General Electric Company — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report; the filing also presents unaudited quarterly results. Amounts below are U.S. dollars.
Business context
GE is a diversified industrial and financial services company operating in more than 100 countries. Its eight reported segments were Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions and GE Capital. GE Capital represented about 31% of consolidated revenues; approximately 52% of revenue came from outside the United States.
GE reorganized its former Energy Infrastructure segment into Power & Water, Oil & Gas and Energy Management effective October 1, 2012, and moved Intelligent Platforms into Energy Management. Prior-period segment results were recast on this basis. GE also merged GE Capital Services into GE Capital Corporation in February 2012.
Key financial metrics
| Metric | FY 2012 | FY 2011 | Change or context |
|---|---|---|---|
| Consolidated revenue and other income | $147.4 billion | $147.3 billion | Essentially flat |
| Earnings from continuing operations attributable to GE | $14.7 billion | $14.2 billion | Up 3% |
| Net earnings attributable to GE | $13.6 billion | $14.2 billion | Down 4%, principally due to larger discontinued-operations losses |
| Diluted EPS from continuing operations | $1.39 | $1.24 | Up 12% |
| Diluted net EPS | $1.29 | $1.23 | Includes discontinued operations |
| Operating earnings and operating EPS | $16.1 billion; $1.52 | $14.9 billion; $1.31 | Non-GAAP; excludes non-operating pension costs |
| Cash from operating activities, consolidated | $31.3 billion | $33.4 billion | Cash and equivalents fell $7.1 billion to $77.4 billion |
| GE industrial CFOA | $11.4 billion | $12.1 billion | Non-GAAP; reported GE CFOA of $17.8 billion included $6.4 billion of GE Capital dividends |
| GE Capital ending net investment, excluding cash | $418.6 billion | Not stated here | Down from $512.8 billion at January 1, 2009 |
| GECC financing receivables, before allowance | $273.9 billion | $295.0 billion | Allowance was $5.0 billion, down from $6.2 billion; nonearning receivables were 2.7% of the portfolio versus 3.0% |
| GE Pension Plan underfunding | $13.3 billion | $13.2 billion | U.S. GAAP basis |
Industrial segment profit totaled $15.5 billion versus $14.1 billion. Segment profit increased at Oil & Gas (16%), Transportation (36%), Home & Business Solutions (31%), Energy Management (68%), Aviation (7%), Healthcare (4%) and Power & Water (8%). These segment measures are not equivalent to consolidated operating income. The filing text does not provide a clear consolidated operating-margin figure.
For the fourth quarter, earnings from continuing operations were $4.45 billion versus $4.05 billion in Q4 2011; diluted EPS from continuing operations was $0.41 versus $0.37. Fourth-quarter net earnings were $4.15 billion versus $3.81 billion.
Cash, debt and liquidity
- Consolidated cash and equivalents were $77.4 billion at year-end, including approximately $15.5 billion at GE and $61.9 billion at GECC. About $53.2 billion was held outside the U.S.; some cash is indefinitely reinvested or subject to regulatory or currency-transfer restrictions.
- GECC had $397.3 billion of total borrowings and bank deposits, down from $443.1 billion. Its reported debt-to-equity ratio was 4.85:1; the company’s adjusted, non-GAAP ratio, net of cash and treating hybrid debt as equity, was 3.66:1.
- GECC had $44.3 billion of current maturities of long-term debt at year-end. Management expected to refinance 2013 maturities using debt issuance, commercial paper, cash, receivables collections, asset sales, deposits and other funding.
- GE reported $48.2 billion of committed unused credit lines. GECC also used unsecured debt, commercial paper, deposits, securitizations and secured funding.
- Consolidated cash from investing activities was $11.3 billion and cash used for financing activities was $51.1 billion. GECC reduced borrowings by approximately $49.5 billion during 2012.
Material changes and unusual items
- Continuing-operations earnings improved, while reported net earnings declined because discontinued operations recorded a $1.04 billion after-tax loss, compared with a $76 million loss in 2011. Major 2012 items included additional GE Money Japan excess-interest reserves, WMC mortgage repurchase reserves and the Consumer Ireland disposal.
