General Electric Company (GE)

FORM 10-Q | Quarterly Report
Jul. 31, 2019 6:12 AM
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About: General Electric Company (GE)View as PDF
GENERAL ELECTRIC CO (Form: 10-Q, Received: 07/31/2019 06:14:15)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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
GEFORM10Q3QFINAL1IMAGE1A38.JPGClick to enlarge
GENERAL ELECTRIC CO MPANY
(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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.06 per share
GE
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 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
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 
There were 8,727,072,000 shares of common stock with a par value of $0.06 per share outstanding at June 30, 2019 .




TABLE OF CONTENTS
 


MD&A
 
 


ABOUT GENERAL ELECTRIC
General Electric Company operates worldwide as a high-tech industrial company through its five industrial segments, Power, Renewable Energy, Aviation, Healthcare, Oil & Gas, and through its financial services segment, Capital. The Power segment offers technologies, solutions, and services related to energy production, including gas and steam turbines, generators, and power generation services. The Renewable Energy segment provides wind turbine platforms, hardware and software, offshore wind turbines, solutions, products and services to hydropower industry, blades for onshore and offshore wind turbines, and high voltage equipment. The Aviation segment provides jet engines and turboprops for commercial airframes, maintenance, component repair, and overhaul services, as well as replacement parts, additive machines and materials, and engineering services. The Healthcare segment provides healthcare technologies in medical imaging, digital solutions, patient monitoring, and diagnostics, drug discovery, biopharmaceutical manufacturing technologies and performance enhancement solutions. The Oil & Gas segment offers oilfield services and equipment, turbomachinery and process solutions. The Capital segment leases and finances aircraft, aircraft engines and helicopters, provides financial and underwriting solutions, and manages our run-off insurance operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
The consolidated financial statements of General Electric Company (the Company) combine the industrial manufacturing and services businesses of GE with the financial services businesses of GE Capital or Financial Services and are prepared in conformity with U.S. generally accepted accounting principles (GAAP).

We believe 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 GE 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 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 – 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.
GE Capital or Financial Services – 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 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).
Industrial segment – the sum of our five industrial reportable 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.

Refer to the Glossary for a list of key terms used in our MD&A and financial statements. Operational and financial overviews for our operating segments are provided in the Segment Operations section.

This document contains “forward-looking statements” - that is, statements related to future events that by their nature address matters that are, to different degrees, uncertain. For details about the uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements, see the Risk Factors and Forward-Looking Statements sections, as well as our Annual Report on Form 10-K for the year ended December 31, 2018 and our other Quarterly Reports on Form 10-Q.

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. See the Non-GAAP Financial Measures section for the reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures.

Amounts reported in billions in tables 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. 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.


2019 2Q FORM 10-Q 3

MD&A
 
 


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.

CONSOLIDATED RESULTS
SIGNIFICANT DEVELOPMENTS. In November 2018, and pursuant to our announced plan of an orderly separation from Baker Hughes, a GE company (BHGE) over time, BHGE completed an underwritten public offering in which we sold 101.2 million shares of BHGE Class A common stock. BHGE also repurchased 65 million BHGE LLC units from us. The total consideration received by us from these transactions was $3.7 billion. As a result, our economic interest in BHGE reduced from 62.5% to 50.4% and we recognized a pre-tax loss in equity of $2.2 billion. Any reduction in our ownership interest below 50% will result in us losing control of BHGE. At that point, we would deconsolidate our Oil & Gas segment, recognize any remaining interest at fair value and recognize any difference between carrying value and fair value of our interest in earnings. Depending on the form and timing of our separation, and if BHGE’s stock price remains below our current carrying value, we may recognize a significant loss in earnings. Based on BHGE's share price at July 26, 2019 of $24.84 per share, the loss upon deconsolidation from a sale of our interest would be approximately $7.4 billion . See Note 15 to the consolidated financial statements for further information.

On February 25, 2019, we completed the spin-off and subsequent merger of our Transportation segment with Wabtec Corporation, a U.S. rail equipment manufacturer. In the transaction, participating GE shareholders received shares of Wabtec common stock representing an approximate 24.3% ownership interest in Wabtec common stock. GE received approximately $2.8 billion in cash as well as shares of Wabtec common stock and Wabtec non-voting convertible preferred stock that, together, represent an approximate 24.9% ownership interest in Wabtec. GE is also entitled to additional cash consideration up to $0.5 billion for tax benefits that Wabtec realizes from the transaction. As a result, we reclassified our Transportation segment to discontinued operations in the first quarter of 2019 and recorded a gain of $3.5 billion ( $2.5 billion after-tax) in discontinued operations. On May 6, 2019, we sold 25.3 million shares of Wabtec common stock resulting in proceeds of $1.8 billion. After the sale, our ownership of Wabtec reduced to approximately 11.8% which we intend to monetize over time. See Notes 2 and 3 to the consolidated financial statements for further information.

Also on February 25, 2019, we announced an agreement to sell our BioPharma business within our Healthcare segment to Danaher Corporation for total consideration of approximately $21.4 billion subject to certain adjustments. At March 31, 2019, we classified BioPharma as a business held for sale. The transaction is expected to close in the fourth quarter of 2019, subject to regulatory approvals and customary closing conditions, and provides us flexibility and optionality with respect to our remaining Healthcare business.

We recognized a non-cash pre-tax impairment charge of $0.7 billion related to goodwill at our Grid Solutions equipment and services reporting unit within our Renewable Energy segment. This charge was recorded within Corporate. See Note 8 to the consolidated financial statements for further information.

SECOND QUARTER 2019 RESULTS. Consolidated revenues were $ 28.8 billion, down $ 0.3 billion, or 1% , for the quarter. The decrease in revenues was largely attributable to the sales of Industrial Solutions, Value -Based Care and Distributed Power businesses in June 2018, July 2018 and November 2018, respectively. Industrial segment organic revenues* increased $1.9 billion, or 7%, driven by our Renewable Energy, Oil & Gas, Aviation and Healthcare segments, partially offset by our Power segment.

Continuing earnings per share was $ (0.03) . Excluding non-operating benefit costs, gains (losses) on business dispositions, restructuring and other charges, goodwill impairments and unrealized gains (losses) on investments, Adjusted earnings per share* was $0.17.

For the three months ended June 30, 2019, GE Industrial profit was $(0.4) billion and GE Industrial profit margins were (1.3)%, down $1.6 billion or 590 basis points, driven by a non-cash goodwill impairment charge of $0.7 billion in the second quarter of 2019, increased net losses from disposed or held for sale businesses of $0.4 billion, increased unrealized losses on investments of $0.3 billion and increased adjusted Corporate operating costs* of $0.1 billion, partially offset by decreased restructuring and other costs of $0.1 billion. Industrial segment profit decreased $ 0.6 billion, or 21% , primarily due to lower results within our Power, Renewable Energy and Aviation segments, partially offset by the performance of our Healthcare and Oil & Gas segments. Industrial segment organic profit* decreased $0.5 billion, or 17%.

GE cash flows from operating activities (CFOA) from continuing operations was $ (0.8) billion for both the six months ended June 30, 2019 and 2018. GE CFOA remained flat primarily due to no GE Pension Plan contributions in 2019 compared to $0.9 billion in 2018 and lower net disbursements for equipment project costs, offset by lower net income and higher cash used for working capital and employee benefit liabilities compared to 2018. Adjusted GE Industrial Free Cash Flows (FCF)* were $(2.2) billion and $(1.4) billion for the six months ended June 30, 2019 and 2018, respectively. The increase in cash used was primarily due to lower net income and higher cash used for working capital and employee benefit liabilities compared to 2018, partially offset by lower net disbursements for equipment project costs compared to 2018. See the Capital Resources and Liquidity - Statement of Cash Flows section for further information.



*Non-GAAP Financial Measure

4 2019 2Q FORM 10-Q

MD&A
CONSOLIDATED RESULTS
 

Orders are contractual commitments with customers to provide specified goods or services for an agreed upon price. Backlog is unfilled customer orders for products and product services (expected life of contract sales for product services).
GE INDUSTRIAL BACKLOG (In billions)
June 30, 2019

June 30, 2018

 
 
 
Equipment
$
85.0

$
81.8

Services
311.5

276.5

Total backlog
$
396.5

$
358.3

GE INDUSTRIAL ORDERS
Three months ended June 30
 
Six months ended June 30
(In billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
Equipment
$
14.1

$
14.9

 
$
26.4

$
27.2

Services
14.6

15.0

 
28.5

28.7

Total orders
$
28.7

$
30.0

 
$
54.9

$
55.9

Total organic orders
$
29.3

$
28.2

 
$
55.8

$
52.7


As of June 30, 2019, backlog increased $ 38.1 billion, or 11% , from the prior year due to an increase in services backlog of $ 35.0 billion and equipment backlog of $ 3.2 billion primarily at Aviation.
For the three months ended June 30, 2019 , orders decreased $ 1.3 billion, or 4% , on a reported basis and increased $1.1 billion, or 4%, organically driven by an increase in services orders of $ 0.5 billion primarily at Renewable Energy, Oil & Gas and Aviation, partially offset by Power as well as an increase in equipment orders of $0.6 billion primarily at Renewable Energy and Power, partially offset by Aviation.
For the six months ended June 30, 2019 , orders decreased $ 1.0 billion, or 2% , on a reported basis and increased $3.1 billion, or 6%, organically driven by an increase equipment orders of $1.8 billion primarily at Renewable Energy, Power and Oil & Gas, partially offset by Aviation as well as an increase in services orders of $1.3 billion primarily at Aviation and Oil & Gas.

