Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
GE > SEC Filings for GE > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for GENERAL ELECTRIC CO

Form 10-K for GENERAL ELECTRIC CO


27-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Operations

The consolidated financial statements of General Electric Company (the Company) combine the industrial manufacturing and services businesses of General Electric Company (GE) with the financial services businesses of General Electric Capital Corporation (GECC or financial services). Unless otherwise indicated by the context, we use the terms "GE" and "GECC" on the basis of consolidation described in Note 1 to the consolidated financial statements in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K Report.

In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered "non-GAAP financial measures" under the U.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in the Supplemental Information section.

We present Management's Discussion of Operations in five parts: Overview of Our Earnings from 2011 through 2013, Global Risk Management, Segment Operations, Geographic Operations and Environmental Matters. Unless otherwise indicated, we refer to captions such as revenues and other income and earnings from continuing operations attributable to the company simply as "revenues" and "earnings" throughout this Management's Discussion and Analysis. Similarly, discussion of other matters in our consolidated financial statements relates to continuing operations unless otherwise indicated. Discussion of GECC's total assets excludes deferred income tax liabilities, which are presented as assets for purposes of our consolidating balance sheet presentations for this filing.

We supplement our GAAP net earnings and earnings per share (EPS) reporting by also reporting operating earnings and operating EPS (non-GAAP measures). Operating earnings and operating EPS include service costs and plan amendment amortization for our principal pension plans as these costs represent expenses associated with employee benefits earned. Operating earnings and operating EPS exclude non-operating pension cost/income such as interest costs, expected return on plan assets and non-cash amortization of actuarial gains and losses. We believe that this reporting provides better transparency to the employee benefit costs of our principal pension plans and Company operating results.

Overview of Our Earnings from 2011 through 2013

Earnings from continuing operations attributable to the Company increased 4% to $15.2 billion in 2013 and increased 4% to $14.6 billion in 2012, reflecting strong industrial segment growth and continued stabilization in financial services during the last two years. Operating earnings (non-GAAP measure), which exclude non-operating pension costs, increased 5% to $16.9 billion in 2013 compared with an 8% increase to $16.0 billion in 2012. Earnings per share (EPS) from continuing operations increased 7% to $1.47 in 2013 compared with a 12% increase to $1.38 in 2012. Operating EPS (non-GAAP measure) increased 9% to $1.64 in 2013 compared with a 16% increase to $1.51 in 2012. Net earnings attributable to the Company decreased 4% in 2013 reflecting a 4% increase in earnings from continuing operations, more than offset by an increase in losses from discontinued operations. Net earnings attributable to the Company decreased 4% in 2012 reflecting losses from discontinued operations, partially offset by an increase of 4% in earnings from continuing operations. We begin 2014 with a record backlog of $244 billion, continue to invest in market-leading technology and services and expect to continue industrial segment revenue and earnings growth.

Power & Water (18% and 23% of consolidated three-year revenues and total segment profit, respectively) revenues decreased 13% in 2013 primarily as a result of lower volume and the effects of the stronger U.S. dollar, partially offset by higher prices and other income. Revenues increased 10% in 2012 primarily as higher volume and other income were partially offset by the effects of the stronger U.S. dollar and lower prices. Segment profit decreased 8% in 2013 primarily driven by lower volume and lower cost productivity, partially offset by the effects of deflation, higher prices and other income. Segment profit increased 8% in 2012 as higher volume, increased other income and deflation were partially offset by lower prices, lower productivity and the stronger U.S. dollar.

(27)


Oil & Gas (10% and 8% of consolidated three-year revenues and total segment profit, respectively) revenues increased 11% in 2013 primarily as a result of higher volume and higher prices. Revenues increased 12% in 2012 as higher volume (driven by acquisitions) and higher sales of both equipment and services were partially offset by the stronger U.S. dollar. Segment profit increased 13% in 2013 primarily on higher volume and higher prices, partially offset by lower cost productivity. Segment profit increased 16% in 2012 on higher volume and increased productivity, partially offset by the effects of the stronger U.S. dollar.

Energy Management (5% and less than 1% of consolidated three-year revenues and total segment profit, respectively) revenues increased 2% in 2013 as higher volume was partially offset by the effects of the stronger U.S. dollar. In 2012, revenues increased 15% as a result of higher volume primarily from acquisitions, higher prices and increased other income offset partially by the effects of the stronger U.S. dollar. Segment profit decreased 16% in 2013 primarily driven by lower productivity. Segment profit increased 68% in 2012 primarily driven by higher prices and increased other income.

