By Rachel Layne
April 17 (Bloomberg) -- General Electric Co.’s first- quarter profit fell 35 percent, a smaller decline than analysts estimated because of tax credits and increased earnings from power-generation equipment and jet engines.
GE Capital’s earnings were reduced by real-estate losses and rising consumer-credit defaults, and the recession cut demand for medical equipment and NBC Universal advertising. Profit rose 19 percent at the energy unit and 6 percent at GE Technology Infrastructure, which includes the engine business.
“We view this morning’s results, order rates and backlog positively despite lower revenue and mixed quality of earnings,” Steven Winoker, a senior analyst at Sanford C. Bernstein & Co. in New York, wrote in a note to clients today. There was a $1.2 billion tax benefit at GE Capital, he said.
Profit from continuing operations declined to $2.83 billion, or 26 cents a share, from $4.35 billion, or 43 cents, a year earlier, Fairfield, Connecticut-based GE said in a statement today. Analysts predicted 21 cents, the average of 11 estimates in a Bloomberg survey.
GE rose 9 cents to $12.36 at 12:07 p.m. in New York Stock Exchange composite trading. The company had lost about 67 percent of its market value in the year since Chief Executive Officer Jeffrey Immeltsurprised investors with a first-quarter 2008 profit decline and lowered annual forecast.
“The global environment remains challenging,” Immelt told investors on a conference call. “While we’re seeing some positive indicators globally, we continue to be cautious and remain safe and secure.”
Backlog ‘a Good Sign’
Revenue fell 9 percent to $38.4 billion. The equipment and service contract backlog was $171 billion, just $1 billion less than at Dec. 31, GE said.
“The backlog was flat for the quarter but actually up year over year,” Peter Sorrentino, who helps manage about $13.3 billion at Huntington Asset Management in Cincinnati, said today in an interview with Bloomberg Television. “That’s a very good sign. That means that the industrial side of GE is still functioning and still functioning well.”
Immelt and GE’s board, navigating the longest U.S. recession in a quarter-century, in February cut the dividend for the first time since 1938 to preserve cash. GE last month lost its top debt ratings from Moody’s Investors Service and Standard & Poor’s Ratings Services for the first time in decades.
“GE has lost its ‘port in the storm’ status, and we believe longer term, the company will need to further transform its portfolio if it seeks to regain that status,” said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York.
Profit Targets
GE previously stopped providing per-share forecasts. While GE Capital has a 2009 profit target of $5 billion, the current economy may mean earnings closer to $2 billion to $2.5 billion, executives said at a March 19 investor meeting. GE “doesn’t see a reason” to change the framework for profit at most of the non-finance units to be little changed to up as much as 5 percent, Immelt said today.
The company will hold another finance-oriented investor meeting in “early summer” Immelt told investors, in addition to the traditional update in May at a conference in Florida.
A net gain of about 1 cent added to per-share profit, Chief Financial Officer Keith Sherin said today. Tax credits of 2 cents and gains of 6 cents from the finance unit and aviation were tempered by 7 cents in markdowns, impairments and changes required for estimating the tax rate for the year.
GE Capital Profit
Income at GE Capital, which includes real estate, private- label credit cards, aircraft leasing and middle-market company lending, declined 58 percent to $1.12 billion on $13.1 billion in sales.
The company eliminated the internal payment GE Capital traditionally gives the parent company. Since September, the payment had been 10 percent of GE Capital’s profit, down from a traditional 40 percent.
Cash generated from operating activities fell 42 percent to $2.8 billion from the year-earlier period because of the lack of payment in 2009 and fewer collections for large equipment, mostly gas turbines, as they are built, known as progress payments, GE said. Working capital improved, GE said.
The company has $47 billion of cash on hand, higher than forecast, Immelt told investors, while the plan to reduce commercial paper is ahead of plan, he said.
GE Energy Infrastructure
Profit and sales rose at the GE Energy Infrastructure segment, led by power-plant turbine and service contracts. The GE Technology Infrastructure group also posted higher profit as demand for jet engines and service helped temper slowing sales of medical-imaging equipment to U.S. hospitals. NBC Universal declined as advertisers pared purchases in the recession.
GE expects a “strong year” at GE Energy amid demand outside the U.S. as well as improving outlook for wind turbine shipments based on firming orders, Immelt said. Though benefits may not be seen until 2010, GE should do better than most competitors under government stimulus spending plans, he said.
About $121 billion of GE’s $172 billion backlog as of Dec. 31 was tied to service agreements, GE said in January. This year, about $38 billion in revenue should be generated from that backlog at margins of 25 percent or higher, S&P debt analyst Robert Schulz estimated in an April 9 report.
The company had about $500 million in cancellations at its large-equipment divisions, Sherin said today.
Order Backlog
GE shares sank to $5.73 in intraday trading on March 4 as investors speculated about potential losses at GE Capital. The shares started recovering after Sherin took to the company-owned CNBC network the next day to reassure investors.
At the March 19 meeting, Vice Chairman Michael Neal told investors GE Capital still has a net income target of $5 billion this year if the U.S. economy shrinks 1.8 percent. Earnings would be $2 billion to $2.5 billion under a Federal Reserve “base case” used to test banks, or zero under an “adverse” case that assumes a 3.3 percent drop in U.S. gross domestic product and unemployment peaking above 10 percent.
“We grew our provisions year over year, we increased our reserve coverage dramatically year over year, and we expect that to continue,” Sherin said in an interview.
The company still doesn’t expect to have to raise outside capital to fund the finance unit’s needs, Sherin said. “And that’s in the context of agreeing with everybody that the provisions are going to be higher over the rest of the year.”
In October, GE sold $3 billion in preferred shares to billionaire Warren Buffett’s Berkshire Hathaway Inc. and $12 billion in common shares to bolster the balance sheet.S&P said today’s results don’t change its AA+ rating for the finance arm.
Government Programs
The finance arm accounted for 38 percent of the parent company’s revenue and 43 percent of its profit from continuing operations last year.
GE Capital, which didn’t take funds from the Federal Reserve’s Troubled Asset Relief Program, can take advantage of two government programs. One allows GE Capital to issue long- term debt insured by the Federal Deposit Insurance Corp., and the other gives it the ability to sell into the Commercial Paper Funding Facility set up by the Fed.
Credit-default swaps protecting against a default by GE Capital fell 1 percentage point to 6.25 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $625,000 initially and $500,000 annually to protect $10 million of the company’s debt from default for five years.
Including a $21 million loss from discontinued operations, the first-quarter net income was $2.81 billion, or 26 cents a share.
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