GE: Investment Thesis
2018 was supposed to be the reset year for General Electric (GE). The company continued to be beset by difficulties, including a further decline, rather than a stabilisation, in its Power market. 2019 is now shaping up as the reset year. Announcement of sale of the Healthcare BioPharma unit for $21.4 billion was a good start to the year. As much as the cash receivable, the BioPharma sale was notable for appearing to be a very good deal, after so many years of bad deals. I have, at times, been quite harsh in my assessment of GE. Among the articles I have published on GE are "GE: Keeping Management 'Honest' On 2018 Guidance" , "GE's Free Cash Flow: It's 'Fake Cash'", and "GE: Q3 Postmortem - Price Target $5 To $8". I certainly intend to continue to scrutinize GE's reporting and to be critical of the lack of transparency of their reporting. But I have had a change of heart on GE's future earnings prospects for Power. And the future market for Power's products and services is key to the future of GE (see here). It is to do with the complete bastardization and corruption of the operation of power networks around the world. There has been a political push to do things, possibly well meaning, to prevent global warming, but which in fact have adverse consequences for CO2 emissions reduction. There are also adverse financial consequences for investment in power generating facilities. I believe this is at the heart of lack of new investment in power generation, adversely affecting GE and other power generation system suppliers. I will be writing in more depth on this in future articles. In the meantime, I find it useful to review GE's progress with re-sizing its workforce. And with my view of the likelihood of a strong pickup in Power out a year or two, I do not have a problem if GE hastens slowly with further employee cuts.
Headline Reduction In GE Employee Numbers - 10,000, Actual Reduction - 30,000
General Electric releases detailed information on employee numbers only once each year. Details of total, and by segment, employee numbers at end of December 2018 and December 2017, are found in the company's forms 10-K for 2018 and 2017, filed with the SEC on February 26, 2019, and February 23, 2018, respectively.
At year-end 2018, General Electric Company and consolidated affiliates employed approximately 283,000 people, of whom approximately 97,000 were employed in the United States.
At year-end 2017, General Electric Company and consolidated affiliates employed approximately 313,000 persons, of whom approximately 106,000 were employed in the United States.
Much of the 30,000 reduction in employee numbers is due sale of businesses. But there is a lot left unexplained by the reporting.
GE: US Employees Represented By Unions
Per 2017 10-K,
Approximately 8,600 GE manufacturing and service employees in the United States are represented for collective bargaining purposes by one of 9 unions (approximately 41 different locals within such unions). A majority of such employees are represented by union locals that are affiliated with the IUE-CWA, The Industrial Division of the Communication Workers of America, AFL-CIO, CLC. Other GE affiliates are parties to labor contracts with various labor unions, also with varying terms and expiration dates that cover approximately 1,700 employees.
Per 2018 10-K,
Approximately 9,900 GE and GE affiliate manufacturing and service employees in the United States are represented for collective bargaining purposes by a union. A majority of such employees are represented by union locals that are affiliated with the IUE-CWA, The Industrial Division of the Communication Workers of America, AFL-CIO, CLC.
It would appear there has been a net overall reduction of ~400 union employees in 2018. Some of this reduction could be from businesses sold, but there definitely have been cuts. This Schenectady News article dated January 5, 2018 reports, "GE cuts Schenectady workforce again Company says production, supervisory workers affected; sources put total at 130."
Something to be aware of is GE is facing renegotiation of collective bargaining agreements in mid-2019. As per 2018 10-K,
In June 2015, GE negotiated four-year collective bargaining agreements with most of its U.S. unions (including the IUE-CWA) and these agreements are scheduled to terminate in June 2019. GE will hold negotiations to enter into new agreements that month. While the outcome of the 2019 negotiations cannot be predicted, GE's recent past negotiations have resulted in agreements that provide employees with good wages and benefits while addressing the competitive realities facing GE.
