GENERAL ELECTRIC CO annual report, FY2014

GE 2014 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. This is an annual report, not a quarterly-only filing. GE combines industrial businesses with GE Capital (GECC), and presents separate measures for each.

Business context and performance

GE reported operations across seven industrial segments and GE Capital, serving customers in approximately 175 countries. The company continued to shift its portfolio toward industrial operations and reduce GE Capital’s size through asset sales and a planned exit from Synchrony Financial.

Consolidated total assets were $648.3B, down from $656.6B. Long-term borrowings were $200.4B; short-term borrowings were $71.8B. The balance sheet also included $62.8B of bank deposits and $29.9B of non-recourse securitization borrowings. GE and GECC had $44.9B of committed unused credit lines. GECC’s estimated Tier 1 common ratio was 12.7%, up from 11.2% (a company estimate, not a regulatory capital ratio).

Material changes and notable items

• Industrial segment revenue growth was led by Oil & Gas (up 10%), Aviation (up 9%) and Power & Water (up 11%). Industrial segment profit increased 10%, driven mainly by Aviation, Oil & Gas and Power & Water; Healthcare profit was flat and Transportation revenue and profit declined.
• GE Capital earnings fell 12%. Its financing receivables, before allowance, declined to $242.1B from $258.2B; nonaccrual receivables fell to $5.2B from $7.9B. The allowance was $5.1B, or 2.1% of receivables.
• GE completed the Synchrony Financial IPO, receiving $2.8B of proceeds that remained at Synchrony; GE retained approximately 85% and continued to consolidate it. GE targeted a later split-off to complete its exit, subject to approvals.
• GE sold its Nordic consumer finance business for $2.3B and signed agreements to sell Appliances to Electrolux for $3.3B, Transportation’s Signaling business to Alstom for about $0.8B, and Budapest Bank to Hungary’s government. These pending sales remained subject to conditions and approvals.
• GE proposed acquiring Alstom’s Thermal, Renewables and Grid businesses for approximately €12.4B, alongside planned joint ventures; the transaction remained subject to regulatory approvals and was targeted to close in 2015. GE also acquired Cameron’s reciprocating compression business and healthcare businesses during 2014.
• Other comprehensive income was a loss of $9.1B, mainly reflecting benefit-plan and currency-translation changes. GE’s pension-plan underfunding rose to $15.8B from $4.7B, substantially due to lower discount rates and updated mortality assumptions.
• Discontinued operations recorded a $112M after-tax loss in 2014, versus a $2.120B loss in 2013, primarily reflecting the prior-year GE Money Japan reserve charge. GE recorded a $0.2B after-tax charge in 2014 related to WMC mortgage repurchase obligations.

Outlook, risks and contingencies

• GE stated a goal of generating 75% of operating earnings from industrial businesses by 2016. It expected pension costs to rise approximately $0.6B in 2015 versus 2014; operating pension costs were expected to be about $1.7B.
• Management described lower oil prices as a risk to Oil & Gas orders and pricing, as customers may reduce capital spending. GE cited cost actions and productivity focus in response; lower energy costs could benefit other businesses.
• GECC’s reduction strategy may lower near-term earnings and could involve impairments, restructuring and other non-cash charges. GECC also faces evolving Federal Reserve oversight as a nonbank SIFI; proposed enhanced standards included capital, liquidity, stress-testing and planning requirements.
• GE identified global economic and currency volatility, customer demand, funding access and cost, credit quality, ratings, cybersecurity, regulation, product quality, acquisitions and integration, and pension assumptions as risks. GECC depended on continued access to debt and commercial-paper markets while diversifying funding sources.
• WMC reported $12.9B of mortgage repurchase claims and an $809M reserve. GE estimated a reasonably possible loss of up to $500M above the reserve, excluding potential exposure from an adverse statute-of-limitations decision; outcomes were uncertain.
• Environmental remediation spending was approximately $0.4B in 2014, with expected annual spending of about $0.4B in 2015 and $0.3B in 2016. Environmental remediation and asbestos reserves totaled $2.182B at year-end.
• The 2014 consolidated effective tax rate was 10.3%; GE noted that tax benefits depended partly on indefinitely reinvested foreign earnings and a U.S. provision for active financial-services income that was extended through 2014. GE warned that failure to extend the provision could significantly increase its effective tax rate after 2015.
• KPMG issued an unqualified opinion on the financial statements and internal controls. Management also concluded internal control over financial reporting was effective at year-end.

Investor verification priorities

1. Reconcile GAAP earnings and cash flow with GE’s non-GAAP operating earnings, Industrial CFOA and free cash flow, including the effect of GECC dividends and 2013 comparison items.
2. Track GE Capital’s progress toward the below-$300B ENI target, the timing and economics of the Synchrony split-off, and the effects of asset dispositions on earnings and capital.
3. Confirm closing, proceeds and regulatory status for the Alstom, Appliances, Signaling and Budapest Bank transactions.
4. Assess the WMC claim reserve against litigation developments, possible additional losses and the separate environmental and asbestos exposures.
5. Monitor pension funding status and assumptions, the effects of lower discount rates and mortality changes, and 2015 benefit costs and contributions.
6. Review GECC refinancing needs, commercial-paper access, deposit growth, liquidity restrictions and the final Federal Reserve requirements applicable to GECC.