General Electric Company — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 3, 2014. Unaudited results. GE combines industrial businesses and GE Capital (GECC), whose results and balance sheet remain significant to the consolidated figures.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Consolidated revenue | $36.2B (+1%) | $35.7B | $106.6B (+1%) | $105.7B |
| Earnings from continuing operations attributable to GE | $3.48B (+6%) | $3.28B | $10.05B (-1%) | $10.19B |
| Net earnings attributable to GE | $3.54B (+11%) | $3.19B | $10.08B (+2%) | $9.85B |
| Diluted EPS, continuing operations | $0.34 | $0.32 | $0.99 | $0.98 |
| Diluted EPS, net earnings | $0.35 | $0.31 | $0.99 | $0.95 |
| Non-GAAP operating earnings / operating EPS | $3.83B / $0.38 (+3% / +6%) | $3.71B / $0.36 | $11.09B / $1.09 (-3% / -2%) | $11.47B / $1.11 |
Q3 industrial revenue rose 3% and industrial segment profit rose 9%; industrial segment margin expanded 90 basis points. For the nine months, industrial revenue rose 6%, segment profit rose 10%, and margin expanded 50 basis points. GE Capital earnings fell 22% in Q3 and 9% for the nine-month period. Consolidated effective tax rates were 11.8% and 10.5%, respectively.
Cash flow, financial position and liquidity
- Cash flow, nine months: Consolidated cash from operating activities was $16.2B, versus $17.2B in 2013. GE industrial CFOA was $7.2B versus $7.8B; GECC operating cash flow was $11.9B versus $11.8B. Consolidated investing activities used $1.9B, compared with $32.0B provided in 2013, which included $16.7B of NBCUniversal sale proceeds. Financing activities used $11.1B versus $39.0B.
- Balance sheet at September 30: Cash and equivalents were $90.4B, up from $88.6B at December 31, 2013; total assets were $650.0B, liabilities $506.5B, and total equity $143.5B.
- Funding and debt: Short-term borrowings were $69.9B and long-term borrowings $213.2B. Non-recourse securitization borrowings were $30.2B and bank deposits $60.8B. Total borrowings and bank deposits were $374.1B, down from $383.0B at year-end 2013. GECC financing receivables, net, were $237.4B, down from $253.0B.
- Liquidity: GE reported $10.6B cash and GECC $79.9B. Committed unused credit lines totaled $45.0B. GECC ending net investment, excluding cash, was $365B.
Changes versus prior period and significant developments
- Industrial growth and profitability improved, led in Q3 by Aviation, Oil & Gas and Healthcare. GE Capital’s revenue and earnings declined, reflecting portfolio reductions, dispositions, core decreases and, in Q3, higher credit-loss provisions.
- Financing receivables before allowance fell $15.6B from year-end, reflecting write-offs, currency effects, the held-for-sale classification of GEMB-Nordic, and collections exceeding originations. Nonaccrual receivables decreased to $6.2B from $7.9B; the allowance was $5.2B, or 2.1% of receivables versus 2.0% at year-end.
- GE completed the Synchrony Financial IPO and underwriters’ option issuance, receiving $2.842B that remains at Synchrony. GE retained approximately 85% ownership and continued to consolidate Synchrony. Synchrony also issued $3.6B of senior debt and obtained $8.0B of term loans.
- GE agreed to sell Appliances to Electrolux for $3.3B, subject to approvals and targeted to close in 2015. GE recorded a $0.1B pension curtailment loss related to the agreement.
- GE’s proposed $13.5B acquisition of Alstom’s Thermal, Renewables and Grid businesses, net of $3.4B assumed net cash, remained subject to approvals; closing was targeted for 2015. The parties also proposed three joint ventures, with Alstom to invest $3.5B.
Outlook, risks and unusual items
- Portfolio strategy: GE targeted GE Capital ENI, excluding cash, of $300B–$350B. Management said reducing non-core assets could weigh on near-term earnings but is expected to improve returns, reduce liquidity risk and strengthen capital ratios over time. No clear company-wide revenue or EPS guidance is provided in the supplied filing text.
- Pensions: A 2014 U.S. law change was estimated to reduce required GE Pension Plan cash funding by about $2.9B through year-end 2015. New mortality tables could increase year-end benefit obligations by approximately $5.0B and reduce 2015 EPS by about $0.06, including $0.01 of operating EPS; GE had not finalized its assumptions.
- WMC mortgage claims: Claims totaled $11.96B at September 30, based on loan purchase prices or unpaid principal balances and not adjusted for paydowns or collateral recoveries. The recorded reserve was $588M; GE estimated reasonably possible losses of $0–$500M above the reserve, excluding potential losses from an adverse decision on statutes of limitations. Fifteen lawsuits were pending after quarter-end developments. Outcomes and ultimate losses remain uncertain.
- Tax and regulation: GE disclosed $5.877B of unrecognized tax benefits and possible reductions of $0–$650M over the next 12 months. The U.S. tax provision deferring tax on active financial-services income was subject to expiration; GE warned its tax rate could rise significantly if it was not extended. GECC was a nonbank SIFI subject to evolving Federal Reserve requirements, including potential enhanced capital and liquidity standards.
- Other exposure: GE recorded a $29M pre-tax Venezuela currency remeasurement charge in Q3 amid uncertainty over exchange rates. Management also cited economic, credit-market, funding, currency, regulatory, litigation, transaction-completion and cybersecurity risks. GE reported no significant change in market risk since December 31, 2013, and stated disclosure controls were effective.
Investor verification priorities
- Reconcile GAAP results with non-GAAP operating earnings and EPS, and assess whether industrial growth offsets GE Capital’s earnings decline.
- Review GECC’s planned asset reductions, funding mix, capital and liquidity requirements, and the consequences of Synchrony’s continued consolidation pending the planned exit.
- Track WMC litigation, claim developments, reserve adequacy and the stated potential loss range, including the unresolved statute-of-limitations issue.
- Verify closing conditions and timing for the Appliances sale, Alstom proposal and GEMB-Nordic disposition; assess associated proceeds, earnings effects and execution risks.
- Monitor pension assumptions and funding, tax-law changes and unresolved tax matters, and evolving GECC regulatory requirements.