GE GE Aerospace

By Thomas Gryta 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 30, 2020).

General Electric Co. reported strong cash flow from its industrial operations and gave an upbeat outlook, as the conglomerate reverses losses in its power business and continues to draw support from its jet-engine division.

GE on Wednesday said it generated $3.9 billion in industrial free cash flow in 2019's final quarter, helping the company exceed its targets for the full year. Cash flow is essentially the money left after a business pays its bills and makes investments.

GE executives projected cash flow and profit would rise in 2020, as restructuring efforts and improved business conditions offset challenges from the grounding of Boeing Co.'s 737 MAX jet. GE is part of a joint venture that makes the engines for the airplane; its financial projections assume the plane returns to service in mid-2020.

"I'm pleased with the strong finish," GE Chief Executive Larry Culp said in an interview. "The priorities coming into 2020 are clear, but we are mindful that there is still a lot to do here."

GE shares rose more than 10% to a new 52-week high on Wednesday. The stock has rebounded from lows in the summer as Mr. Culp pursues his plans to pare the company's debt and streamline operations. Strapped for cash, GE has been selling off business units and it slashed its dividend, most recently in late 2018.

The company said it will provide a detailed 2020 financial outlook in early March.

For all of 2019, GE said it generated $2.3 billion in cash flow from industrial operations, topping its goal of between break-even and $2 billion. Early last year, Mr. Culp warned the company's core operations might burn through as much as $2 billion in 2019, but the outlook improved several times as he implemented this turnaround plan.

After years of falling profits, investors and GE management are focused on cash flow as the most important financial measure.

As is historically the case, GE relied on its fourth-quarter results to meet its annual targets. In the first nine months of 2019, GE produced negative cash flow of $1.6 billion.

The Boston-based company has set a higher bar for 2020, projecting cash flow of $2 billion to $4 billion, despite the grounding of the MAX jet, the sale of its former oil and gas business and the loss of cash generated by BioPharma. GE is awaiting regulatory approval of the $21 billion sale of its biotechnology business.

The grounding of 737 MAX jets after two fatal crashes cut GE's cash flow by $1.4 billion in 2019, as expected. Nonetheless, the aviation business -- the conglomerate's largest business by revenue -- was crucial to sustaining the overall turnaround at GE by providing $4.4 billion in cash flow.

Of GE's entire order backlog of $405 billion, the aviation division accounts for $273 billion. In the fourth quarter, it logged a 22% rise in orders.

Mr. Culp said the MAX issue remains a challenge for the division, with engine shipments expected to drop by half this year. GE will reduce its engine production for the MAX but won't go to zero in anticipation of the plane's return to service.

For most of last year, Boeing was still producing MAX aircraft and GE was delivering engines. But the planes weren't going to customers, which meant delays in payments to GE; and now that Boeing has paused MAX production, there is more uncertainty.

"We go from a relatively straightforward delay in 2019 to a more fluid and complex operating environment in 2020," Mr. Culp said Wednesday.

The grounding of the MAX, and its anticipated resumption of service, is the "biggest swing factor" for GE's free-cash flow projection for this year, he said.

In the fourth quarter, GE's net income fell 6% to $538 million as the company continued to restructure its operations. Revenue dropped 1% to $26.24 billion, exceeding analyst expectations of $25.69 billion, according to FactSet. Excluding various items, GE said it earned 21 cents a share, above the consensus view of 18 cents.

Orders for new equipment and services fell 3% from the year-earlier quarter, excluding acquisitions and currency swings. The decline was driven by a 30% drop for the division that makes turbines for power plants.

The power division, which had been GE's biggest revenue generator, has been at the center of GE's financial and operational woes. Mr. Culp set out to overhaul the business, and it has since been separated into two units.

The century-old business has suffered deep losses amid a global drop in demand for power-generating equipment. It has cut thousands of jobs to adjust to the market, but GE expects it will take years to get the division back on track.

Mr. Culp said the business is now more conservative in pursuing contracts. In the fourth quarter, there were no deals to build entire power plants, a business GE entered with the acquisition of Alstom in 2015.

"What we are trying to do is be more disciplined and more thoughtful about when and where we sign up to do more than deliver just a gas turbine," Mr. Culp said. Such deals, he said, can be difficult to meet performance and schedule requirements, making it harder to achieve margins that make them worthwhile.

The sale of GE's biotechnology business to Mr. Culp's former company, Danaher Corp., received conditional clearance in Europe last month, and GE's 2020 projections assume its closing by the end of March. The company plans to use the proceeds to pay down debt.

For 2020, GE expects industrial revenue growth in the low-single-digit percentage range and adjusted earnings of 50 cents to 60 cents a share. On that basis, it had an adjusted profit of 65 cents in 2019.

Write to Thomas Gryta at thomas.gryta@wsj.com

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January 30, 2020 02:47 ET (07:47 GMT)

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