GENERAL ELECTRIC CO
Item 1. Business
General
Unless otherwise indicated by the context, we use the terms “GE” and “GECC” on the basis of consolidation described in Note 1 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. Also, unless otherwise indicated by the context, “General Electric” means the parent company, General Electric Company (the Company).
General Electric’s address is 1 River Road, Schenectady, NY 12345-6999; we also maintain executive offices at 3135 Easton Turnpike, Fairfield, CT 06828-0001.
We are one of the largest and most diversified infrastructure and financial services corporations in the world. With products and services ranging from aircraft engines, power generation, oil and gas production equipment, and household appliances to medical imaging, business and consumer financing and industrial products, we serve customers in more than 100 countries and employ approximately 307,000 people worldwide. Since our incorporation in 1892, we have developed or acquired new technologies and services that have broadened and changed considerably the scope of our activities.
In virtually all of our global business activities, we encounter aggressive and able competition. In many instances, the competitive climate is characterized by changing technology that requires continuing research and development. With respect to manufacturing operations, we believe that, in general, we are one of the leading firms in most of the major industries in which we participate. The businesses in which General Electric Capital Corporation (GECC) engages are subject to competition from various types of financial institutions, including commercial banks, thrifts, investment banks, broker-dealers, credit unions, leasing companies, consumer loan companies, independent finance companies and finance companies associated with manufacturers.
On November 15, 2013, we announced that we intend to pursue an initial public offering (IPO) of our North American Retail Finance business (Retail Finance) as a first step in a staged exit from that business. We plan to file a registration statement with the U.S. Securities and Exchange Commission (SEC) in the first quarter of 2014 and complete the IPO later in 2014.
We plan to issue up to 20% of the equity of Retail Finance in the IPO, in exchange for cash that will be used to increase the capital of the new company. We currently intend to complete our exit from Retail Finance in 2015 through a split-off transaction, by making a tax-free distribution of our remaining interest in Retail Finance to electing GE stockholders in exchange for shares of GE’s common stock. We may also decide to exit by selling or otherwise distributing or disposing of all or a portion of our remaining interest in the Retail Finance shares.
Prior to January 28, 2011, we also operated a media company, NBC Universal, Inc. (NBCU). Effective January 28, 2011, we held a 49% interest in a media entity that included the NBC Universal businesses. On March 19, 2013, we completed the sale of our remaining 49% common equity interest to Comcast Corporation.
(3)
Forward-Looking Statements
This document contains “forward-looking statements” - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: current economic and financial conditions, including volatility in interest and exchange rates, commodity and equity prices and the value of financial assets; potential market disruptions or other impacts arising in the United States or Europe from developments in sovereign debt situations; the impact of conditions in the financial and credit markets on the availability and cost of General Electric Capital Corporation’s (GECC) funding and on our ability to reduce GECC’s asset levels as planned; the impact of conditions in the housing market and unemployment rates on the level of commercial and consumer credit defaults; pending and future mortgage securitization claims and litigation in connection with WMC, which may affect our estimates of liability, including possible loss estimates; our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so; the adequacy of our cash flows and earnings and other conditions which may affect our ability to pay our quarterly dividend at the planned level or to repurchase shares at planned levels; GECC’s ability to pay dividends to GE at the planned level; our ability to convert pre-order commitments/wins into orders; the price we realize on orders since commitments/wins are stated at list prices; the level of demand and financial performance of the major industries we serve, including, without limitation, air and rail transportation, energy generation, real estate and healthcare; the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including the impact of financial services regulation; our capital allocation plans, as such plans may change including with respect to the timing and size of share repurchases, acquisitions, joint ventures, dispositions and other strategic actions; our success in completing announced transactions and integrating acquired businesses; our ability to complete the staged exit from our North American Retail Finance business as planned; the impact of potential information technology or data security breaches; and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These uncertainties are described in more detail in Part I,
Item 1A. Risk Factors
The following discussion of risk factors contains “forward-looking statements,” as discussed in Item 1. “Business”. These risk factors may be important to understanding any statement in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A), and the consolidated financial statements and related notes in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Our businesses routinely encounter and address risks, some of which will cause our future results to be different - sometimes materially different - than we presently anticipate. Discussion about important operational risks that our businesses encounter can be found in the business descriptions in Item 1. “Business” and the MD&A section of this Form 10-K Report. Below, we describe certain important strategic, operational, financial, and legal and compliance risks. Our reactions to material future developments as well as our competitors’ reactions to those developments will affect our future results.
Our growth is subject to global economic and political risks.
We operate in virtually every part of the world and serve customers in more than 100 countries. In 2013, approximately 53% of our revenue was attributable to activities outside the United States. Our operations are subject to the effects of global competition and geopolitical risks. They are also affected by local economic environments, including inflation, recession, currency volatility and actual or anticipated default on sovereign debt. Political changes, some of which may be disruptive, can interfere with our supply chain, our customers and all of our activities in a particular location. While some of these global economic and political risks can be hedged using derivatives or other financial instruments and some are insurable, such attempts to mitigate these risks are costly and not always successful, and our ability to engage in such mitigation may decrease or become even more costly as a result of more volatile market conditions.
(15)
We are subject to a wide variety of laws, regulations and government policies that may change in significant ways.
Our businesses are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and policies. There can be no assurance that laws, regulations and policies will not be changed in ways that will require us to modify our business models and objectives or affect our returns on investments by restricting existing activities and products, subjecting them to escalating costs or prohibiting them outright. In particular, U.S. and non-U.S. governments are undertaking a substantial revision of the regulation and supervision of bank and non-bank financial institutions, consumer lending, the over-the-counter derivatives market and tax laws and regulations, which changes may have an effect on GE’s and GE Capital’s structure, operations, liquidity, capital requirements, effective tax rate and performance. We are also subject to a number of trade control laws and regulations that may affect our ability to sell our products in global markets. In addition, we are subject to regulatory risks from laws that reduce the allowable lending rate or limit consumer borrowing, local capital requirements that may increase the risk of not being able to retrieve assets, and changes to tax law that may affect our return on investments. For example, GE’s effective tax rate is reduced because active business income earned and indefinitely reinvested outside the United States is taxed at less than the U.S. rate. A significant portion of this reduction depends upon a provision of U.S. tax law that defers the imposition of U.S. tax on certain active financial services income until that income is repatriated to the United States as a dividend. This provision is consistent with international tax norms and permits U.S. financial services companies to compete more effectively with non-U.S. financial institutions in global markets. This provision, which had expired at the end of 2011, was reinstated in January 2013 retroactively for two years through the end of 2013. This provision also had been scheduled to expire and had been extended by Congress on six previous occasions, but there can be no assurance that it will continue to be extended. In the event the provision is not extended after 2013, the current U.S. tax imposed on active financial services income earned outside the United States would increase, making it more difficult for U.S. financial services companies to compete in global markets. If this provision is not extended, we expect our effective tax rate to increase significantly after 2014. In addition, efforts by public and private sectors to control the growth of healthcare costs may lead to lower reimbursements and increased utilization controls related to the use of our products by healthcare providers. Continued government scrutiny, including reviews of the U.S. Food and Drug Administration (U.S. FDA) medical device pre-market authorization and post-market surveillance processes, may impact the requirements for marketing our products and slow our ability to introduce new products, resulting in an adverse impact on our business. Furthermore, we have been, and expect to continue, participating in U.S. and international governmental programs, which require us to comply with strict governmental regulations. Inability to comply with these regulations could adversely affect our status in these projects and adversely affect our results of operations, financial position and cash flows.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are subject to prudential oversight by the Federal Reserve, including as a result of GECC’s designation as a nonbank systemically important financial institution, which subjects us to increased and evolving regulatory requirements.
GECC is a regulated savings and loan holding company and in 2011 became subject to Federal Reserve Board (FRB) supervision under the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA). In 2013, the U.S. Financial Stability Oversight Council (FSOC) designated GECC as a nonbank systemically important financial institution (nonbank SIFI) under the DFA. As a result of this change in supervision and designation, stricter prudential regulatory standards and supervision apply to GECC. Many of the rulemakings for supervision of nonbank SIFIs are not final and therefore the exact impact and implementation date remain uncertain. These DFA rulemakings will require, among other items, enhanced capital and liquidity levels, compliance with the comprehensive capital analysis and review regulations (CCAR), compliance with counterparty credit exposure limits, and the development of a resolution plan for submission to regulators. The FRB recently finalized regulations to revise and replace its current rules on capital adequacy and to extend capital regulations to savings and loan holding companies like GECC. GECC will ultimately also become subject to the Basel III advanced capital rules that will be applicable to institutions with $250 billion or more in assets. The FRB has also indicated in a proposed rulemaking that it will require nonbank SIFIs to submit annual capital plans for review, including institutions’ plans to make capital distributions, such as dividend payments. While GECC is not yet subject to this regulation, GECC’s capital allocation planning remains subject to FRB review as a savings and loan holding company. For additional information, see Liquidity and Borrowings in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K Report.
(16)
We are subject to legal proceedings and legal compliance risks.
We are subject to a variety of legal proceedings and legal compliance risks in virtually every part of the world. We, our representatives, and the industries in which we operate are subject to continuing scrutiny by regulators and other governmental authorities, which may, in certain circumstances, lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages. Additionally, we and our subsidiaries are involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. These include the dredging of polychlorinated biphenyls from a 40-mile stretch of the upper Hudson River in New York State, as described in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K Report. We are also subject to certain other legal proceedings described in Item 3. “Legal Proceedings” of this Form 10-K Report. While we believe that we have adopted appropriate risk management and compliance programs, the global and diverse nature of our operations means that legal and compliance risks will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time.
The success of our business depends on achieving our strategic objectives, including through acquisitions, joint ventures, dispositions and restructurings.
With respect to acquisitions, joint ventures and restructuring actions, we may not achieve expected returns and other benefits as a result of various factors, including integration and collaboration challenges, such as personnel and technology. In addition, we may not achieve anticipated cost savings from restructuring actions, which could result in lower margin rates. We also participate in a number of joint ventures with other companies or government enterprises in various markets around the world, including joint ventures where we may have a lesser degree of control over the business operations, which may expose us to additional operational, financial, legal or compliance risks. We also continue to evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or executing alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives. For example, delays in obtaining tax rulings and regulatory approvals or clearances, and disruptions or volatility in the capital markets may impact our ability to complete the staged exit from our North American Retail Finance business as planned. Alternatively, we may dispose of a business at a price or on terms that are less than we had anticipated. After reaching an agreement with a buyer or seller for the acquisition or disposition of a business, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals on acceptable terms, which may prevent us from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside our control could affect our future financial results.
(17)
Sustained increases in pension and healthcare benefits costs may reduce our profitability.
Our results of operations may be positively or negatively affected by the amount of income or expense we record for our defined benefit pension plans. U.S. generally accepted accounting principles (GAAP) require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions we use to estimate pension expense for 2014 are the discount rate and the expected long-term rate of return on the plan assets. In addition, we are required to make an annual measurement of plan assets and liabilities, which may result in a significant reduction or increase to equity. At the end of 2013, the GE Pension Plan was underfunded, on a U.S. GAAP basis, by $4.7 billion, and the GE Supplementary Pension Plan, an unfunded plan, had a projected benefit obligation of $5.2 billion. For a discussion regarding how our financial statements can be affected by pension plan accounting policies, see Critical Accounting Estimates - Pension Assumptions in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. Although GAAP expense and pension funding contributions are not directly related, key economic factors that affect GAAP expense would also likely affect the amount of cash we would contribute to pension plans as required under the Employee Retirement Income Security Act (ERISA). Failure to achieve expected returns on plan assets driven by various factors, which could include a continued environment of low interest rates or sustained market volatility, could also result in an increase to the amount of cash we would be required to contribute to pension plans. In addition, upward pressure on the cost of providing healthcare benefits to current employees and retirees may increase future funding obligations. Although we have actively sought to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce our profitability.
Conditions in the financial and credit markets may affect the availability and cost of funding.
As disclosed in more detail in the Liquidity and Borrowings section in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K Report, a large portion of our borrowings is in the form of commercial paper and long-term debt. We continue to rely on the availability of the unsecured debt markets to access funding for term and commercial paper maturities for 2014 and beyond and to fund our operations without incurring additional U.S. tax. In addition, we rely on the availability of the commercial paper markets to refinance maturing commercial paper debt throughout the year. In order to further diversify our funding sources, GE Capital continues to expand its reliance on alternative sources of funding, including bank deposits, securitizations and other asset-based funding. There can be no assurance that we will succeed in increasing the diversification of our funding sources or that the short and long-term credit markets will be available or, if available, that the cost of funding will not substantially increase and affect our overall profitability. Factors that may affect the availability of funding or cause an increase in our funding costs include: a decreased reliance on short-term funding, such as commercial paper, in favor of longer-term funding arrangements; decreased capacity and increased competition among debt issuers; increased competition for deposits in our affiliate banks’ markets; and potential market disruptions or other impacts arising in the United States or Europe from developments in sovereign debt situations. If GE Capital’s cost of funding were to increase, it may adversely affect its competitive position and result in lower net interest margins, earnings and cash flows as well as lower returns on its shareowner’s equity and invested capital.
(18)
A deterioration of conditions in the global economy, the major industries we serve or the financial markets, or the soundness of financial institutions and governments we deal with, may adversely affect our business and results of operations.
The business and operating results of our industrial businesses have been, and will continue to be, affected by worldwide economic conditions, including conditions in the air and rail transportation, energy generation, healthcare, home building and other major industries we serve. Existing or potential customers may delay or cancel plans to purchase our products and services, including large infrastructure projects, and may not be able to fulfill their obligations to us in a timely fashion as a result of business deterioration, cash flow shortages, and difficulty obtaining financing due to slower global economic growth and other challenges affecting the global economy. In particular, the airline industry is highly cyclical, and the level of demand for air travel is correlated to the strength of the U.S. and international economies. An extended period of slow growth in the U.S. or internationally that results in the loss of business and leisure traffic could have a material adverse effect on our airline customers and the viability of their business. Service contract cancellations or customer dynamics such as early aircraft retirements or reduced energy demand in our Power & Water business could affect our ability to fully recover our contract costs and estimated earnings. Further, our vendors may be experiencing similar conditions, which may impact their ability to fulfill their obligations to us. If slower growth in the global economy continues for a significant period or there is significant deterioration in the global economy, our results of operations, financial position and cash flows could be materially adversely affected.
If conditions in the financial markets deteriorate, there can be no assurance that we will be able to recover fully the value of certain assets, including real estate, goodwill, intangibles and tax assets. Deterioration in the economy and in default and recovery rates could require us to increase allowances for loan losses, impairments or write-offs, which, depending on the amount of the increase, could have a material adverse effect on our business, financial position and results of operations.
In addition, GE Capital has exposure to many different industries and counterparties, including sovereign governments, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. Many of these transactions expose GE Capital to credit risk in the event of default of its counterparty or client. In addition, GE Capital’s credit risk may be increased when the value of collateral held cannot be realized through sale or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to it. GE Capital also has exposure to these financial institutions in the form of cash on deposit and unsecured debt instruments held in its investment portfolios. GE Capital has policies relating to credit rating requirements and to exposure limits to counterparties (as described in Note 22 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report), which are designed to limit credit and liquidity risk. There can be no assurance, however, that any losses or impairments to the carrying value of financial assets would not materially and adversely affect GE Capital’s business, financial position and results of operations.
Failure to maintain our credit ratings could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets.
The major debt rating agencies routinely evaluate our debt. This evaluation is based on a number of factors, which include financial strength as well as transparency with rating agencies and timeliness of financial reporting. As of December 31, 2013, GE and GECC’s long-term unsecured debt credit rating from Standard and Poor’s Ratings Service (S&P) was AA+ (the second highest of 22 rating categories) with a stable outlook. The long-term unsecured debt credit rating from Moody’s Investors Service (Moody’s) for GE was Aa3 (the fourth highest of 21 rating categories) and for GECC was A1 (the fifth highest of 21 credit ratings), both with stable outlooks. As of December 31, 2013, GE and GECC’s short-term credit rating from S&P was A-1+ (the highest rating category of six categories) and from Moody’s was P-1 (the highest rating category of four categories). There can be no assurance that we will be able to maintain our credit ratings and failure to do so could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets. Various debt and derivative instruments, guarantees and covenants would require posting additional capital or collateral in the event of a ratings downgrade, which, depending on the extent of the downgrade, could have a material adverse effect on our liquidity and capital position.
(19)
Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions, services and data.
Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related attacks pose a risk to the security of our and our customers’, suppliers’ and third-party service providers’ products, systems and networks and the confidentiality, availability and integrity of our data. While we attempt to mitigate these risks by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, we remain potentially vulnerable to additional known or unknown threats. We also may have access to sensitive, confidential or personal data or information in certain of our businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Despite our efforts to protect sensitive, confidential or personal data or information, we may be vulnerable to security breaches, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions. In addition, a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action.
We may face operational challenges that could have a material adverse effect on our business, reputation, financial position and results of operations, and we are dependent on maintenance of existing product lines, market acceptance of new product and service introductions and product and service innovations for continued revenue and earnings growth.
We produce highly sophisticated products and provide specialized services for both our and third-party products that incorporate or use leading-edge technology, including both hardware and software. While we have built extensive operational processes to ensure that the design, manufacture and servicing of such products meet the most rigorous quality standards, there can be no assurance that we or our customers or other third parties will not experience operational process failures or other problems, including through intentional acts, that could result in potential product, safety, regulatory or environmental risks. Despite the existence of crisis management or business continuity plans, operational failures or quality issues, including as a result of organizational changes, could have a material adverse effect on our business, reputation, financial position and results of operations. In addition, the markets in which we operate are subject to technological change and require skilled talent. Our long-term operating results depend substantially upon our ability to continually develop, introduce, and market new and innovative products and services, to modify existing products and services, to customize products and services, to respond to technological change and to execute our product and service development in line with our projected cost estimates.
Our intellectual property portfolio may not prevent competitors from independently developing products and services similar to or duplicative to ours.
Our patents and other intellectual property may not prevent competitors from independently developing or selling products and services similar to or duplicative of ours, and there can be no assurance that the resources invested by us to protect our intellectual property will be sufficient or that our intellectual property portfolio will adequately deter misappropriation or improper use of our technology. We could also face competition in some countries where we have not invested in an intellectual property portfolio. We also face attempts to gain unauthorized access to our IT systems or products for the purpose of improperly acquiring our trade secrets or confidential business information. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development. We may be unable to secure or retain ownership or rights to use data in certain software analytics or services offerings. In addition, we may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming. If GE is found to infringe any third-party rights, we could be required to pay substantial damages or we could be enjoined from offering some of our products and services. Also, there can be no assurances that we will be able to obtain or renew from third parties the licenses we need in the future, and there is no assurance that such licenses can be obtained on reasonable terms.
(20)
Significant raw material shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could increase our operating costs and adversely impact the competitive positions of our products.
Our reliance on third-party suppliers, contract manufacturers and service providers, and commodity markets to secure raw materials, parts, components and sub-systems used in our products exposes us to volatility in the prices and availability of these materials, parts, components, systems and services. Some of these suppliers or their sub-suppliers are limited- or sole-source suppliers. A disruption in deliveries from our third-party suppliers, contract manufacturers or service providers, capacity constraints, production disruptions, price increases, or decreased availability of raw materials or commodities, including as a result of catastrophic events, could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. Quality and sourcing issues experienced by third-party providers can also adversely affect the quality and effectiveness of our products and services and result in liability and reputational harm.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Manufacturing operations are carried out at approximately 237 manufacturing plants located in 38 states in the United States and Puerto Rico and at approximately 305 manufacturing plants located in 40 other countries.
Item 3. Legal Proceedings
As previously reported, in February and March 2012, two shareholder derivative actions were filed in New York Supreme Court naming as defendants GE, a number of GE officers (including our chief executive officer and chief financial officer) and our directors. The complaints sought unspecified damages and principally alleged breaches of fiduciary duty and other causes of action related to 2009 earnings forecasts for GE Capital, changes in the GE dividend and GE’s credit rating in 2009 and GE’s 2008 commercial paper program. In June 2012, these two cases were consolidated into a single action. GE filed a motion to dismiss the consolidated action in December 2012. On November 7, 2013, the court entered an order dismissing the consolidated complaint and granting plaintiffs leave to serve an amended complaint. Plaintiffs served, and later withdrew, an amended complaint, and on January 3, 2014, the court directed the entry of final judgment in favor of GE.
There are 14 lawsuits relating to pending mortgage loan repurchase claims in which WMC, our U.S. mortgage business that we sold in 2007, is a party. The adverse parties in these cases are securitization trustees or parties claiming to act on their behalf. While the alleged claims for relief vary from case to case, the complaints and counterclaims in these actions generally assert claims for breach of contract, indemnification, and/or declaratory judgment, and seek specific performance (repurchase) and/or monetary damages. In the fourth quarter of 2013, WMC entered into settlements that reduce its exposure on claims asserted in certain securitizations. Pending claim and Litigation Claim amounts reported herein reflect the impact of these settlements.
Five WMC cases are pending in the United States District Court for the District of Connecticut. Four of these cases were initiated in 2012, and one was initiated in the third quarter of 2013. Deutsche Bank National Trust Company (Deutsche Bank) is the adverse party in four cases, and Law Debenture Trust Company of New York (Law Debenture) is the adverse party in one case. The Deutsche Bank complaints assert claims on approximately $2,800 million of mortgage loans and seek to recover damages in excess of approximately $1,800 million. The Law Debenture complaint asserts claims on approximately $800 million of mortgage loans, and alleges losses on these loans in excess of approximately $425 million. GECC was initially named a defendant in each of the Connecticut cases and has been dismissed from all of those cases without prejudice.
(21)
Four WMC cases are pending in the United States District Court for the District of Minnesota against US Bank National Association (US Bank), one of which was initiated by WMC seeking declaratory judgment. Three of these cases were filed in 2012, and one was filed in 2011. One additional case filed by WMC in the fourth quarter 2012 was dismissed without prejudice in July 2013, due to a proceeding involving the same securitization in New York State Supreme Court, as described below. WMC voluntarily dismissed without prejudice in January 2014 two other cases in the United States District Court for the District of Minnesota in which WMC had been seeking declaratory judgments. The Minnesota cases still pending involve claims on approximately $800 million of mortgage loans and do not specify the amount of damages sought. In September 2013, the District Court granted in part and denied in part WMC’s motions to dismiss or for summary judgment in these remaining cases, dismissing US Bank’s claims for indemnification and for damages based on WMC’s alleged refusal to repurchase but holding that WMC could be liable for money damages if US Bank can prove that WMC knew of a breach of representation or warranty in the mortgage loan pool of which the trustee had no knowledge and failed to notify the trustee. The court also held that US Bank may seek to recover money damages against WMC for losses incurred by the trustee arising from loans previously liquidated by the trustee if WMC was grossly negligent regarding notifying the trustee of the presence of defects in the loans.
Three cases are pending against WMC in New York State Supreme Court, all of which were initiated by securitization trustees or securities administrators. These cases involve, in the aggregate, claims involving approximately $3,600 million of mortgage loans. One of these lawsuits was initiated by Deutsche Bank in the second quarter 2013 and names as defendants WMC and Barclays Bank PLC. It involves claims against WMC on approximately $1,000 million of mortgage loans and does not specify the amount of damages sought. The second case, in which the plaintiff is The Bank of New York Mellon (BNY), was initiated in the fourth quarter 2012 and names as defendants WMC, J.P. Morgan Mortgage Acquisition Corporation and JPMorgan Chase Bank, N.A. GECC, which was initially named, is no longer a defendant. This case arises from the same securitization as one of the cases initiated by WMC in Minnesota, noted above. BNY asserts claims on approximately $1,300 million of mortgage loans, and seeks to recover damages in excess of $650 million. The third case was initiated by BNY in November 2013 and names as defendants WMC, J.P. Morgan Mortgage Acquisition Corporation and JPMorgan Chase Bank, N.A. In this case, BNY asserts claims on approximately $1,300 million of mortgage loans, and seeks to recover damages in excess of $600 million. An additional case, initiated in the second quarter 2013 by Seagull Point, LLC (Seagull Point), acting individually and purportedly on behalf of Morgan Stanley ABS Capital I Inc. Trust 2007-HE5, named as defendants WMC, Decision One Mortgage Company, LLC (Decision One), Morgan Stanley Mortgage Capital Inc., Morgan Stanley Mortgage Capital Holdings LLC, Morgan Stanley ABS Capital I Inc., and Morgan Stanley ABS Capital I Inc. Trust 2007-HE5 (as nominal defendant), and sought damages against WMC and Decision One in excess of $475 million. Seagull Point dismissed the case in January 2014.
Two cases are pending against WMC in the United States District Court for the Southern District of New York. One case, in which the plaintiff is BNY, was filed in the third quarter 2012. In the second quarter 2013, BNY filed an amended complaint in which it asserts claims on approximately $900 million of mortgage loans, and seeks to recover damages in excess of $378 million. In September 2013, the District Court issued a ruling from the bench denying WMC’s motion to dismiss the trustee’s claim for damages and holding that the initial submission of claims on certain mortgage loans was sufficient to provide notice to WMC that the entire pool of loans supporting the securitization was potentially subject to claims for relief by the trustee. One case was initiated by the Federal Housing Finance Agency (FHFA) by filing a summons with notice in the fourth quarter 2012. In the second quarter 2013, Deutsche Bank, in its role as securitization trustee of the trust at issue in the case, intervened as a plaintiff and filed a complaint relating to approximately $1,300 million of loans and alleging losses in excess of approximately $100 million. In December 2013, the District Court issued an order denying WMC’s motion to dismiss the lawsuit on statute of limitations and other grounds.
(22)
The amounts of the mortgage loans at issue in these cases (discussed above) reflect the purchase price or unpaid principal balances of the loans at the time of purchase and do not give effect to pay downs, accrued interest or fees, or potential recoveries based upon the underlying collateral. Of the mortgage loans involved in these lawsuits, approximately $3,900 million were included in WMC’s pending claims at December 31, 2013. The claims relating to other mortgage loans not included in WMC’s pending claims consist of sampling-based claims in two cases on approximately $600 million of mortgage loans and, in ten cases, claims for repurchase or damages based on the alleged failure to provide notice of defective loans, breach of a corporate representation and warranty, and/or non-specific claims for rescissionary damages on approximately $6,200 million of mortgage loans, as of December 31, 2013. The dismissal of a lawsuit subsequent to December 31, 2013 decreased the pending claims amount by $123 million and the Litigation Claims amount by $318 million. See Note 2 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K Report for additional information.
Item 4. Mine Safety Disclosures.
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
With respect to “Market Information,” in the United States, GE common stock is listed on the New York Stock Exchange (its principal market). GE common stock is also listed on the London Stock Exchange and the Frankfurt Stock Exchange. Trading prices, as reported on the New York Stock Exchange, Inc., Composite Transactions Tape, and dividend information follow:
Common stock market price
Dividends
(In dollars)
High
Low
declared
Fourth quarter
$
28.09
$
23.50
$
0.22
Third quarter
24.95
22.76
0.19
Second quarter
24.45
21.11
0.19
First quarter
23.90
20.68
0.19
Fourth quarter
$
23.18
$
19.87
$
0.19
Third quarter
22.96
19.36
0.17
Second quarter
20.84
18.02
0.17
First quarter
21.00
18.23
0.17
As of January 31, 2014, there were approximately 500,000 shareowner accounts of record.
(23)
During the fourth quarter of 2013, we purchased shares of our common stock as follows.
Approximate
dollar value
Total number
of shares that
of shares
may yet be
purchased
purchased
as part of
under our
Total number
Average
our share
share
of shares
price paid
repurchase
repurchase
Period(a)
purchased
(a)(b)
per share
program
(a)(c)
program
(c)
(Shares in thousands)
October
6,117
$
25.32
6,010
November
26,466
$
27.00
26,385
December
55,610
$
27.18
55,493
Total
88,193
$
27.00
87,888
$
12.3
billion
(a)
Information is presented on a fiscal calendar basis, consistent with our quarterly financial reporting.
(b)
This category includes 305 thousand shares repurchased from our various benefit plans.
(c)
Shares are repurchased through the 2007 GE Share Repurchase Program (the Program). Effective December 14, 2012, we increased the existing Program authorization by $10 billion to $25 billion and extended the Program, which would have otherwise expired on December 31, 2013, through 2015. Effective February 12, 2013, we increased this Program authorization by an additional $10 billion resulting in authorization to repurchase up to a total of $35 billion of our common stock through 2015. As of December 31, 2013, we had repurchased a total of approximately $22.7 billion of common stock under the Program. The Program is flexible and shares are acquired with a combination of borrowings and free cash flow from the public markets and other sources, including GE Stock Direct, a stock purchase plan that is available to the public.
For information regarding compensation plans under which equity securities are authorized for issuance, see Note 16 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(24)
Five-year financial performance graph: 2009-2013
Comparison of five-year cumulative return among GE, S&P 500 and Dow Jones Industrial Average
The annual changes for the five-year period shown in the graph on this page are based on the assumption that $100 had been invested in GE stock, the Standard & Poor’s 500 Stock Index (S&P 500) and the Dow Jones Industrial Average (DJIA) on December 31, 2008, and that all quarterly dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31, 2013.
GE
$
$
$
$
$
$
S&P 500
DJIA
(25)
Item 6. Selected Financial Data.
The following table provides key information for Consolidated, GE and GECC.
(Dollars in millions; per-share amounts in dollars)
General Electric Company and
Consolidated Affiliates
Revenues and other income
$
146,045
$
146,684
$
146,542
$
148,875
$
153,686
Earnings from continuing operations attributable to the
Company
15,177
14,624
14,122
12,577
10,993
Earnings (loss) from discontinued operations, net of taxes,
attributable to the Company
(2,120)
(983)
(933)
Net earnings attributable to the Company
13,057
13,641
14,151
11,644
11,025
Dividends declared(a)
8,060
7,372
7,498
5,212
6,785
Return on average GE shareowners’ equity(b)
12.2
%
12.1
%
12.1
%
12.3
%
11.7
%
Per common share
Earnings from continuing operations - diluted
$
1.47
$
1.38
$
1.23
$
1.15
$
1.00
Earnings (loss) from discontinued operations - diluted
(0.21)
(0.09)
-
(0.09)
-
Net earnings - diluted
1.27
1.29
1.23
1.06
1.01
Earnings from continuing operations - basic
1.48
1.39
1.23
1.15
1.00
Earnings (loss) from discontinued operations - basic
(0.21)
(0.09)
-
(0.09)
-
Net earnings - basic
1.28
1.29
1.24
1.06
1.01
Dividends declared
0.79
0.70
0.61
0.46
0.61
Stock price range
28.09-20.68
23.18-18.02
21.65-14.02
19.70-13.75
17.52-5.87
Year-end closing stock price
28.03
20.99
17.91
18.29
15.13
Cash and equivalents
88,555
77,268
84,440
78,917
70,469
Total assets of continuing operations
654,221
681,684
714,018
729,895
751,677
Total assets
656,560
684,999
718,003
745,426
780,309
Long-term borrowings
221,665
236,084
243,459
293,323
336,172
Common shares outstanding - average (in thousands)
10,222,198
10,522,922
10,591,146
10,661,078
10,613,717
Common shareowner accounts - average
512,000
537,000
570,000
588,000
605,000
Employees at year end(c)
United States
135,000
134,000
131,000
121,000
122,000
Other countries
172,000
171,000
170,000
152,000
168,000
Total employees(c)
307,000
305,000
301,000
273,000
290,000
GE data
Short-term borrowings
$
1,841
$
6,041
$
2,184
$
$
Long-term borrowings
11,515
11,428
9,405
9,656
11,681
Noncontrolling interests
1,006
4,098
5,797
GE shareowners’ equity
130,566
123,026
116,438
118,936
117,291
Total capital invested
$
144,758
$
141,272
$
129,033
$
133,146
$
135,273
Return on average total capital invested(b)
11.3
%
11.7
%
11.7
%
12.0
%
10.7
%
Borrowings as a percentage of total capital invested(b)
9.2
%
12.4
%
9.0
%
7.6
%
9.0
%
Working capital(b)
$
(1,278)
$
(567)
$
(1,712)
$
(3,035)
$
(1,596)
GECC data
Revenues
$
44,067
$
45,364
$
48,324
$
49,163
$
51,065
Earnings from continuing operations attributable to GECC
8,258
7,345
6,480
3,083
1,364
Earnings (loss) from discontinued operations, net of taxes,
attributable to GECC
(2,054)
(1,130)
(928)
Net earnings attributable to GECC
6,204
6,215
6,510
2,155
1,415
Net earnings attributable to GECC common shareowner
5,906
6,092
6,510
2,155
1,415
GECC shareowners' equity
82,694
81,890
77,110
68,984
70,833
Total borrowings and bank deposits
371,062
397,039
442,830
470,363
493,223
Ratio of debt to equity at GECC(d)
4.49:1
4.85:1
5.74:1
6.82:1
6.96:1
Total assets(e)
$
516,829
$
539,351
$
584,643
$
605,365
$
650,465
Transactions between GE and GECC have been eliminated from the consolidated information.
(a)
Included $1,031 million of preferred stock dividends ($806 million related to our preferred stock redemption) in 2011 and $300 million in both 2010 and 2009.
(b)
Indicates terms are defined in the Glossary.
(c)
Excludes NBC Universal employees of 14,000 in both 2010 and 2009.
(d)
Ratios of 3.19:1, 3.66:1, 4.23:1, 5.25:1 and 5.45:1 for 2013, 2012, 2011, 2010 and 2009, respectively, net of cash and equivalents and with classification of hybrid debt as equity. For purposes of these ratios, cash and debt balances have been adjusted to include amounts classified as assets and liabilities of businesses held for sale and discontinued operations.
(e)
GECC’s total assets excludes deferred income tax liabilities, which are presented as assets for purposes of our consolidating balance sheet presentation.
(26)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operations
The consolidated financial statements of General Electric Company (the Company) combine the industrial manufacturing and services businesses of General Electric Company (GE) with the financial services businesses of General Electric Capital Corporation (GECC or financial services). Unless otherwise indicated by the context, we use the terms “GE” and “GECC” on the basis of consolidation described in Note 1 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in the Supplemental Information section.
We present Management’s Discussion of Operations in five parts: Overview of Our Earnings from 2011 through 2013, Global Risk Management, Segment Operations, Geographic Operations and Environmental Matters. Unless otherwise indicated, we refer to captions such as revenues and other income and earnings from continuing operations attributable to the company simply as “revenues” and “earnings” throughout this Management’s Discussion and Analysis. Similarly, discussion of other matters in our consolidated financial statements relates to continuing operations unless otherwise indicated. Discussion of GECC’s total assets excludes deferred income tax liabilities, which are presented as assets for purposes of our consolidating balance sheet presentations for this filing.
We supplement our GAAP net earnings and earnings per share (EPS) reporting by also reporting operating earnings and operating EPS (non-GAAP measures). Operating earnings and operating EPS include service costs and plan amendment amortization for our principal pension plans as these costs represent expenses associated with employee benefits earned. Operating earnings and operating EPS exclude non-operating pension cost/income such as interest costs, expected return on plan assets and non-cash amortization of actuarial gains and losses. We believe that this reporting provides better transparency to the employee benefit costs of our principal pension plans and Company operating results.
Overview of Our Earnings from 2011 through 2013
Earnings from continuing operations attributable to the Company increased 4% to $15.2 billion in 2013 and increased 4% to $14.6 billion in 2012, reflecting strong industrial segment growth and continued stabilization in financial services during the last two years. Operating earnings (non-GAAP measure), which exclude non-operating pension costs, increased 5% to $16.9 billion in 2013 compared with an 8% increase to $16.0 billion in 2012. Earnings per share (EPS) from continuing operations increased 7% to $1.47 in 2013 compared with a 12% increase to $1.38 in 2012. Operating EPS (non-GAAP measure) increased 9% to $1.64 in 2013 compared with a 16% increase to $1.51 in 2012. Net earnings attributable to the Company decreased 4% in 2013 reflecting a 4% increase in earnings from continuing operations, more than offset by an increase in losses from discontinued operations. Net earnings attributable to the Company decreased 4% in 2012 reflecting losses from discontinued operations, partially offset by an increase of 4% in earnings from continuing operations. We begin 2014 with a record backlog of $244 billion, continue to invest in market-leading technology and services and expect to continue industrial segment revenue and earnings growth.
Power & Water (18% and 23% of consolidated three-year revenues and total segment profit, respectively) revenues decreased 13% in 2013 primarily as a result of lower volume and the effects of the stronger U.S. dollar, partially offset by higher prices and other income. Revenues increased 10% in 2012 primarily as higher volume and other income were partially offset by the effects of the stronger U.S. dollar and lower prices. Segment profit decreased 8% in 2013 primarily driven by lower volume and lower cost productivity, partially offset by the effects of deflation, higher prices and other income. Segment profit increased 8% in 2012 as higher volume, increased other income and deflation were partially offset by lower prices, lower productivity and the stronger U.S. dollar.
(27)
Oil & Gas (10% and 8% of consolidated three-year revenues and total segment profit, respectively) revenues increased 11% in 2013 primarily as a result of higher volume and higher prices. Revenues increased 12% in 2012 as higher volume (driven by acquisitions) and higher sales of both equipment and services were partially offset by the stronger U.S. dollar. Segment profit increased 13% in 2013 primarily on higher volume and higher prices, partially offset by lower cost productivity. Segment profit increased 16% in 2012 on higher volume and increased productivity, partially offset by the effects of the stronger U.S. dollar.
Energy Management (5% and less than 1% of consolidated three-year revenues and total segment profit, respectively) revenues increased 2% in 2013 as higher volume was partially offset by the effects of the stronger U.S. dollar. In 2012, revenues increased 15% as a result of higher volume primarily from acquisitions, higher prices and increased other income offset partially by the effects of the stronger U.S. dollar. Segment profit decreased 16% in 2013 primarily driven by lower productivity. Segment profit increased 68% in 2012 primarily driven by higher prices and increased other income.
Aviation (14% and 17% of consolidated three-year revenues and total segment profit, respectively) revenues increased 10% in 2013 on higher volume and higher prices primarily driven by higher services and equipment sales in commercial spares and commercial engines, respectively. In 2012, Aviation revenues increased 6% as a result of higher prices and higher volume driven by increased commercial and military engine sales. Segment profit increased 16% in 2013 as a result of higher prices, higher volume and increased other income offset partially by the effects of inflation and lower productivity. Segment profit increased 7% in 2012 as higher prices and higher volume were partially offset by the effects of inflation and lower productivity.
Healthcare (12% and 13% of consolidated three-year revenues and total segment profit, respectively) revenues were slightly lower in 2013 on lower prices and the effects of a stronger U.S. dollar, partially offset by higher volume. Revenues increased 1% in 2012 due to higher volume in international equipment sales, with the strongest growth in emerging markets and other income, partially offset by the stronger U.S. dollar and lower prices. Segment profit increased 4% in 2013 as a result of increased productivity and volume, partially offset by lower prices, the effects of inflation and the stronger U.S. dollar. Segment profit increased 4% in 2012 as increased productivity, higher volume and other income were partially offset by lower prices and the effects of inflation.
Transportation (4% and 4% of consolidated three-year revenues and total segment profit, respectively) revenues increased 5% in 2013 due to higher volume, primarily from acquisitions. Revenues increased 15% in 2012 due to higher volume and higher prices related to increased equipment sales and services. Segment profit increased 13% in 2013 as a result of the effects of deflation, higher volume and increased productivity. Segment profit increased 36% in 2012 as a result of higher volume, higher prices and increased productivity, reflecting improved service margins.
Appliances & Lighting (formerly Home & Business Solutions) (5% and 1% of consolidated three-year revenues and total segment profit, respectively) revenues increased 5% in 2013 primarily on higher volume at Appliances. In 2012, revenues increased 4% reflecting higher prices at Appliances, partially offset by lower volume. Segment profit increased 23% in 2013 primarily as a result of improved productivity and higher prices. Segment profit increased 31% in 2012 as a result of higher prices, partially offset by the effects of inflation and lower productivity.
GE Capital (31% and 33% of consolidated three-year revenues and total segment profit, respectively) revenues decreased 3% in 2013 and 6% in 2012, reflecting a reduction in ending net investment (ENI). Net earnings increased 12% in 2013 and 13% in 2012 as a result of dispositions and higher gains, partially offset by higher impairments and higher provisions for losses on financing receivables. We reduced ENI, excluding cash and equivalents, to $380 billion at December 31, 2013. GECC is a diversely funded and smaller, more focused finance company with strong positions in several commercial mid-market and consumer financing segments.
(28)
We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the following fourth quarter are attributed to such businesses. Overall, the effects of acquisitions increased consolidated revenues $1.6 billion, $2.0 billion and $4.5 billion in 2013, 2012 and 2011, respectively. The effects of acquisitions on our consolidated net earnings were increases of $0.1 billion, $0.1 billion and an insignificant amount in 2013, 2012 and 2011, respectively. Dispositions also affected our ongoing results through lower revenues of $0.1 billion, $5.1 billion and $12.6 billion in 2013, 2012 and 2011, respectively. The effects of dispositions on net earnings were an increase of $1.4 billion in 2013 and decreases of $0.3 billion in both 2012 and 2011.
Discontinued Operations. In 2013, we sold our CLL trailer services business in Europe (CLL Trailer Services) and announced the planned sale of our Consumer banking business in Russia (Consumer Russia). These actions are consistent with our goal of reducing GECC ENI and focusing our businesses on selective financial services products where we have deep domain experience, broad distribution, and the ability to earn a consistent return on capital, while managing our overall balance sheet size and risk. Discontinued operations also includes GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), our U.S. recreational vehicle and marine equipment financing business (Consumer RV Marine), Consumer Mexico, Consumer Singapore, our Consumer home lending operations in Australia and New Zealand (Australian Home Lending) and our Consumer mortgage lending business in Ireland (Consumer Ireland). All of these operations were previously reported in the GE Capital segment.
We reported the operations described above as discontinued operations for all periods presented. For further information about discontinued operations, see the Segment Operations - Discontinued Operations section in this Item and Note 2 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
We declared $8.1 billion in dividends in 2013. Common per-share dividends increased 13% to $0.79 in 2013 after an increase of 15% to $0.70 in 2012. We increased our quarterly dividend four times between 2011 and 2013, and on February 7, 2014, our Board of Directors approved a quarterly dividend of $0.22 per share of common stock, which is payable April 25, 2014, to shareowners of record at close of business on February 24, 2014. In 2011, we declared $1.0 billion in preferred stock dividends (including $0.8 billion as a result of our redemption of preferred stock). See Note 15 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report for additional information.
Except as otherwise noted, the analysis in the remainder of this section presents the results of GE (with GECC included on a one-line basis) and GECC. See the Segment Operations section of this Item and Note 27 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report for a more detailed discussion of the businesses within GE and GECC.
Significant matters relating to our Statement of Earnings are explained below.
GE sales of product services were $44.8 billion in 2013, an increase of 3% compared with 2012, and operating profit from product services was $13.4 billion in 2013, an increase of 7% compared with 2012. Both the sales and operating profit of product services increases were at Oil & Gas, Aviation, Energy Management and Transportation. GE sales of product services were $43.4 billion in 2012, an increase of 4% compared with 2011, and operating profit from product services was $12.5 billion in 2012, an increase of 6% compared with 2011. Both the sales and operating profit of product services increases were at Power & Water, Oil & Gas, Transportation and Energy Management.
Postretirement benefit plans costs were $6.0 billion, $5.5 billion and $4.1 billion in 2013, 2012 and 2011, respectively. Costs increased in 2013 and 2012 primarily due to the continued amortization of 2008 investment losses and the effects of lower discount rates (principal pension plans discount rate decreased from 5.28% at December 31, 2010 to 4.21% and 3.96% at December 31, 2011 and 2012, respectively.)
(29)
Our discount rate for our principal pension plans at December 31, 2013 was 4.85%, which reflected current interest rates. Considering the current and target asset allocations, as well as historical and expected returns on various categories of assets in which our plans are invested, we have assumed that long-term returns on our principal pension plan assets will be 7.5% for cost recognition in 2014, a reduction from the 8.0% we assumed in 2013, 2012 and 2011. GAAP provides for recognition of differences between assumed and actual returns over a period no longer than the average future service of employees. See the Critical Accounting Estimates section for additional information.
We expect the costs of our postretirement benefits to decrease in 2014 by approximately $1.3 billion as compared to 2013, primarily because of the effects of higher discount rates and lower loss amortization related to our principal pension plans, partially offset by lower expected investment return on pension plan assets.
Pension expense for our principal pension plans on a GAAP basis was $4.4 billion, $3.8 billion and $2.4 billion in 2013, 2012 and 2011, respectively. Operating pension costs (non-GAAP) for these plans were $1.8 billion, $1.7 billion and $1.4 billion in 2013, 2012 and 2011, respectively. Operating earnings include service cost and prior service cost amortization for our principal pension plans as these costs represent expenses associated with employee service. Operating earnings exclude non-operating pension costs/income such as interest cost, expected return on plan assets and non-cash amortization of actuarial gains and losses. We expect operating pension costs for these plans will be about $1.4 billion in 2014. The expected decrease in operating pension costs is attributable primarily to the effects of higher discount rates and lower early retirement costs.
The GE Pension Plan was underfunded by $4.7 billion at the end of 2013 as compared to $13.3 billion at December 31, 2012. The GE Supplementary Pension Plan, which is an unfunded plan, had projected benefit obligations of $5.2 billion and $5.5 billion at December 31, 2013 and 2012, respectively. Our underfunding at year-end 2013 was significantly reduced as compared to 2012 as the effects of higher discount rates and higher investment returns (14.6% return in 2013) more than offset liability growth. Our principal pension plans discount rate increased from 3.96% at December 31, 2012 to 4.85% at December 31, 2013, which decreased the pension benefit obligation at year-end 2013 by approximately $6.8 billion. Our GE Pension Plan assets increased from $44.7 billion at the end of 2012 to $48.3 billion at December 31, 2013, primarily driven by higher investment returns that were partially offset by benefit payments made during the year. Assets of the GE Pension Plan are held in trust, solely for the benefit of Plan participants, and are not available for general company operations.
On July 6, 2012, the U.S. government enacted the “Moving Ahead for Progress in the 21st Century Act”, which contained provisions that changed the interest rate methodology used to calculate Employee Retirement Income Security Act (ERISA) minimum pension funding requirements in the U.S. This change reduced our near-term annual cash funding requirements for the GE Pension Plan. We contributed $0.4 billion to the GE Pension Plan in 2012. We did not contribute to the GE Pension Plan in 2013.
On an ERISA basis, our preliminary estimate is that the GE Pension Plan was approximately 97% funded at January 1, 2014. We will contribute approximately $0.5 billion to the GE Pension Plan in 2014. Our current estimate of the projected 2015 GE Pension Plan required contribution is approximately $2.4 billion.
At December 31, 2013, the fair value of assets for our other pension plans was $2.5 billion less than the respective projected benefit obligations. The comparable amount at December 31, 2012, was $3.9 billion. This decrease was primarily attributable to higher discount rates and higher investment returns. We expect to contribute $0.8 billion to our other pension plans in 2014, as compared to $0.7 billion in both 2013 and 2012.
The unfunded liability for our principal retiree health and life plans was $9.0 billion and $10.9 billion at December 31, 2013 and 2012, respectively. This decrease was primarily attributable to the effects of higher discount rates (retiree health and life plans discount rate increased from 3.74% at December 31, 2012 to 4.61% at December 31, 2013) and lower costs from new healthcare supplier contracts. We fund our retiree health benefits on a pay-as-you-go basis. We expect to contribute $0.5 billion to these plans in 2014 compared with actual contributions of $0.5 billion in both 2013 and 2012.
(30)
The funded status of our postretirement benefits plans and future effects on operating results depend on economic conditions and investment performance. For additional information about funded status, components of earnings effects and actuarial assumptions, see Note 12 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Other costs and expenses are primarily selling, general and administrative expenses (SG&A). GE’s costs were 15.9%, 17.5% and 18.5% of total sales in 2013, 2012 and 2011, respectively. The 2013 decrease was primarily driven by the effects of global cost reduction initiatives both in the industrial segments and corporate as a result of our simplification efforts, partially offset by increased acquisition-related costs and higher restructuring. The 2012 decrease was driven by increased sales and the effects of global cost reduction initiatives, partially offset by increased acquisition-related costs at GE.
Interest on borrowings and other financial charges amounted to $10.1 billion, $12.4 billion and $14.4 billion in 2013, 2012 and 2011, respectively. Substantially all of our borrowings are in financial services, where interest expense was $9.3 billion, $11.6 billion and $13.8 billion in 2013, 2012 and 2011, respectively. GECC average borrowings declined from 2012 to 2013 and from 2011 to 2012, in line with changes in average GECC assets. Interest rates have decreased over the three-year period primarily attributable to declining global benchmark interest rates. GECC average borrowings were $379.5 billion, $420.0 billion and $450.5 billion in 2013, 2012 and 2011, respectively. The GECC average composite effective interest rate was 2.4% in 2013, 2.8% in 2012 and 3.1% in 2011. In 2013, GECC average assets of $522.7 billion were 7% lower than in 2012, which in turn were 5% lower than in 2011. See the Liquidity and Borrowings section in this Item for a discussion of liquidity, borrowings and interest rate risk management.
Income taxes have a significant effect on our net earnings. As a global commercial enterprise, our tax rates are affected by many factors, including our global mix of earnings, the extent to which those global earnings are indefinitely reinvested outside the United States, legislation, acquisitions, dispositions and tax characteristics of our income. Our tax rates are also affected by tax incentives introduced in the U.S. and other countries to encourage and support certain types of activity. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions.
GE and GECC file a consolidated U.S. federal income tax return. This enables GE to use GECC tax deductions and credits to reduce the tax that otherwise would have been payable by GE.
Income taxes on consolidated earnings from continuing operations were 4.2% in 2013 compared with 14.6% in 2012 and 28.5% in 2011.
Our consolidated income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures. There is a benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. The rate of tax on our indefinitely reinvested non-U.S. earnings is below the 35% U.S. statutory rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GE funds the majority of its non-U.S. operations through foreign companies that are subject to low foreign taxes.
We expect our ability to benefit from non-U.S. income taxed at less than the U.S. rate to continue, subject to changes in U.S. or foreign law, including the expiration of the U.S. tax law provision deferring tax on active financial services income, as discussed in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. In addition, since this benefit depends on management’s intention to indefinitely reinvest amounts outside the U.S., our tax provision will increase to the extent we no longer indefinitely reinvest foreign earnings.
(31)
Our benefits from lower-taxed global operations increased to $4.0 billion in 2013 from $2.2 billion in 2012 principally because of the realization of benefits related to the sale of 68.5% of our Swiss consumer finance bank, Cembra Money Bank AG (Cembra), through an initial public offering (IPO), the realization of benefits for prior-year losses, and the resolution of Internal Revenue Service (IRS) audits. Our benefits from lower-taxed global operations increased to $2.2 billion in 2012 from $2.1 billion in 2011, principally because of the realization of benefits for prior-year losses and a decrease in current-year losses for which there was not a full tax benefit.
The benefit from lower-taxed global operations included $0.4 billion, $0.1 billion and $0.1 billion in 2013, 2012 and 2011, respectively, due to audit resolutions. Our benefit from lower-taxed global operations included the effect of the lower foreign tax rate on our indefinitely reinvested non-U.S. earnings, which provided a tax benefit of $2.5 billion, $1.3 billion and $1.5 billion in 2013, 2012 and 2011, respectively. Included in 2013 is a benefit from the indefinite investment of the eligible earnings from the sale of a portion of Cembra. The tax benefit from non-U.S. income taxed at a local country rather than the U.S. statutory tax rate is reported in the effective tax rate reconciliation in the caption “Tax on global earnings including exports” in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. To the extent global interest rates and non-U.S. operating income increase, we would expect tax benefits to increase, subject to management’s intention to indefinitely reinvest those earnings.
The decrease in the consolidated effective tax rate from 2012 to 2013 was primarily attributable to an increase in tax benefits on lower-taxed global operations, including the tax benefit on the sale of a portion of Cembra. The effective tax rate was also lower due to favorable resolution of audit matters and lower income taxed at rates above the average tax rate, partially offset by the absence of the 2012 benefit attributable to the high tax basis in the entity sold in the Business Property disposition.
The decrease in the consolidated effective tax rate from 2011 to 2012 was due, in significant part, to the high effective tax rate in 2011 on the pre-tax gain on the NBC Universal (NBCU) transaction with Comcast Corporation (Comcast) discussed in Note 2 to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplemental Data” of this Form 10-K Report. This gain increased the 2011 consolidated effective tax rate by 12.9 percentage points. The effective tax rate was also lower due to the benefit of the high tax basis in the entity sold in the Business Properties disposition.
Cash income taxes paid in 2013 were $2.5 billion, reflecting the effects of changes to temporary differences between the carrying amount of assets and liabilities and their tax bases and the timing of tax payments to governments.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted and the law extended several provisions, including a two-year extension of the U.S. tax provision deferring tax on active financial services income and certain U.S. business credits, retroactive to January 1, 2012. Under accounting rules, a tax law change is taken into account in calculating the income tax provision in the period enacted. Because the extension was enacted into law in 2013, tax expense in 2013 reflected retroactive extension of the previously expired provisions.
A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated rate, as well as other information about our income tax provisions, is provided in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. The nature of business activities and associated income taxes differ for GE and for GECC and a separate analysis of each is presented in the paragraphs that follow.
We believe that the GE effective tax rate is best analyzed in relation to GE earnings before income taxes excluding the GECC net earnings from continuing operations, as GE tax expense does not include taxes on GECC earnings. GE pre-tax earnings from continuing operations, excluding GECC earnings from continuing operations, were $8.8 billion, $9.5 billion and $12.6 billion for 2013, 2012 and 2011, respectively. The decrease in earnings from 2011 to 2012 reflects the non-repeat of the pre-tax gain on sale of NBCU and higher loss amortization related to our principal pension plans. On this basis, GE’s effective tax rate was 18.9% in 2013, 21.3% in 2012 and 38.3% in 2011.
(32)
Resolution of audit matters reduced the GE effective tax rate throughout this period. The effects of such resolutions are included in the following captions in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Audit resolutions -
effect on GE tax rate, excluding GECC earnings
Tax on global activities including exports
(2.4)
%
(0.7)
%
(0.9)
%
U.S. business credits
(0.6)
-
(0.4)
All other - net
(1.0)
(0.9)
(0.7)
(4.0)
%
(1.6)
%
(2.0)
%
The GE effective tax rate decreased from 2012 to 2013 primarily because of the benefit of audit resolutions shown above.
The GE effective tax rate decreased from 2011 to 2012 primarily because of the high effective tax rate in 2011 on the pre-tax gain on the NBCU transaction with Comcast reflecting the low tax basis in our investments in the NBCU business and the recognition of deferred tax liabilities related to our 49% investment in NBCUniversal LLC (NBCU LLC) (see Note 2). This gain increased the 2011 GE effective tax rate by 19.7 percentage points. Partially offsetting this decrease was an increase in the GE effective tax rate from 2011 to 2012 due to higher income taxed above the average rate and to the decrease in the benefit from audit resolutions shown above.
The GECC effective income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures. There is a tax benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. The rate of tax on our indefinitely reinvested non-U.S. earnings is below the 35% U.S. statutory rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GECC funds the majority of its non-U.S. operations through foreign companies that are subject to low foreign taxes.
We expect our ability to benefit from non-U.S. income taxed at less than the U.S. rate to continue subject to changes of U.S. or foreign law, including the expiration of the U.S. tax law provision deferring tax on active financial services income, as discussed in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. In addition, since this benefit depends on management’s intention to indefinitely reinvest amounts outside the U.S., our tax provision will increase to the extent we no longer indefinitely reinvest foreign earnings.
As noted above, GE and GECC file a consolidated U.S. federal income tax return. This enables GE to use GECC tax deductions and credits to reduce the tax that otherwise would have been payable by GE. The GECC effective tax rate for each period reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GECC for these tax reductions at the time GE’s tax payments are due.
(33)
The GECC effective tax rate was (13.6)% in 2013, compared with 6.6% in 2012. Comparing pre-tax income to a tax benefit resulted in a negative tax rate for 2013. The GECC tax expense decreased by $1.5 billion from an expense of $0.5 billion in 2012 to a benefit of $1.0 billion in 2013. The lower 2013 tax expense is attributable to increased benefits from low-taxed global operations ($1.7 billion), including the significant tax benefit related to the sale of a portion of Cembra ($1.0 billion), and the 2013 tax benefits related to the extension of the U.S. tax provision deferring tax on active financial services income ($0.3 billion). Also lowering the expense is the benefit from the resolution of the Internal Revenue Service (IRS) audit of the 2008-2009 tax years and items for other years ($0.1 billion), which is reported partially in the caption “Tax on global activities including exports” and partially in the caption “All other-net” in the effective tax rate reconciliation in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. The items lowering the expense are partially offset by the absence of the 2012 benefit attributable to the high tax basis in the entity sold in the Business Property disposition ($0.3 billion).
The GECC effective tax rate was 6.6% in 2012, compared with 12.1% in 2011. The GECC tax expense of $0.5 billion in 2012 decreased by $0.4 billion from $0.9 billion in 2011. The lower 2012 tax expense resulted principally from the benefit attributable to the high-tax basis in the entity sold in the Business Property disposition ($0.3 billion), increased benefits from low-taxed global operations ($0.2 billion) and the absence of the 2011 high-taxed disposition of Garanti Bank ($0.1 billion). Partially offsetting the decrease in tax expense was the absence in 2012 of the 2011 benefit from resolution of the 2006-2007 Internal Revenue Service (IRS) audit ($0.2 billion), which is reported in the caption “All other-net” in the effective tax rate reconciliation in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report, and from higher pre-tax income of $0.3 billion that increased the tax expense ($0.1 billion).
Global Risk Management
A disciplined approach to risk is important in a diversified organization like ours in order to ensure that we are executing according to our strategic objectives and that we only accept risk for which we are adequately compensated. We evaluate risk at the individual transaction level, and evaluate aggregated risk at the customer, industry, geographic and collateral-type levels, where appropriate.
Risk assessment and risk management are the responsibility of management and are carried out through risk managers who are operationally integrated into each of our businesses. These risk managers have acquired deep domain expertise through their long careers and proximity to the business’ operations and core processes. Both risk managers and the business leadership teams have specific, risk-focused goals and objectives that are aligned with our overall risk framework.
The GE Board of Directors (Board) has oversight for risk management with a focus on the most significant risks facing the Company, including strategic, operational, financial and legal and compliance risks. At the end of each year, management and the Board jointly develop a list of major risks that GE plans to prioritize in the next year. Throughout the year, the Board and the committees to which it has delegated responsibility dedicate a portion of their meetings to review and discuss specific risk topics in greater detail. Strategic, operational and reputational risks are presented and discussed in the context of the CEO’s report on operations to the Board at regularly scheduled Board meetings and at presentations to the Board and its committees by the vice chairmen, GE and GECC Chief Risk Officers (CROs), general counsel and other employees. The Board has delegated responsibility for the oversight of specific risks to Board committees as follows:
·
The GE Risk Committee oversees risks related to GE Capital and jointly meets throughout the year with the GECC Board of Directors (GECC Board), which is in addition to an annual joint meeting of the GE and GECC Boards. The GE Risk Committee also oversees the Company's four to five most critical enterprise risks and how management is mitigating these risks.
