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However, as measured by the stock price, this was a disappointing year
for GE investors—including GE employees, who own almost 10% of
our stock. We had targeted higher earnings growth, but as I will explain
below, we had to increase reserves at ERC (Employers Reinsurance Corporation),
our reinsurance business. We had to work through the general swirl around
business practices and, perhaps most important, address concerns about
our future growth. Our stock was down 39% for the year, more than the
S&P 500, and GE now trades near the same level it did at the end
of 1997.
As
managers, it is our principal job to make and sell great products and
services that people need and thereby increase earnings. Since 1997,
our earnings have grown more than 80%…far in excess of the S&P
500’s performance. If you have held GE stock for 10 years or more,
the average total annual return on your shares has been 15%—more
than one and a half times the 9% of the S&P 500. Through the cycles,
your GE management team has consistently grown earnings, and I, along
with our many managers, have no doubt that we will be able to continue
to do this.
This
was not a great year to be a rookie CEO. With a tough economy, a volatile
political environment, and the impact of 9/11 and industry cycles, business
challenges were plentiful. Add to that the presumption of widespread
corporate fraud and there were not too many normal days in 2002.
However,
I am an optimist. In many ways, this was the best time to take over a
company. That is because the role of the CEO will, and should, change.
And a new CEO—especially an optimistic one—can embrace change
with an open mind. Let me share a few thoughts with you on how I am leading
GE in this environment.
I
believe that our reputation for integrity and honorable dealings is our
most important asset. GE has not been immune to the fallout from recent
bull and bubble markets. I hear from investors who are concerned about
the quality of corporate earnings, the need for a solid balance sheet
and sustainable cash flow, and the importance of responsible executive
compensation and accounting standards. Let me assure you that GE will
lead on all of these fronts.
As
one example, a substantial portion of my compensation is linked to the
performance of GE stock. Nearly 70% of my net worth is in GE stock. I
hold my stock options to term (10 years), a practice I adopted when I
became chairman and which I will continue. At the same time, I have asked
our board’s Compensation Committee to explore best practices on
linking my pay even more closely with investor interests.
I
strive for openness. I am committed to putting investors inside GE every
day. It will take some time to get this right, but I am committed to
the process. I want investors to understand how GE grows, and that our
fundamentals are real and sustainable. When you have high-performing
businesses run by talented managers, it is enjoyable to let the world
know how the job is getting done. For example, in July we divided GE
Capital into four distinct financial services businesses, each with its
own growth strategies, leverage and balance sheet. This makes them easier
to grow internally and clarifies them externally.
I
believe in the GE team. I see every day just how special your GE team
is. Its members are diverse and talented. They have unceasing curiosity
and relentless drive. They understand the magic of GE…that what
we imagine, we can make happen. Leading this group is the honor of my
life. We are committed to work together, to deliver and always to put
the company first.
Your
GE team believes in high standards, and believes that strong integrity
is the foundation of great performance. I hold myself to a high standard,
and I know you will do the same.
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The GE Business Model
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A Diverse Set of Leading Businesses Driving
Performance
Great businesses we have been in for decades
Operating Rigor with a Focus on Cash Generation
Triple A-worthy discipline for investment in
growth
Great People in a Culture of Learning and
Accountability
Individuals who imagine, lead and perform for
the team and the company
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Our Strategy for Growth
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Technical Leadership
that expands margins and grows the installed
base
Services Acceleration
that improves returns, competitiveness and
customer satisfaction
Enduring Customer Relationships
that are unbreakable because we win together
over the long term
Globalization
as a way to grow faster and be more competitive
Resource Reallocation
to build positions in new markets where we
can achieve superior growth and returns
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Here is how we performed in 2002:
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Earnings before required accounting
changes grew 7% to a record $15.1 billion. Earnings were on track
to grow 17% to $16.5 billion, but we recorded a $1.4 billion charge
for increasing ERC’s reserves.
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Revenues grew 5% to $132 billion.
Industrial sales grew 8%, more than twice the GDP and exceeding our
2001 growth rate. Financial services revenues were flat, reflecting
lower interest rates. However, net revenues (revenues less interest
costs) of Commercial Finance, Consumer Finance and Equipment Management
grew a more robust 15%.
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Cash flow from operating activities
(excluding progress collections) reached $15.2 billion, up 10%. Operating
margin and return on average total capital remained near historic
highs at 19% and 24%, respectively.
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We raised our dividend 6% in December,
our 27th consecutive annual increase. Our yield is a very strong
3.1%, the highest at GE in nearly a decade. Overall, we returned
$9 billion to our investors in 2002 through dividends and stock buybacks.
