Because GE and GECS share certain significant elements of their Statements of Financial Position — property, plant and equipment and borrowings, for example — the following discussion addresses significant captions in the “consolidated” statement. Within the following discussions, however, we distinguish between GE and GECS activities in order to permit meaningful analysis of each individual consolidating statement.
INVESTMENT SECURITIES comprise mainly investment-grade debt securities supporting obligations to annuitants and policyholders. Investment securities were $47.8 billion at December 31, 2006, compared with $42.1 billion at December 31, 2005.
We regularly review investment securities for impairment based on both quantitative and qualitative criteria. Quantitative criteria include length of time and amount that each security is in an unrealized loss position and, for fixed maturities, whether the issuer is in compliance with terms and covenants of the security. Qualitative criteria include the financial health of and specific prospects for the issuer, as well as our intent and ability to hold the security to maturity or until forecasted recovery. Our impairment reviews involve our finance, risk and asset management teams as well as the portfolio management and research capabilities of our internal and third-party asset managers. Our qualitative review attempts to identify those issuers with a greater than 50% chance of default in the following 12 months. These securities are characterized as “at-risk” of impairment. Of investment securities with unrealized losses at December 31, 2006, an insignificant amount was at risk of being charged to earnings in the next 12 months.
Impairment losses for both 2006 and 2005 totaled $0.1 billion. We recognized impairments in both periods for issuers in a variety of industries; we do not believe that any of the impairments indicate likely future impairments in the remaining portfolio.
Gross unrealized gains and losses totaled $2.9 billion and $0.3 billion, respectively, at December 31, 2006, compared with $2.3 billion and $0.5 billion, respectively, at December 31, 2005, primarily reflecting an increase in the estimated fair value of equity securities, partially offset by a decrease in the estimated fair value of debt securities as interest rates increased. At December 31, 2006, available 2007 accounting gains could be as much as $1.7 billion, net of consequential adjustments to certain insurance assets that are amortized based on anticipated gross profits. The market values we used in determining unrealized gains and losses are those defined by relevant accounting standards and should not be viewed as a forecast of future gains or losses.
We also hold collateralized investment securities issued by various airlines, including those operating in bankruptcy. Total amortized cost and fair value of these securities were $0.7 billion at December 31, 2006. Unrealized losses associated with securities in an unrealized loss position for more than 12 months were insignificant, an improvement from the comparable $0.1 billion a year earlier. All of these securities have remained current on all payment terms; we do not expect the borrowers to default. Current appraised market values of associated aircraft collateral exceeded both the market value and the amortized cost of our related securities at December 31, 2006, offering protection in the event of foreclosure. Therefore, we expect full recovery of our investment as well as our contractual returns. See note 10.
WORKING CAPITAL, representing GE inventories and receivables from customers, less trade payables and progress collections
, was $7.6 billion at December 31, 2006, down $0.8 billion from December 31, 2005.
We discuss current receivables and inventories, two important elements of working capital, in the following paragraphs.
CURRENT RECEIVABLES for GE amounted to $14.3 billion at the end of 2006 and $15.1 billion at the end of 2005, and included $9.1 billion due from customers at the end of 2006 compared with $10.3 billion at the end of 2005. Turnover of customer receivables from sales of goods and services was 10.6 in 2006, compared with 9.0 in 2005. Other current receivables are primarily amounts that did not originate from sales of GE goods or services, such as advances to suppliers in connection with large contracts. The allowance for losses decreased $0.3 billion in 2006, primarily reflecting write-offs of receivables for which losses were previously provided. See note 11.
INVENTORIES for GE amounted to $11.3 billion at December 31, 2006, up $1.0 billion from the end of 2005. This increase reflected higher inventories at Infrastructure, which is in line with anticipated growth. GE inventory turnover was 8.3 in both 2006 and 2005. See note 12.
FINANCING RECEIVABLES is our largest category of assets and represents one of our primary sources of revenues. The portfolio of financing receivables, before allowance for losses, was $338.9 billion at December 31, 2006, and $292.2 billion at December 31, 2005. The related allowance for losses at December 31, 2006, amounted to $4.7 billion, compared with $4.6 billion at December 31, 2005, representing our best estimate of probable losses inherent in the portfolio. The 2006 increase reflected overall growth in our portfolio at GE Money and late-year weakening of the U.S. dollar, primarily at GE Money; partially offset by overall improvement in portfolio quality at Commercial Finance and lower losses on commercial aviation loans and leases in our Infrastructure segment. Balances at December 31, 2006 and 2005, included securitized, managed GE trade receivables of $6.0 billion and $3.9 billion, respectively.
