Good day, ladies and gentlemen, and welcome to the General Electric second quarter 2014 earnings conference call. At this time, all participants are in a listen only mode. My name is Christine and I will be your conference coordinator today. If at any time during the call you require assistance, please press star followed by zero, and a conference coordinator will be happy to assist you. 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, Matthew Cribbins, Vice President of Investor Communications. Please proceed.
Thank you, Christine. Good morning and welcome everyone. We are pleased to host today's second quarter webcast. Regarding the materials for this webcast, we issued the press release, presentation, and GE supplemental earlier this morning on our website at www.ge.com/investor. 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, our Senior Vice President and CFO, Jeff Bornstein, and our Senior Vice President, Power & Water, Steve Bolze. We've asked Steve to join today to talk about the Alstom deal. I'd like to turn it over to our Chairman and CEO, Jeff Immelt.
Great, Matt. Thanks. Good morning, everyone. GE had a good quarter in a generally improving environment. We saw solid economic growth across most of our segments. Some economic indicators are really quite strong, like rail loadings, revenue passenger miles, demand for commercial credit, and the appliance market strengthened during the quarter. Global markets were also generally positive. GE ended the quarter with a record backlog of $246 billion. A particular highlight was the payback of our investments in technology. We recorded $36 billion of wins at the Farnborough Air Show. Transportation is prospering because of our commitment to push ahead with the Tier 4 locomotive. Healthcare is gaining share behind several big product launches. In Oil & Gas, the same broad interest in new subsea innovations. There's still a few tough markets like U.S. healthcare and mining, the economic trend is positive.
At the half, execution is in line with our key goals. Industrial segment growth is up 10% with 6% organic revenue growth and margin expansion of 30 basis points. We're on track for $7 billion of capital earnings with a $3 billion dividend. Capital allocation remains balanced and disciplined. We've returned $5.9 billion to investors through dividends and buyback. We're improving the GE portfolio as well. The Alstom acquisition will generate attractive growth and returns while helping GE to accelerate our achievement of 75% industrial earnings. Retail Finance remains on track for an IPO by the end of July. The GE team is executing both operationally and strategically. Orders grew by 4% with slightly positive pricing. Backlog is at a record high, as I said, of $246 billion, up $23 billion from last year. This was the strongest service performance in several years, with growth of 14%.
Aviation spares grew by 16%, Powergen services grew by 13%. Most of our service businesses are expanding. Transportation orders were up close to 40% overall, we've positioned the business to succeed in the future. We experienced some equipment order push-outs, particularly in wind and oil and gas and subsea. However, our rolling four-quarter equipment growth is up 7%. Growth markets remain a highlight with 14% order expansion and growth in six of nine regions. Our orders and backlog give us confidence in the second half in 2015. Our operating execution was good. We had 7% revenue growth in the quarter, with 20 basis points of margin expansion. We're gaining share. Farnborough made a statement about GE's position in aviation with $36 billion in wins. We won nearly 90% of all next-gen narrow body announcements.
As was reported earlier in the week, GE remains substantially ahead on the Tier 4 locomotive. We have 264 Tier 4 locos in backlog for 2015 and 2016, with more on the way. Granted, this was zero in the first quarter, so our momentum is growing. We have nine high-efficiency large block H-class turbines in backlog with many more in the pipeline. In oil and gas, we sold the first 20,000 PSI drilling system to Maersk. We have a $55 million backlog for the industry-leading Revolution CT scanner. For the quarter, equipment revenue grew by 8% and service revenue grew by 5%, Six of nine growth regions expanded in the quarter. In addition, a few of our adjacencies are performing quite well. Life Sciences had order growth of 10%, while Water grew by 11%.
We now expect $1.3 billion of Predictivity revenue for 2014, slightly ahead of our operating plan. Simplification and value gap continue to drive margins. We're reducing the structural cost of GE. For the year, simplification, value gap, and R&D efficiency should continue to be positive. In addition, we saw a nice margin turnaround in Energy Management and Appliances and Lighting, while Transportation and Healthcare are growing margins despite tough markets. We will continue to be negatively impacted by equipment mix for the year, but we're on track for solid margin improvement in 2014 overall, with expansion in most of our businesses. In the quarter, six of our seven industrial segments had earnings growth. Really a good execution quarter. Our capital allocation is in line with plan. Total CFOA is $3.4 billion, down 9% year-to-date.
