10-Q 1 ge1q201810-q.htm 10-Q Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
                                 (Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____ to ____
 
Commission file number 001-00035
geform10q3qfinal1image1a05.jpg
GENERAL ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)

New York
 
14-0689340
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
41 Farnsworth Street, Boston, MA
 
02210
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number, including area code) (617) 443-3000

_______________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
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 Exchange Act). Yes ¨ No þ
There were 8,685,338,000 shares of common stock with a par value of $0.06 per share outstanding at March 31, 2018.



TABLE OF CONTENTS
 



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 or other restructuring and our ongoing portfolio review; GE and GE Capital liquidity; future charges and capital contributions that may be required in connection with GE Capital’s run-off insurance operations, and related 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, including the impact of the new revenue recognition accounting standard and U.S. tax reform; growth and productivity associated with our Digital and Additive businesses; profit margins; cost structure and plans to reduce costs; restructuring, goodwill impairment or other financial charges; tax rates; transaction-related synergies, proceeds and gains; returns on capital and investment; capital allocation, including organic investment, dividends and other priorities; or capital structure and access to funding, including credit ratings and outlooks, debt-to-earnings ratios and leverage.

For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
our execution of GE Industrial and GE Capital business or asset dispositions, including sale prices, the timing of disposition proceeds and potential trailing liabilities, as well as our ongoing portfolio review;
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;
our capital allocation plans, as such plans may change including with respect to the timing and amount of GE dividends, organic investments, including research and development, investments in Digital and capital expenditures, pension funding contributions, acquisitions, joint ventures and other strategic actions;
our ability to maintain our current short- and long-term credit ratings and the impact on our funding costs and competitive position if we do not do so;
customer actions or market developments such as reduced demand for equipment and services and other challenges in our Power business, 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;
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;
GE Capital's liquidity, the impact of conditions in the financial and credit markets on GE Capital’s ability to sell financial assets, the availability and cost of GE Capital funding and GE Capital’s exposure to counterparties;
pending and future mortgage loan repurchase claims, other litigation claims and the U.S. Department of Justice’s investigation under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and other investigations in connection with WMC, which may affect our estimates of liability, including possible loss estimates;
our ability to launch new products in a cost-effective manner;
our ability to increase margins through restructuring and other cost reduction measures;
our ability to convert pre-order commitments/wins into orders/bookings;
the price we realize on orders/bookings since commitments/wins are stated at list prices;
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 completing, including obtaining regulatory approvals and satisfying other closing conditions for, announced transactions on favorable economic terms, such as our plans to sell our Industrial Solutions business, the substantial majority of our Lighting segment or other dispositions that we may pursue;
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, including Alstom and Baker Hughes, a GE company (BHGE);
the impact of potential product safety 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 filing; and
the other factors that are described in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.
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.


2018 1Q FORM 10-Q 3


MD&A
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

PRESENTATION

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).

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 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 cash from operating activities (GE CFOA).
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), as defined in Other Terms Used by GE below.
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 is comprised of our ownership interest of approximately 62.5% 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 37.5% 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.

We integrate acquisitions as quickly as possible. Revenues and earnings from the date we complete the acquisition through the end of the fourth quarter following the acquisition are considered the acquisition effect of such businesses.

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. Certain columns and rows within the tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in millions.


4 2018 1Q FORM 10-Q


MD&A
 
 


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

Backlog and remaining performance obligation (RPO) – 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 contract with a termination clause without substantive penalty and firm purchase orders not yet received even though the probability of cancellation has been historically remote. We plan to continue reporting backlog as we believe that it is a useful metric for investors, given its relevance to total orders.
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.”
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.
Equipment leased to others (ELTO) – rental equipment we own that is available to rent and is stated at cost less accumulated depreciation.
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.
GE Industrial free cash flows (Non-GAAP) – GE CFOA adjusted for gross GE additions to property, plant 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) – 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.
GE Industrial operating profit margin – GE total revenues plus other income minus GE total costs and expenses less GE interest and other financial charges and non-operating benefit costs divided by GE total revenues plus other income.
Adjusted GE Industrial operating profit margin (Non-GAAP) – GE Industrial operating profit margin excluding gains and restructuring and other charges plus noncontrolling interests.
GE Industrial structural costs (Non-GAAP) Industrial structural cost 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.
Net earnings (loss) – we refer to the caption “net earnings (loss) attributable to GE common shareowners” as net earnings.
Net earnings (loss) per share (EPS) – when we refer to net earnings (loss) per share, it is the diluted per-share amount of “net earnings attributable to GE common shareowners.”
Operating earnings – GE earnings from continuing operations attributable to common shareowners excluding the impact of non-operating benefit costs.
Operating earnings per share – when we refer to operating earnings per share, it is the diluted per-share amount of “operating earnings.”
Adjusted earnings - GE earnings from continuing operations excluding the impact of non-operating benefit costs, gains and restructuring and other items, after tax.
Adjusted earnings per share – when we refer to adjusted earnings per share, it is the diluted per-share amount of “adjusted earnings.”
Organic revenues (Non-GAAP) – revenues excluding the effects of acquisitions, dispositions and translational foreign currency exchange.
Product services agreements – contractual commitments, with multiple-year terms, to provide specified services for products in our Power, Renewable Energy, Oil & Gas, Aviation 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.
Revenues – revenues comprise sales of goods, sales of services for our industrial businesses and GE Capital revenues from services for our financial services businesses.
Segment profit – refers to the operating profit of the industrial segments and the net earnings of the Financial Services segment, both of which include other income. See the Segment Operations section within the MD&A for a description of the basis for segment profits.

2018 1Q FORM 10-Q 5


MD&A
 
 


Services – for purposes of the financial statement display of sales and costs of sales in our 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.

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 U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission (SEC) rules. Specifically, we have referred, in various sections of this report, to:

GE Industrial segment organic revenues
GE Industrial structural costs
GE pre-tax earnings from continuing operations, excluding GE Capital earnings (loss) from continuing operations and the corresponding effective tax rates
Adjusted earnings and earnings per share
Adjusted GE Industrial operating profit and operating profit margin (excluding certain items)
GE Industrial Free Cash Flow (FCF) and Adjusted GE Industrial FCF

The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the Supplemental Information section within the MD&A. Non-GAAP financial measures referred to in this report are either labeled as “non-GAAP” or designated as such with an asterisk (*).

OUR OPERATING SEGMENTS

We are a global digital industrial company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive, with products and services ranging from aircraft engines, locomotives, power generation and oil and gas production equipment to medical imaging, financing and industrial products. Operational and financial overviews for our operating segments are provided in the “Segment Operations” section within this MD&A.

OUR INDUSTRIAL OPERATING SEGMENTS
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Power(a)
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Aviation
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Lighting(a) 
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Renewable Energy
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Healthcare
 
 
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Oil & Gas(b)
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Transportation
 
 

OUR FINANCIAL SERVICES OPERATING SEGMENT
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Capital
(a)
Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment was combined with the Power segment and presented as one reporting segment called Power. As a result of this combination, our GE Lighting and Current, powered by GE (Current) businesses are now reported as a separate segment called Lighting.
(b)
Beginning in the third quarter of 2017, our Oil & Gas segment is comprised of our ownership interest of approximately 62.5% in BHGE. We consolidate 100% of BHGE's revenues and cash flows, while our Oil & Gas segment operating profit and net income are derived net of minority interest of approximately 37.5% attributable to BHGE's Class A shareholders.

CORPORATE INFORMATION

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 and 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.

6 2018 1Q FORM 10-Q


MD&A
KEY PERFORMANCE INDICATORS
 

KEY PERFORMANCE INDICATORS

2018 REVENUES PERFORMANCE
 
 
Three months ended March 31
Industrial Segment
9
 %
Industrial Segment Organic (Non-GAAP)
(4
)%
Financial Services
(19
)%
GE INDUSTRIAL ORDERS AND BACKLOG
 
 
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
13.0

$
12.2

Services
14.5

12.9

Total(a)
$
27.4

$
25.1

 
 
 
Backlog
 
 
Equipment
$
85.7

$
83.3

Services
286.7

263.2

Total
$
372.3

$
346.5

(a)    Included $2.6 billion related to Baker Hughes in 2017.
GE INDUSTRIAL COSTS (GAAP) AND GE INDUSTRIAL STRUCTURAL COSTS (NON-GAAP)
 
 
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
GE Industrial costs excluding interest and financial charges and non-operating benefit costs (GAAP)
$
25.0

$
23.6

GE Industrial structural costs (Non-GAAP)
5.7

6.5


GE INDUSTRIAL OPERATING PROFIT MARGINS (GAAP) AND ADJUSTED GE INDUSTRIAL OPERATING PROFIT MARGINS (NON-GAAP)
 
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
GE Industrial operating profit margins (GAAP)
7.7
%
5.2
%
Adjusted GE Industrial operating profit margins (Non-GAAP)
10.2
%
9.6
%

EARNINGS
 
 
Three months ended March 31
(Dollars in billions; per-share amounts in dollars)
2018

2017

 
 
 
Continuing earnings (loss) (GAAP)
$
0.4

$
0.1

Net earnings (loss) (GAAP)
(1.2
)
(0.1
)
Operating earnings (loss) (GAAP)
0.9

0.5

Adjusted earnings (loss) (Non-GAAP)
1.4

1.2

 
 
 
Continuing earnings (loss) per share (GAAP)
$
0.04

$
0.01

Net earnings (loss) per share (GAAP)
(0.14
)
(0.01
)
Operating earnings (loss) per share (GAAP)
0.10

0.06

Adjusted earnings (loss) per share (Non-GAAP)
0.16

0.14

GE CFOA (GAAP) AND GE INDUSTRIAL AND ADJUSTED GE INDUSTRIAL FREE CASH FLOWS (NON-GAAP)
 
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
GE CFOA (GAAP)
$
(1.0
)
$
0.4

GE Industrial free cash flows (Non-GAAP)
(1.7
)
(2.7
)
Adjusted GE Industrial free cash flows (Non-GAAP)
(1.7
)
(2.7
)

2018 1Q FORM 10-Q 7


MD&A
CONSOLIDATED RESULTS
 

CONSOLIDATED RESULTS

2018 DEVELOPMENTS

In the fourth quarter of 2017, we announced our plan to significantly reduce the size of our Board of Directors at the 2018 annual shareowners meeting. On April 25, 2018, 12 directors were elected to the Board of Directors, with increased focus on relevant industry expertise, capital allocation and accounting and financial reporting.
During the first quarter of 2018, we recorded a reserve of $1.5 billion in discontinued operations in connection with the U.S. Department of Justice's (DOJ) ongoing investigation regarding potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) by WMC and GE Capital. See Legal Proceedings and Note 19 to the consolidated financial statements for further information.
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 in cash. The deal is expected to close in the third quarter of 2018, subject to customary closing conditions and regulatory approval.
 
