UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14804
General Electric Capital Services, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1109503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
260 Long Ridge Road, Stamford, Connecticut 06927
(Address of principal executive offices) (Zip Code)
(203) 357-4000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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At July 30, 2002, 1,012 shares of common stock with a par value of $1,000 were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Results of Operations 7
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends 19
Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002 20
Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002 21
Exhibit 99.3 GE Announces Reorganization of Financial Services;
GE Capital to Become Four Separate Businesses 22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
Condensed Statement of Current and Retained Earnings
(Unaudited)
Second quarter ended Six months ended
---------------------------- ---------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ----------- ---------- ------------
(Dollars in millions)
Revenues
Revenues from services $ 12,953 $ 13,439 $ 26,036 $ 27,094
Sales of goods 899 960 1,715 2,028
---------- ----------- ---------- ------------
13,852 14,399 27,751 29,122
---------- ----------- ---------- ------------
Expenses
Interest 2,429 2,671 4,717 5,569
Operating and administrative 3,682 3,960 7,408 8,129
Cost of goods sold 822 866 1,564 1,827
Insurance losses and policyholder and annuity
benefits 3,689 3,712 7,238 7,235
Provision for losses on financing receivables 785 496 1,447 979
Depreciation and amortization of buildings and
equipment and equipment on operating leases 894 797 1,720 1,590
Minority interest in net earnings of consolidated
affiliates 40 42 74 99
---------- ----------- ---------- ------------
12,341 12,544 24,168 25,428
---------- ----------- ---------- ------------
Earnings
Earnings before income taxes and accounting changes 1,511 1,855 3,583 3,694
Provision for income taxes (184) (378) (599) (816)
---------- ----------- ---------- -----------
Earnings before accounting changes 1,327 1,477 2,984 2,878
Cumulative effect of accounting changes - - (1,015) (169)
---------- ----------- ---------- -------------
Net Earnings 1,327 1,477 1,969 2,709
Dividends (430) (508) (961) (1,006)
Retained earnings at beginning of period 24,789 21,956 24,678 21,222
---------- ----------- ---------- -------------
Retained earnings at end of period $ 25,686 $ 22,925 $ 25,686 $ 22,925
========== =========== ========== =============
See Notes to Condensed, Consolidated Financial Statements.
1
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
Condensed Statement of Financial Position
June 29, December 31,
(Dollars in millions) 2002 2001
--------------- ----------------
(Unaudited)
Assets
Cash and equivalents $ 8,580 $ 7,314
Investment securities 106,592 100,138
Financing receivables:
Time sales and loans, net of deferred income 132,854 122,686
Investment in financing leases, net of deferred income 57,734 56,147
--------------- ---------------
190,588 178,833
Allowance for losses on financing receivables (5,215) (4,801)
--------------- ---------------
Financing receivables - net 185,373 174,032
Insurance receivables - net 28,423 27,317
Other receivables - net 13,801 13,267
Inventories 266 270
Equipment on operating leases (at cost), less accumulated
amortization of $10,048 and $9,135 29,325 27,320
Intangible assets 22,295 20,757
Other assets 65,970 55,069
--------------- ---------------
Total assets $ 460,625 $ 425,484
=============== ===============
Liabilities and share owners' equity
Short-term borrowings $ 133,772 $ 160,844
Long-term borrowings:
Senior 123,193 77,920
Subordinated 1,255 1,171
Insurance liabilities, reserves and annuity benefits 128,974 114,223
Other liabilities 30,455 30,352
Deferred income taxes 8,992 8,117
--------------- ---------------
Total liabilities 426,641 392,627
--------------- ---------------
Minority interest in equity of consolidated affiliates 4,341 4,267
--------------- ---------------
Accumulated gains/(losses) - net
Investment securities 230 (348)
Currency translation adjustments (929) (840)
Derivatives qualifying as hedges (1,333) (890)
--------------- ---------------
Accumulated non-owner changes in share owners' equity (2,032) (2,078)
Capital stock 11 11
Additional paid-in capital 5,978 5,979
Retained earnings 25,686 24,678
--------------- ---------------
Total share owners' equity 29,643 28,590
--------------- ---------------
Total liabilities and share owners' equity $ 460,625 $ 425,484
=============== ===============
See Notes to Condensed, Consolidated Financial Statements.
2
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
Condensed Statement of Cash Flows
(Unaudited)
Six months ended
-------------------------------
(Dollars in millions) June 29, June 30,
2002 2001
------------- -------------
Cash Flows from Operating Activities
Net earnings $ 1,969 $ 2,709
Adjustments to reconcile net earnings to cash provided from operating
activities:
Cumulative effect of accounting changes 1,015 169
Provision for losses on financing receivables 1,447 979
Depreciation and amortization of buildings and equipment and
equipment on operating leases 1,720 1,590
Other - net 2,266 4,831
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Cash from operating activities 8,417 10,278
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Cash Flows from Investing Activities
Increase in loans to customers (88,786) (64,610)
Principal collections from customers - loans 83,731 62,060
Investment in equipment for financing leases (11,061) (7,832)
Principal collections from customers - financing leases 8,772 8,157
Net change in credit card receivables (270) 1,219
Buildings and equipment and equipment on operating leases:
- additions (4,699) (6,394)
- dispositions 2,475 3,511
Payments for principal businesses purchased, net of cash acquired (5,244) (3,280)
Purchases of securities by insurance and annuity businesses (24,978) (23,812)
Dispositions and maturities of securities by insurance and annuity
businesses 21,964 20,080
Other - net (1,248) (1,015)
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Cash used for investing activities (19,344) (11,916)
------------- -------------
Cash Flows from Financing Activities
Net change in borrowings (maturities 90 days or less) (35,883) 431
Newly issued debt:
- short-term (maturities 91-365 days) 1,710 2,333
- long-term (longer than one year) 56,569 8,848
Proceeds - nonrecourse, leveraged lease debt 585 856
Repayments and other reductions:
- short-term (maturities 91-365 days) (12,057) (5,895)
- long-term (longer than one year) 188 (3,878)
Principal payments - nonrecourse, leveraged lease debt (321) (170)
Proceeds from sales of investment contracts 3,817 3,610
Cash received upon assumption of insurance liabilities 2,406 -
Redemption of investment contracts (3,860) (3,587)
Dividends paid (961) (1,006)
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Cash from financing activities 12,193 1,542
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Increase/(decrease) in Cash and Equivalents During the Period 1,266 (96)
Cash and Equivalents at Beginning of Period 7,314 6,052
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Cash and Equivalents at End of Period $ 8,580 $ 5,956
============= =============
See Notes to Condensed, Consolidated Financial Statements.
3
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
Notes to Condensed, Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed, consolidated quarterly financial statements
represent the consolidation of General Electric Capital Services, Inc. and all
majority-owned and controlled affiliates (collectively called "GECS"). All
significant transactions among the parent and consolidated affiliates have been
eliminated. Certain prior period data have been reclassified to conform to the
current period presentation.
2. The condensed, consolidated quarterly financial statements are
unaudited. These statements include all adjustments (consisting of normal
recurring accruals) considered necessary by management to present a fair
statement of the results of operations, financial position and cash flows. The
results reported in these condensed, consolidated quarterly financial statements
should not be regarded as necessarily indicative of results that may be expected
for the entire year.