(34)
·
The Audit Committee oversees GE’s and GE Capital’s policies and processes relating to the financial statements, the financial reporting process, compliance and auditing. The Audit Committee, in coordination with the GE Risk Committee, discusses with management the Company’s risk assessment and risk management practices and, when reviewing and approving the annual audit plan for the internal audit functions, prioritizes audit focus areas based on their potential risk to the Company. The Audit Committee also monitors ongoing compliance issues and matters, and also semi-annually conducts an assessment of compliance issues and programs. The Audit Committee jointly meets with the GECC Board once a year, which is in addition to an annual joint meeting of the GE Risk Committee and Audit Committee.
·
The Management Development and Compensation Committee oversees the risk management associated with management resources, structure, succession planning, management development and selection processes, and includes separate reviews of incentive compensation arrangements at GE and GE Capital to confirm that incentive pay does not encourage unnecessary and excessive risk taking and to review and discuss, at least annually, the relationship between risk management policies and practices, corporate strategy and senior executive compensation. The Management Development and Compensation Committee also incentivizes leaders to improve the Company's competitive position.
·
The Governance and Public Affairs Committee oversees risk related to the Company’s governance structure and processes and risks arising from related-person transactions, reviews and discusses with management risks related to GE’s public policy initiatives and activities, and monitors the Company’s environmental, health and safety compliance and related risks.
The GE Board’s risk oversight process builds upon management’s risk assessment and mitigation processes, which include standardized reviews of long-term strategic and operational planning; executive development and evaluation; code of conduct compliance under the Company’s The Spirit & The Letter; regulatory compliance; health, safety and environmental compliance; financial reporting and controllership; and information technology and security. A vice-chairman of GE and GE’s CRO are responsible for overseeing and coordinating risk assessment and mitigation on an enterprise-wide basis. They lead the Corporate Risk Function and are responsible for the identification of key business risks, providing for appropriate management of these risks within GE Board guidelines, and enforcement through policies and procedures. In 2013, the Company combined its risk evaluation process with its quarterly operating reviews to simplify the Company’s operating rhythm and added a vice chairman position with responsibility for both enterprise risk and operations. The Policy Compliance Review Board is a management-level committee that further assists in assessing and mitigating risk. The Policy Compliance Review Board, which conducted four compliance operating reviews and met seven times in 2013, is chaired by the Company’s general counsel and includes the Chief Financial Officer and other senior-level functional leaders. It has principal responsibility for monitoring compliance matters across the Company.
GE's Corporate Risk Function leverages the risk infrastructures in each of our businesses, which have adopted an approach that corresponds to the Company’s overall risk policies, guidelines and review mechanisms. Our risk infrastructure operates at the business and functional levels and is designed to identify, evaluate and mitigate risks within each of the following categories:
·
Strategic. Strategic risk relates to the Company’s future business plans and strategies, including the risks associated with the markets and industries in which we operate, demand for our products and services, competitive threats, technology and product innovation, mergers and acquisitions and public policy.
·
Operational. Operational risk relates to risks (systems, processes, people and external events) that affect the operation of our businesses. It includes product life cycle and execution; product safety and performance; information management and data protection and security, including cyber security; business disruption; human resources; and reputation.
(35)
·
Financial. Financial risk relates to our ability to meet financial obligations and mitigate credit risk, liquidity risk and exposure to broad market risks, including volatility in foreign currency exchange rates and interest rates and commodity prices. Liquidity risk refers to the potential inability to meet contractual or contingent financial obligations (whether on- or off-balance sheet) as they arise, and could potentially impact an institution’s financial condition or overall safety and soundness. Credit risk is the risk of financial loss arising from a customer or counterparty failure to meet its contractual obligations. We face credit risk in our industrial businesses, as well as in our GE Capital investing, lending and leasing activities and derivative financial instruments activities.
·
Legal and Compliance. Legal and compliance risk relates to risks arising from the government and regulatory environment and action, compliance with integrity policies and procedures, including those relating to financial reporting, environmental health and safety, and intellectual property risks. Government and regulatory risk includes the risk that the government or regulatory actions will impose additional cost on us or cause us to have to change our business models or practices.
Risks identified through our risk management processes are prioritized and, depending on the probability and severity of the risk, escalated to the CRO. These risks are discussed and responsibility for them is assigned to the business or functional leader most suited to manage the risk in connection with the quarterly operating reviews. Assigned owners are required to continually monitor, evaluate and report on risks for which they bear responsibility. Enterprise risk leaders within each business and corporate function are responsible to present to the CRO risk assessments and key risks at least annually. We have general response strategies for managing risks, which categorize risks according to whether the Company will avoid, transfer, reduce or accept the risk. These response strategies are tailored to ensure that risks are within acceptable GE Board general guidelines.
Depending on the nature of the risk involved and the particular business or function affected, we use a wide variety of risk mitigation strategies, including delegation of authorities, standardized processes and strategic planning reviews, operating reviews, insurance, and hedging. As a matter of policy, we generally hedge the risk of fluctuations in foreign currency exchange rates, interest rates and commodity prices. Our service businesses employ a comprehensive tollgate process leading up to and through the execution of a contractual service agreement to mitigate legal, financial and operational risks. Furthermore, we centrally manage some risks by purchasing insurance, the amount of which is determined by balancing the level of risk retained or assumed with the cost of transferring risk to others. We manage the risk of fluctuations in economic activity and customer demand by monitoring industry dynamics and responding accordingly, including by adjusting capacity, implementing cost reductions and engaging in mergers, acquisitions and dispositions.
GE Capital Risk Management and Oversight
GE Capital acknowledges risk-taking as a fundamental characteristic of providing financial services. It is inherent to its business and arises in lending, leasing and investment transactions undertaken by GE Capital. GE Capital operates within the parameters of its established risk appetite in pursuit of its strategic goals and objectives.
GE Capital continues to enhance its risk infrastructure and processes to manage risks related to its businesses, and the GE Corporate Risk Function relies upon them in fulfilling its mission.
The GE Risk Committee oversees GE Capital’s risk appetite, risk assessment and management processes. The GE Risk Committee and the GECC Board oversee the GE Capital risk management framework, with the GECC Board approving all significant acquisitions and dispositions as well as significant borrowings and investments. The GE Risk Committee and the GECC Board exercise oversight of investment activities in the business units through delegations of authority. All participants in the GE Capital risk management process must comply with approval limits established by the GE Risk Committee and the GECC Board.
(36)
The Enterprise Risk Management Committee (ERMC), which comprises the most senior leaders in GE Capital as well as the GE CRO, oversees the implementation of GE Capital’s risk appetite, and senior management’s establishment of appropriate systems (including policies, procedures, and management committees) to ensure enterprise risks are effectively identified, measured, monitored, and controlled. The ERMC has delegated management of specific risks to various sub-committees, including the Operational Risk Management Committee, Asset-Liability Committee, Capital Planning Committee and Asset Quality Committee. Day-to-day risk oversight for GE Capital is provided by an independent global risk management organization that includes the GE Capital corporate function in addition to independent risk officers embedded in the individual business units.
GE Capital’s risk management approach rests upon three major tenets: a broad spread of risk based on managed exposure limits; senior secured commercial financings; and a hold-to-maturity model with transactions underwritten to “on-book” standards. Dedicated risk professionals across the businesses include underwriters, portfolio managers, collectors, environmental and engineering specialists, and specialized asset managers. The senior risk officers have, on average, over 30 years of experience.
GE Capital manages all risks relevant to its business environment, which if materialized, could prevent GE Capital from achieving its risk objectives and/or result in losses. These risks are defined as GE Capital’s Enterprise Risk Universe, which includes the following risks: strategic, liquidity, credit and investment, market and operational (including financial, compliance, information technology, human resources and legal). Reputational risk is considered and managed across each of the categories. GE Capital continues to make significant investments in resources to enhance its evolving risk management infrastructure.
GE Capital’s Corporate Risk function, in consultation with the ERMC, updates the Enterprise Risk Appetite Statement annually. This document articulates the enterprise risk objectives, its key universe of risks and the supporting limit structure. GE Capital’s risk appetite is determined relative to its desired risk objectives, including, but not limited to, credit ratings, capital levels, liquidity management, regulatory assessments, earnings, dividends and compliance. GE Capital determines its risk appetite through consideration of portfolio analytics, including stress testing and economic capital measurement, experience and judgment of senior risk officers, current portfolio levels, strategic planning, and regulatory and rating agency expectations.
The Enterprise Risk Appetite Statement is presented to the GECC Board and the GE Risk Committee for review and approval at least annually. On a quarterly basis, the status of GE Capital’s performance against these limits is reviewed by the GE Risk Committee.
GE Capital monitors its capital adequacy including through economic capital, regulatory capital and enterprise stress testing methodologies. GE Capital’s economic capital methodology uses internal models to estimate potential unexpected losses across different portfolios with a confidence level equivalent to an AA agency rating. Although GE Capital is not currently subject to risk-based capital standards, GE Capital estimates capital adequacy based on the Basel 1 U.S. and Basel 3 International and U.S. frameworks. GE Capital uses stress testing for risk, liquidity and capital adequacy assessment and management purposes, and as an integral part of GE Capital’s overall planning processes. Stress testing results inform key strategic portfolio decisions such as the amount of capital required to maintain minimum expected regulatory capital levels in severe but plausible stresses, capital allocation, assist in developing the risk appetite and limits, and help in assessing product specific risk to guide the development and modification of product structures. The GE Risk Committee and the GECC Board review stress test results and their expected impact on capital levels and metrics. The GE Risk Committee and the GECC Board are responsible for overseeing the overall capital adequacy process, as well as approving GE Capital’s annual capital plan and capital actions.
Key risk management policies are approved by the GECC Board and the GE Risk Committee at least annually. GE Capital senior management, in coordination with the GE CRO, meets with the GE Risk Committee throughout the year. At these meetings, GE Capital senior management focuses on the risk issues, strategy and governance of the business.
(37)
Operational risks are inherent in GE Capital’s business activities and are typical of any large enterprise. GE Capital’s operational risk management program seeks to effectively manage operational risk to reduce the potential for significant unexpected losses, and to minimize the impact of losses experienced in the normal course of business. Additional information about our liquidity and how we manage this risk can be found in the Financial Resources and Liquidity section. Additional information about our credit risk and our portfolio can be found in the Financial Resources and Liquidity and Critical Accounting Estimates sections. Additional information about our market risk and how we manage this risk can be found in the Financial Resources and Liquidity section.
Segment Operations
Our eight segments are focused on the broad markets they serve: Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting and GE Capital. In addition to providing information on segments in their entirety, we have also provided supplemental information about the businesses within GE Capital.
Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business in a given period. In connection with that assessment, the Chief Executive Officer may exclude matters such as charges for restructuring; rationalization and other similar expenses; acquisition costs and other related charges; technology and product development costs; certain gains and losses from acquisitions or dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team. See Corporate Items and Eliminations for certain amounts not allocated to GE operating segments because they are excluded from measurement of their operating performance for external purposes.
Segment profit excludes results reported as discontinued operations, earnings attributable to noncontrolling interests of consolidated subsidiaries, GECC preferred stock dividends declared and accounting changes. Segment profit excludes or includes interest and other financial charges and income taxes according to how a particular segment’s management is measured. These costs are excluded in determining segment profit, which we sometimes refer to as “operating profit,” for Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, and Appliances & Lighting and are included in determining segment profit, which we sometimes refer to as “net earnings,” for GE Capital. Certain corporate costs, such as shared services, employee benefits and information technology, are allocated to our segments based on usage. A portion of the remaining corporate costs is allocated based on each segment’s relative net cost of operations. Prior to January 1, 2011, segment profit excluded the effects of principal pension plans. Beginning January 1, 2011, we began allocating service costs related to our principal pension plans and no longer allocate the retiree costs of our postretirement healthcare benefits to our segments. This revised allocation methodology better aligns segment operating costs to the active employee costs, which are managed by the segments. This change does not significantly affect reported segment results.
Results of our formerly consolidated subsidiary, NBCU, and our equity method investment in NBCU LLC until we sold it in the first quarter of 2013, are reported in the Corporate items and eliminations line on the Summary of Operating Segments.
We have reclassified certain prior-period amounts to conform to the current-period presentation. For additional information about our segments, see Part I, Item 1. “Business” and Note 27 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(38)
Summary of Operating Segments
General Electric Company and consolidated affiliates
(In millions)
Revenues(a)
Power & Water
$
24,724
$
28,299
$
25,675
$
24,779
$
27,389
Oil & Gas
16,975
15,241
13,608
9,433
9,683
Energy Management
7,569
7,412
6,422
5,161
5,223
Aviation
21,911
19,994
18,859
17,619
18,728
Healthcare
18,200
18,290
18,083
16,897
16,015
Transportation
5,885
5,608
4,885
3,370
3,827
Appliances & Lighting
8,338
7,967
7,693
7,957
7,816
Total industrial segment revenues
103,602
102,811
95,225
85,216
88,681
GE Capital
44,067
45,364
48,324
49,163
51,065
Total segment revenues
147,669
148,175
143,549
134,379
139,746
Corporate items and eliminations(b)
(1,624)
(1,491)
2,993
14,496
13,940
Consolidated revenues
$
146,045
$
146,684
$
146,542
$
148,875
$
153,686
Segment profit
Power & Water
$
4,992
$
5,422
$
5,021
$
5,804
$
5,592
Oil & Gas
2,178
1,924
1,660
1,406
1,440
Energy Management
Aviation
4,345
3,747
3,512
3,304
3,923
Healthcare
3,048
2,920
2,803
2,741
2,420
Transportation
1,166
1,031
Appliances & Lighting
Total industrial segment profit
16,220
15,486
14,068
14,130
14,352
GE Capital
8,258
7,345
6,480
3,083
1,364
Total segment profit
24,478
22,831
20,548
17,213
15,716
Corporate items and eliminations(b)
(6,300)
(4,841)
(288)
(1,012)
(506)
GE interest and other financial
charges
(1,333)
(1,353)
(1,299)
(1,600)
(1,478)
GE provision for income taxes
(1,668)
(2,013)
(4,839)
(2,024)
(2,739)
Earnings from continuing operations
attributable to the company
15,177
14,624
14,122
12,577
10,993
Earnings (loss) from discontinued
operations, net of taxes
(2,120)
(983)
(933)
Consolidated net earnings
attributable to the Company
$
13,057
$
13,641
$
14,151
$
11,644
$
11,025
(a)
Segment revenues includes both revenues and other income related to the segment.
(b)
Includes the results of NBCU, our formerly consolidated subsidiary, and our former equity method investment in NBCUniversal LLC until we sold it in the first quarter of 2013.
See accompanying notes to consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Power & Water revenues of $24.7 billion decreased $3.6 billion, or 13%, in 2013 as lower volume ($3.9 billion), primarily equipment at Wind and Thermal, and the effects of the stronger U.S. dollar ($0.1 billion) were partially offset by higher prices ($0.2 billion) and other income ($0.2 billion) primarily related to a sale of assets.
Segment profit of $5.0 billion decreased $0.4 billion, or 8%, in 2013 as lower volume ($0.7 billion) and lower cost productivity ($0.3 billion), despite SG&A cost reductions, were partially offset by the effects of deflation ($0.2 billion), higher prices ($0.2 billion) and other income ($0.2 billion) primarily related to a sale of assets.
Power & Water revenues of $28.3 billion increased $2.6 billion, or 10%, in 2012 as higher volume ($3.4 billion), driven by an increase in sales of equipment at Wind, and an increase in other income ($0.2 billion) were partially offset by the effects of the stronger U.S. dollar ($0.6 billion) and lower prices ($0.4 billion).
Segment profit of $5.4 billion increased $0.4 billion, or 8%, in 2012 as higher volume ($0.7 billion), increased other income ($0.2 billion) and the impacts of deflation ($0.1 billion) were partially offset by lower prices ($0.4 billion), lower productivity ($0.1 billion) and the effects of the stronger U.S. dollar ($0.1 billion).
(39)
Power & Water orders increased 13% to $27.4 billion in 2013. Total Power & Water backlog increased 10% to $64.6 billion at December 31, 2013, composed of equipment backlog of $11.4 billion and services backlog of $53.2 billion. Comparable December 31, 2012 equipment and service order backlogs were $8.6 billion and $50.2 billion, respectively.
Oil & Gas revenues of $17.0 billion increased $1.7 billion (including $0.7 billion from acquisitions), or 11%, in 2013 primarily due to higher volume ($1.5 billion) and higher prices ($0.2 billion).
Segment profit of $2.2 billion increased $0.3 billion, or 13%, in 2013 as higher volume ($0.2 billion) and higher prices ($0.2 billion) were partially offset by lower cost productivity ($0.1 billion).
Oil & Gas revenues of $15.2 billion increased $1.6 billion (including $0.7 billion from acquisitions), or 12%, in 2012 as higher volume ($2.3 billion) driven by acquisitions and an increase in sales of both equipment and services was partially offset by the effects of the stronger U.S. dollar ($0.7 billion).
Segment profit of $1.9 billion increased $0.3 billion, or 16%, in 2012 as higher volume ($0.3 billion) and increased productivity ($0.1 billion), reflecting increased equipment margins, were partially offset by the effects of the stronger U.S. dollar ($0.1 billion).
Oil & Gas orders increased 8% to $19.7 billion in 2013. Total Oil & Gas backlog increased 27% to $18.8 billion at December 31, 2013, composed of equipment backlog of $13.0 billion and services backlog of $5.8 billion. Comparable December 31, 2012 equipment and service order backlogs were $10.2 billion and $4.5 billion, respectively.
Energy Management revenues of $7.6 billion increased $0.2 billion, or 2%, in 2013 as higher volume ($0.2 billion) was partially offset by the effects of the stronger U.S. dollar ($0.1 billion).
Segment profit of $0.1 billion decreased 16% in 2013 as a result of lower productivity ($0.1 billion).
Energy Management revenues of $7.4 billion increased $1.0 billion (including $1.0 billion from acquisitions), or 15%, in 2012 as higher volume ($1.1 billion), primarily driven by acquisitions, higher prices ($0.1 billion) and increased other income ($0.1 billion) were partially offset by the effects of the stronger U.S. dollar ($0.2 billion).
Segment profit of $0.1 billion increased $0.1 billion, or 68%, in 2012 as a result of higher prices ($0.1 billion) and increased other income ($0.1 billion).
Energy Management orders increased 12% to $8.8 billion in 2013. Total Energy Management backlog increased 20% to $4.6 billion at December 31, 2013, composed of equipment backlog of $3.6 billion and services backlog of $1.0 billion. Comparable December 31, 2012 equipment and service order backlogs were $3.2 billion and $0.6 billion, respectively.
Aviation revenues of $21.9 billion increased $1.9 billion (including $0.5 billion from acquisitions), or 10%, in 2013 due primarily to higher volume ($1.4 billion) and higher prices ($0.6 billion). Higher volume and higher prices were driven by increased services revenues ($0.7 billion) and equipment ($1.2 billion). The increase in services revenue was primarily due to higher commercial spares sales, while the increase in equipment revenue was primarily due to increased commercial engine shipments.
Segment profit of $4.3 billion increased $0.6 billion, or 16%, in 2013 as higher prices ($0.6 billion), higher volume ($0.2 billion) and increased other income ($0.1 billion) were partially offset by the effects of inflation ($0.2 billion) and lower productivity ($0.1 billion).
(40)
Aviation revenues of $20.0 billion increased $1.1 billion, or 6%, in 2012 due primarily to higher prices ($0.8 billion) and higher volume ($0.4 billion), which were driven by increased commercial and military engine sales.
Segment profit of $3.7 billion increased $0.2 billion, or 7%, in 2012 as higher prices ($0.8 billion) and higher volume ($0.1 billion) were partially offset by higher inflation ($0.3 billion) and lower productivity ($0.3 billion).
Aviation orders increased 16% to $27.2 billion in 2013. Total Aviation backlog increased 22% to $125.1 billion at December 31, 2013, composed of equipment backlog of $28.4 billion and services backlog of $96.7 billion. Comparable December 31, 2012 equipment and service order backlogs were $22.9 billion and $79.5 billion, respectively.
Healthcare revenues of $18.2 billion decreased $0.1 billion in 2013. Revenues decreased as lower prices ($0.3 billion), the effects of the stronger U.S. dollar ($0.2 billion) and lower other income were partially offset by higher volume ($0.5 billion).
Segment profit of $3.0 billion increased $0.1 billion, or 4%, in 2013 as higher productivity ($0.6 billion), driven by SG&A cost reductions, and higher volume ($0.1 billion) were partially offset by lower prices ($0.3 billion), the effects of inflation ($0.2 billion), the stronger U.S. dollar ($0.1 billion) and lower other income.
Healthcare revenues of $18.3 billion increased $0.2 billion, or 1%, in 2012 as higher volume ($0.8 billion) and other income ($0.1 billion) were partially offset by the stronger U.S. dollar ($0.4 billion) and lower prices ($0.3 billion). The revenue increase, driven by higher equipment sales, is attributable to international markets, with the strongest growth in emerging markets.
Segment profit of $2.9 billion increased $0.1 billion, or 4%, in 2012 as increased productivity ($0.4 billion), higher volume ($0.1 billion) and other income ($0.1 billion) were partially offset by lower prices ($0.3 billion) and higher inflation ($0.2 billion), primarily non-material related.
Healthcare orders increased 1% to $19.2 billion in 2013. Total Healthcare backlog increased 5% to $16.1 billion at December 31, 2013, composed of equipment backlog of $5.0 billion and services backlog of $11.1 billion. Comparable December 31, 2012 equipment and service order backlogs were $4.5 billion and $10.9 billion, respectively.
Transportation revenues of $5.9 billion increased $0.3 billion, or 5%, in 2013 due to higher volume ($0.3 billion) primarily from acquisitions.
Segment profit of $1.2 billion increased $0.1 billion, or 13%, in 2013 as a result of effects of material deflation ($0.1 billion) and higher volume and productivity.
Transportation revenues of $5.6 billion increased $0.7 billion, or 15%, in 2012 due to higher volume ($0.6 billion) and higher prices ($0.1 billion). The revenue increase was split between equipment sales ($0.4 billion) and services ($0.3 billion). The increase in equipment revenue was primarily driven by an increase in U.S. locomotive sales and growth in our global mining equipment business. The increase in service revenue was due to higher overhauls and increased service productivity.
Segment profit of $1.0 billion increased $0.3 billion, or 36%, in 2012 as a result of higher volume ($0.1 billion), higher prices ($0.1 billion) and increased productivity ($0.1 billion), reflecting improved service margins.
Transportation orders decreased 8% to $5.1 billion in 2013. Total Transportation backlog increased 3% to $14.9 billion at December 31, 2013, composed of equipment backlog of $2.5 billion and services backlog of $12.4 billion. Comparable December 31, 2012 equipment and service order backlogs were $3.3 billion and $11.1 billion, respectively.
(41)
Appliances & Lighting revenues of $8.3 billion increased $0.4 billion, or 5%, in 2013 reflecting higher volume ($0.4 billion), primarily at Appliances.
Segment profit of $0.4 billion increased 23%, or $0.1 billion, in 2013 primarily due to improved productivity ($0.1 billion) and higher prices.
Appliances & Lighting revenues of $8.0 billion increased $0.3 billion, or 4%, in 2012 reflecting an increase at Appliances, partially offset by lower revenues at Lighting. Overall, revenues increased as higher prices ($0.3 billion) principally at Appliances were partially offset by lower volume ($0.1 billion).
Segment profit of $0.3 billion increased 31%, or $0.1 billion, in 2012 as higher prices ($0.3 billion) were partially offset by the effects of inflation ($0.2 billion) and lower productivity ($0.1 billion).
GE Capital
(In millions)
Revenues
$
44,067
$
45,364
$
48,324
Segment profit
$
8,258
$
7,345
$
6,480
December 31 (In millions)
Total assets
$ 516,829
$ 539,351
(In millions)
Revenues
Commercial Lending and Leasing (CLL)
$
14,316
$
16,458
$
17,714
Consumer
15,741
15,303
16,487
Real Estate
3,915
3,654
3,712
Energy Financial Services
1,526
1,508
1,223
GE Capital Aviation Services (GECAS)
5,346
5,294
5,262
Segment profit (loss)
CLL
$
1,965
$
2,401
$
2,703
Consumer
4,319
3,207
3,616
Real Estate
1,717
(928)
Energy Financial Services
GECAS
1,220
1,150
December 31 (In millions)
Total assets
CLL
$
174,357
$
181,375
Consumer
132,236
138,002
Real Estate
38,744
46,247
Energy Financial Services
16,203
19,185
GECAS
45,876
49,420
GE Capital 2013 revenues decreased 3% and net earnings increased 12% compared with 2012. Revenues for 2013 included $0.1 billion from acquisitions and $0.1 billion as a result of dispositions. Additionally, revenues decreased as a result of organic revenue declines, primarily due to lower ENI, and higher impairments, partially offset by higher gains. Net earnings increased as a result of dispositions, primarily related to the sale of a portion of Cembra through an IPO and higher gains primarily related to the sale of our remaining equity interest in Bank of Ayudhya (Bay Bank), partially offset by higher impairments and higher provisions for losses on financing receivables. GE Capital net earnings in 2013 also included restructuring, rationalization and other charges of $0.2 billion and net losses of $0.1 billion related to our Treasury operations. GE Capital net earnings excluded $0.3 billion of preferred stock dividends declared in 2013.
(42)
GE Capital 2012 revenues decreased 6% and net earnings increased 13% compared with 2011. Revenues for 2012 included $0.1 billion from acquisitions and were reduced by $0.6 billion as a result of dispositions. Revenues in 2012 also decreased as a result of organic revenue declines, primarily due to lower ENI, the stronger U.S. dollar, and the absence of the 2011 gain on sale of a substantial portion of our Garanti Bank equity investment (the Garanti Bank transaction). Net earnings increased by $0.9 billion in 2012, primarily due to lower impairments and core increases, including higher tax benefits, partially offset by the absence of the 2011 gain on the Garanti Bank transaction and operations. GE Capital net earnings in 2012 also included restructuring, rationalization and other charges of $0.1 billion and net losses of $0.2 billion related to our Treasury operations. GE Capital net earnings excluded $0.1 billion of preferred stock dividends declared in 2012.
Additional information about certain GE Capital businesses follows.
CLL 2013 revenues decreased 13% and net earnings decreased 18% compared with 2012. Revenues for 2013 were reduced by $0.1 billion as a result of dispositions. Revenues in 2013 also decreased as a result of organic revenue declines ($1.2 billion), primarily due to lower ENI ($0.8 billion), and higher impairments ($0.7 billion). Net earnings decreased reflecting higher impairments ($0.6 billion), partially offset by dispositions ($0.1 billion).
CLL 2012 revenues decreased 7% and net earnings decreased 11% compared with 2011. Revenues for 2012 were reduced by $0.4 billion as a result of dispositions. Revenues in 2012 also decreased as a result of organic revenue declines ($0.6 billion), primarily due to lower ENI ($0.5 billion), and the stronger U.S. dollar ($0.2 billion). Net earnings decreased reflecting core decreases ($0.2 billion) and dispositions ($0.1 billion).
Consumer 2013 revenues increased 3% and net earnings increased 35% compared with 2012. Revenues for 2013 included $0.1 billion from acquisitions and $0.3 billion as a result of dispositions. Revenues in 2013 also increased as a result of higher gains ($0.5 billion), partially offset by organic revenue declines ($0.4 billion). The increase in net earnings resulted primarily from the sale of a portion of Cembra ($1.2 billion), higher gains ($0.3 billion) related to the sale of Bay Bank and core increases ($0.1 billion). These increases were partially offset by higher provisions for losses on financing receivables ($0.5 billion) reflecting the use of a more granular portfolio segmentation approach, by loss type, in determining the incurred loss period and projected net write-offs over the next 12 months in our installment and revolving credit portfolios.
Consumer 2012 revenues decreased 7% and net earnings decreased 11% compared with 2011. Revenues for 2012 included $0.1 billion from acquisitions and were reduced by $0.1 billion as a result of dispositions. Revenues in 2012 also decreased as a result of the absence of the 2011 gain on the Garanti Bank transaction ($0.7 billion), the stronger U.S. dollar ($0.4 billion) and organic revenue declines ($0.2 billion). The decrease in net earnings resulted primarily from the absence of the 2011 gain on the Garanti Bank transaction and operations ($0.4 billion), higher provisions for losses on financing receivables ($0.1 billion) and dispositions ($0.1 billion), partially offset by core increases ($0.2 billion). The higher provisions for losses on financing receivables reflected the use of a more granular portfolio segmentation approach, by loss type, in determining the incurred loss period in our U.S. Installment and Revolving Credit portfolio.
Real Estate 2013 revenues increased 7% and net earnings were favorable compared with 2012. Revenues in 2013 increased primarily as a result of increases in net gains on property sales ($1.1 billion) mainly due to the sale of real estate comprising certain floors located at 30 Rockefeller Center, New York, partially offset by organic revenue declines ($0.7 billion), primarily due to lower ENI ($0.6 billion). Real Estate net earnings increased as a result of core increases ($0.9 billion) including increases in net gains on property sales ($0.7 billion) and higher tax benefits ($0.3 billion). Depreciation expense on real estate equity investments totaled $0.6 billion and $0.8 billion in 2013 and 2012, respectively.
(43)
Real Estate 2012 revenues decreased 2% and net earnings were favorable compared with 2011. Revenues in 2012 decreased as a result of organic revenue declines ($0.2 billion), primarily due to lower ENI, and the stronger U.S. dollar ($0.1 billion), partially offset by increases in net gains on property sales ($0.2 billion). Real Estate net earnings increased as a result of lower impairments ($0.7 billion), core increases ($0.7 billion) including higher tax benefits of $0.5 billion, lower provisions for losses on financing receivables ($0.2 billion) and increases in net gains on property sales ($0.1 billion). Depreciation expense on real estate equity investments totaled $0.8 billion and $0.9 billion in 2012 and 2011, respectively.
Energy Financial Services 2013 revenues increased 1% and net earnings decreased 5% compared with 2012. Revenues in 2013 increased as a result of dispositions ($0.1 billion) and organic revenue growth ($0.1 billion), partially offset by lower gains ($0.1 billion) and higher impairments. The decrease in net earnings resulted primarily from lower gains ($0.1 billion), partially offset by core increases and dispositions.
Energy Financial Services 2012 revenues increased 23% and net earnings decreased 2% compared with 2011. Revenues in 2012 increased primarily as a result of organic revenue growth ($0.3 billion), including the consolidation of an entity involved in power generating activities and asset sales by investees, and higher gains.
GECAS 2013 revenues increased 1% and net earnings decreased 27% compared with 2012. Revenues in 2013 increased as a result of lower finance lease impairments and higher gains. The decrease in net earnings resulted primarily from higher equipment leased to others (ELTO) impairments ($0.3 billion) related to our operating lease portfolio of commercial aircraft, and core decreases, partially offset by higher gains.
GECAS 2012 revenues increased 1% and net earnings increased 6% compared with 2011. Revenues in 2012 increased as a result of organic revenue growth ($0.2 billion) and higher gains, partially offset by higher impairments ($0.2 billion). The increase in net earnings resulted primarily from core increases ($0.1 billion) and higher gains, partially offset by higher impairments ($0.1 billion).
Corporate Items and Eliminations
(In millions)
Revenues
NBCU/NBCU LLC
$
1,528
$
1,615
$
5,686
Gains (losses) on disposed or held for sale businesses
-
Eliminations and other
(3,605)
(3,292)
(2,693)
Total
$
(1,624)
$
(1,491)
$
2,993
Operating profit (cost)
NBCU/NBCU LLC
$
1,528
$
1,615
$
4,535
Gains (losses) on disposed or held for sale businesses
-
Principal retirement plans(a)
(3,222)
(3,098)
(1,898)
Unallocated corporate and other costs
(5,053)
(3,544)
(2,925)
Total
$
(6,300)
$
(4,841)
$
(288)
(a)
Included non-operating pension income (cost) for our principal pension plans (non-GAAP) of $(2.6) billion, $(2.1) billion and $(1.1) billion in 2013, 2012 and 2011, respectively, which includes expected return on plan assets, interest costs and non-cash amortization of actuarial gains and losses.
Revenues in 2013 decreased $0.1 billion from 2012. This decrease was primarily a result of $0.1 billion lower income related to the operations and disposition of NBCU LLC, a $0.1 billion pre-tax loss related to the impairment of an investment in a Brazilian company and $0.2 billion of lower revenues related to a plant that was sold in 2012, partially offset by $0.3 billion of higher gains from disposed businesses. The higher gains from disposed businesses reflect the net effect of $0.5 billion of gains from industrial business dispositions in 2013 compared with a $0.3 billion gain on joint venture formation and a $0.1 billion loss on sale of a plant in 2012.
(44)
Operating costs in 2013 increased $1.5 billion from 2012. Costs increased primarily as a result of $1.3 billion of higher restructuring and other charges, $0.2 billion of higher GECC preferred stock dividends, $0.1 billion of higher principal retirement plan costs, $0.1 billion of lower NBCU related income and $0.1 billion of impairment referred to above, partially offset by $0.3 billion of higher gains on disposed businesses.
Revenues decreased $4.5 billion in 2012 as $4.1 billion of lower NBCU/NBCU LLC related revenues (primarily due to the non-repeat of the pre-tax gain on the NBCU transaction and the deconsolidation of NBCU in 2011, partially offset by higher earnings at NBCU LLC due to a gain on disposition in 2012) and $0.1 billion of pre-tax losses related to the sale of a plant in the U.K. were partially offset by $0.3 billion of gains on the formation of a joint venture at Aviation.
Operating costs in 2012 increased $4.6 billion from 2011. Costs increased primarily as a result of $2.9 billion of lower NBCU/NBCU LLC related earnings (primarily due to the non-repeat of the 2011 gain related to the NBCU transaction, partially offset by earnings at NBCU LLC due to a gain on disposition in 2012), $1.2 billion of higher costs of our principal retirement plans and $0.4 billion of higher research and development spending and global corporate costs, partially offset by $0.2 billion of lower restructuring and other charges.
Certain amounts included in corporate items and eliminations cost are not allocated to GE operating segments because they are excluded from the measurement of their operating performance for internal purposes. These costs include certain restructuring and other charges, technology and product development costs and acquisition-related costs. For 2013, these amounts totaled $2.4 billion, including Power & Water ($0.4 billion), Oil & Gas ($0.3 billion), Energy Management ($0.2 billion), Aviation ($0.6 billion), Healthcare ($0.6 billion), Transportation ($0.1 billion) and Appliances & Lighting ($0.2 billion). In 2013, Corporate items and eliminations also included $0.5 billion of gains from business disposition including Power & Water ($0.1 billion), Oil & Gas ($0.1 billion) and Healthcare ($0.2 billion).
For 2012, these amounts totaled $1.5 billion, including Power & Water ($0.2 billion), Oil & Gas ($0.1 billion), Energy Management ($0.2 billion), Aviation ($0.3 billion), Healthcare ($0.5 billion), Transportation ($0.1 billion) and Appliances & Lighting ($0.1 billion). In 2012, Corporate items and eliminations also included $0.3 billion of gains related to formation of a joint venture at Aviation.
For 2011, these amounts totaled $1.5 billion, including Power & Water ($0.2 billion), Oil & Gas ($0.3 billion), Energy Management ($0.2 billion), Aviation ($0.2 billion), Healthcare ($0.4 billion), Transportation ($0.1 billion) and Appliances & Lighting ($0.1 billion).
Discontinued Operations
(In millions)
Earnings (loss) from discontinued
operations, net of taxes
$
(2,120)
$
(983)
$
Discontinued operations primarily comprised GE Money Japan, WMC, Consumer RV Marine, Consumer Mexico, Consumer Singapore, Australian Home Lending, Consumer Ireland, CLL Trailer Services and Consumer Russia. Associated results of operations, financial position and cash flows are separately reported as discontinued operations for all periods presented.
In 2013, loss from discontinued operations, net of taxes, reflected a $1.6 billion after-tax effect of incremental reserves, primarily related to an agreement to extinguish our loss-sharing arrangement for excess interest claims associated with the 2008 sale of GE Money Japan, a $0.2 billion after-tax effect of incremental reserves related to retained representation and warranty obligations to repurchase previously sold loans on the 2007 sale of WMC and a $0.2 billion after-tax loss on the planned disposal of Consumer Russia.
(45)
In 2012, loss from discontinued operations, net of taxes, primarily reflected a $0.6 billion after-tax effect of incremental reserves for excess interest claims related to our loss-sharing arrangement on the 2008 sale of GE Money Japan, a $0.3 billion after-tax effect of incremental reserves related to retained representation and warranty obligations to repurchase previously sold loans on the 2007 sale of WMC and a $0.2 billion loss (including a $0.1 billion loss on disposal) related to Consumer Ireland, partially offset by a $0.1 billion tax benefit related to the resolution with the IRS regarding the tax treatment of the 2007 sale of our Plastics business.
In 2011, earnings from discontinued operations, net of taxes, included a $0.3 billion gain on disposal related to the sale of Consumer Singapore and $0.1 billion earnings from operations at Consumer Russia, partially offset by a $0.2 billion after-tax effect of incremental reserves for excess interest claims related to our loss-sharing arrangement on the 2008 sale of GE Money Japan and a $0.2 billion loss from operations at Consumer Ireland.
For additional information related to discontinued operations, see Note 2 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Geographic Operations
Our global activities span all geographic regions and primarily encompass manufacturing for local and export markets, import and sale of products produced in other regions, leasing of aircraft, sourcing for our plants domiciled in other global regions and provision of financial services within these regional economies. Thus, when countries or regions experience currency and/or economic stress, we often have increased exposure to certain risks, but also often have new opportunities that include, among other things, more opportunities for expansion of industrial and financial services activities through purchases of companies or assets at reduced prices and lower U.S. debt financing costs.
Revenues are classified according to the region to which products and services are sold. For purposes of this analysis, the U.S. is presented separately from the remainder of the Americas. We classify certain assets that cannot meaningfully be associated with specific geographic areas as “Other Global” for this purpose.
Geographic Revenues
(In billions)
U.S.
$
68.6
$
70.5
$
69.9
Europe
25.3
26.7
28.2
Pacific Basin
25.5
24.4
23.2
Americas
13.1
13.2
13.2
Middle East and Africa
13.5
11.9
12.0
Total
$
146.0
$
146.7
$
146.5
Non-U.S. revenues were $77.4 billion in 2013, compared with $76.2 billion and $76.6 billion in 2012 and 2011, respectively. Non-U.S. revenues to external customers as a percentage of consolidated revenues were 53% in 2013, compared with 52% in both 2012 and 2011.
GE non-U.S. revenues, excluding GECC, in 2013 were $59.0 billion, up 3% over 2012. Increases in growth markets of 72% in Algeria, 38% in Sub-Sahara and 7% in China offset a decrease of 9% in Europe. These revenues as a percentage of GE total revenues, excluding GECC, were 58% in 2013, compared with 57% and 55% in 2012 and 2011, respectively. GE non-U.S. revenues, excluding GECC, were $57.3 billion in 2012, up 5% from 2011, primarily resulting from increases of 22% in Australia and New Zealand, 20% in China and 8% in Latin America, partially offset by a decrease of 36% in India. The effects of currency fluctuations on reported results decreased revenues by $0.3 billion in 2013, primarily driven by the Japanese yen ($0.3 billion) and Brazilian real ($0.2 billion), partially offset by the euro ($0.4 billion). The effect of currency fluctuations on reported results decreased revenues by $1.9 billion in 2012, primarily driven by the euro ($1.4 billion) and Brazilian real ($0.2 billion). The effects of currency fluctuations on reported results increased revenues by $1.4 billion in 2011, primarily driven by the euro ($0.8 billion) and Japanese yen ($0.2 billion).
(46)
GECC non-U.S. revenues decreased 3% to $18.4 billion in 2013, compared with $19.0 billion and $22.3 billion in 2012 and 2011, respectively, primarily as a result of decreases in Europe. Non-U.S. revenues as a percentage of total revenues were 42% in 2013 and 2012, compared with 46% in 2011. Non-U.S. revenues decreased by 15% in 2012 from $22.3 billion in 2011, primarily as a result of decreases in Europe. The effects of currency fluctuations on reported results decreased revenues by $0.2 billion in 2013, primarily driven by the Japanese yen ($0.2 billion). The effects of currency fluctuations on reported results decreased revenues by $0.7 billion in 2012, primarily driven by the euro ($0.3 billion), Polish zloty ($0.1 billion), Hungarian forint ($0.1 billion) and Czech koruna ($0.1 billion). The effects of currency fluctuations on reported results increased revenues by $1.0 billion in 2011, primarily driven by the Australian dollar ($0.3 billion), euro ($0.2 billion), Japanese yen ($0.1 billion), Canadian dollar ($0.1 billion) and British pound ($0.1 billion).
The effects of foreign currency fluctuations on earnings were minimal, with no single currency having a significant impact.
Total Assets (continuing operations)
December 31 (In billions)
U.S.
$
325.4
$
350.7
Europe
195.1
188.9
Pacific Basin
51.8
55.7
Americas
32.9
32.9
Other Global
49.0
53.5
Total
$
654.2
$
681.7
Total assets of non-U.S. operations on a continuing basis were $328.8 billion in 2013, a decrease of $2.2 billion from 2012. This decrease reflected declines in Pacific Basin and Other Global, primarily due to the strengthening of the U.S. dollar against the Japanese yen and dispositions at various businesses, partially offset by increases in Europe, primarily due to acquisitions.
Financial results of our non-U.S. activities reported in U.S. dollars are affected by currency exchange. We use a number of techniques to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. Such principal currencies are the pound sterling, the euro, the Japanese yen, the Swiss franc and the Australian dollar.
Environmental Matters
Our operations, like operations of other companies engaged in similar businesses, involve the use, disposal and cleanup of substances regulated under environmental protection laws. We are involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. Such statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site. Expenditures for site remediation actions amounted to approximately $0.4 billion in both 2013 and 2012 and $0.3 billion in 2011. We presently expect that such remediation actions will require average annual expenditures of about $0.4 billion for each of the next two years.
(47)
In 2006, we entered into a consent decree with the Environmental Protection Agency (EPA) to dredge PCB-containing sediment from the upper Hudson River. The consent decree provided that the dredging would be performed in two phases. Phase 1 was completed in May through November of 2009. Between Phase 1 and Phase 2 there was an intervening peer review by an independent panel of national experts. The panel evaluated the performance of Phase 1 dredging operations with respect to Phase 1 Engineering Performance Standards and recommended proposed changes to the standards. On December 17, 2010, EPA issued its decision setting forth the final performance standards for Phase 2 of the Hudson River dredging project, incorporating aspects of the recommendations from the independent peer review panel and from GE. In December 2010, we agreed to perform Phase 2 of the project in accordance with the final performance standards set by EPA and increased our reserve by $0.8 billion in the fourth quarter of 2010 to account for the probable and estimable costs of completing Phase 2. In 2011, we completed the first year of Phase 2 dredging and commenced work on planned upgrades to the Hudson River wastewater processing facility. Over the past three years we have dredged 1.7 million cubic yards from the river and, based upon that result and our best professional engineering judgment, we believe that our current reserve continues to reflect our probable and estimable costs for the remainder of Phase 2 of the dredging project.
Financial Resources and Liquidity
This discussion of financial resources and liquidity addresses the Statement of Financial Position; Liquidity and Borrowings; Debt and Derivative Instruments, Guarantees and Covenants; Consolidated Statements of Changes in Shareowners’ Equity and Comprehensive Income; Statement of Cash Flows - Overview from 2011 through 2013; Contractual Obligations; and Variable Interest Entities (VIEs).
Overview of Financial Position
Major changes to our shareowners’ equity are discussed in the Shareowners’ Equity and Comprehensive Income section. In addition, other significant changes to balances in our Statement of Financial Position follow.
Statement of Financial Position
Because GE and GECC share certain significant elements of their Statements of Financial Position - property, plant and equipment and borrowings, for example - the following discussion addresses significant captions in the consolidated statement. Within the following discussions, however, we distinguish between GE and GECC activities in order to permit meaningful analysis of each individual consolidating statement.
Investment securities comprise mainly investment-grade debt securities supporting obligations to annuitants and policyholders in our run-off insurance operations and supporting obligations to holders of guaranteed investment contracts (GICs) in Trinity, and investments held in our CLL business collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries. The fair value of investment securities decreased to $44.0 billion at December 31, 2013 from $48.5 billion at December 31, 2012, primarily due to the sale of U.S. government and federal agency securities at our treasury operations and the impact of higher interest rates. At December 31, 2013, we held debt securities with an estimated fair value of $43.3 billion, which included corporate debt securities, asset-backed securities (ABS), commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS) with estimated fair values of $23.5 billion, $7.4 billion, $3.0 billion and $1.9 billion, respectively. Net unrealized gains on debt securities were $2.5 billion and $4.8 billion at December 31, 2013 and 2012, respectively. This amount included unrealized losses on corporate debt securities, state and municipal securities and CMBS of $0.3 billion, $0.2 billion and $0.1 billion, respectively, at December 31, 2013, as compared with $0.4 billion, $0.1 billion, and $0.1 billion, respectively, at December 31, 2012.
(48)
We regularly review investment securities for impairment using both qualitative and quantitative criteria. For debt securities, our qualitative review considers our intent to sell the security and the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. Our quantitative review considers whether there has been an adverse change in expected future cash flows. Unrealized losses are not indicative of the amount of credit loss that would be recognized. We presently do not intend to sell the vast majority of our debt securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell the vast majority of these securities before recovery of our amortized cost. For equity securities, we consider the length of time and magnitude of the amount that each security is in an unrealized loss position. We believe that the unrealized loss associated with our equity securities will be recovered within the foreseeable future. Uncertainty in the capital markets may cause increased levels of other-than-temporary impairments. For additional information relating to how credit losses are calculated, see Note 3 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Our RMBS portfolio is collateralized primarily by pools of individual, direct mortgage loans (a majority of which were originated in 2006 and 2005), not other structured products such as collateralized debt obligations. The vast majority of our RMBS are in a senior position in the capital structure of the deals and more than 70% are agency bonds or insured by Monoline insurers (Monolines) (on which we continue to place reliance). Of our total RMBS portfolio at December 31, 2013 and 2012, approximately $0.4 billion and $0.5 billion, respectively, relates to residential subprime credit, primarily supporting our guaranteed investment contracts. A majority of this exposure is related to investment securities backed by mortgage loans originated in 2006 and 2005. Substantially all of the subprime RMBS were investment grade at the time of purchase and approximately 70% have been subsequently downgraded to below investment grade.
Our CMBS portfolio is collateralized by both diversified pools of mortgages that were originated for securitization (conduit CMBS) and pools of large loans backed by high-quality properties (large loan CMBS), the majority of which were originated in 2007 and 2006. The vast majority of the securities in our CMBS portfolio have investment-grade credit ratings and the vast majority of the securities are in a senior position in the capital structure of the deals.
Our ABS portfolio is collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries, as well as a variety of diversified pools of assets such as student loans and credit cards. The vast majority of the securities in our ABS portfolio are in a senior position in the capital structure of the deals. In addition, substantially all of the securities that are below investment grade are in an unrealized gain position.
If there has been an adverse change in cash flows for RMBS, management considers credit enhancements such as Monoline insurance (which are features of a specific security). In evaluating the overall creditworthiness of the Monoline, we use an analysis that is similar to the approach we use for corporate bonds, including an evaluation of the sufficiency of the Monoline’s cash reserves and capital, ratings activity, whether the Monoline is in default or default appears imminent, and the potential for intervention by an insurance or other regulator.
Monolines provide credit enhancement for certain of our investment securities, primarily RMBS and municipal securities. The credit enhancement is a feature of each specific security that guarantees the payment of all contractual cash flows, and is not purchased separately by GE. The Monoline industry continues to experience financial stress from increasing delinquencies and defaults on the individual loans underlying insured securities. We continue to rely on Monolines with adequate capital and claims paying resources. We have reduced our reliance on Monolines that do not have adequate capital or have experienced regulator intervention. At December 31, 2013, our investment securities insured by Monolines on which we continue to place reliance were $1.0 billion, including $0.3 billion of our $0.4 billion investment in subprime RMBS. At December 31, 2013, the unrealized loss associated with securities subject to Monoline credit enhancement, for which there is an expected credit loss, was $0.1 billion.
Total pre-tax, other-than-temporary impairment losses during 2013 were $0.8 billion, which was recognized in earnings and primarily relates to credit losses on corporate debt securities and other-than-temporary losses on equity securities and an insignificant amount primarily relates to non-credit-related losses on RMBS and is included within accumulated other comprehensive income (AOCI).
(49)
Total pre-tax, other-than-temporary impairment losses during 2012 were $0.2 billion, of which $0.1 billion was recognized in earnings and primarily relates to credit losses on non-U.S. corporate, U.S. corporate and RMBS securities and other-than-temporary losses on equity securities and $0.1 billion primarily relates to non-credit-related losses on RMBS and is included within AOCI.
At December 31, 2013 and 2012, unrealized losses on investment securities totaled $0.7 billion and $0.8 billion, respectively, including $0.4 billion and $0.8 billion, respectively, aged 12 months or longer. Of the amount aged 12 months or longer at December 31, 2013, more than 70% are debt securities that were considered to be investment grade by the major rating agencies. In addition, of the amount aged 12 months or longer, $0.1 billion and $0.2 billion related to structured securities (mortgage-backed and asset-backed) and corporate debt securities, respectively. With respect to our investment securities that are in an unrealized loss position, aged 12 months or longer at December 31, 2013, the majority relate to debt securities held to support obligations to holders of GICs. We presently do not intend to sell the vast majority of our debt securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell these securities before recovery of our amortized cost. For additional information, see Note 3 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Fair value measurements. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Additional information about our application of this guidance is provided in Notes 1 and 21 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. At December 31, 2013, the aggregate amount of investments that are measured at fair value through earnings totaled $3.2 billion and consisted primarily of various assets held for sale in the ordinary course of business, as well as equity investments.
Working capital, representing GE current receivables and inventories, less GE accounts payable and progress collections, decreased $0.7 billion at December 31, 2013, compared to December 31, 2012 due to increases in accounts payable and progress collections, partially offset by increases in current receivables and inventory. As Power & Water, Oil & Gas and Aviation deliver units out of their backlogs to fulfill commitments over the next few years, progress collections of $13.2 billion at December 31, 2013, will be earned, which, along with progress collections on new orders, will impact working capital. We discuss current receivables and inventories, two important elements of working capital, in the following paragraphs.
Current receivables, before allowance for losses, for GE totaled to $11.4 billion at December 31, 2013 and $9.7 billion at December 31, 2012, and included $7.4 billion due from customers at the end of 2013 compared with $6.3 billion at the end of 2012. GE current receivables turnover was 9.9 in 2013, compared with 10.5 in 2012. The overall increase in current receivables was primarily due to higher volume at Power & Water and Oil & Gas. See Note 4 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Inventories for GE totaled $17.3 billion at December 31, 2013, an increase of $2.0 billion from 2012. This increase reflected higher inventories at Power & Water, Oil & Gas and Aviation to fulfill commitments and backlog. GE inventory turnover was 6.1 and 6.7 in 2013 and 2012, respectively. See Note 5 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Financing receivables is our largest category of assets and represents one of our primary sources of revenues. Our portfolio of financing receivables is diverse and not directly comparable to major U.S. banks. A discussion of the quality of certain elements of the financing receivables portfolio follows.
(50)
Our consumer portfolio is composed primarily of non-U.S. mortgage, sales finance, auto and personal loans in various European and Asian countries and U.S. consumer credit card and sales finance receivables. In 2007, we exited the U.S. mortgage business and we have no U.S. auto or student loans.
Our commercial portfolio primarily comprises senior secured positions with comparatively low loss history. The secured receivables in this portfolio are collateralized by a variety of asset classes, which for our CLL business primarily include: industrial-related facilities and equipment, vehicles, corporate aircraft, and equipment used in many industries, including the construction, manufacturing, transportation, media, communications, entertainment, and healthcare industries. The portfolios in our Real Estate, GECAS and Energy Financial Services businesses are collateralized by commercial real estate, commercial aircraft and operating assets in the global energy and water industries, respectively. We are in a secured position for substantially all of our commercial portfolio.
Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of losses depends on the size, type and risk characteristics of the related financing receivable. Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values (including housing price indices as applicable), and the present and expected future levels of interest rates. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions and are subject to the regulatory examinations process, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible to experience credit losses that are different from our current estimates.
Our risk management process includes standards and policies for reviewing major risk exposures and concentrations, and evaluates relevant data either for individual loans or financing leases, or on a portfolio basis, as appropriate.
Loans acquired in a business acquisition are recorded at fair value, which incorporates our estimate at the acquisition date of the credit losses over the remaining life of the portfolio. As a result, the allowance for losses is not carried over at acquisition. This may have the effect of causing lower reserve coverage ratios for those portfolios.
For purposes of the discussion that follows, “delinquent” receivables are those that are 30 days or more past due based on their contractual terms, and “nonearning” receivables are those that are 90 days or more past due (or for which collection is otherwise doubtful). Nonearning receivables exclude loans purchased at a discount (unless they have deteriorated post acquisition). These loans are initially recorded at fair value and accrete interest income over the estimated life of the loan based on reasonably estimable cash flows even if the underlying loans are contractually delinquent at acquisition. In addition, nonearning receivables exclude loans that are paying on a cash accounting basis but are classified as nonaccrual and impaired. “Nonaccrual” financing receivables include all nonearning receivables and are those on which we have stopped accruing interest. We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due, with the exception of consumer credit card accounts, on which we accrue interest until the account becomes 180 days past due, as discussed below. Recently restructured financing receivables are not considered delinquent when payments are brought current according to the restructured terms, but may remain classified as nonaccrual until there has been a period of satisfactory payment performance by the borrower and future payments are reasonably assured of collection.
(51)
Beginning in the fourth quarter of 2013, we revised our methods for classifying financing receivables as nonaccrual and nonearning to more closely align with regulatory guidance. Under the revised methods, we continue to accrue interest on consumer credit cards until the accounts are written off in the period the account becomes 180 days past due. Previously, we stopped accruing interest on consumer credit cards when the account became 90 days past due. In addition, the revised methods limit the use of the cash basis of accounting for nonaccrual financing receivables.
As a result of these revisions, consumer credit card receivables of $1.1 billion that were previously classified as both nonaccrual and nonearning were returned to accrual status in the fourth quarter of 2013. In addition, $1.5 billion of Real Estate and CLL financing receivables previously classified as nonaccrual, paying in accordance with contractual terms and accounted for on the cash basis, were returned to accrual status, while $2.2 billion of financing receivables previously classified as nonaccrual and accounted for on the cash basis (primarily in Real Estate and CLL) were placed into the nonearning category based on our assessment of the short-term outlook for resolution through payoff or refinance. These changes had an insignificant effect on earnings.
Given that the revised methods result in nonaccrual and nonearning amounts that are substantially the same, we plan to discontinue the reporting of nonearning financing receivables, one of our internal performance metrics, and report selected ratios related to nonaccrual financing receivables in the first quarter of 2014.
Further information on the determination of the allowance for losses on financing receivables and the credit quality and categorization of our financing receivables is provided in the Critical Accounting Estimates section in this Item and Notes 1 and 6 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(52)
Financing receivables at
Nonearning receivables at
Allowance for losses at
December 31,
December 31,
December 31,
December 31,
December 31,
December 31,
(In millions)
Commercial
CLL
Americas
$
68,585
$
72,517
$
1,243
$
1,333
$
$
Europe(a)
37,962
37,037
1,046
1,299
Asia
9,469
11,401
Other(a)
-
-
Total CLL
116,467
121,558
2,702
2,877
1,021
Energy
Financial
Services
3,107
4,851
-
GECAS
9,377
10,915
-
-
Other
Total
Commercial
129,269
137,810
2,712
2,890
1,005
1,041
Real Estate
19,899
20,946
2,301
Consumer
Non-U.S.
residential
mortgages(b)
30,501
33,350
1,766
2,567
Non-U.S.
installment
and revolving
credit
13,677
17,816
U.S. installment
and revolving
credit
55,854
50,853
1,026
2,823
2,282
Non-U.S. auto
2,054
4,260
Other
6,953
8,070
Total Consumer
109,039
114,349
2,219
4,181
3,981
3,583
Total
$
258,207
$
273,105
$
7,232
$
7,515
$
5,178
$
4,944
(a)
During 2013, we transferred our European equipment services portfolio from CLL Other to CLL Europe. Prior-period amounts were reclassified to conform to the current period presentation.
(b)
Included financing receivables of $12,025 million and $12,221 million, nonearning receivables of $751 million and $1,036 million and allowance for losses of $139 million and $142 million at December 31, 2013 and 2012, respectively, primarily related to loans, net of credit insurance, whose terms permitted interest-only payments and high loan-to-value ratios at inception (greater than 90%). At origination, we underwrite loans with an adjustable rate to the reset value. Of these loans, about 85% are in our U.K. and France portfolios, which comprise mainly loans with interest-only payments, high loan-to-value ratios at inception and introductory below market rates, have a delinquency rate of 14%, have a loan-to-value ratio at origination of 82% and have re-indexed loan-to-value ratios of 84% and 64%, respectively. Re-indexed loan-to-value ratios may not reflect actual realizable values of future repossessions. At December 31, 2013, 11% (based on dollar values) of these loans in our U.K. and France portfolios have been restructured.
(53)
The portfolio of financing receivables, before allowance for losses, was $258.2 billion at December 31, 2013, and $273.1 billion at December 31, 2012. Financing receivables, before allowance for losses, decreased $14.9 billion from December 31, 2012, primarily as a result of dispositions ($6.5 billion), write-offs ($5.9 billion), collections (which includes sales) exceeding originations ($3.6 billion) and the stronger U.S. dollar ($1.7 billion).
Related nonearning receivables totaled $7.2 billion (2.8% of outstanding receivables) at December 31, 2013, compared with $7.5 billion (2.8% of outstanding receivables) at December 31, 2012. Nonearning receivables decreased from December 31, 2012, primarily due to collections and write-offs at CLL and the placing of consumer credit card accounts on accrual status, partially offset by nonearning receivables previously classified as cash basis resulting from a revision to our nonaccrual and nonearning methods to more closely align with regulatory guidance in the fourth quarter of 2013.
The allowance for losses at December 31, 2013 totaled $5.2 billion compared with $4.9 billion at December 31, 2012, representing our best estimate of probable losses inherent in the portfolio. Allowance for losses increased $0.2 billion from December 31, 2012, primarily because provisions were higher than write-offs, net of recoveries by $0.4 billion, which is attributable to an increase in provision in our Consumer installment and revolving portfolios. The allowance for losses as a percent of total financing receivables increased from 1.8% at December 31, 2012 to 2.0% at December 31, 2013 primarily due to an increase in the allowance for losses and a decline in the overall financing receivables balance as discussed above. Further information surrounding the allowance for losses related to each of our portfolios is detailed below.
(54)
The following table provides information surrounding selected ratios related to nonearning financing receivables and the allowance for losses.
