GE’s earn­ings re­port shows chal­lenges new CEO faces

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - STEVE LOHR

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.

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