10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

 

(Mark One)

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

Commission file number 001-00035

GENERAL ELECTRIC COMPANY

(Exact name of registrant as specified in its charter)

 

New York

    

14-0689340

(State or other jurisdiction of incorporation or

organization)

     (I.R.S. Employer Identification No.)

3135 Easton Turnpike, Fairfield, CT

    

06828-0001

(Address of principal executive offices)      (Zip Code)

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 þ   Accelerated filer ¨
Non-accelerated filer ¨   Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

There were 10,654,718,000 shares of common stock with a par value of $0.06 per share outstanding at September 24, 2010.


Table of Contents

 

General Electric Company

 

         Page      

Part I – Financial Information

  

Item 1. Financial Statements

  

Condensed Statement of Earnings

     3   

Three Months Ended September 30, 2010

     3   

Nine Months Ended September 30, 2010

     4   

Condensed Statement of Financial Position

     5   

Condensed Statement of Cash Flows

     6   

Summary of Operating Segments

     7   

Notes to Condensed, Consolidated Financial Statements (Unaudited)

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     50   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     76   

Item 4. Controls and Procedures

     77   

Part II – Other Information

  

Item 1. Legal Proceedings

     77   

Item 2. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     77   

Item 6. Exhibits

     78   

Signatures

     79   

Forward-Looking Statements

This document contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: current economic and financial conditions, including volatility in interest and exchange rates, commodity and equity prices and the value of financial assets; the impact of conditions in the financial and credit markets on the availability and cost of General Electric Capital Corporation’s (GECC) funding and on our ability to reduce GECC’s asset levels as planned; the impact of conditions in the housing market and unemployment rates on the level of commercial and consumer credit defaults; changes in Japanese consumer behavior that may affect our estimates of liability for excess interest refund claims (Grey Zone); our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so; the adequacy of our cash flow and earnings and other conditions which may affect our ability to pay our quarterly dividend at the planned level; the level of demand and financial performance of the major industries we serve, including, without limitation, air and rail transportation, energy generation, network television, real estate and healthcare; the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including the impact of financial services regulation; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses; 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.

 

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Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements.

General Electric Company and consolidated affiliates

Condensed Statement of Earnings

 

     Three months ended September 30 (Unaudited)  
     Consolidated      GE(a)      Financial Services (GECS)  
(In millions, except share amounts)    2010      2009      2010      2009      2010      2009  
 

Revenues

                 

Sales of goods

   $     14,525       $     14,627       $     14,485       $     14,486       $ 40       $ 213   

Sales of services

     9,076         10,516         9,108         10,639         –          –    

Other income

     187         438         223         476         –          –    

GECS earnings from continuing operations

     –          –          832         133         –          –    

GECS revenues from services

     12,100         12,218         –          –          12,429         12,533   
                                                     

Total revenues

     35,888         37,799         24,648         25,734         12,469         12,746   
                                                     
 

Costs and expenses

                 

Cost of goods sold

     10,557         11,775         10,517         11,666         39         181   

Cost of services sold

     6,069         6,773         6,102         6,897         –          –    

Interest and other financial charges

     4,039         4,322         393         352         3,790         4,128   

Investment contracts, insurance losses and insurance annuity benefits

     741         732         –          –          796         785   

Provision for losses on financing receivables

     1,696         2,868         –          –          1,696         2,868   

Other costs and expenses

     9,146         9,354         3,632         3,714         5,680         5,781   
                                                     

Total costs and expenses

     32,248         35,824         20,644         22,629         12,001         13,743   
                                                     
 

Earnings (loss) from continuing operations before income taxes

     3,640         1,975         4,004         3,105         468         (997)   

Benefit (provision) for income taxes

     (318)         484         (705)         (654)         387         1,138   
                                                     

Earnings from continuing operations

     3,322         2,459         3,299         2,451         855         141   

Earnings (loss) from discontinued operations, net of taxes

     (1,105)         40         (1,105)         40         (1,104)         40   
                                                     

Net earnings (loss)

     2,217         2,499         2,194         2,491         (249)         181   

Less net earnings (loss) attributable to noncontrolling interests

     162                139         (3)         23          
                                                     

Net earnings (loss) attributable to the Company

     2,055         2,494         2,055         2,494         (272)         173   

Preferred stock dividends declared

     (75)         (75)         (75)         (75)         –          –    
                                                     

Net earnings (loss) attributable to GE common shareowners

   $ 1,980       $ 2,419       $ 1,980       $ 2,419       $ (272)       $ 173   
                                                     
   

Amounts attributable to the Company

                 

Earnings from continuing operations

   $ 3,160       $ 2,454       $ 3,160       $ 2,454       $ 832       $ 133   

Earnings (loss) from discontinued operations, net of taxes

     (1,105)         40         (1,105)         40         (1,104)         40   
                                                     

Net earnings (loss) attributable to the Company

   $ 2,055       $ 2,494       $ 2,055       $ 2,494       $ (272)       $ 173   
                                                     

Per-share amounts

                 

Earnings from continuing operations

                 

Diluted earnings per share

   $ 0.29       $ 0.22               

Basic earnings per share

   $ 0.29       $ 0.22               

Net earnings

                 

Diluted earnings per share

   $ 0.18       $ 0.23               

Basic earnings per share

   $ 0.18       $ 0.23               

Dividends declared per common share

   $ 0.12       $ 0.10               
   

 

(a) Represents the adding together of all affiliated companies except General Electric Capital Services, Inc. (GECS or financial services), which is presented on a one-line basis.

See Note 3 for other-than-temporary impairment amounts.

See accompanying notes. Separate information is shown for “GE” and “Financial Services (GECS).” Transactions between GE and GECS have been eliminated from the “Consolidated” columns.

 

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Table of Contents

 

General Electric Company and consolidated affiliates

Condensed Statement of Earnings

 

     Nine months ended September 30 (Unaudited)  
     Consolidated      GE(a)      Financial Services (GECS)  
(In millions, except share amounts)    2010      2009      2010      2009      2010      2009  
 

Revenues

                 

Sales of goods

   $     43,195       $     44,605       $     42,710       $     44,000       $ 489       $ 691   

Sales of services

     28,583         30,743         28,795         31,159         –          –    

Other income

     815         900         903         1,035         –          –    

GECS earnings from continuing operations

     –          –          2,193         1,479         –          –    

GECS revenues from services

     37,344         39,097         –          –          38,299         39,969   
                                                     

Total revenues

     109,937         115,345         74,601         77,673         38,788         40,660   
                                                     
 

Costs and expenses

                 

Cost of goods sold

     32,258         35,658         31,803         35,175         458         569   

Cost of services sold

     19,076         19,760         19,288         20,177         –          –    

Interest and other financial charges

     12,371         14,302         1,166         1,076         11,598         13,717   

Investment contracts, insurance losses and insurance annuity benefits

     2,210         2,257         –          –          2,353         2,381   

Provision for losses on financing receivables

     5,968         8,021         –          –          5,968         8,021   

Other costs and expenses

     27,300         27,624         10,758         10,634         17,050         17,381   
                                                     

Total costs and expenses

     99,183         107,622         63,015         67,062         37,427         42,069   
                                                     
 

Earnings (loss) from continuing operations before income taxes

     10,754         7,723         11,586         10,611         1,361         (1,409)   

Benefit (provision) for income taxes

     (1,634)         566         (2,479)         (2,393)         845         2,959   
                                                     

Earnings from continuing operations

     9,120         8,289         9,107         8,218         2,206         1,550   

Loss from discontinued operations, net of taxes

     (1,683)         (175)         (1,683)         (175)         (1,679)         (157)   
                                                     

Net earnings

     7,437         8,114         7,424         8,043         527         1,393   

Less net earnings attributable to noncontrolling interests

     328         102         315         31         13         71   
                                                     

Net earnings attributable to the Company

     7,109         8,012         7,109         8,012         514         1,322   

Preferred stock dividends declared

     (225)         (225)         (225)         (225)         –          –    
                                                     

Net earnings attributable to GE common shareowners

   $ 6,884       $ 7,787       $ 6,884       $ 7,787       $ 514       $ 1,322   
                                                     
   

Amounts attributable to the Company

                 

Earnings from continuing operations

   $ 8,792       $ 8,187       $ 8,792       $ 8,187       $ 2,193       $ 1,479   

Loss from discontinued operations, net of taxes

     (1,683)         (175)         (1,683)         (175)         (1,679)         (157)   
                                                     

Net earnings attributable to the Company

   $ 7,109       $ 8,012       $ 7,109       $ 8,012       $ 514       $ 1,322   
                                                     

Per-share amounts

                 

Earnings from continuing operations

                 

Diluted earnings per share

   $ 0.80       $ 0.75               

Basic earnings per share

   $ 0.80       $ 0.75               

Net earnings

                 

Diluted earnings per share

   $ 0.64       $ 0.73               

Basic earnings per share

   $ 0.64       $ 0.73               

Dividends declared per common share

   $ 0.32       $ 0.51               
   

 

(a) Represents the adding together of all affiliated companies except General Electric Capital Services, Inc. (GECS or financial services), which is presented on a one-line basis.

See Note 3 for other-than-temporary impairment amounts.

See accompanying notes. Separate information is shown for “GE” and “Financial Services (GECS).” Transactions between GE and GECS have been eliminated from the “Consolidated” columns.