FIRST QUARTER 2018 RESULTS
Overall, our consolidated continuing results in the first quarter were in line with our expectations. After adjusting for incremental Baker Hughes revenues of $2.6 billion, adjusted consolidated revenues* were $26.1 billion, down $0.8 billion or 3%. The decline in revenues was a result of lower industrial segment revenues of $0.9 billion, or 4%, organically* driven principally by our Power and Oil & Gas segments. Excluding our Power and Oil & Gas segments, industrial segment revenues increased $0.2 billion, or 2%, organically* as Aviation and Healthcare experienced revenue growth versus the prior year period.

Continuing earnings per share was $0.04, and adjusted earnings per share* was $0.16, due to a $0.7 billion decrease in Corporate costs, partially offset by a $0.1 billion, or 5%, decrease in industrial segment profit.

For the three months ended March 31, 2018, restructuring and other charges were $0.05 per share, including $0.02 per share related to BHGE integration and deal related costs. In total, restructuring and other items were $0.6 billion before tax, with restructuring charges totaling about $0.4 billion and businesses development charges totaling $0.2 billion. Subsequent to the Baker Hughes transaction and for the first quarter of 2018, $0.2 billion of restructuring charges related to BHGE are reported within our Oil & Gas segment.

For the three months ended March 31, 2018, GE Industrial profit was $2.1 billion and GE Industrial margins were 7.7%, up $0.8 billion, or 250 basis points, largely driven by a reduction in Corporate costs of $0.7 billion primarily due to decreased restructuring and other costs and gains (losses) on business dispositions of $0.5 billion and decreased adjusted Corporate operating costs* of $0.2 billion. Industrial segment profit decreased $0.1 billion, or 5%, primarily due to lower results within our Power and Oil & Gas segments, partially offset by the performance of our Aviation and Healthcare segments. In the first quarter of 2018, we delivered $0.8 billion of structural cost* reduction, excluding the effects of acquisition and disposition activity and with Baker Hughes on a pro forma basis.

GE CFOA was $(1.0) billion and $0.4 billion for the three months ended March 31, 2018 and 2017, respectively. The decline in GE CFOA is primarily due to a $2.0 billion decrease in dividends from GE Capital. GE CFOA was also impacted by lower earnings from Power and Oil & Gas, as well as higher cash used for working capital compared to 2017, partially offset by Aviation, Healthcare and strong Corporate cost reduction. Additionally, GE CFOA was negatively impacted by GE Pension Plan contributions of $0.3 billion in 2018, compared to no such contributions in the prior year. GE did not receive a common share dividend distribution from GE Capital in the first quarter of 2018, and it does not expect to receive such dividend distributions from GE Capital for the foreseeable future.















*Non-GAAP Financial Measure

8 2018 1Q FORM 10-Q


MD&A
CONSOLIDATED RESULTS
 

CONSOLIDATED RESULTS

THREE MONTHS ENDED MARCH 31

REVENUES
 
 
(Dollars in billions)
2018

2017

 
 
 
Consolidated revenues
$
28.7

$
26.9

 
 
 
Industrial segment revenues(a)
$
27.4

$
25.2

Corporate revenues and Industrial eliminations
(0.5
)
(0.4
)
GE Industrial revenues(a)
$
26.9

$
24.8

 
 
 
Financial services revenues
$
2.2

$
2.7

(a)
GE Industrial refers to GE excluding the continuing operations of GE Capital. Industrial segment refers to the sum of our seven industrial reporting segments, without giving effect to corporate items or the elimination of transactions among such segments and between these segments and our Financial Services segment.

COMMENTARY: 2018 - 2017

Consolidated revenues increased $1.8 billion, or 7%, primarily driven by increased industrial segment revenues of $2.2 billion, partially offset by decreased Financial Services revenues of $0.5 billion. The overall impact of foreign currency movements on consolidated revenues was an increase of $0.9 billion. Below are descriptions of the components:
GE Industrial revenues increased $2.1 billion, or 9%, due to an increase in industrial segment revenues of $2.2 billion offset by a decrease in Corporate revenues and Industrial eliminations of $0.1 billion.
Industrial segment revenues increased $2.2 billion, or 9%, as increases at Oil & Gas, Aviation and Healthcare were partially offset by decreases at Power, Renewable Energy, Transportation and Lighting. This increase was driven by the net effects of acquisitions of $2.7 billion, primarily attributable to Baker Hughes, and the effects of a weaker U.S. dollar of $0.9 billion, partially offset by the net effects of dispositions of $0.5 billion, primarily attributable to the absence of Water following its sale in the third quarter of 2017. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic revenues* decreased $0.9 billion.
Financial Services revenues decreased $0.5 billion, or 19%, primarily due to organic revenue declines and lower gains.



























*Non-GAAP Financial Measure

2018 1Q FORM 10-Q 9


MD&A
CONSOLIDATED RESULTS
 

THREE MONTHS ENDED MARCH 31

EARNINGS (LOSS) AND EARNINGS (LOSS) PER SHARE
 
 
(Dollars in billions; per-share amounts in dollars; attributable to GE common shareowners)
2018

2017

 
 
 
Continuing earnings(a)
$
0.4

$
0.1

 
 
 
Continuing earnings per share
$
0.04

$
0.01

(a)    Also referred to as "Earnings from continuing operations attributable to GE common shareowners"

In the below discussion, GE Industrial refers to GE excluding the continuing operations of GE Capital. Industrial segment refers to the sum of our seven industrial reporting segments, without giving effect to corporate items or the elimination of transactions among such segments and between these segments and our Financial Services segment.
COMMENTARY: 2018 - 2017

Consolidated continuing earnings increased $0.2 billion due to increased GE Industrial continuing earnings of $0.6 billion, partially offset by increased Financial Services losses of $0.2 billion, increased GE Industrial income taxes of $0.1 billion and increased interest and other financial charges of $0.1 billion.
GE Industrial earnings increased $0.6 billion, or 44%, driven by an increase in Corporate profit of $0.7 billion, partially offset by a decrease in industrial segment profit of $0.1 billion.
Corporate profit increased $0.7 billion primarily attributable to decreased restructuring and other costs and gains (losses) on business dispositions of $0.5 billion and decreased adjusted Corporate operating costs* of $0.2 billion.
Industrial segment profit decreased $0.1 billion, or 5%, with decreases at Oil & Gas, Power and Lighting partially offset by higher earnings at Aviation, Healthcare, Transportation and Renewable Energy. This decrease in industrial segment profit was primarily driven by restructuring and business development costs related to Baker Hughes of $0.3 billion and the net effects of dispositions of $0.1 billion, partly associated with the absence of Water following its sale in the third quarter of 2017, partially offset by the net effects of acquisitions $0.1 billion, largely associated with Baker Hughes. Excluding these items, industrial segment organic profit* increased $0.1 billion.
Foreign exchange adversely affected GE Industrial operating earnings by an insignificant amount in the first quarter of 2018.
Financial Services losses increased $0.2 billion, mainly due to lower gains, lower earnings from asset levels due to the reduction in GE Capital, costs associated with calling debt, and a loss related to updates to the U.S. tax reform impact on energy investments, partially offset by lower corporate and restructuring costs.

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 Predix and software solutions that improve our customers’ asset performance. These revenues and associated costs are largely generated from our operating businesses and are included in their segment results.

Revenues were $1.0 billion for the three months ended March 31, 2018, an increase of $0.1 billion or 10% compared to revenues of $0.9 billion for the three months ended March 31, 2017. These increases were primarily driven by Oil & Gas, Power, Aviation and Healthcare.

Orders were $0.9 billion for both the three months ended March 31, 2018 and 2017. Increases in Transportation, Renewable Energy, Oil & Gas and Healthcare were offset by declines in Power, Current and non-GE Verticals.












*Non-GAAP Financial Measure

10 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS
 

SEGMENT OPERATIONS

REVENUES AND PROFIT

Segment revenues include sales of products and services related to the segment.

Segment profit 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 preferred stock dividends are excluded in determining segment profit (which we sometimes refer to as “operating 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.

SIGNIFICANT SEGMENT DEVELOPMENTS

CLASSIFICATION OF THE SUBSTANTIAL MAJORITY OF OUR LIGHTING SEGMENT AS HELD FOR SALE

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. We expect to close substantially all of this deal in the second quarter of 2018.

2018 1Q FORM 10-Q 11


MD&A
SEGMENT OPERATIONS
 

SUMMARY OF OPERATING SEGMENTS
 
 
 
 
 
 
 
 
Three months ended March 31
(In millions)
2018

2017

V%

 
 
 
 
Revenues
 
 
 
Power(a)
$
7,222

$
7,940

(9)
 %
Renewable Energy
1,646

1,767

(7)
 %
Oil & Gas
5,385

3,086

74
 %
Aviation
7,112

6,673

7
 %
Healthcare
4,702

4,305

9
 %
Transportation
872

979

(11)
 %
Lighting(a)
456

462

(1)
 %
      Total industrial segment revenues
27,395

25,213

9
 %
Capital
2,173

2,681

(19)
 %
      Total segment revenues
29,569

27,894

6
 %
Corporate items and eliminations
(908
)
(1,013
)
10
 %
Consolidated revenues
$
28,660

$
26,881

7
 %
 
 
 
 
Segment profit (loss)
 
 
 
Power(a)
$
273

$
438

(38)
 %
Renewable Energy
77

70

10
 %
Oil & Gas(b)
(144
)
260

U

Aviation
1,603

1,273

26
 %
Healthcare
735

661

11
 %
Transportation
130

95

37
 %
Lighting(a)
1

10

(90)
 %
      Total industrial segment profit
2,675

2,807

(5)
 %
Capital
(215
)
(47
)
U

      Total segment profit (loss)
2,460

2,760

(11
)%
Corporate items and eliminations
(653
)
(1,402
)
53
 %
GE interest and other financial charges
(642
)
(564
)
(14)
 %
GE non-operating benefit costs

(684
)
(649
)
(5)
 %
GE benefit (provision) for income taxes
(112
)
(23
)
U

Earnings (loss) from continuing operations attributable
   to GE common shareowners
369

122

F

Earnings (loss) from discontinued operations, net of taxes
(1,553
)
(239
)
U

   Less net earnings attributable to
 
 
 
      noncontrolling interests, discontinued operations


 
Earnings (loss) from discontinued operations,
 
 
 
   net of tax and noncontrolling interest
(1,553
)
(239
)
U

Consolidated net earnings (loss)
attributable to the GE common shareowners
$
(1,184
)
$
(117
)
U


(a)
Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment was combined with the Power segment and presented as one reporting segment called Power. As a result of this combination, our GE Lighting and Current, powered by GE (Current) businesses are now reported as a separate segment called Lighting.
(b)
Oil & Gas segment operating profit excluding restructuring and other charges was $181 million for the three months ended March 31, 2018.



