Warnings of additional cash problems in the coming time were issued by the newly appointed CEO of General Electric Co. even as the company is facing some tough problems in revenues and profits which resulted in a significant drop in the shares of the company as investors lost confidence in the nascent turnaround efforts of the company.
GE Chief Executive Officer Larry Culp said Tuesday at an industry conference that in the current year, there would be negative cash flow from GE’s industrial operations even as the company is struggling with more challenges in its power business and other operational pressures. Compared to 2018, this outlook for cash flow was a sharp drop because the industry closely watched revenues generation of about $4.5 billion from manufacturing of gas turbines and jet engines.
“We think this is a transformation in the making, but we need to pay the piper,” Culp said. he added that GE is taking steps now to “manage though a challenging time, with an eye toward 2020 and 2021.”
The comments clearly indicate the extent of effort that has to be put in by Culp to be able to stage a turnaround for the company which is arguably in one of its worst phases in its history of 127 years. The former CEO of the company John Flannery was hastily replaced in October by Culp and since then a plan for restructuring of the power-equipment business has been announced by him. The plan includes cost reduction and the sale of a bio-pharmaceutical business for $21.4 billion.
The gains that had been made by the company shares in recent months were quickly shed even as Culp spoke at the JPMorgan Chase & Co. conference in New York. There was a drop of 4.7 per cent in the shares of the company marking the largest drop for the share in a month.
This halted a rally in the shares which was ongoing since the beginning of the current year. Till Monday, the shares of the company had increased by 43 per cent because of the renewed strategy and focus of the company on selling of assets and thereby strengthening of the balance sheet.
There is a close watch on the adjusted industrial free cash flow of GE being kept by investors. The adjusted industrial free cash flow is a critical measure of performance for GE because it demotes the resulting or remaining cash with the company pout of the total revenues generated by its manufacturing units after reduction of expenses of operations and other items. This figure is also viewed as an indicator of earnings potential.
Gordon Haskett analyst John Inch said in a note that for credit-rating outlooks, one of the important components if cash flow and therefore an erosion of cash increase the risk of additional debt downgrades.
According to Culp, the power business of the company is an ongoing drag on the overall performance of the company. There has been a general reduction of demand for the gas turbines and other equipment that are manufactured by the unit. The a key product of the unit also faced technical problems. The performance was also affected by the wrong timing of the $22 billion acquisition of Alstom SA’s energy business last year.
(Adapted from Bloomberg.com)