Aviation (14% and 17% of consolidated three-year revenues and total segment profit, respectively) revenues increased 10% in 2013 on higher volume and higher prices primarily driven by higher services and equipment sales in commercial spares and commercial engines, respectively. In 2012, Aviation revenues increased 6% as a result of higher prices and higher volume driven by increased commercial and military engine sales. Segment profit increased 16% in 2013 as a result of higher prices, higher volume and increased other income offset partially by the effects of inflation and lower productivity. Segment profit increased 7% in 2012 as higher prices and higher volume were partially offset by the effects of inflation and lower productivity.

Healthcare (12% and 13% of consolidated three-year revenues and total segment profit, respectively) revenues were slightly lower in 2013 on lower prices and the effects of a stronger U.S. dollar, partially offset by higher volume. Revenues increased 1% in 2012 due to higher volume in international equipment sales, with the strongest growth in emerging markets and other income, partially offset by the stronger U.S. dollar and lower prices. Segment profit increased 4% in 2013 as a result of increased productivity and volume, partially offset by lower prices, the effects of inflation and the stronger U.S. dollar. Segment profit increased 4% in 2012 as increased productivity, higher volume and other income were partially offset by lower prices and the effects of inflation.

Transportation (4% and 4% of consolidated three-year revenues and total segment profit, respectively) revenues increased 5% in 2013 due to higher volume, primarily from acquisitions. Revenues increased 15% in 2012 due to higher volume and higher prices related to increased equipment sales and services. Segment profit increased 13% in 2013 as a result of the effects of deflation, higher volume and increased productivity. Segment profit increased 36% in 2012 as a result of higher volume, higher prices and increased productivity, reflecting improved service margins.

Appliances & Lighting (formerly Home & Business Solutions) (5% and 1% of consolidated three-year revenues and total segment profit, respectively) revenues increased 5% in 2013 primarily on higher volume at Appliances. In 2012, revenues increased 4% reflecting higher prices at Appliances, partially offset by lower volume. Segment profit increased 23% in 2013 primarily as a result of improved productivity and higher prices. Segment profit increased 31% in 2012 as a result of higher prices, partially offset by the effects of inflation and lower productivity.

GE Capital (31% and 33% of consolidated three-year revenues and total segment profit, respectively) revenues decreased 3% in 2013 and 6% in 2012, reflecting a reduction in ending net investment (ENI). Net earnings increased 12% in 2013 and 13% in 2012 as a result of dispositions and higher gains, partially offset by higher impairments and higher provisions for losses on financing receivables. We reduced ENI, excluding cash and equivalents, to $380 billion at December 31, 2013. GECC is a diversely funded and smaller, more focused finance company with strong positions in several commercial mid-market and consumer financing segments.

(28)


We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the following fourth quarter are attributed to such businesses. Overall, the effects of acquisitions increased consolidated revenues $1.6 billion, $2.0 billion and $4.5 billion in 2013, 2012 and 2011, respectively. The effects of acquisitions on our consolidated net earnings were increases of $0.1 billion, $0.1 billion and an insignificant amount in 2013, 2012 and 2011, respectively. Dispositions also affected our ongoing results through lower revenues of $0.1 billion, $5.1 billion and $12.6 billion in 2013, 2012 and 2011, respectively. The effects of dispositions on net earnings were an increase of $1.4 billion in 2013 and decreases of $0.3 billion in both 2012 and 2011.

Discontinued Operations. In 2013, we sold our CLL trailer services business in Europe (CLL Trailer Services) and announced the planned sale of our Consumer banking business in Russia (Consumer Russia). These actions are consistent with our goal of reducing GECC ENI and focusing our businesses on selective financial services products where we have deep domain experience, broad distribution, and the ability to earn a consistent return on capital, while managing our overall balance sheet size and risk. Discontinued operations also includes GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), our U.S. recreational vehicle and marine equipment financing business (Consumer RV Marine), Consumer Mexico, Consumer Singapore, our Consumer home lending operations in Australia and New Zealand (Australian Home Lending) and our Consumer mortgage lending business in Ireland (Consumer Ireland). All of these operations were previously reported in the GE Capital segment.

