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General Electric Company (GE - Analyst Report) reported relatively disappointing second quarter 2013 results with operating earnings of $3.7 billion or 36 cents a share compared to $4.0 billion or 38 cents a share in the year-ago quarter, representing a year-over-year decrease of 5% on a per share basis. Although operating earnings for the reported quarter decreased year over year, it marginally beat the Zacks Consensus Estimate by a penny.

On a GAAP basis, the company reported quarterly earnings of $3.3 billion or 31 cents per share from continuing operations compared to $3.7 billion or 34 cents in second quarter 2012.  

Revenues

Revenues for the reported quarter declined 4% year over year to $35.1 billion, primarily due to a below-par performance of the Power & Water segment. While overall Industrial segment revenue dipped 1% to $25.2 billion, GE Capital revenue decreased 3% year over year to $11.0 billion. Revenues for the reported quarter missed the Zacks Consensus Estimate of $35.7 billion.

Infrastructure orders for the reported quarter increased 4% year over year to $24.1 billion. Total backlog of equipment and services at quarter-end reached a record level of $223 billion.

During the reported quarter, General Electric and its aircraft engine joint venture partners procured Aviation contacts worth over $26 billion at the Paris Air Show. This included $8.6 billion order for CFM LEAP engines and CFM56-5B engines for AirAsia, $1.8 billion worth GEnx engines for United Airlines and $760 million worth CFM LEAP engines in 30 Boeing 737 MAX 8 airplanes for CIT Group.

Revenue by Segment

During the reported quarter, Oil & Gas revenue improved 9% year over year to $3.96 billion, while Energy Management revenue increased 6% to $2.0 billion. Revenue from the Aviation segment climbed 9% year over year to $5.3 billion. However, Healthcare segment witnessed a flat trajectory in year-over-year revenue at $4.5 billion. Home & Business Solutions revenues surged 5% year over year to $2.1 billion.

Revenue from the Transportation segment jumped 2% in the reported quarter to $1.6 billion. However, significantly fewer wind and gas turbine shipments, particularly from the European markets, hampered revenue of the Power & Water segment, which decreased 17% year over year to $5.7 billion.   

Revenue from the GE Capital segment declined 3% year over year to $11.0 billion as it continued its strategy to reduce the overall size of its portfolio while focusing on core growth. In accordance with this plan, GE Capital paid $1.9 billion as second quarter dividend to General Electric. GE Capital intends to pay dividends to the tune of $6.5 billion in 2013 to its parent entity. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $391 billion at quarter-end.

During the reported quarter, GE Oil & Gas augmented its presence in the oil and gas industry with the acquisition of artificial lift technology provider Lufkin Industries Inc. for about $3.3 billion. In addition to strengthening the artificial lift capabilities of General Electric, the strategic acquisition also fortifies its turbomachinery product portfolio by leveraging industrial gears and engineered bearings designed by Lufkin.

Margins, Balance Sheet and Cash Flow

Operating margin in the Industrial segment increased 50 basis points with healthy price performance and material deflation, partially offset by unfavorable volume in Power & Water segment. However, unit shipments in Power & Water are expected to recover in the second half of the year. Year-to-date, General Electric has reduced Industrial structural costs $474 million and remains well on track for planned margin growth of 70 basis points for the year.

General Electric’s total operating income for the reported quarter decreased 2% year over year, with a considerable decline in profits in the Power & Water segment (down 17%). Total Industrial segment profit was up 2% while GE Capital profit dipped 9%.

Cash generated from operating activities for the reported quarter was $5.1 billion. Cash and cash equivalents at quarter-end were $89 billion. General Electric returned $9.9 billion to investors through dividend payouts and buybacks.

Outlook

With a focused and dedicated execution of its strategic plans, General Electric expects to continue its bull run in 2013 and simultaneously benefit the shareholders with a healthy return on investments. The company has exited from the media business and has increased its investments in core industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. General Electric also remains focused on its stringent cost-cutting measures. We remain encouraged with these endeavors of the company.

General Electric presently retains a Zacks Rank #3 (Hold). Other companies in the industry worth mentioning are Hutchison Whampoa Ltd. (HUWHY)), Sumitomo Corporation (SSUMY) and Macquarie Infrastructure Company LLC (MIC - Snapshot Report), each carrying a Zacks Rank #2 (Buy).

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