Enterprise Analysis of Two Competing Corporations Part I – through P&L Statements

By Dhirendra Kumar Ph.D.

There are three major financial statements: P&L Statement, Balance Sheet and the Statement of Cash Flow.  P&L Statement measures a company’s financial performance over a specific accounting period that indicates how revenue is transformed into net income.  Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities along with profit or loss incurred over the specified accounting period.

The concept of Balance Sheet and the enterprise analysis through Balance Sheets are presented in Part II, and the Cash Flow is available cash.  So, the enterprise analysis through the P&L Statement is presented here.

The two major corporations in this analysis are General Electric Company (GE) is Fairfield, CT based corporation and the United Technologies Corporation (UTC) (UTX – is a symbol for UTC in NYSE) is Hartford, CT based corporation.  Their key business summaries are as follows:

General Electric Company operates as a technology and financial services company worldwide.  The company was founded in 1892 and is headquartered in Fairfield, Connecticut.  The company’s major divisions:

The Energy Infrastructure – segment offers wind turbines; gas and steam turbines and generators; integrated gasification combined cycle systems; aircraft engine derivatives; nuclear reactors, fuel, and support services; oil and gas extraction and mining motors and control systems; aftermarket services; water treatment solutions; power conversion infrastructure technology and services; and integrated electrical equipment and systems. This segment also provides surface and subsea drilling and production systems, equipment for floating production platforms, compressors, turbines, turbo-expanders, high pressure reactors, and industrial power generation and auxiliary equipment, as well as pipeline integrity, measurement, inspection, monitoring, and radiation measurement solutions to the oil and gas industry.

Aviation – segment offers jet engines, turboprop and turbo shaft engines, related replacement parts, and aerospace systems and equipment for use in military and commercial aircraft; and maintenance, component repair, and overhaul services.

Health care – segment provides medical imaging and information technologies, medical diagnostics, patient monitoring systems, disease research, drug discovery, biopharmaceutical manufacturing technologies, and remote diagnostic and repair services.

Transportation – segment provides drive technology solutions to various industries, including railroad, transit, mining, oil and gas, power generation, and marine.

Home and Business Solutions – segment provides home appliances; lighting products; and plant automation, hardware, software, and embedded computing systems.

GE Capital – segment offers commercial loans and leases, fleet management, financial programs, home loans, credit cards, personal loans, and other financial services.

United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide.  It was founded in 1934 and is based in Hartford, Connecticut.  The company’s major divisions:

Otis – segment designs, manufactures, sells, and installs passenger and freight elevators, escalators, and moving walkways, as well as provides modernization products to upgrade elevators and escalators, and maintenance and repair services.

Carrier – segment offers heating, ventilating, air conditioning, and refrigeration systems, controls, services, and energy-efficient products for residential, commercial, industrial, and transportation applications.

Fire & Security – segment provides electronic security products, such as intruder alarms, and access control and video surveillance systems; fire safety products comprising specialty hazard detection and fixed suppression products, fire extinguishers, fire detection and life safety systems, and other firefighting equipment; systems integration, video surveillance, installation, maintenance, and inspection services; and monitoring, response, and security personnel services.

Pratt & Whitney – segment offers aircraft engines for the commercial, military, business jet, and general aviation markets; industrial gas turbines; and space propulsion systems, as well as provides maintenance, repair, overhaul, and fleet management services.

Aerospace Systems – segment is a merger of Hamilton Sundstrand and Goodrich Company.  This merger happened during the summer of 2012.  Some of the key products of Goodrich are Landing gear, Lighting systems, Flight control actuation, etc. and Hamilton Sundstrand supplies aerospace products, including power generation, management and distribution, flight control, engine control, environmental control, and propeller systems, as well as auxiliary power units; industrial products, such as air compressors, metering pumps, and fluid handling equipment; and aftermarket services.

Sikorsky – segment manufactures military and commercial helicopters, as well as offers aftermarket helicopter and aircraft parts and services.

Both corporations are very heavily involved in designing, manufacturing, marketing and servicing high technology products, but GE is also involved in financial (capital lending) business.  Five years of P&L data of General Electric (GE) and United Technologies (UTX) are presented in tables 1 and 2 respectively. Financial organizations generally present the latest year’s data first and then the subsequent years.  For example, the presented data should start from the fiscal year (FY) 2011 and then the FY 2010 and so on, but the data are presented in the reverse order to make it a little bit easier for the reader to understand the data.  In Part II, data are presented using the financial concept.  Unfortunately, trend lines from the data cannot be developed due to deep recession period 2008-09. P&L Statement data are analyzed to get some insight understanding about these enterprises. 

