GE Annual Report 2022

You can also read my full letter and download GE's 2022 10-K at our investor website?here.

Dear Fellow Shareholder,

2022 was a year that propelled GE forward. Our changes and achievements were both small—one improvement to one process at one site—and big—successfully launching GE HealthCare as an independent company. Each was rooted in kaizen, “change to make it better,” and delivered on our purpose to build a world that works.

We entered the year with a clear strategy for GE’s path ahead and faced a world that looked quite different from what we expected. We experienced inflationary pressures not seen since the 1980s, geopolitical conflict, global supply chain challenges, and an enduring pandemic. In these times, we focused on “controlling the controllable,” as my mentor at Danaher and GE alumnus George Sherman used to say, and by doing so, we advanced our plans to create independent, industry-leading public?companies.

We maintained our day-to-day focus of meeting customer commitments and made significant operational progress while delivering strong financial performance. GE ended the year with solid revenue growth and margin expansion, and $4.8 billion of free cash flow.* GE Aerospace led the way with order and revenue growth above 20% for the year, and Power delivered double-digit order growth organically and achieved high-single-digit margins. And today, excluding GE HealthCare, higher-margin and more resilient services represent an even larger part of our portfolio at approximately 60% of our?revenue.

This was all made possible by our team’s embedding lean more deeply, putting our customers first, and embracing a culture of humility, transparency, and focus. At GE, we strive to make every hour of every day, every day of every week, every week of every month count, and I couldn’t be prouder of the way our employees have delivered for the company and for each other.

SOLID FOUNDATION

“Step by step and the bird makes its nest,” Abdelhamid Chemami, Operations and Maintenance Specialist at Gas Power, wrote to me in November of 2022 as GE marked the one-year anniversary of the announcement of our spin plans. This message stuck with me. Throughout our journey over the past four years—step by step—we have built a stronger GE.

Our first priority was to reduce our debt load, and we have done so by over $100 billion since 2018—no small feat. Often there were hard decisions to make, but those choices have given us optionality to play more offense both organically and inorganically. Today our balance sheet is solid, and we are operating from a position of strength.

We are also focused on changing the way we work. A lean mindset focuses on safety, quality, delivery, and cost (SQDC)—in that order—and gives us the tools and instincts to make the right decisions and necessary trade-offs. By deeply embedding lean principles and tools, we are creating a problem-solving culture and serving our customers?better.

While developing a lean mindset takes many years, we are gaining ground. At our GE Aerospace site in Greenville, South Carolina, our team performs complex machining operations and detailed inspections on high-pressure turbine blades. With a clear focus on reducing blade delivery lead time, the team created standard lines, which in turn improved part flow. This has reduced lead time by more than 10 days, with a clear target for more reduction to come, improving our operations for our customers and reducing inventory. This is just one of the countless examples of effective utilization of lean across GE.

Our progress on these priorities has made our foundation strong enough to launch three companies. More than a year after this announcement, the logic behind—and our conviction in—our historic transformation has only strengthened. Along the way, the feedback from our customers, investors, employees, and other stakeholders has been overwhelmingly positive.

Let’s take a closer look at our businesses.

GE AEROSPACE

At GE Aerospace, we have a tremendously talented team, a highly differentiated product and technology portfolio, leading positions in attractive commercial and military sectors, and a bold vision for the future of flight.

In 2022, nearly 3 billion people flew with our technology under wing. We have nearly 41,000 commercial engines** at work in more than 70% of global airlines, and a diverse portfolio of more than 26,000 military engines. We take that responsibility seriously, living our purpose to invent the future of flight, lift people up, and bring them home safely.

A highlight in 2022 was being with the team and our customers at the Farnborough International Airshow—the industry’s first major gathering since the pandemic began. As I looked across the tarmac and saw so many of our engines under wing, I felt a deep sense of pride and appreciation—for our employees who make it possible and for our customers who put their trust in us.

