By Thomas Gryta
The troubled aviation industry continued to weigh on General
Electric Co., which reported another quarter of shrinking revenue,
but the conglomerate posted a smaller loss and was able to generate
cash from its industrial operations.
Layoffs and cost cutting have helped GE weather the coronavirus
pandemic's damage to the commercial airlines that ultimately buy
its jet engines. Belt tightening has also helped reverse losses in
GE's long-struggling power turbine unit.
While orders for new equipment fell in several of its key
businesses, GE said it generated $514 million in industrial
free-cash flow in the quarter ended Sept. 30. On that basis, the
company also predicted it would generate $2.5 billion in cash in
the fourth quarter.
The measure is closely watched as a sign of the health of the
company's operations and ability to pay down debt. In the first
half of the year, GE's industrial operations burned through $4.3
billion in cash.
"Clearly aviation is the challenge right now," CEO Larry Culp
said in an interview, noting improvement in other segments and
continuing cost cuts. "We're making more progress and are
encouraged by the positive free cash in the third quarter."
The results were better than expected and GE didn't reveal large
losses in long troubled units. GE shares rose 4.5% to $7.42 on
Wednesday, bucking a broader market selloff. The stock is down
about 33% so far this year.
Mr. Culp said the recent rise in new Covid-19 cases isn't a
surprise because of the changing seasons but it shows the
difficulty in predicting the future trajectory of the pandemic. He
expects it will take years for the industry and GE's aviation
division to recover.
Mr. Culp recently had his second anniversary in the top job,
where he has focused on cutting debt and generating more cash to
turnaround the conglomerate. The pandemic hit the company hard
because of its reliance on the air travel industry. Revenue fell
nearly 40% in GE's aviation business in the latest quarter. The
unit is cutting a quarter of its 52,000 workers.
GE also provided reassuring updates on some areas that have had
investors concerned. The Boston company said an annual test of
reserves in its legacy insurance business resulted in a "small
positive margin" with no impact to earnings. The need to bolster
its insurance reserves by $15 billion was a key reason GE had to
slash its quarterly dividend to a token penny per share. The unit
is responsible for long-term care policies that cover nursing-home
stays that have proved more expensive than many insurers
GE's accounting for the insurance business, as well as
bookkeeping in its power unit, is under investigation by the
federal regulators. The Securities and Exchange Commission recently
warned the company of a possible civil-enforcement action over its
accounting for the insurance business.
GE said Wednesday it has set aside $100 million to cover
potential penalties for all the accounting investigations, and
continues to cooperate with the probes. It was the first time GE
gave investors such an estimate.
Mr. Culp said the reserve is "appropriate given what we know and
given what we can say under the circumstances."
In the latest quarter, the company booked a $400 million charge
for its recent decision to stop building new coal power plants and
a $200 million charge after an annual review of its aircraft
leasing portfolio. GE owns hundreds of jets and is one of the
world's biggest airplane leasing companies through its GE Capital
"The things that worried me were all better," said David Giroux,
T. Rowe Price Group's chief investment officer for equities and
multiasset. "The forward guidance was very encouraging."
Mr. Giroux said an uneventful review of insurance operations was
good news, the healthcare division performed well and the company's
reserve against multiple federal investigations was smaller than he
He has a long-term outlook on GE's stock, he said, and the
pandemic has only delayed the company's turnaround. T. Rowe is GE's
top shareholder with about 770 million shares in various funds, an
8.8% stake, according to FactSet.
"It is starting to turn," Mr. Giroux said. "We are starting to
see signs that we are heading to the right trajectory here."
Overall, GE reported revenue of $19.42 billion, down 17% from a
year ago. Excluding its stake in the Baker Hughes oil business and
other assets it sold, industrial revenue fell 12% to $17.88
The company had a net loss of $1.14 billion, before preferred
stock dividends, compared with a loss of $9.42 billion a year ago
when it booked hefty accounting charges on the Baker Hughes
investment. Excluding restructuring and other charges, GE reported
an adjusted profit of 6 cents a share.
Wall Street was expecting an adjusted loss of 4 cents a share on
revenue of $18.7 billion.
For years, GE's aviation business was the company's biggest and
most profitable. In addition to the pandemic, the business has
suffered from the grounding of Boeing Co.'s MAX jet, which runs on
its engines. On Wednesday, Boeing outlined plans to cut more jobs
and said it is reviewing jet production levels. It expects 737 MAX
deliveries to resume before the end of the year.
GE's aviation revenue fell to $4.92 billion in the third quarter
from $8.11 billion a year ago. New orders dropped 54% from a year
ago. The segment's profit plunged 79% to $356 million.
The unit is now about the same size as GE's other divisions in
terms of revenue but the health-care unit, which makes MRI
machines, ventilators and hospital equipment, was the biggest in
terms of quarterly earnings, generating a $765 million profit.
GE's power unit, which makes turbines for power plants, reported
revenue rose 3% to $4.03 billion and swung to a profit of $150
million. The renewable energy unit, which mostly makes wind
turbines, basically broke even on a 2% rise in revenue to $4.53
Write to Thomas Gryta at email@example.com
(END) Dow Jones Newswires
October 28, 2020 17:52 ET (21:52 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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