Exhibit 99(e)
-1-
FINANCIAL SECTION
CONTENTS
AUDITED FINANCIAL STATEMENTS
2 Earnings
2 Changes in Share Owners' Equity
4 Financial Position
6 Cash Flows
44 Notes to Consolidated
Financial Statements
MANAGEMENT'S DISCUSSION
8 Operations
8 Consolidated Operations
14 Segment Operations
27 International Operations
29 Financial Resources and Liquidity
40 Selected Financial Data
41 Critical Accounting Policies
88 INDEPENDENT AUDITORS' REPORT
MANAGEMENT'S DISCUSSION OF FINANCIAL RESPONSIBILITY
Events of 2001 have stressed the world's economy and capital markets. At GE,
having well informed, confident investors is a critical management objective. We
take full responsibility for this objective, adopting appropriate accounting
policies and devoting our full, unyielding commitment to ensuring that those
policies are applied properly and consistently. We make every effort to report
in a manner that is relevant, complete and understandable. We welcome and
evaluate each suggestion from those who use our reports. Management meets its
responsibility for this objective in the following ways:
RIGOROUS MANAGEMENT OVERSIGHT. Members of our corporate leadership team
review each of our businesses at least six times a year on matters ranging from
overall strategy and financial performance to staffing and compliance. Our
business leaders constantly monitor real-time financial and operating systems
that enable early identification of, and responses to, opportunities and
potential issues. Our Board of Directors oversees management's conduct of the
business, and our Audit Committee, consisting entirely of outside directors,
oversees the Company's internal system of financial controls.
DEDICATION TO CONTROLLERSHIP. We maintain a dynamic system of internal financial
controls designed to ensure accurate financial record-keeping, protection of
physical and intellectual property and efficient use of resources. We recruit
and retain a world-class financial team, including more than 450 internal
auditors who conduct thousands of audits each year in every geographic area and
every GE business. Senior management and the Audit Committee oversee the scope
and results of these reviews. We continuously reinforce key employee
responsibilities around the world through our integrity policies, which require
compliance with law and policy, including financial integrity and avoiding
conflicts of interest. These integrity policies, published in 27 languages, are
provided to each of our more than 300,000 global employees. Our internal
auditors conduct extensive inquiries into compliance with these policies. Our
strong compliance culture requires employees to raise any concerns and prohibits
retribution for doing so. We hold all employees, including top management,
accountable for compliance with our integrity policies.
VISIBILITY TO INVESTORS. As one of the most widely followed companies in the
world, we are keenly aware of the importance of full and open presentation of
our financial position and operating results. We hold more than 200 analyst and
investor meetings every year and communicate all material information covered in
those meetings to the public. Investors have given GE 16 first-place awards in
the last five years as reported by INVESTOR RELATIONS magazine. 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 by our independent audit firm, KPMG LLP, whose
representatives have direct access to the Audit Committee. Their report for 2001
appears on page 88.
Great companies are built on the foundation of accurate financial information
and compliance with the law. The financial information in this report is an
important part of that foundation. We present that information proudly, with the
goal that those who use it will understand GE and share our confidence in its
future.
/s/ Jeffrey R. Immelt /s/ Keith S. Sherin
Jeffrey R. Immelt Keith S. Sherin
Chairman of the Board Senior Vice President, Finance,
and Chief Executive Officer and Chief Financial Officer February 8, 2002
-2-
STATEMENT OF EARNINGS
General Electric Company
and consolidated affiliates
-----------------------------------
For the years ended December 31 (In millions; per-share amounts in dollars) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
REVENUES
Sales of goods $ 52,677 $ 54,828 $ 47,785
Sales of services 18,722 18,126 16,283
Other income (note 2) 234 436 798
Earnings of GECS before accounting changes -- -- --
GECS revenues from services (note 3) 54,280 56,463 46,764
----------------------------------
Total revenues 125,913 129,853 111,630
----------------------------------
COSTS AND EXPENSES (note 4)
Cost of goods sold 35,678 39,312 34,554
Cost of services sold 13,419 12,511 11,404
Interest and other financial charges 11,062 11,720 10,013
Insurance losses and policyholder and annuity benefits 15,062 14,399 11,028
Provision for losses on financing receivables (note 13) 2,481 2,045 1,671
Other costs and expenses 28,162 30,993 27,018
Minority interest in net earnings of consolidated affiliates 348 427 365
----------------------------------
Total costs and expenses 106,212 111,407 96,053
----------------------------------
EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES 19,701 18,446 15,577
Provision for income taxes (note 7) (5,573) (5,711) (4,860)
----------------------------------
EARNINGS BEFORE ACCOUNTING CHANGES 14,128 12,735 10,717
Cumulative effect of accounting changes (note 1) (444) -- --
----------------------------------
NET EARNINGS $ 13,684 $ 12,735 $ 10,717
=================================================================================================================
PER-SHARE AMOUNTS (note 8)
Per-share amounts before accounting changes
Diluted earnings per share $ 1.41 $ 1.27 $ 1.07
Basic earnings per share $ 1.42 $ 1.29 $ 1.09
Per-share amounts after accounting changes
Diluted earnings per share $ 1.37 $ 1.27 $ 1.07
Basic earnings per share $ 1.38 $ 1.29 $ 1.09
=================================================================================================================
DIVIDENDS DECLARED PER SHARE $ 0.66 $ 0.57 $ 0.48 2/3
=================================================================================================================
CONSOLIDATED STATEMENT OF CHANGES IN SHARE OWNERS' EQUITY
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------
CHANGES IN SHARE OWNERS' EQUITY (note 24)
Balance at January 1 $ 50,492 $ 42,557 $ 38,880
------------------------------
Dividends and other transactions with share owners (7,529) (3,044) (4,632)
------------------------------
Changes other than transactions with share owners
Increase attributable to net earnings 13,684 12,735 10,717
Investment securities--net (306) (552) (1,776)
Currency translation adjustments (562) (1,204) (632)
Derivatives qualifying as hedges (955) -- --
------------------------------
Total changes other than transactions with share owners 11,861 10,979 8,309
------------------------------
Balance at December 31 $ 54,824 $ 50,492 $ 42,557
============================================================================================
The notes to consolidated financial statements on pages 44-87 are an integral
part of these statements.
-3-
STATEMENT OF EARNINGS (CONT)
GE GECS
For the years ended December 31 (In millions; ---------------------------- ----------------------------
per-share amounts in dollars) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales of goods $ 49,057 $ 45,427 $ 39,045 $ 3,627 $ 9,408 $ 8,740
Sales of services 18,961 18,380 16,600 -- -- --
Other income (note 2) 433 498 856 -- -- --
Earnings of GECS before accounting changes 5,586 5,192 4,443 -- -- --
GECS revenues from services (note 3) -- -- -- 54,726 56,769 47,009
---------------------------- ----------------------------
Total revenues 74,037 69,497 60,944 58,353 66,177 55,749
---------------------------- ----------------------------
COSTS AND EXPENSES (note 4)
Cost of goods sold 32,419 30,782 26,578 3,266 8,537 7,976
Cost of services sold 13,658 12,765 11,721 -- -- --
Interest and other financial charges 817 811 810 10,598 11,111 9,359
Insurance losses and policyholder and annuity benefits -- -- -- 15,062 14,399 11,028
Provision for losses on financing receivables (note 13) -- -- -- 2,481 2,045 1,671
Other costs and expenses 8,637 8,392 7,732 19,817 22,767 19,433
Minority interest in net earnings of consolidated affiliates 185 213 179 163 214 186
---------------------------- ----------------------------
Total costs and expenses 55,716 52,963 47,020 51,387 59,073 49,653
---------------------------- ----------------------------
EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES 18,321 16,534 13,924 6,966 7,104 6,096
Provision for income taxes (note 7) (4,193) (3,799) (3,207) (1,380) (1,912) (1,653)
---------------------------- ----------------------------
EARNINGS BEFORE ACCOUNTING CHANGES 14,128 12,735 10,717 5,586 5,192 4,443
Cumulative effect of accounting changes (note 1) (444) -- -- (169) -- --
---------------------------- ----------------------------
NET EARNINGS $ 13,684 $ 12,735 $ 10,717 $ 5,417 $ 5,192 $ 4,443
==========================================================================================================================
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 2.
-4-
STATEMENT OF FINANCIAL POSITION
General Electric Company
and consolidated affiliates
---------------------------
At December 31 (In millions) 2001 2000
- ------------------------------------------------------------------------------------------
ASSETS
Cash and equivalents $ 9,082 $ 8,195
Investment securities (note 9) 101,017 91,339
Current receivables (note 10) 9,590 9,502
Inventories (note 11) 8,565 7,812
Financing receivables (investments in time sales, loans and
financing leases)--net (notes 12 and 13) 174,032 143,299
Insurance receivables (note 14) 27,317 23,802
Other GECS receivables 11,105 11,714
Property, plant and equipment (including equipment leased
to others)--net (note 15) 42,140 40,015
Investment in GECS -- --
Intangible assets--net (note 16) 31,649 27,441
All other assets (note 17) 80,526 73,887
------------------------
TOTAL ASSETS $ 495,023 $ 437,006
==========================================================================================
LIABILITIES AND EQUITY
Short-term borrowings (note 18) $ 153,076 $ 119,180
Accounts payable, principally trade accounts 18,158 14,853
Progress collections and price adjustments accrued 11,751 8,271
Dividends payable 1,787 1,589
All other current costs and expenses accrued 14,132 12,219
Long-term borrowings (note 18) 79,806 82,132
Insurance liabilities, reserves and annuity benefits (note 19) 114,223 106,150
All other liabilities (note 20) 32,921 28,494
Deferred income taxes (note 21) 9,130 8,690
------------------------
Total liabilities 434,984 381,578
------------------------
Minority interest in equity of consolidated affiliates (note 22) 5,215 4,936
------------------------
Common stock (9,925,938,000 and 9,932,006,000 shares outstanding
at year-end 2001 and 2000, respectively) 669 669
Accumulated gains/(losses)--net
Investment securities (232) 74
Currency translation adjustments (3,136) (2,574)
Derivatives qualifying as hedges (955) --
Other capital 16,693 15,195
Retained earnings 68,701 61,572
Less common stock held in treasury (26,916) (24,444)
------------------------
Total share owners' equity (notes 24 and 25) 54,824 50,492
------------------------
TOTAL LIABILITIES AND EQUITY $ 495,023 $ 437,006
==========================================================================================
The sum of accumulated gains/(losses) on investment securities, currency
translation adjustments, and derivatives qualifying as hedges constitutes
"Accumulated nonowner changes other than earnings," as shown in note 24, and was
$(4,323) and $(2,500) at year-end 2001 and 2000, respectively.
The notes to consolidated financial statements on pages 44-87 are an integral
part of this statement.
-5-
STATEMENT OF FINANCIAL POSITION (CONT)
GE GECS
--------------------- ---------------------
At December 31 (In millions) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and equivalents $ 10,447 $ 7,210 $ 7,314 $ 6,052
Investment securities (note 9) 879 1,009 100,138 90,330
Current receivables (note 10) 9,805 9,727 -- --
Inventories (note 11) 8,295 7,146 270 666
Financing receivables (investments in time sales, loans and
financing leases)--net (notes 12 and 13) -- -- 174,032 143,299
Insurance receivables (note 14) -- -- 27,317 23,802
Other GECS receivables -- -- 13,267 13,288
Property, plant and equipment (including equipment leased
to others)--net (note 15) 12,799 12,199 29,341 27,816
Investment in GECS 28,590 23,022 -- --
Intangible assets--net (note 16) 12,932 12,424 18,717 15,017
All other assets (note 17) 25,986 24,028 55,088 50,366
--------------------- ---------------------
TOTAL ASSETS $ 109,733 $ 96,765 $ 425,484 $ 370,636
==============================================================================================================
LIABILITIES AND EQUITY
Short-term borrowings (note 18) $ 1,722 $ 940 $ 160,844 $ 123,992
Accounts payable, principally trade accounts 6,680 6,153 13,705 10,436
Progress collections and price adjustments accrued 11,751 8,271 -- --
Dividends payable 1,787 1,589 -- --
All other current costs and expenses accrued 14,132 12,219 -- --
Long-term borrowings (note 18) 787 841 79,091 81,379
Insurance liabilities, reserves and annuity benefits (note 19) -- -- 114,223 106,150
All other liabilities (note 20) 16,089 14,840 16,647 13,451
Deferred income taxes (note 21) 1,013 452 8,117 8,238
--------------------- ---------------------
Total liabilities 53,961 45,305 392,627 343,646
--------------------- ---------------------
Minority interest in equity of consolidated affiliates (note 22) 948 968 4,267 3,968
--------------------- ---------------------
Common stock (9,925,938,000 and 9,932,006,000 shares outstanding
at year-end 2001 and 2000, respectively) 669 669 1 1
Accumulated gains/(losses)--net
Investment securities (232) 74 (348) 4
Currency translation adjustments (3,136) (2,574) (840) (957)
Derivatives qualifying as hedges (955) -- (890) --
Other capital 16,693 15,195 5,989 2,752
Retained earnings 68,701 61,572 24,678 21,222
Less common stock held in treasury (26,916) (24,444) -- --
--------------------- ---------------------
Total share owners' equity (notes 24 and 25) 54,824 50,492 28,590 23,022
--------------------- ---------------------
TOTAL LIABILITIES AND EQUITY $ 109,733 $ 96,765 $ 425,484 $ 370,636
==============================================================================================================
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 4.
-6-
STATEMENT OF CASH FLOWS
General Electric Company
and consolidated affiliates
------------------------------
For the years ended December 31 (In millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
CASH FLOWS--OPERATING ACTIVITIES
Net earnings $ 13,684 $ 12,735 $ 10,717
Adjustments to reconcile net earnings to cash provided
from operating activities
Cumulative effect of accounting changes 444 -- --
Depreciation and amortization of property, plant and equipment 5,370 5,039 4,908
Amortization of goodwill and other intangibles 1,719 2,697 1,783
Earnings (before accounting changes) retained by GECS -- -- --
Deferred income taxes 1,426 1,153 1,502
Decrease (increase) in GE current receivables 197 (537) 143
Decrease (increase) in inventories (485) (924) 266
Increase in accounts payable 4,676 3,297 820
Increase (decrease) in insurance liabilities and reserves 8,194 (1,009) 4,584
Provision for losses on financing receivables 2,481 2,045 1,671
All other operating activities (5,511) (1,806) (1,801)
------------------------------
CASH FROM OPERATING ACTIVITIES 32,195 22,690 24,593
------------------------------
CASH FLOWS--INVESTING ACTIVITIES
Additions to property, plant and equipment (15,520) (13,967) (15,502)
Dispositions of property, plant and equipment 7,345 6,767 6,262
Net increase in GECS financing receivables (13,952) (16,076) (12,628)
Payments for principal businesses purchased (12,429) (2,332) (11,654)
All other investing activities (5,558) (12,091) (8,657)
------------------------------
CASH USED FOR INVESTING ACTIVITIES (40,114) (37,699) (42,179)
------------------------------
CASH FLOWS--FINANCING ACTIVITIES
Net increase (decrease) in borrowings (maturities of 90 days or less) 20,482 (8,243) 6,171
Newly issued debt (maturities longer than 90 days) 32,071 47,645 48,158
Repayments and other reductions (maturities longer than 90 days) (37,001) (32,762) (27,539)
Net dispositions (purchases) of GE shares for treasury (2,435) 469 (1,002)
Dividends paid to share owners (6,358) (5,401) (4,587)
All other financing activities 2,047 12,942 622
------------------------------
CASH FROM (USED FOR) FINANCING ACTIVITIES 8,806 14,650 21,823
------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 887 (359) 4,237
Cash and equivalents at beginning of year 8,195 8,554 4,317
------------------------------
Cash and equivalents at end of year $ 9,082 $ 8,195 $ 8,554
=====================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest $(11,125) $(11,617) $(10,078)
Cash recovered (paid) during the year for income taxes (1,487) (2,604) (1,597)
=====================================================================================================
The notes to consolidated financial statements on pages 44-87 are an integral part of this statement.
-7-
STATEMENT OF CASH FLOWS (CONT)
GE GECS
----------------------------- -------------------------------
For the years ended December 31 (In millions) 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS--OPERATING ACTIVITIES
Net earnings $ 13,684 $ 12,735 $ 10,717 $ 5,417 $ 5,192 $ 4,443
Adjustments to reconcile net earnings to cash provided
from operating activities
Cumulative effect of accounting changes 444 -- -- 169 -- --
Depreciation and amortization of property, plant and equipment 1,919 1,725 1,735 3,451 3,314 3,173
Amortization of goodwill and other intangibles 580 523 584 1,139 2,174 1,199
Earnings (before accounting changes) retained by GECS (3,625) (3,370) (2,777) -- -- --
Deferred income taxes 564 470 655 862 683 847
Decrease (increase) in GE current receivables 207 (550) 190 -- -- --
Decrease (increase) in inventories (881) (663) (61) 396 (261) 327
Increase in accounts payable 364 845 104 4,804 3,047 699
Increase (decrease) in insurance liabilities and reserves -- -- -- 8,194 (1,009) 4,584
Provision for losses on financing receivables -- -- -- 2,481 2,045 1,671
All other operating activities 3,941 3,701 616 (9,314) (5,901) (2,124)
----------------------------- -------------------------------
CASH FROM OPERATING ACTIVITIES 17,197 15,416 11,763 17,599 9,284 14,819
----------------------------- -------------------------------
CASH FLOWS--INVESTING ACTIVITIES
Additions to property, plant and equipment (2,876) (2,536) (2,036) (12,644) (11,431) (13,466)
Dispositions of property, plant and equipment -- 53 -- 7,345 6,714 6,262
Net increase in GECS financing receivables -- -- -- (13,952) (16,076) (12,628)
Payments for principal businesses purchased (1,436) (1,156) (1,594) (10,993) (1,176) (10,060)
All other investing activities (1,535) (234) (432) (7,557) (12,173) (8,283)
----------------------------- -------------------------------
CASH USED FOR INVESTING ACTIVITIES (5,847) (3,873) (4,062) (37,801) (34,142) (38,175)
----------------------------- -------------------------------
CASH FLOWS--FINANCING ACTIVITIES
Net increase (decrease) in borrowings (maturities of 90 days or less) 327 (1,331) (1,230) 23,634 (2,121) 7,308
Newly issued debt (maturities longer than 90 days) 1,303 785 558 30,752 46,887 47,605
Repayments and other reductions (maturities longer than 90 days) (950) (855) (615) (36,051) (31,907) (26,924)
Net dispositions (purchases) of GE shares for treasury (2,435) 469 (1,002) -- -- --
Dividends paid to share owners (6,358) (5,401) (4,587) (1,961) (1,822) (1,666)
All other financing activities -- -- -- 5,090 12,942 622
----------------------------- -------------------------------
CASH FROM (USED FOR) FINANCING ACTIVITIES (8,113) (6,333) (6,876) 21,464 23,979 26,945
----------------------------- -------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 3,237 5,210 825 1,262 (879) 3,589
Cash and equivalents at beginning of year 7,210 2,000 1,175 6,052 6,931 3,342
----------------------------- -------------------------------
Cash and equivalents at end of year $ 10,447 $ 7,210 $ 2,000 $ 7,314 $ 6,052 $ 6,931
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest $ (358) $ (388) $ (482) $(10,767) $(11,229) $ (9,596)
Cash recovered (paid) during the year for income taxes (1,616) (1,804) (1,246) 129 (800) (351)
====================================================================================================================================
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 6.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION OF OPERATIONS
OVERVIEW
General Electric Company's consolidated financial statements represent the
combination of manufacturing and nonfinancial services businesses of General
Electric Company (GE) and the accounts of General Electric Capital Services,
Inc. (GECS).
Management's Discussion of Operations is presented in three parts:
Consolidated Operations, Segment Operations and International Operations.
CONSOLIDATED OPERATIONS
General Electric Company achieved record earnings and cash generation in 2001,
demonstrating the benefits of its diverse business portfolio and continuing
emphasis on globalization, growth in services, Digitization and Six Sigma
Quality.
Revenues were $125.9 billion in 2001, a decrease of 3% from $129.9 billion
in 2000, reflecting a 6% increase in GE's industrial business revenues partially
offsetting a 12% decrease at GECS. As described on page 12, GECS revenues in
both years included the revenues of certain businesses significantly impacted by
strategic repositioning activities. Excluding such activities, consolidated
revenues increased 4%. Revenues in 2000 increased 16% from $111.6 billion in
1999, reflecting continued growth from global activities and services.
Earnings before accounting changes increased to a record $14,128 million in
2001, an 11% increase from $12,735 million in 2000. Per-share earnings before
accounting changes increased to $1.41 during 2001, up 11% from the prior year's
$1.27. (Except as otherwise noted, earnings per share are presented on a diluted
basis.) The cumulative effect of accounting changes related to the adoption, as
of January 1, 2001, of Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, as amended, and the consensus of the FASB's Emerging
Issues Task Force on Issue 99-20, RECOGNITION OF INTEREST INCOME AND IMPAIRMENT
ON PURCHASED AND RETAINED BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS.
Adoption of these standards resulted in a one-time, non-cash reduction of
earnings of $444 million ($0.04 per share). After these required accounting
changes, 2001 earnings and earnings per share were $13,684 million and $1.37,
respectively. Earnings and earnings per share in 2000 rose 19% from $10,717
million and $1.07, respectively, in 1999.
MAJOR PROVISIONS OF NEW ACCOUNTING STANDARDS that may be significant to GE's
financial statements in the future are described in the following paragraphs.
SFAS 141, BUSINESS COMBINATIONS, and SFAS 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, modify the accounting for business combinations, goodwill and
identifiable intangible assets. As of January 1, 2002, all goodwill and
indefinite-lived intangible assets must be tested for impairment and a
transition adjustment will be recognized. Management has not yet determined the
exact amount of goodwill impairment under these new standards, but believes the
non-cash transition charge to earnings will be approximately $1.0 billion ($0.10
per share) and recognized in the first quarter of 2002. Amortization of goodwill
will cease as of January 1, 2002, and, thereafter, all goodwill and any
indefinite-lived intangible assets must be tested at least annually for
impairment. The effect of the non-amortization provisions on 2002 operations
will be affected by 2002 acquisitions and cannot be forecast, but if these rules
had applied to goodwill in 2001, management believes that full-year 2001 net
earnings would have increased by approximately $1.1 billion ($0.11 per share).
SFAS 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, requires recognition
of the fair value of obligations associated with the retirement of long-lived
assets when there is a legal obligation to incur such costs. This amount is
accounted for like an additional element of the corresponding asset's cost, and
is depreciated over that asset's useful life. SFAS 143 will be effective for GE
on January 1, 2003. Management has not yet determined the effect of adopting
this standard on GE's financial position and results of operations.
-9-
DIVIDENDS DECLARED in 2001 amounted to $6,555 million. Per-share dividends of
$0.66 were up 16% from 2000, following a 17% increase from the preceding year.
GE has rewarded its share owners with 26 consecutive years of dividend growth.
GE's dividend growth for the past five years has significantly outpaced dividend
growth of companies in the Standard & Poor's 500 stock index.
[GRAPH HERE]
- --------------------------------------------------------------------------------
GE/S&P CUMULATIVE DIVIDEND GROWTH SINCE 1996
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
GE 12.84% 30.87% 53.49% 81.18% 109.66%
S&P 500 4.03 8.72 11.68 12.08 5.64
- --------------------------------------------------------------------------------
RETURN ON AVERAGE SHARE OWNERS' EQUITY was 27.1% (excluding the effect of
accounting changes) in 2001, about the same as in 2000. The 2000 return on
average share owners' equity improved from 26.8% in 1999.
Except as otherwise noted, the analysis in the remainder of this section
presents GE results with GECS reported on an equity basis.
GE TOTAL REVENUES were $74.0 billion in 2001, compared with $69.5 billion in
2000 and $60.9 billion in 1999.
o GE sales of goods and services were $68.0 billion in 2001, an increase of
7% from 2000, which in turn was 15% higher than in 1999. Volume was about
7% higher in 2001, reflecting strong double-digit increases at Power
Systems and Medical Systems, somewhat offset by decreases across most of
the short-cycle businesses, particularly NBC, Plastics and Specialty
-10-
Materials. While overall selling prices were essentially flat in 2001, the
effects of selling prices in various reporting segments differed markedly.
