GECC Form 10K 12-31-05

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
     
 
FORM 10-K
  

                        (Mark One)

þ 
                                          Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2005
or
 
¨ 
                                      Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ___________to ___________
 
_____________________________
 
Commission file number 1-6461
_____________________________
 
General Electric Capital Corporation
(Exact name of registrant as specified in its charter)

 
Delaware
  
13-1500700
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
    
260 Long Ridge Road, Stamford, Connecticut
  
06927
  
203/357-4000
(Address of principal executive offices)
  
(Zip Code)
  
(Registrant’s telephone number,
including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act: 
 
Title of each class
  
Name of each exchange
on which registered
 
  
 
7.875% Guaranteed Subordinated Notes Due December 1, 2006
  
New York Stock Exchange
6.625% Public Income Notes Due June 28, 2032
  
New York Stock Exchange
6.10% Public Income Notes Due November 15, 2032
  
New York Stock Exchange
5.875% Notes Due February 18, 2033
  
New York Stock Exchange
Step-Up Public Income Notes Due January 28, 2035
  
New York Stock Exchange
 
 
 
Securities Registered Pursuant to Section 12(g) of the Act:
  
 
Title of each class
  
 
None
  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨                                                      Accelerated filer ¨  Non-accelerated filer þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
Aggregate market value of the outstanding common equity held by nonaffiliates of the registrant as of the last business day of the registrant’s recently completed second fiscal quarter: None.
 
At March 2, 2006, 3,985,403 shares of voting common stock, which constitute all of the outstanding common equity, with a par value of $14 were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The consolidated financial statements of General Electric Company, set forth in the Annual Report on Form 10-K of General Electric Company for the year ended December 31, 2005 are incorporated by reference into Part IV hereof.
 
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.
 


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TABLE OF CONTENTS
   
 
  
Page
   
PART I
    
 
    
Item 1.
Business
3
Item 1A.
Risk Factors
7
Item 1B.
Unresolved Staff Comments
9
Item 2.
Properties
9
Item 3.
Legal Proceedings
9
Item 4.
Submission of Matters to a Vote of Security Holders
9
 
    
PART II
    
 
    
Item 5.
Market for the Registrant’s Common Equity and Related Stockholder Matters
9
Item 6.
Selected Financial Data
10
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
34
Item 8.
Financial Statements and Supplementary Data
34
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
77
Item 9A.
Controls and Procedures
77
Item 9B.
Other Information
78
 
    
PART III
    
 
    
Item 10.
Directors and Executive Officers of the Registrant
78
Item 11.
Executive Compensation
78
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
78
Item 13.
Certain Relationships and Related Transactions
78
Item 14.
Principal Accounting Fees and Services
79
 
    
PART IV
    
 
    
Item 15.
Exhibits and Financial Statement Schedules
79
 
Signatures 
88

 

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PART I
 
Item 1. Business.
 
General Electric Capital Corporation
 
General Electric Capital Corporation (GE Capital or GECC) was incorporated in 1943 in the State of New York under the provisions of the New York Banking Law relating to investment companies, as successor to General Electric Contracts Corporation, which was formed in 1932. Until November 1987, our name was General Electric Credit Corporation. On July 2, 2001, we changed our state of incorporation to Delaware. All of our outstanding common stock is owned by General Electric Capital Services, Inc. (GE Capital Services or GECS), formerly General Electric Financial Services, Inc., the common stock of which is in turn wholly-owned, directly or indirectly, by General Electric Company (GE Company or GE). Financing and services offered by GE Capital are diversified, a significant change from the original business of GE Capital, that is, financing distribution and sale of consumer and other GE products. GE manufactures few of the products financed by GE Capital.
 
We operate in four of GE’s operating segments described below. These operations are subject to a variety of regulations in their respective jurisdictions.
 
Our services are offered primarily in North America, Europe and Asia. Our principal executive offices are located at 260 Long Ridge Road, Stamford, Connecticut 06927-1600. At December 31, 2005, our employment totaled approximately 77,500.
 
Our financial information, including filings with the U.S. Securities and Exchange Commission (SEC), is available at www.ge.com/secreports. Copies are also available, without charge, from GE Corporate Investor Communications, 3135 Easton Turnpike, Fairfield, CT, 06828-0001. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room in Washington, D.C.
 
Operating Segments
 
In the fourth quarter of 2005, GE completed a Genworth Financial, Inc. (Genworth) secondary public offering, which reduced our ownership in Genworth to 18%. We have reported Genworth as discontinued operations for all periods presented. Genworth was previously reported in the GE Commercial Finance segment. Also, during the fourth quarter of 2005, our insurance activities, previously reported in the GE Commercial Finance segment, were transferred to GECC corporate items and eliminations for all periods presented.
 
For purposes of our segment discussions throughout this document, the financial services businesses (Equipment Services, Aviation Financial Services, Energy Financial Services and Transportation Finance), are reported in the GE Industrial and GE Infrastructure segments based on the approach management uses to allocate resources and assess performance. Although management’s approach to segments combines industrial businesses with financial services businesses, the financial services businesses will continue to be reported in the GECC financial statements. We will herein provide business descriptions for these specific financial services businesses. We will also continue our longstanding practice of providing supplemental information for certain businesses within the segments.
 
GE Commercial Finance
 
GE Commercial Finance (36.1%, 38.1% and 40.0% of total GECC revenues in 2005, 2004 and 2003, respectively)
 

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offers a broad range of financial services worldwide. We have particular mid-market expertise and offer loans, leases and other financial services to customers, including manufacturers, distributors and end-users for a variety of equipment and major capital assets. These assets include industrial-related facilities and equipment; commercial and residential real estate; vehicles; corporate aircraft; and equipment used in many industries, including the construction, manufacturing, telecommunications and healthcare industries.
 
During 2005, we made a number of acquisitions, the most significant of which were the Transportation Financial Services Group of CitiCapital; the Inventory Finance division of Bombardier Capital; Antares Capital Corp., a unit of Massachusetts Mutual Life Insurance Co.; and ING’s portion of Heller AG.
 
We operate in a highly competitive environment. Our competitors include commercial banks, investment banks, leasing companies, financing companies associated with manufacturers, and independent finance companies. Competition related to our lending and leasing operations is based on price, that is interest rates and fees, as well as deal structure and terms. Profitability is affected not only by broad economic conditions that affect customer credit quality and the availability and cost of capital, but also by successful management of credit risk, operating risk and market risks such as interest rate and currency exchange risks. Success requires high quality risk management systems, customer and industry specific knowledge, diversification, service and distribution channels, strong collateral and asset management knowledge, deal structuring expertise and the ability to reduce costs through technology and productivity.
 
Our headquarters are in Stamford, Connecticut with offices throughout North America, South America, Europe, Australia and Asia.
 
For further information about revenues, segment profit and total assets for GE Commercial Finance, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 17.
 
Capital Solutions
 
Capital Solutions offers a broad range of financial services worldwide, and has particular mid-market expertise, offering loans, leases, inventory finance and other financial services to customers, including manufacturers, dealers and end-users for a variety of equipment and major capital assets. These assets include retail facilities; vehicles; corporate aircraft; and equipment used in many industries, including the construction, transportation, technology, and manufacturing industries.
 
Real Estate
 
Real Estate operates globally, both directly and through joint ventures. Our Real Estate business finances, with both equity and loan structures, the acquisition, refinancing and renovation of office buildings, apartment buildings, retail facilities, industrial properties, parking facilities and franchise properties. Our typical Real Estate loans are intermediate term, may be either senior or subordinated, fixed or floating-rate, and are secured by existing income-producing commercial properties. Our originations of low loan-to-value loans are conducted for term securitization within one year. We invest in, and provide restructuring financing for, portfolios of mortgage loans, limited partnerships and tax-exempt bonds.
 
GE Consumer Finance
 
GE Consumer Finance (35.0%, 31.4% and 30.6% of total GECC revenues in 2005, 2004 and 2003, respectively)
 

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offers credit and deposit products and services to consumers, retailers, brokers and auto dealers in over 50 countries. We offer a broad range of financial products, including private-label credit cards; bank cards; Dual Cards™; corporate travel and purchasing cards; personal loans; auto loans; leases and inventory financing; residential mortgages; home equity loans; debt consolidation loans; current and savings accounts and insurance products related to consumer finance offerings for customers on a global basis.
 
In 2005, as part of our continued global expansion, we made a number of acquisitions, the most significant of which was a 25.5 percent voting stake in Garanti Bank, a full service bank in Turkey.
 
Our operations are subject to a variety of bank and consumer protection regulations, including regulations controlling data privacy. Further, a number of countries have ceilings on rates chargeable to consumers in financial service transactions. We are subject to competition from various types of financial institutions including commercial banks, leasing companies, consumer loan companies, independent finance companies, manufacturers’ captive finance companies, and insurance companies. Industry participants compete on the basis of price, servicing capability, promotional marketing, risk management, and cross selling. The markets in which we operate are also subject to the risks from fluctuations in retail sales, interest and currency exchange rates, and the consumer’s capacity to repay debt.
 
Our headquarters are in Stamford, Connecticut and our operations are located in North America, South America, Europe, Australia and Asia.
 
For further information about revenues, segment profit and total assets for GE Consumer Finance, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 17.
 
GE Industrial
 
GE Industrial (11.9%, 13.1% and 8.2% of total GECC revenues in 2005, 2004 and 2003, respectively) produces and sells products including consumer appliances, industrial equipment and plastics, and related services. We also finance business equipment for a wide variety of customer applications.
 
Our operations are located in North America, Europe, Asia and South America.
 
For further information about revenues and segment profit for GE Industrial, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 17.
 
Equipment Services
 
Equipment Services helps customers manage, finance and operate a wide variety of business equipment worldwide. We provide rentals, leases, sales and asset management services of commercial and transportation equipment, including tractors, trailers, railroad rolling stock, modular space units, intermodal shipping containers and, primarily through an associated company, marine containers. Our operations are conducted in highly competitive markets. Economic conditions, geographic location, pricing and equipment availability are important factors in this business. Future success will depend upon our ability to maintain a large and diverse customer portfolio, optimize asset mix, maximize asset utilization and manage credit risk. In addition, we seek to understand our customers and to meet their needs with unique, efficient and cost effective product and service offerings.
 

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GE Infrastructure
 
GE Infrastructure (9.1%, 8.6% and 9.1% of total GECC revenues in 2005, 2004 and 2003, respectively) produces, sells, finances and services equipment for the air transportation and energy generation industries. We also produce, sell and service equipment for the rail transportation and water treatment industries.
 
Our operations are located in North America, Europe, Asia and South America.
 
For further information about revenues and segment profit for GE Infrastructure, see the Segment Operations section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and note 17.
 
Aviation Financial Services
 
Aviation Financial Services is a global commercial aviation financial services business that offers a broad range of financial products to airlines, aircraft operators, owners, lenders, investors and airport developers. Financial products include leases, aircraft purchasing and trading, loans, engine/spare parts financing, pilot training, fleet planning and financial advisory services. We operate in a highly competitive environment. Our competitors include aircraft manufacturers, banks, financial institutions, and other finance and leasing companies. Competition is based on lease rates and terms, as well as aircraft delivery dates, condition and availability.
 
The U.S. commercial aviation industry continues to face challenges and financial pressure that affect a portion of our commercial aviation business. Many carriers are experiencing major restructuring and reorganization, including bankruptcies. These companies have experienced marginal returns and in some cases losses resulting from competitive pressures and increased fuel costs.
 
Energy Financial Services
 
Energy Financial Services offers structured equity, leveraged leasing, partnerships, project finance and broad-based commercial finance to the global energy and water industries. We operate in a highly competitive environment. Our competitors include banks, financial institutions, energy companies, and other finance and leasing companies. Competition is based on price, that is interest rates and fees, as well as deal structure and terms. As we compete globally, our success is sensitive to the economic and political environment of each country in which we do business.
 
Discontinued Operations
 
In May 2004, we completed the initial public offering of Genworth, our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage insurance operations. Throughout 2005, we continued to reduce our ownership in Genworth, currently at 18%. We intend to continue to dispose of our remaining shares in 2006, subject to market conditions. We reported Genworth as discontinued operations for all periods presented.
 
Regulations and Competition
 
Our activities are subject to a variety of U.S. federal and state regulations including, at the federal level, the Consumer Credit Protection Act, the Equal Credit Opportunity Act and certain regulations issued by the Federal Trade Commission. A majority of states have ceilings on rates chargeable to customers on retail loan transactions,
 

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installment loans and revolving credit financing. Our insurance activities are regulated by various state insurance commissions and non-U.S. regulatory authorities. We are a unitary diversified savings and loan holding company by virtue of owning a federal savings bank in the U.S.; as such, we are subject to holding company supervision by the Office of Thrift Supervision. Our global operations are subject to regulation in their respective jurisdictions. To date, compliance with such regulations has not had a material adverse effect on our financial position or results of operations.
 
The businesses in which we engage are highly competitive. We are subject to competition from various types of financial institutions, including banks, thrifts, investment banks, broker-dealers, credit unions, leasing companies, consumer loan companies, independent finance companies, finance companies associated with manufacturers and insurance and reinsurance companies.
 
