GE Releases 3Q '21 Results

Today GE released third-quarter 2021 earnings. Below are my opening and closing remarks from the earnings call today, edited and condensed for length. For more on GE’s third-quarter earnings, click here and for important information about forward-looking statements, click here.

Our team delivered another strong quarter as orders, margins and cash improved. While the aviation market is showing continued signs of recovery and contributed to the quarter, our focus on continuous improvement and lean is driving broader operational and financial progress. At the same time, we’re managing through significant challenges.

Orders were robust, up 42% with growth in all segments in both services and equipment reflecting continued demand for our technology and solutions and better commercial execution.

Industrial revenue was mixed. We saw continued strength in services, up 7% organically. Aviation improved significantly, benefitting from the market recovery. Equipment was down 9% organically, largely due to supply chain disruptions, the Ford ventilator comparison in Healthcare, and as expected, lower Power equipment.?

Adjusted Industrial margin expanded 270 basis points organically, largely driven by operational improvement in many of our businesses, growth in higher-margin services at Aviation and Power, and net restructuring benefits.

Adjusted EPS was up significantly, driven by Industrial.

Industrial free cash flow was up $1.8 billion, ex discontinued factoring programs due to better earnings, working capital, and the short-term favorable timing impact of aircraft delivery delays.

Overall, I’m encouraged by our performance, especially at Aviation. Let me share what gives us confidence there:

First, our results reflect a significant improvement in near-term market fundamentals departure trends are better than the August dip and have recovered to down (23)% of ’19 levels. We expect this acceleration in traffic to continue as travel restrictions lift and vaccination rates increase.

Our results also reflect operating improvements. For example, at Aviation’s Overhaul shops, our teams have used lean to increase turnaround time by nearly 10% and decrease shop inventory levels by 15% since 4Q’20. This is enabling us to get engines back to customers faster, and at a lower cost. More on lean in a moment.

No business is better positioned than GE Aviation to support our customers through the upcycle. We’re ready with the industry’s largest and youngest fleet, while we continue to invest for the next generation with lower carbon technologies, such as the CFM Rise. Our platform will generate value for decades to come.

We’re also clearly navigating headwinds as we close this year and look to ’22.?

We’re feeling the impact of supply chain disruptions in many of our businesses with the largest impact to date in Healthcare. Based on broader industry trends, we expect company-wide pressure to continue at least into the first half of ’22, our teams are working diligently to increase supply by activating dual sources, qualifying alternative parts, redesigning and requalifying product configurations and expanding factory capacity. We’re also focused on margins as we deploy lean to decrease inventory and costs as well as implement appropriate pricing actions and reduce select discounts.

Our CT team in Japan has been experiencing higher customer demand, so we’re making our production more efficient to help offset the challenge of delayed inputs. The team used value stream mapping, standard work, and quarterly Kaizens to reduce production lead time once parts are received, by more than 40% from last year and there’s line of sight to another 25% reduction by year-end. While a single example in Healthcare, taken together with other efforts, and over time, these add up.

At Renewables, we’re encouraged by the U.S. Administration’s commitment to offshore wind development. However, in onshore wind, the pending U.S. production tax credit extension is creating uncertainty for customers and causing much less U.S. market activity in preparation for 2022. As we’ve shared, a blanket extension, while a well-intentioned policy, has the unintended consequence of pushing out investment decisions. In our business, given the lag between orders and revenue, the impact will continue through the fourth quarter and into ’22. This environment, along with inflation headwinds picking up in '22, makes Renewable’s ongoing work to improve cost productivity even more urgent. ??

Given these puts and takes, we now expect revenue to be about flat for the year, driven by changes to some of our business outlooks. Importantly, even with lowered revenue, we’re raising our margin and EPS?expectations, underscoring improved profitability and services growth, and reflecting our strengthened operations. And we’re narrowing our free cash flow range.?

Looking further out to next year as our businesses continue to strengthen, we expect revenue growth, margin expansion and higher free cash flow despite the pressures that we’re managing through. We’ll provide more detail, as usual, during our 4Q earnings and outlook.

Challenges aside, our performance reflects the continued progress in our journey to become a more focused, simpler, stronger, high-tech industrial.

The GECAS and AerCap combination is a tremendous catalyst, enabling us to focus on our Industrial core and accelerate our deleveraging plan. Just last week, GE and AerCap satisfied all required regulatory clearances for the GECAS transaction, and we’re now targeting to close November 1st.

