Bloomberg News

GE Profit Tops Estimates on Finance Gain as Orders Increase

July 22, 2011

(Updates with closing share price in sixth paragraph.)

July 22 (Bloomberg) -- General Electric Co. posted second- quarter earnings that beat analysts’ estimates, buoyed by its finance unit, as the industrial order backlog rose to a record.

Profit from continuing operations climbed 18 percent to $3.73 billion, or 34 cents a share, from $3.15 billion, or 29 cents, excluding pension costs, Fairfield, Connecticut-based GE said today in a statement. That exceeded the 33-cent average of 13 analysts’ estimates compiled by Bloomberg.

Chief Executive Officer Jeffrey Immelt has said losses have peaked at GE Capital, and the unit is writing more profitable loans. The division’s gains helped offset narrower operating margins at GE Energy, where the company said profitability will improve in the second half. GE’s total backlog, a measure of future industrial growth, rose 6.8 percent to a record $189 billion.

“The source of earnings growth was really GE Capital, where profits more than doubled,” Matt Collins, a St. Louis- based analyst with Edward Jones, said in an e-mail. “Industrial revenue growth actually slowed and profits declined, but if the healthy order growth continues, earnings should rebound in 2012 and beyond.”

Equipment orders gained 33 percent as GE introduces more efficient wind and gas turbines, and service orders climbed 16 percent. Infrastructure orders increased 24 percent.

GE dropped 12 cents to $19.04 at 4:15 p.m. in New York Stock Exchange composite trading amid a broader decline in the Dow Jones Industrial Average and the Standard & Poor’s 500 Industrials Index.

‘Growth Prospects’

Revenue of $35.6 billion topped analysts’ estimates of $34.7 billion after a majority of the NBC Universal media division was sold in January.

Including a pension cost of $181 million, profit attributable to the company was $3.76 billion, or 33 cents a share. This was the second quarter in which GE broke out per- share pension costs or benefits.

“We’re going to see solid double-digit operating earnings growth for the year, and we’re confident in our total-year framework for both earnings” and cash flow from operations, Immelt said on an earnings conference call. “We see momentum building for 2012.”

GE doesn’t give specific earnings and sales forecasts, providing instead a framework that analysts and investors can use to calculate their own estimates. Industrial earnings and sales should increase in the second half of 2011 and accelerate into 2012, Immelt said in the statement.

GE Capital profit from continuing operations more than doubled to $1.66 billion on revenue that was little-changed at $12.4 billion, the company said.

Export Sales

Immelt is working to boost GE’s share of profit from industrial operations and shrink the percentage contribution from the finance division.

Profit in the energy infrastructure segment slid 19 percent to $1.55 billion amid lower prices for wind and gas turbines, even as sales increased.

Profit at the Transportation division climbed almost seven- fold as sales increased 74 percent to $1.23 billion. Health-care profit rose about 8 percent to $711 million on a 10 percent sales gain.

Immelt has doubled research and development spending to about 6 percent of industrial sales this year and plans to keep it at about that level, he told investors, as new product introductions stoke global demand.

More Profitable Backlog

GE said it’s on track to generate between $12 billion and $13 billion in cash from industrial operating activities this year. In the first half, it posted $4.4 billion, a 31 percent decline from a year earlier.

“Investors have to believe the orders in the backlog now are more profitable than some of the revenues coming out of that backlog now,” said Mark Demos, a Minneapolis-based analyst at Fifth Third Asset Management, whose parent company owns more than 5.9 million GE shares. “GE needs to make profitability its key focus.”

Earnings at the energy and health-care units fell short of estimates from Brookfield Investment Management Inc. while the aviation unit performed better than projections, Joel Levington, managing director of corporate credit, said in an e-mail.

Jet Engines

Sales from markets outside the U.S. were 59 percent of the total in the quarter, up from 53 percent for all of last year. Immelt has bolstered exports while adding jobs in the U.S. amid demand from emerging markets including the Middle East, eastern Europe and Brazil.

Forecasts for record jet-engine production were bolstered this week when Boeing Co. chose a GE Aviation partnership as the sole provider for an upgrade of its best-selling 737 jet.

David Joyce, GE Aviation’s chief, told investors last month that research and development will rise this year to about $1.4 billion from $1 billion in 2010. GE and its partners logged $27 billion in orders at the Paris Air Show last month, including a 200-plane order from Malaysia’s AirAsia BHD.

All 22 large gas turbines built at the world’s biggest such plant, in Greenville, South Carolina, will be exports this year. GE is the world’s biggest provider of power-plant turbines, medical-imaging equipment, locomotives and jet engines.

GE last week reorganized management at the Energy Infrastructure segment as it absorbs about $12 billion of acquisitions, a process the company said today is ahead of schedule.

Pricing’s Time Lag

GE Chief Financial Officer Keith Sherin said the company sees a pickup in volume for energy equipment, including wind and gas turbines. GE projects wind-turbine volume will rise to about 1,400 in the second half of 2011 from 1,208 in the same period last year.

“There’s a time lag to the pricing that takes place, that always is the way it goes,” Immelt said, referring to wind turbines. “We’re seeing the early indicators of it turning, but that’s going to take some time.”

To improve margins as volume increases, GE will look to productivity improvements and “material pricing and things like that at the same time,” he said.

Lower material costs of $300 million from working with suppliers, procuring materials locally for plants in emerging markets and some direct commodity contracts aren’t enough to bridge a “value gap” of $500 million to $700 million from selling some equipment at lower prices, Sherin said in a telephone interview.

The gap should level off as the company works on higher productivity and buying materials from lower-cost suppliers, he said.

“Our whole team is focused on the value gap, and that’s what we’re going to be working on,” Sherin said.

--With assistance from John Lear in Chicago and Donna Alvarado in San Francisco. Editors: James Langford, Ed Dufner

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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