For GE’s savior, earnings debut is haunted by same old problems

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The new General Electric Co. looks an awful lot like the old one.

In Larry Culp’s first earnings day as chief executive officer, the company revealed an expanded federal probe into its accounting, a vastly diminished dividend and a hobbled power business. Those are the same woes that bedeviled his predecessor, John Flannery.

The grim outlook underscored a sobering message: GE’s problems won’t be easy to fix. That torpedoed hopes for a quick turnaround under Culp, who dazzled Wall Street years ago with outsized returns when he ran Danaher Corp. While his reputation sparked a mini-rally in GE shares earlier this month after his surprise appointment as CEO, the company’s third-quarter financial results on Tuesday pointed to a long slog ahead.

“Investor patience is thin here,’’ Jeff Sprague, an analyst at Vertical Research Partners, said in a Bloomberg TV interview. “We kind of waited a year for Flannery to sort it all out and we’re changing riders on the horse. There’s only so much one executive can do in a short period of time.’’

GE tumbled 8.8 percent to $10.18 at the Tuesday close in New York, the biggest drop since March 2009 as shares slid to their lowest price since April of that year. GE had already plunged 36 percent this year through Monday.

Legal Wildcard

The accounting investigations are a wildcard for GE as Culp seeks to nurse the maker of gas turbines, jet engines and medical scanners back to health.

The U.S. Securities and Exchange Commission is widening its investigation of the manufacturer’s accounting to look at the $22 billion charge that GE took in the third quarter as goodwill impairment in its power-equipment division.

The company also revealed that the Justice Department is examining the writedown, which GE first disclosed on Oct. 1 when it announced the CEO change, and other areas the SEC is scrutinizing. The Justice Department’s involvement introduced the potential for criminal charges.

“GE has floundered for a long time. The question is: why now?” said Charles Mulford, an accounting professor at the Georgia Institute of Technology. The government probably wants more insight into the company’s valuations and whether it overstated its performance by delaying the charge, he said.

Accounting Questions

GE’s accounting has been under a cloud since January, when it said the SEC was examining revenue recognition from long-term service agreements in the power unit and accounting practices at an old insurance business. That month, the company also announced a $6.2 billion charge in the insurance business and said its finance unit would have to make a $15 billion injection over seven years to shore up reserves.

The company said it was cooperating with the probes and Culp didn’t go into detail on the call. Instead, he dwelt on the company’s business outlook, praising its capabilities while outlining some of his thoughts on what GE needs to do to escape one of the deepest slumps in its 126-year history. He promised additional details early next year.

“Getting to know this company better from the inside has only strengthened my conviction that GE has considerable strengths,’’ Culp said on a conference call with analysts. “The talent here is real, the technology is special. And the global reach of the GE brand and our relationships are truly impressive. But GE needs to change.’’

Culturally, GE must focus more on customers and competitors and “less on corporate,’’ he said. The company also has to make more progress in boosting cash generation. Culp’s decision to all but eliminate the dividend will save about $3.9 billion a year as the quarterly payout falls to a penny a share from 12 cents.

Losing Power

The company also has some bright spots, such as its booming aviation business.

But Culp’s biggest operational challenge is the troubled power unit, which has been grappling with falling demand for gas turbines and declining market share. The Boston-based company in September disclosed that its flagship turbine was facing an oxidation issue that forced a customer to temporarily shut down two U.S. power plants.

The new CEO moved to resuscitate the business by splitting it in two. One unit will combine the gas product and services groups, while a second will hold the portfolio of GE Power’s other assets, including steam, nuclear, grid solutions and power conversion.

But a turnaround will take time. Chief Financial Officer Jamie Miller said the power unit’s difficulties will “persist longer and with deeper impact than expected.’’

That leaves GE with little prospects for a quick turnaround — and in a fog of uncertainty about which of its problems will be next to worsen.

“The challenge is there’s always another piece of news that seems to come out,’’ said Jeff Windau, an analyst at Edward Jones. “Now you’ve got these investigations, you’ve got the power business.’’

— With assistance from Natasha Rausch, Matt Robinson and Sophie Caronello

Bloomberg News
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