GE 2008 Annual Report Download - page 5

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Prepared for Tough Times
We have prepared for a difficult economy in 2009. To that end, we have lowered
costs, increased loss reserves, improved our cash position, and intensified our
management processes.
We made some tough calls as we navigated this environment. We raised $15 billion of
equity at a time when liquidity was virtually frozen. We have gained access to government
funding programs that put us on equal footing with banks.
We have improved our funding. We have already raised about two-thirds of the debt
required to grow our businesses in 2009. We have increased our alternative funding
to $54 billion, mainly through our banks.
We have improved our liquidity. We reduced commercial paper from $100 billion last
year to $60 billion today. We ended 2008 with $48 billion of cash on our balance sheet.
We are targeting our leverage in GE Capital to be 6:1 in 2009.
We are prepared for a very rough economy and have been realistic about our loss
estimates. We benefit from having less consumer exposure than banks and our commercial
loans are senior and secured. We are prepared to hold and operate our assets through
the cycle to maximize value.
We have taken aggressive action to reduce costs by $5 billion. Our base cost will
be down 7% next year, driven by headcount reduction and spending cuts. We have
simplified organizations and reduced layers. We’ll reduce variable costs, including
$2 billion of sourcing on direct material purchases. We expect our indirect costs to
be down close to 10%.
Our industrial businesses generate about $16 billion of cash annually, even in an
economic downturn. We are aiming to reduce working capital by about $5 billion over
the next two years. This gives us plenty of cash to reinvest in growth, support a strong
dividend, or strengthen our balance sheet.
But, our top priority for capital allocation at the present time must be safety. To that
end, we will continue to run the Company with the disciplines of a “Triple A,” including
adequate capital, low leverage, solid earnings, and conservative funding.
We have built a foundation that can weather this economic storm. But to emerge from
this cycle as a more valuable company requires an unflinching commitment to execute our
long-term strategy: building strong businesses and sustaining competitive advantage.
Building Strong Businesses
Over time, we have been able to transform the GE portfolio to meet new opportunities.
That remains true today. The chart on this page shows GE’s cumulative net earnings
over the past four decades: 1970s: $8 billion; 1980s: $24 billion; 1990s: $65 billion;
2000s: approaching $170 billion. We have performed through economic cycles.
Last year, we simplified our operating framework to focus on four main businesses:
technology and energy infrastructure, finance, and media. In 2008, our earnings declined
19%, while the S&P 500’s earnings declined 30%. This is not the type of “outperformance”
we like, but we were better than the broad market. Over time, and in an improved
economy, we expect our businesses will continue to grow faster than the S&P 500. We
have three priorities for 2009: expand leadership in infrastructure and media; capitalize
on GE’s cyclical advantages; and create a more focused GE Capital Finance.
GE DELIVERS 1970s 1980s 1990s 2000s
29
65
10
24
48
90+
~170
(In $ billions)
A
. Dividend
B. GE earnings
ge 2008 annual report 3