General Electric Company (GE) reported relatively lackluster third quarter 2013 results with operating earnings of $3.7 billion or 36 cents a share compared to $3.8 billion or 36 cents a share in the year-ago quarter. Although operating earnings per share for the reported quarter remained flat year over year, it marginally beat the Zacks Consensus Estimate by a penny.
On a GAAP basis, the company reported quarterly earnings of $3.3 billion or 32 cents per share from continuing operations compared to $3.5 billion or 33 cents in third quarter 2012.
Revenues for the reported quarter declined 1% year over year to $35.7 billion, primarily due to lower revenues from the GE Capital segment. While overall Industrial segment revenue increased 2% to $25.3 billion, GE Capital revenue declined 5% year over year to $10.7 billion. Revenues for the reported quarter missed the Zacks Consensus Estimate of $36.0 billion by a whisker.
The company received strong orders during the quarter across the globe. U.S. and Europe orders were up 18% and 17%, respectively, increasing the overall tally by 19% year over year to $25.7 billion. Total backlog of equipment and services at quarter-end reached a record level of $229 billion. The book-to-bill ratio for the quarter was 1.2.
During the reported quarter, General Electric decided to supply Algeria’s Sonelgaz with power generation equipment and services for six new combined-cycle power plants. Valued at $1.9 billion, this is arguably one of the largest power agreements in the company's history. Also during the quarter, General Electric received a $600 million order to supply turbomachinery equipment to Russia’s Yamal liquefied natural gas project. In addition, CFM International – a 50/50 joint venture between General Electric and Snecma, received an order from Air Asia for 528 LEAP aircraft engines and an order from Lufthansa for the new GE9X engine for 34 Boeing 777-9X aircraft, valued at more than $2.5 billion at list price.
Revenue by Segment
During the reported quarter, Oil & Gas revenue improved 18% year over year to $4.3 billion, while Energy Management revenue decreased 3% to $1.8 billion. Revenue from the Aviation segment climbed 12% year over year to $5.4 billion. However, Healthcare segment witnessed a flat trajectory in year-over-year revenue at $4.3 billion. Home & Business Solutions revenues surged 7% year over year to $2.1 billion.
Revenue growth from the Transportation segment remained flat in the reported quarter at $1.4 billion. Significantly fewer wind and gas turbine shipments, particularly from the European markets, hampered revenue of the Power & Water segment, which decreased 10% year over year to $6.5 billion.
Revenue from the GE Capital segment declined 5% year over year to $10.7 billion as it continued its strategy to reduce the overall size of its portfolio while focusing on core growth. In accordance with this plan, GE Capital paid $2 billion as third quarter dividend to General Electric. GE Capital intends to pay dividends to the tune of $6.5 billion in 2013 to its parent entity. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $384.6 billion at quarter-end. GE Capital finished the quarter with a Tier 1 common ratio of 11.3%, up 116 basis points year over year.
During the reported quarter, General Electric closed the acquisition of Avio Aero, an Italy-based manufacturer of aviation propulsion components and systems for civil and military aircraft. In addition, GE Oil & Gas augmented its presence in the oil and gas industry as it closed the acquisition of artificial lift technology provider Lufkin Industries Inc. for about $3.3 billion. Strengthening the artificial lift capabilities of General Electric, the strategic acquisition fortifies its turbomachinery product portfolio by leveraging industrial gears and engineered bearings designed by Lufkin. During the reported quarter, General Electric also collaborated with XD Electric Group to offer high voltage transmission and distribution solutions to customers in China.
Margins, Balance Sheet and Cash Flow
Operating margin in the Industrial segment increased 120 basis points with cost productivity. Unit shipments in Power & Water are expected to further recover in the later half of the year. Year-to-date, General Electric has reduced Industrial structural costs $1 billion and remains well on track for planned margin growth of 70 basis points for the year.
General Electric’s total segment profit for the reported quarter increased 12% year over year, with a rise in profits from Home & Business Solutions (up 28%), Aviation (up 18%) and Transportation (up 15%), partially offset by a considerable decline in profits in the Power & Water segment (down 57%). Total Industrial segment profit was up 11% while GE Capital profit climbed 13%.
Cash generated from operating activities for the reported quarter was $7.8 billion. Cash and marketable securities at quarter-end aggregated $130.4 billion. General Electric returned $13.9 billion to investors through dividend payouts and buybacks.
With a focused and dedicated execution of its strategic plans, General Electric expects to continue its bull run in 2014 as well and simultaneously benefit the shareholders with a healthy return on investments. The company has exited from the media business and has increased its investments in core industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. General Electric also remains focused on its stringent cost-cutting measures. We remain encouraged with these endeavors of the company.
General Electric presently retains a Zacks Rank #3 (Hold). Other companies in the industry worth mentioning are Hutchison Whampoa Ltd. (HUWHY), Sumitomo Corporation (SSUMY) and 3M Company (MMM), each carrying a Zacks Rank #2 (Buy).
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