Good day, ladies and gentlemen, and welcome to the General Electric Third Quarter 20 10 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Noelia, and I'll be your conference coordinator for today. If at any time during the call, you require assistance, please press star followed by 0 and a conference coordinator will be happy to assist you. If you experience issues with the slides refreshing or there appears to be delays As a reminder, this conference is being recorded.
I would now like to turn the program over to your host for today's conference, Trevor Schomberg, Vice President of Investor Communications. Please proceed.
Thank you, Noelia. Good morning, and welcome, everyone. We are pleased to host today's Q3 2010 earnings webcast. Regarding the materials for this webcast, we issued a press release earlier this morning. The presentation slides are available via the webcast.
The slides are also available for download and printing on our website at www.g.com/investor. We'll have time for Q and A at the end. As always, elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light.
For today's webcast, we have our Chairman and CEO, Jeff Immel and our Vice Chairman and CFO, Keith Charron. Now I'd like to turn it over to our Chairman and CEO, Jeff Immel.
Great, Trevor. Good morning, everyone. The team had a good quarter in an improving environment. The environment generally continues to get better. Some of the things we look at like media buying, credit demand, our losses are declining, equipment orders growing.
I think those are all positives for GE. We're seeing a slow recovery in a few areas. Commercial real estate is performing as expected in a tough cycle. As you know, in 2,009, we had negative demand for electricity and that's slowly getting better, but has had an impact in our energy orders certainly in 2009. And the appliances market was tougher as we went through the Q3.
We had good earnings growth. EPS was up 32% and GE Capital, really, the team did a great job. You'll notice that Keith will talk about in a second, GE Money discontinued operations reserves has substantially increased. We believe that that reserve update fully addresses our gray zone risk. Execution is very strong, dollars 78,000,000,000 of cash and equivalents and operating margins grew in the quarter ex NBCU.
And we're doing what we said we'd do on capital allocation. We had about $900,000,000 of stock buyback. The dividend is growing by 20% and we did a couple what we think are value creating is way down, particularly versus where we were 2 years ago. Leverage has been reduced. If you look at our Tier 1 common ratio, it continues to strengthen and we're well positioned within the Basel III outline and our ending that investment plan is on track.
So we have very strong liquidity and capital positions on at GE Capital. Orders grew by 7%. It's the first time in 2 years that equipment and services orders grew at the same time. So we view that as a good sign. Tech infrastructure orders up 33%.
Yes, it's really great. It shows strength really across Healthcare, Transportation and Aviation. The backlog was stable. We had several big push outs in our oil and gas business that should come back to us in Q4. And in places like healthcare, the emerging market orders are up substantially.
The order pricing was only down slightly. It was down about 0.8% in the quarter. So I think that's a pretty good sign for the quarter itself. And as we said in the press release, we think industrial revenue in the Q4 will be up sequentially and roughly flat with where we were in the Q4 of 'nine. So I think there's a lot of good news on the orders page that's going to help us as we go into the Q4 and beyond into 2011, 2012.
We always talk about execution in both margins and cash, and I think the team has done a good job on both of these. Our operating profit rate grew by 40 basis points. That's excluding NBCU, particularly strong performance by energy. We had a positive value gap of about $190,000,000 and a big chunk of that driven by material cost deflation. Our operating teams continue to do a good job.
And at the same time, we absorbed the initial shipments of the GNX engines and the launch cost and that took place in the Q3 as well. From an R and D standpoint, we're investing above 5% of our industrial revenue back into R and D. It's growing 21% year over year. Again, focused on product leadership, expanding our core technologies and creating lower cost position. Just a couple of highlights.
So we have a strong position on the 787 launch. As that goes forward, that will pull a lot of GE systems and engines with it. Very strong new NPI development in our energy business with new 7F, 9F and a larger size Jienbacher engine. And our new investments are scaling in areas like battery, home health and solar. So we're maintaining margins while increasing investment in technology and absorbing some of the initial GNX launch cost.
Also from a cash standpoint, our cash performance was very strong in the quarter. We generated about $3,800,000,000 in 3Q. It's cash flow from operating activities at 1.3 times net income and depreciation. And as expected, our progress balance continues to decline offset by working capital improvements and our working capital turns continue to get better. On the right hand side of the page, you can see the cash walk.
Our consolidated cash is almost $80,000,000,000 $78,000,000,000 Again, we've announced the increase in the dividend and the buyback and again our cash performance is in good shape. Last year, we said our framework for CFOA for the year was between $13,000,000,000 $15,000,000,000 We now think we're on track to be at the high
end of that range.
So it'd be somewhere between $14,000,000,000 $15,000,000,000 as we finish the year in 20,010. So a good job of execution by the team. And now I'll turn it over to Keith to go through the financial performance. Thanks, Jeff.
I'm going to start with the 3rd quarter summary. For the summary for the quarter, we had continuing operations revenues of $35,900,000,000 which were down 5%, industrial sales of $23,600,000,000 which were down 6%. Industrial sales were in line with our expectations. If you look at the last 18 months of orders, we had said that industrial sales will be down and through the first half we were down 5%, 3rd quarter is down 6%. Financial services revenue is down 2%, as we continue to shrink the book and we earned $3,200,000,000 in net income, which is up 29%.
And for earnings per share, we earned $0.29 including the cost of the preferred dividend and earnings per share up 32%. As Jeff covered, the total cash flow from operating activities was very strong, dollars 10,100,000,000 year to date, putting us at the high end of our original range. And taxes are pretty steady in the quarter. The consolidated tax rate for the 3rd quarter is 9%. That rate is up from a negative 25% in the Q3 of 2009 mainly because of the improvement in pre tax earnings at GE Capital.
If you look the GE tax rate is flat with 2,009 at 22%. And then on GE Capital, the rate for the Q3 goes from a large positive in 2,009 where we had a large credit to a negative in 2010. And the negative rate in 2010 reflects a net tax benefit or a credit on $1,500,000,000 of higher JECS pretax income year over year. We expect the GE rate for the full year to be in the mid-20s excluding the NBCU disposition and that would be a bit lower than in the Q3 year to date rate of 26% due to some likely audit resolutions that we see are working on for the Q4. On the right side of the segment results, our industrial businesses, ex media had $3,200,000,000 of segment profit was down 5%.
You can see NBCUniversal's operating results are down 15%, but the real results are better than the reported results. I'll show you that on the details of the upcoming NBCU page. NG Capital continues to demonstrate in a rebound. Net income of $870,000,000 it's up 6 times from last year. So overall segment profit was up 11% and then with lower restructuring at corporate versus last year, total earnings were up 29%.
And we always show you the items that happened in the quarter that we want to report separately. If you look at the top left, you can see that in the Q3, the corporate restructuring and other items were insignificant. We had a net of 0 on restructuring and other items and no gains in the corporate line. So the item that we have to talk about today is in discontinued operations. As you saw in our press release, we added a significant amount to our reserve for the losses related to our Japanese consumer gray zone exposure.
We booked a $1,100,000,000 charge in the quarter in discontinued operations and I'll take you through the details on the right side. The chart on the top right, that's an update from our Q2 call. And as you can see, the average daily claims, which we experienced in Japan continued to decline in July August. However, they increased in September. 1 of the independent personal loan companies in Japan, Takafuji, was rumored to be in financial distress during the month.
And at the end of the month, they filed for bankruptcy. We don't know the specific impact of that event on these claims, but we do know that September daily claims were up after declining for 6 straight months. But during the Q3, we completed a significant study of the gray zone claims trends. We made a decision in the quarter to adjust our reserve estimate to our best estimate of the ultimate exposure. If you remember previously, we were booking to the low end of our range and that resulted in $1,100,000,000 addition to our reserves bringing our total reserves to $1,700,000,000 at the end of Q3.
Now the average monthly losses for the Q3 incoming claims are about $60,000,000 a month. And so our current reserve represents over 24 months of future coverage even if you assume there's no further reduction from today's levels. If you look at the history though, we do believe claims will continue to come down. If you go from the Q1 to the 3rd quarter, claims are down 27%. If you go from last year to this year, claims are down over 35%.
