General Electric says it is under SEC investigation

General Electric, the US industrial group, is under investigation by the Securities and Exchange Commission over its announcement last week that it needed to pay an additional $15 billion (€12.1 billion) over the next seven years for legacy insurance liabilities.

Jamie Miller, GE’s chief financial officer, said on a call with analysts to discuss the company’s fourth-quarter earnings that it had been notified by the SEC that it was “investigating the process leading to the insurance reserve increase and fourth quarter charge as well as GE’s revenue recognition and controls for long-term service agreements.”

She added that the company was “co-operating fully with the investigation, which is in very early stages.”

The company disclosed last week that for the fourth quarter of 2017 it was taking a $9.5 billion pretax charge for those legacy insurance liabilities, which mostly relate to long-term care policies.

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GE pulled out of insurance in 2004-06, but retained a run-off of policies sold in the 1990s and early 2000s. Rising longevity has meant that the cost of long-term care has been soaring.

Ms Miller disclosed the investigation as GE capped off a bruising year in 2017 by reporting a $9.8 billion loss in the fourth quarter, as it was hit by continuing problems in its division making equipment for the power industry.

Those figures included the large charges that the company warned about last week, including the costs of the legacy insurance liabilities.

But even without them, earnings per share were 27 cents, down 55 per cent from the equivalent period of 2016 and below the average of analysts’ forecasts of 28 cents.

Tax changes

GE also suggested it could be one of the companies that is likely to be worse off as a result of the shake-up of the US tax system passed at the end of last year.

The company has been struggling to recover its footing under new chief executive John Flannery, who took over last August. He insisted that the results showed “some of the early progress we are seeing from our key initiatives”.

He added that his management team was “focused on operational execution, capital allocation and deep cost reduction to position us for continued improvement in 2018”.

Revenues were also weaker than expected, down 5 per cent at $31.4 billion for the quarter, and industrial operating profit margins slipped to 11.2 per cent from 16.8 per cent in the final quarter of 2016. However, the company said it had cut $1.7 billion in structural costs in 2017, almost half of it from the power equipment division, and was aiming for a further reduction of $2 billion or more this year.

Of the company’s three core divisions, healthcare performed well, with profits up 13 per cent at $1.16 billion. Aviation including aero engines was up 2 per cent at $1.79 billion. But the profit collapse seen in the third quarter continued in the power division, with an 88 per cent drop to $260 million.

GE has been hit by a shift in the electricity industry towards renewable energy and away from the gas-fired plants that are its traditional strength. It built up its operations in fossil fuel generation, particularly coal-fired power plants, with the $10 billion acquisition of Alstom’s energy business in 2015.

The company suggested its own decisions had played a part in the division’s poor performance, saying the business had operated “well below expectations”. The leadership of the division was changed last year and the team has started taking measures to improve performance, including cutting its headcount of professionals by 11 per cent. The division announced last month that it planned to cut 12,000 jobs and it is reviewing its locations for possible site closures.

Weak power

Orders in the power division were weak, down 13 per cent for 2017 as a whole, while revenues from services dropped 6 per cent. Orders for the renewable energy business, principally wind turbines, were up just 1 per cent for the year at $10.4 billion but profits in the fourth quarter were up 25 per cent at $203 million.

Conditions also remain difficult for Baker Hughes, the oilfield services group in which GE has a controlling 62.5 per cent stake. Excluding restructuring charges and other one-off items, profits there were down 25 per cent at $307 million.

Looking ahead to 2018, GE said it expected the power market to continue to be difficult, and aviation and healthcare to remain strong. It maintained the guidance it gave last year that adjusted earnings per share for 2018, excluding one-off items, were expected to be in the $1-$1.07 range. A year ago Jeff Immelt, the previous chief executive, was still suggesting it was possible that 2018 earnings per share could hit $2.

The company also gave more details of the expected impact of the sweeping tax changes signed into law by US president Donald Trump late last year, which included a reduction in the main rate of corporate tax from 35 per cent to 21 per cent. GE is taking a one-off charge of $3.5 billion, including $2.2 billion for the reduced value of tax credits and deferred tax assets, and $1.2 billion for the new one-off tax of 15.5 per cent on previously accumulated earnings outside the US.

For the longer term, the company said it was planning for a tax rate in the “low to mid 20s” per cent, which would be higher than it has been paying in recent years. It reported last year that excluding GE Capital, the financial services division that has been mostly sold off, it paid an effective tax rate of 14 per cent in 2015 and 9 per cent in 2016.

– Copyright The Financial Times Limited 2018