We’ll use the proceeds to further reduce debt, which we now expect to reach approximately $75 billion since the end of 2018. This is enabling GE to look longer-term, even as we execute our deleveraging.

As we accelerate our transformation, lean and decentralization are key to improving operational execution. This quarter, we hosted our global Kaizen week in each of our businesses with 1,600 employees. John Slattery and I joined our Military team in Lynn, Massachusetts for the full week, while our business CEOs joined our teams across the globe. Lean is about going to genba – where the work is done – and is best learned in operations where you see, touch, smell it firsthand. And in Lynn, we were there to serve those closest to the work – our operators. Our mission was to improve first-time yield on midframes, a key sub-assembly of the military engines we produce in Lynn, whose stubborn variability has been directly and negatively impacting our on-time delivery. By the end of the week, we improved processes for welding and quality checks on midframe parts we’re convinced this will help us reach our goals for Military on-time delivery by mid next year, if not earlier, and we can improve our?performance for years to come.

There are countless other examples of how our teams are leveraging lean to drive sustainable, impactful improvements in safety, quality, delivery, cost and cash, they reflect how we’re running GE better – and how sustaining these efforts drives operational progress and lasting culture change.

Our significant progress on deleveraging and operational execution sets us up well to play offense. Our first priority is organic growth. This starts with improving our teams’ abilities to market, sell, and service the products we have. There are many recent wins across GE this quarter, but to highlight one.

Our Gas Power team delivered, installed and commissioned four TM2500 aeroderivative gas turbines in only 42 days to complement renewable power generation for California’s Department of Water Resources during peak demand season. These turbines, using jet engine technology adapted for industrial and utility power generation, start and ramp up in just minutes, providing rapid and reliable intermittent power, helping enhance the flexibility and sustainability of California’s grid.

And we’re bolstering our offerings with innovative new technology that serves our customers and leads our industries forward. For example, at Renewables, our Haliade-X offshore wind turbine prototype operating in the Netherlands set an industry record by operating at 14 megawatts, more output than has ever been produced by any wind turbine.

From time to time, we’ll augment our organic efforts with inorganic investments. Our recently announced acquisition of BK Medical represents a step forward as we advance our mission of precision healthcare. Bringing BK’s intra-operative ultrasound technology together with the pre- and post-operative capabilities in our Ultrasound business creates a compelling customer offering across the full continuum of care – from diagnostics through surgical and therapeutic interventions as well as patient monitoring. Not only does it expand our high performing $3 billion ultrasound business, but BK is also growing rapidly with attractive margins. We expect the transaction to close in ’22, and I’m looking forward to welcoming the BK team to GE.?

All told, we hope what you see is that GE is operating from a position of strength. today we delivered another strong quarter, and we’re playing more offense, which will only accelerate over time. We’re excited about the opportunities ahead to drive long-term growth and value.

Our teams continue to deliver strong performance. We’re especially encouraged by our earnings improvement, which makes us confident in our ability to deliver our outlook for the year. ?

You’ve seen today that our transformation to a more focused, simpler, stronger high-tech industrial is accelerating. We’re on the verge of closing the GECAS / AerCap merger, a tremendous milestone.

Stepping back, our progress has positioned us to play offense we just wrapped up our annual strategy reviews with our nearly 30 business units. These complement our quarterly operating reviews but have a longer-term focus as we answer two simple questions: “What game are we playing?” and “How do we win?” They were exceptionally strong this year across the board with the most strategic and cross-functional thinking we’ve seen in my three years enabling us to drive long-term growth and value across GE, while delivering on our mission of building a world that works:

• ?We’re positioned to truly shape the future of flight with new technology for sustainability and efficiency – such as the recent Catalyst engine launch, the first clean-sheet turboprop design entering the business and general aviation market in 50 years.
• Touching 1 billion patients per year, we’re delivering more personalized and efficient care through precision health and combining digital and AI within our products – including our new cloud-based Edison TruePACS to help radiologists adapt to higher workloads and increased exam complexity with improved diagnostic accuracy.
• Through our leadership in the energy transition, we’re helping the world tackle the trilemma of sustainability with affordability and reliability – from launching new tech platforms at Renewables, such as the Haliade-X and Cypress, to our recently announced flexible transformer project with the Department of Energy, to growth in the world’s most efficient gas turbines.

So, we still have work to do and as we do it, we’re operating from a position of strength serving customers in vital global markets with a focus on profitable growth and cash generation. Our free cash flow will continue to grow to high single digits, and we have an opportunity to allocate more resources on capital deployment to support GE’s growth over time.?

Thank you for your continued support.