A Winning Value Proposition

It’s now been three years since the start of the pandemic, and the world is eager to travel. The commercial market recovery continues, and we expect total departures to return to 2019 levels in late 2023.

GE Aerospace is uniquely positioned to serve this market as customers expand and upgrade their fleets. Today we have new engines in each market segment that offer double-digit fuel burn reduction, lowering one of our customers’ greatest variable costs. In 2022, CFM International, our joint venture with Safran, was selected by Delta Air Lines to deliver 200 CFM LEAP-1B engines to power its new fleet of Boeing 737-10 aircraft, with options for up to 60 additional engines. We also signed an order with Qatar Airways for GE9X engines to propel up to 50 of its Boeing 777-8 Freighters, as well as a services agreement to cover the maintenance, repair, and overhaul (MRO) of these engines.

Commercial departures are a leading indicator of shop visit demand, which we expect to grow by double digits in the year ahead. We have a diversified services portfolio with an extensive MRO network, providing us with full flexibility to meet customer needs. This year, both Delta TechOps and Air France Industries KLM Engineering & Maintenance joined the global network of LEAP MRO facilities as we work to expand shop visit capacity for the rapidly growing fleet. This is one of many highlights of how we are continuing to serve our?customers.

On the military side, national defense budgets are growing. In the U.S. alone, the Department of Defense increased its fiscal 2023 budget by 4%. Our business is focused on winning core platforms. Our groundbreaking XA100 fighter engine is the first and only adaptive cycle engine to successfully complete testing with the U.S. Air Force, confirming our ability to deliver 30% more range and twice the thermal management capability of the incumbent engine on the F-35 aircraft. In the face of rising geopolitical threats, we stand ready to bring this innovative engine that pairs power with efficiency to the F-35 fighter jet before the end of this decade.

In the rotorcraft segment, we began testing our T901 turboshaft engine, selected by the U.S. Army to replace our ubiquitous T700 powering the Black Hawk and Apache helicopters as well as the Future Attack Reconnaissance Aircraft. And we continue to expand our international efforts with allied nations, for example powering South Korea’s KF-21 Boramae fighter with our F414 engines.

Delivering Strong Growth in 2022

Delivering on this unprecedented ramp starts with our team. The GE Aerospace leadership team balances unparalleled experience with fresh perspective, with nearly half of the leaders new to their roles in the past year.

We see an opportunity to accelerate our lean progress both within GE Aerospace and with our partners, suppliers, and customers. We have improved our operating rhythms, moving to a more frequent weekly and monthly cadence for each of our P&Ls. This helps us manage the business in real time and deliver better, faster, and more efficiently in a highly dynamic environment. To help improve engine delivery, for example, we reprioritized 20% of our existing engineers to solve problems closer to the point of impact and quicker through daily management. As a result, engine output was up year over year.

This year, we have taken steps to vertically integrate our P&Ls further, driving focus within the portfolio. For example, in our Commercial Engines and Services business, we are increasingly running our product lines as their own P&Ls, aligned with how our customers work with us. And we moved the Electric Power and Avionics teams to our Military business, aligning P&Ls with a strong military customer base. This?granularity is improving our process capabilities, especially within our supply chain, and driving accountability closer to the customer.

Taken together, lean and decentralization are making a real impact. For the year, revenue was up 23% organically,* driven by Commercial Services, with internal shop visits up over 20%. Margins were 18.3%, and free cash flow* was $4.9 billion, driven by earnings and working?capital. ?

Shaping the Future of Flight

GE Aerospace has a bright future and, as the company that defines flight for the next generation, we have not taken our eye off our mission to create a smarter and more efficient future of flight. We are continuing our efforts to support use of sustainable aviation fuel, or SAF, which is vital to enabling the airline industry to meet its decarbonization goals.

