Exhibit
13
FINANCIAL
SECTION
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Contents
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46
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Management’s
Discussion of Financial Responsibility
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We
begin with a letter from our Chief Executive and
Financial
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Officers
discussing our unyielding commitment to rigorous
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oversight,
controllership and visibility to investors.
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47
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Management’s
Annual Report on Internal Control
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Over
Financial Reporting
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In
this report our Chief Executive and Financial Officers
provide
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their
assessment of the effectiveness of our internal control
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over
financial reporting. This report is new for 2004 as
required
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by
Section 404 of the Sarbanes-Oxley Act of 2002.
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47
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Report
of Independent Registered Public Accounting Firm
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Our
auditors, KPMG LLP, express their independent opinions
that
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our
financial statements are fairly presented and our
internal
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controls,
effective.
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48
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Management’s
Discussion and Analysis (MD&A)
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48
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Operations
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We
begin the Operations section of MD&A with an overview
of
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our
earnings, including a perspective on how the global
economic
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environment
has affected our businesses over the last three years.
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This
year, we added a discussion of the types of risks we face
and
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the
ways we manage those risks. We then discuss various key
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operating
results for GE industrial (GE) and financial services
(GECS).
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Because
of the fundamental differences in these businesses,
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reviewing
certain information separately for GE and GECS offers a
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more
meaningful analysis. Our discussion of segment results
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includes
quantitative and qualitative disclosure about the
factors
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affecting
segment revenues and profits, and the effects of recent
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acquisitions,
dispositions and significant transactions. We conclude
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the
Operations section with an overview of our operations from
a
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global
perspective and a discussion of environmental matters.
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59
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Financial
Resources and Liquidity
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In
our Financial Resources and Liquidity section of MD&A,
we
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provide
an overview of the major factors that affected our
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consolidated
financial position and insight into the liquidity
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and
cash flow activities of GE and GECS.
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66
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Selected
Financial Data
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Selected
Financial Data provides five years of financial
information
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for
GE and GECS. This table includes commonly used metrics
that
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facilitate
comparison with other companies.
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68
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Critical
Accounting Estimates
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Critical
Accounting Estimates are necessary for us to prepare
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our
financial statements. In this section, we discuss what
these
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estimates
are, why they are important, how they are developed
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and
uncertainties to which they are subject.
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70
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Other
Information
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We
conclude MD&A with an explanation of a new
accounting
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standard
and supplemental information to reconcile certain
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“non-GAAP”
financial measures referred to in our report to the
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most
closely associated GAAP financial measures.
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72
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Audited
Financial Statements and Notes
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72
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Statement
of Earnings
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72
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Consolidated
Statement of Changes in Shareowners’ Equity
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74
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Statement
of Financial Position
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76
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Statement
of Cash Flows
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78
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Notes
to Consolidated Financial Statements
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112
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Glossary
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For
your convenience, we provide a Glossary of key terms
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used
in our financial statements.
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We
also present our financial information electronically
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at
www.ge.com/investor
. This award-winning site
is
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interactive
and informative.
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Management’s Discussion of Financial Responsibility
We believe that great companies are built on a foundation of reliable financial information and compliance with the spirit and letter of the law. For GE, that foundation includes rigorous management oversight of, and an unyielding dedication to, controllership. The financial disclosures in this report are one product of our commitment to high quality financial reporting. In addition, we make every effort to adopt appropriate accounting policies, we devote our full resources to ensuring that those policies are applied properly and consistently and we do our best to fairly present our financial results in a manner that is complete and understandable. While we take pride in our financial reporting, we tirelessly seek improvements, and we welcome your suggestions.
RIGOROUS MANAGEMENT OVERSIGHT
Members of our corporate leadership team review each of our businesses routinely on matters that range from overall strategy and financial performance to staffing and compliance. Our business leaders monitor financial and operating systems, enabling us to identify potential opportunities and concerns at an early stage and positioning us to respond rapidly. Our Board of Directors oversees management’s business conduct, and our Audit Committee, which consists entirely of independent directors, oversees our system of internal controls and procedures. We continually examine our governance practices in an effort to enhance investor trust and improve the Board’s overall effectiveness. The Board and its committees annually conduct a performance self-evaluation and recommend improvements. Our Presiding Director led three meetings of non-employee directors this year, helping us sharpen our full Board meetings to better cover significant topics. Compensation policies for our executives are aligned with the long-term interests of GE investors. For example, payout of CEO equity grants are contingent on our Company meeting key performance metrics.
DEDICATION TO CONTROLLERSHIP
We maintain a dynamic system of internal controls and procedures—including internal control over financial reporting—designed to ensure reliable financial record-keeping, transparent financial reporting and disclosure, and protection of physical and intellectual property. We recruit, develop and retain a world-class financial team. Our internal audit function, 530 auditors, including 380 members of our Corporate Audit Staff, conducts thousands of financial, compliance and process improvement audits each year, in every geographic area, at every GE business. We recognized the contributions of our controllers and these auditors with a Chairman’s Leadership Award in 2005. The Audit Committee oversees the scope and evaluates the overall results of these reviews. Our global integrity policies—the “Spirit & Letter”— require compliance with law and policy, and pertain to such vital issues as upholding financial integrity and avoiding conflicts of interest. These integrity policies are available in 27 languages, and we have provided them to every one of GE’s more than 300,000 global employees, holding each of these individuals—from our top management down—personally accountable for compliance. Our integrity policies serve to reinforce key employee responsibilities around the world, and we inquire extensively about compliance. Our strong compliance culture reinforces these efforts by requiring employees to raise any compliance concerns and by prohibiting retribution for doing so. To facilitate open and candid communication, we have designated ombudspersons throughout the Company to act as independent resources for reporting integrity or compliance concerns. We hold our consultants, agents and independent contractors to the same integrity standards.
VISIBILITY TO INVESTORS
We are keenly aware of the importance of full and open presentation of our financial position and operating results and rely for this purpose on our disclosure controls and procedures, including our Disclosure Committee, which comprises senior executives with detailed knowledge of our businesses and the related needs of our investors. We ask this committee to evaluate the fairness of our financial and non-financial disclosures, and to report their findings to us and to the Audit Committee. We further ensure strong disclosure by holding more than 250 analyst and investor meetings every year. Recognizing the effectiveness of our disclosure policies, investors surveyed annually by Investor Relations magazine have given us 24 awards in the last nine years, including Best Overall Investor Relations Program by a mega-cap company for six of those years. We are in regular contact with representatives of the major rating agencies, and our debt continues to receive their highest ratings. We welcome the strong oversight of our financial reporting activities by our independent registered public accounting firm, KPMG LLP, who are engaged by and report directly to the Audit Committee. Beginning this year, U.S. legislation requires management to report on internal control over financial reporting and for auditors to render an opinion on such controls. Our report and the KPMG LLP report for 2004 appear on page 47.
A GREAT COMPANY
GE continues to earn the admiration of the business world. We were named “The World’s Most Respected Company” for the seventh consecutive year in the Financial Times / PricewaterhouseCoopers annual CEO survey, and again ranked first in corporate governance.
We present our financial information proudly, with the expectation that those who use it will understand our Company, recognize our commitment to performance with integrity, and share our confidence in GE’s future.
/s/
JEFFREY R.
IMMELT
/s/
KEITH S.
SHERIN
JEFFREY R.
IMMELT
Chairman of the Board and Chief Executive Officer
KEITH S. SHERIN
Senior Vice President, Finance and Chief Financial
Officer
February 11, 2005
The management of General Electric Company is responsible for establishing and maintaining adequate internal control over financial reporting for the company. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2004.
General Electric Company’s independent auditor, KPMG LLP, a registered public accounting firm, has issued an audit report on our management’s assessment of our internal control over financial reporting. This audit report appears below.
/s/ JEFFREY R.
IMMELT
/s/ KEITH S. SHERIN
JEFFREY R.
IMMELT
Chairman of the Board and Chief Executive Officer
KEITH S. SHERIN
Senior Vice President, Finance and Chief Financial
Officer
February 11, 2005
Report of Independent Registered Public Accounting F irm
To Shareowners and Board of Directors of General Electric Company
We have audited the accompanying statement of financial position of General Electric Company and consolidated affiliates (“GE”) as of December 31, 2004 and 2003, and the related statements of earnings, changes in shareowners’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. We also have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that GE maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). GE management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of GE’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements appearing on pages 72, 74, 76, 53 and 78–111 present fairly, in all material respects, the financial position of GE as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, management’s assessment that GE maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Furthermore, in our opinion, GE maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by COSO.
As discussed in note 1 to the consolidated financial statements, GE in 2004 and 2003 changed its method of accounting for variable interest entities, in 2003 changed its method of accounting for asset retirement obligations and in 2002 changed its methods of accounting for goodwill and other intangible assets and for stock-based compensation.
Our audits of GE’s consolidated financial statements were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating information appearing on pages 73, 75 and 77 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual entities. The consolidating information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.
KPMG LLP
Stamford, Connecticut
February 11, 2005
Our consolidated financial statements combine the industrial manufacturing, services and media businesses of General Electric Company (GE) with the financial services businesses of General Electric Capital Services, Inc. (GECS or financial services).
We present Management’s Discussion of Operations in five parts: Overview of Our Earnings from 2002 through 2004, Global Risk Management, Segment Operations, Global Operations and Environmental Matters.
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission (SEC) rules; those rules require the supplemental explanations and reconciliations provided on page 70.
2004 WAS A YEAR OF PORTFOLIO TRANSITION. As described in our report last year, we simplified our organization on January 1, 2004, by realigning certain businesses within our segment structure. Certain prior-period amounts in this financial section have been reclassified to reflect this reorganization.
We continued making progress toward our objectives through strategic acquisitions, mergers and dispositions.
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In April 2004, we acquired Amersham plc (Amersham), a world
leader in medical diagnostics and life sciences, to complement our existing
Healthcare business.
-
In May 2004, we combined NBC with Vivendi Universal
Entertainment LLLP (VUE) to create one of the world’s leading media companies,
NBC Universal.
-
In May 2004, we also completed an initial public offering of
Genworth Financial, Inc. (Genworth), our formerly wholly-owned subsidiary that
conducts most of our consumer insurance business, including life and mortgage
insurance operations. We sold approximately 30% of the common shares of
Genworth to the public, and we expect (subject to market conditions) to reduce
our ownership over the next two years as Genworth transitions to full
independence. This transaction resulted in a second quarter pre-tax loss of
$0.6 billion ($0.3 billion after tax), recognized in the Insurance
segment.
-
In December 2004, we sold a majority interest in Gecis, our
global business processing operation, to two leading private investment firms.
We received cash proceeds of $0.6 billion and retained a 40% investment in
Gecis. This transaction resulted in a fourth quarter pre-tax gain of $0.4
billion ($0.3 billion after tax), recognized in the Equipment & Other
Services segment.
WE DECLARED $8.6 BILLION IN DIVIDENDS IN 2004. Per-share dividends of $0.82 were up 6% from 2003, following a 5% increase from the preceding year. In December 2004, our Board of Directors raised our quarterly dividend 10% to $0.22 per share. We have rewarded our shareowners with over 100 consecutive years of dividends, with 29 consecutive years of dividend growth, and our dividend growth for the past five years has significantly outpaced that of companies in the Standard & Poor’s 500 stock index.
Except as otherwise noted, the analysis in the remainder of this section presents the results of GE (with GECS included on a one-line basis) and GECS. See the Segment Operations section on page 52 for a more detailed discussion of the businesses within GE and GECS.
Overview of Our Earnings from 2002 through 2004
The global economic environment must be considered when evaluating our results over the last several years. Important factors for us included slow global economic growth, a weakening U.S. dollar, lower global interest rates, a mild U.S. recession that did not cause significantly higher credit losses, developments in three industries—power generation, property and casualty insurance and commercial aviation—that are significant to us, and escalating raw material prices. As the following pages show in detail, our diversification and risk management strategies enabled us to continue to grow during this challenging time.
Three segments whose operations have a significant effect on our consolidated results and reflect their changing economic environments are Energy, Insurance and Transportation.
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Energy (14% and 22% of consolidated three-year revenues and
total segment profit, respectively) participated in the period of
unprecedented U.S. power industry demand that peaked in 2002, a period often
referred to as the “U.S. power bubble.” The return to normal demand levels is
reflected in lower shipments of large heavy-duty gas turbines. In 2004, we
sold 122 such units, compared with 175 in 2003 and 323 in 2002. We accurately
foresaw the end of the bubble and took action to reduce the effect,
right-sizing the business and growing and investing in other lines of the
power generation business such as product services and wind energy. We believe
the Energy segment is well positioned for its markets in 2005 and
beyond.
-
Insurance (17% and 4% of consolidated three-year revenues and
total segment profit, respectively) was much like most of the property and
casualty reinsurance industry, facing volatility throughout the period. In
2002, we recognized losses on our 1997–2001 business, increasing related
reserves by $3.5 billion before tax. In 2003, our turnaround efforts started
to pay off and we realized benefits from improved operations as earnings
increased by $2.3 billion to a profit of $0.5 billion at GE Insurance
Solutions. In 2004, improved core performance at
GE 2004 ANNUAL REPORT
48
GE Insurance
Solutions reflecting the favorable pricing environment was more than offset by
U.S. hurricane-related losses and continued adverse loss development,
essentially all related to the 1997 through 2001 underwriting years.
- Transportation (10% and 14% of consolidated three-year revenues and total segment profit, respectively) continued to invest in market-leading technology and services. While the commercial aviation industry continues to face challenges and financial pressures that affect our commercial aviation business, our business model succeeds by diversification. Product services, the military engines business and our rail equipment and services business continued to be strong. Overall, Transportation reported segment profit that grew $0.6 billion in 2004 and $0.2 billion in 2003.
Results at two major segments, Healthcare and NBC Universal, reflected continued investment and growth over the last three years.
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Healthcare (8% and 9% of consolidated three-year revenues and
total segment profit, respectively) continued to show strong growth as 2004
revenues and segment profit both rose about 50% since 2002. Our acquisitions
of Amersham in 2004 and Instrumentarium in 2003 contributed $3.2 billion and
$0.6 billion to Healthcare revenues and segment profit, respectively, in 2004.
These acquisitions also expanded the breadth of our product and services
offerings to the healthcare industry, positioning us well for continued
growth.
- NBC Universal (6% and 10% of consolidated three-year revenues and total segment profit, respectively) also contributed a strong performance during the last three years as we continued to invest through acquisitions. Through the combination of NBC and VUE in 2004, and successful acquisitions of Telemundo and Bravo in 2002, we have created a diversified world-class media company. Earnings from the segment increased $0.6 billion in 2004 following a $0.3 billion increase in 2003.
Most of our other operations achieved operating results in line with our expectations in the 2002 to 2004 economic environment.
-
Commercial and Consumer Finance (in total, 25% and 31% of
consolidated three-year revenues and total segment profit, respectively) are
large, profitable growth businesses in which we continue to invest with
confidence. In a challenging economic environment, these businesses grew
earnings by $0.9 billion and $1.0 billion in 2004 and 2003, respectively.
Solid core growth, disciplined risk management and successful acquisitions
have delivered these strong results.
-
Infrastructure (2% of consolidated three-year revenues and
total segment profit), with growth platforms such as security and water
treatment, continued to grow significantly through acquisitions. We foresee
dramatic revenue and earnings growth in these platforms through integration of
these acquisitions, expanded distribution and new product
introductions.
-
Advanced Materials, Consumer & Industrial and Equipment
& Other Services (in total, 19% and 7% of consolidated three-year revenues
and total segment profit, respectively) are particularly sensitive to economic
conditions and consequently were affected adversely by the U.S. recession in
2002 and by slow global growth in developed countries. Higher capacity, in
combination with declining or weak volume growth in many of these industries,
resulted in fierce competitive price pressures. Advanced Materials was hit
particularly hard because of additional pressures from significant inflation
in certain raw materials such as benzene and natural gas.
As the preceding comments about Healthcare, Insurance and NBC Universal illustrate, acquisitions and dispositions played an important role in our growth strategy. We integrate acquisitions as quickly as possible and only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses. Acquisitions contributed $12.3 billion, $5.4 billion and $7.2 billion to consolidated revenues in 2004, 2003 and 2002, respectively. Our consolidated net earnings in 2004, 2003 and 2002 included approximately $1.2 billion, $0.5 billion and $0.6 billion, respectively, from acquired businesses. Dispositions affected our operations through lower revenues and earnings in 2004 of $3.4 billion and $1.2 billion, respectively, and in 2003 through lower revenues of $2.3 billion and higher earnings of $0.2 billion.
Significant matters relating to our Statement of Earnings, which appears on pages 72 and 73, are explained below.
GE SALES OF PRODUCT SERVICES were $25.8 billion in 2004, a 12% increase over 2003. Increases in product services in 2004 and 2003 were widespread, led by continued strong growth at Transportation, Healthcare, Infrastructure and Energy. Operating profit from product services was approximately $6.4 billion in 2004, up 21% from 2003, reflecting ongoing improvements at Transportation, Energy and Healthcare.
POSTRETIREMENT BENEFIT PLANS
reduced pre-tax earnings by $1.2 billion and $0.2 billion in 2004 and 2003, respectively, after contributing $0.6 billion to pre-tax earnings in 2002. Costs of our principal pension plans increased in 2004 and 2003 primarily because of the effects of:-
Prior years investment losses (reducing pre-tax earnings by
$0.6 billion in 2004 and $0.4 billion in 2003), and
-
Lowering pension discount rates used to calculate 2004 and
2003 pension costs from 6.75% to 6.0% and 7.25% to 6.75%, respectively.
Pre-tax earnings in 2004 and 2003 were $0.4 billion and $0.2 billion lower,
respectively, because of these discount rate reductions.
Benefit costs for these plans in 2003 also increased as compared with 2002 because of plan changes resulting from union negotiations as well as increases in retiree medical and drug costs.
Considering current and expected asset allocations, as well as historical and expected returns on various categories of assets in which our plans are invested, we have assumed that long-term returns on our principal pension plan assets would be 8.5% throughout this period and in 2005. U.S. accounting principles provide for recognition of differences between assumed and actual returns over the average future service life of employees.
We believe our postretirement benefit costs will increase again in 2005 for a number of reasons, including further reduction in discount rates at December 31, 2004, continued recognition of prior years investment losses relating to our principal pension plans, and increases in retiree healthcare costs.
Our principal pension plans had a surplus of $6.7 billion at December 31, 2004. We will not make any contributions to the GE Pension Plan in 2005. To the best of our ability to forecast the next five years, we do not anticipate making contributions to that plan so long as expected investment returns are achieved. At December 31, 2004, the fair value of assets for our affiliate and other pension plans was $2.6 billion less than their respective projected benefit obligations. In 2004, we contributed $0.4 billion to such plans and expect to contribute $0.3 billion to these plans in 2005.
The funding status of our postretirement benefit plans and future effects on operating results depend on economic conditions and investment performance. See notes 5 and 6 for additional information about funding status, components of earnings effects and actuarial assumptions. See page 70 for discussion of pension assumptions.
GE OTHER COSTS AND EXPENSES are selling, general and administrative expenses, which increased 22% to $12.0 billion in 2004, following an 8% increase in 2003, substantially the result of acquisitions.
INTEREST ON BORROWINGS AND OTHER FINANCIAL CHARGES amounted to $11.9 billion, $10.8 billion and $10.2 billion in 2004, 2003 and 2002, respectively. Substantially all of our borrowings are done through GECS, where interest expense was $11.4 billion, $10.3 billion and $9.9 billion in 2004, 2003 and 2002, respectively. Changes over the three-year period reflected increased average borrowings, partially offset by the effects of lower interest rates. GECS average borrowings were $322.6 billion, $309.0 billion and $250.1 billion in 2004, 2003 and 2002, respectively. GECS average composite effective interest rate was 3.6% in 2004, compared with 3.3% in 2003 and 4.1% in 2002. Proceeds of these borrowings were used in part to finance asset growth and acquisitions. In 2004, GECS average assets of $577.3 billion were 11% higher than in 2003, which in turn were 15% higher than in 2002. See page 62 for a discussion of interest rate risk management.
INCOME TAXES are a significant cost. As a global commercial enterprise, our tax rates are strongly affected by many factors, including our global mix of earnings, legislation, acquisitions, dispositions and tax characteristics of our income. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. Because of the number of variables affecting our reported tax results, we have prepared this section to facilitate an understanding of our income tax rates.
Income taxes on consolidated earnings before accounting changes were 17.5%, compared with 21.7% in 2003 and 19.9% in 2002. Our consolidated income tax rate was 4.2 percentage points lower in 2004 than 2003 because the 2004 tax benefits from favorable U.S. Internal Revenue Service (IRS) settlements, the NBC Universal transaction, a partial reorganization of our aircraft leasing business and the sale of a majority interest in Gecis were greater than the tax benefits from certain business dispositions in 2003. Our consolidated income tax rate increased by 1.8 percentage points in 2003 because our tax benefits from 2003 business dispositions were less than our 2002 tax benefits from settlements with the IRS. Income tax rates for all three years were lower because of the increasing share of earnings from lower taxed global operations. A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated rate, as well as other information about our income tax provisions, is provided in note 7. The nature of business activities and associated income taxes differ for GE and for GECS, and a separate analysis of each is presented in the paragraphs that follow.
Because GE tax expense does not include taxes on GECS earnings, the GE effective tax rate is best analyzed in relation to GE earnings excluding GECS. GE’s pre-tax earnings excluding GECS were $10.4 billion, $10.7 billion and $14.3 billion for 2004, 2003 and 2002, respectively. On this basis, GE’s effective tax rate was 19.0% in 2004, lower by 7.7 percentage points than the 26.7% rate in 2003 and 2002. The 2004 reduction was primarily a result of two items
GE 2004 ANNUAL REPORT
50
which decreased the 2004 GE tax rate by 7.2 percentage points—settling
several issues with the IRS for the years 1985 through 1999 and tax benefits
associated with the NBC Universal transaction. As part of the IRS settlements,
we closed two significant issues: the 1997 tax-free exchange of the Lockheed
Martin convertible preferred stock we received on the disposition of our
Aerospace business in 1993, and a 1998 tax loss on the sale of a Puerto Rican
subsidiary. The tax portion of these settlements is included in the line “IRS
settlements of Lockheed Martin tax-free exchange/Puerto Rico subsidiary loss” in
note 7. The tax benefits associated with the NBC Universal transaction are
included in the line “All other—net” in note 7. The 2004 GE effective tax rate
also reflects lower pre-tax income, primarily because of lower earnings at
Energy and higher costs related to our principal pension plans. Partially
offsetting these changes was the nonrecurrence of the 2003 tax benefit,
discussed below, on the disposition of GE Superabrasives U.S., Inc.
The 2003 GE rate was reduced by 1.7 percentage points because certain reductions in pre-tax earnings—specifically, lower earnings at Energy and higher costs related to our principal pension plans—affected income taxed at higher than our average rate. The 2003 GE rate was also reduced by 1.0 percentage point (after adjusting for the effect of the lower earnings at Energy and higher costs related to our principal pension plans) from a tax benefit on the disposition of shares of GE Superabrasives U.S., Inc., included in the line “All other—net” in note 7. In 2002, GE entered into settlements with the IRS concerning certain export tax benefits. The effect of these settlements, the tax portion of which is included in the line “Tax on global activities including exports” in note 7, was a reduction of the GE tax rate of 2.7 percentage points. Also in 2002, GE entered into a tax-advantaged transaction to exchange certain assets for the cable network Bravo. The related reduction of 1.0 percentage point in the GE effective tax rate is reflected in the line “All other—net” in note 7.
GECS effective tax rate increased to 15.9% in 2004 from 15.8% in 2003 and negative 1.7% in 2002. The 2004 GECS rate reflects the net benefits, discussed below, of legislation and a partial reorganization of our aircraft leasing operation, which decreased the effective tax rate 1.6 percentage points and is included in the line “Tax on global activities including exports” in note 7; tax benefits from favorable IRS settlements, which decreased the effective tax rate 1.2 percentage points and are included in the line “All other—net” in note 7; and the low-taxed disposition of a majority interest in Gecis which decreased the effective tax rate 0.9 percentage points, and is included in the line “Tax on global activities including exports” in note 7. Offsetting these benefits was the nonrecurrence of the 2003 tax benefit on the disposition of shares of ERC Life Reinsurance Corporation (ERC Life).
As a result of the repeal of the extraterritorial income (ETI) taxing regime as part of the American Jobs Creation Act of 2004 (the Act), the aircraft leasing operations of Commercial Finance no longer qualify for a reduced U.S. tax rate. However, the Act also extended to foreign aircraft leasing, the U.S. tax deferral benefits that were already available to GE’s other active foreign operations. As stated above, these legislative changes, coupled with a partial reorganization of our aircraft leasing business and a favorable Irish tax ruling, decreased GECS effective tax rate 1.6 percentage points.
The increase in the effective tax rate from 2002 to 2003 reflects the nonrecurrence of the 2002 losses at GE Insurance Solutions and GE Equity as well as certain 2002 IRS settlements discussed below, partially offset by a 2.7 percentage point decrease because of the 2003 tax benefit on the disposition of shares of ERC Life.
GECS 2002 effective tax rate reflects the effects of pre-tax losses at GE Insurance Solutions and GE Equity, which reduced the effective tax rate of GECS by 16.7 percentage points, the effects of lower taxed earnings from global operations and favorable tax settlements with the IRS. The benefits of these settlements, which reduced the GECS rate 4.0 percentage points (excluding the GE Insurance Solutions and GE Equity losses), are included in the line “All other—net” in note 7.
Global Risk Management
A disciplined approach to risks is important in a diversified organization such as ours in order to ensure that we are executing according to our strategic objectives and that we only accept risks for which we are adequately compensated. It is necessary for us to manage risk at the individual transaction level, and to consider aggregate risk at the customer, industry, geography and collateral-type levels, where appropriate.
GE’s Board of Directors oversees the risk management process through clearly established delegation of authority. Board meeting agendas are jointly developed with management to cover the same risk topics as our Corporate Risk Committee reviews, including environmental, compliance, liquidity, credit, market and event risks.
GECS Board of Directors oversees the risk management process for financial services, including the approval of all significant acquisitions and dispositions and the establishment of borrowing and investment approval limits delegated to the Investment Committee of the Board, the Chairman, the Chief Financial Officer and the Chief Risk Officer. All participants in the risk management process must comply with these approval limits.
The GECS Chief Risk Officer is responsible, through the Corporate Risk Function, for establishing standards for the measurement, reporting and limiting of risk; for managing and evaluating risk managers; for approving risk management policies and for reviewing major risk exposures and concentrations across the organization. The GECS Corporate Risk Function analyzes certain business risks and assesses them in relation to aggregate risk appetite and approval limits set by the GECS Board of Directors.
Threshold responsibility for identifying, quantifying and mitigating risks is assigned to our individual businesses. Because the risks and their interdependencies are complex, we apply a Six Sigma-based analytical approach to each major product line that monitors performance against external benchmarks, proactively manages changing circumstances, provides early warning detection of risk and facilitates communication to all levels of authority. Other corporate functions such as Financial Planning and Analysis, Treasury, Legal and our Corporate Audit Staff support business-level risk management. Businesses that, for example, hedge risk with derivative financial instruments must do so using our centrally-managed Treasury function, providing assurance that the business strategy complies with our corporate policies and achieves economies of scale. We review risks periodically with business-level risk managers, senior management and our Board of Directors.
GECS employs about 10,000 dedicated risk professionals, including 2,700 involved in collection activities and 1,400 specialized asset managers who evaluate leased asset residuals and remarket off-lease equipment.
GE and GECS manage a variety of risks including liquidity, credit, market and event risks.
-
Liquidity risk is the risk of being unable to accommodate
liability maturities, fund asset growth and meet contractual obligations
through access to funding at reasonable market rates. Additional information
about our liquidity and how we manage this risk can be found on page 59 and in
notes 18 and 28.
-
Credit risk is the risk of financial loss arising from a
customer or counterparty’s failure to meet its contractual obligations. We
face credit risk in our lending and leasing activities (see pages 59 and 68
and notes 1, 12, 13 and 30) and derivative financial instruments activities
(see note 28).
-
Market risk is the potential loss in value of investment and
other asset and liability portfolios, including financial instruments, caused
by changes in market variables, such as interest and currency exchange rates
and equity and commodity prices. We are exposed to market risk in the normal
course of our business operations as a result of our ongoing investing and
funding activities. We attempt to mitigate the risks to our various portfolios
arising from changes in interest and currency exchange rates in a variety of
ways that often include offsetting positions in local currencies or use of
derivatives. Additional information about how we mitigate the risks to our
various portfolios from changes in interest and currency exchange rates can be
found on page 62 and in note 28.
- Event risk is that body of risk beyond liquidity, credit and market risk. Event risk includes the possibility of adverse occurrences both within and beyond our control. Examples of event risk include natural disasters, availability of necessary materials, guarantees of product performance and business interruption. This type of risk is often insurable, and success in managing this risk is ultimately determined by the balance between the level of risk retained or assumed and the cost of transferring the risk to others. The decision as to the appropriate level of event risk to retain or cede is evaluated in the framework of business decisions. Additional information about how we mitigate event risk can be found in note 30.
Segment Operations
Revenues and segment profit for operating segments are shown on page 53. Effective January 1, 2004, we made changes to the way we report our segments. We have reclassified certain prior-period amounts to conform to the current period’s presentation. For additional information, including a description of the products and services included in each segment, see pages 110 and 111.
Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business in a given period. In connection with that assessment, the Chief Executive Officer may exclude matters such as charges for restructuring; rationalization and other similar expenses; in-process research and development and certain other acquisition-related charges; certain gains and losses from dispositions; and litigation settlements or other charges, responsibility for which precedes the current management team.
Segment profit always excludes the effects of principal pension plans and accounting changes. Segment profit excludes or includes interest and other financial charges and segment income taxes according to how a particular segment’s management is measured—excluded in determining operating profit for Advanced Materials, Consumer & Industrial, Energy, Healthcare, Infrastructure, NBC Universal and Transportation; included in determining segment profit, which we refer to as “segment net earnings,” for Commercial Finance, Consumer Finance, Equipment & Other Services and Insurance.
Summary of Operating Segments
| General Electric Company and consolidated affiliates | |||||||||||||||
|
For the years ended December 31 (In
millions)
|
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||
| REVENUES | |||||||||||||||
|
Advanced Materials
|
$ | 8,290 | $ | 7,078 | $ | 6,963 | $ | 7,069 | $ | 8,020 | |||||
|
Commercial Finance
|
23,489 | 20,813 | 19,592 | 17,723 | 17,549 | ||||||||||
|
Consumer Finance
|
15,734 | 12,845 | 10,266 | 9,508 | 9,320 | ||||||||||
|
Consumer & Industrial
|
13,767 | 12,843 | 12,887 | 13,063 | 13,406 | ||||||||||
|
Energy
|
17,348 | 19,082 | 23,633 | 21,030 | 15,703 | ||||||||||
|
Equipment & Other Services
|
8,483 | 4,427 | 5,545 | 7,735 | 15,074 | ||||||||||
|
Healthcare
|
13,456 | 10,198 | 8,955 | 8,409 | 7,275 | ||||||||||
|
Infrastructure
|
3,447 | 3,078 | 1,901 | 392 | 486 | ||||||||||
|
Insurance
|
23,070 | 26,194 | 23,296 | 23,890 | 24,766 | ||||||||||
|
NBC Universal
|
12,886 | 6,871 | 7,149 | 5,769 | 6,797 | ||||||||||
|
Transportation
|
15,562 | 13,515 | 13,685 | 13,885 | 13,285 | ||||||||||
|
Corporate items and eliminations
|
(3,169 | ) | (2,757 | ) | (1,662 | ) | (2,057 | ) | (1,296 | )) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
CONSOLIDATED REVENUES
|
$ | 152,363 | $ | 134,187 | $ | 132,210 | $ | 126,416 | $ | 130,385 | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
| SEGMENT PROFIT | |||||||||||||||
|
Advanced Materials
|
$ | 710 | $ | 616 | $ | 1,000 | $ | 1,433 | $ | 1,864 | |||||
|
Commercial Finance
|
4,465 | 3,910 | 3,310 | 2,879 | 2,528 | ||||||||||
|
Consumer Finance
|
2,520 | 2,161 | 1,799 | 1,602 | 1,295 | ||||||||||
|
Consumer & Industrial
|
716 | 577 | 567 | 894 | 1,270 | ||||||||||
|
Energy
|
2,845 | 4,109 | 6,294 | 4,897 | 2,598 | ||||||||||
|
Equipment & Other Services
|
607 | (419 | ) | (388 | ) | (222 | ) | (212 | ) | ||||||
|
Healthcare
|
2,286 | 1,701 | 1,546 | 1,498 | 1,321 | ||||||||||
|
Infrastructure
|
563 | 462 | 297 | 26 | 45 | ||||||||||
|
Insurance
|
569 | 2,102 | (95 | ) | 1,879 | 2,201 | |||||||||
|
NBC Universal
|
2,558 | 1,998 | 1,658 | 1,408 | 1,609 | ||||||||||
|
Transportation
|
3,213 | 2,661 | 2,510 | 2,577 | 2,511 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total segment profit
|
21,052 | 19,878 | 18,498 | 18,871 | 17,030 | ||||||||||
| GECS goodwill amortization | — | — | — | (552 | ) | (620 | ) | ||||||||
| GE corporate items and eliminations | (1,507 | ) | (491 | ) | 1,041 | 819 | 935 | ||||||||
| GE interest and other financial charges | (979 | ) | (941 | ) | (569 | ) | (817 | ) | (811 | ) | |||||
| GE provision for income taxes | (1,973 | ) | (2,857 | ) | (3,837 | ) | (4,193 | ) | (3,799 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
| Earnings before accounting changes | 16,593 | 15,589 | 15,133 | 14,128 | 12,735 | ||||||||||
| Cumulative effect of accounting changes | — | (587 | ) | (1,015 | ) | (444 | ) | — | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
CONSOLIDATED NET EARNINGS
|
$ | 16,593 | $ | 15,002 | $ | 14,118 | $ | 13,684 | $ | 12,735 | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
The notes to consolidated financial statements on pages 78–111 are an integral part of this summary.
GE 2004 ANNUAL REPORT
53
ADVANCED MATERIALS revenues in 2004 were up 17% to $8.3 billion reflecting higher volume ($0.7 billion), higher prices ($0.4 billion) and the effects of the weaker U.S. dollar ($0.2 billion). Volume increases resulted from the OSi acquisition ($0.4 billion) and higher demand for plastic resins and quartz products. Operating profit of $0.7 billion was 15% higher than in 2003 as productivity ($0.4 billion) and higher prices ($0.4 billion) more than offset the effect of higher material costs ($0.6 billion), primarily from commodities such as benzene and natural gas.
Advanced
Materials revenues in 2003 were up 2% to $7.1 billion as the effects of the
weaker U.S. dollar ($0.3 billion) and the OSi acquisition ($0.1 billion) more
than offset lower core volume ($0.2 billion). Operating profit of $0.6 billion
in 2003 was 38% lower than in 2002, reflecting higher material costs ($0.2
billion), primarily benzene, and lower productivity ($0.2 billion), partially
offset by effects of dispositions and the OSi acquisition.
See
GE Corporate Items and Eliminations on page 57 for a discussion of items not
allocated to this segment.
|
COMMERCIAL
FINANCE
|
||||||||||
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
REVENUES
|
$
|
23,489
|
$
|
20,813
|
$
|
19,592
|
||||
|
NET
REVENUES
|
||||||||||
|
Total
revenues
|
$
|
23,489
|
$
|
20,813
|
$
|
19,592
|
||||
|
Interest
expense
|
6,083
|
5,789
|
5,979
|
|||||||
|
Total
net revenues
|
$
|
17,406
|
$
|
15,024
|
$
|
13,613
|
||||
|
NET
EARNINGS
|
$
|
4,465
|
$
|
3,910
|
$
|
3,310
|
||||
|
December
31 (In millions)
|
2004
|
2003
|
||||||||
|
TOTAL
ASSETS
|
$
|
232,123
|
$
|
214,125
|
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
Real
Estate
(a)
|
||||||||||
|
Revenues
|
$
|
2,519
|
$
|
2,386
|
$
|
2,124
|
||||
|
Net
earnings
|
957
|
834
|
650
|
|||||||
|
Aviation
Services
(a)
|
||||||||||
|
Revenues
|
3,159
|
2,881
|
2,694
|
|||||||
|
Net
earnings
|
520
|
506
|
454
|
|||||||
|
December
31 (In millions)
|
2004
|
2003
|
||||||||
|
Real
Estate
(a)
|
||||||||||
|
Total
assets
|
$
|
33,497
|
$
|
27,767
|
||||||
|
Aviation
Services
(a)
|
||||||||||
|
Total
assets
|
37,384
|
33,271
|
|
(a)
|
We
provide additional information on two of our segment product lines, Real
Estate (commercial real estate financing) and Aviation Services
(commercial aircraft financing). Each of these product lines finances a
single form of collateral, and each has understandable concentrations of
risk and opportunities.
|
|||
Commercial
Finance revenues and net earnings increased 13% and 14%, respectively, compared
with 2003. The increase in revenues resulted primarily from acquisitions ($2.3
billion), the effects of the weaker U.S. dollar ($0.6 billion) and core growth
($0.1 billion), partially offset by lower securitization activity ($0.2 billion)
and lower investment gains ($0.1 billion). The increase in net earnings resulted
primarily from acquisitions ($0.4 billion), core growth ($0.3 billion) and the
effects of the weaker U.S. dollar ($0.1 billion), partially offset by lower
securitization activity ($0.1 billion).
The
most significant acquisitions affecting Commercial Finance results in 2004 were
the U.S. leasing business of IKON Office Solutions, acquired during the second
quarter of 2004; the commercial lending business of Transamerica Finance
Corporation, and Sophia S.A., a real estate company in France, both acquired
during the first quarter of 2004; and the assets of CitiCapital Fleet Services,
acquired during the fourth quarter of 2003. These acquisitions contributed $1.9
billion and $0.3 billion to 2004 revenues and net earnings,
respectively.
The
2003 increase in revenues of 6% resulted primarily from acquisitions across
substantially all businesses ($1.1 billion), higher investment gains at Real
Estate ($0.1 billion) and core growth, partially offset by lower securitization
activity ($0.1 billion). The 2003 increase in net earnings of 18% resulted
primarily from core growth, acquisitions across substantially all businesses
($0.2 billion), higher investment gains at Real Estate as a result of the sale
of properties and our investments in Regency Centers and Prologis ($0.1
billion), lower credit losses ($0.1 billion) resulting from continued
improvement in overall portfolio credit quality as reflected by lower
delinquencies and nonearning receivables, and growth in lower taxed earnings
from global operations ($0.1 billion).
The
most significant acquisitions affecting Commercial Finance 2003 results were the
commercial inventory financing business of Deutsche Financial Services and the
structured finance business of ABB, both of which were acquired during the
fourth quarter of 2002. These two acquisitions contributed $0.5 billion and $0.1
billion to 2003 revenues and net earnings, respectively.
|
CONSUMER
FINANCE
|
||||||||||
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
REVENUES
|
$
|
15,734
|
$
|
12,845
|
$
|
10,266
|
||||
|
NET
REVENUES
|
||||||||||
|
Total
revenues
|
$
|
15,734
|
$
|
12,845
|
$
|
10,266
|
||||
|
Interest
expense
|
3,564
|
2,696
|
2,143
|
|||||||
|
Total
net revenues
|
$
|
12,170
|
$
|
10,149
|
$
|
8,123
|
||||
|
NET
EARNINGS
|
$
|
2,520
|
$
|
2,161
|
$
|
1,799
|
||||
|
December
31 (In millions)
|
2004
|
2003
|
||||||||
|
TOTAL
ASSETS
|
$
|
151,255
|
$
|
106,530
|
Consumer
Finance revenues and net earnings increased 22% and 17%, respectively, from
2003. The increase in revenues resulted primarily from core growth ($1.8
billion), as a result of continued global expansion, acquisitions ($1.0
billion), the effects of the weaker U.S. dollar ($0.8 billion) and higher
securitization activity ($0.1 billion), partially offset by the absence of The
Home Depot private-label credit card receivables that were sold for a gain in
2003 ($0.9 billion). The increase in net earnings resulted from core growth,
including growth in lower taxed earnings from global operations ($0.6 billion),
acquisitions ($0.1 billion), and the effects of the weaker U.S. dollar ($0.1
billion), partially offset by the effects of The Home Depot private-label credit
card receivables ($0.4 billion) and increased costs to launch new products and
promote brand awareness in 2004 ($0.1 billion).
The
most significant acquisitions affecting Consumer Finance results in 2004 were
WMC Finance Co. (WMC), a U.S. wholesale mortgage lender, acquired during the
second quarter of 2004; GC Corporation (GC Card), which provides credit card and
sales finance products in Japan, acquired during the third quarter of 2003; and
First National Bank, which provides mortgage and sales finance products in the
United Kingdom, and the U.S. retail sales finance unit of Conseco Finance Corp.
(Conseco), both acquired during the second quarter of 2003. These acquisitions
contributed $0.7 billion and $0.1 billion to 2004 revenues and net earnings,
respectively.
In
December 2004, we acquired Australian Financial Investments Group (AFIG), a
residential mortgage lender in Austra
lia,
with $13.2 billion in assets and an insignificant effect on 2004 revenues and
earnings. We expect this acquisition to be accretive to earnings in 2005.
Revenues
increased 25% in 2003 as a result of acquisitions ($1.1 billion), the effects of
the weaker U.S. dollar ($0.7 billion), core growth as a result of continued
global expansion and the premium on the sale of The Home Depot private-label
credit card receivables ($0.1 billion). Net earnings increased 20% in 2003 as a
result of core growth, growth in lower taxed earnings from global operations,
the premium on the sale of The Home Depot private-label credit card receivables
($0.1 billion) and acquisitions. These increases were partially offset by lower
securitization activity ($0.2 billion) and lower earnings in Japan, principally
as a result of increased personal bankruptcies.