Nonearning financing receivables
Allowance for losses
Allowance for losses
as a percent of
as a percent of
as a percent of
December 31
financing receivables at
nonearning financing receivables at
total financing receivables at
Commercial
CLL
Americas
1.8
%
1.8
%
38.1
%
36.8
%
0.7
%
0.7
%
Europe
2.8
3.5
39.7
34.3
1.1
1.2
Asia
4.4
1.7
21.8
41.5
1.0
0.7
Other
-
8.6
-
11.5
-
1.0
Total CLL
2.3
2.4
36.2
35.5
0.8
0.8
Energy
Financial
Services
0.1
-
200.0
-
0.3
0.2
GECAS
-
-
-
-
0.2
0.1
Other
1.9
2.7
33.3
23.1
0.6
0.6
Total Commercial
2.1
2.1
37.1
36.0
0.8
0.8
Real Estate
11.6
2.1
8.3
72.1
1.0
1.5
Consumer
Non-U.S.
residential mortgages(a)
5.8
7.7
20.3
18.7
1.2
1.4
Non-U.S.
installment and
revolving credit
0.6
1.2
675.0
273.2
4.3
3.3
U.S. installment
and revolving credit
-
2.0
(b)
222.4
5.1
4.5
Non-U.S. auto
0.9
0.6
311.1
279.2
2.7
1.6
Other
5.0
4.3
43.5
49.0
2.2
2.1
Total Consumer
2.0
3.7
179.4
85.7
3.7
3.1
Total
2.8
2.8
71.6
65.8
2.0
1.8
(a)
Included nonearning financing receivables as a percent of financing receivables of 6.2% and 8.5%, allowance for losses as a percent of nonearning receivables of 18.5% and 13.7% and allowance for losses as a percent of total financing receivables of 1.2% and 1.2% at December 31, 2013 and December 31, 2012, respectively, primarily related to loans, net of credit insurance, whose terms permitted interest-only payments and high loan-to-value ratios at inception (greater than 90%). Compared to the overall Non-U.S. residential mortgage loan portfolio, the ratio of allowance for losses as a percent of nonearning financing receivables for these loans is lower, driven primarily by the higher mix of such products in the U.K. and France portfolios and as a result of the better performance and collateral realization experience in these markets.
(b)
Not meaningful.
Included below is a discussion of financing receivables, allowance for losses, nonearning receivables and related metrics for each of our significant portfolios.
CLL - Americas. Nonearning receivables of $1.2 billion represented 17.2% of total nonearning receivables at December 31, 2013. The ratio of allowance for losses as a percent of nonearning receivables increased from 36.8% at December 31, 2012, to 38.1% at December 31, 2013, reflecting a decrease in nonearning receivables. The ratio of nonearning receivables as a percent of financing receivables remained constant at 1.8% at December 31, 2013 primarily due to decreased nonearning exposures in our industrial and consumer-facing portfolios, partially offset by our materials, media and Latin America portfolios. Collateral supporting these nonearning financing receivables primarily includes assets in the restaurant and hospitality, trucking and industrial equipment industries and corporate aircraft, and for our leveraged finance business, equity of the underlying businesses.
(55)
CLL - Europe. Nonearning receivables of $1.0 billion represented 14.5% of total nonearning receivables at December 31, 2013. The ratio of allowance for losses as a percent of nonearning receivables increased from 34.3% at December 31, 2012 to 39.7% at December 31, 2013, reflecting a decrease in nonearning receivables and allowance for losses in our Interbanca S.p.A. and asset-backed lending portfolios primarily as a result of write-offs. The majority of our CLL - Europe nonearning receivables are attributable to the Interbanca S.p.A. portfolio, which was acquired in 2009. The loans acquired with Interbanca S.p.A. were recorded at fair value, which incorporates an estimate at the acquisition date of credit losses over their remaining life. Accordingly, these loans generally have a lower ratio of allowance for losses as a percent of nonearning receivables compared to the remaining portfolio. Excluding the nonearning loans attributable to the 2009 acquisition of Interbanca S.p.A., the ratio of allowance for losses as a percent of nonearning receivables increased from 58.4% at December 31, 2012, to 70.8% at December 31, 2013, primarily due to a decrease in nonearning receivables as a result of write-offs and sales in our acquisition finance and asset-backed lending portfolios. The ratio of nonearning receivables as a percent of financing receivables decreased from 3.5% at December 31, 2012, to 2.8% at December 31, 2013, for the reasons described above. Collateral supporting these secured nonearning financing receivables are primarily equity of the underlying businesses for our Interbanca S.p.A. business and acquisition finance businesses, the purchased receivables for our asset-backed lending portfolio, and equipment for our equipment finance portfolio.
CLL - Asia. Nonearning receivables of $0.4 billion represented 5.7% of total nonearning receivables at December 31, 2013. The ratio of allowance for losses as a percent of nonearning receivables decreased from 41.5% at December 31, 2012, to 21.8% at December 31, 2013, primarily due to an increase in nonearning receivables in Australia, South Korea and Thailand, partially offset by restructuring activities and write-offs resulting in a reduction of nonearning receivables in our asset-based financing businesses in Japan. The ratio of nonearning receivables as a percent of financing receivables increased from 1.7% at December 31, 2012, to 4.4% at December 31, 2013, primarily due to increased nonearning receivables mentioned above and a decline in financing receivables primarily in our asset-based financing businesses in Japan and Australia. Collateral supporting these nonearning financing receivables is primarily commercial real estate, manufacturing equipment and corporate aircraft.
Real Estate - Debt. Nonearning receivables of $2.3 billion represented 31.8% of total nonearning receivables at December 31, 2013. The increase in nonearning receivables from December 31, 2012, was primarily due to $2.1 billion of financing receivables previously classified as cash basis resulting from a revision to our nonaccrual and nonearning methods to more closely align with regulatory guidance in the fourth quarter of 2013, partially offset by the resolution of North American multi-family and hotel nonearning loans, as well as European retail and mixed-use loans through payoffs, foreclosures and write-offs. The ratio of allowance for losses as a percent of nonearning receivables decreased from 72.1% to 8.3% reflecting the increase in nonearning loans as mentioned above. The ratio of allowance for losses as a percent of total financing receivables decreased from 1.5% at December 31, 2012 to 1.0% at December 31, 2013, driven primarily by the reduction in overall reserves due to improving market conditions and new loan originations in 2013.
The Real Estate financing receivables portfolio is collateralized by income-producing or owner-occupied commercial properties across a variety of asset classes and markets. At December 31, 2013, total Real Estate financing receivables of $19.9 billion were primarily collateralized by office buildings ($5.9 billion), apartment buildings ($3.2 billion), retail facilities ($2.8 billion), warehouse properties ($2.6 billion) and hotel properties ($2.2 billion). In 2013, commercial real estate markets continue to show signs of improved stability and liquidity in certain markets; however, the pace of improvement varies significantly by asset class and market and the long-term outlook remains uncertain. We have and continue to maintain an intense focus on operations and risk management. Loan loss reserves related to our Real Estate-Debt financing receivables are particularly sensitive to declines in underlying property values. Estimating the impact of global property values on loss performance across our portfolio depends on a number of factors, including macroeconomic conditions, property level operating performance, local market dynamics and individual borrower behavior. As a result, any attempts to forecast potential losses carry a high degree of imprecision and are subject to change. At December 31, 2013, we had 116 foreclosed commercial real estate properties totaling $1.0 billion.
(56)
Consumer − Non-U.S. residential mortgages. Nonearning receivables of $1.8 billion represented 24.4% of total nonearning receivables at December 31, 2013. The ratio of allowance for losses as a percent of nonearning receivables increased from 18.7% at December 31, 2012, to 20.3% at December 31, 2013, as a result of lower nonearning receivables due to improved collections and higher property values primarily in our U.K. portfolio. Our non-U.S. mortgage portfolio has a loan-to-value ratio of approximately 75% at origination and the vast majority are first lien positions. Our U.K. and France portfolios, which comprise a majority of our total mortgage portfolio, have reindexed loan-to-value ratios of 77% and 56%, respectively, and about 9% of these loans are without mortgage insurance and have a reindexed loan-to-value ratio equal to or greater than 100%. Re-indexed loan-to-value ratios may not reflect actual realizable values of future repossessions. Loan-to-value information is updated on a quarterly basis for a majority of our loans and considers economic factors such as the housing price index. At December 31, 2013, we had in repossession stock 447 houses in the U.K., which had a value of approximately $0.1 billion. The ratio of nonearning receivables as a percent of financing receivables decreased from 7.7% at December 31, 2012 to 5.8% at December 31, 2013 for the reasons described above.
Consumer − Non-U.S. installment and revolving credit. Nonearning receivables of $0.1 billion represented 1.2% of total nonearning receivables at December 31, 2013. The ratio of allowance for losses as a percent of nonearning receivables increased from 273.2% at December 31, 2012 to 675.0% at December 31, 2013, reflecting an increase in the allowance for losses primarily due to the approach described below and a decrease in nonearning receivables reflect the placing of consumer credit card accounts on accrual status.
Consumer − U.S. installment and revolving credit. Nonearning receivables at December 31, 2013, reflect the placing of consumer credit card accounts on accrual status. The ratio of allowance for losses as a percent of financing receivables increased from 4.5% at December 31, 2012 to 5.1% at December 31, 2013, reflecting an increase in the allowance for losses primarily due to the approach described below.
In 2013, we completed our implementation of a more granular portfolio segmentation approach, by loss type, in determining the incurred loss period in our consumer revolving credit portfolios, which resulted in an increase to the incurred loss period and included a qualitative assessment of the adequacy of the consumer revolving credit portfolios’ allowance for losses, which compares this allowance for losses to projected net write-offs over the next 12 months, in a manner consistent with regulatory guidance. This resulted in an increase of $0.6 billion to the allowance for losses on financing receivables ($0.3 billion, after tax), the vast majority of which was attributable to our U.S. consumer revolving credit portfolios.
Nonaccrual Financing Receivables
The following table provides details related to our nonaccrual and nonearning financing receivables. Nonaccrual financing receivables include all nonearning receivables and are those on which we have stopped accruing interest. We stop accruing interest at the earlier of the time at which collection becomes doubtful or the account becomes 90 days past due, with the exception of consumer credit card accounts, as discussed below.
Beginning in the fourth quarter of 2013, we revised our methods for classifying financing receivables as nonaccrual and nonearning to more closely align with regulatory guidance. Under the revised methods, we continue to accrue interest on consumer credit cards until the accounts are written off in the period the account becomes 180 days past due. Previously, we stopped accruing interest on consumer credit cards when the account became 90 days past due. In addition, the revised methods limit the use of the cash basis of accounting for nonaccrual financing receivables.
As a result of these revisions, consumer credit card receivables of $1.1 billion that were previously classified as both nonaccrual and nonearning were returned to accrual status in the fourth quarter of 2013. In addition, $1.5 billion of Real Estate and CLL financing receivables previously classified as nonaccrual, paying in accordance with contractual terms and accounted for on the cash basis, were returned to accrual status, while $2.2 billion of financing receivables previously classified as nonaccrual and accounted for on the cash basis (primarily in Real Estate and CLL) were placed into the nonearning category based on our assessment of the short-term outlook for resolution through payoff or refinance. These changes had an insignificant effect on earnings.
(57)
Given that the revised methods result in nonaccrual and nonearning amounts that are substantially the same, we plan to discontinue the reporting of nonearning financing receivables, one of our internal performance metrics, and report selected ratios related to nonaccrual financing receivables in the first quarter of 2014.
Substantially all of the differences between nonearning and nonaccrual financing receivables relate to loans that are classified as nonaccrual financing receivables but are paying on a cash accounting basis, and therefore excluded from nonearning receivables. Of our $7.9 billion nonaccrual loans at December 31, 2013, $4.2 billion are currently paying in accordance with their contractual terms. Further information on our nonaccrual and nonearning financing receivables is provided in Notes 1 and 6 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Nonaccrual financing
Nonearning financing
December 31 (In millions)
receivables
receivables
Commercial
CLL
$
2,734
$
4,138
$
2,702
$
2,877
Energy Financial Services
-
-
GECAS
-
-
-
Other
Total Commercial
2,744
4,166
2,712
2,890
Real Estate(a)
2,551
4,885
2,301
Consumer(b)
2,620
4,288
2,219
4,181
Total
$
7,915
$
13,339
$
7,232
$
7,515
(a)
During the fourth quarter of 2013, we reclassified financing receivables of $1.0 billion from nonaccrual to accrual status and $2.1 billion from nonaccrual to nonearning, as discussed above.
(b)
During the fourth quarter of 2013, we reclassified consumer credit card receivables of $1.1 billion from both nonaccrual and nonearning to accrual status, as discussed above.
Impaired Loans
“Impaired” loans in the table below are defined as larger-balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. The vast majority of our Consumer and a portion of our CLL nonaccrual receivables are excluded from this definition, as they represent smaller-balance homogeneous loans that we evaluate collectively by portfolio for impairment.
Impaired loans include nonearning receivables on larger-balance or restructured loans, loans that are currently paying interest under the cash basis (but are excluded from the nonearning category), and loans paying currently that had been previously restructured.
Specific reserves are recorded for individually impaired loans to the extent we have determined that it is probable that we will be unable to collect all amounts due according to original contractual terms of the loan agreement. Certain loans classified as impaired may not require a reserve because we believe that we will ultimately collect the unpaid balance (through collection or collateral repossession).
Further information pertaining to loans classified as impaired and specific reserves is included in the table below.
(58)
December 31 (In millions)
Loans requiring allowance for losses
Commercial(a)
$
1,116
$
1,372
Real Estate
1,245
2,202
Consumer
2,879
3,103
Total loans requiring allowance for losses
5,240
6,677
Loans expected to be fully recoverable
Commercial(a)
2,776
3,697
Real Estate
2,615
3,491
Consumer
Total loans expected to be fully recoverable
5,500
7,293
Total impaired loans
$
10,740
$
13,970
Allowance for losses (specific reserves)
Commercial(a)
$
$
Real Estate
Consumer
Total allowance for losses (specific reserves)
$
$
1,348
Average investment during the period
$
12,347
$
16,262
Interest income earned while impaired(b)
(a)
Includes CLL, Energy Financial Services, GECAS and Other.
(b)
Recognized principally on an accrual basis.
We regularly review our Real Estate loans for impairment using both quantitative and qualitative factors, such as debt service coverage and loan-to-value ratios. We evaluate a Real Estate loan for impairment when the most recent valuation reflects a projected loan-to-value ratio at maturity in excess of 100%, even if the loan is currently paying in accordance with its contractual terms.
Of our $3.9 billion of impaired loans at Real Estate at December 31, 2013, $3.6 billion are currently paying in accordance with the contractual terms of the loan and are typically loans where the borrower has adequate debt service coverage to meet contractual interest obligations. Impaired loans at CLL primarily represent senior secured lending positions.
Our impaired loan balance at December 31, 2013 and 2012, classified by the method used to measure impairment was as follows.
December 31 (In millions)
Discounted cash flow
$
5,558
$
6,693
Collateral value
5,182
7,277
Total
$
10,740
$
13,970
See Note 1 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Our loss mitigation strategy is intended to minimize economic loss and, at times, can result in rate reductions, principal forgiveness, extensions, forbearance or other actions, which may cause the related loan to be classified as a troubled debt restructuring (TDR), and also as impaired. Changes to Real Estate’s loans primarily include maturity extensions, principal payment acceleration, changes to collateral terms and cash sweeps, which are in addition to, or sometimes in lieu of, fees and rate increases. The determination of whether these changes to the terms and conditions of our commercial loans meet the TDR criteria includes our consideration of all relevant facts and circumstances. At December 31, 2013, TDRs included in impaired loans were $9.5 billion, primarily relating to Real Estate ($3.6 billion), CLL ($3.0 billion) and Consumer ($2.9 billion).
(59)
Real Estate TDRs decreased from $5.1 billion at December 31, 2012 to $3.6 billion at December 31, 2013, primarily driven by resolution of TDRs through paydowns, partially offset by extensions of loans scheduled to mature during 2013, some of which were classified as TDRs upon modification. For borrowers with demonstrated operating capabilities, we work to restructure loans when the cash flow and projected value of the underlying collateral support repayment over the modified term. We deem loan modifications to be TDRs when we have granted a concession to a borrower experiencing financial difficulty and we do not receive adequate compensation in the form of an effective interest rate that is at current market rates of interest given the risk characteristics of the loan or other consideration that compensates us for the value of the concession. For the year ended December 31, 2013, we modified $1.6 billion of loans classified as TDRs, substantially all in our Debt portfolio. Changes to these loans primarily included maturity extensions, principal payment acceleration, changes to collateral or covenant terms and cash sweeps that are in addition to, or sometimes in lieu of, fees and rate increases. The limited liquidity and higher return requirements in the real estate market for loans with higher loan-to-value (LTV) ratios have typically resulted in the conclusion that the modified terms are not at current market rates of interest, even if the modified loans are expected to be fully recoverable. We received the same or additional compensation in the form of rate increases and fees for the majority of these TDRs. Of our $1.6 billion and $4.4 billion of modifications classified as TDRs in the last 12 months ended December 31, 2013 and 2012, respectively, $0.2 billion have subsequently experienced a payment default in both 2013 and 2012.
The substantial majority of the Real Estate TDRs have reserves determined based upon collateral value. Our specific reserves on Real Estate TDRs were $0.1 billion at December 31, 2013 and $0.2 billion at December 31, 2012, and were 1.9% and 3.1%, respectively, of Real Estate TDRs. In many situations these loans did not require a specific reserve as collateral value adequately covered our recorded investment in the loan. While these modified loans had adequate collateral coverage, we were still required to complete our TDR classification evaluation on each of the modifications without regard to collateral adequacy.
We utilize certain short-term (three months or less) loan modification programs for borrowers experiencing temporary financial difficulties in our Consumer loan portfolio. These loan modification programs are primarily concentrated in our non-U.S. residential mortgage and non-U.S. installment and revolving portfolios. We sold our U.S. residential mortgage business in 2007 and, as such, do not participate in the U.S. government-sponsored mortgage modification programs. For the year ended December 31, 2013, we provided short-term modifications of approximately $0.1 billion of consumer loans for borrowers experiencing financial difficulties, substantially all in our non-U.S. residential mortgage, credit card and personal loan portfolios, which are not classified as TDRs. For these modified loans, we provided insignificant interest rate reductions and payment deferrals, which were not part of the terms of the original contract. We expect borrowers whose loans have been modified under these short-term programs to continue to be able to meet their contractual obligations upon the conclusion of the short-term modification. In addition, we have modified $1.4 billion of Consumer loans for the year ended December 31, 2013, which are classified as TDRs. Further information on Consumer impaired loans is provided in Note 6 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Delinquencies
For additional information on delinquency rates at each of our major portfolios, see Note 6 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
GECC Selected European Exposures
At December 31, 2013, we had $81.8 billion in financing receivables to consumer and commercial customers in Europe. The GECC financing receivables portfolio in Europe is well diversified across European geographies and customers. Approximately 88% of the portfolio is secured by collateral and represents approximately 500,000 commercial customers. Several European countries, including Spain, Portugal, Ireland, Italy, Greece and Hungary (focus countries), have been subject to credit deterioration due to weaknesses in their economic and fiscal situations. The carrying value of GECC funded exposures in these focus countries and in the rest of Europe comprised the following at December 31, 2013.
(60)
Rest of
Total
December 31, 2013 (In millions)
Spain
Portugal
Ireland
Italy
Greece
Hungary
Europe
Europe
Financing receivables,
before allowance
for losses on
financing receivables
$
1,605
$
$
$
7,149
$
$
3,014
$
70,734
$
83,059
Allowance for losses on
financing receivables
(106)
(18)
(4)
(254)
-
(68)
(787)
(1,237)
Financing receivables,
net of allowance
for losses on
financing receivables(a)(b)
1,499
6,895
2,946
69,947
81,822
Investments(c)(d)
-
-
-
2,211
2,921
Cost and equity method
investments(e)
-
-
1,940
2,726
Derivatives,
net of collateral(c)(f)
-
-
-
-
ELTO(g)
9,286
11,538
Real estate held for
investment(g)
-
-
-
-
4,455
5,670
Total funded exposures(h)
$
3,005
$
$
1,088
$
8,656
$
$
3,520
$
87,941
$
104,844
Unfunded commitments(i)
$
$
$
$
$
$
$
5,784
$
6,897
(a)
Financing receivable amounts are classified based on the location or nature of the related obligor.
(b)
Substantially all relates to non-sovereign obligors. Includes residential mortgage loans of approximately $30.2 billion before consideration of purchased credit protection. We have third-party mortgage insurance for less than 10% of these residential mortgage loans, which were primarily originated in France and the U.K.
(c)
Investments and derivatives are classified based on the location of the parent of the obligor or issuer.
(d)
Includes $0.8 billion related to financial institutions, $0.2 billion related to non-financial institutions and $1.9 billion related to sovereign issuers. Sovereign issuances totaled $0.1 billion and $0.2 billion related to Italy and Hungary, respectively. We held no investments issued by sovereign entities in the other focus countries.
(e)
Substantially all is non-sovereign.
(f)
Net of cash collateral; entire amount is non-sovereign.
(g)
These assets are held under long-term investment and operating strategies, and our ELTO strategies contemplate an ability to redeploy assets under lease should default by the lessee occur. The values of these assets could be subject to decline or impairment in the current environment.
(h)
Excludes $34.4 billion of cash and equivalents, which is composed of $19.6 billion of cash on short-term placement with highly rated global financial institutions based in Europe, sovereign central banks and agencies or supranational entities, of which $1.7 billion is in focus countries, and $14.8 billion of cash and equivalents placed with highly rated European financial institutions on a short-term basis, secured by U.S. Treasury securities ($8.4 billion) and sovereign bonds of non-focus countries ($6.4 billion), where the value of our collateral exceeds the amount of our cash exposure.
(i)
Includes ordinary course of business lending commitments, commercial and consumer unused revolving credit lines, inventory financing arrangements and investment commitments.
(61)
We manage counterparty exposure, including credit risk, on an individual counterparty basis. We place defined risk limits around each obligor and review our risk exposure on the basis of both the primary and parent obligor, as well as the issuer of securities held as collateral. These limits are adjusted on an ongoing basis based on our continuing assessment of the credit risk of the obligor or issuer. In setting our counterparty risk limits, we focus on high-quality credits and diversification through spread of risk in an effort to actively manage our overall exposure. We actively monitor each exposure against these limits and take appropriate action when we believe that risk limits have been exceeded or there are excess risk concentrations. Our collateral position and ability to work out problem accounts have historically mitigated our actual loss experience. Delinquency experience has been relatively stable in our European commercial and consumer platforms in the aggregate, and we actively monitor and take action to reduce exposures where appropriate. Uncertainties surrounding European markets could have an impact on the judgments and estimates used in determining the carrying value of these assets.
Other GECC receivables totaled $16.5 billion at December 31, 2013, an increase of $2.6 billion from 2012, driven by higher amounts due from GE related to material procurement and factoring programs. At December 31, 2013, the balance was primarily composed of amounts due from GE (related to material procurement programs and factoring programs of $6.7 billion), insurance receivables, accrued interest and investment income, nonfinancing customer receivables and amounts due under operating leases.
Property, plant and equipment totaled $68.8 billion at December 31, 2013, an increase of $0.2 billion from 2012, primarily reflecting an increase in machinery and equipment at GE, partially offset by a decrease in equipment leased to others principally at our GECAS aircraft leasing business. This decrease included impairment losses on our operating lease portfolio of commercial aircraft of $0.7 billion and $0.2 billion in 2013 and 2012, respectively. Impairment losses in 2013 incorporated management’s downward revisions to cash flow estimates based upon shorter useful lives and lower aircraft residual values from those indicated by our third-party appraisers, reflecting the introduction of newer technology, fleet retirements and high fuel prices and operating costs. These revised estimates primarily related to cargo aircraft ($0.3 billion), older technology narrow body aircraft ($0.2 billion) and regional jets ($0.1 billion). The average age of aircrafts we impaired in 2013 was 15 years compared with 7 years for our total fleet.
GE property, plant and equipment consisted of investments for its own productive use, whereas the largest element for GECC was equipment provided to third parties on operating leases. Details by category of investment are presented in Note 7 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
GE additions to property, plant and equipment totaled $3.7 billion and $3.9 billion in 2013 and 2012, respectively. Total expenditures, excluding equipment leased to others, for the past five years were $14.2 billion, of which 43% was investment for growth through new capacity and product development; 22% was investment in productivity through new equipment and process improvements; and 35% was investment for other purposes such as improvement of research and development facilities and safety and environmental protection.
GECC additions to property, plant and equipment were $10.0 billion and $11.9 billion during 2013 and 2012, respectively, primarily reflecting additions of commercial aircraft at GECAS.
Goodwill and other intangible assets totaled $77.6 billion and $14.3 billion, respectively, at December 31, 2013. Goodwill increased $4.5 billion and other intangible assets increased $2.3 billion from 2012, primarily from the acquisitions of the aerospace-parts business of Avio S.p.A. (Avio) and Lufkin Industries Inc. (Lufkin). Goodwill increased $0.8 billion from 2011 primarily from the acquisitions of Industrea Limited and Railcar Management, Inc., and the weaker U.S. dollar. Other intangible assets decreased $0.1 billion from 2011, primarily from dispositions and amortization expense, partially offset by acquisitions. See Note 8 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(62)
All other assets comprises mainly equity and cost method investments, real estate equity properties and investments, assets held for sale and derivative instruments, and totaled $70.8 billion at December 31, 2013, a decrease of $30.8 billion from 2012, primarily related to the sale of our remaining investment in NBCU LLC ($18.9 billion), certain held-for-sale real estate and aircraft ($7.9 billion), the sale of certain real estate investments ($3.4 billion), a decrease in the fair value of derivative instruments ($2.4 billion) and a decrease in our Penske Truck Leasing Co., L.P. (PTL) investment ($1.2 billion), partially offset by an increase in contract costs and estimated earnings ($1.5 billion). During 2013, we recognized $0.5 billion of other-than-temporary impairments of cost and equity method investments, excluding those related to real estate.
Included in other assets are Real Estate equity investments of $13.7 billion and $20.7 billion at December 31, 2013 and 2012, respectively. Our portfolio is diversified, both geographically and by asset type. We review the estimated values of our commercial real estate investments annually, or more frequently as conditions warrant. Based on the most recent valuation estimates available, the carrying value of our Real Estate investments exceeded their estimated value by about $2.1 billion. This amount is subject to variation and dependent on economic and market conditions, changes in cash flow estimates and composition of our portfolio, including sales. Commercial real estate valuations have shown signs of improved stability and liquidity in certain markets, primarily in the U.S.; however, the pace of improvement varies significantly by asset class and market. Accordingly, there continues to be risk and uncertainty surrounding commercial real estate values. Declines in estimated value of real estate below carrying amount result in impairment losses when the aggregate undiscounted cash flow estimates used in the estimated value measurement are below the carrying amount. As such, estimated losses in the portfolio will not necessarily result in recognized impairment losses. During 2013, Real Estate recognized pre-tax impairments of $0.3 billion in its real estate held for investment, which were primarily driven by declining cash flow projections for properties in Japan and Europe, as well as strategic decisions to sell portfolios in the U.S., Asia and Europe. During 2012, Real Estate recognized pre-tax impairments of $0.1 billion. Real Estate investments with undiscounted cash flows in excess of carrying value of 0% to 5% at December 31, 2013 had a carrying value of $0.4 billion and an associated estimated unrealized loss of an insignificant amount. Deterioration in economic conditions or prolonged market illiquidity may result in further impairments being recognized. On March 19, 2013, in connection with GE’s sale of its remaining 49% interest in NBCUniversal LLC to Comcast Corporation, we sold real estate comprising certain floors located at 30 Rockefeller Center, New York and the CNBC property located in Englewood Cliffs, New Jersey to affiliates of NBCUniversal for $1.4 billion in cash.
Contract costs and estimated earnings reflect revenues earned in excess of billings on our long-term contracts to construct technically complex equipment (such as power generation, aircraft engines and aeroderivative units) and long-term product maintenance or extended warranty arrangements. Our total contract costs and estimated earnings balances at December 31, 2013 and 2012, were $12.5 billion and $11.0 billion, respectively, reflecting the timing of billing in relation to work performed, as well as changes in estimates of future revenues and costs. Our total contract costs and estimated earnings balance at December 31, 2013 primarily related to customers in our Power & Water, Oil & Gas, Aviation and Transportation businesses. Further information is provided in the Critical Accounting Estimates section of this Item.
Liquidity and Borrowings
We maintain a strong focus on liquidity. At both GE and GECC we manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations throughout business cycles.
Our liquidity and borrowing plans for GE and GECC are established within the context of our annual financial and strategic planning processes. At GE, our liquidity and funding plans take into account the liquidity necessary to fund our operating commitments, which include primarily purchase obligations for inventory and equipment, payroll and general expenses (including pension funding). We also take into account our capital allocation and growth objectives, including paying dividends, repurchasing shares, investing in research and development and acquiring industrial businesses. At GE, we rely primarily on cash generated through our operating activities, any dividend payments from GECC, and also have historically maintained a commercial paper program that we regularly use to fund operations in the U.S., principally within fiscal quarters. During 2013, GECC paid quarterly dividends of $1.9 billion and special dividends of $4.1 billion to GE.
(63)
GECC’s liquidity position is targeted to meet its obligations under both normal and stressed conditions. GECC establishes a funding plan annually that is based on the projected asset size and cash needs of the Company, which, over the past few years, has included our strategy to reduce our ending net investment in GE Capital. GECC relies on a diversified source of funding, including the unsecured term debt markets, the global commercial paper markets, deposits, secured funding, retail funding products, bank borrowings and securitizations to fund its balance sheet, in addition to cash generated through collection of principal, interest and other payments on our existing portfolio of loans and leases to fund its operating and interest expense costs.
Our 2014 GECC funding plan anticipates repayment of principal on outstanding short-term borrowings, including the current portion of long-term debt ($39.2 billion at December 31, 2013), through issuance of long-term debt and reissuance of commercial paper, cash on hand, collections of financing receivables exceeding originations, dispositions, asset sales, and deposits and other alternative sources of funding. Long-term maturities and early redemptions were $48.3 billion in 2013. Interest on borrowings is primarily repaid through interest earned on existing financing receivables. During 2013, GECC earned interest income on financing receivables of $19.6 billion, which more than offset interest expense of $9.3 billion.
During the first quarter of 2013, $5.0 billion of long-term debt issued by GE matured.
We maintain a detailed liquidity policy for GECC that includes a requirement to maintain a contingency funding plan. The liquidity policy defines GECC’s liquidity risk tolerance under different stress scenarios based on its liquidity sources and also establishes procedures to escalate potential issues. We actively monitor GECC’s access to funding markets and its liquidity profile through tracking external indicators and testing various stress scenarios. The contingency funding plan provides a framework for handling market disruptions and establishes escalation procedures in the event that such events or circumstances arise.
GECC is a regulated savings and loan holding company under U.S. law and became subject to Federal Reserve Board (FRB) supervision on July 21, 2011, the one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA). In addition, on July 8, 2013, the U.S. Financial Stability Oversight Council (FSOC) designated GECC as a nonbank systemically important financial institution (nonbank SIFI) under the DFA. Many of the rulemakings for supervision of nonbank SIFIs are not final and therefore the exact impact and implementation date remain uncertain. GECC continues to plan for the enhanced prudential standards that will apply to nonbank SIFIs. These DFA rulemakings will require, among other items, enhanced capital and liquidity levels, compliance with the comprehensive capital analysis and review regulations (CCAR), compliance with counterparty credit exposure limits, and the development of a resolution plan for submission to regulators.
GE is also subject to the Volcker Rule, which U.S. regulators finalized on December 10, 2013. The rule prohibits companies that are affiliated with U.S. insured depository institutions from engaging in “proprietary trading” or acquiring or retaining any ownership interest in, or sponsoring or engaging in certain transactions with, a “hedge fund” or a “private equity fund.” Proprietary trading and fund investing, as prohibited by the rule, are not core activities for GE, but GE is assessing the full impact of the rule, in anticipation of full conformance with the rule, as required by July 21, 2015.
The FRB recently finalized regulations to revise and replace its current rules on capital adequacy and to extend capital regulations to savings and loan holding companies like GECC. Under the final rules, GECC expects that the standardized approach for calculating capital will apply to GECC, in its capacity as a savings and loan holding company, on January 1, 2015. However, that timing could change once nonbank SIFI rules are finalized. GECC will ultimately also become subject to the Basel III advanced capital rules that will be applicable to institutions with $250 billion or more in assets. Initial actions required for compliance with the advanced capital rules, including building out the necessary systems and models, will begin once GECC is subject to regulatory capital rules. However, full implementation will take several years to complete.
(64)
The FRB has also indicated in a proposed rulemaking that they will require nonbank SIFIs to submit annual capital plans for review, including institutions’ plans to make capital distributions, such as dividend payments. The applicability and timing of this proposed regulation to GECC is not yet determined. While GECC is not yet subject to this regulation, GECC’s capital allocation planning remains subject to FRB review as a savings and loan holding company.
Overall, GE does not believe that GECC’s designation as a nonbank SIFI will have a material impact on its business or operations.
Liquidity Sources
We maintain liquidity sources that consist of cash and equivalents, committed unused credit lines and high-quality, liquid investments.
We had consolidated cash and equivalents of $88.6 billion at December 31, 2013 that were available to meet our needs. Of this, $13.7 billion was held at GE and $74.9 billion was held at GECC.
We had committed, unused credit lines totaling $47.8 billion that were extended to us by 50 financial institutions at December 31, 2013. GECC can borrow up to $47.8 billion under all of these credit lines. GE can borrow up to $13.9 billion under certain of these credit lines. These lines include $26.5 billion of revolving credit agreements under which we can borrow funds for periods exceeding one year. Additionally, $21.3 billion are 364-day lines that contain a term-out feature that allows us to extend borrowings for two years from the date on which such borrowings would otherwise be due.
Cash and equivalents of $57.0 billion at December 31, 2013 were held by non-U.S. subsidiaries. Of this amount at December 31, 2013, $8.1 billion was indefinitely reinvested. Indefinitely reinvested cash held outside of the U.S. is available to fund operations and other growth of non-U.S. subsidiaries; it is also available to fund our needs in the U.S. on a short-term basis through short-term loans, without being subject to U.S. tax. Under the Internal Revenue Code, these loans are permitted to be outstanding for 30 days or less and the total of all such loans is required to be outstanding for less than 60 days during the year.
At December 31, 2013, $2.2 billion of GE cash and equivalents was held in countries with currency controls that may restrict the transfer of funds to the U.S. or limit our ability to transfer funds to the U.S. without incurring substantial costs. These funds are available to fund operations and growth in these countries and we do not currently anticipate a need to transfer these funds to the U.S.
At December 31, 2013, GECC cash and equivalents of about $12 billion were in regulated banks and insurance entities and were subject to regulatory restrictions.
If we were to repatriate indefinitely reinvested cash held outside the U.S., we would be subject to additional U.S. income taxes and foreign withholding taxes.
Funding Plan
We reduced our GE Capital ending net investment, excluding cash and equivalents, to $380 billion at December 31, 2013.
During 2013, GECC completed issuances of $33.7 billion of senior unsecured debt (excluding securitizations described below) with maturities up to 40 years (and subsequent to December 31, 2013, an additional $3.9 billion). Average commercial paper borrowings for GECC and GE during the fourth quarter were $31.6 billion and $6.8 billion, respectively, and the maximum amounts of commercial paper borrowings outstanding for GECC and GE during the fourth quarter were $33.1 billion and $9.0 billion, respectively. GECC commercial paper maturities are funded principally through new commercial paper issuances and at GE are substantially repaid before quarter-end using indefinitely reinvested overseas cash, which, as discussed above, is available for use in the U.S. on a short-term basis without being subject to U.S. tax.
(65)
We securitize financial assets as an alternative source of funding. During 2013, we completed $8.9 billion of non-recourse issuances and had maturities of $8.9 billion. At December 31, 2013, consolidated non-recourse borrowings were $30.1 billion.
We have 10 deposit-taking banks outside of the U.S. and two deposit-taking banks in the U.S. - GE Capital Retail Bank, a Federal Savings Bank (FSB), and GE Capital Bank (formerly GE Capital Financial Inc.), an industrial bank (IB). The FSB and IB currently issue certificates of deposit (CDs) in maturity terms up to 10 years. On January 11, 2013, the FSB acquired the deposit business of MetLife Bank, N.A. This acquisition added approximately $6.4 billion in deposits and an online banking platform.
Total alternative funding at December 31, 2013 was $108 billion, composed mainly of $53 billion of bank deposits, $30 billion of non-recourse securitization borrowings, $9 billion of funding secured by real estate, aircraft and other collateral and $9 billion of GE Interest Plus notes. The comparable amount at December 31, 2012 was $101 billion.
As a matter of general practice, we routinely evaluate the economic impact of calling debt instruments where GECC has the right to exercise a call. In determining whether to call debt, we consider the economic benefit to GECC of calling debt, the effect of calling debt on GECC’s liquidity profile and other factors. In 2013, we settled $8.4 billion of callable debt, of which $4.1 billion was called in 2012.
Exchange rate and interest rate risks are managed with a variety of techniques, including match funding and selective use of derivatives. We use derivatives to mitigate or eliminate certain financial and market risks because we conduct business in diverse markets around the world and local funding is not always efficient. In addition, we use derivatives to adjust the debt we are issuing to match the fixed or floating nature of the assets we are originating. We apply strict policies to manage each of these risks, including prohibitions on speculative activities. Following is an analysis of the potential effects of changes in interest rates and currency exchange rates using so-called “shock” tests that seek to model the effects of shifts in rates. Such tests are inherently limited based on the assumptions used (described further below) and should not be viewed as a forecast; actual effects would depend on many variables, including market factors and the composition of the Company’s assets and liabilities at that time.
·
It is our policy to minimize exposure to interest rate changes. We fund our financial investments using debt or a combination of debt and hedging instruments so that the interest rates of our borrowings match the expected interest rate profile on our assets. To test the effectiveness of our fixed rate positions, we assumed that, on January 1, 2014, interest rates decreased by 100 basis points across the yield curve (a “parallel shift” in that curve) and further assumed that the decrease remained in place for 2014. We estimated, based on the year-end 2013 portfolio and holding all other assumptions constant, that our 2014 consolidated net earnings would decline by less than $0.1 billion as a result of this parallel shift in the yield curve.
·
It is our policy to minimize currency exposures and to conduct operations either within functional currencies or using the protection of hedge strategies. We analyzed year-end 2013 consolidated currency exposures, including derivatives designated and effective as hedges, to identify assets and liabilities denominated in other than their relevant functional currencies. For such assets and liabilities, we then evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar, holding all other assumptions constant. This analysis indicated that our 2014 consolidated net earnings would decline by less than $0.1 billion as a result of such a shift in exchange rates.
(66)
Debt and Derivative Instruments, Guarantees and Covenants
Credit Ratings
On April 3, 2012, Moody’s Investors Service (Moody’s) announced that it had downgraded the senior unsecured debt rating of GE by one notch from Aa2 to Aa3 and the senior unsecured debt rating of GECC by two notches from Aa2 to A1. The ratings downgrade did not affect GE’s and GECC’s short-term funding ratings of P-1, which were affirmed by Moody’s. Moody’s ratings outlook for GE and GECC is stable. We did not experience any material operational, funding or liquidity impacts from this ratings downgrade. As of December 31, 2013, GE’s and GECC’s long-term unsecured debt ratings from Standard and Poor’s Ratings Service (S&P) were AA+ with a stable outlook and their short-term funding ratings from S&P were A-1+. We are disclosing these ratings to enhance understanding of our sources of liquidity and the effects of our ratings on our costs of funds. Although we currently do not expect a downgrade in the credit ratings, our ratings may be subject to a revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.
Substantially all GICs were affected by the downgrade and are more fully discussed in the Principal Debt and Derivative Conditions section in this Item.
Principal Debt and Derivative Conditions
Certain of our derivative instruments can be terminated if specified credit ratings are not maintained and certain debt and derivatives agreements of other consolidated entities have provisions that are affected by these credit ratings.
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our standard master agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we offset our exposures with that counterparty and apply the value of collateral posted to us to determine the net exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
Swap, forward and option contracts are executed under standard master agreements that typically contain mutual downgrade provisions that provide the ability of the counterparty to require termination if the long-term credit ratings of the applicable GE entity were to fall below A-/A3. In certain of these master agreements, the counterparty also has the ability to require termination if the short-term ratings of the applicable GE entity were to fall below A-1/P-1. The net derivative liability after consideration of netting arrangements, outstanding interest payments and collateral posted by us under these master agreements was estimated to be $1.2 billion at December 31, 2013. See Note 22 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Other debt and derivative agreements of consolidated entities include Trinity, which comprises two entities that hold investment securities, the majority of which are investment grade, and were funded by the issuance of GICs. These GICs included conditions under which certain holders could require immediate repayment of their investment should the long-term credit ratings of GECC fall below AA-/Aa3 or the short-term credit ratings fall below A-1+/P-1, and are reported in investment contracts, insurance liabilities and insurance annuity benefits. The Trinity assets and liabilities are disclosed in note (a) on our Statement of Financial Position in the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. Another consolidated entity also had issued GICs where proceeds are loaned to GECC. These GICs included conditions under which certain holders could require immediate repayment of their investment should the long-term credit ratings of GECC fall below AA-/Aa3. These obligations are included in long-term borrowings on our Statement of Financial Position in the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. These three consolidated entities ceased issuing GICs in 2010.
(67)
Following the April 3, 2012 Moody’s downgrade of GECC’s long-term credit rating to A1, substantially all of these GICs became redeemable by their holders. In 2012, holders of $2.4 billion in principal amount of GICs redeemed their holdings and GECC made related cash payments. The remaining outstanding GICs will continue to be subject to their scheduled maturities and individual terms, which may include provisions permitting redemption upon a downgrade of one or more of GECC’s ratings, among other things.
Ratio of Earnings to Fixed Charges, Income Maintenance Agreement and Subordinated Debentures
GE provides implicit and explicit support to GECC through commitments, capital contributions and operating support. For example, and as discussed below, GE has committed to keep GECC’s ratio of earnings to fixed charges above a minimum level. GECC’s credit rating is higher than it would be on a stand-alone basis as a result of this financial support. GECC currently does not pay GE for this support.
On March 28, 1991, GE entered into an agreement with GECC to make payments to GECC, constituting additions to pre-tax income under the agreement (which increases equity), to the extent necessary to cause the ratio of earnings to fixed charges of GECC and consolidated affiliates (determined on a consolidated basis) to be not less than 1.10:1 for the period, as a single aggregation, of each GECC fiscal year commencing with fiscal year 1991. GECC’s ratio of earnings to fixed charges was 1.76:1 for 2013. No payment is required in 2013 pursuant to this agreement.
In addition, in connection with certain subordinated debentures of GECC that may be classified as equity (hybrid debt), during events of default or interest deferral periods under such subordinated debentures, GECC has agreed not to declare or pay any dividends or distributions or make certain other payments with respect to its capital stock, and GE has agreed to promptly return any payments made to GE in violation of this agreement. There were $7.7 billion of such debentures outstanding at December 31, 2013. See Note 10 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Statements of Changes in Shareowners’ Equity and Comprehensive Income
An analysis of changes in the elements of shareowners’ equity, as presented in the Statements of Changes in Shareowners’ Equity and Comprehensive Income, follows.
GE shareowners’ equity increased by $7.5 billion in 2013, compared with an increase of $6.6 billion in 2012 and a decrease of $2.5 billion in 2011.
Net earnings increased GE shareowners' equity by $13.1 billion, $13.6 billion and $14.2 billion, partially offset by dividends declared of $8.1 billion, $7.4 billion and $7.5 billion (including $0.8 billion related to our preferred stock redemption) in 2013, 2012 and 2011, respectively.
Elements of AOCI increased shareowners’ equity by $11.1 billion in 2013, compared with an increase of $3.7 billion in 2012 and a decrease of $6.1 billion in 2011. The components of these changes are as follows:
·
Changes in AOCI related to benefit plans increased shareowners’ equity by $11.3 billion in 2013, primarily reflecting higher discount rates used to measure postretirement benefit obligations, higher investment returns and amortization of actuarial losses and prior service costs out of AOCI. This compared with an increase of $2.3 billion and a decrease of $7.0 billion in 2012 and 2011, respectively. The increase in 2012 primarily reflected amortization of actuarial losses and prior service costs out of AOCI, higher investment returns and changes to our principal retiree benefit plans, partially offset by lower discount rates. The decrease in 2011 primarily reflected lower discount rates and lower investment returns, partially offset by amortization of actuarial losses and prior service costs out of AOCI. Further information about changes in benefit plans is provided in Note 12 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(68)
·
Changes in AOCI related to the fair value of derivatives designated as cash flow hedges increased shareowners’ equity by $0.5 billion in 2013, primarily reflecting higher fair value of cross currency hedges, partially offset by releases from AOCI contemporaneous with the earnings effects of the related hedged items. Cash flow hedges increased shareowners’ equity by $0.5 billion and $0.1 billion in 2012 and 2011, respectively. Further information about the fair value of derivatives is provided in Note 22 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
·
Changes in AOCI related to investment securities decreased shareowners’ equity by $0.4 billion in 2013, reflecting the effects of higher interest rates, partially offset by adjustments to reflect the effect of lower unrealized gains on insurance-related assets and equity. Investment securities increased shareowners’ equity by $0.7 billion and $0.6 billion in 2012 and 2011, respectively, reflecting the effects of lower interest rates and improved market conditions on U.S. corporate debt securities, partially offset by adjustments to reflect the effect of the unrealized gains on insurance-related assets and equity. Further information about investment securities is provided in Note 3 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
·
Changes in AOCI related to currency translation adjustments decreased shareowners’ equity by $0.3 billion in 2013 and increased shareowners’ equity by $0.3 billion and $0.2 billion in 2012 and 2011, respectively. Changes in currency translation adjustments reflect the effects of changes in currency exchange rates on our net investment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar. At year-end 2013, the U.S. dollar weakened against the euro and the pound sterling and strengthened against the Japanese yen and the Australian dollar resulting in increases in currency translation adjustments that were more than offset by releases from AOCI related to dispositions. At year-end 2012, the U.S. dollar weakened against most major currencies, including the pound sterling and the euro, and strengthened against the Japanese yen resulting in increases in currency translation adjustments that were partially offset by releases from AOCI related to dispositions. At year-end 2011, the dollar strengthened against most major currencies, including the pound sterling and the euro and weakened against the Australian dollar and the Japanese yen.
Noncontrolling interests included in shareowners’ equity increased $0.8 billion and $3.7 billion in 2013 and 2012, respectively, principally as a result of the issuances of preferred stock by GECC. Noncontrolling interests decreased by $3.6 billion in 2011, principally as a result of dispositions.
Statement of Cash Flows - Overview from 2011 through 2013
Consolidated cash and equivalents were $88.6 billion at December 31, 2013, an increase of $11.3 billion from December 31, 2012. Cash and equivalents totaled $77.3 billion at December 31, 2012, a decrease of $7.2 billion from December 31, 2011.
We evaluate our cash flow performance by reviewing our industrial (non-financial services) businesses and financial services businesses separately. Cash from operating activities (CFOA) is the principal source of cash generation for our industrial businesses. The industrial businesses also have liquidity available via the public capital markets. Our financial services businesses use a variety of financial resources to meet our capital needs. Cash for financial services businesses is primarily provided from the issuance of term debt and commercial paper in the public and private markets and deposits, as well as financing receivables collections, sales and securitizations.
GE Cash Flows
GE cash and equivalents were $13.7 billion at December 31, 2013 compared with $15.5 billion at December 31, 2012. GE CFOA totaled $14.3 billion, $17.8 billion and $12.1 billion in 2013, 2012 and 2011, respectively. With respect to GE CFOA, we believe that it is useful to supplement our GE Statement of Cash Flows and to examine in a broader context the business activities that provide and require cash.
(69)
For the years ended December 31 (In billions)
Operating cash collections(a)
$
104.8
$
105.4
$
93.6
Operating cash payments
(96.5)
(94.0)
(81.5)
Cash dividends from GECC
6.0
6.4
-
GE cash from operating activities (GE CFOA)(a)
$
14.3
$
17.8
$
12.1
(a)
GE sells customer receivables to GECC in part to fund the growth of our industrial businesses. These transactions can result in cash generation or cash use. During any given period, GE receives cash from the sale of receivables to GECC. It also foregoes collection of cash on receivables sold. The incremental amount of cash received from sale of receivables in excess of the cash GE would have otherwise collected had those receivables not been sold, represents the cash generated or used in the period relating to this activity. The incremental cash generated in GE CFOA from selling these receivables to GECC increased GE’s CFOA by $0.1 billion, $1.9 billion and $1.2 billion in 2013, 2012 and 2011, respectively. See Note 26 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report for additional information about the elimination of intercompany transactions between GE and GECC.
The most significant source of cash in GE CFOA is customer-related activities, the largest of which is collecting cash resulting from product or services sales. GE operating cash collections decreased by $0.6 billion in 2013 compared with an increase of $11.8 billion in 2012. In 2013, these changes are consistent with a decrease in collections on long-term contracts and increases in current receivables, partially offset by increased progress collections and improved segment revenues, including the impact of acquisitions, primarily at Aviation and Oil & Gas. In 2012, these changes are consistent with the changes in comparable GE segment revenues, including the impact of acquisitions, primarily at Oil & Gas and Energy Management. Analyses of segment revenues discussed in the preceding Segment Operations section provide additional information regarding our CFOA.
The most significant operating use of cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services. GE operating cash payments increased by $2.5 billion and $12.5 billion in 2013 and 2012, respectively. In 2013, these changes are consistent with NBCU deal-related tax payments and payouts under our long-term incentive plan, partially offset by the non-recurrence of principal pension plan funding. In 2012, these changes are consistent with the changes in GE total costs and expenses, including the impact of acquisitions, primarily at Oil & Gas and Energy Management.
Dividends from GECC, including special dividends, represent the distribution of a portion of GECC retained earnings, and are distinct from cash from continuing operating activities within the financial services businesses. The amounts we show in GE CFOA are the total dividends, including special dividends from excess capital. Beginning in the second quarter of 2012, GECC restarted its dividend to GE. GECC paid quarterly dividends of $1.9 billion in both 2013 and 2012. In addition, GECC paid special dividends of $4.1 billion and $4.5 billion in 2013 and 2012, respectively, to GE. There were no dividends received from GECC in 2011.
GE cash from investing activities was $4.8 billion for 2013 compared with cash used of $5.4 billion and $8.2 billion for 2012 and 2011, respectively. GE cash flows from investing activities increased $10.2 billion during 2013 compared with 2012, primarily due to proceeds of $16.7 billion from the 2013 sale of our remaining 49% common equity interest in NBCU LLC to Comcast, partially offset by the 2013 acquisitions of Avio for $4.4 billion and Lufkin for $3.3 billion.
GE cash used for investing activities decreased by $2.8 billion during 2012 compared with 2011 primarily due to decreased business acquisition activity of $9.7 billion driven by 2011 acquisitions of Converteam, the Well Support division of John Wood Group PLC, Dresser, Inc., Wellstream PLC and Lineage Power Holdings, Inc. This was offset by decreased business disposition activity of $5.7 billion driven by cash received in 2011 related to the formation of NBCU LLC ($6.2 billion) and an increase in additions to property, plant and equipment of $1.0 billion in 2012.
GE cash used for financing activities was $20.9 billion, $5.3 billion and $14.6 billion for 2013, 2012 and 2011, respectively. Cash used for financing activities increased $15.6 billion compared with 2012, primarily as a result of our 2013 repayment of $5.0 billion of GE unsecured notes compared with an issuance of $7.0 billion of notes in 2012. Additionally, increases in cash used in 2013 were a result of increased repurchases of GE shares for treasury in accordance with our share repurchase program of $5.2 billion and increased dividends paid to shareowners of $0.6 billion in 2013.
(70)
GE cash used for financing activities decreased $9.3 billion compared with 2011 primarily due to an issuance of $7.0 billion of notes in 2012 and non-recurrence of two transactions from 2011. In 2011, prior to the formation of NBCU LLC, GE purchased the remaining shares of Vivendi S.A.’s 12.3% interest in NBC Universal for $3.9 billion. Additionally, GE redeemed preferred shares from Berkshire Hathaway Inc. at a redemption price of $3.3 billion. The impacts of these 2011 transactions were offset by increased repurchases of GE shares for treasury in accordance with our share repurchase program of $2.9 billion and increased dividends paid to shareowners of $0.7 billion in 2012.
GECC Cash Flows
GECC cash from operating activities totaled $19.9 billion, $21.7 billion and $20.6 billion in 2013, 2012 and 2011, respectively. Cash from operating activities decreased $1.9 billion during 2013 compared with 2012, primarily due to decreases in net cash collateral held from counterparties on derivative contracts of $5.2 billion, partially offset by increases in other liabilities of $1.8 billion and accounts payable of $1.0 billion.
Cash from operating activities increased $1.1 billion during 2012 compared with 2011, primarily due to increases in net cash collateral held from counterparties on derivative contracts of $1.7 billion, partially offset by decreases in accounts payable of $0.9 billion.
Consistent with our plan to reduce GECC asset levels, cash from investing activities was $23.4 billion, $14.7 billion and $29.8 billion in 2013, 2012 and 2011, respectively. GECC cash from investing activities increased $8.7 billion during 2013 compared with 2012, primarily due to higher proceeds from sales of real estate properties of $7.3 billion; the acquisition of MetLife Bank, N.A. in 2013, resulting in net cash provided from the acquisition of $6.4 billion; lower net purchases of ELTO of $1.6 billion; partially offset by lower net loan repayments from our equity method investments of $4.9 billion and lower collections (which includes sales) exceeding originations of financing receivables of $1.9 billion.
GECC cash from investing activities decreased $15.1 billion during 2012 compared with 2011, primarily due to lower collections (which includes sales) exceeding originations of financing receivables of $9.0 billion, lower proceeds from sales of discontinued operations of $8.7 billion and higher net purchases of ELTO of $1.7 billion. These decreases were partially offset by higher net dispositions and maturities of investment securities of $2.6 billion and a decrease in all other assets-investments of $1.7 billion driven by net activity of our equity method investments.
GECC cash used for financing activities was $29.4 billion, $52.5 billion and $33.2 billion in 2013, 2012 and 2011, respectively. GECC cash used for financing activities decreased $23.0 billion during 2013 compared with 2012, primarily due to lower net repayments of borrowings of $24.0 billion, consisting primarily of net reductions in long-term borrowings and commercial paper, and lower redemptions of guaranteed investment contracts of $2.3 billion, partially offset by lower proceeds from the issuance of preferred stock of $3.0 billion.
GECC cash used for financing activities increased $19.3 billion during 2012 compared with 2011, primarily due to a reduction in total borrowings of $11.7 billion, consisting primarily of net reductions in long-term borrowings and commercial paper; $6.5 billion of dividends paid to shareowners in 2012 (including $0.1 billion paid to preferred shareowners); a reduction in bank deposits of $4.2 billion and $1.0 billion of redemptions of guaranteed investment contracts at Trinity, partially offset by $4.0 billion of proceeds from the issuance of preferred stock.
GECC pays dividends to GE through a distribution of its retained earnings, including special dividends from proceeds of certain business sales. Beginning in the second quarter of 2012, GECC restarted its dividend to GE. During 2013 and 2012, GECC paid quarterly dividends of $1.9 billion in both years and special dividends of $4.1 billion and $4.5 billion, respectively, to GE. No dividends were paid to GE in 2011.
(71)
Intercompany Eliminations
Effects of transactions between related companies are made on an arms-length basis, are eliminated and consist primarily of GECC dividends to GE; GE customer receivables sold to GECC; GECC services for trade receivables management and material procurement; buildings and equipment (including automobiles) leased between GE and GECC; information technology (IT) and other services sold to GECC by GE; aircraft engines manufactured by GE that are installed on aircraft purchased by GECC from third-party producers for lease to others; and various investments, loans and allocations of GE corporate overhead costs. For further information related to intercompany eliminations, see Note 26 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Contractual Obligations
As defined by reporting regulations, our contractual obligations for future payments as of December 31, 2013, follow.
Payments due by period
2019 and
(In billions)
Total
2015-2016
2017-2018
thereafter
Borrowings and bank
deposits (Note 10)
$
383.0
$
116.7
$
103.4
$
59.4
$
103.5
Interest on borrowings and
bank deposits
91.4
9.6
14.0
10.7
57.1
Purchase obligations(a)(b)
67.5
34.2
10.0
9.9
13.4
Insurance liabilities (Note 11)(c)
13.5
1.8
2.1
1.7
7.9
Operating lease obligations
(Note 19)
4.3
0.9
1.4
1.0
1.0
Other liabilities(d)
86.7
22.1
9.7
6.4
48.5
Contractual obligations of
discontinued operations(e)
3.3
3.3
-
-
-
(a)
Included all take-or-pay arrangements, capital expenditures, contractual commitments to purchase equipment that will be leased to others, contractual commitments related to factoring agreements, software acquisition/license commitments, contractual minimum programming commitments and any contractually required cash payments for acquisitions.
(b)
Excluded funding commitments entered into in the ordinary course of business by our financial services businesses. Further information on these commitments and other guarantees is provided in Note 24 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(c)
Included contracts with reasonably determinable cash flows such as structured settlements, guaranteed investment contracts, and certain property and casualty contracts, and excluded long-term care, variable annuity and other life insurance contracts.
(d)
Included an estimate of future expected funding requirements related to our pension and postretirement benefit plans and included liabilities for unrecognized tax benefits. Because their future cash outflows are uncertain, the following non-current liabilities are excluded from the table above: deferred taxes, derivatives, deferred revenue and other sundry items. For further information on certain of these items, see Notes 14 and 22 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(e)
Included payments for other liabilities.
Variable Interest Entities
We securitize financial assets and arrange other forms of asset-backed financing in the ordinary course of business as an alternative source of funding. The securitization transactions we engage in are similar to those used by many financial institutions.
The assets we currently securitize include: receivables secured by equipment, credit card receivables, floorplan inventory receivables, GE trade receivables and other assets originated and underwritten by us in the ordinary course of business. The securitizations are funded with variable funding notes and term debt.
Substantially all of our securitization VIEs are consolidated because we are considered to be the primary beneficiary of the entity. Our interests in other VIEs for which we are not the primary beneficiary are accounted for as investment securities, financing receivables or equity method investments depending on the nature of our involvement.
(72)
At December 31, 2013, consolidated variable interest entity assets and liabilities were $49.3 billion and $32.5 billion, respectively, an increase of $0.9 billion and a decrease of $0.4 billion from 2012. Assets held by these entities are of equivalent credit quality to our other assets. We monitor the underlying credit quality in accordance with our role as servicer and apply rigorous controls to the execution of securitization transactions. With the exception of credit and liquidity support discussed below, investors in these entities have recourse only to the underlying assets.
At December 31, 2013, investments in unconsolidated VIEs, were $12.5 billion, a decrease of $0.2 billion from 2012, primarily related to a decrease of $2.0 billion in PTL, partially offset by an increase of $1.9 billion in an investment in asset-backed securities issued by a senior secured loan fund. In the first quarter of 2013, PTL had repaid all outstanding debt owed and terminated its borrowing arrangement with GECC. During the second quarter of 2013, PTL ceased to be a VIE as a result of a principal in PTL retiring from the GE Board. Therefore, our investment in PTL ($899 million at December 31, 2013) is not reported in the December 31, 2013 balance. In addition to our existing investments, we have contractual obligations to fund additional investments in the unconsolidated VIEs to fund new asset origination. At December 31, 2013, these contractual obligations were $2.8 billion, an increase of $0.1 billion from 2012.
