Good morning, and welcome to the Third Quarter 2020 General Electric Company Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.
And good morning, and welcome to GE's Q3 2020 earnings call. I'm joined by our Chairman and CEO, Larry Culp and CFO, Carolina Diebeck Happe. Before we start, I'd like to remind you that the press release and presentation are available on our website. Note that some of the statements we're making are forward looking and are based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, these elements can change as the world changes.
With that, I'll hand the call over to Larry.
Steve, thank you. Good to be here with you and Carolina in the same room for an earnings call for the very first time. Good morning, everyone. I'm encouraged by our progress in the Q3. Despite the ongoing effects of the COVID-nineteen pandemic on our year to date results, we're building momentum across GE.
And our top line remains pressured, but our actions are driving an improved profitability and cash performance. In the quarter, industrial revenue was down 12% organically. This was largely driven by aviation as healthcare, renewables and power were all up. Industrial margin was 5.6% and organic contraction of 310 basis points year over year. Notably, all segments returned to positive territory for the first time in 2 years.
Adjusted EPS was $0.06 down year over year, but up sequentially. And industrial free cash flow came in at a positive $500,000,000 Our sequential improvement was largely driven by better working capital and earnings. While positive and a good sign, we have plenty more work to do here. Let me focus on orders down 28% organically for a moment. Over 75% of this pressure was driven by aviation as well as part of healthcare, the places hit hardest by the pandemic.
In power and renewables, some pressure results from our actions to be more selective in our commercial activities and some is timing, where we should see stronger conversion in the Q4. Despite this, our backlog remains a real strength at $384,000,000,000 80% is in services where we enjoy healthy margins. And while services are hurting in the near term, they have a long multiyear time horizon and keep us close to our customers. By business, at Aviation and GECAT, we're managing these businesses aggressively and saw sequential improvement. Aviation is on track to deliver more than $1,000,000,000 of cost and $2,000,000,000 of cash action this year.
In Healthcare, we delivered strong margin and cash performance. While pandemic related demand has moderated, we saw scan data and EDX orders approach pre pandemic levels. We continue to see CapEx pressure in private healthcare markets and we're planning cautiously there. As you'll recall, power and renewables were our turnaround story at the start of the year, improved operational discipline and cost out actions are starting to show. In the quarter, both delivered solid organic margin expansion, Power more than 700 basis points, Renewables more than 200.
So clearly, our markets are by and large stabilizing. But to underscore the obvious, stability is not yet recovery. We still acknowledge that the full duration, magnitude and pace of this pandemic across our end markets, operations and supply chain is uncertain. That said, based on what we see today and the actions we've taken, we expect 4th quarter industrial free cash flow of at least $2,500,000,000 with positive contributions from all segments. But how much more really depends on how aviation fares through the quarter.
And importantly, the momentum we're building should help us deliver positive industrial free cash flow in 2021. Moving to Slide 3. From day 1, we've known this would be a game of inches. This is still true today. We're focused on 3 areas where we're making real progress.
1st, we're continuing to strengthen the businesses. As a team, we've been engaged on what matters most, the safety of our employees, taking care of our customers and communities and accelerating our lean transformation. At the same time, we're focused on what we can control in the near term, driving better operational execution and further optimizing our cost structure. Our more than $2,000,000,000 of cost and $3,000,000,000 of cash actions started to play out in the quarter, now 75% complete with our decremental margins, for example, improving sequentially from 44% to 32%. 2nd, we're solidifying our financial position.
Since the beginning of 2019, we've decreased debt by $25,000,000,000 We continue to maintain strong liquidity and flexibility, exiting the Q3 with $39,000,000,000 of cash. Carolina will provide more details in a moment. And third, we're driving long term profitable growth even in the current environment. Lean continues to be the strongest common denominator across GE and this is what builds the foundation for sustainable growth. We're picking up the pace, deploying lean to drive safety, quality, delivery and cost improvement in terms of both productivity and cash generation.
For example, this quarter we held our 2nd lean week event virtually at Gas Power with more than 1,000 participants across 10 countries and functions. We identified dozens of delivery and cost improvement opportunities. We're also continuing our efforts to run GE differently, moving the center of gravity closer to where the action is. We talk about GE as 4 industrial segments, but we drive operational improvement at much deeper levels within the organization. You'll recall that we split Gas Power and Power Portfolio within the Power segment.
This is working well for us. We're now simplifying other segments in similar ways to enhance visibility and raise accountability. For example, we're changing the way we manage P and Ls within Healthcare Systems ranging from LCS to MR to ultrasound, where we are integrating production and product management to improve delivery. Similarly, we're now transitioning grid from 1 to 6 operating P and L. Importantly, this is not only a cost out initiative, but a way to ensure we're using the right processes, tools and resources to improve execution.
This quarter, we held strategy reviews with each business, planning for the long term. These discussions focus on how we put ourselves on the best possible footing to play offense, how we win with our customers and for our shareholders. What was evident is that our businesses are focusing. We're setting more impactful objectives designed to deliver profitable growth. Examples include ensuring our gas turbines remain competitive at the top of the power dispatch curve as well as launching next generation software platforms in our Healthcare Imaging business.
The quality of our strategic thinking was much improved versus a year ago. Now we have to execute. So let's get into the details on the COVID-nineteen dynamics at both GE Aviation and GECAT. On Slide 4, you'll see GE CFM departures, which drives our service business much more so than RPKs. As a reminder, we track departures by region and by platform daily.
With the Q3 overlapping with much of the summer travel season in the Northern Hemisphere, we saw GECFM powered departures generally improve. We've seen this plateau to down 40% in October versus our January baseline as we exit these typically higher traffic months. We expect the market recovery will continue to be correlated with departure trends across regions and fleets. China's departure levels are just below the January baseline and we're watching load factors there carefully. The Americas have remained relatively flat through the quarter, but have shown some improvement in October versus July.