The
most significant acquisitions affecting Consumer Finance 2003 results were First
National Bank and Conseco, both of which were acquired during the second quarter
of 2003. These acquisitions contributed $0.7 billion and $0.1 billion to 2003
revenues and net earnings, respectively.
CONSUMER
& INDUSTRIAL
revenues rose 7% to $13.8 billion in 2004 as higher volume ($1.0 billion) and
the effects of the weaker U.S. dollar ($0.2 billion) more than offset lower
prices ($0.3 billion). Operating profit increased 24% to $0.7 billion as the
negative effects of lower prices ($0.3 billion) and higher labor and indirect
costs ($0.2 billion) were more than offset by productivity ($0.5 billion) and
lower material costs ($0.1 billion).
In
2003, Consumer & Industrial revenues decreased slightly to $12.8 billion as
lower prices ($0.3 billion), primarily of home appliances and consumer lighting
products, were partially offset by the effects of the weaker U.S. dollar ($0.2
billion). Operating profit rose slightly in 2003 as productivity ($0.3 billion),
primarily achieved by combining the lighting and appliance businesses, the mix
of higher-margin appliances and an investment gain were partially offset by
lower prices ($0.3 billion).
See
GE Corporate Items and Eliminations on page 57 for a discussion of items not
allocated to this segment.
ENERGY
revenues declined 9% to $17.3 billion as lower volume ($1.6 billion) and lower
prices ($0.6 billion) were only partially offset by growth in the energy
services businesses and the effects of the weaker U.S. dollar ($0.5 billion).
Energy sold 122 large heavy-duty gas turbines in 2004, compared with 175 in
2003. Operating profit in 2004 fell 31% to $2.8 billion, reflecting lower
productivity ($0.8 billion), primarily from the anticipated decline in higher
margin gas turbine sales and a decrease in customer contract termination fees,
lower prices ($0.6 billion) and lower volume ($0.3 billion), partially offset by
lower material costs ($0.4 billion). Customer contract termination fees, net of
associated costs, were $0.1 billion in 2004 compared with $0.6 billion in 2003.
Energy
revenues fell 19% to $19.1 billion in 2003 as growth in the energy services and
wind businesses was more than offset by lower volume ($4.8 billion), reflecting
the continued effects of the decline in sales of large, heavy-duty gas turbines
(down 46% from 323 units in 2002) and industrial aero-derivative products,
partially offset by the net effects of the weaker U.S. dollar ($0.7 billion).
Operating profit dropped 35% to $4.1 billion in 2003, principally reflecting the
combined effects of lower volume ($1.3 billion), lower productivity ($0.8
billion) and lower prices ($0.5 billion). Customer contract termination fees,
net of associated costs, were $0.6 billion in 2003 and $0.9 billion in 2002,
reflecting the decline in demand for new power generation equipment that began
in 2002, with such fees primarily occurring in that year and the first half of
2003.
Energy
orders were $18.7 billion in 2004, compared with $16.0 billion in 2003,
reflecting strong demand for wind turbines, services, and oil and gas
turbomachinery. The $14.4 billion total backlog at year-end 2004 comprised
unfilled product orders of $8.9 billion (of which 73% was scheduled for delivery
in 2005) and product services orders of $5.5 billion scheduled for 2005
delivery. Comparable December 31, 2003, total backlog was $12.5 billion, of
which $7.9 billion was for unfilled product orders and $4.6 billion for product
services.
EQUIPMENT
& OTHER SERVICES
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
REVENUES
|
$
|
8,483
|
$
|
4,427
|
$
|
5,545
|
||||
|
NET
EARNINGS
|
$
|
607
|
$
|
(419
|
)
|
$
|
(388
|
)
|
||
Equipment
& Other Services revenues and net earnings increased $4.1 billion and $1.0
billion, respectively, from 2003. Adoption of a January 1, 2004, required
accounting change caused revenues to increase $3.2 billion, as a result of
consolidating operating lease rentals ($2.6 billion) and other income ($0.6
billion). See note 1. The most significant entity consolidated as a result of
this change was Penske Truck Leasing Co., L.P. (Penske), which was previously
accounted for using the equity method. Revenue also increased reflecting the
sale of a majority interest in Gecis ($0.4 billion), improved investment returns
at GE Equity ($0.4 billion), the results of consolidated, liquidating
securitization entities ($0.3 billion) and the effects of the weaker U.S. dollar
($0.1 billion). These increases were partially offset by the absence of the U.S.
Auto and Home business that was disposed of in 2003 ($0.4 billion). Contributing
to the increase in net earnings were improved investment returns at GE Equity
($0.3 billion), the gain on sale of a majority interest in Gecis ($0.3 billion),
improved operating performance at Equipment Services ($0.2 billion), and the
results of consolidated, liquidating securitization entities ($0.1
billion).
Equipment
& Other Services revenues and net earnings in 2003 decreased 20% and 8%,
respectively, compared with 2002. More specifically, revenues decreased as a
result of the following:
|
•
|
The
exit of certain European operations at IT Solutions ($1.3 billion) in
response to intense competition and transition of the computer equipment
market to a direct distribution model,
|
|
•
|
Continued
poor market conditions and ongoing dispositions and run-offs of IT
Solutions and the Auto Financial Services business ($0.3 billion),
and
|
|
•
|
Lower
asset utilization and price ($0.2 billion), an effect of industry-wide
excess equipment capacity reflective of the then current conditions in the
road and rail transportation sector.
|
These
decreases were partially offset by the overall improvement in equity markets and
lower level of investment losses in 2003 at GE Equity ($0.2 billion) and the
consolidation of certain securitization entities in our financial statements
($0.7 billion) as a result of our July 1, 2003, required accounting change. See
notes 1 and 29. The decrease in net earnings resulted primarily from lower asset
utilization and price ($0.1 billion) and the absence of a 2002 tax settlement
related to Kidder Peabody ($0.2 billion), offset by improved performance in 2003
at GE Equity ($0.2 billion) and the tax benefit related to the sale of ERC Life
($0.1 billion).
HEALTHCARE
revenues
increased 32% to $13.5 billion in 2004 as higher volume ($3.3 billion),
primarily from acquisitions including Amersham ($2.2 billion) and
Instrumentarium ($1.0 billion), and the effects of the weaker U.S. dollar ($0.4
billion), more than offset lower prices ($0.4 billion). Operating profit of $2.3
billion in 2004 was 34% higher than in 2003 as the effects of higher volume
($0.5 billion) and productivity ($0.5 billion) more than offset the effects of
lower prices ($0.4 billion).
Healthcare
revenues increased 14% to $10.2 billion in 2003 reflecting $0.5 billion of sales
from recently acquired businesses, primarily Instrumentarium, and other volume
growth ($0.7 billion) that more than offset lower prices ($0.4 billion).
Operating profit of $1.7 billion in 2003 rose 10% as productivity ($0.3 billion)
and higher volume ($0.2 billion) more than offset the $0.4 billion effects of
lower prices.
See
GE Corporate Items and Eliminations on page 57 for a discussion of items not
allocated to this segment.
Orders
received by Healthcare in 2004 were $13.8 billion, compared with $10.5 billion
in 2003. The $4.7 billion total backlog at year-end 2004 comprised unfilled
product orders of $2.9 billion (of which 92% was scheduled for delivery in 2005)
and product services orders of $1.9 billion scheduled for 2005 delivery.
Comparable December 31, 2003, total backlog was $4.6 billion, of which $2.8
billion was for unfilled product orders and $1.8 billion for product services
orders.
INFRASTRUCTURE
revenues increased 12% to $3.4 billion in 2004 on higher volume ($0.3 billion),
primarily within our water and security businesses, and the effects of the
weaker U.S. dollar ($0.1 billion). Operating profit rose 22% to $0.6 billion in
2004 as higher volume and productivity more than offset lower prices.
Infrastructure
reported a sharp increase in 2003 revenues, to $3.1 billion, on higher volume
($1.0 billion), primarily from acquisitions. The largest of these acquisitions
were Betz-Dearborn and Osmonics which contributed $0.5 billion of revenues in
2003. Operating profit also rose sharply to $0.5 billion in 2003 on higher
volume ($0.2 billion), primarily from acquisitions.
INSURANCE
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
REVENUES
|
$
|
23,070
|
$
|
26,194
|
$
|
23,296
|
||||
|
NET
EARNINGS
|
$
|
569
|
$
|
2,102
|
$
|
(95
|
)
|
|||
|
GE
Insurance Solutions
(a)
|
||||||||||
|
Revenues
|
$
|
10,005
|
$
|
11,600
|
$
|
9,432
|
||||
|
Net
earnings
|
36
|
481
|
(1,794
|
)
|
||||||
|
(a)
|
Formerly
GE Global Insurance Holding Corporation, the parent of Employers
Reinsurance Corporation (ERC).
|
|||
Insurance
revenues and net earnings decreased 12% and 73%, respectively, from 2003. The
decrease in revenues resulted primarily from the 2003 dispositions ($2.5
billion), including GE Edison Life Insurance Company (Edison Life), Financial
Guaranty Insurance Company (FGIC) and ERC Life; net declines in volume resulting
from strategic exits of certain business channels, primarily at GE Insurance
Solutions ($1.3 billion) and the effects of the Genworth initial public offering
($0.4 billion). These decreases were partially offset by the effects of the
weaker U.S. dollar ($0.6 billion). Net earnings decreased primarily from the
full-year after-tax earnings effects of the Genworth initial public offering
($0.7 billion), the 2003 dispositions ($0.5 billion) and the 2004 U.S.
hurricane-related losses ($0.3 billion) at GE Insurance Solutions. Also
contributing to the net earnings decrease were reserve actions taken at GE
Insurance Solutions related to continued adverse development on
liability-related exposures underwritten in 1997-2001 (discussed below). These
decreases in net earnings were partially offset by improved core performance at
GE Insurance Solutions reflecting the continued favorable premium pricing
environment.
Revenues
in 2003 increased $2.9 billion (12%) on increased premium revenues ($2.2
billion), a gain of $0.6 billion on the sale of Edison Life, higher investment
income ($0.4 billion) and the effects of the weaker U.S. dollar ($0.7 billion).
The premium revenue increase reflected continued favorable pricing at GE
Insurance Solutions ($0.5 billion), net volume growth at GE Insurance Solutions
and certain other insurance businesses ($0.8 billion), absence of prior year
loss adjustments ($0.4 billion), adjustment of current year premium accruals to
actual ($0.3 billion) and lower levels of ceded premiums resulting from a
decline in prior-year loss events ($0.1 billion). Partial revenue offsets
resulted from the absence of revenues following the sale of Edison Life ($0.7
billion) and a $0.2 billion loss on the disposition of FGIC at the end of 2003.
Net
earnings in 2003 increased $2.2 billion, primarily from the substantial
improvement in current operating results at GE Insurance Solutions ($2.3
billion) reflecting improved underwriting, lower adverse development (discussed
below) and generally favorable industry pricing conditions during the year. Net
earnings also benefited from the gain on the sale of Edison Life ($0.3 billion).
These increases were partially offset by the absence of a current year
counterpart to the favorable tax settlement with the IRS in 2002 ($0.2 billion)
and the loss on the sale of FGIC ($0.1 billion after tax).
As
described on page 69 under the caption “Insurance Liabilities and Reserves,” we
routinely update our insurance loss provisions to reflect our best estimates of
losses. At year-end 2004, our best estimate of outstanding net property and
casualty claim-related liabilities at GE Insurance Solutions was $17.4
billion.
GE 2004 ANNUAL REPORT
56
Few losses in an underwriting year are known exactly at the end of that
year; an insurer cannot know a year’s exact losses before customers have
submitted claims and those claims have been evaluated, adjudicated and settled.
This process routinely spans years, and sometimes decades. Like much of the
property and casualty insurance industry, GE Insurance Solution’s recent
operating results have absorbed charges from updates to loss estimates
associated with policies written in prior years. This adverse loss development
has been most pronounced for certain liability-related risk policies
underwritten from 1997 through 2001, principally hospital and professional
liability, workers compensation, product liability and asbestos and
environmental exposures. Adverse development on prior-years claims and expenses
for the three years ended December 31, 2004, amounted to $5.5 billion. Business
that we subsequently exited accounted for 84% of the most recent adverse
development. Although we do not anticipate further provisions related to this
risk, we observe that the associated losses have not yet fully matured.
In
2002, in light of our adverse loss development, we modified our underwriting
processes, rejecting both risks that failed to meet our standards of price,
terms or conditions as well as risks for which sufficient historical data did
not exist to permit us to make a satisfactory pricing evaluation. Consequently,
we curtailed and exited business in particular property and casualty business
channels. Higher underwriting standards have yielded substantial improvement in
operating results in more recent underwriting years, improvement that is most
clearly indicated by our “combined ratio”—the ratio, expressed as a percentage,
of claims-related losses and related underwriting expenses to earned premiums.
In 2004, GE Insurance Solutions’ property and casualty combined ratio was 120%,
that is, $1.20 of costs and losses for each $1.00 of earned premium. However, as
an early indication of the effectiveness of our revised underwriting standards,
the combined ratio for the 2004 underwriting year was 100%, even with extensive
2004 natural catastrophe losses—breakeven underwriting even before the
contribution of investment income.
NBC
UNIVERSAL
2004 revenues were up sharply to $12.9 billion and operating profit was up 28%
to $2.6 billion. Operations were significantly affected by the May combination
of NBC and VUE which increased revenues by $4.7 billion and, net of effects of
the 20% minority interest, operating profit by $0.6 billion. Other significant
2004 factors affecting results were the Athens Olympic Games ($0.9 billion
higher revenues), price increases ($0.2 billion of revenues and operating
profit), volume ($0.3 billion of revenues and $0.1 billion of operating profit)
and $0.3 billion higher NBC Universal operating costs.
NBC
Universal revenues decreased 4% to $6.9 billion in 2003 while operating profit
rose 21% to $2.0 billion. Results and comparability were affected by several
events in 2003 and 2002. Higher prices and network sales increased revenues $0.5
billion in 2003, but were partially offset by advertising reductions because of
coverage of the Iraq war ($0.1 billion). The Salt Lake City Olympic Games and
the final year of NBA coverage contributed $0.7 billion and $0.3 billion,
respectively, to 2002 revenues, but the NBA contract resulted in a loss that
exceeded profit from the Olympics. Telemundo and Bravo, both acquired in 2002,
together added $0.7 billion and $0.1 billion to 2003 revenues and operating
profit, respectively. The 2002 exchange of certain assets for Bravo resulted in
$0.6 billion of gain, $0.2 billion of which was attributed to NBC Universal’s
segment results, an amount equal to $0.2 billion of other charges for
impairments in 2002. The remainder was included in GE Corporate Items and
Eliminations as discussed below.
TRANSPORTATION
revenues rose 15% to $15.6 billion in 2004 on higher volume ($1.9 billion),
including sales in commercial services and of locomotives and military engines.
Operating profit increased 21% to $3.2 billion as higher volume ($0.4 billion)
and productivity ($0.2 billion) more than offset the effect of inflation ($0.1
billion).
In
2003, Transportation revenues decreased slightly to $13.5 billion reflecting
lower volume ($0.2 billion) primarily related to commercial aircraft and
industrial aero-derivative engines, partially offset by higher locomotive sales,
higher military spare parts volume and growth in our rail global signaling
business. Operating profit rose 6% to $2.7 billion in 2003 as productivity ($0.2
billion) largely from workforce efficiency, and lower research and development
spending upon completion of certain development programs more than offset the
effect of lower volume.
In
2004, Transportation revenues from sales to the U.S. government were $3.0
billion, compared with $2.4 billion and $2.2 billion in 2003 and 2002,
respectively.
See
GE Corporate Items and Eliminations below for a discussion of items not
allocated to this segment.
Transportation
received orders of $14.9 billion in 2004, up from $13.3 billion in 2003
primarily from strong locomotive and product services demand. The $13.4 billion
total backlog at year-end 2004 comprised unfilled product orders of $9.3 billion
(of which 59% was scheduled for delivery in 2005) and product services orders of
$4.1 billion scheduled for 2005 delivery. Comparable December 31, 2003, total
backlog was $12.9 billion, of which $9.3 billion was for unfilled product orders
and $3.6 billion for product services orders.
GE
CORPORATE ITEMS AND ELIMINATIONS
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
REVENUES
|
||||||||||
|
Eliminations
|
$
|
(3,169
|
)
|
$
|
(2,757
|
)
|
$
|
(1,662
|
)
|
|
|
OPERATING
PROFIT
|
||||||||||
|
Principal
pension plans
|
$
|
124
|
$
|
1,040
|
$
|
1,556
|
||||
|
Eliminations
|
(438
|
)
|
(504
|
)
|
(558
|
)
|
||||
|
Underabsorbed
corporate overhead
|
(777
|
)
|
(582
|
)
|
(367
|
)
|
||||
|
Not
allocated
|
(548
|
)
|
(354
|
)
|
(11)
|
)
|
||||
|
Other
|
132
|
(91
|
)
|
421
|
||||||
|
Total
|
$
|
(1,507
|
)
|
$
|
(491
|
)
|
$
|
1,041
|
||
GE
Corporate Items and Eliminations include the effects of eliminating transactions
between operating segments; cost reductions from our principal pension plans,
which have declined sharply over the three-year period; liquidating businesses;
underabsorbed corporate overhead; certain non-allocated amounts described below;
and a variety of sundry items. Corporate overhead is allocated to GE operating
segments based on a ratio of segment net cost of operations, excluding direct
materials or their equivalent, to total company cost of operations. This caption
also includes internal allocated costs for segment funds on deposit.
Certain
amounts are not allocated to GE operating segments because they are excluded
from the measurement of their operating performance for internal purposes. In
2004, these comprised $0.4 billion of Healthcare charges, principally related to
the write off of in-process research and development projects and other
transitional costs associated with Amersham, and a $0.1 billion charge at
Consumer & Industrial as the gain on sale of the motors business was more
than offset by costs for inventory obsolescence and other charges. In 2003 and
2002, amounts not allocated to GE operating segments included charges of $0.2
billion in each year for settlement of litigation, restructuring and other
charges at Healthcare; and in 2002, a portion of NBC Universal’s gain from the
Bravo exchange and $0.1 billion for restructuring and other charges at
Transportation and Advanced Materials.
Other
includes a $0.5 billion gain from the sale of 90% of Global eXchange Services in
2002.
Global
Operations
Our
global activities span all geographic regions and primarily encompass
manufacturing for local and export markets, import and sale of products produced
in other regions, leasing of aircraft, sourcing for our plants domiciled in
other global regions and provision of financial services within these regional
economies. Thus, when countries or regions experience currency and/or economic
stress, we often have increased exposure to certain risks, but also often have
new profit opportunities. Potential increased risks include, among other things,
higher receivable delinquencies and bad debts, delays or cancelations of sales
and orders principally related to power and aircraft equipment, higher local
currency financing costs and slowdown in established financial services
activities. New profit opportunities include, among other things, more
opportunities for lower cost outsourcing, expansion of industrial and financial
services activities through purchases of companies or assets at reduced prices
and lower U.S. debt financing costs.
Estimated
results of global activities include the results of our operations located
outside the United States plus all U.S. exports. We classify certain GECS
operations that cannot meaningfully be associated with specific geographic areas
as “Other global” for this purpose.
Global
revenues rose 18% to $71.8 billion in 2004 compared with $60.8 billion and $53.4
billion in 2003 and 2002, respectively. Global revenues to external customers as
a percentage of consolidated revenues were 43% in 2004, compared with 42% and
37% in 2003 and 2002, respectively. The effects of exchange rates on reported
results were to increase revenues by $3.5 billion, $3.8 billion and $0.4 billion
in 2004, 2003 and 2002, respectively; and increase earnings by $0.1 billion in
both 2004 and 2003 and decrease earnings by $0.1 billion in 2002.
CONSOLIDATED
GLOBAL REVENUES
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
Europe
|
$
|
37,000
|
$
|
30,500
|
$
|
24,800
|
||||
|
Pacific
Basin
|
13,100
|
13,100
|
12,000
|
|||||||
|
Americas
|
7,200
|
5,900
|
5,200
|
|||||||
|
Other
global
|
5,400
|
4,600
|
3,900
|
|||||||
|
|
62,700
|
54,100
|
45,900
|
|||||||
|
Exports
from the U.S. to external customers
|
9,100
|
6,700
|
7,500
|
|||||||
|
Total
|
$
|
71,800
|
$
|
60,800
|
$
|
53,400
|
||||
GE
global revenues were $42.4 billion, $33.0 billion and $29.0 billion in 2004,
2003 and 2002, respectively. The increase in 2004 related to both increased
operations outside the U.S. and U.S. exports. GE revenues in Europe rose 40% led
by Healthcare and NBC Universal reflecting the Amersham acquisition and the
combination of NBC and VUE. GE revenues in the Pacific Basin increased 13% led
by Advanced Materials, Infrastructure and Energy. U.S. exports rose 35% on
strong growth at Energy and Transportation. The increase in 2003 related to
increased operations outside the U.S., partially offset by lower U.S. exports.
In 2003, GE revenues in Europe rose 25%, led by Energy, Healthcare and
Infrastructure, reflecting the effects of the weaker U.S. dollar and volume
growth. GE revenues in the Pacific Basin increased 14% in 2003 as most
businesses reported improved results. In 2003, Energy and Infrastructure were
the primary contributors to a 16% increase in revenues in the Americas and
Energy more than accounted for the 10% decrease in U.S. exports.
GECS
global revenues were $29.4 billion, $27.8 billion and $24.4 billion in 2004,
2003 and 2002, respectively. GECS revenues in the Americas increased 47% in
2004, primarily as a result of the acquisition of the commercial lending
business of Transamerica Finance Corporation at Commercial Finance. Revenues
increased 31% in “Other global” as a result of growth at Commercial Finance and
the gain on the sale of a majority interest in Gecis. Revenues in the Pacific
Basin decreased 13% primarily as a result of the 2003 divestiture of Edison Life
at Insurance. This decrease was partially offset by the effects of the weaker
U.S. dollar, acquisitions, primarily GC Card at Consumer Finance, and core
growth at Consumer Finance and Commercial Finance.
Global
operating profit was $12.2 billion in 2004, an increase of 39% over 2003, which
was 35% higher than in 2002. Operating profit in 2004 rose 45% in Europe
reflecting core growth and acquisitions at Consumer Finance and Commercial
Finance, the Amersham acquisition at Healthcare and the combination of NBC and
VUE. Operating profit also rose 42% to $2.2 billion in the Americas and 22% to
$2.9 billion in the Pacific Basin and 46% to $1.3 billion in “Other
global.”
Total
assets of global operations were $323.7 billion in 2004 (43% of consolidated
assets), an increase of $64.8 billion, or 25%, over 2003. GECS global assets
grew 24% from $232.0 billion at the end of 2003 to $287.7 billion at the end of
2004. GECS assets increased 18% in Europe as a result of the effects of the
weaker U.S. dollar ($13.7 billion), acquisitions ($9.2 billion), primarily at
Commercial Finance and Consumer Finance, and growth at Consumer Finance. GECS
assets increased 46% in the Pacific Basin, primarily as a result of acquisitions
at Consumer Finance.
Financial
results of our global activities reported in U.S. dollars are affected by
currency exchange. We use a number of techniques to manage the effects of
currency exchange, including selective borrowings in local currencies and
selective hedging of significant cross-currency transactions. Such principal
currencies are the British pound sterling, the euro, the Japanese yen and the
Canadian dollar.
Environmental
Matters
Our
operations, like operations of other companies engaged in similar businesses,
involve the use, disposal and cleanup of substances regulated under
environmental protection laws.
We
are involved in a sizable number of remediation actions to clean up hazardous
wastes as required by federal and state laws. Such statutes require that
responsible parties fund remediation actions regardless of fault, legality of
original disposal or ownership of a disposal site. Expenditures for site
remediation actions amounted to $0.1 billion in each of the last two years. We
presently expect that such remediation actions will require average annual
expenditures in the range of $0.1 billion to $0.2 billion over the next two
years.
The
U.S. Environmental Protection Agency (EPA) ruled in February 2002 that
approximately 150,000 pounds of polychlorinated biphenyls (PCBs) must be dredged
from a 40-mile stretch of the upper Hudson River in New York State. We have
submitted what is known as a “Good Faith Offer” under the Superfund law and
continue to cooperate and negotiate with the EPA in the implementation of this
ruling. Pursuant to negotiated agreements, we have conducted extensive sampling
of the project area to determine the location of PCBs that may be dredged and
have agreed to undertake the design and engineering of the remedy. The
agreements also provide for the reimbursement of certain EPA costs expended in
the past and which would be expended in the future. The remedial design and
engineering activities are scheduled to be completed during 2006. Negotiations
continue concerning performance of the remedial work. Our Statement of Financial
Position as of December 31, 2004 and 2003, included liabilities for the
estimated costs of this remediation.
Financial
Resources and Liquidity
This
discussion of financial resources and liquidity addresses the Statement of
Financial Position (pages 74-75), Statement of Changes in Shareowners’ Equity
(page 72) and the Statement of Cash Flows (pages 76-77).
Only
a small portion of GECS business is directly related to other GE operations. The
fundamental differences between GE and GECS are reflected in the measurements
commonly used by investors, rating agencies and financial analysts. These
differences will become clearer in the discussion that follows with respect to
the more significant items in the financial statements.
Overview
of Financial Position
Major
changes in our financial position resulted from the following:
|
•
|
During
2004, we completed the acquisition of Amersham by Healthcare and the
combination of NBC and VUE. GECS completed acquisitions of the commercial
lending business of Transamerica Finance Corporation; Sophia S.A., a real
estate company in France; the U.S. leasing business of IKON Office
Solutions; and Benchmark Group PLC, a U.K.-listed real estate property
company at Commercial Finance. Consumer Finance completed acquisitions of
AFIG and WMC. At their respective acquisition dates, these financial
services transactions resulted in a combined increase in total assets of
$32.1 billion, of which $23.0 billion was financing receivables before
allowance for losses, and a combined increase in total liabilities of
approximately $20.5 billion, of which $18.9 billion was debt.
|
|
•
|
Minority
interest in equity of consolidated affiliates increased $10.2 billion
during 2004. In connection with the combination of NBC and VUE, NBC
Universal issued 20% of its shares to a subsidiary of Vivendi Universal.
This is the principal reason GE’s minority interest increased $6.6
billion. GECS minority interest increased $3.6 billion, primarily because
of our sale of approximately 30% of the common shares of Genworth, our
formerly wholly-owned subsidiary that conducts most of our consumer
insurance business, including life and mortgage insurance operations.
|
|
•
|
We
adopted Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 46R, Consolidation of Variable Interest Entities (Revised), on
January 1, 2004, adding $2.6 billion of assets and $2.1
billion of liabilities to our consolidated balance sheet as of that date,
primarily relating to Penske.
|
Statement
of Financial Position
(pages
74-75)
Because
GE and GECS share certain significant elements of their Statements of Financial
Position—property, plant and equipment, and borrowings, for example—the
following discussion addresses significant captions in the “consolidated”
statement. Within the following discussions, however, we distinguish between GE
and GECS activities in order to permit meaningful analysis of each individual
statement.
INVESTMENT
SECURITIES
comprise mainly available-for-sale investment-grade debt securities held by
Insurance in support of obligations to annuitants and policyholders, and debt
and equity securities designated as trading and associated with certain non-U.S.
separate accounts for which contractholders retain the related risks and
rewards, except in the event of our bankruptcy
or
liquidation. Investment securities were $135.5 billion at the end of 2004,
compared with $129.3 billion at the end of 2003. The increase of $6.2 billion
was primarily the net result of investing premiums received, reinvesting
investment income, improvements in debt markets and the effects of the weaker
U.S. dollar.
We
regularly review investment securities for impairment based on criteria that
include the extent to which cost exceeds market value, the duration of that
market decline, our intent and ability to hold to recovery and the financial
health and specific prospects for the issuer. Of available-for-sale securities
with unrealized losses at December 31, 2004, approximately $0.1 billion was at
risk of being charged to earnings in the next 12 months; almost two-thirds of
this amount related to commercial airlines.
Impairment
losses for 2004 totaled $0.2 billion compared with $0.5 billion in 2003. We
recognized impairments in both periods for issuers in a variety of industries;
we do not believe that any of the impairments indicate likely future impairments
in the remaining portfolio.
Gross
unrealized gains and losses were $5.3 billion and $0.8 billion, respectively, at
December 31, 2004, compared with $4.7 billion and $1.2 billion, respectively, at
December 31, 2003, primarily reflecting an increase in the estimated fair value
of debt securities as interest rates declined. We estimate that available gains,
net of estimated impairment of insurance intangible assets, could be as much as
$2.2 billion at December 31, 2004. The market values we used in determining
unrealized gains and losses are those defined by relevant accounting standards
and should not be viewed as a forecast of future gains or losses. See note
9.
At
December 31, 2004, unrealized losses with a duration of 12 months or more
related to investment securities collateralized by commercial aircraft were $0.3
billion. The aggregate amortized cost of these available-for-sale securities was
$1.2 billion. We believe that our securities, which are current on all payment
terms, are in an unrealized loss position because of ongoing negative market
reaction to difficulties in the commercial airline industry. For these
securities, we do not anticipate changes in the timing and amount of estimated
cash flows, and expect full recovery of our amortized cost. Further, should our
cash flow expectation prove to be incorrect, the current aggregate market values
of aircraft collateral, based on information from independent appraisers,
exceeded totals of both the market values and the amortized cost of our
securities at December 31, 2004. See additional discussion of our positions in
the commercial aviation industry on page 65.
WORKING
CAPITAL
,
representing GE inventories and receivables from customers, less trade payables
and progress collections, increased to $8.3 billion at the end of 2004 from $5.3
billion at the end of 2003. The increase was a result of the Amersham
acquisition at Healthcare, the combination of NBC and VUE and the effect of the
weaker U.S. dollar.
We
discuss current receivables and inventories, two important elements of working
capital, in the following paragraphs.
CURRENT
RECEIVABLES
for GE were
$14.5 billion at the end of 2004 and $11.0 billion at the end of 2003, and
included $10.2 billion due from customers at the end of 2004, compared with $6.7
billion
at the end
of 2003. This $3.5 billion increase reflected higher receivables at NBC
Universal resulting from the combination of NBC and VUE and the acquisition of
Amersham by Healthcare. Turnover of customer receivables from sales of goods and
services was 9.4 in 2004, compared with 10.4 in 2003. Other current receivables
are primarily amounts that did not originate from sales of GE goods or services,
such as advances to suppliers in connection with large contracts. See note 10.
INVENTORIES
for GE were $9.6 billion at December 31, 2004, up $1.0 billion from the end of
2003. This increase reflected higher inventories at Healthcare resulting from
the acquisition of Amersham. GE inventory turnover was 8.4 in 2004, an increase
from 7.4 in 2003, as a result of increased sales at Transportation while
inventory remained relatively flat. See note 11.
FINANCING
RECEIVABLES
is our largest category of assets and represents one of our primary sources of
revenues. The portfolio of financing receivables, before allowance for losses,
increased to $288.1 billion at December 31, 2004, from $254.2 billion at the end
of 2003, as discussed in the following paragraphs. The related allowance for
losses at the end of 2004 amounted to $5.6 billion compared with $6.3 billion at
December 31, 2003, representing our best estimate of probable losses inherent in
the portfolio.
A
discussion of the quality of certain elements of the financing receivables
portfolio follows. For purposes of that discussion, “delinquent” receivables are
those that are 30 days or more past due; “nonearning” receivables are those that
are 90 days or more past due (or for which collection has otherwise become
doubtful); and “reduced-earning” receivables are commercial receivables whose
terms have been restructured to a below-market yield.
Commercial
Finance financing receivables, before allowance for losses, totaled $145.4
billion at December 31, 2004, compared with $135.7 billion at December 31, 2003,
and consisted of loans and leases to the equipment, commercial and industrial,
real estate and commercial aircraft industries. This portfolio of receivables
increased primarily from core growth ($28.0 billion) and acquisitions ($13.5
billion), partially offset by securitizations and sales ($31.5 billion). Related
nonearning and reduced-earning receivables were $1.6 billion (1.1% of
outstanding receivables) at December 31, 2004, compared with $1.7 billion (1.3%
of outstanding receivables) at year-end 2003. Commercial Finance financing
receivables are generally backed by assets and there is a broad spread of
geographic and credit risk in the portfolio.
During
2004, Consumer Finance adopted a global policy for uncollectible receivables
that accelerated write-offs to follow one consistent basis. We now write off
unsecured closed-end installment loans that become 120 days contractually past
due and unsecured open-ended revolving loans that become 180 days contractually
past due.
Consumer
Finance financing receivables, before allowance for losses, were $127.8 billion
at December 31, 2004, compared with $94.7 billion at December 31, 2003, and
consisted primarily of card receivables, installment loans, auto loans and
leases, and residential mortgages. This portfolio of receivables increased as a
result of acquisitions ($15.6 billion), core growth ($13.1 billion) and the
effects of the weaker U.S. dollar ($7.3 billion). These increases were partially
offset by whole loan sales and securitization activity ($2.0 billion) and the
standardization of our write-off policy, which resulted in an increase in
write-offs ($0.9 billion) but had an inconsequential effect on earnings.
Nonearning
consumer receivables were $2.5 billion at December 31, 2004 and 2003,
representing 2.0% and 2.6% of outstanding receivables, respectively. The
percentage decrease is primarily related to the standardization of our write-off
policy and the acquisition of AFIG, which obtains credit insurance for certain
receivables, partially offset by higher nonearnings in our European secured
financing business.
Equipment
& Other Services financing receivables, before allowance for losses,
amounted to $14.9 billion and $23.8 billion at December 31, 2004 and 2003,
respectively, and consisted primarily of financing receivables in consolidated,
liquidating securitization entities. This portfolio of receivables decreased
because we have stopped transferring assets to these entities. Nonearning
receivables at December 31, 2004, were $0.2 billion (1.2% of outstanding
receivables) compared with $0.1 billion (0.6% of outstanding receivables) at
December 31, 2003.
Delinquency
rates on managed Commercial Finance equipment loans and leases and managed
Consumer Finance financing receivables follow.
|
|
2004
|
2003
|
2002
|
|||||||
|
Commercial
Finance
|
1.40
|
%
|
1.38
|
%
|
1.75
|
%
|
||||
|
Consumer
Finance
|
4.85
|
5.62
|
5.62
|
|||||||
Delinquency
rates at Commercial Finance increased slightly from December 31, 2003 to
December 31, 2004, reflecting the effect of certain acquired portfolios,
partially offset by improvement in the overall core portfolio. The decline from
December 31, 2002 to December 31, 2003, reflected improved economic conditions
and collection results.
Delinquency
rates at Consumer Finance decreased from December 31, 2003 to December 31, 2004,
as a result of the standardization of our write-off policy, the acquisition of
AFIG, and the U.S. acquisition of WMC, with lower relative delinquencies as a
result of whole loan sales, partially offset by higher delinquencies in our
European secured financing business. See notes 12 and 13.
OTHER
GECS RECEIVABLE
S
totaled $14.1 billion at December 31, 2004, and $12.1 billion at December 31,
2003, and consisted primarily of nonfinancing customer receivables, accrued
investment income, amounts due from GE (generally related to certain material
procurement programs), amounts due under operating leases, receivables due on
sale of securities and various sundry items. Balances at December 31, 2004 and
2003, included securitized, managed GE trade receivables of $3.1 billion and
$2.7 billion, respectively.
PROPERTY,
PLANT AND EQUIPMENT
was $63.3 billion at December 31, 2004, up $9.9 billion from 2003, primarily
reflecting the consolidation of Penske effective January 1, 2004, and
acquisitions of commercial aircraft at Commercial Finance. GE property, plant
and equipment consisted of investments for its own productive use, whereas the
largest element for GECS was equipment provided to third parties on operating
leases. Details by category of investment are presented in note 15.
GE
expenditures for plant and equipment during 2004 totaled $2.4 billion, compared
with $2.2 billion in 2003. Total expenditures for the past five years were $12.9
billion, of which 33% was investment for growth through new capacity and product
development; 36% was investment in productivity through new equipment and
process improvements; and 31% was investment for other purposes such as
improvement of research and development facilities and safety and environmental
protection.
GECS
additions to property, plant and equipment were $10.7 billion and $7.6 billion
during 2004 and 2003, respectively, primarily reflecting additions of commercial
aircraft and vehicles at Commercial Finance and of vehicles at Equipment &
Other Services.
INTANGIBLE
ASSETS
were $83.2
billion at year-end 2004, up from $55.0 billion at year-end 2003. GE intangibles
increased $24.5 billion from $30.2 billion at the end of 2003, principally as a
result of goodwill and other intangibles related to the combination of NBC and
VUE, the Amersham acquisition by Healthcare, acquisitions by Infrastructure and
the effects of the weaker U.S. dollar. GECS intangibles increased $3.7 billion
to $28.5 billion, reflecting goodwill associated with acquisitions, goodwill
associated with the consolidation of Penske effective January 1, 2004, and the
effects of the weaker U.S. dollar. See note 16.
ALL
OTHER ASSETS
totaled $109.9 billion at year-end 2004, an increase of $17.3 billion. This
increase resulted principally from the combination of NBC and VUE, acquisitions
affecting real estate and assets held for sale, and additional investments in
associated companies, partially offset by the consolidation of Penske, which was
previously accounted for using the equity method. See note 17.
CONSOLIDATED
BORROWINGS
were $370.9 billion at December 31, 2004, compared with $329.7 billion at the
end of 2003.
GE
total borrowings were $11.0 billion at year-end 2004 ($3.4 billion short term,
$7.6 billion long term), about the same as at year-end 2003. GE total debt at
the end of 2004 equaled 9.1% of total capital, compared with 12.0% at the end of
2003.
GECS
total borrowings were $361.3 billion at December 31, 2004, of which $154.8
billion is due in 2005 and $206.5 billion is due in subsequent years. Comparable
amounts at the end of 2003 were $320.3 billion in total, $155.5 billion due
within one year and $164.8 billion due thereafter. Included in GECS total
borrowings were borrowings of consolidated, liquidating securitization entities
amounting to $25.8 billion at December 31, 2004, of which $9.8 billion was
asset-backed senior notes of AFIG, and $24.8 billion at December 31, 2003. A
large portion of GECS borrowings ($97.4 billion and $102.6 billion at the end of
2004 and 2003, respectively) was issued in active commercial paper markets that
we believe will continue to be a reliable source of short-term financing. The
average remaining terms and interest rates of General Electric Capital
Corporation (GE Capital) commercial paper were 42 days and 2.39% at the end of
2004, compared with 47 days and 1.40% at the end of 2003. The GE Capital ratio
of debt to equity was 6.61 to 1 at the end of 2004 and 6.74 to 1 at the end of
2003. See note 18.
INSURANCE
LIABILITIES, RESERVES AND ANNUITY BENEFITS
of GECS were $140.9 billion at December 31, 2004, $4.5 billion higher than in
2003. The increase is primarily attributable to growth in annuities, long-term
care insurance, structured settlements, the effects of the weaker U.S. dollar,
increases in loss reserves for policies written in prior years and 2004 U.S.
hurricane-related losses. These increases were partially offset by claim
settlements and maturities of guaranteed investment contracts (GICs). See note
19.
EXCHANGE
RATE AND INTEREST RATE RISKS
are managed with a variety of straightforward techniques, including match
funding and selective use of derivatives. We use derivatives to mitigate or
eliminate certain financial and market risks because we conduct business in
diverse markets around the world and local funding is not always efficient. In
addition, we use derivatives to adjust the debt we are issuing to match the
fixed or floating nature of the assets we are acquiring. We apply strict
policies to manage each of these risks, including prohibitions on derivatives
trading, derivatives market-making or other speculative activities. Following is
an analysis of the potential effects of changes in interest rates and currency
exchange rates using so-called “shock” tests that model effects of shifts in
rates. These are not forecasts.
|
•
|
If,
on January 1, 2005, interest rates had increased 100 basis points across
the yield curve (a “parallel shift” in that curve) and that increase
remained in place for 2005, we estimate, based on our year-end 2004
portfolio and holding everything else constant, that our 2005
GE
and GECS net earnings would decline pro-forma by $0.1 billion and $0.2
billion, respectively.
|
|
•
|
If,
on January 1, 2005, currency exchange rates were to decline by 10% against
the U.S. dollar and that decline remained in place for 2005, we estimate,
based on our year-end 2004 portfolio and holding everything else constant,
that the effect on our 2005
GE
and GECS net earnings would be insignificant.
|
Statement
of Changes in Shareowners’ Equity
(page
72)
Shareowners’
equity increased $31.1 billion in 2004, $15.5 billion in 2003 and $8.9 billion
in 2002. These increases were largely attributable to net earnings but were
partially offset by dividends declared of $8.6 billion, $7.8 billion and $7.3
billion in 2004, 2003 and 2002, respectively. We issued 341.7 million shares of
stock in connection with the Amersham acquisition, increasing equity by $10.7
billion in 2004. We also issued 119.4 million shares of stock to partially fund
the combination of NBC and VUE, increasing equity by $3.8 billion. Currency
translation adjustments increased equity by $3.9 billion in 2004, compared with
$5.1 billion in 2003. Changes in the currency translation adjustments reflect
the effects of changes in currency exchange rates on our net investment in
non-U.S. subsidiaries that have functional currencies other than the U.S.
dollar. In 2004, the pound sterling, euro and, to a lesser extent, Asian
currencies strengthened against the U.S. dollar. In 2003 and 2002, the euro and,
to a lesser extent, Asian currencies strengthened against the U.S. dollar.
Accumulated currency translation adjustments affect net earnings only when all
or a portion of an affiliate is disposed of or substantially liquidated. See
note 24.
