Why did GE's net earnings decline in 2005 even though continuing operations grew?

Net earnings were $16.35 billion versus $16.82 billion in 2004. Earnings from continuing operations increased to $18.28 billion, but discontinued operations posted a loss of $1.92 billion. That loss is mainly from GE Insurance Solutions ($2.85 billion loss, including a $934 million loss on the planned sale), partly offset by $928 million of Genworth earnings.

What are the main risks to GE's credit rating and funding costs?

GE has committed to keep its AAA/Aaa ratings. Several agreements have downgrade triggers. For example, if GE Capital's earnings-to-fixed-charges ratio fell to 1.10:1, GE would have to contribute capital, and if the long-term rating of GE or GECS fell below A-/A3, counterparties could require termination of swap contracts (a potential $2.2 billion disbursement). Management considers these scenarios remote.

How exposed is GE to the commercial airline industry?

Exposure is significant but largely secured. At year-end 2005, the largest exposures to carriers in bankruptcy were Delta ($2.4 billion), UAL ($1.4 billion) and Northwest ($1.3 billion), mostly backed by aircraft collateral. GE had 1,405 commercial aircraft on lease, all placed at year-end, and $10.6 billion of multiple-year aircraft orders outstanding.

What regulatory and legal matters could affect GE?

The SEC opened a formal investigation into GE's use of hedge accounting for derivatives, and GE is cooperating. The SEC and the U.S. Attorney's Office for the Southern District of New York are also examining finite risk insurance. Separately, GE agreed to a consent decree with the EPA to dredge PCBs from the upper Hudson River, with up to $111 million committed for oversight costs and responsibility for phase 1 and potentially phase 2 dredging. The filing does not expect these matters to be material to results.

How strong is GE's cash generation and what are the capital allocation priorities?

GE cash from operating activities was $21.6 billion in 2005 (up 42%), while GECS dividends contributed $7.8 billion of that total. Excluding GECS dividends, industrial CFOA rose 14% to $13.8 billion. Priorities are dividend growth, the $25 billion buyback program (153.3 million shares repurchased for $5.3 billion in 2005), and selective growth investments, including $11.6 billion of GECS equipment additions.

GE 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 3, 2006. Cited figures are marked; the original filing is the authoritative source.

General Electric's 2005 Form 10-K (filed March 3, 2006) reports consolidated revenues of $149.7 billion^a, up 11% from $134.5 billion in 2004, with net earnings of $16.4 billion, down from $16.8 billion, and diluted EPS of $1.54 versus $1.61.

The decline is driven by a $1.9 billion^b loss from discontinued operations, mainly GE Insurance Solutions, which GE agreed to sell to Swiss Re for $8.5 billion. Earnings from continuing operations rose 12% to $18.3 billion, and segment profit grew across most businesses. GE kept its AAA/Aaa ratings, declared $9.6 billion in dividends, and reported $13.3 billion of GE operating profit.

The filing shows a company in transition. GE is exiting insurance (the Genworth stake was cut to 18% and the GE Insurance Solutions sale is expected to close in Q2 2006), while growing its industrial, healthcare, media and finance franchises through acquisitions such as Amersham, Ionics, Edwards Systems and several finance portfolios. Financial services (GECS) remains the dominant balance-sheet and earnings driver, with about $362 billion^c of borrowings and a 7.09:1 debt-to-equity ratio at GE Capital.

Investors should weigh strong operating cash flow and a $25 billion^d buyback program against rising interest costs, which grew to $15.2 billion, and continued exposure to commercial aviation, where several airline customers are in bankruptcy. The filing also discloses open regulatory matters: an SEC investigation into hedge accounting, an SEC and U.S. Attorney inquiry into finite risk insurance, and a PCB dredging obligation on the Hudson River under a consent decree with the EPA, for which GE has committed up to $111 million in oversight costs plus a phase 1 dredging commitment. These items are not expected to be material to results, but they are the main legal risks flagged in the filing.

02—Key points

Key Highlights

Consolidated revenues rose 11% to $149.7 billion in 2005, with global revenues reaching $77.9 billion (about 52% of total), led by Europe and the Pacific Basin.
Net earnings fell about 3% to $16.4 billion, but earnings from continuing operations rose 12% to $18.3 billion; the gap reflects a $1.9 billion loss from discontinued insurance operations.
Diluted EPS was $1.54 (versus $1.61 in 2004), with continuing-operations EPS up to $1.72 from $1.56.
The insurance exit is progressing: the Swiss Re sale of GE Insurance Solutions for $8.5 billion is expected to close in Q2 2006, and GE's remaining Genworth stake is 18%.
GE declared $9.6 billion in dividends, raised the quarterly dividend 14% to $0.25, and runs a $25 billion share repurchase program through 2008 ($19.7 billion remaining at year-end).
GECS interest and other financial charges rose to $15.2 billion from $11.7 billion, reflecting higher average borrowings ($346 billion) and a higher composite rate (4.2% versus 3.5%).
The company retains AAA/Aaa long-term ratings, and its principal pension plans carried a $5.8 billion surplus with no GE Pension Plan contributions planned for 2006.

03—Questions

Frequently Asked Questions

Why did GE's net earnings decline in 2005 even though continuing operations grew?
Net earnings were $16.35 billion versus $16.82 billion in 2004. Earnings from continuing operations increased to $18.28 billion, but discontinued operations posted a loss of $1.92 billion. That loss is mainly from GE Insurance Solutions ($2.85 billion loss, including a $934 million loss on the planned sale), partly offset by $928 million of Genworth earnings.
What are the main risks to GE's credit rating and funding costs?
GE has committed to keep its AAA/Aaa ratings. Several agreements have downgrade triggers. For example, if GE Capital's earnings-to-fixed-charges ratio fell to 1.10:1, GE would have to contribute capital, and if the long-term rating of GE or GECS fell below A-/A3, counterparties could require termination of swap contracts (a potential $2.2 billion disbursement). Management considers these scenarios remote.
How exposed is GE to the commercial airline industry?
Exposure is significant but largely secured. At year-end 2005, the largest exposures to carriers in bankruptcy were Delta ($2.4 billion), UAL ($1.4 billion) and Northwest ($1.3 billion), mostly backed by aircraft collateral. GE had 1,405 commercial aircraft on lease, all placed at year-end, and $10.6 billion of multiple-year aircraft orders outstanding.
What regulatory and legal matters could affect GE?
The SEC opened a formal investigation into GE's use of hedge accounting for derivatives, and GE is cooperating. The SEC and the U.S. Attorney's Office for the Southern District of New York are also examining finite risk insurance. Separately, GE agreed to a consent decree with the EPA to dredge PCBs from the upper Hudson River, with up to $111 million committed for oversight costs and responsibility for phase 1 and potentially phase 2 dredging. The filing does not expect these matters to be material to results.
How strong is GE's cash generation and what are the capital allocation priorities?
GE cash from operating activities was $21.6 billion in 2005 (up 42%), while GECS dividends contributed $7.8 billion of that total. Excluding GECS dividends, industrial CFOA rose 14% to $13.8 billion. Priorities are dividend growth, the $25 billion buyback program (153.3 million shares repurchased for $5.3 billion in 2005), and selective growth investments, including $11.6 billion of GECS equipment additions.

04—Continue

← View all 10-K filings