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GE pays a $1.5 billion penalty

Posted at 12:35 PM, Jan 31, 2019
and last updated 2019-01-31 12:35:18-05

General Electric’s power business keeps crumbling, but the beleaguered company put to rest a major question mark by reaching a $1.5 billion settlement with the Justice Department.

GE announced on Thursday that its adjusted profit declined more than Wall Street analysts had been anticipating. The latest stumble was driven by an $872 million loss at GE Power, the company’s turbine division.

But GE is finally moving past its decade-old subprime disaster. The company said it agreed in principle to pay a $1.5 billion civil penalty to settle the the Justice Department’s investigation into WMC Mortgage, the subprime lender that was shut down a decade ago.

Investors expressed relief that GE doesn’t need to pay more than the $1.5 billion it previously set aside for WMC. GE’s stock surged 17% on Thursday to three-month highs. GE’s stock performance was on track for its best day since 2009.

“We can begin to move that episode behind us,” CEO Larry Culp told analysts about the WMC settlement.

After a horrendous 2017 and 2018, GE shares have spiked about 35% this year on hopes that the worst is over. Although GE is still worth just a fraction of its all-time high, it’s one of the best performing stocks in the S&P 500 in 2019.

“We’re on the precipice of something great,” Culp said. “It’s a start, but we have much more work to do.”

Power problems linger

GE Power, which makes turbines used in natural gas and coal power plants has been the company’s biggest problem for years. The fossil fuels division has been hurt by the rapid rise of renewable energy.

Power orders slumped 19% in the fourth quarter, driving revenue down by 25%. The company blamed “continued execution and operational issues.” GE vowed to improve its power discipline, project management and execution. GE Power has been slashing jobs and shutting facilities.

“Fixing power will take time,” Culp said, adding that the division will struggle again in 2019 and the turnaround is “in the very early innings.”

GE sought to quiet speculation that it could auction off its lucrative aircraft leasing business for a whopping $40 billion.

“We have no plans to sell” the aircraft leasing unit, Culp said.

Shaky outlook

As expected, the bright spot at GE was its booming aviation business, which benefited from soaring orders for engines. GE Aviation logged a 24% jump in quarterly profit and reported an 89% surge in orders for its LEAP engine program.

Culp expects industrial operating profit margins to expand in 2019, but warned free cash flow faces headwinds. Revenue and profit are expected to grow modestly this year.

Culp was more bullish about the longer-term outlook, predicting cash flow will “grow substantially” in 2020 and 2021.

“2019 is still very much a work in progress, but the company is becoming stronger,” Culp said.

JPMorgan Chase analyst C. Stephen Tusa, Jr., one of the biggest GE bears on Wall Street, pointedly asked executives whether the company will generate free cash flow at all in 2019. Tellingly, Culp declined to answer directly, but promised more details soon.

John Inch, an analyst at Gordon Haskett, found the response alarming.

“Why would you give GE, after missing so many times over so many years, the benefit of the doubt?” Inch told CNN Business.

Shrinking the GE empire

Culp, the first outsider CEO in GE’s history, was hired last year to turn around the iconic maker of light bulbs, MRI machines and jet engines. Once the world’s most valuable company, GE has been slammed by years of bad decisions, including poorly timed acquisitions and heaps of debt.

The new CEO moved swiftly to fix GE’s broken balance sheet. Culp slashed GE’s dividend to a penny, sped up its divorce of oil-and-gas giant Baker Hughes and unloaded more businesses.

GE said it sold about $8 billion of assets in the fourth quarter, bringing 2018 sales to $15 billion.

The next big business to go: GE Healthcare, which makes MRI machines and other medical equipment. Culp said GE could monetize nearly half of the profitable health care division, though he declined to detail timing on a transaction.

Despite the WMC settlement, GE still faces outstanding legal issues, including accounting investigations from the SEC and DOJ.

Asked if he’s confident that “all the skeletons in the closet” have been found, Culp left the door open for more bad news.

“I don’t think I would ever say, even on my last day here, that we have found all the skeletons,” Culp said. “I don’t tend to take absolution positions.”