Overview
of Our Cash Flow from 2002 through 2004
(pages
76-77)
GE
cash from operating activities (CFOA) is a useful measure of performance for our
non-financial businesses and totaled $15.2 billion in 2004, $12.9 billion in
2003 and $10.1 billion in 2002. Generally, factors that affect our earnings—for
example, pricing, volume, costs and productivity—affect CFOA similarly. However,
while management of working capital, including timing of collections and
payments and levels of inventory, affects operating results only indirectly, the
effect of these programs on CFOA can be significant. Excluding progress
collections, working capital improvements benefited CFOA by $2.7 billion since
2002, as we applied our inventory Lean Six Sigma and other working capital
management tools broadly.
Our
GE Statement of Cash Flows on page 76 shows CFOA in the required format. While
that display is of some use in analyzing how various assets and liabilities
affected our year-end cash positions, we believe it is also useful to supplement
that display and to examine in a broader context the business activities that
provide and require cash.
|
December
31 (In billions)
|
2004
|
2003
|
2002
|
|||||||
|
Operating
cash collections
|
$
|
81.6
|
$
|
68.4
|
$
|
67.5
|
||||
|
Operating
cash payments
|
(69.5
|
)
|
(58.9
|
)
|
(59.4
|
)
|
||||
|
Cash
dividends from GECS
|
3.1
|
3.4
|
2.0
|
|||||||
|
GE
cash from operating activities
|
$
|
15.2
|
$
|
12.9
|
$
|
10.1
|
||||
The
most significant source of cash in CFOA is customer-related activities, the
largest of which is collecting cash following a product or services sale. GE
operating cash collections increased by about $13.2 billion during 2004 and by
about $0.9 billion during 2003. These increases are consistent with the changes
in comparable GE operating segment revenues, including the 2004 effects of our
acquisition of Amersham and the combination of NBC and VUE. Analyses of
operating segment revenues on page 52 is the best way of understanding their
customer-related CFOA.
The
most significant operating use of cash is to pay our suppliers, employees, tax
authorities and others for the wide range of material and services necessary in
a diversified global organization. GE operating cash payments increased in 2004
by about $10.6 billion, primarily because of the effects of our acquisition of
Amersham and the combination of NBC and VUE, and decreased in 2003 by about $0.5
billion.
Dividends
from GECS represented distribution of a portion of GECS retained earnings,
including proceeds from certain business sales, and are distinct from cash from
operating activities within the financial services businesses, which increased
in 2004 by $4.7 billion to $26.1 billion and decreased in 2003 by $0.1 billion
to $21.4 billion. Financial services cash is not necessarily freely available
for alternative uses. For example, certain cash generated by our Insurance
businesses is restricted by various insurance regulations. See note 23. Further,
any reinvestment in financing receivables is shown in cash used for investing,
not operating activities. Therefore, maintaining or growing Commercial and
Consumer Finance assets requires that we invest much of the
cash
they generate from operating activities in their earning assets. Also, we have
been increasing the equity of our financial services businesses as discussed on
page 64. The amount we show in CFOA is the total dividend, including the normal
dividend as well as any special dividends such as proceeds from business
sales.
Based
on past performance and current expectations, in combination with the financial
flexibility that comes with a strong balance sheet and the highest credit
ratings, we believe we are in a sound position to grow dividends, execute on our
announced $15 billion share repurchase program and continue making selective
investments for long-term growth. With the financial flexibility that comes with
excellent credit ratings, we believe that GE and GECS should be well positioned
to meet the global needs of its customers for capital and to continue providing
our shareowners with good returns.
Contractual
Obligations
As
defined by reporting regulations, our contractual obligations for future
payments as of December 31, 2004, follow:
|
Payments
due by period
|
||||||||||||||||
|
(In
millions)
|
Total
|
2005
|
2006-2007
|
2008-2009
|
2010
and
thereafter
|
|||||||||||
|
Borrowings
(note 18)
|
$
|
370,907
|
$
|
157,746
|
$
|
85,103
|
$
|
47,670
|
$
|
80,388
|
||||||
|
Interest
on borrowings
|
59,000
|
11,000
|
16,000
|
10,000
|
22,000
|
|||||||||||
|
Operating
lease obligations (note 4)
|
7,718
|
1,383
|
2,240
|
1,613
|
2,482
|
|||||||||||
|
Purchase
obligations
(a)(b)
|
53,000
|
35,000
|
11,000
|
4,000
|
3,000
|
|||||||||||
|
Insurance
liabilities (note 19)
(c)
|
9
2,000
|
14,000
|
19,000
|
13,000
|
46,000
|
|||||||||||
|
Other
liabilities
(d)
|
68,000
|
18,000
|
5,000
|
3,000
|
42,000
|
|||||||||||
|
(a)
|
Included
all take-or-pay arrangements, capital expenditures, contractual
commitments to purchase equipment that will be classified as equipment
leased to others, software acquisition/license commitments, contractual
minimum programming commitments and contractually required cash payments
for acquisitions.
|
|||||
|
(b)
|
Excluded
funding commitments entered into in the ordinary course of business by our
financial services businesses. Further information on these commitments is
provided in note 30.
|
|||||
|
(c)
|
Included
guaranteed investment contracts, structured settlements and single premium
immediate annuities based on scheduled payouts, as well as those contracts
with reasonably determinable cash flows such as deferred annuities,
universal life, term life, long-term care, whole life and other life
insurance contracts as well as workers compensation tabular indemnity loan
and long-term liability claims.
|
|||||
|
(d)
|
Included
an estimate of future expected funding requirements related to our pension
and postretirement benefit plans. Because their future cash outflows are
uncertain, the following non-current liabilities are excluded from the
table above: deferred taxes, derivatives, deferred revenue and other
sundry items. Refer to notes 21 and 28 for further information on these
items.
|
|||||
Off-Balance
Sheet Arrangements
We
use off-balance sheet arrangements in the ordinary course of business to improve
shareowner returns. Beyond improving returns, these securitization transactions
serve as funding sources for a variety of diversified lending and securities
transactions. Our securitization transactions are similar to those used by many
financial institutions. In a typical transaction, assets are sold by the
transferor to a special purpose entity (SPE), which purchases the assets with
cash raised through issuance of beneficial interests (usually debt instruments)
to third-party investors. Investors in the beneficial interests usually have
recourse to the assets in the SPEs and often benefit from credit enhancements
supporting the assets (such as overcollateralization). The SPE may also hold
derivatives, such as interest rate swaps, in order to match the interest rate
characteristics of the assets with those of the beneficial interests. An example
is an interest rate swap converting fixed rate assets to variable rates to match
floating rate debt instruments issued by the SPE.
Historically,
we have used both GE-sponsored and third-party entities to execute
securitization transactions in the commercial paper and term markets. With our
adoption of FIN 46,
Consolidation
of Variable Interest Entities
,
on July 1, 2003, we consolidated $36.3 billion of assets and $35.8 billion of
liabilities in certain sponsored entities and stopped executing new
securitization transactions with those entities. We continue to engage in
securitization transactions with third-party conduits and through public, market
term securitizations. In December 2004, we acquired AFIG which added $9.1
billion of securitized mortgage loans in consolidated, liquidating
securitization entities. Without AFIG, assets in consolidated, liquidating
securitization entities were $17.4 billion, down $9.0 billion. See note
29.
Assets
held by SPEs include: receivables secured by equipment, commercial and
residential real estate and other assets; credit card receivables; and trade
receivables. Examples of these receivables include loans and leases on
manufacturing and transportation equipment, residential mortgages, loans on
commercial property, commercial loans, and balances of high credit quality
accounts from sales of a broad range of products and services to a diversified
customer base. In certain transactions, the credit quality of assets transferred
is enhanced by providing credit support. Securitized off-balance sheet assets
totaled $34.4 billion and $26.8 billion at December 31, 2004 and 2003,
respectively.
We
provide financial support related to assets held by certain off-balance sheet
SPEs through liquidity agreements, credit support, and guarantee and
reimbursement contracts. Net liquidity support amounted to $2.3 billion at
December 31, 2004, down from $3.1 billion a year earlier. Credit support, in
which we provide recourse for credit losses in off-balance sheet SPEs, was $6.6
billion as of December 31, 2004. Potential credit losses are provided for in our
financial statements. Based on management’s best estimate of probable losses
inherent in the portfolio of assets that remain off-balance sheet, our financial
statements included $0.1 billion representing the fair value of recourse
obligations at year-end 2004. See note 29.
We
periodically enter into guarantees and other similar arrangements as part of
transactions in the ordinary course of business. These are described further in
note 30.
We
have extensive experience in evaluating economic, liquidity and credit risk. In
view of this experience, the high quality of assets in these entities, the
historically robust quality of commercial paper markets, and the historical
reliability of controls applied to both asset servicing and to activities in the
credit markets, we believe that, under any reasonable future economic
developments, the likelihood is remote that any financial support arrangements
could have an adverse economic effect on our financial position or results of
operations.
Debt
Instruments, Guarantees and Covenants
The
major debt rating agencies routinely evaluate the debt of GE, GECS and GE
Capital, the major borrowing affiliate of GECS. These agencies have given the
highest debt ratings to GE and GE Capital (long-term rating AAA/Aaa; short-term
rating A-1+/P-1). One of our strategic objectives is to maintain these ratings
as they serve to lower our cost of funds and to facilitate our access to a
variety of lenders. We manage our businesses in a fashion that is consistent
with maintaining these ratings.
GE,
GECS and GE Capital have distinct business characteristics that the major debt
rating agencies evaluate both quantitatively and qualitatively.
Quantitative
measures include:
|
•
|
Earnings
and profitability, including earnings quality, revenue growth, the breadth
and diversity of sources of income and return on
assets,
|
|
•
|
Asset
quality, including delinquency and write-off ratios and reserve
coverage,
|
|
•
|
Funding
and liquidity, including cash generated from operating activities,
leverage ratios such as debt-to-capital, market access, back-up liquidity
from banks and other sources, composition of total debt and interest
coverage, and
|
|
•
|
Capital
adequacy, including required capital and tangible leverage
ratios.
|
Qualitative
measures include:
|
•
|
Franchise
strength, including competitive advantage and market conditions and
position,
|
|
•
|
Strength
of management, including experience, corporate governance and strategic
thinking, and
|
|
•
|
Financial
reporting quality, including clarity, completeness and transparency of all
financial performance communications.
|
GE
Capital’s ratings are supported contractually by a GE commitment to maintain the
ratio of earnings to fixed charges at a specified level as described below.
Before
2003, GE Capital maintained a capital structure that included about $8 of debt
for each $1 of equity—a “leverage ratio” of 8:1. For purposes of measuring
segment profit, each of our financial services businesses was also assigned debt
and interest costs on the basis of that consolidated 8:1 leverage ratio. As of
January 1, 2003, we extended a business-specific, market-based leverage to the
performance measurement of each of our financial services businesses. As a
result, at January 1, 2003, debt of $12.5 billion previously allocated to other
financial services segments was allocated to the Equipment & Other Services
segment. We refer to this as “parent-supported debt.” During 2004, a total of
$4.7 billion of such debt was eliminated, compared with $4.6 billion in 2003.
The 2004 reduction was the result of the following:
|
•
|
22%
of operating earnings retained by GECS ($1.8
billion),
|
|
•
|
Proceeds
from the Genworth initial public offering less dividend payments to GE
($1.6 billion),
|
|
•
|
Mortgage
Insurance contingent note payment ($0.5
billion),
|
|
•
|
Sale
of a majority interest of Gecis ($0.5 billion),
and
|
|
•
|
Rationalization
of Insurance and Equipment & Other Services related activities ($0.3
billion).
|
The
remaining $3.2 billion of such debt is expected to be eliminated in 2005.
During
2004, GECS paid $2.3 billion of special dividends to GE, of which $1.3 billion
was a portion of proceeds from the Genworth initial public offering, $0.8
billion was surplus equity related to portfolio restructurings in Insurance and
run-offs in Equipment & Other Services and $0.2 billion was related to
Insurance dispositions.
During
2004, GECS and GECS affiliates issued $57 billion of senior, unsecured long-term
debt, including $3 billion issued by Genworth in connection with the initial
public equity offering described on page 48. This debt was both fixed and
floating rate and was issued to institutional and retail investors in the U.S.
and 17 other global markets. Maturities for these issuances ranged from one to
40 years. We used the proceeds primarily for repayment of maturing long-term
debt, but also to fund acquisitions and organic growth. We anticipate that we
will issue between $50 billion and $60 billion of additional long-term debt
during 2005, although the ultimate amount we issue will depend on our needs and
on the markets.
Following
is the composition of our debt obligations excluding any asset-backed debt
obligations, such as debt of consolidated, liquidating securitization
entities.
|
December
31
|
2004
|
2003
|
|||||
|
Senior
notes and other long-term debt
|
58
|
%
|
55
|
%
|
|||
|
Commercial
paper
|
25
|
27
|
|||||
|
Current
portion of long-term debt
|
11
|
13
|
|||||
|
Other—bank
and other retail deposits
|
6
|
5
|
|||||
|
Total
|
100
|
%
|
100
|
%
|
|||
We
target a ratio for commercial paper of 25% to 35% of outstanding debt based on
the anticipated composition of our assets and the liquidity profile of our debt.
GE Capital is the most widely held name in global commercial paper markets.
We
believe that alternative sources of liquidity are sufficient to permit an
orderly transition from commercial paper in the unlikely event of impaired
access to those markets. Funding sources on which we would rely would depend on
the nature of such a hypothetical event, but include $57.3 billion of
contractually committed lending agreements with 83 highly-rated global banks and
investment banks. Total credit lines extending beyond one year increased $10.0
billion to $56.8 billion at December 31, 2004. See note 18.
Beyond
contractually committed lending agreements, other sources of liquidity include
medium and long-term funding, monetization, asset securitization, cash receipts
from our lending and leasing activities, short-term secured funding on global
assets, and potential sales of other assets.
PRINCIPAL
DEBT CONDITIONS
are described below.
The
following two conditions relate to GE and GECS:
|
•
|
Under
certain swap, forward and option contracts, if the long-term credit rating
of either
GE
or GECS were to fall below A-/A3, certain remedies are required as
discussed in note 28.
|
|
•
|
If
GE Capital’s ratio of earnings to fixed charges, which was 1.87:1 at the
end of 2004, were to deteriorate to 1.10:1 or, upon redemption of certain
preferred stock, its ratio of debt to equity, which was 6.61:1 at the end
of 2004, were to exceed 8:1, GE has committed to contribute capital to GE
Capital. GE also has guaranteed subordinated debt of GECS with a face
amount of $1.0 billion at December 31, 2004 and
2003.
|
The
following three conditions relate to securitization SPEs that were consolidated
upon adoption of FIN 46 on July 1, 2003:
|
•
|
If
the short-term credit rating of GE Capital or certain consolidated SPEs
discussed further in note 29 were to fall below A-1/P-1, GE Capital would
be required to provide substitute liquidity for those entities or provide
funds to retire the outstanding commercial paper. The maximum net amount
that GE Capital would be required to provide in the event of such a
downgrade is determined by contract, and amounted to $12.8 billion at
January 1, 2005. Amounts related to non- consolidated SPEs were $1.4
billion.
|
|
•
|
If
the long-term credit rating of GE Capital were to fall below AA/Aa2, GE
Capital would be required to provide substitute credit support or
liquidate the consolidated SPEs. The maximum amount that GE Capital would
be required to substitute in the event of such a downgrade is determined
by contract, and amounted to $0.9 billion at December 31,
2004.
|
|
•
|
For
certain transactions, if the long-term credit rating of GE Capital were to
fall below A/A2 or BBB+/Baa1 or its short-term credit rating were to fall
below A-2/P-2, GE Capital could be required to provide substitute credit
support or fund the undrawn commitment. GE Capital could be required to
provide up to $2.3 billion in the event of such a downgrade based on terms
in effect at December 31, 2004.
|
One
group of consolidated SPEs, the Trinities and GE Funding CMS, hold assets that
are reported in “Investment securities” and issue GICs that are reported in
“Insurance liabilities, reserves and annuity benefits.” If the long-term credit
rating of GE Capital were to fall below AA-/Aa3 or its short-term credit rating
were to fall below A-1+/P-1, GE Capital could be required to provide up to $0.9
billion of capital to the Trinities. Further, GE Capital could be required to
repay up to $3.1 billion of GICs issued by GE Funding CMS.
In
our history, we have never violated any of the above conditions either at GE or
at GECS. We believe that under any reasonable future economic developments, the
likelihood that any such arrangements could have a significant effect on our
operations, cash flows or financial position is remote.
COMMERCIAL
AVIATION
is an industry in which we have a significant ongoing interest. Although some
U.S. carriers have been operating under pressure, our interest in this industry
is global, and demand in the global markets has been strong. September 11, 2001,
was a significant test for this industry. But since that date, 119 carriers
around the world have placed 709 of our aircraft into service, 415 of which were
Boeing and Airbus narrow-body aircraft. We continue to be confident in the
global industry’s ongoing prospects.
At
December 31, 2004, our global commercial aviation exposure in our Commercial
Finance segment amounted to $37.8 billion, principally loans and leases of $33.0
billion. We had 1,342 commercial aircraft on lease, an increase of 106 aircraft
from last year reflecting acquired leases and on-time delivery of open 2003
order positions. At the end of 2004 and 2003, an insignificant number of our
aircraft were not on lease—2 and 3 aircraft, respectively. At December 31, 2004,
we also had $10.2 billion (list price) of multiple-year orders for various
Boeing, Airbus and other aircraft, including 56 aircraft ($4.3 billion)
scheduled for delivery in 2005, all under agreement to commence operations with
commercial airline customers.
Transportation
sales of new equipment often include long-term customer financing commitments.
Under these commitments, it is our policy to establish a secured position in the
aircraft being financed. At December 31, 2004 and 2003, guarantees of $0.4
billion were in place. Further, at December 31, 2004 and 2003, we had committed
$0.8 billion and $1.2 billion, respectively, to provide financial assistance on
future aircraft sales. See note 30. Our guarantees and commitments are secured
by individual aircraft or pools of aircraft engines related to the specific
financing arrangement. When particular guarantees exceed the value of the
associated security, we consider credit risk of the associated customer and
provide for estimated losses. At December 31, 2004, the total estimated fair
value of aircraft securing these guarantees exceeded the guaranteed amounts, net
of the associated allowance for losses. In addition, at December 31, 2004 and
2003, Transportation had other exposures of $3.8 billion and $3.6 billion,
respectively, consisting primarily of deferred charges and trade
receivables.
US
Airways filed for bankruptcy protection in the third quarter of 2004. In January
2005, US Airways and the Air Transportation Stabilization Board (ATSB) reached
an agreement extending the airline’s use of cash proceeds from its federally
guaranteed loan through June 30, 2005. US Airways’ management has stated
publicly that this agreement with the ATSB will allow US Airways to continue
operations while it completes its restructuring and planned emergence from
Chapter 11 in the summer of 2005. US Airways’ management also has indicated in
its public statements that labor savings will be an important factor affecting
the success of that reorganization. At December 31, 2004, our aggregate exposure
to US Airways was $2.9 billion, the largest component of which was $2.6 billion
of loans and leases, substantially secured by various equipment, including 39
regional jet aircraft, 54 Boeing narrow-body aircraft (primarily 737 type), and
57 Airbus narrow-body aircraft. We and the airline have entered into a
memorandum of understanding to restructure a number of loans and leases. We also
agreed to continue regional jet financing conditioned on the airline
successfully emerging from bankruptcy protection and achieving specified
financial milestones. We have adjusted our estimates of cash flows and residual
values to reflect the current information available to us in this fluid
situation. In addition to our loans and leases, we hold $0.2 billion of
available-for-sale investment securities in US Airways that are secured by
various other aircraft in the fleet. Our $0.1 billion of US Airways
Transportation exposure is either secured or we have made appropriate reserves
for shortfalls. In addition to US Airways, both ATA Holdings Corp. and Aloha
Airgroup, Inc. filed for bankruptcy during 2004. UAL Corp. filed for bankruptcy
in 2002. At December 31, 2004, our exposure was $1.4 billion to UAL Corp., $0.8
billion to ATA Holdings Corp., and $0.3 billion to Aloha Airgroup, Inc.,
consisting primarily of loans and leases. Various Boeing and Airbus aircraft
secure substantially all of these financial exposures.
Commercial
Finance regularly tests the recoverability of its commercial aircraft operating
lease portfolio as described on page 69, and recognized impairment losses of
$0.1 billion and $0.2 billion in 2004 and 2003, respectively. In addition to
these impairment charges relating to operating leases, Commercial Finance
recorded provisions for losses on financing receivables related to commercial
aircraft of $0.3 billion in 2004, primarily related to US Airways and ATA
Holdings Corp.; an insignificant amount was recognized in 2003.
See
pages 59-60 and notes 9 and 15 for further information on our commercial
aviation positions.
Selected
Financial Data
Information
summarized on page 67 is divided into three sections: upper portion—consolidated
data; middle portion—GE data that reflect various conventional measurements for
such enterprises; and lower portion—GECS data that reflect key information
pertinent to financial services businesses.
GE’S
TOTAL RESEARCH AND DEVELOPMENT
expenditures were $3.1 billion in 2004, compared with $2.7 billion and $2.6
billion in 2003 and 2002, respectively. In 2004, expenditures from GE’s own
funds were $2.4 billion compared with $2.1 billion in 2003. Expenditures funded
by customers (mainly the U.S. government) were $0.6 billion in 2004 and 2003.
Expenditures
reported above reflect the definition of research and development required by
generally accepted accounting principles. For operating and management purposes,
we consider amounts spent on product and services technology to include our
reported research and development expenditures, but also amounts for improving
our existing products and services, and the productivity of our plant, equipment
and processes. On this basis, our technology expenditures were about $5
billion.
In
2004, we directed our research and development efforts to technologies that will
differentiate GE products and services in the eyes of our customers.
Environmental impact is a key theme. Our researchers and engineers continue to
search for novel solutions to challenging issues: meeting the world’s rising
energy demands while reducing greenhouse gases and emissions of power generation
technologies; reducing emissions while raising fuel efficiency in air and rail
transportation; and increasing energy efficiency of appliances and lighting,
while meeting the need for performance and capabilities.
Emerging
sciences such as nanotechnology are a significant area of our research.
Nanotechnology has potential applications across the entire GE industrial
portfolio. Our scientists view nanotechnology as the ultimate materials science,
one that could change the materials and manufacturing processes for a wide
variety of our products. We are exploring specific applications in nano-metals
for jet engines, nano-ceramics as coatings for power turbines and nano-particles
for use in targeted contrast agents for medical imaging.
Security
was also a key area of technology research in 2004. Cargo and port security,
intelligent video surveillance and chemical and biological detection are areas
in which we are able to leverage core technologies among different businesses to
bring innovative ideas to market.
In
the Healthcare segment, we continue our quest for personalized healthcare,
ramping up research in the biotechnology field. Combining our previous research
with the work done by scientists at Amersham has opened new fields as we explore
technologies that will enable a “predict and prevent” model for medical
diagnostics.
|
Selected
Financial Data
|
||||||||||||||||
|
(In
millions; per-share amounts in dollars)
|
2004
|
2003
|
2002
|
2001
|
2000
|
|||||||||||
|
GENERAL
ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES
|
||||||||||||||||
|
Revenues
|
$
|
152,363
|
$
|
134,187
|
$
|
132,210
|
$
|
126,416
|
$
|
130,385
|
||||||
|
Earnings
before accounting changes
|
16,593
|
15,589
|
15,133
|
14,128
|
12,735
|
|||||||||||
|
Cumulative
effect of accounting changes
|
—
|
(587
|
)
|
(1,015
|
)
|
(444
|
)
|
—
|
||||||||
|
Net
earnings
|
16,593
|
15,002
|
14,118
|
13,684
|
12,735
|
|||||||||||
|
Dividends
declared
|
8,594
|
7,759
|
7,266
|
6,555
|
5,647
|
|||||||||||
|
Return
on average shareowners’ equity excluding the
|
||||||||||||||||
|
effect
of accounting changes
|
17.4
|
%
|
22.1
|
%
|
25.8
|
%
|
27.1
|
%
|
27.5
|
%
|
||||||
|
Per
share
|
||||||||||||||||
|
Earnings
before accounting changes—diluted
|
$
|
1.59
|
$
|
1.55
|
$
|
1.51
|
$
|
1.41
|
$
|
1.27
|
||||||
|
Cumulative
effect of accounting changes—diluted
|
—
|
(0.06
|
)
|
(0.10
|
)
|
(0.04
|
)
|
—
|
||||||||
|
Earnings—diluted
|
1.59
|
1.49
|
1.41
|
1.37
|
1.27
|
|||||||||||
|
Earnings
before accounting changes—basic
|
1.60
|
1.56
|
1.52
|
1.42
|
1.29
|
|||||||||||
|
Cumulative
effect of accounting changes—basic
|
—
|
(0.06
|
)
|
(0.10
|
)
|
(0.04
|
)
|
—
|
||||||||
|
Earnings—basic
|
1.60
|
1.50
|
1.42
|
1.38
|
1.29
|
|||||||||||
|
Dividends
declared
|
0.82
|
0.77
|
0.73
|
0.66
|
0.57
|
|||||||||||
|
Stock
price range
|
37.75-28.88
|
32.42--21.30
|
41.84-21.40
|
52.90-28.25
|
60.50-41.67
|
|||||||||||
|
Year-end
closing stock price
|
36.50
|
30.98
|
24.35
|
40.08
|
47.94
|
|||||||||||
|
Total
assets
|
750,330
|
647,483
|
575,244
|
495,023
|
437,006
|
|||||||||||
|
Long-term
borrowings
|
213,161
|
172,314
|
140,632
|
79,806
|
82,132
|
|||||||||||
|
Shares
outstanding—average (in thousands)
|
10,399,629
|
10,018,587
|
9,947,113
|
9,932,245
|
9,897,110
|
|||||||||||
|
Shareowner
accounts—average
|
658,000
|
670,000
|
655,000
|
625,000
|
597,000
|
|||||||||||
|
GE
DATA
|
|
|
||||||||||||||
|
Short-term
borrowings
|
$
|
3,409
|
$
|
2,555
|
$
|
8,786
|
$
|
1,722
|
$
|
940
|
||||||
|
Long-term
borrowings
|
7,625
|
8,388
|
970
|
787
|
841
|
|||||||||||
|
Minority
interest
|
7,701
|
1,079
|
1,028
|
948
|
968
|
|||||||||||
|
Shareowners’
equity
|
110,284
|
79,180
|
63,706
|
54,824
|
50,492
|
|||||||||||
|
Total
capital invested
|
$
|
129,019
|
$
|
91,202
|
$
|
74,490
|
$
|
58,281
|
$
|
53,241
|
||||||
|
Return
on average total capital invested
|
||||||||||||||||
|
excluding
effect of accounting changes
|
15.9
|
%
|
19.9
|
%
|
24.5
|
%
|
27.0
|
%
|
27.4
|
%
|
||||||
|
Borrowings
as a percentage of total capital invested
|
9.1
|
%
|
12.0
|
%
|
13.1
|
%
|
4.3
|
%
|
3.3
|
%
|
||||||
|
Working
capital
(a)
|
$
|
8,328
|
$
|
5,282
|
$
|
3,821
|
$
|
(2,398
|
)
|
$
|
799
|
|||||
|
Additions
to property, plant and equipment
|
2,427
|
2,158
|
2,386
|
2,876
|
2,536
|
|||||||||||
|
Employees
at year end
|
||||||||||||||||
|
United
States
|
129,000
|
122,000
|
125,000
|
125,000
|
131,000
|
|||||||||||
|
Other
countries
|
98,000
|
96,000
|
94,000
|
94,000
|
92,000
|
|||||||||||
|
Total
employees
|
227,000
|
218,000
|
219,000
|
219,000
|
223,000
|
|||||||||||
|
GECS
DATA
|
||||||||||||||||
|
Revenues
|
$
|
70,776
|
$
|
64,279
|
$
|
58,699
|
$
|
58,856
|
$
|
66,709
|
||||||
|
Earnings
before accounting changes
|
8,161
|
7,754
|
4,626
|
5,586
|
5,192
|
|||||||||||
|
Cumulative
effect of accounting changes
|
—
|
(339
|
)
|
(1,015
|
)
|
(169
|
)
|
—
|
||||||||
|
Net
earnings
|
8,161
|
7,415
|
3,611
|
5,417
|
5,192
|
|||||||||||
|
Shareowner’s
equity
|
53,755
|
45,308
|
36,929
|
28,590
|
23,022
|
|||||||||||
|
Minority
interest
|
8,682
|
5,115
|
4,445
|
4,267
|
3,968
|
|||||||||||
|
Total
borrowings
|
361,342
|
320,318
|
270,962
|
239,935
|
205,371
|
|||||||||||
|
Ratio
of debt to equity at GE Capital
|
6.61:
1
|
6.74:
1
|
6.58:
1
|
7.31:
1
|
7.53:
1
|
|||||||||||
|
Total
assets
|
$
|
618,327
|
$
|
554,688
|
$
|
489,828
|
$
|
425,484
|
$
|
370,636
|
||||||
|
Insurance
premiums written
|
15,250
|
18,602
|
16,999
|
15,843
|
16,461
|
|||||||||||
|
Employees
at year end
|
||||||||||||||||
|
United
States
|
36,000
|
33,000
|
36,000
|
33,000
|
37,000
|
|||||||||||
|
Other
countries
|
44,000
|
54,000
|
60,000
|
58,000
|
53,000
|
|||||||||||
|
Total
employees
|
80,000
|
87,000
|
96,000
|
91,000
|
90,000
|
|||||||||||
|
Transactions
between GE and GECS have been eliminated from the consolidated
information.
|
||||||||||||||||
|
(a)
Working
capital is defined as the sum of receivables from the sales of goods and
services, plus inventories, less trade accounts payable and progress
collections.
|
||||||||||||||||
GE 2004 ANNUAL REPORT
67
Critical
Accounting Estimates
Accounting
estimates and assumptions discussed in this section are those that we consider
to be the most critical to an understanding of our financial statements because
they inherently involve significant judgments and uncertainties. For all of
these estimates, we caution that future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment. Also see note 1,
Summary of Significant Accounting Policies, which discusses accounting policies
that we have selected from acceptable alternatives.
LOSSES
ON FINANCING RECEIVABLES
are recognized when they are incurred, which requires us to make our best
estimate of probable losses inherent in the portfolio. Such estimate requires
consideration of historical loss experience, adjusted for current conditions,
and judgments about the probable effects of relevant observable data, including
present economic conditions such as delinquency rates, financial health of
specific customers and market sectors, collateral values, and the present and
expected future levels of interest rates. Our risk management process, which
includes standards and policies for reviewing major risk exposures and
concentrations, ensures that relevant data are identified and considered either
for individual loans or leases, or on a portfolio basis, as appropriate.
Our
lending and leasing experience and the extensive data we accumulate and analyze
facilitate estimates that have been reliable over time. Our actual loss
experience was in line with expectations for 2004 (adjusting for the effects of
Consumer Finance’s standardization of its write-off policy), 2003 and 2002.
While losses depend to a large degree on future economic conditions, we do not
anticipate significant adverse credit development in 2005. Further information
is provided in the financing receivables section on page 60, and in notes 1, 12
and 13.
REVENUE
RECOGNITION ON LONG-TERM AGREEMENTS
to provide product services (product services agreements) requires estimates of
profits over the multiple-year terms of such agreements, considering factors
such as the frequency and extent of future monitoring, maintenance and overhaul
events; the amount of personnel, spare parts and other resources required to
perform the services; and future billing rate and cost changes. We routinely
review estimates under product services agreements and regularly revise them to
adjust for changes in outlook. Revisions that affect a product services
agreement’s total estimated profitability will also result in an immediate
adjustment of earnings. We provide for probable losses. We also regularly assess
customer credit risk inherent in the carrying amounts of contract costs and
estimated earnings. We gain insight into future utilization and cost trends, as
well as credit risk, through our knowledge of the installed base of equipment
and the close interaction with our customers that comes with supplying critical
services and parts over extended periods. Carrying amounts for product services
agreements in progress at December 31, 2004 and 2003, were $3.7 billion and $3.2
billion, respectively, and are included in the line, “Contract costs and
estimated earnings” in note 17. Adjustments to earnings resulting from revisions
to estimates on product services agreements have been insignificant for each of
the years in the three-year period ended December 31, 2004.
Further
information is provided in note 1.
ASSET
IMPAIRMENT
assessment involves various estimates and assumptions as follows:
INVESTMENTS
.
We regularly review investment securities for impairment based on criteria that
include the extent to which cost exceeds market value, the duration of that
market decline, our intent and ability to hold to recovery and the financial
health and specific prospects for the issuer. We perform comprehensive market
research and analysis and monitor market conditions to identify potential
impairments. Further information about actual and potential impairment losses is
provided on page 60 and in notes 1 and 9.
LONG-LIVED
ASSETS
.
We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
Determining whether an impairment has occurred typically requires various
estimates and assumptions, including determining which cash flows are directly
related to the potentially impaired asset, the useful life over which cash flows
will occur, their amount, and the asset’s residual value, if any. In turn,
measurement of an impairment loss requires a determination of fair value, which
is based on the best information available. We use internal discounted cash flow
estimates, quoted market prices when available and independent appraisals as
appropriate to determine fair value. We derive the required cash flow estimates
from our historical experience and our internal business plans and apply an
appropriate discount rate.
Commercial
aircraft are a significant concentration of assets in our Commercial Finance
business, and are particularly subject to market fluctuations. Therefore, we
test recoverability of each aircraft in our operating lease portfolio at least
annually. Additionally, we perform quarterly evaluations in circumstances such
as when aircraft are re-leased, current lease terms have changed or a specific
lessee’s credit standing changes. Future rentals and residual values are based
on historical experience and information received routinely from independent
appraisers. Estimated cash flows from future leases are reduced for expected
downtime between leases and for estimated technical costs required to prepare
aircraft to be redeployed. Fair value used to measure impairment is based on
current market values from independent appraisers. Further information on
impairment losses and our overall exposure to the commercial aviation industry
is provided on pages 65-66 and in notes 9 and 15.
GOODWILL
AND OTHER IDENTIFIED INTANGIBLE ASSETS
.
We test goodwill for impairment annually and whenever events or circumstances
make it more likely than not that an impairment may have occurred, such as a
significant adverse change in the business climate or a decision to sell or
dispose of a reporting unit. Determining whether an impairment has occurred
requires valuation of the respective reporting unit, which we estimate using a
discounted cash flow method. When available and as appropriate, we use
comparative market multiples to corroborate discounted cash flow results. In
applying this methodology, we rely on a number of factors, including actual
operating results, future business plans, economic projections and market data.
If
this analysis indicates goodwill is impaired, measuring the impairment requires
a fair value estimate of each identified tangible and intangible asset. In this
case we supplement the cash flow approach discussed above with independent
appraisals, as appropriate.
We
test other identified intangible assets with defined useful lives and subject to
amortization by comparing the carrying amount to the sum of undiscounted cash
flows expected to be generated by the asset. We test intangible assets with
indefinite lives annually for impairment using a fair value method such as
discounted cash flows.
Further
information is provided on page 61 and in notes 1 and 16.
INSURANCE
LIABILITIES AND RESERVES
differ for short- and long-duration insurance contracts. Short-duration
contracts such as property and casualty policies are accounted for based on
actuarial estimates of losses inherent in that period’s claims, including losses
for which claims have not yet been reported. Short-duration contract loss
estimates rely on actuarial observations of ultimate loss experience for similar
historical events. Measurement of long-duration insurance liabilities (such as
guaranteed renewable term, whole life and long-term care insurance policies)
also is based on approved actuarial methods that include assumptions about
expenses, mortality, morbidity, lapse rates and future yield on related
investments. Historical insurance industry experience indicates that a greater
degree of inherent variability exists in assessing the ultimate amount of losses
under short-duration property and casualty contracts than exists for
long-duration mortality exposures. This inherent variability is particularly
significant for liability-related exposures, including latent claims issues
(such as asbestos and environmental related coverage disputes), because of the
extended period of time—often many years— that transpires between when a given
claim event occurs and the ultimate full settlement of such claim. This
situation is then further exacerbated for reinsurance entities (as opposed to
primary insurers) because of coverage often being provided on an
“excess-of-loss” basis and the resulting lags in receiving current claims data.
We
continually evaluate the potential for changes in loss estimates with the
support of qualified reserving actuaries and use the results of these
evaluations both to adjust recorded reserves and to proactively modify
underwriting criteria and product offerings. For actuarial analysis purposes,
reported and paid claims activity is segregated into several hundred reserving
segments, each having differing historical settlement trends. A variety of
actuarial methods are then applied to the underlying data for each of these
reserving segments in arriving at an estimated range of “reasonably possible”
loss scenarios. Factors such as line of business, length of historical
settlement pattern, recent changes in underwriting standards and unusual trends
in reported claims activity will generally affect which actuarial methods are
given more weight for purposes of determining the “best estimate” of ultimate
losses in a particular reserving segment. As discussed on pages 56 and 57 and in
note 19, in recent years, reported claims activity at GE Insurance Solutions
related to prior-year loss events, particularly for liability-related exposures
underwritten in 1997 through 2001, have continued to develop adversely to
previous expectations. This trend was considered in the actuarial reserve study
completed in the fourth quarter of 2002, resulting in a significant increase in
recorded reserves. In 2003, we continued to monitor our reported claims activity
compared with our revised expected loss levels. While for the majority of our
lines of business, reported claims activity in 2003 was reasonably close to
expected amounts, for certain lines the reported claims volumes exceeded our
revised loss expectations. In response to these new data, we further increased
our loss reserves in 2003. In 2004, as part of our comprehensive annual
assessment of recorded claim-related liabilities, we observed that reported
claims activity in certain product lines, substantially related to the 1997
through 2001 underwriting years, continued to exceed previous established
expectations and we again increased our loss reserves.
PENSION
ASSUMPTIONS
are significant inputs to actuarial models that measure pension benefit
obligations and related effects on operations. Two critical assumptions—discount
rate and expected return on assets—are important elements of plan expense and
asset/liability measurement. We evaluate these critical assumptions at least
annually on a plan and country-specific basis. Other assumptions involving
demographic factors such as retirement age, mortality and turnover are evaluated
periodically and are updated to reflect our experience and expectations for the
future. Actual results in any given year will often differ from actuarial
assumptions because of economic and other factors.
The
discount rate enables us to state expected future cash flows at a present value
on the measurement date. This rate is the yield on high-quality fixed income
investments at the measurement date. A lower discount rate increases the present
value of benefit obligations and increases pension expense.
To
determine the expected long-term rate of return on pension plan assets, we
consider the current and expected asset allocations, as well as historical and
expected returns on various categories of plan assets. As of December 31, 2004,
one-year returns on assets in our principal pension plans were 11.7%; five-year
returns were 3.2%; 10-year returns were 11.4% and 25-year returns were 12.2%. We
believe these results, in connection with our current and expected asset
allocations, support our assumed long-term return of 8.5% on those assets.
To
reflect market interest rate conditions, we reduced our discount rate for
principal pension plans at December 31, 2004, from 6.0% to 5.75% and at December
31, 2003, from 6.75% to 6.0%. We assumed that long-term returns on the assets of
our principal pension plans were 8.5% in 2004, the same as our assumptions for
2003 and 2002.
Sensitivity
to changes in key assumptions for our principal pension plans
follows:
|
•
|
Discount
rate—A 25 basis point reduction in discount rate would increase pension
expense in 2005 by $0.1 billion.
|
|
•
|
Expected
return on assets—A 50 basis point increase in the expected return on
assets would decrease pension expense in 2005 by $0.3
billion.
|
Further
information on our postretirement benefit plans is provided on page 50 and in
notes 5 and 6.
OTHER
LOSS CONTINGENCIES
are recorded as liabilities when it is probable that a liability has been
incurred and the amount of the loss is reasonably estimable. Disclosure is
required when there is a reasonable possibility that the ultimate loss will
exceed the recorded provision. Contingent liabilities are often resolved over
long time periods. Estimating probable losses requires analysis of multiple
forecasts that often depend on judgments about potential actions by third
parties such as regulators. Further information is provided in notes 20 and 30.
Other
Information
New
Accounting Standard
In
December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) 123 (revised 2004),
Share-Based
Payment
(SFAS
123R). Among other things, SFAS 123R requires expensing the fair value of stock
options, previously optional accounting that we adopted in 2002. For transition,
upon adoption on July 1, 2005, SFAS 123R will require us to expense the unvested
portion of options granted in 2000 and 2001, reducing net earnings by
approximately $30 million in 2005 and by a similar amount in 2006. SFAS 123R
also will require us to change the classification of certain tax benefits from
options deductions to financing rather than operating cash flows. While the
effects of these future tax deductions will depend on several variables, had
SFAS 123R been in effect, approximately $0.3 billion would have been required to
be classified as cash from financing, not operating, activities in 2004; the
related 2003 amount would have been approximately $0.2 billion.