3. The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, generally
became effective on January 1, 2002. Under SFAS 142, goodwill is no longer
amortized but is tested for impairment using a fair value methodology.
GECS ceased amortizing goodwill effective January 1, 2002. Simultaneously,
to maintain a consistent basis for its measurement of performance, management
revised previously-reported segment information to correspond to the earnings
measurements by which businesses were to be evaluated. In accordance with the
requirements of SFAS 131, Reporting Segments of a Business Enterprise,
previously reported segment results (presented under the heading Operating
Segments on pages 8 and 13), have been restated to be consistent with 2002
reporting. Goodwill amortization expense for the quarter and six months ended
June 30, 2001, was $172 million ($134 million after tax) and $346 million ($273
million after tax), respectively. The effect on earnings of excluding such
goodwill amortization from the second quarter and first six months of 2001
follow:
Second quarter ended Six months ended
-------------------------------- ---------------------------------
(Dollars in millions) June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
--------------- ---------------- --------------- -----------------
Earnings before accounting changes $ 1,327 $ 1,477 $ 2,984 $ 2,878
--------------- ---------------- ---------------- ----------------
Earnings before accounting changes,
excluding 2001 goodwill amortization $ 1,327 $ 1,611 $ 2,984 $ 3,151
--------------- ---------------- ---------------- ----------------
Net earnings $ 1,327 $ 1,477 $ 1,969 $ 2,709
--------------- ---------------- ---------------- ----------------
Net earnings, excluding 2001 goodwill
amortization $ 1,327 $ 1,611 $ 1,969 $ 2,982
--------------- ---------------- ---------------- ----------------
Under SFAS 142, GECS was required to test all existing goodwill for
impairment as of January 1, 2002, on a "reporting unit" basis. A reporting unit
is the operating segment unless, at businesses one level below that operating
segment (the "component" level), discrete financial information is prepared and
regularly reviewed by management, in which case such component is the reporting
unit.
A fair value approach is used to test goodwill for impairment. An
impairment charge is recognized for the amount, if any, by which the carrying
amount of goodwill exceeds its fair value. Fair values were established using
discounted cash flows. When available and as appropriate, comparative market
multiples were used to corroborate discounted cash flow results.
The result of testing goodwill of GECS for impairment in accordance with
SFAS 142, as of January 1, 2002, was a non-cash charge of $1,204 million ($1,015
million after tax), which is reported in the caption "Cumulative effect of
accounting changes". Substantially all of the charge relates to the IT Solutions
business and the GE Auto and Home business, a direct subsidiary of GE Financial
Assurance. The primary factors resulting in the impairment charge were the
difficult economic environment in the information technology sector and
heightened price competition in the auto insurance industry. No impairment
charge was appropriate under the FASB's previous goodwill impairment standard,
which was based on undiscounted cash flows.
4
At June 29, 2002 At December 31, 2001
----------------------------------- -----------------------------------
Intangibles Subject to Amortization Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ---------------- ---------------- -----------------
(Dollars in millions)
Present value of future profits (PVFP) $ 5,752 $ (3,434) $ 5,504 $ (3,306)
Capitalized software 1,389 (500) 1,307 (406)
Servicing assets 3,942 (3,081) 3,768 (2,629)
All other 851 (498) 1,092 (506)
---------------- ---------------- ---------------- ------------------
Total $ 11,934 $ (7,513) $ 11,671 $ (6,847)
================ ================ ================ ==================
Amortization expense related to intangible assets, excluding goodwill for
the second quarter of 2002 and 2001, was $451 million and $382 million,
respectively and for the first six months of 2002 and 2001 was $721 million and
$621 million, respectively. The estimated percentage of the December 31, 2001
net PVFP balance to be amortized over each of the next five years follows:
2002 13.0%
2003 10.5%
2004 8.9%
2005 7.6%
2006 6.3%
Amortization Expense for PVFP in future periods will be affected by
acquisitions, realized capital gains/losses or other factors affecting the
ultimate amount of gross profits realized from certain lines of business.
Similarly, future amortization expense for other intangibles will depend on
acquisition activity and other business transactions.
Goodwill
- --------
Goodwill balances follow:
Consumer Equipment Mid-Market Specialized Specialty
(Dollars in millions) Services Management Financing Financing Insurance All Other Total
------------ ------------- ----------- ------------ ------------ ----------- -----------
Balance,
December 31, 2001 $ 5,785 $ 1,209 $ 2,592 $ 38 $ 1,414 $ 4,895 $ 15,933
Acquisitions/Purchase
Price Accounting
Adjustments 1,570 63 353 519 - 251 2,756
Transition Impairment
(Pre-Tax) - - - - - (1,204) (1,204)
All Other 232 23 12 2 120 - 389
------------ ------------- ----------- ------------ ------------ ----------- -----------
Balance, June 29, 2002 $ 7,587 $ 1,295 $ 2,957 $ 559 $ 1,534 $ 3,942 $ 17,874
============ ============= =========== ============ ============ =========== ===========
As previously disclosed, GECS acquired Heller Financial, Inc. (Heller) on
October 24, 2001. GECS substantially completed its purchase accounting for
Heller during the second quarter of 2002.
4. At January 1, 2001, GECS adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. Under SFAS 133, all derivative
instruments are recognized in the statement of financial position at their fair
values. The cumulative effect of adopting this standard was a one-time reduction
of net earnings in the first quarter of 2001 of $49 million and comprised a
portion of the effect of marking to market options and currency contracts used
for hedging. Also at January 1, 2001, GECS adopted the consensus of the Emerging
Issues Task Force of the FASB on accounting for impairment of beneficial
interests (EITF 99-20). Under this consensus, impairment of certain beneficial
interests in securitized assets must be recognized when the asset's fair value
is below its carrying value and it is probable that there has been an adverse
change in estimated cash flows. The cumulative effect of adopting EITF 99-20 was
a one-time reduction of net earnings in the first quarter of 2001 of $120
million.
5
5. A summary of increases/(decreases) in share owners' equity that do not
result directly from transactions with share owners, net of income taxes,
follows:
Second quarter ended
--------------------------
(Dollars in millions) 6/29/02 6/30/01
--------------------------
Net earnings $ 1,327 $ 1,477
Investment securities - net changes in value 999 (982)
Currency translation adjustments 177 (48)
Derivatives qualifying as hedges - net changes in value (779) 347
---------- ----------
Total $ 1,724 $ 794
========== ==========
Six months ended
--------------------------
(Dollars in millions) 6/29/02 6/30/01
--------------------------
Net earnings $ 1,969 $ 2,709
Investment securities - net changes in value 578 (66)
Currency translation adjustments (89) 158
Derivatives qualifying as hedges - net changes in value (443) (78)
Cumulative effect on share owners' equity of adopting SFAS 133 - (849)
---------- ----------
Total $ 2,015 $ 1,874
========== ==========
6. Revenues and net earnings before accounting changes of GECS, by
operating segment, for the quarter and six months ended June 29, 2002 and June
30, 2001 can be found in the consolidated tables on pages 8 and 13 of this
report, respectively.