Business and Economic Conditions
 
Our businesses are generally affected by general business and economic conditions in countries in which we conduct business. When overall economic conditions deteriorate in those countries, there generally are adverse effects on our operations, although those effects are dynamic and complex. For example, a downturn in employment or economic growth in a particular national or regional economy will generally increase the pressure on customers, which generally will result in deterioration of repayment patterns and a reduction in the value of collateral. However, in such a downturn, demand for loans and other products and services we offer may actually increase. Interest rates, another macro-economic factor, are important to our businesses. In the lending and leasing businesses, higher real interest rates increase our cost to borrow funds, but also provide higher levels of return on new investments. For our operations, such as the insurance activities, that are linked less directly to interest rates, rate changes generally affect returns on investment portfolios.
 
Forward-Looking Statements
 
This document contains “forward-looking statements” - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties which could adversely or positively affect our future results include: the behavior of financial markets, including fluctuations in interest rates and commodity prices; strategic actions, including dispositions; future integration of acquired businesses; future financial performance of major industries which we serve, including, without limitation, the air and rail transportation, energy generation, media, real estate and healthcare industries; and numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements.
 
Item 1A. Risk Factors.
 
The following discussion of risk factors contains “forward-looking statements,” as discussed in Item 1. These risk factors may be important to understanding any statement in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with Management’s Discussion and Analysis (MD&A), and the consolidated financial statements and related notes included in this report.
 
Our businesses routinely encounter and address risks, some of which will cause our future results to be different - sometimes materially different - than we presently anticipate. Discussion about the important operational
 

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risks that our businesses encounter can be found in the MD&A section and in the business descriptions included in the Business section of this Form 10-K. Below, we have described our present view of certain important strategic risks. Our reactions to material future developments as well as our competitors’ reactions to those developments will determine our future results.
 
Our global growth is subject to a number of economic, political and regulatory risks
 
We conduct our operations in virtually every part of the world. Global economic and regulatory developments affect businesses such as ours in many ways. Operations are subject to the effects of global competition. Particular local jurisdiction risks include regulatory risks arising from local laws and from local liquidity regulations, including risks of not being able to retrieve assets. Our global business is affected by local economic environments, including inflation, recession and currency volatility. Political changes, some of which may be disruptive, can interfere with our supply chain, our customers and all of our activities in a particular location. While some of these risks can be hedged using derivatives or other financial instruments and some are insurable, such attempts to mitigate these risks are costly and not always successful.
 
Our credit ratings are important to our cost of capital
 
The major debt agencies routinely evaluate our debt and have given their highest debt ratings to us. One of our strategic objectives is to maintain these “Triple A” ratings as they serve to lower our borrowing costs and facilitate our access to a variety of lenders. Failure to maintain our Triple A debt rating could adversely affect our cost of funds and related margins.
 
The disposition of businesses that do not fit with our evolving strategy can be highly uncertain
 
We will continue to evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives. Our decision to sell Genworth is a recent example of a disposition decision. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives, or we may dispose of a business at a price or on terms which are less than we had anticipated. In addition, there is a risk that we sell a business whose subsequent performance exceeds our expectations, in which case our decision would have potentially sacrificed enterprise value. Correspondingly, we may be too optimistic about a particular business's prospects, in which case we may be unable to find a buyer at a price acceptable to us and therefore may have potentially sacrificed enterprise value.
 

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Item 1B. Unresolved Staff Comments.
 
Not applicable.
 
 
Item 2. Properties.
 
We conduct our business from various facilities, most of which are leased. The locations of our primary facilities are described in Item 1. Business.
 
 
Item 3. Legal Proceedings.
 
In January 2005, the Boston District Office of the U.S. Securities and Exchange Commission (SEC) informed GE that it had commenced an investigation and requested that GE and GECC voluntarily provide certain documents and information with respect to the use of hedge accounting for derivatives by GE and GECC. The SEC Staff advised GE in August 2005 that the SEC had issued a formal order of investigation in connection with this matter, which GE believes to be a common step in the process in such matters. GE and GECC have continued to voluntarily provide documents and information to the SEC Staff and we are cooperating fully with its investigation.
 
On June 14, 2005, GE received a subpoena from the U.S. Attorney’s Office for the Southern District of New York seeking documents relating to finite risk insurance. The subpoena is general in nature. GE received a similar subpoena from the Northeast Regional Office of the SEC on April 29, 2005. We are cooperating fully with the SEC and the U.S. Attorney’s Office.
 
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
Not required by this form.
 
PART II
 
 
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters.
 
See note 15 to the consolidated financial statements. Our common stock is owned entirely by GE Capital Services and, therefore, there is no trading market in such stock.
 

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Item 6. Selected Financial Data.
 
The following selected financial data should be read in conjunction with our financial statements and the related Notes to Consolidated Financial Statements.
 
(In millions)
2005
  
2004
  
2003
  
2002
  
2001
  
                               
Revenues
$
55,515
  
$
50,093
  
$
41,605
  
$
38,432
  
$
38,393
  
Earnings from continuing operations
                              
before accounting changes
  
8,666
    
7,818
    
6,070
    
5,339
    
4,716
  
Earnings from discontinued operations,
                             
net of taxes
  
928
    
442
    
1,396
    
1,215
    
1,294
  
Earnings before accounting changes
  
9,594
    
8,260
    
7,466
    
6,554
    
6,010
  
Cumulative effect of accounting changes
  
-
    
-
    
(339
)
  
(1,015
)
  
(1
)
Net earnings
  
9,594
    
8,260
    
7,127
    
5,539
    
6,009
  
Shareowner’s equity
  
50,188
    
53,958
    
46,692
    
40,126
    
31,739
  
Minority interest
  
2,212
    
2,325
    
2,512
    
1,834
    
1,650
  
Short-term borrowings
  
149,679
    
147,293
    
146,865
    
120,859
    
152,626
  
Long-term borrowings
  
206,206
    
201,392
    
162,541
    
138,452
    
76,140
  
Return on average shareowner’s equity(a)
  
18.32
%
  
17.29
%
  
14.75
%
  
16.32
%
  
17.14
%
Ratio of earnings to fixed charges
  
1.66
    
1.82
    
1.71
    
1.62
    
1.56
  
Ratio of earnings to combined fixed
                             
charges and preferred stock dividends
  
1.66
    
1.81
    
1.71
    
1.61
    
1.55
  
Ratio of debt to equity
  
7.09:1
    
6.46:1
    
6.63:1
    
6.46:1
    
7.21:1
  
Financing receivables - net
$
284,567
  
$
279,588
  
$
245,503
  
$
195,322
  
$
169,615
  
Total assets of continuing operations
  
472,292
    
462,837
    
407,194
    
350,080
    
298,852
  
Total assets
 
475,273
    
566,885
    
506,773
    
439,434
    
381,065
  
                               

(a)
Represents earnings from continuing operations before accounting changes divided by average total shareowner’s equity, excluding effects of discontinued operations (on an annual basis, calculated using a five-point average). Average total shareowner’s equity, excluding effects of discontinued operations, as of the end of each of the years in the five-year period ended December 31, 2005, is described in the Supplemental Information section.
  

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Operations
 
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in the Supplemental Information section.
 
We present Management’s Discussion of Operations in four parts: Overview of Our Earnings from 2003 through 2005, Global Risk Management, Segment Operations and Global Operations.
 
Overview of Our Earnings from 2003 through 2005
 
Our results over the last several years reflect the global economic environment in which we operate. During these years, the economy has grown, but at a rate that, in historic terms, has been relatively modest. Long-term interest rates have been stable. We also experienced a weaker, but recently strengthening, U.S. dollar, escalating energy costs and higher fossil fuel-related raw material prices. Market developments in the commercial aviation industry also had significant effects on our results. We had 1,405 commercial aircraft on lease at December 31, 2005, an increase of 63 aircraft from last year. All of our aircraft were on lease at the end of 2005, and at that time we held $10.6 billion (list price) of multiple-year orders for various Boeing, Airbus and other aircraft, including 73 aircraft ($4.8 billion list price) scheduled for delivery in 2006, all under agreement to commence operations with commercial airline customers. As the following pages show, our diversification and risk management strategies enabled us to continue to grow revenues and earnings to record levels during this challenging time.
 
GE Commercial Finance and GE Consumer Finance (together, 70% and 84% of total three-year revenues and total segment profit, respectively) are large, profitable growth businesses in which we continue to invest with confidence. In a challenging economic environment, these businesses grew earnings by a combined $1.2 billion and $0.9 billion in 2005 and 2004, respectively. GE Commercial Finance and GE Consumer Finance have delivered strong results through solid core growth, disciplined risk management and successful acquisitions. The most significant acquisitions affecting GE Commercial Finance and GE Consumer Finance results in 2005 were the commercial lending business of Transamerica Finance Corporation; WMC Finance Co. (WMC), a U.S. wholesale mortgage lender; Australian Financial Investments Group (AFIG), a residential mortgage lender in Australia; and the Transportation Financial Services Group of CitiCapital. These acquisitions collectively contributed $1.9 billion and $0.2 billion to 2005 revenues and net earnings, respectively.
 
Overall, acquisitions contributed $3.0 billion, $3.3 billion and $2.3 billion to total revenues in 2005, 2004 and 2003, respectively. Our total net earnings in 2005, 2004 and 2003 included approximately $0.3 billion, $0.5 billion and $0.3 billion, respectively, from acquired businesses. We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses. Dispositions also affected our operations through lower revenues of $1.4 billion, $2.4 billion and $1.7 billion in 2005, 2004 and 2003, respectively. This resulted in lower earnings of $0.4 billion and $0.3 billion in 2005 and 2004, respectively, and higher earnings of $0.1 billion in 2003.
 
Significant matters relating to our Statement of Earnings are explained below.
 
Insurance Exit. In 2005, we reduced our exposure to insurance in a disciplined fashion and our exit is now in sight.
 

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In May 2004, we completed the initial public offering of Genworth Financial, Inc. (Genworth), our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage insurance operations. Throughout 2005, we continued to reduce our ownership in Genworth, currently at 18%. We intend to continue to dispose of our remaining shares in 2006, subject to market conditions. We reported Genworth as discontinued operations for all periods presented. Unless otherwise indicated, we refer to captions such as revenues and earnings from continuing operations simply as “revenues” and “earnings” throughout this Management’s Discussion and Analysis. Similarly, discussion of other matters in our consolidated financial statements relates to continuing operations unless otherwise indicated.
 
Interest on borrowings amounted to $14.1 billion, $11.0 billion and $9.7 billion in 2005, 2004 and 2003, respectively. Changes over the three-year period reflected increased average borrowings and increased interest rates. Our average borrowings were $338.1 billion, $311.4 billion and $297.0 billion in 2005, 2004 and 2003, respectively. Our average composite effective interest rate was 4.2% in 2005, compared with 3.6% in 2004 and 3.3% in 2003. Proceeds of these borrowings were used in part to finance asset growth and acquisitions. In 2005, our average assets of $464.7 billion were 9% higher than in 2004, which in turn were 12% higher than in 2003. See the Financial Resources and Liquidity section for a discussion of interest rate risk management.
 
Income taxes are a significant cost. As a global commercial enterprise, our tax rates are affected by many factors, including our global mix of earnings, legislation, acquisitions, dispositions and tax characteristics of our income. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions.
 
Our effective tax rate decreased to 9.8% in 2005 from 15.3% in 2004 and 15.4% in 2003. The 2005 rate reflects the net benefits, discussed below, of a reorganization of our aircraft leasing business; and an increase in lower-taxed earnings from global operations. Together, these items more than account for the 8.0 percentage point decrease in rate from 2004 reflected in the line “Tax on global activities including exports” in note 13. Partially offsetting these benefits was the nonrecurrence of the benefits from 2004 favorable settlements with the U.S. Internal Revenue Service (IRS) and the low-taxed disposition of a majority interest in Gecis, our business process outsourcing operation (now Genpact). The lack of counterparts to these items increased the 2005 tax rate by 2.2 percentage points.
 
The effective tax rate of 15.3% in 2004 and 15.4% in 2003 also reflected the net benefits, discussed below, of a reorganization of our aircraft leasing business, which decreased the 2004 effective tax rate 1.7 percentage points and is included in the line “Tax on global activities including exports” in note 13; tax benefits from favorable IRS settlements, which decreased the 2004 effective tax rate 1.3 percentage points and is included in the line “All other - net” in note 13; and the low-taxed disposition of a majority interest in Genpact which decreased the 2004 effective tax rate 0.9 percentage points, and is included in the line “Tax on global activities including exports” in note 13. Offsetting these benefits was the effect of higher pre-tax income.
 
As a result of the repeal of the extraterritorial income (ETI) taxing regime as part of the American Jobs Creation Act of 2004 (the Act), our aircraft leasing business no longer qualifies for a reduced U.S. tax rate. However, the Act also extended to aircraft leasing, the U.S. tax deferral benefits that were already available to other GE non-U.S. active operations. These legislative changes, coupled with a reorganization of our aircraft leasing business and a favorable Irish tax ruling, decreased our effective tax rate 3.2 percentage points in 2005 and 1.7 percentage points in 2004.
 

