Securities and Exchange CommissionWashington, D.C. 20549
Form 10-Q
OR
(Registrant's telephone number, including area code) (203) 373-2211
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No __
There were 9,949,471,000 shares with a par value of $0.06 per share outstanding at June 28, 2002.
General Electric Company
Forward Looking Statements
This document includes certain "forward–looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in global political, economic, business, competitive, market and regulatory factors.
See notes to condensed consolidated financial statements. Consolidating information is shown for "GE" and "GECS." June 30, 2002, information is unaudited. Transactions between GE and GECS have been eliminated from the "consolidated" columns.
See notes to condensed consolidated financial statements
1. The accompanying condensed quarterly financial statements represent the consolidation of General Electric Company and all companies which it directly or indirectly controls, either through majority ownership or otherwise. Reference is made to note 1 to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2001. That note discusses consolidation and financial statement presentation. As used in this report on Form 10-Q (Report) and in the Annual Report on Form 10-K, "GE" represents the adding together of all affiliated companies except General Electric Capital Services, Inc. (GECS), which is presented on a one-line basis; GECS consists of General Electric Capital Services, Inc. and all of its affiliates; and "consolidated" represents the adding together of GE and GECS with the effects of transactions between the two eliminated. Certain prior year amounts have been reclassified to conform to the current period's presentation.
2. The condensed consolidated quarterly financial statements are unaudited. These statements include all adjustments (consisting of normal recurring accruals) considered necessary by management to present a fair statement of the results of operations, financial position and cash flows. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.
3. The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) 142,Goodwill and Other Intangible Assets, generally became effective for GE and GECS on January 1, 2002. Under SFAS 142, goodwill is no longer amortized but is tested for impairment using a fair value methodology.
GE and GECS ceased amortizing goodwill effective January 1, 2002. Simultaneously, to maintain a consistent basis for its measurement of performance, management revised previously-reported segment information to correspond to the earnings measurements by which businesses were to be evaluated. Accordingly, goodwill amortization is now treated as a corporate rather than a segment cost. Other measurement changes relate to the GE pension and other retiree benefit plans, whose effects are now reported at the corporate level, and allocation to segments of other selected costs previously reported at the corporate level. GECS previously-reported segment information has also been revised to reflect changes effective as of January 1, 2002, in GECS internal organization. GECS Asia/Pacific operations previously managed by region are now managed and reported by the respective operating business. Also, certain businesses previously in separate segments are now reviewed directly by the GECS chief operating decision maker, and are therefore designated by GECS as operating segments. Because none of these operating segments qualifies as a GECS reporting segment, they have been combined for reporting purposes and are presented in "All Other GECS."
Goodwill amortization expense for the second quarter ended June 30, 2001, was $138 million ($133 million after tax) and $172 million ($134 million after tax) for GE and GECS, respectively. Goodwill amortization expense for the six months ended June 30, 2001, was $259 million ($244 million after tax) and $346 million ($273 million after tax) for GE and GECS, respectively. The effects on earnings and earnings per share of excluding such goodwill amortization from the second quarter and first six months of 2001 follow.
Second quarter ended June 30
Consolidated
GE
GECS
(Dollars, except per-share amounts in millions)
2002
2001
Net earnings, as reported
$
4,426
3,897
1,327
1,477
Net earnings, excluding 2001 goodwill amortization
4,164
1,611
Diluted
Basic
Earnings per share, as reported
0.44
0.39
0.45
Earnings per share, excluding 2001 goodwill amortization
0.41
0.42
Six months ended June 30
Earnings before accounting changes, as
reported
7,944
6,914
2,984
2,878
Earnings before accounting changes, excluding 2001 goodwill amortization
7,431
3,151
6,929
6,470
1,969
2,709
6,987
2,982
Earnings per share before accounting changes, as reported
0.79
0.69
0.80
0.70
Earnings per share before accounting changes, excluding 2001 goodwill amortization
0.74
0.75
0.64
0.65
Under SFAS 142, GE and GECS were required to test all existing goodwill for impairment as of January 1, 2002, on a "reporting unit" basis. A reporting unit is the operating segment unless, at businesses one level below that operating segment (the "component" level), discrete financial information is prepared and regularly reviewed by management, in which case such component is the reporting unit.
A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value. Fair values were established using discounted cash flows. When available and as appropriate, comparative market multiples were used to corroborate discounted cash flow results.
The result of testing goodwill of GE and GECS for impairment in accordance with SFAS 142, as of January 1, 2002, was a non-cash charge of $1.204 billion ($1.015 billion after tax, or $0.10 per share), which is reported in the caption "Cumulative effect of accounting changes." Substantially all of the charge relates to GECS IT Solutions business and the GECS GE Auto and Home business, a direct subsidiary of GE Financial Assurance. The primary factors resulting in the impairment charge were the difficult economic environment in the information technology sector and heightened price competition in the auto insurance industry. No impairment charge was appropriate under the FASB's previous goodwill impairment standard, which was based on undiscounted cash flows.
Intangibles Subject to Amortization
(Dollars in millions)
AtJune 30, 2002
AtDecember 31, 2001
GrossCarryingAmount
AccumulatedAmortization
Patents, licenses and other
$1,926
$(458)
$960
$(382)
Capitalized software
2,461
(1,040)
2,353
(918)
Total GE
4,387
(1,498)
3,313
(1,300)
Present value of
future profits (PVFP)
5,752
(3,434)
5,504
(3,306)
1,389
(500)
1,307
(406)
Mortgage servicing assets
3,942
(3,081)
3,768
(2,629)
All other
851
(498)
1,092
(506)
Total GECS
11,934
(7,513)
11,671
(6,847)
Total
$16,321
$(9,011)
$14,984
$(8,147)
Consolidated amortization expense related to intangible assets, excluding goodwill for the quarters ended June 30, 2002 and 2001, was $568 million ($117 million for GE and $451 million for GECS) and $437 million ($55 million for GE and $382 million for GECS), respectively. Consolidated amortization expense related to intangible assets, excluding goodwill for the six months ended June 30, 2002 and 2001, was $918 million ($197 million for GE and $721 million for GECS) and $731 million ($110 million for GE and $621 million for GECS), respectively. The estimated percentage of the December 31, 2001, PVFP balance to be amortized over each of the next five years follows:
13.0
%
2003
10.5
2004
8.9
2005
7.6
2006
6.3
Amortization expense for PVFP in future periods will be affected by acquisitions, realized capital gains/losses or other factors affecting the ultimate amount of gross profits realized from certain lines of business. Similarly, future amortization expense for other intangibles will depend on acquisition activity and other business transactions.
