General Electric Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. GE reports industrial businesses separately from GE Capital (GECC); figures below are consolidated unless noted. Financial statements are unaudited.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue and other income | $34.2 billion | $34.9 billion | Down 2% |
| Earnings from continuing operations attributable to GE | $3.0 billion | $3.6 billion | Down 18% |
| Net earnings attributable to GE | $3.0 billion | $3.5 billion | Down 15% |
| Diluted EPS from continuing operations | $0.29 | $0.35 | Down 17% |
| Diluted net EPS | $0.30 | $0.34 | Down 12% |
| Operating earnings (non-GAAP) | $3.3 billion | $4.1 billion | Down 18% |
| Operating EPS (non-GAAP) | $0.33 | $0.39 | Down 15% |
Industrial segment revenue rose 8% to $24.5 billion and segment profit rose 12% to $3.3 billion. GE reported industrial segment margin expansion of 50 basis points, reflecting pricing and productivity, partly offset by inflation. Industrial orders were $23.7 billion, flat year over year, and backlog reached $245.3 billion. GE Capital revenue fell 8% to $10.5 billion while segment earnings were broadly flat at $1.9 billion.
Consolidated operating cash flow was $5.0 billion, versus $4.6 billion a year earlier. GE’s industrial cash from operating activities (GE CFOA, as presented by management) was $1.7 billion, compared with $0.2 billion. GECC operating cash flow was $3.2 billion, approximately unchanged. Consolidated investing cash flow was $1.8 billion, versus $31.5 billion, largely reflecting the prior-year NBCUniversal sale proceeds. Financing cash outflow was $8.5 billion, versus $23.0 billion.
At March 31, 2014, consolidated cash and equivalents were $87.0 billion; total assets were $652.3 billion and total liabilities were $514.2 billion. Borrowings and bank deposits totaled $380.6 billion, including $76.1 billion short-term borrowings, $221.0 billion long-term borrowings, $28.7 billion non-recourse securitization borrowings and $54.7 billion bank deposits. GE had $11.7 billion of cash and GECC $75.3 billion. The company also reported $47.4 billion of committed, unused credit lines.
GECC financing receivables before allowance were $252.4 billion, down from $258.2 billion at year-end; the allowance was $5.1 billion, or 2.0% of receivables. Nonaccrual receivables were $7.9 billion, or 3.1%, essentially unchanged from year-end. GE declared a quarterly dividend of $0.22 per share, compared with $0.19 in Q1 2013.
Material changes versus the prior period
- Lower consolidated revenue and earnings primarily reflected the absence of substantial NBCUniversal-related income and gains recorded in Q1 2013. Industrial growth partly offset this effect.
- Industrial segment profit improved in Power & Water, Oil & Gas and Aviation. Energy Management, Healthcare, Transportation and Appliances & Lighting reported lower segment profit.
- GE Capital revenue was lower due to dispositions, lower gains and organic revenue declines, including lower ending net investment (ENI); lower impairments and credit-loss provisions helped support earnings.
- GECC financing receivables fell by $5.8 billion, primarily as collections and sales exceeded originations by $4.0 billion, with write-offs also contributing.
- GE acquired API Healthcare for approximately $340 million and certain Thermo Fisher life-science businesses for approximately $1.1 billion. GE issued $3.0 billion of senior unsecured debt.
Outlook, management commentary and risks
- GE’s stated GE Capital ENI target was $300 billion to $350 billion; ENI excluding cash was $374 billion at quarter-end. Management said reducing non-core assets may weigh on near-term earnings but is intended to improve returns, reduce liquidity risk and strengthen capital ratios over time.
- The North American Retail Finance business, operating as Synchrony Financial, filed for an IPO as part of GE’s planned staged exit. On April 30, 2014, after quarter-end, GE announced a binding offer for Alstom’s Thermal, Renewables and Grid businesses for $13.5 billion, net of $3.4 billion of assumed net cash; closing was expected in 2015, subject to reviews and approvals. These are plans, not completed transactions.
- The filing gives no clear consolidated earnings or EPS guidance for the full year. Management cautioned that interim results are not necessarily indicative of full-year results.
- GE warned that the U.S. tax provision deferring tax on active financial-services income was due to expire after 2014; if not extended, the tax rate could increase significantly. The Q1 effective tax rate was 14.9%, versus 12.3%.
- WMC mortgage repurchase claims totaled $11.5 billion in stated loan purchase-price or unpaid-principal amounts, before paydowns, collateral recoveries, interest or fees. GE recorded a $550 million reserve and estimated reasonably possible losses of up to approximately $500 million above that reserve; outcomes remain uncertain. There were 14 related lawsuits.
- GE settled its GE Money Japan refund-claims obligation for approximately $1.7 billion and paid the agreed amount in March 2014. A remaining $56 million liability was reported under the settlement.
- GECC was designated a nonbank systemically important financial institution. Enhanced capital, liquidity, stress-testing and other regulatory requirements were still being developed; timing and impact were uncertain. The filing also identifies risks from funding markets, credit losses, real estate values, litigation, foreign exchange and planned portfolio reductions.
Most important facts for investors to verify
- Reconcile the earnings decline and non-GAAP operating earnings/EPS to the GAAP statements, especially the prior-year NBCUniversal-related gains and other unusual items.
- Assess whether industrial orders, backlog and segment growth convert into profitable revenue and cash flow; review weaker segment trends and the margin calculation.
- Track GE Capital’s progress toward its $300–$350 billion ENI target, including the implications for recurring earnings, funding and liquidity.
- Monitor WMC claim settlements, court rulings, reserve adequacy and potential losses beyond the recorded $550 million reserve.
- Check the status, terms and regulatory approvals of the Synchrony Financial exit and Alstom offer, and assess the tax-law and GECC regulatory developments.