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GE: Don't Be Scared About The Revisions - Here Is What You Need To Know

Cornerstone Investments profile picture
Cornerstone Investments


  • GE revealed revision to 2016 and 2017 EPS retrospectively.
  • Initial reaction on the public forum indicates investors were treating the news as an incremental revelation, which is inaccurate.
  • We break down the adjustment and educate investors of the root cause for the adjustment, which is the adoption of new accounting standards.

GE (NYSE:GE) announced earnings revision on Friday as part of their annual report filed with the SEC. There have been a few articles that reacted negatively to the announcement and argued that GE management has once again let investors down with the seemingly non-stop stream of negative news. While we have published a series of articles on GE's horrific record of dealmaking, we think readers deserve to know the facts and ought to evaluate management based on an objective view in mind.

The earnings revisions last week should really come as no surprise to investors as it was already previously disclosed by the management and was purely driven by adopting new accounting standards. No cash impact resulted and the earnings were revised for comparative purposes. GE does have many other problems as we detailed in our GE Series, however, this earnings revision is not one of them.

GE, General Electric


Nothing New Here

Some articles have incorrectly characterized the earnings revisions at GE as another ugly surprise. In fact, the earnings revision should not come as a surprise at all as the company has disclosed multiple times in its prior filings that a restatement of its prior earnings will be applied given the new accounting standards that it will adopt from January 1, 2018.

In GE's 2016 annual report, it already warned investors about the coming earnings revision as a result of adopting the ASU NO. 2014-09, Revenue From Contracts With Customers:

Companies can use either a full retrospective or modified retrospective method to adopt the standard. Under the full retrospective method, all periods presented will be updated upon adoption to conform to the new standard and a cumulative adjustment for effects on periods prior to 2016 will be recorded to retained earnings as of January 1, 2016. Under the modified retrospective approach, prior periods are not

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Cornerstone Investments profile picture
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Comments (61)

CEO is working hard with his team but he must deliver a good Quarterly report before real money gets back in!
He may be assuming that Transportation will be sold. If this is the case, one needs to know what cash will be received in the sale and what GE will do with it. By the way, I have written to the CEO of GE and have been contacted by their executive of shareholder relations to discuss answers to the questions I have been asking in the SA comments. It has always been a point of contention that the proceeds of asset sales in the past were advertised as being used to provide shareholder value in the form of dividends and share buy backs. I think we, shareholder’s, have not held management’s feet to the fire in that assets that were making money have been sold and proceeds put in acquisitions and initiatives that do not replace the revenue and profit that accompanied the assets sold.
To Old Wizard -

You post is excellent!!

It would be very desirable to have a simple, 1-page summary of the $200 Billion in asset sales in 2015 - 2017. We do know that $29 Billion of the proceeds went for buybacks. But everything else is a mystery - what were the total proceeds??.....just because an asset is "worth" something does not mean that is what the actual sale price (proceeds) was done at.
James Coleman profile picture
Hi OldWiz:

To my knowledge Tusa did not provide "color" to his "post-divestiture FCF"

In my view it is an exercise in futility to "drill down" with any rigor due to the reality we simply do NOT know what, when or for how much any parts, large or small, GE will divest.

Flannery has said a lot of contradictory things- re BH et al, and there's been news reports their "exploring" various sales but that's about it.

What I find most curious is WHY Tusa lowered his PT significanly not long after the 2/18 Barron's article.

What could caused him to go from $14 to $11 (a 20+% cut)??

To me he's putting his successful track record re GE stock on the line for no particular reason.

Unless he thot Inch was going to $12.50 or something.

Any thots?

Thank you.
James Coleman profile picture
Hello again OLdWiz:

I'm sure IR wouldn't say this, BUT why Flannery has announced $20 B in asset sales within 2 yrs. is because of their cash situation.

Div. and buybacks are the least of their concerns in my view.

I also believe that many SA posters do not fully appreciate the time-consuming and costly legal, accounting et al expenses involved.

And whether GE gets their "value" vs. what a "willing buyer" will pay
AND THE TERMS remains to be seen.

BTW if you talk to IR again, will you please ask them WHY the recent sale to a former GE employee was not explained in terms of HOW much, and on what terms?

Absent that VIP info, how do s/h know it was "an arms-length" transaction?

Answer- they don't.

So much for accountability and transparency Mr. CEO.
AutoTech profile picture
Impairment charges + asset sales (disposals) far below current valuations make this stock radioactive above $10 as Power will deliver even uglier things in 2018 than planned, expected.