The net effect in 2001 of exchange rates on sales denominated in currencies
other than the U.S. dollar was slightly negative. Volume in 2000 was about
16% higher than in 1999, with selling price and currency effects both
slightly negative.
For purposes of the financial statement display of sales and costs of
sales on pages 2 and 3, "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
information services activities. GE sales of both spare parts (goods) and
repair services, referred to here by management as "product services
revenues," constitute an important part of operations. Sales of product
services were $18.8 billion in 2001, a 13% increase over 2000. Increases in
product services revenues in 2001 and 2000 were widespread, led by
continued strong growth at Power Systems, Medical Systems and
Transportation Systems. Operating margin from product services was
approximately $4.7 billion, up 17% from 2000 on a comparable basis. The
increase reflected improvements in most product services businesses and was
led by Power Systems and Medical Systems.
o GE other income, earned from a wide variety of sources, was $0.4 billion in
2001, $0.5 billion in 2000 and $0.9 billion in 1999. Other income in 1999
included a pre-tax gain of $0.4 billion resulting from the contribution of
certain of NBC's media properties to NBC Internet (NBCi), a former
publicly-traded company, in exchange for a noncontrolling interest in NBCi.
o Earnings of GECS before accounting changes were $5,586 million, up 8% in
2001, following a 17% increase the year before. See page 23 for an analysis
of these earnings.
PRINCIPAL COSTS AND EXPENSES for GE are those classified as costs of goods and
services sold, and selling, general and administrative expenses. Several GE
initiatives had significant effects on costs:
o The Six Sigma Quality initiative has lowered GE's costs by reducing rework,
simplifying processes and reducing direct material costs.
o Globalization has reduced costs through sourcing of products and services
in lower-cost countries.
o Digitization has also reduced costs by providing GE businesses the ability
to simplify and streamline processes, while investing in internal
infrastructure hardware and software, enabling them to conduct a growing
portion of their business over the Internet. Benefits from this initiative
include improved customer service, expanded product and service offerings
and increased operating efficiency for both GE and its customers.
-11-
Primarily because of the funding status of the GE Pension Plan and other retiree
benefit plans, principal U.S. postretirement benefit plans (the plans)
contributed $1,480 million, $1,266 million and $1,062 million to pre-tax
earnings (6.8%, 6.5% and 6.5% of earnings before accounting changes) in 2001,
2000 and 1999, respectively. See notes 5 and 6 for information about funding
status and actuarial assumptions of the plans. Postretirement benefit costs are
expected to increase in 2002 for a number of reasons, including reduction in the
assumed annual return on assets from 9.5% to 8.5%, reduction in the discount
rate from 7.5% to 7.25% and effects of increases in healthcare costs. In 2002,
management expects these plans to contribute approximately $700 million to
pre-tax earnings. This estimate will not affect the funding status of the GE
Pension Plan; management does not anticipate GE making contributions to that
Plan. The present funding status of the plans provides assurance of benefits for
GE plan participants, but future effects on operating results and funding depend
on economic conditions and investment performance.
Costs and expenses in 1999 included $326 million of unusual charges, the
largest of which resulted from liabilities associated with past activities at
former manufacturing sites that are not part of any current business segment,
and costs for rationalizing certain operations and facilities of the worldwide
industrial businesses. Major elements of the restructuring program included
costs for employee severance, lease termination, dismantlement and site
restoration. The program was essentially complete by the end of 2000.
[GRAPH HERE]
- --------------------------------------------------------------------------------
GE OPERATING MARGIN AS A PERCENTAGE OF SALES
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
As reported 11.0% 16.7% 17.3% 18.6% 19.6%
Restructuring and other
unusual charges 4.7 -- 0.5 0.3 --
- --------------------------------------------------------------------------------
OPERATING MARGIN is sales of goods and services less the costs of goods and
services sold, and selling, general and administrative expenses. GE operating
margin reached a record 19.6% of sales in 2001, up from a comparable 18.9% in
2000 and 17.8% in 1999. The continued improvement in operating margin in 2001
was led by Power Systems and Aircraft Engines, reflecting increasing benefits
from the Digitization, product services and Six Sigma Quality initiatives.
Reported operating margin was 18.6% in 2000, including the costs of a one-time
retirement benefit provision associated with the labor agreement concluded in
the third quarter of that year. Reported operating margin in 1999 was 17.3% of
sales, including the $326 million of unusual charges discussed in the preceding
paragraph.
TOTAL COST PRODUCTIVITY (sales in relation to costs, both on a constant dollar
basis) in 2001 was 2.2% as productivity in long-cycle businesses, particularly
Power Systems and Medical Systems, was partially offset by negative productivity
across several short-cycle businesses, particularly Plastics, reflecting volume
declines. In 2000, total cost productivity of 3.6% reflected benefits from
improvements in base cost productivity achieved through strong volume growth and
the Digitization and Six Sigma Quality initiatives.
GE INTEREST AND OTHER FINANCIAL CHARGES in 2001 amounted to $817 million, about
the same as 2000 and 1999. During 2001, the benefits of lower average interest
rates and lower average borrowing levels were partially offset by increased
provisions for interest on tax liabilities. During 2000, higher average interest
rates were more than offset by lower average borrowing levels.
INCOME TAXES on consolidated earnings before accounting changes were 28.3%,
compared with 31.0% in 2000 and 31.2% in 1999. A more detailed analysis of
differences between the U.S. federal statutory rate and the consolidated rate,
as well as other information about income tax provisions, is provided in note 7.
The effective tax rate of GECS decreased to 19.8% in 2001 from 26.9% in
2000 and 27.1% in 1999. The 2001 effective tax rate reflects the effects of
continuing globalization, certain transactions (see note 7), and the effect of a
pre-tax charge related to the events of September 11. The pre-tax charge related
to September 11 amounted to approximately $600 million, principally at
Insurance, and reduced the GECS effective tax rate by one percentage point.
Management expects that trends in GECS businesses, particularly the continuing
impact of globalization, are likely to result in an effective tax rate for GECS
in 2002 that will be lower than the 2000 and 1999 rates, but higher than the
2001 rate.
-12-
GECS businesses are categorized for management purposes into four operating
segments: Commercial Finance, Consumer Finance, Equipment Management
and Insurance.
GECS earnings before accounting changes were $5,586 million in 2001, up 8%
from $5,192 million in 2000, with strong double-digit earnings growth in the
Consumer Finance and Commercial Finance segments. Net earnings in 2000 increased
17% from 1999. Earnings growth throughout the three-year period resulted from
origination volume and asset growth, productivity and acquisitions of businesses
and portfolios. Principal factors in the 2001 increase were strong productivity
($0.7 billion) and lower taxes ($0.5 billion) partially offset by GE Global
Insurance Holdings ($0.5 billion) and lower realized gains on financial
instruments. Excluding effects of Paine Webber Group, Inc. (PaineWebber) in 2000
and Americom in 2001, both of which are discussed below, such pre-tax gains were
lower in 2001 by $0.5 billion ($0.3 billion after tax). Pre-tax gains on sales
of investment securities declined in 2001 by $0.5 billion, of which $0.4 billion
related to GE Equity; other GE Equity gains were $0.8 billion lower; while gains
on securitizations were up $0.8 billion from 2000.
On November 9, 2001, GECS exchanged the stock of Americom and other related
assets and liabilities for a combination of cash and stock in SES Global, a
leading satellite company. The transaction resulted in a gain of $1,158 million
($642 million after tax).
On December 28, 2000, Montgomery Ward, LLC (Wards), formerly a GECS
subsidiary, filed for bankruptcy protection and began liquidation proceedings.
Net earnings for the year 2000 included operating losses from Wards amounting to
$245 million as well as a charge, primarily to other costs and expenses, for
$815 million ($537 million after tax) to recognize additional associated losses.
o GECS TOTAL REVENUES decreased 12% to $58.4 billion in 2001, following
a 19% increase to $66.2 billion in 2000. The three principal reasons
for the decrease in revenues in 2001 compared with 2000 were: the
deconsolidation of Wards and resulting absence of sales in 2001 ($3.2
billion); the effects of rationalization of operations and market
conditions at IT Solutions ($2.9 billion); and reduced surrender fees
compared with 2000 ($1.2 billion) associated with the planned run-off
of restructured insurance policies of Toho Mutual Life Insurance
Company (Toho) at GE Financial Assurance (GEFA). The increase in 2000
reflected post-acquisition revenues from acquired businesses ($6.5
billion) as well as volume growth ($2.5 billion). Revenues in 2000
also included the gain from sale of common stock of PaineWebber ($1.4
billion). Additional information about other revenue items is provided
in the analysis of GECS operating segments beginning on page 14.
o GECS COST OF GOODS SOLD declined to $3.3 billion in 2001, compared
with $8.5 billion in 2000 and $8.0 billion in 1999, reflecting volume
declines at IT Solutions and the deconsolidation of Wards on December
28, 2000, when Wards commenced liquidation proceedings. The increase
in 2000 primarily reflected the consolidation of Wards from August 2,
1999, through December 28, 2000.
o GECS INTEREST EXPENSE on borrowings in 2001 was $10.6 billion,
compared with $11.1 billion in 2000 and $9.4 billion in 1999. The
change in both years reflected the effects of both interest rates and
the average level of borrowings used to finance asset growth. GECS
average composite effective interest rate was 5.11% in 2001, compared
with 5.89% in 2000 and 5.14% in 1999. In 2001, average assets of
$386.6 billion were 7% higher than in 2000, which in turn were 13%
higher than in 1999. See page 32 for a discussion of interest rate
risk management.
o GECS INSURANCE LOSSES AND POLICYHOLDER AND ANNUITY BENEFITS increased
to $15.1 billion in 2001, compared with $14.4 billion in 2000 and
$11.0 billion in 1999. This increase reflected effects of growth in
premium volume and business acquisitions at GEFA throughout the
period, and costs discussed in the analysis of the Insurance and
All Other GECS segments, partially offset by the planned run-off
of restructured insurance policies at Toho.
-13-
[GRAPH HERE]
- --------------------------------------------------------------------------------
GECS EARNINGS BEFORE ACCOUNTING CHANGES
(In billions)
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
$3.26 $3.80 $4.44 $5.19 $5.59
- --------------------------------------------------------------------------------
o GECS PROVISION FOR LOSSES ON FINANCING RECEIVABLES was $2.5 billion in
2001, compared with $2.0 billion in 2000 and $1.7 billion in 1999.
These provisions principally related to private-label credit cards,
bank credit cards, personal loans and auto loans and leases as well as
commercial, industrial, and equipment loans and leases, all of which
are discussed on page 26 under Portfolio Quality. The provisions
throughout the three-year period reflected higher average receivable
balances, changes in the mix of business, and the effects of
delinquency rates--higher during 2001 and lower during
2000--consistent with industry experience.
o GECS other costs and expenses were $19.8 billion, $22.8 billion and
$19.4 billion in 2001, 2000 and 1999, respectively. Changes over the
three-year period were largely the result of acquisitions and unusual
charges, which were more than offset in 2001 by productivity at
Consumer Finance and Equipment Management. Costs and expenses in 2001
included $0.5 billion of costs in businesses that were acquired after
January 1, 2001, as well as $0.3 billion of costs discussed in the
analysis of All Other GECS. Similarly, 2000 included $2.5 billion of
costs in businesses that were acquired after January 1, 2000; charges
for costs associated with Wards amounting to $0.8 billion, as
discussed previously; and $0.5 billion of costs to rationalize certain
operations discussed in the analysis of All Other GECS.
o Over the last three years, market interest rates have been more
volatile than GECS average composite effective interest rates,
principally because of the mix of effectively fixed-rate borrowings in
the GECS financing structure. GECS portfolio of fixed and
floating-rate financial products has behaved similarly over that
period. Consequently, financing spreads have remained relatively flat
over the three-year period.
-14-
SEGMENT OPERATIONS
Revenues and segment profit for operating segments are shown on page 18. For
additional information, including a description of the products and services
included in each segment, see note 27.
AIRCRAFT ENGINES reported a 6% increase in revenues in 2001, reflecting higher
volume in services, and sales of commercial engines and aero-derivative
products. Operating profit was 7% higher primarily as a result of volume growth
and productivity. Product services revenues following the events of September 11
have been adversely affected by reduced customer flight hours and servicing
requirements. Operating profit in 2000 increased 15% on revenues that were
slightly higher than in 1999. The improvement in operating profit reflected
strong productivity.
In 2001, revenues from sales to the U.S. government were $1.9 billion
compared with $1.6 billion in 2000.
Aircraft Engines received orders of $12.1 billion in 2001 compared with
$13.5 billion in 2000. The $11.2 billion total backlog at year-end 2001
comprised unfilled product orders of $9.4 billion (of which 56% was scheduled
for delivery in 2002) and product services orders of $1.8 billion scheduled for
2002 delivery. Comparable December 31, 2000, total backlog was $12.0 billion.
Management believes the events of September 11 will continue to adversely affect
the airline industry in 2002 with implications for existing backlog, engine
servicing revenue and future new engine orders.
COMMERCIAL FINANCE
- -------------------------------------------------------------------------
(In millions) 2001 2000 1999
- -------------------------------------------------------------------------
REVENUES
Commercial Equipment Financing $ 4,535 $ 3,634 $ 3,195
Real Estate 1,919 1,977 1,582
Aviation Services (GECAS) 2,173 1,962 1,551
Structured Finance Group 1,093 999 812
Commercial Finance 1,786 1,617 1,310
Vendor Financial Services 2,095 1,792 1,372
Other Commercial Finance 279 1 --
-----------------------------
Total revenues $ 13,880 $11,982 $ 9,822
=============================
NET EARNINGS (a)
Commercial Equipment Financing $ 642 $ 537 $ 429
Real Estate 489 374 303
Aviation Services (GECAS) 475 479 284
Structured Finance Group 386 344 270
Commercial Finance 368 290 239
Vendor Financial Services 320 274 236
Other Commercial Finance 44 (4) (3)
------------------------------
Net earnings $ 2,724 $ 2,294 $ 1,758
========================================================================
(a) Charges of $85 million in 2001 were not allocated to this segment, pursuant
to Statement of Financial Accounting Standard (SFAS) No. 131, because
management did not include these costs in measuring the performance of
businesses in this segment for internal purposes. Such charges, included in
All Other GECS, related to restructuring various global operations and to
provisions for disposition of assets.
COMMERCIAL FINANCE revenues increased 16% in 2001, following a 22% increase
in 2000. The 2001 increase resulted from acquisition and volume growth at
Commercial Equipment Financing, Vendor Financial Services, GECAS and Commercial
Finance, including the acquisition of Heller Financial on October 24, 2001
(included in Other Commercial Finance), volume growth at Structured Finance
Group and increased gains on securitizations of financial assets. The increase
in revenues in 2000 primarily reflected asset growth from originations across
all major businesses. Net earnings increased 19% in 2001 and 30% in 2000. The
2001 increase reflected securitization gains, asset growth from acquisitions at
Commercial Equipment Financing, Commercial Finance and Vendor Financial
Services, origination growth at Structured Finance Group, and higher asset gains
and productivity at Real Estate. In 2000, the increase in net earnings resulted
from asset growth from originations and favorable tax effects.
-15-
CONSUMER FINANCE
- -----------------------------------------------------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------
REVENUES
Global Consumer Finance $ 5,561 $ 5,430 $ 5,084
GE Card Services 3,947 3,891 2,478
Other Consumer Finance -- (1) --
-----------------------------
Total revenues $ 9,508 $ 9,320 $ 7,562
=============================
NET EARNINGS (a)
Global Consumer Finance $ 1,039 $ 856 $ 716
GE Card Services 669 520 203
Other Consumer Finance (6) -- 1
-----------------------------
Net earnings $ 1,702 $ 1,376 $ 920
=============================================================================
(a) Charges of $57 million in 2001 were not allocated to this segment,
pursuant to SFAS 131, because management did not include these costs in
measuring the performance of businesses in this segment for internal
purposes. Such charges, included in All Other GECS, related to
unprofitable financing product lines that are being exited.
CONSUMER FINANCE revenues increased 2% in 2001, following a 23% increase
in 2000. Overall, the revenue performance in both years reflected the
post-acquisition revenues from acquired businesses, which was more significant
in 2000, and volume growth. Net earnings increased 24% in 2001 and 50% in 2000.
The 2001 increase reflected productivity at Global Consumer Finance and volume
growth at GE Card Services. The increase in net earnings in 2000 resulted from
acquisition and volume growth at GE Card Services and Global Consumer Finance.
-16-
CONSUMER PRODUCTS
- --------------------------------------------------------------------------------
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------
REVENUES
Appliances $ 5,810 $ 5,887 $ 5,671
Lighting 2,625 2,830 2,854
----------------------------------------
Total revenues $ 8,435 $ 8,717 $ 8,525
========================================
OPERATING PROFIT
Appliances $ 406 $ 439 $ 446
Lighting 242 440 525
----------------------------------------
Total operating profit $ 648 $ 879 $ 971
================================================================================
CONSUMER PRODUCTS revenues were 3% lower than a year ago, as continued
price erosion at Appliances and Lighting offset modest market share gains at
Appliances. Operating profit decreased by 26%, largely as a result of lower
selling prices at Appliances and Lighting and increased program spending on new
products at Appliances. Revenues in 2000 were 2% higher than in 1999, as volume
increases more than offset lower selling prices at Appliances. Operating profit
decreased 9% in 2000, largely as a result of lower prices and productivity at
Lighting.
EQUIPMENT MANAGEMENT
- -----------------------------------------------------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------
REVENUES
Equipment Management revenues $ 4,401 $ 4,969 $ 4,789
=============================
NET EARNINGS (a)
Equipment Management net earnings $ 359 $ 465 $ 422
==============================================================================
(a) Charges of $17 million in 2001 were not allocated to this segment,
pursuant to SFAS 131, because management did not include these costs in
measuring the performance of businesses in this segment for internal
purposes. Such charges, included in All Other GECS, related to the
restructuring of various global operations.
EQUIPMENT MANAGEMENT revenues decreased 11% in 2001 following a 4%
increase in 2000. The 2001 decrease resulted primarily from lower volume across
all of the businesses, primarily driven by lower utilization rates, and the 2000
increase was primarily attributable to higher revenues at Transport
International Pool/Modular Space associated with volume growth and higher
utilization rates. Net earnings decreased 23% in 2001, following a 10% increase
in 2000. The 2001 decrease primarily reflected asset write-downs at Transport
International Pool/Modular Space and European Equipment Management, and lower
utilization rates at Railcar, partially offset by tax benefits from a
restructuring at Penske. The increase in 2000 principally related to
productivity and increased gains at Transport International Pool/Modular Space.
-17-
INDUSTRIAL PRODUCTS AND SYSTEMS
- --------------------------------------------------------------------------------
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------
REVENUES
Industrial Systems $ 4,440 $ 4,469 $ 4,333
Transportation Systems 2,355 2,263 2,358
GE Supply 2,302 2,159 1,951
----------------------------------------
Total revenues $ 9,097 $ 8,891 $ 8,642
========================================
OPERATING PROFIT
Industrial Systems $ 527 $ 596 $ 548
Transportation Systems 400 436 437
GE Supply 99 80 63
----------------------------------------
Total operating profit $ 1,026 $ 1,112 $ 1,048
================================================================================
INDUSTRIAL PRODUCTS AND SYSTEMS revenues in 2001 were 2% higher than in
2000, as higher product services revenues at Transportation Systems, including
acquisitions, more than offset selling price decreases across the segment and
lower volume at Industrial Systems. Operating profit decreased 8% primarily as a
result of the decline in selling prices and cost inflation. Revenues rose 3% in
2000, largely as a result of volume increases at Industrial Systems and growth
in product services, including acquisitions, which more than offset lower
selling prices. Operating profit increased 6% in 2000, primarily reflecting
productivity and growth in product services.
Transportation Systems received orders of $2.6 billion in 2001, compared
with $2.1 billion in 2000. The $1.7 billion total backlog at year-end 2001
comprised unfilled product orders of $1.2 billion (of which 51% was scheduled
for delivery in 2002) and product services orders of $0.5 billion scheduled for
2002 delivery. Comparable December 31, 2000, total backlog was $1.4 billion.
-18-
SUMMARY OF OPERATING SEGMENTS
GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES
-------------------------------------------------------------
For the years ended December 31 (In millions) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
REVENUES
Segments
Aircraft Engines $ 11,389 $ 10,779 $ 10,730 $ 10,294 $ 7,799
Commercial Finance 13,880 11,982 9,822 8,072 6,685
Consumer Finance 9,508 9,320 7,562 6,750 6,032
Consumer Products 8,435 8,717 8,525 8,520 8,763
Equipment Management 4,401 4,969 4,789 4,234 3,982
Industrial Products and Systems 9,097 8,891 8,642 8,305 7,912
Insurance 23,890 24,766 19,433 16,841 14,477
Materials 7,069 8,020 7,118 6,796 6,934
NBC 5,769 6,797 5,790 5,269 5,153
Power Systems 20,211 14,861 10,099 8,500 7,986
Technical Products and Services 9,011 7,915 6,863 5,323 4,861
All Other GECS 6,674 15,140 14,143 12,797 8,755
Eliminations and corporate items (a) (3,421) (2,304) (1,886) (1,232) 1,501
--------- --------- --------- --------- --------
Consolidated revenues $ 125,913 $ 129,853 $ 111,630 $ 100,469 $ 90,840
========= ========= ========= ========= ========
EARNINGS
Segment profit
Aircraft Engines $ 2,147 $ 2,000 $ 1,739 $ 1,478 $ 1,117
Commercial Finance 2,724 2,294 1,758 1,492 1,198
Consumer Finance 1,702 1,376 920 631 667
Consumer Products 648 879 971 1,103 1,152
Equipment Management 359 465 422 476 420
Industrial Products and Systems 1,026 1,112 1,048 874 765
Insurance 1,334 1,642 1,730 1,459 1,235
Materials 1,433 1,865 1,590 1,536 1,533
NBC 1,408 1,609 1,427 1,225 1,129
Power Systems 4,860 2,523 1,537 1,118 1,082
Technical Products and Services 1,623 1,435 1,232 957 856
All Other GECS 19 35 125 146 17
--------- --------- --------- --------- --------
Total segment profit 19,283 17,235 14,499 12,495 11,171
GECS goodwill amortization (552) (620) (512) (408) (281)
GE corporate items and eliminations (b) (c) 407 730 747 909 (80)
GE interest and other financial charges (817) (811) (810) (883) (797)
GE provision for income taxes (4,193) (3,799) (3,207) (2,817) (1,810)
--------- --------- --------- --------- --------
Earnings before accounting changes 14,128 12,735 10,717 9,296 8,203
--------- --------- --------- --------- --------
Cumulative effect of accounting changes (444) -- -- -- --
--------- --------- --------- --------- --------
Net earnings $ 13,684 $ 12,735 $ 10,717 $ 9,296 $ 8,203
========= ========= ========= ========= ========
-19-
The notes to consolidated financial statements on pages 44-87 are an integral
part of this statement. Segment profit excludes any goodwill amortization and
accounting changes. Segment profit includes or excludes interest and other
financial charges and segment income taxes according to how segment management
is measured - excluded for Aircraft Engines, Consumer Products, Industrial
Products and Systems, Materials, NBC, Power Systems and Technical Products and
Services, but included for Commercial Finance, Consumer Finance, Equipment
Management, Insurance and All Other GECS.
(a) Includes revenues of $944 million in 1997 from an appliance distribution
affiliate that was deconsolidated in 1998. Also includes $1,538 million
gain in 1997 from an exchange of preferred stock in Lockheed Martin
Corporation for the stock of a newly formed subsidiary.
(b) Includes pension income and goodwill amortization. Also includes income,
principally from licensing activities, of $88 million, $79 million, $62
million, $271 million and $310 million in 2001, 2000, 1999, 1998 and 1997,
respectively.