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Global Risk Management
 
A disciplined approach to risk is important in a diversified organization such as ours in order to ensure that we are executing according to our strategic objectives and that we only accept risk for which we are adequately compensated. It is necessary for us to manage risk at the individual transaction level, and to consider aggregate risk at the customer, industry, geography and collateral-type levels, where appropriate.
 
Our Board of Directors oversees the risk management process, and approves directly or by delegation all significant acquisitions and dispositions as well as borrowings and investments. All participants in the risk management process must comply with approval limits established by the Board.
 
The Chief Risk Officer is responsible, through the Corporate Risk Function, for establishing standards for the measurement, reporting and limiting of risk; for managing and evaluating risk managers; for approving risk management policies; and for reviewing major risk exposures and concentrations across the organization. Our Corporate Risk Function analyzes certain business risks and assesses them in relation to aggregate risk appetite and approval limits set by our Board of Directors.
 
Threshold responsibility for identifying, quantifying and mitigating risks is assigned to our individual businesses. Because the risks and their interdependencies are complex, we apply a Six Sigma-based analytical approach to each major product line that monitors performance against external benchmarks, proactively manages changing circumstances, provides early warning detection of risk and facilitates communication to all levels of authority. Other corporate functions such as Financial Planning and Analysis, Treasury, Legal and our Corporate Audit Staff support business-level risk management. Businesses that, for example, hedge financial risk with derivative financial instruments must do so using our centrally-managed Treasury function, providing assurance that the business strategy complies with our corporate policies and achieves economies of scale. We review risks periodically with business-level risk managers, senior management and our Board of Directors.
 
We employ about 11,000 dedicated risk professionals, including 6,600 involved in collection activities and 400 specialized asset managers who evaluate leased asset residuals and remarket off-lease equipment.
 
 
We manage a variety of risks including liquidity, credit, market and event risks.
 
•
Liquidity risk is the risk of being unable to accommodate liability maturities, fund asset growth and meet contractual obligations through access to funding at reasonable market rates. Additional information about our liquidity and how we manage this risk can be found in the Financial Resources and Liquidity section and in notes 11 and 18.
 
•
Credit risk is the risk of financial loss arising from a customer or counterparty failure to meet its contractual obligations. We face credit risk in our lending and leasing activities (see the Financial Resources and Liquidity and Critical Accounting Estimates sections and notes 1, 6, 7 and 20) and derivative financial instruments activities (see note 18).
 
•
Market risk is the potential loss in value of investment and other asset and liability portfolios, including financial instruments, caused by changes in market variables, such as interest and currency exchange rates and equity and commodity prices. We are exposed to market risk in the normal course of our business operations as a result of our ongoing investing and funding activities. We attempt to mitigate the risks to our various portfolios arising from changes in interest and currency exchange rates in a variety of ways that

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often include offsetting positions in local currencies or selective use of derivatives. Additional information about how we mitigate the risks to our various portfolios from changes in interest and currency exchange rates can be found in the Financial Resources and Liquidity section and in note 18.
 
•
Event risk is that body of risk beyond liquidity, credit and market risk. Event risk includes the possibility of adverse occurrences both within and beyond our control. Examples of event risk include natural disasters, availability of necessary materials, guarantees of product performance and business interruption. This type of risk is often insurable, and success in managing this risk is ultimately determined by the balance between the level of risk retained or assumed and the cost of transferring the risk to others. The decision as to the appropriate level of event risk to retain or cede is evaluated in the framework of business decisions. Additional information about certain event risk can be found in note 20.
 
Segment Operations
 
Operating segments comprise our four businesses focused on the broad markets they serve: GE Commercial Finance, GE Consumer Finance, GE Industrial and GE Infrastructure. For segment reporting purposes, certain financial services businesses are included in the industrial operating segments that actively manage such businesses and report their results for internal performance measurement purposes. These include Aviation Financial Services, Energy Financial Services and Transportation Finance reported in the GE Infrastructure segment, and Equipment Services reported in the GE Industrial segment.
 
In the fourth quarter of 2005, we commenced reporting Genworth, which was previously reported in the GE Commercial Finance segment, as discontinued operations for all periods presented. Also, during the fourth quarter of 2005, our insurance activities, previously reported in the GE Commercial Finance segment, were transferred to GECC corporate items and eliminations for all periods presented.
 
GECC corporate items and eliminations include the effects of eliminating transactions between operating segments; results of our insurance activities remaining in continuing operations; results of liquidating businesses such as consolidated, liquidating securitization entities; underabsorbed corporate overhead; certain non-allocated amounts determined by the Chief Executive Officer; and a variety of sundry items. GECC corporate items and eliminations is not an operating segment. Rather, it is added to operating segment totals to reconcile to consolidated totals on the financial statements.
 
The Chief Executive Officer allocates resources to, and assesses the performance of operations at the consolidated GE-level. GECC operations are a portion of those segments. We present below in their entirety the four GE segments that include financial services operations. We also provide a one-line reconciliation to GECC-only results, the most significant component of which is the elimination of GE businesses that are not financial services businesses. In addition to providing information on GE segments in their entirety, we have also provided supplemental information for certain businesses within the GE segments. Our Chief Executive Officer does not separately assess the performance of, or allocate resources among, these product lines.
 
Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business in a given period. In connection with that assessment, the Chief Executive Officer may exclude matters such as charges for restructuring; rationalization and other similar expenses; in-process research and development and certain other acquisition-related charges and balances; technology
 

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development costs; certain gains and losses from dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team.
 
Segment profit always excludes the effects of principal pension plans and results reported as discontinued operations and accounting changes. Segment profit excludes or includes interest and other financial charges and income taxes according to how a particular segment’s management is measured - excluded in determining segment profit, which we refer to as “operating profit,” for GE Healthcare, GE NBC Universal and the industrial businesses of the GE Industrial and GE Infrastructure segments; included in determining segment profit, which we refer to as “net earnings,” for GE Commercial Finance, GE Consumer Finance, and the financial services businesses of the GE Industrial segment (Equipment Services) and the GE Infrastructure segment (Aviation Financial Services, Energy Financial Services and Transportation Finance).
 
For additional information about our segments, see Item 1, Business and note 17.
 
Summary of Operating Segments
 
(In millions)
2005
  
2004
  
2003
  
 
 
  
 
  
 
  
Revenues
                  
GE Commercial Finance
$
20,646
  
$
19,524
  
$
16,927
  
GE Consumer Finance
  
19,416
    
15,734
    
12,845
  
GE Industrial
  
32,631
    
30,722
    
24,988
  
GE Infrastructure
  
41,803
    
37,373
    
36,569
  
Total segment revenues
  
114,496
    
103,353
    
91,329
  
GECC corporate items and eliminations(a)
  
4,400
    
4,439
    
5,050
  
Total revenues
  
118,896
    
107,792
    
96,379
  
Less portion of GE revenues not included in GECC
  
(63,381
)
  
(57,699
)
  
(54,774
)
Total revenues in GECC
$
55,515
  
$
50,093
  
$
41,605
  
                   
Segment profit
                  
GE Commercial Finance
$
4,290
  
$
3,570
  
$
2,907
  
GE Consumer Finance
  
3,050
    
2,520
    
2,161
  
GE Industrial
  
2,559
    
1,833
    
1,385
  
GE Infrastructure
  
7,769
    
6,797
    
7,362
  
Total segment profit
  
17,668
    
14,720
    
13,815
  
GECC corporate items and eliminations
  
(55
)
  
880
    
271
  
Less portion of GE segment profit not included in GECC
  
(8,947
)
  
(7,782
)
  
(8,016
)
Earnings in GECC from continuing operations before
                 
accounting change
  
8,666
    
7,818
    
6,070
  
Earnings in GECC from discontinued operations, net of taxes
  
928
    
442
    
1,396
  
Earnings in GECC before accounting change
  
9,594
    
8,260
    
7,466
  
Cumulative effect of accounting change
  
-
    
-
    
(339
)
Total net earnings in GECC
$
9,594
  
$
8,260
  
$
7,127
  
                   

(a)
Primarily revenues associated with our insurance activities remaining in continuing operations that were previously reported in the GE Commercial Finance segment.
  

 

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GE Commercial Finance
 
(In millions)
2005
  
2004
  
2003
  
                   
Revenues
$
20,646
  
$
19,524
  
$
16,927
  
Less portion of GE Commercial Finance
                 
not included in GECC
  
(632
)
  
(456
)
  
(300
)
Total revenues in GECC
$
20,014
  
$
19,068
  
$
16,627
  
                   
Segment profit
$
4,290
  
$
3,570
  
$
2,907
  
Less portion of GE Commercial Finance
                  
not included in GECC
  
(301
)
  
(177
)
  
(99
)
Total segment profit in GECC
$
3,989
  
$
3,393
  
$
2,808
  
                   
                   
December 31 (In millions)
2005
  
2004
        
                   
Total assets
$
190,546
  
$
184,388
        
Less portion of GE Commercial Finance
                 
not included in GECC
  
(1,408
)
  
508
       
Total assets in GECC
$
189,138
  
$
184,896
        
                   
                   
(In millions)
2005
  
2004
  
2003
  
                   
Revenues in GE
                  
Capital Solutions
$
11,476
  
$
11,503
  
$
9,893
  
Real Estate
  
3,492
    
3,084
    
2,956
  
                   
Segment profit in GE
                  
Capital Solutions
$
1,515
  
$
1,325
  
$
1,184
  
Real Estate
 
1,282
    
1,124
    
947
  
                   
                   
December 31 (In millions)
2005
  
2004
        
                   
Assets in GE
                  
Capital Solutions
$
87,306
  
$
80,514
        
Real Estate
  
35,323
    
39,515
        

 
GE Commercial Finance revenues and net earnings increased 6% and 20%, respectively, compared with 2004. Revenues during 2005 and 2004 included $1.0 billion and $0.3 billion from acquisitions, respectively, and in 2005 were reduced by $0.7 billion as a result of dispositions. Revenues during 2005 also increased $1.1 billion as a result of organic revenue growth ($0.8 billion) and the weaker U.S. dollar ($0.3 billion). The increase in net earnings resulted primarily from core growth ($0.6 billion), including growth in lower-taxed earnings from global operations, acquisitions ($0.2 billion) and the weaker U.S. dollar ($0.1 billion), partially offset by lower securitizations ($0.1 billion).
 
GE Commercial Finance revenues and net earnings increased 15% and 23%, respectively, compared with 2003. The increase in revenues resulted primarily from acquisitions ($2.2 billion) and the weaker U.S. dollar ($0.6 billion), partially offset by lower securitizations ($0.2 billion). The increase in net earnings resulted primarily from
 

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acquisitions ($0.4 billion), core growth ($0.3 billion) and the weaker U.S. dollar ($0.1 billion), partially offset by lower securitizations ($0.1 billion).
 
GE Consumer Finance
 
(In millions)
2005
  
2004
  
2003
  
             
Revenues
$
19,416
  
$
15,734
  
$
12,845
  
Less portion of GE Consumer Finance
                 
not included in GECC
  
-
    
(9
)
  
(111
)
Total revenues in GECC
$
19,416
  
$
15,725
  
$
12,734
  
                   
Segment profit
$
3,050
  
$
2,520
  
$
2,161
  
Less portion of GE Consumer Finance
                 
not included in GECC
  
3
    
(25
)
  
50
  
Total segment profit in GECC
$
3,053
  
$
2,495
  
$
2,211
  
                   
                   
December 31 (In millions)
2005
  
2004
        
                   
Total assets
$
158,829
  
$
151,255
        
Less portion of GE Consumer Finance
                  
not included in GECC
  
763
    
(724
)
      
Total assets in GECC
$
159,592
  
$
150,531
        

 
GE Consumer Finance revenues and net earnings increased 23% and 21%, respectively, compared with 2004. Revenues for 2005 included $1.9 billion from acquisitions. Revenues during 2005 also increased $1.8 billion as a result of organic revenue growth ($1.5 billion) and the weaker U.S. dollar ($0.3 billion). The increase in net earnings resulted primarily from core growth ($0.6 billion), including growth in lower-taxed earnings from global operations, and acquisitions ($0.1 billion), partially offset by increased costs to launch new products and promote brand awareness ($0.2 billion).
 
GE Consumer Finance revenues and net earnings increased 22% and 17%, respectively, from 2003. The increase in revenues resulted primarily from organic revenue growth ($1.0 billion), acquisitions ($1.0 billion) and the weaker U.S. dollar ($0.8 billion). Organic revenue growth was achieved despite the absence of a 2004 counterpart to the 2003 gain on sale of The Home Depot private-label credit card receivables ($0.9 billion). The increase in net earnings resulted from core growth ($0.6 billion), including growth in lower-taxed earnings from global operations, acquisitions ($0.1 billion), and the weaker U.S. dollar ($0.1 billion), partially offset by the effects of The Home Depot private-label credit card receivables ($0.4 billion) and increased costs to launch new products and promote brand awareness in 2004 ($0.1 billion).
 

