General Electric continued to be dogged by the legacy of the financial crisis even as some of its industrial operations showed new signs of strength, booking a $1.5bn charge in the first quarter for possible penalties tied to its subprime mortgage business in the 2000s.
John Flannery has been cutting costs sharply since taking over as chief executive in August, and a boom in the global aviation industry lifted prices for GE’s aero engines and other aircraft parts, helping the group post earnings well above analysts’ expectations.
But the company also booked a provision of $1.5bn relating to the US Department of Justice investigation into WMC Mortgage, a subprime lender that GE bought in 2004 and shut down as the housing crisis blew up just three years later.
The charge was yet another sign of how GE Capital, the group’s once-sprawling financial services division, continues to cast a shadow over the company’s performance.
The business was built up under Jack Welch, who led GE from 1981-2001. Under Jeff Immelt, his successor, GE at times relied on financial services for more than half its earnings, but Mr Immelt took the decision to sell off most of the business in 2015.
The charge for WMC is the second time this year GE has been hit by now-defunct finance operations. In January it revealed that it needed to pay $15bn to cover legacy liabilities from its insurance business, which it sold in 2006.
In March, the DoJ asserted WMC violated the 1989 Financial Institution Reform, Recovery and Enforcement Act when originating and selling subprime mortgages in 2006 and 2007. Jamie Miller, GE’s chief financial officer, said the company was in talks with the DoJ about a possible settlement, and was working on a “reasonable resolution” to the case.
Last month Barclays reached a settlement with the DoJ to resolve fraud claims under the same law, agreeing to pay $2bn in civil penalties, and Ms Miller said that deal had helped shape GE’s estimate of the liability it might face.
Despite the charge, investors were heartened by the revival of GE’s industrial operations, which helped the company post quarterly earnings that outstripped analyst expectations. GE’s shares have dropped by 53 per cent over the past 12 months, but were up 3.8 per cent at $14.52 in afternoon trading in New York on Friday.
Earnings per share excluding one-off items and pensions costs were 16 cents for the quarter, up from a restated 14 cents in the equivalent period of 2017 and well above analysts’ forecasts. Revenues were in line with expectations at $27.4bn.
The performance from GE’s industrial operations was mixed, with aviation the standout success. The division reported operating profits of $1.6bn, up 26 per cent on the equivalent period of 2017, as GE both increased the prices for its engines and parts for commercial aircraft, and improved productivity.
Healthcare and transport equipment also reported increased profits, but its power equipment division, another Immelt-era underperformer that Mr Flannery has struggled with, continued to decline. Baker Hughes, the oilfield services group in which GE has a 62.5 per cent stake, swung into loss after restructuring charges.
Cash flows, which have become a focus of attention for GE investors, showed capital spending exceeded adjusted cash from operations by $1.68bn in the quarter, although that was an improvement on the $2.75bn outflow in the first quarter of 2017. For the year as a whole, the company still expects positive free cash flow after capital spending of $6bn-$7bn.
Mr Flannery said that the company was “seeing signs of progress in our performance”. He added that GE had cut structural costs in its industrial businesses by $805m, and was on track to beat its target of cutting $2bn over the course of the year.