Good day, ladies and gentlemen, and welcome to the General Electric First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Ellen, and I will be your conference coordinator today. If you experience issues with the slides refreshing or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded.
I would now like to turn the program over to your host for today's conference, Matt Cribbons, Vice President of Investor Communications. Please proceed.
Thank you. Good morning, everyone, and welcome to GE's Q1 2017 earnings call. Presenting first today is our Chairman and CEO, Jeff Immelt followed by our CFO, Jeff Bornstein. Before we start, I would like to remind you that our earnings release, presentation and supplemental have been available since earlier today on our website at www.ge.com/investor. Please note that some of the statements we are making today are forward looking and are based on our best view of the world and our businesses as we see them today.
As described in our SEC filings and on our website, those elements can change as the world changes. And with that, I will turn it over to Jeff and Mel.
Thanks, Matt. GE had a good quarter and a slow growth and volatile environment. While the resource sector is challenging, we had the strongest oil and gas orders in 10 quarters. We see global growth accelerating while the U. S.
Continues to improve. Since the beginning of 2017, I visited China, Africa, Latin America and Southeast Asia, all are stronger than last year. With orders growth of 10%, we see an attractive environment for GE overall. EPS was $0.21 for the quarter, excluding the impact of uncovered restructuring, industrial EPS was up 15% and verticals grew by 20%. Organic revenue was up 7%, our strongest quarter in more than 2 years.
Segment operating profit grew by 15% organically and total industrial profit was up 20 percent. Margins are expanding and our cost out programs are accelerating. Our cash performance was worse than we expected to start the year with CFOA of $400,000,000 and negative industrial CFOA. We had several one timers and grew working capital in the Q1, which we expect to turn around in the Q2 and be on plan for the year. We executed on our portfolio goals.
The water sale exceeded our expectations and should produce a $2,000,000,000 gain and $2,000,000,000 of cash. GE Capital has exited PRA supervision, completing its pivot. This is an incredible accomplishment for the team. 2 years after we announced our GE Capital strategy, our actions are largely complete. And Baker Hughes is on track for a mid year close.
We're off to a strong start and are reconfirming our framework for the year. We're exceeding our goals for organic growth and margins. We expect to hit our goal for $1,000,000,000 of structural cost out and our plan is to be on track for cash and capital allocation for the year. Orders were very strong in the quarter, up 10%, which was 7% organically. Backlog grew by $3,000,000,000 equipment had
a great quarter with growth of
11%. Services were strong as well with growth of 8%. Pricing was about flat. Orders growth was broad based. We saw expansion in 6 of 7 segments and 9 of 12 regions.
Let me give you a few order highlights that were particularly significant. Power equipment was up 25%, growth markets were up 27%, aviation spares grew by 25%, healthcare equipment was up 10%, life sciences grew by 15%, renewable service doubled, LED orders grew by 42%. We were encouraged that oil and gas orders grew by 9%. Global orders grew by 20% behind some very specific initiatives. Orders grew by double digits in 6 of 7 businesses.
Highlights include a big Kazakhstan rail deal, aviation LEAP orders of $250,000,000 power wins in India were $370,000,000 global onshore wind deals were $270,000,000 Healthcare in China grew by 28% and Mining grew by 16%. Digital orders grew by 7%, including 70% growth in ServiceMax, 60% in Power, 55% in Renewables and 41% in Oil and Gas. We continue to reposition our legacy IT businesses for growth in the future. We signed big global deals at NEC, Bridgestone, South32 and Deutsche Bahn. We established an alliance with China Telecom to bring Revenue strength was broad based with 6 of 7 segments having positive organic growth.
The old power businesses, what you see as power and renewables, was exceptionally strong with both growing 18% and aviation grew by 8%. Our growth initiatives are paying off. Globalization is a major driver with growth market revenue expanding by 10%, where India was up 27%, Middle East up 12% and Africa up 77 percent. Services growth was up 8% and 6 of 7 businesses expanded in the quarter. This was led by aviation up 18% and repowering drove 84% growth in renewables.
New products also added to growth. We finished the quarter with 30H turbines in backlog and 12,200 LEAP engine orders and commitments. Healthcare imaging orders in the U. S. Grew by 13% behind excellent new products.
Digital revenue grew by 16% led by power, oil and gas and renewables. The digital growth outside verticals doubled in the quarter. G Store continues to work. GE Capital supported $2,200,000,000 of industrial orders and GE to GE orders grew substantially. Margins were also a good story.
Industrial operating profit margins grew by 130 basis points with gross margins expanding by 90 basis points. Segment margins grew by 110 basis points. Efficiency was driven by value gap, productivity and digital threat. This more than offset headwinds and mix. Corporate costs are ahead of plan, and we saw margin growth in both equipment and services.
We're on track to reduce structural costs by $1,000,000,000 for the year. In the quarter, costs were down $76,000,000 $200,000,000 lower than our original $500,000,000 cost out plan. We expect this to accelerate during the year. We invested $1,000,000,000 restructuring in the quarter. And for the year, we expect gains and restructuring to offset.
We remain committed for $1,000,000,000 of cost out in 'seventeen and $1,000,000,000 of cost out in 'eighteen. On cash, we had CFOA of $400,000,000 This included a dividend from GE Capital of $2,000,000,000 Industrial CFOA was a negative $1,600,000,000 There's no change to our 2017 framework of total CFOA of $18,000,000,000 to $21,000,000,000 and industrial CFOA of $12,000,000,000 to $14,000,000,000 We built working capital in the quarter to support growth and we're adjusting to a different profile with Alstom and we're impacted by several one timers. Cash is lumpy and we expect to have a strong second quarter. I've asked Jeff to give you a little bit more context on cash flow on the next page. We received an additional $2,000,000,000 dividend from GE Capital in April, bringing the year to date total to $4,000,000,000 against the plan of $6,000,000,000 to $7,000,000,000 for the year, so a good start.
