GE is seeking to regain investor confidence as the blue-chip stock has slid to the worst performance this year on the Dow Jones Industrial Average. John Flannery, who became CEO in August, has said he'll consider all options to address problems, ranging from weak cash flow to sluggish oil and power markets. Last week, he welcomed a representative of the activist investment firm Trian Fund Management to GE's board.

Accounting may enter the spotlight after the resignation this month of CFO Jeff Bornstein, who will be replaced on Nov. 1 by Jamie Miller, currently the head of GE Transportation. She will assume control of the finances of a global industrial conglomerate that generated $119.7 billion in sales last year.

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

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

GE uses adjusted figures to highlight items that “can be controlled by management” and reflect continuing operations, the company said in a statement.

“We use these metrics internally to set operational targets and incentivize our leaders through our compensation plans, as well as externally in our investor framework,” GE said. “We believe that the focus of our ongoing operations is particularly important as we execute on the transformation of our business portfolio to focus on our core infrastructure businesses.”

Although GE stands out for the degree of complexity in its earnings reports, the company is part of a growing trend in corporate America. Almost all S&P 500 companies used some form of 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 investors by giving a more accurate view of underlying operations and stripping away nonrecurring items such as merger costs, litigation or restructuring. But it can also obscure issues by making earnings appear better than they are, said Olga Usvyatsky, vice president of research for Audit Analytics.

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

Regulators have taken notice. In May 2016, the SEC issued guidance on the use and presentation of non-GAAP metrics. The agency has also been more aggressive in contacting companies that may be in violation of the rules.

SEC Letters

In a June 2016 letter to GE, an SEC official said the company's inconsistent use of EPS labels in its 10-K filing “does not appear appropriate.” The SEC again asked GE for clarity on several non-GAAP measures in a letter this year, which was released publicly Sept. 28.

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

While Lawson declined to detail his firm's holdings, public filings indicate that the firm has been dramatically reducing its GE stake. As of June 30, Westwood owned 13,515 shares, valued at about $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 that the non-GAAP adjusted EPS number was a good reflection of what they were earning,” Lawson said. “When those two numbers sync up closer, I think there are a lot of investors who will start to take a closer look at the stock.”

From: Bloomberg News

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