Carolina Dybeck Happe
Senior Vice President and Chief Financial Officer at General Electric
Thanks, Larry. We are continuing to make GE a focused, simpler and stronger high-tech industrial company. Closing the GECAS transaction was a significant milestone that helped us reduce gross debt by $87 billion since the end of 2018 and created an opportunity for us to make reporting changes to substantially simplify our financials and enhance transparency.
This quarter, we moved from a three column reporting format, which showed GE Industrial separately from our financial services operations to a simpler one column format. This means, we moved the remainder of capital, including EFS and run-off insurance into corporate. As we shared before, to provide a clear view of our core performance, our results will exclude run-off insurance from adjusted revenue, profit and free cash flow.
Let me outline what this means. Looking at the EPS and cash flow bridges provided at the right-hand side. Starting with adjusted EPS of $2.12 in the prior three column format. Now ex run-off insurance, adjusted EPS is $1.71 in the one column format. Looking at free cash flow. There are a couple more puts and takes. Starting with the prior three column format or what we call industrial. Adding back the cash impact of discontinued factoring gets us to $5.8 billion.
Transitioning to the one column format, add the impact of legacy Capital, which is largely interest expense and derivatives ex run-off insurance and we arrive at $2.6 billion of free cash flow ex discontinued factoring. Importantly, we expect the $3.2 billion legacy impact on cash flow to be close to $0.5 billion in 2022. This is driven by the significant debt reduction, closing lower interest expense and lower derivatives impact. For ease of comparison, we've provided detailed works, including quarterly financials on our IR website. Stepping back, after this transition quarter, our new simplified financials reflect the strategic actions we've taken to further focus on our industrial core.
Turning to Slide 6. I'll speak to all figures on the one column reporting format and an organic basis unless otherwise noted. Starting with orders. This quarter, we saw strength in aviation and healthcare. We are growing more profitable areas like services, which was up 7%. Meanwhile, equipment was down driven by large order timing at renewables, including the PTC and power. As we've mentioned, we're being more selective in the commercial deals we're pursuing. For the year, equipment and services orders were both up 12% organically with services growing in all businesses. We are confident with this revenue momentum heading into '22.
While adjusted revenue was down this quarter, services was a bright spot, up double-digits with growth in all businesses. We're managing through various market and operational dynamics, including supply chain challenges in all businesses, especially healthcare as well as the continued impact of increased selectivity. Examples here include lower turnkey scope at Power, pursuing deals at the right margins and the exit of new build coal. For the year, these dynamics played through with equipment down and services up.
This quarter, adjusted margins expanded 210 basis points, largely driven by aviation services. For the year, we achieved 400 basis points of margin expansion, driven by services growth, cost productivity, non-repeat of COVID contract charges and more than $1 billion of restructuring savings. At the macro level, inflation pressure continues. Finally, adjusted EPS was up significantly this quarter and for the year, primarily driven by margin expansion. In all, we're pleased with our orders, margins and earnings performance this year, while we continue to drive profitable top-line growth in the year ahead.
Strengthening our cash generation through improved working capital management and linearity has been a major focus of our transformation. This will ultimately drive more consistent, sustainable and higher cash flow. Thanks to the focus and discipline of our team, we generated $3.7 billion of free cash flow this quarter, mainly driven by earnings and working capital. This was down $2.1 billion year-over-year ex discontinued factoring. In addition to improve linearity throughout the year, the decline was primarily driven by the timing of Onshore Wind North America orders due to PTC and healthcare supply chain constraints.
As you know, we stopped factoring this year. The fourth quarter impact was roughly $2 billion, bringing the full year adjustment to approximately $5.1 billion. Working capital was the biggest driver of our free cash flow this quarter. I'll focus on two key dynamics. Receivables were a source of cash, mainly driven by continued operational rigor. For example, this quarter, daily management has improved DSO in three of our four businesses with total company down DSO of 12 days for the full year. On inventory, we reduced $0.5 billion mainly from renewables. This was due to seasonally higher deliveries and more rigorous material management driven by lean as we adjust for the 2022 market demand. We have more to do, but we're confident this will be the source of cash in '22.
