General Electric's CEO Discusses Q4 2013 Results - Earnings Call Transcript

General Electric (GE) Q4 2013 Results Earnings Call January 17, 2014 8:30 AM ET


Trevor Schauenberg - VP, Investor Communications

Jeff Immelt - Chairman and CEO

Jeff Bornstein - SVP and CFO


Scott Davis - Barclays

Steve Tusa - JPMorgan Chase

Andrew Obin - Bank of America Merrill Lynch

Steve Winoker - Sanford Bernstein

Deane Dray - Citi Research

Jeff Sprague - Vertical Research

John Inch - Deutsche Bank

Joe Ritchie - Goldman Sachs

Christopher Glynn - Oppenheimer

Shannon O’Callaghan - Nomura

Julian Mitchell - Credit Suisse


Good day ladies and gentlemen, and welcome to the General Electric fourth quarter 2013 earnings conference call. [Operator instructions.] I would now like to turn the program over to your host for today’s conference, Trevor Schauenberg, vice president of investor communications. Please proceed.

Trevor Schauenberg

Thank you, operator. Good morning, and welcome, everyone. We are pleased to host today’s fourth quarter and total year 2013 earnings webcast. Regarding the materials for this webcast, we issued a press release and the presentation earlier this morning. The slides are available on our website at

As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light.

For today’s webcast, we have our Chairman and CEO Jeff Immelt; and our Senior Vice President and CFO, Jeff Bornstein, and our new IR leader, Mac [Ribbons] . Now I’d like to turn it over to our Chairman and CEO, Jeff Immelt.

Jeff Immelt

Thanks, Trevor, and good morning everybody. The company had a good fourth quarter in a generally improving environment. Orders grew by 8%, and our backlog is at an all-time high at $244 billion.

Growth market orders grew by 13% and the U.S. expanded by 8%, and Europe grew by 3%. So pretty broad-based growth and essentially organic growth was up 5% for the quarter. We earned $0.53 per share in the quarter, up 20%.

Our industrial earnings growth was up 12%, with six of seven segments growing. Capital earned $2.5 billion, including some tax-efficient gains as we exited global platforms. And we were able to pull forward $0.05 of industrial restructuring, partially offset by $0.03 of gain, so this is more than we expected and will give us some more cost out in 2014.

We continue to run the company well. Margins grew by 100 basis points in the quarter and 60 basis points for the year. This actually reflects 66 basis points before the impact of acquisitions. Our value gap was exceptionally strong and we reduced structural cost by $1.6 billion for the year. We generated $17.4 billion of CFOA in India, with $89 billion of consolidated cash.

We allocated accounts in a value-creating way. We returned $18.2 billion through dividends and buyback. We completed $9 billion of M&A, primarily in oil and gas and aviation, and these businesses are delivering for investors. So overall, this was a good quarter for GE, and positions us to deliver in 2014 and beyond.

Our earnings for the quarter were about $31 billion, a record. We also ended the year with a record high backlog of $244 billion. We had growth in both equipment and services. There was real strength in power and water. We ended the year with 125 orders for heavy duty gas turbines. Power gen services grew by 9%, which was actually 16% excluding Europe. And recently, our gains were broad-based. The U.S. continued to rebound, growing 8%. For the total year, orders grew by 8%, and backlog grew by $34 billion.

Aviation orders reflect our record backlog for equipment, but at the same time aviation services continues to be very strong. Orders for oil and gas equipment are always lumpy, but orders year to date are up 8%, and we’re encouraged by the orders’ price performance in oil and gas. We built a big backlog in energy management, which should help in 2014. And transportation is being impacted by a weak mining market.

Orders pricing was in line with our expectations. We saw pricing pressure in heavy-duty gas turbines, mainly based on regional mix. But on balance, we expect to continue to drive a positive value gap in 2014.

Our growth initiatives continue to deliver results. Growth market revenue was up 10% in the quarter. Growth was pretty broad-based. Six of nine regions were up by double digits. And we continue to build out our growth market presence.

