GE Shows How 'Black Box' Assets Boost Profits
November 01 2017 - 12:01PM
Dow Jones News
By Michael Rapoport
General Electric Co. lifted the veil slightly on a part of its
accounting that analysts have said was too opaque, spotlighting how
changes in one group of its assets help to lift profits.
The company provided new details about its so-called contract
assets in its latest quarterly report filed late Monday. These are
assets based on revenues GE books on long-term contracts before it
has the cash in hand, for things such as servicing power plants and
building complex equipment like gas-power systems. That portfolio
has risen 18% this year to $29.8 billion.
The catch is that the level of those assets relies in part on
estimates and assumptions made by GE about how much profit it
ultimately will reap from those contracts. Analysts have complained
they have little insight into the portfolio and the way it
contributes to GE's current profits.
The assets are "kind of a black box," said John Inch, a Deutsche
Bank analyst who has been critical of GE over the quality of its
earnings and disclosure.
This time around, GE said how much the increase in the portfolio
boosted earnings, by $649 million in the third quarter and $1.93
billion for the first nine months of 2017, on a pretax basis. That
is equal to 44% and 51% of pretax earnings from continuing
operations for each period, respectively.
GE laid out the numbers in a new disclosure in its regular
footnote on the assets.
Previously, GE had reported the earnings benefit from its
contract assets on an annual basis. In 2016, that was a $2.2
billion contribution, or about 24% of pretax earnings from
continuing operations for the year.
So what drove the increase in value of the contract assets? GE
said in the latest quarterly report that it was largely due to a
$1.93 billion cumulative catch-up adjustment from higher forecast
revenue and lower forecast costs on its long-term service
agreements.
GE also said the assets related to those service agreements had
increased by an additional $676 million because of "the timing of
revenue recognized for work performed relative to billings and
collections."
On GE's long-term equipment contracts, the contract assets
increased by $1.33 billion because of revenue-timing issues, the
company said.
GE's new disclosures are in line with new rules that will take
effect in January on how companies book revenue. These rules will
require companies to disclose more about changes in their contract
assets.
In addition to the contract assets, analysts and investors have
expressed concerns recently about other aspects of GE's accounting,
such as the company's use of multiple customized earnings measures
and its ability to turn earnings into cash flow.
The concerns have risen since Oct. 20, when GE badly missed Wall
Street estimates for its third-quarter earnings and slashed
earnings expectations for the year. The stock has declined in seven
consecutive trading sessions, dropping more than 14% to GE's lowest
levels in nearly five years.
GE has said it is looking at making its financial reporting
cleaner and simpler. The company plans to provide more details Nov.
13 on that and other retrenchment steps it is planning.
GE is looking to sell more than $20 billion in assets and cut
billions of dollars in costs. Chief Executive John Flannery has
said he is reviewing whether the company can afford to keep paying
its current 24-cent quarterly dividend.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
(END) Dow Jones Newswires
November 01, 2017 11:46 ET (15:46 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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