We do not have implicit support arrangements with any VIE. We did not provide non-contractual support for previously transferred financing receivables to any VIE in either 2013 or 2012.
Critical Accounting Estimates
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. Many of these estimates include determining fair value. All of these estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of investment securities, goodwill, intangibles and long-lived assets, incremental losses on financing receivables, increases in reserves for contingencies, establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other effects. Also see Note 1 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report, which discusses the significant accounting policies that we have selected from acceptable alternatives.
Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of losses depends on the size, type and risk characteristics of the related financing receivable. Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values (including housing price indices as applicable), and the present and expected future levels of interest rates. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions and are subject to the regulatory examination process, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible that we will experience credit losses that are different from our current estimates. Write-offs in both our consumer and commercial portfolios can also reflect both losses that are incurred subsequent to the beginning of a fiscal year and information becoming available during that fiscal year that may identify further deterioration on exposures existing prior to the beginning of that fiscal year, and for which reserves could not have been previously recognized. Our risk management process includes standards and policies for reviewing major risk exposures and concentrations, and evaluates relevant data either for individual loans or financing leases, or on a portfolio basis, as appropriate.
Further information is provided in the Global Risk Management section and Financial Resources and Liquidity - Financing Receivables section of this Item, the Asset impairment section that follows and in Notes 1 and 6 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(73)
Revenue recognition on long-term product services agreements requires estimates of profits over the multiple-year terms of such agreements, considering factors such as the frequency and extent of future monitoring, maintenance and overhaul events; the amount of personnel, spare parts and other resources required to perform the services; and future billing rate and cost changes. We routinely review estimates under product services agreements and regularly revise them to adjust for changes in outlook. We also regularly assess customer credit risk inherent in the carrying amounts of receivables and contract costs and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated investment in the event of customer termination. We gain insight into future utilization and cost trends, as well as credit risk, through our knowledge of the installed base of equipment and the close interaction with our customers that comes with supplying critical services and parts over extended periods. Revisions that affect a product services agreement’s total estimated profitability result in an adjustment of earnings; such adjustments increased earnings by $0.3 billion, $0.4 billion and $0.4 billion in 2013, 2012 and 2011, respectively. We provide for probable losses when they become evident.
Further information is provided in Notes 1 and 9 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Asset impairment assessment involves various estimates and assumptions as follows:
Investments. We regularly review investment securities for impairment using both quantitative and qualitative criteria. For debt securities, if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of our amortized cost, we evaluate other qualitative criteria to determine whether a credit loss exists, such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. Quantitative criteria include determining whether there has been an adverse change in expected future cash flows. For equity securities, our criteria include the length of time and magnitude of the amount that each security is in an unrealized loss position. Our other-than-temporary impairment reviews involve our finance, risk and asset management functions as well as the portfolio management and research capabilities of our internal and third-party asset managers. See Note 1 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report, which discusses the determination of fair value of investment securities.
Further information about actual and potential impairment losses is provided in the Financial Resources and Liquidity - Investment Securities section of this Item and in Notes 1, 3 and 9 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We derive the required undiscounted cash flow estimates from our historical experience and our internal business plans. To determine fair value, we use quoted market prices when available, our internal cash flow estimates discounted at an appropriate interest rate and independent appraisals, as appropriate.
(74)
Our operating lease portfolio of commercial aircraft is a significant concentration of assets in GE Capital, and is particularly subject to market fluctuations. Therefore, we test recoverability of each aircraft in our operating lease portfolio at least annually. Additionally, we perform quarterly evaluations in circumstances such as when aircraft are re-leased, current lease terms have changed or a specific lessee’s credit standing changes. We consider market conditions, such as global demand for commercial aircraft. Estimates of future rentals and residual values are based on historical experience and information received routinely from independent appraisers. Estimated cash flows from future leases are reduced for expected downtime between leases and for estimated technical costs required to prepare aircraft to be redeployed. Fair value used to measure impairment is based on management's best estimate. In determining its best estimate, management evaluates average current market values (obtained from third parties) of similar type and age aircraft, which are adjusted for the attributes of the specific aircraft under lease.
We recognized impairment losses on our operating lease portfolio of commercial aircraft of $0.7 billion and $0.2 billion in 2013 and 2012, respectively. Impairment losses in 2013 incorporated management’s downward revisions to cash flow estimates based upon shorter useful lives and lower aircraft residual values from those indicated by our third-party appraisers, reflecting the introduction of newer technology, fleet retirements and high fuel prices and operating costs. These revised estimates primarily related to cargo aircraft ($0.3 billion), older technology narrow-body aircraft ($0.2 billion) and regional jets ($0.1 billion). The average age of aircrafts we impaired in 2013 was 15 years compared with 7 years for our total fleet. Provisions for losses on financing receivables related to commercial aircraft were an insignificant amount for both 2013 and 2012.
Further information on impairment losses and our exposure to the commercial aviation industry is provided in the Operations - Overview of Our Earnings from 2011 through 2013 and the Financial Resources and Liquidity - Property, plant and equipment sections of this Item and in Notes 7 and 24 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Real Estate. We review the estimated value of our commercial real estate investments annually, or more frequently as conditions warrant. The cash flow estimates used for both estimating value and the recoverability analysis are inherently judgmental, and reflect current and projected lease profiles, available industry information about expected trends in rental, occupancy and capitalization rates and expected business plans, which include our estimated holding period for the asset. Our portfolio is diversified, both geographically and by asset type. However, the global real estate market is subject to periodic cycles that can cause significant fluctuations in market values. Based on the most recent valuation estimates available, the carrying value of our Real Estate investments exceeded their estimated value by about $2.1 billion. This amount is subject to variation dependent on the assumptions described above, changes in economic and market conditions and composition of our portfolio, including sales. Commercial real estate valuations have shown signs of improved stability and liquidity in certain markets, primarily in the U.S.; however, the pace of improvement varies significantly by asset class and market. Accordingly, there continues to be risk and uncertainty surrounding commercial real estate values. Declines in the estimated value of real estate below carrying amount result in impairment losses when the aggregate undiscounted cash flow estimates used in the estimated value measurement are below the carrying amount. As such, estimated losses in the portfolio will not necessarily result in recognized impairment losses. When we recognize an impairment, the impairment is measured using the estimated fair value of the underlying asset, which is based upon cash flow estimates that reflect current and projected lease profiles and available industry information about capitalization rates and expected trends in rents and occupancy and is corroborated by external appraisals. During 2013, Real Estate recognized pre-tax impairments of $0.3 billion in its real estate held for investment, as compared to $0.1 billion in 2012. Deterioration in economic conditions or prolonged market illiquidity may result in further impairments being recognized. Furthermore, significant judgment and uncertainty related to forecasted valuation trends, especially in illiquid markets, result in inherent imprecision in real estate value estimates. Further information is provided in the Global Risk Management and the All other assets sections of this Item and in Note 9 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(75)
Goodwill and Other Identified Intangible Assets. We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year. The impairment test consists of two steps: in step one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied when the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately.
Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from 8.0% to 16.5%.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
We review identified intangible assets with defined useful lives and subject to amortization for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. We test intangible assets with indefinite lives annually for impairment using a fair value method such as discounted cash flows. For our insurance activities remaining in continuing operations, we periodically test for impairment our deferred acquisition costs and present value of future profits.
Further information is provided in the Financial Resources and Liquidity - Goodwill and Other Intangible Assets section of this Item and in Notes 1 and 8 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Pension assumptions are significant inputs to the actuarial models that measure pension benefit obligations and related effects on operations. Two assumptions - discount rate and expected return on assets - are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually on a plan and country-specific basis. We periodically evaluate other assumptions involving demographic factors such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
Accumulated and projected benefit obligations are measured as the present value of expected payments. We discount those cash payments using the weighted average of market-observed yields for high-quality fixed-income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and subsequent-year pension expense; higher discount rates decrease present values and subsequent-year pension expense.
(76)
Our discount rates for principal pension plans at December 31, 2013, 2012 and 2011 were 4.85%, 3.96% and 4.21%, respectively, reflecting market interest rates.
To determine the expected long-term rate of return on pension plan assets, we consider current and target asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future long-term return expectations for our principal benefit plans’ assets, we formulate views on the future economic environment, both in the U.S. and abroad. We evaluate general market trends and historical relationships among a number of key variables that impact asset class returns such as expected earnings growth, inflation, valuations, yields and spreads, using both internal and external sources. We also take into account expected volatility by asset class and diversification across classes to determine expected overall portfolio results given current and target allocations. Assets in our principal pension plans earned 14.6% in 2013, and had average annual returns of 6.5%, 5.9% and 8.9% per year in the 10-, 15- and 25-year periods ended December 31, 2013, respectively. These average historical returns were significantly affected by investment losses in 2008. Based on our analysis of future expectations of asset performance, past return results, and our current and target asset allocations, we have assumed a 7.5% long-term expected return on those assets for cost recognition in 2014. This is a reduction from the 8.0% we assumed in 2013, 2012 and 2011.
Changes in key assumptions for our principal pension plans would have the following effects.
·
Discount rate - A 25 basis point increase in discount rate would decrease pension cost in the following year by $0.2 billion and would decrease the pension benefit obligation at year-end by about $1.7 billion.
·
Expected return on assets - A 50 basis point decrease in the expected return on assets would increase pension cost in the following year by $0.2 billion.
Further information on our pension plans is provided in the Operations - Overview section of this Item and in Note 12 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Income Taxes. Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rate on our global operations. In addition to local country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the United States. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. At December 31, 2013 and 2012, approximately $110 billion and $108 billion of earnings, respectively, have been indefinitely reinvested outside the United States. Most of these earnings have been reinvested in active non-U.S. business operations, and we do not intend to repatriate these earnings to fund U.S. operations. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely.
(77)
Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight. Further, our global and diversified business portfolio gives us the opportunity to employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. Amounts recorded for deferred tax assets related to non-U.S. net operating losses, net of valuation allowances, were $5.5 billion and $4.8 billion at December 31, 2013 and 2012, respectively, including $0.8 billion at both December 31, 2013 and 2012 of deferred tax assets, net of valuation allowances, associated with losses reported in discontinued operations, primarily related to our loss on the sale of GE Money Japan. Such year-end 2013 amounts are expected to be fully recoverable within the applicable statutory expiration periods. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
Further information on income taxes is provided in the Operations - Overview section of this Item and in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Derivatives and Hedging. We use derivatives to manage a variety of risks, including risks related to interest rates, foreign exchange and commodity prices. Accounting for derivatives as hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. The rules and interpretations related to derivatives accounting are complex. Failure to apply this complex guidance correctly will result in all changes in the fair value of the derivative being reported in earnings, without regard to the offsetting changes in the fair value of the hedged item.
In evaluating whether a particular relationship qualifies for hedge accounting, we test effectiveness at inception and each reporting period thereafter by determining whether changes in the fair value of the derivative offset, within a specified range, changes in the fair value of the hedged item. If fair value changes fail this test, we discontinue applying hedge accounting to that relationship prospectively. Fair values of both the derivative instrument and the hedged item are calculated using internal valuation models incorporating market-based assumptions, subject to third-party confirmation, as applicable.
At December 31, 2013, derivative assets and liabilities were $1.0 billion and $1.3 billion, respectively. Further information about our use of derivatives is provided in Notes 1, 9, 21 and 22 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Fair Value Measurements. Assets and liabilities measured at fair value every reporting period include investments in debt and equity securities and derivatives. Assets that are not measured at fair value every reporting period but that are subject to fair value measurements in certain circumstances include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
(78)
A fair value measurement is determined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. The determination of fair value often involves significant judgments about assumptions such as determining an appropriate discount rate that factors in both risk and liquidity premiums, identifying the similarities and differences in market transactions, weighting those differences accordingly and then making the appropriate adjustments to those market transactions to reflect the risks specific to our asset being valued. Further information on fair value measurements is provided in Notes 1, 21 and 22 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
Other loss contingencies are uncertain and unresolved matters that arise in the ordinary course of business and result from events or actions by others that have the potential to result in a future loss. Such contingencies include, but are not limited to environmental obligations, litigation, regulatory proceedings, product quality and losses resulting from other events and developments.
When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low-end of such range. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure is provided.
Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We regularly review all contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.
Further information is provided in Notes 2, 13 and 24 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(79)
Other Information
New Accounting Standards
In March 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The ASU resolves conflicting guidance between Accounting Standards Codification (ASC) Subtopics 810-10, Consolidation, and 830-30, Foreign Currency Matters - Translation of Financial Statements, on whether accumulated currency translation adjustments should be released to earnings in certain circumstances. Under the revised guidance, the entire amount of the cumulative translation adjustment associated with the foreign entity will be released into earnings in the following circumstances: (a) the sale of a subsidiary or group of net assets within a foreign entity that represents a complete or substantially complete liquidation of that entity, (b) the loss of a controlling financial interest in an investment in a foreign entity, or (c) when the accounting for an investment in a foreign entity changes from the equity method to full consolidation. The ASU does not change the requirement to release a pro rata portion of the cumulative translation adjustment of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The revised guidance applies prospectively to transactions or events occurring in fiscal years beginning after December 31, 2013.
Research and Development
GE-funded research and development expenditures were $4.7 billion, $4.5 billion and $4.6 billion in 2013, 2012 and 2011, respectively. In addition, research and development funding from customers, principally the U.S. government, totaled $0.7 billion, $0.7 billion and $0.8 billion in 2013, 2012 and 2011, respectively. Aviation accounts for the largest share of GE’s research and development expenditures with funding from both GE and external funds. Power & Water and Healthcare also made significant expenditures funded primarily by GE.
Orders and Backlog
GE infrastructure equipment orders increased 14% to $60.6 billion and services orders increased 1% to $43.8 billion at December 31, 2013. Total GE infrastructure backlog increased 16% to $244.1 billion at December 31, 2013, composed of equipment backlog of $63.9 billion and services backlog of $180.2 billion. Orders constituting backlog may be cancelled or deferred by customers, subject in certain cases to penalties. See the Segment Operations section of this Item for further information.
Supplemental Information
Financial Measures that Supplement Generally Accepted Accounting Principles
We sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission rules. Specifically, we have referred, in various sections of this Form 10-K Report, to:
·
Industrial cash flows from operating activities (Industrial CFOA) and GE CFOA excluding the effects of NBCU deal-related taxes
·
Operating earnings, operating EPS, operating EPS excluding the effects of the 2011 preferred stock redemption and Industrial operating earnings
·
Operating and non-operating pension costs
·
Average GE shareowners’ equity, excluding effects of discontinued operations
·
Ratio of adjusted debt to equity at GECC, net of adjusted cash and equivalents and with classification of hybrid debt as equity
(80)
·
GE Capital ending net investment (ENI), excluding cash and equivalents
·
GE pre-tax earnings from continuing operations, excluding GECC earnings from continuing operations, the corresponding effective tax rates and the reconciliation of the U.S. federal statutory income tax rate to GE effective tax rate, excluding GECC earnings
The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures follow.
Industrial Cash Flows from Operating Activities (Industrial CFOA) and GE CFOA Excluding the Effects of NBCU Deal-Related Taxes
(In millions)
Cash from GE's operating
activities, as reported
$
14,255
$
17,826
$
12,057
$
14,746
$
16,405
Less dividends from GECC
5,985
6,426
-
-
-
Cash from GE's operating
activities, excluding dividends
from GECC (Industrial CFOA)
$
8,270
$
11,400
$
12,057
$
14,746
$
16,405
Cash from GE's operating
activities, as reported
$
14,255
Adjustment: effects of NBCU
deal-related taxes
3,184
GE CFOA excluding effects of NBCU
deal-related taxes
$
17,439
We refer to cash generated by our industrial businesses as "Industrial CFOA," which we define as GE’s cash from continuing operating activities less the amount of dividends received by GE from GECC. This includes the effects of intercompany transactions, including GE customer receivables sold to GECC; GECC services for trade receivables management and material procurement; buildings and equipment (including automobiles) leased between GE and GECC; information technology (IT) and other services sold to GECC by GE; aircraft engines manufactured by GE that are installed on aircraft purchased by GECC from third-party producers for lease to others; and various investments, loans and allocations of GE corporate overhead costs. We believe that investors may find it useful to compare GE’s operating cash flows without the effect of GECC dividends, since these dividends are not representative of the operating cash flows of our industrial businesses and can vary from period-to-period based upon the results of the financial services businesses. We also believe that investors may find it useful to compare Industrial CFOA excluding the effects of taxes paid related to the NBCU transaction. Management recognizes that these measures may not be comparable to cash flow results of companies that contain both industrial and financial services businesses, but believes that this comparison is aided by the provision of additional information about the amounts of dividends paid by our financial services business and the separate presentation in our financial statements of the Financial Services (GECC) cash flows. We believe that our measures of Industrial CFOA and CFOA excluding NBCU deal-related taxes provide management and investors with useful measures to compare the capacity of our industrial operations to generate operating cash flows with the operating cash flows of other non-financial businesses and companies and as such provide useful measures to supplement the reported GAAP CFOA measure.
(81)
Operating Earnings, Operating EPS and Operating EPS Excluding the Effects of the 2011 Preferred Stock Redemption
(In millions; except earnings per share)
Earnings from continuing operations attributable to GE
$
15,177
$
14,624
$
14,122
$
12,577
$
10,993
Adjustment (net of tax): non-operating pension costs (income)
1,705
1,386
(204)
(967)
Operating earnings
$
16,882
$
16,010
$
14,810
$
12,373
$
10,026
Earnings per share - diluted(a)
Continuing earnings per share
$
1.47
$
1.38
$
1.23
$
1.15
$
1.00
Adjustment (net of tax): non-operating pension costs (income)
0.16
0.13
0.06
(0.02)
(0.09)
Operating earnings per share
1.64
1.51
1.30
1.13
0.91
Less: Effects of the 2011 preferred stock redemption
-
-
0.08
-
-
Operating EPS excluding the effects of the 2011 preferred stock
redemption
$
1.64
$
1.51
$
1.37
$
1.13
$
0.91
(a)
Earnings-per-share amounts are computed independently. As a result, the sum of per-share amounts may not equal the total.
Industrial Operating Earnings
(In millions)
Earnings from continuing operations attributable to GE
$
15,177
Adjustments (net of tax): non-operating pension costs (income)
1,705
Operating earnings
16,882
Less GECC earnings from continuing
operations attributable to the Company
8,258
Less effect of GECC preferred stock dividends
(298)
Operating earnings excluding GECC earnings
from continuing operations and the effect of GECC preferred stock dividends
(Industrial operating earnings)
$
8,922
Industrial operating earnings as a percentage of
operating earnings
53%
Operating earnings excludes non-service-related pension costs of our principal pension plans comprising interest cost, expected return on plan assets and amortization of actuarial gains/losses. The service cost and prior service cost components of our principal pension plans are included in operating earnings. We believe that these components of pension cost better reflect the ongoing service-related costs of providing pension benefits to our employees. As such, we believe that our measure of operating earnings provides management and investors with a useful measure of the operational results of our business. Other components of GAAP pension cost are mainly driven by capital allocation decisions and market performance, and we manage these separately from the operational performance of our businesses. Neither GAAP nor operating pension costs are necessarily indicative of the current or future cash flow requirements related to our pension plan. We also believe that this measure, considered along with the corresponding GAAP measure, provides management and investors with additional information for comparison of our operating results to the operating results of other companies. We believe that presenting operating earnings separately for our industrial businesses also provides management and investors with useful information about the relative size of our industrial and financial services businesses in relation to the total company. We also believe that operating EPS excluding the effects of the $0.8 billion preferred dividend related to the redemption of our preferred stock (calculated as the difference between the carrying value and the redemption value of the preferred stock) is a meaningful measure because it increases the comparability of period-to-period results.
(82)
Operating and Non-Operating Pension Costs
(In millions)
Service cost for benefits earned
$
1,535
$
1,387
$
1,195
Prior service cost amortization
Operating pension costs
1,781
1,666
1,389
Expected return on plan assets
(3,500)
(3,768)
(3,940)
Interest cost on benefit obligations
2,460
2,479
2,662
Net actuarial loss amortization
3,664
3,421
2,335
Non-operating pension costs
2,624
2,132
1,057
Total principal pension plans costs
$
4,405
$
3,798
$
2,446
We have provided the operating and non-operating components of cost for our principal pension plans. Operating pension costs comprise the service cost of benefits earned and prior service cost amortization for our principal pension plans. Non-operating pension costs comprise the expected return on plan assets, interest cost on benefit obligations and net actuarial loss amortization for our principal pension plans. We believe that the operating components of pension costs better reflect the ongoing service-related costs of providing pension benefits to our employees. We believe that the operating and non-operating components of cost for our principal pension plans, considered along with the corresponding GAAP measure, provide management and investors with additional information for comparison of our pension plan costs and operating results with the pension plan costs and operating results of other companies.
Average GE Shareowners' Equity, Excluding Effects of Discontinued Operations(a)
December 31 (In millions)
Average GE shareowners’
equity(b)
$
124,501
$
120,411
$
122,289
$
116,179
$
110,535
Less the effects of the
average net investment in
discontinued operations
(167)
(478)
4,924
13,819
17,432
Average GE shareowners’
equity, excluding effects of
discontinued operations(a)
$
124,668
$
120,889
$
117,365
$
102,360
$
93,103
(a) Used for computing return on average GE shareowners’ equity and return on average total capital invested (ROTC).
(b)
On an annual basis, calculated using a five-point average.
Our ROTC calculation excludes earnings (losses) of discontinued operations from the numerator because U.S. GAAP requires us to display those earnings (losses) in the Statement of Earnings. Our calculation of average GE shareowners’ equity may not be directly comparable to similarly titled measures reported by other companies. We believe that it is a clearer way to measure the ongoing trend in return on total capital for the continuing operations of our businesses given the extent that discontinued operations have affected our reported results. We believe that this results in a more relevant measure for management and investors to evaluate performance of our continuing operations, on a consistent basis, and to evaluate and compare the performance of our continuing operations with the ongoing operations of other businesses and companies.
Definitions indicating how the above-named ratios are calculated using average GE shareowners’ equity, excluding effects of discontinued operations, can be found in the Glossary.
(83)
Ratio of Adjusted Debt to Equity at GECC, Net of Adjusted Cash and Equivalents and with Classification of Hybrid Debt as Equity
December 31 (Dollars in millions)
GECC debt
$
371,062
$
397,039
$
442,830
$
470,363
$
493,224
Add debt of businesses held for sale
and discontinued operations
7,136
Adjusted GECC debt
371,378
397,442
443,357
470,938
500,360
Less cash and equivalents
74,873
61,853
76,641
60,231
62,565
Less cash of businesses held for sale
and discontinued operations
1,975
Less hybrid debt
7,725
7,725
7,725
7,725
7,725
$
288,544
$
327,599
$
358,659
$
402,760
$
428,095
GECC equity
$
82,694
$
81,890
$
77,110
$
68,984
$
70,833
Plus hybrid debt
7,725
7,725
7,725
7,725
7,725
$
90,419
$
89,615
$
84,835
$
76,709
$
78,558
Ratio
3.19:1
3.66:1
4.23:1
5.25:1
5.45:1
We have provided the GECC ratio of debt to equity on a basis that reflects the use of cash and equivalents as a reduction of debt, and long-term debt due in 2066 and 2067 classified as equity. For purposes of this ratio, we have also adjusted cash and debt balances to include amounts classified as assets and liabilities of businesses held for sale and discontinued operations. We believe that this is a useful comparison to a GAAP-based ratio of debt to equity because cash balances may be used to reduce debt and because this long-term debt has equity-like characteristics. The usefulness of this supplemental measure may be limited, however, as the total amount of cash and equivalents at any point in time may be different than the amount that could practically be applied to reduce outstanding debt, and it may not be advantageous or practical to replace certain long-term debt with equity. Despite these potential limitations, we believe that this measure, considered along with the corresponding GAAP measure, provides investors with additional information that may be more comparable to other financial institutions and businesses.
GE Capital Ending Net Investment (ENI), Excluding Cash and Equivalents
December 31,
(In billions)
Financial Services (GECC) total assets
$
512.0
Adjustment: deferred income taxes
4.8
GECC total assets
516.8
Less assets of discontinued operations
2.3
Less non-interest-bearing liabilities
59.3
GE Capital ENI
455.2
Less cash and equivalents
74.9
GE Capital ENI, excluding cash and equivalents
$
380.3
We use ENI to measure the size of our GE Capital segment. We believe that this measure is a useful indicator of the capital (debt or equity) required to fund a business as it adjusts for non-interest-bearing current liabilities generated in the normal course of business that do not require a capital outlay. We also believe that by excluding cash and equivalents, we provide a meaningful measure of assets requiring capital to fund our GE Capital segment, as a substantial amount of this cash and equivalents resulted from debt issuances to pre-fund future debt maturities and will not be used to fund additional assets. Providing this measure will help investors measure how we are performing against our previously communicated goal to reduce the size of our financial services segment.
(84)
GE Pre-Tax Earnings from Continuing Operations, Excluding GECC Earnings from Continuing Operations and the Corresponding Effective Tax Rates
(Dollars in millions)
GE earnings from continuing operations before income taxes
$
17,090
$
16,797
$
19,126
Less GECC earnings from continuing operations
8,258
7,345
6,480
Total
$
8,832
$
9,452
$
12,646
GE provision for income taxes
$
1,668
$
2,013
$
4,839
GE effective tax rate, excluding GECC earnings
18.9
%
21.3
%
38.3
%
Reconciliation of U.S. Federal Statutory Income Tax Rate to GE Effective Tax Rate, Excluding GECC Earnings
U.S. federal statutory income tax rate
35.0
%
35.0
%
35.0
%
Reduction in rate resulting from
Tax on global activities including exports
(7.9)
(7.6)
(7.9)
U.S. business credits
(2.8)
(1.2)
(2.3)
NBCU gain
(1.3)
-
14.9
All other - net
(4.1)
(4.9)
(1.4)
(16.1)
(13.7)
3.3
GE effective tax rate, excluding GECC earnings
18.9
%
21.3
%
38.3
%
We believe that the GE effective tax rate is best analyzed in relation to GE earnings before income taxes excluding the GECC net earnings from continuing operations, as GE tax expense does not include taxes on GECC earnings. Management believes that in addition to the Consolidated and GECC tax rates shown in Note 14 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report, this supplemental measure provides investors with useful information as it presents the GE effective tax rate that can be used in comparing the GE results to other non-financial services businesses.
(85)
Glossary
Backlog Unfilled customer orders for products and product services (12 months for product services).
Borrowing Financial liability (short or long-term) that obligates us to repay cash or another financial asset to another entity.
Borrowings as a percentage of total capital invested For GE, the sum of borrowings and mandatorily redeemable preferred stock, divided by the sum of borrowings, mandatorily redeemable preferred stock, noncontrolling interests and total shareowners’ equity.
Cash equivalents Highly liquid debt instruments with original maturities of three months or less, such as commercial paper. Typically included with cash for reporting purposes, unless designated as available-for-sale and included with investment securities.
Cash flow hedges Qualifying derivative instruments that we use to protect ourselves against exposure to variability in future cash flows. The exposure may be associated with an existing asset or liability, or with a forecasted transaction. See “Hedge.”
Commercial paper Unsecured, unregistered promise to repay borrowed funds in a specified period ranging from overnight to 270 days.
Comprehensive income The sum of Net Income and Other Comprehensive Income. See “Other Comprehensive Income.”
Derivative instrument A financial instrument or contract with another party (counterparty) that is designed to meet any of a variety of risk management objectives, including those related to fluctuations in interest rates, currency exchange rates or commodity prices. Options, forwards and swaps are the most common derivative instruments we employ. See “Hedge.”
Discontinued operations Certain businesses we have sold or committed to sell within the next year and therefore will no longer be part of our ongoing operations. The net earnings, assets and liabilities, and cash flows of such businesses are separately classified on our Statement of Earnings, Statement of Financial Position and Statement of Cash Flows, respectively, for all periods presented.
Effective tax rate Provision for income taxes as a percentage of earnings from continuing operations before income taxes and accounting changes. Does not represent cash paid for income taxes in the current accounting period. Also referred to as “actual tax rate” or “tax rate.”
Ending Net Investment (ENI) The total capital we have invested in the financial services business. It is the sum of short-term borrowings, long-term borrowings and equity (excluding noncontrolling interests) adjusted for unrealized gains and losses on investment securities and hedging instruments. Alternatively, it is the amount of assets of continuing operations less the amount of non-interest-bearing liabilities.
Equipment leased to others Rental equipment we own that is available to rent and is stated at cost less accumulated depreciation.
Fair value hedge Qualifying derivative instruments that we use to reduce the risk of changes in the fair value of assets, liabilities or certain types of firm commitments. Changes in the fair values of derivative instruments that are designated and effective as fair value hedges are recorded in earnings, but are offset by corresponding changes in the fair values of the hedged items. See “Hedge.”
(86)
Financing receivables Investment in contractual loans and leases due from customers (not investment securities).
Forward contract Fixed price contract for purchase or sale of a specified quantity of a commodity, security, currency or other financial instrument with delivery and settlement at a specified future date. Commonly used as a hedging tool. See “Hedge.”
Goodwill The premium paid for acquisition of a business. Calculated as the purchase price less the fair value of net assets acquired (net assets are identified tangible and intangible assets, less liabilities assumed).
Guaranteed investment contracts (GICs) Deposit-type products that guarantee a minimum rate of return, which may be fixed or floating.
Hedge A technique designed to eliminate risk. Often refers to the use of derivative financial instruments to offset changes in interest rates, currency exchange rates or commodity prices, although many business positions are “naturally hedged” - for example, funding a U.S. fixed-rate investment with U.S. fixed-rate borrowings is a natural interest rate hedge.
Intangible asset A non-financial asset lacking physical substance, such as goodwill, patents, licenses, trademarks and customer relationships.
Interest rate swap Agreement under which two counterparties agree to exchange one type of interest rate cash flow for another. In a typical arrangement, one party periodically will pay a fixed amount of interest, in exchange for which that party will receive variable payments computed using a published index. See “Hedge.”
Investment securities Generally, an instrument that provides an ownership position in a corporation (a stock), a creditor relationship with a corporation or governmental body (a bond), rights to contractual cash flows backed by pools of financial assets or rights to ownership such as those represented by options, subscription rights and subscription warrants.
Match funding A risk control policy that provides funding for a particular financial asset having the same currency, maturity and interest rate characteristics as that asset. Match funding is executed directly, by issuing debt, or synthetically, through a combination of debt and derivative financial instruments. For example, when we lend at a fixed interest rate in the U.S., we can borrow those U.S. dollars either at a fixed rate of interest or at a floating rate executed concurrently with a pay-fixed interest rate swap. See “Hedge.”
Monetization Sale of financial assets to a third party for cash. For example, we sell certain loans, credit card receivables and trade receivables to third-party financial buyers, typically providing at least some credit protection and often agreeing to provide collection and processing services for a fee. Monetization normally results in gains on interest-bearing assets and losses on non-interest-bearing assets. See “Securitization” and “Variable interest entity.”
Noncontrolling interest Portion of shareowner’s equity in a subsidiary that is not attributable to GE.
Operating profit GE earnings from continuing operations before interest and other financial charges, income taxes and effects of accounting changes.
Option The right, not the obligation, to execute a transaction at a designated price, generally involving equity interests, interest rates, currencies or commodities. See “Hedge.”
(87)
Other Comprehensive Income Changes in assets and liabilities that do not result from transactions with shareowners and are not included in net income but are recognized in a separate component of shareowners’ equity. Other Comprehensive Income includes the following components:
-
Investment securities - Unrealized gains and losses on securities classified as available-for-sale.
-
Currency translation adjustments - The result of translating into U.S. dollars those amounts denominated or measured in a different currency.
-
Cash flow hedges - The effective portion of the fair value of cash flow hedges. Such hedges relate to an exposure to variability in the cash flows of recognized assets, liabilities or forecasted transactions that are attributable to a specific risk.
-
Benefit plans - Unamortized prior service costs and net actuarial losses (gains) related to pension and retiree health and life benefits.
-
Reclassification adjustments - Amounts previously recognized in Other Comprehensive Income that are included in net income in the current period.
Product services For purposes of the financial statement display of sales and costs of sales in our Statement of Earnings, “goods” is required by U.S. Securities and Exchange Commission regulations to include all sales of tangible products, and “services” must include all other sales, including other services activities. In our Management’s Discussion and Analysis of Operations, we refer to sales under product services agreements and sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “product services,” which is an important part of our operations.
Product services agreements Contractual commitments, with multiple-year terms, to provide specified services for products in our Power & Water, Oil & Gas, Aviation and Transportation installed base - for example, monitoring, maintenance, service and spare parts for a gas turbine/generator set installed in a customer’s power plant.
Productivity The rate of increased output for a given level of input, with both output and input measured in constant currency.
Progress collections Billings and payments received on customer contracts before the related revenue is recognized.
Qualified special purpose entities (QSPEs) A type of variable interest entity whose activities are significantly limited and entirely specified in the legal documents that established it. There also are significant limitations on the types of assets and derivative instruments such entities may hold and the types and extent of activities and decision-making they may engage in.
Retained interest A portion of a transferred financial asset retained by the transferor that provides rights to receive portions of the cash inflows from that asset.
Return on average GE shareowners’ equity Earnings from continuing operations before accounting changes divided by average GE shareowners’ equity, excluding effects of discontinued operations (on an annual basis, calculated using a five-point average). Average GE shareowners’ equity, excluding effects of discontinued operations, as of the end of each of the years in the five-year period ended December 31 of the year for which the ratio is calculated is described in the Supplemental Information section.
Return on average total capital invested For GE, earnings from continuing operations before accounting changes plus the sum of after-tax interest and other financial charges and noncontrolling interests, divided by the sum of the averages of total shareowners’ equity (excluding effects of discontinued operations), borrowings, mandatorily redeemable preferred stock and noncontrolling interests (on an annual basis, calculated using a five-point average). Average total shareowners’ equity, excluding effects of discontinued operations as of the end of each of the years in the five-year period ended December 31 of the year for which the ratio is calculated is described in the Supplemental Information section.
(88)
Securitization A process whereby loans or other receivables are packaged, underwritten and sold to investors. In a typical transaction, assets are sold to a special purpose entity, which purchases the assets with cash raised through issuance of beneficial interests (usually debt instruments) to third-party investors. Whether or not credit risk associated with the securitized assets is retained by the seller depends on the structure of the securitization. See “Monetization” and “Variable interest entity.”
Subprime For purposes of Consumer-related discussion, subprime includes consumer finance products like mortgage, auto, cards, sales finance and personal loans to U.S. and global borrowers whose credit score implies a higher probability of default based upon GECC's proprietary scoring models and definitions, which add various qualitative and quantitative factors to a base credit score such as a FICO score or global bureau score. Although FICO and global bureau credit scores are a widely accepted rating of individual consumer creditworthiness, the internally modeled scores are more reflective of the behavior and default risks in the portfolio compared with stand-alone generic bureau scores.
Turnover Broadly based on the number of times that working capital is replaced during a year. Current receivables turnover is total sales divided by the five-point average balance of GE current receivables. Inventory turnover is total sales divided by a five-point average balance of inventories. See “Working capital.”
Variable interest entity An entity that must be consolidated by its primary beneficiary, the party that holds a controlling financial interest. A variable interest entity has one or both of the following characteristics: (1) its equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) as a group, the equity investors lack one or more of the following characteristics: (a) the power to direct the activities that most significantly affect the economic performance of the entity, (b) obligation to absorb expected losses, or (c) right to receive expected residual returns.
Working capital Represents GE current receivables and inventories, less GE accounts payable and progress collections.
(89)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information about our global risk management can be found in the Operations - Global Risk Management, GE Capital Risk Management and Oversight and Financial Resources and Liquidity and Borrowings - Funding Plan - Exchange Rate and Interest Rate Risks sections in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2013, based on the framework and criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.
Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2013.
Our independent registered public accounting firm has issued an audit report on our internal control over financial reporting. Their report follows.
/s/ Jeffrey R. Immelt
/s/ Jeffrey S. Bornstein
Jeffrey R. Immelt
Jeffrey S. Bornstein
Chairman of the Board and
Chief Executive Officer
February 27, 2014
Senior Vice President and
Chief Financial Officer
(90)
Report of Independent Registered Public Accounting Firm
To Shareowners and Board of Directors
of General Electric Company:
We have audited the accompanying statement of financial position of General Electric Company and consolidated affiliates (the “Company”) as of December 31, 2013 and 2012, and the related statements of earnings, comprehensive income, changes in shareowners’ equity and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
(91)
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of General Electric Company and consolidated affiliates as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by COSO.
Our audits of the consolidated financial statements were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating information appearing on pages 95, 98 and 100 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual entities. The consolidating information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.
/s/ KPMG LLP
Stamford, Connecticut
February 27, 2014
(92)
Audited Financial Statements and Notes
Statement of Earnings
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Shareowners’ Equity
Statement of Financial Position
Statement of Cash Flows
Notes to Consolidated Financial Statements
Basis of Presentation and Summary of Significant Accounting Policies
Assets and Liabilities of Businesses Held for Sale and Discontinued Operations
Investment Securities
Current Receivables
Inventories
GECC Financing Receivables, Allowance for Losses on Financing Receivables and
Supplemental Information on Credit Quality
Property, Plant and Equipment
Goodwill and Other Intangible Assets
All Other Assets
Borrowings and Bank Deposits
Investment Contracts, Insurance Liabilities and Insurance Annuity Benefits
Postretirement Benefit Plans
All Other Liabilities
Income Taxes
Shareowners’ Equity
Other Stock-related Information
Other Income
GECC Revenues from Services
Supplemental Cost Information
Earnings Per Share Information
Fair Value Measurements
Financial Instruments
Variable Interest Entities
Commitments and Guarantees
Supplemental Cash Flows Information
Intercompany Transactions
Operating Segments
Quarterly Information (unaudited)
(93)
Statement of Earnings
General Electric Company
and consolidated affiliates
For the years ended December 31 (In millions; per-share amounts in dollars)
Revenues and other income
Sales of goods
$
71,873
$
72,991
$
66,874
Sales of services
28,669
27,158
27,648
Other income (Note 17)
3,108
2,563
5,063
GECC earnings from continuing operations
-
-
-
GECC revenues from services (Note 18)
42,395
43,972
46,957
Total revenues and other income
146,045
146,684
146,542
Costs and expenses (Note 19)
Cost of goods sold
57,867
56,785
51,455
Cost of services sold
19,274
17,525
16,823
Interest and other financial charges
10,116
12,407
14,422
Investment contracts, insurance losses and
insurance annuity benefits
2,676
2,857
2,912
Provision for losses on financing
receivables (Note 6)
4,818
3,832
3,930
Other costs and expenses
35,143
35,897
36,841
Total costs and expenses
129,894
129,303
126,383
Earnings from continuing operations
before income taxes
16,151
17,381
20,159
Benefit (provision) for income taxes (Note 14)
(676)
(2,534)
(5,745)
Earnings from continuing operations
15,475
14,847
14,414
Earnings (loss) from discontinued operations,
net of taxes (Note 2)
(2,120)
(983)
Net earnings
13,355
13,864
14,443
Less net earnings attributable to
noncontrolling interests
Net earnings attributable to the Company
13,057
13,641
14,151
Preferred stock dividends declared
-
-
(1,031)
Net earnings attributable to GE common
shareowners
$
13,057
$
13,641
$
13,120
Amounts attributable to the Company
Earnings from continuing operations
$
15,177
$
14,624
$
14,122
Earnings (loss) from discontinued operations,
net of taxes
(2,120)
(983)
Net earnings attributable to the Company
$
13,057
$
13,641
$
14,151
Per-share amounts (Note 20)
Earnings from continuing operations
Diluted earnings per share
$
1.47
$
1.38
$
1.23
Basic earnings per share
1.48
1.39
1.23
Net earnings
Diluted earnings per share
1.27
1.29
1.23
Basic earnings per share
1.28
1.29
1.24
Dividends declared per share
0.79
0.70
0.61
See Note 3 for other-than-temporary impairment amounts.
See accompanying notes.
(94)
Statement of Earnings (Continued)
For the years ended December 31
GE(a)
GECC
(In millions; per-share amounts in dollars)
Revenues and other income
Sales of goods
$
71,951
$
73,304
$
67,011
$
$
$
Sales of services
29,063
27,571
28,024
-
-
-
Other income (Note 17)
2,886
2,657
5,268
-
-
-
GECC earnings from continuing operations
8,258
7,345
6,480
-
-
-
GECC revenues from services (Note 18)
-
-
-
43,941
45,245
48,176
Total revenues and other income
112,158
110,877
106,783
44,067
45,364
48,324
Costs and expenses (Note 19)
Cost of goods sold
57,962
57,118
51,605
Cost of services sold
19,668
17,938
17,199
-
-
-
Interest and other financial charges
1,333
1,353
1,299
9,267
11,596
13,760
Investment contracts, insurance losses and
insurance annuity benefits
-
-
-
2,779
2,984
3,059
Provision for losses on financing
receivables (Note 6)
-
-
-
4,818
3,832
3,930
Other costs and expenses
16,105
17,671
17,554
19,776
18,924
19,927
Total costs and expenses
95,068
94,080
87,657
36,748
37,435
40,811
Earnings from continuing operations
before income taxes
17,090
16,797
19,126
7,319
7,929
7,513
Benefit (provision) for income taxes (Note 14)
(1,668)
(2,013)
(4,839)
(521)
(906)
Earnings from continuing operations
15,422
14,784
14,287
8,311
7,408
6,607
Earnings (loss) from discontinued operations,
net of taxes (Note 2)
(2,120)
(983)
(2,054)
(1,130)
Net earnings
13,302
13,801
14,316
6,257
6,278
6,637
Less net earnings attributable to
noncontrolling interests
Net earnings attributable to the Company
13,057
13,641
14,151
6,204
6,215
6,510
Preferred stock dividends declared
-
-
(1,031)
(298)
(123)
-
Net earnings attributable to GE common
shareowners
$
13,057
$
13,641
$
13,120
$
5,906
$
6,092
$
6,510
Amounts attributable to the Company
Earnings from continuing operations
$
15,177
$
14,624
$
14,122
$
8,258
$
7,345
$
6,480
Earnings (loss) from discontinued operations,
net of taxes
(2,120)
(983)
(2,054)
(1,130)
Net earnings attributable to the Company
$
13,057
$
13,641
$
14,151
$
6,204
$
6,215
$
6,510
(a)
Represents the adding together of all affiliated companies except General Electric Capital Corporation (GECC or financial services), which is presented on a one-line basis. See Note 1.
In the consolidating data on this page, "GE" means the basis of consolidation as described in Note 1 to the consolidated financial statements; "GECC" means General Electric Capital Corporation and all of its affiliates and associated companies. Separate information is shown for "GE" and "GECC." Transactions between GE and GECC have been eliminated from the "General Electric Company and consolidated affiliates" columns on the prior page.
(95)
Consolidated Statement of Comprehensive Income
For the years ended December 31 (In millions)
Net earnings
$
13,355
$
13,864
$
14,443
Less: net earnings (loss) attributable to noncontrolling interests
Net earnings attributable to GE
$
13,057
$
13,641
$
14,151
Other comprehensive income (loss)
Investment securities
$
(374)
$
$
Currency translation adjustments
(308)
Cash flow hedges
Benefit plans
11,300
2,299
(7,040)
Other comprehensive income (loss)
11,085
3,757
(6,134)
Less: other comprehensive income (loss) attributable to noncontrolling interests
(25)
(15)
Other comprehensive income (loss) attributable to GE
$
11,110
$
3,744
$
(6,119)
Comprehensive income
$
24,440
$
17,621
$
8,309
Less: comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to GE
$
24,167
$
17,385
$
8,032
Amounts presented net of taxes. See Note 15 for further information about other comprehensive income and noncontrolling interests.
See accompanying notes.
Consolidated Statement of Changes in Shareowners' Equity
(In millions)
GE shareowners' equity balance at January 1
$
123,026
$
116,438
$
118,936
Increases from net earnings attributable to the Company
13,057
13,641
14,151
Dividends and other transactions with shareowners
(8,061)
(7,372)
(7,502)
Other comprehensive income (loss) attributable to GE
11,110
3,744
(6,119)
Net sales (purchases) of shares for treasury
(7,990)
(2,802)
Changes in other capital
(576)
(623)
(3,197)
Ending balance at December 31
130,566
123,026
116,438
Noncontrolling interests
6,217
5,444
1,696
Total equity balance at December 31
$
136,783
$
128,470
$
118,134
See Note 15 for further information about changes in shareowners’ equity.
See accompanying notes.
(96)
Statement of Financial Position
General Electric Company
and consolidated affiliates
At December 31 (In millions, except share amounts)
Assets
Cash and equivalents
$
88,555
$
77,268
Investment securities (Note 3)
43,981
48,510
Current receivables (Note 4)
21,388
19,902
Inventories (Note 5)
17,325
15,374
Financing receivables - net (Note 6)
241,940
257,238
Other GECC receivables
9,114
7,864
Property, plant and equipment - net (Note 7)
68,827
68,633
Investment in GECC
-
-
Goodwill (Note 8)
77,648
73,114
Other intangible assets - net (Note 8)
14,310
11,980
All other assets (Note 9)
70,808
101,644
Deferred income taxes (Note 14)
(54)
Assets of businesses held for sale (Note 2)
Assets of discontinued operations (Note 2)
2,339
3,315
Total assets(a)
$
656,560
$
684,999
Liabilities and equity
Short-term borrowings (Note 10)
$
77,890
$
101,392
Accounts payable, principally trade accounts
16,471
15,654
Progress collections and price adjustments
accrued
13,125
10,877
Dividends payable
2,220
1,980
Other GE current liabilities
13,381
14,895
Non-recourse borrowings of consolidated
securitization entities (Note 10)
30,124
30,123
Bank deposits (Note 10)
53,361
46,200
Long-term borrowings (Note 10)
221,665
236,084
Investment contracts, insurance liabilities
and insurance annuity benefits (Note 11)
26,544
28,268
All other liabilities (Note 13)
61,057
68,166
Liabilities of businesses held for sale (Note 2)
Liabilities of discontinued operations (Note 2)
3,933
2,733
Total liabilities(a)
519,777
556,529
GECC preferred stock (50,000 and 40,000 shares outstanding at
year-end 2013 and 2012, respectively)
-
-
Common stock (10,060,881,000 and 10,405,625,000
shares outstanding at year-end 2013 and 2012, respectively)
Accumulated other comprehensive income attributable to GE(b)
Investment securities
Currency translation adjustments
Cash flow hedges
(257)
(722)
Benefit plans
(9,296)
(20,597)
Other capital
32,494
33,070
Retained earnings
149,051
144,055
Less common stock held in treasury
(42,561)
(34,571)
Total GE shareowners’ equity
130,566
123,026
Noncontrolling interests(c)
6,217
5,444
Total equity (Notes 15 and 16)
136,783
128,470
Total liabilities and equity
$
656,560
$
684,999
(a)
Our consolidated assets at December 31, 2013 include total assets of $47,367 million of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs. These assets include net financing receivables of $41,420 million and investment securities of $3,830 million. Our consolidated liabilities at December 31, 2013 include liabilities of certain VIEs for which the VIE creditors do not have recourse to GE. These liabilities include non-recourse borrowings of consolidated securitization entities (CSEs) of $28,574 million. See Note 23.
(b)
The sum of accumulated other comprehensive income attributable to GE was $(9,120) million and $(20,230) million at December 31, 2013 and 2012, respectively.
(c)
Included accumulated other comprehensive income attributable to noncontrolling interests of $(180) million and $(155) million at December 31, 2013 and 2012, respectively.
See accompanying notes.
(97)
Statement of Financial Position (Continued)
GE(a)
GECC
At December 31 (In millions, except share amounts)
Assets
Cash and equivalents
$
13,682
$
15,509
$
74,873
$
61,853
Investment securities (Note 3)
43,662
48,439
Current receivables (Note 4)
10,970
9,274
-
-
Inventories (Note 5)
17,257
15,295
Financing receivables - net (Note 6)
-
-
253,029
268,161
Other GECC receivables
-
-
16,513
13,891
Property, plant and equipment - net (Note 7)
17,574
16,033
51,607
52,967
Investment in GECC
77,745
77,930
-
-
Goodwill (Note 8)
51,453
46,143
26,195
26,971
Other intangible assets - net (Note 8)
13,180
10,700
1,136
1,287
All other assets (Note 9)
23,708
39,534
47,366
62,186
Deferred income taxes (Note 14)
5,061
5,946
(4,786)
(6,000)
Assets of businesses held for sale (Note 2)
-
-
Assets of discontinued operations (Note 2)
2,330
3,306
Total assets
$
230,962
$
236,447
$
512,043
$
533,351
Liabilities and equity
Short-term borrowings (Note 10)
$
1,841
$
6,041
$
77,298
$
95,940
Accounts payable, principally trade accounts
16,353
14,259
6,549
6,256
Progress collections and price adjustments
accrued
13,152
10,877
-
-
Dividends payable
2,220
1,980
-
-
Other GE current liabilities
13,381
14,896
-
-
Non-recourse borrowings of consolidated
securitization entities (Note 10)
-
-
30,124
30,123
Bank deposits (Note 10)
-
-
53,361
46,200
Long-term borrowings (Note 10)
11,515
11,428
210,279
224,776
Investment contracts, insurance liabilities
and insurance annuity benefits (Note 11)
-
-
26,979
28,696
All other liabilities (Note 13)
40,955
53,093
20,531
15,943
Liabilities of businesses held for sale (Note 2)
-
-
Liabilities of discontinued operations (Note 2)
3,790
2,663
Total liabilities
99,560
112,644
428,917
450,754
GECC preferred stock (50,000 shares and 40,000 shares outstanding at
year-end 2013 and 2012, respectively)
-
-
-
-
Common stock (10,060,881,000 and 10,405,625,000
shares outstanding at year-end 2013 and 2012, respectively)
-
-
Accumulated other comprehensive income attributable to GE
Investment securities
Currency translation adjustments
(687)
(131)
Cash flow hedges
(257)
(722)
(293)
(746)
Benefit plans
(9,296)
(20,597)
(363)
(736)
Other capital
32,494
33,070
32,563
31,586
Retained earnings
149,051
144,055
51,165
51,244
Less common stock held in treasury
(42,561)
(34,571)
-
-
Total GE shareowners’ equity
130,566
123,026
82,694
81,890
Noncontrolling interests
Total equity (Notes 15 and 16)
131,402
123,803
83,126
82,597
Total liabilities and equity
$
230,962
$
236,447
$
512,043
$
533,351
(a)
Represents the adding together of all affiliated companies except General Electric Capital Corporation (GECC or financial services), which is presented on a one-line basis. See Note 1.
In the consolidating data on this page, "GE" means the basis of consolidation as described in Note 1 to the consolidated financial statements; "GECC" means General Electric Capital Corporation and all of its affiliates and associated companies. Separate information is shown for “GE” and “GECC.” Transactions between GE and GECC have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page.
(98)
Statement of Cash Flows
General Electric Company and consolidated affiliates
For the years ended December 31 (In millions)
Cash flows - operating activities
Net earnings
$
13,355
$
13,864
$
14,443
Less net earnings attributable to noncontrolling interests
Net earnings attributable to the Company
13,057
13,641
14,151
(Earnings) loss from discontinued operations
2,120
(29)
Adjustments to reconcile net earnings attributable to the
Company to cash provided from operating activities
Depreciation and amortization of property,
plant and equipment
9,762
9,192
8,986
Earnings from continuing operations retained by GECC
-
-
-
Deferred income taxes
(3,295)
(1,152)
(204)
Decrease (increase) in GE current receivables
(485)
(879)
(670)
Decrease (increase) in inventories
(1,368)
(1,274)
(1,168)
Increase (decrease) in accounts payable
(437)
1,204
Increase (decrease) in GE progress collections
1,893
(920)
(1,146)
Provision for losses on GECC financing receivables
4,818
3,832
3,930
All other operating activities
2,175
8,029
7,057
Cash from (used for) operating activities - continuing
operations
29,037
31,015
32,111
Cash from (used for) operating activities - discontinued
operations
(458)
1,248
Cash from (used for) operating activities
28,579
31,331
33,359
Cash flows - investing activities
Additions to property, plant and equipment
(13,458)
(15,119)
(12,637)
Dispositions of property, plant and equipment
5,883
6,184
5,867
Net decrease (increase) in GECC financing receivables
2,715
6,979
14,785
Proceeds from sales of discontinued operations
8,950
Proceeds from principal business dispositions
3,324
3,618
8,877
Proceeds from sale of equity interest in NBCU LLC
16,699
-
-
Net cash from (payments for) principal businesses purchased
(1,642)
(1,456)
(11,202)
All other investing activities
14,625
11,157
6,527
Cash from (used for) investing activities - continuing
operations
28,674
11,590
21,167
Cash from (used for) investing activities - discontinued
operations
(288)
(1,285)
Cash from (used for) investing activities
29,117
11,302
19,882
Cash flows - financing activities
Net increase (decrease) in borrowings (maturities of
90 days or less)
(14,230)
(2,231)
5,951
Net increase (decrease) in bank deposits
2,197
2,450
6,652
Newly issued debt (maturities longer than 90 days)
45,392
63,019
43,847
Repayments and other reductions (maturities longer
than 90 days)
(61,461)
(103,942)
(85,706)
Proceeds from issuance of GECC preferred stock
3,960
-
Repayment of preferred stock
-
-
(3,300)
Net dispositions (purchases) of GE shares for treasury
(9,278)
(4,164)
(1,456)
Dividends paid to shareowners
(7,821)
(7,189)
(6,458)
Purchases of subsidiary shares from noncontrolling interests
-
-
(4,578)
All other financing activities
(1,418)
(2,958)
(1,867)
Cash from (used for) financing activities - continuing
operations
(45,629)
(51,055)
(46,915)
Cash from (used for) financing activities - discontinued
operations
(19)
Cash from (used for) financing activities
(45,573)
(51,074)
(46,863)
Effect of exchange rate changes on cash and equivalents
(795)
1,278
(841)
Increase (decrease) in cash and equivalents
11,328
(7,163)
5,537
Cash and equivalents at beginning of year
77,459
84,622
79,085
Cash and equivalents at end of year
88,787
77,459
84,622
Less cash and equivalents of discontinued operations
at end of year
Cash and equivalents of continuing operations
at end of year
$
88,555
$
77,268
$
84,440
Supplemental disclosure of cash flows information
Cash paid during the year for interest
$
(8,690)
$
(12,717)
$
(15,571)
Cash recovered (paid) during the year for income taxes
(2,487)
(3,237)
(2,919)
See accompanying notes.
(99)
Statement of Cash Flows (Continued)
GE(a)
GECC
For the years ended December 31 (In millions)
Cash flows - operating activities
Net earnings
$
13,302
$
13,801
$
14,316
$
6,257
$
6,278
$
6,637
Less net earnings attributable to noncontrolling interests
Net earnings attributable to the Company
13,057
13,641
14,151
6,204
6,215
6,510
(Earnings) loss from discontinued operations
2,120
(29)
2,054
1,130
(30)
Adjustments to reconcile net earnings attributable to the
Company to cash provided from operating activities
Depreciation and amortization of property,
plant and equipment
2,449
2,291
2,068
7,313
6,901
6,918
Earnings from continuing operations retained by GECC(b)
(2,273)
(919)
(6,480)
-
-
-
Deferred income taxes
(2,571)
(294)
(327)
(724)
(858)
Decrease (increase) in GE current receivables
(1,432)
1,105
(346)
-
-
-
Decrease (increase) in inventories
(1,351)
(1,204)
(1,122)
(27)
Increase (decrease) in accounts payable
1,938
(880)
Increase (decrease) in GE progress collections
1,919
(920)
(1,146)
-
-
-
Provision for losses on GECC financing receivables
-
-
-
4,818
3,832
3,930
All other operating activities
1,528
2,985
3,350
5,418
3,127
Cash from (used for) operating activities - continuing
operations
14,255
17,826
12,057
19,870
21,731
20,612
Cash from (used for) operating activities - discontinued
operations
(2)
-
-
(456)
1,248
Cash from (used for) operating activities
14,253
17,826
12,057
19,414
22,047
21,860
Cash flows - investing activities
Additions to property, plant and equipment
(3,680)
(3,937)
(2,957)
(9,978)
(11,879)
(9,869)
Dispositions of property, plant and equipment
-
-
-
5,883
6,184
5,867
Net decrease (increase) in GECC financing receivables
-
-
-
3,589
5,490
14,525
Proceeds from sales of discontinued operations
-
-
-
8,950
Proceeds from principal business dispositions
1,316
6,254
1,983
2,863
2,623
Proceeds from sale of equity interest in NBCU LLC
16,699
-
-
-
-
-
Net cash from (payments for) principal businesses purchased
(8,026)
(1,456)
(11,152)
6,384
-
(50)
All other investing activities
(1,488)
(564)
(384)
14,972
11,794
7,733
Cash from (used for) investing activities - continuing
operations
4,821
(5,417)
(8,239)
23,361
14,679
29,779
Cash from (used for) investing activities - discontinued
operations
-
-
(288)
(1,285)
Cash from (used for) investing activities
4,823
(5,417)
(8,239)
23,802
14,391
28,494
Cash flows - financing activities
Net increase (decrease) in borrowings (maturities of
90 days or less)
(890)
1,058
(13,892)
(1,401)
4,393
Net increase (decrease) in bank deposits
-
-
-
2,197
2,450
6,652
Newly issued debt (maturities longer than 90 days)
6,961
44,888
55,841
43,267
Repayments and other reductions (maturities longer
than 90 days)
(5,032)
(34)
(270)
(56,429)
(103,908)
(85,436)
Proceeds from issuance of GECC preferred stock
-
-
-
3,960
-
Repayment of preferred stock
-
-
(3,300)
-
-
-
Net dispositions (purchases) of GE shares for treasury
(9,278)
(4,164)
(1,456)
-
-
-
Dividends paid to shareowners
(7,821)
(7,189)
(6,458)
(6,283)
(6,549)
-
Purchases of subsidiary shares from noncontrolling
interests
-
-
(4,303)
-
-
(275)
All other financing activities
(211)
(75)
(909)
(2,867)
(1,792)
Cash from (used for) financing activities - continuing
operations
(20,881)
(5,284)
(14,627)
(29,438)
(52,474)
(33,191)
Cash from (used for) financing activities - discontinued
operations
-
-
-
(19)
Cash from (used for) financing activities
(20,881)
(5,284)
(14,627)
(29,382)
(52,493)
(33,139)
Effect of exchange rate changes on cash and equivalents
(22)
(50)
(773)
1,276
(791)
Increase (decrease) in cash and equivalents
(1,827)
7,127
(10,859)
13,061
(14,779)
16,424
Cash and equivalents at beginning of year
15,509
8,382
19,241
62,044
76,823
60,399
Cash and equivalents at end of year
13,682
15,509
8,382
75,105
62,044
76,823
Less cash and equivalents of discontinued operations
at end of year
-
-
-
Cash and equivalents of continuing operations
at end of year
$
13,682
$
15,509
$
8,382
$
74,873
$
61,853
$
76,641
Supplemental disclosure of cash flows information
Cash paid during the year for interest
$
(812)
$
(1,182)
$
(1,177)
$
(8,146)
$
(12,172)
$
(15,018)
Cash recovered (paid) during the year for income taxes
(4,753)
(2,987)
(2,303)
2,266
(250)
(616)
(a)
Represents the adding together of all affiliated companies except General Electric Capital Corporation (GECC or financial services), which is presented on a one-line basis. See Note 1.