In Europe, some improvement in July August has reversed in September October. In aggregate, the near term outlook remains quite fluid. And while there's been improvement from the April lows, we're now seeing stabilization at current levels. At GE Aviation, our military business remains resilient, but commercial aviation is clearly challenged. Under our new CEO, John Slattery's leadership, we're progressing on the difficult actions to scale this business for the new market reality.
Notably, these actions drove the sequential cash improvement in the quarter. Looking at these trends we're seeing through October, commercial shipments and shop visits are still down 50% year over year. Services are critical to the recovery of aviation as we generate much of our cash here, especially within narrow bodies, which are more than 40% of our historical revenue. We typically have good line of sight into demand of about 6 weeks out at our internal shops, but we have less visibility into external shop visits. We're working with our customers to forecast shop visits as utilization recovers, supporting our operations and supply chain.
We made an important organizational move in Aviation Services with Russell Stokes returning to Aviation as CEO of that business. Russell will lead our aviation services business in a new role integrating both our commercial and operations team. Shifting to GECAS, similar to aviation, our performance continues to be correlated with the market. As we said last quarter, 80% of our customers have requested deferrals and we've approved about 60% of both. At the end of the Q3, this deferral balance was approximately $400,000,000 and importantly, we've collected about 85 percent of what we've invoiced thus far.
We ended the quarter with 29 aircraft on the ground, up 17 up from 17 in the 2nd quarter out of a fleet of more than 950. We're actively working customer by customer through restructurings and in some cases repossession. And our commercial team is remarketing aircraft. We're also taking action to navigate through this volatility. Let me share with you two examples.
We announced Kalida Air to operate a 37 aircraft fleet as the launch operator on our 777 passenger to freighter cargo conversion program, which features the GE90 powered largest ever twin engine freighter. We've partnered before and we're teaming up again this time with PIMCO to launch a $3,000,000,000 venture that provides airlines with financing to help upgrade their fleets at a critical time. This venture also enables us to acquire new and young fuel efficient aircraft so we can continue providing our customers with the aircraft they need. We continue to plan for a steep market decline through the Q4 and a likely multiyear recovery. Long term, the aviation market has solid fundamentals and we're committed to a safe return to flight post COVID.
We're working with our customers and industry partners to ensure engineering and operational readiness. With that Carolina will provide further insights on the quarter.
Thanks, Larry. Diving into the quarter. Our results are better sequentially, but remain challenged overall. This is particularly true in Aviation, our segment hit hardest by the pandemic. So the recovery and path forward would look and feel different at each business, market conditions are stabilizing.
We're also driving impact with our cost out actions. Year to date, we've reduced headcount by more than 15,000 or 8% and we expect to reach about 20,000 or 10% by year end. And we're seeing operational improvements, especially in Power and Renewables. Looking at our consolidated results, which I'll speak to on an organic basis. Orders were down 28%.
On the services front, Aviation remains the most pressured, while Power and Healthcare were each flat. Backlog was relatively flat year over year and sequentially with puts and takes between segments. Profitability in our backlogs remains attractive as the majority is in services. Industrial revenue was also down, but to a lesser extent than orders, down 12%. Despite the difficult environment, all segments delivered revenue growth, except Aviation.
And all Industrial segments delivered positive profit in the quarter. Our countermeasures continue to accumulate with a more immediate effect in Healthcare, where the margins expanded 260 basis points. In our longer cycle businesses, results improved off the 2nd quarter lows, but at more measured rates. Turning to EPS. Let me highlight 3 differences between continuing and adjusted.
On restructuring, we spent $200,000,000 in the quarter. For 2020, we still expect to spend more on restructuring versus prior year with most of the benefits accruing in 2021. We also reserved $100,000,000 for legacy FDC matters. And on the impairment charge, this was related to our recent decision to exit the new build coal power market within STIM. Excluding these items as well as gains, mark to market and non operating benefits, adjusted EPS was a positive of 0 point 0 $6 Turning to cash.
We generated $500,000,000 of industrial free cash flow in the Q3. Excluding biopharma results, this year is $200,000,000 improvement year over year. Notably, Healthcare delivered strong cash flow conversion due to improved inventory ties, better collections and reduced CapEx. At a high level, cash flow benefited from positive earnings plus G and A across all segments and all businesses grew up sequentially. It's a modest improvement in working capital, driven by management actions and what I'll call stabilizing volume levels, particularly in payables.
While we used $600,000,000 of cash on working capital, this is roughly $1,000,000,000 better sequentially than year over year. Looking at the dynamics. For receivables, we saw higher billings. This is typical in our second half and even more true this year due to the broader economic environment. However, underneath this, there are clear signs of improvement due to better daily management, such as company past dues declining 3 points sequentially and sequential improvement of DSO.
Inventory was a source of cash. As we apply lean here, we expect it will be a greater source in the future. From my recent trip to renewables, visiting onshore wind, I learned how the team transitioned multiple warehouses to a pool based system. This reduced service inventory by $50,000,000 and counting. Payables stabilized from prior quarters as we cleared the payment cycle of pre pandemic material purchases.
As these volumes recover, we expect further benefits here. Progress was the use of cash as outflows from shipments outpaced inflows from new orders and milestone payments. This was primarily driven by Renewables and Aviation. Contract assets were limited impact and other operating flows primarily driven by non cash items in net earnings. This includes the mark to market impact from our Baker Hughes position and noncash benefit costs.
We're also carefully scrutinizing our CapEx spend, down $220,000,000 in the Q3 versus prior year. Year to date, industrial free cash flow is a negative of 3,800,000,000 dollars The drivers include lower earnings, excess position, payables related to the commercial aviation decline, progress due to higher deliveries and lower orders in power and renewables and reduced factoring. With our typical seasonality, we expect the 4th quarter to be our most significant quarter for industrial free cash flow. As Larry said, we're targeting at least $2,500,000,000 Sequential improvement will continue to come from earnings growth, reduced inventory and stabilizing progress. Taking a step back, building a path to sustainable cash flow rests largely on continuing to drive self help across the businesses.