6
Item 2. Management's Discussion and Analysis of Results of Operations
A. Results of Operations - Second quarter of 2002 compared with second quarter
of 2001
Overview
GECS net earnings before accounting changes (discussed in notes 3 and 4 to
the condensed, consolidated financial statements) for the second quarter of 2002
were $1,327 million, a $150 million (10%) decrease from the second quarter of
2001. Excluding the effect of the prior year goodwill amortization ($134 million
after tax), net earnings before accounting changes decreased 18% reflecting $350
million of after tax adjustments to estimates of prior-year loss events at
Employers Reinsurance Corporation, a direct subsidiary of GE Global Insurance
Holdings, increased credit losses, $270 million lower after tax gains from
investment securities (including a $110 million after tax impairment on
WorldCom, Inc. bonds) and $55 million after tax of lower gains on
securitizations. These decreases were partially offset by contributions from
acquisitions, productivity and origination growth. Contributions from acquired
companies to net earnings in the second quarter of 2002 and 2001 included
approximately $168 million and $20 million, respectively. Acquisitions are
integrated as quickly as possible; only earnings during the first 12 months
following the quarter in which the acquisition is completed are considered to be
related to acquired companies.
Operating Results
Total revenues decreased $547 million (4%) to $13,852 million for the
second quarter of 2002, compared with $14,399 million for the second quarter of
2001. This decrease primarily resulted from $325 million pretax of adjustments
to estimates of prior-year loss events at GE Global Insurance Holdings,
portfolio losses at GE Financial Assurance (including $167 million ($110 million
after tax) of pretax impairment on WorldCom, Inc. bonds), and the absence of a
current year counterpart to Americom which was divested in the fourth quarter of
2001, the combination of which were partially offset by acquisitions.
Interest expense on borrowings for the second quarter of 2002 was $2,429
million, 9% lower than for the second quarter of 2001. The decrease reflected
the effects of lower interest rates, partially offset by the effects of higher
average borrowings used to finance acquisitions and asset growth. The average
composite interest rate on GECS' borrowings for the second quarter of 2002 was
4.00% compared with 5.46% in the second quarter of 2001.
Operating and administrative expenses were $3,682 million for the second
quarter of 2002, a 7% decrease over the second quarter of 2001. The decrease
primarily reflected productivity gains in the Consumer Services and Equipment
Management segments and a decrease in amortization expense related to goodwill,
as in accordance with SFAS 142 GECS ceased amortizing goodwill effective January
1, 2002. These decreases were partially offset by operating and administrative
expenses associated with recent acquisitions.
Cost of goods sold is associated with activities of GECS' computer
equipment distribution business. This cost amounted to $822 million for the
second quarter of 2002, compared with $866 million for the second quarter of
2001. The decrease primarily reflected volume declines at IT Solutions.
Insurance losses and policyholder and annuity benefits decreased $23
million to $3,689 million for the second quarter of 2002, compared with the
second quarter of 2001. The decrease is primarily a result of reduced premium
volume at GE Financial Assurance and favorable development on prior year loss
reserves at Mortgage Insurance, partially offset by adverse development on loss
reserves at GE Global Insurance Holdings and the effects of business
acquisitions.
Provision for losses on financing receivables were $785 million for the
second quarter of 2002 compared with $496 million for the second quarter of
2001. These provisions principally relate to consumer receivables and leases
(private-label credit cards, bank credit cards, personal loans and auto loans)
as well as commercial receivables (commercial, industrial, and equipment loans
and leases), all of which are discussed below under Portfolio Quality. The
increase in the provision reflected higher average receivable balances, while
the mix of commercial receivables, which historically have lower losses than
consumer receivables, increased as a percentage of the total portfolio. The
increase also reflected increased reserve requirements in the Mid-Market
Financing businesses consistent with economic trends. Future provisions for
losses will depend primarily on the size of the portfolio, which is expected to
continue to grow, and on associated business and economic conditions.
Depreciation and amortization of buildings and equipment and equipment on
operating leases increased to $894 million for the second quarter of 2002,
compared with $797 million for the second quarter of 2001. The increase was
principally the result of higher levels of equipment on operating leases,
primarily reflecting origination growth and acquisitions, partially offset by
the divestiture of Americom.
7
Provision for income taxes was $184 million for the second quarter of 2002
(an effective tax rate of 12.2%), compared with $378 million for the second
quarter of 2001 (an effective tax rate of 20.4%). The lower effective tax rate
primarily reflected the impact of reduced pre-tax income discussed previously,
increased low taxed earnings from international operations, and the benefits of
a settlement with the Internal Revenue Service ("IRS") resulting from revised
IRS regulations, allowing the deductibility of previously realized losses
associated with the prior disposition of Kidder Peabody preferred stock that
were larger than the prior year tax benefits from restructuring at Penske.
Operating Segments
Revenues and net earnings before accounting changes of GECS, by operating
segment, for the second quarter ended June 29, 2002 and June 30, 2001 are
summarized and discussed below. Second quarter 2001 amounts have been
reclassified to conform to the 2002 presentation, which reflects changes,
effective as of January 1, 2002, in GECS' internal organization and in the
amortization of goodwill. Asia/Pacific operations previously managed by region
are now managed and reported by the respective operating business. Also, certain
businesses, primarily IT Solutions and GE Auto and Home, previously in separate
segments are now reviewed directly by the chief operating decision maker, and
are therefore designated as operating segments. Because none of these operating
segments qualifies as a reporting segment, they have been combined for reporting
purposes and have been presented in "All Other".
Consolidated
Second quarter ended
------------------------------
(Dollars in millions) 6/29/02 6/30/01
------------------------------
Revenues
Consumer Services $ 5,330 $ 5,618
Equipment Management 1,733 1,768
Mid-Market Financing 2,346 1,920
Specialized Financing 784 727
Specialty Insurance 2,446 2,981
All Other 1,213 1,385
----------- -----------
Total revenues $ 13,852 $ 14,399
=========== ===========
Net earnings
Consumer Services $ 559 $ 586
Equipment Management 183 360
Mid-Market Financing 392 277
Specialized Financing 171 161
Specialty Insurance (50) 279
All Other 72 (52)
----------- -----------
Net earnings $ 1,327 $ 1,611
=========== ===========
Following is a discussion of revenues and net earnings from operating segments.
Consumer Services
Second quarter ended
------------------------------
(Dollars in millions) 6/29/02 6/30/01
------------------------------
Revenues
Global Consumer Finance $ 1,501 $ 1,370
GE Financial Assurance 2,817 3,198
GE Card Services 962 956
Other Consumer Services 50 94
----------- -----------
Total revenues $ 5,330 $ 5,618
=========== ===========
Net earnings
Global Consumer Finance $ 323 $ 242
GE Financial Assurance 53 149
GE Card Services 176 187
Other Consumer Services 7 8
----------- -----------
Net earnings $ 559 $ 586
=========== ===========
8
Consumer Services revenues decreased 5% and net earnings decreased 5%
compared with the second quarter of 2001, as the effects of acquisitions were
more than offset by lower earnings at GE Financial Assurance, which reflected
impairment of $167 million pretax ($110 million after tax) of WorldCom, Inc.
bonds, decreased premium volume, and the planned transition of the restructured
Toho insurance policies. GE Financial Assurance had $42 million remaining
exposure to WorldCom, Inc. at June 29, 2002. Other Consumer Services revenues
decreased as a result of the planned run-off of the U.S. auto finance business
portfolio. Consumer Services net earnings decreased primarily as a result of
losses recognized on the impairment of investments at GE Financial Assurance as
well as lower securitization gains at GE Financial Assurance and Card Services,
the combination of which more than offset increased productivity at GE Financial
Assurance and Global Consumer Finance, increased volume growth and acquisitions
at Global Consumer Finance and volume growth at Card Services.
