GE Q1 2013 Form 10-Q Summary
Business context and reporting period. General Electric Company reported unaudited results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. GE’s industrial businesses and GE Capital (GECC) are presented separately in parts of the filing. GECC continued its strategy of reducing its ending net investment and focusing on selected financial services businesses.
Key financial results
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Consolidated revenue and other income | $35.010 billion | $35.080 billion; essentially flat |
| Earnings from continuing operations attributable to GE | $3.636 billion | $3.231 billion; up 13% |
| Net earnings attributable to GE | $3.527 billion | $3.034 billion; up 16% |
| Continuing-operations diluted EPS | $0.35 | $0.30 |
| Net diluted EPS | $0.34 | $0.29 |
| Declared dividend per common share | $0.19 | $0.17 |
| Cash from operating activities | $4.610 billion | $6.466 billion |
| Cash from investing activities | $31.485 billion | $5.319 billion |
| Cash used for financing activities | $22.956 billion | $13.599 billion |
| Cash and equivalents at March 31 | $89.781 billion | $77.357 billion at December 31, 2012 |
| Total assets | $670.690 billion | $685.403 billion at December 31, 2012 |
- Management-reported non-GAAP operating earnings rose 14% to $4.059 billion; operating EPS rose 15% to $0.39. These measures exclude specified non-operating pension costs.
- Consolidated revenue was flat as lower industrial sales and currency effects were offset by acquisitions, dispositions and higher financial services revenue. Industrial sales declined 6% to $22.3 billion; GE Capital revenue rose 2% to $11.5 billion.
- Industrial segment revenue fell to $22.674 billion from $24.055 billion, and industrial segment profit declined to $2.936 billion from $3.285 billion. Power & Water revenue fell 26% and segment profit fell 39%, principally on lower equipment volume and productivity. Aviation revenue and profit rose 4% and 9%, respectively; Transportation revenue and profit rose 12% and 15%.
- GE Capital segment profit increased to $1.927 billion from $1.772 billion. Results included substantial gains from real estate sales, while higher provisions and impairments weighed on several businesses. Consumer segment profit fell 37%; Real Estate segment profit increased sharply, largely due to property-sale gains.
- Operating cash flow declined year over year. GE’s industrial cash from operating activities was $0.2 billion, versus $2.1 billion, with management citing working-capital needs, incentive-plan payouts and tax-payment timing. Investing cash flow included $16.699 billion of proceeds associated with the NBCU transaction.
- At March 31, consolidated short-term borrowings were $83.127 billion, long-term borrowings $234.299 billion, non-recourse securitization borrowings $30.488 billion and bank deposits $49.427 billion. Total borrowings and bank deposits were $397.341 billion, down from $414.060 billion at year-end.
- GECC financing receivables, before allowance, declined to $263.683 billion from $273.936 billion. Its allowance for losses rose to $5.359 billion from $4.985 billion; the provision for financing-receivable losses increased to $1.488 billion from $0.863 billion.
Material changes and unusual items
- On March 19, GE sold its remaining 49% interest in NBCUniversal LLC to Comcast for total consideration of $16.722 billion, including cash, Comcast-guaranteed debt and preferred stock; the debt and preferred shares were subsequently sold at approximately par. GE recognized a $1.096 billion pretax gain on the equity sale. GECC separately sold specified real estate for $1.430 billion and recognized a $921 million pretax gain. These transactions materially increased other income and investing cash flow.
- GECC’s consumer revolving-credit reserve methodology changed in Q1, increasing the allowance by $0.6 billion, or approximately $0.3 billion after tax. Management said the change reflected a more granular segmentation approach and a longer incurred-loss period.
- GE recognized $302 million of pretax other-than-temporary investment-security impairments, versus $32 million in Q1 2012.
- Discontinued operations produced a $109 million loss, compared with a $197 million loss in Q1 2012. Q1 2013 included WMC and GE Money Japan losses; the prior-year period included a significant Consumer Ireland disposal loss.
- GE repaid $5.0 billion of senior unsecured notes. GE raised its share-repurchase authorization by $10 billion, to $35 billion through 2015; Q1 cash repurchases were $1.733 billion.
Outlook, risks and contingencies
- The filing provides no clear consolidated full-year earnings or revenue guidance. Management reiterated GECC’s objective of reducing ending net investment and selectively exiting non-strategic or underperforming businesses.
- Management reported $89.8 billion of consolidated cash and equivalents, a $2.6 billion GECC liquid-investment portfolio and $48.0 billion of committed unused credit lines. Cash is not all freely transferable: $14 billion at GECC was in regulated banks or insurance entities, and some overseas cash is indefinitely reinvested or subject to transfer restrictions.
- WMC’s reserve for pending and estimated future mortgage repurchase claims was $740 million after a $107 million Q1 increase. Pending specified claims were $6.210 billion, but the filing says claim amounts are not estimates of loss. WMC separately faced litigation claims on approximately $4.0 billion of loans for which it had no reserve and could not estimate a reasonably possible loss. The company warned that adverse court decisions or claim experience could increase exposure.
- GE Money Japan’s reserve for excess-interest refund claims was $561 million. The filing describes claim trends and consumer behavior as difficult to predict; sensitivity examples indicate reserve increases of approximately $75 million or $400 million under specified adverse assumptions.
- Unrecognized tax benefits were $5.584 billion; reasonably possible reductions over the next 12 months were estimated at $0–$1.0 billion. GE noted that expiration of the U.S. tax provision deferring tax on active financial-services income after 2014 could significantly raise its tax rate if not extended.
- Other principal risks include credit-market and economic conditions, GECC funding access and credit ratings, financing-receivable losses, real estate values, foreign-exchange movements, regulation and litigation. GECC was under consideration for a possible nonbank SIFI determination; the outcome and timing were uncertain.
- After quarter-end, GE agreed to a $40 million settlement of a shareholder class action, subject to court approval. GE continued to deny the claims.
Most important facts for investors to verify
- How much of earnings growth came from recurring operations versus the NBCU and real-estate gains, and how management’s non-GAAP operating measures reconcile to GAAP results.
- Whether GE’s weaker industrial operating cash flow reflects temporary working-capital timing or a sustained change, and how cash conversion develops in subsequent quarters.
- Whether GECC’s higher consumer-credit allowance proves adequate, particularly after the $0.6 billion methodology-related increase, and how provisions and net write-offs trend.
- Developments in WMC litigation and repurchase claims and GE Money Japan refund claims, including changes in reserves, claims activity and reasonably possible exposure.
- GECC’s progress in reducing ending net investment, refinancing maturities and maintaining liquidity, alongside the status of potential SIFI and capital-regulation requirements.