 

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Table of Contents

 

General Electric Company and consolidated affiliates

Condensed Statement of Financial Position

 

     Consolidated      GE(a)      Financial Services (GECS)  
(In millions, except share amounts)    September 30,
2010
     December 31,
2009
     September 30,
2010
     December 31,
2009
     September 30,
2010
     December 31,
2009
 
     (Unaudited)             (Unaudited)             (Unaudited)         

Assets

                 

Cash and equivalents

   $ 78,392       $ 72,260       $ 12,999       $ 8,654       $ 66,016       $ 64,356   

Investment securities

     45,690         51,941         18         30         45,674         51,913   

Current receivables

     17,738         16,458         9,704         9,818         –          –    

Inventories

     11,997         11,987         11,935         11,916         62         71   

Financing receivables – net

     322,294         329,232         –          –          331,343         336,926   

Other GECS receivables

     8,672         14,177         –          –          13,324         18,752   

Property, plant and equipment – net

     65,538         69,212         11,848         12,495         53,690         56,717   

Investment in GECS

     –          –          66,853         70,833         –          –    

Goodwill

     64,128         65,574         36,300         36,613         27,828         28,961   

Other intangible assets – net

     10,231         11,929         7,954         8,450         2,277         3,479   

All other assets

     98,842         103,417         17,409         17,097         82,440         87,471   

Assets of businesses held for sale

     33,969         34,111         33,183         33,986         786         125   

Assets of discontinued operations

     1,333         1,520         50         50         1,283         1,470   
                                                     

Total assets(b)

   $ 758,824       $ 781,818       $ 208,253       $ 209,942       $ 624,723       $ 650,241   
                                                     

Liabilities and equity

                 

Short-term borrowings

   $ 114,879       $ 130,252       $ 393       $ 504       $ 115,750       $ 131,137   

Accounts payable, principally trade accounts

     14,617         19,703         10,438         10,373         8,335         13,275   

Progress collections and price adjustments accrued

     11,048         12,192         11,653         12,957         –          –    

Other GE current liabilities

     14,864         14,527         14,864         14,527         –          –    

Non-recourse borrowings of consolidated securitization entities

     30,497         3,883         –          –          30,497         3,883   

Bank deposits

     41,928         38,923         –          –          41,928         38,923   

Long-term borrowings

     307,517         337,134         9,962         11,681         298,277         326,391   

Investment contracts, insurance liabilities and insurance annuity benefits

     31,255         31,641         –          –          31,688         32,009   

All other liabilities

     56,602         58,861         35,075         35,232         21,646         23,756   

Deferred income taxes

     1,993         2,173         (3,926)         (4,620)         5,919         6,793   

Liabilities of businesses held for sale

     10,592         6,092         10,146         6,037         446         55   

Liabilities of discontinued operations

     2,422         1,301         164         163         2,258         1,138   
                                                     

Total liabilities(b)

     638,214         656,682         88,769         86,854         556,744         577,360   
                                                     

Preferred stock (30,000 shares outstanding at both September 30, 2010 and December 31, 2009)

     –          –          –          –          –          –    

Common stock (10,654,718,000 and 10,663,075,000 shares outstanding at September 30, 2010 and December 31, 2009, respectively)

     702         702         702         702                 

Accumulated other comprehensive income – net(c)

                 

Investment securities

     (615)         (435)         (615)         (435)         (617)         (436)   

Currency translation adjustments

     (963)         3,836         (963)         3,836         (1,592)         1,372   

Cash flow hedges

     (1,529)         (1,734)         (1,529)         (1,734)         (1,529)         (1,769)   

Benefit plans

     (15,657)         (16,932)         (15,657)         (16,932)         (383)         (434)   

Other capital

     36,982         37,729         36,982         37,729         27,583         27,591   

Retained earnings

     128,126         126,363         128,126         126,363         43,390         44,508   

Less common stock held in treasury

     (31,510)         (32,238)         (31,510)         (32,238)         –          –    
                                                     

Total GE shareowners’ equity

     115,536         117,291         115,536         117,291         66,853         70,833   

Noncontrolling interests(d)

     5,074         7,845         3,948         5,797          1,126         2,048   
                                                     

Total equity

     120,610         125,136         119,484         123,088         67,979         72,881   
                                                     

Total liabilities and equity

   $ 758,824       $ 781,818       $ 208,253       $ 209,942       $ 624,723       $ 650,241   
                                                     
   

 

(a) Represents the adding together of all affiliated companies except General Electric Capital Services, Inc. (GECS or financial services), which is presented on a one-line basis.
(b) Our consolidated assets at September 30, 2010 include total assets of $49,945 million of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs. These assets include net financing receivables of $40,168 million and investment securities of $7,213 million. Our consolidated liabilities at September 30, 2010 include liabilities of certain VIEs for which the VIE creditors do not have recourse to GE. These liabilities include non-recourse borrowings of consolidated securitization entities (CSEs) of $29,833 million. See Note 16.
(c) The sum of accumulated other comprehensive income - net was $(18,764) million and $(15,265) million at September 30, 2010 and December 31, 2009, respectively.
(d) Included accumulated other comprehensive income - net attributable to noncontrolling interests of $(161) million and $(188) million at September 30, 2010 and December 31, 2009, respectively.

See accompanying notes. Separate information is shown for “GE” and “Financial Services (GECS).” Transactions between GE and GECS have been eliminated from the “Consolidated” columns.

 

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Table of Contents

 

General Electric Company and consolidated affiliates

Condensed Statement of Cash Flows

 

     Nine months ended September 30 (Unaudited)  
     Consolidated      GE(a)      Financial Services (GECS)  
(In millions)    2010      2009      2010      2009      2010      2009  

 

Cash flows – operating activities

                 

Net earnings

   $     7,437       $     8,114       $     7,424       $     8,043       $ 527       $ 1,393   

Less net earnings attributable to noncontrolling interests

     328         102         315         31         13         71   
                                                     

Net earnings attributable to the Company

     7,109         8,012         7,109         8,012         514         1,322   

Loss from discontinued operations

     1,683         175         1,683         175         1,679         157   

Adjustments to reconcile net earnings attributable to the Company to cash provided from operating activities

                 

Depreciation and amortization of property, plant and equipment

     7,477         7,893         1,668         1,696         5,809         6,197   

Earnings from continuing operations retained by GECS

     –          –          (2,193)         (1,479)         –          –    

Deferred income taxes

     (1,735)         281         (198)         (179)         (1,537)         460   

Decrease (increase) in GE current receivables

     689         2,181         307         2,330         –          –    

Decrease (increase) in inventories

     (118)         350         (82)         412                (2)   

Increase (decrease) in accounts payable

     1,037         (1,355)         639         (869)         609         (1,288)   

Increase (decrease) in GE progress collections

     (1,291)         (194)         (1,366)                –          –    

Provision for losses on GECS financing receivables

     5,968         8,021         –          –          5,968         8,021   

All other operating activities

     5,836         (11,374)         2,575         1,339         3,464         (12,898)   
                                                     

Cash from (used for) operating activities – continuing operations

     26,655         13,990         10,142         11,442         16,515         1,969   

Cash from (used for) operating activities – discontinued operations

     (179)         (62)         –          (2)         (179)         (60)   
                                                     

Cash from (used for) operating activities

     26,476         13,928         10,142         11,440         16,336         1,909   
                                                     

Cash flows – investing activities

                 

Additions to property, plant and equipment

     (4,415)         (5,808)         (1,484)         (1,770)         (3,138)         (4,231)   

Dispositions of property, plant and equipment

     3,106         3,689         –          –          3,106         3,689   

Net decrease (increase) in GECS financing receivables

     25,798         37,117         –          –          26,543         36,953   

Proceeds from principal business dispositions

     2,787         9,676         1,712         858         905         8,818   

Payments for principal businesses purchased

     (576)         (5,994)         (15)         (357)         (561)         (5,637)   

Capital contribution from GE to GECS

     –          –          –          (9,500)         –          –    

All other investing activities

     7,728         (3,707)         (270)         (2)         7,842         (2,781)   
                                                     

Cash from (used for) investing activities – continuing operations

     34,428         34,973         (57)         (10,771)         34,697         36,811   

Cash from (used for) investing activities – discontinued operations

     112         66         –                 112         64   
                                                     

 

Cash from (used for) investing activities

  

 

 

 

34,540 

 

 

  

 

 

 

35,039 

 

 

  

 

 

 

(57)

 

  

  

 

 

 

(10,769)

 

  

  

 

 

 

34,809 

 

 

  

 

 

 

36,875 

 

 

                                                     

Cash flows – financing activities

                 

Net increase (decrease) in borrowings (maturities of 90 days or less)

     (1,985)         (23,578)         (1,288)         (12)         (822)         (24,390)   

Net increase (decrease) in bank deposits

     4,159         (6,072)         –          –          4,159         (6,072)   

Newly issued debt (maturities longer than 90 days)

     31,424         70,270         4,133         1,825         27,075         68,623   

Repayments and other reductions (maturities longer than 90 days)

     (78,774)         (66,517)         (2,251)         (1,598)         (76,523)         (64,919)   

Net dispositions (purchases) of GE shares for treasury

     (438)         498         (438)         498         –          –    

Dividends paid to shareowners

     (3,434)         (7,845)         (3,434)         (7,845)         –          –    

Capital contribution from GE to GECS

     –          –          –          –          –          9,500   

Purchase of subsidiary shares from noncontrolling interest

     (2,000)         –          (2,000)         –          –          –    

All other financing activities

     (2,678)         (2,324)         (274)         (445)         (2,404)         (1,879)   
                                                     

Cash from (used for) financing activities – continuing operations

     (53,726)         (35,568)         (5,552)         (7,577)         (48,515)         (19,137)   

Cash from (used for) financing activities – discontinued operations

     –          –          –          –          –          –    
                                                     

Cash from (used for) financing activities

     (53,726)         (35,568)         (5,552)         (7,577)         (48,515)         (19,137)   
                                                     

Effect of currency exchange rate changes on cash and equivalents

     (1,225)         (208)         (188)         23         (1,037)         (231)   
                                                     

Increase (decrease) in cash and equivalents

     6,065         13,191         4,345         (6,883)         1,593         19,416   

Cash and equivalents at beginning of year

     72,444         48,367         8,654         12,090         64,540         37,666   
                                                     

Cash and equivalents at September 30

     78,509         61,558         12,999         5,207         66,133         57,082   

Less cash and equivalents of discontinued operations at September 30

     117         184         –          –          117         184   
                                                     

Cash and equivalents of continuing operations at September 30

   $ 78,392       $ 61,374       $ 12,999       $ 5,207       $ 66,016       $ 56,898   
                                                     
   
(a) Represents the adding together of all affiliated companies except General Electric Capital Services, Inc. (GECS or financial services), which is presented on a one-line basis.