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GE Industrial
 
(In millions) 
2005
  
2004
  
2003
  
                   
Revenues
$
32,631
  
$
30,722
  
$
24,988
  
Less portion of GE Industrial not included in GECC
  
(26,004
)
  
(24,151
)
  
(21,560
)
Total revenues in GECC
$
6,627
  
$
6,571
  
$
3,428
  
                   
Segment profit
$
2,559
  
$
1,833
  
$
1,385
  
Less portion of GE Industrial not included in GECC
  
(2,362
)
  
(1,752
)
  
(1,418
)
Total segment profit in GECC
$
197
  
$
81
  
$
(33
)
                   
Revenues in GE
                  
Consumer & Industrial
$
14,092
  
$
13,767
  
$
12,843
  
Equipment Services
 
6,627
    
6,571
    
3,357
  
Plastics
 
6,606
    
6,066
    
5,501
  
                   
Segment profit in GE
                  
Consumer & Industrial
$
871
  
$
716
  
$
577
  
Equipment Services
 
197
    
82
    
(76
)
Plastics
 
867
    
566
    
503
  

 
GE Industrial revenues rose 6%, or $1.9 billion, in 2005 on higher prices ($1.5 billion), higher volume ($0.2 billion) and the weaker U.S. dollar ($0.2 billion) at the industrial businesses in the segment. We realized price increases primarily at Plastics and Consumer & Industrial. Volume increases related primarily to the acquisitions of Edwards Systems Technology and InVision Technologies, Inc. by our Security business, but were partially offset by lower volume at Plastics. Revenues at Equipment Services also increased as a result of organic revenue growth ($0.4 billion) and acquisitions ($0.1 billion), partially offset by the effects of the 2004 disposition of IT Solutions ($0.4 billion). Segment profit rose 35%, or $0.6 billion, at the industrial businesses in the segment in 2005 as price increases ($1.5 billion) and higher volume ($0.1 billion) more than offset higher material and other costs ($0.8 billion), primarily from commodities such as benzene and natural gas at Plastics, and lower productivity ($0.2 billion). Segment profit at Equipment Services also increased as a result of improved operating performance, reflecting core growth ($0.1 billion).
 
GE Industrial revenues rose 23%, or $5.7 billion, in 2004 on higher volume ($2.0 billion), primarily at Consumer & Industrial and Plastics, the weaker U.S. dollar ($0.5 billion) and higher prices ($0.1 billion) at the industrial businesses in the segment. Higher prices at Plastics, as demand for plastic resins increased, were partially offset by lower prices at Consumer & Industrial. On January 1, 2004, we consolidated Penske Truck Leasing Co., L.P. (Penske), previously accounted for using the equity method. As a result, consolidated operating lease rentals and other income increased by $2.6 billion and $0.6 billion, respectively, from 2003 levels. Segment profit rose 32%, or $0.4 billion in 2004, as productivity ($0.8 billion), primarily at Consumer & Industrial and Plastics, higher volume ($0.1 billion) and higher prices ($0.1 billion) more than offset higher material and other costs ($0.8 billion), primarily from commodities such as benzene and natural gas at Plastics. Segment profit at Equipment Services also rose on improved operating performance ($0.2 billion).
 

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GE Infrastructure
 
(In millions)
2005
  
2004
  
2003
  
                   
Revenues
$
41,803
  
$
37,373
  
$
36,569
  
Less portion of GE Infrastructure not included in GECC
  
(36,745
)
  
(33,083
)
  
(32,803
)
Total revenues in GECC
$
5,058
  
$
4,290
  
$
3,766
  
                   
Segment profit
$
7,769
  
$
6,797
  
$
7,362
  
Less portion of GE Infrastructure not included in GECC
  
(6,287
)
  
(5,828
)
  
(6,549
)
Total segment profit in GECC
$
1,482
  
$
969
  
$
813
  
                   
Revenues in GE
                  
Aviation
$
11,904
  
$
11,094
  
$
9,808
  
Aviation Financial Services
 
3,504
    
3,159
    
2,881
  
Energy
 
16,525
    
14,586
    
16,611
  
Energy Financial Services
 
1,349
    
972
    
805
  
Oil & Gas
 
3,598
    
3,135
    
2,842
  
Transportation
  
3,577
    
3,007
    
2,543
  
                   
Segment profit in GE
                 
Aviation
$
2,573
  
$
2,238
  
$
1,809
  
Aviation Financial Services
 
764
    
520
    
506
  
Energy
 
2,665
    
2,543
    
3,875
  
Energy Financial Services
 
646
    
376
    
280
  
Oil & Gas
 
411
    
331
    
264
  
Transportation
  
524
    
516
    
450
  

 
GE Infrastructure revenues rose 12%, or $4.4 billion, in 2005 as higher volume ($4.3 billion) was partially offset by lower prices ($0.6 billion) at the industrial businesses in the segment. The increase in volume was primarily at Energy, Aviation and Transportation. The decrease in prices was primarily at Energy, and was partially offset by increased prices at Transportation and Aviation. Revenues also increased as a result of organic revenue growth at Energy Financial Services ($0.4 billion) and Aviation Financial Services ($0.3 billion).
 
Segment profit rose 14% to $7.8 billion, compared with $6.8 billion in 2004, as higher volume ($1.0 billion) and productivity ($0.2 billion including customer settlements and contract terminations) more than offset lower prices ($0.6 billion) and the effects of higher material and other costs ($0.3 billion) at the industrial businesses in the segment. The increase in volume primarily related to Energy, Aviation and Transportation. Segment profit also increased as a result of increased net earnings at the financial services businesses. This increase reflected core growth at Energy Financial Services ($0.3 billion) and core growth at Aviation Financial Services ($0.2 billion), including growth in lower-taxed earnings from global operations related to a reorganization of our aircraft leasing operations.
 
GE Infrastructure revenues increased 2%, or $0.8 billion, in 2004 as the weaker U.S. dollar ($0.5 billion), primarily at Energy, and higher volume ($0.4 billion) were partially offset by lower prices ($0.6 billion) at the industrial businesses of the segment, primarily at Energy. The increase in volume was the net result of increased sales in commercial services and military engines at Aviation and locomotives at Transportation, partially offset by lower sales at Energy. Energy sold 122 large heavy-duty gas turbines in 2004, compared with 175 in 2003. Financial services activity, primarily at Aviation Financial Services and Energy Financial Services, increased revenues primarily from organic revenue growth ($0.4 billion) and acquisitions ($0.1 billion).
 

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Segment profit fell 8%, or $0.6 billion, in 2004 as lower material costs ($0.3 billion), primarily at Energy, and higher volume ($0.1 billion) were more than offset by lower prices ($0.6 billion) and lower productivity ($0.6 billion) at the industrial businesses of the segment. The lower productivity was the net effect of lower productivity at Energy, primarily from the anticipated decline in higher margin gas turbine sales and a decrease in customer contract termination fees, partially offset by higher productivity at Aviation. Segment profit from the financial services businesses, primarily Energy Financial Services, increased $0.1 billion as a result of core growth.
 
GE Infrastructure orders were $38.4 billion in 2005, up from $34.0 billion in 2004. The $29.2 billion total backlog at year-end 2005 comprised unfilled product orders of $18.8 billion (of which 65% was scheduled for delivery in 2006) and product service orders of $10.4 billion scheduled for 2006 delivery. Comparable December 31, 2004, total backlog was $27.8 billion, of which $18.2 billion was for unfilled product orders and $9.6 billion for product services orders.
 
Discontinued Insurance Operations
 
(In millions)
2005
  
2004
  
2003
  
                   
Earnings in GECC from discontinued operations, net of taxes
$
928
  
$
442
  
$
1,396
  

 
Discontinued operations comprise Genworth, our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage insurance operations. Results of Genworth are reported as discontinued operations for all periods presented.
 
Earnings from discontinued operations in 2005 reflected Genworth earnings ($0.9 billion). Dividends we receive from Genworth and any gains or losses on sales of our remaining 18% position in Genworth common stock will also be reported in discontinued operations.
 
Earnings from discontinued operations in 2004 reflected earnings of Genworth ($0.4 billion), including our share of 2004 earnings from operations ($0.8 billion), partially offset by the loss on the Genworth initial public offering in May 2004 ($0.3 billion).
 
For additional information related to discontinued operations see note 2.
 
Global Operations
 
Our global activities span all geographic regions and primarily encompass leasing of aircraft and provision of financial services within these regional economies. Thus, when countries or regions experience currency and/or economic stress, we often have increased exposure to certain risks, but also often have new profit opportunities. Potential increased risks include, among other things, higher receivable delinquencies and bad debts, delays or cancelations of sales and orders principally related to aircraft equipment, higher local currency financing costs and slowdown in our established activities. New profit opportunities include, among other things, more opportunities for lower cost outsourcing, expansion of our activities through purchases of companies or assets at reduced prices and lower U.S. debt financing costs.
 
Estimated results of global activities include the results of our operations located outside the United States. We classify certain operations that cannot meaningfully be associated with specific geographic areas as “Other Global” for this purpose.
 

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Global revenues rose 18% to $29.7 billion in 2005 compared with $25.2 billion and $21.3 billion in 2004 and 2003, respectively. Global revenues as a percentage of total revenues were 54% in 2005, compared with 50% and 51% in 2004 and 2003, respectively.
 
Revenues in the Pacific Basin increased 28% in 2005, primarily as a result of the acquisition of AFIG at GE Consumer Finance and organic revenue growth at GE Consumer Finance and GE Commercial Finance. Revenues increased 25% in Europe primarily as a result of higher investment income (largely offset by policyholder dividends) at our insurance activities, and organic revenue growth and acquisitions at GE Consumer Finance and GE Commercial Finance. Revenues in Other Global decreased 3% primarily as a result of the absence of a current-year counterpart to the 2004 gain on the sale of a majority interest in Genpact, partially offset by organic revenue growth at GE Infrastructure.
 
Global pre-tax earnings were $5.5 billion in 2005, an increase of 9% over 2004, which were 38% higher than in 2003. Pre-tax earnings in 2005 rose 28% in the Americas and 27% in Europe as a result of core growth, primarily at GE Commercial Finance and GE Consumer Finance. These increases in pre-tax earnings were partially offset by a 43% decrease in Other Global in 2005 as a result of the absence of a current-year counterpart to the 2004 gain on the sale of a majority interest in Genpact, and higher costs at GE Infrastructure.
 
Our global assets on a continuing basis of $261.9 billion at the end of 2005 were 1% higher than at the end of 2004, reflecting acquisitions and core growth, almost fully offset by the recently strengthening U.S. dollar.
 
Financial results of our global activities reported in U.S. dollars are affected by currency exchange. We use a number of techniques to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. Such principal currencies are the pound sterling, the euro, the Japanese yen and the Canadian dollar.
 
Financial Resources and Liquidity
 
This discussion of financial resources and liquidity addresses the Statement of Financial Position, the Statement of Changes in Shareowner’s Equity, the Statement of Cash Flows, Contractual Obligations, Off-Balance Sheet Arrangements, and Debt Instruments, Guarantees and Covenants.
 
Overview of Financial Position
 
Major changes in our financial position resulted from the following:
 
·
In the fourth quarter of 2005, GE completed a Genworth secondary public offering, which reduced our ownership in Genworth from 27% to 18%. We have separately reported the assets and liabilities related to Genworth as discontinued operations for all periods presented.
 
·
Our discontinued operations assets and liabilities decreased by $99.6 billion on September 27, 2005, when we reduced our ownership of Genworth to 27%, a level of investment that is reported as an associated company. As an associated company, our ongoing interest in Genworth operating results were presented on a one-line basis. This deconsolidation had a significant effect on our assets and liabilities of discontinued operations.
 

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·
During 2005, we completed acquisitions of the Transportation Financial Services Group of CitiCapital, the Inventory Finance division of Bombardier Capital, Antares Capital Corp., a unit of Massachusetts Mutual Life Insurance Co., and ING’s portion of Heller AG.
 
·
The U.S. dollar was stronger at December 31, 2005, than it was at December 31, 2004, reducing the translated levels of our non-U.S. dollar assets and liabilities. However, on average, the U.S. dollar in 2005 has been weaker than during the comparable 2004 period, resulting in increases in reported levels of non-U.S. dollar operations as noted in the preceding Operations section.
 
Statement of Financial Position
 
Investment securities comprise mainly available-for-sale investment-grade debt securities supporting obligations to annuitants and policyholders, and debt and equity securities designated as trading and associated with certain non-U.S. insurance contractholders who retain the related investment risks and rewards except in the event of our bankruptcy or liquidation. Investment securities were $29.5 billion at December 31, 2005, compared with $32.9 billion at December 31, 2004.
 
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 available-for-sale securities with unrealized losses at December 31, 2005, an inconsequential amount was at risk of being charged to earnings in the next 12 months.
 