12 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS
 

SEGMENT RESULTS – THREE MONTHS ENDED MARCH 31

INDUSTRIAL SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment(a)(c)
$
12.8

$
12.9

Services(b)(c)
14.6

12.4

Total(d)
$
27.4

$
25.2

(a)
In 2018, $11.7 billion, excluding $1.1 billion related to Baker Hughes*.
(b)
In 2018, $13.1 billion, excluding $1.5 billion related to Baker Hughes*.
(c)
For the purposes of the MD&A, "services" refers 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). For the purposes of the financial statement display of sales and costs of sales in our 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.
(d)
Industrial segment refers to the sum of our seven industrial reporting segments, without giving effect to corporate items or the elimination of transactions among such segments and between these segments and our Financial Services segment. Therefore, industrial segment revenues will not agree to GE revenues as shown in the Statement of Earnings (Loss).
INDUSTRIAL SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit(a)
$
2.7

$
2.8

Segment profit margin
9.8
%
11.1
%
(a)
In 2018, $2.9 billion, excluding $(0.2) billion related to Baker Hughes*.

2018 – 2017 COMMENTARY

Industrial segment revenues increased $2.2 billion, or 9%, driven by increases at Oil & Gas primarily due to Baker Hughes, Aviation and Healthcare, partially offset by decreases at Power, Renewable Energy, Transportation and Lighting.
Industrial segment profit decreased $0.1 billion, or 5%, driven by lower earnings at Oil & Gas primarily due to restructuring costs associated with Baker Hughes, Power driven by lower volume, unfavorable price and the absence of Water. These decreases were partially offset by higher earnings at Aviation, Healthcare and Renewable Energy.
Industrial segment margin decreased 130 basis points to 9.8% in 2018 from 11.1% in 2017 driven by negative variable cost productivity, price pressure and business mix. The decrease in industrial segment margin reflects decreases at Oil & Gas, Power and Lighting, offset by increases at Transportation, Aviation, Renewable Energy and Healthcare.
RECONCILIATION OF INDUSTRIAL BACKLOG TO REMAINING PERFORMANCE OBLIGATION
 
March 31, 2018
(Dollars in billions)
Equipment

Services

Total

 
 
 
 
Backlog
$
85.7

$
286.7

$
372.3

Adjustments
(31.9
)
(87.8
)
(119.8
)
Remaining Performance Obligation
$
53.7

$
198.8

$
252.5


Remaining performance obligation is a defined term under GAAP. See Other Terms Used section within MD&A and Note 9 to the consolidated financial statements for further information. Adjustments to reported backlog are largely driven by the Aviation business: (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 substantial 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.







*Non-GAAP Financial Measure

2018 1Q FORM 10-Q 13


MD&A
SEGMENT OPERATIONS | POWER

gear1710kpowera07.jpg POWER

OPERATIONAL OVERVIEW

SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
Gas Power Systems(a)
$
1.5

$
2.1

Power Services
2.8

2.6

Steam Power Systems
0.5

0.4

Energy Connections(b)
2.2

2.2

Other(c)
0.2

0.7

Total segment revenues
$
7.2

$
7.9

(a) Includes Distributed Power
(b) Includes Industrial Solutions, Grid Solutions, Power Conversion and Automation & Controls
(c) Includes Water & Process Technologies and GE Hitachi Nuclear

ORDERS AND BACKLOG
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
2.3

$
3.9

Services
3.2

4.0

Total
$
5.6

$
7.9

 
 
 
Backlog
 
 
Equipment
$
25.8

$
25.8

Services
70.2

72.0

Total
$
95.9

$
97.8


UNIT SALES
 
 
 



1Q 2018
1Q 2017
V
Gas Turbines
12
20
(8)

14 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS | POWER


FINANCIAL OVERVIEW

SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment
$
3.5

$
4.2

Services
3.7

3.8

Total
$
7.2

$
7.9

 
 
 
SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit
$
0.3

$
0.4

Segment profit margin
3.8
%
5.5
%

COMMENTARY: 2018 - 2017
Segment revenues down $0.7 billion (9%);
Segment profit down $0.2 billion (38%):
The power market was softer than expected during the first quarter of 2018 due to energy efficiency, renewable energy penetration and delays in expected orders. The overall market for new gas orders in 2018 is trending to less than 30 gigawatts. In addition, excess capacity in developed markets, continued pressure in oil and gas applications and macroeconomic and geopolitical environments have created softening demand for gas turbines.
Equipment revenues decreased primarily at Gas Power Systems due to lower unit sales, including nine fewer aeroderivative units as well as eight fewer gas turbines and 11 fewer Heat Recovery Steam Generators. Services revenues decreased primarily due to the absence of Water following the sale in September 2017 as well as 15 fewer AGP upgrades, partially offset by an increase in revenues at Power Services driven by higher outages and field service repairs. Revenues also decreased due to price pressure, offset by the effects of a weaker U.S. dollar versus the euro.
The decrease in profit was due to lower volume, price pressure and the absence of Water, partially offset by $0.4 billion of structural cost* reduction, excluding the effects of acquisition and disposition activity and foreign exchange.




















*Non-GAAP Financial Measure

2018 1Q FORM 10-Q 15


MD&A
SEGMENT OPERATIONS | RENEWABLE ENERGY

gear1710krenewableenergya06.jpg RENEWABLE ENERGY

OPERATIONAL OVERVIEW

SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
Onshore Wind
$
1.3

$
1.5

Offshore Wind
0.2


Hydro
0.2

0.2

Total segment revenues
$
1.6

$
1.8


ORDERS AND BACKLOG
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
2.1

$
1.7

Services
0.3

0.4

Total
$
2.4

$
2.1

 
 
 
Backlog
 
 
Equipment
$
8.5

$
6.9

Services
7.5

5.6

Total
$
16.0

$
12.5


UNIT SALES
 
 
 



1Q 2018
1Q 2017
V
Wind Turbines
352
539
(187)



16 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS | RENEWABLE ENERGY


FINANCIAL OVERVIEW

SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment
$
1.2

$
1.5

Services
0.4

0.3

Total
$
1.6

$
1.8

 
 
 
SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit
$
0.1

$
0.1

Segment profit margin
4.7
%
4.0
%

COMMENTARY: 2018 - 2017
Segment revenues down $0.1 billion (7%);
Segment profit up 10%:
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, overcapacity in the industry, the move to auctions in international markets and U.S. tax reform contributed to continued pricing pressure in the first quarter of 2018.
Equipment volume decreased due to 187 fewer wind turbine shipments on a unit basis, or 31% fewer megawatts shipped, than in the prior year. This decrease was primarily driven by lower U.S. volume as the first quarter of 2017 included the fulfillment of the Safe Harbor transactions signed in the fourth quarter of 2016. Services volume increased due to 112 more repower units at Onshore Wind. Revenues also increased due to the acquisition of LM Wind in April 2017, which contributed $0.1 billion of inorganic revenue growth in the first quarter of 2018, and the effects of a weaker U.S. dollar versus the euro and the Chinese renminbi, partially offset by pricing pressure.
The increase in profit was due to structural and product cost-out actions, partially offset by price pressure and lower volume.


2018 1Q FORM 10-Q 17


MD&A
SEGMENT OPERATIONS | OIL & GAS

gear1710koilgasa06.jpg OIL & GAS

OPERATIONAL OVERVIEW

SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
Turbomachinery & Process Solutions (TPS)
$
1.4

$
1.7

Oilfield Services (OFS)(a)
2.7

0.2

Oilfield Equipment (OFE)(b)
0.7

0.7

Digital Solutions
0.6

0.5

Total segment revenues
$
5.4

$
3.1

(a) Previously referred to as Surface
(b) Previously referred to as Subsea Systems & Drilling

ORDERS AND BACKLOG
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
1.9

$
0.8

Services
3.3

1.8

Total(a)
$
5.2

$
2.6

(a) Included $2.6 billion related to Baker Hughes in 2018

 
 
 
 
 
Backlog
 
 
Equipment
$
5.3

$
6.0

Services
16.6

14.8

Total
$
21.8

$
20.8



18 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS | OIL & GAS


FINANCIAL OVERVIEW

SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment(a)
$
2.2

$
1.3

Services(b)
3.2

1.8

Total
$
5.4

$
3.1

(a) $1.2 billion, excluding $1.1 billion related to Baker Hughes* in 2018
(b) $1.7 billion, excluding $1.5 billion related to Baker Hughes* in 2018
 
 
 
 
 
SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit(a)
$
(0.1
)
$
0.3

Segment profit margin(b)
(2.7
)%
8.4
%
(a) $0.1 billion, excluding $(0.2) billion related to Baker Hughes* in 2018
(b) 2.1%, excluding (7.9)% related to Baker Hughes* in 2018
 
 

COMMENTARY: 2018 - 2017
Segment revenues up $2.3 billion (74%);
Segment profit down $0.4 billion:

Stability in the oil and gas market since the second half of 2017 has led to continued improvements in activity. North American onshore rig count has continued to grow, and international rig count has also seen moderate increases. Offshore projects remain subject to increases in customer spending behavior, and final investment decisions on liquefied natural gas (LNG) projects are also expected to start in late 2018 as the market continues to be oversupplied.
The Baker Hughes acquisition in July 2017 contributed $2.6 billion of inorganic revenue growth in the first quarter of 2018. Legacy Oil & Gas equipment and services revenues decreased due to lower volume primarily at TPS and OFE as a result of the market conditions and lower opening backlog. These decreases were partially offset by the effects of a weaker U.S. dollar versus the euro.
The decrease in profit was primarily driven by negative variable cost productivity and restructuring and other charges, partially offset by increased volume from Baker Hughes and synergies delivered from combining the two companies.

















