Acquisitions, Goodwill and Other Intangibles Assets

9 Months Ended

Sep. 30, 2016

Acquisitions, Goodwill and Intangible Assets Disclosure [Abstract]

Acquisitions, Goodwill and Other Intangible Assets

NOTE 7. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS

Acquisitions

On October 31, 2016, we announced anagreement with Baker Hughes Incorporated (Baker Hughes) to combine GE’s Oil & Gas business and Baker Hughes to create a new company. The transaction will be executed using a partnership structure, pursuant to which GE Oil & Gas and Baker Hughes will each contribute their operating assets to a newly formed partnership. GE will have a 62.5% interest in this partnership and existing Baker Hughes shareholders will have a 37.5% interest through a newly NYSE listed corporation. Baker Hughes shareholders will also receive a special one-time cash dividend of $17.50 per share at closing. GE will contribute $7.4 billon to the new partnership to fund the cash dividend to existing Baker Hughes shareholders. The transaction is subject to the approval of Baker Hughes shareholders, regulatory approvals and other customary closing conditions.

On September 14, 2016, we acquired the remaining 74% of the software developer Meridium Inc. for cash proceeds of $370 million. Upon gaining control, we fair valued the business including our previously held 26% equity interest. The preliminary purchase price allocation resulted in goodwill of approximately $350 million and amortizable intangible assets of approximately $165 million. The allocation of the purchase price will be finalized upon completion of post-closing procedures.

On May 10, 2016, we announced the pending acquisition of the heat recovery steam generator (“HRSG”) business from Doosan Engineering & Construction (“Doosan”) for $250 million. On August 16, 2016, we acquired 80% of the HRSG business for proceeds of approximately $220 million. The remaining 20% of the HRSG business continues to be subject to local regulatory requirements and we expect a staggered close beginning in the fourth quarter of 2016 through the first half of 2017. The preliminary purchase price allocation resulted in goodwill of approximately $170 million and amortizable intangible assets of approximately $35 million. The allocation of the purchase price will be finalized upon completion of post-closing procedures.

On November 2, 2015, we acquired the Thermal, Renewables and Grid businesses from Alstom. The purchase price was €9,200 million ($10,124 million), net of cash acquired of approximately €1,600 million ($1,765 million). In order to obtain approval by the European Commission and the Department of Justice, GE pledged to sell certain of Alstom's gas-turbine assets and its Power Systems Manufacturing subsidiary to AnsaldoEnergiaSpA (Ansaldo) after the close of the transaction for approximately €120 million. The purchase price will be paid by Ansaldo over a period of five years. The transaction closed on February 25, 2016.

We formed three consolidated joint ventures with Alstom in grid technology, renewable energy, and global nuclear and French steam power. In addition, GE contributed its Digital Energy business to the grid technology joint venture.

Alstom holds 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 holds similar redemption rights for the global nuclear and French steam power joint venture that are exercisable during the first full calendar quarter immediately following the fifth or sixth anniversary of the acquisition date. 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 holds 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 2016 through 2019 and also upon a decision to IPO the joint venture.

GE holds 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 has 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.

The acquisition and alliances with Alstom will have a significant effect on our Power, Energy Connections and Renewable Energy segments, and to a lesser extent our Oil & Gas segment. The financial impact of acquired businesses on individual segments will be affected by a number of variables, including operating performance, purchase accounting effects and realized synergies. In addition, due to the amount of time that elapsed between signing and closing, the commercial operations of the businesses were negatively affected primarily as a result of uncertainty among Alstom customers regarding the execution of the transaction. This affected the overall valuation of the acquired businesses at the time of close and, accordingly, is reflected among the initial and adjusted amounts assigned to the assets and liabilities recorded in purchase accounting.