Goodwill
Goodwill balances follow:
Balance12/31/01
TransitionImpairment
Acquired
ForeignExchangeand Other
Balance6/30/02
Aircraft Engines
$1,916
$ --
$345
$ 11
$2,272
Appliances
234
--
(11)
223
Industrial Products and Systems
1,357
949
6
2,312
Materials
1,923
1,474
(21)
3,376
NBC
2,568
2,386
4,954
Power Systems
1,948
689
58
2,695
Technical Products and Services
2,408
278
16
2,702
12,354
6,121
59
18,534
15,933
(1,204)
2,756
389
17,874
$28,287
$(1,204)
$8,877
$448
$36,408
4. At January 1, 2001, GE and GECS adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Under SFAS 133, all derivative instruments are recognized in the statement of financial position at their fair values. The cumulative effect of adopting this standard was a one-time reduction of net earnings in the first quarter of 2001 of $324 million ($0.03 per share) and comprised two significant elements: one element represented the fair value of equity options embedded in loans that provided both GE and the borrower the right, but not the obligation, to convert the loans into shares of the borrower's stock; the second element of the transition effect was a portion of the effect of marking to market options and currency contracts used for hedging. Also at January 1, 2001, GE and GECS adopted the consensus of the Emerging Issues Task Force of the FASB on accounting for impairment of beneficial interests (EITF 99-20). Under this consensus, impairment of certain beneficial interests in securitized assets must be recognized when the asset's fair value is below its carrying value and it is probable that there has been an adverse change in estimated cash flows. The cumulative effect of adopting EITF 99-20 was a one-time reduction of net earnings in the first quarter of 2001 of $120 million ($0.01 per share).
5. A summary of increases/(decreases) in share owners' equity that do not result directly from transactions with share owners, net of income taxes, follows:
Second quarter ended
6/30/02
6/30/01
Net earnings
Investment securities -- net changes in value
779
(938
)
Currency translation adjustments
556
(171
Derivatives qualifying as hedges -- net changes in value
(759)
343
5,002
3,131
Six months ended
332
71
151
(27
(396)
(213
Cumulative effect on equity of adopting SFAS 133
(827
7,016
5,474
6. Inventories consisted of the following:
At
12/31/01
Raw materials and work in process
4,955
4,708
Finished goods
4,258
3,951
Unbilled shipments
320
312
Revaluation to LIFO
(660
(676
Total GE inventories
8,873
8,295
266
270
9,139
8,565
7. Property, plant and equipment (including equipment leased to others) -- net, consisted of the following:
Original cost
32,258
31,232
43,126
40,055
75,384
71,287
Accumulated depreciation and amortization
19,072
18,433
11,841
10,714
30,913
29,147
Property, plant and equipment -- net
13,186
12,799
31,285
29,341
44,471
42,140
8. GE's authorized common stock consisted of 13,200,000,000 shares, having a par value of $0.06 each. Information related to the calculation of earnings per share follows.
(Dollar amounts and shares in millions;
per-share amounts in dollars)
Consolidated operations
Net earnings available to common share owners
Dividend equivalents -- net of tax
3
Net earnings available for per-share calculation
4,429
3,900
Average equivalent shares
Shares of GE common stock
9,942
9,936
Employee compensation-related shares, including stock options
87
129
Total average equivalent shares
10,029
10,065
Net earnings per share
Earnings before accounting changes
Earnings before accounting changes for per-share calculation
7,950
6,920
Cumulative effect of accounting changes
(1,015
(444
6,935
6,476
9,937
9,935
95
131
10,032
10,066
Per-share amounts
(0.10
(0.05
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
A. Results of Operations -- Second Quarter of 2002 Compared With Second Quarter of 2001
General Electric Company's earnings rose 14% to $4.426 billion from $3.897 billion in the second quarter of 2001, and earnings per share increased 13% to $0.44. Both earnings and earnings per share were records for the quarter. Power Systems, NBC, Medical Systems and Appliances had double-digit operating profit growth and eight GE Capital businesses had double-digit net earnings growth. Earnings reflect $358 million from a favorable settlement with the Internal Revenue Service of a dispute regarding exports from Aircraft Engines since 1979; a $70 million after-tax benefit from the termination of Power Systems gas turbine orders; approximately $350 million of after-tax adjustments to estimates of prior-year loss events at Employers Reinsurance Corporation (ERC), a direct subsidiary of GE Global Insurance Holdings, which resulted in a quarterly loss for GE Global Insurance Holdings of $236 million; and a $110 million after-tax loss to recognize impairment of WorldCom, Inc. bonds.
Revenues rose 4% over the second quarter of 2001 to $33.214 billion. GE industrial revenues grew 10%, with double-digit growth at Power Systems, Medical Systems, Appliances and Specialty Materials. Revenues at GE Capital Services (GECS) declined 4% because of the revenue effects of ERC and portfolio losses including the impairment of WorldCom, Inc. bonds.
Acquisitions contributed $215 million to earnings in the second quarter of 2002 compared with approximately $25 million in the comparable 2001 period. For purposes of this discussion, only earnings during the first 12 months following the quarter in which the acquisition is completed are considered to be related to acquired companies.
GE's second-quarter operating margin was 21.2%, up from last year's 20.6%, reflecting continuing productivity gains.