We realized 75% of our cash actions to date and the remainder is coming in the Q4 and repositioning aviation to emerge stronger when the market recovers. Taking a broader view of working capital and looking for additional opportunities, inventory, just over 2 turns today, is an area where we can improve our consistency and performance. Lastly, we expect our run off items and the level of reduction in factoring to decrease over the next few years. Factoring has decreased by close to $2,000,000,000 this year. Moving to Slide 7.
We're making incremental progress on strengthening our balance sheet. Recall our 2Q actions where we reduced near term liquidity needs by $10,500,000,000 We ended the quarter with $39,000,000,000 of total cash, dollars 24,000,000 at GE and $15,000,000 at GE Capital. As you know, we're fully monetizing our remaining $5,000,000,000 stake Baker Hughes over the next 3 years. This month, we received the first sales process of $400,000,000 In addition, we're reducing debt and we're evaluating liability management opportunities. Year to date, we reduced GE debt by 8,100,000,000 dollars including $500,000,000 in the quarter related to the wind down of our commercial paper program.
It's important to note that in addition to paying down debt, we've significantly reduced our reliance on intra quarter borrowing. Our Industrial Commercial Paper program ticked at $20,000,000,000 intra quarter in 2017 versus today's balance of 0. Year to date, we've paid down GE Capital debt of $3,600,000,000 $2,300,000,000 in the quarter. As previously stated, we expect to achieve our leverage targets over time due to the impact of COVID-nineteen and our financial policy goals remain unchanged. So moving to our segments, which I'll also speak to on an organic basis.
Aviation, we're encouraged by our sequential improvements, evidenced by positive margins despite the challenging market conditions already mentioned. Orders were down more than 50%. We saw declines of roughly 60% in both commercial engines and commercial services. Our backlog stands at $262,000,000,000 up 4% year over year. This is the Q2 we added to our CSL and transactional services backlog, while our equipment backlog was down $2,000,000,000 sequentially, driven by lower orders and backlog conversion to sales.
Cancellations flowed significantly this quarter before about 100 Leap 1B cancellations, much lower than 800 or so in the Q2. Significant, but for context, our ending backlog has nearly 10,000 LEAP-1A and 1B engines. Revenue was down nearly 40% year over year, but up 12% sequentially. Commercial engine revenue was down. We shipped 385 fewer engines for less than half of the prior year.
This includes 283 less LEAP units. This is partly due to the 7 37 MAX grounding and slower production. Commercial services revenue was also down more than 55%. This was due to lower spare parts sales and shop visits. Military revenue increased 7%, driven by development sales and service volumes.
Missed some engine shipments at the quarter end due to supply chain challenges. Segment margin returned to positive territory. Sequential improvement was driven by the cost actions and lower commercial services charges. This was partially offset by an impairment of roughly $100,000,000 in JV in our systems business related to commercial market declines. Separately, while supply chain costs were about 30% lower sequentially, we still had approximately $120,000,000 of excess costs due to lower production rates.
Aviation has completed around 70% of the more than $1,000,000,000 of cost $2,000,000,000 of cash actions. To date, the business has realized close to $1,000,000,000 in cost savings. We completed further workforce reductions, bringing the year to date total to roughly 20%. These efforts have improved our decremental margins to 43% from 59% in the 2nd quarter. Moving to Healthcare.
We delivered solid results through better commercial and operational execution. In Healthcare Systems, order declines are moderating, particularly in Public Healthcare markets where the governments are prioritizing investments in quality and access. Broadly, global scans have now approached the 4th quarter baseline and we saw better sequential demand in imaging and ultrasound. With that backdrop, Healthcare orders decreased 4%. In Healthcare Systems, orders declined 5%.
We saw continued softness in imaging and ultrasound demand and significantly lower demand for pandemic related products. In PDX, recovery continued. Orders were down 2% versus 28% down in the 2nd quarter. Global procedure volumes largely recovered to pre COVID-nineteen level with some variation by region. Healthcare revenue was up 10%.
About $300,000,000 of revenue was related to the delivery of the remaining ventilators ordered by the U. S. Department of Health and Human Services. Excluding this, revenue was up 3%. HCS was up 12% or 4% excluding the HHS order.
Strong execution against pandemic related product backlog was partially offset by lower demand for products less correlated with COVID-nineteen. GDX revenue was down 2%, a significant improvement sequentially. Segment margin was up 2 60 basis points. This was driven by higher volume, improved cost productivity and SG and A reductions. Healthcare reduced headcount by roughly 600 this quarter.
The team is executing well on cost reduction, while prioritizing growth investments with R and D flat to prior year. Turning to Power. Our performance has been impacted by the timing of outages and the discretionary spending on upgrades during the pandemic, particularly in the Middle East. However, sequential improvement is driven by self help actions and there's still significant opportunity for margin expansion. On the market, global electricity demand declined low single digits.
However, gas based power generation remained resilient and GE gas turbine utilization was up mid single digits. Overall, orders were pressured. Equipment orders were down 35%, largely driven by gas power on lower orders. However, we saw a significant improvement of flow orders in the Q2, and we expect a strong pipeline lead to better equipment orders in the Q4. Service orders are expected to remain challenged due to customer budget constraints and lower discretionary spend.
We exited the quarter with lower backlog. Of note, gas power backlog was $65,000,000,000 down $1,400,000,000 sequentially, primarily on lower orders due in part to timing and deal selectivity. Revenue was up 3%. In Gas Power, revenue was up 7%. Our equipment revenue was up double digits, largely driven by our extended scope shipment.
We shipped 11 gas turbines in the 3rd quarter, and we're on track to deliver 45 to 50 heavy duty gas turbines this year. Services revenue was down slightly, largely driven by a continued decline in upgrades. This was some stabilization with typical outage seasonality after the first half disruption. Based on what we see today, we are still targeting to complete roughly 95% of the outages originally planned for the year. Turning to Power Portfolio.
Revenue was down 7%, largely driven by steam equipment project timing. Segment margin turned positive after a tough second quarter and expanded 760 basis points. This was primarily driven due to better equipment project execution and the reduction of gas power fixed costs of 16%. We also saw margin expansion across all 3 power portfolio businesses with the strongest performance in power conversion. Across power, we're advancing on our cost actions, reducing headcount by roughly 600 this quarter.