Employee Numbers Reporting At December 31, 2018, Does Not Reflect Reorganization Of Power
GE Chairman and CEO, Lawrence Culp, announced in October 2018,
Second, GE intends to reorganize Power to accelerate the business' operating and financial improvements. GE plans to create two units - a unified Gas business combining GE's gas product and services groups, and a second unit constituting the portfolio of GE Power's other assets including Steam, Grid Solutions, Nuclear, and Power Conversion. The Company also intends to consolidate Power's headquarters structure to ensure these units can best serve their customers.
Further segment restructuring and organization was announced in the 4th quarter 2018 earnings press release,
Announced plans to consolidate GE's renewable and grid assets into Renewable Energy; Launching an independent GE-owned Digital business to better focus on growth opportunities in industrial IoT; Refocused Global Growth Organization (GGO) to support commercial growth in emerging markets; Named new leaders, including Kevin Cox as chief human resources officer, Rachel Duan as CEO of GGO, Scott Strazik as CEO of Gas Power, Karyn Ovelmen as transformation leader of Gas Power, John Rice as chairman of Gas Power, and Steve Winoker as VP of Investor Relations
I was disappointed to see Power employee numbers at the end of 2018 had not been separated by unit. Nevertheless, I have updated the employee analysis included in my October 2018 article, "GE Headcount" to include the 2018 numbers, per TABLE 1 below.
TABLE 1 above shows the increases and decreases in employee numbers by segment, between end of 2017 and end of 2018. It also shows the total reduction of 30,000 employees included 9,000 from the US and 21,000 from outside the US. The only recent guidance on employee number cuts was from the CEO, in the 4th quarter earnings call, in relation to Power segment, "As a result last year, we reduced headcount by 10,000 or 15% in the business, "
That leaves various changes in TABLE 1 above unexplained. In TABLE 2 below, I make a best effort attempt to provide explanations. I did reach out to GE Investor relations, and they did point me in the direction of certain business unit disposals, but they were unable to assist where information was not already in the public domain.
Employee Numbers - Corporate & Other Including GGO
From TABLE 2, it would appear the only reduction achieved in Corporate and GGO employee numbers in 2018 was due to transfer of 10,400 personnel out to the individual business segments (see announcement further above). The projections in TABLE 2 show Corporate and GGO employees are expected to represent 9.7% of the total workforce, at the end of 2019. This is an increase on the 9.1% at the end of 2017, even after the transfer of significant numbers of Corporate employees to business segments in 2018. As can be seen, with the balance of businesses intended to be sold down in 2019, including the interest in Baker Hughes (NYSE:BHGE), GE total employee numbers in 2019 can be expected to fall below 200,000.
Employee Numbers - Business Segments
It would appear business segments have added more employees than the assumed 10,400 transferred from Corporate and Global Growth Organization (GGO). I have attributed increases in business segment employee numbers to transfers in from Corporate and GGO, up to the 10,400 reduction in the number of Corporate and GGO employees. But increase in business segment employee numbers exceeded 10,400, by 2,700, which I attributed to net new hires. The reduction of 22,700 due to sale of business units should be reasonably accurate. The 10,000 reduction in Power employees due to retrenchments comes from the GE 4th quarter earnings call.
Separate Power Units
From an analyst point of view, I find it disappointing there is an announcement, with much fanfare, of Power being split into 2 separate operating units, but this is not reflected in the 2018 year-end employee numbers analysis. I have to wonder if the 2019 quarterly financials will report the 2 Power business units results separately.
GE Headcount: Summary
By the end of 2019, GE will be left with 3 segments, Aviation. Healthcare, and Power, each with ~50,000 employees. In addition, there will be Renewables with ~23,000 employees, Corporate and Global Growth Organisation ~18,000, and GE Capital with ~2,000. Corporate and Global Growth appears to be the area most likely for further cuts. But, as indicated at the beginning, it would be unfortunate if staff were let go ahead of a pick-up in Power in the next couple of years, requiring new hires.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.