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GE > SEC Filings for GE > Form 10-Q on 31-Jul-2014All Recent SEC Filings

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Form 10-Q for GENERAL ELECTRIC CO


31-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We are one of the largest and most diversified infrastructure and financial services corporations in the world. With products and services ranging from aircraft engines, power generation, oil and gas production equipment, and household appliances to medical imaging, business and consumer financing and industrial products. Operating businesses that are reported as segments include Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting and GE Capital.

General Electric Company's consolidated financial statements represent the combination of the industrial manufacturing and product services businesses of General Electric Company (GE) and the financial services businesses of General Electric Capital Corporation (GECC or Financial Services).

In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered "non-GAAP financial measures" under the U.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in Exhibit 99(a) to this Form 10-Q Report.

Unless otherwise indicated, we refer to captions such as revenues and other income and earnings from continuing operations attributable to the Company simply as "revenues" and "earnings" throughout this Management's Discussion and Analysis. Similarly, discussion of other matters in our condensed, consolidated financial statements relates to continuing operations unless otherwise indicated.

We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses.

We supplement our GAAP net earnings and earnings per share (EPS) reporting by also reporting operating earnings and operating EPS (non-GAAP measures). Operating earnings and operating EPS include service costs and plan amendment amortization for our principal pension plans as these costs represent expenses associated with employee benefits earned. Operating earnings and operating EPS exclude non-operating pension cost/income such as interest costs, expected return on plan assets and non-cash amortization of actuarial gains and losses. We believe that this reporting provides better transparency to the employee benefit costs of our principal pension plans and Company operating results.

We have reclassified certain prior-period amounts to conform to the current-period presentation.

(51)

OVERVIEW
--------------------------------------------------------------------------------

                            Three months ended June 30            Six months ended June 30
(Dollars in millions,
except per share
amounts)                     2014          2013          V%        2014         2013         V%

GAAP
Consolidated revenues   $  36,233     $  35,059          3%   $  70,411    $  70,002         1%
and other income
Earnings from
continuing operations
attributable
 to the Company             3,586         3,257         10%       6,573        6,904       (5)%
Earnings (loss) from
discontinued
operations,
 net of taxes,                (41)         (124)      (67)%         (29)        (244)     (88)%
attributable to the
Company
Consolidated net
earnings attributable
to
 the Company            $   3,545     $   3,133         13%       6,544        6,660       (2)%
EPS from continuing          0.35          0.31         13%        0.65         0.66       (2)%
operations-diluted
EPS from net                 0.35          0.30         17%        0.65         0.64         2%
earnings-diluted
Effective tax rate            5.1  %        8.3  %                  9.8  %      10.4  %

Non-GAAP
Operating earnings      $   3,930     $   3,687          7%   $   7,259    $   7,757       (6)%
Operating EPS                0.39          0.36          8%        0.72         0.75       (4)%

Revenues

Revenues increased 3% in the three months ended June 30, 2014 compared with the same period of 2013. Industrial sales increased 7%, reflecting organic growth and the effects of acquisitions. Financial Services revenues decreased 6% as a result of organic revenue declines, lower gains and the effects of dispositions, partially offset by lower impairments.

Overall, the effects of acquisitions increased consolidated revenues $0.7 billion and $0.2 billion in the three months ended June 30, 2014 and 2013, respectively. Dispositions also affected our operations through lower revenues of $0.5 billion and $0.3 billion in the three months ended June 30, 2014 and 2013, respectively.

Revenues increased 1% in the six months ended June 30, 2014 compared with the same period of 2013. Industrial sales increased 7%, reflecting organic growth and the effects of acquisitions. Financial Services revenues decreased 7% as a result of lower gains, organic revenue declines, primarily due to lower ENI and the effects of dispositions, partially offset by lower impairments. Other income decreased to $0.5 billion in the six months ended June 30, 2014 from 1.7 billion in the same period of 2013 due to the absence of NBCUniversal (NBCU LLC) related income, primarily from the sale of our remaining 49% common equity interest in NBCU LLC in the first quarter of 2013.

