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GE is a multi-business growth company bound together by common operating systems and initiatives, and a common culture with strong values. Because of these shared systems, processes and values, the whole of GE is greater than the sum of its parts.
I judge our model’s success along two dimensions: broad-based financial contribution of our businesses, measured by the number of them that grow earnings at double digits; and continuous improvement of our execution, measured by cash flow growth and balance sheet strength. Along both dimensions, GE had a successful 2003.
Two-thirds of our businesses had double-digit earnings growth. Our performance leaders were Consumer Finance (+20%), NBC (+21%), Medical Systems (+10%), Specialty Materials (+35%) and, in a very tough market, Consumer Products (+13%). Our best overall performer, and winner of the Chairman’s Leadership Award, was Commercial Finance. Mike Neal and his team grew earnings 18% and had an excellent strategic performance that improved both returns and market position.
Two businesses that excelled even without double-digit earnings growth were Power Systems and Aircraft Engines. Power Systems’ earnings declined 35%, as demand for gas turbines in the U.S. returned to normal after five years of a “bubble.” However, John Rice and his team have built powerful services, oil and gas, and renewables businesses, which together had nearly $12 billion of high-margin revenues, up 30% in 2003. While we expect one more year of declining turbine shipments in the U.S., Power Systems—now called GE Energy—is positioned for sustained double-digit growth starting in 2005.
The last three years were the worst in the history of commercial aviation, yet in 2003 Aircraft Engines still grew earnings 4%. Dave Calhoun and his team kept investing in technology, services and customers. They and their partners launched a total of six new commercial engines, won significant new commercial engine orders and built a $28 billion multiyear services backlog. This year, Aircraft Engines is combining with our Rail business to form GE Transportation. With revenues per airline passenger mile growing, and with Charlene Begley and her Rail team expecting locomotive shipments to grow more than 20%, Transportation should see double-digit earnings growth in 2004 for the first time in three years.
Our biggest earnings issue in 2003 was Plastics, where operating profit was more than 70% below 2000 levels. In 1994, when I ran a substantial portion of Plastics, Jack Welch almost fired me because we only grew earnings 7%, nowhere near our 20% target. But we made the business better. John Krenicki, one of our best young leaders, is now running it, and he’s going to improve it, too. But with industry overcapacity and high raw material prices, there are no easy answers for John and his team. They are focusing on higher-margin specialty applications and products. They lead in China, the world’s fastest-growing plastics market. They are getting smarter about the way they purchase raw materials. And, in a difficult year, John and his team still generated more than $1 billion in cash flow from operating activities. I’m not sure when Plastics will get back to 2000 profit levels. However, our commitment is to get there ahead of the industry.
There is proof that you can get out of the “GE Doghouse.” Last year, I wrote about our disappointment with Employers Reinsurance Corporation (ERC), and I raised questions about the reinsurance industry and our ability to execute. However, I like the way Ron Pressman and his team are executing. They have exited unprofitable lines and written disciplined, high-return new business. Their balance sheet and investment returns are strong. ERC is now a much more stable business with multiple strategic options.
Cash is the best reflection of operating discipline, and in 2003, our cash flow from operating activities (CFOA) grew 28%, including a $2.2 billion improvement from inventory, receivables and payables. This and other actions helped keep our balance sheet strong and maintain our triple-A ratings. We have improved our financial flexibility by reducing “parent-supported debt” at GE Capital by more than $9 billion over the past two years. We increased our U.S. pension surplus, now at $6 billion, and we expect to be able to meet our obligations to our pensioners without having to contribute cash to the GE Pension Plan for the foreseeable future. By 2005, we should be generating approximately $5 billion of free cash flow.
About one-third of our Six Sigma specialists are now working on a new initiative called “cash entitlement.” This is the difference between our performance in a process—for example, inventory turnover at Plastics—versus being twice as good as our competition. Reaching cash entitlement in all of our businesses would free up an additional $7 billion in cash.
GE has operating momentum. Our markets are more favorable than they have been since 2000. Energy has one more down year, but is positioned for years of double-digit growth thereafter. In 2004, we should have double-digit earnings growth at nine
of 11 businesses, with CFOA growing in double digits as well.
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