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
- Have to take an additional charge for 2016 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:
- 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?
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The chickens coming home to roost.
The cows well milked and Moar War.
Too bad Jeff Immelt can’t be thrown in jail, or have his compensation clawed back. Neutron Jack must be very proud of how his successor has handled GE. I bet Edison is doing somersaults in his grave.
Edison must be truly spinning, like the induction motor that his great rival, Nikola Tesla (another much misused name nowadays) invented.
Actually Galileo Ferraris invented the induction motor in 1885, the Tesla motor arrived in 1887, and he was granted a US patent.
Walter Baily, created an induction motor in 1879, but it was Francois Argo who in 1824 worked out the theory of how an induction motor would operate.
It was Michael Faraday discovered the existence of electromagnetic fields and electromagnetic induction in the 1820’s.
Like most inventions the breakthroughs are based on the work of those who went before.
+1. Like Edison didn’t invent the light bulb and Walt Disney was far from the first to create an animated feature.
Now, wait a minute!
Immelt was not a pariah to everyone.
He was Obama’s “Jobs Czar”
Don’t forget that.
This statement from the article is wee bit short years-wise, with regards to how the company “accounted for revenues” – I was there over 30 years ago and saw how they overstated it, first hand, I worked with finance – LOL
“the restatements for 2016 and 2017 earnings are separate. They have to do with how the company accounted for revenues from long-term contracts.”
If even I knew GE was going to restate earnings (admit that previous earnings releases were a lie and a sham) almost every wall street investor must have known as well.
Is the tide going out yet or did this naked swimmer run out of the water for fear of the sharks? I see futures are up on the news so I’m guessing the tide is high (credit to Debbie Harry).
Welcome to your corporate rulers, America.
All the politicians are bought, all the regulators are owned (by the 2%).
Vulture capitalism for the USA. Sweet
capitalism? Not even, more like swindelism
hey, you do you all realize the 16 cent restatement for 2017 was disclosed in the Nov. 2017 slide-deck? slide #48…look it up.
this is actually fake news by FT, who originally broke the non-story. would be great if they contacted an actual GE analyst or the company.
The disclosure came via a 10-K SEC filing, filed on Friday, Feb 23, at 4:52 PM. I linked the filing so that you can read it yourself.
It’s 2017 earnings were released in January 2018. So whatever you saw in November was certainly not a “restatement” of earnings for 2017 since 2017 wasn’t even over and since its results would be published two months later (Jan 2018).
There are 4 items in that filing, which I pointed out:
1. Increase the loss for 2017 by 16 cents a share.
2. Reduce its 2016 earnings per 13 cents a share
3. Take an additional charge of $4.2 billion for 2016 against “retained earnings.”
4. A Justice Department investigation into its now defunct subprime mortgage business.
So why don’t you read the article before writing this nonsense?
Good ol’ fake news trolls strike again! Lol. It was likely an estimate or projected balance sent out to investors to make sure the shareholders are not shocked and surprised when the official numbers are confirmed.
Hi Wolf,
They revised earnings and took another big write off. Which is the bigger risk to investors? Lack of earnings clarity or worries about what else is lurking on that balance sheet. Neither is attractive and the stock action today is ugly with new lows. Scylla or Charybdis?
With a company as complex as GE, it is like with a big bank: you will not be able to know what is really going on, and what went on, until after the whole thing collapses and you can sort through the debris to see what’s left over.
Gosh Wolf,
Your GSM is showing!
√
For those that do not know the subprime crisis was the largest fraud ever on the American public and no one went to jail. How it worked was this. The FED created cheap money allowing banks and GE to borrow cheap money. These became part of MERS, (Mortgage Registration System). The actual notes were placed in $25 million pools and the mortgages then became separated from the notes making making the liens, (the mortgages), were no longer valid leaving the borrower an unsecured loan. They then started to make loans and also buying loans that were made to fail. Why? Two reasons. The FED allowed up to 10 insurance policies on each note by entities who had no relationship with the borrowers. These were unique in that normally investors who have the policies would only receive back the paid downed principal amount but these when triggered paid the original principal amount plus legal cost. Who underwrote the policies? AIG which needed a taxpayer bailout. Two when prices collapsed investors flooded in and bought these homes for almost nothing. Think Blackrock here.
The reason for MERS was to bypass paying the local doc stamps every time a security changed hands.
Now when these loans were not failing fast enough they brought in the law firms with the robo signers and illegally foreclosed on million of families. Here in Florida they even foreclosed on families with no mortgages.
Now when investors woke up they sued the banks in droves and this is when Paulson went to Congress claiming if they did not bail the banks out the whole system would collapse which of course it would not have. It was all intentionally created and the net is full of people saying the coming collapse would be worse than in 2008/9. These idiots simply do not realize there was no crisis. Both Bear Stearns and Lehman has huge pools of these and when they went south they sued. They were denied bailout funds and eventually filed for bankruptcy. This was wall streets revenge.
