GE 2006 Annual Report Download - page 52

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GE OPERATING PROFIT is earnings from continuing operations
before interest and other financial charges, and income taxes.
GE operating profit excluding the effects of pension costs was
$15.5 billion in 2006, up from $13.6 billion in 2005 and $11.3 billion
in 2004 (15.2%, 14.8% and 13.5% of GE industrial revenues in 2006,
2005 and 2004, respectively). The increase in 2006 operating profi t
reflected higher productivity (principally Industrial and Healthcare),
volume (Infrastructure) and prices (Infrastructure), partially offset
by higher material and other costs across all segments. The increase
in 2005 operating profi t reflected higher productivity (principally
Healthcare and Infrastructure), volume (Infrastructure and
NBC Universal) and prices (Industrial), partially offset by higher
material and other costs across all segments.
INTEREST ON BORROWINGS AND OTHER FINANCIAL CHARGES
amounted to $19.3 billion, $15.1 billion and $11.6 billion in 2006,
2005 and 2004, respectively. Substantially all of our borrowings
are through GECS, where interest expense was $18.1 billion,
$14.2 billion and $11.1 billion in 2006, 2005 and 2004, respectively.
Changes over the three-year period reflected increased average
borrowings and increased interest rates. GECS average borrowings
were $389.0 billion, $346.1 billion and $319.2 billion in 2006, 2005
and 2004, respectively. GECS average composite effective interest
rate was 4.7% in 2006, compared with 4.2% in 2005 and 3.5% in
2004. Proceeds of these borrowings were used in part to fi nance
asset growth and acquisitions. In 2006, GECS average assets of
$514.5 billion were 9% higher than in 2005, which in turn were 7%
higher than in 2004. See the Financial Resources and Liquidity
section for a discussion of interest rate risk management.
GECS BORROWINGS 2002 2003 2004 2005 2006
(In $ billions) 426
362
356
317
267
A. Senior notes
B. Other
C. Commercial paper
D. Subordinated notes
INCOME TAXES are a significant cost. As a global commercial
enterprise, our tax rates are affected by many factors, including
our global mix of earnings, legislation, acquisitions, dispositions
and the tax characteristics of our income. Our tax returns are
routinely audited and settlements of issues raised in these audits
sometimes affect our tax provisions.
Income taxes on consolidated earnings from continuing
operations were 16.1% in 2006, compared with 17.8% in 2005
and 18.2% in 2004. Our consolidated income tax rate decreased
from 2005 to 2006 as growth in lower-taxed earnings from global
operations, including one-time tax benefits from non-U.S. tax
net operating losses and the non-U.S. gain on disposition of the
Advanced Materials business, exceeded 2005 tax benefi ts from
a reorganization of our aircraft leasing business, a repatriation
of non-U.S. earnings at a reduced rate of U.S. tax and favorable
settlements with tax authorities.
Our consolidated income tax rate was essentially unchanged in
2005 from 2004 because the 2005 tax benefits from a reorganization
of our aircraft leasing business and from the growth in lower-
taxed global operations were about the same as the 2004 tax
benefits from favorable U.S. Internal Revenue Service (IRS) settle-
ments, the NBC Universal combination, the 2004 reorganization
of our aircraft leasing business and a lower tax rate on the sale of
a portion of Genpact, our business process outsourcing operation.
A more detailed analysis of differences between the U.S. federal
statutory rate and the consolidated rate, as well as other informa-
tion about our income tax provisions, is provided in note 8. The
nature of business activities and associated income taxes differ
for GE and for GECS and a separate analysis of each is presented
in the paragraphs that follow.
Because GE tax expense does not include taxes on GECS
earnings, the GE effective tax rate is best analyzed in relation to
GE earnings excluding GECS. GE pre-tax earnings from continuing
operations excluding comparable GECS earnings were $12.8 billion,
$11.9 billion and $10.4 billion for 2006, 2005 and 2004, respec-
tively. On this basis, GE’s effective tax rate was 20.2% in 2006,
23.1% in 2005 and 19.0% in 2004.
The decrease in the 2006 rate from 2005 was primarily attrib-
utable to growth in lower-taxed earnings from global operations,
including one-time tax benefits from non-U.S. net operating
losses and the non-U.S. gain on the disposition of the Advanced
Materials business. These benefits, which decreased the GE
rate by 4.5 percentage points, are included in note 8 in the line
“Tax on global activities including exports.” Partially offsetting
these items was the lack of a counterpart to the 2005 repatriation
of non-U.S. earnings at a reduced U.S. tax rate, discussed below
(0.9 percentage points) and a decrease in benefits from favorable
audit resolutions with tax authorities (0.8 percentage points). The
effects of 2006 favorable audit resolutions are reflected in note 8
in the lines “All other — net” (0.8 percentage points) and “Tax on
global activities including exports” (0.7 percentage points).
The increase in the 2005 rate over the 2004 rate was primarily
attributable to the lack of current-year counterparts to the 2004
settlements with the IRS and 2004 tax benefi ts associated with
the NBC Universal combination, both discussed below, that
together reduced the 2004 rate by 7.2 percentage points. Partially
offsetting this increase were the favorable effects of a number of
audit resolutions with taxing authorities and our 2005 repatriation
of non-U.S. earnings at the reduced U.S. tax rate provided in 2004
legislation (together representing a 3.2 percentage point reduction
of the GE tax rate). These 2005 tax benefits are reflected in note
8 in the lines “All other — net” (1.6 percentage points) and “Tax on
global activities including exports” (1.6 percentage points).
The 2004 GE rate reflects two items that decreased the rate
by 7.2 percentage points — settling several issues with the IRS for
the years 1985 through 1999 and tax benefi ts associated with
the NBC Universal combination. As part of the IRS settlements,
50 ge 2006 annual report