Can General Electric Return to Its Former Glory?

At the turn of the millennium, General Electric (GE 2.39%) was a true juggernaut of a company. Led by legendary CEO Jack Welch, GE went from a primarily manufacturing company in 1982 to a conglomerate of business divisions competing in multiple and divergent industries by 2000. But this epic expansion wasn't without consequences.

Many of these business investments relied on debt for financing that would later be paid off by the operating profits of those companies. But problems arose for some of these investments because GE overpaid for the businesses and, thanks to a couple of economic downturns, they began to perform quite poorly. Debt began to pile up and investors started to flee. By Nov. 30, 2018, General Electric hit a share price low of just $7.50 -- a long way down from its all-time high of $58.13 in late August 2000.

Since that low, the former blue-chip stock has been making significant changes to right the ship and get back to growth. Larry Culp, CEO of General Electric since October 2018, believes that GE can once again attain greatness. By cutting out poorly performing business units and focusing on GE's core business, Culp feels that a turnaround is possible.

But there is still significant uncertainty about GE's debt and failing business units. That brings up the question: Can GE really right the ship?

Image source: General Electric.

The plan to reduce debt and clean GE's balance sheets

To better understand how GE plans to fix its debt problems, it's useful to know how it got in this situation. One of the largest debt-inducing events occurred in 2008 and 2009, when GE's Capital unit required a bailout from the U.S. government and investor Warren Buffett. Add in the constant financing needs for underperforming divisions and it's no wonder that GE's total liabilities, and long-term debt eventually hit highs of $728.6 billion and $358 billion respectively in that time period.

Over 10 years later, what's left of this massive pile of long-term debt obligations is coming due.

Thankfully, GE's long-term debt load has been reduced to just $77.8 billion as of its latest quarterly filing. That's down over 78% from its all-time high and 16% lower than what was reported in the second quarter of 2019. Even total liabilities are down, albeit to a still somewhat large amount, and now stand at $233.8 billion.

While total liabilities include long-term debt, using long-term debt is a better way to finance debt due to its maturity rate being greater than one year. Regardless, these reductions are all part of Culp's plan of focusing on paying off and restructuring bad debt.

So it is General Electric's plan to not only cut out bad business units, but also to use those resulting cash flows to pay off current debt. So far the plan has worked. GE no longer has large amounts of bonds and debt due during 2020 and most of 2021.

More positive news for General Electric is that Carolina Dybeck Happe will be taking over as Chief Financial Officer in early 2020. Dybeck Happe is the current CFO at A.P. Moller-Maersk and has helped the international shipping and logistics company reduce debt and reshape its portfolio of over 700 subsidiaries. Specifically, Dybeck Happe was able to restructure Maersk's debt, resulting in a 32% share price increase and profitability upgrade in just one year.

Turning General Electric into a lean, profitable machine

At its beginning, GE was a lighting and industrial products company founded by the merger of Edison General Electric Co. and the Thomas Houston Co. Over time, though, GE was able to expand to what it has become today. As a conglomerate, General Electric is made up of over 110 different worldwide subsidiaries. These subsidiaries are involved in sectors from medical to energy and even financial services. Despite the wide reach, GE is running into problems.

Because industries are always changing, some of General Electric's one-time star business divisions have become current poorly performing divisions. Underperforming units, such as Power and Capital, have taken away many of the gains from better-performing divisions, resulting in the need for more financing. The table below shows the results of each of GE's eight different divisions, according to its 2018 annual report (the latest full-year figures available).

Data source: 2018 General Electric annual report.

Since GE's debt load has reached a tipping point, Culp has decided that it's time to sell off some of these failing business units. In fact, in June of 2018, GE sold off part of its troubled Power division to a private equity firm for $3.25 billion (this was before Culp took over as CEO). The selling continued in early 2019 with Danaher (DHR +0.56%) buying GE's biopharmaceutical unit for a hefty $21.4 billion. Some analysts believe that Culp could order more asset sales of GE's Power division in the near future.

So far these sell-offs have worked in creating a leaner and more profitable General Electric. The question still remains: Has Culp trimmed the company enough, or will more units be sold in the future?

While it is hard to say for sure what will happen, a decision on whether or not to sell more units will depend on GE's balance sheet and debt. 

Smoother seas are on the horizon

While these last few years have been tough on GE, it seems that Culp's plan to turn the company around is starting to work. Liabilities and debt are both down under Culp's reign and should continue to decrease further in the future. The addition of Dybeck Happe will also help GE continue its debt-reduction plan.

Right now, General Electric is like a large ocean liner with Larry Culp at the helm, and it's running somewhat off course. Captain Culp's plan to bring the ship back on course is effective and already making progress. But as with any large ship, it takes time to make a full turn and get back up to speed. Hopefully, General Electric will be back on course and in smoother waters in the near future. You might want to consider climbing aboard yourself as an investor and taking advantage of the new direction.