General Electric Company — 2015 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparative period is the corresponding 2014 period. GE combines industrial operations with GE Capital (GECC). Unless stated otherwise, amounts are U.S. dollars.
Business context
GE announced in April 2015 a plan to sell most of GE Capital’s assets over approximately 24 months and focus on industrial businesses. It expects to retain financing businesses tied to its industrial operations, including aviation services, energy financial services and healthcare equipment finance. GE classified most Commercial Lending and Leasing (CLL) and Real Estate operations, and its U.S. mortgage business, as discontinued operations.
Financial performance and position
| Metric | Q3 2015 | Nine months 2015 | Comparison / context |
|---|---|---|---|
| Consolidated revenue | $31.680 billion | $92.731 billion | Down 1% and 2%, respectively; nine-month decline primarily reflected $3.9 billion of unfavorable currency effects. Industrial segment organic revenue grew 4% in both periods. |
| Continuing earnings attributable to GE | $2.853 billion; $0.28 per diluted share | Loss of $2.091 billion; loss of $0.21 per diluted share | Q3 earnings were up 1% from $2.831 billion. YTD compared with earnings of $8.016 billion in 2014, reflecting exit-plan charges. |
| Net earnings attributable to GE | $2.506 billion; $0.25 per diluted share | Loss of $12.427 billion; loss of $1.23 per diluted share | Q3 was down 29% from $3.537 billion. YTD 2014 net earnings were $10.081 billion. |
| Discontinued operations | Loss of $347 million, after tax | Loss of $10.336 billion, after tax | YTD loss principally reflected planned CLL and Real Estate disposals. |
| Industrial segment profit | $4.530 billion, up 5% | $12.445 billion, up 6% | Industrial segment margin increased 100 basis points in each period. Five of seven industrial segments increased profit. |
| Cash from operating activities | Not separately stated in the supplied filing text | $13.147 billion consolidated, including discontinued operations | Continuing-operations operating cash flow was $10.065 billion, versus $11.168 billion in 2014. GE reported its cash from operating activities decreased $0.6 billion. |
| Cash and equivalents | $99.086 billion at September 30 | — | Up $14.2 billion from December 31, 2014; comprised $16.810 billion at GE and $82.276 billion at GECC. |
| Borrowings and deposits | $291.387 billion at September 30 | — | Includes $46.495 billion short-term borrowings, $180.011 billion long-term borrowings, $16.225 billion non-recourse securitization borrowings and $48.656 billion bank deposits. Borrowings decreased $46.5 billion from year-end. |
| Total assets / equity | $581.310 billion / $119.993 billion at September 30 | — | Total assets were $653.514 billion at December 31, 2014. |
| GE Capital ending net investment | $176 billion, excluding liquidity | — | GE expects retained GE Capital businesses to represent about $90 billion of ending net investment. |
Material changes and segment trends
- Industrial segment revenue fell 1% in Q3 and YTD, while organic revenue grew 4% in both periods. Foreign exchange reduced industrial revenue by $1.2 billion in Q3 and $3.5 billion YTD.
- Oil & Gas was the principal industrial weakness: Q3 revenue fell 16% and profit 12%; YTD revenue fell 13% and profit 10%. Management cited lower volume, currency effects, oil-price-related delays and pricing pressure.
- Aviation profit increased 7% in Q3 and 10% YTD; Power & Water profit increased 7% and 5%. Healthcare profit declined 10% in Q3 and 4% YTD.
- GE recorded $21.1 billion of after-tax GE Capital Exit Plan charges YTD, including $0.4 billion in Q3. The charges included $9.8 billion of disposal-related losses, $6.2 billion of tax expense, $4.7 billion of asset impairments and $0.4 billion of restructuring and other charges.
- GE signed agreements to sell approximately $94 billion of GE Capital ending net investment during the first nine months; approximately $60 billion had closed by September 30. GECC financing receivables fell $38.7 billion, and assets of discontinued operations fell $65.0 billion from year-end.
Outlook, risks and unusual items
- GE estimated approximately $23 billion of after-tax exit-plan charges through 2016, of which approximately $6 billion was expected to result in future net cash expenditures. Management’s estimate and sale proceeds depend on transaction execution, approvals, asset values and market conditions.
- GECC targeted reducing commercial paper to approximately $5 billion by year-end 2015, expected to issue no incremental unsecured term debt for five years, and planned to maintain elevated liquidity while asset sales proceed. GECC reported $97.0 billion of liquidity sources, including cash, liquid investments and cash classified with discontinued operations or businesses held for sale; GE also reported $46.0 billion of committed unused credit lines.
- GE fully and unconditionally guaranteed approximately $184 billion of specified GECC debt at September 30. A GECC debt exchange was increased to $36 billion and settled after quarter-end, on October 26, 2015.
- Moody’s downgraded GE’s senior unsecured rating to A1 in April; S&P affirmed its AA+ rating but changed GE’s outlook to negative in October. GECC ratings were affirmed as described in the filing.
- GECC remained subject to nonbank SIFI supervision and enhanced regulatory standards. The exit plan and planned reorganization were subject to regulatory review and approvals. The Synchrony Financial exchange offer and the proposed Alstom acquisition were significant post-quarter or pending transactions; the Department of Justice was seeking to block the planned Appliances sale to Electrolux.
- WMC mortgage repurchase litigation remained a material contingency. Reported claims totaled $11.879 billion, while reserves were $832 million; GE estimated reasonably possible losses of up to $500 million above reserves, excluding losses from an adverse statute-of-limitations decision.
- Other exposures included uncertainty over Venezuelan currency exchange rates and European credit conditions. GE stated that lower oil prices had contributed to Oil & Gas business pressure; the Energy Financial Services reporting unit’s fair value exceeded carrying value by approximately 13%, with no goodwill impairment recorded.
- GE reported effective disclosure controls as of September 30, 2015. It cautioned that estimates and interim results may change and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Progress, timing, approvals, proceeds and final charges for GE Capital asset sales, including the amounts of future cash expenditures and the retained portfolio’s size.
- GE’s cash generation from continuing industrial operations, excluding asset-sale proceeds and discontinued operations, and the sustainability of dividends and share repurchases.
- GECC liquidity, debt maturities, commercial-paper reduction, the scope of GE’s guarantee, and any implications of credit-rating changes.
- Actual disposal values and impairment assumptions for held-for-sale assets, including consumer receivables and discontinued CLL and Real Estate businesses.
- Outcomes and reserve adequacy for WMC litigation, the Appliances sale proceedings, and regulatory approvals for the Synchrony and Alstom transactions.