01—Abstract
Summary
Summary of the 10-K/A filed January 19, 2007. Cited figures are marked; the original filing is the authoritative source.
General Electric's January 19, 2007 Form 10-K/A restates financial results for 2001 through 2005 and selected quarters of 2004 and 2005.
The restatement stems from the SEC Office of Chief Accountant's view that GE's commercial paper interest rate swap hedging program at GECC and GECS did not meet the SFAS 133 specificity requirement. As a result, GE is eliminating hedge accounting for those swaps from January 1, 2001, so fair value changes now flow directly through earnings. The restatement is non-cash and has no effect on cash flows or liquidity, and the effects on financial position are described as immaterial.
The cumulative reduction in earnings from continuing operations before accounting changes through 2005 is $473 milliona, against reported cumulative earnings of about $77.1 billion. Annual effects are modest: 2005 earnings rise by $358 million (about 2.0%), while 2002 falls by $1,169 million (about 7.4%). The filing also discloses a material weakness in internal controls over hedge documentation.
Management concluded that its 2005 internal control over financial reporting was not effective, which reverses the original March 2006 conclusion. GE says it modified the commercial paper hedging program and adopted documentation effective January 1, 2007, which it believes remediates the weakness. The SEC formal investigation into GE's SFAS 133 application is ongoing.
Management also states that it has found no hedge positions inconsistent with its risk management policies or economic objectives. Beyond the restatement, the filing reports a fundamentally strong franchise. 2005 consolidated revenues were $150.2 billionb (restated), net earnings were $16.7 billion, and dividends declared were $9.6 billion.
GE retained AAA/Aaa ratings and declared a 14%c dividend increase in December 2005. Key risks include the pending exit from insurance (sale of GE Insurance Solutions to Swiss Re and the remaining Genworth stake), the SEC investigations, and continued exposure to commercial aviation, where several airlines were in bankruptcy.
02—Key points
Key Highlights
- Restatement of 2001-2005 results: cumulative earnings from continuing operations reduced by $473 million (non-cash) due to elimination of hedge accounting on commercial paper interest rate swaps at GECC/GECS.
- 2005 restated earnings from continuing operations were $18.6 billion, up $358 million from the previously reported $18.3 billion; 2005 net earnings were $16.7 billion, and restated 2005 revenue was $150.2 billion.
- Management disclosed a material weakness in hedge documentation under SFAS 133 and concluded that internal control over financial reporting was not effective as of December 31, 2005; remediation was effective January 1, 2007.
- The restatement has no effect on cash flows or liquidity, and management characterizes its effects on financial position as immaterial.
- SEC formal investigation into GE's SFAS 133 accounting is ongoing, and the company says it is cooperating fully; a related SEC and U.S. Attorney subpoena concerns finite risk insurance.
- GE is exiting insurance: GE Insurance Solutions' P&C and European life/health businesses are being sold to Swiss Re for $8.5 billion, and the Genworth stake was reduced to 18%; 2005 discontinued operations loss was $1.9 billion.
- Capital returns remained strong: $9.6 billion in dividends declared in 2005 (up 11% per share), a $25 billion share repurchase program, and retained AAA/Aaa ratings.
03—Questions
Frequently Asked Questions
Why is GE restating its financial statements?
The SEC Office of Chief Accountant concluded that GE's commercial paper interest rate swap hedging program did not meet the SFAS 133 specificity requirement. GE's management and Audit Committee then recommended eliminating hedge accounting for these swaps from January 1, 2001, which the Board approved on January 18, 2007. As a result, fair value changes on these swaps are recognized in earnings immediately rather than over the hedging relationship.
How much does the restatement change GE's earnings?
The effect is small in aggregate but volatile year to year. Cumulative earnings from continuing operations through 2005 decline by $473 million, against about $77.1 billion reported. Annual changes are +$358 million in 2005, +$341 million in 2004, +$325 million in 2003, -$1,169 million in 2002, and -$328 million in 2001. Diluted EPS for 2005 rises from $1.54 to $1.57.
Does the restatement affect GE's cash flows or liquidity?
No. GE states the restatement is non-cash and has no effect on cash flows or liquidity. Effects on financial position at the end of each restated period are described as immaterial, and GE says the reversal of the cumulative adjustments will affect future net earnings only over the remaining life of the swaps.
What are the main risks for investors highlighted in the filing?
Key risks include the ongoing SEC investigation into hedge accounting and the related material weakness in internal control, which GE says is remediated as of January 1, 2007. Other risks include the pace of insurance disposals (Swiss Re closing expected Q2 2006, and remaining Genworth shares), commercial aviation exposure with several airline customers in bankruptcy (Delta, UAL, Northwest), and the company's reliance on maintaining AAA/Aaa ratings to keep borrowing costs low.
How strong is GE's underlying business and shareholder return profile?
The filing shows continued growth: 2005 consolidated revenues rose to $150.2 billion (from $135.0 billion in 2004), and segment profit reached $23.4 billion. GE declared $9.6 billion in dividends, raised its quarterly dividend 14% to $0.25, and has over 100 consecutive years of dividends. Management also has a $25 billion share repurchase program running through 2008, with $19.7 billion remaining at year-end.
04—Continue