GE 2020 Third-Quarter Form 10-Q Summary
Business context and reporting period
General Electric Company reported for the quarter and nine months ended September 30, 2020. Its industrial businesses are Power, Renewable Energy, Aviation and Healthcare; GE Capital includes aircraft leasing and run-off insurance operations. Results reflect the COVID-19 pandemic and the March 2020 sale of BioPharma to Danaher.
Key financial metrics
| Metric | Third quarter 2020 | Nine months 2020 |
|---|---|---|
| Consolidated revenue | $19.4 billion, down 17% year over year | $57.7 billion, down 16% |
| Continuing earnings (loss) attributable to GE common shareholders | $(1.16) billion; diluted EPS $(0.13) | $2.99 billion; diluted EPS $0.32 |
| Adjusted EPS (non-GAAP) | $0.06, versus $0.15 | $(0.04), versus $0.43 |
| GE Industrial profit margin | GAAP (7.2%); adjusted non-GAAP 5.6% | GAAP 8.3%; adjusted non-GAAP 3.0% |
| GE cash from operating activities | Quarterly figure not clearly stated in the filing text | $(3.2) billion, versus $0.1 billion |
| GE Industrial free cash flow (non-GAAP) | Quarterly figure not clearly stated in the filing text | $(3.8) billion, versus $(1.6) billion |
| Consolidated cash, cash equivalents and restricted cash | $39.2 billion at September 30 | — |
| Consolidated borrowings | $79.5 billion at September 30, down from $90.9 billion at December 31, 2019 | — |
GE Industrial adjusted profit and adjusted EPS are non-GAAP measures; they exclude specified items. Nine-month GAAP earnings included a $12.4 billion pre-tax gain on the BioPharma sale. GE Industrial net debt, a non-GAAP measure, was $34.6 billion at September 30, down from $47.9 billion at year-end 2019. GE had $20.2 billion of available revolving credit facilities.
Material changes versus the prior comparable period
- COVID-19 drove the sharpest deterioration in Aviation: third-quarter revenue fell 39% and segment profit fell 79%; nine-month revenue fell 32% and segment profit fell 86%. Commercial aviation demand, spare-parts shipments and shop visits weakened substantially.
- GE Industrial orders fell 31% in the quarter and 25% in the first nine months. Total backlog was $383.6 billion, down 5% from December 2019.
- Healthcare revenue declined 7% in the quarter, but organic revenue grew 10%, supported by COVID-response products; the BioPharma divestiture reduced reported results.
- Power’s third-quarter revenue rose 3% and it returned to segment profit; Renewable Energy revenue rose 2% and it reported a small profit. Both segments remained challenged by lower orders, market pressure or project execution risks.
- Adjusted GE Industrial profit was $1.0 billion in the quarter, down 53%; nine-month adjusted profit was $1.6 billion, down 74%. GE Industrial operating cash flow and free cash flow weakened substantially year over year.
Outlook, management commentary, risks and unusual items
- Management said the duration and magnitude of COVID-19 impacts and the pace of recovery could not be forecast. Aviation was the most affected business; global departures at September 30 were about 40% below the pre-pandemic baseline. Management expected aviation recovery to take multiple years, subject to travel confidence, public-health and economic conditions.
- For 2020, GE targeted more than $2 billion in company-wide operational cost reductions and more than $3 billion in cash-preservation actions. It said about 75% of company-wide savings actions had been realized by the filing date. Aviation separately targeted more than $1 billion of cost reductions and more than $2 billion of cash preservation, and had completed about 70% of its actions through the third quarter.
- GE recorded a $429 million pre-tax non-cash impairment related to Steam assets after announcing it would exit the new-build coal power market. Second-quarter non-cash goodwill impairments were $877 million at Aviation’s Additive unit and $839 million at GECAS. GECAS also recorded $497 million of aircraft-portfolio impairments in the first nine months.
- GE recognized $4.6 billion of nine-month pre-tax unrealized losses on its remaining Baker Hughes investment. The company began a plan to monetize that position over approximately three years and received about $0.4 billion in October 2020.
- The SEC issued a Wells notice concerning its investigation of GE’s run-off insurance operations, indicating staff was considering recommending a civil action. GE recorded a $100 million reserve for the investigation as a whole, disputed the staff’s position and said the ultimate liability could be higher.
- Run-off insurance premium-deficiency testing showed a positive margin of less than 2%; adverse assumption changes could reduce that margin or require additional reserves. GE also expected about $2 billion of capital contributions to GE Capital in the fourth quarter of 2020 and approximately $2 billion in 2021 for insurance funding; further contributions through 2024 were possible.
- Ratings outlooks from Moody’s and S&P were negative; Fitch’s was stable. The filing identifies potential liquidity, funding-cost and market-access effects from further downgrades. Management also cited pension, legal, credit, aircraft leasing, long-term service contract and market risks.
Important facts for investors to verify
- Whether Aviation demand, shop visits, long-term service agreement assumptions and backlog stabilize, and whether further cancellations or contract adjustments occur.
- Whether the targeted cost reductions and cash-preservation actions are completed and translate into improved industrial cash flow.
- Whether GE Capital’s aircraft lease deferrals, customer credit conditions and aircraft valuations lead to additional impairments or cash-flow pressure.
- Whether run-off insurance assumptions, statutory asset-adequacy testing and required capital contributions remain consistent with GE’s estimates.
- The resolution and potential financial consequences of the SEC investigation and other legal contingencies.
- How the BioPharma disposal gain, Baker Hughes mark-to-market volatility and other unusual items affect comparisons between GAAP and adjusted results.