Additionally, Gas Power is utilizing lean tools to enhance the availability of parts for outages. As a result, on time delivery is almost 30 points better year over year. At Renewables, which has been the least impacted by the pandemic, we're encouraged by the team's progress. Onshore wind delivers near record volume. Offshore wind signed its first Halyard X supply contract with the prototype now operating at 13 megawatts and our turnaround efforts at grid and hydro are continuing.
Starting with the market. U. S. Production tax credits continue to support onshore wind in North America. In offshore wind, we're building a robust pipeline to capture secular growth through the decade.
Orders were down 18%. Remember that this can be a lumpy business. Onshore wind was down driven by tough comps to the 2019 PTC order volume and some North America repower orders shifting to the 4th quarter. Separately, there was a large 6 megawatt offshore wind order in 2019 that did not repeat. We expect strong onshore wind order growth in North America for the 4th quarter, and offshore wind should recognize its first order for Phase A of the Dogger Bank wind farm.
That said, despite expecting strong 4th quarter order growth, we're focused on underwriting discipline and deal selectivity to drive improved margins and cash flow. Revenue was up 4% as Onshore Wind delivered nearly 1500 new units and repower kits. It's up 5% year over year and 24% sequentially. Delivering on such significant volume requires strong partnerships with our customers and early management to ensure safety and site readiness. We also delivered our 1st Cypress unit and have more than 700 units in backlog.
Segment margin was positive with operational improvements taking hold. Margin expanded by 230 basis points, driven by cost productivity, better pricing and volume in onshore Wind North America. This quarter, we reduced headcount by roughly 900. While we're encouraged by the positive margin, it's early and there's significant opportunity to improve further. At G Capital, we recently announced that Jen Van Bell, currently our Treasurer, will take on an expanded role as CEO here.
I'm excited to continue working closely with Jen in her new capacity. Looking at the quarter, we ended with $101,000,000,000 of assets excluding liquidity. Sequentially, this was flat. Continuing operations generated an adjusted net loss of $61,000,000 At GECAS, we generated a loss of $38,000,000 You recall that in the Q2, GECAS completed an accelerated impairment review of the riskiest part of the lease book, about 20% of the total. This quarter, Greek has conducted their annual portfolio impairment review, which incorporates 3rd party appraisal data and updates to cash flow assumptions for the entire portfolio.
This resulted in a pretax equipment lease impairment of $163,000,000 Year to date, GKS has now booked impairments of approximately 500,000,000 dollars against our $29,000,000,000 equipment based portfolio. Going forward, we'll continue to monitor credit risk. We acknowledge that further market deterioration could result in additional airline failures over and above those that we have considered in our reviews. Turning to insurance. We generated positive earnings of $57,000,000 The financial markets continued to recover, increasing the unrealized gains in our investment securities portfolio and positive mark to market adjustments and realized gains.
We conducted the annual premium deficiency test, also known as the loss recognition test this quarter. This test resulted in a positive margin of just under 2% of the current reserve, so not impacting earnings. Slightly favorable claims experience and premium rate increases more than offset the discount rate headwind. Our rebuild claims curve from 2017 continue to hold. And as a reminder, we'll complete our annual statutory cash flow test for CFT in the Q1 of 2021.
As it relates to the pandemic, we've continued to see trends in our change data. On the LTC block, we're seeing both a reduction in new claims and higher terminations. In our Run of Life business, we're seeing higher claims due to mortality. In our restructured settlement block, we're also seeing higher mortality. At GE Capital, we ended the 3rd quarter with 41x debt to equity.
We remain committed to achieving a debt to equity ratio of less than 4 over time. As noted, in the Q4, GE will provide parent funding to GE Capital of approximately $2,000,000,000 in line with the required annual insurance statutory funding for 2020. Parent support levels are determined by looking across various metrics, including our internal economic capital framework. In 2021, we expect an additional contribution from GE to GE Capital to meet our existing insurance statutory funding requirements of approximately $2,000,000,000 In light of the uncertain environment, further contributions depend on the GE Capital's performance, including GE CAS operations and the insurance CFT results. At corporate, adjusted costs were down 9%.
Functional cost and operations improved. GE Digital continues to optimize its cost structure, now close to breakeven. Corporate continued to reduce headcount, down 400 sequentially and 10% year to date. EHS costs and other costs were up, and we expect higher costs in the 4th quarter, primarily driven by the timing of the EHS activity. To wrap up with a final thought, I'm often asked what was my biggest surprise coming to GE.
One that comes to mind is the grit and the commitment of my finance team. So we have a lot to work with and a lot to do. Let me share how we are partnering with the businesses to drive better margin expansion and cash flow generation. 1st, we're becoming more operational. We're prioritizing fewer important KPIs to help deliver better performance.
Examples include on time delivery as well as product and project costs. We're also changing how we manage these KPIs at the right level, closer to where the business is run. And we're moving toward active, true daily management wherever possible. 2nd, we're deepening our focus on cash flow. This includes working capital and the timing of billings and collection.
In too many quarters, a significant amount of our cash is collected in the last month or even last week of the quarter. And we're using lean and automation to improve strength, quality and scale. In our digital business, for example, over the last year, we've reduced the closing process by 50%. Although we're early in this journey, especially on working capital improvement, I'm encouraged by the process and the progress we're making. Larry, back to you.
Carolina, thank you. Our transformation of GE is accelerating. In September, we introduced a new purpose statement for the company. We rise to the challenge of building a world that works. This is more true than ever as we continue to deliver for customers and tackle the world's biggest challenges from precision health to the safe return to flight to the energy transition.
Climate change is undoubtedly a massive challenge and one where the technology advancements we deliver for our customers will play an important role. We've also been reducing greenhouse gas emissions from our own facilities since 2004 and we met our most recent goal for 2020 early, reducing our emissions by 21%. Now we're strengthening our sustainability plans by committing to be carbon neutral in our facilities and operations by 2,030. And our strategy to achieve this is threefold. 1st, we'll boost operational investments over time to achieve energy efficiencies.
