Tuesday, June 26, was a good day for General Electric Co. (GE - Get Report) , but there are still some questions to be answered with regards to the Boston-based industrial conglomerate's balance sheet.
Chief Executive John Flannery acknowledged that management is still working to reduce its long-term care exposure, which forced the company to book a $6.2 billion after-tax charge during the fourth quarter of 2017 and to commit to $15 billion in further contributions over the next seven years to shore up its reserves, even though GE largely exited the business more than a decade ago. The company made the first installment of $3 billion during the first quarter this year, and it is scheduled to make $2 billion in reserve charges annually for the next six years.
"Our strategy with regard to GE Capital is clear; we're making it smaller and more focused. We are reducing assets by $25 billion, and we'll bring our debt to equity to less than 4-times by 2020," Flannery said during a conference call this morning to discuss the results of its strategic review. "We are aggressively working on actions and alternatives to mitigate, reduce or eliminate our exposure to long-term care insurance."
GE confirmed today it would spin off its healthcare unit and exit its majority stake in oilfield service company Baker Hughes (BHGE) . These decisions reflect the outcome of a year-long strategic review, and in turn, will shift GE's focus to three primary units: aviation, power and renewable energy.
The new healthcare company will be spun off in the next 12 to 18 months, Flannery told CNBC. He noted that the company would take on $18 billion of pension liabilities and debt, which will "drop our leverage at the core GE company below 2.5-times debt-to-Ebitda," in-line with industry peers.
Analyst Justin Bergner of Gabelli & Co., who rates GE stock a "buy", called the health-care spin-off "a very positive announcement" and said the news is "providing comfort to investors that there aren't more shoes to fall."
Bergner explained that the decision to spin off GE's healthcare business by way of a two-part process involving both an IPO of 20% of the unit and a return of 80% of the business to shareholders should "bring in material cash needed to de-lever."
"I have a $23 private market value, which is sort of what we think the company could be worth," Bergner said. "We think stock could trade at or near $20 by the end of 2019."
Shares of GE rose 8.2% to $13.70 at noon New York time.
Credit ratings giant Moody's affirmed its rating of GE and GE Capital at A2. There was an urgency for the beleaguered industrial conglomerate to improve its financial position substantially, Moody's said, and GE's plans to separate its healthcare business along with the sale of GE Transportation to Wabtec and other asset divestitures proved to be the "most significant move" in becoming more fiscally sound.
GE Capital's standalone credit profile could improve, Moody's said, "if the company strengthens its ratio of tangible common equity to tangible managed assets towards levels comparable to those of finance and leasing company peers and meaningfully reduces its insurance exposures." Conversely, Moody's could downgrade GE Capital's rating should there be a "weakening of GE's support or weaker-than-anticipated support of future debt issuance."
Moody's, however, maintained its negative outlook due to "continued weakness in earnings and cash flows," which is expected through 2019 and into 2020.
"GE's largest segment, Power, has endured a prolonged period of demand weakness in gas turbine demand, which is expected to continue for several years, constraining growth in margins and cash flows in this segment for some time," Moody's said in a statement. "As well, only modest growth is anticipated for GE's much smaller Renewable Energy segment, with segment operating margins expected to remain at or near 7%. GE's Aviation segment, while highly profitable with segment operating margins of over 24%, is not currently generating robust cash flow due to a ramp-up of investments in new engine platforms, and is not expected to do so before 2020."
--With reporting by Kinsey Grant.