Industrial CFOA is above last year in total, below if you add back the impact of the NBCU taxes last year. CFOA is impacted by timing and long cycle orders in wind, driven by the lack of PTC clarity and in oil and gas. Additionally, we have more inventory for second half shipments, given the substantially higher organic revenue growth we expect in 2014 versus 2013. We'll see strong improvement in working capital in the third quarter and second half. As previously communicated, we expect the capital dividend to be about $3 billion in 2014. We ended the quarter with $87 billion of cash, We expect CFOA for 2014 to be in the $14 billion-$17 billion range, as outlined in our 2014 framework. We have a similar first half, second half profile that we had in 2013. Capital allocation continues to be disciplined and balanced.
We have raised the dividend by 16% for 2014. We filed the Red Herring for RFS today, targeting a late July IPO. This should raise roughly $3.1 billion at the midpoint price for 15% of the company. We are targeting $4 billion at dispositions for the year. In an important move for GE, the Alstom deal is announced and signed, targeting a 2015 close. This is an exciting opportunity for GE and our investors. By 2016, we expect this will add $0.06-$0.09 per share and allow the company to have 75% of our earnings from industrial. The synergies and returns are excellent. Steve Bolze is here this morning to give you an update on Alstom. Let me turn it over to Steve.
Thanks, Jeff. We have had a lot going on with respect to the Alstom transaction. I wanted to update you on the deal, our revised structure, and our execution plans. As you recall from our initial announcement on April 30th, the acquisition of Alstom's power and grid businesses would represent the largest single acquisition in GE's history. At the time, we said it was subject to several reviews, including our discussions with the French government. Those discussions have led now to our revised offer. We are happy with the outcome and have the unanimous recommendation of the Alstom board and the endorsement of the French government. A key point that I would like to stress is the deal economics remain the same. The price did not go up. Our deal is $13.5 billion of enterprise value at 7.9 times EBITDA. Alstom still retains its transport business.
We have, however, revised the initial deal structure and payment terms. We will be selling our signaling business to Alstom Transport and creating three joint ventures. GE will have operational control in these joint ventures. Alstom will be investing about $3.5 billion for its stakes. I will give further details on the ventures in a moment. Although the structure has been modified, our strategic rationale has not changed. The power sector is core to GE's future. It has excellent long-term growth prospects. Alstom power and grid are businesses we know and like and are being acquired at a good time in the cycle. What we like the most about Alstom is it complements us in technology, geography, and they have great talent. It brings us broader scope and power, a larger installed base for services growth, and larger presence in emerging markets.
Together with GE, this creates opportunities to improve our combined performance. It is in our sweet spot. We continue to see good cost synergy opportunities. Our plans remain intact. Overall, this is an attractive investment in a core business which expands our competitive capabilities and is accretive to GE earnings in year one with high teens IRR. On the next page, I want to ground you on the new deal structure. First, the changes do not impact the core businesses, which are Alstom's thermal assets. We will still own close to 100% of Alstom's gas and steam equipment and service businesses. About 86% of our synergies are in these businesses. With respect to the joint ventures, Alstom will be the investor, but GE will have operational control. We still have clear visibility to the remaining synergies. The first JV is renewables.
It's made up of Alstom's offshore wind and leading hydro business, as well as some of their new renewable technologies. GE and Alstom will each own 50% of this joint venture. Onshore wind from Alstom will go directly into GE at 100%. The second JV is the combination of GE's Digital Energy business and Alstom's grid business. GE and Alstom will each own 50% of the joint venture. The third joint venture is Global Nuclear and French Steam. We knew all along that with the majority of electricity generation in France being from nuclear power, there would be nuclear sovereignty issues. This venture includes Alstom's production and servicing equipment for conventional island of nuclear power plants and development and sales of related new equipment globally. It also includes Alstom's steam turbine equipment and servicing applications for France.
In this joint venture, GE will own 80% of the economics and Alstom 20%, but Alstom will still have 50% of the voting interest. The sovereignty issues are addressed through a preferred share held by the French state with certain governance rights. In each JV, GE has control, will appoint the CEO, and expects to consolidate. Alstom will have standard minority governance rights and will have put options with a minimum floor value at defined times. These joint ventures will not impact our ability to achieve our synergies. On top of these ventures, one additional transaction is that we agreed to sell our signaling business, a part of GE Transportation. It's a good deal for both parties. We got a good price for it, a market multiple, and it is a business that will do better as part of a larger signaling business that Alstom has.