For this to work the insurance firms who guarantee chain of custody had to be involved as many with MERS loans sold before the values dropped. How could they give a clean title when the note had been separated from the mortgage? They in fact can’t.
This also included the FED, corrupt judges, corrupt DOJ, corrupt FBI and corrupt Attorney Generals at the state level. No one stepped in to help the families.
There is a guy who about 3 to 4 years ago made a series of videos about his MERS loan from BoA. He did extensive research and stopped paying the mortgage. when the bank started calling he just kept asking ” send me the current chain of title}. They couldn’t. When finally foreclosed on he hired an attorney and at the first hearing he ask the bank to produce all documentation which they couldn’t. This lasted over two years while he was living in the home rent free. One day he gets a call from his attorney and said the bank has made an offer. If he signs over the property he would receive $10,000, clean up his credit pertaining to the loan and pay all legal fees which he accepted.
Now of all things this separation of note from the mortgage dated back to a Supreme Court ruling made in the late 1700s and since the court has refused to hear any challenges to the original ruling.
There is always a guy somewhere who ….
This guy is a sign of hope to all of us, a statement that all is not lost to us after all.
Oh happy day.
KPMB commits audit FRAUD, GE commits earnings FRAUD, and as we speak the DNC is arguing in court that the election FRAUD they committed against Sanders to rig the primary elections for Hillary is a constitutional right per the U.S. constitution.
See a pattern?
Meanwhile, ordinary citizens who note at public forums that their elected officials are accepting brides from corporations in return for policy and votes, are arrested and removed from speaking (see Jimmy Dore’s latest). I guess that is not a right protected by the constitution.
Anyways, as a long time Boston area resident I hope Boston didn’t give a way TOO much of our tax dollars to get the fraudsters at GE to bride it into relocating it’s head quarters to Boston.
I was financial officer in a medical device company that went public on the NYSE in 2004. We had a killer product but to make it financial viable we needed Medicare to set a high rate for reimbursement. In comes Richard Blum, Senator Feinstein’s husband, who invested in the company two years before going public. Medicare gave us a reimbursement rate higher than we could ever image and Blum later cashed out for 200 million! That is how the Feinstein and Pelosi and their ilk are worth millions.
How did they keep all of this under wraps for so long? I knew something was up when Immelt annonced retirement and then soon after moved his exit date up considerably and was out the door.
All of the directors should be held accountable as well as the CEO, CFO, etc.
But of course they won’t. Most of this is business as usual wherein the government continues to turn a blind eye to bigco malfeasance.
No one other than a Florida fisherman has ever been charged for violating SOX. Laws are only for the little people.
The Citizen’s United decision was a coup d’etat by corporations. The government is purely an arm of corporate America at this point. With the labor market tightening, expect to see retirement ages increased and welfare tightened up to increase the labor pool and lower wages.
I agree regarding your implication that the Citizens United ruling was just plain out of whack-a-doodle land. And to express what I truly think of those Ivy League educated Supreme Court justices who tell us corporations are people via this ruling and other rulings, and use such reasoning to nullify laws to regulate corporations, would probably get me banned from this site, not mention the comment getting passed moderation.
Oh, no!!! Are the FED hikes starting to single out large losers who were floating on almost free credit to avert/postpone their debt? Or did someone figure out GAAP is not a clothes brand? :)
GAAP is about as useful as The GAP was or is LOL. Its as useful as a Big 4 Audit LOL
Why should anyone look at financial results? Anymore ; they’re guesstimates subject to change and revisions at any future date.No hard data in which to place your bet.
Hi Tom,
Yes to everything you say. But think of these financial numbers as being like the reflections on the wall of Plato’s cave, reflections of reality, perhaps misleading–but it’s all we’ve got as “outsiders”. And people oftern learn a great deal from these “reflections”.
This is what happens when corporations are run by busisness school graduates
I no longer have CNBC on cable to see what they have to say about this latest news. They are probably claiming, “It’s only a flesh wound.”
Briliant Petunia LOL!
They just copy and pasted the Financial Times article, lazy job but they don’t seem want to put their 2 cents in on it.
GE owned NBC and a lot of people there probably still have a boatload of GE stock in their pension plans. You won’t hear a peep out of them that’s negative about GE.
Well, depending on how you look at it, GE traded (only) 144.5 million shares today. Somebody’s buying.
Crony Capitalism…privatizing profits and socializing losses for over 100 years!
What is interesting is how many of the 99%ers support/defend this kind of capitalism.
Many of them are getting a monthly check in return for their vote.
You left a lot of 0’s off.
Creative accounting strikes back! Looks like I was right about the end of cheap credit being a wake up call and causing Zombies to finally die for real.
A Zombie is a company that operates at a loss and keeps going by taking debt and liquidating assets & reducing costs without ever ending on the Black.
A Zombie Unicorn is a “Unicorn” that’s also a Zombie company but somehow can keep going by taking debt and taking debt and taking debt, see Tesla and Netflix.
