GE - Industrial Management Cases

By pjain      Published July 20, 2020, 12:37 a.m. in blog Invest   

GE Business Review for Investors - expensive value trap for 2020

July 2020 COVID hurts - c7 [(5.5 13.3) 31] y=0.6% de=2.5x pay=10% 5yr$-4%e-15%

  • 2020/Covid ALL 3 big divisions are HURT
  • New CEO Culp has admitted that things have gotten so far off track in 2020, free cash flow is going to be negative in 2020.

  • GE Aviation => NEEDS MONEY - No FCF - needing $4b/qtr in Q2'20

    Best GE analyst Tusa believes that the company is not adequately protected against the collapse of the aviation sector

  • Power GE expects ~20% gas turbine outages shifting 1H to 2H; Renewables faces supply chain challenges layering onto structural operating challenges

  • Healthcare moderate organic pressure (and likely mix headwinds), net of surges for some products,” Glynn stated in a note.

  • Oil services/equipment unit BKR to keep on giving HUGE losses

  • Altman Z-Score of 1.41, which indicates it could go bankrupt within the next 24 months.

  • HOPELESS til Covid-19 stands!

    I argued that the company doesn’t stand a chance in this type of economy, no matter how many strings Culp pulls. He isn’t going to be able to pull a rabbit out of his hat. Until we are virus-free, GE is not the kind of stock you want to own. It’s a multi-year turnaround. It’s pretty hard to fix a business when the economy’s in the dumpster. The risks of owning GE stock in the short-term outweigh the potential benefits over the long haul. I do not recommend it. - Will Ashworth, May 2020

  • HIGH DEBT $85b Debt as of 5/2020 $66b LT debt $19b ST debt

  • $262b Initial Book Assets - but how sellable are those assets?

  • BA engine sales hurt badly on 737max grounding! Hurts most profitable GE Aviation

G.E. lowered its earnings target for next year and reiterated that 2018 would be a “reset year.”

Q1, 2020 - Baker Hughes writeoffs hurt GE

Q1 2020 results on April 29. With Baker Hughes (NYSE:BKR) announcing it will book a $15 billion impairment in the first quarter against its Oilfield Services and Oilfield Equipment operating units due to uncertainty surrounding the demand for oil during the pandemic.

2018 - Reset year

2017 EPS-10% FY$1 exp $1.6

  • Flannery took large one time-charges
  • Sharp drop in its big power-generation business was a surprise, and poor quarterly performance and scaled-back outlook for the year.

About GE

G.E., the country’s largest manufacturing company, had nearly 300,000 employees worldwide at the end of 2016 before Flannery.

GE Timeline

After Edison invented the light bulb, GE was the business that actually put it into production, with the generation and distribution to make it happen.

GE then the company diversified, getting into heavy INDUSTRIAL electrical equipment

As prosperity reigned, GE exploited national consumer appliances booming with nationwide distribution even through 1960s. At that time the quality was excellent.

Unfortunately, GE will also be known as one of the greatest riches to rags stories in US corporate history. Misleadership and bad timing created a perfect storm that decimated the company.

SEG: GE Aviation

  • 2020 in deep doodoo
  • Division’s CEO, David Joyce, which provided shareholders with very little in the way of good news in 2020.
  • Boeing 737-Max and 2020 Covid-19 Hurts Airplane Engine business
  • What is worse, 12 year veteran Joyce is retiring June 15, 2020.
  • Customers have reduced production schedules for 2021+
  • NOT ENOUGH Cost reductions might reduce the free cash flow outflows, but they can’t eliminate them.

The company’s aviation unit, a leading manufacturer of jet engines delivered strong profits in Q4'19. Revenue for the aviation division was flat at $7.2 billion, but the company reported that orders rose 11 percent in the quarter.

SEG CORE: GE Healthcare

GEs health care business, which includes life sciences and medical-imaging equipment, delivered strong profits in Q4'19. The health care business saw sales grow by 6 percent to $5.4 billion.

SEG CORE but Problematic : GE Power expanded as Generation business slowed

While GE has a strong franchise in the power-generation business and industry-leading technology in its gas turbine business, especially its new line of the large power generators, each of which produces enough electricity to light up 500,000 households. Worldwide, 30 percent of electricity is generated by G.E. equipment.

Its power generation business badly misjudged the electric power market. The decline in the power business also put a big dent in G.E.’s cash flow, reducing the corporate total by an estimated $3 billion, to about $7 b.