So we do believe claims will continue to come down and we're going to continue to aggressively manage the claims process in Japan with Shinsei. At the end of the day, we moved off the low end of the range to our best estimate. And based on what we know today, we believe we fully address this issue. I'll go into the businesses. For the business results, I'm going to start with GE Capital.
Mike Neal and the team had another very positive quarter. Obviously, revenue of $11,600,000 was down 3 percent driven by the lower assets and some dispositions. Pre tax earnings of $527,000,000 They were up $1,500,000,000 versus last year, a tremendous improvement. Net income of $870,000,000 was up over $700,000,000 versus last year. And that's a result of lower credit costs, higher margins on the business, partially offset by lower assets and higher impairments in the quarter.
We ended Q3 with $489,000,000 of ending net investment, that's down 7% from last year and we're well on our way to hitting the $440,000,000,000 any target by 2012. Another highlight in the quarter would be the new volume. If you look, commercial volume was up 45% over last year to $10,600,000,000 mostly driven by CLL with very strong margins. And overall, we did $40,000,000,000 of volume and that included consumer coming down too as we shrink in the places we want to shrink. So I'm going to cover the asset quality metrics in the next few pages.
So here are a few comments by the main businesses. First is Commercial Real Estate. The environment continued to be challenging as we expected. The business lost $405,000,000 in net income. That was $133,000,000 better than last year and also $100,000,000 over $100,000,000 better than Q2, but it's still a large loss.
We recorded $178,000,000 of after tax credit losses on our debt portfolio and the declines globally have started to really abate. The average decline in our global property values was 0% to 1%, but for the properties where we took a reserve, the decline was an average 7%. We also incurred $315,000,000 of after tax marks and impairments on our equity portfolio. There were some positives in the quarter. We sold 90 properties for 700,000,000 dollars and overall our assets are down to $75,000,000,000 down 10% from last year and down 2% from Q2 even with some impact from the foreign exchange.
Non earning assets in real estate were down $200,000,000 However, as you look forward, we still expect the real estate business to remain under pressure for the near future. Commercial lending and leasing also had a very strong quarter, earnings of $443,000,000 up $313,000,000 versus last year. Those results were driven by lower losses, lower margin impairments and higher core margins. That all reflects the improvements in asset quality. GECAS of $158,000,000 those earnings were down 16% as we completed our annual impairment review in the quarter.
Impairments of $260,000,000 pretax were higher than last year, driven by some valuation declines on 7 37 Class 6 and 50 Seat Regional Jets. Those impairments were partially offset again in GECAS by lower credit costs and higher core income and the portfolio remains in great shape, but we have 0 non earning assets. And Energy Financial Services also had a good quarter with earnings up 34. The real highlight in the quarter is our consumer business. We had another great quarter there, delivered $826,000,000 of net income, up $380,000,000 The earnings growth came from lower credit losses, partially offset by some lower assets.
U. S. Retail Finance earned $329,000,000 up over 100 percent driven by portfolio quality improvements and better margins. In the consumer business, the Global Banking had a good quarter. Global Banking earned $293,000,000 up 80% driven by lower credit costs.
And UK Home Lending also earned $45,000,000 in the quarter and our owned real estate stock in the UK is the lowest it's been since the Q2 of 'eight. We ended the quarter with 7 46 properties and we continue to do better than our marks on the properties that we do sell. The realization in the quarter was 116%. Overall, a really positive outlook for GE Capital, the 2nd positive growth quarter in a row demonstrating the turnaround and the recovery that we're having in GE Capital.
On the
next page is the asset quality, delinquencies and non earnings. In the interest of time and as these metrics are all improving, I'm just going to summarize a few key points. If you look at both equipment and consumer, our delinquencies and our non earning balances and our percents continue to improve. All the trends are down slightly from Q2. Down on the bottom left for real estate, the delinquency dollars were flat, but our delinquency rate went up slightly because the book is down a bit and real estate non earnings were also down $200,000,000 So we have a GE Capital analyst event that we scheduled for Tuesday, December 7, and the team is going to provide a lot more detail on this and other topics at that time.
Next is on an update on reserves. If you look at reserve balances, they were flat from Q2 to Q3 at 9,100,000,000 dollars Reserve coverage increased slightly to 2.69 percent. We had $1,700,000,000 of new provisions against $1,800,000,000 of write offs, some rounding and foreign exchange impact left the reserve flat at 9.1. If you look at the 2 business segments, commercial reserves are up. It's driven by real estate, but coverage is up.
And if you look at the details, both our commercial 30 day delinquency dollars, so the actual dollars that are past due and our commercial non earning assets are both down $300,000,000 Q3 versus Q2. And when you look at the collateralized position, we feel confident about the recovery we're going to have relative to the non earning amounts that are out there. For the consumer businesses, the coverage is down slightly driven by the continued improvement in the portfolio quality metrics. Even for consumer, the managed delinquency dollars are down $250,000,000 in Q3 versus Q2 and non earning consumer assets are down about $60,000,000 Q3 versus Q2. So we feel great about the overall GE Capital asset quality and reserve coverage and Jeff Borenstein is going to cover this in more detail during the upcoming GE Capital Analyst Meeting.
Start the Industrial Businesses with NBCUniversal. Jeff Zucker and the team had a pretty solid quarter adjusting for the non repeat of last year's AET end gain. And if you look, the reported revenues on the left side of $4,100,000,000 were flat and reported op profit of $625,000,000 is down 15%. However, the operating performance was better than that. On the right side, if you take out the net impact of the AETN gain and impairment charges, which we highlighted last year, those netted to a positive $137,000,000 in Q3 'nine.
If you adjust for that, the operating result for the quarter would have been up 5%. If you look at the dynamics for the business, Cable continued to deliver strong performance. Revenues of $1,200,000,000 were up 8% and segment profit was up 22%, led by strength across the Entertainment portfolio. If you look at broadcast, the revenues of $1,400,000,000 were down 2% and the segment profit here was down about $80,000,000 driven by the significant investments that the team has made in primetime. Local market remains strong.
In the 3rd quarter, the local markets were up 18%, which is a good sign and the scatter market remains strong. For the Q3, it was up 20% plus on the network and on cable and we continue to see scatter up double digits in the 4th quarter versus the most recent upfront. Film and Parks had a strong quarter. Revenues were up 16%. Segment profit was up more than 2 times from last year, a great result with the movie Despicable Me.
And our Parks business had the best quarter ever, driven by the success of Harry Potter in Orlando and King Kong in Hollywood. They had a record quarter. We continue to work with the regulatory reviews. We're cooperating fully. We hope to close the transaction with Comcast by year end.
We continue to prepare for the closing. We had a successful debt offering, so we've completed the JVs financing. And we also completed the initial partial purchase from Vivendi for $2,000,000,000 increasing our ownership stake by about 7.5%. So lots going on in MVC and pretty good operational quarter. Next is Technology Infrastructure.
John Rice and his team delivered a 3rd quarter in line with our expectations and the outlook was consistent with what we delivered in the 2nd quarter as we said. If you look at the key businesses, I'd start with Aviation. Orders of $5,000,000,000 were up 10%. We're definitely seeing a pickup in Aviation Equipment orders. Commercial engine orders of $1,500,000,000 were up 57%.
CFM orders were up 196 percent. GE90 orders were up 70%. Gen X orders were up 100%. So the increase is very broad based. Military orders of $500,000,000 in the quarter were down 9%.
We ended the quarter with our major equipment backlog at $19,600,000 which is up 2% from the 2nd quarter. For service, orders in the quarter were down 6%. Our commercial spare parts orders were $22,200,000 per day, which is a pretty good rate. The rate compared to reported last year is down too, but we continue to report we had an Avial order last year. If you adjust for that Avial order, the rate in the Q3 would have been up 25%.
So we are definitely seeing a pickup relative to last year. We had a real decline in the Q3 and at 22.2% that's a good healthy orders rate for the spares business. Revenues of $4,400,000,000 were down 3%. That's driven by the lower military unit deliveries, which were down 14% in the quarter. That was partially offset by higher commercial deliveries, which were up 2%.
