General Electric Company Forecasting School

General Electric CompanyForecasting

School

TAXPLANNING CASE 6TAX COMPARISON OF THE FOUR BUSINESS ENTITIES

QUESTIONS

Thisassignment utilizes an Excel spreadsheet to extend the analysis ofthe four entities for four additional years and incorporates theeffects of liquidating the entity at the end of Year 5.Thespreadsheet allows for alternative inputs of each of the initial yearvariables used in Case Study #1. Instructions for utilizing thisspreadsheet are included on the next page.

  1. In the original spreadsheet analysis based on the current inputs, the “Reasonable Compensation” variable (cell D20) is $55,000, and the “Other Payments/ Withdrawals” variable (cell D21 of the spreadsheet) is $30,000. Redetermine the total taxes paid under each of the following changes in these two variables, and explain the relative changes in results:

Total TaxesPaid by Entity

$75,000/$50,000

Comp/Other Pay

$100,000/$25,000

Comp/Other Pay

$50,000/$75,000

Comp/Other Pay

Sole Proprietorship

$529,949

542,588

534,390

Partnership

$529,949

542,588

534,390

S Corporation

$500,577

507,031

488,390

C Corporation

$676,787

666,437

690,464

Explanation

Weobserve that as the proportion of reasonable compensation increasesagainst other payments, the total tax paid also increases across thedifferent business entities. For Sole Proprietorship, Partnership,and C Corporation even where other payments are more thancompensation, we still observe an increase in the total taxes paid.However, a unique trend is observed in the S Corporation wherebylower “Reasonable Compensation” level leads to reduced totaltaxes paid therefore tax savings on the company. For S Corporations,the higher the “Other Payments” over “Reasonable Compensation”,the lower the taxes paid and thus tax savings for the company.

Shareholderswho also hold the positions of company officers in S corporations arelegally entitled to a “reasonable” salary. An S corporation’sexecutive officer is subject to treatment like any other employeethus his/her salary qualifies for employment tax. Approximately 15%of the total salary goes to employment taxes, directed towardsemployee’s Medicare and Social Security.

Retainedearnings do not qualify for employment taxes, yet they contribute alarge part towards corporate growth. After reasonable salary has beenpaid out to shareholders who hold official positions in the company,and are engaged in the daily operations of the company, the excessamount is distributed to shareholders as “dividends” (in otherterms distributions) which do not qualify for employment taxes.

Scorporations use this loophole to save thousands of dollars annually.An S corporation making good profits annually could enable ashareholder officer save up to $6,000 annually on unpaid taxes ascompared to operating under other company types such as LimitedLiability Company or sole proprietorship. S corporations are subjectto employment taxes while sole proprietors are subject toself-employment taxes.

  1. In the original analysis, the “Sales/CGS Growth Percentage” variable (cell H7 of the spreadsheet) is 20%. Redetermine the total taxes paid under each of the following changes in this growth percentage, and explain the relative changes in the results:

Total TaxesPaid by Entity

20%

Sales/CGS Growth

12%

Sales/CGS Growth

28%

Sales/CGS Growth

Sole Proprietorship

$529,949

$388,090

$741,829

Partnership

$529,949

$388,090

$741,829

S Corporation

$500,577

$368,237

$701,454

C Corporation

$676,787

$459,858

$924,579

Explanation

Thegross profit margin i.e. Sales/CGS Growth X 100% has a directrelation with total tax paid by a company. Where the gross profitmargin is 12%, the tax payable for sole proprietorship andpartnership is $388,090, while it is $529,949 for 20% gross profitmargin and $741,829 at 28% gross profit margin.

Increasein Sales/CGS Growth will have a huge impact on the level of taxationespecially related to the Ccorporation since there will be anincrease in tax liabilities, and worsen the C corporation results, inrelative terms. This result is due to the fact that the cashgenerated in excess when issued out as dividends will result in asecond round of tax or may upon liquidation be transferred as a finaldistribution.

3.In the original analysis, the “Land/Building Appreciation”variable (cell H27 of the spreadsheet) is 10%. Redetermine the totaltaxes paid under each of the following changes in appreciation rates,and explain the relative changes in the results:

Total TaxesPaid by Entity

10%

Appreciation Rate

2%

Appreciation Rate

18%

Appreciation Rate

Sole Proprietorship

$529,949

$496,617

$574,522

Partnership

$529,949

$496,617

$574,522

S Corporation

$500,577

$467,246

$545,151

C Corporation

$676,787

$598,126

$781,982

Explanation

As the rate of appreciation ofland and building increases, the total tax payable also increases,thus portraying a direct-relationship between the two variables inthe names of appreciation of land/building and total tax paid. Thistrend is similar for all the different entities.

There is a standard rate oftax that is subjected to land and any other improvements that maytake place on the land for instance setting up of building andproperty. Nonetheless, a taxation model called two-rate/ split ratedeviates from the norms by setting a higher tax rate on land thanbuildings/ structures. In fact adapting the two-step tax systemdecreases the deadweight losses related to distortionary taxation andpropels the economic activity.

4.In the original analysis, the dividends received by the individualtaxpayers qualified for a 15% maximum rate.Redetermine the totaltaxes paid assuming that the preferential dividend rate sunsets asproposed, and dividends are taxed fully as ordinary income (changethe input for cell H43 to reflect this). Explain the relativechanges in results.

Total TaxesPaid by Entity

15 % Preference

$55,000/$30,000

Comp/Other Pay

Sole Proprietorship

$510,231

Partnership

$510,231

S Corporation

$467,655

C Corporation

$666,284

Current

Preferential Rate

No Preference –

$55,000/$30,000

Comp/Other Pay

No Preference –

$70,000/$15,000

Comp/Other Pay

Sole Proprietorship

$529,949

$537,277

$514,006

Partnership

$529,949

$537,277

$514,006

S Corporation

$500,577

$494,701

$471,431

C Corporation

$676,787

$708,242

$683,639

Explanation

In the case wherereby thecompanies issue preference shares and the preference dividends aretaxed at 15%, the total tax is slightly lower across all the businessentities. For compensation of $55,000 and other pay $30,000, at 15%preference dividend, the total tax is $510,231compared to $537,277for Sole Proprietorship and Partnership and the same trend cutsacross all the entities.