Equipment Management
Second quarter ended
------------------------------
(Dollars in millions) 6/29/02 6/30/01
------------------------------
Revenues
Aviation Services (GECAS) $ 683 $ 589
Americom - 118
Other Equipment Management 1,050 1,061
----------- -----------
Total revenues $ 1,733 $ 1,768
=========== ===========
Net earnings
Aviation Services (GECAS) $ 117 $ 155
Americom - 34
Other Equipment Management 66 171
----------- -----------
Net earnings $ 183 $ 360
=========== ===========
Equipment Management revenues and net earnings decreased 2% and 49%,
respectively in the second quarter of 2002, compared with the corresponding
period in 2001, reflecting the absence of a counterpart to 2001 Americom
revenues following its divestiture in the fourth quarter of 2001, partially
offset by volume growth at GECAS. The decrease in net earnings is attributable
to prior year tax benefits from restructuring at Penske (included in Other
Equipment Management), decreased gains from asset sales at GECAS and the
divestiture of Americom, partially offset by volume growth and acquisitions at
GECAS. As a result of the divestiture of Americom, GECS received an equity
interest in SES Global, which is included in the Specialized Financing segment.
Mid-Market Financing
Second quarter ended
------------------------------
(Dollars in millions) 6/29/02 6/30/01
------------------------------
Revenues
Commercial Equipment Financing $ 1,170 $ 997
Commercial Finance 554 436
Vendor Financial Services 554 487
Other Mid-Market Financing 68 -
----------- -----------
Total revenues $ 2,346 $ 1,920
=========== ===========
Net earnings
Commercial Equipment Financing $ 165 $ 119
Commercial Finance 138 92
Vendor Financial Services 74 62
Other Mid-Market Financing 15 4
----------- -----------
Net earnings $ 392 $ 277
=========== ===========
9
Mid-Market Financing revenues and net earnings increased 22% and 42%,
respectively, in the second quarter of 2002 compared with the second quarter of
2001. The increase in revenues principally reflected acquisitions across all
businesses. The increase in net earnings reflected contributions from
acquisitions across all businesses, partially offset by higher credit losses at
Commercial Finance, Commercial Equipment Financing and Vendor Financial
Services. Other Mid-Market Financing also includes results of the Healthcare
Financial Services business, which was recently launched primarily from assets
acquired in the October, 2001, acquisition of Heller Financial, Inc. ("Heller").
Specialized Financing
Second quarter ended
----------------------------
(Dollars in millions) 6/29/02 6/30/01
----------------------------
Revenues
Real Estate $ 557 $ 461
Structured Finance Group 296 275
GE Equity (87) (21)
Other Specialized Financing 18 12
----------- -----------
Total revenues $ 784 $ 727
=========== ===========
Net earnings
Real Estate $ 133 $ 123
Structured Finance Group 125 106
GE Equity (85) (64)
Other Specialized Financing (2) (4)
----------- -----------
Net earnings $ 171 $ 161
=========== ===========
Specialized Financing revenues increased 8% in the second quarter of 2002
as a result of acquisitions at Real Estate and Structured Finance Group and
revenues associated with Structured Finance Group's equity method investment in
SES Global (acquired in the fourth quarter of 2001), partially offset by
increased asset losses on investments at GE Equity and reduced asset gains at
Structured Finance Group and Real Estate. GE Equity manages equity investments
in early-stage, early growth, pre-IPO companies. Revenues at GE Equity include
income, gains and losses on such investments. During the second quarter of 2002
and 2001, losses on GE Equity's investments exceeded gains and other investment
income, resulting in negative revenues. Specialized Financing net earnings
increased 6% as a result of acquisitions at Real Estate and volume growth and
net income associated with the equity investment in SES Global at Structured
Finance Group, the combination of which more than offset increased asset losses
at GE Equity and reduced asset gains at Structured Finance Group.
Specialty Insurance
Second quarter ended
----------------------------
(Dollars in millions) 6/29/02 6/30/01
----------------------------
Revenues
Mortgage Insurance $ 256 $ 270
GE Global Insurance Holdings 2,076 2,565
Other Specialty Insurance 114 146
----------- ---------
Total revenues $ 2,446 $ 2,981
=========== =========
Net earnings
Mortgage Insurance $ 133 $ 93
GE Global Insurance Holdings (236) 140
Other Specialty Insurance 53 46
----------- ---------
Net earnings $ (50) $ 279
=========== =========
10
Specialty Insurance revenues decreased 18% in the second quarter of 2002
primarily as a result of reduced premiums resulting from $325 million of pre-tax
adjustments to estimates of prior-year loss events, lower investment income at
GE Global Insurance Holdings and reduced gains at GE Global Insurance Holdings
and Mortgage Insurance. The decrease in Other Specialty Insurance revenues
related to the portfolio run-off at Mortgage Services, partially offset by
increased investment gains at Financial Guaranty Insurance Company. The 118%
decrease in Specialty Insurance net earnings during the second quarter of 2002
resulted from $350 million of after-tax adjustments (including both reduced
revenues and increased costs) to estimates of prior-year loss events, lower
investment income at GE Global Insurance Holdings, and reduced investment gains
at GE Global Insurance Holdings and Mortgage Insurance, partially offset by
favorable development on prior year loss reserves and volume growth at Mortgage
Insurance, primarily in Canada and Australia.
All Other GECS
Second quarter ended
----------------------------
(Dollars in millions) 6/29/02 6/30/01
----------------------------
Revenues
IT Solutions $ 994 $ 1,090
Other 219 295
----------- ----------
Total revenues $ 1,213 $ 1,385
=========== ==========
Net earnings
IT Solutions $ 7 $ (4)
Other 65 (48)
----------- ----------
Net earnings $ 72 $ (52)
=========== ==========
All Other GECS decline in revenues primarily related to reduced volume at
IT Solutions, including the effects of exiting lower performing businesses. The
increase in All Other GECS net earnings reflects the inclusion of a tax
settlement with the IRS resulting from revised IRS regulations, allowing the
deductibility of previously realized losses associated with the prior
disposition of Kidder Peabody preferred stock and the recovery of state tax
benefits. Corporate expenses were also lower in 2002. The net earnings
improvement in IT Solutions related to exiting lower performing businesses.
11
B. Results of Operations - First half of 2002 compared with first half of 2001
Overview
GECS net earnings before accounting changes (discussed in notes 3 and 4 to
the condensed, consolidated financial statements) for the first six months of
2002 were $2,984 million, a $106 million (4%) increase from the first six months
of 2001. Excluding the effect of the prior year goodwill amortization ($273
million after tax), net earnings before accounting changes decreased 5%
reflecting increased credit losses, $367 million lower after tax gains from
investment securities (including a $110 million after tax impairment on
WorldCom, Inc. bonds), $385 million after tax adjustments to estimates of
prior-year loss events at Employers Reinsurance Corporation, a direct subsidiary
of GE Global Insurance Holdings, and $82 million after tax of lower gains on
securitizations. These decreases were partially offset by contributions from
acquisitions, productivity and origination growth, as well as, lower taxes.
