By Thomas Gryta
General Electric Co.'s second-quarter profit dropped 30% from a
year earlier as weakness in the company's power division continued
to offset growth in other major units.
While the struggling conglomerate backed its 2018 profit goal,
it said free cash flow would be at the low end of its previous
estimate. GE reiterated that it will take years to turn around the
power business, its largest division.
GE recently unveiled its road map for restructuring under Chief
Executive John Flannery, a series of moves to dismantle the company
short of a complete breakup of the onetime bellwether. Over several
years, GE plans to hive off its Healthcare unit into a separate
company and shed its majority holding in oil-and-gas firm Baker
Hughes.
GE has reached deals in recent months to spin off its
transportation division and sell several smaller businesses. It
said Friday that its plan to sell $20 billion in assets is
"substantially complete."
"The second quarter was an important one for GE," Mr. Flannery
said in a conference call with analysts, noting that GE cut costs
in its industrial divisions by $1.1 billion in the first half.
"We've described 2018 as a reset year and in the quarter we made
significant progress on that journey."
The company's adjusted earnings of 19 cents a share for the
period beat Wall Street expectations for 17 cents a share,
according to Thomson Reuters. Revenue of $30.1 billion also topped
consensus projections of $29.3 billion.
Still, the company's shares were off 4.5%, or 61 cents, at
$13.11. The stock has lost half its value in the past 12
months.
RBC Capital analyst Deane Dray said that the challenges facing
GE aren't new, but the company may have spooked investors by
highlighting potential downside risks in major areas including the
power division, its financial-services business and the potential
fallout of ongoing trade friction.
For example, the company previously had forecast selling 50 to
55 gas turbines this year but on Friday projected "about 50" for
the year. It also said new tariffs could cost it $300 million to
$400 million a year and that it expects to offset at least half of
that amount. GE Capital is expected to be break-even, but the
company stressed that was a "rough" estimate.
"It was demonstrably negative in how they framed key
assumptions," Mr. Dray said.
On Friday's call, Mr. Flannery, who took the helm at GE last
August, said the company is "meeting or beating our plan in all
businesses except for power."
He called that division -- which makes turbines used in power
plants to generate electricity -- the biggest challenge facing the
company and said the protracted downturn for that market is
pressuring cash flow and working capital.
"The market is challenging but we need to work through that," Mr
Flannery said. "It is going to be a multiyear fix with some
volatility."
The division's revenue fell 19% from the year-earlier quarter to
$7.6 billion on a 26% drop in orders, while profit declined 58%. So
far it has sold 19 gas turbines compared with 41 at the same point
last year. Orders are usually stronger later in the year, Chief
Financial Officer Jamie Miller said, but she noted that some new
orders for the massive machines have moved to the second half.
The order softness hits GE's cash flow because payments from
customers while the turbines are in production are coming in slower
when deliveries are delayed, Ms. Miller said in an interview.
GE is continuing to cut costs in the business and close
facilities. Last year, it set plans to cut 12,000 jobs in the
division and has already eliminated 7,000 of those positions, Ms.
Miller said. It cut $565 million in costs during the first half,
putting it on track to cut $1 billion in the division by
year-end.
GE reported second-quarter net income of $615 million, down from
$875 million a year earlier. Overall, GE said revenue in the three
months ended June 30 rose 3% from $29.1 billion, including a boost
from the merger of its Oil & Gas business with Baker Hughes a
year ago. GE still owns a majority stake in the combined
company.
The company stood by its 2018 earnings projection of $1 to $1.07
a share; it has said it will likely meet the lower end of that
range, and analysts currently forecast just 95 cents a share for
the year. The estimate was originally given in November when the
company revised its long-held target of $2 a share in earnings for
2018. The company expects restructuring costs of $2.7 billion
before taxes for 2018, Ms. Miller said.
GE now expects adjusted free cash flow of about $6 billion for
2018, compared with a previous projection of $6 billion to $7
billion. The company still expects to end the year with at least
$15 billion in cash.
GE cut its dividend in November, only the second time since the
Great Depression, and investors are focused on its ability to
generate cash from its operations. In the latest quarter, it had
adjusted free cash flow of $258 million from its industrial
operations, a jump from the previous quarter's negative free cash
flow of $1.7 billion but down from $369 million a year ago.
As power struggled, profits and sales rose in GE's other two
core units, aviation and health care.
In the aviation business, which manufactures and services jet
engines, sales rose 13% and profit grew 7%. Orders at the division
jumped 29% as demand for its next-generation jet engines remained
strong. GE also booked more than $22 billion in new orders this
week at the Farnborough airshow in England, it said.
At health care, profit rose 12% to $926 million as revenue grew
6% to about $5 billion.
Profit at GE Capital, the company's financial-services division,
dropped 20% to $207 million, while revenue fell 1% to $2.4
billion.
GE continues to contemplate shrinking both the size and risk in
the unit. The business has been a source of negative surprises for
investors and Mr. Flannery is looking for options to neutralize or
exit parts or all of the business, people familiar with the matter
say.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
July 20, 2018 13:57 ET (17:57 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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