Overall, the effects of acquisitions increased consolidated revenues $1.3 billion and $0.3 billion in the six months ended June 30, 2014 and 2013, respectively. Dispositions also affected our operations through lower revenues of $2.5 billion and higher revenues of $0.8 billion in the six months ended June 30, 2014 and 2013, respectively.

Earnings from continuing operations attributable to the Company

Earnings from continuing operations attributable to the Company increased 10% in the three months ended June 30, 2014 compared with the same period of 2013, primarily due to a 9% increase in the operating profit of the industrial segments. Net earnings (loss) attributable to noncontrolling interests was zero in the three months ended June 30, 2014 as the loss attributable to noncontrolling interests was offset by GECC preferred stock dividends declared.

Our consolidated earnings in the three months ended June 30, 2014 and 2013 increased $0.1 billion and an insignificant amount, respectively, from acquired businesses. The effects of dispositions on earnings were decreases of $0.2 billion and $0.1 billion in the three months ended June 30, 2014 and 2013, respectively.

Earnings from continuing operations attributable to the Company decreased 5% in the six months ended June 30, 2014 compared with the same period of 2013, primarily due to the absence of gains related to the first quarter 2013 sale of our remaining 49% common equity interest in NBCU LLC ($1.4 billion), partially offset by a 10% increase in the operating profit of the industrial segments. Net earnings (loss) attributable to noncontrolling interests was insignificant in the six months ended June 30, 2014 as the loss attributable to noncontrolling interests was offset by GECC preferred stock dividends declared.

(52)

Our consolidated earnings in the six months ended June 30, 2014 and 2013 increased $0.2 billion and an insignificant amount, respectively, from acquired businesses. The effects of dispositions on earnings were a decrease of $1.4 billion and an increase of $0.8 billion in the six months ended June 30, 2014 and 2013, respectively.

Other 2014 Financial Highlights and Significant Developments

In the second quarter of 2014, Industrial segment revenues increased 7% on organic growth of 5%, and Industrial segment operating profit increased 9% with growth driven by Oil & Gas, Aviation, Power & Water and Energy Management. In the six months ended June 30, 2014, Industrial segment revenues increased 8% on organic growth of 6%, and Industrial segment profit increased 10% with growth driven by Aviation, Oil & Gas, Power & Water and Energy Management.

In the second quarter of 2014, Industrial segment margin increased 20 bps driven by higher pricing, partially offset by lower productivity and the effects of inflation. In the six months ended June 30, 2014, Industrial segment margin increased 30 bps driven by higher pricing, partially offset by the effects of inflation and lower productivity.

In the second quarter of 2014, orders of $25.1 billion increased 4%. In the six months ended June 30, 2014, orders of $48.8 increased 2%. Backlog increased to $246.4 billion.

GE Capital segment earnings decreased 5% and 2% in the three and six months ended June 30, 2014, respectively, on GE Capital ending net investment (ENI), excluding cash and equivalents, of $371 billion.

GE acquired API Healthcare (API), a healthcare workforce management software and analytics solutions provider, in February 2014 for $0.3 billion and certain Thermo Fisher Scientific Inc. life-science businesses (Thermo Fisher) in March 2014 for $1.1 billion. GE acquired Cameron's Reciprocating Compression division in June 2014 for $0.6 billion.

GE completed issuances of $3.0 billion of senior unsecured debt with maturities up to 30 years in the first quarter of 2014.

