General Electric (NYSE:GE)
Historical Stock Chart
3 Months : From Oct 2019 to Jan 2020
By Thomas Gryta
General Electric Co. reported a $9.5 billion third-quarter loss, weighed down by accounting charges, but the industrial conglomerate showed signs of progress and again raised its cash-flow outlook for the year.
Larry Culp, who took over as CEO about a year ago, has been revamping GE with a focus on cutting its debt and generating cash from its businesses of making jet engines and power turbines.
"I'm starting to see the improvements I wanted to see when we started on this path a year ago," Mr. Culp said on a conference call Wednesday. The first outsider to run GE, Mr. Culp has called 2019 a reset year for the company.
GE's shares surged on the latest results, jumping 12% to $10.14. Investors and analysts were relieved the company's core operations are stabilizing and there were no major surprises from a review of a legacy insurance business.
The manufacturing giant has been through several difficult years caused by problems in its power and financial-services units. It switched leaders, gutted its dividend and sold off business units. After tumbling in 2017 and 2018, GE's share price is little changed from where it was trading when Mr. Culp took over.
GE reported adjusted cash flow from industrial operations of $650 million for the third quarter and predicted it would generate as much as $2 billion of cash on that basis for the full year. Cash flow is essentially the money remaining after paying bills and making investments.
GE's struggles in recent years have made cash flow the most important financial measure for investors. Even JPMorgan's Steve Tusa, who has a negative opinion of GE shares, said this week that 2019 cash flow would likely be slightly positive. GE previously projected 2019 cash flow ranging from negative $1 billion to positive $1 billion, an estimate it increased in July.
In an interview, Mr. Culp said the cash flow was benefiting from increased internal controls, more spending discipline and fewer surprises arising in the operations. The company also benefited from lower-than-expected restructuring costs, Mr. Culp said. "We are getting the cost out with less investment," he said.
The 2019 projection translates to fourth-quarter cash flow of at least $1.6 billion. Mr. Culp has said he wants to move away from GE's long-held pattern of having the strongest sales at the end of the year and the end of quarters, but it will take years to break the habit.
"Every day of the quarter and the year needs to matter as much as the last day of the quarter and year," he said Wednesday.
In the third quarter, GE reported a net loss attributable to common shareholders of $9.47 billion, compared with a year ago loss of $22.8 billion, when it booked a big charge on its power business. Revenue was flat at $23.36 billion as gains in aviation and health-care units were offset by declines in the power business.
GE booked an $8.7 billion charge to reflect the lowered value of its investment in oil equipment and services firm Baker Hughes. GE had previously warned investors about the charge as it sold down its stake and gave up majority control of Baker Hughes. The company also recorded a $1 billion charge on its legacy insurance business and a $740 million write-down on the value of its hydropower business.
Excluding charges, GE said its adjusted earnings were 15 cents a share, ahead of an analyst projection of 12 cents a share, according to Refinitiv.
Mr. Culp said Wednesday GE was raising its cash-flow goals despite a drag from Boeing Co.'s grounding of its 737 Max airplane. The jet is powered by engines made by GE in partnership with France's Safran SA. GE reduced its production rate of its Leap engines used in the plane.
GE still expects the grounding to reduce cash flow by $1.4 billion for the full year if the plane remains unable to fly. Mr. Culp said GE was following Boeing's lead and is being conservative in assuming the Max won't fly again this year. Orders for its Leap engine dropped 90% in the quarter.
The company said it completed a test on its long-term-care insurance holdings in the third quarter to see whether it has enough cash reserved for its expected future obligations. The $1 billion deficiency charge was largely the result of lower market interest rates. Last year, the company had to commit $15 billion in additional reserves for the policies after revamping its assumptions for the portfolio. GE said those assumptions remain in line with actual results.
Analysts at Evercore ISI said the insurance shortfall was on the low end of expectations. "Following its mega charge in early 2018 and the resulting black cloud cast over the life-insurance industry ... we think this news should come as a relief." Importantly, GE said its claims are developing as expected, while some other insurers have reported adverse development.
The power division, which had been GE's biggest in terms of revenue, has been at the center of financial and operational woes. The century-old business has suffered from deep losses amid a global drop in demand for power-generating equipment. GE said business remains in the middle of a multiyear turnaround as the unit's revenue fell 14% from a year ago to $3.93 billion, but the division narrowed its losses to $144 million.
Profits and revenue rose in the GE's aviation and health-care units. The aviation division, which makes jet engines, had $8.11 billion in third-quarter revenue and generated $1.72 billion in profits. The health-care unit, which makes hospital equipment and had $4.92 billion in quarterly revenue, delivered a $974 million profit.
The company also highlighted its renewable-energy business, which it now considers one of the four major divisions. The unit sells wind turbines, hydropower equipment and includes GE's electric-grid operation. Revenue rose 13% to $4.4 billion on a 30% jump in new orders.
GE Capital, its financial-services operations, performed better than expected in the quarter. GE plans to pay down the division's $14 billion in debt, mostly using cash expected from selling its biotechnology operations. GE still will contribute $4 billion in cash to the division in 2019.
GE has been selling assets to pay down its debt, including the biotechnology sale for more than $20 billion to Danaher Corp., Mr. Culp's former company. Danaher said last week that it is making progress on closing the deal, including a $750 million asset sale that is contingent on the deal, but doesn't expect it to close until the first quarter.
--Leslie Scism contributed to this article.
Write to Thomas Gryta at email@example.com
(END) Dow Jones Newswires
October 30, 2019 12:26 ET (16:26 GMT)
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