Impairment losses for 2005 were insignificant compared with $0.1 billion in 2004. 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 were $0.6 billion and $0.2 billion, respectively, at December 31, 2005, compared with $0.8 billion and $0.4 billion, respectively, at December 31, 2004. At December 31, 2005, available accounting gains could be as much as $0.4 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. See note 5.
 
We also hold collateralized investment securities issued by various airlines, including those operating in bankruptcy. Total amortized cost of these securities was $1.6 billion at December 31, 2005, and total fair value was $1.5 billion. Unrealized losses totaling $0.1 billion were associated with securities in an unrealized loss position for more than 12 months, an improvement from the comparable $0.3 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, 2005, offering protection in the event of foreclosure. Therefore, we expect full recovery of our investment as well as our contractual returns.
 

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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 $289.1 billion at December 31, 2005, and $285.2 billion at December 31, 2004. The related allowance for losses at December 31, 2005, amounted to $4.6 billion, compared with $5.6 billion at December 31, 2004, representing our best estimate of probable losses inherent in the portfolio. The allowance for losses decreased $1.0 billion from 2004. The 2005 decrease reflected write-offs of previously reserved financing receivables ($0.8 billion), principally commercial aviation loans and leases in our GE Infrastructure segment, and the recently strengthening U.S. dollar ($0.2 billion). During 2005, changes in U.S. bankruptcy laws prompted certain customers to accelerate filing for bankruptcy protection. These changes had an inconsequential effect on our allowance and earnings. Balances at December 31, 2005 and 2004, included securitized, managed GE trade receivables of $3.9 billion and $3.5 billion, respectively. See notes 6 and 7.
 
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; “nonearning” receivables are those that are 90 days or more past due (or for which collection has otherwise become doubtful); and “reduced-earning” receivables are commercial receivables whose terms have been restructured to a below-market yield.
 
GE Commercial Finance financing receivables, before allowance for losses, totaled $128.9 billion at December 31, 2005, compared with $121.5 billion at December 31, 2004, 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 ($38.9 billion) and acquisitions ($10.9 billion), partially offset by securitizations and sales ($36.0 billion) and the recently strengthening U.S. dollar ($2.0 billion). Related nonearning and reduced-earning receivables were $1.3 billion (1.0% of outstanding receivables) at December 31, 2005, and $1.4 billion (1.2% of outstanding receivables) at year-end 2004. GE Commercial Finance financing receivables are generally backed by assets and there is a broad spread of geographic and credit risk in the portfolio.
 
GE Consumer Finance financing receivables, before allowance for losses, were $130.1 billion at December 31, 2005, compared with $127.8 billion at December 31, 2004, 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 ($11.3 billion) and acquisitions ($0.4 billion), partially offset by the recently strengthening U.S. dollar ($7.8 billion), securitizations ($0.7 billion), loans transferred to assets held for sale ($0.5 billion) and dispositions ($0.4 billion). Nonearning consumer receivables were $2.8 billion at December 31, 2005, compared with $2.5 billion at December 31, 2004, representing 2.1% and 2.0% of outstanding receivables, respectively. The increase was primarily related to higher nonearning receivables in our European secured financing business, a business that tends to experience relatively higher delinquencies but lower losses than the rest of our consumer portfolio.
 
GE Infrastructure financing receivables, before allowance for losses, were $18.9 billion at December 31, 2005, compared with $20.8 billion at December 31, 2004, and consisted primarily of loans and leases to the commercial aircraft and energy industries. Related nonearning and reduced-earning receivables were insignificant at December 31, 2005, down from $0.2 billion (0.8% of outstanding receivables) at December 31, 2004.
 
Other financing receivables, before allowance for losses, were $11.2 billion and $15.1 billion at December 31, 2005 and December 31, 2004, 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. Nonearning receivables at December 31, 2005, were $0.1 billion (0.7% of outstanding receivables) compared with $0.2 billion (1.2% of outstanding receivables) at December 31, 2004.
 

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Delinquency rates on managed GE Commercial Finance equipment loans and leases and managed GE Consumer Finance financing receivables follow.
 
December 31
2005
    
2004
    
2003
    
                   
GE Commercial Finance
1.31
%
  
1.40
%
  
1.38
%
  
GE Consumer Finance
5.08
    
4.85
    
5.62
    

 
Delinquency rates at GE Commercial Finance decreased from December 31, 2004, to December 31, 2005, primarily resulting from improved credit quality across all portfolios. The increase from December 31, 2003, to December 31, 2004, reflected the effect of certain acquired portfolios, partially offset by improvement in the overall core portfolio.
 
Delinquency rates at GE Consumer Finance increased from December 31, 2004, to December 31, 2005, as a result of higher delinquencies in our European secured financing business, discussed above. The decrease from December 31, 2003, to December 31, 2004, reflected the results of the standardization of our write-off policy, the acquisition of AFIG, and the U.S. acquisition of WMC, with lower relative delinquencies as a result of whole loan sales, partially offset by higher delinquencies in our European secured financing business, discussed above. See notes 6 and 7.
 
Other receivables totaled $25.7 billion at December 31, 2005, and $21.2 billion at December 31, 2004, and consisted primarily of nonfinancing customer receivables, insurance receivables, amounts due from GE (generally related to certain material procurement programs), amounts due under operating leases, receivables due on sale of securities and various sundry items.
 
Buildings and equipment consisted primarily of equipment provided to third parties on operating leases. Buildings and equipment amounted to $50.9 billion at December 31, 2005, up $4.7 billion from 2004, primarily reflecting acquisitions of commercial aircraft at the Aviation Financial Services business of GE Infrastructure. Details by category of investment are presented in note 8. Additions to buildings and equipment were $11.2 billion and $10.3 billion during 2005 and 2004, respectively, primarily reflecting additions of commercial aircraft at the Aviation Financial Services business of GE Infrastructure and vehicles at GE Commercial Finance and the Equipment Services business of GE Industrial.
 
Borrowings amounted to $355.9 billion at December 31, 2005, of which $149.7 billion is due in 2006 and $206.2 billion is due in subsequent years. Comparable amounts at the end of 2004 were $348.7 billion in total, $147.3 billion due within one year and $201.4 billion due thereafter. Included in our total borrowings were borrowings of consolidated, liquidating securitization entities amounting to $16.8 billion and $25.8 billion at December 31, 2005 and 2004, respectively. A large portion of our borrowings ($90.4 billion and $89.8 billion at the end of 2005 and 2004, 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 our commercial paper were 45 days and 4.09% at the end of 2005, compared with 42 days and 2.39% at the end of 2004. Our ratio of debt to equity was 7.09 to 1 at the end of 2005 and 6.46 to 1 at the end of 2004. See note 11.
 
Exchange rate and interest rate risks are managed with a variety of straightforward 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
 

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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, 2006, 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 2006. We estimated, based on that year-end 2005 portfolio and holding everything else constant, that our 2006 net earnings would decline by $0.1 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 2005 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 2006 earnings of such a shift in exchange rates.
 
Statement of Changes in Shareowner’s Equity
 
Shareowner’s equity decreased $3.8 billion in 2005, and increased $7.3 billion in 2004 and $6.6 billion in 2003. Changes over the three-year period were largely attributable to net earnings, partially offset by dividends declared of $8.6 billion, $3.1 billion and $4.5 billion in 2005, 2004 and 2003, respectively. Also, a redemption of the preferred stock decreased shareowner’s equity by $2.5 billion in 2005. Currency translation adjustments decreased equity by $2.5 billion in 2005, compared with a $2.3 billion increase in 2004. Changes in currency translation adjustments reflect the effects of changes in currency exchange rates on our net investment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar. In 2005, the U.S. dollar strengthened against the pound sterling and euro. In 2004, the pound sterling, euro and, to a lesser extent, Asian currencies strengthened against the U.S. dollar. See note 15. Accumulated currency translation adjustments affect net earnings only when all or a portion of an affiliate is disposed of or substantially liquidated.
 
Overview of Our Cash Flow from 2003 through 2005
 
Our cash and equivalents aggregated $6.2 billion at the end of 2005, reduced from $8.4 billion at year-end 2004. Over the past three years, our borrowings with maturities of 90 days or less have decreased by $17.9 billion. New borrowings of $184.5 billion having maturities longer than 90 days were added during those years, while $137.1 billion of such long-term borrowings were retired.
 
Our principal use of cash has been investing in assets to grow our businesses. Of the $63.9 billion that we invested over the past three years, $36.8 billion was used for additions to financing receivables; $28.8 billion was used to invest in new equipment, principally for lease to others; and $31.5 billion was used for acquisitions of new businesses, the largest of which were the Transportation Financial Services Group of CitiCapital and the Inventory Finance division of Bombardier Capital in 2005; the commercial lending business of Transamerica Finance Corporation and Sophia S.A. in 2004; and First National Bank and Conseco in 2003.
 

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Although we generated $55.8 billion from operating activities over the last three years, our cash is not necessarily freely available for alternative uses. For example, use of cash generated by our regulated activities is often restricted by such regulations. Further, any reinvestment in financing receivables is shown in cash used for investing activities, not operating activities. Therefore, maintaining or growing our assets requires that we invest much of the cash we generate from operating activities in our earning assets.
 
Based on past performance and current expectations, in combination with the financial flexibility that comes with a strong balance sheet and the highest credit ratings, we believe that we are in a sound position to grow dividends and continue making selective investments for long-term growth.
 
Contractual Obligations
 
As defined by reporting regulations, our contractual obligations for future payments as of December 31, 2005, follow.
 
 
Payments due by period
(In billions)
Total
  
2006
  
2007-2008
  
2009-2010
  
2011 and
thereafter
                   
Borrowings (note 11)
$
355.9
  
$
149.7
    
$
84.6
      
$
47.1
      
$
74.5
  
                                         
Interest on borrowings
  
64.0
    
12.0
      
17.0
        
10.0
        
25.0
  
                                         
Operating lease obligations (note 4)
  
4.0
    
0.8
      
1.2
        
0.9
        
1.1
  
                                         
Purchase obligations(a)(b)
  
22.0
    
15.0
      
6.0
        
1.0
        
-
  
                                         
Insurance liabilities (note 12)(c)
  
15.0
    
4.0
      
4.0
        
1.0
        
6.0
  
                                         
Other liabilities(d)
  
13.0
    
10.0
      
1.0
        
-
        
2.0
  
                                         

(a)
 
Included all take-or-pay arrangements, capital expenditures, contractual commitments to purchase equipment that will be classified as equipment leased to others, software acquisition/license commitments and any contractually required cash payments for acquisitions.
 
  
(b)
 
Excluded funding commitments entered into in the ordinary course of business. Further information on these commitments and other guarantees is provided in note 20.
 
  
(c)
 
Included guaranteed investment contracts (GICs), structured settlements and single premium immediate annuities based on scheduled payouts, as well as those contracts with reasonably determinable cash flows such as deferred annuities, term life, long-term care, whole life and other life insurance contracts.
 
  
(d)
Included an estimate of future expected funding requirements related to our pension benefit plans. Because their future cash outflows are uncertain, the following non-current liabilities are excluded from the table above: deferred taxes, derivatives, deferred revenue and other sundry items. See notes 13 and 18 for further information on certain of these items.
  

 
Off-Balance Sheet Arrangements
 
We use off-balance sheet arrangements in the ordinary course of business to improve shareowner returns. These securitization transactions also serve as funding sources for a variety of diversified lending and securities transactions. Our securitization transactions are similar to those used by many financial institutions.
 
In a typical securitization transaction, we sell assets to a special purpose entity (SPE), which has obtained cash by issuing beneficial interests, usually debt, to third parties. Securitization entities commonly use derivatives
 

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such as interest rate swaps to match interest rate characteristics of the assets with characteristics of the related beneficial interests. An example is an interest rate swap that serves to convert fixed rate assets to a variable rate, matching the cash flows on SPE floating rate debt. An investor in a beneficial interest usually has recourse to assets in the associated SPE, and often benefits from credit enhancements supporting those assets. The most common credit enhancement is overcollateralization, where we securitize a greater principal amount of assets than debt issued by the SPE. Our other credit enhancements are in the form of liquidity and credit support agreements and guarantee and reimbursement contracts. We have provided $0.1 billion at year-end 2005 representing our best estimate of the fair value of potential losses under these arrangements.
 
Historically, we executed securitization transactions using entities sponsored by us and by third parties. Beginning in 2003, we only have executed securitization transactions with third parties in the asset-backed commercial paper and term markets. Securitization entities hold receivables secured by equipment, commercial and residential real estate, credit card receivables and other assets. Our total securitized assets at year-end 2005 amounted to $56.2 billion, a $3.5 billion increase from year-end 2004. Of that total, the off-balance sheet amount was $38.3 billion, up $11.5 billion from December 31, 2004, and the amount in consolidated, liquidating securitization entities was $17.9 billion, down $8.1 billion from December 31, 2004, reflecting repayments. See note 19 for further information.
 