See accompanying notes. Separate information is shown for “GE” and “Financial Services (GECS).” Transactions between GE and GECS have been eliminated from the “Consolidated” columns and are discussed in Note 17.

 

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Summary of Operating Segments

General Electric Company and consolidated affiliates

 

     Three months ended September 30
(Unaudited)
     Nine months ended September 30
(Unaudited)
 
(In millions)    2010      2009      2010      2009  

Revenues

           

Energy Infrastructure(a)

   $ 8,359       $ 9,769       $ 26,554       $ 29,310   

Technology Infrastructure(a)

     9,210         9,306         26,930         28,466   

NBC Universal

     4,069         4,079         12,139         11,168   

GE Capital(a)

     11,616         12,005         36,244         38,516   

Home & Business Solutions(a)

     2,125         2,136         6,315         6,229   
                                   

Total segment revenues

     35,379         37,295         108,182         113,689   

Corporate items and eliminations

     509         504         1,755         1,656   
                                   

Consolidated revenues

   $ 35,888       $ 37,799       $ 109,937       $ 115,345   
                                   

Segment profit(b)

           

Energy Infrastructure(a)

   $ 1,656       $ 1,649       $ 5,047       $ 4,830   

Technology Infrastructure(a)

     1,474         1,645         4,431         5,090   

NBC Universal

     625         732         1,431         1,662   

GE Capital(a)

     871         141         2,308         1,601   

Home & Business Solutions(a)

     104         104         318         239   
                                   

Total segment profit

     4,730         4,271         13,535         13,422   

Corporate items and eliminations

     (472)         (811)         (1,098)         (1,766)   

GE interest and other financial charges

     (393)         (352)         (1,166)         (1,076)   

GE provision for income taxes

     (705)         (654)         (2,479)         (2,393)   
                                   

Earnings from continuing operations attributable to the Company

     3,160         2,454         8,792         8,187   

Earnings (loss) from discontinued operations, net of taxes, attributable to the Company

     (1,105)         40         (1,683)         (175)   
                                   

Consolidated net earnings attributable to the Company

   $ 2,055       $ 2,494       $ 7,109       $ 8,012   
                                   
   

 

(a) Effective January 1, 2010, we reorganized our segments. We have reclassified prior-period amounts to conform to the current-period presentation. See Note 1 for a description of the reorganization.
(b) Segment profit always excludes the effects of principal pension plans, results reported as discontinued operations, earnings attributable to noncontrolling interests of consolidated subsidiaries and accounting changes, and 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 acquisitions or dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team. Segment profit excludes or includes interest and other financial charges and income taxes according to how a particular segment’s management is measured – excluded in determining segment profit, which we sometimes refer to as “operating profit,” for Energy Infrastructure, Technology Infrastructure, NBC Universal and Home & Business Solutions; included in determining segment profit, which we sometimes refer to as “net earnings,” for GE Capital.

See accompanying notes.

 

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Notes to Condensed, Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed, consolidated financial statements represent the consolidation of General Electric Company and all companies that we directly or indirectly control, either through majority ownership or otherwise. See Note 1 to the consolidated financial statements for the year ended December 31, 2009, included in our Form 8-K filed on May 6, 2010, which discusses our consolidation and financial statement presentation. As used in this report on Form 10-Q (Report) and in our 2009 consolidated financial statements, “GE” represents the adding together of all affiliated companies except General Electric Capital Services, Inc. (GECS or financial services), which is presented on a one-line basis; GECS consists of General Electric Capital Services, Inc. and all of its affiliates; and “Consolidated” represents the adding together of GE and GECS with the effects of transactions between the two eliminated.

Effective January 1, 2010, we reorganized our segments to better align our Consumer & Industrial and Energy businesses for growth. As a result of this reorganization, we created a new segment called Home & Business Solutions that includes the Appliances and Lighting businesses from our previous Consumer & Industrial segment and the retained portion of the GE Fanuc Intelligent Platforms business of our previous Enterprise Solutions business (formerly within our Technology Infrastructure segment). In addition, the Industrial business of our previous Consumer & Industrial segment and the Sensing & Inspection Technologies and Digital Energy businesses of our previous Enterprise Solutions business are now part of the Energy business within the Energy Infrastructure segment. The Security business of Enterprise Solutions is reported in Corporate Items and Eliminations for periods prior to its sale in the first quarter of 2010. Also, effective January 1, 2010, the Capital Finance segment was renamed GE Capital and includes all of the continuing operations of General Electric Capital Corporation (GECC). In addition, the Transportation Financial Services business, previously reported in GE Capital Aviation Services (GECAS), is now included in Commercial Lending and Leasing (CLL) and our Consumer business in Italy, previously reported in Consumer, is now included in CLL. GE includes Energy Infrastructure, Technology Infrastructure, NBC Universal (NBCU) and Home & Business Solutions. GECS includes GE Capital.

Beginning in the first quarter of 2010, we have included a separate line on the statement of cash flows for the effect of currency exchange rate changes on cash and equivalents. We had previously included the effect of currency exchange rate changes on cash and equivalents in “All other operating activities” for GE and “All other investing activities” for GECS, as the effect was insignificant.

We have reclassified certain prior-period amounts to conform to the current-period presentation. Unless otherwise indicated, information in these notes to the condensed, consolidated financial statements relates to continuing operations.

Accounting Changes

On January 1, 2010, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2009-16 and ASU 2009-17, amendments to Accounting Standards Codification (ASC) 860, Transfers and Servicing, and ASC 810, Consolidation, respectively (ASU 2009-16 & 17). ASU 2009-16 eliminates the Qualified Special Purpose Entity (QSPE) concept, and ASU 2009-17 requires that all such entities be evaluated for consolidation as Variable Interest Entities (VIEs). Adoption of these amendments resulted in the consolidation of all of our sponsored QSPEs. In addition, we consolidated assets of VIEs related to direct investments in entities that hold loans and fixed income securities, a media joint venture and a small number of companies to which we have extended loans in the ordinary course of business and subsequently were subject to a troubled debt restructuring (TDR).

 

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We consolidated the assets and liabilities of these entities at amounts at which they would have been reported in our financial statements had we always consolidated them. We also deconsolidated certain entities where we did not meet the definition of the primary beneficiary under the revised guidance; however the effect was insignificant at January 1, 2010. The incremental effect on total assets and liabilities, net of our investment in these entities, was an increase of $31,097 million and $33,042 million, respectively, at January 1, 2010. The net reduction of total equity (including noncontrolling interests) was $1,945 million at January 1, 2010, principally related to the reversal of previously recognized securitization gains as a cumulative effect adjustment to retained earnings. See Note 16 for additional information.

The amended guidance on ASC 860 changed existing derecognition criteria in a manner that significantly narrows the types of transactions that will qualify as sales. The revised criteria apply to transfers of financial assets occurring after December 31, 2009.

Interim Period Presentation

The condensed, consolidated financial statements and notes thereto are unaudited. 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 2009 consolidated financial statements. 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.

2. ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE AND DISCONTINUED OPERATIONS

Assets and Liabilities of Businesses Held for Sale

NBC Universal

On December 3, 2009, we entered into an agreement with Comcast Corporation (Comcast) to transfer the assets of the NBCU business to a newly formed entity, which will consist of our NBCU businesses and Comcast’s cable networks, regional sports networks, certain digital properties and certain unconsolidated investments. Pursuant to the transaction, we currently expect to receive $6,400 million in cash from Comcast ($7,100 million less certain adjustments based on various events between contract signing and closing) and will own a 49% interest in the newly formed entity, which we will account for under the equity method. The transaction is subject to receipt of various regulatory approvals and is expected to close within the next three months.

On September 26, 2010, we acquired approximately 38% of Vivendi S.A.’s (Vivendi) interest in NBCU (7.7% of NBCU’s outstanding shares) for $2,000 million. Provided the transaction described above subsequently closes, we will acquire the remaining Vivendi interest in NBCU for $3,578 million and make an additional payment of $222 million related to the previously purchased shares.

 

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On March 19, 2010, NBCU entered into a three-year credit agreement and a 364-day bridge loan agreement. On April 30, 2010, NBCU issued $4,000 million of senior, unsecured notes with maturities ranging from 2015 to 2040 (interest rates ranging from 3.65% to 6.40%). On October 4, 2010, NBCU issued $5,100 million of senior, unsecured notes with maturities ranging from 2014 to 2041 (interest rates ranging from 2.10% to 5.95%). Subsequent to these issuances, the credit agreement and bridge loan agreement were terminated, with a $750 million revolving credit agreement remaining in effect. If the transaction described above has not closed before June 10, 2011 or such earlier date as the master agreement governing the transaction is terminated, NBCU will redeem the senior, unsecured notes at a redemption price equal to 101% of the aggregate principal amount. Proceeds from these issuances were transferred to us. Following the completion of the sale, we expect to realize approximately $7,900 million in cash after debt reduction, transaction fees and the buyout of the Vivendi interest in NBCU.

