GE 2014 Q2 Form 10-Q Summary
Business context and reporting period
General Electric Company reported unaudited results for the quarter and six months ended June 30, 2014. GE combines industrial businesses—including Power & Water, Oil & Gas, Aviation, Healthcare and Transportation—with GE Capital (GECC). Unless stated otherwise, financial figures below are consolidated and in U.S. dollars.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue and other income | $36.2B (+3%) | $35.1B | $70.4B (+1%) | $70.0B |
| Earnings from continuing operations attributable to GE | $3.586B (+10%) | $3.257B | $6.573B (-5%) | $6.904B |
| Net earnings attributable to GE | $3.545B (+13%) | $3.133B | $6.544B (-2%) | $6.660B |
| Diluted EPS, continuing operations | $0.35 (+13%) | $0.31 | $0.65 (-2%) | $0.66 |
| Operating earnings and operating EPS (non-GAAP) | $3.930B; $0.39 | $3.687B; $0.36 | $7.259B; $0.72 | $7.757B; $0.75 |
| GE industrial cash from operating activities | Not stated quarterly in the supplied filing text | $3.4B | $3.7B |
- Consolidated cash from operating activities was $10.2B for the first half, down from $11.9B. GECC generated $8.3B of operating cash, versus $8.6B.
- Industrial segment revenue rose 7% in Q2 and 8% in the first half; industrial segment profit rose 9% and 10%, respectively. Industrial segment margin expanded 20 basis points in Q2 and 30 basis points in the first half, principally on higher pricing, partly offset by productivity and inflation.
- Q2 orders increased 4% to $25.1B; first-half orders rose 2% to $48.8B. Backlog was $246.4B.
- At June 30, consolidated assets were $651.9B and liabilities $511.8B. Cash and equivalents were $86.6B, compared with $88.6B at year-end. GECC financing receivables, net, were $241.7B, down from $253.0B.
- Total borrowings and bank deposits were $378.7B, down from $383.0B at December 31, 2013. This included $73.5B short-term borrowings, $216.8B long-term borrowings, $30.2B non-recourse securitization borrowings and $58.1B bank deposits.
- GE reported $46.8B of committed unused credit lines. Some cash is held in regulated entities or countries with transfer restrictions; $17B of GECC cash was in regulated banks and insurance entities.
Material changes versus comparable periods
- Q2 industrial growth was led by Oil & Gas, Aviation, Power & Water and Energy Management. Transportation revenue fell 18% in Q2 amid lower locomotive and mining equipment sales; Healthcare revenue was flat and reflected U.S. market weakness.
- GE Capital revenue fell 6% in Q2 and 7% in the first half; GE Capital earnings attributable to common shareholders declined 5% and 2%, respectively. The filing cites organic revenue declines, dispositions and lower gains, partly offset by lower impairments and provisions.
- First-half continuing earnings declined mainly because 2013 included gains related to the NBCUniversal sale. Other income fell to $0.5B from $1.7B. GE’s 2013 cash flow also included $16.7B of proceeds from that sale.
- GECC financing receivables before allowance declined $11.4B since year-end, reflecting collections exceeding originations, the Nordic business held for sale, and write-offs. Nonaccrual receivables declined to $7.1B, or 2.9% of receivables, from $7.9B, or 3.1%.
- First-half GECC cash collections on financing receivables exceeded originations by $3.4B, while net repayments exceeded new debt issuance by $15.0B, consistent with the balance-sheet reduction strategy.
Outlook, commentary, risks and unusual items
- GE continued to target GE Capital ending net investment, excluding cash, of $300B–$350B; it was $371B at June 30. Management said exiting non-core businesses could reduce near-term earnings, while expecting improved longer-term returns, lower liquidity risk and stronger capital ratios.
- GE’s proposed $13.5B acquisition of Alstom’s Thermal, Renewables and Grid businesses (net of $3.4B assumed net cash) was recommended by Alstom’s board. The related joint ventures would include $3.5B of Alstom investment. Closing was targeted for 2015, subject to approvals.
- Synchrony Financial priced a 15% IPO on July 30, 2014, after quarter-end. GE planned a split-off in late 2015, subject to regulatory approvals and market conditions; GECC would continue consolidating Synchrony after the IPO.
- WMC, GE’s former U.S. mortgage business, faced $12.1B of reported repurchase claims, a gross claim measure that excludes paydowns, collateral recoveries and other adjustments. Its reserve was $549M; GE estimated reasonably possible losses of up to approximately $500M above that reserve. Potential exposure from an adverse statute-of-limitations decision could not be meaningfully estimated. Fourteen lawsuits were pending.
- GE settled its GE Money Japan refund-claims obligation for approximately $1.7B and paid the related $1.836B reserve during the first half. GE also committed to sell its Nordic consumer finance business, with $3.2B of assets, and cited the transaction as a factor reducing its projected full-year tax rate.
- The Q2 effective tax rate was 5.1%, versus 8.3% a year earlier; the first-half rate was 9.8%, versus 10.4%. GE warned that its tax rate could increase significantly after 2014 if the U.S. tax provision deferring tax on active financial services income is not extended.
- GECC was designated a nonbank systemically important financial institution and filed its first resolution plan in June 2014. The effects and timing of enhanced capital, liquidity and other requirements remained uncertain.
- Management identified exposure to economic and financial-market conditions, GECC funding and planned asset reductions, credit losses, WMC litigation, credit ratings, regulatory changes and execution of strategic transactions as risks. The filing reported no significant change in market risk since year-end and stated that disclosure controls were effective.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with the company’s non-GAAP operating earnings measures, including the pension-cost adjustments and first-half NBCU comparison.
- Track GECC’s progress toward the $300B–$350B ending-net-investment target, including the timing and proceeds of dispositions and their effect on earnings and funding.
- Monitor WMC claims, litigation outcomes, reserve adequacy and the unquantified statute-of-limitations exposure.
- Confirm regulatory and other approvals, financing and expected terms for the Alstom transaction and Synchrony split-off.
- Assess refinancing and liquidity needs, credit-rating sensitivity, restricted cash, regulatory capital requirements and the potential tax-rate effect if the active financial services income provision expires.