management’s discussion and analysis Operations Our consolidated financial statements combine the industrial manufacturing, services and media businesses of General Electric Company (GE) with the financial services businesses of General Electric Capital Services, Inc. (GECS or fi nancial services). In the accompanying analysis of financial information, we sometimes use information derived from consolidated fi nancial 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 fi nancial 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 fi ve parts: Overview of Our Earnings from 2004 through 2006, Global Risk Management, Segment Operations, Global Operations and Environmental Matters. Overview of Our Earnings from 2004 through 2006 Our results over the last several years reflect the global economic environment in which we operate. Global markets have been, and remain, strong. Orders for products and services continue to increase. Emerging markets continue to grow and to offer us new opportunities. Abundant global liquidity is providing us capital market opportunities, but reducing risk spreads. In these highly competitive markets, we have, over the last three years, achieved organic revenue growth averaging 8% and signifi cantly accelerated our globalization. Revenues from our operations located outside the United States plus all U.S. exports (global revenues) grew by more than 60% over this period. We also experienced a weaker U.S. dollar, escalating energy costs and higher fossil fuel-related raw material prices. Our debt continues to receive the highest ratings of the major rating agencies. As the following pages show, our diversification and risk management strategies enabled us to continue to grow revenues and earnings to record levels during this challenging time. Of our six segments, Infrastructure (28% and 34% of consoli- dated three-year revenues and total segment profi t, respectively) was one of the most significantly affected by the recent economic environment. During these years we invested in other lines of power generation, such as wind power, and developed product services. As a result, Energy revenues have grown signifi cantly over these years and the business is positioned well for continued growth in 2007 and beyond. We also continued to invest in market-leading technology and services at Aviation, Water and Transportation. At December 31, 2006, we had 1,419 commercial aircraft, of which all but one were on lease, and we held $14.0 billion (list price) of multiple-year orders for various Boeing, Airbus and other aircraft, including 63 aircraft ($4.3 billion list price) scheduled for delivery in 2007, all under agreement to commence operations with commercial airline customers. Product services and sales of our Evolution Series locomotives continue to be strong. Commercial Finance and GE Money, formerly Consumer Finance, (together, 27% and 32% of consolidated three-year revenues and total segment profit, respectively) are large, profi table growth businesses in which we continue to invest with confidence. In a competitive environment, these businesses grew earnings by a combined $1.2 billion and $1.3 billion in 2006 and 2005, respec- tively. Commercial Finance and GE Money have delivered strong results through solid core growth, disciplined risk management and successful acquisitions. The most signifi cant acquisitions affecting Commercial Finance and GE Money results in 2006 were the custom fleet business of National Australia Bank Ltd. Antares Capital Corp. the Transportation Financial Services Group of CitiCapital and joint ventures with Garanti Bank and Hyundai Card Company. These acquisitions collectively contributed $0.9 billion and $0.3 billion to 2006 revenues and net earnings, respectively. CONSOLIDATED REVENUES 2002 2003 2004 2005 2006 (In $ billions) 163 148 134 112 113 A. GECS Revenues B. GE Revenues We have achieved strong growth in Healthcare (10% and 12% of consolidated three-year revenues and total segment profi t, respectively) with a combination of organic growth and strategic acquisitions. Healthcare realized benefits from the acquisitions of IDX Systems Corporation in 2006, Amersham plc (Amersham) in 2004 and Instrumentarium in 2003, expanding the breadth of our product and service offerings to the healthcare industry, and positioning us well for continued strong growth. NBC Universal (10% and 12% of consolidated three-year revenues and total segment profi t, respectively) has developed into a diversified world-class media company over the last several years, largely through the combination of NBC with Vivendi Universal Entertainment LLLP (VUE) in 2004. Nevertheless, the technology and business model for the entertainment media industry continues to evolve, and NBC Universal’s recent results were somewhat disappointing. In 2006, we made signifi cant progress in our turnaround efforts and believe that NBC Universal is well positioned to compete in this challenging environment. Industrial (22% and 10% of consolidated three-year revenues and total segment profit, respectively) is particularly sensitive to economic conditions. Higher capacity, in combination with declining or weak volume growth in many of the industries in which it operates, resulted in increased competitive price pres- sures. The Consumer & Industrial business continued to grow through product innovation and its focus on high-end appliances. 48 ge 2006 annual report