*Non-GAAP Financial Measure

2018 1Q FORM 10-Q 19


MD&A
SEGMENT OPERATIONS | AVIATION

gear1710kaviationa06.jpg AVIATION

OPERATIONAL OVERVIEW

SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
Commercial Engines & Services
$
5.3

$
5.0

Military
1.0

0.9

Systems & Other
0.9

0.8

Total segment revenues
$
7.1

$
6.7


ORDERS AND BACKLOG
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
3.2

$
2.7

Services
5.0

4.5

Total
$
8.1

$
7.2

 
 
 
Backlog
 
 
Equipment
$
34.5

$
34.5

Services
167.1

144.7

Total
$
201.6

$
179.2


UNIT SALES
 
 
 
 
1Q 2018
1Q 2017
V
Commercial Engines
651

627

24

LEAP Engines(a)
186

77

109

Military Engines
138

120

18

Spares Rate(b)
$
25.2

$
21.7

$
3.6

(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



20 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS | AVIATION


FINANCIAL OVERVIEW

SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment
$
2.5

$
2.6

Services
4.6

4.1

Total
$
7.1

$
6.7

 
 
 
SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit
$
1.6

$
1.3

Segment profit margin
22.5
%
19.1
%

COMMENTARY: 2018 - 2017
Segment revenues up $0.4 billion (7%);
Segment profit up $0.3 billion (26%):
Global passenger air travel continued to grow with revenue passenger kilometers (RPK) growth outpacing the five-year average and demand exceeding capacity. Industry-load factors remained above 80%. Air freight volume also increased, particularly in international markets, with freight ton kilometers (FTK) demand also exceeding capacity for the quarter.
Services revenue increased primarily due to a higher commercial spares shipment rate, as well as higher prices. Equipment revenues decreased slightly due to lower legacy and GEnx Commercial engine shipments, partially offset by more LEAP and Military engine shipments.
The increase in profit was mainly due to higher spare engine shipments, product and structural cost productivity and higher prices. These increases were partially offset by an unfavorable business mix driven by negative LEAP margin impact.

2018 1Q FORM 10-Q 21


MD&A
SEGMENT OPERATIONS | HEALTHCARE

gear1710khealthcarea06.jpg HEALTHCARE

OPERATIONAL OVERVIEW
SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
Healthcare Systems
$
3.3

$
3.0

Life Sciences
1.1

1.0

Healthcare Digital
0.2

0.3

Total segment revenues
$
4.7

$
4.3


ORDERS AND BACKLOG
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
2.7

$
2.6

Services
2.1

2.0

Total
$
4.7

$
4.5

 
 
 
Backlog
 
 
Equipment
$
6.1

$
5.6

Services
11.5

11.4

Total
$
17.7

$
17.0


FINANCIAL OVERVIEW
SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment
$
2.6

$
2.3

Services
2.1

2.0

Total
$
4.7

$
4.3

 
 
 
SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit
$
0.7

$
0.7

Segment profit margin
15.6
%
15.4
%

COMMENTARY: 2018 - 2017
Segment revenues up $0.4 billion (9%);
Segment profit up $0.1 billion (11%):
The 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.
Services and equipment revenues increased due to higher volume in Healthcare Systems attributable to global growth in Imaging and Ultrasound in both developed regions such as Europe and developing regions such as China and emerging markets. Volume also increased in Life Sciences, driven by Bioprocess and Contrast Imaging. Revenues also increased due to the effects of a weaker U.S. dollar versus the euro, Chinese renminbi and pound sterling, 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. These increases were partially offset by price pressure at Healthcare Systems and investments in programs.

22 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS | TRANSPORTATION

gear1710ktransportationa07.jpg TRANSPORTATION

OPERATIONAL OVERVIEW

SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
Locomotives
$
0.2

$
0.5

Services
0.5

0.4

Mining
0.1


Other(a)
0.1

0.1

Total segment revenues
$
0.9

$
1.0

(a) Includes Marine, Stationary, Drilling and Digital

ORDERS AND BACKLOG
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
0.7

$
0.5

Services
0.8

0.5

Total
$
1.5

$
1.0

 
 
 
Backlog
 
 
Equipment
$
5.3

$
4.4

Services
13.5

14.5

Total
$
18.8

$
18.9


UNIT SALES
 
 
 
 
1Q 2018
1Q 2017
V
Locomotives
60
157
(97)


2018 1Q FORM 10-Q 23


MD&A
SEGMENT OPERATIONS | TRANSPORTATION


FINANCIAL OVERVIEW

SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment
$
0.3

$
0.5

Services
0.6

0.5

Total
$
0.9

$
1.0

 
 
 
SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit
$
0.1

$
0.1

Segment profit margin
14.9
%
9.7
%

COMMENTARY: 2018 - 2017
Segment revenues down $0.1 billion (11%);
Segment profit up 37%:
The North American market continues to see some fleet overcapacity (which is declining) and constrained spending by the railroads limiting fleet expansion. However, total rail volume increased 2.4% during the first quarter of 2018 driven primarily by an increase in intermodal traffic(a). With improving carload volume, the number of parked locomotives has decreased 18% from the prior year.
Equipment volume decreased primarily driven by lower locomotive shipments in North America due to continuing challenging market conditions. Services revenues increased as railroads are running their locomotives longer, and recently 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 increase in profit was driven by favorable business mix from a higher proportion of services volume as well as lower engineering spend and the effects of restructuring actions.

(a)    Defined as when at least two modes of transportation are used to move freight.

24 2018 1Q FORM 10-Q


MD&A
SEGMENT OPERATIONS | LIGHTING

gear1710klightinga07.jpg LIGHTING

OPERATIONAL OVERVIEW
SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
Current
$
0.2

$
0.2

GE Lighting
0.2

0.2

Total segment revenues
$
0.5

$
0.5


ORDERS AND BACKLOG
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Orders
 
 
Equipment
$
0.2

$
0.2

Services


Total
$
0.2

$
0.2

 
 
 
Backlog
 
 
Equipment
$
0.2

$
0.1

Services


Total
$
0.2

$
0.1


FINANCIAL OVERVIEW
SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Revenues
 
 
Equipment
$
0.4

$
0.5

Services


Total
$
0.5

$
0.5

 
 
 
SEGMENT PROFIT AND PROFIT MARGIN
Three months ended March 31
(Dollars in billions)
2018

2017

 
 
 
Segment profit
$

$

Segment profit margin
0.2
%
2.2
%

COMMENTARY: 2018 - 2017
Segment revenues down 1%;
Segment profit down 90%:
The traditional lighting market continued to be challenging in the first quarter of 2018 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.
Equipment revenues decreased due to lower traditional lighting product and solar sales and lower LED prices, partially offset by continued volume growth in LED. In addition, revenues further decreased due to Lighting regional exits outside of North America.
The decrease in profit was driven by lower prices and product mix, partially offset by material deflation, lower depreciation and amortization, and savings from restructuring, regional exits and decreased investment and controllable spending.


2018 1Q FORM 10-Q 25


MD&A
SEGMENT OPERATIONS | CAPITAL

gear1710kcapitala05.jpg CAPITAL

OPERATIONAL AND FINANCIAL OVERVIEW

SEGMENT & SUB-SEGMENT REVENUES
Three months ended March 31
(Dollars in billions)

2018

2017

 
 
 
GECAS
$
1.2

$
1.4

Industrial Finance
0.3

0.3

Insurance and Other Financing
0.7

0.8

EFS

0.1

Total segment revenues
$
2.2

$
2.7


SEGMENT PROFIT(a)
 
 
(Dollars in billions)
2018

2017

 
 
 
Profit
$
(0.2
)
$

(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.

SIGNIFICANT TRENDS & DEVELOPMENTS
GE Capital paid common dividends of $2.0 billion to GE in the three months ended March 31, 2017, and did not pay a dividend in the three months ended March 31, 2018. In addition, GE Capital does not expect to make a common share dividend distribution to GE for the foreseeable future.
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 Energy Financial Services and Industrial Finance businesses over the next 24 months.
In the three months ended March 31, 2018, GE Capital contributed capital to its insurance subsidiaries of $3.5 billion and expects to contribute approximately an additional $11 billion through 2024 subject to monitoring by the Kansas Insurance Department. GE is required to maintain specified capital levels at these insurance subsidiaries under capital maintenance agreements. We perform premium deficiency testing at least annually. Any future adverse changes in our assumptions could result in an increase to future policy benefit reserves. For example, a hypothetical five percent increase in future claim costs, holding all other assumptions constant, would result in a $1.5 billion increase to our future policy benefit reserves. Similarly, a hypothetical 25 basis point decline in expected investment yield, holding all other assumptions constant, would result in a $1.0 billion increase in future policy benefit reserves. 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. See Note 12 to the consolidated financial statements for further information.
During the first quarter of 2018, we recorded a reserve of $1.5 billion in discontinued operations in connection with the DOJ ongoing investigation regarding potential violations of FIRREA by WMC and GE Capital. See Legal Proceedings and Note 19 to the consolidated financial statements for further information. 
COMMENTARY: 2018 - 2017
Capital revenues decreased $0.5 billion, or 19%, primarily due to organic revenue declines and lower gains.

Capital losses increased $0.2 billion mainly due to lower gains, lower earnings from asset levels due to the reduction in GE Capital, costs associated with calling debt, and a loss related to updates to the U.S. tax reform impact on energy investments, partially offset by lower corporate and restructuring costs.

26 2018 1Q FORM 10-Q


MD&A
CORPORATE ITEMS AND ELIMINATIONS

CORPORATE ITEMS AND ELIMINATIONS
 
 
 
 
REVENUES AND OPERATING PROFIT (COST)
 
 
 
 
 
 
 
 
Three months ended March 31
(In millions)
2018

2017

 
 
 
 
Revenues
 
 
 
Eliminations and other
$
(908
)
$
(1,013
)
Total Corporate Items and Eliminations
$
(908
)
$
(1,013
)
 
 
 
 
Operating profit (cost)
 
 
 
Gains (losses) on disposals(a)
$
(67
)
$
2

 
Restructuring and other charges
(331
)
(974
)
 
Eliminations and other
(255
)
(430
)
Total Corporate Items and Eliminations
$
(653
)
$
(1,402
)
(a)
Includes gains (losses) on disposed or held for sale businesses.