We reported the operations described above as discontinued operations for all periods presented. For further information about discontinued operations, see the Segment Operations - Discontinued Operations section in this Item and Note 2 to the consolidated financial statements in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K Report.

We declared $8.1 billion in dividends in 2013. Common per-share dividends increased 13% to $0.79 in 2013 after an increase of 15% to $0.70 in 2012. We increased our quarterly dividend four times between 2011 and 2013, and on February 7, 2014, our Board of Directors approved a quarterly dividend of $0.22 per share of common stock, which is payable April 25, 2014, to shareowners of record at close of business on February 24, 2014. In 2011, we declared $1.0 billion in preferred stock dividends (including $0.8 billion as a result of our redemption of preferred stock). See Note 15 to the consolidated financial statements in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K Report for additional information.

Except as otherwise noted, the analysis in the remainder of this section presents the results of GE (with GECC included on a one-line basis) and GECC. See the Segment Operations section of this Item and Note 27 to the consolidated financial statements in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K Report for a more detailed discussion of the businesses within GE and GECC.

Significant matters relating to our Statement of Earnings are explained below.

GE sales of product services were $44.8 billion in 2013, an increase of 3% compared with 2012, and operating profit from product services was $13.4 billion in 2013, an increase of 7% compared with 2012. Both the sales and operating profit of product services increases were at Oil & Gas, Aviation, Energy Management and Transportation. GE sales of product services were $43.4 billion in 2012, an increase of 4% compared with 2011, and operating profit from product services was $12.5 billion in 2012, an increase of 6% compared with 2011. Both the sales and operating profit of product services increases were at Power & Water, Oil & Gas, Transportation and Energy Management.

Postretirement benefit plans costs were $6.0 billion, $5.5 billion and $4.1 billion in 2013, 2012 and 2011, respectively. Costs increased in 2013 and 2012 primarily due to the continued amortization of 2008 investment losses and the effects of lower discount rates (principal pension plans discount rate decreased from 5.28% at December 31, 2010 to 4.21% and 3.96% at December 31, 2011 and 2012, respectively.)

(29)


Our discount rate for our principal pension plans at December 31, 2013 was 4.85%, which reflected current interest rates. Considering the current and target asset allocations, as well as historical and expected returns on various categories of assets in which our plans are invested, we have assumed that long-term returns on our principal pension plan assets will be 7.5% for cost recognition in 2014, a reduction from the 8.0% we assumed in 2013, 2012 and 2011. GAAP provides for recognition of differences between assumed and actual returns over a period no longer than the average future service of employees. See the Critical Accounting Estimates section for additional information.

We expect the costs of our postretirement benefits to decrease in 2014 by approximately $1.3 billion as compared to 2013, primarily because of the effects of higher discount rates and lower loss amortization related to our principal pension plans, partially offset by lower expected investment return on pension plan assets.

Pension expense for our principal pension plans on a GAAP basis was $4.4 billion, $3.8 billion and $2.4 billion in 2013, 2012 and 2011, respectively. Operating pension costs (non-GAAP) for these plans were $1.8 billion, $1.7 billion and $1.4 billion in 2013, 2012 and 2011, respectively. Operating earnings include service cost and prior service cost amortization for our principal pension plans as these costs represent expenses associated with employee service. Operating earnings exclude non-operating pension costs/income such as interest cost, expected return on plan assets and non-cash amortization of actuarial gains and losses. We expect operating pension costs for these plans will be about $1.4 billion in 2014. The expected decrease in operating pension costs is attributable primarily to the effects of higher discount rates and lower early retirement costs.

The GE Pension Plan was underfunded by $4.7 billion at the end of 2013 as compared to $13.3 billion at December 31, 2012. The GE Supplementary Pension Plan, which is an unfunded plan, had projected benefit obligations of $5.2 billion and $5.5 billion at December 31, 2013 and 2012, respectively. Our underfunding at year-end 2013 was significantly reduced as compared to 2012 as the effects of higher discount rates and higher investment returns (14.6% return in 2013) more than offset liability growth. Our principal pension plans discount rate increased from 3.96% at December 31, 2012 to 4.85% at December 31, 2013, which decreased the pension benefit obligation at year-end 2013 by approximately $6.8 billion. Our GE Pension Plan assets increased from $44.7 billion at the end of 2012 to $48.3 billion at December 31, 2013, primarily driven by higher investment returns that were partially offset by benefit payments made during the year. Assets of the GE Pension Plan are held in trust, solely for the benefit of Plan participants, and are not available for general company operations.

