GE 2010 Annual Report Download - page 36

management’s discussion and analsis
34 GE 2010 ANNUAL REPORT
GE SALES OF PRODUCT SERVICES were $34.7 billion in 2010, a
decrease of 1% compared with 2009. Decreases in product
services at Technology Infrastructure were partially offset
by increases at Energy Infrastructure and Home & Business
Solutions. Operating profit from product services was $10.0 bil-
lion in 2010, about flat compared with 2009.
POSTRETIREMENT BENEFIT PLANS costs were $3.0 billion, $2.6 bil-
lion and $2.2 billion in 2010, 2009 and 2008, respectively. Costs
increased in 2010 primarily due to the amortization of 2008
investment losses and the effects of lower discount rates (prin-
cipal pension plans discount rate decreased from 6.11% at
December 31, 2008 to 5.78% at December 31, 2009), partially
offset by lower early retirement costs.
Costs increased in 2009 primarily because the effects of lower
discount rates (principal pension plans discount rate decreased
from 6.34% at December 31, 2007 to 6.11% at December 31, 2008)
and increases in early retirements resulting from restructuring
activities and contractual requirements, partially offset by amorti-
zation of prior years’ investment gains and benefits from new
healthcare supplier contracts.
Our discount rate for our principal pension plans at
December 31, 2010 was 5.28%, which reflected current interest
rates. Considering the current and expected asset allocations, as
well as historical and expected returns on various categories of
assets in which our plans are invested, we have assumed that
long-term returns on our principal pension plan assets will be
8.0% for cost recognition in 2011, a reduction from the 8.5% we
assumed in 2010, 2009 and 2008. GAAP provides recognition of
differences between assumed and actual returns over a period no
longer than the average future service of employees. See the
Critical Accounting Estimates section for additional information.
We expect the costs of our postretirement benefits to increase
in 2011 by approximately $1.1 billion as compared to 2010, pri-
marily because of the effects of additional 2008 investment loss
amortization and lower discount rates.
Pension expense for our principal pension plans on a GAAP
basis was $1.1 billion, $0.5 billion and $0.2 billion for 2010, 2009
and 2008, respectively. Operating pension costs (non-GAAP) for
these plans were $1.4 billion, $2.0 billion and $1.7 billion in 2010,
2009 and 2008, respectively.
The GE Pension Plan was underfunded by $2.8 billion at the
end of 2010 as compared to $2.2 billion at December 31, 2009. The
GE Supplementary Pension Plan, which is an unfunded plan, had
projected benefit obligations of $4.4 billion and $3.8 billion at
December 31, 2010 and 2009, respectively. The increase in under-
funding from year-end 2009 was primarily attributable to the
effects of lower discount rates, partially offset by an increase in
GE Pension Plan assets. Our principal pension plans discount
rate decreased from 5.78% at December 31, 2009 to 5.28% at
December 31, 2010, which increased the pension benefit obliga-
tion at year-end 2010 by approximately $2.9 billion. Our
GE Pension Plan assets increased from $42.1 billion at the end of
2009 to $44.8 billion at December 31, 2010, driven by a 13.5%
increase in investment values during the year, partially offset by
benefit payments. Assets of the GE Pension Plan are held in trust,
solely for the benefit of Plan participants, and are not available for
general company operations.
On an Employee Retirement Income Security Act (ERISA) basis,
the GE Pension Plan was 98% funded at January 1, 2011. We will
not make any contributions to the GE Pension Plan in 2011.
Funding requirements are determined as prescribed by ERISA and
for GE, are based on the Plan’s funded status as of the beginning
of the previous year and future contributions may vary based on
actual plan results. Assuming our 2011 actual experience is con-
sistent with our current benefit assumptions (e.g., expected return
on assets and interest rates), we will be required to make about
$1.4 billion in contributions to the GE Pension Plan in 2012.
At December 31, 2010, the fair value of assets for our other
pension plans was $2.1 billion less than the respective projected
benefit obligations. The comparable amount at December 31,
2009, was $2.7 billion. We expect to contribute $0.7 billion to our
other pension plans in 2011, compared with actual contributions
of $0.6 billion and $0.7 billion in 2010 and 2009, respectively. We
fund our retiree health benefits on a pay-as-you-go basis. The
unfunded liability for our principal retiree health and life plans was
$10.9 billion and $11.6 billion at December 31, 2010 and 2009,
respectively. This decrease was primarily attributable to lower
healthcare trends and the effects of healthcare reform provisions
on our Medicare-approved prescription drug plan, partially offset
by lower discount rates (retiree health and life plans discount
rate decreased from 5.67% at December 31, 2009 to 5.15% at
December 31, 2010). We expect to contribute $0.7 billion to these
plans in 2011 compared with actual contributions of $0.6 billion
in both 2010 and 2009.
The funded status of our postretirement benefits plans and
future effects on operating results depend on economic condi-
tions and investment performance. For additional information
about funded status, components of earnings effects and actu-
arial assumptions, see Note 12.
GE OTHER COSTS AND EXPENSES are selling, general and adminis-
trative expenses. These costs were 16.3%, 14.3% and 12.9% of
total GE sales in 2010, 2009 and 2008, respectively. The increase
in 2010 is primarily due to increased selling expenses to support
global growth and higher pension costs, partially offset by lower
restructuring and other charges.
INTEREST ON BORROWINGS AND OTHER FINANCIAL CHARGES
amounted to $16.0 billion, $18.3 billion and $25.8 billion in 2010,
2009 and 2008, respectively. Substantially all of our borrowings
are in financial services, where interest expense was $15.0 bil-
lion, $17.5 billion and $24.7 billion in 2010, 2009 and 2008,
respectively. GECS average borrowings declined from 2009 to
2010 and from 2008 to 2009, in line with changes in average
GECS assets. Interest rates have decreased over the three-year
period attributable to declining global benchmark interest rates,
partially offset by higher average credit spreads. GECS average
borrowings were $480.4 billion, $497.6 billion and $521.2 billion
in 2010, 2009 and 2008, respectively. The GECS average