We believe that adjusting operating corporate 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)
 
 
 
Three months ended March 31
(In millions)
2018

2017

 
 
 
Total Corporate Items and Eliminations (GAAP)
$
(653
)
$
(1,402
)
Less: restructuring and other charges
(331
)
(974
)
Less: gains (losses) on disposals
(67
)
2

Adjusted total corporate costs (operating) (Non-GAAP)
$
(255
)
$
(430
)

2018 - 2017 COMMENTARY: THREE MONTHS ENDED MARCH 31

Revenues increased $0.1 billion, primarily as a result of:
$0.1 billion decrease in inter-segment eliminations.

Operating costs decreased $0.7 billion, primarily as a result of:
$0.6 billion of lower restructuring and other charges primarily due to the non-recurrence of Alstom related restructuring costs in the first quarter of 2017.
$0.2 billion of lower Corporate costs from restructuring and cost reduction actions.
These decreases were partly offset by $0.1 billion of lower gains due to held for sale adjustments primarily related to our Lighting segment.















*Non-GAAP Financial Measure

2018 1Q FORM 10-Q 27


MD&A
CORPORATE ITEMS AND ELIMINATIONS

RESTRUCTURING

Restructuring actions are an essential component of our cost improvement efforts to 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 such as those associated with product line exits. We continue to closely monitor the economic environment and may undertake further restructuring actions to more closely align our cost structure with earnings and cost reduction goals.
RESTRUCTURING & OTHER CHARGES
 
 
 
Three months ended March 31
(In billions)
2018

2017

 
 
 
Workforce reductions
$
0.2

$
0.5

Plant closures & associated costs and other asset write-downs
0.2

0.3

Acquisition/disposition net charges
0.2

0.2

Goodwill impairment


Other
0.0

0.0

Total(a)
$
0.6

$
1.0

(a)
Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment.

2018 - 2017 COMMENTARY: THREE MONTHS ENDED MARCH 31

For the three months ended March 31, 2018, restructuring and other charges were $0.6 billion of which approximately $0.3 billion was reported in cost of products/services and $0.3 billion was reported in selling, general and administrative expenses (SG&A). These activities were primarily at Oil & Gas, Power and Corporate. Cash expenditures for restructuring and other charges were approximately $0.5 billion for three months ended March 31, 2018. Of the total $0.6 billion restructuring and other charges, $0.3 billion was recorded in the Oil & Gas segment, which amounted to $0.2 billion net of noncontrolling interest.

For the three months ended March 31, 2017, restructuring and other charges were $1.0 billion of which approximately $0.7 billion was reported in cost of products/services and $0.3 billion was reported in SG&A. These activities were primarily at Power, Corporate and Oil & Gas. Cash expenditures for restructuring and other charges were approximately $0.6 billion for the three months ended March 31, 2017.


28 2018 1Q FORM 10-Q


MD&A
CORPORATE ITEMS AND ELIMINATIONS

COSTS AND GAINS NOT INCLUDED IN SEGMENT RESULTS

As discussed in the Segment Operations section within the MD&A, certain amounts are not included in industrial segment results because they are excluded from measurement of their operating performance for internal and external purposes. These costs relate primarily to restructuring and acquisition and disposition activities. The amount of costs and gains (losses) not included in segment results are as follows.
COSTS
 
 
 
 
 
Three months ended March 31
 
(In billions)
2018

 
2017

 
 
 
 
 
 
Power(a)
$
0.1

 
$
0.4

 
Renewable Energy

 

 
Oil & Gas(b)

 
0.1

 
Aviation

 

 
Healthcare
0.1

 
0.1

 
Transportation

 
0.1

 
Lighting(a)

 
0.1

 
Total
$
0.2

 
$
0.8

 
(a)
Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment has been combined with the Power segment and presented as one reporting segment called Power. As a result of this combination, our GE Lighting and Current, powered by GE (Current) businesses are now reported as a separate segment called Lighting.
(b)
Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment operating profit for our Oil & Gas segment.

GAINS (LOSSES)
 
 
 
 

For the three months ended March 31, 2018, there were $0.1 billion of losses not included in the segment results, primarily within the Power and Lighting segments. There were no gains or losses not included in segment results for the three months ended March 31, 2017.

2018 1Q FORM 10-Q 29


MD&A
OTHER CONSOLIDATED INFORMATION

OTHER CONSOLIDATED INFORMATION

INCOME TAXES

GE pays 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., including in countries with lower tax rates than in the U.S. We reinvest most of our foreign earnings overseas to be able to fund our active non-U.S. business operations. 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. On December 22, 2017, 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 our 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. Our provisional estimate of the transition tax on historic foreign earnings and the effect on our deferred taxes is described in Note 14 to the consolidated financial statements. Finally, our tax returns are routinely audited, and settlements of issues raised in these audits sometimes affect our tax rates.

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.

See Other Consolidated Information - Income Taxes section and Critical Accounting Estimates - Income Taxes section within MD&A in our Annual Report on Form 10-K for the year ended December 31, 2017 for further information on income taxes.

CONSOLIDATED – THREE MONTHS ENDED MARCH 31
(Dollars in billions)
2018

2017

 
 
 
Provision (benefit) for income taxes
$

$
(0.1
)
20182017 COMMENTARY: THREE MONTHS ENDED MARCH 31

The consolidated income tax rate was (7)% and 198% for the quarters ended March 31, 2018 and 2017, respectively.

The consolidated income tax benefit was an insignificant amount in the first quarter of 2018 and $0.1 billion for the first quarter of 2017. The tax benefit decreased due to a lower benefit from global activities relative to the U.S. statutory rate and the cost of the newly enacted base erosion and global intangible income provisions and by an increase in pretax income subject to tax. This was partially offset by an adjustment to the 2018 three-month provision that decreased the rate to be in line with the lower projected full year rate while in 2017, the first quarter included an adjustment to increase the three-month rate to be in line with the higher projected full year rate. In addition, in the first quarter of 2018 there was a tax benefit recorded at Baker Hughes to adjust the provisional estimate of the impact of U.S. tax reform and measurement period adjustments to purchase price allocation.

The consolidated tax provision includes $0.1 billion and an insignificant amount of expense for GE (excluding GE Capital) for the first quarters of 2018 and 2017, respectively.

The effective tax rate in future periods is expected to increase given changes in our income profile including changes to GE Capital earnings.

See Note 14 to the consolidated financial statements for additional information related to income taxes.



30 2018 1Q FORM 10-Q


MD&A
OTHER CONSOLIDATED INFORMATION

BENEFITS FROM GLOBAL OPERATIONS

Absent the effects of U.S. tax reform, our consolidated income tax provision is reduced because of the benefits of lower-taxed global operations. The benefit was significant prior to the decrease in the U.S. statutory rate to 21% beginning in 2018. While reduced, there is still a benefit as certain non-U.S. income is subject to local country tax rates that are below the new U.S. statutory rate.

The rate of tax on our indefinitely reinvested non-U.S. earnings is below the historic 35% 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, 2017, we had not decided to repatriate these earnings to the U.S. Given U.S. tax reform, substantially all of our prior unrepatriated earnings are subject to U.S. tax and accordingly we expect to have the ability to repatriate available non-U.S. cash from those 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. We will update our analysis of investment in foreign earnings in 2018 as we consider the impact of U.S. tax reform.

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.

Because the U.S. tax rate has been reduced to 21% beginning in 2018 and because the U.S. has adopted a territorial tax system and enacted new provisions of U.S. law related to taxation of global operations as part of U.S. tax reform, the overall tax benefit from non-U.S. operations compared to the U.S. statutory rate will be reduced or eliminated going forward as we also have non-U.S. operations taxed at close to the current U.S. statutory rate of 21% and non-U.S. operations with non-deductible losses and may incur additional taxes related to newly enacted U.S. tax provisions on global operations, as discussed below.

As part of U.S. tax reform, the U.S. has enacted a tax on “base eroding” payments from the U.S. We are evaluating the impact of this new provision on our operations and intend to undertake restructuring actions to avoid a significant 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. Because aspects of the new law and the effect on our operations is uncertain and because aspects of the accounting rules associated with the tax on global intangible low-taxed income have not been resolved, we have made an accrual for the current but not the deferred tax effects of this provision. Overall, we project a cost for the base erosion and global intangible low tax income provisions in 2018 that exceeds the net benefit of non-U.S. operations taxed at less than the 21% U.S. statutory tax rate.

We have not significantly adjusted our provisional estimate of the enactment of U.S. tax reform during the first quarter of 2018 as we continue to analyze information related to our operations as well as new guidance and other aspects of the enacted provisions. However, there were discrete changes associated with measurement period adjustments to purchase price allocation and the estimated impact of the change in tax rate on deferred taxes identified at Baker Hughes that reduced tax expense by $0.1 billion in the quarter. Primarily all of this benefit relates to non-consolidated operations and did not affect net earnings attributable to the company as there is an offsetting adjustment in income from noncontrolling interests. Partially offsetting this benefit was the cost relating to the revaluation of deferred taxes corresponding to measurement period adjustments to the purchase price allocation for the Baker Hughes acquisition.

DISCONTINUED OPERATIONS

Discontinued operations primarily comprise residual assets and liabilities related to our exited U.S. mortgage business (WMC), as discussed in Legal Proceedings and Notes 2 and 19 to the consolidated financial statements, as well as our mortgage portfolio in Poland and trailing liabilities associated with the sale of our GE Capital businesses as a result of the GE Capital Exit Plan (our plan announced in 2015 to reduce the size of our financial services businesses).

During the first quarter of 2018, we recorded a reserve of $1.5 billion in discontinued operations in connection with the DOJ ongoing investigation regarding potential violations of FIRREA by WMC and GE Capital. See Legal Proceedings and Note 19 to the consolidated financial statements for further information. 


2018 1Q FORM 10-Q 31


MD&A
STATEMENT OF FINANCIAL POSITION

STATEMENT OF FINANCIAL POSITION

Because GE and GE Capital share certain significant elements of their Statements of Financial Position, the following discussion addresses significant captions in the consolidated statement. Within the following discussions, however, we distinguish between GE and GE Capital activities in order to permit meaningful analysis of each individual consolidating statement.

