GE

General Electric Company (GE) - Q1 2008 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for General Electric Company for the period ended March 31, 2008. GE operates as a diversified conglomerate with two primary reporting components: industrial manufacturing and product services ("GE") and financial services ("GECS"). The company is a large accelerated filer with approximately 9.97 billion shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 8% year-over-year, driven by acquisitions, a weaker U.S. dollar, and organic growth in industrial sales (up 12%).
• Earnings Decline: Earnings from continuing operations decreased 12% to $4.36 billion. This was primarily due to lower earnings in financial services segments (Commercial Finance and GE Money) and higher provisions for loan losses.
• Financial Services Performance:
  • Commercial Finance: Revenues up 7%, but net earnings down 20% due to core declines, lower investment income, and higher mark-to-market losses.
  • GE Money: Revenues up 8%, but net earnings down 19% due to lower securitization income and higher delinquencies in the U.S. portfolio.
• Discontinued Operations: Loss from discontinued operations improved significantly to $57 million (net of tax) compared to a $357 million loss in Q1 2007, largely due to the prior year's heavy losses from the U.S. mortgage business (WMC).
• Balance Sheet Expansion: Total assets increased by $38.6 billion, primarily driven by a $32.3 billion increase in financing receivables and the acquisition of Merrill Lynch Capital.

Outlook, Risks, and Management Commentary

• Capital Markets: Management highlighted illiquidity in credit markets, which contributed to higher reported Level 3 fair value instruments and increased delinquency rates in consumer and commercial portfolios.
• Delinquencies: Delinquency rates at GE Money rose to 5.64% (up from 5.36% at year-end 2007), driven by U.S. portfolio deterioration. Commercial Finance delinquencies also increased slightly to 1.36%.
• Investment Portfolio: GE holds $5.8 billion in residential mortgage-backed securities (RMBS) with $1.8 billion of subprime exposure. Unrealized losses on RMBS were $0.6 billion. Management noted that continued uncertainty in capital markets may cause increased levels of losses.
• Dividends and Buybacks: Dividends declared per share increased to $0.31 from $0.28. The company continues its $15 billion share repurchase program, having purchased approximately 32 million shares in Q1 2008.
• Accounting Changes: GE adopted SFAS 157 (Fair Value Measurements) on January 1, 2008. Management anticipates adopting SFAS 141R (Business Combinations) and SFAS 160 (Noncontrolling Interests) in 2009, which will alter the accounting for acquisitions and minority interests.

Key Facts for Investor Verification

• Subprime Exposure: Verify the specific composition and credit enhancement of the $1.8 billion subprime exposure within the RMBS portfolio and the impact of monoline insurer downgrades.
• Loan Loss Provisions: Monitor the trend in the provision for losses on financing receivables, which increased to $1.36 billion in Q1 2008 from $936 million in Q1 2007.
• Discontinued Operations: Confirm the timeline for the sale of the Japanese personal loan business (Lake), which is expected to be completed by the end of Q3 2008.
• Level 3 Assets: Review the $15.0 billion in Level 3 assets (unobservable inputs) and the potential for further mark-to-market adjustments given market volatility.
• Acquisition Integration: Assess the financial impact of recent major acquisitions, including Merrill Lynch Capital and Smiths Aerospace, on future earnings and goodwill balances.