With respect to our 49% interest in the newly formed entity, we will hold redemption rights, which, if exercised, cause the entity to purchase half of our ownership interest after 3.5 years and the remaining half after 7 years subject to certain exceptions, conditions and limitations. Our interest will also be subject to call provisions, which, if exercised, allow Comcast to purchase our interest at specified times subject to certain exceptions. The redemption price for such transactions is determined pursuant to a formula specified in the agreement.

At December 31, 2009, we classified the NBCU assets and liabilities of $32,150 million and $5,751 million, respectively, as held for sale. The major classes of assets are current receivables ($2,136 million), property, plant and equipment – net ($1,805 million), goodwill and other intangible assets – net ($21,574 million) and all other assets ($6,514 million), including film and television production costs of $4,507 million. The major classes of liabilities are accounts payable ($398 million), other GE current liabilities ($4,051 million) and all other liabilities ($1,300 million).

At September 30, 2010, NBCU assets and liabilities of $33,180 million and $10,146 million, respectively, were classified as held for sale. The major classes of assets are current receivables ($2,019 million), property, plant and equipment – net ($1,976 million), goodwill and other intangible assets – net ($22,239 million) and all other assets ($6,813 million), including film and television production costs of $4,551 million. The major classes of liabilities are accounts payable ($516 million), other GE current liabilities ($3,745 million), all other liabilities ($1,207 million) and long-term borrowings ($4,810 million).

Other

On February 28, 2010, we completed the sale of our Security business for $1,787 million. Assets and liabilities of $1,780 million and $282 million, respectively, were classified as held for sale at December 31, 2009.

In June 2010, we committed to sell our GE Capital Consumer businesses in Indonesia and Argentina. In September 2010, we committed to sell our GE Capital Consumer business in Brazil. Assets of $756 million and liabilities of $396 million were classified as held for sale at September 30, 2010.

 

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Summarized financial information for businesses held for sale is shown below.

 

(In millions)    September 30,
2010
     December 31,
2009
 

Assets

     

Cash and equivalents

   $ 66      $   

Current receivables

     2,019        2,188  

Financing receivables – net

     590          

Property, plant and equipment – net

     2,018        1,978  

Goodwill

     19,601        20,086  

Other intangible assets – net

     2,676        2,866  

All other assets

     6,838        6,621  

Other

     161        372  
                 

Assets of businesses held for sale

   $ 33,969      $ 34,111  
                 

Liabilities

     

Accounts payable

   $ 533      $ 451  

Other GE current liabilities

     3,745        4,139  

All other liabilities

     1,193        1,447  

Long-term borrowings

     4,860        2  

Other

     261        53  
                 

Liabilities of businesses held for sale

   $ 10,592      $ 6,092  
                 

Discontinued Operations

Discontinued operations comprised GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC) and Plastics. Associated results of operations, financial position and cash flows are separately reported as discontinued operations for all periods presented.

Summarized financial information for discontinued GECS operations is shown below.

 

     Three months ended September 30      Nine months ended September 30  
(In millions)    2010      2009      2010      2009  

Total revenues

   $ (1)       $ 4      $ (4)       $ (4)   
                                   

Earnings (loss) from discontinued operations, net of taxes

           

Loss from operations

   $ (4)       $ (5)       $ (13)       $ (75)   

Earnings (loss) on disposal

     (1,100)         45         (1,666)         (82)   
                                   

Total earnings (loss) from discontinued operations, net of taxes

   $ (1,104)       $ 40       $ (1,679)       $ (157)   
                                   

Assets of GECS discontinued operations were $1,283 million and $1,470 million at September 30, 2010 and December 31, 2009, respectively, and primarily comprised a deferred tax asset for a loss carryforward, which expires in 2015, related to the sale of our GE Money Japan business. Liabilities of GECS discontinued operations were $2,258 million and $1,138 million at September 30, 2010 and December 31, 2009, respectively. During the nine months ended September 30, 2010, we recorded incremental reserves of $1,666 million for excess interest claims related to our loss-sharing arrangement on the 2008 sale of GE Money Japan. During the first quarter of 2010, we also reduced tax reserves by $325 million related to resolution of an uncertain tax position in Japan, but were required to record an offsetting valuation allowance on our deferred tax asset in Japan.

 

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GE Money Japan

During the third quarter of 2007, we committed to a plan to sell our Japanese personal loan business, 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 third quarter of 2008, we completed the sale of GE Money Japan, which included Lake, along with our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd. As a result, we recognized an after-tax loss of $908 million in 2007 and an incremental loss of $361 million in 2008. In connection with the sale, we reduced the proceeds on the sale for estimated interest refund claims in excess of the statutory interest rate. Proceeds from the sale were to be increased or decreased based on the actual claims experienced in accordance with loss-sharing terms specified in the sale agreement, with all claims in excess of 258 billion Japanese Yen (approximately $3,000 million) remaining our responsibility. The underlying portfolio to which this obligation relates is in runoff and interest rates were capped for all designated accounts by mid-2009. In the third quarter of 2010, we began making reimbursements under this arrangement.

We update our estimate of our share of expected excess interest refund claim losses quarterly. We recorded a reserve of $132 million in the second quarter of 2009 for our estimated share of incremental losses under the loss-sharing provisions of the agreement based on our experience at that time. In 2010, our overall claims experience has developed unfavorably. While the number of new claims continues to decline from 2009, the pace of the decline has been slower than expected and claims severity has increased. We believe that the level of excess interest refund claims has been impacted by the challenging global economic conditions, in addition to Japanese legislative and regulatory changes. During the first six months of 2010, we accrued $566 million of incremental reserves for these claims.

While our average daily claims continued to decline through August 2010, we observed an increase in claims during September 2010 and higher call and claim volume in October 2010. Additionally, a large independent personal loan company in Japan filed for bankruptcy in September 2010. Based on these factors and additional analysis completed in the third quarter, we recorded an adjustment to our reserves of $1,100 million to bring the reserve to a better estimate of our probable loss. This adjustment primarily reflects revisions in our assumptions and calculations of the number of estimated probable future incoming claims, increases in claims severity assumptions, reflecting recent trends in amounts paid per claim, and higher estimates of loss for claims in process of settlement. As of September 30, 2010, our reserve for reimbursement of claims in excess of the statutory interest rate was $1,667 million.

The amount of these reserves is based on analyses of recent and historical claims experience, pending and estimated future excess interest refund requests, the estimated percentage of customers who present valid requests, and our estimated payments related to those requests. Our estimated liability for excess interest refund claims at September 30, 2010 assumes the pace of incoming claims will decelerate (but at a lower rate than we had previously assumed), average exposure per claim remains consistent with recent experience, and we see the impact of our loss mitigation efforts. Estimating the pace of decline in incoming claims can have a significant effect on the total amount of our liability. For example, our estimate assumes incoming average daily claims will decline at a long-term average of four percent monthly. Holding all other assumptions constant, if claims declined at a rate of one percent higher or lower than assumed, our liability estimate would change by approximately $250 million.

Based on what we know today, we believe that our reserve for excess interest refund claims represents a better estimate of our probable loss. Uncertainties around the impact of laws and regulations, challenging economic conditions, the runoff status of the underlying book of business and the effects of our mitigation efforts make it difficult to develop a meaningful estimate of the aggregate possible claims exposure. Recent trends, including the effect of governmental actions, market activity regarding other personal loan companies and consumer activity, may continue to have an adverse effect on claims development.

 

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GE Money Japan revenues from discontinued operations were an insignificant amount in both the third quarter of 2010 and 2009 and both the nine months ended September 30, 2010 and 2009, respectively. In total, GE Money Japan losses from discontinued operations, net of taxes, were $1,101 million and $10 million in the third quarters of 2010 and 2009, respectively, and $1,672 million and $142 million for the nine months ended September 30, 2010 and 2009, respectively.

WMC

During the fourth quarter of 2007, we completed the sale of WMC, our U.S. mortgage business. WMC substantially discontinued all new loan originations by the second quarter of 2007, and is not a servicer of any loans. In connection with our sale 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 representation and warranties were not met. All claims received for early payment default have either been resolved or are no longer being pursued.

Pending claims for unmet representations and warranties have declined from approximately $800 million at December 31, 2009 to approximately $250 million at September 30, 2010. Reserves related to unmet contractual representations and warranties were $101 million at September 30, 2010, and $205 million at December 31, 2009. 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.

Through September 30, 2010, WMC has not experienced a significant change in the trends related to repurchase requests and WMC’s current reserve represents our best estimate of losses with respect to WMC’s repurchase obligation. Actual losses could exceed the reserve amount if actual claim rates, valid tenders or losses WMC incurs on repurchased loans are higher than historically observed.

WMC revenues from discontinued operations were $(1) million and $4 million in the third quarters of 2010 and 2009, respectively, and $(4) million and $(5) million for the nine months ended September 30, 2010 and 2009, respectively. In total, WMC’s earnings (loss) from discontinued operations, net of taxes, were $(2) million and $3 million in the third quarters of 2010 and 2009, respectively, and $(5) million and $(8) million for the nine months ended September 30, 2010 and 2009, respectively.

GE Industrial

GE industrial losses from discontinued operations, net of taxes, were $1 million and an insignificant amount in the third quarters of 2010 and 2009, respectively, and $4 million and $18 million for the nine months ended September 30, 2010 and 2009, respectively. The sum of GE industrial earnings (loss) from discontinued operations, net of taxes, and GECS earnings (loss) from discontinued operations, net of taxes, is reported as GE industrial earnings (loss) from discontinued operations, net of taxes, on the Condensed Statement of Earnings.

