GE Shows How 'Black Box' Assets Boost Profits

By Michael Rapoport Features Dow Jones Newswires

General Electric Co. lifted the veil slightly on a part of its accounting that analysts have said was too opaque, spotlighting how changes in one group of its assets help to lift profits.

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The company provided new details about its so-called contract assets in its latest quarterly report filed late Monday. These are assets based on revenues GE books on long-term contracts before it has the cash in hand, for things such as servicing power plants and building complex equipment like gas-power systems. That portfolio has risen 18% this year to $29.8 billion.

The catch is that the level of those assets relies in part on estimates and assumptions made by GE about how much profit it ultimately will reap from those contracts. Analysts have complained they have little insight into the portfolio and the way it contributes to GE's current profits.

The assets are "kind of a black box," said John Inch, a Deutsche Bank analyst who has been critical of GE over the quality of its earnings and disclosure.

This time around, GE said how much the increase in the portfolio boosted earnings, by $649 million in the third quarter and $1.93 billion for the first nine months of 2017, on a pretax basis. That is equal to 44% and 51% of pretax earnings from continuing operations for each period, respectively.

GE laid out the numbers in a new disclosure in its regular footnote on the assets.

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Previously, GE had reported the earnings benefit from its contract assets on an annual basis. In 2016, that was a $2.2 billion contribution, or about 24% of pretax earnings from continuing operations for the year.

So what drove the increase in value of the contract assets? GE said in the latest quarterly report that it was largely due to a $1.93 billion cumulative catch-up adjustment from higher forecast revenue and lower forecast costs on its long-term service agreements.

GE also said the assets related to those service agreements had increased by an additional $676 million because of "the timing of revenue recognized for work performed relative to billings and collections."

On GE's long-term equipment contracts, the contract assets increased by $1.33 billion because of revenue-timing issues, the company said.

GE's new disclosures are in line with new rules that will take effect in January on how companies book revenue. These rules will require companies to disclose more about changes in their contract assets.

In addition to the contract assets, analysts and investors have expressed concerns recently about other aspects of GE's accounting, such as the company's use of multiple customized earnings measures and its ability to turn earnings into cash flow.

The concerns have risen since Oct. 20, when GE badly missed Wall Street estimates for its third-quarter earnings and slashed earnings expectations for the year. The stock has declined in seven consecutive trading sessions, dropping more than 14% to GE's lowest levels in nearly five years.

GE has said it is looking at making its financial reporting cleaner and simpler. The company plans to provide more details Nov. 13 on that and other retrenchment steps it is planning.

GE is looking to sell more than $20 billion in assets and cut billions of dollars in costs. Chief Executive John Flannery has said he is reviewing whether the company can afford to keep paying its current 24-cent quarterly dividend.

Write to Michael Rapoport at Michael.Rapoport@wsj.com

General Electric Co. lifted the veil slightly on a part of its accounting that analysts have said was too opaque, spotlighting how changes in one group of its assets help to lift profits.

The company provided new details about its so-called contract assets in its latest quarterly report filed late Monday. These are assets based on revenues GE books on long-term contracts before it has the cash in hand, for things such as servicing power plants and building complex equipment like gas-power systems. That portfolio has risen 18% this year to $29.8 billion.

The catch is that the level of those assets relies in part on estimates and assumptions made by GE about how much profit it ultimately will reap from those contracts. Analysts have complained they have little insight into the portfolio and the way it contributes to GE's current profits.

The assets are "kind of a black box," said John Inch, a Deutsche Bank analyst who has been critical of GE over the quality of its earnings and disclosure.

This time around, GE said how much the increase in the portfolio boosted earnings, by $649 million in the third quarter and $1.93 billion for the first nine months of 2017, on a pretax basis. That is equal to 44% and 51% of pretax earnings from continuing operations for each period, respectively.

GE laid out the numbers in a new disclosure in its regular footnote on the assets.

Previously, GE had reported the earnings benefit from its contract assets on an annual basis. In 2016, that was a $2.2 billion contribution, or about 24% of pretax earnings from continuing operations for the year.

So what drove the increase in value of the contract assets? GE said in the latest quarterly report that it was largely due to a $1.93 billion cumulative catch-up adjustment from higher forecast revenue and lower forecast costs on its long-term service agreements.

GE also said the assets related to those service agreements had increased by an additional $676 million because of "the timing of revenue recognized for work performed relative to billings and collections."

On GE's long-term equipment contracts, the contract assets increased by $1.33 billion because of revenue-timing issues, the company said.

GE's new disclosures are in line with new rules that will take effect in January on how companies book revenue. These rules will require companies to disclose more about changes in their contract assets.

In addition to the contract assets, analysts and investors have expressed concerns recently about other aspects of GE's accounting, such as the company's use of multiple customized earnings measures and its ability to turn earnings into cash flow.

The concerns have risen since Oct. 20, when GE badly missed Wall Street estimates for its third-quarter earnings and slashed earnings expectations for the year. The stock has declined in seven consecutive trading sessions, dropping more than 14% to GE's lowest levels in nearly five years.

GE has said it is looking at making its financial reporting cleaner and simpler. The company plans to provide more details Nov. 13 on that and other retrenchment steps it is planning.

GE is looking to sell more than $20 billion in assets and cut billions of dollars in costs. Chief Executive John Flannery has said he is reviewing whether the company can afford to keep paying its current 24-cent quarterly dividend.

Write to Michael Rapoport at Michael.Rapoport@wsj.com

(END) Dow Jones Newswires

November 01, 2017 11:46 ET (15:46 GMT)