GE has published its financial results after a “challenging” Q2 2020. The accounts report $877 million in goodwill impairment charges related to the firm’s recent 3D printing acquisitions.
In Q2 2020, GE’s revenue declined from $23.4 billion in Q2 2019 to $17.75 billion, causing the firm to move its annual risk-based impairment review from Q4 2020 into Q3. The company’s appraisal valued 2016 acquisitions Arcam and Concept Laser as worth less than the amount paid for them, writing off goodwill worth $877 million in the process. Following the move, GE’s CFO Carolina Dybeck, admitted that the firm is “anticipating pressure on its cash flow assumptions” during H2 2020.
Speaking to 3D Printing Industry, a GE spokesperson would not answer direct questions about the goodwill impairment.
GE’s 3D printing acquisitions
GE announced plans to purchase metal 3D printing companies Arcam and, initially, SLM Solutions in late 2016. The deal, reported to be worth $1.4 billion, was designed to act as a spearhead for GE’s 3D printing implementation program across its business. Shareholders in SLM Solutions saw their investment increase by 36.7 percent after negotiations were made public, and shares in Arcam jumped more than 50 percent.
Despite the momentum around the deal, and the SLM board advising shareholders to accept the offer, negotiations faltered. At this point, SLM’s shares had soared to $42.54, raising the value of the company to $761 million. The increasing influence of the Elliott Group, run by billionaire Paul Singer, ended GE’s involvement in the process, with the firm declining to pay the premium demanded by the opportunist U.S. hedge fund.
Since the negotiations collapsed, SLM has faced financial challenges, and the Elliott Group stepped in to provide a €13 million cash injection in April 2019. Towards the end of 2019, SLM turned its financial performance around, and saw a considerable increase in orders. This momentum carried over to 2020, and the company posted its record revenue intake during Q1 2020, and 90 percent revenue growth over H1 2020.
GE, by contrast, eventually purchased metal 3D printing companies Arcam and Concept Laser in 2016, saying at the time that it expected to grow the business to over $1 billion by 2020. GE continued to invest in the firm, increasing its stake in the company from 77 percent to 95 percent later that year. Arcam has continued to expand its 3D printing offering, launching its EBM Spectra H system and opening a new Center of Excellence in Gothenburg, Sweden.
The $877 million GE goodwill impairment write-off
An impairment to goodwill usually indicates that a company has either decided to pay more than book value for an asset or has declined since the acquisition. Either way, once a difference is identified between the amount paid by the purchasing business, and the assessed fair value of the asset, the difference can be written off as goodwill.
Although companies list the goodwill of acquisitions on their balance sheets, they don’t depreciate or amortize like regular assets, so businesses are required to appraise them on a yearly basis. The fact that GE has opted to assess 20 percent of its assets early, indicates that its investments have been particularly badly affected by the ongoing pandemic.
Reducing the value of a company’s goodwill can be risky, given that businesses are valued on their assets, but firms tidying up their balance sheets can be good news for investors. Sometimes it’s considered better to ‘bite the bullet’ and write-off part of an investment, rather than have a bloated, unrealistic balance sheet. In this context, and under the cover of COVID-19, now could be an opportune time for companies to tidy their balance sheets without damaging their shares prices.
Over H1 2020, GE’s shares slipped from $11.16 to $6.83, and it’s leadership may have decided that they couldn’t decline much further, and proceeded with the write-off. After the firm’s financial results were published, its shares declined to $6.07 but quickly recovered to $6.61, suggesting that investors have factored the impairment into their valuation.
The impact of GE’s Q2 2020 financial results
GE suffered a 26 percent decline in its total revenue during Q2 2020, with its flagship aerospace segment being particularly badly affected by the pandemic. The travel restrictions caused by COVID-19 have led GE’s aviation revenue to drop from $8.5 billion in Q2 2019 to $3.7 billion in Q2 2020.
Although GE didn’t break down its Q2 3D printing figures in detail within its financials, it’s likely that its 3D printing business is also suffering from the macroeconomic climate. The fact that the firm’s goodwill impairments came from its GECAS aviation and Additive divisions, also lends further credence to the idea that these segments were identified as risk areas by GE.
In an earnings call with analysts and investors, Lawrence Culp Jr, GE’s Chairman and CEO, defended the company’s move to write-off the goodwill of its assets. “We had a very challenging second quarter that we met head-on, executing well operationally while we took actions to further de-risk our company,” said Culp Jr.
“Our earnings performance was impacted by the ongoing impact of COVID-19 on our businesses, but we made faster progress on elements within our control, including our targeted cost and cash preservation actions,” he added.
Concluding with a Q&A on the earnings call, GE’s CFO Carolina Dybeck, said that the firm would continue to review its portfolio, but also raised concerns about its cash flow during H2 2020. “We’ll finalize our annual review of the entire portfolio in the third quarter,” said Dybeck. “We do anticipate pressure on our cash flow assumptions driven by possible elevated repossession and a prolonged recovery for the industry.”
“We’ll continue to monitor credit risk impairments, as we go over the year,” she added. GE reduced its Earnings Per Share EPS by $0.15 year-on-year in response to the reduction in customer demand seen during Q2 2020, and the firm’s goodwill impairment charges.
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Featured image shows a series of Arcam 3D printers that were acquired and installed by GE Additive. Image via GE Additive.