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GE's Other Problem: Complex Financial Reporting; GE's next finance chief promises to get 'back to basics' with the company's financial reportingGE's Other Problem: Complex Financial Reporting; GE's next finance chief promises to get 'back to basics' with the company's financial reportingGrant, Charley.
Wall Street Journal (Online); New York, N.Y General Electric Co.'s next finance chief promised Friday to get "back to basics" with the conglomerate's financial reporting, after the latest quarterly results highlighted the complexity of the company's bookkeeping. Sharp revisions to the company's forecasts for the current year, just three months after the company had backed them, raised fresh concerns among investors and analysts about the way the company measures its performance. The financial reports will likely be a focus of new CEO John Flannery and incoming Chief Financial Officer Jamie Miller. In meeting with investors in recent months, the new boss was told that the muddy reporting needed to change. In his letter to employees on his first day, Mr. Flannery said he heard investors "loud and clear." GE presents its financials to investors in unusual ways. Besides reporting traditional earnings per share under generally accepted accounting principles, GE also reports that figure on an adjusted basis that excludes results of businesses that might be sold in the future. The Boston-based company also reports a key cash-flow metric differently from most public companies. The company adjusts the figure to exclude taxes on the company's deals, as well as costs to fund its employee pension plan. Wall Street analysts have long expressed frustration with GE's presentation of financial results, typically describing the accounting as "aggressive." In a recent note to clients, William Blair analyst Nicholas Heymann expressed hope that Mr. Flannery's review would include "replacing aspirational with tangible pragmatic operating targets and simplifying GE's accounting." Ms. Miller promised changes on a conference call with Wall Street analysts on Friday, including scrapping its adjusted earnings figure and reporting cash flow in line with industry standards. "We're really looking at, how can we report in a much cleaner way, just a much simpler presentation of what you see? I'd kind of call it a back-to-the-basics approach," she said. Ms. Miller, who previously ran the company's transportation unit, will take over from Finance Chief Jeff Bornstein on Nov. 1. She joined GE in 2008 as chief accounting officer and previously was a finance executive at insurer Anthem Inc. and a partner at PricewaterhouseCoopers LLP. Mr. Bornstein told investors Friday he was leaving because of the company's poor performance . "We are not living up to our own standards or those of investors, and the buck stops with me," he said. On Friday, GE cut its profit targets for the year by a third and sliced its forecast for cash flow by half. The company's ability to generate cash has been a question among investors, nervous about its ability to support its $8 billion annual dividend. Those fears have been heightened since the first quarter of the year, when GE surprised investors with a negative cash flow. One focus of investors has been the ability of the company to use its GE Capital business to smooth earnings of the more-cyclical industrial business. As GE has sold down its financial operations, its overall financial performance has declined. GE executives told investors the company's GE Capital business didn't pay a dividend to the parent company--and would halt any such payments until the company completes an actuarial analysis of claims reserves in the company's long-term-care reinsurance business. Mr. Bornstein also disclosed the company had made a $500 million correction to the cash flow reported in the first half of the year. He said it had been underreported because derivative hedge settlements had been incorrectly classified. The company has made other changes to its reporting in recent history. In May GE changed the way it calculates the rate that profits convert into free cash flow, a closely watched metric for industrial companies. The effects of the change resulted in more-impressive figures. GE reported a conversion rate of 91% for 2016 under the new method, instead of 76% under the old method. |
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