(c) 1999 includes unusual charges amounting to $265 million. Of the total,
amounts that relate to activities of GE operating segments were as follows:
Aircraft Engines--$42 million, Consumer Products--$80 million, Industrial
Products and Systems--$7 million, Materials--$13 million and Technical
Products and Services--$34 million. 1997 includes unusual charges of $2,322
million. Of the total, amounts that relate to activities of GE operating
segments were as follows: Aircraft Engines--$342 million, Consumer
Products--$412 million, Industrial Products and Systems--$270 million,
Materials--$63 million, NBC--$161 million, Power Systems--$437 million and
Technical Products and Services--$157 million. Also included in 1997 is a
$1,538 million gain associated with the Lockheed Martin Corporation
transaction described in (a) above.
-20-
INSURANCE
(In millions) 2001 2000 1999
-------- ------- -------
REVENUES
GE Financial Assurance $ 12,826 $12,888 $ 8,790
Mortgage Insurance 1,075 973 936
GE Global Insurance Holdings 9,453 10,223 9,013
Other GE Insurance 536 682 694
-------- ------- -------
Total revenues $ 23,890 $24,766 $19,433
======== ======= =======
NET EARNINGS (a)
GE Financial Assurance $ 726 $ 672 $ 485
Mortgage Insurance 407 356 346
GE Global Insurance Holdings 32 505 690
Other GE Insurance 169 109 209
-------- ------- -------
Net earnings $ 1,334 $ 1,642 $ 1,730
======== ======= =======
(a) Charges of $306 million in 2001 were not allocated to this segment,
pursuant to SFAS 131, because management did not include these costs in
measuring the performance of businesses in this segment for internal
purposes. Such charges, included in All Other GECS, related to
unprofitable insurance product lines being exited and to provisions for
disposition of nonstrategic investments.
INSURANCE revenues decreased 4% in 2001, following a 27% increase in 2000.
The 2001 decrease was the result of reduced net premiums earned at GE Global
Insurance Holdings (the parent of Employers Reinsurance Corporation), reflecting
the events of September 11 as discussed below, decreased investment income at GE
Global Insurance Holdings, and decreased surrender fee income at GE Financial
Assurance associated with the planned run-off of restructured insurance policies
at Toho. These factors were partially offset by increased premium income
associated with origination volume at GE Global Insurance Holdings, and
post-acquisition revenues from acquisition growth and volume growth at GE
Financial Assurance. The increase in revenues in 2000 resulted from post
acquisition revenues from acquired businesses and volume growth at GE Financial
Assurance, and premium growth and increased investment income, as higher
interest income more than offset a decrease in net realized investment gains at
GE Global Insurance Holdings. Net pre-tax realized investment gains in the
marketable equity and debt securities portfolios amounted to $970 million, $817
million and $890 million in 2001, 2000 and 1999, respectively. Remaining
available gains in the portfolios at December 31, 2001, amounted to $1,796
million before tax.
Net earnings decreased 19% and 5% in 2001 and 2000, respectively,
reflecting GE Global Insurance Holdings underwriting results, which were
partially offset by productivity at GE Financial Assurance in 2001 and
acquisition and volume growth at GE Financial Assurance in 2000. Net earnings in
2001 at GE Global Insurance Holdings were adversely affected by approximately
$575 million ($386 million after tax) related to the insurance losses arising
from the events of September 11. This amount primarily resulted from contingent
premium payment provisions contained in certain retrocession agreements. After
these particular losses, total losses exceeded retrocession policy limits in
place at GE Global Insurance Holdings. Substantially all of the September 11
losses are recoverable from retrocessionaires under reinsurance policies that
require additional premiums to those retrocessionaires. Therefore, the 2001
Statement of Earnings reflects $698 million reduction in net premiums earned and
$78 million of increased losses, partially offset by $201 million in lower
insurance acquisition costs. Historical experience related to large catastrophic
events has shown that a broad range of total insurance industry loss estimates
often exists following such an event and it is not unusual for there to be
significant subsequent revisions in such estimates. Management's best estimate
of its existing net liability based on the information currently available is
$575 million, net of estimated recoveries under retrocession arrangements, under
which a portion of losses is routinely ceded to other reinsurance entities.
Substantially all of GECS retrocessionaires are large, highly rated reinsurance
entities. At this time, management does not anticipate that any significant
portion of its estimated recoveries will be uncollectible.
-21-
[GRAPH HERE]
- --------------------------------------------------------------------------------
CONSOLIDATED INTERNATIONAL REVENUES BY REGION
(In billions)
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
Europe $20.63 $24.35 $25.82 $26.67 $26.29
Pacific Basin 7.98 8.06 10.19 15.19 13.30
Americas 6.20 6.91 6.73 7.68 7.89
Other 3.43 3.19 2.94 3.41 3.96
- --------------------------------------------------------------------------------
Net earnings in 2001 and 2000 were also adversely affected by the continued
deterioration of underwriting results at GE Global Insurance Holdings,
reflecting higher property and casualty-related losses (principally as a result
of adverse development relating to prior-year loss events) and the continued
effects of low premiums in the property and casualty insurance/reinsurance
industry. GE Global Insurance Holdings underwriting results in 2001 and 2000
tracked performance in the global property and casualty industry. As these
results were realized, management began increasing premiums for given levels of
coverage, and reevaluated product lines, policies, contracts and specific
customers. Businesses that, following this reevaluation, were deemed to offer
reasonable returns were retained and, in some cases, expanded. On the other
hand, activities were curtailed in businesses with unsatisfactory risk/return
profiles.
The majority of the adverse development at GE Global Insurance Holdings in
2001, and to a lesser extent in 2000, related to higher projected ultimate
losses for liability coverages, especially in the hospital liability,
nonstandard automobile (automobile insurance extended to higher-risk drivers)
and commercial and public entity general liability lines of business. The
increase in 2000 also reflected an increase in industry-wide loss estimates
related to certain large property loss events, with the largest impact resulting
from the European windstorms of December 1999. The adverse development of GE
Global Insurance Holdings for both years was partially mitigated by favorable
experience in the Mortgage Insurance business, which resulted from favorable
economic conditions, improvement in certain real estate markets and loss
mitigation efforts.
MATERIALS
- ----------------------------------------------------
(In millions) 2001 2000 1999
- ----------------------------------------------------
REVENUES
Plastics $ 5,252 $ 6,013 $ 5,315
Specialty Materials 1,817 2,007 1,803
---------------------------
Total revenues $ 7,069 $ 8,020 $ 7,118
===========================
OPERATING PROFIT
Plastics $ 1,166 $ 1,518 $ 1,297
Specialty Materials 267 347 293
----------------------------
Total operating profit $ 1,433 $ 1,865 $ 1,590
====================================================
MATERIALS revenues were 12% lower than in 2000, reflecting increased pricing
pressures and lower volume at both Plastics and Specialty Materials. Plastics
experienced continued softness in the automotive, optical media,
telecommunication and business equipment markets while Specialty Materials was
adversely affected by lower sales in the semiconductor market. Operating profit
was 23% lower, primarily as a result of lower pricing and volume, and negative
base cost productivity at both Plastics and Specialty Materials. Operating
profit in 2000 increased 17% on revenues that were 13% higher than in 1999. The
increases in both revenues and operating profit were primarily attributable to
higher volume and improved selling prices at both Plastics and Specialty
Materials, which more than offset the effects of higher raw material prices.
[GRAPH HERE]
- --------------------------------------------------------------------------------
GE ORDERS BACKLOG
(In billions)
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
$26.44 $28.53 $32.42 $44.17 $47.43
- --------------------------------------------------------------------------------
-22-
NBC revenues declined 15% from the record-high levels of 2000 which were 17%
higher than in 1999. Revenues in 2001 were negatively affected by a significant
decline in advertising volume and pricing, as well as lost revenue related to
coverage of the events of September 11. Revenues in 2000 benefited from
broadcast of the 2000 Summer Olympic Games as well as strong growth in cable
operations, particularly at CNBC. Operating profit decreased 12% in 2001
reflecting adverse advertising market conditions, events of September 11, and
charges resulting from dissolving the XFL, which more than offset savings from
cost reduction actions. Operating profit increased 13% in 2000 as growth in
owned-and-operated stations, cable operations and network operations was
partially offset by higher license fees associated with the renewal of certain
sports and prime-time programs.
POWER SYSTEMS operating results throughout the last three years reflected the
sharp increase in U.S. gas turbine sales of market leading "F" technology,
higher prices for those turbines and base cost productivity associated with
their manufacture. Secondarily, and with a longer-lasting effect, the portfolio
of long-term product services agreements associated with new unit sales has
generated favorable operating results. Aero-derivative units revenues also
benefited from increased demand in the power generation sector throughout this
period. Reflecting these conditions, revenues increased 36% in 2001, following
an increase of 47% in 2000. Similarly, operating profit increased 93% in 2001,
following an increase of 64% in 2000.
Power Systems orders were $24.5 billion in 2001, a 4% increase over 2000,
reflecting continued strength of the power generation business and renewed
growth in the oil and gas industry. The $28.9 billion total backlog at year-end
2001 comprised unfilled product orders of $24.1 billion (of which 75% was
scheduled for delivery in 2002) and product services orders of $4.7 billion
scheduled for 2002 delivery. Comparable December 31, 2000, total backlog was
$25.1 billion. As a result of softening demand for electric power in the U.S.
market, management is in discussions with certain customers regarding their
equipment requirements. These discussions may result in changes to contractual
agreements, including delays or cancellations. In the event of order
cancellation, contractual terms require customers to pay termination fees. In
all cases, such fees are expected to cover Power Systems' investment in the
contracts and at least a portion has generally been received as progress
collections. At least partial recovery of lost profits would also be expected.
TECHNICAL PRODUCTS AND SERVICES
- ----------------------------------------------------
(In millions) 2001 2000 1999
---------------------------
REVENUES
Medical Systems $ 8,409 $ 7,275 $ 6,171
Global eXchange Services 602 640 692
---------------------------
Total revenues $ 9,011 $ 7,915 $ 6,863
===========================
OPERATING PROFIT
Medical Systems $ 1,498 $ 1,321 $ 1,107
Global eXchange Services 125 114 125
---------------------------
Total operating profit 1,623 1,435 1,232
====================================================
TECHNICAL PRODUCTS AND SERVICES revenues rose 14% in 2001, primarily as a
result of sharply higher volume at Medical Systems. Sales by businesses acquired
during the last two years accounted for 5% of Medical Systems 2001 revenues.
Operating profit grew 13%, largely as a result of productivity and volume growth
as well as higher realized gains, principally the result of disposition in 2001
of a joint venture at Global eXchange Services. Revenues in 2000 were 15% higher
than 1999 on sharply higher volume at Medical Systems. Operating profit
increased 16% in 2000, largely as a result of productivity and volume increases
at Medical Systems, which more than offset lower selling prices across the
segment.
-23-
Orders received by Medical Systems in 2001 were $8.9 billion, a 17%
increase over 2000. The $4.1 billion total backlog at year-end 2001 comprised
unfilled product orders of $2.7 billion (of which 68% was scheduled for delivery
in 2002) and product services orders of $1.4 billion scheduled for 2002
delivery. Comparable December 31, 2000, total backlog was $3.6 billion.
[GRAPH HERE]
- --------------------------------------------------------------------------------
GECS REVENUES
(In billions)
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
$39.93 $48.70 $55.75 $66.18 $58.35
- --------------------------------------------------------------------------------
-24-
ALL OTHER GECS
- ------------------------------------------------------------------------------
(In millions) 2001 2000 1999
- ------------------------------------------------------------------------------
REVENUES
Wards $ -- $ 3,234 $ 1,622
IT Solutions 4,180 7,072 8,381
GE Equity (126) 1,079 863
Americom 540 594 463
Americom gain 1,158 -- --
PaineWebber gain -- 1,366 --
Asset impairments (383) (238) --
Product line exits (53) -- --
Other 1,358 2,033 2,814
-----------------------------
Total revenues $ 6,674 $15,140 $14,143
=============================
NET EARNINGS
Wards
Operating losses $ -- $ (245) $ (26)
Losses from Ward's bankruptcy (22) (537) --
IT Solutions 47 (152) (20)
GE Equity (270) 525 416
Americom 256 197 152
Americom gain 642 -- --
PaineWebber gain -- 848 --
Asset impairments (310) (49) --
Product line exits (180) -- --
Restructuring (144) (298) --
Other -- (254) (397)
------------------------------
Net earnings $ 19 $ 35 $ 125
==============================================================================
ALL OTHER GECS includes GECS activities and businesses that management has
chosen not to allocate to one of the four GECS segments.
In addition to comments on GECS All Other elsewhere in this report, the
following comments relate to the table above:
o IT SOLUTIONS (ITS) -- During 2000 and 2001, in response to intense
competition and transition of the computer equipment market to a
direct distribution model, ITS exited its underperforming operations
in the United Kingdom, France, Brazil and Mexico and significantly
reduced its reseller role in the United States. Costs for involuntary
termination benefits, asset impairments, facilities exit costs and
losses on sales of portions of the business amounted to $45 million
($43 million after-tax) and $246 million ($191 million after-tax) in
2001 and 2000, respectively and are included in restructuring in the
table above. The number of employees was reduced from a 2000 peak of
11,000 to 7,500 at the end of 2001.
o GE EQUITY -- GE Equity manages equity investments in early-stage,
early growth, pre-IPO companies. GE Equity revenues include income,
gains and losses on such investments. During 2001, losses on GE
Equity's investments exceeded gains and other investment income,
resulting in negative revenues. Net earnings in 2001 included a $270
million net loss at GE Equity, which increased over the prior year
principally from reduced asset gains.
o AMERICOM - On November 9, 2001, GECS exchanged its satellite
operations, comprising the stock of Americom and other related assets
and liabilities, for a combination of cash and 31% of the
publicly-traded stock of SES Global, a leading satellite company, in
order to create the world's largest satellite services provider. The
transaction resulted in a gain of $1,158 million ($642 million after
tax), representing the difference between the carrying value of the
69% investment in Americom and the amount of cash plus the market
value of SES Global shares received at the closing date. No gain was
recorded on the 31% interest in Americom that was indirectly retained
by GECS. GECS investment in SES Global is accounted for on the equity
method.
-25-
o 2001 -- ASSET IMPAIRMENTS AND PRODUCT LINE EXITS - Operations included
$656 million of charges related to disposing of and providing for
disposition of several nonstrategic investments and other assets, to
certain unprofitable insurance and financing product lines that are
being exited, and to restructuring various global operations. These
costs, not allocated to the related businesses as management did not
include these costs in measuring the performance of those businesses
for internal purposes, included $478 million ($310 million after tax)
for other-than-temporary impairments of investments, the largest of
which were held by GE Financial Assurance, GE Equity and GE Global
Insurance Holdings. These losses, $383 million of which were charged
to revenues, included $130 million ($84 million after tax) of losses
on Enron bonds; such bonds were written down to a cost basis of $32
million at December 31, 2001. These losses also included investment
impairment charges of $199 million ($130 million after tax) on
non-U.S. mutual funds and the technology sector.
In response to escalating losses, management decided to cease further
underwriting and exit certain insurance and financing product lines.
Charges associated with such loss events and the resulting exits
totaled $180 million after tax, of which $149 million related to the
loss events in GE Global Insurance Holdings product lines, primarily
nonstandard automobile and higher limit industrial property insurance
coverages, and the remaining $31 million related to the exit of the
Consumer Direct business by GE Card Services.
Restructuring of several GECS global businesses included consolidation
of several European Equipment Management businesses and
rationalization of certain European Equipment Management businesses.
Costs related to the exit of these activities amounted to $144 million
after tax and consisted of involuntary termination benefits,
facilities exit costs, and asset impairments.
o 2000 -- LOSSES FROM WARD'S BANKRUPTCY, ASSET IMPAIRMENTS AND
RESTRUCTURINGS -- Net earnings included charges of $537 million
related to the Ward's bankruptcy and strategic rationalization costs
of $347 million related to IT Solutions, Mortgage Services, GE Equity
and Auto Financial Services (AFS), primarily for asset write-downs,
employee severance and lease terminations, which were not allocated to
those businesses because management did not include these costs in
measuring the performance of those businesses for internal purposes.
o OTHER -- Other includes GECS corporate function expenses, liquidating
businesses and other non-segment aligned operations, the most
significant of which were AFS, Mortgage Services, and the GE Auto and
Home business. The decrease in revenues in both years arose from AFS
and Mortgage Services, as both operations stopped accepting new
business in 2000. Corporate function expenses decreased in 2000 and
2001, but liquidating operations at AFS and Mortgage Services incurred
higher losses in 2000, offsetting some of the expense reduction.
-26-
PORTFOLIO QUALITY
FINANCING RECEIVABLES is the largest category of assets for GECS and
represents one of its primary sources of revenues. The portfolio of financing
receivables, before allowance for losses, increased to $178.8 billion at the end
of 2001 from $147.3 billion at the end of 2000, as discussed in the following
paragraphs. The related allowance for losses at the end of 2001 amounted to $4.8
billion ($4.0 billion at the end of 2000), representing management's best
estimate of probable losses inherent in the portfolio.
A discussion of the quality of certain elements of the financing
receivables portfolio follows. "Nonearning" receivables are those that are 90
days or more delinquent (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.
Consumer financing receivables, primarily credit card and personal loans
and auto loans and leases, were $52.3 billion at year-end 2001, an increase of
$3.5 billion from year-end 2000. Credit card and personal receivables increased
$7.0 billion, primarily from increased origination and acquisition growth,
partially offset by sales and securitizations and the net effects of foreign
currency translation. Auto receivables decreased $3.5 billion, primarily as a
result of the run-off of the liquidating Auto Financial Services portfolio.
Nonearning consumer receivables at year-end 2001 were $1.5 billion, about 2.9%
of outstandings, compared with $1.1 billion, about 2.3% of outstandings at
year-end 2000. Write-offs of consumer receivables increased to $1.7 billion from
$1.3 billion for 2000, reflecting the maturing of private label credit card
portfolios and higher personal bankruptcies on credit card loan portfolios in
Japan. Consistent with industry trends, consumer delinquency rates increased
during 2001.
- --------------------------------------------------------------------------------
CONSOLIDATED TOTAL ASSETS
(In billions)
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
United States $206.46 $227.11 $263.78 $277.82 $315.18
International 97.55 128.82 141.26 159.19 179.84
- --------------------------------------------------------------------------------
Other financing receivables, which totaled $126.5 billion at December 31,
2001, consisted of a diverse commercial, industrial and equipment loan and lease
portfolio. This portfolio increased $28.0 billion during 2001, reflecting
increased acquisition and origination growth, partially offset by sales and
securitizations. Related nonearning and reduced-earning receivables were $1.7
billion, about 1.4% of outstandings at year-end 2001, compared with $0.9
billion, about 1.0% of outstandings at year-end 2000, reflecting several large
bankruptcies and the current economic environment. These receivables are backed
by assets and are covered by reserves for probable losses.
GECS loans and leases to commercial airlines amounted to $21.5 billion at
the end of 2001, up from $15.3 billion at the end of 2000. GECS commercial
aircraft positions also included financial guarantees, funding commitments,
credit and liquidity support agreements and aircraft orders as discussed in
note 17.
-27-
INTERNATIONAL OPERATIONS
Estimated results of international activities include the results of GE and GECS
operations located outside the United States plus all U.S. exports. Certain GECS
operations that cannot meaningfully be associated with specific geographic areas
are classified as "other international" for this purpose.
International revenues of $51.4 billion, $53.0 billion and $45.7 billion in
2001, 2000 and 1999, respectively, represented about 41% of consolidated
revenues in each year.
CONSOLIDATED INTERNATIONAL REVENUES
---------------------------
(In millions) 2001 2000 1999
- ---------------------------------------------------------
Europe $23,878 $24,144 $22,919
Pacific Basin 11,447 12,921 7,879
Americas 5,507 5,912 5,229
Other 3,456 2,842 2,136
---------------------------
44,288 45,819 38,163
Exports from the U.S. to
external customers 7,149 7,138 7,513
---------------------------
$51,437 $52,957 $45,676
=========================================================
GE international revenues grew to $28.3 billion in 2001, an increase of
$1.6 billion (6%) over 2000. Revenues in 2000 were $26.7 billion, $2.7 billion
(11%) higher than in 1999. The increase in 2001 was attributable to sales in
operations based outside the United States, which grew 8% to $21.2 billion.
European revenues were 16% higher in 2001, led by increases at Power Systems and
Medical Systems. Revenues in the Americas (North and South America, except for
the United States) increased 6%, reflecting continued growth in both Canadian
and Latin American operations. Pacific Basin revenues and total U.S. exports in
2001 were relatively unchanged from 2000.
GECS international revenues were $23.1 billion in 2001, a decrease of 12%
from $26.3 billion in 2000. Revenues in the Pacific Basin decreased 19% in 2001,
as 2000 revenues included surrender fee income at GEFA from the planned run-off
of restructured insurance policies of Toho. Revenues in Europe decreased 12% in
2001 as acquisition and core growth at Global Consumer Finance were more than
offset by reduced premiums earned, associated with a combination of lower
origination volume and increased ceded premiums as a result of the events of
September 11 at GE Global Insurance Holdings, and reduced revenue associated
with the rationalization of certain operations at IT Solutions.
Consolidated international operating profit was $6.1 billion in 2001, a
decrease of 11% over 2000, which was 21% higher than in 1999. Additional
information about operating profit by region is provided in note 28.
Total assets of international operations were $180.0 billion in 2001 (36%
of consolidated assets), an increase of 13% over 2000. GECS assets increased 23%
in Europe, reflecting a mix of origination and acquisition growth. GECS also
achieved significant asset growth at GECAS, which is classified as "other
international" in note 28.
-28-
The international activities of GE and GECS span all global regions and
primarily encompass manufacturing for local and export markets, import and sale
of products produced in other regions, leasing of aircraft, sourcing for GE
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, GE may have increased exposure to certain risks
but also may have new profit opportunities. Potential increased risks include,
among other things, higher receivables delinquencies and bad debts, delays or
cancellation of sales and orders principally related to power and aircraft
equipment, higher local currency financing costs and a slowdown in established
financial services activities. New profit opportunities include, among other
things, lower costs of goods sourced from countries with weakened currencies,
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.
Financial results of GE international activities reported in U.S. dollars
are affected by currency exchange. A number of techniques are used to manage the
effects of currency exchange, including selective borrowings in local currencies
and selective hedging of significant cross-currency transactions. Principal
currencies are the euro, the Japanese yen and the Canadian dollar. GE and GECS
operations in Europe are all euro-capable as of January 1, 2002.
REGARDING ENVIRONMENTAL MATTERS, GE's operations, like operations of other
companies engaged in similar businesses, involve the use, disposal and cleanup
of substances regulated under environmental protection laws.
In 2001, GE expended about $52 million for capital projects related to the
environment. The comparable amount in 2000 was $48 million. These amounts
exclude expenditures for remediation actions, which are principally expensed and
are discussed below. Capital expenditures for environmental purposes have
included pollution control devices--such as wastewater treatment plants,
groundwater monitoring devices, air strippers or separators, and
incinerators--at new and existing facilities constructed or upgraded in the
normal course of business. Consistent with policies stressing environmental
responsibility, average annual capital expenditures other than for remediation
projects are presently expected to be about $55 million over the next two years
for new or expanded programs to build facilities or modify manufacturing
processes to minimize waste and reduce emissions. This is about the same level
as recent experience.
GE also is 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 approximately $119 million in 2001, compared
with $128 million in 2000. It is presently expected that such remediation
actions will require average annual expenditures in the range of $110 million to
$150 million over the next two years.
The U.S. Environmental Protection Agency 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. GE's
December 31, 2001, Statement of Financial Position includes a liability for the
estimated costs of this remediation.
NO RELATED PARTY TRANSACTIONS had a material effect on GE's financial position,
cash flows or results of operations. Certain immaterial related party
transactions are discussed in the 2001 proxy statement, available from GE.
-29-
MANAGEMENT'S DISCUSSION OF FINANCIAL RESOURCES AND LIQUIDITY
OVERVIEW
This discussion of financial resources and liquidity addresses the Statement of
Financial Position (page 4), Statement of Changes in Share Owners' Equity
(page 2) and the Statement of Cash Flows (page 6).
