General Electric (GE) has submitted a highly anticipated filing to the Securities and Exchange Commission (SEC), providing crucial information about the impending breakup of the company into two entities: GE Aerospace and GE Vernova. The filing, known as Form 10, is used for registering new securities and, in this case, pertains to GE Vernova, the power generation company that will be spun off from GE.
Debt-Free Start for GE Vernova
An intriguing detail gleaned from the 272-page Form 10 filing is that GE Vernova will commence its journey without any debt. In fact, it is expected to have a cash balance of approximately $4.2 billion at the time of the spinoff. This leaves GE Aerospace with $15 billion in cash but also incurs $18 billion in debt.
Furthermore, GE is utilizing its stake in GE Healthcare Technologies, which it retained when the business was spun out in 2023, to repay around $1 billion in debt.
It is worth mentioning that General Electric still has an underfunded pension. At the end of 2023, the pension deficit stood at approximately $8 billion. While underfunded pensions differ from debt in terms of how liabilities and assets are accounted for, Vernova will assume $1.6 billion of the deficit, while Aerospace will shoulder the remainder.
Financial Projections for GE Aerospace
With GE Aerospace anticipating an operating profit of roughly $6.3 billion in 2023, it is estimated that the earnings before interest, taxes, depreciation, and amortization (EBITDA) will amount to approximately $7.4 billion based on recent depreciation levels. Considering the debt, cash reserves, and pension deficit, the resulting financial leverage for the manufacturing company will be less than two times the EBITDA—not an overly significant burden.
Three Business Segments for Vernova
Once the separation is finalized in the coming weeks (exact date to be determined), GE Vernova will operate as an independent entity with three distinct business segments: Power, wind, and electrification.
The power segment pertains to the gas turbine business, while the wind segment focuses on wind turbine operations—a familiar area for investors. However, the spinoff introduces additional details about the electrification segment, which encompasses GE's electricity grid, power conversion, solar, storage, and related software businesses.
In conclusion, General Electric's filing has shed light on key aspects of the forthcoming breakup, highlighting the initial financial standing of GE Vernova and providing insights into the business segments of both GE Aerospace and GE Vernova. These developments mark an important milestone in GE's corporate restructuring efforts, signaling promising opportunities for their future growth and success.
Business Performance
Total Vernova revenue for 2023 was $33.2 billion, up about 11% on a comparable basis from 2022. Power generated about $17.4 billion in sales and an EBITDA margin of about 10%.
Comparing EBITDA Margins
The average EBITDA margin for non-financial companies in the S&P 500 is roughly 20%.
Wind generated $9.8 billion in 2023 sales and an EBITDA loss of $1 billion. The margin was minus 10.5%. That isn’t great, but the loss in 2022 was $1.7 billion. The electrification business generated $6.4 billion in sales and an EBITDA margin of 3.7%.
Vernova’s overall 2023 EBITDA was $807 million. The bottom-line loss was $474 million. That’s not great but a huge improvement from the 2022 net loss of $2.7 billion. Free cash flow in 2023 was positive, however, coming in at $422 million.
Sales Breakdown
Overall, GE said sales of services and products are split about 50/50 for the entire Vernova business.
The Vernova Opportunity
GE is positioning Vernova as the American company that can lead in the energy transition away from more carbon-intensive fuels. Natural gas generates less carbon dioxide—the main gas blamed for global climate change—than an equivalent amount of coal or oil. What’s more, turbines also can burn hydrogen which generates no carbon dioxide when burned.
GE believes power and power use markets generate some $1.4 trillion in annual sales that grow between 4% and 5% a year, on average. Vernova’s addressable portion of that is about $265 billion in annual sales giving the company a market share of about 12%. Vernova’s goal will be to increase market share—and profit margins in each of its businesses.
The Stock
GE stock wasn’t reacting much to the filing in premarket trading Friday. Coming into the session, GE shares have risen about 77% over the past 12 months outperforming the Nasdaq Composite by about 43 percentage points.
The number of shares outstanding for Vernova—and how many Vernova shares that GE shareholders will get for every share of GE held—hasn’t been finalized yet.
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