The revolutionary CFM RISE Technology Demonstration Program is the manifestation of the deep commitment GE and Safran share for achieving ambitious goals for a sustainable future. Leveraging an open fan architecture, hybrid electric capability, and key materials technologies like additive manufacturing and ceramic matrix composites (CMCs), this program is aiming to reduce fuel consumption and CO2 emissions by more than 20% compared with today’s most efficient engines. In 2022, we announced a new flight test program for a hydrogen combustion engine and an open fan flight test demonstration, both with Airbus. In hybrid electric, we are working with NASA and Boeing to fly a megawatt-class hybrid electric system. And our Avio Aero team will lead a European project to test a hybrid electric motor powered by hydrogen fuel cells.

Overall, GE Aerospace is an exceptional franchise. The quality of our technology and product development plans, the energy and collaboration of our team, and our unique positioning as the industry’s largest and youngest fleet give us confidence that this business will generate significant value for decades to come.

?GE VERNOVA

GE’s portfolio of energy businesses, now called GE Vernova, is helping the energy sector solve for sustainability, reliability, and affordability. With approximately 54,000 wind turbines and 7,000 gas turbines, GE Vernova helps generate 30% of the world’s electricity and has a meaningful role to play in the energy transition. Our experienced leadership team brings industry expertise to drive business improvement and we are excited about its planned future as a standalone company.

?At the Center of a Dynamic and Growing Market

GE Vernova sits at the center of a dynamic and growing market. External catalysts, including U.S. climate legislation and constraints in the European energy market, are increasing investment in new decarbonization technologies, an area where GE Vernova’s portfolio is uniquely positioned to lead. These catalysts also improve the long-term economic profile of the underlying businesses.

The U.S. Inflation Reduction Act is game-changing. It provides the certainty and stability our Renewable Energy customers need to make long-term investments, especially in onshore wind. GE Vernova’s decarbonization technologies are aligned with the $370 billion in tax credits the bill provides. Additionally, the Infrastructure Investment and Jobs Act provides at least $65 billion for investment in grid, nuclear, and breakthrough technologies.

With Europe seeking to address energy security concerns, there is renewed urgency to reduce emissions and make energy more resilient, and there is pragmatism in doing so. The new EU taxonomy, for example, reinforces the important roles of gas and nuclear alongside renewables. Our customers in the region are engaging our full technology roadmap, including wind, hydropower, gas fuel blends, and grid.

Global gas generation and utilization continues to grow, with strength in Europe and the U.S. While we saw volatility in gas prices and availability this year, gas remains a fuel of choice on dispatch curves globally to meet growing electricity demand, and we continue to plan for a gas turbine market of 25 to 30 gigawatts annually.

Making Progress and Preparing to Spin

While these trends provide tailwinds for GE Vernova over time, external pressures faced in 2022 impacted business performance.

Power delivered solid performance. Gas Power grew, driven by services strength and aeroderivative momentum. We continued to advance our turnaround at Power Conversion, focus on services at Steam Power, and deliver innovation at GE Hitachi Nuclear Energy. This progress enabled us to deliver double-digit orders growth organically, with growth across each business, achieve high-single-digit margins with significant margin expansion, and improve free cash flow* of $1.9 billion for the year. Services continues to be a major driver of our business performance and improvement, and we are well positioned for continued growth with our expanded HA fleet.

Scott Strazik, CEO of GE Vernova, who successfully led the Gas Power business, is now running a similar strategy at Renewable Energy.

Onshore Wind is an $8 billion annual revenue business, where we have added over 40 gigawatts to the grid. However, like most of the industry, this business has faced challenges due to the U.S. production tax credit (PTC) lapse, which reduced 2022 demand. Additionally, cost has been a challenge, with inflation and rapid innovation straining quality. We moved quickly to enhance product quality and reduce costs. We deployed corrective measures in our existing fleet to increase availability; reduced fixed costs, which included the difficult but necessary step of decreasing our global headcount; and are more selective on the projects we bid on to ensure we’re executing profitably.

Offshore Wind is transitioning to approximately $500 million in annual revenue and growing. We installed and commissioned 80 turbines for EDF on schedule, and now our focus shifts to our 7-gigawatt Haliade-X backlog.