For service, 6% revenue growth was the best quarterly result in 2013. Highlights include 54 advanced gas paths. Aviation spares grew by 17%. The oil and gas services grew by 17%. We launched another 14 productivity offerings in the fourth quarter. And our dollars per installed base grew by 5% in the quarter.

We continue to win in the market. The Dubai Airshow resulted in $40 billion of wins. The Revolution CT is rapidly becoming the industry standard. We’re the only locomotive competitor, with both a tier four diesel and an LNG offering in test, and we continue to build out service technology in the oil and gas installed base.

At our outlook meeting, we set a target of 4% to 7% organic growth for 2014. And with the huge backlog and strong growth initiatives, that looks achievable.

For margins, we have a pretty good story on margins, growing 100 basis points in the quarter. We finished the year up 66 basis points on an organic basis. We had an internal plan that was well above 70 basis points, but we were impacted by supply chain quality issues [in wind] and some energy management project delays.

By business, we had positive operating leverage year over year and margin expansion in six of seven businesses. Big drivers of our margin expansion were simplification and value gap. In 2013 we achieved $1.6 billion of simplification benefits and our value gap was about $900 million.

In addition, we were able to do more fourth quarter restructuring, which will fortify our margin goals in 2014. One other note, we had no gains in the fourth quarter of ’13 versus some gains in the fourth quarter of ’12. So this really was solid performance.

We’re getting fairly consistent margin performance across the company, and with margins expanding 110 basis points in the second half, we really feel like we have good momentum going into 2014.

So on to 2014. We plan to grow margins in 2014 in line with our goal to exceed 17% by 2016. And we pulled forward more restructuring in ’13 than we originally planned. In the fourth quarter of ’13, we executed $0.05 per share of projects that have an 18-month payback. This was partially offset by $0.03 of gains.

We finished 2013 with $1.6 billion of structural cost out. Because of our fourth quarter restructuring, we’re increasing our cost out goals for 2014. At the outlook meeting, we said we would achieve about $1 billion of cost out. We’re now targeting to get more than $1 billion. And we expect our SG&A as a percentage of revenue to be about 14% in ’14.

Key margin drivers will again be value gap and simplification. We expect R&D to be better and mix will be negative as our product sales are growing faster than service. But our margin plans have been fortified, and this should be a tailwind for GE going into 2014.

Look, we ended the quarter with significant balance sheet strength. Our total CFOA was about $17.5 billion for the year, consistent with expectations. We had a good quarter in capital efficiency and working capital.

On the GE Capital side, we have substantial liquidity. Our commercial paper fell below $30 billion for the first time in many, many years. And we ended the year with $89 billion of consolidated cash and about $14 billion at the parent.

We’re implementing our plans of value creation and opportunistic and balanced capital allocation. In 2013, we returned $18.2 billion to investors through dividends and buyback. And we announced a 16% increase in our dividend at year-end.

And like I said earlier, we completed $9 billion of acquisitions. As I said at the outlook meeting, we plan to work capital efficiency hard in 2014, and our capital allocation will create value for our investors.

So with that, let me turn it over to Jeff to talk about the operations and performance of the businesses.

Jeff Bornstein

Great, thank you. So I’ll start with consolidated results. We had continuing operations revenue of $40.4 billion, reported up 3% in the quarter, industrial sales of $28.8 billion were up 6%, and GE Capital revenues were up $11.1 billion, down 5%.

Operating earnings of $5.4 billion were up 16%, and operating earnings per share of $0.53 were up 20%. Continuing EPS of $0.49, which includes the impact of nonoperating pension, and net earnings per share of $0.41 includes the impact of discontinued operations, which I’ll cover on the next page.

As Jeff says, total year CFOA was $14.3 billion. When you add back the $3.2 billion of NBC tax impact, you get to $17.5 billion. We had solid industrial performance this year, with the variance to 2012 driven by the NBCU related taxes, as I mentioned.

We received $2 billion of dividends from GE Capital in the quarter. The GE tax rate for the quarter was 19%, which is in line with the framework we provided earlier in the year, and the total year rate was also 19%.