- GE Capital revenue fell 6% to $46.0 billion, while its segment earnings rose 12% to $7.4 billion. Lower impairments and other core improvements helped earnings; lower ending net investment, currency and the absence of the prior-year Garanti Bank gain weighed on revenue or earnings comparisons.
- GE’s consolidated effective tax rate was 14.4%, versus 28.3% in 2011. The prior year included a high tax impact from the NBC Universal transaction; 2012 also benefited from the Business Properties disposition. The U.S. tax provision for deferral of tax on certain active foreign financial-services income was reinstated retroactively in January 2013 through 2013.
- GE’s GAAP principal pension cost rose to $3.8 billion from $2.4 billion. The principal-plan discount rate fell to 3.96%; management expected 2013 operating pension costs of about $1.7 billion and total postretirement benefit costs to increase by about $0.4 billion in 2013.
- Moody’s downgraded GE and GECC long-term ratings in April 2012; GE was rated Aa3 and GECC A1 at year-end, both with stable outlooks. Management reported no material funding or liquidity impact from the downgrade, but some guaranteed investment contracts became redeemable.
- GE increased its share-repurchase authorization to $25 billion in December 2012 and to $35 billion in February 2013, through 2015. Common dividends declared were $0.70 per share for 2012, up from $0.61.
Outlook, commentary and risks
Management said GE entered 2013 with a record infrastructure backlog of approximately $209.5 billion and expected continued revenue and earnings growth. No specific consolidated revenue or earnings guidance was provided in the filing text. Backlog orders may be cancelled or deferred, subject in some cases to penalties.
Subsequent events included an agreement to sell GE’s remaining 49% NBCUniversal LLC interest, with expected consideration of approximately $16.7 billion, and a separate $1.4 billion real-estate sale; both were expected to close by the end of Q1 2013. GE also announced an agreement to acquire Avio’s aviation business for $4.3 billion. These were pending transactions as of the filing date. GE Capital acquired MetLife Bank’s deposit business in January 2013, adding approximately $6.4 billion of deposits.
- Credit and funding: GE Capital relies on commercial paper and unsecured debt markets; market disruption, higher funding costs, reduced credit availability or a further ratings downgrade could affect liquidity, margins and earnings.
- Credit portfolios and real estate: Defaults, collateral-value declines and uncertain commercial real-estate conditions could require higher reserves or impairments. Management highlighted continuing sensitivity in non-U.S. mortgages and commercial real estate.
- Contingencies: WMC faced 15 mortgage repurchase lawsuits. Pending specified claims were $5.36 billion, against reserves of $633 million; separate litigation claims were not reserved, and GE said a meaningful possible-loss estimate was not available. GE Money Japan’s excess-interest claims were also difficult to predict; its reserve was $700 million.
- Pensions and regulation: Pension costs and funding depend on discount rates, investment returns and other assumptions. GE Capital was subject to Federal Reserve supervision and was under consideration for a proposed nonbank SIFI determination.
- Other risks: Global economic and political conditions, currency movements, customer demand, legal and environmental proceedings, product quality, cybersecurity, suppliers and changes in tax or financial-services regulation could materially affect results.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management concluded controls were effective at December 31, 2012.
Important facts for investors to verify
- Reconcile continuing-operations earnings, non-GAAP operating earnings and discontinued-operations losses, particularly the Japan and WMC reserve assumptions.
- Review GE Capital’s 2013 refinancing needs, funding mix, cash availability and sensitivity to ratings changes.
- Assess the quality and concentration of GECC’s loan and real-estate portfolios, including allowance adequacy, nonaccrual assets and collateral assumptions.
- Track pension-plan funding, discount-rate assumptions and expected 2013 costs and contributions.
- Confirm the completion, final proceeds and tax effects of the NBCUniversal and real-estate sales, and the status and terms of the Avio acquisition.
- Compare backlog conversion, cancellations, segment orders and margins with management’s stated expectation of continued growth.