management’s discussion and analysis Delinquency rates at Commercial Finance decreased from December 31, 2004, through December 31, 2006, primarily resulting from improved credit quality across all portfolios. Delinquency rates at GE Money decreased from December 31, 2005, to December 31, 2006, as a result of improvements in our European secured fi nancing business, partially offset by the weakening U.S. dollar at the end of the year. The increase from December 31, 2004, to December 31, 2005, reflected higher delinquencies in our European secured fi nancing business, a business that tends to experience relatively higher delinquencies but lower losses than the rest of the consumer portfolio. See notes 13 and 14. OTHER GECS RECEIVABLES totaled $21.9 billion at December 31, 2006, and $18.6 billion at December 31, 2005, and consisted pri- marily of amounts due from GE (generally related to certain material procurement programs), insurance receivables, nonfi nancing customer receivables, amounts due under operating leases, receivables due on sale of securities and various sundry items. PROPERTY, PLANT AND EQUIPMENT amounted to $75.0 billion at December 31, 2006, up $7.4 billion from 2005, primarily refl ecting acquisitions of commercial aircraft at the Aviation Financial Services business of Infrastructure and the consolidation of GE SeaCo at the Equipment Services business of Industrial during the second quarter of 2006. GE property, plant and equipment consisted of investments for its own productive use, whereas the largest element for GECS was equipment provided to third parties on operating leases. Details by category of investment are presented in note 15. GE expenditures for plant and equipment during 2006 totaled $3.4 billion, compared with $2.8 billion in 2005. Total expendi- tures for the past five years were $13.1 billion, of which 30% was investment for growth through new capacity and product development 35% was investment in productivity through new equipment and process improvements and 35% was investment for other purposes such as improvement of research and devel- opment facilities and safety and environmental protection. GECS additions to property, plant and equipment were $13.2 billion and $11.6 billion during 2006 and 2005, respectively, primarily reflecting additions of vehicles at Commercial Finance and the Equipment Services business of Industrial, and commercial aircraft at the Aviation Financial Services business of Infrastructure. INTANGIBLE ASSETS were $86.4 billion at the end of 2006, up from $81.6 billion at the end of 2005. GE intangible assets increased $2.6 billion from $57.8 billion at the end of 2005, principally as a result of goodwill and other intangible assets related to the IDX Systems Corporation and Biacore International AB acquisitions by Healthcare, the ZENON Environmental Inc. acquisition by Infrastructure, and the acquisition of iVillage Inc. by NBC Universal. This increase to intangible assets was offset by dispositions of $1.3 billion, principally as a result of the sale of Advanced Materials by Industrial. GECS intangible assets increased by $2.2 billion to $26.0 billion at December 31, 2006, principally as a result of increases in good- will and other intangible assets, primarily related to acquisitions and the weaker U.S. dollar at the end of the year. See note 16. ALL OTHER ASSETS totaled $97.1 billion at year-end 2006, an increase of $12.3 billion, reflecting increases from additional investments and acquisitions in real estate, increases in assets held for sale, partially offset by decreases in associated companies and prepaid pension assets. See note 17. BORROWINGS amounted to $433.0 billion at December 31, 2006, compared with $370.4 billion at the end of 2005. GE total borrowings were $11.3 billion at year-end 2006 ($2.2 billion short term, $9.1 billion long term) compared with $10.2 billion at December 31, 2005. GE total debt at the end of 2006 equaled 8.7% of total capital compared with 8.1% at the end of 2005. GECS borrowings amounted to $426.3 billion at December 31, 2006, of which $173.3 billion is due in 2007 and $253.0 billion is due in subsequent years. Comparable amounts at the end of 2005 were $362.1 billion in total, $157.7 billion due within one year and $204.4 billion due thereafter. Included in GECS total borrowings were borrowings of consolidated, liquidating securitization entities amounting to $11.1 billion and $16.8 billion at December 31, 2006 and 2005, respectively. A large portion of GECS borrowings ($100.2 billion and $97.4 billion at the end of 2006 and 2005, respectively) was issued in active commercial paper markets that we believe will continue to be a reliable source of short-term financing. The average remaining terms and interest rates of GE Capital commercial paper were 48 days and 5.09% at the end of 2006, compared with 45 days and 4.09% at the end of 2005. The GE Capital ratio of debt to equity was 7.52 to 1 at the end of 2006 and 7.09 to 1 at the end of 2005. See note 18. EXCHANGE RATE AND INTEREST RATE RISKS are managed with a variety of techniques, including match funding and selective use of derivatives. We use derivatives to mitigate or eliminate certain financial and market risks because we conduct business in diverse markets around the world and local funding is not always efficient. In addition, we use derivatives to adjust the debt we are issuing to match the fixed or floating nature of the assets we are acquiring. We apply strict policies to manage each of these risks, including prohibitions on derivatives trading, derivatives market-making or other speculative activities. Following is an analysis of the potential effects of changes in interest rates and currency exchange rates using so-called “shock” tests that model effects of shifts in rates. These are not forecasts. It is our policy to minimize exposure to interest rate changes. We fund our financial investments using debt or a combination of debt and hedging instruments so that the interest rates and terms of our borrowings match the expected yields and terms on our assets. To test the effectiveness of our positions, we assumed that, on January 1, 2007, interest rates increased by 100 basis points across the yield curve (a “parallel shift” in 60 ge 2006 annual report