During the first quarter of 2014, our North American Retail Finance business, under the name Synchrony Financial, filed a registration statement with the U.S. Securities and Exchange Commission for an initial public offering (IPO), as a first step in a planned, staged exit from that business. On July 30, 2014, Synchrony Financial priced its IPO of 125,000,000 shares of common stock at a price of $23.00 per share, for approximately 15% of the company. Synchrony has granted the underwriters an option to purchase up to an aggregate of 18,750,000 additional shares of common stock. Proceeds from the equity offering will be retained at Synchrony following the IPO. Following the IPO, GECC will continue consolidating the business, and we are targeting a split-off of the business in late 2015, subject to bank regulatory and other approvals and market conditions.

On June 20, 2014, GE's offer to acquire the Thermal, Renewables and Grid businesses of Alstom for $13.5 billion, net of $3.4 billion of assumed net cash in the businesses to be acquired, was positively recommended by Alstom's board of directors. In addition, GE, Alstom and the French Government signed a memorandum of understanding for the formation of three joint ventures in grid technology, renewable energy, and global nuclear and French steam power. Alstom will invest $3.5 billion of cash in these joint ventures. The proposed transaction is subject to further reviews and approvals, including Alstom's works councils and shareholder approval, as well as regulatory approvals. The transaction is targeted to close in 2015.

(53)

SEGMENT OPERATIONS


Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business in a given period. In connection with that assessment, the Chief Executive Officer may exclude matters such as charges for restructuring; rationalization and other similar expenses; acquisition costs and other related charges; technology and product development costs; certain gains and losses from acquisitions or dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team.

Segment revenues include both revenues and other income related to the segment. Segment profit excludes results reported as discontinued operations, earnings attributable to noncontrolling interests of consolidated subsidiaries, and accounting changes. Segment profit excludes or includes interest and other financial charges and income taxes according to how a particular segment's management is measured - excluded in determining segment profit, which we sometimes refer to as "operating profit," for Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation and Appliances & Lighting; included in determining segment profit, which we sometimes refer to as "net earnings," for GE Capital. Certain corporate costs, such as shared services, employee benefits and information technology are allocated to our segments based on usage. A portion of the remaining corporate costs are allocated based on each segment's relative net cost of operations.

Effective in the second quarter of 2014, our GE Capital segment results include the effects of the GECC preferred stock dividends. Previously, such dividends had been reported in the caption "Corporate items and eliminations" in the Company's Summary of Operating Segments table. Presenting GE Capital segment results including the effects of the GECC preferred stock dividends is consistent with the way management now measures the results of our financial services business. Prior-period segment information has been recast to be consistent with how we currently evaluate the performance of GE Capital.

Results of our former equity method investment in NBCU LLC, through the date of sale in the first quarter of 2013, are reported in the Corporate items and eliminations line in the Summary of Operating Segments.

In addition to providing information on segments in their entirety, we have also provided supplemental information for certain operations within the segments.

(54)

Summary of Operating Segments (Unaudited)

                               Three months ended June 30         Six months ended June 30
(Dollars in millions)             2014         2013       V%        2014         2013       V%

Revenues
  Power & Water             $    6,292    $   5,715      10%   $  11,801    $  10,540      12%
  Oil & Gas                      4,761        3,955      20%       9,069        7,354      23%
  Energy Management              1,856        1,981     (6%)       3,528        3,729     (5%)
  Aviation                       6,090        5,303      15%      11,868       10,377      14%
  Healthcare                     4,483        4,490       -%       8,681        8,779     (1%)
  Transportation                 1,306        1,597    (18%)       2,533        3,019    (16%)
  Appliances & Lighting          2,120        2,127       -%       3,977        4,044     (2%)
  Total industrial              26,908       25,168       7%      51,457       47,842       8%
segment revenues
  GE Capital                    10,247       10,916     (6%)      20,762       22,384     (7%)
   Total segment revenues       37,155       36,084       3%      72,219       70,226       3%
Corporate items and               (922)      (1,025)     10%      (1,808)        (224)       U
eliminations
Consolidated revenues and   $   36,233    $  35,059       3%   $  70,411    $  70,002       1%
other income

