General Electric Co. (GE) - Get Report shares sank by nearly 3% on Tuesday, Jan. 16, after the industrial conglomerate said it will book a $6.2 billion charge to its fourth-quarter earnings linked to weakness in its North American Life & Health insurance portfolio.
"Needless to say at a time when we are moving forward as a company, I am deeply disappointed at the magnitude of the charge in this legacy portfolio," Chief Executive John Flannery said during a conference call with analysts.
Flannery, the company's eleventh CEO, said that the after-tax GAAP charge of $6.2 billion will be $7.5 billion at a 21% tax rate, which will be reflected in GE's fourth-quarter financial results that will be released on Jan. 24 at 8:30 a.m. EST.
The Boston-based company also said that GE Capital, its financing arm, would make $15 billion payments over the next seven years in order to shore up NALH's statutory reserves, starting with around $3 billion in the first quarter of this year, and approximately $2 billion annually from 2019 to 2024. GE Capital will also suspend its dividend to GE "for foreseeable future," the company said.
To be sure, Chief Financial Officer Jamie Miller said that the annual contributions from 2019 to 2024 should not affect the company's 2018 capital allocation plan.
The charge and payments come as a result of GE's comprehensive review of its insurance reserves. "This was a rigorous process involving complex factors and estimates relating primarily to long-term care policies written by primary insurance companies and reinsured by NALH," Flannery said in a statement.
Flannery also hinted at further organizational restructuring efforts, noting that he's been examining the portfolio and structures to make sure that businesses can have "the organic and inorganic and strategic flexibility to maximize the business potential."
"So, as I look at the company and continue to evolve along this continuum, I believe there could be different structures that can achieve all of those objectives and that we need to examine those," Flannery said.
"You've already seen that with Synchrony and Baker Hughes, those are two examples of how that might work and that's something we'd consider for other parts of the company, whether that's power, aviation, or healthcare," he continued.
Shares of GE fell by 2.8% to $18.25 at 11 a.m. EST on Tuesday. The Dow stock has lost about 20% of its value in the last three months.
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Stifel analyst Robert McCarthy said in a Jan. 16 research note that GE's moves were "largely telegraphed and unsurprising, but ungood." The company remains an industrial free cash flow story with limited upside potential, McCarthy added. Stifel rates GE shares at Hold with an $18 price target.
Prior to Tuesday's announcement, Deutsche Bank analyst John Inch estimated that GE could owe up to $9 billion in new taxes. Deutsche has a Sell rating on GE stock.
Separately, Moody's Investors Service affirmed the ratings of GE and GE Capital following the update on the insurance portfolio review, saying that the outlook is stable.
"The stable outlook of GE's ratings is predicated on Moody's expectation that the decline in revenues in GE's Power and Transportation segments will be offset by growth in other segments, most notably Aviation, resulting in modest organic revenue growth and EBITA margins of approximately 16% in 2018, calculated with GE's 62.5% ownership of Baker Hughes (BHGE) - Get Report on a deconsolidated basis," the ratings giant said. "GE Capital's stable ratings outlook reflects GE's strong support of GE Capital and the benefits to financial stability of the company's strong liquidity management."
Shares of GE, which has a market capitalization of about $156 billion, have been under intense pressure amid perhaps the biggest challenge in the company's 100-plus year history, which were amplified by the slashing of its dividend -- for the second time in a decade -- as new CEO Flannery confronts the reality of less consistent cash flow after selling most of its lucrative lending business.
The company, which last reduced the quarterly payout in 2009, will return 12 cents a year to shareholders instead of the 24 cents it paid in the three months through September, according to a statement prior to the investor meeting on Nov. 13, when Flannery detailed his revised strategy for the digital manufacturer.
Last month, GE said it will cut more than 2,000 jobs in Europe as part of a worldwide reduction in its workforce that could reach 12,000 in an effort to cut costs by around $3.5 billion over the next two years.
GE has told employees in Germany that around 1,600 people will be laid off, along with around 1,200 in Switzerland. The global figure may hit 12,000, GE said, a figure that would equate to nearly a fifth of the GE Power workforce, amid what it called "challenges in the power market worldwide ... driven by overcapacity, lower utilization, fewer outages, an increase in steam plant retirements, and overall growth in renewables."
"This decision was painful but necessary for GE Power to respond to the disruption in the power market, which is driving significantly lower volumes in products and services," said GE Power CEO Russell Stokes. "Power will remain a work in progress in 2018. We expect market challenges to continue, but this plan will position us for 2019 and beyond."
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