GENERAL ELECTRIC CO quarterly report, Q2 FY2009

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GE 2009 Q2 Form 10-Q Summary

Business context and reporting period

General Electric Company reported unaudited results for the quarter and six months ended June 30, 2009, compared with the same periods in 2008. GE combines its industrial businesses—Energy Infrastructure, Technology Infrastructure, NBC Universal, and Consumer & Industrial—with GE Capital (GECS). The filing cites the severe economic and credit-market downturn as an important backdrop.

Financial performance and position

  • Second-quarter revenue: $39.1 billion, down 17% year over year. Industrial sales fell 7%; GECS revenue fell 29% to $13.4 billion.
  • Second-quarter earnings: Continuing-operations earnings attributable to GE were $2.865 billion, down 47%; diluted continuing-operations EPS was $0.26 versus $0.54. Net earnings attributable to GE common shareowners were $2.596 billion, down 49%, and net EPS was $0.24 versus $0.51. Discontinued operations contributed a $194 million after-tax loss.
  • Six-month results: Revenue was $77.5 billion, down 13%; continuing-operations earnings attributable to GE were $5.697 billion, down 42%, and diluted continuing-operations EPS was $0.52 versus $0.98. Net earnings attributable to common shareowners were $5.332 billion, down 43%.
  • Margins: The filing does not provide a single consolidated operating-margin measure. Net margin, calculated as net earnings attributable to common shareowners divided by revenue, was approximately 6.6% in Q2 2009 versus 10.8% in Q2 2008.
  • Segment results: Q2 segment profit was $1.792 billion at Energy Infrastructure (up 13%), $1.833 billion at Technology Infrastructure (down 11%), $539 million at NBC Universal (down 41%), $590 million at Capital Finance (down 80%), and $111 million at Consumer & Industrial (down 20%).
  • Cash flow: Six-month consolidated cash from operating activities was $5.6 billion versus $18.1 billion. GE industrial cash from operating activities was $7.1 billion versus $9.3 billion; GECS used $1.7 billion of operating cash versus generating $12.3 billion. Consolidated cash and equivalents were $52.3 billion at June 30.
  • Debt and liquidity: Consolidated short- and long-term borrowings totaled approximately $514.1 billion at June 30, versus $523.8 billion at year-end 2008. GE reported $55.4 billion of committed, unused credit lines. GECS borrowings were $502.6 billion; financing receivables, net, were $359.5 billion.
  • Credit quality: GECS’s six-month provision for financing-receivable losses rose to $5.153 billion from $2.812 billion. Nonearning receivables increased to $13.1 billion from $8.0 billion at year-end; the allowance rose to $6.6 billion from $5.3 billion.

Material changes versus the prior comparable period

  • Revenue and earnings declined broadly, with the sharpest pressure at Capital Finance, where lower asset levels, currency effects, and higher credit-loss provisions reduced results.
  • Q2 Capital Finance segment profit fell to $590 million from $2.903 billion. Real Estate reported a $237 million segment loss, versus $484 million profit a year earlier.
  • GECS collections on financing receivables exceeded originations by approximately $25 billion in the first half, supporting its planned balance-sheet reduction. GECS assets declined about $10.1 billion from year-end.
  • GE’s cash contribution of $9.5 billion to GECS in Q1 supported capital and leverage objectives; $8.8 billion was subsequently contributed to GE Capital. GECS suspended its dividend to GE beginning in January.
  • Standard & Poor’s downgraded GE and GE Capital long-term ratings from AAA to AA+ in March; Moody’s downgraded them from Aaa to Aa2. Both affirmed short-term ratings.

Outlook, risks, contingencies, and unusual items

  • Management said it expected the global economic environment and U.S. unemployment to continue deteriorating in 2009, potentially increasing delinquencies, loan-loss provisions, and adverse effects on GECS results. The filing does not provide a quantified earnings forecast.
  • GE reduced its quarterly dividend by 68%, from $0.31 to $0.10 per share, effective in Q3 2009; management estimated savings of about $4 billion for the rest of 2009 and $9 billion annually thereafter.
  • Management reported completion of its 2009 long-term debt funding plan: approximately $45 billion targeted, including $34.6 billion issued under the FDIC Temporary Liquidity Guarantee Program and $9.2 billion of non-guaranteed debt during the first half. It had also prefunded $20 billion of its 2010 funding target. GE Capital received FDIC approval in July to position itself to exit the guarantee program. Continued access to unsecured funding and the effect of the program’s expiration remained risks.
  • GE Capital’s SEC ratio of earnings to fixed charges was 0.94:1 for the first half. A separate income-maintenance agreement with GE is intended to bring the fiscal-year ratio to at least 1.10; the Q1 capital contribution supports that agreement but does not increase the GAAP ratio disclosed in the filing.
  • Notable items included a $700 million Q1 tax benefit from designating about $2 billion of additional foreign subsidiary earnings as indefinitely reinvested; a $296 million pre-tax gain related to the PTL sale and retained-interest remeasurement; and a $343 million pre-tax gain from remeasuring GE’s prior BAC investment after acquiring control. Q2 also included $205 million of pre-tax investment-security impairments recognized in earnings.
  • GE’s June review estimated real estate carrying value exceeded estimated value by about $5 billion; management noted this does not necessarily result in recognized impairment. Real Estate recorded $0.2 billion of pre-tax impairments in the first half, and further deterioration could lead to additional charges.
  • Contingencies included a $132 million Q2 accrual for expected GE Money Japan interest-refund claims and a $243 million reserve for WMC loan-repurchase obligations. GE reported $6.925 billion of unrecognized tax benefits and a reasonably possible reduction of $0–$1.4 billion in the following 12 months.
  • Accounting changes effective in 2010 for securitizations and variable-interest entities could require consolidation of substantially all former qualifying special purpose entities. Assuming consolidation at carrying value, GE estimated approximately $40 billion of additional GECS net financing receivables and a roughly $2 billion reduction in equity using June 30 balances.
  • Management identified risks including credit-market and funding conditions, credit-rating changes, defaults and unemployment, real-estate weakness, demand in major industries, legal and regulatory proceedings, and the ability to maintain the dividend. No significant change in market-risk exposures from year-end was reported.

Most important facts for investors to verify

  • Whether GE Capital can sustain funding access and reduce commercial-paper exposure as planned, particularly as FDIC-guaranteed funding is phased out.
  • Subsequent trends in GECS delinquencies, nonearning loans, loss provisions, and the adequacy of reserves amid deteriorating economic conditions.
  • Cash generation in GE’s industrial businesses and GECS, and whether GECS asset reductions and collections continue to support liquidity.
  • Potential further impairments in real estate, investment securities, and other assets, including the sensitivity of valuations to market assumptions.
  • The final impact of GE Money Japan claims, WMC repurchase requests, tax audits, and the 2010 securitization/VIE accounting changes.
  • Whether the reduced dividend and stated funding and liquidity plans remain consistent with earnings, cash flow, and credit-rating requirements.