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.
STATEMENT OF FINANCIAL POSITION
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, distinction
is drawn between GE and GECS activities in order to permit meaningful analysis
of each individual statement.
INVESTMENT SECURITIES for each of the past two years comprised mainly
investment-grade debt securities held by GEFA and the other insurance businesses
of GECS in support of obligations to annuitants and policyholders. GE investment
securities were $0.9 billion at year-end 2001, a decrease of $0.1 billion from
2000, reflecting decreases in the fair value of equity and corporate debt
securities partially offset by additional investments. GECS investment
securities were $100.1 billion in 2001, compared with $90.3 billion in 2000. The
increase of $9.8 billion resulted from investment of premiums received,
reinvestment of investment income, and the addition of securities from acquired
companies, partially offset by sales and maturities as well as decreases in the
fair value of certain debt and equity securities. See note 9 for further
information.
-30-
WORKING CAPITAL, representing GE cash invested in inventories and receivables
from customers less trade payables and progress payments, has improved
significantly over the past three years. Working capital declined from an
investment of $5.0 billion at the beginning of 1999 to a negative $2.4 billion
at the end of 2001 on much higher progress collections from Power Systems
customers. As Power Systems completes its orders backlog over the next few
years, progress collections of $11.8 billion at December 31, 2001, will be
earned, affecting working capital turnover adversely. Nevertheless, working
capital performance at the end of this backlog fulfillment period is expected to
be improved from January 1, 1999, the result of Six Sigma and Digitization
initiatives. Current receivables and inventories, two important elements of
working capital, are discussed in the following paragraphs.
CURRENT RECEIVABLES for GE were $9.8 billion at the end of 2001, an increase of
$0.1 billion from year-end 2000, and included $5.9 billion due from customers at
the end of 2001, compared with $6.3 billion at the end of 2000. Turnover of
customer receivables from sales of goods and services was 10.1 in 2001, compared
with 10.0 in 2000. 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.
INVENTORIES for GE were $8.3 billion at December 31, 2001, up $1.1 billion from
the end of 2000. GE inventory turnover was 7.9 in 2001, a decrease from 8.5 in
2000, as a result of higher inventories in short-cycle businesses.
GECS inventories were $270 million and $666 million at December 31, 2001
and 2000, respectively. The decrease in 2001 primarily reflected the
rationalization of certain operations at IT Solutions, as well as improved
inventory management.
FINANCING RECEIVABLES of GECS were $174.0 billion at year-end 2001, net of
allowance for losses, up $30.7 billion over 2000. These receivables are
discussed on page 26 and in notes 12 and 13.
INSURANCE RECEIVABLES of GECS were $27.3 billion at year-end 2001, an increase
of $3.5 billion. The increase was primarily attributable to increased recoveries
under existing retrocession agreements and core growth, partially offset by the
planned run-off of assets at Toho (see note 14).
OTHER RECEIVABLES of GECS totaled $13.3 billion at both December 31, 2001 and
2000, and consists primarily of nonfinancing customer receivables, accrued
investment income, amounts due from GE (generally related to certain trade
payable programs), amounts due under operating leases, receivables due on sales
of securities and various sundry items.
-31-
PROPERTY, PLANT AND EQUIPMENT (including equipment leased to others) was $42.1
billion at December 31, 2001, up $2.1 billion from 2000. GE property, plant and
equipment consists of investments for its own productive use, whereas the
largest element for GECS is in 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 2001 totaled $2.9 billion,
compared with $2.5 billion in 2000. Total expenditures for the past five years
were $12.2 billion, of which 40% was investment for growth through new capacity
and product development; 34% was investment in productivity through new
equipment and process improvements; and 26% 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 (including equipment leased
to others), were $12.6 billion during 2001 ($11.4 billion during 2000),
primarily reflecting acquisitions of transportation equipment.
INTANGIBLE ASSETS were $31.6 billion at year-end 2001, up from $27.4 billion at
year-end 2000. GE intangibles increased to $12.9 billion from $12.4 billion at
the end of 2000, principally as a result of goodwill related to acquisitions by
Power Systems and Medical Systems, partially offset by amortization. GECS
intangibles increased $3.7 billion to $18.7 billion, reflecting goodwill and
other intangibles associated with acquisitions, the largest of which was the
acquisition of Heller Financial, partially offset by amortization.
ALL OTHER ASSETS totaled $80.5 billion at year-end 2001, an increase of $6.6
billion from the end of 2000. GE other assets increased $2.0 billion,
principally reflecting an increase in the prepaid pension asset partially offset
by a decrease in long-term receivables. GECS other assets increased $4.7 billion
as a result of additional investments in real estate and associated companies,
the recognition of all derivatives at fair value in accordance with SFAS 133,
and increases in deferred insurance acquisition costs, partially offset by
decreases in "separate accounts" (see note 17).
CONSOLIDATED BORROWINGS aggregated $232.9 billion at December 31, 2001, compared
with $201.3 billion at the end of 2000. The major debt-rating agencies evaluate
the financial condition of GE and of GE Capital (the major public borrowing
entity of GECS) differently because of their distinct business characteristics.
Using criteria appropriate to each and considering their combined strength,
those major rating agencies continue to give the highest ratings to debt of both
GE and GE Capital.
GE total borrowings were $2.5 billion at year-end 2001 ($1.7 billion short
term, $0.8 billion long term), an increase of $0.7 billion from year-end 2000.
GE total debt at the end of 2001 equaled 4.3% of total capital, up from 3.3% at
the end of 2000.
GECS total borrowings were $239.9 billion at December 31, 2001, of which
$160.8 billion is due in 2002 and $79.1 billion is due in subsequent years.
Comparable amounts at the end of 2000 were $205.4 billion in total, $124.0
billion due within one year and $81.4 billion due thereafter. A large portion of
-32-
GECS borrowings ($117.5 billion and $94.5 billion at the end of 2001 and 2000,
respectively) was issued in active commercial paper markets that management
believes will continue to be a reliable source of short-term financing. Most of
this commercial paper was issued by GE Capital. The average remaining terms and
interest rates of GE Capital commercial paper were 46 days and 2.37% at the end
of 2001, compared with 45 days and 6.43% at the end of 2000. The GE Capital
ratio of debt to equity was 7.31 to 1 at the end of 2001 and 7.53 to 1 at the
end of 2000.
INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS were $114.2 billion, $8.1
billion higher than in 2000. The increase was primarily attributable to the
addition of reserves associated with the events of September 11, and growth in
deferred annuities and guaranteed investment contracts, partially offset by the
planned run-off of policyholder contracts at Toho and decreases in separate
accounts. For additional information on these liabilities, see note 19.
INTEREST RATE AND CURRENCY RISK MANAGEMENT is important in the normal business
activities of GE and GECS. Derivative financial instruments are used by GE and
GECS to mitigate or eliminate certain financial and market risks, including
those related to changes in interest rates and currency exchange rates. As a
matter of policy, neither GE nor GECS engages in derivatives trading,
derivatives market-making or other speculative activities.
The U.S. Securities and Exchange Commission requires that registrants
provide information about potential effects of changes in interest rates and
currency exchange. Although the rules offer alternatives for presenting this
information, none of the alternatives is without limitations. The following
discussion is based on so-called "shock tests," which model effects of interest
rate and currency shifts on the reporting company. Shock tests, while probably
the most meaningful analysis permitted, are constrained by several factors,
including the necessity to conduct the analysis based on a single point in time
and by their inability to include the complex market reactions that normally
would arise from the market shifts modeled. While the following results of shock
tests for changes in interest rates and currency exchange rates may have some
limited use as benchmarks, they should not be viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical increase in interest rates of 100 basis
points across all maturities (sometimes referred to as a "parallel shift in
the yield curve"). Under this model with all else constant, it is estimated
that such an increase, including repricing in the securities portfolio,
would reduce the 2002 net earnings of GECS based on year-end 2001 positions
by approximately $189 million; the pro forma effect for GE was
insignificant. Based on positions at year-end 2000, the pro forma effect on
2001 net earnings of such an increase in interest rates was estimated to be
a decrease of approximately $124 million for GECS and was insignificant for
GE.
o The geographic distribution of GE and GECS operations is diverse. One means
of assessing exposure to changes in currency exchange rates is to model
effects on reported earnings using a sensitivity analysis. Year-end 2001
consolidated currency exposures, including financial instruments designated
and effective as hedges, were analyzed to identify GE and GECS assets and
liabilities denominated in other than their relevant functional currencies.
Net unhedged exposures in each currency were then remeasured assuming a 10%
decrease (substantially greater decreases for hyperinflationary currencies)
in currency exchange rates compared with the U.S. dollar. Under this model,
management estimated at year-end 2001 that such a decrease would have an
insignificant effect on 2002 earnings of either GE or GECS.
-33-
STATEMENT OF CHANGES IN SHARE OWNERS' EQUITY
Share owners' equity increased $4.3 billion, $7.9 billion and $3.7 billion in
2001, 2000 and 1999, respectively. The increases were largely attributable to
net earnings of $13.7 billion, $12.7 billion and $10.7 billion partially offset
by dividends of $6.6 billion, $5.6 billion and $4.8 billion in 2001, 2000 and
1999, respectively.
Currency translation adjustments reduced equity by $562 million, $1,204
million and $632 million in 2001, 2000 and 1999, respectively. Changes in the
currency translation adjustment reflect the effects of changes in currency
exchange rates on GE net investment in non-U.S. subsidiaries that have
functional currencies other than the U.S. dollar. Over the three-year period,
changes in the currency translation adjustment were largely affected by exchange
rate changes in the euro and Asian currencies. The euro was relatively unchanged
versus the U.S. dollar in 2001 after weakening in 2000 and 1999. Asian
currencies weakened in 2001 and 2000 after strengthening in 1999. Accumulated
currency translation adjustments affect net earnings only when all or a portion
of an affiliate is disposed of.
Adoption of SFAS 133 in 2001 reduced equity by $955 million, including $827
million at the date of adoption. Further information about this accounting
change is provided in note 1.
STATEMENT OF CASH FLOWS
Because cash management activities of GE and GECS are separate and distinct, it
is more useful to review their cash flows separately.
GE CASH AND EQUIVALENTS aggregated $10.4 billion at the end of 2001, up from
$7.2 billion at year-end 2000. GE periodically invests available cash in GECS
short-term borrowings. Such amounts are classified as cash equivalents in the GE
Statement of Financial Position and amounted to $8.7 billion and $5.1 billion at
December 31, 2001 and 2000, respectively. During 2001, GE generated a record
-34-
$17.2 billion in cash from operating activities, a $1.8 billion increase over
2000 primarily due to the 11% increase in earnings before accounting changes. Of
this increase, $200 million is attributable to higher 2001 progress collections,
primarily at Power Systems. Excluding progress collections in both 2001 and
2000, cash from operating activities increased 13% in 2001. The 2001 cash
generation provided the necessary resources to purchase $3.1 billion of GE
common stock under the share repurchase program described below, to pay $6.4
billion in dividends to share owners, to contribute $3.0 billion to GECS, a
portion of which was used to partially fund the acquisition of Heller Financial,
to invest $2.9 billion in plant and equipment and to make $1.4 billion in
acquisitions.
Operating activities are the principal source of GE's cash flows. Over the
past three years, operating activities have provided more than $44 billion of
cash. The principal application of this cash was distributions of approximately
$24 billion to share owners, both through payment of dividends ($16.3 billion)
and through the share repurchase program ($7.2 billion) described below. Other
applications included investment in plant and equipment ($7.4 billion),
acquisitions ($4.2 billion) and the 2001 capital contribution of $3.0 billion to
GECS.
[GRAPH HERE]
- --------------------------------------------------------------------------------
CASH FROM OPERATING ACTIVITIES
(In billions)
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
$9.21 $9.64 $10.00 $12.16 $13.75
Progress collections 0.11 0.39 1.77 3.26 3.45
- --------------------------------------------------------------------------------
Under the share repurchase program initiated in December 1994, GE has
purchased 1.0 billion shares of GE stock. In December 2001, GE's Board of
Directors increased the amount authorized from $22 billion to $30 billion. Funds
used for the share repurchase are expected to be generated largely from
operating cash flow.
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, management believes that GE is in a sound position to complete
the share repurchase program, to grow dividends in line with earnings, and to
continue making selective investments for long-term growth. Expenditures for
plant and equipment are expected to be about $2.3 billion in 2002, principally
for productivity and growth.
GECS CASH AND EQUIVALENTS aggregated $7.3 billion at the end of 2001, up from
$6.1 billion at year-end 2000. One of the primary sources of cash for GECS is
short and long-term borrowings. Over the past three years, GECS borrowings with
maturities of 90 days or less have increased by $28.8 billion. New borrowings of
$125.2 billion having maturities longer than 90 days were added during those
years, while $94.9 billion of such longer-term borrowings were retired. GECS
also generated $41.7 billion from operating activities, which benefited in 2001
from an increase in insurance liabilities and reserves, net of an increase in
reinsurance recoverables, and a decrease from the planned run-off of
policyholder contracts at Toho.
The principal use of cash by GECS has been investing in assets to grow its
businesses. Of the $110.1 billion that GECS invested over the past three years,
$42.7 billion was used for additions to financing receivables; $37.5 billion was
used to invest in new equipment, principally for lease to others; and $22.2
billion was used for acquisitions of new businesses, the largest of which were
Heller Financial and Mellon Leasing in 2001 and Japan Leasing and the credit
card operations of JC Penney in 1999.
With the financial flexibility that comes with excellent credit ratings,
management believes that GECS should be well positioned to meet the global needs
of its customers for capital and to continue providing GE share owners with good
returns.
-35-
LIQUIDITY
The major debt-rating agencies evaluate the financial condition of GE and of GE
Capital, the major public borrowing entity of GECS, differently because of their
distinct business characteristics. Factors that are important to the ratings of
both include the following: cash generating ability--including cash generated
from operating activities; earnings quality--including revenue growth and the
breadth and diversity of sources of income; leverage ratios--such as debt to
total capital and interest coverage; and asset utilization, including return on
assets and asset turnover ratios. Considering those factors, as well as other
criteria appropriate to GE and GECS individually, those major rating agencies
continue to give the highest ratings to debt of both GE and GE Capital
(long-term credit rating AAA/Aaa; short-term credit rating A-1+/P-1).
GLOBAL COMMERCIAL PAPER MARKETS are a primary source of liquidity for GE and
GECS. GE Capital is the most widely-held name in those markets, with $117.5
billion and $94.5 billion outstanding at the end of 2001 and 2000, respectively.
Money markets are extremely robust. In 2001, GE Capital's commercial paper
accounted for only 2.4% of activity with maturities of less than one year in the
U.S. market, the largest of the global money markets.
Management believes 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 management would rely
would depend on the nature of such a hypothetical event, but include $33 billion
of contractually committed lending agreements with highly-rated global banks,
medium and long-term funding, monetization and asset securitization, cash
receipts from GECS lending and leasing activities, short-term secured funding on
global assets, and asset sales. Strength of commercial paper markets and GE
Capital's access to those markets was evidenced on and immediately after
September 11, when many financial markets were closed, but GE Capital continued
to issue commercial paper without interruption.
-36-
OFF-BALANCE SHEET ARRANGEMENTS are used in the ordinary course of business to
achieve improved share owner returns. One of the most common forms of
off-balance sheet arrangements is asset securitization. The transactions
described below are similar to those used by many financial institutions and are
part of an $800 billion annual market for asset-backed commercial paper. GE and
GECS use sponsored and third-party entities as well as term execution for
securitizations. As part of this program, management considers the relative
risks and returns of each alternative and predominantly uses sponsored entities.
Management believes these transactions could be readily executed through
non-sponsored entities or term securitization at insignificant incremental cost.
In addition to improved share owner returns, special purpose entities serve
as funding sources for a variety of diversified lending and securities
transactions, transfer selected credit risk and improve cash flows while
enhancing the ability to provide a full range of competitive products for
customers.
The discussion below and on page 38 describes sponsored special purpose
entities, and is organized as follows:
o STRUCTURE of sponsored special purpose entities and of transactions that
result in gains on sales and removal of assets from the financial
statements. This section describes assets in the entities as well as
management prohibitions on certain types of activities.
o SUPPORT, both financial and operational, provided for special purpose
entities. This section describes the potential risks associated with
special purpose entities as well as management's measures to control risk
and conclusions about its potential significance.
o ACCOUNTING OUTLOOK for these entities. This section briefly discusses the
accounting policy deliberations that have been undertaken recently
regarding special purpose entities.
STRUCTURE. Simply stated, GE and GECS are selling high-quality, low-yield
financial assets to highly-rated entities that have financed those purchases
using low-cost commercial paper. Because GECS is the sponsor of these entities
and guarantees certain of their positions, management believes that the
structures warrant a more complete explanation, as follows.
The first step in the securitization process uses entities that meet the
accounting criteria for Qualifying Special Purpose Entities (qualifying
entities). Among other criteria, a qualifying entity's activities must be
restricted to passive investment in financial assets and issuance of beneficial
interests in those assets. Under generally accepted accounting principles,
entities meeting these criteria are not consolidated in the sponsor's financial
statements. GE and GECS sell selected financial assets to qualifying entities.
Examples include GECS financing and credit card receivables and GE trade
receivables. On the whole, the credit quality of such assets is equal to or
higher than the credit quality of similar assets owned by GE and GECS.
-37-
Qualifying entities raise cash by issuing beneficial interests--rights to
cash flows from the assets--to other GECS-sponsored special purpose entities
that issue highly-rated commercial paper to third-party institutional investors.
These entities use commercial paper proceeds to obtain beneficial interests in
the financial assets of qualifying entities, as well as financial assets
originated by multiple third parties. GECS provides credit support for certain
of these assets, as well as liquidity support for the commercial paper, as
described on page 38. In accordance with its contractual commitments to the
entities, GECS rigorously underwrites and services the associated assets, both
those originated by GE or GECS, and those originated by other participants. All
of the entities' assets serve as collateral for the commercial paper. These
entities are not consolidated in the accompanying financial statements. Support
activities include credit reviews at acquisition and ongoing review, billing and
collection activities--the same support activities that GECS employs for its own
financing receivables.
GECS-sponsored special purpose entities are routinely evaluated by the
major credit rating agencies, including monthly reviews of key performance
indicators and annual reviews of asset quality. Commercial paper issued by these
entities has always received the highest available ratings from the major credit
rating agencies and at year-end 2001 was rated A-1+/P-1.
The following table summarizes receivables held by special purpose
entities.
---------------------------
December 31 (In millions) 2001 2000
- ---------------------------------------------------------
Receivables--secured by
Equipment $ 12,781 $ 7,993
Commercial real estate 9,971 7,445
Other assets 7,761 6,249
Credit card receivables 9,470 6,170
Trade receivables 3,028 3,138
---------------------------
Total receivables $43,011 $30,995
=========================================================
GE assets included in the categories above at year-end
2001 and 2000, respectively, are as follows:
Equipment--$631 million and $269 million; Other
assets--$757 million and $611 million; Trade
receivables--$2,396 million and $1,733 million.
- ---------------------------------------------------------
Each of the categories of assets shown in the table above represent
portfolios of assets that, in addition to being highly rated, are diversified to
avoid concentrations of risk. In each of the first three categories, financing
receivables are collateralized by a diverse mix of assets. Examples of assets in
each category follow: equipment--loans and leases on manufacturing and
transportation equipment; commercial real estate--loans on diversified
commercial property; other assets--diversified commercial loans; credit card
receivables--more than 23 million individual accounts; trade
receivables--balances of high credit quality accounts from sales of a broad
range of products and services to a diversified customer base.
-38-
In addition to the activities discussed previously, Financial Guaranty
Insurance Company (FGIC), a GECS affiliate that is a leader in the municipal
bond insurance market, uses special purpose entities that offer municipalities
guaranteed investment contracts with interests in high-quality, fixed-maturity,
investment grade assets. FGIC actively manages these assets under strict
investment criteria and GE Capital also provides certain performance guarantees.
Total assets in sponsored FGIC entities amounted to $13.4 billion and $10.2
billion at December 31, 2001 and 2000, respectively.
None of these special purpose entities or qualifying entities is permitted
to hold GE stock and there are no commitments or guarantees that provide for the
potential issuance of GE stock. These entities do not engage in speculative
activities of any description, are not used to hedge GE or GECS positions, and
under GE integrity policies, no GE employee is permitted to invest in any
sponsored special purpose entity.
SUPPORT. Financial support for certain special purpose entities is provided
in the following ways.
o Under active liquidity support agreements, GECS has agreed to lend to these
entities on a secured basis if (a) certain market conditions render the
entities unable to issue new debt instruments, or (b) the entity's credit
ratings were reduced below specified levels. The maximum amount of such
support for commercial paper outstanding was $43.2 billion at December 31,
2001. Under related unused liquidity support agreements, GECS has made
additional liquidity support commitments of $9.4 billion at December 31,
2001, that would be effective upon addition of qualified assets to the
entities.
o Under credit support agreements, GECS provides recourse for a maximum of
$14.5 billion of credit losses in special purpose entities. $9.1 billion of
this support represents full recourse for certain assets; the balance is
based on loss-sharing formulas. Assets with credit support are funded by
commercial paper that is subject to the liquidity support described above.
Potential credit losses are provided for in GE and GECS financial
statements based on management's best estimate of probable losses inherent
in the portfolio using the same methodology as for owned assets. GECS
allowances for losses amounted to $0.7 billion and $0.6 billion at year-end
2001 and 2000, respectively.
o Performance guarantees relate to letters of credit and liquidity support
for guaranteed investment contracts and are subject to a maximum of $3.8
billion at December 31, 2001.
Management has 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 both to asset servicing and to activities in the
credit markets, management believes that, under any reasonable future economic
developments, the likelihood is remote that any such arrangements could have a
significant effect on GE or GECS operations, cash flows or financial position.
Sales of securitized assets to special purpose entities result in a gain or
loss amounting to the net of sales proceeds, the carrying amount of net assets
sold, the fair value of servicing rights and an allowance for losses.
Securitization sales resulted in gains of $1.3 billion and about $0.5 billion in
2001 and 2000, respectively, and are included in GECS revenues.
-39-
ACCOUNTING OUTLOOK. Various generally accepted accounting principles
specify the conditions that GE and GECS observe in not consolidating special
purpose entities and qualifying entities. Accounting for special purpose
entities is under review by the Financial Accounting Standards Board, and their
non-consolidated status may change as a result of those reviews.
SUMMARY. The special purpose entities described above meet GE's economic
objectives for their use while complying with generally accepted accounting
principles. In the event that accounting rules change in a way that adversely
affects sponsored entities, alternative securitization techniques discussed on
page 36 would likely serve as a substitute at insignificant incremental cost.
PRINCIPAL DEBT CONDITIONS that could automatically result in remedies, such as
acceleration of GE or GECS debt, are described below.
o If the short-term credit rating of GE Capital or certain special purpose
entities previously discussed were to fall below. A-1+/P-1, GE Capital
would be required to provide substitute liquidity for those entities or to
purchase the outstanding commercial paper. The maximum amount that GE
Capital would be required to provide in the event of such a downgrade is
$43.2 billion at December 31, 2001.
o If the long-term credit rating of GE Capital or certain special purpose
entities previously discussed were to fall below AA-/Aa3, GE Capital would
be required to provide substitute credit support or liquidate the special
purpose entities. The maximum amount that GE Capital would be required to
substitute in the event of such a downgrade is $14.5 billion at December
31, 2001.
o If the long-term credit rating of either GE or GECS under certain swap,
forward and option contracts falls below A-/A3, certain remedies are
required as discussed in note 29.
o If GE Capital's ratio of earnings to fixed charges, which was 1.72 to 1 at
the end of 2001 deteriorates to 1.10 to 1 or, upon redemption of certain
preferred stock, its ratio of debt to equity, which was 7.31 to 1 at the
end of 2001 exceeds 8 to 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, 2001, and 2000.
o If the GE long-term credit rating were to fall below investment grade (a
downgrade of 9 ratings increments), certain special purpose entities with
which GE has financing arrangements would have the right to terminate those
arrangements potentially requiring $2.5 billion of secured funding.
