General Electric Company — Q3 2011 Form 10-Q
Business context and period. GE reported for the quarter and nine months ended September 30, 2011. Results combine GE’s industrial businesses and GE Capital (GECS). NBC Universal was deconsolidated after its January 2011 transfer to a joint venture in which GE retained a 49% interest. Dollar amounts below are in U.S. billions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Consolidated revenue | $35.4 | $35.4 | $109.3 | $108.4 |
| Earnings from continuing operations attributable to GE | $3.223 | $3.107 | $10.147 | $8.615 |
| Continuing-operations diluted EPS | $0.22 | $0.28 | $0.86 | $0.78 |
| Net earnings attributable to GE common shareowners | $2.343 | $1.980 | $9.390 | $6.884 |
| Net diluted EPS | $0.22 | $0.18 | $0.88 | $0.64 |
- Q3 revenue was flat year over year; excluding NBCU, revenue increased 12%. Nine-month revenue rose 1%; excluding NBCU, it increased 8%. Product-services sales increased 16% in Q3 and 15% for the nine months.
- Management reported Q3 operating earnings, excluding non-operating pension costs, of $3.395 billion, up 11%; operating EPS was $0.24, down 14%. Excluding the preferred-stock redemption effect, operating EPS was $0.31, up 11%. For the nine months, operating earnings were $10.663 billion, up 26%, and operating EPS was $0.91, up 18% (non-GAAP measures).
- The $806 million preferred-stock redemption charge reduced Q3 earnings attributable to common shareowners and continuing-operations EPS. The preferred shares were redeemed on October 17, 2011; GE said this would eliminate approximately $0.3 billion of annual preferred dividends beginning in 2012.
- Segment performance was mixed: Energy Infrastructure Q3 revenue grew 30%, but profit fell 9%, primarily due to lower productivity. Aviation, Healthcare and Transportation profit increased; Home & Business Solutions profit declined 63%. GE Capital segment profit rose to $1.467 billion from $0.818 billion, mainly on lower credit-loss provisions and impairments.
- GE Capital’s nine-month improvement also reflected lower provisions, the Garanti Bank transaction gain and lower impairments. The consolidated effective tax rate was 33.7% for the nine months, versus 15.4% a year earlier, substantially reflecting tax expense on the NBCU transaction.
Cash flow, balance sheet and liquidity
- At September 30, consolidated assets were $737.7 billion, down $13.5 billion from December 31, 2010; liabilities were $610.9 billion, down $16.1 billion. Shareowners’ equity was $126.8 billion.
- Cash and equivalents were $91.4 billion, up from $78.9 billion at year-end 2010. GE reported $23.4 billion of operating cash flow from continuing operations for the nine months, including $6.5 billion for GE industrial operations and $16.6 billion for GECS. GE industrial operating cash flow fell from $10.1 billion a year earlier, primarily due to working-capital needs and the NBCU disposition.
- GECS financing receivables, net, declined to $293.7 billion from $312.2 billion at year-end. GECS reported $31.3 billion of investing cash flow, including an $18.5 billion net reduction in financing receivables, and used $25.9 billion in financing activities as it reduced borrowings.
- GECS borrowings and bank deposits totaled $456.8 billion, down from $470.5 billion at year-end. GECS reported $126.9 billion of short-term borrowings and $259.4 billion of long-term borrowings. The filing also describes $29.0 billion of non-recourse securitization borrowings.
- Management cited $3.0 billion in a centrally managed liquid-investment portfolio and $53.6 billion in committed unused credit lines, in addition to cash. Approximately $10 billion of cash was in regulated entities or restricted countries. GECS funding remained exposed to credit-market access, refinancing needs and its planned reduction in asset levels.
Material changes, outlook and risks
- GE sold NBCU assets for $6.2 billion cash and retained a 49% NBCUniversal LLC interest. GE recognized a $3.557 billion pre-tax disposition gain and related tax expense of $3.181 billion; the filing reports an approximately $400 million after-tax gain before a Q3 fair-value adjustment. The transaction materially affected comparability of revenue and taxes.
- GE completed significant Energy Infrastructure acquisitions, including Converteam, Dresser, Well Support and Wellstream; total cash consideration for acquisitions during the first nine months was $11.8 billion. Management stated that reducing GE Capital’s ending net investment remained a strategy, with that amount (excluding cash) falling from $471 billion at year-end to $452 billion.
- GE provided no specific quantitative earnings guidance in the supplied filing text. It warned that results could be affected by economic and credit-market volatility, European sovereign-debt developments, funding costs and the pace of GECS asset reduction, credit defaults, demand in served industries, regulation, litigation, transactions, and the ability to sustain planned dividends and credit ratings.
- GE Money Japan excess-interest refund claims remained uncertain. The reserve was $739 million; management estimated that a one-percentage-point difference in the assumed long-term claims decline rate could change the liability by about $250 million. Claims increased in September after earlier declines.
- Real Estate remained exposed to property values and market liquidity. The Real Estate reporting unit’s carrying value exceeded its estimated fair value by about $0.7 billion in the first impairment-test step, but the second step showed implied goodwill exceeding recorded goodwill by about $3.9 billion, so no impairment was recorded. GE cautioned that key assumptions were sensitive to market conditions.
- Other notable exposures include $6.7 billion of Real Estate troubled debt restructurings, $3.6 billion of Commercial nonaccrual financing receivables, pending WMC mortgage representation-and-warranty claims, tax audits and unrecognized tax benefits, environmental remediation, and ongoing municipal financial-products investigations and litigation. GE stated environmental exposure could exceed accrued amounts but was not reasonably estimable.
Most important facts for investors to verify
- Reconcile reported EPS with the $806 million preferred-stock redemption charge and distinguish GAAP earnings from management’s non-GAAP operating measures.
- Assess the sustainability of GE industrial cash generation given lower year-to-date operating cash flow and increased inventory and working-capital requirements.
- Review GECS refinancing capacity, short-term funding exposure, scheduled maturities and progress toward the planned asset reduction.
- Track credit quality, allowance adequacy, TDR performance and real-estate valuation assumptions, particularly if economic or property-market conditions worsen.
- Monitor the Japanese refund-claim reserve, WMC claims, NBCU tax effects, tax contingencies and material legal or environmental proceedings.