General Electric Company — Q2 2012 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2012; comparisons are with the quarter and six months ended June 30, 2011, unless noted. GE reports industrial businesses separately from GE Capital (GECC); consolidated figures eliminate transactions between them. The filing is unaudited.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Change |
|---|---|---|---|
| Consolidated revenue | $36.5 billion | $35.6 billion | +2% |
| GE industrial segment revenue | $25.0 billion | $23.0 billion | +9% |
| GE Capital revenue | $11.5 billion | $12.4 billion | -8% |
| Earnings from continuing operations attributable to GE | $3.658 billion | $3.570 billion | +2% |
| Net earnings attributable to GE common shareowners | $3.105 billion | $3.689 billion | -16% |
| Diluted EPS from continuing operations | $0.34 | $0.33 | +3% |
| Diluted net EPS | $0.29 | $0.35 | -17% |
- For the first six months, revenue was $71.7 billion, down 3%; continuing-operations earnings attributable to GE were $6.909 billion, down 1%; and net earnings attributable to common shareowners were $6.139 billion, down 13%. Diluted EPS was $0.65 from continuing operations and $0.58 net.
- Six-month consolidated cash from operating activities was $14.2 billion, versus $15.1 billion. Cash from investing activities was $4.6 billion, versus $20.8 billion; cash used for financing was $28.7 billion, versus $26.3 billion. Cash and equivalents ended June at $74.3 billion, down $10.2 billion from year-end.
- At June 30, total assets were $694.1 billion, total liabilities $570.2 billion and total equity $123.9 billion. GECC financing receivables, net, were $274.0 billion, down from $288.8 billion at year-end; its allowance for credit losses was $5.2 billion, down from $6.2 billion.
- GECC borrowings and bank deposits totaled $418.0 billion, down from $443.1 billion at year-end. GE reported $74.3 billion in consolidated cash and equivalents and $48.8 billion in committed unused credit lines. The filing reports no single consolidated current-liquidity ratio.
- GE declared dividends of $0.17 per common share in Q2, compared with $0.15 a year earlier.
Material changes and management commentary
- Industrial segment revenue rose 9% in Q2, with growth led by Energy Infrastructure and Transportation. Industrial segment profit was $3.744 billion, versus $3.506 billion.
- GE Capital’s Q2 revenue fell 8%, while segment profit rose to $2.122 billion from $1.615 billion. Management attributed the earnings improvement to core increases and lower impairments, partly offset by lower gains. GE Capital assets declined $25.7 billion from year-end as the company continued to reduce its balance sheet.
- Net earnings declined more than continuing-operations earnings chiefly because discontinued operations recorded a $553 million loss in Q2, versus $194 million of earnings a year earlier. Q2 2012 included losses associated with GE Money Japan and WMC; Q2 2011 included a gain on the Consumer Singapore sale.
- Operating earnings, a non-GAAP measure excluding non-operating pension costs, increased 7% to $4.010 billion in Q2 and 4% to $7.597 billion for the first six months. Operating EPS rose 12% to $0.38 in Q2 and 7% to $0.72 for the first six months.
- GECC paid GE $3.0 billion in dividends during Q2, including a $2.5 billion special dividend. GECC also issued $2.227 billion of preferred stock.
- Moody’s downgraded GE’s senior unsecured rating from Aa2 to Aa3 and GECC’s from Aa2 to A1 on April 3; short-term ratings were affirmed. Management did not anticipate a material operational, funding or liquidity impact. The downgrade made substantially all relevant Trinity GICs redeemable; holders redeemed $2.4 billion during Q2.
Outlook, risks and contingencies
- The filing provides no quantified full-year earnings or revenue guidance. GE said a July 2012 U.S. pension-funding law change was expected to reduce GE Pension Plan cash funding by approximately $2.5 billion through year-end 2013.
- GE Money Japan claims reserves increased by $336 million in the first half; the reserve was $695 million at June 30. GE cited uncertainty in the pace and severity of future claims and estimated that specified adverse claim-rate assumptions could add approximately $100 million to $350 million to reserves.
- WMC’s reserve for mortgage representations-and-warranties claims was $491 million at June 30, after a $351 million second-quarter increase. Pending repurchase claims were $2.731 billion; these claim amounts are not the same as estimated losses. GE noted substantial estimation uncertainty and active litigation.
- Other disclosed risks include European sovereign-debt and credit-market conditions, GECC funding costs and asset-reduction plans, credit defaults, real-estate values, regulatory changes, litigation, tax matters and the ability to sustain planned dividends. GE had $5.340 billion of unrecognized tax benefits and said environmental remediation exposure could exceed accrued amounts, though excess exposure was not reasonably estimable.
- Management reported effective disclosure controls as of June 30, 2012, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether GE Capital’s earnings improvement and balance-sheet reduction continue without weakening funding access or liquidity.
- How the GE Money Japan and WMC claims develop, including reserve adequacy, litigation outcomes and any additional charges.
- Whether industrial growth and segment profitability offset ongoing declines in GE Capital revenue and the effects of currency movements.
- The sustainability of GECC dividends to GE, the common dividend, and planned pension contributions under changing market and regulatory conditions.
- How discontinued-operation losses, asset dispositions and the absence of prior-period transaction gains affect comparisons in subsequent periods.