Cash generated from GE's operating activities, excluding progress collections, was $6.1 billion in the first half of 2002, up 12% from $5.4 billion last year. Progress collections are primarily payments received from customers in advance of the sale of heavy-duty gas turbines and aircraft engines. Excluding progress payments from operating activities portrays cash flow as if collections occurred at the time of sale. Reported cash flow from GE's operating activities was $3.5 billion which, reflecting the record progress collections in 2001, was 55% lower than last year's $7.8 billion. GE returned $4.7 billion to shareowners in the first half of 2002 through $3.6 billion in dividends and $1.1 billion in shares repurchased.
Segment Analysis:
The comments that follow compare revenues and segment profit by operating segment for the second quarters of 2002 and 2001.
• Aircraft Engines reported revenues of $2.764 billion, 10% lower than the second quarter of 2001, reflecting reduced commercial engine sales and servicing revenues partially offset by increased military sales. Operating profit increased to $566 million, 3% over the second quarter of 2001, reflecting continued base cost productivity that offset the effects of lower volume and unfavorable product mix.
• Appliancesrevenues of $1.600 billion rose 14% over the second quarter of 2001 as new products continued to gain market share, more than offsetting lower selling prices. Operating profit increased 28% to $119 million largely as a result of volume, continued base cost productivity and lower material costs, which more than offset decreases in selling prices.
• Industrial Products and Systems
Revenues
Industrial Systems
1,273
1,220
Lighting
532
604
Transportation Systems
594
572
GE Supply
626
586
Total revenues
3,025
Operating profit
160
29
78
124
122
28
22
Total operating profit
310
382
Industrial Products and Systems reported a 1% increase in revenues and a 19% decrease in operating profit primarily as a result of lower selling prices across the businesses. Industrial Systems revenues were 4% higher than in the second quarter of 2001 reflecting contributions from acquisitions that more than offset lower volume and sharply lower selling prices. Industrial Systems operating profit was 19% lower than last year primarily because of sharply lower selling prices. Lighting continued to experience lower volumes and pricing which adversely affected revenues -- down 12% and operating profit -- 63% lower than last year. Transportation System's operating profit rose 2% on 4% higher revenue reflecting the effect of acquisitions. GE Supply reported an operating profit increase of $6 million on revenues that were 7% higher reflecting higher volume, lower material costs and productivity which offset the effect of lower prices.
• Materials
Plastics
1,420
1,363
Specialty Materials
608
493
2,028
1,856
275
334
94
97
369
431
Materials revenues were up 9% from last year's first quarter as volume increases, including revenues from acquired businesses, more than offset continued weakness in pricing. Operating profit decreased 14% principally as a result of lower pricing that more than offset higher volumes and lower material costs. Plastics experienced continued pricing pressure that accounted for most of an 18% decline in operating profit. Specialty Materials revenue increased 23% primarily as a result of acquisition volume. Operating profit in the second quarter of 2002 was 3% lower than last year as pricing and lower productivity offset the benefits of higher volumes and lower material costs.
• NBCreported a 9% increase in revenues compared with the second quarter of 2001, primarily reflecting improved performance in the advertising market, the Telemundo acquisition and the absence of a counterpart to a one-time charge related to the shutdown of the XFL in 2001. Operating profit increased 11% reflecting improved performance in the advertising market, productivity improvements and absence of the XFL charge.
• Power Systems revenues increased 27%, primarily as a result of higher volume in gas turbines (109 vs. 90 in 2001), growth in services, higher selling prices and contract cancellation fees of $162 million. Operating profit rose 66%, reflecting the combined effects of higher volume, productivity, improved selling prices and contract cancellation fees, net of related costs.
• Technical Products and Services
Medical Systems
2,212
1,960
Global eXchange Services
104
188
2,316
2,148
401
356
10
67
411
423
Technical Products and Services revenues increased 8% from the second quarter of 2001, primarily as a result of 13% revenue and operating profit growth at Medical Systems, which reported higher equipment volume, including acquisitions, and continued growth in services. Operating profit for the segment fell 3% in the second quarter, reflecting the absence in 2002 of a counterpart to a gain on disposition of a joint venture at Global eXchange Services in 2001.
• GE Capital Services
Consumer Services
5,330
5,618
Equipment Management
1,733
1,768
Mid-Market Financing
2,346
1,920
Specialized Financing
784
727
Specialty Insurance
2,446
2,981
All Other
1,213
1,385
13,852
14,399
559
183
360
392
277
171
161
(50
279
72
(52
GECS net earnings for the second quarter of 2002 were $1,327 million, a $150 million (10%) decrease from the second quarter of 2001. Excluding the effect of the prior year goodwill amortization ($134 million after tax) net earnings decreased 18% reflecting approximately $350 million of after-tax adjustments to estimates of prior-year loss events at Employers Reinsurance Corporation, a direct subsidiary of GE Global Insurance Holdings, increased credit losses, $270 million lower after-tax gains from investment securities (including a $110 million after-tax impairment on WorldCom, Inc. bonds) and $55 million after-tax of lower gains on securitizations. These decreases were partially offset by contributions from acquisitions, productivity and origination growth. Contributions from acquired companies to net earnings in the second quarter of 2002 and 2001 included approximately $168 million and $20 million, respectively. Acquisitions are integrated as quickly as possible; only earnings during the first 12 months following the quarter in which the acquisition is completed are considered to be related to acquired companies.
Global Consumer Finance
1,501
1,370
GE Financial Assurance
2,817
3,198
GE Card Services
962
956
Other Consumer Services
50
323
242
53
149
176
187
7
8
Consumer Services revenues decreased 5% and net earnings decreased 5% compared with the second quarter of 2001, as the effects of acquisitions were more than offset by lower earnings at GE Financial Assurance, which reflected impairment of $167 million pre-tax ($110 million after tax) of WorldCom, Inc. bonds, decreased premium volume, and the planned transition of the restructured Toho insurance policies. GE Financial Assurance had $42 million remaining exposure to WorldCom, Inc. at June 30, 2002. Other Consumer Services revenues decreased as a result of the planned run-off of the U.S. auto finance business portfolio. Consumer Services net earnings decreased primarily as a result of losses recognized on the impairment of investments at GE Financial Assurance, as well as lower securitization gains at GE Financial Assurance and Card Services, the combination of which more than offset increased productivity at GE Financial Assurance and Global Consumer Finance, increased volume growth and acquisitions at Global Consumer Finance and volume growth at Card Services.