Though dividends for preferredstock have their interest fixed like a bond, their taxation isdifferent. By the fact that numerous preferred dividends arequalified, this means that their rate of taxation is slightly lowerthan that of normal income. Only investors falling in the highest taxbracket pay 20% on qualified dividends, otherwise most of the otherpreferred shareholders have a tax burden of only 15%. Below 15% ofordinary income tax bracket have no tax obligation on qualifieddividends. Though preferred stock is categorized as equity, it sharesnumerous characteristics with a bond. Numerous preferred shares areissued cumulatively therefore any withheld dividends are accrued andpaid out to preference shareholders when the company becomesprofitable.

Double taxation of incomeremains to be main tax disadvantage related to C corporations. Thecompany pays an income tax on profits and yet when the same earningsare transferred to the owners, income tax is paid again. Tax ratesreductions associated with dividends to a rate of 15% maximummitigates the double taxation effect but does not completelyeliminate it. Some companies pay interest, salaries, or rents to itsshareholders since they would qualify as deductible items and thusremove the first layer of taxation. The mentioned payments howeverhave to be reasonable enough otherwise IRS may categorize theamounts as dividends, which are taxable to the shareholder.

References

Everett, J. O., Hennig, C. J.,&amp Nichols, N. B. (2008). Contemporary tax practice: Research,planning and strategies. Chicago, IL: CCH.

General Electric Company Forecasting School

General Electric CompanyForecasting

School

TAXPLANNING CASE 6TAX COMPARISON OF THE FOUR BUSINESS ENTITIES

QUESTIONS

Thisassignment utilizes an Excel spreadsheet to extend the analysis ofthe four entities for four additional years and incorporates theeffects of liquidating the entity at the end of Year 5.Thespreadsheet allows for alternative inputs of each of the initial yearvariables used in Case Study #1. Instructions for utilizing thisspreadsheet are included on the next page.

  1. In the original spreadsheet analysis based on the current inputs, the “Reasonable Compensation” variable (cell D20) is $55,000, and the “Other Payments/ Withdrawals” variable (cell D21 of the spreadsheet) is $30,000. Redetermine the total taxes paid under each of the following changes in these two variables, and explain the relative changes in results:

Total TaxesPaid by Entity

$75,000/$50,000

Comp/Other Pay

$100,000/$25,000

Comp/Other Pay

$50,000/$75,000

Comp/Other Pay

Sole Proprietorship

$529,949

542,588

534,390

Partnership

$529,949

542,588

534,390

S Corporation

$500,577

507,031

488,390

C Corporation

$676,787

666,437

690,464

Explanation

Weobserve that as the proportion of reasonable compensation increasesagainst other payments, the total tax paid also increases across thedifferent business entities. For Sole Proprietorship, Partnership,and C Corporation even where other payments are more thancompensation, we still observe an increase in the total taxes paid.However, a unique trend is observed in the S Corporation wherebylower “Reasonable Compensation” level leads to reduced totaltaxes paid therefore tax savings on the company. For S Corporations,the higher the “Other Payments” over “Reasonable Compensation”,the lower the taxes paid and thus tax savings for the company.

Shareholderswho also hold the positions of company officers in S corporations arelegally entitled to a “reasonable” salary. An S corporation’sexecutive officer is subject to treatment like any other employeethus his/her salary qualifies for employment tax. Approximately 15%of the total salary goes to employment taxes, directed towardsemployee’s Medicare and Social Security.

Retainedearnings do not qualify for employment taxes, yet they contribute alarge part towards corporate growth. After reasonable salary has beenpaid out to shareholders who hold official positions in the company,and are engaged in the daily operations of the company, the excessamount is distributed to shareholders as “dividends” (in otherterms distributions) which do not qualify for employment taxes.

Scorporations use this loophole to save thousands of dollars annually.An S corporation making good profits annually could enable ashareholder officer save up to $6,000 annually on unpaid taxes ascompared to operating under other company types such as LimitedLiability Company or sole proprietorship. S corporations are subjectto employment taxes while sole proprietors are subject toself-employment taxes.

  1. In the original analysis, the “Sales/CGS Growth Percentage” variable (cell H7 of the spreadsheet) is 20%. Redetermine the total taxes paid under each of the following changes in this growth percentage, and explain the relative changes in the results:

Total TaxesPaid by Entity

20%

Sales/CGS Growth

12%

Sales/CGS Growth

28%

Sales/CGS Growth

Sole Proprietorship

$529,949

$388,090

$741,829

Partnership

$529,949

$388,090

$741,829

S Corporation

$500,577

$368,237

$701,454

C Corporation

$676,787

$459,858

$924,579

Explanation

Thegross profit margin i.e. Sales/CGS Growth X 100% has a directrelation with total tax paid by a company. Where the gross profitmargin is 12%, the tax payable for sole proprietorship andpartnership is $388,090, while it is $529,949 for 20% gross profitmargin and $741,829 at 28% gross profit margin.

Increasein Sales/CGS Growth will have a huge impact on the level of taxationespecially related to the Ccorporation since there will be anincrease in tax liabilities, and worsen the C corporation results, inrelative terms. This result is due to the fact that the cashgenerated in excess when issued out as dividends will result in asecond round of tax or may upon liquidation be transferred as a finaldistribution.

3.In the original analysis, the “Land/Building Appreciation”variable (cell H27 of the spreadsheet) is 10%. Redetermine the totaltaxes paid under each of the following changes in appreciation rates,and explain the relative changes in the results:

Total TaxesPaid by Entity

10%

Appreciation Rate

2%

Appreciation Rate

18%

Appreciation Rate

Sole Proprietorship

$529,949

$496,617

$574,522

Partnership

$529,949

$496,617

$574,522

S Corporation

$500,577

$467,246

$545,151

C Corporation

$676,787

$598,126

$781,982

Explanation

As the rate of appreciation ofland and building increases, the total tax payable also increases,thus portraying a direct-relationship between the two variables inthe names of appreciation of land/building and total tax paid. Thistrend is similar for all the different entities.

There is a standard rate oftax that is subjected to land and any other improvements that maytake place on the land for instance setting up of building andproperty. Nonetheless, a taxation model called two-rate/ split ratedeviates from the norms by setting a higher tax rate on land thanbuildings/ structures. In fact adapting the two-step tax systemdecreases the deadweight losses related to distortionary taxation andpropels the economic activity.