-40-
None of these conditions has been met in GE or GECS history, and management
believes that under any reasonable future economic developments, the likelihood
is remote that any such arrangements could have a significant effect on GE and
GECS operations, cash flows or financial position.
TIMING OF CONTRACTUAL COMMITMENTS at GE and GECS, related to leases and debt,
follow.
- ------------------------------------------------------------------------------
(In billions) 2002 2003 2004 2005 2006
- ------------------------------------------------------------------------------
GE $ 2.2 $ 0.5 $ 0.5 $ 0.3 $ 0.3
GECS
Commercial paper 117.5 -- -- -- --
Other 44.4 26.4 15.2 10.5 6.9
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA summarized on the following page are 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 $2,349 million in 2001, up
7% over 2000, which was 9% higher than 1999. In 2001, expenditures from GE's own
funds were $1,980 million, an increase of 6% over 2000, reflecting continuing
research and development work related to new product, service and process
technologies. Product technology efforts in 2001 included continuing development
work on the next generation of gas turbines, further advances in
state-of-the-art diagnostic imaging technologies, and development of more
fuel-efficient, cost-effective aircraft engine designs. Services technologies
include advances in diagnostic applications, including remote diagnostic
capabilities related to repair and maintenance of medical equipment, aircraft
engines, power generation equipment and locomotives. Process technologies
provided improved product quality and performance and increased capacity for
manufacturing engineered materials. Expenditures funded by customers (mainly the
U.S. government) were $369 million in 2001, up $43 million from 2000.
GE'S TOTAL BACKLOG of firm unfilled orders at the end of 2001 was $47.4 billion,
an increase of 7% over 2000, reflecting strong double-digit growth at Power
Systems, Medical Systems and Transportation Systems, partially offset by lower
backlog at Aircraft Engines. Of the total, $38.9 billion related to products, of
which 70% was scheduled for delivery in 2002. Product services orders, included
in this reported backlog for only the succeeding 12 months, were $8.4 billion at
the end of 2001. Orders constituting this backlog may be canceled or deferred by
customers, subject in certain cases to penalties. See Segment Operations
beginning on page 14 for further information.
[GRAPH HERE]
- --------------------------------------------------------------------------------
GE SHARE PRICE ACTIVITY
(In dollars)
1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
High $25.52 $34.65 $53.17 $60.50 $52.90
Low 15.98 23.00 31.42 41.67 28.25
Close 24.46 34.00 51.58 47.94 40.08
- --------------------------------------------------------------------------------
-41-
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
High-quality financial statements require rigorous application of high-quality
accounting policies. The policies discussed below are considered by management
to be critical to an understanding of GE's financial statements because their
application places the most significant demands on management's judgment, with
financial reporting results relying on estimation about the effect of matters
that are inherently uncertain. Specific risks for these critical accounting
policies are described in the following paragraphs. For all of these policies,
management cautions that future events rarely develop exactly as forecast, and
the best estimates routinely require adjustment.
LOSSES ON FINANCING RECEIVABLES are recognized when they are incurred.
Measurement of such losses requires consideration of historical loss experience,
including the need to adjust 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 value, and the present and expected levels of
interest rates. GECS exposure to losses on financing receivables at year-end
2001 was approximately $193 billion, including credit support for special
purpose entities, against which an allowance for losses of approximately $5.5
billion was provided. An analysis of changes in the allowance for losses is
provided on page 26 which discusses financing receivable portfolio quality.
While losses depend to a large degree on future economic conditions, management
does not forecast significant adverse credit development in 2002. Further
information is provided in notes 1, 12 and 13.
-42-
SELECTED FINANCIAL DATA
--------------------------------------------------
(Dollar amounts in millions; per-share amounts in dollars) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES
Revenues $ 125,913 $129,853 $111,630 $100,469 $90,840
Earnings before accounting changes 14,128 12,735 10,717 9,296 8,203
Cumulative effect of accounting changes (444) -- -- -- --
Net earnings 13,684 12,735 10,717 9,296 8,203
Dividends declared 6,555 5,647 4,786 4,081 3,535
Earned on average share owners' equity excluding
effect of accounting changes 27.1% 27.5% 26.8% 25.7% 25.0%
Per share
Earnings before accounting changes--diluted $ 1.41 $ 1.27 $ 1.07 $ 0.93 $ 0.82
Cumulative effect of accounting changes--diluted (0.04) -- -- -- --
Earnings--diluted 1.37 1.27 1.07 0.93 0.82
Earnings before accounting changes--basic 1.42 1.29 1.09 0.95 0.83
Cumulative effect of accounting changes--basic (0.04) -- -- -- --
Earnings--basic 1.38 1.29 1.09 0.95 0.83
Dividends declared 0.66 0.57 0.48 2/3 0.41 2/3 0.36
Stock price range 52.90 60.50 53.17 34.65 25.52
-28.25 -41.67 -31.42 -23.00 -15.98
Year-end closing stock price 40.08 47.94 51.58 34.00 24.46
Total assets 495,023 437,006 405,200 355,935 304,012
Long-term borrowings 79,806 82,132 71,427 59,663 46,603
Shares outstanding--average (in thousands) 9,932,245 9,897,110 9,833,478 9,806,995 9,824,075
Share owner accounts--average 625,000 597,000 549,000 534,000 509,000
==============================================================================================================
GE DATA
Short-term borrowings $ 1,722 $ 940 $ 2,245 $ 3,466 $ 3,629
Long-term borrowings 787 841 722 681 729
Minority interest 948 968 823 816 569
Share owners' equity 54,824 50,492 42,557 38,880 34,438
--------------------------------------------------
Total capital invested $ 58,281 $ 53,241 $ 46,347 $ 43,843 $39,365
==================================================
Return on average total capital invested 27.0% 27.4% 25.8% 23.9% 23.6%
Borrowings as a percentage of total capital invested
excluding effect of accounting changes 4.3% 3.3% 6.4% 9.5% 11.1%
Working capital (a) $ (2,398) $ 799 $ 3,922 $ 5,038 $ 5,990
Additions to property, plant and equipment 2,876 2,536 2,036 2,047 2,191
Employees at year end
United States 125,000 131,000 124,000 125,000 128,000
Other countries 94,000 92,000 86,000 82,000 81,000
--------------------------------------------------
Total employees 219,000 223,000 210,000 207,000 209,000
==============================================================================================================
GECS DATA
Revenues $ 58,353 $ 66,177 $ 55,749 $ 48,694 $39,931
Earnings before accounting changes 5,586 5,192 4,443 3,796 3,256
Cumulative effect of accounting changes (169) -- -- -- --
Net earnings 5,417 5,192 4,443 3,796 3,256
Share owner's equity 28,590 23,022 20,321 19,727 17,239
Minority interest 4,267 3,968 4,391 3,459 3,113
Borrowings from others 239,935 205,371 200,025 172,200 141,263
Ratio of debt to equity at GE Capital 7.31:1 7.53:1 8.44:1 7.86:1 7.45:1
Total assets $ 425,484 $370,636 $345,018 $303,297 $255,408
Insurance premiums written 15,843 16,461 13,624 11,865 9,396
Employees at year end
United States (b) 33,000 37,000 43,000 38,000 37,000
Other countries 58,000 53,000 57,000 48,000 30,000
--------------------------------------------------
Total employees 91,000 90,000 100,000 86,000 67,000
==============================================================================================================
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.
(b) Excludes employees of Montgomery Ward in 1999.
-43-
IMPAIRMENT OF INVESTMENT SECURITIES results in a charge to operations when a
market decline below cost is other than temporary. Management regularly reviews
each investment security for impairment based on criteria that include the
extent to which cost exceeds market value, the duration of that market decline
and the financial health of and specific prospects for the issuer. GECS
investment securities amounted to approximately $100 billion at year-end 2001.
Gross unrealized gains and losses included in that carrying amount related to
debt securities were $1.9 billion and $2.3 billion, respectively. Gross
unrealized gains and losses on equity securities were $0.2 billion and $0.4
billion, respectively. Of those securities whose carrying amount exceeds fair
value at year-end 2001, and based on application of GE's accounting policy for
impairment, approximately $600 million of portfolio value is at risk of being
charged to earnings in 2002. GECS actively performs comprehensive market
research, monitors market conditions and segments its investments by credit risk
in order to minimize impairment risks. Further information is provided in notes
1 and 9 and on page 46, which discusses the investment securities portfolio.
REVENUE RECOGNITION ON LONG-TERM AGREEMENTS to provide product services (product
services agreements) requires estimates of profits over the entire terms of such
agreements, considering factors such as the frequency and extent of future
maintenance events, cost of personnel, material and other resources required to
perform the services, and future cost changes. GE management routinely reviews
estimates under product services agreements; such estimates are regularly
revised 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. Management regularly assesses customer credit
risk inherent in the carrying amounts of contract costs and estimated earnings
and provides for losses when they are incurred. Such carrying amounts for
product services agreements in progress at December 31, 2001 and 2000, were $2.3
billion and $1.7 billion, respectively. 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, 2001.
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 the amount of loss 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 term and whole life insurance
policies) also is based on approved actuarial techniques, but necessarily
includes assumptions about mortality, lapse rates and future yield on related
investments. GECS insurance liabilities, reserves and annuity benefits totaled
$114.2 billion at year-end 2001. Of that total, approximately $27.2 billion
related to unpaid claims and claims adjustment expenses for short-duration
insurance coverage. As discussed on page 21, there has been a recent shift in
the source of adverse loss development away from property to liability coverage.
Management continually evaluates the potential for changes in loss estimates,
both positive and negative, and uses the results of these evaluations both to
adjust recorded provisions and to adjust underwriting criteria and product
offerings. The potential for further adverse loss development in these areas is
highly uncertain. Further information about insurance liabilities is provided in
note 19.
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.
OTHER SIGNIFICANT ACCOUNTING POLICIES, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies related to revenue
recognition, financial instruments and consolidation policy require difficult
judgments on complex matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among topics currently
under reexamination by accounting standards setters and regulators. Although no
specific conclusions reached by these standard setters appear likely to cause a
material change in GE's accounting policies, outcomes cannot be predicted with
confidence. Also see note 1, Summary of Significant Accounting Policies, which
discusses accounting policies that must be selected by management when there are
acceptable alternatives.
-44-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements represent the adding
together of all affiliates-companies that General Electric Company directly or
indirectly controls. Results of associated companies-generally companies that
are 20% to 50% owned and over which General Electric Company, directly or
indirectly, has significant influence-are included in the financial statements
on a "one-line" basis.
FINANCIAL STATEMENT PRESENTATION. Financial data and related measurements are
presented in the following categories:
o 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.
o GECS. This affiliate owns all of the common stock of General Electric
Capital Corporation (GE Capital) and GE Global Insurance Holdings
Corporation (GE Global Insurance Holdings), the parent of Employers
Reinsurance Corporation. GE Capital, GE Global Insurance Holdings and their
respective affiliates are consolidated in the GECS columns and constitute
its business.
o CONSOLIDATED. This represents the adding together of GE and GECS.
The effects of transactions among related companies within and between each of
the above-mentioned groups are eliminated. Transactions between GE and GECS are
not material.
Certain prior-year amounts have been reclassified to conform to the 2001
presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
SALES OF GOODS AND SERVICES. Sales of goods are recorded when a firm sales
agreement is in place, delivery has occurred and collectibility of the fixed or
determinable sales price is reasonably assured. Sales of services are recorded
when performed in accordance with contracts. For long-term product services
agreements, estimated profit rates are used to record sales as work is
performed. Estimates are subject to change and may result in adjustments to
margins. Losses, if any, are provided for when probable. For contracts that
contain multiple products and/or services, amounts assigned to each component
are based on its objectively determined fair value, such as the sales price for
the component when it is sold separately or competitor prices for similar
components.
GECS REVENUES FROM SERVICES (EARNED INCOME). Income on all loans is recognized
on the interest method. Accrual of interest income is suspended at the earlier
of the time at which collection of an account becomes doubtful or the account
becomes 90 days delinquent. Interest income on impaired loans is recognized
either as cash is collected or on a cost-recovery basis as conditions warrant.
Financing lease income is recorded on the interest method so as 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.
Operating lease income is recognized on a straight-line basis over the
terms of underlying leases.
Origination, commitment and other nonrefundable fees related to fundings
are deferred and recorded in earned income on the interest method. Commitment
fees related to loans not expected to be funded and line-of-credit fees are
deferred and recorded in earned income on a straight-line basis over the period
to which the fees relate. Syndication fees are recorded in earned income at the
time related services are performed unless significant contingencies exist.
Income from investment and insurance activities is discussed on page 46.
-45-
DEPRECIATION AND AMORTIZATION. The cost of most of GE's manufacturing plant and
equipment is depreciated using an accelerated method based primarily on a
sum-of-the-years digits formula.
The cost of GECS equipment leased to others on operating leases is
amortized, principally on a straight-line basis, to estimated residual value
over the lease term or over the estimated economic life of the equipment.
Depreciation of property and equipment used by GECS is recorded on either a
sum-of-the-years digits formula or a straight-line basis over the lives of the
assets.
RECOGNITION OF LOSSES ON FINANCING RECEIVABLES. The allowance for losses on
small-balance receivables reflects management's best estimate of probable losses
inherent in the portfolio determined principally on the basis of historical
experience. For other receivables, principally the larger loans and leases, the
allowance for losses is determined primarily on the basis of management's best
estimate of probable losses, including specific allowances for known troubled
accounts.
All accounts or portions thereof deemed to be uncollectible or to require
an excessive collection cost are written off to the allowance for losses.
Small-balance accounts generally are written off when 6 to 12 months delinquent,
although any such balance judged to be uncollectible, such as an account in
bankruptcy, is written down immediately to estimated realizable value.
Large-balance accounts are reviewed at least quarterly, and those accounts with
amounts that are judged to be uncollectible are written down to estimated
realizable value.
When collateral is repossessed in satisfaction of a loan, the receivable is
written down against the allowance for losses to estimated fair value of the
asset less costs to sell, transferred to other assets and subsequently carried
at the lower of cost or estimated fair value less costs to sell. This accounting
method has been employed principally for specialized financing transactions.
-46-
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. Investments in debt and marketable equity securities are
reported at fair value based primarily 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. Substantially
all investment securities are designated as available for sale, with unrealized
gains and losses included in share owners' equity, net of applicable taxes and
other adjustments. Investment securities are regularly reviewed for impairment
based on criteria that include the extent to which cost exceeds market value,
the duration of the market decline, and the financial health of and specific
prospects for the issuer. Unrealized losses that are other than temporary are
recognized 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 virtually all of GE's U.S. inventories is determined on a
last-in, first-out (LIFO) basis. Cost of other GE inventories is primarily
determined on a first-in, first-out (FIFO) basis.
GECS inventories consist primarily of finished products held for sale. Cost
is primarily determined on a FIFO basis.
INTANGIBLE ASSETS. Goodwill is amortized over its estimated period of benefit on
a straight-line basis; other intangible assets are amortized on appropriate
bases over their estimated lives. No amortization period exceeds 40 years. When
an intangible asset exceeds associated expected operating cash flows, it is
considered to be impaired and is written down to fair value, which is determined
based on either discounted future cash flows or appraised values.
GECS INSURANCE ACCOUNTING POLICIES. Accounting policies for GECS insurance
businesses follow.
PREMIUM INCOME. Insurance premiums are reported as earned income as follows:
o For short-duration insurance contracts (including property and casualty,
accident and health, and financial guaranty insurance), premiums are
reported as earned income, generally on a pro-rata basis, over the terms of
the related agreements. For retrospectively rated reinsurance contracts,
premium adjustments are recorded based on estimated losses and loss
expenses, taking into consideration both case and incurred-but-not-reported
reserves.
o For traditional long-duration insurance contracts (including term and whole
life contracts and annuities payable for the life of the annuitant),
premiums are reported as earned income when due.
o For investment contracts and universal life contracts, premiums received
are reported as liabilities, not as revenues. Universal life contracts are
long-duration insurance contracts with terms that are not fixed and
guaranteed; for these contracts, revenues are recognized 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, revenues are recognized on the associated investments and
amounts credited to policyholder accounts are charged to expense.
-47-
DEFERRED POLICY ACQUISITION COSTS. Costs that vary with and are primarily
related to the acquisition of new and renewal insurance and investment contracts
are deferred and amortized over the respective policy terms. For short-duration
insurance contracts, acquisition costs consist primarily of commissions,
brokerage expenses and premium taxes. For long-duration insurance contracts,
these costs consist primarily 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.
o For short-duration insurance contracts, these costs are amortized pro rata
over the contract periods in which the related premiums are earned.
o For traditional long-duration insurance contracts, these costs are
amortized over the respective contract periods in proportion to either
anticipated premium income or, in the case of limited-payment contracts,
estimated benefit payments.
o For investment contracts and universal life contracts, these costs are
amortized on the basis of anticipated gross profits.
Periodically, deferred policy acquisition costs are reviewed for recoverability;
anticipated investment income is considered in recoverability evaluations.
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 enterprises is
recorded as the present value of future profits and is amortized over the
respective policy terms in a manner similar to deferred policy acquisition
costs. Unamortized balances are adjusted to reflect experience and impairment,
if any.
ACCOUNTING CHANGES. At January 1, 2001, GE and GECS adopted Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, as amended. Under SFAS 133, all derivative instruments
(including certain derivative instruments embedded in other contracts) are
-48-
recognized in the balance sheet at their fair values and changes in fair value
are recognized immediately in earnings, unless the derivatives qualify as hedges
of future cash flows. For derivatives qualifying as hedges of future cash flows,
the effective portion of changes in fair value is recorded temporarily in
equity, then recognized in earnings along with the related effects of the hedged
items. Any ineffective portion of hedges is reported in earnings as it occurs.
Further information about derivatives and hedging is provided in note 29.
The cumulative effect of adopting this accounting change at January 1,
2001, was as follows:
Share owners'
(In millions) Earnings (a) equity
- --------------------------------------------------------------------------------
Adjustment to fair value of derivatives $(502) $(1,340)
Income tax effects 178 513
----- -------
Total $(324) $ (827)
================================================================================
The earnings per share effect was $0.03.
(a) For earnings effect, amount shown is net of adjustment to hedged items.
- --------------------------------------------------------------------------------
The cumulative effect on earnings comprised two significant elements. One
element was associated with conversion option positions that were embedded in
financing agreements, and the other was a portion of the effect of marking to
market options and currency contracts used for hedging. The cumulative effect on
share owners' equity was primarily attributable to marking to market forward and
swap contracts used to hedge variable-rate borrowings. Decreases in the fair
values of these instruments were attributable to declines in interest rates
since inception of the hedging arrangements. As a matter of policy, GECS ensures
that funding, including the effect of derivatives, of its lending and other
financing asset positions are substantially matched in character (e.g., fixed
vs. floating) and duration. As a result, declines in the fair values of these
effective derivatives are offset by unrecognized gains on the related financing
assets and hedged items, and future earnings will not be subject to volatility
arising from interest rate changes.
In November 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on accounting for impairment of
retained beneficial interests (EITF 99-20). Under this consensus, impairment of
certain beneficial interests in securitized assets must be recognized when (1)
the asset's fair value is below its carrying value, and (2) it is probable that
there has been an adverse change in estimated cash flows. The cumulative effect
of adopting EITF 99-20 at January 1, 2001, was a one-time reduction of net
earnings of $120 million ($0.01 per share).
These accounting changes did not involve cash, and management expects that
they will have no more than a modest effect on future results.
-49-
2 GE OTHER INCOME
(In millions) 2001 2000 1999
----- ----- -----
Residual licensing and royalty income $ 75 $ 65 $ 67
Associated companies (106) (111) (1)
Marketable securities and bank deposits 184 55 105
Customer financing 11 22 17
Other items 269 467 668
----- ----- -----
$ 433 $ 498 $ 856
================================================================================
Other income in 1999 included a gain of $388 million related to the
contribution of certain of NBC's media properties to NBC Internet (NBCi), a
former publicly-traded company, in exchange for a noncontrolling interest in
NBCi. Assets contributed by NBC included its 100% interest in NBC.com,
NBC-IN.com and VideoSeeker.com as well as a 10% interest in a fourth property,
CNBC.com.
3 GECS REVENUES FROM SERVICES
(In millions) 2001 2000 1999
------- ------- -------
Time sales, loan and other income (a) $22,150 $22,326 $18,209
Operating lease rentals 6,088 6,183 6,022
Financing leases 4,261 3,688 3,587
Investment income 6,593 8,479 6,243
Premium and commission income of insurance
businesses 15,634 16,093 12,948
------- ------- -------
$54,726 $56,769 $47,009
================================================================================
(a) Includes gains on sales of financial assets through securitizations of
$1,327 million in 2001, compared with $489 million in 2000, which was
approximately the same as the 1999 amount.
- --------------------------------------------------------------------------------
-50-
For insurance businesses, the effects of reinsurance on premiums written
and premium and commission income were as follows:
(In millions) 2001 2000 1999
-------- -------- --------
PREMIUMS WRITTEN
Direct $ 9,958 $ 9,390 $ 7,382
Assumed 9,603 9,552 8,520
Ceded (3,718) (2,481) (2,278)
-------- -------- --------
$ 15,843 $ 16,461 $ 13,624
-------- -------- --------
PREMIUM AND COMMISSION INCOME
Direct $ 9,912 $ 9,026 $ 7,002
Assumed 9,471 9,643 8,460
Ceded (3,749) (2,576) (2,514)
-------- -------- --------
$ 15,634 $ 16,093 $ 12,948
================================================================================
Reinsurance recoveries recognized as a reduction of insurance losses and
policyholder and annuity benefits amounted to $5,863 million, $3,232 million and
$2,648 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
4 SUPPLEMENTAL COST INFORMATION
Total expenditures for research and development were $2,349 million, $2,193
million and $2,017 million in 2001, 2000 and 1999, respectively. The
Company-funded portion aggregated $1,980 million in 2001, $1,867 million in 2000
and $1,667 million in 1999.
Rental expense under operating leases is shown below.
(In millions) 2001 2000 1999
----- ----- -----
GE $ 694 $ 648 $ 607
GECS 1,006 1,176 1,067
================================================================================
At December 31, 2001, minimum rental commitments under noncancelable
operating leases aggregated $2,608 million and $5,179 million for GE and GECS,
respectively. Amounts payable over the next five years follow.
(In millions) 2002 2003 2004 2005 2006
---- ---- ---- ---- ----
GE $519 $410 $328 $277 $228
GECS 997 680 601 636 407
================================================================================
GE's selling, general and administrative expense totaled $8,637 million in
2001, $8,392 million in 2000 and $7,732 million in 1999. Insignificant amounts
of interest were capitalized by GE and GECS in 2001, 2000 and 1999.
-51-
5 RETIREE HEALTH AND LIFE BENEFITS
GE and its affiliates 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 (see note 6) with 10
or more years of service. Retirees share in the cost of healthcare benefits.
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.
EFFECT ON OPERATIONS
(In millions) 2001 2000 1999
----- ----- -----
Expected return on plan assets $(185) $(178) $(165)
Service cost for benefits earned 191 165 107
Interest cost on benefit obligation 459 402 323
Prior service cost 90 49 8
Net actuarial loss recognized 60 40 45
----- ----- -----
Total cost $ 615 $ 478 $ 318
================================================================================
FUNDING POLICY for retiree health benefits is generally to pay covered expenses
as they are incurred. GE funds retiree life insurance benefits at its
discretion.
Changes in the accumulated postretirement benefit obligation for retiree
benefit plans follow.
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (APBO)
(In millions) 2001 2000
------- -------
Balance at January 1 $ 6,422 $ 4,926
Service cost for benefits earned 191 165
Interest cost on benefit obligation 459 402
Participant contributions 30 25
Plan amendments -- 948
Actuarial loss 287 534
Benefits paid (593) (578)
------- -------
Balance at December 31 (a) $ 6,796 $ 6,422
================================================================================
(a) The APBO for the health plans was $4,965 million and $4,688 million at
year-end 2001 and 2000, respectively.
