The U.S.-based multinational conglomerate corporation General Electric (GE, Financial) recently came out with its fourth quarter earnings, which missed both on earnings and revenue. Nonetheless, two of the company’s strongest businesses- GE Aviation and GE Healthcare had shown resilience as they posted robust results in the fourth quarter. Though the company’s earnings missed expectations, it provided stronger-than expected 2018 guidance that lifted GE’s shares before the market opened.
Snapshot of the quarter
Excluding the charges that the company incurred, GE earnings per share (EPS) came in 2 cents a share less than what the analysts hoped for to 27 cents per share. GE’s fourth quarter revenue dropped to an unsatisfactory $31.40 billion, down 5% from 2016. Analysts expected revenue of nearly $34 billion. On a positive note, GE’s industrial cash flows from operations stood at $9.7 billion for 2017, which was much better than what was projected ($7 billion).
GE’s performance in the healthcare sector was impressive as its profits soared 13% while revenue and orders climbed 6% and 9%, respectively. For 2017, the company made a profit of $3.4 billion, which translates to a 9% surge when compared with 2016. GE provided 2018 guidance for this sector stating that profits could well and truly increase by 4% to 6%.
GE’s Aviation sector also witnessed some success in the fourth quarter. While the company reported mixed revenue, its profits surged 2% from the same period last year. As far as the whole year is concerned, the sector’s profits came in at $6.6 billion. Moreover, GE expects this segment to deliver high-single-digit profit growth in the years to come.
Power segment suffers
The company’s CEO John L. Flannery wants to sell off the non-core businesses besides the oil and gas industries and focus on core ones such as power (including renewable), aviation, and healthcare. As a matter of fact, power segment remains an area of concern for the company as revenue in this sector plunged 15% when compared with Q4 of 2016 while orders dipped 25% during the same period. Thus, the company needs segments like Healthcare and Aviation to step up to compensate for its declining power segment.
The SEC issue
As far as the company is concerned, its contract assets have grown a lot in the recent times. Contract asset refers to a situation where the company’s recognizes its revenue and earnings without actually having received cash. The Securities and Exchange Commission (SEC) might therefore rule that the company has overstated its revenue through contract assets. As a matter of fact, the company has also been under investigation by SEC over its accounting practices.
Furthermore, the company is also under investigation by SEC regarding its long-term service agreements (LTSA). The company provides these services in segments like power plants and jet engines where it recognizes revenue beforehand (contract assets). When these payments have no condition, it is recorded as receivables. However, when it involves certain commitment or condition, General Electric treats it as contract assets. The company's contract assets have been increasing, particularly in the power segment, which is drawing SEC's attention and raising investor concern.
Bottomline
The SEC investigation on the contract asset, which raises questions on General Electric's revenue recognition policy, is a bit concerning. On the bright side, aviation and healthcare segments have been doing pretty well, and are expected to remain strong in the long-term. In addition, Flannery's focus on improving operational cash generation is also making progress. Though there are doubts lingering around the SEC investigation for which investors should remain cautious, the steady performance of the aviation and healthcare segments with strong outlook should provide some comfort.
(Disclosure: I do not hold any position in the stock mentioned in this article.)
