By Thomas Gryta
General Electric Co. swung to a first-quarter profit and
reported stronger cash production than expected, but cautioned that
the grounding of Boeing Co.'s 737 Max airliner could hurt the
timing of its cash flows.
A GE joint venture makes engines for the Boeing plane, which has
been grounded after two fatal crashes. Boeing has halted new MAX
deliveries, which could slow the pace at which GE's factories can
ship engines for the plane.
The Aviation unit's backlog of orders has been a bright spot for
GE, which has struggled with slack demand in its other major
division, which makes turbines for power plants. In the first
quarter, sales and profits rose in Aviation while both fell at
Power.
Overall, GE's core industrial businesses burned through $1.2
billion of cash in the quarter; the company warned earlier this
year that its core business could burn through as much as $2
billion of cash in 2019.
On a conference call Tuesday, executives said they expect
industrial cash flow to be negative in the second quarter. They
estimated the Boeing Max problems could delay roughly $225 million
in cash flow in the second quarter. GE makes the engines in a joint
venture with France's Safran SA, which also recently warned the
grounding could delay its cash flow. GE maintained its forecasts
for 2019 set earlier this year.
It has called 2019 a "reset year" and said the first quarter
would be the low point of the results. New CEO Larry Culp is
restructuring the company, prioritizing the struggling Power
division as well as reducing the conglomerate's massive debt
load.
"One quarter is a data point, not a trend," Mr. Culp said on a
conference call Tuesday. He noted that most of the company's
restructuring efforts would fall into the second half of the
year.
In the first quarter, GE reported a profit of $3.55 billion,
compared with a year ago loss of $1.18 billion. Revenue fell 2% to
$27.29 billion, as a 22% decline in the Power division offset gains
in Aviation and other units.
In the quarter, GE completed the sale of its century-old
locomotive business, struck a more than $20 billion deal to sell
its biotechnology business and paid $1.5 billion to settle a
long-running Justice Department probe into a legacy subprime
mortgage lending business.
Investors and analysts see cash production as a strong measure
of a company's performance and value, and Mr. Culp has said he
wouldn't manage the company based on earnings targets. For GE,
which has all but eliminated its dividend, the goal is returning to
sustainable cash flow. But like many things at GE in recent years,
the company's complexity makes it difficult to assess performance
around a single financial metric.
Analysts had varying expectations for the company's performance
in the quarter. RBC Capital analyst Deane Dray estimated negative
cash flow of $4 billion and Gordon Haskett analyst John Inch
projected cash burn of about $2.5 billion. JPMorgan analyst Stephen
Tusa estimated a negative $3 billion.
"Did this change our view on anything? The answer is no," said
Mr. Dray. With the multiple challenges facing GE, he sees the lack
of surprises in the results as positive. "It is so much better for
the market for GE to need to explain why something is better rather
than worse," he said.
GE expects to report positive cash flow in 2020, but the Power
division isn't expected to produce cash until 2021.
After rallying early in the day, GE shares gave back much of the
gains Tuesday afternoon and were up about 4% to $10.14. The stock
has surged about 34% this year but is down 30% in the last 12
months. Two years ago, GE shares traded at close to $30.
Citigroup analyst Andrew Kaplowitz said the cash-flow results
were "encouraging but, in the context of unchanged overall 2019
guidance, we think GE remains in the relatively early stage of a
gradual turnaround."
GE said its Power business eked out a small profit even as
revenue fell 22% from a year ago to $5.66 billion. GE has been
restructuring the unit, which has struggled with slack demand for
power-plant equipment and excess inventories. GE said orders fell
14% in the latest quarter but rose in the gas side of the
business.
In an interview, Mr. Culp said some orders for GE's large
natural gas turbine came in sooner than expected, along with an
associated down payment.
The CEO said most of the new power orders came from the U.S.,
but added that GE is still chasing deals around the world. He
reiterated a break from GE's strategy just a few years ago: The
company is isn't just focused on market share at all costs.
"Market share is interesting, but margins and cash are better,"
he said
The Aviation unit, which makes jet engines used by Boeing and
Airbus, reported $1.66 billion in quarterly profit as revenue rose
12% to nearly $8 billion, making it GE's biggest and most
profitable unit. The business shipped more than 400 LEAP engines in
the quarter, more than twice as many as in the year-ago
quarter.
The Healthcare unit had a quarterly profit of $781 million on
flat revenue of $4.68 billion. GE is selling off the fast-growing
biotech side of the operations, using the proceeds to help pay down
debt. That will leave behind a business focused on selling hospital
equipment such as MRI machines.
GE Capital ended the first quarter with $122 billion of assets.
GE has been shrinking the once massive lending operation, which
still includes a large jet leasing business and legacy insurance
business. The unit had a profit of $135 million from continuing
operations in the quarter and GE has said it would have to pump $4
billion into the unit this year.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
April 30, 2019 14:10 ET (18:10 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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