Assets of GE industrial discontinued operations were $50 million at both September 30, 2010 and December 31, 2009. Liabilities of GE industrial discontinued operations were $164 million and $163 million at September 30, 2010, and December 31, 2009, respectively, and primarily represent taxes payable and pension liabilities related to the sale of our Plastics business in 2007.

 

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3. INVESTMENT SECURITIES

Substantially all of our investment securities are classified as available-for-sale. These comprise mainly investment-grade debt securities supporting obligations to annuitants and policyholders in our run-off insurance operations and holders of guaranteed investment contracts (GICs) in Trinity (which ceased issuing new investment contracts beginning in the first quarter of 2010), and investment securities held at our global banks. We do not have any securities classified as held to maturity.

 

     At  
     September 30, 2010      December 31, 2009  
(In millions)    Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair value
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair value
 

GE

                       

Debt – U.S. corporate

   $      $ –        $ –        $      $ 12       $      $ (1)       $ 15   

Equity – available-for-sale

     16         –          –          16         14                –          15   
                                                                       
     18         –          –          18         26                (1)         30   
                                                                       

GECS

                       

Debt

                       

U.S. corporate

     22,194         2,357         (199)         24,352         22,778         973         (724)         23,027   

State and municipal

     2,960         185         (176)         2,969         2,638         42         (278)         2,402   

Residential mortgage- backed(a)

     3,335         138         (460)         3,013         4,005         79         (766)         3,318   

Commercial mortgage-backed

     2,834         193         (182)         2,845         3,053         89         (440)         2,702   

Asset-backed

     3,360         99         (233)         3,226         2,994         48         (305)         2,737   

Corporate – non-U.S.

     2,369         91         (82)         2,378         1,831         59         (50)         1,840   

Government – non-U.S.

     2,482         101         (48)         2,535         2,902         63         (29)         2,936   

U.S. government and federal agency

     3,086         73         (9)         3,150         2,628         46         –          2,674   

Retained interests(b)

     56         10         (25)         41         8,479         392         (40)         8,831   

Equity

                       

Available-for-sale

     550         183         (26)         707         489         242         (5)         726   

Trading

     458         –          –          458         720         –          –          720   
                                                                       
     43,684         3,430         (1,440)         45,674         52,517         2,033         (2,637)         51,913   
                                                                       

Eliminations

     (2)         –          –          (2)         (2)         –          –          (2)   
                                                                       

Total

   $ 43,700       $ 3,430       $ (1,440)       $ 45,690       $ 52,541       $ 2,038       $ (2,638)       $ 51,941   
                                                                       
   

 

(a) Substantially collateralized by U.S. mortgages. Of our total residential mortgage-backed securities (RMBS) portfolio at September 30, 2010, $1,233 million relates to securities issued by government sponsored entities and $1,780 million relates to securities of private label issuers. Securities issued by private label issuers are collateralized primarily by pools of individual direct mortgage loans of individual financial institutions.

 

(b) Included $1,918 million of retained interests at December 31, 2009 accounted for at fair value in accordance with ASC 815, Derivatives and Hedging. See Note 16.

The fair value of investment securities decreased to $45,690 million at September 30, 2010, from $51,941 million at December 31, 2009, primarily driven by a decrease in retained interests as a result of our adoption of ASU 2009-16 & 17 and maturities, partially offset by improved market conditions and purchases in our run-off insurance operations.

 

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The following tables present the estimated fair values and gross unrealized losses of our available-for-sale investment securities.

 

     In loss position for  
     Less than 12 months     12 months or more  
(In millions)     
 
Estimated
        fair value
  
  
    
 
 
Gross
unrealized
        losses
  
  
(a) 
   
 
Estimated
        fair value
  
  
    
 
 
Gross
unrealized
        losses
  
  
(a) 

September 30, 2010

          

Debt

          

U.S. corporate

   $ 216      $ (7)      $ 2,324      $ (192)   

State and municipal

     165        (11)        548        (165)   

Residential mortgage-backed

     32        (2)        1,353        (458)   

Commercial mortgage-backed

     25        (1)        784        (181)   

Asset-backed

     81        (16)        944        (217)   

Corporate – non-U.S.

     333        (30)        722        (52)   

Government – non-U.S.

     682        (3)        137        (45)   

U.S. government and federal agency

     272        (9)                –    

Retained interests

             –         14        (25)   

Equity

     169        (25)        5        (1)   
                                  

Total

   $ 1,975      $ (104)      $ 6,831      $ (1,336)   
                                  

December 31, 2009

          

Debt

          

U.S. corporate

   $ 2,818      $ (78)      $ 4,802      $ (647)   

State and municipal

     920        (139)        614        (139)   

Residential mortgage-backed

     118        (14)        1,678        (752)   

Commercial mortgage-backed

     167        (5)        1,293        (435)   

Asset-backed

     126        (11)        1,342        (294)   

Corporate – non-U.S.

     374        (18)        481        (32)   

Government – non-U.S.

     399        (4)        224        (25)   

U.S. government and federal agency

             –                 –    

Retained interests

     208        (16)        27        (24)   

Equity

     92        (2)        10        (3)   
                                  

Total

   $ 5,222      $ (287)      $ 10,471      $ (2,351)   
                                  
   

 

(a) At September 30, 2010, other-than-temporary impairments previously recognized through other comprehensive income (OCI) on securities still held amounted to $(399) million, of which $(296) million related to RMBS. Gross unrealized losses related to those securities at September 30, 2010 amounted to $(271) million, of which $(185) million related to RMBS.

We adopted amendments to ASC 320 and recorded a cumulative effect adjustment to increase retained earnings as of April 1, 2009 of $62 million.

We regularly review investment securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell our debt securities and believe that it is not more likely than not that we will be required to sell these securities that are in an unrealized loss position before recovery of our amortized cost. We believe that the unrealized loss associated with our equity securities will be recovered within the foreseeable future. The methodologies and significant inputs used to measure the amount of credit loss for our investment securities during the nine months ended September 30, 2010 have not changed from those described in our 2009 consolidated financial statements. See Note 3 in our 2009 consolidated financial statements, for additional information regarding these methodologies and inputs.

 

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During the third quarter of 2010, we recorded pre-tax, other-than-temporary impairments of $38 million, of which $31 million was recorded through earnings ($23 million relates to equity securities) and $7 million was recorded in accumulated other comprehensive income (AOCI). At July 1, 2010, cumulative impairments recognized in earnings associated with debt securities still held were $428 million. During the third quarter, we recognized first time impairments of $2 million and incremental charges on previously impaired securities of $1 million. These amounts included $1 million related to securities that were subsequently sold.

During the nine months ended September 30, 2010, we recorded pre-tax, other-than-temporary impairments of $297 million, of which $166 million was recorded through earnings ($24 million relates to equity securities) and $131 million was recorded in AOCI. At January 1, 2010, cumulative impairments recognized in earnings associated with debt securities still held were $340 million. During the nine months ended September 30, 2010, we recognized first time impairments of $94 million and incremental charges on previously impaired securities of $37 million. These amounts included $40 million related to securities that were subsequently sold.

During the third quarter of 2009, we recorded pre-tax, other-than-temporary impairments of $325 million, of which $161 million was recorded through earnings ($26 million relates to equity securities), and $164 million was recorded in AOCI. At July 1, 2009, cumulative impairments recognized in earnings associated with debt securities still held were $499 million. During the third quarter, we recognized first time impairments of $48 million and incremental charges on previously impaired securities of $55 million. Previous credit impairments related to securities sold were $82 million.

During the nine months ended September 30, 2009, we recognized impairments of $921 million, of which $33 million was reclassified to retained earnings at April 1, 2009, as a result of the amendments to ASC 320, Investments – Debt and Equity Securities. Subsequent to April 1, 2009, first time and incremental credit impairments were $74 million and $204 million, respectively. Previous credit impairments related to securities sold were $82 million.

Contractual Maturities of GECS Investment in Available-for-Sale Debt Securities (Excluding Mortgage-

Backed and Asset-Backed Securities)

 

(In millions)            Amortized
    cost
     Estimated
        fair value
 

Due in

     

2010

   $ 3,944      $ 3,967  

2011-2014

     7,241        7,499  

2015-2019

     4,362        4,581  

2020 and later

     17,544        19,337  

We expect actual maturities to differ from contractual maturities because borrowers have the right to call or prepay certain obligations.

 

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Supplemental information about gross realized gains and losses on available-for-sale investment securities follows.

 

    Three months ended September 30     Nine months ended September 30  
(In millions)   2010     2009     2010     2009  

GE

       

Gains

  $ –       $ –       $ –       $ –    

Losses, including impairments

    –         –         –         (172)   
                               

Net

    –         –         –         (172)   
                               

GECS

       

Gains

    35        55        168        114   

Losses, including impairments

    (46)        (186)        (191)        (534)   
                               

Net

    (11)        (131)        (23)        (420)   
                               

Total

  $ (11)      $ (131)      $ (23)      $ (592)   
                               

Although we generally do not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders. In some of our bank subsidiaries, we maintain a certain level of purchases and sales volume principally of non-U.S. government debt securities. In these situations, fair value approximates carrying value for these securities.

Proceeds from investment securities sales and early redemptions by the issuer totaled $4,878 million and $3,786 million in the third quarters of 2010 and 2009, respectively, and $12,467 million and $7,418 million for the nine months ended September 30, 2010 and 2009, respectively, principally from the sales of short-term securities in our bank subsidiaries.

We recognized net pre-tax gains on trading securities of $33 million and $29 million in the third quarters of 2010 and 2009, respectively, and $52 million and $273 million for the nine months ended September 30, 2010 and 2009, respectively.

4. INVENTORIES

Inventories consisted of the following.