Cash into the quarter is $7,900,000,000 We paid $2,100,000,000 of dividends and had $2,300,000,000 of buyback for a total of $4,400,000,000 return to shareholders. And with that, I'll turn it over to Jeff to give you more details on cash and operations.
Thanks, Jeff. As Jeff said, we had a strong quarter on orders, revenues and margins. However, our industrial CFOA was at $1,600,000,000 uses of cash, about $1,000,000,000 below our expectations. We expect to see most of this come back over the remainder of the year and we see no change for our outlook for the year of $12,000,000,000 to $14,000,000,000 of industrial CFOA. Walking the left side of the page, industrial net income plus depreciation in the quarter was $1,500,000,000 Working capital was a use of $1,300,000,000 This is about $700,000,000 higher usage than our expectation.
The miss was mainly driven by power and renewables, partially offset by better performance in our healthcare business. Receivables was a benefit of $200,000,000 about $400,000,000 less than our plan. Operationally, we've seen improvement in collections. However, we didn't collect on a number of accounts in the quarter that we expected to. In aviation, which historically has not had issues with past dues, we missed by about $200,000,000 on 5 customer accounts, which will clear in the Q2, no issue.
In Power, we didn't collect on several delinquent accounts in tougher regions around the world, but we expect to collect these throughout the rest of the year, including in the Q2. Inventory was a use of 800,000,000 dollars about $100,000,000 worth than we expected. Most of the businesses were right on the plan. The miss was driven by softness in the U. S.
Healthcare market, particularly around ultrasound and LCS, but we expect to work out this inventory over the remainder of the year. Payables were a use of $400,000,000 roughly as we expected. This is driven by payments of 4th quarter purchases that were significantly higher than the new volume added in the Q1, and we see this dynamic most every year in the first quarter. Progress collections was a use of $300,000,000 This was primarily driven by 2 things. First, it was the impact of renewables from shipping equipment in the Q1 following the buildup of progress collections from Safe Harbor wind turbines in the 4th quarter.
Secondly, we had several large orders in the quarter that did not reach financial closure. These includes large orders in energy connections in Iraq, a power deal in Algeria and a big transportation transaction in Angola. We expect these deals to close in the second and third quarter. Contract assets were a use of $1,900,000,000 This was $300,000,000 worth than expected. Of the $1,900,000,000 $500,000,000 was from our long term equipment contracts where the timing of our billing and revenue recognition milestones differ.
This will catch up throughout the year as we execute against the contracts. The remaining $1,400,000,000 is our long term service agreements. There are 2 pieces to this. $600,000,000 is related to service contracts where we've incurred costs and booked the revenue, but haven't yet built the customer. We expect this to partly come back over the year as we see higher asset utilization in Power and Aviation, and we've seen the similar trends in prior years.
The other $800,000,000 are contract adjustments driven by better cost performance and Part Life, primarily driven by Power and Aviation. Versus expectations, the $300,000,000 of lower cash on contracts assets is driven by $200,000,000 of long term equipment contracts that we expect to come back throughout the year and the $100,000,000 is from services contract adjustments I just walked through, which will come back over the remaining life of those contracts as we build for utilization. In total, we were about $1,000,000,000 off our Q1 plan, but we'll recover the vast majority over the second to the fourth quarter. In the first half of twenty sixteen, we delivered $400,000,000 of CFOA. For 2017, we expect significantly strong cash performance in the Q2 with sequential improvement throughout the year.
Our total year plan is $12,000,000,000 to $14,000,000,000 That's driven by an increase in net income plus depreciation. We expect to see a benefit from working capital that is similar to last year's benefit. Contract assets will be similar impact as 2016 and other cash flows will be lower cash usage this year, largely driven by the absence of the one time LTIP payment in 2016. So with that, I'll move on to consolidated results. Revenues were $27,700,000,000 down 1% in the quarter.
Industrial revenues were flat at 25,000,000,000 dollars As you can see on the right side of the page, the industrial segments were up 1% on a reported basis. Organically, industrial segment revenue was up 7% or affected by the appliance disposition. Industrial operating plus vertical EPS was $0.21 flat with prior year. Excluding gains in restructuring, which is a $0.03 headwind versus the Q1 of last year, industrial operating verticals EPS was up 12%. Operating EPS was $0.14 in the quarter, up from $0.06 in the Q1 of last year.
This incorporates other continuing GE Capital activity, including excess debt headquarter runoff costs that I'll cover separately on the capital page. Continuing EPS of $0.10 includes the impact of non operating pension and net EPS of $0.07 includes discontinued operations. The total disc ops impact was a negative $0.03 in the quarter, driven by GE capital exits that we executed in the quarter. The GE tax rate was 15%, in line with our total year mid teens guidance. The GE capital tax rate was favorable, reflecting a tax benefit on our pretax continuing loss.
On the right side of the segment results, as I mentioned, Industrial segment revenues were up 1% on a reported basis and up 7% organically. 6 of the 7 businesses were positive organically, with Power and Renewables up double digits. Industrial segment op profit was up 9%. And Industrial op profit, which includes corporate operating costs, was up 11%. On the bottom of the page, as I mentioned earlier, industrial operating plus vertical EPS was $0.21 up 12%, excluding gains in restructuring, with industrial operating EPS up 15% on the same basis.