MAJOR CHANGES IN OUR FINANCIAL POSITION FOR THE THREE MONTHS ENDED
MARCH 31, 2018

Cash, cash equivalents and restricted cash decreased $11.8 billion.
As of the period ended March 31, 2018, GE Cash, cash equivalents and restricted cash excluding BHGE was $7.5 billion and BHGE Cash, cash equivalents and restricted cash was $5.6 billion.
GE Cash, cash equivalents and restricted cash decreased $5.7 billion due to net repayments of borrowings of $1.8 billion (including $0.7 billion at BHGE), payments of common dividends to shareowners of $1.0 billion, cash used for operating activities of $1.0 billion, gross additions to PP&E and internal-use software of $1.0 billion, net investments in intangible assets of $0.6 billion and BHGE net stock repurchases and dividends to noncontrolling interests of $0.3 billion.
GE Capital Cash, cash equivalents and restricted cash as of March 31, 2018 was $19.0 billion and decreased $6.1 billion primarily due to net repayments of borrowings of $9.1 billion and net purchases of investment securities of $2.6 billion, partially offset by maturities of liquidity investments of $3.0 billion and net collections of financing receivables of $2.9 billion.
See the Statement of Cash Flows section for additional information.
Investment securities decreased $1.5 billion, primarily due to maturities of liquidity portfolio investments and a decrease in net unrealized gains, partially offset by net purchases of investment securities at GE Capital. See Note 3 to the consolidated financial statements for additional information.
Current receivables decreased $1.6 billion, primarily due to collections of receivables sold by GE to GE Capital in the fourth quarter of 2017 outpacing new volume. See Note 4 to the consolidated financial statements for additional information.
Inventories increased $1.2 billion, primarily due to build for future demand in our Renewable Energy, Power, Aviation and Oil & Gas segments. See Note 5 to the consolidated financial statements for additional information.
Goodwill increased $1.5 billion, primarily due to the effects of currency exchange of $1.1 billion and purchase accounting adjustments of $0.5 billion. See Note 8 to the consolidated financial statements for additional information.
Contract and other deferred assets increased $0.4 billion. Revenues in excess of billings increased $0.2 billion and $0.4 billion for our long-term service and equipment agreements, respectively. These increases were partially offset by a decrease in other deferred assets of $0.2 billion, primarily due to a decrease in deferred inventory costs. See Note 10 to the consolidated financial statements for additional information.
All other assets decreased $2.2 billion, primarily due to the adoption of ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. See Note 1 to the consolidated financial statements for additional information.
Deferred income taxes increased $2.7 billion, primarily due to the adoption of ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. See Note 1 to the consolidated financial statements for additional information.
Borrowings decreased $8.8 billion, primarily due to net repayment of borrowings at GE Capital of $9.1 billion and net repayment of borrowings at BHGE of $0.7 billion, partially offset by the effects of currency exchange of $2.0 billion. See Note 11 to the consolidated financial statements for additional information.
Investment contracts, insurance liabilities and insurance annuity benefits decreased $1.2 billion, primarily due to a decrease in future policy benefit reserves as a result of a decrease in unrealized gains on debt securities supporting insurance contracts. See Note 12 to the consolidated financial statements for additional information.


32 2018 1Q FORM 10-Q


MD&A
FINANCIAL RESOURCES AND LIQUIDITY

FINANCIAL RESOURCES AND LIQUIDITY

LIQUIDITY AND BORROWINGS

We maintain a strong focus on liquidity. At both GE and GE Capital we manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations throughout business cycles.

Our liquidity and borrowing plans for GE and GE Capital 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 our capital allocation and growth objectives, including paying dividends, repurchasing shares, funding debt maturities and insurance obligations, investing in research and development and acquiring industrial businesses. We define our liquidity risk tolerance under stress based on liquidity sources, and our liquidity position is targeted to meet our obligations under both normal and stressed conditions.

GE cash, cash equivalents and restricted cash totaled $13.1 billion at March 31, 2018, including $5.6 billion at BHGE. At GE, we rely primarily on free cash flows from our operating businesses, proceeds from announced dispositions and planned debt issuances. 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. Our focus is on strengthening our cash position, with a balanced capital allocation plan including organic investments that generate strong returns, coupled with a competitive dividend payout ratio. We intend to maintain a disciplined financial policy targeting a strong credit profile.

In 2018, GE expects to incur up to $6.0 billion of incremental long-term debt, primarily to fund the GE Pension Plan. This incremental debt may consist of new unsecured term debt issued in the external debt markets or intercompany arrangements between GE and GE Capital, utilizing GE Capital's excess unsecured term debt. During the first quarter of 2018, GE and GE Capital entered into an intercompany loan for $0.3 billion (utilizing a portion of GE Capital's excess unsecured term debt) to fund its required contribution to the GE Pension Plan in the first quarter of 2018. The loan has a fixed interest rate of 4.56% and a term of 18 years.

Our 2018 capital allocation plan also considers potential funding of Alstom redemption rights related to certain consolidated joint ventures, which Alstom has expressed an intent to exercise. See Note 15 to the consolidated financial statements for further information.

GE has available a variety of liquidity management tools to fund its operations, including a commercial paper program, bank operating lines and short-term intercompany loans from GE Capital which are typically repaid within the same quarter. At GE Capital, we mainly rely on cash and short-term investments, cash generated from dispositions and cash flows from our businesses to fund our insurance obligations and debt maturities, including the current portion of long-term debt of $11.2 billion at March 31, 2018, as well as our operating and interest costs.

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 2020. GE Capital expects to maintain an adequate liquidity position, primarily as a result of cash and short-term investments, cash generated from dispositions and cash flows from our businesses. During this period, we expect to continue to have excess interest costs as asset sales have outpaced our debt maturities. Additionally, as previously communicated, GE Capital expects to fund approximately $14.5 billion to our insurance subsidiaries over the next seven years, of which $3.5 billion was funded in the first quarter of 2018. These contributions are subject to ongoing monitoring by the Kansas Insurance Department and GE is required to maintain specified capital levels at these insurance subsidiaries under capital maintenance agreements.

As of March 31, 2018, GE Capital maintained liquidity sources of $21.7 billion that consisted of cash, cash equivalents and restricted cash of $19.0 billion, high-quality investments of $2.0 billion and cash, cash equivalents and restricted cash of $0.6 billion classified within discontinued operations. We also expect to generate incremental cash of approximately $15.0 billion from planned asset reduction actions over the next two years. 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 excess interest costs.

In 2015, senior unsecured notes and commercial paper were assumed by GE upon its merger with GE Capital resulting in 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, this is reflected as an intercompany payable to GE within borrowings. At March 31, 2018, the outstanding assumed debt was $43.5 billion (see Note 11 to the consolidated financial statements for additional information). The following table provides a reconciliation of total short-term and long-term borrowings as reported on the respective GE and GE Capital Statements of Financial Position to borrowings originally issued by GE and GE Capital.

2018 1Q FORM 10-Q 33


MD&A
FINANCIAL RESOURCES AND LIQUIDITY

March 31, 2018 (in billions)
GE

GE Capital

Consolidated(a)

 
 
 
 
Total short- and long-term borrowings
$
77.4

$
50.4

$
125.8

 
 
 
 
Debt assumed by GE from GE Capital
(43.5
)
43.5


Intercompany loans with right of offset
7.6

(7.6
)

Total intercompany payable (receivable) between GE and GE Capital
(35.9
)
35.9


 
 
 
 
Total borrowings issued and outstanding
$
41.5

$
86.3

$
125.8

(a)
Includes $1.9 billion elimination of other intercompany borrowings between GE and GE Capital.
 
The following table illustrates the primary components of borrowings originally issued and outstanding in GE and GE Capital.
(In billions)
 
 
 
 
GE
March 31, 2018

 
GE Capital
March 31, 2018

Commercial paper
$
3.0

 
Commercial paper
$
3.9

Senior notes
21.6

 
Senior and subordinated notes
43.3

Intercompany loans from GE Capital(a)
7.6

 
Senior and subordinated notes assumed by GE
43.5

Other GE borrowings
2.8

 
Intercompany loans to GE(a)
(7.6
)
Total GE excluding BHGE
$
35.0

 
Other GE Capital borrowings
3.1

BHGE borrowings
6.5

 
 
 
Total borrowings issued by GE
$
41.5

 
Total borrowings issued by GE Capital
$
86.3

(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.

LIQUIDITY SOURCES

GE cash, cash equivalents and restricted cash totaled $13.1 billion at March 31, 2018, including $5.6 billion in BHGE. GE Capital maintained liquidity sources of $21.7 billion that consisted of cash, cash equivalents and restricted cash of $19.0 billion, high-quality investments of $2.0 billion and cash, cash equivalents and restricted cash of $0.6 billion classified as discontinued operations. Additionally, at March 31, 2018, GE had $20.3 billion of committed bilateral operating lines extended by 15 banks, which had no outstanding balance at March 31, 2018, as well as $20.0 billion of committed unused credit lines extended by 36 banks in a syndicated credit facility agreement expiring in 2021. GE Capital has the right to compel GE to borrow under certain of these credit lines and transfer the proceeds as loans to GE Capital.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(In billions)
March 31, 2018

 
 
March 31, 2018

 
 
 
 
 
GE(a)
$
13.1

 
U.S.
$
12.7

GE Capital(b)
19.0

 
Non-U.S.
19.4

(a)
At March 31, 2018, $4.2 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 $1.1 billion of BHGE cash and equivalents, which is subject to similar restrictions.
(b)
At March 31, 2018, GE Capital cash, cash equivalents and restricted cash of about $1.5 billion were primarily in insurance entities and was subject to regulatory restrictions.

As a result of U.S. tax reform, approximately $6 billion of GE non-U.S. cash, cash equivalents and restricted cash at March 31, 2018 can be repatriated without incremental U.S. federal income tax. Included in this amount was approximately $2 billion of BHGE cash and equivalents.
COMMERCIAL PAPER
(In billions)
GE

 
GE Capital

 
 
 
 
Average commercial paper borrowings during the first quarter of 2018
$
16.6

 
$
4.9

Maximum commercial paper borrowings outstanding during the first quarter of 2018
$
19.5

 
$
5.2

Ending commercial paper balance at March 31, 2018
$
3.0

 
$
3.9


GE Capital commercial paper maturities have historically been funded principally through new commercial paper issuances, and GE's are substantially repaid within the respective quarter.


34 2018 1Q FORM 10-Q


MD&A
FINANCIAL RESOURCES AND LIQUIDITY

We securitize financial assets as an alternative source of funding. During 2018, we completed $0.1 billion of non-recourse issuances and $0.7 billion of non-recourse borrowings matured. At March 31, 2018, consolidated non-recourse securitization borrowings were $1.3 billion.

