G.E. Profits Are in Line With Analysts’ Outlook
By CHRISTINE HAUSER
Published: October 21, 2011
General Electric, the nation’s largest industrial company, said on Friday that it had higher net earnings for the third quarter, but price pressures in its energy business squeezed profit margins in an economic environment that the company’s chief executive described as “volatile.”
The company reported net income of $3.2 billion in the July-September period, up 57 percent compared with the same period in 2010. A large part of that leap, however, resulted from a significant one-time charge last year related to G.E.’s discontinued consumer finance unit in Japan.
The company said it had operating earnings per share of 31 cents in the third quarter, up 11 percent from 2010 and exactly in line with expectations of analysts surveyed by Thomson Reuters.
That excluded the 8-cents-per-share impact of its payback of Berkshire Hathaway’s investment, made in October 2008 when G.E. was being battered by the financial crisis. The cash infusion was repaid this month for $3.3 billion. But the company said it expected that the payback would improve annualized earnings per share by 3 cents a share in future quarters. Revenue for the period was $35.4 billion, which the company described as flat compared with the third quarter of 2010. Analysts had forecast $34.93 billion in revenue, according to a survey compiled by Thomson Reuters.
Jeffrey R. Immelt, G.E.’s chief executive, said the company was pleased with the results, the sixth consecutive quarter of double-digit growth in operating earnings, in what he called a “volatile macro environment.”
“We ended the quarter with a record high order backlog of $191 billion and we remain confident in our full-year 2011 operating framework,” he said in a statement.
In a conference call with analysts, Mr. Immelt said G.E. expected “solid” double-digit operating earnings for the year, with improved margins in the company’s energy business.
Profits fell 9 percent in the third quarter in the energy unit, to $1.5 billion, with the wind turbine business driving margins down, mostly because of competition and weakness in new orders.
“It was the largest driver of the margin pressure,” said Keith S. Sherin, G.E.’s chief financial officer, in an interview.
Richard Tortoriello, an analyst at S&P Capital IQ, said he thought the company reported a good quarter “given the kind of ups and downs that we see in the economic news.”
“The hit there was the lower-priced wind turbine shipments,” he said. “Prices reflect when orders are booked, and it takes a while for prices to improve.”
But Jeffrey T. Sprague, an analyst with Vertical Research Partners, called the results disappointing.
“The company is reporting very good order growth but you are seeing very intense competition for orders,” Mr. Sprague said. “You have got poorly priced products in the backlog that, when you begin delivering, it pressures the margins.”
G.E. had been expecting its business for power generation equipment to improve this year. Industrial orders grew in the third quarter, but the rate slowed to 16 percent.
Mr. Sherin said the data on long cycle equipment business could be “lumpy” and that orders for the first three quarters of the year were “very strong.” He said the company expected a strong fourth quarter in the energy business that would continue in 2012.
The earnings report provided a glimpse into the company’s progress in overhauling its diverse range of businesses. With its global reach, it also gives a snapshot into how business is faring in the United States and around the world.
The strongest industrial growth for large American manufacturers has recently come from abroad, but in the past month the debt crisis in Europe has caused concern about economic prospects. Mr. Sherin said in the call that G.E. was monitoring the situation in Europe closely.
Other industrial companies also have announced results. Honeywell International reported Friday that earnings rose 45 percent, to $1.10 a share, and it raised its 2011 outlook.
“Despite signals of slower economic growth, we expect positive organic growth to continue the rest of this year and into 2012,” said David M. Cote, the chairman and chief executive of Honeywell.
United Technologies reported this week that its earnings per share for the third quarter were $1.47, up 13 percent compared with the same quarter in 2010. The company also raised its full-year outlook.
Industrials rose nearly 2 percent on Wall Street. General Electric closed down nearly 2 percent at $16.31. Honeywell rose more than 5 percent to $51.28.
G.E., based in Fairfield, Conn., said that in the third quarter, its industrial segments had $23.4 billion in revenue, up 19 percent. International revenue was up by 25 percent, driven by growth in Brazil, Russia, China, India, Canada, Mexico and the Middle East.
But it has been gradually paring back its finance business, GE Capital, as part of a long-term strategy to rely more on its core industrial units. In the third quarter, GE Capital showed a 1 percent rise in revenue to $12 billion.
GE Capital earned about $1.5 billion in the third quarter, up 79 percent compared with the same quarter in 2010, because of lower credit costs and improved margins, the company said. Mr. Sherin said commercial real estate pared its losses to $82 million.
After the financial crisis, G.E. cut its dividend in 2009, the first time it did so since the Great Depression. Since then, it has raised its dividend three times, to 60 cents a share.
“When we get into the second or third year of the recovery, the longer cycle business will start to produce good returns,” said Mr. Tortoriello, the S&P Capital analyst. “That is why we are going to see significant earnings growth in G.E. in 2012 which we may not see from industrial companies in general because of the slowing growth in the economy.”