2nd, smart power sourcing will enable us to reduce our emissions from the grid. And finally, we'll use lean practices to eliminate energy waste. Separately, we announced that we will pursue an exit from the new build coal power market. This decision highlights the interplay we are seeing between decarbonization, market dynamics and our own business strategy. Taking a step back, as I reflect on 2 years in at GE, what gives me confidence in GE's future are our fundamental strengths.
In what continues to be a difficult operating environment, our team continues to show humility, transparency and focus every day. Looking across GE, we continue to build on our legacy of innovation, leading with technology. This was evidenced by some big wins in the quarter. Gas Power was awarded a large equipment contract with Taiwan Power Company featuring the 7HA.03, which optimally balances power output efficiency and maintainability. Additionally, Renewables finalized a supply contract with Dogger Bank for what will become the world's largest offshore wind farm.
In healthcare, we introduced a number of AI enhanced product to make our customer workflows more efficient, including our Vivid Ultra Edition and cardiovascular ultrasound. And Aviation received certification from the U. S. FAA for the GX-9X, the world's most powerful commercial engine and designed to be the most fuel efficient GE has ever built. And at the same time, our technologies are uniquely capable of helping solve the climate change challenge.
We're raising the bar in reducing carbon emissions and increasing efficiency. We're delighted that Gas Power 7 turbines will supply the first purpose built hydrogen burning power plant in the U. S. By 2,030, the plant is expected to run on 100% hydrogen. And there's no company with the scale of GE's global reach, brand, talent and long term customer relationships.
In all, we're encouraged by our progress amidst a challenging backdrop. We remain focused on the long term, not only in terms of our ability to perform, but to realize our purpose in the full potential of GE. With that, Steve, go to questions.
Thanks, Larry. Before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask just one question so we can get to as many people as possible. Brandon, can you please open the line?
Thank you, sir. We'll now begin the question and answer session. And from RBC Capital Markets, we have Deane Dray. Please go ahead.
Thank you. Good morning, everyone. Appreciate all the detail here.
Good morning, Deane. Good morning,
Deane. Since free cash flow is the primary operating metric that we're focused on, I'd love to hear from Carolina a bit more about the goals on inventory. You mentioned 2 turns. What's the target? How much more can you go?
And then maybe Larry can contribute on the thoughts on rationalizing CapEx. I know there are trade offs that you're making every day here in terms of not wanting to compromise growth opportunities coming out, but where does the CapEx stand in that thought here?
Thanks, Dan. So let me start then on the working capital. I think to better understand working capital, you sort of have to take a step back. So I try to look at it for the full year so far, and then I'll end with the opportunities because it's sort of one goes with the other. So it's a big focus area for us.
And to start with, we have a lot more to do. I mean there are several large moving pieces in our cash flow, mostly around Aviation and Renewables. So if we start with receivables, our year to date cash flow is actually impacted by SEK 2,000,000,000 lower reduced factoring alone, right? So we've used SEK 5,100,000,000 so far and SEK 2,000,000,000 of that is really reducing factory. Some was on lower volumes, some was our decision.
And underlying that, we are making progress on the DSO, especially in Power Renewables and Healthcare, but we see pressure in Aviation. But I do see there's a big opportunity also going forward in improving our underlying results, I would say, in all areas. And one good example is how gas is working with Scott and the team to improve both overdues, and they have significantly reduced their DSOs with more than tenders lately. So there's more to come there in all areas. And then of course, it will be a balance between the growing sales and also factoring.
Moving to inventory. I would say at this point of the year, typically, inventory is a significant working capital drag, right, because we build inventory for the first three quarters and then we deliver a lot in the Q4. So this year, basically we started the year by building the Q1, then COVID hitting and then working really hard to take inventory down. And that's what we continue to do. And it's not that easy to take down inventories fast in a long cycle business.
So I said that we have significant room to improve here. Our turns are 2, so we can significantly improve that. I would say all segments can improve here. And aviation is working to significantly reduce the size also because of the new realities of the demand. So I would say lean will continue to play a big role in improvement.
It's not a quick fix, but it's a big opportunity for us here. I would say the most significant working capital pressure so far is payables and especially in Aviation. I mean, simply put, we've been paying our suppliers for higher material inputs in the first half while now significantly reducing the input in the second and the third quarter to reflect the lower demand, especially in Aviation. I mean, the account has started to stabilize now, but I expect this to improve as we see the end markets improve. Lastly, we've seen a lot of pressure on progress so far this year, right?
So cash flow from progress is really just a difference between collecting payments on new orders and milestones versus executing deliveries. And Renewables, as you heard me say, we delivered record onshore wind volumes. So we burn progress faster than collections on new orders. And Power is also pressured and of course, Aviation, considering the new significantly lower demand. So I would say focusing on you have to do it business by business and piece by piece.
The biggest opportunities as it is now is in receivables and in inventory. And I would also add to that is improving linearity. So not only looking at it sort of end of quarter and end of year, but having a more stable use through the year. So a lot more to be done, a lot of possible improvements, but we'll get there.
Ian, I would just add on CapEx briefly. We don't want to ever be in a position where we're under investing in innovation, dare I say safety or quality. But that said, I think one of the beauties, one of the benefits we'll get from a true lean transformation at GE is we'll just have a, I think, a sharper more critical eye with respect to how we think about capital more broadly, not only in terms of when we need capital, but then when we see a need, how do we go about it, right? Because there's so many I was in a facility just last week, for example, I won't name the business, don't know who I'm talking about, where it was clear that as we were tackling a particular project in that business that I'm not sure we had the shortest leash on the team with respect to capital, right? We were looking at other measures of success.
So as we implement that philosophy more broadly, I think we'll have an opportunity to spend less. On the other hand, of course, we're going to look for every opportunity we can to put money to work smartly around new products, around new technologies, let alone enhancing safety and quality in our facilities and in our field operations.
