GE 2009 Annual Report Download - page 118

116 GE 2009 ANNUAL REPORT
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Our ROTC calculation excludes earnings (losses) of discontinued
operations from the numerator because U.S. GAAP requires us to
display those earnings (losses) in the Statement of Earnings. We
exclude the cumulative effect of earnings (losses) of discontinued
operations from the denominator in our ROTC calculation (1) for
each of the periods for which related discontinued operations were
presented, and (2) for our average net investment in discontinued
operations since July 1, 2005. Had we disposed of these operations
before July 1, 2005, we would have applied the proceeds to reduce
parent-supported debt at GE Capital. However, since parent-
supported debt at GE Capital was retired by June 30, 2005, we
have assumed that we would have distributed the proceeds after
that time to shareowners through share repurchases, thus reduc-
ing average GE shareowners’ equity. Our calculation of average GE
shareowners’ equity may not be directly comparable to similarly
titled measures reported by other companies. We believe that it is
a clearer way to measure the ongoing trend in return on total
capital for the continuing operations of our businesses given the
extent that discontinued operations have affected our reported
results. We believe that this results in a more relevant measure for
management and investors to evaluate performance of our con-
tinuing operations, on a consistent basis, and to evaluate and
compare the performance of our continuing operations with the
ongoing operations of other businesses and companies.
Definitions indicating how the above-named ratios are calcu-
lated using average GE shareowners’ equity, excluding effects of
discontinued operations, can be found in the Glossary.
Ratio of Debt to Equity at GE Capital, Net of Cash and
Equivalents and with Classification of Hybrid Debt as Equity
December 31 (Dollars in millions) 2009 2008
GE Capital debt $496,558 $510,356
Less cash and equivalents 63,693 36,430
Less hybrid debt 7,725 7,725
$425,140 $466,201
GE Capital equity $ 73,718 $ 58,229
Plus hybrid debt 7,725 7,725
$ 81,443 $ 65,954
Ratio 5.22:1 7.07:1
We have provided the GE Capital ratio of debt to equity on a
basis that reflects the use of cash and equivalents to reduce
debt, and with long-term debt due in 2066 and 2067 classified as
equity. We believe that this is a useful comparison to a GAAP-
based ratio of debt to equity because cash balances may be used
to reduce debt and because this long-term debt has equity-like
characteristics. The usefulness of this supplemental measure may
be limited, however, as the total amount of cash and equivalents
at any point in time may be different than the amount that could
practically be applied to reduce outstanding debt, and it may not
be advantageous or practical to replace certain long-term debt
with equity. In the first quarter of 2009, GE made a $9.5 billion
payment to GECS (of which $8.8 billion was further contributed
to GE Capital through capital contribution and share issuance).
Despite these potential limitations, we believe that this measure,
considered along with the corresponding GAAP measure, provides
investors with additional information that may be more compa-
rable to other financial institutions and businesses.
Capital Finance Ending Net Investment (ENI),
Excluding the Effects of Currency Exchange Rates
December 31 (In billions) 2009 2008
GECS total assets $650.2 $660.9
Less assets of discontinued operations 1.5 1.7
Less non-interest bearing liabilities 75.7 85.5
Less GECS headquarters ENI 79.4 48.5
Capital Finance ENI 493.6 525.2
Less effects of currency exchange rates 21.4 —
Capital Finance ENI, excluding the effects of
currency exchange rates $472.2 $ 525.2
We use ENI to measure the size of our financial services business.
We believe that this measure is a better indicator of the capital
(debt or equity) required to fund a business as it adjusts for non-
interest bearing current liabilities generated in the normal course
of business that do not require a capital outlay. We also believe
that by excluding the impact of GECS discontinued operations,
GECS headquarters items and the effects of currency exchange
movements during the year, we provide a more meaningful
measure for our Capital Finance segment.
GE Pre-Tax Earnings from Continuing Operations, Excluding
GECS Earnings and the Corresponding Effective Tax Rates
(Dollars in millions) 2009 2008 2007
GE earnings from continuing
operations before income taxes $14,142 $21,926 $25,958
Less GECS earnings from
continuing operations 1,590 7,774 12,417
Total $12,552 $14,152 $13,541
GE provision for income taxes $ 2,739 $ 3,427 $ 2,794
GE effective tax rate, excluding
GECS earnings 21.8% 24.2% 20.6%
Average GE Shareowners’ Equity, Excluding Effects of Discontinued Operations (a)
December 31 (In millions) 2009 2008 2007 2006 2005
Average GE shareowners’ equity (b) $110,535 $113,387 $113,842 $109,174 $110,998
Less the effects of
Cumulative earnings from discontinued operations — — — — 2,094
Average net investment in discontinued operations (642) (590) 3,640 11,658 13,298
Average GE shareowners’ equity, excluding effects of
discontinued operations (a) $111,177 $113,977 $110,202 $ 97,516 $ 95,606
(a) Used for computing return on average GE shareowners’ equity and return on average total capital invested shown in the Selected Financial Data section.
(b) On an annual basis, calculated using a five-point average.