Aviation Services (GECAS)
683
589
Americom
118
Other Equipment Management
1,050
1,061
117
155
34
66
Equipment Management revenues and net earnings decreased 2% and 49%, respectively, in the second quarter of 2002, compared with the corresponding period in 2001, reflecting the absence of a counterpart to 2001 Americom revenues following its divestiture in the fourth quarter of 2001, partially offset by volume growth at GECAS. The decrease in net earnings is attributable to prior year tax benefits from restructuring at Penske (included in Other Equipment Management), decreased gains from asset sales at GECAS and the divestiture of Americom, partially offset by volume growth and acquisitions at GECAS. As a result of the divestiture of Americom, GECS received an equity interest in SES Global, which is included in the Specialized Financing operating activity.
Commercial Equipment Financing
1,170
997
Commercial Finance
554
436
Vendor Financial Services
487
Other Mid-Market Financing
68
165
119
138
92
74
62
15
4
Mid-Market Financing revenues and net earnings increased 22% and 42%, respectively, in the second quarter of 2002 compared with the second quarter of 2001. The increase in revenues principally reflected acquisition growth across all businesses. The increase in net earnings reflected contributions from acquisitions across all businesses, partially offset by higher credit losses at Commercial Finance, Commercial Equipment Financing and Vendor Financial Services. Other Mid-Market Financing also includes results of the Healthcare Financial Services business, which was recently launched primarily from assets acquired in the October 2001, acquisition of Heller Financial, Inc. ("Heller").
Real Estate
557
461
Structured Finance Group
296
GE Equity
(87
(21
Other Specialized Financing
18
12
133
123
125
106
(85
(64
(2
(4
Specialized Financing revenues increased 8% in the second quarter of 2002 as a result of acquisitions at Real Estate and Structured Finance Group and revenues associated with Structured Finance Group's equity method investment in SES Global (acquired in the fourth quarter of 2001), partially offset by increased asset losses on investments at GE Equity and reduced asset gains at Structured Finance Group and Real Estate. GE Equity manages equity investments in early-stage, early growth, pre-IPO companies. Revenues at GE Equity include income, gains and losses on such investments. During the second quarter of 2002 and 2001, losses on GE Equity's investments exceeded gains and other investment income, resulting in negative revenues. Specialized Financing net earnings increased 6% as a result of acquisitions at Real Estate and volume growth and net income associated with the equity investment in SES Global at Structured Finance Group, the combination of which more than offset increased asset losses at GE Equity and reduced asset gains at Structured Finance Group.
Mortgage Insurance
256
GE Global Insurance Holdings
2,076
2,565
Other Specialty Insurance
114
146
93
(236
140
46
Specialty Insurance revenues decreased 18% in the second quarter of 2002 primarily as a result of reduced premiums resulting from approximately $325 million of pre-tax adjustments to estimates of prior-year loss events, lower investment income at GE Global Insurance Holdings and reduced gains at GE Global Insurance Holdings and Mortgage Insurance. The decrease in Other Specialty Insurance revenues related to the portfolio run-off at Mortgage Services, partially offset by increased investment gains at Financial Guaranty Insurance Company. The 118% decrease in Specialty Insurance net earnings during the second quarter of 2002 resulted from approximately $350 million of after-tax adjustments (including both reduced revenues and increased costs) to estimates of prior-year loss events, lower investment income at GE Global Insurance Holdings, and reduced investment gains at GE Global Insurance Holdings and Mortgage Insurance, partially offset by favorable development on prior year loss reserves and volume growth at Mortgage Insurance, primarily in Canada and Australia.
All Other GECS
IT Solutions
994
1,090
Other
219
295
65
(48
All Other GECS decline in revenues primarily related to reduced volume at IT Solutions, including the effects of exiting lower performing businesses. The increase in All Other GECS net earnings reflects the inclusion of a tax settlement with the Internal Revenue Service (IRS) resulting from revised IRS regulations, allowing the deductibility of previously realized losses associated with the prior disposition of Kidder Peabody preferred stock and the recovery of state tax benefits. Corporate expenses were also lower in 2002. The net earnings improvement in IT Solutions related to exiting lower performing businesses.
B. Results of Operations -- First Half of 2002 Compared With First Half of 2001
Earnings before accounting changes for the first half rose 15% to $7.944 billion and earnings per share before accounting changes increased 14% to $.79, up from last year's $.69. Earnings before accounting changes exclude the one-time, non-cash impact of adopting new accounting rules (discussed in notes 3 and 4 of this 10-Q report). Both earnings per share and earnings were records for the first half.
Consolidated revenues for the first six months of 2002 aggregated $63.7 billion, up 2% from last year. GE sales of goods and services were 8% higher, with improvements led by double-digit increases at Power Systems, NBC and Appliances. Operating profit of GE's industrial operating segments increased to $7.3 billion up from $6.3 billion in the first half of 2001, as double-digit growth in Power Systems and Appliances more than offset lower operating profit at Lighting, Plastics, Specialty Materials and Industrial Systems.
Acquisitions contributed $374 million to earnings in the first six months of 2002 compared with approximately $50 million in the comparable 2001 period.
Operating margin in the first half of 2002 was 19.8% of sales, compared with last year's 19.2%. The improvement in operating margin reflects continuing productivity gains.
The following comments compare revenues and segment profit by industry segment for the first half of 2002 with the same period of 2001.
• Aircraft Engines revenues decreased 8% from the first half of 2001, reflecting reduced commercial product service revenues partially offset by increased military sales. Following the events of September 11, product service revenues were adversely affected by reduced customer flight hours and corresponding servicing requirements, resulting in lower product service revenue during the first half of 2002. Operating profit was 4% lower primarily as a result of lower service volumes and lower pricing, partially offset by base cost and other productivity.