Cash flow in 18 will maybe be $6B and quite a bit of that will pre-fund the pension problem.

No growth in cash for the foreseeable future --- u g l y.
To AutoTech -

"Cash flow in 2018 will maybe be $6B and quite a bit of that will pre-fund the pension problem."
......................... ......................... .........................

Really?? Really?? The following is to clarify -

Industrial "Adjusted Cash From Operating Activities" (CFOA) is estimated at $9 - $10 Billion in 2018.

Industrial "Free Cash Flow" (FCF) is estimated at $6 - $7 Billion in 2018.

The above data items are shown in the 10-K (page 103).

The above data items are NOT the source of pre-funding the pensions.

The pre-funding at $6 Billion will be "borrowed funds" ( = added debt) as stated by Flannery in his presentation (Nov 13th) (page 15).
AutoTech profile picture
We use free cash and that will come in around $6B in 2018. I said "quite a bit" of it will pre-fund the pension problem. They're borrowing because they're OUT OF CASH with a 95% payout ratio on the divy. Cash flow looks miserable for years to come as well.

Radioactive above $10 - JPM just said an $11 target (even that's high).

To AutoTech -

Yes, you did say "quite a bit" of "Free Cash Flow" (FCF) will pre-fund the pension.

And you are WRONG. How many times do you have to be told that GE (Flannery) is borrowing the $6 Billion to pre-fund the pension??

And NONE of the Industrial FCF is being used for the pension. None!!

2) The payout ratio on the dividend is NOT 95% as you've posted. Using the range of Industrial FCF at $6 - $7 Billion in 2018, the dividend ($4.2 Billion annually) payout ratio is from 60% - 70%.

Check your data on how you got the wrong number.
Things will get better in H2
Good article. Your pointing to a possible impairment in power GE to overvaluing of Alstom assets might be seen as a surprise, but I doubt it. I believe that Immelt didn’t want to know the downside risks, because the community saw the Alstom acquisition as a real coup and Immelt’s bonus was highly dependent on this acquisition’s completion. The question remains: how much was Flannery’s bonus dependent on thus acquisition since he was credited with being instrumental in affecting it. Should a write-off occur, will it be characterized in GE financials as another one-time cost. How many times has one-time costs been part of the GE financials? Constant buying and selling of assets, discontinuance of operations, false starts like the solar panel manufacturing facility, hiring many software people then changing the strategy and laying off salesmen, etc all give rise to “one time” costs that because of their regularity might better be characterized as simply costs of doing business in the manner in which it has been conducted for much of the last 20 years. Haven’t heard whether or not this will change for the better under the new management regardless of what accounting standard is applied to revenue and income time recognition of equipment and maintenance contract sales.
Cornerstone Investments profile picture
Fair point. Most companies treat impairment as one-time which is appropriate in our view. Agree with the complexity of GE financials and the pervasive use of non-GAAP measure which makes it hard for investors to evaluate and understand the underlying business.
James Coleman profile picture
Old Wizard:

Very well said, as per usual. It's interesting to me the ALSTOM "deal" was at the time was heralded as essentially the deal of the century for GE as a GOOG search will reveal.

Cramer's comments then are particularly ironic now.

And Flannery was indeed intimately involed as a picture of him and Immelt in France to visit their Prez I posted shows.

