General Electric Co. (GE) recently released its third-quarter earnings, but the report has left investors and reporters frustrated. Instead of providing consolidated numbers and a balance-sheet update, the earnings release was filled with numerous nonstandard, non-GAAP numbers.
GE suggests that using non-GAAP numbers makes it easier for investors to compare results from different periods and evaluate the performance of their businesses. However, the first statement received by reporters sets the tone for how the numbers are perceived, and many reporters do not have the time to search for information in regulatory filings.
In addition to the confusing array of numbers, GE announced the upcoming spinoff of its power and renewable-energy businesses as GE Vernova. This separation is part of the company's plan to break up its industrial conglomerate structure. The spinoff is scheduled to occur at the beginning of the second quarter of 2024, leaving the aerospace business as a standalone company that will continue trading on the New York Stock Exchange under the ticker symbol "GE." The spun-off businesses will trade under the ticker "GEV."
Given this focus on restructuring, the earnings release primarily highlighted individual businesses, with consolidated numbers buried on Page 7 under the headline "Adjusted Earnings (Loss) (Non-GAAP)." This placement further adds to the confusion surrounding the report.
GE's decision to exclude consolidated numbers and omit a balance-sheet update has generated frustration among investors and reporters alike. While the company claims that all relevant information can be found in its regulatory filing, relying exclusively on this document may hinder a comprehensive understanding of GE's financial performance.
Companies' Disclosure of Non-GAAP Numbers Raises Concerns
In terms of financial reporting, companies have the flexibility to present non-GAAP numbers alongside GAAP numbers, given that they provide equal prominence to both and include a reconciliation between the two. However, a recent press release raised eyebrows as it failed to offer such reconciliation and instead highlighted adjusted numbers.
The press release included a "continuing" EPS (Earnings Per Share) figure of 8 cents, but the attention was placed on the adjusted EPS of 82 cents. The adjusted number excluded various items such as insurance, non-operating benefit costs, gains (losses) on retained and sold ownership interests, other equity securities, restructuring & other charges, and other miscellaneous items.
Additionally, the company's table showcased adjusted revenue by removing insurance revenue, which was deemed a runoff business. This decision to focus on adjusted figures rather than GAAP numbers is reminiscent of previous practices by General Electric (GE), where they would report multiple EPS figures. Such practices were criticized by MarketWatch for causing confusion and potentially misleading investors.
Critics argue that GE's emphasis on alternative metrics and the de-emphasis on GAAP numbers may be attributed to the company's restructuring efforts and lack of focus on the overall organization. However, this approach can create confusion for anyone seeking a comprehensive overview of the company's performance. Francine McKenna, an esteemed investigative journalist, educator, blogger, and commentator specializing in accounting matters, voiced concern about this practice. McKenna, who is also a former journalist and currently a lecturer at the University of Pennsylvania's Wharton School, highlighted the need for greater transparency in financial reporting.
Despite the controversy surrounding the press release, GE experienced its most substantial stock rally in two years following its publication. The adjusted EPS number and revenue both exceeded consensus estimates, resulting in Chief Executive Larry Culp expressing confidence and raising the full-year guidance during the post-earnings conference call with analysts.
Overall, while GE's recent financial results were strong, the manner in which the company presented its figures has sparked debate and raised questions about the transparency and clarity of its financial reporting practices.
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