Thank you.
From JPMorgan, we have Steve Tusa. Please go ahead.
Hey, guys. Good morning.
Hey, Steve. Good morning. Good morning.
Just a quick follow-up on that receivables comment. Note 4 seemed to have a lot of activity on that front. You said that the factoring was a headwind in the quarter, maybe it was a headwind in the year. Can you just maybe clarify that? And then also, the messaging in July was definitely not confident on positive free cash flow in the second half.
And the messaging with regards to the options pricing suggested that there was also not much improvement through August. So I guess like what happened timing wise in September that really kind of flipped the switch on that? Or was it just you guys were just incrementally cautious sitting there in kind of late July? I'm just kind of curious, you talked about linearity of cash flow through the quarter. And it just seems like this is kind of a big inflection here late in the quarter, given some of those dynamics.
Thanks.
So Steve, why don't I start with the factoring? In the quarter, our factoring balance is slightly up from $8,100,000,000 versus $7,700,000 in the previous quarter and with penetration basically flat. But year to date, it's almost $2,000,000,000 decrease. And that's when you look at the working capital of $5,000,000,000 usage, dollars 2 of that is decreasing factoring and we expect to continue to do so.
Steve, I would say that what we've been dealing with given the COVID dynamics is a host of uncertainties with the passage of time have become less so. I think our last public comments suggested we thought the second half would be positive. We never talked about a specific number with respect to the 3rd quarter. And again, given the progress on the $2,000,000,000 of cost actions, the $3,000,000,000 of cash actions, I think what was a very strong quarter on the part of our health care business and the lack of any further deterioration of note in Aviation allowed us to put the quarter that you see here, the $500,000,000 of free cash together. And I would just add, I think we were encouraged by the turnarounds at both Power and Renewables.
We came into the year knowing that 2020 was going to be important year for both businesses to demonstrate traction in that regard. And whether you look at the sequential improvements, whether you look at the year on year margin expansion or the setup particularly for our Gas Power business going into next year when we think we'll be cash flow positive. I just think there's a lot of progress in those businesses despite some of the timing dynamics that we've seen particularly with respect to outage execution, again, more back half loaded than first half loaded. So it's a game of inches. We've never been in a more challenging environment.
But I think as the year has played out, certainly as the fall here has played out, we're again encouraged by what we see from the businesses broadly, but are taking little for granted.
Great. Thank you.
From Deutsche Bank, we have Nicole DeBlase. Please go ahead.
Yes, thanks. Good morning, Larry. Good morning, Carolina.
Good morning, Carol. Good
morning, Carol.
So maybe we can talk a little bit about inheritance taxes. That's part of the bridge from 2020 to 2021. Can you just maybe talk about an update as to where that stands?
Sure. Nicole, I think we use that phrase from the early days when I joined the company just to describe some of the things, some of the legacy issues that we were wrestling with. But we don't talk about those dynamics the same way internally. And I think we need to start talking about them in the way that is more aligned with how we're running the business. So you've got a better sense of those things that we have control of versus those that are running off, right?
We've talked previously about those headwinds decreasing from $4,000,000,000 last year to $2,000,000,000 next year and a host of issues, right? Legal, pension, supply chain, finance, recourse factoring and of course restructuring. I think as we come in here to the Q4, I think we're doing better in 2020 than we thought. And we know next year's restructuring cash is going to be higher given the announcement around the new build coal exit and some of the additional aviation actions. So I think the lift next year is going to be a little less than what we thought, but on balance over the 2 years in line.
I think as we go forward, let's think about 3 things. 1, restructuring, which we're going to continue to evaluate on expected returns. I think those are very much within our control. Carolina mentioned factoring, right? Better part of $2,000,000,000 year to date of a headwind from the factoring reduction.
Those are actions that I think are largely within our control. And then there are the other items that should come down over time, whether it's some of the U. K. And Alstom related pension dynamics and some of the legal settlements that are a little harder to predict. But I think on balance, it's part of the setup for us to deliver positive free cash flow in 'twenty one.
Okay. Up next, we have from Goldman Sachs, Joe Ritchie. Please go ahead.
Hi, good morning, everybody.
Good morning, Joe. Hey, Joe. Good morning.
So, guys, look, it's great to see the progress that you're making just across the entity and specifically on free cash flow. I know there's been a lot of focus there. But maybe just kind of focusing on the $2,500,000,000 number for the Q4. Larry, your MO historically has been to be conservative when you set goalposts like this. And as you kind of think about the 4Q number, there's I'm trying to understand how much of it is within your control, whether it's your higher margin businesses improving, the cash restructuring actions that you have coming through?
Just trying to understand exactly how much is already within your control versus what you need help with from the market to get to $2,500,000,000 plus in 4Q?
Sure, Joe. I appreciate that feedback on my MO. We're just trying to build and improve here at GE. But when we say at least 2.5% in the 4%, I think what we're saying is that, again, we're going to see the cash the cost and cash actions that we've talked about previously play through. I think we're going to see sequential improvement in profit in 3 of the 4 segments.
I think Renewables is likely to be more flattish in that regard, right? And as we get that $2,000,000,000 of cost fully implemented, that should play through and be a cash flow benefit.
Yes. And I would add to that comment on working capital then. We have typical Q4 seasonality that holds this year as well, especially from Power and Renewables. And then we have our own management actions. So I see for the Q4 really benefits on the working capital primarily coming from continued inventory reduction and a lift from payables as the volumes start to normalize although on a lower level.
We expect to see sequentially improved progress collections or basically less of drag, especially with gas power and renewables, who are then offsetting the aviation pressure. I think on receivables, we have a headwind just because of the sort of Q4 sequential growth, but we continue our collections work. So that one will also depend a bit sort of collections versus, backtrings.