- --------------------------------------------------------------------------------
-52-
Changes in the fair value of assets for retiree benefit plans follow.
FAIR VALUE OF ASSETS
(In millions) 2001 2000
------- -------
Balance at January 1 $ 2,031 $ 2,369
Actual return on plan assets (163) (85)
Employer contributions 466 300
Participant contributions 30 25
Benefits paid (593) (578)
------- -------
Balance at December 31 $ 1,771 $ 2,031
================================================================================
Plan assets are held in trust and consist mainly of common stock and
fixed-income investments. GE common stock represented 6.4% and 6.9% of trust
assets at year-end 2001 and 2000, respectively.
GE recorded assets and liabilities for retiree benefit plans are as
follows:
RETIREE BENEFIT ASSET/(LIABILITY)
December 31 (In millions) 2001 2000
------- -------
Funded status (a) $(5,025) $(4,391)
Unrecognized prior service cost 909 999
Unrecognized net actuarial loss 1,393 818
------- --------
Net liability recognized $(2,723) $(2,574)
======= ========
Amounts recorded in the Statement
of Financial Position:
Prepaid retiree life plans asset $ 66 $ 8
Retiree health plans liability (2,789) (2,582)
------- --------
Net liability recognized $(2,723) $(2,574)
================================================================================
(a) Fair value of assets less APBO, as shown in the preceding tables.
- --------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS used to determine costs and benefit obligations for
principal retiree benefit plans follow.
ACTUARIAL ASSUMPTIONS
December 31 2001 2000 1999
---- ---- ----
Discount rate 7.25% 7.5% 7.75%
Compensation increases 5.0 5.0 5.0
Healthcare cost trend (a) 11.6 10.0 9.0
Return on assets for the year (b) 9.5 9.5 9.5
================================================================================
(a) For 2001, gradually declining to 5.0% after 2009.
(b) For 2002, the return on assets actuarial assumption will be 8.5%.
- --------------------------------------------------------------------------------
Increasing or decreasing the healthcare cost trend rates by one percentage
point would have had an insignificant effect on the December 31, 2001,
accumulated postretirement benefit obligation and the annual cost of retiree
health plans.
Experience gains and losses, as well as the effects of changes in actuarial
assumptions and plan provisions, are amortized over the average future service
period of employees.
-53-
6 PENSION BENEFITS
GE and its affiliates sponsor a number of pension plans. Principal pension plans
are discussed below; other pension plans are not significant individually or in
the aggregate.
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. Benefit provisions are subject to
collective bargaining. The GE Pension Plan covers approximately 503,000
participants, including 141,000 employees, 164,000 former employees with vested
rights to future benefits, and 198,000 retirees and beneficiaries receiving
benefits.
The GE Supplementary Pension Plan is a pay-as-you-go plan providing
supplementary retirement benefits primarily to higher-level, longer-service U.S.
employees.
Details of the effect on operations of principal pension plans, and the
total effect on cost of postretirement benefit plans, follow.
EFFECT ON OPERATIONS
(In millions) 2001 2000 1999
------- ------- -------
Expected return on plan assets $ 4,327 $ 3,754 $ 3,407
Service cost for benefits earned (a) (884) (780) (693)
Interest cost on benefit obligation (2,065) (1,966) (1,804)
Prior service cost (244) (237) (151)
SFAS 87 transition gain -- 154 154
Net actuarial gain recognized 961 819 467
------- ------- -------
Income from pensions 2,095 1,744 1,380
------- ------- -------
Retiree benefit plans cost (note 5) (615) (478) (318)
------- ------- -------
Net cost reductions from
postretirement benefit plans $ 1,480 $ 1,266 $ 1,062
================================================================================
(a) Net of participant contributions.
- --------------------------------------------------------------------------------
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 GE may determine to be appropriate. GE has not
made contributions to the GE Pension Plan since 1987 because the fully funded
status of the Plan precludes a current tax deduction and because any GE
contribution would require payment of excise taxes.
-54-
Changes in the projected benefit obligation for principal pension plans
follow.
PROJECTED BENEFIT OBLIGATION (PBO)
(In millions) 2001 2000
-------- --------
Balance at January 1 $ 28,535 $ 25,522
Service cost for benefits earned (a) 884 780
Interest cost on benefit obligation 2,065 1,966
Participant contributions 141 140
Plan amendments -- 1,155
Actuarial loss (b) 889 970
Benefits paid (2,091) (1,998)
-------- --------
Balance at December 31 $ 30,423 $ 28,535
================================================================================
(a) Net of participant contributions.
(b) Principally associated with discount rate changes.
- --------------------------------------------------------------------------------
Changes in the fair value of assets for principal pension plans follow.
FAIR VALUE OF ASSETS
(In millions) 2001 2000
-------- --------
Balance at January 1 $ 49,757 $ 50,243
Actual return on plan assets (2,876) 1,287
Employer contributions 75 85
Participant contributions 141 140
Benefits paid (2,091) (1,998)
-------- --------
Balance at December 31 $ 45,006 $ 49,757
================================================================================
Plan assets are held in trust and consist mainly of common stock and
fixed-income investments. GE common stock represented 8.6% and 9.2% of trust
assets at year-end 2001 and 2000, respectively.
GE recorded assets and liabilities for principal pension plans are as
follows:
PREPAID PENSION ASSET/(LIABILITY)
December 31 (In millions) 2001 2000
-------- --------
Funded status (a) $ 14,583 $ 21,222
Unrecognized prior service cost 1,373 1,617
Unrecognized net actuarial gain (3,541) (12,594)
-------- --------
Net asset recognized $ 12,415 $ 10,245
======== ========
Amounts recorded in the Statement of
Financial Position:
Prepaid pension asset $ 13,740 $ 11,377
Supplementary Pension Plan liability (1,325) (1,132)
-------- --------
Net asset recognized $ 12,415 $ 10,245
================================================================================
(a) Fair value of assets less PBO, as shown in the preceding tables.
- --------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS used to determine costs and benefit obligations for
principal pension plans follow.
ACTUARIAL ASSUMPTIONS
December 31 2001 2000 1999
---- ---- ----
Discount rate 7.25% 7.5% 7.75%
Compensation increases 5.0 5.0 5.0
Return on assets for the year (a) 9.5 9.5 9.5
================================================================================
(a) For 2002, the return on assets actuarial assumption will be 8.5%.
- --------------------------------------------------------------------------------
Experience gains and losses, as well as the effects of changes in actuarial
assumptions and plan provisions, are amortized over the average future service
period of employees.
-55-
7 PROVISION FOR INCOME TAXES
(In millions) 2001 2000 1999
------ ------ ------
GE
Current tax expense $3,632 $3,331 $2,555
Deferred tax expense from
temporary differences 561 468 652
------ ------ ------
4,193 3,799 3,207
------ ------ ------
GECS
Current tax expense 517 1,229 806
Deferred tax expense from
temporary differences 863 683 847
------ ------ ------
1,380 1,912 1,653
------ ------ ------
CONSOLIDATED
Current tax expense 4,149 4,560 3,361
Deferred tax expense from
temporary differences 1,424 1,151 1,499
------ ------ ------
$5,573 $5,711 $4,860
================================================================================
GE includes GECS in filing 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 $2,514 million, $3,005 million and $1,632 million in
2001, 2000 and 1999, respectively, and amounts applicable to non-U.S.
jurisdictions of $1,225 million, $1,246 million and $1,399 million in 2001, 2000
and 1999, respectively. Consolidated deferred tax expense related to U.S.
federal income taxes was $1,455 million, $1,095 million and $1,475 million in
2001, 2000 and 1999, respectively.
Deferred income tax balances reflect the impact of temporary differences
between the carrying amounts of assets and liabilities and their tax bases and
are stated at enacted tax rates expected to be in effect when taxes are actually
paid or recovered. See note 21 for details.
Except for certain earnings that GE intends to reinvest indefinitely,
provision has been made for the estimated U.S. federal income tax liabilities
applicable to undistributed earnings of affiliates and associated companies. It
is not practicable to determine the U.S. federal income tax liability, if any,
that would be payable if such earnings were not reinvested indefinitely.
Consolidated U.S. income before taxes and cumulative effect of accounting
changes was $13.9 billion in 2001, $12.9 billion in 2000 and $11.3 billion in
1999. The corresponding amounts for non-U.S.-based operations were $5.8 billion
in 2001, $5.5 billion in 2000 and $4.3 billion in 1999.
-56-
A reconciliation of the U.S. federal statutory tax rate to the actual tax
rate is provided below.
RECONCILIATION OF U.S. FEDERAL STATUTORY TAX RATE TO ACTUAL RATE
CONSOLIDATED GE GECS
------------------------- ---------------------- ----------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
Statutory U.S. federal 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 -- -- -- (10.7) (11.0) (11.2) -- -- --
Amortization of goodwill 1.0 1.1 1.1 0.8 0.7 0.8 0.9 1.1 1.0
Tax-exempt income (1.3) (1.5) (1.7) -- -- -- (3.8) (4.0) (4.4)
Tax on international activities including
exports (5.4) (4.9) (4.2) (3.2) (3.0) (2.6) (6.7) (5.8) (4.8)
Americom/Rollins goodwill (1.1) -- -- -- -- -- (3.2) -- --
All other-net 0.1 1.3 1.0 1.0 1.3 1.0 (2.4) 0.6 0.3
---- ---- ---- ---- ---- ---- ---- ---- ----
(6.7) (4.0) (3.8) (12.1) (12.0) (12.0) (15.2) (8.1) (7.9)
---- ---- ---- ---- ---- ---- ---- ---- ----
Actual income tax rate 28.3% 31.0% 31.2% 22.9% 23.0% 23.0% 19.8% 26.9% 27.1%
===============================================================================================================================
-57-
8 EARNINGS PER SHARE INFORMATION
2001 2000 1999
------------------ ---------------- ----------------
(In millions; per-share amounts in dollars) Diluted Basic Diluted Basic Diluted Basic
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS
Earnings before accounting changes $ 14,128 $ 14,128 $12,735 $12,735 $10,717 $10,717
Dividend equivalents-net of tax 12 -- 11 -- 8 --
-------- -------- ------- ------- ------- -------
Earnings before accounting changes
for per-share calculation 14,140 14,128 12,746 12,735 10,725 10,717
Cumulative effect of accounting changes (444) (444) -- -- -- --
-------- -------- ------- ------- ------- -------
Net earnings available for per-share calculation $ 13,696 $ 13,684 $12,746 $12,735 $10,725 $10,717
-------- -------- ------- ------- ------- -------
AVERAGE EQUIVALENT SHARES
Shares of GE common stock outstanding 9,932 9,932 9,897 9,897 9,833 9,833
Employee compensation-related shares,
including stock options 120 -- 160 -- 163 --
-------- -------- ------- ------- ------- -------
Total average equivalent shares 10,052 9,932 10,057 9,897 9,996 9,833
-------- -------- ------- ------- ------- -------
PER-SHARE AMOUNTS
Earnings before accounting changes $ 1.41 $ 1.42 $ 1.27 $ 1.29 $ 1.07 $ 1.09
Cumulative effect of accounting changes (0.04) (0.04) -- -- -- --
-------- -------- ------- ------- ------- -------
Net earnings per share $ 1.37 $ 1.38 $ 1.27 $ 1.29 $ 1.07 $ 1.09
==========================================================================================================
9 INVESTMENT SECURITIES
2001 2000
------------------------------------------ -------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated
cost gains losses fair value cost gains losses fair value
-------- ---------- ---------- ---------- --------- ---------- ---------- ----------
GE SECURITIES
Debt-U.S. corporate $ 350 $ 99 $ -- $ 449 $ 364 $ 209 $ -- $ 573
Equity 412 47 (29) 430 316 266 (146) 436
-------- ------- --------- -------- ------- ------- -------- -------
762 146 (29) 879 680 475 (146) 1,009
-------- ------- --------- -------- ------- ------- -------- -------
GECS SECURITIES
Debt
U.S. corporate 47,391 880 (1,626) 46,645 39,078 459 (1,282) 38,255
State and municipal 12,518 180 (136) 12,562 13,272 499 (139) 13,632
Mortgage-backed 16,442 424 (90) 16,776 13,683 323 (160) 13,846
Corporate-non-U.S 13,088 232 (277) 13,043 12,640 374 (168) 12,846
Government-non-U.S 6,104 183 (124) 6,163 5,059 104 (108) 5,055
U.S. government and
federal agency 1,233 25 (32) 1,226 2,106 15 (42) 2,079
Equity 3,926 178 (381) 3,723 4,392 703 (478) 4,617
-------- ------- --------- -------- ------- ------- -------- -------
100,702 2,102 (2,666) 100,138 90,230 2,477 (2,377) 90,330
-------- ------- --------- -------- ------- ------- -------- -------
$101,464 $ 2,248 $ (2,695) $101,017 $90,910 $ 2,952 $ (2,523) $91,339
================================================================================================================
A substantial portion of mortgage-backed securities shown in the table above are collateralized by U.S.
residential mortgages.
- ----------------------------------------------------------------------------------------------------------------
-58-
CONTRACTUAL MATURITIES OF GECS INVESTMENT IN DEBT SECURITIES (EXCLUDING
MORTGAGE-BACKED SECURITIES)
Amortized Estimated
(In millions) cost fair value
--------- ----------
Due in
2002 $ 5,184 $ 5,244
2003-2006 17,382 17,293
2007-2011 20,858 20,600
2012 and later 36,910 36,502
================================================================================
It is expected that actual maturities will differ from contractual maturities
because borrowers have the right to call or prepay certain obligations.
- --------------------------------------------------------------------------------
Supplemental information about gross realized gains and losses of
investment securities follows.
(In millions) 2001 2000 1999
------- ------- -------
GE
Gains $ 236 $ 8 $ 24
Losses (100) (76) --
------- ------- -------
Net 136 (68) 24
------- ------- -------
GECS
Gains (a) 1,800 3,581 1,406
Losses (838) (714) (484)
------- ------- -------
Net 962 2,867 922
------- ------- -------
$ 1,098 $ 2,799 $ 946
================================================================================
(a) Includes $1,366 million, in 2000, from the sale of GECS investment in
common stock of Paine Webber Group, Inc. Proceeds from securities sales
amounted to $39,950 million in 2001, $24,748 million in 2000 and $18,521
million in 1999.
- --------------------------------------------------------------------------------
-59-
10 GE CURRENT RECEIVABLES
December 31 (In millions) 2001 2000
-------- --------
Aircraft Engines $ 1,976 $ 1,840
Consumer Products 605 536
Industrial Products and Systems 876 1,037
Materials 1,008 1,126
NBC 335 384
Power Systems 3,587 3,668
Technical Products and Services 1,341 1,128
Corporate items and eliminations 439 358
-------- --------
10,167 10,077
Less allowance for losses (362) (350)
-------- --------
$ 9,805 $ 9,727
================================================================================
Receivables balances at December 31, 2001 and 2000, before allowance for
losses, included $5,893 million and $6,323 million, respectively, from sales of
goods and services to customers, and $447 million and $233 million,
respectively, from transactions with associated companies.
Current receivables of $270 million at year-end 2001 and $227 million at
year-end 2000 arose from sales, principally of aircraft engine goods and
services, on open account to various agencies of the U.S. government, which is
GE's largest single customer. About 4%, 3% and 4% of GE's sales of goods and
services were to the U.S. government in 2001, 2000 and 1999, respectively.
11 INVENTORIES
December 31 (In millions) 2001 2000
------- -------
GE
Raw materials and work in process $ 4,708 $ 4,134
Finished goods 3,951 3,614
Unbilled shipments 312 243
------- -------
8,971 7,991
Less revaluation to LIFO (676) (845)
------- -------
8,295 7,146
------- -------
GECS
Finished goods 270 666
------- -------
$ 8,565 $ 7,812
================================================================================
LIFO revaluations decreased $169 million in 2001, compared with decreases
of $82 million in 2000 and $84 million in 1999. Included in these changes were
decreases of $8 million, $6 million and $4 million in 2001, 2000 and 1999,
respectively, that resulted from lower LIFO inventory levels. There were net
cost decreases in each of the last three years. As of December 31, 2001, GE is
obligated to acquire certain raw materials at market prices through the year
2016 under various take-or-pay or similar arrangements. Annual minimum
commitments under these arrangements are insignificant.
-60-
12 GECS FINANCING RECEIVABLES (INVESTMENTS IN TIME SALES, LOANS AND FINANCING
LEASES)
December 31 (In millions) 2001 2000
--------- ---------
TIME SALES AND LOANS
Commercial Finance 76,515 51,447
Consumer Finance 45,136 41,918
Equipment Management 293 149
Insurance -- 90
Other 742 2,666
--------- ---------
122,686 96,270
--------- ---------
INVESTMENT IN FINANCING LEASES
Direct financing leases 49,412 46,186
Leveraged leases 6,735 4,877
--------- ---------
56,147 51,063
--------- ---------
178,833 147,333
Less allowance for losses (note 13) (4,801) (4,034)
--------- ---------
$ 174,032 $ 143,299
================================================================================
Time sales and loans represents 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. At year-end 2001 and 2000,
commercial real estate loans and leases of $25,466 million and $21,329 million,
respectively, were included in either financing receivables or GECS insurance
receivables. Note 17 contains information on airline loans and leases.
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.
-61-
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 Direct
financing leases financing leases Leveraged leases
------------------- ------------------- -------------------
December 31 (In millions) 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
Total minimum lease payments receivable $ 83,316 $ 74,960 $ 53,870 $ 50,556 $ 29,446 $ 24,404
Less principal and interest on third-party
nonrecourse debt (22,588) (19,773) -- -- (22,588) (19,773)
-------- -------- -------- -------- -------- --------
Net rentals receivable 60,728 55,187 53,870 50,556 6,858 4,631
Estimated unguaranteed residual value of
leased assets 8,996 7,314 5,544 4,602 3,452 2,712
Less deferred income (13,577) (11,438) (10,002) (8,972) (3,575) (2,466)
-------- -------- -------- -------- -------- --------
INVESTMENT IN FINANCING LEASES
(AS SHOWN ABOVE) 56,147 51,063 49,412 46,186 6,735 4,877
Less amounts to arrive at net investment
Allowance for losses (679) (646) (606) (558) (73) (88)
Deferred taxes (9,168) (8,408) (4,643) (4,496) (4,525) (3,912)
-------- -------- -------- -------- -------- --------
NET INVESTMENT IN FINANCING LEASES $ 46,300 $ 42,009 $ 44,163 $ 41,132 $ 2,137 $ 877
===========================================================================================================
-62-
CONTRACTUAL MATURITIES
Total time sales Net rentals
(In millions) and loans (a) receivable (a)
----------------- --------------
Due in
2002 $ 39,162 $15,303
2003 22,585 13,116
2004 19,723 9,057
2005 10,247 6,284
2006 7,729 3,520
2007 and later 23,240 13,448
- --------------------------------------------------------------------------------
Total $122,686 $60,728
================================================================================
(a) Experience has shown that a substantial portion of receivables will be paid
prior to contractual maturity, and these amounts should not be regarded as
forecasts of future cash flows.
- --------------------------------------------------------------------------------
Nonearning consumer receivables were $1,540 million and $1,139 million at
December 31, 2001 and 2000, respectively, a substantial amount of which were
private-label credit card loans. Nonearning and reduced-earning receivables
other than consumer receivables were $1,734 million and $949 million at year-end
2001 and 2000, respectively.
"Impaired" loans are defined by generally accepted accounting principles as
large balance 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) 2001 2000
------ ----
Loans requiring allowance for losses $1,041 $475
Loans expected to be fully recoverable 574 384
------ ----
$1,615(a) $859
====== ====
Allowance for losses $ 422 $166
Average investment during year 1,121 801
Interest income earned while impaired (b) 17 20
================================================================================
(a) Includes $408 million of loans classified as impaired by Heller Financial,
Inc., which was acquired in October 2001.
(b) Recognized principally on cash basis.
- --------------------------------------------------------------------------------
13 GECS ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
(In millions) 2001 2000 1999
------- ------- -------
Balance at January 1 $ 4,034 $ 3,708 $ 3,223
Provisions charged to operations 2,481 2,045 1,671
Net transfers primarily related
to acquisitions and sales 564 22 271
Amounts written off-net (2,278) (1,741) (1,457)
------- ------- -------
Balance at December 31 $ 4,801 $ 4,034 $ 3,708
================================================================================
14 GECS INSURANCE RECEIVABLES
At year-end 2001 and 2000, GECS insurance receivables included reinsurance
recoverables of $12,606 million and $8,240 million and receivables at insurance
affiliates of $14,711 million and $15,562 million, respectively. Receivables at
insurance affiliates include premium receivables, investments in whole real
estate and other loans, policy loans and funds on deposit with reinsurers.
-63-
15 PROPERTY, PLANT AND EQUIPMENT (INCLUDING EQUIPMENT LEASED TO OTHERS)
December 31 (In millions) 2001 2000
------- -------
ORIGINAL COST
GE
Land and improvements $ 577 $ 544
Buildings, structures and related
equipment 7,281 6,982
Machinery and equipment 21,414 20,792
Leasehold costs and manufacturing
plant under construction 1,960 1,871
------- -------
31,232 30,189
------- -------
GECS
Buildings and equipment 3,600 5,753
Equipment leased to others
Aircraft 16,173 12,888
Vehicles 10,779 9,872
Railroad rolling stock 3,439 3,459
Marine shipping containers 1,618 2,196
Mobile and modular structures 1,325 1,288
Information technology equipment 1,321 1,069
Construction and manufacturing
equipment 799 591
Scientific, medical and other
equipment 1,001 685
------- -------
40,055 37,801
------- -------
$71,287 $67,990
======= =======
ACCUMULATED DEPRECIATION
AND AMORTIZATION
GE $18,433 $17,990
GECS
Buildings and equipment 1,579 2,084
Equipment leased to others 9,135 7,901
------- -------
$29,147 $27,975
================================================================================
Amortization of GECS equipment leased to others was $2,958 million, $2,620
million and $2,673 million in 2001, 2000 and 1999, respectively. Noncancelable
future rentals due from customers for equipment on operating leases at year-end
2001 totaled $16,072 million and are due as follows: $3,954 million in 2002;
$3,183 million in 2003; $2,396 million in 2004; $1,749 million in 2005; $1,245
million in 2006; and $3,545 million thereafter.
16 INTANGIBLE ASSETS
December 31 (In millions) 2001 2000
------- -------
GE
Goodwill $12,354 $11,962
Other intangibles 578 462
------- -------
12,932 12,424
------- -------
GECS
Goodwill 15,933 11,550
Present value of future profits (PVFP) 2,198 2,780
Other intangibles 586 687
------- -------
18,717 15,017
------- -------
$31,649 $27,441
================================================================================
GE intangible assets are net of accumulated amortization of $3,854 million in
2001 and $3,413 million in 2000. GECS intangible assets are net of accumulated
amortization of $6,954 million in 2001 and $5,815 million in 2000.
- --------------------------------------------------------------------------------
The amount of goodwill amortization included in net earnings (net of income
taxes) in 2001, 2000 and 1999 was $499 million, $439 million and $395 million
for GE and $552 million, $620 million and $512 million for GECS, respectively.
PVFP amortization, which is on an accelerated basis and net of interest, is
projected to range from 13% to 6% of the year-end 2001 unamortized balance for
each of the next five years.
-64-
17 ALL OTHER ASSETS
December 31 (In millions) 2001 2000
-------- --------
GE
Investments
Associated companies (a) $ 2,539 $ 2,670
Other 1,336 1,888
-------- --------
3,875 4,558
Prepaid pension asset 13,740 11,377
Contract costs and estimated earnings 2,292 1,736
Prepaid broadcasting rights 1,108 967
Long-term receivables, including notes 909 1,987
Derivative instruments (b) 254 83
Other 3,808 3,320
-------- --------
25,986 24,028
-------- --------
GECS
Investments
Associated companies (a) 14,415 12,785
Real estate 8,141 6,496
Assets acquired for resale 1,725 1,394
Other 5,222 5,207
-------- --------
29,503 25,882
Separate accounts 10,403 11,705
Deferred insurance acquisition costs 6,768 5,815
Derivative instruments (b) 2,066 314
Servicing assets (c) 1,139 1,449
Other 5,209 5,201
-------- --------
55,088 50,366
-------- --------
ELIMINATIONS (548) (507)
-------- --------
$ 80,526 $ 73,887
================================================================================
(a) Includes advances to associated companies which are non-controlled,
non-consolidated equity investments.