4.In the original analysis, the dividends received by the individualtaxpayers qualified for a 15% maximum rate.Redetermine the totaltaxes paid assuming that the preferential dividend rate sunsets asproposed, and dividends are taxed fully as ordinary income (changethe input for cell H43 to reflect this). Explain the relativechanges in results.

Total TaxesPaid by Entity

15 % Preference

$55,000/$30,000

Comp/Other Pay

Sole Proprietorship

$510,231

Partnership

$510,231

S Corporation

$467,655

C Corporation

$666,284

Current

Preferential Rate

No Preference –

$55,000/$30,000

Comp/Other Pay

No Preference –

$70,000/$15,000

Comp/Other Pay

Sole Proprietorship

$529,949

$537,277

$514,006

Partnership

$529,949

$537,277

$514,006

S Corporation

$500,577

$494,701

$471,431

C Corporation

$676,787

$708,242

$683,639

Explanation

In the case wherereby thecompanies issue preference shares and the preference dividends aretaxed at 15%, the total tax is slightly lower across all the businessentities. For compensation of $55,000 and other pay $30,000, at 15%preference dividend, the total tax is $510,231compared to $537,277for Sole Proprietorship and Partnership and the same trend cutsacross all the entities.

Though dividends for preferredstock have their interest fixed like a bond, their taxation isdifferent. By the fact that numerous preferred dividends arequalified, this means that their rate of taxation is slightly lowerthan that of normal income. Only investors falling in the highest taxbracket pay 20% on qualified dividends, otherwise most of the otherpreferred shareholders have a tax burden of only 15%. Below 15% ofordinary income tax bracket have no tax obligation on qualifieddividends. Though preferred stock is categorized as equity, it sharesnumerous characteristics with a bond. Numerous preferred shares areissued cumulatively therefore any withheld dividends are accrued andpaid out to preference shareholders when the company becomesprofitable.

Double taxation of incomeremains to be main tax disadvantage related to C corporations. Thecompany pays an income tax on profits and yet when the same earningsare transferred to the owners, income tax is paid again. Tax ratesreductions associated with dividends to a rate of 15% maximummitigates the double taxation effect but does not completelyeliminate it. Some companies pay interest, salaries, or rents to itsshareholders since they would qualify as deductible items and thusremove the first layer of taxation. The mentioned payments howeverhave to be reasonable enough otherwise IRS may categorize theamounts as dividends, which are taxable to the shareholder.

References

Everett, J. O., Hennig, C. J.,&amp Nichols, N. B. (2008). Contemporary tax practice: Research,planning and strategies. Chicago, IL: CCH.

General Electric Company Forecasting School

GeneralElectric Company Forecasting

School

Abstract

GeneralElectric Company Forecasting

Thepaper talks about General Electric, the fourth biggest public limitedcompany of the world in the list of multinational companies. Thepaper tells about the listing of the company in stock exchange and onother places. The paper mainly focuses on the core business issues ofRevenue, Earning and Stock Price in the coming five years. It alsothrows light on the Market Environment, Competitive Strengths andWeaknesses. It also focuses on Financial Statements and financialanalysis of the company in different years and the application oflabor laws and interdepartmental relations. The paper also talksabout the corporate regulations and its legal affairs from differentperspectives. It also encompasses the corporate issues which aredomestic and also the foreign in a bigger perspective. The paperwhole heartedly also considers the other issues which affect thebusiness functions.

GeneralElectric Co. is a multinational firm dealing in technology andfinancial services with its core business being the production,transmission, distribution, management, and optimization ofelectricity(Forbes, 2015).It has a wide variety of products and services ranging from powergeneration, manufacture of aircraft engines, security technology,water processing, medical imaging, media content, business andconsumer financing, as well as industrial products. General electrichas eight different segments of operations: Oil and Gas, Power andWater, Aviation, Healthcare, Energy Management, Home and BusinessSolutions, Transportation, and GE Capital. Itis very probable that stock price of GE will show positive trend inthe coming 5 years.

Oiland Gas

Thissegment supplies different equipments to critical for the drillingand production through compression of pipeline and liquefied naturalgas, refineries downward processing in petrochemical plants andrefineries, and pipeline inspection.

EnergyManagement Segment

Thissegment manufactures integrated electrical systems and productsnecessary to protect, distribute, and control equipment and energy.Among the products GE manufactures include electrical control anddistribution products, power and lighting panels, circuit breakersand switch gear, all of which are used to manage and distribute powerin a range of industrial, commercial, residential, and consumerapplications.

AviationSegment

Thissegment manufactures, sells, and offers after sales service for jetengines, turbo shaft and turboprop engines, as well as spare partsfor commercial and military aircraft. The military enginesmanufactured by GE are put into use in different aircraft includingbombers, fighters, helicopters, surveillance aircraft, tankers, andmarine applications.

HealthcareSegment

Thissegment manufactures healthcare technologies for instance medicalimaging, patient monitoring systems, medical informationtechnologies, patient monitoring systems, medical diagnostics, drugdiscovery, disease research, as well as biopharmaceuticalmanufacturing technologies. Early detection and prediction ofdiseases as well as helping physicians monitor progress of diseasesand design tailor-made medical solutions for patients.

TransportationSegment

Thissegment develops technology solutions to various stakeholders indifferent industries such as transit, oil and gas, railroad, mining,marine, and power generation. It also offers a variety of serviceofferings aimed at enhancing fleet efficiency, and diminishingoperating expenses, such as repair services, modernizations,modernizations, enhancement of locomotives, as well as services basedon information such as remote diagnostics and monitoring.

Homeand Business Solutions

Thissegment invests in the manufacturing of differentiated products inthe form of energy efficient solutions for businesses as well asindividual consumers. GE’s products entail various appliances,lighting product subsets channeled towards consumer applications, aswell as automation solutions and lighting products channeled towardsindustrial and commercial applications.

CapitalSegment

TheGeneral Electric Capital segment include offering services such asfleet management, financial programs, commercial leases and loans,credit cards, home loans, personal loans, to mention but a few. GE’sfinancial services are open to both large and small scale businesses.

Theproject will deeply consider following areas of General Electric fromall aspects.