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There
is a job that belongs to you and your fellow investors, and not to me.
That is setting a value on our future prospects in the form of a stock
price. Last year, despite what we saw as a lot of progress in the face
of headwinds, the market revised downward its perception of our future.
Maybe the market had too rosy a view of many companies, and not just GE.
But that is certainly not the case now. This is a great company with great
prospects. When investors fully understand that fact—and I intend
to make sure they do—valuation must change.
It
starts with understanding our business model, our strategy for growth
and our values.
THE GE BUSINESS MODEL
CEOs don’t make the best economists. We make commitments, not
forecasts. But it’s safe to say things are very different today
than in the late 1990s. We seem to be in the third year of a “post-bubble” cycle,
made worse by the 9/11 tragedy. This period is characterized by slow
economic growth—not a double dip, but without a spark—with
tough pricing, volatile capital markets, difficult industry cycles,
the threat of war and low corporate trust.
We
don’t see this environment as a negative. Rather, we believe
this is an environment in which companies make their own success.
This is the time for us to create our own growth through bold ideas
and rigorous execution. And we have a business model that will enable
us to grow in this economy.
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Our Goal: To grow earnings 10%-plus annually with 20%-plus
return on total capital…reliably, sustainably, through
the cycles. Getting there depends on our solid business model:
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A diverse set of leading
businesses driving performance
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Operating rigor with a focus
on cash generation
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Great people in a culture
of learning and accountability
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A DIVERSE SET OF LEADING BUSINESSES
GE has great businesses, most of which we’ve been in for decades, some
for 80 years or more. In addition to leading in their markets, these businesses
have many traits in common: an unparalleled technical foundation; direct customer
interfaces; multiple ways to make money through products, services and financing;
global scale; and low capital intensity. The characteristics of our businesses
allow us to outperform our competitors in each cycle; the combination of our
businesses allows GE to perform through the cycles.
Power Systems
is a great example. In 2002, its earnings grew nearly 30% as shipments of gas
turbines in the U.S. peaked. This business has generated an incremental $7 billion
of net income for investors during the four-year gas turbine bubble. We know
that Power’s 2003 earnings will be down as the demand for gas turbines
declines. But Power is led by one of our most experienced teams. As a result,
Power has no financial hangover from excess capacity or risky financing, so we
can give our investors a soft landing. With an installed base of turbines and
a multi-year services backlog that both have grown tenfold, and investment in
new platforms including Oil & Gas and Wind Energy, Power is positioned for
long-term growth and high returns.
Our performance
in a difficult commercial aviation market has been excellent. Our earnings in
Aircraft Engines and GECAS (our leasing unit) were down only 5% in 2002, despite
a near 20% decline in commercial engine shipments and the bankruptcies of two
major U.S. airlines. Our businesses are extremely well managed, and their leaders
have been through these cycles before. We took cost out of the Engines business,
while investing $700 million in R&D to develop eight new engines. We have
a successful family of engines for regional jets, the only growth segment in
commercial aviation. Our service and military businesses should grow more than
15%, providing earnings momentum. Meanwhile, GECAS has kept a 1,100-plus fleet
productive, with only 12 planes on the ground at the end of the year. Our in-depth
knowledge of these assets and our global marketing skills have allowed GECAS
to grow through the turmoil. We are managing through bankruptcies at major customers
and have remarketed more than 140 aircraft. We will emerge from this cycle with
strengthened customer relationships, ahead of our competition. These businesses
should
have double-digit earnings growth in 2003.
Medical
Systems should also have an excellent 2003. Medical introduced 30 new products in
2002, the most in its history. The backlog of orders for these high-margin products
is at an all-time high, and service growth continues at 11% annually. Medical’s
healthcare information technology business grew orders 30% in 2002 and is well
positioned for 2003. Our Medical business is the global leader in diagnostic
imaging and clinical information technology, two of the fastest-growing segments
in healthcare. Medical has a vibrant leadership team with deep healthcare expertise,
and the business is positioned for sustained double-digit growth.
NBC continues
to outpace its competition in financial performance and ratings. Earnings grew
18% in 2002, a terrific performance that we expect will continue through 2003.
Our prime-time ratings in key viewing demographics (adults ages 18-49) were 29%
higher than the next network’s, allowing GE to command a 50% share of the
growth in the “upfront” (pre-season) advertising market. In 2002,
we added the Telemundo and Bravo networks to NBC. Telemundo is well positioned
to capture the growth in Hispanic advertising. Bravo’s upscale audience
parallels NBC’s and creates new opportunities for content. Because of NBC’s
great performance, I was delighted to present Bob Wright and his team with our
annual Chairman’s Leadership Award for “best overall performance.” |
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