  Table 1.  General Electric Co. P&L Statements: 2007 – 2011

 

General Electric Co. (GE) P&L Financial Data

Source: http://www.marketwatch.com/investing/ge/financials

Fiscal year is January – December.  All values in USD in Billions

Description

2007

2008

2009

2010

2011

Sales/Revenue

169.72

180.93

155.78

149.06

142.24

Cost of Goods Sold (COGS) incl. D&A

95.76

108.87

93.8

86.64

75.55

COGS incl. D&A as a % of Revenue

56.4

60.2

60.2

58.1

53.1

COGS excluding D&A

85.48

95.3

81.09

74.88

64.64

COGS excluding D&A as a % of Revenue

50.4

52.7

52.1

50.2

45.4

Depreciation & Amortization Expense

10.28

13.57

12.71

11.76

10.91

Depreciation

10.28

11.49

10.64

10.01

9.19

Amortization of Intangibles

0

2.08

2.07

1.75

1.72

Gross Income

73.96

72.06

61.98

62.42

66.69

Gross Income as a % of Revenue

43.6

39.8

39.8

41.9

46.9

SG&A Expense

18.22

18.71

19.22

21.26

22.95

R&D

4.08

4.31

4.37

4.92

5.39

Other SG&A

14.14

14.4

14.85

16.34

17.56

Other Operating Expenses

30.09

34.04

32.53

27.05

26.82

Unusual Expenses

0

0

0

-0.319

-4.83

EBIT after Unusual Expense

0

0

0

0.319

4.83

Non Operating Income/Expense

1.74

0.687

0.112

0.246

-2.1

Non Operating Interest Income

0.611

0.567

0.227

0.173

0.258

Equity in Affiliates (Pretax)

0

0

0

0

0

Interest Expense

1.15

1.12

0.895

1.06

0.7

Gross Interest Expense

1.15

1.12

0.895

1.06

0.7

Interest Capitalized

0

0

0

0

0

Pretax Income

26.85

19.44

9.67

13.79

19.21

Pretax Income as a % of Revenue

15.8

10.7

6.2

9.2

13.5

Income Tax

4.13

1.05

-1.09

1.05

5.73

Income Tax – Current Domestic

0.478

-0.724

-0.801

-3.25

1.28

Table 1 Cont’d.  General Electric Co. P&L Statements: 2007 – 2011

General Electric Co. (GE) P&L Financial Data
Source: http://www.marketwatch.com/investing/ge/financials
Fiscal year is January – December.  All values in USD in Billions
Description

2007

2008

2009

2010

2011

  Income Tax – current Foreign

3.03

3.06

2.42

3.26

4.66

  Income Tax – Deferred Domestic

0.623

-1.28

-2.71

1.05

-0.203

  Income Tax – Deferred Foreign

0

0

0

0

0

  Income Tax credits

0

0

0

0

0

Equity in Affiliates

0.671

0.332

0.667

0.413

0.894

Other After tax Income (Expense)

0

0

0

0

0

Consolidated Net Income

23.39

18.73

11.43

13.15

14.37

Minority Interest Expense

0.916

0.641

0.216

0.535

0.292

Net Income

22.48

18.09

11.22

12.62

14.08

  Extraordinaries & Discontinued Operations

-0.26

-0.679

-0.193

-0.979

0.077

    Extra Item & Gain/loss sale of Assets

-0.26

-0.679

-0.193

-0.979

0.022

      Cumulative Effect – Accounting Chg.

0

0

0

0

0

    Discontinued Operations

0

0

0

0

0.055

Net Income After Extraordinaries

22.22

17.41

11.02

11.64

14.16

Preferred Dividends

0

0

0.3

0.3

1.03

Net Income Available to Common Stocks

22.48

18.09

10.92

12.32

13.05

Basic Shares Outstanding, Billions

10.18

10.08

10.61

10.66

10.59

EPS (Basic), Dollars

2.21

1.79

1.03

1.16

1.23

Diluted Shares outstanding, Billions

10.22

10.10

10.62

10.68

10.62

EPS (Diluted), Dollars

2.20

1.79

1.03

1.15

1.23

Table 2.  United Technologies Corp. P&L Statements 2007 – 2011

 

United Technologies Corp. (UTX) P&L Financial Data

Source: http://www.marketwatch.com/investing/utx/financials
Fiscal year is January – December.  All values in USD in Billions
Description

2007

2008

2009

2010

2011

Sales/Revenue

53.92

59.12

52.43

54.33

58.09

Cost of Goods Sold (COGS) incl. D&A

39.81

43.49

38.86

39.13

41.06

COGS incl. D&A as a % of Revenue

73.8

73.6

74.1

72.0

70.7

COGS excluding D&A

38.64

42.17

37.6

37.78

39.72

COGS excluding D&A as a % of Revenue

71.7

71.3

71.7

69.5

68.4

Depreciation & Amortization Expense

1.17

1.32

1.26

1.35

1.34

  Depreciation

0.77

0.865

0.852

0.9

0.89

  Amortization of Intangibles

0.4

0.455

0.408

0.45

0.45

Gross Income

14.11

15.63

13.57

15.20

17.03

Gross Income as a % of Revenue

26.2

26.4

25.9

28.0

29.3

SG&A Expense

7.73

8.29

7.23

7.61

8.59

  R&D

1.68

1.77

1.56

1.75

2.28

  Other SG&A

6.05

6.52

5.67

5.86

6.31

Other Operating Expenses

0

0

0

0.108

0

Unusual Expenses

0.166

0.357

0.477

0.29

1.03

EBIT after Unusual Expense

-0.166

-0.357

-0.477

-0.29

-1.03

Non Operating Income/Expense

0.84

0.642

0.604

0

0.691

Non Operating Interest Income

0

0

0

0

0.179

Equity in Affiliates (Pretax)