In fall 2017, John Flannery told investors that G.E.’s big electricity-generation division had badly misjudged the market and produced too many power turbines, inventory piled up. He warned that it would take a year or more to fix the business.

Flannery - It never should have happened. We screwed up running this thing. .. The entire top management team of the power-generation unit has been replaced.

The outlook for 2019, while improving, is expected to be challenging as well for its big power-turbine business, which fell off sharply this year.

However it is also strong in wind turbines for renewable energy.

Demand permanently

Renewable power sources have somewhat curbed demand for new gas turbines, as have energy conservation programs, especially in developed nations.

SEG: Lighting - for sale

G.E.’s lighting division is already up for sale.

SEG: Railway locomotive - for sale

G.E.’s railway locomotive divisions is already up for sale even though its business is strong.

SEG: GE Capital legacy liabilities - Spinoff

Hit by lingering uncertainties about the liabilities of its finance arm, GE Capital.

Immelt has shed nearly all of the company’s finance arm, GE Capital. At its peak, the finance unit accounted for more than half of the company’s profits, and its lending ranged from home mortgages in Japan to reinsurance for long-term care for the aged.

SEG Oil and Gas: Baker Huges - Spinoff

  • 2017 July completed merger of its oil and gas business with Baker Hughes as a separate company, in which G.E. holds a 62.5 percent stake.
  • The revenue from that merged business is why G.E.’s revenue grew 14 percent, to $33.5 billion, in the third quarter.

Strategic Management Analysis of GE

Complexity of Conglomerates hurt GE

"Complexity has hurt us.” - Flannery

GE's conglomerate complexity was long a part of the company’s pitch to investors. Past executives like Jack Welch argued that they could efficiently manage businesses that had little in common, like television, with NBC, and financial services. Other companies followed that thinking as well, leading to a wave of deal-making.

Legacy of decades of Pensions dragging down

  • GE was an attractive employer affectionately called the company "Generous Electric".

    • These pensions were reduced, and Jack enriched himself and his senior staff on the backs of talented employees.
  • GE is regulated on "properly" funding the pensions - but companies given lots of leeway in "estimating rates of returns" to reduce bite eg. Oct 2019 - had to pre-fund $5b ERISA [Employee Retirement Income Security Act] funding requirements for 2021 and 2022

    • This should reduce its pension deficit down to $8b (from $13b earlier)
  • 2009 ended its pension plan, new employees were offered 401k plan.

  • 2012 - GE pension plan closed to all new entrants
  • 2019 Oct - freezing pensions for about 20,000 CURRENT salaried employees
    • Legacy drags changes by law e.g. even Oct 2019 pension freeze was limited
    • No mandatory change for already retired and already collecting pensions
    • It will offer a lumpsum option for 100,000 former employees who have NOT started pension payments early payoffs to people to cash out now.

Long Term Care miscalculated - Tens of Billions of Liabilities

In Jan 2018, Flannery set aside $15 B over seven years to pay for obligations held by its finance unit, mainly on long-term care insurance policies.

Board Complexity failed GE

John Flannery is reducing G.E. board of directors to 12 members from 18. Three of the dozen will be new directors.

Financial Engineering Optimization killed Competitiveness

Jack used creative accounting, cutting the reserves for the credit and real-estate business which boosted short term EPS and the stock, eventually cost ing the company billions.

Jack Misjudged Long term environment.

  • Jack never had the foresight to recognize the changes in the external environment,

Big push to go Global - helped but reduced margins

  • GE went from 60% sales in the USA to 60% coming from Global.

GE under Jack Welch Built up Conglomerate

Neutron Jack (Welch) came along to boost stock/financials

Jack Welch ushered in an aggressive management style with high emphasis on results now. GE made a lot of money for its stockholders during this time and peaked at about $600 billion in revenue. - The company also became more of a bank. Lastly, it's Six Sigma quality program was ccopied industry wide. - All he did was sell off assets that this "genius" couldn't manage better - Jack failed to improve GE performance and competitiveness

Arrogant Jack

  • He thought he was perfect and that was the demise of GE

Jack was Bad at forecasting Mega Moves - Finance, Power, Oil

Also it didn't anticipate downturn in fossil fuel power plant industry.

Buys good businesses and Runs them into the Ground

Destroyed employee morale - Stacking, Pension Cuts

  • Remember the "cut the bottom 10% forced ranking of people which destroyed loyalty. I never worked for them, but I was a supplier and watched it all happen.

