General Electric Co.’s new chief executive officer got off to a rocky start with Wall Street as the company revealed an expanded accounting probe by U.S. authorities.
The Securities and Exchange Commission is expanding its probe of the company’s accounting to look at a $22 billion charge in the power-equipment unit, the company said Tuesday as it reported earnings for the first time since CEO Larry Culp took the reins. The Justice Department is also examining the writedown, which GE first warned of on Oct. 1.
The probe adds to the pressure on GE, which is already contending with one of the deepest slumps in its 126-year history amid cash-flow shortfalls and declining demand for its gas turbines. Culp, who was appointed in a surprise announcement Oct. 1, also unveiled the first steps of his turnaround plan, with a major dividend cut and a reorganization of the company’s power division. He’ll also have to deal with federal investigators as well.
“Yes, it’s a surprise and, yes, they slipped it in” during the call, said Karen Ubelhart, an analyst at Bloomberg Intelligence. “But we just don’t know how big it could be.’’
The shares fell 2.3 percent to $10.90 at 9:41 a.m. in New York after sliding as much as 5.9 percent for the biggest intraday drop since May. GE has plunged 36 percent this year to levels last seen shortly after the recession in 2009. Culp’s appointment sparked a mini-rally earlier this month, but that fizzled recently.
Company Cooperation
GE said in January that the SEC was looking at accounting in the power division and an old insurance portfolio that prompted a $6.2 billion charge. The Boston-based company said it’s cooperating with the probes.
“Staff from the DOJ are also investigating these matters, and we are providing them with requested documents and information as well,” GE said in a regulatory filing.
Culp was tasked with accelerating a turnaround plan centered on cost cuts and a more-focused portfolio of manufacturing businesses. Until Tuesday, the boss hadn’t publicly addressed shareholders or offered insight into the direction he’d take, making the earnings report and subsequent conference call among the company’s most highly anticipated.
While the dividend cut was a blow to investors, it wasn’t unexpected. Former CEO John Flannery had suggested a reduction was likely, following a separation of the health-care unit in another year. Many analysts had predicted the move would come sooner once Culp was ushered in.
Culp, who joined GE’s board in April, has been visiting the company’s businesses since taking over. GE has said his comments Tuesday would include a preliminary assessment of what he’s learned but that he won’t give a thorough analysis until early next year.
The new CEO did, however, move to resuscitate the gasping power unit by splitting it in two. A unified business will combine the gas product and services groups, while a second unit will hold the portfolio of GE Power’s other assets, including steam, nuclear, grid solutions and power conversion.
The power unit’s difficulties will “persist longer and with deeper impact than expected,’’ Chief Financial Officer Jamie Miller said. As a result, GE will miss its full-year target for cash flow by a significant amount, she said.
Third-quarter sales plunged 33 percent in the operation. The division has been hampered by a broad market slump, exacerbated by GE’s ill-timed 2015 acquisition of Alstom SA’s energy unit for $10 billion. More recently, GE disclosed that its flagship gas turbines are suffering from an oxidation issue.
Sales Decline
GE Aviation, one of the bright spots for the company, boosted sales 12 percent as it rolls out a new engine for narrow-body commercial jets.
Total sales dropped 3.6 percent to $29.6 billion, GE said in a statement. Adjusted earnings fell to 14 cents a share, well shy of the 20-cent average of analyst estimates compiled by Bloomberg.
