December 31, 2018 and 2017, respectively.
|
| |
(d) | Represents cost deferral for shipped goods (such as components for wind turbine assemblies within our Renewable Energy segment) and labor and overhead costs on time and material service contracts (primarily originating in Power and Aviation) and other costs for which the criteria for revenue recognition has not yet been met.
|
| |
(e) | Includes costs incurred prior to production (such as requisition engineering) for equipment production contracts, primarily within our Aviation segment, which are allocated ratably to each unit produced.
|
Contract and other deferred assets decreased $356 million in 2018 which included a decrease in our equipment related contract assets of $599 million primarily from decline in new orders at Power. In addition, our long-term service agreements decreased $62 million due to an unfavorable change in estimated profitability of $203 million, primarily at Aviation, which was partially offset by an increase in net revenues in excess of billings, primarily at Power. These decreases were partially offset by an increase in non-recurring engineering costs of $312 million, primarily at Aviation.
PROGRESS COLLECTIONS & DEFERRED INCOME
Progress collections represent cash received from customers under ordinary commercial payment terms in advance of delivery. Progress collections on equipment contracts primarily comprises milestone payments received from customers prior to the manufacture and delivery of customized equipment orders. Other progress collections primarily comprises down payments from customers to reserve production slots for standardized inventory orders such as advance payments from customers when they place orders for wind turbines and blades within our Renewable Energy segment and payments from airframers and airlines for install and spare engines, respectively, within our Aviation segment.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 (In millions) | Power | Aviation | Oil & Gas | Renewable Energy | Transportation | Other(a) | Total |
| | | | | | | | |
| GE | | | | | | | |
| Progress collections on equipment contracts | $ | 6,690 |
| $ | 114 |
| $ | 878 |
| $ | 423 |
| $ | 239 |
| $ | — |
| $ | 8,344 |
|
| Other progress collections | 692 |
| 4,034 |
| 552 |
| 3,467 |
| 68 |
| 338 |
| 9,151 |
|
| Total progress collections | $ | 7,382 |
| $ | 4,148 |
| $ | 1,430 |
| $ | 3,890 |
| $ | 307 |
| $ | 338 |
| $ | 17,495 |
|
| Deferred income | 163 |
| 1,338 |
| 164 |
| 241 |
| 11 |
| 1,739 |
| 3,656 |
|
Progress collections and deferred income
| $ | 7,545 |
| $ | 5,486 |
| $ | 1,594 |
| $ | 4,131 |
| $ | 318 |
| $ | 2,077 |
| $ | 21,151 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 (In millions) | Power | Aviation | Oil & Gas | Renewable Energy | Transportation | Other(a) | Total |
| | | | | | | | |
| GE | | | | | | | |
| Progress collections on equipment contracts | $ | 8,493 |
| $ | 134 |
| $ | 1,149 |
| $ | 591 |
| $ | 316 |
| $ | — |
| $ | 10,683 |
|
| Other progress collections | 775 |
| 4,373 |
| 141 |
| 2,180 |
| 71 |
| 88 |
| 7,627 |
|
| Total progress collections | $ | 9,268 |
| $ | 4,507 |
| $ | 1,290 |
| $ | 2,771 |
| $ | 387 |
| $ | 88 |
| $ | 18,310 |
|
| Deferred income | 286 |
| 1,289 |
| 317 |
| 245 |
| 18 |
| 1,756 |
| 3,911 |
|
Progress collections and deferred income
| $ | 9,554 |
| $ | 5,795 |
| $ | 1,608 |
| $ | 3,016 |
| $ | 405 |
| $ | 1,843 |
| $ | 22,221 |
|
| |
(a) | Primarily includes our Healthcare segment. |
Revenues recognized for balances included in contract liabilities at the beginning of the year were $16,885 million and $12,870 million for the years ended December 31, 2018 and 2017, respectively.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 11. BORROWINGS
In 2015, senior unsecured notes and commercial paper were assumed by GE upon its merger with GE Capital. Under the conditions of the 2015 assumed debt agreement, GE Capital agreed to continue making required principal and interest payments on behalf of GE, resulting in the establishment of an intercompany receivable and payable between GE and GE Capital. On the GE Statement of Financial Position, assumed debt is presented within borrowings with an offsetting receivable from GE Capital, and on the GE Capital Statement of Financial Position, assumed debt is reflected as an intercompany payable to GE within borrowings.
Following is a summary of GE and GE Capital borrowings.
|
| | | | | | | | | | | |
| December 31 (Dollars in millions) | | 2018 |
| | 2017 |
| |
| | | | | | |
| Short-term borrowings | | Amount |
| Average Rate(a) |
| Amount |
| Average Rate(a) |
|
| GE | | | | | |
| Commercial paper | | $ | 3,005 |
| 1.64 | % | $ | 3,000 |
| 1.35 | % |
| Current portion of long-term borrowings | | 103 |
| 6.60 |
| 1,142 |
| 4.29 |
|
| Current portion of long-term borrowings assumed by GE(e) | | 4,207 |
| 3.76 |
| 8,310 |
| 2.82 |
|
| Other | | 2,112 |
| | 2,095 |
| |
| Total GE short-term borrowings | | $ | 9,427 |
| | $ | 14,548 |
| |
| | | | | | |
| GE Capital | | | | | |
| Commercial paper | | $ | 5 |
|
| $ | 5,013 |
| 1.45 |
|
| Current portion of long-term borrowings(b) | | 3,984 |
| 2.00 |
| 5,781 |
| 1.26 |
|
| Intercompany payable to GE(d) | | 2,684 |
| | 8,310 |
| |
| Other | | 1,010 |
| | 497 |
| |
| Total GE Capital short-term borrowings | | $ | 7,684 |
| | $ | 19,602 |
| |
| | | | | | |
| Eliminations(d) | | (4,262 | ) | | (10,114 | ) | |
| Total short-term borrowings | | $ | 12,849 |
| | $ | 24,036 |
| |
| | | | | | |
| Long-term borrowings | Maturities | Amount |
| Average Rate(a) |
| Amount |
| Average Rate(a) |
|
| GE | | | | | |
| Senior notes(c) | 2020-2047 | $ | 26,628 |
| 2.58 | % | $ | 27,233 |
| 2.55 | % |
| Senior notes assumed by GE(e) | 2020-2055 | 29,218 |
| 4.30 |
| 35,491 |
| 3.59 |
|
| Subordinated notes assumed by GE(e) | 2021-2037 | 2,836 |
| 3.64 |
| 2,913 |
| 3.28 |
|
| Other | | 460 |
| | 1,003 |
| |
Other borrowings assumed by GE(e)
| | — |
| | 400 |
| |
| Total GE long-term borrowings | | $ | 59,143 |
| | $ | 67,040 |
| |
| | | | | | |
| GE Capital | | | | | |
| Senior notes | 2020-2039 | $ | 35,105 |
| 3.49 |
| $ | 40,754 |
| 3.11 |
|
| Subordinated notes | | 165 |
| | 208 |
|
|
| Intercompany payable to GE(d) | | 19,828 |
| | 31,533 |
| |
| Other(b) | | 885 |
| | 1,118 |
| |
| Total GE Capital long-term borrowings | | $ | 55,982 |
| | $ | 73,614 |
| |
| | | | | | |
| Eliminations(d) | | (19,892 | ) | | (32,079 | ) | |
| Total long-term borrowings | | $ | 95,234 |
| | $ | 108,575 |
| |
Non-recourse borrowings of consolidated securitization entities(f) | 2019-2022 | 1,875 |
| 3.97 | % | 1,980 |
| 2.77 | % |
| Total borrowings | | $ | 109,958 |
| | $ | 134,591 |
| |
| |
(a) | Based on year-end balances and year-end local currency effective interest rates, including the effects from hedging.
|
| |
(b) | Included $161 million and $885 million of short- and long-term borrowings, respectively, at December 31, 2018 and $348 million and $1,118 million of short- and long-term borrowings, respectively, at December 31, 2017, of funding secured by aircraft and other collateral. Of this, $216 million and $458 million is non-recourse to GE Capital at December 31, 2018 and 2017, respectively. |
| |
(c) | Included $6,177 million and $6,206 million of BHGE senior notes at December 31, 2018 and 2017, respectively. Total BHGE borrowings were $6,330 million and $7,225 million at December 31, 2018 and 2017, respectively. |
| |
(d) | Included a reduction of $1,523 million and zero for the current portion of intercompany loans from GE Capital to GE at December 31, 2018 and 2017, respectively, and a reduction of $12,226 million and $7,271 million for the long-term portion of intercompany loans from GE Capital to GE at December 31, 2018 and 2017, respectively. These loans bear the right of offset against amounts owed under the assumed debt agreement and can be prepaid by GE at any time in whole or in part, without premium or penalty. |
| |
(e) | At December 31, 2018, the remaining GE Capital borrowings that had been assumed by GE as part of the GE Capital Exit Plan was $36,262 million ($4,207 million short term and $32,054 long term), for which GE has an offsetting Receivable from GE Capital of $22,513 million. The difference of $13,749 million represents the amount of borrowings GE Capital had funded with available cash to GE via an intercompany loan in lieu of GE issuing borrowings externally. |
| |
(f) | Included $225 million and $621 million of current portion of long-term borrowings at December 31, 2018 and 2017, respectively. See Note 21 for further information. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
On April 10, 2015, GE provided a full and unconditional guarantee on the payment of the principal and interest on all tradable senior and subordinated outstanding long-term debt securities and all commercial paper issued or guaranteed by GE Capital. At December 31, 2018, the guarantee applies to $37,711 million of GE Capital debt.
See Note 20 for further information about borrowings and associated swaps.
Long-term debt maturities over the next five years follow.
|
| | | | | | | | | | | | | | | |
| (In millions) | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
|
| | | | | | |
| GE excluding assumed debt(a) | $ | 103 |
| $ | 870 |
| $ | 578 |
| $ | 6,271 |
| $ | 1,451 |
|
| GE Capital debt assumed by GE(b) | 4,207 |
| 6,172 |
| 4,663 |
| 1,959 |
| 2,835 |
|
| GE Capital other debt | 3,984 | (c) | 11,309 |
| 2,001 |
| 2,207 |
| 2,358 |
|
| |
(a) | Includes maturities of BHGE borrowings of $43 million, $12 million, $537 million, $1,274 million and $8 million in 2019, 2020, 2021, 2022 and 2023, respectively. |
| |
(b) | Of these maturities, $1,523 million, $3,369 million, $442 million, zero and zero for 2019, 2020, 2021, 2022 and 2023, respectively, were effectively transferred to GE through intercompany loans with right of offset. |
| |
(c) | Fixed and floating rate notes of $433 million contain put options with exercise dates in 2019, and which have final maturity beyond 2023.
|
NOTE 12. INVESTMENT CONTRACTS, INSURANCE LIABILITIES AND INSURANCE ANNUITY BENEFITS
Investment contracts, insurance liabilities and insurance annuity benefits comprise mainly obligations to annuitants and insureds in our run-off insurance operations.
|
| | | | | | | | | | | | | | | |
| December 31, 2018 (In millions) | Long-term care insurance contracts | Structured settlement annuities & life insurance contracts | Other
contracts | Other adjustments(a) | Total |
| | | | | | |
| Future policy benefit reserves | $ | 16,029 |
| $ | 9,495 |
| $ | 169 |
| $ | 2,247 |
| $ | 27,940 |
|
| Claim reserves(b) | 3,917 |
| 230 |
| 1,178 |
| — |
| 5,324 |
|
| Investment contracts(c) | — |
| 1,239 |
| 1,149 |
| — |
| 2,388 |
|
| Unearned premiums and other | 34 |
| 205 |
| 103 |
| — |
| 342 |
|
| | 19,980 |
| 11,169 |
| 2,599 |
| 2,247 |
| 35,994 |
|
| Eliminations | — |
| — |
| (432 | ) | — |
| (432 | ) |
| Total | $ | 19,980 |
| $ | 11,169 |
| $ | 2,167 |
| $ | 2,247 |
| $ | 35,562 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 (In millions) | Long-term care insurance contracts | Structured settlement annuities & life insurance contracts | Other
contracts | Other adjustments(a) | Total |
| | | | | | |
| Future policy benefit reserves | $ | 16,522 |
| $ | 9,257 |
| $ | 191 |
| $ | 4,582 |
| $ | 30,552 |
|
| Claim reserves(b) | 3,590 |
| 274 |
| 1,230 |
| — |
| 5,094 |
|
| Investment contracts(c) | — |
| 1,348 |
| 1,221 |
| — |
| 2,569 |
|
| Unearned premiums and other | 45 |
| 211 |
| 117 |
| — |
| 372 |
|
| | 20,157 |
| 11,090 |
| 2,759 |
| 4,582 |
| 38,587 |
|
| Eliminations | — |
| — |
| (451 | ) | — |
| (451 | ) |
| Total | $ | 20,157 |
| $ | 11,090 |
| $ | 2,308 |
| $ | 4,582 |
| $ | 38,136 |
|
| |
(a) | To the extent that unrealized gains on specific investment securities supporting our insurance contracts would result in a premium deficiency, should those gains be realized, an increase in future policy benefit reserves is recorded, with an after-tax reduction of net unrealized gains recognized through "Other comprehensive income" in our consolidated Statement of Earnings (Loss). |
| |
(b) | Other contracts included claim reserves of $346 million and $364 million related to short-duration contracts at EIC, net of eliminations, at December 31, 2018 and December 31, 2017, respectively.
|
| |
(c) | Investment contracts are contracts without significant mortality or morbidity risks.
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
During 2017, in response to elevated claim experience for a portion of our long-term care insurance contracts that was most pronounced for policyholders with higher attained ages, we initiated a comprehensive review of premium deficiency assumptions across all insurance products, which included reconstructing our future claim cost projections for long-term care contracts utilizing trends observed in our emerging experience for older claimant ages and later duration policies. Certain of our long-term care policyholders only recently started to reach the prime claim paying period and our new claim cost assumptions considered the emerging credibility of this claim data. In addition to the adverse impact from the revised future claim cost projections over a long-term horizon, our premium deficiency assumptions considered mortality, length of time a policy will remain in force and both near-term and longer-term investment return expectations. Future investment yields estimated in 2017 were lower than in previous premium deficiency tests, primarily due to the effect of near-term yields on approximately $14,500 million of future expected capital contributions, as discussed below. The capital contributions will be invested at the current market yields which had the impact of lowering the average long-term investment yield used to calculate the discount rate and, as such, further adversely impacted the estimated premium deficiency. Our discount rate assumption for purposes of performing the 2017 premium deficiency assessments resulted in a weighted-average rate of approximately 5.67% compared to approximately 6.17% in 2016.
The 2017 test indicated a premium deficiency requiring the unlocking of reserves and resetting of actuarial assumptions to current assumptions. This resulted in a $9,481 million pre-tax charge to earnings in 2017, which included a $398 million impairment of deferred acquisition costs, a $216 million impairment of present value of future profits, and an $8,867 million increase in future policy benefit reserves. reserves is recorded, with an offsetting after-tax reduction to net unrealized gains recorded in other comprehensive income. See Note 12 for further information.
In connection with our premium deficiency test in 2017, additions to reinsurance recoverables of $2,399 million were largely offset by an allowance for losses of $2,185 million based upon our assessment of collectability that would otherwise have reduced the earnings impact of the premium deficiency.
During the fourth quarter of 2018, we completed our annual premium deficiency test. This review included updated experience studies based on additional data since the 2017 test, and considered updated external input based on industry trends and adjustments to assumptions as a result. Based on this analysis, using our most recent future policy benefit reserve assumptions, we identified a premium deficiency which resulted in a $82 million pre-tax charge to earnings in 2018. The increase to future policy benefit reserves was primarily attributable to the following key assumption changes:
Increased discount rate assumptions in 2018 compared to our original estimate. Our revised reinvestment plan incorporates the remaining projected capital contribution of approximately $11,000 million through 2024, of which approximately $1,900 million was received in the first quarter of 2019, and introduction of strategic initiatives for the investment into new higher-yielding asset classes while maintaining an overall A-rated fixed income portfolio. These initiatives are the result of an extensive review in 2018 of our investment management opportunities including the engagement of external investment advisors. Our discount rate assumption for purposes of performing the premium deficiency assessments resulted in a weighted-average rate of approximately 6.04%, compared to approximately 5.67% in 2017. The increased discount rate favorably impacted our reserve margin by $1,900 million;
Lower long-term care insurance morbidity improvement assumptions indicating less long-term improvement (1.25% per year) over shorter durations (between 12 and 20 yearsbased on the average attained age of the underlying books of business) which adversely impacted our reserve margin by $1,200 million;
Higher interest rates leading to higher inflation which increased projected utilization on long-term care insurance policies which adversely impacted our reserve margin by $325 million;
Lower policy terminations on long-term care insurance policies and revisions to assumptions of future mortality primarily for older attained ages, based on experience analysis of internal and industry data, on life insurance products which adversely impacted our reserve margin by $200 million and $300 million, respectively; and
Higher levels of projected long-term care premium rate increases due to larger rate filings by some ceding companies than previously planned which favorably impacted our reserve margin by $200 million. Our 2018 premium deficiency test includes approximately $1,700 million of anticipated premium increases or benefit reductions associated with future in-force rate actions, including actions that are: (a) approved and not implemented, (b) filed but not yet approved and (c) estimated on future filings through 2028.
Certain future adverse changes in our assumptions could result in the unlocking of reserves, resetting of actuarial assumptions to current assumptions, an increase to future policy benefit reserves and a charge to earnings. Any favorable changes to these assumptions could result in additional margin in our premium deficiency test and higher income over the remaining duration of the portfolio, including higher investment income.
Claim reserve activity included incurred claims of $2,106 million, $2,020 million and $1,989 million of which $(46) million, $135 million and $123 million related to the recognition of adjustments to prior year claim reserves arising from our periodic reserve evaluation in the years ended December 31, 2018, 2017 and 2016, respectively. Paid claims were $1,937 million, $1,670 million and $1,671 million in the years ended December 31, 2018, 2017 and 2016, respectively. The vast majority of paid claims relate to prior year insured events primarily as a result of the length of time long-term care policyholders remain on claim.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
When insurance companies cede insurance risk to third parties, such as reinsurers, they are not relieved of their primary obligation to policyholders and cedents. When losses on ceded risks give rise to claims for recovery, we establish allowances for probable losses on such receivables from reinsurers as required. The vast majority of our remaining net reinsurance recoverables are secured by assets held in a trust for which we are the beneficiary. Reinsurance recoverables, net are included in the caption "Other GE Capital receivables" in our consolidated Statement of Financial Position.
|
| | | | | | |
| December 31 (In millions) | 2018 | 2017 |
| | | |
| Reinsurance recoverables, gross | | |
| Future policy benefit reserves | $ | 2,605 |
| $ | 3,928 |
|
| Claim reserves | 756 |
| 715 |
|
| | 3,361 |
| 4,643 |
|
| Allowance for losses | (1,090 | ) | (2,185 | ) |
| Reinsurance recoverables, net | $ | 2,271 |
| $ | 2,458 |
|
We recognize reinsurance recoveries as a reduction of our consolidated Statement of Earnings (Loss) caption “Investment contracts, insurance losses and insurance annuity benefits.” Reinsurance recoveries were $324 million, $454 million and $370 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Statutory accounting practices, not GAAP, determine the required statutory capital levels of our insurance legal entities and, therefore, may affect the amount or timing of capital contributions that may be required from GE Capital to its insurance legal entities. Statutory accounting practices are set forth by the National Association of Insurance Commissioners (NAIC) as well as state laws, regulation and general administrative rules and differ in certain respects from GAAP. The 2017 and 2018 premium deficiency results described above were recorded on a GAAP basis. The adverse impact on our statutory additional actuarial reserves (AAR) arising from our revised assumptions in 2017, including the collectability of reinsurance recoverables, is expected to require GE Capital to contribute approximately $14,500 million additional capital to its run-off insurance operations in 2018-2024. For statutory accounting purposes, the Kansas Insurance Department (KID), approved our request for a permitted accounting practice to recognize the 2017 AAR increase over a seven-year period. GE Capital provided capital contributions to its insurance subsidiaries of approximately $3,500 million and $1,900 million in the first quarter of 2018 and 2019, respectively. GE Capital expects to provide further capital contributions of approximately $9,000 million through 2024 subject to ongoing monitoring by KID. GE is a party to capital maintenance agreements with its run-off insurance subsidiaries whereby GE will maintain their statutory capital levels at 300% of their year-end Authorized Control Level risk-based capital requirements as defined from time to time by the NAIC.
NOTE 13. POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS
PLANS. We sponsor a number of pension and retiree health and life insurance benefit plans including our twothat we present in three categories, principal pension plans, for certain U.S. employees.other pension plans and principal retiree benefit plans. We use a December 31 measurement date for these plans.
Our principal pension plans are the GE Pension Plan and the GE Supplementary Pension Plan. The GE Pension Plan is a defined benefit plan that covers approximately 243,000 retirees and beneficiaries, approximately 144,500 vested former employees and approximately 43,000 active employees. This plan is closed to new participants. The GE Supplementary Pension Plan is an unfunded plan that provides supplementary benefits to higher-level, longer-service employees. The GE Supplementary Pension Plan annuity benefit is closed to new participants and has been replaced by an installment benefit.
We also administer other pension plans, including legacy plans that were part of acquisitions. Other pension plans in 2018 included 52 U.S. and non-U.S. pension plans with assets or obligations greater than $50 million. These other pension plans cover approximately 65,000 retirees and beneficiaries, approximately 88,000 vested former employees and approximately 27,000 active employees.
On our balance sheet,consolidated Statement of Financial Position, we measure our plan assets at fair value and the obligations at the present value of the estimated payments to plan participants. Participants earn benefits based on their service and pay. Those estimated future payment amounts are determined based on assumptions. Differences between our actual results and what we assumed are recorded in a separate component of equity each period. These differences are amortized into earnings over the remaining average future service of active employees or the expected life of inactive participants, as applicable, who participate in the plan. See Note 13 for further information.
LOSS CONTINGENCIES.Loss contingencies are uncertain and unresolved matters that arise in the ordinary course of business and result from events or actions by others that have the potential to result in a future loss. Such contingencies include, but are not limited to environmental obligations, litigation, regulatory investigations and proceedings, product quality and losses resulting from other events and developments. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low-end of such range. Disclosure is provided for material loss contingencies when a loss is probable but a reasonable estimate cannot be made, and when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We regularly review contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. See Note 23 for further information.
SUPPLY CHAIN FINANCE PROGRAMS. We evaluate supply chain finance programs to ensure where we use a third-party intermediary to settle our trade payables, their involvement does not change the nature, existence, amount, or timing of our trade payables and does not provide the Company with any direct economic benefit. If any characteristics of the trade payables change or we receive a direct economic benefit, we reclassify the trade payables as borrowings.
FAIR VALUE MEASUREMENTS. The following sections describe the valuation methodologies we use to measure financial and non-financial instruments accounted for at fair value including certain assets within our pension plans and retiree benefit plans. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These inputs establish a fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Significant inputs to the valuation model are unobservable.
RECURRING FAIR VALUE MEASUREMENTS. For financial assets and liabilities measured at fair value on a recurring basis, primarily investment securities and derivatives, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. See Note 20 for further information.
Debt Securities. When available, we use quoted market prices to determine the fair value of debt securities which are included in Level 1. For our remaining debt securities, we obtain pricing information from an independent pricing vendor. The inputs and assumptions to the pricing vendor’s models are derived from market observable sources including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and other market-related data. These investments are included in Level 2. Our pricing vendors may also provide us with valuations that are based on significant unobservable inputs, and in those circumstances, we classify the investment securities in Level 3.
Annually, we conduct reviews of our primary pricing vendor to validate that the inputs used in that vendor’s pricing process are deemed to be market observable as defined in the standard. We believe that the prices received from our pricing vendor are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy.
GE20182019 FORM 10-K 127 73
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
THE COST OF OUR PLANSWe use non-binding broker quotes and other third-party pricing services as our primary basis for valuation when there is limited, or no, relevant market activity for a specific instrument or for other instruments that share similar characteristics. Debt securities priced in this manner are included in Level 3.
Equity securities with readily determinable fair values. These publicly traded equity securities are valued using quoted prices and are included in Level 1.
Derivatives.The amount we reportmajority of our derivatives are valued using internal models. The models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts. Derivative assets and liabilities included in Level 3 primarily represent equity derivatives and interest rate products that contain embedded optionality or prepayment features.
Investments in private equity, real estate and collective funds held within our earningspension plans. These investments are generally valued using the net asset value (NAV) per share as pension cost consistsa practical expedient for fair value provided certain criteria are met. The NAVs are determined based on the fair values of the following components:
Service cost – the cost of benefits earned by active employees who participateunderlying investments in the plan.funds. Investments that are measured at fair value using the NAV practical expedient are not required to be classified in the fair value hierarchy.
Prior service cost (credit) amortization – the cost of changes
NONRECURRING FAIR VALUE MEASUREMENTS. Certain assets are measured at fair value on a nonrecurring basis. These assets may include loans and long-lived assets reduced to our benefits plans (plan amendments) related to prior service performed.
Expected return on plan assets – the return we expect to earn on plan investments used to pay future benefits.
Interest cost – the accrual of interestfair value upon classification as held for sale, impaired loans based on the pension obligationsfair value of the underlying collateral, impaired equity securities without readily determinable fair value, equity method investments and long-lived assets, and remeasured retained investments in formerly consolidated subsidiaries upon a change in control that results in the deconsolidation of that subsidiary and retention of a noncontrolling stake in the entity. Assets written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs. See Note 20 for further information.
Equity investments without readily determinable fair value and Associated companies. Equity investments without readily determinable fair value and associated companies are valued using market observable data such as transaction prices when available. When market observable data is unavailable, investments are valued using either a discounted cash flow model, comparative market multiples, third-party pricing sources or a combination of these approaches as appropriate. These investments are generally included in Level 3.
Long-lived Assets.Fair values of long-lived assets, including aircraft, are primarily derived internally and are based on observed sales transactions for similar assets. In other instances for which we do not have comparable observed sales transaction data, collateral values are developed internally and corroborated by external appraisal information. Adjustments to third-party valuations may be performed in circumstances where market comparables are not specific to the attributes of the specific collateral or appraisal information may not be reflective of current market conditions due to the passage of time.time and the occurrence of market events since receipt of the information.
Net actuarial loss (gain) amortization – differences between
ACCOUNTING CHANGES.On January 1, 2019, we adopted ASU No. 2016-02 and related amendments, Leases (Topic 842). Upon adoption, we recorded a $315 million increase to retained earnings, primarily attributable to the release of deferred gains on sale-lease back transactions. Our ROU assets and lease liabilities for operating leases at adoption were $3,272 million and $3,459 million, respectively, excluding discontinued operations and businesses held for sale. After the adoption date, principal collections on financing leases are classified as Cash from operating activities in our estimates (for example, discount rate, expected returnconsolidated Statement of Cash Flows. Previously, such flows were classified as Cash from investing activities.
On January 1, 2019, we adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU requires certain changes to the presentation of hedge accounting in the financial statements and some new or modified disclosures. The ASU also simplifies the application of hedge accounting and expands the strategies that qualify for hedge accounting. The adoption had an immaterial effect on plan assets)our financial statements.
NOTE 2. BUSINESSES HELD FOR SALE AND DISCONTINUED OPERATIONS
ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE.In August 2019, we announced an agreement to sell PK AirFinance, an aviation lending business within our Capital segment, to Apollo Global Management, LLC and Athene Holding Ltd. The sale of a substantial portion of the assets and liabilities was completed in the fourth quarter for proceeds of $3,575 million, and we recognized a pre-tax gain of $50 million. As of December 31, 2019, we had remaining assets of $241 million (including Cash, cash equivalents and restricted cash of $45 million) and liabilities of $52 million for this business classified as held for sale. We expect to complete the sale of these remaining assets in the first half of 2020.
In February 2019, we announced an agreement to sell our BioPharma business within our Healthcare segment to Danaher Corporation for total consideration of approximately $21,400 million, subject to certain adjustments. As of December 31, 2019, we had assets of $8,742 million (including goodwill of $5,549 million) and liabilities of $1,372 million for this business classified as held for sale. We expect to complete the sale, subject to regulatory approval, in the first quarter of 2020.
In 2018, we signed an agreement to sell Energy Financial Services' (EFS) debt origination business within our Capital segment, to Starwood Property Trust, Inc. The sale was completed for proceeds of $2,011 million and we recognized a pre-tax gain of $288 million.
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In November 2017, the Company announced its intention to exit approximately $20 billion of industrial assets. Since this announcement, we have classified various businesses across our Power, Aviation, and Healthcare segments, and Corporate as held for sale. In 2019, we closed certain of these transactions within Corporate and our Power and Aviation segments for total net proceeds of $1,070 million, recognized a pre-tax gain of $214 million in Other income in our consolidated Statement of Earnings (Loss) and liquidated $548 million of our previously recorded valuation allowance. These transactions are subject to customary working capital and other post-close adjustments. In addition, we recorded an additional valuation allowance of $254 million for the remaining businesses in held for sale. As of December 31, 2019, we have closed the sale of substantially all of these assets in accordance with the plan.
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| | | | | | |
FINANCIAL INFORMATION FOR ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE
December 31 (In millions) | 2019 |
| 2018 |
|
| | | |
| Current receivables | $ | 499 |
| $ | 184 |
|
| Inventories | 712 |
| 529 |
|
| Financing receivables held for sale | 197 |
| — |
|
| Property, plant, and equipment – net and Operating leases | 958 |
| 423 |
|
| Goodwill and Other intangible assets - net | 6,286 |
| 884 |
|
| Valuation allowance | (719 | ) | (1,013 | ) |
| Deferred income taxes | 815 |
| — |
|
| All other assets | 400 |
| 622 |
|
| Assets of businesses held for sale | $ | 9,149 |
| $ | 1,629 |
|
| | |
| Accounts payable & Progress collections and deferred income | $ | 843 |
| $ | 428 |
|
| Non-current compensation and benefits | 466 |
| 152 |
|
| All other liabilities | 349 |
| 128 |
|
| Liabilities of businesses held for sale | $ | 1,658 |
| $ | 708 |
|
DISCONTINUED OPERATIONS.Discontinued operations include our Baker Hughes and Transportation segments and certain assets and liabilities from legacy financial services businesses. Results of operations, financial position and cash flows for these businesses are reported as discontinued operations for all periods presented.
In September 2019, pursuant to our announced plan of an orderly separation of Baker Hughes over time, we sold a total of 144.1 million shares in Baker Hughes for $3,037 million in cash (net of certain deal related costs), which reduced our ownership interest in Baker Hughes from 50.2% to 36.8%. As a result, we have deconsolidated our Baker Hughes segment and reclassified its results to discontinued operations for all periods presented and recognized a loss of $8,715 million ($8,238 million after-tax). The loss represents the sum of the realized loss on sale of the 144.1 million shares as well as the loss upon deconsolidation, which represents the difference between the carrying value and fair value of our remaining interest as of the transaction date.
We elected to account for our remaining interest in Baker Hughes (comprising our 36.8% ownership interest and a promissory note receivable) at fair value. The initial fair value of this investment was $9,587 million based on the Baker Hughes opening share price of $23.53 as of the transaction date and the fair value of the promissory note receivable of $706 million. Our investment is recorded in Investment securities in our consolidated Statement of Financial Position and related earnings or loss from subsequent changes in fair value will be recognized in Other income in continuing operations in our consolidated Statement of Earnings (Loss). See Note 3 for further information.
We have continuing involvement with Baker Hughes primarily through our remaining interest, ongoing purchases and sales of products and services, as well as the transition services that we provide to Baker Hughes. They also participated in GE Capital's supply chain finance program up to the date of separation. In addition, in the fourth quarter of 2019, we formed an aeroderivative joint venture (JV) with Baker Hughes relating to their respective aeroderivative gas turbine products and services. The JV has total assets net of liabilities of $613 million and is currently consolidated by GE. Since the date of the transaction, we had sales and purchases of products and services with Baker Hughes and affiliates of $312 million and $105 million, respectively. We have collected net cash of $1,016 million from Baker Hughes related to these activities, including $494 million of repayments on the promissory note. In addition, in the fourth quarter of 2019 we received a dividend of $68 million from Baker Hughes.
In February 2019, we completed the spin-off and subsequent merger of our Transportation business with Wabtec, a U.S. rail equipment manufacturer. In the transaction, our shareholders received shares of Wabtec common stock representing an approximate 24.3% ownership interest in Wabtec common stock. We received $2,827 million in cash (net of certain deal related costs) as well as shares of Wabtec common stock and Wabtec non-voting convertible preferred stock that, together, represent approximately 24.9% ownership interest in Wabtec. In addition, we are entitled to additional cash consideration up to $470 million for tax benefits that Wabtec realizes from the transaction. We reclassified our Transportation segment to discontinued operations in the first quarter of 2019.
As part of the transaction, we recorded a gain of $3,471 million ($2,508 million after-tax) in discontinued operations and a net after-tax decrease of $852 million in additional paid in capital in connection with the spin-off of approximately 49.4% of Transportation to our shareholders. The decrease in additional paid in capital was net of $940 million of taxes, including $860 million of current taxes (of which $693 million was related to U.S. federal taxes). The fair value of our interest in Wabtec’s common and preferred shares was $3,513 million based on the opening share price of $73.45 at the date of the transaction and was recorded in Investment securities in our consolidated Statement of Financial Position.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Discontinued operations for our financial services businesses primarily relate to the GE Capital Exit Plan (our plan, announced on April 10, 2015, to reduce the size of our financial services businesses) and were previously reported in our Capital segment. These discontinued operations primarily comprise our mortgage portfolio in Poland, residual assets and liabilities related to our exited U.S. mortgage business (WMC), and trailing liabilities associated with the sale of our GE Capital businesses.
In January 2019, we announced an agreement in principle with the United States to settle the investigation by the U.S. Department of Justice (DOJ) regarding potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by WMC and GE Capital, and in April 2019, the parties entered into a definitive settlement agreement. Under the agreement, which concludes this investigation, GE, without admitting liability or wrongdoing, paid the United States a civil penalty of $1,500 million.
In June 2019, GE Capital recorded in Earnings (loss) from discontinued operations, net of taxes in our consolidated Statement of Earnings (Loss), $332 million of tax benefits and $46 million of net interest benefits due to a decrease in our balance of unrecognized tax benefits. See Note 15 for further information.
|
| | | | | | | | | | | | | | | |
RESULTS OF DISCONTINUED OPERATIONS For the year ended December 31, 2019 (In millions) | Baker Hughes |
| | Transportation and Other |
| | GE Capital |
| | Total |
|
| | | | | | | | |
| Sales of goods and services | $ | 16,047 |
| | $ | 550 |
| | $ | — |
| | $ | 16,598 |
|
| GE Capital revenues and other income (loss) | — |
| | — |
| | 33 |
| | 33 |
|
| Cost of goods and services sold | (13,317 | ) | | (478 | ) | | — |
| | (13,795 | ) |
| Other costs and expenses | (2,390 | ) | | (19 | ) | | (240 | ) | | (2,650 | ) |
| | | | — |
| | | | |
| Earnings (loss) of discontinued operations before income taxes | 340 |
| | 53 |
| | (207 | ) | | 186 |
|
| Benefit (provision) for income taxes(b) | (176 | ) | | (15 | ) | | 344 |
| | 153 |
|
| Earnings (loss) of discontinued operations, net of taxes(a) | 165 |
| | 39 |
| | 136 |
| | 339 |
|
| | | | | | | | |
| Gain (loss) on disposal before income taxes | (8,715 | ) | | 3,471 |
| | 61 |
| | (5,183 | ) |
| Benefit (provision) for income taxes(b) | 477 |
| | (963 | ) | | (5 | ) | | (491 | ) |
| Gain (loss) on disposal, net of taxes | (8,238 | ) | | 2,508 |
| | 56 |
| | (5,675 | ) |
| |
| | | | | | — |
|
| Earnings (loss) from discontinued operations, net of taxes | $ | (8,074 | ) | | $ | 2,547 |
| | $ | 192 |
| | $ | (5,335 | ) |
|
| | | | | | | | | | | | | | | |
For the year ended December 31, 2018 (In millions) | | | | | | | |
| | | | | | | | |
| Sales of goods and services | $ | 22,859 |
| | $ | 3,898 |
| | $ | — |
| | $ | 26,757 |
|
| GE Capital revenues and other income (loss) | — |
| | — |
| | (1,347 | ) | | (1,347 | ) |
| Cost of goods and services sold | (19,198 | ) | | (2,809 | ) | | — |
| | (22,007 | ) |
| Other costs and expenses | (3,346 | ) | | (607 | ) | | (407 | ) | | (4,360 | ) |
| | | | | | | | |
| Earnings (loss) of discontinued operations before income taxes | 315 |
| | 482 |
| | (1,755 | ) | | (958 | ) |
| Benefit (provision) for income taxes(b) | (347 | ) | | (143 | ) | | 82 |
| | (408 | ) |
| Earnings (loss) of discontinued operations, net of taxes(a) | (33 | ) | | 339 |
| | (1,673 | ) | | (1,366 | ) |
| | | | | | | | |
| Gain (loss) on disposal before income taxes | — |
| | — |
| | 4 |
| | 4 |
|
| Benefit (provision) for income taxes(b) | — |
| | — |
| | (1 | ) | | (1 | ) |
| Gain (loss) on disposal, net of taxes | — |
| | — |
| | 3 |
| | 3 |
|
| | | | | | | | |
| Earnings (loss) from discontinued operations, net of taxes | $ | (33 | ) | | $ | 339 |
| | $ | (1,670 | ) | | $ | (1,363 | ) |
|
| | | | | | | | | | | | | | | |
For the year ended December 31, 2017 (In millions) | | | | | | | |
| | | | | | | | |
| Sales of goods and services | $ | 17,180 |
| | $ | 3,935 |
| | $ | — |
| | $ | 21,115 |
|
| GE Capital revenues and other income (loss) | — |
| | — |
| | 174 |
| | 174 |
|
| Cost of goods and services sold | (14,450 | ) | | (2,990 | ) | | — |
| | (17,441 | ) |
| Other costs and expenses | (2,993 | ) | | (483 | ) | | (910 | ) | | (4,386 | ) |
| | | | | | | | |
| Earnings (loss) of discontinued operations before income taxes | (264 | ) | | 461 |
| | (735 | ) | | (538 | ) |
| Benefit (provision) for income taxes(b) | (59 | ) | | (138 | ) | | 295 |
| | 97 |
|
| Earnings (loss) of discontinued operations, net of taxes(a) | (323 | ) | | 323 |
| | (440 | ) | | (441 | ) |
| | | | | | | | |
| Gain (loss) on disposal before income taxes | — |
| | — |
| | 306 |
| | 306 |
|
| Benefit (provision) for income taxes(b) | — |
| | — |
| | (178 | ) | | (178 | ) |
| Gain (loss) on disposal, net of taxes | — |
| | — |
| | 128 |
| | 128 |
|
| | | | | | | | |
| Earnings (loss) from discontinued operations, net of taxes | $ | (323 | ) | | $ | 323 |
| | $ | (312 | ) | | $ | (312 | ) |
(a) Earnings (loss) of discontinued operations attributable to the Company after income taxes was $279 million, $(1,367) million and $(360) million for the years ended December 31, 2019, 2018 and 2017, respectively.
(b) Total tax benefit (provision) for discontinued operations and disposals included current tax benefit (provision) of $1,260 million, $(508) million, and $(704) million, including current U.S. Federal tax benefit (provision) of $1,252 million, $156 million and $(313) million, and deferred tax benefit (provision) of $(1,599) million, $99 million and $624 million for the years ended December 31, 2019, 2018, and 2017, respectively.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | |
December 31 (In millions) | 2019 |
| 2018 |
|
|
|
|
| Cash, cash equivalents and restricted cash | $ | 638 |
| $ | 4,424 |
|
| Investment securities | 202 |
| 522 |
|
| Current receivables | 81 |
| 6,258 |
|
| Inventories | — |
| 5,419 |
|
| Financing receivables held for sale (Polish mortgage portfolio) | 2,485 |
| 2,745 |
|
| Property, plant and equipment - net | — |
| 7,139 |
|
| Goodwill and intangible assets - net | — |
| 31,622 |
|
| Deferred income taxes | 264 |
| 1,174 |
|
| All other assets | 439 |
| 4,550 |
|
| Assets of discontinued operations(a) | $ | 4,109 |
| $ | 63,853 |
|
|
|
|
| Accounts payable & Progress collections and deferred income | $ | 40 |
| $ | 6,806 |
|
| All other liabilities | 163 |
| 12,476 |
|
| Liabilities of discontinued operations(b) | $ | 203 |
| $ | 19,281 |
|
(a) Assets of discontinued operations included $54,596 million and $4,573 million related to our Baker Hughes and Transportation businesses, respectively as of December 31, 2018.
(b) Liabilities of discontinued operations included $15,535 million and $1,871 million related to our Baker Hughes and Transportation businesses, respectively as of December 31, 2018.
Included within All other liabilities of discontinued operations at December 31, 2019 and December 31, 2018 are intercompany tax receivables in the amount of $839 million and $1,141 million, respectively, primarily related to the financial services businesses that were part of the GE Capital Exit Plan, which are offset within All other liabilities of consolidated GE.
NOTE 3. INVESTMENT SECURITIES
All of our debt securities are classified as available-for-sale and substantially all are investment-grade debt securities supporting obligations to annuitants and policyholders in our run-off insurance operations. Changes in fair value of our debt securities are recorded to other comprehensive income. Equity securities with readily determinable fair values are included within this caption and changes in their fair value are recorded in earnings. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| December 31 (In millions) | Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value |
|
| Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value |
|
|
|
|
|
|
|
|
|
|
|
| Debt |
|
|
|
|
|
|
|
|
|
| U.S. corporate | $ | 23,037 |
| $ | 4,636 |
| $ | (11 | ) | $ | 27,661 |
|
| $ | 21,306 |
| $ | 2,257 |
| $ | (357 | ) | $ | 23,206 |
|
| Non-U.S. corporate | 2,161 |
| 260 |
| (1 | ) | 2,420 |
|
| 1,906 |
| 53 |
| (76 | ) | 1,883 |
|
| State and municipal | 3,086 |
| 598 |
| (15 | ) | 3,669 |
|
| 3,320 |
| 367 |
| (54 | ) | 3,633 |
|
| Mortgage and asset-backed | 3,117 |
| 116 |
| (4 | ) | 3,229 |
|
| 3,325 |
| 51 |
| (54 | ) | 3,322 |
|
| Government and agencies | 1,391 |
| 126 |
| — |
| 1,516 |
|
| 1,314 |
| 62 |
| (20 | ) | 1,357 |
|
| Equity | 10,025 |
| — |
| — |
| 10,025 |
|
| 107 |
| — |
| — |
| 107 |
|
| Total | $ | 42,816 |
| $ | 5,736 |
| $ | (31 | ) | $ | 48,521 |
|
| $ | 31,277 |
| $ | 2,792 |
| $ | (561 | ) | $ | 33,508 |
|
The estimated fair values of investment securities at December 31, 2019 increased since December 31, 2018, primarily due to decreases in market yields and the classification of our remaining equity interest in Baker Hughes within investment securities. We elected to account for our remaining Baker Hughes interest and a promissory note receivable at fair value. At December 31, 2019, the fair value of our interest in Baker Hughes was $9,888 million.
Net unrealized gains (losses) for equity securities, which are recorded in Other income within continuing operations, were $800 million (including a gain of $793 million related to our interest in Baker Hughes), $(8) million and an insignificant amount for the years ended December 31, 2019, 2018 and 2017, respectively.
Proceeds from debt and equity securities sales, early redemptions by issuers and principal payments on the Baker Hughes promissory note totaled $7,967 million, $3,222 million and $3,240 million for the years ended December 31, 2019, 2018, and 2017, respectively. Gross realized gains on investment securities were $115 million, $249 million and $243 million, and gross realized losses and impairments were $(203) million, $(41) million and $(24) million for the years ended 2019, 2018 and 2017, respectively. These realized losses included $(132) million related to the Wabtec sale as of December 31, 2019.
Gross unrealized losses of $(11) million and $(20) million are associated with debt securities with a fair value of $724 million and $274 million that have been in a loss position for less than 12 months and 12 months or more, respectively, at December 31, 2019. Gross unrealized losses of $(310) million and $(251) million are associated with debt securities with a fair value of $7,048 million, and $3,856 million that have been in a loss position for less than 12 months and 12 months or more, respectively, at December 31, 2018.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Contractual maturities of investments in available-for-sale debt securities (excluding mortgage and asset-backed securities) at December 31, 2019 are as follows:
|
| | | | | | |
| (In millions) | Amortized cost |
| Estimated fair value |
|
| | | |
| Due | | |
| Within one year | $ | 514 |
| $ | 527 |
|
| After one year through five years | 2,615 |
| 2,766 |
|
| After five years through ten years | 6,614 |
| 7,599 |
|
| After ten years | 19,932 |
| 24,374 |
|
We expect actual experience whichmaturities to differ from contractual maturities because borrowers have the right to call or prepay certain obligations.
In addition to the equity securities described above, we hold $517 million and $542 million of equity securities without readily determinable fair value at December 31, 2019 and December 31, 2018, respectively that are classified in All other assets in our consolidated Statement of Financial Position. We initially recognize these assets at cost and have recorded insignificant fair value increases, net of impairment, to earnings for the years ended December 31, 2019 and 2018, respectively and cumulatively, based on observable transactions.
NOTE 4. CURRENT AND LONG-TERM RECEIVABLES
|
| | | | | | | | | | | | | |
| Consolidated |
| GE |
| December 31 (In millions) | 2019 |
| 2018 |
|
| 2019 |
| 2018 |
|
|
|
|
|
|
|
|
| Power | $ | 4,689 |
| $ | 4,652 |
|
| $ | 3,289 |
| $ | 2,270 |
|
| Renewable Energy | 2,306 |
| 1,938 |
|
| 1,749 |
| 1,475 |
|
| Aviation(a) | 3,249 |
| 1,483 |
|
| 2,867 |
| 1,145 |
|
| Healthcare | 2,105 |
| 2,431 |
|
| 1,379 |
| 1,260 |
|
| Corporate | 246 |
| 238 |
|
| 223 |
| 205 |
|
| Customer receivables | 12,594 |
| 10,742 |
|
| 9,507 |
| 6,355 |
|
| Sundry receivables | 5,049 |
| 4,573 |
|
| 5,247 |
| 4,569 |
|
| Allowance for losses | (874 | ) | (670 | ) |
| (872 | ) | (662 | ) |
| Total current receivables | $ | 16,769 |
| $ | 14,645 |
|
| $ | 13,883 |
| $ | 10,262 |
|
(a) Increase in Aviation segment is primarily driven by receivables from Boeing due to 737 MAX temporary fleet grounding, with balance of $1,397 million as of December 31, 2019.
