General Electric Company (GE) - Q1 2004 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2004. GE reorganized its reporting segments on January 1, 2004, reducing the count from 14 to 11 to align with markets and customers. The company operates through two primary consolidating entities: the industrial manufacturing businesses ("GE") and the financial services businesses ("GECS").
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Total Revenues | $33,350 million | $30,456 million |
| Net Earnings | $3,240 million | $2,999 million |
| Diluted EPS | $0.32 | $0.30 |
| Cash from Operating Activities | $8,011 million | $3,634 million |
| Total Assets | $662,106 million | $647,483 million (Year-end 2003) |
| Total Liabilities | $569,329 million | $562,523 million (Year-end 2003) |
| Financing Receivables (Net) | $232,678 million | $226,029 million (Year-end 2003) |
| Short-term Borrowings | $143,212 million | $134,917 million (Year-end 2003) |
| Long-term Borrowings | $169,472 million | $170,004 million (Year-end 2003) |
Note: Q1 2003 Net Earnings included a $215 million non-cash charge for an accounting change (SFAS 143). Q1 2004 EPS is $0.32 both before and after accounting changes.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 10% to $33.4 billion. Industrial sales rose 6% to $16.7 billion, while Financial Services revenues grew 14% to $16.9 billion.
- Profitability: Net earnings increased 8% to $3.24 billion. Operating margin decreased to 12.0% from 15.4% in Q1 2003, driven by lower sales of higher-margin products in the Energy segment and reduced earnings from principal U.S. pension plans.
- Segment Performance:
- Commercial Finance: Revenues up 13%, Net Earnings up 10% due to acquisitions and investment gains.
- Consumer Finance: Revenues up 30%, Net Earnings up 10% driven by acquisitions and securitization activity.
- Energy: Revenues fell 12% and operating profit fell 28% due to lower volume and price, and the absence of contract termination fees present in 2003.
- Insurance: Revenues down 7% and Net Earnings down 20% primarily due to 2003 dispositions of insurance businesses.
- Healthcare: Revenues up 17% and operating profit up 11% due to volume growth from the Instrumentarium acquisition.
- Accounting Changes: Adoption of FIN 46R on Jan 1, 2004, consolidated Penske Truck Leasing Co., L.P., adding $2.6 billion in assets and $2.1 billion in liabilities with no impact on net earnings.
Guidance, Outlook, and Risks
- Acquisitions & Strategy: GE closed the acquisition of Amersham plc ($10.7 billion) in April 2004. The company expects to complete the combination of NBC and Vivendi Universal Entertainment in Q2 2004. An IPO for Genworth Financial (life and mortgage insurance) is expected in the first half of 2004.
- Capital Markets: In March 2004, GE issued 119.4 million shares for $3.8 billion to fund the NBC/Vivendi deal. GECS plans to issue an additional $40-$50 billion of long-term debt in 2004.
- Risks & Contingencies:
- Airline Exposure: Significant exposure to financially distressed airlines: $2.8 billion to US Airways and $4.3 billion to UAL Corp. and Air Canada. GE is evaluating legal obligations regarding future lease financing commitments to US Airways and has extended a restructuring commitment to Air Canada through September 30, 2004.
- Portfolio Quality: Consumer Finance delinquency rates rose slightly to 5.70% (from 5.57% at year-end) due to portfolio mix and seasonality. Commercial Finance delinquency rates were 1.42%.
- Investment Securities: Gross unrealized gains were $7.0 billion. Approximately $0.1 billion of portfolio value is at risk of being charged to earnings in the next 12 months.
Investor Verification Checklist
- Verify the status and timeline of the NBC/Vivendi Universal combination and the Genworth Financial IPO.
- Monitor the resolution of US Airways and Air Canada bankruptcy proceedings and the potential impact on GE's $7.1 billion combined exposure.
- Review the Energy segment order book and pricing trends given the 28% drop in operating profit.
- Assess the integration progress of recent acquisitions, specifically Amersham plc (Healthcare) and Transamerica/Sophia (Commercial Finance).
- Track the Consumer Finance delinquency rates and provision for losses as the portfolio mix shifts toward secured financing.