Remaining performance obligation (RPO), a defined term under GAAP, is backlog excluding any purchase order that provides the customer with the ability to cancel or terminate without incurring a substantive penalty, even if the likelihood of cancellation is remote based on historical experience. We plan to continue reporting backlog as we believe that it is a useful metric for investors, given its relevance to total orders. See Note 9 to the consolidated financial statements for further information.
June 30, 2019 (In billions)
Equipment

Services

Total





Backlog
$
85.0

$
311.5

$
396.5

Adjustments
(34.7
)
(110.4
)
(145.1
)
Remaining performance obligation
$
50.3

$
201.1

$
251.4


Adjustments to reported backlog of $(145.1) billion as of June 30, 2019 are largely driven by adjustments of $(132.1) billion in our Aviation segment: (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 substantive 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. These adjustments to reported backlog are expected to be satisfied beyond one year.
REVENUES
Three months ended June 30
 
Six months ended June 30
(In billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
Consolidated revenues
$
28.8

$
29.2

 
$
56.1

$
56.9

 
 
 
 
 
 
Equipment
12.6

12.6

 
24.2

24.7

Services
14.5

14.6

 
28.3

28.4

Industrial segment revenues
27.1

27.2

 
52.5

53.2

Corporate items and Industrial eliminations
(0.2
)
(0.1
)
 
(0.2
)

GE Industrial revenues
$
26.8

$
27.1

 
$
52.2

$
53.2

 
 
 
 
 
 
Financial services revenues
$
2.3

$
2.4

 
$
4.5

$
4.6


For the three months ended June 30, 2019 , consolidated revenues decreased $ 0.3 billion, or 1% , primarily driven by decreased industrial segment revenues of $ 0.1 billion and decreased Financial Services revenues of $0.1 billion. The overall foreign currency impact on consolidated revenues was a decrease of $0.6 billion.
Industrial segment revenues decreased $ 0.1 billion as decreases at Power and Healthcare were partially offset by increases at Renewable Energy, Oil & Gas and Aviation. This decrease was driven by the net effects of dispositions of $1.4 billion, primarily attributable to the sales of Industrial Solutions, Value -Based Care and Distributed Power in June 2018, July 2018 and November 2018, respectively , and the effects of a stronger U.S. dollar of $0.6 billion. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic revenues* increased $1.9 billion, or 7%.
*Non-GAAP Financial Measure

2019 2Q FORM 10-Q 5

MD&A
CONSOLIDATED RESULTS
 

Financial Services revenues decreased $ 0.1 billion, or 4% , primarily due to volume declines, partially offset by higher gains and lower impairments.

For the six months ended June 30, 2019 , consolidated revenues decreased $ 0.8 billion, or 1% , primarily driven by decreased industrial segment revenues of $ 0.7 billion and decreased Financial Services revenues of $ 0.1 billion. The overall foreign currency impact on consolidated revenues was a decrease of $1.3 billion.
Industrial segment revenues decreased $ 0.7 billion, or 1% , as decreases at Power and Healthcare were partially offset by increases at Aviation, Oil & Gas and Renewable Energy. This decrease was driven by the net effects of dispositions of $2.6 billion, primarily attributable to the sales of Industrial Solutions, Value -Based Care and Distributed Power in June 2018, July 2018 and November 2018, respectively , and the effects of a stronger U.S. dollar of $1.3 billion. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic revenues* increased $3.2 billion, or 6%.
Financial Services revenues decreased $ 0.1 billion, or 1% , primarily due to volume declines, partially offset by higher gains and lower impairments.
EARNINGS (LOSS) AND EARNINGS (LOSS) PER SHARE
Three months ended June 30
 
Six months ended June 30
(In billions; per-share in dollars and diluted)
2019

2018

 
2019

2018

 
 
 
 
 
 
Continuing earnings
$
(0.3
)
$
0.7

 
$
0.7

$
0.9

 
 
 
 
 
 
Continuing earnings per share
$
(0.03
)
$
0.08

 
$
0.07

$
0.11


For the three months ended June 30, 2019 , consolidated continuing earnings decreased $ 1.0 billion due to decreased GE Industrial continuing earnings of $ 1.3 billion, and a goodwill impairment charge of $ 0.7 billion in 2019, partially offset by increased benefit for GE Industrial income taxes of $ 0.6 billion driven by the completion of prior years’ audit, decreased interest and other financial charges of $ 0.2 billion, decreased non-operating benefit costs of $0.1 billion and decreased Financial Services losses of $ 0.1 billion.
GE Industrial continuing earnings decreased $ 1.3 billion, or 49% . Corporate items and eliminations decreased $ 0.7 billion primarily attributable to increased net losses from disposed or held for sale businesses of $0.4 billion, increased unrealized losses on investments of $0.3 billion and increased adjusted Corporate operating costs* of $0.1 billion, partially offset by decreased restructuring and other costs of $0.1 billion. Industrial segment profit decreased $ 0.6 billion, or 21% , with decreases at Power, Renewable Energy and Aviation, partially offset by higher profit at Healthcare and Oil & Gas. This decrease in industrial segment profit was driven in part by the net effects of dispositions of $0.1 billion, primarily associated with the sales of Industrial Solutions, Value -Based Care and Distributed Power in June 2018, July 2018 and November 2018, respectively . Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic profit* decreased $0.5 billion, or 17%.
Financial Services continuing losses decreased $ 0.1 billion, or 57% , primarily due to higher gains, lower impairments, higher tax benefits and lower excess interest costs, partially offset by volume declines. Gains were $0.2 billion and $0.1 billion in the second quarters of 2019 and 2018, respectively, which primarily related to sales of GE Capital Aviation Services (GECAS) aircraft and engines resulting in gains of $0.1 billion in both 2019 and 2018 and the sale of an equity method investment resulting in a gain of $0.1 billion in 2019 at Energy Financial Services (EFS).

For the six months ended June 30, 2019 , consolidated continuing earnings decreased $ 0.3 billion due to decreased GE Industrial continuing earnings of $ 0.9 billion and a goodwill impairment charge of $ 0.7 billion in 2019, partially offset by decreased Financial Services losses of $ 0.5 billion, decreased provision for GE Industrial income taxes of $ 0.4 billion driven by the completion of prior years’ audit, decreased interest and other financial charges of $ 0.3 billion and decreased non-operating benefit costs of $ 0.3 billion.
GE Industrial continuing earnings decreased $ 0.9 billion, or 20% . Corporate items and eliminations decreased $ 0.3 billion primarily attributable to increased unrealized losses on investments of $0.3 billion and increased adjusted Corporate operating costs* of $0.2 billion, partially offset by decreased restructuring and other costs of $0.2 billion. Industrial segment profit decreased $ 0.6 billion, or 11% , with decreases at Renewable Energy, Power and Aviation, partially offset by higher profit at Oil & Gas and Healthcare. This decrease in industrial segment profit was driven in part by the net effects of dispositions of $0.3 billion, primarily associated with the sales of Industrial Solutions, Value -Based Care and Distributed Power in June 2018, July 2018 and November 2018, respectively , offset by lower restructuring and business development costs related to Baker Hughes of $0.3 billion and the effects of a weaker U.S. dollar of $0.1 billion. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic profit* decreased $0.7 billion, or 12%.
Financial Services continuing losses decreased $ 0.5 billion primarily due to higher gains, lower excess interest costs, tax law changes and lower impairments. Gains were $0.4 billion and $0.2 billion in the first half of 2019 and 2018, respectively, which primarily related to sales of GECAS aircraft and engines resulting in gains of $0.2 billion and $0.1 billion in the first half of 2019 and 2018 a nd the sale of an equity method investment resulting in a gain of $0.1 billion in 2019 at EFS.








*Non-GAAP Financial Measure

6 2019 2Q FORM 10-Q

MD&A
CONSOLIDATED RESULTS
 

AVIATION AND GECAS 737 MAX. Aviation develops, produces, and sells LEAP aircraft engines through CFM International (CFM), a company jointly owned by GE and Safran Aircraft Engines, a subsidiary of the Safran Group of France. The LEAP-1B engine is the exclusive engine for the Boeing 737 MAX. In March 2019, global regulatory authorities ordered a temporary fleet grounding of the Boeing 737 MAX. In April 2019, Boeing announced a temporary reduction in the 737 MAX production rate, and during the second quarter of 2019, CFM reduced its production rate for the LEAP-1B to meet Boeing's revised aircraft build rate. As a result of the 737 MAX grounding, GE CFOA was adversely affected by an estimated $0.3 billion and $0.6 billion for the three and six months ended June 30, 2019, respectively. If the 737 MAX remains grounded, based on current assumptions, we anticipate a negative impact to GE CFOA of approximately $0.4 billion per quarter in the second half of 2019. See Capital Resources and Liquidity - Statement of Cash Flows for further information.

At June 30, 2019, GECAS owned 29 of these aircraft, 25 of which are leased to various lessees that remain obligated to make contractual rental payments. In addition, GECAS has made pre-delivery payments to Boeing related to 150 of these aircraft on order and has made financing commitments to acquire a further 19 aircraft under purchase and leaseback contracts with airlines.

As of June 30, 2019, we have approximately $2.1 billion of net assets related to the 737 MAX program that primarily comprises pre-delivery payments and owned aircraft subject to lease offset by progress collections. No impairment charges were incurred related to the 737 MAX aircraft and related balances in the first half of 2019 as we continue to believe these assets are fully recoverable. We continue to monitor these developments with our airline customers, lessees and Boeing.

SEGMENT OPERATIONS. Segment revenues include sales of products and services by the segment. Industrial segment profit is determined based on internal performance measures used by our Chief Operating Decision Maker (CODM), who is our 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, certain gains and losses from acquisitions or dispositions, and certain litigation settlements. Subsequent to the Baker Hughes transaction on July 3, 2017, restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment. See the Corporate Items and Eliminations section for additional information about costs excluded from segment profit.

Segment profit excludes results reported as discontinued operations and 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.

Interest and other financial charges, income taxes and non-operating benefit costs are excluded in determining segment 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 those related to 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.

2019 2Q FORM 10-Q 7

MD&A
SEGMENT OPERATIONS
 

SUMMARY OF REPORTABLE SEGMENTS
Three months ended June 30
 
Six months ended June 30
(Dollars in millions)
2019

2018

V%

 
2019

2018

V%

 
 
 
 
 
 
 
 
Power
$
4,681

$
6,261

(25)
 %
 
$
9,298

$
12,209

(24)
 %
Renewable Energy
3,627

2,883

26
 %
 
6,165

5,722

8
 %
Aviation
7,877

7,519

5
 %
 
15,831

14,631

8
 %
Healthcare
4,934

4,978

(1)
 %
 
9,616

9,680

(1)
 %
Oil & Gas
5,953

5,554

7
 %
 
11,569

10,939

6
 %
      Total industrial segment revenues
27,071

27,195

 %
 
52,479

53,181

(1)
 %
Capital
2,321

2,429

(4)
 %
 
4,548

4,602

(1)
 %
      Total segment revenues
29,392

29,623

(1)
 %
 
57,027

57,783

(1)
 %
Corporate items and eliminations
(561
)
(462
)
(21)
 %
 
(910
)
(833
)
(9)
 %
Consolidated revenues
$
28,831

$
29,162

(1)
 %
 
$
56,117

$
56,950

(1)
 %
 
 
 
 
 
 
 
 
Power
$
117

$
410

(71)
 %
 
$
228

$
654

(65)
 %
Renewable Energy
(184
)
85

U

 
(371
)
196

U

Aviation
1,385

1,475

(6)
 %
 
3,046

3,078

(1)
 %
Healthcare
958

926

3
 %
 
1,740

1,660

5
 %
Oil & Gas
82

73

12
 %
 
245

(70
)
F

      Total industrial segment profit (loss)
2,359

2,969

(21)
 %
 
4,887

5,518

(11)
 %
Capital
(89
)
(207
)
57
 %
 
46

(422
)
F

      Total segment profit (loss)
2,270

2,762

(18)
 %
 
4,933

5,095

(3)
 %
Corporate items and eliminations
(956
)
(222
)
U

 
(1,165
)
(886
)
(31)
 %
GE goodwill impairments
(744
)

 %
 
(744
)

 %
GE interest and other financial charges
(444
)
(686
)
35
 %
 
(1,032
)
(1,326
)
22
 %
GE non-operating benefit costs
(554
)
(688
)
19
 %
 
(1,115
)
(1,369
)
19
 %
GE benefit (provision) for income taxes
137

(487
)
F

 
(213
)
(576
)
63
 %
Earnings (loss) from continuing operations attributable to GE common shareowners
(291
)
679

U

 
663

940

(29
)%
Earnings (loss) from discontinued operations, net of taxes
231

(63
)
F

 
2,823

(1,504
)
F

Less net earnings attributable to noncontrolling interests, discontinued operations

1

(100)
 %
 
(2
)
4

U

Earnings (loss) from discontinued operations, net of tax and noncontrolling interest
231

(64
)
F

 
2,825

(1,508
)
F

Consolidated net earnings (loss) attributable to the GE common shareowners
$
(61
)
$
615

U

 
$
3,488

$
(568
)
F


Effective the first quarter of 2019, Corporate items and eliminations includes the results of our Lighting segment for all periods presented.