Financial
Measures that Supplement Generally Accepted Accounting
Principles
We
sometimes use information derived from consolidated financial information but
not presented in our financial statements prepared in accordance with U.S.
generally accepted accounting principles (GAAP). Certain of these data are
considered “non-GAAP financial measures” under SEC rules. Specifically, we have
referred, in various sections of this Annual Report, to:
|
•
|
Organic
revenue growth in 2004,
|
|
•
|
Earnings
growth, excluding Insurance dispositions, in 2004,
|
|
•
|
Growth
in Industrial CFOA in 2004,
|
|
•
|
GE
earnings before income taxes and accounting changes excluding GECS
earnings, and the corresponding effective tax rate, for the three years
ended December 31, 2004,
|
|
•
|
Net
revenues (revenues from services less interest) of the Commercial Finance
and Consumer Finance segments for the three years ended December 31, 2004,
and
|
|
•
|
Delinquency
rates on financing receivables of the Commercial Finance and Consumer
Finance segments for 2004, 2003 and 2002.
|
ORGANIC
REVENUE GROWTH
|
(In
millions)
|
2004
|
2003
|
%
change
|
|||||||
|
Revenues
as reported
|
$
|
152,363
|
$
|
134,187
|
||||||
| Less: | ||||||||||
|
Effects
of acquisitions, dispositions and currency exchange rates
|
19,244
|
1,289
|
||||||||
|
Insurance
|
23,070
|
26,194
|
||||||||
|
Energy
|
17,348
|
19,082
|
||||||||
|
Revenues
excluding the effects of acquisitions,
dispositions
and currency exchange rates,
Insurance
and Energy (organic revenues)
|
$
|
92,701
|
$
|
87,622
|
6
|
%
|
||||
EARNINGS
GROWTH, EXCLUDING INSURANCE DISPOSITIONS
|
(In
millions)
|
2004
|
2003
|
%
change
|
|||||||
|
Earnings
before accounting changes
|
||||||||||
|
as
reported
|
$
|
16,593
|
$
|
15,589
|
||||||
|
Less
effect of Insurance dispositions
|
(721
|
)
|
728
|
|||||||
|
Earnings,
excluding Insurance
|
||||||||||
|
dispositions
|
$
|
17,314
|
$
|
14,861
|
17
|
%
|
||||
GROWTH
IN INDUSTRIAL CFOA
|
(In
millions)
|
2004
|
2003
|
%
change
|
|||||||
|
Cash
from GE’s operating activities
|
||||||||||
|
as
reported
|
$
|
15,204
|
$
|
12,975
|
||||||
|
Less
GECS dividends
|
3,105
|
3,435
|
||||||||
|
Cash
from GE’s operating activities
|
||||||||||
|
excluding
dividends from GECS
|
||||||||||
|
(Industrial
CFOA)
|
$
|
12,099
|
$
|
9,540
|
27
|
%
|
||||
GE
TAX RATE, EXCLUDING GECS EARNINGS
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
GE
earnings before income taxes and accounting changes
|
$
|
18,566
|
$
|
18,446
|
$
|
18,970
|
||||
|
Less
GECS earnings
|
8,161
|
7,754
|
4,626
|
|||||||
|
Total
|
$
|
10,405
|
$
|
10,692
|
$
|
14,344
|
||||
|
Provision
for income taxes
|
$
|
1,973
|
$
|
2,857
|
$
|
3,837
|
||||
|
Effective
tax rate
|
19.0
|
%
|
26.7
|
%
|
26.7
|
%
|
||||
We
believe that meaningful analysis of our financial performance requires an
understanding of the factors underlying that performance and our judgments about
the likelihood that particular factors will repeat. In some cases, short-term
patterns and long-term trends may be obscured by large factors or events. For
example, events or trends in a particular segment may be so significant as to
obscure patterns and trends of our industrial or financial services businesses
in total. For this reason, we believe that investors may find it useful to see
our 2004 revenue growth without the effect of acquisitions, dispositions and
currency exchange rates, and without the effects of two businesses, Insurance
and Energy, whose revenues were adversely affected by their changing economic
environments and other factors; and 2004 earnings without the effect of
Insurance dispositions. Similarly, we believe that investors would find it
useful to compare our 2004 operating cash flow against our 2003 operating cash
flow without the impact of GECS dividends.
NET
REVENUES
We
provided reconciliations of net revenues to reported revenues for these segments
on page 54. Because net revenues is a common industry measure of margin, these
disclosures enable investors to compare the results of our financial services
businesses with results of others in the same industry.
DELINQUENCY
RATES ON FINANCING RECEIVABLES
Delinquency
rates on financing receivables follow.
COMMERCIAL
FINANCE
|
December
31
|
2004
|
2003
|
2002
|
|||||||
|
Managed
|
1.40
|
%
|
1.38
|
%
|
1.75
|
%
|
||||
|
Off-book
|
0.90
|
1.27
|
0.09
|
|||||||
|
On-book
|
1.58
|
1.41
|
2.16
|
|||||||
CONSUMER
FINANCE
|
December
31
|
2004
|
2003
|
2002
|
|||||||
|
Managed
|
4.85
|
%
|
5.62
|
%
|
5.62
|
%
|
||||
|
Off-book
|
5.09
|
5.04
|
4.84
|
|||||||
|
On-book
|
4.84
|
5.67
|
5.76
|
|||||||
We
believe that delinquency rates on managed financing receivables provide a useful
perspective of our portfolio quality and are key indicators of financial
performance. Further, investors use such information, including the results of
both the on-book and securitized portfolios, which are relevant to our overall
performance.
STATEMENT
OF EARNINGS
|
|
|
General
Electric Company
and
consolidated affiliates
|
|
|||||||
|
For
the years ended December 31
(In
millions; per-share amounts in dollars)
|
|
2004
|
|
2003
|
|
2002
|
|
|||
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of goods
|
|
$
|
55,005
|
|
$
|
49,963
|
|
$
|
55,096
|
|
|
Sales
of services
|
|
|
29,700
|
|
|
22,391
|
|
|
21,138
|
|
|
Other
income (note 2)
|
|
|
1,064
|
|
|
602
|
|
|
1,013
|
|
|
Earnings
of GECS before accounting changes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
GECS
revenues from services (note 3)
|
|
|
66,594
|
|
|
61,231
|
|
|
54,963
|
|
|
Total
revenues
|
|
|
152,363
|
|
|
134,187
|
|
|
132,210
|
|
|
COSTS
AND EXPENSES
(note 4)
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
42,645
|
|
|
37,189
|
|
|
38,833
|
|
|
Cost
of services sold
|
|
|
19,114
|
|
|
14,017
|
|
|
14,023
|
|
|
Interest
and other financial charges
|
|
|
11,907
|
|
|
10,825
|
|
|
10,216
|
|
|
Insurance
losses and policyholder and annuity benefits
|
|
|
15,627
|
|
|
16,369
|
|
|
17,608
|
|
|
Provision
for losses on financing receivables (note 13)
|
|
|
3,888
|
|
|
3,752
|
|
|
3,084
|
|
|
Other
costs and expenses
|
|
|
38,148
|
|
|
31,821
|
|
|
29,229
|
|
|
Minority
interest in net earnings of consolidated affiliates
|
|
|
928
|
|
|
310
|
|
|
326
|
|
|
Total
costs and expenses
|
|
|
132,257
|
|
|
114,283
|
|
|
113,319
|
|
|
EARNINGS
BEFORE INCOME TAXES AND ACCOUNTING CHANGES
|
|
|
20,106
|
|
|
19,904
|
|
|
18,891
|
|
|
Provision
for income taxes (note 7)
|
|
|
(3,513
|
)
|
|
(4,315
|
)
|
|
(3,758
|
)
|
|
EARNINGS
BEFORE ACCOUNTING CHANGES
|
|
|
16,593
|
|
|
15,589
|
|
|
15,133
|
|
|
Cumulative
effect of accounting changes (note 1)
|
|
|
—
|
|
|
(587
|
)
|
|
(1,015
|
)
|
|
NET
EARNINGS
|
|
$
|
16,593
|
|
$
|
15,002
|
|
$
|
14,118
|
|
|
Per-share
amounts (note 8)
|
|
|
|
|
|
|
|
|
|
|
|
Per-share
amounts before accounting changes
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.59
|
|
$
|
1.55
|
|
$
|
1.51
|
|
|
Basic
earnings per share
|
|
|
1.60
|
|
|
1.56
|
|
|
1.52
|
|
|
Per-share
amounts after accounting changes
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
1.59
|
|
|
1.49
|
|
|
1.41
|
|
|
Basic
earnings per share
|
|
|
1.60
|
|
|
1.50
|
|
|
1.42
|
|
|
DIVIDENDS
DECLARED PER SHARE
|
|
$
|
0.82
|
|
$
|
0.77
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREOWNERS’ EQUITY
|
(In
millions)
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
CHANGES
IN SHAREOWNERS’ EQUITY
(note 24)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$
|
79,180
|
|
$
|
63,706
|
|
$
|
54,824
|
|
|
Dividends
and other transactions with shareowners
|
|
|
10,009
|
|
|
(5,520
|
)
|
|
(6,382
|
)
|
|
Changes
other than transactions with shareowners
|
|
|
|
|
|
|
|
|
|
|
|
Increase
attributable to net earnings
|
|
|
16,593
|
|
|
15,002
|
|
|
14,118
|
|
|
Investment
securities—net
|
|
|
412
|
|
|
710
|
|
|
1,378
|
|
|
Currency
translation adjustments—net
|
|
|
3,942
|
|
|
5,123
|
|
|
1,000
|
|
|
Cash
flow hedges—net
|
|
|
569
|
|
|
320
|
|
|
(1,157
|
)
|
|
Minimum
pension liabilities—net
|
|
|
(421
|
)
|
|
(161
|
)
|
|
(75
|
)
|
|
Total
changes other than transactions with shareowners
|
|
|
21,095
|
|
|
20,994
|
|
|
15,264
|
|
|
Balance
at December 31
|
|
$
|
110,284
|
|
$
|
79,180
|
|
$
|
63,706
|
|
The
notes to consolidated financial statements on pages 78-111 are an integral part
of these statements.
STATEMENT OF EARNINGS
(CONTINUED)
|
|
GE
|
GECS
|
|||||||||||||||||
|
For
the years ended December 31
(In
millions; per-share amounts in dollars)
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
|||||||||||||
|
REVENUES
|
|
|
|
|
|
|
|||||||||||||
|
Sales
of goods
|
$
|
52,260
|
$
|
47,767
|
$
|
51,957
|
$
|
2,840
|
$
|
2,228
|
$
|
3,296
|
|||||||
|
Sales
of services
|
29,954
|
22,675
|
21,360
|
—
|
—
|
—
|
|||||||||||||
|
Other
income (note 2)
|
1,076
|
645
|
1,106
|
—
|
—
|
—
|
|||||||||||||
|
Earnings
of GECS before accounting changes
|
8,161
|
7,754
|
4,626
|
—
|
—
|
—
|
|||||||||||||
|
GECS
revenues from services (note 3)
|
—
|
—
|
—
|
67,936
|
62,051
|
55,403
|
|||||||||||||
|
Total
revenues
|
91,451
|
78,841
|
79,049
|
70,776
|
64,279
|
58,699
|
|||||||||||||
|
COSTS
AND EXPENSES
(note 4)
|
|
|
|
|
|
|
|||||||||||||
|
Cost
of goods sold
|
39,999
|
35,102
|
35,951
|
2,741
|
2,119
|
3,039
|
|||||||||||||
|
Cost
of services sold
|
19,368
|
14,301
|
14,245
|
—
|
—
|
—
|
|||||||||||||
|
Interest
and other financial charges
|
979
|
941
|
569
|
11,372
|
10,262
|
9,935
|
|||||||||||||
|
Insurance
losses and policyholder and annuity benefits
|
—
|
—
|
—
|
15,844
|
16,369
|
17,608
|
|||||||||||||
|
Provision
for losses on financing receivables (note 13)
|
—
|
—
|
—
|
3,888
|
3,752
|
3,084
|
|||||||||||||
|
Other
costs and expenses
|
12,001
|
9,870
|
9,131
|
26,840
|
22,436
|
20,343
|
|||||||||||||
|
Minority
interest in net earnings of consolidated affiliates
|
538
|
181
|
183
|
390
|
129
|
143
|
|||||||||||||
|
Total
costs and expenses
|
72,885
|
60,395
|
60,079
|
61,075
|
55,067
|
54,152
|
|||||||||||||
|
EARNINGS
BEFORE INCOME TAXES AND ACCOUNTING
CHANGES |
18,566
|
18,446
|
18,970
|
9,701
|
9,212
|
4,547
|
|||||||||||||
|
Provision
for income taxes (note 7)
|
(1,973
|
)
|
(2,857
|
)
|
(3,837
|
)
|
(1,540
|
)
|
(1,458
|
)
|
79
|
||||||||
|
EARNINGS
BEFORE ACCOUNTING CHANGES
|
16,593
|
15,589
|
15,133
|
8,161
|
7,754
|
4,626
|
|||||||||||||
|
Cumulative
effect of accounting changes (note 1)
|
—
|
(587
|
)
|
(1,015
|
)
|
—
|
(339
|
)
|
(1,015
|
)
|
|||||||||
|
NET
EARNINGS
|
$
|
16,593
|
$
|
15,002
|
$
|
14,118
|
$
|
8,161
|
$
|
7,415
|
$
|
3,611
|
|||||||
In
the consolidating data on this page "GE" means the basis of consolidation as
described in note 1 to the consolidated financial statements; "GECS" means
General Electric Capital Services, Inc. and all of its affiliates and associated
companies. Transactions between GE and GECS have been eliminated from the
"General Electric Company and consolidated affiliates" columns on page 72.
STATEMENT OF FINANCIAL POSITION
|
|
General
Electric Company and
consolidated
affiliates
|
||||||
|
At
December 31 (In millions)
|
2004
|
2003
|
|||||
|
|
|
|
|||||
|
ASSETS
|
|
|
|||||
|
Cash
and equivalents
|
$
|
15,328
|
$
|
12,664
|
|||
|
Investment
securities (note 9)
|
135,536
|
129,269
|
|||||
|
Current
receivables (note 10)
|
14,233
|
10,732
|
|||||
|
Inventories
(note 11)
|
9,778
|
8,752
|
|||||
|
Financing
receivables—net (notes 12 and 13)
|
282,467
|
247,906
|
|||||
|
Insurance
receivables—net (note 14)
|
25,709
|
27,541
|
|||||
|
Other
GECS receivables
|
10,771
|
9,747
|
|||||
|
Property,
plant and equipment—net (note 15)
|
63,334
|
53,388
|
|||||
|
Investment
in GECS
|
—
|
—
|
|||||
|
Intangible
assets—net (note 16)
|
83,240
|
55,025
|
|||||
|
All
other assets (note 17)
|
109,934
|
92,621
|
|||||
|
Total
assets
|
$
|
750,330
|
$
|
647,645
|
|||
|
LIABILITIES
AND EQUITY
|
|
|
|||||
|
Short-term
borrowings (note 18)
|
$
|
157,746
|
$
|
157,397
|
|||
|
Accounts
payable, principally trade accounts
|
24,729
|
19,950
|
|||||
|
Progress
collections and price adjustments accrued
|
3,937
|
4,433
|
|||||
|
Dividends
payable
|
2,329
|
2,013
|
|||||
|
All
other current costs and expenses accrued
|
17,539
|
15,343
|
|||||
|
Long-term
borrowings (note 18)
|
213,161
|
172,314
|
|||||
|
Insurance
liabilities, reserves and annuity benefits (note 19)
|
140,585
|
136,428
|
|||||
|
All
other liabilities (note 20)
|
49,223
|
41,746
|
|||||
|
Deferred
income taxes (note 21)
|
14,414
|
12,647
|
|||||
|
Total
liabilities
|
623,663
|
562,271
|
|||||
|
Minority
interest in equity of consolidated affiliates
(note
22)
|
16,383
|
6,194
|
|||||
|
Common
stock (10,586,358,000 and 10,063,120,000
shares
outstanding at year-end 2004 and 2003, respectively)
|
669
|
669
|
|||||
|
Accumulated
gains (losses)—net
|
|
|
|||||
|
Investment
securities
|
2,268
|
1,856
|
|||||
|
Currency
translation adjustments
|
6,929
|
2,987
|
|||||
|
Cash flow hedges
|
(1,223
|
)
|
(1,792
|
)
|
|||
|
Minimum
pension liabilities
|
(657
|
)
|
(236
|
)
|
|||
|
Other
capital
|
24,265
|
17,497
|
|||||
|
Retained
earnings
|
90,795
|
82,796
|
|||||
|
Less
common stock held in treasury
|
(12,762
|
)
|
(24,597
|
)
|
|||
|
Total
shareowners’ equity (notes 24 and 25)
|
110,284
|
79,180
|
|||||
|
Total
liabilities and equity
|
$
|
750,330
|
$
|
647,645
|
|||
The notes
to consolidated financial statements on pages 78-111 are an integral part of
this statement.
STATEMENT
OF FINANCIAL POSITION (CONTINUED)
|
|
GE
|
GECS
|
|||||||||||
|
At
December 31 (In millions)
|
2004
|
2003
|
2004
|
2003
|
|||||||||
|
|
|
|
|
|
|||||||||
|
ASSETS
|
|
|
|
|
|||||||||
|
Cash
and equivalents
|
$
|
3,155
|
$
|
1,670
|
$
|
12,367
|
$
|
11,273
|
|||||
|
Investment
securities (note 9)
|
413
|
380
|
135,152
|
128,889
|
|||||||||
|
Current
receivables (note 10)
|
14,533
|
10,973
|
—
|
—
|
|||||||||
|
Inventories
(note 11)
|
9,589
|
8,555
|
189
|
197
|
|||||||||
|
Financing
receivables—net (notes 12 and 13)
|
—
|
—
|
282,467
|
247,906
|
|||||||||
|
Insurance
receivables—net (note 14)
|
—
|
—
|
25,971
|
27,541
|
|||||||||
|
Other
GECS receivables
|
—
|
—
|
14,134
|
12,103
|
|||||||||
|
Property,
plant and equipment—net (note 15)
|
16,756
|
14,566
|
46,578
|
38,822
|
|||||||||
|
Investment
in GECS
|
53,755
|
45,308
|
—
|
—
|
|||||||||
|
Intangible
assets—net (note 16)
|
54,720
|
30,204
|
28,520
|
24,821
|
|||||||||
|
All
other assets (note 17)
|
38,123
|
30,448
|
72,949
|
63,136
|
|||||||||
|
Total
assets
|
$
|
191,044
|
$
|
142,104
|
$
|
618,327
|
$
|
554,688
|
|||||
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|||||||||
|
Short-term
borrowings (note 18)
|
$
|
3,409
|
$
|
2,555
|
$
|
154,843
|
$
|
155,468
|
|||||
|
Accounts
payable, principally trade accounts
|
11,013
|
8,753
|
17,104
|
13,566
|
|||||||||
|
Progress
collections and price adjustments accrued
|
3,937
|
4,433
|
—
|
—
|
|||||||||
|
Dividends
payable
|
2,329
|
2,013
|
—
|
—
|
|||||||||
|
All
other current costs and expenses accrued
|
17,569
|
15,343
|
—
|
—
|
|||||||||
|
Long-term
borrowings (note 18)
|
7,625
|
8,388
|
206,499
|
164,850
|
|||||||||
|
Insurance
liabilities, reserves and annuity benefits (note 19)
|
—
|
—
|
140,902
|
136,428
|
|||||||||
|
All
other liabilities (note 20)
|
23,561
|
18,449
|
25,744
|
23,217
|
|||||||||
|
Deferred
income taxes (note 21)
|
3,616
|
1,911
|
10,798
|
10,736
|
|||||||||
|
Total
liabilities
|
73,059
|
61,845
|
555,890
|
504,265
|
|||||||||
|
Minority
interest in equity of consolidated affiliates
(note
22)
|
7,701
|
1,079
|
8,682
|
5,115
|
|||||||||
|
Common
stock (10,586,358,000 and 10,063,120,000
shares
outstanding at year-end 2004 and 2003, respectively)
|
669
|
669
|
1
|
1
|
|||||||||
|
Accumulated
gains (losses)—net
|
|
|
|
|
|||||||||
|
Investment
securities
|
2,268
|
1,856
|
2,345
|
1,864
|
|||||||||
|
Currency
translation adjustments
|
6,929
|
2,987
|
5,183
|
2,639
|
|||||||||
|
Cash flow hedges
|
(1,223
|
)
|
(1,792
|
)
|
(1,354
|
)
|
(1,727
|
)
|
|||||
|
Minimum
pension liabilities
|
(657
|
)
|
(236
|
)
|
(150
|
)
|
(41
|
)
|
|||||
|
Other
capital
|
24,265
|
17,497
|
12,370
|
12,268
|
|||||||||
|
Retained
earnings
|
90,795
|
82,796
|
35,360
|
30,304
|
|||||||||
|
Less
common stock held in treasury
|
(12,762
|
)
|
(24,597
|
)
|
—
|
—
|
|||||||
|
Total
shareowners’ equity (notes 24 and 25)
|
110,284
|
79,180
|
53,755
|
45,308
|
|||||||||
|
Total
liabilities and equity
|
$
|
191,044
|
$
|
142,104
|
$
|
618,327
|
$
|
554,688
|
|||||
In
the consolidating data on this page, “GE” means the basis of consolidation as
described in note 1 to the consolidated financial statements; “GECS” means
General Electric Capital Services, Inc. and all of its affiliates and associated
companies. Transactions between GE and GECS have been eliminated from the
“General Electric Company and consolidated affiliates” columns on page
74.
STATEMENT
OF CASH FLOWS
|
|
Electric
Company and
consolidated
affiliates
|
|||||||||
|
For
the years ended December 31 (In millions)
|
2004
|
2003
|
2002
|
|||||||
|
|
||||||||||
|
CASH
FLOWS—OPERATING ACTIVITIES
|
||||||||||
|
Net
earnings
|
$
|
16,593
|
$
|
15,002
|
$
|
14,118
|
||||
|
Adjustments
to reconcile net earnings to cash provided
|
|
|
|
|||||||
|
from
operating activities
|
|
|
|
|||||||
|
Cumulative
effect of accounting changes
|
—
|
587
|
1,015
|
|||||||
|
Depreciation
and amortization of property, plant
and
equipment
|
8,385
|
6,956
|
6,511
|
|||||||
|
Earnings
(before accounting changes) retained by GECS
|
—
|
—
|
—
|
|||||||
|
Deferred
income taxes
|
(1,702
|
)
|
1,127
|
2,414
|
||||||
|
Decrease
(increase) in GE current receivables
|
(849
|
)
|
534
|
(409
|
)
|
|||||
|
Decrease
(increase) in inventories
|
(468
|
)
|
874
|
(87
|
)
|
|||||
|
Increase
(decrease) in accounts payable
|
5,370
|
802
|
227
|
|||||||
|
Decrease
in GE progress collections
|
(464)
|
)
|
(2,268
|
)
|
(5,062
|
)
|
||||
|
Increase
in insurance liabilities and reserves
|
4,961
|
1,679
|
9,454
|
|||||||
|
Provision
for losses on financing receivables
|
3,888
|
3,752
|
3,084
|
|||||||
|
All
other operating activities
|
770
|
184
|
(2,499
|
)
|
||||||
|
CASH
FROM OPERATING ACTIVITIES
|
36,484
|
29,229
|
28,766
|
|||||||
|
CASH
FLOWS—INVESTING ACTIVITIES
|
|
|
|
|||||||
|
Additions
to property, plant and equipment
|
(13,118
|
)
|
(9,779
|
)
|
(14,056
|
)
|
||||
|
Dispositions
of property, plant and equipment
|
5,845
|
4,952
|
6,357
|
|||||||
|
Net
increase in GECS financing receivables
|
(15,280
|
)
|
(4,687
|
)
|
(18,082
|
)
|
||||
|
Payments
for principal businesses purchased
|
(18,703
|
)
|
(14,407
|
)
|
(21,570
|
)
|
||||
|
Investment
in GECS
|
—
|
—
|
—
|
|||||||
|
All
other investing activities
|
2,842
|
2,078
|
(13,876
|
)
|
||||||
|
CASH
USED FOR INVESTING ACTIVITIES
|
(38,414
|
)
|
(21,843
|
)
|
(61,227
|
)
|
||||
|
CASH
FLOWS—FINANCING ACTIVITIES
|
|
|
|
|||||||
|
Net
increase (decrease) in borrowings (maturities of
90
days or less)
|
(2,729
|
)
|
(20,544
|
)
|
(17,347
|
)
|
||||
|
Newly
issued debt (maturities longer than 90 days)
|
61,659
|
67,545
|
95,008
|
|||||||
|
Repayments
and other reductions (maturities
longer
than 90 days)
|
(47,106
|
)
|
(43,479
|
)
|
(40,454
|
)
|
||||
|
Net
dispositions (purchases) of GE shares for treasury
|
3,993
|
726
|
(985
|
)
|
||||||
|
Dividends
paid to shareowners
|
(8,278
|
)
|
(7,643
|
)
|
(7,157
|
)
|
||||
|
All
other financing activities
|
(2,945
|
)
|
(237
|
)
|
3,873
|
|||||
|
CASH
FROM (USED FOR) FINANCING ACTIVITIES
|
4,594
|
(3,632
|
)
|
32,938
|
||||||
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS DURING YEAR
|
2,664
|
3,754
|
477
|
|||||||
|
Cash
and equivalents at beginning of year
|
12,664
|
8,910
|
8,433
|
|||||||
|
Cash
and equivalents at end of year
|
$
|
15,328
|
$
|
12,664
|
$
|
8,910
|
||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOWS INFORMATION
|
|
|
|
|||||||
|
Cash
paid during the year for interest
|
$
|
(11,907
|
)
|
$
|
(10,910
|
)
|
$
|
(9,654
|
)
|
|
|
Cash
recovered (paid) during the year for income taxes
|
(1,339
|
)
|
(1,539
|
)
|
(948
|
)
|
||||
The
notes to consolidated financial statements on pages 78-111 are an integral part
of this statement.
STATEMENT OF CASH FLOWS
(CONTINUED)
In
the consolidating data on this page, “GE” means the basis of consolidation as
described in note 1 to the consolidated financial statements; “GECS” means
General Electric Capital Services, Inc. and all of its affiliates and associated
companies. Transactions between GE and GECS have been eliminated from the
“General Electric Company and consolidated affiliates” columns on page 76.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1
Summary
of Significant Accounting Policies
Accounting
principles
Our
financial statements are prepared in conformity with U.S. generally accepted
accounting principles (GAAP).
Consolidation
Our
financial statements consolidate all of our affiliates—companies that we control
and in which we hold a majority voting interest. Associated companies are
companies that we do not control but over which we have significant influence,
most often because we hold a shareholder voting position of 20% to 50%. Results
of associated companies are presented on a one-line basis.
In
2004 and 2003, as we describe on page 81, we consolidated certain
non-affiliates, including certain special purpose entities (SPEs) and
investments previously considered associated companies, because of new
accounting requirements that became effective in each of those years.
Financial
statement presentation
We
have reclassified certain prior-year amounts to conform to the current year’s
presentation.
Financial
data and related measurements are presented in the following categories:
|
•
|
GE
This represents the adding together of all affiliates other than General
Electric Capital Services, Inc. (GECS), whose operations are presented on
a one-line basis.
|
|
•
|
GECS
This affiliate owns all of the common stock of General Electric Capital
Corporation (GE Capital) and GE Insurance Solutions Corporation (GE
Insurance Solutions), the parent of Employers Reinsurance Corporation
(ERC). GE Capital, GE Insurance Solutions and their respective affiliates
are consolidated in the GECS columns and constitute its
business.
|
|
•
|
CONSOLIDATED
This represents the adding together of GE and
GECS.
|
Effects
of transactions between related companies are eliminated. Transactions between
GE and GECS are immaterial and consist primarily of GECS services for material
procurement and trade receivables management, medical equipment manufactured by
GE that is leased by GECS to others, aircraft engines manufactured by GE that
are installed on aircraft purchased by GECS from third-party producers for
operating lease to others, buildings and equipment leased by GE from GECS, and
GE investments in GECS commercial paper.
Preparing
financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
Sales
of goods and services
We
record sales of goods when a firm sales agreement is in place, delivery has
occurred and collect-ibility of the fixed or determinable sales price is
reasonably assured. If customer acceptance of products is not assured, sales are
recorded only upon formal customer acceptance.
Sales
of goods in the Consumer & Industrial, Advanced Materials and Infrastructure
businesses typically do not include multiple product and/or service elements, in
contrast with sales in certain of the businesses referred to below. Consumer
lighting products, home videos and computer hardware and software products are
often sold with a right of return. Accumulated experience is used to estimate
and provide for such returns when we record the sale.
Sales
of goods in the Transportation, Healthcare, Energy and certain Infrastructure
businesses sometimes include multiple components and sometimes include services
such as installation. In such contracts, amounts assigned to each component are
based on that component’s objectively determined fair value, such as the sales
price for the component when it is sold separately or competitor prices for
similar components. Sales are recognized individually for delivered components
only if they have value to the customer on a standalone basis, and the
undelivered components have objectively determined fair values and are not
essential to the functionality of the delivered components. When undelivered
components are inconsequential or perfunctory and not essential to the
functionality of the delivered components (like certain training commitments),
we recognize sales on the total contract and make provision for the cost of the
incomplete components.
We
record sales of product services, certain power generation equipment and certain
military aircraft engines in accordance with contracts. For long-term product
services agreements, we use estimated contract profit rates to record sales as
work is performed. For certain power generation equipment and certain military
aircraft engines, we use estimated contract profit rates to record sales as
major components are completed and delivered to customers. Estimates are subject
to revisions; revisions that affect an agreement’s total estimated profitability
result in an immediate adjustment of earnings. We provide for any loss when that
loss is probable. We expense costs to acquire or originate sales agreements as
incurred.
We
record broadcast and cable television advertising sales when advertisements are
aired, net of provision for any viewer shortfalls (make goods). We record sales
from theatrical distribution of films as the films are exhibited; sales of home
videos, net of a return provision, when the videos are shipped and available for
sale by retailers; fees from cable and satellite operators when services are
provided, and licensing of film and television programming when we make the
material available for airing.
GECS
revenues from services (earned income)
We
use the interest method to recognize income on all loans. Interest on time sales
and loans includes origination, commitment and other non-refundable fees related
to funding (recorded in earned income on the interest method). We stop accruing
interest at the earlier of the time at which collection of an account becomes
doubtful or the account becomes 90 days past due. We recognize interest income
on nonearning loans either as cash is collected or on a cost-recovery basis as
con-ditions warrant. We resume accruing interest on nonearning, non-restructured
Commercial Finance loans only when (a) payments are brought current according to
the loan’s original terms and (b) future payments are reasonably assured. When
we agree to restructured terms with the borrower, we resume accruing interest
only when reasonably assured that we will recover full contractual payments,
and
such loans pass underwriting reviews equivalent to those applied to new loans.
We resume accruing interest on nonearning Consumer Finance loans upon receipt of
the third consecutive minimum monthly payment or the equivalent. Specific limits
for each type of loan restrict the number of times any particular delinquent
loan may be categorized as non-delinquent and interest accrual resumed.
We
record financing lease income on the interest method to produce a level yield on
funds not yet recovered. Estimated unguaranteed residual values of leased assets
are based primarily on periodic independent appraisals of the values of leased
assets remaining at expiration of the lease terms. Significant assumptions we
use in estimating residual values include estimated net cash flows over the
remaining lease term, results of future remarketing, and future component part
and scrap metal prices, discounted at an appropriate rate.
We
recognize operating lease income on a straight-line basis over the terms of
underlying leases.
Fees
include commitment fees related to loans that we do not expect to fund and
line-of-credit fees. We record these fees in earned income on a straight-line
basis over the period to which they relate. We record syndication fees in earned
income at the time related services are performed unless significant
contingencies exist.
See
page 80 for a discussion of income from investment and insurance activities.
Depreciation
and amortization
The
cost of GE manufacturing plant and equipment is depreciated over its estimated
economic life. U.S. assets are depreciated using an accelerated method based on
a sum-of-the-years digits formula; non-U.S. assets are depreciated on a
straight-line basis.
The
cost of GECS equipment leased to others on operating leases is amortized on a
straight-line -basis to estimated residual value over the lease term or over the
estimated economic life of the equipment. See note 15.
Film
and television costs
We
defer film and television production costs, including direct costs, production
overhead, development costs and interest. We do not defer costs of exploitation,
which principally comprise costs of film and television program marketing and
distribution. We amortize deferred film and television production costs, as well
as associated participation and residual costs, on an individual production
basis using the ratio of the current period’s gross revenues to estimated total
remaining gross revenues from all sources; we state such costs at the lower of
amortized cost or fair value. We defer the costs of acquired broadcast material,
including rights to material for use on NBC Universal’s broadcast and cable
networks, at the earlier of acquisition or when the license period begins and
the material is available for use. We amortize acquired broadcast material and
rights when we broadcast the associated programs; we state such costs at the
lower of amortized cost or net realizable value.
Losses
on financing receivables
Our
allowance for losses on financing receivables represents our best estimate of
probable losses inherent in the portfolio. Our method of calculating estimated
losses depends on the size, type and risk characteristics of the related
receivables. Write-offs are deducted from the allowance for losses and
subsequent recoveries are added. Impaired financing receivables are written down
to the extent that principal is judged to be uncollectible.
Our
consumer loan portfolio consists of smaller balance, homogeneous loans including
card receivables, installment loans, auto loans and leases and residential
mortgages. Each portfolio is collectively evaluated for impairment. The
allowance for losses on these receivables is established through a process that
estimates the probable losses inherent in the portfolio, based upon statistical
analyses of portfolio data. These include migration analysis, in which
historical delinquency and credit loss experience is applied to the current
aging of the portfolio, together with analyses that reflect current trends and
conditions. We also consider overall portfolio indicators including nonearning
loans, trends in loan volume and lending terms, credit policies and other
observable environmental factors.
During
2004, Consumer Finance adopted a global policy for uncollectible receivables
that accelerated write-offs to follow one consistent basis. We now write off
unsecured closed-end installment loans that become 120 days contractually past
due and unsecured open-ended revolving loans that become 180 days contractually
past due. Loans secured with non-real-estate collateral are written down to the
estimated value of the collateral, less costs to sell, at 120 days contractually
past due. Real estate secured loans (both revolving and closed-end) are written
down to a percentage of the estimated fair value of the property, less costs to
sell, no later than 360 days past due.
The
first step in establishing our quarterly allowances for losses on larger balance
non-homogenous commercial and equipment loans and leases is to survey the entire
portfolio for potential specific credit or collection issues indicating an
impairment. This survey first considers the financial status, payment history,
collateral value, industry conditions and guarantor support related to specific
customers. Any delinquencies or bankruptcies are indications of potential
impairment requiring further assessment of collectibility. Our risk function
routinely receives financial as well as rating agency reports on our customers,
and we elevate for further attention those customers whose operations we judge
to be marginal or deteriorating. We also elevate customers for further attention
when we observe a decline in collateral values for asset-based loans. While
collateral values are not always available, when we observe such a decline, we
evaluate relevant markets to assess recovery alternatives—for example, for real
estate loans, relevant markets are local; for aircraft loans, relevant markets
are global. Our risk function reports to senior management its evaluation of any
balances that it has identified as impaired, and we make allowances based on our
evaluation of all available information, including expected future cash flows,
fair value of collateral net of disposal costs and the secondary market value of
the financing receivables. After providing for specific incurred losses, we then
determine an allowance for losses that have been incurred in the balance of the
portfolio but cannot yet be identified to a specific loan or lease. This
estimate is prepared by each line of business every quarter and reviewed by
senior management.
GE 2004 ANNUAL REPORT
79
Portfolios
of smaller balance homogenous commercial and equipment loans which are not
individually evaluated for impairment are evaluated collectively for impairment.
This evaluation is based upon various statistical analyses which consider
historical losses and the current aging of the portfolio.
For
homogeneous loans and leases, delinquencies are an important indication of a
developing loss, and we monitor delinquency rates closely in all of our
portfolios.
Experience
is not available with new products; therefore, while we are developing that
experience, we set loss allowances based on our experience with the most closely
analogous products in our portfolio.
When
we repossess collateral in satisfaction of a commercial loan, we write the
receivable down against the allowance for losses. Repossessed collateral is
included in “All other assets” in the Statement of Financial Position and
carried at the lower of cost or estimated fair value less costs to sell.
The
underlying assumptions, estimates and assessments we use are continually updated
to reflect our view of current conditions. Changes in such estimates can
significantly affect the allowance and provision for losses. It is possible to
experience credit losses that are different from our current estimates.
Cash
and equivalents
Debt
securities with original maturities of three months or less are included in cash
equivalents unless designated as available-for-sale and classified as investment
securities.
Investment
securities
We
report investments in debt and marketable equity securities, and equity
securities at our insurance affiliates, at fair value based on quoted market
prices or, if quoted prices are not available, discounted expected cash flows
using market rates commensurate with credit quality and maturity of the
investment. Unrealized gains and losses on available-for-sale investment
securities are included in shareowners’ equity, net of applicable taxes and
other adjustments. We regularly review investment securities for impairment
based on criteria that include the extent to which cost exceeds market value,
the duration of that market decline, our intent and ability to hold to recovery
and the financial health and specific prospects for the issuer. Unrealized
losses that are other than temporary are recognized in earnings. For investment
securities designated as trading, unrealized gains and losses are recognized
currently in earnings. Realized gains and losses are accounted for on the
specific identification method.
Inventories
All
inventories are stated at the lower of cost or realizable values. Cost for
substantially all of GE’s U.S. inventories is determined on a last-in, first-out
(LIFO) basis. Cost of other GE inventories is determined on a first-in,
first-out (FIFO) basis. GECS inventories consist of finished products held for
sale, and cost is determined on a FIFO basis.
Intangible
assets
We
do not amortize goodwill, but test it annually for impairment using a fair value
approach at the “reporting unit” level. A reporting unit is the operating
segment, or a business one level below that operating segment (the “component”
level) if discrete financial information is prepared and regularly reviewed by
segment management. However, components are aggregated as a single reporting
unit if they have similar economic characteristics. We recognize an impairment
charge for any amount by which the carrying amount of a reporting unit’s
goodwill exceeds its fair value. We use discounted cash flows to establish fair
values. When available and as appropriate, we use comparative market multiples
to corroborate discounted cash flow results. When a business within a reporting
unit is disposed of, goodwill is allocated to the gain or loss on disposition
using the relative fair value method.
We
amortize the cost of other intangibles over their estimated useful lives unless
such lives are deemed indefinite. Amortizable intangible assets are tested for
impairment based on undiscounted cash flows and, if impaired, written down to
fair value based on either discounted cash flows or appraised values. Intangible
assets with indefinite lives are tested annually for impairment and written down
to fair value as required.
GECS
INSURANCE ACCOUNTING POLICIES
Accounting
policies for GECS insurance businesses follow.
PREMIUM
INCOME.
We report insurance premiums as earned income as follows:
|
•
|
For
short-duration insurance contracts (including property and casualty, and
accident and health insurance), we report premiums as earned income,
generally on a pro-rata basis, over the terms of the related agreements.
For retrospectively rated reinsurance contracts, we record premium
adjustments based on estimated losses and loss expenses, taking into
consideration both case and incurred-but-not-reported (IBNR) reserves.
|
|
•
|
For
traditional long-duration insurance contracts (including term and whole
life contracts and annuities payable for the life of the annuitant), we
report premiums as earned income when due.
|
|
•
|
For
investment contracts and universal life contracts, we report premiums
received as liabilities, not as revenues. Universal life contracts are
long-duration insurance contracts with terms that are not fixed and
guaranteed; for these contracts, we recognize revenues for assessments
against the policyholder’s account, mostly for mortality, contract
initiation, administration and surrender. Investment contracts are
contracts that have neither significant mortality nor significant
morbidity risk, including annuities payable for a determined period; for
these contracts, we recognize revenues on the associated investments, and
amounts credited to policyholder accounts are charged to
expense.
|
GE 2004 ANNUAL REPORT
80
DEFERRED
ACQUISITION COSTS.
Costs
that vary with and are directly related to the acquisition of new and renewal
insurance and investment contracts are deferred and amortized as
follows:
|
•
|
Short-duration
contracts—Acquisition costs consist of commissions, brokerage expenses and
premium taxes and are amortized ratably over the contract periods in which
the related premiums are earned.
|
|
•
|
Long-duration
contracts—Acquisition costs consist of first-year commissions in excess of
recurring renewal commissions, certain variable sales expenses and certain
support costs such as underwriting and policy issue expenses. For
traditional long-duration insurance contracts, we amortize these costs
over the respective contract periods in proportion to either anticipated
premium income, or, in the case of limited-payment contracts, estimated
benefit payments. For investment contracts and universal life contracts,
amortization of these costs is based on estimated gross profits and is
adjusted as those estimates are revised.
|
We
review deferred acquisition costs periodically for recoverability considering
anticipated investment income.
PRESENT
VALUE OF FUTURE PROFITS.
The actuarially determined present value of anticipated net cash flows to be
realized from insurance, annuity and investment contracts in force at the date
of acquisition of life insurance policies is recorded as the present value of
future profits and is amortized over the respective policy terms in a manner
similar to deferred acquisition costs. We adjust unamortized balances to reflect
experience and impairment, if any.
Accounting
changes
We
adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN)
46R,
Consolidation
of Variable Interest Entities (Revised)
,
on January 1, 2004, adding $2.6 billion of GECS assets and $2.1 billion of GECS
liabilities to our consolidated balance sheet as of that date. The most
significant entity consolidated was Penske Truck Leasing Co., L.P. (Penske),
which was previously accounted for using the equity method. Penske provides
full-service commercial truck leasing, truck rental and logistics services,
primarily in North America. This accounting change did not require an adjustment
to earnings and will not affect future earnings or cash flows.
We
adopted FIN 46,
Consolidation
of Variable Interest Entities
,
on July 1, 2003, and for the first time consolidated certain special purpose
entities. In total, transition resulted in a $372 million ($0.04 per share)
after-tax accounting charge to our third quarter 2003 net earnings, which is
reported in the caption “Cumulative effect of accounting changes.”
|
•
|
FIN
46 required that, if practicable, we consolidate assets and liabilities of
FIN 46 entities based on their carrying amounts. For us, such transition
losses were primarily associated with interest rate swaps that did not
qualify for hedge accounting before transition. Additional transition
losses arose from recording carrying amounts of assets and liabilities as
we eliminated certain previously recognized gains.
|
|
•
|
When
it was impracticable to determine carrying amounts, as defined, FIN 46
required assets and liabilities to be consolidated at their July 1, 2003,
fair values. We recognized a loss on consolidation of certain of these
entities because the fair value of associated liabilities, including the
fair values of interest rate swaps, exceeded independently appraised fair
values of their related assets.
|
|
•
|
For
assets that had been securitized using qualifying special purpose entities
(QSPEs), transition carrying amounts were based on hypothetical repurchase
of the assets at fair value. Transition effects associated with
consolidation of these assets and liabilities were insignificant, as were
transition effects of consolidating assets and liabilities associated with
issuance of guaranteed investment contracts
(GICs).
|
Further
information about these entities is provided in note 29.