Current sundry receivables include supplier advances, revenue sharing programs receivables, other non-income based tax receivables, certain intercompany balances that eliminate upon consolidation and deferred purchase price. The deferred purchase price represents our retained risk with respect to current customer receivables sold to third parties through one of the receivable facilities. The balance of the deferred purchase price held by GE Capital at December 31, 2019 and 2018, was $421 million and $468 million, respectively.
Sales of GE current customer receivables.GE sales of customer receivables to GE Capital or third parties are made on arm's length terms and any discount related to time value of money is recognized by GE when the customer receivables are sold. As of December 31, 2019 and 2018, GE sold approximately 51% and 66%, respectively, of its gross customer receivables to GE Capital or third parties. The performance of sold current receivables is similar to the performance of our other GE current receivables; delinquencies are not expected to be significant. Any difference between the carrying value of receivables sold and total cash collected is recognized as financing costs by GE in Interest and other financial charges in our consolidated Statement of Earnings (Loss). Costs of $515 million and $616 million were recognized during the years ended December 31, 2019 and 2018, respectively.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Activity related to customer receivables sold by GE is as follows: |
| | | | | | | | | | | | | | | |
| (In millions) | GE Capital | | Third Parties | | GE Capital | | Third Parties |
| | 2019 | | 2018 |
| | | | | | | | |
| Balance at January 1 | $ | 4,386 |
| | $ | 7,880 |
| | $ | 9,656 |
| | $ | 5,710 |
|
| GE sales to GE Capital | 40,988 |
| | — |
| | 50,318 |
| | — |
|
| GE sales to third parties | — |
| | 6,370 |
| | — |
| | 5,481 |
|
| GE Capital sales to third parties | (28,073 | ) | | 28,073 |
| | (30,904 | ) | | 30,904 |
|
| Collections and other | (14,621 | ) | | (35,567 | ) | | (25,414 | ) | | (34,216 | ) |
| Reclassification from long-term customer receivables | 407 |
| | — |
| | 731 |
| | — |
|
| Balance at December 31 | $ | 3,087 |
| (a) | $ | 6,757 |
| | $ | 4,386 |
| (a) | $ | 7,880 |
|
(a) At December 31, 2019 and 2018, $539 million and $1,380 million, respectively, of the current receivables purchased and retained by GE Capital, had been sold by GE to GE Capital with recourse (i.e., GE retains all or some risk of default). The effect on GE cash flows from operating activities (CFOA) of claims by GE Capital on receivables sold with recourse has been insignificant for the years ended December 31, 2019 and 2018.
When GE sells customer receivables to GE Capital or third parties it accelerates the receipt of cash that would otherwise have been collected from customers. In any given period, the amount of cash received from sales of customer receivables compared to the cash GE would have otherwise collected had those customer receivables not been sold represents the cash generated or used in the period relating to this activity. Sales to GE Capital impact GE CFOA, while sales to third parties impact both GE and Consolidated CFOA. The impact of selling fewer customer receivables to GE Capital and those subsequently sold by GE Capital to third parties, including the effect of business dispositions, decreased GE’s CFOA by $2,099 million, $3,401 million and $138 million in the years ended December 31, 2019, 2018 and 2017, respectively.
LONG-TERM RECEIVABLES. In certain circumstances, GE provides customers, primarily within our Power, Renewable Energy and Aviation businesses, with extended payment terms for the purchase of new equipment, purchases of upgrades and spare parts for our long-term service agreements. These long-term customer receivables are initially recorded at present value and have an average remaining duration of approximately three years and are included in equityAll other assets in the consolidated Statement of Financial Position. |
| | | | | | | | | | | | | |
| Consolidated | | GE |
December 31 (In millions) | 2019 |
| 2018 |
|
| 2019 |
| 2018 |
|
|
|
|
|
|
|
| Long-term customer receivables | $ | 906 |
| $ | 1,442 |
|
| $ | 506 |
| $ | 559 |
|
| Long-term sundry receivables | 1,504 |
| 1,180 |
|
| 1,834 |
| 1,519 |
|
| Allowance for losses | (128 | ) | (145 | ) |
| (128 | ) | (145 | ) |
| Total long-term receivables | $ | 2,282 |
| $ | 2,477 |
|
| $ | 2,212 |
| $ | 1,933 |
|
Long-term sundry receivables include supplier advances, revenue sharing programs receivables, other non-income based tax receivables and amortized into earnings.certain intercompany balances that eliminate upon consolidation.
Curtailment loss (gain) – earnings effects
Sales of amounts previously deferred which have been accelerated becauseGE long-term customer receivables.Through the second quarter of 2018, sales of long-term customer receivables were primarily made to GE Capital, while subsequently, GE has sold an event that shortens future service or eliminates benefits (for example, a sale of a business).
Pension cost components follow.insignificant amount to third parties to transfer economic risk during both the years ended December 31, 2019 and 2018. Activity related to long-term customer receivables purchased by GE Capital is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COST OF PENSION PLANS | Total | | Principal pension plans | | Other pension plans |
| (In millions) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | | | | | |
| Service cost for benefits earned | $ | 1,227 |
| $ | 1,629 |
| $ | 1,699 |
| | $ | 888 |
| $ | 1,055 |
| $ | 1,237 |
| | $ | 339 |
| $ | 574 |
| $ | 462 |
|
| Prior service cost (credit) amortization | 134 |
| 285 |
| 304 |
| | 143 |
| 290 |
| 303 |
| | (9 | ) | (5 | ) | 1 |
|
| Expected return on plan assets | (4,646 | ) | (4,639 | ) | (4,370 | ) | | (3,248 | ) | (3,390 | ) | (3,336 | ) | | (1,398 | ) | (1,249 | ) | (1,034 | ) |
| Interest cost on benefit obligations | 3,270 |
| 3,462 |
| 3,609 |
| | 2,658 |
| 2,856 |
| 2,939 |
| | 612 |
| 606 |
| 670 |
|
| Net actuarial loss amortization | 4,107 |
| 3,241 |
| 2,705 |
| | 3,785 |
| 2,812 |
| 2,449 |
| | 322 |
| 429 |
| 256 |
|
| Curtailment loss (gain) | 37 |
| 43 |
| 50 |
| | 34 |
| 64 |
| 31 |
| | 3 |
| (21 | ) | 19 |
|
| Pension cost | $ | 4,129 |
| $ | 4,021 |
| $ | 3,997 |
| | $ | 4,260 |
| $ | 3,687 |
| $ | 3,623 |
| | $ | (131 | ) | $ | 334 |
| $ | 374 |
|
|
| | | | | | | |
GE Capital December 31 (In millions) | 2019 |
| | 2018 |
|
| | | | |
| Balance at January 1 | $ | 883 |
| | $ | 1,947 |
|
| GE sales to GE Capital | — |
| | 134 |
|
| Sales, collections, accretion and other | (75 | ) | | (468 | ) |
| Reclassification to current customer receivables | (407 | ) | | (731 | ) |
| Balance at December 31(a) | $ | 400 |
| | $ | 883 |
|
(a) At December 31, 2019 and 2018, $312 million and $628 million, respectively, of long-term customer receivables purchased and retained by GE Capital, had been sold by GE to GE Capital with recourse (i.e., GE retains all or some risk of default). The effect on GE CFOA of claims by GE Capital on receivables sold with recourse have been insignificant for the years ended December 31, 2019 and 2018.
Similar to sales of current customer receivables, sales of long-term customer receivables can result in cash generation or use in our Statements of Cash Flows. The impact from the sale of long-term customer receivables to GE Capital, including those subsequently sold by GE Capital to third parties, decreased GE’s CFOA by $585 million, $878 million and increased GE's CFOA by $250 million in the years ended December 31, 2019, 2018 and 2017, respectively.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
UNCONSOLIDATED RECEIVABLES FACILITIES. GE Capital has 2 revolving receivables facilities, with a total program size of $4,300 million, under which customer receivables purchased from GE are sold to third parties. In one of the facilities, upon the sale of receivables, we receive proceeds of cash and deferred purchase price and the Company’s remaining risk with respect to the sold receivables is limited to the balance of the deferred purchase price. In December 2018, we renegotiated the terms of this receivables facility. Effective January 2019, sales of receivables to the third-party purchasers and creation of deferred purchase price occur monthly rather than daily. As a result, both non-cash increases to the deferred purchase price and cash payments received on the deferred purchase price declined in 2019. In the other facility, upon the sale of receivables, we receive proceeds of cash only and therefore the Company has no remaining risk with respect to the sold receivables. Activity related to these facilities is included in GE Capital sales to third parties line in the sales of GE current customer receivables table above and is as follows:
|
| | | | | | | |
For the years ended December 31 (In millions) | 2019 |
|
| 2018 |
|
|
|
|
|
| Customer receivables sold to receivables facilities | $ | 21,695 |
|
| $ | 23,984 |
|
| Total cash purchase price for customer receivables | 21,202 |
|
| 18,040 |
|
| Cash collections re-invested to purchase customer receivables | 18,012 |
|
| 15,095 |
|
|
|
|
|
|
| Non-cash increases to deferred purchase price | $ | 257 |
|
| $ | 5,272 |
|
| Cash payments received on deferred purchase price | 303 |
|
| 5,192 |
|
CONSOLIDATED SECURITIZATION ENTITIES. GE Capital consolidates 3 VIEs that purchased customer receivables and long-term customer receivables from GE. At December 31, 2019 and 2018, these VIEs held current customer receivables of $2,080 million and $2,141 million and long-term customer receivables of $375 million and $678 million, respectively that were funded through the issuance of non-recourse debt to third parties. At December 31, 2019 and 2018, the outstanding debt under their respective debt facilities was $1,655 million and $1,875 million, respectively.
NOTE 5. FINANCING RECEIVABLES AND ALLOWANCES
|
| | | | | | | | | | | | | |
| | Consolidated | | GE Capital |
December 31 (In millions) | 2019 |
| 2018 |
| | 2019 |
| 2018 |
|
| | | | | | |
| Loans, net of deferred income | $ | 1,098 |
| $ | 5,118 |
|
| $ | 4,927 |
| $ | 10,834 |
|
| Investment in financing leases, net of deferred income | 2,070 |
| 2,639 |
|
| 2,070 |
| 2,822 |
|
| 3,168 |
| 7,757 |
|
| 6,996 |
| 13,656 |
|
| Allowance for losses | (33 | ) | (58 | ) |
| (17 | ) | (28 | ) |
| Financing receivables – net | $ | 3,134 |
| $ | 7,699 |
|
| $ | 6,979 |
| $ | 13,628 |
|
Consolidated finance lease income was $173 million, $275 million and $274 million for the years ended December 31, 2019, 2018 and 2017, respectively.
|
| | | | | | | | | | | | | | | | | | | | |
| NET INVESTMENT IN FINANCING LEASES | Total financing leases |
| Direct financing and sales type leases(a) |
| Leveraged leases |
December 31 (In millions) | 2019 |
| 2018 |
| | 2019 |
| 2018 |
| | 2019 |
| 2018 |
|
| | | | | | | | |
| Total minimum lease payments receivable | $ | 1,628 |
| $ | 2,719 |
| | $ | 799 |
| $ | 1,421 |
| | $ | 829 |
| $ | 1,298 |
|
| Less principal and interest on third-party non-recourse debt | (216 | ) | (474 | ) | | — |
| — |
| | (216 | ) | (474 | ) |
| Net minimum lease payments receivable | 1,412 |
| 2,245 |
| | 799 |
| 1,421 |
| | 613 |
| 824 |
|
| Less deferred income | (178 | ) | (329 | ) | | (139 | ) | (286 | ) | | (39 | ) | (43 | ) |
| Discounted lease receivable | 1,234 |
| 1,916 |
| | 660 |
| 1,135 |
| | 574 |
| 781 |
|
| Estimated unguaranteed residual value of leased assets, net of deferred income | 835 |
| 906 |
| | 412 |
| 420 |
| | 423 |
| 486 |
|
| Investment in financing leases, net of deferred income(b) | $ | 2,070 |
| $ | 2,822 |
| | $ | 1,072 |
| $ | 1,556 |
| | $ | 997 |
| $ | 1,266 |
|
(a) Included $506 million and $399 million investment in sales type leases at December 31, 2019 and 2018, respectively.
(b) See Note 15 for deferred tax amounts related to financing leases.
|
| | | | | | | | | | | | | | | | | | | | | |
CONTRACTUAL MATURITIES, DUE IN (In millions) | 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total |
|
| | | | | | | | |
| Total loans | $ | 3,832 |
| $ | 511 |
| $ | 238 |
| $ | 113 |
| $ | 93 |
| $ | 140 |
| $ | 4,927 |
|
| Net minimum lease payments receivable | 303 |
| 270 |
| 194 |
| 281 |
| 198 |
| 166 |
| 1,412 |
|
We expect actual maturities to differ from contractual maturities, primarily as a result of prepayments.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
We manage our GE Capital financing receivables portfolio using delinquency and nonaccrual data as key performance indicators. At December 31, 2019, 4.2%, 2.9% and 6.1% of financing receivables were over 30 days past due, over 90 days past due and on nonaccrual, respectively, with the vast majority of nonaccrual financing receivables secured by collateral. At December 31, 2018, 2.4%, 1.8% and 0.9% of financing receivables were over 30 days past due, over 90 days past due and on nonaccrual, respectively.
GE Capital financing receivables that comprise receivables purchased from GE are reclassified to either Current receivables or All other assets in the consolidated Statement of Financial Position. To the extent these receivables are purchased with full or limited recourse, they are excluded from the delinquency and nonaccrual data above. See Note 4 for further information.
NOTE 6. INVENTORIES
|
| | | | | | |
December 31 (In millions) | 2019 |
| 2018 |
|
| | |
| Raw materials and work in process | $ | 8,771 |
| $ | 8,057 |
|
| Finished goods | 5,333 |
| 5,746 |
|
| Total inventories | $ | 14,104 |
| $ | 13,803 |
|
NOTE 7. PROPERTY, PLANT AND EQUIPMENT AND OPERATING LEASES
|
| | | | | | | | | | | | | | |
| Depreciable lives-new | Original Cost |
| Net Carrying Value |
December 31 (Dollars in millions) | (in years) | 2019 |
| 2018 |
|
| 2019 |
| 2018 |
|
|
|
|
|
|
|
|
| Land and improvements | 8 | $ | 608 |
| $ | 700 |
|
| $ | 596 |
| $ | 673 |
|
| Buildings, structures and related equipment | 8-40 | 7,824 |
| 8,455 |
|
| 3,875 |
| 4,083 |
|
| Machinery and equipment | 4-20 | 20,082 |
| 19,425 |
|
| 8,360 |
| 8,048 |
|
| Leasehold costs and manufacturing plant under construction | 1-10 | 2,165 |
| 2,646 |
|
| 1,539 |
| 2,024 |
|
| GE |
| $ | 30,680 |
| $ | 31,225 |
|
| $ | 14,370 |
| $ | 14,828 |
|
|
|
|
|
|
|
|
| Land and improvements, buildings, structures and related equipment | 1-40 | 149 |
| $ | 153 |
|
| 29 |
| $ | 32 |
|
| Equipment leased to others (ELTO) |
| | |
|
|
|
| Aircraft | 15-20 | 35,507 |
| 36,476 |
|
| 21,414 |
| 22,201 |
|
| Engines | 15-20 | 4,113 |
| 3,234 |
|
| 3,283 |
| 2,489 |
|
| Helicopters | 15-20 | 5,474 |
| 5,230 |
|
| 4,709 |
| 4,660 |
|
| All other | 15-35 | 237 |
| 209 |
|
| 214 |
| 128 |
|
| GE Capital(a) |
| $ | 45,480 |
| $ | 45,302 |
|
| $ | 29,649 |
| $ | 29,510 |
|
| | | | | | | |
| Eliminations |
| (972 | ) | (909 | ) |
| (729 | ) | (728 | ) |
| Total |
| $ | 75,187 |
| $ | 75,618 |
|
| $ | 43,290 |
| $ | 43,611 |
|
(a) Included $1,539 million and $1,397 million of original cost of assets leased to GE with accumulated amortization of $(251) million and $(241) million at December 31, 2019 and 2018, respectively.
Consolidated depreciation and amortization related to property, plant and equipment was $4,026 million, $4,419 million and $4,332 million for the years ended December 31, 2019, 2018 and 2017, respectively. Amortization of GE Capital ELTO was $2,019 million, $2,089 million and $2,190 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Noncancellable future rentals due from customers for equipment on operating leases at December 31, 2019, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total |
|
| | | | | | | | |
| | $ | 2,982 |
| $ | 2,625 |
| $ | 2,258 |
| $ | 1,820 |
| $ | 1,647 |
| $ | 5,652 |
| $ | 16,985 |
|
Operating lease income on our ELTO was $3,804 million, $4,075 million, and $4,144 million for the years ended December 31, 2019, 2018, and 2017, respectively, and comprises fixed lease income of $3,045 million, $3,243 million and $3,395 million and variable lease income of $759 million, $832 million and $748 million, respectively.
Operating Lease Assets and Liabilities. Our ROU assets and lease liabilities for operating leases were $2,896 million and $3,162 million, respectively, as of December 31, 2019. Substantially all of our operating leases have remaining lease terms of 12 years or less, some of which may include options to extend.
|
| | | | | | | | | | | |
OPERATING LEASE EXPENSE (In millions) | 2019 |
| | 2018 |
| | 2017 |
|
| | | | | | |
| Long-term (fixed) | $ | 834 |
| | $ | 966 |
| | $ | 1,003 |
|
| Long-term (variable) | 136 |
| | 177 |
| | 231 |
|
| Short-term | 206 |
| | 133 |
| | 131 |
|
| Total operating lease expense | $ | 1,176 |
| | $ | 1,276 |
| | $ | 1,365 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | | | | |
MATURITY OF LEASE LIABILITIES (In millions) | 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total |
|
| | | | | | | | |
| Undiscounted lease payments | $ | 766 |
| $ | 655 |
| $ | 561 |
| $ | 465 |
| $ | 375 |
| $ | 914 |
| $ | 3,737 |
|
| Less: imputed interest | | | | | | | (575 | ) |
| Total lease liability as of December 31, 2019 | | | | | | | $ | 3,162 |
|
|
| | | |
SUPPLEMENTAL INFORMATION RELATED TO OPERATING LEASES (Dollars in millions) | |
| | |
| Operating cash flows used for operating leases for the year ended December 31, 2019 | $ | 888 |
|
| Right-of-use assets obtained in exchange for new lease liabilities for the year ended December 31, 2019 | $ | 746 |
|
| Weighted-average remaining lease term at December 31, 2019 | 6.9 years |
|
| Weighted-average discount rate at December 31, 2019 | 4.9 | % |
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CHANGES IN GOODWILL BALANCES |
|
| 2018 | 2019 |
| (In millions) | Balance at
December 31, 2017 |
| Dispositions and
classifications
to held for sale |
| Impairments |
| Currency exchange and other |
| Balance at
December 31, 2018 |
| Dispositions and classifications to held for sale |
| Impairments |
| Currency exchange and other |
| Balance at
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Power | $ | 20,855 |
| $ | (1,903 | ) | $ | (18,443 | ) | $ | (369 | ) | $ | 139 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | 145 |
|
| Renewable Energy | 7,626 |
| (3 | ) | (2,859 | ) | (35 | ) | 4,730 |
| — |
| (1,486 | ) | 46 |
| 3,290 |
|
| Aviation | 10,008 |
| (12 | ) | — |
| (158 | ) | 9,839 |
| — |
| — |
| 20 |
| 9,859 |
|
| Healthcare | 17,306 |
| (21 | ) | — |
| (58 | ) | 17,226 |
| (5,558 | ) | — |
| 59 |
| 11,728 |
|
| Capital(a) | 984 |
| — |
| — |
| (80 | ) | 904 |
| (39 | ) | — |
| (26 | ) | 839 |
|
| Corporate(b) | 2,042 |
| (81 | ) | (833 | ) | 9 |
| 1,136 |
| — |
| — |
| (262 | ) | 873 |
|
| Total | $ | 58,821 |
| $ | (2,020 | ) | $ | (22,136 | ) | $ | (691 | ) | $ | 33,974 |
| $ | (5,597 | ) | $ | (1,486 | ) | $ | (157 | ) | $ | 26,734 |
|
(a) Capital balance at December 31, 2019 is our GE Capital Aviation Services (GECAS) business.
(b) Corporate balance at December 31, 2019 is our Digital business.
Goodwill balances decreased primarily as a result of transferring our BioPharma business within our Healthcare segment to held for sale and goodwill impairments at our Hydro and Grid Solutions equipment and services reporting units within our Renewable Energy segment.
In the second quarter of 2019, we reorganized our Grid Solutions reporting unit in our Power segment by separating our Grid Solutions software business from the Grid Solutions reporting unit. Our Grid Solutions software business was then moved into Corporate and combined with our Digital business. In addition, the remaining Grid Solutions reporting unit (now referred to as Grid Solutions equipment and services) was moved into our Renewable Energy segment as a separate reporting unit. As a result, we allocated goodwill between Grid Solutions software and the Grid Solutions equipment and services reporting units based on the relative fair values of each business. This resulted in $1,618 million of goodwill transferring from our Power segment to our Renewable Energy segment and our Digital business within Corporate in the amounts of $744 million and $874 million, respectively.
As a consequence of separating the two businesses, the Grid Solutions equipment and services reporting unit’s fair value was below its carrying value. Therefore, we conducted step two of the goodwill impairment test for this reporting unit using a current outlook.
In performing the second step, we identified unrecognized intangible assets primarily related to internally developed technology and trade name. The combination of these unrecognized intangibles, adjustments to the carrying value of other assets and liabilities, and reduced reporting unit fair value calculated in step one, resulted in an implied fair value of goodwill below the carrying value of goodwill for the Grid Solutions equipment and services reporting unit. Therefore, we recorded a non-cash goodwill impairment loss of $744 million in Goodwill impairments in our consolidated Statement of Earnings (Loss). We determined the fair value of the Grid Solutions equipment and services reporting unit using a combination of the market and income approaches. After the impairment charge, there is no remaining goodwill associated with our Grid Solutions equipment and services reporting unit.
Further, in the second quarter of 2019, a portion of goodwill recorded at Corporate associated with our Digital acquisitions that was previously allocated to our Renewable Energy, Aviation and Healthcare segments in purchase accounting and for goodwill testing purposes was reflected in these segments in the table above.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In the third quarter of 2019, we performed our annual impairment test. Based on the results of this test, the fair values of each of our reporting units exceeded their carrying values except for our Hydro reporting unit within our Renewable Energy segment. The Hydro reporting unit continued to experience declines in order growth and increased project costs which resulted in downward revisions to our current and projected earnings and cash flows for this business. Therefore, we performed a step two analysis which resulted in a non-cash goodwill impairment loss of $742 million. We determined the fair value of the Hydro reporting unit using the income approach. We recorded the impairment loss in Goodwill impairments in our consolidated Statement of Earnings (Loss). After the impairment charge, there is 0 remaining goodwill associated with our Hydro reporting unit. All of the goodwill in this reporting unit was previously recorded as a result of the Alstom acquisition.
Subsequent to this year's third quarter testing, and in order to improve alignment of our annual goodwill impairment testing and strategic planning processes, we changed our annual testing date from the third quarter to the fourth quarter. Therefore, we retested the goodwill at each of our reporting units in the fourth quarter of 2019. Based on the results of this test, the fair value of all our reporting units exceeded their carrying values.
We continue to monitor the operating results and cash flow forecasts of our Additive reporting unit in our Aviation segment as the fair value of this reporting unit was not significantly in excess of its carrying value. At December 31, 2019, our Additive reporting unit had goodwill of $1,116 million.
We also continue to evaluate strategic options to accelerate the further reduction in the size of GE Capital, some of which could have a material charge depending on the timing, negotiated terms and conditions of any agreements, including $839 million of goodwill.
In 2018, we recognized a total non-cash goodwill impairment loss of $22,136 million in our Power Generation, Grid Solutions, and Hydro reporting units in our Power and Renewable Energy segments.
Determining the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION December 31 (In millions) | Gross carrying
amount |
| Accumulated
amortization |
| Net |
|
| Gross carrying
amount |
| Accumulated
amortization |
| Net |
|
| | | | | | | |
| Customer-related(a) | $ | 6,770 |
| $ | (3,070 | ) | $ | 3,701 |
| | $ | 7,107 |
| $ | (2,768 | ) | $ | 4,341 |
|
| Patents and technology | 8,180 |
| (3,730 | ) | 4,450 |
| | 9,166 |
| (3,973 | ) | 5,192 |
|
| Capitalized software | 5,822 |
| (3,651 | ) | 2,171 |
| | 5,951 |
| (3,643 | ) | 2,308 |
|
| Trademarks & other | 737 |
| (406 | ) | 332 |
| | 818 |
| (481 | ) | 337 |
|
| Total | $ | 21,510 |
| $ | (10,857 | ) | $ | 10,653 |
| | $ | 23,041 |
| $ | (10,865 | ) | $ | 12,178 |
|
(a) Balance includes payments made to our customers, primarily within our Aviation business.
Intangible assets decreased in the fourth quarter of 2019, primarily as a result of amortization, impairments, and the transfer of BioPharma within our Healthcare segment to held for sale of $542 million. Consolidated amortization expense was $1,569 million, $2,163 million and $1,862 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Included within amortization expense for the years ended December 31, 2019 and December 31, 2018 were non-cash impairment charges recorded in Corporate and in our Power segment for $103 million and $428 million, respectively. We determined the fair value of these intangible assets using an income approach. These charges were recorded in Selling, general, and administrative expenses in our consolidated Statement of Earnings (Loss).
Estimated Consolidated annual pre-tax amortization for intangible assets over the next five calendar years are as follows:
|
| | | | | | | | | | | | | | | |
ESTIMATED 5 YEAR CONSOLIDATED AMORTIZATION (In millions) | 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
|
| | | | | |
| Estimated annual pre-tax amortization | $ | 1,358 |
| $ | 1,274 |
| $ | 1,173 |
| $ | 1,081 |
| $ | 1,107 |
|
During 2019, we recorded additions to intangible assets subject to amortization of $664 million with a weighted-average amortizable period of 5.4 years, including capitalized software of $555 million, with a weighted-average amortizable period of 5.2 years.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 9. CONTRACT AND OTHER DEFERRED ASSETS & PROGRESS COLLECTIONS AND DEFERRED INCOME
Contract and other deferred assets decreased $629 million in 2019. Our long-term service agreements decreased primarily due to billings of $11,508 million and a net unfavorable change in estimated profitability of $124 million at Power and $49 million at Aviation, offset by revenues recognized of $11,082 million.
|
| | | | | | | | | | | | | | | | | | |
December 31, 2019 (In millions) | Power | Aviation | Renewable Energy | Healthcare | Other | Total |
|
|
|
|
|
|
|
| Revenues in excess of billings | $ | 5,342 |
| $ | 4,996 |
| $ | — |
| $ | — |
| $ | — |
| $ | 10,338 |
|
| Billings in excess of revenues | (1,561 | ) | (3,719 | ) | — |
| — |
| — |
| (5,280 | ) |
| Long-term service agreements(a) | $ | 3,781 |
| $ | 1,278 |
| $ | — |
| $ | — |
| $ | — |
| $ | 5,058 |
|
| Short-term and other service agreements | 190 |
| 316 |
| 43 |
| 169 |
| — |
| 717 |
|
| Equipment contract revenues(b) | 2,508 |
| 82 |
| 1,217 |
| 324 |
| 106 |
| 4,236 |
|
| Total contract assets | 6,478 |
| 1,675 |
| 1,260 |
| 492 |
| 106 |
| 10,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred inventory costs(c) | 943 |
| 287 |
| 1,677 |
| 359 |
| — |
| 3,267 |
|
| Nonrecurring engineering costs(d) | 44 |
| 2,257 |
| 47 |
| 35 |
| 8 |
| 2,391 |
|
| Customer advances and other(e) | — |
| 1,165 |
| — |
| — |
| (32 | ) | 1,133 |
|
| Contract and other deferred assets | $ | 7,465 |
| $ | 5,384 |
| $ | 2,985 |
| $ | 886 |
| $ | 82 |
| $ | 16,801 |
|
|
| | | | | | | | | | | | | | | | | | |
December 31, 2018 (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues in excess of billings | $ | 5,368 |
| $ | 5,412 |
| $ | — |
| $ | — |
| $ | — |
| $ | 10,780 |
|
| Billings in excess of revenues | (1,693 | ) | (3,297 | ) | — |
| — |
| — |
| (4,989 | ) |
| Long-term service agreements(a) | $ | 3,675 |
| $ | 2,115 |
| $ | — |
| $ | — |
| $ | — |
| $ | 5,790 |
|
| Short-term and other service agreements | 167 |
| 272 |
| — |
| 251 |
| — |
| 690 |
|
| Equipment contract revenues(b) | 2,761 |
| 80 |
| 1,174 |
| 320 |
| 64 |
| 4,400 |
|
| Total contract assets | 6,603 |
| 2,468 |
| 1,174 |
| 571 |
| 64 |
| 10,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred inventory costs(c) | 1,003 |
| 673 |
| 1,267 |
| 360 |
| 5 |
| 3,309 |
|
| Nonrecurring engineering costs(d) | 43 |
| 1,916 |
| 85 |
| 34 |
| 17 |
| 2,095 |
|
| Customer advances and other(e) | — |
| 1,146 |
| — |
| — |
| — |
| 1,146 |
|
| Contract and other deferred assets | $ | 7,650 |
| $ | 6,204 |
| $ | 2,525 |
| $ | 966 |
| $ | 87 |
| $ | 17,431 |
|
| |
| (a) | Included amounts due from customers at Aviation for the sales of engines, spare parts and services, which we will collect through higher usage-based fees from servicing equipment under long-term service agreements, totaling $1,712 million and $1,562 million as of December 31, 2019 and 2018, respectively. The corresponding discount is recorded within liabilities as Deferred income and amounted to $308 million and $310 million as of December 31, 2019 and 2018, respectively. |
| |
| (b) | Included are amounts due from customers at Power for the sale of services upgrades, which we collect through incremental fixed or usage-based fees from servicing the equipment under long-term service agreements, totaling $909 million and $886 million as of December 31, 2019 and 2018, respectively. |
| |
| (c) | Represents cost deferral for shipped goods (such as components for wind turbine assemblies within our Renewable Energy segment) and labor and overhead costs on time and material service contracts (primarily originating in Power and Aviation) and other costs for which the criteria for revenue recognition has not yet been met. |
| |
| (d) | Included costs incurred prior to production (such as requisition engineering) for equipment production contracts, primarily within our Aviation segment, which are allocated ratably to each unit produced. |
| |
| (e) | Included advances to and amounts due from customers at Aviation for the sale of engines, spare parts and services, which we will collect through incremental fees for goods and services to be delivered in future periods, totaling $986 million and $950 million as of December 31, 2019 and 2018, respectively. The corresponding discount is recorded within liabilities as Deferred income and amounted to $256 million and $223 million as of December 31, 2019 and 2018, respectively. |
PROGRESS COLLECTIONS & DEFERRED INCOME. Progress collections represent cash received from customers under ordinary commercial payment terms in advance of delivery. Progress collections on equipment contracts primarily comprise milestone payments received from customers prior to the manufacture and delivery of customized equipment orders. Other progress collections primarily comprise down payments from customers to reserve production slots for standardized inventory orders such as advance payments from customers when they place orders for wind turbines and blades within our Renewable Energy segment and payments from airframers and airlines for install and spare engines, respectively, within our Aviation segment.
Progress collections and deferred income increased $1,456 million in 2019 primarily due to milestone payments received primarily at Aviation and Renewable Energy. These increases were partially offset by the timing of revenue recognition in excess of new collections received, primarily at Healthcare and Power.
Revenues recognized for contracts included in liability position at the beginning of the year were $11,020 million and $14,960 million for the year ended December 31, 2019 and 2018, respectively.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
December 31, 2019 (In millions) | Power | Aviation | Renewable Energy | Healthcare | Other | Total |
|
|
|
|
|
|
|
| Progress collections on equipment contracts | $ | 5,857 |
| $ | 115 |
| $ | 1,268 |
| $ | — |
| $ | — |
| $ | 7,240 |
|
| Other progress collections | 413 |
| 4,748 |
| 4,193 |
| 305 |
| 189 |
| 9,849 |
|
| Total progress collections | $ | 6,270 |
| $ | 4,863 |
| $ | 5,461 |
| $ | 305 |
| $ | 189 |
| $ | 17,089 |
|
| Deferred income(a) | 49 |
| 1,528 |
| 284 |
| 1,647 |
| 98 |
| 3,606 |
|
GE Progress collections and deferred income
| $ | 6,319 |
| $ | 6,391 |
| $ | 5,745 |
| $ | 1,952 |
| $ | 287 |
| $ | 20,694 |
|
|
| | | | | | | | | | | | | | | | | | |
December 31, 2018 (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Progress collections on equipment contracts | $ | 5,536 |
| $ | 114 |
| $ | 1,325 |
| $ | — |
| $ | — |
| $ | 6,975 |
|
| Other progress collections | 691 |
| 4,034 |
| 3,557 |
| 299 |
| 201 |
| 8,783 |
|
| Total progress collections | $ | 6,227 |
| $ | 4,148 |
| $ | 4,883 |
| $ | 299 |
| $ | 201 |
| $ | 15,758 |
|
| Deferred income(a) | 112 |
| 1,338 |
| 260 |
| 1,692 |
| 79 |
| 3,480 |
|
GE Progress collections and deferred income
| $ | 6,339 |
| $ | 5,486 |
| $ | 5,143 |
| $ | 1,991 |
| $ | 280 |
| $ | 19,239 |
|
| |
| (a) | Included in this balance are finance discounts associated with customer advances at Aviation of $564 million and $533 million as of December 31, 2019 and 2018, respectively. |
NOTE 10. ALL OTHER ASSETS
|
| | | | | | |
December 31 (In millions) | 2019 |
| 2018 |
|
|
|
|
|
|
| Equity method and other investments (Notes 3 and 26) | $ | 4,015 |
| $ | 4,003 |
|
| Long-term receivables (Note 4) | 2,212 |
| 1,933 |
|
| Prepaid taxes and deferred charges | 1,480 |
| 1,763 |
|
| Derivative instruments (Note 21) | 211 |
| 30 |
|
| Other | 481 |
| 849 |
|
| Total GE | $ | 8,399 |
| $ | 8,578 |
|
|
|
|
| Equity method and other investments (Notes 3 and 26) | $ | 2,227 |
| $ | 3,097 |
|
| GECAS pre-delivery payments (Note 23) | 2,934 |
| 3,086 |
|
| Assets held for sale | 2,294 |
| 2,762 |
|
| Derivative instruments (Note 21) | 529 |
| 175 |
|
| Other | 664 |
| 748 |
|
| Total GE Capital | $ | 8,648 |
| $ | 9,869 |
|
| Eliminations | (586 | ) | (90 | ) |
| Total Consolidated | $ | 16,461 |
| $ | 18,357 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 11. BORROWINGS
|
| | | | | | | | | | | |
December 31 (Dollars in millions) | | 2019 |
| | 2018 |
| |
| | | | | | |
| | | Amount |
| Average Rate |
| Amount |
| Average Rate |
|
| Commercial paper | | $ | 3,008 |
| 1.62 | % | $ | 3,005 |
| 1.64 | % |
| Current portion of long-term borrowings | | 766 |
| 0.36 |
| 60 |
| 4.02 |
|
| Current portion of long-term borrowings assumed by GE | | 5,473 |
| 3.71 |
| 4,207 |
| 3.76 |
|
| Other | | 1,832 |
| | 2,081 |
| |
| Total GE short-term borrowings | | $ | 11,079 |
| | $ | 9,354 |
| |
| | | | | | |
| Current portion of long-term borrowings | | 11,226 |
| 3.01 | % | 3,984 |
| 2.00 | % |
| Intercompany payable to GE | | 2,104 |
| | 2,684 |
| |
| Other | | 804 |
| | 1,015 |
| |
| Total GE Capital short-term borrowings | | $ | 14,134 |
| | $ | 7,684 |
| |
| | | | | | |
| Eliminations | | (3,140 | ) | | (4,262 | ) | |
| Total short-term borrowings | | $ | 22,072 |
| | $ | 12,776 |
| |
| | | | | | |
| | Maturities | Amount |
| Average Rate |
| Amount |
| Average Rate |
|
| Senior notes | 2022-2044 | $ | 14,762 |
| 2.11 | % | $ | 20,387 |
| 2.28 | % |
| Senior notes assumed by GE | 2021-2054 | 23,024 |
| 4.17 |
| 29,218 |
| 4.30 |
|
| Subordinated notes assumed by GE | 2021-2037 | 2,871 |
| 3.68 |
| 2,836 |
| 3.64 |
|
| Other | | 324 |
| | 417 |
| |
| Total GE long-term borrowings | | $ | 40,980 |
| | $ | 52,858 |
| |
| | | | | | |
| Senior notes | 2021-2042 | $ | 25,371 |
| 3.66 | % | $ | 35,105 |
| 3.49 | % |
| Subordinated notes | | 178 |
| | 165 |
|
|
| Intercompany payable to GE | | 17,038 |
| | 19,828 |
| |
| Other | | 626 |
| | 885 |
| |
| Total GE Capital long-term borrowings | | $ | 43,213 |
| | $ | 55,982 |
| |
| | | | | | |
| Eliminations | | (17,038 | ) | | (19,892 | ) | |
| Total long-term borrowings | | $ | 67,155 |
| | $ | 88,949 |
| |
Non-recourse borrowings of consolidated securitization entities | 2020-2021 | 1,655 |
| 1.34 | % | 1,875 |
| 2.05 | % |
| Total borrowings | | $ | 90,882 |
| | $ | 103,599 |
| |
At December 31, 2019, the outstanding GE Capital borrowings that had been assumed by GE as part of the GE Capital Exit Plan was $31,368 million ($5,473 million short term and $25,895 million long term), for which GE has an offsetting Receivable from GE Capital of $19,142 million. The difference of $12,226 million ($3,369 million in short-term borrowings and $8,857 million in long-term borrowings) represents the amount of borrowings GE Capital had funded with available cash to GE via intercompany loans in lieu of GE issuing borrowings externally. In 2019, GE repaid $1,523 million of maturing intercompany loans from GE Capital.
At December 31, 2019, total GE borrowings of $32,917 million comprised GE-issued borrowings of $20,691 million and intercompany loans from GE Capital to GE of $12,226 million as described above.
GE has provided a full and unconditional guarantee on the payment of the principal and interest on all tradable senior and subordinated outstanding long-term debt securities and all commercial paper issued or guaranteed by GE Capital. At December 31, 2019, the Guarantee applies to $34,683 million of GE Capital debt.
On September 30, 2019, GE completed a tender offer to purchase $4,846 million in aggregate principal amount of certain senior unsecured debt, comprising $1,250 million of 4.500% Notes due 2044, $1,144 million of 4.125% Notes due 2042, €992 million ($1,101 million equivalent) of 2.125% Notes due 2037, €784 million ($870 million equivalent) of 1.500% Notes due 2029, €374 million ($415 million equivalent) of 1.875% Notes due 2027, and €59 million ($66 million equivalent) of 1.250% Notes due 2023. The total cash consideration paid for these purchases was $5,031 million and the total carrying amount of the purchased notes was $4,787 million, resulting in a loss of $255 million (including $12 million of accrued fees and other costs associated with the tender) which was recorded in Interest and other financial charges in the GE Statement of Earnings (Loss). In addition to the purchase price, GE paid any accrued and unpaid interest on the purchased notes through the date of purchase.
Non-recourse borrowings of consolidated securitization entities included $1,569 million and $225 million of current portion of long-term borrowings at December 31, 2019 and 2018, respectively. See Notes 4 and 22 for further information.
See Note 21 for further information about borrowings and associated interest rate swaps.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Long-term debt maturities over the next five years follow.
|
| | | | | | | | | | | | | | | |
| (In millions) | 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
|
| | | | | | |
| GE excluding assumed debt | $ | 766 |
| $ | 47 |
| $ | 4,994 |
| $ | 1,360 |
| $ | 773 |
|
| GE Capital debt assumed by GE(a) | 5,473 |
| 4,685 |
| 1,954 |
| 2,842 |
| 918 |
|
| GE Capital other debt | 11,226 | (b) | 1,930 |
| 2,215 |
| 2,418 |
| 117 |
|
| |
| (a) | Of these maturities, $3,369 million, $442 million, 0, 0 and $528 million for 2020, 2021, 2022, 2023 and 2024 respectively, were effectively transferred to GE through intercompany loans with right of offset. |
| |
| (b) | Fixed and floating rate notes of $443 million contain put options with exercise dates in 2020, which have final maturity beyond 2024. |
NOTE 12. INSURANCE LIABILITIES AND ANNUITY BENEFITS
Insurance liabilities and annuity benefits comprise mainly obligations to annuitants and insureds in our run-off insurance operations.
|
| | | | | | | | | | | | | | | |
December 31, 2019 (In millions) | Long-term care insurance contracts | Structured settlement annuities & life insurance contracts | Other
contracts | Other adjustments(a) | Total |
|
|
|
|
|
|
| Future policy benefit reserves | $ | 16,755 |
| $ | 9,511 |
| $ | 183 |
| $ | 5,655 |
| $ | 32,104 |
|
| Claim reserves(b) | 4,238 |
| 252 |
| 1,125 |
|
| 5,615 |
|
| Investment contracts(c) | — |
| 1,136 |
| 1,055 |
| — |
| 2,191 |
|
| Unearned premiums and other | 30 |
| 196 |
| 96 |
| — |
| 322 |
|
| 21,023 |
| 11,095 |
| 2,459 |
| 5,655 |
| 40,232 |
|
| Eliminations | — |
| — |
| (406 | ) | — |
| (406 | ) |
| Total | $ | 21,023 |
| $ | 11,095 |
| $ | 2,053 |
| $ | 5,655 |
| $ | 39,826 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2018 (In millions) |
|
|
|
|
|
|
|
|
|
|
|
| Future policy benefit reserves | $ | 16,029 |
| $ | 9,495 |
| $ | 169 |
| $ | 2,247 |
| $ | 27,940 |
|
| Claim reserves(b) | 3,917 |
| 230 |
| 1,178 |
| — |
| 5,324 |
|
| Investment contracts(c) | — |
| 1,239 |
| 1,149 |
| — |
| 2,388 |
|
| Unearned premiums and other | 34 |
| 205 |
| 103 |
| — |
| 342 |
|
| 19,980 |
| 11,169 |
| 2,599 |
| 2,247 |
| 35,994 |
|
| Eliminations | — |
| — |
| (432 | ) | — |
| (432 | ) |
| Total | $ | 19,980 |
| $ | 11,169 |
| $ | 2,167 |
| $ | 2,247 |
| $ | 35,562 |
|
| |
| (a) | To the extent that unrealized gains on specific investment securities supporting our insurance contracts would result in a premium deficiency should those gains be realized, an increase in future policy benefit reserves is recorded, with an after-tax reduction of net unrealized gains recognized through Other comprehensive income in our consolidated Statement of Earnings (Loss). |
| |
| (b) | Other contracts included claim reserves of $342 million and $346 million related to short-duration contracts at Electric Insurance Company, net of eliminations, at December 31, 2019 and December 31, 2018, respectively. |
| |
| (c) | Investment contracts are contracts without significant mortality or morbidity risks. |
We annually perform premium deficiency testing in the aggregate across our run-off insurance portfolio. We performed this year’s testing in the third quarter of 2019, consistent with our historical practice prior to 2017 when we reconstructed our claim cost curves. These procedures included updating experience studies since our last test completed in the fourth quarter of 2018, independent actuarial analysis and review of industry benchmarks. As we experienced a premium deficiency in 2018, our 2019 premium deficiency testing started with a zero margin and, accordingly, any net adverse development would result in a future charge to earnings. Using our most recent future policy benefit reserve assumptions, including changes to our assumptions related to discount rate and future premium rate increases, as described below, we identified a premium deficiency resulting in a $972 million non-cash pre-tax charge to earnings in the third quarter 2019.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The increase to future policy benefit reserves resulting from our 2019 testing was primarily attributable to the following key assumption changes:
| |
| • | We have observed a significant decline in market interest rates this year, which has resulted in a lower discount rate and adversely impacted our reserve margin by $1,344 million. As noted above, our discount rate is based upon the actual yields on our investment portfolio and our forecasted reinvestment rates, which comprise the future rates at which we expect to invest proceeds from investment maturities, net of operating cash flows, and projected future capital contributions. Market interest rates have declined by approximately 130 basis points since our 2018 premium deficiency test, with 60 basis points of this reduction occurring since the second quarter 2019. Although the movement in market rates impacts the reinvestment rate, it does not materially impact the actual yield on our existing investments. Furthermore, our assumed reinvestment rate on future fixed income investments is based both on current expected long-term average rates and market interest rates. Thus, a decline in market interest rates will not result in an equivalent decline in our discount rate assumption. Our discount rate assumption for purposes of performing the premium deficiency assessment resulted in weighted average rate of 5.74% compared to 6.04% in 2018. This decline in the discount rate from 2018 to 2019 reflected a lower reinvestment rate increasing to an expected long-term average investment yield over a longer period, lower prospective expected returns on higher yielding assets classes introduced with our 2018 strategic initiatives, and slightly lower actual yields on our investment security portfolio. |
| |
| • | Higher levels of projected long-term care premium rate increases due to larger rate filings by some ceding companies than previously planned, which favorably impacted our reserve margin by $263 million. Since our premium deficiency testing performed in 2018, we have implemented approximately $200 million of previously approved rate increase actions. Our 2019 premium deficiency test includes approximately $2,000 million of anticipated future premium increases or benefit reductions associated with future in-force rate actions. This represents an increase of $300 million from our 2018 premium deficiency test to account for actions that are: (a) approved and not yet implemented, (b) filed but not yet approved, and (c) estimated on future filings through 2028, and includes the effect of the lower discount rate mentioned above. |
Certain future adverse changes in our assumptions could result in the unlocking of reserves, resetting of actuarial assumptions to current assumptions, an increase to future policy benefit reserves and a charge to earnings. Any favorable changes to these assumptions could result in additional margin in our premium deficiency test and higher income over the remaining duration of the portfolio, including higher investment income.
Claim reserve activity included incurred claims of $1,873 million, $2,106 million and $2,020 million, of which $(36) million, $(46) million and $135 million related to the recognition of adjustments to prior year claim reserves arising from our periodic reserve evaluation in the years ended December 31, 2019, 2018 and 2017, respectively. Paid claims were $1,626 million, $1,937 million and $1,670 million in the years ended December 31, 2019, 2018 and 2017, respectively. The vast majority of paid claims relate to prior year insured events primarily as a result of the length of time long-term care policyholders remain on claim.
