01—Abstract
Summary
Summary of the 10-K filed March 7, 2003. Cited figures are marked; the original filing is the authoritative source.
General Electric's 2002 Form 10-K, filed March 7, 2003, reports record results: consolidated revenues rose 5% to $131.7 billiona and earnings before accounting changes rose 7% to a record $15.1 billion, or $1.51 per diluted share.
Net earnings were $14.1 billionb ($1.41 per share) after a $1.0 billion after-tax cumulative effect charge from adopting SFAS 142 goodwill rules. Return on average share owners' equity (excluding accounting changes) was 25.8%, and the company declared $7.3 billion in dividends ($0.73 per share, up 11%, its 27th consecutive year of dividend growth). The quality of earnings is mixed beneath the headline.
Insurance (GE Global Insurance Holding/Employers Re) took a $3.5 billionc pre-tax charge for adverse loss development in 2002, pushing Insurance segment net earnings to a $509 million loss and GECS earnings down 17%. Power Systems, by contrast, was a bright spot, with segment profit up 29% to $6.3 billion, helped by $0.9 billion of contract termination fees. Power Systems orders fell sharply to $14.2 billion from $24.5 billion, and total GE backlog dropped 24% to $36.1 billion, signaling weaker demand ahead.
Industrial margins were pressured: GE operating margin fell to 19.1% and Consumer Products profit fell 24%. Investors should also note that GE's reported balance sheet is heavily weighted toward its financial services arm, GECS, which carries $270.9 billiond of borrowings against $36.9 billion of equity, and that the company has a planned reduction of $12.5 billion of debt allocated to All Other GECS by 2005. GE retained its AAA/Aaa ratings on GE and GE Capital debt.
Management reported that the company will not contribute to the GE Pension Plan in 2003, that postretirement benefit costs are expected to rise, and that labor contracts covering most U.S. union employees expire in June 2003. The company also disclosed $1.6 billion of aircraft engine financing commitments and $3.7 billion of exposure to US Airways and UAL, both in bankruptcy.
02—Key points
Key Highlights
- Record 2002 earnings before accounting changes of $15.1 billion ($1.51 diluted EPS), up 7%, on consolidated revenues of $131.7 billion (up 5%).
- Net earnings of $14.1 billion were reduced by a $1.0 billion after-tax cumulative effect charge from SFAS 142 goodwill impairments, mainly at GECS IT Solutions and GE Auto and Home.
- Insurance was the major drag: a $3.5 billion pre-tax charge for adverse development at GE Global Insurance Holding (ERC) produced a $509 million segment net loss, and GECS earnings before accounting changes fell 17% to $4.6 billion.
- Power Systems segment profit rose 29% to $6.3 billion, but new orders fell to $14.2 billion from $24.5 billion and total GE backlog declined 24% to $36.1 billion.
- Dividends declared of $7.3 billion ($0.73 per share, up 11%) marked the 27th consecutive year of dividend growth, while $2.0 billion was spent repurchasing shares in 2002.
- Consolidated borrowings rose to $279.4 billion from $232.9 billion, with GECS borrowings of $270.9 billion; GE Capital's debt-to-equity ratio improved to 6.58:1 from 7.31:1.
- GE's operating margin declined to 19.1% of sales from 19.6%, reflecting weakness in Plastics, Specialty Materials and Lighting, and the company's AAA/Aaa debt ratings were maintained.
03—Questions
Frequently Asked Questions
How did GE's 2002 earnings compare with prior years, and what drove the change?
Earnings before accounting changes rose 7% to a record $15.1 billion ($1.51 per diluted share) from $14.1 billion in 2001. Power Systems profit growth (+29%), acquisitions, and productivity drove gains, partly offset by Insurance's $3.5 billion pre-tax reserve charge and weaker Materials and Consumer Products results. Reported net earnings were $14.1 billion ($1.41 per share) after a $1.0 billion goodwill accounting charge.
What is the biggest risk in the Insurance business?
GE Global Insurance Holding (Employers Re) recognized $3.5 billion of pre-tax adverse development in 2002 for liability claims written from 1997 to 2001, including hospital medical malpractice, product liability and asbestos. Reserve estimates may need further revision, and ERC's financial strength ratings were lowered during 2002, though they remain investment grade. Management says the ratings changes should not materially affect liquidity.
Is the slowdown in Power Systems a concern for future earnings?
Yes. Power Systems orders fell to $14.2 billion from $24.5 billion as US power generation demand declined sharply, and total company backlog dropped 24% to $36.1 billion. Current-year profit was supported by $0.9 billion of customer contract termination fees, which may not recur. Management also expects progress collections to fall about $3 billion in 2003, which will reduce working capital benefits.
How leveraged is GE, and are its credit ratings secure?
Consolidated borrowings were $279.4 billion, almost all at GE Capital (GECS, $270.9 billion). GE Capital's debt-to-equity ratio improved to 6.58:1, and management plans to reduce financial services debt, including $12.5 billion allocated to All Other GECS, by 2005. GE and GE Capital retained AAA/Aaa long-term ratings. Certain contractual downgrade triggers, such as short-term ratings falling below A-1/P-1, could require GE Capital to provide up to $22.6 billion of liquidity support, though management views these scenarios as remote.
What dividend and share repurchase policy did GE follow in 2002?
GE declared $7.3 billion in dividends ($0.73 per share, up 11%), extending 27 consecutive years of dividend growth. It repurchased $2.0 billion of stock in 2002 under a $30 billion authorization, with about $22.7 billion used cumulatively through year-end 2002. GECS plans to reduce its dividend payments to GE to 10% of operating earnings to rebuild equity.
04—Continue