Statement
of Financial Accounting Standards (SFAS) 143,
Accounting
for Asset Retirement Obligations
,
became effective for us on January 1, 2003. Under SFAS 143, obligations
associated with the retirement of long-lived assets are recorded when there is a
legal obligation to incur such costs. This amount is accounted for like an
additional element of cost, and, like other cost elements, is depreciated over
the corresponding asset’s useful life. On January 1, 2003, we recorded a
one-time, non-cash transition charge of $330 million ($215 million after tax, or
$0.02 per share), which is reported in the caption “Cumulative effect of
accounting changes.”
SFAS
143 primarily affects our accounting for costs associated with the future
retirement of facilities used for storage and production of nuclear fuel and,
with our acquisition of Amersham plc (Amersham) in April 2004,
radio-pharmaceuticals and special radio-labeled chemicals. See note 20.
In
2002, we adopted SFAS 142,
Goodwill
and Other Intangible Assets
,
under which goodwill is no longer amortized but is tested for impairment using a
fair value method. Using the required reporting unit basis, we tested all of our
goodwill for impairment as of January 1, 2002, and recorded a non-cash charge of
$1.204 billion ($1.015 billion after tax, or $0.10 per share). All of the charge
related to Equipment & Other Services. Factors contributing to the
impairment charge were the difficult economic environment in the information
technology sector and heightened price competition in the auto insurance
industry. No impairment charge had been required under our previous goodwill
impairment policy, which was based on undiscounted cash flows.
Also
in 2002, we adopted on a prospective basis the stock option expense provisions
of SFAS 123,
Accounting
for Stock-Based Compensation
.
A comparison of reported and pro-forma net earnings, including effects of
expensing stock options, follows.
|
(In
millions; per-share amounts in dollars)
|
2004
|
2003
|
2002
|
|
|
Net
earnings, as reported
|
$16,593
|
$15,002
|
$14,118
|
|
|
Earnings
per share, as reported
|
||||
|
Diluted
|
1.59
|
1.49
|
1.41
|
|
|
Basic
|
1.60
|
1.50
|
1.42
|
|
|
Stock
option expense
|
||||
|
included
in net earnings
|
93
|
81
|
27
|
|
|
Total
stock option expense
(a)
|
245
|
315
|
330
|
|
|
PRO-FORMA
EFFECTS
|
||||
|
Net
earnings, on pro-forma basis
|
16,441
|
14,768
|
13,815
|
|
|
Earnings
per share, on pro-forma basis
|
||||
|
Diluted
|
1.57
|
1.47
|
1.38
|
|
|
Basic
|
1.58
|
1.47
|
1.39
|
|
|
(a)
|
As
if we had applied SFAS 123 to expense stock options in all periods.
Included amounts we actually recognized in
earnings.
|
|||
Note
2
GE
Other Income
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
Gain
on dispositions of businesses, net
(a)
|
$
|
464
|
$
|
110
|
$
|
506
|
||||
|
Associated
companies
|
191
|
118
|
(170
|
)
|
||||||
|
Licensing
and royalty income
|
145
|
135
|
103
|
|||||||
|
Marketable
securities and bank deposits
|
92
|
75
|
31
|
|||||||
|
Other
items
(b)
|
184
|
207
|
636
|
|||||||
|
Total
|
$
|
1,076
|
$
|
645
|
$
|
1,106
|
||||
|
(a)
|
Included
$141 million gain on sale of our motors business in 2004 and $488 million
gain on the 2002 disposition of Global eXchange
Services.
|
|
(b)
|
Included
$571 million gain related to the 2002 Bravo exchange.
|
Note
3
GECS
Revenues from Services
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
Interest
on time sales and loans
|
$
|
18,956
|
$
|
17,196
|
$
|
14,068
|
||||
|
Premiums
earned by insurance businesses
|
16,126
|
18,661
|
16,484
|
|||||||
|
Operating
lease rentals
|
10,744
|
(a)
|
7,199
|
6,879
|
||||||
|
Investment
income
|
6,764
|
6,489
|
5,570
|
|||||||
|
Financing
leases
|
4,160
|
4,206
|
4,441
|
|||||||
|
Fees
|
3,860
|
3,162
|
2,943
|
|||||||
|
Other
income
|
7,326
|
(b)
|
5,138
|
5,018
|
||||||
|
Total
(c)
|
$
|
67,936
|
$
|
62,051
|
$
|
55,403
|
||||
|
(a)
|
Included
$2,593 million relating to the consolidation of Penske.
|
|||
|
(b)
|
Included
other operating revenue of Penske of $977 million and gain on sale of
Gecis of $396 million, partially offset by the loss on Genworth Financial,
Inc. (Genworth) initial public offering of $388 million.
|
|||
|
(c)
|
Included
$1,002 million in 2004 and $695 million in 2003 related to consolidated,
liquidating securitization entities.
|
|||
For
insurance businesses, the effects of reinsurance on premiums written and
premiums earned were as follows:
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
PREMIUMS
WRITTEN
|
||||||||||
|
Direct
|
$
|
9,463
|
$
|
11,640
|
$
|
11,659
|
||||
|
Assumed
|
8,666
|
9,616
|
9,409
|
|||||||
|
Ceded
|
(2,879
|
)
|
(2,654
|
)
|
(4,069
|
)
|
||||
|
Total
|
$
|
15,250
|
$
|
18,602
|
$
|
16,999
|
||||
|
PREMIUMS
EARNED
|
||||||||||
|
Direct
|
$
|
10,235
|
$
|
11,448
|
$
|
10,922
|
||||
|
Assumed
|
8,455
|
9,964
|
9,569
|
|||||||
|
Ceded
|
(
2,564
|
)
|
(2,751
|
)
|
(4,007
|
)
|
||||
|
Total
|
$
|
16,126
|
$
|
18,661
|
$
|
16,484
|
||||
Supplemental
Cost Information
Total
expenditures for research and development were $3,091 million, $2,656 million
and $2,631 million in 2004, 2003 and 2002, respectively. The portion we funded
was $2,443 million in 2004, $2,103 million in 2003 and $2,215 million in 2002.
Rental
expense under operating leases is shown below.
|
(In
millions)
|
2004
|
2003
|
2002
|
|
GE
|
$874
|
$733
|
$773
|
|
GECS
|
997
|
893
|
977
|
At
December 31, 2004, minimum rental commitments under noncancelable operating
leases aggregated $2,880 million and $4,838 million for GE and GECS,
respectively. Amounts payable over the next five years follow.
|
(In
millions)
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
GE
|
$601
|
$463
|
$376
|
$306
|
$255
|
|
GECS
|
782
|
768
|
633
|
543
|
509
|
GE’s
selling, general and administrative expenses totaled $12,001 million in 2004,
$9,870 million in 2003 and $9,131 million in 2002.
Note
5
Retiree
Health and Life Benefits
We
sponsor a number of retiree health and life insurance benefit plans (retiree
benefit plans). Principal retiree benefit plans are discussed below; other such
plans are not significant individually or in the aggregate.
PRINCIPAL
RETIREE BENEFIT PLANS
generally provide health and life insurance benefits to employees who retire
under the GE Pension Plan with 10 or more years of service. See note 6. Retirees
share in the cost of healthcare benefits. Certain benefit provisions are subject
to collective bargaining. These plans cover approximately 250,000 retirees and
dependents.
The
effect on operations of principal retiree benefit plans is shown in the
following table.
COST
OF PRINCIPAL RETIREE BENEFIT PLANS
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
Expected
return on plan assets
|
$
|
(149
|
)
|
$
|
(159
|
)
|
$
|
(170
|
)
|
|
|
Service
cost for benefits earned
|
210
|
307
|
277
|
|||||||
|
Interest
cost on benefit obligation
|
518
|
535
|
469
|
|||||||
|
Prior
service cost
|
298
|
191
|
96
|
|||||||
|
Net
actuarial loss recognized
|
60
|
127
|
78
|
|||||||
|
Retiree
benefit plans cost
|
$
|
937
|
$
|
1,001
|
$
|
750
|
||||
ACTUARIAL
ASSUMPTIONS.
The discount rates at December 31 were used to measure the year-end benefit
obligations and the earnings effects for the subsequent year. Actuarial
assumptions used to determine benefit obligations and earnings effects for
principal retiree benefit plans follow.
ACTUARIAL
ASSUMPTIONS
|
December
31
|
2004
|
2003
|
2002
|
2001
|
|||||||||
|
Discount
rate
(a)
|
5.75
|
%
|
6.0
|
%
|
6.75
|
%
|
7.25
|
%
|
|||||
|
Compensation
increases
|
5
|
5
|
5
|
5
|
|||||||||
|
Expected
return on assets
|
8.5
|
8.5
|
8.5
|
9.5
|
|||||||||
|
Initial
healthcare trend rate
(b)
|
10.3
|
10.5
|
13
|
12
|
|||||||||
|
(a)
|
Weighted
average discount rates for determination of 2004 and 2003 costs were 5.9%
and 6.4%, respectively.
|
||||
|
(b)
|
For
2004, gradually declining to 5% for 2013 and thereafter.
|
||||
To
determine the expected long-term rate of return on retiree life plan assets, we
consider the current and expected asset allocations, as well as historical and
expected returns on various categories of plan assets. We apply our expected
rate of return to a market-related value of assets, which stabilizes variability
in assets to which we apply that expected return.
We
amortize experience gains and losses, as well as the effects of changes in
actuarial assumptions and plan provisions, over a period no longer than the
average future service of employees.
FUNDING
POLICY
for retiree health benefits is generally to pay covered expenses as they are
incurred. We fund retiree life insurance benefits at our discretion.
Changes
in the accumulated postretirement benefit obligation for retiree benefit plans
follow.
ACCUMULATED
POSTRETIREMENT BENEFIT OBLIGATION (APBO)
|
(In
millions)
|
2004
|
2003
|
|||||
|
Balance
at January 1
|
$
|
9,701
|
$
|
7,435
|
|||
|
Service
cost for benefits earned
|
210
|
307
|
|||||
|
Interest
cost on benefit obligation
|
518
|
535
|
|||||
|
Participant
contributions
|
37
|
33
|
|||||
|
Plan
amendments
(a)
|
—
|
2,483
|
|||||
|
Actuarial
gain
|
(509
|
)
|
(416
|
)
|
|||
|
Benefits
paid
|
(797
|
)
|
(720
|
)
|
|||
|
Other
|
90
|
44
|
|||||
|
Balance
at December 31
(b)
|
$
|
9,250
|
$
|
9,701
|
|||
|
(a)
|
Related
to changes in retiree benefit plans resulting from collective bargaining
agreements that extend through June 2007.
|
||
|
(b)
|
The
APBO for the retiree health plans was $6,979 million and $7,514 million at
year-end 2004 and 2003, respectively.
|
||
Increasing
or decreasing the healthcare cost trend rates by 1.0 percentage point would have
had an insignificant effect on the December 31, 2004, accumulated postretirement
benefit obligation and the annual cost of retiree health plans. Our principal
retiree benefit plans are collectively bargained and have provisions that limit
our per capita costs.
Changes
in the fair value of assets for retiree benefit plans follow.
FAIR
VALUE OF ASSETS
|
(In
millions)
|
2004
|
2003
|
|||||
|
Balance
at January 1
|
$
|
1,626
|
$
|
1,426
|
|||
|
Actual
gain on plan assets
|
160
|
309
|
|||||
|
Employer
contributions
|
626
|
565
|
|||||
|
Participant
contributions
|
37
|
33
|
|||||
|
Benefits
paid
|
(797
|
)
|
(720
|
)
|
|||
|
Other
|
—
|
13
|
|||||
|
Balance
at December 31
|
$
|
1,652
|
$
|
1,626
|
|||
We
expect to contribute approximately $710 million in 2005 to cover unfunded
healthcare benefits.
Plan
assets are held in trust, as follows:
PLAN
ASSET ALLOCATION
|
|
2004
|
2003
|
||||||||
|
December
31
|
Target
allocation
|
Actual
allocation
|
Actual
allocation
|
|||||||
|
Equity
securities
|
62-74
|
%
|
71
|
%
|
73
|
%
|
||||
|
Debt
securities
|
20-26
|
19
|
20
|
|||||||
|
Real
estate
|
1-5
|
1
|
1
|
|||||||
|
Other
|
3-9
|
9
|
6
|
|||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||
Plan
fiduciaries set investment policies and strategies for the trust. Long-term
strategic investment objectives include preserving the funded status of the
trust and balancing risk and return. The plan fiduciaries oversee the investment
allocation process, which includes selecting investment managers, setting
long-term strategic targets and monitoring asset allocations. Target allocation
ranges are guidelines, not limitations, and occasionally plan fiduciaries will
approve allocations above or below a target range.
Trust
assets invested in short-term securities must be invested in securities rated
A1/P1 or better. GE common stock represented 6.2% and 5.4% of trust assets at
year-end 2004 and 2003, respectively, and is subject to a statutory limit when
it reaches 10% of total trust assets.
Our
recorded assets and liabilities for retiree benefit plans are as follows:
RETIREE
BENEFIT ASSET (LIABILITY)
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Funded
status
(a)
|
$
|
(7,598
|
)
|
$
|
(8,075
|
)
|
|
|
Unrecognized
prior service cost
|
2,747
|
3,045
|
|||||
|
Unrecognized
net actuarial loss
|
1,004
|
1,584
|
|||||
|
Net
liability recognized
|
$
|
(3,847
|
)
|
$
|
(3,446
|
)
|
|
|
Amounts
recorded in the Statement
|
|||||||
|
of
Financial Position:
|
|||||||
|
Retiree
life plans prepaid asset
|
$
|
38
|
$
|
81
|
|||
|
Retiree
health plans liability
|
(3,885
|
)
|
(3,527
|
)
|
|||
|
Net
liability recognized
|
$
|
(3,847
|
)
|
$
|
(3,446
|
)
|
|
|
(a)
|
Fair
value of assets less APBO, as shown in the preceding
tables.
|
||
Estimated
future benefit payments are as follows:
ESTIMATED
FUTURE BENEFIT PAYMENTS
|
(In
millions)
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010-
2014
|
|||||||||||||
|
|
$
|
875
|
$
|
850
|
$
|
900
|
$
|
850
|
$
|
800
|
$
|
3,600
|
Effective
April 1, 2004, we included the effects of the U.S. Medicare Prescription Drug,
Improvement and Modernization Act of 2003 in our consolidated financial
statements, reducing APBO by $583 million without a significant effect on our
2004 operations.
Note
6
Pension
Benefits
We
sponsor a number of pension plans. Principal pension plans, together with
affiliate and certain other pension plans (other pension plans), detailed in
this note represent about 99% of our total pension assets.
PRINCIPAL
PENSION PLANS
are the GE Pension Plan and the GE Supplementary Pension Plan.
The
GE Pension Plan provides benefits to certain U.S. employees based on the greater
of a formula recognizing career earnings or a formula recognizing length of
service and final average earnings. Certain benefit provisions are subject to
collective bargaining.
The
GE Supplementary Pension Plan is an unfunded plan providing supplementary
retirement benefits primarily to higher-level, longer-service U.S. employees.
OTHER
PENSION PLANS
in 2004 included 34 U.S. and non-U.S. pension plans with pension assets or
obligations greater than $50 million. These defined benefit plans generally
provide benefits to employees based on formulas recognizing length of service
and earnings.
PENSION
PLAN PARTICIPANTS
|
|
Principal
|
Other
|
|||||
|
|
pension
|
pension
|
|||||
|
(In
thousands)
|
plans
|
plans
|
|||||
|
Active
employees
|
141
|
47
|
|||||
|
Vested
former employees
|
174
|
35
|
|||||
|
Retirees
and beneficiaries
|
205
|
22
|
|||||
|
Total
|
520
|
104
|
|||||
Details
of the cost of our pension plans follow.
COST
OF PENSION PLANS
|
Total
|
Principal
pension plans
|
Other
pension plans
|
||||||||||||||||||||||||||
|
(In
millions)
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
|||||||||||||||||||
|
Expected
return on plan assets
|
$
|
(4,258
|
)
|
$
|
(4,245
|
)
|
$
|
(4,245
|
)
|
$
|
(3,958
|
)
|
$
|
(4,072
|
)
|
$
|
(4,084
|
)
|
$
|
(300
|
)
|
$
|
(173
|
)
|
$
|
(161
|
)
|
|
|
Service
cost for benefits earned
|
1,438
|
1,375
|
1,245
|
1,178
|
1,213
|
1,107
|
260
|
162
|
138
|
|||||||||||||||||||
|
Interest
cost on benefit obligation
|
2,516
|
2,390
|
2,288
|
2,199
|
2,180
|
2,116
|
317
|
210
|
172
|
|||||||||||||||||||
|
Prior
service cost
|
317
|
252
|
221
|
311
|
248
|
217
|
6
|
4
|
4
|
|||||||||||||||||||
|
Net
actuarial loss (gain) recognized
|
242
|
(544
|
)
|
(905
|
)
|
146
|
(609
|
)
|
(912
|
)
|
96
|
65
|
7
|
|||||||||||||||
|
Total
cost
|
$
|
255
|
$
|
(772
|
)
|
$
|
(1,396
|
)
|
$
|
(124
|
)
|
$
|
(1,040
|
)
|
$
|
(1,556
|
)
|
$
|
379
|
$
|
268
|
$
|
160
|
|||||
ACTUARIAL
ASSUMPTIONS
are described below. The discount rates at December 31 were used to measure the
year-end benefit obligations and the earnings effects for the subsequent
year.
ACTUARIAL
ASSUMPTIONS
|
Principal
pension plans
|
Other
pension plans (weighted average)
|
||||||||||||||||||||||||
|
December
31
|
2004
|
2003
|
2002
|
2001
|
2004
|
2003
|
2002
|
2001
|
|||||||||||||||||
|
Discount
rate
|
5.75
|
%
|
6.00
|
%
|
6.75
|
%
|
7.25
|
%
|
5.28
|
%
|
5.54
|
%
|
5.87
|
%
|
6.55
|
%
|
|||||||||
|
Compensation
increases
|
5.00
|
5.00
|
5.00
|
5.00
|
4.02
|
3.85
|
3.90
|
4.27
|
|||||||||||||||||
|
Expected
return on assets
|
8.50
|
8.50
|
8.50
|
9.50
|
7.61
|
7.61
|
7.62
|
8.19
|
|||||||||||||||||
To
determine the expected long-term rate of return on pension plan assets, we
consider the current and expected asset allocations, as well as historical and
expected returns on various categories of plan assets. For the principal pension
plans, we apply our expected rate of return to a market-related value of assets,
which stabilizes variability in assets to which we apply that expected return.
We
amortize experience gains and losses and effects of changes in actuarial
assumptions and plan provisions over a period no longer than the average future
service of employees.
FUNDING
POLICY
for the GE Pension Plan is to contribute amounts sufficient to meet minimum
funding requirements as set forth in employee benefit and tax laws plus such
additional amounts as we may determine to be appropriate. We have not made
contributions to the GE Pension Plan since 1987. We will not make any
contributions to the GE Pension Plan in 2005; any GE contribution to that plan
would require payment of excise taxes and would not be deductible for income tax
purposes. In 2005, we expect to pay approximately $115 million for the GE
Supplementary Pension Plan benefit payments and administrative expenses ($102
million in 2004), and expect to contribute approximately $340 million to other
pension plans ($370 million in 2004).
BENEFIT
OBLIGATIONS
are described in the following table. Accumulated and projected benefit
obligations (ABO and PBO) represent the obligations of a pension plan for past
service as of the measurement date. ABO is the present value of benefits earned
to date with benefits computed based on current compensation levels. PBO is ABO
increased to reflect expected future compensation.
PROJECTED
BENEFIT OBLIGATION
|
Principal
pension plans
|
Other
pension plans
|
||||||||||||
|
(In
millions)
|
2004
|
2003
|
2004
|
2003
|
|||||||||
|
Balance
at January 1
|
$
|
37,827
|
$
|
33,266
|
$
|
4,863
|
$
|
3,475
|
|||||
|
Service
cost for benefits earned
|
1,178
|
1,213
|
260
|
162
|
|||||||||
|
Interest
cost on benefit obligations
|
2,199
|
2,180
|
317
|
210
|
|||||||||
|
Participant
contributions
|
163
|
169
|
31
|
25
|
|||||||||
|
Plan
amendments
|
—
|
654
|
15
|
2
|
|||||||||
|
Actuarial
loss
(a)
|
969
|
2,754
|
371
|
164
|
|||||||||
|
Benefits
paid
|
(2,367
|
)
|
(2,409
|
)
|
(230
|
)
|
(148
|
)
|
|||||
|
Acquired
plans
|
—
|
—
|
1,169
|
551
|
|||||||||
|
Exchange
rate adjustments
|
|||||||||||||
|
and
other
|
—
|
—
|
448
|
422
|
|||||||||
|
Balance
at December 31
(b)
|
$
|
39,969
|
$
|
37,827
|
$
|
7,244
|
$
|
4,863
|
|||||
|
(a)
|
Principally
associated with discount rate changes for principal pension
plans.
|
||||
|
(b)
|
The
PBO for the GE Supplementary Pension Plan was $3.3 billion and $2.7
billion at year-end 2004 and 2003,
respectively.
|
||||
ABO
balances for our pension plans follow.
ACCUMULATED
BENEFIT OBLIGATION
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
GE
Pension Plan
|
$
|
35,296
|
$
|
33,859
|
|||
|
GE
Supplementary Pension Plan
|
1,916
|
1,619
|
|||||
|
Other
pension plans
|
6,434
|
4,422
|
|||||
PLANS
WITH ASSETS LESS THAN ABO
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Funded
plans with assets less than ABO:
|
|||||||
|
Plan
assets
|
$
|
3,943
|
$
|
2,640
|
|||
|
Accumulated
benefit obligations
|
5,075
|
3,460
|
|||||
|
Projected
benefit obligations
|
5,825
|
3,852
|
|||||
|
Unfunded
plans covered by book reserves:
(a)
|
|||||||
|
Accrued
pension liability
|
2,948
|
2,456
|
|||||
|
Accumulated
benefit obligations
|
2,628
|
2,201
|
|||||
|
Projected
benefit obligations
|
4,001
|
3,330
|
|||||
|
(a)
|
Primarily
related to the GE Supplementary Pension Plan.
|
||
Pension
Plan Assets are described below.
FAIR
VALUE OF ASSETS
|
Principal
pension plans
|
Other
pension plans
|
||||||||||||
|
(In
millions)
|
2004
|
2003
|
2004
|
2003
|
|||||||||
|
Balance
at January 1
|
$
|
43,879
|
$
|
37,811
|
$
|
3,035
|
$
|
2,064
|
|||||
|
Actual
gain on plan assets
|
4,888
|
8,203
|
292
|
264
|
|||||||||
|
Employer
contributions
|
102
|
105
|
370
|
183
|
|||||||||
|
Participant
contributions
|
163
|
169
|
31
|
25
|
|||||||||
|
Benefits
paid
|
(2,367
|
)
|
(2,409
|
)
|
(230
|
)
|
(148
|
)
|
|||||
|
Acquired
plans
|
—
|
—
|
868
|
373
|
|||||||||
|
Exchange
rate adjustments
|
|||||||||||||
|
and
other
|
—
|
—
|
286
|
274
|
|||||||||
|
Balance
at December 31
|
$
|
46,665
|
$
|
43,879
|
$
|
4,652
|
$
|
3,035
|
|||||
Our
pension plan assets are held in trust, as follows:
PLAN
ASSET ALLOCATION
|
Principal
pension plans
|
||||||||||
|
2004
|
2003
|
|||||||||
|
|
Target
|
Actual
|
Actual
|
|||||||
|
December
31
|
Allocation
|
Allocation
|
Allocation
|
|||||||
|
Equity
securities
|
51-63
|
%
|
63
|
%
|
60
|
%
|
||||
|
Debt
securities
|
21-27
|
19
|
20
|
|||||||
|
Real
estate
|
4-8
|
6
|
7
|
|||||||
|
Private
equities
|
5-11
|
6
|
7
|
|||||||
|
Other
|
3-7
|
6
|
6
|
|||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||
Plan
fiduciaries of the GE Pension Plan set investment policies and strategies for
the GE Pension Trust. Long-term strategic investment objectives include
preserving the funded status of the trust and balancing risk and return. These
plan fiduciaries oversee the investment allocation process, which includes
selecting investment managers, commissioning periodic asset-liability studies,
setting long-term strategic targets and monitoring asset allocations. Target
allocation ranges are guidelines, not limitations, and occasionally plan
fiduciaries will approve allocations above or below a target range.
GE
Pension Trust assets are invested subject to the following additional
guidelines:
|
•
|
Short-term
securities must be rated A1/P1 or better,
|
|
•
|
Real
estate may not exceed 25% of total assets (6% of trust assets at
December
|
|
•
|
Investments
in securities not freely tradable may not exceed 20% of total assets (11%
of trust assets at December 31, 2004), and
|
|
•
|
GE
stock is limited by statute when it reaches 10% of total trust assets
(7.0% and 6.3% at the end of 2004 and 2003, respectively).
|
Our
recorded assets and liabilities for pension plans are as follows:
PREPAID
PENSION ASSET (LIABILITY)
|
|
Principal
pension plans
|
Other
pension plans
|
|||||||||||
|
December
31 (In millions)
|
2004
|
2003
|
2004
|
2003
|
|||||||||
|
Funded
status
(a)
|
$
|
6,696
|
$
|
6,052
|
$
|
(2,592
|
)
|
$
|
(1,828
|
)
|
|||
|
Unrecognized
prior
|
|||||||||||||
|
service
cost
|
1,260
|
1,571
|
45
|
36
|
|||||||||
|
Unrecognized
net
|
|||||||||||||
|
actuarial
loss
|
7,481
|
7,588
|
1,662
|
1,184
|
|||||||||
|
Net
amount recognized
|
$
|
15,437
|
$
|
15,211
|
$
|
(885
|
)
|
$
|
(608
|
)
|
|||
|
Amounts
recorded in the
|
|||||||||||||
|
Statement
of Financial
|
|||||||||||||
|
Position:
|
|||||||||||||
|
Prepaid
pension asset
|
$
|
17,629
|
$
|
17,038
|
$
|
158
|
$
|
20
|
|||||
|
Accrued
pension
|
|||||||||||||
|
obligation
(b)
|
(2,192
|
)
|
(1,827
|
)
|
(2,061
|
)
|
(1,040
|
)
|
|||||
|
Intangible
assets
|
—
|
—
|
57
|
49
|
|||||||||
|
Accumulated
other
|
|||||||||||||
|
comprehensive
|
|||||||||||||
|
income
|
—
|
—
|
961
|
363
|
|||||||||
|
Net
amount recognized
|
$
|
15,437
|
$
|
15,211
|
$
|
(885
|
)
|
$
|
(608
|
)
|
|||
|
(a)
|
Fair
value of assets less PBO, as shown in the preceding
tables
|
||||
|
(b)
|
For
principal pension plans, represents the GE Supplementary Pension Plan
liability.
|
||||
Estimated
future benefit payments for our pension plans are as follows:
ESTIMATED
FUTURE BENEFIT PAYMENTS
|
|
Principal
|
Other
|
|||||
|
|
pension
|
pension
|
|||||
|
(In
millions)
|
plans
|
plans
|
|||||
|
2005
|
$
|
2,350
|
$
|
250
|
|||
|
2006
|
2,400
|
250
|
|||||
|
2007
|
2,400
|
275
|
|||||
|
2008
|
2,500
|
275
|
|||||
|
2009
|
2,500
|
300
|
|||||
|
2010-2014
|
13,500
|
1,600
|
|||||
Note
7
Provision
for Income Taxes
|
(In
millions)
|
2004
|
|
2003
|
|
2002
|
|||||
|
GE
|
||||||||||
|
Current
tax expense
|
$
|
2,148
|
$
|
2,468
|
$
|
2,833
|
||||
|
Deferred
tax expense (benefit)
|
||||||||||
|
from
temporary differences
|
(175
|
)
|
389
|
1,004
|
||||||
|
|
1,973
|
2,857
|
3,837
|
|||||||
|
GECS
|
||||||||||
|
Current
tax expense (benefit)
|
3,067
|
720
|
(1,488
|
)
|
||||||
|
Deferred
tax expense (benefit)
|
||||||||||
|
from
temporary differences
|
(1,527
|
)
|
738
|
1,409
|
||||||
|
|
1,540
|
1,458
|
(79
|
)
|
||||||
|
CONSOLIDATED
|
||||||||||
|
Current
tax expense
|
5,215
|
3,188
|
1,345
|
|||||||
|
Deferred
tax expense (benefit) from temporary differences
|
(1,702 | ) |
1,127
|
2,413
|
||||||
|
Total
|
$
|
3,513
|
$
|
4,315
|
$
|
3,758
|
||||
GE
and GECS file a consolidated U.S. federal income tax return. The GECS provision
for current tax expense includes its effect on the consolidated return.
Consolidated
current tax expense includes amounts applicable to U.S. federal income taxes of
$1,839 million, $1,555 million and $137 million in 2004, 2003 and 2002,
respectively, and amounts applicable to non-U.S. jurisdictions of $3,135
million, $1,304 million and $1,061 million in 2004, 2003 and 2002, respectively.
Consolidated deferred taxes related to U.S. federal income taxes was income of
$1,986 million in 2004 compared with expense of $685 million and $2,112 million
in 2003 and 2002, respectively.
Deferred
income tax balances reflect the effects of temporary differences between the
carrying amounts of assets and liabilities and their tax bases as well as from
net operating loss and tax credit carryforwards, and are stated at enacted tax
rates expected to be in effect when taxes are actually paid or recovered.
Deferred income tax assets represent amounts available to reduce income taxes
payable on taxable income in future years. We evaluate the recoverability of
these future tax deductions by assessing the adequacy of future expected taxable
income from all sources, including reversal of temporary differences and
forecasted operating earnings. See note 21 for details.
We
have not provided U.S. deferred taxes on cumulative earnings of non-U.S.
affiliates and associated companies that have been reinvested indefinitely.
These earnings relate to ongoing operations and, at December 31, 2004, were
approximately $29 billion. Because of the availability of U.S. foreign tax
credits, it is not practicable to determine the U.S. federal income tax
liability that would be payable if such earnings were not reinvested
indefinitely. Deferred taxes are provided for earnings of non-U.S. affiliates
and associated companies when we plan to remit those earnings.
The
American Jobs Creation Act of 2004 (the Act) allows U.S. companies a one-time
opportunity to repatriate non-U.S. earnings through 2005 at a 5.25% rate of tax
rather than the normal U.S. tax rate of 35%, provided that certain criteria,
including qualified U.S. reinvestment, are met. Available tax credits related to
the repatriation would be reduced under provisions of the Act. While GE
continues to evaluate the Act, because the vast majority of our permanently
reinvested non-U.S. earnings have been deployed in active business operations,
and it is therefore unlikely that we will repatriate any material portion of our
permanently reinvested non-U.S. earnings, no incremental tax provision effect
has been recorded through December 31, 2004. If we were to repatriate up to
$3,000 million of indefinitely reinvested earnings in 2005, incremental taxes
would be provided at less than a 5% rate.
Consolidated
U.S. income before taxes and the cumulative effect of accounting changes was
$8.6 billion in 2004, $11.2 billion in 2003 and $12.0 billion in 2002. The
corresponding amounts for non-U.S.-based operations were $11.5 billion in 2004,
$8.7 billion in 2003 and $6.9 billion in 2002.
A
reconciliation of the U.S. federal statutory income tax rate to the actual
income tax rate is provided below.
RECONCILIATION
OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO ACTUAL INCOME TAX
RATE
|
Consolidated
|
GE
|
GECS
|
||||||||||||||||||||||||||
|
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
|||||||||||||||||||
|
U.S.
federal statutory income tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||||||||
|
Increase
(reduction) in rate resulting from:
|
||||||||||||||||||||||||||||
|
Inclusion
of after-tax earnings of GECS
|
||||||||||||||||||||||||||||
|
in
before-tax earnings of GE
|
—
|
—
|
—
|
(15.4
|
)
|
(14.7
|
)
|
(8.5
|
)
|
—
|
—
|
—
|
||||||||||||||||
|
Tax-exempt
income
|
(1.0
|
)
|
(1.1
|
)
|
(1.2
|
)
|
—
|
—
|
—
|
(2.0
|
)
|
(2.4
|
)
|
(5.1
|
)
|
|||||||||||||
|
Tax
on global activities including exports
|
(12.4
|
)
|
(9.0
|
)
|
(10.6
|
)
|
(5.8
|
)
|
(4.3
|
)
|
(5.2
|
)
|
(14.6
|
)
|
(10.8
|
)
|
(22.5
|
)
|
||||||||||
|
IRS
settlements of Lockheed Martin tax-free
|
||||||||||||||||||||||||||||
|
exchange/Puerto
Rico subsidiary loss
|
(3.4
|
)
|
—
|
—
|
(3.7
|
)
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
All
other—net
|
(0.7
|
)
|
(3.2
|
)
|
(3.3
|
)
|
0.5
|
(0.5
|
)
|
(1.1
|
)
|
(2.5)
|
)
|
(6.0)
|
)
|
(9.1
|
)
|
|||||||||||
|
|
(17.5
|
)
|
(13.3
|
)
|
(15.1
|
)
|
(24.4
|
)
|
(19.5
|
)
|
(14.8
|
)
|
(19.1
|
)
|
(19.2
|
)
|
(36.7
|
)
|
||||||||||
|
Actual
income tax rate
|
17.5
|
%
|
21.7
|
%
|
19.9
|
%
|
10.6
|
%
|
15.5
|
%
|
20.2
|
%
|
15.9
|
%
|
15.8
|
%
|
(1.7
|
)%
|
||||||||||
Note
8
Earnings
Per Share Information
|
2004
|
2003
|
2002
|
|||||||||||||||||
|
(In
millions; per-share amounts in dollars)
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
|||||||||||||
|
CONSOLIDATED
OPERATIONS
|
|||||||||||||||||||
|
Earnings
before accounting changes
|
$
|
16,593
|
$
|
16,593
|
$
|
15,589
|
$
|
15,589
|
$
|
15,133
|
$
|
15,133
|
|||||||
|
Adjustments
to earnings before accounting changes
(a)
|
(1
|
)
|
—
|
1
|
—
|
13
|
—
|
||||||||||||
|
Earnings
before accounting changes for
per-share calculation
|
16,592
|
16,593
|
15,590
|
15,589
|
15,146
|
15,133
|
|||||||||||||
|
Cumulative
effect of accounting changes
|
—
|
—
|
(587
|
)
|
(587
|
)
|
(1,015
|
)
|
(1,015
|
)
|
|||||||||
|
Net
earnings available for per-share calculation
|
$
|
16,592
|
$
|
16,593
|
$
|
15,003
|
$
|
15,002
|
$
|
14,131
|
$
|
14,118
|
|||||||
|
AVERAGE
EQUIVALENT SHARES
|
|||||||||||||||||||
|
Shares
of GE common stock outstanding
|
10,400
|
10,400
|
10,019
|
10,019
|
9,947
|
9,947
|
|||||||||||||
|
Employee
compensation-related shares,
including stock options |
45
|
—
|
56
|
—
|
81
|
—
|
|||||||||||||
|
Total
average equivalent shares
|
10,445
|
10,400
|
10,075
|
10,019
|
10,028
|
9,947
|
|||||||||||||
|
PER-SHARE
AMOUNTS
|
|||||||||||||||||||
|
Earnings
before accounting changes
|
$
|
1.59
|
$
|
1.60
|
$
|
1.55
|
$
|
1.56
|
$
|
1.51
|
$
|
1.52
|
|||||||
|
Cumulative
effect of accounting changes
|
—
|
—
|
(0.06
|
)
|
(0.06
|
)
|
(0.10
|
)
|
(0.10
|
)
|
|||||||||
|
Net
earnings per share
|
$
|
1.59
|
$
|
1.60
|
$
|
1.49
|
$
|
1.50
|
$
|
1.41
|
$
|
1.42
|
|||||||
(a)
Included dividend equivalents and dilutive effects of subsidiary-issued
stock-based awards.
Note
9
Investment
Securities
|
2004
|
2003
|
||||||||||||||||||||||||
|
December
31 (In millions)
|
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Estimated
fair
value
|
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Estimated
fair
value
|
|||||||||||||||||
|
GE
|
|||||||||||||||||||||||||
|
Available-for-sale
securities
|
|||||||||||||||||||||||||
|
Debt—U.S.
corporate
|
$
|
350
|
$
|
—
|
$
|
—
|
$
|
350
|
$
|
350
|
$
|
—
|
$
|
(28
|
)
|
$
|
322
|
||||||||
|
Equity
|
58
|
8
|
(3
|
)
|
63
|
42
|
18
|
(2
|
)
|
58
|
|||||||||||||||
|
GE
securities
|
408
|
8
|
(3
|
)
|
413
|
392
|
18
|
(30
|
)
|
380
|
|||||||||||||||
|
GECS
|
|||||||||||||||||||||||||
|
Available-for-sale
securities
|
|||||||||||||||||||||||||
|
Debt:
|
|||||||||||||||||||||||||
|
U.S.
corporate
|
51,739
|
2,921
|
(565
|
)
|
54,095
|
52,299
|
2,558
|
(684
|
)
|
54,173
|
|||||||||||||||
|
State
and municipal
|
12,779
|
337
|
(35
|
)
|
13,081
|
12,707
|
382
|
(23
|
)
|
13,066
|
|||||||||||||||
|
Mortgage-backed
|
15,314
|
235
|
(75
|
)
|
15,474
|
13,441
|
271
|
(93
|
)
|
13,619
|
|||||||||||||||
|
Asset-backed
|
11,584
|
291
|
(52
|
)
|
11,823
|
12,503
|
250
|
(84
|
)
|
12,669
|
|||||||||||||||
|
Corporate—non-U.S.
|
17,431
|
788
|
(45
|
)
|
18,174
|
14,720
|
557
|
(89
|
)
|
15,188
|
|||||||||||||||
|
Government—non-U.S.
|
9,722
|
274
|
(27
|
)
|
9,969
|
8,558
|
169
|
(65
|
)
|
8,662
|
|||||||||||||||
|
U.S.
government and federal agency
|
1,448
|
84
|
(3
|
)
|
1,529
|
1,616
|
58
|
(19
|
)
|
1,655
|
|||||||||||||||
|
Equity
|
2,059
|
413
|
(25
|
)
|
2,447
|
2,526
|
393
|
(117
|
)
|
2,802
|
|||||||||||||||
|
Trading
securities
|
(a
|
)
|
(a
|
)
|
(a
|
)
|
8,560
|
(a
|
)
|
(a
|
)
|
(a
|
)
|
7,055
|
|||||||||||
|
GECS
securities
|
122,076
|
5,343
|
(827
|
)
|
135,152
|
(b)
|
118,370
|
4,638
|
(1,174
|
)
|
128,889
|
(b)
|
|||||||||||||
|
ELIMINATIONS
|
(17
|
)
|
(12
|
)
|
—
|
(29
|
)
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Total
|
$
|
122,467
|
$
|
5,339
|
$
|
(830
|
)
|
$
|
135,536
|
$
|
118,762
|
$
|
4,656
|
$
|
(1,204
|
)
|
$
|
129,269
|
|||||||
|
(a)
|
Not
applicable.
|
||||||||
|
(b)
|
Included
$1,147 million in 2004 and $1,566 million in 2003 of debt securities
related to consolidated, liquidating securitization
entities.
|
||||||||
Investment
securities included in our general account portfolio above and designated as
trading represent actively managed debt and equity securities of certain
non-U.S. insurance contractholders who retain the related risks and rewards,
except in the event of our bankruptcy or liquidation. Changes in unrealized
gains and losses on these securities are recognized currently in earnings.
During 2004, the net gain on investment securities classified as trading and
included in earnings was $293 million.
A
substantial portion of our mortgage-backed securities are collateralized by U.S.
residential mortgages.