FOREIGN CURRENCY

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 are euro, the pound sterling, 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. The effects of foreign currency fluctuations, excluding the earnings impact of the underlying hedged item, decreased net earnings for the three months ended March 31, 2018 by less than $0.1 billion.

As of March 31, 2018, we held the U.S. dollar equivalent of $0.5 billion of cash in Angolan kwanza. As there is no liquid derivatives market for this currency, we have used Angolan kwanza to purchase $0.4 billion equivalent bonds issued by the central bank in Angola (Banco Nacional de Angola) with various maturities through 2020 to mitigate the related currency devaluation exposure risk. The bonds are denominated in Angolan kwanza as U.S. dollar equivalents, so that, upon payment of periodic interest and principal upon maturity, payment is made in Angolan kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate.

See Note 17 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.

CREDIT RATINGS

We have relied, and may continue to rely, on the short-term and long-term debt capital markets to fund, among other things, a significant portion of our operations and significant acquisitions. 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.

On April 25, 2018, Moody’s changed its ratings outlook to negative from stable for GE and GE Capital, and affirmed their short- and long-term credit ratings for GE and GE Capital.   All credit ratings and outlooks assigned by S&P and Fitch for GE and GE Capital remain unchanged.

We are disclosing these updates and the ratings below 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 our Annual Report on Form 10-K for the year ended December 31, 2017, under “Risk Factors - Financial Risks - Funding & liquidity - Failure to maintain our credit ratings, or conditions in the financial and credit markets, could adversely affect our access to capital markets, funding costs and related margins, liquidity, capital allocation plans and competitive position.”

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
Negative
Stable
Negative
Short term
P-1
A-1
F1
Long term
A2
A
A+
 
 
 
 
GE Capital
 
 
 
Outlook
Negative
Stable
Negative
Short term
P-1
A-1
F1
Long term
A2
A
A+


2018 1Q FORM 10-Q 35


MD&A
FINANCIAL RESOURCES AND LIQUIDITY

STATEMENT OF CASH FLOWS - THREE MONTHS ENDED MARCH 31, 2018 VERSUS 2017

We evaluate our cash flows performance by reviewing our industrial (non-GE Capital) businesses and GE Capital businesses separately. Cash from operating activities (CFOA) is the principal source of cash generation for our industrial businesses.

All other operating activities reflect cash sources and uses as well as non-cash adjustments to net earnings (loss) including those related to taxes, pensions, restructuring and gains (losses) on principal business dispositions. See Note 20 to the consolidated financial statements for further information regarding All other operating activities and All other investing activities.

GE CASH FLOWS – THREE MONTHS ENDED MARCH 31

With respect to GE CFOA, we believe that it is useful to supplement our GE Statement of Cash Flows and to examine in a broader context the business activities that provide and require cash.

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 and others for a wide range of material and services. Dividends from GE Capital represent the distribution of a portion of GE Capital retained earnings, and are distinct from 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 the MD&A and Notes 4 and 21 to the consolidated financial statements for further information regarding certain transactions affecting our consolidated Statement of Cash Flows.

20182017 COMMENTARY

GE cash used for operating activities increased $1.4 billion primarily due to the following:
No common dividends were paid by GE Capital to GE in the three months ended March 31, 2018 compared with $2.0 billion in the three months ended March 31, 2017.
Cash used for GE CFOA (excluding common dividends received from GE Capital in 2017) amounted to $1.0 and $1.6 billion in 2018 and 2017, respectively, primarily due to the following:
Net earnings for cash flows plus depreciation and amortization of property, plant and equipment, amortization of intangible assets and deferred income taxes of $1.6 billion in 2018 compared with $0.8 billion in 2017. Net earnings for cash flows included restructuring and other charges and current tax expense of $0.6 billion and $0.5 billion, respectively, in 2018, compared with $1.0 billion and $0.4 billion, respectively, in 2017.
Lower growth in contract and other deferred assets of $0.4 billion in 2018 compared with $1.2 billion in 2017, primarily due to the timing of revenue recognized relative to the timing of billings and collections on our long-term service agreements and the liquidation of deferred inventory, primarily in our Power segment.
An increase in cash used for working capital of $0.3 billion in 2018 compared with 2017. This was primarily due to an increase in cash used for current receivables of $0.3 billion, mainly in our Renewable Energy segment and an increase in cash used for inventories of $0.3 billion, mainly in our Aviation and Oil & Gas segments. These increases in cash used for working capital were partially offset by an increase in cash generated by progress collections of $0.1 billion, driven by our Renewable Energy segment and a decrease in cash used for accounts payable of $0.1 billion.
GE Pension Plan contributions of $0.3 billion in 2018 compared with no such contributions in 2017.
Lower taxes paid of $0.3 billion in 2018 compared with $0.7 billion in 2017.
An increase in net cash used to reduce other liabilities of approximately $0.4 billion.

GE cash used for investing activities decreased $0.3 billion primarily due to the following:
No business acquisitions in 2018, compared with business acquisitions of $1.0 billion in 2017, mainly driven by the acquisition of ServiceMax for $0.9 billion (net of cash acquired).
This decrease in cash used was partially offset by following increases:
Technology investments in our Aviation segment of $0.6 billion in 2018, compared with $0.1 billion in 2017.
Net cash paid for settlements of derivative hedges of $0.2 billion in 2018.


36 2018 1Q FORM 10-Q


MD&A
FINANCIAL RESOURCES AND LIQUIDITY

GE cash used for financing activities increased $1.9 billion primarily due to the following:
A net decrease in borrowings of $1.8 billion in 2018, mainly driven by net repayments of debt of $2.1 billion (including $0.7 billion at BHGE), partially offset by a long-term loan from GE Capital to GE of $0.3 billion, compared with a net increase in borrowings of $2.5 billion in 2017, primarily driven by long-term loans from GE Capital to GE of $4.1 billion, partially offset by the settlement of the remaining portion of a 2016 short-term loan from GE Capital to GE of $1.3 billion.
This increase in cash used was partially offset by the following decreases:
An insignificant amount of net repurchases of GE treasury shares in 2018, compared with net repurchases of $1.6 billion in 2017.
Common dividends paid to shareowners of $1.0 billion in 2018, compared with $2.1 billion in 2017.

GE CAPITAL CASH FLOWS – THREE MONTHS ENDED MARCH 31

20182017 COMMENTARY-CONTINUING OPERATIONS:

GE Capital cash from operating activities-continuing operations increased $0.4 billion primarily due to the following:
A general increase in cash generated from earnings of continuing operations and lower operating costs, including payroll.

GE Capital cash from investing activities-continuing operations decreased $4.3 billion primarily due to the following:
Investment securities decreased $2.1 billion related to net maturities of $0.5 billion in 2018 compared to net maturities of $2.6 billion in 2017.
Net proceeds from the sales of our discontinued operations of an insignificant amount in 2018 compared to $0.8 billion in 2017.
A general reduction in funding related to discontinued operations.
These decreases were partially offset by a long-term loan from GE Capital to GE of $0.3 billion in 2018 compared to long-term loans from GE Capital to GE of $4.1 billion partially offset by the settlement of the remaining portion of a 2016 short-term loan from GE Capital to GE of $1.3 billion in 2017.

GE Capital cash used for financing activities-continuing operations decreased $1.7 billion primarily due to the following:
No GE Capital common dividends paid to GE in 2018 compared to $2.0 billion in 2017.

2018 1Q FORM 10-Q 37


MD&A
FINANCIAL RESOURCES AND LIQUIDITY

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 Energy Financial Services and Industrial Finance 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 involved are made on arm's length terms and are reported in the GE and GE Capital columns of our financial statements. These transactions include, but are not limited to, the following:
GE Capital dividends to GE,
GE Capital working capital solutions to optimize GE cash management,
GE Capital enabled GE industrial orders, including related GE guarantees to GE Capital,
GE Capital financing of GE long-term receivables, and
Aircraft engines, power equipment, 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 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

GE did not receive a common share dividend distribution from GE Capital in the three months ended March 31, 2018 and it does not expect to for the foreseeable future. GE Capital paid $2.0 billion of common dividends to GE in the three months ended March 31, 2017.

In order to manage short-term liquidity and credit exposure, GE sells current receivables to 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 collects 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 the 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 of current receivables sold to GE Capital, including current receivables subsequently sold to third parties, decreased GE’s CFOA by $2.3 billion and $3.3 billion in the three months ended March 31, 2018 and 2017, respectively.

As of March 31, 2018, GE Capital had approximately $8.7 billion recorded on its balance sheet related to current receivables purchased from GE. Of these amounts, approximately 38% had been sold by GE to GE Capital with recourse (i.e., the GE business retains the 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 recourse to GE has not been significant for the three months ended March 31, 2018 and 2017.

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 remains at $3.8 billion at March 31, 2018. See Note 4 to the consolidated financial statements for further information.


38 2018 1Q FORM 10-Q


MD&A
FINANCIAL RESOURCES AND LIQUIDITY

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 significant upgrades and for fixed billings within our long-term service contracts. Similar to current receivables, GE may sell these long-term receivables to GE Capital to manage short-term liquidity and fund growth. These transactions are made on arm's length terms and any fair value adjustments, primarily related to time value of money, are recognized within the Industrial business in the period these receivables are sold to GE Capital. GE Capital accretes interest and factoring fee income over the life of the receivables. Factoring fee 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. GE Capital had approximately $2.0 billion and $2.1 billion of financing receivables related to GE long-term customer receivables outstanding, net of deferred income of approximately $0.2 and $0.3 billion recorded in its balance sheet at March 31, 2018 and December 31, 2017, respectively. The effect of cash generated from the sale of these long-term receivables with GE Capital decreased GE's CFOA by an insignificant amount and increased GE's CFOA by $0.1 billion in the three months ended March 31, 2018 and 2017, respectively.

ENABLED ORDERS

Enabled orders represent the act of introducing, elevating and influencing customers and prospects that result in an industrial sale, potentially coupled with programmatic captive financing or driving incremental products or services. During the three months ended March 31, 2018 and 2017, GE Capital enabled $1.6 billion and $2.2 billion of GE industrial orders, respectively. 2018 orders are primarily with our Transportation ($0.5 billion), Renewable Energy ($0.4 billion) and Healthcare ($0.4 billion) businesses.