  1. Revenue, Earnings and Stock Price

Inthis section we will consider all the business functions which arethe source of company revenue and earnings. Section will also observethe stock price on stock exchange in different eras. GeneralElectric’s share hit its seven year high of $30 on 11/11/2015. Thismarked a 20% increase in the entire year(CNNMoney 2015,p1).This year alone, GE’s stock has been on a recovery rallying 19%from the end of December. This was higher than the 1% increase in theentire S&ampP 500 index that reported 1% increase. Just a few monthsafter GE’s Chief Executive, Mr. Immelt had announced an exit of thecompany’s $500 billion lending business in the name of GE Capital,which at the height of its success was the contributor of more thanhalf of the company’s revenue but had recently started faltering.However, in September of 2015, through its finance division GECapital, General electric acquired a French-based transportationcompany known as Alstom. And just as recently as on 10/12/2015,General Electric landed a $2.6 billion massive 11-year contract tobuild 1,000 trains in India. Nonetheless, GE stock has merely touchedits 2007 pre-recession high of $42 a share after approximately sevenyears. Its lowest recorded share price was $7 in March 2009, as aresult of the heightened global financial crisis, when there was anentire deep in the American Stock market. The Trian Fund Managementowned by Peltz was reported to hold a $2.5 billion stake in GeneralElectric, being amongst the largest investments owned by anindividual in GE. Peltz and his fund rank as being among the top 10shareholders of the company.

GeneralElectric’s future outlook is seemingly looking more bullish due tothe growth of the company’s Managing Director’s vision ofexpanding General Electric’s heavy industrial businesses that dealin the manufacturing of jet engines and locomotives, power turbines,as well as increased focus on tapping profits industrial equipmentdata streams interpretations. Most financial and investment analystshave forecasted a $32 price tag on GE’s stock by the beginning of2016 and a further shoot to $37 a share by the end of the same year,with additional potential for growth. If this prediction turns outcorrect, this would only leave the share a few dollars short of the$39.66 share price milestone of the company when Mr. Immelt joinedthe helm of its leadership on Sept. 7, 2001(CNNMoney2015,p1).

Accordingto John Hecht- a financial and investments analyst with Jefferies-together with his team of other analysts, weakness is the best methodto acquire GE’s shares during the pricing window of SynchronyFinancial (SYF), which in the near future will be the company’sindependent consumer credit division. Hecht and team give thisrecommendation based on the fact that the opening of the window on10thNovember will follow a historical precedent whereby the stock’svolatility will exponentially increase over a period of time. Theratio of exchange is set at a maximum of 1.1308 per share of GeneralElectric, although this is just a provisional ratio, the final ofwhich will depend on a three-day Volume Weighted Average Price (VWAP)lasting from 10-12 November, 2015 (CNNMoney2015,p2).On completion of the exchange process, there will be a completeremoval of the stock overhang and an improvement of the stockliquidity. According to Hecht and team, fundamentally speaking,Synchrony remains their best bet in regard to capitalization and loangrowth prospects, credit trends, and margins allowance.

StockInformation: Charts

http://app.quotemedia.com/quotetools/chartcache/40196.png

Theoperating EPS grew in 2014 by 1% to $1.65. The profits in theindustrial segment shot up to 10%, whereas a 12% decline of financialprofits was also experienced. Out of GE’s total earnings,industrial earnings contribute in the range of 60%. There was a 5%decline in GE Capital’s ENI to $363 billion. In the year 2014, GEcapital recorded a remarkable 12.7% Tier 1 capital ratio and aliquidity of $76 billion (GE2014, p2).

GEwill continue its disciplined and balanced capital allocationtechniques. The company intends to grow the dividend in tandem withthe earnings while prioritizing this goal for the sake of investors.GE aims at undertaking the Synchrony split, a float reduction methodthat is extremely capital efficient, resulting to a share drop of 8%.The company will further invest $10-15 billion annually in capitalequipment, R&ampD, and IT to further expand the company globally andcut down on cost. As for M&ampA, it is only limited to Alstom (GE2014, p4).

ThoughGE remains on track for its financial pivot, however, in spite of thecompany’s efforts, there was a 7% decline of total shareholderreturn, trailing the S&ampP 500. The company has made short-termsacrifices to achieve long-term benefits. For example, through theIPO, GE relinquished 15% of Synchrony’s earnings, although as ofyet investors have not feel the advantage of the stock split. In itsrestructuring efforts, GE also invested $0.12 EPS representing a 5%drag on earnings and reduced GE’s 2014 returns (GE2014, p4).These moves will nonetheless manifest in accelerated growth projectedin 2015 and 2016.

b.Market Environment

Thissection will focus on the company’s position in the market withrespect to its relation with its customers. It will also foresee thefuture prospects of the company in the entire market with new orexisting products and in new regions of the world.

Overthe past decade, GE has invested and spent a couple of billions ofother related companies to develop its oil and gas segment.Currently, GE is among, if not, the largest producers and suppliersof gas and oil drilling equipment and machinery to energy companies.GE’s business has recently been boosted by the demand which hasresulted from the rising oil prices. In 2014, the initial nine monthsexperienced a massive rise in the company’s revenue to the tune ofdouble digits contributing to 13% of GE’s total revenue. However,GE’s oil and gas segment is likely to be greatly negativelyimpacted by the current drop in oil prices(Mann 2015, p2).There has been a $40 per barrel drop in the price of Brent crude oilfrom $100 to $60 per barrel just recently (Levisohn 2015, p1). Theincreased US oil production coupled with OPEC’s luck of deployingproduction cuts measures, there will be a continued oil glut in thenear future, further putting pressure on oil prices. What is yet tobe seen is how GE will thrive in this fallen oil price environment,which will hit hard the company’s oil and gas segment. However,pundits are still optimistic that the impact will not be so hardsince there will be a cancelling out effect emanating from growthrecorded in other business segments more so the power, aviation, andtransportation segments. The increased sales in locomotives and gasturbines, as well as aircraft engines will most likely push forwardGE’s overall results.

