GE’s earnings report shows challenges new CEO faces

John Flannery will not formally assume the job of chief executive of General Electric until August. But he made a cameo appearance in an earnings conference call Friday, and said he was conducting a rigorous review of each of the company’s businesses and would present his plans in November.

His analysis, Flannery said, was a big task across a large global corporation. He said he was “not worried about the company being dead in the water until then.”

GE’s quarterly results were certainly not those of a company dead in the wa-

ter, but they pointed to the challenge ahead for Flannery. The profit and revenue were in line with analysts’ diminished expectations. Cash flow, after a surprising drop last quarter, rebounded.

But GE said earnings for the year would probably be at the low end of the company’s previous projection of operating earnings of $1.60 to $1.70 a share. That sent GE shares down in early trading.

The company’s financial performance continues to be hurt by the impact of low energy prices on its big oil-field equipment business. And as GE has sold off much of its once huge financial arm, the contribution from GE Capital has shrunk as well — a streamlining by design as the company returns to its industrial roots.

GE reported operating earnings per share of 28 cents, a 45 percent decline from the year-earlier quarter, but slightly above the average estimate of analysts of 25 cents a share, as compiled by Thomson Reuters.

The company reported a 12 percent falloff in revenue, to $29.56 billion, somewhat higher than the Wall Street average forecast of $29.02 billion. But revenue from industrial operations, which excludes one-time gains or losses from asset sales or acquisitions, increased 2 percent, to $28 billion. Industrial results are the crucial yardstick for GE now as its finance unit is pared back.

But the number that investors were watching most closely was cash flow. A Wall Street maxim states that earnings are an opinion, but cash is a fact. That is, big companies can often employ financial-engineering tactics to lift reported earnings.

Free cash flow — cash generated, minus capital expenses — can be a purer measure of the financial health of a business. For GE, the cash flow numbers have been disappointing since last year. And in the first quarter, the company reported a negative cash flow of $1.6 billion from industrial operations, $1 billion below management’s earlier forecast.

GE’s executives said the shortfall was largely explained by the increase in inventory for orders on new products coming to market, including jet engines, power generators and locomotives. That capital-intensive buildup is a short-term drain on cash, but it reflects strong orders that later convert to sales and profit.

On Friday, GE reported free cash flow from industrial operations of $1.5 billion, a reassuring move into positive territory. Much of the company’s cash flow comes at the end of the year, because that is when industrial customers buy new equipment. Still, it will need a strong second half to achieve its forecast of cash flow of $12 billion to $14 billion for the year.

Investors are keeping a close eye on cash generation because GE has pulled back from its profit goal for 2018.

On May 24, speaking to analysts at a GE conference in Florida, Jeffrey Immelt, the chief executive, recalled the 2015 plan and the years since. The oil and gas market, given the price declines, was “much tougher” than anticipated, he said. A bit later, referring to the 2018 profit goal, he said, “Two dollars will be at the high end of the range” of likely outcomes. Translated: scarcely a chance.

“When he had to talk down the number, that became a lightning rod for criticism,” said Deane Dray, an analyst at RBC Capital Markets.

Less than a month later, Flannery was named the new chief at GE. After 16 years as chief executive, Immelt was expected to step down, but the timing surprised analysts.

On Friday, GE executives offered no guidance for 2018 earnings — that will come in November from Flannery. But Wall Street analysts have already scaled back their profit forecast for 2018 to $1.81 a share.