General Electric Company — Q2 2010 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2010, compared with the corresponding 2009 periods. GE reports industrial operations separately from GE Capital (GECS); consolidated figures eliminate intercompany transactions. Effective January 1, 2010, GE reorganized its segments and adopted new consolidation rules for securitization entities, affecting period comparisons.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Consolidated revenue | $37.444B | $39.108B | $74.049B | $77.546B |
| Continuing earnings attributable to GE | $3.297B | $2.883B | $5.632B | $5.733B |
| Net earnings attributable to GE common shareowners | $3.034B | $2.614B | $4.904B | $5.368B |
| Diluted EPS from continuing operations | $0.30 | $0.26 | $0.51 | $0.53 |
| Diluted net EPS | $0.28 | $0.25 | $0.45 | $0.51 |
Cash flow and liquidity. First-half operating cash flow was $16.527B, versus $5.534B in 2009. GE industrial operating cash flow was $6.314B (down from $7.044B); GECS operating cash flow was $10.195B, compared with cash used of $1.709B. Consolidated cash and equivalents were $73.848B at June 30, including $12.861B at GE and $61.547B at GECS. GE reported $51.7B of committed, unused credit lines; cash plus committed lines exceeded twice GECS commercial paper borrowings.
Debt and balance sheet. Total assets were $749.9B, down $31.9B from year-end 2009; total liabilities were $629.2B. GECS borrowings and bank deposits totaled $481.7B, down from $500.3B at December 31, 2009. This includes $121.0B short-term borrowings, $289.8B long-term borrowings, $33.4B non-recourse securitization borrowings and $37.5B bank deposits. Consolidated equity was $120.7B.
Credit and portfolio quality. GECS provision for financing-receivable losses was $2.009B in Q2, down from $2.817B; first-half provision was $4.272B, down from $5.153B. At June 30, financing receivables before allowance were $342.4B, nonearning receivables were $12.7B (3.7%), and the allowance was $9.1B (2.7% of receivables). Impaired loans rose to $15.4B from $13.5B at January 1, primarily reflecting Real Estate. Real Estate held $8.3B of impaired loans; $5.9B were current under contractual terms.
Material changes versus prior periods
- Q2 revenue fell 4% and first-half revenue fell 5%. Management cited organic declines and portfolio changes, partly offset by the weaker U.S. dollar; first-half NBC Olympics broadcasts also supported revenue.
- Q2 continuing earnings attributable to GE rose 14%, while first-half continuing earnings declined 2%. First-half common-shareowner net earnings fell 9%, reflecting higher discontinued-operation losses.
- First-half discontinued-operation losses were $578M, versus $215M, primarily due to $566M of incremental reserves tied to the 2008 GE Money Japan sale. Q2 discontinued-operation loss was $188M.
- At January 1, new consolidation rules added approximately $31.1B of assets and $33.0B of liabilities and reduced total equity by $1.9B. GE cautioned that this accounting change complicates comparisons.
- GE Capital reduced assets and borrowings amid its stated plan to shrink the portfolio. First-half collections exceeded financing originations by $17.3B; excluding the accounting adoption effect, GECS assets declined $62.9B.
Segment snapshot, Q2. Energy Infrastructure revenue/profit was $9.540B/$1.910B; Technology Infrastructure $9.061B/$1.554B; NBC Universal $3.750B/$607M; GE Capital $12.297B/$830M; and Home & Business Solutions $2.250B/$143M. Segment profit is a management measure, not a uniform GAAP measure. Energy and Home & Business Solutions profits improved; Technology Infrastructure profit declined 11%. GE Capital profit increased from $431M, principally due to lower credit provisions, lower costs and a gain on the Regency transaction.
Outlook, risks and unusual items
- The filing provides no consolidated full-year earnings or revenue guidance. Management said results for the interim period are not necessarily indicative of full-year results.
- Management expected Real Estate losses to remain higher than in 2009. It estimated that an additional 1% or 5% decline in global property values could require approximately $0.1B or $0.4B of additional loan-loss reserves; outcomes are highly uncertain.
- GE Money Japan claims remained uncertain. GE recorded $697M of liability for excess-interest refund claims at June 30, including $186M of Q2 reserves. Under specified assumptions, slower monthly claims declines could increase the estimate by approximately $100M to $1.2B.
- The planned NBC Universal/Comcast transaction remained subject to regulatory approvals. GE expected approximately $7.9B cash proceeds after specified debt reduction, fees and the Vivendi buyout; closing was expected within six months. NBCU had $32.7B of assets and $10.1B of liabilities classified as held for sale.
- GE cited financial-market volatility, GECC funding costs and asset-reduction execution, credit defaults, credit ratings, dividend capacity, industry demand, regulation, litigation and strategic transactions as risks that could cause actual results to differ materially from forward-looking statements.
- GE’s Hudson River PCB remediation remained subject to EPA review and a Phase II decision; potential additional costs were uncertain. In July 2010, GE agreed to an SEC settlement concerning the UN Oil-for-Food Program, including a $1M penalty and approximately $22.5M disgorgement plus interest; DOJ closed its investigation without criminal action. Other disclosed proceedings included municipal investment-product investigations and shareholder litigation.
- After quarter-end, the board raised the quarterly common dividend 20%, from $0.10 to $0.12 per share, and extended the share-repurchase authorization through 2013, with repurchases expected to resume in Q3 2010.
Important facts for investors to verify
- Reconcile Q2 earnings growth with first-half declines and assess the contribution of credit-provision reductions, gains and discontinued operations.
- Track GE Capital funding, debt maturities, asset runoff, cash availability and the consequences of securitization consolidation; distinguish recourse from non-recourse obligations.
- Monitor commercial real estate valuations, impaired and nonearning loans, reserve adequacy, and the sensitivity of losses to collateral values.
- Follow GE Money Japan claims development and the assumptions underlying the $697M reserve, as well as progress and cash proceeds from the NBCU transaction.
- Review legal, environmental and regulatory developments, and confirm the timing and sustainability of the announced dividend increase and resumption of share repurchases.