Following
are estimated fair value of, and gross unrealized losses on, our
available-for-sale investment securities.
|
Less
than 12 months
|
12
months or more
|
||||||||||||
|
December
31 (In millions)
|
Estimated
fair
value
|
Gross
unrealized
losses
|
Estimated
fair
value
|
Gross
unrealized
losses
|
|||||||||
|
2004
|
|||||||||||||
|
Debt:
|
|||||||||||||
|
U.S.
corporate
|
$
|
8,092
|
$
|
(212
|
)
|
$
|
2,347
|
$
|
(353
|
)
|
|||
|
State
and municipal
|
3,603
|
(33
|
)
|
63
|
(2
|
)
|
|||||||
|
Mortgage-backed
|
5,572
|
(55
|
)
|
563
|
(20
|
)
|
|||||||
|
Asset-backed
|
2,501
|
(20
|
)
|
485
|
(32
|
)
|
|||||||
|
Corporate—non-U.S.
|
4,235
|
(26
|
)
|
822
|
(19
|
)
|
|||||||
|
Government—non-U.S.
|
1,370
|
(10
|
)
|
1,142
|
(17
|
)
|
|||||||
|
U.S.
government and
|
|||||||||||||
|
federal
agency
|
237
|
(2
|
)
|
43
|
(1
|
)
|
|||||||
|
Equity
|
253
|
(20
|
)
|
71
|
(8
|
)
|
|||||||
|
Total
|
$
|
25,863
|
$
|
(378
|
)
|
$
|
5,536
|
$
|
(452
|
)
|
|||
|
2003
|
|||||||||||||
|
Debt:
|
|||||||||||||
|
U.S.
corporate
|
$
|
7,915
|
$
|
(255
|
)
|
$
|
2,360
|
$
|
(457
|
)
|
|||
|
State
and municipal
|
1,620
|
(23
|
)
|
2
|
—
|
||||||||
|
Mortgage-backed
|
4,299
|
(86
|
)
|
135
|
(7
|
)
|
|||||||
|
Asset-backed
|
2,279
|
(26
|
)
|
1,523
|
(58
|
)
|
|||||||
|
Corporate—non-U.S.
|
2,925
|
(71
|
)
|
123
|
(18
|
)
|
|||||||
|
Government—non-U.S.
|
3,317
|
(60
|
)
|
24
|
(5
|
)
|
|||||||
|
U.S.
government and
|
|||||||||||||
|
federal
agency
|
256
|
(19
|
)
|
—
|
—
|
||||||||
|
Equity
|
402
|
(81
|
)
|
105
|
(38
|
)
|
|||||||
|
Total
|
$
|
23,013
|
$
|
(621
|
)
|
$
|
4,272
|
$
|
(583
|
)
|
|||
Securities
in an unrealized loss position for 12 months or more at December 31, 2004 and
2003, included investment securities collateralized by commercial aircraft,
primarily Enhanced Equipment Trust Certificates, with unrealized losses of $291
million and $355 million, respectively, and estimated fair values of $941
million and $1,072 million, respectively. We review all of our investment
securities routinely for other than temporary impairment as described on page
80. In accordance with that policy, we provide for all amounts that we do not
expect either to collect in accordance with the contractual terms of the
instruments or to recover based on underlying collateral values. For our
securities collateralized by commercial aircraft, that review includes our best
estimates of the securities’ cash flows, underlying collateral values, and
assessment of whether the borrower is in compliance with terms and conditions.
We believe that our securities, which are current on all payment terms, are in
an unrealized loss position because of ongoing negative market reaction to
commercial airline industry difficulties. We do not anticipate changes in the
timing and amount of estimated cash flows and we expect full recovery of our
amortized cost. Should our cash flow expectation prove to be incorrect, the
current aggregate market values of aircraft collateral, based on information
from independent appraisers, exceeded totals of both the market values and the
amortized cost of our securities at December 31, 2004.
CONTRACTUAL
MATURITIES OF GECS INVESTMENT IN AVAILABLE- FOR-SALE DEBT SECURITIES (EXCLUDING
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES)
|
(In
millions)
|
Amortized
cost
|
Estimated
fair
value
|
|||||
|
Due
in
|
|||||||
|
2005
|
$
|
7,802
|
$
|
7,906
|
|||
|
2006-2009
|
22,305
|
22,593
|
|||||
|
2010-2014
|
26,947
|
27,639
|
|||||
|
2015
and later
|
36,065
|
38,710
|
|||||
We
expect actual maturities to differ from contractual maturities because borrowers
have the right to call or prepay certain obligations.
Supplemental
information about gross realized gains and losses on available-for-sale
investment securities follows.
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
GE
|
||||||||||
|
Gains
|
$
|
15
|
$
|
3
|
$
|
—
|
||||
|
Losses,
including impairments
|
—
|
(38
|
)
|
(76
|
)
|
|||||
|
Net
|
15
|
(35
|
)
|
(76
|
)
|
|||||
|
GECS
|
||||||||||
|
Gains
|
749
|
1,322
|
1,578
|
|||||||
|
Losses,
including impairments
|
(342
|
)
|
(914
|
)
|
(1,277
|
)
|
||||
|
Net
|
407
|
408
|
301
|
|||||||
|
Total
|
$
|
422
|
$
|
373
|
$
|
225
|
||||
Proceeds
from available-for-sale securities sales amounted to $27,100 million, $36,600
million and $46,400 million in 2004, 2003 and 2002, respectively.
Note
10
GE
Current Receivables
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Advanced
Materials
|
$
|
875
|
$
|
927
|
|||
|
Consumer
& Industrial
|
1,031
|
1,111
|
|||||
|
Energy
|
3,788
|
3,788
|
|||||
|
Healthcare
|
2,862
|
2,024
|
|||||
|
Infrastructure
|
466
|
400
|
|||||
|
NBC
Universal
|
4,067
|
938
|
|||||
|
Transportation
|
1,981
|
1,993
|
|||||
|
Corporate
items and eliminations
|
201
|
278
|
|||||
|
|
15,271
|
11,459
|
|||||
|
Less
allowance for losses
|
(738
|
)
|
(486
|
)
|
|||
|
Total
|
$
|
14,533
|
$
|
10,973
|
|||
Receivables
balances at December 31, 2004 and 2003, before allowance for losses, included
$10,182 million and $6,746 million, respectively, from sales of goods and
services to customers, and $246 million and $226 million, respectively, from
transactions with associated companies.
Current
receivables of $435 million and $444 million at December 31, 2004 and 2003,
respectively, arose from sales, principally of aircraft engine goods and
services, on open account to various agencies of the U.S. government, our
largest single customer. About 4% of our sales of goods and services were to the
U.S. government in 2004, 2003 and 2002.
Note
11
Inventories
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
GE
|
|||||||
|
Raw
materials and work in process
|
$
|
5,042
|
$
|
4,530
|
|||
|
Finished
goods
|
4,806
|
4,376
|
|||||
|
Unbilled
shipments
|
402
|
281
|
|||||
|
|
10,250
|
9,187
|
|||||
|
Less
revaluation to LIFO
|
(661
|
)
|
(632
|
)
|
|||
|
|
9,589
|
8,555
|
|||||
|
GECS
|
|||||||
|
Finished
goods
|
189
|
197
|
|||||
|
Total
|
$
|
9,778
|
$
|
8,752
|
|||
As
of December 31, 2004, we were obligated to acquire certain raw materials at
market prices through the year 2023 under various take-or-pay or similar
arrangements. Annual minimum commitments under these arrangements are
insignificant.
Note
12
GECS
Financing Receivables (investments in time sales, loans and financing
leases)
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Time
sales and loans, net of deferred income
|
$
|
220,361
|
$
|
188,842
|
|||
|
Investment
in financing leases, net of deferred income
|
67,754
|
65,320
|
|||||
|
|
288,115
|
254,162
|
|||||
|
Less
allowance for losses (note 13)
|
(5,648
|
)
|
(6,256
|
)
|
|||
|
Financing
receivables—net
|
$
|
282,467
|
$
|
247,906
|
|||
Included
in the above are the financing receivables of consolidated, liquidating
securitization entities as follows:
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Time
sales and loans, net of deferred income
|
$
|
20,496
|
$
|
18,050
|
|||
|
Investment
in financing leases, net of deferred income
|
2,125
|
3,827
|
|||||
|
|
22,621
|
21,877
|
|||||
|
Less
allowance for losses
|
(5
|
)
|
—
|
||||
|
Financing
receivables—net
|
$
|
22,616
|
$
|
21,877
|
|||
Details
by segment follow.
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
COMMERCIAL
FINANCE
|
|||||||
|
Equipment
|
$
|
74,970
|
$
|
68,085
|
|||
|
Commercial
and industrial
|
36,443
|
35,035
|
|||||
|
Real
estate
|
20,470
|
20,171
|
|||||
|
Commercial
aircraft
|
13,562
|
12,424
|
|||||
|
|
145,445
|
135,715
|
|||||
|
CONSUMER
FINANCE
|
|||||||
|
Non-U.S.
residential mortgages
|
42,201
|
19,593
|
|||||
|
Non-U.S.
installment and revolving credit
|
33,889
|
31,954
|
|||||
|
Non-U.S.
auto
|
23,517
|
20,729
|
|||||
|
U.S.
installment and revolving credit
|
21,385
|
16,545
|
|||||
|
Other
|
6,771
|
5,856
|
|||||
|
|
127,763
|
94,677
|
|||||
|
EQUIPMENT
& OTHER SERVICES
|
14,907
|
23,770
|
|||||
|
|
288,115
|
254,162
|
|||||
|
Less
allowance for losses
|
(5,648
|
)
|
(6,256
|
)
|
|||
|
Total
|
$
|
282,467
|
$
|
247,906
|
|||
GECS
financing receivables include both time sales and loans and financing leases.
Time sales and loans represent transactions in a variety of forms, including
time sales, revolving charge and credit, mortgages, installment loans,
intermediate-term loans and revolving loans secured by business assets. The
portfolio includes time sales and loans carried at the principal amount on which
finance charges are billed periodically, and time sales and loans carried at
gross book value, which includes finance charges.
Investment
in financing leases consists of direct financing and leveraged leases of
aircraft, railroad rolling stock, autos, other transportation equipment, data
processing equipment and medical equipment, as well as other manufacturing,
power generation, commercial real estate, and commercial equipment and
facilities.
As
the sole owner of assets under direct financing leases and as the equity
participant in leveraged leases, GECS is taxed on total lease payments received
and is entitled to tax deductions based on the cost of leased assets and tax
deductions for interest paid to third-party participants. GECS is generally
entitled to any residual value of leased assets.
Investment
in direct financing and leveraged leases represents net unpaid rentals and
estimated unguaranteed residual values of leased equipment, less related
deferred income. GECS has no general obligation for principal and interest on
notes and other instruments representing third-party participation related to
leveraged leases; such notes and other instruments have not been included in
liabilities but have been offset against the related rentals receivable. The
GECS share of rentals receivable on leveraged leases is subordinate to the share
of other participants who also have security interests in the leased equipment.
NET
INVESTMENT IN FINANCING LEASES
|
Total
financing leases
|
Direct
financing leases
|
Leveraged
leases
|
|||||||||||||||||
|
December
31 (In millions)
|
2004
|
2003
|
2004
|
2003
|
2004
|
2003
|
|||||||||||||
|
Total
minimum lease payments receivable
|
$
|
91,840
|
$
|
91,592
|
$
|
63,733
|
$
|
62,121
|
$
|
28,107
|
$
|
29,471
|
|||||||
|
Less
principal and interest on third-party
nonrecourse
debt
|
(20,992
|
)
|
(22,144
|
)
|
—
|
—
|
(20,992
|
)
|
(22,144
|
)
|
|||||||||
|
Net
rentals receivable
|
70,848
|
69,448
|
63,733
|
62,121
|
7,115
|
7,327
|
|||||||||||||
|
Estimated
unguaranteed residual
value
of leased assets
|
10,323
|
9,747
|
6,898
|
6,072
|
3,425
|
3,675
|
|||||||||||||
|
Less
deferred income
|
(13,417
|
)
|
(13,875
|
)
|
(9,966
|
)
|
(10,099
|
)
|
(3,451
|
)
|
(3,776
|
)
|
|||||||
|
Investment
in financing leases, net
of
deferred income
|
67,754
|
65,320
|
60,665
|
58,094
|
7,089
|
7,226
|
|||||||||||||
|
Less
amounts to arrive at net investment
|
|||||||||||||||||||
|
Allowance
for losses
|
(1,090
|
)
|
(830
|
)
|
(903
|
)
|
(734
|
)
|
(187
|
)
|
(96
|
)
|
|||||||
|
Deferred
taxes
|
(9,767
|
)
|
(10,250
|
)
|
(5,099
|
)
|
(5,793
|
)
|
(4,668
|
)
|
(4,457
|
)
|
|||||||
|
Net
investment in financing leases
|
$
|
56,897
|
$
|
54,240
|
$
|
54,663
|
$
|
51,567
|
$
|
2,234
|
$
|
2,673
|
|||||||
CONTRACTUAL
MATURITIES
|
(In
millions)
|
Total
time sales
and
loans
|
Net
rentals
receivable
|
|
Due
in
|
||
|
2005
|
$66,085
|
$17,767
|
|
2006
|
31,394
|
14,595
|
|
2007
|
25,461
|
10,900
|
|
2008
|
13,770
|
7,908
|
|
2009
|
13,796
|
5,097
|
|
2010
and later
|
69,855
|
14,581
|
|
Total
|
$220,361
|
$70,848
|
We
expect actual maturities to differ from contractual maturities.
Individually
“impaired” loans are defined by GAAP as larger balance or restructured loans for
which it is probable that the lender will be unable to collect all amounts due
according to original contractual terms of the loan agreement. An analysis of
impaired loans follows.
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Loans
requiring allowance for losses
|
$
|
1,689
|
$
|
1,062
|
|||
|
Loans
expected to be fully recoverable
|
520
|
1,430
|
|||||
|
|
$
|
2,209
|
$
|
2,492
|
|||
|
Allowance
for losses
|
$
|
749
|
$
|
434
|
|||
|
Average
investment during year
|
2,403
|
2,318
|
|||||
|
Interest
income earned while impaired
(a)
|
26
|
33
|
|||||
|
(a)
Recognized
principally on cash basis.
|
||
Note
13
GECS
Allowance for Losses on Financing Receivables
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
BALANCE
AT JANUARY 1
|
||||||||||
|
Commercial
Finance
|
$
|
2,244
|
$
|
2,664
|
$
|
2,532
|
||||
|
Consumer
Finance
|
3,984
|
2,782
|
2,173
|
|||||||
|
Equipment
& Other Services
|
28
|
54
|
87
|
|||||||
|
|
6,256
|
5,500
|
4,792
|
|||||||
|
PROVISION
CHARGED TO OPERATIONS
|
||||||||||
|
Commercial
Finance
|
651
|
887
|
1,110
|
|||||||
|
Consumer
Finance
|
3,219
|
2,808
|
1,950
|
|||||||
|
Equipment
& Other Services
|
18
|
57
|
24
|
|||||||
|
|
3,888
|
3,752
|
3,084
|
|||||||
|
OTHER
ADDITIONS (REDUCTIONS)
(a)
|
(74
|
)
|
679
|
704
|
||||||
|
GROSS
WRITE-OFFS
|
||||||||||
|
Commercial
Finance
|
(954
|
)
|
(1,321
|
)
|
(1,262
|
)
|
||||
|
Consumer
Finance
(b)
|
(4,423
|
)
|
(3,114
|
)
|
(2,383
|
)
|
||||
|
Equipment
& Other Services
|
(75
|
)
|
(88
|
)
|
(77
|
)
|
||||
|
|
(5,452
|
)
|
(4,523
|
)
|
(3,722
|
)
|
||||
|
RECOVERIES
|
||||||||||
|
Commercial
Finance
|
163
|
126
|
95
|
|||||||
|
Consumer
Finance
|
846
|
710
|
534
|
|||||||
|
Equipment
& Other Services
|
21
|
12
|
13
|
|||||||
|
|
1,030
|
848
|
642
|
|||||||
|
BALANCE
AT DECEMBER 31
|
||||||||||
|
Commercial
Finance
|
2,140
|
2,244
|
2,664
|
|||||||
|
Consumer
Finance
|
3,473
|
3,984
|
2,782
|
|||||||
|
Equipment
& Other Services
|
35
|
28
|
54
|
|||||||
|
Balance
at December 31
|
$
|
5,648
|
$
|
6,256
|
$
|
5,500
|
||||
|
(a)
|
Other
additions (reductions) primarily included the effects of acquisitions,
securitization activity and the effects of exchange rates. These additions
(reductions) included $314 million, $480 million and $487 million related
to acquisitions and $(461) million, $(335) million and $(80) million
related to securitization activity in 2004, 2003 and 2002, respectively.
|
|||
|
(b)
|
Included
$889 million in 2004 related to the standardization of our write-off
policy.
|
|||
See
note 12 for amounts related to consolidated, liquidating securitization
entities.
SELECTED
FINANCING RECEIVABLES RATIOS
|
December
31
|
2004
|
2003
|
|||||
|
ALLOWANCE
FOR LOSSES ON FINANCING
RECEIVABLES
AS A
PERCENTAGE OF TOTAL FINANCING RECEIVABLES |
|||||||
|
Commercial
Finance
|
1.47
|
%
|
1.65
|
%
|
|||
|
Consumer
Finance
(a)
|
2.72
|
4.21
|
|||||
|
Equipment
& Other Services
|
0.23
|
0.12
|
|||||
|
Total
|
1.96
|
2.46
|
|||||
|
NONEARNING
AND REDUCED EARNING
FINANCING
RECEIVABLES AS A
PERCENTAGE
OF
TOTAL FINANCING RECEIVABLES
|
|||||||
|
Commercial
Finance
|
1.1
|
%
|
1.3
|
%
|
|||
|
Consumer
Finance
(a)
|
2.0
|
2.6
|
|||||
|
Equipment
& Other Services
|
1.2
|
0.6
|
|||||
|
Total
|
1.5
|
1.7
|
|||||
|
(a)
|
The
standardization of our write-off policy in 2004 reduced the allowance for
losses on financing receivables as a percentage of total financing
receivables by 74 basis points, and nonearning and reduced earning
financing receivables as a percentage of total financing receivables by 57
basis points.
|
||
Note
14
GECS
Insurance Receivables
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Reinsurance
recoverables
|
$
|
11,509
|
$
|
12,067
|
|||
|
Commercial
mortgage loans
|
6,993
|
6,648
|
|||||
|
Premiums
receivable
|
4,479
|
4,510
|
|||||
|
Policy
loans
|
1,378
|
1,245
|
|||||
|
Funds
on deposit with reinsurers
|
590
|
623
|
|||||
|
Other
|
1,240
|
2,669
|
|||||
|
Allowance
for losses
|
(218
|
)
|
(221
|
)
|
|||
|
Total
(a)
|
$
|
25,971
|
$
|
27,541
|
|||
|
(a)
|
Included
$342 million in 2004 and $484 million in 2003 related to consolidated,
liquidating securitization entities.
|
||
Note
15
Property,
Plant and Equipment
|
December
31 (Dollars in millions)
|
Estimated
useful
lives-
new
(years)
|
2004
|
2003
|
|||||||
|
ORIGINAL
COST
|
||||||||||
|
GE
|
||||||||||
|
Land
and improvements
|
8
|
(a)
|
$
|
1,274
|
$
|
861
|
||||
|
Buildings,
structures and related equipment
|
8-40
|
9,168
|
8,369
|
|||||||
|
Machinery
and equipment
|
4-20
|
25,775
|
24,184
|
|||||||
|
Leasehold
costs and manufacturing plant under construction
|
1-10
|
2,930
|
2,228
|
|||||||
|
|
39,147
|
35,642
|
||||||||
|
GECS
(b)
|
||||||||||
|
Buildings
and equipment
|
1-40
|
6,167
|
4,792
|
|||||||
|
Equipment
leased to others
|
||||||||||
|
Aircraft
|
20
|
26,837
|
23,069
|
|||||||
|
Vehicles
|
4-14
|
23,056
|
16,600
|
|||||||
|
Railroad
rolling stock
|
9-30
|
3,390
|
3,356
|
|||||||
|
Mobile
and modular space
|
12-20
|
2,965
|
3,164
|
|||||||
|
Construction
and manufacturing
|
3-25
|
1,772
|
1,563
|
|||||||
|
All
other
|
3-33
|
3,021
|
3,026
|
|||||||
|
|
67,208
|
55,570
|
||||||||
|
Total
|
$
|
106,355
|
$
|
91,212
|
||||||
|
NET
CARRYING VALUE
|
||||||||||
|
GE
|
||||||||||
|
Land
and improvements
|
$
|
1,176
|
$
|
814
|
||||||
|
Buildings,
structures and related equipment
|
3,956
|
4,332
|
||||||||
|
Machinery
and equipment
|
8,955
|
7,547
|
||||||||
|
Leasehold
costs and manufacturing plant under construction
|
2,669
|
1,873
|
||||||||
|
|
16,756
|
14,566
|
||||||||
|
GECS
(b)
|
||||||||||
|
Buildings
and equipment
|
3,526
|
2,827
|
||||||||
|
Equipment
leased to others
|
||||||||||
|
Aircraft
(c)
|
21,991
|
19,097
|
||||||||
|
Vehicles
|
14,062
|
9,745
|
||||||||
|
Railroad
rolling stock
|
2,193
|
2,220
|
||||||||
|
Mobile
and modular space
|
1,636
|
1,814
|
||||||||
|
Construction
and manufacturing
|
1,157
|
1,121
|
||||||||
|
All
other
|
2,013
|
1,998
|
||||||||
|
|
46,578
|
38,822
|
||||||||
|
Total
|
$
|
63,334
|
$
|
53,388
|
||||||
|
(a)
|
Estimated
useful lives exclude land.
|
|||
|
(b)
|
Included
$2.2 billion and $2.1 billion of original cost of assets leased to GE with
accumulated amortization of $0.4 billion and $0.3 billion at December 31,
2004 and 2003, respectively.
|
|||
|
(c)
|
Commercial
Finance recognized impairment losses of $0.1 billion in 2004 and $0.2
billion in 2003 recorded in the caption “Other costs and expenses” in the
Statement of Earnings to reflect adjustments to fair value based on
current market values from independent appraisers.
|
|||
Amortization
of GECS equipment leased to others was $5,365 million, $4,224 million and $3,919
million in 2004, 2003 and 2002, respectively. Noncancelable future rentals due
from customers for equipment on operating leases at December 31, 2004, are due
as follows:
|
(In
millions)
|
|
|
Due
in
|
|
|
2005
|
$7,001
|
|
2006
|
5,537
|
|
2007
|
4,155
|
|
2008
|
2,971
|
|
2009
|
2,056
|
|
2010
and later
|
6,272
|
|
Total
|
$27,992
|
Note
16
Intangible
Assets
|
December
31 (In millions)
|
2004
|
2003
|
|
GE
|
||
|
Goodwill
|
$45,775
|
$26,242
|
|
Capitalized
software
|
1,894
|
1,678
|
|
Other
intangibles
|
7,051
|
2,284
|
|
|
54,720
|
30,204
|
|
GECS
|
||
|
Goodwill
|
25,416
|
21,527
|
|
Present
value of future profits (PVFP)
|
1,426
|
1,562
|
|
Capitalized
software
|
758
|
800
|
|
Other
intangibles
|
920
|
932
|
|
|
28,520
|
24,821
|
|
Total
|
$83,240
|
$55,025
|
GE
intangible assets were net of accumulated amortization of $6,098 million in 2004
and $5,759 million in 2003. GECS intangible assets were net of accumulated
amortization of $10,876 million in 2004 and $10,292 million in
2003.
Changes
in goodwill balances, net of accumulated amortization, follow.
|
2004
|
2003
|
|||||||||||||||||||||||||||
| (In millions) |
Balance
January
1
|
Acquisitions/
purchase
accounting
adjustments
|
Inter-segment
transfers
|
Currency
exchange
and
other
|
Balance
December
31
|
Balance
January
1
|
Acquisitions/
purchase
accounting
adjustments
|
Currency
exchange
and
other
|
Balance
December
31
|
|||||||||||||||||||
|
Advanced
Materials
|
$
|
2,810
|
$
|
(6
|
)
|
$
|
—
|
$
|
46
|
$
|
2,850
|
$
|
2,077
|
$
|
720
|
$
|
13
|
$
|
2,810
|
|||||||||
|
Commercial
Finance
|
8,736
|
938
|
523
|
74
|
10,271
|
8,469
|
183
|
84
|
8,736
|
|||||||||||||||||||
|
Consumer
Finance
|
7,779
|
1,275
|
384
|
422
|
9,860
|
5,562
|
1,294
|
923
|
7,779
|
|||||||||||||||||||
|
Consumer
& Industrial
|
795
|
—
|
—
|
(16
|
)
|
779
|
720
|
15
|
60
|
795
|
||||||||||||||||||
|
Energy
|
4,212
|
200
|
—
|
144
|
4,556
|
3,374
|
450
|
388
|
4,212
|
|||||||||||||||||||
|
Equipment
& Other Services
|
920
|
(11
|
)
|
(523
|
)
|
1,073
|
(a)
|
1,459
|
887
|
29
|
4
|
920
|
||||||||||||||||
|
Healthcare
|
4,766
|
8,422
|
—
|
71
|
13,259
|
2,898
|
1,846
|
22
|
4,766
|
|||||||||||||||||||
|
Infrastructure
|
3,725
|
633
|
—
|
56
|
4,414
|
3,192
|
365
|
168
|
3,725
|
|||||||||||||||||||
|
Insurance
|
4,092
|
10
|
(384
|
)
|
108
|
3,826
|
4,176
|
12
|
(96
|
)
|
4,092
|
|||||||||||||||||
|
NBC
Universal
|
6,730
|
9,944
|
—
|
(2
|
)
|
16,672
|
5,223
|
1,507
|
—
|
6,730
|
||||||||||||||||||
|
Transportation
|
3,204
|
53
|
—
|
(12
|
)
|
3,245
|
2,842
|
354
|
8
|
3,204
|
||||||||||||||||||
|
Total
|
$
|
47,769
|
$
|
21,458
|
$
|
—
|
$
|
1,964
|
$
|
71,191
|
$
|
39,420
|
$
|
6,775
|
$
|
1,574
|
$
|
47,769
|
||||||||||
|
(a)
|
Included
$1,055 million of goodwill associated with the consolidation of Penske
effective January 1, 2004.
|
|||||||||
The
amount of goodwill related to new acquisitions during 2004 was $20,958 million,
the largest of which were the combination of NBC and Vivendi Universal
Entertainment LLLP (VUE) and the acquisitions of Amersham by Healthcare and
InVision Technologies, Inc. ($618 million) by Infrastructure.
The
amount of goodwill related to purchase accounting adjustments to prior-year
acquisitions during 2004 was $500 million, primarily associated with the 2003
acquisition of Instrumentarium at Healthcare and Allbank and First National Bank
at Consumer Finance.
The
amount of goodwill related to new acquisitions recorded during 2003 was $6,602
million, the largest of which were Instrumentarium ($1,754 million) by
Healthcare, Bravo ($1,473 million) by NBC
Universal
and First National Bank ($680 million) by Consumer Finance.
The
amount of goodwill related to purchase accounting adjustments to prior-year
acquisitions during 2003 was $173 million, primarily associated with the 2002
acquisitions of several businesses at Infrastructure, Australian Guarantee
Corporation at Consumer Finance and Security Capital Group at Commercial
Finance.
Upon
closing an acquisition, we estimate the fair values of assets and liabilities
acquired and consolidate the acquisition as quickly as possible. Given the time
it takes to obtain pertinent information to finalize the acquired company’s
balance sheet (frequently with implications for the price of the acquisition),
then to adjust the acquired company’s accounting policies, procedures, books and
records to our standards, it is often several quarters before we are able to
finalize those initial fair value estimates. Accordingly, it is not uncommon for
our initial estimates to be subsequently revised.
INTANGIBLE
ASSETS SUBJECT TO AMORTIZATION
|
December
31 (In millions)
|
Gross
carrying
amount
|
Accumulated
amortization
|
Net
|
|||||||
|
2004
|
||||||||||
|
Patents,
licenses and other
|
$
|
6,366
|
$
|
(1,131
|
)
|
$
|
5,235
|
|||
|
Capitalized
software
|
5,466
|
(2,814
|
)
|
2,652
|
||||||
|
PVFP
|
3,382
|
(1,956
|
)
|
1,426
|
||||||
|
Servicing
assets and all other
|
4,739
|
(4,037
|
)
|
702
|
||||||
|
Total
|
$
|
19,953
|
$
|
(9,938
|
)
|
$
|
10,015
|
|||
|
2003
|
||||||||||
|
Patents,
licenses and other
|
$
|
2,685
|
$
|
(806
|
)
|
$
|
1,879
|
|||
|
Capitalized
software
|
4,911
|
(2,433
|
)
|
2,478
|
||||||
|
PVFP
|
3,348
|
(1,786
|
)
|
1,562
|
||||||
|
Servicing
assets and all other
|
4,634
|
(3,809
|
)
|
825
|
||||||
|
Total
|
$
|
15,578
|
$
|
(8,834
|
)
|
$
|
6,744
|
|||
Indefinite-lived
intangible assets were $2,034 million and $512 million at December 31, 2004 and
2003, respectively, and principally comprised trademarks, tradenames and U.S.
Federal Communications Commission licenses.
Consolidated
amortization expense related to intangible assets, subject to amortization, for
2004 and 2003 was $1,656 million and $1,497 million, respectively.
Changes
in PVFP balances follow.
|
(In
millions)
|
2004
|
2003
|
|||||
|
Balance
at January 1
|
$
|
1,562
|
$
|
2,457
|
|||
|
Acquisitions
|
—
|
46
|
|||||
|
Dispositions
|
—
|
(658
|
)
|
||||
|
Accrued
interest
(a)
|
90
|
113
|
|||||
|
Amortization
|
(221
|
)
|
(351
|
)
|
|||
|
Other
|
(5
|
)
|
(45
|
)
|
|||
|
Balance
at December 31
|
$
|
1,426
|
$
|
1,562
|
|||
|
(a)
|
Interest
was accrued at a rate of 6.3% and 4.3% for 2004 and 2003,
respectively.
|
||
GE 2004 ANNUAL REPORT
94
Recoverability of PVFP is evaluated periodically by comparing the current
estimate of expected future gross profits with the unamortized asset balance. If
such comparison indicates that the expected gross profits will not be sufficient
to recover PVFP, the difference is charged to expense. No such expense was
recorded in 2004 or 2003.
Amortization
expense for PVFP in future periods will be affected by acquisitions, realized
capital gains/losses or other factors affecting the ultimate amount of gross
profits realized from certain lines of business. Similarly, future amortization
expense for other intangibles will depend on acquisition activity and other
business transactions.
The
estimated percentage of the December 31, 2004, net PVFP balance to be amortized
over each of the next five years follows.
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||
|
8.9
|
% |
8.3
|
%
|
7.2
|
%
|
6.3
|
%
|
5.3
|
%
|
SIGNIFICANT
ACQUISITIONS AND COMBINATIONS
In
April 2004, we acquired all of the outstanding common shares of Amersham plc, a
world leader in medical diagnostics and life sciences. The total purchase price
of $11,279 million included 341.7 million shares of GE common stock valued at
$10,674 million, cash of $150 million and assumed debt of $455 million.
Preliminary allocation of the purchase price assigned $8,217 million to
goodwill, $2,704 million to identified intangible assets that will be amortized
over periods ranging from five to 25 years, $158 million to acquired inventories
and $99 million to acquired in-process research and development projects charged
to operations in the second quarter of 2004.
In
May 2004, we completed the combination of NBC with VUE and certain related
assets to create one of the world’s leading media companies, NBC Universal, Inc.
(NBC Universal). Twenty percent of NBC Universal’s shares were issued to a
subsidiary of Vivendi Universal (VU) as partial consideration for VU’s interest
in VUE and the related assets. NBC’s acquired interest in VUE and the related
assets was valued at $14,429 million, for which we exchanged the NBC Universal
shares, paid cash to certain VUE interest holders of $3,650 million and assumed
debt of $2,498 million. In March 2004, we issued 119.4 million shares of our
common stock for net cash proceeds of $3,765 million, and we used most of those
proceeds to fund the $3,650 million we paid in this transaction. The preliminary
allocation of our acquired interest assigned $9,944 million to goodwill, $1,516
million to indefinite-lived intangibles and $310 million to identified
intangible assets that will be amortized over periods ranging from two to 20
years. As a result of issuing the NBC Universal shares, we essentially disposed
of 20% of NBC, and therefore recorded an increase in shareowners’ equity of
$2,153 million, net of taxes of $1,439 million. The holders of 5.44% of the VUE
common interests did not participate in the transaction and remained a minority
interest holder of VUE at December 31, 2004. This minority interest holder also
owns a $758 million preferred interest in VUE that is mandatorily redeemable for
cash in 2022. The present value of that obligation is reported in the caption
“All other liabilities” in the Statement of Financial Position, while U.S.
Treasury securities held by VUE in approximately the same amount and designated
to repay this obligation are included in the caption “All other assets” in the
Statement of Financial Position.
Note
17
All
Other Assets
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
GE
|
|||||||
|
Investments
|
|||||||
|
Associated
companies
(a)
|
$
|
1,830
|
$
|
1,348
|
|||
|
Other
(b)
|
3,974
|
1,228
|
|||||
|
|
5,804
|
2,576
|
|||||
|
Prepaid
pension asset—principal plans
|
17,629
|
17,038
|
|||||
|
Contract
costs and estimated earnings
|
4,089
|
3,634
|
|||||
|
Film
and television costs
|
3,441
|
1,582
|
|||||
|
Long-term
receivables, including notes
|
2,821
|
1,932
|
|||||
|
Derivative
instruments
(c)
|
628
|
454
|
|||||
|
Other
|
3,711
|
3,232
|
|||||
|
|
38,123
|
30,448
|
|||||
|
GECS
|
|||||||
|
Investments
|
|||||||
|
Associated
companies
(a)
|
11,048
|
13,218
|
|||||
|
Real
estate
(d)
|
19,190
|
15,573
|
|||||
|
Assets
held for sale
(e)
|
6,501
|
1,856
|
|||||
|
Securities
lending transactions
|
3,202
|
3,026
|
|||||
|
Other
(f)
|
6,699
|
6,263
|
|||||
|
|
46,640
|
39,936
|
|||||
|
Separate
accounts
|
8,959
|
8,316
|
|||||
|
Deferred
acquisition costs
|
8,180
|
7,879
|
|||||
|
Derivative
instruments
(c)
|
3,062
|
1,913
|
|||||
|
Other
|
6,108
|
5,092
|
|||||
|
|
72,949
|
63,136
|
|||||
|
ELIMINATIONS
|
(1,138
|
)
|
(963
|
)
|
|||
|
Total
(g)
|
$
|
109,934
|
$
|
92,621
|
|||
|
(a)
|
Included
advances to associated companies, which are non-controlled,
non-consolidated equity investments.
|
||
|
(b)
|
Included
cost method investments of $1,780 million in 2004, of which the fair value
and unrealized loss of those in a continuous loss position for less than
12 months was $373 million and $34 million, respectively. Cost method
investments were each evaluated for impairment. Also included
available-for-sale securities of $1,200 million in 2004, of which the
unrealized loss of those in a continuous unrealized loss position for less
than 12 months was $111 million.
|
||
|
(c)
|
Amounts
are stated at fair value in accordance with SFAS 133,
Accounting for
Derivative Instruments and Hedging Activities
, as amended. We discuss
types of derivative instruments and how we use them in note
28.
|
||
|
(d)
|
GECS
investment in real estate consists principally of two categories: real
estate held for investment and equity method investments. Both categories
contained a wide range of properties including the following at December
31, 2004: office buildings (46%), apartment buildings (16%), self storage
facilities (11%), retail facilities (10%), industrial properties (6%),
parking facilities (5%), franchise properties (3%) and other (3%). At
December 31, 2004, investments were located in Europe (45%), North America
(41%) and Asia (14%).
|
||
|
(e)
|
These
assets held for sale were accounted for at the lower of carrying amount or
each asset’s estimated fair value less costs to sell.
|
||
|
(f)
|
Included
cost method investments of $2,626 million in 2004, of which the fair value
and unrealized loss of those in a continuous loss position for less than
12 months was $111 million and $31 million, respectively. The fair value
and unrealized loss of those in a continuous loss position for 12 months
or more was $56 million and $42 million, respectively. Cost method
investments were each evaluated for impairment.
|
||
|
(g)
|
Included
$2,408 million in 2004 and $2,352 million in 2003 related to consolidated,
liquidating securitization entities.
|
||
Separate
accounts represent investments controlled by policyholders and are associated
with identical amounts reported as insurance liabilities in note 19.
Note
18
Borrowings
SHORT-TERM
BORROWINGS
|
|
2004
|
2003
|
|||||||||||
|
December
31 (Dollars in millions)
|
Amount
|
Average
rate
(a)
|
Amount
|
Average
rate
(a)
|
|||||||||
|
GE
|
|||||||||||||
|
Commercial
paper
|
|||||||||||||
|
U.S.
|
$
|
—
|
—
|
%
|
$
|
1,149
|
1.08
|
%
|
|||||
|
Non-U.S.
|
131
|
2.52
|
340
|
2.72
|
|||||||||
|
Payable
to banks, principally non-U.S
|
272
|
3.34
|
388
|
4.89
|
|||||||||
|
Current
portion of long-term debt
|
2,698
|
2.33
|
392
|
2.58
|
|||||||||
|
Other
|
308
|
286
|
|||||||||||
|
|
3,409
|
2,555
|
|||||||||||
|
GECS
|
|||||||||||||
|
Commercial
paper
|
|||||||||||||
|
U.S.
|
|||||||||||||
|
Unsecured
|
62,694
|
2.24
|
65,536
|
1.11
|
|||||||||
|
Asset-backed
(b)
|
13,842
|
2.17
|
21,998
|
1.12
|
|||||||||
|
Non-U.S.
|
20,835
|
2.96
|
15,062
|
2.93
|
|||||||||
|
Current
portion of long-term debt
(c)
|
37,582
|
4.10
|
38,367
|
3.30
|
|||||||||
|
Other
|
19,890
|
14,505
|
|||||||||||
|
|
154,843
|
155,468
|
|||||||||||
|
ELIMINATIONS
|
(506
|
)
|
(626
|
)
|
|||||||||
|
Total
|
$
|
157,746
|
$
|
157,397
|
|||||||||
|
(a)
|
Based
on year-end balances and year-end local currency interest rates. Current
portion of long-term debt included the effects of interest rate and
currency swaps, if any, directly associated with the original debt
issuance.
|
||||
|
(b)
|
Entirely
obligations of consolidated, liquidating securitization entities. See note
29.
|
||||
|
(c)
|
Included
short-term borrowings by consolidated, liquidating securitization entities
of $756 million and $482 million at December 31, 2004 and 2003,
respectively.
|
||||
LONG-TERM
BORROWINGS
|
December
31 (Dollars in millions)
|
2004
Average
rate
(a)
|
Maturities
|
2004
|
2003
|
|||||||||
|
GE
|
|||||||||||||
|
Senior
notes
|
5.00
|
%
|
2013
|
$
|
4,984
|
$
|
7,483
|
||||||
|
Industrial
development/
|
|||||||||||||
|
pollution
control bonds
|
2.28
|
2006-2027
|
307
|
331
|
|||||||||
|
Payable
to banks,
|
|||||||||||||
|
principally
U.S.
(b)
|
3.42
|
2006-2018
|
1,927
|
212
|
|||||||||
|
Other
(c)
|
407
|
362
|
|||||||||||
|
|
7,625
|
8,388
|
|||||||||||
|
GECS
|
|||||||||||||
|
Senior
notes
|
|||||||||||||
|
Unsecured
|
3.74
|
2006-2055
|
180,183
|
149,049
|
|||||||||
|
Asset-backed
(d)
|
4.15
|
2006-2035
|
10,939
|
1,948
|
|||||||||
|
Extendible
notes
(e)
|
2.40
|
2007-2009
|
14,258
|
12,591
|
|||||||||
|
Subordinated
notes
(f)
|
7.44
|
2006-2035
|
1,119
|
1,262
|
|||||||||
|
|
206,499
|
164,850
|
|||||||||||
|
ELIMINATIONS
|
(963
|
)
|
(924
|
)
|
|||||||||
|
Total
|
$
|
213,161
|
$
|
172,314
|
|||||||||
|
(a)
|
Based
on year-end balances and year-end local currency interest rates, including
the effects of interest rate and currency swaps, if any, directly
associated with the original debt issuance.
|
||||
|
(b)
|
Included
$1,670 million of debt resulting from the VUE transaction.
|
||||
|
(c)
|
A
variety of obligations having various interest rates and maturities,
including certain borrowings by parent operating components and
affiliates.
|
||||
|
(d)
|
Asset-backed
senior notes are all issued by consolidated, liquidating securitization
entities as discussed in note 29. The amount related to Australian
Financial Investments Group (AFIG), a 2004 acquisition, was $9,769
million.
|
||||
|
(e)
|
Included
obligations of consolidated, liquidating securitization entities in the
amount of $267 million and $362 million at December 31, 2004 and 2003,
respectively.
|
||||
|
(f)
|
At
year-end 2004 and 2003, $1.0 billion of subordinated notes were guaranteed
by GE.
|
||||
Our
borrowings are addressed below from the perspectives of liquidity, interest rate
and currency risk management. Additional information about borrowings and
associated swaps can be found in note 28.
LIQUIDITY
is affected by debt maturities and our ability to repay or refinance such debt.
Long-term debt maturities over the next five years follow.
|
(In
millions)
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||
|
GE
|
$
|
2,698
|
$
|
150
|
$
|
1,858
|
$
|
26
|
$
|
20
|
||||||
|
GECS
|
37,582
|
(a)
|
54,012
|
(b)
|
29,083
|
20,895
|
26,729
|
|||||||||
|
(a)
|
Floating
rate extendible notes of $244 million are due in 2005, but are extendible
at the investors’ option to a final maturity in 2008. Floating rate notes
of $482 million contain put options with exercise dates in 2005, but have
final maturity dates greater than 2010.
|
|||||
|
(b)
|
Floating
rate extendible notes of $14.0 billion are due in 2006, but are extendible
at the investors’ option to a final maturity in 2007 ($12.0 billion) and
2009 ($2.0 billion).
|
|||||
Committed
credit lines totaling $57.3 billion had been extended to us by 83 banks at
year-end 2004. Included in this amount was $47.4 billion provided directly to
GECS and $9.9 billion provided by 21 banks to GE, to which GECS also has access.
The GECS lines include $19.2 billion of revolving credit agreements under which
we can borrow funds for periods exceeding one year. The remaining $38.1 billion
are 364-day lines of which $37.6 billion contain a
term-out
feature that allows GECS to extend the borrowings for one year from the date of
expiration of the lending agreement. We pay banks for credit facilities, but
compensation amounts were insignificant in each of the past three years.
INTEREST
RATE AND CURRENCY RISK
is managed through the direct issuance of debt or use of derivatives. We take
positions in view of anticipated behavior of assets, including prepayment
behavior. We use a variety of instruments, including interest rate and currency
swaps and currency forwards, to achieve our interest rate objectives. The
following table shows GECS borrowing positions considering the effects of
currency and interest rate swaps.