Included in the
$0.21 was $0.08 of uncovered restructuring that I'll go through on the next page. So next on industrial other items in the quarter. As I said, we had $0.08 of charges related to industrial restructuring and other items that were taken to corporate. Charges were $1,000,000,000 on a pre tax basis with more than $300,000,000 of Alstom Synergy investments primarily related to power in Europe. We also made significant investments in corporate, oil and gas, energy connections and lighting and healthcare in the quarter.
Restructuring charges totaled about $800,000,000 and BD charges were approximately $200,000,000 related to Baker Hughes, the water disposition, the industrial solutions disposition and the digital acquisitions. There were no gains in the quarter. For the year, we expect about $0.25 of restructuring to offset by $0.25 of gains from water and industrial solutions dispositions. We are targeting a 3rd quarter close for the water transaction and a 4th quarter close for the Industrial Solutions transaction. For the Q2, we expect to do about $0.07 of restructuring with no offsetting gains.
Next, I'll cover the segments. I'll start with the power business. Power orders of $6,100,000,000 were up 8% with equipment higher by 25% and services flat. Equipment growth of 25% was driven by Gas Power Systems up 12% and Steam Power Systems up almost 100%. Gas Power Systems was driven by higher aero up 20 units and 10 more HRSGs versus last year.
Gas turbine orders were down 13 units, 12 versus 25. We had orders for 2H units, including our 1st H in China. We have 30H units in backlog and expect to ship 23Hs in 2017. Steam Power Systems recorded orders totaling $591,000,000 up almost 100%, primarily driven by 2 projects for which the business will provide coal fired turbine islands. These orders were taken by an existing JV within Alstom, which we took majority control of in the quarter.
Service orders were flat. Total orders for upgrades were up 34%, but the AGPs were down 5 units 20 versus 25 a year ago. Offsetting upgrade growth was lower transactional services in Europe and the Middle East and lower new unit installation volume. Revenues of $6,100,000,000 were higher by 17% with equipment revenue growing 59% and services revenue flat. Equipment revenue growth was driven by higher deliveries of gas turbines, HRSGs and aero units.
We shipped 20 gas turbines versus 13 a year ago. In addition, we shipped 24 HRSGs versus 1 and 11 aero units versus 5 compared with last year. 8 shipments were essentially flat at 4 units. Service revenues were flat despite strong upgrade growth, up 26%, including lower AGPs of 21 versus 27%. Upgrade growth was offset by lower boiler service volume in North America and fewer major outages in the Middle East, Africa and Europe.
Power earned just under $800,000,000 operating profit, up 39%. Performance was principally driven by cost productivity and equipment volume, offset partly by mix of equipment versus service. Gas Power Systems and Steam Power Systems drove most of the improvement in profitability. Power had a good quarter driving both equipment orders and equipment profitability. The business is intensely focused on structural costs and delivering $500,000,000 of cost out for the year.
Power had a very strong organic growth quarter on higher aero turbines and higher gas turbines shipments, driving organic growth up 18%. Our view for the year of mid single digit organic growth has not changed. Power is on Power is on track for 100 to 105 gas turbines in 2017 and expect to deliver the upgrade growth, including 155 to 165 AGPs. No change to the outlook that the business provided in the March Investor Meeting. On Renewables, the business had a solid quarter.
Orders of $2,100,000,000 grew 8% with onshore wind higher by 4% and hydro orders up 39%. Onshore wind orders were up on $167,000,000 of repower commitments versus none last year. The strength in repower was partially offset by lower wind turbine orders down 8%. We took orders for 589 units versus 7 16 units last year, down 18%, but the megawatts for the units ordered grew by 3%. The lower unit count was driven by the U.
S, which was down 61% after a very strong 4th quarter, partially offset by very strong international growth, up almost double. The wind market is very competitive with pressure on price both in the U. S. And globally. Hydro secured a few large equipment orders in Turkey and Nigeria for 8 Francis turbines.
Backlog grew 8% year over year to $13,400,000,000 Renewables revenue of $2,000,000,000 grew 22%, driven by onshore wind up 11% and hydro up 2x. Onshore wind growth was largely driven by repowering deliveries. Wind turbine shipments were down 15%, 567 turbines versus 668 a year ago. However, the megawatts that we shipped were essentially flat on the larger turbines. Operating profit grew 29% in the quarter, driven by cost out actions on the 2 megawatt NPI, positive value gap and repowering volume, partially offset by higher NPI spend on the new 3 megawatt turbine.
Margins expanded 20 basis points in the quarter. The business made good progress in the 2.x megawatt NPI unit cost, but will require additional cost actions given the competitiveness in the market. They are earlier in the learning curve and on the cost out processes on the 3 megawatt MPIs. We closed the Alarm acquisition this week and the vertical integration will enhance the business' ability to drive cost performance and growth. In Aviation, before I discuss the Q1 results for the business, I want to make you aware of a change we've made to how we report our Aviation spares rate.
Historically, we provided an all in spares rate that included external shipments of spares, spares used in time and material shop visits, and spares consumed in shop visits for our engines under long term service agreements. Going forward, our spares rate will only include externally shipped spares and spares used in time and material shop visits. Over the past several years, the strong growth in our long term services agreements and the associated shop visits has driven the percentage of spares used in LTSAs to be a much greater proportion of the historical order and sales rate. These spares are also part of the LTSA billing and are already accounted for in revenues. We believe the new spares rate provides investors with more visibility to transactional market dynamics.
