GE to Simply Its Reporting of Financial Results -- Update
November 13 2017 - 04:50PM
Dow Jones News
By Michael Rapoport
General Electric Co. said Monday it plans to simplify the way it
reports financial results, admitting it has been hurt by its own
accounting complexity.
GE still plans to use its own customized metrics to gauge its
financial performance, as opposed to using only measures calculated
under standard accounting rules. But the company said it wants to
be more transparent and will focus its reporting on
more-streamlined measures that emphasize the amount of cash the
company is generating.
"Simplification of metrics is going to be a huge focus going
forward," Chief Executive John Flannery told investors. "Complexity
has hurt us."
While many companies report their own customized measures of
performance in addition to standard ones, GE is known for reporting
multiple measures, stripping out various costs and adjusting for
different changes and assumptions in its business -- a practice
that often makes its results hard for investors to follow.
Now, GE will change its top earnings metric to "adjusted"
earnings per share -- excluding gains, restructuring and
nonoperating pension costs. That is a change from the company's
current focus on what it calls "Industrial operating + Verticals"
earnings, which excludes the pension costs but adds in the results
of businesses from finance arm GE Capital that the company plans to
retain after divesting most of it.
"You want this to be easier to understand and more in line with
our peers," said Jamie Miller, GE's chief financial officer.
The new adjusted-EPS metric also incorporates accounting changes
that will take effect in January and broadly affect how companies
book revenue.
GE's new metric would give the company roughly the same level of
expected earnings this year as under the current metric. It said
2017 "adjusted EPS" would be $1.04 to $1.12, compared with $1.05 to
$1.10 as calculated under the "Industrial operating + Verticals"
metric.
In addition, GE will now use free cash flow as its primary
measure of cash flow, changing from "Industrial CFOA," or cash flow
from operating activities. "Free cash flow is a much more
penetrating metric," Mr. Flannery said.
Free cash flow will exclude deal taxes and funding for GE's
pension plan -- GE already provides an adjusted version of
Industrial CFOA that excludes those now. It will also take into
account the company's spending on property and equipment, as well
as capitalized software.
Under the new method, industrial free cash flow for 2017 would
be $3 billion, compared with $7 billion as calculated under the
current Industrial CFOA metric. The difference is mostly due to
$4.6 billion in property and equipment spending and capitalized
software.
The company didn't directly address whether it plans to scale
back the array of financial metrics it reports. Ms. Miller said
more changes in GE's financial reporting will be coming throughout
2018.
But she defended GE's basic practice of using "non-GAAP" metrics
rather than relying solely on measures that comply with generally
accepted accounting principles. That's "a fairly common way" to do
things, she said.
GE's changes in GE's financial reporting are part of a package
of streamlining and retrenchment steps that the company unveiled
Monday, including a 50% cut in its dividend and a refocusing of the
company around its core business units of aviation, heath care and
power.
GE also said it would reduce the number of metrics it uses to
gauge annual bonuses and incentive compensation for its executives,
as part of a streamlining of its executive-pay plan. Currently the
company uses four to five metrics to help determine how much
executives will receive in bonuses and incentive pay; that will be
reduced to two to three metrics, GE said.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
(END) Dow Jones Newswires
November 13, 2017 16:35 ET (21:35 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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