GECS
EFFECTIVE BORROWINGS (INCLUDING SWAPS)
|
|
2004
|
2003
|
||||||||
|
December
31 (Dollars in millions)
|
Amount
|
Average
rate
|
Amount
|
|||||||
|
Short-term
(a)
|
$
|
91,253
|
2.52
|
%
|
$
|
88,499
|
||||
|
Long-term
(including current portion)
|
||||||||||
|
Fixed
rate
(b)
|
$
|
148,344
|
4.57
|
%
|
$
|
121,677
|
||||
|
Floating
rate
|
121,745
|
3.02
|
110,142
|
|||||||
|
Total
long-term
|
$
|
270,089
|
$
|
231,819
|
||||||
|
(a)
|
Included
commercial paper and other short-term debt.
|
|||
|
(b)
|
Included
fixed-rate borrowings and $23.6 billion ($26.5 billion in 2003) notional
long-term interest rate swaps that effectively convert the floating-rate
nature of short-term borrowings to fixed rates of
interest
|
|||
At
December 31, 2004, interest rate swap maturities ranged from 2005 to 2048,
including swap maturities for hedges of commercial paper that ranged from 2005
to 2024. The use of commercial paper swaps allows us to match our actual asset
profile more efficiently and provides more flexibility as it does not depend on
investor demand for particular maturities.
Note
19
GECS
Insurance Liabilities, Reserves and Annuity Benefits
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Investment
contracts and universal life benefits
|
$
|
63,136
|
$
|
63,787
|
|||
|
Life
insurance benefits
(a)
|
31,660
|
28,040
|
|||||
|
Unpaid
claims and claims adjustment expenses
(b)
|
30,288
|
29,176
|
|||||
|
Unearned
premiums
|
6,859
|
7,109
|
|||||
|
Separate
accounts (see note 17)
|
8,959
|
8,316
|
|||||
|
Total
|
$
|
140,902
|
$
|
136,428
|
|||
|
(a)
|
Life
insurance benefits are accounted for mainly by a net-level-premium method
using estimated yields generally ranging from 2.0% to 8.5% in 2004 and
1.2% to 8.5% in 2003.
|
||
|
(b)
|
Principally
property and casualty reserves amounting to $25.0 billion and $24.9
billion at December 31, 2004 and 2003, respectively. Included amounts for
both reported and IBNR claims, reduced by anticipated salvage and
subrogation recoveries. Estimates of liabilities are reviewed and updated
continually, with changes in estimated losses reflected in operations.
|
||
When
insurance affiliates cede insurance to third parties, they are not relieved of
their primary obligation to policyholders. Losses on ceded risks give rise to
claims for recovery; we establish allowances for probable losses on such
receivables from reinsurers as required.
We
recognize reinsurance recoveries as a reduction of the Statement of Earnings
caption “Insurance losses and policyholder and annuity benefits.” Reinsurance
recoveries were $1,369 million, $1,781 million and $2,234 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
The
insurance liability for unpaid claims and claims adjustment expenses related to
policies that may cover environmental and asbestos exposures is based on known
facts and an assessment of applicable law and coverage litigation. Liabilities
are recognized for both known and unasserted claims (including the cost of
related litigation) when sufficient information has been developed to indicate
that a claim has been incurred and a range of potential losses can be reasonably
estimated. Developed case law and adequate claim history do not exist for
certain claims, principally because of significant uncertainties as to both the
level of ultimate losses that will occur and what portion, if any, will be
deemed to be insured amounts.
A
summary of activity affecting unpaid claims and claims adjustment expenses,
principally in property and casualty lines, follows.
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
Balance
at January 1—gross
|
$
|
29,176
|
$
|
30,571
|
$
|
27,233
|
||||
|
Less
reinsurance recoverables
|
(8,313
|
)
|
(9,646
|
)
|
(9,400
|
)
|
||||
|
Balance
at January 1—net
|
20,863
|
20,925
|
17,833
|
|||||||
|
Claims
and expenses incurred
|
||||||||||
|
Current
year
|
8,641
|
9,002
|
9,505
|
|||||||
|
Prior
years
|
1,098
|
740
|
3,188
|
|||||||
|
Claims
and expenses paid
|
||||||||||
|
Current
year
|
(1,985)
|
)
|
(2,565
|
)
|
(3,173
|
)
|
||||
|
Prior
years
|
(6,967
|
)
|
(7,079
|
)
|
(6,918
|
)
|
||||
|
Other
(a)
|
1,110
|
(160
|
)
|
490
|
||||||
|
Balance
at December 31—net
|
22,760
|
20,863
|
20,925
|
|||||||
|
Add
reinsurance recoverables
|
7,528
|
8,313
|
9,646
|
|||||||
|
Balance
at December 31—gross
|
$
|
30,288
|
$
|
29,176
|
$
|
30,571
|
||||
|
(a)
|
Included
$633 million in 2004 related to the adoption of FIN
46R.
|
|||
Claims
and expenses incurred—prior years represents additional losses (adverse
development) recognized in any year for loss events that occurred before the
beginning of that year. Adverse development, which amounted to 5%, 4% and 18% of
beginning of year loss reserves in 2004, 2003 and 2002, respectively, was
primarily encountered at GE Insurance Solutions.
Reported
claims activity at GE Insurance Solutions related to prior-year loss events,
particularly for liability-related exposures underwritten in 1997 through 2001,
has continued to develop adversely to previous expectations. More specifically,
reported claims activity for these underwriting years accelerated dramatically
in 2002, affecting much of our liability-related product exposures, including
hospital medical malpractice, product liability, professional liability,
umbrella liability, workers compensation, individual liability and asbestos. In
response to these data, we adjusted our best estimate of ultimate losses to be
higher in the range of what were viewed as reasonably possible loss scenarios at
that time, increasing recorded reserves by $2.5 billion in the fourth quarter of
2002, for a total of $3.5 billion adverse development at GE Insurance Solutions
for the year.
For
a majority of our lines of business, reported claims activity in 2003 was
reasonably close to expected amounts. However, for certain lines—principally
medical malpractice, product liability and certain director and officer related
coverage—the reported claims volumes exceeded our revised loss expectations.
Accordingly, we increased our loss reserves to the newly-indicated ultimate
levels, recording adverse development of $0.9 billion in 2003.
In
2004, as part of our comprehensive annual assessment of recorded claim-related
liabilities, we observed that reported claims activity in certain product lines,
substantially related to the 1997 through 2001 underwriting years, continued to
exceed previously established loss expectations. The more significant lines of
business affected were workers compensation, hospital and professional
liability, and asbestos and environmental exposures. Incorporating this updated
information into our reserving process led to an increase in ultimate loss
projections and corresponding reserve levels by $1.1 billion for the year. We
will continue to monitor reported claims activity for all lines of business in
the future and take necessary reserve actions—either to increase or decrease
reserves—as our estimates continue to mature.
Our
mortgage insurance business experienced favorable development during the
three-year period, primarily reflecting continued strength in certain real
estate markets and the success of our loss containment initiatives.
Financial
guarantees and credit life risk of insurance affiliates are summarized
below.
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Guarantees,
principally on municipal bonds
|
$
|
1,190
|
$
|
1,190
|
|||
|
Mortgage
insurance risk in force
|
194,600
|
146,627
|
|||||
|
Credit
life insurance risk in force
|
29,906
|
25,728
|
|||||
|
Less
reinsurance
|
(2,397
|
)
|
(2,207
|
)
|
|||
|
Total
|
$
|
223,299
|
$
|
171,338
|
|||
Certain
insurance affiliates offer insurance guaranteeing the timely payment of
scheduled principal and interest on municipal bonds. Other insurance affiliates
provide insurance to protect residential mortgage lenders from severe financial
loss caused by the non-payment of loans and issue credit life insurance designed
to pay the balance due on a loan if the borrower dies before the loan is repaid.
As part of their overall risk management process, insurance affiliates cede to
third parties a portion of their risk associated with these guarantees. In doing
so, they are not relieved of their primary obligation to
policyholders.
Note
20
All
Other Liabilities
This
caption includes year-end 2004 and 2003 accruals for noncurrent compensation and
benefits of $12,606 million and $10,380 million, respectively, and asset
retirement obligations amounting to $791 million and $374 million, respectively.
During 2004, we recorded asset retirement obligations of $381 million as a
result of our acquisition of Amersham, accretion expense of $26 million and
other adjustments of $10 million. Also included in this caption are amounts for
deferred income, derivative instruments, interest on tax liabilities, product
warranties, mandatorily redeemable preferred interest in VUE (see note 16),
accrued participations and residuals and a variety of sundry items.
We
are involved in numerous remediation actions to clean up hazardous wastes as
required by federal and state laws. Liabilities for remediation costs at each
site are based on our best estimate of undiscounted future costs, excluding
possible insurance recoveries. When there appears to be a range of possible
costs with equal likelihood, liabilities are based on the low end of such range.
Uncertainties about the status of laws, regulations, technology and information
related to individual sites make it difficult to develop a meaningful estimate
of the reasonably possible aggregate environmental remediation exposure.
However, even in the unlikely event that remediation costs amounted to the high
end of the range of costs for each site, the resulting additional liability
would not be material to our financial position, results of operations or
liquidity.
Note
21
Deferred
Income Taxes
Aggregate
deferred income tax amounts are summarized below.
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
ASSETS
|
|||||||
|
GE
|
$
|
9,464
|
$
|
7,594
|
|||
|
GECS
|
8,507
|
9,948
|
|||||
|
|
17,971
|
17,542
|
|||||
|
LIABILITIES
|
|||||||
|
GE
|
13,080
|
9,505
|
|||||
|
GECS
|
19,305
|
20,684
|
|||||
|
|
32,385
|
30,189
|
|||||
|
Net
deferred income tax liability
|
$
|
14,414
|
$
|
12,647
|
|||
Principal
components of our net liability (asset) representing deferred income tax
balances are as follows:
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
GE
|
|||||||
|
Provisions
for expenses
(a)
|
$
|
(5,833
|
)
|
$
|
(4,723
|
)
|
|
|
Retiree
insurance plans
|
(1,346
|
)
|
(1,206
|
)
|
|||
|
Prepaid
pension asset—principal plans
|
6,170
|
5,963
|
|||||
|
Depreciation
|
2,029
|
1,714
|
|||||
|
Other—net
|
2,596
|
163
|
|||||
|
|
3,616
|
1,911
|
|||||
|
GECS
|
|||||||
|
Financing
leases
|
9,767
|
10,250
|
|||||
|
Operating
leases
|
3,716
|
3,523
|
|||||
|
Deferred
acquisition costs
|
1,567
|
1,501
|
|||||
|
Allowance
for losses
|
(2,208
|
)
|
(2,036
|
)
|
|||
|
Insurance
reserves
|
(1,184
|
)
|
(1,109
|
)
|
|||
|
Cash
flow hedges
|
(909
|
)
|
(1,029
|
)
|
|||
|
AMT
credit carryforward
|
(203
|
)
|
(351
|
)
|
|||
|
Other—net
|
252
|
(13
|
)
|
||||
|
|
10,798
|
10,736
|
|||||
|
Net
deferred income tax liability
|
$
|
14,414
|
$
|
12,647
|
|||
|
(a)
|
Represents
the tax effects of temporary differences related to expense accruals for a
wide variety of items, such as employee compensation and benefits,
interest on tax liabilities, product warranties and other sundry items
that are not currently deductible.
|
||
Note
22
Minority
Interest in Equity of Consolidated Affiliates
Minority
interest in equity of consolidated affiliates includes common shares in
consolidated affiliates and preferred stock issued by GE Capital and by
affiliates of GE Capital. The balance is summarized as follows:
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Minority
interest in consolidated affiliates
|
|||||||
|
NBC
Universal
(a)
|
$
|
6,529
|
$
|
—
|
|||
|
Genworth
Financial, Inc.
(b)
|
3,778
|
—
|
|||||
|
Others
(c)
|
2,158
|
1,753
|
|||||
|
Minority
interest in preferred stock
(d)
|
|||||||
|
GE
Capital
|
2,600
|
2,600
|
|||||
|
GE
Capital affiliates
|
1,318
|
1,841
|
|||||
|
Total
|
$
|
16,383
|
$
|
6,194
|
|||
|
(a)
|
Resulted
from the combination of NBC and VUE. See note 16.
|
||
|
(b)
|
Resulted
from the sale of approximately 30% of the common shares of our previously
wholly-owned subsidiary.
|
||
|
(c)
|
Included
minority interest in consolidated, liquidating securitization entities,
partnerships and common shares of consolidated affiliates.
|
||
|
(d)
|
The
preferred stock primarily pays cumulative dividends at variable rates.
Dividend rates in local currency on the preferred stock ranged from 0.99%
to 5.46% during 2004 and 0.91% to 5.65% during 2003.
|
||
Our
minority interest in VUE reflects $1,582 million for shares of cumulative
redeemable preferred interests (VUE preferred) held by IAC/InterActiveCorp (IAC)
at December 31, 2004. VUE preferred pays dividends of 5%, with cash of 3.6% and
the remaining 1.4% in kind. VUE holds IAC securities, with a fair value of
$1,564 million, that may be used to redeem the VUE preferred in 2022. After
redemption, any remaining IAC securities are for the exclusive benefit of VU. We
have designated this entire position as a hedge of the disposition of the IAC
shares.
Note
23
Restricted
Net Assets of GECS
Certain
GECS consolidated affiliates are restricted from remitting certain funds to GECS
in the form of dividends or loans by a variety of regulations, the purpose of
which is to protect affected insurance policyholders, depositors or investors.
At December 31, 2004 and 2003, net assets of regulated GECS affiliates amounted
to $60.4 billion and $46.7 billion, respectively, of which $41.4 billion and
$37.0 billion, respectively, was restricted.
At
December 31, 2004 and 2003, the aggregate statutory capital and surplus of the
insurance businesses totaled $19.4 billion and $15.9 billion, respectively.
Accounting practices prescribed by statutory authorities are used in preparing
statutory statements.
Note
24
Shareowners’
Equity
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
| TOTAL EQUITY | ||||||||||
|
Balance
at December 31
|
$
|
110,284
|
$
|
79,180
|
$
|
63,706
|
||||
|
COMMON
STOCK ISSUED
|
$
|
669
|
$
|
669
|
$
|
669
|
||||
|
ACCUMULATED
NONOWNER CHANGES OTHER THAN EARNINGS
|
||||||||||
|
Balance
at January 1
|
$
|
2,815
|
$
|
(3,177
|
)
|
$
|
(4,323
|
)
|
||
|
Investment
securities—net of deferred taxes of $503, $590 and $847
|
677
|
960
|
1,630
|
|||||||
|
Currency
translation adjustments— net of deferred taxes of $(1,318), $(1,447) and
$20
|
3,942
|
5,119
|
1,000
|
|||||||
|
Cash
flow hedges—net of deferred
|
||||||||||
|
taxes
of $(42), $(448) and $(822)
|
10
|
(803
|
)
|
(2,070
|
)
|
|||||
|
Minimum
pension liabilities—net of
|
||||||||||
|
deferred
taxes of $(184), $(85)
|
||||||||||
|
and
$(42)
|
(421
|
)
|
(161
|
)
|
(75
|
)
|
||||
|
Reclassification
adjustments
|
||||||||||
|
Investment
securities—net of deferred taxes of $(142), $(135) and
$(135)
|
(265
|
)
|
(250
|
)
|
(252
|
)
|
||||
|
Currency
translation adjustments
|
—
|
4
|
—
|
|||||||
|
Cash
flow hedges—net of deferred
|
||||||||||
|
taxes
of $318, $643 and $207
|
559
|
1,123
|
913
|
|||||||
|
Balance
at December 31
|
$
|
7,317
|
$
|
2,815
|
$
|
(3,177
|
)
|
|||
|
OTHER
CAPITAL
|
||||||||||
|
Balance
at January 1
|
$
|
17,497
|
$
|
17,288
|
$
|
16,693
|
||||
|
Gains
on treasury stock dispositions
|
||||||||||
|
and
other
(a)
|
4,615
|
209
|
595
|
|||||||
|
Issuance
of subsidiary shares
(a)(b)
|
2,153
|
—
|
—
|
|||||||
|
Balance
at December 31
|
$
|
24,265
|
$
|
17,497
|
$
|
17,288
|
||||
|
RETAINED
EARNINGS
|
||||||||||
|
Balance
at January 1
|
$
|
82,796
|
$
|
75,553
|
$
|
68,701
|
||||
|
Net
earnings
|
16,593
|
15,002
|
14,118
|
|||||||
|
Dividends
(a)
|
(8,594
|
)
|
(7,759
|
)
|
(7,266
|
)
|
||||
|
Balance
at December 31
|
$
|
90,795
|
$
|
82,796
|
$
|
75,553
|
||||
|
COMMON
STOCK HELD IN TREASURY
|
||||||||||
|
Balance
at January 1
|
$
|
24,597
|
$
|
26,627
|
$
|
26,916
|
||||
|
Purchases
(a)
|
1,892
|
1,177
|
2,851
|
|||||||
|
Dispositions
(a)
(c)
|
(13,727
|
)
|
(3,207
|
)
|
(3,140
|
)
|
||||
|
Balance
at December 31
|
$
|
12,762
|
$
|
24,597
|
$
|
26,627
|
||||
|
(a)
|
Total
dividends and other transactions with shareowners increased equity by
$10,009 million in 2004 and reduced equity by $5,520 million and $6,382
million in 2003 and 2002, respectively.
|
|||
|
(b)
|
Related
to the issuance of 20% of NBC Universal’s shares to a subsidiary of
Vivendi Universal as part of the transaction described in note 16.
|
|||
|
(c)
|
In
2004, included 341.7 million shares valued at $10,674 million issued in
the Amersham acquisition, and 119.4 million shares valued at $3,765
million sold to partially fund the NBC and VUE combination.
|
|||
Under
the share repurchase program initiated in 1994, we repurchased 6 million shares
for a total of $0.2 billion during 2004. As of December 31, 2004, a total of
1,109 million shares, having an aggregate cost of approximately $23 billion, had
been purchased and the program was closed out. In December 2004, our Board of
Directors authorized a new three-year (2005-2007), $15 billion share repurchase
program.
Common
shares issued and outstanding are summarized in the following
table.
SHARES
OF GE COMMON STOCK
|
December
31 (In thousands)
|
2004
|
2003
|
2002
|
|
Issued
|
11,145,212
|
11,145,212
|
11,145,212
|
|
In
treasury
|
(558,854)
|
(1,082,092)
|
(1,175,318)
|
|
Outstanding
|
10,586,358
|
10,063,120
|
9,969,894
|
GE
has 50 million authorized shares of preferred stock ($1.00 par value), but has
not issued any such shares as of December 31, 2004.
The
effects of translating to U.S. dollars the financial statements of non-U.S.
affiliates whose functional currency is the local currency are included in
shareowners’ equity. Asset and liability accounts are translated at year-end
exchange rates, while revenues and expenses are translated at average rates for
the period.
Note
25
Other
Stock-Related Information
We
grant stock options, restricted stock units (RSUs) and performance share units
(PSUs) to employees under the 1990 Long-Term Incentive Plan as described in our
current Proxy Statement. In addition, we grant options and RSUs in limited
circumstances to consultants, advisors and independent contractors (primarily
non-employee talent at NBC Universal) under a plan approved by our Board of
Directors in 1997 (the consultants’ plan). There are outstanding grants under
two separate shareowner approved option plans for non-employee directors; the
last grant was made in 2002 and no further grants are expected to be made under
these plans. Requirements for stock option shares may be met from either
unissued or treasury shares. RSUs give the recipients the right to receive
shares of our stock upon the lapse of their related restrictions. Restrictions
on RSUs lapse in various increments and at various dates, beginning after three
years from date of grant through grantee retirement. Although the plan permits
us to issue RSUs settleable in cash, we have only issued RSUs settleable in
shares of our stock. PSUs give recipients the right to receive shares of our
stock upon the achievement of certain performance targets.
We
measure the total cost of each stock option grant at the date of grant using a
market-based option trading model. We recognize the cost of each stock option,
RSU and PSU on a straight-line basis over its vesting period.
Stock
options expire 10 years from the date they are granted and vest over service
periods that range from one to five years.
All
grants of GE options under all plans must be approved by the Management
Development and Compensation Committee, which comprises entirely outside
directors.
|
Average
per share
|
||||||||||
|
(Shares
in thousands)
|
Shares
subject to option
|
Exercise
price
|
Option
price
|
|||||||
|
Balance
at December 31, 2001
|
354,453
|
$
|
25.08
|
$
|
40.08
|
|||||
|
Options
granted
|
46,928
|
27.37
|
27.37
|
|||||||
|
Options
exercised
|
(29,146
|
)
|
9.45
|
31.86
|
||||||
|
Options
terminated
|
(10,177
|
)
|
38.14
|
(a
|
)
|
|||||
|
Balance
at December 31, 2002
|
362,058
|
26.26
|
24.35
|
|||||||
|
Options
granted
|
8,261
|
31.19
|
31.19
|
|||||||
|
Options
exercised
|
(43,829
|
)
|
9.45
|
27.59
|
||||||
|
Options
terminated
|
(10,643
|
)
|
38.98
|
(a
|
)
|
|||||
|
Balance
at December 31, 2003
|
315,847
|
28.30
|
30.98
|
|||||||
|
Options
granted
(b)
|
27,141
|
32.26
|
32.26
|
|||||||
|
Options
exercised
|
(43,110
|
)
|
10.54
|
32.68
|
||||||
|
Options
terminated
|
(13,409
|
)
|
36.91
|
(a
|
)
|
|||||
|
Balance
at December 31, 2004
|
286,469
|
$
|
30.94
|
$
|
36.50
|
|||||
|
(a)
|
Not
applicable.
|
|||
|
(b)
|
Included
approximately 3.5 million options that replaced canceled SARs and have
identical terms.
|
|||
STOCK
COMPENSATION PLANS
|
December
31, 2004 (Shares in thousands)
|
Securities
to be issued upon exercise
|
Weighted
average exercise price
|
Securities
available for future issuance
|
|||||||
|
APPROVED
BY SHAREOWNERS
|
||||||||||
|
Options
|
285,152
|
$
|
30.97
|
(a
|
)
|
|||||
|
RSUs
|
30,715
|
(b
|
)
|
(a
|
)
|
|||||
|
PSUs
|
700
|
(b
|
)
|
(a
|
)
|
|||||
|
NOT
APPROVED BY SHAREOWNERS
|
||||||||||
|
Options
|
1,317
|
24.64
|
(c
|
)
|
||||||
|
RSUs
|
3,036
|
(b
|
)
|
(c
|
)
|
|||||
|
Total
(d)
|
320,920
|
$
|
30.94
|
130,385
|
||||||
|
(a)
|
Under
the 1990 Long-Term Incentive Plan, 0.95% of issued common stock (including
treasury shares) as of the first day of each calendar year during which
the Plan is in effect becomes available for awards in that calendar year.
Total shares available for future issuance under the 1990 Long-Term
Incentive Plan amounted to 105.9 million shares.
|
|||
|
(b)
|
Not
applicable.
|
|||
|
(c)
|
Total
shares available for future issuance under the consultants’ plan amount to
24.5 million shares.
|
|||
|
(d)
|
In
connection with various acquisitions, there are an additional 1.8 million
options outstanding, with a weighted average exercise price of
$19.98
|
|||
Outstanding
options expire on various dates through December 9, 2014.
The
following table summarizes information about stock options outstanding at
December 31, 2004.
STOCK
OPTIONS OUTSTANDING
|
(Shares
in thousands)
|
Outstanding
|
Exercisable
|
||||||||||||||
|
Exercise
price range
|
Shares
|
Average
life
(a)
|
Average
exercise
price
|
Shares
|
Average
exercise
price
|
|||||||||||
|
$7.83-14.73
|
52,457
|
1.1
|
$
|
12.11
|
52,457
|
$
|
12.11
|
|||||||||
|
15.83-27.05
|
76,738
|
5.4
|
25.59
|
54,171
|
24.99
|
|||||||||||
|
27.20-35.48
|
52,494
|
8.4
|
33.05
|
12,494
|
34.06
|
|||||||||||
|
35.79-42.33
|
56,127
|
4.8
|
39.48
|
55,482
|
39.50
|
|||||||||||
|
43.17-57.31
|
48,653
|
6.3
|
47.56
|
29,045
|
47.56
|
|||||||||||
|
Total
|
286,469
|
5.2
|
$
|
30.94
|
203,649
|
$
|
29.40
|
|||||||||
|
At
year-end 2003, options with an average exercise price of $24.63 were
exercisable on 214 million shares; at year-end 2002, options with an
average exercise price of $18.75 were exercisable on 214 million
shares.
|
||||||
|
(a)
|
Average
contractual life remaining in years.
|
|||||
OPTION
VALUE INFORMATION
(a)
|
|
2004
|
2003
|
2002
|
|||||||
|
Fair
value per option (in dollars)
(b)
|
$
|
8.33
|
$
|
9.44
|
$
|
7.73
|
||||
|
Valuation
assumptions
|
||||||||||
|
Expected
option term (in years)
|
6.0
|
6.0
|
6.0
|
|||||||
|
Expected
volatility
|
27.7
|
%
|
34.7
|
%
|
33.7
|
%
|
||||
|
Expected
dividend yield
|
2.5
|
2.5
|
2.7
|
|||||||
|
Risk-free
interest rate
|
4.0
|
3.5
|
3.5
|
|||||||
|
(a)
|
Weighted
averages of option grants during each period.
|
|||
|
(b)
|
Estimated
using Black-Scholes option pricing
model.
|
|||
Note
26
Supplemental
Cash Flows Information
Changes
in operating assets and liabilities are net of acquisitions and dispositions of
principal businesses.
“Payments
for principal businesses purchased” in the Statement of Cash Flows is net of
cash acquired and includes debt assumed and immediately repaid in acquisitions.
“All
other operating activities” in the Statement of Cash Flows consists primarily of
adjustments to current and noncurrent accruals and deferrals of costs and
expenses, adjustments for gains and losses on assets, increases and decreases in
assets held for sale and adjustments to assets.
Non-cash
transactions include the following: in 2004, the issuance of GE common stock
valued at $10,674 million in connection with the acquisition of Amersham and the
issuance of NBC Universal shares valued at $5,845 million in connection with the
combination of NBC and VUE; in 2003, the acquisition of Osmonics, Inc. for GE
common stock valued at $240 million; and in 2002, the acquisition of Interlogix,
Inc. for GE common stock valued at $395 million and the acquisition of Bravo for
GE common stock and other investment securities valued at $335 million and $886
million, respectively.
|
For
the years ended December 31 (In millions)
|
2004
|
2003
|
2002
|
|||||||
|
GE
|
||||||||||
|
NET
DISPOSITIONS (PURCHASES) OF GE SHARES FOR
TREASURY
|
||||||||||
|
Open
market purchases under share repurchase program
|
$
|
(203
|
)
|
$
|
(340
|
)
|
$
|
(1,981
|
)
|
|
|
Other
purchases
|
(1,689
|
)
|
(837
|
)
|
(870
|
)
|
||||
|
Dispositions
|
5,885
|
1,903
|
1,866
|
|||||||
|
|
$
|
3,993
|
$
|
726
|
$
|
(985
|
)
|
|||
|
GECS
|
||||||||||
|
ALL
OTHER OPERATING ACTIVITIES
|
||||||||||
|
Proceeds
from assets held for sale
|
$
|
84
|
$
|
1,168
|
$
|
25
|
||||
|
Amortization
of intangible assets
|
800
|
947
|
1,558
|
|||||||
|
Realized
gains on sale of investment securities
|
(407
|
)
|
(408
|
)
|
(301
|
)
|
||||
|
Other
|
117
|
508
|
(1,838
|
)
|
||||||
|
|
$
|
594
|
$
|
2,215
|
$
|
(556
|
)
|
|||
|
NET
INCREASE IN GECS FINANCING RECEIVABLES
|
||||||||||
|
Increase
in loans to customers
|
$
|
(342,357
|
)
|
$
|
(263,815
|
)
|
$
|
(209,431
|
)
|
|
|
Principal
collections from customers—loans
|
305,846
|
238,518
|
185,329
|
|||||||
|
Investment
in equipment for financing leases
|
(22,649
|
)
|
(22,825
|
)
|
(19,828
|
)
|
||||
|
Principal
collections from customers—financing leases
|
19,715
|
18,909
|
15,305
|
|||||||
|
Net
change in credit card receivables
|
(7,322
|
)
|
(11,483
|
)
|
(19,108
|
)
|
||||
|
Sales
of financing receivables
|
31,487
|
36,009
|
29,651
|
|||||||
|
|
$
|
(15,280
|
)
|
$
|
(4,687
|
)
|
$
|
(18,082
|
)
|
|
|
ALL
OTHER INVESTING ACTIVITIES
|
||||||||||
|
Purchases
of securities by insurance and annuity businesses
|
$
|
(34,164
|
)
|
$
|
(50,127
|
)
|
$
|
(64,721
|
)
|
|
|
Dispositions
and maturities of securities by insurance and annuity
businesses
|
32,668
|
43,720
|
54,423
|
|||||||
|
Proceeds
from principal business dispositions
|
472
|
3,337
|
—
|
|||||||
|
Other
|
1,467
|
3,277
|
(4,936
|
)
|
||||||
|
|
$
|
443
|
$
|
207
|
$
|
(15,234
|
)
|
|||
|
NEWLY
ISSUED DEBT HAVING MATURITIES LONGER THAN 90 DAYS
|
||||||||||
|
Short-term
(91 to 365 days)
|
$
|
1,504
|
$
|
1,576
|
$
|
1,796
|
||||
|
Long-term
(longer than one year)
|
59,198
|
57,572
|
93,026
|
|||||||
|
Proceeds—nonrecourse,
leveraged lease
|
562
|
791
|
1,222
|
|||||||
|
|
$
|
61,264
|
$
|
59,939
|
$
|
96,044
|
||||
|
REPAYMENTS
AND OTHER REDUCTIONS OF DEBT HAVING
MATURITIES LONGER THAN 90 DAYS
|
||||||||||
|
Short-term
(91 to 365 days)
|
$
|
(41,443
|
)
|
$
|
(38,756
|
)
|
$
|
(32,950
|
)
|
|
|
Long-term
(longer than one year)
|
(3,443
|
)
|
(3,664
|
)
|
(5,936
|
)
|
||||
|
Principal
payments—nonrecourse, leveraged lease
|
(652
|
)
|
(782
|
)
|
(339
|
)
|
||||
|
|
$
|
(45,538
|
)
|
$
|
(43,202
|
)
|
$
|
(39,225
|
)
|
|
|
ALL
OTHER FINANCING ACTIVITIES
|
||||||||||
|
Proceeds
from sales of investment contracts
|
$
|
18,103
|
$
|
9,319
|
$
|
7,894
|
||||
|
Redemption
of investment contracts
|
(21,048
|
)
|
(9,556
|
)
|
(6,834
|
)
|
||||
|
Capital
contributions from GE
|
—
|
—
|
6,300
|
|||||||
|
Cash
received upon assumption of insurance liabilities
|
—
|
—
|
2,813
|
|||||||
|
|
$
|
(2,945
|
)
|
$
|
(237
|
)
|
$
|
10,173
|
||
Operating
Segments
REVENUES
|
Total
revenues
|
Intersegment
revenues
|
External
revenues
|
||||||||||||||||||||||||||
|
(In
millions)
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
|||||||||||||||||||
|
Advanced
Materials
|
$
|
8,290
|
$
|
7,078
|
$
|
6,963
|
$
|
45
|
$
|
31
|
$
|
25
|
$
|
8,245
|
$
|
7,047
|
$
|
6,938
|
||||||||||
|
Commercial
Finance
|
23,489
|
20,813
|
19,592
|
279
|
195
|
128
|
23,210
|
20,618
|
19,464
|
|||||||||||||||||||
|
Consumer
Finance
|
15,734
|
12,845
|
10,266
|
33
|
23
|
12
|
15,701
|
12,822
|
10,254
|
|||||||||||||||||||
|
Consumer
& Industrial
|
13,767
|
12,843
|
12,887
|
476
|
290
|
347
|
13,291
|
12,553
|
12,540
|
|||||||||||||||||||
|
Energy
|
17,348
|
19,082
|
23,633
|
191
|
213
|
287
|
17,157
|
18,869
|
23,346
|
|||||||||||||||||||
|
Equipment
& Other Services
|
8,483
|
4,427
|
5,545
|
(354
|
)
|
(241
|
)
|
(142
|
)
|
8,837
|
4,668
|
5,687
|
||||||||||||||||
|
Healthcare
|
13,456
|
10,198
|
8,955
|
—
|
2
|
2
|
13,456
|
10,196
|
8,953
|
|||||||||||||||||||
|
Infrastructure
|
3,447
|
3,078
|
1,901
|
95
|
85
|
84
|
3,352
|
2,993
|
1,817
|
|||||||||||||||||||
|
Insurance
|
23,070
|
26,194
|
23,296
|
42
|
23
|
2
|
23,028
|
26,171
|
23,294
|
|||||||||||||||||||
|
NBC
Universal
|
12,886
|
6,871
|
7,149
|
—
|
—
|
—
|
12,886
|
6,871
|
7,149
|
|||||||||||||||||||
|
Transportation
|
15,562
|
13,515
|
13,685
|
692
|
772
|
1,044
|
14,870
|
12,743
|
12,641
|
|||||||||||||||||||
|
Corporate
items and eliminations
|
(3,169
|
)
|
(2,757
|
)
|
(1,662
|
)
|
(1,499
|
)
|
(1,393
|
)
|
(1,789
|
)
|
(1,670
|
)
|
(1,364
|
)
|
127
|
|||||||||||
|
Total
|
$
|
152,363
|
$
|
134,187
|
$
|
132,210
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
152,363
|
$
|
134,187
|
$
|
132,210
|
||||||||||
|
Revenues
of GE businesses include income from sales of goods and services to
customers and other income.
Sales
from one component to another generally are priced at equivalent
commercial selling prices.
|
|||||||||
Revenues originating from operations based in the United States were
$95,467 million, $84,795 million and $90,954 million in 2004, 2003 and 2002,
respectively. Revenues originating from operations based outside the United
States were $56,896 million, $49,392 million and $41,256 million in 2004, 2003
and 2002, respectively.
|
Assets
|
Property,
plant and equipment additions
(a)
|
Depreciation
and amortization
|
||||||||||||||||||||||||||
|
At
December 31
|
For
the years ended December 31
|
For
the years ended December 31
|
||||||||||||||||||||||||||
|
(In
millions)
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
|||||||||||||||||||
|
Advanced
Materials
|
$
|
12,318
|
$
|
12,359
|
$
|
11,372
|
$
|
638
|
$
|
797
|
$
|
703
|
$
|
774
|
$
|
655
|
$
|
632
|
||||||||||
|
Commercial
Finance
|
232,123
|
214,125
|
202,571
|
7,582
|
7,405
|
8,999
|
3,827
|
3,466
|
3,133
|
|||||||||||||||||||
|
Consumer
Finance
|
151,255
|
106,530
|
76,965
|
217
|
191
|
221
|
334
|
276
|
232
|
|||||||||||||||||||
|
Consumer
& Industrial
|
6,945
|
7,526
|
8,387
|
267
|
318
|
449
|
512
|
560
|
516
|
|||||||||||||||||||
|
Energy
|
18,264
|
17,121
|
16,372
|
402
|
514
|
734
|
573
|
555
|
517
|
|||||||||||||||||||
|
Equipment
& Other Services
|
55,744
|
63,989
|
27,995
|
3,215
|
1,148
|
2,417
|
1,995
|
1,126
|
1,034
|
|||||||||||||||||||
|
Healthcare
|
24,871
|
10,816
|
7,573
|
1,590
|
289
|
170
|
565
|
278
|
247
|
|||||||||||||||||||
|
Infrastructure
|
7,155
|
5,977
|
4,998
|
127
|
177
|
388
|
168
|
120
|
113
|
|||||||||||||||||||
|
Insurance
|
179,205
|
170,044
|
182,297
|
23
|
35
|
71
|
411
|
583
|
469
|
|||||||||||||||||||
|
NBC
Universal
|
34,206
|
11,619
|
10,401
|
1,189
|
121
|
252
|
273
|
117
|
109
|
|||||||||||||||||||
|
Transportation
|
13,676
|
13,285
|
12,599
|
436
|
595
|
348
|
435
|
412
|
377
|
|||||||||||||||||||
|
Corporate
items and eliminations
|
14,568
|
14,254
|
13,714
|
152
|
179
|
121
|
93
|
126
|
165
|
|||||||||||||||||||
|
Total
|
$
|
750,330
|
$
|
647,645
|
$
|
575,244
|
$
|
15,838
|
$
|
11,769
|
$
|
14,873
|
$
|
9,960
|
$
|
8,274
|
$
|
7,544
|
||||||||||
|
(a)
|
Additions
to property, plant and equipment include amounts relating to principal
businesses purchased.
|
|||||||||
Property,
plant and equipment associated with operations based in the United States were
$25,452 million, $20,828 million and $19,808 million at year-end 2004, 2003 and
2002, respectively. Property, plant and equipment associated with operations
based outside the United States were $37,882 million, $32,560 million and
$29,265 million at year-end 2004, 2003 and 2002, respectively.
Basis
for presentation
Our
operating businesses are organized based on the nature of products and services
provided. Segment accounting policies are the same as described in note
1.
A
description of our operating segments can be found on pages 110-111 and details
of segment profit by operating segment can be found on page 53 of this report.
Derivatives
and Other Financial Instruments
Derivatives
and hedging
Exchange
rate and interest rate risks are managed with a variety of straightforward
techniques, including match funding and selective use of derivatives. We use
derivatives to mitigate or eliminate certain financial and market risks because
we conduct business in diverse markets around the world and local funding is not
always efficient. In addition, we use derivatives to adjust the debt we are
issuing to match the fixed or floating nature of the assets we are acquiring. We
apply strict policies to manage each of these risks, including prohibitions on
derivatives trading, derivatives market-making or other speculative
activities.
To
qualify for hedge accounting, the details of the hedging relationship must be
formally documented at inception of the arrangement, including the risk
management objective, hedging strategy, hedged item, specific risks that are
being hedged, the derivative instrument and how effectiveness is being assessed.
The derivative must be highly effective in offsetting either changes in fair
value or cash flows, as appropriate, for the risk being hedged. Effectiveness is
evaluated on a retrospective and prospective basis. If a hedge relationship
becomes ineffective, it no longer qualifies as a hedge. Any excess gains or
losses attributable to such ineffectiveness, as well as subsequent changes in
the fair value of the derivative, are recognized in earnings.
Cash
flow hedges
Cash
flow hedges are hedges that use simple derivatives to offset the variability of
expected future cash flows. Variability can appear in floating rate assets,
floating rate liabilities or from certain types of forecasted transactions, and
can arise from changes in interest rates or currency exchange rates. For
example, GECS often borrows at a variable rate of interest to fund our financial
services businesses. If Commercial Finance needs the funds to make a floating
rate loan, there is no exposure to interest rate changes, and no hedge is
necessary. However, upon making a fixed rate loan, we will contractually commit
to pay a fixed rate of interest to a counterparty who will pay us a variable
rate of interest (an “interest rate swap”). We then designate this swap as a
cash flow hedge of the associated variable-rate borrowing. If, as expected, the
derivative is perfectly effective in offsetting variable interest in the
borrowing, we record changes in its fair value in a separate component in
equity, then release those changes to earnings contemporaneously with the
earnings effects of the hedged item. Further information about hedge
effectiveness is provided on page 105.
We
use currency forwards and options to manage exposures to changes in currency
exchange rates associated with commercial purchase and sale transactions. These
instruments permit us to eliminate the cash flow variability, in local currency,
of costs or selling prices denominated in currencies other than the functional
currency. In addition, we use these instruments, along with interest rate and
currency swaps, to convert borrowings into the currency of the local market in
which we do business.
At
December 31, 2004, amounts related to derivatives qualifying as cash flow hedges
amounted to a reduction of equity of $1,223 million, of which we expect to
transfer $453 million to earnings in 2005 along with the earnings effects of the
related forecasted transactions. At December 31, 2004, the amount of
unrecognized losses related to cash flow hedges of short-term borrowings was
$1,823 million. In 2004, there were no forecasted transactions that failed to
occur. At December 31, 2004, the maximum term of derivative instruments that
hedge forecasted transactions was 23 years and related to hedges of anticipated
bond purchases in the Insurance business.
Fair
value hedges
Fair
value hedges are hedges that eliminate the risk of changes in the fair values of
assets, liabilities and certain types of firm commitments. For example, we will
use an interest rate swap in which we receive a fixed rate of interest and pay a
variable rate of interest to change the cash flow profile of a fixed-rate
borrowing to match the variable rate financial asset that it is funding. We
record changes in fair value of derivatives designated and effective as fair
value hedges in earnings, offset by corresponding changes in the fair value of
the hedged item.
We
use interest rate swaps, currency swaps and interest rate and currency forwards
to hedge the effects of interest rate and currency exchange rate changes on
local and nonfunctional currency denominated fixed-rate borrowings and certain
types of fixed rate assets. Fair value adjustments increased the carrying amount
of debt outstanding at December 31, 2004, by $2,282 million. We use equity
options to hedge price changes in invest-ment securities.
Net
investment hedges
Net
investment hedges are hedges that use derivative contracts or cash instruments
to hedge the foreign currency exposure of a net investment in a foreign
operation. We manage currency exposures that result from net investments in
affiliates principally by funding assets denominated in local currency with debt
denominated in that same currency. In certain circumstances, we manage such
exposures with currency forwards and currency swaps.
Derivatives
not designated as hedges
We
must meet specific criteria in order to apply any of the three forms of hedge
accounting. For example, hedge accounting is not permitted for hedged items that
are marked to market through earnings. We use derivatives to hedge exposures
when it makes economic sense to do so, including circumstances in which the
hedging relationship does not qualify for hedge accounting as described in the
following paragraph. We also will occasionally receive derivatives, such as
equity warrants, in the ordinary course of business. Derivatives that do not
qualify for hedge accounting are marked to market through earnings.