We had 4 63 deliveries of commercial engines this year in the quarter versus 4 56 last year. For revenue, service revenues were down 3%. That was driven by about 4% lower overhauls. Segment profit was down 17%. That's consistent with our results in the first half.
Basically, the Aviation business has had 16% down in profit through the half. And the 3rd quarter included one difficult comparison against the gain on our Wolverhampton sale in the Q3 of 2009 and we also started shipping the new Gen X engines, as Jeff said, which pressured our margins a bit in the quarter. For Healthcare, the Healthcare team continued to see a stronger market. Orders of $4,200,000,000 were up 6%. Equipment orders were up 8%.
If you look at some of the pieces, diagnostic imaging was up 5%, driven by double digit gains in both CT and MR globally. U. S. Diagnostic imaging was flat. Clinical Systems was very strong, up 16% and U.
S. Clinical Systems were up 17%. China was up 18%, India was up 36% and service orders overall were up 1%. We ended Q3 with a $4,000,000,000 equipment backlog that's up percent versus last year and up 5% versus Q2. And segment profit was up 14% as the strong volume and productivity more than offset the impact of pricing.
Next is transportation. Transportation's results continue to be impacted by a tough operating environment. However, if you look at all the indicators, the market outlook is getting much better. Orders of $1,400,000,000 in the quarter were up 122%. Equipment orders of $900,000,000 were up 5 times over last year and that was split both domestically and internationally.
Service orders were up 15%. The number of parked locomotives declined from 3,000 at the end of Q2 to 2,350 at the end of Q3 as rail volumes are up 13% year to date. In the quarter, revenue of $869,000,000 that was down 10% driven by 18% fewer locomotives. We shipped 96 locomotives this year versus 117 last year and services were also down 10%. Segment profit of 101,000,000 dollars was now 43%, reflecting the lower volumes.
So while the business results are down in the quarter, the environment here definitely is improving. Next is Energy. John Krennicki and the Energy team held profits flat despite having lower equipment volumes. Revenues of $8,400,000,000 were down 14 percent, Sigma profit of $1,700,000,000 was flat. If you look at energy, energy orders $7,500,000,000 were up 2%.
Equipment orders of $3,200,000,000 were down 5%. That was really driven by power and water. Power and water equipment orders were down 9% driven by thermal. We had orders for 15 gas turbines this year versus 23 last year. The 23 last year included 15 of the Iraq units, so it was a one large order.
Wind orders of $1,100,000,000 were down 15%. We received orders for 500 wind turbines this year, which was down about 60 units. On the positive side, we had orders for 25 aero units this year versus 6 last year, 2 90 Enbocker units versus 206 last year and service orders of $4,200,000,000 were up 8% driven by strong growth in core energy services. Revenues of $6,800,000,000 were down 15%. Equipment revenue was down 21%.
That's really driven by lower wind units. We delivered 6 16 units this year versus 935 last year and also less non GE balance of plant on some of the big projects. That was about $325,000,000 less revenue year over year. That was partially offset by higher gas turbine units. We shipped 24 units this quarter versus 16 last year.
Service revenue of $3,100,000,000 was down 6% driven by lower outage and parts revenues and segment profit of $1,400,000,000 was up 4%. The team did a great job managing margins. We had price increases, we had material deflation and we had good variable cost productivity more than offsetting the impact of the lower volume. Oil and Gas, orders of $1,700,000,000 were down 22%. This is really a tough comparison quarter.
We had equipment orders of $700,000,000 that was down 44% mainly because of the tough comparisons. Last year, we had $500,000,000 of one order, the Gorgon order was booked in Q3. And we also had about $370,000,000 of equipment orders pushed out of Q3. So year to date equipment orders of $3,100,000,000 are down about 10%, a lot better than what we had in the quarter with the lumpiness we have here and we expect the 4th quarter to be pretty good. Service orders of $950,000,000 were up 12% driven by strong spare parts sales and also upgrades.
For the quarter, revenues of $1,800,000,000 were down 9%. Equipment revenues were down $14,000,000 driven by lower downstream volume. Last year in Q3, we delivered 5 reactors for the petrochemical industry and this year, we didn't have any. So we're really making a shift from the downstream business to the upstream business as we go from petrochemicals and processing up into LNG and you're going to see that shift over the next year and a half. Service revenues in the quarter were down 1%, up 6% ex FX and segment profit at 2.87% was down 15% driven by the lower reactor volume and the impact of the stronger dollar year over year which hurt oil and gas.
If you exclude those 2 items, segment profit was about flat in the quarter. So the energy team delivered flat profit in a little tougher comparison and tougher environment quarter. Next is and Business Solutions. Charlene Begley and the Home and Business Solutions team had a flat quarter in Q3. It's really driven by weakness in the appliance market.
Revenues of $2,100,000,000 were down 1%. Segment profit of $104,000,000 was flat with last year. In terms of the market, we saw really good strength, continued strength in lighting and it's driven by the energy efficiency trends. We had great volume in those products including compact fluorescents, LEDs and new ballast. Orders for lighting in the quarter were up 9%.
For appliance, the market was down 4% in the 3rd quarter and our orders were down 6% with continued weakness in the contract channel. Multifamily was very weak in the quarter that's affecting the overall business. If you look segment profit at $104,000,000 was flat. That includes the impact of higher costs that we've put into the appliances to meet the new Energy Star standards, which on a net basis is a positive because it resulted in $51,000,000 of tax credits that aren't included in the pretax numbers above. We continue to invest in Home and Business Solutions.
If you look in the quarter, R and D was up 27%. We're also going to be doing more investments over the next several quarters and you'll be seeing announcements on things like the lighting expansion in Ohio and other plants that we're going to be working on. So the markets are mixed, but we're maintaining our profitability and we're doing a lot of investment for the future, especially around energy. With that, let me turn it back to Jeff.
Great, Keith. Thanks. And just to give you some more color on the year and going forward, going back to the 2010 earnings framework. As we finish the year, we expect positive earnings growth in the Q4 in our Industrial and at NBCU and in GE Capital business based on improving markets and solid execution. So we're going to see pretty good momentum from a business standpoint and operating standpoint as we get into 4th quarter.
Good margin performance in Media, strong markets and good performance in Cable and Parks. And in GE Capital, the recovery continues. We'll have several 4th quarter items on the corporate line. These will include some gains. For instance, if we close NBCUniversal, there'll be a gain associated with that and some tax settlements offset by restructuring and some other items.
One of those items might be, for instance, we're in discussion with the EPA on Phase 2 of the Hudson River. And even while we have a good reserve already set up for Phase 2, we don't know where those discussions will go and we'll work on that the EPA in the Q4. So in all, this will likely be a slight negative in the quarter in the corporate items. We've done a lot to strengthen the company for 2011 and beyond. We have a very strong backlog and executing well.
And as we've said all along, the capital allocation optionality is very sound for the company.
I'll give you an update
of all this in December, but as we sit here today and I think about the company going forward, we really expect industrial earnings to grow and by that I mean Infrastructure and Home and Business Solutions. We expect growth in those segments going forward in the future. We expect capital, solid earnings growth in GE Capital. We expect to have pension headwinds. And as we complete the NBCUniversal joint venture with Comcast, we expect some dilution there to be expected.
So that's kind of the way I think about the 2010 as we finish the year and a prelude into how we ought to look at the December meeting and the company going forward. And then just to wrap it up on a chart I've used in the past, I think the attractive financial profile remains intact and with good momentum in the future, strong financial flexibility. This is parent cash and again the 4th quarter number reflects the increased dividend, the buyback and the announced M and A. So we can put that cash already to work and that financial flexibility grows over time. And the things that we said we were going to work on, I think we've made good progress on repositioning GE Capital to have good profit growth and competitive advantage.
I think Q3 gives you a pretty good sense of that. Growth in return on our infrastructure over time, you can see what we're investing in R and D and the product pipeline is robust. Building enterprise value around process excellence, we have very high margins through the downturn and our working capital turns are very strong inside the company. And then capital allocation to create long term shareholder value, we've restarted the buyback, we've increased the dividend and you've seen what we've done on strategic M and A. So we've done what we said we would do over the last year or so on capital allocation.