ALSTOM ACQUISITION ACCOUNTING UPDATE

The total consideration for the acquired businesses, at the time of close included our purchase price of $10,124 million (net of cash acquired) and a preliminary valuation of noncontrolling interests, of approximately $3,600 million for a total of approximately $13,700 million. In the fourth quarter of 2015, the preliminary allocation of purchase price resulted in goodwill, intangible assets and unfavorable customer contract liabilities of approximately $13,500 million, $5,200 million, and $1,100 million respectively. The amount of goodwill recognized compared with identifiable intangible assets is affected by estimated GE-specific synergies, which are not permitted to be included in the measurement of identifiable intangibles. Such synergies include additional revenue from cross-selling complementary product lines. The preliminary fair value of the associated noncontrolling interests consisted of approximately $2,900 million for Alstom's redeemable noncontrolling interests in the three joint ventures (presented separately from total equity in the consolidated balance sheet) and $700 million for all other noncontrolling interests.

Through the third quarter of 2016, we adjusted the preliminary allocation of purchase price, which has now resulted in goodwill, intangible assets, and unfavorable customer contract liabilities, of approximately $17,200 million, $4,400 million, and $2,350 million respectively as of the acquisitions date. These adjustments, which are necessary to reflect acquired assets and liabilities of the acquired businesses at fair value, reflected revisions in estimates in the first, second and third quarters of 2016, primarily related to cash flow and other valuation assumptions for customer contracts, increases to legal reserves, and other fair value adjustments related to acquired assets and liabilities. The approximate amounts of significant purchase accounting adjustments recorded since the date of acquisition include a reduction in the book value of assets sold to Ansaldo of $450 million, adjustments to the fair value of derivative contracts of $350 million, decreases in inventory balances of $115 million, increases to legal reserves of $1,000 million, increases to property, plant and equipment of $50 million, a reduction in the book value of aged accounts receivable of $200 million and other project related costs such as warranty provisions and liquidating damages of $625 million. In addition, the preliminary fair value of Alstom's redeemable noncontrolling interests was increased by $100 million to approximately $3,000 million and all other noncontrolling interests decreased by $100 million to approximately $600 million. We will finalize our purchase accounting analysis in the fourth quarter.

With respect to legal reserves, the amounts we have recorded relate to legacy legal and compliance matters of the Alstom businesses that existed before the date of our acquisition, which matters we have been independently assessing since that time. As previously reported, these include Alstom legacy matters in a number of jurisdictions that involve alleged anti-competitive activities or alleged improper payments. While we believe that the amounts recorded in connection with our purchase accounting reviews of the identified matters are appropriate, such legal and compliance matters are inherently uncertain, and future payments that may be necessary to resolve them could vary from the liability amounts recorded.

In addition to purchase price allocation based on the fair value of acquired assets and liabilities, other adjustments are necessary to reflect differences between IFRS and US GAAP, as applied to differences in facts and circumstances between those businesses as part of Alstom and as part of GE post acquisition. The table below presents approximate consideration paid, amounts of assets acquired and liabilities assumed as of the acquisition date, inclusive of the purchase accounting adjustments and IFRS to US GAAP adjustments recorded as of September 30, 2016, and the fair value of the non-controlling interest.

ASSETS ACQUIRED AND LIABILITIES ASSUMED AT THE ACQUISITION DATE
	Approximate
	balance at
(in millions)	September 30, 2016
Assets
Cash and equivalents	$	1,750
Current receivables		4,050
Inventories		4,700
Property, plant and equipment		2,850
Goodwill		17,200
Other intangible assets		4,400
All other assets, net(a)		3,750
Total Assets	$	38,700
Liabilities
Accounts payable	$	1,900
Progress collections		2,900
Accrued contract liabilities		10,500
All other liabilities(b)		7,850
Total Liabilities		23,200
Redeemable noncontrolling interests		3,000
Noncontrolling interest		600
Total purchase price		11,900
Cash acquired		1,750
Total purchase price, net of cash acquired	$	10,100

(a) Includes approximately $350 million of net deferred tax assets, including approximately $50 million of non-U.S. loss carry forwards net of valuation allowances and offsetting liabilities for unrecognized benefits. Also includes approximately $200 million of indemnification receivables for liabilities for unrecognized income tax benefits and other tax uncertainties.

(b) Includes approximately $950 million of liabilities for unrecognized income tax benefits and other uncertain taxes and approximately $750 million of pension and other employee related costs.

