General Electric Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. GE combines industrial operations with GE Capital (GECC); results are significantly affected by GE’s announced plan to exit most financial services assets.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Consolidated revenue | $32.8 billion (+2%) | $32.3 billion | $61.1 billion (-2%) | $62.5 billion |
| Continuing-operations earnings attributable to GE | $2.39 billion (-17%) | $2.88 billion | $(4.94) billion | $5.19 billion |
| Continuing-operations diluted EPS | $0.24 | $0.28 | $(0.49) | $0.51 |
| Discontinued-operations earnings (loss), net of tax | $(3.75) billion | $0.66 billion | $(9.99) billion | $1.36 billion |
| Net earnings (loss) attributable to GE | $(1.36) billion | $3.55 billion | $(14.93) billion | $6.54 billion |
| Net diluted EPS | $(0.13) | $0.35 | $(1.48) | $0.65 |
- Industrial segment profit increased 5% in Q2 and 6% year to date. Industrial segment margin rose 70 basis points in Q2 and 100 basis points year to date, supported by productivity, volume and pricing.
- Q2 industrial segment revenue was essentially flat; organic growth was 5%, offset by $1.3 billion of unfavorable foreign exchange. First-half consolidated revenue was reduced by $2.5 billion from currency effects.
- GE Capital segment profit was $218 million in Q2, down 78%, and a loss of $8.29 billion for the first half, versus $2.25 billion of profit a year earlier, chiefly reflecting exit-plan charges and portfolio changes.
Cash flow, liquidity and debt
- For the first six months, consolidated cash from operating activities was $12.39 billion, versus $10.21 billion in 2014. Investing activities provided $16.55 billion, including $15.58 billion of proceeds from discontinued-operation sales; financing activities used $18.71 billion.
- At June 30, cash and equivalents were $91.67 billion on the consolidated balance sheet. GE reported $17.0 billion of cash; GECC reported $74.6 billion, including cash classified with discontinued operations and businesses held for sale. GE and GECC also had $45.9 billion of committed unused credit lines.
- Total borrowings and bank deposits were $315.96 billion, down from $333.11 billion at December 31, 2014. The filing attributes the decrease in borrowings mainly to GECC repayments and currency translation, partly offset by GE debt issuance.
- GE provided a full and unconditional guarantee covering approximately $207 billion of specified GECC debt at June 30. GECC intended to issue no incremental unsecured term debt for five years and targeted reducing commercial paper to about $5 billion by year-end 2015.
- GE’s shareowner equity was $109.5 billion, down from $128.2 billion at year-end. GE declared dividends of $0.23 per share in Q2 and $0.46 per share for the first half; it returned $4.8 billion through dividends and repurchases in the first half.
Material changes, outlook and risks
- GE Capital Exit Plan: Announced April 10, 2015, the plan targets sales of most GECC assets over approximately 24 months, retaining principally GECAS, Energy Financial Services, Healthcare Equipment Finance, Working Capital Solutions and run-off insurance. GECC ending net investment, excluding liquidity, was $179 billion; management expected retained businesses to represent about $90 billion.
- GE signed agreements to sell approximately $68 billion of GECC ending net investment during the first half; approximately $20 billion of Real Estate transactions had closed by June 30. Management estimated about $23 billion of after-tax exit-plan charges through 2016, approximately $6 billion of which was expected to require future net cash expenditures. GE recorded $16.1 billion in Q1 and $4.6 billion in Q2.
- Discontinued operations primarily included most Commercial Lending and Leasing (CLL), Real Estate and WMC. The Q2 discontinued-operations loss included a $4.3 billion after-tax CLL disposal loss. First-half losses included after-tax disposal losses of $7.2 billion for CLL and $2.4 billion for Real Estate. Held-for-sale valuation depends on estimates of fair value and selling costs.
- Management cited industrial productivity, pricing and volume as positive factors, while the stronger U.S. dollar, unfavorable mix and weakness in Oil & Gas weighed on results. Oil & Gas revenue and segment profit fell 15% and 12% in Q2; management noted lower oil prices could pressure orders, project timing and pricing, and described ongoing cost actions. The filing provides no clear consolidated earnings or EPS guidance for the remainder of 2015.
- Transaction approvals and execution remain important uncertainties. The European Commission raised competition concerns about the proposed Alstom acquisition; remedies were proposed, and the transaction remained subject to approvals. On July 1, the Department of Justice initiated court proceedings seeking to block the proposed Electrolux purchase of Appliances.
- GE’s credit outlook was stable after Moody’s lowered GE’s senior unsecured rating to A1 from Aa3; S&P affirmed GE and GECC at AA+ with stable outlooks. GECC’s regulatory status, funding access, asset-sale timing and prices, and ability to complete planned transactions are risks. GE also identified currency, interest-rate, credit-market, litigation, tax and industrial-demand uncertainties.
- WMC had 15 pending mortgage repurchase lawsuits and $12.3 billion of reported claims; this is the underlying loan purchase price or unpaid principal, not an estimate of loss. The reserve was $825 million, and GE estimated reasonably possible losses of up to $500 million above the reserve, excluding certain statute-of-limitations outcomes.
- Controls and procedures were reported effective at June 30, 2015; GE said enhanced procedures were in place to monitor GECC controls during the planned dispositions.
Important facts for investors to verify
- Progress, realized proceeds and final after-tax and cash costs of the GE Capital Exit Plan, including whether additional valuation charges arise.
- Which GECC assets and liabilities remain classified as discontinued operations, and the comparability of reported continuing results after the portfolio reclassification.
- GECC funding, liquidity and debt repayment trends, including the implications of GE’s approximately $207 billion guarantee and rating changes.
- Regulatory outcomes and closing timing for Alstom, Appliances and other announced asset sales.
- Potential changes in WMC litigation exposure and reserves, and the assumptions underlying held-for-sale valuations and tax charges.