A. Results of Operations
General Electric Company's consolidated financial statements represent the
combination of the industrial manufacturing and product services businesses of
General Electric Company (GE) and the financial services businesses of General
Electric Capital Corporation (GECC or Financial Services).
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 Exhibit 99(a) to this Form 10-Q Report.
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 condensed, consolidated
financial statements relates to continuing operations unless otherwise
indicated.
Overview
Earnings from continuing operations attributable to the Company increased 2% to
$3.658 billion in the second quarter of 2012 compared with $3.570 billion in the
second quarter of 2011. Earnings per share (EPS) from continuing operations
increased 3% to $0.34 in the second quarter of 2012 compared with $0.33 in the
second quarter of 2011. Operating earnings (non-GAAP measure), which excludes
non-operating pension costs, increased 7% to $4.010 billion in the second
quarter of 2012 compared with $3.751 billion in the second quarter of 2011.
Operating earnings per share (non-GAAP measure) increased 12% to $0.38 in the
second quarter of 2012 compared with $0.34 in the second quarter of 2011.
(59)
Earnings from continuing operations attributable to the Company decreased 1% to
$6.909 billion in the six months ended June 30, 2012 compared with $6.968
billion in the same period of 2011. Earnings per share (EPS) from continuing
operations increased 2% to $0.65 in the six months ended June 30, 2012 compared
with $0.64 in the six months ended June 30, 2011. Operating earnings (non-GAAP
measure), which excludes non-operating pension costs, increased 4% to $7.597
billion in the six months ended June 30, 2012 compared with $7.312 billion in
the same period of 2011. Operating earnings per share (non-GAAP measure)
increased 7% to $0.72 in the six months ended June 30, 2012 compared with $0.67
in the same period of 2011.
Earnings (loss) from discontinued operations, net of taxes, was $(0.6) billion
in the second quarter of 2012 compared with $0.2 billion in the second quarter
of 2011. In the second quarter of 2012, we recorded losses of $0.3 billion and
$0.2 billion related to the discontinued operations of GE Money Japan and WMC,
respectively. The second quarter of 2011 included a $0.3 billion gain on the
sale of Consumer Singapore. For additional information related to discontinued
operations, see Note 2 to the condensed, consolidated financial statements.
Earnings (loss) from discontinued operations, net of taxes, was $(0.8) billion
in the six months ended June 30, 2012 compared with $0.2 billion in the same
period of 2011. In the six months ended June 30, 2012, we recorded losses of
$0.4 billion related to GE Money Japan, $0.2 billion related to WMC and $0.2
billion related to the discontinued operations of our Consumer Ireland business.
The six months ended June 30, 2011 included a $0.3 billion gain on the sale of
Consumer Singapore.
Net earnings attributable to GE common shareowners decreased 16% to $3.105
billion and EPS decreased 17% to $0.29 in the second quarter of 2012 compared
with $3.689 billion and $0.35, respectively, in the second quarter of 2011.
Net earnings attributable to GE common shareowners decreased 13% to $6.139
billion and EPS decreased 12% to $0.58 in the six months ended June 30, 2012
compared with $7.047 billion and $0.66, respectively, in the same period of
2011.
Revenues of $36.5 billion in the second quarter of 2012 increased 2% compared
with the second quarter of 2011, reflecting the net effects of acquisitions and
dispositions and organic revenue growth partially offset by the stronger U.S.
dollar. Industrial sales increased 9% to $25.1 billion, primarily reflecting an
increase in organic revenue. Sales of product services (including sales of spare
parts and related services) of $10.8 billion in the second quarter of 2012
increased 2% compared with the second quarter of 2011. Financial Services
revenues decreased 8% over the comparable period of last year to $11.5 billion
as a result of organic revenue declines, primarily due to lower GE Capital
Ending Net Investment (ENI), the stronger U.S. dollar and lower gains. Other
income decreased to $0.4 billion in the second quarter of 2012 from $0.6 billion
in the same period of 2011 mainly attributable to the non-repeat of a commercial
settlement and lower gains on dispositions.
Revenues of $71.7 billion in the six months ended June 30, 2012 decreased 3%
compared with the same period of 2011, reflecting organic revenue growth.
Revenues excluding the impact of NBCU were 3% higher compared with the six
months ended June 30, 2011. Industrial sales increased 8% to $48.8 billion,
primarily reflecting an increase in organic revenue. Sales of product services
(including sales of spare parts and related services) of $21.3 billion in the
six months ended June 30, 2012 increased 6% compared with the same period of
2011. Financial Services revenues decreased 10% over the comparable period of
last year to $22.9 billion as a result of organic revenue declines, primarily
due to lower GE Capital ENI, the absence of the 2011 gain on sale of a
substantial portion of our Garanti Bank equity investment (2011 Garanti gain)
and the stronger U.S. dollar. Other income decreased to $1.0 billion in the six
months ended June 30, 2012 from $4.2 billion in the same period of 2011 mainly
attributable to the sale of NBCU in the first quarter of 2011.
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Overall, acquisitions contributed $0.8 billion and $1.1 billion to consolidated
revenues in the second quarters of 2012 and 2011, respectively. Our consolidated
earnings in the second quarters of 2012 and 2011 included an immaterial amount
and $0.1 billion from acquired businesses, respectively. We integrate
acquisitions as quickly as possible. Only revenues and earnings from the date we
complete the acquisition through the end of the fourth following quarter are
attributed to such businesses. Dispositions also affected our operations through
lower revenues of $0.3 billion and $3.7 billion in the second quarters of 2012
and 2011, respectively. The effects of dispositions on earnings were an
immaterial amount and a decrease of $0.1 billion in the second quarters of 2012
and 2011, respectively.
Overall, acquisitions contributed $2.2 billion and $1.6 billion to consolidated
revenues in the six months ended June 30, 2012 and 2011, respectively. Our
consolidated earnings in the six months ended June 30, 2012 and 2011 included
$0.1 billion and $0.1 billion from acquired businesses, respectively.
Dispositions also affected our operations through lower revenues of $4.8 billion
and $3.8 billion in the six months ended June 30, 2012 and 2011, respectively.
The effects of dispositions on earnings were a decrease of $0.6 billion and an
increase of $0.2 billion in the six months ended June 30, 2012 and 2011,
respectively.
The most significant acquisitions affecting results for the three and six months
ended June 30, 2012 were the 2011 acquisitions of Converteam and the Well
Support division of John Wood Group PLC at Energy Infrastructure.
Segment Operations
Segment profit is determined based on internal performance measures used by the
Chief Executive Officer to assess the performance of each business in a given
period. In connection with that assessment, the Chief Executive Officer may
exclude matters such as charges for restructuring; rationalization and other
similar expenses; acquisition costs and other related charges; technology and
product development costs; certain gains and losses from acquisitions or
dispositions; and litigation settlements or other charges, responsibility for
which preceded the current management team.
Segment revenues include both revenues and other income related to the segment.
Segment profit excludes results reported as discontinued operations, earnings
attributable to noncontrolling interests of consolidated subsidiaries, GECC
preferred stock dividends declared and accounting changes. Segment profit
excludes or includes interest and other financial charges and income taxes
according to how a particular segment's management is measured - excluded in
determining segment profit, which we sometimes refer to as "operating profit,"
for Energy Infrastructure, Aviation, Healthcare, Transportation and Home &
Business Solutions; included in determining segment profit, which we sometimes
refer to as "net earnings," for GE Capital.
On February 22, 2012, we merged our wholly-owned subsidiary, GECS, with and into
GECS' wholly-owned subsidiary, GECC. Our financial services segment, GE Capital,
continues to comprise the continuing operations of GECC, which now include the
run-off insurance operations previously held and managed in GECS. Unless
otherwise indicated, references to GECC and the GE Capital segment in this Form
10-Q Report relate to the entity or segment as they exist subsequent to the
February 22, 2012 merger.
On July 20, 2012, we announced that we will reorganize our Energy Infrastructure
segment into three stand-alone businesses, effective in the fourth quarter 2012.
We will begin reporting these businesses on the new basis beginning with the
fourth quarter of 2012.
Results of our formerly consolidated subsidiary, NBCU, and our current equity
method investment in NBCUniversal LLC (NBCU LLC) are reported in the Corporate
items and eliminations line on the Summary of Operating Segments.
We have reclassified certain prior-period amounts to conform to the
current-period presentation. In addition to providing information on segments in
their entirety, we have also provided supplemental information for certain
operations within the segments. Refer to the Summary of Operating Segments in
Item 1 of this Form 10-Q for a reconciliation of the total reportable segments'
profit to the consolidated net earnings attributable to the Company.
(61)
Energy Infrastructure
Three months ended June 30 Six months ended June 30
(In millions) 2012 2011 2012 2011
Revenues $ 11,919 $ 10,402 $ 23,087 $ 19,851
Segment profit $ 1,755 $ 1,552 $ 3,279 $ 2,933
Revenues
Energy $ 8,559 $ 7,184 $ 16,601 $ 14,291
Oil & Gas 3,658 3,480 7,074 6,038
Segment profit
Energy $ 1,282 $ 1,117 $ 2,464 $ 2,232
Oil & Gas 535 483 935 789
Energy Infrastructure revenues increased $1.5 billion, or 15%, to $11.9 billion
(including $0.5 billion from acquisitions), in the second quarter of 2012 as
higher volume ($2.0 billion) was partially offset by the effects of the stronger
U.S. dollar ($0.5 billion) across the segment.
Segment profit of $1.8 billion in the second quarter of 2012 increased $0.2
billion, or 13%, as increased volume ($0.3 billion) was partially offset by the
effects of the stronger U.S. dollar ($0.1 billion) across the segment.
Energy Infrastructure revenues increased $3.2 billion, or 16%, to $23.1 billion
(including $1.4 billion from acquisitions), in the six months ended June 30,
2012 as higher volume ($3.9 billion) was partially offset by the effects of the
stronger U.S. dollar ($0.6 billion) across the segment.
Segment profit of $3.3 billion in the six months ended June 30, 2012 increased
$0.3 billion, or 12%, as increased volume ($0.6 billion) was partially offset by
the effects of the stronger U.S. dollar ($0.1 billion) and decreased
productivity ($0.1 billion). Higher volume and the effects of the stronger U.S.
dollar were at both Energy and Oil & Gas. The effects of productivity were
primarily at Energy.
Aviation revenues of $4.9 billion in the second quarter of 2012 increased $0.1
billion, or 3%, due primarily to higher prices ($0.2 billion), partially offset
by lower other income ($0.1 billion). Higher revenues were driven by increased
equipment sales ($0.3 billion), which was primarily due to higher commercial
engine shipments, partially offset by lower services ($0.1 billion).
