GE Earnings Show Some Signs of a Turnaround

General Electric reported a first-quarter loss on Friday, but there were also signs that the struggling industrial giant is beginning to stabilize its business.

GE’s big power-generator division continues to drag down the company’s overall performance, and it is still burdened with financial liabilities that linger from the conglomerate’s pared-back finance arm, GE Capital.

But GE’s other major industrial divisions, led by aviation and health care, delivered solid results in the quarter. That should provide some assurance to investors as the company charts a future dependent on its industrial lines.

In a conference call, John L. Flannery, the company’s chief executive, called the quarterly results “a good start” to the year that showed “signs of progress” at GE, with improving trends in industrial earnings, cash flow and profit margins.

Especially heartening for investors, General Electric reaffirmed its profit outlook for the year, predicting earnings per share of $1 to $1.07, though likely at the lower end of that range, GE said. Analysts had been skeptical that GE could do that well. The average analysts’ forecast for the year was 95 cents a share, as compiled by Thomson Reuters.

GE also reaffirmed that its free cash flow — funds available for the day-to-day running of a business — would be $6 billion to $7 billion for the year.

The positive outlook for earnings and cash, despite the troubled power division, points to “the underlying performance in the core businesses,” Jamie Miller, GE’s chief financial officer, said in an interview. “We’re really making progress.”

The company’s shares rose nearly 4 percent in trading Friday.

GE reported a net loss of $1.18 billion for the quarter, but it was mainly related to a one-time charge of $1.5 billion for liabilities in a subprime lender, WMC Mortgage, which GE once owned and is part of a federal investigation.

The company’s decision to set aside the $1.5 billion, analysts said, was an encouraging step to contain the financial fallout from the investigation. “Risk is receding, not rising,” said Nicholas Heymann, an analyst at William Blair.

Without that charge, the company’s operating earnings per share rose 14 percent, to 16 cents a share, or 5 cents above analysts’ estimates.

Total revenue in the quarter rose 7 percent to nearly $28.7 billion, ahead of analysts’ expectations, helped by the contribution from the merger of GE’s oil-field equipment business with Baker Hughes last July. GE owns a majority stake in the combined company.

But GE’s revenue from industrial operations, excluding acquisitions and currency swings, fell 4 percent, to $23.8 billion. This so-called organic revenue does not include the merger-related lift from the Baker Hughes deal, and the falloff in GE’s power-generator business more than offset the gains from aviation and health care.

In its jet engine business, revenue rose 7 percent and operating profit rose 26 percent. It is not yet clear whether the Southwest Airlines accident this week, which left one passenger dead, will have any effect on the company’s aviation business. Investigators said an engine, made by CFM International, a joint venture between General Electric and France’s Safran, suffered a catastrophic failure in midair when a fan blade broke, creating shrapnel that punctured a window in the plane.

GE’s power turbine business remains weak, with revenue down 9 percent and orders 29 percent lower.

Since he became chief executive last August, Flannery has been wrestling with a series of setbacks. Last fall, he surprised investors by telling them GE’s big power-generation unit — long a pillar of strength for the company — was reeling. The division had badly misjudged the market, producing too many power turbines as global demand for electricity generation softened.

At the time, Flannery warned the that it might take a few years to fix the power business, prompting GE to cut its dividend for only the second time since the Great Depression.

Then, in January, GE delivered two more jolts. The company announced it would take a big charge and set aside $15 billion over seven years to pay for obligations held by GE Capital, mainly on long-term care insurance policies. GE had been shrinking its once-huge finance arm for years, and its liabilities were thought to be few, and known.

The Securities and Exchange Commission is investigating the company’s handling of its insurance obligations and how it accounted for multiyear industrial services contracts.

Flannery’s blueprint for General Electric is not yet complete, but he did elaborate on his management philosophy on Friday. GE, he said, must become a “simpler, leaner, high-performance company,” with a small headquarters staff and most decisions made by the individual businesses.

GE’s lighting and rail locomotive divisions are already up for sale, and others may follow.

Flannery is also cutting costs aggressively. GE said it would trim expenses by more than $2 billion this year. “Flannery is doing a good job on the things he can control and he’s addressing the worry points,” said Deane Dray, an analyst at RBC Capital Markets.