The GE Capital tax rate was significantly negative in the fourth quarter, primarily driven by the tax efficient sale of our Swiss platform, which resulted in about $1 billion of tax benefits in the quarter. This drove a negative 77% tax rate in the quarter, and for the year GE Capital’s tax rate was a negative 14%.

On the right side, you can see the segment results, with total industrial segment profit up 12% and six of seven businesses contributing to earnings growth. GE Capital earnings also grew in the quarter, up 38%. And I’ll take you through the dynamics of each of the segments on the following pages, but overall, a reasonably strong quarter.

On the other items page, first we had $0.03 of gains related to industrial transactions. We disposed of air filtration within our power and water business, the Vital Signs business within healthcare, and the advanced sensors business within oil and gas. All three of these gains were booked in corporate.

We had $0.05 of charges in the quarter related to restructuring and other items. This was about $0.02 higher than we had planned, as we continue to invest in restructuring to rightsize the industrial cost structure and position the company for 2014 and beyond.

In discontinued operations, we had $787 million in after tax impacts in the quarter, really driven by four items. First, we booked $442 million of additional reserves on Grey Zone. While we saw claims decline in the third quarter, claims in the fourth quarter are above our model expectations. So we revised our assumption to reflect a further slowing in the overall claims reduction rate. We ended the quarter with $859 million in reserves.

On WMC, pending claims declined from $6.3 billion in the third quarter to $5.6 billion at the end of the year, as the team settled about $1 billion of pending claims. That was partially offset by new pending claims of $281 million.

We recorded a $116 million charge resulting in the total reserve balance at the end of the year of $800 million, and that’s flat with where we ended the third quarter.

Also in the quarter we signed an agreement to sell our consumer bank in Russia, resulting in a $170 million loss in discontinued ops, principally FX-related. And we expect to complete the transaction in the first quarter, and this will lower our E&I by almost $1 billion.

Lastly, we had a [unintelligible] tax adjustment related to plastics of $65 million on disallowment of interest reductions from years previous.

So on an operating basis, we had $0.02 higher industrial restructuring versus gains, which was about $300 million on a pretax basis. It’s the main driver of our higher corporate expense in the quarter.

Now I’ll go through each of the segments, starting with power and water. Orders of $10.3 billion were up 44%, our largest orders quarter in the last five years. Excluding Europe, orders were actually up 56%.

Equipment orders of $6.4 billion were up 81%, driven by thermal and wind. Thermal orders were up three times, driven by the Algerian deal and strength in Saudi and Latin America. Excluding Algeria, thermal orders were still up over 100%. We had orders for 65 gas turbines in the fourth quarter versus 26 last year, and that brought the total year to 124 units on order. Backlog for thermal was up 70% for the year.

Wind orders were up 63%. We had orders for 779 wind turbines versus 412 in the fourth quarter of ’12, principally driven by U.S. demand. And wind backlog was up 43% for the year. Service orders of $3.9 billion were up 8%, primarily driven by PGS, up 9%, and up 16% ex Europe.

And we were very strong in AGPs. We did 25 AGPs in the quarter versus 6 in the previous year. Total [unintelligible] price was lower, as Jeff said, at 3%, with thermal down 4% and wind down 5%.

Revenue in the quarter was $7.7 billion. That was flat with last year. Thermal revenue was down 11% as we shipped 28 gas turbines versus 32 in the fourth quarter of ’12. That was partially offset by wind up 6%, with shipment of 875 turbines versus 722 a year ago.

We recognized the revenue on 200 fewer wind turbines than we had planned, primarily due to a supply chain quality issue and project delays and customer delays. The impact on the quarter was approximately $500 million of revenue, and including the reserves for the quality issues, about $100 million of margin.

As we work through the quarter here, we had some blade issues in November. The team was all over it. We spent an enormous amount of time within the supply chain understanding the blade issue.

We spent most of December understanding what the fleet impact would be and what the manufacturing anomalies associated with it were, and it was really not until around Christmastime that we realized that we probably weren’t going to [rev req] a lot of these turbines that potentially could have an issue with the blade.