Segment profit of $0.9 billion in the second quarter of 2012 decreased 4%, as
higher inflation ($0.1 billion), lower productivity and lower other income were
partially offset by higher prices ($0.2 billion). The impact of higher equipment
revenues was more than offset by lower service revenues.
Aviation revenues of $9.7 billion in the six months ended June 30, 2012
increased $0.6 billion, or 7%, due primarily to higher volume ($0.4 billion) and
higher prices ($0.3 billion). Higher revenue was driven by increased equipment
sales ($0.7 billion), which was due to higher commercial engine shipments.
Segment profit of $1.8 billion in the six months ended June 30, 2012 decreased
1%, as higher prices ($0.3 billion) and higher volume ($0.1 billion) were offset
by higher inflation ($0.2 billion) and lower productivity ($0.2 billion). The
impact of higher equipment revenues were more than offset by lower service
revenues.
Healthcare revenues of $4.5 billion in the second quarter of 2012 were flat as
higher volume ($0.2 billion) was offset by the effects of the stronger U.S.
dollar ($0.1 billion) and lower prices ($0.1 billion). Growth in both the U.S.
and emerging markets was offset by declines in Europe.
Segment profit of $0.7 billion in the second quarter of 2012 decreased 2%,
reflecting lower prices ($0.1 billion) and higher labor inflation ($0.1
billion), partially offset by increased productivity ($0.1 billion).
(62)
Healthcare revenues of $8.8 billion in the six months ended June 30, 2012
increased $0.2 billion, or 2%, due to higher volume ($0.5 billion), partially
offset by the effects of the stronger U.S. dollar ($0.1 billion) and lower
prices ($0.1 billion). Higher revenues were due to increased equipment sales
($0.2 billion), primarily driven by growth in both the U.S. and emerging
markets.
Segment profit of $1.3 billion in the six months ended June 30, 2012 increased
3%, reflecting increased productivity ($0.2 billion) and higher volume ($0.1
billion), partially offset by lower prices ($0.1 billion) and higher labor
inflation ($0.1 billion).
Transportation revenues of $1.6 billion in the second quarter of 2012 increased
$0.3 billion, or 27%, primarily due to higher volume ($0.3 billion) related to
increased equipment sales. The increase in equipment sales was primarily driven
by an increase in locomotive sales and growth in our global mining equipment
business.
Segment profit of $0.3 billion in the second quarter of 2012 increased $0.1
billion, or 58%, primarily as a result of increased productivity ($0.1 billion),
higher volume and higher prices, reflecting an increase in equipment sales.
Transportation revenues of $2.8 billion in the six months ended June 30, 2012
increased $0.7 billion, or 33%, primarily due to higher volume ($0.7 billion)
and higher prices ($0.1 billion). The increase is related to increased equipment
sales ($0.6 billion) and services ($0.1 billion). The increase in equipment
revenue was primarily driven by an increase in locomotive sales and growth in
our global mining equipment business.
Segment profit of $0.5 billion in the six months ended June 30, 2012 increased
$0.2 billion, or 53%, as a result of increased volume ($0.1 billion) and higher
prices ($0.1 billion), primarily reflecting an increase in equipment sales.
Home & Business Solutions revenues of $2.2 billion in the second quarter of 2012
increased 2% compared with the second quarter of 2011, reflecting increases at
Appliances partially offset by lower revenues at Lighting and Intelligent
Platforms. Overall, revenues increased primarily as a result of increased
prices, ($0.1 billion).
Segment profit of $0.1 billion decreased 14% in the second quarter of 2012 as
decreased productivity ($0.1 billion), reflecting investment in new product
development, and the effects of inflation were partially offset by increased
prices ($0.1 billion).
Home & Business Solutions revenues of $4.3 billion in the six months ended June
30, 2012 increased $0.2 billion, or 4%, compared with the same period of 2011,
reflecting increases at Appliances partially offset by lower revenues at
Lighting and Intelligent Platforms. Overall, revenues increased primarily as a
result of increased prices ($0.2 billion).
Segment profit of $0.2 billion decreased 13% in the six months ended June 30,
2012 as the effects of inflation ($0.1 billion) and decreased productivity ($0.1
billion), reflecting investment in new product development, were partially
offset by increased prices ($0.2 billion).
GE Capital
Three months ended June 30 Six months ended June 30
(In millions) 2012 2011 2012 2011
Revenues $ 11,458 $ 12,440 $ 22,900 $ 25,476
Segment profit $ 2,122 $ 1,615 $ 3,914 $ 3,405
At
June 30, December 31, June 30,
(In millions) 2012 2011 2011
Total assets $ 558,804 $ 584,536 $ 605,634
(63)
Three months ended June 30 Six months ended June 30
(In millions) 2012 2011 2012 2011
Revenues
Commercial Lending and Leasing (CLL) $ 4,141 $ 4,666 $ 8,583 $ 9,274
Consumer 3,812 4,172 7,689 8,995
Real Estate 876 992 1,712 1,899
Energy Financial Services 446 365 685 710
GE Capital Aviation Services (GECAS) 1,317 1,327 2,648 2,652
Segment profit
CLL $ 626 $ 701 $ 1,311 $ 1,255
Consumer 907 1,042 1,736 2,283
Real Estate 221 (335) 277 (693)
Energy Financial Services 122 139 193 251
GECAS 308 321 626 627
At
June 30, December 31, June 30,
(In millions) 2012 2011 2011
Assets
CLL $ 185,284 $ 193,869 $ 198,223
Consumer 134,874 138,534 145,427
Real Estate 57,892 60,873 67,660
Energy Financial Services 19,559 18,357 18,092
GECAS 49,927 48,821 48,822
GE Capital revenues decreased 8% and net earnings increased 31% in the second
quarter of 2012. Revenues were reduced by $0.2 billion as a result of
dispositions. Revenues also decreased as a result of organic revenue declines,
primarily due to lower ENI, the stronger U.S. dollar and lower gains. Net
earnings increased as a result of core increases and lower impairments,
partially offset by lower gains.
GE Capital revenues decreased 10% and net earnings increased 15% in the first
six months of 2012. Revenues included $0.1 billion from acquisitions and were
reduced by $0.3 billion as a result of dispositions. Revenues also decreased as
a result of organic revenue declines, primarily due to lower ENI, the absence of
the 2011 Garanti gain and the stronger U.S. dollar. Net earnings increased as a
result of lower impairments, core increases and lower provisions for losses on
financing receivables, reflecting improved portfolio quality, partially offset
by the absence of the 2011 Garanti gain and operations.
Additional information about certain GE Capital businesses follows.
CLL revenues decreased 11% and net earnings decreased 11% in the second quarter
of 2012. Revenues were reduced by $0.1 billion as a result of dispositions.
Revenues also decreased as a result of organic revenue declines ($0.3 billion)
and the stronger U.S. dollar ($0.1 billion). Net earnings decreased reflecting
core decreases ($0.1 billion).
CLL revenues decreased 7% and net earnings increased 4% in the first six months
of 2012. Revenues were reduced by $0.2 billion as a result of dispositions.
Revenues also decreased as a result of organic revenue declines ($0.4 billion)
and the stronger U.S. dollar ($0.1 billion). Net earnings increased reflecting
lower provisions for losses on financing receivables ($0.1 billion).
(64)
Consumer revenues decreased 9% and net earnings decreased 13% in the second
quarter of 2012. Revenues decreased as a result of organic revenue declines
($0.2 billion) and the stronger U.S. dollar ($0.2 billion). The decrease in net
earnings resulted primarily from core decreases ($0.1 billion).
Consumer revenues decreased 15% and net earnings decreased 24% in the first six
months of 2012. Revenues included $0.1 billion from acquisitions and were
reduced by $0.1 billion as a result of dispositions. Revenues also decreased as
a result of the absence of the 2011 Garanti gain ($0.7 billion), organic revenue
declines ($0.4 billion) and the stronger U.S. dollar ($0.2 billion). The
decrease in net earnings resulted primarily from the absence of the 2011 Garanti
gain ($0.3 billion), core decreases ($0.2 billion), lower Garanti results ($0.1
billion) and dispositions ($0.1 billion), partially offset by lower provisions
for losses on financing receivables.
Real Estate revenues decreased 12% and net earnings were favorable in the second
quarter of 2012. Revenues decreased as a result of organic revenue declines
($0.1 billion), primarily due to lower ENI. Real Estate net earnings increased
as a result of core increases ($0.3 billion) including higher tax benefits of
$0.2 billion, lower impairments ($0.2 billion) and lower provisions for losses
on financing receivables ($0.1 billion). Depreciation expense on real estate
equity investments totaled $0.2 billion in both the second quarters of 2012 and
2011.
Real Estate revenues decreased 10% and net earnings were favorable in the first
six months of 2012. Revenues decreased as a result of organic revenue declines
($0.2 billion), primarily due to lower ENI, partially offset by increases in net
gains on property sales. Real Estate net earnings increased as a result of lower
impairments ($0.5 billion), core increases ($0.4 billion) including higher tax
benefits of $0.3 billion, and lower provisions for losses on financing
receivables ($0.1 billion). Depreciation expense on real estate equity
investments totaled $0.4 billion and $0.5 billion in the first six months of
2012 and 2011, respectively.
Energy Financial Services revenues increased 22% and net earnings decreased 12%
in the second quarter of 2012. Revenues increased primarily as a result of
organic revenue growth ($0.2 billion) including asset sales by investees and the
consolidation of an entity involved in power generating activities, partially
offset by lower gains ($0.1 billion). The decrease in net earnings resulted
primarily from lower gains ($0.1 billion), partially offset by core increases
($0.1 billion).
Energy Financial Services revenues decreased 4% and net earnings decreased 23%
in the first six months of 2012. Revenues decreased primarily as a result of
lower gains ($0.2 billion), partially offset by organic revenue growth ($0.2
billion) including asset sales by investees and the consolidation of an entity
involved in power generating activities. The decrease in net earnings resulted
primarily from lower gains ($0.1 billion), partially offset by core increases
($0.1 billion).
GECAS revenues decreased 1% and net earnings decreased 4% in the second quarter
of 2012. Revenues decreased as a result of higher impairments and lower gains,
partially offset by organic revenue growth. The decrease in net earnings
resulted primarily from higher impairments and lower gains, partially offset by
core increases.
GECAS revenues and net earnings were both flat in the first six months of 2012.