AVIATION

During the three months ended March 31, 2018 and 2017, GE Capital acquired 8 aircraft (list price totaling $0.9 billion) and 9 aircraft (list price totaling $1.1 billion), respectively, from third parties that will be leased to others, which are powered by engines that were manufactured by GE Aviation and affiliates. Additionally, GE Capital had $1.1 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 March 31, 2018 and December 31, 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. There was no additional funding obligations recognized by GE Capital for the three months ended March 31, 2018. The additional funding obligation recognized by GE Capital was $0.1 billion for the three months ended March 31, 2017.

On a consolidated basis, the additional required pension funding 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 to GE Capital transactions with third parties primarily in connection with enabled orders. 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, asset value guarantees and loss pool arrangements. As of March 31, 2018, GE had outstanding guarantees to GE Capital on $2.1 billion of funded exposure and $0.7 billion of unfunded commitments, which included guarantees issued by industrial businesses. The recorded amount of these contingent liabilities was $0.2 billion as of March 31, 2018 and is dependent upon 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, debt assumed by GE from GE Capital in connection with the merger of GE Capital into GE was $43.5 billion, and GE guaranteed $41.3 billion of GE Capital debt at March 31, 2018. See Note 21 to the consolidated financial statements for additional information about the eliminations of intercompany transactions between GE and GE Capital.

2018 1Q FORM 10-Q 39


MD&A
CRITICAL ACCOUNTING ESTIMATES

CRITICAL ACCOUNTING ESTIMATES

We utilized significant estimates in the preparation of the first quarter financial statements.

Please refer to the Critical Accounting Estimates section within MD&A and Note 1 to the consolidated financial statements of our Annual Report on Form 10-K Report filed on February 23, 2018, for a discussion of our accounting policies and the critical accounting estimates we use to: assess the recoverability of assets such as financing receivables and goodwill; determine the fair value of financial assets; determine our provision for income taxes and recoverability of deferred tax assets and determine the liability for future policy benefits.
REVENUE RECOGNITION ON LONG-TERM PRODUCT SERVICES AGREEMENTS

On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and the related amendments (ASC 606), which supersedes most previous U.S. GAAP revenue guidance. The standard requires us to make certain estimates that affect the amount and timing of revenue recognized in a given period, primarily related to equipment and service contracts that are recognized on an overtime basis (refer to Note 1 and Note 9 to the consolidated financial statements for further discussion of our accounting policy for these contracts). The most critical estimates relevant to our revenue accounting are related to our long-term product service agreements as discussed below.

We enter into long-term product service agreements with our customers primarily within our Aviation, Power, Oil & Gas and Transportation segments. These agreements require us to provide preventative maintenance, asset overhaul / updates, 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. 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 revenue recognition on long-term product services agreements requires estimates of both customer payments expected to be received over the contract term as well as the costs expected to be incurred to perform required maintenance services. We routinely review estimates under product services agreements and regularly revise them to adjust for changes in outlook as described below.
   
We recognize revenue as we perform under these arrangements using an over time accounting model based on costs incurred relative to total expected costs. Throughout the life of a contract, this measure of progress captures the nature of the 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.
   
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. 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 a customer 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. To the extent required, we limit the amount of variable consideration used to estimate our transaction price such that it is improbable that a significant revenue reversal will occur in future periods.
  
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.
   
We regularly assess 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.

See Notes 1, 9 and 10 to the consolidated financial statements for further information.


40 2018 1Q FORM 10-Q


MD&A
OTHER ITEMS
 

OTHER ITEMS

NEW ACCOUNTING STANDARDS

ASU NO. 2018-02, INCOME STATEMENT - REPORTING COMPREHENSIVE INCOME (TOPIC 220): RECLASSIFICATION OF CERTAIN TAX EFFECTS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME

In February 2018, the Financial Accounting Standards Board (FASB) issued 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 on the balance of other comprehensive earnings may be reclassified to retained earnings. The ASU is effective for periods beginning after December 15, 2018, with an election to adopt early. We are evaluating the effect of the standard on our consolidated financial statements.

ASU NO. 2016-13, FINANCIAL INSTRUMENTS - CREDIT LOSSES

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about 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 apply 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 continue to evaluate the effect of the standard on our consolidated financial statements.

ASU NO. 2016-02, LEASES

In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU establishes a right-of-use (ROU) model that requires a lessee to record a ROU 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. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we continue to evaluate the effect of the standard on our consolidated financial statements, we anticipate that the adoption of the ASU may materially affect our Statement of Financial Position.

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 quarterly report.


2018 1Q FORM 10-Q 41


MD&A
OTHER ITEMS
 

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. Non-U.S. affiliates of GE are conducting limited activities as described below in accordance with General License H.  All of these activities are conducted in accordance with all applicable laws and regulations.

A non-U.S. affiliate of GE’s Oil & Gas business received a purchase order during the first quarter of 2018 for the sale of goods pursuant to General License H. The purchase order covers the sale of valves and parts for industrial machinery and equipment used in gas plants, petrochemical plants and gas production projects in Iran. This purchase order is valued at €0.1 million ($0.1 million).  This non-U.S. affiliate attributed €5.4 million ($6.7 million) in gross revenues and €1.7 million ($2.1 million) in net profits against previously reported transactions during the quarter ending March 31, 2018.

A second non-U.S. affiliate of GE’s Oil & Gas business received ten purchase orders during the first quarter of 2018 for the sale of spares parts to support gas plants, petrochemical plants and gas production projects in Iran. The ten purchase orders are individually valued at €0.1 million ($0.1 million), €0.1 million ($0.1 million), €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), and less than €0.1 million ($0.1 million) each. This non-U.S. affiliate did not recognize any revenue or profit during the quarter ending March 31, 2018.

A non-U.S. affiliate of GE’s Power business received a purchase order pursuant to General License H valued at less than €0.2 million ($0.2 million) during the first quarter of 2018 for the sale of compressor parts to a petrochemical company in Iran. This non-U.S. affiliate did not recognize any revenue or profit during the quarter ending March 31, 2018.

A second non-U.S. affiliate of GE's Power business received a purchase order pursuant to General License H valued at less than €0.1 million ($0.1 million) during the first quarter of 2018 for the sale of protection relays to an oil refinery in Iran.  This non-U.S. affiliate attributed €0.4 million ($0.5 million) in gross revenues and €0.2 million ($0.2 million) in net profits against previously reported transactions during the quarter ending March 31, 2018

A third non-U.S. affiliate of GE's Power business received two purchase orders pursuant to General License H valued at €0.1 million ($0.1 million) and less than €0.1 million ($0.1 million) during the first quarter of 2018 for the sale of spare parts to petrochemical companies in Iran. This non-U.S. affiliate did not recognize any revenue or profit during the quarter ending March 31, 2018.

All of these non-U.S. affiliates intend to continue the activities described above, as permitted by all applicable laws and regulations.

For additional information on business activities related to Iran, please refer to the Other Items section within MD&A in our Annual Report on Form 10-K for the year ended December 31, 2017.

42 2018 1Q FORM 10-Q


MD&A
SUPPLEMENTAL INFORMATION

SUPPLEMENTAL INFORMATION

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” under SEC rules. Specifically, we have referred, in various sections of this report, to:

GE Industrial segment organic revenues
GE Industrial structural costs
GE pre-tax earnings from continuing operations, excluding GE Capital earnings (loss) from continuing operations and the corresponding effective tax rates
Adjusted earnings and earnings per share
Adjusted GE Industrial operating profit and operating profit margin (excluding certain items)
GE Industrial Free Cash Flows (FCF) and Adjusted GE Industrial FCF

The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures follow.
 

2018 1Q FORM 10-Q 43


MD&A
SUPPLEMENTAL INFORMATION

GE INDUSTRIAL SEGMENT ORGANIC REVENUES (NON-GAAP)
 
 
 
 
Three months ended March 31
(In millions)
2018

2017

V%
 
 
 
 
GE Industrial segment revenue (GAAP)
$
27,395

$
25,213

9
 %
Adjustments:
 
 
 
Acquisitions
2,725

7

 
Business dispositions (other than dispositions acquired for investment)
1

483

 
Currency exchange rate(a)
853


 
GE Industrial segment organic revenue (Non-GAAP)
$
23,817

$
24,724

(4)
 %
(a) Translational foreign exchange
 
 
 
 
 
 
 
Organic revenue growth* measures revenue growth 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 revenue growth* 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 revenue growth" 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.

GE INDUSTRIAL STRUCTURAL COSTS (NON-GAAP)
 
 
 
 
 
 
Three months ended March 31
(In millions)
2018

2017

V$
 
 
 
 
GE Industrial costs excluding interest and other financial charges and non-operating benefit costs (GAAP)
$
25,026

$
23,647

$
1,379

Less: Segment variable costs
18,757

16,932

 
Less: Segment restructuring & other charges
280

12

 
Less: Segment acquisitions/dispositions structural costs and impact from foreign exchange
306

(376
)
 
Less: Corporate restructuring & other charges
331

974

 
Add: Corporate revenues, other income and NCI (excluding gains and GE Capital eliminations)
373

424

 
GE Industrial structural costs (Non-GAAP)
$
5,725

$
6,530

$
(805
)
 
 
 
 
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 three months ended March 31, 2017.
We believe that GE Industrial structural costs* are a meaningful measure as they are broader than selling, general and administrative costs and represent the total structural costs in the industrial segments and Corporate that generally do not vary with volume.

GE PRE-TAX EARNINGS FROM CONTINUING OPERATIONS, EXCLUDING GE CAPITAL EARNINGS (LOSS) FROM CONTINUING OPERATIONS AND THE CORRESPONDING EFFECTIVE TAX RATES (NON-GAAP)
 
Three months ended March 31
(Dollars in millions)
2018

2017

 
 
 
GE earnings from continuing operations before income taxes (GAAP)
$
519

$
39

Less: GE Capital earnings (loss) from continuing operations
(215
)
(47
)
Adjusted earnings from continuing operations before income taxes (Non-GAAP)
734

86

 
 
 
GE (excluding GE Capital) provision for income taxes - continuing operations (GAAP)
$
112

$
23

GE effective tax rate, excluding GE Capital earnings (Non-GAAP)
15
%
27
%
 
 
 
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 13 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2017, 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

44 2018 1Q FORM 10-Q


MD&A
SUPPLEMENTAL INFORMATION

ADJUSTED EARNINGS AND EPS (NON-GAAP)
 
Three months ended March 31
(Dollars in millions; except per-share amounts)
2018

2017

V%