GE

General Electric Company (GE) - Q1 2003 10-Q Summary

Business Context and Reporting Period

This filing covers the quarterly period ended March 31, 2003. General Electric Company (GE) operates as a diversified conglomerate comprising industrial manufacturing and product services (GE) and financial services (GE Capital Services, or GECS). The company reported 9,994,362,000 shares outstanding as of the period end.

Key Financial Metrics

Margins: Operating margin was 15.4% of sales in Q1 2003, down from 18.2% in Q1 2002.

Material Changes vs. Prior Period

• Earnings Growth: Net earnings increased 19.8% year-over-year, driven primarily by a significantly smaller non-cash accounting charge in 2003 ($215 million) compared to 2002 ($1.015 billion). Earnings before accounting changes decreased 8.6% to $3.214 billion.
• Revenue Decline: Total revenues decreased 0.7%. Industrial sales fell 6% to $15.8 billion, while financial services revenues rose 6% to $14.7 billion.
• Segment Performance:
  • Power Systems: Revenues fell 20% and operating profit dropped 42% due to lower gas turbine sales.
  • NBC: Revenues declined 26% due to the absence of Winter Olympic broadcast revenues and lower ad revenue from Iraq war coverage.
  • Commercial Finance: Revenues and net earnings increased 8% and 15%, respectively, driven by asset growth.
  • Consumer Finance: Revenues and net earnings increased 16% and 10%, respectively.
• Cash Flow: Operating cash flow decreased significantly to $3.5 billion from $5.5 billion, largely due to lower progress collections and higher insurance claim payments.

Guidance, Outlook, Risks, and Unusual Items

• Accounting Changes:
  • SFAS 143: Adoption resulted in a $215 million after-tax charge for asset retirement obligations (nuclear fuel facilities).
  • SFAS 142: In Q1 2002, a $1.015 billion after-tax goodwill impairment charge was recorded (primarily GECS IT Solutions and Auto/Home). No similar charge occurred in Q1 2003.
  • SFAS 123: Stock option expense of $22 million was recognized in Q1 2003.
• Liquidity and Debt: GE and GE Capital maintain AAA/Aaa credit ratings. The company issued $16 billion of long-term debt in Q1 2003 to fund maturing debt and asset growth. Commercial paper is targeted at 25-35% of outstanding debt.
• Risks and Contingencies:
  • Airline Industry: Significant exposure ($3.8 billion) to UAL Corp and Air Canada, both of which filed for bankruptcy reorganization. US Airways emerged from bankruptcy on March 31, 2003.
  • Telecommunications: Investments and commitments total $9.5 billion and $3.0 billion, respectively, with ongoing monitoring for credit and impairment losses.
  • FIN 46: New consolidation rules for Variable Interest Entities (SPEs) are effective July 1, 2003. The impact on the balance sheet is currently impracticable to forecast.

Investor Verification Checklist

• Accounting Adjustments: Verify the impact of the $215 million SFAS 143 charge and the absence of the prior year's $1.015 billion goodwill charge when comparing year-over-year earnings.
• Airline Exposure: Review the $3.8 billion exposure to bankrupt airlines (UAL, Air Canada) and the adequacy of provisions for probable losses.
• Power Systems Outlook: Assess the sustainability of the 20% revenue decline in Power Systems and its impact on future industrial margins.
• Debt Composition: Monitor the shift from commercial paper to long-term debt and the company's ability to maintain AAA ratings amidst asset growth.
• FIN 46 Impact: Watch for updates regarding the July 1, 2003, adoption of FIN 46 and potential balance sheet consolidation of SPEs.