(65)
Corporate Items and Eliminations
Three months ended June 30 Six months ended June 30
(In millions) 2012 2011 2012 2011
Revenues
NBCU/NBCU LLC $ 242 $ 280 $ 429 $ 5,080
Gains on disposed businesses - - 274 -
Eliminations and other (242) (113) (683) (419)
Total $ - $ 167 $ 20 $ 4,661
Operating Profit (Cost)
Gains on disposed businesses $ - $ - $ 274 $ -
NBCU/NBCU LLC 242 280 429 3,928
Principal retirement plans(a) (832) (519) (1,603) (950)
Underabsorbed corporate overhead
and other costs (875) (445) (1,610) (1,170)
Total $ (1,465) $ (684) $ (2,510) $ 1,808
(a) Included non-operating (non-GAAP) pension income (cost) of $(0.5) billion
and $(0.3) billion in the second quarters of 2012 and 2011, respectively,
and $(1.1) billion and $(0.5) billion in six months ended June 30, 2012 and
2011, respectively, which includes interest costs, expected return on plan
assets and non-cash amortization of actuarial gains and losses. See Exhibit
99(a) of this Form 10-Q Report.
Corporate items and eliminations revenues in the second quarter of 2012
decreased $0.2 billion, primarily due to the non-repeat of a $0.2 billion prior
year commercial settlement. Corporate items and eliminations costs increased
$0.8 billion due to $0.3 billion of higher costs of our principal retirement
plans, $0.2 billion from a non-repeat of a commercial settlement, and $0.1
billion of higher global corporate costs.
Corporate items and eliminations revenues in the six months ended June 30, 2012
decreased $4.6 billion as $4.7 billion of lower NBCU/NBCU LLC related revenues
(primarily due to the non-repeat of the pre-tax gain on the NBCU transaction and
the deconsolidation of NBCU in 2011) were partially offset by $0.3 billion of
higher gains on other disposed businesses. Corporate items and eliminations
costs increased $4.3 billion as $3.5 billion of lower NBCU/NBCU LLC related
earnings, primarily from the non-repeat of the 2011 gain related to the NBCU
transaction, $0.7 billion of higher costs of our principal retirement plans,
$0.2 billion of higher research and development spending and global corporate
costs and $0.2 billion from a non-repeat of a commercial settlement were
partially offset by $0.3 billion of a gain on formation of an aviation joint
venture and $0.2 billion lower restructuring and other charges.
Certain amounts included in Corporate items and eliminations cost are not
allocated to GE operating segments because they are excluded from the
measurement of their operating performance for internal purposes. For the second
quarter of 2012, these included $0.1 billion of costs at Healthcare, primarily
technology and product development costs and restructuring, rationalization and
other charges, $0.1 billion of costs at Energy Infrastructure, primarily
acquisition-related costs, technology and product development costs and
restructuring, rationalization and other charges, $0.1 billion of costs at
Aviation, primarily technology and product development costs, and $0.1 billion
at Home and Business Solutions for product development and other costs. In the
six months ended June 30, 2012 and 2011, these included $0.3 billion of gain
related to a joint venture formation at Aviation, $0.2 billion of costs at
Energy Infrastructure, primarily acquisition-related costs, technology and
product development costs, and restructuring, rationalization and other charges,
$0.2 billion of costs at Healthcare and $0.1 billion at each of Aviation, and
Transportation, primarily technology and product development costs and
restructuring, rationalization and other charges, and $0.1 billion at Home and
Business Solutions, primarily product development and other costs.
In the second quarter of 2012, underabsorbed corporate overhead and other costs
increased $0.4 billion compared with same period of 2011, reflecting increased
costs at our global research centers and global corporate costs and a prior
year
commercial settlement.
(66)
In the six months ended June 30, 2012, underabsorbed corporate overhead and
other costs increased $0.4 billion compared with the same period of 2011,
reflecting increased costs at our global research centers and global corporate
costs and a prior year commercial settlement, partially offset by lower
restructuring and other charges (including acquisition-related costs).
Income Taxes
The consolidated provision for income taxes was an expense of $0.5 billion in
the second quarter of 2012 (an effective tax rate of 11.8%), compared with $0.9
billion for the same period of 2011 (an effective tax rate of 19.7%). Our
consolidated income tax rate decreased from the second quarter of 2011 to the
second quarter of 2012, primarily due to the benefit of the high tax basis in
the entity being sold in the Business Property disposition, and from increased
benefits from lower-taxed international operations, partially offset by a higher
adjustment in the second quarter of 2012 to bring our six month tax rate in line
with the projected full year tax rate.
The consolidated provision for income taxes was an expense of $1.1 billion in
the six months ended June 30, 2012 (an effective tax rate of 13.9%), compared
with $4.8 billion for the same period of 2011 (an effective tax rate of 40.4%).
Our consolidated income tax rate decreased from the six months ended June 30,
2011 to the six months ended June 30, 2012, primarily because of the lack of a
comparable item to the first quarter 2011 gain on NBCU, the benefit of the high
tax basis in the entity being sold in the Business Property disposition, and
from increased benefits from lower-taxed international operations.
Approximately 20 percentage points of the 26 percentage point decrease in the
consolidated effective tax rate from the six months ended June 30, 2011 to the
six months ended June 30, 2012 was due to the first quarter 2011 disposition of
NBCU. In connection with the transaction, we recognized income tax expense of
$3.2 billion on a pretax gain of $3.7 billion, reflecting the low tax basis in
our investment in the NBCU business, and the recognition of deferred tax
liabilities related to our 49% investment in NBCU LLC. As our investment in NBCU
LLC is structured as a partnership for U.S. tax purposes, U.S. taxes are
recorded separately from the equity investment.
Our effective income tax rate, excluding the NBCU disposition, 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 GECC 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 of U.S. or foreign law, including the
expiration on December 31, 2011 of the U.S. tax law provision deferring tax on
active financial services income, as discussed in Note 14 in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2011 (2011 consolidated
financial statements). If this provision is not extended, our tax rate will
increase significantly after 2012. 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.
Discontinued Operations
Three months ended June 30 Six months ended June 30
(In millions) 2012 2011 2012 2011
Earnings (loss) from discontinued
operations,
net of taxes $ (553) $ 194 $ (770) $ 229
(67)
Discontinued operations primarily comprised 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).
Results of these businesses are reported as discontinued operations for all
periods presented.
Loss from discontinued operations, net of taxes, in the three and six months
ended June 30, 2012 primarily reflect the $0.3 billion after-tax effect of
incremental reserves for excess interest claims related to our loss-sharing
arrangement on the 2008 sale of GE Money Japan and the $0.2 billion after-tax
effect of incremental reserves related to retained representation and warranty
obligations to repurchase previously sold loans on the 2007 sale of WMC. In
addition, the first six months of 2012 included a $0.2 billion loss (which
includes a $0.1 billion loss on disposal) related to Consumer Ireland.
Earnings from discontinued operations, net of taxes, in the three and six months
ended June 30, 2011 primarily reflected a $0.3 billion gain related to the sale
of Consumer Singapore and earnings from operations of Australia Home Lending of
$0.1 billion, partially offset by the loss on sale of Australian Home Lending of
$0.2 billion.
For additional information related to discontinued operations, see Note 2 to the
condensed, consolidated financial statements.
B. Statement of Financial Position
Overview of Financial Position
Major changes in our financial position for the six months ended June 30, 2012
resulted from the following:
· At GECC, repayments exceeded new issuances of total borrowings by $23.8
billion and collections on financing receivables exceeded originations by $5.8
billion at GECC;
· The U.S. dollar was stronger for most major currencies at June 30, 2012 than
at December 31, 2011, decreasing the translated levels of our non-U.S. dollar
assets and liabilities.
· GECC issued 22,500 shares of preferred stock for proceeds of $2.2 billion
during the second quarter of 2012. The effect of this issuance is reported as
a $2.2 billion increase in consolidated noncontrolling interests and
consolidated total equity.
· GECC paid $3.0 billion of dividends to GE.
Consolidated assets were $694.1 billion at June 30, 2012, a decrease of $23.1
billion from December 31, 2011. GE assets increased $3.0 billion, and Financial
Services assets decreased $25.7 billion.
GE assets were $221.0 billion at June 30, 2012, a $3.0 billion increase from
December 31, 2011 and reflect an increase in inventories of $1.6 billion and an
increase in other assets of $1.1 billion.
Financial Services assets were $558.8 billion at June 30, 2012, a $25.7 billion
decrease from December 31, 2011, and reflect a reduction of net financing
receivables ($14.9 billion), and decreases in cash and equivalents ($10.5
billion) and derivative assets ($3.9 billion).
Consolidated liabilities were $570.2 billion at June 30, 2012, a $28.9 billion
decrease from December 31, 2011. GE liabilities decreased $0.4 billion and
Financial Services liabilities decreased $28.5 billion.
GE liabilities were $100.1 billion at June 30, 2012, a $0.4 billion decrease
from December 31, 2011. The ratio of borrowings to total capital invested for GE
at June 30, 2012 was 8.8% compared with 9.0% at December 31, 2011 and 7.8%
at
June 30, 2011.
(68)
Financial Services liabilities decreased $28.5 billion from December 31, 2011 to
$478.2 billion at June 30, 2012, and reflect a $23.8 billion net reduction in
borrowings, primarily in long-term borrowings and commercial paper, consistent
with our overall reduction in assets, redemptions of guaranteed investment
contracts (GICs) at Trinity ($2.0 billion), lower factoring liabilities at CLL
($1.2 billion) and lower deposits at our banks ($0.9 billion).
Cash Flows
Consolidated cash and equivalents were $74.3 billion at June 30, 2012, a
decrease of $10.2 billion during the six months ended June 30, 2012. Cash and
equivalents totaled $91.1 billion at June 30, 2011, an increase of $12.1 billion
during the six months ended June 30, 2011.
We evaluate our cash flow performance by reviewing our industrial (non-financial
services) businesses and financial services businesses separately. Cash from
operating activities (CFOA) is the principal source of cash generation for our
industrial businesses. The industrial businesses also have liquidity available
via the public capital markets. Our financial services businesses use a variety
of financial resources to meet our capital needs. Cash for financial services
businesses is primarily provided from the issuance of term debt and commercial
paper in the public and private markets, time deposits, as well as financing
receivables, collections, sales and securitizations.
GE Cash Flow
GE cash and equivalents were $8.6 billion at June 30, 2012, compared with $13.6
billion at June 30, 2011. GE CFOA totaled $6.8 billion for the six months ended
June 30, 2012 compared with $4.4 billion for the six months ended June 30, 2011.
With respect to GE CFOA, we believe that it is useful to supplement our GE
Condensed Statement of Cash Flows and to examine in a broader context the
business activities that provide and require cash.
