3 Takeaways From General Electric's Latest 10-K

BofA Securities has three key takeaways from General Electric Co.’s GE latest 10-K filing relative to the conglomerate's industrial free cash flow guidance; the normalization of its elevated leverage; and the impact of rising interest rates on the company’s liabilities.

GE's Industrial FCF Guidance: GE’s “transition away from customer receivables sales (i.e., factoring) was a $3.2 billion drag on 2020 Industrial FCF,” analyst Andrew Obin said in a Tuesday note. 

Without the drag, GE's 2020 FCF would already have been above the midpoint of the 2021 guidance, the analyst said. 

Yet GE’s current factoring balances have dropped by 46% from their 2018 levels, with the majority of receivables that were originated under now-defunct programs having since been collected, he said. 

“Based on the lower starting balance and management commentary, we forecast only a $0.4bn drag in 2021.” 

BofA maintained a Buy rating on GE with a $14 price objective. 

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GE's Elevated Leverage Normalizing Quickly: GE Industrial wrapped up 2020 “with 5.9x net debt to EBITDA leverage,” although Obin said the company’s $7.3-billion stake in Baker Hughes Co BKR was not part of the calculation.

Last month, GE monetized $700 million of its Baker Hughes stake, the analyst said, adding that the “2020 adj. EBITDA had over $1.3bn in non-cash charges that we do not expect to repeat.”

Furthermore, he said GE Industrial has approximately $10 billion in excess liquidity and said further proactive debt reduction is possible.

"Higher interest rates should reduce pension balances, which are included in net debt. Every 25bp higher discount rate would decrease GE Industrial’s US pension obligation by $2.4bn, equating to 0.25x lower net debt leverage in 2021,” Obin said. 

GE's Rising Rates, Frozen Pensions: BofA Securities forecast a 1.75% increase in 10-year Treasury rates by the end of 2021.

With this scenario, GE’s freezing of its U.S. pension plan — which became effective last month — coupled with a 25-basis-point increase in discount rates could result in GE Capital’s long-term care insurance liabilities decreasing by $900 million from a current $21.3 billion, Obin said. 

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Photo by Bubba73 via Wikimedia.