General Electric Co. slashed its profit forecast as earnings fell far short of expectations, underscoring the severity of the challenges facing the company’s new boss.
CEO John Flannery is grappling with one of the deepest slumps in the beleaguered manufacturer’s history, with hurdles from poor cash flows to slumping power-generation markets. The shares plunged the most in two years, extending what already is by far this year’s biggest loss on the Dow Jones Industrial Average.
The latest results are “completely unacceptable,” Flannery said on a conference call with investors. “We need to make some major changes with urgency and a depth of purpose.”
The cut is the latest step in what is shaping up to be a dramatic repositioning of GE under its new leadership. Flannery this month welcomed a representative of activist investor Trian Fund Management to GE’s board and announced several management changes. He is seeking deep cost cuts and has said he will consider all options, including portfolio changes.
“Everything is on the table,” Flannery said on the earnings call, his first as CEO. “Things will not stay the same at GE.”
The shares tumbled 5.1% to $22.37 at 9:33 a.m. in New York after dropping as much as 6.3%, the most intraday since August 2015.
The new CEO, who will detail his plans to reshape the Boston-based company at an investor meeting Nov. 13, is targeting more than $20 billion of asset divestitures within two years, GE said.
Adjusted earnings this year are expected to be $1.05 to $1.10 a share, down from a previous range of $1.60 to $1.70 a share, GE said Friday in the statement. Analysts had anticipated $1.54 a share, according to the average of estimates compiled by Bloomberg.
Profit Miss
The maker of jet engines and gas turbines reported that adjusted profit decreased to 29 cents a share for the third quarter, falling well short of the 50-cent average of analysts’ estimates compiled by Bloomberg. GE hasn’t missed estimates by more than half a cent in over nine years.
Earnings were hurt by restructuring and impairment charges, as well as a sharp decline in profit in the power-generation division.
GE cut $500 million in costs during the quarter, bringing the 2017 total to $1.2 billion, which the company said is ahead of its original plans.
“This is a light-speed version of transformation,” said Nicholas Heymann, an analyst with William Blair & Co. “This is a really compressed process.”
Industrial operating cash flow, a major focus for investors, was $1.7 billion in the quarter, excluding deal taxes and pension plan funding, GE said.
The company reduced its industrial-cash-flow forecast to $7 billion after previously saying it could top $12 billion.
GE’s liquidity came under scrutiny after the company reported negative-$1.6 billion in industrial operating cash flow in the first quarter, about $1 billion worse than the company had anticipated. The measure rebounded modestly in the second quarter.
Management Overhaul
Sales fell 3.5% in GE Power, the world’s largest maker of gas turbines, as profit plummeted by more than half. GE Aviation, which is boosting production on a new jet engine, increased revenue 8.1%.
Flannery announced several top management changes this month, including naming a new chief financial officer. Jamie Miller, the current head of the GE Transportation unit, will assume the CFO role from Jeff Bornstein in the coming weeks.
The new CEO also became chairman this month — earlier than planned — after the surprise retirement of Jeffrey Immelt, who had been slated to stay until year-end.
The appointment of Ed Garden, a founding partner of Trian, to GE’s board this month marked a victory for the activist firm, which had pledged to hold management accountable. Trian, co-founded by Nelson Peltz, became one of GE’s largest shareholders when it took a $2.5 billion stake in 2015.
Investors are bracing for a possible dividend cut. Though GE has said the payout remains a top priority, a dividend reduction has already been priced into the stock, Susquehanna derivative strategist Chris Jacobson said in a note.
After Friday’s results, it is “increasingly likely some cut is coming” to the dividend, Robert McCarthy, an analyst at Stifel Financial Corp., said in a note.
By Richard Clough