Contributions from acquired companies to net earnings in the first six months of
2002 and 2001 included approximately $317 million and $37 million, respectively.
Acquisitions are integrated as quickly as possible; only earnings during the
first 12 months following the quarter in which the acquisition is completed are
considered to be related to acquired companies.
Operating Results
Total revenues decreased $1,371 million (5%) to $27,751 million for the
first six months of 2002, compared with $29,122 million for the first six months
of 2001. This decrease primarily resulted from $325 million of pretax
adjustments to estimates of prior-year loss events at GE Global Insurance
Holdings, reduced market interest rates, volume decreases at IT Solutions, the
absence of revenues from Americom which was divested in the fourth quarter of
2001, lower securitization gains, and portfolio losses at GE Financial Assurance
(including $167 million ($110 million after tax) of pretax impairments of
WorldCom, Inc. bonds), the combination of which were partially offset by
acquisitions.
Interest expense on borrowings for the first six months of 2002 was $4,717
million, 15% lower than for the first six months of 2001. The decrease reflected
the effects of lower interest rates, partially offset by the effects of higher
average borrowings used to finance acquisitions and asset growth. The average
composite interest rate on GECS' borrowings for the first six months of 2002 was
4.03% compared with 5.60% in the first six months of 2001.
Operating and administrative expenses were $7,408 million for the first six
months of 2002, a 9% decrease over the first six months of 2001. The decrease
primarily reflected productivity gains in the Consumer Services and Equipment
Management segments and a decrease in amortization expense related to goodwill,
as in accordance with SFAS 142 GECS ceased amortizing goodwill effective January
1, 2002. These decreases were partially offset by operating and administrative
expenses associated with recent acquisitions.
Cost of goods sold is associated with activities of GECS' computer
equipment distribution business. This cost amounted to $1,564 million for the
first six months of 2002, compared with $1,827 million for the first six months
of 2001. The decrease primarily reflected volume declines at IT Solutions.
Insurance losses and policyholder and annuity benefits increased $3 million
to $7,238 million for the first six months of 2002, compared with the first six
months of 2001. The increase is primarily a result of adverse development on
loss reserves at GE Global Insurance Holdings and the effects of business
acquisitions, offset by reduced premium volume at GE Financial Assurance and
favorable development on prior year loss reserves at Mortgage Insurance.
Provision for losses on financing receivables were $1,447 million for the
first six months of 2002 compared with $979 million for the first six months of
2001. These provisions principally relate to consumer receivables and leases
(private-label credit cards, bank credit cards, personal loans and auto loans)
as well as commercial receivables (commercial, industrial, and equipment loans
and leases), all of which are discussed below under Portfolio Quality. The
increase in the provision reflected higher average receivable balances, while
the mix of commercial receivables, which historically have lower losses than
consumer receivables, increased as a percentage of the total portfolio. The
increase also reflected increased reserve requirements in the Mid-Market
Financing businesses consistent with economic trends. Future provisions for
losses will depend primarily on the size of the portfolio, which is expected to
continue to grow, and on associated business and economic conditions.
Depreciation and amortization of buildings and equipment and equipment on
operating leases increased to $1,720 million for the first six months of 2002,
compared with $1,590 million for the first six months of 2001. The increase was
principally the result of higher levels of equipment on operating leases,
primarily reflecting origination growth and acquisitions.
12
Provision for income taxes was $599 million for the first six months of
2002 (an effective tax rate of 16.7%), compared with $816 million for the first
six months of 2001 (an effective tax rate of 22.1%). The lower effective tax
rate primarily reflected the impact of reduced pre-tax income discussed
previously, increased low taxed earnings from international operations, and the
benefits of a settlement with the IRS resulting from revised IRS regulations,
allowing the deductibility of previously realized losses associated with the
prior disposition of Kidder Peabody preferred stock that were larger than the
prior year tax benefits from restructuring at Penske.
Operating Segments
Revenues and net earnings before accounting changes of GECS, by operating
segment, for the first six months of 2002 and 2001 are summarized and discussed
below. First half of 2001 amounts have been reclassified to conform to the 2002
presentation, which reflects changes, effective as of January 1, 2002, in GECS'
internal organization and in the amortization of goodwill. Asia/Pacific
operations previously managed by region are now managed and reported by the
respective operating business. Also, certain businesses, primarily IT Solutions
and GE Auto and Home, previously in separate segments are now reviewed directly
by the chief operating decision maker, and are therefore designated as operating
segments. Because none of these operating segments qualifies as a reporting
segment, they have been combined for reporting purposes and have been presented
in "All Other".
Consolidated
Six months ended
-----------------------------
(Dollars in millions) 6/29/02 6/30/01
-----------------------------
Revenues
Consumer Services $ 10,740 $ 11,310
Equipment Management 3,332 3,613
Mid-Market Financing 4,617 3,871
Specialized Financing 1,504 1,562
Specialty Insurance 5,231 5,869
All Other 2,327 2,897
---------- -----------
Total revenues $ 27,751 $ 29,122
========== ===========
Earnings before accounting changes
Consumer Services $ 1,263 $ 1,234
Equipment Management 352 666
Mid-Market Financing 746 569
Specialized Financing 389 280
Specialty Insurance 184 549
All Other 50 (147)
---------- -----------
Total earnings before accounting changes $ 2,984 $ 3,151
========== ===========
Following is a discussion of revenues and net earnings before accounting
changes from operating segments. For purposes of this discussion, net earnings
before accounting changes is referred to as net earnings.
13
Consumer Services
Six months ended
----------------------------
(Dollars in millions) 6/29/02 6/30/01
----------------------------
Revenues
Global Consumer Finance $ 2,971 $ 2,688
GE Financial Assurance 5,800 6,298
GE Card Services 1,865 2,078
Other Consumer Services 104 246
--------- -----------
Total revenues $ 10,740 $ 11,310
========= ===========
Net earnings
Global Consumer Finance $ 643 $ 539
GE Financial Assurance 226 308
GE Card Services 387 364
Other Consumer Services 7 23
--------- -----------
Net earnings $ 1,263 $ 1,234
========= ===========
Consumer Services net earnings increased 2% on revenues that were 5% lower
compared with the first six months of 2001. Revenues decreased at GE Financial
Assurance and Card Services, and were partially offset by increased revenues at
Global Consumer Finance. The decrease at GE Financial Assurance included
impairment of $167 million pretax ($110 million after tax) of WorldCom, Inc.
bonds, declines from the planned transition of restructured Toho insurance
policies and decreased premium volume. GE Financial Assurance had $42 million
remaining exposure to WorldCom, Inc. at June 29, 2002. The decrease at Card
Services related to exited businesses and lower securitizations. The revenue
decreases at GE Financial Assurance and Card Services were partially offset by
acquisitions at all three major businesses and volume growth at Global Consumer
Finance. Other Consumer Services revenues decreased as a result of the planned
run-off of the U.S. auto finance business portfolio. The increase in Consumer
Services net earnings reflects acquisitions and volume growth at Global Consumer
Finance, volume growth at Card Services, as well as productivity at GE Financial
Assurance, the combination of which was partially offset by losses recognized on
the impairments of investments at GE Financial Assurance, lower securitization
gains at Card Services and the planned run-off of the auto finance business
portfolio.
