gecc10q6302008.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended June 30,
2008
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from ___________to ___________
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_____________________________
Commission
file number 1-6461
_____________________________
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GENERAL ELECTRIC
CAPITAL CORPORATION
(Exact
name of registrant as specified in its
charter)
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Delaware
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13-1500700
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3135
Easton Turnpike, Fairfield, Connecticut
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06828-0001
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(Address
of principal executive offices)
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(Zip
Code)
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(Registrant’s
telephone number, including area code) (203)
373-2211
(Former
name, former address and former fiscal year,
if
changed since last report)
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 þ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer þ
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
At July
24, 2008, 3,985,403 shares of voting common stock, which constitute all of the
outstanding common equity, with a par value of $14 per share 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.
Part
I – Financial Information
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Page
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Item 1. Financial
Statements
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Condensed Statement of Current
and Retained Earnings
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3
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Condensed Statement of
Financial Position
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4
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Condensed Statement of Cash
Flows
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5
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Notes to Condensed,
Consolidated Financial Statements (Unaudited)
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6
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Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
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17
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Item 4. Controls and
Procedures
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28
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Part
II – Other Information
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Item 1. Legal
Proceedings
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29
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Item 6. Exhibits
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30
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Signatures
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31
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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 often
contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,”
“seek,” or “will.” Forward-looking statements by their nature address matters
that are, to different degrees, uncertain. For us, particular uncertainties that
could adversely or positively affect our future results include: the behavior of
financial markets, including fluctuations in interest and exchange rates and
commodity and equity prices; the commercial and consumer credit environment; the
impact of regulation and regulatory, investigative and legal actions; strategic
actions, including acquisitions and dispositions; future integration of acquired
businesses; future financial performance of major industries which we serve,
including, without limitation, the air and rail transportation, energy
generation, media, real estate and healthcare industries; 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. We do not undertake to update our forward-looking
statements.
Part
I. Financial Information
Item
1. Financial Statements
General
Electric Capital Corporation and consolidated affiliates
Condensed
Statement of Current and Retained Earnings
(Unaudited)
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Three
months ended
June
30
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Six
months ended
June
30
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(In
millions)
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2008
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2007
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2008
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2007
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Revenues
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Revenues
from services (Note 3)
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$
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17,672
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$
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16,045
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$
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34,473
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$
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31,790
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Sales
of goods
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528
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28
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895
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60
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Total revenues
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18,200
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16,073
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35,368
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31,850
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Costs
and expenses
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Interest
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6,273
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5,385
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12,354
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10,564
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Operating
and administrative
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4,868
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4,557
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9,428
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8,765
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Cost
of goods sold
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461
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23
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778
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48
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Investment
contracts, insurance losses and insurance
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annuity benefits
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122
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173
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265
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339
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Provision
for losses on financing receivables
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1,492
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1,059
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2,841
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2,063
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Depreciation
and amortization
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2,137
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1,924
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4,258
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3,838
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Minority
interest in net earnings of consolidated
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affiliates
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63
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49
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99
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153
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Total costs and
expenses
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15,416
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13,170
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30,023
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25,770
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Earnings
from continuing operations before
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income taxes
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2,784
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2,903
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5,345
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6,080
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Provision
for income taxes
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(34
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)
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(441
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)
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(104
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)
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(738
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)
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Earnings
from continuing operations
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2,750
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2,462
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5,241
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5,342
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Loss
from discontinued operations, net of
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taxes (Note 2)
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(336
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)
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(254
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)
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(392
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)
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(655
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)
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Net
earnings
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2,414
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2,208
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4,849
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4,687
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Dividends
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(889
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)
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(932
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)
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(2,019
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)
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(3,906
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)
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Retained
earnings at beginning of period
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41,818
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37,056
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40,513
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37,551
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Retained
earnings at end of period
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$
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43,343
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$
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38,332
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$
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43,343
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$
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38,332
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See
accompanying notes.
General
Electric Capital Corporation and consolidated affiliates
Condensed
Statement of Financial Position
(In
millions)
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June
30, 2008
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December
31, 2007
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(Unaudited)
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Assets
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Cash
and equivalents
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$
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15,495
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$
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8,607
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Investment
securities
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22,244
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20,588
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Inventories
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82
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63
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Financing
receivables – net (Note 5)
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421,700
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378,467
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Other
receivables
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26,264
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28,708
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Property,
plant and equipment, less accumulated amortization of
$26,473
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and $24,443
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65,334
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63,685
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Goodwill
(Note 6)
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27,182
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25,251
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Other
intangible assets – net (Note 6)
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3,807
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4,038
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Other
assets
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81,703
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82,498
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Assets
of discontinued operations (Note 2)
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8,492
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8,481
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Total
assets
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$
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672,303
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$
|
620,386
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|
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Liabilities
and equity
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Short-term
borrowings (Note 7)
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$
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196,386
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$
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186,769
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Accounts
payable
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17,246
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|
|
14,515
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Long-term
borrowings (Note 7)
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343,373
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309,231
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Investment
contracts, insurance liabilities and insurance annuity
benefits
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|
12,518
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|
|
12,311
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Other
liabilities
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|
26,093
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|
|
25,580
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|
Deferred
income taxes
|
|
8,331
|
|
|
7,983
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|
Liabilities
of discontinued operations (Note 2)
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1,825
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|
|
1,160
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Total
liabilities
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|
605,772
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|
557,549
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Minority
interest in equity of consolidated affiliates
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2,291
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|
1,607
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|
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|
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|
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Capital
stock
|
|
56
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|
|
56
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|
Accumulated
gains (losses) – net
|
|
|
|
|
|
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Investment
securities
|
|
(766
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)
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|
(25
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)
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Currency translation
adjustments
|
|
8,157
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|
|
7,368
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Cash flow hedges
|
|
(635
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)
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|
(749
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)
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Benefit plans
|
|
(87
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)
|
|
(105
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)
|
Additional
paid-in capital
|
|
14,172
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|
|
14,172
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Retained
earnings
|
|
43,343
|
|
|
40,513
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|
Total shareowner’s
equity
|
|
64,240
|
|
|
61,230
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|
Total
liabilities and equity
|
$
|
672,303
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|
$
|
620,386
|
|
|
|
|
|
|
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The sum
of accumulated gains (losses) on investment securities, currency translation
adjustments, cash flow hedges and benefit plans constitutes “Accumulated
nonowner changes other than earnings,” and was $6,669 million and $6,489 million
at June 30, 2008, and December 31, 2007, respectively.
See
accompanying notes.
General
Electric Capital Corporation and consolidated affiliates
Condensed
Statement of Cash Flows
(Unaudited)
(In
millions)
|
Six
months ended
June
30
|
|
|
2008
|
|
2007
|
|
Cash
flows – operating activities
|
|
|
|
|
|
|
Net
earnings
|
$
|
4,849
|
|
$
|
4,687
|
|
Loss
from discontinued operations
|
|
392
|
|
|
655
|
|
Adjustments
to reconcile net earnings to cash provided from operating
activities
|
|
|
|
|
|
|
Depreciation and amortization of
property, plant and equipment
|
|
4,258
|
|
|
3,838
|
|
Increase in accounts
payable
|
|
1,949
|
|
|
2,759
|
|
Provision for losses on
financing receivables
|
|
2,841
|
|
|
2,063
|
|
All other operating
activities
|
|
(1,903
|
)
|
|
(3,271
|
)
|
Cash
from operating activities – continuing operations
|
|
12,386
|
|
|
10,731
|
|
Cash
from operating activities – discontinued operations
|
|
477
|
|
|
3,743
|
|
Cash
from operating activities
|
|
12,863
|
|
|
14,474
|
|
|
|
|
|
|
|
|
Cash
flows – investing activities
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
(6,518
|
)
|
|
(7,376
|
)
|
Dispositions
of property, plant and equipment
|
|
5,332
|
|
|
4,680
|
|
Increase
in loans to customers
|
|
(191,176
|
)
|
|
(162,455
|
)
|
Principal
collections from customers – loans
|
|
165,348
|
|
|
147,175
|
|
Investment
in equipment for financing leases
|
|
(13,460
|
)
|
|
(11,942
|
)
|
Principal
collections from customers – financing leases
|
|
12,098
|
|
|
11,126
|
|
Net
change in credit card receivables
|
|
(468
|
)
|
|
4,606
|
|
Payments
for principal businesses purchased
|
|
(12,762
|
)
|
|
(5,829
|
)
|
Proceeds
from principal business dispositions
|
|
4,422
|
|
|
1,102
|
|
All
other investing activities
|
|
(1,642
|
)
|
|
(6,824
|
)
|
Cash
used for investing activities – continuing operations
|
|
(38,826
|
)
|
|
(25,737
|
)
|
Cash
used for investing activities – discontinued operations
|
|
(435
|
)
|
|
(3,753
|
)
|
Cash
used for investing activities
|
|
(39,261
|
)
|
|
(29,490
|
)
|
|
|
|
|
|
|
|
Cash
flows – financing activities
|
|
|
|
|
|
|
Net
increase (decrease) in borrowings (maturities of 90 days or
less)
|
|
8,400
|
|
|
(1,239
|
)
|
Newly
issued debt
|
|
|
|
|
|
|
Short-term (91 to 365
days)
|
|
313
|
|
|
775
|
|
Long-term (longer than one
year)
|
|
61,026
|
|
|
47,001
|
|
Non-recourse, leveraged
lease
|
|
57
|
|
|
24
|
|
Repayments
and other debt reductions
|
|
|
|
|
|
|
Short-term (91 to 365
days)
|
|
(33,256
|
)
|
|
(20,261
|
)
|
Long-term (longer than one
year)
|
|
(859
|
)
|
|
(3,628
|
)
|
Non-recourse, leveraged
lease
|
|
(429
|
)
|
|
(609
|
)
|
Dividends
paid to shareowner
|
|
(2,019
|
)
|
|
(3,734
|
)
|
All
other financing activities
|
|
95
|
|
|
(169
|
)
|
Cash
from financing activities – continuing operations
|
|
33,328
|
|
|
18,160
|
|
Cash
used for financing activities – discontinued operations
|
|
(3
|
)
|
|
(4
|
)
|
Cash
from financing activities
|
|
33,325
|
|
|
18,156
|
|
|
|
|
|
|
|
|
Increase
in cash and equivalents
|
|
6,927
|
|
|
3,140
|
|
Cash
and equivalents at beginning of year
|
|
8,907
|
|
|
9,849
|
|
Cash
and equivalents at June 30
|
|
15,834
|
|
|
12,989
|
|
Less
cash and equivalents of discontinued operations at June 30
|
|
339
|
|
|
176
|
|
Cash
and equivalents of continuing operations at June 30
|
$
|
15,495
|
|
$
|
12,813
|
|
|
|
|
|
|
|
|
See
accompanying notes.
Notes
to Condensed, Consolidated Financial Statements (Unaudited)
1. Summary
of Significant Accounting Policies
Our
financial statements are prepared in conformity with the U.S. generally accepted
accounting principles (GAAP). Preparing financial statements in conformity with
GAAP requires us to make estimates and assumptions that affect reported amounts
and related disclosures. Actual results could differ from those estimates. These
statements include all adjustments (consisting of normal recurring accruals)
that we considered necessary to present a fair statement of our results of
operations, financial position and cash flows. The results reported in these
condensed, consolidated financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire year. It
is suggested that these condensed, consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in our
latest shareowner’s Annual Report on Form 10-K. See Note 1 to the consolidated
financial statements included in the Annual Report on Form 10-K for the year
ended December 31, 2007, which discusses our consolidation and financial
statement presentation. We have reclassified certain prior-period amounts to
conform to the current-period’s presentation.
All of
the outstanding common stock of General Electric Capital Corporation (GE Capital
or GECC) is owned by General Electric Capital Services, Inc. (GECS), all of
whose common stock is owned, directly or indirectly, by General Electric Company
(GE Company or GE). Our financial statements consolidate all of our affiliates –
companies that we control and in which we hold a majority voting interest. GECC
includes GE Commercial Finance, GE Money and the financial services businesses
of GE Infrastructure (Aviation Financial Services, Energy Financial Services and
Transportation Finance). Details of total revenues and segment profit by
operating segment can be found on page 20 of this report.
Unless
otherwise indicated, information in these notes to condensed, consolidated
financial statements relates to continuing operations.
We label
our quarterly information using a calendar convention, that is, first quarter is
labeled as ending on March 31, second quarter as ending on June 30, and third
quarter as ending on September 30. It is our longstanding practice to establish
interim quarterly closing dates using a fiscal calendar, which requires our
businesses to close their books on either a Saturday or Sunday, depending on the
business. The effects of this practice are modest and only exist within a
reporting year. The fiscal closing calendar from 1993 through 2013 is available
on our website, www.ge.com/secreports.
Accounting
changes
On
January 1, 2008, we adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, and
SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities, which are more
fully discussed in Note 8 to the condensed, consolidated financial
statements.
2. Discontinued
Operations
Discontinued
operations is comprised of our Japanese personal loan business (Lake) and our
Japanese mortgage and card businesses, excluding our minority ownership in GE
Nissen Credit Co., Ltd. (GE Money Japan), our U.S. mortgage business (WMC), GE
Life and Genworth Financial, Inc. (Genworth). Associated results of operations,
financial position and cash flows are separately reported as discontinued
operations for all periods presented.
GE
Money Japan
In
September 2007, we committed to a plan to sell Lake upon determining that,
despite restructuring, Japanese regulatory limits for interest charges on
unsecured personal loans did not permit us to earn an acceptable return. During
the second quarter of 2008, we committed to sell GE Money Japan, resulting in
the addition of our Japanese mortgage and card businesses to discontinued
operations. Subsequent to the end of the second quarter, we reached an agreement
to sell these businesses and expect to complete the sale by the end of the third
quarter of 2008, subject to regulatory approval and closing conditions. In
connection with this agreement, and primarily related to our Japanese mortgage
and card businesses, we recorded an incremental $233 million impairment loss in
the second quarter of 2008. GE Money Japan revenues from discontinued operations
were $209 million and $276 million in the second quarters of 2008 and 2007,
respectively, and $454 million and $578 million in the first six months of 2008
and 2007, respectively. In total, GE Money Japan losses from discontinued
operations, net of taxes, were $311 million and $50 million in the second
quarters of 2008 and 2007, respectively, and $358 million and $69 million in the
first six months of 2008 and 2007, respectively.
WMC
In
December 2007, we completed the sale of our U.S. mortgage business. In
connection with the transaction, WMC retained certain obligations related to
loans sold prior to the disposal of the business, including WMC’s contractual
obligations to repurchase previously sold loans as to which there was an early
payment default or with respect to which certain contractual representations and
warranties were not met. Reserves related to these obligations were $280 million
and $232 million at June 30, 2008 and March 31, 2008, respectively. WMC revenues
from discontinued operations were $(62) million and $(407) million in the second
quarters of 2008 and 2007, respectively, and $(57) million and $(860) million in
the first six months of 2008 and 2007, respectively. In total, WMC’s losses from
discontinued operations, net of taxes, were $20 million and $204 million in the
second quarters of 2008 and 2007, respectively, and $27 million and $584 million
in the first six months of 2008 and 2007, respectively.
Insurance
In total,
losses from insurance-related discontinued operations, net of taxes, were $5
million and an insignificant amount in the second quarters of 2008 and 2007,
respectively, and $7 million and $2 million in the first six months of 2008 and
2007, respectively.
Summarized
financial information for discontinued operations is shown below.
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
$
|
147
|
|
$
|
(131
|
)
|
$
|
397
|
|
$
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes
|
$
|
(192
|
)
|
$
|
(649
|
)
|
$
|
(269
|
)
|
$
|
(1,325
|
)
|
Income
tax benefit
|
|
89
|
|
|
394
|
|
|
110
|
|
|
669
|
|
Loss
from discontinued operations, net of taxes
|
$
|
(103
|
)
|
$
|
(255
|
)
|
$
|
(159
|
)
|
$
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal before income taxes
|
$
|
(224
|
)
|
$
|
(11
|
)
|
$
|
(224
|
)
|
$
|
(11
|
)
|
Income
tax benefit (expense)
|
|
(9
|
)
|
|
12
|
|
|
(9
|
)
|
|
12
|
|
Gain
(loss) on disposal, net of taxes
|
$
|
(233
|
)
|
$
|
1
|
|
$
|
(233
|
)
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of taxes
|
$
|
(336
|
)
|
$
|
(254
|
)
|
$
|
(392
|
)
|
$
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the second quarter of 2008, we increased our assets of discontinued operations
at June 30, 2008, and December 31, 2007 by $2,172 million and $1,778 million,
respectively. These increases related to the inclusion of our Japanese mortgage
and card businesses in discontinued operations.
|
|
|
At
|
|
(In
millions)
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and equivalents
|
$
|
339
|
|
$
|
300
|
|
Financing
receivables – net
|
|
6,875
|
|
|
6,675
|
|
Other
|
|
1,278
|
|
|
1,506
|
|
Assets
of discontinued operations
|
$
|
8,492
|
|
$
|
8,481
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
(In
millions)
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
$
|
1,825
|
|
$
|
1,160
|
|
|
|
|
|
|
|
|
Assets
and liabilities at June 30, 2008, and December 31, 2007, primarily comprised our
GE Money Japan business.
3. Revenues
From Services
Revenues
from services are summarized in the following table.
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on loans
|
$
|
6,723
|
|
$
|
5,756
|
|
$
|
13,196
|
|
$
|
11,315
|
|
Equipment
leased to others
|
|
3,896
|
|
|
3,674
|
|
|
7,691
|
|
|
7,413
|
|
Fees
|
|
1,407
|
|
|
1,585
|
|
|
2,736
|
|
|
2,959
|
|
Investment
income
|
|
643
|
|
|
495
|
|
|
1,248
|
|
|
1,247
|
|
Financing
leases
|
|
1,190
|
|
|
1,200
|
|
|
2,339
|
|
|
2,311
|
|
Real
estate investments
|
|
1,133
|
|
|
962
|
|
|
2,290
|
|
|
2,047
|
|
Associated
companies
|
|
647
|
|
|
590
|
|
|
1,116
|
|
|
1,008
|
|
Gross
securitization gains
|
|
223
|
|
|
547
|
|
|
511
|
|
|
1,118
|
|
Other
items
|
|
1,810
|
|
|
1,236
|
|
|
3,346
|
|
|
2,372
|
|
Total
|
$
|
17,672
|
|
$
|
16,045
|
|
$
|
34,473
|
|
$
|
31,790
|
|
4. Income
Taxes
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:
|
|
|
At
|
|
(In
millions)
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Unrecognized
tax benefits
|
$
|
2,951
|
|
$
|
2,964
|
|
Portion that, if recognized,
would reduce tax expense and effective tax rate(a)
|
|
1,478
|
|
|
1,540
|
|
Accrued
interest on unrecognized tax benefits
|
|
651
|
|
|
548
|
|
Accrued
penalties on unrecognized tax benefits
|
|
71
|
|
|
55
|
|
Reasonably
possible reduction to the balance of unrecognized tax benefits
in
|
|
|
|
|
|
|
succeeding 12
months
|
|
0-300
|
|
|
0-350
|
|
Portion that, if recognized,
would reduce tax expense and effective tax rate(a)
|
|
0-50
|
|
|
0-100
|
|
|
|
|
|
|
|
|
(a)
|
Some
portion of such reduction might be reported as discontinued
operations.
|
|
The IRS
is currently auditing the GE consolidated income tax returns for 2003-2005, a
substantial portion of which include our activities. In addition, certain other
U.S. tax deficiency issues and refund claims for previous years remain
unresolved. It is reasonably possible that the 2003-2005 U.S. audit cycle will
be completed during the next 12 months, which could result in a decrease in our
balance of unrecognized tax benefits. 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.
5. Financing
Receivables
Financing
receivables – net, consisted of the following.
|
|
|
At
|
(In
millions)
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Loans,
net of deferred income
|
$
|
354,124
|
|
$
|
308,601
|
|
|
Investment
in financing leases, net of deferred income
|
|
72,076
|
|
|
74,082
|
|
|
|
|
426,200
|
|
|
382,683
|
|
|
Less
allowance for losses
|
|
(4,500
|
)
|
|
(4,216
|
)
|
|
Financing
receivables – net(a)
|
$
|
421,700
|
|
$
|
378,467
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included
$8,170 million and $9,708 million related to consolidated, liquidating
securitization entities at June 30, 2008, and December 31, 2007,
respectively.
|
|
|
6. Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets – net, consisted of the following.
|
|
|
At
|
(In
millions)
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
27,182
|
|
$
|
25,251
|
|
|
Intangible
assets subject to amortization
|
|
3,807
|
|
|
4,038
|
|
|
Total
|
$
|
30,989
|
|
$
|
29,289
|
|
|
Changes
in goodwill balances follow.
|
2008
|
|
(In
millions)
|
GE
Commercial
Finance
|
|
GE
Money
|
|
GE
Infrastructure(a)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1
|
$
|
14,445
|
|
|
$
|
10,273
|
|
|
$
|
533
|
|
|
$
|
25,251
|
|
|
|
Acquisitions/purchase
accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments
|
|
836
|
|
|
|
509
|
|
|
|
340
|
|
|
|
1,685
|
|
|
|
Dispositions,
currency exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and other
|
|
184
|
|
|
|
64
|
|
|
|
(2
|
)
|
|
|
246
|
|
|
|
Balance
June 30
|
$
|
15,465
|
|
|
$
|
10,846
|
|
|
$
|
871
|
|
|
$
|
27,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included
only portions of the segment that are financial services
businesses.
|
|
Goodwill
balances increased $1,351 million from new acquisitions and $466 million as a
result of the weaker U.S. dollar in 2008. The most significant increases related
to acquisitions of Merrill Lynch Capital ($581 million at GE Commercial
Finance), Bank BPH ($508 million at GE Money) and CDM Resource Management, Ltd.
($230 million at GE Infrastructure). During 2008, the goodwill balance increased
by $334 million related to purchase accounting
adjustments
to prior-year acquisitions. The most significant of these adjustments were
increases of $173 million and $79 million associated with the 2007 acquisitions
of Sanyo Electric Credit Co., Ltd. by GE Commercial Finance and Regency Energy
Partners LP by GE Infrastructure, respectively.
Intangible
Assets Subject to Amortization
|
At
|
|
June
30, 2008
|
|
December
31, 2007
|
(In
millions)
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
|
2,125
|
|
$
|
(690
|
)
|
$
|
1,435
|
|
$
|
2,389
|
|
$
|
(866
|
)
|
$
|
1,523
|
Patents,
licenses and trademarks
|
|
652
|
|
|
(561
|
)
|
|
91
|
|
|
427
|
|
|
(308
|
)
|
|
119
|
Capitalized
software
|
|
2,016
|
|
|
(1,254
|
)
|
|
762
|
|
|
1,806
|
|
|
(1,076
|
)
|
|
730
|
Lease
valuations
|
|
1,760
|
|
|
(437
|
)
|
|
1,323
|
|
|
1,841
|
|
|
(360
|
)
|
|
1,481
|
All
other
|
|
352
|
|
|
(156
|
)
|
|
196
|
|
|
330
|
|
|
(145
|
)
|
|
185
|
Total
|
$
|
6,905
|
|
$
|
(3,098
|
)
|
$
|
3,807
|
|
$
|
6,793
|
|
$
|
(2,755
|
)
|
$
|
4,038
|
Amortization
expense related to intangible assets subject to amortization was $209 million
and $211 million for the quarters ended June 30, 2008 and 2007, respectively.
Amortization expense related to intangible assets subject to amortization for
the six months ended June 30, 2008 and 2007, was $405 million and $362 million,
respectively.
7. Borrowings
Borrowings
are summarized in the following table.
|
|
|
At
|
(In
millions)
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
Unsecured
|
$
|
63,449
|
|
$
|
66,717
|
|
|
Asset-backed(a)
|
|
4,092
|
|
|
4,775
|
|
|
Non-U.S.
|
|
27,172
|
|
|
28,711
|
|
|
Current
portion of long-term debt(b)
|
|
53,127
|
|
|
56,300
|
|
|
Bank
deposits(c)(d)
|
|
24,435
|
|
|
11,486
|
|
|
Bank
borrowings(e)
|
|
12,274
|
|
|
6,915
|
|
|
GE
Interest Plus notes(f)
|
|
10,043
|
|
|
9,590
|
|
|
Other
|
|
1,794
|
|
|
2,275
|
|
|
Total
|
|
196,386
|
|
|
186,769
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
notes
|
|
|
|
|
|
|
|
Unsecured(g)
|
|
320,742
|
|
|
284,125
|
|
|
Asset-backed(h)
|
|
6,793
|
|
|
5,528
|
|
|
Extendible
notes
|
|
4,627
|
|
|
8,500
|
|
|
Subordinated
notes(i)(j)
|
|
11,211
|
|
|
11,078
|
|
|
Total
|
|
343,373
|
|
|
309,231
|
|
|
Total
borrowings
|
$
|
539,759
|
|
$
|
496,000
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Consists
entirely of obligations of consolidated, liquidating securitization
entities.
|
(b)
|
Included
$550 million and $1,106 million of asset-backed senior notes, issued by
consolidated, liquidating securitization entities at June 30, 2008, and
December 31, 2007, respectively.
|
(c)
|
Included
$16,122 million and $10,789 million of deposits in non-U.S. banks at June
30, 2008, and December 31, 2007, respectively.
|
(d)
|
Included
certificates of deposits distributed by brokers of $8,313 million and $697
million at June 30, 2008, and December 31, 2007,
respectively.
|
(e)
|
Term
borrowings from banks with a remaining term to maturity of less than 12
months.
|
(f)
|
Entirely
variable denomination floating rate demand notes.
|
(g)
|
Included
borrowings from GECS affiliates of $990 million and $874 million at June
30, 2008 and December 31, 2007, respectively.
|
(h)
|
Included
$2,944 million and $3,410 million of asset-backed senior notes, issued by
consolidated, liquidating securitization entities at June 30, 2008, and
December 31, 2007, respectively.
|
(i)
|
Included
$450 million of subordinated notes guaranteed by GE at June 30, 2008, and
December 31, 2007.
|
(j)
|
Included
$8,191 million and $8,064 million of subordinated debentures receiving
rating agency equity credit at June 30, 2008, and December 31, 2007,
respectively.
|
8. Fair
Value Measurements
Effective
January 1, 2008, we adopted SFAS 157, Fair Value Measurements, for
all financial instruments and non-financial instruments accounted for at fair
value on a recurring basis. SFAS 157 establishes a new framework for measuring
fair value and expands related disclosures. Broadly, the SFAS 157 framework
requires fair value to be determined based on the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market
participants.
SFAS 157 establishes market or observable inputs as the preferred source of
values, followed by assumptions based on hypothetical transactions in the
absence of market inputs.
The
valuation techniques required by SFAS 157 are based upon observable and
unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our market assumptions.
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.
Further, in other instances, we retain independent pricing vendors to assist in
valuing certain instruments.
The
following section describes the valuation methodologies we use to measure
different financial instruments at fair value.
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.
When
quoted market prices are unobservable, we use quotes from independent pricing
vendors based on recent trading activity and other relevant information
including market interest rate curves, referenced credit spreads and estimated
prepayment rates where applicable. These investments are included in Level 2 and
primarily comprise our portfolio of corporate fixed income, government, mortgage
and asset-backed securities.
Retained
interests in securitizations are valued using a discounted cash flow model that
considers the underlying structure of the securitization and estimated net
credit exposure, prepayment assumptions, discount rates and expected life.
Investment securities priced using non-binding broker quotes and retained
interests are included in Level 3. We use non-binding broker quotes 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
receive one quote for Level 2 and Level 3 securities where third party quotes
are used as our basis for fair value measurement.
Private
equity investments held in investment company affiliates are initially valued at
cost. Valuations are reviewed at the end of each quarter utilizing available
market data to determine whether or not any fair value adjustments are
necessary. Such market data include comparable public company trading multiples.
Unobservable inputs include company-specific fundamentals and other third party
transactions in that security. Our valuation methodology for private equity
investments is applied consistently and these investments are generally included
in Level 3. Level 3 investment securities valued using non-binding broker quotes
totaled $695 million at June 30, 2008, and were classified as available-for-sale
securities.
Derivatives
We use
closing prices for derivatives included in Level 1, which are traded either on
exchanges or liquid over-the-counter markets.
The
remainder of the derivatives portfolio is valued using internal models, most of
which are primarily based on 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 interest rate
products that contain embedded optionality or prepayment features.
Loans
When
available, we use observable market data, including pricing on recent closed
market transactions, to value loans which 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 are valued using collateral values as a
practical expedient.
Effective
January 1, 2008, we adopted SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. Upon adoption, we elected to report
$172 million of commercial mortgage loans at fair value in order to have them on
the same accounting basis (measured at fair value through earnings) as the
derivatives economically hedging these loans.
The
tables below reflect the addition of our Japanese mortgage and card businesses
to discontinued operations.
The
following table presents our assets and liabilities measured at fair value on a
recurring basis at June 30, 2008. Included in the table are investment
securities of $10,988 million supporting obligations to holders of guaranteed
investment contracts. Such securities are primarily investment grade. In
addition, the table includes $3,864 million and $3,758 million of derivative
assets and liabilities, respectively, with highly rated counterparties,
primarily used for risk management purposes. Also included are retained
interests in securitizations totaling $4,530 million.
(a)
|
FASB
Interpretation (FIN) 39, Offsetting of Amounts Related
to Certain Contracts, permits the netting of derivative receivables
and derivative payables when a legally enforceable master netting
agreement exists. Includes fair value adjustments related to our own and
counterparty credit risk.
|
(b)
|
Includes
private equity investments and loans designated under the fair value
option.
|
The
following tables present the changes in Level 3 instruments measured on a
recurring basis for the three and six months ended June 30, 2008. The majority
of our Level 3 balances consist of investment securities classified as
available-for-sale with changes in fair value recorded in equity.
Changes
in Level 3 instruments for the three months ended June 30, 2008
|
April
1, 2008
|
|
Net
realized/
unrealized
gains
(losses)
included
in
earnings(a)
|
|
Net
realized/
unrealized
gains
(losses)
included
in
accumulated
nonowner
changes
other
than
earnings
|
|
Purchases,
issuances
and
settlements
|
|
Transfers
in
and/or
out
of
Level
3(b)
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,894
|
|
$
|
227
|
|
$
|
3
|
|
$
|
185
|
|
$
|
488
|
|
$
|
9,797
|
|
|
$
|
6
|
|
|
|
489
|
|
|
15
|
|
|
(31
|
|
|
(59
|
|
|
|
|
|
414
|
|
|
|
(15
|
|
|
|
714
|
|
|
10
|
|
|
(5
|
|
|
(55
|
|
|
|
|
|
715
|
|
|
|
10
|
|
|
|
10,097
|
|
|
252
|
|
|
(33
|
|
|
71
|
|
|
|
|
|
10,926
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings
effects are primarily included in “Revenues from services” and “Interest”
captions in the Condensed Statement of Current and Retained
Earnings.
|
(b)
|
Transfers
in and out of Level 3 are considered to occur at the beginning of the
period.
|
(c)
|
Represents
the amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains (losses) relating to assets
and liabilities classified as Level 3 that are still held at June 30,
2008.
|
(d)
|
Represents
derivative assets net of derivative liabilities and includes cash accruals
of $12 million not reflected in the fair value hierarchy
table.
|
Changes
in Level 3 instruments for the six months ended June 30, 2008
|
January
1, 2008
|
|
Net
realized/
unrealized
gains
(losses)
included
in
earnings(a)
|
|
Net
realized/
unrealized
gains
(losses)
included
in
accumulated
nonowner
changes
other
than
earnings
|
|
Purchases,
issuances
and
settlements
|
|
Transfers
in
and/or
out
of
Level
3(b)
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,329
|
|
$
|
381
|
|
$
|
(99
|
)
|
$
|
698
|
|
$
|
488
|
|
$
|
9,797
|
|
|
$
|
(28
|
)
|
|
|
200
|
|
|
290
|
|
|
26
|
|
|
(102
|
|
|
|
|
|
414
|
|
|
|
272
|
|
|
|
689
|
|
|
(8
|
|
|
28
|
|
|
(45
|
|
|
|
|
|
715
|
|
|
|
(9
|
|
|
|
9,218
|
|
|
663
|
|
|
(45
|
|
|
551
|
|
|
|
|
|
10,926
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings
effects are primarily included in “Revenues from services” and “Interest”
captions in the Condensed Statement of Current and Retained
Earnings.
|
(b)
|
Transfers
in and out of Level 3 are considered to occur at the beginning of the
period.
|
(c)
|
Represents
the amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains (losses) relating to assets
and liabilities classified as Level 3 that are still held at June 30,
2008.
|
(d)
|
Earnings
from Derivatives were partially offset by $36 million in losses from
related derivatives included in Level 2 and $57 million in losses from
qualifying fair value hedges.
|
(e)
|
Represents
derivative assets net of derivative liabilities and includes cash accruals
of $12 million not reflected in the fair value hierarchy
table.
|
Certain
assets measured at fair value on a non-recurring basis, and therefore not
included in the preceding tables, were $89 million identified as Level 2 and
$1,935 million identified as Level 3. We recognized $269 million and $424
million of losses related to non-recurring fair value measurements of loans, and
$76 million and $142 million of other-than-temporary impairments of cost and
equity method investments during the second quarter and first six months of
2008, respectively. These other-than-temporary impairments included $59 million
related to FGIC Corporation (FGIC) common stock recorded in the first quarter of
2008.
9. Shareowner’s
Equity
A summary
of increases (decreases) in shareowner’s equity that did not result directly
from transactions with the shareowner, net of income taxes,
follows.
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
$
|
2,414
|
|
$
|
2,208
|
|
$
|
4,849
|
|
$
|
4,687
|
|
Investment
securities – net
|
|
(240
|
)
|
|
(74
|
)
|
|
(741
|
)
|
|
(15
|
)
|
Currency
translation adjustments – net
|
|
(320
|
)
|
|
1,287
|
|
|
789
|
|
|
1,023
|
|
Cash
flow hedges – net
|
|
1,792
|
|
|
695
|
|
|
114
|
|
|
764
|
|
Benefit
plans – net
|
|
5
|
|
|
(1
|
)
|
|
18
|
|
|
14
|
|
Total
|
$
|
3,651
|
|
$
|
4,115
|
|
$
|
5,029
|
|
$
|
6,473
|
|
10. Off-Balance
Sheet Arrangements
The
following table represents assets in off-balance sheet securitization
entities.
|
|
|
At
|
(In
millions)
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Receivables
secured by
|
|
|
|
|
|
|
|
Equipment
|
$
|
7,001
|
|
$
|
6,552
|
|
|
Commercial real
estate
|
|
7,343
|
|
|
7,721
|
|
|
Other assets
|
|
12,065
|
|
|
12,880
|
|
|
Credit
card receivables
|
|
22,612
|
|
|
22,793
|
|
|
Trade
receivables
|
|
125
|
|
|
320
|
|
|
Total
securitized assets(a)(b)
|
$
|
49,146
|
|
$
|
50,266
|
|
|
|
|
|
|
|
|
|
|
(a)
|
At
June 30, 2008, and December 31, 2007, liquidity support amounted to $1,178
million and $1,266 million, respectively. Credit support amounted to
$1,191 million and $1,214 million at June 30, 2008, and December 31, 2007,
respectively.
|
(b)
|
Liabilities
for recourse obligations related to off-balance sheet assets were $2
million at both June 30, 2008, and December 31,
2007.
|
11. Immaterial
Correction
During
the course of an internal review in connection with our ongoing U.S. Securities
and Exchange Commission (SEC) investigation, we identified an immaterial item
with respect to the Statement of Cash Flows that we have corrected from amounts
in a previous filing. This item relates to an error in classification within
investing activities. This error had no effect on our total cash or cash
equivalents, nor did it affect our financial position or results of
operations.
Corrected
amounts for the Condensed Statement of Cash Flows for the six months ended June
30, 2007 follow. As reported amounts reflect the GE Money Japan, WMC and
insurance-related businesses as discontinued operations.
The
second quarter 2007 Form 10-Q misclassified $884 million of credit card
receivables as loans within the investing activities section of the Condensed
Statement of Cash Flows. As a result, increase in loans to customers reported as
$(163,339) million was adjusted to $(162,455) million; net change in credit card
receivables reported as $5,490 million was adjusted to $4,606 million. As this
was a reclassification within the investing activities section of the Condensed
Statement of Cash Flows, there was no change to total cash used for investing
activities – continuing operations and to total cash and equivalents of
continuing operations.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
A.
Results of Operations
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 Exhibit 99 to this report on Form 10-Q.
Unless
otherwise indicated, we refer to captions such as revenues and earnings from
continuing operations simply as “revenues” and “earnings” throughout this
Management’s Discussion and Analysis. Similarly, discussion of
other
matters
in our condensed, consolidated financial statements relates to continuing
operations unless otherwise indicated.
Overview
Revenues
for the second quarter of 2008 were $18.2 billion, a $2.1 billion (13%) increase
over the second quarter of 2007. Revenues for the second quarter of 2008
included $1.1 billion of revenue from acquisitions and in 2008 were reduced by
$0.1 billion as a result of dispositions. Revenues also increased $1.1 billion
compared with the second quarter of 2007 as a result of the weaker U.S. dollar,
partially offset by organic revenue declines. Organic revenue growth excludes
the effects of acquisitions, business dispositions (other than dispositions of
businesses acquired for investment) and currency exchange rates. Earnings were
$2.8 billion, up 12% from $2.5 billion in the second quarter of
2007.
Revenues
for the first six months of 2008 were $35.4 billion, a $3.5 billion (11%)
increase over the first six months of 2007. Revenues for the first six months of
2008 and 2007 included $2.2 billion and $0.2 billion, respectively, of revenue
from acquisitions and in 2008 were increased by $0.3 billion as a result of
dispositions. Revenues also increased $1.3 billion compared with the first six
months of 2007. This increase resulted from the weaker U.S. dollar, partially
offset by organic revenue declines. Earnings were $5.2 billion, down 2% from
$5.3 billion in the first six months of 2007.
Overall,
acquisitions contributed $1.1 billion and $0.7 billion to total revenues in the
second quarters of 2008 and 2007, respectively. Our earnings in the second
quarters of 2008 and 2007 included approximately $0.2 billion and an
insignificant amount, respectively, from acquired businesses. We integrate
acquisitions as quickly as possible. Only revenues and earnings from the date we
complete the acquisition through the end of the fourth following quarter are
attributed to such businesses. Dispositions also affected our operations through
lower revenues of $0.1 billion and $1.0 billion in the second quarters of 2008
and 2007, respectively. The effect of dispositions on earnings was insignificant
in the second quarter of 2008 and was a decrease of $0.1 billion in the second
quarter of 2007.
Acquisitions
contributed $2.2 billion to total revenues and $0.2 billion to earnings in the
first six months of 2008, compared with $1.4 billion and an insignificant
amount, respectively, in the first six months of 2007. Dispositions also
affected our operations through higher revenues of $0.3 billion in the first six
months of 2008 and lower revenues of $1.4 billion in the first six months of
2007. The effects of dispositions on earnings was an increase of $0.3 billion
and a decrease of $0.1 billion in the first six months of 2008 and 2007,
respectively.
The most
significant acquisitions affecting results in 2008 were Merrill Lynch Capital;
Sanyo Electric Credit Co., Ltd.; Diskont und Kredit AG and Disko Leasing GmbH
(DISKO) and ASL Auto Service-Leasing GmbH (ASL), the leasing businesses of KG
Allgemeine Leasing GmbH & Co. at GE Commercial Finance; and Regency Energy
Partners LP at GE Infrastructure.
The
provision for income taxes was an insignificant amount for the second quarter of
2008 (effective tax rate of 1.2%), compared with $0.4 billion for the second
quarter of 2007 (effective tax rate of 15.2%). The tax rate decreased primarily
as a result of increased benefits from lower-taxed global operations, a lower
provision in the second quarter 2008 as compared to the second quarter 2007 to
bring our six-month tax rate in line with the projected full year tax rate, and
lower pre-tax income from jurisdictions (primarily the U.S.) that are taxed at
higher than our average rate, partially offset by the absence of the tax benefit
related to the 2007 sale of our investment in SES.
The
provision for income taxes was $0.1 billion for the first six months of 2008
(effective tax rate of 1.9%), compared with $0.7 billion for the first six
months of 2007 (effective tax rate of 12.1%). The tax rate decreased primarily
as a
result of
lower pre-tax income from jurisdictions (primarily the U.S.) that are taxed at
higher than our average rate, increased benefits from lower-taxed global
operations, and a tax benefit related to the mark-to-market of our Genpact
investment, partially offset by the absence of the tax benefit related to the
2007 sale of our investment in SES.
Segment
Operations
Operating
segments comprise our three businesses focused on the broad markets they serve:
GE Commercial Finance, GE Money and GE Infrastructure. For segment reporting
purposes, certain financial services businesses including Aviation Financial
Services, Energy Financial Services and Transportation Finance are reported in
the GE Infrastructure segment because GE Infrastructure actively manages such
businesses and reports their results for internal performance measurement
purposes.
GECC
corporate items and eliminations include the effects of eliminating transactions
between operating segments; results of our insurance activities remaining in
continuing operations; underabsorbed corporate overhead; certain non-allocated
amounts determined by the Chief Executive Officer; and a variety of sundry
items. GECC corporate items and eliminations is not an operating segment.
Rather, it is added to operating segment totals to reconcile to consolidated
totals on the financial statements.
The Chief
Executive Officer allocates resources to, and assesses the performance of
operations at the consolidated GE-level. GECC operations are a portion of those
segments. We present below in their entirety the three GE segments that include
financial services operations. We also provide a one-line reconciliation to
GECC-only results, the most significant component of which is the elimination of
GE businesses that are not financial services businesses. In addition to
providing information on GE segments in their entirety, we have also provided
supplemental information for certain businesses within the GE segments. Our
Chief Executive Officer does not separately assess the performance of, or
allocate resources among, these product lines.
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; in-process research and development and certain other
acquisition-related charges and balances; technology and product development
costs; certain gains and losses from dispositions; and litigation settlements or
other charges, responsibility for which preceded the current management
team.
Segment
profit always excludes the effects of principal pension plans, results reported
as discontinued operations 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 – excluded in determining segment
profit, which we sometimes refer to as “operating profit,” for GE Healthcare, GE
NBC Universal, GE Industrial Products and the industrial businesses of the GE
Infrastructure segment; included in determining segment profit, which we
sometimes refer to as “net earnings,” for GE Commercial Finance, GE Money, and
the financial services businesses of the GE Infrastructure segment (Aviation
Financial Services, Energy Financial Services and Transportation
Finance).
We have
reclassified certain prior-period amounts to conform to the current-period’s
presentation.
Summary
of Operating Segments
|
Three
months ended
June
30
(Unaudited)
|
|
Six
months ended
June
30
(Unaudited)
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
GE
Commercial Finance
|
$
|
9,259
|
|
$
|
8,138
|
|
$
|
17,825
|
|
$
|
16,169
|
|
GE
Money
|
|
6,629
|
|
|
6,276
|
|
|
13,037
|
|
|
12,234
|
|
GE
Infrastructure
|
|
17,552
|
|
|
13,934
|
|
|
32,512
|
|
|
26,136
|
|
Total segment
revenues
|
|
33,440
|
|
|
28,348
|
|
|
63,374
|
|
|
54,539
|
|
GECC
corporate items and eliminations
|
|
202
|
|
|
339
|
|
|
510
|
|
|
790
|
|
Total
revenues
|
|
33,642
|
|
|
28,687
|
|
|
63,884
|
|
|
55,329
|
|
Less
portion of GE revenues not included in GECC
|
|
(15,442
|
)
|
|
(12,614
|
)
|
|
(28,516
|
)
|
|
(23,479
|
)
|
Total
revenues in GECC
|
$
|
18,200
|
|
$
|
16,073
|
|
$
|
35,368
|
|
$
|
31,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
GE
Commercial Finance
|
$
|
1,390
|
|
$
|
1,304
|
|
$
|
2,548
|
|
$
|
2,744
|
|
GE
Money
|
|
1,056
|
|
|
1,158
|
|
|
2,051
|
|
|
2,381
|
|
GE
Infrastructure
|
|
3,174
|
|
|
2,563
|
|
|
5,762
|
|
|
4,771
|
|
Total segment
profit
|
|
5,620
|
|
|
5,025
|
|
|
10,361
|
|
|
9,896
|
|
GECC
corporate items and eliminations(a)
|
|
(92
|
)
|
|
(310
|
)
|
|
(267
|
)
|
|
(389
|
)
|
Less
portion of GE segment profit not
|
|
|
|
|
|
|
|
|
|
|
|
|
included in
GECC
|
|
(2,778
|
)
|
|
(2,253
|
)
|
|
(4,853
|
)
|
|
(4,165
|
)
|
Earnings
in GECC from continuing operations
|
|
2,750
|
|
|
2,462
|
|
|
5,241
|
|
|
5,342
|
|
Loss
in GECC from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
(336
|
)
|
|
(254
|
)
|
|
(392
|
)
|
|
(655
|
)
|
Total
net earnings in GECC
|
$
|
2,414
|
|
$
|
2,208
|
|
$
|
4,849
|
|
$
|
4,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included
restructuring and other charges of $0.1 billion for the first six months
of 2008, compared with $0.2 billion for the second quarter and first six
months of 2007, primarily related to GE Money and GE Commercial
Finance.
|
See
accompanying notes to condensed, consolidated financial statements.