CHANGES IN GOODWILL BALANCES
					Dispositions,
					currency
	Balance at				exchange		Balance at
(In millions)	January 1, 2016		Acquisitions (a)		and other		September 30, 2016
Power	$	16,736	$	3,648	$	(4)	$	20,381
Renewable Energy		2,580		314		(8)		2,886
Oil & Gas		10,594		1		(80)		10,515
Aviation		8,567		-		26		8,593
Healthcare		17,353		162		(47)		17,467
Transportation		851		25		10		885
Energy Connections & Lighting		6,441		63		(211)		6,293
Capital		2,370		-		-		2,369
Corporate		34		346		218		598
Total	$	65,526	$	4,559	$	(97)	$	69,988

(a)Goodwill balances associated with Alstom and their allocations to segments are preliminary.

Goodwill balances increased by $4,461 million in 2016, primarily as a result of the Alstom acquisition purchase accounting adjustments and other acquisitions.

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 reporting unit valuations ranged from 9.5% to 16.5%.

During the third quarter of 2016, we performed our annual impairment test of goodwill for all of our reporting units. Based on the results of our step one testing, the fair values of each of the GE reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed for any of our reporting units and no goodwill impairment was recognized.

While all of our reporting units passed step one of our annual impairment testing in 2016, we identified four reporting units for which the fair value was not substantially in excess of its carrying value. Due to the continuation of depressed oil and natural gas prices, the fair value of our Energy Financial Services reporting unit, within our Capital operating segment, continues to be impacted and was in excess of its carrying value by approximately 2%. The goodwill associated with our Energy Financial Services reporting unit was $1,386 million at September 30, 2016, representing approximately 2% of our total goodwill. The estimated fair value of the Energy Financial Services reporting unit is based on a number of assumptions about future business performance and investment, including the performance of our renewable investment portfolio and the expected proceeds and timing of non-strategic investment divestitures. Our assumed discount rate was 10% and was derived by applying a capital asset pricing model and corroborated using equity analyst research reports and implied cost of equity based on forecasted price to earnings per share multiples for similar companies. Based on the results of the step 1 testing, we further substantiated our Energy Financial Services goodwill balance by performing the second step analysis in which the implied fair value of goodwill exceeded its carrying value by approximately $670 million. While we have seen some stabilization in the oil and gas environment, there continues to be uncertainty about a number of assumptions upon which the estimated implied fair value of goodwill is based. While all reporting units within our Oil & Gas operating segment are significantly in excess of their carrying value, the business continues to experience declines in orders, project commencement delays and pricing pressures, which affect their fair value. While the goodwill of the Energy Financial Services and Oil & Gas reporting units are not currently impaired, we will continue to monitor the oil & gas industry and the impact it may have on these businesses.

In addition, the fair value of the Power Conversion reporting unit, within our Energy Connections operating segment, was in excess of its carrying value by approximately 9%. The goodwill associated with our Power Conversion reporting unit was $1,154 million at September 30, 2016, representing approximately 2% of our total goodwill. Our Power Conversion reporting unit has experienced a decline in order growth and an increase in the order to cash cycle, which has caused the reduction in value over the prior year. While the goodwill of the reporting unit is not currently impaired, there could be an impairment in the future as a result of changes in certain assumptions. For example, the reporting unit’s fair value could be adversely affected and result in an impairment of goodwill if actual cash flows are below estimated cash flows, the estimated cash flows are discounted at a higher risk-adjusted rate or market multiples decrease.