Oil & Gas segment profit excluding restructuring and other charges* of $135 million and $148 million was $217 million and $222 million for the three months ended June 30, 2019 and 2018, respectively. Oil & Gas segment profit excluding restructuring and other charges* of $194 million and $473 million was $439 million and $403 million for the six months ended June 30, 2019 and 2018, respectively.






















*Non-GAAP Financial Measure

8 2019 2Q FORM 10-Q

MD&A
SEGMENT OPERATIONS
 

POWER
Effective the first quarter of 2019, we reorganized the businesses within our Power segment into Gas Power and Power Portfolio, and effectively eliminated the Power headquarters structure to allow us to reduce costs and improve operations. In the second quarter of 2019, we completed the reorganization of our Grid Solutions equipment and services business into our Renewable Energy segment and our Grid Solutions software business into Corporate for all periods presented. Gas Power is a unified gas life cycle business combining our Gas Power Systems and Power Services businesses, while Power Portfolio comprises our Steam Power Systems (including services previously reported in Power Services), Power Conversion and GE Hitachi Nuclear businesses. Power Portfolio's 2018 results also include our former Industrial Solutions and Distributed Power businesses which were sold in June 2018 and November 2018, respectively.

The power market as well as its operating environment continue to be challenging. Over the past several quarters, our outlook for Power was driven by the significant overcapacity in the industry, increased price pressure from competition on servicing the installed base, and the uncertain timing of deal closures due to financing and the complexities of working in emerging markets. In addition, our near-term earnings outlook could be impacted by project execution and our own underlying operational challenges. Also, market factors such as increasing energy efficiency and renewable energy penetration continue to impact long-term demand.

We have and will continue to take actions to right size our business for the current market conditions and our long-term outlook, including restructuring our operations to dispose of non-core businesses, resizing our remaining businesses to better align with market demand and driving these businesses with an operational rigor and discipline that is focused on our customers’ lifecycle experience. We are building a cost structure to support an average 25 to 30 gigawatt new unit gas turbine market; however, actual orders in a given year can vary. As a result of these actions and overall market conditions, we believe the business is showing early signs of stabilization and expect incremental improvements in 2020 with further acceleration in 2021 and beyond.

We continue to invest in new product development, such as our HA-Turbines, and upgrades which offset our cost reduction initiatives as these are critical to our customers and the long-term strategy of the business.
(In billions)
 
 
 
June 30, 2019
June 30, 2018
 
 
 
 
 
 
Equipment
 
 
 
$
19.4

$
18.6

Services
 
 
 
67.0

68.0

Total backlog
 
 
 
$
86.4

$
86.6

 
Three months ended June 30
 
Six months ended June 30
(Dollars in billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
GE Gas Turbine unit orders
20

10

 
35

18

Heavy-Duty Gas Turbine(a) unit orders
16

7

 
27

11

HA-Turbine(b) unit orders
7

2

 
10

2

Aeroderivative(a) unit orders
4

3

 
8

7

GE Gas Turbine Gigawatts orders(c)
4.6

1.5

 
6.7

2.0

 
 
 
 
 
 
GE Gas Turbine unit sales
11

12

 
20

26

Heavy-Duty Gas Turbine(a) unit sales
4

7

 
11

19

HA-Turbine(b) unit sales

3

 
1

4

Aeroderivative(a) unit sales
7

5

 
9

7

(a) Heavy-Duty Gas Turbines and Aeroderivatives are subsets of GE Gas Turbines.
(b) HA-Turbines are a subset of Heavy-Duty Gas Turbines.
(c) Gigawatts reported associated with financial orders in the periods presented.


 
 
 
Equipment
$
2.1

$
2.5

 
$
3.1

$
4.0

Services
2.8

3.8

 
5.5

6.8

Total orders
$
4.9

$
6.3

 
$
8.6

$
10.7

Gas Power
$
3.2

$
3.5

 
$
6.5

$
7.0

Power Portfolio
1.4

2.8

 
2.8

5.2

Total sub-segment revenues
$
4.7

$
6.3

 
$
9.3

$
12.2

Equipment
$
1.5

$
2.4

 
$
3.0

$
4.9

Services
3.2

3.8

 
6.3

7.3

Total segment revenues
$
4.7

$
6.3

 
$
9.3

$
12.2

 
 
 
 
 
 
Segment profit
$
0.1

$
0.4

 
$
0.2

$
0.7

Segment profit margin
2.5
%
6.5
%
 
2.5
%
5.4
%



2019 2Q FORM 10-Q 9

MD&A
SEGMENT OPERATIONS
 

For the three months ended June 30, 2019, segment orders were down $ 1.4 billion ( 22% ), segment revenues were down $ 1.6 billion ( 25% ) and segment profit was down $ 0.3 billion ( 71% ).
Reported orders decrease of $ 1.4 billion was driven primarily by the nonrecurrence of $1.1 billion of orders related to I ndustrial Solutions and Distributed Power following their sales in June 2018 and November 2018, respectively. Orders increased $0.1 billion, or 2%, organically mainly due to orders for nine more heavy-duty gas turbines at Gas Power, largely offset by a decrease in Steam orders at Power Portfolio.
Revenues decreased $0.3 billion, or 5%, organically*. Equipment revenues decreased due to lower unit sales, including three fewer heavy-duty gas turbines. Services revenues decreased due to lower contractual services revenues driven by lower outages and mix.
Profit decreased $0.2 billion, or 69%, organically* due to lower unit sales and lower productivity.

For the six months ended June 30, 2019, segment orders were down $ 2.2 billion ( 20% ), segment revenues were down $ 2.9 billion ( 24% ) and segment profit was down $ 0.4 billion ( 65% ).
Backlog as of June 30, 2019 decreased $ 0.2 billion from June 30, 2018 primarily due to the nonrecurrence of $3.9 billion of backlog related to I ndustrial Solutions and Distributed Power following their sales in June 2018 and November 2018, respectively. Offsetting this decrease, backlog increased $3.8 billion, or 5%, driven by an increase equipment backlog of $2.1 billion and services backlog of $1.6 billion.
Reported orders decrease of $ 2.2 billion was driven primarily by the nonrecurrence of $2.3 billion of orders related to I ndustrial Solutions and Distributed Power following their sales in June 2018 and November 2018, respectively. Orders increased $0.6 billion, or 7%, organically mainly due to orders for 16 more heavy-duty gas turbines at Gas Power, largely offset by a decrease in Steam orders at Power Portfolio.
Revenues decreased $0.4 billion, or 4%, organically*. Equipment revenues decreased due to lower unit sales, including eight fewer heavy-duty gas turbines, and services revenues decreased due to lower contractual services revenues driven by lower outages and mix.
Profit decreased $0.3 billion, or 61%, organically* due to lower unit sales, partially offset by lower costs and favorable contractual settlements of $0.1 billion.

RENEWABLE ENERGY
In the second quarter of 2019, we completed the reorganization of our Grid Solutions equipment and services business into our Renewable Energy segment and our Grid Solutions software business into Corporate for all periods presented. We recognized a non-cash pre-tax impairment charge of $0.7 billion related to goodwill at our Grid Solutions equipment and services reporting unit. This charge was recorded within Corporate. See Note 8 to the consolidated financial statements for further information.

The onshore wind market in the U.S. continues to see the positive impact from the Production Tax Credit (PTC) cycle and customer preference shifting to larger, more efficient units to drive down costs and compete with other power generation options. Despite the competitive nature of the market, onshore wind order pricing has stabilized in the first half of 2019 due to demand caused by the anticipated expiration of PTCs in the U.S. in 2020 and auction stabilization in international markets. We expect a significant production ramp for 2019 deliveries in onshore wind and are monitoring our operational risk as we execute. The grid market continues to be challenging as we have experienced current year order declines in the High Voltage Direct Current (HVDC) and High Voltage (HV) product lines.

New product introductions continue to be important to our customers who are demonstrating the willingness to invest in new technology that decreases the levelized cost of energy. We are continuing to focus on cost reduction initiatives of our products, in-sourcing blade production and developing larger, more efficient turbines like the Haliade-X and Cypress.
(In billions)
 
 
 
June 30, 2019
June 30, 2018
 
 
 
 
 
 
Equipment
 
 
 
$
15.3

$
15.3

Services
 
 
 
10.4

7.9

Total backlog
 
 
 
$
25.7

$
23.3











*Non-GAAP Financial Measure

10 2019 2Q FORM 10-Q

MD&A
SEGMENT OPERATIONS
 

 
Three months ended June 30
 
Six months ended June 30
(Dollars in billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
Wind Turbine unit orders
984

320

 
1,954

1,256

Wind Turbine Megawatts orders(a)
2,670

1,032

 
5,334

3,380

Repower unit orders
494

287

 
594

345

 
 
 
 
 
 
Wind Turbine unit sales
804

351

 
1,157

703

Wind Turbine Megawatts sales(a)
2,257

1,039

 
3,245

1,915

Repower unit sales

221

227

 
377

403

(a) Megawatts reported associated with financial orders in the periods presented.
 