When insurance companies cede insurance risk to third parties, such as reinsurers, they are not relieved of their primary obligation to policyholders and cedents. When losses on ceded risks give rise to claims for recovery, we establish allowances for probable losses on such receivables from reinsurers as required. The vast majority of our remaining net reinsurance recoverables are secured by assets held in a trust for which we are the beneficiary. Reinsurance recoverables, net of allowances of $1,355 million and $1,090 million, are included in Other GE Capital receivables in our consolidated Statement of Financial Position, and amounted to $2,416 million and $2,271 million at December 31, 2019 and December 31, 2018, respectively.
We recognize reinsurance recoveries as a reduction of Insurance losses and annuity benefits in our consolidated Statement of Earnings (Loss). Reinsurance recoveries were $362 million, $324 million and $454 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Statutory accounting practices, not GAAP, determine the required statutory capital levels of our insurance legal entities and, therefore, may affect the amount or timing of capital contributions that may be required from GE Capital to its insurance legal entities. Statutory accounting practices are set forth by the National Association of Insurance Commissioners (NAIC) as well as state laws, regulation and general administrative rules and differ in certain respects from GAAP. The 2018 and 2019 premium deficiency results described above were recorded on a GAAP basis. The adverse impact on our statutory additional actuarial reserves (AAR) arising from our revised assumptions in 2017, including the collectability of reinsurance recoverables, is expected to require GE Capital to contribute approximately $14,500 million additional capital to its run-off insurance operations in 2018-2024. For statutory accounting purposes, the Kansas Insurance Department (KID), approved our request for a permitted accounting practice to recognize the 2017 AAR increase over a seven-year period. GE Capital provided capital contributions to its insurance subsidiaries of $2,000 million, $1,900 million and $3,500 million in the first quarters of 2020, 2019 and 2018, respectively. GE Capital expects to provide further capital contributions of approximately $7,000 million through 2024 subject to ongoing monitoring by KID. GE is a party to capital maintenance agreements with its run-off insurance subsidiaries whereby GE will maintain their statutory capital levels at 300% of their year-end Authorized Control Level risk-based capital requirements as defined from time to time by the NAIC.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 13. POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS AND RETIREE HEALTH AND LIFE BENEFITS.
We sponsor a number of pension and retiree health and life insurance benefit plans that we present in 3 categories, principal pension plans, other pension plans and principal retiree benefit plans. Smaller pension plans with pension assets or obligations less than $50 million and other retiree benefit plans are not presented. We use a December 31 measurement date for these plans.
Principal pension plans represent the GE Pension Plan and the GE Supplementary Pension Plan. The GE Pension Plan is a defined benefit plan that covers approximately 245,500 retirees and beneficiaries, approximately 97,000 vested former employees and approximately 31,500 active employees. This plan has been closed to new participants since 2012.
The GE Supplementary Pension Plan is an unfunded plan that provides supplementary benefits to higher-level, longer-service employees. The GE Supplementary Pension Plan annuity benefit has been closed to new participants since 2011 and has been replaced by an installment benefit.
Other pension plans in 2019 included 44 U.S. and non-U.S. pension plans with pension assets or obligations greater than $50 million which cover approximately 57,000 retirees and beneficiaries, approximately 54,000 vested former employees and approximately 22,000 active employees. Principal retiree benefit plans provide health and life insurance benefits to certain eligible participants, and these participants share in the cost of the healthcare benefits. Principal retiree benefit plans cover approximately 176,000 retirees and dependents.
In October 2019, we approved changes to our principal pension plans. The GE Pension Plan benefits for approximately 20,000 employees with salaried benefits will be frozen effective January 1, 2021, and thereafter these employees will receive increased company contributions in the company sponsored defined contribution plan in lieu of participation in a defined benefit plan. As a result, we recognized a non-cash pre-tax curtailment loss of $298 million in the fourth quarter of 2019 as non-operating benefit costs. In addition, the GE Supplementary Pension Plan benefits for approximately 700 employees who became executives before 2011 will be frozen effective January 1, 2021, and thereafter these employees will accrue the installment benefit currently offered to new executives since 2011. The change in the GE Supplementary Pension Plan reduced the projected benefit obligation by $297 million and has been treated as a plan amendment that is being amortized over future periods.
As result, we remeasured the pension assets and obligations for the principal pension plans as of October 1, 2019, which resulted in a net actuarial loss of $4,735 million, which was recorded in Accumulated other comprehensive income. The net actuarial loss was primarily due to a reduction in the discount rate since December 31, 2018, offset by our asset performance up to the remeasurement date and the impact of the freeze for the GE Pension Plan.
Finally, we offered approximately 100,000 former U.S. employees with a vested benefit in the GE Pension Plan a limited-time option to take a lump sum distribution in lieu of future monthly payments. In December 2019, lump sum distributions of $2,657 million were made from the GE Pension Trust.
At December 31, 2019, we completed our annual year-end measurement of the funded status of the principal pension plans which resulted in a net actuarial gain of $3,898 million which was recorded in Accumulated Other Comprehensive Income. The net actuarial gain was primarily due to the impact of the lump-sum distributions, an increase in the discount rate since the remeasurement date, asset performance in the fourth quarter and updated mortality assumptions.
For the year ended December 31, 2019, we recognized a net actuarial loss of $837 million which is a result of a $4,735 million net actuarial loss from remeasurement as of October 1, 2019 and a $3,898 million net actuarial gain from our annual year-end measurement.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COST OF OUR BENEFITS PLANS AND ASSUMPTIONS |
| | 2019 | | 2018 | | 2017 |
| (Dollars in millions) | Principal pension |
| Other pension |
| Principal retiree benefit |
| | Principal pension |
| Other pension |
| Principal retiree benefit |
| | Principal pension |
| Other pension |
| Principal retiree benefit |
|
| | | | | | | | | | | | |
| Components of expense (income) | | | | �� | | | | | | | |
| Service cost - operating | $ | 654 |
| $ | 246 |
| $ | 58 |
| | $ | 888 |
| $ | 323 |
| $ | 63 |
| | $ | 1,055 |
| $ | 542 |
| $ | 94 |
|
| Interest cost | 2,780 |
| 542 |
| 202 |
| | 2,658 |
| 548 |
| 196 |
| | 2,856 |
| 561 |
| 224 |
|
| Expected return on plan assets | (3,428 | ) | (1,144 | ) | (21 | ) | | (3,248 | ) | (1,285 | ) | (29 | ) | | (3,390 | ) | (1,176 | ) | (36 | ) |
| Amortization of net actuarial loss (gain) | 3,439 |
| 319 |
| (118 | ) | | 3,785 |
| 312 |
| (79 | ) | | 2,812 |
| 418 |
| (80 | ) |
| Amortization of prior service cost (credit) | 135 |
| 3 |
| (232 | ) | | 143 |
| (9 | ) | (230 | ) | | 290 |
| (5 | ) | (171 | ) |
| Curtailment / settlement loss (gain)(a) | 349 |
| 13 |
| (38 | ) | | 34 |
| 1 |
| — |
| | 64 |
| 24 |
| 4 |
|
| Non-operating | 3,275 |
| (267 | ) | (207 | ) | | 3,372 |
| (433 | ) | (142 | ) | | 2,632 |
| (178 | ) | (59 | ) |
| Net periodic expense (income) | $ | 3,929 |
| $ | (21 | ) | $ | (149 | ) | | $ | 4,260 |
| $ | (110 | ) | $ | (79 | ) | | $ | 3,687 |
| $ | 364 |
| $ | 35 |
|
| Weighted-average assumptions used to determine benefit obligations | | | | | | | | | | | |
| Discount rate | 3.36 | % | 1.97 | % | 3.05 | % | | 4.34 | % | 2.75 | % | 4.12 | % | | 3.64 | % | 2.41 | % | 3.43 | % |
| Compensation increases | 2.95 |
| 3.16 |
| 3.75 |
| | 3.60 |
| 3.16 |
| 3.60 |
| | 3.55 |
| 3.09 |
| 3.55 |
|
| Initial healthcare trend rate(b) | N/A |
| N/A |
| 5.90 |
| | N/A |
| N/A |
| 6.00 |
| | N/A |
| N/A |
| 6.00 |
|
| Weighted-average assumptions used to determine benefit cost | | | | | | | | | | | |
| Discount rate(c) | 4.07 |
| 2.75 |
| 4.12 |
| | 3.64 |
| 2.41 |
| 3.43 |
| | 4.11 |
| 2.55 |
| 3.75 |
|
| Expected rate of return on plan assets | 6.75 |
| 6.76 |
| 7.00 |
| | 6.75 |
| 6.75 |
| 7.00 |
| | 7.50 |
| 6.75 |
| 7.00 |
|
(a) For 2019, principal pension principally the curtailment loss due to GE Pension Plan freeze announced in October 2019.
(b) For 2019, ultimately declining to 5% for 2030 and thereafter.
(c) Weighted average 2019 discount rate for principal pension was 4.07%. Discount rate was 4.34% for January 1, 2019 through September 30, 2019 and then changed to 3.24% for the remainder of 2019 due to the remeasurement of the plans for the U.S. pension changes announced in October 2019.
The components of net periodic benefit costs, other than the service cost component, are included in the caption "Non-operatingNon-operating benefit costs"costs in our consolidated Statement of Earnings (Loss).
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| PLAN FUNDED STATUS AND AMOUNTS RECORDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
| | 2019 | | 2018 | |
| (in millions) | Principal pension |
| | Other pension |
| | Principal retiree benefit |
| | Principal pension |
| | Other pension |
| | Principal retiree benefit |
| |
| Change in benefit obligations | | | | | | | | | | | | |
| Balance at January 1 | $ | 68,500 |
| | $ | 21,091 |
| | $ | 5,153 |
| | $ | 74,985 |
| | $ | 23,066 |
| | $ | 6,006 |
| |
| Service cost | 654 |
| | 246 |
| | 58 |
| | 888 |
| | 323 |
| | 63 |
| |
| Interest cost | 2,780 |
| | 542 |
| | 202 |
| | 2,658 |
| | 548 |
| | 196 |
| |
| Participant contributions | 77 |
| | 29 |
| | 61 |
| | 90 |
| | 37 |
| | 60 |
| |
| Plan amendments | (42 | ) | (a) | (17 | ) | | (23 | ) | | — |
| | 82 |
| | — |
| |
| Actuarial loss (gain) | 7,073 |
| (b) | 2,422 |
| (e) | 275 |
| (e) | (6,263 | ) | (e) | (879 | ) | (e) | (593 | ) | (f) |
| Benefits paid | (3,788 | ) | | (1,043 | ) | | (533 | ) | | (3,729 | ) | | (1,002 | ) | | (569 | ) | |
| Curtailments | (838 | ) | | (32 | ) | | (33 | ) | | — |
| | (11 | ) | | — |
| |
| Settlements | (2,657 | ) | (c) | — |
| | — |
| | — |
| | — |
| | — |
| |
| Acquisitions (dispositions) / other - net | (3 | ) | | (1,030 | ) | | — |
| | (129 | ) | | (90 | ) | | (10 | ) | |
| Exchange rate adjustments | — |
| | 713 |
| | — |
| | — |
| | (983 | ) | | — |
| |
| Balance at December 31 | $ | 71,756 |
| (d) | $ | 22,921 |
| | $ | 5,160 |
| (g) | $ | 68,500 |
| (d) | $ | 21,091 |
| | $ | 5,153 |
| (g) |
| Change in plan assets | | | | | | | | | | | | |
| Balance at January 1 | 50,009 |
| | 17,537 |
| | 362 |
| | 50,361 |
| | 19,306 |
| | 518 |
| |
| Actual gain (loss) on plan assets | 8,694 |
| | 2,229 |
| | 57 |
| | (2,996 | ) | | (245 | ) | | (17 | ) | |
| Employer contributions | 298 |
| | 716 |
| | 342 |
| | 6,283 |
| | 475 |
| | 370 |
| |
| Participant contributions | 77 |
| | 29 |
| | 61 |
| | 90 |
| | 37 |
| | 60 |
| |
| Benefits paid | (3,788 | ) | | (1,043 | ) | | (533 | ) | | (3,729 | ) | | (1,002 | ) | | (569 | ) | |
| Settlements | (2,657 | ) | (c) | — |
| | — |
| | — |
| | — |
| | — |
| |
| Acquisitions (dispositions) / other - net | — |
| | (1,030 | ) | | — |
| | — |
| | (185 | ) | | — |
| |
| Exchange rate adjustments | — |
| | 704 |
| | — |
| | — |
| | (849 | ) | | — |
| |
| Balance at December 31 | $ | 52,633 |
| | $ | 19,142 |
| | $ | 289 |
| | $ | 50,009 |
| | $ | 17,537 |
| | $ | 362 |
| |
| Funded status - deficit(h) | $ | 19,123 |
| | $ | 3,779 |
| | $ | 4,871 |
| | $ | 18,491 |
| | $ | 3,554 |
| | $ | 4,791 |
| |
| Amounts recorded in the consolidated Statement of Financial Position | | | | | | | | | | | | |
| Non-current assets - other | — |
| | 475 |
| | — |
| | — |
| | 746 |
| | — |
| |
| Current liabilities - other | (296 | ) | | (123 | ) | | (355 | ) | | (280 | ) | | (117 | ) | | (378 | ) | |
| Non-current liabilities - compensation and benefits | (18,827 | ) | | (4,131 | ) | | (4,516 | ) | | (18,211 | ) | | (4,183 | ) | | (4,413 | ) | |
| Net amount recorded | $ | (19,123 | ) | | $ | (3,779 | ) | | $ | (4,871 | ) | | $ | (18,491 | ) | | $ | (3,554 | ) | | $ | (4,791 | ) | |
| Amounts recorded in Accumulated other comprehensive income (loss) | | | | | | | | | | | | |
| Prior service cost (credit) | 67 |
| | (16 | ) | | (2,376 | ) | | 596 |
| | 7 |
| | (2,584 | ) | |
| Actuarial loss (gain) | 7,961 |
| | 4,665 |
| | (833 | ) | | 10,430 |
| | 3,740 |
| | (1,196 | ) | |
| Total recorded in Accumulated other comprehensive income (loss) | $ | 8,028 |
| | $ | 4,649 |
| | $ | (3,209 | ) | | $ | 11,026 |
| | $ | 3,747 |
| | $ | (3,780 | ) | |
| |
| (a) | GE Supplementary Pension Plan amendment for the U.S. pension changes announced in October 2019 offset by other plan amendments adopted in 2019. |
| |
| (b) | Principally associated with discount rate changes offset by impact of the one-time lump sum payments. |
| |
| (c) | Payments made to former employees from the GE Pension Trust for the one-time lump sum payments. |
| |
| (d) | The PBO for the GE Supplementary Pension Plan, which is an unfunded plan, was $6,691 million and $6,110 million at year-end 2019 and 2018, respectively. |
| |
| (e) | Principally associated with discount rate changes. |
| |
| (f) | Principally due to discount rate changes and favorable cost trends. |
| |
| (g) | The benefit obligation for retiree health plans was $3,306 million and $3,425 million at December 31, 2019 and 2018, respectively. |
| |
| (h) | Total unfunded status for principal pension plan, other pension plans and principal retiree benefit plans was $27,773 million and $26,836 million at December 31, 2019 and 2018, respectively. Of these amounts, $14,340 million and $13,292 million at December 31, 2019 and 2018, respectively, related to plans that are not subject to regulatory funding requirements and the benefits for these plans are funded as they become due. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
ASSUMPTIONS USED IN PENSION CALCULATIONS
Accounting requirements necessitate the use of assumptions to reflect the uncertainties and the length of time over which the pension obligations will be paid. The actual amount of future benefit payments will depend upon when participants retire, the amount of their benefit at retirement and how long they live. To reflect the obligations in today’s dollars, we discount the future payments using a rate that matches the time frame over which the payments will be made. We also need to assume a long-term rate of return that will be earned on investments used to fund these payments.
The assumptions used to measure our pension benefit obligations follow.
|
| | | | | | | | | | | | | |
| ASSUMPTIONS USED TO MEASURE PENSION | Principal pension plans | | Other pension plans (weighted average) |
BENEFIT OBLIGATIONS December 31 | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | |
| Discount rate | 4.34 | % | 3.64 | % | 4.11 | % | | 2.81 | % | 2.45 | % | 2.58 | % |
| Compensation increases | 3.60 |
| 3.55 |
| 3.80 |
| | 3.16 |
| 3.12 |
| 3.48 |
|
The discount rate used to measure the pension obligations at the end of the year is also used to measure pension cost in the following year.
CALCULATIONS. We determine the discount rate using the weighted-average yields on high-quality fixed-income securities that have maturities consistent with the timing of benefit payments. Lower discount rates increase the size of the benefit obligation and generally increase pension expense in the following year; higher discount rates reduce the size of the benefit obligation and generally reduce subsequent-year pension expense.
The compensation assumption is used to estimate the annual rate at which pay of plan participants will grow. If the rate of growth assumed increases, the size of the pension obligations will increase, as will the amount recorded in shareowners’ equityAccumulated other comprehensive income (loss) in our consolidated Statement of Financial Position and amortized into earnings in subsequent periods.
The assumptions used to measure pension cost follow.
|
| | | | | | | | | | | | | |
| ASSUMPTIONS USED TO MEASURE PENSION COST | Principal pension plans | | Other pension plans (weighted average) |
| December 31 | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | |
| Discount rate | 3.64 | % | 4.11 | % | 4.38 | % | | 2.45 | % | 2.58 | % | 3.33 | % |
| Expected return on assets | 6.75 |
| 7.50 |
| 7.50 |
| | 6.67 |
| 6.75 |
| 6.36 |
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The expected return on plan assets is the estimated long-term rate of return that will be earned on the investments used to fund the pension obligations. To determine this rate, we consider the composition of our plan investments, our historical returns earned, and our expectations about the future. Based on our analysis, we have assumed a 6.75% long-term expected return on GE Pension Plan assets for cost recognition in 2019 and 2018. This is a reduction from the 7.50% we assumed in 20172017.
The healthcare trend assumptions apply to our pre-65 retiree medical plans. Our post-65 retiree plan has a fixed subsidy and 2016.therefore is not subject to healthcare inflation.
We evaluate these assumptions annually. We evaluate other assumptions periodically, such as retirement age, mortality and turnover, and update them as necessary to reflect our actual experience and expectations for the future. Differences between our actual results and what we assumed are recorded in Accumulated other comprehensive income each period. These differences are amortized into earnings over the remaining average future service of active participating employees or the expected life of inactive participants, as applicable.
Further information about our pension assumptions, including a sensitivity analysis of certain assumptions for our principal pension plans, can be found in the Critical Accounting Estimates – Pension Assumptions within MD&A.
|
| | | | | | | | | | | | | | | |
| FUNDED STATUS | Principal pension plans | | Other pension plans | |
| December 31 (In millions) | 2018 |
| | 2017 |
| | 2018 |
| 2017 |
| |
| | | | | | | | |
| Projected benefit obligations | $ | 68,500 |
| | $ | 74,985 |
| | $ | 23,256 |
| $ | 25,303 |
| |
| Fair value of plan assets | 50,009 |
| | 50,361 |
| | 19,379 |
| 21,224 |
| |
| Underfunded | $ | 18,491 |
| | $ | 24,624 |
| | $ | 3,877 |
| $ | 4,079 |
| |
|
| | | | | | | | | | | | | | | |
| PROJECTED BENEFIT OBLIGATIONS (PBO) | Principal pension plans | | Other pension plans | |
| (In millions) | 2018 |
| | 2017 |
| | 2018 |
| 2017 |
| |
| | | | | | | | |
| Balance at January 1 | $ | 74,985 |
| | $ | 71,501 |
| | $ | 25,303 |
| $ | 22,543 |
| |
| Service cost for benefits earned | 888 |
| | 1,055 |
| | 339 |
| 574 |
| |
| Interest cost on benefit obligations | 2,658 |
| | 2,856 |
| | 612 |
| 606 |
| |
| Participant contributions | 90 |
| | 91 |
| | 37 |
| 42 |
| |
| Plan amendments | — |
| | — |
| | 89 |
| — |
| |
| Actuarial loss (gain) | (6,263 | ) | (a) | 3,300 |
| (a) | (961 | ) | (181 | ) | |
| Benefits paid | (3,729 | ) | | (3,818 | ) | | (1,113 | ) | (977 | ) | |
| Acquisitions (dispositions) / other - net | (129 | ) | | — |
| | (4 | ) | 1,321 |
| |
| Exchange rate adjustments | — |
| | — |
| | (1,046 | ) | 1,375 |
| |
| Balance at December 31 | $ | 68,500 |
| (b) | $ | 74,985 |
| (b) | $ | 23,256 |
| $ | 25,303 |
| |
| |
(a) | Principally associated with discount rate changes. |
| |
(b) | The PBO for the GE Supplementary Pension Plan, which is an unfunded plan, was $6,110 million and $6,682 million at year-end 2018 and 2017, respectively. |
THE COMPOSITION OF OUR PLAN ASSETS
ASSETS. The fair value of our pension plans' investments is presented below. The inputs and valuation techniques used to measure the fair value of these assets are described in Note 1 and have been applied consistently.
| | | | Principal pension plans | | Other pension plans | 2019 | | 2018 |
| December 31 (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| |
| (In millions) | | Principal pension |
| | Other pension |
| | Principal pension |
| | Other pension |
|
| | | | | | | | | | | |
| Global equity | $ | 6,015 |
| $ | 9,192 |
| | $ | 4,323 |
| $ | 6,323 |
| $ | 6,826 |
| | $ | 3,484 |
| | $ | 6,015 |
| | $ | 4,323 |
|
| Debt securities | | | | | | | | | | |
| Fixed income and cash investment funds | 2,069 |
| 1,200 |
| | 6,504 |
| 6,242 |
| 4,398 |
| | 8,089 |
| | 2,069 |
| | 6,320 |
|
| U.S. corporate(a) | 8,734 |
| 6,597 |
| | 397 |
| 393 |
| 8,025 |
| | 365 |
| | 8,734 |
| | 397 |
|
| Other debt securities(b) | 5,264 |
| 5,225 |
| | 520 |
| 599 |
| 6,076 |
| | 424 |
| | 5,264 |
| | 472 |
|
| Real estate | 2,218 |
| 2,125 |
| | 175 |
| 222 |
| 2,309 |
| | 140 |
| | 2,218 |
| | 175 |
|
| Private equities & other investments | 557 |
| 581 |
| | 424 |
| 481 |
| |
| Private equities and other investments | | 23 |
| | 452 |
| | 557 |
| | 369 |
|
| Total | 24,857 |
| 24,920 |
| | 12,343 |
| 14,260 |
| 27,657 |
| | 12,954 |
| | 24,857 |
| | 12,056 |
|
| | | | | |
| Investments measured at net asset value (NAV) | | | | |
| Plan assets measured at net asset value | | | | | | | | |
| Global equity | 12,558 |
| 13,790 |
| | 1,668 |
| 1,871 |
| 14,616 |
| | 1,450 |
| | 12,558 |
| | 1,228 |
|
| Debt securities | 6,400 |
| 4,107 |
| | 1,431 |
| 1,247 |
| 3,744 |
| | 914 |
| | 6,400 |
| | 883 |
|
| Real estate | 1,261 |
| 1,258 |
| | 1,754 |
| 1,598 |
| 1,167 |
| | 1,930 |
| | 1,261 |
| | 1,704 |
|
| Private equities & other investments | 4,933 |
| 6,286 |
| | 2,183 |
| 2,248 |
| |
| Private equities and other investments | | 5,449 |
| | 1,894 |
| | 4,933 |
| | 1,666 |
|
| Total plan assets at fair value | $ | 50,009 |
| $ | 50,361 |
| | $ | 19,379 |
| $ | 21,224 |
| $ | 52,633 |
| | $ | 19,142 |
| | $ | 50,009 |
| | $ | 17,537 |
|
| |
| (a) | Primarily represented investment-grade bonds of U.S. issuers from diverse industries. |
| |
| (b) | Primarily represented investments in residential and commercial mortgage-backed securities, non-U.S. corporate and government bonds and U.S. government, federal agency, state and municipal debt. |
GE Pension Plan investments with a fair value of $2,838 million and $2,990 million in 2019 and 2018, respectively, were classified within Level 3 and primarily relate to real estate. The remaining investments were substantially all considered Level 1 and 2. Other pension plans investments with a fair value of $105 million and $116 million in 2019 and 2018, respectively, were classified within Level 3. Principal retiree benefit plan investments with a fair value of $289 million and $362 million at December 31, 2019 and 2018, respectively, comprised global equity and debt securities which are considered Level 1 and 2. There were no Level 3 principal retiree benefit plan investments held in 2019 and 2018. Plan assets that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy.
|
| | | | | | | | | | | |
| ASSET ALLOCATION OF PENSION PLANS | 2019 Target allocation | | 2019 Actual allocation |
| | Principal Pension | | | Other Pension (weighted average) | | | Principal Pension | | | Other Pension (weighted average) | |
| | | | | | | | | | | | |
| Global equity | 30.0 - 47.0 | % | | 23 | % | | 41 | % | | 27 | % |
| Debt securities (including cash equivalents) | 21.0 - 65.0 | | | 55 | | | 42 | | | 51 | |
| Real estate | 3.5 - 13.5 | | | 9 | | | 7 | | | 11 | |
| Private equities & other investments | 6.0 - 16.0 | | | 13 | | | 10 | | | 11 | |
GE20182019 FORM 10-K 129 92
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
GE Pension Plan. Investments with a fair value of $2,990 million and $2,891 million in 2018 and 2017, respectively, were classified within Level 3. The remaining investments were substantially all considered Level 1 and 2. Assets that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy.
Other Pension Plans. Investments with a fair value of $116 million and $154 million in 2018 and 2017, respectively, were classified within Level 3. The remaining investments were substantially all considered Level 1 and 2. Assets that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy.
|
| | | | | | | | | | | | | |
| FAIR VALUE OF PLAN ASSETS | Principal pension plans | | Other pension plans |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Balance at January 1 | $ | 50,361 |
| $ | 45,893 |
| | $ | 21,224 |
| $ | 17,091 |
|
| Actual gain (loss) on plan assets | (2,996 | ) | 6,217 |
| | (299 | ) | 1,977 |
|
| Employer contributions | 6,283 |
| 1,978 |
| | 522 |
| 870 |
|
| Participant contributions | 90 |
| 91 |
| | 37 |
| 42 |
|
| Benefits paid | (3,729 | ) | (3,818 | ) | | (1,113 | ) | (977 | ) |
| Acquisitions (dispositions) / other - net | — |
| — |
| | (92 | ) | 1,221 |
|
| Exchange rate adjustments | — |
| — |
| | (900 | ) | 1,000 |
|
| Balance at December 31 | $ | 50,009 |
| $ | 50,361 |
| | $ | 19,379 |
| $ | 21,224 |
|
|
| | | | | | | | |
| ASSET ALLOCATION | Principal pension plans | | Other pension plans (weighted average) |
| | 2018 | 2018 |
| | 2018 |
| 2018 |
|
| December 31 | Target allocation | Actual allocation |
| | Target allocation |
| Actual allocation |
|
| | | | | | |
| Global equity | 33.5 - 53.5% | 37 | % | | 33 | % | 32 | % |
| Debt securities (including cash equivalents) | 15.0 - 58.5 | 45 |
| | 35 |
| 46 |
|
| Real estate | 5.0 - 15.0 | 7 |
| | 11 |
| 10 |
|
| Private equities & other investments | 6.5 - 16.5 | 11 |
| | 21 |
| 12 |
|
Plan fiduciaries of the GE Pension Plan set investment policies and strategies for the GE Pension Trust and oversee its investment allocation, which includes selecting investment managers and setting long-term strategic targets. The primary strategic investment objectives are balancing investment risk and return and monitoring the plan’s liquidity position in order to meet the near-term benefit payment and other cash needs. Target allocation percentages are established at an asset class level by plan fiduciaries. Target allocation ranges are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below a target range.
According to U.S. statute, the aggregate holdings of all qualifying employer securities (e.g., GE common stock)securities represented 0.6% and qualifying employer real property may not exceed 10% of the fair value of trust assets at the time of purchase. GE securities represented 0.5% and 1.0% of the GE Pension Trust assets at year endDecember 31, 2019 and 2018, and 2017, respectively.
The GE Pension Plan has a broadly diversified portfolio of investments in equities, fixed income, private equities and real estate; these investments are both U.S. and non-U.S. in nature. The plan utilizes derivatives to implement investment strategies as well as for hedging asset and liability risks. As of December 31, 2018,2019, no sector concentration of assets exceeded 15% of total GE Pension Plan assets.
AMOUNTS INCLUDED IN SHAREOWNERS’ EQUITY
Amounts included in shareowners’ equity that will be amortized in future reporting periods follow.
|
| | | | | | | | | | | | | |
| | Principal pension plans | | Other pension plans |
| December 31 (In millions, pre-tax) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Prior service cost (credit) | $ | 596 |
| $ | 784 |
| | $ | 14 |
| $ | (100 | ) |
| Net actuarial loss | 10,430 |
| 14,326 |
| | 3,918 |
| 3,712 |
|
| Total | $ | 11,026 |
| $ | 15,110 |
| | $ | 3,932 |
| $ | 3,612 |
|
In 2019, we estimate for our principal pension plans that we will amortize $140 million of prior service cost and $3,050 million of net actuarial loss from shareowners’ equity into pension cost. For the other pension plans, the estimated prior service costs and net actuarial loss to be amortized in 2019 will be $5 million and $345 million, respectively. Comparable amounts in 2018 respectively, were $143 million and $3,785 million for our principal pension plans and prior service credits of $9 million and net actuarial loss amortization of $322 million for the other pension plans.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
OUR FUNDING POLICY
POLICY. Our policy for funding the GE Pension Plan is to contribute amounts sufficient to meet minimum funding requirements under employee benefit and tax laws. We may decide to contribute additional amounts beyond this level. We made contributions of $6,000 million and $1,717 million to the GE Pension Plan in 2018 and 2017, respectively.2018. Our 2018 contributions satisfied our minimum ERISA funding requirement of $1,500 million and the remaining $4,500 million was a voluntary contribution to the plan. We currently expect thisThis voluntary contribution will bewas sufficient to satisfyour minimum ERISA funding requirement for 2019 and 2020. In October 2019, we announced our intent to contribute approximately $4,000 million to $5,000 million to the GE Pension Plan in 2020. We expect this amount to equal our estimated future minimum ERISA funding requirements at least through 2022.
We expect to pay approximately $295$305 million for benefit payments under our GE Supplementary Pension Plan and administrative expenses of our principal pension plans and expect to contribute approximately $765$500 million to other pension plans in 2019. In 2018, comparative amounts were $283 million and $522 million, respectively.
|
| | | | | | | | | | | | | | | | | | |
ESTIMATED FUTURE BENEFIT PAYMENTS (In millions) | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 - 2028 |
|
| | | | | | | |
| Principal pension plans | $ | 3,735 |
| $ | 3,795 |
| $ | 3,875 |
| $ | 3,930 |
| $ | 3,985 |
| $ | 20,760 |
|
| Other pension plans | 1,050 |
| 1,045 |
| 1,050 |
| 1,070 |
| 1,080 |
| 5,715 |
|
DEFINED CONTRIBUTION PLAN
We have a defined contribution plan for eligible U.S. employees that provide discretionary contributions. We made contributions to our defined contribution plan of $430 million, $475 million and $500 million in the years ended December 31, 2018, 2017, and 2016, respectively.
RETIREE HEALTH AND LIFE BENEFITS
We sponsor a number of postretirement health and life insurance benefit plans (retiree benefit plans).
Principal Retiree Benefit Plans. Provide health and life insurance benefits to eligible participants and these participants share in the cost of healthcare benefits. Principal retiree benefit plans cover approximately 181,000 retirees and dependents. Principal retiree benefit plans are discussed below. We use a December 31 measurement date for our plans.
Benefit plans cost was $(79) million, $35 million and $115 million for the years ended December 31, 2018, 2017, 2016, respectively. The components of net periodic benefit costs other than the service cost component are included in the caption "Non-operating benefit costs" in our consolidated Statement of Earnings (Loss).
The accounting assumptions in the table below are those that are significant to the measurement of our benefit obligations.
|
| | | | | | |
ASSUMPTIONS USED TO MEASURE BENEFIT OBLIGATIONS December 31 | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Discount rate | 4.12 | % | 3.43 | % | 3.75 | % |
| Compensation increases | 3.60 |
| 3.55 |
| 3.80 |
|
| Initial healthcare trend rate(a) | 6.00 |
| 6.00 |
| 6.00 |
|
| |
(a) | For 2018, ultimately declining to 5% for 2030 and thereafter.
|
The healthcare trend assumptions apply to our pre-65 retiree medical plans. Our post-65 retiree plan has a fixed subsidy and therefore is not subject to healthcare inflation. The discount rate used to measure the benefit obligation at the end of the year is also used to measure benefit cost in the following year. The assumptions used to measure benefit cost follow.
|
| | | | | | |
ASSUMPTIONS USED TO MEASURE BENEFIT COST December 31 | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Discount rate(a) | 3.43 | % | 3.75 | % | 3.93 | % |
| Expected return on assets | 7.00 |
| 7.00 |
| 7.00 |
|
| |
(a) | Weighted average discount rate of 3.86% was used for determination of cost in 2016. |
|
| | | | | | |
FUNDED STATUS December 31 (In millions) | 2018 |
| 2017 |
|
| | | |
| Accumulated postretirement benefit obligation | $ | 5,153 |
| $ | 6,006 |
|
| Fair value of plan assets | 362 |
| 518 |
|
| Underfunded | $ | 4,791 |
| $ | 5,488 |
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | |
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (In millions) | 2018 |
| 2017 |
|
| | | |
| Balance at January 1 | $ | 6,006 |
| $ | 6,289 |
|
| Service cost for benefits earned | 63 |
| 94 |
|
| Interest cost on benefit obligations | 196 |
| 224 |
|
| Participant contributions | 60 |
| 54 |
|
| Plan amendments | — |
| (8 | ) |
| Actuarial gain(a) | (593 | ) | (94 | ) |
| Benefits paid | (569 | ) | (580 | ) |
| Acquisitions (dispositions) / other - net | (10 | ) | 27 |
|
| Balance at December 31(b) | $ | 5,153 |
| $ | 6,006 |
|
| |
(a) | In 2018, gain principally due to increase in discount rate and favorable cost trends. |
| |
(b) | The benefit obligation for retiree health plans was $3,425 million and $4,084 million at December 31, 2018 and 2017, respectively. |
THE COMPOSITION OF OUR PLAN ASSETS
The fair value of principal retiree benefit plans’ investments was $362 million and $518 million at December 31, 2018 and 2017, respectively, comprising global equity and debt securities. The inputs and valuation techniques used to measure the fair value of the assets are consistently applied and described in Note 1.
There were no Level 3 investments held in 2018 and 2017. These investments were all considered Level 1 and 2. Principal retiree benefit plan assets that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy.
|
| | | |
| ASSET ALLOCATION | 2018 | 2018 |
|
December 31 | Target allocation | Actual allocation |
|
| | | |
| Global equity | 54 - 74% | 63 | % |
| Debt securities (including cash equivalents) | 16 - 55 | 28 |
|
| Private equities & other investments | 0 - 12 | 9 |
|
AMOUNTS INCLUDED IN SHAREOWNERS’ EQUITY
Amounts included in shareowners’ equity that will be amortized in future reporting periods follow.
|
| | | | | | |
| December 31 (In millions, pre-tax) | 2018 |
| 2017 |
|
| | | |
| Prior service credit | $ | (2,584 | ) | $ | (2,814 | ) |
| Net actuarial gain | (1,196 | ) | (732 | ) |
| Total | $ | (3,780 | ) | $ | (3,546 | ) |
The estimated prior service credit and net actuarial gain to be amortized in 2019 will be $230 million and $120 million, respectively. Comparable amounts amortized in 2018 were $230 million of prior service credit and $79 million of net actuarial gain.
OUR FUNDING POLICY
2020. We fund retiree health benefits on a pay-as-you-go basis and the retiree life insurance trust at our discretion. We expect to contribute approximately $385$360 million in 20192020 to fund such benefits. In 2018, we contributed $370
|
| | | | | | | | | | | |
EXPECTED FUTURE BENEFIT PAYMENTS OF OUR BENEFIT PLANS (In millions) | Principal pension |
| | Other pension |
| | Principal retiree benefit |
|
| | | | | | |
| 2020 | $ | 3,795 |
| | $ | 1,030 |
| | $ | 495 |
|
| 2021 | 3,875 |
| | 1,005 |
| | 475 |
|
| 2022 | 3,930 |
| | 1,015 |
| | 455 |
|
| 2023 | 3,965 |
| | 1,035 |
| | 435 |
|
| 2024 | 3,980 |
| | 1,050 |
| | 415 |
|
| 2025 - 2029 | 19,965 |
| | 5,550 |
| | 1,775 |
|
DEFINED CONTRIBUTION PLAN. We have a defined contribution plan for eligible U.S. employees that provides discretionary contributions. Defined contribution costs were $355 million, $410 million and $460 million for these plans.
the years ended December 31, 2019, 2018, and 2017, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COST OF POSTRETIREMENT BENEFIT PLANS AND CHANGES IN OTHER COMPREHENSIVE INCOME | |
| For the years ended December 31 | 2019 | | 2018 | | 2017 |
| (In millions, pre-tax) | Principal pension |
| Other pension |
| Principal retiree benefit |
| | Principal pension |
| Other pension |
| Principal retiree benefit |
| | Principal pension |
| Other pension |
| Principal retiree benefit |
|
| | | | | | | | | | | | |
| Cost (income) of postretirement benefit plans | $ | 3,929 |
| $ | (21 | ) | $ | (149 | ) | | $ | 4,260 |
| $ | (110 | ) | $ | (79 | ) | | $ | 3,687 |
| $ | 364 |
| $ | 35 |
|
| Changes in other comprehensive income | | | | | | | | | | | |
| Prior service cost (credit) - current year | (42 | ) | (17 | ) | (23 | ) | | — |
| 82 |
| — |
| | — |
| — |
| (8 | ) |
| Actuarial loss (gain) - current year | 971 |
| 1,252 |
| 240 |
| | (111 | ) | 464 |
| (543 | ) | | 474 |
| (639 | ) | (128 | ) |
| Reclassifications out of AOCI | | | | | | | | | | | |
| Curtailment / settlement gain (loss) | (353 | ) | (12 | ) | 4 |
| | (45 | ) | (2 | ) | — |
| | (64 | ) | (20 | ) | (4 | ) |
| Amortization of net actuarial gain (loss) | (3,439 | ) | (319 | ) | 118 |
| | (3,785 | ) | (312 | ) | 79 |
| | (2,812 | ) | (418 | ) | 80 |
|
| Amortization of prior service credit (cost) | (135 | ) | (3 | ) | 232 |
| | (143 | ) | 9 |
| 230 |
| | (290 | ) | 5 |
| 171 |
|
| Total changes in other comprehensive income | (2,998 | ) | 901 |
| 571 |
| | (4,084 | ) | 241 |
| (234 | ) | | (2,692 | ) | (1,072 | ) | 111 |
|
| Cost of postretirement benefit plans and changes in other comprehensive income | $ | 931 |
| $ | 880 |
| $ | 422 |
| | $ | 176 |
| $ | 131 |
| $ | (313 | ) | | $ | 995 |
| $ | (708 | ) | $ | 146 |
|
|
| | | | | | | | | | | | | | | | | | |
ESTIMATED FUTURE BENEFIT PAYMENTS (In millions) | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 - 2028 |
|
| | | | | | | |
| | $ | 520 |
| $ | 500 |
| $ | 480 |
| $ | 465 |
| $ | 450 |
| $ | 1,950 |
|
GE20182019 FORM 10-K 132
93
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 14. CURRENT AND ALL OTHER LIABILITIES
|
| | | | | | |
December 31 (In millions) | 2019 |
| 2018 |
|
|
|
|
| Sales allowances, equipment projects and other commercial liabilities | $ | 5,203 |
| $ | 5,255 |
|
| Product warranties (Note 23) | 1,371 |
| 1,346 |
|
| Employee compensation and benefit liabilities | 5,114 |
| 5,138 |
|
| Taxes payable | 1,349 |
| 503 |
|
| Environmental, health and safety liabilities (Note 23) | 330 |
| 204 |
|
| Due to GE Capital | 1,080 |
| 1,578 |
|
| Other | 2,385 |
| 2,422 |
|
| Other GE current liabilities | 16,833 |
| 16,444 |
|
| Eliminations | (1,080 | ) | (1,578 | ) |
| Consolidated other GE current liabilities | $ | 15,753 |
| $ | 14,866 |
|
|
|
|
| Sales allowances, equipment projects and other commercial liabilities | 4,422 |
| 5,136 |
|
| Product warranties (Note 23) | 793 |
| 846 |
|
| Uncertain tax positions and related liabilities | 2,585 |
| 3,404 |
|
| Alstom legacy legal matters (Note 23) | 875 |
| 889 |
|
| Environmental, health and safety liabilities (Note 23) | 2,154 |
| 1,968 |
|
| Redeemable noncontrolling interests (Note 16) | 439 |
| 378 |
|
| Derivative instruments (Note 21) | 171 |
| 328 |
|
| Other | 1,349 |
| 1,931 |
|
| GE all other liabilities | $ | 12,787 |
| $ | 14,881 |
|
|
|
|
| Aircraft maintenance reserve, sales deposits and other commercial liabilities | 2,900 |
| 2,585 |
|
| Interest payable | 1,189 |
| 1,458 |
|
| Uncertain tax positions and other taxes payable | 394 |
| 1,646 |
|
| Derivative instruments (Note 21) | 31 |
| 258 |
|
| Other | 525 |
| 1,615 |
|
| GE Capital other liabilities | $ | 5,040 |
| $ | 7,562 |
|
| Eliminations | (1,244 | ) | (1,605 | ) |
| Consolidated all other liabilities | $ | 16,583 |
| $ | 20,839 |
|
| Total | $ | 32,336 |
| $ | 35,705 |
|
|
| | | | | | | | | | | | |
2018 COST OF POSTRETIREMENT BENEFIT PLANS AND CHANGES IN OTHER COMPREHENSIVE INCOME (In millions, pre-tax) | Total postretirement benefit plans |
| Principal pension plans |
| Other pension plans |
| Principal retiree benefit plans |
|
| | | | | |
| Cost of postretirement benefit plans | $ | 4,050 |
| $ | 4,260 |
| $ | (131 | ) | $ | (79 | ) |
| Changes in other comprehensive income | | | | |
| Prior service cost (credit) – current year | 89 |
| — |
| 89 |
| — |
|
| Net actuarial loss (gain) – current year | (103 | ) | (111 | ) | 551 |
| (543 | ) |
| Reclassification out of AOCI: | | | | |
| Net curtailment gain (loss) | (52 | ) | (45 | ) | (7 | ) | — |
|
| Prior service credit (cost) amortization | 96 |
| (143 | ) | 9 |
| 230 |
|
| Net actuarial gain (loss) amortization | (4,028 | ) | (3,785 | ) | (322 | ) | 79 |
|
| Total changes in other comprehensive income | (3,998 | ) | (4,084 | ) | 320 |
| (234 | ) |
Cost of postretirement benefit plans and changes in other comprehensive income | $ | 52 |
| $ | 176 |
| $ | 189 |
| $ | (313 | ) |
|
| | | | | | | | | | | | |
2017 COST OF POSTRETIREMENT BENEFIT PLANS AND CHANGES IN OTHER COMPREHENSIVE INCOME
(In millions, pre-tax) | Total
postretirement
benefit plans |
| Principal pension
plans |
| Other pension
plans |
| Principal retiree
benefit plans |
|
| | | | | |
| Cost of postretirement benefit plans | $ | 4,056 |
| $ | 3,687 |
| $ | 334 |
| $ | 35 |
|
| Changes in other comprehensive income | | | | |
| Prior service cost (credit) – current year | (8 | ) | — |
| — |
| (8 | ) |
| Net actuarial loss (gain) – current year | (310 | ) | 474 |
| (656 | ) | (128 | ) |
| Reclassification out of AOCI: | | | | |
| Net curtailment gain (loss) | (88 | ) | (64 | ) | (20 | ) | (4 | ) |
| Prior service credit (cost) amortization | (114 | ) | (290 | ) | 5 |
| 171 |
|
| Net actuarial gain (loss) amortization | (3,161 | ) | (2,812 | ) | (429 | ) | 80 |
|
| Total changes in other comprehensive income | (3,681 | ) | (2,692 | ) | (1,100 | ) | 111 |
|
Cost of postretirement benefit plans and changes in other comprehensive income | $ | 375 |
| $ | 995 |
| $ | (766 | ) | $ | 146 |
|
|
| | | | | | | | | | | | |
2016 COST OF POSTRETIREMENT BENEFIT PLANS AND CHANGES IN OTHER COMPREHENSIVE INCOME
(In millions, pre-tax) | Total
postretirement
benefit plans |
| Principal pension
plans |
| Other pension
plans |
| Principal retiree
benefit plans |
|
| | | | | |
| Cost of postretirement benefit plans | $ | 4,112 |
| $ | 3,623 |
| $ | 374 |
| $ | 115 |
|
| Changes in other comprehensive income | | | | |
| Prior service cost (credit) – current year | (61 | ) | — |
| (54 | ) | (7 | ) |
| Net actuarial loss (gain) – current year | 4,038 |
| 2,317 |
| 1,989 |
| (268 | ) |
| Reclassification out of AOCI: | | | | |
| Net curtailment gain (loss) | (50 | ) | (31 | ) | (19 | ) | — |
|
| Prior service credit (cost) amortization | (140 | ) | (303 | ) | (1 | ) | 164 |
|
| Net actuarial gain (loss) amortization | (2,655 | ) | (2,449 | ) | (256 | ) | 50 |
|
| Total changes in other comprehensive income | 1,132 |
| (466 | ) | 1,659 |
| (61 | ) |
Cost of postretirement benefit plans and changes in other comprehensive income | $ | 5,244 |
| $ | 3,157 |
| $ | 2,033 |
| $ | 54 |
|
NOTE 14.15. INCOME TAXES
GE and GE Capital file a consolidated U.S. federal income tax return. This enables GE and GE Capital to use tax deductions and credits of one member of the group to reduce the tax that otherwise would have been payable by another member of the group. The effective tax rate reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GE Capital for tax reductions and GE Capital pays for tax increases at the time GE’s tax payments are due.