So that's it for the quarter and now we have a chance to take some questions Trevor.
Great. Thanks. Thanks Jeff. Thanks Keith. Duvalier, I think we're ready to turn over to the Q and A.
Thank you. Your first question comes from the line of Steven Whittaker from Sanford Bernstein.
Good morning. Hey, Steven. Just first question around the order rates for 2011. Can you give us some perspective, sorry, in this quarter the conversion rate into next year based on what you're seeing now? How much of that converts?
I think if you look historically,
somewhere between 85%, 90% of sort of the orders you bring into the backlog at the end of the year would convert into sales in the next year. So if you end the year if we end the year for example in Energy with $13,000,000,000 of backlog, you're probably going to get 90% of that converting into sales on
average. And that's true for the current aviation profile? Aviation is
a little longer backlog. If you think about that, I'd use run rates in aviation more than a backlog conversion because if you look the airframers are pretty much full, right. They're increasing the rates a bit. If you look at the announcements between now and 2012, they're going to have a significant increase in their production rates. But I'd work off of run rates there.
The 777 is going to go from 5 to 7 a month by 12. The 737 is going to go from 31 to 38 a month by 13. The A320 is going from 34 to 40 a month by 12. So that's the thing I'd look at as the airframe run rates for aviation.
I think beyond that Keith on aviation is you just have the Boeing forecast on 787s.
Got a lot of.
You got a lot of juice there given our penetration.
Okay. And am I correct in if I exclude the Iraqi order or at least normalize it from Q2, equipment at the time instead of being up 17% was probably up mid single digits. So this 9% increase I should think about relative to a mid single digit increase in the last quarter if I normalize for that. Is that not right?
Yes. Q3 year to date equipment orders were up 4%. So I think the longer period should take for the long cycle orders give you a better feel for the run rate.
I mean, Stephen, the way I would look at it, I divide energy more or less into 4 buckets. You've got the service business where orders are picking up and are going to stay really very strong. And then you've got oil and gas where Keith really talked about some of the transitions in oil and gas, but they're probably flattish to down slightly so far, but there's no reason to expect oil and gas not to be decent as we go forward. The what I would call the fossil fleet in total, which is heavy duty gas turbines, jenbacher, aero derivatives, all that stuff, those are flattish and I think will probably stay in that range. And then renewables, we expect to be down slightly as you go.
They were down year to date and will probably continue to be under pressure as we go forward. So I kind of think about it in those 4 buckets.
Okay. All right. And then on just on JECS a little bit, the E and I I saw was just up a little bit in the supplemental on the quarter versus the last 49 versus 47. Is that trending? Anything we should note about the trend relative to your targets and reducing the size of capital?
No, I think if you look at Page 3 of the presentation, we show you that the business reductions in the quarter were strong again. The business reductions were down 9,000,000,000 dollars but with the dollar in the mark from the Q2 to Q3 that increased assets by $11,000,000,000 So in terms of our business reductions, we're still ahead of schedule and we'll be we're well on track to hit the $440,000,000 One of the things that we did in the quarter as you saw, we also purchased some assets from Citigroup. I mean it's another indication that we're ahead of our shrinkage targets and we have room for some bulk origination as well as the good underwriting and the origination that we're seeing from the commercial teams.
Okay. And then on Shinseh, just a little bit more clarity. The 11% assumed claims per month reduction, that was sort of the run rate that we had in from you guys before. So what number are you thinking of now when you're based on the additional reserving?
Yes. Basically, when you look at the last 12 months of claims activity and you include September, where September went up and we're as we said, we're obviously the Takafuji event had some impact on it, but I don't know how much. If you look at the rates, 3 months, 6 months, 9 month 12 month reductions in claims per month, they range from 2% to 6%. And so we basically have taken the midpoint of the range, which is the 12 month reduction of an average of about 4%, Steve.
Okay.
Well, I have more, but
let me hand it off to some other people
who can get questions in. Thanks. Thank you.
Your next question comes from the line of John Inch from Bank of America.
Thank you. Good morning, everyone. Good morning, John. Good morning, guys. So what was the organic growth for the industrial businesses, Ether Jeff, this quarter?
Yes. Organic grab that for you. If you look, for Industrial, total was down 4%. Energy was down 12%, Tech was flat and HMBS was up 1%.
Okay, great. There was no corporate restructuring and I think and I can't remember if you sort of had intimated this officially or just it was suggested that I think you did about $0.03 in the first half. And I had thought the second half was actually going to be sort of an overall ramp from the $0.03 rate. Does that imply and I think it kind of goes back to Jeff's comments. Does that imply there's a potentially fairly large restructuring action coming in the Q4 maybe offset with DAC sale gains and possibly NBC or some other stuff?
Or how should we think about that? What really would be the nature of it? Is it sort of a cleanup heading into 2011? Or is it catching up with other things? Or how would you like us to think about it?
Well, I think, as Jeff said, in the Q4, we have a number of items that are potentially going to happen. We're expecting the NBC deal to close. If the MVC deal closes in the Q4, that should result in a small after tax gain. We do expect some tax settlements we're working on right now on years 2003 to 2005 with the IRS and we're in final discussions, will it happen and will the amount be is hard to say, but that could be in there. So offsetting those things are a variety of opportunities, whether it's asset sales or it's continued restructuring like you've seen us do in terms of taking the cost structure down or other charges like the environmental that Jeff said.
I mean, I think our anticipation is that the negatives will likely be more than offset by some of the positives that we have in the quarter, we don't know. At the end of the day, when you do year over year, I think it's the way to look at it, John. We had a net last year in the quarter of about 0 point 0 $6 0 point 0 $0.06 of gains that we had and $0.09 of negatives if you look at last year's Q4 for a net of $0.03 of restructuring in the quarter. And our view is that right now the restructuring in the 4th quarter and other charges will probably be a little higher than that. Okay.
We
can't really time these things, but there's no problem. A lot of them are under discussion. I think we always anticipated that some of them would be back end loaded and that's where we are. But I think all of them in many ways take risk out of, let's say, 2011.
It sounds like
you're just being opportunistic. You're not there's not some big thing you're working towards, if that makes sense. Just lastly, the market's kind of been anti towards the banks possibly having to repurchase that mortgages. Just kind of thinking out loud, are there any implications as it pertains to your previous ownership of WMC? I know you got to go back, but I just I glanced at the cane, it says that you do actually retain some sort of obligation for liabilities or loans previously sold.
So how should we think about that?
Well, we obviously are watching that. I'd say that we've had a very good experience in 2010, in 2,009. When we first exited WMC, that's when we had our wave of negotiations and settlements with the banks around mortgages that the team had underwritten and sold. So at the end of 2,009, we had a reserve of about $200,000,000 The current reserve is about half of that, but we had pending claims at 2,009 of close to $800,000,000 and the pending claims are down over around $250,000,000 We've had very favorable settlement rates on the claims and the claims for months have come down in 2010 versus the 2,009 levels. So I think our team is on top of it.
I think we've dealt with most of what we had to deal with as far as we know, we've dealt with everything we had to deal with back when we first exited WMC and we had a big reserve and we had a lot of settlements. But that activity has really declined substantially. As far as our view of this right now is that we're in pretty good shape here on WMC.
Okay, perfect.
Thank
you. Thanks, John.
Your next question comes from the line of Shannon O'Callaghan from Nomura.
Good morning.
Good morning. Hi, Shannon.
First question on your comfort zone around non earnings coverage. I mean, it's continued to tick up here. Now we're at 74%. I mean, in the back, you show where you think you are versus commercial and consumer at like 2.60 for commercial, 2.98 for consumer. I mean, where does this 74% go?
I mean, obviously, non earning dollars are down. You'd expect losses to be better than non earnings. I mean, where does that 74% go from here?
Well, it's going to depend upon how we do in terms of working out the collateral positions we have. But I feel great about our non earning coverage. If you look at the data that we've had where we put up a certain amount of reserves and we had certain amount of non earnings, like if you go back to the Q3 or Q4 of 2,009 and you look at the amount of non earnings and the reserves, we basically worked through the majority of those non earnings by the end of Q3. And then as we have additional new non earnings, we're continuing to work through and that we work through in a way that's generally favorable versus our reserve position. So we feel strongly about our collateral coverage.