In addition to that, we will enter into a collaboration agreement for both services and commercial activities that should make both GE and Alstom's transportation businesses more successful. As for our presence in France and Europe, after Alstom's businesses join the GE family, we expect to have over 100,000 employees in Europe. We have agreed to add 1,000 new jobs in France and have factored this commitment into our financial plans. In addition, we have committed to keeping grid, hydro, offshore wind, and steam turbine headquarters in France. In summary, the deal returns remain unchanged. There will be $3.5 billion less cash invested up front and a $0.01-$0.02 reduction in EPS accretion. Now let's look at our plans for execution. We still see $300 million in year one synergies growing to $1.2 billion in year five.
We expect to realize 80% of the $1.2 billion in synergies by the third year. There are four main categories for synergies. The first is optimizing the manufacturing and services footprints. The combined businesses have 16 major manufacturing sites and many more feeder sites, and about 70 service sites across the globe. We estimate roughly $400 million of our savings here over the period. Second, leveraging the combined sourcing buy to increase productivity. We have approximately $5 billion in common spend that we believe we can realize about 5% savings on. This is very consistent with our experience when we bought EGT from Alstom in 1999. The third area is combining our R&D efforts across the product lines. Lastly, by consolidating supporting functions across SG&A, we see the ability to get about 10% synergy here across the combined businesses.
We expect to spend approximately $900 million over the first five years to realize the $1.2 billion of cost savings. Beyond the $1.2 billion, we have assumed some modest revenue synergies but see the potential for more upside. The teams have started to work to develop these additional growth opportunities. The current plan should drive $0.06-$0.09 of EPS accretion in 2016, assuming a mid-2015 close. We have now kicked off for integration planning with Alstom so we can hit the ground running when the approval process is complete. This will be a broad GE effort spanning many parts of the company. We have appointed Mark Hutchinson our overall GE integration leader. Mark is a GE officer with broad global experience and was most recently our CEO of China. We have formed a joint GE Alstom steering committee and had our first meeting last week in Paris.
From here, the process for closing will include works council consultations, Alstom shareholder approval, and customary regulatory reviews, driving an expected closing in mid-2015. Overall, we are excited about the acquisition. We are confident in our ability to execute, and we have a proven and experienced integration team now in place to ensure success. With that, I want to hand it over to Jeff Bornstein.
Thanks, Steve. I'll start with a second quarter summary here. We had revenues of $36.2 billion, up 3% from the second quarter of 2013. Industrial sales of $26.2 billion were up 7%, and GE Capital revenues of $10.2 billion were down 6%. Operating earnings of $3.9 billion were up 7%, and operating earnings per share of $0.39 were up 8%. Continuing EPS of $0.35 includes the impact of non-operating pension, and net EPS includes the impact of discontinued operations. We had a $41 million charge in the quarter in disc ops, primarily $30 million from WMC. WMC pending claims were down $700 million in the quarter, and litigation claims were $1.3 billion higher. Reserves of $550 million are essentially flat versus the prior quarter, with a slightly higher coverage of potential losses. As Jeff said, CFOA year-to-date was $3.4 billion.
We had industrial CFOA of $2 billion and received $1.4 billion of dividends from GE Capital. Industrial CFOA was up 12% reported and down 41% excluding the impact of 2013 NBCU tax payments. This is driven by timing of orders and inventory build, and we're still on track for the $14 billion-$17 billion CFOA range that we guided for the year. The GE tax rate for the quarter was 19%, up from 17% last year, bringing the year-to-date rate to 21%. As previously communicated, we expect the full-year industrial rate to be about 20%. The GE Capital tax rate of a negative 13% was principally driven by the announced Consumer Nordics disposition. The tax benefits from this transaction are anticipated to be higher than what we had planned for, and with that, we now expect a low single-digit tax rate for the full year.
We recorded roughly $260 million of tax benefits in the second quarter to bring the year-to-date rate in line with the expected lower full-year rate. On the right side, you can see the segment results. Strong top-line growth of the industrial segment's revenues up 7% and operating profit growth of 9%. GE Capital earnings were down 5% in the quarter on lower assets. Per our previous communication, the GE Capital results now include the impact of preferred stock dividends. For the quarter, that was approximately $160 million versus $135 million in Q2 of 2013. I'll cover the dynamics of each of the segments on the following pages. First, I'll cover other items for the quarter. We had $0.03 of restructuring and other charges at corporate.
About $0.02 of that related to ongoing industrial restructuring and other items as we continue to invest in simplification to improve the industrial cost structure. The spend was broad-based with projects in every business and corporate. We were executing on approximately 145 projects that average a year-and-a-half payback. We also had a $0.01 one-time charge related to the write off of an asset in our consolidated nuclear joint venture. We took 51% of the impact related to that write off, and our partners took the remainder. Offsetting the restructuring, we booked a gain related to the disposition of Wayne Fueling Systems business in oil and gas. We recorded a pre-tax gain at corporate of $90 million related to that transaction. The net impact of these two items was a $0.02 charge. To give some context, the gain came in about $100 million lower than expected.