 
 
Equipment
$
2.9

$
2.0

 
$
5.9

$
5.0

Services
0.8

0.7

 
1.3

1.2

Total orders
$
3.7

$
2.7

 
$
7.2

$
6.2

Onshore Wind
$
2.4

$
1.3

 
$
3.9

$
2.6

Grid Solutions equipment and services
0.9

1.2

 
1.9

2.4

Hydro and Offshore Wind
0.2

0.3

 
0.4

0.7

Total sub-segment revenues
$
3.6

$
2.9

 
$
6.2

$
5.7

Equipment
$
2.9

$
2.2

 
$
4.8

$
4.6

Services
0.8

0.6

 
1.3

1.2

Total segment revenues
$
3.6

$
2.9

 
$
6.2

$
5.7

 
 
 
 
 
 
Segment profit (loss)
$
(0.2
)
$
0.1

 
$
(0.4
)
$
0.2

Segment profit margin
(5.1
)%
2.9
%
 
(6.0
)%
3.4
%

For the three months ended June 30, 2019, segment orders were up $ 1.0 billion ( 35% ), segment revenues were up $ 0.7 billion ( 26% ) and segment profit was down $ 0.3 billion.
Orders increased $1.0 billion, or 38%, organically due to increased demand for North America Onshore Wind equipment resulting from the anticipated expiration of PTCs.
Revenues increased $0.9 billion, or 33%, organically*. Equipment revenues increased due to 453 more wind turbine shipments on a unit basis, or 117% more megawatts shipped, than in the prior year, offset by a decrease in Grid Solutions equipment due to lower HVDC and Alternate Current Substation (ACS) project revenues and HV product shipments. Services revenues increased primarily due to an increase in repower units pricing at Onshore Wind from the prior year.
Profit decreased $0.3 billion organically* largely due to higher losses in Grid Solutions equipment and services, Hydro and Offshore Wind as we began fully consolidating these entities in the fourth quarter of 2018, as well as project execution challenges including higher losses on legacy contracts. These items were offset by increased profit driven by higher volume in Onshore Wind and cost productivity, offset by the impact of U.S.-China tariffs, price pressure in Grid Solutions equipment and services and Onshore Wind and increased research and development spend for Haliade-X and Cypress.

For the six months ended June 30, 2019, segment orders were up $ 1.0 billion ( 17% ), segment revenues were up $ 0.4 billion ( 8% ) and segment profit was down $ 0.6 billion.
Backlog as of June 30, 2019 increased $ 2.4 billion, or 10% , from June 30, 2018 driven by increased demand at Onshore Wind resulting from the anticipated expiration of PTCs as well as increased repower orders, partially offset by a decrease in Grid Solutions equipment backlog due to lower HVDC orders.
Orders increased $1.2 billion, or 20%, organically due to increased demand for North America Onshore Wind equipment resulting from the anticipated expiration of PTCs.
Revenues increased $0.8 billion, or 14%, organically*. Equipment revenues increased due to 454 more wind turbine shipments on a unit basis, or 69% more megawatts shipped, than in the prior year, partially offset by decreases in Offshore due to the execution of a large project in prior year and Grid Solutions equipment due to lower HVDC and ACS project revenues and HV product shipments. Services revenues increased primarily due to an increase in repower units pricing at Onshore Wind from the prior year.
Profit decreased $0.6 billion organically* due to higher losses in Grid Solutions equipment and services, Hydro and Offshore Wind as we began fully consolidating these entities in the fourth quarter of 2018, as well as project execution challenges including higher losses on legacy contracts, partially offset by a $0.1 billion non-cash gain from the termination of two Offshore Wind contracts. These items were offset by increased profit driven by higher volume in Onshore Wind and cost productivity, offset by the impact of U.S.-China tariffs, price pressure in Grid Solutions equipment and services and Onshore Wind and increased research and development spend for Haliade-X and Cypress.


*Non-GAAP Financial Measure

2019 2Q FORM 10-Q 11

MD&A
SEGMENT OPERATIONS
 

AVIATION
Global passenger air travel continued to grow (measured in revenue passenger kilometers (RPK)*), oil prices remained stable, and traffic growth was broad-based across global regions. We expect this trend to drive continued demand in the installed base of commercial engines and increased focus on newer, more fuel-efficient aircraft. Industry-load factors for airlines remained above 80%*. Air freight volume decreased, particularly in international markets driven by economic conditions and slowing global trade. As it relates to the military environment, the U.S. Department of Defense has increased its budget and foreign governments have increased spending to upgrade or modernize their existing fleets, creating future opportunities.

We announced record commercial wins at the Paris Air Show, some of which, contributed to backlog growth of 17% from June 30, 2018. We continue to expect future orders as a result of these wins.

Total engineering, comprised of both company and customer funded spending, continues to grow in line with revenue growth. Company funded R&D spend has remained approximately flat as more costs have transitioned to external funding, primarily in our Military business.

Refer to the Aviation and GECAS 737 MAX discussion in Consolidated Results for information regarding the Company's exposure related to the temporary fleet grounding of the Boeing 737 MAX.
(In billions)
 
 
 
June 30, 2019
June 30, 2018
 
 
 
 
 
 
Equipment
 
 
 
$
38.2

$
36.1

Services
 
 
 
205.7

171.9

Total backlog
 
 
 
$
243.9

$
208.1

 
Three months ended June 30
 
Six months ended June 30
(Dollars in billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
Commercial Engines unit orders
899

959

 
1,698

2,134

GEnx Engines(a) unit orders
21

269

 
51

293

LEAP Engines(a) unit orders
693

440

 
1,329

1,434

Military Engines unit orders
53

277

 
79

528

 
 
 
 
 
 
Commercial Engines unit sales
723

697

 
1,474

1,348

GEnx Engines(a) unit sales
70

57

 
148

107

LEAP Engines(a) unit sales
437

250

 
861

436

Military Engines unit sales
143

204

 
304

342

Spares Rate(b) unit sales
$
27.0

$
26.6

 
$
28.5

$
25.9

(a) GEnx and LEAP engines are subsets of commercial engines
(b) Commercial externally shipped spares and spares used in time & material shop visits in millions of dollars per day.
Equipment
$
3.5

$
4.5

 
$
6.7

$
7.7

Services
5.1

5.0

 
10.6

9.9

Total orders
$
8.6

$
9.5

 
$
17.3

$
17.6

Commercial Engines & Services
$
5.8

$
5.5

 
$
11.8

$
10.8

Military
1.0

1.1

 
2.0

2.0

Systems & Other
1.1

0.9

 
2.0

1.8

Total sub-segment revenues
$
7.9

$
7.5

 
$
15.8

$
14.6

Equipment
$
3.0

$
2.9

 
$
6.1

$
5.4

Services
4.8

4.6

 
9.7

9.2

Total segment revenues
$
7.9

$
7.5

 
$
15.8

$
14.6

 
 
 
 
 
 
Segment profit
$
1.4

$
1.5

 
$
3.0

$
3.1

Segment profit margin
17.6
%
19.6
%
 
19.2
%
21.0
%






* Based on the latest available information from the International Air Transport Association

12 2019 2Q FORM 10-Q

MD&A
SEGMENT OPERATIONS
 

For the three months ended June 30, 2019, segment orders were down $1.0 billion ( 10% ), segment revenues were up $0.4 billion ( 5% ) and segment profit was down $0.1 billion ( 6% ).
Orders decreased $0.8 billion, or 9%, organically primarily driven by four large commercial equipment orders received in second quarter 2018 that were not expected to repeat in the current year. Services orders increased attributable to increased materials orders.
Revenues increased $0.5 billion, or 6%, organically*. Equipment revenues increased primarily due to 26 more commercial units, including 187 more LEAP units, versus the prior year, partially offset by lower legacy commercial output in the CFM product line and timing of military equipment deliveries. Services revenues also increased primarily due to increased price and a higher commercial spare parts shipment rate.
Profit decreased $0.1 billion, or 6%, organically*, mainly due to the continued negative mix from lower shipments on commercial engines, primarily the CFM to LEAP engine transition and Passport engine shipments, partially offset by Services increased volume and increased price. Additionally, we recorded charges in the period related to the uncertainty of collection for a customer in a challenging financial position and additional costs for the GE9X engine certification.

For the six months ended June 30, 2019, segment orders were down $ 0.4 billion ( 2% ), segment revenues were up $1.2 billion ( 8% ) and segment profit was down 1% .
Backlog as of June 30, 2019 increased $ 35.8 billion, or 17% , from June 30, 2018 primarily due to an increase in long-term service agreements.
Orders decreased $0.4 billion, or 2%, organically primarily driven by four large commercial equipment orders received in second quarter 2018 that were not expected to repeat in the current year. Services orders increased attributable to increased materials orders.
Revenues increased $1.3 billion, or 9%, organically*. Equipment revenues increased primarily due to 126 more commercial units, including 425 more LEAP units, versus the prior year, partially offset by lower legacy commercial output in the CFM product line and the timing of military equipment deliveries. Services revenues also increased primarily due to increased price and a higher commercial spare parts shipment rate.
Profit decreased 1% organically*, mainly due to the continued negative mix from lower shipments on commercial engines, primarily the CFM to LEAP engine transition and Passport engine shipments, partially offset by Services increased volume and increased price. Additionally, we recorded charges in the period related to the uncertainty of collection for a customer in a challenging financial position and additional costs for the GE9X engine certification.

HEALTHCARE
The global healthcare market has continued to expand, driven by macro trends relating to growing and aging populations, increasing chronic and lifestyle-related disease, accelerating demand for healthcare in emerging markets, increasing demand for biologic drugs and insulin, and increasing use of diagnostic imaging. Technological innovation that makes it possible to address an increasing number of diseases, conditions and patients in more cost-effective manner has also driven growth across each of our global markets.

The Healthcare Systems market continues to expand at low single-digit rates. Growth in emerging markets is driven by long-term trends of expanding demand and access to healthcare. However, there is short-term variation driven by market-specific political and economic cycles. Developed markets are expected to remain steady in the near term driven by macro trends in the healthcare industry. The Life Sciences market, which encompasses Bioprocess and Pharmaceutical diagnostics, continues to be strong. The Bioprocess market is growing at a high single-digit rate, driven by growth in biologic drugs. The Pharmaceutical diagnostics business is positioned in the contrast agent and nuclear tracer markets. This market is expected to grow at low- to mid-single digit rates, driven by continued diagnostic imaging procedure growth and increasing contrast and tracer-enhancement of these same procedures, as these products help to increase the precision of the diagnostic information provided to clinicians.

We continue focusing on creating new products and solutions as well as expanding uses of existing offerings that are tailored to the different needs of our global customers. We strive to introduce technology innovation that enable our customers to improve their patient and operational outcomes as they diagnose, treat and monitor an increasing number of medical conditions and patients. During the year, we launched a number of new products, including CARESCAPE ONE, our next generation patient monitoring solution, and Revolution Apex, our first Artificial Intelligence-enabled premium CT. In addition, in our first collaboration product with Roche, we released the Navify Tumor Board 2.0, a solution that pools medical imaging and other patient data to give medical teams a more comprehensive view of each patient in a single place before they decide on treatment.