• Appliancesrevenues were 11% higher than last year as new products continued to gain market share, especially in the U.S. market, more than offsetting lower selling prices. Operating profit increased 17% principally as a result of volume, base cost productivity and lower material costs, which more than offset decreases in selling prices.
2,370
2,344
1,072
1,076
1,120
1,158
1,152
5,676
5,829
232
293
49
137
177
172
48
40
506
642
Industrial Products and Systems reported a 3% decrease in revenues and 21% lower operating profit primarily as a result of declines in selling prices across the businesses in the segment. Industrial Systems revenues rose 1% compared with last year reflecting contributions from acquisitions that more than offset lower volume and sharply lower selling prices. Industrial Systems' lower operating profit was principally the result of lower selling prices that offset the contributions of acquisitions. During the first half of 2002, Lighting was adversely affected by volume declines, higher advertising costs related to new product introductions and charges related to customer delinquencies, resulting in a 12% decline in revenues and a 64% drop in operating profit. Transportation operating profit rose 3% on 4% lower revenues as a result of strong variable cost productivity. Supply operating profits for the first half of 2002 increased $8 million on revenues that were about flat, reflecting lower material costs and continued variable and base cost productivity.
2,599
2,811
1,009
979
3,608
3,790
482
673
141
178
623
Materials revenues decreased 5% and operating profit declined 27% from first half of 2001 levels. Plastics revenues were 8% below the first half of 2001, primarily due to continued weakness in pricing. Operating profit declined 28% as lower raw material prices were not sufficient to offset lower pricing. Similarly at Specialty Materials, operating profit decreased 21% as higher volumes and lower material costs were more than offset by lower pricing and productivity.
• NBCreported a 25% increase in revenues compared with the first half of 2001, primarily reflecting NBC's improved performance in the advertising market, its broadcast of the Winter Olympics, the Telemundo acquisition and absence of a counterpart to a one-time charge related to the shutdown of the XFL in 2001. Operating profit increased 9% reflecting NBC's improved performance in the advertising market and absence of the XFL charge.
• Power Systems revenues increased 25%, reflecting higher volume in gas turbines (194 vs. 170 in 2001), continued growth in services, higher selling prices and contract cancellation fees of $638 million. Operating profit increased 72%, primarily as a result of the increase in volume coupled with higher selling prices, productivity and contract cancellation fees, net of related costs.
4,075
3,788
209
358
4,284
4,146
667
649
98
682
747
Technical Products and Services revenues increased 3% from the first half of 2001, principally as a result of 8% revenue growth at Medical Systems, which reported higher equipment volume, including acquisitions, and continued growth in services. Operating profit for the segment fell 9% as the growth at Medical Systems was more than offset by the absence of a counterpart to a gain on disposition of a joint venture at Global eXchange Services in 2001.
10,740
11,310
3,332
3,613
4,617
3,871
1,504
1,562
5,231
5,869
2,327
2,897
27,751
29,122
1,263
1,234
352
666
746
569
280
184
549
(147
Total earnings before accounting changes
GECS earnings before accounting changes decreased 5% to $2,984 million reflecting increased credit losses, $367 million lower after-tax gains from investment securities (including a $110 million after-tax impairment on WorldCom, Inc. bonds), approximately $385 million after-tax adjustments to estimates of prior-year loss events at Employers Reinsurance Corporation, a direct subsidiary of GE Global Insurance Holdings, and $82 million after tax of lower gains on securitizations. These decreases were partially offset by contributions from acquisitions, productivity and origination growth, as well as lower taxes. Contributions to net earnings in the first six months of 2002 and 2001 included approximately $317 million and $37 million, respectively, from acquired companies. Acquisitions are integrated as quickly as possible; only earnings during the first 12 months following the quarter in which the acquisition is completed are considered to be related to acquired companies. For purposes of this discussion, earnings before accounting changes is referred to as "net earnings."
2,971
2,688
5,800
6,298
1,865
2,078
246
643
539
226
308
387
364
23
Consumer Services net earnings increased 2% on revenues that were 5% lower compared with the first six months of 2001. Revenues decreased at GE Financial Assurance and Card Services and were partially offset by increased revenues at Global Consumer Finance. The decrease at GE Financial Assurance included impairment of $167 million pre-tax ($110 million after tax) of WorldCom, Inc. bonds, declines from the planned transition of restructured Toho insurance policies and decreased premium volume. GE Financial Assurance had $42 million remaining exposure to WorldCom, Inc. at June 30, 2002. The decrease at Card Services related to exited businesses and lower securitizations. The revenue decreases at GE Financial Assurance and Card Services were partially offset by acquisitions at all three major businesses and volume growth at Global Consumer Finance. Other Consumer Services revenues decreased as a result of the planned run-off of the U.S. auto finance business portfolio. The increase in Consumer Services net earnings reflects acquisitions and volume growth at Global Consumer Finance, volume growth at Card Services, as well as productivity at GE Financial Assurance, the combination of which was partially offset by losses recognized on the impairments of investments at GE Financial Assurance, lower securitization gains at Card Services and the planned run-off of the auto finance business portfolio.
1,251
1,105
355
2,081
2,153
212
285
Equipment Management revenues decreased 8% and net earnings decreased 47% in the first six months of 2002 compared with the corresponding period in 2001. The decrease in revenues principally reflected the divestiture of Americom in the fourth quarter of 2001, partially offset by volume growth and acquisitions at GECAS. The decrease in net earnings principally reflected the divestiture of Americom, prior year tax benefits from restructuring at Penske (included in Other Equipment Management), and decreased gains from asset sales at GECAS, the combination of which more than offset volume growth and acquisitions at GECAS. As a result of the divestiture of Americom, GECS received an equity interest in SES Global, which is included in the Specialized Financing operating activity.
