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Jeffrey Immelt

GE Soothes Investor Cash Concerns in Immelt's Final Days as CEO

July 21, 2017
Industrial operating cash flow -- a metric Immelt said would rebound -- rose to $1.5 billion in the second quarter.

General Electric Co. shored up its cash performance as Jeffrey Immelt tackled one of investors’ biggest concerns in his final days as chief executive officer.

Industrial operating cash flow rose to $1.5 billion in the second quarter, GE said Friday in a statement as it reported earnings. Immelt had promised the metric would rebound after a surprise plunge during the first three months of the year rattled shareholders in the maker of jet engines, gas turbines and medical scanners.

The figure was “significantly better” in the second quarter than in the first, Immelt said in the release. “We expect cash flow to continue to improve throughout the year.”

The results give the departing CEO a boost as he prepares to hand the reins to John Flannery. The Boston-based manufacturer, under pressure from activist investor Trian Fund Management, recently agreed to deepen cost cuts as it contends with feeble demand in some markets and persistently low oil prices.

GE was little changed before regular trading in New York. The shares plunged 16% this year through Thursday, while the Standard & Poor’s 500 Index climbed 10%.

Cash Focus

Flannery, a GE veteran who currently runs the health-care division, has said he will make cash flow a focus when he takes the helm on Aug. 1. GE set off alarm bells after reporting negative $1.6 billion in industrial operating cash flows in the first quarter, as working capital increased. That was about $1 billion worse than the company had anticipated.

In the latest numbers, “the cash flow isn’t as adverse, and the cash flow is everything,” said Nicholas Heymann, an analyst with William Blair & Co.

Second-quarter adjusted earnings fell to 28 cents a share. That exceeded the 25 cent average of analysts’ estimates compiled by Bloomberg. Sales declined 12% to $29.6 billion, compared with $29.2 billion expected by analysts.

Investors may be concerned about margins in the industrial businesses, which barely budged, Heymann said. Revenue climbed 5% in GE Power, the world’s largest maker of gas turbines. At GE Aviation, which is boosting production on a new jet engine, it was little changed.

Sales slid 3% in the oil and gas unit, which has struggled amid the plunge and sluggish recovery of crude prices. GE this month closed a deal to combine the division with Baker Hughes, a move to broaden product offerings and help the companies capitalize on an eventual rebound. GE owns 62.5% of the new entity.

Reshaping Portfolio

Immelt has been reshaping the portfolio and tightening operations amid pressure from Trian. The firm co-founded by Nelson Peltz took a stake in GE in 2015 after Immelt unveiled a plan to shed financial businesses and tilt the company toward equipment manufacturing.

Immelt last month revealed plans to step down after nearly 16 years as CEO. He will stay chairman until the end of the year.

Despite becoming one of the world’s best-known CEOs, Immelt failed to win the accolades that Wall Street bestowed on his predecessor, Jack Welch. The shares have fallen by almost one-third since Immelt took the helm. He faced criticism for cutting the dividend in 2009 and paying too much for some acquisitions, and he also built up the oil and gas division just before crude prices plummeted.

In preparation for the CEO transition, Flannery has been on a “listening tour” to meet with investors, customers, employees and government officials. He plans to provide an update in mid-November to detail his plans for the portfolio, cost cutting and the 2018 outlook.

GE on Friday stuck by its forecast for 2017, reaffirming expectations for operating earnings of $1.60 to $1.70. Organic revenue will grow 3 percent to 5 percent.

By Richard Clough

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