GE Earnings Fall as New Leadership Picks Up Restructuring Work

By Cara Lombardo Features Dow Jones Newswires

General Electric Co. said its third-quarter earnings fell as it incurred hefty restructuring charges during Chief Executive John Flannery's first official quarter at the helm, and the new CEO outlined plans to exit more than $20 billion of the company's businesses.

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GE reported a third-quarter profit of $1.8 billion, or 21 cents a share, down from $2 billion, or 22 cents a share a year earlier. Excluding costly restructuring charges and other items, adjusted per-share earnings fell to 29 cents from 32 cents. Impairments and restructuring charges during the period dented GE's per-share earnings by 16 cents.

GE said it is looking to streamline its portfolio of businesses by more than $20 billion in the next one to two years. The company also forecast adjusted earnings for the full year that were significantly below the previous target.

GE shares dropped 5% premarket Friday after closing Thursday at $23.58. The company's stock has fallen 25% this year.

Since Mr. Flannery took over two months ago, he has begun implementing his ideas to cut costs at the company and review a far-reaching portfolio of business.

Mr. Flannery is slated to release updated financial targets and lay out his vision Nov. 13. It is likely to include cutting thousands of jobs and scaling back GE's structure.

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"We are focused on redefining our culture, running our businesses better, and reducing our complexity," Mr. Flannery said in prepared remarks Friday.

He also wants to streamline the company's global research efforts, which could include shutting down research centers in Shanghai, Munich and Rio de Janeiro.

Mr. Flannery, a GE lifer who has made it clear he is open to change, has also grounded a fleet of six corporate jets often used by his predecessor.

GE's revenue jumped 14% to $33.5 billion in its third quarter, up from $29.3 billion a year earlier. Analysts had expected revenue of $32.56 billion, boosted by a merger of GE's oil-and-gas unit with Baker Hughes.

Oil-and-gas revenue rose 81% from a year ago. All segments saw growth other than power, lighting and transportation. Transportation revenues dropped 14%.

Write to Cara Lombardo at cara.lombardo@wsj.com

General Electric Co. slashed its 2017 projections as new Chief Executive John Flannery started to outline his plans to restructure the struggling conglomerate, setting a goal to sell more than $20 billion of assets and cut an additional $1 billion in spending.

"Our results are unacceptable to say the least," Mr. Flannery said on a conference call Friday, noting that he was reviewing whether the company could afford to maintain its current dividend payout. "Things will not stay the same at GE."

Mr. Flannery, who took the job in August and recently became chairman with the early exit of Jeff Immelt, has expressed an urgency to reduce costs and rethink the sprawling company. In addition to lowering earnings targets by a third, the company Friday cut its forecast for 2017 cash flow by half from a July projection.

GE shares gained 18 cents in Friday trading to $23.76, after tumbling as much as 7% earlier in the day. The shares had fallen 25% this year, erasing nearly $80 billion in market value even as the stock market has surged to record highs.

The Boston company's third-quarter earnings fell as it incurred hefty restructuring charges, reporting a profit of $1.8 billion, down from $2 billion a year earlier. Excluding restructuring charges and other items, adjusted per-share earnings fell to 29 cents from 32 cents, still well below Wall Street expectations of 49 cents.

Mr. Flannery is slated to update investors at a Nov. 13 meeting on the details of his strategic review. He has already been cutting jobs, research operations and executive perks, such as corporate jets. On Friday, Mr. Flannery said he planned to cut an additional $1 billion in expenses next year, bringing total reductions to $3 billion over two years.

Under Mr. Immelt, GE pivoted away from financial services that once accounted for the lion's share of its profits as well as consumer businesses that made it a household name. It invested in energy markets and moved deeper into emerging economies. Two thirds of its employees and about 70% of its revenue are outside the U.S.

Mr. Immelt sold GE's ownership of NBCUniversal and shrunk GE Capital, which was one of the country's biggest lenders before the financial crisis. He also struck deals meant to diversify, acquiring Alstom SA's power-plant business and merging GE's oil-and-gas business with Baker Hughes, an oil-field-services provider.

But the company was under pressure from investors, including activist Trian Fund Management LP, to streamline operations and boost profits. GE, which had about 295,000 employees at the start of the year, is still one of the world's biggest makers of jet engines, power-plant turbines, MRI machines and diesel locomotives.

On Friday, Mr. Flannery said he is looking to sell off about $20 billion worth of assets in the next 1 to 2 years. Mr. Flannery said the company has many strong divisions but also "a number of other businesses which drain investment and management resources without the prospects for a substantial reward."

The company lowered its adjusted 2017 per-share profit target to $1.05-$1.10 from a previous view of $1.60-$1.70. Analysts currently expect earnings of $1.53 a share in 2017.

The company now projects cash flow from operating activities to be about $7 billion, a steep revision from the previous view of $12 billion to $14 billion. A big part of the drop is coming from the power division, which primarily makes turbines for gas and coal-fire power plants.

In an interview, Mr. Flannery said he was surprised with the results from the power business, GE's largest, and blamed the former management of the division. He said the other divisions of the company were "quite strong" when looking at their orders.

"I'm disappointed in the power business. Deeply," Mr. Flannery said, noting there was an overestimation of demand in the power market, along with too much inventory and not enough cost cuts to adjust to the pressures.

"We have not run the business well of late," he said. GE expanded the division, now its largest by revenue, following the Alstom deal.

The drop in cash flow has raised questions about how the company will fund its dividend, pensions and capital investments. On Friday, Mr. Flannery said the current cash-flow projections aren't going to be the norm at GE, but the company is looking to balance investing in growth and paying the dividend.

He said investors should think of 2018 as a "reset year." He wouldn't commit to the company maintaining its current dividend. Mr. Flannery previously had pledged the dividend wouldn't change, but said Friday that his view is "continuing to evolve."

"Expected bad. Got bad," said analyst Scott Davis, CEO of Melius Research, noting the quarterly results raise questions about whether the company is fixable. "Pressure to break this up just went through the roof."

GE cut $500 million in industrial costs in the third quarter and has reduced that annual spending by $1.2 billion for the year so far. Earlier this year, GE set a goal to cut $1 billion in such costs this year and next, under pressure from Trian, which recently gained a seat on the company's board.

Mr. Flannery said he would look at potential changes to the board, which was mostly appointed during Mr. Immelt's tenure.

"The board is big at 18 people, there is no doubt about that, and that is one of the topics being discussed," he said.

Incoming Chief Financial Officer Jamie Miller said the company would simplify how it reports results. It will revise how it measures free cash flow to be in line with others in the industry with a "back to basics approach," she said.

Mr. Flannery already has called on company leaders to review their divisions and plans to streamline the company's global research efforts. That could include shutting down research centers in Shanghai, Munich and Rio de Janeiro, people familiar with the matter have said.

GE's revenue jumped 14% to $33.5 billion in the quarter, up from $29.3 billion a year earlier. Analysts had expected revenue of $32.56 billion, boosted by the Baker Hughes deal.

Oil-and-gas revenue rose 81% from a year ago driven by Baker Hughes; without the new assets, revenue fell 7%. Revenue growth was mixed with aviation and health care businesses expanding, but power, lighting and transportation all shrinking. Transportation revenues dropped 14%.

--Cara Lombardo contributed to this article.

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

(END) Dow Jones Newswires

October 20, 2017 18:55 ET (22:55 GMT)