(b) Amounts at December 31, 2001, are stated at fair value in accordance with
SFAS 133; corresponding amounts at December 31, 2000, are stated at
amortized cost. See note 29 for a discussion of the types and uses of
derivative instruments.
(c) Associated primarily with serviced residential mortgage loans amounting to
$59 billion and $81 billion at December 31, 2001 and 2000, respectively.
- --------------------------------------------------------------------------------
In line with industry practice, sales of commercial jet aircraft engines
often involve long-term customer financing commitments. In making such
commitments, it is GE's general practice to require that it have or be able to
establish a secured position in the aircraft being financed. Under such airline
financing programs, GE had issued guarantees amounting to $1,181 million at
year-end 2001 and $1,160 million at year-end 2000; and it had entered into
commitments totaling $1,497 million and $1,476 million at year-end 2001 and
2000, respectively, to provide financial assistance on future aircraft engine
sales. Net of reserves, the estimated fair values of the aircraft securing these
guarantees exceeded the related guaranteed amounts at December 31, 2001. GECS
acts as a lender and lessor to the commercial airline industry. At December 31,
2001 and 2000, the balance of such GECS loans and leases was $21.5 billion and
$15.3 billion, respectively. In addition, at December 31, 2001, GECS had issued
financial guarantees and funding commitments of $0.9 billion ($0.6 billion at
year-end 2000), credit and liquidity support agreements to special purpose
entities sponsored by GECS of $0.9 billion ($0.6 billion at year-end 2000) and
had placed multi-year orders for various Boeing, Airbus and other aircraft with
list prices of approximately $19.9 billion ($22.9 billion at year-end 2000).
At year-end 2001, the National Broadcasting Company had $6,646 million of
commitments to acquire broadcast material and the rights to broadcast television
programs, including U.S. television rights to future Olympic Games, and
commitments under long-term television station affiliation agreements that
require payments through the year 2010.
In connection with numerous projects, primarily power generation bids and
contracts, GE had issued various bid and performance bonds and guarantees
totaling $3,704 million at year-end 2001 and $4,599 million at year-end 2000.
Separate accounts represent investments controlled by policyholders and are
associated with identical amounts reported as insurance liabilities in note 19.
-65-
18 BORROWINGS
SHORT-TERM BORROWINGS
2001 2000
---------------------- ----------------------
December 31 Average Average
(In millions) Amount rate (a) Amount rate (a)
- --------------------------------------------------------------------------------
GE
Commercial paper
Non-U.S $ 266 3.87% $ 172 5.77%
Payable to banks,
principally non-U.S 1,160 5.58 527 11.30
Current portion of
long-term debt 80 6.46 71 7.90
Other 216 170
-------- --------
1,722 940
-------- --------
GECS
Commercial paper
U.S 100,170 2.21 77,525 6.67
Non-U.S 17,289 3.36 16,965 5.46
Current portion of
long-term debt 30,952 5.08 19,283 5.95
Other 12,590 10,219
-------- --------
161,001 123,992
-------- --------
Foreign currency
loss (b) (157) --
-------- --------
160,844 123,992
-------- --------
ELIMINATIONS (9,490) (5,752)
-------- --------
$153,076 $119,180
================================================================================
LONG-TERM BORROWINGS
2001
December 31 Average
(In millions) rate (a) Maturities 2001 2000
-------- ---------- ---- ----
GE
Industrial development/
pollution control bonds 2.53% 2003-2027 $ 336 $ 334
Payable to banks,
principally non-U.S. 5.36 2003-2007 241 255
Other (c) 210 252
-------- -------
787 841
-------- -------
GECS
Senior notes 4.89 2003-2055 78,347 80,383
Subordinated notes (d) 7.74 2006-2035 1,171 996
-------- -------
79,518 81,379
-------- -------
Foreign currency loss (b) (427) --
-------- -------
79,091 81,379
-------- -------
ELIMINATIONS (72) (88)
-------- -------
$ 79,806 $82,132
================================================================================
(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) Total GECS borrowings in 2001 exclude the foreign exchange effects of
related currency swaps in accordance with the provisions of SFAS 133.
(c) A variety of obligations having various interest rates and maturities,
including certain borrowings by parent operating components and affiliates.
(d) At year-end 2001 and 2000, $996 million of subordinated notes were
guaranteed by GE.
- --------------------------------------------------------------------------------
-66-
Borrowings of GE and GECS are addressed below from two
perspectives-liquidity and interest rate risk management. Additional information
about borrowings and associated swaps can be found in note 29.
LIQUIDITY requirements of GE and GECS are principally met through the credit
markets. Maturities of long-term borrowings (including the current portion)
during the next five years follow.
(In millions) 2002 2003 2004 2005 2006
- --------------------------------------------------------------------------------
GE $ 80 $ 97 $ 203 $ 13 $ 101
GECS 30,795 25,713 14,630 9,907 6,469
================================================================================
Committed credit lines of $4.7 billion had been extended to GE by 22 banks
at year-end 2001. All of GE's credit lines are available to GECS and its
affiliates in addition to their own credit lines.
At year-end 2001, GECS held committed lines of credit aggregating $28.6
billion, including $12.2 billion of revolving credit agreements pursuant to
which it has the right to borrow funds for periods exceeding one year. Both GE
and GECS compensate banks for credit facilities in the form of fees, which were
insignificant in each of the past three years.
INTEREST RATE RISK is managed by GECS in light of the anticipated behavior,
including prepayment behavior, of assets in which debt proceeds are invested. A
variety of instruments, including interest rate and currency swaps and currency
forwards, are employed to achieve management's interest rate objectives.
Effective interest rates are lower under these "synthetic" positions than could
have been achieved by issuing debt directly.
The following table shows GECS borrowing positions considering the effects
of currency and interest rate swaps.
GECS EFFECTIVE BORROWINGS (INCLUDING SWAPS)
2001 2000
---------------------- --------
December 31 Average
(In millions) Amount rate Amount
-------- ------- --------
Short-term (a) $101,101 2.56% $ 80,162
======== ========
Long-term (including current
portion)
Fixed rate (b) $105,387 5.59% $ 98,905
Floating rate 34,031 3.23 26,304
-------- --------
Total long-term $139,418 $125,209
================================================================================
(a) Includes commercial paper and other short-term debt.
(b) Includes fixed-rate borrowings and $28.9 billion ($24.5 billion in 2000)
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, 2001, swap maturities ranged from 2002 to 2048.
-67-
19 GECS INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS
December 31 (In millions) 2001 2000
-------- --------
Investment contracts and universal
life benefits $ 39,052 $ 33,232
Life insurance benefits (a) 31,198 32,288
Unpaid claims and claims adjustment
expenses (b) 27,233 22,886
Unearned premiums 6,337 6,039
Separate accounts (see note 17) 10,403 11,705
-------- --------
$114,223 $106,150
================================================================================
(a) Life insurance benefits are accounted for mainly by a net-level-premium
method using estimated yields generally ranging from 2% to 9% in both 2001
and 2000.
(b) Principally property and casualty reserves; includes amounts for both
reported and incurred-but-not-reported 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 GECS cedes insurance to third parties, it is not relieved of its
primary obligation to policyholders. Losses on ceded risks give rise to claims
for recovery; allowances for probable losses are established on such receivables
from reinsurers as required.
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 due to 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.
-68-
A summary of activity affecting unpaid claims and claims adjustment
expenses, principally in property and casualty lines follows.
(In millions) 2001 2000 1999
-------- -------- --------
Balance at January 1-gross $ 22,886 $ 21,473 $ 19,611
Less reinsurance recoverables (5,477) (4,832) (3,483)
-------- -------- --------
Balance at January 1-net 17,409 16,641 16,128
Claims and expenses incurred
Current year 9,199 9,718 6,917
Prior years 682 607 248
Claims and expenses paid
Current year (3,021) (3,704) (2,508)
Prior years (6,694) (6,572) (5,162)
Claims reserves related to
acquired companies -- 488 929
Other 258 231 89
-------- -------- --------
Balance at December 31-net 17,833 17,409 16,641
Add reinsurance recoverables 9,400 5,477 4,832
-------- -------- --------
Balance at December 31-gross $ 27,233 $ 22,886 $ 21,473
================================================================================
Prior-year claims and expenses incurred in the preceding table resulted
principally from settling claims established in earlier accident years for
amounts that differed from expectations.
Financial guarantees and credit life risk of insurance affiliates are
summarized below.
December 31 (In millions) 2001 2000
--------- ---------
Guarantees, principally on municipal
bonds and asset-backed securities $ 215,874 $ 194,061
Mortgage insurance risk in force 79,892 68,112
Credit life insurance risk in force 16,590 19,910
Less reinsurance (41,148) (42,143)
--------- ---------
$ 271,208 $ 239,940
================================================================================
Certain GECS insurance affiliates offer insurance guaranteeing the timely
payment of scheduled principal and interest on municipal bonds and certain
asset-backed securities. These insurance affiliates also 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, GECS 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.
-69-
20 GE ALL OTHER LIABILITIES
This caption includes noncurrent compensation and benefit accruals at year-end
2001 and 2000 of $6,639 million and $6,268 million, respectively. Also included
are amounts for deferred incentive compensation, deferred income, interest on
tax liabilities, product warranties and a variety of sundry items.
GE is 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 management's 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 lower 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 GE's financial position, results
of operations or liquidity.
21 DEFERRED INCOME TAXES
Aggregate deferred income tax amounts are summarized below.
December 31 (In millions) 2001 2000
------- -------
ASSETS
GE $ 6,416 $ 6,131
GECS 8,585 7,309
------- -------
15,001 13,440
LIABILITIES
GE 7,429 6,583
GECS 16,702 15,547
------- -------
24,131 22,130
------- -------
NET DEFERRED INCOME TAX LIABILITY $ 9,130 $ 8,690
================================================================================
Principal components of the net liability/(asset) representing deferred
income tax balances for GE and GECS are as follows:
December 31 (In millions) 2001 2000
------- -------
GE
Provisions for expenses (a) $(4,432) $(4,392)
Retiree insurance plans (953) (904)
Prepaid pension asset 4,809 3,982
Depreciation 932 944
Other-net 657 822
------- -------
1,013 452
------- -------
GECS
Financing leases 9,168 8,408
Operating leases 3,399 3,301
Deferred insurance acquisition costs 1,360 856
Allowance for losses (2,139) (1,684)
Insurance reserves (1,397) (1,270)
AMT credit carryforwards (695) (671)
Other-net (1,579) (702)
------- -------
8,117 8,238
------- -------
NET DEFERRED INCOME TAX LIABILITY $ 9,130 $ 8,690
================================================================================
(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.
- --------------------------------------------------------------------------------
-70-
22 GECS MINORITY INTEREST IN EQUITY OF CONSOLIDATED AFFILIATES
Minority interest in equity of consolidated GECS affiliates includes preferred
stock issued by GE Capital and by affiliates of GE Capital. The preferred stock
primarily pays cumulative dividends at variable rates. Value of the preferred
shares is summarized below.
December 31 (In millions) 2001 2000
------ ------
GE Capital $2,600 $2,600
GE Capital affiliates 1,446 1,066
================================================================================
Dividend rates in local currency on the preferred stock ranged from 1.62%
to 6.40% during 2001 and from 4.15% to 6.82% during 2000.
23 RESTRICTED NET ASSETS OF GECS AFFILIATES
Certain GECS consolidated affiliates are restricted from remitting 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 year-end 2001, net assets of regulated GECS affiliates amounted to $37.4
billion, of which $31.7 billion was restricted.
At December 31, 2001 and 2000, the aggregate statutory capital and surplus
of the insurance businesses totaled $17.7 billion and $16.2 billion,
respectively. Accounting practices prescribed by statutory authorities are used
in preparing statutory statements.
-71-
24 SHARE OWNERS' EQUITY
(In millions) 2001 2000 1999
-------- -------- --------
COMMON STOCK ISSUED $ 669 $ 669 $ 594
-------- -------- --------
ACCUMULATED NONOWNER
CHANGES OTHER THAN EARNINGS
Balance at January 1 $ (2,500) $ (744) $ 1,664
Cumulative effect of adopting
SFAS 133-net of deferred
taxes of $(513) (827) -- --
Investment securities-net
of deferred taxes of $111,
$686 and $(614) 203 1,363 (1,132)
Currency translation
adjustments-net of deferred
taxes of $48, $(312) and $(100) (562) (1,204) (632)
Derivatives qualifying as
hedges-net of deferred
taxes $(505) (690) -- --
Reclassification adjustments-
Investment securities-net
of deferred taxes of $(274),
$(1,031) and $(349) (509) (1,915) (644)
Derivatives qualifying as
hedges-net of deferred
taxes of $397 562 -- --
-------- -------- --------
Balance at December 31 $ (4,323) $ (2,500) $ (744)
======== ======== ========
OTHER CAPITAL
Balance at January 1 $ 15,195 $ 10,790 $ 6,808
Gains on treasury stock
dispositions (a) 1,498 4,480 3,982
Adjustment for stock split -- (75) --
-------- -------- --------
Balance at December 31 $ 16,693 $ 15,195 $ 10,790
======== ======== ========
RETAINED EARNINGS
Balance at January 1 $ 61,572 $ 54,484 $ 48,553
Net earnings 13,684 12,735 10,717
Dividends (a) (6,555) (5,647) (4,786)
-------- -------- --------
Balance at December 31 $ 68,701 $ 61,572 $ 54,484
======== ======== ========
COMMON STOCK HELD IN TREASURY
Balance at January 1 $ 24,444 $ 22,567 $ 18,739
Purchases (a) 4,708 5,342 7,488
Dispositions (a) (2,236) (3,465) (3,660)
-------- -------- --------
Balance at December 31 $ 26,916 $ 24,444 $ 22,567
================================================================================
(a) Total dividends and other transactions with share owners reduced equity by
$7,529 million, $3,044 million and $4,632 million in 2001, 2000 and 1999,
respectively.
- --------------------------------------------------------------------------------
-72-
In December 2001, GE's Board of Directors increased the authorization to
repurchase Company common stock to $30 billion. Funds used for the share
repurchase will be generated largely from free cash flow. Through year-end 2001,
1,030 million shares having an aggregate cost of almost $21 billion had been
repurchased under this program and placed in treasury.
Common shares issued and outstanding are summarized in the following table.
SHARES OF GE COMMON STOCK
December 31 (In thousands) 2001 2000 1999
----------- ----------- -----------
Issued 11,145,212 11,145,212 11,145,054
In treasury (1,219,274) (1,213,206) (1,290,526)
----------- ----------- -----------
Outstanding 9,925,938 9,932,006 9,854,528
================================================================================
In April 2000, share owners authorized (a) an increase in the number of
authorized shares of common stock from 4,400,000,000 shares each with a par
value of $0.16 to 13,200,000,000 shares each with a par value of $0.06 and (b)
the split of each unissued and issued common share, including shares held in
treasury, into three shares of common stock each with a par value of $0.06. All
share data and per-share amounts have been adjusted to reflect this change.
GE has 50 million authorized shares of preferred stock ($1.00 par value),
but no such shares have been issued.
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 share owners' equity. Asset and liability accounts are translated at year-end
exchange rates, while revenues and expenses are translated at average rates for
the period.
-73-
25 OTHER STOCK-RELATED INFORMATION
STOCK OPTION ACTIVITY
Average per share
Shares ---------------------
subject Exercise Market
(Shares in thousands) to option price price
--------- -------- ------
Balance at December 31, 1998 359,784 $ 11.59 $ 34.00
Options granted 51,281 37.93 37.93
Options exercised (61,679) 7.82 39.42
Options terminated (8,012) 21.15 --
-------- ------ ------
Balance at December 31, 1999 341,374 16.01 51.58
Options granted 46,278 47.84 47.84
Options exercised (44,758) 8.82 53.00
Options terminated (9,715) 28.47 --
-------- ------ ------
Balance at December 31, 2000 333,179 21.03 47.94
Options granted 60,946 41.15 41.15
Options exercised (31,801) 10.04 43.95
Options terminated (7,871) 39.02 --
-------- ------ ------
Balance at December 31, 2001 354,453 25.08 40.08
================================================================================
Stock option plans, stock appreciation rights (SARs), restricted stock and
restricted stock units are described in GE's current Proxy Statement. With
certain restrictions, requirements for stock option shares can be met from
either unissued or treasury shares.
At year-end 2001, there were 131 thousand SARs outstanding at an average
exercise price of $7.68. There were 27.3 million restricted stock shares and
restricted stock units outstanding at year-end 2001.
There were 538.7 million and 487.1 million additional shares available for
grants of options, SARs, restricted stock and restricted stock units at December
31, 2001 and 2000, respectively. Under the 1990 Long-Term Incentive Plan, 0.95%
of the Company's 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 granting awards in such year. Any unused portion, in addition to shares
allocated to awards that are canceled or forfeited, is available for later
years.
Outstanding options and SARs expire on various dates through December 21,
2011. Restricted stock grants vest on various dates up to normal retirement of
grantees.
-74-
The following table summarizes information about stock options outstanding
at December 31, 2001.
STOCK OPTIONS OUTSTANDING
(Shares in thousands)
Outstanding Exercisable
------------------------------- ----------------------
Average Average
Exercise Average exercise exercise
price range Shares life (a) price Shares price
- --------------------------------------------------------------------------------
$5.72-8.50 58,324 1.6 $ 7.63 58,324 $ 7.63
8.51-13.23 65,494 2.9 9.15 65,494 9.15
13.48-26.10 66,065 5.2 18.13 53,465 16.94
26.42-39.73 81,807 7.9 34.79 24,881 32.20
41.35-57.31 82,763 9.0 45.91 6,908 47.45
------- --- ------ ------- ------
Total 354,453 5.7 25.08 209,072 14.73
================================================================================
At year-end 2000, options with an average exercise price of $11.35 were
exercisable on 205 million shares; at year-end 1999, options with an average
exercise price of $9.13 were exercisable on 206 million shares. (a) Average
contractual life remaining in years.
- --------------------------------------------------------------------------------
Stock options expire 10 years from the date they are granted; options vest
over service periods that range from one to five years.
Disclosures required by SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
are as follows:
OPTION VALUE INFORMATION (a)
(In dollars) 2001 2000 1999
------ ------ ------
Fair value per option (b) $12.15 $15.76 $11.23
Valuation assumptions
Expected option term (years) 6.0 6.4 6.5
Expected volatility 30.5% 27.1% 23.7%
Expected dividend yield 1.6% 1.2% 1.3%
Risk-free interest rate 4.9% 6.4% 5.8%
================================================================================
(a) Weighted averages of option grants during each period.
(b) Estimated using Black-Scholes option pricing model.
- --------------------------------------------------------------------------------
PRO FORMA EFFECTS (a)
December 31 (In millions;
per-share amounts in dollars) 2001 2000 1999
------- ------- -------
Net earnings $13,388 $12,502 $10,572
Earnings per share-diluted 1.33 1.24 1.06
-basic 1.35 1.26 1.08
================================================================================
(a) 2001 earnings and earnings per share include effects of accounting changes.
- --------------------------------------------------------------------------------
-75-
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, increases and decreases in progress collections, adjustments
for gains and losses on assets, increases and decreases in assets held for sale,
and adjustments to assets.
Noncash transactions include the following: in 2001, the acquisition of
Imatron Inc. for GE common stock valued at $205 million; in 2000, the
acquisition of Harmon Industries for shares of GE common stock valued at $346
million; and in 1999, GE's contribution of certain media properties in exchange
for a noncontrolling interest in NBCi, a former publicly-traded company
(described in note 2).
-76-
Certain supplemental information related to GE and GECS cash flows is shown
below.
For the years ended December 31 (In millions) 2001 2000 1999
--------- --------- --------
GE
PURCHASES AND SALES OF GE SHARES FOR TREASURY
Open market purchases under share repurchase program $ (3,137) $ (2,226) $ (1,866)
Other purchases (1,571) (3,116) (5,622)
Dispositions (mainly to employee and dividend
reinvestment plans) 2,273 5,811 6,486
--------- --------- --------
$ (2,435) $ 469 $ (1,002)
========= ========= ========
GECS
FINANCING RECEIVABLES
Increase in loans to customers $(140,758) $(100,938) $(95,201)
Principal collections from customers-loans 121,004 87,432 86,379
Investment in equipment for financing leases (20,315) (15,454) (18,173)
Principal collections from customers-financing
leases 11,641 7,873 13,634
Net change in credit card receivables (14,815) (9,394) (10,740)
Sales of financing receivables 29,291 14,405 11,473
--------- --------- --------
$ (13,952) $ (16,076) $(12,628)
========= ========= ========
ALL OTHER INVESTING ACTIVITIES
Purchases of securities by insurance and annuity
businesses $ (53,452) $ (35,911) $(26,271)
Dispositions and maturities of securities by
insurance and annuity businesses 45,403 25,960 23,979
Proceeds from principal business dispositions 2,572 (605) 279
Other (2,080) (1,617) (6,270)
--------- --------- --------
$ (7,557) $ (12,173) $ (8,283)
========= ========= ========
NEWLY ISSUED DEBT HAVING MATURITIES LONGER THAN 90
DAYS
Short-term (91 to 365 days) $ 12,622 $ 12,782 $ 15,799
Long-term (longer than one year) 16,118 32,297 30,082
Proceeds-nonrecourse, leveraged lease debt 2,012 1,808 1,724
--------- --------- --------
$ 30,752 $ 46,887 $ 47,605
========= ========= ========
REPAYMENTS AND OTHER REDUCTIONS OF DEBT HAVING
MATURITIES LONGER THAN 90 DAYS
Short-term (91 to 365 days) $ (29,195) $ (27,777) $(21,211)
Long-term (longer than one year) (6,582) (3,953) (5,447)
Principal payments-nonrecourse, leveraged lease debt (274) (177) (266)
--------- --------- --------
$ (36,051) $ (31,907) $(26,924)
========= ========= ========
ALL OTHER FINANCING ACTIVITIES
Proceeds from sales of investment contracts $ 9,080 $ 8,826 $ 7,236
Redemption of investment contracts (7,033) (9,061) (7,127)
Preferred stock issued by GECS affiliates -- -- 513
Capital contributions from GE 3,043 -- --
Cash received upon assumption of Toho Mutual Life
Insurance Company insurance liabilities -- 13,177 --
--------- --------- --------
$ 5,090 $ 12,942 $ 622
=========================================================================================
-77-
27 OPERATING SEGMENTS
REVENUES (For years ended December 31)
Total revenues Intersegment revenues External revenues
--------------------------------- -------------------------- --------------------------------
(In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Aircraft Engines $ 11,389 $ 10,779 $ 10,730 $ 1,282 $ 687 $ 477 $ 10,107 $ 10,092 $ 10,253
Commercial Finance 13,880 11,982 9,822 37 77 42 13,843 11,905 9,780
Consumer Finance 9,508 9,320 7,562 12 4 3 9,496 9,316 7,559
Consumer Products 8,435 8,717 8,525 89 103 107 8,346 8,614 8,418
Equipment Management 4,401 4,969 4,789 90 24 10 4,311 4,945 4,779
Industrial Products and Systems 9,097 8,891 8,642 838 627 524 8,259 8,264 8,118
Insurance 23,890 24,766 19,433 13 2 1 23,877 24,764 19,432
Materials 7,069 8,020 7,118 21 46 38 7,048 7,974 7,080
NBC 5,769 6,797 5,790 -- -- -- 5,769 6,797 5,790
Power Systems 20,211 14,861 10,099 152 144 169 20,059 14,717 9,930
Technical Products and Services 9,011 7,915 6,863 21 19 15 8,990 7,896 6,848
All Other GECS 6,674 15,140 14,143 (152) (107) (56) 6,826 15,247 14,199
Eliminations and corporate items (3,421) (2,304) (1,886) (2,403) (1,626) (1,330) (1,018) (678) (556)
--------- --------- --------- ------- ------- ------- --------- --------- ---------
CONSOLIDATED REVENUES $ 125,913 $ 129,853 $ 111,630 $ -- $ -- $ -- $ 125,913 $ 129,853 $ 111,630
========= ========= ========= ======= ======= ======= ========= ========= =========
GE revenues include income from sales of goods and services to customers and
other income. Sales from one Company component to another generally are priced
at equivalent commercial selling prices.