Theprice fall in oil to $60 will most likely reduce their investment inequipment and machinery, and consequently affect the oil and gassegment of GE. Approximately 60% of the revenue obtained by GE isgenerated by the sale of turbomachinery, downstream oil and gasbusiness, as well as measurement and control equipment (Levisohn2015, p2). With the ever growing LNG’s share in the general fuelconsumption mix, and comparatively lower impact on the downstreamsegment as a result of fallen oil prices, GE predicts that thiscomponent of its gas and oil revenue will most probably beunaffected, at least in the short term till the end of 2015. Subseaprojects contribute another 15% of the overall oil and gas revenue.The revenue acquired by GE from these projects will most probably notbe significantly impacted in 2015, since the nature of these projectsis majorly long-term. Consequently, a measurable proportion of GE’santicipated revenue from the subsea region in 2015, already appearsin GE’s backlog. The remaining portion of approximately 25% of itsgas and oil revenue is generated from surface drilling, the componentthat will most probably be highly affected by lower oil prices.Overall, GE predicts a 5% reduction in gas and oil revenue in 2015alone as a result of reduced oil prices. In this environment whererevenue for GE is on a downtrend in its gas and oil segment, thecompany will play its part by striving to maintain a stable marginfor the ailing segment. The company in this respect aims at adaptingcost-reduction strategies in order to sustain the oil and gassegment.

Nonetheless,in the long term, there is likely to be a significant growth in GE’sgas and oil business pushed by the increased global energy demand,more so from the developing countries (Levisohn 2015, p2). Oil priceswill most likely be pushed up by increased demand from developingeconomies such as India and/or exponential rise in production withinthe U.S. The increased oil prices will in turn attract greater energycompanies’ capital investments, thereby boosting GE’s equipmentand machinery sales. Thereby GE’s long-term economic outlook isthat of the oil and gas segment acting as the company’s growthdriver.

Despitethe reduced revenue and resultant profit from GE’s oil and gasbusiness, there is a high likelihood of increased overall growth inrevenue and profit driven by the good performance expected from itsother business segments as was previously experienced. The aviationsegment, which constitutes approximately 16% of GE’s topline, willprobably continue to rally towards the end of 2015 as a result ofmore engine shipments (Levisohn 2015, p3). The continued rise in thenumber of people travelling by air globally calls for airlinesincreasing their fleet of planes by acquiring new ones, together withparts such as engines, and other aircraft parts from suppliers suchas GE. Increased rail traffic is also bolstering GE’s locomotiverevenues, and with Alston’s acquisition, there is a growth outlookof the company’s energy segment in 2015. Since GE also derivesapproximately half of its total revenue from the U.S. government, thecontinuous growth of the U.S. economy will greatly enhance GE’ssteady revenue stream. Thereby, despite GE’s reduction in its gasand oil business in 2015, the company’s diversified productportfolio will exhume a form of strength that will probably bolsterits overall performance hence growth in GE’s overall results.

c.CompetitiveStrengths and Weaknesses

Inthis section of the report we will consider the overall strength ofthe company in comparison to its competitive companies and itsweaknesses as well. We will also consider which other factors affectthe strength and weaknesses of the company.

Strengths

Globalrecognition: GE has gained global recognition by venturing into theinternational market by introducing a wide range of unique goods andservices. According to Forbes magazine 2009 edition, GE was ranked asthe largest company in the world (GE 2014, p4). In terms of brandrecognition, GE is at the top of the chain. This global recognitionhas give GE a competitive advantage over its rivals due to itsability to develop loyal customers and create new customer base.

Globalcompetitiveness and strengths: GE’s products have for long beenworld acclaimed for their undoubted quality as the main objective ofthe company is meeting specific needs of customers (GE 2014, p4). Forthis reason, GE has attracted various clients in the form ofgovernment agencies and corporations and as such has established afavorable competitive position globally. In many of the countrieswhere GE’s investments have spun, the only exception being theUnited States, the company is the biggest lender.

DiversifiedOperations: Under its different production segments, GE has investedin a variety of products ranging from energy, technology, aviation,automotives, home appliances, insurance and financial services, amongothers. Diversification of products plays a critical role of riskmitigation.

ExcellentManagement: The management of GE is unique in such a way thatbusiness units are classified into business units, with each unitunder independent management and playing a unique role within thecompany (GE 2014, p4). Examples of such include GE EquipmentServices, GE Commercial Services, GE Energy, GE Consumer Finance, GEInsurance among others. Due to the high level of efficiency andaccountability, this type of management style enhances productivityto a large extent.

Environmentalinitiatives: In recent times, GE has engaged in increasedenvironmental initiatives in its quest for a green economy andheightened social responsibility. GE’s ‘Ecoimagination’ programhas bolstered its efforts towards environmentally friendly venturesfor instance technologies such as airplane low emission engines,solar energy sources, water purification and hybrid locomotivestechnologies. These environmental initiatives have earned GE a goodreputation globally since it is considered socially andenvironmentally responsible.

Weaknesses

Under-performingenergy sector: The global crisis that occurred in 2007-2008 seriouslyaffected GE since it caused major fluctuations in the prices of fuel.Since then, GE’s energy segment has never met the performanceexpectations (GE 2014, p5). Oil and gas prices fluctuations havemajorly been as a result of supply shortages and this has immenselynegatively affected the company’s profitability.

Threatto flexibility: Over-diversification is often considered a greatthreat to a company since it results to overstretching of resourceswhich leads to bureaucracies in decision-making. The numerous marketsegments at GE require commitment in terms of time and attention andthus excessive diversification could cause management challenges (GE2014, p5).

d.Financial Statements

Inthis section we will consider all the segments of financialstatements which include Balance Sheet, Income Statement, Cash FlowStatement, Statement of Changes in Equity and Notes to the accounts.Additionally we will consider the financial statements of differentyears for the comparison purpose. General electric recorded totalsales of $148.45 billion in the 2014 financial year. The companyranked No. 9 globally in the revenue collected in that duration, no.23 in terms of sales, no. 21 in profit, no. 53 in terms of assetbase, and no. 13 in market value (GE 2015, p1).

Assets

Fiscal year is January-December. All values USD millions.