(b)
Represents GECC earnings from continuing operations attributable to the Company, net of GECC dividends paid to GE.
In the consolidating data on this page, "GE" means the basis of consolidation as described in Note 1 to the consolidated financial statements; "GECC" means General Electric Capital Corporation and all of its affiliates and associated companies. Separate information is shown for “GE” and “GECC.” Transactions between GE and GECC have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page and are discussed in Note 26.
(100)
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP).
Consolidation
Our financial statements consolidate all of our affiliates - entities in which we have a controlling financial interest, most often because we hold a majority voting interest. To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (VIE) model to the entity, otherwise the entity is evaluated under the voting interest model.
Where we hold current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in that VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally. When changes occur to the design of an entity, we reconsider whether it is subject to the VIE model. We continuously evaluate whether we have a controlling financial interest in a VIE.
We hold a controlling financial interest in other entities where we currently hold, directly or indirectly, more than 50% of the voting rights or where we exercise control through substantive participating rights or as a general partner. Where we are a general partner, we consider substantive removal rights held by other partners in determining if we hold a controlling financial interest. We reevaluate whether we have a controlling financial interest in these entities when our voting or substantive participating rights change.
Associated companies are unconsolidated VIEs and other entities in which we do not have a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of 20% to 50%. Associated companies are accounted for as equity method investments. Results of associated companies are presented on a one-line basis. Investments in, and advances to, associated companies are presented on a one-line basis in the caption “All other assets” in our Statement of Financial Position, net of allowance for losses, that represents our best estimate of probable losses inherent in such assets.
Financial Statement Presentation
We have reclassified certain prior-year amounts to conform to the current-year’s presentation.
Financial data and related measurements are presented in the following categories:
GE - This represents the adding together of all affiliates other than General Electric Capital Corporation (GECC), whose continuing operations are presented on a one-line basis, giving effect to the elimination of transactions among such affiliates.
GECC - This represents the adding together of all affiliates of GECC, giving effect to the elimination of transactions among such affiliates.
Consolidated - This represents the adding together of GE and GECC, giving effect to the elimination of transactions between GE and GECC.
Operating Segments - These comprise our eight businesses, focused on the broad markets they serve: Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting (formerly Home & Business Solutions) and GE Capital. Prior-period information has been reclassified to be consistent with how we managed our businesses in 2013.
(101)
Unless otherwise indicated, information in these notes to consolidated financial statements relates to continuing operations. Certain of our operations have been presented as discontinued. See Note 2.
The effects of translating to U.S. dollars the financial statements of non-U.S. affiliates whose functional currency is the local currency are included in shareowners’ equity. Asset and liability accounts are translated at year-end exchange rates, while revenues and expenses are translated at average rates for the respective periods.
Preparing financial statements in conformity with U.S. GAAP requires us to make estimates based on assumptions about current, and for some estimates future, economic and market conditions (for example, unemployment, market liquidity, the real estate market, etc.), which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current conditions and how we expect them to change in the future, as appropriate, it is reasonably possible that in 2014 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial position. Among other effects, such changes could result in future impairments of investment securities, goodwill, intangibles and long-lived assets, incremental losses on financing receivables, establishment of valuation allowances on deferred tax assets and increased tax liabilities.
Sales of Goods and Services
We record all sales of goods and services only when a firm sales agreement is in place, delivery has occurred or services have been rendered and collectibility of the fixed or determinable sales price is reasonably assured.
Arrangements for the sale of goods and services sometimes include multiple components. Most of our multiple component arrangements involve the sale of goods and services in the Healthcare segment. Our arrangements with multiple components usually involve an upfront deliverable of large machinery or equipment and future service deliverables such as installation, commissioning, training or the future delivery of ancillary products. In most cases, the relative values of the undelivered components are not significant to the overall arrangement and are typically delivered within three to six months after the core product has been delivered. In such agreements, selling price is determined for each component and any difference between the total of the separate selling prices and total contract consideration (i.e., discount) is allocated pro rata across each of the components in the arrangement. The value assigned to each component is objectively determined and obtained primarily from sources such as the separate selling price for that or a similar item or from competitor prices for similar items. If such evidence is not available, we use our best estimate of selling price, which is established consistent with the pricing strategy of the business and considers product configuration, geography, customer type, and other market specific factors.
Except for goods sold under long-term agreements, we recognize sales of goods under the provisions of U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104, Revenue Recognition. We often sell consumer products and computer hardware and software products with a right of return. We use our accumulated experience to estimate and provide for such returns when we record the sale. In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have reliably demonstrated that all specified acceptance criteria have been met or when formal acceptance occurs, respectively. In arrangements where we provide goods for trial and evaluation purposes, we only recognize revenue after customer acceptance occurs. Unless otherwise noted, we do not provide for anticipated losses before we record sales.
(102)
We recognize revenue on agreements for sales of goods and services under power generation unit and uprate contracts, nuclear fuel assemblies, larger oil drilling equipment projects, aeroderivative unit contracts, military development contracts, locomotive production contracts, and long-term construction projects, using long-term construction and production contract accounting. We estimate total long-term contract revenue net of price concessions as well as total contract costs. For goods sold under power generation unit and uprate contracts, nuclear fuel assemblies, aeroderivative unit contracts, military development contracts and locomotive production contracts, we recognize sales as we complete major contract-specified deliverables, most often when customers receive title to the goods or accept the services as performed. For larger oil drilling equipment projects and long-term construction projects, we recognize sales based on our progress toward contract completion measured by actual costs incurred in relation to our estimate of total expected costs. We measure long-term contract revenues by applying our contract-specific estimated margin rates to incurred costs. We routinely update our estimates of future costs for agreements in process and report any cumulative effects of such adjustments in current operations. We provide for any loss that we expect to incur on these agreements when that loss is probable.
We recognize revenue upon delivery for sales of aircraft engines, military propulsion equipment and related spare parts not sold under long-term product services agreements. Delivery of commercial engines, non-U.S. military equipment and all related spare parts occurs on shipment; delivery of military propulsion equipment sold to the U.S. government or agencies thereof occurs upon receipt of a Material Inspection and Receiving Report, DD Form 250 or Memorandum of Shipment. Commercial aircraft engines are complex equipment manufactured to customer order under a variety of sometimes complex, long-term agreements. We measure sales of commercial aircraft engines by applying our contract-specific estimated margin rates to incurred costs. We routinely update our estimates of future revenues and costs for commercial aircraft engine agreements in process and report any cumulative effects of such adjustments in current operations. Significant components of our revenue and cost estimates include price concessions and performance-related guarantees as well as material, labor and overhead costs. We measure revenue for military propulsion equipment and spare parts not subject to long-term product services agreements based on the specific contract on a specifically measured output basis. We provide for any loss that we expect to incur on these agreements when that loss is probable; consistent with industry practice, for commercial aircraft engines, we make such provision only if such losses are not recoverable from future highly probable sales of spare parts and services for those engines.
We sell product services under long-term product maintenance or extended warranty agreements in our Aviation, Power & Water, Oil & Gas and Transportation segments, where costs of performing services are incurred on other than a straight-line basis. We also sell product services in our Healthcare segment, where such costs generally are expected to be on a straight-line basis. For the Aviation, Power & Water, Oil & Gas and Transportation agreements, we recognize related sales based on the extent of our progress toward completion measured by actual costs incurred in relation to total expected costs. We routinely update our estimates of future costs for agreements in process and report any cumulative effects of such adjustments in current operations. For the Healthcare agreements, we recognize revenues on a straight-line basis and expense related costs as incurred. We provide for any loss that we expect to incur on any of these agreements when that loss is probable.
GECC Revenues from Services (Earned Income)
We use the interest method to recognize income on loans. Interest on loans includes origination, commitment and other non-refundable fees related to funding (recorded in earned income on the interest method). We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due, with the exception of consumer credit card accounts. Beginning in the fourth quarter of 2013, we continue to accrue interest on consumer credit cards until the accounts are written off in the period the account becomes 180 days past due. Previously, we stopped accruing interest on consumer credit cards when the account became 90 days past due. Previously recognized interest income that was accrued but not collected from the borrower is reversed, unless the terms of the loan agreement permit capitalization of accrued interest to the principal balance. Although we stop accruing interest in advance of payments, we recognize interest income as cash is collected when appropriate, provided the amount does not exceed that which would have been earned at the historical effective interest rate; otherwise, payments received are applied to reduce the principal balance of the loan.
(103)
We resume accruing interest on nonaccrual, non-restructured commercial loans only when (a) payments are brought current according to the loan’s original terms and (b) future payments are reasonably assured. When we agree to restructured terms with the borrower, we resume accruing interest only when it is reasonably assured that we will recover full contractual payments, and such loans pass underwriting reviews equivalent to those applied to new loans. We resume accruing interest on nonaccrual consumer loans when the customer’s account is less than 90 days past due and collection of such amounts is probable. Interest accruals on modified consumer loans that are not considered to be troubled debt restructurings (TDRs) may return to current status (re-aged) only after receipt of at least three consecutive minimum monthly payments or the equivalent cumulative amount, subject to a re-aging limitation of once a year, or twice in a five-year period.
We recognize financing lease income on the interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values are based upon management's best estimates of the value of the leased asset at the end of the lease term. We use various sources of data in determining this estimate, including information obtained from third parties, which is adjusted for the attributes of the specific asset under lease. Guarantees of residual values by unrelated third parties are considered part of minimum lease payments. Significant assumptions we use in estimating residual values include estimated net cash flows over the remaining lease term, anticipated results of future remarketing, and estimated future component part and scrap metal prices, discounted at an appropriate rate.
We recognize operating lease income on a straight-line basis over the terms of underlying leases.
Fees include commitment fees related to loans that we do not expect to fund and line-of-credit fees. We record these fees in earned income on a straight-line basis over the period to which they relate. We record syndication fees in earned income at the time related services are performed, unless significant contingencies exist.
Depreciation and Amortization
The cost of GE manufacturing plant and equipment is depreciated over its estimated economic life. U.S. assets are depreciated using an accelerated method based on a sum-of-the-years digits formula; non-U.S. assets are generally depreciated on a straight-line basis.
The cost of GECC equipment leased to others on operating leases is depreciated on a straight-line basis to estimated residual value over the lease term or over the estimated economic life of the equipment.
The cost of GECC acquired real estate investments is depreciated on a straight-line basis to the estimated salvage value over the expected useful life or the estimated proceeds upon sale of the investment at the end of the expected holding period if that approach produces a higher measure of depreciation expense.
The cost of individually significant customer relationships is amortized in proportion to estimated total related sales; cost of other intangible assets is generally amortized on a straight-line basis over the asset’s estimated economic life. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. See Notes 7 and 8.
(104)
Losses on Financing Receivables
Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of losses depends on the size, type and risk characteristics of the related financing receivable. Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values (including housing price indices as applicable), and the present and expected future levels of interest rates. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions and are subject to the regulatory examination process, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible that we will experience credit losses that are different from our current estimates. Write-offs are deducted from the allowance for losses when we judge the principal to be uncollectible and subsequent recoveries are added to the allowance at the time cash is received on a written-off account.
"Impaired" loans are defined as larger-balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to the original contractual terms of the loan agreement.
“Troubled debt restructurings” (TDRs) are those loans for which we have granted a concession to a borrower experiencing financial difficulties where we do not receive adequate compensation. Such loans are classified as impaired, and are individually reviewed for specific reserves.
“Nonaccrual financing receivables” are those on which we have stopped accruing interest. We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due, with the exception of consumer credit card accounts, for which we continue to accrue interest until the accounts are written off in the period that the account becomes 180 days past due. Although we stop accruing interest in advance of payments, we recognize interest income as cash is collected when appropriate provided the amount does not exceed that which would have been earned at the historical effective interest rate. Recently restructured financing receivables are not considered delinquent when payments are brought current according to the restructured terms, but may remain classified as nonaccrual until there has been a period of satisfactory payment performance by the borrower and future payments are reasonably assured of collection.
“Nonearning financing receivables” are a subset of nonaccrual financing receivables for which cash payments are not being received or for which we are on the cost recovery method of accounting (i.e., any payments are accounted for as a reduction of principal). This category excludes loans purchased at a discount (unless they have deteriorated post acquisition). These loans are initially recorded at fair value and accrete interest income over the estimated life of the loan based on reasonably estimable cash flows even if the underlying loans are contractually delinquent at acquisition.
Beginning in the fourth quarter of 2013, we revised our methods for classifying financing receivables as nonaccrual and nonearning to more closely align with regulatory guidance. Under the revised methods, we continue to accrue interest on consumer credit cards until the accounts are written off in the period the account becomes 180 days past due. Previously, we stopped accruing interest on consumer credit cards when the account became 90 days past due. In addition, the revised methods limit the use of the cash basis of accounting for nonaccrual financing receivables.
As a result of these revisions, consumer credit card receivables of $1,051 million that were previously classified as both nonaccrual and nonearning were returned to accrual status in the fourth quarter of 2013. In addition, $1,524 million of Real Estate and CLL financing receivables previously classified as nonaccrual, paying in accordance with contractual terms and accounted for on the cash basis, were returned to accrual status, while $2,174 million of financing receivables previously classified as nonaccrual and accounted for on the cash basis (primarily in Real Estate and CLL) were placed into the nonearning category based on our assessment of the short-term outlook for resolution through payoff or refinance.
(105)
Given that the revised methods result in nonaccrual and nonearning amounts that are substantially the same, we plan to discontinue the reporting of nonearning financing receivables, one of our internal performance metrics, and report selected ratios related to nonaccrual financing receivables, in the first quarter of 2014.
“Delinquent” receivables are those that are 30 days or more past due based on their contractual terms.
The same financing receivable may meet more than one of the definitions above. Accordingly, these categories are not mutually exclusive and it is possible for a particular loan to meet the definitions of a TDR, impaired loan, nonaccrual loan and nonearning loan and be included in each of these categories. The categorization of a particular loan also may not be indicative of the potential for loss.
Our consumer loan portfolio consists of smaller-balance, homogeneous loans, including credit card receivables, installment loans, auto loans and leases and residential mortgages. We collectively evaluate each portfolio for impairment quarterly. The allowance for losses on these receivables is established through a process that estimates the probable losses inherent in the portfolio based upon statistical analyses of portfolio data. These analyses include migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, together with other analyses that reflect current trends and conditions. We also consider our historical loss experience to date based on actual defaulted loans and overall portfolio indicators including nonearning loans, trends in loan volume and lending terms, credit policies and other observable environmental factors such as unemployment rates and home price indices.
Our commercial loan and lease portfolio consists of a variety of loans and leases, including both larger-balance, non-homogeneous loans and leases and smaller-balance homogeneous loans and leases. Losses on such loans and leases are recorded when probable and estimable. We routinely evaluate our entire portfolio for potential specific credit or collection issues that might indicate an impairment.
For larger-balance, non-homogeneous loans and leases, we consider the financial status, payment history, collateral value, industry conditions and guarantor support related to specific customers. Any delinquencies or bankruptcies are indications of potential impairment requiring further assessment of collectibility. We routinely receive financial as well as rating agency reports on our customers, and we elevate for further attention those customers whose operations we judge to be marginal or deteriorating. We also elevate customers for further attention when we observe a decline in collateral values for asset-based loans. While collateral values are not always available, when we observe such a decline, we evaluate relevant markets to assess recovery alternatives - for example, for real estate loans, relevant markets are local; for commercial aircraft loans, relevant markets are global.
Measurement of the loss on our impaired commercial loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of collateral, net of expected selling costs, if the loan is determined to be collateral dependent. We determine whether a loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. Our review process can often result in reserves being established in advance of a modification of terms or designation as a TDR. After providing for specific incurred losses, we then determine an allowance for losses that have been incurred in the balance of the portfolio but cannot yet be identified to a specific loan or lease. This estimate is based upon various statistical analyses considering historical and projected default rates and loss severity and aging, as well as our view on current market and economic conditions. It is prepared by each respective line of business. For Real Estate, this includes assessing the probability of default and the loss given default based on loss history of our portfolio for loans with similar loan metrics and attributes.
(106)
We consider multiple factors in evaluating the adequacy of our allowance for losses on Real Estate financing receivables, including loan-to-value ratios, collateral values at the individual loan level, debt service coverage ratios, delinquency status, and economic factors including interest rate and real estate market forecasts. In addition to these factors, we evaluate a Real Estate loan for impairment classification if its projected loan-to-value ratio at maturity is in excess of 100%, even if the loan is currently paying in accordance with its contractual terms. Substantially all of the loans in the Real Estate portfolio are considered collateral dependent and are measured for impairment based on the fair value of collateral. If foreclosure is deemed probable or if repayment is dependent solely on the sale of collateral, we also include estimated selling costs in our reserve. Collateral values for our Real Estate loans are determined based upon internal cash flow estimates discounted at an appropriate rate and corroborated by external appraisals, as appropriate. Collateral valuations are routinely monitored and updated annually, or more frequently for changes in collateral, market and economic conditions. Further discussion on determination of fair value is in the Fair Value Measurements section below.
Experience is not available for new products; therefore, while we are developing that experience, we set loss allowances based on our experience with the most closely analogous products in our portfolio.
Our loss mitigation strategy intends to minimize economic loss and, at times, can result in rate reductions, principal forgiveness, extensions, forbearance or other actions, which may cause the related loan to be classified as a TDR.
We utilize certain loan modification programs for borrowers experiencing temporary financial difficulties in our Consumer loan portfolio. These loan modification programs are primarily concentrated in our non-U.S. residential mortgage and non-U.S. installment and revolving portfolios and include short-term (three months or less) interest rate reductions and payment deferrals, which were not part of the terms of the original contract. We sold our U.S. residential mortgage business in 2007 and, as such, do not participate in the U.S. government-sponsored mortgage modification programs.
Our allowance for losses on financing receivables on these modified consumer loans is determined based upon a formulaic approach that estimates the probable losses inherent in the portfolio based upon statistical analyses of the portfolio. Data related to redefault experience is also considered in our overall reserve adequacy review. Once the loan has been modified, it returns to current status (re-aged) only after receipt of at least three consecutive minimum monthly payments or the equivalent cumulative amount, subject to a re-aging limitation of once a year, or twice in a five-year period in accordance with the Federal Financial Institutions Examination Council guidelines on Uniform Retail Credit Classification and Account Management policy issued in June 2000. We believe that the allowance for losses would not be materially different had we not re-aged these accounts.
For commercial loans, we evaluate changes in terms and conditions to determine whether those changes meet the criteria for classification as a TDR on a loan-by-loan basis. In Commercial Lending and Leasing (CLL), these changes primarily include: changes to covenants, short-term payment deferrals and maturity extensions. For these changes, we receive economic consideration, including additional fees and/or increased interest rates, and evaluate them under our normal underwriting standards and criteria. Changes to Real Estate’s loans primarily include maturity extensions, principal payment acceleration, changes to collateral terms, and cash sweeps, which are in addition to, or sometimes in lieu of, fees and rate increases. The determination of whether these changes to the terms and conditions of our commercial loans meet the TDR criteria includes our consideration of all of the relevant facts and circumstances. When the borrower is experiencing financial difficulty, we carefully evaluate these changes to determine whether they meet the form of a concession. In these circumstances, if the change is deemed to be a concession, we classify the loan as a TDR.
When we repossess collateral in satisfaction of a loan, we write down the receivable against the allowance for losses. Repossessed collateral is included in the caption “All other assets” in the Statement of Financial Position and carried at the lower of cost or estimated fair value less costs to sell.
(107)
For Consumer loans, we write off unsecured closed-end installment loans when they are 120 days contractually past due and unsecured open-ended revolving loans at 180 days contractually past due. We write down consumer loans secured by collateral other than residential real estate when such loans are 120 days past due. Consumer loans secured by residential real estate (both revolving and closed-end loans) are written down to the fair value of collateral, less costs to sell, no later than when they become 180 days past due. Unsecured consumer loans in bankruptcy are written off within 60 days of notification of filing by the bankruptcy court or within contractual write-off periods, whichever occurs earlier.
Write-offs on larger-balance impaired commercial loans are based on amounts deemed uncollectible and are reviewed quarterly. Write-offs are determined based on the consideration of many factors, such as expectations of the workout plan or restructuring of the loan, valuation of the collateral and the prioritization of our claim in bankruptcy. Write-offs are recognized against the allowance for losses at the earlier of transaction confirmation (for example, discounted pay-off, restructuring, foreclosure, etc.) or not later than 360 days after initial recognition of a specific reserve for a collateral dependent loan. If foreclosure is probable, the write-off is determined based on the fair value of the collateral less costs to sell. Smaller-balance, homogeneous commercial loans are written off at the earlier of when deemed uncollectible or at 180 days past due.
Partial Sales of Business Interests
Gains or losses on sales of affiliate shares where we retain a controlling financial interest are recorded in equity. Gains or losses on sales that result in our loss of a controlling financial interest are recorded in earnings along with remeasurement gains or losses on any investments in the entity that we retained.
Cash and Equivalents
Debt securities and money market instruments with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities.
Investment Securities
We report investments in debt and marketable equity securities, and certain other equity securities, at fair value. See Note 21 for further information on fair value. Unrealized gains and losses on available-for-sale investment securities are included in shareowners’ equity, net of applicable taxes and other adjustments. We regularly review investment securities for impairment using both quantitative and qualitative criteria.
For debt securities, if we do not intend to sell the security or it is not more likely than not that we will be required to sell the security before recovery of our amortized cost, we evaluate other qualitative criteria to determine whether we do not expect to recover the amortized cost basis of the security, such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. We also evaluate quantitative criteria including determining whether there has been an adverse change in expected future cash flows. If we do not expect to recover the entire amortized cost basis of the security, we consider the security to be other-than-temporarily impaired, and we record the difference between the security’s amortized cost basis and its recoverable amount in earnings and the difference between the security’s recoverable amount and fair value in other comprehensive income. If we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, the security is also considered other-than-temporarily impaired and we recognize the entire difference between the security’s amortized cost basis and its fair value in earnings. For equity securities, we consider the length of time and magnitude of the amount that each security is in an unrealized loss position. If we do not expect to recover the entire amortized cost basis of the security, we consider the security to be other-than-temporarily impaired, and we record the difference between the security’s amortized cost basis and its fair value in earnings.
Realized gains and losses are accounted for on the specific identification method. Unrealized gains and losses on investment securities classified as trading and certain retained interests are included in earnings.
(108)
Inventories
All inventories are stated at the lower of cost or realizable values. Cost for a significant portion of GE U.S. inventories is determined on a last-in, first-out (LIFO) basis. Cost of other GE inventories is determined on a first-in, first-out (FIFO) basis. LIFO was used for 39% and 37% of GE inventories at December 31, 2013 and 2012, respectively. GECC inventories consist of finished products held for sale; cost is determined on a FIFO basis.
Goodwill and Other Intangible Assets
We do not amortize goodwill, but test it at least annually for impairment at the reporting unit level. A reporting unit is the operating segment, or one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We recognize an impairment charge if the carrying amount of a reporting unit exceeds its fair value and the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill. We use a market approach, when available and appropriate, or the income approach, or a combination of both to establish fair values. When a portion of a reporting unit is disposed, goodwill is allocated to the gain or loss on disposition based on the relative fair values of the business or businesses disposed and the portion of the reporting unit that will be retained.
We amortize the cost of other intangibles over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets is generally amortized on a straight-line basis over the asset’s estimated economic life, except that individually significant customer-related intangible assets are amortized in relation to total related sales. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required.
GECC Investment Contracts, Insurance Liabilities and Insurance Annuity Benefits
Certain entities that we consolidate provide guaranteed investment contracts, primarily to states, municipalities and municipal authorities.
Our insurance activities include providing insurance and reinsurance for life and health risks and providing certain annuity products. Two primary product groups are provided: traditional insurance contracts and investment contracts. Insurance contracts are contracts with significant mortality and/or morbidity risks, while investment contracts are contracts without such risks.
For short-duration insurance contracts, including accident and health insurance, we report premiums as earned income over the terms of the related agreements, generally on a pro-rata basis. For traditional long-duration insurance contracts including long-term care, term, whole life and annuities payable for the life of the annuitant, we report premiums as earned income when due.
Premiums received on investment contracts (including annuities without significant mortality risk) are not reported as revenues but rather as deposit liabilities. We recognize revenues for charges and assessments on these contracts, mostly for mortality, contract initiation, administration and surrender. Amounts credited to policyholder accounts are charged to expense.
Liabilities for traditional long-duration insurance contracts represent the present value of such benefits less the present value of future net premiums based on mortality, morbidity, interest and other assumptions at the time the policies were issued or acquired. Liabilities for investment contracts equal the account value, that is, the amount that accrues to the benefit of the contract or policyholder including credited interest and assessments through the financial statement date. For guaranteed investment contracts, the liability is also adjusted as a result of fair value hedging activity.
(109)
Liabilities for unpaid claims and estimated claim settlement expenses represent our best estimate of the ultimate obligations for reported and incurred-but-not-reported claims and the related estimated claim settlement expenses. Liabilities for unpaid claims and estimated claim settlement expenses are continually reviewed and adjusted through current operations.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1 -
Quoted prices for identical instruments in active markets.
Level 2 -
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 -
Significant inputs to the valuation model are unobservable.
We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we have risk management teams that review valuation, including independent price validation for certain instruments. With regard to Level 3 valuations (including instruments valued by third parties), we perform a variety of procedures to assess the reasonableness of the valuations. Such reviews, which may be performed quarterly, monthly or weekly, include an evaluation of instruments whose fair value change exceeds predefined thresholds (and/or does not change) and consider the current interest rate, currency and credit environment, as well as other published data, such as rating agency market reports and current appraisals. These reviews are performed within each business by the asset and risk managers, pricing committees and valuation committees. A detailed review of methodologies and assumptions is performed by individuals independent of the business for individual measurements with a fair value exceeding predefined thresholds. This detailed review may include the use of a third-party valuation firm.
Recurring Fair Value Measurements
The following sections describe the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis.
Investments in Debt and Equity Securities. When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly traded equity securities.
(110)
For large numbers of investment securities for which market prices are observable for identical or similar investment securities but not readily accessible for each of those investments individually (that is, it is difficult to obtain pricing information for each individual investment security at the measurement date), we obtain pricing information from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the methodology of the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The pricing vendor considers available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2 and primarily comprise our portfolio of corporate fixed income, and government, mortgage and asset-backed securities. In infrequent circumstances, our pricing vendors may provide us with valuations that are based on significant unobservable inputs, and in those circumstances we classify the investment securities in Level 3.
Annually, we conduct reviews of our primary pricing vendor to validate that the inputs used in that vendor’s pricing process are deemed to be market observable as defined in the standard. While we are not provided access to proprietary models of the vendor, our reviews have included on-site walk-throughs of the pricing process, methodologies and control procedures for each asset class and level for which prices are provided. Our reviews also include an examination of the underlying inputs and assumptions for a sample of individual securities across asset classes, credit rating levels and various durations, a process we perform each reporting period. In addition, the pricing vendor has an established challenge process in place for all security valuations, which facilitates identification and resolution of potentially erroneous prices. We believe that the prices received from our pricing vendor are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy.
We use non-binding broker quotes and other third-party pricing services as our primary basis for valuation when there is limited, or no, relevant market activity for a specific instrument or for other instruments that share similar characteristics. We have not adjusted the prices we have obtained. Investment securities priced using non-binding broker quotes and other third-party pricing services are included in Level 3. As is the case with our primary pricing vendor, third-party brokers and other third-party pricing services do not provide access to their proprietary valuation models, inputs and assumptions. Accordingly, our risk management personnel conduct reviews of vendors, as applicable, similar to the reviews performed of our primary pricing vendor. In addition, we conduct internal reviews of pricing for all such investment securities quarterly to ensure reasonableness of valuations used in our financial statements. These reviews are designed to identify prices that appear stale, those that have changed significantly from prior valuations, and other anomalies that may indicate that a price may not be accurate. Based on the information available, we believe that the fair values provided by the brokers and other third-party pricing services are representative of prices that would be received to sell the assets at the measurement date (exit prices).
Derivatives. We use closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter markets.
The majority of our derivatives are valued using internal models. The models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts.
Derivative assets and liabilities included in Level 3 primarily represent equity derivatives and interest rate products that contain embedded optionality or prepayment features.
(111)
Non-recurring Fair Value Measurements
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
The following sections describe the valuation methodologies we use to measure financial and non-financial instruments accounted for at fair value on a non-recurring basis and for certain assets within our pension plans and retiree benefit plans at each reporting period, as applicable.
Financing Receivables and Loans Held for Sale. When available, we use observable market data, including pricing on recent closed market transactions, to value loans that are included in Level 2. When this data is unobservable, we use valuation methodologies using current market interest rate data adjusted for inherent credit risk, and such loans are included in Level 3. When appropriate, loans may be valued using collateral values (see Long-Lived Assets below).
Cost and Equity Method Investments. Cost and equity method investments are valued using market observable data such as quoted prices when available. When market observable data is unavailable, investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate and other third-party pricing sources. These investments are generally included in Level 3.
Investments in private equity, real estate and collective funds are valued using net asset values. The net asset values are determined based on the fair values of the underlying investments in the funds. Investments in private equity and real estate funds are generally included in Level 3 because they are not redeemable at the measurement date. Investments in collective funds are included in Level 2.
Long-lived Assets, including Real Estate. Fair values of long-lived assets, including aircraft and real estate, are primarily derived internally and are based on observed sales transactions for similar assets. In other instances, for example, collateral types for which we do not have comparable observed sales transaction data, collateral values are developed internally and corroborated by external appraisal information. Adjustments to third-party valuations may be performed in circumstances where market comparables are not specific to the attributes of the specific collateral or appraisal information may not be reflective of current market conditions due to the passage of time and the occurrence of market events since receipt of the information. For real estate, fair values are based on discounted cash flow estimates that reflect current and projected lease profiles and available industry information about capitalization rates and expected trends in rents and occupancy and are corroborated by external appraisals. These investments are generally included in Level 2 or Level 3.
Retained Investments in Formerly Consolidated Subsidiaries. Upon a change in control that results in deconsolidation of a subsidiary, the fair value measurement of our retained noncontrolling stake is valued using market observable data such as quoted prices when available, or if not available, an income approach, a market approach, or a combination of both approaches as appropriate. In applying these methodologies, we rely on a number of factors, including actual operating results, future business plans, economic projections, market observable pricing multiples of similar businesses and comparable transactions, and possible control premium. These investments are generally included in Level 1 or Level 3, as appropriate, determined at the time of the transaction.
(112)
Accounting Changes
On January 1, 2012, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2011-05, an amendment to Accounting Standards Codification (ASC) 220, Comprehensive Income. ASU 2011-05 introduced a new statement, the Consolidated Statement of Comprehensive Income. The amendments affect only the display of those components of equity categorized as other comprehensive income and do not change existing recognition and measurement requirements that determine net earnings.
On January 1, 2012, we adopted FASB ASU 2011-04, an amendment to ASC 820, Fair Value Measurements. ASU 2011-04 clarifies or changes the application of existing fair value measurements, including: that the highest and best use valuation premise in a fair value measurement is relevant only when measuring the fair value of nonfinancial assets; that a reporting entity should measure the fair value of its own equity instrument from the perspective of a market participant that holds that instrument as an asset; to permit an entity to measure the fair value of certain financial instruments on a net basis rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of such net exposure; that in the absence of a Level 1 input, a reporting entity should apply premiums and discounts when market participants would do so when pricing the asset or liability consistent with the unit of account; and that premiums and discounts related to size as a characteristic of the reporting entity’s holding are not permitted in a fair value measurement. Adopting these amendments had no effect on the financial statements.
On January 1, 2011, we adopted FASB ASU 2009-13 and ASU 2009-14, amendments to ASC 605, Revenue Recognition and ASC 985, Software, respectively, (ASU 2009-13 &14). ASU 2009-13 requires the allocation of consideration to separate components of an arrangement based on the relative selling price of each component. ASU 2009-14 requires certain software-enabled products to be accounted for under the general accounting standards for multiple component arrangements. These amendments were effective for new revenue arrangements entered into or materially modified on or subsequent to January 1, 2011.
Although the adoption of these amendments eliminated the allocation of consideration using residual values, which was applied primarily in our Healthcare segment, the overall impact of adoption was insignificant to our financial statements. In addition, there are no significant changes to the number of components or the pattern and timing of revenue recognition following adoption.
On July 1, 2011, we adopted FASB ASU 2011-02, an amendment to ASC 310, Receivables. This ASU provides guidance for determining whether the restructuring of a debt constitutes a TDR and requires that such actions be classified as a TDR when there is both a concession and the debtor is experiencing financial difficulties. The amendment also clarifies guidance on a creditor’s evaluation of whether it has granted a concession. The amendment applies to restructurings that have occurred subsequent to January 1, 2011. As a result of adopting these amendments on July 1, 2011, we have classified an additional $271 million of financing receivables as TDRs and have recorded an increase of $77 million to our allowance for losses on financing receivables. See Note 6.
NOTE 2. ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE AND DISCONTINUED OPERATIONS
Assets and Liabilities of Businesses Held for Sale
In the first quarter of 2013, we committed to sell certain of our machining and fabrication businesses at Aviation and our Consumer auto and personal loan business in Portugal. We completed the sale of our Consumer auto and personal loan business in Portugal on July 15, 2013 for proceeds of $83 million. We completed the sale of our machining & fabrication business on December 2, 2013 for proceeds of $108 million.
In the third quarter of 2012, we completed the sale of our CLL business in South Korea for proceeds of $168 million.
(113)
In the second quarter of 2012, we committed to sell a portion of our Business Properties portfolio (Business Property) in Real Estate, including certain commercial loans, the origination and servicing platforms and the servicing rights on loans previously securitized by GECC. We completed the sale of Business Property on October 1, 2012 for proceeds of $2,406 million. We deconsolidated substantially all Real Estate securitization entities in the fourth quarter of 2012 as servicing rights related to these entities were transferred to the buyer at closing.
NBCU
On January 28, 2011, we transferred the assets of the NBCU business and Comcast Corporation (Comcast) transferred certain of its assets to a newly formed entity, NBCUniversal LLC (NBCU LLC). In connection with the transaction, we received $6,176 million in cash from Comcast (which included $49 million of transaction-related cost reimbursements) and a 49% interest in NBCU LLC. Comcast held the remaining 51% interest in NBCU LLC. In connection with the transaction, we also entered into a number of agreements with Comcast governing the operation of the venture and transitional services, employee, tax and other matters. In addition, Comcast is obligated to share with us potential tax savings associated with their purchase of its 51% NBCU LLC member interest, if realized. We did not recognize these potential future payments as consideration for the sale, but record such payments in income as they are received.
Following the transaction, we deconsolidated NBCU and we accounted for our investment in NBCU LLC under the equity method. We recognized a pre-tax gain on the sale of $3,705 million ($526 million after tax). In connection with the sale, we recorded income tax expense of $3,179 million, reflecting the low tax basis in our investment in the NBCU business and the recognition of deferred tax liabilities related to our 49% investment in NBCU LLC. As our investment in NBCU LLC was structured as a partnership for U.S. tax purposes, U.S. taxes were recorded separately from the equity investment.
At December 31, 2012, the carrying amount of our equity investment in NBCU LLC was $18,887 million, reported in the “All other assets” caption in our Statement of Financial Position. At December 31, 2012, deferred tax liabilities related to our NBCU LLC investment were $4,937 million, and were reported in the “Deferred income taxes” caption in our Statement of Financial Position.
On March 19, 2013, we closed the transaction to sell our remaining 49% common equity interest in NBCU LLC to Comcast for total consideration of $16,722 million, consisting of $11,997 million in cash, $4,000 million in Comcast guaranteed debt and $725 million in preferred stock. The $4,000 million of debt and the $725 million of preferred shares were both issued by a wholly-owned subsidiary of Comcast. During the first quarter of 2013, we sold both of these investments at approximately par value. Consistent with the initial purchase of the 51% interest of NBCU LLC, Comcast is obligated to share with us potential tax savings associated with their purchase of our remaining 49% NBCU LLC interest, if realized. GECC also sold real estate comprising certain floors located at 30 Rockefeller Center, New York and the CNBC property located in Englewood Cliffs, New Jersey to affiliates of NBCU LLC for $1,430 million in cash.
As a result of the transactions, we recognized pre-tax gains of $1,096 million ($825 million after tax) on the sale of our 49% common equity interest in NBCU LLC and $921 million ($564 million after tax) on the sale of GECC’s real estate properties.
Discontinued Operations
Discontinued operations primarily comprised GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), our U.S. recreational vehicle and marine equipment financing business (Consumer RV Marine), Consumer Mexico, Consumer Singapore, our Consumer home lending operations in Australia and New Zealand (Australian Home Lending), our Consumer mortgage business in Ireland (Consumer Ireland), our CLL trailer services business in Europe (CLL Trailer Services) and our Consumer banking business in Russia (Consumer Russia). Associated results of operations, financial position and cash flows are separately reported as discontinued operations for all periods presented.
(114)
Summarized financial information for discontinued operations is shown below.
(In millions)
Operations
Total revenues and other income (loss)
$
$
$
1,074
Earnings (loss) from discontinued operations
before income taxes
$
(494)
$
(586)
$
(93)
Benefit (provision) for income taxes
Earnings (loss) from discontinued operations,
net of taxes
$
(339)
$
(388)
$
Disposal
Gain (loss) on disposal before income taxes
$
(2,027)
$
(792)
$
(329)
Benefit (provision) for income taxes
Gain (loss) on disposal, net of taxes
$
(1,781)
$
(595)
$
Earnings (loss) from discontinued operations,
net of taxes(a)
$
(2,120)
$
(983)
$
(a)
The sum of GE industrial earnings (loss) from discontinued operations, net of taxes, and GECC earnings (loss) from discontinued operations, net of taxes, is reported as GE earnings (loss) from discontinued operations, net of taxes, on the Statement of Earnings.
December 31 (In millions)
Assets
Cash and equivalents
$
$
Financing receivables - net
Property, plant and equipment - net
Other
1,390
1,625
Assets of discontinued operations
$
2,339
$
3,315
Liabilities
Deferred income taxes
$
$
Other
3,685
2,361
Liabilities of discontinued operations
$
3,933
$
2,733
Other assets at December 31, 2013 and 2012, primarily comprised a deferred tax asset for a loss carryforward, which expires principally in 2017 and in part in 2019, related to the sale of our GE Money Japan business.
GE Money Japan
During the third quarter of 2008, we completed the sale of GE Money Japan, which included our Japanese personal loan business. Under the terms of the sale, we reduced the proceeds from the sale for estimated refund claims in excess of the statutory interest rate. Proceeds from the sale were to be increased or decreased based on the actual claims experienced in accordance with loss-sharing terms specified in the sale agreement, with all claims in excess of 258 billion Japanese yen (approximately $3,000 million) remaining our responsibility. The underlying portfolio to which this obligation relates is in runoff status and interest rates were capped for all designated accounts by mid-2009. In the third quarter of 2010, we were required to begin making reimbursements under this arrangement.
(115)
Overall, excess interest refund claims activity has been difficult to predict and subject to several adverse factors, including the challenging global economic conditions over the last few years, the financial status of other Japanese personal lenders (including the 2010 bankruptcy of a large independent personal loan company), substantial ongoing legal advertising and consumer behavior. Since our disposition of the business, incoming claims have continued to decline; however, the pace and pattern of this decline are highly variable, difficult to predict and can have a significant effect on our estimate of this refund claims obligation.
The terms of the sale agreement provided us with a buyout option to extinguish this obligation at March 31, 2014, and on a biennial basis thereafter if we elected not to exercise our option in 2014. On February 26, 2014, we reached an agreement with the buyer in which we will pay 175 billion Japanese yen (approximately $1,700 million) to extinguish this obligation.
Our reserve for these refund claims increased from $700 million at December 31, 2012 to $1,836 million at December 31, 2013, as increases to the reserve of $1,645 million during 2013, including $1,440 million in the fourth quarter, primarily reflecting the February 26, 2014 agreement, were partially offset by refund claims payments of $361 million and the effects of a strengthening U.S. dollar against the Japanese yen of $148 million. Our reserve at December 31, 2013 represents the estimated required reimbursements for refund claims through March 31, 2014 in accordance with the 2008 sale agreement and the amount provided for under the 2014 agreement with the buyer.
GE Money Japan earnings (loss) from discontinued operations, net of taxes, were $(1,636) million, $(649) million and $(238) million in 2013, 2012 and 2011, respectively.
WMC
During the fourth quarter of 2007, we completed the sale of WMC, our U.S. mortgage business. WMC substantially discontinued all new loan originations by the second quarter of 2007, and is not a loan servicer. In connection with the sale, WMC retained certain representation and warranty obligations related to loans sold to third parties prior to the disposal of the business and contractual obligations to repurchase previously sold loans as to which there was an early payment default. All claims received by WMC for early payment default have either been resolved or are no longer being pursued.
Pending repurchase claims based upon representations and warranties made in connection with loan sales were $5,643 million at December 31, 2013, $5,357 million at December 31, 2012 and $705 million at December 31, 2011. Pending claims represent those active repurchase claims that identify the specific loans tendered for repurchase and, for each loan, the alleged breach of a representation or warranty. As such, they do not include unspecified repurchase claims, such as the Litigation Claims discussed below, or claims relating to breaches of representations that were made more than six years before WMC was notified of the claim. WMC believes that these repurchase claims do not meet the substantive and procedural requirements for tender under the governing agreements, would be disallowed in legal proceedings under applicable statutes of limitations or are otherwise invalid. The amounts reported in pending claims reflect the purchase price or unpaid principal balances of the loans at the time of purchase and do not give effect to pay downs, accrued interest or fees, or potential recoveries based upon the underlying collateral. In the fourth quarter of 2013, WMC entered into settlements that reduce its exposure on claims asserted in certain securitizations. Pending claim and Litigation Claim amounts reported herein reflect the impact of these settlements. Historically, a small percentage of the total loans WMC originated and sold have been treated as “validly tendered,” meaning the loan was subject to repurchase because there was a breach of a representation and warranty that materially and adversely affected the value of the loan, and the demanding party met all other procedural and substantive requirements for repurchase.
(116)
Reserves related to WMC pending and estimated future loan repurchase claims were $800 million at December 31, 2013, reflecting a net increase to reserves in the year ended December 31, 2013 of $167 million due to incremental claim activity and updates to WMC’s estimate of future losses. The amount of the reserve is based upon pending loan repurchase requests, WMC’s historical loss experience and evaluation of claim activity on loans tendered for repurchase.
The following table provides a roll forward of the reserve and pending repurchase claims.
Reserve
Pending claims
(In millions)
(In millions)
Balance at January 1
$
$
Balance at January 1
$ 5,357
$
Provision
New claims
1,259
4,838
Claim resolutions/
rescissions
(187 )
(10 )
Claim resolutions/
rescissions
(973 )
(186 )
Balance at December 31
$
$
Balance at December 31
$ 5,643
$ 5,357
Given the significant recent activity in pending claims and related litigation filed in connection with such claims, it is difficult to assess whether future losses will be consistent with WMC’s past experience. Adverse changes to WMC’s assumptions supporting the reserve for pending and estimated future loan repurchase claims may result in an increase to these reserves. For example, a 100% increase in the estimated loss rate on loans tendered (and assuming settlements at current demands), would result in an increase to the reserves of approximately $525 million.
As of December 31, 2013, there were 17 lawsuits involving claims made against WMC arising from alleged breaches of representations and warranties on mortgage loans included in 15 securitizations. Subsequent to December 31, 2013, three of these lawsuits were dismissed leaving 14 lawsuits remaining. WMC initiated one of the cases as the plaintiff; in the other cases WMC is a defendant. The adverse parties in these cases are securitization trustees or parties claiming to act on their behalf. In 12 of these lawsuits, the adverse parties seek compensatory or other relief for mortgage loans beyond those included in WMC’s previously discussed pending claims at December 31, 2013 (Litigation Claims). These Litigation Claims consist of sampling-based claims in two cases on approximately $600 million of mortgage loans and, in the other ten cases, claims for repurchase or damages based on the alleged failure to provide notice of defective loans, breach of a corporate representation and warranty, and/or non-specific claims for rescissionary damages on approximately $6,200 million of mortgage loans at December 31, 2013. The dismissal of a lawsuit subsequent to December 31, 2013 decreased the pending claims amount by $123 million and the Litigation Claims amount by $318 million. These claims reflect the purchase price or unpaid principal balances of the loans at the time of purchase and do not give effect to pay downs, accrued interest or fees, or potential recoveries based upon the underlying collateral. As noted above, WMC believes that the Litigation Claims conflict with the governing agreements and applicable law. As a result, WMC has not included the Litigation Claims in its pending claims or in its estimates of future loan repurchase requests and holds no related reserve as of December 31, 2013.
(117)
At this point, WMC is unable to develop a meaningful estimate of reasonably possible loss in connection with the Litigation Claims described above due to a number of factors, including the extent to which courts will agree with the theories supporting the Litigation Claims. The case law on these issues is unsettled, and while several courts have supported some of the theories underlying WMC’s legal defenses, other courts have rejected them. There are a number of pending cases, including WMC cases, which, in the coming months, could provide more certainty regarding the legal status of these claims. An adverse court decision on any of the theories supporting the Litigation Claims could increase WMC’s exposure in some or all of the 14 lawsuits, result in a reclassification of some or all of the Litigation Claims to pending claims and provoke new claims and lawsuits on additional loans. However, WMC continues to believe that it has defenses to all the claims asserted in litigation, including, for example, causation and materiality requirements, limitations on remedies for breach of representations and warranties, and the applicable statutes of limitations. To the extent WMC is required to repurchase loans, WMC’s loss also would be affected by several factors, including pay downs, accrued interest and fees, and the value of the underlying collateral. It is not possible to predict the outcome or impact of these defenses and other factors, any one of which could materially affect the amount of any loss ultimately incurred by WMC on these claims.
WMC has received claims on approximately $2,200 million of mortgage loans after the expiration of the statute of limitations as of December 31, 2013, $1,700 million of which are also included as Litigation Claims. WMC has also received unspecified indemnification demands from depositors/underwriters/sponsors of residential mortgage-backed securities (RMBS) in connection with lawsuits brought by RMBS investors concerning alleged misrepresentations in the securitization offering documents to which WMC is not a party. WMC believes that it has defenses to these demands.
The reserve estimates reflect judgment, based on currently available information, and a number of assumptions, including economic conditions, claim activity, pending and threatened litigation, indemnification demands, estimated repurchase rates, and other activity in the mortgage industry. Actual losses arising from claims against WMC could exceed the reserve amount and additional claims and lawsuits could result if actual claim rates, governmental actions, litigation and indemnification activity, adverse court decisions, settlement activity, actual repurchase rates or losses WMC incurs on repurchased loans differ from its assumptions. It is difficult to develop a meaningful estimate of aggregate possible claims exposure because of uncertainties surrounding economic conditions, the ability and propensity of mortgage loan holders to present and resolve valid claims, governmental actions, mortgage industry activity and litigation, court decisions affecting WMC’s defenses, and pending and threatened litigation and indemnification demands against WMC.
WMC revenues and other income (loss) from discontinued operations were $(346) million, $(500) million and $(42) million in 2013, 2012 and 2011, respectively. In total, WMC’s earnings (loss) from discontinued operations, net of taxes, were $(232) million, $(337) million and $(34) million in 2013, 2012 and 2011, respectively.
Other Financial Services
In the fourth quarter of 2013, we announced the planned disposition of Consumer Russia and classified the business as discontinued operations. Consumer Russia revenues and other income (loss) from discontinued operations were $260 million, $276 million and $280 million in 2013, 2012 and 2011, respectively. Consumer Russia earnings (loss) from discontinued operations, net of taxes, were $(193) million (including a $170 million loss on the planned disposal), $33 million and $87 million in 2013, 2012 and 2011, respectively.
In the first quarter of 2013, we announced the planned disposition of CLL Trailer Services and classified the business as discontinued operations. We completed the sale in the fourth quarter of 2013 for proceeds of $528 million. CLL Trailer Services revenues and other income (loss) from discontinued operations were $271 million, $399 million and $464 million in 2013, 2012 and 2011, respectively. CLL Trailer Services earnings (loss) from discontinued operations, net of taxes, were $(2) million (including an $18 million gain on disposal), $22 million and $17 million in 2013, 2012 and 2011, respectively.
(118)
In the first quarter of 2012, we announced the planned disposition of Consumer Ireland and classified the business as discontinued operations. We completed the sale in the third quarter of 2012 for proceeds of $227 million. Consumer Ireland revenues and other income (loss) from discontinued operations were an insignificant amount, $7 million and $13 million in 2013, 2012 and 2011, respectively. Consumer Ireland earnings (loss) from discontinued operations, net of taxes, were $6 million, $(195) million (including a $121 million loss on disposal) and $(153) million in 2013, 2012 and 2011, respectively.
In the second quarter of 2011, we entered into an agreement to sell our Australian Home Lending operations and classified it as discontinued operations. As a result, we recognized an after-tax loss of $148 million in 2011. We completed the sale in the third quarter of 2011 for proceeds of approximately $4,577 million. Australian Home Lending revenues and other income (loss) from discontinued operations were an insignificant amount, $4 million and $250 million in 2013, 2012 and 2011, respectively. Australian Home Lending earnings (loss) from discontinued operations, net of taxes, were $14 million, $6 million and $(65) million in 2013, 2012 and 2011, respectively.
In the first quarter of 2011, we entered into an agreement to sell our Consumer Singapore business for $692 million. The sale was completed in the second quarter of 2011. Consumer Singapore revenues and other income (loss) from discontinued operations were $1 million, an insignificant amount and $30 million in 2013, 2012 and 2011, respectively. Consumer Singapore earnings (loss) from discontinued operations, net of taxes, were $1 million, $2 million and $333 million (including a $319 million gain on disposal) in 2013, 2012 and 2011, respectively.
The Consumer RV Marine and Consumer Mexico dispositions were completed during the first quarter and the second quarter of 2011, respectively, for proceeds of $2,365 million and $1,943 million, respectively. Consumer RV Marine revenues and other income (loss) from discontinued operations were an insignificant amount, $1 million and $11 million in 2013, 2012 and 2011, respectively. Consumer RV Marine earnings (loss) from discontinued operations, net of taxes, were $(1) million, an insignificant amount and $2 million in 2013, 2012 and 2011, respectively. Consumer Mexico revenues and other income (loss) from discontinued operations were an insignificant amount, $2 million and $67 million in 2013, 2012 and 2011, respectively. Consumer Mexico earnings (loss) from discontinued operations, net of taxes, were $(11) million, $(12) million and $30 million in 2013, 2012 and 2011, respectively.
GE Industrial
GE industrial earnings (loss) from discontinued operations, net of taxes, were $(66) million, $147 million and $(1) million in 2013, 2012 and 2011, respectively. During the fourth quarter of 2013, we recorded an increase to our tax reserve related to Spanish taxes for the years prior to our 2007 disposition of our Plastics business. During the third quarter of 2012, we resolved with the Internal Revenue Service the tax treatment of the 2007 disposition of our Plastics business, resulting in a tax benefit of $148 million. The sum of GE industrial earnings (loss) from discontinued operations, net of taxes, and GECC earnings (loss) from discontinued operations, net of taxes, is reported as GE industrial earnings (loss) from discontinued operations, net of taxes, on the Statement of Earnings.
(119)
NOTE 3. INVESTMENT SECURITIES
Substantially all of our investment securities are classified as available-for-sale. These comprise mainly investment-grade debt securities supporting obligations to annuitants and policyholders in our run-off insurance operations and supporting obligations to holders of guaranteed investment contracts (GICs) in Trinity and investments held in our CLL business collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries. We do not have any securities classified as held-to-maturity.
Gross
Gross
Gross
Gross
Amortized
unrealized
unrealized
Estimated
Amortized
unrealized
unrealized
Estimated
December 31 (In millions)
cost
gains
losses
fair value
cost
gains
losses
fair value
GE
Debt
U.S. corporate
$
$
$
-
$
$
$
-
$
-
$
Corporate - non-U.S.
-
(1)
-
-
Equity
Available-for-sale
(41)
-
-
Trading
-
-
-
-
(42)
-
-
GECC
Debt
U.S. corporate
19,600
2,323
(217)
21,706
20,233
4,201
(302)
24,132
State and municipal
4,245
(191)
4,289
4,084
(113)
4,546
Residential mortgage-
backed(a)
1,819
(48)
1,910
2,198
(119)
2,262
Commercial mortgage-
backed
2,929
(82)
3,035
2,930
(95)
3,094
Asset-backed
7,373
(46)
7,387
5,784
(77)
5,738
Corporate - non-U.S.
1,741
(86)
1,758
2,391
(126)
2,415
Government - non-U.S.
2,336
(7)
2,410
1,617
(3)
1,763
U.S. government and
federal agency
(27)
3,462
-
3,565
Retained interests
-
-
Equity
Available-for-sale
(3)
(3)
Trading
-
-
-
-
41,136
3,233
(707)
43,662
43,533
5,744
(838)
48,439
Eliminations
(4)
-
-
(4)
(3)
-
-
(3)
Total
$
41,474
$
3,256
$
(749)
$
43,981
$
43,604
$
5,744
$
(838)
$
48,510
(a)
Substantially collateralized by U.S. mortgages. Of our total RMBS portfolio at December 31, 2013, $1,224 million relates to securities issued by government-sponsored entities and $686 million relates to securities of private label issuers. Securities issued by private label issuers are collateralized primarily by pools of individual direct mortgage loans of financial institutions.
The fair value of investment securities decreased to $43,981 million at December 31, 2013, from $48,510 million at December 31, 2012, primarily due to the sale of U.S. government and federal agency securities at our treasury operations and the impact of higher interest rates.
(120)
The following tables present the estimated fair values and gross unrealized losses of our available-for-sale investment securities.
In loss position for
Less than 12 months
12 months or more
Gross
Gross
Estimated
unrealized
Estimated
unrealized
December 31 (In millions)
fair value
(a)
losses
(a)(b)
fair value
losses
(b)
Debt
U.S. corporate
$
2,170
$
(122)
$
$
(95)
State and municipal
1,076
(82)
(109)
Residential mortgage-backed
(11)
(37)
Commercial mortgage-backed
(24)
(58)
Asset-backed
(2)
(44)
Corporate - non-U.S.
(4)
(83)
Government - non-U.S.
1,479
(6)
(1)
U.S. government and federal agency
(27)
-
Retained interests
-
-
-
Equity
(44)
-
-
Total
$
6,057
$
(322)
$
3,284
$
(427)
Debt
U.S. corporate
$
$
(7)
$
$
(295)
State and municipal
(2)
(111)
Residential mortgage-backed
(1)
(118)
Commercial mortgage-backed
-
(95)
Asset-backed
(1)
(76)
Corporate - non-U.S.
(8)
(118)
Government - non-U.S.
(1)
(2)
U.S. government and federal agency
-
-
-
-
Retained interests
-
-
-
Equity
(3)
-
-
Total
$
1,130
$
(23)
$
4,106
$
(815)
(a)
The December 31, 2013 table includes the estimated fair value of and gross unrealized losses on Corporate-non-U.S. and Equity securities held by GE. The estimated fair value of and gross unrealized losses on Corporate-non-U.S. securities held by GE were $12 million and $(1) million, respectively. The estimated fair value of and gross unrealized losses on Equity securities held by GE were $222 million and $(41) million, respectively.
(b)
Includes gross unrealized losses at December 31, 2013 of $(99) million related to securities that had other-than-temporary impairments previously recognized.
We regularly review investment securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell the vast majority of our debt securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell these securities before recovery of our amortized cost. We believe that the unrealized loss associated with our equity securities will be recovered within the foreseeable future.
Substantially all of our U.S. corporate debt securities are rated investment grade by the major rating agencies. We evaluate U.S. corporate debt securities based on a variety of factors, such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. In the event a U.S. corporate debt security is deemed to be other-than-temporarily impaired, we isolate the credit portion of the impairment by comparing the present value of our expectation of cash flows to the amortized cost of the security. We discount the cash flows using the original effective interest rate of the security.
(121)
The vast majority of our RMBS have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deals. Of our total RMBS at December 31, 2013 and 2012, approximately $378 million and $471 million, respectively, relate to residential subprime credit, primarily supporting our guaranteed investment contracts. These are collateralized primarily by pools of individual, direct mortgage loans (a majority of which were originated in 2006 and 2005), not other structured products such as collateralized debt obligations. In addition, of the total residential subprime credit exposure at December 31, 2013 and 2012, approximately $285 million and $219 million, respectively, was insured by Monoline insurers (Monolines) on which we continue to place reliance.
Our commercial mortgage-backed securities (CMBS) portfolio is collateralized by both diversified pools of mortgages that were originated for securitization (conduit CMBS) and pools of large loans backed by high-quality properties (large loan CMBS), a majority of which were originated in 2007 and 2006. The vast majority of the securities in our CMBS portfolio have investment-grade credit ratings and are in a senior position in the capital structure of the deals.
Our asset-backed securities (ABS) portfolio is collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries, as well as a variety of diversified pools of assets such as student loans and credit cards. The vast majority of our ABS are in a senior position in the capital structure of the deals. In addition, substantially all of the securities that are below investment-grade are in an unrealized gain position.
For ABS and RMBS, we estimate the portion of loss attributable to credit using a discounted cash flow model that considers estimates of cash flows generated from the underlying collateral. Estimates of cash flows consider credit risk, interest rate and prepayment assumptions that incorporate management’s best estimate of key assumptions of the underlying collateral, including default rates, loss severity and prepayment rates. For CMBS, we estimate the portion of loss attributable to credit by evaluating potential losses on each of the underlying loans in the security. Collateral cash flows are considered in the context of our position in the capital structure of the deals. Assumptions can vary widely depending upon the collateral type, geographic concentrations and vintage.
If there has been an adverse change in cash flows for RMBS, management considers credit enhancements such as monoline insurance (which are features of a specific security). In evaluating the overall credit worthiness of the Monoline, we use an analysis that is similar to the approach we use for corporate bonds, including an evaluation of the sufficiency of the Monoline’s cash reserves and capital, ratings activity, whether the Monoline is in default or default appears imminent, and the potential for intervention by an insurance or other regulator.
During 2013, we recorded pre-tax, other-than-temporary impairments of $798 million, of which $767 million was recorded through earnings ($15 million relates to equity securities) and $31 million was recorded in accumulated other comprehensive income (AOCI). At January 1, 2013, cumulative impairments recognized in earnings associated with debt securities still held were $588 million. During 2013, we recognized first-time impairments of $389 million and incremental charges on previously impaired securities of $336 million. Of these cumulative amounts recognized through December 31, 2013, $120 million related to securities that were subsequently sold before the end of 2013.