 

     At  
(In millions)    September 30,
2010
    December 31,
2009
 

Raw materials and work in process

   $ 7,262      $ 7,581   

Finished goods

     4,806        4,176   

Unbilled shipments

     388        759   
                
     12,456        12,516   

Less revaluation to LIFO

     (459     (529
                

Total

   $ 11,997      $ 11,987   
                

 

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5. GECS FINANCING RECEIVABLES AND ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES

GECS financing receivables – net, consisted of the following.

 

     At  
(In millions)    September 30,
2010
     January 1,
2010(a)
     December 31,
2009
 

Loans, net of deferred income

   $ 293,133       $ 331,710       $ 290,586   

Investment in financing leases, net of deferred income

     47,357         55,209         54,445   
                          
     340,490         386,919         345,031   

Less allowance for losses

     (9,147)         (9,805)         (8,105)   
                          

Financing receivables – net(b)

   $ 331,343       $     377,114       $ 336,926   
                          
   

 

(a) Reflects the effects of our adoption of ASU 2009-16 & 17 on January 1, 2010.

 

(b) Financing receivables at September 30, 2010 and December 31, 2009 included $1,631 million and $2,704 million, respectively, relating to loans that had been acquired in a transfer but have been subject to credit deterioration since origination per ASC 310, Receivables.

Effective January 1, 2009, loans acquired in a business acquisition are recorded at fair value, which incorporates our estimate at the acquisition date of the credit losses over the remaining life of the portfolio. As a result, the allowance for loan losses is not carried over at acquisition. This may result in lower reserve coverage ratios prospectively. Details of financing receivables – net follow.

 

     At  
(In millions)    September 30,
2010
     January 1,
2010(a)
     December 31,
2009
 

CLL(b)

        

Americas

   $ 89,769       $ 99,666       $ 87,496   

Europe

     36,969         43,403         41,455   

Asia

     12,192         13,159         13,202   

Other

     2,651         2,836         2,836   
                          
     141,581         159,064         144,989   
                          

Consumer(b)

        

Non-U.S. residential mortgages

     49,239         58,345         58,345   

Non-U.S. installment and revolving credit

     22,729         24,976         24,976   

U.S. installment and revolving credit

     42,782         47,171         23,190   

Non-U.S. auto

     10,038         13,344         13,344   

Other

     10,035         11,688         11,688   
                          
     134,823         155,524         131,543   
                          

Real Estate

     42,481         48,673         44,841   
                          

Energy Financial Services

     7,291         7,790         7,790   
                          

GECAS(b)

     12,227         13,254         13,254   
                          

Other(c)

     2,087         2,614         2,614   
                          
     340,490         386,919         345,031   

Less allowance for losses

     (9,147)         (9,805)         (8,105)   
                          

Total

   $ 331,343       $     377,114       $ 336,926   
                          
   

 

(a) Reflects the effects of our adoption of ASU 2009-16 & 17 on January 1, 2010.

 

(b) During the first quarter of 2010, we transferred the Transportation Financial Services business from GECAS to CLL and the Consumer business in Italy from Consumer to CLL. Prior-period amounts were reclassified to conform to the current-period presentation.

 

(c) Primarily consisted of loans and financing leases related to certain consolidated, liquidating securitization entities.

 

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Individually impaired loans are defined by U.S. generally accepted accounting principles (GAAP) as larger balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. The vast majority of our consumer and a portion of our CLL nonearning receivables are excluded from this definition, as they represent smaller balance homogeneous loans that we evaluate collectively by portfolio for impairment.

Further information pertaining to loans classified as impaired and specific reserves is included in the tables below.

 

     At  
(In millions)    September 30,
2010
     January 1,
2010(a)
    December 31,
2009
 

Loans requiring allowance for losses

   $ 12,764      $ 9,541     $ 9,145  

Loans expected to be fully recoverable

     4,405        3,914       3,741  
                         

Total impaired loans

   $ 17,169      $     13,455     $ 12,886  
                         

Allowance for losses (specific reserves)

   $ 3,175      $ 2,376     $ 2,331  

Average investment during the period

     14,956           (c)        8,493  

Interest income earned while impaired(b)

     339           (c)        227  
   

 

(a) Reflects the effects of our adoption of ASU 2009-16 & 17 on January 1, 2010.
(b) Recognized principally on cash basis for the nine months ended September 30, 2010, and the year ended December 31, 2009, respectively.
(c) Not applicable.

 

     At  
         September 30, 2010              January 1, 2010(a)              December 31, 2009      
(In millions)    Impaired
    Loans     
     Specific
    Reserves     
     Impaired
    Loans     
     Specific
    Reserves     
     Impaired
    Loans     
     Specific
    Reserves     
 

Commercial(b)

   $ 5,662      $ 1,141      $ 5,084      $ 1,031      $ 4,985      $ 1,073  

Consumer

     2,418        516        1,747        307        1,383        241  

Real Estate

     9,089        1,518        6,624        1,038        6,518        1,017  
                                                     

Total

   $ 17,169      $ 3,175      $ 13,455      $ 2,376      $ 12,886      $ 2,331  
                                                     
   

 

(a) Reflects the effects of our adoption of ASU 2009-16 & 17 on January 1, 2010.
(b) Comprises CLL, GECAS and Energy Financial Services.

Impaired loans increased by $3,714 million from January 1, 2010, to September 30, 2010, primarily relating to increases at Real Estate. Impaired loans consolidated as a result of our adoption of ASU 2009-16 & 17 primarily related to our Consumer business. We regularly review our Real Estate loans for impairment using both quantitative and qualitative factors, such as debt service coverage and loan-to-value ratios. We classify Real Estate loans as impaired when the most recent valuation reflects a projected loan-to-value ratio at maturity in excess of 100%, even if the loan is currently paying in accordance with contractual terms. The increase in Real Estate impaired loans reflects deterioration in commercial real estate values, particularly in U.S. and Japanese collateral. The increase in Real Estate specific reserves is consistent with the increase in impaired loans, as well as value declines since January 1, 2010. Of our $9,089 million impaired loans at Real Estate at September 30, 2010, $6,527 million are currently paying in accordance with the contractual terms of the loan. Impaired loans at CLL primarily represent senior secured lending positions.

 

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Our loss mitigation strategy intends to minimize economic loss and, at times, can result in rate reductions, principal forgiveness, extensions, forbearance or other actions, which may cause the related loan to be classified as a TDR. Such loans are classified as impaired, and specific reserves are determined based upon the present value of expected future cash flows discounted at the loan’s original effective interest rate, or collateral value as a practical expedient in accordance with the requirements of ASC 310-10-35. As of September 30, 2010, TDRs included in impaired loans were $7,829 million, primarily relating to Real Estate ($3,118 million), CLL ($2,463 million) and Consumer ($2,162 million). TDRs consolidated as a result of our adoption of ASU 2009-16 & 17 primarily related to our Consumer business ($364 million).

GECS Allowance for Losses on Financing Receivables

 

(In millions)    
 
 
Balance
December 31,
2009
  
  
 
   
 
 
Adoption of
ASU 2009-
16 & 17
  
  
(a) 
   
 
 
Balance
January 1,
2010
  
  
  
   
 
 
Provision
charged to
operations
  
  
  
    Other(b)       
 
Gross
write-offs
  
(d) 
    Recoveries (d)     
 
 
Balance
September 30,
2010
  
  
  

CLL(c)

               

Americas

  $ 1,179      $ 66       $ 1,245      $ 823      $ (20)      $ (787)      $ 95       $ 1,356  

Europe

    575        –         575        190        (47)        (348)        41         411  

Asia

    244        (10)        234        131        (10)        (118)        15         252  

Other

    11        –         11        (3)        –         –         –         8  

Consumer(c)

               

Non-U.S. residential

               

mortgages

    949        –         949        243        (57)        (281)        68         922  

Non-U.S. installment

               

and revolving credit

    1,181        –         1,181        874        (44)        (1,401)        433         1,043  

U.S. installment and

               

revolving credit

    1,698        1,602         3,300        2,405        (4)        (3,401)        372         2,672  

Non-U.S. auto

    308        –         308        78        (34)        (286)        142         208  

Other

    300        –         300        213        (24)        (298)        64         255  

Real Estate

    1,494        42         1,536        918        (2)        (597)               1,857  

Energy Financial Services

    28        –         28        56              –         –         85  

GECAS(c)

    104        –         104        17        –         (96)        –         25  

Other

    34        –         34        23        (2)        (3)               53  
                                                               

Total

  $ 8,105      $ 1,700      $ 9,805      $ 5,968      $ (243)      $ (7,616)      $ 1,233       $ 9,147  
                                                               
   

 

(a) Reflects the effects of our adoption of ASU 2009-16 & 17 on January 1, 2010.

 

(b) Other primarily included the effects of currency exchange.

 

(c) During the first quarter of 2010, we transferred the Transportation Financial Services business from GECAS to CLL and the Consumer business in Italy from Consumer to CLL. Prior-period amounts were reclassified to conform to the current-period presentation.

 

(d) Net write-offs (write-offs less recoveries) in certain portfolios may exceed the beginning allowance for losses as our revolving credit portfolios turn over more than once per year or, in all portfolios, can reflect losses that are incurred subsequent to the beginning of the fiscal year due to information becoming available during the current year which may identify further deterioration on existing financing receivables.