Six months ended June 30
(In billions) 2012 2011
Operating cash collections(a) $ 50.7 $ 44.3
Operating cash payments (46.9) (39.9)
Cash dividends from GECC 3.0 -
GE cash from operating activities (GE CFOA)(a) $ 6.8 $ 4.4
(a) GE sells customer receivables to GECC in part to fund the growth of our
industrial businesses. These transactions can result in cash generation or
cash use. During any given period, GE receives cash from the sale of
receivables to GECC. It also foregoes collection of cash on receivables
sold. The incremental amount of cash received from sale of receivables in
excess of the cash GE would have otherwise collected had those receivables
not been sold, represents the cash generated or used in the period relating
to this activity. The incremental cash generated in GE CFOA from selling
these receivables to GECC decreased GE CFOA by $0.1 billion in the six
months ended June 30, 2012 and decreased GE CFOA by $0.1 billion in the six
months ended June 30, 2011. See Note 19 to the condensed, consolidated
financial statements for additional information about the elimination of
intercompany transactions between GE and GECC.
The most significant source of cash in GE CFOA is customer-related activities,
the largest of which is collecting cash following a product or services sale. GE
operating cash collections increased by $6.4 billion during the six months ended
June 30, 2012. This increase is consistent with the comparable changes in sales
and GE current receivables.
The most significant operating use of cash is to pay our suppliers, employees,
tax authorities and others for a wide range of material and services. GE
operating cash payments increased by $7.0 billion for the six months ended June
30, 2012, consistent with the increase in total costs and expenses and changes
in accounts payable.
GE CFOA increased $2.4 billion compared with the six months ended June 30, 2011,
primarily reflecting the dividends received from GECC, partially offset by the
effects of changes in accounts payable.
(69)
Dividends from GECC, including special dividends, represent the distribution of
a portion of GECC retained earnings, and are distinct from cash from continuing
operating activities within the financial services business. The amounts we show
in GE CFOA are the total dividends, including special dividends from excess
capital. Beginning in the second quarter of 2012, GECC restarted its dividend to
GE. In addition to a dividend of $0.5 billion, GECC paid GE a special dividend
of $2.5 billion in the second quarter of 2012.
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 minimum pension funding requirements in the U.S.
We currently estimate that the change will reduce our GE Pension Plan cash
funding by approximately $2.5 billion through year-end 2013.
GECC Cash Flow
GECC cash and equivalents were $66.3 billion at June 30, 2012, compared with
$78.0 billion at June 30, 2011. GECC cash from operating activities totaled
$10.8 billion for the six months ended June 30, 2012, compared with cash from
operating activities of $9.7 billion for the same period of 2011.
Consistent with our plan to reduce GECC asset levels, cash from investing
activities was $6.9 billion during the six months ended June 30, 2012, primarily
resulting from a $5.8 billion reduction in financing receivables due to
collections exceeding originations and $2.3 billion related to net loan
repayments from our equity method investments, partially offset by $2.8 billion
of net purchases of equipment leased to others (ELTO).
GECC cash used for financing activities for the six months ended June 30, 2012
of $27.8 billion related primarily to a $23.8 billion reduction in total
borrowings, consisting primarily of reductions in long-term borrowings and
commercial paper, $3.0 billion of dividends paid to GE, $2.0 billion of
redemptions of guaranteed investment contracts at Trinity and $0.9 billion of
lower deposits at our banks, partially offset by $2.2 billion of proceeds from
the second quarter issuance of preferred stock.
Intercompany Eliminations
Effects of transactions between related companies are made on an arms-length
basis, are eliminated and consist primarily of GECC dividends to GE; GE customer
receivables sold to GECC; GECC services for trade receivables management and
material procurement; buildings and equipment (including automobiles) leased
between GE and GECC; information technology (IT) and other services sold to GECC
by GE; aircraft engines manufactured by GE that are installed on aircraft
purchased by GECC from third-party producers for lease to others; and various
investments, loans and allocations of GE corporate overhead costs. See Note 19
to the condensed, consolidated financial statements for further information
related to intercompany eliminations.
Fair Value Measurements
See Note 1 in our 2011 consolidated financial statements for disclosures related
to our methodology for fair value measurements. Additional information about
fair value measurements is provided in Note 15 to the condensed, consolidated
financial statements.
At June 30, 2012, the aggregate amount of assets that are measured at fair value
through earnings totaled $8.3 billion and consisted primarily of various assets
held for sale in the ordinary course of business, as well as equity investments.
(70)
C. Financial Services Portfolio Quality
Investment securities comprise mainly investment grade debt securities
supporting obligations to annuitants, policyholders and holders of GICs in our
run-off insurance operations and Trinity, investment securities at our treasury
operations and investments held in our CLL business collateralized by senior
secured loans of high-quality, middle-market companies in a variety of
industries. The fair value of investment securities increased to $47.9 billion
at June 30, 2012 from $47.4 billion at December 31, 2011, primarily due to the
impact of lower interest rates and additional purchases in our CLL business. Of
the amount at June 30, 2012, we held debt securities with an estimated fair
value of $47.1 billion, which included corporate debt securities, asset-backed
securities (ABS), residential mortgage-backed securities (RMBS) and commercial
mortgage-backed securities (CMBS) with estimated fair values of $27.2 billion,
$5.1 billion, $2.4 billion and $3.0 billion, respectively. Net unrealized gains
on debt securities were $4.0 billion and $3.0 billion at June 30, 2012 and
December 31, 2011, respectively. This amount included unrealized losses on
corporate debt securities, ABS, RMBS and CMBS of $0.5 billion, $0.1 billion,
$0.2 billion and $0.2 billion, respectively, at June 30, 2012, as compared with
$0.6 billion, $0.2 billion, $0.3 billion and $0.2 billion, respectively, at
December 31, 2011.
We regularly review investment securities for impairment using both qualitative
and quantitative criteria. We presently do not intend to sell the vast majority
of our debt securities that are in an unrealized loss position and believe that
it is not more likely than not that we will be required to sell the vast
majority of these securities before recovery of our amortized cost. We believe
that the unrealized loss associated with our equity securities will be recovered
within the foreseeable future.
Our RMBS portfolio is collateralized primarily by pools of individual, direct
mortgage loans (a majority of which were originated in 2006 and 2005), not other
structured products such as collateralized debt obligations. Substantially all
of our RMBS are in a senior position in the capital structure of the deals and
more than 70% are agency bonds or insured by Monoline insurers (on which we
continue to place reliance). Of our total RMBS portfolio at June 30, 2012 and
December 31, 2011, approximately $0.5 billion and $0.6 billion, respectively,
relate to residential subprime credit, primarily supporting our guaranteed
investment contracts. A majority of exposure to residential subprime credit
related to investment securities backed by mortgage loans originated in 2006 and
2005. Substantially all of the subprime RMBS were investment grade at the time
of purchase and approximately 70% have been subsequently downgraded to below
investment grade.
Our CMBS portfolio is collateralized by both diversified pools of mortgages that
were originated for securitization (conduit CMBS) and pools of large loans
backed by high quality properties (large loan CMBS), a majority of which were
originated in 2007 and 2006. The vast majority of the securities in our CMBS
portfolio have investment grade credit ratings and the vast majority of the
securities are in a senior position in the capital structure.
Our ABS portfolio is collateralized by senior secured loans of high-quality,
middle-market companies in a variety of industries, as well as a variety of
diversified pools of assets such as student loans and credit cards. The vast
majority of our ABS are in a senior position in the capital structure of the
deals. In addition, substantially all of the securities that are below
investment grade are in an unrealized gain position.
If there has been an adverse change in cash flows for RMBS, management considers
credit enhancements such as Monoline insurance (which are features of a specific
security). In evaluating the overall creditworthiness of the Monoline insurer
(Monoline), we use an analysis that is similar to the approach we use for
corporate bonds, including an evaluation of the sufficiency of the Monoline's
cash reserves and capital, ratings activity, whether the Monoline is in default
or default appears imminent, and the potential for intervention by an insurance
or other regulator.
(71)
Monolines provide credit enhancement for certain of our investment securities,
primarily RMBS and municipal securities. The credit enhancement is a feature of
each specific security that guarantees the payment of all contractual cash
flows, and is not purchased separately by GE. The Monoline industry continues to
experience financial stress from increasing delinquencies and defaults on the
individual loans underlying insured securities. We continue to rely on Monolines
with adequate capital and claims paying resources. We have reduced our reliance
on Monolines that do not have adequate capital or have experienced regulator
intervention. At June 30, 2012, our investment securities insured by Monolines
on which we continue to place reliance were $1.5 billion, including $0.3 billion
of our $0.5 billion investment in subprime RMBS. At June 30, 2012, the
unrealized loss associated with securities subject to Monoline credit
enhancement, for which there is an expected credit loss, was $0.2 billion.
Total pre-tax, other-than-temporary impairment losses during the second quarter
of 2012 were an insignificant amount, which was recognized in earnings and
primarily relates to credit losses on non-U.S. corporate securities and
other-than-temporary losses on equity securities.
Total pre-tax, other-than-temporary impairment losses during the second quarter
of 2011 were $0.1 billion which was recognized in earnings and primarily relates
to credit losses on non-U.S. corporate securities, non-U.S. government
securities and RMBS.
Total pre-tax, other-than-temporary impairment losses during the six months
ended June 30, 2012 were $0.1 billion, of which $0.1 billion was recognized in
earnings and primarily relates to credit losses on non-U.S. corporate securities
and other-than-temporary losses on equity securities.
Total pre-tax, other-than-temporary impairment losses during the six months
ended June 30, 2011 were $0.2 billion, of which $0.1 billion was recognized in
earnings and primarily relates to credit losses on non-U.S. corporate
securities, retained interests, non-U.S. government securities and RMBS.
Our qualitative review attempts to identify issuers' securities that are
"at-risk" of other-than-temporary impairment, that is, for securities that we do
not intend to sell and it is not more likely than not that we will be required
to sell before recovery of our amortized cost, whether there is a possibility of
credit loss that would result in an other-than-temporary impairment recognition
in the following 12 months. Securities we have identified as "at-risk" primarily
relate to investments in U.S. and non-U.S. corporate debt securities across a
broad range of industries, and RMBS. The amount of associated unrealized loss on
these securities at June 30, 2012, is $0.6 billion. Unrealized losses are not
indicative of the amount of credit loss that would be recognized as credit
losses are determined based on adverse changes in expected cash flows rather
than fair value. For further information relating to how credit losses are
calculated, see Note 3 in our 2011 consolidated financial statements.
Uncertainty in the capital markets may cause increased levels of
other-than-temporary impairments.