During 2012, we recorded pre-tax, other-than-temporary impairments of $193 million, of which $141 million was recorded through earnings ($39 million relates to equity securities) and $52 million was recorded in AOCI. At January 1, 2012, cumulative impairments recognized in earnings associated with debt securities still held were $726 million. During 2012, we recognized first-time impairments of $27 million and incremental charges on previously impaired securities of $40 million. Of these cumulative amounts recognized through December 31, 2012, $219 million related to securities that were subsequently sold before the end of 2012.
During 2011, we recorded pre-tax, other-than-temporary impairments of $467 million, of which $387 million was recorded through earnings ($81 million relates to equity securities) and $80 million was recorded in AOCI. At January 1, 2011, cumulative impairments recognized in earnings associated with debt securities still held were $500 million. During 2011, we recognized first-time impairments of $58 million and incremental charges on previously impaired securities of $230 million. Of these cumulative amounts recognized through December 31, 2011, $62 million related to securities that were subsequently sold before the end of 2011.
(122)
Contractual Maturities of Investment in Available-for-Sale Debt Securities (Excluding Mortgage-Backed
and Asset-Backed Securities)
Amortized
Estimated
(In millions)
cost
fair value
Due
Within one year
$
2,397
$
2,417
After one year through five years
3,303
3,506
After five years through ten years
4,984
5,156
After ten years
18,024
19,901
We expect actual maturities to differ from contractual maturities because borrowers have the right to call or prepay certain obligations.
Supplemental information about gross realized gains and losses on available-for-sale investment securities follows.
(In millions)
GE
Gains
$
$ -
$ -
Losses, including impairments
(20 )
(1 )
-
Net
(19 )
(1 )
-
GECC
Gains
Losses, including impairments
(762 )
(211 )
(402 )
Net
(523 )
(34 )
(197 )
Total
$ (542 )
$ (35 )
$ (197 )
Although we generally do not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders. In some of our bank subsidiaries, we maintain a certain level of purchases and sales volume principally of non-U.S. government debt securities. In these situations, fair value approximates carrying value for these securities.
Proceeds from investment securities sales and early redemptions by issuers totaled $19,276 million, $12,745 million and $15,606 million in 2013, 2012 and 2011, respectively, principally from the sale of Comcast guaranteed debt and short-term securities in our bank subsidiaries and treasury operations.
We recognized pre-tax gains on trading securities of $48 million, $20 million and $22 million in 2013, 2012 and 2011, respectively.
(123)
NOTE 4. CURRENT RECEIVABLES
Consolidated(a)
GE(b)
December 31 (In millions)
Power & Water
$
3,895
$
2,977
$
2,335
$
1,700
Oil & Gas
5,444
4,656
3,134
1,872
Energy Management
1,540
1,600
Aviation
4,307
4,756
2,260
2,493
Healthcare
4,398
4,253
2,029
2,012
Transportation
Appliances & Lighting
1,337
1,286
Corporate items & eliminations
21,835
20,364
11,412
9,730
Less Allowance for Losses
(447)
(462)
(442)
(456)
Total
$
21,388
$
19,902
$
10,970
$
9,274
(a)
Included GE industrial customer receivables factored through a GECC affiliate and reported as financing receivables by GECC. See Note 26.
(b)
GE current receivables balances at December 31, 2013 and 2012, before allowance for losses, included $7,441 million and $6,283 million, respectively, from sales of goods and services to customers, and $37 million and $70 million at December 31, 2013 and 2012, respectively, from transactions with associated companies.
GE current receivables of $127 million and $114 million at December 31, 2013 and 2012, respectively, arose from sales, principally of Aviation goods and services, on open account to various agencies of the U.S. government. As a percentage of GE revenues, approximately 4% of GE sales of goods and services were to the U.S. government in 2013, 2012 and 2011.
NOTE 5. INVENTORIES
December 31 (In millions)
GE
Raw materials and work in process
$
10,220
$
9,295
Finished goods
6,726
6,020
Unbilled shipments
17,530
15,693
Less revaluation to LIFO
(273)
(398)
17,257
15,295
GECC
Finished goods
Total
$
17,325
$
15,374
(124)
NOTE 6. GECC FINANCING RECEIVABLES, ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES AND SUPPLEMENTAL INFORMATION ON CREDIT QUALITY
December 31 (In millions)
Loans, net of deferred income(a)
$
231,268
$
240,634
Investment in financing leases, net of deferred income
26,939
32,471
258,207
273,105
Less allowance for losses
(5,178)
(4,944)
Financing receivables - net(b)
$
253,029
$
268,161
(a)
Deferred income was $2,013 million and $2,184 million at December 31, 2013 and 2012, respectively.
(b)
Financing receivables at December 31, 2013 and 2012 included $544 million and $750 million, respectively, relating to loans that had been acquired in a transfer but have been subject to credit deterioration since origination.
GECC financing receivables include both loans and financing leases. Loans represent transactions in a variety of forms, including revolving charge and credit, mortgages, installment loans, intermediate-term loans and revolving loans secured by business assets. The portfolio includes loans carried at the principal amount on which finance charges are billed periodically, and loans carried at gross book value, which includes finance charges.
Investment in financing leases consists of direct financing and leveraged leases of aircraft, railroad rolling stock, autos, other transportation equipment, data processing equipment, medical equipment, commercial real estate and other manufacturing, power generation, and commercial equipment and facilities.
For federal income tax purposes, the leveraged leases and the majority of the direct financing leases are leases in which GECC depreciates the leased assets and is taxed upon the accrual of rental income. Certain direct financing leases are loans for federal income tax purposes. For these transactions, GECC is taxed only on the portion of each payment that constitutes interest, unless the interest is tax-exempt (e.g., certain obligations of state governments).
Investment in direct financing and leveraged leases represents net unpaid rentals and estimated unguaranteed residual values of leased equipment, less related deferred income. GECC has no general obligation for principal and interest on notes and other instruments representing third-party participation related to leveraged leases; such notes and other instruments have not been included in liabilities but have been offset against the related rentals receivable. The GECC share of rentals receivable on leveraged leases is subordinate to the share of other participants who also have security interests in the leased equipment. For federal income tax purposes, GECC is entitled to deduct the interest expense accruing on non-recourse financing related to leveraged leases.
(125)
Net Investment in Financing Leases
Total financing leases
Direct financing leases(a)
Leveraged leases(b)
December 31 (In millions)
Total minimum lease payments receivable
$
29,970
$
36,451
$
24,571
$
29,416
$
5,399
$
7,035
Less principal and interest on third-party
non-recourse debt
(3,480)
(4,662)
-
-
(3,480)
(4,662)
Net rentals receivables
26,490
31,789
24,571
29,416
1,919
2,373
Estimated unguaranteed residual value
of leased assets
5,073
6,346
3,067
4,272
2,006
2,074
Less deferred income
(4,624)
(5,664)
(3,560)
(4,453)
(1,064)
(1,211)
Investment in financing leases, net of
deferred income
26,939
32,471
24,078
29,235
2,861
3,236
Less amounts to arrive at net investment
Allowance for losses
(202)
(198)
(192)
(193)
(10)
(5)
Deferred taxes
(4,075)
(4,506)
(1,783)
(2,245)
(2,292)
(2,261)
Net investment in financing leases
$
22,662
$
27,767
$
22,103
$
26,797
$
$
(a)
Included $317 million and $330 million of initial direct costs on direct financing leases at December 31, 2013 and 2012, respectively.
(b)
Included pre-tax income of $31 million and $81 million and income tax of $11 million and $32 million during 2013 and 2012, respectively. Net investment credits recognized on leveraged leases during 2013 and 2012 were insignificant.
Contractual Maturities
Total
Net rentals
(In millions)
loans
receivable
Due in
$
54,971
$
8,184
19,270
6,114
19,619
4,209
17,281
2,733
14,714
1,798
2019 and later
43,121
3,452
168,976
26,490
Consumer revolving loans
62,292
-
Total
$
231,268
$
26,490
We expect actual maturities to differ from contractual maturities.
(126)
The following tables provide additional information about our financing receivables and related activity in the allowance for losses for our Commercial, Real Estate and Consumer portfolios.
December 31 (In millions)
Commercial
CLL
Americas
$
68,585
$
72,517
Europe (a)
37,962
37,037
Asia
9,469
11,401
Other (a)
Total CLL
116,467
121,558
Energy Financial Services
3,107
4,851
GE Capital Aviation Services (GECAS)
9,377
10,915
Other
Total Commercial
129,269
137,810
Real Estate
19,899
20,946
Consumer
Non-U.S. residential mortgages
30,501
33,350
Non-U.S. installment and revolving credit
13,677
17,816
U.S. installment and revolving credit
55,854
50,853
Non-U.S. auto
2,054
4,260
Other
6,953
8,070
Total Consumer
109,039
114,349
Total financing receivables
258,207
273,105
Less allowance for losses
(5,178)
(4,944)
Total financing receivables - net
$
253,029
$
268,161
(a)
During 2013, we transferred our European equipment services portfolio from CLL Other to CLL Europe. Prior-period amounts were reclassified to conform to the current period presentation.
(127)
Allowance for Losses on Financing Receivables
Balance at
Provision
Balance at
January 1,
charged to
Gross
December 31,
(In millions)
operations
Other
(a)
write-offs
(b)
Recoveries
(b)
Commercial
CLL
Americas
$
$
$
(1)
$
(422)
$
$
Europe
(441)
Asia
(11)
(115)
Other
(3)
-
(3)
-
-
Total CLL
1,021
-
(981)
Energy Financial
Services
(1)
-
-
-
GECAS
-
-
-
Other
(1)
-
(2)
Total Commercial
1,041
-
(983)
1,005
Real Estate
(4)
(163)
Consumer
Non-U.S. residential mortgages
(458)
Non-U.S. installment
and revolving credit
(93)
(967)
U.S. installment and revolving credit
2,282
3,006
(51)
(2,954)
2,823
Non-U.S. auto
(13)
(126)
Other
(236)
Total Consumer
3,583
4,049
(136)
(4,741)
1,226
3,981
Total
$
4,944
$
4,818
$
(140)
$
(5,887)
$
1,443
$
5,178
(a)
Other primarily included dispositions and the effects of currency exchange.
(b)
Net write-offs (gross write-offs less recoveries) in certain portfolios may exceed the beginning allowance for losses as a result of losses that are incurred subsequent to the beginning of the fiscal year due to information becoming available during the current year, which may identify further deterioration on existing financing receivables.
(128)
Balance at
Provision
Balance at
January 1,
charged to
Gross
December 31,
(In millions)
operations
Other
(a)
write-offs
(b)
Recoveries
(b)
Commercial
CLL
Americas
$
$
$
(51)
$
(568)
$
$
Europe
(3)
(390)
Asia
(3)
(134)
Other
(1)
(10)
-
Total CLL
1,450
(58)
(1,102)
1,021
Energy Financial
Services
-
(24)
GECAS
-
(13)
-
Other
(20)
(17)
Total Commercial
1,530
(78)
(1,156)
1,041
Real Estate
1,089
(44)
(810)
Consumer
Non-U.S. residential mortgages
(261)
Non-U.S. installment
and revolving credit
(974)
U.S. installment and revolving credit
2,008
2,666
(24)
(2,906)
2,282
Non-U.S. auto
(4)
(146)
Other
(257)
Total Consumer
3,543
3,218
(4,544)
1,344
3,583
Total
$
6,162
$
3,832
$
(100)
$
(6,510)
$
1,560
$
4,944
(a)
Other primarily included transfers to held-for-sale and the effects of currency exchange.
(b)
Net write-offs (gross write-offs less recoveries) in certain portfolios may exceed the beginning allowance for losses as a result of losses that are incurred subsequent to the beginning of the fiscal year due to information becoming available during the current year, which may identify further deterioration on existing financing receivables.
(129)
Balance at
Provision
Balance at
January 1,
charged to
Gross
December 31,
(In millions)
operations
(a)
Other
(b)
write-offs
(c)
Recoveries
(c)
Commercial
CLL
Americas
$
1,288
$
$
(96)
$
(700)
$
$
Europe
(5)
(286)
Asia
(214)
Other
(3)
(2)
-
Total CLL
1,945
(91)
(1,202)
1,450
Energy Financial
Services
-
(1)
(4)
GECAS
-
-
(3)
-
Other
-
(47)
Total Commercial
2,045
(92)
(1,256)
1,530
Real Estate
1,488
(747)
1,089
Consumer
Non-U.S. residential
mortgages
(13)
(295)
Non-U.S. installment
and revolving credit
(29)
(1,198)
U.S. installment and
revolving credit
2,333
2,241
(3,095)
2,008
Non-U.S. auto
(4)
(216)
Other
(20)
(272)
Total Consumer
4,346
2,999
(65)
(5,076)
1,339
3,543
Total
$
7,879
$
3,930
$
(155)
$
(7,079)
$
1,587
$
6,162
(a)
Included a provision of $77 million at Consumer related to the July 1, 2011 adoption of ASU 2011-02.
(b)
Other primarily included transfers to held-for-sale and the effects of currency exchange.
(c)
Net write-offs (gross write-offs less recoveries) in certain portfolios may exceed the beginning allowance for losses as a result of losses that are incurred subsequent to the beginning of the fiscal year due to information becoming available during the current year, which may identify further deterioration on existing financing receivables.
(130)
Credit Quality Indicators
We provide further detailed information about the credit quality of our Commercial, Real Estate and Consumer financing receivables portfolios. For each portfolio, we describe the characteristics of the financing receivables and provide information about collateral, payment performance, credit quality indicators, and impairment. We manage these portfolios using delinquency and nonearning data as key performance indicators. The categories used within this section such as impaired loans, TDR and nonaccrual financing receivables are defined by the authoritative guidance and we base our categorization on the related scope and definitions contained in the related standards. The categories of nonearning and delinquent are defined by us and are used in our process for managing our financing receivables. Definitions of these categories are provided in Note 1.
Past Due Financing Receivables
The following tables display payment performance of Commercial, Real Estate, and Consumer financing receivables.
Over 30 days
Over 90 days
Over 30 days
Over 90 days
December 31
past due
past due(a)
past due
past due
Commercial
CLL
Americas
1.1
%
0.5
%
1.1
%
0.5
%
Europe
3.8
2.1
3.7
2.1
Asia
0.5
0.3
0.9
0.6
Other
-
-
0.1
-
Total CLL
1.9
1.0
1.9
1.0
Energy Financial Services
-
-
-
-
GECAS
-
-
-
-
Other
0.1
0.1
2.8
2.8
Total Commercial
1.7
0.9
1.7
0.9
Real Estate
1.2
1.1
2.3
2.2
Consumer
Non-U.S. residential mortgages(b)
11.2
6.9
12.0
7.5
Non-U.S. installment and revolving credit
3.7
1.1
3.8
1.1
U.S. installment and revolving credit
4.4
2.0
4.6
2.0
Non-U.S. auto
4.4
0.7
3.1
0.5
Other
2.5
1.4
2.8
1.7
Total Consumer
6.1
3.2
6.5
3.4
Total
3.5
%
1.9
%
3.7
%
2.1
%
(a)
Included $1,197 million of Consumer loans at December 31, 2013, which are over 90 days past due and continue to accrue interest until the accounts are written off in the period that the account becomes 180 days past due.
(b)
Consumer loans secured by residential real estate (both revolving and closed-end loans) are written down to the fair value of collateral, less costs to sell, no later than when they become 180 days past due.
(131)
Nonaccrual Financing Receivables
Nonaccrual financing
Nonearning financing
receivables(a)
receivables(a)
December 31 (Dollars in millions)
Commercial
CLL
Americas
$
1,275
$
1,951
$
1,243
$
1,333
Europe
1,046
1,740
1,046
1,299
Asia
Other
-
-
Total CLL
2,734
4,138
2,702
2,877
Energy Financial Services
-
-
GECAS
-
-
-
Other
Total Commercial
2,744
(b)
4,166
(b)
2,712
2,890
Real Estate
2,551
(c)
4,885
(c)
2,301
Consumer
Non-U.S. residential mortgages
2,161
2,598
1,766
2,567
Non-U.S. installment and revolving credit
U.S. installment and revolving credit
1,026
1,026
Non-U.S. auto
Other
Total Consumer
2,620
(d)
4,288
(d)
2,219
4,181
Total
$
7,915
$
13,339
$
7,232
$
7,515
Allowance for losses percentage
Commercial
36.6
%
25.0
%
37.1
%
36.0
%
Real Estate
7.5
6.6
8.3
72.1
Consumer
151.9
83.6
179.4
85.7
Total
65.4
%
37.1
%
71.6
%
65.8
%
(a)
During the fourth quarter of 2013, we revised our methods for classifying financing receivables as nonaccrual and nonearning to more closely align with regulatory guidance. Given that the revised methods result in nonaccrual and nonearning amounts that are substantially the same, we plan to discontinue the reporting of nonearning financing receivables in the first quarter of 2014. Further information on our nonaccrual and nonearning financing receivables is provided in Note 1 to the consolidated financial statements.
(b)
Included $1,397 million and $2,647 million at December 31, 2013 and 2012, respectively, that are currently paying in accordance with their contractual terms.
(c)
Included $2,308 million and $4,461 million at December 31, 2013 and 2012, respectively, that are currently paying in accordance with their contractual terms.
(d)
Included $527 million and $734 million at December 31, 2013 and 2012, respectively, that are currently paying in accordance with their contractual terms.
(132)
Impaired Loans
The following tables provide information about loans classified as impaired and specific reserves related to Commercial, Real Estate and Consumer.
With no specific allowance
With a specific allowance
Recorded
Unpaid
Average
Recorded
Unpaid
Average
investment
principal
investment in
investment
principal
Associated
investment
December 31 (In millions)
in loans
balance
loans
in loans
balance
allowance
in loans
Commercial
CLL
Americas
$
1,670
$
2,187
$
2,154
$
$
$
$
Europe
1,589
Asia
Other
-
-
-
-
-
-
Total CLL
2,774
4,125
3,290
1,108
1,551
1,138
Energy Financial Services
-
-
-
GECAS
-
-
-
-
-
-
Other
-
Total Commercial(a)
2,776
4,128
3,299
1,116
1,559
1,146
Real Estate(b)
2,615
3,036
3,058
1,245
1,507
1,688
Consumer(c)
2,879
2,948
3,058
Total
$
5,500
$
7,317
$
6,455
$
5,240
$
6,014
$
$
5,892
Commercial
CLL
Americas
$
2,487
$
2,927
$
2,535
$
$
$
$
Europe
1,131
1,901
1,009
Asia
Other
-
-
Total CLL
3,680
4,892
3,649
1,361
1,847
1,942
Energy Financial Services
-
-
-
-
-
GECAS
-
-
-
Other
Total Commercial(a)
3,697
4,920
3,694
1,372
1,858
1,994
Real Estate(b)
3,491
3,712
3,773
2,202
2,807
3,752
Consumer(c)
3,103
3,141
2,949
Total
$
7,293
$
8,749
$
7,567
$
6,677
$
7,806
$
1,348
$
8,695
(a)
We recognized $218 million and $253 million of interest income, including $60 million and $92 million on a cash basis, for the years ended December 31, 2013 and 2012, respectively, principally in our CLL Americas business. The total average investment in impaired loans for the years ended December 31, 2013 and 2012 was $4,445 million and $5,688 million, respectively.
(b)
We recognized $187 million and $329 million of interest income, including $135 million and $237 million on a cash basis, for the years ended December 31, 2013 and 2012, respectively. The total average investment in impaired loans for the years ended December 31, 2013 and 2012 was $4,746 million and $7,525 million, respectively.
(c)
We recognized $221 million and $168 million of interest income, including $3 million and $4 million on a cash basis, for the years ended December 31, 2013 and 2012, respectively, principally in our Consumer-U.S. installment and revolving credit portfolios. The total average investment in impaired loans for the years ended December 31, 2013 and 2012 was $3,156 million and $3,049 million, respectively.
(133)
December 31 (In millions)
Commercial
Non-impaired financing receivables
$
125,377
$
132,741
General reserves
Impaired loans
3,892
5,069
Specific reserves
Real Estate
Non-impaired financing receivables
$
16,039
$
15,253
General reserves
Impaired loans
3,860
5,693
Specific reserves
Consumer
Non-impaired financing receivables
$
106,051
$
111,141
General reserves
3,414
2,910
Impaired loans
2,988
3,208
Specific reserves
Total
Non-impaired financing receivables
$
247,467
$
259,135
General reserves
4,209
3,596
Impaired loans
10,740
13,970
Specific reserves
1,348
Impaired loans classified as TDRs in our CLL business were $2,961 million and $3,872 million at December 31, 2013 and 2012, respectively, and were primarily attributable to CLL Americas ($1,770 million and $2,577 million, respectively). For the year ended December 31, 2013, we modified $1,509 million of loans classified as TDRs, primarily in CLL Americas ($737 million). Changes to these loans primarily included extensions, interest-only payment periods, debt to equity exchange and forbearance or other actions, which are in addition to, or sometimes in lieu of, fees and rate increases. Of our $1,509 million and $2,936 million of modifications classified as TDRs during 2013 and 2012, respectively, $71 million and $217 million have subsequently experienced a payment default in 2013 and 2012, respectively.
Real Estate TDRs decreased from $5,146 million at December 31, 2012 to $3,625 million at December 31, 2013, primarily driven by resolution of TDRs through paydowns, partially offset by extensions of loans scheduled to mature during 2013, some of which were classified as TDRs upon modification. We deem loan modifications to be TDRs when we have granted a concession to a borrower experiencing financial difficulty and we do not receive adequate compensation in the form of an effective interest rate that is at current market rates of interest given the risk characteristics of the loan or other consideration that compensates us for the value of the concession. The limited liquidity and higher return requirements in the real estate market for loans with higher loan-to-value (LTV) ratios have typically resulted in the conclusion that the modified terms are not at current market rates of interest, even if the modified loans are expected to be fully recoverable. For the year ended December 31, 2013, we modified $1,595 million of loans classified as TDRs. Changes to these loans primarily included maturity extensions, principal payment acceleration, changes to collateral or covenant terms and cash sweeps, which are in addition to, or sometimes in lieu of, fees and rate increases. Of our $1,595 million and $4,351 million of modifications classified as TDRs during 2013 and 2012, respectively, $197 million and $210 million have subsequently experienced a payment default in 2013 and 2012, respectively.
(134)
The vast majority of our Consumer nonaccrual financing receivables are smaller-balance homogeneous loans evaluated collectively, by portfolio, for impairment and therefore are outside the scope of the disclosure requirement for impaired loans. Accordingly, impaired loans in our Consumer business represent restructured smaller-balance homogeneous loans meeting the definition of a TDR, and are therefore subject to the disclosure requirement for impaired loans, and commercial loans in our Consumer-Other portfolio. The recorded investment of these impaired loans totaled $2,988 million (with an unpaid principal balance of $3,101 million) and comprised $109 million with no specific allowance, primarily all in our Consumer-Other portfolio, and $2,879 million with a specific allowance of $567 million at December 31, 2013. The impaired loans with a specific allowance included $261 million with a specific allowance of $35 million in our Consumer-Other portfolio and $2,618 million with a specific allowance of $532 million across the remaining Consumer business and had an unpaid principal balance and average investment of $2,948 million and $3,058 million, respectively, at December 31, 2013.
Impaired loans classified as TDRs in our Consumer business were $2,874 million and $3,041 million at December 31, 2013 and 2012, respectively. We utilize certain loan modification programs for borrowers experiencing financial difficulties in our Consumer loan portfolio. These loan modification programs primarily include interest rate reductions and payment deferrals in excess of three months, which were not part of the terms of the original contract, and are primarily concentrated in our non-U.S. residential mortgage and U.S. credit card portfolios. For the year ended December 31, 2013, we modified $1,441 million of consumer loans for borrowers experiencing financial difficulties, which are classified as TDRs, and included $879 million of non-U.S. consumer loans, primarily residential mortgages, credit cards and personal loans and $562 million of U.S. consumer loans, primarily credit cards. We expect borrowers whose loans have been modified under these programs to continue to be able to meet their contractual obligations upon the conclusion of the modification. Of our $1,441 million and $1,751 million of modifications classified as TDRs during 2013 and 2012, respectively, $266 million and $334 million have subsequently experienced a payment default in 2013 and 2012, respectively.
SUPPLEMENTAL CREDIT QUALITY INFORMATION
Commercial
Substantially all of our Commercial financing receivables portfolio is secured lending and we assess the overall quality of the portfolio based on the potential risk of loss measure. The metric incorporates both the borrower’s credit quality along with any related collateral protection.
Our internal risk ratings process is an important source of information in determining our allowance for losses and represents a comprehensive, statistically validated approach to evaluate risk in our financing receivables portfolios. In deriving our internal risk ratings, we stratify our Commercial portfolios into 21 categories of default risk and/or six categories of loss given default to group into three categories: A, B and C. Our process starts by developing an internal risk rating for our borrowers, which is based upon our proprietary models using data derived from borrower financial statements, agency ratings, payment history information, equity prices and other commercial borrower characteristics. We then evaluate the potential risk of loss for the specific lending transaction in the event of borrower default, which takes into account such factors as applicable collateral value, historical loss and recovery rates for similar transactions, and our collection capabilities. Our internal risk ratings process and the models we use are subject to regular monitoring and validation controls. The frequency of rating updates is set by our credit risk policy, which requires annual Risk Committee approval. The models are updated on a regular basis and statistically validated annually, or more frequently as circumstances warrant.
The table below summarizes our Commercial financing receivables by risk category. As described above, financing receivables are assigned one of 21 risk ratings based on our process and then these are grouped by similar characteristics into three categories in the table below. Category A is characterized by either high-credit-quality borrowers or transactions with significant collateral coverage that substantially reduces or eliminates the risk of loss in the event of borrower default. Category B is characterized by borrowers with weaker credit quality than those in Category A, or transactions with moderately strong collateral coverage that minimizes but may not fully mitigate the risk of loss in the event of default. Category C is characterized by borrowers with higher levels of default risk relative to our overall portfolio or transactions where collateral coverage may not fully mitigate a loss in the event of default.
(135)
Secured
December 31 (In millions)
A
B
C
Total
CLL
Americas
$
65,444
$
1,587
$
1,554
$
68,585
Europe(a)
35,968
1,019
37,466
Asia
8,962
9,320
Other(a)
-
-
Total CLL
110,475
2,206
2,791
115,472
Energy Financial Services
2,969
-
2,978
GECAS
9,175
9,377
Other
-
-
Total
$
122,937
$
2,265
$
2,943
$
128,145
CLL
Americas
$
68,360
$
1,775
$
2,382
$
72,517
Europe(a)
33,756
1,188
1,256
36,200
Asia
10,732
11,221
Other(a)
-
Total CLL
113,007
3,080
4,104
120,191
Energy Financial Services
4,725
-
-
4,725
GECAS
10,681
10,915
Other
-
-
Total
$
128,899
$
3,303
$
4,115
$
136,317
(a)
During 2013, we transferred our European equipment services portfolio from CLL Other to CLL Europe. Prior-period amounts were reclassified to conform to the current period presentation.
For our secured financing receivables portfolio, our collateral position and ability to work out problem accounts mitigates our losses. Our asset managers have deep industry expertise that enables us to identify the optimum approach to default situations. We price risk premiums for weaker credits at origination, closely monitor changes in creditworthiness through our risk ratings and watch list process, and are engaged early with deteriorating credits to minimize economic loss. Secured financing receivables within risk Category C are predominantly in our CLL businesses and are primarily composed of senior term lending facilities and factoring programs secured by various asset types including inventory, accounts receivable, cash, equipment and related business facilities as well as franchise finance activities secured by underlying equipment.
Loans within Category C are reviewed and monitored regularly, and classified as impaired when it is probable that they will not pay in accordance with contractual terms. Our internal risk rating process identifies credits warranting closer monitoring; and as such, these loans are not necessarily classified as nonearning or impaired.
Our unsecured Commercial financing receivables portfolio is primarily attributable to our Interbanca S.p.A. and GE Sanyo Credit acquisitions in Europe and Asia, respectively. At December 31, 2013 and 2012, these financing receivables included $313 million and $458 million rated A, $580 million and $583 million rated B, and $231 million and $452 million rated C, respectively.
Real Estate
Due to the primarily non-recourse nature of our Debt portfolio, loan-to-value ratios provide the best indicators of the credit quality of the portfolio.
(136)
Loan-to-value ratio
Less than
80% to
Greater than
Less than
80% to
Greater than
December 31 (In millions)
80%
95%
95%
80%
95%
95%
Debt
$
15,576
$
1,300
$
2,111
$
13,570
$
2,572
$
3,604
By contrast, the credit quality of the owner occupied/credit tenant portfolio is primarily influenced by the strength of the borrower’s general credit quality, which is reflected in our internal risk rating process, consistent with the process we use for our Commercial portfolio. At December 31, 2013, the internal risk rating of A, B and C for our owner occupied/credit tenant portfolio approximated $571 million, $179 million and $162 million, respectively, as compared to December 31, 2012, ratings of $956 million, $25 million and $219 million, respectively.
Within Real Estate-Debt, these financing receivables are primarily concentrated in our North American and European Lending platforms and are secured by various property types. A substantial majority of the Real Estate-Debt financing receivables with loan-to-value ratios greater than 95% are paying in accordance with contractual terms. Substantially all of these loans and the majority of our owner occupied/credit tenant financing receivables included in Category C are impaired loans that are subject to the specific reserve evaluation process described in Note 1. The ultimate recoverability of impaired loans is driven by collection strategies that do not necessarily depend on the sale of the underlying collateral and include full or partial repayments through third-party refinancing and restructurings.
Consumer
At December 31, 2013, our U.S. consumer financing receivables included private-label credit card and sales financing for approximately 61 million customers across the U.S. with no metropolitan area accounting for more than 6% of the portfolio. Of the total U.S. consumer financing receivables, approximately 67% relate to credit card loans that are often subject to profit and loss-sharing arrangements with the retailer (which are recorded in revenues), and the remaining 33% are sales finance receivables that provide financing to customers in areas such as electronics, recreation, medical and home improvement.
Our Consumer financing receivables portfolio comprises both secured and unsecured lending. Secured financing receivables comprise residential loans and lending to small and medium-sized enterprises predominantly secured by auto and equipment, inventory finance and cash flow loans. Unsecured financing receivables include private-label credit card financing. A substantial majority of these cards are not for general use and are limited to the products and services sold by the retailer. The private-label portfolio is diverse with no metropolitan area accounting for more than 6% of the related portfolio.
Non-U.S. residential mortgages
For our secured non-U.S. residential mortgage book, we assess the overall credit quality of the portfolio through loan-to-value ratios (the ratio of the outstanding debt on a property to the value of that property at origination). In the event of default and repossession of the underlying collateral, we have the ability to remarket and sell the properties to eliminate or mitigate the potential risk of loss. The table below provides additional information about our non-U.S. residential mortgages based on loan-to-value ratios.
Loan-to-value ratio
80% or
Greater than
Greater than
80% or
Greater than
Greater than
December 31 (In millions)
less
80% to 90%
90%
less
80% to 90%
90%
Non-U.S. residential mortgages
$
17,224
$
5,130
$
8,147
$
18,568
$
5,699
$
9,083
(137)
The majority of these financing receivables are in our U.K. and France portfolios and have re-indexed loan-to-value ratios of 77% and 56%, respectively. Re-indexed loan-to-value ratios may not reflect actual realizable values of future repossessions. We have third-party mortgage insurance for about 24% of the balance of Consumer non-U.S. residential mortgage loans with loan-to-value ratios greater than 90% at December 31, 2013. Such loans were primarily originated in France and the U.K.
Installment and Revolving Credit
For our unsecured lending products, including the non-U.S. and U.S. installment and revolving credit and non-U.S. auto portfolios, we assess overall credit quality using internal and external credit scores. Our internal credit scores imply a probability of default that we consistently translate into three approximate credit bureau equivalent credit score categories, including (a) 671 or higher, which are considered the strongest credits; (b) 626 to 670, which are considered moderate credit risk; and (c) 625 or less, which are considered weaker credits.
Internal ratings translated to approximate credit bureau equivalent score
671 or
626 to
625 or
671 or
626 to
625 or
December 31 (In millions)
higher
less
higher
less
Non-U.S. installment and revolving credit
$
8,310
$
2,855
$
2,512
$
10,228
$
4,267
$
3,321
U.S. installment and revolving credit
36,723
11,101
8,030
33,204
9,753
7,896
Non-U.S. auto
1,395
3,141
Of those financing receivable accounts with credit bureau equivalent scores of 625 or less at December 31, 2013, 97% relate to installment and revolving credit accounts. These smaller-balance accounts have an average outstanding balance less than one thousand U.S. dollars and are primarily concentrated in our retail card and sales finance receivables in the U.S. (which are often subject to profit and loss-sharing arrangements), and closed-end loans outside the U.S., which minimizes the potential for loss in the event of default. For lower credit scores, we adequately price for the incremental risk at origination and monitor credit migration through our risk ratings process. We continuously adjust our credit line underwriting management and collection strategies based on customer behavior and risk profile changes.
Consumer - Other
Secured lending in Consumer - Other comprises loans to small and medium-sized enterprises predominantly secured by auto and equipment, inventory finance and cash flow loans. We develop our internal risk ratings for this portfolio in a manner consistent with the process used to develop our Commercial credit quality indicators, described above. We use the borrower’s credit quality and underlying collateral strength to determine the potential risk of loss from these activities.
At December 31, 2013, Consumer - Other financing receivables of $6,137 million, $315 million and $501 million were rated A, B and C, respectively. At December 31, 2012, Consumer - Other financing receivables of $6,873 million, $451 million and $746 million were rated A, B and C, respectively.
(138)
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Depreciable
lives-new
December 31 (Dollars in millions)
(in years)
Original cost
GE
Land and improvements
(a)
$
$
Buildings, structures and related equipment
8-40
8,910
8,361
Machinery and equipment
4-20
25,323
24,090
Leasehold costs and manufacturing plant under construction
1-10
3,309
2,815
38,249
35,878
GECC(b)
Land and improvements, buildings, structures and related equipment
1-35
(a)
2,504
2,485
Equipment leased to others
Aircraft
50,337
49,954
Vehicles
1-20
14,656
15,952
Railroad rolling stock
4-50
4,636
4,180
Construction and manufacturing
1-30
2,916
3,055
All other
7-27
3,518
3,427
78,567
79,053
Eliminations
(347)
(363)
Total
$
116,469
$
114,568
Net carrying value
GE
Land and improvements
$
$
Buildings, structures and related equipment
4,205
4,003
Machinery and equipment
9,701
9,061
Leasehold costs and manufacturing plant under construction
2,997
2,387
17,574
16,033
GECC(b)
Land and improvements, buildings, structures and related equipment
1,025
Equipment leased to others
Aircraft(c)
34,938
36,231
Vehicles
8,312
8,634
Railroad rolling stock
3,129
2,744
Construction and manufacturing
1,955
2,069
All other
2,248
2,290
51,607
52,967
Eliminations
(354)
(367)
Total
$
68,827
$
68,633
(a)
Depreciable lives exclude land.
(b)
Included $1,353 million and $1,466 million of original cost of assets leased to GE with accumulated amortization of $342 million and $451 million at December 31, 2013 and 2012, respectively.
(c)
The GECAS business of GE Capital recognized impairment losses of $732 million and $242 million in 2013 and 2012, respectively. These losses are recorded in the caption “Other costs and expenses” in the Statement of Earnings to reflect adjustments to fair value based on an evaluation of average current market values (obtained from third parties) of similar type and age aircraft, which are adjusted for the attributes of the specific aircraft under lease.
Consolidated depreciation and amortization related to property, plant and equipment was $9,762 million, $9,192 million and $8,986 million in 2013, 2012 and 2011, respectively. Amortization of GECC equipment leased to others was $6,696 million, $6,097 million and $6,063 million in 2013, 2012 and 2011, respectively.
(139)
Noncancellable future rentals due from customers for equipment on operating leases at December 31, 2013, are as follows:
(In millions)
Due in
$
7,168
5,925
4,838
3,823
3,070
2019 and later
7,695
Total
$
32,519
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
December 31 (In millions)
Goodwill
$
77,648
$
73,114
Other intangible assets - net
Intangible assets subject to amortization
$
14,150
$
11,821
Indefinite-lived intangible assets(a)
Total
$
14,310
$
11,980
(a)
Indefinite-lived intangible assets principally comprised in-process research and development, trademarks and tradenames.
Upon closing an acquisition, we estimate the fair values of assets and liabilities acquired and consolidate the acquisition as quickly as possible. Given the time it takes to obtain pertinent information to finalize the acquired company’s balance sheet, then to adjust the acquired company’s accounting policies, procedures, and books and records to our standards, it is often several quarters before we are able to finalize those initial fair value estimates. Accordingly, it is not uncommon for our initial estimates to be subsequently revised.
In August 2013, we acquired the aviation business of Avio S.p.A. (Avio) for $4,449 million in cash. We recorded a pre-tax acquisition-related charge of $96 million related to the effective settlement of Avio’s pre-existing contractual relationships with GE. Avio is a manufacturer of aviation propulsion components and systems and is included in our Aviation segment. The preliminary purchase price allocation resulted in goodwill of $3,043 million and amortizable intangible assets of $1,830 million. The allocation of the purchase price will be finalized upon completion of post-closing procedures.
In July 2013, we acquired Lufkin Industries, Inc. (Lufkin) for $3,309 million in cash. Lufkin is a leading provider of artificial lift technologies for the oil and gas industry and a manufacturer of industrial gears and is included in our Oil & Gas segment. The purchase price allocation resulted in goodwill of $2,027 million and amortizable intangible assets of $997 million. The allocation of the purchase price will be finalized upon completion of post-closing procedures.
On March 27, 2012, we contributed a portion of our civil avionics systems business to a newly formed joint venture in exchange for 50% of the new entity. This resulted in the deconsolidation of our civil avionics business and the recording of the interest in the new joint venture at fair value. As a result, we recognized a pre-tax gain of $274 million ($152 million after tax) in the first quarter of 2012.
On September 2, 2011, we purchased a 90% interest in Converteam for $3,586 million. In connection with the transaction, we entered into an arrangement to purchase the remaining 10% at the two-year anniversary of the acquisition date for 343 million euros (approximately $465 million). This amount was recorded as a liability at the date of acquisition and was paid out in October 2013.
(140)
Changes in goodwill balances follow.
Dispositions,
Dispositions,
currency
currency
Balance at
exchange
Balance at
Balance at
exchange
Balance at
(In millions)
January 1
Acquisitions
and other
December 31
January 1
Acquisitions
and other
December 31
Power & Water
$
8,821
$
-
$
$
8,822
$
8,769
$
-
$
$
8,821
Oil & Gas
8,365
2,217
(66)
10,516
8,233
8,365
Energy Management
4,610
4,748
4,621
-
(11)
4,610
Aviation
5,975
3,043
9,103
5,996
(76)
5,975
Healthcare
16,762
(164)
16,643
16,631
(90)
16,762
Transportation
-
1,012
Appliances & Lighting
-
(5)
GE Capital
26,971
(793)
26,195
26,902
-
26,971
Corporate
-
(1)
-
-
-
-
Total
$
73,114
$
5,333
$
(799)
$
77,648
$
72,297
$
$
(28)
$
73,114
Goodwill balances increased $4,534 million in 2013, primarily as a result of the acquisitions of Avio ($3,043 million) and Lufkin ($2,027 million), partially offset by dispositions.
Goodwill balances increased $817 million in 2012, primarily as a result of the weaker U.S. dollar ($356 million) and acquisitions of Industrea Limited ($282 million) and Railcar Management, Inc. ($136 million) at Transportation.
We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year. The impairment test consists of two steps: in step one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied when the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately.
Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from 8.0% to 16.5%.
During the third quarter of 2013, we performed our annual impairment test of goodwill for all of our reporting units. Based on the results of our step one testing, the fair values of each of the GE reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized.
(141)
Our Real Estate reporting unit had a goodwill balance of $742 million at December 31, 2013. While the Real Estate reporting unit’s book value was within the range of its fair value, we further substantiated our Real Estate goodwill balance by performing the second step analysis in which the implied fair value of goodwill exceeded its carrying value by approximately $3.7 billion. The estimated fair value of the Real Estate reporting unit is based on a number of assumptions about future business performance and investment, including loss estimates for the existing finance receivable and investment portfolio, new debt origination volume and margins, and the recent stabilization of the real estate market allowing for sales of real estate investments at normalized margins. Our assumed discount rate was 11.25% and was derived by applying a capital asset pricing model and corroborated using equity analyst research reports and implied cost of equity based on forecasted price to earnings per share multiples for similar companies. While we have seen stabilization in some markets, given the volatility and uncertainty in the current commercial real estate environment, there is uncertainty about a number of assumptions upon which the estimated fair value is based. Different loss estimates for the existing portfolio, changes in the new debt origination volume and margin assumptions, changes in the expected pace of the commercial real estate market recovery, or changes in the equity return expectation of market participants may result in changes in the estimated fair value of the Real Estate reporting unit.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
Intangible Assets Subject to Amortization
Gross
Gross
carrying
Accumulated
carrying
Accumulated
December 31 (In millions)
amount
amortization
Net
amount
amortization
Net
Customer-related
$
7,938
$
(2,312)
$
5,626
$
6,977
$
(2,156)
$
4,821
Patents and technology
6,602
(2,621)
3,981
5,432
(2,406)
3,026
Capitalized software
8,256
(5,252)
3,004
7,514
(4,673)
2,841
Trademarks
1,356
(295)
1,061
(239)
Lease valuations
(498)
1,163
(792)
Present value of future profits(a)
(574)
-
(530)
-
All other
(359)
(369)
Total
$
26,061
$
(11,911)
$
14,150
$
22,986
$
(11,165)
$
11,821
(a)
Balances at December 31, 2013 and 2012 reflect adjustments of $322 million and $353 million, respectively, to the present value of future profits in our run-off insurance operations to reflect the effects that would have been recognized had the related unrealized investment securities holding gains and losses actually been realized.
During 2013, we recorded additions to intangible assets subject to amortization of $3,735 million, primarily from the acquisitions of Avio ($1,830 million) and Lufkin ($997 million) as well as the capitalization of new software across several business platforms. The components of finite-lived intangible assets acquired during 2013 and their respective weighted-average amortizable period are: $1,257 million - Customer-related (21.9 years); $1,255 million - Patents and technology (25.5 years); $732 million - Capitalized software (4.6 years); $363 million - Trademarks (28.1 years); $2 million - Lease valuations (5.0 years); and $126 million - All other (22.4 years).
Consolidated amortization related to intangible assets was $1,711 million, $1,612 million and $1,744 million for 2013, 2012 and 2011, respectively. We estimate annual pre-tax amortization for intangible assets over the next five calendar years to be as follows: 2014 - $1,588 million; 2015 - $1,473 million; 2016 - $1,336 million; 2017 - $1,185 million; and 2018 - $1,026 million.
(142)
NOTE 9. ALL OTHER ASSETS
December 31 (In millions)
GE
Investments
Associated companies(a)
$
3,937
$
22,169
Other
4,563
22,614
Contract costs and estimated earnings(b)
12,522
11,041
Long-term receivables, including notes
Derivative instruments
Other
5,007
4,782
23,708
39,534
GECC
Investments
Associated companies
17,348
19,119
Real estate(c)(d)
16,163
25,154
Assets held for sale(e)
2,571
4,194
Cost method(d)
1,462
1,665
Other
1,446
38,474
51,578
Advances to suppliers
2,328
1,805
Derivative instruments
1,117
3,557
Deferred borrowing costs
Deferred acquisition costs(f)
Other
4,551
4,260
47,366
62,186
Eliminations
(266)
(76)
Total
$
70,808
$
101,644
(a)
Included our investment in NBCU LLC of $18,887 million at December 31, 2012. At December 31, 2012, we also had $4,937 million, of deferred tax liabilities related to this investment. See Note 14.
(b)
Contract costs and estimated earnings reflect revenues earned in excess of billings on our long-term contracts to construct technically complex equipment (such as power generation, aircraft engines and aeroderivative units) and long-term product maintenance or extended warranty arrangements. These amounts are presented net of related billings in excess of revenues of $1,842 million and $1,498 million at December 31, 2013 and 2012, respectively.
(c)
GECC investments in real estate consisted principally of two categories: real estate held for investment and equity method investments. Both categories contained a wide range of properties including the following at December 31, 2013: office buildings (52%), apartment buildings (14%), retail facilities (9%), industrial properties (7%), franchise properties (3%) and other (15%). At December 31, 2013, investments were located in the Americas (41%), Europe (35%) and Asia (24%).
(d)
The fair value of and unrealized loss on cost method investments in a continuous loss position for less than 12 months at December 31, 2013, were $17 million and an insignificant amount, respectively. There were no cost method investments in a continuous loss position for 12 months or more at December 31, 2013. The fair value of and unrealized loss on cost method investments in a continuous loss position for less than 12 months at December 31, 2012, were $142 million and $37 million, respectively. The fair value of and unrealized loss on cost method investments in a continuous loss position for 12 months or more at December 31, 2012, were $2 million and an insignificant amount, respectively.
(e)
Assets were classified as held for sale on the date a decision was made to dispose of them through sale or other means. At December 31, 2013 and 2012, such assets consisted primarily of loans, aircraft, equipment and real estate properties, and were accounted for at the lower of carrying amount or estimated fair value less costs to sell. These amounts are net of valuation allowances of $127 million and $200 million at December 31, 2013 and 2012, respectively.
(f)
Balances at December 31, 2013 and 2012 reflect adjustments of $700 million and $764 million, respectively, to deferred acquisition costs in our run-off insurance operations to reflect the effects that would have been recognized had the related unrealized investment securities holding gains and losses actually been realized.
(143)
NOTE 10. BORROWINGS AND BANK DEPOSITS
Short-term Borrowings
Average
Average
December 31 (Dollars in millions)
Amount
rate(a)
Amount
rate(a)
GE
Commercial paper
$
-
-
%
$
0.28
%
Payable to banks
3.38
3.02
Current portion of long-term
borrowings
5.65
5,068
5.11
Other
1,425
Total GE short-term borrowings
1,841
6,041
GECC
Commercial paper
U.S.
24,877
0.18
33,686
0.22
Non-U.S.
4,168
0.33
9,370
0.92
Current portion of long-term
borrowings(b)(c)(d)
39,215
2.70
44,264
2.85
GE Interest Plus notes(e)
8,699
1.11
8,189
1.20
Other(c)
Total GECC short-term borrowings
77,298
95,940
Eliminations
(1,249)
(589)
Total short-term borrowings
$
77,890
$
101,392
Long-term Borrowings
Average
Average
December 31 (Dollars in millions)
Maturities
Amount
rate(a)
Amount
rate (a)
GE
Senior notes
2015-2042
$
10,968
3.63
%
$
10,963
3.63
%
Payable to banks
2015-2023
1.10
1.79
Other
Total GE long-term borrowings
11,515
11,428
GECC
Senior unsecured notes(b)
2015-2054
186,433
2.97
199,646
2.95
Subordinated notes(d)
2021-2037
4,821
3.93
4,965
2.92
Subordinated debentures(f)
2066-2067
7,462
5.64
7,286
5.78
Other(c)
11,563
12,879
Total GECC long-term borrowings
210,279
224,776
Eliminations
(129)
(120)
Total long-term borrowings
$
221,665
$
236,084
Non-recourse borrowings of
consolidated securitization
entities(g)
2014-2019
$
30,124
1.05
%
$
30,123
1.12
%
Bank deposits(h)
$
53,361
$
46,200
Total borrowings and bank
deposits
$
383,040
$
413,799
(144)
(a)
Based on year-end balances and year-end local currency effective interest rates, including the effects from hedging.
(b)
Included in total long-term borrowings were $481 million and $604 million of obligations to holders of GICs at December 31, 2013 and 2012, respectively. These obligations included conditions under which certain GIC holders could require immediate repayment of their investment should the long-term credit ratings of GECC fall below AA-/Aa3. Following the April 3, 2012 Moody’s downgrade of GECC’s long-term credit rating to A1, substantially all of these GICs became redeemable by their holders. In 2012, holders of $386 million in principal amount of GICs redeemed their holdings and GECC made related cash payments. The remaining outstanding GICs will continue to be subject to their scheduled maturities and individual terms, which may include provisions permitting redemption upon a downgrade of one or more of GECC’s ratings, among other things.
(c)
Included $9,468 million and $9,757 million of funding secured by real estate, aircraft and other collateral at December 31, 2013 and 2012, respectively, of which $2,868 million and $3,294 million is non-recourse to GECC at December 31, 2013 and 2012, respectively.
(d)
Included $300 million of subordinated notes guaranteed by GE at both December 31, 2013 and 2012.
(e)
Entirely variable denomination floating-rate demand notes.
(f)
Subordinated debentures receive rating agency equity credit and were hedged at issuance to the U.S. dollar equivalent of $7,725 million.
(g)
Included at December 31, 2013 and 2012 were $9,047 million and $7,707 million of current portion of long-term borrowings, respectively, and $21,077 million and $22,416 million of long-term borrowings, respectively. See Note 23.
(h)
Included $13,614 million and $15,896 million of deposits in non-U.S. banks at December 31, 2013 and 2012, respectively, and $18,275 million and $17,291 million of certificates of deposits with maturities greater than one year at December 31, 2013 and 2012, respectively.
On October 9, 2012, GE issued $7,000 million of notes comprising $2,000 million of 0.850% notes due 2015, $3,000 million of 2.700% notes due 2022 and $2,000 million of 4.125% notes due 2042. On February 1, 2013, we repaid $5,000 million of 5.0% GE senior unsecured notes.
Additional information about borrowings and associated swaps can be found in Note 22.
Liquidity is affected by debt maturities and our ability to repay or refinance such debt. Long-term debt maturities over the next five years follow.
(In millions)
GE
$
$
2,189
$
$
4,023
$
GECC
39,215
(a)
39,672
31,987
25,866
18,183
(a)
Fixed and floating rate notes of $443 million contain put options with exercise dates in 2014, and which have final maturity beyond 2018.
Committed credit lines totaling $47.8 billion had been extended to us by 50 banks at year-end 2013. GECC can borrow up to $47.8 billion under all of these credit lines. GE can borrow up to $13.9 billion under certain of these credit lines. The GECC lines include $26.5 billion of revolving credit agreements under which we can borrow funds for periods exceeding one year. Additionally, $21.3 billion are 364-day lines that contain a term-out feature that allows GE or GECC to extend the borrowings for two years from the date on which such borrowings would otherwise be due.
(145)
NOTE 11. INVESTMENT CONTRACTS, INSURANCE LIABILITIES AND INSURANCE ANNUITY BENEFITS
Investment contracts, insurance liabilities and insurance annuity benefits comprise mainly obligations to annuitants and policyholders in our run-off insurance operations and holders of guaranteed investment contracts.
December 31 (In millions)
Investment contracts
$
3,144
$
3,321
Guaranteed investment contracts
1,471
1,644
Total investment contracts
4,615
4,965
Life insurance benefits(a)
18,959
20,427
Other(b)
3,405
3,304
26,979
28,696
Eliminations
(435)
(428)
Total
$
26,544
$
28,268
(a)
Life insurance benefits are accounted for mainly by a net-level-premium method using estimated yields generally ranging from 3.0% to 8.5% in both 2013 and 2012.
(b)
Substantially all unpaid claims and claims adjustment expenses and unearned premiums.
When insurance affiliates cede insurance risk to third parties, such as reinsurers, they are not relieved of their primary obligation to policyholders. When losses on ceded risks give rise to claims for recovery, we establish allowances for probable losses on such receivables from reinsurers as required. Reinsurance recoverables are included in the caption “Other GECC receivables" on our Statement of Financial Position, and amounted to $1,685 million and $1,542 million at December 31, 2013 and 2012, respectively.
We recognize reinsurance recoveries as a reduction of the Statement of Earnings caption “Investment contracts, insurance losses and insurance annuity benefits.” Reinsurance recoveries were $250 million, $234 million and $224 million for the years ended December 31, 2013, 2012 and 2011, respectively.
NOTE 12. POSTRETIREMENT BENEFIT PLANS
Pension Benefits
We sponsor a number of pension plans. Principal pension plans, together with affiliate and certain other pension plans (other pension plans) detailed in this note, represent about 99% of our total pension assets. We use a December 31 measurement date for our plans.
Principal Pension Plans are the GE Pension Plan and the GE Supplementary Pension Plan.
The GE Pension Plan provides benefits to certain U.S. employees based on the greater of a formula recognizing career earnings or a formula recognizing length of service and final average earnings. Certain benefit provisions are subject to collective bargaining. Salaried employees who commence service on or after January 1, 2011 and any employee who commences service on or after January 1, 2012 will not be eligible to participate in the GE Pension Plan, but will participate in a defined contribution retirement program.
The GE Supplementary Pension Plan is an unfunded plan providing supplementary retirement benefits primarily to higher-level, longer-service U.S. employees.
(146)
Other Pension Plans in 2013 included 40 U.S. and non-U.S. pension plans with pension assets or obligations greater than $50 million. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings.
Pension Plan Participants
Principal
Other
pension
pension
December 31, 2013
Total
plans
plans
Active employees
128,000
94,000
34,000
Vested former employees
229,000
184,000
45,000
Retirees and beneficiaries
263,000
230,000
33,000
Total
620,000
508,000
112,000
Cost of Pension Plans
Total
Principal pension plans
Other pension plans
(In millions)
Service cost for benefits earned
$
1,970
$
1,779
$
1,498
$
1,535
$
1,387
$
1,195
$
$
$
Prior service cost amortization
Expected return on plan assets
(4,163)
(4,394)
(4,543)
(3,500)
(3,768)
(3,940)
(663)
(626)
(603)
Interest cost on benefit obligations
2,983
2,993
3,176
2,460
2,479
2,662
Net actuarial loss amortization
4,007
3,701
2,486
3,664
3,421
2,335
Pension plans cost
$
5,050
$
4,366
$
2,824
$
4,405
$
3,798
$
2,446
$
$
$
Actuarial assumptions are described below. The actuarial assumptions at December 31 are used to measure the year-end benefit obligations and the pension costs for the subsequent year.
Principal pension plans
Other pension plans (weighted average)
December 31
Discount rate
4.85
%
3.96
%
4.21
%
5.28
%
4.39
%
3.92
%
4.42
%
5.11
%
Compensation increases
4.00
3.90
3.75
4.25
3.76
3.30
4.31
4.44
Expected return on assets
7.50
8.00
8.00
8.00
6.92
6.82
7.09
7.25
To determine the expected long-term rate of return on pension plan assets, we consider current and target asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future return expectations for our principal pension plans' assets, we formulate views on the future economic environment, both in the U.S. and abroad. We evaluate general market trends and historical relationships among a number of key variables that impact asset class returns such as expected earnings growth, inflation, valuations, yields and spreads, using both internal and external sources. We also take into account expected volatility by asset class and diversification across classes to determine expected overall portfolio results given current and target allocations. Based on our analysis of future expectations of asset performance, past return results, and our current and target asset allocations, we have assumed a 7.5% long-term expected return on those assets for cost recognition in 2014. This is a reduction from the 8.0% we had assumed in 2013, 2012 and 2011. For the principal pension plans, we apply our expected rate of return to a market-related value of assets, which stabilizes variability in the amounts to which we apply that expected return.
We amortize experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, over a period no longer than the average future service of employees.
(147)
Funding policy for the GE Pension Plan is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as we may determine to be appropriate. We contributed $433 million to the GE Pension Plan in 2012. The ERISA minimum funding requirements did not require a contribution in 2013. As such, we did not contribute to the GE Pension Plan in 2013. We expect to contribute $528 million to the GE Pension Plan in 2014. In addition, we expect to pay approximately $244 million for benefit payments under our GE Supplementary Pension Plan and administrative expenses of our principal pension plans and expect to contribute approximately $800 million to other pension plans in 2014. In 2013, comparative amounts were $225 million and $673 million, respectively.
Benefit obligations are described in the following tables. Accumulated and projected benefit obligations (ABO and PBO) represent the obligations of a pension plan for past service as of the measurement date. ABO is the present value of benefits earned to date with benefits computed based on current compensation levels. PBO is ABO increased to reflect expected future compensation.
Projected Benefit Obligation
Principal pension plans
Other pension plans
(In millions)
Balance at January 1
$
63,502
$
60,510
$
13,584
$
11,637
Service cost for benefits earned
1,535
1,387
Interest cost on benefit obligations
2,460
2,479
Participant contributions
Plan amendments
-
-
(6)
Actuarial loss (gain) (a)
(6,406)
2,021
(575)
Benefits paid
(3,134)
(3,052)
(477)
(425)
Acquisitions (dispositions) / other - net
-
-
Exchange rate adjustments
-
-
(26)
Balance at December 31(b)
$
58,113
$
63,502
$
13,535
$
13,584
(a)
Principally associated with discount rate changes.
(b)
The PBO for the GE Supplementary Pension Plan, which is an unfunded plan, was $5,162 million and $5,494 million at year-end 2013 and 2012, respectively.
Accumulated Benefit Obligation
December 31 (In millions)
GE Pension Plan
$
50,967
$
55,664
GE Supplementary Pension Plan
3,946
4,114
Other pension plans
12,629
12,687
Plans With Assets Less Than ABO
December 31 (In millions)
Funded plans with assets less than ABO
Plan assets
$
57,430
$
53,276
Accumulated benefit obligations
60,715
66,069
Projected benefit obligations
63,532
69,234
Unfunded plans(a)
Accumulated benefit obligations
5,243
5,390
Projected benefit obligations
6,512
6,828
(a)
Primarily related to the GE Supplementary Pension Plan.
Plan Assets
The fair value of the classes of the pension plans' investments is presented below. The inputs and valuation techniques used to measure the fair value of the assets are consistently applied and described in Note 1.
(148)
Fair Value of Plan Assets
Principal pension plans
Other pension plans
(In millions)
Balance at January 1
$
44,738
$
42,137
$
9,702
$
8,381
Actual gain on plan assets
6,312
4,854
1,212
Employer contributions
Participant contributions
Benefits paid
(3,134)
(3,052)
(477)
(425)
Acquisitions (dispositions) / other - net
-
-
(31)
-
Exchange rate adjustments
-
-
(34)
Balance at December 31
$
48,297
$
44,738
$
11,059
$
9,702
Asset Allocation
Other pension plans
Principal pension plans
(weighted average)
Target
Actual
Target
Actual
allocation
allocation
allocation
allocation
Equity securities
17 - 57
% (a)
% (b)
%
%
Debt securities (including cash equivalents)
13 - 53
Private equities
8 - 18
Real estate
2 - 12
Other
3 - 13
(a)
Target equally divided between U.S. equity securities and non-U.S. equity securities.
(b)
Actual allocations were 26% for U.S. equity securities and 19% for non-U.S. equity securities.
Plan fiduciaries of the GE Pension Plan set investment policies and strategies for the GE Pension Trust and oversee its investment allocation, which includes selecting investment managers, commissioning periodic asset-liability studies and setting long-term strategic targets. Long-term strategic investment objectives take into consideration a number of factors, including the funded status of the plan, a balance between risk and return and the plan’s liquidity needs. Target allocation percentages are established at an asset class level by plan fiduciaries. Target allocation ranges are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below a target range.
Plan fiduciaries monitor the GE Pension Plan’s liquidity position in order to meet the near-term benefit payment and other cash needs. The GE Pension Plan holds short-term debt securities to meet its liquidity needs.
