GE renewing its focus on returning to industrial roots, looks to cut $2B in costs
GE's new CEO John Flannery said the company will shed business units worth more than $20 billion over the next several years and plans to cut US$2 billion in costs in 2018
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NEW YORK—General Electric’s new CEO is starting to lay out bold plans to return the conglomerate to its industrial roots by slashing costs and streamlining its operations.
John Flannery said Oct. 20 that the company will shed business units worth more than $20 billion over the next year or two.
Flannery, who has been on the job less than three months, is expected to provide more details next month on how he will put his own stamp on the Boston-based manufacturing giant. But he offered plenty of hints after GE’s latest disappointing financial results.
GE drastically cut expectations for the full year after its third-quarter profit fell more sharply than expected due to large restructuring charges. Flannery called the results unacceptable.
“It’s also clear from our current results that we need to make some major changes with urgency and a depth of purpose,” he said on a conference call with analysts.
The company’s shares slid 6 per cent in morning trading but recovered throughout the day. They ended regular trading up 25 cents at $23.83.
Flannery led GE’s health care unit until becoming CEO in August. He replaced Jeff Immelt, who had reshaped GE after taking over from legendary CEO Jack Welch but couldn’t reverse a slump in the company’s stock while the overall market boomed. GE shares are down 25 per cent this year, the worst performer in the Dow Jones industrial average.
Immelt also came under fire for executive perks. GE acknowledged that on occasions an empty plane followed the CEO’s jet on trips, and one of Flannery’s first moves was grounding GE’s fleet of six corporate jets. Flannery has replaced several top executives.
On Friday, Flannery did not mention Immelt by name but said he was focusing on fixing GE’s “culture,” which he said “needs to be driven by mutual candour and intense execution, and the accountability that must come with that.” He mentioned the overhaul of the top executive ranks and the addition to the board of a representative from activist investor Trian Fund Management.
“Things will not stay the same at GE,” Flannery vowed.
The CEO promised more details on GE’s transformation at a Nov. 13 meeting, but he talked Friday about major cost cuts across the board and the exit from a slew of businesses.
General Electric Co. has been paring businesses for well over a decade now.
The drive to get lean has come with a big price tag.
During the quarter, profit fell 9 per cent to $1.84 billion, or 21 cents per share. Earnings, adjusted for non-recurring costs and to account for discontinued operations, came to 29 cents per share, but that’s still far from the per-share earnings of 49 cents that Wall Street had expected, according to a survey by Zacks Investment Research.
Revenue jumped 14 per cent to $33.5 billion, exceeding the $31.92 billion analysts had expected. Sales in the power unit, GE’s biggest source of revenue, fell 4 per cent and the unit’s profitability fell by half. Sales and earnings in the transportation division were off by double-digit percentages.
But other parts of GE are growing including aviation, the company’s second-biggest business _ GE makes jet engines _ and health care. Revenue from the oil and gas division nearly doubled on the acquisition of Baker Hughes, which closed in July.
The company has already surpassed its goal of cutting $1 billion in industrial costs this year. It plans more than $2 billion in cuts next year, double the original target, to go with at least $20 billion in divestments over the next year or two, Flannery said.
GE has many strong areas “but a number of other businesses which drain investment and management resources without the prospects for a substantial reward,” Flannery said. “We will have a simpler, more focused portfolio.”
The company cut its full-year outlook to between $1.05 and $1.10 per share. That’s well down from a previous per-share outlook of $1.60 to 1.70, and far off the $1.54 per share analysts that had been looking for, according to a poll by FactSet.
“As bad as earnings undeniably are, the focus remains on cash,” said Morgan Stanley analyst Nigel Coe.
Flannery’s focus was also on cash flow in an August letter, and was a big driver in the sell-off early Friday.
Industrial operating cash flow was $1.7 billion during the quarter, more than a billion short of projections from Morgan Stanley.