Cost cuts help GE profit beat estimates as orders swell

Fri Jul 19, 2013 6:09pm BST

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(Reuters) - General Electric Co (GE.N) said on Friday its backlog of orders and services for jet engines, oil pumps and dozens of other products jumped 4 percent sequentially in the second quarter, sending shares up nearly 5 percent.

Chief Executive Jeff Immelt said he was bullish on the company's prospects for the rest of the year as GE tries to reduce the size of its finance unit and boost industrial-related sales.

GE's order book, an indicator of how much work it has received from customers, rose to $223 billion globally. The order book rose 20 percent in the United States alone.

"This is as close as GE comes to a positive surprise as possible," said Tim Ghriskey of Solaris Asset Management, which owns GE shares.

Some analysts were wary though, hoping the conglomerate will be able to achieve its long-stated goal of boosting 2013 margins by 0.7 percent. Its 2012 operating margin was 11.8 percent.

"That will require Herculean improvement in the second half" of 2013, said Nick Heymann, an analyst at William Blair & Co, which trades GE shares.

Quarterly profit and revenue slipped, a sign of the company's success in shrinking the finance unit. Still, earnings topped estimates.

The trick is for GE to turn around orders quickly so it can collect revenue from customers. GE cannot recognize the $223 billion in orders as revenue until it delivers products to customers.

Some investors said they would prefer GE focus on turning orders into revenue as quickly as possible.

"To me the backlog on orders is a mixed bag because it continues to reoccur," said Oliver Pursche, president of Gary Goldberg Financial Services, which owns GE shares. "That to me speaks of a business management issue."

The world's largest jet engine manufacturer announced more than $26 billion in jet engine orders last month at the Paris Air Show. Earlier this month, it closed on its nearly $3 billion buyout of oilfield pump maker Lufkin, broadening its offerings of pumps that pull oil and gas to the surface.

Sales in both its oil & gas and aviation units rose 9 percent in the quarter.

Energy, especially subsea oil exploration, and aviation are considered two of GE's strongest growth areas, drawing the most optimism from shareholders.

"Among investors, I think there was quite a bit of concern that this quarter was going to be a more challenging one," said Jack DeGan, chief investment officer at Harbor Advisory Corp, which owns GE shares. "I was pleasantly surprised that the quarter came in as strong as it did."

GE CAPITAL SHRINKING

The shrinking of the finance unit, GE Capital, dented overall results, though it has been expected on Wall Street and has been CEO Immelt's long-stated goal.

GE Capital's revenue fell 3 percent from the same period last year, and its earnings dropped 9 percent.

The company transferred its chief financial officer, Keith Sherin, to run GE Capital earlier this month, a move designed to help achieve the goal.

GE Capital nearly sank the whole company during the 2008 recession, highlighting why Immelt and his team want to shrink it. Still, the unit brought in nearly one-third of overall quarterly revenue and wrote a $1.9 billion dividend check to its parent company during the quarter, showing just how large it remains.

Immelt expects GE Capital to pay $6.5 billion in dividends this year to the company.

Last month, U.S. regulators said GE Capital was "systemically important" to the U.S. financial system, a designation commonly known as "too big to fail." That effectively means it will be scrutinized more closely by the U.S. Federal Reserve and may require additional capital reserves.

"GE Capital is shrinking quicker than expected," said Perry Adams of Northwestern Bank, which owns GE shares. That's "good from a capital allocation standpoint."

Across the company, second-quarter net income fell to $3.69 billion, or 36 cents per share, in the second quarter, from $4.01 billion, or 38 cents per share, a year earlier.

Analysts expected earnings of 35 cents per share, according to Thomson Reuters I/B/E/S.

Revenue fell 4 percent to $35.1 billion. Analysts looked for $35.56 billion.

GE has aggressively cut costs, including making layoffs, and has sliced more than $474 million so far this year, though GE declined to provide exact numbers on layoffs.

The company plans to keep research spending flat in 2013.

The stock was up 4.6 percent to $24.72 in afternoon trading even as the broader markets dipped. Shares have jumped 12.6 percent so far this year.

(Reporting by Ernest Scheyder and Patricia Kranz in New York and Bijoy Koyitty in Bangalore; Editing by Saumyadeb Chakrabarty and Jeffrey Benkoe)

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