2010

2011

2012

2013

2014

Cash &amp Short Term Investments

79.38B

84.74B

77.6B

88.64B

90.23B

Cash Only

78.96B

84.5B

77.36B

88.56B

90.21B

Short-Term Investments

417M

241M

248M

80M

22M

Total Accounts Receivable

337.63B

307.47B

287.49B

272.44B

257.15B

Accounts Receivables, Net

328.68B

299.91B

279.53B

263.33B

248.05B

Accounts Receivables, Gross

329.1B

300.36B

279.99B

263.78B

253.62B

Bad Debt/Doubtful Accounts

(428M)

(452M)

(462M)

(447M)

(5.57B)

Other Receivables

8.95B

7.56B

7.96B

9.11B

9.1B

Inventories

11.53B

13.79B

15.37B

17.33B

17.69B

Finished Goods

4.5B

5.02B

6.1B

6.79B

7.18B

Work in Progress

Raw Materials

6.97B

8.74B

9.3B

10.22B

9.82B

Progress Payments &amp Other

52M

35M

(20M)

311M

693M

Other Current Assets

0

0

0

0

0

Miscellaneous Current Assets

Total Current Assets

428.53B

406B

380.47B

378.4B

365.07B

2010

2011

2012

2013

2014

Net Property, Plant &amp Equipment

66.21B

65.74B

69.74B

68.83B

66.39B

Property, Plant &amp Equipment – Gross

110.05B

108.12B

116.76B

116.47B

113.32B

Buildings

10.99B

10.93B

10.99B

11.41B

9.92B

Land &amp Improvements

573M

611M

612M

707M

700M

Computer Software and Equipment

Other Property, Plant &amp Equipment

(347M)

(462M)

Accumulated Depreciation

43.83B

42.38B

47.02B

47.64B

46.93B

Total Investments and Advances

118.58B

138.22B

126.41B

88.68B

89.83B

Other Long-Term Investments

90.83B

94.17B

85.12B

67.39B

69.14B

Long-Term Note Receivable

1.1B

1.32B

714M

993M

766M

Intangible Assets

74.45B

84.69B

94.88B

91.96B

90.71B

Net Goodwill

64.47B

72.63B

73.45B

77.65B

76.55B

Net Other Intangibles

9.97B

12.07B

21.43B

14.31B

14.16B

Other Assets

62.35B

21.27B

13.12B

27.43B

33.05B

Tangible Other Assets

58.45B

18.33B

10.32B

24.2B

30.77B

Total Assets

778.97B

747.93B

717.26B

656.56B

648.35B

Liabilities &amp Shareholders` Equity

2010

2011

2012

2013

2014

ST Debt &amp Current Portion LT Debt

128.46B

148.33B

110.49B

86.94B

79.23B

Short Term Debt

52.33B

54.92B

52.06B

38.61B

31.73B

Current Portion of Long Term Debt

76.13B

93.41B

58.43B

48.33B

47.5B

Accounts Payable

14.66B

16.4B

15.68B

16.47B

16.34B

Income Tax Payable

Other Current Liabilities

24.1B

27B

27.75B

28.73B

27.54B

Dividends Payable

1.56B

1.8B

1.98B

2.22B

2.32B

Accrued Payroll

Miscellaneous Current Liabilities

22.54B

25.2B

25.77B

26.51B

25.22B

Total Current Liabilities

167.22B

191.72B

153.91B

132.13B

123.11B

Long-Term Debt

350.18B

305.12B

303.57B

296.1B

285.75B

Long-Term Debt excl. Capitalized Leases

350.18B

305.12B

303.57B

296.1B

285.75B

Non-Convertible Debt

350.18B

305.12B

303.57B

296.1B

285.75B

Convertible Debt

0

0

0

0

0

Capitalized Lease Obligations

0

0

Provision for Risks &amp Charges

54.94B

72.57B

67.73B

54.4B

Deferred Taxes

2.84B

(131M)

(75M)

(275M)

(2.54B)

Deferred Taxes – Credit

30.6B

30.56B

31.86B

Deferred Taxes – Debit

27.76B

30.69B

31.93B

275M

2.54B

Other Liabilities

51.84B

29.84B

31.72B

37.14B

102.66B

Other Liabilities (excl. Deferred Income)

51.84B

29.84B

31.72B

37.14B

102.66B

Deferred Income

Total Liabilities

654.78B

629.8B

588.79B

519.78B

511.52B

Non-Equity Reserves

0

0

0

0

0

Preferred Stock (Carrying Value)

0

0

0

0

0

Redeemable Preferred Stock

0

0

0

0

0

Non-Redeemable Preferred Stock

0

0

0

0

0

Common Equity (Total)

118.94B

116.44B

123.03B

130.57B

128.16B

Common Stock Par/Carry Value

702M

702M

702M

702M

702M

Retained Earnings

131.14B

137.79B

144.06B

149.05B

155.33B

ESOP Debt Guarantee

0

0

0

0

0

Cumulative Translation Adjustment/Unrealized For. Exch. Gain

(1.37B)

(1.04B)

(310M)

(131M)

(2.43B)

Unrealized Gain/Loss Marketable Securities

(636M)

(30M)

677M

307M

1.01B

Revaluation Reserves

0

0

0

0

0

Treasury Stock

(31.94B)

(31.77B)

(34.57B)

(42.56B)

(42.59B)

Total Shareholders` Equity

118.94B

116.44B

123.03B

130.57B

128.16B

Accumulated Minority Interest

5.26B

1.7B

5.44B

6.22B

8.67B

Total Equity

124.2B

118.13B

128.47B

136.78B

136.83B

Therewas a broad-based industrial performance with a remarkable 5 out of 7segments recording growth. A 7% growth in revenue was recorded in theindustrial organic segment, significantly higher than the peers. Atthe end of 2014, there was a record $261 billion backlog. Marginswere recorded at 16.2%. The simplification and productivity programsalso continued to reveal huge benefits. CFOA was reported at $15.2billion, $11.2 billion of free cash-flow, a 6% increase(GE2014, p1). Though GE experienced a solid cash performance, the futureseems very bright with enough room for an upside.

GE’sgoal is to attain 17% returns and margins by 2014. In the past fewyears, GE has substantially reduced its structural cost by $4 billionto a globally acceptable level. The following waves of improvementtargeted by the company include segment gross returns and margins,and product cost. GE’s cost base is approximately $100 billion,direct product and service cost contributing a staggering 70%. GE’s“segment gross margins,” were recorded at 27%, this is revenueover and above the costs. Over the proceeding few years, the companyaims at growing its margin by 100-200 basis points (GE2014, p1).