Consumption of spares and long term service agreements can be impacted by customer fleet management, optimization of shop visits over the life of the contract or for various other reasons. Starting with the Q1 of 'seventeen, we will report only a ship rate for spares on this new basis as the orders and shipments are virtually the same. This change does not impact any reported financial information. Historical information for spares rate on the new basis as well as the old method are included in the supplemental presentation material. Moving to Aviation's 1st quarter performance, the business continues to execute well in a strong market.
Global revenue of passenger kilometers grew 7% year to date February with strength in both domestic and international routes. Airfreight volumes increased 7.2% through February. Orders in the quarter were $7,400,000,000 with equipment up 5%. Commercial engine orders were up 3% on higher LEAP and Gen X, partially offset by lower GE90 and CF6 orders. Dollars 1,700,000,000 of new commercial engine orders included $932,000,000 for LEAP, dollars 206,000,000 for CF34, dollars 138,000,000 for GE90, and $166,000,000 of Gen X orders.
CFM orders were also up 13% to $186,000,000 Military equipment orders of $169,000,000 were down 46% driven by no repeat of a large Blackhawk T700 Army order from last year. Service orders grew 17%. Commercial service orders were higher by 18% with CSA growth of 20% and spares ADOR of 21,700,000 a day was 25% on the new basis. Military service orders were up 40% at $610,000,000 on increased spare parts. Backlog finished the quarter at $158,000,000,000 up 3%.
The equipment backlog of $33,000,000,000 down 5 percent and service backlog of $125,000,000,000 ended up 5%. Revenues grew 9% in the quarter to $6,800,000,000 Equipment revenues were down 2% driven by military down 47% on lower shipments, partially offset by commercial growth of 12%. Commercial engine deliveries were down 7%. However, revenue was up driven by increased mix to higher value Gen X and LEAP engines. Service revenues were up 17% driven by commercial spares rate of $21,700,000 a day, up 25%, again the same as the order rate.
Our profit in the quarter totaled $1,700,000,000 up 10%, primarily driven by favorable price, volume and cost productivity, partly offset by the negative impact of 81 LEAP shipments versus 0 last year. Margins expanded 50 basis points in the quarter. Demand for the LEAP engine continues to be strong with over 900,000,000 of orders booked in the quarter. The reliability and performance of spec of the 41 aircraft flying with LEAP today has been excellent. The business is generating strong productivity to offset the negative mix impact of LEAP and is on track to report 2017 margin rates above flat with last year on continuing cost improvements.
We will continue to ramp production to an expected 450 to 500 LEAP shipments for the year. The oil and gas environment has been improving, led by increased activity in the North American onshore market. Rig count was up 70% versus prior year and up 25 percent from the Q4 of last year and has increased sequentially each of the last three quarters. External forecasts continue to be slightly more positive on 2017 upstream spending, particularly among independents. The timing of recovery will vary by segment and a large degree of uncertainty remains.
Crude inventory remained at 5 year highs and markets are closely watching OPEC output compliance. Offshore activity remains weak. Before I get into the dynamics of the quarter, just one item regarding oil and gas sub segment reporting. We combined the Turbomachinery and Downstream Technology businesses. So I'll talk to the performance of those businesses on a combined basis.
Orders for oil and gas of $2,600,000,000 were higher by 7%, with equipment orders growing 30%. Every segment saw higher equipment orders. Turbomachinery and Downstream grew 33%, surface up 10% and subsea up 52%. The equipment orders performance is a positive sign, but growth is off a very low base. Service orders were down 2%, but flat organically.
Turbomachinery and downstream was down 2%, digital solutions was down 3%, surface down 8% and subsea down 18%. Backlog ended the quarter at $20,400,000,000 down 10% versus last year. Equipment backlog was down 32%, but service backlog actually grew 4%. Revenues in the quarter of $3,000,000,000 were down 9%. Equipment revenues were down 20%, driven by subsea down 29%, turbomachinery downstream down 19% and surface down 2%.
Service revenues were flat with turbomachinery Service revenues were flat with Turbomachinery downstream up 13% and Digital Solutions up 1%, offset by Subsea down 36% and Surface down 14%. Operating profit of $207,000,000 was lower by 33%, primarily driven by lower price and volume, partially offset by cost out. The first half of 'seventeen remains very challenging for the business. Despite positive equipment orders performance this quarter, our longer cycle equipment businesses in Turbomachinery Downstream and Subsea will lag the recovery on onshore. The team is focused on capturing growth opportunities and rebuilding its backlog.
We continue to expect increased activity in our Surface, Digital Solutions and Transactional Service businesses as we move into the second half of the year. The Baker Hughes deal remains on track to close mid year. We filed the draft Both the GE Oil and Gas and Baker Hughes team integration teams are making great progress towards the closing. Next up is healthcare. Our healthcare business had a solid quarter.
Orders grew 7% versus last year and were up 8% on an organic basis. Geographically, organic orders grew 2% in the U. S, 5% in Europe and 21% in emerging markets. Emerging market growth was led by China up 28%, the Middle East up 16% and Latin America up 14%. On a product line basis, healthcare systems orders grew 5% 6% organically, driven by growth in ultrasound up 10% and imaging products up 12% with broad based growth in MR and CT as well as MAMO on successful NPI launches.
Growth in HCS and ultrasound was partly offset by Life Care Solutions, which was down 8%, primarily driven by the U. S. General market uncertainty around reform. Life Science grew 15%, led by bioprocess up 25% and core imaging up 8%. Bioprocess growth was driven by a NORDA for our QBO products in the quarter.
