gecc10q93008.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 September
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
October 29, 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.
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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.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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33
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Item
4.
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Controls
and Procedures
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33
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Part
II – Other Information
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Item
1.
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Legal
Proceedings
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33
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Item
1A.
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Risk
Factors
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33
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Item
6.
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Exhibits
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37
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Signatures
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38
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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,
commodity and equity prices and the value of financial assets; continued
volatility and further deterioration of the capital markets; 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
September
30
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Nine
months ended
September
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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17,045
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$
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16,738
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$
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51,422
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$
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48,387
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Sales
of goods
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579
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277
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1,474
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337
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Total revenues
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17,624
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17,015
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52,896
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48,724
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Costs
and expenses
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Interest
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6,675
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5,631
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19,021
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16,181
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Operating
and administrative
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4,580
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4,537
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13,946
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13,241
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Cost
of goods sold
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486
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236
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1,264
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284
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Investment
contracts, insurance losses and insurance
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annuity
benefits
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108
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178
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373
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517
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Provision
for losses on financing receivables
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1,634
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1,189
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4,437
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3,200
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Depreciation
and amortization
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2,355
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1,993
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6,612
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5,830
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Minority
interest in net earnings of consolidated
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affiliates
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111
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58
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210
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211
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Total costs and
expenses
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15,949
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13,822
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45,863
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39,464
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Earnings
from continuing operations before
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income taxes
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1,675
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3,193
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7,033
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9,260
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Benefit
(provision) for income taxes
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413
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15
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286
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(732
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Earnings
from continuing operations
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2,088
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3,208
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7,319
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8,528
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Loss
from discontinued operations, net of
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taxes (Note 2)
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(169
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)
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(1,367
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)
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(551
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)
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(2,000
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)
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Net
earnings
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1,919
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1,841
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6,768
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6,528
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Dividends
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(273
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)
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(1,225
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)
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(2,292
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)
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(5,131
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)
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Retained
earnings at beginning of period
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43,343
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38,332
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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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44,989
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$
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38,948
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$
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44,989
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$
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38,948
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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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September
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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12,200
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$
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8,607
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Investment
securities
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20,837
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20,588
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Inventories
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73
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63
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Financing
receivables – net (Notes 5 and 6)
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419,442
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378,467
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Other
receivables
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25,162
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28,708
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Property,
plant and equipment, less accumulated amortization of
$28,891
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and $24,443
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65,718
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63,685
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Goodwill
(Note 7)
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26,143
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25,251
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Other
intangible assets – net (Note 7)
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3,740
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4,038
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Other
assets
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80,660
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82,502
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Assets
of discontinued operations (Note 2)
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1,220
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8,823
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Total
assets
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$
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655,195
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$
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620,732
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Liabilities
and equity
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Short-term
borrowings (Note 8)
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$
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209,835
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$
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186,769
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Accounts
payable
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14,875
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14,515
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Long-term
borrowings (Note 8)
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321,912
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309,231
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Investment
contracts, insurance liabilities and insurance annuity
benefits
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12,088
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12,311
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Other
liabilities
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23,100
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25,580
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Deferred
income taxes
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9,910
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7,983
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Liabilities
of discontinued operations (Note 2)
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351
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1,506
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Total
liabilities
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592,071
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557,895
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Minority
interest in equity of consolidated affiliates
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2,504
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1,607
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Capital
stock
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56
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|
56
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Accumulated
gains (losses) – net
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Investment
securities
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(1,133
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)
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(25
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)
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Currency translation
adjustments
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4,768
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7,368
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Cash flow hedges
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(2,148
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)
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(749
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)
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Benefit plans
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(84
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)
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(105
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)
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Additional
paid-in capital
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14,172
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14,172
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Retained
earnings
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44,989
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40,513
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Total shareowner’s
equity
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60,620
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|
61,230
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Total
liabilities and equity
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$
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655,195
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$
|
620,732
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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 $1,403 million and $6,489 million
at September 30, 2008, and December 31, 2007, respectively.
See
accompanying notes.
General
Electric Capital Corporation and consolidated affiliates
Condensed
Statement of Cash Flows
(Unaudited)
|
Nine
months ended
September
30
|
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(In
millions)
|
2008
|
|
2007
|
|
|
|
|
|
|
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Cash
flows – operating activities
|
|
|
|
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Net
earnings
|
$
|
6,768
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$
|
6,528
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|
Loss
from discontinued operations
|
|
551
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|
2,000
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|
Adjustments
to reconcile net earnings to cash provided from operating
activities
|
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|
|
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Depreciation and amortization of
property, plant and equipment
|
|
6,612
|
|
|
5,830
|
|
Decrease in accounts
payable
|
|
(62
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)
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|
(536
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)
|
Provision for losses on
financing receivables
|
|
4,437
|
|
|
3,200
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All other operating
activities
|
|
(462
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)
|
|
(2,789
|
)
|
Cash
from operating activities – continuing operations
|
|
17,844
|
|
|
14,233
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|
Cash
from operating activities – discontinued operations
|
|
512
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|
|
4,761
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|
Cash
from operating activities
|
|
18,356
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|
|
18,994
|
|
|
|
|
|
|
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Cash
flows – investing activities
|
|
|
|
|
|
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Additions
to property, plant and equipment
|
|
(9,348
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)
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|
(10,169
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)
|
Dispositions
of property, plant and equipment
|
|
7,055
|
|
|
7,082
|
|
Increase
in loans to customers
|
|
(290,958
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)
|
|
(251,013
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)
|
Principal
collections from customers – loans
|
|
263,839
|
|
|
224,341
|
|
Investment
in equipment for financing leases
|
|
(18,477
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)
|
|
(19,598
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)
|
Principal
collections from customers – financing leases
|
|
17,850
|
|
|
18,492
|
|
Net
change in credit card receivables
|
|
(2,852
|
)
|
|
3,281
|
|
Payments
for principal businesses purchased
|
|
(24,989
|
)
|
|
(7,522
|
)
|
Proceeds
from sale of discontinued operations
|
|
5,220
|
|
|
–
|
|
Proceeds
from principal business dispositions
|
|
4,422
|
|
|
1,102
|
|
All
other investing activities
|
|
(969
|
)
|
|
(4,014
|
)
|
Cash
used for investing activities – continuing operations
|
|
(49,207
|
)
|
|
(38,018
|
)
|
Cash
used for investing activities – discontinued operations
|
|
(631
|
)
|
|
(4,781
|
)
|
Cash
used for investing activities
|
|
(49,838
|
)
|
|
(42,799
|
)
|
|
|
|
|
|
|
|
Cash
flows – financing activities
|
|
|
|
|
|
|
Net
decrease in borrowings (maturities of 90 days or less)
|
|
(16,888
|
)
|
|
(9,934
|
)
|
Newly
issued debt
|
|
|
|
|
|
|
Short-term (91 to 365
days)
|
|
26,982
|
|
|
815
|
|
Long-term (longer than one
year)
|
|
72,175
|
|
|
77,914
|
|
Non-recourse, leveraged
lease
|
|
113
|
|
|
24
|
|
Repayments
and other debt reductions
|
|
|
|
|
|
|
Short-term (91 to 365
days)
|
|
(41,778
|
)
|
|
(32,251
|
)
|
Long-term (longer than one
year)
|
|
(2,471
|
)
|
|
(4,518
|
)
|
Non-recourse, leveraged
lease
|
|
(524
|
)
|
|
(681
|
)
|
Dividends
paid to shareowner
|
|
(2,291
|
)
|
|
(4,973
|
)
|
All
other financing activities
|
|
(362
|
)
|
|
(455
|
)
|
Cash
from financing activities – continuing operations
|
|
34,956
|
|
|
25,941
|
|
Cash
used for financing activities – discontinued operations
|
|
(4
|
)
|
|
(5
|
)
|
Cash
from financing activities
|
|
34,952
|
|
|
25,936
|
|
|
|
|
|
|
|
|
Increase
in cash and equivalents
|
|
3,470
|
|
|
2,131
|
|
Cash
and equivalents at beginning of year
|
|
8,907
|
|
|
9,849
|
|
Cash
and equivalents at September 30
|
|
12,377
|
|
|
11,980
|
|
Less
cash and equivalents of discontinued operations at September
30
|
|
177
|
|
|
165
|
|
Cash
and equivalents of continuing operations at September 30
|
$
|
12,200
|
|
$
|
11,815
|
|
|
|
|
|
|
|
|
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 Form
8-K dated October 8, 2008. See Note 1 to the consolidated financial statements
for the year ended December 31, 2007, included in our Form 8-K dated October 8,
2008, 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 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
Commercial Lending and Leasing (CLL), Real Estate, GE Money, GECAS and Energy
Financial Services. Details of total revenues and segment profit by operating
segment can be found on page 21 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 9 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
During
the third quarter of 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 completed the sale during the third quarter of
2008. In connection with this agreement, and primarily related to our Japanese
mortgage and card businesses, we recorded an incremental $247 million impairment
loss in the first nine months of 2008. Under this agreement, the sale proceeds
will be increased or reduced to reflect our portion of actual interest refund
claims based on terms specified in the agreement. GE Money Japan
revenues from discontinued operations were $209 million and $298 million in the
third quarters of 2008 and 2007, respectively, and $760 million and $1,017
million in the first nine months of 2008 and 2007, respectively. In total, GE
Money Japan losses from discontinued operations, net of taxes, were $160 million
and $1,030 million in the third quarters of 2008 and 2007, respectively, and
$508 million and $1,077 million in the first nine months of 2008 and 2007,
respectively.
WMC
During
the fourth quarter of 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 $224 million
at September 30, 2008. The amount of these reserves is based upon pending and
estimated future loan repurchase requests, the estimated percentage of loans
validly tendered for repurchase, and our estimated losses on loans repurchased.
Based on our historical experience, we estimate that a small percentage of the
total loans we originated and sold will be tendered for repurchase, and of those
tendered, only a limited amount will qualify as “validly tendered,” meaning the
loans sold did not satisfy specified contractual obligations. The amount of our
current reserve represents our best estimate of losses with respect to our
repurchase obligations. However, actual losses could exceed our reserve amount,
if actual claim rates, valid tenders or losses we incur on repurchased loans,
are higher than historically observed. WMC revenues from discontinued operations
were $(7) million and $(431) million in the third quarters of 2008 and 2007,
respectively, and $(64) million and $(1,291) million in the first nine months of
2008 and 2007, respectively. In total, WMC’s losses from discontinued
operations, net of taxes, were $8 million and $332 million in the third quarters
of 2008 and 2007, respectively, and $35 million and $916 million in the first
nine months of 2008 and 2007, respectively.