A discussion of the quality of certain elements of the financing receivables portfolio follows. For purposes of that discussion, “delinquent” receivables are those that are 30 days or more past due; and “nonearning” receivables are those that are 90 days or more past due (or for which collection has otherwise become doubtful).
Commercial Finance financing receivables, before allowance for losses, totaled $153.2 billion at December 31, 2006, compared with $131.8 billion at December 31, 2005, and consisted of loans and leases to the equipment and leasing, commercial and industrial and real estate industries. This portfolio of receivables increased primarily from core growth ($58.3 billion), acquisitions ($5.6 billion), and late-year weakening of the U.S. dollar ($2.4 billion), partially offset by securitizations and sales ($42.8 billion). Related nonearning receivables were $1.6 billion (1.0% of outstanding receivables) at December 31, 2006, and $1.3 billion (1.0% of outstanding receivables) at year-end 2005. Commercial Finance financing receivables are generally backed by assets and there is a broad spread of geographic and credit risk in the portfolio.
GE Money financing receivables, before allowance for losses, were $156.7 billion at December 31, 2006, compared with $130.1 billion at December 31, 2005, and consisted primarily of card receivables, installment loans, auto loans and leases, and residential mortgages. This portfolio of receivables increased primarily as a result of core growth ($17.7 billion), late-year weakening of the U.S. dollar ($8.2 billion) and acquisitions ($3.2 billion), partially offset by loans transferred to assets held for sale ($2.5 billion). Related nonearning receivables were $3.3 billion at December 31, 2006, compared with $2.8 billion at December 31, 2005, both representing 2.1% of outstanding receivables. The increase was primarily related to the weaker U.S. dollar at the end of the year and overall growth in the portfolio.
Infrastructure financing receivables, before allowance for losses, were $21.2 billion at December 31, 2006, compared with $19.1 billion at December 31, 2005, and consisted primarily of loans and leases to the commercial aircraft and energy industries. Related nonearning receivables were insignificant at December 31, 2006 and 2005.
Other financing receivables, before allowance for losses, were $7.8 billion and $11.2 billion at December 31, 2006, and December 31, 2005, respectively, and consisted primarily of financing receivables in consolidated, liquidating securitization entities. This portfolio of receivables decreased because we have stopped transferring assets to these entities. Related nonearning receivables at December 31, 2006, were $0.1 billion (1.1% of outstanding receivables) compared with $0.1 billion (0.7% of outstanding receivables) at December 31, 2005.
Delinquency rates on managed Commercial Finance equipment loans and leases and managed GE Money financing receivables follow.
| December 31 | 2006 | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Commercial Finance | 1.22 | % | 1.31 | % | 1.40 | % | |||
| GE Money | 5.05 | 5.08 | 4.85 | ||||||
Delinquency rates at Commercial Finance decreased from December 31, 2004, through December 31, 2006, primarily resulting from improved credit quality across all portfolios.
Delinquency rates at GE Money decreased from December 31, 2005, to December 31, 2006, as a result of improvements in our European secured financing business, partially offset by the weakening U.S. dollar at the end of the year. The increase from December 31, 2004, to December 31, 2005, reflected higher delinquencies in our European secured financing business, a business that tends to experience relatively higher delinquencies but lower losses than the rest of the consumer portfolio. See notes 13 and 14.
OTHER GECS RECEIVABLES totaled $21.9 billion at December 31, 2006, and $18.6 billion at December 31, 2005, and consisted primarily of amounts due from GE (generally related to certain material procurement programs), insurance receivables, nonfinancing customer receivables, amounts due under operating leases, receivables due on sale of securities and various sundry items.
PROPERTY, PLANT AND EQUIPMENT amounted to $75.0 billion at December 31, 2006, up $7.4 billion from 2005, primarily reflecting acquisitions of commercial aircraft at the Aviation Financial Services business of Infrastructure and the consolidation of GE SeaCo at the Equipment Services business of Industrial during the second quarter of 2006. GE property, plant and equipment consisted of investments for its own productive use, whereas the largest element for GECS was equipment provided to third parties on operating leases. Details by category of investment are presented in note 15.