At June 30, 2012 and December 31, 2011, unrealized losses on investment
securities totaled $1.2 billion and $1.6 billion, respectively, including $1.1
billion and $1.2 billion, respectively, aged 12 months or longer. Of the amount
aged 12 months or longer at June 30, 2012, more than 65% are debt securities
that were considered to be investment grade by the major rating agencies. In
addition, of the amount aged 12 months or longer, $0.5 billion and $0.4 billion
related to structured securities (mortgage-backed and asset-backed) and
corporate debt securities, respectively. With respect to our investment
securities that are in an unrealized loss position at June 30, 2012, the
majority relate to debt securities held to support obligations to holders of
GICs. We presently do not intend to sell the vast majority of our debt
securities that are in an unrealized loss position and believe that it is not
more likely than not that we will be required to sell these securities before
recovery of our amortized cost. For additional information, see Note 3 to the
condensed, consolidated financial statements.
Financing receivables is our largest category of assets and represents one of
our primary sources of revenues. Our portfolio of financing receivables is
diverse and not directly comparable to major U.S. banks. A discussion of the
quality of certain elements of the financing receivables portfolio follows.
(72)
The majority of our consumer portfolio is non-U.S. and primarily comprises
mortgage, sales finance, auto and personal loans in various European and Asian
countries. Our U.S. consumer financing receivables comprise 17% of our total
portfolio. Of those, approximately 64% relate primarily to credit cards, which
are often subject to profit and loss sharing arrangements with the retailer (the
results of which are reflected in revenues), and have a smaller average balance
and lower loss severity as compared to bank cards. The remaining 36% are sales
finance receivables, which provide electronics, recreation, medical and home
improvement financing to customers. In 2007, we exited the U.S. mortgage
business and we have no U.S. auto or student loans.
Our commercial portfolio primarily comprises senior, secured positions with
comparatively low loss history. The secured receivables in this portfolio are
collateralized by a variety of asset classes, which for our CLL business
primarily include: industrial-related facilities and equipment, vehicles,
corporate aircraft, and equipment used in many industries, including the
construction, manufacturing, transportation, media, communications,
entertainment, and healthcare industries. The portfolios in our Real Estate,
GECAS and Energy Financial Services businesses are collateralized by commercial
real estate, commercial aircraft and operating assets in the global energy and
water industries, respectively. We are in a secured position for substantially
all of our commercial portfolio.
Losses on financing receivables are recognized when they are incurred, which
requires us to make our best estimate of probable losses inherent in the
portfolio. The method for calculating the best estimate of losses depends on the
size, type and risk characteristics of the related financing receivable. Such an
estimate requires consideration of historical loss experience, adjusted for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency
rates, financial health of specific customers and market sectors, collateral
values (including housing price indices as applicable), and the present and
expected future levels of interest rates. The underlying assumptions, estimates
and assessments we use to provide for losses are updated periodically to reflect
our view of current conditions and are subject to the regulatory examinations
process, which can result in changes to our assumptions. Changes in such
estimates can significantly affect the allowance and provision for losses. It is
possible to experience credit losses that are different from our current
estimates.
Our risk management process includes standards and policies for reviewing major
risk exposures and concentrations, and evaluates relevant data either for
individual loans or financing leases, or on a portfolio basis, as appropriate.
Loans acquired in a business acquisition are recorded at fair value, which
incorporates our estimate at the acquisition date of the credit losses over the
remaining life of the portfolio. As a result, the allowance for losses is not
carried over at acquisition. This may have the effect of causing lower reserve
coverage ratios for those portfolios.
For purposes of the discussion that follows, "delinquent" receivables are those
that are 30 days or more past due based on their contractual terms; and
"nonearning" receivables are those that are 90 days or more past due (or for
which collection is otherwise doubtful). Nonearning receivables exclude loans
purchased at a discount (unless they have deteriorated post acquisition). Under
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 310, Receivables, these loans are initially recorded at fair value and
accrete interest income over the estimated life of the loan based on reasonably
estimable cash flows even if the underlying loans are contractually delinquent
at acquisition. In addition, nonearning receivables exclude loans that are
paying on a cash accounting basis but classified as nonaccrual and impaired.
"Nonaccrual" financing receivables include all nonearning receivables and are
those on which we have stopped accruing interest. We stop accruing interest at
the earlier of the time at which collection of an account becomes doubtful or
the account becomes 90 days past due. Recently restructured financing
receivables are not considered delinquent when payments are brought current
according to the restructured terms, but may remain classified as nonaccrual
until there has been a period of satisfactory payment performance by the
borrower and future payments are reasonably assured of collection.
Further information on the determination of the allowance for losses on
financing receivables and the credit quality and categorization of our financing
receivables is provided in Notes 5 and 17.
(73)
Financing receivables Nonearning receivables Allowance for losses
June 30, December 31, June 30, December 31, June 30, December 31,
(In millions) 2012 2011 2012 2011 2012 2011
Commercial
CLL
Americas $ 77,241 $ 80,505 $ 1,739 $ 1,862 $ 662 $ 889
Europe 34,722 36,899 1,390 1,167 484 400
Asia 11,313 11,635 232 269 87 157
Other 711 436 9 11 1 4
Total CLL 123,987 129,475 3,370 3,309 1,234 1,450
Energy
Financial
Services 5,159 5,912 2 22 12 26
GECAS 12,046 11,901 56 55 32 17
Other 587 1,282 22 65 12 37
Total
Commercial 141,779 148,570 3,450 3,451 1,290 1,530
Real Estate
Debt(a) 22,409 24,501 403 541 682 949
Business
Properties(b) 5,301 8,248 227 249 105 140
Total Real Estate 27,710 32,749 630 790 787 1,089
Consumer
Non-U.S.
residential
mortgages(c) 33,826 35,550 2,720 2,870 481 546
Non-U.S.
installment
and revolving
credit 17,960 18,544 243 263 665 717
U.S. installment
and revolving
credit 45,531 46,689 773 990 1,724 2,008
Non-U.S. auto 4,740 5,691 28 43 79 101
Other 7,643 7,244 380 419 179 199
Total Consumer 109,700 113,718 4,144 4,585 3,128 3,571
Total $ 279,189 $ 295,037 $ 8,224 $ 8,826 $ 5,205 $ 6,190
(a) Financing receivables included $0.1 billion of construction loans at both
June 30, 2012 and December 31, 2011.
(b) Our Business Properties portfolio is underwritten primarily by the credit
quality of the borrower and secured by tenant and owner-occupied commercial
properties.
(c) At June 30, 2012, net of credit insurance, approximately 27% of our secured
Consumer non-U.S. residential mortgage portfolio comprised loans with
introductory, below market rates that are scheduled to adjust at future
dates; with high loan-to-value ratios at inception (greater than 90%); whose
terms permitted interest-only payments; or whose terms resulted in negative
amortization. At origination, we underwrite loans with an adjustable rate to
the reset value. Of these loans, 84% are in our U.K. and France portfolios,
which comprise mainly loans with interest-only payments, high loan-to-value
ratios at inception and introductory below market rates, have a delinquency
rate of 15%, have a loan-to-value ratio at origination of 78% and have
re-indexed loan-to-value ratios of 82% and 66%, respectively. At June 30,
2012, 8% (based on dollar values) of these loans in our U.K. and France
portfolios have been restructured.
(74)
The portfolio of financing receivables, before allowance for losses, was $279.2
billion at June 30, 2012, and $295.0 billion at December 31, 2011. Financing
receivables, before allowance for losses, decreased $15.8 billion from December
31, 2011, primarily as a result of collections exceeding originations ($5.8
billion) (which includes sales), transfers to held-for-sale ($3.6 billion),
write-offs ($3.3 billion) and the stronger U.S. dollar ($1.5 billion).
Related nonearning receivables totaled $8.2 billion (2.9% of outstanding
receivables) at June 30, 2012, compared with $8.8 billion (3.0% of outstanding
receivables) at December 31, 2011. Nonearning receivables decreased from
December 31, 2011, primarily due to write-offs and payoffs in Real Estate and
improved economic conditions in the U.S. and collections in Consumer.
The allowance for losses at June 30, 2012 totaled $5.2 billion compared with
$6.2 billion at December 31, 2011, representing our best estimate of probable
losses inherent in the portfolio. Allowance for losses decreased $1.0 billion
from December 31, 2011, primarily because provisions were lower than write-offs,
net of recoveries by $0.9 billion, which is attributable to a reduction in the
overall financing receivables balance and an improvement in the overall credit
environment. The allowance for losses as a percent of total financing
receivables decreased from 2.1% at December 31, 2011 to 1.9% at June 30, 2012
primarily due to a decrease in the allowance for losses as discussed above,
partially offset by a decline in the overall financing receivables balance as
collections exceeded originations. Further information surrounding the allowance
for losses related to each of our portfolios is detailed below.
(75)
The following table provides information surrounding selected ratios related to
nonearning financing receivables and the allowance for losses.
Nonearning financing
receivables Allowance for losses Allowance for losses
as a percent of as a percent of as a percent of
nonearning financing total financing
financing receivables receivables receivables
June December December December
30, 31, June 30, 31, June 30, 31,
2012 2011 2012 2011 2012 2011
Commercial
CLL
Americas 2.3 % 2.3 % 38.1 % 47.7 % 0.9 % 1.1 %
Europe 4.0 3.2 34.8 34.3 1.4 1.1
Asia 2.1 2.3 37.5 58.4 0.8 1.3
Other 1.3 2.5 11.1 36.4 0.1 0.9
Total CLL 2.7 2.6 36.6 43.8 1.0 1.1
Energy - 0.4 600.0 118.2 0.2 0.4
Financial
Services
GECAS 0.5 0.5 57.1 30.9 0.3 0.1
Other 3.7 5.1 54.5 56.9 2.0 2.9
Total 2.4 2.3 37.4 44.3 0.9 1.0
Commercial
Real Estate
Debt 1.8 2.2 169.2 175.4 3.0 3.9
Business 4.3 3.0 46.3 56.2 2.0 1.7
Properties
Total Real 2.3 2.4 124.9 137.8 2.8 3.3
Estate
Consumer
Non-U.S.
residential 8.0 8.1 17.7 19.0 1.4 1.5
mortgages
Non-U.S.
installment
and
revolving 1.4 1.4 273.7 272.6 3.7 3.9
credit
U.S.
installment
and revolving 1.7 2.1 223.0 202.8 3.8 4.3
credit
Non-U.S. auto 0.6 0.8 282.1 234.9 1.7 1.8
Other 5.0 5.8 47.1 47.5 2.3 2.7
Total Consumer 3.8 4.0 75.5 77.9 2.9 3.1
Total 2.9 3.0 63.3 70.1 1.9 2.1
Included below is a discussion of financing receivables, allowance for losses,
nonearning receivables and related metrics for each of our significant
portfolios.