Segment profit
  Power & Water             $    1,133    $   1,087       4%   $   2,021    $   1,806      12%
  Oil & Gas                        665          532      25%       1,111          857      30%
  Energy Management                 69           31        F          74           46      61%
  Aviation                       1,197        1,067      12%       2,312        2,003      15%
  Healthcare                       730          726       1%       1,300        1,321     (2%)
  Transportation                   270          313    (14%)         472          580    (19%)
  Appliances & Lighting            102           83      23%         155          162     (4%)
  Total industrial               4,166        3,839       9%       7,445        6,775      10%
segment profit
  GE Capital                     1,703        1,789     (5%)       3,636        3,727     (2%)
   Total segment profit          5,869        5,628       4%      11,081       10,502       6%
Corporate items and             (1,474)      (1,748)     16%      (3,016)      (2,227)   (35%)
eliminations
GE interest and other             (400)        (326)   (23%)        (765)        (650)   (18%)
financial charges
GE provision for income           (409)        (297)   (38%)        (727)        (721)    (1%)
taxes
Earnings from continuing
operations
  attributable to the            3,586        3,257      10%       6,573        6,904     (5%)
Company
Earnings (loss) from
discontinued operations,
   net of taxes                    (41)        (124)     67%         (29)        (244)     88%
Consolidated net earnings
attributable to
  the Company               $    3,545    $   3,133      13%   $   6,544    $   6,660     (2%)

Power & Water

Revenues of $6.3 billion in the three months ended June 30, 2014 increased $0.6 billion, or 10%, on higher volume ($0.6 billion), primarily equipment at Thermal and Wind, partially offset by lower prices ($0.1 billion). Segment profit of $1.1 billion in the three months ended June 30, 2014 increased 4%, on higher volume ($0.1 billion) and higher other income ($0.1 billion), partially offset by lower prices ($0.1 billion) and lower productivity ($0.1 billion). The increase in earnings from higher volume was primarily driven by Thermal and Wind.

Revenues of $11.8 billion in the six months ended June 30, 2014 increased $1.3 billion, or 12%, on higher volume ($1.4 billion), primarily equipment at Wind and Thermal, partially offset by lower prices ($0.1 billion). Segment profit of $2.0 billion in the six months ended June 30, 2014 increased $0.2 billion, or 12%, on higher volume ($0.2 billion) and higher productivity ($0.1 billion), partially offset by lower prices ($0.1 billion). The increase in earnings from higher volume was primarily driven by Wind and Thermal.

(55)

Oil & Gas

Revenues of $4.8 billion in the three months ended June 30, 2014 increased $0.8 billion, or 20%, on higher volume ($0.7 billion) and the effects of a weaker U.S. dollar ($0.1 billion). Higher volume was primarily due to higher equipment sales, primarily at Subsea and Turbomachinery, and the result of the third-quarter 2013 acquisition of Lufkin Industries, Inc. Segment profit of $0.7 billion in the three months ended June 30, 2014 increased $0.1 billion, or 25%, on higher volume ($0.1 billion). The operating profit improvements were primarily at Turbomachinery and Subsea.

Revenues of $9.1 billion in the six months ended June 30, 2014 increased $1.7 billion, or 23%, on higher volume ($1.5 billion) and higher other income ($0.1 billion) due to non-repeat of charges incurred in the first quarter of 2013, the effects of a weaker U.S. dollar ($0.1 billion) and higher prices ($0.1 billion). Higher volume was primarily due to higher equipment sales, primarily at Subsea and Turbomachinery and the result of the third-quarter 2013 acquisition of Lufkin Industries, Inc. Segment profit of $1.1 billion in the six months ended June 30, 2014 increased $0.3 billion, or 30%, on higher volume ($0.2 billion) and higher other income ($0.1 billion). The operating profit improvements were primarily at Subsea and Turbomachinery.

