GE

General Electric Company (GE) 2008 10-K Summary

Business Context and Reporting Period

This report covers the fiscal year ended December 31, 2008. General Electric is a diversified technology, media, and financial services corporation operating in over 100 countries with approximately 323,000 employees. The company is organized into five primary operating segments: Energy Infrastructure, Technology Infrastructure, NBC Universal, Capital Finance (GE Capital), and Consumer & Industrial. The reporting period was characterized by unprecedented volatility in global financial and credit markets, significantly impacting GE Capital's operations and funding costs.

Key Financial Metrics

Note: Consolidated revenues include GECS revenues. Industrial operating profit excludes GECS earnings.

Material Changes vs. Prior Period

• Financial Services Deterioration: GE Capital earnings fell 29% to $8.6 billion due to a $1.9 billion increase in the provision for losses on financing receivables, lower investment income, and mark-to-market losses. Delinquency rates on consumer financing receivables rose to 7.47% from 5.38% in 2007.
• Industrial Resilience: Despite the global economic slowdown, industrial segments (Energy, Technology, NBC, Consumer) grew operating profit by 5.4%. Energy Infrastructure revenues rose 26% and Technology Infrastructure revenues rose 8%.
• Liquidity Position: Cash and equivalents surged to $48.2 billion, up $32.5 billion from 2007, driven by a $15 billion equity offering (common and preferred stock) in October 2008 and a reduction in commercial paper borrowings.
• Discontinued Operations: The company reported a loss of $679 million from discontinued operations, primarily related to the sale of GE Money Japan and the WMC mortgage business.

Guidance, Outlook, and Risks

• Outlook: Management expects the challenging credit and economic environment to continue affecting earnings in 2009. The company plans to reduce GE Capital's asset levels and commercial paper exposure. A 2009 funding plan anticipates approximately $45 billion of senior, unsecured long-term debt issuance.
• Credit Ratings: Standard & Poor's affirmed GE's "AAA" rating but revised the outlook to "negative." Moody's placed the long-term ratings on review for possible downgrade in January 2009 due to uncertainty regarding GE Capital's asset quality.
• Key Risks:
  • Liquidity and Funding: Continued volatility in credit markets could increase funding costs or limit access to capital.
  • Asset Quality: Rising unemployment and housing market declines could lead to further increases in loan loss provisions and write-downs.
  • Legal Proceedings: Ongoing SEC investigations regarding accounting practices (derivatives, revenue recognition) and antitrust investigations into municipal finance sales.
  • Real Estate: Significant exposure to commercial and residential real estate markets, with carrying values exceeding estimated values by approximately $4 billion in the Capital Finance Real Estate portfolio.

Investor Verification Checklist

• GE Capital Asset Quality: Verify the adequacy of the $5.3 billion allowance for losses on financing receivables against rising delinquency rates (2.1% of total portfolio).
• Investment Securities Impairment: Review the $5.4 billion in unrealized losses on debt securities, specifically the exposure to subprime residential mortgage-backed securities ($1.3 billion) and commercial mortgage-backed securities.
• Real Estate Valuation: Assess the $4 billion gap between the carrying value and estimated value of the Capital Finance Real Estate investment portfolio.
• Legal Contingencies: Monitor the status of the SEC investigation and potential civil injunctive actions regarding accounting practices.
• Dividend Sustainability: Evaluate the ability to maintain the quarterly dividend of $0.31 per share given the reduced dividend payout ratio from GE Capital (reduced from 40% to 10% of earnings).