Revenues in the quarter grew 3%, both on a reported and organic basis. Healthcare systems revenues were higher by 3% versus last year and life sciences revenue grew by 5 percent. Operating profit of $643,000,000 was up 2% reported, but higher by 6% organically, driven by volume and productivity, partially offset by negative price and program investments. FX was a $32,000,000 profit drag in the quarter. Margins contracted 10 basis points on a reported basis, but were up 50 basis points excluding the effect of foreign exchange.
The business continues to execute well on new product introductions and driving cost productivity. Healthcare is targeting further product costs out in line with the 2016 performance they delivered. They are focused on driving more competitiveness and sourcing, increasing the number of brilliant factories and over 300 cost out engineers dedicated to product competitiveness. Despite some uncertainty in the shorter cycle lower ticket segment of the U. S.
Market around reforms, we believe the broader healthcare market supports our view of low to mid single digit organic revenue growth for the year. Next is transportation. Domestic market dynamics were slightly more positive, building on the modest improvement we saw in the 4th quarter. North American carload volume was up 4.4% in the quarter, driven by 2.2% growth in the intermodal carload space and 6.6% growth in commodity carloads. Commodity carload growth was primarily driven by coal, which was up 15 percent and agriculture higher by 4%.
Petroleum continued its weakness down 6%. In addition, GE Park Locals were down 24% from last year and down 11% from year end. Although these signs of improvement are important, they are off a weak base and as of yet have not signaled a consistent trend. Transportation orders for the quarter totaled $1,100,000,000 up 70%. Equipment orders of $526,000,000 were higher by 500%.
We received orders for 37 locos and over 100 international kits versus no orders in the Q1 of last year. The 37 local orders included 24 locals for North America. This is the 1st North American Tier 4 Class 1 order we've taken since 2014. Mining equipment orders were also higher. We received orders for 115 minuteing wheels versus 84 last year.
Service orders of $582,000,000 were up 3%. Backlog finished at $20,000,000,000 down five percent versus last year, driven by equipment down 27%, partly offset by services up 4%. Revenues in the quarter were higher by 6%, with equipment up 15% and services down 1%. Locomotive deliveries were above flat year over year at 157 with a higher mix of international Locos. North American locomotives were down 33%, while international locomotive shipments grew 159%, driven by deliveries in Pakistan and South Africa.
Our profit of $156,000,000 was down 5% on unfavorable mix on higher digital investment, partially offset by productivity. No change to the outlook we shared with you in December. 2017 will be a challenging year with locomotive shipments likely down close to 50%, operating profit down double digits and pressure on margin rates. The business continues to drive structural cost out as well as building their international backlog. Next on Energy Connections and Lighting, orders for the segment totaled $2,600,000,000 which were down 2%.
Energy Connection orders of 2,400,000,000 dollars were down 12%, driven by power conversion down 36% and grid down 8%, partially offset by Industrial Solutions, which grew 11% in the quarter. Power conversion performance was driven by continued pressure in oil and gas and no repeat of a large inverter order in the Q1 of last year. Grid's 1st quarter performance was impacted by orders delays in the Middle East that will close in the Q2, specifically a large order in Iraq. Industrial Solutions, which was up 11%, outperformed versus the NEMA market, which was up an estimated 3% in the quarter. Our current platform had orders in the quarter totaling 243,000,000 dollars Revenues for Energy Connections grew 1% reported and 4% organically.
Grid grew 19%, partly offset by Industrial Solutions down 2% and Power Conversion down 26% organically. Current and lighting revenues were down 11% with current growing 3% and legacy business increasing by 22% as we exit markets and experience lower demand for OLED technology. Operating profit in the quarter of $28,000,000 was substantially higher versus last year, driven by structural cost actions. Energy Connections earned $20,000,000 and Current and Lighting earned $8,000,000 No change in the 2017 outlook. We expect better execution from these businesses with double digit profit growth for the year.
We divestiture of Industrial Solutions to happen late in the year. Finally, I'll cover GE Capital. The verticals earned $535,000,000 in the quarter, up 8% from the prior year, driven principally by lower impairments, higher tax benefits, partially offset by lower gains. GECAS, Energy Finance and Industrial Finance all had strong quarters and overall portfolio In the Q1, the verticals funded $1,800,000,000 of on book volume and enabled $2,200,000,000 of industrial orders. Other continuing operations generated $582,000,000 loss in the quarter, driven by excess interest expense, restructuring costs related to portfolio transformation and headquarters operating costs.
As I've said in the past, these costs will continue to come down as excess debt matures and we right size the organization. Versus the Q1 of last year, other continuing costs are down $800,000,000 driven by these lower excess debt costs, non repeat of costs associated with both the Q1 of 'sixteen hybrid tender offer and the preferred equity exchange. In addition, we expect incremental tax benefits associated with the completion of the GE Capital restructuring towards the second half of the year. Discontinued operations generated $242,000,000 loss, driven by exit plan related items and operating costs. Overall, GE Capital reported a net loss of $290,000,000 We ended the quarter with $167,000,000,000 of assets, including $43,000,000,000 of liquidity.
Assets were down $16,000,000,000 from year end. GE Capital closed on $7,000,000,000 of transactions in the quarter, including the sale of our French consumer finance platform and our Hyundai JV. In total, dollars 198,000,000,000 has been action since April of 2015, dollars 263,000,000,000 including the spin off of Synchrony. All major sales activity related to GE Capital XL plan is now complete. Dollars 8,000,000,000 of assets remaining will largely be run off over the next 12 to 18 months.
