GE 2002 Annual Report Download - page 9
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ERC experienced more than a decade of strong per-
formance from 1984 to 1996. However, we allowed our-
selves to go into more volatile, commodity insurance
lines and new geographies, and we did not manage this
expansion well. Our poor underwriting in the late 1990s
resulted in ERC’s losses in 2002. Although it offers little
solace, our experience reflects that of the insurance
industry, which has increased reserves by $25 billion to
address poor underwriting during those years.
When businesses underperform, we owe investors
four things: state the financial results with complete
clarity; correct the issues with our best people and
intense management; maximize returns for investors;
and share the lessons to avoid repeating the mistakes.
We are doing these things with ERC.
We have had a leadership team in place for the last
two years that is fixing this business. ERC has exited its
lower-return product lines, made a host of changes in
operations and achieved $1 billion in price improvements
in 2002 — and expects to maintain this momentum in
2003.ERC is improving every day, in an industry that is
heading toward stronger returns for the next few years.
As you can see, GE will post solid growth in 2003
because of our business diversity. Power Systems will
be down, as expected; however, the rest of the com-
pany is positioned for double-digit growth.
OPERATING RIGOR
Strong processes are the foundation of our operating
rigor. We are in the ninth year of Six Sigma at GE, and
it has become a permanent initiative— Six Sigma is
the way we work. During the last year we completed
more than 50,000 projects, focused primarily in three
areas: working with our customers on their issues;
improving our internal processes to improve our cus-
tomer interfaces and generate cash; and improving
the flow of high-technology products and services to
the marketplace.
We are in the fifth year of building a digital capability
to make GE leaner and faster. Digitization is now gen-
erating $2 billion in annual productivity savings
through sourcing and infrastructure. At the same time,
we have used digitization to link with our customers’
workflow and improve service.
Increasingly, the focus of our operating rigor is on
growing cash flow. Cash is a priority for our leadership
team and represents 60% of the measurement used
for their incentive compensation. Six Sigma is creat-
ing repeatable and reliable processes that allow us to
reduce cash tied up in inventory and receivables.
Through digitization we are getting more from our
fixed assets. We plan to generate nearly $30 billion in
operating cash flow ex-progress in 2002-2003.
We took several actions to strengthen our balance
sheet in 2002. We improved our liquidity by reducing
the commercial paper of our financial services busi-
nesses to 31% of their total debt outstanding. We also
infused more than $6 billion into those businesses to
increase capital and reduce leverage. GE’s Triple A rating
was affirmed by the rating agencies, and our rigorous
approach was recognized. We received four awards,
including “Borrower of the Year” and “Best Corporate
Issuer,” from bond investors and underwriters sur-
veyed by International Finance Review.
Financial strength gives us the ability to invest in
growth, and we have viewed this economic cycle as a
time to invest. We have increased the number of engi-
neers, salespeople and service resources. We will
invest more than $3 billion in technology, including major
investments in our global research centers. We’ve
strengthened our commitment to China, increasing
resources there 25% in 2002, and we’ve increased
our presence in Europe, where GE should exceed $30
billion in revenues in 2003.
Acquisitions are a key form of investment for us.
We have invested nearly $35 billion in acquisitions over
the past two years. Acquisitions are a way to redeploy
cash flow for future growth. The key is discipline: we
buy the right businesses at the right price and grow
them. Our acquisitions tend to be between $100 million
and $2 billion in value, in industries we know. Our
industrial acquisitions are companies with high margin
rates and low capital requirements where GE can
boost growth and cash flow. Our financial services busi-
nesses consolidate portfolios when GE can improve
funding cost, risk management and growth. Our invest-
ment screen is simple: we expect a 15% cash-on-cash
return by year five, or we don’t do the deal.
LETTER TO STAKEHOLDERS Our strategy for growth