Business Context and Reporting Period
Company: General Electric Company (GE)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Third quarter and nine months ended September 30, 2001
Context: The filing covers a period significantly impacted by the September 11 terrorist attacks, resulting in specific insurance losses and reinsurance premiums. The report also details the adoption of new accounting standards (SFAS 133 and EITF 99-20) effective January 1, 2001, which resulted in non-cash cumulative adjustments to earnings.
Key Financial Metrics
| Metric | Q3 2001 | Q3 2000 | 9 Months 2001 | 9 Months 2000 |
|---|---|---|---|---|
| Total Revenues | $29,468 million | $32,014 million | $91,938 million | $94,872 million |
| Net Earnings | $3,281 million | $3,180 million | $9,751 million | $9,150 million |
| Diluted EPS | $0.33 | $0.32 | $0.97 | $0.91 |
| Operating Margin | 18.9% | 18.4% | 19.1% | 18.8% |
| Cash from Operations (9M) | $11,730 million (GE only) | $9,943 million (GE only) | ||
| Consolidated Cash Flow (9M) | ||||
| Total Assets | $460,097 million | $437,006 million (Year-end 2000) | N/A | |
| Total Liabilities | $401,638 million | $381,578 million (Year-end 2000) | ||
| Shareholders' Equity | $53,597 million | $50,492 million (Year-end 2000) | N/A | |
| Dividends Declared (9M) | $0.48 per share | $0.27 per share |
Material Changes vs. Prior Period
- Earnings Growth: Q3 2001 net earnings increased 3% to $3.281 billion. Excluding $400 million in September 11-related insurance losses, earnings would have grown 16%.
- Revenue Trends: Consolidated revenues decreased 8% in Q3 2001 compared to Q3 2000, largely due to strategic repositioning at GE Capital Services (GECS) and the absence of the 2000 Summer Olympics broadcast revenue at NBC. However, ongoing industrial revenues increased 10%.
- Accounting Adjustments: The nine-month 2001 net earnings include a $444 million reduction due to the cumulative effect of adopting SFAS 133 (derivatives) and EITF 99-20 (impairment accounting). Ongoing earnings (excluding these non-cash items) were $10.195 billion, an 11% increase over the prior year.
- Segment Performance:
- Power Systems: Revenues surged 43% and operating profit rose 94% in Q3 due to higher gas turbine volume and pricing.
- NBC: Revenues dropped 45% in Q3 due to the absence of Olympic broadcast revenue and September 11 impacts.
- Materials: Revenues fell 18% and operating profit dropped 27% due to softness in automotive and optical media markets.
- GECS: Earnings were down 12% in Q3 primarily due to September 11 insurance losses; without these, earnings would have grown 15%.
Guidance, Outlook, and Risks
- Management Outlook: Management expressed comfort with the FirstCall analysts' consensus estimate of $1.41 per share for the full year 2001.
- September 11 Impact: The company reported $400 million in insurance losses for Q3. Management noted that Aircraft Engines' commercial spare parts demand slowed post-September 11 and is not expected to return to pre-attack levels in Q4.
- Future Accounting Changes (2002):
- Goodwill (SFAS 142): Effective Jan 1, 2002, goodwill amortization will cease and be replaced by impairment testing. Management estimates this would have increased 2001 net earnings by approximately $1.1 billion ($0.11 per share) if applied retroactively.
- Pensions: Management estimates a decrease in noncash pension cost reductions in 2002, potentially reducing net earnings by $0.05 to $0.07 per share compared to 2001.
- Liquidity and Capital: GE accelerated its stock repurchase program following the NYSE reopening, purchasing $832 million in Q3. Total repurchases since 1994 reached $19.9 billion. Dividends were increased by 17% year-over-year.
Investor Verification Checklist
- Insurance Exposure: Verify the final settlement of September 11-related insurance losses and reinsurance recoveries, as Q3 figures included a $400 million loss and increased reinsurance receivables of $3.3 billion.
- Accounting Transition: Confirm the impact of SFAS 133 and EITF 99-20 on future earnings volatility, specifically regarding derivative fair value changes and impairment of securitized assets.
- Goodwill Impairment: Monitor the Jan 1, 2002 transition to SFAS 142 for potential one-time goodwill impairment charges, despite the expected long-term earnings boost from eliminating amortization.
- GECS Asset Quality: Review the $149.7 billion in financing receivables and the $4.1 billion allowance for losses to assess credit risk in the capital services portfolio.
- Industrial Order Rates: Validate management's claim that short-cycle businesses are maintaining order rates comparable to pre-September 11 levels.