General Electric Company: Q3 2003 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2003, and the nine months ended on that date. General Electric (GE) operates as a diversified conglomerate comprising industrial manufacturing and product services (GE) and financial services (GE Capital Services, or GECS). A significant event during this period was the early adoption of FASB Interpretation No. 46 (FIN 46) on July 1, 2003, requiring the consolidation of certain variable interest entities, which materially impacted the balance sheet and earnings.
Key Financial Metrics
| Metric (in millions) | Q3 2003 | Q3 2002 | 9M 2003 | 9M 2002 |
|---|---|---|---|---|
| Total Revenues | $33,394 | $32,719 | $97,223 | $96,697 |
| Net Earnings | $3,649 | $4,087 | $10,442 | $11,016 |
| Diluted EPS (Reported) | $0.36 | $0.41 | $1.04 | $1.10 |
| Diluted EPS (Excl. Accounting Changes) | $0.40 | $0.41 | $1.10 | $1.20 |
| Cash from Operating Activities | $7,378 (GE only) | $5,721 (GE only) | $22,904 (Consolidated) | $21,803 (Consolidated) |
| Total Assets | $626,933 | $575,244 | — | — |
| Total Liabilities | $548,661 | $506,065 | — | — |
| Shareowners' Equity | $72,481 | $63,706 | — | — |
Note: Operating cash flow for GE (industrial) is highlighted as it is a key liquidity driver for the parent company. Consolidated operating cash flow includes significant financial services activity.
Material Changes vs. Prior Period
- Accounting Changes: The adoption of FIN 46 resulted in a one-time, non-cash after-tax charge of $372 million ($0.04 per share) in Q3 2003. This reduced reported net earnings but did not affect cash flow. Excluding this charge, Q3 earnings before accounting changes were $4.021 billion, a slight decline from $4.087 billion in Q3 2002.
- Revenue Growth: Consolidated revenues increased 2% in Q3 and 1% for the nine months. Financial services revenues grew 13% in Q3, driven by gains on asset sales and foreign currency translation, while industrial sales declined 5% due to lower gas turbine sales.
- Segment Performance:
- Power Systems: Revenues fell 18% (Q3) and 24% (9M) due to a sharp decline in large gas turbine sales (47 units in Q3 2003 vs. 83 in Q3 2002). Operating profit dropped 31% in Q3.
- Insurance: Net earnings surged 85% in Q3, driven by gains on the sale of GE Edison Life and lower adverse development at ERC.
- Consumer Finance: Revenues and earnings grew 30% and 27% respectively in Q3, aided by acquisitions and the sale of Home Depot private-label credit card receivables.
- Plastics: Operating profit fell 55% in Q3 due to higher raw material costs (oil/benzene) and lower productivity.
- Balance Sheet Expansion: Total assets increased by $51.7 billion year-over-year, primarily due to the consolidation of $36.3 billion in assets under FIN 46 and growth in financing receivables.
Guidance, Outlook, and Risks
- Strategic Transactions:
- NBC/Vivendi Merger: Announced October 8, 2003, to create NBC Universal (80% GE-owned). Expected to close in H1 2004.
- Acquisitions: Completed acquisition of Instrumentarium Corp. ($2.1 billion) and announced agreement to acquire Amersham plc (~$9.5 billion).
- Divestitures: Completed sale of GE Edison Life and U.S. Auto/Home businesses to AIG. Agreed to sell Financial Guaranty Insurance Company (FGIC) for $1.6 billion (expected Q4 close).
- Liquidity and Capital: GE Capital maintains a AAA/Aaa credit rating. The company plans to reduce non-business related debt in financial services by the end of 2005. GE Capital issued ~$40 billion of long-term debt in the first nine months of 2003.
- Risks and Contingencies:
- Aviation Exposure: Significant exposure to airlines in bankruptcy (UAL Corp, Air Canada) totaling $4.2 billion. Impairment losses on aircraft leases were $212 million for the nine months ended Sept 30, 2003.
- Accounting Uncertainty: Ongoing FASB interpretation of FIN 46 and potential retroactive changes to SFAS 140 could impact future financial reporting.
- Investment Impairments: Approximately $160 million of investment securities with unrealized losses are at risk of being charged to earnings in the next 12 months.
Key Facts for Investor Verification
- Adjusted Earnings: Verify the "earnings before accounting changes" metric ($0.40 diluted EPS for Q3) as the primary indicator of operational performance, excluding the $372 million FIN 46 charge.
- Power Systems Cycle: Monitor the recovery of large gas turbine sales volumes, which are currently depressed and significantly impacting industrial margins.
- FIN 46 Impact: Confirm the long-term impact of consolidating $36.3 billion in assets and $35.8 billion in liabilities on leverage ratios and future earnings volatility.
- Aviation Credit Quality: Review the specific provisions and recoveries related to the $4.2 billion exposure to bankrupt airlines (UAL, Air Canada).
- Dividend Sustainability: Note the 5.6% increase in the per-share dividend rate to $0.19 for Q3, supported by strong operating cash flow from GE ($7.4 billion in Q3).