Our businesses are subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. Changes to these laws or regulations may affect our tax liability, return on investments and business operations.
|
| | | | | | | | | |
(BENEFIT) PROVISION FOR INCOME TAXES (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Current tax expense (benefit) | $ | 2,551 |
| $ | 1,743 |
| $ | 2,405 |
|
| Deferred tax expense (benefit) from temporary differences | (1,242 | ) | (1,276 | ) | 1,088 |
|
| Total GE | 1,309 |
| 467 |
| 3,493 |
|
| Current tax expense (benefit) | (720 | ) | 596 |
| (1,008 | ) |
| Deferred tax expense (benefit) from temporary differences | 138 |
| (970 | ) | (5,294 | ) |
| Total GE Capital | (582 | ) | (374 | ) | (6,302 | ) |
| Current tax expense (benefit) | 1,831 |
| 2,339 |
| 1,397 |
|
| Deferred tax expense (benefit) from temporary differences | (1,104 | ) | (2,245 | ) | (4,205 | ) |
| Total consolidated | $ | 726 |
| $ | 93 |
| $ | (2,808 | ) |
|
| | | | | | | | | |
CONSOLIDATED EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| U.S. earnings | $ | 506 |
| $ | (9,861 | ) | $ | (17,918 | ) |
| Non-U.S. earnings | 643 |
| (11,126 | ) | 6,573 |
|
| Total | $ | 1,149 |
| $ | (20,987 | ) | $ | (11,345 | ) |
GE20182019 FORM 10-K 133 94
|
| | | | | | | | | |
CONSOLIDATED (BENEFIT) PROVISION FOR INCOME TAXES (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| U.S. Federal | | | |
| Current | $ | 146 |
| $ | 1,019 |
| $ | (734 | ) |
| Deferred | (1,266 | ) | (3,144 | ) | (3,625 | ) |
| Non - U.S. | | | |
| Current | 2,008 |
| 1,132 |
| 1,820 |
|
| Deferred | 106 |
| 1,197 |
| (429 | ) |
| Other | (267 | ) | (111 | ) | 160 |
|
| Total | $ | 726 |
| $ | 93 |
| $ | (2,808 | ) |
|
| | | | | | | | | |
INCOME TAXES PAID (RECOVERED) (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| GE | $ | 2,183 |
| $ | 1,803 |
| $ | 2,700 |
|
| GE Capital | 45 |
| 65 |
| (264 | ) |
| Total(a) | $ | 2,228 |
| $ | 1,868 |
| $ | 2,436 |
|
(a) Includes tax payments reported in discontinued operations.
|
| | | | | | | | | | | | | | | | | | | | |
| RECONCILIATION OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO ACTUAL INCOME TAX RATE | Consolidated | | GE | | GE Capital |
| 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
|
| | | | | | | | | | | | |
| U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | 35.0 | % | | 21.0 | % | 21.0 | % | 35.0 | % | | 21.0 | % | 21.0 | % | 35.0 | % |
Increase (reduction) in rate resulting from inclusion of after-tax earnings of GE Capital in before-tax earnings of GE | — |
| — |
| — |
| | 8.8 |
| (0.5 | ) | (43.2 | ) | | — |
| — |
| — |
|
| Tax on global activities including exports | 91.0 |
| (5.0 | ) | 30.3 |
| | 86.5 |
| (5.0 | ) | 34.6 |
| | 8.1 |
| 3.2 |
| 12.2 |
|
| U.S. business credits(a) | (22.5 | ) | 2.6 |
| 4.3 |
| | (9.1 | ) | 0.4 |
| 1.5 |
| | 21.9 |
| 120.0 |
| 3.2 |
|
| Goodwill impairments | 26.0 |
| (21.5 | ) | (7.8 | ) | | 23.5 |
| (21.4 | ) | (7.3 | ) | | — |
| — |
| (3.8 | ) |
| Tax Cuts and Jobs Act enactment | 0.2 |
| (0.2 | ) | (39.8 | ) | | 7.9 |
| 0.5 |
| (89.6 | ) | | 15.2 |
| (36.5 | ) | 3.1 |
|
| All other – net(b)(c)(d) | (52.5 | ) | 2.7 |
| 2.8 |
| | (35.6 | ) | 2.8 |
| 5.2 |
| | 23.1 |
| (8.0 | ) | 0.2 |
|
| | 42.2 |
| (21.4 | ) | (10.2 | ) | | 82.0 |
| (23.2 | ) | (98.8 | ) | | 68.3 |
| 78.7 |
| 14.9 |
|
| Actual income tax rate | 63.2 | % | (0.4 | )% | 24.8 | % | | 103.0 | % | (2.2 | )% | (63.8 | )% | | 89.3 | % | 99.7 | % | 49.9 | % |
| |
| (a) | U.S. general business credits, primarily the credit for energy produced from renewable sources and the credit for research performed in the U.S. |
| |
| (b) | Included, for each period, the expense or benefit for Other taxes reported above in the consolidated (benefit) provision for income taxes, net of 21.0% federal effect for the years ended December 31, 2019 and 2018 and 35.0% federal effect for the year ended December 31, 2017. |
| |
| (c) | For the year ended December 31, 2019, included (12.5)% and (11.3)% in consolidated and GE, respectively, related to the disposition of the Digital ServiceMax business. For the year ended December 31, 2018, included 2.8% and 2.8% in consolidated and GE, respectively, related to deductible stock losses. Included in 2017 is 5.6% and 11.7% in consolidated and GE, respectively, related to the disposition of the Water business. Also included in 2017 is (3.1)% and (6.4)% in consolidated and GE, respectively, related to losses on planned dispositions. |
| |
| (d) | For the year ended December 31, 2019, included (32.9)%, (27.9)% and 3.5% in consolidated, GE and GE Capital, respectively for the resolution of the IRS audit of our consolidated U.S. income tax returns for 2012-2013. |
U.S. TAX REFORM
REFORM.On December 22, 2017, the U.S. enacted legislation commonly known as the Tax Cuts and Jobs Act (“U.S.(U.S. tax reform”)reform) that lowered the statutory tax rate on U.S. earnings to 21%, taxes historic foreign earnings at a reduced rate of tax, establishes a territorial tax system and enacts new taxes associated with global operations.
The impact of enactment of U.S. tax reform was recorded in 2017 on a provisional basis as the legislation provided for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. This amount was adjusted in both 2018 and 2019 based on guidance issued during the year.each of these years. Additional guidance may be issued after 20182019 and any resulting effects will be recorded in the quarter of issuance. Additionally, as part of U.S. tax reform, the U.S. has enacted a minimum tax on foreign earnings (“global(global intangible low tax income”)income). We have not made an accrual for the deferred tax aspects of this provision.
With the enactment of U.S. tax reform, we recorded, for the year ended December 31, 2017, tax expense of $4,512 million to reflect our provisional estimate of both the transition tax on historic foreign earnings ($1,155 million including $2,925 million at GE and $(1,770) million at GE Capital) and the revaluation of deferred taxes ($3,357 million including $1,980 million at GE and $1,377 million at GE Capital). For the year ended December 31, 2018, we finalized our provisional estimate of the enactment of U.S. tax reform and recorded an additional tax expense of $41 million.
For the year ended December 31, 2019, we recorded an additional tax expense of $2 million based on the issuance in January 2019 of final regulations on the transition tax on historic foreign earnings. The cash impact of the transition tax on historic foreign earnings was largely offset by accelerated use of deductions and tax credits and was substantially incurred with the filing of the 2017 tax return with no amount subject to the deferred payment provision provided under law. |
| | | | | | | | | |
(BENEFIT) PROVISION FOR INCOME TAXES (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| GE | | | |
| Current tax expense (benefit) | $ | 2,451 |
| $ | 2,810 |
| $ | (140 | ) |
| Deferred tax expense (benefit) from temporary differences | (1,494 | ) | 881 |
| 438 |
|
| | 957 |
| 3,691 |
| 298 |
|
| GE Capital | | | |
| Current tax expense (benefit) | 596 |
| (1,008 | ) | (1,138 | ) |
| Deferred tax expense (benefit) from temporary differences | (970 | ) | (5,294 | ) | (293 | ) |
| | (374 | ) | (6,302 | ) | (1,431 | ) |
| Consolidated | | | |
| Current tax expense (benefit) | 3,047 |
| 1,802 |
| (1,278 | ) |
| Deferred tax expense (benefit) from temporary differences | (2,464 | ) | (4,413 | ) | 145 |
|
| Total | $ | 583 |
| $ | (2,611 | ) | $ | (1,133 | ) |
|
| | | | | | | | | |
CONSOLIDATED EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| U.S. earnings | $ | (10,197 | ) | $ | (18,935 | ) | $ | 535 |
|
| Non-U.S. earnings | (9,937 | ) | 7,784 |
| 6,496 |
|
| Total | $ | (20,134 | ) | $ | (11,151 | ) | $ | 7,031 |
|
|
| | | | | | | | | |
CONSOLIDATED (BENEFIT) PROVISION FOR INCOME TAXES (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| U.S. Federal | | | |
| Current | $ | 954 |
| $ | (823 | ) | $ | (2,646 | ) |
| Deferred | (3,393 | ) | (3,740 | ) | (1,217 | ) |
| Non - U.S. | | | |
| Current | 1,859 |
| 2,286 |
| 1,730 |
|
| Deferred | 1,240 |
| (522 | ) | 1,054 |
|
| Other | (78 | ) | 188 |
| (54 | ) |
| Total | $ | 583 |
| $ | (2,611 | ) | $ | (1,133 | ) |
|
| | | | | | | | | |
INCOME TAXES PAID (RECOVERED) (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| GE | $ | 1,803 |
| $ | 2,700 |
| $ | 2,612 |
|
| GE Capital | 65 |
| (264 | ) | 4,857 |
|
| Total(a) | $ | 1,868 |
| $ | 2,436 |
| $ | 7,469 |
|
(a) Includes tax payments reported in discontinued operations.
|
| | | | | | | | | | | | | | | | | | | | |
| RECONCILIATION OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO ACTUAL INCOME TAX RATE | Consolidated | | GE | | GE Capital |
| 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | | | | | |
| U.S. federal statutory income tax rate | 21.0 | % | 35.0 | % | 35.0 | % | | 21.0 | % | 35.0 | % | 35.0 | % | | 21.0 | % | 35.0 | % | 35.0 | % |
Increase (reduction) in rate resulting from inclusion of after-tax earnings of GE Capital in before-tax earnings of GE | — |
| — |
| — |
| | (0.5 | ) | (44.8 | ) | 5.6 |
| | — |
| — |
| — |
|
| Tax on global activities including exports | (6.6 | ) | 31.2 |
| (29.8 | ) | | (6.6 | ) | 36.6 |
| (25.6 | ) | | 3.2 |
| 12.2 |
| 4.9 |
|
| U.S. business credits(a) | 2.7 |
| 4.5 |
| (5.8 | ) | | 0.5 |
| 1.7 |
| (1.2 | ) | | 120.0 |
| 3.2 |
| 15.7 |
|
| Goodwill impairments | (22.4 | ) | (7.9 | ) | — |
| | (22.3 | ) | (7.6 | ) | — |
| | — |
| (3.8 | ) | — |
|
| Tax Cuts and Jobs Act enactment | (0.2 | ) | (40.5 | ) | — |
| | 0.5 |
| (92.9 | ) | — |
| | (36.5 | ) | 3.1 |
| — |
|
| All other – net(b)(c) | 2.6 |
| 1.1 |
| (15.5 | ) | | 2.7 |
| 2.1 |
| (10.0 | ) | | (8.0 | ) | 0.2 |
| 14.7 |
|
| | (23.9 | ) | (11.6 | ) | (51.1 | ) | | (25.7 | ) | (104.9 | ) | (31.2 | ) | | 78.7 |
| 14.9 |
| 35.3 |
|
| Actual income tax rate | (2.9 | )% | 23.4 | % | (16.1 | )% | | (4.7 | )% | (69.9 | )% | 3.8 | % | | 99.7 | % | 49.9 | % | 70.3 | % |
| |
(a) | U.S. general business credits, primarily the credit for energy produced from renewable sources and the credit for research performed in the U.S. |
| |
(b) | Includes, for each period, the expense or benefit for “Other” taxes reported above in the consolidated (benefit) provision for income taxes, net of 21.0% federal effect for the year ended December 31, 2018 and 35.0% federal effect for the years ended December 31, 2017 and 2016. |
| |
(c) | For the year ended December 31, 2018, included 2.9% and 2.9% in consolidated and GE, respectively, and in 2016, (9.9)% and (8.9)% in consolidated and GE, respectively, related to deductible stock losses. Included in 2017 is 5.7% and 12.1% in consolidated and GE, respectively, related to the disposition of the Water business. Also included in 2017 is (3.1)% and (6.6)% in consolidated and GE, respectively, related to losses on planned dispositions. |
UNRECOGNIZED TAX POSITIONS
POSITIONS.Annually, we file over 4,3004,100 income tax returns in overalmost 300 global taxing jurisdictions. We are under examination or engaged in tax litigation in many of these jurisdictions. The Internal Revenue Service (IRS) is currently auditing our consolidated U.S. income tax returns for 2012-2013 and has begun2014-2015. In June 2019, the IRS completed the audit of our consolidated U.S. income tax returns for 2014-2015. In addition, certain other U.S. tax deficiency issues and refund claims for previous years are still unresolved. It is reasonably possible that a portion of the unresolved items could be resolved during the next 12 months,2012-2013, which could resultresulted in a decrease in our balance of “unrecognizedunrecognized tax benefits” – that is,benefits (i.e., the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements.statements). The IRS had disallowed theCompany recognized a resulting non-cash continuing operations tax loss on our 2003 dispositionbenefit of ERC Life Reinsurance Corporation. We contested the disallowance$378 million plus an additional net interest benefit of this loss. In August 2016, the government approved a final settlement$107 million. Of these amounts, GE recorded $355 million of the case and the balance of unrecognized tax benefits and associated$98 million of net interest was adjusted to reflectbenefits and GE Capital recorded $23 million of tax benefits and $9 million of net interest benefits. GE Capital recorded an additional non-cash benefit in discontinued operations of $332 million of tax benefits and $46 million of net interest benefits. See Note 2 for further information. As previously disclosed, the agreed settlement. During 2015, the IRS completed the audit of our consolidated U.S. income tax returns for 2010-2011, except for certain issues that were completed in 2016. The United Kingdom tax authorities have indicated an intent to disallowdisallowed interest deductions claimed by GE Capital for the years 2004-20152007-2015 that could result in a potential impact of approximately $1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties. If assessed, we intend to contestWe are contesting the disallowance. We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merits. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2010-2011 and the resolution of the ERC Life Reinsurance Corporation case, reduced our 2016 consolidated income tax rate by 6.8 percentage points.
The balance of unrecognized tax benefits, the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were:
| | UNRECOGNIZED TAX BENEFITS December 31 (Dollars in millions) | 2018 |
| 2017 |
| 2019 |
| 2018 |
|
| | | |
| Unrecognized tax benefits | $ | 5,563 |
| $ | 5,449 |
| $ | 4,169 |
| $ | 5,563 |
|
| Portion that, if recognized, would reduce tax expense and effective tax rate(a) | 4,265 |
| 3,626 |
| 2,701 |
| 4,265 |
|
| Accrued interest on unrecognized tax benefits | 934 |
| 810 |
| 722 |
| 934 |
|
| Accrued penalties on unrecognized tax benefits | 182 |
| 158 |
| 195 |
| 182 |
|
Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months | 0-1,300 |
| 0-1,100 |
| 0-700 |
| 0-1,300 |
|
| Portion that, if recognized, would reduce tax expense and effective tax rate(a) | 0-1,200 |
| 0-900 |
| 0-650 |
| 0-1,200 |
|
| |
(a) | (a) Some portion of such reduction may be reported as discontinued operations. |
| | UNRECOGNIZED TAX BENEFITS RECONCILIATION (In millions) | 2018 |
| 2017 |
| 2019 |
| 2018 |
|
| | | |
| Balance at January 1 | $ | 5,449 |
| $ | 4,692 |
| $ | 5,563 |
| $ | 5,449 |
|
| Additions for tax positions of the current year | 300 |
| 260 |
| 403 |
| 300 |
|
Additions for tax positions of prior years(a) | 945 |
| 791 |
| 500 |
| 945 |
|
Reductions for tax positions of prior years | (905 | ) | (113 | ) | (1,927 | ) | (905 | ) |
| Settlements with tax authorities | (64 | ) | (57 | ) | (155 | ) | (64 | ) |
| Expiration of the statute of limitations | (162 | ) | (124 | ) | (214 | ) | (162 | ) |
| Balance at December 31 | $ | 5,563 |
| $ | 5,449 |
| $ | 4,169 |
| $ | 5,563 |
|
| |
| (a) | For 2017, the amount shown as “additions for tax positions of prior years”2019, reductions included $326$710 million related to uncertain tax liabilities acquired in the completion of the 2012-2013 IRS audit and $442 million related to the deconsolidation of Baker Hughes transaction.Hughes. |
We classify interest on tax deficiencies as interest expense; we classify income tax penalties as provision for income taxes. For the years ended December 31, 2019, 2018 and 2017, and 2016,$(93) million, $127 million $143 million and $(105)$143 million of interest expense (income), respectively, and $20 million, $(7) million $7 million and $(4)$7 million of tax expense (income) related to penalties, respectively, were recognized in our consolidated Statement of Earnings (Loss).
DEFERRED INCOME TAXES
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates (including the U.S. tax rate of 21% beginning in 2018 as a result of U.S. tax reform) expected to be in effect when taxes are paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we consider it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is established.
Deferred taxes, as needed, are provided for our investment in affiliates and associated companies when we plan to remit those earnings. TAXES.We have not provided deferred taxes on cumulative net earnings of non-U.S. affiliates and associated companies of approximately $43$40 billion that have been reinvested indefinitely. SubstantiallyGiven U.S. tax reform, substantially all of our prior unrepatriated earnings were subject to U.S. tax as a result of U.S. tax reform and accordingly we expect to have the ability to repatriate these earningsavailable non-U.S. cash without additional federal tax cost, and any foreign withholding tax on a repatriation to the U.S. would potentially be partially offset by a U.S. foreign tax credit. However, because most of these earnings have been reinvested in active non-U.S. business operations, as of December 31, 2018,2019, we have not decided to repatriate these earnings to the U.S. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
|
| | | | | | |
DEFERRED INCOME TAXES December 31 (In millions) | 2018 |
| 2017 |
|
| | | |
| Assets | | |
| GE | $ | 14,777 |
| $ | 16,013 |
|
| GE Capital | 6,214 |
| 6,176 |
|
| | 20,991 |
| 22,189 |
|
| Liabilities | | |
| GE | (4,286 | ) | (8,197 | ) |
| GE Capital | (4,278 | ) | (5,177 | ) |
| Eliminations | 5 |
| 4 |
|
| | (8,559 | ) | (13,370 | ) |
| Net deferred income tax asset (liability) | $ | 12,432 |
| $ | 8,819 |
|
|
| | | | | | |
DEFERRED INCOME TAXES December 31 (In millions) | 2019 |
| 2018 |
|
| | | |
| GE | $ | 12,807 |
| $ | 14,479 |
|
| GE Capital | 5,124 |
| 6,214 |
|
| Total assets | 17,931 |
| 20,693 |
|
| GE | (4,618 | ) | (4,302 | ) |
| GE Capital | (3,424 | ) | (4,278 | ) |
| Eliminations | — |
| 4 |
|
| Total liabilities | (8,042 | ) | (8,576 | ) |
| Net deferred income tax asset (liability) | $ | 9,889 |
| $ | 12,117 |
|
| | COMPONENTS OF THE NET DEFERRED INCOME TAX ASSET (LIABILITY) December 31 (In millions) | 2018 |
| 2017 |
| 2019 |
| 2018 |
|
| | | |
| GE | | |
| Principal pension plans | $ | 3,883 |
| $ | 3,911 |
| $ | 4,016 |
| $ | 3,883 |
|
| Other non-current compensation and benefits | 2,553 |
| 2,780 |
| 2,206 |
| 2,431 |
|
| Provision for expenses | 2,480 |
| 2,485 |
| 1,990 |
| 2,208 |
|
| Intangible assets | | 1,315 |
| 820 |
|
| Retiree insurance plans | 1,006 |
| 1,152 |
| 1,023 |
| 1,006 |
|
| Non-U.S. loss carryforwards(a) | 1,568 |
| 2,078 |
| 602 |
| 1,362 |
|
| U.S. credit carryforwards(b) | 74 |
| 1,932 |
| 74 |
| 74 |
|
| Baker Hughes investment | | (1,256 | ) | 721 |
|
| Contract assets | (1,874 | ) | (2,925 | ) | (1,232 | ) | (1,781 | ) |
| Intangible assets | 1,303 |
| (2,033 | ) | |
| Depreciation | (720 | ) | (1,022 | ) | (823 | ) | (855 | ) |
| Other – net | 218 |
| (543 | ) | |
| | 10,491 |
| 7,815 |
| |
| GE Capital | | |
| Other – net(c) | | 274 |
| 307 |
|
| GE | | 8,189 |
| 10,176 |
|
| Operating leases | (2,690 | ) | (2,689 | ) | (2,218 | ) | (2,690 | ) |
| Financing leases | (599 | ) | (877 | ) | (477 | ) | (599 | ) |
| Energy investments | (144 | ) | (754 | ) | |
| Intangible assets | (16 | ) | (25 | ) | (10 | ) | (16 | ) |
| U.S. credit carryforwards(b) | 2,491 |
| 1,632 |
| |
| Insurance company loss reserves | 1,386 |
| 1,373 |
| 1,715 |
| 1,386 |
|
| Non-U.S. loss carryforwards(a) | 1,231 |
| 1,271 |
| 1,274 |
| 1,231 |
|
| Other – net | 277 |
| 1,068 |
| |
| | 1,936 |
| 999 |
| |
| U.S. credit carryforwards(b) | | 785 |
| 2,491 |
|
| Other – net(c) | | 631 |
| 133 |
|
| GE Capital | | 1,700 |
| 1,936 |
|
| Eliminations | 5 |
| 4 |
| — |
| 4 |
|
| Net deferred income tax asset (liability) | $ | 12,432 |
| $ | 8,819 |
| $ | 9,889 |
| $ | 12,117 |
|
| |
| (a) | Net of valuation allowances of $5,103$4,801 million and $4,251$3,799 million for GE and $767$201 million and $448$767 million for GE Capital foras of December 31, 2019 and 2018, and 2017, respectively. Of the net deferred tax asset as of December 31, 20182019 of $2,799$1,876 million, $37$3 million relates to net operating loss carryforwards that expire in various years ending from December 31, 20192020 through December 31, 2021; $3142022; $193 million relates to net operating losses that expire in various years ending from December 31, 20222023 through December 31, 20382039 and $2,448$1,680 million relates to net operating loss carryforwards that may be carried forward indefinitely. |
| |
| (b) | Of the net deferred tax asset as of December 31, 20182019 of $2,565$859 million for U.S. credit carryforwards, $1,144 million expires in the year ending December 31, 2027 through 2028, $74 million expires in the years ending December 31, 2030 through 2032 and $1,347$785 million expires in various years ending from December 31, 20332036 through December 31, 2038.2039. |
(c) Included valuation allowances related to assets other than non-U.S. loss carryforwards of $1,897 million and $1,002 million for GE and $248 million and $131 million for GE Capital as of December 31, 2019 and 2018, respectively.
GE20182019 FORM 10-K 137 97
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 15. SHAREOWNERS’16. SHAREHOLDERS’ EQUITY
|
| | | | | | | | | |
| (In millions) | 2018 |
| 2017 |
| 2016 |
|
| Preferred stock issued | $ | 6 |
| $ | 6 |
| $ | 6 |
|
| Common stock issued | $ | 702 |
| $ | 702 |
| $ | 702 |
|
| Accumulated other comprehensive income (loss) | | | |
| Balance at January 1 | $ | (14,404 | ) | $ | (18,588 | ) | $ | (16,532 | ) |
| Other comprehensive income (loss) before reclassifications | | | |
| Investment securities - net of deferred taxes of $41, $(335), $84(a) | 87 | (627) | 170 |
| Currency translation adjustments (CTA) - net of deferred taxes of $29, $(537), $719 | (2,076) | 846 | (1,593) |
| Cash flow hedges - net of deferred taxes of $(26), $31, $(41) | (149) | 171 | (234) |
| Benefit plans - net of deferred taxes of $115, $32, $(1,016) | 71 | 550 | (2,946) |
| Total | $ | (2,066 | ) | $ | 940 |
| $ | (4,603 | ) |
| Reclassifications from other comprehensive income | | | |
| Investment securities - net of deferred taxes of $(6), $(81), $30(b) | (23 | ) | (149 | ) | 34 |
|
| Currency translation gains (losses) on dispositions - net of deferred taxes of $89, $(543), $241(b) | 412 |
| 1,333 |
| 294 |
|
| Cash flow hedges - net of deferred taxes of $4, $(28), $37(c) | 98 |
| (120 | ) | 327 |
|
| Benefit plans - net of deferred taxes of $2,610, $1,111, $966(d) | 1,345 |
| 2,232 |
| 1,878 |
|
| Total(e)(f) | $ | 1,831 |
| $ | 3,296 |
| $ | 2,533 |
|
| Other comprehensive income (loss) | (235 | ) | 4,236 |
| (2,070 | ) |
| Less other comprehensive income (loss) attributable to noncontrolling interests | (225 | ) | 51 |
| (14 | ) |
| Other comprehensive income (loss), net, attributable to GE | $ | (10 | ) | $ | 4,184 |
| $ | (2,056 | ) |
| Balance at December 31 | $ | (14,414 | ) | $ | (14,404 | ) | $ | (18,588 | ) |
| Other capital | | | |
| Balance at January 1 | $ | 37,384 |
| $ | 37,224 |
| $ | 37,613 |
|
| Gains (losses) on treasury stock dispositions and other(g) | (1,880 | ) | 160 |
| (389 | ) |
| Balance at December 31 | $ | 35,504 |
| $ | 37,384 |
| $ | 37,224 |
|
| Retained earnings | | | |
| Balance at January 1(h) | $ | 117,245 |
| $ | 133,857 |
| $ | 135,677 |
|
| Net earnings (loss) attributable to the Company | (22,355 | ) | (8,484 | ) | 7,500 |
|
| Dividends and other transactions with shareowners | (3,669 | ) | (7,741 | ) | (9,054 | ) |
| Redemption value adjustment on redeemable noncontrolling interests(i) | (374 | ) | (388 | ) | (267 | ) |
| Changes in accounting(j) | 2,261 |
| — |
| — |
|
| Balance at December 31 | $ | 93,109 |
| $ | 117,245 |
| $ | 133,857 |
|
| Common stock held in treasury | | | |
| Balance at January 1 | $ | (84,902 | ) | $ | (83,038 | ) | $ | (63,539 | ) |
| Purchases | (268 | ) | (3,849 | ) | (22,073 | ) |
| Dispositions | 1,244 |
| 1,985 |
| 2,574 |
|
| Balance at December 31 | $ | (83,925 | ) | $ | (84,902 | ) | $ | (83,038 | ) |
| Total equity | | | |
| GE shareowners' equity balance | $ | 30,981 |
| $ | 56,030 |
| $ | 70,162 |
|
| Noncontrolling interests balance | 20,500 |
| 17,468 |
| 1,663 |
|
| Total equity balance at December 31 | $ | 51,481 |
| $ | 73,498 |
| $ | 71,825 |
|
| |
(a) | Included adjustments of $1,825 million, $(1,259) million and $(57) million in 2018, 2017 and 2016, respectively, to investment contracts, insurance liabilities and annuity benefits in our run-off insurance operations to reflect the effects that would have been recognized had the related unrealized investment securities holding gains and losses been realized. See Note 12 for further information. |
| |
(b) | Primarily recorded in "GE Capital Revenues from Services" and "Other income" and income taxes in "Benefit (provision) for income taxes" in our consolidated Statement of Earnings (Loss). Currency translation gains and losses on dispositions included zero, $483 million and $211 million in 2018, 2017 and 2016, respectively, in earnings (loss) from discontinued operations, net of taxes. |
| |
(c) | Cash flow hedges primarily includes impact of foreign exchange contracts and gains and losses) on interest rate derivatives, primarily recorded in GE Capital revenue from services, interest and other financial charges and other costs and expenses. See Note 20.
|
| |
(d) | Primarily includes amortization of actuarial gains and losses, amortization of prior service cost and curtailment gain and loss. These components are included in the computation of net periodic pension cost. See Note 13 for further information.
|
| |
(e) | Included $227 million and $782 million after-tax reclassification of AOCI to Other Capital as part of the loss from sale of 12.1% economic interest in BHGE in November, 2018, and recognition of noncontrolling interest in BHGE in 2017, respectively. |
| |
(f) | Included $(1,815) million deferred tax AOCI, primarily related to benefit plans $(1,740) million, reclassified to retained earnings for stranded tax effects as a result of adoption of ASU 2018-02 in 2018. |
| |
(g) | Included $(1,696) million loss recorded in Other Capital from the sale of 12.1% economic interest in BHGE in November 2018. |
| |
(h) | January 1, 2018 amount has been adjusted to reflect retrospective adoption of ASC 606 $(8,061) million and preferable accounting change from LIFO to FIFO $(377) million. |
| |
(i) | Amount of redemption value adjustment on redeemable noncontrolling interest shown net of deferred taxes. |
| |
(j) | On January 1, 2018, we adopted several new accounting standards on a modified retrospective basis. Cumulative impact of these changes was recorded in the opening retained earnings and it increased our retained earnings by $446 million, primarily due to an increase of $410 million related to ASU 2016-16. In the fourth quarter of 2018, we adopted ASU 2018-02 and reclassified $1,815 stranded tax effects from the Tax Cuts and Jobs act on AOCI to retained earnings. See Note 1 for further information. |
|
| | | | | | | | | | | |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (In millions) | 2019 |
| | 2018 |
| | 2017 |
|
| | | | | | |
| Beginning balance | $ | (39 | ) | | $ | (102 | ) | | $ | 674 |
|
| Other comprehensive income (loss) (OCI) before reclassifications – net of deferred taxes of $32, $41 and $(335)(a) | 141 |
| | 87 |
| | (627 | ) |
| Reclassifications from OCI – net of deferred taxes of $(11), $(6) and $(81) | (42 | ) | | (23 | ) | | (149 | ) |
| Other comprehensive income (loss) | 100 |
| | 64 |
| | (776 | ) |
| Less OCI attributable to noncontrolling interests | — |
| | — |
| | 1 |
|
| Investment securities ending balance | $ | 61 |
| | $ | (39 | ) | | $ | (102 | ) |
| | | | | | |
| Beginning balance | $ | (6,134 | ) | | $ | (4,661 | ) | | $ | (6,806 | ) |
| OCI before reclassifications – net of deferred taxes of $(98), $29 and $(537) | 41 |
| | (2,076 | ) | | 846 |
|
| Reclassifications from OCI – net of deferred taxes of $(9), $89 and $(543)(b) | 1,234 |
| | 412 |
| | 1,333 |
|
| Other comprehensive income (loss) | 1,275 |
| | (1,664 | ) | | 2,179 |
|
| Less OCI attributable to noncontrolling interests | (40 | ) | | (192 | ) | | 35 |
|
| Currency translation adjustments ending balance | $ | (4,818 | ) | | $ | (6,134 | ) | | $ | (4,661 | ) |
| | | | | | |
| Beginning balance | $ | 13 |
| | $ | 62 |
| | $ | 12 |
|
| OCI before reclassifications – net of deferred taxes of $6, $(26) and $31 | (21 | ) | | (149 | ) | | 171 |
|
| Reclassifications from OCI – net of deferred taxes of $2, $4 and $(28) | 58 |
| | 98 |
| | (120 | ) |
| Other comprehensive income (loss) | 37 |
| | (51 | ) | | 51 |
|
| Less OCI attributable to noncontrolling interests | 2 |
| | (2 | ) | | 1 |
|
| Cash flow hedges ending balance | $ | 49 |
| | $ | 13 |
| | $ | 62 |
|
| | | | | | |
| Beginning balance | $ | (8,254 | ) | | $ | (9,702 | ) | | $ | (12,469 | ) |
| OCI before reclassifications – net of deferred taxes of $(355), $115 and $32 | (1,820 | ) | | 71 |
| | 550 |
|
| Reclassifications from OCI – net of deferred taxes of $852, $2,610 and $1,111 | 3,048 |
| | 1,345 |
| | 2,232 |
|
| Other comprehensive income (loss) | 1,228 |
| | 1,416 |
| | 2,782 |
|
| Less OCI attributable to noncontrolling interests | (2 | ) | | (32 | ) | | 15 |
|
| Benefit plans ending balance | $ | (7,024 | ) | | $ | (8,254 | ) | | $ | (9,702 | ) |
| | | | | | |
| Accumulated other comprehensive income (loss) at December 31 | $ | (11,732 | ) | | $ | (14,414 | ) | | $ | (14,404 | ) |
GE(a) Included adjustments of $(2,693) million, $1,825 million and $(1,259) million in 2019, 2018 FORM 10-K 138and 2017, respectively, related to insurance liabilities and annuity benefits in our run-off insurance operations to reflect the effects that would have been recognized had the related unrealized investment security gains been realized. See Note 12 for further information.
(b) Currency translation gains and losses included $1,066 million, 0 and $483 million in 2019, 2018 and 2017, respectively, in earnings (loss) from discontinued operations, net of taxes.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SHARES OF GE PREFERRED STOCK
On January 20,In 2016, we issued $5,694 million of GE Series D preferred stock, following an exchange offer for existing GE series A, B and C. The Series D preferred stockwhich are callable on January 21, 2021 and bear a fixed interest rate of 5.00% through January 21, 2021 and floating rate equal2021. In addition to three-month LIBOR plus 3.33% thereafter. Following the exchange offer,Series D, $250 million of existing GE Series A, B and C preferred stock still remain outstanding with an initial average fixed dividend rate of 4.07%.are also outstanding. The total carrying value of GE preferred stock at December 31, 20182019 was $5,573$5,738 million and will increase to $5,944 million by the respective call dates through periodic accretion. Dividends on GE preferred stock are payable semi-annually in June and December and accretion is recorded on a quarterly basis. Dividends on GE preferred stock totaled $460 million, including cash dividends of $295 million, $447 million, including cash dividends of $295 million, and $436 million, including cash dividends of $295 million, and $656 million, including cash dividends of $332 million, for the years ended December 31, 2019, 2018 2017 and 2016,2017, respectively.
In conjunction with the 2016 exchange of the GE Capital preferred stock into GE preferred stock and the exchange of Series A, B and C preferred stock into Series D preferred stock, GE Capital issued preferred stock to GE for which the amount and terms mirrored the GE external preferred stock held by external investors. On July 1,stock. In 2018, GE Capital and GE exchanged the existing Series D preferred stock issued to GE for new Series D preferred stock, which is mandatorily convertible into GE Capital commonCommon stock on January 21, 2021. The new Series D preferred stock has a carrying value of $5,497 million at December 31, 2018 andAfter this conversion, GE Capital will no longer be subjectpay preferred dividends to periodic accretion. The cash dividend on the new GE Capital preferred stock will equal the cash dividend and accretion on the GE Series D preferred stock through January 21, 2021, at which time the GE Capital preferred stock will convert to GE Capital common stock.GE. The exchange of GE Capital Series D preferred stock has no impact on the GE Series D preferred stock, which remains callable for $5,694 million on January 21, 2021 or thereafter on dividend payment dates. Additionally, there were no changes to the existing Series A, B or C preferred stock issued to GE.
GE has 50.0 million authorized shares of preferred stock ($1.00 par value)., of which 5,939,875, 5,939,875 and 5,944,2505,939,875 shares are outstanding as of December 31, 2019, 2018 and 2017, and 2016, respectively.
SHARES OF GE COMMON STOCK
On April 10, 2015, we announced a new repurchase program of up to $50.0 billion in common stock, excluding the Synchrony Financial exchange we completed in 2015. Under our share purchase programs, on a book basis, we repurchased shares of 19.5 million, 129.0 million and 725.8 million for a total of $235 million, $3,783 million and $22,005 million for the years ended 2018, 2017, and 2016, respectively. The Program was flexible and shares were acquired with a combination of borrowings and free cash flow from the public markets and other sources, including GE Stock Direct, a stock purchase plan that is available to the public. Additionally, during 2016, we repurchased $11,370 million of our common stock under accelerated share repurchase (ASR) agreements.
GE’s authorized common stock consists of 13,200 million shares having a par value of $0.06 each. each, with 11,694 million shares issued. Under our share purchase programs we repurchased shares of 1.1 million, and 19.5 million, for a total of $10 million and $235 million for the years ended 2019 and 2018, respectively.
|
| | | |
COMMON SHARES ISSUES AND OUTSTANDING December 31 (In thousands) | 2018 | 2017 | 2016 |
| | | |
| Issued | 11,693,841 | 11,693,841 | 11,693,841 |
| In treasury | (2,991,614) | (3,013,270) | (2,951,227) |
| Outstanding | 8,702,227 | 8,680,571 | 8,742,614 |
NONCONTROLLING INTERESTS
Noncontrolling interests in equity of consolidated affiliates includes common shares in consolidated affiliatesamounted to $1,545 million and preferred stock issued by our affiliates.
As previously announced, we plan an orderly separation of our ownership interest in BHGE over time. In November 2018, BHGE completed an underwritten public offering in which we sold 101.2$20,500 million, shares of BHGEincluding 0 and $19,239 million attributable to Baker Hughes Class A common stock. BHGE also repurchased 65.0 million BHGE LLC units from GE. As a result, our economic interest in BHGE reduced from 62.5%shareholders at December 31, 2019 and 2018, respectively. See Note 2 for further information related to 50.4% and we recognized a loss of $2,169 million ($1,696 million after tax), which decreased the Other Capital component of shareowners' equity. Sale of Class A common stock resulted in an increase inBaker Hughes transaction. Net earnings (loss) attributable to noncontrolling interests of $4,214 million. Any reductionwere $33 million, $203 million and $(47) million in our ownership interest below 50% will result2019, 2018 and 2017, respectively. Dividends attributable to noncontrolling interests were $(331) million, $(362) million and $(222) million in us losing control of BHGE. At that point, we would deconsolidate our Oil & Gas segment, recognize any remaining interest at fair value2019, 2018 and recognize any difference between carrying value and fair value of our interest in earnings. Depending on the form and timing of our separation, and if BHGE’s stock price remains below our current carrying value, we may recognize a significant loss in earnings. Based on BHGE's share price at January 31, 2019 of $23.57 per share, the incremental loss upon deconsolidation by a sale of our interest would be approximately $8,400 million.2017, respectively.
GE20182019 FORM 10-K 139 98
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | |
CHANGES TO NONCONTROLLING INTERESTS (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | |
| Balance at January 1 | $ | 17,468 |
| $ | 1,663 |
| $ | 1,864 |
|
| Net earnings (loss) | 203 |
| (47 | ) | (46 | ) |
| Dividends | (362 | ) | (222 | ) | (72 | ) |
| Other (including AOCI)(a)(b)(c)(d) | 3,191 |
| 16,072 |
| (83 | ) |
| Balance at December 31(e) | $ | 20,500 |
| $ | 17,468 |
| $ | 1,663 |
|
| |
(a) | Included impact of AOCI, acquisitions, dispositions and BHGE stock repurchases. |
| |
(b) | Included $16,238 million related to BHGE transaction in 2017.
|
| |
(c) | Included $155 million related to Arcam AB acquisition in our Aviation segment in 2016.
|
| |
(d) | Included $(123) million for deconsolidation of investment funds managed by GE Asset Management (GEAM) upon the adoption of ASU 2015-2, Amendments to the Consolidation Analysis in 2016.
|
| |
(e) | Included $19,239 million and $15,836 million attributable to the BHGE Class A Shareholders at December 31, 2018 and 2017, respectively.
|
REDEEMABLE NONCONTROLLING INTERESTS
Redeemable noncontrolling interests presented in All other liabilities in our consolidated Statement of Financial Position include common shares issued by our affiliates that are redeemable at the option of the holder of those interests.
As partinterests and amounted to $439 million and $378 million as of the Alstom acquisition, in 2015 we formed three joint ventures in grid technology, renewable energy,December 31, 2019 and global nuclear2018, respectively. Net earnings (loss) attributable to redeemable noncontrolling interests was $33 million, $(291) million and French steam power. Noncontrolling interests in these joint ventures hold certain redemption rights. Our retained earnings is adjusted for subsequent changes in the redemption value of the noncontrolling interest in these entities to the extent that the redemption value exceeds the carrying amount of the noncontrolling interest.
Alstom had redemption rights with respect to its interest in the grid technology and renewable energy joint ventures, which, if exercised, would require us to purchase all of their interest during September 2018 or September 2019. Alstom also had similar redemption rights$(320) million for the global nuclearyears ended December 31, 2019, 2018 and French steam power joint venture that are exercisable during2017, respectively. On October 2, 2018, we settled the first quarter of 2021 or the first quarter of 2022. The redemption price would generally be equal to Alstom's initial investment plus annual accretion of 3% for the grid technology and renewable energy joint ventures and plus annual accretion of 2% for the nuclear and French steam power joint venture, with potential upside sharing based on an EBITDA multiple. Alstom also had additional redemption rights in other limited circumstances as well as a call option to require GE to sell all of its interests in the renewable energy joint venture at the higher of fair value or Alstom's initial investment plus annual accretion of 3% during the month of May in the years 2017 through 2019 and also upon a decision to IPO the joint venture.
GE had a call option on Alstom's interest in the global nuclear and French steam power joint venture at the same amount as Alstom's redemption price in the event that Alstom exercises its put option in the grid technology or renewable energy joint ventures. GE also had call options on Alstom's interest in the three joint ventures in other limited circumstances. In addition, the French Government holds a preferred interest in the global nuclear and French steam power joint venture, giving it certain protective rights.
In January 2018, Alstom informed us that they intend to exercise their redemption rights with respect to the grid technology and renewable energy joint ventures in September 2018. Pursuant to an agreement signed between Alstom and GE in May 2018, if Alstom exercised its redemption rights in September 2018 with respect to the grid technology and renewable energy joint ventures, GE would be deemed to have exercised its option to acquire Alstom’s interest in the nuclear and French steam power joint venture. On September 5, 2018, Alstom exercised its redemption rights related to grid technology and renewable energy, and accordingly GE also exercised its call option to acquire Alstom’s interest in the nuclear and French steam power joint venture. Accordingly, redeemable noncontrolling interest balance was reclassified to GE current liabilities in the third quarterassociated with3joint ventures with Alstom for a payment amount of 2018, and was settled on October 2, 2018,$3,105 million in accordance with the contractual payment terms. The price GE paid was $2,192 million for the grid technology joint venture, $763 million for the renewable energy joint venture and $150 million for the nuclear and French steam power joint venture.
|
| | | | | | | | | |
CHANGES TO REDEEMABLE NONCONTROLLING INTERESTS (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | |
| Balance at January 1 | $ | 3,391 |
| $ | 3,017 |
| $ | 2,962 |
|
| Net earnings (loss) | (291 | ) | (320 | ) | (243 | ) |
| Dividends | (19 | ) | (62 | ) | (17 | ) |
| Redemption value adjustment | 408 |
| 419 |
| 267 |
|
| Other(a)(b)(c) | (3,106 | ) | 337 |
| 49 |
|
| Balance at December 31 | $ | 382 |
| $ | 3,391 |
| $ | 3,017 |
|
| |
(a) | In 2016, included $204 million related to the Concept Laser GmbH acquisition in our Aviation segment.
|
| |
(b) | Includes impact of foreign currency changes.
|
| |
(c) | In 2018, included $(3,105) million to acquire Alstom’s interest in joint ventures described above.
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
OTHER
Common dividends from GE Capital to GE totaled zero,0, 0 and $4,105 million (including cash dividends of $4,016 million) and $20,118 million (including cash dividends of $20,095 million) for the years ended December 31, 2019, 2018 2017 and 2016,2017, respectively.
NOTE 16. OTHER STOCK-RELATED INFORMATION
17. SHARE-BASED COMPENSATION
We grant stock options, restricted stock units and performance share units to employees under the 2007 Long-Term Incentive Plan. Grants made under all plans must be approved by the Management Development and Compensation Committee of GE’s Board of Directors, which is composed entirely of independent directors. We record compensation expense for awards expected to vest over the vesting period. We estimate forfeitures based on experience and adjust expense to reflect actual forfeitures. When options are exercised and restricted stock units vest, we issue shares from treasury stock.
STOCK OPTIONS
Under our stock option program, an employee receives an award that providesStock options provide employees the opportunity in the future to purchase GE shares in the future at the market price of our stock on the date the award is granted the (strike(the strike price). The options become exercisable over the vesting period (typically three or five years)years) and expire 10 years from the grant date if not exercised. We value theRestricted stock options using a black-scholes option pricing model.
The weighted average grant-date fair value of options granted during 2018, 2017 and 2016, was $3.00, $3.81, and $3.61, respectively. Key assumptions include: risk free rates of 2.8%, 2.3%, and 1.4%, dividend yields of 2.3%, 3.3%, and 3.4%, expected volatility of 32%, 28%, and 20%, expected lives of 5.9 years, 6.3 years and 6.5 years, and strike prices of $12.13, $18.97, and $29.63 for 2018, 2017 and 2016, respectively.
