GE: Expect More Ugly Surprises Before Turnaround Is Done
(Bloomberg Gadfly) -- Skeletons keep tumbling out of General Electric Co.'s closet.
The industrial conglomerate on Tuesday said it would take a $6.2 billion after-tax charge in the fourth quarter related to shortfalls in a legacy insurance business within its GE Capital division. GE will also make statutory reserve contributions of $15 billion over seven years to help cover elevated claims.
The magnitude of the charges announced on Tuesday is a nasty surprise and a sharp rebuke to GE investors who had hoped the worst was behind the company. It's been a near-constant onslaught of bad news, from the dramatic reduction in GE's 2017 guidance in October, to the slashing of its dividend in November and now this.
The latest insurance charge -- related to holdover assets from a business GE divested between 2004 and 2006 -- begs the question of whether more could still be coming. If the previous management could miss the challenges in the company's power business, its cash-flow shortfalls and GE Capital liabilities, what else did they underestimate and at what point do shareholders decide to hold those departed executives accountable?
GE fell as much as 4.1 percent on Tuesday morning, erasing a decent chunk of its gains so far in 2018. While this latest batch of bad news is largely confined to GE Capital, details about the insurance charges have ramifications for the company's broader challenges and turnaround efforts.
First, the company's fourth-quarter charge will climb to $7.5 billion after taking into account the impact of new U.S. tax legislation and a 21 percent rate. GE is among the select few industrial companies for whom the tax bill could be more of a penalty than a benefit. The company's consolidated effective tax rate was negative 5.1 percent in 2016.
Additionally, while the forced repatriation of its undistributed foreign earnings may ultimately increase its financial flexibility, the company in the meantime is still looking at a liability. On Tuesday, GE said it expects a charge of $3.4 billion in connection with the repatriation of overseas earnings and a revaluation of deferred taxes. The impact on its cash should be small, it said, as existing tax attributes offset the repatriation payments. But it's still a headache at a time when GE has enough problems as far as cash is concerned.
Along these lines, GE can't borrow money from its industrial businesses right now to help plug the holes in these legacy insurance assets. The company is expecting between $6 billion and $7 billion in industrial free cash flow this year, although analysts say the real number is closer to zero if you account for pension liabilities and capital expenditures as other industrial companies would. As such, to help bring leverage at GE Capital down to the targeted level, GE will have to further shrink that business.
It's planning on reducing its energy financial-services business to less than $5 billion of assets by 2019, down from about $10 billion now. Its industrial finance operations will be whittled down to about $15 billion of assets, from $26 billion currently, over the same time period. That risks being dilutive both to earnings and to the valuation prescribed to that business in any sum-of-the-parts analysis -- something that will be increasingly important as the company contemplates a more radical breakup.
At the risk of sounding like a broken record, there is still a ways to go before GE becomes a company worthy of investors' trust.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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