0

0

0

0

0

Interest Expense

0.666

0.689

0.705

0.648

0.673

  Gross Interest Expense

0.682

0.708

0.723

0.665

0.673

  Interest Capitalized

0.016

0.019

0.018

0.017

0

  Pretax Income

6.39

6.94

5.76

6.54

7.61

  Pretax Income as a % of Revenue

11.8

11.7

11.0

12.0

13.1

Income Tax

1.84

1.88

1.58

1.83

2.23

  Income Tax – Current Domestic

0.572

0.627

0.293

0.25

0.527

Table 2 Cont’d.  United Technologies Corp. P&L Statements 2007 – 2011

United Technologies Corp. (UTX) P&L Financial Data
Source: http://www.marketwatch.com/investing/utx/financials
Fiscal year is January – December.  All values in USD in Billions
Description

2007

2008

2009

2010

2011

  Income Tax – current Foreign

1.21

1.21

0.837

1.16

1.37

  Income Tax – Deferred Domestic

0.16

0.09

0.411

0.461

0.555

  Income Tax – Deferred Foreign

-0.102

-0.045

0.04

-0.048

-0.224

  Income Tax credits

0

0

0

0

0

Equity in Affiliates

0

0

0

0

0

Other After tax Income (Expense)

0

0

0

0

0

Consolidated Net Income

4.55

5.06

4.18

4.71

5.38

Minority Interest Expense

0.324

0.364

0.35

0.338

0.395

Net Income

4.22

4.69

3.83

4.38

4.98

  Extraordinaries & Discontinued Operations

0

0

0

0

0

    Extra Item & Gain/loss sale of Assets

0

0

0

0

0

      Cumulative Effect – Accounting Chg.

0

0

0

0

0

    Discontinued Operations

0

0

0

0

0

Net Income After Extraordinaries

4.22

4.69

3.83

4.38

4.98

Preferred Dividends

0

0

0

0

0

Net Income Available to Common Stocks

4.22

4.69

3.83

4.38

4.98

Basic Shares Outstanding, Billions

0.9639

0.9378

0.917

0.9079

0.8923

EPS (Basic), Dollars

4.38

5.00

4.18

4.82

5.58

Diluted Shares outstanding, Billions

0.9888

0.9564

0.9290

0.9227

0.9068

As you analyze the presented data in Tables 1 and 2, you will observe some key distinctions between UTX and GE as listed below:

  • Even though both the corporations are large corporations, but GE is about three times larger than UTX in revenue.
  • GE’s COGS ranges between 53 – 60 percent of revenue while UTX’s COGS ranges 71 – 74 percent of revenue.  As you know that COGS is the manufacturing cost and GE’s good portion of revenue comes from the capital division that is why GE has a smaller percentage of revenue as COGS.
  • It looks like that GE has made a huge capital investment which is resulting in large depreciation in the range of 10 -13 Billions of USD a year while UTX’s depreciation is about 1.25 Billion of USD a year.  As pointed out earlier that GE’s revenue is about three times the revenue of UTX, but capital depreciation is about nine times.  So, GE is making huge capital investments.  You have to go in much deeper details to find out more about the actual capital investments.
  • Five years (2007 – 11) average R&D expenditure in GE was 2.9 percent of Revenue while in UTX was 3.3 percent of Revenue which is about 10 percent higher than GE.
  • GE’s pretax income dropped very significantly during recession and has not reached to pre-recession period through fiscal year 2011, but UTX’s pretax income did not change significantly during recession and has already passed the pre-recession mark.  It is clear from the data below:

2007    2008    2009    2010    2011

GE’s Pretax income as a % of Revenue         15.8     10.7     6.2       9.2       13.5

UTX’s Pretax income as a % of Revenue       11.8     11.7     11.0     12.0     13.1

  • Another very interesting data: Earnings Per Share (EPS): let’s analyze EPS (Diluted) which is earnings per share in USD.

2007    2008    2009    2010    2011

GE’s EPS (Diluted), Dollars                           2.20     1.79     1.03     1.15     1.23

UTX’s EPS (Diluted), Dollars                        4.27     4.91     4.12     4.74     5.49

As discussed earlier, GE’s pretax income was reduced very significantly during recession and has not fully recovered yet which is clearly reflecting in the EPS.  UTX’s pretax income is up by 11 percent, but the EPS (Diluted) is up by almost 29 percent.  While GE increased their outstanding shares from 10.22 billion to 10.62 billion while UTX reduced their outstanding shares from 988.8 Million to 906.8 millions.  As company is increasing their common outstanding shares, they are diluting their income per share.

A high level analysis is presented here which shows the importance of P&L statement.  If interested, perform a detailed analysis which will provide a lot more useful information for business planning.

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