We have extensive experience in evaluating economic, liquidity and credit risk related to the assets we securitize. Assets held by these entities are of high quality and we actively monitor them in accordance with our servicing role. We apply rigorous controls to the execution of securitization transactions and continuously monitor developments affecting credit. In view of our experience and taking into consideration the historical depth and liquidity of global commercial paper markets, we believe that, under any plausible future economic scenario, the likelihood is remote that the financial support arrangements we provide to securitization entities could have an adverse effect on our financial position or results of operations.
 
Debt Instruments, Guarantees and Covenants
 
The major debt rating agencies routinely evaluate our debt. These agencies have given us the highest debt ratings (long-term rating AAA/Aaa; short-term rating A-1+/P-1). One of our strategic objectives is to maintain these ratings, as they serve to lower our cost of funds and to facilitate our access to a variety of lenders. We manage our businesses in a fashion that is consistent with maintaining these ratings.
 
We have distinct business characteristics that the major debt rating agencies evaluate both quantitatively and qualitatively.
 
Quantitative measures include:
 
•
Earnings and profitability, revenue growth, the breadth and diversity of sources of income and return on assets,
 
•
Asset quality, including delinquency and write-off ratios and reserve coverage,
 
•
Funding and liquidity, including cash generated from operating activities, leverage ratios such as debt-to-capital, market access, back-up liquidity from banks and other sources, composition of total debt and interest coverage, and
 

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•
Capital adequacy, including required capital and tangible leverage ratios.
 
Qualitative measures include:
 
•
Franchise strength, including competitive advantage and market conditions and position,
 
•
Strength of management, including experience, corporate governance and strategic thinking, and
 
•
Financial reporting quality, including clarity, completeness and transparency of all financial performance communications.
 
Our ratings are supported contractually by a GE commitment to maintain the ratio of earnings to fixed charges at a specified level as described below.
 
As of January 1, 2003, we extended a business-specific, market-based leverage to the performance measurement of each of our businesses. As a result, at January 1, 2003, debt of $12.5 billion previously allocated to our segments was allocated to GECC corporate items and eliminations. We refer to this as “parent-supported debt.” As of December 31, 2004, $3.2 billion of such debt remained and was paid down during the first quarter of 2005.
 
During 2005, we paid $3.9 billion of special dividends to GE through GECS, which was a portion of the proceeds from the Genworth secondary public offerings.
 
During 2005, GECC and GECC affiliates issued $58 billion of senior, unsecured long-term debt and $2 billion of subordinated debt. This debt was both fixed and floating rate and was issued to institutional and retail investors in the U.S. and 15 other global markets. Maturities for these issuances ranged from one to 40 years. We used the proceeds primarily for repayment of maturing long-term debt, but also to fund acquisitions and organic growth. We anticipate that we will issue between $55 billion and $65 billion of additional long-term debt during 2006, mostly to repay maturing long-term debt. The ultimate amount we issue will depend on our needs and on the markets.
 
Following is the composition of our debt obligations excluding any asset-backed debt obligations, such as debt of consolidated, liquidating securitization entities.
 
December 31
2005
  
2004
               
Senior notes and other long-term debt
  
59
%
    
59
%
Commercial paper
 
24
      
24
  
Current portion of long-term debt
  
12
      
11
  
Other - bank and other retail deposits
  
5
      
6
  
Total
 
100
%
    
100
%

 
We target a ratio for commercial paper of 25% to 35% of outstanding debt based on the anticipated composition of our assets and the liquidity profile of our debt. GE Capital is the most widely held name in global commercial paper markets.
 
We believe that alternative sources of liquidity are sufficient to permit an orderly transition from commercial paper in the unlikely event of impaired access to those markets. Funding sources on which we would
 

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rely would depend on the nature of such a hypothetical event, but include $57.2 billion of contractually committed lending agreements with 75 highly-rated global banks and investment banks. Total credit lines extending beyond one year increased $0.3 billion to $57.1 billion at December 31, 2005. See note 11.
 
Beyond contractually committed lending agreements, other sources of liquidity include medium and long-term funding, monetization, asset securitization, cash receipts from our lending and leasing activities, short-term secured funding on global assets and potential sales of other assets.
 
Principal debt conditions are described below.
 
The following two conditions relate to GECC:
 
•
Swap, forward and option contracts are required to be executed under master-netting agreements containing mutual down-grade provisions that provide the ability of the counterparty to require assignment or termination if the long-term credit rating of GECC were to fall below A-/A3. Had this provision been triggered at December 31, 2005, we could have been required to disburse $1.9 billion.
 
•
If our ratio of earnings to fixed charges, which was 1.66:1 at the end of 2005, were to deteriorate to 1.10:1 or, upon redemption of certain preferred stock, our ratio of debt to equity, which was 7.09:1 at the end of 2005, were to exceed 8:1, GE has committed to contribute capital to us. GE also has guaranteed certain issuances of our subordinated debt with a face amount of $0.7 billion at December 31, 2005 and 2004.
 
The following three conditions relate to consolidated, liquidating securitization entities:
 
•
If our short-term credit rating of certain consolidated, liquidating securitization entities discussed further in note 19 were to fall below A-1/P-1, we would be required to provide substitute liquidity for those entities or provide funds to retire the outstanding commercial paper. The maximum net amount that we would be required to provide in the event of such a downgrade is determined by contract, and amounted to $12.8 billion at January 1, 2006. Amounts related to non-consolidated SPEs were $1.7 billion.
 
•
If our long-term credit rating were to fall below AA/Aa2, we would be required to provide substitute credit support or liquidate the consolidated, liquidating securitization entities. The maximum amount that we would be required to substitute in the event of such a downgrade is determined by contract, and amounted to $0.6 billion at December 31, 2005.
 
•
For certain transactions, if our long-term credit rating were to fall below A/A2 or BBB+/Baa1 or our short-term credit rating were to fall below A-2/P-2, we could be required to provide substitute credit support or fund the undrawn commitment. We could be required to provide up to $2.0 billion in the event of such a downgrade based on terms in effect at December 31, 2005.
 
One group of consolidated SPEs holds high quality investment securities funded by the issuance of guaranteed investment contracts (GICs). If our long-term credit rating were to fall below AA-/Aa3 or our short-term credit rating were to fall below A-1+/P-1, we could be required to provide up to $3.6 billion of capital to such entities.
 
In our history, we have never violated any of the above conditions. We believe that under any reasonable future economic developments, the likelihood that any such arrangements could have a significant effect on our operations, cash flows or financial position is remote.
 

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Critical Accounting Estimates
 
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Also see note 1, Summary of Significant Accounting Policies, which discusses accounting policies that we have selected from acceptable alternatives.
 
Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. Such estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values, and the present and expected future levels of interest rates. Our risk management process, which includes standards and policies for reviewing major risk exposures and concentrations, ensures that relevant data are identified and considered either for individual loans or leases, or on a portfolio basis, as appropriate.
 
Our lending and leasing experience and the extensive data we accumulate and analyze facilitate estimates that have proven reliable over time. Our actual loss experience was in line with expectations for 2005, 2004 and 2003. While prospective losses depend to a large degree on future economic conditions, we do not anticipate significant adverse credit development in 2006. Further information is provided in the Financial Resources and Liquidity - Financing Receivables section, the Asset impairment section given below and in notes 1, 6 and 7.
 
Asset impairment assessment involves various estimates and assumptions as follows:
 
Investments. We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of that market decline, our intent and ability to hold to maturity or until forecasted recovery and the financial health of and specific prospects for the issuer. We perform comprehensive market research and analysis and monitor market conditions to identify potential impairments. Further information about actual and potential impairment losses is provided in the Financial Resources and Liquidity - Investment Securities section and in notes 1 and 5.
 
Long-lived assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We derive the required undiscounted cash flow estimates from our historical experience and our internal business plans. To determine fair value, we use our internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available and independent appraisals, as appropriate.
 
Commercial aircraft are a significant concentration of assets in GE Infrastructure, and are particularly subject to market fluctuations. Therefore, we test recoverability of each aircraft in our operating lease portfolio at least annually. Additionally, we perform quarterly evaluations in circumstances such as when aircraft are re-leased, current lease terms have changed or a specific lessee’s credit standing changes. Future rentals and residual values are based on historical experience and information received routinely from independent appraisers. Estimated cash
 

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flows from future leases are reduced for expected downtime between leases and for estimated technical costs required to prepare aircraft to be redeployed. Fair value used to measure impairment is based on current market values from independent appraisers.
 
We recognized impairment losses on our operating lease portfolio of commercial aircraft of $0.3 billion and $0.1 billion in 2005 and 2004, respectively. In addition to these impairment charges relating to operating leases, we recorded provisions for losses on financing receivables related to commercial aircraft of $0.2 billion in 2005, primarily related to Northwest Airlines Corporation (Northwest Airlines), and $0.3 billion in 2004, primarily related to US Airways and ATA Holdings Corp.
 
Certain of our commercial aviation customers are operating under bankruptcy protection while they implement steps to return to profitable operations with a lower cost structure. At December 31, 2005, our largest exposures to carriers operating in bankruptcy were to Delta Air Lines, $2.3 billion; UAL Corp., $1.4 billion; and Northwest Airlines, $1.1 billion. Our financial exposures to these carriers are substantially secured by various Boeing, Airbus and Bombardier aircraft and operating equipment. On February 1, 2006, UAL Corp. emerged from bankruptcy protection.
 
Further information on impairment losses and our exposure to the commercial aviation industry is provided in the Operations - Overview section and in notes 5, 8 and 20.
 
Goodwill and other identified intangible assets. We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of a reporting unit. Determining whether an impairment has occurred requires valuation of the respective reporting unit, which we estimate using a discounted cash flow method. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data.
 
If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible and intangible asset. In this case we supplement the cash flow approach discussed above with independent appraisals, as appropriate.
 
We test other identified intangible assets with defined useful lives and subject to amortization by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset.
 
Further information is provided in notes 1 and 9.
 
Derivatives and Hedging. We use derivatives to manage a variety of risks, including risks related to interest rates, foreign exchange and commodity prices. Accounting for derivatives as hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. The accounting guidance related to derivatives accounting is complex. Failure to apply this complex guidance correctly will result in all changes in the fair value of the derivative being reported in earnings, while offsetting changes in the fair value of the hedged item are reported in earnings only upon realization, regardless of whether the hedging relationship is economically effective.
 

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In evaluating whether a particular relationship qualifies for hedge accounting, we first determine whether the relationship meets the strict criteria to qualify for exemption from ongoing effectiveness testing. For a relationship that does not meet these criteria, we test effectiveness at inception and quarterly thereafter by determining whether changes in the fair value of the derivative offset, within a specified range, changes in the fair value of the hedged item. This test is conducted on a cumulative basis each reporting period. If fair value changes fail this test, we discontinue applying hedge accounting to that relationship prospectively. Fair values of both the derivative instrument and the hedged item are calculated using internal valuation models incorporating market-based assumptions, subject to third party confirmation.
 
At December 31, 2005, derivative assets and liabilities were $1.5 billion and $1.9 billion, respectively. Further information about our use of derivatives is provided in notes 11 and 18.
 
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will materially exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators. Further information is provided in note 20.
 
Supplemental Information
 
Financial Measures that Supplement Generally Accepted Accounting Principles
 
We sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with GAAP. Certain of these data are considered “non-GAAP financial measures” under SEC rules. Specifically, we have referred to:
 
•
Average total shareowner’s equity, excluding effects of discontinued operations
 
•
Delinquency rates on certain financing receivables of the GE Commercial Finance and GE Consumer Finance segments for 2005, 2004 and 2003
 
The reason we use these non-GAAP financial measures and their reconciliation to their most directly comparable GAAP financial measures follow.
 

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Average Total Shareowner’s Equity, Excluding Effects of Discontinued Operations(a)
 
December 31 (In millions)
2005
  
2004
  
2003
  
2002
  
2001
  
                               
Average total shareowner’s equity(b)
$
53,436
  
$
49,354
  
$
43,954
  
$
34,261
  
$
27,773
  
Less:
                              
Cumulative effect of earnings from
                             
discontinued operations(c)
  
4,787
    
4,131
    
2,788
    
1,537
    
259
  
Average net investment in discontinued
                              
operations(d)
  
1,336
    
-
    
-
    
-
    
-
  
Average total shareowner’s equity, excluding
                             
effects of discontinued operations(a)
$
47,313
  
$
45,223
  
$
41,166
  
$
32,724
  
$
27,514
  
                               

(a)
 
Used for computing return on average shareowner’s equity shown in the Selected Financial Data section.
 
  
(b)
 
On an annual basis, calculated using a five-point average.
 
  
(c)
 
Represented the average cumulative net earnings effects of discontinued operations from 2001 to 2005 (on an annual basis, calculated using a five-point average).
 
  
(d)
Represented the average net investment in discontinued operations for the second half of 2005 only - see below.
  