Service revenues of $3.8 billion were up 3%, up 8% ex Europe. On segment profit, $1.9 billion was up 9%, driven primarily by value gap. The power and water team has also done an exceptional job on cost, with SG&A in the quarter down 18% and down 13% for the year. Margins improved 190 basis points year over year in the fourth quarter.

Overall, based on 2013 orders, we’re seeing a gradual improvement in heavy duty gas turbines and wind will also have a strong year in 2014. With these higher deliveries, coupled with simplification benefits, we expect power and water to grow earnings in 2014. Based on our backlog, we do expect deliveries to ramp through the year similar to 2013.

Additionally, we’re continuing to work through the blade supply issues in wind. And it could have a moderate impact on the first quarter, but it in no way changes our outlook for 2014 for the business or the wind business.

Next is oil and gas. Orders of $5.5 billion were down 2%, with equipment orders down 8%. Subsea orders were down 10% and drilling and surface was down 20% on tough comparisons to last year. That was partially offset by M&C, up 8%.

For the year, equipment orders were up 12% and backlog grew 27%. Service orders were up 6%, led by global service, up 8%, partially offset by M&C, down 3%. Service backlog grew 27% in services as well.

Orders pricing was strong in the quarter, up 1.8%. Operations in the business had a solid quarter. Revenue for $5.3 billion was up 17%, that’s up 9% after acquisitions. Equipment revenues of $2.8 billion were higher by 16%, driven by strong execution in subsea, up 70%, drilling and service, up 20%, partially offset by M&C, down 18% on continued market softness.

Service revenues of $2.5 billion were up 17% with strength in global services, up 9%, drilling and surface up 20%, and subsea up 45%. Segment profit grew 24% to $800 million, up 18% after acquisitions, driven by strong value gap and higher volume. Margins were up 80 basis points year over year, and they were up 120 basis points year over year excluding acquisitions.

Next I’ll walk through aviation and healthcare. Aviation, orders of $7 billion were down 5%, driven by equipment orders down 15%. Commercial engine orders were $3.2 billion, down 12%, primarily driven by the huge ramp of CFM LEAP orders starting in the fourth quarter of ’12. CFM orders were down 23% in the quarter to $1.5 billion.

GEnx orders of $1 billion were up 21%, and GE90 orders were up 43% in the quarter. Commercial engines backlog grew 28% to $21.6 billion, despite not yet booking the vast majority of the $23 billion plus of energy commitments from the Dubai Airshow.

Military engine orders were down 43% as we expected, so as we look ahead into 2014 for the military business, we’re expecting profits to be down mid-single digits year over year. Service orders of $3 billion were up 11%, driven by commercial spares, up 16%, to $26 million a day. Military service orders were down 3%, driven by sequestration and lower flying hours, which are down 15% to 20% over the last 12 months.

Service backlog ended the year at $97 billion, 22% higher than year-end 2012. Orders pricing was strong, with positive 1.8%. Revenue in the quarter of $6.2 billion was up 13%, up 7% ex Avio. The commercial equipment revenue was 17% higher with 627 unit deliveries versus 589 in 4Q of ’12 and a greater mix of higher value GEnx and GE90 engines.

We shipped 80 GEnx engines in the quarter. The military revenues were up 16% on lower units, 239 versus 258, but the value was higher, driven by favorable mix of tankers and fighter engines.

Service revenues were up 10%, driven by strong spares revenue, up 17% to $26.4 million a day. And military service was down 17%, driven in part by sequestration and the lower flying hours, in addition to the wind down of some upgrade programs.

Operating profit of $1.25 billion was up 20%, up 13% ex Avio, on strong volume and value gap. Margin rates improved 130 basis points, 100 basis points ex Avio. Strong cost productivity more than offset GEnx mix and higher R&D spend, and also if you exclude the Duarte disposition from the fourth quarter of ’12, margins would have been up 310 basis points in the quarter. So overall, a very strong quarter and a strong year for the aviation team.