Of course I don’t think the term “Zombie company” wil catch on, but whatever.
Write down the current price of GE stock and the date on a Post-It note and stick it on the edge of your desk.
Wait one year, and marvel at how the most hated stock somehow seems to make money for the intrepid investor that is willing to wade in now when the masses are convinced that there is no hope for the company.
This issue isn’t so much about GE, but behavioral economics. GE bulls are like unicorns at this point.
Full disclosure, I bought GE and am down 20%, but a year from now people will have forgotten the current troubles of GE, and hopefully I will sell with a long-term capital gain that beats the S&P 500 return during that interval.
“Get ’em when the’re cold.”
I’ve see blue chip recoveries before, but not when there is so much debt to contend with. These stocks usually keep going down until there is a debt restructuring. Best to stay away in my opinion. The overdue recession hasn’t even started yet.
Bobber, you are probably right, but to make it interesting, lets put a $200 wager on it. Write down the GE stock price and todays date, and if in one year it is lower (not including splits) I will donate $200 to Wolf Richter so that he can continue with his excellent work on Wolfstreet. If you lose, then you can do the same. Are we on? This will be a very mini version of Warren Buffet’s bet with the hedge fund guy, but off by a few decimals.
The fact that there is so much negative sentiment on GE makes me all the more confident that all the bad news is already baked in to the price, and one year is a lot of time to get their house in order.
Hi wisil and Bobber,
Thanks. Now we’re on the right track. If I understand this bet correctly, this is an awesome bet. IF GE is lower in one year than it is today, wisil is going to donate $200 to WOLF STREET; and if it is higher, Bobber is going to donate $200.
Did I get this right? Bobber?
For future reference, here’s the donate page:
https://wolfstreet.com/how-to-donate-to-wolf-street/
Even we skip the donation, it’s still an interesting bet :-)
At this point the only way GE can recover is if the government gives them low costs loans… again.
Hi Wisil,
What’s the “under”?
GE right now is at 14.55, so anything under that, and I will eat my hat. (Pay Wolf $200)
You are going to lose and Wolf needs to start making plans for that $200.
General Electric Aviation gives a unit cost for the GEnx turbofan at $25-28 million (no support). The varying price is due to different versions being certified for different airliners.
Rolls-Royce offers its direct competitor, the Trent 1000, at a unit cost of $42 million, but including support.
How in the world can GE sell a modern, large diameter turbofan at such a low price? The answer is in the title at the top of this page: GE has been selling these engines at a large loss.
Differently from Rolls-Royce, which dutifully informed investors how much the Trent 1000 development has cost the company to date ($7.7 billion in December 2017 dollars) , GE has made extremely difficult to dig out details about how much the GEnx program has cost to date, But the former “Bluest of the Blue Chips” companies will happily inform you (and anybody with Internet access) they estimate over the next 25 years they’ll sell Boeing alone $40 billion worth of GEnx engines. Sadly they do not inform us if they’ll keep on losing money on said engines at the present pace.
Commercial aviation is cutthroat business, but GE may have committed a critical mistake here by lowballing one of its traditional cash cows: should the GEnx start being sold at cost (no profit but at least no losses) it would add at least $10 million to the unit price of every GE-engined twinjet. At that point opting for the more expensive R-R unit (which offers better “hot and high” performances) would become a serious option, which would make even more sense for customers mainly operating in “hot and high” areas, such as South Asia.
Watch those $40 billion in projected sale evaporate if GE is forced to hike the GEnx unit price.
And this is just the tip of the iceberg. GE won’t go under: it’s just too big and too solid an engineering company.
But it needs a CEO with the political capital to expend to undo many of Jeff Immelt’s decisions, which were aimed exclusively at goosing stock prices, even if this meant reporting billions in red ink down the road.
There’s still a window of opportunity during which stock markets will still be high before the interest-rate-induced hangover kicks in.
Use it wisely.
Peeps should interview Jack Welsh who retired at the exact market top of GE in 2001.
This calls for some top shelf non-GAAP accounting to explain. Think ‘Captain Underpants’, but more professional … someone you would trust your money with.
Are bonuses to be clawed back? I didn’t think so.
Since all the bad news is baked into the price, any news that is less than bad, or is possibly good, or maybe projects improved earnings, calculated based on the latest “guesstimate” by the company, using the most up to date lies….I mean figures, should cause a breakout to a new higher stock price. (Hysterical laughter….)
Of course, maybe the GE accountants are all smoking legal pot imported from Colorado, to deal with the stress of all these numbers and their various permutations…
Take note about its secret bailout in 2009. If not for this, GE would have been forced into bankruptcy then! It was already past the point of no return. And that’s when many of their receivables were irreparably harmed.
To all the hardy souls that have held on since the days of Jack Welch: This is what “The World’s Greatest Manager” has wrought. The market value of your investment today is less than it was in 2000. And GE wasn’t thrown in the trash heap after the dot.com crash.