Equipment Management
Six months ended
------------------------------
(Dollars in millions) 6/29/02 6/30/01
------------------------------
Revenues
Aviation Services (GECAS) $ 1,251 $ 1,105
Americom - 355
Other Equipment Management 2,081 2,153
----------- -----------
Total revenues $ 3,332 $ 3,613
=========== ===========
Net earnings
Aviation Services (GECAS) $ 212 $ 285
Americom - 125
Other Equipment Management 140 256
----------- -----------
Net earnings $ 352 $ 666
=========== ===========
Equipment Management revenues decreased 8% and net earnings decreased 47%
in the first six months of 2002 compared with the corresponding period in 2001.
The decrease in revenues principally reflected the divestiture of Americom in
the fourth quarter of 2001, partially offset by volume growth and acquisitions
at GECAS. The decrease in net earnings principally reflected the divestiture of
Americom, prior year tax benefits from restructuring at Penske (included in
Other Equipment Management), and decreased gains from asset sales at GECAS, the
combination of which more than offset volume growth and acquisitions at GECAS.
As a result of the divestiture of Americom, GECS received an equity interest in
SES Global, which is included in the Specialized Financing segment.
14
Mid-Market Financing
Six months ended
------------------------------
(Dollars in millions) 6/29/02 6/30/01
------------------------------
Revenues
Commercial Equipment Financing $ 2,251 $ 1,953
Commercial Finance 1,164 960
Vendor Financial Services 1,089 958
Other Mid-Market Financing 113 -
----------- -----------
Total revenues $ 4,617 $ 3,871
=========== ===========
Net earnings
Commercial Equipment Financing $ 333 $ 239
Commercial Finance 245 205
Vendor Financial Services 141 119
Other Mid-Market Financing 27 6
----------- -----------
Net earnings $ 746 $ 569
=========== ===========
Mid-Market Financing revenues and net earnings increased 19% and 31%,
respectively, in the first six months of 2002 compared with the first six months
of 2001. The increase in revenues principally reflected acquisitions across all
businesses, partially offset by decreased market interest rates. Growth in net
earnings reflected the results of acquisitions across all businesses, partially
offset by reduced asset gains at Commercial Finance and higher credit losses at
Commercial Finance, Commercial Equipment Financing and Vendor Financial
Services. Other Mid-Market Financing principally includes the results of the
Healthcare Financial Services business, which was recently launched primarily
from assets acquired in the October, 2001, acquisition of Heller.
Specialized Financing
Six months ended
------------------------------
(Dollars in millions) 6/29/02 6/30/01
------------------------------
Revenues
Real Estate $ 1,018 $ 1,059
Structured Finance Group 592 587
GE Equity (142) (110)
Other Specialized Financing 36 26
----------- -----------
Total revenues $ 1,504 $ 1,562
=========== ===========
Net earnings
Real Estate $ 295 $ 255
Structured Finance Group 254 212
GE Equity (155) (181)
Other Specialized Financing (5) (6)
----------- -----------
Net earnings $ 389 $ 280
=========== ===========
15
Specialized Financing revenues decreased 4% in the first six months of
2002, primarily reflecting lower market interest rates at Real Estate, lower
asset gains at Structured Finance Group and increased asset losses on
investments at GE Equity, partially offset by acquisitions at Real Estate and
Structured Finance Group and revenues associated with Structured Finance Group's
equity method investment in SES Global (acquired in the fourth quarter of 2001).
GE Equity manages equity investments in early-stage, early growth, pre-IPO
companies. Revenues at GE Equity include income, gains and losses on such
investments. During the first six months of 2002 and 2001, losses on GE Equity's
investments exceeded gains and other investment income, resulting in negative
revenues. Specialized Financing net earnings increased 39% in the first six
months of 2002, reflecting origination growth at Structured Finance Group,
acquisitions at Real Estate and Structured Finance Group and net income
associated with Structured Finance Group's equity investment in SES Global,
partially offset by lower asset gains at Structured Finance Group.
Specialty Insurance
Six months ended
----------------------------
(Dollars in millions) 6/29/02 6/30/01
----------------------------
Revenues
Mortgage Insurance $ 536 $ 579
GE Global Insurance Holdings 4,483 5,062
Other Specialty Insurance 212 228
----------- ---------
Total revenues $ 5,231 $ 5,869
=========== =========
Net earnings
Mortgage Insurance $ 233 $ 217
GE Global Insurance Holdings (156) 286
Other Specialty Insurance 107 46
----------- ---------
Net earnings $ 184 $ 549
=========== =========
Specialty Insurance revenues decreased 11% in the first six months of 2002,
primarily as a result of reduced premiums resulting from $325 million of pretax
adjustments to estimates of prior-year loss events and reduced gains at GE
Global Insurance Holdings and reduced premiums associated with mortgage
refinancing activities and reduced gains at Mortgage Insurance. Net earnings
decreased 66% in the first six months of 2002, resulting from $385 million of
after tax adjustments (including both reduced revenues and increased costs) to
estimates of prior-year loss events and lower investment income at GE Global
Insurance Holdings, as well as reduced gains at GE Global Insurance Holdings and
Mortgage Insurance, partially offset by volume growth at Mortgage Insurance,
primarily in Canada and Australia. The increase in Other Specialty Insurance was
attributable to lower costs associated with the portfolio run-off at Mortgage
Services and higher earned premiums at Financial Guaranty Insurance Company.
All Other GECS
Six months ended
----------------------------
(Dollars in millions) 6/29/02 6/30/01
----------------------------
Revenues
IT Solutions $ 1,910 $ 2,311
Other 417 586
----------- ----------
Total revenues $ 2,327 $ 2,897
=========== ==========
Net earnings
IT Solutions $ 5 $ (7)
Other 45 (140)
----------- ----------
Net earnings $ 50 $ (147)
=========== ==========
16
All Other GECS decline in revenues primarily related to reduced volume at
IT Solutions, including the effects of exiting lower performing businesses. The
increase in All Other GECS net earnings reflects the inclusion of a tax
settlement with the IRS resulting from revised IRS regulations, allowing the
deductibility of previously realized losses associated with the prior
disposition of Kidder Peabody preferred stock and the recovery of state tax
benefits. Corporate expenses were also lower in 2002. The net earnings
improvement in IT Solutions related to exiting lower performing businesses.
Portfolio Quality
Financing receivables is the largest category of assets for GECS and
represents one of its primary sources of revenues. The portfolio of financing
receivables, before allowance for losses, increased to $190.6 billion at June
29, 2002, from $178.8 billion at the end of 2001, primarily reflecting
acquisitions, as well as the effects of foreign currency translation of
financing receivables, in excess of securitizations. The related allowance for
losses at June 29, 2002 amounted to $5.2 billion ($4.8 billion at the end of
2001) and represents management's best estimate of probable losses inherent in
the portfolio. A discussion about the quality of certain elements of the
portfolio of financing receivables follows. "Nonearning" receivables are those
that are 90 days or more delinquent (or for which collection has otherwise
become doubtful) and "reduced-earning" receivables are commercial receivables
whose terms have been restructured to a below-market yield.