Healthcare orders of $5.4 billion were up 1%, driven by emerging markets up 4%, with Latin America up 15% and China up 8%, partially offset by Russia, down 19%. From a developed markets perspective, the U.S. was flat, Europe was up 2%, Japan was down 10%, but actually up 11% excluding the impact of FX.

Equipment orders of $3.4 billion were down 1%. CT was down 16%, MR was up 1%, ultrasound was down 2%, and molecular imaging was up 6%. Service orders of $2.1 billion were up 3%, driven by healthcare IT, up 6%. Healthcare IT growth has picked up as new product launches are gaining traction. And as Jeff said at the December outlook meeting, we expect healthcare IT to be up 10% organically in 2014.

Revenue of $5.1 billion was down 1%. That’s flat excluding the effects of FX. And fourth quarter profit of $1.1 billion was up 4%, as the benefits of simplification more than offset the impact of lower price and foreign exchange.

SG&A was down 13% in the quarter, and down 6% for the year. Margin rates were up 110 basis points. Excluding the impact of the Thomas Medical disposition in the fourth quarter of ’12, our profit would have been up 13%, with margins expanding 230 basis points.

Next I’ll cover transportation. Orders of $1.2 billion were down 9%. Equipment orders were down 2%, and we had orders for 149 locos versus 88 in the fourth quarter of ’12. But mining orders continue to be soft, down 60%. Service orders were down 15%, driven by flat service contracts, but offset by fewer modifications and weak demand for mining parts.

Revenues of $1.5 billion were up 7% year over year. Strong equipment growth of 22% was offset by service revenue down 8%, again driven by soft mining parts. Locomotive shipments were higher, with fourth quarter deliveries of 171 units compared with 117 a year ago.

Operating profit of $280 million was up 11%, with margins better by 70 basis points. And the improvement was principally driven by positive value gap. In 2013, transportation executed well in a difficult environment, expanding margins 140 basis points.

Looking into 2014, we expect a continuing soft mining industry with OHB shipments down 50% for the year. And the first quarter will be weaker than that, probably down closer to 80%. We expect a slow recovery for North American coal offset somewhat by strong international pipeline for locos.

Performance in our energy management business has been disappointing this year. Although results were modestly better sequentially, they were still well below the business’ potential.

Orders continue to be a good story, up 6% in the quarter to $2.3 billion, a record for the business. This was driven by power conversion, up 18% on strong renewables industry volume, offset partially by industrial solutions, down 6%.

2013 backlog was up 20%, with every single platform in the business being higher. Revenues were up 4%, principally driven by industrial solutions and intelligent platforms. Operating profit of $46 million was down 28%, driven by power conversion.

This business has continued to deal with backlog conversion challenges and higher setup costs as they began production of our new marine platform. Over the last few years, the marine business has more than doubled its backlog, and total power conversion has grown backlog by 35%. We expect to see steady progress in power conversion throughout 2014 as their volume ramps and they focus on converting this backlog.

Despite the poor performance in energy management this quarter, we do think we are making progress in our restructuring efforts and our execution issues. For instance, our industrial solutions business that we started restructuring two years ago was up 71% in op profit in the quarter. It was up 38% for the year on op profit, on almost flat volume. So more work to do here, but also some good execution within our industrial solutions business.

Appliances and lighting had a good quarter, primarily driven by appliances. Overall, the appliance domestic industry was up 10% on units, with strength in both retail, up 10%, and contract, up 12%. Housing starts continue to be positive. They were up 16%, with single family better by 13% and multifamily up 22%.

Revenues of $2.2 billion were higher by 6%, led by a 9% increase in appliances. Lighting revenues were up 1%, with strong global LED sales, which were up 50%, offset by continued decline in our incandescent product lines.

Segment profit of $142 million was up 23%. Appliances op profit was up 51%, driven by positive value gap and productivity, and lighting op profit was higher by 5%. Margins improved 90 basis points in the quarter for the segment.

Next I’m going to go through GE Capital. Before I go through the standard operating page, I thought I’d take you through a layout of some of the major items in the quarter, similar to the way Keith did it in the November meeting.