And that's one thing that we're going to have Jeff Bornstein give a bigger update on when we get to the December meeting, go through. We had some charts we did in July last year where we went through the details of non earning provisions that we had and then what actually happened. We're going to update those in December and go through them with you, but we feel pretty good about it.
Yes. I mean, it
just seems like you're selling things for greater than your carrying value and things like that and you've got this big I'm just wondering when that 74% goes down?
Really, the driver is going to be how you think about new provisions on losses relative to the quality of the book. And as delinquencies and non earnings continue to improve, as you say, those additional provisions quarter to quarter are going to continue to come down and that's going to be really what drives the future profitability here.
Okay. On the industrial side, just a question about the improvements you're talking about in the aerospace aftermarket. I mean, on the last call, you said airlines were still deferring overhauls and things. I mean, what are you seeing in terms of change of behavior on that front?
We're seeing quite a bit of activity in the marketplace, obviously. If you look revenue passenger miles were up 6.4% August year to date, cargo is up almost 20% August year to date. The park fleet has started to change a little bit. We had about 13% of the world's fleet was parked in the first half of the year. It's down to 12%.
We've seen a number of cargo planes come out of the park fleet and we saw the orders picking up if you look at spares relative to last year ex the Avial. So I think it looks pretty good. We feel pretty good about the outlook.
Okay. The last one then I'll go. Just on sort of Basel III requirements and an update there on your thoughts, sounds like you're pretty comfortable, but just in terms of where you are risk weighted asset treatment and things like that, any color?
Well, it's a lot to still be determined. I think first of all, most of our entities aren't subject directly to the Basel standard. So I think we're going to have to still work through how much and what is going to be impacted by Basel III. We've looked at the main published criteria for capital levels and for liquidity. And if you look 7% Tier 1 capital requirement, Tier 1 common capital requirement by 2019, I know everyone's going to get to these requirements much sooner than that.
And you look at where we are today, even with adjustments we think we may have to make to the risk weighted asset measurement or what's accounted for as Tier 1 common capital, we feel pretty good that by even by the end of this year, we're going to be in the ranges here that we need to be in. So there's still more details to be worked out. But obviously, as we shrink GE Capital and we continue to leave that capital in through 2010 and through 2011, we continue to strengthen the capital ratios that we think will be in good shape. We don't have any of the big adjustments that some of the banks have on risk weighted assets for a couple of things like we don't have a lot of subordinated capital. We don't have any mortgage servicing rights.
We don't have some of the biggest things that are creating some of the adjustments out there and I think that bodes well for us as we go forward. And then on liquidity measurements, we feel great about that. Obviously, with the amount of cash that we have and bringing down the CP balances, we feel like the outlook for that is pretty good shape as well.
Great. Really helpful. Thanks a lot. Yes.
Your next question comes from the line of Deane Dray from Citi.
Thank you. Good morning. Hey, Deane. Hey, start with a 2 part question on M and A and would like you to put the announcements last week in context if you could, especially in the acquisition of the consumer finance portfolio. Would that suggest are you seeing the bottom of the cycle there?
You're not just shrinking that book, but you're also selectively looking to grow. That's the first part of the question. And secondly, as you do look at allocation of capital and by our assessment, this would potentially be the biggest M and A cycle for GE. Are you changing any of the processes of how you're vetting acquisition candidates and what's the environment look like today?
I would say just first on the consumer finance and I'd like Jeff to comment on overall on the M and A. I think if you look at what we were able to do, we're able to add to a space where we've got a real competitive advantage on distribution. I mean, we're basically a unique provider of capital to retail distribution in this country and we have a tremendous franchise that Mark Begore, Glen Marino run and they are performing extremely well in the current cycle in terms of their asset quality metrics and you saw the income in the consumer business and the U. S. Retail business, a lot of that is in this retail distribution.
So what we acquired were additional retail distribution arrangements. It's more like a B2B financing and it wasn't in the private label credit card, which is also doing extremely well. So I feel great about that. I mean adding to that is a place where we've got a nice competitive advantage on distribution. We've got a tremendous business franchise and we bought assets at a very attractive price.
So I think Dean on the other part of your question, I'd first say our teams are doing a great job on cash generation. I think everybody is really focused on it. Be with the incremental capital that we have from the NBCU transaction when that takes place, that really gives us some real tailwind there. The third thing I'd say, just to reiterate what Keith said earlier is that we think GE Capital is going to create its own strength and that's well underway. And so I think GE Capital is in great shape.
So on so we started to buy back, we've increased the dividend and on the strategic and industrial M and A, I think some of the things that we talked about at EPG on the size of deal, we'll be disciplined on the size of deal. These will all be infrastructure. All the deals we do will be infrastructure kind of deals. They'll be bolt ons to the core of what we're doing in terms of inside the business. And we think that as we do these kinds of deals that they will be able to accrete in a relatively short time period from a standpoint of what we'll pay and how we value them.
They all return greater than our cost of capital. So just the things that I've talked about in the past, I would say kind of what you saw last week is what we'll continue to
try to do. I know you're limited in what you can say about Wellstream, but should the takeaway be that there are valuations of which considers just too expensive? And will you if you can't spend all this capital, should we infer that there would be more buybacks potentially and higher dividends?
Well, what I would say, I can't say anything about Wallstream, period. The second thing I'd say is that, there are good opportunities out there, we think. And the third thing I'd say is that if we don't see good opportunities, we'll increase the dividend and do more buyback.
Perfect. Thank you.
So I think that's just consistent with what we've said in the past. Thank you.
Your next question comes from the line of Christopher Glynn from Oppenheimer.
Thanks. Good morning. Good morning, Chris. Just a question on the GE capital operating cost structure. Do you think you need to do some more dramatic downsizing there for the trend to smaller more focused GE capital?
I think it will be pruning. I think we've done a dramatic restructuring. If you look at the change in the cost structure and how much we've taken out of the SG and A of that business over the last 18 months, today we're going to continue to shrink the things that we're running off. The global mortgages will continue to shrink, but we've really cut the cost base dramatically. Today we're looking at some things in investment around the mid market distribution and in areas where we may be able to take advantage of some of the disruptions because of the capital requirements of the banks or other things where we provide a real competitive advantage.
We get local. We're totally connected to the mid market customer. We're underwriting their assets. We're willing to take the residual risk because we know the assets and we've got a pretty good value proposition. So I don't think there's going to be a dramatic change in the cost structure there.
I think we're going to continue to run off the places that we've set our red assets. You see us doing that And we're going to incrementally add in places where we think we have a competitive advantage.
Okay. And then the cash balance at GE Capital, how should we think about when that can start to trend back in the direction towards historical levels?
Well, the way I think about it is it's significant today, it's high today as we brought the CP down, as we continue to maintain the bank lines that basically is allowing us to continue to pre fund in advance of maturities. And I think what we're going to do is work our way through 2011 and then obviously we have the TLGP maturities in 2011 and in 2012. And when we get through into what I would call a normalized period, Christopher, we're going to definitely be able to bring the cash balance down, we're going to bring the CP down and we'll probably operate with less bank lines as we go into that environment. But in terms of ratios and safe and secure, we're going to be able to keep our cash plus our bank lines at 2x our CP. And I think until you work your way through to a normalized period, which we should work through in 2012, we're probably going to have the $60,000,000,000 kind of range cash, dollars 50,000,000,000 to $60,000,000,000 as we work our way through that.
But I think after that period in normalized place, you're going to be able to bring that down to a lower level and still be above well above whatever the standards are for the important liquidity measurements for the regulators.
Great. Thanks a lot. Yes.
Your next question comes from the line of Steve Tusa from JPMorgan.
Hi, good morning. Hey, Steve.
Good morning, Steve. Just wanted to touch on energy for a second. So wind was obviously pretty bad, but I think you said the thermal deliveries were up nicely, yet the revenues were still pretty light. Can you just maybe talk about what else happened in the segment there? And then secondly, on the margins, pretty good margins on the revenue performance, yet your value gap closed relative to last quarter.
