How did GE's 2003 earnings compare with 2002, and what drove the change?

Net earnings rose to $15.0 billion from $14.1 billion, and diluted EPS rose to $1.49 from $1.41. Earnings before accounting changes rose 3% to $15.6 billion. The increase was driven mainly by GECS, whose earnings before accounting changes nearly doubled to $7.8 billion, primarily because 2002 included a large loss at Employers Reinsurance. Power Systems earnings fell sharply as gas turbine shipments declined, partly offsetting gains elsewhere.

Is GE's industrial business weakening?

Parts of it are. GE operating margin fell to 15.9% from 19.1%, Power Systems profit dropped 35% to $4.1 billion on lower gas turbine volume, and Plastics profit fell about 50% on higher raw material costs. Management argues that excluding Power Systems, revenues grew 6% and earnings before accounting changes grew 17%, and that the power 'bubble' of 2002 was a temporary peak. Investors should note that the Power Systems backlog declined to $12.3 billion from $16.1 billion.

What is the status of the Genworth IPO and other major transactions?

GE began the IPO process for Genworth Financial, which comprises most of its life and mortgage insurance businesses, in January 2004. It plans to sell about one-third of the equity in 1H 2004, subject to market conditions and regulatory approvals, and to reduce its stake over three years. Other pending transactions include the merger of NBC with Vivendi Universal Entertainment (creating NBC Universal, about 80% GE-owned) and the acquisition of Amersham plc. The company also completed the Commercial Finance acquisition of most of Transamerica Finance's commercial lending business in January 2004.

How strong is GE's balance sheet and funding position?

GE and GE Capital maintain AAA/Aaa long-term ratings. GE's own borrowings were $10.9 billion, or 12.0% of total capital. GE Capital's debt-to-equity ratio improved to 6.20:1 from 6.58:1, and the company plans to eliminate parent-supported debt by end-2005. GE Capital had $57.2 billion of committed bank credit lines and relies heavily on commercial paper ($80.6 billion), though management considers the commercial paper market reliable. Total consolidated borrowings were $304.9 billion.

What risks should investors monitor from this filing?

Key risks include insurance reserve adequacy at Employers Reinsurance, which recorded $3.5 billion of adverse development in 2002 and a further $0.9 billion in 2003 in liability lines such as medical malpractice and product liability. Airline exposure is significant: about $4.3 billion relates to UAL and Air Canada, both in bankruptcy, and about $2.5 billion to US Airways. Commercial Finance and Consumer Finance credit quality, interest rate and currency movements, and the cyclicality of Power Systems and Plastics are also important. The company reports no material pending legal proceedings.

GE 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2004. Cited figures are marked; the original filing is the authoritative source.

General Electric's 2003 10-K, filed March 1, 2004, reports consolidated revenues of $134.2 billion^a (up 1.5% from $132.2 billion), net earnings of $15.0 billion ($1.49 diluted EPS, down from $1.41 in 2002 after $0.6 billion of 2003 accounting-change charges), and earnings before accounting changes of $15.6 billion ($1.55 per diluted share, up 3%).

Consolidated total assets reached $647.5 billion^b. Growth was driven by financial services: GECS earnings before accounting changes rose to $7.8 billion from $4.6 billion, largely on the absence of 2002 Employers Reinsurance losses, while Commercial Finance and Consumer Finance grew earnings 18% and 20%. Industrial performance was weaker: GE operating margin fell to 15.9% from 19.1%, Power Systems segment profit dropped 35% as gas turbine shipments declined, and Plastics profit fell sharply.

Excluding Power Systems, revenues grew 6% and earnings before accounting changes grew 17%. Management emphasized balance-sheet strength and shareowner returns: $7.8 billion^c of dividends declared ($0.77 per share, up 5%, 28 consecutive years of growth), a AAA/Aaa parent rating, and a plan to eliminate GECS 'parent supported debt' by end-2005 via dispositions. Major portfolio actions in 2003 included selling Edison Life, U.S. Auto and Home, FGIC, and ERC Life, and acquiring First National Bank, Conseco's retail sales finance unit, Instrumentarium, and OSi Specialties.

