General Electric Co. (IW 500/6) reported a sharp drop in cash flow, denting the industrial giant’s results even as sales climbed for its power and jet-engine divisions.
“Our cash performance was worse than we expected to start the year,” CEO Jeffrey Immelt said on a conference call with analysts. Industrial operating cash flow fell to negative $1.6 billion in the first quarter, about $1 billion less than the company expected.
The results amplify the pressure on Immelt, who is trying to regain momentum after the oil-price slump and sluggish economy constrained growth last year and weighed on the stock price last year. The Boston-based company agreed last month to reduce costs further, following talks with shareholder Trian Fund Management, an activist firm co-founded by Nelson Peltz.
GE fell 1.6% to $29.80 at 11:24 a.m. in New York, the biggest decrease among the 30 members of the Dow Jones Industrial Average. Shares dropped as much as 2% for the worst decline in almost three months. GE slid 4.2% this year through April 20, compared with a 5.2% gain for the Standard & Poor’s 500 Index.
Despite weak cash performance, GE saw strong orders and improved margins, 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.
First-quarter sales rose 17% at GE Power, the world’s largest maker of gas turbines, the company said on April 21. 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%.
“We’re very encouraged by first quarter performance,” Immelt said on the call. The 61-year-old, who has run the industrial giant for 15 years, is seeking improvement in areas such as cost-cutting and cash.
GE maintained its forecast for as much as $14 billion in industrial operating cash flow this year, saying the performance would improve.
GE has pledged to tie management bonuses more closely to financial targets after the discussions with Trian. The shareholder, which took a stake in GE in 2015, said it would hold management accountable after the collapse of a stock rally that had been fueled by Immelt’s plan to tilt GE away from finance and toward equipment manufacturing.
With a renewed focus on the industrial operations, first-quarter orders rose 10% to $25.7 billion.
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% on an organic basis -- an “impressive achievement,” according to Deane Dray, an analyst at RBC Capital Markets. “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.
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.
By Richard Clough