GE’s aerospace operations drove a recovery in the industrial group’s cash flow in the second quarter, but the group cautioned that its working capital would come under pressure as it shielded customers from the full effects of supply chain disruptions for the rest of the year.
Larry Culp, the GE chief executive who plans to become head of the remaining aerospace business after it splits off its healthcare and energy divisions, said the group was sticking to its guidance that full-year adjusted earnings per share would fall between $2.80 and $3.50 a share.
However, “external pressures” including inflation meant that GE was on track to hit the low end of its guidance on all metrics except cash, where delayed renewable energy orders and the expected hits to working capital would “push out” about $1bn of free cash flow to a later date.
Conditions were “so chaotic and unpredictable”, particularly in aerospace and healthcare, that GE would “hold our customers back” if it did not carry more inventory than it would like to so that it could fulfill orders, Culp told the FT.
“This is not going to be something that GE stops talking about in 2022,” he said of the supply chain challenges, but “I’d like to think we’re not still talking about it in 2024.”
Analysts’ consensus estimates for full-year earnings had already come down to $2.80 a share before Tuesday’s report, down from $3.20 three months earlier when GE cautioned in April about the impact of lockdowns in China and the war in Ukraine.
A 27 percent jump in aerospace revenues delivered a 5 percent advance in GE’s top line, with adjusted revenues of $17.9bn beating analysts’ expectations of $17.6bn. Services revenues in the aerospace business surged 47 percent while commercial engine deliveries fell due to supply chain disruptions.
GE reported a narrower net loss, down from $1.04bn to $244mn, and adjusted earnings of 78 cents a share, up from 22 cents a year earlier and ahead of Wall Street’s forecast of 37 cents.
Its shares were up by more than 6 percent by midday in New York on Tuesday, leaving them down 22.7 percent year to date and still lagging the S&P 500.
GE said it remained on track with the plan it announced last November to split into three public companies focused on healthcare, energy and aviation by 2024. On Tuesday it said it incurred “separation costs” of about $200mn in the second quarter as it moved towards the three-way split.
Speaking on the day that 3M announced plans to separate its own healthcare businessCulp said he remained confident that the strategy would boost GE’s valuation in the long run.
“I think the view that we’re going to unlock value will play out over time. That healthcare investor who will want to — and may well need to — own GE HealthCare when it’s an independent company can’t do so today. That demand for that stock isn’t yet something we can tap into,” he said.
GE announced this month that its energy business would be rebranded as GE Vernova when it goes public in 2024, its healthcare business would be spun off early next year with the name GE HealthCare and Culp would lead the remaining aviation business, which will be called GE Aerospace.
Inflation pressures would lead to slightly lower healthcare profits of $3bn in the full year, GE said. It added that it no longer expected a “step up” in profit in the second half of the year at its renewable energy business, where it blamed “paralysis in Washington” for a shortfall in expectations for the onshore wind turbine market.