For the year, free cash flow was $1.9 billion or $2.6 billion ex discontinued factoring. As previously discussed, the consolidation to one column resulted in a negative impact of $3.2 billion, mostly from interest and derivatives. When you add back the impact of discontinued factoring, we generated $5.8 billion of industrial free cash flow in '21. As Larry said earlier, we believe this best represents our operating performance for the year. And this is the number, which we will grow from in '22 and going forward. Allowance and discounts payments or AD&A were a net zero this quarter, which is $200 million better than we anticipated due to delayed aircraft deliveries. This resulted in total year '21 AD&A flow of a positive $500 million flat year-over-year.
Let's take a look at free cash flow by business for the year, ex factoring all periods. Aviation delivered an impressive $4.6 billion, up $2.6 billion. This was driven by services strength aligning with the market recovery, improved working capital including strong customer collections and timing of customer allowance payments. Healthcare delivered $2.7 billion, which was roughly flat ex biopharma. Higher earnings were offset by working capital pressure linked to supply chain constraints. Renewables was negative $1.2 billion versus breakeven last year. We saw a decline in the U.S. equipment orders due to PTC. The lower down payments drove a $1.5 billion of progress funds, while inventory and receivables substantially improved.
Total power generated $1.2 billion, up $600 million, mainly driven by improved earnings and working capital at Gas Power, including substantial progress payments for our derivative orders and backlog growth. This was partially offset by the impact of new build coal, which was about $500 million negative. Overall, our terms are driving working capital improvements, which coupled with higher earnings, will continue to drive measurable free cash flow growth in '22.
Turning to Slide 8. We've made substantial progress strengthening our long-term financial position. On leverage, our rating agency aligned net debt EBITDA was 5.4 times in '21, improving from our estimate of approximately 6 times, driven by higher debt reduction. Using a market aligned measure, which includes bonds, preferreds and cash, as you can see on the slide, we ended '21 at 3.3 times and expect to be around 2 times at the end of '22. We expect our leverage to continue to decrease with a clear focus on improving operations and thereby EBITDA.
Additionally, we have significant sources available growing free cash flow, cash on hand of $16 billion and our stakes in AerCap and Baker Hughes, totaling $13 billion. We've continued to derisk and actively manage our pension. We decreased our after-tax deficit by $8 billion, ending the year at $12 billion, driven by strong asset returns and a favorable interest rate environment. Going forward, the strength of our balance sheet positions us well to create three independent investment-grade and industry-leading companies and enables us to invest for growth.
Moving to our business results, which I'll also speak to on an organic basis. First on Aviation. Our strong results reflect our underlying business fundamentals and a recovery in commercial market. For the quarter, orders grew double-digits. Both Commercial Engines and Services were up substantially again year-over-year. Military orders were down, largely due to tough comp when we had large wins on F404 and F414 last year, but demand remained strong. Revenue was up, Commercial Services grew significantly. Shop visits was up over 40% again year-over-year and mid-single-digit sequentially. Overall, scope improved sequentially. MRO purchases were seasonally higher in the fourth quarter. And as usual, we expect activity to decline significantly in the first quarter.
Commercial Engines was down double-digits. The driver here were two-fold. First, mix continues to shift to more NPI units, specifically LEAP with lower production rates on GEnx. Second, we're navigating continued supply chain and labor availability challenges. Military was also down as output challenges continue, but we are seeing significantly higher first-time yields in the areas where we have fully implemented lean and sustainable process improvements. It's taking more time to realize the process benefits across all production lines. We'll see more tangible and visible progress particularly through the second half of '22.
Segment margin expanded significantly year-over-year and sequentially. This was primarily driven by Commercial Services growth and favorable Commercial Engines mix. For the year, while Aviation revenue was slightly below our expectations, margin expanded to 13.5% reported. This leverage was supported by solid services and shop visits increased 10% year-over-year and we reduced operational costs.
