GE

Business Context and Reporting Period

Company: General Electric Company (GE)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2007
Business Overview: GE operates through industrial manufacturing and product services (GE) and financial services (GECS). Key segments include Infrastructure, Commercial Finance, GE Money, Healthcare, NBC Universal, and Industrial.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 6% to $40.2 billion, driven by 8% organic growth and a weakening U.S. dollar. Financial services revenues grew 16% to $17.3 billion.
• Earnings Growth: Earnings from continuing operations rose 8% to $4.51 billion. Net earnings increased 2% to $4.51 billion.
• Segment Performance:
  • Infrastructure: Revenues up 18% and profit up 28%, driven by higher volume and prices in Energy and Aviation, plus the Vetco Gray acquisition.
  • Commercial Finance: Revenues up 15% and profit up 21%, aided by acquisitions and core growth.
  • GE Money: Revenues up 14%, but profit growth was modest (2%) due to reduced earnings from the U.S. mortgage business (WMC) and Japan.
  • NBC Universal: Revenues declined 22% due to the absence of Olympic broadcasts compared to 2006, though profit increased 6%.
  • Industrial: Revenues fell 9% and profit dropped 20% due to prior-year dispositions (GE Supply, Advanced Materials) and higher material costs.
• Balance Sheet: Total assets increased $16.8 billion from year-end 2006. Cash and equivalents rose to $19.3 billion.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects to issue approximately $45 billion of additional long-term debt in 2007, primarily to repay maturing debt. The company plans to continue its $25 billion share repurchase program and grow dividends.
• Unusual Items:
  • Accounting Changes: Adoption of FIN 48 and FSP FAS 13-2 on Jan 1, 2007, reduced retained earnings by $126 million.
  • Discontinued Operations: Q1 2006 included a $263 million gain from discontinued operations (insurance businesses), whereas Q1 2007 had an insignificant loss of $2 million.
  • Swiss Re Gain: Corporate items included a $558 million gain on the sale of Swiss Re common stock.
• Risks and Contingencies:
  • Legal Proceedings: Ongoing SEC investigation into hedge accounting for derivatives and pre-2004 Rail transactions. DOJ and SEC investigations into marketing of guaranteed investment contracts to municipalities.
  • Credit Quality: Delinquency rates at GE Money increased to 5.48% (from 5.05% at year-end 2006), primarily due to early payment defaults in the WMC subprime mortgage portfolio. A $0.3 billion after-tax charge was taken related to WMC.
  • Tax Uncertainty: Unrecognized tax benefits totaled $6.8 billion; global audit resolutions in 2007 could reduce this by up to $1.9 billion.

Investor Verification Checklist

• WMC Exposure: Verify the extent of ongoing exposure and potential future charges related to the U.S. subprime mortgage portfolio (WMC) given the $0.3 billion charge and rising delinquencies.
• SEC Investigation: Monitor developments in the SEC investigation regarding hedge accounting and Rail business transactions for potential restatements or penalties.
• Debt Maturity Wall: Assess the impact of the planned $45 billion debt issuance and the company's ability to refinance maturing long-term debt in current market conditions.
• Industrial Segment Turnaround: Evaluate the trajectory of the Industrial segment, which saw significant revenue and profit declines due to dispositions and cost pressures.
• Tax Provision: Review the potential impact of the $1.9 billion potential reduction in unrecognized tax benefits on future effective tax rates.