GE Tumbles Most in Three Months as Power-Unit Woes Sap 2019 Cash

(Bloomberg) -- General Electric Co.'s new boss warned of additional cash problems at the ailing company, eroding confidence in a nascent turnaround and sending the shares tumbling.

Cash flow from GE's industrial operations will be negative this year as GE grapples with further challenges in its power business and other operational pressures, Chief Executive Officer Larry Culp said Tuesday at an industry conference. That's a sharp drop from 2018, when the maker of gas turbines and jet engines brought in $4.5 billion by the closely watched measure.

“We think this is a transformation in the making, but we need to pay the piper,” he said. GE is taking steps now to “manage though a challenging time, with an eye toward '20 and '21.”

The startling revelation underscored how far Culp has to go to pull GE out of one of the deepest slumps in its 127-year history. Since taking the helm in October following the surprise ouster of John Flannery, Culp has announced a restructuring of the power-equipment unit, cut costs and agreed to the $21.4 billion sale of a bio-pharmaceutical business.

The shares reversed earlier gains and plunged as Culp spoke at the JPMorgan Chase & Co. conference in New York. GE fell 4.7 percent to $9.89 at the close in New York, the biggest decline in three months.

GE's Cash Burn Should Be a Wake-Up Call: Brooke Sutherland

The slide sapped momentum from a rally that started the year. GE had surged 43 percent through Monday, buoyed by the CEO's focus on strengthening the balance sheet and selling assets. Last year's slump was the worst since at least the early 1970s.

Rating Risk

Investors have kept a close eye on adjusted industrial free cash flow, GE's measure of the leftover cash generated by its manufacturing units after accounting for operating and other expenses. The metric is considered an indicator of earnings potential.

Cash flow is also an important element in credit-rating outlooks, so an outflow raises the risk of additional debt downgrades, Gordon Haskett analyst John Inch said in a note.

The power business remains a significant drag, Culp said. That unit, which makes gas turbines and other equipment, has struggled with slumping demand, technical problems with a key product and the ill-timed acquisition of Alstom SA's energy business, which contributed to a $22 billion charge last year.

‘Multiyear Turnaround'

“This is a multiyear turnaround in power,” Culp said. This year's cash outflow from the power division will be worse than last year's $2.7 billion burn.

The headwinds to 2019 cash flow will “meaningfully lessen” in 2020 and 2021, GE said in slides accompanying Culp's presentation. The company anticipates strong performance in its aviation and renewable energy units this year.

GE plans to provide its full 2019 forecast on March 14.

To contact the reporter on this story: Richard Clough in New York at rclough9@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

©2019 Bloomberg L.P.