Joe, I would just add that when you ask about the market, some of the things that are outside of our control, I'd really say, we're going to look to do the best we can across the board, probably have a little bit more variability or uncertainty at Aviation, right? The departures is an important measure for us. We'll see how that plays out. I think we mentioned in our prepared remarks, external shop visits is where we don't have as much visibility compared to what we have with respect to our own activity. Shipments out of the airframers triggers our AD and A obligations, a working capital dynamic there that could go against us.
And I think we've shared before that we have past due, particularly on our military business. We're not happy with that. We can clear some of that. That will be helpful. If we don't, obviously not.
So a few things that are still in play. But I think again between the cost and cash actions, earnings, working capital that Carolina highlighted, we think at least 2.5% is the right outlook at this point given what we know and don't.
Great. Thank you both.
From Wolfe Research, we have Nigel Coe. Please go ahead.
Thanks. Good morning, Larry. Good morning, Karina.
Morning,
Nigel. So I guess we've covered cash quite well here. So let's move on to Power. I think you mentioned, Larry, that the pipeline of activity and potentially orders in 4Q looks pretty good in Power. So maybe just talk about what you're seeing there.
And on Gas Power Services, I think you said sort of flattish to maybe slightly down in Gas Power Services. I'm wondering as we go into 4Q,
and as
we start to get some significant easier comps there, do you think that we are moving into kind of growth mode back at Power Services? And maybe just give us some indication of how the moving pieces are tracking? Thanks.
Sure. Yes. No, I think that in contrast to last year gas power that was more front loaded from an orders perspective, We'll see things be more back loaded there. I think some of the wins that we have referenced should convert into orders in the Q4. That's when we talked when we talked about the conversion, that's what we were alluding to.
So we think that we're looking at a 25 gig to 30 gig market over time. That will bounce around. But I think as we exit this year, we're encouraged by what we see both from a pending orders perspective and from a pipeline view. With respect to services, Nigel, I would say the story is not wildly different here in late October utilization. Has been fairly consistent.
We've seen that read through to CSAs. I think Carolina referenced the pressure we have seen. I think a function of COVID, frankly, on upgrades, at least in part, we need to evolve the product roadmap, but we know we had some opportunities in the Middle East, for example, that have just been pressured and then some given the oil price dynamics. And then there's the transactional dynamic. What I'm probably most encouraged by and we referenced the strategic reviews, we were with the Gas Power team just a few weeks ago.
Scott has reset his services leadership. So we have new leaders in many of the critical roles. I was just really encouraged by the way they're getting back to some fundamentals. We need to improve our execution both operationally and commercially in the transactional book. The same thing applies with respect to upgrades even though that will be tougher.
I had the opportunity I took my little field trip a few weeks ago. I went to a CSA site and a transactional site. Fascinating to see how the differences in the work play out given the nature of those transactions. So we need to show you that we can take better care of our customers that we can get back to driving a little bit of growth in this business. It will never be our best grower, but we think we can do better and we can get good conversion on that activity.
And that's what we aim to show you in the coming quarters.
Thanks, Larry.
From Barclays, we have Julian Mitchell. Please go ahead.
Thanks. Good morning. Maybe just wanted to circle back on to working capital, I'm afraid. So look, this year, it looks like it's maybe a €4,000,000,000 headwind on cash. Last year was about €3,000,000,000 So it's sort of €7,000,000,000 cash out over 2 years.
Given everything you talked about earlier in this call, should we expect a very material tailwind there next year? And perhaps more specifically in Aviation, it's puzzling in a way on the outside that working capital has been a headwind there, whether the market is very good or very bad. And you've seen 3 years in a row of working cap headwinds at Aviation. Given we've got 2 months to go till next year, what can you tell us about your expectations for aviation working capital next year? I'm assuming some of these supplier terms that are written and so forth start to become a bit easier next year.
Yes. Well, thanks for the question. No, you're right. We've had a significant use of working capital. Of course, the reality is that you have to take working capital into context with the business and how it's growing or not growing, right?
So it's been a significant shift this year from the beginning of the year with strong growth and then sort of the rest of the year in many places working on reducing to the new level. If we look at next year, again, specifically for Aviation, a lot will depend on how the top line develops in Aviation, right, because that also shows on the receivable side and also the level of diesel. We are working and John Slattery and the team are working very hard on improving our collections and the processes to the collections. So I would say on the receivable, it's really a function of where the top line will be as well as our efforts in factoring, plus underlying improvement on the DSO. On the inventory side, having started with a strong growth trajectory and now working to take it down, there's clearly more to do on the inventory side for the Tillman aviation and they are working on it and it's not a quick fix.
So we expect to see improvement next year on the inventory to sort of come to the new lower levels. Then on the payable side, I mean this year, payable for aviation sort of took the big adjustment on lower levels. So it's been a big drag for Aviation this year in payables. But going forward with sort of stabilization of the situation, we would expect the payables ought to be positive. Progress, well, it's going to be a mix of how much goes out and how much comes in, right?
So it's very dependent on the order situation, but it is not being as big a drag as it is this year. And you remember, we had the big MRO order also from military that we got in progress this year, which is sort of going to be used next year. So I would say that's all 4 of them. So good opportunities both on inventory and receivables, but also on payables more as a function of the situation and progress being sort of more market dependent.
Thank you. From Citigroup, we have Andy Kaplowitz. Please go ahead.
Good morning, everyone.
Good morning, Andy.
Larry, so you've talked about positive cash flow for 2021. I know everybody is sort of asking about it. Maybe if there's a finer point on the bridge into 2021, You've obviously got these cost actions in aviation. You've talked about the inheritance taxes. Is there any other sort of puts and takes that we talk about by division?
You did have very strong cash in Healthcare. So can you talk about the sustainability of that as you go into 2021?
Okay. So let me start then. Rightly, as you say, I mean, earnings is going to be a key driver, and we'll see some gradual improvement in some of the end markets, like in aviation and healthcare and CDX. A big part is our self help, the 2020 costs and cash actions, right? We talked about that it's SEK 2,000,000,000 this year in cash sorry, costs and SEK 3,000,000,000 in cash.