 

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(In millions)    Balance
January 1,
2009
     Provision
charged to
operations
     Other(a)      Gross
write-offs
             Recoveries      Balance
September 30,
2009
 

CLL(b)

                 

Americas

   $ 843      $ 969      $ (34)       $ (746)       $ 66      $ 1,098  

Europe

     311        458        10         (299)         53        533  

Asia

     163        188               (136)         19        242  

Other

     4        4               (5)                 6  

Consumer(b)

                 

Non-U.S. residential mortgages

     381        804        82         (423)         129        973  

Non-U.S. installment and revolving credit

     1,049        1,335        40         (1,691)         375        1,108  

U.S. installment and revolving credit

     1,700        2,631        (761)         (2,134)         132        1,568  

Non-U.S. auto

     203        346        45         (435)         137        296  

Other

     226        257               (273)         39        258  

Real Estate

     301        903        13         (190)         1        1,028  

Energy Financial Services

     58        42               –                  101  

GECAS

     58        69        (1)         –                  126  

Other

     28        15        –          (22)         2        23  
                                                     

Total

   $       5,325      $       8,021      $       (585)       $       (6,354)       $       953      $       7,360  
                                                     
   

 

(a) Other primarily included the effects of securitization activity and currency exchange.

 

(b) During the first quarter of 2010, we transferred the Transportation Financial Services business from GECAS to CLL and the Consumer business in Italy from Consumer to CLL. Prior-period amounts were reclassified to conform to the current-period presentation.

6. Property, Plant and Equipment

Property, plant and equipment – net, consisted of the following.

 

     At  
(In millions)    September 30,
2010
     December 31,
2009
 

Original cost

   $     110,234       $     113,315   

Less accumulated depreciation and amortization

     (44,696)         (44,103)   
                 

Property, plant and equipment – net

   $ 65,538       $ 69,212   
                 

Consolidated depreciation and amortization related to property, plant and equipment was $2,622 million and $2,658 million for the third quarters of 2010 and 2009, respectively, and $7,477 million and $7,893 million for the nine months ended September 30, 2010 and 2009, respectively.

 

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets – net, consisted of the following.

 

     At  
(In millions)    September 30,
2010
     December 31,
2009
 

Goodwill

   $ 64,128      $ 65,574  
                 

Other intangible assets

     

Intangible assets subject to amortization

   $ 10,127      $ 11,824  

Indefinite-lived intangible assets(a)

     104        105  
                 

Total

   $ 10,231      $ 11,929  
                 
   

 

(a) Indefinite-lived intangible assets principally comprised trademarks and tradenames.

Changes in goodwill balances follow.

 

(In millions)    Balance
January 1,
2010
     Acquisitions      Dispositions,
currency
exchange
and other
     Balance
September 30,
2010
 

Energy Infrastructure

   $ 12,777      $ 36      $ (84)       $ 12,729  

Technology Infrastructure

     22,648        10        (104)         22,554  

GE Capital

     28,961        21        (1,154)         27,828  

Home & Business Solutions

     1,188                (171)         1,017  
                                   

Total

   $       65,574      $           67      $     (1,513)       $     64,128  
                                   

Goodwill balances decreased $1,446 million during the nine months ended September 30, 2010, primarily as a result of the stronger U.S. dollar ($802 million) and the deconsolidation of Regency Energy Partners L.P. (Regency) at GE Capital ($557 million).

On May 26, 2010, we sold our general partnership interest in Regency, a midstream natural gas services provider, and retained a 21% limited partnership interest. This resulted in the deconsolidation of Regency and the remeasurement of our limited partnership interest to fair value. We recorded a pre-tax gain of $119 million, which is reported in GECS revenues from services.

We test goodwill for impairment annually and more frequently if circumstances warrant. We determine fair values for each of the reporting units using an income approach. When available and appropriate, we use comparative market multiples to corroborate discounted cash flow results. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using the capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from 9% to 14.5%. Valuations using the market approach reflect prices and other relevant observable information generated by market transactions involving comparable businesses.

 

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Compared to the market approach, the income approach more closely aligns each reporting unit valuation to our business profile, including geographic markets served and product offerings. Required rates of return, along with uncertainty inherent in the forecasts of future cash flows are reflected in the selection of the discount rate. Equally important, under this approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat more limited in its application because the population of potential comparables is often limited to publicly-traded companies where the characteristics of the comparative business and ours can be significantly different, market data is usually not available for divisions within larger conglomerates or non-public subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to our business. It can also be difficult, under current market conditions, to identify orderly transactions between market participants in similar businesses. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation and weight the methodologies appropriately.

We performed our annual impairment test of goodwill for all of our reporting units in the third quarter using data as of July 1, 2010. The impairment test consists of two steps: in step one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied when the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. In performing the valuations, we used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. Based on the results of our step one testing, the fair values of each of the GE Industrial reporting units and the CLL, Consumer, Energy Financial Services and GECAS reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized.

Our Real Estate reporting unit had a goodwill balance of $1,099 million at September 30, 2010. As the carrying amount exceeded the fair value of our Real Estate reporting unit by about $3 billion as of July 1, 2010, we performed step two of the goodwill impairment test. Based on the results of the step two analysis for Real Estate, the implied fair value of goodwill exceeded the carrying value of goodwill by about $3 billion, and accordingly, no goodwill impairment was required. The performance of the step one and two tests for evaluating our Real Estate goodwill is dependent upon several assumptions related to this business, including loss estimates for our portfolio, new origination volume and margins, anticipated stabilization of the commercial real estate market, discount rates and fair values of the business’ assets and liabilities. Relatively minor changes to these assumptions could adversely affect the results of the impairment test.

Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could change in future periods.

 

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Intangible Assets Subject to Amortization

 

     At  
     September 30, 2010      December 31, 2009  
(In millions)    Gross
carrying
amount
     Accumulated
amortization
     Net      Gross
carrying
amount
     Accumulated
amortization
     Net  

Customer-related

   $ 5,645      $ (1,545)       $ 4,100      $ 6,044      $ (1,392)       $ 4,652  

Patents, licenses and trademarks

     5,393        (2,529)         2,864        5,198        (2,177)         3,021  

Capitalized software

     6,712        (4,404)         2,308        6,549        (4,127)         2,422  

Lease valuations

     1,660        (883)         777        1,754        (793)         961  

Present value of future profits(a)

     474        (474)                 921        (470)         451  

All other

     393        (315)         78        745        (428)         317  
                                                     

Total

   $   20,277      $     (10,150)       $   10,127      $   21,211      $     (9,387)       $   11,824  
                                                     
   

 

(a) Balance at September 30, 2010 reflects a third quarter 2010 adjustment to the present value of future profits in our run-off insurance operation to reflect the effects that would have been recognized had the related unrealized investment securities holding gains and losses actually been realized in accordance with ASC 320-10-S99-2.

Consolidated amortization related to intangible assets subject to amortization was $435 million and $616 million for the three months ended September 30, 2010 and 2009, respectively. Consolidated amortization related to intangible assets subject to amortization for the nine months ended September 30, 2010 and 2009, was $1,294 million and $1,629 million, respectively.

 

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8. GECS BORROWINGS AND BANK DEPOSITS

GECS borrowings are summarized in the following table.

 

     At  
(In millions)    September 30,
2010
     December 31,
2009
 

Short-term borrowings

     

Commercial paper

     

U.S.

   $ 31,129      $ 37,775  

Non-U.S.

     10,191        9,525  

Current portion of long-term borrowings(a)(b)(c)

     62,777        69,883  

GE Interest Plus notes(d)

     8,824        7,541  

Other(c)

     2,829        6,413  
                 

GECS short-term borrowings

   $ 115,750      $ 131,137  
                 

Long-term borrowings

     

Senior unsecured notes(a)(b)

   $ 277,076      $ 305,306  

Subordinated notes(e)

     2,523        2,686  

Subordinated debentures(f)

     7,204        7,647  

Other(c)(g)

     11,474        10,752  
                 

GECS long-term borrowings

   $ 298,277      $ 326,391  
                 

Non-recourse borrowings of consolidated securitization entities(h)

   $ 30,497      $ 3,883  
                 

Bank deposits(i)

   $ 41,928      $ 38,923  
                 

Total borrowings and bank deposits

   $   486,452      $   500,334  
                 
   

 

(a) GECC had issued and outstanding $54,795 million and $59,336 million of senior, unsecured debt that was guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program at September 30, 2010 and December 31, 2009, respectively. Of the above amounts $9,750 million and $5,841 million is included in current portion of long-term borrowings at September 30, 2010 and December 31, 2009, respectively.

 

(b) Included in total long-term borrowings were $2,535 million and $3,138 million of obligations to holders of guaranteed investment contracts at September 30, 2010 and December 31, 2009, respectively. GECC could be required to repay up to approximately $2,500 million if its long-term credit rating were to fall below AA–/Aa3 or its short-term credit rating were to fall below A–1+/P–1.

 

(c) Included $11,002 million and $10,604 million of secured funding at September 30, 2010 and December 31, 2009, respectively, of which $3,991 million and $5,667 million is non-recourse to GECS at September 30, 2010 and December 31, 2009, respectively.

 

(d) Entirely variable denomination floating rate demand notes.

 

(e) Included $417 million of subordinated notes guaranteed by GE at both September 30, 2010 and December 31, 2009.

 

(f) Subordinated debentures receive rating agency equity credit and were hedged at issuance to the U.S. dollar equivalent of $7,725 million.

 

(g) Included $1,839 million and $1,649 million of covered bonds at September 30, 2010 and December 31, 2009, respectively. If the short-term credit rating of GECC were reduced below A–1/P–1, GECC would be required to partially cash collateralize these bonds in an amount up to $767 million.

 

(h) Included at September 30, 2010 was $1,935 million of commercial paper, $9,316 million of current portion of long-term borrowings and $19,246 million of long-term borrowings related to former QSPEs consolidated on January 1, 2010 upon our adoption of ASU 2009-16 & 17, previously consolidated liquidating securitization entities and other on-book securitization borrowings. Included at December 31, 2009, was $2,424 million of commercial paper, $378 million of current portion of long-term borrowings and $1,081 million of long-term borrowings issued by consolidated liquidating securitization entities. See Note 16.

