GE profit drops 46% as finance unit falters

January 26, 2009 at 12:00a.m.

WASHINGTON (AP) — In a discouraging report for the American economy, General Electric Co. posted a 46 percent drop in fourth-quarter earnings Friday and warned of a “tough environment” this year as it struggles with its ailing finance business.

The results cap a difficult 2008 for one of the world’s largest industrial companies. Shares dropped more than 50 percent as profits at its finance arm, GE Capital, were sapped by a recession that has forced companies and consumers to limit borrowing or default on loans.

Beyond finance, GE has a major stake in many sectors of the U.S. economy, including entertainment, health care and energy. That means the economic crisis could broadly hurt the company, as utilities cut back on big purchases such as GE turbines, advertisers reduce spending at its NBC television stations and shoppers buy fewer of its dishwashers.

“The environment in total is very tough,” GE’s Chief Executive Jeff Immelt told analysts on the company’s conference call.

Although GE reaffirmed plans to both pay GE’s $1.24 dividend and defend its top “AAA” rated credit, its shares fell nearly 8 percent Friday afternoon as investors worried about their vulnerability.

GE says it expects earnings growth of zero to 5 percent this year from its industrial and media divisions, down from 10 percent in 2008. Industrial orders have fallen 6 percent for the coming year.

Fourth-quarter results highlighted that the slowdown was already under way for some of its businesses. Transportation profits dropped 16 percent and health care earnings fell 9 percent. Aviation, however, notched a 21-percent jump in profit.

NBC Universal, which includes Universal Studios, the NBC network and the Universal theme park chain, reported a 6 percent drop in profits to $865 million, driven down in part by less advertising at NBC’s local stations.

Quarterly profits at GE Capital — its largest segment — fell to $1.03 billion, less than a third of last year’s total. The finance arm also fell short of its $9 billion profit goal for the year, topping out at $8.6 billion. In addition, provisions for loan losses will be $1 billion greater than originally forecast.

Still, GE expects to have cash available to make its dividend payments.

“We are not straining to pay it,” Immelt said. “We’ve got lots of cash and free cash flow.”

But analysts point out GE plans to raise that money from industrial businesses that could be hit hard by the slowdown.

GE Capital, which makes loans to consumers and businesses, has been hit by the financial crisis that left many banks and financial institutions short of cash and stuck with bad debts.

GE, based in Fairfield, Conn., embarked on a restructuring program last year, cutting the size of GE Capital and slashing jobs at the lending unit and on GE’s industrial side.

GE’s overall earnings totaled $3.65 billion, or 35 cents per share, after paying preferred dividends, down from $6.7 billion, or 66 cents per share, a year earlier.

Results included $1.5 billion in charges related to the restructuring of GE Capital and increased reserves. The company also recorded $1.38 billion in tax benefits during the quarter.

Amid diminished Wall Street expectations, GE’s earnings from continuing operations before preferred dividends matched the consensus of analysts polled by Thomson Reuters for 37 cents a share.

Quarterly revenue slipped 5 percent to $46.2 billion.

The company is preparing for what should be a difficult 2009 as it pares down GE Capital, reduces its dependence on risky debt and tries to maintain growth on its industrial side as the recession worsens.

The company’s top credit rating will also likely face close scrutiny from ratings agencies like Standard & Poor’s, which warned last month that there is a one-in-three chance GE will lose “AAA” rating in the next two years, largely due to GE Capital’s woes.

For all of 2008, GE earned $17.3 billion, or $1.72 per share, down 22 percent from a year earlier. Company revenues grew 6 percent during 2008 to $182 billion.

Shares of GE fell $1.03, or 7.6 percent, to $12.45 in early afternoon trade.