GE is working to cut costs at its healthcare unit by $700 million in response to “expected near-term volatility and cost pressures from COVID-19," it said in reporting first quarter results on Wednesday.
The conglomerate predicted its healthcare business will rebound quickly from the coronavirus pandemic, at least compared to its aviation unit, but nonetheless felt the need to cut costs.
- The cuts, which include a reduction in headcount of undisclosed size, come on top of actions GE outlined late last year as part of its broader effort to boost healthcare margins.
GE Healthcare achieved 1% revenue growth on a reported basis in the quarter. Profits increased 15%, making healthcare the only GE unit to deliver bottom-line growth in the quarter. GE attributed the uptick in healthcare profits to “volume and cost productivity, partially offset by price and logistics pressures from COVID-19.”
The performance, which is in line with GE’s now-retracted forecast of low single-digit organic revenue growth for the healthcare unit, masks big swings at different subunits. GE identified pharmaceutical diagnostics, a high-margin business, as a clear loser, noting that it was hurt by procedure deferrals. Sales of some products sold by the unit are down as much as 50%, according to the conglomerate.
The situation at the healthcare systems business was more mixed, with a doubling of demand for some COVID-19 equipment such as respiratory devices and CT scanners being offset by deferrals that dragged sales of certain products down as much as 50%.
With the dynamics, which only fully emerged part way through the quarter, guaranteed to continue over at least part of the next reporting period, GE is adapting its healthcare unit for a bumpy period.
“Healthcare is accelerating its planned transformation to expand margins...by reducing headcount, fixed costs, discretionary spend and marketing spend, prioritizing R&D, deferring capex and optimizing working capital,” GE CEO Lawrence Culp told investors on Wednesday's conference call to discuss the first quarter results.
Culp expects healthcare to “normalize and modernize” at some point in the future. To gauge when that will happen, GE is tracking metrics including healthcare admission rates, non-COVID-19 procedures and spending by hospitals and governments. Based on its performance in April and trends in China, where previously deferred procedures are now happening, GE expects healthcare to be down in the second quarter but potentially recover later in the year.
The likelihood that the COVID-19 crisis will continue to affect GE over the coming quarters is shaping the company’s approach to cost cutting, notably by leading it to gradually switch its attention from temporary emergency measures to more lasting changes.
“By no means are these headlines today the end. It’s very much a work in progress,” Culp said.
Although not a major business line, GE earlier this month won a $336 million HHS contract to supply 50,000 ventilators to the U.S. government by mid-July under the Defense Production Act, the 1950 law empowering the president to require companies to prioritize and accept contracts for materials and services during national emergencies. GE and Ford are making a simplified ventilator based on a design licensed from Airon. HHS had earlier detailed a separate contract with GE worth $64 million for 2,410 ventilators produced by June 29.
GE on Wednesday said it doubled its capacity of ventilators in the first quarter and plans to do the same by the end of June.