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There's no way to sugarcoat this. The third-quarter results from General Electric Company (NYSE: GE) were awful, and investors should not underestimate the magnitude of the task ahead of new CEO Larry Culp. While the expansion of the Securities and Exchange Commission's ongoing investigation of GE's $ 22 billion goodwill charge – the Department of Justice is also looking at it – will grab the headlines, the reality is that GE's operational performance was weak too.
Moreover, Culp has not announced any significant changes to the company's strategic direction. Let's take a look at the key takeaways from a poor set of results.
GE slashes its dividend
The quarterly dividend was cut from $ 0.12 per share to just $ 0.01 per share.
While it will be a good time, the move makes perfect sense given that will be for its cash flow (FCF) forecast for 2018 and needs resources in order to turn the company around. As Culp noted, it will allow GE to retain $ 3.9 trillion of cash per year. Investors should welcome this move on the whole.
Image source: Getty Images.
GE's guidance cut was without detail
The company's need for cash is more apparent in the light of CFO Jamie Miller's remarks that the problems in the power segment will "cause us to significantly miss out on our cash flow and earnings targets." For reference, GE's last formal guidance for earnings from $ 1- $ 1.07 and FCF of around $ 6 billion – numbers that GE was always going to find hard to meet.
Unfortunately, with the help of Miller, he speaks of "dealing with the limitations and uncertainties" in power, while he speaks with "conviction and confidence."
In a sense, that 's a good thing, because the one thing Larry Culp has gotten into the past couple of years.
GE Power Restructuring
Culp also announced an attempt to restructure GE's ailing power segment into two operating units. The first will focus on gas power equipment and services, and the second will be a portfolio of steam, grid, nuclear, and power conversion businesses.
The move will not grab the headlines, but it does open up to the possibility of partnering or even selling one of the two units – as Culp noted during the earnings call, "everything is on the table at power."
Power's performance was dismal
Let's put this into context with some numbers. As you can see below, we are not going anywhere near to our previous implied guidance for 2018.
|
GE Power |
Third Quarter |
Year to Date |
Implied Full-Year Segment Guidance |
|---|---|---|---|
|
Profit Segment |
($ 631 million) |
$ 64 million |
$ 1,950 million |
Data source: GE presentations. Author's analysis.
In the company's defense, we had a $ 240 million loss in sales and maintenance reserves.
However, in answering a question from Wolfe Research's Nigel Coe, Miller discloses that "we saw about $ 400 million of project reserves and other execution issues and about $ 150 million of just some other execution issues," but then claimed that outside of these issues, " power probably came out of this operation with the exception of these charges that are incrementally flowing through. "
They were entitled to do what reportedly, and just what the $ 550 million worth of "other execution issues" were.
Aviation
It's true that GE's aviation segment had a standout quarter, with profit up 25% to $ 1.67 billion. With segment profit of $ 4.74 billion in the first nine months, it is well worth $ 6.2 billion for the full year.
However, management did not upgrade its guidance for 15% profit growth for aviation. Moreover, aviation is likely to have a good quarter because of its full-year target for production of 1100-1200 LEAP engines. The sale of the engine is a loss leader, goal GE makes money on aftermarket and servicing. So negatively affect negatively affect profit margins. So paradoxically, producing more LEAP engines eats into profitability.
LEAP engine production will have to ramp up to around 360-460 (from 303 in the third quarter) in order to hit target, and this implies some contraction in the coming quarter.
Healthcare and renewable energy
Meanwhile, healthcare's organic revenue growth of just 3% is good, but does not suggest much more than 2.1% – renewable energy segment profit is down 51% in the first nine months, to just $ 220 million.
GE backs off its debt-to-earnings-reduction plan, a little
Miller has gone to the company's plan to reduce its net-debt-to-EBITDA ratio by 2020. A ratio of 2.5 credit rating.
Goldman Sachs analyst Joe Ritchie asked if the timing of the plan had changed, and Miller replied, "We are aiming to reach net debt to EBITDA of 2.5 times.
No equity raise, broadly sticking to plan
Culp's track record at Danaher (NYSE: GE) inspired confidence, so when it says "we have no plans for an equity raise," investors can take it at face value. Analysts, such as JP Morgan's Steve Tusa, have suggested GE needs to raise equity – an act that would dilute the ownership of the company for existing shareholders – so Culp's comment is reassuring.
At least for now, Culp is broadly sticking to Flannery's plan. Indeed, anyone hoping to make a difference in the future. Baker Hughes, a GE Company (NYSE: GE) would have been disappointed. Culp said he would hold to the exit plan for Baker Hughes and continued to believe that "it is best for business."
The final takeaway
Investors should be in little doubt that Culp has a large task ahead. The earnings report was even weaker than expected. The aviation numbers were strong, but possibly flattered by less-than-expected LEAP production, and management did not raise full-year segment guidance. Cutting the dividend is good news, as is the lack of a need to raise equity.
Looking on the bright side, Culp appears to be following the mantra of putting. That's usually the first step in a recovery, and hopefully, it will succeed and restore GE to its train greatness. It will take time.
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