General Electric Co. (GE) on Friday said it was restating earnings from 2001 through the first quarter of 2005 after an internal audit found that its accounting for certain currency and interest rate derivatives did not comply with accounting standards.
GE (search) also increased its outlook for second-quarter earnings on strong orders and the sale of an insurance business.
GE, the world's largest company by market value, said the restatement would result in a total noncash increase of $381 million for the entire period, which equates to less than six-tenths of 1 percent of its earnings over that time.
GE, whose businesses range from financial services to the manufacture of jet engines, said the restatement lowered 2005 first-quarter earnings by $78 million, or 1 cent per share, to 37 cents per share.
Tim Ghriskey, chief investment officer at Solaris Asset Management, said the restatement is a minor issue, because it does not affect GE's stated cash flow.
"The market focus seems to be on the guidance for the second quarter, which is certainly favorable, and on the company's comments that the businesses are strong really across the board," said Ghriskey.
"Those are the big issues here," Ghriskey added.
GE Chief Executive Jeff Immelt (search), on a conference call with analysts said he was "disappointed by the restatement, but the GE business outlook is unaffected and it remains robust."
Immelt delivered a bullish outlook for GE's businesses and said April orders were strong, rising 11 percent in the second quarter so far. GE nudged its second-quarter earnings outlook higher by a penny per share.
That heartened many investors. "It kind of goes hand in hand with a decent economy, jobs growth, all those kinds of things," said Mike Binger, co-manager of the Thrivent Large Cap Growth Fund, which holds GE shares. "It's just encouraging what they're saying."
Immelt said the "vast majority" of the higher guidance comes from the planned sale of GE's medical liability insurance business, Medical Protective Corp. (search), to Berkshire Hathaway Inc.'s (BRKA) National Indemnity unit.
The sale of Medical Protective would contribute to earnings with an after-tax gain of $75 million, Immelt said.
Shares of GE rose as much as 20 cents to $36.05, before retreating to trade down 2 cents at $35.83 in afternoon trading on the New York Stock Exchange.
GE said it discovered in an internal audit that its accounting for certain transactions to protect its financial services business from changes in interest rates and currency exchange rates did not comply with a set of complex accounting rules called SFAS 133.
These rules for derivatives and hedging activities force companies to book as a gain or a loss the change in the value of derivatives when it is out of sync with the underlying value of the asset.
GE said it received a letter in January from the Boston office of the U.S. Securities and Exchange Commission (search) requesting that GE voluntarily provide documents for an informal investigation it was conducting.
The company said it plans to cooperate fully with the SEC.
"This is not about fraud or making metrics or anything like that. This is about a mistake that is judged through an ever-changing lens," said Immelt.
The accounting pertained to "match funding" or how GE uses derivatives in the form of options, swaps or forwards to mitigate possible volatility from a change in interest rates, currency rates of commodity prices.
In March, GE cut more than $1 billion off its originally reported operating cash flow for 2003 and 2002 in response to concerns from U.S. securities regulators that some companies may not have properly classified financing they provide to customers for purchases.
At the time, GE downplayed the revision because its investors do not focus on consolidated cash flow. The restatement on Friday was unrelated to this previous revision.
The restatement added $226 million to GE's earnings in 2004, $234 million to earnings in 2003 and $49 million in 2002, while it had a $50 million negative impact to 2001 earnings.
Standard & Poor's said its "AAA" rating on GE would be unchanged by the restatement.
For the second-quarter, GE sees earnings per share at 43 cents to 45 cents, a penny higher than its previous range of 42 cents to 44 cents. Analysts are forecasting second-quarter EPS of 43 cents, according to Reuters Estimates.
The company maintained its earnings outlook for the full year of $1.78 to $1.83 per share.