GE: Lots Of Goodwill On The Balance Sheet

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About: General Electric (GE)
by: Don Beynon
Summary

Although not excessive, Goodwill is 22% of GE's assets on the 2017 Balance Sheet.

At $84 Billion Goodwill is the single largest asset entry.

Goodwill exceeds Property, Plant & Equipment by 56%.

The level of Goodwill is not of the same concern as many other GE issues but it is something to note should negative impairment of Alstom or other businesses occur.

Investment Thesis

General Electric (GE) has 22% of total assets under goodwill, but by itself this is not necessarily bad. For example Honeywell (HON) is at 31%, Procter & Gamble (PG) is 38% and United Technologies (UTC) is 29%. But GE seems to have paid a high price for recent acquisitions, especially Alstom. So if goodwill is significantly written down a deleterious effect on the income statement and balance sheet could occur. I bring this up to make investors further aware of the current and potential financial environment with GE.

Goodwill is a common accounting principle

Goodwill is a balance sheet entry under Generally Accepted Accounting Principles (GAAP). It is an “intangible” asset which may be recorded when a buyer purchases a company. Goodwill is not a physical asset such as buildings or equipment. It represents intangibles such as business reputation. It is the excess beyond what was paid for the business or fair value - tangible assets, intangible assets and liabilities. So paying for and recording goodwill intangibles is not uncommon nor bad if one acquires a growing or continuing business. When a company acquires another business they are acquiring much more than bricks and mortar, inventories and hard goods. They may be acquiring a continuing, going concern, including liabilities and debt, that is envisioned to aid their own business strategy. So an acquirer is getting much more than “property, plant and equipment”. Here's a Wikipedia definition of goodwill.

GE and companies must periodically assess the goodwill on the Balance Sheet to determine if it has changed in value. For example, have customers migrated to other businesses. This process is known as “impairment”. GE, per GAAP standards, does not amortize goodwill but test it at least annually for impairment at the reporting business segment level.

2017 Annual Report specific acquisition and goodwill notes

In 2016 the goodwill was $70.4 Billion. In 2017 it jumped to nearly $84 Billion, an increase of 19%. Note 8 of the 2017 Annual Report provides information about the price of acquisitions and the resultant goodwill recorded. Some of the Notes are stated as preliminary and/or define partial percentage of ownership but it provides data for thoughtful consideration.

Date

Acquisition

Price (Million)

Goodwill (Million)

April 20, 2017

LM Windpower

$1,700 M

$1,490 M

January 10, 2017

ServiceMax (remaining 96%)

$867 M

$670 M (Total)

Sept. 14, 2017

Meridium (Remaining 74%)

$369 M

$360 M (Total)

May 10, 2016

Doosan HRSG (95%)

$250 M

$160 M

Nov. 17, 2016

Arcam AB

$422 M (61.9%)

$523 M (Total which includes previous 14.3%)

Dec. 8, 2016

Concept Laser GmbH

$573 M (75%)

$674 M

Nov. 2, 2016

Alstom

$10,124 M

$17,300 M, and also amortizable intangible assets of $4,400 M

Source: Recorded from GE 2017 Annual Report

I show “Amortizable intangible assets” above for Alstom since it is the big (very big) acquisition.

The combination of GE’s Oil & Gas business with Baker Hughes also has a huge effect on goodwill.

Regarding the 62.5% of Baker Hughes controlled by GE, per the Annual Report, the “Total identifiable net assets” acquired by GE was $11.5 Billion. Goodwill was listed as $13.4 Billion. The Annual Report Note states “The above goodwill represents future economic benefits expected to be recognized from combining the operations of GE Oil & Gas and Baker Hughes, including expected future synergies and operating efficiencies”.

How goodwill and “Other Intangible Assets” were calculated and defined by GE is not clearly evident, for example what was the amount of debt assumed by GE. But considerable goodwill has been recorded. While the price for Alstom was $10.1 Billion, the goodwill plus amortizable intangible assets is nearly $22 Billion.

Why it Matters

If significant impairment occurs and goodwill is written down a change in the Balance Sheet occurs reducing the corporate assets. All else being equal the ratio of liabilities/assets is increased. And with impairment the write down can flow to the income statement and can negatively effect Earnings Per Share, which may effect the stock price.

In the Annual Report GE states that in 2017 they performed an impairment loss of $1,164 million of the Power Conversion business goodwill as recorded on the Statement of Earnings (Loss). After the impairment loss there was no goodwill in their Power Conversion business.

The Annual Report also states “Due to the overall decline in the Power market, we performed an interim step-one analysis of our Power Generation reporting unit within our Power segment, which indicated that its fair value has declined since our last impairment test; however, was still significantly in excess of its carrying value. We will continue to monitor the Power markets and the impact it may have on this reporting unit.” Investors should keep an eye on this.

Conclusion

The purpose of this article is not to raise a big red flag of another GE issue, but to increase investor awareness of the goodwill on GE’s balance sheet and possible negative effects going forward. In growing markets acquisitions and mergers and the associated goodwill may be a contributor. In soft markets goodwill may be a looming issue.

Disclosure: I am/we are long GE, PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.