GE 2012 Annual Report Download - page 39

management’s discussion and analsis
GE 2012 ANNUAL REPORT 37
(retiree health and life plans discount rate decreased from 4.09%
at December 31, 2011 to 3.74% at December 31, 2012). We fund
our retiree health benefits on a pay-as-you-go basis. We expect
to contribute $0.6 billion to these plans in 2013 compared with
actual contributions of $0.5 billion and $0.6 billion in 2012 and
2011, respectively.
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 17.5%, 18.5% and 16.3% of
total GE sales in 2012, 2011 and 2010, respectively. The 2012
decrease was primarily driven by increased sales and the effects
of global cost reduction initiatives, partially offset by increased
acquisition-related costs. The vast majority of the 2011 increase
was driven by higher pension costs and increased costs to sup-
port global growth.
INTEREST ON BORROWINGS AND OTHER FINANCIAL CHARGES
amounted to $12.5 billion, $14.5 billion and $15.5 billion in 2012,
2011 and 2010, respectively. Substantially all of our borrowings
are in financial services, where interest expense was $11.7 billion,
$13.9 billion and $14.5 billion in 2012, 2011 and 2010, respectively.
GECC average borrowings declined from 2011 to 2012 and from
2010 to 2011, in line with changes in average GECC assets.
Interest rates have decreased over the three-year period primarily
attributable to declining global benchmark interest rates. GECC
average borrowings were $421.9 billion, $452.7 billion and
$472.0 billion in 2012, 2011 and 2010, respectively. The GECC aver-
age composite effective interest rate was 2.8% in 2012, 3.1% in
2011 and 3.1% in 2010. In 2012, GECC average assets of $562.1 bil-
lion were 5% lower than in 2011, which in turn were 3% lower than
in 2010. See the Liquidity and Borrowings section for a discussion
of liquidity, borrowings and interest rate risk management.
INCOME TAXES have a significant effect on our net earnings. As a
global commercial enterprise, our tax rates are affected by many
factors, including our global mix of earnings, the extent to which
those global earnings are indefinitely reinvested outside the
United States, legislation, acquisitions, dispositions and tax char-
acteristics of our income. Our tax rates are also affected by tax
incentives introduced in the U.S. and other countries to encour-
age and support certain types of activity. Our tax returns are
routinely audited and settlements of issues raised in these audits
sometimes affect our tax provisions.
GE and GECC file a consolidated U.S. federal income tax return.
This enables GE to use GECC tax deductions and credits to reduce
the tax that otherwise would have been payable by GE.
Income taxes on consolidated earnings from continuing
operations were 14.4% in 2012 compared with 28.3% in 2011 and
7.3% in 2010.
Our consolidated income tax rate is lower than the U.S. statu-
tory rate primarily because of benefits from lower-taxed global
operations, including the use of global funding structures. There
is a benefit from global operations as non-U.S. income is subject
to local country tax rates that are significantly below the 35% U.S.
statutory rate. These non-U.S. earnings have been indefinitely
reinvested outside the U.S. and are not subject to current U.S.
income tax. The rate of tax on our indefinitely reinvested non-U.S.
earnings is below the 35% U.S. statutory rate because we have
significant business operations subject to tax in countries where
the tax on that income is lower than the U.S. statutory rate and
because GE funds the majority of its non-U.S. operations through
foreign companies that are subject to low foreign taxes.
We expect our ability to benefit from non-U.S. income taxed
at less than the U.S. rate to continue, subject to changes in U.S. or
foreign law, including the expiration of the U.S. tax law provision
deferring tax on active financial services income, as discussed in
Note 14. In addition, since this benefit depends on management’s
intention to indefinitely reinvest amounts outside the U.S., our
tax provision will increase to the extent we no longer indefinitely
reinvest foreign earnings.
Our benefits from lower-taxed global operations increased to
$2.2 billion in 2012 from $2.1 billion in 2011 principally because of
the realization of benefits for prior year losses and a decrease in
current year losses for which there was not a full tax benefit. Our
benefits from lower-taxed global operations declined to $2.1 bil-
lion in 2011 from $2.8 billion in 2010 principally because of lower
earnings indefinitely reinvested in our operations subject to tax
in countries where the tax on that income is lower than the U.S.
statutory rate and a decrease in the benefit from audit resolu-
tions. The benefit from lower-taxed global operations include in
2012 and in 2011 $0.1 billion, and in 2010 $0.4 billion due to audit
resolutions. To the extent global interest rates and non-U.S. oper-
ating income increase we would expect tax benefits to increase,
subject to management’s intention to indefinitely reinvest
those earnings.
Our benefit from lower taxed global operations included the
effect of the lower foreign tax rate on our indefinitely reinvested
non-U.S. earnings which provided a tax benefit of $1.3 billion in
2012, $1.5 billion in 2011 and $2.0 billion in 2010. The tax benefit
from non-U.S. income taxed at a local country rather than the U.S.
statutory tax rate is reported in the effective tax rate reconcilia-
tion in the line “Tax on global earnings including exports.”
The decrease in the consolidated effective tax rate from 2011
to 2012 was due in significant part to the high effective tax rate
in 2011 on the pre-tax gain on the NBC Universal (NBCU) transac-
tion with Comcast Corporation (Comcast) discussed in Note 2.
This gain increased the 2011 consolidated effective tax rate by
12.8 percentage points. The effective tax rate was also lower due
to the benefit of the high tax basis in the entity sold in the Business
Property disposition.