RESTRICTED STOCK
A restricted stock unitunits (RSU) award providesprovide an employee with the right to receive shares of GE stock when the restrictions lapse which occurs in equal amounts over the vesting period. Upon vesting, each RSU is converted into GE common stock on a 1-for-one basis. Performance share units (PSU) provide an employee with the right to receive shares of GE stock based upon achievement of certain performance or market metrics. Upon vesting (if applicable), each PSU is converted into GE common stock on a one-for-one basis. We value stock options using a Black-Scholes option pricing model, RSUs using the market price on grant date.date, and PSUs using both market price on grant date and a Monte Carlo simulation as needed based on performance metrics.
|
| | | | | | | | | | |
| WEIGHTED AVERAGE GRANT DATE FAIR VALUE |
| 2019 |
| 2018 |
| 2017 |
|
| | | | | |
| Stock Options |
| $ | 3.48 |
| $ | 3.00 |
| $ | 3.81 |
|
| RSUs |
| 10.12 |
| 13.96 |
| 24.89 |
|
| PSUs |
| 10.73 |
| 4.80 |
| N/A |
|
Key assumptions used in the Black Scholes valuation for stock options include: risk free rates of 2.5%, 2.8%, and 2.3%, dividend yields of 0.4%, 2.3%, and 3.3%, expected volatility of 33%, 32%, and 28%, expected lives of 6.0 years, 5.9 years, and 6.3 years, and strike prices of $10.00, $12.13, and $18.97 for 2019, 2018, and 2017, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| STOCK-BASED COMPENSATION ACTIVITY | Stock Options |
| RSUs |
| Shares (in millions) |
| Weighted average exercise price |
| Weighted average contractual term (in years) | Intrinsic value (in millions) |
|
| Shares (in millions) |
| Weighted average grant date fair value |
| Weighted average contractual term (in years) | Intrinsic value (in millions) |
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at January 1, 2019 | 466 |
| $ | 19.59 |
|
|
|
| 29 |
| $ | 18.07 |
|
|
|
| Spin-off adjustment (a) | 17 |
| N/A |
|
|
|
|
| 1 |
| N/A |
|
|
|
|
| Granted | 34 |
| 10.00 |
|
|
|
| 16 |
| 10.12 |
|
|
|
| Exercised | (7 | ) | 9.36 |
|
|
|
| (15 | ) | 17.04 |
|
|
|
| Forfeited | (11 | ) | 13.66 |
|
|
|
| (3 | ) | 15.40 |
|
|
|
| Expired | (41 | ) | 17.24 |
|
|
|
| N/A |
| N/A |
|
|
|
|
| Outstanding at December 31, 2019 | 458 |
| $ | 18.66 |
| 4.6 | $ | 185 |
|
| 28 |
| $ | 13.29 |
| 1.4 | $ | 315 |
|
| Exercisable at December 31, 2019 | 335 |
| $ | 21.03 |
| 3.1 | $ | — |
|
| N/A |
| N/A |
| N/A | N/A |
|
| Expected to vest | 113 |
| $ | 12.36 |
| 8.5 | $ | 165 |
|
| 26 |
| $ | 13.45 |
| 1.3 | $ | 285 |
|
| |
| (a) | In connection with the spin-off of GE Transportation and pursuant to the anti-dilution provisions of the 2007 Long Term Incentive Plan, the Company made adjustments to exercise price and the number of shares to preserve the intrinsic value of the awards prior to the separation. The adjustments to the stock-based compensation awards did not result in additional compensation expense. |
Total outstanding PSUs at December 31, 2019 were 12 million shares with a weighted average grant date fair value of RSUs granted during 2018, 2017, and 2016 was $13.96, $24.89, $30.20, respectively.
|
| | | | | | | | | | | | |
| STOCK-BASED COMPENSATION ACTIVITY | | Stock Options | | RSUs |
| | | Shares (in millions) |
| Weighted average exercise price |
| | Shares (in millions) |
| Weighted average grant date fair value |
|
| Outstanding at January 1, 2018 | | 399 |
| $ | 21.91 |
| | 17 |
| $ | 26.94 |
|
| Granted | | 108 |
| 12.13 |
| | 22 |
| 13.96 |
|
| Exercised | | (2 | ) | 11.46 |
| | (6 | ) | 25.81 |
|
| Forfeited | | (13 | ) | 20.09 |
| | (4 | ) | 21.89 |
|
| Expired | | (26 | ) | 24.49 |
| | N/A |
| N/A |
|
| Outstanding at December 31, 2018 | | 466 |
| $ | 19.59 |
| | 29 |
| $ | 18.07 |
|
| Exercisable at December 31, 2018 | | 318 |
| $ | 21.46 |
| | N/A |
| N/A |
|
| Expected to vest | | 133 |
| $ | 15.89 |
| | 27 |
| $ | 18.08 |
|
Stock options outstanding, exercisable, and expected to vest have an insignificant$7.39. The intrinsic value and weighted average contractual term of 5.1 years, 3.3 years, and 8.9 years, respectively. RSUsPSUs outstanding and expected to vest have an intrinsic value of $222were $128 million and $208 million and weighed average contractual term of 1.42.3 years and 1.4 years,, respectively.
|
| | | | | | | | | |
| (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Compensation expense (after-tax)(a)(b) | $ | 336 |
| $ | 241 |
| $ | 297 |
|
| Cash received from stock options exercised | 24 |
| 528 |
| 1,037 |
|
Intrinsic value of stock options exercised and RSUs vested
| 83 |
| 493 |
| 860 |
|
| |
(a) | Unrecognized compensation expense related to unvested equity awards as of December 31, 2018 was $740 million, which will be amortized over approximately 2 years.
|
| |
(b) | Income tax benefit recognized in earnings was $40 million, $138 million, and $274 million in 2018, 2017, and 2016, respectively.
|
GE20182019 FORM 10-K 141 99
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | |
| (In millions) | 2019 |
| 2018 |
| 2017 |
|
|
|
|
|
| Compensation expense (after-tax)(a)(b) | $ | 400 |
| $ | 336 |
| $ | 241 |
|
| Cash received from stock options exercised | 69 |
| 24 |
| 528 |
|
Intrinsic value of stock options exercised and RSUs vested
| 154 |
| 83 |
| 493 |
|
| |
| (a) | Unrecognized compensation cost related to unvested equity awards as of December 31, 2019 was $515 million, which will be amortized over a weighted average period of 1.1 years. |
| |
| (b) | Income tax benefit recognized in earnings was $20 million, $40 million and $138 million in 2019, 2018, and 2017, respectively. |
NOTE 17.18. EARNINGS PER SHARE INFORMATION
|
| | | | | | | | | | | | | | | | | | | | |
| 2019 |
| 2018 |
| 2017 |
| (In millions; per-share amounts in dollars) | Diluted |
| Basic |
|
| Diluted |
| Basic |
|
| Diluted |
| Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations for per-share calculation | $ | 416 |
| $ | 416 |
|
| $ | (20,997 | ) | $ | (20,997 | ) |
| $ | (8,270 | ) | $ | (8,270 | ) |
| Preferred stock dividends | (460 | ) | (460 | ) |
| (447 | ) | (447 | ) |
| (436 | ) | (436 | ) |
Earnings (loss) from continuing operations attributable to
common shareholders for per-share calculation | $ | (45 | ) | $ | (45 | ) |
| $ | (21,445 | ) | $ | (21,445 | ) |
| $ | (8,706 | ) | $ | (8,706 | ) |
Earnings (loss) from discontinued operations for per-share calculation | (5,396 | ) | (5,396 | ) |
| (1,372 | ) | (1,372 | ) |
| (251 | ) | (251 | ) |
Net earnings (loss) attributable to GE common shareholders for per-share calculation | (5,440 | ) | (5,440 | ) |
| (22,809 | ) | (22,809 | ) |
| (8,944 | ) | (8,944 | ) |
|
|
|
|
|
|
|
|
|
| Shares of GE common stock outstanding | 8,724 |
| 8,724 |
|
| 8,691 |
| 8,691 |
|
| 8,687 |
| 8,687 |
|
Employee compensation-related shares (including stock options) and warrants(a) | — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| Total average equivalent shares | 8,724 |
| 8,724 |
|
| 8,691 |
| 8,691 |
|
| 8,687 |
| 8,687 |
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations | $ | (0.01 | ) | $ | (0.01 | ) |
| $ | (2.47 | ) | $ | (2.47 | ) |
| $ | (1.00 | ) | $ | (1.00 | ) |
| Earnings (loss) from discontinued operations | (0.62 | ) | (0.62 | ) |
| (0.16 | ) | (0.16 | ) |
| (0.03 | ) | (0.03 | ) |
| Net earnings (loss) | (0.62 | ) | (0.62 | ) |
| (2.62 | ) | (2.62 | ) |
| (1.03 | ) | (1.03 | ) |
|
|
|
|
|
|
|
|
|
| Potentially dilutive securities(a) |
| 450 |
|
|
| 420 |
|
|
| 119 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
| (In millions; per-share amounts in dollars) | Diluted |
| Basic |
|
| Diluted |
| Basic |
|
| Diluted |
| Basic |
|
| | | | | | | | |
| Amounts attributable to the Company: | | | | | | | | |
| Consolidated | | | | | | | | |
Earnings (loss) from continuing operations for per-share calculation(a)(b) | $ | (20,636 | ) | $ | (20,636 | ) | | $ | (8,193 | ) | $ | (8,193 | ) | | $ | 8,431 |
| $ | 8,436 |
|
| Preferred stock dividends | (447 | ) | (447 | ) | | (436 | ) | (436 | ) | | (656 | ) | (656 | ) |
Earnings (loss) from continuing operations attributable to common shareowners for per-share calculation(a)(b) | $ | (21,083 | ) | $ | (21,083 | ) | | $ | (8,629 | ) | $ | (8,629 | ) | | $ | 7,775 |
| $ | 7,780 |
|
Earnings (loss) from discontinued operations for per-share calculation(a)(b) | (1,734 | ) | (1,734 | ) | | (328 | ) | (328 | ) | | (955 | ) | (950 | ) |
Net earnings (loss) attributable to GE common shareowners for per-share calculation(a)(b) | $ | (22,809 | ) | $ | (22,809 | ) | | $ | (8,944 | ) | $ | (8,944 | ) | | $ | 6,824 |
| $ | 6,829 |
|
| | | | | | | | |
| Average equivalent shares | | | | | | | | |
| Shares of GE common stock outstanding | 8,691 |
| 8,691 |
| | 8,687 |
| 8,687 |
| | 9,025 |
| 9,025 |
|
Employee compensation-related shares (including stock options) and warrants | — |
| — |
| | — |
| — |
| | 105 |
| — |
|
| Total average equivalent shares | 8,691 |
| 8,691 |
| | 8,687 |
| 8,687 |
| | 9,130 |
| 9,025 |
|
| | | | | | | | |
| Per-share amounts | | | | | | | | |
| Earnings (loss) from continuing operations | $ | (2.43 | ) | $ | (2.43 | ) | | $ | (0.99 | ) | $ | (0.99 | ) | | $ | 0.85 |
| $ | 0.86 |
|
| Earnings (loss) from discontinued operations | (0.20 | ) | (0.20 | ) | | (0.04 | ) | (0.04 | ) | | (0.10 | ) | (0.11 | ) |
| Net earnings (loss) | (2.62 | ) | (2.62 | ) | | (1.03 | ) | (1.03 | ) | | 0.75 |
| 0.76 |
|
Our unvested restricted stock unit awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and, therefore, are included in the computation of earnings per share pursuant to the two-class method. Application of this treatment had an insignificant effect.
| |
(a) | Included a dilutive adjustment of an insignificant amount of dividend equivalents in each of the three years presented.
|
| |
(b) | Included in 2016 is a dilutive adjustment for the change in income for forward purchase contracts that may be settled in stock.
|
For the years ended December 31, 2019, 2018 and 2017, and 2016, approximately 420 million, 119 million and 22 million, respectively,as a result of outstanding stock awardsexcess dividends in respect to the current period earnings, losses were not included inallocated to the computation of diluted earnings per share because their effect was antidilutive.participating securities.
Earnings-per-share amounts are computed independently for earnings (loss) from continuing operations, earnings (loss) from discontinued operations and net earnings (loss). As a result, the sum of per-share amounts from continuing operations and discontinued operations may not equal the total per-share amounts for net earnings.
NOTE 18.19. OTHER INCOME
| | | December 31 (In millions) | 2018 |
| 2017 |
| 2016 |
| |
| (In millions) | | 2019 |
| 2018 |
| 2017 |
|
| | |
| GE | | |
| Purchases and sales of business interests(a) | $ | 1,294 |
| $ | 1,021 |
| $ | 3,731 |
| $ | 3 |
| $ | 1,234 |
| $ | 1,024 |
|
| Licensing and royalty income | 221 |
| 193 |
| 175 |
| 256 |
| 218 |
| 188 |
|
| Associated companies | (111 | ) | 202 |
| 76 |
| 206 |
| 21 |
| 208 |
|
| Net interest and investment income | 669 |
| 425 |
| 263 |
| |
| Net interest and investment income(b) | | 1,220 |
| 562 |
| 358 |
|
| Other items | 182 |
| 96 |
| (17 | ) | 515 |
| 282 |
| 115 |
|
| 2,255 |
| 1,937 |
| 4,227 |
| |
| GE | | 2,200 |
| 2,317 |
| 1,893 |
|
| Eliminations | 4 |
| 189 |
| (87 | ) | 22 |
| 4 |
| 189 |
|
| Total | $ | 2,259 |
| $ | 2,126 |
| $ | 4,140 |
| $ | 2,222 |
| $ | 2,321 |
| $ | 2,083 |
|
| |
| (a) | Included a pre-tax gain of $224 million on the sale of ServiceMax partially offset by charges to the valuation allowance on businesses classified as held for sale of $245 million in 2019. Included pre-tax gains of $737 million on the sale of Distributed Power, $681 million on the sale of Healthcare Value-Based Care and $267 million on the sale of Industrial Solutions, partially offset by charges to the valuation allowance on businesses classified as held for sale of $554 million in 2018. Included a pre-tax gain of $1,931 million on the sale of our Water business, partially offset by charges to the valuation allowance on businesses classified as held for sale of $1,000 million in 2017. Included a pre-tax gain of $3,106 million on the sale of our Appliances business and $398 million on the sale of GE Asset Management in 2016. See Note 2 for further information. |
| |
| (b) | Included unrealized gain of $793 million related to our interest in Baker Hughes in 2019. Included interest income associated with customer advances of $143 million, $136 million and $105 million in 2019, 2018 and 2017, respectively. See Notes 1, 3 and 9. |
GE20182019 FORM 10-K 142 100
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 19.20. FAIR VALUE MEASUREMENTS
RECURRING FAIR VALUE MEASUREMENTS
MEASUREMENTS.Our assets and liabilities measured at fair value on a recurring basis include investment securities mainly supporting obligations to annuitants and policyholders in our run-off insurance operations, derivatives, and derivatives. our remaining equity interest in Baker Hughes.
|
| | | | | | | | | | | | | | | |
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS (In millions) | Level 1 |
| Level 2 |
| Level 3(a) |
| Netting
adjustment(d) |
| Net balance(b) |
|
| December 31, 2018 | | | | | |
| Assets | | | | | |
| Investment securities | $ | 126 |
| $ | 29,408 |
| $ | 4,301 |
| $ | — |
| $ | 33,835 |
|
| Derivatives | — |
| 2,294 |
| 8 |
| (2,001 | ) | 301 |
|
| Total | $ | 126 |
| $ | 31,701 |
| $ | 4,309 |
| $ | (2,001 | ) | $ | 34,136 |
|
| | | | | | |
| Liabilities | | | | | |
| Derivatives | $ | — |
| $ | 1,913 |
| $ | 6 |
| $ | (1,234 | ) | $ | 686 |
|
| Other(c) | — |
| 722 |
| — |
| — |
| 722 |
|
| Total | $ | — |
| $ | 2,635 |
| $ | 6 |
| $ | (1,234 | ) | $ | 1,408 |
|
| | | | | | |
| December 31, 2017 | | | | | |
| Assets | | | | | |
| Investment securities | $ | 158 |
| $ | 34,126 |
| $ | 4,413 |
| $ | — |
| $ | 38,696 |
|
| Derivatives | — |
| 3,343 |
| 21 |
| (2,986 | ) | 378 |
|
| Total | $ | 158 |
| $ | 37,469 |
| $ | 4,433 |
| $ | (2,986 | ) | $ | 39,074 |
|
| Liabilities | | | | | |
| Derivatives | $ | — |
| $ | 2,354 |
| $ | 7 |
| $ | (2,034 | ) | $ | 327 |
|
| Other(c) | — |
| 999 |
| — |
| — |
| 999 |
|
| Total | $ | — |
| $ | 3,353 |
| $ | 7 |
| $ | (2,034 | ) | $ | 1,325 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS December 31 (In millions) | |
| | Level 1 | Level 2 | Level 3(a) | Netting
adjustment(d) | Net balance(b) |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | | | | | | | | | | |
| Investment securities | $ | 9,704 |
| $ | 88 |
| $ | 33,606 |
| $ | 29,408 |
| $ | 5,210 |
| $ | 4,013 |
| $ | — |
| $ | — |
| $ | 48,521 |
| $ | 33,508 |
|
| Derivatives | — |
| — |
| 2,561 |
| 2,197 |
| 11 |
| 8 |
| (1,832 | ) | (2,001 | ) | 740 |
| 205 |
|
| Total assets | $ | 9,704 |
| $ | 88 |
| $ | 36,167 |
| $ | 31,605 |
| $ | 5,221 |
| $ | 4,021 |
| $ | (1,832 | ) | $ | (2,001 | ) | $ | 49,261 |
| $ | 33,713 |
|
| | | | | | | | | | | |
| Derivatives | $ | — |
| $ | — |
| $ | 834 |
| $ | 1,814 |
| $ | 19 |
| $ | 6 |
| $ | (651 | ) | $ | (1,234 | ) | $ | 202 |
| $ | 586 |
|
| Other(c) | — |
| — |
| 807 |
| 722 |
| — |
| — |
| — |
| — |
| 807 |
| 722 |
|
| Total liabilities | $ | — |
| $ | — |
| $ | 1,641 |
| $ | 2,535 |
| $ | 19 |
| $ | 6 |
| $ | (651 | ) | $ | (1,234 | ) | $ | 1,009 |
| $ | 1,308 |
|
| |
| (a) | Included debt securities classified within Level 3 of $3,4983,977 million of U.S. corporate and $580$330 million of Government and agencies securities at December 31, 2018,2019, and $3,6293,498 million of U.S. corporate and $614292 million of Government and agencies securities at December 31, 2017. 2018. |
| |
| (b) | See Notes 3 and 2021 for further information on the composition of our investment securities and derivative portfolios. |
| |
| (c) | Primarily represents the liabilities associated with certain of our deferred incentive compensation plans. |
| |
| (d) | The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts include fair value adjustments related to our own and counterparty non-performance risk. |
LEVEL 3 INSTRUMENTS
INSTRUMENTS.The vast majority of our Level 3 balances consist ofcomprised debt securities classified as available-for-sale with changes in fair value recorded in shareowners’ equity. other comprehensive income.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Balance at
January 1 |
| Net
realized/
unrealized
gains
(losses)
included in
earnings(a) |
| Net
realized/
unrealized
gains
(losses)
included
in AOCI(b) |
| Purchases(c) |
| Sales |
| Settlements |
| Transfers
into
Level 3 |
| Transfers
out of
Level 3 |
| Balance at
December 31 |
|
| 2018 | | | | | | | | | |
| Debt securities | $ | 4,413 |
| $ | 2 |
| $ | (234 | ) | $ | 804 |
| $ | (65 | ) | $ | (358 | ) | $ | 2 |
| $ | (262 | ) | $ | 4,301 |
|
| 2017 | | | | | | | | | |
| Debt securities | $ | 4,406 |
| $ | 54 |
| 66 |
| $ | 1,108 |
| $ | (38 | ) | $ | (641 | ) | $ | 32 |
| $ | (575 | ) | $ | 4,413 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Balance at
January 1 |
| Net realized/unrealized gains(losses)(a) |
| Purchases(b) |
| Sales & Settlements |
| Transfers
into
Level 3 |
| Transfers
out of
Level 3 |
| Balance at
December 31 |
|
| | | | | | | | |
| 2019 | | | | | | | |
| Investment securities | $ | 4,013 |
| $ | 399 |
| $ | 2,159 |
| $ | (1,308 | ) | $ | — |
| $ | (53 | ) | $ | 5,210 |
|
| 2018 | | | | | | | |
| Investment securities | $ | 4,109 |
| $ | (231 | ) | $ | 729 |
| $ | (333 | ) | $ | 2 |
| $ | (262 | ) | $ | 4,013 |
|
| |
| (a) | Earnings effects are primarilyPrimarily included in the “GE Capital revenues from services”net unrealized gains (losses) of $404 million and “Interest and other financial charges” captions in our consolidated Statement of Earnings (Loss).
|
| |
(b) | Includes unrealized net gains and losses of $(233)$(231) million and $97 million and realized net gains and losses of $(1) million and $(32) million in other comprehensive income for the years ended December 31, 20182019 and December 31, 2017,2018, respectively.
|
| |
(c)(b) | Included $615$975 million and $675$615 million of U.S. corporate debt securities for the years ended December 31, 20182019 and 2017. 2018, respectively. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NONRECURRING FAIR VALUE MEASUREMENTS
MEASUREMENTS. The following table represents nonrecurring fair value amountsvalues (as measured at the time of the adjustment) for those assets remeasured to fair value on a nonrecurring basis during the fiscal year and were still held at December 31, 20182019 and 2017. 2018.
|
| | | | | | | | | | | | | |
| | Remeasured during the years ended December 31 |
| | 2019 | | 2018 |
| (In millions) | Level 2 | Level 3 | | Level 2 | Level 3 |
| | | | | | |
| Financing receivables and financing receivables held for sale | $ | — |
| $ | 21 |
| | $ | — |
| $ | 47 |
|
| Equity securities without readily determinable fair value and equity method investments | — |
| 306 |
| | 479 |
| 874 |
|
| Long-lived assets | 12 |
| 412 |
| | 152 |
| 422 |
|
| Goodwill | — |
| — |
| | — |
| 2,440 |
|
| Total | $ | 12 |
| $ | 739 |
| | $ | 631 |
| $ | 3,783 |
|
|
| | | | | | | | | | | | | |
| ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING | Remeasured during the years ended December 31 |
| BASIS | 2018 | | 2017 |
(In millions) | Level 2 | Level 3 | | Level 2 | Level 3 |
| | | | | | |
| Financing receivables and financing receivables held for sale | $ | — |
| $ | 47 |
| | $ | 32 |
| $ | 1,649 |
|
| Equity securities without readily determinable fair value and equity method investments | 479 |
| 874 |
| | — |
| 2,076 |
|
| Long-lived assets | 152 |
| 422 |
| | 177 |
| 591 |
|
| Goodwill | — |
| 2,440 |
| | — |
| — |
|
| Total | $ | 631 |
| $ | 3,783 |
| | $ | 209 |
| $ | 4,316 |
|
The following table represents the fair value adjustments to assets measured at fair value on a nonrecurring basis and still held at December 31, 2018 and 2017.
|
| | | | | | |
| December 31 (In millions) | 2018 |
| 2017 |
|
| | | |
| Financing receivables and financing receivables held for sale | $ | (23 | ) | $ | (310 | ) |
| Equity securities without readily determinable fair value and equity method investments | (535 | ) | (891 | ) |
| Long-lived assets | (1,152 | ) | (819 | ) |
| Goodwill | (22,136 | ) | (2,550 | ) |
| Total | $ | (23,845 | ) | $ | (4,571 | ) |
|
| | | | | | |
| LEVEL 3 MEASUREMENTS - SIGNIFICANT UNOBSERVABLE INPUTS |
| | | | | |
| (Dollars in millions) | Fair value | Valuation technique | Unobservable inputs | Range (weighted-average) |
| | | | | |
| December 31, 2018 | | | | |
| Recurring fair value measurements | | | | |
| Investment securities(b) | $ | 402 |
| Income approach | Discount rate(a) | 2.8%-7.6% (6.8)% |
| | | | | |
| Nonrecurring fair value measurements |
| Financing receivables | $ | 22 |
| Income approach | Discount rate(a) | 10% |
| | | | | |
| Equity securities without readily determinable fair value and equity method investments | 579 |
| Income approach, market comparables | Discount rate(a) | 6.5%-35% (8.7%) |
| | | | | |
| Long-lived assets | 159 |
| Income approach | Discount rate(a) | 2.9%-11.1% (8.2%) |
| | | | | |
| | | | | |
| December 31, 2017 | | | | |
| Recurring fair value measurements | | | | |
| Investment securities(b) | $ | 903 |
| Income approach | Discount rate(a) | 3.0%-12.6% (6.2%) |
| | | | | |
| Nonrecurring fair value measurements | | | | |
| Financing receivables | $ | 1,639 |
| Income approach | Discount rate(a) | 3.2%-16.5% (10.0%) |
| | | | | |
| Equity securities without readily determinable fair value and equity method investments | 2,037 |
| Income approach | Discount rate(a) | 5.0%-50.0% (7.7%) |
| | | | | |
| Long-lived assets | 554 | Income approach | Discount rate(a) | 2.7%-18.0% (7.3%) |
| |
(a) | Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value.
|
| |
(b) | Comprises substantially all of U.S. corporate and government Non-U.S. securities
|
At December 31, 2018 and December 31, 2017, other Level 3 recurring fair value measurements of $3,893 million and $3,517 million, respectively, and nonrecurring measurements of $483 million and $83 million, respectively, are valued using non-binding broker quotes or other third-party sources. Other nonrecurring fair value measurements were $100 million and $3 million and other recurring fair value measurements were insignificant at December 31, 2018 and December 31, 2017, respectively. These fair value measurements utilize a number of different unobservable inputs not subject to meaningful aggregation.
GE20182019 FORM 10-K 144
101
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
At December 31, 2019 and 2018, certain Level 3 assets with recurring fair value measurements of $4,933 million and $3,893 million, respectively, and nonrecurring measurements of $377 million and $483 million, respectively, were valued using non-binding broker quotes or other third-party sources. These fair value measurements utilize a number of different unobservable inputs not subject to meaningful aggregation. In addition, certain equity securities without readily determinable fair value and equity method investments with a fair value totaling $36 million and $572 million at December 31, 2019 and 2018, respectively, were valued using the income approach, for which discount rates were determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rates would result in a decrease in the fair values. The range of discount rates used to price these investments was 12%-16%, with a weighted average of 15% and 6.5%-35%, with a weighted average of 8.9% at December 31, 2019 and 2018, respectively. Other Level 3 assets with recurring and nonrecurring fair value measurements are not material individually or in the aggregate.
NOTE 20.21. FINANCIAL INSTRUMENTS
The following table provides information about assets and liabilities not carried at fair value. The tablevalue and excludes finance leases, equity securities without readily determinable fair value and non-financial assets and liabilities. Substantially all of thethese assets discussed below are considered to be Level 3. The3 and the vast majority of our liabilities’ fair values can be determined based on significant observable inputs and thusvalue are considered Level 2. Few of
|
| | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| (In millions) | Carrying
amount
(net) |
| Estimated
fair value |
| | Carrying
amount
(net) |
| Estimated
fair value |
|
| |
|
| |
|
|
| Assets |
|
| |
|
|
| Loans and other receivables | $ | 4,113 |
| $ | 4,208 |
| | $ | 8,811 |
| $ | 8,829 |
|
| Liabilities |
|
| |
|
|
| Borrowings (Note 11) | $ | 90,882 |
| $ | 97,754 |
| | $ | 103,599 |
| $ | 100,492 |
|
| Investment contracts (Note 12) | 2,191 |
| 2,588 |
| | 2,388 |
| 2,630 |
|
Unlike the instruments are actively traded and their fair values must often be determined using financial models. Realization of thecarrying amount, estimated fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity. borrowings included $1,106 million and $1,324 million of accrued interest at
December 31, 2019 and 2018, respectively. |
| | | | | | | | | | | | | |
| 2018 | | 2017 |
| December 31 (In millions) | Carrying
amount
(net) |
| Estimated
fair value |
| | Carrying
amount
(net) |
| Estimated
fair value |
|
|
|
| |
|
|
| GE |
|
| |
|
|
| Assets |
|
| |
|
|
| Notes receivable | $ | 798 |
| $ | 787 |
| | $ | 700 |
| $ | 700 |
|
| Liabilities |
|
| |
|
|
| Borrowings(a)(b) | 32,309 |
| 29,586 |
| | 34,473 |
| 35,416 |
|
| Borrowings (assumed by GE)(a)(c) | 36,262 |
| 36,298 |
| | 47,114 |
| 53,502 |
|
|
|
| |
|
|
| GE Capital |
|
| |
|
|
| Assets |
|
| |
|
|
| Loans | 10,820 |
| 10,807 |
| | 17,363 |
| 17,331 |
|
| Other commercial mortgages | 1,747 |
| 1,792 |
| | 1,489 |
| 1,566 |
|
| Loans held for sale | 404 |
| 405 |
| | 3,274 |
| 3,274 |
|
| Liabilities |
|
| |
|
|
| Borrowings(a)(d)(e)(f) | 43,028 |
| 42,006 |
| | 55,353 |
| 60,415 |
|
| Investment contracts | 2,388 |
| 2,630 |
| | 2,569 |
| 2,996 |
|
| |
(a) | See Note 11 for further information.
|
| |
(b) | Included $210 million and $217 million of accrued interest in estimated fair value at December 31, 2018 and December 31, 2017, respectively.
|
| |
(c) | Included $568 million and $696 million of accrued interest in estimated fair value at December 31, 2018 and December 31, 2017, respectively.
|
| |
(d) | Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at December 31, 2018 and December 31, 2017 would have been reduced by $1,300 million and $1,754 million, respectively.
|
| |
(e) | Included $583 million and $731 million of accrued interest in estimated fair value at December 31, 2018 and December 31, 2017, respectively.
|
| |
(f) | Excluded $22,513 million and $39,844 million of net intercompany payable to GE at December 31, 2018 and December 31, 2017, respectively.
|
A description of how we estimate fair values follows:
Loans.Based on a discounted future cash flows methodology, using current market interest rate data adjusted for inherent credit risk or quoted market prices and recent transactions, if available.
Borrowings.Based on valuation methodologies using current market interest rate data that are comparable to market quotes adjusted for our non-performance risk or quoted market prices and recent transactions, if available.
Investment contracts. Based on expected future cash flows, discounted at currently offered rates for immediate annuity contracts or the income approach for single premium deferred annuities.
Assets and liabilities that are reflected in the accompanying financial statements at fair value are not included in the above disclosures; such items include cash and equivalents, investment securities and derivative financial instruments.
|
| | | | | | |
NOTIONAL AMOUNTS OF LOAN COMMITMENTS December 31 (In millions) | 2018 |
| 2017 |
|
|
|
|
| Ordinary course of business lending commitments(a) | $ | 767 |
| $ | 1,105 |
|
| Unused revolving credit lines | 34 |
| 198 |
|
| |
(a) | Excluded investment commitments of $1,373 million and $677 million at December 31, 2018 and December 31, 2017, respectively.
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DERIVATIVES AND HEDGINGHEDGING. Our policy requires that derivatives are used solely for managing risks and not for speculative purposes. Total gross notional was $98,018 million ($55,704 million in GE Capital and $42,314 million in GE) and $117,104 million ($79,082 million in GE Capital and $38,022 million in GE) at December 31, 2019 and 2018, respectively. GE Capital notional relates primarily to managing interest rate and currency risk between financial assets and liabilities, and GE notional relates primarily to managing currency risk.
Cash flow hedges – We
GE and GE Capital use cash flow hedginghedges primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts in our industrial businesses and to convert foreign currency debt that we have issued in our financial services business back to our functional currency.
As part of our ongoing effort to reduce borrowings, we may repurchase debt that was in a cash flow hedge accounting relationship. At the time of determining that the debt cash flows are probable of not occurring any related OCI will be released to earnings.
Fairchanges. In addition, GE Capital uses fair value hedges – These derivatives are used to hedge the effects of interest rate and currency exchange rate changes on debt that we have issued.
Netit has issued as well as net investment hedges – We invest to hedge investments in foreign operations that conduct their financial services activities in currencies other than the U.S. dollar. We hedge the currency risk associated with those investments primarily using non-derivative instruments such as debt denominated in a foreign currencyoperations. Both GE and short-term currency exchange contracts under which we receive U.S. dollars and pay foreign currency.
Economic Hedges –TheseGE Capital also use derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. We use economic hedges when we have exposures to currency exchange risk for which we are unable to meet the requirements for hedge accounting or when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative making hedge accounting unnecessary. Even though the derivative is an effective economic hedge, there may be a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item.
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). The notional amount is used to compute interest or other payment streams to be made under the contract and is a measure of our level of activity. We generally disclose derivative notional amounts on a gross basis. The majority of the outstanding notional amount of $124 billion at December 31, 2018 is related to managing interest rate and currency risk between financial assets and liabilities in our financial services business. The remaining derivative notional amount primarily relates to hedges of anticipated sales and purchases in foreign currency, commodity purchases and contractual terms in contracts that are considered embedded derivatives.GE2019 FORM 10-K 102
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The table below provides additional information about how derivatives are reflected in our financial statements. Derivative assets and liabilities are recorded at fair value exclusive of interest earned or owed on interest rate derivatives, which is presented separately onin our consolidated Statement of Financial Position. Cash collateral and securities held as collateral represent assets that have been provided by our derivative counterparties as security for amounts they owe us (derivatives that are in an asset position).
GE2018 FORM 10-K 146 |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| (In millions) | Gross Notional |
| All other assets |
| All other liabilities |
| | Gross Notional |
| All other assets |
| All other liabilities |
|
| | | | | | | | |
| Interest rate contracts | $ | 23,918 |
| $ | 1,636 |
| $ | 11 |
| | $ | 22,904 |
| $ | 1,335 |
| $ | 23 |
|
| Currency exchange contracts | 7,044 |
| 99 |
| 46 |
| | 7,854 |
| 175 |
| 114 |
|
| Derivatives accounted for as hedges | $ | 30,961 |
| $ | 1,734 |
| $ | 57 |
| | $ | 30,758 |
| $ | 1,511 |
| $ | 138 |
|
| | | | | | | | |
| Interest rate contracts | $ | 3,185 |
| $ | 18 |
| $ | 12 |
| | $ | 6,198 |
| $ | 28 |
| $ | 2 |
|
| Currency exchange contracts | 62,165 |
| 697 |
| 744 |
| | 77,544 |
| 653 |
| 1,472 |
|
| Other contracts | 1,706 |
| 123 |
| 40 |
| | 2,604 |
| 13 |
| 209 |
|
| Derivatives not accounted for as hedges | $ | 67,056 |
| $ | 838 |
| $ | 796 |
| | $ | 86,346 |
| $ | 695 |
| $ | 1,682 |
|
| | | | | | | | |
| Gross derivatives | $ | 98,018 |
| $ | 2,572 |
| $ | 853 |
| | $ | 117,104 |
| $ | 2,205 |
| $ | 1,820 |
|
| | | | | | | | |
| Netting and credit adjustments | | $ | (546 | ) | $ | (546 | ) | | | $ | (959 | ) | $ | (967 | ) |
| Cash collateral adjustments | | (1,286 | ) | (105 | ) | | | (1,042 | ) | (267 | ) |
| Net derivatives recognized in Statement of Financial Position | | $ | 740 |
| $ | 202 |
| | | $ | 205 |
| $ | 586 |
|
| | | | | | | | |
| Net accrued interest | | $ | 182 |
| $ | 1 |
| | | $ | 205 |
| $ | 1 |
|
| Securities held as collateral | | (469 | ) | — |
| | | (235 | ) | — |
|
| Net amount | | $ | 452 |
| $ | 203 |
| | | $ | 174 |
| $ | 587 |
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | |
| FAIR VALUE OF DERIVATIVES | 2018 | | 2017 |
December 31 (in millions) | Assets |
| Liabilities |
| | Assets |
| Liabilities |
|
| | | | | | |
| Derivatives accounted for as hedges | | | | | |
| Interest rate contracts | $ | 1,335 |
| $ | 23 |
| | $ | 1,862 |
| $ | 148 |
|
| Currency exchange contracts | 175 |
| 121 |
| | 160 |
| 70 |
|
| Other contracts | — |
| — |
| | — |
| — |
|
| | $ | 1,511 |
| $ | 145 |
| | $ | 2,021 |
| $ | 218 |
|
| | | | | | |
| Derivatives not accounted for as hedges | | | | | |
| Interest rate contracts | 28 |
| 2 |
| | 93 |
| 8 |
|
| Currency exchange contracts | 747 |
| 1,562 |
| | 1,111 |
| 2,043 |
|
| Other contracts | 16 |
| 211 |
| | 139 |
| 91 |
|
| | $ | 791 |
| $ | 1,775 |
| | $ | 1,343 |
| $ | 2,143 |
|
| | | | | | |
Gross derivatives recognized in Statement of Financial Position | | | | | |
| Gross derivatives | 2,301 |
| 1,920 |
| | 3,364 |
| 2,361 |
|
| Gross accrued interest | 209 |
| 6 |
| | 469 |
| (38 | ) |
| | $ | 2,511 |
| $ | 1,926 |
| | $ | 3,833 |
| $ | 2,323 |
|
| | | | | | |
| Amounts offset in Statement of Financial Position | | | | | |
| Netting adjustments(a) | (963 | ) | (971 | ) | | (1,457 | ) | (1,456 | ) |
| Cash collateral(b) | (1,042 | ) | (267 | ) | | (1,529 | ) | (578 | ) |
| | $ | (2,005 | ) | $ | (1,238 | ) | | $ | (2,986 | ) | $ | (2,034 | ) |
| | | | | | |
Net derivatives recognized in Statement of Financial Position | | | | | |
| Net derivatives | 505 |
| 687 |
| | 847 |
| 289 |
|
| | | | | | |
Amounts not offset in Statement of Financial Position | | | | | |
| Securities held as collateral(c) | (235 | ) | — |
| | (405 | ) | — |
|
| | | | | | |
| Net amount(d) | $ | 270 |
| $ | 687 |
| | $ | 441 |
| $ | 289 |
|
Derivatives are classified in the captions “All other assets” and “All other liabilities” and the related accrued interest is classified in “Other GE Capital receivables” and “All other liabilities”Fair value of derivatives in our consolidated Statement of Financial Position.
| |
(a) | The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts include fair value adjustments related to our own and counterparty non-performance risk. At December 31, 2018 and December 31, 2017, the cumulative adjustment for non-performance risk was $8 million and $(1) million, respectively.
|
| |
(b) | ExcludedPosition excluded accrued interest. Cash collateral adjustments excluded excess collateral received and posted of $104 million and $603 million at December 31, 2019, respectively, and $3 million and $439 million at December 31, 2018, respectively. Securities held as collateral excluded excess cash collateral received and posted of $3 million and $439 million at December 31, 2018, respectively, and $10 million and $255 million at December 31, 2017, respectively. |
| |
(c) | Excluded excess securities collateral received with a fair value of zero and $16 million at December 31, 2018 and December 31, 2017, respectively. |
| |
(d) | At December 31, 2018, our exposures to counterparties (including accrued interest), net of collateral we held, was $170 million; counterparties' exposures to our derivative liability (including accrued interest), net of collateral posted by us, was $657 million at December 31, 2018. These exposures exclude embedded derivatives. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
EFFECTS OF DERIVATIVES ON EARNINGS
All derivatives are marked to fair value of $27 million and 0 at December 31, 2019 and 2018, respectively.
FAIR VALUE HEDGES. We use derivatives to hedge the effects of interest rate and currency exchange rate changes on our balance sheet, whether they are designated in aborrowings. At December 31, 2019, the cumulative amount of hedging relationship for accounting purposes or are used as economic hedges. As discussedadjustments of $4,234 million (including $2,458 million on discontinued hedging relationships) was included in the previous sections, each typecarrying amount of hedge affects the financial statements differently. In fair value and economic hedges, both the hedged item andliability of $54,723 million. At December 31, 2018, the cumulative amount of hedging derivative largely offsetadjustments of $3,255 million (including $2,731 million on discontinued hedging relationships) was included in earnings each period. Inthe carrying amount of the hedged liability of $59,651 million. The cumulative amount of hedging adjustments was primarily recorded in long-term borrowings.
CASH FLOW HEDGES. We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and net investment hedges, the effective portion of the hedging derivative is offsetsale contracts in separate components of shareowners’ equityour industrial businesses and ineffectiveness is recognizedto convert foreign currency debt that we have issued in earnings. The table below summarizes these offsets and the net effect on pre-tax earnings.
|
| | | | | | | | | |
| (In millions) | Effect on hedging instrument |
| Effect on underlying |
| Effect on earnings(a) |
|
| | | | |
| 2018 | | | |
| Cash flow hedges | $ | (154 | ) | $ | 154 |
| $ | — |
|
| Fair value hedges | (724 | ) | 617 |
| (107 | ) |
| Net investment hedges(b) | 669 |
| (646 | ) | 23 |
|
| Economic hedges(c) | (2,068 | ) | 1,560 |
| (508 | ) |
| Total | | | $ | (592 | ) |
|
| | | | | | | | | |
| 2017 | | | |
| Cash flow hedges | $ | 199 |
| $ | (199 | ) | $ | — |
|
| Fair value hedges | (556 | ) | 371 |
| (185 | ) |
| Net investment hedges(b) | (1,833 | ) | 1,852 |
| 19 |
|
| Economic hedges(c) | 1,147 |
| (1,683 | ) | (536 | ) |
| Total | | | $ | (702 | ) |
The amounts in the table above generally do not include associated derivative accruals in income or expense.
| |
(a) | For cash flow and fair value hedges, the effect on earnings is primarily related to ineffectiveness. For net investment hedges, the effect on earnings is related to ineffectiveness and spot-forward differences.
|
| |
(b) | Both non-derivatives and derivatives hedging instruments are included. The carrying value of non-derivative instruments designated as net investment hedges was $(12,458) million and $(13,028) million at December 31, 2018 and December 31, 2017, respectively. Total pre-tax reclassifications from CTA to gain (loss) was $(1) million and $125 million in 2018 and 2017, respectively. Total pre-tax reclassifications from CTA to gain (loss) included zero and $125 million recorded in discontinued operations in 2018 and 2017, respectively.
|
| |
(c) | Net effect is substantially offset by the change in fair value of the hedged item that will affect earnings in future periods.
|
our financial services business back to our functional currency. Changes in the fair value of cash flow hedges are recorded in a separate componentAccumulated other comprehensive income (AOCI) in our consolidated Statement of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI)Financial Position and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument. gain (loss) recognized in AOCI was $25 million, $(154) million and $199 million for the years ended December 31, 2019, 2018 and 2017, respectively. The gain (loss) reclassified from AOCI to earnings was $(60) million, $(102) million and $149 million for the years ended December 31, 2019, 2018 and 2017, respectively. These amounts were primarily related to currency exchange and interest rate contracts.
|
| | | | | | | | | | | | | | | | | | | |
| CASH FLOW HEDGE ACTIVITY | Gains (losses) recognized in AOCI | | Gains (losses) reclassified from AOCI into earnings |
(In millions) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | |
| Interest rate contracts | $ | (3 | ) | $ | 4 |
| $ | 6 |
| | $ | (11 | ) | $ | (27 | ) | $ | (79 | ) |
| Currency exchange contracts | (152 | ) | 195 |
| (281 | ) | | (92 | ) | 176 |
| (282 | ) |
| Commodity contracts | — |
| — |
| — |
| | — |
| — |
| (2 | ) |
| Total(a) | $ | (154 | ) | $ | 199 |
| $ | (274 | ) | | $ | (102 | ) | $ | 149 |
| $ | (364 | ) |
| |
(a) | Gains (losses) is recorded in “GE Capital revenues from services”, “Interest and other financial charges”, and “Other costs and expenses” in our consolidated Statement of Earnings (Loss) when reclassified.
|
The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $43$110 million gain at December 31, 2018.2019. We expect to transfer $54reclassify $16 million lossof gain to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In allFor the twelve monthsyears ended December 31, 2019, 2018 2017 and 2016,2017, we recognized insignificant gains and losses related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At December 31, 2019, 2018 2017 and 2016,2017, the maximum term of derivative instruments that hedge forecasted transactions was 13 years, 14 years and 15 years, respectively.
NET INVESTMENT HEDGES. We invest in foreign operations that conduct their financial services activities in currencies other than the U.S. dollar. We hedge the currency risk associated with those investments primarily using non-derivative instruments such as debt denominated in a foreign currency and 16 years, respectively.
short-term currency exchange contracts under which we receive U.S. dollars and pay foreign currency. For cash flowthese hedges, the amount of ineffectiveness in the hedging relationship and amountportion of the changes in fair value changes of the derivatives or debt instruments that are not includedrelates to changes in spot currency exchange rates is recorded in a separate component of AOCI. The portion of the measurementfair value changes of ineffectiveness were insignificant forthe derivatives related to differences between spot and forward rates is recorded in earnings each reporting period. The amounts recorded in AOCI affect earnings if the hedged investment is sold, substantially liquidated, or control is lost.
GE20182019 FORM 10-K 148
103
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The total gain (loss) recognized in AOCI on hedging instruments for the years ended December 31, 2019, 2018 and 2017 was $120 million, $646 million and $(1,852) million, respectively, comprising $(36) million, $162 million and $(277) million on currency exchange contracts and $156 million, $484 million and $(1,575) million on foreign currency debt, respectively. The total gain (loss) excluded from assessment and recognized in earnings was $27 million, $23 million and $19 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The carrying value of foreign currency debt designated as net investment hedges was $9,190 million, $12,458 million and $13,028 at
December 31, 2019, 2018 and 2017 respectively. The total reclassified from AOCI into earnings was $7 million, $(1) million and $125 million for the years ended December 31, 2019, 2018 and 2017, respectively.
EFFECTS OF DERIVATIVES ON EARNINGS. All derivatives are marked to fair value on our balance sheet, whether they are designated in a hedging relationship for accounting purposes or are used as economic hedges. For derivatives not designated as hedging instruments, substantially all of the gain or loss recognized in earnings is offset by either the current period change in value of underlying exposures which is recorded in earnings in the current period or a future period when the recording of the exposures occur.
The table below presents the effect of our derivative financial instruments in the consolidated Statement of Earnings (Loss):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| (In millions) | Revenues | Cost of sales | Interest Expense | SG&A | Other Income | | Revenues | Cost of sales | Interest Expense | SG&A | Other Income |
| | | | | | | | | | | | |
Total amounts presented in the consolidated Statement of Earnings (Loss) | $ | 95,214 |
| $ | 70,029 |
| $ | 4,227 |
| $ | 13,949 |
| $ | 2,222 |
| | $ | 97,012 |
| $ | 72,818 |
| $ | 4,766 |
| $ | 14,643 |
| $ | 2,321 |
|
| | | | | | | | | | | | |
Total effect of cash flow hedges | $ | 5 |
| $ | (24 | ) | $ | (37 | ) | $ | (3 | ) | $ | — |
| | $ | (53 | ) | $ | (10 | ) | $ | (39 | ) | $ | — |
| $ | — |
|
| | | | | | | | | | | | |
| Hedged items | | | $ | (1,276 | ) | | | | | | $ | 617 |
| | |
Derivatives designated as hedging instruments | | | 1,229 |
| | | | | | (724 | ) | | |
Total effect of fair value hedges | | | $ | (48 | ) | | | | | | $ | (107 | ) | | |
| | | | | | | | | | | | |
| Interest rate contracts | $ | (24 | ) | $ | — |
| $ | (50 | ) | $ | — |
| $ | — |
| | $ | (72 | ) | $ | — |
| $ | (4 | ) | $ | — |
| $ | — |
|
| Currency exchange contracts | 180 |
| (35 | ) | — |
| (6 | ) | (59 | ) | | (1,303 | ) | (520 | ) | — |
| — |
| (47 | ) |
| Other | (2 | ) | — |
| 195 |
| — |
| 1 |
| | (1 | ) | — |
| (95 | ) | — |
| (10 | ) |
Total effect of derivatives not designated as hedges | $ | 154 |
| $ | (35 | ) | $ | 145 |
| $ | (6 | ) | $ | (58 | ) | | $ | (1,375 | ) | $ | (520 | ) | $ | (99 | ) | $ | — |
| $ | (56 | ) |
COUNTERPARTY CREDIT RISK
RISK. Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we net our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasury securities) when our receivables due from the counterparties, measured at current market value, exceeds specified limits. The fair value of such collateral was $1,277 million at December 31, 2018, of which $1,042 million was cash and $235 million was in the form of securities held by a custodian for our benefit. Under certain of these same agreements, we post collateral to our counterparties for our derivative obligations, the fair value of cash collateral posted was $267 million at December 31, 2018. At December 31, 2018, our Our exposures to counterparties (including accrued interest), net of collateral we hold,held, was $170 million. This excludes$368 million and $95 million at December 31, 2019 and 2018, respectively. Counterparties' exposures related to embedded derivatives.
Additionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the credit rating of the counterparty were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability subject to such termination provisions, after consideration(including accrued interest), net of collateral posted by us, was $159 million and outstanding interest payments was $657$571 million at December 31, 2018. This excludes exposure related to embedded derivatives. See the Credit Ratings2019 and Conditions section of Capital Resources and Liquidity in MD&A for more information.2018, respectively.
NOTE 21.22. VARIABLE INTEREST ENTITIES
A VIE is an entity that has any of these characteristics: (1) it is controlled by someone other than its shareowners or partners, (2) its shareowners or partners are not economically exposedIn addition to the entity’s earnings (for example, they are protected against losses), or (3) it was thinly capitalized when it was formed. In the normal course3 VIEs detailed in Note 4, we have other consolidated VIEs with assets of business we become involved with VIEs either because we help create them or we invest$2,663 million and $2,321 million, and liabilities of $1,137 million and $1,611 million at December 31 2019 and 2018, respectively. The increase in them. Our VIEs either provide goods and services to customers or provide financing to third parties for the purchase of GE goods and services. If we control theconsolidated VIE we consolidate it and provide disclosure below. However, if the VIE is a business and use of its assets is not limitedprimarily due to settling its liabilities, ongoing disclosures are not required.
CONSOLIDATED VARIABLE INTEREST ENTITIES
Our most significant consolidated VIE is a joint venture, BHGE LLC, which was formed as partthe formation of the Baker Hughes transaction. BHGE LLC owns the operating assets of GE Oil & Gas and Baker Hughes. BHGE LLC is a VIE as we hold an economic interest of approximately 50.4%aeroderivative JV described in the partnership, but we hold no voting or participating rights through our direct economic ownership. BHGE LLC is a SEC Registrant with separate filing requirements and its separate financial information can be obtained from www.sec.gov.
Previously we reported three joint ventures which were formed as part of the Alstom acquisition as consolidated VIEs. These joint ventures were considered VIEs because equity held by Alstom did not participate fully in the earnings of the ventures due to contractual features allowing Alstom to sell their interests back to GE. We consolidated these joint ventures because we controlled all their significant activities. These joint ventures were in all other respects regular businesses and were therefore exempt from ongoing disclosure requirements for consolidated VIEs provided below. These joint ventures ceased to be VIEs on September 5, 2018 when Alstom exercised their put and are now wholly-owned consolidated voting interest entities. See Note 15 for further information.
The table below provides information about consolidated VIEs that are subject to ongoing disclosure requirements. Substantially all of these entities were created to help our customers finance the purchase of GE goods and services or to purchase GE customer notes receivable arising from sales of GE goods and services.2. These entities have no features that could expose us to losses that would significantly exceed the difference between the consolidated assets and liabilities. Substantially all the assets of our consolidated VIEs at December 31, 2019 can only be used to settle the liabilities of those VIEs.
Our investments in unconsolidated VIEs were $1,937 million and $2,346 million, at December 31, 2019 and 2018, respectively. These investments are primarily owned by GE Capital businesses, $621 million and $1,670 million of which were owned by EFS, comprised of equity method investments, and $896 million and 0 of which were owned by our run-off insurance operations, primarily comprising investment securities, at December 31, 2019 and 2018, respectively. The increase in investments in unconsolidated VIEs in our run-off insurance operations reflects implementation of our revised reinvestment plan which incorporates the introduction of strategic initiatives to invest in higher-yielding asset classes. Our maximum exposure to loss in respect of unconsolidated VIEs is increased by our commitments to make additional investments in these entities described in Note 23.
GE20182019 FORM 10-K 149 104
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | |
| ASSETS AND LIABILITIES |
| GE Capital |
|
| OF CONSOLIDATED VIES |
| Customer | Trade |
|
|
| (In millions) | GE | Notes receivables(a) | receivables(b) | Other(c) | Total |
|
|
|
|
|
|
| December 31, 2018 |
|
|
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
| Financing receivables, net | $ | — |
| $ | — |
| $ | 1,774 |
| $ | 930 |
| $ | 2,704 |
|
| Current receivables | 129 |
| 366 |
| — |
| — |
| 496 |
|
| Investment securities | 35 |
| — |
| — |
| — |
| 35 |
|
| Other assets | 593 |
| 830 |
| — |
| 944 |
| 2,367 |
|
| Total | $ | 756 |
| $ | 1,197 |
| $ | 1,774 |
| $ | 1,874 |
| $ | 5,601 |
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
| Borrowings | $ | 44 |
| $ | — |
| $ | — |
| $ | 806 |
| $ | 850 |
|
| Non-recourse borrowings | — |
| 534 |
| 1,341 |
| — |
| 1,875 |
|
| Other liabilities | 342 |
| 546 |
| 423 |
| 490 |
| 1,801 |
|
| Total | $ | 386 |
| $ | 1,079 |
| $ | 1,765 |
| $ | 1,296 |
| $ | 4,526 |
|
|
|
|
|
|
|
| December 31, 2017 |
|
|
|
|
|
| Assets |
|
|
|
|
|
| Financing receivables, net | $ | — |
| $ | — |
| $ | — |
| $ | 792 |
| $ | 792 |
|
| Current receivables | 59 |
| 570 |
| — |
| — |
| 630 |
|
| Investment securities | — |
| — |
| — |
| 918 |
| 918 |
|
| Other assets | 586 |
| 1,182 |
| — |
| 1,920 |
| 3,688 |
|
| Total | $ | 646 |
| $ | 1,752 |
| $ | — |
| $ | 3,630 |
| $ | 6,028 |
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
| Borrowings | $ | 39 |
| $ | — |
| $ | — |
| $ | 1,027 |
| $ | 1,066 |
|
| Non-recourse borrowings | — |
| 669 |
| — |
| 16 |
| 685 |
|
| Other liabilities | 345 |
| 1,021 |
| — |
| 1,525 |
| 2,891 |
|
| Total | $ | 384 |
| $ | 1,690 |
| $ | — |
| $ | 2,568 |
| $ | 4,642 |
|
| |
(a) | Two funding entities were established to purchase customer notes receivable from GE, one of which is partially funded by third-party debt.
|
| |
(b) | On September 28, 2018, GE Capital entered a new $1,500 million current receivables facility with an alternative funding vehicle that it controlled. This facility, which will expire in eighteen months, unless extended, is a pan-European multi-jurisdiction, multi-currency revolving receivables facility. The alternative funding vehicle purchases GE current receivables on a daily basis and issues non-recourse debt to third-party banks to fund its purchases. GE Capital consolidates the entity because it services the purchased current receivables.
|
| |
(c) | In January 2018, ownership of the equity shares of Electric Insurance Company (EIC) were distributed to GE Capital by a bankruptcy trustee. We have previously reported EIC as a VIE because we received a 100% beneficial interest in the assets, liabilities and operations of EIC, related to an interim distribution in 2001. As EIC is now a consolidated voting interest entity we removed EIC from our VIE disclosure. In 2017, $1,470 million of assets and $959 million of liabilities were included related to EIC.
|
Total revenues from our consolidated VIEs were $895 million, $1,057 million and $1,141 million for the years ended December 31, 2018, 2017 and 2016, respectively. Related expenses consisted primarily of cost of goods and services of $314 million, $338 million and $692 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Where we provide servicing for third-party investors, we are contractually permitted to commingle cash collected from customers on financing receivables sold to third-party investors with our own cash prior to payment to third-party investors, provided our short-term credit rating does not fall below A2/P2. These third-party investors also owe us amounts for purchased financial assets and scheduled interest and principal payments. At December 31, 2018 and 2017, the amounts of commingled cash owed to the third-party investors were $72 million and $60 million, respectively.
UNCONSOLIDATED VARIABLE INTEREST ENTITIES
We become involved with unconsolidated VIEs primarily through assisting in the formation and financing of the entity. We do not consolidate these entities because we do not have power over decisions that significantly affect their economic performance. Our investments in unconsolidated VIEs, at December 31, 2018 and 2017 were $2,346 million and $5,833 million, respectively. Substantially all of these investments are held by EFS. The decrease in unconsolidated VIE exposure in 2018 was primarily driven by disposals of EFS investments as part of the GE Capital strategic shift. Obligations to make additional investments in these entities are not significant.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 22.23. COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES
COMMITMENTS
COMMITMENTS. The GE Capital Aviation Services (GECAS)GECAS business within theour Capital segment has placed multiple-year orders for various Boeing, Airbus and other aircraft manufacturers with list prices approximating $34,076$36,313 million, excluding pre-delivery payments made in advance, (including 414366 new aircraft with delivery dates of 21%16% in 2019,2020, 19% in 20202021 and 60%65% in 20212022 through 2024)2026) and secondary orders with airlines for used aircraft of approximately $2,534$2,419 million (including 4855 used aircraft with delivery dates of 90%71% in 20192020, 20% in 2021 and 10%9% in 2020)2022) at December 31, 2018.2019. When we purchase aircraft, it is at a contractual price, which is usually less than the aircraft manufacturer’s list price. The final payment is the contractual price less any pre-delivery payments that have been made in advance of the order. Pre-delivery payments are staged partial payments of the aircraft contractual price made by us to the manufacturer pursuant to an aircraft purchase agreement, usually 18-24 months in advance of the delivery of the aircraft. As of December 31, 2018,2019, we have made $3,086$2,934 million of pre-delivery payments to aircraft manufacturers.
GE Capital had total investment commitments of $2,648 million at December 31, 2019. The commitments primarily comprise project financing investments in thermal and wind energy projects of $1,225 million and investments by our run-off insurance operations in investment securities and other assets of $1,394 million, included within these commitments are obligations to make additional investments in unconsolidated VIEs of $217 million and $996 million, respectively. See Note 22 for further information.
As of December 31, 2018,2019, in our Aviation segment, we have committed to provide financing assistance of $2,654$2,269 million of future customer acquisitions of aircraft equipped with our engines.
GUARANTEES
Our guarantees are provided in the ordinary course of business. We underwrite these guarantees considering economic, liquidity and credit risk of the counterparty. We believe that the likelihood is remote that any such arrangements could have a significant adverse effect on our financial position, results of operations or liquidity. We record liabilities for guarantees at estimated fair value, generally the amount of the premium received, or if we do not receive a premium, the amount based on appraisal, observed market values or discounted cash flows. Any associated expected recoveries from third parties are recorded as other receivables, not netted against the liabilities.GUARANTEES. At December 31, 2018,2019, we were committed under the following guarantee arrangements beyond those provided on behalf of VIEs. See Note 21 for further information. arrangements:
Credit Support.At December 31, 2018,2019, we have provided $1,502$1,565 million of credit support on behalf of certain customers or associated companies, predominantly joint ventures and partnerships, using arrangements such as standby letters of credit and performance guarantees. These arrangements enable these customers and associated companies to execute transactions or obtain desired financing arrangements with third parties. Should our customer or associated company fail to perform under the terms of the transaction or financing arrangement, we would be required to perform on their behalf. Under most such arrangements, our guarantee is secured, usually by the asset being purchased or financed, or possibly by certain other assets of the customer or associated company for the term of the related financing arrangements or transactions. The liability for such credit support was $64$35 million at December 31, 2018. 2019.
Indemnification Agreements – Continuing Operations.Operations. At December 31, 2018,2019, we have $1,903$1,611 million of other indemnification commitments, including representations and warranties in sales of businesses or assets, for which we recorded a liability of $259$192 million.
We also have agreements that require us to fund up to $208 million at December 31, 2018 under residual value guarantees on a variety of leased equipment. Under most of our residual value guarantees, our commitment is secured by the leased asset. The liability for these indemnification agreements was $6 million.
Indemnification Agreements – Discontinued Operations Operations.At December 31, 2018,2019, we have provided specific indemnities to buyers of GE Capital’s assets that, in the aggregate, represent a maximum potential claim of $1,880 million. The majority$1,032 million with the related reserves of these indemnifications relate to the sale of businesses and assets under the GE Capital Exit Plan. We have recorded related liabilities of $253$142 million, which incorporates our evaluation of risk and the likelihood of making payments under the indemnities. The recognized liabilities represent the estimated fair value of the indemnities when issued as adjusted for any subsequent probable and estimable losses. DuringApproximately 44% of these exposures are expected to be resolved within the fourth quarter of 2018, we received a favorable court ruling relatednext year, while substantially all indemnifications are expected to an indemnity we provided in connection withbe resolved within the sale of a GE Capital business, which, if not subject to further extrajudicial actions, would reduce the amount of the maximum potential claim by $676 million. In addition, in connection with the 2015 public offering and sale of Synchrony Financial, GE Capital indemnified Synchrony Financial and its directors, officers, and employees against the liabilities of GECC's businesses other than historical liabilities of the businesses that are part of Synchrony Financial's ongoing operations. next ten years.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
PRODUCT WARRANTIES
WARRANTIES. We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information, mostly historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows.
|
| | | | | | | | | |
| (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Balance at January 1 | $ | 2,192 |
| $ | 2,103 |
| $ | 1,743 |
|
| Current-year provisions | 713 |
| 945 |
| 929 |
|
| Expenditures | (715 | ) | (788 | ) | (708 | ) |
| Other changes | (26 | ) | (69 | ) | 139 |
|
| Balance at December 31 | $ | 2,165 |
| $ | 2,192 |
| $ | 2,103 |
|
|
| | | | | | | | | |
| (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Balance at January 1 | $ | 2,348 |
| $ | 1,929 |
| $ | 1,733 |
|
| Current-year provisions | 1,071 |
| 961 |
| 801 |
|
| Expenditures | (960 | ) | (827 | ) | (734 | ) |
| Other changes(a) | 51 |
| 286 |
| 130 |
|
| Balance at December 31 | $ | 2,510 |
| $ | 2,348 |
| $ | 1,929 |
|
|
| | |
(a)FINANCIAL STATEMENTS | Included $172 million related to Baker Hughes and LM Wind Power acquisitions in 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
OTHER LOSS CONTINGENCIES
LEGAL MATTERS
InMATTERS. In the normal course of our business, we are involved from time to time in various arbitrations, class actions, commercial litigation, investigations and other legal, regulatory or governmental actions, including the significant matters described below.below that could have a material impact on our results of operations. In many proceedings, including the specific matters described below, it is inherently difficult to determine whether any loss is probable or even reasonably possible or to estimate the size or range of the possible loss, and accruals for legal matters are not recorded until a loss for a particular matter is considered probable and reasonably estimable. Given the nature of legal matters and the complexities involved, it is often difficult to predict and determine a meaningful estimate of loss or range of loss until we know, among other factors, the particular claims involved, the likelihood of success of our defenses to those claims, the damages or other relief sought, how discovery or other procedural considerations will affect the outcome, the settlement posture of other parties and other factors that may have a material effect on the outcome. For these matters, unless otherwise specified, we do not believe it is possible to provide a meaningful estimate of loss at this time. Moreover, it is not uncommon for legal matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated.
WMC.During the fourth quarter of 2007, we completed the sale of WMC, our U.S. mortgage business. WMC substantially discontinued all new loan originations by the second quarter of 2007, and was never a loan servicer. In connection with the sale, WMC retained certain representation and warranty obligations related to loans sold to third parties prior to the disposal of the business and contractual obligations to repurchase previously sold loans that had an early payment default. All claims received by WMC for early payment default have either been resolved or are no longer being pursued.
The remaining claims that were active claims have beenduring 2019 were brought by securitization trustees or administrators seeking recovery from WMC for alleged breaches of representations and warranties on mortgage loans that serve as collateral for residential mortgage-backed securities (RMBS). At December 31, 2018, suchThese claims consisted of $144 million of individual claims generally submitted before the filing of a lawsuit (compared to $462 million at December 31, 2017) and $433 million of additional claims asserted against WMC in litigation without making a prior claim (Litigation Claims) (compared to $3,198 million at December 31, 2017). The total amount of these claims, $577 million, reflects the purchase price or unpaid principal balanceswere resolved as part of the loans atChapter 11 bankruptcy case described below.
In January 2019, we announced an agreement in principle with the time of purchase and does not give effectUnited States to pay downs or potential recoveries based uponsettle the underlying collateral, which in many cases are substantial, nor to accrued interest or fees. WMC believes that repurchase claims brought based upon representations and warranties made more than six years before WMC was notified of the claim would be disallowed in legal proceedings under applicable law and the decisions of the New York Court of Appeals in ACE Securities Corp. v. DB Structured Products, Inc., (June 11, 2015) and Deutsche Bank National Trust Company v. Flagstar Capital Markets Corporation (October 16, 2018) on the statute of limitations period governing such claims.
Reserves related to repurchase claims made against WMC were $210 million at December 31, 2018, reflecting a net decrease to reserves in the year ended December 31, 2018 of $206 million due to settlements partially offsetinvestigation by incremental provisions. The reserve estimate takes into account recent settlement activity and is based upon WMC’s evaluation of the remaining exposures as a percentage of estimated lifetime mortgage loan losses within the pool of loans supporting each securitization for which timely claims have been asserted in litigation against WMC. Settlements in prior periods reduced WMC’s exposure on claims asserted in certain securitizations and the claim amounts reported above give effect to these settlements. During the first quarter of 2018, we also recorded a reserve of $1,500 million in connection with the U.S. Department of Justice'sJustice (DOJ) ongoing investigation regarding potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by WMC and GE Capital, discussedand in Legal Proceedings. This charge was recorded inApril 2019, the first quarter based upon our estimate ofparties entered into a definitive settlement agreement. Under the loss contingency at that time, including the status of our settlement discussions with the DOJ in the first quarter and an assessment of prior settlements reached in similar matters. On January 31, 2019, GE announced that it had reached an agreement, in principle with the DOJ to settlewhich concludes this investigation, under which GE, will paywithout admitting liability or wrongdoing, paid the United States a civil penalty of $1,500 million consistent.
In April 2019, WMC commenced a case under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. WMC subsequently filed a Chapter 11 plan seeking an efficient and orderly resolution of all claims, demands, rights, and/or liabilities to be asserted by or against WMC as the debtor. GE Capital provided approximately $14 million of debtor-in-possession financing to fund administrative expenses associated with the $1,500 million reserve recorded for this matterChapter 11 proceeding. In August 2019, we reached a settlement with WMC to resolve potential claims that WMC may have had against certain GE entities. This settlement was incorporated into and approved as part of the Chapter 11 plan that the Bankruptcy Court approved in November 2019. The Chapter 11 plan also incorporated the resolution of the claims at issue in the first quarter 2018.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | |
ROLLFORWARD OF THE RESERVE RELATED TO REPURCHASE CLAIMS (In millions) | 2018 |
| 2017 |
|
| | | |
| Balance at January 1 | $ | 416 |
| $ | 626 |
|
| Provision | 2 |
| 51 |
|
| Claim resolutions / rescissions | (208 | ) | (261 | ) |
| Balance at December 31 | $ | 210 |
| $ | 416 |
|
previously reported lawsuit that the TMI Trust Company (TMI), as successor to Law Debenture Trust Company of New York, brought against WMC has also received indemnification demands, nearly allin the United States District Court for the District of which are unspecified, from depositors/underwriters/sponsorsConnecticut with respect to approximately $800 million of RMBSmortgage loans. The Chapter 11 plan became effective in December 2019, and GE Capital’s membership interests in WMC were extinguished pursuant to the plan. In total, we paid approximately $207 million to WMC in connection with lawsuits brought by RMBS investors concerning alleged misrepresentations in the securitization offering documents to whichsettlement of potential claims that WMC is not a party, or, in two cases, involving mortgage loan repurchase claims mademay have had against RMBS sponsors. WMC believes that it has defenses to these demands.
Adverse changes to WMC’s assumptions supporting the reserve may result in an increase to these reserves. WMC estimates a rangeus, as discussed above. As of reasonably possible loss for all WMC-related matters from approximately $50 million to $150 million over its recorded reserve at December 31, 2018. This estimate involves significant judgment and may not reflect2019, we had no further liabilities to WMC. As a condition to the range of uncertainties and unpredictable outcomes inherent in litigation, including the remaining lawsuit discussed in Legal Proceedings and potential changes in WMC’s legal strategy.
As previously disclosed, it is possible that WMC will file for bankruptcy based upon developments in the remaining lawsuit and potential legal claims involving WMC. In the event of a WMC bankruptcy,settlement agreement described above, GE Capital would be required to reassess itsprovided WMC consolidation analysis depending upon the specific facts and circumstances at$39.5 million of exit financing that time, which might result in GE Capital no longer consolidating WMC’sis secured by other remaining assets and liabilities in its financial statements. In that event, GE and GE Capital would have to assess their respective direct exposure, if any, to WMC-related loss contingencies. A WMC bankruptcy would also give rise to costs and expenses, consisting of administrative expenses, legal fees, and settlements of claims against WMC.
Alstom legacy matters.legal matters. On November 2, 2015, we acquired the Thermal, Renewables and Grid businesses from Alstom. Prior to the acquisition, the seller was the subject of two2 significant cases involving anti-competitive activities and improper payments: (1) in January 2007, Alstom was fined €65 million by the European Commission for participating in a gas insulated switchgear cartel that operated from 1988 to 2004 (that fine was later reduced to €59 million), and (2) in December 2014, Alstom pled guilty in the United States to multiple violations of the Foreign Corrupt Practices Act and paid a criminal penalty of $772 million. As part of GE’s accounting for the acquisition, we established a reserve amounting to $858 million for legal and compliance matters related to the legacy business practices that were the subject of these and related cases in various jurisdictions. At December 31, 2018, thisjurisdictions, including the previously reported legal proceedings in Israel and Slovenia that are described below. The reserve balance was $875 million and $889 million. The increase is primarily driven by foreign currency movements. million at December 31, 2019 and 2018, respectively.
Regardless of jurisdiction, the allegations relate to claimed anti-competitive conduct or improper payments in the pre-acquisition period as the source of legal violations and/or damages. Given the significant litigation and compliance activity related to these matters and our ongoing efforts to resolve them, it is difficult to assess whether the disbursements will ultimately be consistent with the reserve established. The estimation of this reserve involved significant judgment and may not reflect the full range of uncertainties and unpredictable outcomes inherent in litigation and investigations of this nature, and at this time we are unable to develop a meaningful estimate of the range of reasonably possible additional losses beyond the amount of this reserve. Damages sought may include disgorgement of profits on the underlying business transactions, fines and/or penalties, interest, or other forms of resolution. Factors that can affect the ultimate amount of losses associated with these and related matters include the way cooperation is assessed and valued, prosecutorial discretion in the determination of damages, formulas for determining fines and penalties, the duration and amount of legal and investigative resources applied, political and social influences within each jurisdiction, and tax consequences of any settlements or previous deductions, among other considerations. Actual losses arising from claims in these and related matters could exceed the amount provided.
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In September 2013, the Israeli Antitrust Authority issued a decision whereby Alstom, Siemens AG and ABB Ltd. were held liable for an alleged anti-competitive arrangement in the gas-insulated switchgears market in Israel. While there was no fine in connection with that decision, claimants brought civil actions in 2013 seeking damages of approximately $950 million and $600 million, respectively, related to the alleged conduct underlying the decision that are pending before the Central District Court in Israel. The parties have been working to finalize a settlement, which is subject to court approval, and we anticipate a decision from the court in the first half of 2020.
In connection with alleged improper payments by Alstom relating to contracts won in 2006 and 2008 for work on a state-owned power plant in Šoštanj, Slovenia, the power plant owner in January 2017 filed an arbitration claim for damages of approximately $430 million before the International Chamber of Commerce Court of Arbitration in Vienna, Austria. In February 2017, a government investigation in Slovenia of the same underlying conduct proceeded to an investigative phase overseen by a judge of the Celje District Court.
Shareholder and related lawsuits. Since November 2017, several putative shareholder class actions under the federal securities laws have been filed against GE and certain affiliated individuals and consolidated into a single action currently pending in the U.S. District Court for the Southern District of New York (the Hachem case). In October 2019, the lead plaintiff filed a fifth amended consolidated class action complaint naming as defendants GE and current and former GE executive officers. It alleges violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 related to insurance reserves and accounting for long-term service agreements and seeks damages on behalf of shareholders who acquired GE stock between February 27, 2013 and January 23, 2018. GE filed a motion to dismiss in December 2019.
Since February 2018, multiple shareholder derivative lawsuits have also been filed against current and former GE executive officers and members of GE’s Board of Directors and GE (as nominal defendant). NaN shareholder derivative lawsuits are currently pending: the Bennett case, which was filed in Massachusetts state court, and the Cuker case, which was filed in New York state court. These lawsuits have alleged violations of securities laws, breaches of fiduciary duties, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement, although the specific matters underlying the allegations in the lawsuits have varied. The allegations in the Bennett case relate to substantially the same facts as those underlying the securities class action described above, and the allegations in the Cuker case relate to alleged corruption in China. The Bennett complaint also includes a claim for professional negligence and accounting malpractice against GE’s auditor, KPMG. The plaintiffs seek unspecified damages and improvements in GE’s corporate governance and internal procedures. The Bennett case has been stayed pending final resolution of another shareholder derivative lawsuit (the Gammel case) that was previously dismissed. In August 2019, the Cuker plaintiffs filed an amended complaint. In September 2019, GE filed a motion to dismiss the amended complaint.
In June 2018, a lawsuit (the Bezio case) was filed in New York state court derivatively on behalf of participants in GE’s 401(k) plan (the GE Retirement Savings Plan (RSP)), and alternatively as a class action on behalf of shareholders who acquired GE stock between February 26, 2013 and January 24, 2018, alleging violations of Section 11 of the Securities Act of 1933 based on alleged misstatements and omissions related to insurance reserves and performance of GE’s business segments in a GE RSP registration statement and documents incorporated therein by reference. In November 2018, the plaintiffs filed an amended derivative complaint naming as defendants GE, former GE executive officers and Fidelity Management Trust Company, as trustee for the GE RSP. In January 2019, GE filed a motion to dismiss, and in November 2019, the court dismissed the remaining claims and the plaintiffs filed a notice of appeal. In December 2019, the plaintiffs filed a second amended derivative complaint, and in January 2020, GE filed a motion to dismiss.
In July 2018, a putative class action (the Mahar case) was filed in New York state court naming as defendants GE, former GE executive officers, a former member of GE’s Board of Directors and KPMG. It alleged violations of Sections 11, 12 and 15 of the Securities Act of 1933 based on alleged misstatements related to insurance reserves and performance of GE’s business segments in GE Stock Direct Plan registration statements and documents incorporated therein by reference and seeks damages on behalf of shareholders who acquired GE stock between July 20, 2015 and July 19, 2018 through the GE Stock Direct Plan. In February 2019, this case was dismissed. In March 2019, plaintiffs filed an amended derivative complaint naming the same defendants. In April 2019, GE filed a motion to dismiss the amended complaint. In October 2019, the court denied GE's motion to dismiss and stayed the case pending the outcome of the Hachem case. In November 2019, the plaintiffs moved to re-argue to challenge the stay, and GE cross-moved to re-argue the denial of the motion to dismiss and filed a notice of appeal.
In October 2018, a putative class action (the Houston case) was filed in New York state court naming as defendants GE, certain GE subsidiaries and current and former GE executive officers and employees. It alleges violations of Sections 11, 12 and 15 of the Securities Act of 1933 and seeks damages on behalf of purchasers of senior notes issued in 2016 and rescission of transactions involving those notes. This case has been stayed pending resolution of the motion to dismiss the Hachem case.
In December 2018, a putative class action (the Varga case) was filed in the U.S. District Court for the Northern District of New York naming GE and a former GE executive officer as defendants in connection with the oversight of the GE RSP. It alleges that the defendants breached fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by failing to advise GE RSP participants that GE Capital insurance subsidiaries were allegedly under-reserved and continued to retain a GE stock fund as an investment option in the GE RSP. The plaintiffs seek unspecified damages on behalf of a class of GE RSP participants and beneficiaries from January 1, 2010 through January 19, 2018 or later. In April 2019, GE filed a motion to dismiss.
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In February 2019, 2 putative class actions (the Birnbaum case and the Sheet Metal Workers Local 17 Trust Funds case) were filed in the U.S. District Court for the Southern District of New York naming as defendants GE and current and former GE executive officers. In April 2019, the court issued an order consolidating these two actions. In June 2019, the lead plaintiff filed an amended consolidated complaint. It alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 based on alleged misstatements regarding GE's H-class turbines and goodwill related to GE's Power business. The lawsuit seeks damages on behalf of shareholders who acquired GE stock between December 4, 2017 and December 6, 2018. In August 2019, the lead plaintiff filed a second amended complaint. In September 2019, GE filed a motion to dismiss the second amended complaint.
In February 2019, a securities action (the Touchstone case) was filed in the U.S. District Court for the Southern District of New York naming as defendants GE and current and former GE executive officers. It alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 1707.43 of the Ohio Securities Act and common law fraud based on alleged misstatements regarding insurance reserves, GE Power’s revenue recognition practices related to long term service agreements, GE’s acquisition of Alstom, and the goodwill recognized in connection with that transaction. The lawsuit seeks damages on behalf of 6 institutional investors who purchased GE common stock between August 1, 2014 and October 30, 2018 and rescission of those purchases. This case has been stayed pending resolution of the motion to dismiss the Hachem case.
As previously reported by Baker Hughes, in March 2019, 2 derivative lawsuits were filed in the Delaware Court of Chancery naming as defendants GE, directors of Baker Hughes (including former members of GE’s Board of Directors and current and former GE executive officers) and Baker Hughes (as nominal defendant), and the court issued an order consolidating these two actions (the Schippnick case). The complaint as amended in May 2019 alleges, among other things, that GE and the Baker Hughes directors breached their fiduciary duties and that GE was unjustly enriched by entering into transactions and agreements related to GE's sales of approximately 12% of its ownership interest in Baker Hughes in November 2018. The complaint seeks declaratory relief, disgorgement of profits, an award of damages, pre- and post-judgment interest and attorneys’ fees and costs. In May 2019, the plaintiffs voluntarily dismissed their claims against the directors who were members of the Baker Hughes Conflicts Committee and a former Baker Hughes director. In October 2019, the Court denied the remaining defendants’ motions to dismiss, except with respect to the unjust enrichment claim against GE, which has been dismissed. In November 2019, the defendants filed their answer to the complaint, and a special litigation committee of the Baker Hughes Board of Directors moved for an order staying all proceedings in this action pending completion of the committee's investigation of the allegations and claims asserted in the complaint. In December 2019, the court granted a six-month stay.
In August 2019, a putative class action (the Tri-State case) was filed in the Delaware Court of Chancery naming as defendants GE and the former Board of Directors of Baker Hughes Incorporated (BHI). It alleges fraud, aiding and abetting breaches of fiduciary duty, and aiding and abetting breaches of duty of disclosure by GE based on allegations regarding financial statements that GE provided the former BHI board, management and shareholders in connection with BHI’s merger with GE’s Oil and Gas Business in July 2017. The plaintiff seeks damages on behalf of BHI shareholders during the period between October 7, 2016 and July 5, 2017. In October 2019, the City of Providence filed a complaint containing allegations substantially similar to those in the Tri-State complaint. The cases were consolidated in November 2019, and in December 2019, the plaintiffs filed an amended consolidated complaint which is similar to the prior complaints but does not include fraud claims against GE.
These cases are at an early stage; we believe we have defenses to the claims and are responding accordingly.
SEC investigation.In late November 2017, staff of the Boston office of the U.S. Securities & Exchange Commission (SEC) notified us that they are conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. Following our investor update in January 2018 about the increase in future policy benefit reserves for GE Capital’s run-off insurance operations, the SEC staff expanded the scope of its investigation to encompass the reserve increase and the process leading to the reserve increase. Following our announcement in October 2018 about the expected non-cash goodwill impairment charge related to GE’s Power business, the SEC expanded the scope of its investigation to include that charge as well. We are providing documents and other information requested by the SEC staff, and we are cooperating with the ongoing investigation. Staff from the DOJ are also investigating these matters, and we are providing them with requested documents and information as well.
Other GE Retirement Savings Plan class actions.NaN putative class action lawsuits have been filed regarding the oversight of the GE RSP, and those class actions have been consolidated into a single action in the U.S. District Court for the District of Massachusetts. The consolidated complaint names as defendants GE, GE Asset Management, current and former GE and GE Asset Management executive officers and employees who served on fiduciary bodies responsible for aspects of the GE RSP during the class period. Like similar lawsuits that have been brought against other companies in recent years, this action alleges that the defendants breached their fiduciary duties under ERISA in their oversight of the GE RSP, principally by retaining 5 proprietary funds that plaintiffs allege were underperforming as investment options for plan participants and by charging higher management fees than some alternative funds. The plaintiffs seek unspecified damages on behalf of a class of GE RSP participants and beneficiaries from September 26, 2011 through the date of any judgment. In August and December 2018, the court issued orders dismissing 1 count of the complaint and denying GE's motion to dismiss the remaining counts. We believe we have defenses to the claims and are responding accordingly.
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Bank BPH. As previously reported, GE Capital’s subsidiary Bank BPH, along with other Polish banks, has been subject to ongoing litigation in Poland related to its portfolio of floating rate residential mortgages, with cases brought by individual borrowers seeking relief related to their foreign currency-denominated mortgages in various courts throughout Poland. Approximately 86% of the Bank BPH portfolio is indexed to or denominated in foreign currencies (primarily Swiss francs), and the total portfolio had a carrying value of $2.5 billion at December 31, 2019. In October 2019, the European Court of Justice (ECJ) issued a decision about the approach to remedy in a case involving another Polish bank’s foreign currency loans, and in January 2020, a pending case involving a Bank BPH loan was referred to the ECJ. While there remains significant uncertainty as to how the prior ECJ decision, or a future decision on the Bank BPH case, will influence the Polish courts as they consider individual cases, we are observing an increase in the number of lawsuits brought against Bank BPH and other banks in Poland with similar portfolios that may continue in future reporting periods. We also believe there is a potential for unifying rules of decision to emerge regarding both the finding of liability and approach to remedy that could change our estimate of the potential effects of borrower litigation. Future adverse developments in the potential for legislative relief or in litigation across the Polish banking industry as a result of ECJ decisions or otherwise could result in losses related to these loans in future reporting periods.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
MATTERS.Our operations, like operations of other companies engaged in similar businesses, involve the use, disposal and cleanup of substances regulated under environmental protection laws. Welaws and nuclear decommissioning regulations. Additionally, like many other industrial companies, we and our subsidiaries are involveddefendants in numerous remediation actionsvarious lawsuits related to clean upalleged worker exposure to asbestos or other hazardous wastes as required by federal and state laws.materials. Liabilities for environmental remediation, costsnuclear decommissioning and worker exposure claims exclude possible insurance recoveries and, when dates and amounts of such costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range.recoveries. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites and lawsuits, such amounts are not reasonably estimable. Total reserves related to environmental remediation, nuclear decommissioning and asbestosworker exposure claims were $1,699$2,484 million and $2,172 million at December 31, 2018. 2019 and 2018, respectively.
As previously reported, in 2000, GE and the Environmental Protection Agency (EPA) entered into a consent decree relating to PCB cleanup of the Housatonic River in Massachusetts. Following EPA’s release in September 2015 of an intended final remediation decision, GE and EPA engaged in mediation and the first step of the dispute resolution process contemplated by the consent decree. In October 2016, the EPA issued its final decision pursuant to the consent decree, which GE and several other interested parties appealed to EPA’s Environmental Appeals Board (EAB). The EAB issued its decision in January 2018, affirming parts of EPA’s decision and granting relief to GE on certain significant elements of its challenge. The EAB remanded the decision back to EPA to address those elements and reissue a revised final remedy, and EPA convened a mediation process with GE and interested stakeholders. In February 2020, EPA announced an agreement between EPA and many of the mediation stakeholders, including GE, concerning a revised Housatonic River remedy. EPA will next propose this remedy for public comment and then finalize a revised remedy. As of December 31, 2019, and based on its assessment of current facts and circumstances and its defenses, GE believes that it has recorded adequate reserves to cover future obligations associated with the proposed final remedy.
Expenditures for site remediation, nuclear decommissioning and worker exposure claims amounted to approximately $236 million, $214 million, and $227 million for the years ended December 31, 2019, 2018, and 2017, respectively. We presently expect that such expenditures will be approximately $350 million and $250 million in 2020 and 2021, respectively.
GE20182019 FORM 10-K 153 109
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 23.24. CASH FLOWS INFORMATION
Changes in operating assets and liabilities are net of acquisitions and dispositions of principal businesses.
Amounts reported in the “ProceedsProceeds from sales of discontinued operations”operations and “ProceedsProceeds from principal business dispositions” linesdispositions captions in our consolidated Statement of Cash Flows are net of cash transferred and included certain deal-related costs. Amounts reported in the “NetNet cash from (payments for) principal businesses purchased” linepurchased caption are net of cash acquired and included certain deal-related costs and debt assumed and immediately repaid in acquisitions.
|
| | | | | | | | | |
| For the years ended December 31 (In millions) | 2018 |
| 2017 |
| 2016 |
|
|
|
|
|
| All other operating activities |
|
|
|
| Other gains on investing activities | $ | (510 | ) | $ | (138 | ) | $ | (90 | ) |
| Restructuring and other charges(a) | 990 |
| 1,951 |
| 1,668 |
|
| Increase (decrease) in equipment project accruals | (951 | ) | (186 | ) | (595 | ) |
| Other(b) | 596 |
| (406 | ) | (1,834 | ) |
| $ | 125 |
| $ | 1,221 |
| $ | (851 | ) |
| All other investing activities | | | |
| Derivative settlements (net)(c) | $ | (861 | ) | $ | (1,142 | ) | $ | — |
|
| Investments in intangible assets (net) | (496 | ) | (321 | ) | (499 | ) |
| Investments in associated companies (net) | 127 |
| (226 | ) | (420 | ) |
| Other investments (net) | (50 | ) | (281 | ) | (160 | ) |
| Other | 90 |
| (90 | ) | (270 | ) |
| | $ | (1,190 | ) | $ | (2,061 | ) | $ | (1,349 | ) |
| All other financing activities | | | |
| Proceeds from BHGE public share offering | $ | 2,273 |
| $ | — |
| $ | — |
|
| Acquisition of noncontrolling interests(d) | (3,732 | ) | (499 | ) | (102 | ) |
| Dividends paid to noncontrolling interests | (366 | ) | (263 | ) | (49 | ) |
| Other | 102 |
| 234 |
| (122 | ) |
| | $ | (1,723 | ) | $ | (528 | ) | $ | (273 | ) |
| Net dispositions (purchases) of GE shares for treasury |
|
|
|
| Open market purchases under share repurchase program(e) | $ | (245 | ) | $ | (3,506 | ) | $ | (22,581 | ) |
| Other purchases | (23 | ) | (67 | ) | (399 | ) |
| Dispositions | 250 |
| 1,021 |
| 1,550 |
|
| $ | (17 | ) | $ | (2,550 | ) | $ | (21,429 | ) |
|
| | | | | | | | | |
GE For the years ended December 31 (In millions) | 2019 |
| 2018 |
| 2017 |
|
|
|
|
|
| Increase (decrease) in employee benefit liabilities(a) | $ | 227 |
| $ | 587 |
| $ | (68 | ) |
| Other gains on investing activities | (723 | ) | (378 | ) | (138 | ) |
| Restructuring and other charges(b) | 1,144 |
| 2,244 |
| 2,781 |
|
| Restructuring and other cash expenditures | (1,157 | ) | (1,474 | ) | (1,484 | ) |
| Increase (decrease) in equipment project accruals | (314 | ) | (939 | ) | (212 | ) |
| Baker Hughes Class B dividends received | 282 |
| 494 |
| 251 |
|
| Other(c) | 613 |
| 142 |
| 374 |
|
| All other operating activities | $ | 72 |
| $ | 676 |
| $ | 1,504 |
|
| | | | |
| Derivative settlements (net) | $ | (14 | ) | $ | (947 | ) | $ | (1,016 | ) |
| Investments in intangible assets (net) | (30 | ) | (496 | ) | (321 | ) |
| Other investments (net)(d) | 791 |
| 726 |
| (1,404 | ) |
| Sales of retained ownership interests in Wabtec | 3,383 |
| — |
| — |
|
| Other(e) | (455 | ) | 77 |
| (6,698 | ) |
| All other investing activities | $ | 3,675 |
| $ | (640 | ) | $ | (9,439 | ) |
| | | | |
| Disposition of Baker Hughes noncontrolling interests | $ | — |
| $ | 4,373 |
| $ | 308 |
|
| Acquisition of noncontrolling interests(f) | (28 | ) | (3,345 | ) | (135 | ) |
| Other(g) | (284 | ) | 79 |
| 117 |
|
| All other financing activities | $ | (312 | ) | $ | 1,107 |
| $ | 290 |
|
| | | | |
| Open market purchases under share repurchase program | $ | (10 | ) | $ | (245 | ) | $ | (3,506 | ) |
| Other purchases | (47 | ) | (23 | ) | (67 | ) |
| Dispositions | 84 |
| 250 |
| 1,021 |
|
| Net dispositions (purchases) of GE shares for treasury | $ | 29 |
| $ | (17 | ) | $ | (2,550 | ) |
| |
| (a) | Reflected the effects of restructuring and other charges of $2,941 million, $3,947 million and $3,350 million and restructuring and other cash expenditures of $(1,951) million, $(1,996) million and $(1,682) million for the years ended December 31, 2018, 2017 and 2016, respectively. ExcludesIncluded non-cash adjustments reflected as "Depreciation and amortization of property, plant and equipment" or "Amortization of intangible assets" in our consolidated Statement of Cash Flows.
for stock-based compensation expenses. |
| |
| (b) | Excluded non-cash adjustments reflected as Depreciation and amortization of property, plant and equipment or Amortization of intangible assets in our consolidated Statement of Cash Flows. |
| |
| (c) | Included other adjustments to net income, such as write-downs of assets and the impacts of acquisition accounting and changes in other assets and other liabilities classified as operating activities, such as the timing of payments of employee-related liabilities and customer allowances. |
| |
(c) | The classification of settlements of derivative instruments was corrected from operating cash flows to investing cash flows in 2017. Such settlements of $178 million in 2016 were not reclassified and corrected in investing cash flows as they were not considered material.
|
| |
| (d) | Included the provision of a promissory note to Baker Hughes in 2017 and subsequent principal collections in 2018 and 2019. See Note 2. |
| |
| (e) | Included net activity related to settlements between our continuing operations and discontinued operations. In 2017, this was primarily driven by funding in order to complete the Baker Hughes acquisition. |
| |
| (f) | Primarily included the acquisition of Alstom's interest in the grid technology, renewable energy, and global nuclear and French steam power joint ventures for $(3,105)$(3,105) million in the fourth quarter of 2018. See Note 15. 16. |
| |
(e)(g) | Included $(11,370)Primarily included debt tender expenditures of $(255) million paid under ASR agreements incurred to purchase GE long-term debt in 2016.2019.
|
GE20182019 FORM 10-K 154 110
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
GE CAPITAL
| | | For the years ended December 31 (In millions) | 2018 |
| 2017 |
| 2016 |
| |
GE CAPITAL For the years ended December 31 (In millions) | | 2019 |
| 2018 |
| 2017 |
|
| | |
|
| All other operating activities | | |
| Cash collateral on derivative contracts | $ | (595 | ) | $ | 131 |
| $ | (428 | ) | |
| Cash collateral and settlements received (paid) on derivative contracts | | $ | 1,263 |
| $ | (708 | ) | $ | 836 |
|
| Increase (decrease) in other liabilities | 240 |
| (798 | ) | 3,256 |
| (1,470 | ) | 240 |
| (798 | ) |
| Other(a) | 483 |
| 11,783 |
| 1,204 |
| 811 |
| 627 |
| 11,076 |
|
| All other operating activities | | $ | 605 |
| $ | 158 |
| $ | 11,114 |
|
| | $ | 127 |
| $ | 11,115 |
| $ | 4,032 |
|
|
| Net decrease (increase) in GE Capital financing receivables | | |
| Increase in loans to customers | $ | (30,207 | ) | $ | (45,251 | ) | $ | (65,055 | ) | $ | (15,022 | ) | $ | (30,207 | ) | $ | (45,251 | ) |
| Principal collections from customers - loans | 37,237 |
| 47,471 |
| 60,375 |
| 18,083 |
| 37,237 |
| 47,471 |
|
| Investment in equipment for financing leases | (306 | ) | (585 | ) | (690 | ) | (18 | ) | (306 | ) | (585 | ) |
| Principal collections from customers - financing leases | 802 |
| 1,011 |
| 856 |
| |
| Principal collections from customers - financing leases(b) | | — |
| 802 |
| 1,011 |
|
| Sales of financing receivables | 2,458 |
| 251 |
| 3,235 |
| 345 |
| 2,458 |
| 251 |
|
| Net decrease (increase) in GE Capital financing receivables | | $ | 3,389 |
| $ | 9,986 |
| $ | 2,897 |
|
| | $ | 9,986 |
| $ | 2,897 |
| $ | (1,279 | ) |
|
| All other investing activities | | |
| Purchases of investment securities | $ | (5,775 | ) | $ | (2,867 | ) | $ | (18,588 | ) | $ | (6,205 | ) | $ | (5,775 | ) | $ | (2,867 | ) |
| Dispositions and maturities of investment securities | 8,309 |
| 10,001 |
| 7,343 |
| 4,589 |
| 8,309 |
| 10,001 |
|
| Decrease (increase) in other assets - investments | (4,516 | ) | (8,497 | ) | 8,853 |
| 1,347 |
| (4,516 | ) | (8,497 | ) |
| Other(b) | 2,464 |
| 4,375 |
| 3,690 |
| |
| Other(c) | | 2,886 |
| 2,464 |
| 4,375 |
|
| All other investing activities | | $ | 2,617 |
| $ | 482 |
| $ | 3,013 |
|
| | $ | 482 |
| $ | 3,013 |
| $ | 1,297 |
|
|
| Repayments and other reductions (maturities longer than 90 days) | | |
| Short-term (91 to 365 days) | $ | (14,251 | ) | $ | (18,591 | ) | $ | (44,519 | ) | $ | (10,515 | ) | $ | (14,251 | ) | $ | (18,591 | ) |
| Long-term (longer than one year) | (5,460 | ) | (2,054 | ) | (13,418 | ) | (991 | ) | (5,460 | ) | (2,054 | ) |
| Principal payments - non-recourse, leveraged leases | (125 | ) | (362 | ) | (348 | ) | (126 | ) | (125 | ) | (362 | ) |
| Repayments and other reductions (maturities longer than 90 days) | | $ | (11,632 | ) | $ | (19,836 | ) | $ | (21,007 | ) |
| | $ | (19,836 | ) | $ | (21,007 | ) | $ | (58,285 | ) |
|
| Redemption of investment contracts | | $ | (279 | ) | $ | (268 | ) | $ | (344 | ) |
| Settlements paid on derivative contracts | | (864 | ) | (2,235 | ) | (212 | ) |
| Other | | 324 |
| 95 |
| 276 |
|
| All other financing activities | | $ | (819 | ) | $ | (2,408 | ) | $ | (280 | ) |
| Proceeds from sales of investment contracts | $ | 5 |
| $ | 10 |
| $ | 19 |
| |
| Redemption of investment contracts | (268 | ) | (344 | ) | (346 | ) | |
| Other | (2,145 | ) | 54 |
| (2,134 | ) | |
| | $ | (2,408 | ) | $ | (280 | ) | $ | (2,460 | ) | |
| |
| (a) | Primarily included non-cash adjustments for insurance-related charges recorded in the fourth quarter of2019 and 2017. |
| |
| (b) | In 2019, per ASU No. 2016-02, Leases, principal collections from customers on financing leases is classified as cash from operating activities. |
| |
| (c) | Primarily included cash related to our current receivables and supply chain finance programs and net activity related to settlements between our continuing operations (primarily our treasury operations) and businesses in discontinued operations. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 24.25. INTERCOMPANY TRANSACTIONS
Transactions between related companies are made on arm's length terms and are reported in the GE and GE Capital columns of our financial statements, which we believe provide useful supplemental information to our consolidated financial statements. These transactions are eliminated in consolidation andmay include, but are not limited to, the following:
GE Capital dividends to GE,
GE Capital working capital services to GE, including tradecurrent receivables and supply chain finance programs,
programs; GE Capital enabled GE industrial orders,finance transactions, including related GE guarantees to GE Capital,
Capital; GE Capital financing of GE long-term receivables,receivables; and
Aircraft aircraft engines, power equipment and renewable energy equipment and healthcare equipment manufactured by GE that are installed on GE Capital investments, including leased equipment.