So if you start on the left here, GE Capital earned $2.5 billion, up 38% from a year ago. On the right side, you can see we had $1.6 billion of tax benefits and gains from the Switzerland and the BAY transactions as we discussed. We sold 68.5% share in the Swiss consumer bank via an IPO, resulting in $1.2 billion of tax benefits and gains. In addition, we completed the sale of our remaining stake in Bay Bank, resulting in a $400 million gain.

As the team continues to reposition the portfolio, we did have $1 billion of charges related to dispositions and restructuring of noncore consumer and real estate assets as well as impairments in CLL and GECAS. And I’ll cover some of the principal drivers here.

In the consumer segment, we exited $700 million of mortgage assets in the Netherlands at a loss of $75 million. And we recorded an impairment charge of $90 million on an investment in a Taiwanese bank that positions us to exit that noncore asset in 2014.

In real estate, we had a $75 million charge related to the sell down of the equity book in our Swedish portfolio. In CLL, we recorded an after-tax impairment of $290 million related to two specific investments as well as a small writedown in our corporate asset book.

And in GECAS, we recorded impairments of $270 million, primarily related to certain older aircraft types that are more susceptible to changes in technology and operator preferences, which reduces our exposure to these less desirable assets and creates additional portfolio flexibility. And I’ll cover more of these items as I go through each of the segments on the following page.

Finally, we had adjustments to reserving models, primarily in North America retail finance and consumer international, resulting in $200 million in higher after-tax credit costs in the quarter. In retail, we increased our loss reserve coverage in 12 months to 12.5 months of forecasted chargeoffs. And after adjusting for all these items, GE Capital’s net income in the quarter was $2.1 billion.

Now to cover operations in the segments, revenue of $11.1 billion was down 5%, with assets down 4% or $22 billion year over year. Net income of $2.5 billion was up 38% from prior year as the tax benefits and gains, as I mentioned, from the Swiss and BAY transactions, more than offset portfolio actions, higher losses and impairments, and lower assets.

We ended the quarter with $380 billion of ENI. That’s down $36 billion or 9% from last year, and down $3 billion sequentially. Noncore ENI was down 22% to $53 billion. Net interest margins in the quarter increased 16 basis points to 5%, and flat with the third quarter. Volume was up 5% in the quarter, with new business ROIs over 2%, as we continue to stay disciplined on pricing and risk hurdles.

Tier one common on a Basel I basis improved by 10 basis points sequentially and 120 basis points year over year to 11.4%, driven by the reduction in assets and after paying $2 billion of dividends in the quarter.

For total year 2013, GE Capital paid $6 billion in dividends at the parent and will pay an additional $130 million in the first quarter to reflect the higher fourth quarter earnings.

On the right side of the page, asset quality trends continue to be strong, with delinquency rates improving across the portfolio. We ended the quarter with $29 billion of commercial paper, ahead of our plans, and liquidity was very strong, ending the quarter at $75 billion.

Now I’ll walk through each of the segments. The commercial lending and leasing business ended the fourth quarter with $74 billion of assets - that’s down 4% from last year - including a reduction in noncore assets of $3 billion. On book core volume was $13 billion, down 8%, due to the elevated level of customer activity we saw last year from the U.S. fiscal cliff concerns.

But we did see strong volume growth in the U.S. direct mid-market businesses, which were up 32% in the quarter versus 2012. Overall, new business returns remained attractive at about 2% ROIs, despite continued excess liquidity. These are positive growth indicators as we think about our core CLL business going into next year.

Earnings of $263 million were down 52%, driven by lower assets and impairments. After adjusting for impairments that I covered on the prior page, earnings would have been up 1% with assets down 4%. Asset quality was stable in the portfolio. In 2013, the CLL business earned $2 billion, and going into ’14, we expect it to be up double digits.

The consumer segment ended the quarter with $132 billion of assets. That’s down 4% from last year. The Swiss and BAY deals we exited reduced assets by $5 billion. Net income of $2.1 billion was up almost three times, again driven by these two transactions, partially offset by higher credit costs and charges related to the portfolio actions that I talked about on the prior page.

