General Electric Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; amounts below are in U.S. dollars. GE combines industrial businesses, while GE Capital (GECC) provides financial services.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue and other income | $35.7B | $36.3B | $105.9B | $107.7B |
| Earnings from continuing operations attributable to GE | $3.27B | $3.45B | $10.16B | $10.34B |
| Net earnings attributable to GE | $3.19B | $3.49B | $9.85B | $9.63B |
| Diluted EPS, continuing operations | $0.32 | $0.33 | $0.98 | $0.98 |
| Diluted EPS, net earnings | $0.31 | $0.33 | $0.95 | $0.91 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $17.2B | $20.1B |
Q3 revenue declined about 1% and continuing earnings fell 5% year over year; net earnings fell 9%. For the nine months, revenue declined about 2% and continuing earnings about 2%, while net earnings rose 2%, partly reflecting lower discontinued-operation losses. GE reported non-GAAP operating earnings of $3.70B for Q3, down 3%, and $11.44B for nine months, up 1%; operating EPS was $0.36 for Q3 and $1.11 for nine months. These are management-defined non-GAAP measures.
Industrial segment revenue was $25.8B in Q3, up 3%; segment profit was $4.0B, up 11%. Aviation and Oil & Gas grew, while Power & Water revenue declined 10%. GE Capital revenue fell 5% to $10.7B, while segment profit increased 13% to $1.9B. No clear consolidated operating-margin figure is provided in the filing text.
Cash, debt and liquidity
- Cash and equivalents were $86.5B at September 30, 2013, including $10.2B at GE and $76.3B at GECC. Consolidated cash increased $9.1B from year-end 2012.
- Nine-month operating cash flow was $17.2B, down from $20.1B. GE cash from operating activities (GE CFOA, a management measure) was $7.8B versus $10.7B; GECC operating cash flow was $11.8B versus $14.9B.
- Consolidated borrowings and bank deposits totaled $388.1B, down from $414.1B at December 31, 2012. This included $80.5B of short-term borrowings, $226.9B of long-term borrowings, $30.0B of non-recourse securitization borrowings and $50.8B of bank deposits.
- GE had $47.6B of committed, unused credit lines. Management reported $661.4B in total assets and $532.4B in total liabilities at quarter-end.
- GECC financing receivables, net, were $254.2B, down from $269.0B at year-end. The allowance for losses was $5.2B, or 2.0% of gross financing receivables, versus 1.8% at year-end; nonearning receivables were $6.4B, or 2.5% of the portfolio, versus $7.5B, or 2.7%.
Material changes and notable items
- GE completed the sale of its remaining 49% interest in NBCUniversal to Comcast in March for total consideration of $16.7B. GE recognized a $1.1B pre-tax gain on the equity interest sale; GECC also recorded a $0.9B pre-tax gain on related real estate sales. NBCU proceeds contributed significantly to investing cash flow.
- GE acquired Avio’s aerospace-parts business and Lufkin Industries in Q3. These acquisitions contributed to increases in goodwill and intangible assets; GE recorded a $96M pre-tax Avio-related charge for settling pre-existing contractual relationships.
- GE repurchased $8.0B of its shares and paid $5.9B in dividends during the first nine months. The quarterly dividend declared was $0.19 per share, versus $0.17 a year earlier.
- GE Capital’s ending net investment was approximately $385B at September 30; management’s stated target was $300B–$350B. GECC’s assets declined $18.6B from year-end, while its borrowings declined by about $25.5B.
- The Q3 consolidated tax rate was 9.6%, versus 13.8% a year earlier; the nine-month rate was 10.1%, versus 14.1%. GE attributed the lower rates principally to benefits from lower-taxed global operations and U.S. tax provisions and credits.
Outlook, risks and contingencies
- The filing provides no clear numerical earnings or revenue guidance for the full year. Management emphasized GECC balance-sheet reduction and selective focus on financial-services businesses; delivery of the $300B–$350B net-investment target depends on asset reductions and dispositions.
- GE Money Japan’s reserve for excess-interest refund claims was $527M at September 30, down from $700M at year-end after claim payments and currency effects, partly offset by a $205M reserve increase. Management described claims trends as difficult to predict; specified adverse claim-rate scenarios could add about $75M–$400M to the reserve.
- WMC had $800M of reserves for pending and estimated future mortgage repurchase claims, while active pending claims were $6.31B. Separate litigation claims involved approximately $6.6B of loans and were not reserved; GE said a meaningful loss estimate could not be developed. The filing describes 16 related lawsuits and uncertainty over legal defenses and potential exposure.
- GECC was designated a nonbank systemically important financial institution in July 2013. Enhanced capital, liquidity and supervisory requirements were still being developed; timing and impact remained uncertain. GE also identified funding-market, credit-loss, real-estate, regulatory, currency, litigation, tax and capital-allocation risks.
- Unrecognized tax benefits were $5.93B; a reduction of up to $1.4B was considered reasonably possible over the succeeding 12 months. Environmental remediation exposure could exceed accrued amounts, but the filing says the excess is not reasonably estimable.
- GE disclosed risks to its credit rating, GECC funding costs and ability to reduce assets as planned, as well as possible effects on dividends and repurchases if cash flows, earnings or GECC dividends are inadequate.
Important facts for investors to verify
- Whether GECC can reduce ending net investment from approximately $385B to management’s $300B–$350B target without materially weakening earnings or liquidity.
- Future GE Money Japan claims experience and whether the $527M reserve remains adequate.
- Developments in WMC repurchase litigation, including any rulings that could bring currently unreserved litigation claims into the reserve estimate.
- GECC credit quality, consumer-loss provisioning and the effects of its more granular reserve methodology, which increased the allowance by $0.6B in Q1.
- GE’s cash-flow conversion and the sustainability of dividends and share repurchases, considering GE CFOA’s decline and the role of GECC dividends.
- Final regulatory requirements for GECC as a nonbank SIFI, and any changes to tax rules supporting GE’s low effective tax rate.