We run this portfolio with intensity. In 2004, our cash flow from operating activities (CFOA) grew 18%, powered by a 27% expansion in industrial cash flow. CFOA growth and other actions helped keep our balance sheet strong and maintain our “Triple-A” ratings. Since November 2002, we have improved our financial flexibility by reducing “parent-supported” debt of the financial services businesses by about $14 billion. Our pension plans in total continue to have a surplus of more than $4 billion, and we expect to meet our obligations to pensioners with no significant increase in funding for the foreseeable future.
GE is filled with “capital-efficient” and “high-intellect” businesses. In other words, we get growth without building factories and we allocate capital to maximize returns. We run these businesses with a clear focus on reducing working capital and improving return on equity.
We have a new area of focus that we call Lean Six Sigma. We have leveraged Lean manufacturing’s classic tools for reducing cycle time with the problem-solving capability of Six Sigma. In the last two years, Transportation improved inventory turns from seven to nine, and Advanced Materials improved receivables by six turns. We achieved $2.7 billion of improvements in working capital in 2003–04 and intend to continue this progress. The same focus on capital efficiency exists in our financial services businesses. Commercial Finance has expanded its returns through a “Lean Six Sigma”-like focus on margin expansion, risk management and lower cost.
In 2005–07, GE expects to generate more than $60 billion of CFOA. Remember, CFOA is what is left over after we have made substantial investments in the Company. In our case, this is $60-plus billion after investing $15 billion in technology, $10 billion in media programming, and $12 billion in marketing and information technology (IT), as well as funding more than $100 billion of financial services asset growth. Simply put, we generate a lot more cash than we need to grow your Company.
This gives GE substantial financial flexibility. We plan to return about 75% of this cash to you in the form of consistent dividend growth and up to $15 billion in stock buybacks through 2007. With the remainder, we can invest $3–5 billion in industrial acquisitions each year. These activities strengthen our earnings growth rate while expanding returns.
At the same time, we remain committed to reducing cost by generating $4 billion of productivity each year. We want to achieve this target without compromising our investments in growth. This requires new ways to run the Company.
We have a broad operating initiative called Simplification. We are targeting a reduction in “non-growth cost” of $3 billion over three years. We are measuring reductions in legal entities, headquarters, “rooftops,” computer systems … anything that is not directly linked with customer satisfaction and growth. We are creating “Centers of Excellence” to share best practices and reduce cost. We are outsourcing common systems. The fact is that complexity is the enemy of growth and we want to eliminate it.
The results are significant. Commercial Finance is consolidating its $232 billion-asset business into three customer service/operations centers. This will save $300 million over the next three years while adding more than 1,000 salespeople. Consumer & Industrial consolidated three headquarters into one. This saved more than $100 million in structural cost, two-thirds of which was redeployed into new products. Energy organized its separate technologies into one global product company. In addition, Transportation and Energy are sharing some IT and operational assets. These moves will allow Energy to reduce structural cost by $300 million annually and increase the number of new product launches.
We have built a fast-growth portfolio. We run our businesses with intensity, creating low-cost operations and generating excess cash. On this foundation we are building a dynamic growth process that will transform GE.
 |
 |
 |