North American retail finance earned $466 million in the fourth quarter - that’s down 2% - as higher core net income was offset by reserve adjustments and continued marketing investments. Asset growth in the business was strong at 10%, driven by volume up 11%. Overall, consumer asset quality remained stable.

Real estate had another decent quarter. Assets ended the quarter at $39 billion. That’s down 16%, down $1 billion sequentially. The equity book is down 32% from a year ago to $14 billion. Net income of $128 million was down 59% versus 2012, but in line with where we expected them to be. That was driven by nonrepeat of last year’s gain from the sale of our business properties portfolio of about $82 million and our Sweden equity sell down, at about $75 million.

In the quarter we sold 341 properties with a book value of about $2.4 billion for $145 million in gains. The debt business earned over $100 million in the quarter and originated $4.7 billion of volume at attractive returns, including the purchase of a $1.8 billion U.K. portfolio from Deutsche Postbank.

Asset quality continues to improve, with 30-day delinquencies at 124 basis points. And that’s the lowest level we’ve seen since the crisis. The real estate team earned $1.7 billion in 2013, and continues to execute well as they shrink the equity book and invest in a profitable debt business. In ’14, we expect the business to have lower earnings, as we’ve shared with you, with the debt business performing well, offset by lower gains and tax benefits.

Within the verticals, GECAS earned $71 million. That’s down 79%, driven by impairments of $270 million, which were up roughly $230 million from prior year. As I mentioned on the prior page, we revised our expectations for certain older aircraft types in our portfolio. We lowered our estimate of future cash flows on these aircraft to reflect a shorter useful life and lower residual values.

As a result, we had impairments related to old and narrow bodies of about $130 million, cargo aircraft of $50 million, and $32 million on 50-seat regional jets. The average age of the aircraft we impaired in the quarter was 15 years compared to our fleet average of about 7 years. GECAS did end the quarter with zero delinquencies and no aircraft on the ground. For the total year 2013, GECAS earned $900 million, and in ’14 we expect them to be up double digits.

EFS earnings were up 95 in the quarter to $117 million, driven largely by lower margin impairments year over year. We had several large items in the quarter. As we continue to reposition the portfolio, the capital team continues to execute well and deliver strong operating results. In ’13, the business earned $8.3 billion, up 12%, on $36 billion lower E&I.

Capital liquidity and funding are all very strong and we continue to be disciplined around the volume that we’re originating. In ’14, we expect GE Capital to earn roughly $7 billion on core growth, offset by lower gains, tax benefits, and the impact of our anticipated retail finance IPO.

So with that, I’ll turn it back to Jeff.

Jeff Immelt

Great, Jeff. Thanks. Again, just to recap on ’13, we had a good year in ’13. Industrially, our segment profits grew by 12% in the second half and then we had five of seven segments that had strong growth for the year. We grew margins by 66 basis points organically, close to our 70 basis point goal.

Organic growth was flat but up 5% ex power and water. Capital had a solid year, with earnings up 12% while shrinking E&I by 9%. And they paid a dividend of $6 billion to the parent. Per our plan, we returned $18.2 billion of cash to investors through dividends and buybacks.

So we hit really most of our goals for 2013. And then looking forward, on the 2014 framework, we have no change for the 2014 operating framework. We expect double digit industrial earnings growth similar to the second half of ’13. We expect 4% to 7% organic growth with expanded margins.

GE Capital has about $7 billion of earnings, reflecting an improving origination environment, the North American retail transaction, and lower real estate gains. Corporate should be slightly more positive as we pulled forward restructuring into 2013. And there’s no change in our outlook for cash or revenue.

So we end the year with momentum. I think we presented this framework to you in December, and I would say, based on the way we closed the year, we’re quite confident in this operating framework for 2014. So we feel good about the momentum of the company.

So Trevor, with that, let’s turn it back to you and take some questions.

Trevor Schauenberg

Great. Thanks, Jeff and Jeff. Operator, let’s open up the phone lines for questions.

Earnings Call Part 2: