Business context and reporting period
General Electric Company’s Form 10-K covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. GE operates industrial businesses and GE Capital across eight reported segments, serving customers in more than 100 countries. Approximately 53% of 2013 revenue came from outside the United States.
Financial results and key metrics
Unless otherwise noted, amounts are U.S. dollars. Revenue and profit comparisons are for fiscal 2013 versus 2012.
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Consolidated revenue and other income | $146.0 billion | $146.7 billion | Down 0.4% |
| Earnings from continuing operations attributable to GE | $15.2 billion | $14.6 billion | Up 4% |
| Operating earnings (non-GAAP) | $16.9 billion | $16.0 billion | Up 5% |
| Diluted EPS from continuing operations | $1.47 | $1.38 | Up 7% |
| Operating diluted EPS (non-GAAP) | $1.64 | $1.51 | Up 9% |
| Net earnings attributable to GE | $13.1 billion | $13.6 billion | Down 4%, reflecting larger discontinued-operations losses |
| GE industrial segment revenue / profit | $103.6 billion / $16.2 billion | $102.8 billion / $15.5 billion | Revenue up 1%; profit up 5% |
| GE Capital revenue / segment profit | $44.1 billion / $8.3 billion | $45.4 billion / $7.3 billion | Revenue down 3%; profit up 12% |
Fourth-quarter context: The unaudited quarterly table reports earnings from continuing operations of $5.15 billion in Q4 2013 versus $4.45 billion in Q4 2012, and net earnings attributable to GE of $3.21 billion versus $4.01 billion. Q4 discontinued-operations loss was $1.79 billion versus $0.30 billion. The filing’s quarterly table does not provide a clear consolidated fourth-quarter revenue figure.
- Cash flow: Consolidated cash from operating activities was $28.6 billion, down from $31.3 billion. Investing activities provided $29.1 billion, including $16.7 billion from the NBCUniversal interest sale; financing activities used $45.6 billion. GE industrial cash from operating activities, a non-GAAP measure excluding GE Capital dividends, was $8.3 billion versus $11.4 billion.
- Cash and liquidity: Cash and equivalents were $88.6 billion at year-end, including $13.7 billion at GE and $74.9 billion at GE Capital. Committed unused credit lines totaled $47.8 billion. Some cash was held overseas or in regulated entities and may not be freely available for all uses.
- Debt and funding: Consolidated short-term borrowings were $77.9 billion; long-term borrowings were $221.7 billion; non-recourse securitization borrowings were $30.1 billion; and bank deposits were $53.4 billion. The filing reports total borrowings and bank deposits of $383.0 billion. GE Capital’s adjusted debt-to-equity ratio, net of cash and treating hybrid debt as equity, was 3.19:1; its reported debt-to-equity ratio was 4.49:1.
- Credit portfolio: GE Capital financing receivables before allowance were $258.2 billion, down from $273.1 billion. The allowance for losses was $5.2 billion, or 2.0% of receivables, versus $4.9 billion, or 1.8%. Nonearning receivables were $7.2 billion, 2.8% of the portfolio, broadly unchanged as a percentage.
- Capital returns: GE declared $8.1 billion of dividends; common dividends per share rose 13% to $0.79. GE repurchased approximately $10.4 billion of shares on a book basis during 2013.
Material changes versus the prior comparable period
- Industrial segment profit rose, led by Aviation (+16%), Oil & Gas (+13%), Transportation (+13%) and Appliances & Lighting (+23%). Power & Water profit fell 8% as lower equipment volume and weaker productivity outweighed pricing and other income; Energy Management profit fell 16%.
- GE Capital continued to shrink its balance sheet: ending net investment excluding cash declined to $380 billion, while its stated target range was $300–$350 billion. Lower asset levels reduced revenue, while higher gains and dispositions supported earnings.
