GE 2020 Q2 Form 10-Q Summary
Business context and reporting period
General Electric Company filed for the quarter ended June 30, 2020. GE operates Power, Renewable Energy, Aviation and Healthcare, alongside GE Capital. Results reflect continuing operations unless noted. COVID-19 materially affected GE’s markets and operations, with Aviation and GE Capital’s aircraft-leasing business especially exposed.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Consolidated revenue | $17.8B | $23.4B | $38.3B | $45.6B |
| Continuing earnings attributable to GE common shareholders | $(2.2)B | $(0.3)B | $4.1B | $0.6B |
| GAAP diluted continuing EPS | $(0.27) | $(0.03) | $0.46 | $0.07 |
| Adjusted EPS (non-GAAP) | $(0.15) | $0.16 | $(0.10) | $0.29 |
Six-month earnings were substantially affected by the $12.3B pretax gain on the BioPharma sale; Baker Hughes fair-value changes also caused significant volatility. Q2 GE Industrial profit margin was (5.7)%, versus (1.8)% a year earlier; adjusted GE Industrial margin was (3.2)%, versus 8.5%.
GE cash from operating activities for the first half was $(3.3)B, compared with $(1.1)B in 2019; GE Industrial free cash flow, a non-GAAP measure, was $(4.3)B versus $(2.2)B. Consolidated cash, cash equivalents and restricted cash were $41.4B at June 30. Consolidated borrowings were $81.9B, down from $90.9B at December 31, 2019; GE Industrial net debt, a non-GAAP measure, was $34.0B versus $47.9B.
Material changes versus comparable periods
- Q2 revenue fell 24% year over year; GE Industrial revenue declined 25%. The largest segment pressure was Aviation: Q2 revenue fell 44% and segment profit was a loss of $0.7B, versus $1.4B profit in Q2 2019.
- For the first half, GE Industrial adjusted organic profit fell 84% to $0.6B. Power and Renewable Energy reported segment losses; Healthcare profit declined, while its COVID-related products partly offset weakness in other demand.
- GE Industrial orders fell 38% in Q2, and backlog was $380.5B at June 30, down 6% from year-end. Aviation backlog fell $14.9B from year-end amid cancellations and lower expected utilization.
- GE completed the BioPharma sale on March 31 for $20.7B cash plus $0.4B of assumed pension liabilities, recognizing a $12.3B pretax gain.
Outlook, risks and unusual items
- Management said it could not forecast the full duration or magnitude of COVID-19 impacts. It expected pandemic-related demand, profitability and cash-flow pressures to continue, depending on the severity and duration of the pandemic.
- GE targeted more than $2B of 2020 operating cost reductions and more than $3B of cash-preservation actions. Aviation’s targets were more than $1B of cost reductions and $2B of cash preservation. GE reported realizing over one-third of company-wide savings actions by the filing date.
- Management expected aviation recovery to take multiple years. Commercial departures remained about 60% below the pre-pandemic baseline at June 30; Aviation reported substantial customer deferral requests and possible future contract changes or impairments.
- Q2 included non-cash goodwill impairments of $0.9B at Aviation’s Additive reporting unit and $0.8B at GECAS, and Aviation charges for lower production, customer credit risk and revised long-term service agreement assumptions. Further charges could follow if estimates change.
- GE issued $13.5B of longer-dated debt and reduced near-term maturities by $10.5B through issuance and tender actions. GE Industrial had no remaining 2020–2021 debt maturities; GE Capital had $5B due in 2020 and $3B in 2021. GE’s and GE Capital’s Moody’s and S&P outlooks were negative; Fitch had downgraded ratings in April.
- Other risks include potential further credit downgrades and higher funding costs, insurance and pension assumption sensitivity, aircraft-lease and customer-credit deterioration, and legal and tax contingencies. GE cited a potential UK tax matter of approximately $1B that it is contesting; the filing does not provide a meaningful estimate of possible additional losses for certain legal matters.
Important facts for investors to verify
- Whether cash generation improves and whether management achieves its cost-reduction and cash-preservation targets.
- How airline traffic, Aviation service activity, lease deferrals, aircraft utilization and customer contract modifications affect Aviation and GECAS revenue, backlog and asset values.
- Whether additional goodwill, aircraft, long-term service agreement, insurance or pension charges are recorded as market conditions and estimates change.
- Progress on debt reduction, liquidity, credit ratings and GE Capital’s planned insurance funding needs, including expected contributions of approximately $7B through 2024.
- The sustainability of reported first-half earnings and EPS after separating the BioPharma disposal gain and Baker Hughes mark-to-market effects from ongoing operating results.