General Electric Co. still has things to learn about transparency.I’ve long held that a true recovery for the struggling industrial giant must entail a restoration of credibility and a reckoning with the tendency toward obfuscation that allowed its cash-flow and balance-sheet challenges to lurk beneath the surface for so long. GE has made some progress on this front – including overhauling its board, hiring a new head of investor relations and opening the door to hiring a new auditor – but it’s also made some missteps that have left me wondering what the company was thinking. The latest of these came to light on Wednesday when Chief Financial Officer Jamie Miller acknowledged that one of the ways GE presented orders booked at its power business in the first quarter may have created some “confusion.”
GE touted 4.5 gigawatts of power-equipment orders on its earnings call. Miller had said at the time that these were orders for heavy-duty gas turbines, a market that has seen a significant plunge in demand. JPMorgan Chase & Co. analyst Steve Tusa questioned that statement in the wake of the call, saying in a note the math just didn’t make sense, given that GE said it had booked only three of its higher-wattage H-class turbines in the period. Then, when Miller was asked about this at a Goldman Sachs Group Inc. conference on Wednesday, she clarified that GE was referencing orders as defined by industry data firm McCoy Power Reports. This includes not only heavy-duty gas turbines but also orders funneled through joint ventures and aeroderivative models. The 4.5 gigawatt count also appears to include some orders that were already in GE’s backlog at the end of 2018, meaning that’s not all new business.
Miller’s confusing comments on the earnings call last month about the 4.5 gigawatts may have just been a verbal typo. But it’s unclear why GE made a point of mentioning that number in the first place. According to Tusa, the company hadn’t typically highlighted the McCoy measure of demand on a quarterly basis for its power division and had only disclosed orders in units, which paints a clearer picture. Miller seemed to agree that this number risked being misleading, saying Wednesday that McCoy’s reporting guidelines and the manner in which GE actually books orders for its earnings are “apples and oranges.”
Whether intentional or not, highlighting that 4.5 gigawatts of orders created a perception among some followers of the company that GE’s troubled power business was seeing the early stages of a stabilization, if not a recovery, and that its forecast for flat heavy-duty order volume over the next few years could turn out to be too pessimistic. Orders for both gas turbines overall and H-class models were indeed up in the period, but Tusa estimates first-quarter orders for turbines used by utilities were more in the ballpark of 1 gigawatt for GE after also backing out a unit that was sold to the GE Capital finance arm. That would actually put GE’s share of orders behind that of Siemens AG and Mitsubishi Heavy Industries Ltd. on a comparable basis, Tusa says.
You’ve seen a similar dynamic play out in GE’s forecasts. GE reported $4.5 billion of adjusted industrial free cash flow in 2018, well short of its targets and past performance, and analysts had been bracing for further declines in 2019. But CEO Larry Culp still shocked the market when he said in March that cash flow would actually be negative for the year. He also said just two weeks before the first quarter ended that GE would burn significantly more cash in the period than the $1.7 billion it had the year prior. When GE actually reported its earnings, cash flow was significantly better than analysts had been expecting based on those comments. To be fair, the company was at pains to emphasize that was largely a function of power orders coming in earlier than expected and stuck by its guidance for as much as a $2 billion cash burn across all its industrial businesses in 2019.
Reading between the lines here, GE seems to be trying to set the lowest possible bar for itself while also giving Wall Street positive data points to latch onto. There’s nothing wrong with positioning the company to exceed management’s forecasts for a change. But it does create this weird dynamic between expectations and reality that sets up investors to think that if GE only ends up burning $1 billion of cash this year it’s somehow a success. Miller on Wednesday said that GE expected its industrial businesses to consume between $1 billion and $2 billion in cash in the second quarter. That would be in line with management’s previous comments that cash flow deterioration should be spread out through 2019. But that would also imply that the better-than-expected power orders were pulled forward from the second quarter, rather than the fourth quarter when volumes and cash flow are typically the highest, which is surprising.
I genuinely think GE is trying to improve its transparency and accountability. It’s to Miller’s credit that she didn’t try to dance around the question about the orders numbers and addressed the confusion upfront. Overhauling a culture isn’t easy, but it just seems like GE sometimes can’t get out of its own way and given the history, it’s hard to give the company the benefit of the doubt. It’s healthy for the management team to get pressed on the things that it says. Hopefully in the long run that leads GE to a better place.