GE 2012 Q3 Form 10-Q Summary
Business context and reporting period
General Electric Company reported unaudited results for the three and nine months ended September 30, 2012. The company combines industrial businesses with GE Capital (GECC); intercompany transactions are eliminated in consolidated results. Amounts below are U.S. dollars. GE reorganized Energy Infrastructure effective October 1, 2012, with reporting on the new basis beginning in Q4.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Consolidated revenues | $36.3B | $35.4B | $108.0B | $109.3B |
| Earnings from continuing operations attributable to GE | $3.45B | $3.29B | $10.36B | $10.26B |
| Net earnings attributable to GE common shareowners | $3.49B | $2.34B | $9.63B | $9.39B |
| Diluted EPS, continuing operations | $0.33 | $0.23 | $0.98 | $0.87 |
| Operating cash flow | Not reported quarterly in the supplied statement | Not reported quarterly in the supplied statement | $20.1B | $24.2B |
- Q3 revenue rose about 3%; nine-month revenue declined about 1%. Management attributed industrial growth to organic revenue, partly offset by a stronger U.S. dollar; GE Capital revenue fell with lower ending net investment, currency effects and, year to date, the absence of the 2011 Garanti gain.
- Q3 earnings from continuing operations attributable to GE increased 5%; nine-month earnings increased 1%. The much larger Q3 increase in common-share earnings reflects, in part, $881 million of preferred dividends declared in Q3 2011, with none in Q3 2012.
- Industrial segment revenue and profit were $24.8B and $3.6B in Q3, versus $23.4B and $3.2B a year earlier. GE Capital revenue was $11.4B, down from $12.0B, while segment profit rose to $1.7B from $1.5B. For the nine months, industrial revenue was $73.6B and profit $10.6B; GE Capital revenue was $34.3B and profit $5.6B.
- Consolidated cash from operating activities for the nine months was $20.1B, down from $24.2B. GE industrial cash from operating activities was $10.7B versus $6.5B, including $5.4B of GECC dividends; GECC operating cash flow was $15.0B versus $16.7B. Consolidated cash increased $1.0B during the period.
- At September 30, cash and equivalents were $85.5B; total assets $698.9B, liabilities $570.9B and equity $128.0B. Net GECC financing receivables were $271.6B, down from $288.8B at year-end; the associated allowance was $5.4B, or 1.9% of receivables, versus 2.1% at year-end.
- Total borrowings and bank deposits were $431.5B, down from $453.4B at year-end. GECC reduced total borrowings by $28.4B. GE reported $8.9B of borrowings-to-total-capital invested at September 30. The filing does not provide a single consolidated operating-margin measure.
- Liquidity sources included $85.5B cash, a $3.0B high-quality liquid investment portfolio and $48.5B in committed unused credit lines. GECC’s funding plan continued to emphasize reducing its asset base; collections exceeded financing-receivable originations by $9.5B over the nine months.
Material changes and notable items
- GE Capital assets fell $22.9B from year-end, principally as financing receivables declined. Consolidated liabilities fell $28.2B. GE working capital increased $3.1B to support expected equipment sales.
- Nine-month discontinued operations recorded a $733M loss, versus $164M of earnings in 2011, largely reflecting GE Money Japan, WMC and Consumer Ireland. Q3 discontinued operations were $37M of earnings, including a $148M tax benefit tied to the 2007 Plastics sale, partly offset by WMC charges.
- GE recorded a $178M pre-tax loss on a U.K. plant committed for sale in Q3; the sale closed October 18. GE completed the $2.4B Business Property sale on October 1, after quarter-end, and the $227M Consumer Ireland sale during Q3.
- GE’s principal pension-plan cost was $2.8B for the nine months, up from $1.8B. A September plan amendment reduced certain retiree health and life obligations by about $450M. GE estimated a legislative change would reduce GE Pension Plan cash funding by about $2.5B through year-end 2013.
- No goodwill impairment was recorded. Real Estate was a sensitive exception: its reporting-unit carrying value exceeded estimated fair value by about $1.8B in the first test, but the second step indicated implied goodwill fair value exceeded its carrying value by about $1.7B. The estimates depend on uncertain real-estate assumptions.
Outlook, risks and contingencies
- The filing gives no specific consolidated full-year revenue or earnings guidance. Management described continued GECC asset reduction and noted that weaker financial-services revenue reflected lower ending net investment. The filing cautions that interim results are not necessarily indicative of full-year results.
- GE Money Japan claims remain uncertain: GE added $344M to its reserve in the first nine months, leaving a $578M reserve. Management said claim trends are variable; specified adverse changes in claim-rate assumptions could add about $100M to $350M to reserves.
- WMC had $4.075B of pending loan-repurchase claims at September 30 and a $608M reserve, increased by $117M in Q3. Separate trustee claims based on loan sampling involved loans with about $950M original principal balance and were not reserved; GE disputes their validity. The filing also describes pending litigation and warns actual losses could exceed reserves.
- Moody’s downgraded GE to Aa3 and GECC to A1 in April; short-term ratings were affirmed. GE reported no material operational, funding or liquidity impact. About $2.4B of GICs were redeemed in Q2 and Q3; additional repayment obligations could arise if specified ratings thresholds are breached.
- Other risks highlighted include European sovereign and credit-market stress, GECC funding access and planned deleveraging, consumer and commercial credit losses, real-estate values, currency and interest-rate volatility, regulatory changes, legal proceedings and tax uncertainties. Unrecognized tax benefits totaled $5.3B; reasonably possible reductions over the next 12 months were estimated at $0–$600M.
- The company noted that the U.S. tax treatment of active financial-services income could increase its tax rate after 2012 if the relevant provision is not extended. It also disclosed that GECC’s possible designation as a nonbank systemically important financial institution remained under consideration.
Important facts for investors to verify
- Whether GECC continues to reduce assets and borrowings while maintaining market access, liquidity and planned distributions to GE.
- Developments in WMC repurchase claims and litigation, and GE Money Japan excess-interest claims relative to recorded reserves.
- Credit performance, allowance adequacy and commercial real-estate valuations, including the assumptions behind the Real Estate goodwill test.
- How much reported earnings and cash flow depend on one-time gains, tax items, discontinued operations and GECC dividends to GE.
- Potential effects of ratings changes, GIC redemption triggers, regulatory requirements and tax-law changes on funding costs, liquidity and cash distributions.