ASSETS PROPERTY, PLANT AND
EQUIPMENT
ADDITIONS (INCLUDING DEPRECIATION AND
EQUIPMENT LEASED TO OTHERS) AMORTIZATION
For the years ended For the years ended
At December 31 December 31 December 31
----------------------------- ------------------------- ----------------------
(In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- -------- ------- ------- ------- ------ ------ ------
Aircraft Engines $ 9,972 $ 10,006 $ 9,333 $ 402 $ 416 $ 368 $ 269 $ 268 $ 320
Commercial Finance 171,255 123,662 106,867 8,829 5,720 7,070 1,430 1,160 986
Consumer Finance 62,978 57,018 58,265 195 184 607 163 289 250
Consumer Products 5,366 4,963 4,554 390 351 329 318 288 279
Equipment Management 25,410 23,531 22,690 4,282 4,800 4,806 1,464 1,394 1,457
Industrial Products and Systems 6,545 5,647 4,561 238 357 230 205 210 234
Insurance 155,500 144,716 118,832 37 103 69 444 1,208 375
Materials 10,517 10,065 9,686 814 573 477 529 485 507
NBC 5,572 5,136 5,371 64 99 94 94 77 83
Power Systems 13,237 11,759 9,944 774 657 514 288 244 236
Technical Products and Services 6,984 6,229 5,163 213 211 164 162 121 148
All Other GECS 10,341 21,709 38,364 401 627 2,880 382 579 590
Corporate items and eliminations (a) 11,346 12,565 11,570 94 55 58 1,341 1,413 1,226
-------- -------- -------- ------- ------- ------- ------ ------ ------
CONSOLIDATED TOTALS $495,023 $437,006 $405,200 $16,733 $14,153 $17,666 $7,089 $7,736 $6,691
======== ======== ======== ======= ======= ======= ====== ====== ======
Additions to property, plant and equipment include amounts relating to principal
businesses purchased.
(a) Depreciation and amortization includes goodwill amortization.
PROVISION FOR INCOME TAXES
(In millions) ----------------------------
For the years ended December 31 2001 2000 1999
- ------------------------------------------------------------------
Commercial Finance $ 757 $ 656 $ 521
Consumer Finance 525 477 224
Equipment Management (136) 204 174
Insurance 221 324 481
All Other GECS 13 251 253
-------- -------- --------
Total $ 1,380 $ 1,912 $ 1,653
======== ======== ========
-78-
BASIS FOR PRESENTATION. The Company's operating businesses are organized based
on the nature of products and services provided. Certain GE businesses do not
meet the definition of a reportable operating segment and have been aggregated.
The Materials segment consists of Plastics and Specialty Materials. The
Industrial Products and Systems segment consists of Industrial Systems,
Transportation Systems and GE Supply. The Technical Products and Services
segment consists of Medical Systems and Global eXchange Services. All Other GECS
consists of IT Solutions, GE Equity, Americom, Wards and other asset impairments
and product line exits.
Details of segment profit by operating segment can be found on page 18 of
this report. A description of operating segments for General Electric Company
and consolidated affiliates follows.
AIRCRAFT ENGINES. 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 commuter 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 Power
Systems.
COMMERCIAL FINANCE. Loans, financing and operating leases, and other services
for customers, including manufacturers, distributors and end-users, for a
variety of equipment and major capital assets that includes industrial
facilities and equipment, energy-related facilities, commercial and residential
real estate loans and investments, vehicles, aircraft, and equipment used in
construction, manufacturing, data processing and office applications,
electronics and telecommunications and healthcare.
CONSUMER PRODUCTS. Major appliances and related services for products such as
refrigerators, freezers, electric and gas ranges, dishwashers, clothes washers
and dryers, microwave ovens, room air conditioners and residential water system
products. Products and services are sold in North America and in global markets
under various GE and private-label brands. 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 (including
a wide variety of lamps, lighting fixtures and wiring devices).
CONSUMER FINANCE. Private-label credit card loans, personal loans, time sales
and revolving credit and inventory financing for retail merchants, and auto
leasing and inventory financing.
EQUIPMENT MANAGEMENT. Leases, loans, sales and asset management services for
portfolios of commercial and transportation equipment, including trailers, auto
fleets, modular space units, railroad rolling stock and marine shipping
containers.
INDUSTRIAL PRODUCTS AND SYSTEMS. Electrical distribution and control equipment
(including power delivery and control products such as transformers, meters,
relays, capacitors and arresters); transportation systems products and
maintenance services (including diesel and electric locomotives, transit
propulsion equipment, motorized wheels for off-highway vehicles, and railway
signaling communications systems); electric motors and related products; a broad
range of electrical and electronic industrial automation products (including
drive systems); installation, engineering and repair services, which includes
management and technical expertise for large projects such as process control
systems; and GE Supply, a network of electrical supply houses. Markets are
extremely diverse. Products and services are sold to commercial and industrial
end users, including utilities, to original equipment manufacturers, to
electrical distributors, to retail outlets, to railways and to transit
authorities. Increasingly, products and services are developed for and sold in
global markets.
-79-
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; financial guaranty
insurance, principally on municipal bonds and asset-backed securities, and
private mortgage insurance.
MATERIALS. High-performance engineered plastics used in applications such as
automobiles and housings for computers and other business equipment; ABS resins;
silicones; superabrasive industrial diamonds; quartz products; and laminates.
Products are sold worldwide to a diverse customer base consisting mainly of
manufacturers.
NBC. Principal businesses are the furnishing of U.S. network television services
to more than 220 affiliated stations, production of television programs,
operation of 13 VHF and UHF television broadcasting stations, operation of four
cable/satellite networks around the world, and investment and programming
activities in the Internet, multimedia and cable television.
POWER SYSTEMS. Power plant products and services, including design,
installation, operation and maintenance services. Markets and competition are
global. Gas turbines and aircraft engine derivatives and related services are
sold separately and as part of packaged power plants for electric utilities,
independent power producers and for industrial cogeneration and mechanical drive
applications. Steam turbine-generators and related services are sold to electric
utilities and, for cogeneration, to industrial and other power customers. Also
includes portable power plants, nuclear reactors and fuel and support services
for GE's new and installed boiling water reactors, and equipment to support the
distribution of oil and gas products.
TECHNICAL PRODUCTS AND SERVICES. 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. Products and services are sold
worldwide to hospitals and medical facilities. Also includes a full range of
computer-based information and data interchange services for both internal and
external use to commercial and industrial customers.
ALL OTHER GECS. GECS activities and businesses that management has chosen not to
allocate to one of the four GECS segments including IT Solutions, GE Equity,
Americom, Wards and other asset impairments and product line exits.
Very few of the products financed by GECS are manufactured by GE.
-80-
28 GEOGRAPHIC SEGMENT INFORMATION (CONSOLIDATED)
The table below presents data by geographic region.
Revenues and operating profit shown below are classified according to their
country of origin (including exports from such areas). Revenues classified under
the caption "United States" include royalty and licensing income from non-U.S.
sources.
REVENUES
For the years ended December 31
Total revenues Intersegment revenues External revenues
-------------------------------- --------------------------------- ---------------------------------
(In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
United States $ 89,876 $ 90,981 $ 78,970 $ 3,877 $ 3,518 $ 2,690 $ 85,999 $ 87,463 $ 76,280
Europe 23,878 24,144 22,919 2,009 1,212 1,081 21,869 22,932 21,838
Pacific Basin 11,447 12,921 7,879 1,258 1,218 924 10,189 11,703 6,955
Other (a) 8,963 8,754 7,365 1,107 999 808 7,856 7,755 6,557
Intercompany eliminations (8,251) (6,947) (5,503) (8,251) (6,947) (5,503) -- -- --
-------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $125,913 $ 129,853 $ 111,630 $ -- $ -- $ -- $ 125,913 $ 129,853 $ 111,630
===================================================================================================================================
SEGMENT OPERATING PROFIT (b) ASSETS LONG-LIVED ASSETS (c)
For the years ended December 31 At December 31 At December 31
-------------------------------- --------------------------------- ---------------------------------
(In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
United States $ 18,055 $ 15,455 $ 13,391 $ 315,179 $ 277,818 $ 264,129 $ 18,593 $ 19,180 $ 21,612
Europe 1,297 2,062 1,886 93,963 80,282 83,358 6,176 5,870 6,101
Pacific Basin 1,857 1,754 1,092 41,385 42,281 28,214 1,888 1,936 2,017
Other (a) 1,210 1,406 909 44,683 36,804 29,687 15,519 13,076 11,329
Intercompany eliminations (8) 9 11 (187) (179) (188) (36) (47) (37)
-------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $ 22,411 $ 20,686 $ 17,289 $ 495,023 $ 437,006 $ 405,200 $ 42,140 $ 40,015 $ 41,022
===================================================================================================================================
(a) Includes the Americas other than the United States and operations that cannot meaningfully be associated with specific
geographic areas (for example, commercial aircraft leased by GE Capital Aviation Services).
(b) Excludes GECS income taxes of $1,380 million, $1,912 million and $1,653 million in 2001, 2000 and 1999, respectively, which
are included in the measure of segment profit reported on page 18.
(c) Property, plant and equipment (including equipment leased to others).
- ----------------------------------------------------------------------------------------------------------------------------------
-81-
29 ADDITIONAL INFORMATION ABOUT CERTAIN FINANCIAL INSTRUMENTS
Assets and liabilities that are reflected in the accompanying financial
statements at fair value are not included in the following disclosures; such
items include cash and equivalents, investment securities, separate accounts
and, beginning in 2001, derivative financial instruments. Other assets and
liabilities-those not carried at fair value-are discussed in the following
pages. Apart from certain borrowings by GE and GECS and certain marketable
securities, few of the instruments discussed below are actively traded and their
fair values must often be determined using models. Although management has made
every effort to develop the fairest representation of fair value for this
section, it would be unusual if the estimates could actually have been realized
at December 31, 2001 or 2000.
A description of how fair values are estimated follows.
BORROWINGS. Based on market quotes or comparables.
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.
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.
FINANCIAL GUARANTEES AND CREDIT LIFE. Based on expected future cash flows,
considering expected renewal premiums, claims, refunds and servicing costs,
discounted at a current market rate.
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.
-82-
FINANCIAL INSTRUMENTS
2001 2000
------------------------------------------- ---------------------------------------------
Assets (liabilities) Assets (liabilities)
--------------------------------- --------------------------------
Carrying Estimated fair value Carrying Estimated fair value
Notional amount -------------------- Notional amount --------------------
December 31 (In millions) amount (net) High Low amount (net) High Low
- --------------------------------------------------------------------------------------------------------------------------------
GE
Investments and notes receivable (b) $ (a) $ 570 $ 568 $ 568 $ (a) $ 2,012 $ 2,060 $ 2,026
Borrowings (c)(d) (a) (2,509) (2,509) (2,509) (a) (1,781) (1,781) (1,781)
Recourse obligations for receivables
sold 471 (45) (45) (45) 589 (42) (42) (42)
Financial guarantees 3,605 (49) (49) (49) 3,065(g) -- -- --
Financing commitments 1,497 (47) (47) (47) 1,492 -- -- --
Liquidity support 362 -- -- -- -- -- -- --
GECS
Assets
Time sales and loans (a) 118,584 119,986 117,930 (a) 92,912 93,539 92,360
Mortgages acquired for resale (a) 1,596 1,631 1,596 (a) 1,267 1,250 1,245
Other financial instruments (a) 9,496 9,671 9,599 (a) 10,940 11,130 11,102
Liabilities
Borrowings (c)(d) (a) (240,519) (244,069) (244,069) (a) (205,371) (207,670) (207,670)
Investment contract benefits (a) (32,427) (32,192) (31,815) (a) (27,575) (26,144) (26,144)
Insurance-financial guarantees
and credit life (e) 271,208 (2,941) (2,983) (3,091) 239,940 (2,759) (2,797) (2,910)
Other financial instruments 4,678 (629) (590) (590) 2,982 (1,184) (1,114) (1,114)
Special purpose entity support
Credit and liquidity (f) 43,176 (712) (712) (712) 31,197 (630) (630) (630)
Credit and liquidity-unused 9,404 -- -- -- 6,470 -- -- --
Performance guarantees 3,759 -- -- -- 2,870(h) -- -- --
-unused 441 -- -- -- 1,330(h) -- -- --
Swap guarantees and other
guarantees 8,506 -- -- -- 7,415(h) -- -- --
Other firm commitments
Ordinary course of business
lending commitments 9,636 -- -- -- 9,450 -- -- --
Unused revolving credit lines
Commercial 27,770 -- -- -- 19,372(i) -- -- --
Consumer-principally
credit cards 222,929 -- -- -- 188,421 -- -- --
================================================================================================================================
(a) These financial instruments do not have notional amounts.
(b) Amounts in 2000 include $1.0 billion related to Lockheed Martin note, which was prepaid in 2001.
(c) Includes effects of interest rate and currency swaps.
(d) See note 18.
(e) See note 19.
(f) Includes credit support of $14,496 million and $9,784 million at December 31, 2001 and 2000, respectively.
(g) Reported as $2,345 million in 2000.
(h) Reported, in total, as $7,895 million in 2000.
(i) Reported as $11,278 million in 2000.
- --------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES AND HEDGING. GE and GECS global business activities routinely deal
with fluctuations in interest rates, in currency exchange rates and in commodity
and other asset prices. GE and GECS apply strict policies to managing each of
these risks, including prohibitions on derivatives trading, derivatives
market-making or other speculative activities. These policies require the use of
derivative instruments in concert with other techniques to reduce or eliminate
these risks.
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On January 1, 2001, GE adopted SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, as discussed in note 1. The paragraphs that
follow provide additional information about derivatives and hedging
relationships in accordance with the requirements of SFAS 133.
CASH FLOW HEDGES. Under SFAS 133, 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 funds at a variable
rate of interest. If GECS needs the funds to make a floating rate loan, there is
no exposure to interest rate changes, and no hedge is necessary. However, if a
fixed rate loan is made, GECS will contractually commit to pay a fixed rate of
interest to a counterparty who will pay GECS a variable rate of interest (an
"interest rate swap"). This swap will then be designated as a cash flow hedge of
the associated variable rate borrowing. If, as would be expected, the derivative
is perfectly effective in offsetting variable interest in the borrowing, changes
in its fair value are recorded in a separate component in equity and released to
earnings contemporaneously with the earnings effects of the hedged item. Further
information about hedge effectiveness is provided below.
GE uses currency forwards and options to manage exposures to changes in
currency exchange rates associated with commercial purchase and sale
transactions. These instruments permit GE to eliminate the cash flow
variability, in local currency, of costs or selling prices denominated in
currencies other than the functional currency. In addition, GE and GECS use
these instruments, along with interest rate and currency swaps, to optimize
borrowing costs and investment returns. For example, currency swaps and
non-functional currency borrowings together provide lower funding costs than
could be achieved by issuing debt directly in a given currency.
Adoption of SFAS 133 resulted in a reduction of share owners' equity of
$827 million at January 1, 2001. Of that amount, $259 million was transferred to
earnings in 2001 along with the earnings effects of the related forecasted
transactions for no net impact on earnings. At December 31, 2001, amounts
related to derivatives qualifying as cash flow hedges amounted to a reduction of
equity of $955 million, of which $665 million was expected to be transferred to
earnings in 2002 along with the earnings effects of the related forecasted
transactions. In 2001, there were no forecasted transactions that failed to
occur. At December 31, 2001, the maximum term of derivative instruments that
hedge forecasted transactions was 24 months.
FAIR VALUE HEDGES. Under SFAS 133, 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, GECS will use an interest rate swap in which
it receives a fixed rate of interest and pays 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. Changes in fair value of derivatives
designated and effective as fair value hedges are recorded in earnings and are
offset by corresponding changes in the fair value of the hedged item.
GE and GECS use interest rate swaps, currency swaps and interest rate and
currency forwards to hedge the effect of interest rate and currency exchange
rate changes on local and nonfunctional currency denominated fixed-rate
borrowings and certain types of fixed-rate assets. Equity options are used to
hedge price changes in investment securities and equity-indexed annuity
liabilities at GECS.
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NET INVESTMENT HEDGES. The net investment hedge designation under SFAS 133
refers to the use of derivative contracts or cash instruments to hedge the
foreign currency exposure of a net investment in a foreign operation. At GE and
GECS, currency exposures that result from net investments in affiliates are
managed principally by funding assets denominated in local currency with debt
denominated in that same currency. In certain circumstances, such exposures are
managed using currency forwards and currency swaps.
DERIVATIVES NOT DESIGNATED AS HEDGES. SFAS 133 specifies criteria that must be
met 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. GE and GECS 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. GE and GECS also will occasionally receive derivatives, such as
equity warrants, in the ordinary course of business. Under SFAS 133, derivatives
that do not qualify for hedge accounting are marked to market through earnings.
GE and GECS use 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. For example, GECS uses equity
options to hedge the risk of changes in equity prices embedded in insurance
liabilities associated with annuity contracts written by GE Financial Assurance.
GECS also uses interest rate swaps, purchased options and futures as an economic
hedge of the fair value of mortgage servicing rights. GE and GECS occasionally
obtain equity warrants as part of sourcing or financing transactions. Although
these instruments are considered to be derivatives under SFAS 133, their
economic risk is similar to, and managed on the same basis as, other equity
instruments held by GE and GECS.
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 corresponding fair value changes in 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 used by GE and GECS. Earnings effects of such items
are shown in the following table as "amounts excluded from the measure of
effectiveness."
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Cash flow Fair value
December 31 (In millions) hedges hedges
--------- ----------
Ineffectiveness $ 1 $ 26
Amounts excluded from the measure
of effectiveness $(1) $(16)
================================================================================
At December 31, 2001, the fair value of derivatives in a gain position and
recorded in "All other assets" is $2.3 billion and the fair value of derivatives
in a loss position and recorded in "All other liabilities" is $3.8 billion.
The following table provides fair value information about derivative
instruments for the year 2000. Following adoption of SFAS 133 on January 1,
2001, all derivative instruments are reported at fair value in the financial
statements and similar disclosures for December 31, 2001, are not relevant.
2000
------------------------------
Assets (liabilities)
--------------------
Carrying
Notional amount Estimated
December 31 (In millions) amount (net) fair value
-------- -------- -----------
GE
Assets
Investment related
Cancelable interest rate
swap $ 1,046 $ 6 $ 4
Liabilities
Borrowings related instruments
Interest rate swaps 786 -- (38)
Currency swaps 172 -- (4)
Other firm commitments
Forwards and options 6,961 37 30
GECS
Assets
Integrated swaps 22,911 (44) (771)
Purchased options 9,832 105 164
Options, including "floors" 21,984 202 208
Interest rate swaps and futures 2,798 29 38
Liabilities
Interest rate swaps 52,681 -- (208)
Currency swaps 24,314 -- (957)
Currency forwards 27,902 -- 381
Other firm commitments
Currency forwards 1,585 8 47
Currency swaps 647 292 275
================================================================================
COUNTERPARTY CREDIT RISK. The risk that counterparties to derivative contracts
will be financially unable to make payments to GE or GECS according to the terms
of the agreements is counterparty credit risk. Counterparty credit risk is
managed on an individual counterparty basis, which means that gains and losses
are netted for each counterparty to determine the amount at risk. When a
counterparty exceeds credit exposure limits in terms of amounts due to GE or
GECS, typically as a result of changes in market conditions (see table below),
no additional transactions are executed until the exposure with that
counterparty is reduced to an amount that is within the established limit. All
swaps are executed under master swap 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-. If the
downgrade provisions had been triggered at December 31, 2001, GE and GECS could
have been required to disburse up to $2.9 billion and could have claimed $0.8
billion from counterparties-the net fair value losses and gains. At December 31,
2001 and 2000, gross fair value gains amounted to $3.3 billion and $3.2 billion,
respectively. At December 31, 2001 and 2000, gross fair value losses amounted to
$5.4 billion and $4.0 billion, respectively.
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As part of its ongoing activities, GECS enters into swaps that are
integrated into investments in or loans to particular customers. Such integrated
swaps not involving assumption of third-party credit risk are evaluated and
monitored like their associated investments or loans and are not therefore
subject to the same credit criteria that would apply to a stand-alone position.
Except for such positions, all other swaps, purchased options and forwards with
contractual maturities longer than one year are conducted within the credit
policy constraints provided in the table below. Foreign exchange forwards with
contractual maturities shorter than one year must be executed with
counterparties having an A-1+/ P-1 credit rating and the credit limit for these
transactions is $150 million.
COUNTERPARTY CREDIT CRITERIA Credit rating
----------------------------
Moody's Standard & Poor's
------- -----------------
Term of transaction
Between one and five years Aa3 AA-
Greater than five years Aaa AAA
Credit exposure limits
Up to $50 million Aa3 AA-
Up to $75 million Aaa AAA
================================================================================
-87-
30 QUARTERLY INFORMATION (UNAUDITED)
First quarter Second quarter Third quarter Fourth quarter
(Dollar amounts in millions; ------------------ ---------------- ---------------- ----------------
per-share amounts in dollars) 2001 2000 2001 2000 2001 2000 2001 2000
-------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED OPERATIONS
Earnings before accounting changes $ 3,017 $ 2,592 $ 3,897 $ 3,378 $ 3,281 $ 3,180 $ 3,933 $ 3,585
Cumulative effect of accounting changes (444) -- -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- ------- -------
Net earnings 2,573 2,592 3,897 3,378 3,281 3,180 3,933 3,585
Per-share amounts before accounting
changes
Diluted earnings per share $ 0.30 $ 0.26 $ 0.39 $ 0.34 $ 0.33 $ 0.32 $ 0.39 $ 0.36
Basic earnings per share 0.30 0.26 0.39 0.34 0.33 0.32 0.40 0.36
Per-share amounts after accounting
changes
Diluted earnings per share 0.26 0.26 0.39 0.34 0.33 0.32 0.39 0.36
Basic earnings per share 0.26 0.26 0.39 0.34 0.33 0.32 0.40 0.36
SELECTED DATA
GE
Sales of goods and services 15,850 14,370 17,588 16,414 16,359 15,578 18,221 17,445
Gross profit from sales 4,960 4,520 5,677 5,372 5,245 4,675 6,059 5,693
GECS
Total revenues 14,723 15,681 14,399 16,470 13,298 16,444 15,933 17,582
Operating profit 1,839 1,746 1,855 1,697 1,512 2,020 1,760 1,641
Earnings before accounting changes 1,401 1,210 1,477 1,277 1,301 1,478 1,407 1,227
=================================================================================================================
For GE, gross profit from sales is sales of goods and services less costs
of goods and services sold. For GECS, operating profit is "Earnings before
income taxes and accounting changes."
Earnings-per-share amounts for each quarter are required to be computed
independently. As a result, their sum does not equal the total year
earnings-per-share amounts in 2000.
-88-
INDEPENDENT AUDITORS' REPORT
TO SHARE OWNERS AND BOARD OF DIRECTORS OF
GENERAL ELECTRIC COMPANY
We have audited the accompanying statement of financial position of General
Electric Company and consolidated affiliates as of December 31, 2001 and 2000,
and the related statements of earnings, changes in share owners' equity and cash
flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned financial statements appearing on pages
2 to 7, 18 and 44 to 87 present fairly, in all material respects, the financial
position of General Electric Company and consolidated affiliates at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the
Company in 2001 changed its method of accounting for derivative instruments and
hedging activities and impairment of certain beneficial interests in securitized
assets.
/s/ KPMG LLP
- ---------------------
KPMG LLP
Stamford, Connecticut
February 8, 2002, except as to notes 10, 12 and 27, which are as of
September 17, 2002.