GE GE Aerospace

Core power unit posts another weak quarter, but stock rises at lack of negative surprises

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 (February 1, 2019).

General Electric Co. executives said they were making progress in turning around the troubled conglomerate, after the company reported another quarter of weak profits in its core power business and legacy problems in its GE Capital unit.

Larry Culp, who took over as chief executive in October, warned that fixing the power unit would take time and he declined to provide detailed financial targets for the new year.

"2019 still very much work in progress but the company is becoming stronger," Mr. Culp said in a conference call Thursday. He said he expected the company's industrial revenues to rise this year, with gains in most units and declines in power.

Mr. Culp cautioned the company's cash flow in 2019 would be impacted by restructuring, charges related to its power business, investments in its health-care spinoff and other one-time items. He said he expected cash flow to grow substantially in 2020 and 2021.

While GE's quarterly results were weak compared with peers and executives avoided committing to specific targets for the year ahead, the lack of setbacks was positive.

"I think for a number of investors, the absence of yet another negative surprise is perhaps very much a part of the story," Mr. Culp said in an interview Thursday.

Shares of GE closed 11.65% higher at $10.16, marking the stock's biggest single-day percentage gain in a decade. The shares have rallied more than 50% from their low in December but are still trading below where they were when Mr. Culp took over and 35% below where they stood a year ago.

GE plans to provide financial projections at some point when it has enough confidence in its operations.

"I'm not going to put the company's reputation at further risk by satisfying an artificial calendar in that regard," Mr. Culp said. "We are going to come out with guidance when we can walk people through it, where the math adds up, and we can be very clear on how we are going to go about delivering on those numbers."

Mr. Culp said the company aims to reduce its leverage by $50 billion from selling off its transportation division, selling down its stake in oil-services firm Baker Hughes and the initial public offering of the health-care business. He said GE doesn't plan to sell its Gecas plane-leasing business, which several private-equity firms have expressed interest in buying.

GE expects to contribute $4 billion to GE Capital this year. It also agreed to pay $1.5 billion to settle a long-running investigation by the Justice Department into a defunct subprime-mortgage business called WMC.

The government was investigating whether the business violated federal lending laws as part of a larger probe into the subprime mortgage crisis. The charge was in line with the amount GE had previously set aside for a potential settlement.

The fourth-quarter profit attributable to GE was $761 million, compared with a loss of $10.82 billion a year earlier, when it booked a large charge for a shortfall in reserves at a defunct GE Capital insurance business.

GE finance chief Jamie Miller said GE still expects to pay $2 billion into reserves this year. An annual review should be finished in mid- to late February, she said, but no changes are expected.

Last year, GE surprised investors when it revealed it was still on the hook for the policies, which provide coverage for nursing home stays and other care, and it would need to bolster reserves by $15 billion over seven years.

Revenue rose 5% to $33.28 billion, including a 25% decline in power business, which makes turbines for power plants, and a 21% jump in its aviation business, which manufactures jet engines. Those are the two biggest units that will be the core of the company after it moves ahead with plans to break itself apart following a difficult two years.

Cash flow from operations was $6.4 billion for the quarter, down 9% from last year. The fourth quarter is typically the strongest for GE. Full-year cash flow from operations dropped 80% to $2.3 billion from $11 billion in 2017.

On the conference call, GE said its goals were to attain a A credit rating and return to a dividend payment "in line with peers over time." Investors have been nervous about GE's credit rating, which was downgraded two notches last year to BBB by the major credit-rating firms. The company has twice in the past 18 months cut its once generous dividend.

The power division, which had been GE's biggest in terms of revenue, has been at the center of GE's financial and operational woes. The pain continued in the fourth quarter with a segment loss of $872 million, which GE said came from "continued execution and operational issues." The company is reviewing every power project and contract, but said the work will take time.

The company's aviation business continued to outshine the other operations -- segment profit was higher than all others combined -- as demand for its jet engines remained strong from plane makers Boeing Co. and Airbus SE. Profit rose 24% to $1.7 billion in the quarter on revenue of $8.5 billion.

The other major GE business, health care, showed little growth as profit rose 2% to $1.18 billion and revenue grew 2% to $5.4 billion in the quarter.

The company did provide some directional projections for 2019, expecting industrial revenue to rise in the low to mid-single digits. The Power division will have another down year as the overall market remains slow.

In aviation, 75% to 80% of commercial engine sales are locked in through existing orders along with services revenue of $15 billion. Overall, the division expects high-single-digit revenue growth and low single-digit profit growth.

Despite settling the mortgage-related investigation, Mr. Culp still must contend with continuing government probes into GE's accounting. Both the Justice Department and the Securities and Exchange Commission are investigating GE's revenue recognition of service contracts in its power business, a $22 billion charge booked in the third quarter and the process that uncovered the insurance shortfall.

"It is very hard to predict how long some of these other investigations are likely to take," Mr. Culp said. GE has previously denied wrongdoing, and Mr. Culp said it is cooperating with the investigations.

"We would certainly like to wrap up anything of that nature sooner rather than later," he said. "But those investigations tend to go on for extended periods of time. We've been through them before."

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

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February 01, 2019 02:47 ET (07:47 GMT)

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