Effective January 1, 2019, the Healthcare Equipment Finance (HEF) financing business within our Capital segment was transferred to our Healthcare segment and is presented within Healthcare Systems.








*Non-GAAP Financial Measure

2019 2Q FORM 10-Q 13

MD&A
SEGMENT OPERATIONS
 

(In billions)
 
 
 
June 30, 2019
June 30, 2018
 
 
 
 
 
 
Equipment
 
 
 
$
6.7

$
6.2

Services
 
 
 
11.5

11.4

Total backlog
 
 
 
$
18.2

$
17.6

 
Three months ended June 30
 
Six months ended June 30
(Dollars in billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
Equipment
$
3.2

$
3.1

 
$
6.1

$
5.8

Services
2.0

2.2

 
4.0

4.2

Total orders
$
5.2

$
5.3

 
$
10.1

$
10.1

Healthcare Systems
$
3.6

$
3.7

 
$
7.0

$
7.3

Life Sciences
1.3

1.2

 
2.6

2.4

Total sub-segment revenues
$
4.9

$
5.0

 
$
9.6

$
9.7

Equipment
$
2.8

$
2.8

 
$
5.5

$
5.4

Services
2.1

2.2

 
4.1

4.3

Total segment revenues
$
4.9

$
5.0

 
$
9.6

$
9.7

 
 
 
 
 
 
Segment profit
$
1.0

$
0.9

 
$
1.7

$
1.7

Segment profit margin
19.4
%
18.6
%
 
18.1
%
17.1
%

For the three months ended June 30, 2019, segment orders were down $0.1 billion ( 2% ), segment revenues were down 1% and segment profit was up 3% .
Orders increased $0.1 billion, or 3%, organically primarily attributable to continued strength in Life Sciences.
Revenues increased $0.2 billion, or 4%, organically* due to higher volume in Life Sciences, driven by BioPharma and Pharmaceutical Diagnostics, as well as higher volume in Healthcare Systems.
Profit increased $0.1 billion, or 9%, organically* primarily driven by volume growth and cost productivity due to cost reduction actions including increased digital automation, sourcing and logistic initiatives, design engineering and prior year restructuring actions. These increases were partially offset by inflation, the impact of U.S.-China tariffs, and investments in programs including digital product innovations and Healthcare Systems new product introductions.

For the six months ended June 30, 2019, segment orders were up $ 0.1 billion ( 1% ), segment revenues were down $0.1 billion ( 1% ) and segment profit was up $0.1 billion ( 5% ).
Backlog as of June 30, 2019 increased $ 0.7 billion, or 4% , from June 30, 2018 primarily due to an increase in equipment backlog of $0.5 billion.
Orders increased $0.6 billion, or 6%, organically primarily attributable to growth in services orders in both Life Sciences and Healthcare Systems.
Revenues increased $0.4 billion, or 4%, organically* due to higher volume in Life Sciences, driven by BioPharma and Pharmaceutical Diagnostics, as well as higher volume in Healthcare Systems.
Profit increased $0.2 billion, or 11%, organically* primarily driven by volume growth and cost productivity due to cost reduction actions including increased digital automation, sourcing and logistic initiatives, design engineering and prior year restructuring actions. These increases were partially offset by inflation, the impact of U.S.-China tariffs, and investments in programs including digital product innovations and Healthcare Systems new product introductions.
















*Non-GAAP Financial Measure

14 2019 2Q FORM 10-Q

MD&A
SEGMENT OPERATIONS
 

OIL & GAS
The oil and gas market is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is driven by a number of factors, including our customers' forecasts of future energy supply and demand, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, the impact of new
government regulations and most importantly, their expectations for oil and natural gas prices as a key driver of their cash flows.

Oil and gas markets remained dynamic in the second quarter of 2019. Commodity prices increased 9% as compared to the first quarter of 2019. However, Brent and WTI oil prices remained 7% and 12%, respectively, lower than the same quarter last year. Within the quarter, Brent oil prices fluctuated from a high of $74.94 to a low of $61.66, and WTI oil prices fluctuated from a high of $66.24 to a low of $51.13. In addition, rig counts in the quarter were up 3% versus the second quarter of 2018 driven by a 15% increase in the international rig count, partially offset with a 7% decline in the North American rig count. From an offshore and liquefied natural gas (LNG) perspective, in the first half of 2019, major equipment projects were awarded in the Oilfield Equipment and Turbomachinery & Process Solutions markets, in line with expectations. We remain focused on delivering innovative cost-efficient solutions that deliver step changes in operating and economic performance for our customers.
(In billions)
 
 
 
June 30, 2019
June 30, 2018
 
 
 
 
 
 
Equipment
 
 
 
$
5.6

$
5.3

Services
 
 
 
15.6

16.0

Total backlog
 
 
 
$
21.1

$
21.4

 
Three months ended June 30
 
Six months ended June 30
(Dollars in billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
Equipment
$
2.8

$
2.5

 
$
5.1

$
4.5

Services
3.7

3.5

 
7.2

6.8

Total orders
$
6.5

$
6.0

 
$
12.2

$
11.3

Turbomachinery & Process Solutions (TPS)
$
1.4

$
1.4

 
$
2.7

$
2.8

Oilfield Services (OFS)
3.3

2.9

 
6.2

5.6

Oilfield Equipment (OFE)
0.7

0.6

 
1.4

1.3

Digital Solutions
0.6

0.7

 
1.2

1.3

Total sub-segment revenues
$
6.0

$
5.6

 
$
11.6

$
10.9

Equipment
$
2.4

$
2.2

 
$
4.6

$
4.4

Services
3.6

3.4

 
6.9

6.5

Total segment revenues
$
6.0

$
5.6

 
$
11.6

$
10.9

 
 
 
 
 
 
Segment profit
$
0.1

$
0.1

 
$
0.2

$
(0.1
)
Segment profit margin
1.4
%
1.3
%
 
2.1
%
(0.6
)%

For the three months ended June 30, 2019, segment orders were up $ 0.5 billion ( 8% ), segment revenues were up $0.4 billion ( 7% ) and segment profit was up 12% .
Orders increased $0.7 billion, or 11%, organically primarily driven by an increase in equipment orders resulting from major contract awards in TPS and increased OFS activity.
Revenues increased $0.6 billion, or 11%, organically* primarily resulting from higher OFS activity of $0.4 billion in international and North America markets and higher OFE activity of $0.1 billion driven by higher volume in subsea production systems and services.
Profit increased 5% organically* primarily driven by volume growth and improved cost productivity, partially offset by a loss related to the expected sale of a non-core business within TPS.

For the six months ended June 30, 2019, segment orders were up $ 0.9 billion ( 8% ), segment revenues were up $0.6 billion ( 6% ) and segment profit was up $0.3 billion .
Backlog as of June 30, 2019 decreased $ 0.3 billion, or 1% , from June 30, 2018 primarily due to a decrease in services backlog of $0.5 billion, partially offset by an increase in equipment backlog of $0.2 billion.
Orders increased $1.3 billion, or 11%, organically primarily driven by an increase in equipment orders resulting from major contract awards in TPS and increased OFS activity.
Revenues increased $1.0 billion, or 9%, organically* primarily resulting from higher OFS activity of $0.7 billion in international and North America markets and higher OFE activity of $0.2 billion driven by higher volume in subsea production systems and services.
Profit increased $0.1 billion, or 18%, organically* primarily driven by volume growth and improved cost productivity, partially offset by a loss related to the expected sale of a non-core business within TPS.


*Non-GAAP Financial Measure

2019 2Q FORM 10-Q 15

MD&A
SEGMENT OPERATIONS
 

CAPITAL
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 (EFS) and Industrial Finance (IF) businesses (GE Capital strategic shift). With respect to this announcement, we completed $15 billion of asset reductions during 2018 and $1.6 billion of asset reductions during the first half of 2019, including approximately $0.5 billion during the second quarter of 2019. Also in the second quarter of 2019, we classified $3.6 billion of GE Capital Aviation Services (GECAS) financing receivables as held for sale. See Note 5 to the consolidated financial statements for further information. We expect to execute total asset reductions of approximately $10 billion by the end of 2019, primarily comprising receivables held by GECAS, Working Capital Solutions (WCS), supply chain finance program and EFS assets. We continue to evaluate strategic options to accelerate the further reduction in the size of GE Capital, some of which could have a material financial charge depending on the timing, negotiated terms and conditions of any ultimate arrangements.

In the second quarter of 2019, GE Capital received a $1.5 billion capital contribution from GE and expects to receive approximately $2.5 billion of additional capital contributions from GE by the end of 2019.

GE Capital made capital contributions to its insurance subsidiaries of $1.9 billion and $3.5 billion in the first quarters of 2019 and 2018, respectively, and expects to provide further capital contributions of approximately $9 billion through 2024. See the Capital Resources and Liquidity section for further information.

We annually perform premium deficiency testing across our run-off insurance portfolio and expect this year’s testing to be completed in the third quarter of 2019. We have observed a decline in market interest rates this year, which we expect will result in a lower discount rate and, holding all other assumptions constant, an increase in our future policy benefit reserves on a GAAP basis. In addition, it may also result in a lower discount rate under the statutory accounting rules that are relevant for determining the amount of capital to be contributed to our insurance subsidiaries.

As previously disclosed within the GAAP Reserve Sensitivities included in “Other Items” in our Annual Report on Form 10-K for the year ended December 31, 2018, a 25 basis point reduction in our discount rate, holding all other assumptions within our 2018 premium deficiency test constant, could increase our future policy benefit reserves on a GAAP basis by up to $1.0 billion (pre-tax).

Our discount rate is based upon the actual yields on our investment security portfolio and our forecasted reinvestment rate, which comprises the future rates at which we expect to invest proceeds from investment maturities and projected future capital contributions.  While the movement in market rates impacts the reinvestment rate, it does not typically impact the actual yield on our existing investments. Furthermore, our assumed reinvestment rate on future fixed income investments is based both on expected long-term average rates and current market interest rates.

For the reasons described above, a decline in market interest rates would not result in an equivalent decline in our discount rate assumption. Since our 2018 premium deficiency test, market interest rates have declined by approximately 75 basis points. This will impact a component of our discount rate only, and holding all other assumptions constant, would have increased our future policy benefit reserves on a GAAP basis by less than $1.0 billion (pre-tax).

There are many other assumptions that we are in the process of updating as part of our annual premium deficiency test that will be completed in the third quarter of 2019.

Effective January 1, 2019, the HEF business within our Capital segment was transferred to our Healthcare segment.

