July 27 (Reuters) – General Electric Co (GE.N) said on Tuesday it is facing inflationary pressure that is set to intensify, particularly at its jet-engine business, for the remainder of the year.
The comments came after the Boston-based industrial conglomerate lifted its free cash flow forecast for the year after unexpectedly reporting positive cash flow in the second quarter as industrial orders and revenue returned to growth.
In an interview, Chief Executive Larry Culp said the company is managing the inflationary pressure through a combination of price increases, better sourcing of parts and raw materials, elimination of waste and higher productivity.
“We’re certainly not immune from these inflationary pressures,” he told Reuters. “We’re going to see more of that pressure in the second half.”
American manufacturers of all sizes are grappling with the strongest inflationary pressure in three decades as a result of supply bottlenecks and relentless rise in raw-materials prices in the past 13 months. read more
The supply chain issues have increased GE’s lead times and inventory. But for the resultant price pressure, Culp said the company’s quarterly earnings would have been even better.
GE is drawing up mitigation measures as it expects the logjam to persist in 2022, Culp said.
Still, an improvement across all of its industrial segments, particularly in the services business, prompted the company to lift its free cash flow estimate for this year to $3.5 billion to $5 billion from $2.5 billion to $4.5 billion projected earlier.
The General Electric logo is pictured on working helmets during a visit at the General Electric offshore wind turbine plant in Montoir-de-Bretagne, near Saint-Nazaire, western France, November 21, 2016. REUTERS/Stephane Mahe/File Photo
Services account for nearly half of GE’s revenue and more than half of its earnings and cash flow streams. The segment saw a 50% increase in orders in the quarter from a year ago.
The company reported an unexpected free cash flow of $388 million in the second quarter, in contrast to its earlier expectation of an outflow of $400 million.
If the momentum continues, Culp said he would not rule out hitting a $7 billion free cash flow target before 2023.
Free-cash flow is closely watched by investors as a sign of the health of GE’s operations and ability to repay debt.
Shares were up 1.2% to $13.06 in morning trade.
The aviation unit, usually the company’s cash cow, has been hammered by the COVID-19 pandemic as airlines cut back on flights and grounded aircraft.
GE said the unit is showing “early signs” of recovery and new orders are outpacing canceled ones. More importantly, flight departures, which drive aftermarket services business, are accelerating in those geographies that generate the bulk of the company’s aviation revenue.
Culp said while the company is “carefully” watching the impact of the COVID-19’s Delta variant, it still expects the departures of narrow-body aircraft to bounce back to 2019 levels in 2023.
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