Energy Management

Revenues of $1.9 billion in the three months ended June 30, 2014 decreased $0.1 billion, or 6%, on lower volume ($0.1 billion). Lower volume was primarily driven by weakness in the North American utility and electrical distribution markets. Segment profit of $0.1 billion increased more than 100% in the three months ended June 30, 2014 on higher productivity reflecting selling, general and administrative (SG&A) cost reductions.

Revenues of $3.5 billion in the six months ended June 30, 2014 decreased $0.2 billion, or 5%, on lower volume ($0.2 billion) and other income driven by the absence of a gain on a disposition in the first quarter of 2013. Lower volume was primarily driven by weakness in the North American utility and electrical distribution markets. Segment profit increased 61% in the six months ended June 30, 2014 on higher productivity ($0.1 billion) reflecting continued SG&A cost reductions, partially offset by the absence of a gain on a disposition in the first quarter of 2013.

Aviation

Revenues of $6.1 billion in the three months ended June 30, 2014 increased $0.8 billion, or 15%, on higher volume ($0.4 billion), higher prices ($0.3 billion) and higher other income ($0.1 billion). Higher volume was driven by higher equipment sales on increased commercial engine shipments and increased service revenues as well as the third-quarter 2013 acquisition of Avio S.p.A. (Avio). Segment profit of $1.2 billion in three months ended June 30, 2014 increased $0.1 billion, or 12%, on higher prices ($0.3 billion), higher volume ($0.1 billion) and higher other income ($0.1 billion), partially offset by lower productivity ($0.3 billion) and the effects of inflation ($0.1 billion). Operating profit improvements were primarily driven by services and the impact of Avio.

Revenues of $11.9 billion in the six months ended June 30, 2014 increased $1.5 billion, or 14%, on higher volume ($0.9 billion) and higher prices ($0.6 billion). Higher volume was driven by higher equipment sales on increased service revenues and increased commercial engine shipments as well as the third-quarter 2013 acquisition of Avio S.p.A. (Avio). Segment profit of $2.3 billion in six months ended June 30, 2014 increased $0.3 billion, or 15%, on higher prices ($0.6 billion), higher volume ($0.2 billion) and higher other income ($0.1 billion), partially offset by lower productivity ($0.3 billion) and the effects of inflation ($0.2 billion). Operating profit improvements were primarily driven by services and the impact of Avio.

Healthcare

Revenues of $4.5 billion in the three months ended June 30, 2014 were flat as higher volume ($0.1 billion) was offset by lower prices ($0.1 billion). Revenues were down in equipment and flat in services reflecting weakness in the U.S. markets. Segment profit of $0.7 billion in the three months ended June 30, 2014 increased 1% on higher productivity ($0.1 billion) reflecting SG&A cost reductions, partially offset by lower prices ($0.1 billion).

Revenues of $8.7 billion in the six months ended June 30, 2014 decreased $0.1 billion, or 1%, on lower prices ($0.1 billion), partially offset by higher volume ($0.1 billion). Revenues were down in both equipment and services reflecting weakness in the U.S. markets. Segment profit of $1.3 billion in the six months ended June 30, 2014 decreased 2% on lower prices ($0.1 billion) and the effects of inflation ($0.1 billion) offset by higher productivity ($0.2 billion) reflecting SG&A cost reductions.

(56)

Transportation

Revenues of $1.3 billion in the three months ended June 30, 2014 decreased $0.3 billion, or 18%, on lower volume ($0.3 billion). Lower volume was driven by lower locomotive equipment sales and weakness in the Mining business where both equipment and services revenues decreased. Segment profit of $0.3 billion in the three months ended June 30, 2014 decreased 14%, primarily due to lower volume ($0.1 billion). Lower volume was primarily related to equipment sales of locomotives and mining equipment.

