General Electric Co.’s stock was soaring after the company reported fourth-quarter results, then the industrial conglomerate’s bombshell about a government accounting probe triggered a sharp pullback that erased all the gains. Chief Financial Officer Jamie Miller said in the post-earnings conference call with Wall Street analysts that the company was notified by the Securities and Exchange Commission, that the accounting process that led to the large insurance reserve increase last week was being investigated. Miller said the SEC was also looking into GE’s revenue recognition and controls for long-term service agreements. “We are cooperating fully with the investigation, which is in very early stages,” Miller said, according to a transcript provided by FactSet.
The insurance reserve increase refers to GE’s announcement last Tuesday, that after a review of its legacy reinsurance businesses, it will take a $6.2 billion after-tax charge and a $3 billion cash contribution to its insurance subsidiary that will grow to $15 billion by 2024. Chief Executive John Flannery said at the time, as some analysts questioned the auditing process, that he was “deeply disappointed” that the risk in the business was “underappreciated.”
The stock had traded up as much as 5.8 per cent in premarket trade, after the GE reported fourth-quarter results, and after the start of the post-earnings conference call. Although the company missed bottom- and top-line expectations, investors seemed to cheer Flannery’s upbeat tone about the progress the company was making in just a short time to tackle its problems and reshape the business.
The company also provided a 2018 adjusted earnings-per-share outlook of $1.00 to $1.07, which surrounded the FactSet consensus of $1.02, said it didn’t expect to issue any debt until 2020, but also said power markets could potentially be worse than expected in 2018. But after the SEC probe comments, the stock took a sharp dive. It tumbled 2.3 per cent in active morning trade Wednesday, enough to pace the Dow Jones Industrial Average’s decliners. The stock had run up 4.5% on Tuesday, the biggest one-day gain in over two year, ahead of the results. When asked on the call by Cowen & Co. analyst Gautam Khanna more specifically about the SEC probe, Miller said since she came into the role of CFO on Nov. 1, she has been going through a “very deep review on pretty much everything” in finance, but had so far said there was nothing to be overly concerned about.
“But look, if I see something, we’ll deal with it,” Miller said, according to the FactSet transcript. “But I don’t see anything at this point.” This isn’t the first time the SEC has looked into GE’s accounting. Before Miller took over the role of CFO, the company received a comment letter for the SEC regarding the company’s reporting of numbers that were inconsistent with Generally Accepted Accounting Principles.
It’s probably no coincidence that Flannery said in October that GE would change how it communicates with investors, and that Miller pointed out Wednesday’s call that the earnings releases’s new format makes it “more substantive and easily digestible.”
“We will continue to relook at all of our communications, formats and data that we provide to investors with the goal to continue to increase standardisation and transparency so you’ll likely see more changes as we move throughout 2018,” Miller said.
Another issue for investors is that CEO Flannery said on the call that GE will be a different company in the future, as it continues to review the best structure and assess the long-term potential of its businesses.
“There will be a GE in the future, but it will look very different that it does today,” Flannery said, according to the FactSet transcript. A “different” GE could prompt a review by the company that oversees the Dow Jones Industrial Average, which would put the company’s record 110 year run as a member of the index at risk. The stock has plunged 45% over the past 12 months, while the Dow industrials has rallied 32%.