As a result of this, as of March 30, GE Capital's non U. S. Activities are no longer subject to consolidated supervision by the UK's PRA. GE Capital paid $2,000,000,000 of dividends during the quarter and an additional $2,000,000,000 this week. We remain on track for $6,000,000,000 to $7,000,000,000 of dividends for the total year.
Overall, the GE Capital team delivered a strong performance from the verticals, while executing on all aspects of our action plan. With that, I'll turn it back to Jeff.
Thanks, Jeff. We are reconfirming our 2017 operating framework. We should meet all of our goals for operating EPS. We're off to a good start on organic growth and margins. The goals for industrial operating profit and structural cost out are in sight.
Despite a slow start, we plan to hit $12,000,000,000 to $14,000,000,000 of industrial CFOA for the year. We believe that capital dividend should be $6,000,000,000 to $7,000,000,000 for the year. Dispositions are on track. We are on track to return $19,000,000,000 to $21,000,000,000 to investors through dividend and buyback. So to recap, we had 10% orders growth, 7% organic growth, 130 basis points of margin expansion and 20% organic industrial operating profit growth and a commitment to hit CFOA for the year.
So this is a good start. Matt, now for some questions.
Thanks, Jeff. With that, let's open it up for questions.
Thank you. The first question is from Scott Davis with Barclays.
Hi, good morning guys.
Hey Scott.
I wanted to talk about the cadence of the cost add. I get to like a $230,000,000 number in 1Q. I think that's what you said. I would assume if you did that every quarter, you get to your $2,000,000,000 pretty on a kind of steady cadence. But Jeff Weinstein, you commented that that would ramp a little bit faster through the year.
So how do you think about that $2,000,000,000 Is that something that comes out steady over 2 years? Or is that something where you can front end load a fair amount of it?
Yes. Okay.
And just on that,
if you can give a little bit of color on
how much of that cost out is really from last year's restructuring versus new cost initiatives?
Yes. So what we're talking about is structural costs or base costs or fixed costs, it excludes variable costs. We talked about $2,000,000,000 of cost out, dollars 1,000,000,000 each in 2017 2018. So the goal this year is to take $1,000,000,000 of that base cost down. If you go to the supplement, we do a walk for you in the Q1.
So in the Q1, those costs year over year were down about $75,000,000 Now, beneath that, we took out over $375,000,000 of those costs. And that was partly offset by a couple of 100,000,000 more as we expected higher digital spend year over year and then just wage inflation of about $80,000,000 So good underlying performance there. It's going to accelerate over the year because we've taken enormous number of actions here in the Q1 across all of the businesses in corporate. We talked about the effort around horizontal IT, which we think is worth $250,000,000 in the year, what we just announced around the tax corporate tax team, and that transition to PwC. We've kind of taken a number of headcount actions, both at corporate and across the businesses here in the Q1.
So we expect that to grow over the course of the year. The other reference point I'd give you is, when we talked at the outlook meeting, we talked about a goal of 500,000,000 dollars with which we had $1,700,000,000 kind of pipeline against. Against that original plan, the Q1, we're $200,000,000 better than that original plan. So that gives us confidence that we're on track for the higher plan of $1,000,000,000 for the year. So I think you'll continue to see better performance here in the Q2.
And then I think you'll see a real acceleration in the second half of the year. To answer your question on restructuring from prior years. So within this bucket of costs, I said we took out $375,000,000 before digital and the effect of EOP, effect on wages. About $174,000,000 of that 3.75 dollars was from prior year restructuring actions.
But I would say, Scott, having a good 130 basis points of margin with a lot of the structural costs still to kick in makes us feel good on the 100 basis point goal for the year on margins.
Right. And I know you're focused on the base fixed costs. On the variable cost, how does that play into the next several quarters?
So, as we talked about well, let's go back to what we said at outlook. At outlook, we talked about a goal of 100 basis points of margin improvement. And we said 50 of that was going to come from everything we were doing around restructuring, etcetera. And then the incremental cost plan was going to deliver the next 50 basis points. If you look at gross margins in the quarter, we were better by 90 basis points.
So gross margin is all product and service costs. So that's a good down payment against delivering the total year margin. And I
would say again on gross margin, Scott, we've built in kind of a negative mix visavis the LEAP and things like that, and we still can more than offset that with other strong programs we've got in the company.
The next question is from Jeffrey Sprague with Vertical Research Partners.
Thank you. Good morning, everyone. Hey, Jeff. Hey, could we just explore a little more what's going on in Alstom? There was a comment about you're taking a different profile there.
It was unclear what you meant by that. And it also sounds like one of the JVs got consolidated in the quarter?
Yes. Expand on your first I'm not sure I understood your first question, Jeff. Okay. So let me just talk about the JV and then I'll let Jeff talk about the first part of your question. When we did the Alstom acquisition, as part of that, we acquired an interest in a JV in the steam space in India.
And we were a minority shareholder. So we spent a little bit an insignificant amount of money to actually gain controllership or control of that JV in India. So in the steam space, it's around steam equipment, it largely services India.
And then Jeff, the comment I made is the profile of Alstom was always very highly skewed towards their last quarter. It's going to take a while to get that normalized on the kind of the GE timeframe just based on some of the EPC work and project work they do. So that was the comment that I made.
Yes, I don't think that the profile is materially different than our own business. We have a lot of long term contracts, 81 to 1 contracts that you know about. We're really building against those here in the Q1. Those will hit billing milestones over the course of the year. And like our own equipment businesses, the Alstom equipment businesses will improve on cash performance throughout the year.
The next question is from Andrew Kaplowitz with Citi.