So is there something in the mix there that drove that margin that we should be aware of going forward?
Well, I'd say on revenues, if you look, again, the biggest item was renewables. And if you look with the wind volume, it was down wind turbines were down 300 units, it's down $600,000,000 of revenue in the quarter. Then we had $300,000,000 of balance of plant. When we do a large power plant, a lot of the times we source material and just include it in the project, but it's not GE material, dollars 300,000,000 less, that doesn't have a lot of calories in it, obviously, a margin calories for us. So that's almost $1,000,000,000 of the revenue decline.
Those were the biggest factors I'd say. We had some lower steam turbine units. We had a couple lower generators, but the biggest were those two items. In terms of margins and energy, the team just does it is doing a tremendous job. They're really working on protecting the price and the backlog.
They're doing a great job on sourcing and getting deflation. They're working their way through a wind market that has really collapsed in the U. S. And we've got a very attractive position there and they're adding value by putting new products in place that give customers a little more value, the 1.6% instead of the 1.5% on the wind turbines and things like that. So they've done a good job working their way through this.
I think services margins have held in all of the infrastructure segments. They've stayed strong. So I don't have one specific mix item. With the revenue down and with continuing to provide high margin equipment in the places like the gas turbines and the wind margin backlog, wind margin that's in backlog is very high. These guys have done a good job combined with the sourcing benefits we're getting.
The other thing I'd say Steve
is the power gen units are being used right now and the customers fleets and that bodes well I think for energy services in the rest of this year and into next year.
So you use the term collapse in the wind market. How is renewables down modestly next year in the face of what looks to be a pretty hard environment from an order perspective in wind?
A lot of that's going to come globally, Steve, like Canada, Brazil, Turkey, places like that, I think are where a lot of the demand is going to be. I'd say probably a lower margins than the ones we booked a year or so ago in the U. S, but that's where the demand will be.
Okay. And then just one last question on GE Capital. You talked about holding a $50,000,000,000 to $60,000,000,000 of cash. That seems to be significantly higher than kind of the $25,000,000,000 to $40,000,000 guided to last December in that kind of strategic funding plan slide you gave. Is that just driven by lack of visibility on the new regs?
And then secondly, you gave us a nice margin number, a portfolio margin number last quarter. I think it was somewhere in kind of the 5.2% range year to date. Can you maybe just update us on whether that's tracking towards that number or what it did in the quarter and how we see that going forward?
Sure. We haven't changed the cash outlook. I guess I'd ask Trevor to look at the chart with you and see what we're dealing with. I think we've been saying $50,000,000,000 to $60,000,000,000 of cash in GE Capital. We just did a bunch of bonds at the end of the quarter that gave us a little bit of cash in advance.
I mean we're going to look at when the market opportunities are there for us to fund ourselves and we did like $5,000,000,000 right at the end of the quarter. But I think when you looked at the numbers on that, maybe we're dealing with $40,000,000,000 $13,000,000 and that's consistent with what I just said I'd say. Okay. In terms of margins, I think the quarter was about 5.1% in the margins. So it's pretty similar to what we had in the second quarter.
Okay, great.
Thank you. All right. Thank you.
Your next question comes from the line of Scott Davis from Morgan Stanley.
Good morning. Hey, Scott. Hi, Scott.
I want to follow-up on Steve's question a bit because I think from the phone calls I'm getting in, the biggest kind of angst out there is coming from the revenue decline in Energy Infrastructure. How much I guess, kind of my question is, were you guys surprised as we were at how bad things got in wind this fast? Or was this something that we just kind of modeled out wrong and missed the rate of change?
We've been talking about the wind market for quite a while here. And we weren't surprised by it at all. So maybe we got to look at how do we model it with you guys a little better. But really it's something that's consistent with what John Kornicki and the team have basically been saying to us all along and the way we've been planning to run the business.
Fair enough. So let's dig into that
a little bit. I mean if
you think in terms of wind revenues down 32%, can you make money in the business at that kind of level? Do we have a much bigger swing in profits? I mean, I know you outsource a lot of components here and so can moderate production down pretty fast, but what how do we think about kind of decremental margins?
Yes. I think wind can stay very profitable for us. It's an attractive business. We don't disclose the specific profit numbers, but I would say that in relative to our equipment margins, it's a very profitable business. And as Jeff said, we'll probably have a mix shift as we go from some of the backlog stuff that we have in the U.
S. And we worked through that in 'nine a little bit, we worked through it in 'ten, we have some more of that in 'eleven and we're going to shift into international and probably will be slightly lower margins. But it's at a very good profitability level. We're building our service business as we've built out a huge installed base and that's going to over time contribute. So we like the business.
We're investing like crazy. We've got a big investment in larger wind turbines. We've got a great position that we're working on for offshore.
Scott, if I could just take you back to the Mosaic that we talked about in May and then again in the Q2. We always flag Renewables as a risk. And I think that's well recorded and well written about not just with GE, but others. And then we always said that on the other side, the way the industry typically works is you get pretty good orders for the aero derivatives and the gas units like Genbacher. I think that's taken place.
And then that leads to a rebound in the heavy duty gas turbine market. That's going to take place. We see pretty good demand outside the U. S. That's taking place.
And our service business is dramatically strengthening. So I think when you think about 2011 and 2012, we think the diversity of this business is just quite strong. And then what Keith said earlier is we remain de verticalized, so we can keep pretty good margins in something like wind even when the volume because we've been we've seen this rodeo before in terms of how the industry can kind of go through these peaks and valleys. So again, I think the revenue number I get, but I think if you look at the margin number and the diversity of the energy portfolio, we feel pretty good about how this business is positioned to fight through the next few years.
Makes sense. So let's move to something more positive and that's Dresser. I mean, clearly, the market like that deal and it's a type of acquisition I don't think we've seen in a while with you guys. And so it's great to see it kind of get back to your roots again. But what when you think about size wise, I mean, that was $3,000,000,000 which is about well, if you're talking about $30,000,000,000 over 3 years, I mean, should we expect somewhere are there more deals in that kind of size range that can move the needle?
Or was that a bit of a one off? And now you're probably looking at more like you call them bolt ons, which is pretty big too.
Scott, we like energy. We think we got a good executing team there. And in the 1% to 3% range, really, if you think about Energy and Oil and Gas, there's just lots of companies in that range. So I think we have a pretty repeatable process in terms of how to get cost synergy. We don't really count on revenue synergies when we evaluate the deals.
We like the supply chain. We know how to get cash out of the supply chain. So I think those are all the positives. And so we think in an orderly way, we can kind of chunk through and do a bunch of deals kind of in that range.
Okay. Thank you.
Your next question comes from the line of Terry Darling from Goldman Sachs.
Hey, Terry. Good morning. Good morning, Terry.
Just a couple of cleanup items I think on some of the things you mentioned, just some clarifications. I guess first, Jeff, you made a number of comments on 4Q orders. And I'm just trying to wrap all that up. And it kind of sounded to me net net that orders would be up sequentially, but probably down year over year given the tough comp in some of the businesses you had last year. Is that the right way to translate?
I think orders will be flattish, Terry, would be my assessment. But again, I hate to give guidance point to point, but I would say we talked about orders should be flattish, revenue in Q4 industrially should be up Q over Q and flat versus year ago. That's how I'd look at it.
And then just on that orders, you
were just talking equipment, right? Well, equipment and service.
I'm sorry. I was just talking equipment then.
I think equipment will be maybe up slightly, flat to up slightly
in that range.
Okay. And
then I'm just wondering, is there any update on some of the key commercial aero headwinds on R and D and start up losses that we talked about last quarter? Or are those numbers still roughly
as you thought they were a quarter ago
in terms
of the Say the question again, sorry. I'm sorry.
But talking about some of the 2011 headwinds in commercial aviation, the R and D increase that we talked about last quarter as well as the startup losses on GE and X, Have any of those numbers moved around on it? Well, okay,
there's a little bit that's going to happen in 'ten versus what we had planned, but there's still going to be a chunk in 'eleven as well.
And that's still kind of 500, 700 if I'm remembering correctly or is
that Less than 500 about. Yes, we love 700, 500. That's completely consistent with what we've it's no worse than that.