GE
Commercial Finance
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
9,259
|
|
$
|
8,138
|
|
$
|
17,825
|
|
$
|
16,169
|
|
Less
portion of GE Commercial Finance not
|
|
|
|
|
|
|
|
|
|
|
|
|
included in
GECC
|
|
(34
|
)
|
|
(244
|
)
|
|
(187
|
)
|
|
(545
|
)
|
Total revenues in
GECC
|
$
|
9,225
|
|
$
|
7,894
|
|
$
|
17,638
|
|
$
|
15,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
1,390
|
|
$
|
1,304
|
|
$
|
2,548
|
|
$
|
2,744
|
|
Less
portion of GE Commercial Finance not
|
|
|
|
|
|
|
|
|
|
|
|
|
included in
GECC
|
|
(55
|
)
|
|
(119
|
)
|
|
(75
|
)
|
|
(306
|
)
|
Total segment profit in
GECC
|
$
|
1,335
|
|
$
|
1,185
|
|
$
|
2,473
|
|
$
|
2,438
|
|
|
At
|
(In
millions)
|
June
30,
2008
|
|
June
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
338,546
|
|
$
|
277,807
|
|
$
|
310,412
|
|
|
|
Less
portion of GE Commercial Finance not
|
|
|
|
|
|
|
|
|
|
|
|
included in
GECC
|
|
(1,637
|
)
|
|
10,211
|
|
|
(3,453
|
)
|
|
|
Total assets in
GECC
|
$
|
336,909
|
|
$
|
288,018
|
|
$
|
306,959
|
|
|
|
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
in GE
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Solutions
|
$
|
3,821
|
|
$
|
3,465
|
|
$
|
7,455
|
|
$
|
6,828
|
|
Real Estate
|
|
1,964
|
|
|
1,557
|
|
|
3,847
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit in GE
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Solutions
|
$
|
503
|
|
$
|
463
|
|
$
|
903
|
|
$
|
858
|
|
Real Estate
|
|
484
|
|
|
476
|
|
|
960
|
|
|
1,040
|
|
|
At
|
(In
millions)
|
June
30,
2008
|
|
June
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
in GE
|
|
|
|
|
|
|
|
|
|
|
|
Capital Solutions
|
$
|
124,040
|
|
$
|
115,167
|
|
$
|
122,527
|
|
|
|
Real Estate
|
|
90,611
|
|
|
62,057
|
|
|
79,285
|
|
|
|
GE
Commercial Finance revenues increased 14% and net earnings increased 7% compared
with the second quarter of 2007. Revenues for the second quarter of 2008
included $0.5 billion from acquisitions. Revenues for the quarter also increased
$0.7 billion compared with the second quarter of 2007 as a result of the weaker
U.S. dollar ($0.4 billion) and organic revenue growth ($0.3 billion). Net
earnings increased by $0.1 billion in the second quarter of 2008, resulting from
acquisitions ($0.1 billion), higher investment income ($0.1 billion) and the
weaker U.S. dollar ($0.1 billion), partially offset by core declines ($0.2
billion), including an increase of $0.1 billion in the provision for losses
on
financing
receivables. These results also included a gain on sale of a portion of our
investment in Penske Truck Leasing Co., L.P. ($0.1 billion).
GE
Commercial Finance revenues increased 10% and net earnings decreased 7% compared
with the first six months of 2007. Revenues for the first six months of 2008 and
2007 included $1.1 billion and $0.2 billion from acquisitions, respectively, and
in 2008 were reduced by $0.2 billion as a result of dispositions. Revenues for
the first six months also increased $1.0 billion compared with the first six
months of 2007 as a result of the weaker U.S. dollar ($0.8 billion) and organic
revenue growth ($0.2 billion). Net earnings decreased by $0.2 billion in the
first six months of 2008, resulting from core declines ($0.6 billion), including
an increase of $0.1 billion in the provision for losses on financing
receivables, partially offset by acquisitions ($0.2 billion), the weaker U.S.
dollar ($0.1 billion) and higher securitization and investment income ($0.1
billion). Net earnings included the effect of higher mark-to-market losses and
other-than-temporary impairments ($0.3 billion), and Genpact mark-to-market
gains ($0.5 billion), which were largely offset by the absence of the effects of
the 2007 SES transaction ($0.4 billion).
Real
Estate assets at June 30, 2008 increased $11.3 billion, or 14%, from December
31, 2007, including $12.1 billion, or 33%, attributable to an
increase in real estate loans, slightly offset by a decline in real estate
equity investments. During the second quarter of 2008, we sold real estate
assets with a book value totaling $1.8 billion, which resulted in net earnings
of $0.4 billion. Real estate net earnings were consistent with the second
quarter of 2007, as increases in interest income from real estate loans ($0.2
billion) and net rental revenue ($0.1 billion) were partially offset by higher
interest expense ($0.3 billion), and net earnings from the sale of real estate
investments were slightly higher.
During
the first six months of 2008, we sold real estate assets with a book value
totaling $3.5 billion, which resulted in net earnings of $0.9 billion. Real
Estate net earnings declined $0.1 billion compared to the first six months of
2007, as increases in interest income from real estate loans ($0.4 billion) and
net rental revenue ($0.3 billion) were offset by higher interest expense ($0.6
billion) and provisions for losses ($0.1 billion). Net earnings from the sale of
real estate investments were slightly lower as a result of increasingly
difficult market conditions experienced in the first six months of 2008. In the
normal course of our business operations, we sell certain real estate equity
investments when it is economically advantageous for us to do so. However, as
real estate values are affected by certain forces beyond our control (e.g.
market fundamentals and demographic conditions), it is difficult to predict with
certainty the level of future sales or sales prices.
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
6,629
|
|
$
|
6,276
|
|
$
|
13,037
|
|
$
|
12,234
|
|
Less
portion of GE Money not included in GECC
|
|
–
|
|
|
−
|
|
|
–
|
|
|
−
|
|
Total revenues in
GECC
|
$
|
6,629
|
|
$
|
6,276
|
|
$
|
13,037
|
|
$
|
12,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
1,056
|
|
$
|
1,158
|
|
$
|
2,051
|
|
$
|
2,381
|
|
Less
portion of GE Money not included in GECC
|
|
(5
|
)
|
|
(19
|
)
|
|
(7
|
)
|
|
(41
|
)
|
Total segment profit in
GECC
|
$
|
1,051
|
|
$
|
1,139
|
|
$
|
2,044
|
|
$
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
(In
millions)
|
June
30,
2008
|
|
June
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
221,192
|
|
$
|
189,258
|
|
$
|
209,174
|
|
Less
portion of GE Money not included in GECC
|
|
135
|
|
|
955
|
|
|
100
|
|
Total assets in
GECC
|
$
|
221,327
|
|
$
|
190,213
|
|
$
|
209,274
|
|
GE Money
revenues increased 6% and net earnings decreased 9% compared with the second
quarter of 2007. Revenues for the second quarter of 2008 included $0.1 billion
from acquisitions and were reduced by $0.1 billion as a result of dispositions.
Revenues for the quarter also increased $0.3 billion compared with the second
quarter of 2007 as a result of the weaker U.S. dollar ($0.5 billion), partially
offset by organic revenue declines ($0.1 billion), primarily as a result of
lower securitization activity. The decrease in net earnings resulted primarily
from core declines ($0.2 billion) (including the effects of higher delinquencies
of $0.1 billion) and lower securitization income ($0.1 billion), partially
offset by growth in lower-taxed earnings from global operations ($0.2
billion).
GE Money
revenues increased 7% and net earnings decreased 14% compared with the first six
months of 2007. Revenues for the first six months of 2008 included $0.2 billion
from acquisitions and $0.4 billion from the sale of our CPS business and were
reduced by $0.1 billion from dispositions. Revenues for the first six months
also increased $0.3 billion compared with the first six months of 2007 as a
result of the weaker U.S. dollar ($0.8 billion) and organic revenue declines
($0.5 billion), primarily as a result of lower securitization activity. The
decrease in net earnings resulted primarily from core declines ($0.5 billion)
(including lower results in the U.S. reflecting the effects of higher
delinquencies of $0.2 billion) and lower securitization income ($0.4 billion)
(including declines in the fair value of retained interest in securitizations of
$0.1 billion). These decreases were partially offset by growth in lower-taxed
earnings from global operations ($0.3 billion), the gain on the sale of our CPS
business ($0.2 billion) and as a result of the weaker U.S. dollar ($0.1
billion).
GE
Infrastructure
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
17,552
|
|
$
|
13,934
|
|
$
|
32,512
|
|
$
|
26,136
|
|
Less
portion of GE Infrastructure not
|
|
|
|
|
|
|
|
|
|
|
|
|
included in GECC
|
|
(15,408
|
)
|
|
(12,370
|
)
|
|
(28,329
|
)
|
|
(22,934
|
)
|
Total revenues in
GECC
|
$
|
2,144
|
|
$
|
1,564
|
|
$
|
4,183
|
|
$
|
3,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
3,174
|
|
$
|
2,563
|
|
$
|
5,762
|
|
$
|
4,771
|
|
Less
portion of GE Infrastructure not
|
|
|
|
|
|
|
|
|
|
|
|
|
included in GECC
|
|
(2,718
|
)
|
|
(2,115
|
)
|
|
(4,771
|
)
|
|
(3,818
|
)
|
Total segment profit in
GECC
|
$
|
456
|
|
$
|
448
|
|
$
|
991
|
|
$
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
in GE
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
$
|
4,923
|
|
$
|
4,079
|
|
$
|
9,243
|
|
$
|
7,530
|
|
Aviation Financial
Services
|
|
1,081
|
|
|
1,088
|
|
|
2,312
|
|
|
2,337
|
|
Energy
|
|
7,003
|
|
|
5,195
|
|
|
12,643
|
|
|
9,862
|
|
Energy Financial
Services
|
|
989
|
|
|
417
|
|
|
1,759
|
|
|
741
|
|
Oil & Gas
|
|
1,895
|
|
|
1,821
|
|
|
3,430
|
|
|
2,969
|
|
Transportation
|
|
1,202
|
|
|
1,107
|
|
|
2,350
|
|
|
2,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit in GE
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
$
|
914
|
|
$
|
828
|
|
$
|
1,689
|
|
$
|
1,527
|
|
Aviation Financial
Services
|
|
252
|
|
|
266
|
|
|
639
|
|
|
654
|
|
Energy
|
|
1,222
|
|
|
895
|
|
|
2,129
|
|
|
1,584
|
|
Energy Financial
Services
|
|
178
|
|
|
169
|
|
|
323
|
|
|
270
|
|
Oil & Gas
|
|
255
|
|
|
189
|
|
|
416
|
|
|
291
|
|
Transportation
|
|
241
|
|
|
217
|
|
|
495
|
|
|
431
|
|
GE
Infrastructure revenues increased 26%, or $3.6 billion, in the second quarter of
2008 on higher volume ($2.3 billion), higher prices ($0.4 billion) and the
weaker U.S. dollar ($0.3 billion) at the industrial businesses of the segment.