2,251
1,953
1,164
960
1,089
958
113
333
239
245
205
27
Mid-Market Financing revenues and net earnings increased 19% and 31%, respectively, in the first six months of 2002 compared with the first six months of 2001. The increase in revenues principally reflected acquisitions across all businesses, partially offset by decreased market interest rates. Growth in net earnings reflected the results of acquisitions across all businesses, partially offset by reduced asset gains at Commercial Finance and higher credit losses at Commercial Finance, Commercial Equipment Financing and Vendor Financial Services. Other Mid-Market Financing principally includes the results of the Healthcare Financial Services business, which was recently launched primarily from assets acquired in the October 2001, acquisition of Heller.
1,018
1,059
592
587
(142
(110
36
26
255
254
(155
(181
(5
(6
Specialized Financing revenues decreased 4% in the first six months of 2002, primarily reflecting lower market interest rates at Real Estate, lower asset gains at Structured Finance Group and increased asset losses on investments at GE Equity, partially offset by acquisitions at Real Estate and Structured Finance Group and revenues associated with Structured Finance Group's equity method investment in SES Global (acquired in the fourth quarter of 2001). GE Equity manages equity investments in early-stage, early growth, pre-IPO companies. Revenues at GE Equity include income, gains and losses on such investments. During the first six months of 2002 and 2001, losses on GE Equity's investments exceeded gains and other investment income, resulting in negative revenues. Specialized Financing net earnings increased 39% in the first six months of 2002, reflecting origination growth at Structured Finance Group, acquisitions at Real Estate and Structured Finance Group and net income associated with Structured Finance Group's equity investment in SES Global, partially offset by lower asset gains at Structured Finance Group.
536
579
4,483
5,062
228
233
217
(156
286
107
Specialty Insurance revenues decreased 11% in the first six months of 2002, primarily as a result of reduced premiums resulting from approximately $325 million of pre-tax adjustments to estimates of prior- year loss events and reduced gains at GE Global Insurance Holdings, reduced premiums associated with mortgage refinancing activities and reduced gains at Mortgage Insurance. Net earnings decreased 66% in the first six months of 2002, resulting from approximately $385 million of after-tax adjustments (including both reduced revenues and increased costs) to estimates of prior-year loss events and lower investment income at GE Global Insurance Holdings, as well as reduced gains at GE Global Insurance Holdings and Mortgage Insurance, partially offset by volume growth at Mortgage Insurance, primarily in Canada and Australia. The increase in Other Specialty Insurance was attributable to lower costs associated with the portfolio run-off at Mortgage Services and higher earned premiums at Financial Guaranty Insurance Company.
1,910
2,311
417
5
(7
45
(140
All Other GECS decline in revenues primarily related to reduced volume at IT Solutions including the effects of exiting lower performing businesses. The increase in All Other GECS net earnings reflects the inclusion of a tax settlement with the Internal Revenue Service resulting from revised IRS regulations, allowing the deductibility of previously realized losses associated with the prior disposition of Kidder Peabody preferred stock and the recovery of state tax benefits. Corporate expenses were also lower in 2002. The net earnings improvement in IT Solutions related to exiting lower performing businesses.
C. Financial Condition
With respect to the Condensed Statement of Financial Position, consolidated assets of $540.9 billion at June 30, 2002, were $45.9 billion higher than at December 31, 2001.
GE assets were $113.1 billion at June 30, 2002, an increase of $3.4 billion from December 31, 2001. The increase was primarily attributable to a $7.1 billion increase in intangible assets from acquisitions, principally Telemundo and Betz Dearborn, and an increase of $2.7 billion in all other assets offset , by an $8.8 billion decrease in cash and equivalents. During the second quarter of 2002, GE announced its intent to sell the Global eXchange Services (GXS) business. GXS assets and liabilities have therefore been classified as assets and liabilities held for sale. GXS assets approximate $265 million, primarily intangible assets, accounts receivable and property, plant and equipment, and are included in "All other assets." Related GXS liabilities approximating $80 million are included in "All other liabilities."
GECS assets increased by $35.1 billion from the end of 2001 primarily because of increases in financing receivables, all other assets and investment securities. Financing receivables, net of the allowance for losses, aggregated $185.4 billion at June 30, 2002, an increase of $11.3 billion. The increase primarily reflected the effects of higher origination volume, acquisitions and the effects of foreign currency translation, partially offset by securitizations. GECS allowance for losses on financing receivables of $5.2 billion at June 30, 2002, reflected management's best estimate of probable losses inherent in the portfolio. All other assets increased $11.0 billion at the end of the second quarter primarily due to acquisitions in separate accounts and real estate investments. Investment securities increased $6.5 billion to $106.6 billion at the end of the second quarter, primarily reflecting investment of premiums received and acquisitions. In addition, property, plant and equipment (including equipment leased to others) increased $1.9 billion to $31.3 billion at the end of the second quarter and primarily related to the acquisition of aircraft. Intangible assets increased $1.5 billion to $22.3 billion at the end of the second quarter primarily due to acquisitions, partially offset by the goodwill impairment recorded upon adoption of SFAS 142. Other GECS receivables increased $1.6 billion to $42.2 billion at the end of the second quarter primarily due to growth from the acquisitions of AGC Limited and Saison Life.
Consolidated liabilities of $476.8 billion at June 30, 2002, were $41.9 billion higher than the year-end 2001 balance. GE liabilities were relatively unchanged; GECS liabilities increased $34.0 billion.
GE total borrowings were $3.3 billion ($2.4 billion short-term and $0.9 billion long-term) at June 30, 2002, an increase of $0.7 billion from December 31, 2001. GE's ratio of debt to total capital at the end of June 2002 was 5.2% compared with 4.3% at the end of last year and 3.4% at June 30, 2001.
GECS liabilities increased by $34.0 billion reflecting an increase in long-term borrowings of $45.4 billion and a decrease in short-term borrowings of $27.1 billion from year-end 2001 as discussed in the "Liquidity" section of this report. In addition, insurance liabilities, reserves and annuity benefits increased $14.8 billion to $129.0 billion at the end of June 2002, primarily reflecting acquisition growth and growth in deferred annuities and guaranteed investment contracts. Other changes in GECS liabilities comprised numerous, relatively small items.