Key forward items include the planned Genworth Financial IPO in 1H 2004, the NBC–Vivendi Universal Entertainment merger (NBC Universal, ~80% GE-owned), the pending Amersham acquisition, and FIN 46R adoption adding roughly $2.5 billion^d to assets. Risk items to watch include Employers Reinsurance's reserve history (a $3.5 billion adverse development charge in 2002 and $0.9 billion in 2003), a declining Power Systems order backlog (down to $12.3 billion from $16.1 billion), exposure to distressed airline customers (about $4.3 billion to UAL and Air Canada), and the significant reliance on commercial paper funding at GE Capital. The company reports no material pending legal proceedings.

02—Key points

Key Highlights

Consolidated revenues rose 1.5% to $134.2 billion; net earnings rose 6% to $15.0 billion, with diluted EPS of $1.49 (EPS before accounting changes of $1.55, up 3%).
Excluding the declining Power Systems segment, revenues grew 6% and earnings before accounting changes grew 17%, signaling underlying momentum beneath a weaker headline.
GECS (financial services) earnings before accounting changes jumped to $7.8 billion from $4.6 billion, driven by the absence of 2002 Employers Reinsurance losses and strong Commercial and Consumer Finance growth.
GE industrial operating margin compressed to 15.9% from 19.1%, mainly from Power Systems (segment profit down 35%) and Plastics (down about 50%).
Dividends declared totaled $7.8 billion ($0.77 per share, +5%), extending 28 consecutive years of dividend growth; GE and GE Capital retain AAA/Aaa ratings.
Portfolio reshaping continued: Genworth Financial IPO planned for 1H 2004, NBC to merge with Vivendi Universal Entertainment, and the pending Amersham acquisition; GECS parent-supported debt targeted for elimination by end-2005.
Key risks include Employers Reinsurance reserve adverse development ($3.5B in 2002, $0.9B in 2003), a Power Systems backlog down to $12.3B from $16.1B, and roughly $4.3B of exposure to airlines in bankruptcy (UAL, Air Canada).

03—Questions

Frequently Asked Questions

How did GE's 2003 earnings compare with 2002, and what drove the change?
Net earnings rose to $15.0 billion from $14.1 billion, and diluted EPS rose to $1.49 from $1.41. Earnings before accounting changes rose 3% to $15.6 billion. The increase was driven mainly by GECS, whose earnings before accounting changes nearly doubled to $7.8 billion, primarily because 2002 included a large loss at Employers Reinsurance. Power Systems earnings fell sharply as gas turbine shipments declined, partly offsetting gains elsewhere.
Is GE's industrial business weakening?
Parts of it are. GE operating margin fell to 15.9% from 19.1%, Power Systems profit dropped 35% to $4.1 billion on lower gas turbine volume, and Plastics profit fell about 50% on higher raw material costs. Management argues that excluding Power Systems, revenues grew 6% and earnings before accounting changes grew 17%, and that the power 'bubble' of 2002 was a temporary peak. Investors should note that the Power Systems backlog declined to $12.3 billion from $16.1 billion.
What is the status of the Genworth IPO and other major transactions?
GE began the IPO process for Genworth Financial, which comprises most of its life and mortgage insurance businesses, in January 2004. It plans to sell about one-third of the equity in 1H 2004, subject to market conditions and regulatory approvals, and to reduce its stake over three years. Other pending transactions include the merger of NBC with Vivendi Universal Entertainment (creating NBC Universal, about 80% GE-owned) and the acquisition of Amersham plc. The company also completed the Commercial Finance acquisition of most of Transamerica Finance's commercial lending business in January 2004.
How strong is GE's balance sheet and funding position?
GE and GE Capital maintain AAA/Aaa long-term ratings. GE's own borrowings were $10.9 billion, or 12.0% of total capital. GE Capital's debt-to-equity ratio improved to 6.20:1 from 6.58:1, and the company plans to eliminate parent-supported debt by end-2005. GE Capital had $57.2 billion of committed bank credit lines and relies heavily on commercial paper ($80.6 billion), though management considers the commercial paper market reliable. Total consolidated borrowings were $304.9 billion.
What risks should investors monitor from this filing?
Key risks include insurance reserve adequacy at Employers Reinsurance, which recorded $3.5 billion of adverse development in 2002 and a further $0.9 billion in 2003 in liability lines such as medical malpractice and product liability. Airline exposure is significant: about $4.3 billion relates to UAL and Air Canada, both in bankruptcy, and about $2.5 billion to US Airways. Commercial Finance and Consumer Finance credit quality, interest rate and currency movements, and the cyclicality of Power Systems and Plastics are also important. The company reports no material pending legal proceedings.

04—Continue

← View all 10-K filings