Last quarter, General Electric Co. reported earnings of 28 centsa share. Also 13 cents a share, 19 cents a share, and 15 cents ashare—all at the same time.

The numbers represent profit that includes or excludes certainitems, such as pension costs and discontinued operations. Whilemost big U.S. companies release adjusted earnings that deviate fromgenerally accepted accounting principles, GE stands out for thesheer head-scratching complexity of its quarterly reports. It's oneof only 21 S&P 500 companies that release more than oneadjusted EPS figure.

The methods have created headaches for investors, who say theyobscure the company's true performance, and drawn fresh scrutinyfrom the Securities and Exchange Commission. Now, with a new CEOand finance chief in place and contending with a deepening shareslump, GE is facing calls to bring more clarity to its balancesheet.

“They have to fix the quality of earnings,” said Deane Dray, ananalyst with RBC Capital Markets. “People are beginning to questionwhat is in GE's adjusted earnings and what should it be. Investorsare not comfortable with the previous reporting, so it does have tochange.”

GE is seeking to regain investor confidence as the blue-chipstock has slid to the worst performance this year on the Dow JonesIndustrial Average. John Flannery, who became CEO in August, hassaid he'll consider all options to address problems, ranging fromweak cash flow to sluggish oil and power markets. Last week, hewelcomed a representative of the activist investment firm TrianFund Management to GE's board.

Accounting may enter the spotlight after the resignation thismonth of CFO Jeff Bornstein, who will be replaced on Nov. 1 byJamie Miller, currently the head of GE Transportation. She willassume control of the finances of a global industrial conglomeratethat generated $119.7 billion in sales last year.

“GE's numbers are complex,” said Scott Lawson, vice president atWestwood Holdings Group Inc., which oversees more than $20 billionin investments, including GE stock, as of June 30. As an investor,“you may find that is a challenge you don't want to workthrough.”

GE, which will release third-quarter earnings on Friday, reportsas many as four earnings-per-share figures, including GAAP andadjusted numbers. Since announcing a plan in 2015 to sell $200billion of finance businesses, GE has favored a metric known as“industrial operating + verticals” EPS, which excludes theperformance of divisions on the selling block.

GE uses adjusted figures to highlight items that “can becontrolled by management” and reflect continuing operations, thecompany said in a statement.

“We use these metrics internally to set operational targets andincentivize our leaders through our compensation plans, as well asexternally in our investor framework,” GE said. “We believe thatthe focus of our ongoing operations is particularly important as weexecute on the transformation of our business portfolio to focus onour core infrastructure businesses.”

Although GE stands out for the degree of complexity in itsearnings reports, the company is part of a growing trend incorporate America. Almost all S&P 500 companies used some formof adjusted metrics last year, up from about 58% 20 years ago,according to data from research firm Audit Analytics. Amazon.com,for instance, offers a non-GAAP cash-flow metric.

Companies argue that adjustments provide clarity for investorsby giving a more accurate view of underlying operations andstripping away nonrecurring items such as merger costs, litigationor restructuring. But it can also obscure issues by making earningsappear better than they are, said Olga Usvyatsky, vice president ofresearch for Audit Analytics.

“When companies present non-GAAP metrics, in many casescompanies are trying to convey management's point of view,” shesaid. “In many cases, non-GAAP metrics are higher.”

Regulators have taken notice. In May 2016, the SEC issuedguidance on the use and presentation of non-GAAP metrics. Theagency has also been more aggressive in contacting companies thatmay be in violation of the rules.

SEC Letters

In a June 2016 letter to GE, an SEC official said the company'sinconsistent use of EPS labels in its 10-K filing “does not appearappropriate.” The SEC again asked GE for clarity on severalnon-GAAP measures in a letter this year, which was releasedpublicly Sept. 28.

As GE has streamlined in recent years, including shedding mostfinance operations and focusing more tightly on industries such asenergy and aviation, investors have changed how they assess thestock, said Westwood Holdings' Lawson. Cash flow has become moreimportant as investors see discrepancies between GAAP figures andGE's adjusted metrics, he said.

While Lawson declined to detail his firm's holdings, publicfilings indicate that the firm has been dramatically reducing itsGE stake. As of June 30, Westwood owned 13,515 shares, valued atabout $365,000, down from 1.6 million shares three months before.The firm held almost 7 million shares in 2014.

“GE somewhere along the line lost the benefit of the doubt thatthe non-GAAP adjusted EPS number was a good reflection of what theywere earning,” Lawson said. “When those two numbers sync up closer,I think there are a lot of investors who will start to take acloser look at the stock.”

From: Bloomberg News

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