Business context and reporting period
General Electric Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. GE reports industrial businesses separately from GE Capital (GECC), its financial-services business. Dollar figures below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue and other income | $35.1 billion | $36.4 billion | $70.1 billion | $71.5 billion |
| Continuing earnings attributable to GE | $3.255 billion | $3.658 billion | $6.891 billion | $6.889 billion |
| Net earnings attributable to GE | $3.133 billion | $3.105 billion | $6.660 billion | $6.139 billion |
| Diluted EPS from continuing operations | $0.31 | $0.34 | $0.66 | $0.65 |
| Diluted net EPS | $0.30 | $0.29 | $0.64 | $0.58 |
| Cash from operating activities | Not separately stated for the quarter | Not separately stated for the quarter | $11.931 billion | $14.217 billion |
- Second-quarter revenue fell about 4%; continuing earnings attributable to GE fell 11%. GE’s non-GAAP operating earnings declined 8% to $3.685 billion and operating EPS declined 5% to $0.36.
- For the first half, revenue fell about 2%, while continuing earnings attributable to GE were essentially unchanged. Non-GAAP operating earnings rose 2% to $7.744 billion and operating EPS rose 6% to $0.75.
- Discontinued operations recorded after-tax losses of $122 million in the quarter and $231 million for the six months, improved from $553 million and $750 million, respectively, in 2012.
- Calculated continuing pretax margin was approximately 10.6% for the quarter versus 11.5% a year earlier, and 11.2% for the half-year versus 11.4%. These ratios are calculated from reported pretax earnings and revenue.
Cash flow, balance sheet and liquidity
- Consolidated operating cash flow was $11.9 billion for the first half, down from $14.2 billion. GE industrial cash from operating activities was $3.7 billion, versus $6.8 billion; GE cited lower GECC dividends, lower collections and deal-related tax payments among the factors.
- Investing activities provided $36.9 billion, including $16.7 billion of proceeds from the sale of GE’s remaining NBCUniversal interest. Financing activities used $36.8 billion.
- At June 30, cash and equivalents were $88.7 billion, up from $77.4 billion at year-end 2012. Total assets were $660.5 billion, liabilities $531.7 billion and total equity $128.8 billion.
- Short-term borrowings were $77.2 billion, down from $101.4 billion at year-end; long-term borrowings were $231.3 billion, versus $236.1 billion. The balance sheet also included $30.3 billion of non-recourse securitization borrowings and $48.6 billion of bank deposits.
- GE reported $47.6 billion of committed unused credit lines. Cash included funds held abroad and amounts subject to regulatory or currency-transfer restrictions; approximately $21.8 billion of foreign-held cash was described as indefinitely reinvested.
Material changes and segment performance
- Industrial segment revenue was $25.2 billion in the quarter, down from $25.4 billion; industrial segment profit increased to $3.839 billion from $3.750 billion. For the first half, industrial revenue declined to $47.8 billion from $49.4 billion and segment profit declined to $6.775 billion from $7.035 billion.
- Power & Water was the principal industrial weakness: second-quarter revenue and profit each fell 17%, reflecting lower equipment volume, particularly in Wind and Thermal. Aviation revenue rose 9% and profit 16%; Oil & Gas revenue rose 9% and profit 14%.
- GE Capital second-quarter revenue declined 3% to $11.0 billion and segment profit declined 9% to $1.922 billion. Management attributed the pressure to lower ending net investment, higher impairments and higher credit-loss provisions, partly offset by gains and dispositions.
- GE completed the sale of its remaining 49% NBCUniversal interest to Comcast in March for total consideration of $16.7 billion and recorded a $1.096 billion pretax gain. GECC also sold specified real estate for $1.430 billion, recognizing a $921 million pretax gain. The NBCUniversal proceeds materially affected first-half investing cash flow.
- GECC’s financing receivables before allowance fell to $262.4 billion from $273.9 billion at year-end, as collections and sales exceeded originations. The allowance rose to $5.3 billion from $5.0 billion; the allowance was 2.0% of receivables versus 1.8%.
Outlook, risks and unusual items
- Management reiterated its objective of reducing GE Capital’s ending net investment and described continued focus on selective financial-services businesses and potential exits from non-strategic or underperforming businesses. The provided filing text does not give a specific consolidated earnings or revenue forecast.
- GECC was designated a nonbank systemically important financial institution on July 8, 2013, after quarter-end. The filing says enhanced capital, liquidity, stress-testing and resolution-planning requirements were expected, but their precise impact and timing remained uncertain. GE did not expect a material effect on GECC’s business or operations.
- WMC, GE’s former U.S. mortgage business, had $6.335 billion of pending loan repurchase claims and a $787 million reserve at June 30. Separate litigation claims covered additional loans, for which WMC held no reserve and could not estimate a reasonably possible loss. The filing gives an illustrative sensitivity: specified adverse changes in assumptions could increase reserves by about $750 million.
- GE Money Japan’s reserve for excess-interest refund claims was $557 million, down from $700 million at year-end after payments and currency effects, partly offset by a $126 million reserve increase. GE estimated that certain adverse claim-rate assumptions could add about $75 million or $400 million to the reserve; aggregate exposure was not meaningfully estimable.
- Other exposures include $5.834 billion of unrecognized tax benefits, with a reasonably possible reduction of $0–$1.0 billion in the succeeding 12 months; environmental remediation costs that could exceed accruals but were not reasonably estimable; and ongoing credit, real-estate valuation, market, funding, regulatory and litigation risks.
- GE agreed to a $40 million settlement of a shareholder securities class action, subject to court approval. The filing also notes a $1.6 billion NBCUniversal deal-related tax payment during the quarter and a $5.0 billion GE senior-note repayment in the first quarter.
- GE declared dividends of $0.19 per common share for the quarter, versus $0.17 a year earlier. It repurchased 176.1 million shares under its repurchase program in April–June; the reported remaining authorization was $16.8 billion.
Important facts for investors to verify
- Whether industrial revenue and profit recover from weakness in Power & Water, and whether Aviation and other growing businesses can offset it.
- GE Capital’s planned asset reduction, funding access, credit-loss provisions, and the eventual costs and requirements associated with its nonbank SIFI designation.
- The adequacy of reserves for WMC claims and GE Money Japan refund claims, particularly given the disclosed sensitivities and unreserved litigation claims.
- How much of first-half cash generation and earnings reflects the NBCUniversal and real-estate transactions, gains, tax effects and other unusual items.
- The durability of GE’s dividend and share repurchases relative to industrial cash generation, GECC distributions, liquidity needs and debt obligations.