The increase in volume reflected the increased sales of thermal and wind
equipment and services at Energy; the effects of acquisitions and increased
sales of engine services and commercial engines at Aviation; increases
in both equipment and chemical sales at Water; and increased
equipment sales at Transportation; partially offset by lower volume at Oil &
Gas. The effects of the weaker U.S. dollar were primarily at Energy and Oil
& Gas, while higher prices were principally at Energy and Aviation. Revenues
also increased as a result of financial services’ acquisitions ($0.6 billion),
primarily at Energy Financial Services.
Segment
profit rose 24%, or $0.6 billion, as higher volume ($0.4 billion), higher prices
($0.4 billion) and productivity ($0.1 billion) were partially offset by higher
material and other costs ($0.3 billion) at the industrial businesses of the
segment. The increase in volume primarily related to Energy, Aviation and
Water.
GE
Infrastructure revenues rose 24% to $32.5 billion for the six months ended June
30, 2008, on higher volume ($4.2 billion), higher prices ($0.6 billion) and the
weaker U.S. dollar ($0.6 billion) at the industrial businesses of the segment.
The increase in volume reflected the effects of acquisitions at Aviation and Oil
& Gas; increased sales of thermal and wind equipment and services at Energy;
military and commercial engines and services at Aviation; both equipment and
chemical sales at Water; and increased equipment sales at Transportation. Price
increases were primarily at Energy and Aviation, while the effects of the weaker
U.S. dollar were primarily at Energy and Oil & Gas.
Revenues
for the six months also increased as a result of financial services’
acquisitions ($0.9 billion), primarily at Energy Financial
Services.
Segment
profit for the first six months of 2008 rose 21% to $5.8 billion, compared with
$4.8 billion in 2007, as higher volume ($0.8 billion), higher prices ($0.6
billion) and productivity ($0.1 billion) were partially offset by higher
material and other costs ($0.5 billion) at the industrial businesses of the
segment. Volume increases were primarily at Energy, Aviation and Water. Higher
material and other costs were primarily at Aviation and Energy.
Discontinued
Operations
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
in GECC from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
$
|
(336
|
)
|
$
|
(254
|
)
|
$
|
(392
|
)
|
$
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations is comprised of our Japanese personal loan business (Lake) and our
Japanese mortgage and card businesses, excluding our minority ownership in GE
Nissen Credit Co., Ltd. (GE Money Japan), our U.S. mortgage business (WMC), GE
Life, and Genworth Financial, Inc. Results of these businesses are reported as
discontinued operations for all periods presented.
Loss from
discontinued operations, net of taxes, for the second quarter and first six
months of 2008, primarily reflected the estimated incremental loss on disposal
($0.2 billion) and the loss from operations ($0.1 billion) at GE Money
Japan.
Loss from
discontinued operations, net of taxes, for the second quarter of 2007, reflected
the loss from operations at WMC ($0.2 billion) and GE Money Japan ($0.1
billion).
Loss from
discontinued operations, net of taxes, for the first six months of 2007,
reflected the loss from operations at WMC ($0.6 billion) and GE Money Japan
($0.1 billion).
For
additional information related to discontinued operations, see Note 2 to the
condensed, consolidated financial statements.
B.
Statement of Financial Position
Overview
of Financial Position
Major
changes in our financial position resulted from the following:
·
|
During
the first six months of 2008, we completed the acquisition of Merrill
Lynch Capital and Bank BPH.
|
·
|
The
U.S. dollar was weaker at June 30, 2008, than at December 31, 2007,
increasing the translated levels of our non-U.S. dollar assets and
liabilities.
|
Effective
January 1, 2008, we adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, for
all financial instruments and non-financial
instruments
accounted for at fair value on a recurring basis. Adoption of SFAS 157 did not
have a material effect on our financial position or results of operations.
Illiquidity in the credit markets experienced during the first six months of
this year contributed to the amount of our reported Level 3 instruments,
primarily in our available-for-sale investment portfolios. At June 30, 2008, the
aggregate amount of instruments requiring fair value measurement on a recurring
basis included in Level 3 represented approximately 1% of the aggregate amount
of total assets and liabilities. Of the aggregate amount of total financial
instruments requiring recurring fair value measurement, approximately 35% are
included in Level 3. The amount we report in Level 3 in future periods will be
directly affected by market conditions. See Note 8 to the condensed,
consolidated financial statements for further information related to the
adoption of SFAS 157.
Overview
of Our Cash Flow
Our cash
and equivalents aggregated $15.5 billion at June 30, 2008, compared with $12.8
billion at June 30, 2007. GECC cash from operating activities (CFOA) totaled
$12.4 billion at June 30, 2008, compared to $10.7 billion at June 30, 2007. The
increase is primarily the result of increased collections of interest from loans
and finance leases, rental income from operating leases, increases in security
deposits, and decreases in provision for taxes, partially offset by increases in
interest payments on borrowings.
Our
principal use of cash has been investing in assets to grow our businesses. Of
the $38.8 billion that we invested during the six months of 2008, $27.7 billion
was used for additions to financing receivables; $6.5 billion was used to invest
in new equipment, principally for lease to others; and $12.8 billion was used
for acquisitions of new businesses, the largest of which were Merrill Lynch
Capital and Bank BPH.
We paid
dividends to General Electric Capital Services, Inc. (GECS), our parent company,
through a distribution of our retained earnings, including proceeds from certain
business sales. Dividends paid to GECS totaled $2.0 billion in the first six
months of 2008 compared to $3.7 billion in the first six months of 2007. There
were no special dividends paid to GECS in the first six months of 2008, compared
to $1.8 billion in the first six months of 2007. During the first six months of
2008, our borrowings with maturities of 90 days or less have increased by $8.4
billion. New borrowings of $61.4 billion having maturities longer than 90 days
were added during the six months of 2008, while $34.5 billion of such long-term
borrowings were retired.
Based on
past performance and current expectations, in combination with the financial
flexibility that comes with a strong balance sheet and the highest credit
ratings, we believe that we are in a sound position to grow dividends to our
parent company and continue making selective investments for long-term
growth.
C.
Financial Services Portfolio Quality
Investment securities comprise
mainly investment-grade debt securities supporting obligations to holders of
guaranteed investment contracts. Investment securities were $22.2 billion at
June 30, 2008, compared with $20.6 billion at December 31, 2007. Of the amount
at June 30, 2008, we held residential mortgage-backed securities (RMBS) and
commercial mortgage-backed securities with estimated fair values of $4.2 billion
and $1.6 billion, respectively. Such amounts included unrealized losses of $0.7
billion and $0.1 billion, respectively. At June 30, 2008, of the RMBS amount, we
had approximately $1.6 billion of exposure to subprime credit, supporting our
guaranteed investment contracts; $1.4 billion of this amount was insured by
monoline insurers (Monolines). Monolines provide credit enhancement for
certain of our investment securities. At June 30, 2008, our investment
securities insured by Monolines were $2.9 billion. Although several of the
Monolines have been downgraded by the rating agencies, a majority of this amount
was insured by investment-grade Monolines.
At June
30, 2008, unrealized losses on investment securities totaled $1.4 billion. Of
this amount, $0.7 billion were aged 12 months or more. We regularly review
investment securities for other-than-temporary impairment based on criteria that
include the extent to which cost exceeds market value, the duration of that
market decline, our intent and ability to hold to recovery and the financial
health and specific prospects for the issuer. Of securities with unrealized
losses at June 30, 2008, an insignificant amount was at risk of being charged to
earnings in the next 12 months. Continued uncertainty in the capital markets may
cause increased levels of losses. Other-than-temporary impairment losses were
$0.1 billion for the first six months of 2008, compared with an insignificant
amount in 2007. Investments in retained interests decreased by $0.1 billion in
the first six months of 2008 reflecting declines in fair value accounted for in
accordance with SFAS 155, Accounting for Certain Hybrid
Financial Instruments, that became effective at the beginning of
2007.
Financing receivables is our
largest category of assets and represents one of our primary sources of
revenues. The portfolio of financing receivables, before allowance for losses,
was $426.2 billion at June 30, 2008, and $382.7 billion at December 31, 2007.
The related allowance for losses at June 30, 2008, amounted to $4.5 billion,
compared with $4.2 billion at December 31, 2007, representing our best estimate
of probable losses inherent in the portfolio. A discussion of the quality of
certain elements of the financing receivables portfolio follows. For purposes of
that discussion, “delinquent” receivables are those that are 30 days or more
past due; and “nonearning” receivables are those that are 90 days or more past
due (or for which collection has otherwise become doubtful).
Financing
receivables, before allowance for losses, increased $43.5 billion from December
31, 2007, primarily as a result of core growth ($35.4 billion), acquisitions
($18.6 billion) and the weaker U.S. dollar ($7.7 billion), partially offset by
securitization and sales ($20.6 billion) and dispositions ($3.3 billion).
