A massive restructuring in its operating portfolio in order to create a simpler and nimbler company with a re-focus on core operations enabled General Electric Company GE to report relatively modest first-quarter 2015 results. Operating earnings for the reported quarter was $3.1 billion or 31 cents a share compared with $3.3 billion or 33 cents a share in the year-ago quarter.
The decrease in year-over-year earnings was primarily attributable to decline in revenues. However, operating earnings for the reported quarter marginally exceeded the Zacks Consensus Estimate by a penny.
On a GAAP basis, the company reported a quarterly loss of $13.6 billion or a loss of 135 cents per share, compared with $3.0 billion or 30 cents per share in first-quarter 2014. The drastic fall in reported earnings was primarily due to a reshuffle in the operating portfolio in order to reduce the volatility in earnings associated with the financial businesses of GE Capital and focus on the strong industrial roots of the company.
Revenues
Total revenue for the reported quarter (excluding GE Capital exits) decreased 3% year over year to $33,104 million and fell short of the Zacks Consensus Estimate of $34,424 million. While overall Industrial segment revenue fell 1% year over year to $23.8 billion, GE Capital revenue dropped 7% to $9.7 billion. However, organic revenue growth for the industrial segment aggregated 3% for the quarter to $24.4 billion.
Total orders for the quarter decreased 3% year over year to $23.1 billion, while total backlog of equipment and services at quarter-end continued its upward ascent for a record high $263 billion. Despite an overall revenue decline, the company recorded a decent 2% growth in the U.S. and 6% in the growth markets backed by solid growth in China, Latin America and India.
Revenue by Segment
During the reported quarter, Oil & Gas revenues declined 8% year over year as expected due to macroeconomic headwinds to $4.0 billion, while Energy Management revenues improved 1% to $1.7 billion. Revenues from Aviation segment fell 2% year over year to $5.7 billion largely due to a reduction in capital spending for the commercial aviation and defense industries. Transportation revenues improved a healthy 7% year over year to $1.3 billion on higher locomotive shipments.
Both Power & Water and Appliances & Lighting segment revenues were up 4% and 5%, respectively, to $5.7 billion and $1.9 billion. Revenues from the Healthcare segment, however, declined 3% to $4.1 billion due to soft demand from emerging markets.
Revenues from the GE Capital segment decreased 7% year over year to $9.7 billion. For the reported quarter, GE Capital paid $450 million in dividends to parent General Electric. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $302.8 billion at quarter-end, down 19% year over year. GE Capital finished the quarter with a Tier 1 common ratio of 10.6%.
Margins, Balance Sheet and Cash Flow
General Electric recorded a healthy margin improvement in the reported quarter with stringent cost-cutting and simplification initiatives. Industrial segment profit improved 9% year over year to $3.6 billion, with a rise in profits from Appliances & Lighting (up 94%), Energy Management (up 18%), and Transportation (up 11%), partially offset by a decline in profit in the Oil & Gas segment (down 3%) and Power & Water (down 2%). Gross margin for the industrial segment increased 90 bps to 26.2%, while operating margin climbed 120 bps to 14.6%.
Cash generated from operating activities totaled $1.3 billion, with $0.9 billion generated from industrial activities. Cash and marketable securities at quarter end aggregated $129.0 billion. General Electric returned $2.3 billion to shareholders during the year.
Restructuring Initiatives
In order to focus more on its core industrial businesses, General Electric has keenly continued with its strategic restructuring initiatives. The company is actively pursuing the sale of its GE Money Bank AB (Nordics) consumer finance business to Spain’s Banco Santander, S.A. SAN. The biggest bank of Spain agreed to acquire GE Capital's consumer finance business in Sweden, Norway and Denmark, for about $953 million. The transaction, announced in late June last year, is making good headway in terms of regulatory approvals.
In addition, General Electric is further planning to divest its ownership stake in Polish Bank BPH SA. The diversified conglomerate has about 89% stake in Bank BPH.
In accordance with Chairman and CEO Jeff Immelt’s vision to transform the company to an industrial-focused firm, General Electric has vouched to divest most of the financial units under GE Capital over the next 24 months. The only financial operations that would be retained by the company will include the financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and will thus form an integral part of its corporate activities.
Immelt’s current restructuring plan also involves the sale of over 4,400 properties, including warehouses, factories, malls, apartment buildings and other commercial properties of GE Capital Real Estate. The real estate assets accounted for about 7% of the aggregate GE Capital assets worth $499 billion at year-end 2014.
Immelt felt that this was perhaps the most opportune time to sell these assets when the market was relatively high. The decision might also have been triggered by the Federal Reserve’s decision to raise interest rates later this year, thereby pushing up the financing costs.
The transactions will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014.
The company has recorded $16 billion of after-tax charges in the first quarter of 2015 in connection with the plan, $12 billion of which are non cash. The company expects that the adverse impact of the divestments would be nullified by share buybacks over the exit period.
Management has authorized a new share repurchase program worth $50 billion to execute this strategy, reducing its outstanding share count to 8-8.5 billion by 2018. About $35 billion will be made available through dividend payments of GE Capital to its parent company. General Electric is likely to return over $90 billion to shareholders through dividends and share buybacks through 2018.
Outlook
With a focused and dedicated execution of its strategic plans as reflected in the quarterly results, General Electric expects to continue its bull run in 2015 with its restructuring framework and simultaneously benefit the shareholders with a healthy return on investments. The company continues to expect double-digit Industrial operating EPS growth to $1.10-$1.20 per share; 2%–5% industrial segment organic revenue growth; margin expansion; a smaller GE Capital; $12–$15 billion in free cash flow including disposal of non-core assets to the tune of $90 billion; and $10 billion-$30 billion returned to shareowners.
The company has started its exit from the financial business and has increased its investments in core industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. General Electric also remains focused on its stringent cost-cutting measures. We remain encouraged with these endeavors of the company. However, shares remained flat in pre-market trading following the release as investors probably expected a healthy beat.
General Electric currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth a look include Compass Diversified Holdings CODI, and Carlisle Companies Inc. CSL, both carrying a Zacks Rank #2 (Buy).
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