 

(i) Included $23,884 million and $21,252 million of deposits in non-U.S. banks at September 30, 2010 and December 31, 2009, respectively, and $11,787 million and $10,476 million of certificates of deposits distributed by brokers with maturities greater than one year at September 30, 2010 and December 31, 2009, respectively.

 

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9. POSTRETIREMENT BENEFIT PLANS

We sponsor a number of pension and retiree health and life insurance benefit plans. Principal pension plans include the GE Pension Plan and the GE Supplementary Pension Plan. Principal retiree benefit plans generally provide health and life insurance benefits to employees who retire under the GE Pension Plan with 10 or more years of service. Other pension plans include the U.S. and non-U.S. pension plans with pension assets or obligations greater than $50 million. Smaller pension plans and other retiree benefit plans are not material individually or in the aggregate. The effect on operations of the pension plans follows.

 

     Principal Pension Plans  
     Three months ended September 30      Nine months ended September 30  
(In millions)    2010      2009      2010      2009  

Expected return on plan assets

   $ (1,084)       $ (1,125)       $ (3,254)       $ (3,378)   

Service cost for benefits earned

     275         522         844         1,211   

Interest cost on benefit obligation

     678         667         2,020         2,001   

Prior service cost amortization

     59         81         178         242   

Net actuarial loss amortization

     331         86         993         259   
                                   

Pension plans cost

   $ 259       $ 231       $ 781       $ 335   
                                   
     Other Pension Plans  
     Three months ended September 30      Nine months ended September 30  
(In millions)    2010      2009      2010      2009  

Expected return on plan assets

   $ (126)       $ (110)       $ (380)       $ (321)   

Service cost for benefits earned

     65         84         209         249   

Interest cost on benefit obligation

     116         117         360         338   

Prior service cost amortization

                    11          

Net actuarial loss amortization

     48         37         159         93   
                                   

Pension plans cost

   $ 106       $ 131       $ 359       $ 367   
                                   

The effect on operations of principal retiree health and life insurance plans follows.

  

     Principal Retiree Health and Life Insurance Plans  
     Three months ended September 30      Nine months ended September 30  
(In millions)    2010      2009      2010      2009  

Expected return on plan assets

   $ (29)       $ (32)       $ (87)       $ (96)   

Service cost for benefits earned

     50         177         162         336   

Interest cost on benefit obligation

     175         177         525         531   

Prior service cost amortization

     158         168         474         504   

Net actuarial gain amortization

     (6)         (27)         (18)         (81)   
                                   

Retiree benefit plans cost

   $ 348       $ 463       $ 1,056       $ 1,194   
                                   

 

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10. 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,
2010
     December 31,
2009
 

Unrecognized tax benefits

   $ 7,112      $ 7,251  

  Portion that, if recognized, would reduce tax expense and effective tax rate(a)

     4,675        4,918  

Accrued interest on unrecognized tax benefits

     1,572        1,369  

Accrued penalties on unrecognized tax benefits

     106        99  

Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months

     0-1,500         0-1,800   

  Portion that, if recognized, would reduce tax expense and effective tax rate(a)

     0-1,000         0-1,400   
   

 

(a) Some portion of such reduction may be reported as discontinued operations.

The IRS is currently auditing our consolidated income tax returns for 2003-2007. We expect the 2003-2005 audit to be completed during the fourth quarter of 2010, with the exception of certain items including the disallowance by the IRS of the loss on our 2003 disposition of shares of ERC Life Reinsurance Corporation. We expect to contest the disallowance of this loss. In addition, certain other U.S. tax deficiency issues and refund claims for previous years remain unresolved. The conclusion of the 2003-2005 audit could result in a decrease in our balance of “unrecognized tax benefits” – that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.

GE and GECS file a consolidated U.S. federal income tax return. The GECS provision for current tax expense includes its effect on the consolidated return. The effect of GECS on the consolidated liability is generally settled in cash as GE tax payments are due. The effect of GECS on the amount of the consolidated tax liability from the formation of the NBCU joint venture will be settled in cash when it otherwise would have reduced the liability of the group absent the tax on formation.

During the first quarter of 2009, following the change in our external credit ratings, funding actions taken and review of our operations, liquidity and funding, we determined that undistributed prior-year earnings of non-U.S. subsidiaries of GECS, on which we had previously provided deferred U.S. taxes, would be indefinitely reinvested outside the U.S. This change increased the amount of prior-year earnings indefinitely reinvested outside the U.S. by approximately $2 billion, resulting in an income tax benefit of $700 million in the first quarter of 2009.

 

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11. SHAREOWNERS’ EQUITY

A summary of increases (decreases) in GE shareowners’ equity that did not result directly from transactions with shareowners, net of income taxes, follows.

 

     Three months ended September 30      Nine months ended September 30  
(In millions)    2010      2009      2010      2009  

Net earnings attributable to the Company

   $ 2,055       $ 2,494      $ 7,109       $ 8,012  

Investment securities – net(a)

     (906)         1,697        (180)         2,615  

Currency translation adjustments – net

     2,356         1,857        (4,799)         4,342  

Cash flow hedges – net

     (239)         71        205         1,476  

Benefit plans – net

     351         180        1,275         659  
                                   

Total

   $ 3,617       $ 6,299      $ 3,610       $ 17,104  
                                   
   

 

(a) Includes adjustments as of September 30, 2010 to deferred acquisition costs, present value of future profits, and investment contracts, insurance liabilities and insurance annuity benefits in our run-off insurance operation to reflect the effects that would have been recognized had the related unrealized investment securities holding gains and losses actually been realized in accordance with ASC 320-10-S99-2.

On January 1, 2010, we adopted ASU 2009-16 & 17. This resulted in a reduction of GE shareowners’ equity primarily related to the reversal of a portion of previously recognized securitization gains. This adjustment is reflected as a cumulative effect adjustment of the opening balances of retained earnings ($1,708 million) and accumulated other comprehensive income ($265 million). See Notes 1 and 16 for additional information.

Changes to noncontrolling interests are as follows.

 

     Three months ended September 30      Nine months ended September 30  
(In millions)    2010      2009      2010      2009  

Beginning balance

   $ 6,791       $ 8,340       $ 7,845       $ 8,947   

Net earnings

     162                328         102   

Dividends

     (18)         (152)         (277)         (444)   

NBCU share purchase(a)

     (1,876)         –          (1,876)         –    

Dispositions(b)

     –          –          (979)         (331)   

AOCI and other(c)

     15         87         33          
                                   

Ending balance

   $ 5,074       $ 8,280       $ 5,074       $ 8,280   
                                   
   

 

(a) On September 26, 2010, we acquired 7.7% of NBCU’s outstanding shares from Vivendi for $2,000 million, of which $1,876 million was recorded as a reduction in noncontrolling interest and $124 million was recorded as a reduction in additional paid in capital reflecting the amount paid in excess of the carrying value of the noncontrolling interest.

 

(b) Includes the effects of deconsolidating both Regency $(979) million during the second quarter of 2010 and Penske Truck Leasing Co., L.P. (PTL) $(331) million during the first quarter of 2009.

 

(c) Changes to the individual components of AOCI attributable to noncontrolling interests were insignificant.

 

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12. GECS REVENUES FROM SERVICES

GECS revenues from services are summarized in the following table.

 

     Three months ended September 30      Nine months ended September 30  
(In millions)    2010      2009      2010      2009  

Interest on loans(a)

   $ 5,363      $ 4,933      $ 16,693      $ 15,113  

Equipment leased to others

     2,799        2,902        8,329        9,314  

Fees(a)

     1,236        1,160        3,725        3,419  

Investment income(a)(b)

     600        755        1,686        2,413  

Financing leases(a)

     694        795        2,153        2,533  

Premiums earned by insurance activities

     511        515        1,490        1,525  

Net securitization gains(a)

             449                1,169  

Real estate investments

     330        410        961        1,128  

Associated companies

     491        277        1,548        751  

Other items(c)(d)

     405        337        1,714        2,604  
                                   

Total

   $ 12,429      $ 12,533      $ 38,299      $ 39,969  
                                   
   

 

(a) On January 1, 2010, we adopted ASU 2009-16 & 17 which required us to consolidate substantially all of our former QSPEs. As a result, 2010 GECS revenues from services include interest and fee income from these entities, which were not presented on a consolidated basis in 2009. Also beginning in 2010, we no longer record gains for substantially all of our securitizations as they are recorded as on-book financings. See Note 16.

 

(b) Included net other-than-temporary impairments on investment securities of $31 million and $161 million in the third quarters of 2010 and 2009, respectively, and $166 million and $251 million for the nine months ended September 30, 2010 and 2009, respectively. See Note 3.

 

(c) Included a gain on the sale of a limited partnership interest in PTL and a related gain on the remeasurement of the retained investment to fair value totaling $296 million in the first quarter of 2009.

 

(d) Included a gain of $343 million on the remeasurement to fair value of our equity method investment in BAC Credomatic GECF Inc. (BAC), following our acquisition of a controlling interest in the second quarter of 2009.

 

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Table of Contents

 

13. EARNINGS PER SHARE INFORMATION

GE’s authorized common stock consists of 13,200,000,000 shares having a par value of $0.06 each. Information related to the calculation of earnings per share follows.

 

     Three months ended September 30  
     2010      2009  
(In millions; per-share amounts in dollars)          Diluted            Basic            Diluted            Basic  

Amounts attributable to the Company:

           

Consolidated

           

Earnings from continuing operations for per-share calculation(a)

   $     3,148       $     3,148       $     2,438       $     2,438   

Preferred stock dividends declared

     (75)