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Credit Crisis Crimps GE

The conglomerate's profits are being hurt by weakness at its financial-services unit

By BW and AP Staff

It was not what an anxious Wall Street wanted to hear. General Electric (GE) reported a smaller than expected first-quarter profit Apr. 11 and lowered its outlook for fiscal 2008, as a slowing U.S. economy sapped its financial-services business.

The news from the U.S. corporate bellwether sent shock waves through financial markets, pushing major index futures solidly into the red ahead of the Apr. 11 Wall Street opening. GE, which makes jet engines, railroad locomotives, and water treatment plants, and owns TV studio NBC, said net income fell 6%, to $4.3 billion, or 43¢ per share, from $4.57 billion, or 44¢ per share, a year ago.

Earnings from continuing operations totaled $4.4 billion, or 44¢ per share, down 8% year-over-year. Revenue climbed 8%, to $42.24 billion from $39.20 billion, with global revenue up 22%.

Demand Remains Strong

Analysts surveyed by Thomson Financial (TOC) expected profit from continuing operations would be 51¢ per share on revenue of $43.68 billion. The company had forecast profit of 50¢ to 53¢ per share.

"Demand for our global infrastructure business remained strong, but our financial-services businesses were challenged by a slowing U.S. economy and difficult capital markets," GE Chairman and Chief Executive Jeff Immelt said in a statement.

GE said international operations—more than half of revenues are generated overseas—helped sustain the company's balance sheet as the U.S. economy continues to slump. But the company wasn't able to complete asset sales, due to tighter credit markets, and was forced to take impairment charges that cut 5¢ off per-share earnings.

NBC Universal Grew 3%

"Our primary shortfall was a decline in financial-services earnings," Immelt said. "We knew the first quarter was going to be challenging, but the extraordinary disruption in the capital markets in March affected our ability to complete asset sales and resulted in higher market-to-market losses."

Immelt added that its commercial finance and GE Money businesses still earned $2.2 billion during the quarter, in what he characterized as a "trough market." NBC Universal grew profits 3%, while health-care earnings were affected by continued regulatory shipping restrictions on surgical supplies.

Credit-Market Worries Persist

GE lowered its full-year outlook for earnings from continuing operations to between $2.20 and $2.30 per share, to account for an expected 5% to 10% decline in financial-services profit. For the fiscal second quarter, GE forecast earnings per share of 53¢ to 55¢. GE had projected earnings from continuing operations of at least $2.42 a share in 2008. Analysts had predicted earnings from continuing operations of 58¢ for the second quarter and $2.43 for the full year.

The company's release set "what could be an ominous tone to the markets," wrote Jay Collins of DT Trading in Chicago in a premarket note Apr. 11. He noted that GE cited the credit markets as the major source of issues in its performance. "For all of the talk of the end being near for the issues in that arena, I am more worried than ever," Collins said.

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