GE's Cash Flow Drops, Raising Pressure on Immelt Over Earnings

  • ‘Cash performance was worse than we expected,’ CEO says
  • First-quarter sales climb in power and aviation divisions

General Electric Co. reported a sharp drop in cash flow, further denting the industrial giant after some investors had grown anxious about recent results.

“Our cash performance was worse than we expected to start the year,” Chief Executive Officer Jeffrey Immelt said on a conference call with analysts Friday. Industrial operating cash flow fell to negative $1.6 billion in the first quarter, about $1 billion worse than the company expected. 

The results amplify the pressure on Immelt to get GE back on track after the oil-price slump and sluggish economy constrained growth and weighed on shares last year. The Boston-based company agreed last month to step up cost-cutting efforts following talks with shareholder Trian Fund Management, which was co-founded by Nelson Peltz.

The cash weakness stained an otherwise solid quarter, highlighted by organic sales growth and improved margins, Deane Dray, an analyst at RBC Capital Markets, said in an interview.

“It gave people a reason to not feel good about the quarter,” he said. “There’s a standard of quality of earnings that investors expect. Here you have GE, in the very first quarter, missing on the cash flow.”

GE fell 2.4 percent to $29.55 at 1:44 p.m. in New York, the second-biggest decrease among the 30 members of the Dow Jones Industrial Average. The stock earlier dropped 2.7 percent for its worst decline in almost three months.

First-quarter sales rose 17 percent at GE Power, the world’s largest maker of gas turbines, the company said in a statement. Investors have kept a close eye on the division following softer-than-expected results last quarter as several shipments slipped into this year.

GE Aviation, which is boosting production of a new jet engine, increased first-quarter revenue 8.7 percent.

Linking Bonuses

The company pledged last month to tie management bonuses more closely to financial targets after the discussions with Trian. The shareholder, which invested in 2015, said it would hold management accountable after the end of a stock rally that had been fueled by Immelt’s plan to tilt GE away from finance and toward equipment manufacturing. The 61-year-old has run GE for 15 years. Trian declined to comment on GE’s results.

With a renewed focus on industrial operations, first-quarter orders rose 10 percent to $25.7 billion. GE maintained its forecast for as much as $14 billion in industrial operating cash flow this year, saying the performance would improve in the coming periods.

There were plenty of positive signs in Friday’s results, including orders and margin performance, said Nicholas Heymann, an analyst at William Blair & Co. “They had to hit a bunch of metrics and they hit most of them,” he said.

Adjusted earnings were 21 cents a share, topping the 17-cent average of analysts’ estimates compiled by Bloomberg. Sales fell 0.7 percent to $27.7 billion, compared with $26.4 billion expected by analysts.

Revenue rose 7 percent on an organic basis -- an “impressive achievement,” according to Dray. “The underlying strength this quarter provides us with another key confirming indicator that the industrial sector is finally emerging from the seven-quarter industrial recession,” he said in a note.

Oil Down

Revenue fell 9.4 percent in the oil and gas unit, which has struggled amid a plunge and sluggish recovery of crude prices. GE hopes to capitalize on an eventual rebound through a deal announced last year to combine its oil business with Baker Hughes Inc. The merger, which will give GE a 62.5 percent ownership stake, is on track to close midyear, GE said.

Despite the sales decline, GE is “encouraged that oil and gas orders grew by 9 percent,” Immelt said on the call.

GE is pruning divisions as part of a portfolio transformation. The company announced a deal during the quarter to sell its water business and plans to unload the industrial solutions unit this year.

Operating earnings in 2017 will be $1.60 to $1.70 a share, GE said, reaffirming an earlier forecast. Organic revenue is forecast to climb 3 percent to 5 percent.

— With assistance by Beth Jinks

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