GE 10-Q Summary: Third Quarter and Nine Months Ended September 30, 2010
Business context and reporting period
General Electric Company reported for the quarter and nine months ended September 30, 2010, comparing results with the same 2009 periods. GE reports industrial businesses separately from GE Capital (GECS); consolidated figures eliminate intercompany transactions. Segment reporting was reorganized effective January 1, 2010, with prior periods reclassified.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Consolidated revenue | $35.9 billion | $37.8 billion | $109.9 billion | $115.3 billion |
| Continuing earnings attributable to GE | $3.16 billion | $2.45 billion | $8.79 billion | $8.19 billion |
| Continuing diluted EPS | $0.29 | $0.22 | $0.80 | $0.75 |
| Net earnings attributable to common shareowners | $1.98 billion | $2.42 billion | $6.88 billion | $7.79 billion |
| Net diluted EPS | $0.18 | $0.23 | $0.64 | $0.73 |
- Q3 continuing earnings increased 29%, while revenue declined 5%; nine-month continuing earnings rose 7% as revenue fell 5%. Continuing earnings were approximately 8.8% of revenue in Q3 2010 versus 6.5% in Q3 2009, and 8.0% for the 2010 nine-month period versus 7.1% in 2009.
- Net earnings fell because discontinued operations recorded losses of $1.105 billion in Q3 and $1.683 billion for the nine months, principally from GE Money Japan excess-interest claim reserves. Common dividends declared were $0.12 per share for Q3 versus $0.10; nine-month dividends were $0.32 versus $0.51.
- Segment revenue/profit in Q3: Energy Infrastructure $8.36/$1.66 billion; Technology Infrastructure $9.21/$1.47 billion; NBC Universal $4.07/$0.63 billion; GE Capital $11.62/$0.87 billion; Home & Business Solutions $2.13/$0.10 billion. GE Capital profit improved markedly from $0.14 billion, mainly due to lower credit-loss provisions and lower selling, general and administrative costs.
- Cash from operating activities for the nine months was $26.48 billion consolidated, including $10.14 billion at GE and $16.34 billion at GECS. GE’s reported cash from operating activities (GE CFOA) was $10.1 billion, down from $11.4 billion. GECS investing cash flow was $34.7 billion, largely reflecting financing-receivable collections exceeding originations; GECS financing cash outflow was $48.5 billion, mainly from debt reduction.
- At September 30, consolidated cash and equivalents were $78.4 billion; total assets were $758.8 billion, down from $781.8 billion at year-end 2009. Consolidated total liabilities were $638.2 billion. GECS borrowings and bank deposits totaled $486.5 billion, including $115.8 billion short-term borrowings, $298.3 billion long-term borrowings, $30.5 billion non-recourse securitization borrowings and $41.9 billion deposits. GECS financing receivables, net, were $331.3 billion.
- GECS financing receivables before allowance were $340.5 billion; the allowance was $9.1 billion (2.7% of receivables), versus $9.8 billion and 2.5% at January 1, 2010. Nonearning receivables were $12.3 billion, or 3.6% of receivables. Impaired loans rose to $17.2 billion from $13.5 billion at January 1, with deterioration concentrated in Real Estate.
Material changes, outlook, risks and unusual items
- GE recorded an additional $1.1 billion Q3 reserve for Japanese excess-interest refund claims associated with the 2008 GE Money Japan sale; total reserve reached $1.667 billion. Management’s estimate assumes incoming claims decline an average 4% monthly; a one-percentage-point difference in that decline rate could change the liability estimate by approximately $250 million.
- GE Capital’s asset-reduction strategy continued: collections exceeded originations by approximately $26.5 billion during the first nine months. Management reported improving credit trends in several consumer and commercial portfolios but expected Real Estate losses to remain higher than in 2009. A further 1% or 5% decline in global property values was estimated to require approximately $0.1 billion or $0.4 billion in additional Real Estate loan-loss reserves, respectively.
- Commercial Real Estate remained a significant risk: impaired Real Estate loans reached $9.1 billion, and Real Estate equity investments had an estimated value below carrying value by approximately $6.3 billion based on the latest second-quarter estimate. Real Estate recorded $1.5 billion of investment impairments in the first nine months of 2010.
- GE adopted new consolidation and securitization accounting rules on January 1, 2010, adding approximately $31.1 billion of assets and $33.0 billion of liabilities and reducing total equity by approximately $1.9 billion at adoption. This affects comparability of balance-sheet and portfolio figures.
- The planned Comcast/NBCU transaction remained subject to regulatory approvals and was expected to close within three months. GE expected approximately $7.9 billion in cash after debt reduction, fees and the Vivendi buyout; October NBCU debt issuance was a subsequent event. GE had acquired 7.7% of NBCU from Vivendi for $2.0 billion in September.
- GE reported $52.1 billion of committed, unused credit lines. It stated that cash and committed lines together exceeded twice GECS commercial-paper borrowings. GE had pre-funded its 2010 GECS long-term debt plan and issued $18 billion of senior unsecured debt during the first nine months toward its 2011 funding plan.
- Other notable exposures include the Hudson River PCB dredging project, for which EPA’s Phase II decision and GE’s election whether to proceed were pending; $7.1 billion of unrecognized tax benefits; and potential GECC funding obligations tied to credit-rating triggers. Management cautioned that economic, credit-market, housing, unemployment, currency, interest-rate, regulatory and legal conditions could cause actual outcomes to differ from forward-looking statements.
- GE increased its quarterly common dividend 20% to $0.12 and resumed share repurchases in Q3; it bought 52.8 million shares under the program for approximately $0.8 billion during the quarter. Management said it would not expect a 2011 payment under the GECC Income Maintenance Agreement if GECC’s improvement continued.
Important facts for investors to verify
- Whether the Japanese excess-interest claim reserve adequately reflects later claim frequency and severity; the filing notes substantial estimation sensitivity.
- Subsequent performance of GE Capital’s Real Estate portfolio, including impaired and nonearning loans, collateral values, reserves and real estate investment impairments.
- Completion, regulatory approval and final cash proceeds for the Comcast/NBCU transaction, including Vivendi-related payments and NBCU debt.
- GECS funding access, debt maturities, credit-rating-triggered collateral or liquidity requirements, and the progress and sustainability of asset reductions.
- Effects of the new securitization consolidation rules when comparing reported assets, liabilities, financing receivables and cash flows with prior periods.
- Resolution of the EPA Phase II dredging decision and related future costs, plus material developments in tax audits and other legal or regulatory matters.