Consolidated cash and equivalents were $10.2 billion at June 30, 2002, an increase of $1.1 billion during the first half of 2002. Cash and equivalents were $8.0 billion at June 30, 2001, a decrease of $0.2 billion during last year's first half.
GE cash and equivalents decreased $8.8 billion during the first half of 2002 to $1.7 billion at June 30, 2002. Cash provided from operating activities was $3.5 billion during the first six months of 2002, compared with $7.8 billion in the first half of 2001, reflecting continuing improvements in earnings and lower progress collections during the period. Progress collections are primarily payments received from customers in advance of the sale of heavy-duty gas turbines and aircraft engines. Had collections occurred at the time of sale, cash provided from operating activities would have been $6.1 billion compared with $5.4 billion in 2001. Cash used for investing activities ($8.7 billion) principally resulted from investments in business acquisitions. Cash used for financing activities ($3.6 billion) included $1.1 billion for repurchases of common stock under the share repurchase program and $3.6 billion for dividends paid to share owners, a 12.5% increase in the per-share dividend rate compared with the first half of last year.
GE cash and equivalents increased $2.4 billion during the first half of 2001 to $9.6 billion at June 30, 2001. Cash provided from operating activities was $7.8 billion during the first six months of 2001, compared with $5.9 billion in the first half of 2000, reflecting continuing improvements in earnings as well as higher progress collections during the period. Cash used for investing activities ($1.0 billion) principally resulted from investments in new plant and equipment for a diverse number of projects to lower costs and improve efficiencies as well as investments in business acquisitions. Cash used for financing activities ($4.4 billion) included $1.5 billion for repurchases of common stock under the share repurchase program and $3.2 billion for dividends paid to share owners, a 17% increase in the per-share dividend rate compared with the first half of 2000.
GECS cash and equivalents increased by $1.3 billion during the first half of 2002 to $8.6 billion. Cash provided from operating activities was $8.4 billion during the first six months of 2002, compared with $10.3 billion during the first half of 2001. The decrease in cash from operating activities compared with last year was largely attributable to lack of a current year counterpart to the prior year increase in accounts payable, increases in income taxes payable and payables on purchases of investment securities. Cash from financing activities totaled $12.2 billion, reflecting net additions of debt. The principal use of GECS cash during the period was for investing activities ($19.3 billion), a majority of which was attributable to financing receivables, business acquisitions and additions to property, plant and equipment (including equipment leased to others).
GECS cash and equivalents decreased by $0.1 billion during the first half of 2001 to $6.0 billion. Cash provided from operating activities was $10.3 billion during the first six months of 2001, compared with $0.8 billion during the first half of 2000. The increase in cash from operating activities compared with last year was largely attributable to insurance policyholder redemptions in 2000 associated with the Toho acquisition. Cash from financing activities totaled $1.5 billion, reflecting net additions of debt. The principal use of GECS cash during the period was for investing activities ($11.9 billion), a majority of which was attributable to additions to property, plant and equipment (including equipment leased to others) and business acquisitions.
Liquidity
The major debt-rating agencies evaluate the financial condition of GE and of GE Capital Corporation ("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 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 cash for GE and GECS. GE Capital is the most widely-held name in those markets. GECS began the year with $117 billion of commercial paper, about 49% of GECS total debt outstanding at December 31, 2001, and at the end of the second quarter of 2002 had $83 billion of commercial paper outstanding, about 32% of GECS total debt outstanding. GECS now targets a ratio for commercial paper as a percent of outstanding debt of 25% to 35%.
As of June 30, 2002, GECS held approximately $54 billion of contractually committed lending agreements with highly-rated global banks and investment banks, an increase of $21 billion since December 31, 2001. When considering the contractually committed lending agreements as well as other sources of liquidity, including medium and long-term funding, monetization, asset securitization, cash receipts from GECS lending and leasing activities, short-term secured funding on global assets, and potential asset sales, management believes it could achieve an orderly transition from commercial paper in the unlikely event of impaired access to the commercial paper market.
During the first half of 2002, GECS issued approximately $58 billion of long-term debt in U.S. and international markets. These funds were used primarily to reduce the amount of commercial paper outstanding, fund maturing long-term debt, and fund acquisitions and asset growth. GECS anticipates issuing approximately $20 billion to $40 billion of additional long-term debt using both U.S. and international markets during the remainder of 2002. The proceeds from such issuances will be used to fund maturing long-term debt, additional acquisitions and asset growth. The ultimate amount of debt issuances will depend upon the growth in assets, acquisition activity, availability of markets and movements in interest rates.
GE and GECS use special purpose entities as described in the December 31, 2001, Annual Report on Form 10-K. Receivables held by special purpose entities as of June 30, 2002 and December 31, 2001, were $44.4 billion and $43.0 billion, respectively, and the maximum amount of liquidity support for commercial paper outstanding was about the same at $43.3 billion. The maximum recourse provided under credit support agreements increased from $14.5 billion at December 31, 2001, to $15.1 billion at June 30, 2002.
GECS Portfolio Quality
Financing receivablesis 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 $190.6 billion at June 30, 2002, from $178.8 billion at the end of 2001, primarily reflecting acquisitions, as well as the effects of foreign currency translation of financing receivables, in excess of securitizations. The related allowance for losses at June 30, 2002 amounted to $5.2 billion ($4.8 billion at the end of 2001) and represents GECS management's best estimate of probable losses inherent in the portfolio. A discussion about the quality of certain elements of the portfolio of financing receivables 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 $60.7 billion at June 30, 2002 ($52.3 billion at December 31, 2001). Nonearning consumer receivables at June 30, 2002 were consistent with year-end 2001, at $1.5 billion, about 2.4% of outstandings at June 30, 2002 and about 2.9% of outstandings at December 31, 2001. Write-offs of consumer receivables were $0.9 billion for the first six months of both 2002 and 2001.