Revenues of $2.5 billion in the six months ended June 30, 2014 decreased $0.5 billion, or 16%, on lower volume ($0.5 billion). Segment profit of $0.5 billion in the six months ended June 30, 2014 decreased $0.1 billion, or 19%, primarily due to lower volume ($0.1 billion). Lower volume was driven by lower equipment sales and weakness in the Mining business where both equipment and services revenues decreased.

Appliances & Lighting

Revenues of $2.1 billion in the three months ended June 30, 2014 were flat. Segment profit of $0.1 billion in the three months ended June 30, 2014 increased 23% driven by higher productivity.

Revenues of $4.0 billion in the six months ended June 30, 2014 decreased $0.1 billion, or 2%, on lower volume ($0.1 billion), primarily at Appliances as a result of first quarter 2014 weather-related pressures. Segment profit of $0.2 billion in the six months ended June 30, 2014 decreased 4% on lower productivity and the effects of the stronger U.S. dollar, partially offset by price increases.

GE Capital

GE Capital revenues decreased 6% and net earnings decreased 5% in the three months ended June 30, 2014. Revenues decreased as a result of organic revenue declines, lower gains and the effects of dispositions, partially offset by lower impairments. Net earnings reflected the effects of dispositions and lower gains, partially offset by lower impairments, core increases and lower provisions for losses on financing receivables.

GE Capital revenues decreased 7% and net earnings decreased 2% in the six months ended June 30, 2014. Revenues decreased as a result of lower gains, organic revenue declines, primarily due to lower ENI, and the effects of dispositions, partially offset by lower impairments. Net earnings reflected lower gains, the effects of dispositions and core decreases, partially offset by lower impairments and lower provisions for losses on financing receivables.

We have communicated our goal of reducing GE Capital's ENI, excluding cash and equivalents, most recently targeting a balance of $300 billion to $350 billion. ENI is a metric used by us to measure the total capital we have invested in our financial services business. GE Capital's ENI, excluding cash and equivalents, was $371 billion at June 30, 2014. To achieve this goal, we are more aggressively focusing our businesses on selective financial services products where we have deep domain experience, broad distribution, the ability to earn a consistent return on capital and are competitively advantaged, while managing our overall balance sheet size and risk. We have a strategy of exiting those businesses that are deemed to be non-strategic or that are underperforming. We have completed a number of dispositions in our businesses in the past and will continue to evaluate options going forward.

Accordingly, in the short-term, as we reduce our ENI through exiting non-core businesses, the overall level of our future net earnings may be reduced. However, over the long-term, we believe that this strategy will improve our long-term performance through higher returns as we will have a larger concentration of assets in our core businesses, as opposed to the underperforming or non-strategic assets we will be exiting; reduce liquidity risk as we pay down outstanding debt and diversify our sources of funding (with less reliance on the global commercial paper markets and an increase in alternative sources of funding such as deposits); and reduce capital requirements while strengthening capital ratios.

(57)

Additional Information-GE Capital

Businesses

                             Three months ended June 30        Six months ended June 30
(Dollars in millions)          2014         2013       V%        2014         2013       V%

Revenues
CLL                       $   3,611    $   3,907     (8)%   $   7,193    $   7,414     (3)%
Consumer                      3,598        3,650     (1)%       7,200        7,475     (4)%
Real Estate                     664          872    (24)%       1,295        2,529    (49)%
Energy Financial                307          303       1%         776          646      20%
Services
GECAS                         1,345        1,282       5%       2,690        2,661       1%
  Total revenues              9,525       10,014     (5)%      19,154       20,725     (8)%
Corporate items and             722          902    (20)%       1,608        1,659     (3)%
eliminations
Total revenues            $  10,247    $  10,916     (6)%   $  20,762    $  22,384     (7)%

Profit
CLL                       $     541    $     825    (34)%   $   1,105    $   1,223    (10)%
Consumer                        472          830    (43)%       1,258        1,364     (8)%
Real Estate                     289          435    (34)%         528        1,125    (53)%
Energy Financial                 76           60      27%         229          143      60%
Services
. . .
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