A classic Friday night bad-news SEC-filing dump.
It’s not like General Electric doesn’t already have enough existential problems, ranging from its $29-billion pension-fund “nightmare” to the $9.8 billion loss in Q4 that it reported in January. It’s in a massive restructuring, trying to shed $20 billion in assets. Some of its core businesses are deteriorating. And it’s being hounded for its famously opaque and purposefully confusing earnings reports.
So to keep the damage to a minimum, GE disclosed on Friday after hours in an SEC filing that it will:
- Have to restate the loss for 2017, making it even larger.
- Have to restate its 2016 earnings per share and also take a big charge against “retained earnings.”
- Face a Justice Department investigation into its now defunct subprime mortgage business.
This Justice Department investigation of its subprime mortgages originated between 2005 and 2007 by its now defunct unit, WMC Mortgage Corp, was listed under items that “could cause our actual results to be materially different than those expressed in our forward-looking statements.” And they may “affect our estimates of liability, including possible loss estimates.”
Of note concerning those subprime mortgages: GE got bailed out by the Fed and the Federal government during the Financial Crisis. GE received bailout loans from TARP, a Federal program, and the FDIC guaranteed $139 billion of GE Capital debt. In addition, the New York Fed, which handled the Fed bailouts, handed GE large amounts of cheap loans (which GE has paid back). GE’s then CEO Jeff Inmelt was a director at the New York Fed during that period and was involved in the decisions of the Fed bailouts. At the same time, he was on CNBC hyping his company’s stock.
But the restatements for 2016 and 2017 earnings are separate. They have to do with how the company accounted for revenues from long-term contracts. The SEC is already investigating GE’s accounting of its long-term service contracts. GE had previously disclosed this investigation. The new way of accounting for those long-term contracts “will simply more closely align revenue with cash,” GE explained. And this “we believe will be helpful to our investors.”
No kidding. This could have been more helpful to investors years ago.
So for 2016, this change of accounting for long-term contracts will generate a charge of $4.2 billion – $1 billion related to commercial aircraft engines and $3.3 billion related to services businesses in Power and Aviation – against retained earnings on its balance sheet. Thus, it will bypass the income statement. GE originally reported a profit of $8.2 billion for 2016
In addition, GE estimates that its 2016 earnings on its income statement, originally reported as $0.89 a share, will be cut by $0.13 to $0.76 a share; and that its 2017 loss of $0.72 a share (or $6.2 billion) will increase by $0.16 to a loss of $0.88 a share.
As a reminder, GE also lost $6.1 billion in 2015.
GE says it has adopted the new standard as of January 1, 2018. But everything remains uncertain:
These estimates may be refined as we finalize the implementation effort required to adopt the standard. Upon adoption in 2018, our books and records will only reflect the results as required under the new standard limiting our ability to estimate the effect of the standard on our earnings. Given the inherent difficulty in this ongoing estimation of the effect of the standard on any future periods, we do not plan to continue to assess the effect on 2018.
This accounting of revenues closer in line with cash than the prior numbers will also impact future periods “for years,” but to a lesser extent, and “this expectation is based on many variables, including underlying business performance, which are subject to change, making the effect of the standard on future periods difficult to estimate.”
When all is said and sold off, GE’s debt burden – much of it attributable to GE Capital – looks enormous versus the size of remaining assets and cash flow. Read… What’s the Chance of Iconic GE Going Bankrupt?