Insurance
In total,
losses from insurance-related discontinued operations, net of taxes, were $1
million and $5 million in the third quarters of 2008 and 2007, respectively, and
$8 million and $7 million in the first nine months of 2008 and 2007,
respectively.
Summarized
financial information for discontinued operations is shown below.
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
$
|
202
|
|
$
|
(133
|
)
|
$
|
696
|
|
$
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
before income
taxes
|
$
|
(206
|
)
|
$
|
(615
|
)
|
$
|
(488
|
)
|
$
|
(1,927
|
)
|
Income
tax benefit
|
|
51
|
|
|
185
|
|
|
184
|
|
|
863
|
|
Loss
from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
$
|
(155
|
)
|
$
|
(430
|
)
|
$
|
(304
|
)
|
$
|
(1,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal before income taxes
|
$
|
(1,278
|
)
|
$
|
(1,516
|
)
|
$
|
(1,502
|
)
|
$
|
(1,527
|
)
|
Income
tax benefit
|
|
1,264
|
|
|
579
|
|
|
1,255
|
|
|
591
|
|
Loss
on disposal, net of taxes
|
$
|
(14
|
)
|
$
|
(937
|
)
|
$
|
(247
|
)
|
$
|
(936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of taxes
|
$
|
(169
|
)
|
$
|
(1,367
|
)
|
$
|
(551
|
)
|
$
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and equivalents
|
$
|
177
|
|
$
|
300
|
|
Financing
receivables – net
|
|
–
|
|
|
6,675
|
|
Other
|
|
1,043
|
|
|
1,848
|
|
Assets
of discontinued operations
|
$
|
1,220
|
|
$
|
8,823
|
|
|
|
|
|
|
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
$
|
351
|
|
$
|
1,506
|
|
|
|
|
|
|
|
|
3. Revenues
From Services
Revenues
from services are summarized in the following table.
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on loans
|
$
|
7,153
|
|
$
|
6,024
|
|
$
|
20,258
|
|
$
|
17,231
|
|
Equipment
leased to others
|
|
3,953
|
|
|
3,739
|
|
|
11,644
|
|
|
11,152
|
|
Fees
|
|
1,985
|
|
|
1,543
|
|
|
4,716
|
|
|
4,494
|
|
Investment
income
|
|
373
|
|
|
579
|
|
|
1,620
|
|
|
1,826
|
|
Financing
leases
|
|
1,099
|
|
|
1,139
|
|
|
3,438
|
|
|
3,449
|
|
Real
estate investments
|
|
798
|
|
|
1,361
|
|
|
3,088
|
|
|
3,408
|
|
Associated
companies
|
|
560
|
|
|
663
|
|
|
1,676
|
|
|
1,671
|
|
Gross
securitization gains
|
|
223
|
|
|
367
|
|
|
734
|
|
|
1,478
|
|
Other
items
|
|
901
|
|
|
1,323
|
|
|
4,248
|
|
|
3,678
|
|
Total
|
$
|
17,045
|
|
$
|
16,738
|
|
$
|
51,422
|
|
$
|
48,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Unrecognized
tax benefits
|
$
|
3,216
|
|
$
|
2,964
|
|
Portion that, if recognized,
would reduce tax expense and
|
|
|
|
|
|
|
effective tax rate(a)
|
|
1,489
|
|
|
1,540
|
|
Accrued
interest on unrecognized tax benefits
|
|
698
|
|
|
548
|
|
Accrued
penalties on unrecognized tax benefits
|
|
71
|
|
|
55
|
|
Reasonably
possible reduction to the balance of unrecognized
|
|
|
|
|
|
|
tax benefits in succeeding 12
months
|
|
0-350
|
|
|
0-350
|
|
Portion that, if recognized,
would reduce tax expense
|
|
0-50
|
|
|
0-100
|
|
and effective tax rate(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Some
portion of such reduction might be reported as discontinued
operations.
|
|
The IRS
is currently auditing the GE consolidated income tax returns for 2003-2007, 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)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Loans,
net of deferred income
|
$
|
351,178
|
|
$
|
308,601
|
|
Investment
in financing leases, net of deferred income
|
|
72,891
|
|
|
74,082
|
|
|
|
424,069
|
|
|
382,683
|
|
Less
allowance for losses (Note 6)
|
|
(4,627
|
)
|
|
(4,216
|
)
|
Financing
receivables – net(a)
|
$
|
419,442
|
|
$
|
378,467
|
|
|
|
|
|
|
|
|
(a)
|
Included
$7,172 million and $9,708 million related to consolidated, liquidating
securitization entities at September 30, 2008, and December 31, 2007,
respectively.
|
|
Details
of financing receivables – net follow.
|
At
|
(In
millions)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
CLL
|
|
|
|
|
|
|
|
Equipment
and leasing and other
|
$
|
108,420
|
|
$
|
94,970
|
|
|
Commercial
and industrial
|
|
68,370
|
|
|
55,219
|
|
|
|
|
176,790
|
|
|
150,189
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
48,090
|
|
|
32,228
|
|
|
|
|
|
|
|
|
|
|
GE
Money
|
|
|
|
|
|
|
|
Non-U.S.
residential mortgages(a)
|
|
72,117
|
|
|
73,042
|
|
|
Non-U.S.
installment and revolving credit
|
|
33,554
|
|
|
34,669
|
|
|
U.S.
installment and revolving credit
|
|
29,058
|
|
|
27,914
|
|
|
Non-U.S.
auto
|
|
24,281
|
|
|
27,368
|
|
|
Other
|
|
12,009
|
|
|
10,198
|
|
|
|
|
171,019
|
|
|
173,191
|
|
|
|
|
|
|
|
|
|
|
GECAS(b)
|
|
15,381
|
|
|
14,097
|
|
|
|
|
|
|
|
|
|
|
Energy
Financial Services
|
|
8,597
|
|
|
7,867
|
|
|
|
|
|
|
|
|
|
|
Other(c)
|
|
4,192
|
|
|
5,111
|
|
|
|
|
424,069
|
|
|
382,683
|
|
|
Less
allowance for losses
|
|
(4,627
|
)
|
|
(4,216
|
)
|
|
Total
|
$
|
419,442
|
|
$
|
378,467
|
|
|
|
|
|
|
|
|
|
|
(a)
|
At
September 30, 2008, net of credit insurance, approximately 26% of this
portfolio comprised loans with introductory, below market rates that are
scheduled to adjust at future dates; with high loan-to-value ratios at
inception; whose terms permitted interest-only payments; or whose terms
resulted in negative amortization. At the origination date, all of these
loans were underwritten to the reset value.
|
|
(b)
|
Included
loans and financing leases of $13,101 million and $11,685 million at
September 30, 2008, and December 31, 2007, respectively, related to
commercial aircraft at Aviation Financial Services.
|
|
(c)
|
Included
loans and financing leases of $4,192 million and $5,106 million at
September 30, 2008, and December 31, 2007, respectively, related to
certain consolidated, liquidating securitization entities.
|
|
6. Allowance
for Losses on Financing Receivables
|
Balance
January
1,
2008
|
|
Provision
charged
to
operations
|
|
Currency
exchange
|
|
Other(a)
|
|
Gross
write-offs
|
|
Recoveries
|
|
Balance
September
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
leasing and other
|
$
|
641
|
|
$
|
373
|
|
$
|
4
|
|
$
|
89
|
|
$
|
(517
|
)
|
$
|
66
|
|
$
|
656
|
|
Commercial
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
industrial
|
|
274
|
|
|
235
|
|
|
(10
|
)
|
|
6
|
|
|
(164
|
)
|
|
12
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
168
|
|
|
47
|
|
|
(4
|
)
|
|
8
|
|
|
(10
|
)
|
|
1
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GE
Money
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgages
|
|
246
|
|
|
147
|
|
|
(20
|
)
|
|
5
|
|
|
(135
|
)
|
|
52
|
|
|
295
|
|
Non-U.S.
installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and revolving
credit
|
|
1,371
|
|
|
1,259
|
|
|
(51
|
)
|
|
(6
|
)
|
|
(1,968
|
)
|
|
722
|
|
|
1,327
|
|
U.S.
installment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revolving credit
|
|
985
|
|
|
1,908
|
|
|
–
|
|
|
(416
|
)
|
|
(1,477
|
)
|
|
215
|
|
|
1,215
|
|
Non-U.S.
auto
|
|
324
|
|
|
260
|
|
|
(19
|
)
|
|
(40
|
)
|
|
(479
|
)
|
|
225
|
|
|
271
|
|
Other
|
|
162
|
|
|
131
|
|
|
(3
|
)
|
|
31
|
|
|
(182
|
)
|
|
54
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECAS
|
|
8
|
|
|
47
|
|
|
–
|
|
|
–
|
|
|
(1
|
)
|
|
–
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
19
|
|
|
12
|
|
|
–
|
|
|
2
|
|
|
–
|
|
|
–
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
18
|
|
|
18
|
|
|
–
|
|
|
(1
|
)
|
|
(15
|
)
|
|
–
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
4,216
|
|
$
|
4,437
|
|
$
|
(103
|
)
|
$
|
(322
|
)
|
$
|
(4,948
|
)
|
$
|
1,347
|
|
$
|
4,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Other
primarily included the effects of acquisitions and securitization
activity.
|
7. Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets – net, consisted of the following.
|
At
|
(In
millions)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Goodwill
|
$
|
26,143
|
|
$
|
25,251
|
|
Intangible
assets subject to amortization
|
|
3,740
|
|
|
4,038
|
|
Total
|
$
|
29,883
|
|
$
|
29,289
|
|
|
|
|
|
|
|
|
Changes
in goodwill balances follow.
|
2008
|
|
|
CLL
|
|
Real
Estate
|
|
GE
Money
|
|
GECAS
|
|
Energy
Financial
Services
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1
|
$
|
11,871
|
|
$
|
1,055
|
|
$
|
10,273
|
|
$
|
162
|
|
$
|
1,890
|
|
$
|
25,251
|
|
Acquisitions/purchase
accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments
|
|
849
|
|
|
151
|
|
|
400
|
|
|
2
|
|
|
327
|
|
|
1,729
|
|
Dispositions,
currency exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and other
|
|
(132
|
)
|
|
(20
|
)
|
|
(621
|
)
|
|
(5
|
)
|
|
(59
|
)
|
|
(837
|
)
|
Balance
September 30
|
$
|
12,588
|
|
$
|
1,186
|
|
$
|
10,052
|
|
$
|
159
|
|
$
|
2,158
|
|
$
|
26,143
|
|
Goodwill
balances increased $1,244 million from new acquisitions. The most significant
increases related to acquisitions of Merrill Lynch Capital ($608 million at CLL,
Energy Financial Services and GECAS), Bank BPH ($399 million at GE Money) and
CDM Resource Management, Ltd. ($229 million at Energy Financial Services).
During 2008, the goodwill balance increased by $485 million related to purchase
accounting adjustments to prior-year acquisitions. The most significant of these
adjustments were increases of $176 million and $150 million associated with the
2007 acquisitions of Sanyo Electric Credit Co., Ltd. by CLL and Dundee REIT by
Real Estate, respectively. In 2008, goodwill balances decreased $550 million as
a result of the stronger U.S. dollar.
Intangible
Assets Subject to Amortization
|
At
|
|
September
30, 2008
|
|
December
31, 2007
|
(In
millions)
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
|
2,144
|
|
$
|
(718
|
)
|
$
|
1,426
|
|
$
|
2,389
|
|
$
|
(866
|
)
|
$
|
1,523
|
Patents,
licenses and trademarks
|
|
779
|
|
|
(577
|
)
|
|
202
|
|
|
427
|
|
|
(308
|
)
|
|
119
|
Capitalized
software
|
|
2,109
|
|
|
(1,352
|
)
|
|
757
|
|
|
1,806
|
|
|
(1,076
|
)
|
|
730
|
Lease
valuations
|
|
1,771
|
|
|
(521
|
)
|
|
1,250
|
|
|
1,841
|
|
|
(360
|
)
|
|
1,481
|
All
other
|
|
260
|
|
|
(155
|
)
|
|
105
|
|
|
330
|
|
|
(145
|
)
|
|
185
|
Total
|
$
|
7,063
|
|
$
|
(3,323
|
)
|
$
|
3,740
|
|
$
|
6,793
|
|
$
|
(2,755
|
)
|
$
|
4,038
|
Amortization
expense related to intangible assets subject to amortization was $273 million
and $185 million for the quarters ended September 30, 2008 and 2007,
respectively. Amortization expense related to intangible assets subject to
amortization for the nine months ended September 30, 2008 and 2007, was $675
million and $543 million, respectively.
8. Borrowings
Borrowings
are summarized in the following table.
|
At
|
(In
millions)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
Unsecured
|
$
|
56,530
|
|
$
|
66,717
|
|
Asset-backed(a)
|
|
3,864
|
|
|
4,775
|
|
Non-U.S.
|
|
25,681
|
|
|
28,711
|
|
Current
portion of long-term debt(b)
|
|
68,151
|
|
|
56,301
|
|
Bank
deposits(c)(d)
|
|
31,781
|
|
|
11,486
|
|
Bank
borrowings(e)
|
|
13,353
|
|
|
6,915
|
|
GE
Interest Plus notes(f)
|
|
8,348
|
|
|
9,590
|
|
Other
|
|
2,127
|
|
|
2,274
|
|
Total
|
|
209,835
|
|
|
186,769
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
notes
|
|
|
|
|
|
|
Unsecured(g)(h)
|
|
303,881
|
|
|
284,125
|
|
Asset-backed(i)
|
|
5,279
|
|
|
5,528
|
|
Extendible
notes
|
|
2,197
|
|
|
8,500
|
|
Subordinated
notes(j)(k)
|
|
10,555
|
|
|
11,078
|
|
Total
|
|
321,912
|
|
|
309,231
|
|
Total
borrowings
|
$
|
531,747
|
|
$
|
496,000
|
|
|
|
|
|
|
|
|
(a)
|
Consists
entirely of obligations of consolidated, liquidating securitization
entities.
|
(b)
|
Included
$397 million and $1,106 million of asset-backed senior notes, issued by
consolidated, liquidating securitization entities at September 30, 2008,
and December 31, 2007, respectively.
|
(c)
|
Included
$16,305 million and $10,789 million of deposits in non-U.S. banks at
September 30, 2008, and December 31, 2007,
respectively.
|
(d)
|
Included
certificates of deposits distributed by brokers of $15,476 million and
$697 million at September 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
$1,684 million of certificates of deposits with maturities greater than
one year at September 30, 2008, and no such certificates of deposits at
December 31, 2007.
|
(h)
|
Included
borrowings from GECS affiliates of $996 million and $874 million at
September 30, 2008, and December 31, 2007,
respectively.
|
(i)
|
Included
$2,421 million and $3,410 million of asset-backed senior notes, issued by
consolidated, liquidating securitization entities at September 30, 2008,
and December 31, 2007, respectively.
|
(j)
|
Included
$450 million of subordinated notes guaranteed by GE at September 30, 2008,
and December 31, 2007.
|
(k)
|
Included
$7,741 million and $8,064 million of subordinated debentures receiving
rating agency equity credit at September 30, 2008, and December 31, 2007,
respectively.
|
9. 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, and government,
mortgage and asset-backed securities. In infrequent circumstances, our pricing
vendors may provide us with valuations that are based on significant
unobservable inputs, and in those circumstances we classify the investment
securities in Level 3.
As part
of our adoption of SFAS 157 in the first quarter of 2008, we conducted a review
of our primary pricing vendor, with the assistance of an accounting firm, to
validate that the inputs used in that vendor’s pricing process are deemed to be
market observable as defined in the standard. More specifically, we used a
combination of approaches to validate that the process used by the pricing
vendor is consistent with the requirements of the standard and that the levels
assigned to these valuations are reasonable. While we were not provided access
to proprietary models of the vendor, our review included on-site walk-throughs
of the pricing process, methodologies and control procedures for each asset
class for which prices are provided. Our review also included an examination of
the underlying inputs and assumptions for a sample of individual securities, a
process we have continued to perform for each reporting period.
Based on
this examination, and the ongoing review performed, we believe that the
valuations used in our financial statements are reasonable and are appropriately
classified in the fair value hierarchy. As of September 30, 2008, the valuation
provided by pricing services was $8,524 million and was classified in Level 2.
The valuations provided by pricing services based on significant unobservable
inputs was insignificant and those investment securities are classified as Level
3.
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 have not adjusted the prices we have obtained. Level 3
investment securities valued using non-binding broker quotes totaled $62 million
at September 30, 2008, and were classified as available-for-sale
securities.
We
receive one quote for Level 2 and Level 3 securities where third party quotes
are used as our basis for fair value measurement. As is the case with our
primary pricing vendor, third party providers of quotes do not provide access to
their proprietary valuation models, inputs and assumptions. Accordingly, our
risk management personnel conduct internal reviews of pricing for all such
investment securities at least quarterly to ensure reasonability of valuations
used in our financial statements. These reviews are designed to identify prices
that appear stale, those that have changed significantly from prior valuations,
and other anomalies that may indicate that a price may not be accurate. We also
follow established routines for reviewing and reconfirming valuations with the
pricing provider, if deemed appropriate. In addition, the pricing vendor has an
established challenge process in place for all security valuations, which
facilitates identification and resolution of potentially erroneous prices. Based
on the information available, we believe that the fair values provided by the
brokers are consistent with the principles of SFAS 157.
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 any 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.
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
following table presents our assets and liabilities measured at fair value on a
recurring basis at September 30, 2008. Included in the table are investment
securities of $9,953 million supporting obligations to holders of guaranteed
investment contracts. Such securities are primarily investment grade. In
addition, the table includes $5,646 million and $2,659 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 $4,709 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 nine months ended September 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 September 30,
2008
|
July
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)
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,797
|
|
$
|
284
|
|
$
|
(215
|
)
|
$
|
(477
|
)
|
$
|
(75
|
)
|
$
|
9,314
|
|
|
$
|
128
|
|
|
|
414
|
|
|
301
|
|
|
17
|
|
|
(30
|
|
|
|
|
|
709
|
|
|
|
268
|
|
|
|
715
|
|
|
(34
|
|
|
(37
|
|
|
1
|
|
|
|
|
|
645
|
|
|
|
(31
|
|
|
|
10,926
|
|
|
551
|
|
|
(235
|
|
|
(506
|
|
|
|
|
|
10,668
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 30,
2008.
|
(d)
|
Earnings
from Derivatives were more than offset by $85 million in losses from
related derivatives included in Level 2 and $253 million in losses from
qualifying fair value hedges.
|
(e)
|
Represents
derivative assets net of derivative liabilities and includes cash accruals
of $19 million not reflected in the fair value hierarchy
table.
|
Changes
in Level 3 instruments for the nine months ended September 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)
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,329
|
|
$
|
665
|
|
$
|
(314
|
)
|
$
|
221
|
|
$
|
413
|
|
$
|
9,314
|
|
|
$
|
102
|
|
|
|
200
|
|
|
591
|
|
|
43
|
|
|
(132
|
|
|
|
|
|
709
|
|
|
|
464
|
|
|
|
689
|
|
|
(42
|
|
|
(9
|
|
|
(44
|
|
|
|
|
|
645
|
|
|
|
9
|
|
|
|
9,218
|
|
|
1,214
|
|
|
(280
|
|
|
45
|
|
|
|
|
|
10,668
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 30,
2008.
|
(d)
|
Earnings
from Derivatives were partially offset by $132 million in losses from
related derivatives included in Level 2 and $309 million in losses from
qualifying fair value hedges.
|
(e)
|
Represents
derivative assets net of derivative liabilities and includes cash accruals
of $19 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 $257 million identified as Level 2 and
$1,913 million identified as Level 3. We recognized $121 million and $379
million of losses related to non-recurring fair value measurements of loans, and
$199 million and $275 million of other-than-temporary impairments of cost and
equity method investments during the third quarter and first nine months of
2008, respectively.
10. 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
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
$
|
1,919
|
|
$
|
1,841
|
|
$
|
6,768
|
|
$
|
6,528
|
|
Investment
securities – net
|
|
(367
|
)
|
|
(225
|
)
|
|
(1,108
|
)
|
|
(240
|
)
|
Currency
translation adjustments – net
|
|
(3,389
|
)
|
|
1,316
|
|
|
(2,600
|
)
|
|
2,339
|
|
Cash
flow hedges – net
|
|
(1,513
|
)
|
|
(842
|
)
|
|
(1,399
|
)
|
|
(78
|
)
|
Benefit
plans – net
|
|
3
|
|
|
2
|
|
|
21
|
|
|
16
|
|
Total
|
$
|
(3,347
|
)
|
$
|
2,092
|
|
$
|
1,682
|
|
$
|
8,565
|
|
11. Off-Balance
Sheet Arrangements
The
following table represents assets in off-balance sheet securitization
entities.
|
At
|
(In
millions)
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Receivables
secured by
|
|
|
|
|
|
|
Equipment
|
$
|
6,169
|
|
$
|
6,552
|
|
Commercial real
estate
|
|
7,183
|
|
|
7,721
|
|
Other assets
|
|
11,085
|
|
|
12,880
|
|
Credit
card receivables
|
|
21,910
|
|
|
22,793
|
|
Trade
receivables
|
|
154
|
|
|
320
|
|
Total
securitized assets(a)(b)
|
$
|
46,501
|
|
$
|
50,266
|
|
|
|
|
|
|
|
|
(a)
|
At
September 30, 2008, and December 31, 2007, liquidity support amounted to
$1,134 million and $1,266 million, respectively. Credit support amounted
to $1,152 million and $1,214 million at September 30, 2008, and December
31, 2007, respectively.
|
(b)
|
Liabilities
for recourse obligations related to off-balance sheet assets were $2
million at both September 30, 2008, and December 31,
2007.
|
12. Subsequent
Event
On
October 7, 2008, General Electric Company (“GE”), our ultimate parent, completed
an offering of 547,825,000 shares of common stock at a price of $22.25 per
share. The underwriters of the offering have an option expiring November 1, 2008
to purchase from GE up to an additional 82,173,750 shares.
On
October 16, 2008, GE issued 30,000 shares of GE’s 10% cumulative perpetual
preferred stock, par value $1.00 per share, having an aggregate liquidation
value of $3.0 billion, and warrants to purchase 134,831,460 shares of GE’s
common stock, par value $0.06 per share, for an aggregate purchase price of $3.0
billion in cash. The preferred stock is redeemable at GE’s option after three
years, in whole or in part, at a price of 110% of liquidation value plus accrued
and unpaid dividends. The warrants are exercisable at the holder’s option at any
time and from time to time, in whole or in part, for five years at an exercise
price of $22.25 per share of common stock and are settled through physical share
issuance.
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 third quarter of 2008 were $17.6 billion, a $0.6 billion (4%) increase
over the third quarter of 2007. Revenues for the third quarters of 2008 and 2007
included $1.4 billion and $0.3 billion of revenue from acquisitions,
respectively, and in 2008 were reduced by $0.1 billion as a result of
dispositions. Revenues for the quarter also decreased $0.4 billion compared with
the third quarter of 2007 as a result of organic revenue declines, partially
offset by the weaker U.S. dollar. Organic revenue growth excludes the effects of
acquisitions, business dispositions (other than dispositions of businesses
acquired for investment) and currency exchange rates. Earnings were $2.1
billion, down 35% from $3.2 billion in the third quarter of 2007.
Revenues
for the first nine months of 2008 were $52.9 billion, a $4.2 billion (9%)
increase over the first nine months of 2007. Revenues for the first nine months
of 2008 and 2007 included $3.6 billion and $0.5 billion of revenue from
acquisitions, respectively, and in 2008 were increased by $0.2 billion as a
result of dispositions. Revenues for the first nine months also increased $0.9
billion compared with the first nine months of 2007 as a result of the weaker
U.S. dollar, partially offset by organic revenue declines. Earnings were $7.3
billion, down 14% from $8.5 billion in the first nine months of
2007.
Overall,
acquisitions contributed $1.4 billion and $1.0 billion to total revenues in the
third quarters of 2008 and 2007, respectively. Our earnings in the third
quarters of 2008 and 2007 included approximately $0.1 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 $0.6 billion
in the third quarters of 2008 and 2007, respectively. The effect of dispositions
on earnings was insignificant in the third quarters of 2008 and
2007.
Acquisitions
contributed $3.6 billion to total revenues and $0.4 billion to earnings in the
first nine months of 2008, compared with $2.4 billion and $0.1 billion,
respectively, in the first nine months of 2007. Dispositions also affected our
operations through lower revenues of $0.3 billion and $2.0 billion in the first
nine months of 2008 and 2007, respectively. The effects of dispositions on
earnings was an increase of $0.3 billion during the first nine months of 2008
compared with a decrease of $0.1 billion in the first nine months of
2007.
The most
significant acquisitions affecting results in 2008 were Merrill Lynch Capital
(primarily at CLL); Sanyo Electric Credit Co., Ltd. (Sanyo); CitiCapital;
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 Commercial Lending and Leasing (CLL); Regency Energy Partners LP at
Energy Financial Services; and Bank BPH at GE Money.
The
provision for income taxes was a benefit of $0.4 billion for the third quarter
of 2008 (effective tax rate of negative 24.7%), compared with an insignificant
benefit for the third quarter of 2007 (effective tax rate of negative 0.5%). 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, partially offset by a higher provision in the third quarter 2008 as
compared to the third quarter 2007 to bring our nine-month tax rate in line with
the projected full year tax rate, and by the absence of the tax benefit related
to the 2007 sale of our investment in SES.
The
provision for income taxes was a benefit of $0.3 billion for the first nine
months of 2008 (effective tax rate of negative 4.1%), compared with an expense
of $0.7 billion for the first nine months of 2007 (effective tax rate of 7.9%).
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 lower-taxed global operations, and the 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 five businesses focused on the broad markets they serve:
CLL, Real Estate, GE Money, GECAS and Energy Financial Services. The Chairman
allocates resources to, and assesses the performance of, these five businesses.
We also provide a one-line reconciliation to GECC-only results, the most
significant component of these reconciliations is the exclusion of the results
of businesses which are not subsidiaries of GECC but instead are direct
subsidiaries of GECS. In addition to providing information on GECS segments in
their entirety, we have also provided supplemental information for the Capital
Solutions business within the CLL segment for greater clarity. Our Chairman does
not separately assess the performance of, or allocate resources to, this
business.
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 Chairman; 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.
Segment
profit is determined based on internal performance measures used by the Chairman
to assess the performance of each business in a given period. In connection with
that assessment, the Chairman 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 includes
interest and other financial charges and income taxes, which we sometimes refer
to as “net earnings”.
We have
reclassified certain prior-period amounts to conform to the current period’s
presentation.
Summary
of Operating Segments
|
Three
months ended
September
30
(Unaudited)
|
|
Nine
months ended
September
30
(Unaudited)
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL
|
$
|
6,547
|
|
$
|
6,862
|
|
$
|
20,525
|
|
$
|
19,859
|
|
Real
Estate
|
|
1,679
|
|
|
1,937
|
|
|
5,526
|
|
|
5,109
|
|
GE
Money
|
|
6,540
|
|
|
6,153
|
|
|
19,481
|
|
|
18,246
|
|
GECAS
|
|
1,265
|
|
|
1,195
|
|
|
3,690
|
|
|
3,660
|
|
Energy
Financial Services
|
|
1,261
|
|
|
832
|
|
|
3,020
|
|
|
1,573
|
|
Total segment
revenues
|
|
17,292
|
|
|
16,979
|
|
|
52,242
|
|
|
48,447
|
|
GECC
corporate items and eliminations
|
|
501
|
|
|
271
|
|
|
1,011
|
|
|
1,061
|
|
Total
revenues
|
|
17,793
|
|
|
17,250
|
|
|
53,253
|
|
|
49,508
|
|
Less
portion of GECS revenues not included in GECC
|
|
(169
|
)
|
|
(235
|
)
|
|
(357
|
)
|
|
(784
|
)
|
Total
revenues in GECC
|
$
|
17,624
|
|
$
|
17,015
|
|
$
|
52,896
|
|
$
|
48,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL
|
$
|
394
|
|
$
|
905
|
|
$
|
2,005
|
|
$
|
2,633
|
|
Real
Estate
|
|
244
|
|
|
640
|
|
|
1,204
|
|
|
1,680
|
|
GE
Money
|
|
791
|
|
|
947
|
|
|
2,832
|
|
|
3,306
|
|
GECAS
|
|
285
|
|
|
274
|
|
|
955
|
|
|
960
|
|
Energy
Financial Services
|
|
306
|
|
|
255
|
|
|
606
|
|
|
501
|
|
Total segment
profit
|
|
2,020
|
|
|
3,021
|
|
|
7,602
|
|
|
9,080
|
|
GECC
corporate items and eliminations(a)
|
|
121
|
|
|
269
|
|
|
(146
|
)
|
|
(120
|
)
|
Less
portion of GECS segment profit not
|
|
|
|
|
|
|
|
|
|
|
|
|
included in GECC
|
|
(53
|
)
|
|
(82
|
)
|
|
(137
|
)
|
|
(432
|
)
|
Earnings
in GECC from continuing operations
|
|
2,088
|
|
|
3,208
|
|
|
7,319
|
|
|
8,528
|
|
Loss
in GECC from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
(169
|
)
|
|
(1,367
|
)
|
|
(551
|
)
|
|
(2,000
|
)
|
Total
net earnings in GECC
|
$
|
1,919
|
|
$
|
1,841
|
|
$
|
6,768
|
|
$
|
6,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included
restructuring and other charges of $0.1 billion and $0.2 billion for the
first nine months of 2008 and 2007, respectively, primarily related to CLL
and GE Money.
|
|
See
accompanying notes to consolidated financial statements.
|
|
CLL
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
6,547
|
|
$
|
6,862
|
|
$
|
20,525
|
|
$
|
19,859
|
|
Less
portion of CLL not included in GECC
|
|
(148
|
)
|
|
(216
|
)
|
|
(335
|
)
|
|
(723
|
)
|
Total revenues in
GECC
|
$
|
6,399
|
|
$
|
6,646
|
|
$
|
20,190
|
|
$
|
19,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
394
|
|
$
|
905
|
|
$
|
2,005
|
|
$
|
2,633
|
|
Less
portion of CLL not included in GECC
|
|
(32
|
)
|
|
(64
|
)
|
|
(113
|
)
|
|
(352
|
)
|
Total segment profit in
GECC
|
$
|
362
|
|
$
|
841
|
|
$
|
1,892
|
|
$
|
2,281
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
September
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
252,477
|
|
$
|
220,391
|
|
$
|
229,608
|
|
|
Less
portion of CLL not included in GECC
|
|
(1,962
|
)
|
|
2,831
|
|
|
(3,174
|
)
|
|
Total assets in
GECC
|
$
|
250,515
|
|
$
|
223,222
|
|
$
|
226,434
|
|
|
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Solutions
|
$
|
3,673
|
|
$
|
3,543
|
|
$
|
11,128
|
|
$
|
10,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Solutions
|
$
|
317
|
|
$
|
444
|
|
$
|
1,220
|
|
$
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
September
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
|
Capital Solutions
|
$
|
130,482
|
|
$
|
118,861
|
|
$
|
122,527
|
|
|
CLL
revenues decreased 5% and net earnings decreased 56% compared with the third
quarter of 2007. Revenues for the third quarter of 2008 included $0.4 billion
from acquisitions. Revenues for the quarter decreased $0.7 billion compared with
the third quarter of 2007 as a result of organic revenue declines ($0.9
billion), partially offset by the weaker U.S. dollar ($0.2 billion). Net
earnings decreased by $0.5 billion in the third quarter of 2008, resulting from
core declines ($0.5 billion), partially offset by acquisitions ($0.1 billion).
Net earnings included the effects of higher mark-to-market losses and
other-than-temporary impairments ($0.3 billion) and Genpact mark-to-market
losses ($0.2 billion), and the absence of the effects of the 2007 SES
transaction ($0.1 billion).
CLL
revenues increased 3% and net earnings decreased 24% compared with the first
nine months of 2007. Revenues for the first nine months of 2008 and 2007
included $1.3 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 nine months decreased $0.2 billion
compared
with the first nine months of 2007 as a result of organic revenue declines ($1.0
billion), partially offset by the weaker U.S. dollar ($0.8 billion). Net
earnings decreased by $0.6 billion in the first nine months of 2008, resulting
from core declines ($1.0 billion), including an increase of $0.1 billion in the
provision for losses on financing receivables and lower investment income ($0.1
billion), partially offset by acquisitions ($0.3 billion) and higher
securitization ($0.1 billion). Net earnings included the effects of higher
mark-to-market losses and other-than-temporary impairments ($0.5 billion), and
the absence of the effects of the 2007 SES transaction ($0.6 billion), partially
offset by Genpact mark-to-market gains ($0.3 billion). These results also
included a gain on sale of a portion of our investment in Penske Truck Leasing
Co., L.P. ($0.1 billion).
Real
Estate
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,679
|
|
$
|
1,937
|
|
$
|
5,526
|
|
$
|
5,109
|
|
Less
portion of Real Estate not included in GECC
|
|
(9
|
)
|
|
(16
|
)
|
|
(9
|
)
|
|
(54
|
)
|
Total revenues in
GECC
|
$
|
1,670
|
|
$
|
1,921
|
|
$
|
5,517
|
|
$
|
5,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
244
|
|
$
|
640
|
|
$
|
1,204
|
|
$
|
1,680
|
|
Less
portion of Real Estate not included in GECC
|
|
(2
|
)
|
|
(7
|
)
|
|
4
|
|
|
(25
|
)
|
Total segment profit in
GECC
|
$
|
242
|
|
$
|
633
|
|
$
|
1,208
|
|
$
|
1,655
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
September
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
88,739
|
|
$
|
72,197
|
|
$
|
79,285
|
|
|
Less
portion of Real Estate not included in GECC
|
|
(32
|
)
|
|
(260
|
)
|
|
(279
|
)
|
|
Total assets in
GECC
|
$
|
88,707
|
|
$
|
71,937
|
|
$
|
79,006
|
|
|
Real
Estate revenues decreased 13% and net earnings decreased 62% compared with the
third quarter of 2007. Revenues for the third quarter included $0.1 billion from
acquisitions. Revenues for the quarter decreased $0.3 billion compared with the
third quarter of 2007 as a result of organic revenue declines ($0.4 billion),
partially offset by the weaker U.S. dollar ($0.1 billion). Real Estate net
earnings decreased $0.4 billion compared with the third quarter of 2007,
primarily from a decline in net earnings from real estate equity investments
($0.5 billion), partially offset by an increase in net earnings from real estate
lending ($0.1 billion).
Real
Estate assets at September 30, 2008 increased $9.5 billion, or 12%, from
December 31, 2007, including $13.2 billion, or 36%, attributable to an increase
in real estate lending, partially offset by a $3.5 billion, or 9%, decline in
real estate equity investments. During the first nine months of 2008, we sold
real estate equity investment assets with a book value totaling $5.1 billion,
which resulted in net earnings of $1.2 billion that were partially offset by
depreciation and other expenses.
Real
Estate revenue increased 8% and net earnings decreased 28% compared with the
first nine months of 2007. Revenues for the first nine months of 2008 included
$0.3 billion from acquisitions. Revenues for the first nine months increased
$0.2 billion compared with the first nine months of 2007 as a result of the
weaker U.S. dollar ($0.3 billion), partially offset by organic revenue declines
($0.1 billion).
Real
Estate net earnings decreased $0.5 billion compared with the first nine months
of 2007, primarily from a decline in net earnings from real estate equity
investments ($0.5 billion), partially offset by an increase in net earnings from
real estate lending ($0.1 billion). Net earnings from the sale of real estate
equity investments were lower as a result of increasingly difficult market
conditions experienced in the first nine 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.
GE
Money
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
6,540
|
|
$
|
6,153
|
|
$
|
19,481
|
|
$
|
18,246
|
|
Less
portion of GE Money not included in GECC
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Total revenues in
GECC
|
$
|
6,540
|
|
$
|
6,153
|
|
$
|
19,481
|
|
$
|
18,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
791
|
|
$
|
947
|
|
$
|
2,832
|
|
$
|
3,306
|
|
Less
portion of GE Money not included in GECC
|
|
(14
|
)
|
|
(10
|
)
|
|
(21
|
)
|
|
(51
|
)
|
Total segment profit in
GECC
|
$
|
777
|
|
$
|
937
|
|
$
|
2,811
|
|
$
|
3,255
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
September
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
209,222
|
|
$
|
196,840
|
|
$
|
209,178
|
|
|
Less
portion of GE Money not included in GECC
|
|
135
|
|
|
100
|
|
|
100
|
|
|
Total assets in
GECC
|
$
|
209,357
|
|
$
|
196,940
|
|
$
|
209,278
|
|
|
GE Money
revenues increased 6% and net earnings decreased 16% compared with the third
quarter of 2007. Revenues for the third quarter of 2008 included $0.3 billion
from acquisitions and were reduced by $0.1 billion as a result of dispositions.
Revenues for the quarter also increased $0.2 billion compared with the third
quarter of 2007 as a result of the weaker U.S. dollar ($0.3 billion), partially
offset by organic revenue declines ($0.2 billion). The decrease in net earnings
resulted primarily from core declines ($0.2 billion), including the effects of
higher delinquencies of $0.2 billion, and lower securitization income ($0.1
billion), partially offset by growth in lower-taxed earnings from global
operations ($0.1 billion).
GE Money
revenues increased 7% and net earnings decreased 14% compared with the first
nine months of 2007. Revenues for the first nine months of 2008 included $0.4
billion from acquisitions and $0.4 billion from the gain on sale of our CPS
business and were reduced by $0.1 billion from dispositions. Revenues for the
first nine months also increased $0.5 billion compared with the first nine
months of 2007 as a result of the weaker U.S. dollar ($1.1 billion), partially
offset by organic revenue declines ($0.6 billion). The decrease in net earnings
resulted primarily from core declines ($0.8 billion) (including lower results
reflecting the effects of higher delinquencies of $0.5 billion) and lower
securitization income ($0.4 billion). These decreases were partially offset by
growth in lower-taxed earnings from global operations ($0.4 billion), the gain
on the sale of our CPS business ($0.2 billion), the weaker U.S. dollar ($0.1
billion) and acquisitions ($0.1 billion).
GECAS
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,265
|
|
$
|
1,195
|
|
$
|
3,690
|
|
$
|
3,660
|
|
Less
portion of GECAS not included in GECC
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(3
|
)
|
Total revenues in
GECC
|
$
|
1,264
|
|
$
|
1,193
|
|
$
|
3,688
|
|
$
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
285
|
|
$
|
274
|
|
$
|
955
|
|
$
|
960
|
|
Less
portion of GECAS not included in GECC
|
|
1
|
|
|
–
|
|
|
(2
|
)
|
|
(2
|
)
|
Total segment profit in
GECC
|
$
|
286
|
|
$
|
274
|
|
$
|
953
|
|
$
|
958
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
September
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
49,841
|
|
$
|
47,038
|
|
$
|
47,189
|
|
|
Less
portion of GECAS not included in GECC
|
|
(225
|
)
|
|
(212
|
)
|
|
(219
|
)
|
|
Total assets in
GECC
|
$
|
49,616
|
|
$
|
46,826
|
|
$
|
46,970
|
|
|
GECAS
revenues and net earnings increased 6% and 4%, respectively, compared with the
third quarter of 2007. The increase in revenues resulted primarily from organic
revenue growth ($0.1 billion). The increase in net earnings resulted primarily
from core growth.
GECAS
revenues increased 1% and net earnings decreased 1% compared with the first nine
months of 2007. The increase in revenues is primarily as a result of organic
revenue growth ($0.1 billion), partially offset by lower investment income ($0.1
billion). The decrease in net earnings resulted primarily from lower investment
income, partially offset by core growth.