GEgroup is focused on enhancing GE Capital’s returns from its $7billion 2014 earnings which were a 12% decline from the previousyear. The segment’s dividend return to the parent was 3 billion, asignificant decline from 2013. GE Capital has a capital base ofapproximately $83 billion though the returns are weigh below thecompany’s cost of capital (GE2014, p1).

e.Management and Labor Relations

Thissection will focus on the deployment of labor laws in the company andwill consider the relations of management with labor and how this hasbeen maintained. General Electric has a total staff base of 305,000employees distributed across its different branches across the world(Gaus2012, p1). In 2000, the workers in GE were not unionisable. Thismeans that the workers had no bargaining power against theiremployers. However, still then GE did not choose to exploit itsemployees. Most of the employees at the electric plant were beingpaid a rate of $24 an hour. Moreover, the plant had devised agrievance-like platform following a “peer review” procedure ofdispute resolution. Though some employees believed that there was nopossibility of GE treating them better, the company mostly provedthem wrong by treating them well. Whatever benefits the unionizedmembers enjoyed, were also enjoyed by the non-union workers on a moveto restrict unionizing activities.

Ahistoric 1946 strike loss prompted GE’s management to take a sternstance against unions, and encouraging individual responsibility. Theunionized North faced plant closures, and the jobs moved West andSouth, while adopting a “take it or leave it” attitude towardsnegotiation, at the time known as “Boulwarism”, named after thethen labor relations chief.

GEattained a combined model of corporate triumphalism andde-unionization, to the extent of requiring the services of actorRonald Reagan to speak on pertinent topics as factory floors and the“free-market” economy that existed in the ‘50s and ‘60s.There was a remarkable outcome of these strategies, with the fruitsbeing the 1969 employment of 150,000 union workers. This figure isalmost ten times more than last year’s joint bargaining thatcovered a mere 15,500. The overall number of GE employees has alsoplunged in the U.S. The last four years has experienced the closureof 30 plants in the U.S. alone, with the employees being absorbedinto other plants thereby a total of approximately 130,000 beingemployed in almost 100 locations. Between 2000 and 2010, theSecurities and Exchange Commission has recorded approximately 34,000having had lost their jobs in the company (Gaus 2012, p1).

Managementeventually had an upper hand and began dictating terms after boxingthe unions at GE. The contract signed last summer brought out awell-defined benefit pensions for newly hired employees, easedcontracting out, and increased the cost of healthcare (Gaus 2012,p2). An outstanding feature of GE is the special relationship betweenthe Obama administration and the company. The culmination of thisrelationship is the appointment of GE’s CEO Jeff Immelt as theperson in charge of the Council on Jobs and Competitiveness, with hismajor achievement in this role being convincing President Obama topropose reducing the rate of corporate tax to 28 percent.

Duringone of Obama’s visits to a GE plant last year, the U.S. Presidentpraised the company he termed as a “model for America” since ithad created some jobs in U.S. industries. It seems Obama’s beliefand commitment lies in the fact that GE’s wage-reduction approachis critical to the revival of the ailing manufacturing industry,terming it as “insourcing” (Gaus 2012, p2). In a State of theUnion speech made in January by Obama, he quoted a study byconsultants that stated how weak unions, low wages, and increasedproductivity will in the near future make Southern U.S. statescompete on the same level with China. He is of the opinion thatcompanies that bring back manufacturing jobs onshore- regardless ofwhether they pay just above minimum wage- should be subjected to newtax incentives since they deserve it.

IUE-CWAorganizer by the name of Jeff Lacher mentions that GE is testingworkers to ascertain what the company can get away with- and quicklyrushed after the Burlington workforce. In December 2010, managementthreatened to close the plant unless it attained $8 million insavings, sending shock waves to a workforce of predominantly over 40year-olds consisting of mainly couples. The state, city, and countypumped in $2.4 million, and workers’ wages were sliced by up tohalf (Gaus 2012, p2). GE even conspired with the non-union plant toengage in a voting process on the wage cut, in order to tag the moveas being a negotiation and not extortion. However, according toHarold Smith, a Burlington worker, management has denounced therelease details regarding the vote.

Themain people who are pushing for the union drive are senior employeeswho had dedicated whole their working lives into working for GE inthe plant. Despite their dedication, some of them still qualify forIowa’s low income health plan, as well as food stamps. The workersat Burlington are however not fearful of GE’s retaliation fororganizing strikes for the mere fact that other factories within thesame vicinity pay as little wages as they are being paid and they arealso hiring.

Therewere three previous attempts for formation of anion at the Kansa Cityengine plant before their January second victory with IBEW. The majormotivator was a fatal accident in 2010, which fuelled a sequence ofbroken promises that followed previous votes. A worker was sandwichedby two locomotive engine motors, crushing his legs from whichinjuries he succumbed in hospital.

Oncethe organizing came to the limelight, GE on a desperate move stroveto separate older workers in support of unionizing placed on thefirst shift, from the less enthusiastic, younger workers on secondshift. GE’s management eradicated a weekend “super-shift” thatresulted in an overlap thereby the members of the organizingcommittee were forced to stay up the whole night until almost dawnwhile answering questions of the younger workers whose shift waslapsing at midnight. On the same day, instant-response handbills wereused to answer the company’s charges (Gaus 2012, p3).

f.Regulations and Litigation Issues

Inthis section we will see how company regulates its working with thedirectives of regulatory bodies and its legal affairs. This area willprovide us a lot of information regarding company’s regulatory andlegal repute in the market. Among the worst hitting controversiesthat General Electric ever face is the Fukushima 1 Nuclear PowerPlant catastrophe that occurred in 2011 whereby six of the Plant’saffected reactors had GE as their designer and various critics fromas far as 1972 had raised their criticisms regarding their design.According to a March 2011 issue of The New York Times, GE faileddeclare profits and file taxes in 2010 despite a global profit of14.2 billion- $5 billion obtained from American operations alone- yetstill the company did not have tax burdens in 2010. On the contrary,GE had a tax refund amounting to $3.2 billion in 2010. Another ofthese criticisms is the supposed one fifth reductions of GE’s staffsince 2002.

Anothercriticism was raised by a non-party affiliated organization PublicCampaign in 2011 of directing $84.35 million towards lobbying asopposed to remitting taxes during 2008-2010, where they applied andwere granted tax rebates in the range of $4.7 billion, although thecompany made a profit of $10.4 billion. Worse still, GE lay off 4,168employees since 2008, while selfishly giving a 27% pay hike to itstop 5 executives totaling to $75.9. Within the duration of 1990-2001, GE was subjected to 42 litigation cases that resulted topayment of fines and damages adding up to $934,027,215.

