GE's Annual Report Spells Out Risks from Boeing's 737 MAX and Has Plenty of Detail for Investors -- Barrons.com
By Al Root
General Electric management has released its 2019 annual report, in which CEO Larry Culp reviewed the year and the company provided disclosures about cash flow, debt, pensions and the 737 MAX. It is an interesting read. The good news for investors is the report has shrunk.
The number of pages in an annual filing, of course, doesn't say anything material about a company or its stock. Often times, debt or merger agreements can get appended to annual reports, dramatically increasing the length of a filing. Still, the new report's format is a sign that Culp -- who recently celebrated his one year anniversary as the boss -- is putting his style and stamp on the company.
General Electric's (ticker: GE) industrial net debt finished the year at about $48 billion, down from $55 billion in 2018. Debt at the industrial conglomerate can be difficult to follow because GE Capital -- the company's finance unit -- is larger than lending units run by other industrial companies.
Total debt borrowings fell to $91 billion from $104 billion. Debt will fall further after GE closes the sale of its biopharma health-care division to Danaher (DHR). GE also has more Baker Hughes (BKR) stock to sell.
GE's pension plan, which in some respects is another form of debt, grew to almost $100 billion, up about $5 billion. Falling interest rates were responsible for the increase.
A pension obligation is a stream of future payments, discounted back to the present. When interest rates are lower it means a company has to set aside more to meet its claims. Investing returns in a low-rate environment fall. That's the way the math works.
GE's pension underfunding grew by about $1 billion, far short of the $5 billion obligation increase. Company efforts to manage the obligation, including cash contributions, helped that metric.
The company also offered investors more cash-flow detail by segment. GE Power -- the company's most troubled division -- burned through $1.5 billion in cash during 2019. That is a lot, but down from more than $2.2 billion in 2018.
Cash flow at aviation -- GE's best performing division -- was stable at about $4.4 billion, even though the company faced a significant cash-flow headwind because of the Boeing (BA) 737 MAX. GE, along with its joint venture partner Safran (SAF.France), makes the engines for the MAX, which has been grounded worldwide since mid-March following two deadly crashes inside of five months.
GE also spelled out its exposure to the MAX in the company's aircraft leasing unit. GECAS, short for GE Capital aviation services, owns 29 MAX aircraft. In addition, it has made pre-delivery payments for 144 MAX jets and has financing commitments to buy an additional 18 aircraft under purchase and lease-back contracts with airlines.
"As of December 31, 2019, we have approximately $2.5 billion of net assets -- $4.8 billion of assets and $2.3 billion of liabilities) -- related to the 737 MAX program," the annual report says.
The numbers and arrangements aren't surprising, but investors now have more detail.
The MAX did end up as a new risk factor in GE's annual report. Companies list a lot of risk factors -- it is required by regulators -- and the MAX shows up in a risk factor related to product safety.
Barclay's analyst Julian Mitchell, in a Monday research report, called the new disclosures interesting, choosing to highlight GE's installed base of equipment. GE, for instance, has 7,700 power turbines and 37,800 commercial- aircraft engines and 26,600 military engines in the field.
Mitchell rates shares the equivalent of Buy and has a $15 price target for the stock. J.P. Morgan analyst Stephen Tusa, on the other hand, rates shares the equivalent of Sell and has a $5 price target. He also wrote a report about the annual filing.
He remains skeptical and in his detailed report he questioned R&D spending, working capital management and employee head count. The filing seems to have done little to allay his concerns.
At least the filing was easier to get through this year.
GE, under Culp, is still in turnaround mode. That is one reason analyst price targets range from $5 to $15 a share. The stock is down about 48% since the end of 2014. The Dow Jones Industrial Average, for comparison, is up 81% over that span. The S&P 500 is up 74%.
GE shares were up 0.2% to $11.89 early Tuesday.