GE’s woes deepen as new accounting probe revealed
GENERAL Electric’s new CEO got off to a rocky start with Wall Street as the company revealed an expanded accounting probe by US authorities.
The Securities and Exchange Commission (SEC) is to look at a $22bn charge in the power-equipment unit, the company said yesterday as it reported earnings for the first time since CEO Larry Culp took the reins. The Justice Department (DoJ) is also examining the write-down, which stems from goodwill impairment. The probe adds to the pressure on GE, which is already contending with one of the deepest slumps in its 126-year history amid cashflow shortfalls and declining demand for its gas turbines.
Mr Culp, who was appointed in a surprise announcement on October 1, also unveiled the first steps of his turnaround plan, with a major dividend cut and a reorganisation of the company’s power division. He’ll also have to deal with federal investigators as well.
“Yes, it’s a surprise and, yes, they slipped it in” during the call, said Karen Ubelhart, an analyst at Bloomberg Intelligence. “But we just don’t know how big it could be.’’
The shares fell 2.3pc to $10.90 at 9.41am in New York after sliding as much as 5.9pc for the biggest intraday drop since May. GE has plunged 36pc this year to levels last seen shortly after the recession in 2009. Mr Culp’s appointment sparked a minirally earlier this month, but that fizzled recently.
GE said in January that the SEC was looking at accounting in the power division and an old insurance portfolio that prompted a $6.2bn charge.
“Staff from the DoJ are also investigating these matters, and we are providing them with requested documents and information as well,” GE said in a regulatory filing.
Mr Culp was tasked with accelerating a turnaround plan centred on cost cuts and a more-focused portfolio of manufacturing businesses. Until yesterday, he had not publicly addressed shareholders, making the earnings report and subsequent conference call among the company’s most highly anticipated.
While the dividend cut was a blow to investors, it wasn’t unexpected. Ex-CEO John Flannery had suggested a reduction was likely, following a separation of the health-care unit in another year.
Mr Culp, who joined GE’s board in April, has been visiting the company’s businesses since taking over. GE has said his comments would include a preliminary assessment but that he won’t give a thorough analysis until early next year.
The new CEO did, however, move to resuscitate the gasping power unit by splitting it. A unified business will combine the gas product and services groups, while a second unit will hold other assets, including steam, nuclear, grid solutions and power conversion.
The power unit’s difficulties will “persist longer and with deeper impact than expected,’’ CFO Jamie Miller said. As a result, GE will miss its fullyear target for cash flow by a significant amount, she said.
Third-quarter sales plunged 33pc in the operation. The division has been hampered by a broad market slump, exacerbated by GE’s ill-timed 2015 acquisition of Alstom’s energy unit for $10bn. More recently, GE disclosed that its flagship gas turbines are suffering from an oxidation issue.
GE Aviation, one of the bright spots for the company, boosted sales 12pc as it rolls out a new engine for narrow-body commercial jets.
Total sales dropped 3.6pc to $29.6bn, GE said. Adjusted earnings fell to 14 cents a share, well shy of the 20-cent average of analyst estimates.