GE woes deepen as SEC probe throws wrench in turnaround.
MULTINATIONALS
• General Electric Co. is under investigation by U. S. regulators after t aking a l arger- t han- expected charge in its finance division, dealing a new black eye to a company once enshrined as an icon of American business.
The Securities and Exchange Commission is looking at the accounting practices related to a review of a GE insurance business as well as “revenue recognition and controls for long- term service agreements” in the power-equipment unit, chief financial officer Jamie Miller said Wednesday.
The company is co- operating fully with the inquiry, which is in the early stages, she said. Miller told analysts and investors on a conference call that she isn’t “overly concerned” about the issues under scrutiny.
The probe compounds the mess GE is sorting through after a year of management turmoil, cash- flow concerns and falling demand in key businesses such as power and locomotives. GE was the biggest loser on the Dow Jones Industrial Average last year, with a 45 per cent tumble.
Chief executive officer John Flannery, who took the reins in August, last week disclosed the US$ 6.2 billion fourth- quarter charge, which is tied to old insurance policies for long- term care.
“We can’t be certain that prior management purposely misled investors, but we certainly believe there were ethical lapses that deserve attention,” Scott Davis, an analyst at Melius Research, said in a note regarding the SEC investigation. “The positive is that new management can use this as another cata- lyst to drive cultural change.”
The SEC declined to comment.
The shares fell two per cent to US$ 16.54 in midafternoon trading in New York, erasing a pre- market gain of more than five per cent. The company had advanced after it reaffirmed its 2018 profit forecast and Flannery said GE is in talks for more than 20 asset dispositions.
In disclosing the charge, GE said the company’s finance unit would pay US$15 billion over seven years to fill a shortfall in reserves. A review of the insurance portfolio had been under way since the middle of last year.
The Boston- based company hasn’t done any new business in the long- term care market since 2006. Still, it was saddled with obligations on contracts written years ago. The liabilities can swell when claims costs are higher than expected or when investment income fails to meet projections, a problem exacerbated by low interest rates.
GE said last week that dividends from GE Capital to the parent company would remain suspended for the “foreseeable future” after the payment was halted during the portfolio review.
Fourth- quarter adjusted profit fell to 27 cents a share, GE reported, slightly below the 28- cent average of analysts’ estimates compiled by Bloomberg. Revenue was up slightly in GE Aviation, and profit rose 2.1 per cent as the business boosted production rates on a new jet engine. Sales increased 5.9 per cent in GE Healthcare.
The c o mp a n y said strength in its jet-engine and health- care businesses is shoring up confidence in the forecast of US$1 to US$1.07 a share in adjusted 2018 earnings.
The earnings report signalled that GE is stabilizing, though the SEC probe is likely to obscure the positive developments, said Nicholas Heymann, an analyst at William Blair.
“It’s rough seas, and the rough seas aren’t going to calm until the regulatory concerns subside,” he said. “But this ship isn’t breaking apart on a reef.”