By Thomas Gryta
General Electric Co. slashed its 2017 projections as new Chief
Executive John Flannery started to outline his restructuring plans,
setting a goal to exit more than $20 billion of the struggling
conglomerate's businesses.
"Our results are unacceptable to say the least," Mr. Flannery
said on a conference call Friday, noting that his review of the
company is exhaustive and everything is on the table. "Things will
not stay the same at GE."
Mr. Flannery, who came into the job in August and recently
became chairman with the early exit of Jeff Immelt, has expressed
an urgency to reduce costs and rethink the sprawling company. In
addition to lowering earnings targets by a third, the company
Friday cut its forecast for 2017 cash flow by half from a July
projection.
GE shares fell 17 cents in Friday-afternoon trading to $23.41,
after tumbling as much as 7% earlier in the day. The stock had
fallen 25% this year, erasing nearly $80 billion in market value
even as the stock market has surged to record highs.
"We need to make some major changes," Mr. Flannery said. He is
focusing on shifting the culture of the company, he said, and
working with the board to change compensation plans to better align
policy with investors.
The Boston company's third-quarter earnings fell as it incurred
hefty restructuring charges, reporting a profit of $1.8 billion,
down from $2 billion a year earlier. Excluding restructuring
charges and other items, adjusted per-share earnings fell to 29
cents from 32 cents, still well below Wall Street expectations of
49 cents.
Impairments and restructuring charges during the period dented
GE's per-share earnings by 16 cents.
Mr. Flannery is slated to update investors at a Nov. 13 meeting
on the details of his strategic review. He has already been cutting
jobs, research operations and executive perks, like corporate
jets.
GE said it is looking to streamline its portfolio of businesses
by more than $20 billion in the next 1 to 2 years, without
providing details. Mr. Flannery said the company has many strong
divisions but also "a number of other businesses which drain
investment and management resources without the prospects for a
substantial reward."
The company lowered its adjusted 2017 per share profit target to
$1.05-$1.10 from a previous view of $1.60-$1.70. Analysts currently
expect earnings of $1.53 a share in 2017.
Cash flow from operating activities is now projected to be about
$7 billion, a steep revision from the previous view of $12 billion
to $14 billion, with a big part of the drop coming from the power
division, which primarily makes turbines for gas and coal-fire
power plants.
In an interview, Mr. Flannery said he was surprised with the
results from the power business, GE's largest, putting the blame
squarely on the former management of the division. He said the
other divisions of the company were "quite strong" when looking at
their orders.
"I'm disappointed in the power business. Deeply," Mr. Flannery
said, noting there was an overestimation of demand in the power
market, along with too much inventory and not enough cost cuts to
adjust to the pressures.
"We have not run the business well of late," he said. GE
expanded the division, now its largest by revenue, following the
acquisition of Alstom SA's power plant assets in 2015.
The drop in cash flow has raised persistent questions about how
the company will fund its dividend, pensions and capital
investments. On Friday, Mr. Flannery said the current cash flow
projections aren't going to be the norm at GE, but the company is
looking to balance investing in growth and paying the dividend.
He said investors should think of 2018 as a "reset year" but
wouldn't commit to the company maintaining its dividend at the
current level. Mr. Flannery had previously pledged the dividend
wouldn't change, but said Friday that his view is "continuing to
evolve."
"Expected bad. Got bad," said analyst Scott Davis, CEO of Melius
Research, noting the quarterly results raise questions about
whether the company is fixable. "Pressure to break this up just
went through the roof."
GE is ahead of its goal to cut $1 billion in industrial costs
this year, cutting $500 million in the third quarter and hitting
$1.2 billion for the year so far. Earlier this year, GE set a goal
to cut $1 billion in such costs this year and next, under pressure
from activist investor Trian Fund Management, which recently gained
a seat on the company's board.
Mr. Flannery said he would look at potential changes to the
board, which was mostly appointed during Mr. Immelt's time running
the company. "The board is big at 18 people, there is no doubt
about that, and that is one of the topics being discussed," he
said.
Incoming Chief Financial Officer Jamie Miller said the company
would simplify how it reports results. It will revise how it
measures free cash flow to be in line with others in the industry
with a "back to basics approach," she said.
Mr. Flannery already has called on company leaders to review
their divisions and plans to streamline the company's global
research efforts, which could include shutting down research
centers in Shanghai, Munich and Rio de Janeiro, people familiar
with the matter have said.
GE's revenue jumped 14% to $33.5 billion in its third quarter,
up from $29.3 billion a year earlier. Analysts had expected revenue
of $32.56 billion, boosted by a merger of GE's oil-and-gas unit
with Baker Hughes.
Oil-and-gas revenue rose 81% from a year ago driven by Baker
Hughes; without the new assets, revenue fell 7%. Revenue growth was
mixed with aviation and health care businesses expanding, but
power, lighting and transportation all shrinking. Transportation
revenues dropped 14%.
--Cara Lombardo contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
October 20, 2017 13:19 ET (17:19 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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