By Thomas Gryta
General Electric Co. slashed its 2017 projections as new Chief
Executive John Flannery started to outline his plans to restructure
the struggling conglomerate, setting a goal to sell more than $20
billion of assets and cut an additional $1 billion in spending.
"Our results are unacceptable to say the least," Mr. Flannery
said on a conference call Friday, noting that he was reviewing
whether the company could afford to maintain its current dividend
payout. "Things will not stay the same at GE."
Mr. Flannery, who took 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 gained 18 cents in Friday trading to $23.76, after
tumbling as much as 7% earlier in the day. The shares had fallen
25% this year, erasing nearly $80 billion in market value even as
the stock market has surged to record highs.
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.
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, such as corporate
jets. On Friday, Mr. Flannery said he planned to cut an additional
$1 billion in expenses next year, bringing total reductions to $3
billion over two years.
Under Mr. Immelt, GE pivoted away from financial services that
once accounted for the lion's share of its profits as well as
consumer businesses that made it a household name. It invested in
energy markets and moved deeper into emerging economies. Two thirds
of its employees and about 70% of its revenue are outside the
U.S.
Mr. Immelt sold GE's ownership of NBCUniversal and shrunk GE
Capital, which was one of the country's biggest lenders before the
financial crisis. He also struck deals meant to diversify,
acquiring Alstom SA's power-plant business and merging GE's
oil-and-gas business with Baker Hughes, an oil-field-services
provider.
But the company was under pressure from investors, including
activist Trian Fund Management LP, to streamline operations and
boost profits. GE, which had about 295,000 employees at the start
of the year, is still one of the world's biggest makers of jet
engines, power-plant turbines, MRI machines and diesel
locomotives.
On Friday, Mr. Flannery said he is looking to sell off about $20
billion worth of assets in the next 1 to 2 years. 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.
The company now projects cash flow from operating activities to
be about $7 billion, a steep revision from the previous view of $12
billion to $14 billion. A big part of the drop is 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, and blamed 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
Alstom deal.
The drop in cash flow has raised 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." He
wouldn't commit to the company maintaining its current dividend.
Mr. Flannery previously had 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 cut $500 million in industrial costs in the third quarter and
has reduced that annual spending by $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 Trian, 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 tenure.
"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. That 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 the quarter, up from
$29.3 billion a year earlier. Analysts had expected revenue of
$32.56 billion, boosted by the Baker Hughes deal.
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 18:55 ET (22:55 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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