GE 2012 First-Quarter 10-Q Summary
Reporting period: Three months ended March 31, 2012; filed May 4, 2012. GE reports industrial operations and GE Capital (GECC) separately as well as on a consolidated basis. Unless indicated otherwise, dollar amounts are in U.S. dollars.
Financial results and position
| Metric | Q1 2012 | Q1 2011 or prior period |
|---|---|---|
| Consolidated revenue and other income | $35.2 billion | $38.3 billion; down 8% |
| Earnings from continuing operations attributable to GE | $3.251 billion | $3.398 billion; down 4% |
| Net earnings attributable to GE common shareowners | $3.034 billion; $0.29 per share | $3.358 billion; $0.31 diluted per share |
| Operating earnings and operating EPS (non-GAAP) | $3.587 billion; $0.34 | $3.561 billion; $0.33 |
| Cash from operating activities, consolidated | $6.466 billion | $7.696 billion |
| Cash from operating activities, GE industrial | $2.059 billion | $1.684 billion |
| Total assets / total liabilities | $707.7 billion / $586.1 billion | Assets $717.2 billion / liabilities $599.1 billion at Dec. 31, 2011 |
| Total equity | $121.6 billion | $118.1 billion at Dec. 31, 2011 |
| Cash and equivalents, consolidated | $83.7 billion | $84.5 billion at Dec. 31, 2011 |
The filing does not provide a single consolidated operating-margin measure. Industrial segment profit was $3.269 billion on $23.720 billion of segment revenue, versus $2.984 billion on $20.799 billion a year earlier. GE Capital segment profit was $1.792 billion, essentially flat, while its revenue declined to $11.442 billion from $13.036 billion.
- Debt and funding: Consolidated short-term borrowings were $138.7 billion and long-term borrowings $233.5 billion. GECC borrowings, non-recourse securitization debt and bank deposits totaled $431.9 billion, down from $443.1 billion at year-end. GECC’s financing receivables, net, were $281.4 billion, versus $288.8 billion.
- Credit quality: GECC’s allowance for financing-receivable losses was $5.7 billion, down from $6.2 billion. Nonearning receivables were $8.5 billion, or 3.0% of receivables, approximately unchanged as a percentage from year-end.
- Liquidity: GE reported $83.7 billion in consolidated cash and equivalents, a $3.6 billion liquid-investment portfolio and $51.6 billion in committed unused credit lines. About $76.2 billion of cash was held at GECC; some GECC cash is subject to regulatory restrictions.
- Dividends: GE declared $0.17 per common share, compared with $0.14 in Q1 2011; cash dividends paid totaled $1.799 billion.
Material changes and unusual items
- Revenue fell mainly because of dispositions, a stronger U.S. dollar and the absence of prior-year items, partly offset by organic industrial growth. Excluding NBCU, revenue was 4% higher year over year; industrial sales rose 7%.
- GE’s reported continuing earnings fell 4%, while non-GAAP operating earnings rose 1%. Operating EPS excluding one-time items increased 17%, according to management.
- Net earnings included a $217 million after-tax loss from discontinued operations, compared with $35 million of earnings in Q1 2011. Consumer Ireland contributed a $188 million after-tax loss, including a $147 million disposal loss.
- Q1 2011 results included a $3.557 billion pre-tax NBC Universal disposal gain and a $690 million pre-tax gain from the sale of part of GE Capital’s Garanti Bank investment. Their non-repeat materially affects year-over-year revenue, profit and tax comparisons.
- GE recorded a $274 million pre-tax gain ($152 million after tax) on the contribution of part of its civil avionics business to a joint venture. Q1 2012 also included higher pension costs; the consolidated effective tax rate was 16.2%, versus 53.0% in Q1 2011, largely reflecting the prior-year NBCU-related tax expense.
- Industrial growth was strongest in Energy Infrastructure and Transportation: revenue increased 18% and 41%, respectively. Home & Business Solutions segment profit declined 11%; GE Capital revenue declined 12%, while segment profit was flat.
Outlook, risks and contingencies
- The filing provides no quantified company-wide revenue or earnings guidance. Management described ongoing efforts to reduce GE Capital’s asset levels; GECC financing-receivable collections exceeded originations by $6.6 billion in the quarter. Management said it did not anticipate material operating, funding or liquidity impacts from the subsequent Moody’s downgrade.
- On April 3, 2012, after quarter-end, Moody’s downgraded GE’s senior unsecured rating one notch to Aa3 and GECC’s two notches to A1; short-term ratings were affirmed. The downgrade made substantially all of certain GECC-guaranteed investment contracts redeemable. Holders redeemed $2.1 billion on May 1; $0.8 billion remained within its contractual redemption period as of May 2. Other downgrade-related cash and collateral impacts were less than $0.6 billion.
- GECC’s planned resumption of dividends to GE is subject to Federal Reserve review. GE also cited cash flow, earnings and other conditions as factors affecting its ability to maintain the planned common dividend.
- Key business risks include financial-market volatility and European sovereign-debt developments; GECC funding access, funding costs and planned asset reductions; credit defaults tied to housing and employment; demand in GE’s served industries; regulation; litigation; and execution of acquisitions, joint ventures and dispositions.
- Japan consumer claims: GE held a $496 million reserve for excess-interest refund claims at March 31. Management estimated that a 20% adverse change in the assumed decline in incoming claims could increase the reserve by about $110 million; future claims remain difficult to predict.
- WMC mortgage claims: Pending representation-and-warranty repurchase claims were $562 million at March 31, against a $140 million reserve. GE reported an additional $689 million of claims received after quarter-end through May 3, and noted litigation and uncertainty over future claims and losses.
- Other exposures: Unrecognized tax benefits were $5.229 billion; the company estimated a possible $0–$850 million reduction over the next 12 months. GE said environmental remediation exposure could exceed recorded accruals, but could not reasonably estimate the possible excess.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with management’s non-GAAP operating earnings measures, including the treatment of pension costs and one-time items.
- Assess whether industrial growth and GECC portfolio improvement can offset lower GE Capital revenue and continued asset reduction.
- Review GECC liquidity and refinancing needs in light of debt maturities, ratings-related contract provisions and the GIC redemptions.
- Track reserve adequacy and claim developments for Japanese excess-interest refunds and WMC, including post-quarter claims and litigation.
- Monitor Consumer Ireland disposal results, the tax position and the timing of any GECC dividends, as well as the risks to GE’s dividend plan.