Energy
Financial Services
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,261
|
|
$
|
832
|
|
$
|
3,020
|
|
$
|
1,573
|
|
Less
portion of Energy Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
not included in
GECC
|
|
(11
|
)
|
|
(1
|
)
|
|
(11
|
)
|
|
(4
|
)
|
Total revenues in
GECC
|
$
|
1,250
|
|
$
|
831
|
|
$
|
3,009
|
|
$
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
306
|
|
$
|
255
|
|
$
|
606
|
|
$
|
501
|
|
Less
portion of Energy Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
not included in
GECC
|
|
(6
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
(2
|
)
|
Total segment profit in
GECC
|
$
|
300
|
|
$
|
254
|
|
$
|
601
|
|
$
|
499
|
|
|
At
|
(In
millions)
|
September
30,
2008
|
|
September
30,
2007
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
21,856
|
|
$
|
17,493
|
|
$
|
18,705
|
|
|
Less
portion of Energy Financial Services
|
|
|
|
|
|
|
|
|
|
|
not included in
GECC
|
|
(53
|
)
|
|
(40
|
)
|
|
(52
|
)
|
|
Total assets in
GECC
|
$
|
21,803
|
|
$
|
17,453
|
|
$
|
18,653
|
|
|
Energy
Financial Services revenues and net earnings increased 52% and 20%,
respectively, compared with the third quarter of 2007. Revenues for the third
quarters of 2008 and 2007 included $0.6 billion and $0.3 billion from
acquisitions. Revenues for the quarter also increased $0.1 billion compared with
the third quarter of 2007 as a result of organic revenue growth ($0.1 billion).
The increase in net earnings resulted primarily from core growth.
Energy
Financial Services revenues and net earnings increased 92% and 21%,
respectively, compared with the first nine months of 2007. Revenues for the
first nine months of 2008 and 2007 included $1.5 billion and $0.3 billion from
acquisitions. Revenues for the first nine months also increased $0.2 billion
compared with the first nine months of 2007 as a result of organic revenue
growth ($0.2 billion). The increase in net earnings resulted primarily from core
growth ($0.1 billion).
Discontinued
Operations
|
Three
months ended
September
30
|
|
Nine
months ended
September
30
|
|
(In
millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
in GECC from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
$
|
(169
|
)
|
$
|
(1,367
|
)
|
$
|
(551
|
)
|
$
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 third quarter of 2008, reflected
loss from operations ($0.2 billion), primarily at GE Money Japan.
Loss from
discontinued operations, net of taxes, for the first nine months of 2008,
primarily reflected loss from operations ($0.3 billion) and the estimated
incremental loss on disposal ($0.2 billion) at GE Money Japan.
Loss from
discontinued operations, net of taxes, for the third quarter of 2007, reflected
the estimated incremental loss on disposal ($0.9 billion) at Lake and the loss
from operations at WMC ($0.3 billion) and GE Money Japan ($0.1
billion).
Loss from
discontinued operations, net of taxes, for the first nine months of 2007,
reflected the estimated incremental loss on disposal ($0.9 billion) at Lake and
the loss from operations at WMC ($0.9 billion) and GE Money Japan ($0.2
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 nine months of 2008, we completed the acquisitions of Merrill
Lynch Capital, CitiCapital and Bank
BPH.
|
·
|
The
U.S. dollar was stronger at September 30, 2008, than at December 31, 2007,
decreasing the translated levels of our non-U.S. dollar assets and
liabilities.
|
Cash
Flows
Our cash
and equivalents aggregated $12.2 billion at September 30, 2008, compared with
$11.8 billion at September 30, 2007. GECC cash from operating activities (CFOA)
totaled $17.8 billion for the first nine months of 2008 compared with $14.2
billion for the first nine months of 2007. The increase is primarily the result
of increased collections of interest from loans and finance leases and rental
income from operating leases, resulting primarily from core growth and currency
exchange; and increases in cash collateral received from counterparties on
derivative contracts and security deposits. These increases were partially
offset by increases in interest payments resulting from increased borrowings,
and taxes paid.
Our
principal use of cash has been investing in assets to grow our businesses. Of
the $49.2 billion that we invested during the first nine months of 2008, $30.6
billion was used for additions to financing receivables; $25.0 billion was used
for acquisitions of new businesses, the largest of which were Merrill Lynch
Capital, CitiCapital and Bank BPH; and $9.3 billion was used to invest in new
equipment, principally for lease to others.
We paid
dividends to General Electric Capital Services, Inc. (GECS), our parent, through
a distribution of our retained earnings, including special dividends from
proceeds of certain business sales. Dividends paid to GECS totaled $2.3 billion
in the first nine months of 2008 compared with $5.0 billion in the first nine
months of 2007. There were no special dividends paid to GECS in the first nine
months of 2008 compared with $1.8 billion in the first nine months of 2007.
During the first nine months of 2008, our borrowings with maturities of 90 days
or less have decreased by $16.9 billion. New borrowings of $99.3 billion having
maturities longer than 90 days were added during the first nine months of 2008,
while $44.8 billion of such long-term borrowings were retired.
Fair
Value Measurements
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. During the third quarter,
our methodology remained consistent with prior quarters for measuring fair value
of financial instruments trading in volatile markets. Additional information
about our application of SFAS 157 is provided in Note 9 to the condensed,
consolidated financial statements.
The fair
value of derivatives includes an adjustment for our non-performance risk. At
September 30, 2008, the adjustment for our non-performance risk was a gain of
$0.1 billion.
At
September 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 consolidated 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 9 to the condensed, consolidated financial statements for further
information related to the adoption of SFAS 157.
C.
Financial Services Portfolio Quality
Investment securities comprise
mainly investment-grade debt securities supporting obligations to holders of
guaranteed investment contracts. Investment securities were $20.8 billion at
September 30, 2008 compared with $20.6 billion at December 31, 2007. Of the
amount at September 30, 2008, we held residential mortgage-backed securities
(RMBS) and commercial mortgage-backed securities with estimated fair values of
$3.8 billion and $1.5 billion, respectively. Such amounts included unrealized
losses of $0.8 billion and $0.2 billion, respectively.
At
September 30, 2008, we had approximately $1.5 billion of exposure to residential
subprime credit, primarily supporting our guaranteed investment contracts; $1.2
billion of this amount was insured by monoline insurers (Monolines). Monolines
provide credit enhancement for certain of our investment securities. At
September 30, 2008, our total investment securities insured by Monolines were
$2.7 billion. Although several of the Monolines have been downgraded by the
rating agencies, a majority of this amount was insured by investment-grade
Monolines. In addition, we had approximately $0.8 billion of exposure to
commercial, regional and foreign banks, primarily relating to corporate debt
securities, with associated unrealized losses of $0.1 billion.
We
regularly review investment securities for impairment using both quantitative
and qualitative criteria. Quantitative criteria include length of time and
amount that each security is in an unrealized loss position and, for fixed
maturities, whether the issuer is in compliance with terms and covenants of the
security. Qualitative criteria include the financial health of and specific
prospects for the issuer, as well as our intent and ability to hold the security
to maturity or until forecasted recovery. Our impairment reviews involve our
finance, risk and asset management functions as well as the portfolio management
and research capabilities of our internal and third-party asset managers. At
September 30, 2008, unrealized losses on investment securities totaled $1.9
billion, including $1.2 billion aged 12 months or more. Of the amount aged 12
months or more, $0.2 billion and $1.0 billion related to corporate debt
securities and structured securities (mortgage-backed, asset-backed and retained
interests in off-balance sheet securitization arrangements), respectively.
Other-than-temporary impairment losses were $0.2 billion for the first nine
months of 2008, primarily relating to RMBS and corporate debt securities of
financial institutions. Other-than-temporary impairment losses were $0.1 billion
for the first nine months of 2007.
Our
qualitative review attempts to identify issuers’ securities “at-risk” of
impairment, that is, with a possibility of other-than-temporary impairment
recognition in the following 12 months. Of securities with unrealized losses at
September 30, 2008, $0.4 billion 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.
Financing receivables is our
largest category of assets and represents one of our primary sources of
revenues. 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).
Selected
financing receivables ratios follow.
|
September
30, 2008
|
|
Nonearning
receivables
as
a
percentage
of
total
financing
receivables
|
|
Allowance
for
losses
as a
percentage
of
nonearning
receivables
|
|
Allowance
for
losses
as
a
percentage
of
total
financing
receivables
|
|
|
|
|
|
|
|
|
|
|
CLL
|
|
|
|
|
|
|
|
|
|
Equipment
and leasing and other
|
|
1.0
|
%
|
|
59.4
|
%
|
|
0.6
|
%
|
Commercial
and industrial
|
|
1.5
|
|
|
35.1
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
0.2
|
|
|
230.8
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
GE
Money
|
|
|
|
|
|
|
|
|
|
Non-U.S.
residential mortgages
|
|
4.6
|
|
|
8.9
|
|
|
0.4
|
|
Non-U.S.
installment and revolving credit
|
|
1.8
|
|
|
221.4
|
|
|
4.0
|
|
U.S.
installment and revolving credit
|
|
2.3
|
|
|
179.5
|
|
|
4.2
|
|
Non-U.S.
auto
|
|
0.4
|
|
|
280.1
|
|
|
1.1
|
|
Other
|
|
2.8
|
|
|
56.3
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
GECAS
|
|
1.0
|
|
|
37.0
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Financial Services
|
|
1.9
|
|
|
20.3
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
0.8
|
|
|
58.8
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1.8
|
|
|
60.9
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rates on managed equipment financing loans and leases and managed consumer
financing receivables follow.
|
Delinquency
rates at
|
|
September
30,
2008(a)
|
|
December
31,
2007
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
Equipment
Financing
|
|
1.61
|
%
|
|
1.21
|
%
|
|
1.35
|
%
|
Consumer
|
|
6.54
|
|
|
5.38
|
|
|
5.26
|
|
U.S.
|
|
6.17
|
|
|
5.52
|
|
|
5.14
|
|
Non-U.S.
|
|
6.69
|
|
|
5.32
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
The
portfolio of financing receivables, before allowance for losses, was $424.1
billion at September 30, 2008, and $382.7 billion at December 31, 2007.
Financing receivables, before allowance for losses, increased $41.4 billion from
December 31, 2007, primarily as a result of core growth ($47.2 billion) and
acquisitions ($31.8 billion), partially offset by securitization and sales
($28.3 billion), the stronger U.S. dollar ($10.7 billion) and dispositions ($3.3
billion).
Related
nonearning receivables amounted to $7.6 billion (1.8% of outstanding
receivables) at September 30, 2008, compared with $5.4 billion (1.4% of
outstanding receivables) at December 31, 2007. Nonearning receivables excludes
loans held for sale. Related nonearning receivables increased from December 31,
2007, primarily as a result of new exposures, including the effects of the Sanyo
and Bank BPH acquisitions, as well as the continued deterioration in the U.S.
and U.K. markets and certain European portfolios. At
September 30, 2008, our nonearning receivables included a higher concentration
of loans secured by mortgages and mid-market equipment, which have lower
historical loss experience than unsecured exposures.
The
allowance for losses at September 30, 2008, amounted to $4.6 billion compared
with $4.2 billion at December 31, 2007, representing our best estimate of
probable losses inherent in the portfolio and reflecting the current credit and
economic environment. Allowance for losses increased $0.4 billion from December
31, 2007, primarily as a result of overall growth in our portfolio and increased
delinquencies in the U.S. and U.K. markets and certain European portfolios. We
recorded a provision for loan losses of $1.6 billion in the third quarter of
2008 compared with $1.2 billion in the third quarter of 2007.
Delinquency
rates on equipment financing loans and leases increased from December 31, 2007,
and September 30, 2007, to September 30, 2008, primarily as a result of the
inclusion of the Sanyo acquisition in Japan, which contributed an additional 10
basis points at September 30, 2008, as well as deterioration in our U.S.
commercial middle market and certain European portfolios. The current financial
market turmoil and tight credit conditions may continue to lead to a higher
level of commercial delinquencies and provisions for financing receivables and
could adversely affect results of operations at CLL.
Delinquency
rates on consumer financing receivables increased from December 31, 2007, and
September 30, 2007, to September 30, 2008, primarily as a result of continued
deterioration in our U.S. portfolio, the effects of tighter credit conditions in
our secured financing business in the U.K. and the acquisition of Bank BPH. 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.
See Notes 5 and 6 to the condensed, consolidated financial
statements.
Other assets comprise mainly
real estate investments, equity and cost method investments and assets held for
sale. Other assets totaled $80.7 billion at September 30, 2008, compared with
$82.5 billion at December 31, 2007. Of the amount at September 30, 2008, we had
cost method investments totaling $2.3 billion. Cost method investments include a
$0.1 billion investment in 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 nine
months of 2008, we recognized other-than-temporary impairments on our
investments in FGIC common stock ($0.1 billion in the first quarter) and
preferred stock ($0.2 billion in the third quarter). We continue to monitor our
investment in FGIC closely, including review for further
impairment.
D.
Liquidity and Borrowings
We manage
our liquidity to help ensure access to sufficient funding at acceptable costs to
meet our business needs and financial obligations throughout business cycles. We
rely on cash generated through our operating activities as well as unsecured and
secured funding sources, including commercial paper, term debt, bank deposits,
bank borrowings, securitization and other retail funding products.
The
global credit markets have recently experienced unprecedented volatility, which
has affected both the availability and cost of our funding sources. In this
current volatile credit environment, GE, our ultimate parent, has taken a number
of initiatives to strengthen its liquidity, maintain its dividend, and maintain
the highest credit ratings. Specifically, GE has:
·
|
Reduced
the GECS dividend to GE from 40% to 10% of GECS earnings and suspended its
stock repurchase program;
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·
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Raised
$15 billion in cash through common and preferred stock offerings in
October 2008;
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·
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Reduced
commercial paper borrowings at GECS to $88 billion at September 30,
2008;
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·
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Targeted
to further reduce GECS commercial paper borrowings to $80 billion by the
end of 2008 and to 10-15% of total GECS borrowings going
forward;
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·
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Begun
resizing GE to deliver a 60%/40% industrial-financial services earnings
split by the end of 2009;
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·
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Grown
our deposit funding at GECS to $33.5 billion at September 30, 2008;
and
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·
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Registered
to use the Federal Reserve’s Commercial Paper Funding Facility for up to
$98 billion, which is available through April 30,
2009.
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Throughout
this period of volatility, we have been able to continue to meet our funding
needs at acceptable costs. We continue to access the commercial paper markets
without interruption, although we have been doing so at shorter average
maturities than historically. During the first nine months of 2008, GECC and its
affiliates have issued $69.2 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 40 years. We are not currently planning to issue
long-term debt for the remainder of 2008, but will consider it if we have
opportunities to issue debt on favorable terms as a result of more stable
markets or other developments. We maintain securitization capability in most of
the asset classes we have traditionally securitized. However, these capabilities
have been, and continue to be, more limited than in 2007. Securitization
proceeds at GECS were $0.7 billion and $4.9 billion during the three months and
nine months ended September 30, 2008, respectively. Comparable amounts for 2007
were $5.2 billion and $16.9 billion, for three months and nine months,
respectively.
We have
successfully grown our deposits at GECS by $22.0 billion since January 1, 2008,
to $33.5 billion at September 30, 2008. We have deposit-taking capability at
nine banks outside of the U.S. and two banks in the U.S., GE Money Bank Inc., a
Federal Savings Bank (FSB), and GE Capital Financial Inc., an Industrial Loan
Corporation (ILC). The FSB and ILC currently issue certificates of deposits
(CDs) distributed by brokers in maturity terms from three months to five years.
Total outstanding CDs at these two banks at September 30, 2008 were $17.2
billion. We expect deposits to continue to grow and constitute a greater
percentage of our total funding in the future.
In the
event we cannot sufficiently access our normal sources of funding, we have a
number of alternative sources of liquidity available, including cash balances
and collections, marketable securities, credit lines and liquidity facilities
provided by governments.
We
anticipate that we will continue to generate cash from operating activities in
the future, which is available to help meet our liquidity needs. We also
generate substantial cash from the principal collections of loans and
financing
leases,
which historically has been invested in asset growth. We plan to slow new asset
originations and investment to the extent necessary to generate cash from
collections in excess of originations to help support liquidity
needs.
Committed,
unused credit lines at GECS totaling $62.1 billion had been extended to GECS by
66 financial institutions at September 30, 2008. These lines include $37.3
billion of revolving credit agreements under which we can borrow funds for
periods exceeding one year. The remaining $24.8 billion are 364-day lines that
contain a term-out feature that allows us to extend borrowings for one year from
the date of expiration of the lending agreement. Investment securities at GECS
with a fair value of $10.0 billion at September 30, 2008 supporting obligations
to holders of guaranteed investment contracts are also available as a source of
liquidity by entering into a repurchase agreement with a counterparty. The cash
proceeds available from a repurchase agreement transaction could be
significantly less than fair value depending on existing market conditions at
the time.
We are
currently evaluating the effect on our operations and funding strategies of
recently announced actions by the governments of the United States and other
nations. The U.S. Government has enacted legislation and created several
programs to help stabilize credit markets and financial institutions and restore
liquidity, including the Emergency Economic Stabilization Act of 2008, the
Federal Reserve’s Commercial Paper Funding Facility (CPFF) and Money Market
Investor Funding Facility (MMIFF) and the Federal Deposit Insurance
Corporation’s (FDIC) Temporary Liquidity Guarantee Program. Additionally, the
governments of many nations have announced similar measures for institutions in
their respective countries.
We
believe that the Federal Reserve’s recently announced CPFF and MMIFF add an
important liquidity backstop for U.S. issuers of commercial paper and money
market commercial paper investors and will help restore confidence in the prime
commercial paper market. On October 20, 2008, we submitted our registration and
received notification of our eligibility for the Federal Reserve Bank of New
York CPFF, which began purchases of qualifying commercial paper on October 27,
2008. We plan to use the facility primarily to support our commercial paper
investors who need liquidity and to manage our maturity profile.
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:
·
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Transaction
costs will generally be expensed. Certain such costs are presently treated
as costs of the acquisition.
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·
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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.
|
·
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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.
|
·
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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
3. Quantitative and Qualitative Disclosures About Market Risk
There
have been no significant changes to our market risk since December 31, 2007. For
a discussion of our exposure to market risk, refer to Part II, Item 7A.
“Quantitative and Qualitative Disclosures about Market Risk,” contained in our
Annual Report on Form 10-K for the year ended December 31, 2007.
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 internal control over
financial reporting and concluded that (i) our disclosure controls and
procedures were effective as of September 30, 2008, and (ii) no change in
internal control over financial reporting occurred during the quarter ended
September 30, 2008, that has materially affected, or is reasonably likely to
materially affect, such internal control over financial reporting.
Part
II. Other Information
Item
1. Legal Proceedings
In July
and September 2008, shareholders filed two purported class actions under the
federal securities laws in the United States District Court for the District of
Connecticut naming GE as defendant, as well as GE’s chief executive officer and
chief financial officer. The complaints allege that GE and GE’s chief executive
officer made false and misleading statements that artificially inflated GE’s
stock price between March 12, 2008 and April 10, 2008, when GE announced that
its results for the first quarter of 2008 would not meet GE’s previous guidance
and GE also lowered its full year guidance for 2008. In addition, shareholders
have filed two purported derivative actions in New York State court against GE’s
chief executive officer and chief financial officer, the members of GE’s board
and GE (as nominal defendant)
for alleged breach of fiduciary duty and other claims in connection with these
events. These four cases, which seek unspecified damages, are in their earliest
stages and GE intends to defend itself vigorously.
In
October 2008, shareholders filed a purported class action under the federal
securities laws in the United States District Court for the Southern District of
New York naming GE as defendant, as well as GE’s chief executive officer and
chief financial officer. The complaint alleges that during a conference call
with analysts on September 25, 2008, defendants made false and misleading
statements concerning (i) the state of GE’s funding, cash flows, and liquidity
and (ii) the question of issuing additional equity, which caused economic loss
to those shareholders who purchased GE stock between September 25, 2008 and
October 2, 2008, when GE announced the pricing of a common stock offering. This
case, which seeks unspecified damages, is at the earliest stage and GE intends
to defend itself vigorously.