CLL - Americas. Nonearning receivables of $1.7 billion represented 21.1% of
total nonearning receivables at June 30, 2012. The ratio of allowance for losses
as a percent of nonearning receivables decreased from 47.7% at December 31,
2011, to 38.1% at June 30, 2012, reflecting an overall improvement in the credit
quality of the remaining portfolio and an overall decrease in nonearning
receivables. The ratio of nonearning receivables as a percent of financing
receivables remained constant at 2.3% at June 30, 2012. Collateral supporting
these nonearning financing receivables primarily includes assets in the
restaurant and hospitality, trucking and industrial equipment industries and
corporate aircraft, and for our leveraged finance business, equity of the
underlying businesses.
(76)
CLL - Europe. Nonearning receivables of $1.4 billion represented 16.9% of total
nonearning receivables at June 30, 2012. The ratio of allowance for losses as a
percent of nonearning receivables increased slightly from 34.3% at December 31,
2011, to 34.8% at June 30, 2012, reflecting increases in nonearning receivables
and the allowance for losses in our Interbanca S.p.A. portfolio, substantially
offset by an increase in nonearning receivables in our asset-backed lending
portfolio requiring a relatively lower reserve level based on the strength of
the underlying collateral values. The majority of nonearning receivables are
attributable to the Interbanca S.p.A. portfolio, which was acquired in 2009. The
loans acquired with Interbanca S.p.A. were recorded at fair value, which
incorporates an estimate at the acquisition date of credit losses over their
remaining life. Accordingly, these loans generally have a lower ratio of
allowance for losses as a percent of nonearning receivables compared to the
remaining portfolio. Excluding the nonearning loans attributable to the 2009
acquisition of Interbanca S.p.A., the ratio of allowance for losses as a percent
of nonearning receivables decreased from 55.9% at December 31, 2011, to 46.3% at
June 30, 2012, primarily due to an increase in nonearning receivables in our
asset-backed lending portfolio, which requires a relatively lower reserve level
based on the strength of the underlying collateral. The ratio of nonearning
receivables as a percent of financing receivables increased from 3.2% at
December 31, 2011, to 4.0% at June 30, 2012, for the reasons described above.
Collateral supporting these secured nonearning financing receivables are
primarily equity of the underlying businesses for our Interbanca S.p.A. business
and equipment for our equipment finance portfolio.
CLL - Asia. Nonearning receivables of $0.2 billion represented 2.8% of total
nonearning receivables at June 30, 2012. The ratio of allowance for losses as a
percent of nonearning receivables decreased from 58.4% at December 31, 2011, to
37.5% at June 30, 2012, primarily due to a decline in allowance for losses as a
result of write-offs in Japan, partially offset by collections and write-offs of
nonearning receivables in our asset-based financing businesses in Japan. The
ratio of nonearning receivables as a percent of financing receivables decreased
from 2.3% at December 31, 2011, to 2.1% at June 30, 2012, primarily due to the
decline in nonearning receivables related to our asset-based financing
businesses in Japan, partially offset by a lower financing receivables balance.
Collateral supporting these nonearning financing receivables is primarily
commercial real estate, manufacturing equipment, corporate aircraft, and assets
in the auto industry.
Real Estate - Debt. Nonearning receivables of $0.4 billion represented 4.9% of
total nonearning receivables at June 30, 2012. The decrease in nonearning
receivables from December 31, 2011, was driven primarily by the resolution of
North American multi-family and hotel nonearning loans, as well as European
retail and mixed use loans, through payoffs and foreclosures. The ratio of
allowance for losses as a percent of total financing receivables decreased from
3.9% at December 31, 2011 to 3.0% at June 30, 2012, driven primarily by
write-offs related to settlements and payoffs from impaired loan borrowers and
improvement in collateral values. The ratio of allowance for losses as a percent
of nonearning receivables decreased from 175.4% to 169.2% reflecting write-offs
and resolution of nonearning loans as mentioned above.
The Real Estate financing receivables portfolio is collateralized by
income-producing or owner-occupied commercial properties across a variety of
asset classes and markets. At June 30, 2012, total Real Estate financing
receivables of $27.7 billion were primarily collateralized by office buildings
($6.0 billion), owner-occupied properties ($5.3 billion), apartment buildings
($3.8 billion) and hotel properties ($3.5 billion). In the first six months of
2012, commercial real estate markets showed signs of improved stability and
liquidity in certain markets; however, the pace of improvement varies
significantly by asset class and market and the long term outlook remains
uncertain. We have and continue to maintain an intense focus on operations and
risk management. Loan loss reserves related to our Real Estate-Debt financing
receivables are particularly sensitive to declines in underlying property
values. Assuming global property values decline an incremental 1% or 5%, and
that decline occurs evenly across geographies and asset classes, we estimate
incremental loan loss reserves would be required of less than $0.1 billion and
approximately $0.2 billion, respectively. Estimating the impact of global
property values on loss performance across our portfolio depends on a number of
factors, including macroeconomic conditions, property level operating
performance, local market dynamics and individual borrower behavior. As a
result, any sensitivity analyses or attempts to forecast potential losses carry
a high degree of imprecision and are subject to change. At June 30, 2012, we had
126 foreclosed commercial real estate properties totaling $1.0 billion.
(77)
Consumer - Non-U.S. residential mortgages. Nonearning receivables of $2.7
billion represented 33.1% of total nonearning receivables at June 30, 2012. The
ratio of allowance for losses as a percent of nonearning receivables decreased
from 19.0% at December 31, 2011 to 17.7% at June 30, 2012, primarily as a result
of improved portfolio quality in the U.K. and write-offs in Hungary. Our
non-U.S. mortgage portfolio has a loan-to-value ratio of approximately 75% at
origination and the vast majority are first lien positions. Our U.K. and France
portfolios, which comprise a majority of our total mortgage portfolio, have
reindexed loan-to-value ratios of 84% and 57%, respectively. About 4% of these
loans are without mortgage insurance and have a reindexed loan-to-value ratio
equal to or greater than 100%. Loan-to-value information is updated on a
quarterly basis for a majority of our loans and considers economic factors such
as the housing price index. At June 30, 2012, we had in repossession stock 474
houses in the U.K., which had a value of approximately $0.1 billion. The ratio
of nonearning receivables as a percent of financing receivables decreased
slightly from 8.1% at December 31, 2011 to 8.0% at June 30, 2012.
Consumer - Non-U.S. installment and revolving credit. Nonearning receivables of
$0.2 billion represented 3.0% of total nonearning receivables at June 30, 2012.
The ratio of allowance for losses as a percent of nonearning receivables
increased from 272.6% at December 31, 2011 to 273.7% at June 30, 2012,
reflecting higher delinquencies, and lower nonearnings due to collections and
write-offs primarily in Australia and New Zealand.
Consumer - U.S. installment and revolving credit. Nonearning receivables of $0.8
billion represented 9.4% of total nonearning receivables at June 30, 2012. The
ratio of allowance for losses as a percent of nonearning receivables increased
from 202.8% at December 31, 2011, to 223.0% at June 30, 2012 reflecting improved
economic conditions, lower entry rates and improved collections resulting in
reductions in our nonearning receivables balance. The ratio of nonearning
receivables as a percentage of financing receivables decreased from 2.1% at
December 31, 2011 to 1.7% at June 30, 2012 primarily due to improved collections
reflecting an improvement in the overall credit environment.
Nonaccrual Financing Receivables
The following table provides details related to our nonaccrual and nonearning
financing receivables. Nonaccrual financing receivables include all nonearning
receivables and are those on which we have stopped accruing interest. We stop
accruing interest at the earlier of the time at which collection becomes
doubtful or the account becomes 90 days past due. Substantially all of the
differences between nonearning and nonaccrual financing receivables relate to
loans which are classified as nonaccrual financing receivables but are paying on
a cash accounting basis, and therefore excluded from nonearning receivables. Of
our $15.0 billion nonaccrual loans at June 30, 2012, $6.6 billion are currently
paying in accordance with their contractual terms.
Nonaccrual Nonearning
financing financing
(In millions) receivables receivables
June 30, 2012
Commercial
CLL $ 4,792 $ 3,370
Energy Financial Services 52 2
GECAS 344 56
Other 46 22
Total Commercial 5,234 3,450
Real Estate 5,380 630
Consumer 4,373 4,144
Total $ 14,987 $ 8,224
(78)
Impaired Loans
"Impaired" loans in the table below are defined as larger balance or
restructured loans for which it is probable that the lender will be unable to
collect all amounts due according to original contractual terms of the loan
agreement. The vast majority of our Consumer and a portion of our CLL nonaccrual
receivables are excluded from this definition, as they represent smaller balance
homogeneous loans that we evaluate collectively by portfolio for impairment.
Impaired loans include nonearning receivables on larger balance or restructured
loans, loans that are currently paying interest under the cash basis (but are
excluded from the nonearning category), and loans paying currently but which
have been previously restructured.
Specific reserves are recorded for individually impaired loans to the extent we
have determined that it is probable that we will be unable to collect all
amounts due according to original contractual terms of the loan agreement.
Certain loans classified as impaired may not require a reserve because we
believe that we will ultimately collect the unpaid balance (through collection
or collateral repossession).
Further information pertaining to loans classified as impaired and specific
reserves is included in the table below.
(In millions) June 30, December 31,
2012 2011Loans requiring allowance for losses
Commercial(a) $ 2,065 $ 2,357
Real Estate 3,718 4,957
Consumer 2,897 2,824
Total loans requiring allowance for losses 8,680
10,138
Loans expected to be fully recoverable
Commercial(a) 3,815 3,305
Real Estate 3,748 3,790
Consumer 106 69
Total loans expected to be fully recoverable 7,669
7,164
Total impaired loans $ 16,349 $
17,302
Allowance for losses (specific reserves)
Commercial(a) $ 640 $ 812
Real Estate 561 822
Consumer 625 680
Total allowance for losses (specific reserves) $ 1,826 $
2,314
Average investment during the period $ 16,940 $
18,167
Interest income earned while impaired(b) 374
733
(a) Includes CLL, Energy Financial Services, GECAS and Other.
(b) Recognized principally on a cash basis.
We regularly review our Real Estate loans for impairment using both quantitative
and qualitative factors, such as debt service coverage and loan-to-value ratios.
