01—Abstract
Summary
Summary of the 10-K filed February 20, 2008. Cited figures are marked; the original filing is the authoritative source.
General Electric's 2007 Form 10-K (filed February 20, 2008) reports record results: consolidated revenues rose to $172.7 billiona in 2007 from $151.8 billion in 2006, and net earnings reached $22.2 billion, or $2.17 diluted EPS (up from $2.00).
Earnings from continuing operations were $22.5 billionb, while discontinued operations produced a small loss of $0.3 billion, as large gains on the Plastics sale ($1.6 billion after tax) were offset by losses on WMC and Lake. Organic revenue growth was about 9%, and total segment profit grew 16% to $29.0 billion. Infrastructure, Commercial Finance, and GE Money drove most of the growth, and the company paid $11.7 billion in dividends while repurchasing $13.9 billion of stock.
The main investor debate centers on GE Capital. GECS borrowings reached $500.9 billionc, and the GE Capital debt-to-equity ratio rose to 8.10:1 from 7.52:1. GE Money's U.S. delinquency rate increased to 5.52% from 4.93%, and the company acknowledged a deteriorating U.S. consumer credit environment, with about one-third of its U.S.-managed portfolio exposed to subprime borrowers.
GE also disclosed an SEC investigation into hedge accounting and revenue recognition. Its internal review identified errors in previously reported results, which the company concluded were immaterial, so no restatement was required, though it did identify significant deficiencies in internal control (not a material weakness). GE maintained its AAA/Aaa ratings and a $15 billiond three-year buyback authorization, and it announced it would move its headquarters to London.
The company also completed a large string of acquisitions in 2007, including Smiths Aerospace and Vetco Gray, and it agreed to acquire most of Merrill Lynch Capital in February 2008. Investors should weigh the strong industrial earnings and cash returns against the financial services leverage, rising credit losses, and open regulatory matters.
02—Key points
Key Highlights
- Consolidated revenues rose 14% to $172.7 billion in 2007; organic revenue growth was about 9%, and global revenues reached $86.5 billion (50% of the total).
- Net earnings increased 7% to $22.2 billion; diluted EPS was $2.17 versus $2.00, with continuing-operations EPS of $2.20. Discontinued operations were a small loss of $0.3 billion.
- Total segment profit grew 16% to $29.0 billion, led by Infrastructure ($10.8 billion, up 22%), Commercial Finance ($6.0 billion), and GE Money ($4.3 billion, up 31%).
- GE Capital leverage rose: total GECS borrowings were $500.9 billion and the debt-to-equity ratio was 8.10:1, versus 7.52:1 in 2006. GE Money's U.S. delinquency rate increased to 5.52%.
- Shareholder returns remained substantial: $11.7 billion in dividends declared ($1.15 per share, up 12%), $13.9 billion in share repurchases, and a new three-year $15 billion program authorized in December 2007.
- Regulatory and control matters: an ongoing SEC formal investigation into hedge accounting and revenue recognition; errors were identified but deemed immaterial with no restatement, and significant (not material-weakness) control deficiencies were disclosed.
- Strategic moves: Plastics was sold for $11.6 billion, Smiths Aerospace ($5.2 billion) and Vetco Gray were acquired, and GE announced a February 2008 headquarters move to London plus the purchase of most of Merrill Lynch Capital.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, General Electric Co kept $0.13.
- Revenue$169.96B100.0%
- Cost of revenue−$47.31B27.8%
- Gross profit$122.66B72.2%
- Operating costs−$97.04B57.1%
- Operating income$25.61B15.1%
- Interest, other & tax−$3.41B2.0%
- Net income$22.21B13.1%
Where FY2007 revenue went
$169.96B- Operating costs: $97.04B, 57% of revenue
- Cost of revenue: $47.31B, 28% of revenue
- Net income: $22.21B, 13% of revenue
- Interest, other & tax: $3.41B, 2.0% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 20, 2008Financial Statements
05—Questions
Frequently Asked Questions
How did GE's core industrial businesses perform in 2007?
Infrastructure was the standout, with revenues up 23% to $57.9 billion and segment profit up 22% to $10.8 billion, driven by Aviation, Energy, and Oil & Gas. Healthcare revenues rose only 3% and its segment profit fell 3%, reflecting price pressure and regulatory shipment suspensions. Industrial revenues were flat at $17.7 billion, with Consumer & Industrial restructuring to offset weak housing demand.
Is GE's financial services exposure a risk for investors?
It is the most significant issue in the filing. GECS borrowings of $500.9 billion and a debt-to-equity ratio of 8.10:1 reflect heavy reliance on capital markets. GE Money's U.S. delinquencies rose to 5.52%, and about one-third of its U.S.-managed portfolio is subprime. Management said it has never violated its debt covenants and that its AAA rating supports funding access, but deteriorating consumer credit and higher provisions for losses ($4.5 billion, up 45%) are clear pressure points.
What is the status of the SEC investigation and internal control issues?
The SEC has an ongoing formal investigation covering hedge accounting and revenue recognition, and GE is cooperating and has regularly reported findings. An internal review identified errors, including cut-off and spare-parts profit issues, that management judged immaterial, so prior periods were not restated but were adjusted in the 2007 comparatives. Management and KPMG concluded the issues constitute significant deficiencies, not a material weakness, and ICFR was deemed effective as of December 31, 2007.
How strong is GE's cash generation and capital return policy?
GE's industrial cash from operating activities (CFOA excluding GECS dividends) grew 15% to $16.0 billion, and free cash flow reached $19.0 billion. Dividends were raised 11% to $0.31 per quarter, marking 32 consecutive years of increases, and the company repurchased $13.9 billion of stock in 2007. The company expects to issue about $80 billion of long-term debt in 2008 to fund operations and capital returns.
06—Continue