GE vows 'sweeping change' to combat falling profits

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After what he called “horrible” results in the third quarter, John Flannery, General Electric (GE)’s new CEO, vowed on Friday to shed more than 20 billion US dollars worth of assets and hold executives accountable for failing to deliver profits.

GE badly missed Wall Street expectations and slashed its full-year forecast, sending shares down as much as 6 percent early in the day. But the stock rebounded and closed up 1 percent at 23.83 US dollars after new CEO said he will focus the company on delivering profit and cash to shareholders.

John L. Flannery, chairman & CEO of GE/ Photo from GE's website.

As the AP News reported, during the quarter, profit fell by 9 percent to 1.84 billion US dollars, 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.

Flannery said the company has already surpassed its goal of cutting 1 billion US dollars in industrial costs this year. It plans more than 2 billion US dollars in cuts next year, double the original target, to go with at least 20 billion US dollars in divestments over the next year or two, according to AP News.

Investors are pushing for big changes after more than a decade of frustration at poor returns from the 125-year-old maker of power plants, jet engines, medical devices and other industrial equipment.

Since former CEO Jeff Immelt took the helm in September 2001, the stock is down more than 40 percent and has posted a negative return even after reinvesting its juicy dividends.

Flannery, who took over as CEO on August 1, said he would change GE’s culture to hold managers more accountable, demand better performance from the businesses and reduce the complexity of GE’s portfolio.

Flannery led GE’s health care unit until becoming CEO in August. He replaced 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 percent this year, the worst performer in the Dow Jones industrial average, according to the AP news.

GE’s good businesses are being held back by others that “drain investment and management resources without the prospect for a substantial reward,” Flannery said on a conference call with analysts.

“We will have a simpler, more focused portfolio” in coming months, he said. “We are driving sweeping change.”

Flannery declined to say what is on the chopping block, details he is due to unveil on November 13. Immelt also shook up GE’s portfolio, shedding plastics, NBCUniversal and most of GE Capital. He made acquisitions to build its power and oil and gas businesses. He also poured money into 3-D printing and a digital-industrial unit. Flannery voiced support for both on Friday.

Flannery also suggested GE would do what it could to sustain its dividend, but that it had to balance paying investors with investing to build its businesses.

Analysts had clear ideas about what pieces GE could do without: “GE will likely sell transportation, lighting and about anything else that isn’t nailed down and very core,” analyst Scott Davis at Melius Research wrote in a note on Friday.

June 11, 2016: The logo at the entrance of General Electric (GE) Celma, GE's aviation engine overhaul facility in Petropolis, Rio de Janeiro, Brazil/VCG photo

As proof of GE’s new approach to performance, outgoing Chief Financial Officer Jeff Bornstein took the blame for the poor results during the conference call, his last as CFO.

“Accountability has to start with me,” he said. “We are not living up to our own standards or those of investors, and the buck stops with me.”

GE’s poor third-quarter results showed the depth of problems confronting Flannery, and he voiced eagerness to shake up GE’s highest levels. A board seat recently given to Ed Garden, a founding partner at activist investor Trian Fund Management, would spark “robust dialogue,” he said, and shedding some of the 18 directors was “being examined.”

GE cut its profit forecast for the full year to 1.05 US dollars to 1.10 US dollars a share, from 1.60 US dollars to 1.70 US dollars previously, and said it would generate only about 7 billion US dollars in cash from operations, down from 12 billion US dollars to 14 billion US dollars it had forecast earlier. It left its dividend unchanged.

Source(s): Reuters