Consumer financing receivables, primarily credit card and personal loans
and auto loans and leases, were $60.7 billion at June 29, 2002 ($52.3 billion at
December 31, 2001). Nonearning consumer receivables at June 29, 2002 were
consistent with year-end 2001, at $1.5 billion, about 2.4% of outstandings at
June 29, 2002 and about 2.9% of outstandings at December 31, 2001. Write-offs of
consumer receivables were $0.9 billion for the first six months of both 2002 and
2001.
Commercial financing receivables, which totaled $129.9 billion at June 29,
2002 ($126.5 billion at December 31, 2001), consisted of a diverse commercial,
industrial and equipment loan and lease portfolio. Related nonearning and
reduced-earning receivables were $2.5 billion at June 29, 2002, about 1.9% of
outstandings, compared with $1.7 billion, about 1.4% of outstandings at year-end
2001. The increase is primarily driven by nonearning and reduced-earning
receivables associated with Heller of approximately $430 million; at December
31, 2001, $408 million of such loans were earning but classified as impaired.
The increase also related to several bankruptcies and deal restructurings,
involving primarily middle-market customers, including a significant amount
related to the telecommunications industry. These receivables are generally
backed by assets and are covered by reserves for probable losses. Such reserves
are based on management's best estimates and changes to these provisions will be
dependent on future associated business and economic conditions. At June 29,
2002 and December 31, 2001, the portfolio included loans and leases on
commercial aircraft of $24.2 billion and $21.5 billion, respectively.
Investment securities comprise principally investment grade debt securities
held by GE Financial Assurance and the specialty insurance businesses and were
$106.6 billion, including gross unrealized gains and losses of $2.6 billion and
$2.0 billion, respectively, at June 29, 2002 ($100.1 billion, including gross
unrealized gains and losses of $2.1 billion and $2.7 billion, respectively, as
of December 31, 2001). Investment securities are regularly reviewed for
impairment based on criteria that include the extent to which cost exceeds
market value, the duration of that market decline and the financial health and
specific prospects for the issuer. Of those securities whose carrying amount
exceeds fair value at June 29, 2002, and based upon application of GECS'
accounting policy for impairment, approximately $570 million of portfolio value
is at risk of being charged to earnings in the second half of 2002. Impairment
losses recognized for the first six months of 2002 were $429 million, including
$334 million ($217 million after-tax) from the telecommunications and cable
industries, of which $167 million ($110 million after-tax) was recognized in the
second quarter of 2002 due to the events relating to WorldCom, Inc.
In recent periods the telecommunication and cable industries have
experienced significant volatility. GECS investments in (primarily within
financing receivables and investment securities) and commitments to these
industries aggregate approximately $13 billion as of June 29, 2002. These
investments are subject to GECS policies for reserving (on financing
receivables) and other than temporary impairment, as appropriate; any future
losses will be dependent upon associated business and economic conditions.
Liquidity
The major debt-rating agencies evaluate the financial condition of GE
Capital Corporation (GE Capital), the major public borrowing entity of GECS.
Factors that are important to the ratings of GECS include the following: cash
generating ability - including cash generated from operating activities;
earnings quality - including revenue growth and the breadth and diversity of
sources of income; leverage ratios - such as debt to total capital and interest
coverage; and asset utilization, including return on assets and asset turnover
ratios. Considering those factors, as well as other criteria appropriate to
GECS, those major rating agencies continue to give the highest ratings to debt
of GE Capital (long-term credit rating AAA/Aaa; short-term credit rating
A-1+/P-1).
17
Global commercial paper markets are a primary source of cash for GECS. GE
Capital is the most widely-held name in those markets. GECS began the year with
$117 billion of commercial paper, about 49% of total debt outstanding at
December 31, 2001, and at the end of the second quarter of 2002 had $83 billion
of commercial paper outstanding, about 32% of total debt outstanding at June 29,
2002. GECS now targets a ratio for commercial paper as a percent of outstanding
debt of 25% to 35%.
As of June 29, 2002, GECS held approximately $54 billion of contractually
committed lending agreements with highly-rated global banks and investment banks
an increase of $21 billion since December 31, 2001. When considering the
contractually committed lending agreements as well as other sources of
liquidity, including medium and long-term funding, monetization, asset
securitization, cash receipts from GECS lending and leasing activities, short
term secured funding on global assets, and potential asset sales, management
believes it could achieve an orderly transition from commercial paper in the
unlikely event of impaired access to the commercial paper market.
During the first half of 2002, GECS issued approximately $58 billion of
long-term debt in U.S. and international markets. These funds were used
primarily to reduce the amount of commercial paper outstanding, fund maturing
long-term debt, and fund acquisitions and asset growth. GECS anticipates issuing
approximately $20 billion to $40 billion of additional long-term debt using both
U.S. and international markets during the remainder of 2002. The proceeds from
such issuances will be used to fund maturing long-term debt, additional
acquisitions and asset growth. The ultimate amount of debt issuances will depend
upon the growth in assets, acquisition activity, availability of markets and
movements in interest rates.
GECS uses special purpose entities as described in the December 31, 2001,
Annual Report on Form 10-K. Receivables held by special purpose entities as of
June 29, 2002 and December 31, 2001, were $44.4 billion and $43.0 billion,
respectively, and the maximum amount of liquidity support for commercial paper
outstanding was about the same at $43.3 billion. The maximum recourse provided
under credit support agreements increased from $14.5 billion at December 31,
2001, to $15.1 billion at June 29, 2002.
Other
On July 26, 2002, General Electric Company ("GE") announced organizational
changes that will result in the businesses that comprise GE Capital Services
becoming four separate businesses, effective August 1, 2002: GE Commercial
Finance, GE Insurance, GE Consumer Finance and GE Equipment Management. Each of
these businesses will report directly to Jeff Immelt, Chairman and Chief
Executive Officer of GE, and GE Vice Chairman Dennis Dammerman. GE Capital
Services and GE Capital Corporation will remain as legal entities and continue
as the major borrowers of funds necessary to support all of GE's financial
services activities. For more detail, see the press release, dated July 26,
2002, filed as Exhibit 99.3 to this quarterly report.
Forward Looking Statements
This document includes certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially
from these expectations due to changes in global political, economic, business,
competitive, market and regulatory factors.
18
Exhibit 12
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
Computation of Ratio of Earnings to Fixed Charges
and
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
Six Months Ended June 29, 2002
(Unaudited)
Ratio of
Earnings to
Combined Fixed
Ratio of Charges and
Earnings to Preferred Stock
(Dollars in millions) Fixed Charges Dividends
----------------- -----------------
Net earnings $ 1,969 $ 1,969
Provision for income taxes 599 599
Minority interest in net earnings of consolidated affiliates 74 74
----------------- -----------------
Earnings before provision for income taxes and minority interest 2,642 2,642
----------------- -----------------
Fixed charges:
Interest 4,799 4,799
One-third of rentals 159 159
----------------- -----------------
Total fixed charges 4,958 4,958
----------------- -----------------
Less interest capitalized, net of amortization (20) (20)
----------------- -----------------
Earnings before provision for income taxes and minority interest, plus fixed
charges $ 7,580 $ 7,580
================= =================
Ratio of earnings to fixed charges 1.53
=================
Preferred stock dividend requirements -
Ratio of earnings before provision for income taxes to net earnings 1.30
Preferred stock dividend factor on pre-tax basis -
Fixed charges 4,958
-----------------
Total fixed charges and preferred stock dividend requirements $ 4,958
=================
Ratio of earnings to combined fixed charges and preferred stock dividends 1.53
=================
For purposes of computing the ratios, fixed charges consist of interest
on all indebtedness and one-third of rentals, which management believes is a
reasonable approximation of the interest factor of such rentals.