Grid is a $3 billion annual revenue business, where market demand in automation and hardware remains strong. In the fourth quarter of 2022, we saw a major inflection point—Grid was profitable for the first time since 2018, reflecting our restructuring and selectivity efforts, and orders also grew significantly.

Lean continues to generate new opportunities for sustained improvement across GE Vernova and, in turn, for our customers. For example, Gas Power Services’ business playbook for planned maintenance outage events, called Live Outage, hosts all critical content and standard procedures that field crews need at their fingertips. Initially launched in the United States, at power plants powered by GE 7F gas turbines, it helped complete outages safely with a substantial reduction in cycle time, getting our customers’ turbine back online sooner. In 2022, Live Outage expanded to the Europe and the Middle East for GE 9F turbines.

?Leading a New Era of Energy

The planned spin-off of GE Vernova comes as the world faces a 50% increase in electricity demand over the next two decades. Against this backdrop, the strategic imperative to electrify and decarbonize the world is a challenge that GE Vernova was made to meet.

In the U.S., Power secured an order from Kindle Energy in Louisiana to provide H-Class power generation equipment. Initially fueled by natural gas, it has the ability to use up to 50% hydrogen by volume. In Vietnam, Power secured its first new 9HA.02 combined-cycle power plant order, which is expected to improve the reliability and stability of the energy grid to support renewables penetration. Renewable Energy, along with Invenergy, completed the largest wind farm in North America in a single phase. Notably, the Traverse Wind Energy Center is powered by more than 350 of our 2-megawatt platform turbines. Hydro Solutions signed orders with a total generating capacity of 7 gigawatts in 2022, and GE Hitachi Nuclear Energy is working with several customers, including Ontario Power Generation in Canada, to deploy advanced nuclear technologies like our BWRX-300 small modular reactor, which produces no carbon during operation.

I’m excited about our plans for the future of GE Vernova. Combining Renewable Energy, Power, and Digital into one business brings together unique experience, talented people, and a pioneering spirit that can power the future while also helping decarbonize the world.

GE HEALTHCARE

Big picture, GE HealthCare operates in an attractive, growing market, fueled by global trends, including the aging population, chronic disease, and the rise of the middle class in developing markets. The healthcare industry is also facing challenges in improving productivity, harnessing patient data more effectively, and extending care out of the hospital to alternative care sites. There is no medical technology company better suited to address these challenges.

GE HealthCare is a new company, and one with extensive scale—serving 1 billion patients across 2 billion procedures a year—and profound global reach, with almost 60% of annual sales outside the U.S. It also has more than 4 million equipment installations, and upgrades to the fleet help the business create value and stay close to customers. Investing $1 billion in research and development annually, GE HealthCare remains at the forefront of innovation.

With the spin, GE effectively distributed a $30 billion dividend in the form of GE HealthCare shares, while retaining an approximately 19.9% stake in the company. And shareholders in the new GE HealthCare are already seeing value unlocked as the independent company embarks on its important mission to create a world where healthcare has no limits.

CREATING VALUE TODAY AND TOMORROW

GE Board Member and former U.S. Secretary of Defense Ash Carter sadly passed away in October. We miss him every day and again express our deepest sympathies to his wife and family. Ash once said to me, “I like the ethos of GE,” and how GE sits on the same side of the table with customers when it comes to technology and efficient production. I couldn’t agree more. We approach our work with our customers as “one team with one fight,” as Ash would describe it. That was as true this past year as it was for the more than 130 years that came before it, and we will carry that ethos into our future.

2022 marked the beginning of a new era for GE. One where we are unleashing our full potential as three independent industry leaders. Creating a smarter and more efficient future of flight, driving decarbonization through the energy transition, and enabling precision care are big challenges, not for the faint of heart. I know our teams are ready to deliver.

*Non-GAAP Financial Measure

** Including GE and its joint venture partners