Commercial financing receivables, which totaled $129.9 billion at June 30, 2002 ($126.5 billion at December 31, 2001), consisted of a diverse commercial, industrial and equipment loan and lease portfolio. Related nonearning and reduced-earning receivables were $2.5 billion at June 30, 2002, about 1.9% of outstandings, compared with $1.7 billion, about 1.4% of outstandings at year-end 2001. The increase is primarily driven by nonearning and reduced-earning receivables associated with Heller of approximately $430 million; at December 31, 2001, $408 million of such loans were earning but classified as impaired. The increase also related to several bankruptcies and deal restructurings involving middle-market customers, including a significant amount related to the telecommunication industry. These receivables are generally backed by assets and are covered by reserves for probable losses. Such reserves are based on management's best estimates and changes to these provisions will be dependent upon future associated business and economic conditions. At June 30, 2002 and December 31, 2001, the portfolio included loans and leases on commercial aircraft of $24.2 billion and $21.5 billion, respectively.
Investment securities comprise principally investment grade debt securities held by GE Financial Assurance and the GECS specialty insurance businesses and were $106.6 billion, including gross unrealized gains and losses of $2.6 billion and $2.0 billion, respectively, at June 30, 2002 ($100.1 billion, including gross unrealized gains and losses of $2.1 billion and $2.7 billion, respectively, as of December 31, 2001). Investment securities are regularly reviewed 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 and specific prospects for the issuer. Of those securities whose carrying amount exceeds fair value at June 30, 2002, and based upon application of GE' accounting policy for impairment, approximately $570 million of portfolio value is at risk of being charged to earnings in the second half of 2002. Impairment losses recognized for the first six months of 2002 were $429 million, including $334 million ($217 million after-tax) from the telecommunications and cable industries, of which $167 million ($110 million after tax) was recognized in the second quarter of 2002 due to the events relating to WorldCom, Inc.
In recent periods the telecommunication and cable industries have experienced significant volatility. GECS investments in (primarily within financing receivables and investment securities), and commitments to these industries aggregate approximately $13 billion as of June 30, 2002. These investments are subject to GE and GECS policies for reserving (on financing receivables) and other than temporary impairment, as appropriate; future losses will be dependent upon associated business and economic conditions.
Part II. Other Information
Item 1. Legal Proceedings
Environmental
As previously reported, in January 2002, the Company entered into discussions with the New York State Department of Environmental Conservation regarding potential noncompliance with the state's Clean Water Act at its Waterford, NY facility. The state alleges spills and discharges in excess of permitted limits as well as reporting violations. The state has informed the company that it is currently seeking a penalty of $1.5 million. The Company has disputed both the allegations and penalty amount. Negotiations are underway with the State.
In April 2002, the Ohio Environmental Protection Agency informed the Company that it was seeking penalties of $4.3 million for violations of the state's Clean Air Act at its Newark, OH facility. The state alleges that the site constructed air emission sources without undergoing adequate New Source Review. The matter involves conditions identified by the Company and voluntarily disclosed to the state more than 5 years ago which the Company proactively addressed with the concurrence of the State. The Company believes that the penalty demand by the state is inappropriate and unreasonable considering the history of the matter. Negotiations with the State are underway.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Share Owners of General Electric Company was held on April 24, 2002.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast with respect to such matters are as follows:
Proposals and Vote Tabulations
Votes Cast
Broker
For
Against
Abstain
Non-votes
Management Proposals
Approval of the appointment ofindependent auditors for 2002
7,896,606,625
297,096,241
54,930,336
0
Proposal to approve material terms of executive officer performance goals
7,802,890,560
346,104,521
99,638,121
Share Owner Proposals
(1)
Relating to cumulative voting
1,625,542,524
4,796,391,987
121,177,359
1,705,521,332
(2)
Relating to global warming
1,165,992,005
4,915,366,495
461,753,370
(3)
Relating to nuclear power report
362,349,198
5,844,927,778
335,834,894
(4)
Relating to report on PCB cleanup costs
1,360,500,795
4,903,418,739
279,192,336
(5)
Relating to poison pill
2,553,318,036
3,854,959,604
134,834,230
(6)
Relating to pension fund income/executive compensation
848,064,339
5,544,897,701
150,149,830
(7)
Relating to performance-based stock options
2,019,606,863
4,388,248,216
135,256,791
(8)
Related to executive severance agreements
2,458,423,421
3,850,087,784
234,600,665
Election of Directors
Director
Votes Received
Votes Withheld
James I. Cash, Jr.
7,942,670,273
305,962,929
Dennis D. Dammerman
7,920,628,859
328,004,343
Paolo Fresco
7,921,525,398
327,107,804
Ann M. Fudge
7,854,712,598
393,920,604
Claudio X. Gonzalez
7,895,543,791
353,089,411
Jeffrey R. Immelt
7,920,960,441
327,672,761
Andrea Jung
7,944,200,883
304,432,319
Kenneth G. Langone
7,920,565,094
328,068,108
Rochelle B. Lazarus
7,945,434,987
303,198,215
Scott G. McNealy
7,874,846,940
373,786,262
Sam Nunn
7,861,818,850
386,814,352
Roger S. Penske
7,854,963,478
393,669,724
Gary L. Rogers
7,920,736,573
327,896,629
Andrew C. Sigler
7,893,342,433
355,290,769
Douglas A. Warner III
7,901,554,400
347,078,802
Robert C. Wright
7,921,471,443
327,161,759
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11. Computation of Per Share Earnings* Exhibit 12. Computation of Ratio of Earnings to Fixed Charges. Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Data required by Statement of Financial Accounting Standards No. 128, Earnings per Share, is provided in note 8 to the condensed consolidated financial statements in this report.
b. Reports on Form 8-K during the quarter ended June 30, 2002.
A Form 8-K was filed on April 11, 2002, under Item 9, incorporating by reference GE's April 11, 2002, press release setting forth GE's first-quarter 2002 earnings.