General Electric warns of another year of falling profit
Power business is set for restructuring to adjust to market demand
General Electric Co. warned investors of another year of lower profits and weak cash flow from its core industrial operations, but the forecast was in keeping with the conglomerate’s recent cautionary outlook.
In a conference call Thursday, GE executives called 2019 a “reset year” and detailed their plans to cut costs and debt. There were few surprises for GE investors, many of whom have braced for a difficult year.
GE shares gained 30 cents, or 3%, to $10.32 in Thursday afternoon trading. The stock has rallied from below $7 in December but is still down from about $30 two years ago.
Larry Culp, who took over as chief executive in October, had previously declined to provide detailed financial targets for GE as he spent time reviewing the company. Last week he gave a hint of the struggles ahead by revealing that GE’s portfolio of industrial businesses will fail to produce cash this year.
Mr. Culp reiterated Thursday that he expects the company’s core industrial operations to generate cash in 2020 and beyond. “I have confidence that our industrial businesses in aggregate should yield cash on sales more than double last year’s levels over the long term,” Mr. Culp said on the conference call. “But there is a lot of ground to cover before we get there.”
GE forecast on Thursday that its industrial operations could burn up to $2 billion more cash than they generate in 2019, and set earnings targets for the year that were below Wall Street’s forecasts.
The financial projections follow two difficult years in which the conglomerate has reported falling profits and slashed its dividend.
For 2019, GE expects adjusted earnings of 50 cents to 60 cents per share, compared with the 70 cents forecast by analysts. In 2018, GE reported a per-share profit of 65 cents and positive cash flow of $4.5 billion from its industrial operations.
The negative cash flow is a consequence of the troubled power business and the costly restructuring it needs to adjust to market demand. GE has excess capacity after buying the power business of Alstom SA in 2015. “We need to improve and we need to deliver, and over time that is the best contribution we can make to the debate,” Mr. Culp said in an interview.
GE said adjusted cash flow in its power unit would be down in 2019 with “significant improvement” in 2020 and turn positive in 2021. The division had negative cash flow of $2.7 billion in 2018.
The company said it planned to further reduce costs in the power division, which employs about 60,000 people around the globe producing and servicing turbines used in gas and coal-fueled power plants. GE said it expects to reduce costs in the division by $800 million over two years.
GE declined to give details on the number of jobs eliminated in the division, but said it has cut 34% of headcount at its large power manufacturing locations in Schenectady, N.Y., and Greenville, S.C.
GE’s planned cost cuts don’t include closing any major facilities, but there will be more restructuring in the future, Mr. Culp said. “We are respectful of the processes ahead of us in 2019 and 2020 in both the U.S. and Europe,” he said.
He also noted that the turnaround at the division won’t simply be about cutting capacity but will be a broader reordering of the business. “We want folks to understand that we have more cost than we need,” he said, “more cost then we can afford on a whole host of levels.”
The conglomerate, which also has large aviation and healthcare divisions, aims to get costs at its corporate operations— which oversees the individual businesses—to below $700 million in 2021from $1.2 billion last year.
GE said it has cut about 10,000 workers from corporate staff, which had more than 28,000 people at the end of 2017. That included researchers and global sales teams, whose functions have been moved into business units, as well as GE Digital, a technology unit that has been cut back and partly sold off. GE employed 283,000 people world-wide at the end of 2018.
David Joyce, head of the aviation unit, said the division planned to move 1,000 engineering jobs to the U.S. military by the end of 2020. In addition to jet engines for planes made by Boeing Co. and Airbus SE, GE makes engines and other systems for military jets and helicopters.
GE said its financial services division GE Capital would stop losing money by 2021, but noted that it will likely need to put more cash into the unit in 2020 to fund its insurance portfolio. GE had already disclosed plans to contribute $4 billion in cash to GE Capital in 2019.
Mr. Culp has targeted the balance sheet for his initial focus, aiming to pay down debt as fast as possible, while the company restructures the power business. Last month, GE agreed to sell its biotechnology business to Mr. Culp’s former company, Danaher Corp., for $21billion in cash.
The sale was a surprise shift as GE was in the process of separating the entire health-care division into its own company. With the Danaher deal, GE is now re-evaluating its plans for an IPO of the rest of the healthcare division, which primarily makes MRI machines and hospital equipment.
The company said Thursday it expects the Danaher deal to close in the fourth quarter of 2019.
Jamie Miller, GE’s finance chief, said the company was evaluating debt tenders, pension funding and other actions to cut debt.
GE also plans to raise about $18 billion over two years by selling down its stakes in oilfield services firm Baker Hughes and locomotive maker Wabtec Corp. Each houses a former GE division.