 
U.S. GAAP requires earnings of discontinued operations to be displayed separately in the Statement of Earnings. Accordingly, the numerators used in our calculations of returns on average shareowner’s equity presented in Selected Financial Data section exclude those earnings. Further we believe it is appropriate to exclude from the denominators, specifically the average total shareowner’s equity component, the cumulative effect of those earnings since 2000 for each of the five years for which such returns are presented, as well as our average net investment in discontinued operations for the second half of 2005 only. Had we disposed of these operations before mid-2005, proceeds would have been applied to reduce parent-supported debt; however since parent-supported debt was retired in the first half of 2005, we have assumed that any proceeds after that time would have been distributed to our shareowner by means of dividends, thus reducing average total shareowner’s equity.
 
Delinquency Rates on Certain Financing Receivables
 
Delinquency rates on managed GE Commercial Finance equipment loans and leases and managed GE Consumer Finance financing receivables follow.
 
GE Commercial Finance
 
December 31 
2005
  
2004
  
2003
  
             
Managed
1.31
%
1.40
%
1.38
%
Off-book
0.76
  
0.90
  
1.27
  
On-book
1.53
  
1.58
  
1.41
  

 

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GE Consumer Finance
 
December 31 
2005
  
2004
  
2003
  
             
Managed
5.08
%
4.85
%
5.62
%
Off-book
5.28
  
5.09
  
5.04
  
On-book
5.07
  
4.84
  
5.67
  

 
We believe that delinquency rates on managed financing receivables provide a useful perspective on our on and off-book portfolio quality and are key indicators of financial performance.
 
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Information about our global risk management can be found on page 13 of Item 7.
 
 
Item 8. Financial Statements and Supplementary Data.
 
Report of Independent Registered Public Accounting Firm


To the Board of Directors of
General Electric Capital Corporation:

We have audited the statement of financial position of General Electric Capital Corporation and consolidated affiliates (“GECC”) as of December 31, 2005 and 2004, and the related statements of earnings, changes in shareowner’s equity and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15. We also have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that GECC maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). GECC management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of GECC’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
 

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accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements and schedule referred to above present fairly, in all material respects, the financial position of GECC and consolidated affiliates as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, management’s assessment that GECC maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Furthermore, in our opinion, GECC maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by COSO.
 
As discussed in note 1 to the consolidated financial statements, GECC in 2004 and 2003 changed its method of accounting for variable interest entities.
 
/s/ KPMG LLP
Stamford, Connecticut
February 10, 2006

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General Electric Capital Corporation and consolidated affiliates
 
Statement of Earnings
 
For the years ended December 31 (In millions)
2005
  
2004
  
2003
  
                   
Revenues
                  
Revenues from services (note 3)
$
52,987
  
$
47,253
  
$
39,377
  
Sales of goods
  
2,528
    
2,840
    
2,228
  
Total revenues
  
55,515
    
50,093
    
41,605
  
                   
Costs and expenses
                  
Interest
 
14,094
    
10,960
    
9,741
  
Operating and administrative (note 4)
  
16,412
    
15,916
    
12,484
  
Cost of goods sold
  
2,369
    
2,741
    
2,119
  
Investment contracts, insurance losses and insurance annuity benefits 
  
3,032
    
1,466
    
1,865
  
Provision for losses on financing receivables (note 7)
  
3,864
    
3,868
    
3,612
  
Depreciation and amortization (note 8)
  
5,983
    
5,755
    
4,529
  
Minority interest in net earnings of consolidated affiliates
  
155
    
159
    
82
  
Total costs and expenses
  
45,909
    
40,865
    
34,432
  
                   
Earnings from continuing operations before income taxes
                  
and accounting change
  
9,606
    
9,228
    
7,173
  
Provision for income taxes (note 13)
  
(940
)
  
(1,410
)
  
(1,103
)
                   
Earnings from continuing operations before accounting change
  
8,666
    
7,818
    
6,070
  
Earnings from discontinued operations, net of taxes (note 2)
  
928
    
442
    
1,396
  
                   
Earnings before accounting change
  
9,594
    
8,260
    
7,466
  
Cumulative effect of accounting change (note 1)
  
-
    
-
    
(339
)
Net earnings
$
9,594
  
$
8,260
  
$
7,127
  
                   
                   
Statement of Changes in Shareowner’s Equity
                  
                   
(In millions)
2005
  
2004
  
2003
  
Changes in shareowner’s equity (note 15)
                 
Balance at January 1
$
53,958
  
$
46,692
  
$
40,126
  
Dividends and other transactions with shareowner
  
(11,101
)
  
(2,805
)
  
(4,466
)
Changes other than transactions with shareowner
                  
Increase attributable to net earnings
  
9,594
    
8,260
    
7,127
  
Investment securities - net
 
(230
)
  
(595
)
  
517
  
Currency translation adjustments - net
 
(2,501
)
  
2,296
    
3,150
  
Cash flow hedges - net
 
491
    
203
    
247
  
Minimum pension liabilities - net
  
(23
)
  
(93
)
  
(9
)
Total changes other than transactions with shareowner
  
7,331
    
10,071
    
11,032
  
Balance at December 31
$
50,188
  
$
53,958
  
$
46,692
  
                   

The notes to consolidated financial statements are an integral part of these statements.
  
 


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General Electric Capital Corporation and consolidated affiliates
 
Statement of Financial Position
 
At December 31 (In millions, except share amounts)
2005
  
2004
  
             
Assets
            
Cash and equivalents
$
6,182
  
$
8,433
  
Investment securities (note 5)
  
29,463
    
32,868
  
Inventories
  
159
    
189
  
Financing receivables - net (notes 6 and 7)
  
284,567
    
279,588
  
Other receivables
  
25,685
    
21,215
  
Buildings and equipment - net (note 8)
  
50,936
    
46,250
  
Intangible assets - net (note 9)
  
23,182
    
22,996
  
Other assets (note 10)
  
52,118
    
51,298
  
Assets of discontinued operations (note 2)
  
2,981
    
104,048
  
Total assets
$
475,273
  
$
566,885
  
             
Liabilities and equity
            
Borrowings (note 11)
$
355,885
  
$
348,685
  
Accounts payable
  
14,435
    
14,138
  
Investment contracts, insurance liabilities and insurance annuity benefits (note 12)
  
24,429
    
25,835
  
Other liabilities
  
16,935
    
18,073
  
Deferred income taxes (note 13)
  
11,189
    
10,547
  
Liabilities of and minority interest in discontinued operations (note 2)
  
-
    
93,324
  
Total liabilities
  
422,873
    
510,602
  
             
Minority interest in equity of consolidated affiliates (note 14)
  
2,212
    
2,325
  
             
Variable cumulative preferred stock, $100 par value, liquidation preference
$100,000 per share (33,000 shares authorized; 700 shares issued
and outstanding at December 31, 2005 and 26,000 shares issued and
outstanding at December 31, 2004)
  
-
    
3
  
Common stock, $14 par value (4,166,000 shares authorized at
December 31, 2005 and 2004, and 3,985,403 shares issued
and outstanding at December 31, 2005 and 2004)
  
56
    
56
  
Accumulated gains (losses) - net
           
Investment securities
 
744
    
974
  
Currency translation adjustments
 
2,343
    
4,844
  
Cash flow hedges
  
(790
)
  
(1,281
)
Minimum pension liabilities
  
(147
)
  
(124
)
Additional paid-in capital
  
12,055
    
14,539
  
Retained earnings
  
35,927
    
34,947
  
Total shareowner’s equity (note 15)
  
50,188
    
53,958
  
Total liabilities and equity
$
475,273
  
$
566,885
  
             

The sum of accumulated gains (losses) on investment securities, currency translation adjustments, cash flow hedges and minimum pension liabilities constitutes “Accumulated nonowner changes other than earnings,” as shown in note 15, and was $2,150 million and $4,413 million at December 31, 2005 and 2004, respectively.
 
  
The notes to consolidated financial statements are an integral part of this statement.
 
  

 

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General Electric Capital Corporation and consolidated affiliates
 
Statement of Cash Flows
 
For the years ended December 31 (In millions)
2005
  
2004
  
2003
  
                   
Cash flows - operating activities
                  
Net earnings
$
9,594
  
$
8,260
  
$
7,127
  
Earnings from discontinued operations
  
(928
)
  
(442
)
  
(1,396
)
Adjustments to reconcile net earnings to cash provided
                 
from operating activities
                  
Cumulative effect of accounting change
  
-
    
-
    
339
  
Depreciation and amortization of buildings and equipment
  
5,983
    
5,755
    
4,529
  
Deferred income taxes
  
(963
)
  
116
    
965
  
Decrease (increase) in inventories
  
30
    
(9
)
  
(35
)
Increase (decrease) in accounts payable
  
(1,071
)
  
2,258
    
1,963
  
Increase (decrease) in insurance liabilities
 
848
    
1,293
    
(1,186
)
Provision for losses on financing receivables
  
3,864
    
3,868
    
3,612
  
All other operating activities (note 16)
  
1,574
    
(703
)
  
537
  
Cash from operating activities - continuing operations
  
18,931
    
20,396
    
16,455
  
Cash from operating activities - discontinued operations
  
3,283
    
5,139
    
5,595
  
Cash from operating activities
  
22,214
    
25,535
    
22,050
  
                   
Cash flows - investing activities
                  
Additions to buildings and equipment
  
(11,208
)
  
(10,304
)
  
(7,251
)
Dispositions of buildings and equipment
  
5,519
    
5,488
    
4,619
  
Net increase in financing receivables (note 16)
  
(17,156
)
  
(14,952
)
  
(4,736
)
Payments for principal businesses purchased
  
(7,167
)
  
(13,888
)
  
(10,482
)
All other investing activities (note 16)
  
8,119
    
5,767
    
3,781
  
Cash used for investing activities - continuing operations
  
(21,893
)
  
(27,889
)
  
(14,069
)
Cash used for investing activities - discontinued operations
  
(4,987
)
  
(7,558
)
  
(4,596
)
Cash used for investing activities
  
(26,880
)
  
(35,447
)
  
(18,665
)
                   
Cash flows - financing activities
                  
Net increase (decrease) in borrowings (maturities of 90 days or less)
  
(5,086
)
  
130
    
(12,972
)
Newly issued debt (maturities longer than 90 days) (note 16)
  
65,868
    
58,628
    
60,012
  
Repayments and other reductions (maturities longer
                 
than 90 days) (note 16)
  
(48,840
)
  
(45,115
)
  
(43,128
)
Dividends paid to shareowner
  
(8,614
)
  
(3,148
)
  
(4,472
)
All other financing activities (note 16)
  
(2,617
)
  
(2,864
)
  
593
  
Cash from financing activities - continuing operations
  
711
    
7,631
    
33
  
Cash from (used for) financing activities - discontinued operations
  
297
    
2,402
    
(682
)
Cash from (used for) financing activities
  
1,008
    
10,033
    
(649)
  
                   
Increase (decrease) in cash and equivalents during year
  
(3,658
)
  
121
    
2,736
  
Cash and equivalents at beginning of year
  
9,840
    
9,719
    
6,983
  
Cash and equivalents at end of year
  
6,182
    
9,840
    
9,719
  
Less cash and equivalents of discontinued operations at end of year
  
-
    
1,407
    
1,424
  
Cash and equivalents of continuing operations at end of year
$
6,182
  
$
8,433
  
$
8,295
  
                   
Supplemental disclosure of cash flows information
                  
Cash paid during the year for interest
$
(15,056
)
$
(10,995
)
$
(10,323
)
Cash recovered (paid) during the year for income taxes
  
(2,459
)
  
785
    
726
  
                   

The notes to consolidated financial statements are an integral part of this statement.


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General Electric Capital Corporation and consolidated affiliates
 
Notes to Consolidated Financial Statements
 
Note 1. Summary of Significant Accounting Policies
 
Accounting principles
 
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP).
 
Consolidation
 
All of our outstanding common stock is owned by General Electric Capital Services, Inc. (GE Capital Services or GECS), all of whose common stock is owned, directly or indirectly, by General Electric Company (GE Company or GE). Our financial statements consolidate all of our affiliates - companies that we control and in which we hold a majority voting interest. Associated companies are companies that we do not control but over which we have significant influence, most often because we hold a shareholder voting position of 20% to 50%. Results of associated companies are presented on a one-line basis. Investments in and advances to associated companies are presented on a one-line basis in the caption “Other assets” in our Statement of Financial Position, net of allowance for losses that represents our best estimate of probable losses inherent in such assets.
 
Because of new accounting requirements that became effective in 2004 and 2003, we consolidated certain non-affiliates, including certain special purpose entities (SPEs) and investments previously considered associated companies, in each of those years.
 
Financial statement presentation
 
We have reclassified certain prior-year amounts to conform to the current year’s presentation.
 
Operating Segments
 
These comprise our four businesses focused on the broad markets they serve: GE Commercial Finance, GE Consumer Finance, GE Industrial and GE Infrastructure. For segment reporting purposes, certain financial services businesses are included in the industrial operating segments that actively manage such businesses and report their results for internal performance measurement purposes. These include Aviation Financial Services, Energy Financial Services and Transportation Finance reported in the GE Infrastructure segment, and Equipment Services reported in the GE Industrial segment.
 
Unless otherwise indicated, information in these notes to consolidated financial statements relates to continuing operations.
 