GE Pension Trust assets are invested subject to the following additional guidelines:
·
Short-term securities must generally be rated A-1/P-1 or better, except for 15% of such securities that may be rated A-2/P-2 and other short-term securities as may be approved by the plan fiduciaries.
·
Real estate investments may not exceed 25% of total assets.
·
Investments in restricted securities (excluding real estate investments) that are not freely tradable may not exceed 30% of total assets (actual was 17% of trust assets at December 31, 2013).
According to statute, the aggregate holdings of all qualifying employer securities (e.g., GE common stock) and qualifying employer real property may not exceed 10% of the fair value of trust assets at the time of purchase. GE securities represented 4.5% and 4.2% of trust assets at year-end 2013 and 2012, respectively.
(149)
The GE Pension Plan has a broadly diversified portfolio of investments in equities, fixed income, private equities, real estate and hedge funds; these investments are both U.S. and non-U.S. in nature. As of December 31, 2013, U.S. government direct and indirect obligations represented 16% of total GE Pension Plan assets. No other sector concentration of assets exceeded 15% of total GE Pension Plan assets.
The following tables present GE Pension Plan investments measured at fair value.
(In millions)
Level 1
Level 2
Level 3
Total
December 31, 2013
Equity securities
U.S. equity securities(a)
$
11,067
$
1,568
$
-
$
12,635
Non-U.S. equity securities(a)
7,832
1,292
-
9,124
Debt securities
Fixed income and cash investment funds
-
2,078
-
2,078
U.S. corporate(b)
-
4,555
-
4,555
Residential mortgage-backed
-
1,093
-
1,093
U.S. government and federal agency(c)
-
5,253
-
5,253
Other debt securities(d)
-
2,317
-
2,317
Private equities(a)
-
-
6,269
6,269
Real estate(a)
-
-
3,354
3,354
Other investments(e)
-
1,622
1,791
Total investments
$
18,899
$
18,325
$
11,245
48,469
Other(f)
(172)
Total assets
$
48,297
December 31, 2012
Equity securities
U.S. equity securities(a)
$
8,876
$
2,462
$
-
$
11,338
Non-U.S. equity securities(a)
6,699
1,644
-
8,343
Debt securities
Fixed income and cash investment funds
-
1,931
1,981
U.S. corporate(b)
-
2,758
-
2,758
Residential mortgage-backed
-
1,420
1,423
U.S. government and federal agency(c)
-
5,489
-
5,489
Other debt securities(d)
-
2,053
2,075
Private equities(a)
-
-
6,878
6,878
Real estate(a)
-
-
3,356
3,356
Other investments(e)
-
1,694
1,738
Total investments
$
15,575
$
17,801
$
12,003
45,379
Other(f)
(641)
Total assets
$
44,738
(a)
Included direct investments and investment funds.
(b)
Primarily represented investment-grade bonds of U.S. issuers from diverse industries.
(c)
Included short-term investments to meet liquidity needs.
(d)
Primarily represented investments in non-U.S. corporate bonds, non-U.S. government bonds and commercial mortgage-backed securities.
(e)
Substantially all represented hedge fund investments.
(f)
Primarily represented net unsettled transactions related to purchases and sales of investments and accrued income receivables.
(150)
The following tables present the changes in Level 3 investments for the GE Pension Plan.
Changes in Level 3 Investments for the Year Ended December 31, 2013
Purchases,
Transfers
issuances
in and/or
January 1,
Net realized
Net unrealized
and
out of
December 31,
(In millions)
gains (losses)
gains (losses)
settlements
Level 3
(a)
Debt securities
Fixed income and cash
investment funds
$
$
(7)
$
-
$
(43)
$
-
$
-
Residential mortgage-backed
-
-
-
(3)
-
Other debt securities
-
-
(22)
-
-
Private equities
6,878
(1,675)
(47)
6,269
Real estate
3,356
(355)
-
3,354
Other investments
1,694
(1)
(77)
(194)
1,622
$
12,003
$
$
1,118
$
(2,172)
$
(244)
$
11,245
(a) Transfers in and out of Level 3 are considered to occur at the beginning of the period.
Changes in Level 3 Investments for the Year Ended December 31, 2012
Purchases,
Transfers
issuances
in and/or
January 1,
Net realized
Net unrealized
and
out of
December 31,
(In millions)
gains (losses)
gains (losses)
settlements
Level 3
(a)
Debt securities
Fixed income and cash
investment funds
$
$
-
$
$
(21)
$
-
$
U.S. corporate
(1)
-
(2)
-
-
Residential mortgage-backed
(2)
-
-
-
Other debt securities
(2)
-
(122)
-
Private equities
6,786
(479)
-
6,878
Real estate
3,274
(217)
-
3,356
Other investments
1,709
(71)
(48)
1,694
$
11,985
$
$
$
(912)
$
(48)
$
12,003
(a)
Transfers in and out of Level 3 are considered to occur at the beginning of the period.
Other pension plans’ assets were $11,059 million and $9,702 million at December 31, 2013 and 2012, respectively. Equity and debt securities amounting to $9,781 million and $8,497 million represented approximately 89% of total investments at both December 31, 2013 and 2012. The plans’ investments were classified as 11% Level 1, 78% Level 2 and 11% Level 3 at December 31, 2013. The plans’ investments were classified as 14% Level 1, 75% Level 2 and 11% Level 3 at December 31, 2012. The changes in Level 3 investments were insignificant for the years ended December 31, 2013 and 2012.
(151)
Pension Asset (Liability)
Principal pension plans
Other pension plans
December 31 (In millions)
Funded status(a)(b)
$
(9,816)
$
(18,764)
$
(2,476)
$
(3,882)
Pension asset (liability) recorded in the
Statement of Financial Position
Pension asset
$
-
$
-
$
$
Pension liabilities
Due within one year(c)
(170)
(159)
(67)
(62)
Due after one year
(9,646)
(18,605)
(2,734)
(3,961)
Net amount recognized
$
(9,816)
$
(18,764)
$
(2,476)
$
(3,882)
Amounts recorded in shareowners’
equity (unamortized)
Prior service cost (credit)
$
1,160
$
1,406
$
$
(4)
Net actuarial loss
11,555
24,437
2,459
3,962
Total
$
12,715
$
25,843
$
2,468
$
3,958
(a)
Fair value of assets less PBO, as shown in the preceding tables.
(b)
The GE Pension Plan was underfunded by $4.7 billion and $13.3 billion at December 31, 2013 and December 31, 2012, respectively.
(c)
For principal pension plans, represents the GE Supplementary Pension Plan liability.
In 2014, we estimate that we will amortize $215 million of prior service cost and $2,565 million of net actuarial loss for the principal pension plans from shareowners’ equity into pension cost. For other pension plans, the estimated prior service cost and net actuarial loss to be amortized in 2014 will be $5 million and $215 million, respectively. Comparable amortized amounts in 2013, respectively, were $246 million and $3,664 million for the principal pension plans and $7 million and $343 million for other pension plans.
Estimated Future Benefit Payments
-
(In millions)
Principal pension
$
3,105
$
3,175
$
3,240
$
3,310
$
3,380
$
18,370
plans
Other pension
plans
$
$
$
$
$
$
2,935
Retiree Health and Life Benefits
We sponsor a number of retiree health and life insurance benefit plans (retiree benefit plans). Principal retiree benefit plans are discussed below; other such plans are not significant individually or in the aggregate. We use a December 31 measurement date for our plans.
Principal Retiree Benefit Plans provide health and life insurance benefits to certain eligible participants and these participants share in the cost of healthcare benefits. In 2012, we amended our principal retiree benefit plans such that, effective January 1, 2015, our post-65 retiree medical plans will be closed to salaried and retired salaried employees who are not enrolled in the plans as of that date, and we will no longer offer company-provided life insurance in retirement for certain salaried employees who retire after that date. These plans cover approximately 198,000 retirees and dependents.
(152)
Cost of Principal Retiree Benefit Plans
(In millions)
Service cost for benefits earned
$
$
$
Prior service cost amortization
Expected return on plan assets
(60)
(73)
(97)
Interest cost on benefit obligations
Net actuarial loss (gain) amortization
(45)
(110)
Net curtailment/settlement gain
-
(101)
-
Retiree benefit plans cost
$
$
1,086
$
1,260
Actuarial assumptions are described below. The actuarial assumptions at December 31 are used to measure the year-end benefit obligations and the retiree benefit plan costs for the subsequent year.
December 31
Discount rate
4.61
%
3.74
%(a)
4.09
%(a)
5.15
%
Compensation increases
4.00
3.90
3.75
4.25
Expected return on assets
7.00
7.00
7.00
8.00
Initial healthcare trend rate(b)
6.00
6.50
7.00
7.00
(a)
Weighted average discount rates of 3.77% and 3.94% were used for determination of costs in 2013 and 2012, respectively.
(b)
For 2013, ultimately declining to 5% for 2030 and thereafter.
To determine the expected long-term rate of return on retiree life plan assets, we consider current and target asset allocations, historical and expected returns on various categories of plan assets, as well as expected benefit payments and resulting asset levels. In developing future return expectations for retiree benefit plan assets, we formulate views on the future economic environment, both in the U.S. and abroad. We evaluate general market trends and historical relationships among a number of key variables that impact asset class returns such as expected earnings growth, inflation, valuations, yields and spreads, using both internal and external sources. We also take into account expected volatility by asset class and diversification across classes to determine expected overall portfolio results given current and target allocations. Based on our analysis of future expectations of asset performance, past return results, our current and target asset allocations as well as a shorter time horizon for retiree life plan assets, we have assumed a 7.0% long-term expected return on those assets for cost recognition in 2014. We apply our expected rate of return to a market-related value of assets, which stabilizes variability in the amounts to which we apply that expected return.
We amortize experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, over a period no longer than the average future service of employees.
Funding Policy. We fund retiree health benefits on a pay-as-you-go basis. We expect to contribute approximately $545 million in 2014 to fund such benefits. We fund the retiree life insurance trust at our discretion.
(153)
Changes in the accumulated postretirement benefit obligation for retiree benefit plans follow.
Accumulated Postretirement Benefit Obligation (APBO)
(In millions)
Balance at January 1
$
11,804
$
13,056
Service cost for benefits earned
Interest cost on benefit obligations
Participant contributions
Plan amendments
-
(832)
Actuarial gain
(1,836)
(a)
(60)
Benefits paid
(746)
(758)
Net curtailment/settlement
-
(366)
Balance at December 31(b)
$
9,913
$
11,804
(a)
Primarily associated with discount rate change and lower costs from new healthcare supplier contracts.
(b)
The APBO for the retiree health plans was $7,626 million and $9,218 million at year-end 2013 and 2012, respectively.
A one percentage point change in the assumed healthcare cost trend rate would have the following effects.
1%
1%
(In millions)
Increase
Decrease
APBO at December 31, 2013
$
$
(671)
Service and interest cost in 2013
(52)
Plan Assets
The fair value of the classes of retiree benefit plans' investments is presented below. The inputs and valuation techniques used to measure the fair value of assets are consistently applied and described in Note 1.
Fair Value of Plan Assets
(In millions)
Balance at January 1
$
$
1,004
Actual gain on plan assets
Employer contributions
Participant contributions
Benefits paid
(746)
(758)
Balance at December 31
$
$
Asset Allocation
December 31
Target
Actual
allocation
allocation
Equity securities
35 - 75
%(a)
%(b)
Debt securities (including cash equivalents)
11 - 46
Private equities
0 - 25
Real estate
0 - 12
Other
0 - 10
(a)
Target allocations were 18-38% for U.S. equity securities and 17-37% for non-U.S. equity securities.
(b)
Actual allocations were 23% for U.S. equity securities and 16% for non-U.S. equity securities.
(154)
Plan fiduciaries set investment policies and strategies for the trust and oversee its investment allocation, which includes selecting investment managers and setting long-term strategic targets. The primary strategic investment objectives are balancing investment risk and return and monitoring the plan’s liquidity position in order to meet the near-term benefit payment and other cash needs. Target allocation percentages are established at an asset class level by plan fiduciaries. Target allocation ranges are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below a target range.
Trust assets invested in short-term securities must generally be invested in securities rated A-1/P-1 or better, except for 15% of such securities that may be rated A-2/P-2 and other short-term securities as may be approved by the plan fiduciaries. According to statute, the aggregate holdings of all qualifying employer securities (e.g., GE common stock) and qualifying employer real property may not exceed 10% of the fair value of trust assets at the time of purchase. GE securities represented 4.0% and 5.8% of trust assets at year-end 2013 and 2012, respectively.
Retiree life plan assets were $903 million and $946 million at December 31, 2013 and 2012, respectively. Equity and debt securities amounting to $727 million and $741 million represented approximately 77% and 75% of total investments at December 31, 2013 and 2012, respectively. The plans’ investments were classified as 33% Level 1, 43% Level 2 and 24% Level 3 at December 31, 2013. The plans’ investments were classified as 28% Level 1, 47% Level 2 and 25% Level 3 at December 31, 2012. The changes in Level 3 investments were insignificant for the years ended December 31, 2013 and 2012.
Retiree Benefit Asset (Liability)
December 31 (In millions)
Funded status(a)
$
(9,010)
$
(10,858)
Liability recorded in the Statement of Financial Position
Retiree health plans
Due within one year
$
(531)
$
(589)
Due after one year
(7,095)
(8,629)
Retiree life plans
(1,384)
(1,640)
Net liability recognized
$
(9,010)
$
(10,858)
Amounts recorded in shareowners' equity (unamortized)
Prior service cost
$
$
1,356
Net actuarial loss (gain)
(1,667)
Total
$
(704)
$
1,538
(a)
Fair value of assets less APBO, as shown in the preceding tables.
In 2014, we estimate that we will amortize $395 million of prior service cost and $170 million of net actuarial gain from shareowners’ equity into retiree benefit plans cost. Comparable amortized amounts in 2013 were $393 million of prior service cost and $45 million of net actuarial gain.
Estimated Future Benefit Payments
-
(In millions)
$
$
$
$
$
$
3,500
(155)
Postretirement Benefit Plans
2013 Cost of Postretirement Benefit Plans and Changes in Other Comprehensive Income
Total
Principal
Other
Retiree
postretirement
pension
pension
benefit
(In millions)
benefit plans
plans
plans
plans
Cost of postretirement benefit plans
$
5,977
$
4,405
$
$
Changes in other comprehensive income
Prior service cost - current year
-
-
Net actuarial gain - current year(a)
(12,263)
(9,218)
(1,151)
(1,894)
Prior service cost amortization
(646)
(246)
(7)
(393)
Net actuarial gain (loss) amortization
(3,962)
(3,664)
(343)
Total changes in other comprehensive income
(16,860)
(13,128)
(1,490)
(2,242)
Cost of postretirement benefit plans and
changes in other comprehensive income
$
(10,883)
$
(8,723)
$
(845)
$
(1,315)
(a)
Principally associated with discount rate changes and plan asset gains in excess of expected return on plan assets.
NOTE 13. ALL OTHER LIABILITIES
This caption includes liabilities for various items including non-current compensation and benefits, deferred income, interest on tax liabilities, unrecognized tax benefits, environmental remediation, asset retirement obligations, derivative instruments, product warranties and a variety of sundry items.
Accruals for non-current compensation and benefits amounted to $27,853 million and $40,318 million at December 31, 2013 and 2012, respectively. These amounts include postretirement benefits, pension accruals, and other compensation and benefit accruals such as deferred incentive compensation. See Note 12.
We are involved in numerous remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs exclude possible insurance recoveries and, when dates and amounts of such costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites, such amounts are not reasonably estimable. Total reserves related to environmental remediation and asbestos claims, were $2,612 million at December 31, 2013.
(156)
NOTE 14. INCOME TAXES
Provision for Income Taxes
(In millions)
GE
Current tax expense
$
4,239
$
2,307
$
5,166
Deferred tax expense (benefit) from temporary differences
(2,571)
(294)
(327)
1,668
2,013
4,839
GECC
Current tax expense (benefit)
(268)
1,379
Deferred tax expense (benefit) from temporary differences
(724)
(858)
(992)
Consolidated
Current tax expense
3,971
3,686
5,949
Deferred tax expense (benefit) from temporary differences
(3,295)
(1,152)
(204)
Total
$
$
2,534
$
5,745
GE and GECC file a consolidated U.S. federal income tax return. This enables GE to use GECC tax deductions and credits to reduce the tax that otherwise would have been payable by GE. The GECC effective tax rate for each period reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GECC for these tax reductions at the time GE’s tax payments are due.
Consolidated U.S. earnings from continuing operations before income taxes were $6,099 million, $8,309 million and $10,206 million in 2013, 2012 and 2011, respectively. The corresponding amounts for non-U.S.-based operations were $10,052 million, $9,072 million and $9,953 million in 2013, 2012 and 2011, respectively.
Consolidated current tax expense includes amounts applicable to U.S. federal income taxes of $85 million, $685 million and $1,079 million in 2013, 2012 and 2011, respectively, including the benefit from GECC deductions and credits applied against GE’s current U.S. tax expense. Consolidated current tax expense amounts applicable to non-U.S. jurisdictions were $3,659 million, $2,871 million and $4,624 million in 2013, 2012 and 2011, respectively. Consolidated deferred taxes related to U.S. federal income taxes were an expense (benefit) of $(2,315) million, $(414) million and $1,529 million in 2013, 2012 and 2011, respectively, and amounts applicable to non-U.S. jurisdictions of an expense (benefit) of $(1,038) million, $(773) million and $(2,077) million in 2013, 2012 and 2011, respectively.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
(157)
Our businesses are subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. Changes to these laws or regulations may affect our tax liability, return on investments and business operations. For example, GE’s effective tax rate is reduced because active business income earned and indefinitely reinvested outside the United States is taxed at less than the U.S. rate. A significant portion of this reduction depends upon a provision of U.S. tax law that defers the imposition of U.S. tax on certain active financial services income until that income is repatriated to the United States as a dividend. This provision is consistent with international tax norms and permits U.S. financial services companies to compete more effectively with foreign banks and other foreign financial institutions in global markets. This provision, which had expired at the end of 2011, was reinstated in January 2013 retroactively for two years through the end of 2013. The provision had been scheduled to expire and had been extended by Congress on six previous occasions, but there can be no assurance that it will continue to be extended. In the event the provision is not extended after 2013, the current U.S. tax imposed on active financial services income earned outside the United States would increase, making it more difficult for U.S. financial services companies to compete in global markets. If this provision is not extended, we expect our effective tax rate to increase significantly after 2014.
We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that have been reinvested indefinitely. These earnings relate to ongoing operations and, at December 31, 2013 and December 31, 2012, were approximately $110 billion and $108 billion, respectively. Most of these earnings have been reinvested in active non-U.S. business operations and we do not intend to repatriate these earnings to fund U.S. operations. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely. Deferred taxes are provided for earnings of non-U.S. affiliates and associated companies when we plan to remit those earnings.
Annually, we file over 5,800 income tax returns in over 250 global taxing jurisdictions. We are under examination or engaged in tax litigation in many of these jurisdictions. During 2013, the Internal Revenue Service (IRS) completed the audit of our consolidated U.S. income tax returns for 2008-2009, except for certain issues that remain under examination. During 2011, the IRS completed the audit of our consolidated U.S. income tax returns for 2006-2007, except for certain issues that remained under examination. At December 31, 2013, the IRS was auditing our consolidated U.S. income tax returns for 2010-2011. In addition, certain other U.S. tax deficiency issues and refund claims for previous years were unresolved. The IRS has disallowed the tax loss on our 2003 disposition of ERC Life Reinsurance Corporation. We have contested the disallowance of this loss. It is reasonably possible that the unresolved items could be resolved during the next 12 months, which could result in a decrease in our balance of “unrecognized tax benefits” - that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2008-2009, reduced our 2013 consolidated income tax rate by 2.8 percentage points. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2006-2007, reduced our 2011 consolidated effective tax rate by 2.4 percentage points.
The balance of unrecognized tax benefits, the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were:
December 31 (In millions)
Unrecognized tax benefits
$
5,816
$
5,445
Portion that, if recognized, would reduce tax expense and effective tax rate(a)
4,307
4,032
Accrued interest on unrecognized tax benefits
Accrued penalties on unrecognized tax benefits
Reasonably possible reduction to the balance of unrecognized tax benefits
in succeeding 12 months
0-900
0-800
Portion that, if recognized, would reduce tax expense and effective tax rate(a)
0-350
0-700
(a)
Some portion of such reduction might be reported as discontinued operations.
(158)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(In millions)
Balance at January 1
$
5,445
$
5,230
Additions for tax positions of the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
(1,140)
(723)
Settlements with tax authorities
(98)
(191)
Expiration of the statute of limitations
(34)
(46)
Balance at December 31
$
5,816
$
5,445
We classify interest on tax deficiencies as interest expense; we classify income tax penalties as provision for income taxes. For the years ended December 31, 2013, 2012 and 2011, $22 million, $(45) million and $(197) million of interest expense (income), respectively, and $0 million, $33 million and $10 million of tax expense (income) related to penalties, respectively, were recognized in the Statement of Earnings.
A reconciliation of the U.S. federal statutory income tax rate to the actual income tax rate is provided below.
Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate
Consolidated
GE
GECC
U.S. federal statutory income
tax rate
35.0
%
35.0
%
35.0
%
35.0
%
35.0
%
35.0
%
35.0
%
35.0
%
35.0
%
Increase (reduction) in rate
resulting from
inclusion of after-tax
earnings of GECC in
before-tax earnings of GE
-
-
-
(16.9)
(15.3)
(11.9)
-
-
-
Tax on global activities
including exports(a)
(24.7)
(12.5)
(10.4)
(4.1)
(4.3)
(5.2)
(45.0)
(18.4)
(14.7)
NBCU gain
(0.7)
-
9.3
(0.7)
-
9.8
-
-
-
Business Property disposition
-
(1.9)
-
-
-
-
-
(4.2)
-
U.S. business credits(b)
(3.6)
(2.6)
(3.2)
(1.5)
(0.7)
(1.5)
(4.6)
(4.3)
(4.7)
All other - net
(1.8)
(3.4)
(2.2)
(2.0)
(2.7)
(0.9)
1.0
(1.5)
(3.5)
(30.8)
(20.4)
(6.5)
(25.2)
(23.0)
(9.7)
(48.6)
(28.4)
(22.9)
Actual income tax rate
4.2
%
14.6
%
28.5
%
9.8
%
12.0
%
25.3
%
(13.6)
%
6.6
%
12.1
%
(a)
Included (6.0)% and (13.3)% in consolidated and GECC, respectively, related to the sale of 68.5% of our Swiss consumer finance bank, Cembra Money Bank AG (Cembra), through an initial public offering in 2013.
(b)
U.S. general business credits, primarily the credit for manufacture of energy efficient appliances, the credit for energy produced from renewable sources, the advanced energy project credit, the low-income housing credit and the credit for research performed in the U.S.
(159)
Deferred Income Taxes
Aggregate deferred income tax amounts are summarized below.
December 31 (In millions)
Assets
GE
$
15,284
$
19,745
GECC
13,224
11,876
28,508
31,621
Liabilities
GE
(10,223)
(13,799)
GECC
(18,010)
(17,876)
(28,233)
(31,675)
Net deferred income tax asset (liability)
$
$
(54)
Principal components of our net asset (liability) representing deferred income tax balances are as follows:
December 31 (In millions)
GE
Provision for expenses(a)
$
5,934
$
6,503
Principal pension plans
3,436
6,567
Retiree insurance plans
3,154
3,800
Non-U.S. loss carryforwards(b)
Contract costs and estimated earnings
(3,550)
(3,087)
Intangible assets
(2,268)
(2,269)
Depreciation
(1,079)
(698)
Investment in global subsidiaries
(1,077)
(921)
Investment in NBCU LLC
-
(4,937)
Other - net
(363)
5,061
5,946
GECC
Operating leases
(6,284)
(6,141)
Financing leases
(4,075)
(4,506)
Intangible assets
(1,943)
(1,666)
Cash flow hedges
(163)
(115)
Net unrealized gains (losses) on securities
(145)
(314)
Non-U.S. loss carryforwards(b)
3,791
3,049
Allowance for losses
2,640
1,975
Investment in global subsidiaries
1,883
1,689
Other - net
(490)
(4,786)
(6,000)
Net deferred income tax asset (liability)
$
$
(54)
(a)
Represented the tax effects of temporary differences related to expense accruals for a wide variety of items, such as employee compensation and benefits, other pension plan liabilities, interest on tax liabilities, product warranties and other sundry items that are not currently deductible.
(b)
Net of valuation allowances of $2,089 million and $1,712 million for GE and $862 million and $628 million for GECC, for 2013 and 2012, respectively. Of the net deferred tax asset as of December 31, 2013, of $4,665 million, $30 million relates to net operating loss carryforwards that expire in various years ending from December 31, 2014, through December 31, 2016; $478 million relates to net operating losses that expire in various years ending from December 31, 2017 through December 31, 2030 and $4,157 million relates to net operating loss carryforwards that may be carried forward indefinitely.
(160)
NOTE 15. SHAREOWNERS’ EQUITY
(In millions)
Preferred stock issued
$
-
$
-
$
-
Common stock issued
$
$
$
Accumulated other comprehensive income
Balance at January 1
$
(20,230)
$
(23,974)
$
(17,855)
Other comprehensive income before reclassifications
8,844
(9,601)
Reclassifications from other comprehensive income
2,266
2,903
3,482
Other comprehensive income, net, attributable to GE
11,110
3,744
(6,119)
Balance at December 31
$
(9,120)
$
(20,230)
$
(23,974)
Other capital
Balance at January 1
$
33,070
$
33,693
$
36,890
Gains (losses) on treasury stock dispositions and other
(576)
(623)
(703)
Preferred stock redemption
-
-
(2,494)
Balance at December 31
$
32,494
$
33,070
$
33,693
Retained earnings
Balance at January 1
$
144,055
$
137,786
$
131,137
Net earnings attributable to the Company
13,057
13,641
14,151
Dividends(a)
(8,060)
(7,372)
(7,498)
Other
(1)
-
(4)
Balance at December 31
$
149,051
$
144,055
$
137,786
Common stock held in treasury
Balance at January 1
$
(34,571)
$
(31,769)
$
(31,938)
Purchases
(10,466)
(5,295)
(2,067)
Dispositions
2,476
2,493
2,236
Balance at December 31
$
(42,561)
$
(34,571)
$
(31,769)
Total equity
GE shareowners' equity balance at December 31
$
130,566
$
123,026
$
116,438
Noncontrolling interests balance at December 31
6,217
5,444
1,696
Total equity balance at December 31
$
136,783
$
128,470
$
118,134
(a) Included $1,031 million ($806 million related to our preferred stock redemption) of dividends on preferred stock in 2011.
Shares of GE Preferred Stock
On October 16, 2008, we issued 30,000 shares of 10% cumulative perpetual preferred stock (par value $1.00 per share) having an aggregate liquidation value of $3,000 million, and warrants to purchase 134,831,460 shares of common stock (par value $0.06 per share) to Berkshire Hathaway Inc. (Berkshire Hathaway) for net proceeds of $2,965 million in cash. The proceeds were allocated to the preferred shares ($2,494 million) and the warrants ($471 million) on a relative fair value basis and recorded in other capital. The warrants were exercisable through October 16, 2013, at an exercise price of $22.25 per share of common stock and were to be settled through physical share issuance. The terms of the warrants were amended in January 2013 to allow for net share settlement where the total number of issued shares is based on the amount by which the average market price of GE common stock over the 20 trading days preceding the date of exercise exceeds the exercise price of $22.25. On October 16, 2013, Berkshire Hathaway Inc. (Berkshire Hathaway) exercised in full their warrants to purchase shares of GE common stock and on October 17, 2013, GE delivered 10.7 million shares to Berkshire Hathaway. The transaction had equal and offsetting effects on other capital and common stock held in treasury.
The preferred stock was redeemable at our option three years after issuance at a price of 110% of liquidation value plus accrued and unpaid dividends. On September 13, 2011, we provided notice to Berkshire Hathaway that we would redeem the shares for the stated redemption price of $3,300 million, plus accrued and unpaid dividends. In connection with this notice, we recognized a preferred dividend of $806 million (calculated as the difference between the carrying value and redemption value of the preferred stock), which was recorded as a reduction to earnings attributable to common shareowners and common shareowners’ equity. The preferred shares were redeemed on October 17, 2011.
(161)
GE has 50 million authorized shares of preferred stock ($1.00 par value). No shares were issued and outstanding as of December 31, 2013 and 2012.
Shares of GE Common Stock
On December 14, 2012, we increased the existing authorization by $10 billion to $25 billion for our share repurchase program and extended the program (which would have otherwise expired on December 31, 2013) through 2015. On February 12, 2013, we increased the existing authorization by an additional $10 billion resulting in authorization to repurchase up to a total of $35 billion of our common stock through 2015. Under this program, on a book basis, we repurchased 432.6 million shares for a total of $10,375 million during 2013 and 248.6 million shares for a total of $5,185 million during 2012.
GE has 13.2 billion authorized shares of common stock ($0.06 par value).
Common shares issued and outstanding are summarized in the following table.
December 31 (In thousands)
Issued
11,693,841
11,693,841
11,693,841
In treasury
(1,632,960)
(1,288,216)
(1,120,824)
Outstanding
10,060,881
10,405,625
10,573,017
(162)
Accumulated Other Comprehensive Income
(In millions)
Investment securities
Balance at January 1
$
$
(30)
$
(636)
OCI before reclassifications - net of deferred taxes of $(407), $387 and $341(a)
(692)
Reclassifications from OCI - net of deferred taxes of $222, $13 and $1
Other comprehensive income(b)
(374)
Less: OCI attributable to noncontrolling interests
(4)
(2)
Balance at December 31
$
$
$
(30)
Currency translation adjustments (CTA)
Balance at January 1
$
$
$
(86)
OCI before reclassifications - net of deferred taxes of $(613), $(266) and $(717)
(201)
Reclassifications from OCI - net of deferred taxes of $793, $54 and $357
(818)
(174)
Other comprehensive income(b)
(308)
Less: OCI attributable to noncontrolling interests
(22)
(39)
Balance at December 31
$
$
$
Cash flow hedges
Balance at January 1
$
(722)
$
(1,176)
$
(1,280)
OCI before reclassifications - net of deferred taxes of $250, $392 and $238
(860)
Reclassifications from OCI - net of deferred taxes of $(177), $(245) and $202
(271)
Other comprehensive income(b)
Less: OCI attributable to noncontrolling interests
(1)
Balance at December 31
$
(257)
$
(722)
$
(1,176)
Benefit plans
Balance at January 1
$
(20,597)
$
(22,901)
$
(15,853)
Prior service credit (cost) - net of deferred taxes of $(5), $304 and $(276)
(6)
(495)
Net actuarial gain (loss) - net of deferred taxes of $4,506, $(574) and $(4,746)
8,269
(1,396)
(8,637)
Net curtailment/settlement - net of deferred taxes of $0, $123 and $0
-
-
Prior service cost amortization - net of deferred taxes of $267, $326 and $341
Net actuarial loss amortization - net of deferred taxes of $1,343, $1,278 and $811
2,640
2,490
1,578
Other comprehensive income(b)
11,300
2,299
(7,040)
Less: OCI attributable to noncontrolling interests
(1)
(5)
Balance at December 31
$
(9,296)
$
(20,597)
$
(22,901)
Accumulated other comprehensive income at December 31
$
(9,120)
$
(20,230)
$
(23,974)
(a)
Includes adjustments of $(1,171) million, $527 million and $786 million in 2013, 2012 and 2011, respectively, to deferred acquisition costs, present value of future profits, and investment contracts, insurance liabilities and insurance annuity benefits in our run-off insurance operations to reflect the effects that would have been recognized had the related unrealized investment securities holding gains and losses actually been realized.
(b)
Total other comprehensive income was $11,085 million, $3,757 million and $(6,134) million in 2013, 2012 and 2011, respectively.
(163)
Reclassification out of AOCI
Components of AOCI
Statement of Earnings
Caption
Available-for-sale securities
Realized gains (losses) on
sale/impairment of securities
$
(540)
$
(35)
$
(32)
Other income
Tax (expense) or benefit
$
(318)
$
(22)
$
(31)
Net of tax
Currency translation adjustments
Gains (losses) on dispositions
$
$
$
(738)
Costs and expenses
Tax (expense) or benefit
$
$
$
(381)
Net of tax
Cash flow hedges
Gains (losses) on interest rate
derivatives
$
(364)
$
(499)
$
(820)
Interest and other financial charges
Foreign exchange contracts
(510)
(a)
Other
(116)
(b)
(1,180)
Total before tax
(177)
(245)
Tax (expense) or benefit
$
$
(68)
$
(978)
Net of tax
Benefit plan items
Amortization of prior service costs
$
(664)
$
(823)
$
(855)
(c)
Amortization of actuarial gains (losses)
(3,983)
(3,768)
(2,389)
(c)
(4,647)
(4,591)
(3,244)
Total before tax
1,610
1,604
1,152
Tax (expense) or benefit
$
(3,037)
$
(2,987)
$
(2,092)
Net of tax
Total reclassification adjustments
$
(2,266)
$
(2,903)
$
(3,482)
Net of tax
(a)
Includes $608 million, $894 million and $(310) million in GECC revenues from services and $(44) million, $(102) million and $(200) million in interest and other financial charges for the years ended December 31, 2013, 2012 and 2011, respectively.
(b)
Primarily included in costs and expenses.
(c)
Amortization of prior service costs and actuarial gains and losses out of AOCI are included in the computation of net periodic pension costs. See Note 12 for further information.
Noncontrolling Interests
Noncontrolling interests in equity of consolidated affiliates includes common shares in consolidated affiliates and preferred stock issued by GECC. The balance is summarized as follows.
December 31 (In millions)
GECC preferred stock
$
4,950
$
3,960
Other noncontrolling interests in consolidated affiliates(a)
1,267
1,484
Total
$
6,217
$
5,444
(a)
Consisted of a number of individually insignificant noncontrolling interests in partnerships and consolidated affiliates.
(164)
Changes to noncontrolling interests are as follows.
Years ended December 31
(In millions)
Beginning balance
$
5,444
$
1,696
$
5,262
Net earnings
GECC issuance of preferred stock
3,960
-
GECC preferred stock dividend
(298)
(123)
-
Repurchase of NBCU shares(a)
-
-
(3,070)
Dispositions(b)
(175)
-
(609)
Dividends
(80)
(42)
(34)
Other (including AOCI)(c)
(270)
(145)
Ending balance
$
6,217
$
5,444
$
1,696
(a)
In January 2011 and prior to the transaction with Comcast, we acquired 12.3% of NBCU’s outstanding shares from Vivendi for $3,673 million and made an additional payment of $222 million related to previously purchased shares. Of these amounts, $3,070 million reflects a reduction in carrying value of noncontrolling interests. The remaining amount of $825 million represents the amount paid in excess of our carrying value, which was recorded as an increase in our basis in NBCU.
(b)
Includes noncontrolling interests related to the sale of GE SeaCo of $311 million and the redemption of Heller Financial preferred stock of $275 million in 2011.
(c)
Primarily acquisitions and eliminations.
During the second quarter of 2013, GECC issued 10,000 shares of non-cumulative perpetual preferred stock with a $0.01 par value for proceeds of $990 million. The preferred shares bear an initial fixed interest rate of 5.25% through June 15, 2023, bear a floating rate equal to three-month LIBOR plus 2.967% thereafter and are callable on June 15, 2023. Dividends on the GECC preferred stock are payable semi-annually, in June and December, with the first payment on this issuance made in December 2013.
During 2012, GECC issued 40,000 shares of non-cumulative perpetual preferred stock with a $0.01 par value for proceeds of $3,960 million. Of these shares, 22,500 bear an initial fixed interest rate of 7.125% through June 15, 2022, bear a floating rate equal to three-month LIBOR plus 5.296% thereafter and are callable on June 15, 2022, and 17,500 shares bear an initial fixed interest rate of 6.25% through December 15, 2022, bear a floating rate equal to three-month LIBOR plus 4.704% thereafter and are callable on December 15, 2022. Dividends on the GECC preferred stock are payable semi-annually, in June and December, with the first payment on these issuances made in December 2012. GECC preferred stock is presented as noncontrolling interests in the GE consolidated statement of financial position.
During 2013 and 2012, GECC paid quarterly dividends of $1,930 million and $1,926 million, respectively, and special dividends of $4,055 million and $4,500 million, respectively, to GE. No dividends were paid during 2011.
NOTE 16. OTHER STOCK-RELATED INFORMATION
We grant stock options, restricted stock units (RSUs) and performance share units (PSUs) to employees under the 2007 Long-Term Incentive Plan. This plan replaced the 1990 Long-Term Incentive Plan. In addition, we grant options and RSUs in limited circumstances to consultants, advisors and independent contractors under a plan approved by our Board of Directors in 1997 (the Consultants’ Plan). Share requirements for all plans may be met from either unissued or treasury shares. Stock options expire 10 years from the date they are granted and vest over service periods that range from one to five years. RSUs give the recipients the right to receive shares of our stock upon the vesting of their related restrictions. Restrictions on RSUs vest in various increments and at various dates, beginning after one year from date of grant through grantee retirement. Although the plan permits us to issue RSUs settleable in cash, we have only issued RSUs settleable in shares of our stock. PSUs give recipients the right to receive shares of our stock upon the achievement of certain performance targets.
All grants of GE options under all plans must be approved by the Management Development and Compensation Committee, which consists entirely of independent directors.
(165)
Stock Compensation Plans
Securities
to be
Weighted
Securities
issued
average
available
upon
exercise
for future
December 31, 2013 (Shares in thousands)
exercise
price
issuance
Approved by shareowners
Options
473,247
$
20.02
(a)
RSUs
13,572
(b)
(a)
PSUs
(b)
(a)
Not approved by shareowners (Consultants’ Plan)
Options
25.32
(c)
RSUs
-
(b)
(c)
Total
488,133
$
20.02
404,574
(a)
In 2007, the Board of Directors approved the 2007 Long-Term Incentive Plan (the Plan), which replaced the 1990 Long-Term Incentive Plan. During 2012, an amendment was approved to increase the number of shares authorized for issuance under the Plan from 500 million shares to 925 million shares. No more than 230 million of the total number of authorized shares may be available for awards granted in any form provided under the Plan other than options or stock appreciation rights. Total shares available for future issuance under the Plan amounted to 376.4 million shares at December 31, 2013.
(b)
Not applicable.
(c)
Total shares available for future issuance under the Consultants’ Plan amount to 28.2 million shares.
Outstanding options expire on various dates through December 13, 2023.
The following table summarizes information about stock options outstanding at December 31, 2013.
Stock Options Outstanding
Outstanding
Exercisable
Average
Average
Shares
Average
exercise
Shares
exercise
Exercise price range
(In thousands)
life(a)
price
(In thousands)
price
Under $10.00
34,973
4.9
$
9.57
26,995
$
9.57
10.01-15.00
56,571
5.1
11.98
45,821
11.98
15.01-20.00
172,157
6.8
17.46
91,007
17.24
20.01-25.00
139,740
9.1
22.55
20,533
21.57
25.01-30.00
20,638
4.3
28.19
20,115
28.23
30.01-35.00
35,993
1.6
33.54
35,993
33.54
Over $35.00
13,539
3.3
38.67
13,539
38.67
Total
473,611
6.5
$
20.02
254,003
$
20.15
At year-end 2012, options with a weighted average exercise price of $20.85 were exercisable on 214 million shares.
(a)
Average contractual life remaining in years.
(166)
Stock Option Activity
Weighted
Weighted
average
Aggregate
average
remaining
intrinsic
Shares
exercise
contractual
value
(In thousands)
price
term (In years)
(In millions)
Outstanding at January 1, 2013
467,837
$
19.27
Granted
62,762
23.80
Exercised
(36,191)
13.65
Forfeited
(9,688)
18.95
Expired
(11,109)
31.60
Outstanding at December 31, 2013
473,611
$
20.02
6.5
$
4,140
Exercisable at December 31, 2013
254,003
$
20.15
5.1
$
2,348
Options expected to vest
200,909
$
19.79
8.0
$
1,656
We measure the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value of options granted during 2013, 2012 and 2011 was $4.52, $3.80 and $4.00, respectively. The following assumptions were used in arriving at the fair value of options granted during 2013, 2012 and 2011, respectively: risk-free interest rates of 2.5%, 1.3% and 2.6%; dividend yields of 4.0%, 4.0% and 3.9%; expected volatility of 28%, 29% and 30%; and expected lives of 7.5 years, 7.8 years and 7.7 years. Risk-free interest rates reflect the yield on zero-coupon U.S. Treasury securities. Expected dividend yields presume a set dividend rate and we used a historical five-year average for the dividend yield. Expected volatilities are based on implied volatilities from traded options and historical volatility of our stock. The expected option lives are based on our historical experience of employee exercise behavior.
The total intrinsic value of options exercised during 2013, 2012 and 2011 amounted to $392 million, $265 million and $65 million, respectively. As of December 31, 2013, there was $663 million of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted average period of 2 years, of which approximately $180 million after tax is expected to be recognized in 2014.
Stock option expense recognized in net earnings during 2013, 2012 and 2011 amounted to $231 million, $220 million and $230 million, respectively. Cash received from option exercises during 2013, 2012 and 2011 was $490 million, $355 million and $89 million, respectively. The tax benefit realized from stock options exercised during 2013, 2012 and 2011 was $128 million, $88 million and $21 million, respectively.
Other Stock-based Compensation
Weighted
Weighted
average
Aggregate
average
remaining
intrinsic
Shares
grant date
contractual
value
(In thousands)
fair value
term (In years)
(In millions)
RSUs outstanding at January 1, 2013
14,878
$
22.45
Granted
3,951
24.54
Vested
(4,583)
24.35
Forfeited
(674)
21.25
RSUs outstanding at December 31, 2013
13,572
$
22.58
2.8
$
RSUs expected to vest
12,352
$
22.32
2.7
$
(167)
The fair value of each restricted stock unit is the market price of our stock on the date of grant. The weighted average grant date fair value of RSUs granted during 2013, 2012 and 2011 was $24.54, $20.79 and $16.74, respectively. The total intrinsic value of RSUs vested during 2013, 2012 and 2011 amounted to $109 million, $116 million and $154 million, respectively. As of December 31, 2013, there was $190 million of total unrecognized compensation cost related to nonvested RSUs. That cost is expected to be recognized over a weighted average period of 2 years, of which approximately $42 million after tax is expected to be recognized in 2014. As of December 31, 2013, 1.0 million PSUs with a weighted average remaining contractual term of 2 years, an aggregate intrinsic value of $27 million and $8 million of unrecognized compensation cost were outstanding. Other share-based compensation expense for RSUs and PSUs recognized in net earnings amounted to $62 million, $79 million and $84 million in 2013, 2012 and 2011, respectively.
The income tax benefit recognized in earnings based on the compensation expense recognized for all share-based compensation arrangements amounted to $145 million, $153 million and $163 million in 2013, 2012 and 2011, respectively. The excess of actual tax deductions over amounts assumed, which are recognized in shareowners’ equity, were $86 million $53 million and $12 million in 2013, 2012 and 2011, respectively.
When stock options are exercised and restricted stock vests, the difference between the assumed tax benefit and the actual tax benefit must be recognized in our financial statements. In circumstances in which the actual tax benefit is lower than the estimated tax benefit, that difference is recorded in equity, to the extent there are sufficient accumulated excess tax benefits. At December 31, 2013, our accumulated excess tax benefits are sufficient to absorb any future differences between actual and estimated tax benefits for all of our outstanding option and restricted stock grants.
NOTE 17. OTHER INCOME
(In millions)
GE
Purchases and sales of business interests(a)
$
1,777
$
$
3,804
Licensing and royalty income
Marketable securities and bank deposits
Associated companies(b)
1,545
Interest income from GECC
Other items(c)
2,886
2,657
5,268
Eliminations
(94)
(205)
Total
$
3,108
$
2,563
$
5,063
(a)
Included a pre-tax gain of $1,096 million on the sale of our 49% common equity interest in NBCU LLC and $3,705 million related to formation of NBCU LLC, in 2013 and 2011, respectively. See Note 2.
(b)
Included income of $1,416 million and $789 million from our former equity method investment in NBCU LLC, in 2012 and 2011, respectively.
(c)
Included net gains on asset sales of $330 million in 2013.
(168)
NOTE 18. GECC REVENUES FROM SERVICES
(In millions)
Interest on loans
$
17,951
$
18,843
$
19,818
Equipment leased to others
9,804
10,456
10,879
Fees
4,720
4,709
4,669
Investment income(a)
1,809
2,630
2,500
Financing leases
1,667
1,888
2,378
Associated companies(b)
1,809
1,538
2,337
Premiums earned by insurance activities
1,573
1,715
1,905
Real estate investments(c)
2,528
1,709
1,625
Other items(a)(d)
2,080
1,757
2,065
43,941
45,245
48,176
Eliminations
(1,546)
(1,273)
(1,219)
Total
$
42,395
$
43,972
$
46,957
(a)
Included net other-than-temporary impairments on investment securities of $747 million, $140 million and $387 million in 2013, 2012 and 2011, respectively, of which $96 million related to the impairment of an investment in a Brazilian company that was fully offset by the benefit of a guarantee provided by GE as a component of other items for 2013. See Note 3.
(b)
During 2013, we sold our remaining equity interest in the Bank of Ayudhya (Bay Bank) and recorded a pre-tax gain of $641 million. During 2012, we sold our remaining equity interest in Garanti Bank, which was classified as an available-for-sale security. During 2011, we sold an 18.6% equity interest in Garanti Bank and recorded a pre-tax gain of $690 million.
(c)
During 2013, we sold real estate comprising certain floors located at 30 Rockefeller Center, New York for a pre-tax gain of $902 million.
(d)
During 2013, we sold a portion of Cembra through an initial public offering and recorded a pre-tax gain of $351 million.
NOTE 19. SUPPLEMENTAL COST INFORMATION
We funded research and development expenditures of $4,750 million in 2013, $4,520 million in 2012 and $4,601 million in 2011. Research and development costs are classified in cost of goods sold in the Statement of Earnings. In addition, research and development funding from customers, principally the U.S. government, totaled $711 million, $680 million and $788 million in 2013, 2012 and 2011, respectively.
Consolidated other costs and expenses totaled $35,143 million, $35,897 million and $36,841 million in 2013, 2012 and 2011, respectively, and comprised selling, general and administrative costs (SG&A), depreciation and amortization and other operating costs. GE’s SG&A totaled $16,105 million, $17,671 million and $17,554 million in 2013, 2012 and 2011, respectively. GECC’s operating and administrative expenses totaled $12,463 million, $12,023 million and $13,009 million in 2013, 2012 and 2011, respectively, and depreciation and amortization totaled $7,313 million, $6,901 million and $6,918 million in 2013, 2012 and 2011, respectively.
Our businesses enter into collaborative arrangements primarily with manufacturers and suppliers of components used to build and maintain certain engines, under which GE and these participants share in risks and rewards of these product programs. Under these arrangements, participation fees earned and recorded as other income totaled $44 million, $36 million and $12 million for the years 2013, 2012 and 2011, respectively. GE’s payments to participants are recorded as cost of services sold ($820 million, $594 million and $612 million for the years 2013, 2012 and 2011, respectively) or as cost of goods sold ($2,613 million, $2,507 million and $1,996 million for the years 2013, 2012 and 2011, respectively).
Rental expense under operating leases is shown below.
(In millions)
GE
$
1,220
$
1,134
$
GECC
1,648
1,673
1,550
Eliminations
(135)
(142)
(165)
Total
$
1,513
$
1,531
$
1,385
(169)
At December 31, 2013, minimum rental commitments under noncancellable operating leases aggregated $3,087 million and $1,427 million for GE and GECC, respectively. Amounts payable over the next five years follow.
(In millions)
GE
$
$
$
$
$
GECC
Eliminations
(59)
(42)
(34)
(24)
(16)
Total
$
$
$
$
$
NOTE 20. EARNINGS PER SHARE INFORMATION
(In millions; per-share amounts in dollars)
Diluted
Basic
Diluted
Basic
Diluted
Basic
Amounts attributable to the Company:
Consolidated
Earnings from continuing operations for per-share
calculation(a)(b)
$
15,145
$
15,157
$
14,604
$
14,603
$
14,102
$
14,101
Preferred stock dividends declared(c)
-
-
-
-
(1,031)
(1,031)
Earnings from continuing operations attributable to
common shareowners for per-share calculation(a)(b)
15,145
15,157
14,604
14,603
13,070
13,070
Earnings (loss) from discontinued operations for
per-share calculation(a)(b)
(2,128)
(2,116)
(980)
(980)
Net earnings attributable to GE common shareowners
for per-share calculation(a)(b)
$
13,028
$
13,040
$
13,622
$
13,622
$
13,099
$
13,098
Average equivalent shares
Shares of GE common stock outstanding
10,222
10,222
10,523
10,523
10,591
10,591
Employee compensation-related shares (including
stock options) and warrants
-
-
-
Total average equivalent shares
10,289
10,222
10,564
10,523
10,620
10,591
Per-share amounts
Earnings from continuing operations
$
1.47
$
1.48
$
1.38
$
1.39
$
1.23
$
1.23
Earnings (loss) from discontinued operations
(0.21)
(0.21)
(0.09)
(0.09)
-
-
Net earnings
1.27
1.28
1.29
1.29
1.23
1.24
Our unvested restricted stock unit awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and, therefore, are included in the computation of earnings per share pursuant to the two-class method. Application of this treatment has an insignificant effect.
(a)
Included an insignificant amount of dividend equivalents in each of the three years presented.
(b)
Included in 2013 is a dilutive adjustment for the change in income for forward purchase contracts that may be settled in stock.
(c)
Included $806 million related to the redemption of our 10% cumulative preferred stock in 2011. See Note 15.
For the years ended December 31, 2013, 2012 and 2011, there were approximately 121 million, 292 million and 321 million, respectively, of outstanding stock awards that were not included in the computation of diluted earnings per share because their effect was antidilutive.
Earnings-per-share amounts are computed independently for earnings from continuing operations, earnings (loss) from discontinued operations and net earnings. As a result, the sum of per-share amounts from continuing operations and discontinued operations may not equal the total per-share amounts for net earnings.
(170)
NOTE 21. FAIR VALUE MEASUREMENTS
For a description of how we estimate fair value, see Note 1.
The following tables present our assets and liabilities measured at fair value on a recurring basis. Included in the tables are investment securities primarily supporting obligations to annuitants and policyholders in our run-off insurance operations and supporting obligations to holders of GICs in Trinity and investment securities held in our CLL business collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries.
(171)
Netting
(In millions)
Level 1
(a)
Level 2
(a)
Level 3
adjustment
(b)
Net balance
December 31, 2013
Assets
Investment securities
Debt
U.S. corporate
$
-
$
18,788
$
2,953
$
-
$
21,741
State and municipal
-
4,193
-
4,289
Residential mortgage-backed
-
1,824
-
1,910
Commercial mortgage-backed
-
3,025
-
3,035
Asset-backed(c)
-
6,898
-
7,387
Corporate - non-U.S.
1,064
-
1,770
Government - non-U.S.
1,590
-
2,410
U.S. government and federal
agency
-
-
Retained interests
-
-
-
Equity
Available-for-sale
-
Trading
-
-
Derivatives(d)
-
8,304
(6,739)
1,740
Other(e)
-
-
-
Total
$
2,204
$
38,635
$
12,115
$
(6,739)
$
46,215
Liabilities
Derivatives
$
-
$
5,409
$
$
(4,355)
$
1,074
Other(f)
-
1,170
-
-
1,170
Total
$
-
$
6,579
$
$
(4,355)
$
2,244
December 31, 2012
Assets
Investment securities
Debt
U.S. corporate
$
-
$
20,580
$
3,591
$
-
$
24,171
State and municipal
-
4,469
-
4,546
Residential mortgage-backed
-
2,162
-
2,262
Commercial mortgage-backed
-
3,088
-
3,094
Asset-backed(c)
-
5,023
-
5,738
Corporate - non-U.S.
1,132
1,218
-
2,421
Government - non-U.S.
1,019
-
1,763
U.S. government and federal
agency
-
3,288
-
3,565
Retained interests
-
-
-
Equity
Available-for-sale
-
Trading
-
-
-
Derivatives(d)
-
11,432
(7,926)
3,940
Other(e)
-
-
Total
$
1,646
$
47,901
$
11,663
$
(7,926)
$
53,284
Liabilities
Derivatives
$
-
$
3,434
$
$
(3,177)
$
Other(f)
-
-
-
Total
$
-
$
4,342
$
$
(3,177)
$
1,185
(a)
The fair value of securities transferred between Level 1 and Level 2 was $2 million during 2013.
(b)
The netting of derivative receivables and payables (including the effects of any collateral posted or received) is permitted when a legally enforceable master netting agreement exists.
(c)
Includes investments in our CLL business in asset-backed securities collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries.
(d)
The fair value of derivatives included an adjustment for non-performance risk. The cumulative adjustment was a gain (loss) of $(7) million and $(15) million at December 31, 2013 and 2012, respectively. See Note 22 for additional information on the composition of our derivative portfolio.
(e)
Included private equity investments and loans designated under the fair value option.
(f)
Primarily represented the liability associated with certain of our deferred incentive compensation plans.
(172)
The following tables present the changes in Level 3 instruments measured on a recurring basis for the years ended December 31, 2013 and 2012, respectively. The majority of our Level 3 balances consist of investment securities classified as available-for-sale with changes in fair value recorded in shareowners’ equity.
Changes in Level 3 Instruments for the Year Ended December 31, 2013
Net
(In millions)
change in
Net realized/
unrealized
Net
unrealized
gains
realized/
gains (losses)
(losses)
unrealized
included in
relating to
Balance
gains
accumulated
Balance
instruments
at
(losses)
other
Transfers
Transfers
at
still held at
January 1,
included
comprehensive
into
out of
December 31,
December 31,
in earnings
(a)
income
Purchases
Sales
Settlements
Level 3
(b)
Level 3
(b)
(c)
Investment securities
Debt
U.S. corporate
$
3,591
$
(497)
$
$
$
(424)
$
(231)
$
$
(109)
$
2,953
$
-
State and municipal
-
(7)
-
(5)
-
-
Residential
mortgage-backed
-
(5)
-
(2)
(7)
-
-
-
Commercial
mortgage-backed
-
-
-
-
(6)
-
-
Asset-backed
5,023
2,632
(4)
(795)
(7)
6,898
-
Corporate - non-U.S.
1,218
(103)
5,814
(3)
(5,874)
(58)
1,064
-
Government
- non-U.S.
(12)
-
-
-
-
-
-
U.S. government and
federal agency
-
(52)
-
-
-
-
-
-
Retained interests
-
(21)
-
-
-
Equity
Available-for-sale
-
-
-
-
-
-
(2)
-
Trading
-
-
-
-
-
-
-
-
-
-
Derivatives(d)(e)
(66)
(2)
-
(226)
(30)
Other
(68)
(779)
-
(12)
(102)
Total
$
11,645
$
(725)
$
$
9,389
$
(1,212)
$
(7,165)
$
$
(185)
$
12,104
$
(132)
(a)
Earnings effects are primarily included in the “GECC revenues from services” and “Interest and other financial charges” captions in the Statement of Earnings.
(b)
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
(c)
Represented the amount of unrealized gains or losses for the period included in earnings.
(d)
Represented derivative assets net of derivative liabilities and included cash accruals of $9 million not reflected in the fair value hierarchy table.
(e)
Gains (losses) included in net realized/unrealized gains (losses) included in earnings were offset by the earnings effects from the underlying items that were economically hedged. See Note 22.
(173)
Changes in Level 3 Instruments for the Year Ended December 31, 2012
Net
(In millions)
change in
Net realized/
unrealized
Net
unrealized
gains
realized/
gains (losses)
(losses)
unrealized
included in
relating to
Balance
gains
accumulated
Balance
instruments
at
(losses)
other
Transfers
Transfers
at
still held at
January 1,
included
comprehensive
into
out of
December 31,
December 31,
in earnings
(a)
income
Purchases
Sales
Settlements
Level 3
(b)
Level 3
(b)
(c)
Investment securities
Debt
U.S. corporate
$
3,235
$
$
$
$
(214)
$
(110)
$
$
(200)
$
3,591
$
-
State and municipal
-
-
(1)
(103)
-
Residential
mortgage-backed
(3)
-
(3)
(77)
-
Commercial
mortgage-backed
-
(1)
-
-
-
(3)
-
Asset-backed
4,040
(25)
1,490
(502)
-
(6)
5,023
-
Corporate - non-U.S.
1,204
(11)
(51)
(172)
(136)
1,218
-
Government
- non-U.S.
(33)
(72)
(40)
-
-
-
U.S. government and
federal agency
-
-
-
-
-
-
-
Retained interests
(1)
(3)
(6)
(12)
-
-
Equity
Available-for-sale
-
(1)
(3)
(1)
(4)
-
Trading
-
-
-
-
-
-
-
-
-
-
Derivatives(d)(e)
(1)
(1)
-
(112)
(58)
Other
(137)
-
-
(92)
Total
$
10,176
$
$
$
2,578
$
(985)
$
(451)
$
$
(679)
$
11,645
$
(a)
Earnings effects are primarily included in the “GECC revenues from services” and “Interest and other financial charges” captions in the Statement of Earnings.
(b)
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
(c)
Represented the amount of unrealized gains or losses for the period included in earnings.
(d)
Represented derivative assets net of derivative liabilities and included cash accruals of $2 million not reflected in the fair value hierarchy table.
(e)
Gains (losses) included in net realized/unrealized gains (losses) included in earnings were offset by the earnings effects from the underlying items that were economically hedged. See Note 22.
(174)
Non-Recurring Fair Value Measurements
The following table represents non-recurring fair value amounts (as measured at the time of the adjustment) for those assets remeasured to fair value on a non-recurring basis during the fiscal year and still held at December 31, 2013 and 2012. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
Remeasured during the year ended December 31
(In millions)
Level 2
Level 3
Level 2
Level 3
Financing receivables and loans held for sale
$
$
2,986
$
$
4,094
Cost and equity method investments(a)
-
Long-lived assets, including real estate
2,050
1,088
2,182
Total
$
2,260
$
4,764
$
1,076
$
6,589
(a)
Includes the fair value of private equity and real estate funds included in Level 3 of $126 million and $84 million at December 31, 2013 and 2012, respectively.
The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and still held at December 31, 2013 and 2012.
Year ended December 31
(In millions)
Financing receivables and loans held for sale
$
(361)
$
(595)
Cost and equity method investments(a)
(484)
(153)
Long-lived assets, including real estate(b)
(1,188)
(624)
Total
$
(2,033)
$
(1,372)
(a)
Includes fair value adjustments associated with private equity and real estate funds of $(14) million and $(33) million during 2013 and 2012, respectively.
(b)
Includes impairments related to real estate equity properties and investments recorded in other costs and expenses of $108 million and $218 million during 2013 and 2012, respectively.
(175)
Level 3 Measurements
The following table presents information relating to the significant unobservable inputs of our Level 3 recurring and non-recurring measurements.
Valuation
Unobservable
Range (weighted
(Dollars in millions)
Fair value
technique
inputs
average)
December 31, 2013
Recurring fair value measurements
Investment securities
Debt
U.S. corporate
$
Income approach
Discount rate(a)
1.5%-13.3% (6.5%)
Asset-backed
6,854
Income approach
Discount rate(a)
1.2%-10.5% (3.7%)
Corporate - non-U.S.
