General Electric Company — 2009 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Amounts are in U.S. dollars; financial figures are generally in millions unless noted. GE reports industrial businesses separately from GE Capital (GECS), which is important when interpreting consolidated cash flow and debt.
Business context and financial performance
GE operates Energy Infrastructure, Technology Infrastructure, NBC Universal, and Consumer & Industrial; GECS includes Capital Finance. The filing describes results amid difficult economic and credit-market conditions.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Consolidated revenue | $37.8 billion | $47.2 billion | $115.3 billion | $136.3 billion |
| Earnings from continuing operations attributable to GE | $2.454 billion | $4.477 billion | $8.187 billion | $14.222 billion |
| Net earnings attributable to GE common shareowners | $2.419 billion | $4.312 billion | $7.787 billion | $13.688 billion |
| Diluted EPS from continuing operations | $0.22 | $0.45 | $0.75 | $1.42 |
| Diluted net EPS | $0.23 | $0.43 | $0.73 | $1.37 |
Q3 revenue fell 20% and continuing-operations earnings attributable to GE fell 45% year over year. For the nine months, revenue fell 15% and continuing-operations earnings fell 42%. GE reported no clear consolidated operating-margin figure in the supplied filing text.
Cash flow, debt and liquidity
- Cash: Consolidated cash and equivalents were $61.4 billion at September 30, 2009, versus $48.2 billion at December 31, 2008. GE held $5.2 billion and GECS $56.9 billion, before the presentation distinction for discontinued operations.
- Cash flow, nine months: Consolidated operating cash flow was $14.0 billion, down from $28.3 billion. GE industrial cash from operating activities was $11.5 billion versus $13.6 billion; GECS operating cash flow was $1.9 billion versus $18.7 billion. GECS cash from investing activities was $36.6 billion, primarily reflecting collections exceeding new financing originations.
- Borrowings: Consolidated short- and long-term borrowings totaled approximately $518.2 billion at September 30. GECS reported borrowings of $508.4 billion, down from $514.6 billion at year-end 2008. GECS commercial paper was approximately $50 billion, compared with $72 billion at year-end.
- Funding and liquidity: GE reported $52.3 billion of committed, unused credit lines. GE said it completed its 2009 long-term debt funding plan and had prefunded $35 billion of its 2010 target. It stated that available funds and alternative funding measures were adequate for liquidity needs, while noting that renewed credit-market disruption could affect unsecured debt issuance.
- Dividends: GE reduced its quarterly common dividend from $0.31 to $0.10 per share beginning with the second-quarter 2009 dividend. Nine-month dividends declared were $0.51 per share, versus $0.93 in 2008.
Material changes and credit quality
- GECS Capital Finance revenue fell 30% in Q3 and segment profit fell 87%, to $12.2 billion and $263 million, respectively. The filing attributes the decline chiefly to a lower asset base, lower interest rates, currency effects, and higher credit-loss provisions.
- GECS provision for losses on financing receivables was $2.9 billion in Q3 and $8.0 billion for the first nine months, versus $1.6 billion and $4.5 billion in the comparable 2008 periods.
- GECS financing receivables, net, declined to $348.5 billion from $372.5 billion at year-end. The allowance for losses increased to $7.4 billion from $5.3 billion; nonearning receivables rose to $13.8 billion from $8.0 billion.
- Impaired loans increased to $12.1 billion from $3.6 billion at year-end, with increases concentrated in Real Estate and Commercial Lending and Leasing. Management cited deterioration in real estate markets, unemployment, and the broader economy.
- By segment, Q3 Energy Infrastructure profit increased to $1.6 billion despite lower revenue; Technology Infrastructure profit declined to $1.7 billion; NBC Universal profit was $732 million and included a $0.6 billion gain related to A&E Television Networks; Consumer & Industrial profit rose to $117 million.
Outlook, risks and unusual items
- The filing provides no specific consolidated earnings or revenue guidance for the remainder of 2009. Management warned that economic conditions and U.S. unemployment could continue to deteriorate in 2009, potentially increasing consumer credit provisions.
- Key stated uncertainties include GE Capital funding access and cost, credit defaults, maintaining credit ratings and the dividend, demand in GE’s major markets, regulatory changes, and legal proceedings. S&P and Moody’s downgraded GE and GE Capital’s long-term ratings in March 2009; short-term ratings were affirmed.
- GE Capital’s ratio of earnings to fixed charges was 0.88:1 for the first nine months. A GE income-maintenance agreement provides for support to GE Capital toward a 1.10 annual threshold under the agreement; GE contributed $9.5 billion to GECS in Q1, and said it did not anticipate further 2009 contributions.
- GE recorded a $296 million pre-tax gain associated with its partial sale and deconsolidation of Penske Truck Leasing, and gains on remeasurement of prior interests in ATI-Singapore and BAC. NBC Universal recorded the $0.6 billion A&E-related gain. These items affect comparisons with prior periods.
- GE settled an SEC investigation in August 2009, agreeing to a $50 million civil penalty without admitting or denying the complaint’s allegations. The investigation concerned accounting matters from 2002–2003; GE said prior filings had already corrected the matters and no further corrections were required.
- GE expected new securitization and variable-interest-entity accounting rules effective January 1, 2010 to likely bring substantially all former QSPEs onto its balance sheet. Under an illustrative carrying-value approach, the company estimated approximately $30 billion of additional assets and a $2 billion reduction in equity at September 30, 2009.
- Other exposures include $212 million of reserves for WMC loan-repurchase obligations and unresolved tax matters, including $7.1 billion of unrecognized tax benefits. GE also disclosed shareholder securities litigation and other legal proceedings.
Investor verification priorities
- Confirm the trend and adequacy of GECS credit-loss allowances, nonearning receivables, impaired loans, and commercial real-estate valuations.
- Assess GECS refinancing needs, commercial-paper exposure, committed credit availability, and reliance on government-supported funding programs.
- Separate GE industrial cash generation from GECS cash flows and distinguish cash balances from amounts available to the parent.
- Normalize earnings for the A&E, PTL, ATI-Singapore, and BAC gains, restructuring charges, impairments, and elevated credit provisions.
- Review the prospective balance-sheet and equity effects of the 2010 securitization/VIE accounting changes, and monitor litigation, tax, and WMC repurchase exposures.