General Electric Co. is under investigation by U.S. regulators after taking a larger-than-expected charge in its finance division.
The Securities and Exchange Commission is looking at the accounting practices related to a review of a GE insurance business as well as "revenue recognition and controls for long-term service agreements" in the power-equipment unit, Chief Financial Officer Jamie Miller said Wednesday during a conference call about the company's fourth-quarter earnings.
The company is cooperating fully with the inquiry, which is in the early stages, she said. Miller told analysts and investors that she isn't "overly concerned" about the issues under scrutiny.
The investigation compounds the mess GE is sorting through after a year of management turmoil, cash-flow concerns and falling demand in key businesses such as power and locomotives. GE was the biggest loser on the Dow Jones industrial average last year, with a 45 percent tumble. Chief Executive Officer John Flannery, who took the reins in August, last week disclosed the $6.2 billion fourth-quarter charge, which is tied to old insurance policies for long-term care.
"We can't be certain that prior management purposely misled investors, but we certainly believe there were ethical lapses that deserve attention," Scott Davis, an analyst at Melius Research, said in a note regarding the SEC investigation. "The positive is that new management can use this as another catalyst to drive cultural change."
The SEC declined to comment.
In disclosing the charge last week, GE said the company's finance unit would pay $15 billion over seven years to fill a shortfall in reserves. A review of the insurance portfolio had been underway since the middle of last year.
The Boston-based company hasn't done any new business in the long-term care market since 2006. Still, it was saddled with obligations on contracts written years ago. The liabilities can swell when claims costs are higher than expected or when investment income fails to meet projections -- a problem exacerbated by low interest rates.
GE said last week that dividends from GE Capital to the parent company would remain suspended for the "foreseeable future" after the payment was halted during the portfolio review.
Fourth-quarter profit, excluding certain charges, fell to 27 cents a share, GE reported, slightly below the 28-cent average of analysts' estimates compiled by Bloomberg. Revenue was up slightly in GE Aviation, and profit rose 2.1 percent as the business boosted production rates on a new jet engine. Sales increased 5.9 percent in GE Healthcare.
The company said strength in its jet-engine and health care businesses is shoring up confidence in the forecast of $1 to $1.07 a share in adjusted 2018 earnings.
The earnings report signaled that GE is stabilizing, though the SEC probe is likely to obscure the positive developments, said Nicholas Heymann, an analyst at William Blair.
"It's rough seas, and the rough seas aren't going to calm until the regulatory concerns subside," he said. "But this ship isn't breaking apart on a reef."
Last fall, shortly after taking over as chief executive, Flannery told investors that GE's electricity-generation division had badly misjudged the market and produced too many power turbines, warning that it would take a year or more to fix the business.
Throughout the conference call Wednesday, Flannery emphasized that despite its current challenges, GE had industrial businesses that were fundamentally strong. "We have a lot to work on," he said, "but we have a lot to work with."
Much of the turnaround, Flannery insisted, could be accomplished with belt-tightening and improved execution. And he pointed to what he described as a bright spot: that cash flow from industrial operations, although down, was above expectations. The cash flow, he said, was one of the "green shoots" beginning to emerge as GE tries to reverse its slide.
Overall, GE reported a net loss of $9.8 billion for the last three months of last year. That included the big charge for insurance obligations and a separate $3.5 billion charge related to the tax law enacted at the end of 2017.
Information for this article was contributed by Ben Bain of Bloomberg News and by Steve Lohr of The New York Times.
Business on 01/25/2018