Finally, two reporting unit fair values were impacted as a result of the Alstom transaction. Subsequent to the close of the acquisition of Alstom, we formed two new reporting units, Grid Solutions and Hydro. The Alstom Grid business was combined with our Digital Energy business, within our Energy Connections operating segment, to create the new Grid Solutions reporting unit and the Alstom Hydro business is a newly created reporting unit within our Renewable Energy operating segment. Since fair value equals carrying value at the time of acquisition, this caused the fair value of these reporting units not to be significantly in excess of its carrying value. The fair value of the Hydro reporting unit approximated its carrying value and the excess of fair value over carrying value of the Grid Solutions reporting unit is approximately 3%. The goodwill associated with our Hydro and Grid Solutions reporting units was $756 million and $3,586 million, respectively, representing approximately 1% and 5% of our total goodwill at September 30, 2016. While the goodwill of these reporting units are not currently impaired, there could be an impairment in the future as a result of changes in certain assumptions. For example, the fair value of these reporting units could be adversely affected and result in an impairment of goodwill if expected synergies of the acquisition with Alstom are not realized or if the reporting units were not able to execute on customer opportunities, the estimated cash flows are discounted at a higher risk-adjusted rate or market multiples decrease.

As of September 30, 2016, we believe that the goodwill is recoverable for all of the reporting units; however, there can be no assurances that the goodwill will not be impaired in future periods.

In 2015, we identified one reporting unit for which the fair value was not substantially in excess of its carrying value. Due to the sharp decline experienced in oil prices and the prospect of a continuation of prevailing oil prices, the fair value of our Energy Financial Services reporting unit, within our Capital operating segment, had been impacted and was in excess of its carrying value by approximately 13%. Due to the continued decline in oil prices, we performed an impairment test in the fourth quarter using data as of December 31, 2015, which resulted in the fair value of our Energy Financial Services reporting unit being in excess of its carrying value by approximately 12%. In the current year, the fair value of the Energy Financial Services reporting unit continues to be impacted by the market conditions within the oil & gas industry as discussed above.

In 2015, although not impaired, our Oil & Gas business had also experienced declines in orders, project commencement delays and pricing pressures, which affected the fair value of our Oil & Gas reporting units. Our Oil & Gas business continues to be affected by the overall market conditions as discussed above.

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. It is reasonably possible that the judgments and estimates described above could change in future periods.

oTHER INTANGIBLE ASSETS

OTHER INTANGIBLE ASSETS - NET
(In millions)	September 30, 2016		December 31, 2015
Intangible assets subject to amortization	$	16,679	$	17,688
Indefinite-lived intangible assets(a)		101		109
Total	$	16,779	$	17,797

(a) Indefinite-lived intangible assets principally comprise trademarks and in-process research and development.

INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
	September 30, 2016						December 31, 2015
	Gross						Gross
	carrying		Accumulated				carrying		Accumulated
(In millions)	amount		amortization		Net		amount		amortization		Net
Customer-related	$	9,393	$	(2,400)	$	6,993	$	9,758	$	(2,113)	$	7,645
Patents and technology		8,813		(3,459)		5,354		8,543		(3,096)		5,447
Capitalized software		7,710		(4,529)		3,181		7,375		(4,136)		3,239
Trademarks		1,246		(337)		910		1,337		(282)		1,055
Lease valuations		132		(55)		77		167		(22)		145
Present value of future profits(a)		676		(676)		-		651		(651)		-
All other		312		(147)		165		267		(108)		159
Total	$	28,282	$	(11,602)	$	16,679	$	28,098	$	(10,408)	$	17,688

(a) Balances at September 30, 2016 and December 31, 2015 reflect adjustments of $247 million and $266 million, respectively, to the present value of future profits in our run-off insurance operation to reflect the effects that would have been recognized had the related unrealized investment securities holding gains and losses actually been realized.

Intangible assets subject to amortization decreased by $1,009 million in the nine months endedSeptember 30, 2016, primarily as a result of changes in the fair value of the acquired Alstom intangible assets and amortization, offset by acquisitions, capitalized software and patents across all business platforms.

GE amortization expense related to intangible assets subject to amortization was $363 million and $362 million in the three months endedSeptember 30, 2016 and 2015, respectively, and $1,258 million and $1,055 million for the nine months endedSeptember 30, 2016 and 2015, respectively. GE Capital amortization expense related to intangible assets subject to amortization was $33 million and $21 million in the three months endedSeptember 30, 2016 and 2015, respectively, and $103 million and $78 million for the nine months endedSeptember 30, 2016 and 2015, respectively.