In addition to the above transactions that primarily enable growth for the GE businesses, there are routine related party transactions, which include, but are not limited to, the following:
Expenses expenses related to parent-subsidiary pension plans,
Buildingsplans; buildings and equipment leased between GE and GE Capital, including sale-leaseback transactions,
Informationtransactions; information technology (IT) and other services sold to GE Capital by GE
SettlementsGE; settlements of tax liabilities,liabilities; and
Various various investments, loans and allocations of GE corporate overhead costs.
Presented below is a walk of intercompany eliminations from the combined GE and GE Capital totals to the consolidated cash flows.
|
| | | | | | | | | |
| (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Combined GE and GE Capital cash from (used for) operating activities - continuing operations | $ | 6,495 |
| $ | 2,282 |
| $ | 13,853 |
|
| GE current receivables sold to GE Capital | 1,081 |
| 5 |
| (4,435 | ) |
| GE long-term receivables sold to GE Capital | 468 |
| 1,079 |
| (250 | ) |
| Supply chain finance programs(a) | 2,289 |
| (18 | ) | 302 |
|
| GE Capital common dividends to GE | — |
| — |
| (4,016 | ) |
| Other reclassifications and eliminations | 86 |
| (138 | ) | 387 |
|
| Consolidated cash from (used for) operating activities-continuing operations | $ | 10,419 |
| $ | 3,210 |
| $ | 5,840 |
|
| | | | |
| Combined GE and GE Capital cash from (used for) investing activities - continuing operations | $ | 13,509 |
| $ | 14,915 |
| $ | (3,473 | ) |
| GE current receivables sold to GE Capital | (1,677 | ) | (839 | ) | 4,561 |
|
| GE long-term receivables sold to GE Capital | (468 | ) | (1,079 | ) | 250 |
|
| Supply chain finance programs(a) | (2,289 | ) | 18 |
| (302 | ) |
| GE Capital loans to GE | — |
| 6,479 |
| 7,271 |
|
| Repayment of GE Capital loans by GE | (1,523 | ) | — |
| (1,329 | ) |
| Capital contribution from GE to GE Capital | 4,000 |
| — |
| — |
|
| Other reclassifications and eliminations | (868 | ) | (570 | ) | (251 | ) |
| Consolidated cash from (used for) investing activities-continuing operations | $ | 10,684 |
| $ | 18,925 |
| $ | 6,728 |
|
| | | | |
| Combined GE and GE Capital cash from (used for) financing activities - continuing operations | $ | (14,665 | ) | $ | (22,408 | ) | $ | (21,738 | ) |
| GE current receivables sold to GE Capital | 596 |
| 835 |
| (127 | ) |
| GE Capital common dividends to GE | — |
| — |
| 4,016 |
|
| GE Capital loans to GE | — |
| (6,479 | ) | (7,271 | ) |
| Repayment of GE Capital loans by GE | 1,523 |
| — |
| 1,329 |
|
| Capital contribution from GE to GE Capital | (4,000 | ) | — |
| — |
|
| Other reclassifications and eliminations | 782 |
| 706 |
| (136 | ) |
| Consolidated cash from (used for) financing activities-continuing operations | $ | (15,764 | ) | $ | (27,345 | ) | $ | (23,927 | ) |
| |
| (a) | Represents the reduction of the GE liability associated with the funded participation in a supply chain finance program with GE Capital, primarily as a result of GE Capital's sale of the program platform to MUFG Union Bank, N.A. (MUFG) in 2019. |
GE current receivables sold to GE Capital excludes $303 million, $5,192 million and $4,411 million related to cash payments received on the Receivable facility deferred purchase price in the years ended December 31, 2019, 2018 and 2017, respectively, which are reflected as Cash from investing activities in the GE Capital and Consolidated columns of our consolidated Statement of Cash Flows. Sales of current and long-term receivables from GE to GE Capital are classified as Cash from operating activities in the GE column of our Statement of Cash Flows. See Note 4 for further information.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Presented below is a walk of intercompany eliminations from the unconsolidated GE and GE Capital totals to the consolidated cash flows.
|
| | | | | | | | | |
| (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Cash from (used for) operating activities-continuing operations | | | |
| Combined | $ | 3,839 |
| $ | 13,408 |
| $ | 29,753 |
|
| GE current receivables sold to GE Capital(a) | 198 |
| (2,611 | ) | 697 |
|
| GE long-term receivables sold to GE Capital | 1,079 |
| (250 | ) | (1,569 | ) |
| GE Capital common dividends to GE | — |
| (4,016 | ) | (20,095 | ) |
| Other reclassifications and eliminations(b) | (455 | ) | 470 |
| (1,282 | ) |
| Total cash from (used for) operating activities-continuing operations | $ | 4,662 |
| $ | 7,000 |
| $ | 7,503 |
|
| Cash from (used for) investing activities-continuing operations | | | |
| Combined | $ | 14,054 |
| $ | (49 | ) | $ | 58,087 |
|
| GE current receivables sold to GE Capital(a) | (1,149 | ) | 2,538 |
| (170 | ) |
| GE long-term receivables sold to GE Capital | (1,079 | ) | 250 |
| 1,569 |
|
| GE Capital long-term loans to GE | 5,999 |
| 7,271 |
| — |
|
| GE Capital short-term loans to GE | 480 |
| (1,329 | ) | 1,329 |
|
| Other reclassifications and eliminations(b) | (252 | ) | (335 | ) | 1,751 |
|
| Total cash from (used for) investing activities-continuing operations | $ | 18,052 |
| $ | 8,348 |
| $ | 62,566 |
|
| Cash from (used for) financing activities-continuing operations | | | |
| Combined | $ | (26,212 | ) | $ | (19,065 | ) | $ | (109,024 | ) |
| GE current receivables sold to GE Capital | 952 |
| 72 |
| (527 | ) |
| GE Capital common dividends to GE | — |
| 4,016 |
| 20,095 |
|
| GE Capital long-term loans to GE | (5,999 | ) | (7,271 | ) | — |
|
| GE Capital short-term loans to GE | (480 | ) | 1,329 |
| (1,329 | ) |
| Other reclassifications and eliminations(b) | 706 |
| (135 | ) | (468 | ) |
| Total cash from (used for) financing activities-continuing operations | $ | (31,033 | ) | $ | (21,055 | ) | $ | (91,253 | ) |
| |
(a) | Excludes $5,192million, $4,411 million and zero related to cash payments received on the Receivable facility DPP in the years ended December 31, 2018, 2017 and 2016, respectively, which are reflected as Cash from investing activities in the GE Capital and the consolidated GE Company columns of our Statement of Cash Flows. Sales of current receivables from GE to GE Capital are classified as Cash from operating activities in the GE column of our Statement of Cash flows. See Note 1 and Note 4.
|
| |
(b) | Includes eliminations of other cash flows activities, including financing of supply chain finance programs of $(318) million, $122 million and $(586) million in the years ended December 31, 2018, 2017 and 2016, respectively, and various investments, loans and allocations of GE corporate overhead costs.
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 25.26. OPERATING SEGMENTS
BASIS FOR PRESENTATION
PRESENTATION.Our operating businesses are organized based on the nature of markets and customers. Segment accounting policies are the same as described and referenced in Note 1. Segment results for our financial services businesses reflect the discrete tax effect of transactions.
A description of our operating segments as of December 31, 2018,2019, can be found in the Summary of Operating Segments table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this Form 10-K Report.
| | | | | | | | | | | | | | | | | | | | | Years ended December 31 |
| | Total revenues(a) | | Intersegment revenues(b) | | External revenues | Total revenues(a) | | Intersegment revenues(b) | | External revenues |
REVENUES (In millions) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
| 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
|
| | | | | | | | | | | |
| Power | $ | 27,300 |
| $ | 34,878 |
| $ | 35,835 |
| | $ | 1,795 |
| $ | 1,385 |
| $ | 1,325 |
| | $ | 25,505 |
| $ | 33,493 |
| $ | 34,510 |
| $ | 18,625 |
| $ | 22,150 |
| $ | 29,426 |
| | $ | 357 |
| $ | 152 |
| $ | 326 |
| | $ | 18,267 |
| $ | 21,997 |
| $ | 29,100 |
|
| Renewable Energy | 9,533 |
| 9,205 |
| 9,752 |
| | 25 |
| 70 |
| 11 |
| | 9,508 |
| 9,135 |
| 9,740 |
| 15,337 |
| 14,288 |
| 14,321 |
| | 139 |
| 186 |
| 242 |
| | 15,198 |
| 14,102 |
| 14,080 |
|
| Aviation | 30,566 |
| 27,013 |
| 26,240 |
| | 448 |
| 573 |
| 718 |
| | 30,119 |
| 26,440 |
| 25,522 |
| 32,875 |
| 30,566 |
| 27,013 |
| | 758 |
| 375 |
| 459 |
| | 32,117 |
| 30,191 |
| 26,554 |
|
| Oil & Gas | 22,859 |
| 17,180 |
| 12,938 |
| | 363 |
| 646 |
| 382 |
| | 22,496 |
| 16,535 |
| 12,556 |
| |
| Healthcare | 19,784 |
| 19,017 |
| 18,212 |
| | 20 |
| 15 |
| 12 |
| | 19,765 |
| 19,002 |
| 18,201 |
| 19,942 |
| 19,784 |
| 19,017 |
| | — |
| — |
| — |
| | 19,942 |
| 19,784 |
| 19,017 |
|
| Transportation | 3,898 |
| 3,935 |
| 4,585 |
| | 25 |
| 10 |
| — |
| | 3,873 |
| 3,925 |
| 4,585 |
| |
| Lighting(c) | 1,723 |
| 1,941 |
| 4,762 |
| | 2 |
| 28 |
| 19 |
| | 1,721 |
| 1,913 |
| 4,743 |
| |
| Total industrial segment revenues | 115,664 |
| 113,168 |
| 112,324 |
| | 2,678 |
| 2,725 |
| 2,467 |
| | 112,986 |
| 110,443 |
| 109,857 |
| 86,778 |
| 86,789 |
| 89,776 |
| | 1,254 |
| 714 |
| 1,027 |
| | 85,524 |
| 86,075 |
| 88,749 |
|
| Capital | 9,551 |
| 9,070 |
| 10,905 |
| | 1,384 |
| 1,620 |
| 1,288 |
| | 8,166 |
| 7,451 |
| 9,617 |
| 8,741 |
| 9,551 |
| 9,070 |
| | 971 |
| 1,384 |
| 1,558 |
| | 7,770 |
| 8,167 |
| 7,512 |
|
Corporate items and eliminations | (3,600 | ) | (3,995 | ) | (3,760 | ) | | (4,062 | ) | (4,345 | ) | (3,755 | ) | | 463 |
| 350 |
| (5 | ) | (305 | ) | 673 |
| 433 |
| | (2,225 | ) | (2,097 | ) | (2,585 | ) | | 1,920 |
| 2,770 |
| 3,018 |
|
| Total | $ | 121,615 |
| $ | 118,243 |
| $ | 119,469 |
| | $ | — |
| $ | — |
| $ | — |
| | $ | 121,615 |
| $ | 118,243 |
| $ | 119,469 |
| $ | 95,214 |
| $ | 97,012 |
| $ | 99,279 |
| | $ | — |
| $ | — |
| $ | — |
| | $ | 95,214 |
| $ | 97,012 |
| $ | 99,279 |
|
| |
| (a) | Revenues of GE businesses include income from sales of goods and services to customers. |
| |
| (b) | Sales from one component to another generally are priced at equivalent commercial selling prices. |
| |
(c) | Lighting segment included Appliances through its disposition in the second quarter of 2016. |
The equipment and services revenues classification in the table below is consistent with our segment MD&A presentation. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31 |
| | 2019 | | 2018 | | 2017 |
| (In millions) | Equipment | Services | Total | | Equipment | Services | Total | | Equipment | Services | Total |
| | | | | | | | | | | | |
| Power | $ | 6,247 |
| $ | 12,378 |
| $ | 18,625 |
| | $ | 8,077 |
| $ | 14,073 |
| $ | 22,150 |
| | $ | 12,909 |
| $ | 16,517 |
| $ | 29,426 |
|
| | | | | | | | | | | | |
| Renewable Energy | 12,267 |
| 3,069 |
| 15,337 |
| | 11,419 |
| 2,870 |
| 14,288 |
| | 13,969 |
| 352 |
| 14,321 |
|
| | | | | | | | | | | | |
| Aviation | 12,804 |
| 20,071 |
| 32,875 |
| | 11,499 |
| 19,067 |
| 30,566 |
| | 10,215 |
| 16,797 |
| 27,013 |
|
| | | | | | | | | | | | |
| Healthcare | 11,585 |
| 8,357 |
| 19,942 |
| | 11,422 |
| 8,363 |
| 19,784 |
| | 10,771 |
| 8,246 |
| 19,017 |
|
| | | | | | | | | | | | |
| Total industrial segment revenues | $ | 42,904 |
| $ | 43,875 |
| $ | 86,778 |
| | $ | 42,416 |
| $ | 44,372 |
| $ | 86,789 |
| | $ | 47,864 |
| $ | 41,913 |
| $ | 89,776 |
|
|
| | | | | | | | | | | |
| SEGMENT REVENUES | Years ended December 31 |
(In millions) | 2019 |
| | 2018 |
| | 2017 |
|
| | | | | | |
| Gas Power | $ | 13,122 |
|
| $ | 13,296 |
|
| $17,100 |
| Power Portfolio | 5,503 |
|
| 8,853 |
|
| 12,326 |
|
| Power | $ | 18,625 |
| | $ | 22,150 |
| | $ | 29,426 |
|
| | | | | | |
| Onshore Wind | $ | 10,421 |
| | $ | 8,220 |
| | $ | 8,055 |
|
| Grid Solutions equipment and services | 4,062 |
| | 4,772 |
| | 5,117 |
|
| Other | 855 |
| | 1,296 |
| | 1,149 |
|
| Renewable Energy | $ | 15,337 |
| | $ | 14,288 |
| | $ | 14,321 |
|
| | | | | | |
| Commercial | $ | 24,217 |
| | $ | 22,724 |
| | $ | 19,709 |
|
| Military | 4,389 |
| | 4,103 |
| | 3,991 |
|
| Systems & Other | 4,269 |
| | 3,740 |
| | 3,314 |
|
| Aviation | $ | 32,875 |
| | $ | 30,566 |
| | $ | 27,013 |
|
| | | | | | |
| Healthcare Systems | $ | 14,648 |
| | $ | 14,886 |
| | $ | 14,460 |
|
| Life Sciences | 5,294 |
| | 4,898 |
| | 4,557 |
|
| Healthcare | $ | 19,942 |
| | $ | 19,784 |
| | $ | 19,017 |
|
| | | | | | |
| Total industrial segment revenues | $ | 86,778 |
| | $ | 86,789 |
| | $ | 89,776 |
|
| Capital(a) | 8,741 |
| | 9,551 |
| | 9,070 |
|
| Corporate items and eliminations | (305 | ) | | 673 |
| | 433 |
|
| Consolidated revenues | $ | 95,214 |
| | $ | 97,012 |
| | $ | 99,279 |
|
(a) Substantially all of our revenues at GE Capital are outside of the scope of ASC 606.
Revenues from customers located in the United States were $46,754$39,372 million, $44,251$39,876 million and $49,336$41,468 million infor the years ended December 31, 2019, 2018 2017 and 2016,2017, respectively. Revenues from customers located outside the United States were $74,861$55,843 million, $73,992$57,136 million and $70,133$57,811 million infor the years ended December 31, 2019, 2018 2017 and 2016,2017, respectively.
|
| | | | | | | | | |
PROFIT AND EARNINGS (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| Power | $ | (808 | ) | $ | 1,947 |
| $ | 4,187 |
|
| Renewable Energy | 287 |
| 583 |
| 631 |
|
| Aviation | 6,466 |
| 5,370 |
| 5,324 |
|
| Oil & Gas | 429 |
| 158 |
| 1,302 |
|
| Healthcare | 3,698 |
| 3,488 |
| 3,210 |
|
| Transportation | 633 |
| 641 |
| 966 |
|
| Lighting(a) | 70 |
| 27 |
| 165 |
|
| Total industrial segment profit | 10,774 |
| 12,213 |
| 15,785 |
|
| Capital | (489 | ) | (6,765 | ) | (1,251 | ) |
| Total segment profit | 10,285 |
| 5,448 |
| 14,534 |
|
| Corporate items and eliminations | (2,796 | ) | (4,060 | ) | (2,064 | ) |
| GE goodwill impairments | (22,136 | ) | (1,165 | ) | — |
|
| GE interest and other financial charges | (2,708 | ) | (2,753 | ) | (2,026 | ) |
| GE non-operating benefit costs | (2,764 | ) | (2,385 | ) | (2,349 | ) |
| GE provision for income taxes | (957 | ) | (3,691 | ) | (298 | ) |
| Earnings (loss) from continuing operations attributable to GE common shareowners | (21,076 | ) | (8,605 | ) | 7,797 |
|
| Earnings (loss) from discontinued operations, net of taxes | (1,726 | ) | (309 | ) | (954 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | — |
| 6 |
| (1 | ) |
| Earnings (loss) from discontinued operations, net of taxes and noncontrolling interests | (1,726 | ) | (315 | ) | (952 | ) |
| Consolidated net earnings (loss) attributable to GE common shareowners | $ | (22,802 | ) | $ | (8,920 | ) | $ | 6,845 |
|
| |
(a) | Lighting segment included Appliances through its disposition in the second quarter of 2016. |
GE20182019 FORM 10-K 157 113
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
REMAINING PERFORMANCE OBLIGATION. As of December 31, 2019, the aggregate amount of the contracted revenues allocated to our unsatisfied (or partially unsatisfied) performance obligations was $245,434 million. We expect to recognize revenue as we satisfy our remaining performance obligations as follows: 1) equipment-related remaining performance obligation of $48,487 million of which 58%, 76% and 88% is expected to be recognized within 1, 2 and 5 years, respectively, and the remaining thereafter; and 2) services-related remaining performance obligations of $196,947 million of which 14%, 46%, 72% and 83% is expected to be recognized within 1, 5, 10 and 15 years, respectively, and the remaining thereafter. Contract modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
Total sales of goods and services to agencies of the U.S. Government were 5%, 5% and 4% of GE revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Within our Aviation segment, defense-related sales were 5%, 4% and 4% of GE revenues for the years ended December 31, 2019, 2018 and 2017, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets(a) | | Property, plant and
equipment additions(b) | | Depreciation and amortization(c) |
| | At December 31 | | For the years ended December 31 | | For the years ended December 31 |
| (In millions) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | | | | | |
| Power | $ | 33,809 |
| $ | 66,552 |
| $ | 68,165 |
| | $ | 378 |
| $ | 1,072 |
| $ | 963 |
| | $ | 1,474 |
| $ | 1,358 |
| $ | 1,549 |
|
| Renewable Energy | 10,974 |
| 10,467 |
| 7,812 |
| | 285 |
| 624 |
| 166 |
| | 309 |
| 255 |
| 183 |
|
| Aviation | 38,021 |
| 37,473 |
| 35,614 |
| | 1,070 |
| 1,426 |
| 1,328 |
| | 1,042 |
| 979 |
| 811 |
|
| Oil & Gas | 54,300 |
| 59,072 |
| 24,426 |
| | 624 |
| 5,469 |
| 284 |
| | 1,486 |
| 1,100 |
| 548 |
|
| Healthcare | 28,048 |
| 28,408 |
| 28,331 |
| | 378 |
| 393 |
| 432 |
| | 832 |
| 806 |
| 785 |
|
| Transportation | 4,270 |
| 3,757 |
| 3,746 |
| | 104 |
| 128 |
| 108 |
| | 156 |
| 136 |
| 170 |
|
| Lighting(d) | 699 |
| 619 |
| 1,570 |
| | 17 |
| 34 |
| 160 |
| | 1 |
| 86 |
| 173 |
|
| Capital(e) | 123,939 |
| 156,716 |
| 182,970 |
| | 4,569 |
| 3,680 |
| 3,769 |
| | 2,163 |
| 2,343 |
| 2,514 |
|
Corporate items and eliminations(f) | 15,068 |
| 6,182 |
| 6,488 |
| | (65 | ) | (100 | ) | 94 |
| | 760 |
| 367 |
| 340 |
|
| Total | $ | 309,129 |
| $ | 369,245 |
| $ | 359,122 |
| | $ | 7,360 |
| $ | 12,728 |
| $ | 7,305 |
| | $ | 8,223 |
| $ | 7,429 |
| $ | 7,073 |
|
|
| | | | | | | | | |
PROFIT AND EARNINGS For the years ended December 31 (In millions) | 2019 |
| 2018 |
| 2017 |
|
| | | | |
| Power | $ | 386 |
| $ | (808 | ) | $ | 1,894 |
|
| Renewable Energy | (666 | ) | 292 |
| 728 |
|
| Aviation | 6,820 |
| 6,466 |
| 5,370 |
|
| Healthcare | 3,896 |
| 3,698 |
| 3,488 |
|
| Total industrial segment profit | 10,436 |
| 9,647 |
| 11,479 |
|
| Capital | (530 | ) | (489 | ) | (6,765 | ) |
| Total segment profit | 9,906 |
| 9,158 |
| 4,714 |
|
| Corporate items and eliminations | (2,212 | ) | (2,837 | ) | (3,798 | ) |
| GE goodwill impairments | (1,486 | ) | (22,136 | ) | (1,165 | ) |
| GE interest and other financial charges | (2,115 | ) | (2,415 | ) | (2,538 | ) |
| GE non-operating benefit costs | (2,828 | ) | (2,740 | ) | (2,409 | ) |
| GE provision for income taxes | (1,309 | ) | (467 | ) | (3,493 | ) |
| Earnings (loss) from continuing operations attributable to GE common shareholders | (44 | ) | (21,438 | ) | (8,689 | ) |
| Earnings (loss) from discontinued operations, net of taxes | (5,335 | ) | (1,363 | ) | (312 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, discontinued operations | 60 |
| 1 |
| (81 | ) |
| Earnings (loss) from discontinued operations, net of taxes and noncontrolling interests | (5,395 | ) | (1,364 | ) | (231 | ) |
| Consolidated net earnings (loss) attributable to GE common shareholders | $ | (5,439 | ) | $ | (22,802 | ) | $ | (8,920 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Interest and other financial charges | | Benefit (provision) for income taxes |
For the years ended December 31 (In millions) | 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
|
| | | | | | | | |
| Capital | $ | 2,532 |
| $ | 2,982 |
| $ | 3,145 |
| | $ | 582 |
| $ | 374 |
| $ | 6,302 |
|
| Corporate items and eliminations(a) | 1,695 |
| 1,784 |
| 1,510 |
| | (1,309 | ) | (467 | ) | (3,493 | ) |
| Total | $ | 4,227 |
| $ | 4,766 |
| $ | 4,655 |
| | $ | (726 | ) | $ | (93 | ) | $ | 2,808 |
|
| |
| (a) | Total assets ofIncluded amounts for Power, Renewable Energy, Aviation Oil & Gas,and Healthcare, Transportationfor which our measure of segment profit excludes interest and Capital operating segments at December 31, 2018, include investments inother financial charges and advances to associated companies of $1,140 million, $46 million, $2,013 million, $133 million, $271 million, $59 million and $3,029 million, respectively. Lighting held an insignificant balance as of December 31, 2018. Investments in and advances to associated companies contributed approximately $(1) million, $3 million, $126 million, $(136) million, $16 million, $4 million, $(2) million and $185 million to segment pre-tax income for the year ended December 31, 2018 of Power, Renewable Energy, Aviation, Oil & Gas, Healthcare, Transportation, Lighting and Capital operating segments, respectively.taxes. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets | | Property, plant and
equipment additions(a) | | Depreciation and amortization(b) |
| | At December 31 | | For the years ended December 31 | | For the years ended December 31 |
| (In millions) | 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2017 |
|
| | | | | | | | | | | | |
| Power | $ | 26,731 |
| $ | 27,389 |
| $ | 55,827 |
| | $ | 277 |
| $ | 358 |
| $ | 1,018 |
| | $ | 880 |
| $ | 1,307 |
| $ | 1,228 |
|
| Renewable Energy | 15,935 |
| 16,400 |
| 18,466 |
| | 455 |
| 303 |
| 677 |
| | 425 |
| 474 |
| 382 |
|
| Aviation | 41,647 |
| 38,021 |
| 37,473 |
| | 1,031 |
| 1,070 |
| 1,426 |
| | 1,150 |
| 1,042 |
| 979 |
|
| Healthcare | 30,514 |
| 28,048 |
| 28,408 |
| | 395 |
| 378 |
| 393 |
| | 702 |
| 832 |
| 806 |
|
| Capital(c) | 117,546 |
| 119,329 |
| 150,805 |
| | 3,830 |
| 4,569 |
| 3,680 |
| | 2,083 |
| 2,163 |
| 2,342 |
|
Corporate items and eliminations(d) | 29,565 |
| 18,032 |
| 10,758 |
| | (175 | ) | (46 | ) | (64 | ) | | 355 |
| 763 |
| 456 |
|
| Total continuing | $ | 261,939 |
| $ | 247,219 |
| $ | 301,737 |
| | $ | 5,813 |
| $ | 6,632 |
| $ | 7,130 |
| | $ | 5,595 |
| $ | 6,582 |
| $ | 6,193 |
|
| |
(b)(a) | Additions to property, plant and equipment include amounts relating to principal businesses purchased. |
| |
(c)(b) | IncludesIncluded amortization expense related to intangible assets. |
| |
(d)(c) | Lighting segment included Appliances through its disposition in the second quarter of 2016. |
| |
(e) | IncludesIncluded Capital discontinued operations. |
| |
(f) | Includes deferred income taxes that are presented as assets for purposes of our consolidatingbalance sheet presentation. |
| |
| (d) | Included GE deferred income taxes that are presented as assets for purposes of our balance sheet presentation. |
|
| | | | | | | | | | | | | | | | | | | |
| | Interest and other financial charges | | Benefit (provision) for income taxes |
| (In millions) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | |
| Capital | $ | 2,982 |
| $ | 3,145 |
| $ | 3,790 |
| | $ | 374 |
| $ | 6,302 |
| $ | 1,431 |
|
| Corporate items and eliminations(a) | 2,077 |
| 1,724 |
| 1,234 |
| | (957 | ) | (3,691 | ) | (298 | ) |
| Total | $ | 5,059 |
| $ | 4,869 |
| $ | 5,025 |
| | $ | (583 | ) | $ | 2,611 |
| $ | 1,133 |
|
| |
(a) | Included amounts for Power, Renewable Energy, Aviation, Oil & Gas, Healthcare, Transportation and Lighting, for which our measure of segment profit excludes interest and other financial charges and income taxes. |
Property, plant and equipment – net associated with operations based in the United States were $14,872 million, $17,643 million and $14,987 million at December 31, 2018, 2017 and 2016, respectively. Property, plant and equipment – net associated with operations based outside the United States were $35,877 million, $36,231 million and $35,531 million at December 31, 2018, 2017 and 2016, respectively.
NOTE 26. COST INFORMATION
RESEARCH AND DEVELOPMENT
We conduct research and development (R&D) activities to continually enhance our existing products and services, develop new product and services to meet our customers’ changing needs and requirements, and address new market opportunities.
Research and development expenses are classified in cost of goods and services sold in our consolidated Statement of Earnings (Loss). In addition, R&D funding from customers, principally the U.S. government, is recorded as an offset to such costs. We also enter into R&D arrangements with unrelated investors, which are generally formed through partnerships and consolidated within GE’s financial statements. R&D funded through consolidated partnerships is classified within net earnings/loss attributable to noncontrolling interests.
GE20182019 FORM 10-K 158 114
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | GE funded | Customer funded(c) | Partner funded | Total R&D |
| (In millions) | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 |
| Aviation | $ | 950 |
| $ | 907 |
| $ | 1,092 |
| $ | 564 |
| $ | 586 |
| $ | 498 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,514 |
| $ | 1,492 |
| $ | 1,591 |
|
| Healthcare | 968 |
| 908 |
| 869 |
| 23 |
| 26 |
| 32 |
| — |
| — |
| — |
| 991 |
| 934 |
| 901 |
|
| Power | 579 |
| 885 |
| 949 |
| 5 |
| 18 |
| 4 |
| 2 |
| 17 |
| 45 |
| 586 |
| 920 |
| 998 |
|
| Oil & Gas | 624 |
| 450 |
| 287 |
| 22 |
| 9 |
| — |
| 55 |
| 42 |
| 28 |
| 700 |
| 501 |
| 315 |
|
| Renewable Energy | 311 |
| 299 |
| 213 |
| 11 |
| 3 |
| 7 |
| — |
| — |
| — |
| 323 |
| 302 |
| 220 |
|
| Corporate(a) | 547 |
| 1,124 |
| 1,092 |
| 48 |
| 65 |
| 83 |
| — |
| — |
| — |
| 595 |
| 1,189 |
| 1,175 |
|
| All Other(b) | 155 |
| 165 |
| 235 |
| — |
| — |
| — |
| — |
| — |
| — |
| 155 |
| 165 |
| 235 |
|
| Total | $ | 4,134 |
| $ | 4,738 |
| $ | 4,737 |
| $ | 671 |
| $ | 707 |
| $ | 625 |
| $ | 57 |
| $ | 59 |
| $ | 73 |
| $ | 4,862 |
| $ | 5,504 |
| $ | 5,436 |
|
(a) Includes Global Research CenterTotal assets of Power, Renewable Energy, Aviation, Healthcare, Capital and Digital.
(b) Includes TransportationCorporate at December 31, 2019, include investments in and Lighting.
(c) Principally U.S Government funded.
COLLABORATIVE ARRANGEMENTS
Our businesses enter into collaborative arrangements primarily with manufacturers and suppliersadvances to associated companies of components used to build and maintain certain engines, and joint venture partners, under which GE and these participants share in the risks and rewards of these product and service programs. In these circumstances, judgment is required to determine whether we control components and services prior to their transfer to the customer. GE’s payments to participants are primarily recorded as either cost of services sold ($1,813$565 million, $1,884$630 million, $2,073 million, $245 million, $2,159 million and $1,725$45 million, respectively. Investments in and advances to associated companies contributed approximately $(4) million, $(2) million, $204 million, $19 million, $324 million and $(11) million to pre-tax income for the yearsyear ended December 31, 2018, 20172019 of Power, Renewable Energy, Aviation, Healthcare, Capital and 2016, respectively) orCorporate, respectively.
We classify certain assets that cannot meaningfully be associated with specific geographic areas as cost of goods sold ($3,097 million, $2,806 million and $2,958 million“Other Global” for the years endedthis purpose.
|
| | | | | | |
December 31 (In millions) | 2019 |
| 2018 |
|
| | | |
| U.S. | $ | 144,405 |
| $ | 126,566 |
|
| Non-U.S. | | |
| Europe | 70,565 |
| 70,007 |
|
| Asia | 22,089 |
| 22,355 |
|
| Americas | 13,435 |
| 12,871 |
|
| Other Global | 11,445 |
| 15,420 |
|
| Total Non-U.S. | $ | 117,534 |
| $ | 120,653 |
|
| Total assets (Continuing Operations) | $ | 261,939 |
| $ | 247,219 |
|
The increase in total continuing assets from December 31, 2018 2017to December 31, 2019 is primarily due to the deconsolidation of our Baker Hughes segment and 2016, respectively). GE develops, produces and sells LEAP and CFM56 engines through CFM International, a company jointly owned by GE and Safran Aircraft Engines, a subsidiaryclassification of the Safran Group of France. GE makes substantialour retained interest in Baker Hughes within investment securities, as well as lower sales of partsreceivables and services to CFM International, the sales priceseffect of which areadopting new leasing standards.
Property, plant and equipment – net associated with operations based on arms-length terms with third-party customers.
RENTAL EXPENSE
Rental expense under operating leases is shown below.
|
| | | | | | | | | |
| (In millions) | 2018 |
| 2017 |
| 2016 |
|
| | | | |
| GE | $ | 1,850 |
| $ | 1,699 |
| $ | 1,576 |
|
| GE Capital | 107 |
| 105 |
| 91 |
|
| | 1,958 |
| 1,804 |
| 1,668 |
|
| Eliminations | (110 | ) | (143 | ) | (126 | ) |
| Total | $ | 1,848 |
| $ | 1,661 |
| $ | 1,542 |
|
Atin the United States were $11,992 million, $11,868 million and $12,393 million at December 31, 2019, 2018 minimum rental commitments under noncancellable operating leases aggregated $6,063and 2017, respectively. Property, plant and equipment – net associated with operations based outside the United States were $31,298 million, $31,743 million and $272$33,576 million for GEat December 31, 2019, 2018 and GE Capital,2017, respectively. Amounts payable over the next five years follow.
|
| | | | | | | | | | | | | | | |
| (In millions) | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
|
| | | | | | |
| GE | $ | 1,162 |
| $ | 1,010 |
| $ | 844 |
| $ | 707 |
| $ | 579 |
|
| GE Capital | 29 |
| 27 |
| 27 |
| 59 |
| 56 |
|
| | 1,191 |
| 1,037 |
| 871 |
| 766 |
| 635 |
|
| Eliminations | (103 | ) | (99 | ) | (95 | ) | (85 | ) | (70 | ) |
| Total | $ | 1,088 |
| $ | 938 |
| $ | 776 |
| $ | 681 |
| $ | 565 |
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 27. GUARANTOR FINANCIAL INFORMATION
GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On October 26, 2015, GE Capital International Funding Company Unlimited Company formerly GE Capital International Funding Company (the Issuer), then a finance subsidiary of General Electric Capital Corporation, settled its previously announced private offers to exchange (the Exchange Offers) the Issuer’s newissued senior unsecured notes for certain outstanding debt securities of General Electric Capital Corporation.
The newregistered notes that were issued wereare fully and unconditionally, jointly and severally guaranteed by both the Company and GE Capital International Holdings Limited (GECIHL) (each a Guarantor, and together, the Guarantors).
Under the terms of a registration rights agreement entered into in connection with the Exchange Offers, the Issuer and the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission (SEC) for an offer to exchange new senior notes of the Issuer registered with the SEC and guaranteed by the Guarantors for certain of the Issuer’s outstanding unregistered senior notes. This exchange was completed in July 2016.
PRESENTATION
In connection with the registration of the senior notes, the The Company is required to provide certain financial information regarding the Issuer and the Guarantors of the registered securities, specifically a Condensed Consolidating StatementStatements of Earnings and Comprehensive Income, for the years ended December 31, 2018, 2017 and 2016, Condensed Consolidating Statements of Financial Position as of December 31, 2018 and December 31, 2017 and Condensed Consolidating Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 for:
| |
| • | General Electric Company (the Parent Company Guarantor) – prepared with investments in subsidiaries accounted for under the equity method of accounting and excluding any inter-segment eliminations; |
| |
| • | GE Capital International Funding Company Unlimited Company (the Subsidiary Issuer) – finance subsidiary that issued the guaranteed notes for debt; |
| |
| • | GE Capital International Holdings Limited (GECIHL)(the Subsidiary Guarantor) – prepared with investments in non-guarantor subsidiaries accounted for under the equity method of accounting; |
| |
| • | Non-Guarantor Subsidiaries – prepared on an aggregated basis excluding any elimination or consolidation adjustments and includes predominantly all non-cash adjustments for cash flows; |
| |
| • | Consolidating Adjustments – adjusting entries necessary to consolidate the Parent Company Guarantor with the Subsidiary Issuer, the Subsidiary Guarantor and Non-Guarantor Subsidiaries and in the comparative periods, this category includes the impact of new accounting policies adopted as described in Note 1; and |
| |
| • | Consolidated – prepared on a consolidated basis. |
General Electric Company (the Parent Company Guarantor) – prepared with investments in subsidiaries accounted for under the equity method of accounting and excluding any inter-segment eliminations;
GE Capital International Funding Company Unlimited Company (the Subsidiary Issuer) – finance subsidiary that issued the guaranteed notes for debt;
GE Capital International Holdings Limited (GECIHL)(the Subsidiary Guarantor) – prepared with investments in non-guarantor subsidiaries accounted for under the equity method of accounting;
Non-Guarantor Subsidiaries – prepared on an aggregated basis excluding any elimination or consolidation adjustments and includes predominantly all non-cash adjustments for cash flows;
Consolidating Adjustments– adjusting entries necessary to consolidate the Parent Company Guarantor with the Subsidiary Issuer, the Subsidiary Guarantor and Non-Guarantor Subsidiaries and in the comparative periods, this category includes the impact of new accounting policies adopted as described in Note 1; and
Consolidated – prepared on a consolidated basis.