Hey, good morning guys. So obviously, order growth inflected pretty positively in the quarter and we know you have your management incentives in line toward delivering significant cash flow. So why isn't cash better? Why not maybe even sacrifice some orders from difficult customers if you have to for better cash or maybe pressure suppliers even harder to generate more cash? I guess the question we're trying to figure out is whether the issues are transient and cyclical, which we think they are, or some people think they're structural, especially in tower.
How would you answer that question?
Well, when you look at the Q1 performance, we talked about being $1,000,000,000 lower than our expectations, dollars 700,000,000 of that in working capital. And within that $700,000,000 $400,000,000 really related to receivables. Our receivables performance actually was pretty good in the quarter. Our collection of factors was better year over year. We did factor $1,300,000,000 less versus the Q1 of last year, but we expected to do that.
It was really around the accounts I talked about. In aviation, we had a couple of 100,000,000 of past dues that we don't normally experience in aviation. Those are already clearing here in the Q2. And then some big pass throughs in the Middle East in our power business that are on schedule. We will collect the majority of what we expect to collect in the Q1.
We'll do that in the Q2. Then we had a small kind of $100,000,000 kind of miss in inventory versus our own expectations. Interestingly, across most of the businesses hit their inventory expectation and our inventory performance year over year was $700,000,000 better than the Q1 of last year. That's important because when we think about our working capital, we've talked about $3,000,000,000 plus of working capital improvement in the year to get to $12,000,000,000 to $14,000,000,000 a big part of that is driven by inventory. Last year, we were really helped by progress in AP.
This year, it's about receivables and inventory. And so getting off to a $700,000,000 better outcome year over year on inventory is good, but it was $100,000,000 less than we thought it would be. And that was all about healthcare in North America and that will liquidate. That's mostly timing around sales and orders. So we're not too concerned about that.
And then progress is a couple of 100,000,000 light versus what we expected. It was a 300,000,000 use in the quarter. A big part of what drove that was we took enormous amounts of progress in the Q4 of last year in renewables around U. S. Onshore wind and people getting ahead of the PTC.
Now we're shipping against that progress. So we're liquidating the progress. We collected the cash 4th quarter, now we're revenue recognition we're rev wrecking and shipping those units and the majority of that cash was collected last year. Having said that, we have some really big orders, particularly in the Middle East that we thought we're going to get to financial close in the Q1. It looks like most of those will get to financial close in the Q2.
I talked about earlier the big grid order in Iraq. I think we feel really good about that. I think next week, we're likely going to announce, which was part of this progress, miss, the biggest service deal in the history of our power services business in the Middle East, a really phenomenal transaction. We thought it was going to close a couple of weeks early. It's going to close next week, we believe.
So we feel good about that. And then some progress we expected to collect out of West Africa, which will happen in the Q2. So we were $1,000,000,000 off in those buckets versus what we expected. I think we feel good about how we move from where we are today to the $12,000,000,000 to $14,000,000,000 we talked about for the year. So if you just go back, I'm just trying to give you a framework on how to think about it.
Listen, we committed to $17,200,000,000 of pre tax operating profit. So using that as a baseline, from here, we see $12,000,000,000 plus of debt income plus depreciation between the 2nd Q4. We expect to generate about $4,500,000,000 roughly of working capital improvements 2Q through 4Q. That's about on par with what we did in 2016. It's within $100,000,000 to $200,000,000 of what we actually did execute in 2016.
Again, inventory a big piece of that. We expect contract assets to be a drag here in the next three quarters of about $2,000,000,000 For the total year, that would put us at about $3,900,000,000 That is equivalent to what contract assets did in 2016. So at the moment, we're not planning anything better or worse. And then in other operating cash, which we gave you a lot more disclosure in the K, we see that as a positive for the year, largely because we had the long term incentive plan payout last year. We won't have that this year.
And that's how we get to a framework of $12,000,000,000 to $14,000,000,000 We're also looking for some of that big base cost structure we're taking out to fall through to cash as well. So we're taking $1,000,000,000 of cash. That should be virtually all cash as well. It will show up in the net income plus depreciation line. So that's a little bit of a cash edge here on execution for the year.
The next question is from Steve Tusa with JPMorgan.
Hey, guys. Good morning. Thanks for squeezing me in here. How are you?
Yes, good.
I'm doing okay. So when you look at the non cash earnings from contract assets, how is that reported in the margin bridge? And then on the restructuring, with the $800,000,000 of restructuring and other, is there anything in there that's not pure payback kind of headcount restructuring? And if so, what's the volume? I think you had a disclosure in your 10 ks around that, around the breakout of restructuring.
Thanks.
Well, Steve, the $800,000,000 of restructuring in the quarter is just that, it's restructuring. So it's they're projects with paybacks. So they are very much structured. When I say structured, I mean headcount and site capacity related. So I'll give you some detail around it.
Dollars 800,000,000 of restructuring, about $500,000,000 of that is really related to workforce capacity, okay, dollars 5 of the $800,000,000 We've got about $300,000,000 roughly that's associated with plant capacity, consolidating footprint, etcetera. And then on the balance to get to $1,000,000,000 charge in the quarter is $200,000,000 of BD. And that's really all Baker Hughes Water Industrial Systems and some of the digital acquisitions we closed in the quarter. So the answer to your question, dollars 800,000,000 is all investment with payback. Ask your first part of your question again.
It's on the contracts.
So, yes, so contracts in the quarter are so on the CSA contracts, which is I think what you're talking about, CSA contracts in the quarter were up $1,400,000,000 year over year. $800,000,000 of that increase was associated with contract updates, okay? And that's versus $500,000,000 a year ago. So it's higher by $266,000,000 year over year. Of the about $300,000,000 it's up year over year, a little more than half of that's in Power.