Refer to the Aviation and GECAS 737 MAX discussion in Consolidated Results for information regarding the Company's exposure related to the temporary fleet grounding of the Boeing 737 MAX.

16 2019 2Q FORM 10-Q

MD&A
SEGMENT OPERATIONS
 

 
Three months ended June 30
 
Six months ended June 30
(In billions)
2019

2018

 
2019

2018

 
 
 
 
 
 
GECAS
$
1.2

$
1.2

 
$
2.5

$
2.4

EFS
0.1

(0.1
)
 
0.1

(0.1
)
IF and WCS
0.2

0.4

 
0.5

0.7

Insurance
0.7

0.7

 
1.4

1.5

Other continuing operations

0.1

 

0.1

Total sub-segment revenues
$
2.3

$
2.4

 
$
4.5

$
4.6

GECAS
$
0.3

$
0.3

 
$
0.6

$
0.6

EFS
0.1


 
0.1


IF and WCS
0.1

0.1

 
0.1

0.2

Insurance


 


Other continuing operations(a)
(0.5
)
(0.6
)
 
(0.8
)
(1.1
)
Total sub-segment profit
$
(0.1
)
$
(0.2
)
 
$

$
(0.4
)
 
June 30, 2019
December 31, 2018
GE Capital debt to equity ratio
4.5:1
5.7:1
(a) Other continuing operations is primarily driven by excess interest costs from debt previously allocated to assets that have been sold as part of the GE Capital Exit Plan (our plan announced in 2015 to reduce the size of our financial services businesses), preferred stock dividend costs and interest costs not allocated to GE Capital segments, which are driven by GE Capital’s interest allocation process. Interest costs are allocated to GE Capital segments based on the tenor of their assets using the market rate at the time of origination. Debt on the GE Capital balance sheet was issued based on the profile of our balance sheet prior to the decision in 2015 to strategically reduce the size of GE Capital. It included long-dated maturities that are no longer consistent with a much smaller business. As a result, actual interest expense is higher than interest expense allocated to the remaining GE Capital segments. Preferred stock dividend costs will become a GE obligation in January 2021 as the internal preferred stock issued by GE Capital to GE under which GE Capital pays preferred stock dividends to GE to fund GE preferred stock dividends will convert into common equity. See Note 15 to the consolidated financial statements for further information on GE and GE Capital preferred stock. The excess interest costs from debt previously allocated to assets that have been sold are expected to run off by 2020. In addition, we anticipate unallocated interest costs to decline gradually as debt matures and/or is refinanced.
For the three months ended June 30, 2019, Capital revenues decreased $ 0.1 billion, or 4% , primarily due to volume declines, partially offset by higher gains and lower impairments.
Capital losses decreased $ 0.1 billion, or 57% , primarily due to higher gains, lower impairments, higher tax benefits and lower excess interest costs, partially offset by volume declines. Gains were $0.2 billion and $0.1 billion in the second quarters of 2019 and 2018, respectively, which primarily related to sales of GECAS aircraft and engines resulting in gains of $0.1 billion in both 2019 and 2018 and the sale of an equity method investment resulting in a gain of $0.1 billion in 2019 at EFS.

For the six months ended June 30, 2019, Capital revenues decreased $ 0.1 billion, or 1% , primarily due to volume declines, partially offset by higher gains and lower impairments.
Capital losses decreased $ 0.5 billion primarily due to higher gains, lower excess interest costs, tax law changes and lower impairments. Gains were $0.4 billion and $0.2 billion in the first half of 2019 and 2018, respectively, which primarily related to sales of GECAS aircraft and engines resulting in gains of $0.2 billion and $0.1 billion in the first half of 2019 and 2018 and the sale of an equity method investment resulting in a gain of $0.1 billion in 2019 at EFS.
CORPORATE ITEMS AND ELIMINATIONS
 
Three months ended June 30
 
Six months ended June 30
(In millions)
2019

2018

 
2019

2018

 
 
 
 
 
 
Revenues
 
 
 
 
 
Eliminations and other
$
(561
)
$
(462
)
 
$
(910
)
$
(833
)
Total Corporate Items and Eliminations
$
(561
)
$
(462
)
 
$
(910
)
$
(833
)
 
 
 
 
 
 
Operating profit (cost)
 
 
 
 
 
Gains (losses) on disposals and held for sale businesses
$
(116
)
$
329

 
$
250

$
263

Restructuring and other charges(a)
(328
)
(462
)
 
(567
)
(800
)
Unrealized gains (losses)
(51
)
266

 
(38
)
266

Goodwill impairment (Note 8)
(744
)

 
(744
)

Adjusted total corporate costs (operating) (Non-GAAP)
(462
)
(356
)
 
(809
)
(614
)
Total Corporate Items and Eliminations (GAAP)
$
(1,700
)
$
(222
)
 
$
(1,909
)
$
(886
)
(a) Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment profit for our Oil & Gas segment.

2019 2Q FORM 10-Q 17

MD&A
CORPORATE ITEMS AND ELIMINATIONS

Unrealized gains (losses) are related to our retained Wabtec equity investment for the three and six months ended June 30, 2019, and to our Pivotal software equity investment for the three months ended June 30, 2018.

For the three months ended June 30, 2019 , revenues decreased by $0.1 billion, primarily as a result of a $0.3 billion decrease in revenue related to our Lighting business, partially offset by a $0.1 billion increase in inter-segment eliminations.

Operating costs increased $1.5 billion, primarily as a result of a goodwill impairment charge of $0.7 billion related to our Renewable Energy segment in the second quarter of 2019, and $0.4 billion of higher net losses from disposed or held for sale businesses. These higher net losses primarily relate to the nonrecurrence of a $0.3 billion gain from the sale of our Industrial Solutions business to ABB in the second quarter of 2018 and a $0.1 billion realized loss on our Wabtec investment in the second quarter of 2019. Operating costs also increased as a result of $0.3 billion of higher unrealized losses due to the nonrecurrence of a $0.3 billion unrealized gain related to our equity investment in Pivotal Software in the second quarter of 2018, and a $0.1 billion unrealized loss related to our equity investment in Wabtec in the second quarter of 2019. These increases were partially offset by $0.1 billion of lower restructuring and other charges. In addition, adjusted total corporate costs* increased $0.1 billion due to an increase of $0.1 billion in costs associated with existing environmental, health and safety matters in the second quarter of 2019, and the nonrecurrence of gains associated with the sale of intangible assets of $0.1 billion in the second quarter of 2018.

For the six months ended June 30, 2019 , revenues decreased by $0.1 billion, primarily as a result of a $0.4 billion decrease in revenue related to our Lighting business partly offset by a $0.2 billion increase in inter-segment eliminations.

Operating costs increased $1.0 billion, primarily as a result of a goodwill impairment charge of $0.7 billion related to our Renewable Energy segment in the second quarter of 2019, higher unrealized losses, primarily due to the nonrecurrence of a $0.3 billion unrealized gain related to our equity investment in Pivotal Software in the second quarter of 2018. These increases were partially offset by $0.2 billion of lower restructuring and other charges primarily related to our Power segment. In addition, adjusted total corporate costs* increased $0.2 billion due to a $0.1 billion increase in costs associated with existing environmental, health and safety matters in the second quarter of 2019, and the nonrecurrence of gains associated with the sale of intangible assets of $0.1 billion in the six months ended June 30, 2018 .

Excluding gains (losses) on disposals and held for sale businesses, restructuring and other charges, unrealized gains (losses) and goodwill impairment in the above table, adjusted total corporate costs (operating)* were $462 million and $809 million for the three and six months ended June 30, 2019, respectively, and $356 million and $614 million for the three and six months ended June 30, 2018, respectively. We believe that adjusting corporate costs* to exclude the effects of items that are not closely associated with ongoing corporate operations provides management and investors with a meaningful measure that increases the period-to-period comparability of our ongoing corporate costs.

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 acquisitions, and certain other asset write-downs such as those associated with product line exits. We continue to closely monitor the economic environment and expect to undertake further restructuring actions to more closely align our cost structure with earnings and cost reduction goals.

RESTRUCTURING & OTHER CHARGES
Three months ended June 30
 
Six months ended June 30
(In billions)
2019

2018

 
2019
2018
 
 
 
 
 
 
Workforce reductions
$
0.2

$
0.2

 
$
0.4

$
0.4

Plant closures & associated costs and other asset write-downs
0.1

0.3

 
$
0.2

0.5

Acquisition/disposition net charges
0.1

0.2

 
$
0.2

0.4

Total (including Oil & Gas)
$
0.4

$
0.7

 
$
0.8

$
1.3


For the three months ended June 30, 2019 , restructuring and other charges were $0.4 billion of which approximately $0.1 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 Corporate, Power and Oil & Gas. Cash expenditures for restructuring and other charges were approximately $0.4 billion for the three months ended June 30, 2019 . Of the total $0.4 billion restructuring and other charges, $0.1 billion was recorded in the Oil & Gas segment, which amounted to $0.1 billion net of noncontrolling interest.

For the three months ended June 30, 2018 , restructuring and other charges were $0.7 billion of which approximately $0.2 billion was reported in cost of products/services, $0.4 billion was reported in SG&A. These activities were primarily at Corporate, Oil & Gas, and Power. Cash expenditures for restructuring and other charges were approximately $0.4 billion for the three months ended June 30, 2018 . Of the total $0.7 billion restructuring and other charges, $0.2 billion was recorded in the Oil & Gas segment, which amounted to $0.1 billion net of noncontrolling interest.




*Non-GAAP Financial Measure

18 2019 2Q FORM 10-Q

MD&A
CORPORATE ITEMS AND ELIMINATIONS

For the six months ended June 30, 2019 , restructuring and other charges were $0.8 billion of which approximately $0.2 billion was reported in cost of products/services and $0.5 billion was reported in SG&A. These activities were primarily at Corporate, Power and Oil & Gas. Cash expenditures for restructuring and other charges were approximately $0.8 billion for the six months ended June 30, 2019 . Of the total $0.8 billion restructuring and other charges, $0.2 billion was recorded in the Oil & Gas segment, which amounted to $0.1 billion net of noncontrolling interest.

For the six months ended June 30, 2018 , restructuring and other charges were $1.3 billion of which approximately $0.5 billion was reported in cost of products/services, $0.7 billion was reported in SG&A. These activities were primarily at Oil & Gas, Corporate and Power. Cash expenditures for restructuring and other charges were approximately $0.8 billion for the six months ended June 30, 2018 . Of the total $1.3 billion restructuring and other charges, $0.5 billion was recorded in the Oil & Gas segment, which amounted to $0.3 billion net of noncontrolling interest.

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.