Looking at '22, given our strong fourth quarter margin and movement on Aviation in the first quarter, we expect margins closer to mid-teens driven by seasonal decreases in MRO buying behavior and the new engine ramp. Broadly speaking, we continue to evaluate and manage the impact of Omicron, our confident in the long-term fundamentals of this business.
Moving to Healthcare. Looking at our performance, market momentum continues to drive strong demand despite the industry-wide supply chain constraints. For the quarter, orders were up high-single-digit, both year-over-year and compared to '19 levels. This was driven by high-single-digit growth in Healthcare Systems and low-single-digit growth in PDx. Revenue was down with a mid-single-digit decline in Healthcare Systems. This more than offset the low-single-digit growth at PDx. Service revenue increased low-single-digits.
Industry-wide semiconductor, resin, parts and labor shortages continued across all modalities. Absent these shortages, meaning if we were able to fill all orders, we estimate that organic revenue growth would have been about 7 to 8 points higher in the fourth quarter or year-over-year the growth of 4% and about 3 to 4 points higher for the full year or growth of mid-single-digit. Supply chain challenges are expected to continue at least through the first half of '22, which we're actively managing. We are confident that these factors are temporary and the business should return to long-term sustainable growth.
We've seen elective procedures holding through the year end. While Omicron is having a more recent impact on procedure volumes, it is still too early to quantify, but we're encouraged to see hospitals better managing routine procedures along with the COVID cases. Segment margin declined year-over-year, largely driven by supply chain issues and inflation. Also recall that the fourth quarter was a difficult comp to 2020 as revenue began to rebound significantly from COVID lows. This was partially offset by productivity and higher PDx volume. In addition, we're seeing evidence of lean-driven operational improvement, including healthcare finance where our team is lean to reduce the quarter close process to five days down from 10 days just two years ago.
For the year, Healthcare delivered strong performance. We proactively managed sourcing and logistics as well as qualifying new parts, for example, to partially mitigate supply chain impact. Orders were up double-digits with strength in HCS and PDx. Revenue was up low-single-digits and margins expanded with 70 basis points. Overall, this strength has enabled us to increase our recent organic and inorganic investments. We continued to reinvest launching a significant number of exciting new products in MR, CT, X-ray, handheld ultrasound, interventional and digital. The innovation we deliver extends beyond clinical capabilities.
We also always consider how can we help customers make the most of their investments whether that's through efficient digital upgrades at AI, such as our AIR Recon DL or leveraging a platform like Revolution Apex CT to scale existing solutions without significant hardware changes. And on the inorganic side, we completed the acquisition of BK Medical in December, adding fast-growing surgical visualization assets to our $3 billion ultrasound business. Looking forward, Healthcare is well positioned for continued profitable growth, targeting 25 to 75 bps of margin expansion as we prepare to stand up the business as an independent company.
Turning to Renewables. As Larry said, we're focused on improving our performance in '22 and '23. Looking at the quarter, orders were down double-digits, driven largely by PTC uncertainty, delaying investments in the U.S. onshore equipment. Offshore was also down slightly despite several large orders, including Dogger Bank C this quarter. Revenue declined mid-single digits, driven by lower equipment deliveries at onshore and continued project selectivity at grid. Offshore was also lower, driven by project timing. Services partially offset these declines as repower revenue nearly doubled, even ex repower, Offshore Services grew double-digits for the year.
Segment margin declined over 500 basis points, largely due to onshore and grid. Onshore margins declined were negative, driven by our international business. We continue to experience challenge related to our new technology ramp as well as project execution and lower margins on older deals in the backlog, which will run off over the next couple of years. In the U.S., margins improved. This was due to continued productivity and higher repower sales, partially offset by lower volume.
At grid, cost actions were more than offset by continued volume declines, largely driven by selectivity and project costs. While both supply chain and inflation impacts were limited this quarter, rising inflation will be a bigger impact in 2022, as we have previously flagged. So for the year, we delivered double-digit order growth driven by offshore, while revenue and margin both declined. Long-term, we are firmly positioned to lead the energy transition, building on advanced technologies like the Haliade-X, which we'll begin delivering in '22.