We classify Real Estate loans as impaired when the most recent valuation
reflects a projected loan-to-value ratio at maturity in excess of 100%, even if
the loan is currently paying in accordance with contractual terms.
Of our $7.5 billion impaired loans at Real Estate at June 30, 2012, $6.7 billion
are currently paying in accordance with the contractual terms of the loan and
are typically loans where the borrower has adequate debt service coverage to
meet contractual interest obligations. Impaired loans at CLL primarily represent
senior secured lending positions.
Our impaired loan balance at June 30, 2012 and December 31, 2011, classified by
the method used to measure impairment was as follows.
(79)
June 30, December 31,
(In millions) 2012 2011
Method used to measure impairment
Discounted cash flow $ 8,978 $ 8,858
Collateral value 7,371 8,444
Total $ 16,349 $ 17,302
See Note 1 in our 2011 consolidated financial statements for further information
on our valuation processes.
Our loss mitigation strategy is intended to minimize economic loss and, at
times, can result in rate reductions, principal forgiveness, extensions,
forbearance or other actions, which may cause the related loan to be classified
as a TDR, and also as impaired. Changes to Real Estate's loans primarily include
maturity extensions, principal payment acceleration, changes to collateral terms
and cash sweeps, which are in addition to, or sometimes in lieu of, fees and
rate increases. The determination of whether these changes to the terms and
conditions of our commercial loans meet the TDR criteria includes our
consideration of all relevant facts and circumstances. At June 30, 2012, TDRs
included in impaired loans were $13.5 billion, primarily relating to Real Estate
($6.3 billion), CLL ($4.3 billion) and Consumer ($2.9 billion).
Real Estate TDRs decreased from $7.0 billion at December 31, 2011 to $6.3
billion at June 30, 2012, primarily driven by resolution of TDRs through
paydowns, restructuring and foreclosures, partially offset by extensions of
loans scheduled to mature during 2012, some of which were classified as TDRs
upon modification. For borrowers with demonstrated operating capabilities, we
work to restructure loans when the cash flow and projected value of the
underlying collateral support repayment over the modified term. We deem loan
modifications to be TDRs when we have granted a concession to a borrower
experiencing financial difficulty and we do not receive adequate compensation in
the form of an effective interest rate that is at current market rates of
interest given the risk characteristics of the loan or other consideration that
compensates us for the value of the concession. For the six months ended June
30, 2012, we modified $2.3 billion of loans classified as TDRs substantially all
in our Debt portfolio. Changes to these loans primarily included maturity
extensions, principal payment acceleration, changes to collateral or covenant
terms and cash sweeps, which are in addition to, or sometimes in lieu of, fees
and rate increases. The limited liquidity and higher return requirements in the
real estate market for loans with higher loan-to-value (LTV) ratios has
typically resulted in the conclusion that the modified terms are not at current
market rates of interest, even if the modified loans are expected to be fully
recoverable. We received the same or additional compensation in the form of rate
increases and fees for the majority of these TDRs. Of our $4.5 billion of
modifications classified as TDRs in the last twelve months, $0.4 billion have
subsequently experienced a payment default in the last six months.
The substantial majority of the Real Estate TDRs have reserves determined based
upon collateral value. Our specific reserves on Real Estate TDRs were $0.4
billion at June 30, 2012 and $0.6 billion at December 31, 2011, and were 6.6%
and 8.4%, respectively, of Real Estate TDRs. In many situations these loans did
not require a specific reserve as collateral value adequately covered our
recorded investment in the loan. While these modified loans had adequate
collateral coverage, we were still required to complete our TDR classification
evaluation on each of the modifications without regard to collateral adequacy.
(80)
We utilize certain short-term (three months or less) loan modification programs
for borrowers experiencing temporary financial difficulties in our Consumer loan
portfolio. These loan modification programs are primarily concentrated in our
non-U.S. residential mortgage and non-U.S. installment and revolving portfolios.
We sold our U.S. residential mortgage business in 2007 and as such, do not
participate in the U.S. government-sponsored mortgage modification programs. For
the six months ended June 30, 2012, we provided short-term modifications of
approximately $0.3 billion of consumer loans for borrowers experiencing
financial difficulties, substantially all in our non-U.S. residential mortgage,
credit card and personal loan portfolios, which are not classified as TDRs. For
these modified loans, we provided insignificant interest rate reductions and
payment deferrals, which were not part of the terms of the original contract. We
expect borrowers whose loans have been modified under these short-term programs
to continue to be able to meet their contractual obligations upon the conclusion
of the short-term modification. In addition, we have modified $0.9 billion of
consumer loans for the six months ended June 30, 2012, which are classified as
TDRs. Further information on Consumer impaired loans is provided in Note 17 to
the condensed, consolidated financial statements.
Delinquencies
For additional information on delinquency rates at each of our major portfolios,
see Note 17 to the condensed, consolidated financial statements.
GECC Selected European Exposures
At June 30, 2012, we had $87 billion in financing receivables to consumer and
commercial customers in Europe. The GECC financing receivables portfolio in
Europe is well diversified across European geographies and customers.
Approximately 87% of the portfolio is secured by collateral and represents
approximately 500,000 commercial customers. Several European countries,
including Spain, Portugal, Ireland, Italy, Greece and Hungary ("focus
countries"), have been subject to credit deterioration due to weaknesses in
their economic and fiscal situations. The carrying value of GECC funded
exposures in these focus countries and in the rest of Europe comprised the
following at June 30, 2012.
(81)
Rest of TotalJune 30, 2012 (In Spain Portugal IrelandItaly Greece HungaryEuropeEurope
millions)
Financing
receivables,
before
allowance
for losses on
financing $ 2,038$ 523$ 402$ 7,092$ 69$ 2,957$ 76,062$ 89,143
receivables
Allowance for
losses on
financing (100) (25) (14) (316) -
(113) (1,288) (1,856)
receivables
Financing
receivables,
net of
allowance
for losses on 1,938 498 388 6,776 69
2,844 74,774 87,287
financing
receivables(a)(b)
Investments(c)(d) 2 - - 597 - 156 1,883 2,638
Cost and equity
method
investments(e) 835 24 348 27 31 5 702 1,972
Derivatives,
net of - - - 87 - - 99 186
collateral(c)(f)
ELTO(g) 553 66 341 883 259 354 9,796 12,252
Real estate held
for
investment(g) 754 - - 397 - - 5,977 7,128
Total funded $ 4,082 $ 588 $ 1,077 $ 8,767 $ 359 $ 3,359 $ 93,231 $ 111,463
exposures(h)
Unfunded $ 7 $ 9 $ 29 $ 277 $ - $ 590 $ 8,144 $ 9,056
commitments
(a) Financing receivable amounts are classified based on the location or nature
of the related obligor.
(b) Substantially all relates to non-sovereign obligors. Includes residential
mortgage loans of approximately $33.3 billion before consideration of
purchased credit protection. We have third-party mortgage insurance for
approximately 27% of these residential mortgage loans, substantially all of
which were originated in the U.K., Poland and France.
(c) Investments and derivatives are classified based on the location of the
parent of the obligor or issuer.
(d) Includes $1.0 billion related to financial institutions, $0.3 billion
related to non-financial institutions and $1.3 billion related to sovereign
issuers. Sovereign issuances totaled $0.1 billion and $0.1 billion related
to Italy and Hungary, respectively. We held no investments issued by
sovereign entities in the other focus countries.
(e) Substantially all is non-sovereign.
(f) Net of cash collateral; entire amount is non-sovereign.
(g) These assets are held under long-term investment and operating strategies,
and our ELTO strategies contemplate an ability to redeploy assets under
lease should default by the lessee occur. The values of these assets could
be subject to decline or impairment in the current environment.
(h) Excludes $35.0 billion of cash and equivalents, which is composed of $20.2
billion of cash on short-term placement with highly rated global financial
institutions based in Europe, sovereign central banks and agencies or supra
national entities, of which $1.1 billion is in focus countries, and $14.8
billion of cash and equivalents placed with highly rated European financial
institutions on a short-term basis, secured by U.S. Treasury securities
($6.1 billion) and sovereign bonds of non-focus countries ($8.7 billion),
where the value of our collateral exceeds the amount of our cash exposure.
(82)
We manage counterparty exposure, including credit risk, on an individual
counterparty basis. We place defined risk limits around each obligor and review
our risk exposure on the basis of both the primary and parent obligor, as well
as the issuer of securities held as collateral. These limits are adjusted on an
ongoing basis based on our continuing assessment of the credit risk of the
obligor or issuer. In setting our counterparty risk limits, we focus on high
quality credits and diversification through spread of risk in an effort to
actively manage our overall exposure. We actively monitor each exposure against
these limits and take appropriate action when we believe that risk limits have
been exceeded or there are excess risk concentrations. Our collateral position
and ability to work out problem accounts has historically mitigated our actual
loss experience. Delinquency experience has been relatively stable in our
European commercial and consumer platforms in the aggregate, and we actively
monitor and take action to reduce exposures where appropriate. Uncertainties
surrounding European markets could have an impact on the judgments and estimates
used in determining the carrying value of these assets.
All other assets comprise mainly real estate equity properties and investments,
equity and cost method investments, derivative instruments and assets held for
sale, and totaled $71.9 billion at June 30, 2012, a decrease of $3.7 billion,
primarily related to decreases in the fair value of derivative instruments ($3.9
billion) and the sale of certain held-for-sale real estate and aircraft ($1.6
billion), partially offset by the consolidation of an entity involved in power
generating activities ($1.4 billion). During the six months ended June 30, 2012,
we recognized an insignificant amount of other-than-temporary impairments of
cost and equity method investments, excluding those related to real estate.
Included in other assets are Real Estate equity investments of $23.1 billion and
$23.9 billion at June 30, 2012 and December 31, 2011, respectively. Our
portfolio is diversified, both geographically and by asset type. We review the
estimated values of our commercial real estate investments at least annually, or
more frequently as conditions warrant. Based on the most recent valuation
estimates available, the carrying value of our Real Estate investments exceeded
their estimated value by about $2.6 billion. Commercial real estate valuations
in 2011 and the first six months of 2012 showed signs of improved stability and
liquidity in certain markets, primarily in the U.S.; however, the pace of
improvement varies significantly by asset class and market. Accordingly, there
continues to be risk and uncertainty surrounding commercial real estate values.