*Perhaps* that's why GE's silence is defeaning re ALSTOM until the
eventual day of reckoning.
Is Warren Buffett buying?
Cornerstone Investments profile picture
It's a rumour now, nothing announced yet
It’s a clear buy at those levels
Short squeeze will do the rest
12 US-Dollar will not happen
“They adopted new accounting standards” . . . . . . . in other words they had none before?
Cornerstone Investments profile picture
the word "new" means there were "old" standards before.
I have stopped reading all those write-ups on GE. The bottomline is it does have many problems, thanks to the previous CEO Inmmelt, which are being resolved gradually by the able new management, kind similar to the VRX situation. GE is not going to be bankrupt, but to reverse itself to its glorious past in two to three years by keeping its profitable core divisions and sell those unproductive divisions as the CEO is doing now openly and decisively. If one can expect its share to return conservatively to $35, those waiting for buying at $10 to $12 are meaningless exercises and more than likely unfulfilled expectation. When Warren Buffett even stated recently in CNBC he might be interested in buying GE, you know the bottom is here. I am long GE and IBM big time to compliment other high flyers, ADBE, LRCX, SHOP, SQ and WYNN, among others in my portfolio.
When it comes to GE, here’s what you need to know.
Where’s the door!
GE-Why bother?
James Coleman profile picture
Are you suggesting Flannery is going to take down Immelt and Welch for fraud?
It’s obvious that all three (and Sherin) are up their ears in corporate
malfeasance. GE shareholders should demand a “special prosecutor” to investigate these crimes. (If Shkreli went to prison, then Immelt et. al. shouldn’t be far behind.) If I had the resources, I’d do it myself.
They did not put a bounty on a lock of Clintons hair :)
Shkrei was charged (and convicted) with being "engaged in multiple schemes to ensnare investors through a web of lies and deceit". That's written all over Immelt and Welch.
GE managers call earnings restatements “changes in accounting standards”. The rest of the world calls it “fraud”. If Immelt has to answer in the courts for corporate governance fraud, then Welch is in trouble also. Welch knew all about the LTC insurance claims that GE recently disclosed. (Most of those contracts were written during Welch’s tenure.) Flannery has been counting beans at GE for thirty years. Flannery knows all about fraudulent accounting at GE. He was right there.
ShineInvest81 profile picture
Waiting for it to drop like the Titanic then make hay.
ckarabin profile picture
The books are the books! The books tell you the value of the company and its income. It's always funny when a company revises down its income and then tells you "Don't worry, our income statement does not really explain what's happening at the company!"

What?!!!!!!!!! And so what that cash flow is unchanged! Income is what matters. Cash flow can be just recovery of investments, you still need to make a profit on those investments.
But cashflow is visible while “income” not so much.
To ckarabin -

"Don't worry, our income statement does not really explain what's happening at the company!"
......................... ......................... .........................

Would you provide the link or reference as to where it shows the above statement?? Was this really made by GE?? Or did you make it up and then to add "validity" to it, you conveniently put quotation marks "...." around it?? which of course, as you know, is not ethical and very misleading.
falconetti aanthony profile picture
ok ..a bit late. fact is GE's " aggressive accounting" made the company look stronger than it was..and that , in turn, manipulated the stock price...amazing how creative white collar crime descriptions can be " aggressive accounting" " mis spoken" ..I prefer deceptive accounting and lying to shareholders..but all are a well dressed, well educated lot, mt blanc pens, superior vocabulary..but when you hit them with the bright lights, they still scurry into hiding like roaches.

really, the damage is done.. GE has lost investors alot of money..and jack Welch and Jeff Ommlet have lost as well.. maybe both should be in jail.. but they are not.

the mop up continues...
g.dimit profile picture
These type things in Finance you might be called CREATIVE ACCOUNTING With other words
Manipulating the Numbers to look a lot better.

This type of Accounting make me Suspicious WHAT THE COMPANY TRY TO HIDE?

Possibly more Information should be come available the upcoming a few weeks
Don Beynon profile picture
Does the restatement really matter.. The cash to run the business has not changed. In my opinion this is not big deal.
James Coleman profile picture
Restatements negatively affect GE's financials, and makes them more vulnerable to a credit downgrade.
ASC 606 was instituted for the very good reason that many companies were playing fast and loose with the way they accounted for partly-completed projects, with enormous exaggerations of the percentage of completion actually being achieved with specific projects, and thus being interpreted as "earned income" when there was little income, little earned and even less actually paid for.

A company which had been half-way honest in previous years would therefore see little need for a major recast of its prior-year accounts, to accommodate the new (and long-heralded) ASC 606 degree of honesty and accuracy. On the other hand, the more lascivious the previous exaggerations had been, the more the fudged numbers would need to be swallowed into a one-time charge against earnings.

I take the exact opposite view to that held by Cornerstone Investments. I think the massive recast of GE's accounts are a huge embarrassment to the company, to any remaining members of the prior BOD, as well as to the auditor. And of course it raises yet more questions about other shenanigans which may be revealed in GE's current and past accounts.

The size of the adjustments tells its own story, and investors need to recognize the (sad) significance of it for their investment in GE stock.
James Coleman profile picture
I completely agree with you as to WHY GE shoes to go this route.

Why they didn't choose other options available to them I believe is related
to the SEC probe, and their more than a decade long creative accounting practices.

GOOG this accounting change and you will find many more co's that chose an option other than GE.
Excellent analysis and article, thanks for the clarifications.
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