GEhas also been faced a wide variety of environmental problemsresulting from its activities. In year 2000, the Political ResearchInstitute undertook a research that listed GE as the fourth highestpolluting companies in the United States, with a shocking over 4.4million pounds (2,000 tons) annually of toxic chemical emissions. In1983, Robert Abrams, the then New York State Attorney General filed alegal suit compelling General Electric Co. to cover cleanup costs toa presumed 100,000 tons of dumped chemicals emanating from theirWaterford plant. In 1999, GE consented to paying $250 million in formof a settlement for pollution claims on the Housatonic River locatedat Pittsfield Massachusetts in addition to other sites, the toxicchemicals being in the form of polychlorinated biphenyls (PCBs)together with other hazardous substances.

Between1947 and 1977, GE was guilty of heavily polluting the Hudson Riverwith PCBs. There was a range of devastating effects that was causedby this contamination that was extremely devastating to wildlife andpeople who either drink the river water or eat fish from the river.This action caused uproar among many people like Pete Seeger whoorganized the clear water festival to raise awareness of the problem.The fruits of the activism were the EPA designating the site amongthe superfund sites that called for extensive cleanup. Sewage dumpingand mercury contamination are other contributors to the Hudson RiverWatershed problems.

GEhas also had a fair share of litigation cases related to accountingmalpractices. An example of such is an August 4, 2009 fine of $50 bySEC on GE for two separate incident of flaunting accounting rules bymisinforming investors into believing that the company would achieveand surpass the firm’s earnings expectations. GE’s defenserelated operations also led to criminal accusations against thecompany. In 1990, GE faced criminal charges for defrauding the USDepartment of Defense, followed by another suite in 1992 on corruptpractices charges that engulfed the selling procedures of jet enginesto Israel. Moreover, in 2008, an abandoned building owned by GE andlocated on Seaview Avenue has been mentioned as acting as a hideoutfor a 72-year-old thief.

g.Domestic and Foreign macro Issues

Thissegment of the report will concentrate on the domestic issues whichcompany is facing and all the foreign issues which are associatedwith the expansion of company to world level. This section willprovide the information about company’s dealing with such issues.When tackling a company’s Macro environment, we look at the PESTanalysis. This tool is extremely important in understanding marketdecline or growth, potential, business position, and operationaldirections. In the analysis of the company’s macro environment, GEis faced with and analysis of economic, political, technological, andsocio-cultural aspects(Hubpages2010, 1). The PEST analysis is necessary to enable the company bettercomprehend its business environment as well as allocate necessaryresources and facilities to enhance productivity and profitability.

PESTAnalysis

Political

Differentnations face different political issues. As such, some countriesprovide a conducive environment for foreign companies to thrivewhereas others present difficult political conditions. For instancethe internal revenue authority in the U.S. compels the filing andsubmission of annual tax returns on April 15 every year (Hubpages2010, 1). Legal and regulatory, taxes, industry-specific regulations,government structures, among other aspect are included in thepolitical system. The American prevailing political stability hugelysupports the thriving of businesses. However, in some countries wherethe government has extensive control over the business environmentfor instance Singapore and China, GE may find it challenging toprosper.

Economic

Exchangerate and Interest rate fluctuations as well as currency valueimmensely affect operations and activities of GE. The global economiccrisis left such a significant impact throughout the world with GEnot being left behind (Hubpages 2010, 3). GE’s sales declinedsignificantly majorly as a result of lower bank lending rates. GE’sCapital Finance unit suffered losses fuelled by the 2007-2009recession coupled with a cyclical business downturn caused GE’sstock prices to sink below $5. Revenue decreased by 14% overall in2009. GE’s operations largely exhibit the same features as that ofthe entire U.S. economy.

Social-culture

Theventuring of GE into different countries largely faces various socialcultural challenges. Cultures, Norms, Religion, and social set-upshugely set the guidelines on how GE ought to behave within the U.S.environment (Hubpages 2010, 3). GE has to face issues such asemployment policies, working hours, managerial appointmentprocedures, and types of goods to produce. One distinct feature of GEis a culture that employs diversity as a means of attaining learningopportunities, a bank of ideas whose richness and breadth uniquelyrepresents world business. GE corporate culture is in the belief thata company should be able to possess strong learning abilities andrapidly acting on the knowledge to present certain outcomes.

Technology

Manycompanies globally are having most of their activities influenced asa result of the fast pace of technological advancement globally.There is a continuous inception of innovative products as a result ofthe daily technological advancement. GE’s main objective ischanging people’s lives by translating creative ideas intoinnovative products (Hubpages 2010, 4). GE has ventured in countrieswith the highest levels of technology such as the United States andJapan. GE has to ensure that its technology is updated any time newtechnology enters the market. According to GE, a smarter power gridcan be best achieved through such technologies as utility security,energy management software, energy storage, as well as services forelectric vehicle charging.

References

CNNMoney(2015).IsGE finally turning around? Stock hits 7-year high. Retrievedfrom:&lthttp://money.cnn.com/2015/10/05/investing/ge-activist-nelson-peltz/?iid=EL&gt

Forbes.The World’s Most Valuble Brands. Retrieved from:&lthttp://www.forbes.com/companies/general-electric/&gt

Gaus,M. (2012). 50 Percent Pay Cuts at GE`s Plants: Is This the Future ofAmerican Jobs? Alternet. Retrieved from:&lthttp://www.alternet.org/story/154990/50_percent_pay_cuts_at_ge`s_plants%3A_is_this_the_future_of_american_jobs&gtGE(2014). A New Kind of Industrial Company. GE 2014 Annual Report.Retrieved from: &lthttp://www.ge.com/ar2014/ceo-letter/&gtHubpages(2010). SWOT Analysis of General Electric Company. Retrieved from:&lthttp://hubpages.com/money/SWOT-Analysis-of-General-Electric-Company&gt

Levisohn,B (2015). Synchrony Financial: As General Electric Split Nears, It’sTime to Buy. Barron’s. Retrieved from:&lthttp://blogs.barrons.com/stockstowatchtoday/2015/11/10/synchrony-financial-as-general-electric-split-nears-its-time-to-buy/&gt

Mann,T (2015). GeneralElectric Stock Closes Above $30 for First Time in Seven Years. TheWallstreet Journal.Retrieved from: &lthttp://www.wsj.com/articles/general-electric-stock-closes-above-30-for-first-time-in-seven-years-1447198261&gt