By Thomas Gryta
General Electric Co. said securities regulators have opened a
probe into the company's accounting practices, a new challenge to
the conglomerate's efforts to untangle its problems and turn around
its struggling business.
The Securities and Exchange Commission is investigating how the
company recognized revenue from long-term service contracts for
projects like power-plant repairs and jet-engine maintenance, GE
said. The Boston-based giant, which reported revenue of $122
billion for 2017, has about $15 billion of such service contracts
on its books.
The SEC first inquired about the contract accounting in late
November after the company sharply revised its financial
projections, according to a person familiar with the matter. Last
week, the agency sought additional information about GE's review of
its insurance business after the company disclosed a massive
charge, this person said.
The U.S. investigation brings more uncertainty to an industrial
powerhouse that has fallen on hard times, and adds to the obstacles
that new CEO John Flannery must overcome. It also provides fuel for
analysts and investors who have long regarded GE's accounting and
some of its holdings as a "black box."
"If you were concerned about black box issues in the past,
aren't you much more concerned about it today?" said John Inch, an
analyst at Deutsche Bank.
GE's finance chief, Jamie Miller, who disclosed the probe on an
earnings call with investors Wednesday, said the company is
cooperating with the SEC. She said the probe was in "very early
stages." In an interview, Ms. Miller said she has been conducting a
"deep review" of GE finances and that she hasn't seen indications
of accounting problems.
The disclosure came after GE reported declines in fourth-quarter
revenue and profit. Shares of GE had rallied as much as 5% in
premarket trading, but surrendered those gains after the SEC probe
was announced. Shares have tumbled 45% over the past 12 months.
Ms. Miller, who used to run GE's Transportation unit and took
over as finance chief on Nov. 1, played down the specter of
additional unexpected charges at GE, noting that she is "pretty
well through" her review of the company's balance sheet. She said
she continues to review GE's financial processes, systems and past
decisions.
GE's accounting has long been a subject of scrutiny. The company
regularly beat Wall Street's estimates under former CEO Jack Welch.
The precision with which it did so, though, led critics to question
the results.
In 2009, GE paid $50 million to settle SEC allegations that it
had used improper accounting methods to boost earnings and revenues
in 2002 and 2003. The company didn't admit or deny the SEC's
allegations in agreeing to the settlement.
Under former CEO Jeff Immelt, the company wound down much of its
lending business in the wake of the financial crisis and made big
acquisitions to expand its power and oil businesses. But the
industrial units struggled in recent years to generate enough cash
to pay the company's dividend, prompting the company's move in
November to cut the investor payout by half.
GE has a growing portfolio of "contract assets" coming mostly
from its core power and aviation businesses. These are assets based
on revenues GE books on multiyear contracts before it has the cash
in hand, for things such as servicing power plants and building
complex equipment like gas-power systems. The company has said it
would eventually realize all the cash related to those
contracts.
GE's contract assets on its balance sheet were $28.9 billion at
the end of December, down slightly from September but up $3.7
billion from a year ago. A spokesperson said about $15.2 billion of
the balance is from long-term service agreements, with the
remainder related to equipment contracts. The service contracts are
generally 10 to 30 years long.
The level of contract assets relies in part on GE's own
estimates and assumptions about how much profit it will ultimately
reap from those contracts, and analysts have said they have little
visibility into those estimates. In the first nine months of 2017,
earnings stemming from the increase in contract assets amounted to
$1.93 billion, according to GE, more than half the company's pretax
earnings from continuing operations.
Last week, GE surprised investors when it disclosed it would
book a $6.2 billion charge in its fourth quarter related to its
insurance operations and needed to set aside $15 billion over seven
years to bolster insurance reserves at its GE Capital unit.
Mr. Flannery, who took over last summer and slashed GE's
financial projections, has promised to simplify the company's
business. Last week, he put the possibility on the table of
breaking apart the company, saying he was evaluating whether to
separate its major business units into public companies.
"There will be a GE in the future, but it will look different
than it does today," Mr. Flannery said Wednesday. "We have a long
way to go but the mission is clear."
He reiterated that he will do "whatever it takes" to make sure
the core businesses are positioned for growth. "We are looking at
any option we need to think about in that context," he said.
GE already is exploring ways to shed its majority stake in Baker
Hughes, which includes GE's former oil business, as well as sell
its century-old Lighting business. The company also is looking to
sell its Transportation unit, which builds locomotives, according
to people familiar with the matter.
On Wednesday, the company said it is working on more than 20
deals to rearrange its portfolio. It aims to shed $20 billion in
assets. It expects to cut costs by more than $2 billion in 2018 --
more than the $1.7 billion cut in 2017 -- and will soon announce a
revamped board of directors.
GE also said it would restate its 2016 and 2017 financial
results because of newly adopted revenue recognition rules around
its long-term service contracts. The change will result in "a lower
asset balance and lower earnings going forward," Ms. Miller said,
but "doesn't change anything related to our cash balances or cash
flows."
The restatement is separate from the SEC inquiry and isn't
related to accounting errors or other reporting problems, a GE
spokesperson said. The accounting rule changes require the
prior-period results to conform with the new standard.
The latest quarterly results show continued woes in GE's Power
business, where revenue fell 15% and profits tumbled 88% from a
year ago. The business, GE's biggest by revenue, sells turbines to
power plants around the globe. In the quarter, the division's
orders dove 25%.
GE revealed the problems in the power business in the fall,
detailing how it misjudged a major shift in the market. Last month,
it targeted cutting 12,000 jobs the division, nearly 18% of the
unit's workforce.
For the fourth quarter, GE reported a loss of $9.64 billion, or
$1.13 a share, down from a profit of $3.67 billion, or 39 cents a
share, last year. The results were weighed down by the
insurance-related charge as well as costs tied to U.S. tax
overhaul. Revenue fell 5.1% from a year ago to $31.4 billion. The
company said its quarterly revenue was $33.1 billion including
assets that the company has put up for sale.
--Michael Rapoport contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
January 24, 2018 19:07 ET (00:07 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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