Moving to Power. The team delivered strong performance this year, driven by operational improvements, especially at Gas Power. For the quarter, orders were down driven by Gas Power offsetting steam growth. Gas declined facing a tough comp and some customer timing changes. This quarter, we booked four HA units, some of which will run on hydrogen-blended natural gas. We see continued momentum on our HA with more than 20 tech selections for the year, which we'll likely manifest in orders in '22 and '23.
Steam orders were up across equipment and services, driven by the nuclear part of the Steam business. Revenue was down. Equipment was down due to fewer unit shipments, reduced turnkey scope at gas and steam's continued exit of new build coal. We're navigating supply chain constraints, which significantly impacted deliveries this quarter. Services was up. Gas was up double-digits with both CSA and transactional volume growth.
One reminder. Due to the aeroderivative joint venture with Baker being deconsolidated effective November 1, gas services revenue no longer includes the sales from the joint venture to Baker Hughes or about $1 billion -- $0.5 billion of lower reported annual revenue. Steam services was down on continued selectivity. Margins expanded year-over-year and were up sequentially, largely driven by Gas Power services. All businesses delivered positive margin this quarter.
For the year, orders were up low-single-digits. Gas orders were about flat with services offsetting equipment. We remain selective with disciplined underwriting. Margin in our gas equipment backlog increased by 2 points. And due to selectivity, 80% of our heavy-duty unit orders were equipment only in scope. Power revenue was down 4%. Services saw double-digit growth led by gas, while equipment was down with turnkey revenue about $1 billion lower year-over-year. Steam's coal equipment backlog also ended below $1 billion and power conversion grew double-digits. Margins improved more than 300 basis points. Gas has stabilized, achieving high-single-digit margins and power conversion achieved low-single-digit margins, reflecting operational improvement through the year.
Looking at '22, we see opportunities to expand margins and improve free cash flow as lean becomes further embedded and steam continues to exit new build coal. At gas, equipment revenue will increase driven by aeroderivative growth and heavy-duty normalizing. HA commissioned units will almost double by year end versus 2020, supporting future services and cash growth. We expect total power to achieve high-single-digit margins in 2023.
Now closing with corporate. As we've discussed, we're driving leaner processes and decentralization to reduce functional and operational costs. Compared to our outlook on the prior reporting basis, adjusted corporate costs was less than $1 billion in '21, down 30%. Adjusted capital net income was negative $350 million, better than our most recent guide of negative $500 million. As we've mentioned earlier, on our one column basis, Capital is now part of corporate. So for the year, adjusted corporate cost was $1.2 billion with functions and operations continuing to improve.
I'm encouraged at digital with double-digit order growth in the fourth quarter and exciting innovations such as autonomous tuning software. This applies AI to continuously optimize any gas turbine to operate with the ideal combustion and reduce emissions and fuel consumption. At insurance, which is included -- excluded from our organic results as this is a run-off business, net income was approximately $450 million. This was up significantly, driven primarily by strong investment results and favorable claim experience in our LTC portfolio, partially offset by higher paid claims in our life portfolio.
Consistent with prior years, we will finalize our annual statutory cash flow test in the first quarter. We currently anticipate that this will be in line with our permitted practice requirements. In discontinued operations, we have our run-off Polish BPH mortgage portfolio with a current gross balance of $2.4 billion. This quarter, we recorded charges of about $200 million, mainly driven by more adverse results in the ongoing litigation with borrowers. This brings the total estimate of losses in connection with this litigation to approximately $800 million.
In all, this quarter marked a strong close to 2021. As you can see, lean and decentralization are not just operational levers, they are becoming embedded in our culture and in the business. These operational improvements drove margin expansion, EPS growth and free cash flow generation for the year, and we are continuing to improve. Our strong performance is enabling us to play more offense and drive sustainable long-term profitable growth.
Now Larry, back to you.