For the three months ended June 30, 2019 , costs not included in segment results were $0.9 billion, of which $0.8 billion was related to the Renewable Energy segment primarily as a result of a goodwill impairment charge of $0.7 billion and $0.1 billion was related to the Power segment. There were no gains or losses not included in the segment results for the three months ended June 30, 2019. In addition to the segment results, there was $0.1 billion of costs and $0.1 billion of losses related to Corporate.

For the three months ended June 30, 2018 , costs not included in segment results were $0.3 billion, of which $0.1 billion was related to the Power segment and $0.1 billion was related to the Renewable Energy segment. Gains not included in segment results were $0.3 billion, of which $0.3 billion was related to the Power segment. In addition to the segment results, there was $0.2 billion of costs and $0.3 billion of gains related to Corporate.

For the six months ended June 30, 2019 , costs not included in segment results were $1.0 billion, of which $0.8 billion was related to the Renewable Energy segment primarily as a result of a goodwill impairment charge of $0.7 billion, $0.1 billion was related to the Power segment and $0.1 billion was related to the Healthcare segment. There were no gains or losses not included in the segment results for the six months ended June 30, 2019. In addition to the segment results, there was $0.3 billion of costs and $0.2 billion of gains related to Corporate.

For the six months ended June 30, 2018 , costs not included in segment results were $0.5 billion, of which $0.3 billion was related to the Power segment, $0.1 billion was related to the Renewable Energy segment, and $0.1 billion was related to the Healthcare segment. Gains not included in segment results were $0.3 billion, of which $0.3 billion was related to the Power segment. In addition to segment results, there was $0.3 billion of costs and $0.2 billion of gains related to Corporate.

OTHER CONSOLIDATED INFORMATION
INTEREST AND OTHER FINANCIAL CHARGES. Consolidated interest and other financial charges amounted to $1.0 billion and $1.3 billion for the three months ended June 30, 2019 and 2018, respectively, and $2.1 billion and $2.6 billion for the six months ended
June 30, 2019 and 2018, respectively.

GE interest and other financial charges (which excludes interest on assumed debt) amounted to $0.4 billion and $0.7 billion for the three months ended June 30, 2019 and 2018, respectively and $1.0 billion and $1.3 billion for the six months ended June 30, 2019 and 2018, respectively. The reductions were driven primarily by the reversal of $0.1 billion of accrued interest on tax liabilities due to the completion of the 2012-2013 Internal Revenue Service (IRS) audit in June 2019, as well as lower expense related to lower sales of GE long-term receivables to GE Capital. The primary components of GE interest and other financial charges are interest on short- and long-term borrowings and financing costs on sales of receivables. Total GE interest and other financial charges of $0.2 billion and $0.4 billion was recorded at Corporate and $0.3 billion and $0.3 billion was recorded by GE segments for the three months ended June 30, 2019 and 2018, respectively, and $0.5 billion and $0.7 billion was recorded at Corporate and $0.5 billion and $0.6 billion was recorded by GE segments for the six months ended June 30, 2019 and 2018, respectively.

GE Capital interest and other financial charges (which includes interest on debt assumed by GE) was $0.6 billion and $0.8 billion for the three months ended June 30, 2019 and 2018, respectively, and $1.3 billion and $1.6 billion for the six months ended June 30, 2019 and 2018, respectively. The decrease in 2019 compared to 2018 was primarily due to lower average borrowings balances due to maturities and lower net interest on assumed debt resulting from an increase in intercompany loans to GE which bear the right of offset (see the Borrowings section of Capital Resources and Liquidity for an explanation of assumed debt and right-of-offset loans), partially offset by an increase in average interest rates due to changes in market rates.

CONSOLIDATED INCOME TAXES. 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. 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. Finally, our tax returns are routinely audited, and settlements of issues raised in these audits sometimes affect our tax rates.


2019 2Q FORM 10-Q 19

MD&A
OTHER CONSOLIDATED INFORMATION

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, 2018 for further information.

For the three months ended June 30, 2019 , the consolidated income tax rate was 54.0% compared to 40.8% for the three months ended June 30, 2018. The positive rate for 2019 reflects a tax benefit on a pre-tax loss.

In June 2019, the IRS completed the audit of our consolidated U.S. income tax returns for 2012-2013, which resulted in a decrease in our balance of unrecognized tax benefits (i.e., the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements). The Company recognized a resulting non-cash continuing operations tax benefit of $0.4 billion plus an additional net interest benefit of $0.1 billion. Of these amounts, GE recorded $0.4 billion of tax benefits and $0.1 billion of net interest benefits, and GE Capital recorded insignificant amounts of tax and net interest benefits. These benefits resulted in an impact to continuing earnings per share of $0.06. GE Capital also recorded a non-cash benefit in discontinued operations of $0.3 billion of tax benefits and an insignificant amount of net interest benefits. These benefits resulted in an impact to discontinued earnings per share of $0.04. See Notes 2 and 14 of the consolidated financial statements for further information.

The consolidated provision (benefit) for income taxes was $(0.1) billion in the second quarter of 2019 and $0.5 billion in the second quarter of 2018 . The decrease in tax provision was primarily due to the completion of the above-referenced IRS audit of the 2012-2013 consolidated U.S. income tax returns, lower expense from global activities including the nonrecurrence of a 2018 charge associated with a change in deferred taxes resulting from the decision to execute an internal restructuring to separate the Healthcare business, the nonrecurrence of second quarter 2018 dispositions taxed above the statutory rate and the decrease in pre-tax income. This was partially offset by a lower benefit to adjust the year-to-date tax rate to be in-line with the lower projected full-year rate.

The consolidated tax provision (benefit) includes $(0.1) billion and $0.5 billion for GE (excluding GE Capital) for the second quarters of 2019 and 2018 , respectively.

For the six months ended June 30, 2019 , the consolidated income tax rate was 7.4% compared to 30.0% for the six months ended June 30, 2018.

The consolidated provision (benefit) for income taxes was $0.1 billion for the six months of 2019 and $0.5 billion for the six months of 2018 . The decrease in tax provision was primarily due to the completion of the above-referenced IRS audit of the 2012-2013 consolidated U.S. income tax returns, lower expense from global activities including the nonrecurrence of a 2018 charge associated with a change in deferred taxes resulting from the decision to execute an internal restructuring to separate the Healthcare business and the nonrecurrence of 2018 dispositions taxed above the statutory rate. This was partially offset by the lower benefit to adjust the year-to-date tax rate to be in-line with the lower projected full-year rate.

The consolidated tax provision (benefit) includes $0.2 billion and $0.6 billion for GE (excluding GE Capital) for the six months of 2019 and 2018 , respectively.

DISCONTINUED OPERATIONS. Discontinued operations primarily comprise our Transportation segment, 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, our mortgage portfolio in Poland and trailing liabilities associated with the sale of our GE Capital businesses.

In the first quarter of 2019, as a result of the spin-off and subsequent merger of our Transportation business with Wabtec, we recognized a gain of $3.5 billion ($2.5 billion after-tax) in discontinued operations. See Notes 2 and 3 to the consolidated financial statements for further information.

In June 2019, GE Capital recorded $0.3 billion of tax benefits and an insignificant amount of net interest benefits due to a decrease in our balance of unrecognized tax benefits. See the Consolidated Income Tax section above.

In January 2019, we announced an agreement in principle with the United States to settle the investigation by the U.S. Department of Justice (DOJ) regarding potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by WMC and GE Capital, and in April 2019, the parties entered into a definitive settlement agreement. Under the agreement, which concludes this investigation, GE, without admitting liability or wrongdoing, paid the United States a civil penalty of $1.5 billion .

The mortgage portfolio in Poland comprises floating rate residential mortgages, of which approximately 84% are denominated in Swiss Francs, as opposed to the local currency in Poland, which comprises the remaining 16%. At June 30, 2019, the portfolio had a carrying value of $2.6 billion with a 1.4% 90-day delinquency rate and an average loan to value ratio of 70%. The portfolio is recorded at fair value less cost to sell and includes a $0.3 billion impairment, which reflects our best estimate of the effects of potential legislative relief to borrowers and of ongoing litigation in Poland related to foreign currency-denominated mortgages. Future adverse developments in the potential for legislative relief or in litigation involving our subsidiary or other banks with similar portfolios could result in further impairment or other losses related to these loans in future reporting periods.


20 2019 2Q FORM 10-Q

MD&A
OTHER CONSOLIDATED INFORMATION

FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS
Three months ended June 30

Six months ended June 30
(In billions)
2019

2018


2019

2018

Earnings (loss) of discontinued operations, net of taxes
$
231

$
(63
)

$
270

$
(1,507
)
Gain (loss) on disposal, net of taxes



2,553

3

Earnings (loss) from discontinued operations, net of taxes
$
231

$
(63
)

$
2,823

$
(1,504
)

CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL POLICY. We intend to maintain a disciplined financial policy, targeting a sustainable credit rating in the Single-A range with a GE industrial net debt*/EBITDA ratio of less than 2.5x and a dividend in line with our peers over time, as well as a less than 4-to-1 debt-to-equity ratio for GE Capital. We remain on track to deliver against these leverage goals. GE industrial net debt* was $54.4 billion and $55.3 billion at June 30, 2019 and December 31, 2018, respectively.

GE realized $1.8 billion of proceeds in the second quarter of 2019 from the monetization of a portion of our stake in Wabtec, in addition to total proceeds of $3.3 billion realized in the first quarter of 2019, comprising $2.8 billion from the completion of the merger of our Transportation business with Wabtec and $0.4 billion of proceeds from the sale of our Digital ServiceMax business. We also expect to realize future proceeds from the sale of our BioPharma business within our Healthcare segment and the monetization of our remaining stakes in BHGE and Wabtec. At June 30, 2019, GE total cash, cash equivalents and restricted cash was $20.1 billion.

GE Capital generated approximately $1.6 billion from asset reductions for the six months ended June 30, 2019, as part of our plan to execute total asset reductions of approximately $10 billion in 2019 to meet our overall $25 billion target. In addition, in the second quarter of 2019, GE Capital received a $1.5 billion capital contribution from GE, and expects to receive approximately $2.5 billion of additional capital contributions from GE by the end of 2019. At June 30, 2019, GE Capital total cash, cash equivalents and restricted cash was $11.9 billion (excluding $0.6 billion classified within discontinued operations).

We maintain a strong focus on liquidity, and define our liquidity risk tolerance based on sources and uses to maintain a sufficient liquidity position to meet our obligations under both normal and stressed conditions. At both GE and GE Capital, we manage our liquidity to provide access to sufficient funding to meet our business needs and financial obligations throughout business cycles.

Our liquidity plans 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 funding debt maturities and insurance obligations, investing in research and development, and dividend payments.