Declines in estimated value of real estate below carrying amount result in
impairment losses when the aggregate undiscounted cash flow estimates used in
the estimated value measurement are below the carrying amount. As such,
estimated losses in the portfolio will not necessarily result in recognized
impairment losses. During both the three and six months ended June 30, 2012,
Real Estate recognized pre-tax impairments of less than $0.1 billion in its real
estate held for investment, which were primarily driven by declining cash flow
projections for properties in Japan. Real Estate investments with undiscounted
cash flows in excess of carrying value of 0% to 5% at June 30, 2012 had a
carrying value of $0.6 billion and an associated estimated unrealized loss of
less than $0.1 billion. Continued deterioration in economic conditions or
prolonged market illiquidity may result in further impairments being recognized.
Liquidity and Borrowings
We maintain a strong focus on liquidity. At both GE and GECC we manage our
liquidity to help provide access to sufficient funding to meet our business
needs and financial obligations throughout business cycles.
Our liquidity and borrowing plans for GE and GECC are established within the
context of our annual financial and strategic planning processes. At GE, our
liquidity and funding plans take into account the liquidity necessary to fund
our operating commitments, which include primarily purchase obligations for
inventory and equipment, payroll and general expenses (including pension
funding). We also take into account our capital allocation and growth
objectives, including paying dividends, repurchasing shares, investing in
research and development and acquiring industrial businesses. At GE, we rely
primarily on cash generated through our operating activities, any dividend
payments from GECC, and also have historically maintained a commercial paper
program that we regularly use to fund operations in the U.S., principally within
fiscal quarters. During the second quarter of 2012, GECC paid a dividend of $0.5
billion to GE, as well as a special dividend of $2.5 billion.
(83)
GECC's liquidity position is targeted to meet our obligations under both normal
and stressed conditions. GECC establishes a funding plan annually that is based
on the projected asset size and cash needs of the Company, which over the past
few years, has included our strategy to reduce our ending net investment in GE
Capital. GECC relies on a diversified source of funding, including the unsecured
term debt markets, the global commercial paper markets, deposits, secured
funding, retail funding products, bank borrowings and securitizations to fund
its balance sheet, in addition to cash generated through collection of
principal, interest and other payments on our existing portfolio of loans and
leases to fund its operating and interest expense costs.
Our 2012 GECC funding plan anticipates repayment of principal on outstanding
short-term borrowings, including the current portion of its long-term debt
($82.7 billion at December 31, 2011), through issuance of long-term debt and
reissuance of commercial paper, cash on hand, collections of financing
receivables exceeding originations, dispositions, asset sales, and deposits and
other alternative sources of funding. Long-term maturities were $26 billion in
the second quarter of 2012. Interest on borrowings is primarily repaid through
interest earned on existing financing receivables. During the second quarter of
2012, GECC earned interest income on financing receivables of $5.3 billion,
which more than offset interest expense of $3.0 billion.
We maintain a detailed liquidity policy for GECC which includes a requirement to
maintain a contingency funding plan. The liquidity policy defines GECC's
liquidity risk tolerance under different stress scenarios based on its liquidity
sources and also establishes procedures to escalate potential issues. We
actively monitor GECC's access to funding markets and its liquidity profile
through tracking external indicators and testing various stress scenarios. The
contingency funding plan provides a framework for handling market disruptions
and establishes escalation procedures in the event that such events or
circumstances arise.
GECC is a savings and loan holding company under U.S. law and became subject to
Federal Reserve Board (FRB) supervision on July 21, 2011, the one-year
anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The FRB has recently finalized a regulation that requires certain organizations
it supervises to submit annual capital plans for review, including institutions'
plans to make capital distributions, such as dividend payments. The
applicability and timing of this proposed regulation to GECC is not yet
determined; however, the FRB has indicated that it expects to extend these
requirements to large savings and loan holding companies through separate
rulemaking or by order. While GECC is not yet subject to this regulation, GECC's
capital allocation planning is still subject to FRB review. In addition, the FRB
recently proposed regulations to revise and replace its current rules on capital
adequacy. The proposed regulations would apply to savings and loan holding
companies like GECC. The transition period for achieving compliance with the
proposed regulations following final adoption is unclear.
Actions taken to strengthen and maintain our liquidity are described in the
following section.
Liquidity Sources
We maintain liquidity sources that consist of cash and equivalents and a
portfolio of high-quality, liquid investments (Liquidity Portfolio) and
committed unused credit lines.
We have consolidated cash and equivalents of $74.3 billion at June 30, 2012,
which is available to meet our needs. Of this, approximately $9 billion is held
at GE and approximately $66 billion is held at GECC.
In addition to our $74.3 billion of cash and equivalents, we have a
centrally-managed portfolio of high-quality, liquid investments with a fair
value of $3.1 billion at June 30, 2012. The Liquidity Portfolio is used to
manage liquidity and meet the operating needs of GECC under both normal and
stress scenarios. The investments consist of unencumbered U.S. government
securities, U.S. agency securities, securities guaranteed by the government,
supranational securities, and a select group of non-U.S. government securities.
We believe that we can readily obtain cash for these securities, even in
stressed market conditions.
(84)
We have committed, unused credit lines totaling $48.8 billion that have been
extended to us by 54 financial institutions at June 30, 2012. GECC can borrow up
to $48.8 billion under all of these credit lines. GE can borrow up to $11.8
billion under certain of these credit lines. These lines include $32.6 billion
of revolving credit agreements under which we can borrow funds for periods
exceeding one year. Additionally, $16.2 billion are 364-day lines that contain a
term-out feature that allows us to extend borrowings for one or two years from
the date of expiration of the lending agreement.
Cash and equivalents of $53.0 billion at June 30, 2012 are held outside of the
U.S. Of this amount, $11.3 billion is indefinitely reinvested. Indefinitely
reinvested cash held outside of the U.S. is available to fund operations and
other growth of non-U.S. subsidiaries; it is also used to fund our needs in the
U.S. on a short-term basis through short-term loans, without being subject to
U.S. tax. Under the Internal Revenue Code, these loans are permitted to be
outstanding for 30 days or less and the total of all such loans are required to
be outstanding for less than 60 days during the year.
$1.3 billion of GE cash and equivalents is held in countries with currency
controls that may restrict the transfer of funds to the U.S. or limit our
ability to transfer funds to the U.S. without incurring substantial costs. These
funds are available to fund operations and growth in these countries and we do
not currently anticipate a need to transfer these funds to the U.S.
At GECC, about $8 billion of cash and equivalents are in regulated banks and
insurance entities and are subject to regulatory restrictions.
If we were to repatriate indefinitely reinvested cash held outside the U.S., we
would be subject to additional U.S. income taxes and foreign withholding taxes.
Funding Plan
We have reduced our GE Capital ending net investment, excluding cash and
equivalents, from $513 billion at January 1, 2009 to $433 billion at June 30,
2012.
In 2012, we completed issuances of $21.1 billion of senior unsecured debt with
maturities up to 22 years (and subsequent to June 30, 2012, an additional $1.7
billion). Average commercial paper borrowings for GECC and GE during the second
quarter were $42.0 billion and $16.1 billion, respectively, and the maximum
amounts of commercial paper borrowings outstanding for GECC and GE during the
second quarter were $43.4 billion and $18.1 billion, respectively. GECC
commercial paper maturities are funded principally through new commercial paper
issuances and at GE are substantially repaid before quarter-end using
indefinitely reinvested overseas cash which, as discussed above, is available
for use in the U.S. on a short-term basis without being subject to U.S. tax.
Under the Federal Deposit Insurance Corporation's (FDIC) Temporary Liquidity
Guarantee Program (TLGP), the FDIC guaranteed certain senior, unsecured debt
issued by GECC on or before October 31, 2009 for which we paid $2.3 billion of
fees to the FDIC for our participation. Our TLGP-guaranteed debt has remaining
maturities of $17 billion in 2012. We anticipate funding these and our other
long-term debt maturities through a combination of existing cash, new debt
issuances, collections exceeding originations, dispositions, asset sales,
deposits and other alternative sources of funding. GECC and GE are parties to an
Eligible Entity Designation Agreement and GECC is subject to the terms of a
Master Agreement, each entered into with the FDIC. The terms of these agreements
include, among other things, a requirement that GE and GECC reimburse the FDIC
for any amounts that the FDIC pays to holders of GECC debt that is guaranteed by
the FDIC.
We securitize financial assets as an alternative source of funding. During 2012,
we completed $8.1 billion of non-recourse issuances and had maturities of $6.7
billion. At June 30, 2012, consolidated non-recourse borrowings were $30.7
billion.
(85)
We have deposit-taking capability at 12 banks outside of the U.S. and two banks
in the U.S. - GE Capital Retail Bank (formerly GE Money Bank), a Federal Savings
Bank (FSB), and GE Capital Financial Inc., an industrial bank (IB). The FSB and
IB currently issue certificates of deposit (CDs) in maturity terms from three
months to ten years.
Total alternative funding at June 30, 2012 was $65 billion, composed mainly of
$42 billion bank deposits, $8 billion of funding secured by real estate,
aircraft and other collateral and $9 billion GE Interest Plus notes. The
comparable amount at December 31, 2011 was $66 billion.
Credit Ratings
On April 3, 2012, Moody's Investors Service (Moody's) announced that it had
downgraded the senior unsecured debt rating of GE by one notch from Aa2 to Aa3
and the senior unsecured debt rating of GECC by two notches from Aa2 to A1. The
ratings downgrade does not affect GE's and GECC's short-term funding ratings of
P-1, which were affirmed by Moody's. Moody's ratings outlook for GE and GECC is
stable. We do not anticipate any material operational, funding or liquidity
impacts from this ratings downgrade.
As further disclosed in our 2011 consolidated financial statements, GECC has
fully guaranteed repayment of $4.1 billion of guaranteed investment contract
(GIC) obligations of Trinity. As a result of Moody's downgrade, substantially
all of these GICs became redeemable by the holders. In addition, another
consolidated entity also had issued GICs where proceeds are loaned to GECC and
$1.1 billion of these GICs became redeemable by the holders. During the second
quarter of 2012, holders of $2.4 billion in principal amount of GICs redeemed
their holdings and GECC made related cash payments. These redemptions were fully
considered in our previously discussed liquidity plan. The remaining outstanding
GICs will continue to be subject to the existing terms and maturities of their
respective contracts.
Additionally, there were other contracts affected by the downgrade with
provisions requiring us to provide additional funding, post collateral and make
other payments. The total cash and collateral impact of these contracts was less
than $0.5 billion.
Income Maintenance Agreement
As set forth in Exhibit 99(b) hereto, GECC's ratio of earnings to fixed charges
was 1.62:1 during the six months ended June 30, 2012 due to higher pre-tax
earnings at GECC, which were primarily driven by lower losses and delinquencies.
For additional information, see the Income Maintenance Agreement section in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our 2011 consolidated financial statements.