Jeff Immelt 2001-2017 : Started unwinding GE

Jeffrey R. Immelt, led G.E. for 16 years after Mr. Welch retired in 2001 to Aug 2017.

Mr. Immelt’s goal for G.E. was to create an industrial company for the internet age, adding software and sensors to industrial equipment to make “smart” machines. It was a bold plan, and Mr. Immelt once predicted that G.E. would become “a Top 10 software company” by 2020.

  • Jeff Immelt was left to pick up the pieces as a protege of Jack, he could not really change things or undo Jack's "legacy"

Immelt was sucking up to Barack Obama, trying to get government contracts, and all the buddy buddy stuff. But Obama infra spend never happened.

Immelt came in and destroyed it all, quickly adding layers upon layers, especially in the sales force which became a bloated, unaccountable mess.

Sells business and they Thrive in Freedom - Synchrony bank, NBC

Mr. Immelt described GE as a “classic conglomerate” and sold off its media business, NBC Universal, to Comcast and its consumer appliance business, among others.

When the financial crisis of 2008-2009 hit, GE had to sell much of the failing financial businesses, and after several bad business decisions, they had to sell more businesses to pay down debt, fund the pension, and maintain cash flow.

GE appliance devision now owned by China anyway. This will attract globalist minded buyers as long as American jobs increasingly go overseas and/ or total product from the USA is decreasing.

John Flannery, CEO Aug 2017-

Mr. Flannery is a 30-year G.E. veteran who is a finance expert and most recently ran the health care business.

He has made changes to the board including activists and removed three directors close to Immelt.

Recognizing Billions in Losses

  • Jan 2018 G.E. announced that it would take a $6.2 B charge in the fourth quarter, and set aside $15 B over seven years to pay for obligations held by its finance unit, mainly on long-term care insurance policies.

Cut dividend in Half as Downsized Supports less FCF

New CEO in fall 2017, sharply reduced its earnings forecast and cut its dividend by half, only its second payout cut since the Great Depression. G.E. it would cut its dividend, only the second time it has done so since the Great Depression. The quarterly payout will be sliced in half, to 12 cents a share.

With downsizing, there are far fewer businesses to put cash or support the dividend.

The total dividend payout had been $8.4 billion a year in 2016.

Cutting Costs and Capex, More stock Compensation

Mr. Flannery has attacked expenses wanting to "inject more rigor and accountability” into the G.E. culture. However most steps are symbolic and not structural. - company’s cost-cutting target for 2018 would be doubled, to reduce expenses by $2 b - Cuts in corporate overhead - grounded the corporate jet fleet and slashed the company car program - mostly symbolic savings - stretched out the construction schedule for G.E.’s new headquarters in Boston - closed down several international research-and-development labs - trimmed the work force in units like GE Digital.

Mr. Flannery is changing the compensation program for G.E.’s top 5,000 managers. The current plan, he explained, is about 70 percent in cash and the remainder in stock. The new plan, he added, will flip that ratio, with 70 percent of compensation in stock. CEO's own will be 100% in stock.

$20b of Divisions for Sale - Downsizing strategy

Mr. Flannery’s strategy will accelerate the streamlining job begun by Immelt his immediate predecessor.

The winnowing is to focus G.E.’s capital investment and management time on the most promising businesses with “no sacred cows,

Mr. Flannery is selling off businesses to streamline the company. The lighting and railway locomotive divisions are up for sale, and others could follow.

More than $20 billion in assets are earmarked for sale in the next couple of years. Even the three core segments of power, health and aviation could go on for sale if necessary.

Focus on industrial for turnaround

As of Jan 2018, Mr. Flannery emphasized that despite its current challenges, G.E. had industrial businesses that were fundamentally strong.

The turnaround he believed could be accomplished with belt-tightening and improved execution.

Early good results seemed reassuring - cash flow from industrial operations, although down, was above expectations as G.E. tries to reverse its slide.

GE Digital already cut, on block

Mr. Flannery has consistently declared his support for G.E.’s digital-industrial vision — but that does not guarantee the future for GE Digital.

A smaller G.E. might not need a stand-alone digital unit. Some analysts recommend putting all the software in the industrial divisions, like power and aviation, closer to customers so closing San Ramon Predix.

New CEO Larry Culp - replaces slow moving Flannery!

Background of Culp

  • "Given Culp's [CEO Larry Culp] history of turning around Danaher during his tenure as CEO there, as well as his success in boosting GE's results before the crisis, I continue to have faith in his ability to fix these execution issues," - Larry Ramer stated on May 11.

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