Income approach
Discount rate(a)
1.4%-46.0% (15.1%)
Other financial assets
Income approach,
Market comparables
Weighted average
cost of capital
9.3%-9.3% (9.3%)
EBITDA multiple
5.4X-12.5X (9.5X)
Discount rate(a)
5.2%-8.8% (5.3%)
Capitalization rate(b)
6.3%-7.5% (7.2%)
Non-recurring fair value measurements
Financing receivables and loans held for sale
$
1,937
Income approach, Business enterprise value
Capitalization rate(b)
5.5%-16.7% (8.0%)
EBITDA multiple
4.3X-5.5X (4.8X)
Discount rate(a)
6.6%-6.6% (6.6%)
Cost and equity method investments
Income approach,
Market comparables
Discount rate(a)
5.7%-5.9% (5.8%)
Capitalization rate(b)
8.5%-10.6% (10.0%)
Weighted average
cost of capital
9.3%-9.6% (9.4%)
EBITDA multiple
7.1X-14.5X (11.3X)
Revenue multiple
2.2X-12.6X (9.4X)
Long-lived assets, including real estate
Income approach
Capitalization rate(b)
5.4%-14.5% (7.8%)
Discount rate(a)
4.0%-23.0% (9.0%)
December 31, 2012
Recurring fair value measurements
Investment securities
Debt
U.S. corporate
$
1,652
Income approach
Discount rate(a)
1.3%-29.9% (11.1%)
Asset-backed
4,977
Income approach
Discount rate(a)
2.1%-13.1% (3.8%)
Corporate - non-U.S.
Income approach
Discount rate(a)
1.5%-25.0% (13.2%)
Other financial assets
Income approach,
Market comparables
Weighted average
cost of capital
8.7%-10.2% (8.7%)
EBITDA multiple
4.9X-10.6X (7.9X)
Non-recurring fair value measurements
Financing receivables and loans held for sale
$
2,835
Income approach,
Business enterprise value
Capitalization rate(b)
3.8%-14.0% (8.0%)
EBITDA multiple
2.0X-6.0X (4.8X)
Cost and equity method investments
Income approach
Capitalization rate(b)
9.2%-12.8% (12.0%)
Long-lived assets, including real estate
Income approach
Capitalization rate(b)
4.8%-14.6% (7.3%)
(a)
Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value.
(b)
Represents the rate of return on net operating income that is considered acceptable for an investor and is used to determine a property’s capitalized value. An increase in the capitalization rate would result in a decrease in the fair value.
(176)
At December 31, 2013 and December 31, 2012, other Level 3 recurring fair value measurements of $2,816 million and $3,146 million, respectively, and non-recurring measurements of $1,460 million and $2,412 million, respectively, are valued using non-binding broker quotes or other third-party sources. For a description of our process to evaluate third-party pricing servicers, see Note 1. At December 31, 2013 and December 31, 2012, other recurring fair value measurements of $327 million and $370 million, respectively, and non-recurring fair value measurements of $571 million and $285 million, respectively, were individually insignificant and utilize a number of different unobservable inputs not subject to meaningful aggregation.
NOTE 22. FINANCIAL INSTRUMENTS
The following table provides information about the assets and liabilities not carried at fair value in our Statement of Financial Position. The table excludes finance leases and non-financial assets and liabilities. Substantially all of the assets discussed below are considered to be Level 3. The vast majority of our liabilities’ fair value can be determined based on significant observable inputs and thus considered Level 2. Few of the instruments are actively traded and their fair values must often be determined using financial models. Realization of the fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity.
Assets (liabilities)
Assets (liabilities)
Carrying
Carrying
Notional
amount
Estimated
Notional
amount
Estimated
December 31 (In millions)
amount
(net)
fair value
amount
(net)
fair value
GE
Assets
Investments and notes
receivable
$
(a)
$
$
$
(a)
$
$
Liabilities
Borrowings(b)
(a)
(13,356)
(13,707)
(a)
(17,469)
(18,619)
GECC
Assets
Loans
(a)
226,293
230,792
(a)
235,888
238,254
Other commercial mortgages
(a)
2,270
2,281
(a)
2,222
2,249
Loans held for sale
(a)
(a)
1,180
1,181
Other financial instruments(c)
(a)
1,622
2,203
(a)
1,858
2,276
Liabilities
Borrowings and bank
deposits(b)(d)
(a)
(371,062)
(386,823)
(a)
(397,039)
(414,264)
Investment contract benefits
(a)
(3,144)
(3,644)
(a)
(3,321)
(4,150)
Guaranteed investment
contracts
(a)
(1,471)
(1,459)
(a)
(1,644)
(1,674)
Insurance - credit life(e)
2,149
(108)
(94)
2,277
(120)
(104)
(a)
These financial instruments do not have notional amounts.
(b)
See Note 10.
(c)
Principally cost method investments.
(d)
Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at December 31, 2013 and 2012 would have been reduced by $2,284 million and $7,937 million, respectively.
(e)
Net of reinsurance of $1,250 million and $2,000 million at December 31, 2013 and 2012, respectively.
A description of how we estimate fair values follows.
Loans
Based on a discounted future cash flows methodology, using current market interest rate data adjusted for inherent credit risk or quoted market prices and recent transactions, if available.
(177)
Borrowings and bank deposits
Based on valuation methodologies using current market interest rate data that are comparable to market quotes adjusted for our non-performance risk.
Investment contract benefits
Based on expected future cash flows, discounted at currently offered rates for immediate annuity contracts or the income approach for single premium deferred annuities.
Guaranteed investment contracts
Based on valuation methodologies using current market interest rate data, adjusted for our non-performance risk.
All other instruments
Based on observable market transactions and/or valuation methodologies using current market interest rate data adjusted for inherent credit risk.
Assets and liabilities that are reflected in the accompanying financial statements at fair value are not included in the above disclosures; such items include cash and equivalents, investment securities and derivative financial instruments.
Additional information about certain categories in the table above follows.
Insurance - credit life
Certain insurance affiliates, primarily in Consumer, issue credit life insurance designed to pay the balance due on a loan if the borrower dies before the loan is repaid. As part of our overall risk management process, we cede to third parties a portion of this associated risk, but are not relieved of our primary obligation to policyholders.
Loan Commitments
Notional amount
December 31 (In millions)
Ordinary course of business lending commitments(a)
$
4,756
$
3,708
Unused revolving credit lines(b)
Commercial(c)
16,570
17,929
Consumer - principally credit cards
290,662
271,211
(a)
Excluded investment commitments of $1,395 million and $1,276 million as of December 31, 2013 and 2012, respectively.
(b)
Excluded inventory financing arrangements, which may be withdrawn at our option, of $13,502 million and $12,813 million as of December 31, 2013 and 2012, respectively.
(c)
Included commitments of $11,629 million and $12,923 million as of December 31, 2013 and 2012, respectively, associated with secured financing arrangements that could have increased to a maximum of $14,590 million and $15,731 million at December 31, 2013 and 2012, respectively, based on asset volume under the arrangement.
Securities Repurchase and Reverse Repurchase Arrangements
Our issuances of securities repurchase agreements are insignificant and are limited to activities at certain of our foreign banks primarily for purposes of liquidity management. At December 31, 2013, we were party to repurchase agreements totaling $126 million, which were reported in short-term borrowings on the financial statements. We have had no repurchase agreements that were accounted for as off-book financing and we do not engage in securities lending transactions.
(178)
We also enter into reverse securities repurchase agreements primarily for short-term investment with maturities of 90 days or less. At December 31, 2013, we were party to reverse repurchase agreements totaling $20.8 billion, which were reported in cash and equivalents on the financial statements. Under these reverse securities repurchase agreements, we typically lend available cash at a specified rate of interest and hold U.S. or highly-rated European government securities as collateral during the term of the agreement. Collateral value is in excess of amounts loaned under the agreements.
Derivatives and hedging
As a matter of policy, we use derivatives for risk management purposes, and we do not use derivatives for speculative purposes. A key risk management objective for our financial services businesses is to mitigate interest rate and currency risk by seeking to ensure that the characteristics of the debt match the assets they are funding. If the form (fixed versus floating) and currency denomination of the debt we issue do not match the related assets, we typically execute derivatives to adjust the nature and tenor of funding to meet this objective within pre-defined limits. The determination of whether we enter into a derivative transaction or issue debt directly to achieve this objective depends on a number of factors, including market-related factors that affect the type of debt we can issue.
The notional amounts of derivative contracts represent the basis upon which interest and other payments are calculated and are reported gross, except for offsetting foreign currency forward contracts that are executed in order to manage our currency risk of net investment in foreign subsidiaries. Of the outstanding notional amount of $320,000 million, approximately 87%, or $277,000 million, is associated with reducing or eliminating the interest rate, currency or market risk between financial assets and liabilities in our financial services businesses. The remaining derivative activities primarily relate to hedging against adverse changes in currency exchange rates and commodity prices related to anticipated sales and purchases and contracts containing certain clauses that meet the accounting definition of a derivative. The instruments used in these activities are designated as hedges when practicable. When we are not able to apply hedge accounting, or when the derivative and the hedged item are both recorded in earnings concurrently, the derivatives are deemed economic hedges and hedge accounting is not applied. This most frequently occurs when we hedge a recognized foreign currency transaction (e.g., a receivable or payable) with a derivative. Since the effects of changes in exchange rates are reflected concurrently in earnings for both the derivative and the transaction, the economic hedge does not require hedge accounting.
(179)
The following table provides information about the fair value of our derivatives by contract type, separating those accounted for as hedges and those that are not.
Fair value
Fair value
December 31 (In millions)
Assets
Liabilities
Assets
Liabilities
Derivatives accounted for as hedges
Interest rate contracts
$
3,837
$
1,989
$
8,443
$
Currency exchange contracts
1,830
1,777
Other contracts
-
-
5,668
2,973
9,334
2,496
Derivatives not accounted for as hedges
Interest rate contracts
Currency exchange contracts
2,257
2,245
1,797
Other contracts
2,811
2,456
2,532
Gross derivatives recognized in statement of
financial position
Gross derivatives
8,479
5,429
11,866
3,454
Gross accrued interest
1,227
1,683
9,706
5,670
13,549
3,468
Amounts offset in statement of financial position
Netting adjustments(a)
(4,120)
(4,113)
(2,801)
(2,786)
Cash collateral(b)
(2,619)
(242)
(5,125)
(391)
(6,739)
(4,355)
(7,926)
(3,177)
Net derivatives recognized in statement of
financial position
Net derivatives
2,967
1,315
5,623
Amounts not offset in statement of
financial position
Securities held as collateral(c)
(1,962)
-
(5,227)
-
Net amount
$
1,005
$
1,315
$
$
Derivatives are classified in the captions “All other assets” and “All other liabilities” and the related accrued interest is classified in “Other GECC receivables” and “All other liabilities” in our financial statements.
(a)
The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts included fair value adjustments related to our own and counterparty non-performance risk. At December 31, 2013 and 2012, the cumulative adjustment for non-performance risk was a gain (loss) of $(7) million and $(15) million, respectively.
(b)
Excludes excess cash collateral received and posted of $160 million and $37 million at December 31, 2013, respectively, and $42 million and $10 million at December 31, 2012, respectively.
(c)
Excludes excess securities collateral received of $363 million and $359 million at December 31, 2013 and 2012, respectively.
Fair value hedges
We use interest rate and currency exchange derivatives to hedge the fair value effects of interest rate and currency exchange rate changes on local and non-functional currency denominated fixed-rate debt. For relationships designated as fair value hedges, changes in fair value of the derivatives are recorded in earnings within interest and other financial charges, along with offsetting adjustments to the carrying amount of the hedged debt. The following table provides information about the earnings effects of our fair value hedging relationships for the years ended December 31, 2013 and 2012, respectively.
(180)
(In millions)
Gain (loss)
Gain (loss)
Gain (loss)
Gain (loss)
on hedging
on hedged
on hedging
on hedged
derivatives
items
derivatives
items
Interest rate contracts
$
(5,258)
$
5,180
$
$
(1,041)
Currency exchange contracts
(7)
(68)
Fair value hedges resulted in $(79) million and $(303) million of ineffectiveness in 2013 and 2012, respectively. In both 2013 and 2012, there were insignificant amounts excluded from the assessment of effectiveness.
Cash flow hedges
We use interest rate, currency exchange and commodity derivatives to reduce the variability of expected future cash flows associated with variable-rate borrowings and commercial purchase and sale transactions, including commodities. For derivatives that are designated in a cash flow hedging relationship, the effective portion of the change in fair value of the derivative is reported as a component of AOCI and reclassified into earnings contemporaneously and in the same caption with the earnings effects of the hedged transaction.
The following table provides information about the amounts recorded in AOCI, as well as the gain (loss) recorded in earnings, primarily in GECC revenue from services, interest and other financial charges, and other costs and expenses, when reclassified out of AOCI, for the years ended December 31, 2013 and 2012, respectively. See Note 15 for additional information about reclassifications out of AOCI.
Gain (loss) recognized
Gain (loss) reclassified from
in AOCI
AOCI into earnings
(In millions)
Interest rate contracts
$
(26)
$
(158)
$
(364)
$
(499)
Currency exchange contracts
1,004
Commodity contracts
(6)
(5)
(5)
Total
$
$
$
$
The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $251 million loss at December 31, 2013. We expect to transfer $208 million to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In 2013, we recognized insignificant gains and losses related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At December 31, 2013 and 2012, the maximum term of derivative instruments that hedge forecasted transactions was 19 years and 20 years, respectively.
For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness are both reflected in earnings each reporting period. These amounts are primarily reported in GECC revenues from services and totaled $0 million and $5 million for the years ended December 31, 2013 and 2012, respectively.
Net investment hedges in foreign operations
We use currency exchange derivatives to protect our net investments in global operations conducted in non-U.S. dollar currencies. For derivatives that are designated as hedges of net investment in a foreign operation, we assess effectiveness based on changes in spot currency exchange rates. Changes in spot rates on the derivative are recorded as a component of AOCI until such time as the foreign entity is substantially liquidated or sold. The change in fair value of the forward points, which reflects the interest rate differential between the two countries on the derivative, is excluded from the effectiveness assessment.
The following table provides information about the amounts recorded in AOCI for the years ended December 31, 2013 and 2012, as well as the gain (loss) recorded in GECC revenues from services when reclassified out of AOCI.
(181)
Gain (loss) recognized
Gain (loss) reclassified
(In millions)
in CTA
from CTA
Currency exchange contracts
$
2,322
$
(2,905)
$
(1,525)
$
The amounts related to the change in the fair value of the forward points that are excluded from the measure of effectiveness were $(678) million and $(874) million for the years ended December 31, 2013 and 2012, respectively, and are recorded in interest and other financial charges.
Free-standing derivatives
Changes in the fair value of derivatives that are not designated as hedges are recorded in earnings each period. As discussed above, these derivatives are typically entered into as economic hedges of changes in interest rates, currency exchange rates, commodity prices and other risks. Gains or losses related to the derivative are typically recorded in GECC revenues from services or other income, based on our accounting policy. In general, the earnings effects of the item that represent the economic risk exposure are recorded in the same caption as the derivative. Losses for the year ended December 31, 2013 on derivatives not designated as hedges were $(449) million composed of amounts related to interest rate contracts of $(111) million, currency exchange contracts of $(595) million, and other derivatives of $257 million. These losses were more than offset by the earnings effects from the underlying items that were economically hedged. Losses for the year ended December 31, 2012 on derivatives not designated as hedges were $(90) million composed of amounts related to interest rate contracts of $(296) million, currency exchange contracts of $80 million, and other derivatives of $126 million. These losses were more than offset by the earnings effects from the underlying items that were economically hedged.
Counterparty credit risk
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we net our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasury securities) when our receivable due from the counterparty, measured at current market value, exceeds a specified limit. The fair value of such collateral was $4,581 million, of which $2,619 million was cash and $1,962 million was in the form of securities held by a custodian for our benefit. Under certain of these same agreements, we post collateral to our counterparties for our derivative obligations, the fair value of which was $242 million at December 31, 2013. At December 31, 2013, our exposure to counterparties (including accrued interest), net of collateral we hold, was $871 million. This excludes exposure related to embedded derivatives.
Additionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the long-term credit rating of the counterparty were to fall below A-/A3. In certain of these master agreements, each party also has the ability to require termination if the short-term rating of the counterparty were to fall below A-1/P-1. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability, after consideration of collateral posted by us and outstanding interest payments was $1,234 million at December 31, 2013. This excludes embedded derivatives.
(182)
NOTE 23. VARIABLE INTEREST ENTITIES
We use variable interest entities primarily to securitize financial assets and arrange other forms of asset-backed financing in the ordinary course of business. Except as noted below, investors in these entities only have recourse to the assets owned by the entity and not to our general credit. We do not have implicit support arrangements with any VIE. We did not provide non-contractual support for previously transferred financing receivables to any VIE in 2013 or 2012.
In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.
In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.
Consolidated Variable Interest Entities
We consolidate VIEs because we have the power to direct the activities that significantly affect the VIEs economic performance, typically because of our role as either servicer or manager for the VIE. Our consolidated VIEs fall into three main groups, which are further described below:
·
Trinity comprises two consolidated entities that hold investment securities, the majority of which are investment grade, and were funded by the issuance of GICs. The GICs included conditions under which certain holders could require immediate repayment of their investment should the long-term credit ratings of GECC fall below AA-/Aa3 or the short-term credit ratings fall below A-1+/P-1. The outstanding GICs are subject to their scheduled maturities and individual terms, which may include provisions permitting redemption upon a downgrade of one or more of GECC’s ratings, among other things, and are reported in investment contracts, insurance liabilities and insurance annuity benefits.
·
Consolidated Securitization Entities (CSEs) were created to facilitate securitization of financial assets and other forms of asset-backed financing that serve as an alternative funding source by providing access to variable funding notes and term markets. The securitization transactions executed with these entities are similar to those used by many financial institutions and substantially all are non-recourse. We provide servicing for substantially all of the assets in these entities.
The financing receivables in these entities have similar risks and characteristics to our other financing receivables and were underwritten to the same standard. Accordingly, the performance of these assets has been similar to our other financing receivables; however, the blended performance of the pools of receivables in these entities reflects the eligibility criteria that we apply to determine which receivables are selected for transfer. Contractually the cash flows from these financing receivables must first be used to pay third-party debt holders as well as other expenses of the entity. Excess cash flows are available to GE. The creditors of these entities have no claim on other assets of GE.
(183)
·
Other remaining assets and liabilities of consolidated VIEs relate primarily to three categories of entities: (1) joint ventures that lease equipment of $1,539 million of assets and $727 million of liabilities; (2) other entities that are involved in power generating and leasing activities of $762 million of assets and no liabilities; and (3) insurance entities that, among other lines of business, provide property and casualty and workers’ compensation coverage for GE of $1,209 million of assets and $566 million of liabilities.
The table below summarizes the assets and liabilities of consolidated VIEs described above.
Consolidated Securitization Entities
Credit
Trade
December 31 (In millions)
Trinity
(a)
cards
(b)
Equipment
(b)
receivables
Other
Total
Assets(c)
Financing
receivables, net
$
-
$
24,766
$
12,928
$
2,509
$
2,044
$
42,247
Investment securities
2,786
-
-
-
1,044
3,830
Other assets
-
2,430
3,220
Total
$
2,999
$
24,786
$
13,485
$
2,509
$
5,518
$
49,297
Liabilities(c)
Borrowings
$
-
$
-
$
-
$
-
$
$
Non-recourse
borrowings
-
15,363
10,982
2,180
28,574
Other liabilities
1,482
1,351
3,334
Total
$
1,482
$
15,591
$
11,230
$
2,205
$
1,998
$
32,506
Assets(c)
Financing
receivables, net
$
-
$
24,169
$
12,456
$
2,339
$
1,952
$
40,916
Investment securities
3,435
-
-
-
1,051
4,486
Other assets
-
2,428
3,034
Total
$
3,652
$
24,198
$
12,816
$
2,339
$
5,431
$
48,436
Liabilities(c)
Borrowings
$
-
$
-
$
-
$
-
$
$
Non-recourse
borrowings
-
17,208
9,811
2,050
29,123
Other liabilities
1,656
1,215
3,036
Total
$
1,656
$
17,354
$
9,822
$
2,058
$
1,980
$
32,870
(a)
Excludes intercompany advances from GECC to Trinity, which are eliminated in consolidation of $1,837 million and $2,441 million at December 31, 2013 and 2012, respectively.
(b)
We provide servicing to the CSEs and are contractually permitted to commingle cash collected from customers on financing receivables sold to CSE investors with our own cash prior to payment to a CSE, provided our short-term credit rating does not fall below A-1/P-1. These CSEs also owe us amounts for purchased financial assets and scheduled interest and principal payments. At December 31, 2013 and 2012, the amounts of commingled cash owed to the CSEs were $6,314 million and $6,225 million, respectively, and the amounts owed to GECC by CSEs were $5,540 million and $6,143 million, respectively.
(c)
Asset amounts exclude intercompany receivables for cash collected on behalf of these entities by GE as servicer, which are eliminated in consolidation. Such receivables provide the cash to repay the entities’ liabilities. If these intercompany receivables were included in the table above, assets would be higher. In addition, other assets, borrowings and other liabilities exclude intercompany balances that are eliminated in consolidation.
Total revenues from our consolidated VIEs were $7,540 million, $7,127 million and $6,326 million in 2013, 2012 and 2011, respectively. Related expenses consisted primarily of provisions for losses of $1,247 million, $1,171 million and $1,146 million in 2013, 2012 and 2011, respectively, and interest and other financial charges of $355 million, $541 million and $594 million in 2013, 2012 and 2011, respectively. These amounts do not include intercompany revenues and costs, principally fees and interest between GE and the VIEs, which are eliminated in consolidation.
(184)
Investments in Unconsolidated Variable Interest Entities
Our involvement with unconsolidated VIEs consists of the following activities: assisting in the formation and financing of the entity, providing recourse and/or liquidity support, servicing the assets and receiving variable fees for services provided. We are not required to consolidate these entities because the nature of our involvement with the activities of the VIEs does not give us power over decisions that significantly affect their economic performance.
Our largest exposure to any single unconsolidated VIE at December 31, 2013 is an investment in asset-backed securities issued by the Senior Secured Loan Program (SSLP), a fund that invests in high-quality senior secured debt of various middle-market companies ($6,996 million). Other significant unconsolidated VIEs include investments in real estate entities ($2,369 million), which generally consist of passive limited partnership investments in tax-advantaged, multi-family real estate and investments in various European real estate entities; and exposures to joint ventures that purchase factored receivables ($2,624 million).
The classification of our variable interests in these entities in our financial statements is based on the nature of the entity and the type of investment we hold. Variable interests in partnerships and corporate entities are classified as either equity method or cost method investments. In the ordinary course of business, we also make investments in entities in which we are not the primary beneficiary but may hold a variable interest such as limited partner interests or mezzanine debt investments. These investments are classified in two captions in our financial statements: “All other assets” for investments accounted for under the equity method, and “Financing receivables - net” for debt financing provided to these entities. Our investments in unconsolidated VIEs at December 31, 2013 and December 31, 2012 follow.
December 31 (In millions)
Other assets and investment securities
$
9,129
$
10,027
Financing receivables - net
3,346
2,654
Total investments
12,475
12,681
Contractual obligations to fund
investments or guarantees
2,741
2,608
Revolving lines of credit
Total
$
15,247
$
15,330
As previously reported, during 2012, Penske Truck Leasing Co., L.P. (PTL) effected a recapitalization and subsequently acquired third-party financing in order to repay outstanding debt owed to GECC. In the first quarter of 2013, PTL had repaid all outstanding debt owed and terminated its borrowing arrangement with GECC. During the second quarter of 2013, PTL ceased to be a VIE as a result of a principal in PTL retiring from the GE Board. Therefore, our investment in PTL ($899 million at December 31, 2013) is not reported in the December 31, 2013 balance in the table above. As co-issuer and co-guarantor of the $700 million of debt raised by the funding entity related to PTL, GECC reports this amount, which is also our loss exposure and excluded from the table above, as debt of GECC in its financial statements. GECC has been indemnified by the other limited partners of PTL for their proportionate share of the debt obligation.
In addition to the entities included in the table above, we also hold passive investments in RMBS, CMBS and ABS issued by VIEs. Such investments were, by design, investment grade at issuance and held by a diverse group of investors. Further information about such investments is provided in Note 3.
(185)
NOTE 24. COMMITMENTS AND GUARANTEES
Commitments
In our Aviation segment, we had committed to provide financing assistance on $2,669 million of future customer acquisitions of aircraft equipped with our engines, including commitments made to airlines in 2013 for future sales under our GE90 and GEnx engine campaigns. The GECAS business of GE Capital had placed multiple-year orders for various Boeing, Airbus and other aircraft with list prices approximating $29,405 million and secondary orders with airlines for used aircraft of approximately $816 million at December 31, 2013.
Product Warranties
We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information - mostly historical claims experience - claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows.
(In millions)
Balance at January 1
$
1,383
$
1,507
$
1,405
Current-year provisions
Expenditures
(814)
(723)
(881)
Other changes
(12)
Balance at December 31
$
1,324
$
1,383
$
1,507
Guarantees
Our guarantees are provided in the ordinary course of business. We underwrite these guarantees considering economic, liquidity and credit risk of the counterparty. We believe that the likelihood is remote that any such arrangements could have a significant adverse effect on our financial position, results of operations or liquidity. We record liabilities for guarantees at estimated fair value, generally the amount of the premium received, or if we do not receive a premium, the amount based on appraisal, observed market values or discounted cash flows. Any associated expected recoveries from third parties are recorded as other receivables, not netted against the liabilities.
At December 31, 2013, we were committed under the following guarantee arrangements beyond those provided on behalf of VIEs. See Note 23.
·
Credit Support. We have provided $2,775 million of credit support on behalf of certain customers or associated companies, predominantly joint ventures and partnerships, using arrangements such as standby letters of credit and performance guarantees. These arrangements enable these customers and associated companies to execute transactions or obtain desired financing arrangements with third parties. Should the customer or associated company fail to perform under the terms of the transaction or financing arrangement, we would be required to perform on their behalf. Under most such arrangements, our guarantee is secured, usually by the asset being purchased or financed, or possibly by certain other assets of the customer or associated company. The length of these credit support arrangements parallels the length of the related financing arrangements or transactions. The liability for such credit support was $36 million at December 31, 2013.
·
Indemnification Agreements. We have agreements that require us to fund up to $125 million at December 31, 2013 under residual value guarantees on a variety of leased equipment. Under most of our residual value guarantees, our commitment is secured by the leased asset. The liability for these indemnification agreements was $21 million at December 31, 2013.
At December 31, 2013, we also had $1,009 million of other indemnification commitments, substantially all of which relate to representations and warranties in sales of businesses or assets.
·
Contingent Consideration. These are agreements to provide additional consideration to a buyer or seller in a business combination if contractually specified conditions related to the acquisition or disposition are achieved.
(186)
NOTE 25. SUPPLEMENTAL CASH FLOWS INFORMATION
Changes in operating assets and liabilities are net of acquisitions and dispositions of principal businesses.
Amounts reported in the “Proceeds from sales of discontinued operations” and “Proceeds from principal business dispositions” lines in the Statement of Cash Flows are net of cash disposed and included certain deal-related costs. Amounts reported in the “Net cash from (payments for) principal businesses purchased” line is net of cash acquired and included certain deal-related costs and debt assumed and immediately repaid in acquisitions. Amounts reported in the “Proceeds from sale of equity interest in NBCU LLC” line included certain deal-related costs.
Amounts reported in the “All other operating activities” line in the Statement of Cash Flows consist primarily of adjustments to current and noncurrent accruals, deferrals of costs and expenses and adjustments to assets. GECC had non-cash transactions related to foreclosed properties and repossessed assets totaling $482 million, $839 million and $859 million in 2013, 2012 and 2011, respectively.
Certain supplemental information related to GE and GECC cash flows is shown below.
For the years ended December 31 (In millions)
GE
Net dispositions (purchases) of GE shares for treasury
Open market purchases under share repurchase program
$
(10,225)
$
(5,005)
$
(2,065)
Other purchases
(91)
(110)
(100)
Dispositions
1,038
$
(9,278)
$
(4,164)
$
(1,456)
GECC
All other operating activities
Amortization of intangible assets
$
$
$
Net realized losses on investment securities
Cash collateral on derivative contracts
(2,271)
2,900
1,247
Increase (decrease) in other liabilities
2,334
(1,344)
Other
(912)
1,477
2,465
$
$
5,418
$
3,127
Net decrease (increase) in GECC financing receivables
Increase in loans to customers
$
(311,860)
$
(308,156)
$
(322,270)
Principal collections from customers - loans
307,849
307,250
332,100
Investment in equipment for financing leases
(8,652)
(9,192)
(9,610)
Principal collections from customers - financing leases
9,646
10,976
12,431
Net change in credit card receivables
(8,058)
(8,030)
(6,243)
Sales of financing receivables
14,664
12,642
8,117
$
3,589
$
5,490
$
14,525
All other investing activities
Purchases of investment securities
$
(16,422)
$
(15,666)
$
(20,816)
Dispositions and maturities of investment securities
18,139
17,010
19,535
Decrease (increase) in other assets - investments
1,089
4,338
2,672
Proceeds from sales of real estate properties
10,680
3,381
3,152
Other
1,486
2,731
3,190
$
14,972
$
11,794
$
7,733
Newly issued debt (maturities longer than 90 days)
Short-term (91 to 365 days)
$
$
$
Long-term (longer than one year)
44,833
55,782
43,257
$
44,888
$
55,841
$
43,267
Repayments and other reductions (maturities
longer than 90 days)
Short-term (91 to 365 days)
$
(52,553)
$
(94,114)
$
(81,918)
Long-term (longer than one year)
(3,291)
(9,368)
(2,786)
Principal payments - non-recourse, leveraged leases
(585)
(426)
(732)
$
(56,429)
$
(103,908)
$
(85,436)
All other financing activities
Proceeds from sales of investment contracts
$
$
2,697
$
4,396
Redemption of investment contracts
(980)
(5,515)
(6,230)
Other
(420)
(49)
$
(909)
$
(2,867)
$
(1,792)
(187)
NOTE 26. INTERCOMPANY TRANSACTIONS
Transactions between related companies are made on an arms-length basis, are eliminated and consist primarily of GECC dividends to GE; GE customer receivables sold to GECC; GECC services for trade receivables management and material procurement; buildings and equipment (including automobiles) leased between GE and GECC; information technology (IT) and other services sold to GECC by GE; aircraft engines manufactured by GE that are installed on aircraft purchased by GECC from third-party producers for lease to others; and various investments, loans and allocations of GE corporate overhead costs.
These intercompany transactions are reported in the GE and GECC columns of our financial statements, but are eliminated in deriving our consolidated financial statements. Effects of these eliminations on our consolidated cash flows from operating, investing and financing activities are $(5,088) million, $492 million and $4,690 million for 2013, $(8,542) million, $2,328 million and $6,703 million for 2012 and $(558) million, $(373) million and $903 million for 2011, respectively. Details of these eliminations are shown below.
For the years ended December 31 (In millions)
Cash from (used for) operating activities-continuing operations
Combined
$
34,125
$
39,557
$
32,669
GE customer receivables sold to GECC
(1,809)
(577)
GECC dividends to GE
(5,985)
(6,426)
-
Other reclassifications and eliminations
(307)
$
29,037
$
31,015
$
32,111
Cash from (used for) investing activities-continuing operations
Combined
$
28,182
$
9,262
$
21,540
GE customer receivables sold to GECC
2,005
Other reclassifications and eliminations
(794)
$
28,674
$
11,590
$
21,167
Cash from (used for) financing activities-continuing operations
Combined
$
(50,319)
$
(57,758)
$
(47,818)
GE customer receivables sold to GECC
(622)
(196)
GECC dividends to GE
5,985
6,426
-
Other reclassifications and eliminations
(673)
$
(45,629)
$
(51,055)
$
(46,915)
NOTE 27. OPERATING SEGMENTS
Basis for presentation
Our operating businesses are organized based on the nature of markets and customers. Segment accounting policies are the same as described in Note 1. Segment results for our financial services businesses reflect the discrete tax effect of transactions.
Results of our formerly consolidated subsidiary, NBCU, and our equity method investment in NBCU LLC, which we sold in the first quarter of 2013 are reported in the Corporate items and eliminations line on the Summary of Operating Segments.
A description of our operating segments as of December 31, 2013, can be found below, and details of segment profit by operating segment can be found in the Summary of Operating Segments table in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(188)
Power & Water
Power plant products and services, including design, installation, operation and maintenance services are sold into global markets. Gas, steam and aeroderivative turbines, nuclear reactors, generators, combined cycle systems, controls and related services, including total asset optimization solutions, equipment upgrades and long-term maintenance service agreements are sold to power generation and other industrial customers. Renewable energy solutions include wind turbines. Water treatment services and equipment include specialty chemical treatment programs, water purification equipment, mobile treatment systems and desalination processes.
Oil & Gas
Oil & Gas supplies mission critical equipment for the global oil and gas industry, used in applications spanning the entire value chain from drilling and completion through production, liquefied natural gas (LNG) and pipeline compression, pipeline inspection, and including downstream processing in refineries and petrochemical plants. The business designs and manufactures surface and subsea drilling and production systems, equipment for floating production platforms, compressors, turbines, turboexpanders, high pressure reactors, industrial power generation and a broad portfolio of auxiliary equipment.
Energy Management
Energy Management is GE’s electrification business. Global teams design leading technology solutions for the delivery, management, conversion and optimization of electrical power for customers across multiple energy-intensive industries. GE has invested in our Energy Management capabilities, with strategic acquisitions and joint ventures that enable GE to increase its offerings to the utility, industrial, renewables, oil and gas, marine, metals and mining industries. Plant automation hardware, software and embedded computing systems including controllers, embedded systems, advanced software, motion control, operator interfaces and industrial computers are also provided by Energy Management.
Aviation
Aviation products and services include jet engines, aerospace systems and equipment, replacement parts and repair and maintenance services for all categories of commercial aircraft; for a wide variety of military aircraft, includ­ing fighters, bombers, tankers and helicopters; for marine appli­cations; and for executive and regional aircraft. Products and services are sold worldwide to airframe manufacturers, airlines and government agencies.
Healthcare
Healthcare products include diagnostic imaging systems such as Magnetic Resonance (MR), Computed Tomography (CT) and Positron Emission Tomography (PET) scanners, X-ray, nuclear imaging, digital mammography, and Molecular Imaging technologies. Healthcare-manufactured technologies include patient and resident monitoring, diagnostic cardiology, ultrasound, bone densitometry, anesthesiology and oxygen therapy, and neonatal and critical care devices. Related services include equipment monitoring and repair, information technologies and customer productivity services. Products also include diagnostic imaging agents used in medical scanning procedures, drug discovery, biopharmaceutical manufacturing and purification, and tools for pro­tein and cellular analysis for pharmaceutical and academic research, including a pipeline of precision molecular diagnostics in development for neurology, cardiology and oncology applications. Products and services are sold worldwide to hospitals, medical facilities, pharmaceutical and biotechnology companies, and to the life science research market.
Transportation
Transportation is a global technology leader and supplier to the railroad, mining, marine and drilling industries. GE provides freight and passenger locomotives, diesel engines for rail, marine and stationary power applications, railway signaling and communications systems, underground mining equipment, motorized drive systems for mining trucks, information technology solutions, high-quality replacement parts and value added services.
(189)
Appliances & Lighting
Products include major appliances and related services for products such as refrigerators, freezers, electric and gas ranges, cooktops, dishwashers, clothes washers and dryers, microwave ovens, room air conditioners, residential water systems for filtration, softening and heating, and hybrid water heaters. These products are distributed both to retail outlets and direct to consumers, mainly for the replacement market, and to building contractors and distributors for new installations. Lighting products include a wide variety of lamps and lighting fixtures, including light-emitting diodes. Products and services are sold in North America and in global markets under various GE and private-label brands.
GE Capital
CLL has particular mid-market expertise, and primarily offers secured commercial loans, equipment financing and other financial services to companies across a wide range of industries including construction, retail, manufacturing, transportation, media, communications, technology and healthcare. Equipment financing activities include industrial, medical, fleet vehicles, corporate aircraft, construction, office imaging and many other equipment types.
Consumer offers a full range of financial products including private-label credit cards; personal loans; bank cards; auto loans and leases; mortgages; debt consolidation; home equity loans; deposit and other savings products; and small and medium enterprise lending on a global basis.
Real Estate offers a comprehensive range of capital and investment solutions and finances, with both equity and loan structures, the acquisition, refinancing and renovation of office buildings, apartment buildings, retail facilities, hotels and industrial properties.
Energy Financial Services offers financial products to the global energy industry including structured equity, debt, leasing, partnership financing, product finance, and broad-based commercial finance.
GECAS, our commercial aircraft financing and leasing business, offers a wide range of aircraft types and financing options, including operating leases and secured debt financing, and also provides productivity solutions including spare engine leasing, airport and airline consulting services, and spare parts financing and management.
Revenues
Total revenues(a)
Intersegment revenues(b)
External revenues
(In millions)
Power & Water
$
24,724
$
28,299
$
25,675
$
$
1,119
$
$
23,777
$
27,180
$
24,881
Oil & Gas
16,975
15,241
13,608
16,615
14,927
13,306
Energy Management
7,569
7,412
6,422
6,721
6,925
5,918
Aviation
21,911
19,994
18,859
21,411
19,322
18,442
Healthcare
18,200
18,290
18,083
18,186
18,253
18,018
Transportation
5,885
5,608
4,885
5,873
5,597
4,852
Appliances & Lighting
8,338
7,967
7,693
8,313
7,944
7,671
Total industrial
103,602
102,811
95,225
2,706
2,663
2,137
100,896
100,148
93,088
GE Capital
44,067
45,364
48,324
1,150
1,037
42,917
44,327
47,347
Corporate items
and eliminations(c)
(1,624)
(1,491)
2,993
(3,856)
(3,700)
(3,114)
2,232
2,209
6,107
Total
$
146,045
$
146,684
$
146,542
$
-
$
-
$
-
$
146,045
$
146,684
$
146,542
(a)
Revenues of GE businesses include income from sales of goods and services to customers and other income.
(b)
Sales from one component to another generally are priced at equivalent commercial selling prices.
(c)
Includes the results of NBCU (our formerly consolidated subsidiary) and our former equity method investment in NBCUniversal LLC.
Revenues from customers located in the United States were $68,617 million, $70,466 million and $69,910 million in 2013, 2012 and 2011, respectively. Revenues from customers located outside the United States were $77,428 million, $76,218 million and $76,632 million in 2013, 2012 and 2011, respectively.
(190)
Property, plant and
Assets(a)(b)
equipment additions(c)
Depreciation and amortization
At December 31
For the years ended December 31
For the years ended December 31
(In millions)
Power & Water
$
29,526
$
27,174
$
27,074
$
$
$
$
$
$
Oil & Gas
26,181
20,099
18,855
1,185
Energy Management
9,962
9,253
9,835
Aviation
32,272
25,144
23,567
1,178
Healthcare
27,956
28,458
27,981
Transportation
4,472
4,389
2,633
Appliances & Lighting
4,237
4,133
3,675
GE Capital
516,829
539,351
584,643
9,978
11,879
9,871
7,738
7,348
7,480
Corporate items
and eliminations(d)
5,125
26,998
19,740
(99)
Total
$
656,560
$
684,999
$
718,003
$
14,389
$
15,375
$
13,553
$
11,473
$
10,804
$
10,730
(a)
Assets of discontinued operations, NBCU (our formerly consolidated subsidiary) and our former equity method investment in NBCUniversal LLC are included in Corporate items and eliminations for all periods presented.
(b)
Total assets of the Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting and GE Capital operating segments at December 31, 2013, include investment in and advances to associated companies of $507 million, $108 million, $788 million, $1,463 million, $576 million, $10 million, $388 million and $17,348 million, respectively. Investments in and advances to associated companies contributed approximately $(26) million, $18 million, $3 million, $4 million, $(48) million, $0 million, $40 million and $1,809 million to segment pre-tax income of Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting and GE Capital operating segments, respectively, for the year ended December 31, 2013. Aggregate summarized financial information for significant associated companies assuming a 100% ownership interest included: total assets of $98,658 million, primarily financing receivables of $46,655 million; total liabilities of $66,535 million, primarily debt of $40,030 million; revenues totaled $22,692 million; and net earnings totaled $2,431 million.
(c)
Additions to property, plant and equipment include amounts relating to principal businesses purchased.
(d)
Includes deferred income taxes that are presented as assets for purposes of our consolidating balance sheet presentation.
Interest and other financial charges
Provision (benefit) for income taxes
(In millions)
GE Capital
$
9,267
$
11,596
$
13,760
$
(992)
$
$
Corporate items and eliminations(a)
1,668
2,013
4,839
Total
$
10,116
$
12,407
$
14,422
$
$
2,534
$
5,745
(a)
Included amounts for Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting, for which our measure of segment profit excludes interest and other financial charges and income taxes.
Property, plant and equipment - net associated with operations based in the United States were $28,657 million, $27,192 million and $25,974 million at year-end 2013, 2012 and 2011, respectively. Property, plant and equipment - net associated with operations based outside the United States were $40,170 million, $41,441 million and $38,573 million at year-end 2013, 2012 and 2011, respectively.
(191)
NOTE 28. QUARTERLY INFORMATION (UNAUDITED)
First quarter
Second quarter
Third quarter
Fourth quarter
(In millions; per-share amounts in dollars)
Consolidated operations
Earnings from continuing operations
$
3,631
$
3,257
$
3,423
$
3,681
$
3,272
$
3,460
$
5,149
$
4,449
Earnings (loss) from discontinued
operations
(120)
(185)
(124)
(543)
(91)
(1,785)
(303)
Net earnings
3,511
3,072
3,299
3,138
3,181
3,508
3,364
4,146
Less net earnings attributable to
noncontrolling interests
(16)
(10)
Net earnings attributable to
the Company
$
3,527
$
3,034
$
3,133
$
3,105
$
3,191
$
3,491
$
3,206
$
4,011
Per-share amounts - earnings from
continuing operations
Diluted earnings per share
$
0.35
$
0.30
$
0.31
$
0.34
$
0.32
$
0.33
$
0.49
$
0.41
Basic earnings per share
0.35
0.30
0.32
0.34
0.32
0.33
0.49
0.41
Per-share amounts - earnings (loss)
from discontinued operations
Diluted earnings per share
(0.01)
(0.02)
(0.01)
(0.05)
(0.01)
-
(0.18)
(0.03)
Basic earnings per share
(0.01)
(0.02)
(0.01)
(0.05)
(0.01)
-
(0.18)
(0.03)
Per-share amounts - net earnings
Diluted earnings per share
0.34
0.29
0.30
0.29
0.31
0.33
0.32
0.38
Basic earnings per share
0.34
0.29
0.30
0.29
0.31
0.33
0.32
0.38
Selected data
GE
Sales of goods and services
$
22,303
$
23,687
$
24,623
$
25,138
$
25,262
$
24,749
$
28,826
$
27,301
Gross profit from sales
4,867
5,653
6,007
5,800
5,691
6,025
6,819
8,341
GECC
Total revenues
11,468
11,267
10,916
11,285
10,606
11,207
11,077
11,605
Earnings from continuing operations
attributable to the Company
1,938
1,760
1,924
2,112
1,903
1,668
2,493
1,805
For GE, gross profit from sales is sales of goods and services less costs of goods and services sold.
Earnings-per-share amounts are computed independently each quarter for earnings from continuing operations, earnings (loss) from discontinued operations and net earnings. As a result, the sum of each quarter’s per-share amount may not equal the total per-share amount for the respective year; and the sum of per-share amounts from continuing operations and discontinued operations may not equal the total per-share amounts for net earnings for the respective quarters.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of December 31, 2013, and (ii) no change in internal control over financial reporting occurred during the quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
Management’s annual report on internal control over financial reporting and the report of our independent registered public accounting firm appears in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(192)
Item 9B. Other Information.
Not applicable.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers of the Registrant (As of February 1, 2014)
Date assumed
Executive
Name
Position
Age
Officer Position
Jeffrey R. Immelt
Chairman of the Board and Chief Executive Officer
January 1997
Jeffrey S. Bornstein
Senior Vice President and Chief Financial Officer
July 2013
Kathryn A. Cassidy
Senior Vice President and GE Treasurer
March 2003
Elizabeth J. Comstock
Senior Vice President, Chief Marketing Officer
April 2013
Brackett B. Denniston III
Senior Vice President and General Counsel
February 2004
Jan R. Hauser
Vice President, Controller & Chief Accounting Officer
April 2013
Daniel C. Heintzelman
Vice Chairman, Enterprise Risk and Operations
October 2013
Susan Peters
Senior Vice President, Human Resources
August 2013
John G. Rice
Vice Chairman of General Electric Company;
President & CEO, Global Growth & Operations
September 1997
Keith S. Sherin
Vice Chairman of General Electric Company; CEO,
GE Capital
January 1999
All Executive Officers are elected by the Board of Directors for an initial term that continues until the Board meeting immediately preceding the next annual statutory meeting of shareowners, and thereafter are elected for one-year terms or until their successors have been elected. All Executive Officers have been executives of General Electric Company for the last five years except for Ms. Hauser. Prior to joining GE in March 2013, Ms. Hauser served as a partner, Accounting Services, National Professional Services Group at PricewaterhouseCoopers LLP.
The remaining information called for by this item is incorporated by reference to “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Other Governance Policies and Practices” and “Board Committees” in our definitive proxy statement for our 2014 Annual Meeting of Shareowners to be held April 23, 2014, which will be filed within 120 days of the end of our fiscal year ended December 31, 2013 (the 2014 Proxy Statement).
Item 11. Executive Compensation.
Incorporated by reference to “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Summary Compensation,” “All Other Compensation,” “Other Benefits,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards,” “Option Exercises and Stock Vested,” “Pension Benefits,” “Nonqualified Deferred Compensation,” “Potential Payments Upon Termination at Fiscal Year-End” and “Director Compensation” in the 2014 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference to “Stock Ownership Information” in the 2014 Proxy Statement. The remaining information called for by this item relating to “Securities Authorized for Issuance under Equity Compensation Plans” is provided in Note 16 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report.
(193)
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated by reference to “Related Person Transactions” and “Director Independence” in the 2014 Proxy Statement.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference to “Independent Auditor Information” in the 2014 Proxy Statement.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
(a)1. Financial Statements
Included in Part II of this report:
Statement of Earnings for the years ended December 31, 2013, 2012 and 2011
Consolidated Statement of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011
Consolidated Statement of Changes in Shareowners’ Equity for the years ended December 31, 2013, 2012 and 2011
Statement of Financial Position at December 31, 2013 and 2012
Statement of Cash Flows for the years ended December 31, 2013, 2012 and 2011
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Other financial information:
Summary of Operating Segments
Notes to consolidated financial statements
Operating segment information
(a)2. Financial Statement Schedules
The schedules listed in Reg. 210.5-04 have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(a)3. Exhibit Index
2(a)
Master Agreement dated as of December 3, 2009 by and among General Electric Company, NBC Universal, Inc., Comcast Corporation and Navy, LLC. (Incorporated by reference to Exhibit 2(a) to General Electric’s Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2009).
3(i)
The Certificate of Incorporation, as amended, of General Electric Company.*
3(ii)
The By-Laws, as amended, of General Electric Company (Incorporated by reference to Exhibit 3(ii) of General Electric’s Current Report on Form 8-K dated February 15, 2013 (Commission file number 001-00035)).
4(a)
Amended and Restated General Electric Capital Corporation (GECC) Standard Global Multiple Series Indenture Provisions dated as of February 27, 1997 (Incorporated by reference to Exhibit 4(a) to GECC’s Registration Statement on Form S-3, File No. 333-59707 (Commission file number 001-06461)).
4(b)
Third Amended and Restated Indenture dated as of February 27, 1997, between GECC and The Bank of New York Mellon, as successor trustee (Incorporated by reference to Exhibit 4(c) to GECC’s Registration Statement on Form S-3, File No. 333-59707 (Commission file number 001-06461)).
(194)
4(c)
First Supplemental Indenture dated as of May 3, 1999, supplemental to Third Amended and Restated Indenture dated as of February 27, 1997 (Incorporated by reference to Exhibit 4(dd) to GECC’s Post-Effective Amendment No. 1 to Registration Statement on Form S-3, File No. 333-76479 (Commission file number 001-06461)).
4(d)
Second Supplemental Indenture dated as of July 2, 2001, supplemental to Third Amended and Restated Indenture dated as of February 27, 1997 (Incorporated by reference to Exhibit 4(f) to GECC’s Post-Effective Amendment No.1 to Registration Statement on Form S-3, File No. 333-40880 (Commission file number 001-06461)).
4(e)
Third Supplemental Indenture dated as of November 22, 2002, supplemental to Third Amended and Restated Indenture dated as of February 27, 1997 (Incorporated by reference to Exhibit 4(cc) to GECC’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-3, File No. 333-100527 (Commission file number 001-06461)).
4(f)
Fourth Supplemental Indenture dated as of August 24, 2007, supplemental to Third Amended and Restated Indenture dated as of February 27, 1997 (Incorporated by reference to Exhibit 4(g) to GECC’s Registration Statement on Form S-3, File number 333-156929 (Commission file number 001-06461)).
4(g)
Indenture dated December 1, 2005, between General Electric Company and The Bank of New York Mellon, as successor trustee (Incorporated by reference to Exhibit 4(a) of General Electric’s Current Report on Form 8-K filed on December 9, 2005 (Commission file number 001-00035)).
4(h)
Senior Note Indenture dated as of October 9, 2012, between General Electric Company and The Bank of New York Mellon, as trustee (Incorporated by reference to Exhibit 4.1 to General Electric’s Current Report on Form 8-K filed on October 9, 2012 (Commission file number 001-00035)).
4(i)
Twelfth Amended and Restated Fiscal and Paying Agency Agreement among GECC, GE Capital Australia Funding Pty Ltd., GE Capital European Funding, GE Capital U.K. Funding and The Bank of New York Mellon and The Bank of New York Mellon (Luxembourg) S.A., as fiscal and paying agents, dated as of April 5, 2013 (Incorporated by reference to Exhibit 4(i) to GECC’s Form 10-K Report for the year ended December 31, 2013 (Commission file number 001-06461)).
4(j)
Letter from the Senior Vice President and Chief Financial Officer of General Electric to GECC dated September 15, 2006, with respect to returning dividends, distributions or other payments to GECC in certain circumstances described in the Indenture for Subordinated Debentures dated September 1, 2006, between GECC and the Bank of New York, as successor trustee (Incorporated by reference to Exhibit 4(c) to GECC’s Post-Effective Amendment No. 2 to Registration Statement on Form S-3, File No. 333-132807 (Commission file number 001-06461)).
4(k)
Agreement to furnish to the Securities and Exchange Commission upon request a copy of instruments defining the rights of holders of certain long-term debt of the registrant and consolidated subsidiaries.*
(10)
Except for 10(y), (z) and (aa) below, all of the following exhibits consist of Executive Compensation Plans or Arrangements:
(a)
General Electric Incentive Compensation Plan, as amended effective July 1, 1991 (Incorporated by reference to Exhibit 10(a) to General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1991).
(b)
General Electric Financial Planning Program, as amended through September 1993 (Incorporated by reference to Exhibit 10(h) to General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1993).
(195)
(c)
General Electric Supplemental Life Insurance Program, as amended February 8, 1991 (Incorporated by reference to Exhibit 10(i) to General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1990).
(d)
General Electric Directors’ Charitable Gift Plan, as amended through December 2002 (Incorporated by reference to Exhibit 10(i) to General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2002).
(e)
General Electric Leadership Life Insurance Program, effective January 1, 1994 (Incorporated by reference to Exhibit 10(r) to General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1993).
(f)
General Electric 1996 Stock Option Plan for Non-Employee Directors (Incorporated by reference to Exhibit A to the General Electric Proxy Statement for its Annual Meeting of Shareowners held on April 24, 1996 (Commission file number 001-00035)).
(g)
General Electric Supplementary Pension Plan, as amended effective January 1, 2011 (Incorporated by reference to Exhibit 10(g) to General Electric’s Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2010).
(h)
General Electric 2003 Non-Employee Director Compensation Plan, Amended and Restated as of February 7, 2014.*
(i)
Amendment to Nonqualified Deferred Compensation Plans, dated as of December 14, 2004 (Incorporated by reference to Exhibit 10(w) to the General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2004).
(j)
GE Retirement for the Good of the Company Program, as amended effective January 1, 2009 (Incorporated by reference to Exhibit 10(j) to General Electric’s Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2008.
(k)
GE Excess Benefits Plan, effective January 1, 2009 (Incorporated by reference to Exhibit 10(k) to General Electric's Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2008).
(l)
General Electric 2006 Executive Deferred Salary Plan, as amended January 1, 2009 (Incorporated by reference to Exhibit 10(l) to General Electric's Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2008).
(m)
General Electric Company 2007 Long-Term Incentive Plan (as amended and restated April 25, 2012) (Incorporated by reference to Exhibit 99.1 to General Electric’s Registration Statement on Form S-8, dated May 4, 2012, File number 333-181177 (Commission file number 001-00035)).
(n)
Form of Agreement for Stock Option Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan, as amended January 1, 2009 (Incorporated by reference to Exhibit 10(n) to General Electric's Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2008).
(o)
Form of Agreement for Annual Restricted Stock Unit Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan, as amended January 1, 2009 (Incorporated by reference to Exhibit 10(o) to General Electric's Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 2008).
(196)
(p)
Form of Agreement for Periodic Restricted Stock Unit Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.4 of General Electric’s Current Report on Form 8-K dated April 27, 2007 (Commission file number 001-00035)).
(q)
Form of Agreement for Long Term Performance Award Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan (as amended and restated April 25, 2012) (Incorporated by reference to Exhibit 10(a) of General Electric’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (Commission file number 001-00035)).
(r)
Form of Agreement for Performance Stock Unit Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.6 of General Electric’s Current Report on Form 8-K dated April 27, 2007 (Commission file number 001-00035)).
(s)
First Restatement of the General Electric International Employee Stock Purchase Plan effective May 1, 2002 (Incorporated by reference to Exhibit 4.1 to General Electric's Registration Statement on Form S-8, File No. 333-163106 (Commission file number 001-00035)).
(t)
Form of Agreement for Long Term Performance Award Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan (Incorporated by reference to Exhibit 10 of General Electric’s Current Report on Form 8-K dated February 12, 2010 (Commission file number 001-00035)).
(u)
Time Sharing Agreement dated November 22, 2010 between General Electric Company and Jeffrey R. Immelt (Incorporated by reference to Exhibit 10(z) to General Electric’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (Commission file number 001-00035)).
(v)
(w)
(x)
GE Stock Option Grant Agreement Dated March 4, 2010 for Jeffrey R. Immelt Terms & Conditions as Amended April 18, 2011 (Incorporated by reference to Exhibit 10(h) of General Electric’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (Commission file number 001-00035)).
Non-Competition Agreement between General Electric Company and John Krenicki effective July 24, 2012 (Incorporated by reference to Exhibit 10(a) of General Electric’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (Commission file number 001-00035)).
Time Sharing Agreement dated March 13, 2013 between General Electric Company and Brackett B. Denniston III (Incorporated by reference to Exhibit 10(b) of General Electric’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (Commission file number 001-00035)).
(y)
Amended and Restated Income Maintenance Agreement, dated October 29, 2009, between the Registrant and General Electric Capital Corporation (Incorporated by reference to Exhibit 10 to GECC's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (Commission file number 001-06461)).
(z)
(aa)
Transaction Agreement dated as of February 12, 2013 among General Electric Company, Comcast Corporation, National Broadcasting Company Holding, Inc., Navy Holdings, Inc., NBCUniversal, LLC and NBCUniversal Media, LLC (Incorporated by reference to Exhibit 10(a) of General Electric’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (Commission file number 001-00035)).
Amendment dated as of March 19, 2013 to the Transaction Agreement dated as of February 12, 2013 by and among General Electric Company, Comcast Corporation, NBCUniversal, LLC, NBCUniversal Media, LLC, National Broadcasting Company Holding, Inc. and Navy Holdings, Inc. (Incorporated by reference to Exhibit 10(c) of General Electric’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (Commission file number 001-00035)).
(197)
(11)
Statement re Computation of Per Share Earnings.**
12(a)
Computation of Ratio of Earnings to Fixed Charges.*
12(b)
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.*
(21)
Subsidiaries of Registrant.*
(23)
Consent of Independent Registered Public Accounting Firm.*
(24)
Power of Attorney.*
31(a)
Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.*
31(b)
Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.*
(32)
Certification Pursuant to 18 U.S.C. Section 1350.*
99(a)
Undertaking for Inclusion in Registration Statements on Form S-8 of General Electric Company (Incorporated by reference to Exhibit 99(b) to General Electric Annual Report on Form 10-K (Commission file number 001-00035) for the fiscal year ended December 31, 1992).
99(b)
Computation of Ratio of Earnings to Fixed Charges (Incorporated by reference to Exhibit 12(a) to GECC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (Commission file number 001-06461)).
(101)
The following materials from General Electric Company's Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Statement of Earnings for the years ended December 31, 2013, 2012 and 2011, (ii) Consolidated Statement of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011, (iii) Consolidated Statement of Changes in Shareowners' Equity for the years ended December 31, 2013, 2012 and 2011, (iv) Statement of Financial Position at December 31, 2013 and 2012, (v) Statement of Cash Flows for the years ended December 31, 2013, 2012 and 2011, and (vi) the Notes to Consolidated Financial Statements.
*
Filed electronically herewith.
**
Information required to be presented in Exhibit 11 is provided in Note 20 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share.
(198)
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K for the fiscal year ended December 31, 2013, to be signed on its behalf by the undersigned, and in the capacities indicated, thereunto duly authorized in the Town of Fairfield and State of Connecticut on the 27th day of February 2014.
General Electric Company
(Registrant)
By
/s/ Jeffrey S. Bornstein
Jeffrey S. Bornstein
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
(199)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signer
Title
Date
/s/ Jeffrey S. Bornstein
Principal Financial Officer
February 27, 2014
Jeffrey S. Bornstein
Senior Vice President and
Chief Financial Officer
/s/ Jan R. Hauser
Principal Accounting Officer
February 27, 2014
Jan R. Hauser
Vice President and Controller
Jeffrey R. Immelt*
Chairman of the Board of Directors
(Principal Executive Officer)
W. Geoffrey Beattie*
John J. Brennan*
Director
Director
James I. Cash, Jr.*
Francisco D’Souza*
Marijn E. Dekkers*
Director
Director
Director
Ann M. Fudge*
Director
Susan Hockfield*
Director
Andrea Jung*
Director
Robert W. Lane*
Director
Ralph S. Larsen*
Director
Rochelle B. Lazarus*
Director
James J. Mulva*
Director
James E. Rohr*
Director
Mary L. Schapiro*
Director
Robert J. Swieringa*
Director
James S. Tisch*
Director
Douglas A. Warner III*
Director
A majority of the Board of Directors
*By
/s/ Christoph A. Pereira
Christoph A. Pereira
Attorney-in-fact
February 27, 2014
(200)