General Electric (GE) Q3 Earnings Top Estimates, Decline Y/Y

General Electric Company GE reported better-than-expected results for the third quarter of 2020, with earnings surpassing the Zacks Consensus Estimate by 200%. The earnings beat came in after two consecutive quarters of weaker-than-expected results. Also, its sales exceeded the consensus estimate by 1.4%.

In the reported quarter, the industrial conglomerate’s adjusted earnings were 6 cents per share, surpassing the Zacks Consensus Estimate of a loss of 6 cents. However, the bottom line decreased 60% from the year-ago quarter’s earnings of 15 cents per share on weak sales generation, partially offset by lower costs and expenses.

Revenue Details

In the quarter under review, General Electric’s consolidated revenues were $19,417 million, reflecting a year-over-year decline of 16.9%. Weakness in Industrial and GE Capital’s performances hurt the quarterly results.

However, the company’s revenues surpassed the Zacks Consensus Estimate of $19,149 million.

On a segmental basis, its Industrial revenues declined 16.7% year over year to $17,918 million. Also, GE Capital’s revenues were down 19.8% year over year to $1,681 million.

For the Industrial segment, organic revenues in the quarter decreased 12.4% from the year-ago quarter to $17,877 million. Industrial orders declined 31% year over year to $15.5 billion. Organically, orders were down 28%. Backlog at the end of the third quarter was at $383.6 billion.

Performance of the Industrial segment’s components business is discussed below:

Aviation revenues decreased 39.3% year over year to $4,919 million and orders fell 54%. Notably, third-quarter shipment of LEAP engines totaled 172, reflecting a decline of 283 from the year-ago quarter.

Healthcare revenues in the reported quarter totaled $4,565 million, decreasing 7.3% year over year. The segment’s orders dipped 20%. On an organic basis, revenues declined 5% year over year.

Renewable Energy revenues totaled $4,525 million, up 2.3% year over year. Its orders declined 21% in the reported quarter. Organically, the segment’s sales were up 4% year over year, while orders were down 18%.

The Power segment’s revenues were up 2.5% year over year to $4,025 million. The segment’s orders decreased 12% on a year-over-year basis. Notably, Gas Power revenues increased 7.6% year over year to $2,940 million and that for the Power Portfolio was down 9.1% year over year to $1,085 million.

Margin Profile

In the quarter under review, General Electric’s cost of sales declined 11.8% year over year to $15,275 million. It represented 78.7% of the quarter’s revenues versus 74.2% in the year-ago quarter. Selling, general and administrative expenses in the quarter decreased 2% year over year to $3,227 million. It was 16.6% of the quarter’s revenues versus 14.1% in the year-ago quarter.

The Industrial segment’s adjusted operating profit in the quarter was $1,001 million, down 53.4% year over year. Margin in the quarter was 5.6% versus 10% in the third quarter of 2019. On a reported basis, the Power segment recorded operating profit of $150 million against a loss of $144 million in the year-ago quarter, while Renewable Energy’s earnings were $5 million compared with a loss of $98 million in third-quarter 2019. The Aviation segment’s earnings were $356 million, down 79% year over year. The Healthcare segment’s profits declined 21% year over year to $765 million.

The GE Capital segment witnessed a loss of $52 million compared with a loss of $645 million in the year-ago quarter.

Interest and other financial charges decreased 41.7% year over year to $745 million.

Balance Sheet and Cash Flow

Exiting the third quarter of 2020, General Electric had cash and cash equivalents of $86 billion, down 2.8% from $88.5 billion recorded at the end of the previous quarter. Borrowings were $79.5 billion, down 2.9% from $81.9 billion at the end of the second quarter.

The company noted that it reduced Industrial debts by $8.1 billion and GE Capital debt by $3.6 billion in the year-to-date period.

Non-GAAP free cash flow for GE Industrial totaled $514 million in the third quarter, down 20.9% year over year.

Restructuring

In June 2018, General Electric communicated plans to transform into a high-tech industrial company — focused on Aviation, Power and Renewable Energy.

In sync with its plans, the company completed the sale of its transportation business to Westinghouse Air Brake Technologies Corporation WAB in the first quarter of 2019. Further, General Electric completed the divestment of the BioPharma business to Danaher Corporation DHR in March 2020.

Further, General Electric lost its controlling shareholding in Baker Hughes Company BKR. In addition, the company started a program in the third quarter to fully dispose of its remaining stake in Baker Hughes. These actions will be valid in the coming three years. The divestment of this non-core possession will likely help General Electric to focus on core businesses, better uses of capital, deleveraging and others. Notably, proceeds of $0.4 billion from these actions were recorded by the company in October 2020.

Efforts are on track to reduce the exposure to the GE Capital business. Asset disposition has amounted to $4.6 billion in the year-to-date period.

Outlook

In the quarters ahead, General Electric is committed toward strengthening its businesses, reducing leverage and making investments in innovation.

For 2020, the company expects cash preservation of more than $3 billion and operational cash out of more than $2 billion (roughly 75% already realized). Industrial free cash flow is expected to be $2.5 billion or in excess in the fourth quarter of 2020, while the same is anticipated to be positive in 2021.

General Electric Company Price, Consensus and EPS Surprise

General Electric Company price-consensus-eps-surprise-chart | General Electric Company Quote

With a market capitalization of $64.6 billion, General Electric currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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