LUFK Lufkin Industries, Inc. (MM)

Despite continued macroeconomic headwinds, General Electric Company (GE) reported strong first quarter 2013 results with operating earnings of $4.1 billion or 39 cents per share compared to $3.6 billion or 34 cents in the year-ago quarter, representing a year-over-year increase of 15% on a per share basis.

This was the twelfth consecutive quarter in which the company witnessed double-digit growth in operating earnings. The operating earnings for the reported quarter beat the Zacks Consensus Estimate by 4 cents.

On a GAAP basis, the company reported quarterly earnings of $3.6 billion or 35 cents per share from continuing operations compared to $3.2 billion or 30 cents in first quarter 2012.  

Revenues

Revenues for the reported quarter were relatively flat year over year at $35.0 billion, primarily due to a higher-than-expected decline in the performance of the Industrial segment in Europe, partially offset by solid contributions from Aviation, Transportation and Home & Business Solutions.

While Industrial segment revenue dipped 6% to $22.3 billion, GE Capital revenue climbed 2% year over year to $11.5 billion. Revenues for the reported quarter exceeded the Zacks Consensus Estimate of $34.5 billion.

Infrastructure orders for the reported quarter increased 3% year over year to $23.8 billion, with ratio of equipment orders received to orders billed (book-to-bill) being 1.3. Total backlog of equipment and services at quarter-end reached a record level of $216 billion. During first quarter 2013, General Electric received a services contract worth $620 million from QGC (Queensland Gas Company) for its Queensland Curtis LNG plant off the east coast of Australia.

General Electric also penned a $500 million deal to provide power equipment and long-term service for the Emirates Aluminum smelter complex in Abu Dhabi, and extended a $333 million worth service contract for Russia’s Sakhalin-2, one of the world’s largest integrated oil and gas projects.

Revenue by Segment

During the reported quarter, Oil & Gas revenue was flat year over year at $3.4 billion, while Energy Management revenue increased 2% to $1.7 billion. Revenue from the Aviation segment climbed 4% year over year to $5.1 billion. However, both Healthcare and Home & Business Solutions segments witnessed a flat trajectory in year-over-year revenue at $4.3 billion and $1.9 billion, respectively.

Revenue from the Transportation segment jumped 12% in the reported quarter to $1.4 billion. However, significantly fewer wind and gas turbine shipments, particularly from the European markets, hampered revenue of the Power & Water segment, which decreased 26% year over year to $4.8 billion. Consequently, the overall revenue from the Industrial segment declined 6% in first quarter 2013 to $22.7 billion compared to year-ago period.   

Revenue from the GE Capital segment rose 2% year over year to $11.5 billion as it continued its strategy to reduce the overall size of its portfolio while focusing on core growth. During the reported quarter, GE Capital closed the acquisition of the deposit base and online deposits business of MetLife, Inc. (MET).

Margins, Balance Sheet and Cash Flow

General Electric’s total operating income for the reported quarter decreased 4% year over year, with a considerable decline in profits in the Power & Water and Energy Management segments (down 39% and 29% respectively). Total Industrial segment profit dipped 11% despite a significant contribution from the Home & Business Solutions (up 39%) and Transportation (up 15%). On a positive note, management expects Power & Water segment to improve in the second half of the year to report a healthy performance for full year 2013.

In order to further boost its margins, General Electric continues to implement its cost-cutting initiatives, and expects to reduce industrial structural costs by at least $1 billion in 2013. The company has already curtailed its industrial structural costs by $200 million in the reported quarter. With improving profits in Power & Water, and healthy performance in other segments, General Electric anticipates a margin improvement of 70 basis points in 2013.

Cash generated from operating activities for the reported quarter was $0.2 billion due to inventory build-up for second-half volume, tax and long-term incentive plan payouts. During first quarter 2013, General Electric sold its remaining 49% stake in the NBCUniversal joint venture to Comcast Corporation (CMCSA) for $18.1 billion.

Subsequent to the quarter-end, the company also inked a definitive agreement to acquire artificial lift technology provider Lufkin Industries Inc. (LUFK) for $3.3 billion. Cash and cash equivalents at quarter-end were $90 billion. General Electric repurchased $1.9 billion worth of stock during the reported quarter and returned $3.9 billion to investors through dividend payouts and buybacks.

Outlook

With a focused and dedicated execution of its strategic plans, General Electric expects to continue its bull run in 2013 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).

 
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