Our restructuring spend of $300 million pre-tax also came in about $100 million lower than planned. This was due to lower spend of about $70 million needed to execute the existing projects and some delays attributable to works councils for roughly $35 million. In addition to the ongoing restructuring spend, we had the one-time charge related to the nuclear asset write off. Restructuring and other charges, net of gains of $0.02, ended up being a higher expense than we planned in the quarter. I'll take you through the segments, starting with power and water. Orders of $6.3 billion were up 6%. Equipment orders were down 1%, with distributed power down 32%, thermal down 9%, and renewables up 16%. The decrease in distributed power is attributable to the timing of orders in the emerging markets that we expect to close in the second half.
Thermal orders were lower on gas turbine orders, 10 versus 24 a year ago, partially offset by more BOP orders for balance of plant. First half gas turbine orders were 41 versus 32 a year ago. No change to our framework for 125 gas turbine orders for the year. In the second quarter, we booked our first H gas turbine order for a cogen application in Russia, and we expect to ship that unit in 2015. Service orders were up 12%, driven by PGS up 13% on strong demand for upgrades and parts. We expect a reasonably strong transactional outage season in the second half of the year. We booked 19 AGPs in the quarter versus 12 a year ago. Revenue in the quarter was higher by 10% to $6.3 billion. Growth was driven by equipment up 20% and services up 2%.
Equipment revenue was driven by thermal up 38% on two more gas turbines versus last year and higher BOP up 38%. Wind equipment revenues were up 30%, with 159 more wind turbines year-over-year. Thermal and wind growth was partly offset by lower distributed power growth, which shipped 41 units this year versus 55 a year ago. Op profit of $1.1 billion was up 4%, driven by volume and simplification benefits offset by negative mix, principally higher BOP and wind shipments. Product line mix was 2.4 points of a margin drag in the quarter. SG&A was down 7% in the quarter. Our outlook for the business for the total year has not changed. At the moment, we are likely to be stronger on AGPs than we planned, but may see some distributed power volume push. Gas and wind turbines remain within the framework we've shared with you.
Orders were up 5% in the quarter to $5.3 billion. Equipment orders were down 9% versus a very strong second quarter in 2013, when equipment was up 42%. Turbomachinery was down 42% versus up 74% last year. Subsea was down 44% versus up 30% a year ago. Downstream technology up 85% on strong petrochemical demand and drilling and service up 55% were strong in the quarter. Drilling received a launch order for our new 20,000 PSI drilling system, the first in the industry for Maersk and BP. The 20,000 PSI capability makes ultra-deep offshore drilling possible in areas unavailable today. We're quite excited about the progress there. Service orders were strong, up 23%, with turbomachinery higher by 49% on increased upgrades, installations, and transactional services. Downstream technology was up 35% and M&C was up 1%.
M&C was up 19%, excluding the impact of the Wayne and Sensors dispositions. Revenues at $4.8 billion were up 20%, driven by equipment strength up 29%, with Subsea up 51% and Turbomachinery up 15%. Service revenues were higher by 11% versus the second quarter of last year. Operating profit was up 25% on higher volume, positive value gap, and strong productivity, offset partially by negative mix from Subsea growth. Margin rates in the quarter improved 50 basis points. On the next page, aviation. Demand for travel continues its strong growth. Year-to-date May, revenue passenger kilometers globally were up 6.2%, with strength across all regions. Freight grew 4.4% May year-to-date. Orders in aviation were up 1%, with equipment down 8%, driven, as we expected, by commercial engines down 27% on lower CFM orders and a non-repeat of the FedEx CF6 order from last year.
This was partially offset by stronger international military orders. Service orders were 13% higher, with spare parts orders rate up 16% to $28.4 million a day. As Jeff mentioned at the Farnborough Airshow, we won 312 LEAP engines on the Boeing MAX. We also won 520 LEAP engines on the Airbus A320neo versus 100 to the competition. For the A320neo program to date, we've won 54% of the engines. In 2014 year-to-date, the LEAP has won 67% of the engines on the A320neo. Overall, since the launch, the LEAP engine has won 77% of all narrow body competitions. Operationally in the quarter, revenues were higher by 15%. Equipment revenues were also up 15%, driven by commercial engines up 14% and military engines up 3%. We shipped 75 GEnx engines versus 33 a year ago in the quarter.