On July 6, 2012, the U.S. government enacted the "Moving Ahead for Progress in the 21st Century Act", which contained provisions that changed the interest rate methodology used to calculate Employee Retirement Income Security Act (ERISA) minimum pension funding requirements in the U.S. This change reduced our near-term annual cash funding requirements for the GE Pension Plan. We contributed $0.4 billion to the GE Pension Plan in 2012. We did not contribute to the GE Pension Plan in 2013.

On an ERISA basis, our preliminary estimate is that the GE Pension Plan was approximately 97% funded at January 1, 2014. We will contribute approximately $0.5 billion to the GE Pension Plan in 2014. Our current estimate of the projected 2015 GE Pension Plan required contribution is approximately $2.4 billion.

At December 31, 2013, the fair value of assets for our other pension plans was $2.5 billion less than the respective projected benefit obligations. The comparable amount at December 31, 2012, was $3.9 billion. This decrease was primarily attributable to higher discount rates and higher investment returns. We expect to contribute $0.8 billion to our other pension plans in 2014, as compared to $0.7 billion in both 2013 and 2012.

The unfunded liability for our principal retiree health and life plans was $9.0 billion and $10.9 billion at December 31, 2013 and 2012, respectively. This decrease was primarily attributable to the effects of higher discount rates (retiree health and life plans discount rate increased from 3.74% at December 31, 2012 to 4.61% at December 31, 2013) and lower costs from new healthcare supplier contracts. We fund our retiree health benefits on a pay-as-you-go basis. We expect to contribute $0.5 billion to these plans in 2014 compared with actual contributions of $0.5 billion in both 2013 and 2012.

(30)


The funded status of our postretirement benefits plans and future effects on operating results depend on economic conditions and investment performance. For additional information about funded status, components of earnings effects and actuarial assumptions, see Note 12 to the consolidated financial statements in

Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K
Report.

Other costs and expenses are primarily selling, general and administrative expenses (SG&A). GE's costs were 15.9%, 17.5% and 18.5% of total sales in 2013, 2012 and 2011, respectively. The 2013 decrease was primarily driven by the effects of global cost reduction initiatives both in the industrial segments and corporate as a result of our simplification efforts, partially offset by increased acquisition-related costs and higher restructuring. The 2012 decrease was driven by increased sales and the effects of global cost reduction initiatives, partially offset by increased acquisition-related costs at GE.

Interest on borrowings and other financial charges amounted to $10.1 billion, $12.4 billion and $14.4 billion in 2013, 2012 and 2011, respectively. Substantially all of our borrowings are in financial services, where interest expense was $9.3 billion, $11.6 billion and $13.8 billion in 2013, 2012 and 2011, respectively. GECC average borrowings declined from 2012 to 2013 and from 2011 to 2012, in line with changes in average GECC assets. Interest rates have decreased over the three-year period primarily attributable to declining global benchmark interest rates. GECC average borrowings were $379.5 billion, $420.0 billion and $450.5 billion in 2013, 2012 and 2011, respectively. The GECC average composite effective interest rate was 2.4% in 2013, 2.8% in 2012 and 3.1% in 2011. In 2013, GECC average assets of $522.7 billion were 7% lower than in 2012, which in turn were 5% lower than in 2011. See the Liquidity and Borrowings section in this Item for a discussion of liquidity, borrowings and interest rate risk management.

Income taxes have a significant effect on our net earnings. As a global commercial enterprise, our tax rates are affected by many factors, including our global mix of earnings, the extent to which those global earnings are indefinitely reinvested outside the United States, legislation, acquisitions, dispositions and tax characteristics of our income. Our tax rates are also affected by tax incentives introduced in the U.S. and other countries to encourage and support certain types of activity. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions.

GE and GECC file a consolidated U.S. federal income tax return. This enables GE to use GECC tax deductions and credits to reduce the tax that otherwise would have been payable by GE.

Income taxes on consolidated earnings from continuing operations were 4.2% in 2013 compared with 14.6% in 2012 and 28.5% in 2011.

Our consolidated income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures. There is a benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. The rate of tax on our indefinitely reinvested non-U.S. earnings is below the 35% U.S. statutory rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GE funds the majority of its non-U.S. operations through foreign companies that are subject to low foreign taxes.

