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Disappointing 3Q17 Results Force General Electric to Cut Guidance

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Part 9
Disappointing 3Q17 Results Force General Electric to Cut Guidance PART 9 OF 10

Industrial Cash Flow—A Soft Spot for General Electric in 3Q17

GE’s industrial cash flows in 3H17

General Electric’s (GE) Industrial segments’ operating cash flows (or CFOA) have been a weak spot for the company. In 3Q17, GE’s cash flows from continuing operations in this segment totaled $465.0 million. 

Even if we leave the ~$5.1 billion in dividends from GE Capital in 3Q16, the Industrial cash flows from continuing operations in that quarter totaled $2.5 billion.

Industrial Cash Flow—A Soft Spot for General Electric in 3Q17

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GE experienced a huge fall of 82% in its Industrial segment’s cash flow in 3Q17. After adjusting the deal taxes and GE Pension Plan funding, the non-GAAP1 Industrial cash flows in 3Q17 totaled ~$1.7 billion, still down 40% from $2.9 billion in 3Q16.

Factors impacting GE’s Industrial cash flows

On GE’s 2Q17 conference call, the company’s former CEO, Jeff Immelt, stated, “We expect to hit $16 billion to $20 billion of free cash flow plus dispositions. We still expect to have solid Industrial CFOA between the $12 billion to $14 billion.” 

In our coverage of GE’s 2Q17 earnings, we observed that GE’s working capital management poses a challenge.

During its 3Q17 earnings call on October 20, 2017, Jeff Bornstein, GE’s outgoing CFO, said, “Versus our expectations, our CFOA in the quarter was negatively impacted by two things: lower-than-expected power earnings, and underperformance in working capital.”

Bornstein continued, “This is worse than expectations, primarily driven by lower-than-anticipated power volume, which resulted in lower earnings and higher inventory on hand. We also had lower oil and gas collections versus plan.”

This poor performance in extracting cash flows from Industrial operations has led the market to expect the new CEO, John Flannery, to announce a dividend cut. As the November meeting approaches, this possibility hasn’t been ruled out.

ETF discussion

Boeing (BA) leads the holdings of the Industrial Select Sector SPDR ETF (XLI), comprising ~6.5% of its portfolio. Investors who prefer indirect exposure to industrial stocks can consider investing in XLI. General Electric (GE), 3M (MMM), and Honeywell International (HON) comprise ~6.1%, ~6.1%, and ~5.0%, respectively, of XLI’s holdings.

In the final part of our 3Q17 post-earnings series for GE, we’ll look at analysts’ commentary on the company.

  1. generally accepted accounting principles
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