The effects of translating to U.S. dollars the financial statements of non-U.S. affiliates whose functional currency is the local currency are included in shareowner’s equity. Asset and liability accounts are translated at year-end exchange rates, while revenues and expenses are translated at average rates for the period.
 

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Effects of transactions between related companies are eliminated. As a wholly-owned subsidiary, GECC enters into various operating and financing arrangements with GE. These arrangements are on terms that are commercially reasonable but are related party transactions and therefore require the following disclosures. At December 31, 2005 and 2004, Financing receivables included $3,904 million and $3,505 million, respectively, of receivables from GE customers. Other receivables included $3,716 million and $3,159 million, respectively, of receivables from GE. Buildings and equipment included $1,637 million and $1,866 million, respectively, of buildings and equipment leased to GE, net of accumulated depreciation. Borrowings included $1,448 million and $1,104 million, respectively, of amounts held by GE.
 
    Preparing financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.
 
Sales of goods
 
We record sales of goods when a firm sales agreement is in place, delivery has occurred and collectibility of the fixed or determinable sales price is reasonably assured. If customer acceptance of products is not assured, we record sales only upon formal customer acceptance.
 
Revenues from services (earned income)
 
We use the interest method to recognize income on all loans. Interest on loans includes origination, commitment and other non-refundable fees related to funding (recorded in earned income on the interest method). We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due. We recognize interest income on nonearning loans either as cash is collected or on a cost-recovery basis as conditions warrant. We resume accruing interest on nonearning, non-restructured commercial loans only when (a) payments are brought current according to the loan’s original terms and (b) future payments are reasonably assured. When we agree to restructured terms with the borrower, we resume accruing interest only when reasonably assured that we will recover full contractual payments, and such loans pass underwriting reviews equivalent to those applied to new loans. We resume accruing interest on nonearning consumer loans when the customer’s account is less than 90 days past due.
 
We record financing lease income on the interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease inception represent our initial estimates of the fair value of the leased assets at the expiration of the lease and are based primarily on independent appraisals, which are updated periodically. Guarantees of residual values by unrelated third parties are considered part of minimum lease payments. Significant assumptions we use in estimating residual values include estimated net cash flows over the remaining lease term, results of future remarketing, and future component part and scrap metal prices, discounted at an appropriate rate.
 
We recognize operating lease income on a straight-line basis over the terms of underlying leases.
 

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Fees include commitment fees related to loans that we do not expect to fund and line-of-credit fees. We record these fees in earned income on a straight-line basis over the period to which they relate. We record syndication fees in earned income at the time related services are performed, unless significant contingencies exist.
 
See the Investment securities and Investment contracts, insurance liabilities and insurance annuity benefits sections of this note for a description of accounting policies for these activities.
 
Depreciation and amortization
 
The cost of our equipment leased to others on operating leases is amortized on a straight-line basis to estimated residual value over the lease term or over the estimated economic life of the equipment. See note 8.
 
Losses on financing receivables
 
Our allowance for losses on financing receivables represents our best estimate of probable losses inherent in the portfolio. Our method of calculating estimated losses depends on the size, type and risk characteristics of the related receivables. Write-offs are deducted from the allowance for losses and subsequent recoveries are added. Impaired financing receivables are written down to the extent that we judge principal to be uncollectible.
 
Our portfolio consists entirely of homogenous consumer loans and of commercial loans and leases. The underlying assumptions, estimates and assessments we use to provide for losses are continually updated to reflect our view of current conditions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible to experience credit losses that are different from our current estimates.
 
Our consumer loan portfolio consists of smaller balance, homogenous loans including card receivables, installment loans, auto loans and leases and residential mortgages. We collectively evaluate each portfolio for impairment. The allowance for losses on these receivables is established through a process that estimates the probable losses inherent in the portfolio based upon statistical analyses of portfolio data. These analyses include migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, together with other analyses that reflect current trends and conditions. We also consider overall portfolio indicators including nonearning loans, trends in loan volume and lending terms, credit policies and other observable environmental factors.
 
During 2004, GE Consumer Finance adopted a global policy for uncollectible receivables that accelerated write-offs to follow one consistent basis. We write off unsecured closed-end installment loans at 120 days contractually past due and unsecured open-ended revolving loans at 180 days contractually past due. We write down loans secured by collateral other than real estate to the fair value of the collateral, less costs to sell, when such loans are 120 days past due. Consumer loans secured by residential real estate (both revolving and closed-end loans) are written down to the fair value of collateral, less costs to sell, no later than when they become 360 days past due. Unsecured loans in bankruptcy are written off within 60 days of notification of filing by the bankruptcy court or within contractual write-off periods, whichever occurs earlier.
 
Our commercial loan and lease portfolio consists of a variety of loans and leases, including both larger balance, non-homogenous loans and leases and smaller balance homogenous commercial and equipment loans and leases. Losses on such loans and leases are recorded when probable and estimable. We routinely survey our entire portfolio for potential specific credit or collection issues that might indicate an impairment. For larger balance, non-homogenous loans and leases, this survey first considers the financial status, payment history, collateral value,
 

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industry conditions and guarantor support related to specific customers. Any delinquencies or bankruptcies are indications of potential impairment requiring further assessment of collectibility. We routinely receive financial, as well as rating agency reports, on our customers, and we elevate for further attention those customers whose operations we judge to be marginal or deteriorating. We also elevate customers for further attention when we observe a decline in collateral values for asset-based loans. While collateral values are not always available, when we observe such a decline, we evaluate relevant markets to assess recovery alternatives - for example, for real estate loans, relevant markets are local; for aircraft loans, relevant markets are global. We provide allowances based on our evaluation of all available information, including expected future cash flows, fair value of collateral, net of disposal costs, and the secondary market value of the financing receivables. After providing for specific incurred losses, we then determine an allowance for losses that have been incurred in the balance of the portfolio but cannot yet be identified to a specific loan or lease. This estimate is based on historical and projected default rates and loss severity, and it is prepared by each respective line of business.
 
Experience is not available with new products; therefore, while we are developing that experience, we set loss allowances based on our experience with the most closely analogous products in our portfolio.
 
When we repossess collateral in satisfaction of a loan, we write down the receivable against the allowance for losses. Repossessed collateral is included in Other assets in the Statement of Financial Position and carried at the lower of cost or estimated fair value less costs to sell.
 
The remainder of our commercial loans and leases are portfolios of smaller balance homogenous commercial and equipment positions that we evaluate collectively for impairment based upon various statistical analyses considering historical losses and aging.
 
Sales of stock by affiliates
 
We record gains or losses on sales by an affiliate of its own shares as revenue unless realization of gains is not reasonably assured, in which case we record the results in shareowner’s equity.
 
Cash and equivalents
 
Debt securities with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities.
 
Investment securities 
 
We report investments in debt and marketable equity securities, and equity securities in our insurance portfolio, at fair value based on quoted market prices or, if quoted prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. Unrealized gains and losses on available-for-sale investment securities are included in shareowner’s equity, net of applicable taxes and other adjustments. We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of that market decline, our intent and ability to hold to maturity or until forecasted recovery and the financial health of and specific prospects for the issuer. Unrealized losses that are other than temporary are recognized in earnings. For investment securities designated as trading, unrealized gains and losses are recognized currently in earnings. Realized gains and losses are accounted for on the specific identification method.
 

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Inventories
 
All inventories are stated at the lower of cost or realizable values. Our inventories consist of finished products held for sale, and cost is determined on a first-in, first-out basis.
 
Intangible assets
 
We do not amortize goodwill, but test it annually for impairment using a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We recognize an impairment charge for any amount by which the carrying amount of a reporting unit’s goodwill exceeds its fair value. We use discounted cash flows to establish fair values. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. When a business within a reporting unit is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value method.
 
We amortize the cost of other intangibles over their estimated useful lives. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values.
 
Investment contracts, insurance liabilities and insurance annuity benefits
 
Certain SPEs, which we consolidate, provide guaranteed investment contracts to states, municipalities and municipal authorities.
 
Our insurance activities also include providing insurance and reinsurance for life and health risks and providing certain annuity products. Two product groups are provided: traditional insurance contracts and investment contracts. Insurance contracts are contracts with significant mortality and/or morbidity risks, while investment contracts are contracts without such risks.
 
For short-duration insurance contracts, including accident and health insurance, we report premiums as earned income over the terms of the related agreements, generally on a pro-rata basis. For traditional long-duration insurance contracts including term, whole life and annuities payable for the life of the annuitant, we report premiums as earned income when due.
 
Premiums received on investment contracts (including annuities without significant mortality risk) are not reported as revenues but rather as deposit liabilities. We recognize revenues for charges and assessments on these contracts, mostly for mortality, contract initiation, administration and surrender. Amounts credited to policyholder accounts are charged to expense.
 
Liabilities for traditional long-duration insurance contracts represent the present value of such benefits less the present value of future net premiums based on mortality, morbidity, interest and other assumptions at the time the policies were issued or acquired. Liabilities for investment contracts equal the account value, that is, the amount that accrues to the benefit of the contract or policyholder including credited interest and assessments through the financial statement date.
 
Liabilities for unpaid claims and claims adjustment expenses represent our best estimate of the ultimate obligations for reported and incurred-but-not-reported claims and the related estimated claim settlement expenses.
 

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Liabilities for unpaid claims and claims adjustment expenses are continually reviewed and adjusted through current operations.
 
Accounting change
 
On July 1, 2003, we adopted FIN 46, Consolidation of Variable Interest Entities, and, on January 1, 2004, the related subsequent amendment (FIN 46R). Consequently, in 2003 we recorded a $339 million after-tax charge related to the first-time consolidation of certain SPEs, reported in the caption “Cumulative effect of accounting change.” There was no earnings effect arising from our adoption of FIN 46R. Additional information about entities consolidated under these rules is provided in note 19.
 
Note 2. Discontinued Operations
 
Sale of Genworth
 
In May 2004, we completed the initial public offering of Genworth Financial Inc. (Genworth), our formerly wholly-owned subsidiary that conducted most of our consumer insurance business, including life and mortgage insurance operations. During 2005, we reduced our ownership in Genworth to 18% through further sales of stock in three secondary public offerings. Our remaining available-for-sale investment in Genworth common stock is included in assets of discontinued operations, and results of future sales will be reported in discontinued operations.
 
Discontinued operations
 
At December 31, 2005, Genworth was classified as discontinued operations and its results of operations, financial position and cash flows are separately reported for all periods presented. Summarized financial information for discontinued operations is set forth below. Gain (loss) on disposal included actual effects of the Genworth sale.
 
 
Genworth
  
(In millions)
2005
  
2004
  
2003
  
                   
Discontinued Operations Before Disposal
                  
Revenues from services
$
7,906
  
$
10,145
  
$
11,765
  
                   
Earnings from discontinued operations before
                 
minority interest and income taxes
$
1,387
  
$
1,543
  
$
2,038
  
Minority interest
 
394
    
200
    
2
  
Earnings from discontinued operations before income taxes
  
993
    
1,343
    
2,036
  
Income tax expense
  
(617
)
  
(565
)
  
(640
)
Earnings from discontinued operations before
                  
disposal, net of taxes
$
376
  
$
778
  
$
1,396
  
                   
Disposal
                  
Gain (loss) on disposal before income taxes
$
932
  
$
(570
)
$
-
  
Income tax benefit (expense)
  
(380
)
  
234
    
-
  
                   
Gain (loss) on disposal, net of taxes
$
552
  
$
(336
)
$
-
  
                   
Earnings from discontinued operations, net of taxes
$
928
  
$
442
  
$
1,396
  

 

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Genworth
  
December 31 (In millions)
2005
  
2004
  
             
Cash and equivalents
$
-
  
$
1,407
  
Investment securities
  
2,981
    
54,064
  
Other receivables
  
-
    
27,936
  
Other
  
-
    
20,641
  
Assets of discontinued operations
$
2,981
  
$
104,048
  
             
Investment contracts, insurance liabilities and insurance
            
annuity benefits
$
-
  
$
78,055
  
Other
  
-
    
11,489
  
Minority interest
  
-
    
3,780
  
Liabilities of and minority interest in discontinued operations
$
-
  
$
93,324
  
             
Accumulated gains - net
            
Investment securities
$
465
  
$
707
  
Currency translation adjustments
  
-
    
332
  
Cash flow hedges
  
-
    
191
  
Total accumulated nonowner changes other than earnings
$
465
  
$
1,230
  

 
Note 3. Revenues from Services
 
(In millions)
2005
  
2004
  
2003
  
                   
Interest on loans
$
19,895
  
$
17,114
  
$
15,357
  
Operating lease rentals
  
11,476
    
10,654
    
7,123
  
Investment income
  
2,623
    
1,698
    
1,313
  
Fees
 
4,049
    
3,284
    
2,436
  
Financing leases
  
3,894
    
4,069
    
4,117
  
Premiums earned by insurance activities
  
1,063
    
589
    
2,268
  
Other income
  
9,987
    
9,845
    
6,763
  
Total(a)
$
52,987
  
$
47,253
  
$
39,377
  
                   

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