GENERAL ELECTRIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF STATEMENT OF CURRENT AND RETAINED EARNINGS General Sales in 1975 were slightly below 1974, the first decrease in many years. It is estimated that the physical volume of goods sold in 1975 was down about 10% from the prior year, principally because of the economic recession. Sales in 1974 were about 16% higher than in 1973. About half of the increase in sales from 1973 to 1974 was attributable to greater physical volume. Approximately one seventh of sales in 1975 and 1974 were to agencies of the U. S. government which is General Electric's largest single customer. Despite inflationary pressures, 1975 operating costs were only slightly above 1974 levels as a result of rigorous cost control. However, operating margin as a percent to sales was 6.9%, down from 7.4% in 1974. Although the operating margin in 1974 in dollars represented an increase from 1973, as a percent to sales the 1974 margin was down from the 1973 rate of 8.2%. The decline in the operating margin ratio for two consecutive years was principally due to higher material and labor costs associated with the inflationary economic climate. Interest and other financial charges for 1975 were less than in 1974 due to lower average interest rates paid for short-term borrowings and a lower average level of total borrowings. This decrease followed a sharp increase in interest expense from 1973 to 1974 when higher interest rates prevailed and General Electric increased its level of borrowings. Provision for income taxes in 1975 was lower than in 1974 principally because of lower income. Details of the slightly lower effective tax rate for 1975 (37.7%), compared with 1974 (38.2%), are shown in Note 14 to the General Electric Financial Statements. The decrease in the 1974 effective tax rate from 1973's rate (41.4%) was principally due to a change in the proportion of earnings from consolidated affiliates, including General Electric Domestic International Sales Corporation, which are subject to aggregate tax rates generally less than the U. S. federal statutory rate. Results by Major Category The impact of inflation, cost-price squeeze and recession has affected the major categories of General Electric's business in varying degrees. Amounts of sales and income before taxes by major categories for the years 1971 through 1975 are shown under "Business of General Electric" below. These amounts, together with the accompanying descriptive material, should be reviewed in conjunction with the following commentary for a better understanding of the differing impact on total General Electric results for any particular year. Aerospace Aerospace sales and earnings* in 1975 were up slightly from 1974 despite a decline in sales of commercial jet engines. Improved sales and earnings by operations supplying military aircraft jet engines and other military and commercial equipment, combined with cost control programs, accounted for the category's steady results. In 1974 Aerospace earnings increased 60% from 1973 while sales increased 19%. The sharp rise in earnings was the result of a higher volume of shipments of commercial and military aircraft jet engines and of "learning curve" improvements in jet engine production costs. Consumer Consumer markets entered 1975 in a sharp decline. Sales touched bottom early in the year and then began an improvement that continued through the end of the year. Although total 1975 sales were 10% below 1974, earnings improved substantially from the depressed 1974 level. Rigorous efforts to reduce expenses, combined with price improvements to offset escalating costs, accounted for the 25% earnings gain. * "Earnings" as used under "Results by Major Category" refer to income before taxes. 16 Among specific products, major appliance sales in 1975 at the retail level showed good recovery late in the year. However, continued low rates of housing starts precluded significant improvement in the contract appliance portion of this business. Appliances sold primarily in the replacement market, such as home laundry products and refrigerators, showed a faster recovery than those, such as ranges and dishwashers, tied more closely to housing construction. Housewares and audio products sales were slow during the early part of the year but participated in the improvement as the year progressed. Lamp operations enjoyed a particularly strong comeback in earnings. Sales of television sets for General Electric, and the industry generally, were poor in 1975. For 1974, Consumer sales were up slightly while earnings dropped 45% from the previous year. Sales in the latter half of 1974 were affected by the impact of lower consumer confidence and the collapse of the housing construction market. Costs of producing consumer goods, especially raw materials, rose faster than selling prices. Industrial Components and Systems Industrial Components and Systems sales in 1975 were down 5% from 1974, while earnings were down 11%. The products and services that make up this category were affected by varying economic cycles during 1975. Operations which supply producer equipment for industry started the year with strong sales and earnings resulting from a record order backlog. Results, however, trailed off as the year progressed. Components and materials operations serving consumer goods and construction markets were weak throughout most of the year, but began to show gains as the year closed. Medical systems and information and industrial services improved both sales and earnings for the year. Sales and earnings of Industrial Components and Systems increased 21% and 33%, respectively, during 1974 from 1973. These increases reflected high levels of industrial capital expenditures by customers as well as continued growth in General Electric's service-oriented businesses. Industrial Power Equipment The Industrial Power Equipment category underwent major adjustments in 1975 in the wake of the worldwide energy crisis and the economic recession. Although sales were up somewhat, earnings were lower than in 1974. A decline in sales of steam turbine-generator units from the earlier year had a significant adverse impact on earnings. Sales of steam turbine-generators during 1975 totaled 16.4 million kilowatts compared with 21.3 million in 1974. Sales in kilowatts of steam turbine-generators in 1976 are expected to be approximately 15% above those in 1975. General Electric's nuclear business increased sales in 1975 and remained marginally profitable. General Electric gas turbines had a second difficult year in 1975 because of the weak domestic utility market. However, because of strength in international markets, gas turbine sales decreased only slightly from 1974 levels. The excess of oil tanker capacity cut sharply into markets for marine propulsion turbine systems, forcing cancellation of some orders in the backlog. A slow recovery is expected for the marine business. Sales of power delivery equipment, such as transformers, circuit breakers, switchgear and related apparatus, were down slightly from the preceding year, although operating results were improved through better pricing and cost and productivity improvement programs. Industrial Power Equipment sales rose by 13% in 1974 from 1973 but earnings were 26% below the 1973 level due primarily to the cost-price squeeze and to reduced domestic sales of gas turbines to utilities. International International sales in 1975 were 16% higher than in 1974 but earnings were down 9%. The decrease in earnings was principally because of lower export margins and losses on certain installation contracts. Total export sales from the U. S. to external customers were $1.6 billion in 1975, compared with $1.5 billion in 1974. Canadian General Electric Company Limited improved both sales and earnings, which included proceeds from the sale of the heavy-water plant operated in support of Canada's nuclear energy program. Principal Latin American affiliates in Brazil, Venezuela and Mexico reported higher sales in 1975, while the strong earnings gains in Venezuela and Mexico were partially offset by a slight earnings decline in Brazil. Sales and earnings of most European affiliates were improved in 1975 from 1974. Virtually all of General Electric's affiliates in the Far East reported increased sales in 1975, although earnings were generally lower because of unsettled economic conditions. 17