And most of that is associated with updates of park costs when we change standards every year. So for the contracts that were under review in the Q1, if we change the standard on the park costs and deliver against that contract in the future, we did that update. And then there's a small update for escalation that's mostly around our aviation business. We update once a year on escalation within the service contracts. That part of long term contracts that are revenues versus billing, so outside of contract updates, was $600,000,000 in the Q1.
And that's really where we've incurred shop visits, outages, we've incurred cost against those service contracts ahead of actually billing the hours or the events associated with it. So that's mostly timing and some of that will come back over the course of the year as we actually bill against the utilization or bill against an outage or a shop visit. So I would say that's mostly timing. That's the $1,400,000,000 increase that you see in contracts year over year.
The next question is from Julian Mitchell with Credit Suisse.
Hi, thank you.
Hi, Julian. How are you?
Good, thanks. Just wanted a quick question on the back to the cash flow. So Jeff Bornstein, I think you'd called out that $400,000,000 of industrial CFOA in the first half of last year. Was the implication that we should assume the first half of this year is around the same level? And then also my follow-up would just be on the contract assets piece.
You've had outflows last year of about $4,000,000,000 in cash. It's about $4,000,000,000 out this year. Before that in 2014 'fifteen, it was more like $1,500,000,000 to $2,000,000,000 per year. So I just wondered with GE today, as you look out beyond this year, what's the normalized contract assets cash outflows we should expect annually?
So, let me take part 2 first. So, yes, we expect the contract drag on cash flow for the year to be roughly the same, 'sixteen versus 'seventeen, as you said, at about $3,900,000 I think you got a number of phenomenons going on. We're investing like crazy in productivity and cost out, whether that's additive, value engineering, driving these plant closures, restructuring, all this finds its way into lower costs. When we get lower costs, the cost to execute against our contracts improves. And when they improve, the accounting has us account for that and where it changes our view on the ultimate profitability of these contracts.
That's one mechanism and we're hugely focused on that. And I think you want us focused on that, that's all future cash, future economics, etcetera, on a go forward basis. We're not pulling future profit forward. That is not what we're doing. We're just restating where we are in the contract from inception to date.
The second part is, where the long term service agreements that protect our installed base, our penetration continues to improve. When you look at the attach rate on the H turbine, on the LEAP engine, the population in our backlog around these contracts is growing substantially and has over the last number of years. And so there's a volume factor associated with it as well. What was the first part?
I think on the I think at the half, we expect CFOA to be roughly comparable.
So what I would say on the half, we think CFOA is going to be sequentially much better in the Q2 than the first, and we would expect year over year CFOA to be better through the half.
And the next question is from Shannon O'Callaghan with UBS.
Hey, so power equipment orders up 25% in a quarter when gas turbines were down about 50%. I mean, it seems to support this shift you've been talking about from gas turbine sales to Power Island sales and the expanded scope. You also have pretty easy comps in Austin. So I'm just want a little color on the sustainability of that kind of equipment order strength in power despite kind of a weaker gas turbine outlook.
Look, I think, Shannon, we look at the total gas turbine market probably being roughly flat year over year. We do think this increased content is kind of here to stay. So, it's our expectation that that continues through the year. And then, I think at the end of the day, we've got a decent competitive position in steam. We don't have any false expectations about that market, but we will pick up some orders there as well.
I'll just give you a little bit of color. So, I talked about it earlier. We landed 2 big steam turbine island orders in the quarter, which is hugely positive. We were much stronger on aero units and orders in the quarter. We were up 20 year over year on aero derivatives.
And we took 10 more HRSG orders out of Alstom in the quarter than we did a year ago. And as you mentioned, we were down 13 gas turbines. So a little broader strength in just above gas turbines.
The next question is from Andrew Obin with Bank of America Merrill Lynch.
Yes, good morning.
Hey, Andrew. Just a question
in terms of progression of organic growth through the year. How much of Q1 growth was pulled from the Q4 2016 shortfall? And were there any orders or revenues pulled from the Q2 and the rest of the year?
Again, certainly, there is going to be some spillover from Q4 into Q1. I still think 3% to 5% is the right way to peg the year. We're encouraged about how the Q1 started. And I would say, Andrew, business outside the U. S.
Is incrementally better than we had expected, I think, when we lined up the year. So, I think there's some macro drivers that are also important in terms of our ability to capitalize on the year. And then I think 10% orders growth is a nice bellwether for investors to reinforce, I think, what our guidance is for 2017.
The only thing I'd add to that, Andrew, is at year end, we talked about power that we had some short ship as we expected gas turbines, both arrows and units. We expect as we said on the call, we expect those to close here in 2017. We think those are good projects. Those did not close in the Q1. So to answer your question, the orders performance you saw in the Q1, particularly around power that we talked about from year end, those units are not in the first
quarter. That was our final question. I'll turn it back to you, Matt, for any closing remarks.
Thank you. The replay of today's call will be available this afternoon on our Investor website. We remind you that next Wednesday, we'll be holding our Annual Shareholder Meeting in Asheville, North Carolina. And Jeff, you're going to speak at EPG Conference on May 20. With that, Jeff?
Great, Matt. So again, I would just spike out I think we're very encouraged by Q1 performance, 10% orders growth, 7% organic, 130 basis points of margin. I think a solid cash profile for the year. So, I think, Matt, off to a great start. I think very encouraged by 2017.
Great. Thanks for joining today.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.