Yes. Great.
No change there. And then any update on pension headwind for next year? You did mention that. I think we all can see what's happening with rates, but any finer point you want to put on that for people?
Well, I think if you look at pension, Ross, this year we're experiencing about $1,000,000,000 pre tax headwind. Without any other changes that would be a similar amount next year. Today, there's 2 unknowns really, right? There's the discount rate and then there's the what do you do with the earnings rate. Those are the 2 things being debated a lot in the world.
I'd say from a discount rate perspective today, if you had to do it, it's somewhere between around 70 basis points probably lower. But who knows what the 10 year is going to do and what the 10 year AA is going to do between now year end. So there's variability there. We said that 25 basis points of discount rate is about $200,000,000 of increased pension costs. And then what's your return on assets?
We have an 8.5% assumption. Over a long period of time, we've more than made that in the short period with the 2,008 losses. You don't get that in the 5 10 year averages. But excluding that, the returns have been very good. We've got a very high equity allocation.
We've got a long term liability we're dealing with here. We're 7% through roughly today through the Q3 up in the pension in terms of the return. So how will that play out? We'll have to see. We've said that a 50 basis point change there somewhere around $300,000,000 So those size kind of the dimension of what we may be dealing with and we'll have to give that update in December when we get to there.
That's helpful. Just a couple of
other quick ones. First Keith on tax, I think maybe I missed it, I apologize, but the lower rate this quarter than I think you had been looking for, what was the driver there? And then it sounds like 4th quarter is closer to 20%, maybe to get the full year to the mid-20s and then any counsel on 11% at this early stage?
Well, first of all, the tax rate is exactly what we were expecting in the Q3. I mean, if you look at it, it's flat to last year. In terms of rate, it's $50,000,000 higher of a provision for the industrial. It's, I don't know, dollars 750,000,000 higher of a provision at GE Capital. So taxes are $800,000,000 higher year over year and flat from a rate on the industrial and significantly higher obviously on the capital side in terms of dollars.
For the year, excluding the MVCU sale, which will create volatility in the tax rate, we're saying that we estimate the industrial rate, which is 26% year to date Q3 to be somewhere lower than that. And that depends upon whether or not we do reach a settlement on the 2,003 to 2,005 tax year. Because we're in negotiations on that, I do not have an amount on that. But the tax rate in the Q4 would be lower for industrial to bring the overall rate down a bit.
But Keith, if we complete in BC, that's That raises the tax rate.
That'll raise the tax rate. That'll raise the tax rate. So because we've got a low basis, there'll be a high tax on that gain. Absolutely. For 2011, we'd say that industrial rates are going to stay in the mid-20s.
We don't have a change in anything structurally. And then in GE Capital, we'll have to see how things go. We would expect the rate to be similar to what we get as a total year rate this year. And we expect the structural benefits between somewhere $1,800,000,000 this year, should be similar next year. And we need obviously, we need legislation to get extended to get to those rates.
Okay. And then just one last quick one. Should we anticipate a WMC reserve increase of any meaningful quarter of magnitude in the Q4?
I don't foresee that at all. Okay.
Thanks very much.
Your next question comes from the line of Julian Mitchell from Credit Suisse.
Yes, thanks. My first question was really on the power side in terms of not so much volumes, but what you're seeing on pricing because you mentioned it being a sort of high single digit negative in your order backlog Q2. Siemens said something similar about a month ago. So I wondered if you'd seen any change in pricing trends very recently because I guess there's a sense in which the large thermal stuff, in particular gas, is near its volume sort of trough. So if you're seeing pricing starting to firm up there, wind, obviously, you're not near that volume trough, so I guess pricing remains very difficult.
And what do you think that means for your value gap going forwards?
I think the pricing remains challenged,
right? I mean, yes, energy overall was down 2.8, Jeff. Thermal was down 5, not a lot of orders. And then obviously, wind was down about 12, so renewables. So overall, 2.8 because you got to benefit services.
So and other components, the other The other Airdrivers.
Stuff like that is pretty strong. So and I think we're still seeing pretty good deflation in terms of what the teams are doing in terms of productivity and material cost out and sourcing. So I think we haven't gone through the budget for next year on value gap and things like that, but this team does a pretty good job in those areas.
Okay. But the I guess the is there still a big gap between the pricing effect in your P and L and the pricing effect in your backlog? Or is that gap closing already?
I think it's closing, Julien. In other words, I think if you look at I think things aren't getting worse and I think it's closing, but we'll be able to reflect more when we get together in December.
Sure. Okay. And then secondly, just on the healthcare market, you mentioned cost saving initiatives offsetting pricing there. I guess pricing is always a feature in Healthcare. Has there been any change there recently?
And also, I guess, on the demand side in the U. S, has there been any change in the last 3 or 4 months or everything is as it was in June?
Julien, I would say that their margin rates are pretty good and the pricing is, if anything, slightly stronger than they had anticipated or at least no worse. And so I think they've done a nice job there and they're building a lot of backlog. I think the U. S. Market is vibrant is the wrong word, but I think people are redoing their planning on post reform and that's been generally positive.
So I think the market itself and our performance is pretty good.
Great. Thanks.
Your next question comes from the line of Nigel Coe from Deutsche Bank.
Thanks. Good morning, guys. Hey, Nigel. So just I'd hate to go back to wind again, but I thought Jeff's comments about the margin in the backlog on wind is very good. And I think you might have said actually improving.
Yet pricing down, I think, 8% last quarter, down 12% this quarter. It sounds like you're having a lot of success in passing through that deflation to your supply chain. And I just wondered maybe if you get more success in going back and shaking those guys down, maybe that's the wrong word, but certainly a tremendous job of the margins. And just wondering if you could just go into that a bit more?
I think the strategy has been for a long time on all the stuff we do is to be pretty de verticalized. And I think we do a good job of working with our suppliers on productivity and cost out. All that being said, my suspicion is that the margin in the Renewable business will be down year over year and that will be offset by improvements in Services and Oil and Gas and some of the other areas.
Okay. And just to understand that your 4Q revenue comments, I think you said flat year over year in 4Q.
On the industrial side.
On industrial side, but that implies about 20% pickup from 3Q levels. Could you maybe just go into what's driving that pickup because it implies a nice reversion in both energy and primary energy?
Well, I think it's been typical over time as you've got people finish out the year and that's when a lot of the projects complete. Healthcare in particular, there's a budgeting cycle by the hospitals that impacts healthcare, but in some ways almost every one of our infrastructure businesses has a stronger So,
pretty consistent quarterly annual tariff.
Stronger Q4. 3rd quarter, a lot of our customers do shutdowns and power plants do turnarounds and stuff like that. So, this is not a typical, I don't think, Nigel.
Yes. And I know the full key is usually higher, but the 20% pickup is a lot higher than UGC. But that's great news. And then Keith, on the MVC gain offset by some items, I mean, we've done some back of the envelope calculations that suggest the gain could be close to $1,000,000,000 pretax, and it sounds like it's going to be lower than that. Can you maybe just put some color on that?
I haven't done what the pretax number is. I think what we said is we'll have a, we believe, a couple of 100,000,000 after tax gain. As I said, it's a high tax transaction. So we're still finalizing so much around that valuation and accounting and tax. But our expectation today, my expectation today is we have a couple of $100,000,000 after tax gain.
And does it have some range around it? Sure it does.
Okay. And then just one quick one, then I'll pass it on. On. The losses have been coming in very nicely in GE Capital, dollars 1,700,000,000 this quarter. On the E and I target that you have, dollars 400,000,000,000 long term target, what kind of what's the neighborhood of losses would you think is a good run rate on that asset base?
Well, I think if you go back to our pre crisis levels and you take a look at our average normalized consumer losses and our average normalized commercial losses And you look at the mix of the business, our traditional loss rates are down around a little over 1%, 1% to 1.5% with a good consumer mix. So our expectation is that we go back to pre crisis loss levels and then if you adjust the mix between commercial and consumer, you can get a pretty good number there.
And that suggests something in the range of about $500,000,000
That's too low.
Too low? Okay.