19
Exhibit 99.1
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of General Electric Capital Services,
Inc. (the "Company") on Form 10-Q for the period ending June 29, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Denis Nayden, President of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
/s/ Denis Nayden
- ---------------------------
Denis Nayden
President
July 31, 2002
20
Exhibit 99.2
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of General Electric Capital Services,
Inc. (the "Company") on Form 10-Q for the period ending June 29, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, James A. Parke, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
/s/ James A. Parke
- -----------------------
James A. Parke
Executive Vice President and
Chief Financial Officer
July 31, 2002
21
Exhibit 99.3
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
Press Release
GE Announces Reorganization of Financial Services;
GE Capital to Become Four Separate Businesses
FAIRFIELD, Conn.--(BUSINESS WIRE)--July 26, 2002--GE Chairman and CEO Jeff
Immelt today announced organization changes that will result in GE Capital, the
Company's diversified financial services business, becoming four separate GE
financial services businesses.
Effective August 1, 2002, GE Capital will become GE Commercial Finance, GE
Insurance, GE Consumer Finance and GE Equipment Management. Each of the
businesses will report directly to Immelt and GE Vice Chairman Dennis Dammerman,
who has oversight for GE Capital.
"The reason for doing this is simple - I want more direct contact with the
financial services teams," Immelt said. "GE's financial businesses generate 40
percent of the Company's earnings. They have been an important part of GE's
growth for decades, offering tremendous diversity of financial services, great
leadership and the best people in the industry. To build on this success, it now
makes sense to operate these businesses even more effectively.
"These four new financial services businesses have great breadth and the
resources to deliver globally," Immelt said. "They have similar customers,
processes and opportunities for greater sharing. With this simplified structure,
the leaders of these four businesses will interact directly with me, enabling
faster decision making and execution.
"The organization and leadership will be aligned with their natural
markets," Immelt said. "This will create a clearer line of sight on how our
financial services businesses operate and enhance growth. Our external reporting
will mirror this organizational structure, providing greater clarity for
investors."
Named to lead the four financial businesses are: Michael A. Neal, President
and CEO, GE Commercial Finance; David R. Nissen, President and CEO, GE Consumer
Finance; Arthur H. Harper, President and CEO, GE Equipment Management; and
Michael D. Fraizer, President and CEO, GE Insurance.
To ensure the same rigorous level of financial stewardship, several critical
and shared GE Capital Corporate functions including Risk Management, Capital
Markets, Controllership, Tax and Treasury, will remain intact. GE Capital
Services, Inc. and GE Capital Corporation will remain as legal entities and
continue as the major borrowers of funds necessary to support all of GE's
financial services activities. Their boards will continue as platforms for
reviews of operations, transactions and capital allocation among the four
financial services businesses. Dammerman will be chairman and James A. Parke
will be vice chairman of both boards. Parke also has been promoted to a GE
Senior Vice President and, in addition to his current responsibilities as GE
Capital Chief Financial Officer, will oversee GE Equity and GE Information
Technology Solutions.
GE Capital Chairman and CEO Denis J. Nayden's plans include creating a
financial services advisory company. In this regard, he will continue to serve
as a senior advisor to Immelt and the GE Capital Board on business development
and other matters.
"Denis Nayden is a great leader and a big reason for GE Capital's
outstanding performance," Immelt said. "He and the Capital Corporate team are to
be commended for creating smart, entrepreneurial, and disciplined teams that
have made GE the leader in key financial industries.
"I want to thank Denis for building such a strong record of performance and
financial integrity at GE Capital over the past 25 years, and I am extremely
pleased that he has agreed to continue in a key role," Immelt said. "Denis'
extensive expertise, financial acumen and industry knowledge will be invaluable
to me as we continue to grow."
Nayden said: "Leading GE Capital has been a tremendous professional and
personal experience, especially having had the opportunity to work with a
fabulous team of energized, talented people. By creating four financial services
businesses, each with a strong leader, we are fulfilling Jeff's vision of
customer centricity by creating a leaner, faster, more efficient operation. I
look forward to continuing a strong relationship with the Company."
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Current GE Capital businesses will be organized into the new structure as
follows:
o GE Commercial Finance: Aviation Services, Commercial Equipment
Financing, Commercial Finance, Healthcare Financial Services, Real
Estate, Structured Finance Group, Vendor Financial Services
o GE Equipment Management: Fleet Services, Rail Services, TIP/Mod Space,
European Equipment Management, Penske Truck Leasing
o GE Consumer Finance: Card Services, Global Consumer Finance
o GE Insurance: Employer's Reinsurance, Financial Assurance, Financial
Guaranty Insurance, Mortgage Insurance
GE will continue its practice of expanded financial disclosure covering
these businesses.
"We have a talented financial leadership team in place representing decades
of experience with GE Capital, and a deep bench supporting them." Immelt said.
"Mike Neal brings a great history of deal making and strong leadership. Mike
Fraizer's industry knowledge and talents have helped create a thriving global
consumer insurance business. Included in the Insurance segment will be Employers
Reinsurance Corporation, which will continue to be led by Ron Pressman. Art
Harper brings a legacy of excellent operational depth, experience and
management. Dave Nissen's strategic perspective and leadership have helped him
build a global consumer finance business literally from the ground up.
"I have envisioned having more direct contact with our financial services
team since I became chairman and CEO last September," Immelt said. "GE Capital
is positioned for another year of double-digit growth. Our businesses and
portfolio, as well as our processes and procedures, are in great shape. The
performance of our Company remains on track for 2002."
GE (NYSE: GE) is a diversified technology and services company dedicated to
creating products that make life better. From aircraft engines and power
generation to financial services, medical imaging, television programming and
plastics, GE operates in more than 100 countries and employs more than 300,000
people worldwide. For more information, visit the company's Web site at
http://www.ge.com/
Caution Concerning Forward-Looking Statements
This document includes certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially
from these expectations due to changes in global political, economic, business,
competitive, market and regulatory factors. More detailed information about
those factors is contained in GE's filings with the Securities and Exchange
Commission.
--30--rc/ny*
CONTACT: General Electric, Fairfield
David Frail, 203/373-3387
david.frail@corporate.ge.com
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 12 Computation of ratio of earnings to fixed charges
and computation of ratio of earnings to combined fixed
charges and preferred stock dividends.
Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
Exhibit 99.3 GE Announces Reorganization of Financial Services;
GE Capital to Become Four Separate Businesses
b. Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL ELECTRIC CAPITAL SERVICES, INC.
---------------------------------------
(Registrant)
Date: July 31, 2002 By: /s/ J.A. Parke
--------------------------------------------
J.A. Parke,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: July 31, 2002 By: /s/ J.C. Amble
--------------------------------------------
J.C. Amble,
Vice President and Controller
(Principal Accounting Officer)
25