We
use swaps and option contracts, including caps, floors and collars, as an
economic hedge of changes in interest rates, currency exchange rates and equity
prices on certain types of assets and liabilities. We occasionally obtain equity
warrants as part of sourcing or financing transactions. Although these
instruments are considered to be derivatives, their economic risk is similar to,
and managed on the same basis as, other equity instruments we hold.
Earnings
effects of derivatives
The
table that follows provides additional information about the earnings effects of
derivatives. In the context of hedging relationships, “effectiveness” refers to
the degree to which fair value changes in the hedging instrument offset the
corresponding expected earnings effects of the hedged item. Certain elements of
hedge positions cannot qualify for hedge accounting under SFAS 133 whether
effective or not, and must therefore be marked to market through earnings. Time
value of purchased options is the most common example of such elements in
instruments we use. Pre-tax earnings effects of such items are shown in the
following table as “Amounts excluded from the measure of effectiveness.”
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
CASH
FLOW HEDGES
|
|||||||
|
Ineffectiveness
|
$
|
2
|
$
|
(19
|
)
|
||
|
Amounts
excluded from the measure of effectiveness
|
25
|
—
|
|||||
|
FAIR
VALUE HEDGES
|
|||||||
|
Ineffectiveness
|
11
|
—
|
|||||
|
Amounts
excluded from the measure of effectiveness
|
3
|
—
|
|||||
In
2004, Energy recognized a loss of $30 million, after tax and before cancelation
penalties, for terminating a forward euro contract when our customer canceled
its hedged, firm order for equipment and services.
Counterparty
credit risk
The
risk that counterparties to derivative contracts will default and not make
payments to us according to the terms of the agreements is counterparty credit
risk. We manage counterparty credit risk on an individual counterparty basis,
which means that we net exposures on transactions by counterparty where legal
right of offset exists to determine the amount of exposure to each counterparty.
When a counterparty exceeds credit exposure limits (see table below), as
measured by current market value of the derivative contract, no additional
transactions are permitted to be executed until the exposure with that
counterparty is reduced to an amount that is within the established limits.
Swaps are required to be executed under master agreements containing mutual
credit downgrade provisions that provide the ability to require assignment or
termination in the event either party is downgraded below A3 or A-.
To
further mitigate credit risk, in certain cases we have entered into collateral
arrangements that provide us with the right to hold collateral when the current
market value of derivative contracts exceeds an exposure threshold. Under these
arrangements, we may receive U.S. Treasury and other highly-rated securities or
cash to secure our exposure to counterparties; such collateral is available to
us in the event that a counterparty defaults. From an economic standpoint, we
evaluate credit risk exposures and compliance with credit exposure limits net of
such collateral. If the downgrade provisions had been triggered at December 31,
2004, we could have been required to disburse up to $5.4 billion and could have
claimed $4.7 billion from counterparties, including $3.0 billion of collateral
that has been pledged to us.
Fair
values of our derivative assets and liabilities represent the replacement value
of existing derivatives at market prices and can change significantly from
period to period based on, among other factors, market movements and changes in
our positions. At December 31, 2004 and 2003, gross fair value gains amounted to
$6.5 billion and $5.5 billion, respectively. At December 31, 2004 and 2003,
gross fair value losses amounted to $7.2 billion and $6.9 billion,
respectively.
The
following tables illustrate our policy relating to exposure limits to
counterparties.
COUNTERPARTY
CREDIT CRITERIA
|
Credit
rating
|
|||||||
|
|
Moody’s
|
S&P
|
|||||
|
Foreign
exchange forwards and other
|
|||||||
|
derivatives
less than one year
|
P-1
|
A-1
|
|||||
|
All
derivatives between one and five years
|
Aa3
|
(a)
|
AA-
|
(a)
|
|||
|
All
derivatives greater than five years
|
Aaa
|
(a)
|
AAA
|
(a)
|
|||
|
(a)
|
Counterparties
that have an obligation to provide collateral to cover credit exposure in
accordance with a credit support agreement must have a minimum A3/A-
rating.
|
||
EXPOSURE
LIMITS
|
|
Exposure
|
|||||||||
|
|
Greater
than one year
|
|||||||||
|
(In
millions)
|
Less
than one year
|
With
collateral
|
Without
collateral
|
|||||||
|
Minimum
rating
|
||||||||||
|
Aaa/AAA
|
$
|
150
|
$
|
100
|
$
|
75
|
||||
|
Aa3/AA-
|
150
|
50
|
50
|
|||||||
|
A3/A-
|
150
|
5
|
Not
allowed
|
|||||||
|
2004
|
2003
|
||||||||||||||||||
|
Assets
(liabilities)
|
Assets
(liabilities)
|
||||||||||||||||||
| December 31 (In millions) |
Notional
amount |
Carrying
amount (net) |
Estimated
fair value |
Notional
amount |
Carrying
amount (net) |
Estimated
fair value |
|||||||||||||
|
GE
|
|||||||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Investments
and notes receivable
|
$
|
(a
|
)
|
$
|
3,465
|
$
|
3,545
|
$
|
(a
|
)
|
$
|
645
|
$
|
645
|
|||||
|
Liabilities
|
|||||||||||||||||||
|
Borrowings
(b)
(c)
|
(a
|
)
|
(11,034
|
)
|
(11,144
|
)
|
(a
|
)
|
(10,943
|
)
|
(10,991
|
)
|
|||||||
|
Other
financial instruments
|
(a
|
)
|
(758
|
)
|
(855
|
)
|
(a
|
)
|
—
|
—
|
|||||||||
|
GECS
|
|||||||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Time
sales and loans
|
(a
|
)
|
215,803
|
216,923
|
(a
|
)
|
183,416
|
182,961
|
|||||||||||
|
Other
commercial and residential mortgages
|
(a
|
)
|
11,213
|
11,402
|
(a
|
)
|
8,759
|
9,085
|
|||||||||||
|
Other
financial instruments
|
(a
|
)
|
3,206
|
3,420
|
(a
|
)
|
2,701
|
2,701
|
|||||||||||
|
Liabilities
|
|||||||||||||||||||
|
Borrowings
(b)
(c)
|
(a
|
)
|
(361,342
|
)
|
(370,641
|
)
|
(a
|
)
|
(320,318
|
)
|
(331,381
|
)
|
|||||||
|
Investment
contract benefits
|
(a
|
)
|
(35,312
|
)
|
(35,337
|
)
|
(a
|
)
|
(34,224
|
)
|
(34,035
|
)
|
|||||||
|
Insurance—financial
guarantees and credit life
(d)
|
223,299
|
(3,582
|
)
|
(3,582
|
)
|
171,338
|
(3,935
|
)
|
(3,935
|
)
|
|||||||||
|
Other
firm commitments
|
|||||||||||||||||||
|
Ordinary
course of business lending commitments
|
|||||||||||||||||||
|
Fixed
rate
|
2,503
|
—
|
—
|
2,158
|
—
|
—
|
|||||||||||||
|
Variable
rate
|
8,156
|
—
|
—
|
8,923
|
—
|
—
|
|||||||||||||
|
Unused
revolving credit lines
(e)
|
|||||||||||||||||||
|
Commercial
|
|||||||||||||||||||
|
Fixed
rate
|
1,210
|
—
|
—
|
896
|
—
|
—
|
|||||||||||||
|
Variable
rate
|
21,411
|
—
|
—
|
15,953
|
—
|
—
|
|||||||||||||
|
Consumer—principally
credit cards
|
|||||||||||||||||||
|
Fixed
rate
|
141,965
|
—
|
—
|
107,892
|
—
|
—
|
|||||||||||||
|
Variable
rate
|
200,219
|
—
|
—
|
131,106
|
—
|
—
|
|||||||||||||
|
(a)
|
These
financial instruments do not have notional amounts.
|
||||||
|
(b)
|
Included
effects of interest rate swaps and cross currency swaps.
|
||||||
|
(c)
|
See
note 18.
|
||||||
|
(d)
|
See
note 19.
|
||||||
|
(e)
|
Excluded
inventory financing arrangements, which may be withdrawn at our option, of
$8.9 billion and $4.2 billion as of December 31, 2004 and 2003,
respectively.
|
||||||
Assets
and liabilities that are reflected in the accompanying financial statements at
fair value are not included in the above disclosures; such items include cash
and equivalents, investment securities, separate accounts and derivative
financial instruments. Other assets and liabilities—those not carried at fair
value—are discussed below. Apart from certain of our borrowings and certain
marketable securities, few of the instruments discussed below are actively
traded and their fair values must often be determined using models. Although we
have made every effort to represent accurate estimated fair values in this
section, there is no assurance that such estimates could actually have been
realized at December 31, 2004 or 2003.
A
description of how we estimate fair values follows.
Time
sales and loans
Based
on quoted market prices, recent transactions and/or discounted future cash
flows, using rates at which similar loans would have been made to similar
borrowers.
Borrowings
Based
on discounted future cash flows using current market rates which are comparable
to market quotes.
Investment
contract benefits
Based
on expected future cash flows, discounted at currently offered discount rates
for immediate annuity contracts or cash surrender values for single premium
deferred annuities.
All
other instruments
Based
on comparable market transactions, discounted future cash flows, quoted market
prices, and/or estimates of the cost to terminate or otherwise settle
obligations.
Note
29
Securitization
Entities
We
securitize financial assets in the ordinary course of business to improve
shareowner returns. The securitization transactions we engage in are similar to
those used by many financial institutions. Beyond improving returns, these
securitization transactions serve as funding sources for a variety of
diversified lending and securities transactions. Historically, we have used both
GE-supported and third-party entities to execute securitization transactions
funded in the commercial paper and term bond markets.
Securitized
assets that are on-balance sheet include assets consolidated on July 1, 2003,
upon adoption of FIN 46. Although we do not control these entities,
consolidation was required because we provided a majority of the credit and
liquidity support for their activities. A majority of these entities were
established to issue asset-backed securities, using assets that were sold by us
and by third parties. These entities differ from others included in our
consolidated financial statements because the assets they hold are legally
isolated and are unavailable to us under any circumstances. Repayment of their
liabilities depends primarily on cash flows generated by their assets. Because
we have ceased transferring assets to these entities, balances will decrease as
the assets repay. We refer to these entities as “consolidated, liquidating
securitization entities.”
In
December 2004, we acquired AFIG. Securitization entities used by AFIG before our
acquisition to transfer its assets, residential real estate mortgages, are
required by U.S. accounting standards to be consolidated. These entities have
characteristics similar to those we consolidated when we adopted FIN 46, and we
intend to run off their assets. Therefore, we refer to them as consolidated,
liquidating securitization entities.
The
following table represents assets in securitization entities, both consolidated
and off-balance sheet.
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Receivables
secured by:
|
|||||||
|
Equipment
|
$
|
13,918
|
$
|
15,616
|
|||
|
Commercial
real estate
|
15,538
|
16,713
|
|||||
|
Residential
real estate—AFIG
|
9,094
|
—
|
|||||
|
Other
assets
|
11,723
|
9,114
|
|||||
|
Credit
card receivables
|
7,075
|
8,581
|
|||||
|
GE
trade receivables
|
3,582
|
3,249
|
|||||
|
Total
securitized assets
|
$
|
60,930
|
$
|
53,273
|
|||
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Off-balance
sheet
(a)(b)
|
$
|
34,417
|
$
|
26,810
|
|||
|
On-balance
sheet—AFIG
|
9,094
|
—
|
|||||
|
On-balance
sheet—other
(c)
|
17,419
|
26,463
|
|||||
|
Total
securitized assets
|
$
|
60,930
|
$
|
53,273
|
|
(a)
|
At
December 31, 2004 and 2003, liquidity support amounted to $2,300 million
and $3,100 million, respectively. These amounts are net of $4,300 million
and $2,400 million, respectively, participated or deferred beyond one
year. Credit support amounted to $6,600 million and $5,500 million at
December 31, 2004 and 2003, respectively.
|
||
|
(b)
|
Liabilities
for recourse obligations related to off-balance sheet assets were $0.1
billion at both December 31, 2004 and 2003.
|
||
|
(c)
|
At
December 31, 2004 and 2003, liquidity support amounted to $14,400 million
and $18,400 million, respectively. These amounts are net of $1,200 million
and $5,300 million, respectively, participated or deferred beyond one
year. Credit support amounted to $6,900 million and $8,600 million at
December 31, 2004 and 2003, respectively.
|
||
The
portfolio of financing receivables consisted of loans and financing lease
receivables secured by equipment, commercial and residential real estate and
other assets; credit card receivables; and trade receivables. Examples of these
assets include loans and leases on manufacturing and transportation equipment,
loans on commercial property, commercial loans, and balances of high credit
quality accounts from sales of a broad range of products and services to a
diversified customer base.
Assets
in consolidated, liquidating securitization entities are shown in the following
captions in the Statement of Financial Position.
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Investment
securities
|
$
|
1,147
|
$
|
1,566
|
|||
|
Financing
receivables—net (note 12)
(a)
|
22,616
|
21,877
|
|||||
|
Other
assets
|
2,408
|
2,352
|
|||||
|
Other,
principally insurance receivables
|
342
|
668
|
|||||
|
Total
|
$
|
26,513
|
$
|
26,463
|
|||
|
(a)
|
Included
$9,094 million related to AFIG.
|
||
Off-balance
sheet arrangements
We
continue to engage in off-balance sheet securitization transactions with
third-party entities and to use public market term securitizations. As discussed
above, assets in off-balance sheet securitization entities amounted to $34.4
billion and $26.8 billion at December 31, 2004 and 2003, respectively. Gross
securi-tization gains amounted to $1,195 million in 2004 compared with $1,394
million in 2003 and $1,796 million in 2002.
Amounts
recognized in our financial statements related to sales to off-balance sheet
securitization entities are as follows:
|
December
31 (In millions)
|
2004
|
2003
|
|||||
|
Retained
interests
|
$
|
3,637
|
$
|
2,663
|
|||
|
Servicing
assets
(a)
|
33
|
150
|
|||||
|
Recourse
liability
|
(64
|
)
|
(75
|
)
|
|||
|
Total
|
$
|
3,606
|
$
|
2,738
|
|||
|
(a)
|
2003
included $115 million of mortgage servicing rights sold in
2004.
|
||
|
•
|
RETAINED
INTERESTS.
When we securitize receivables, we determine fair value based on
discounted cash flow models that incorporate, among other things,
assumptions including loan pool credit losses, prepayment speeds and
discount rates. These assumptions are based on our experience, market
trends and anticipated performance related to the particular assets
securitized. Subsequent to recording retained interests, we review
recorded values quarterly in the same manner and using current
assumptions. We recognize impairments when carrying amounts exceed current
fair values.
|
|
•
|
SERVICING
ASSETS.
Following a securitization transaction, we retain responsibility for
servicing the receivables, and are therefore entitled to an ongoing fee
based on the outstanding principal balances of the receivables. Servicing
assets are primarily associated with residential mortgage loans. Their
value is subject to credit, prepayment and interest rate risk.
|
|
•
|
RECOURSE
LIABILITY.
Certain transactions require credit support agreements. As a result, we
provide for expected credit losses under these agreements and such amounts
approximate fair value.
|
| (Dollars in millions) |
Equipment
|
Commercial
real estate
|
Other
assets
|
Credit
card receivables
|
|||||||||
|
2004
|
|||||||||||||
|
Cash
proceeds from
|
|||||||||||||
|
securitization
|
$
|
5,367
|
$
|
4,578
|
$
|
—
|
$
|
8,121
|
|||||
|
Proceeds
from collections reinvested in new receivables
|
—
|
—
|
21,389
|
5,208
|
|||||||||
|
Cash
received on retained interest
|
107
|
70
|
128
|
1,788
|
|||||||||
|
Weighted
average lives (in months)
|
37
|
68
|
—
|
7
|
|||||||||
|
ASSUMPTIONS
AS OF SALE DATE
(a)
|
|||||||||||||
|
Discount
rate
|
8.2
|
%
|
13.0
|
%
|
—
|
12.2
|
%
|
||||||
|
Prepayment
rate
|
9.1
|
%
|
11.2
|
%
|
—
|
14.9
|
%
|
||||||
|
Estimate
of credit losses
|
1.9
|
%
|
1.1
|
%
|
—
|
8.9
|
%
|
||||||
|
2003
|
|||||||||||||
|
Cash
proceeds from securitization
|
$
|
5,416
|
$
|
3,082
|
$
|
2,009
|
$
|
—
|
|||||
|
Proceeds
from collections reinvested in new receivables
|
—
|
—
|
14,047
|
11,453
|
|||||||||
|
Weighted
average lives (in months)
|
29
|
72
|
106
|
7
|
|||||||||
|
ASSUMPTIONS
AS OF SALE DATE
(a)
|
|||||||||||||
|
Discount
rate
|
6.6
|
%
|
11.5
|
%
|
6.4
|
%
|
11.2
|
%
|
|||||
|
Prepayment
rate
|
10.1
|
%
|
10.8
|
%
|
4.6
|
%
|
15.0
|
%
|
|||||
|
Estimate
of credit losses
|
1.6
|
%
|
1.6
|
%
|
0.2
|
%
|
10.8
|
%
|
|||||
|
Cash
receipts related to servicing and other sources were less than $300
million in 2004.
|
|||||
|
(a)
|
Based
on weighted averages.
|
||||
Key assumptions used in measuring the fair value of retained interests in securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are noted in the following table. These assumptions may differ from those in the previous table as these related to all outstanding retained interests as of December 31, 2004.
|
(Dollars
in millions)
|
Equipment
|
Commercial
real estate
|
Other
assets
|
Credit
card receivables
|
|||||||||
|
DISCOUNT
RATE
(a)
|
7.3
|
%
|
8.6
|
%
|
6.7
|
%
|
11.3
|
%
|
|||||
|
Effect
of:
|
|||||||||||||
|
10%
Adverse change
|
$
|
(10
|
)
|
$
|
(13
|
)
|
$
|
(19
|
)
|
$
|
(9
|
)
|
|
|
20%
Adverse change
|
(20
|
)
|
(26)
|
)
|
(37
|
)
|
(17
|
)
|
|||||
|
PREPAYMENT
RATE
(a)
|
9.4
|
%
|
3.2
|
%
|
1.1
|
%
|
12.2
|
%
|
|||||
|
Effect
of:
|
|||||||||||||
|
10%
Adverse change
|
$
|
(6
|
)
|
$
|
(4
|
)
|
$
|
(9
|
)
|
$
|
(35
|
)
|
|
|
20%
Adverse change
|
(12
|
)
|
(9
|
)
|
(19
|
)
|
(65
|
)
|
|||||
|
ESTIMATE
OF CREDIT LOSSES
(a)
|
1.8
|
%
|
0.4
|
%
|
0.5
|
%
|
8.0
|
%
|
|||||
|
Effect
of:
|
|||||||||||||
|
10%
Adverse change
|
$
|
(11
|
)
|
$
|
(8
|
)
|
$
|
—
|
$
|
(34
|
)
|
||
|
20%
Adverse change
|
(23
|
)
|
(17
|
)
|
(2
|
)
|
(67
|
)
|
|||||
|
Remaining
weighted
|
|||||||||||||
|
average
lives (in months)
|
35
|
101
|
62
|
8
|
|||||||||
|
Net
credit losses
|
$
|
54
|
$
|
7
|
$
|
25
|
$
|
465
|
|||||
|
Delinquencies
|
78
|
38
|
10
|
256
|
|||||||||
|
(a)
|
Based
on weighted averages.
|
||||
GUARANTEE
AND REIMBURSEMENT CONTRACTS.
We provide protection to certain counterparties of interest rate swaps entered
into by securitization-related entities related to changes in the relationship
between commercial paper interest rates and the timing and amount of the payment
streams. These arrangements provide protection for the life of the assets held
by the SPE but generally amortize in proportion to the decline in underlying
asset principal balances. At December 31, 2004, the notional amount of such
support was $1.8 billion and related assets and liabilities were insignificant.
Note
30
Commitments
and Guarantees
Commitments,
including guarantees
In
our Transportation business, we have committed to provide financial assistance
on future sales of aircraft equipped with our engines, totaling $818 million at
December 31, 2004. In addition, our Commercial Finance business had placed
multiple-year orders for various Boeing, Airbus and other aircraft with list
prices approximating $10.2 billion at December 31, 2004.
At
December 31, 2004, we were committed under the following guarantee arrangements
beyond those provided on behalf of SPEs. See note 29.
|
•
|
LIQUIDITY
SUPPORT.
Liquidity support provided to holders of certain variable rate bonds
issued by municipalities amounted to $3,612 million at December 31, 2004.
If holders elect to sell supported bonds that cannot be remarketed, we are
obligated to repurchase them at par. If called upon, our position would be
secured by the repurchased bonds. While we hold any such bonds, we would
receive interest payments from the municipalities at a rate that is in
excess of the stated rate on the bond. To date, we have not been required
to perform under such arrangements. In addition, we are currently not
providing any new liquidity facilities.
|
|
•
|
CREDIT
SUPPORT.
We have provided $6,868 million of credit support on behalf of certain
customers or associated companies, predominantly joint ventures and
partnerships, using arrangements such as standby letters of credit and
performance guarantees. These arrangements enable our customers and
associated companies to execute transactions or obtain desired financing
arrangements with third parties. Should the customer or associated company
fail to perform under the terms of the transaction or financing
arrangement, we would be required to perform on their behalf. Under most
such arrangements, our guarantee is secured, usually by the asset being
purchased or financed but possibly by certain other assets of the customer
or associated company. The length of these credit support arrangements
parallels the length of the related financing arrangements or
transactions. The liability for such credit support was $95 million at
December 31, 2004.
|
|
•
|
INDEMNIFICATION
AGREEMENTS.
These are agreements that require us to fund up to $837 million under
residual value guarantees on a variety of leased equipment and $194
million of other indemnification commitments arising from sales of
businesses or assets. Under most of our residual value guarantees, our
commitment is secured by the leased asset at termination of the lease. The
liability for these indemnification agreements was $85 million at December
31, 2004.
|
|
•
|
CONTINGENT
CONSIDERATION.
These are agreements to provide additional consideration in a business
combination to the seller if contractually specified conditions related to
the acquired entity are achieved. At December 31, 2004, we had recognized
liabilities for estimated payments amounting to $56 million of our total
exposure of $444 million.
|
At
year-end 2004, NBC Universal had $7,598 million of commitments to acquire film
and broadcast material and the rights to broadcast television programs,
including U.S. television rights to future Olympic Games, contractual
commitments under various creative talent arrangements and commitments under
long-term television station affiliation agreements that require payments
through 2014.
Our
guarantees are provided in the ordinary course of business. We underwrite these
guarantees considering economic, liquidity and credit risk of the counterparty.
We believe that the likelihood is remote that any such arrangements could have a
significant adverse effect on our financial position, results of operations or
liquidity. We record liabilities for guarantees at estimated fair value,
generally the amount of the premium received, or if we do not receive a premium,
the amount based on appraisal, observed market values or discounted cash flows.
Any associated recoveries from third parties are recorded as other receivables;
not netted against the liabilities.
Product
warranties
We
provide for estimated product warranty expenses when we sell the related
products. Because warranty estimates are forecasts that are based on the best
available information—mostly historical claims experience—claims costs may
differ from amounts provided. An analysis of changes in the liability for
product warranties follows.
|
(In
millions)
|
2004
|
2003
|
2002
|
|||||||
|
Balance
at January 1
|
$
|
1,437
|
$
|
1,304
|
$
|
968
|
||||
|
Current
year provisions
|
720
|
751
|
918
|
|||||||
|
Expenditures
(a)
|
(838
|
)
|
(749
|
)
|
(694
|
)
|
||||
|
Other
changes
|
7
|
131
|
112
|
|||||||
|
Balance
at December 31
|
$
|
1,326
|
$
|
1,437
|
$
|
1,304
|
||||
|
(a)
|
Primarily
related to Energy
|
|||
Note
31
Quarterly
Information (Unaudited)
|
First
quarter
|
Second
quarter
|
Third
quarter
|
Fourth
quarter
|
||||||||||||||||||||||
|
(In
millions; per-share amounts in dollars)
|
2004
|
2003
|
2004
|
2003
|
2004
|
2003
|
2004
|
2003
|
|||||||||||||||||
|
CONSOLIDATED
OPERATIONS
|
|||||||||||||||||||||||||
|
Earnings
before accounting changes
|
$
|
3,240
|
$
|
3,214
|
$
|
3,924
|
$
|
3,794
|
$
|
4,051
|
$
|
4,021
|
$
|
5,378
|
$
|
4,560
|
|||||||||
|
Cumulative
effect of accounting changes
|
—
|
(215
|
)
|
—
|
—
|
—
|
(372
|
)
|
—
|
—
|
|||||||||||||||
|
Net
earnings
|
$
|
3,240
|
$
|
2,999
|
$
|
3,924
|
$
|
3,794
|
$
|
4,051
|
$
|
3,649
|
$
|
5,378
|
$
|
4,560
|
|||||||||
|
Per-share
amounts before accounting changes
|
|||||||||||||||||||||||||
|
Diluted
earnings per share
|
$
|
0.32
|
$
|
0.32
|
$
|
0.38
|
$
|
0.38
|
$
|
0.38
|
$
|
0.40
|
$
|
0.51
|
$
|
0.45
|
|||||||||
|
Basic
earnings per share
|
0.32
|
0.32
|
0.38
|
0.38
|
0.38
|
0.40
|
0.51
|
0.45
|
|||||||||||||||||
|
Per-share
amounts after accounting changes
|
|||||||||||||||||||||||||
|
Diluted
earnings per share
|
0.32
|
0.30
|
0.38
|
0.38
|
0.38
|
0.36
|
0.51
|
0.45
|
|||||||||||||||||
|
Basic
earnings per share
|
0.32
|
0.30
|
0.38
|
0.38
|
0.38
|
0.36
|
0.51
|
0.45
|
|||||||||||||||||
|
SELECTED
DATA
|
|||||||||||||||||||||||||
|
GE
|
|||||||||||||||||||||||||
|
Sales
of goods and services
|
$
|
16,680
|
$
|
15,758
|
$
|
19,995
|
$
|
17,640
|
$
|
20,967
|
$
|
16,463
|
$
|
24,572
|
$
|
20,581
|
|||||||||
|
Gross
profit from sales
|
4,467
|
4,836
|
5,503
|
5,590
|
5,648
|
4,568
|
7,229
|
6,045
|
|||||||||||||||||
|
GECS
|
|||||||||||||||||||||||||
|
Total
revenues
|
16,943
|
14,867
|
17,133
|
15,887
|
17,549
|
17,007
|
19,151
|
16,518
|
|||||||||||||||||
|
Earnings
before accounting changes
|
1,845
|
1,670
|
1,696
|
1,602
|
2,233
|
2,207
|
2,387
|
2,275
|
|||||||||||||||||
For GE, gross profit from sales is sales of goods and services
less costs of goods and services sold.
Earnings-per-share
amounts for each quarter are required to be computed independently. As a result,
their sum does not equal the total year basic earnings per share after
accounting changes in 2004 and 2003.
A
description of operating segments for General Electric Company and consolidated
affiliates as of December 31, 2004, and the basis for presentation in this
report, follows.
Advanced
Materials
High-performance
engineered plastics used in a variety of applications such as automotive parts,
computer enclosures, telecommunications equipment and construction materials.
Products also include structured products, silicones and high-purity quartzware.
Products and services are sold worldwide to a diverse customer base consisting
mainly of manufacturers.
Commercial
Finance
Loans,
leases and other financial services to customers, including manufacturers,
distributors and end-users for a variety of equipment and major capital assets.
These assets include industrial and energy- related facilities and equipment;
commercial and residential real estate; vehicles; aircraft; and equipment used
in many industries, including the construction, manufacturing,
telecommunications and healthcare industries.
Consumer
Finance
Private-label
credit cards; personal loans; bank cards; auto loans; leases and inventory
financing; residential mortgages; corporate travel and purchasing cards; debt
consolidation loans; home equity loans; and credit and other insurance products
for customers on a global basis.
Consumer
& Industrial
Major
appliances and related services for products such as refrigerators, freezers,
electric and gas ranges, cooktops, dish-washers, clothes washers and dryers,
microwave ovens, room air conditioners and residential water system products.
Distributed to both retail outlets and direct to consumers, mainly for the
replacement market, and to building contractors and distributors for new
installations. Lighting products include a wide variety of lamps and lighting
fixtures. Electrical distribution and control equipment includes power delivery
and control products such as transformers, meters and relays. Also includes GE
Supply, a network of electrical supply houses. Products and services are sold in
North America and in global markets under various GE and private-label brands.
Energy
Power
plant products and services, including design, installation, operation and
maintenance services sold into global markets. Gas, steam and aeroderivative
turbines, generators, combined cycle systems, controls and related services,
including total asset optimization solutions, equipment upgrades and contractual
services, are sold to power generation and other industrial customers. Renewable
energy solutions including wind turbines and hydro turbines and generators.
Advanced turbomachinery products and related services for the oil and gas
market, including total pipeline integrity solutions. Substation automation,
network solutions and power equipment sold to power transmission and
distribution customers. Also includes portable and rental power plants, nuclear
reactors, fuel and nuclear support services.
Equipment
& Other Services
Rentals,
leases, sales, asset management services and loans for portfolios of commercial
and transportation equipment, including tractors, trailers, railroad rolling
stock, modular space units, intermodal shipping containers and marine
containers. Also included in the segment are activities and businesses that are
not measured within one of the other financial services segments—for example,
corporate financial services expenses, liquidating businesses and other
non-segment aligned operations.
Healthcare
Medical
imaging systems such as magnetic resonance (MR) and computed tomography (CT)
scanners, x-ray, nuclear imaging and ultrasound, as well as diagnostic
cardiology and patient monitoring devices; related services, including equipment
monitoring and repair, computerized data management and customer productivity
services. Diagnostic imaging agents used in medical scanning procedures, protein
separations products including chromotography purification systems used in the
manufacture of biopharmaceuticals, and high-throughput systems for applications
in genomics, proteomics and bioassays. Products and services are sold worldwide
to hospitals, medical facilities, pharmaceutical and biotechnology companies and
to the life science research market.
Infrastructure
Chemical
water treatment program services and equipment; measurement and sensing
equipment (products and subsystems for sensing temperature flow rates, humidity
and pressure); security equipment and systems (including card access systems,
video and sensor monitoring equipment, integrated facility monitoring systems
and explosive detection systems); a broad range of automation hardware and
software. Markets are extremely diverse. Products and services are sold to
commercial and industrial end-users, including utilities; original equipment
manufacturers; electrical distributors; retail outlets; airports; railways; and
transit authorities. Increasingly, products and services are developed for and
sold in global markets.
Insurance
U.S.
and international multiple-line property and casualty reinsurance, certain
directly written specialty insurance and life reinsurance, consumer investment,
insurance and retirement services, and private mortgage insurance.
Principal
businesses are the furnishing of U.S. network television services to more than
230 affiliated stations, production of television programs, the production and
distribution of motion pictures, operation of 29 VHF and UHF television
broadcasting stations, operation of cable/satellite networks around the world,
operation of theme parks, and investment and programming activities in
multimedia and the Internet.
Transportation
Jet
engines and replacement parts and repair and maintenance services for all
categories of commercial aircraft (short/medium, intermediate and long-range);
for a wide variety of military aircraft, including fighters, bombers, tankers
and helicopters; and for executive and regional aircraft. Products and services
are sold worldwide to airframe manufacturers, airlines and government agencies.
Also includes aircraft engine derivatives used as marine propulsion and
industrial power sources; the latter is also reported in Energy. Rail systems
products and maintenance services including diesel electric locomotives, transit
propulsion equipment, motorized wheels for off-highway vehicles, and railway
signaling communications systems.
Glossary
ADVERSE
OR FAVORABLE DEVELOPMENT
An adjustment to increase (adverse development) or reduce (favorable
development) the provision for estimated ultimate insurance losses in a year
following the year in which the loss event occurred.
BACKLOG
Unfilled customer orders for products and product services (12 months for
product services).
BORROWING
Financial liability (short or long-term) that obliges us to repay cash or
another financial asset to another entity.
BORROWINGS
AS A PERCENTAGE OF TOTAL CAPITAL INVESTED
For GE, the sum of borrowings and mandatorily redeemable preferred stock,
divided by the sum of borrowings, mandatorily redeemable preferred stock,
minority interest and total shareowners’ equity.
CASH
EQUIVALENTS
Highly liquid debt instruments with original maturities of less than three
months, such as commercial paper. Typically included with cash for reporting
purposes, unless designated as available-for-sale and included with investment
securities.
CASH
FLOW HEDGES
Qualifying derivative instruments that we use to protect ourselves against
exposure to volatility in future cash flows. The exposure may be associated with
an existing asset or liability, or with a forecasted transaction. See
“Hedge.”
CASH
GENERATORS
Our
Advanced Materials, Consumer & Industrial, Insurance and Equipment &
Other Services segments, businesses that provide consistently strong cash flow
and grow earnings in an expanding economy.
COMMERCIAL
PAPER
Unsecured, unregistered promise to repay borrowed funds in a specified period
ranging from overnight to 270 days.
CUSTOMER
SERVICE AGREEMENTS
(also referred to as “product services agreements”) Contractual commitments,
with multiple-year terms, to provide specified services for products in our
industrial installed base—for example, monitoring, maintenance, overhaul and
spare parts for a gas turbine/generator set installed in a customer’s power
plant.
DERIVATIVE
INSTRUMENT
A
financial instrument or contract with another party (counterparty) that is
structured to meet any of a variety of financial objectives, including those
related to fluctuations in interest rates, currency exchange rates and commodity
prices. Options, forwards and swaps are the most common derivative instruments
we employ. See “Hedge.”
DIRECT
WRITTEN PREMIUMS
Amounts charged to insureds in exchange for coverages provided in accordance
with the terms of an insurance/reinsurance contract.
EARNED
PREMIUMS
Portion of the premium, net of any amount ceded, pertaining to the segment of
the policy period for which insurance coverage has been provided.
EFFECTIVE
TAX RATE
Provision for income taxes as a percentage of earnings before income taxes and
accounting changes. Does not represent cash paid for income taxes in the current
accounting period.
EQUIPMENT
LEASED TO OTHERS
Rental equipment we own that is available to rent and is stated at cost less
accumulated depreciation.
FAIR
VALUE HEDGE
Qualifying derivative instruments that we use to eliminate the risk of changes
in the fair value of assets, liabilities or certain types of firm commitments.
Changes in the fair values of derivative instruments that are designated and
effective as fair value hedges are recorded in earnings, but are offset by
corresponding changes in the fair values of the hedged items. See
“Hedge.”
FINANCIAL
LEVERAGE
The relationship of debt to equity. Expressed for financial services businesses
as borrowings divided by equity. Expressed for industrial businesses as
borrowings divided by total capital.
FINANCING
RECEIVABLES
Investment in contractual loans and leases due from customers (not investment
securities).
FORWARD
CONTRACT
Fixed price contract for purchase or sale of a specified quantity of a
commodity, security, currency or other financial instrument with delivery and
settlement at a specified future date. Commonly used as a hedging tool. See
“Hedge.”
GOODWILL
The premium paid for acquisition of a business. Calculated as the purchase price
less the fair value of net assets acquired (net assets are identified tangible
and intangible assets, less liabilities assumed).
GROWTH
ENGINES
Our
Commercial Finance, Consumer Finance, Energy, Healthcare, Infrastructure, NBC
Universal and Transportation segments, businesses that are market leaders with
strengths in technology, cost, services, global distribution and capital
efficiency.
GUARANTEED
INVESTMENT CONTRACTS (GICS)
Deposit-type products that guarantee a minimum rate of return, which may be
fixed or floating.
HEDGE
A
technique designed to eliminate risk. Often refers to the use of derivative
financial instruments to offset changes in interest rates, currency exchange
rates or commodity prices, although many business positions are “naturally
hedged”—for example, funding a U.S. fixed-rate investment with U.S. fixed-rate
borrowings is a natural interest rate hedge.
INSURANCE
RECEIVABLES
Receivables of our insurance businesses associated with (1) reinsurance
agreements in which those businesses legally transferred (ceded) insurance
losses (and related premiums) to reinsurers and are entitled to recovery of
those insurance losses; (2) premiums on insurance and reinsurance contracts; (3)
policy loans to policyholders of certain life insurance contracts; and (4)
premium funds on deposit with reinsurance customers as collateral for our
obligations as a reinsurer.
INTANGIBLE
ASSET
A
non-financial asset lacking physical substance, such as goodwill, patents,
trademarks and licenses. Also includes present value of future profits, which
are anticipated net discounted cash flows to be realized from certain in-force
insurance, annuity and investment contracts at the date we acquire a life
insurance business.
INTEREST
RATE SWAP
Agreement under which two counterparties agree to exchange one type of interest
rate cash flow for another. In a typical arrangement, one party periodically
will pay a fixed amount of interest, in exchange for which that party will
receive variable payments computed using a published index. See
“Hedge.”
GE 2004
ANNUAL REPORT 112
INVESTMENT SECURITIES
Generally, an instrument that provides an ownership position in a corporation (a
stock), a creditor relationship with a corporation or governmental body (a
bond), or rights to ownership such as those represented by options, subscription
rights and subscription warrants.
MANAGED
RECEIVABLES
Total receivable amounts on which we continue to perform billing and collection
activities, including receivables that have been sold with and without credit
recourse and are no longer reported on our balance sheet.
MATCH
FUNDING
A
risk control policy that provides funds for a particular financial asset having
the same currency, maturity and interest rate characteristics as that asset.
Match funding ensures that we maintain initial financing spreads or margins for
the life of a financial asset, and is executed directly, by issuing debt, or
synthetically, through a combination of debt and derivative financial
instruments. For example, when we lend at a fixed interest rate in the U.S., we
can borrow those U.S. dollars either at a fixed rate of interest or at a
floating rate executed concurrently with a pay-fixed interest rate swap. See
“Hedge.”
MONETIZATION
Sale of financial assets to a third party for cash. For example, we sell certain
loans, credit card receivables and trade receivables to third-party financial
buyers, typically providing at least some credit protection and often agreeing
to provide collection and processing services for a fee. Monetization normally
results in gains on interest-bearing assets and losses on non-interest bearing
assets. See “Securitization” and “Variable Interest Entity.”
NET
REVENUES
For our lending and leasing businesses, revenues from services, less interest
and other financial charges.
OPERATING
PROFIT
Earnings before interest and other financial charges, income taxes and effects
of accounting changes.
OPTION
The right, not the obligation, to execute a transaction at a designated price,
generally involving equity interests, interest rates, currencies or commodities.
See “Hedge.”
PREMIUM
Rate that is charged under insurance/reinsurance contracts.
PRESENT
VALUE OF FUTURE PROFITS
See “Intangible Asset.”
PRODUCT
SERVICES
For purposes of the financial statement display of sales and costs of sales on
pages 72 and 73, “goods” is required by U.S. Securities and Exchange Commission
regulations to include all sales of tangible products, and “services” must
include all other sales, including broadcasting and other services activities.
In our Management’s Discussion and Analysis of Operations we refer to sales of
both spare parts (goods) and related services as sales of “product services,”
which is an important part of our operations.
PRODUCT
SERVICES AGREEMENTS
See “Customer Service Agreements.”
PRODUCTIVITY
The rate of increased output for a given level of input, with both output and
input measured in constant currency. A decline in output for a given level of
input is “negative” productivity.
PROGRESS
COLLECTIONS
Payments received from customers as deposits before the associated work is
performed or product is delivered.
REINSURANCE
A
form of insurance that insurance companies buy for their own
protection.
RETROCESSION
AGREEMENT
Contract to acquire third-party insurance protection for reinsurance policies
written. Retrocession is a risk mitigation technique.
RETURN
ON AVERAGE SHAREOWNERS’ EQUITY
Earnings before accounting changes divided by average total equity (on an annual
basis, calculated using a five-point average).
RETURN
ON AVERAGE TOTAL CAPITAL INVESTED EXCLUDING EFFECT OF ACCOUNTING
CHANGES
For GE, earnings before accounting changes plus the sum of after-tax interest
and other financial charges and minority interest, divided by the sum of total
shareowners’ equity, borrowings, mandatorily redeemable preferred stock and
minority interest (on an annual basis, calculated using a five-point
average).
SECURITIZATION
A
process whereby loans or other receivables are packaged, underwritten and sold
to investors. In a typical transaction, assets are sold to a special purpose
entity (SPE), which purchases the assets with cash raised through issuance of
beneficial interests (usually debt instruments) to third party investors.
Whether or not credit risk associated with the securitized assets is retained by
the seller depends on the structure of the securitization. See “Monetization”
and “Variable Interest Entity.”
SEPARATE
ACCOUNT
Investments controlled by policyholders and associated with identical amounts
reported as insurance liabilities.
TURNOVER
Broadly based on the number of times that working capital is replaced during a
year. Accounts receivable turnover is total sales divided by the five-point
average balance of customer receivables from sales of goods and services (trade
receivables). Inventory turnover is total sales divided by a five-point average
balance of inventories. See “Working Capital.”
UNEARNED
PREMIUMS
Portion of the premium received, net of any amount ceded, that relates to future
coverage periods.
UNPAID
CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
Claims reserves for events that have occurred, including both reported and
incurred-but-not-reported (IBNR) reserves, and the expenses of settling such
claims.
VARIABLE
INTEREST ENTITY
Entity defined by Financial Accounting Standards Board Interpretation No. 46 (as
amended), and that must be consolidated by its primary beneficiary. A variable
interest entity has one or both of the following characteristics: (1) its equity
at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, or (2) as a group,
the equity investors lack one or more of the following characteristics: (a)
direct/indirect ability to make decisions, (b) obligation to absorb expected
losses, or (c) right to receive expected residual returns.
WORKING
CAPITAL
Sum of receivables from the sales of goods and services, plus inventories, less
trade accounts payables and progress collections.