Are you talking about on a quarterly basis?
Yes, that
would be quarterly basis.
It still seems a little low to me.
Okay. Thanks, Heath.
Your next question comes from the line of Jeff Sprague from Vertical Research Partners.
Thank you. Good morning, everyone.
Hey, Jeff.
Hey, Jeff. Hey, could we make sure we've got the aviation R and D thing straight? So you gave a generalized answer to Terry. But my understanding is you're thinking there's $300,000,000 to $500,000,000 R and D headwind next year. But that was allowing for the possibility of a 7 37 reengine, which clearly isn't going to happen and possibly allowing for an A320 reengine, which is maybe not happening, certainly sliding further to the right.
So as you look at what actually might happen as opposed to what you were conceptually prepared for, what do you think the R and D headwind actually looks like?
Jeff, we haven't done our formal budgets for next year and there's a lot I'd still like to go through. But we're shipping the GNX engines in the Q3 Q4 of this year, right? So those are some of the costs associated with that. And look, it's certainly not going to be any worse next year than what we've already said and could be better. But I'd rather kind of go through that with you as we finish this year.
And I think we've made a little bit better through stuff we've done in 10 and then we'll just see where the R and D goes as we go into next year.
Look, that's a big category. The $500,000,000 that has been discussed is not one thing. It's a total set of things, including the launch of the Gen X, including the new programs, including other expenses we have with those programs, including China. So it's a lot of things. I think if you think about it in a macro sense, it's built into our run rate.
You're seeing some of it in the run rate in the 3rd Q4 here with what we talked about in Aviation. And there are other things in 2011 that offset that. I mean, if you look, we expect to have a good improvement in the services growth. We do have some other volume growth across the other commercial engines that aren't as pressured when you look at that compared to the Gen X. And we've got pretty good margins in the rest of that business.
So it's not one lump sum thing down year over year. It's included in a lot of the run rate. It's just a pressure that does have to be absorbed by the business as we go through a lot of development. And those development programs are multi year. I mean, we're investing in the LEAP X.
We're going to continue to invest in the LEAP X. So I think it's a part of the fabric of that business, but it's not one lump sum number that's just like just down next year because of that. That's never what we intended it to be.
That's helpful. So then just maybe to understand the run rate then, obviously, the margins did step down in Q3. Can you give us a sense of what the Gen X impact was in the quarter?
No, we're not giving out individual kind of product margin, Jeff. These launch engines are definitely pressured when you look at the concession levels and also the learning curve on the engine and that will improve as we go through 20 10 and go through 2011. We get up to normal volumes and we get to more normal launch prices and concessions. You're going to see that continue to improve. But we're not giving a specific margin per engine on a product line.
We haven't traditionally done that. It's part of the fact that the business was down 17% in the quarter.
Yes. You shipped physical Gen X engines in the quarter though, correct?
We recorded revenue on about 18%. And those are for the 747 so far. That engine is certified in the Q4. The engine for the 787 will certify, we believe.
And a lot of ground
has been covered here, but just over on to oil and gas. What are the margin ramifications for this transition in the business from downstream to upstream?
Yes. I think the equipment margin ramifications are not it's not a change. It was really a volume thing that we're talking about. The LNG margins or at least the average margins for the equipment of this business, they've done a tremendous job on winning the LNG orders around the world. And those will be we had a little bit of gorgon in the quarter actually.
So it's not a margin shift issue. It's really a timing of volume issue. And we hope we'll show you that when we look at the Q4 and you see the orders again and you look at the total year orders, you're going to feel pretty good about
it. Is there something that's driving the delay? Is it financing? Is it uncertainty about energy prices? Or is it just noise you think?
I think we saw projects push in the quarter across the business. For whatever reason, whether it's financing or it's the ability to get the resources they need to do the project in certain parts of the world, we have some constraints. If you look at Australia, places just packed with orders and opportunities and they're trying to get the ability to execute. So it's a combination of things, but it doesn't change our outlook at all on the view for oil and gas, that's for sure. I think
it's mainly noise, Jeff. I really do.
Okay. And I'm sorry, just one last one. Did you say Arrow spares were up some 25% ex?
If you look, the reported is down to at the $22,000,000 a day, Jeff. But we have this Avel order that we did last year and every quarter that it was for not the core business production spares where they're going to handle that for us and that kind of distorts the average daily order rate. If you compare it ex that ABL order, it's up about 25%. So at $22,000,000 a day, that's and again, I think part of that is the comparison last year. We really dipped in the Q3 last year as the park planes went in and as people pushed out maintenance, we're down in the $17,000,000 $18,000,000 a day range.
So part of it is that. But at $22,000,000 a day, that's a really good order rate for us and a very healthy order rate for the business.
Is the ABL comp the same in Q4? And is it totally burned off at that point?
Q4 is the last quarter of it. I don't know the exact number, but it's in the Q4 numbers that I saw. Saw there was some ABL. Great. Thank you very much.
Yes. Thanks, Jeff.
And our last question comes from the line of Bob Cornell from Barclays Capital.
No, let's leave the best for last. All right, Bob. How are you? The pre provision earnings in capital less than I thought of $2,200,000,000 versus an estimate of $2,700,000,000 But from what you said, it sounds like impairments were over $1,000,000,000 because loss and impairments were 2.8 percent. My point is that it looks like the pre provision earnings, I mean the net interest margin actually was a positive in the quarters.
Could you just take us through that a little bit and tell us what was going on in the impairments, what might happen in the Q4? Well, first, in terms of pre tax pre provision, I'll go from 2Q to 3Q. We were 2.7 in 2Q, 2.2 in 3Q, so it's down about $500,000,000 $300 of that is the higher marks and impairments. Now you got to remember in the quarter, we had about $200,000,000 of that comes from the GECAS annual impairment review and that was a little high and that was higher than what we had last year obviously. We had another $100,000,000 in treasury in marks and impairments that again at the end of the day those hedge marks go to 0 when the instrument gets to the end of its life, but that was 100.
And then we also had a little bit year over year when you or quarter over quarter when you look we had a Regency positive in the second quarter. It doesn't repeat. So I think if you look at it, our view is if you do pretax, so you just do pretax, Q2 was 700, Q3 is 500, down 200, it's really all the impairments in GECAS, higher impairments in GECAS quarter over quarter. And even at that level, that's pretty good profitability for JECS since part of this turnaround. I mean, it gives us plenty of pretax.
We don't believe we're going to have any payment under the income maintenance agreement. And again, I think the impairments at the end of the day, those are not run rate types of things. Those are things that we're having to deal with on a quarter by quarter basis and they're not going to be staying at those levels in the run rates forever. Just what was the net interest margin 3rd over second? And was that is it trending up or trending down?
I don't know what that number is, Bob. So I guess the point is, are you seeing some margin compression in the business?
No. Overall, we were at 5.2%
versus 5.1%. So 5.1% versus 5.2% in the 2nd quarter, 5.1%. So it's running at about that rate. But I think the bigger thing is if you look at the new volume we did and we covered that in here, the amounts and the ROIs, I mean, you're talking about 2.6 ROI and the new volume we did. That's really attractive.
So this will make it clear. You had
$300,000,000 higher margin impairments in the Q3 of Q2, is that what you said? Yes, I did.
Okay. Thank you.
All
right. Great, Nolia. I think that's the end of the Q and A.
Thank you, everyone. The replay of
today's webcast will be available this afternoon. Just a few housekeeping items here, if you stick with me for a minute. We will be distributing our quarterly supplemental data schedule for GE Capital later today that we started doing last quarter. And I do have several events to announce. First, we'll be hosting our GE Healthcare Analyst Meeting in New York City on November 9.
Please visit our website for details. 2nd, we will host our GE Capital webcast on December 7. We'll send out details once that's finalized. 3rd, our annual outlook meeting with our Chairman and CEO in New York City, which we hold every year will be held on December 14. More information will be sent out closer to that date.
And then finally, our Q4 2010 earnings webcast will take place on Friday, January 21.
So if you could put those
in your calendar and join us, that would be great. As always, Joanne and I will be available to take questions later today. Thank you very much, everyone.
Thank you for your participation in today's conference.