The Plastics business was hit particularly hard during these three years because of additional pressure from signifi cant infl ation in natural gas and certain raw materials such as benzene. As a result of these factors and the 2006 sales of GE Supply and Advanced Materials, we do not expect this segment to experience signifi cant growth in 2007. Overall, acquisitions contributed $3.9 billion, $9.6 billion and $12.3 billion to consolidated revenues in 2006, 2005 and 2004, respectively. Our consolidated earnings in 2006, 2005 and 2004 included approximately $0.5 billion, $0.9 billion and $1.2 billion, respectively, from acquired businesses. We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the fourth follow- ing quarter are attributed to such businesses. Dispositions also affected our ongoing results through lower revenues of $2.6 billion, $2.0 billion and $3.0 billion in 2006, 2005 and 2004, respectively. This resulted in lower earnings of $0.1 billion in both 2006 and 2005 and $0.5 billion in 2004. Significant matters relating to our Statement of Earnings are explained below. INSURANCE EXIT. In 2006, we substantially completed our planned exit of the insurance businesses through the sale of the property and casualty insurance and reinsurance businesses and the European life and health operations of GE Insurance Solutions Corporation (GE Insurance Solutions) and the sale of GE Life, our U.K.-based life insurance operation, to Swiss Reinsurance Company (Swiss Re). Also during 2006, we completed the sale of our remaining 18% investment in Genworth Financial, Inc. (Genworth), our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage operations, through a secondary public offering. We reported the insurance businesses described above as discontinued operations for all periods presented. Unless otherwise indicated, we refer to captions such as revenues and earnings from continuing operations simply as “revenues” and “earnings” throughout this Management’s Discussion and Analysis. Similarly, discussion of other matters in our consolidated fi nancial statements relates to continuing operations unless otherwise indicated. WE DECLARED $10.7 BILLION IN DIVIDENDS IN 2006. Per-share dividends of $1.03 were up 13% from 2005, following an 11% increase from the preceding year. In December 2006, our Board of Directors raised our quarterly dividend 12% to $0.28 per share. We have rewarded our shareowners with over 100 consecutive years of dividends, with 31 consecutive years of dividend growth. Except as otherwise noted, the analysis in the remainder of this section presents the results of GE (with GECS included on a one- line basis) and GECS. See the Segment Operations section for a more detailed discussion of the businesses within GE and GECS. management’s discussion and analysis GE SALES OF PRODUCT SERVICES were $30.3 billion in 2006, a 12% increase over 2005. Increases in product services in 2006 and 2005 were widespread, led by continued strong growth at Infrastructure and Healthcare. Operating profit from product services was approximately $8.3 billion in 2006, up 19% from 2005, refl ecting ongoing improvements at Infrastructure and Healthcare. POSTRETIREMENT BENEFIT PLANS reduced pre-tax earnings by $2.3 billion, $1.7 billion and $1.2 billion in 2006, 2005 and 2004, respectively. Costs of our principal pension plans increased over the last three years primarily because of the effects of: Prior years’ investment losses which reduced pre-tax earnings from the preceding year by $0.5 billion, $0.5 billion and $0.6 billion in 2006, 2005 and 2004, respectively, and Lowering pension discount rates which reduced pre-tax earn- ings from the preceding year by $0.1 billion, $0.1 billion and $0.4 billion in 2006, 2005 and 2004, respectively. Considering current and expected asset allocations, as well as historical and expected returns on various categories of assets in which our plans are invested, we have assumed that long- term returns on our principal pension plan assets would be 8.5% throughout this period and in 2007. U.S. generally accepted accounting principles provide for recognition of differences between assumed and actual returns over a period no longer than the average future service of employees. We expect costs of our principal pension plans to stabilize in 2007. However, our labor agreements with various U.S. unions expire in June 2007, and we will be engaged in negotiations to attain new agreements. While results of the 2007 union negotia- tions cannot be predicted, our recent past negotiations have resulted in agreements that increased costs. Our principal pension plans had a surplus of $11.5 billion at December 31, 2006. We will not make any contributions to the GE Pension Plan in 2007. To the best of our ability to forecast the next five years, we do not anticipate making contributions to that plan as long as expected investment returns are achieved. At December 31, 2006, the fair value of assets for our other pension plans was $2.6 billion less than their respective projected benefi t obligations. We expect to contribute $0.6 billion to these plans in 2007, compared with $0.5 billion and $0.4 billion in 2006 and 2005, respectively. The funded status of our postretirement benefit plans and future effects on operating results depend on economic conditions and investment performance. See notes 6 and 7 for additional information about funded status, components of earnings effects and actuarial assumptions. See the Critical Accounting Estimates section for discussion of pension assumptions. GE OTHER COSTS AND EXPENSES are selling, general and adminis- trative expenses. These costs were 14.0%, 14.7% and 14.6% of total GE sales in 2006, 2005 and 2004, respectively. ge 2006 annual report 49
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