NEW YORK: General Electric disclosed on Wednesday (Jan 24) that it faces a accounting probe by US regulators, as it reported a nearly US$10 billion loss in the last quarter due to charges linked to its insurance business and US tax reform.
The news of the probe of the massive charges in the insurance business cast another shadow over the troubled industrial conglomerate as it tries to right the ship.
The quarterly results showed continued weakness in the power division, offset by much better market conditions in aviation and health care where operating profits grew.
And GE pointed to progress in cutting costs and said improved execution had lifted the company's cashflow, a closely-watched Wall Street benchmark.
"We have a long way to go, but the mission is clear and we're moving forward together as one team with purpose," chief executive John Flannery told analysts on a conference call.
GE reported a fourth-quarter loss of US$9.8 billion due to hefty charges linked to its insurance business and US tax reform, compared to profits of US$3.5 billion in the same quarter of the prior year. Revenues in the fourth quarter were US$31.4 billion, a five per cent decline.
The huge charges pushed annual results into a US$6.2 billion loss, compared with US$9.2 billion in profits in 2016.
A major weak spot has been GE's power business amid tepid demand for gas turbines as renewable energy has taken more capacity globally.
Company officials have warned investors to expect another "tough" year for power in 2018 and some of their comments on Wednesday suggested 2019 could be bad as well.
The weakness in power has caught Wall Street off guard over the last year and contributed to a sense that GE management installed last summer did not have a clear grasp on the company's issues. GE tapped Flannery to replace Jeff Immelt and the new executive team has won some praise from Wall Street for candor.
But fears about the management were revived last week when GE stunned investors with a US$6.2 billion charge after adding more reserves in its reinsurance business following a review of actuarial assumptions.
Then the company on Wednesday disclosed that US regulators have opened a probe into that decision.
The US Securities and Exchange Commission is "investigating the process leading to the insurance reserve increase and the fourth quarter charge," GE Chief Financial Officer Jamie Miller told analysts on a conference call.
"We are cooperating fully with the investigation, which is in very early stages."
Miller said she was not "overly concerned" about the SEC query and does not currently expect that GE would need to set aside additional legal reserves for that or other matters.
SIGNS OF PROGRESS
Flannery announced a major restructuring initiative in November and followed up with 12,000 job cuts in the power unit in December. He has also pledged to shake up the company's board of directors and restructure the company as needed.
In the earnings reports, GE confirmed its 2018 forecasts, including projecting adjusted earnings per share of US$1.00 to US$1.07 in 2018, compared with US$1.00 per share expected by analysts. The company also affirmed its cashflow projection after fourth-quarter cash came in higher than expected.
"Our results this quarter demonstrate some of the early progress we are seeing from our key initiatives," Flannery said.
CFRA Research kept a "hold" recommendation on GE following the report.
"GE needs to hit 2018 targets on cost cuts, asset sales and improved earnings and cash flow," said CFRA analyst Jim Corridore. "We will look for progress before becoming more positive."
Analysts gave a mixed review to the report, with RBC Capital Markets praising the better-than-expected cashflow, but doubting that the quarter "marks a definitive bottoming in the stock."
"The gravity of the operating challenges - especially at power - are likely to pressure the stock over the near-term," RBC said in a note.
GE shares fell 2.7 per cent to US$16.44, the biggest loser in the Dow.