GE Stands by Forecast for Now Despite $500 Million Virus Drag
GE Sees Up to $500 Million Virus Drag on First-Quarter Cash Flow
(Bloomberg) -- General Electric Co. stood by its annual financial forecast despite a first-quarter blow from the coronavirus outbreak that has disrupted supply chains and hurt business activity worldwide. There’s still a danger that the outlook will worsen.
Free cash flow from manufacturing operations will take a hit of as much as $500 million this quarter because of the virus’s spread, GE said Wednesday. The infection will drag down operating profit by as much as $300 million, in part as canceled flights in China weigh on the aviation business. The 2020 forecast doesn’t incorporate the virus’s impact beyond the first quarter, with GE saying it’s “too early” to assess the longer-term effects.
The outbreak poses a new risk to Chief Executive Officer Larry Culp’s attempt to pull Boston-based GE from one of the worst slumps in its 128-year history. His efforts to pare debt and sell assets at the maker of jet engines, power equipment and medical scanners have restored a measure of investor confidence after a sharp downturn in recent years.
“GE is reaffirming the broader road map of its longer-term operational improvements and deleveraging targets,” Deane Dray, an analyst at RBC Capital Markets, said in a note. “There is still material downside risk to GE’s 2020 guidance metrics from the coronavirus’s still-evolving impact on global demand and supply chains.”
The shares were little changed at $10.90 at 10:37 a.m. in New York. After losing more than $200 billion in market value during the two years ended 2018, GE had one of its best annual stock gains last year.
‘Helpful Piece’
While the coronavirus presents a new challenge, GE got a bit of good news from a recent deal with Boeing Co. regarding payment for engines for the 737 Max, which has been grounded for almost a year after two deadly crashes.
The agreement gives GE added clarity for its aviation division, which has been a bright spot amid the company’s troubles in recent years. Safran SA, which makes Max engines with GE through a joint venture, said last week that the agreement calls for payment of all delivered units this year and a schedule of compensation for 2019 deliveries.
“That does give us certainty relative to that stream of cash at aviation, which is a helpful piece in the puzzle,” Culp said in an interview.
What Bloomberg Intelligence Says
“Intact 2020 guidance could understate risks outside of General Electric’s control, namely the coronavirus, but we believe profit targets can be met with loftier gains from its turnaround plan.”
--Karen Ubelhart, North America industrials analyst
Read the report
Adjusted earnings in the first quarter will be about 10 cents a share, GE said in a statement. That trailed the 13-cent average of analyst estimates compiled by Bloomberg.
The full-year forecast calls for adjusted earnings of 50 cents to 60 cents a share and industrial free cash flow of as much as $4 billion.
“The guidance is designed to sail through any kind of imaginable weather in 2020,” said Nicholas Heymann, an analyst at William Blair & Co. There are signs that the ailing renewable-energy business can be turned around, he said, and “we got a little less headwind from the Max.”
China Business
The coronavirus presents an acute concern for GE, which has 18,000 employees in China, including about 2,000 in Hubei province -- the epicenter of the global outbreak. The virus reduced operating capacity at GE and its suppliers.
“Most of our facilities in China, save our facilities in the Wuhan area, are back up and operating,” Culp said. “The performance levels are not yet uniformly at full capacity.” All but two of GE’s sites in the country have restarted since the outbreak.
“We clearly have inventory in our facilities that we’re using, but the replenishment of certain components in some cases may not be back-filled in the time frame we would like,” Culp said. “Given how long China has been off line, we are seeing either some of those part shortages or working with our supply base to avoid any of those shortages.”
Departures of aircraft serviced by GE have dropped about 60% in China, reducing billings.
GE itself has put in some travel restrictions for employees in affected areas, Culp said, but hasn’t issued a blanket ban because “so much of what we do is mission critical with our customers.” Still, he said, “we have encouraged everyone to go to the no-handshake routine.”
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
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