management’s discussion and analysis that curve) and further assumed that the increase remained in place for 2007. We estimated, based on that year-end 2006 portfolio and holding everything else constant, that our 2007 GE consolidated net earnings would decline by $0.2 billion. It is our policy to minimize currency exposures and to conduct operations either within functional currencies or using the protection of hedge strategies. We analyzed year-end 2006 consolidated currency exposures, including derivatives desig- nated and effective as hedges, to identify assets and liabilities denominated in other than their relevant functional currencies. For such assets and liabilities, we then evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. This analysis indicated that there would be an inconsequential effect on 2007 earnings of such a shift in exchange rates. Consolidated Statement of Changes in Shareowners’ Equity Shareowners’ equity increased by $3.0 billion and $31.2 billion in 2006 and 2004, respectively, and decreased by $1.6 billion in 2005. Changes over the three-year period were largely attributable to net earnings, partially offset by dividends declared of $10.7 billion, $9.6 billion and $8.6 billion in 2006, 2005 and 2004, respectively. In 2006, we purchased $7.8 billion of GE stock (229.4 million shares) and in 2005, we purchased $5.3 billion of GE stock (153.3 million shares) under our $25 billion share repurchase program. In 2004, we issued 341.7 million shares of stock in connection with the Amersham acquisition, which increased equity by $10.7 billion, and 119.4 million shares of stock to partially fund the combination of NBC and VUE, which increased equity by $3.8 billion. Currency translation adjustments increased equity by $3.6 billion in 2006 and $3.9 billion in 2004, compared with a $4.3 billion decrease in 2005. Changes in currency translation adjustments refl ect the effects of changes in currency exchange rates on our net invest- ment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar. As of December 31, 2006, the U.S. dollar was weaker than the pound sterling and the euro and slightly stronger than the Japanese yen. As of December 31, 2005, the U.S. dollar was stronger than the pound sterling, the euro and the Japanese yen. As of December 31, 2004, the pound sterling, the euro and to a lesser extent, Asian currencies were stronger than the U.S. dollar. See note 23. Accumulated currency translation adjustments affect net earnings only when all or a portion of an affiliate is disposed of or substantially liquidated. Overview of Our Cash Flow from 2004 through 2006 GE cash from operating activities (CFOA) is a useful measure of performance for our non-financial businesses and totaled $24.6 billion in 2006, $21.6 billion in 2005 and $15.2 billion in 2004. Generally, factors that affect our earnings for example, pricing, volume, costs and productivity affect CFOA similarly. However, while management of working capital, including timing of collections and payments and levels of inventory, affects operating results only indirectly, the effect of these programs on CFOA can be signifi cant. GE CUMULATIVE CASH FLOWS 2002–2006 2002 2003 2004 2005 2006 (In $ billions) 84 60 38 23 A. Cash flows from operating activities 10 B. Dividends paid C. Shares repurchased ($) Our GE Statement of Cash Flows shows CFOA in the required format. While that display is of some use in analyzing how various assets and liabilities affected our year-end cash positions, we believe that it is also useful to supplement that display and to examine in a broader context the business activities that provide and require cash. December 31 (In billions) 2006 2005 2004 Operating cash collections $ 98.2 $ 89.9 $ 81.6 Operating cash payments (83.4) (76.1) (69.5) Cash dividends from GECS 9.8 7.8 3.1 GE cash from operating activities $ 24.6 $ 21.6 $ 15.2 The most significant source of cash in CFOA is customer-related activities, the largest of which is collecting cash following a product or services sale. GE operating cash collections increased by $8.3 billion during both 2006 and 2005. These increases are consistent with the changes in comparable GE operating segment revenues, comprising Healthcare, NBC Universal and the industrial businesses of the Industrial and Infrastructure segments. Analyses of operating segment revenues discussed in the preceding Segment Operations section is the best way of understanding their customer-related CFOA. The most significant operating use of cash is to pay our suppliers, employees, tax authorities and others for the wide range of materials and services necessary in a diversifi ed global organization. GE operating cash payments increased by $7.3 billion in 2006 and by $6.6 billion in 2005, comparable to the increases in GE total costs and expenses. Dividends from GECS represented distribution of a portion of GECS retained earnings, including proceeds from certain business sales, and are distinct from cash from continuing operating activities within the financial services businesses, which increased in 2006 by $2.1 billion to $21.9 billion and decreased in 2005 by $0.7 billion to $19.8 billion. The amount we show in CFOA is the total dividend, including the normal dividend as well as any special dividends from excess capital primarily resulting from GECS business sales. ge 2006 annual report 61
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