GE expenditures for plant and equipment during 2006 totaled $3.4 billion, compared with $2.8 billion in 2005. Total expenditures for the past five years were $13.1 billion, of which 30% was investment for growth through new capacity and product development; 35% was investment in productivity through new equipment and process improvements; and 35% was investment for other purposes such as improvement of research and development facilities and safety and environmental protection.
GECS additions to property, plant and equipment were $13.2 billion and $11.6 billion during 2006 and 2005, respectively, primarily reflecting additions of vehicles at Commercial Finance and the Equipment Services business of Industrial, and commercial aircraft at the Aviation Financial Services business of Infrastructure.
INTANGIBLE ASSETS were $86.4 billion at the end of 2006, up from $81.6 billion at the end of 2005. GE intangible assets increased $2.6 billion from $57.8 billion at the end of 2005, principally as a result of goodwill and other intangible assets related to the IDX Systems Corporation and Biacore International AB acquisitions by Healthcare, the ZENON Environmental Inc. acquisition by Infrastructure, and the acquisition of iVillage Inc. by NBC Universal. This increase to intangible assets was offset by dispositions of $1.3 billion, principally as a result of the sale of Advanced Materials by Industrial.
GECS intangible assets increased by $2.2 billion to $26.0 billion at December 31, 2006, principally as a result of increases in goodwill and other intangible assets, primarily related to acquisitions and the weaker U.S. dollar at the end of the year. See note 16.
ALL OTHER ASSETS totaled $97.1 billion at year-end 2006, an increase of $12.3 billion, reflecting increases from additional investments and acquisitions in real estate, increases in assets held for sale, partially offset by decreases in associated companies and prepaid pension assets. See note 17.
BORROWINGS amounted to $433.0 billion at December 31, 2006, compared with $370.4 billion at the end of 2005.
GE total borrowings were $11.3 billion at year-end 2006 ($2.2 billion short term, $9.1 billion long term) compared with $10.2 billion at December 31, 2005. GE total debt at the end of 2006 equaled 8.7% of total capital compared with 8.1% at the end of 2005.
GECS borrowings amounted to $426.3 billion at December 31, 2006, of which $173.3 billion is due in 2007 and $253.0 billion is due in subsequent years. Comparable amounts at the end of 2005 were $362.1 billion in total, $157.7 billion due within one year and $204.4 billion due thereafter. Included in GECS total borrowings were borrowings of consolidated, liquidating securitization entities amounting to $11.1 billion and $16.8 billion at December 31, 2006 and 2005, respectively. A large portion of GECS borrowings ($100.2 billion and $97.4 billion at the end of 2006 and 2005, respectively) was issued in active commercial paper markets that we believe will continue to be a reliable source of short-term financing. The average remaining terms and interest rates of GE Capital commercial paper were 48 days and 5.09% at the end of 2006, compared with 45 days and 4.09% at the end of 2005. The GE Capital ratio of debt to equity was 7.52 to 1 at the end of 2006 and 7.09 to 1 at the end of 2005. See note 18.
EXCHANGE RATE AND INTEREST RATE RISKS are managed with a variety of techniques, including match funding and selective use of derivatives. We use derivatives to mitigate or eliminate certain financial and market risks because we conduct business in diverse markets around the world and local funding is not always efficient. In addition, we use derivatives to adjust the debt we are issuing to match the fixed or floating nature of the assets we are acquiring. We apply strict policies to manage each of these risks, including prohibitions on derivatives trading, derivatives market-making or other speculative activities. Following is an analysis of the potential effects of changes in interest rates and currency exchange rates using so-called “shock” tests that model effects of shifts in rates. These are not forecasts.
- It is our policy to minimize exposure to interest rate changes. We fund our financial investments using debt or a combination of debt and hedging instruments so that the interest rates and terms of our borrowings match the expected yields and terms on our assets. To test the effectiveness of our positions, we assumed that, on January 1, 2007, interest rates increased by 100 basis points across the yield curve (a “parallel shift” in that curve) and further assumed that the increase remained in place for 2007. We estimated, based on that year-end 2006 portfolio and holding everything else constant, that our 2007 GE consolidated net earnings would decline by $0.2 billion.
- It is our policy to minimize currency exposures and to conduct operations either within functional currencies or using the protection of hedge strategies. We analyzed year-end 2006 consolidated currency exposures, including derivatives designated and effective as hedges, to identify assets and liabilities denominated in other than their relevant functional currencies. For such assets and liabilities, we then evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. This analysis indicated that there would be an inconsequential effect on 2007 earnings of such a shift in exchange rates.
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