Related nonearning receivables were $6.5 billion (1.5% of outstanding
receivables) at June 30, 2008, compared with $5.4 billion (1.4% of outstanding
receivables) at year-end 2007. Nonearning receivables exclude loans held for
sale.
Delinquency
rates on managed GE Commercial Finance equipment loans and leases and managed GE
Money financing receivables follow.
|
Delinquency
rates at
|
|
|
June
30, 2008(a)
|
|
December
31, 2007
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
GE
Commercial Finance
|
1.48
|
%
|
1.21
|
%
|
1.28
|
%
|
GE
Money
|
5.92
|
|
5.38
|
|
5.22
|
|
U.S.
|
5.55
|
|
5.52
|
|
4.50
|
|
Non-U.S.
|
6.07
|
|
5.32
|
|
5.50
|
|
|
|
|
|
|
|
|
Delinquency
rates at GE Commercial Finance increased from December 31, 2007, and June 30,
2007, to June 30, 2008, primarily as a result of the inclusion of the Sanyo
acquisition in Japan, which contributed an additional nine basis points at June
30, 2008, as well as deterioration in our U.S. commercial middle market and
certain European portfolios.
Delinquency
rates at GE Money increased from December 31, 2007, and June 30, 2007, to June
30, 2008, primarily as a result of continued deterioration in our U.S. portfolio
and the effects of tighter credit conditions in our secured financing business
in the U.K. In response, GE Money will continue to tighten underwriting
standards related to the U.S. and U.K. consumers and will continue its process
of regularly reviewing and adjusting reserve levels in response
to when
it is probable that losses have been incurred in the portfolio. This environment
may result in higher provisions for loan losses and could adversely affect
results of operations at GE Money.
Other assets comprise mainly
real estate investments, equity and cost method investments and assets held for
sale. Other assets totaled $81.7 billion at June 30, 2008, compared with $82.5
billion at December 31, 2007. Of the amount at June 30, 2008, we had cost method
investments totaling $2.7 billion. Cost method investments include our
investment in preferred and common stock, $0.3 billion and an insignificant
amount, respectively, of FGIC Corporation (FGIC), a monoline credit insurer.
During 2008, credit rating agencies downgraded FGIC; following the downgrades,
various alternatives were being considered. During the first quarter of 2008, we
recognized an other-than-temporary impairment on FGIC common stock. No such
impairment occurred during the second quarter of 2008. We continue to monitor
our investment in FGIC closely, including review for further
impairment.
D.
Borrowings
During
the first six months of 2008, GECC and GECC affiliates issued $59.6 billion of
senior, unsecured long-term debt. This debt was both fixed and floating rate and
was issued to institutional and retail investors in the U.S. and 17 other global
markets. Maturities for these issuances ranged from one to 30 years. We used the
proceeds for repayment of maturing long-term debt and to fund acquisitions and
organic growth. We anticipate that we will issue approximately $20 to $25
billion of additional long-term debt during the remainder of 2008, mostly to
repay maturing long-term debt. The ultimate amount we issue will depend on our
needs and on the markets.
E.
New Accounting Standard
On
December 4, 2007, the FASB issued SFAS 141R, Business Combinations, which
we will adopt on January 1, 2009. This standard will significantly change the
accounting for business acquisitions both during the period of the acquisition
and in subsequent periods. Among the more significant changes in the accounting
for acquisitions are the following:
·
|
Transaction
costs will generally be expensed. Certain such costs are presently treated
as costs of the acquisition.
|
·
|
In-process
research and development (IPR&D) will be accounted for as an asset,
with the cost recognized as the research and development is realized or
abandoned. IPR&D is presently expensed at the time of the
acquisition.
|
·
|
Contingencies,
including contingent consideration, will generally be recorded at fair
value with subsequent adjustments recognized in operations. Contingent
consideration is presently accounted for as an adjustment of purchase
price.
|
·
|
Decreases
in valuation allowances on acquired deferred tax assets will be recognized
in operations. Such changes previously were considered to be subsequent
changes in consideration and were recorded as decreases in
goodwill.
|
Generally,
the effects of SFAS 141R will depend on future acquisitions.
Item
4. Controls and Procedures
Under the
direction of our Chief Executive Officer and Chief Financial Officer, we
evaluated our disclosure controls and procedures and concluded that our
disclosure controls and procedures were effective as of June 30,
2008.
Except as
described in Part II, Item 1. “Legal Proceedings,” there were no changes in our
internal control over financial reporting during the period ended June 30, 2008,
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Part
II. Other Information
Item
1. Legal Proceedings
As
previously reported, in January 2005 the staff of the U.S. Securities and
Exchange Commission (SEC) informed GE that it had commenced an investigation and
requested certain documents and information with respect to the use of hedge
accounting for derivatives by GE and us. In August 2005, the SEC staff advised
GE that the SEC had issued a formal order of investigation in the matter. The
SEC staff has taken testimony in this matter and has requested information about
other GE accounting policies and practices, including items related to revenue
recognition and our cash flow presentations.
In the
course of responding to SEC inquiries, GE recently identified certain items not
previously corrected in GE’s Consolidated Statement of Cash Flows. These items
primarily relate to elimination of the cash flow effects of intercompany
transactions between GE and General Electric Capital Services, Inc. (GECS) and
include effects of clerical errors, errors in elimination classifications among
operating, investing and financing activities and transaction-reporting errors
involving identification of intercompany transactions. GE reflected the
adjustments for these items in prior period financial information reported in
its Form 10-Q. These errors had no effects on GE’s total cash or cash
equivalents, nor did they affect GE’s financial position or results of
operations. GE also adjusted the prior period financial information for items
(primarily involving failures to eliminate certain types of intercompany
transactions from consolidated cash flows) that GE had previously identified and
determined to be immaterial with the concurrence of KPMG. In Exhibit 99(b) to
GE’s Form 10-Q, GE provided the effect of these adjustments on its Statement of
Cash Flows for each of the years 2005, 2006 and 2007, the year to date periods
for 2007 and the first quarter of 2008. We also identified an immaterial item
not previously corrected in our Statement of Cash Flows. This item relates to an
error in classification within investing activities. We have provided the
effects of this adjustment on our Statement of Cash Flows in the prior period
financial information in this Form 10-Q. This error had no effect on our total
cash or cash equivalents, nor did they affect our financial position on results
of operations.
We and GE
and its audit committee have evaluated the circumstances surrounding the effects
of these items on our previously reported financial statements, and have
determined that the adjustments relating to these items are not material to our
financial statements.
We and GE
also have reviewed our internal control over financial reporting with respect to
the items identified above and have concluded that the internal control
deficiencies implicated by these items constitute a significant deficiency in
our internal control over financial reporting, but do not (individually or in
the aggregate with other identified deficiencies) constitute a material weakness
in our internal control. In response to these items, we and GE have initiated a
number of internal control enhancements, including enhancing our process
documentation, review processes and training as it relates to the preparation of
the Consolidated Statement of Cash Flows.
We and GE
continue to cooperate with the ongoing SEC investigation and to discuss the
investigation and issues arising in that investigation and our internal review
of certain accounting matters with the SEC staff with a goal of completing our
review and resolving these matters as soon as practicable. Senior management and
GE’s audit committee are monitoring these matters closely with the assistance of
outside counsel and accounting experts. We and
GE and
its audit committee are committed to addressing issues that arise and to
providing transparent disclosure to our investors concerning these
matters.
As
previously reported, the Antitrust Division of the Department of Justice (DOJ)
and the SEC are conducting an industry-wide investigation of marketing and sales
of guaranteed investment contracts, and other financial instruments, to
municipalities. In connection with this investigation, two of our subsidiaries
have received subpoenas and requests for information in connection with the
investigation: GE Funding CMS and GE Funding Capital Market Services, Inc. (GE
FCMS). We have cooperated and continue to cooperate fully with the SEC and DOJ
in this matter. On July 21, 2008, GE FCMS received a "Wells notice" advising
that the SEC staff is considering recommending that the SEC bring a civil
injunctive action or institute an administrative proceeding in connection with
the bidding for various financial instruments associated with municipal
securities by certain former employees of GE FCMS. GE FCMS is one of several
industry participants that received Wells notices during 2008. GE FCMS
understands that it will have an opportunity to respond to the Wells notice and
to discuss the matter with the staff before any recommendation is made to the
Commission.
In June
2008, the Environmental Protection Agency issued a notice of violation alleging
non-compliance with the Clean Air Act at a power cogeneration plant in Homer
City, PA. The plant is operated exclusively by EME Homer City Generation L.P.,
and is owned and leased to EME Homer City Generation L.P. by our subsidiaries.
The notice of violation does not indicate a specific penalty amount but makes
reference to statutory fines. We believe that we have meritorious defenses and
that EME Homer City Generation L.P. is obligated to indemnify our
subsidiaries and pay all costs associated with this matter.
|
Exhibit
12
|
Computation
of Ratio of Earnings to Fixed Charges.*
|
|
Exhibit
31(a)
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Amended.*
|
|
Exhibit
31(b)
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Amended.*
|
|
Exhibit
32
|
Certification
Pursuant to 18 U.S.C. Section 1350.*
|
|
Exhibit
99
|
Financial
Measures That Supplement Generally Accepted Accounting
Principles.*
|
|
|
*
Filed electronically herewith.
|
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 Corporation
(Registrant)
|
July
25, 2008
|
|
/s/
Jamie S. Miller
|
|
Date
|
|
Jamie
S. Miller
Senior
Vice President and Controller
Duly
Authorized Officer and Principal Accounting Officer
|
|
|
|