Following is an overview of the primary sources of liquidity for GE and GE Capital as well as significant transactions that affect their respective liquidity positions. See the Liquidity Sources section for details of GE and GE Capital liquidity and the Statement of Cash Flows section for information regarding GE and GE Capital cash flow results.

GE LIQUIDITY. GE's primary sources of liquidity consist of cash and cash equivalents, free cash flows from our operating businesses, monetization of receivables, proceeds from announced dispositions, and short-term borrowing facilities (described below). 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.

As mentioned above, GE has available a variety of short-term borrowing facilities to fund its operations, including a commercial paper program, revolving credit facilities and short-term intercompany loans from GE Capital, which are generally repaid within the same quarter. See the Liquidity Sources section for details of our credit facilities and borrowing activity in our external short-term borrowing facilities.

GE CAPITAL LIQUIDITY. GE Capital’s primary sources of liquidity consist of cash and cash equivalents, cash generated from asset reductions and cash flows from our businesses. 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 2021. We expect to maintain an adequate liquidity position to fund our insurance obligations and debt maturities primarily as a result of cash generated from asset reductions and dispositions, as well as from repayments of intercompany loans and capital contributions from GE. 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 interest expense. See the Segment Operations - Capital section for further information regarding allocation of GE Capital interest expense to the GE Capital businesses.

GE Capital provided capital contributions to its insurance subsidiaries of approximately $1.9 billion and $3.5 billion in the first quarters of 2019 and 2018, respectively, and expects to provide further capital contributions of approximately $9 billion through 2024. These contributions are subject to ongoing monitoring by Kansas Insurance Department (KID), and the total amount to be contributed could increase or decrease, or the timing could be accelerated, based upon the results of reserve adequacy testing or a decision by KID to modify the schedule of contributions set forth in January 2018. GE maintains specified capital levels at these insurance subsidiaries under capital maintenance agreements. Going forward, we anticipate funding any capital needs for insurance through a combination of GE Capital asset sales, GE Capital liquidity, GE Capital future earnings and capital contributions from GE.

*Non-GAAP Financial Measure

2019 2Q FORM 10-Q 21

MD&A
CAPITAL RESOURCES AND LIQUIDITY

In January 2019, we announced an agreement in principle with the United States to settle the DOJ investigation regarding potential violations of FIRREA by WMC and GE Capital, and in April 2019, the parties entered into a definitive settlement agreement. Under the agreement, which concludes this investigation, GE, without admitting liability or wrongdoing, paid the United States a civil penalty of $1.5 billion , on behalf of itself and WMC. GE Capital concurrently paid $1.5 billion to GE to indemnify GE for this payment pursuant to the terms of an agreement between GE and GE Capital.

LIQUIDITY SOURCES. Consolidated cash, cash equivalents and restricted cash totaled $32.0 billion at June 30, 2019, comprising $13.1 billion and $18.8 billion held in the U.S. and outside the U.S., respectively. Cash held in non-US entities has generally been reinvested in active foreign business operations; however, substantially all of our unrepatriated earnings were subject to U.S. federal tax and, if there is a change in reinvestment, we would expect to be able to repatriate that cash (excluding amounts held in countries with currency controls) without additional federal tax cost. Any foreign withholding tax on a repatriation to the U.S. would potentially be partially offset by a U.S. foreign tax credit.

GE cash, cash equivalents and restricted cash totaled $20.1 billion at June 30, 2019, including $3.1 billion in BHGE, $2.7 billion of cash held in countries with currency control restrictions, and $0.6 billion of restricted use cash. Excluding these items, total GE cash and cash equivalents was $13.6 billion at June 30, 2019. BHGE cash can only be accessed by GE through the declaration of a dividend by BHGE's Board of Directors, our pro-rata share of BHGE stock buybacks, and settlements of any intercompany positions. Cash held in countries with currency control restrictions represents cash held in countries which 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, but which is available to fund operations and growth in these countries. Restricted use cash represents cash that is not available to fund operations, and primarily comprises collateral for receivables sold and funds restricted in connection with certain ongoing litigation matters .

GE Capital cash, cash equivalents and restricted cash totaled $11.9 billion at June 30, 2019 (excluding $0.6 billion classified within discontinued operations), including $0.9 billion which was subject to regulatory restrictions, primarily in insurance entities.

GE has in place committed credit lines which it may use from time to time to meet its short-term liquidity needs. The following table provides a summary of the committed and available credit lines at June 30, 2019.
GE COMMITTED AND AVAILABLE CREDIT FACILITIES (In billions)
June 30, 2019
December 31, 2018
 
 
 
Unused back-up revolving credit facility
$
20.0

$
20.0

Revolving credit facilities (exceeding one year)
18.9

23.9

Bilateral revolving credit facilities (364-day)
3.1

3.6

Total committed credit facilities
$
42.0

$
47.5

Less offset provisions
6.7

6.7

Total net available credit facilities
$
35.3

$
40.8


Included in our credit facilities is an unused $20.0 billion back-up syndicated credit facility extended by 36 banks, expiring in 2021, and an unused $14.8 billion syndicated credit facility extended by six banks, expiring in 2020. The commitments under these syndicated credit facilities may be reduced by up to $6.7 billion due to offset provisions for any bank that holds a commitment to lend under both facilities.

In 2019 and 2020, the amount committed and available under the syndicated credit facility expiring in 2020 will periodically be reduced by the greater of specified contractual commitment reductions or calculated commitment reductions, which is determined based on any potential specified issuances of equity and incurrences of incremental debt by GE or its subsidiaries, as well as a portion of industrial business disposition proceeds. In the first quarter of 2019, the amount committed and available under this facility was reduced by the calculated commitment reduction of $5.0 billion to $14.8 billion. Remaining contractual commitment reductions are $7.4 billion in the fourth quarter of 2019, $2.5 billion in the second quarter of 2020, and $5.0 billion in the fourth quarter of 2020. On March 12, 2019, GE entered into an amendment to the facility, which provides for a deferral of the timing of the fourth quarter 2019 and second quarter 2020 contractual commitment reductions if the BioPharma transaction does not close prior to those reduction dates. The $20 billion syndicated back-up revolving credit facility expiring in 2021 does not contain any contractual commitment reduction features.

Under the terms of an agreement between GE Capital and GE, GE Capital has the right to compel GE to borrow under all credit facilities except the syndicated credit facility expiring in 2020, and transfer the proceeds to GE Capital as intercompany loans, which would be subject to the same terms and conditions as those between GE and the lending banks. GE Capital has not exercised this right.


22 2019 2Q FORM 10-Q

MD&A
CAPITAL RESOURCES AND LIQUIDITY

The following table provides a summary of the activity in the primary external sources of short-term liquidity for GE in the second quarter of 2019 and 2018.
(In billions)
GE Commercial Paper
Revolving Credit Facilities
Total
 
 
 
 
2019
 
 
 
Average borrowings during the second quarter
$
3.0

$
1.3

$
4.3

Maximum borrowings outstanding during the second quarter
3.1

1.8

4.8

Ending balance at June 30
3.0


3.0

 
 
 
 
2018
 
 
 
Average borrowings during the second quarter
$
13.4

$
1.6

$
15.0

Maximum borrowings outstanding during the second quarter
15.8

2.0

17.3

Ending balance at June 30
3.0


3.0

Total average and maximum borrowings in the table above are calculated based on the daily outstanding balance of the sum of commercial paper and revolving credit facilities.

The reduction in total GE average and maximum short-term borrowings during the second quarter of 2019 compared to the second quarter of 2018 was primarily driven by holding more cash resulting from disposition proceeds.

In addition to its external liquidity sources, GE may from time to time enter into short-term intercompany loans from GE Capital to utilize GE Capital’s excess cash as an efficient source of liquidity. These loans are repaid within the same quarter. No such loans were made in the first six months of 2019.

BORROWINGS. Consolidated total borrowings were $105.8 billion and $109.9 billion at June 30, 2019 and December 31, 2018, respectively. The reduction from 2018 to 2019 was driven primarily by net repayments at GE Capital of $5.3 billion, including $4.3 billion of long-term debt maturities, partially offset by an increase of $1.0 billion in fair value adjustments for debt in fair value hedge relationships.

In 2015, senior unsecured notes and commercial paper were assumed by GE upon its merger with GE Capital. Under the conditions of the 2015 assumed debt agreement, GE Capital agreed to continue making required principal and interest payments on behalf of GE, resulting in the establishment of an intercompany receivable and payable between GE and GE Capital. In addition, GE Capital has periodically made intercompany loans to GE with maturity terms that mirror the assumed debt. As these loans qualify for right-of-offset presentation, they reduce the assumed debt intercompany receivable and payable between GE and GE Capital, as noted in the table below.

The following table provides a reconciliation of total short- and long-term borrowings as reported on the respective GE and GE Capital Statements of Financial Position to borrowings adjusted for assumed debt and intercompany loans:
June 30, 2019  (In billions)
GE

GE Capital

Consolidated(a)

 
 
 
 
Total short- and long-term borrowings
$
66.8

$
40.0

$
105.8

 
 
 
 
Debt assumed by GE from GE Capital
(35.0
)
35.0


Intercompany loans with right of offset
13.7

(13.7
)

Total intercompany payable (receivable) between GE and GE Capital
(21.2
)
21.2


 
 
 
 
Total borrowings adjusted for assumed debt and intercompany loans
$
45.6

$
61.2

$
105.8

(a)
Included elimination of other GE borrowings from GE Capital, primarily related to timing of cash settlements associated with GE receivables monetization programs.

When measuring the individual financial positions of GE and GE Capital, assumed debt should be considered a GE Capital debt obligation, and the intercompany loans with the right of offset mentioned above should be considered a GE debt obligation and a reduction of GE Capital’s total debt obligations. The following table illustrates the primary components of GE and GE Capital borrowings, adjusted for assumed debt and intercompany loans.

2019 2Q FORM 10-Q 23

MD&A
CAPITAL RESOURCES AND LIQUIDITY

GE  (In billions)
June 30, 2019

December 31,
2018

 
GE Capital (In billions)
June 30, 2019

December 31, 2018

Commercial paper
$
3.0

$
3.0

 
Commercial paper
$

$

GE senior notes
20.4

20.4

 
Senior and subordinated notes
37.3

39.1

Intercompany loans from
GE Capital
13.7

13.7

 
Senior and subordinated notes assumed by GE
35.0

36.3

Other GE borrowings
2.2

2.6

 
Intercompany loans to GE
(13.7
)
(13.7
)
Total adjusted borrowings ex. BHGE
$
39.3

$
39.7

 
Other GE Capital borrowings
2.7

3.9

Total BHGE borrowings
6.3

6.3

 
 
 
 
Total GE adjusted borrowings
$
45.6

$
46.0