We expect our ability to benefit from non-U.S. income taxed at less than the U.S. rate to continue, subject to changes in U.S. or foreign law, including the expiration of the U.S. tax law provision deferring tax on active financial services income, as discussed in Note 14 to the consolidated financial statements in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K Report. In addition, since this benefit depends on management's intention to indefinitely reinvest amounts outside the U.S., our tax provision will increase to the extent we no longer indefinitely reinvest foreign earnings.

(31)


Our benefits from lower-taxed global operations increased to $4.0 billion in 2013 from $2.2 billion in 2012 principally because of the realization of benefits related to the sale of 68.5% of our Swiss consumer finance bank, Cembra Money Bank AG (Cembra), through an initial public offering (IPO), the realization of benefits for prior-year losses, and the resolution of Internal Revenue Service (IRS) audits. Our benefits from lower-taxed global operations increased to $2.2 billion in 2012 from $2.1 billion in 2011, principally because of the realization of benefits for prior-year losses and a decrease in current-year losses for which there was not a full tax benefit.

The benefit from lower-taxed global operations included $0.4 billion, $0.1 billion and $0.1 billion in 2013, 2012 and 2011, respectively, due to audit resolutions. Our benefit from lower-taxed global operations included the effect of the lower foreign tax rate on our indefinitely reinvested non-U.S. earnings, which provided a tax benefit of $2.5 billion, $1.3 billion and $1.5 billion in 2013, 2012 and 2011, respectively. Included in 2013 is a benefit from the indefinite investment of the eligible earnings from the sale of a portion of Cembra. The tax benefit from non-U.S. income taxed at a local country rather than the U.S. statutory tax rate is reported in the effective tax rate reconciliation in the caption "Tax on global earnings including exports" in Note 14 to the consolidated financial statements in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K Report. To the extent global interest rates and non-U.S. operating income increase, we would expect tax benefits to increase, subject to management's intention to indefinitely reinvest those earnings.

The decrease in the consolidated effective tax rate from 2012 to 2013 was primarily attributable to an increase in tax benefits on lower-taxed global operations, including the tax benefit on the sale of a portion of Cembra. The effective tax rate was also lower due to favorable resolution of audit matters and lower income taxed at rates above the average tax rate, partially offset by the absence of the 2012 benefit attributable to the high tax basis in the entity sold in the Business Property disposition.

The decrease in the consolidated effective tax rate from 2011 to 2012 was due, in significant part, to the high effective tax rate in 2011 on the pre-tax gain on the NBC Universal (NBCU) transaction with Comcast Corporation (Comcast) discussed in Note 2 to the consolidated financial statements in Part II, Item 8, "Financial Statements and Supplemental Data" of this Form 10-K Report. This gain increased the 2011 consolidated effective tax rate by 12.9 percentage points. The effective tax rate was also lower due to the benefit of the high tax basis in the entity sold in the Business Properties disposition.

Cash income taxes paid in 2013 were $2.5 billion, reflecting the effects of changes to temporary differences between the carrying amount of assets and liabilities and their tax bases and the timing of tax payments to governments.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted and the law extended several provisions, including a two-year extension of the U.S. tax provision deferring tax on active financial services income and certain U.S. business credits, retroactive to January 1, 2012. Under accounting rules, a tax law change is taken into account in calculating the income tax provision in the period enacted. Because the extension was enacted into law in 2013, tax expense in 2013 reflected retroactive extension of the previously expired provisions.

A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated rate, as well as other information about our income tax provisions, is provided in Note 14 to the consolidated financial statements in

Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K
Report. The nature of business activities and associated income taxes differ for GE and for GECC and a separate analysis of each is presented in the paragraphs that follow.

We believe that the GE effective tax rate is best analyzed in relation to GE earnings before income taxes excluding the GECC net earnings from continuing operations, as GE tax expense does not include taxes on GECC earnings. GE pre-tax earnings from continuing operations, excluding GECC earnings from continuing operations, were $8.8 billion, $9.5 billion and $12.6 billion for 2013, 2012 and 2011, respectively. The decrease in earnings from 2011 to 2012 reflects the non-repeat of the pre-tax gain on sale of NBCU and higher loss amortization related to our principal pension plans. On this basis, GE's effective tax rate was 18.9% in 2013, 21.3% in 2012 and 38.3% in 2011.

. . .

  Add GE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for GE - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.