Certain
risks described below update the risk factors in Part 1, Item 1A. "Risk Factors"
in our Annual Report on Form 10-K for the year ended December 31, 2007 and were
included as part of the offering documents in GE’s recently completed offering
of shares of common stock.
Risks
Relating to the Financial Services Industry and Financial Markets
Recent
government actions to stabilize credit markets and financial institutions may
not be effective and could adversely affect our competitive
position.
The U.S. Government recently enacted
legislation and created several programs to help stablilize credit markets and
financial institutions and restore liquidity, including the Emergency Economic
Stablilization Act of 2008, the Federal
Reserve’s Commercial Paper Funding Facility
(CPFF) and Money Market Investor Funding Facility and the Federal Deposit
Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program.
Additionally, the governments of many nations have announced similar measures
for institutions in their respective countries. There is no assurance that these
programs individually or collectively will have beneficial effects in the credit
markets, will address credit or liquidity issues of companies that participate
in the programs or will reduce volatility or uncertainty in the financial
markets. The failure of these programs to have their intended effects
could have a material adverse effect on the financial markets, which in turn
could materially and adversely affect our business, financial condition and
results of operations. During the period that these programs are in
place, we could temporarily benefit from the terms of the programs or
from the conditions for participation, relative to other companies that do not
participate in the programs we do. To the extent that we participate
in these programs or other programs, there is no assurance that such programs
will remain available for sufficient periods of time or on acceptable terms to
benefit us, and the expiration of such programs could have unintended adverse
effects on us.
Current
levels of market volatility are unprecedented.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months. In recent weeks, the volatility and
disruption have reached unprecedented levels. In some cases, the markets have
exerted downward pressure on stock prices and credit capacity for certain
issuers. A large portion of GE Capital’s borrowings have been issued in the
commercial paper markets and, although GE Capital has continued to issue
commercial paper, there can be no assurance that such markets will continue to
be a reliable source of short-term financing for GE Capital. If current levels
of market disruption and volatility continue or worsen, or if we cannot lower
our asset levels as planned, we would seek to repay commercial paper as it
becomes due or to meet our other liquidity needs using the Federal Reserve's
CPFF Program, the net proceeds of GE’s equity offering and the investment
by Berkshire Hathaway Inc., drawing upon contractually committed lending
agreements primarily provided by global banks and/or by seeking other funding
sources. However, under such extreme market conditions, there can be no
assurance such agreements and other funding sources would be available or
sufficient.
Difficult
conditions in the financial services markets have materially and adversely
affected the business and results of operations of GE Capital and we do not
expect these conditions to improve in the near future.
Dramatic
declines in the housing market during the prior year, with falling home prices
and increasing foreclosures and unemployment, have resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities, have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Many lenders
and institutional investors have reduced, and in some cases, ceased to provide
funding to borrowers including other financial institutions. This market turmoil
and tightening of credit have led to an increased level of commercial and
consumer delinquencies, lack of consumer confidence, increased market volatility
and widespread reduction of business activity generally.
The
soundness of other financial institutions could adversely affect GE
Capital.
GE
Capital has exposure to many different industries and counterparties, and
routinely executes transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks, investment banks and
other institutional clients. Many of these transactions expose GE Capital to
credit risk in the event of default of its counterparty or client. In addition,
GE Capital’s credit risk may be exacerbated when the collateral held by it
cannot be realized upon or is liquidated at prices not sufficient to recover the
full amount of the loan or derivative exposure due to it. GE Capital also has
exposure to these financial institutions in the form of equity investments and
unsecured debt instruments. There can be no assurance that any such
losses or impairments to the carrying value of its financial assets would not
materially and adversely affect GE Capital’s business and results of
operations.
The
real estate markets are highly uncertain.
We
provide financing for the acquisition, refinancing and renovation of various
types of properties. We also consider opportunities to buy and sell properties,
which may result in significant outlays or proceeds of cash, either individually
or in the aggregate. The profitability of real estate investments is largely
dependent upon the specific geographic market in which they are located and the
perceived value of that market at the time of sale. We may have difficulty
optimizing that mix and such activity may vary significantly from one year to
the next. Under current market and credit conditions, there can be no assurance
as to the level of sales we will complete or the net sales proceeds we will
realize. In addition, our funding transactions expose GE Capital to credit risk
in the event of default.
In
addition, we are a residential mortgage lender in certain geographic markets
that have been and may continue to be adversely affected by declines in real
estate values and home sale volumes, job losses and other factors that may
negatively impact the credit performance of our mortgage loans. Our allowance
for loan losses on these mortgage loans is based on our analysis of current and
historical delinquency and loan performance, as well as other management
assumptions that may be inaccurate predictions of credit performance in this
environment.
Failure
to maintain our “Triple-A” credit ratings could adversely affect our cost of
funds and related margins, liquidity, competitive position and access to capital
markets.
The major
debt agencies routinely evaluate our debt and have given their highest credit
ratings to us. This evaluation is based on a number of factors, which include
financial strength as well as transparency with rating agencies and timeliness
of financial reporting. On September 25, 2008, GE reaffirmed its longstanding
commitment to maintaining its “Triple A” ratings and announced that it is taking
certain steps to strengthen its capital and liquidity position, including
reducing the level of dividends it receives from GE Capital from 40% to 10% of
GE Capital’s earnings, suspending the repurchase of its common stock, reducing
GE Capital’s commercial paper debt to a level of 10 to 15% of GE
Capital’s total debt and reducing the size of its financial services business so
that it contributes only approximately 40% of its total earnings by the end of
2009. GE also announced that GE Capital’s long-term funding plan for 2008 has
been completed. Following this announcement, Standard & Poor’s Ratings
Services affirmed GE and GE Capital’s “AAA” long-term and “A-1+” short-term
corporate credit ratings with a stable outlook and Moody’s Investor Services
commented that GE’s revised operational and financial strategies for GE Capital
“are supportive of” GE’s and GE Capital’s “Aaa” long-term and “Prime-1”
short-term ratings with a stable outlook. In light of the difficulties in the
financial services industry and the difficult financial markets, however, there
can be no assurance that GE will successfully complete these steps or, in the
event of further deterioration in the financial markets, that completion
of these steps and any others GE might take in response, will be sufficient to
allow it to maintain its “Triple A” ratings. Failure to do so could adversely
affect GE’s cost of funds and related margins, liquidity, competitive position
and access to capital markets.
Other
Business Risks
Our
global growth is subject to a number of economic and political
risks.
We
conduct our operations in virtually every part of the world. Global economic
developments affect businesses such as ours in many ways. Operations are also
subject to the effects of global competition. Our global business is affected by
local economic environments, including inflation, recession and currency
volatility. Political changes, some of which may be disruptive, can interfere
with our supply chain, our customers and all of our activities in a particular
location. While some of these risks can be hedged using derivatives or other
financial instruments and some are insurable, such attempts to mitigate
these risks are costly and not always successful, and our ability to engage in
such mitigation has decreased or become even more costly as a result of recent
market developments.
The
success of our business depends on achieving our objectives for strategic
acquisitions and dispositions.
With
respect to acquisitions and mergers, we may not be able to identify suitable
candidates at terms acceptable to us, or may not achieve expected returns and
other benefits as a result of integration challenges, such as personnel and
technology. We will continue to evaluate the potential disposition of assets and
businesses that may no longer help us meet our objectives. When we decide to
sell assets or a business, we may encounter difficulty in finding buyers or
alternative exit strategies on acceptable terms in a timely manner, which could
delay the accomplishment of our strategic objectives, or we may dispose of a
business at a price or on terms that are less than we had anticipated. These
difficulties have been exacerbated in the current credit environment because
buyers have difficulty obtaining the necessary financing. In addition, there is
a risk that we may sell a business whose subsequent performance exceeds our
expectations, in which case our decision would have potentially sacrificed
enterprise value. We also may be too optimistic about a particular business’s
prospects, in which case we may be unable to find a buyer at a price acceptable
to us and therefore may have potentially sacrificed enterprise
value.
We
are subject to a wide variety of laws and regulations.
Our
businesses are subject to regulation by U.S. federal and state laws and foreign
laws, regulations and policies. Changes to laws or regulations may require us to
modify our business objectives or affect our returns on investment if existing
practices become more restricted, subject to escalating costs or prohibited
outright. Particular risks include regulatory risks arising from local laws,
such as laws that reduce the allowable lending rate or limit consumer borrowing,
from local liquidity regulations that may increase the risks of not being able
to retrieve assets, and changes to tax law that may affect our return on
investments. For example, GE’s effective tax rate is reduced because active
business income earned and indefinitely reinvested outside the United States is
taxed at less than the U.S. rate. A significant portion of this reduction
depends upon a provision of U.S. tax law that defers the imposition of U.S. tax
on certain active financial services income until that income is repatriated to
the United States as a dividend. This provision
is consistent with international tax norms and permits U.S. financial services
companies to compete more effectively with foreign banks and other foreign
financial institutions in global markets. This provision, currently scheduled to
expire at the end of 2009, has been scheduled to expire and has been extended by
Congress on five previous occasions, including in October of 2008, but there can
be no assurance that it will continue to be extended. In the event this
provision is not extended after 2009, the current U.S. tax imposed on active
financial services income earned outside the United States would increase,
making it more difficult for U.S. financial services companies to compete in
global markets. If this provision is not extended, we expect our effective tax
rate to increase significantly after 2011.
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Exhibit
12
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Computation
of Ratio of Earnings to Fixed Charges.*
|
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Exhibit
31(a)
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Amended.*
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Exhibit
31(b)
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Amended.*
|
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Exhibit
32
|
Certification
Pursuant to 18 U.S.C. Section 1350.*
|
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Exhibit
99
|
Financial
Measures That Supplement Generally Accepted Accounting
Principles.*
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|
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*
Filed electronically herewith.
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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)
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October
30, 2008
|
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/s/
Jamie S. Miller
|
|
Date
|
|
Jamie
S. Miller
Senior
Vice President and Controller
Duly
Authorized Officer and Principal Accounting Officer
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