General Electric Co. said Monday it plans to simplify the way it reports financial results, admitting it has been hurt by its own accounting complexity.
GE still plans to use its own customized metrics to gauge its financial performance, as opposed to using only measures calculated under standard accounting rules. But the company said it wants to be more transparent and will focus its reporting on more-streamlined measures that emphasize the amount of cash the company is generating.
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"Simplification of metrics is going to be a huge focus going forward," Chief Executive John Flannery told investors. "Complexity has hurt us."
While many companies report their own customized measures of performance in addition to standard ones, GE is known for reporting multiple measures, stripping out various costs and adjusting for different changes and assumptions in its business -- a practice that often makes its results hard for investors to follow.
Now, GE will change its top earnings metric to "adjusted" earnings per share -- excluding gains, restructuring and nonoperating pension costs. That is a change from the company's current focus on what it calls "Industrial operating + Verticals" earnings, which excludes the pension costs but adds in the results of businesses from finance arm GE Capital that the company plans to retain after divesting most of it.
"You want this to be easier to understand and more in line with our peers," said Jamie Miller, GE's chief financial officer.
The new adjusted-EPS metric also incorporates accounting changes that will take effect in January and broadly affect how companies book revenue.
GE's new metric would give the company roughly the same level of expected earnings this year as under the current metric. It said 2017 "adjusted EPS" would be $1.04 to $1.12, compared with $1.05 to $1.10 as calculated under the "Industrial operating + Verticals" metric.
In addition, GE will now use free cash flow as its primary measure of cash flow, changing from "Industrial CFOA," or cash flow from operating activities. "Free cash flow is a much more penetrating metric," Mr. Flannery said.
Free cash flow will exclude deal taxes and funding for GE's pension plan -- GE already provides an adjusted version of Industrial CFOA that excludes those now. It will also take into account the company's spending on property and equipment, as well as capitalized software.
Under the new method, industrial free cash flow for 2017 would be $3 billion, compared with $7 billion as calculated under the current Industrial CFOA metric. The difference is mostly due to $4.6 billion in property and equipment spending and capitalized software.
The company didn't directly address whether it plans to scale back the array of financial metrics it reports. Ms. Miller said more changes in GE's financial reporting will be coming throughout 2018.
But she defended GE's basic practice of using "non-GAAP" metrics rather than relying solely on measures that comply with generally accepted accounting principles. That's "a fairly common way" to do things, she said.
GE's changes in GE's financial reporting are part of a package of streamlining and retrenchment steps that the company unveiled Monday, including a 50% cut in its dividend and a refocusing of the company around its core business units of aviation, heath care and power.
GE also said it would reduce the number of metrics it uses to gauge annual bonuses and incentive compensation for its executives, as part of a streamlining of its executive-pay plan. Currently the company uses four to five metrics to help determine how much executives will receive in bonuses and incentive pay; that will be reduced to two to three metrics, GE said.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
(END) Dow Jones Newswires
November 13, 2017 16:35 ET (21:35 GMT)