- GE completed the sale of its remaining 49% NBCUniversal interest to Comcast for total consideration of $16.7 billion, including cash, guaranteed debt and preferred stock. GE also acquired Avio’s aviation business for $4.4 billion and Lufkin Industries for $3.3 billion.
- GE Capital’s financing receivables decreased $14.9 billion, primarily due to dispositions, write-offs, collections exceeding originations and currency effects. Borrowings and bank deposits declined from $413.8 billion to $383.0 billion.
- The GE Pension Plan’s GAAP underfunding narrowed to $4.7 billion from $13.3 billion, principally because of higher discount rates and strong investment returns. GE shareowners’ equity increased to $130.6 billion from $123.0 billion.
Outlook, management commentary, risks and unusual items
- Outlook: Management said GE began 2014 with a record infrastructure backlog of $244.1 billion and expected continued industrial revenue and earnings growth. Orders in the backlog may be cancelled or deferred, sometimes subject to penalties.
- GE Capital strategy: Management aims to reduce ending net investment to $300–$350 billion, focus on selected businesses, pay down debt and diversify funding. It cautioned that exits from non-core businesses may reduce near-term earnings. GE announced plans for a 2014 IPO of up to 20% of North American Retail Finance, with a planned 2015 split-off or other exit; completion was not assured.
- Regulation and funding: GE Capital was designated a nonbank systemically important financial institution in 2013 and expected enhanced capital, liquidity, stress-testing and resolution-planning requirements. GE relies on commercial paper and unsecured debt markets to refinance maturities; market disruption, higher funding costs or ratings downgrades could affect liquidity and earnings.
- Tax and pension: The consolidated effective tax rate was 4.2%, compared with 14.6% in 2012, reflecting lower-taxed global earnings, the Cembra sale and favorable audit resolutions. Management warned that failure to extend the U.S. tax provision for certain foreign financial-services income could significantly raise the effective tax rate after 2014. GE expected approximately $0.5 billion of GE Pension Plan contributions in 2014 and estimated a preliminary required contribution of about $2.4 billion for 2015.
- Discontinued operations and reserves: Discontinued operations produced a $2.1 billion after-tax loss, including a $1.6 billion after-tax reserve increase related primarily to GE Money Japan excess-interest claims, a $0.2 billion increase for WMC loan-repurchase obligations and a $0.2 billion loss on the planned Consumer Russia disposal. In February 2014, GE agreed to pay approximately $1.7 billion to extinguish the Japan obligation.
- Legal exposure: WMC had $0.8 billion reserved for pending and estimated future loan-repurchase claims, against $5.6 billion of pending claims. Separate litigation claims covered approximately $6.8 billion of loans and were unreserved; GE said a meaningful estimate of possible loss could not be made. Outcomes and potential losses remain uncertain.
- Other sensitivities: GE disclosed aircraft lease impairments of approximately $0.7 billion, commercial real estate valuation uncertainty, a $0.6 billion increase to the consumer revolving-credit allowance from a revised estimation approach, and $0.4 billion of annual environmental remediation spending. GE’s pension costs, loan-loss estimates, long-term contract profitability and fair-value measurements depend on assumptions that may change.
Important facts for investors to verify
- Reconcile GAAP continuing earnings and EPS with management’s non-GAAP operating earnings and EPS, including the pension-cost adjustments.
- Review the drivers and repeatability of GE Capital’s gains, tax benefits and dispositions, and track progress toward the $300–$350 billion ending-net-investment target.
- Assess GE Capital’s refinancing needs, maturity schedule, commercial-paper access, available liquidity and the effects of evolving SIFI capital and liquidity rules.
- Monitor the WMC litigation and reserves, the Japan settlement, and other discontinued-operations exposures; the filing says some potential losses cannot be reasonably estimated.
- Check execution of the Retail Finance exit plan and whether backlog converts to revenue, given possible cancellations or deferrals.
- Evaluate pension funding requirements, tax benefits dependent on foreign earnings and law, and the sensitivity of credit and real estate reserves to economic conditions.