But that annualizes $1,500,000,000 to $2,000,000,000 of structural cost out, and that flows down through the free cash flow, right? So that will carry over for next year on that. And we're working to increase that number, should we send? I talked about factoring. Factoring has been a significant headwind in 2020.
So we don't expect this to repeat at the same level in 2021. Also the non repeat of the aviation payables outflow as the market stabilizes will help. It will be partially offset by progress. And then we'll have what we talked about or Larry mentioned on inheritance items with less of a lift from that in 2021.
Andy, and I just I think we've got the line of sight that Carolina has talked about. We're going to go through detailed reviews with the businesses here in November to put a finer point on all of that. But to me, I hope we'll stay a little bit here in the Q3. I think what we're going to demonstrate in the Q4 is this operational transformation is gathering momentum. And a number of the things we've talked about commercially, be it just increasing visibility, enhancing our win rate, while being more selective, turning that into better underwriting and then ultimately execution particularly in and around projects and power and renewables, all of that, the cumulative effect of those small wins, again, that game of inches, daily management, I think is what we aim to deliver here.
Thank you.
Thanks, Andy.
From Vertical Research, we have Jeff Sprague. Please go ahead.
Thank you. Good morning, everyone.
Good morning, Jeff. Hey,
good morning, Larry. Good to hear your voice. Nice to see the positive cash flow. Can we just spend a minute on the SEC here? I guess the question is kind of the basis is on which you reserve $100,000,000 I mean, do you have visibility on that number?
Was it just untenable to not book anything given the fact that this has now been formalized? And, just your comfort that that's kind of in the right zip code of what the total cost might be?
So Jeff, as we have disclosed, we've been cooperating with the SEC on its investigation on several legacy matters and they relate to insurance, long term service agreements and the goodwill charge at Power in 2018. And we recorded a reserve in the Q3 of $100,000,000 We believe that that's appropriate under the circumstances and that's to address all of the issues covered in the SEC investigation.
But that's based on some kind of historical analysis of prior situations? I guess that's really the question, how you derive that number.
Jeff, I would as Caroline has said, I think we're cooperating with the commission and I think we take that reserve at that level given our view on what's appropriate given the circumstances. And other than that, we really are not at liberty to say more publicly.
Okay. Thank you.
Thanks, Jeff.
From UBS, we have Marcus Bittermeier. Please go ahead.
Yes. Hi, good morning, everyone.
Good morning, Mark. Mark, maybe
just on
Hi. Good morning. Just on Power free cash flow, please. If we I understand sort of the moving pieces in the near term here, but if you look at the glide path specifically in that business, you provide a lot of helpful granularity, I think, in the appendix on the gas side. So I'm kind of intrigued by the exit on the new builds on the steam side.
How much of your capital infrastructure in place with in steam do you need or fixed cost, I should say, do you need to kind of keep that business going, I guess, on the service side, if you're saying it's exiting ultimately the newbuild side? Because it's not really focused on the fixed costs that you have within power on the steam So I'm just wondering how much upside there could be on the overall power fixed cost base here going forward? Thank you.
Marcus, you're exactly right. When you think about the steam business, right, we've got both, if you will, capacity that serves the coal new build market in addition to the nuclear business and a service platform that serves both markets. I think that that's a business that has been challenged, where we have not necessarily made all the progress we have made in Gas Power. Part of the announcement that we have signaled with respect to the new build exit with respect to coal will allow us to take more cost, more fixed cost, as you say. I don't believe in fixed cost, frankly, but the cost there that we can lean out.
And then we'll continue to look for opportunities throughout the rest of that portfolio. So the team's made progress, a number of legacy dynamics in play, particularly in steam. So we're not yet where we are in gas power, but working very hard. And I think as we remix that business more towards services, we'll shed that cost and it will be a better contributor to GE going forward, albeit one that's unlikely to have a robust top line growth trajectory.
From Bank of America, we have Andrew Ogan. Please go ahead.
Yes, sir. Good morning.
Good morning, Andrew.
Just a question on Aviation. You had lower charges around long term service agreements in 3rd quarter versus the first half. How much of the CSA book has been renegotiated given lower scheduled flights? And sort of a broader question, and I think Larry sort of talked about working with customers, how do you work with your customers to keep them from sort of going to the 3rd parties in this environment in aviation?
So Andrew, to start with the CSA charges, the lower than expected, well, I think we should keep in mind that in the second quarter, we really took an aggressive look at all our CSA contracts in relation with what happened what is happening with COVID and our expectations going forward. So we took a $600,000,000 charge for COVID impact. This quarter, we saw some impact, but that was from higher cost coming out of the CSA margin review. It's about 100,000,000, but that's no change to our earlier forecast on the outlook on the CSAs, right? I think it's important to remember, the CSA models are really long term in nature, and it's really bottom up modeling.
And it's sort of estimated future billings versus future costs to serve up to 15 to 20 years, right? So with that said, we are mindful of the situation. We are, of course, monitoring the sort of current utilization trends and looking at bankruptcies, frankly. But we haven't seen anything that is that changed our estimates from the Q2. And that's why we don't have any other impairments on the book in the Q3.
Andrew, and with respect to how we serve and how we compete, I would just add that it's important for everyone to remember that we have an active network of partners that do shop visits for the airlines that we supply into, right? We don't do all that work in our own shops. So that support continues. I think part of what we wanted to do having Russell slide over to Aviation, take on that more broadly defined Aviation Services business is to make sure that we are synchronizing better what we do from a repair and overhaul perspective with the commercial side of the business. So whether it be helping carriers execute different scopes, be it providing better delivery to our 3rd parties, managing green time as everybody is as we work through cash conservation with airlines.
That's just a set of daily operational issues that, that business has managed and managed well over really decades. I think we're seeing particular pressure here today but encouraged by what we see already with Russell and the team managing through the COVID period here.
Thank you. We're out of time at this point. We will now turn it back to Steve for final remarks.
Thanks, Brandon. Thanks, Larry, Carolina and everybody for follow-up. I know we're past the hour, but appreciate you staying with us and look forward to speaking with you. Thanks very much everybody.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.