GE20182019 FORM 10-K 160
115
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) | | FOR THE YEAR ENDED DECEMBER 31, 2018 | |
| FOR THE YEAR ENDED DECEMBER 31, 2019 | | FOR THE YEAR ENDED DECEMBER 31, 2019 |
| | (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
| |
| (In millions) | | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | |
| Revenues | | |
| Sales of goods and services | $ | 34,972 |
| $ | — |
| $ | — |
| $ | 164,691 |
| $ | (86,119 | ) | $ | 113,543 |
| $ | 28,078 |
| $ | — |
| $ | — |
| $ | 154,927 |
| $ | (95,518 | ) | $ | 87,487 |
|
| GE Capital revenues from services | — |
| 917 |
| 1,038 |
| 9,531 |
| (3,414 | ) | 8,072 |
| — |
| 964 |
| 64 |
| 9,949 |
| (3,250 | ) | 7,728 |
|
| Total revenues and other income | 34,972 |
| 917 |
| 1,038 |
| 174,222 |
| (89,533 | ) | 121,615 |
| |
| Total revenues | | 28,078 |
| 964 |
| 64 |
| 164,876 |
| (98,768 | ) | 95,214 |
|
| | | |
| Costs and expenses | | |
| Interest and other financial charges | 6,939 |
| 911 |
| 2,560 |
| 5,238 |
| (10,589 | ) | 5,059 |
| 1,612 |
| 980 |
| 1,405 |
| 1,975 |
| (1,745 | ) | 4,227 |
|
| Other costs and expenses | 42,233 |
| — |
| 1 |
| 183,511 |
| (86,795 | ) | 138,950 |
| 32,563 |
| 1 |
| — |
| 166,371 |
| (106,876 | ) | 92,059 |
|
| Total costs and expenses | 49,171 |
| 911 |
| 2,561 |
| 188,748 |
| (97,384 | ) | 144,008 |
| 34,175 |
| 981 |
| 1,406 |
| 168,346 |
| (108,622 | ) | 96,287 |
|
| Other income | 7,640 |
| — |
| — |
| 29,269 |
| (34,650 | ) | 2,259 |
| (3,853 | ) | — |
| — |
| 30,453 |
| (24,378 | ) | 2,222 |
|
| Equity in earnings (loss) of affiliates | (15,162 | ) | — |
| 1,554 |
| 240,036 |
| (226,428 | ) | — |
| 5,923 |
| — |
| 1,290 |
| 75,445 |
| (82,658 | ) | — |
|
Earnings (loss) from continuing operations before income taxes | (21,721 | ) | 6 |
| 31 |
| 254,778 |
| (253,228 | ) | (20,134 | ) | (4,028 | ) | (17 | ) | (52 | ) | 102,427 |
| (97,182 | ) | 1,149 |
|
| Benefit (provision) for income taxes | 1,092 |
| 5 |
| — |
| (2,381 | ) | 701 |
| (583 | ) | (1,143 | ) | 1 |
| — |
| (228 | ) | 643 |
| (726 | ) |
| Earnings (loss) from continuing operations | (20,629 | ) | 11 |
| 31 |
| 252,397 |
| (252,527 | ) | (20,717 | ) | (5,170 | ) | (16 | ) | (52 | ) | 102,200 |
| (96,539 | ) | 423 |
|
Earnings (loss) from discontinued operations, net of taxes | (1,726 | ) | — |
| (39 | ) | — |
| 39 |
| (1,726 | ) | 192 |
| — |
| 59 |
| — |
| (5,585 | ) | (5,335 | ) |
| Net earnings (loss) | (22,355 | ) | 11 |
| (8 | ) | 252,396 |
| (252,488 | ) | (22,443 | ) | (4,979 | ) | (16 | ) | 7 |
| 102,200 |
| (102,124 | ) | (4,912 | ) |
Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (204 | ) | 116 |
| (89 | ) | — |
| — |
| — |
| 7 |
| 59 |
| 66 |
|
Net earnings (loss) attributable to the Company | (22,355 | ) | 11 |
| (8 | ) | 252,601 |
| (252,604 | ) | (22,355 | ) | (4,979 | ) | (16 | ) | 7 |
| 102,192 |
| (102,184 | ) | (4,979 | ) |
| Other comprehensive income | (10 | ) | — |
| (82 | ) | (2,917 | ) | 2,999 |
| (10 | ) | 2,681 |
| — |
| (1,022 | ) | 2,280 |
| (1,258 | ) | 2,681 |
|
Comprehensive income (loss) attributable to the Company | $ | (22,364 | ) | $ | 11 |
| $ | (90 | ) | $ | 249,683 |
| $ | (249,604 | ) | $ | (22,364 | ) | $ | (2,297 | ) | $ | (16 | ) | $ | (1,015 | ) | $ | 104,472 |
| $ | (103,441 | ) | $ | (2,297 | ) |
| | CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) | | FOR THE YEAR ENDED DECEMBER 31, 2017 | |
| FOR THE YEAR ENDED DECEMBER 31, 2018 | | FOR THE YEAR ENDED DECEMBER 31, 2018 |
| | (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
| |
| (In millions) | | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | |
| Revenues | | |
| Sales of goods and services | $ | 35,551 |
| $ | — |
| $ | — |
| $ | 161,158 |
| $ | (85,742 | ) | $ | 110,968 |
| $ | 34,972 |
| $ | — |
| $ | — |
| $ | 164,691 |
| $ | (110,723 | ) | $ | 88,940 |
|
| GE Capital revenues from services | — |
| 703 |
| 800 |
| 9,888 |
| (4,115 | ) | 7,276 |
| — |
| 917 |
| 1,038 |
| 9,531 |
| (3,414 | ) | 8,072 |
|
| Total revenues and other income | 35,551 |
| 703 |
| 800 |
| 171,046 |
| (89,857 | ) | 118,243 |
| |
| Total revenues | | 34,972 |
| 917 |
| 1,038 |
| 174,222 |
| (114,136 | ) | 97,012 |
|
| | | |
| Costs and expenses | | |
| Interest and other financial charges | 4,396 |
| 652 |
| 2,006 |
| 4,928 |
| (7,112 | ) | 4,869 |
| 1,728 |
| 911 |
| 2,560 |
| 2,459 |
| (2,893 | ) | 4,766 |
|
| Other costs and expenses | 36,263 |
| — |
| 18 |
| 175,676 |
| (85,306 | ) | 126,651 |
| 47,471 |
| — |
| 1 |
| 186,262 |
| (118,180 | ) | 115,554 |
|
| Total costs and expenses | 40,659 |
| 653 |
| 2,023 |
| 180,604 |
| (92,418 | ) | 131,520 |
| 49,199 |
| 911 |
| 2,561 |
| 188,721 |
| (121,073 | ) | 120,320 |
|
| Other income | 3,769 |
| — |
| — |
| 76,453 |
| (78,096 | ) | 2,126 |
| 3,910 |
| — |
| — |
| 29,268 |
| (30,857 | ) | 2,321 |
|
| Equity in earnings (loss) of affiliates | (3,985 | ) | — |
| 1,938 |
| 109,525 |
| (107,477 | ) | — |
| (11,404 | ) | — |
| 1,554 |
| 240,036 |
| (230,186 | ) | — |
|
Earnings (loss) from continuing operations before income taxes | (5,324 | ) | 50 |
| 714 |
| 176,420 |
| (183,012 | ) | (11,151 | ) | (21,721 | ) | 6 |
| 31 |
| 254,803 |
| (254,106 | ) | (20,987 | ) |
| Benefit (provision) for income taxes | (2,842 | ) | (5 | ) | 115 |
| 5,926 |
| (583 | ) | 2,611 |
| 1,092 |
| 5 |
| — |
| (2,381 | ) | 1,191 |
| (93 | ) |
| Earnings (loss) from continuing operations | (8,166 | ) | 45 |
| 829 |
| 182,346 |
| (183,595 | ) | (8,540 | ) | (20,629 | ) | 11 |
| 31 |
| 252,422 |
| (252,915 | ) | (21,080 | ) |
Earnings (loss) from discontinued operations, net of taxes | (319 | ) | — |
| 41 |
| 4 |
| (35 | ) | (309 | ) | (1,726 | ) | — |
| (39 | ) | — |
| 401 |
| (1,363 | ) |
| Net earnings (loss) | (8,484 | ) | 45 |
| 870 |
| 182,350 |
| (183,629 | ) | (8,849 | ) | (22,355 | ) | 11 |
| (8 | ) | 252,422 |
| (252,514 | ) | (22,443 | ) |
Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (137 | ) | (228 | ) | (365 | ) | — |
| — |
| — |
| (204 | ) | 116 |
| (89 | ) |
Net earnings (loss) attributable to the Company | (8,484 | ) | 45 |
| 870 |
| 182,487 |
| (183,402 | ) | (8,484 | ) | (22,355 | ) | 11 |
| (8 | ) | 252,627 |
| (252,629 | ) | (22,355 | ) |
| Other comprehensive income | 4,184 |
| — |
| 567 |
| (7,474 | ) | 6,908 |
| 4,184 |
| (10 | ) | — |
| (82 | ) | (2,840 | ) | 2,922 |
| (10 | ) |
Comprehensive income (loss) attributable to the Company | $ | (4,300 | ) | $ | 45 |
| $ | 1,436 |
| $ | 175,013 |
| $ | (176,494 | ) | $ | (4,300 | ) | $ | (22,364 | ) | $ | 11 |
| $ | (90 | ) | $ | 249,786 |
| $ | (249,707 | ) | $ | (22,364 | ) |
GE20182019 FORM 10-K 161 116
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE YEAR ENDED DECEMBER 31, 2017 |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Sales of goods and services | $ | 35,551 |
| $ | — |
| $ | — |
| $ | 161,172 |
| $ | (104,782 | ) | $ | 91,942 |
|
| GE Capital revenues from services | — |
| 703 |
| 800 |
| 9,888 |
| (4,053 | ) | 7,337 |
|
| Total revenues | 35,551 |
| 703 |
| 800 |
| 171,060 |
| (108,835 | ) | 99,279 |
|
| | | | | | | |
| Interest and other financial charges | 1,644 |
| 652 |
| 2,006 |
| 3,343 |
| (2,990 | ) | 4,655 |
|
| Other costs and expenses | 38,765 |
| — |
| 18 |
| 177,223 |
| (107,954 | ) | 108,052 |
|
| Total costs and expenses | 40,409 |
| 653 |
| 2,023 |
| 180,566 |
| (110,943 | ) | 112,707 |
|
| Other income | (959 | ) | — |
| — |
| 75,291 |
| (72,249 | ) | 2,083 |
|
| Equity in earnings (loss) of affiliates | 553 |
| — |
| 1,938 |
| 109,521 |
| (112,012 | ) | — |
|
Earnings (loss) from continuing operations before income taxes | (5,263 | ) | 50 |
| 714 |
| 175,307 |
| (182,152 | ) | (11,345 | ) |
| Benefit (provision) for income taxes | (2,896 | ) | (5 | ) | 115 |
| 5,877 |
| (282 | ) | 2,808 |
|
| Earnings (loss) from continuing operations | (8,159 | ) | 45 |
| 829 |
| 181,184 |
| (182,435 | ) | (8,536 | ) |
Earnings (loss) from discontinued operations, net of taxes | (325 | ) | — |
| 41 |
| 4 |
| (32 | ) | (312 | ) |
| Net earnings (loss) | (8,484 | ) | 45 |
| 870 |
| 181,187 |
| (182,467 | ) | (8,849 | ) |
Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (137 | ) | (228 | ) | (365 | ) |
Net earnings (loss) attributable to the Company | (8,484 | ) | 45 |
| 870 |
| 181,324 |
| (182,239 | ) | (8,484 | ) |
| Other comprehensive income | 4,184 |
| — |
| 567 |
| (7,552 | ) | 6,985 |
| 4,184 |
|
| Comprehensive income (loss) attributable to the Company | $ | (4,300 | ) | $ | 45 |
| $ | 1,436 |
| $ | 173,773 |
| $ | (175,254 | ) | $ | (4,300 | ) |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE YEAR ENDED DECEMBER 31, 2016 |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues | | | | | | |
| Sales of goods and services | $ | 40,315 |
| $ | — |
| $ | — |
| $ | 152,047 |
| $ | (82,191 | ) | $ | 110,171 |
|
| GE Capital revenues from services | — |
| 897 |
| 1,419 |
| 12,994 |
| (6,012 | ) | 9,297 |
|
| Total revenues and other income | 40,315 |
| 897 |
| 1,419 |
| 165,041 |
| (88,203 | ) | 119,469 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 3,505 |
| 831 |
| 2,567 |
| 5,429 |
| (7,308 | ) | 5,025 |
|
| Other costs and expenses | 42,047 |
| — |
| 143 |
| 168,259 |
| (98,897 | ) | 111,553 |
|
| Total costs and expenses | 45,552 |
| 831 |
| 2,711 |
| 173,688 |
| (106,205 | ) | 116,577 |
|
| Other income | 10,949 |
| — |
| — |
| 63,363 |
| (70,172 | ) | 4,140 |
|
| Equity in earnings (loss) of affiliates | 115 |
| — |
| 1,542 |
| 116,897 |
| (118,554 | ) | — |
|
Earnings (loss) from continuing operations before income taxes | 5,826 |
| 66 |
| 250 |
| 171,613 |
| (170,724 | ) | 7,031 |
|
| Benefit (provision) for income taxes | 2,565 |
| (10 | ) | (105 | ) | (1,906 | ) | 589 |
| 1,133 |
|
| Earnings (loss) from continuing operations | 8,392 |
| 56 |
| 145 |
| 169,707 |
| (170,135 | ) | 8,165 |
|
Earnings (loss) from discontinued operations, net of taxes | (891 | ) | — |
| (1,927 | ) | 351 |
| 1,514 |
| (954 | ) |
| Net earnings (loss) | 7,500 |
| 56 |
| (1,782 | ) | 170,058 |
| (168,621 | ) | 7,211 |
|
Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (149 | ) | (141 | ) | (289 | ) |
Net earnings (loss) attributable to the Company | 7,500 |
| 56 |
| (1,782 | ) | 170,207 |
| (168,480 | ) | 7,500 |
|
| Other comprehensive income | (2,056 | ) | (12 | ) | 1,126 |
| (3,393 | ) | 2,279 |
| (2,056 | ) |
Comprehensive income (loss) attributable to the Company | $ | 5,444 |
| $ | 44 |
| $ | (657 | ) | $ | 166,814 |
| $ | (166,201 | ) | $ | 5,444 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| DECEMBER 31, 2019 |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 10,591 |
| $ | — |
| $ | — |
| $ | 26,438 |
| $ | (636 | ) | $ | 36,394 |
|
| Receivables - net | 47,170 |
| 17,726 |
| 230 |
| 61,026 |
| (99,104 | ) | 27,047 |
|
| Investment in subsidiaries | 147,397 |
| — |
| 40,408 |
| 421,613 |
| (609,418 | ) | — |
|
| All other assets | 28,377 |
| 236 |
| — |
| 291,995 |
| (118,000 | ) | 202,607 |
|
| Total assets | $ | 233,535 |
| $ | 17,961 |
| $ | 40,638 |
| $ | 801,071 |
| $ | (827,158 | ) | $ | 266,048 |
|
| | | | | | | |
| Short-term borrowings | $ | 135,172 |
| $ | — |
| $ | 2,981 |
| $ | 9,712 |
| $ | (125,792 | ) | $ | 22,072 |
|
| Long-term and non-recourse borrowings | 40,660 |
| 16,771 |
| 24,417 |
| 34,262 |
| (47,301 | ) | 68,809 |
|
| All other liabilities | 66,808 |
| 161 |
| 70 |
| 146,972 |
| (68,705 | ) | 145,306 |
|
| Total liabilities | 242,640 |
| 16,932 |
| 27,468 |
| 190,946 |
| (241,799 | ) | 236,187 |
|
| | | | | | | |
| Total liabilities and equity | $ | 233,535 |
| $ | 17,961 |
| $ | 40,638 |
| $ | 801,071 |
| $ | (827,158 | ) | $ | 266,048 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| DECEMBER 31, 2018 |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Assets | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 9,561 |
| $ | — |
| $ | — |
| $ | 25,975 |
| $ | (516 | ) | $ | 35,020 |
|
| Receivables - net | 28,426 |
| 17,467 |
| 2,792 |
| 69,268 |
| (84,161 | ) | 33,791 |
|
| Investment in subsidiaries(a) | 215,434 |
| — |
| 45,832 |
| 733,535 |
| (994,801 | ) | — |
|
| All other assets | 29,612 |
| 12 |
| — |
| 359,066 |
| (148,372 | ) | 240,318 |
|
| Total assets | $ | 283,033 |
| $ | 17,479 |
| $ | 48,623 |
| $ | 1,187,844 |
| $ | (1,227,850 | ) | $ | 309,129 |
|
| | | | | | | |
| Liabilities and equity | | | | | | |
| Short-term borrowings | $ | 150,426 |
| $ | — |
| $ | 9,854 |
| $ | 9,649 |
| $ | (157,080 | ) | $ | 12,849 |
|
| Long-term and non-recourse borrowings | 59,800 |
| 16,115 |
| 24,341 |
| 41,066 |
| (44,213 | ) | 97,109 |
|
| All other liabilities | 41,826 |
| 336 |
| 245 |
| 152,889 |
| (47,987 | ) | 147,308 |
|
| Total Liabilities | 252,052 |
| 16,452 |
| 34,439 |
| 203,604 |
| (249,281 | ) | 257,266 |
|
| | | | | | | |
Total liabilities, redeemable noncontrolling interests and equity | $ | 283,033 |
| $ | 17,479 |
| $ | 48,623 |
| $ | 1,187,844 |
| $ | (1,227,850 | ) | $ | 309,129 |
|
| |
(a) | Included within the subsidiaries of the Subsidiary Guarantor are cash and cash equivalent balances of $6,892 million and net assets of discontinued operations of $3,482 million. |
GE20182019 FORM 10-K 162
117
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| DECEMBER 31, 2018 |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 9,561 |
| $ | — |
| $ | — |
| $ | 25,975 |
| $ | (4,412 | ) | $ | 31,124 |
|
| Receivables - net | 30,466 |
| 17,467 |
| 2,792 |
| 69,268 |
| (90,504 | ) | 29,488 |
|
| Investment in subsidiaries | 176,239 |
| — |
| 45,832 |
| 733,535 |
| (955,605 | ) | — |
|
| All other assets | 29,615 |
| 12 |
| — |
| 359,063 |
| (138,230 | ) | 250,460 |
|
| Total assets | $ | 245,881 |
| $ | 17,479 |
| $ | 48,623 |
| $ | 1,187,841 |
| $ | (1,188,751 | ) | $ | 311,072 |
|
| | | | | | | |
| Short-term borrowings | $ | 150,426 |
| $ | — |
| $ | 9,854 |
| $ | 9,649 |
| $ | (157,153 | ) | $ | 12,776 |
|
| Long-term and non-recourse borrowings | 59,800 |
| 16,115 |
| 24,341 |
| 41,066 |
| (50,498 | ) | 90,824 |
|
| All other liabilities | 43,872 |
| 336 |
| 245 |
| 153,160 |
| (41,622 | ) | 155,992 |
|
| Total liabilities | 254,098 |
| 16,452 |
| 34,439 |
| 203,875 |
| (249,273 | ) | 259,591 |
|
| | | | | | | |
| Total liabilities and equity | $ | 245,881 |
| $ | 17,479 |
| $ | 48,623 |
| $ | 1,187,841 |
| $ | (1,188,751 | ) | $ | 311,072 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| DECEMBER 31, 2017 |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Assets | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 3,472 |
| $ | — |
| $ | 3 |
| $ | 41,236 |
| $ | (743 | ) | $ | 43,967 |
|
| Receivables - net | 50,923 |
| 17,316 |
| 32,381 |
| 87,776 |
| (147,551 | ) | 40,846 |
|
| Investment in subsidiaries(a) | 277,929 |
| — |
| 77,488 |
| 715,936 |
| (1,071,353 | ) | — |
|
| All other assets | 49,147 |
| 16 |
| 32 |
| 437,537 |
| (202,301 | ) | 284,431 |
|
| Total assets | $ | 381,472 |
| $ | 17,332 |
| $ | 109,904 |
| $ | 1,282,485 |
| $ | (1,421,948 | ) | $ | 369,245 |
|
| | | | | | | |
| Liabilities and equity | | | | | | |
| Short-term borrowings | $ | 191,807 |
| $ | — |
| $ | 46,033 |
| $ | 22,603 |
| $ | (236,407 | ) | $ | 24,036 |
|
| Long-term and non-recourse borrowings | 71,023 |
| 16,632 |
| 34,730 |
| 55,367 |
| (67,197 | ) | 110,556 |
|
| All other liabilities | 62,612 |
| 484 |
| 131 |
| 172,020 |
| (77,483 | ) | 157,764 |
|
| Total Liabilities | 325,442 |
| 17,116 |
| 80,894 |
| 249,991 |
| (381,088 | ) | 292,355 |
|
| | | | | | | |
Total liabilities, redeemable noncontrolling interests and equity | $ | 381,472 |
| $ | 17,332 |
| $ | 109,904 |
| $ | 1,282,485 |
| $ | (1,421,948 | ) | $ | 369,245 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED DECEMBER 31, 2019 |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash from (used for) operating activities(a) | $ | 5,526 |
| $ | 137 |
| $ | (1,685 | ) | $ | 33,515 |
| $ | (28,721 | ) | $ | 8,772 |
|
| | | | | | | |
| Cash from (used for) investing activities | 32,210 |
| (137 | ) | 6,223 |
| 400,190 |
| (429,548 | ) | 8,939 |
|
| | | | | | | |
| Cash from (used for) financing activities | (36,706 | ) | — |
| (4,538 | ) | (436,933 | ) | 462,045 |
| (16,133 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | — |
| — |
| — |
| (50 | ) | — |
| (50 | ) |
| Increase (decrease) in cash, cash equivalents and restricted cash | 1,030 |
| — |
| — |
| (3,277 | ) | 3,776 |
| 1,529 |
|
| Cash, cash equivalents and restricted cash at beginning of year | 9,561 |
| — |
| — |
| 30,399 |
| (4,412 | ) | 35,548 |
|
| Cash, cash equivalents and restricted cash at end of year | 10,591 |
| — |
| — |
| 27,121 |
| (636 | ) | 37,077 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at end of year | — |
| — |
| — |
| 638 |
| — |
| 638 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 10,591 |
| $ | — |
| $ | — |
| $ | 26,484 |
| $ | (636 | ) | $ | 36,439 |
|
| |
(a) | Included within the subsidiaries of the Subsidiary Guarantor are cash and cash equivalent balances of $15,225 million and net assets of discontinued operations of $4,318 million. |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED DECEMBER 31, 2018 |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash from (used for) operating activities(a) | $ | 42,999 |
| $ | (387 | ) | $ | 34,361 |
| $ | 294,372 |
| $ | (367,099 | ) | $ | 4,246 |
|
| | | | | | | |
| Cash from (used for) investing activities | 1,430 |
| 457 |
| 27,415 |
| (259,216 | ) | 248,152 |
| 18,239 |
|
| | | | | | | |
| Cash from (used for) financing activities | (38,340 | ) | (70 | ) | (61,779 | ) | (50,018 | ) | 119,175 |
| (31,033 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | — |
| — |
| — |
| (628 | ) | — |
| (628 | ) |
| Increase (decrease) in cash, cash equivalents and restricted cash | 6,089 |
| — |
| (3 | ) | (15,490 | ) | 228 |
| (9,176 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 3,472 |
| — |
| 3 |
| 41,993 |
| (743 | ) | 44,724 |
|
| Cash, cash equivalents and restricted cash at end of year | 9,561 |
| — |
| — |
| 26,503 |
| (516 | ) | 35,548 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at end of year | — |
| — |
| — |
| 528 |
| — |
| 528 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 9,561 |
| $ | — |
| $ | — |
| $ | 25,975 |
| $ | (516 | ) | $ | 35,020 |
|
| |
| (a) | Parent Company Guarantor cash flows included cash from (used for) operating activities of discontinued operations of $(1,726)$(1,282) million. |
GE20182019 FORM 10-K 163 118
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS | | FOR THE YEAR ENDED DECEMBER 31, 2017 | |
| FOR THE YEAR ENDED DECEMBER 31, 2018 | | FOR THE YEAR ENDED DECEMBER 31, 2018 |
| | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
| Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | |
| Cash from (used for) operating activities(a) | $ | (29,470 | ) | $ | 52 |
| $ | 4,305 |
| $ | 248,524 |
| $ | (217,379 | ) | $ | 6,032 |
| $ | 42,950 |
| $ | (387 | ) | $ | 34,361 |
| $ | 328,029 |
| $ | (399,976 | ) | $ | 4,978 |
|
| | | |
| Cash from (used for) investing activities | (4,251 | ) | (52 | ) | (1,871 | ) | (326,789 | ) | 339,527 |
| 6,564 |
| 1,292 |
| 457 |
| 27,415 |
| (297,621 | ) | 286,736 |
| 18,280 |
|
| | | |
| Cash from (used for) financing activities | 34,465 |
| — |
| (2,473 | ) | 70,163 |
| (121,302 | ) | (19,146 | ) | (38,154 | ) | (70 | ) | (61,779 | ) | (48,782 | ) | 116,979 |
| (31,807 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | — |
| — |
| — |
| 891 |
| — |
| 891 |
| — |
| — |
| — |
| (628 | ) | — |
| (628 | ) |
| Increase (decrease) in cash, cash equivalents and restricted cash | 743 |
| — |
| (39 | ) | (7,211 | ) | 846 |
| (5,660 | ) | 6,089 |
| — |
| (3 | ) | (19,002 | ) | 3,739 |
| (9,176 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 2,729 |
| — |
| 41 |
| 49,204 |
| (1,590 | ) | 50,384 |
| 3,472 |
| — |
| 3 |
| 49,400 |
| (8,151 | ) | 44,724 |
|
| Cash, cash equivalents and restricted cash at end of year | 3,472 |
| — |
| 3 |
| 41,993 |
| (743 | ) | 44,724 |
| 9,561 |
| — |
| — |
| 30,399 |
| (4,412 | ) | 35,548 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at end of year | — |
| — |
| — |
| 757 |
| — |
| 757 |
| — |
| — |
| — |
| 4,424 |
| — |
| 4,424 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 3,472 |
| $ | — |
| $ | 3 |
| $ | 41,236 |
| $ | (743 | ) | $ | 43,967 |
| $ | 9,561 |
| $ | — |
| $ | — |
| $ | 25,975 |
| $ | (4,412 | ) | $ | 31,124 |
|
| |
| (a) | Parent Company Guarantor cash flows included cash from (used for) operating activities of discontinued operations of $(319)$1,991 million. |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED DECEMBER 31, 2017 |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash from (used for) operating activities(a) | $ | (29,441 | ) | $ | 52 |
| $ | 4,305 |
| $ | 149,385 |
| $ | (117,747 | ) | $ | 6,554 |
|
| | | | | | | |
| Cash from (used for) investing activities | (4,432 | ) | (52 | ) | (1,871 | ) | (222,298 | ) | 234,032 |
| 5,379 |
|
| | | | | | | |
| Cash from (used for) financing activities | 34,616 |
| — |
| (2,473 | ) | 70,782 |
| (121,410 | ) | (18,484 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | — |
| — |
| — |
| 891 |
| — |
| 891 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | 743 |
| — |
| (39 | ) | (1,239 | ) | (5,125 | ) | (5,659 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 2,729 |
| — |
| 41 |
| 50,640 |
| (3,026 | ) | 50,384 |
|
| Cash, cash equivalents and restricted cash at end of year | 3,472 |
| — |
| 3 |
| 49,400 |
| (8,151 | ) | 44,724 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at end of year | — |
| — |
| — |
| 7,901 |
| — |
| 7,901 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 3,472 |
| $ | — |
| $ | 3 |
| $ | 41,499 |
| $ | (8,151 | ) | $ | 36,823 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| FOR THE YEAR ENDED DECEMBER 31, 2016 |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash from (used for) operating activities(a) | $ | (5,344 | ) | $ | (10 | ) | $ | (387 | ) | $ | 229,968 |
| $ | (223,067 | ) | $ | 1,160 |
|
| | | | | | | |
| Cash from (used for) investing activities | 13,708 |
| 16,384 |
| 35,443 |
| (11,842 | ) | (4,557 | ) | 49,135 |
|
| | | | | | | |
| Cash from (used for) financing activities | (9,879 | ) | (16,374 | ) | (35,388 | ) | (275,647 | ) | 246,825 |
| (90,464 | ) |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | — |
| — |
| — |
| (1,146 | ) | — |
| (1,146 | ) |
| Increase (decrease) in cash, cash equivalents and restricted cash | (1,516 | ) | — |
| (332 | ) | (58,667 | ) | 19,201 |
| (41,315 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 4,244 |
| — |
| 374 |
| 107,871 |
| (20,791 | ) | 91,698 |
|
| Cash, cash equivalents and restricted cash at end of year | 2,729 |
| — |
| 41 |
| 49,204 |
| (1,590 | ) | 50,384 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at end of year | — |
| — |
| — |
| 1,601 |
| — |
| 1,601 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of year | $ | 2,729 |
| $ | — |
| $ | 41 |
| $ | 47,603 |
| $ | (1,590 | ) | $ | 48,783 |
|
| |
| (a) | Parent Company Guarantor cash flows included cash from (used for) operating activities of discontinued operations of $(891)$239 million. |
NOTE 28. BAKER HUGHES SUMMARIZED FINANCIAL INFORMATION
In September 2019, we deconsolidated our Baker Hughes segment and elected to account for our remaining interest in Baker Hughes (comprising 377.4 million shares and a promissory note receivable) at fair value. At December 31, 2019, the fair value of our interest in Baker Hughes was $9,888 million. Since the date of deconsolidation, we have not sold any shares of Baker Hughes and recognized an unrealized gain of $793 million for the period ended December 31, 2019 based on a share price of $25.63. See Notes 2 and 3 for further information.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Summarized financial information of Baker Hughes from the date of deconsolidation is as follows.
|
| | | |
From September 16 to December 31, 2019 (In millions) | |
| | |
| Revenues | $ | 7,751 |
|
| Gross Profit | 1,558 |
|
| Net income (loss) | 120 |
|
| Net income (loss) attributable to the entity | 60 |
|
|
| | | |
December 31, 2019 (In millions) | |
| | |
| Current | $ | 15,222 |
|
| Noncurrent | 38,147 |
|
| Total assets | $ | 53,369 |
|
| | |
| Current | $ | 10,014 |
|
| Noncurrent | 8,857 |
|
| Total liabilities | $ | 18,871 |
|
| Noncontrolling interests | $ | 12,570 |
|
Baker Hughes is a SEC registrant with separate filing requirements, and its financial information can be obtained from www.sec.gov or www.bakerhughes.com.
NOTE 28.29. QUARTERLY INFORMATION (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First quarter | | Second quarter | | Third quarter | | Fourth quarter |
| (In millions; per-share amounts in dollars) | 2019 |
| 2018 |
| | 2019 |
| 2018 |
| | 2019 |
| 2018 |
| | 2019 |
| 2018 |
|
| | | | | | | | | | | | |
| Consolidated operations | | | | | | | | | | | |
| Earnings (loss) from continuing operations | $ | 983 |
| $ | 446 |
| | $ | (115 | ) | $ | 791 |
| | $ | (1,290 | ) | $ | (23,014 | ) | | $ | 845 |
| $ | 697 |
|
| Earnings (loss) from discontinued operations | 2,663 |
| (1,559 | ) | | 219 |
| (122 | ) | | (8,093 | ) | 155 |
| | (123 | ) | 163 |
|
| Net earnings (loss) | 3,645 |
| (1,113 | ) | | 104 |
| 669 |
| | (9,383 | ) | (22,859 | ) | | 721 |
| 860 |
|
Less net earnings (loss) attributable to noncontrolling interests | 57 |
| 34 |
| | (23 | ) | (132 | ) | | 40 |
| (90 | ) | | (7 | ) | 99 |
|
Net earnings (loss) attributable to the Company | $ | 3,588 |
| $ | (1,147 | ) | | $ | 127 |
| $ | 800 |
| | $ | (9,423 | ) | $ | (22,769 | ) | | $ | 728 |
| $ | 761 |
|
Per-share amounts – earnings (loss) from continuing operations | | | | | | | | | | | |
| Diluted earnings (loss) per share | $ | 0.10 |
| $ | 0.03 |
| | $ | (0.03 | ) | $ | 0.08 |
| | $ | (0.15 | ) | $ | (2.64 | ) | | $ | 0.07 |
| $ | 0.06 |
|
| Basic earnings (loss) per share | 0.10 |
| 0.03 |
| | (0.03 | ) | 0.08 |
| | (0.15 | ) | (2.64 | ) | | 0.08 |
| 0.06 |
|
Per-share amounts – earnings (loss) from discontinued operations | | | | | | | | | | | |
| Diluted earnings (loss) per share | 0.30 |
| (0.17 | ) | | 0.03 |
| (0.01 | ) | | (0.93 | ) | 0.02 |
| | (0.02 | ) | 0.01 |
|
| Basic earnings (loss) per share | 0.30 |
| (0.17 | ) | | 0.03 |
| (0.01 | ) | | (0.93 | ) | 0.02 |
| | (0.01 | ) | 0.01 |
|
| Per-share amounts – net earnings (loss) | | | | | | | | | | | |
| Diluted earnings (loss) per share | 0.40 |
| (0.14 | ) | | (0.01 | ) | 0.07 |
| | (1.08 | ) | (2.62 | ) | | 0.06 |
| 0.07 |
|
| Basic earnings (loss) per share | 0.41 |
| (0.14 | ) | | (0.01 | ) | 0.07 |
| | (1.08 | ) | (2.62 | ) | | 0.06 |
| 0.07 |
|
| Dividends declared | 0.01 |
| 0.12 |
| | 0.01 |
| 0.12 |
| | 0.01 |
| 0.12 |
| | 0.01 |
| 0.01 |
|
| | | | | | | | | | | | |
| Selected data | | | | | | | | | | | |
| GE | | | | | | | | | | | |
| Sales of goods and services | $ | 20,324 |
| $ | 21,138 |
| | $ | 21,416 |
| $ | 22,190 |
| | $ | 21,519 |
| $ | 21,273 |
| | $ | 24,460 |
| $ | 24,437 |
|
| Gross profit from sales | 4,494 |
| 4,879 |
| | 4,500 |
| 5,100 |
| | 4,660 |
| 3,924 |
| | 5,780 |
| 4,261 |
|
| GE Capital | | | | | | | | | | | |
| Total revenues | 2,227 |
| 2,173 |
| | 2,321 |
| 2,429 |
| | 2,097 |
| 2,473 |
| | 2,096 |
| 2,476 |
|
Earnings (loss) from continuing operations attributable to the Company | 175 |
| (179 | ) | | 99 |
| (22 | ) | | (603 | ) | 58 |
| | 259 |
| 101 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First quarter | | Second quarter | | Third quarter | | Fourth quarter |
| (In millions; per-share amounts in dollars) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | | | | | |
| Consolidated operations | | | | | | | | | | | |
| Earnings (loss) from continuing operations | $ | 440 |
| $ | 52 |
| | $ | 789 |
| $ | 1,164 |
| | $ | (22,899 | ) | $ | 1,297 |
| | $ | 952 |
| $ | (11,053 | ) |
Earnings (loss) from discontinued operations | (1,553 | ) | (239 | ) | | (121 | ) | (146 | ) | | 39 |
| (106 | ) | | (92 | ) | 182 |
|
| Net earnings (loss) | (1,113 | ) | (187 | ) | | 669 |
| 1,019 |
| | (22,859 | ) | 1,191 |
| | 860 |
| (10,872 | ) |
Less net earnings (loss) attributable to noncontrolling interests | 34 |
| (104 | ) | | (132 | ) | (38 | ) | | (90 | ) | (169 | ) | | 99 |
| (53 | ) |
Net earnings (loss) attributable to the Company | $ | (1,147 | ) | $ | (83 | ) | | $ | 800 |
| $ | 1,057 |
| | $ | (22,769 | ) | $ | 1,360 |
| | $ | 761 |
| $ | (10,818 | ) |
Per-share amounts – earnings (loss) from continuing operations | | | | | | | | | | | |
| Diluted earnings (loss) per share | $ | 0.04 |
| $ | 0.01 |
| | $ | 0.08 |
| $ | 0.12 |
| | $ | (2.63 | ) | $ | 0.16 |
| | $ | 0.08 |
| $ | (1.29 | ) |
| Basic earnings (loss) per share | 0.04 |
| 0.01 |
| | 0.08 |
| 0.12 |
| | (2.63 | ) | 0.16 |
| | 0.08 |
| (1.29 | ) |
Per-share amounts – earnings (loss) from discontinued operations | | | | | | | | | | | |
| Diluted earnings (loss) per share | (0.18 | ) | (0.03 | ) | | (0.01 | ) | (0.02 | ) | | — |
| (0.01 | ) | | (0.01 | ) | 0.02 |
|
| Basic earnings (loss) per share | (0.18 | ) | (0.03 | ) | | (0.01 | ) | (0.02 | ) | | — |
| (0.01 | ) | | (0.01 | ) | 0.02 |
|
| Per-share amounts – net earnings (loss) | | | | | | | | | | | |
| Diluted earnings (loss) per share | (0.14 | ) | (0.01 | ) | | 0.07 |
| 0.10 |
| | (2.62 | ) | 0.15 |
| | 0.07 |
| (1.27 | ) |
| Basic earnings (loss) per share | (0.14 | ) | (0.01 | ) | | 0.07 |
| 0.10 |
| | (2.62 | ) | 0.15 |
| | 0.07 |
| (1.27 | ) |
| Dividends declared | 0.12 |
| 0.24 |
| | 0.12 |
| 0.24 |
| | 0.12 |
| 0.24 |
| | 0.01 |
| 0.12 |
|
| | | | | | | | | | | | |
| Selected data | | | | | | | | | | | |
| GE | | | | | | | | | | | |
| Sales of goods and services | $ | 26,894 |
| $ | 24,780 |
| | $ | 28,079 |
| $ | 27,129 |
| | $ | 27,456 |
| $ | 28,774 |
| | $ | 31,213 |
| $ | 30,571 |
|
| Gross profit from sales | 5,867 |
| 4,936 |
| | 6,202 |
| 5,971 |
| | 5,107 |
| 5,676 |
| | 5,738 |
| 5,671 |
|
| GE Capital | | | | | | | | | | | |
| Total revenues | 2,173 |
| 2,681 |
| | 2,429 |
| 2,446 |
| | 2,473 |
| 2,397 |
| | 2,476 |
| 1,545 |
|
Earnings (loss) from continuing operations attributable to the Company | (179 | ) | (13 | ) | | (22 | ) | 10 |
| | 58 |
| 60 |
| | 101 |
| (6,385 | ) |
For GE, gross profit from sales is sales of goods and services less costs of goods and services sold.
Earnings-per-share amounts are computed independently each quarter for earnings (loss) from continuing operations, earnings (loss) from discontinued operations and net earnings.earnings (loss). As a result, the sum of each quarter’s per-share amount may not equal the total per-share amount for the respective year; and the sum of per-share amounts from continuing operations and discontinued operations may not equal the total per-share amounts for net earnings (loss) for the respective quarters.
GE20182019 FORM 10-K 165 120
|
| | |
| FORWARD-LOOKING STATEMENTS | | |
FORWARD-LOOKING STATEMENTS
Our public communications and SEC filings may contain statements related to future, not past, events. These forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "estimate," "forecast," "target," "preliminary," or "range." Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about our expected financial performance, including cash flows, revenues, organic growth, margins, earnings and earnings per share; macroeconomic and market conditions; planned and potential business or asset dispositions; our de-leveraging plans, including leverage ratios and targets, the timing and nature of actions to reduce indebtedness and our credit ratings and outlooks; GE's and GE Capital's funding and liquidity; our businesses’ cost structures and plans to reduce costs; restructuring, goodwill impairment or other financial charges; or tax rates.
For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
our success in executing and completing, including obtaining regulatory approvals and satisfying other closing conditions for, announced GE Industrial and GE Capital business or asset dispositions or other transactions, including the planned sale of our BioPharma business within our Healthcare segment and plan to exit our equity ownership position in Baker Hughes, the timing of closing for those transactions and the expected proceeds and benefits to GE;
our de-leveraging and capital allocation plans, including with respect to actions to reduce our indebtedness, the timing and amount of GE dividends, organic investments, and other priorities;
further downgrades of our current short- and long-term credit ratings or ratings outlooks, or changes in rating application or methodology, and the related impact on our liquidity, funding profile, costs and competitive position;
GE’s liquidity and the amount and timing of our GE Industrial cash flows and earnings, which may be impacted by customer, competitive, contractual and other dynamics and conditions;
GE Capital's capital and liquidity needs, including in connection with GE Capital’s run-off insurance operations and discontinued operations; the amount and timing of required capital contributions to the insurance operations and strategic actions that we may pursue; the impact of conditions in the financial and credit markets on GE Capital's ability to sell financial assets; the availability and cost of funding; and GE Capital's exposure to particular counterparties and markets;
global economic trends, competition and geopolitical risks, including changes in the rates of investment or economic growth in key markets we serve, or an escalation of trade tensions such as those between the U.S. and China;
changes in macroeconomic and market conditions, particularly interest rates as it relates to our pension and run-off insurance liabilities, as well as the value of stocks and other financial assets (including our equity ownership positions in Baker Hughes), oil and other commodity prices and exchange rates;
market developments or customer actions that may affect levels of demand and the financial performance of the major industries and customers we serve, such as secular, cyclical and competitive pressures in our Power business, pricing and other pressures in the renewable energy market, levels of demand for air travel and other customer dynamics such as early aircraft retirements, conditions in key geographic markets and other shifts in the competitive landscape for our products and services;
the length and severity of the recent coronavirus outbreak, including its impacts across our businesses on demand, operations in China and our global supply chains;
operational execution by our businesses, including our ability to improve the operations and execution of our Power and Renewable Energy businesses, and the continued strength of our Aviation business;
changes in law, regulation or policy that may affect our businesses, such as trade policy and tariffs, regulation related to climate change and the effects of U.S. tax reform and other tax law changes;
our decisions about investments in new products, services and platforms, and our ability to launch new products in a cost-effective manner;
our ability to increase margins through implementation of operational changes, restructuring and other cost reduction measures;
the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including the impact of Alstom, SEC and other investigative and legal proceedings;
the impact of actual or potential failures of our products or third-party products with which our products are integrated, such as the fleet grounding of the Boeing 737 MAX and the timing of its return to service, and related reputational effects;
the impact of potential information technology, cybersecurity or data security breaches; and
the other factors that are described in "Risk Factors" in this form 10-K report.
These or other uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements. This document includes certain forward-looking projected financial information that is based on current estimates and forecasts. Actual results could differ materially.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our Executive Officers of the Registrant (As of February 1, 2019)2020)
|
| | | | | | |
| | | | | | | Date assumed |
| | | | | | | Executive |
| Name | | Position | | Age | | Officer Position |
| | | | | | | |
| H. Lawrence Culp, Jr. | | Chairman of the Board & Chief Executive Officer | | 5556 | | October 2018 |
| Jamie S. Miller | | Senior Vice President & Chief Financial Officer | | 5051 | | November 2017 |
| Michael J. Holston | | Senior Vice President, General Counsel & Secretary | | 5657 | | April 2018 |
| David L. Joyce | | Vice Chairman of General Electric Company; | | 6263 | | September 2016 |
| | | President & CEO, GE Aviation | | | | |
Raghu KrishnamoorthyL. Kevin Cox | | Senior Vice President, Chief Human Resources Officer | | 5856 | | December 2017February 2019 |
| Kieran P. Murphy | | Senior Vice President of General Electric Company; | | 5556 | | September 2018 |
| | | President & CEO, GE Healthcare | | | | |
| Jérôme X. Pécresse | | Senior Vice President of General Electric Company; | | 5152 | | September 2018 |
| | | President & CEO, GE Renewable Energy | | | | |
| Russell Stokes | | Senior Vice President of General Electric Company; | | 4748 | | September 2018 |
| | | President & CEO, GE Power Portfolio | | | | |
| Scott L. Strazik | | Senior Vice President of General Electric Company; | | 4041 | | January 2019 |
| | | CEO, GE Gas Power | | | | |
| Thomas S. Timko | | Vice President, Controller & Chief Accounting Officer | | 5051 | | September 2018 |
All Executive Officers are elected by the Board of Directors for an initial term that continues until the Board meeting immediately preceding the next annual statutory meeting of shareowners,shareholders, and thereafter are elected for one-year terms or until their successors have been elected. All Executive Officers have been executives of General Electric Company for the last five years except for Messrs. Culp, Cox, Holston, Pécresse and Timko.
Prior to joining GE in April 2018 as an independent director and being elected to the position of Chairman and CEO in October 2018, Mr. Culp served as CEO at Danaher Corp. (2001-2014); as a senior advisor at Danaher Corp. (2014-2016); as a senior lecturer at Harvard Business School (2015 - 2018)(2015-2018); and as a senior adviser at Bain Capital Private Equity, LP (2017 - 2018)(2017-2018).
Prior to joining GE in February 2019, Mr. Cox had been Chief Human Resources Officer at American Express since 2005.
Prior to joining GE in April 2018, Mr. Holston had been general counsel at Merck since 2015, after joining the drugmaker as chief ethics and compliance officer in 2012.
Prior to joining GE in November 2015 with the acquisition of Alstom, Mr. Pécresse was an Executive Vice President of Alstom since June 2011.
Prior to joining GE in September 2018, Mr. Timko was chief accounting officerVice President, Controller and Chief Accounting Officer at General Motors since 2013.
The remaining information called for by this item is incorporated by reference to “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Other Governance Policies & Practices” and “Board Operations” in our definitive proxy statement for our 20192020 Annual Meeting of ShareownersShareholders to be held May 8, 2019,5, 2020, which will be filed within 120 days of the end of our fiscal year ended December 31, 20182019 (the 20192020 Proxy Statement).
GE20182019 FORM 10-K 166 122
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
Included in the “Financial Statements and Supplementary Data” section of this report:
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Statement of Earnings (Loss) for the years ended December 31, 2019, 2018 2017 and 20162017
Consolidated Statement of Financial Position at December 31, 2019 and 2018
Statement of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Statement of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Statement of Financial Position at December 31,2019, 2018 and 2017
Statement of Cash FlowsChanges in Shareholders' Equity for the years ended December 31, 2019, 2018 2017 and 20162017
Notes to consolidated financial statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Summary of Operating Segments
(a)2. Financial Statement Schedules
The schedules listed in Reg. 210.5-04 have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(a)3. Exhibit Index
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Exhibit
Number | | Description |
| 2(a) | | |
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| 2(b) | | Amendment to Transaction Agreement and Plan of Merger dated March 27, 2017 between General Electric Company, Baker Hughes Incorporated, Bear Newco, Inc., Bear MergerSub, Inc., BHI Newco, Inc., and Bear MergerSub 2, Inc. (Incorporated by reference to Bear Newco, Inc.'s Registration Statement on Form S-4, pages A-II-I through G-16, filed pursuant to Rule 424(b)(3) on May 30, 2017 (Commission file number 333-216991)). |
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| 3(i) | | The Restated Certificate of Incorporation of General Electric Company (Incorporated by reference to Exhibit 3(i) to GE’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013), as amended by the Certificate of Amendment, dated December 2, 2015 (Incorporated by reference to Exhibit 3.1 to GE’s Current Report on Form 8-K, dated December 3, 2015), as further amended by the Certificate of Amendment, dated January 19, 2016 (Incorporated by reference to Exhibit 3.1 to GE’s Current Report on Form 8-K, dated January 20, 2016) and, as further amended by the Certificate of Change of General Electric Company (Incorporated by reference to Exhibit 3(1) to GE’s Current Report on Form 8-K, dated September 1, 2016 (in each case, under Commission file number 001-00035). |
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3(ii) | | The By-Laws, as further amended by the Certificate of General Electric Company, as amended and restated on June 9, 2017Amendment, dated May 13, 2019 (Incorporated by reference to Exhibit 3.1 to GE’s Current Report on Form 8-K, dated JuneMay 13, 2019), and as further amended by the Certificate of Change of General Electric Company (Incorporated by reference to Exhibit 3.1 to GE’s Current Report on Form 8-K, dated December 9, 20172019) (in each case, under Commission file number 001-00035). |
| 3(ii) | | |
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| 4(a) | | |
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| 4(b) | | |
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| 4(c) | | |
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| 4(d) | | |
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| 4(e) | | |
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| 4(f) | | |
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4(i) |
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| 4(h) | | |
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4(j)4(i) | | |
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4(k)4(j) | | |
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4(l)
4(k) | | |
| 4(l) | | |
| (10) | | Except for 10(t), (x)10(aa) and (cc)(bb) below, all of the following exhibits consist of Executive Compensation Plans or Arrangements: |
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| | | (a) | General Electric Incentive Compensation Plan, as amended effective July 1, 1991 (Incorporated by reference to Exhibit 10(a) to GE’s Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1991). |
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| | (b) | |
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| | | (c) | General Electric Supplemental Life Insurance Program, as amended February 8, 1991 (Incorporated by reference to Exhibit 10(i) to GE’s Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1990). |
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| | (d) | |
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| | | (e) | |
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| | | (f) | |
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| | | (g) | |
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| | | (h) | |
| | (i) | |
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| | | (i)(j) | |
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| | | (j)(k) | |
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| | | (k)(l) | |
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| | | (l)(m) | |
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| | | (m)(n) | |
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| | | (n)(o) | |
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| | | (o)(p) | |
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| | (p) | |
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| | | (q) | |
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| | (r) | |
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| | | (r) | |
| | | (s) | |
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| | | (t) | |
| | (u) | |
| | (v) | |
| | (w) | |
| | (x) | |
| | (y) | |
| | (z) | |
| | (aa) | |
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| | (u) | |
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| | (v)(bb) | |
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| | (w) | |
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| | (x) | |
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| | (y) | |
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| | (z) |
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| | (aa) | |
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| | (bb) | |
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| | (cc) | |
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| (11) | | |
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| (21) | | |
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| (23) | | |
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| (24) | | |
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| 31(a) | | |
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| 31(b) | | |
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| (32) | | |
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(95) | | |
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| 99(a) | | Undertaking for Inclusion in Registration Statements on Form S-8 of General Electric Company (Incorporated by reference to Exhibit 99(b) to General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1992). |
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| 99(b) | | |
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| 99(c) | | |
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| (101) | | The following materials from General Electric Company's Annual Report on Form 10-K for the year ended December 31, 2018, formatted inas Inline XBRL (eXtensible Business Reporting Language); (i) Statement of Earnings (Loss) for the years ended December 31, 2019, 2018 and 2017, (ii) Statement of Financial Position at December 31, 2019 and 2016, (ii) Consolidated2018, (iii) Statement of Cash Flows for the years ended December 31, 2019, 2018 and 2017, (iv) Statement of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016, (iii) Statement of Financial Position at December 31,2019, 2018 and 2017, (iv)(v) Statement of Cash FlowsChanges in Shareholders' Equity for the years ended December 31, 2019, 2018 and 2017, and 2016, and (v)(vi) the Notes to Consolidated Financial Statements.* |
| (104) | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed electronically herewith. |
| ** | Information required to be presented in Exhibit 11 is provided in Note 1718 to the consolidated financial statements in this Form 10-K Report in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share. |
GE20182019 FORM 10-K 170
125
FORM 10-K CROSS REFERENCE INDEX
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| | | | |
| Item Number | | Page(s) |
| Part I | | | | |
| Item 1. | | Business | | 4-5, 12-35, 43-443, 7, 9-20 |
| | | | | |
| Item 1A. | | Risk Factors | | 79-8650-57 |
| Item 1B. | | Unresolved Staff Comments | | Not applicable |
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| Item 2. | | Properties | | 43 |
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| Item 3. | | Legal Proceedings | | 86-88106-109 |
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| Item 4. | | Mine Safety Disclosures | | 68Not applicable |
| Part II | | | | |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | 7, 7850 |
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| Item 6. | | Selected Financial Data | | 7849 |
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| Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 5-774-49 |
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| Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk | | 47-49, 146-14928-30, 102-104 |
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| Item 8. | | Financial Statements and Supplementary Data | | 93-16562-120 |
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| Item 9. | | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | | Not applicable |
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| Item 9A. | | Controls and Procedures | | 9058 |
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| Item 9B. | | Other Information | | Not applicable |
| Part III | | | | |
| Item 10. | | Directors, Executive Officers and Corporate Governance | | 166122 |
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| Item 11. | | Executive Compensation | | (a) |
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| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | (b), 14199-100 |
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| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | (c) |
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| Item 14. | | Principal Accountant Fees and Services | | (d) |
| Part IV | | | | |
| Item 15. | | Exhibits and Financial Statement Schedules | | 167-170123-125 |
| Item 16. | | Form 10-K Summary | | Not applicable |
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| Signatures | | | 172127 |
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| (a) | Incorporated by reference to “Compensation” in the 20192020 Proxy Statement. |
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| (b) | Incorporated by reference to “Stock Ownership Information” in the 20192020 Proxy Statement. |
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| (c) | Incorporated by reference to “Related Person Transactions” and “How We Assess Director Independence” in the 20192020 Proxy Statement. |
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| (d) | Incorporated by reference to “Independent Auditor Information” in the 20192020 Proxy Statement. |
GE20182019 FORM 10-K 171 126
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K for the fiscal year ended December 31, 2018,2019, to be signed on its behalf by the undersigned, and in the capacities indicated, thereunto duly authorized in the City of Boston and Commonwealth of Massachusetts on the 2624th day of February 2019.2020.
General Electric Company
(Registrant)
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| By | /s/ Jamie S. Miller |
| | Jamie S. Miller Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| | Signer | | Title | | Date |
| | | | | | |
| | /s/ Jamie S. Miller | | Principal Financial Officer | | February 26, 201924, 2020 |
| | Jamie S. Miller
Senior Vice President and Chief Financial Officer | | | | |
| | | | | | |
| | /s/ Thomas S. Timko | | Principal Accounting Officer | | February 26, 201924, 2020 |
| | Thomas S. Timko Vice President, Chief Accounting Officer and Controller | | | | |
| | | | | | |
| | /s/ H. Lawrence Culp, Jr. | | Principal Executive Officer | | February 26, 201924, 2020 |
| | H. Lawrence Culp, Jr.* Chairman of the Board of Directors | | | | |
| | | | | | |
| | Sébastien M. Bazin* | | Director | | |
| | W. Geoffrey Beattie* | | Director | | |
| Francisco D’Souza*D'Souza* | | Director | | |
| | Edward P. Garden* | | Director | | |
| | Thomas W. Horton* | | Director | | |
| | Risa Lavizzo-Mourey* | | Director | | |
| | James J. Mulva*Catherine A. Lesjak* | | Director | | |
| | Paula Rosput Reynolds* | | Director | | |
| | Leslie F. Seidman* | | Director | | |
| | James S. Tisch* | | Director | | |
| | | | | |
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| | A majority of the Board of Directors | | | | |
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| *By | /s/ Christoph A. Pereira | | | | |
| | Christoph A. Pereira
Attorney-in-fact | | | | |
| | February 26, 201924, 2020 | | | | |
GE20182019 FORM 10-K 172
127