Services revenue was up 15%, with strength in commercial services partly offset by military services. Operating profit in the quarter was 12%, driven by higher volume, positive value gap, offset by negative mix associated with the GEnx shipments and higher R&D spend in the quarter. Operating profit margins of 19.7% were down 40 basis points in the quarter. Through the half, margins are up 20 basis points. Overall, Dave Joyce and the aviation team continues to execute and win. We expect the technology investments we've made and continue to make will sustain the momentum. Next, healthcare. Healthcare in the second quarter was again soft in the U.S., as we expected. Inpatient volumes were weak, which, in conjunction with increased consumerism and the changes in the healthcare law, appear to be causing hospital and clinics to continue to be cautious on new investments.
Orders for the business of $4.8 billion were flat, with emerging markets up 7%, led by Latin America up 12% and China up 12%, offset by the U.S. down 2%. Equipment orders were flat, with HCS down 4%, offset partially by Life Sciences up 23%, up 5% organically. Service orders were up 1%. Backlog of $16.6 billion was 6% higher than a year ago. Revenues were flat, with developed markets down 2% and emerging markets up 7%, with strength in China, Latin America, and the Middle East. Operating profit was up 1%, with strong cost productivity offset by negative value gap and FX. SG&A ex acquisitions was down 8% in the second quarter. Op profit margins improved 10 basis points, up 60 basis points organically.
For the second half, we expect the market dynamics to be similar to the first half, with weakness in the U.S., continued growth in life sciences and the growth regions. The business will continue to deliver on remaking their cost structure. We expect that healthcare will grow earnings single digits for the year. Next, talk about transportation. The transportation team continues to execute well in a pretty tough environment. Domestic activity continues to improve, though. Car loads in the U.S. were up 4% for the first half, driven by intermodal, petroleum, and very strong grain shipments. Even coal saw 30 basis points of growth as post-winter stockpiles are replenished. Higher volume in conjunction with the first quarter weather effect have impacted velocity on the lines. As a result, parked locos are at their lowest levels since 2007, 2008. We are seeing increased orders activity in locos.
At the beginning of the year, we communicated that we expected to ship about 600 units in 2014. We now expect that shipment number to be closer to 750-plus. Balancing that, mining volume for both units and parts are weak. We guided an expectation of being down almost 50% in 2014 versus 2013. We now expect mining to be slightly weaker than that. Orders for the quarter were up 35%, with equipment growth of 40% and service growth of 32%. Equipment strength was driven by North American locomotives, including our first order for 39 Tier 4 locos for delivery in 2015. Service orders were driven by locomotive parts and $125 million signaling win in Singapore. Backlog of $15.9 billion grew 13% from the second quarter of last year, driven by equipment up 51%. Revenues in the quarter were down 18%.
Equipment was down, driven by mining down 43% and lower loco and kit deliveries. Service revenue was down on weak mining parts, partially offset by core services and loco parts. Op profit, down 14%, was driven by lower volume, partially offset by positive value gap and cost out. SG&A was down 14% in the quarter. Operating margins improved 110 basis points on strong cost management. Our total year expectations for transportation remain intact, with better locomotive demand and deliveries offsetting slightly worse mining experience than the 50% down we expected. We feel good about our momentum on locomotives and are experiencing high utilization of our plants in 2014. Based on the first-to-market Tier 4 solution and improved rail volumes, we are optimistic that customers will continue to place orders in and for 2015. Energy management.
The business took a couple steps forward in the quarter, but still remains very much a work in progress. Orders were down 14% in the quarter, partly driven by no repeat of the big ComEd meter order last year in Digital Energy. Digital Energy orders were down 32%, but up 26% excluding the ComEd order. Industrial Solutions was down 8% on slow demand in North America and the exit as part of restructuring of 7 subscale international platforms. Power Conversion saw a number of marine orders push in the second half. Backlog continues to grow, up 12% year-over-year. Revenue in the quarter was down 6%. Op profit more than doubled from last year to $69 million, and margin rates improved 110 basis points.
The team is doing a great job executing their restructuring strategies, including reducing rooftops by 40%, simplifying their product structures, and realigning their SG&A functions. Restructuring benefits are delivering productivity that more than offsets the negative volume. We expect energy management to continue its improvement trajectory. Appliances core industry was up 5% in the second quarter, with contract up 8% and retail up 4%. Housing starts rebounded up 9%, helping volumes in the quarter, and single-family starts grew 5%. Multi-family starts grew 18% in the quarter. Revenue in the quarter was flat, with appliances flat and lighting down 1%. Appliance revenue was down one point on volume, but up one point on price. We ran a number of promotional events that drove improvement during the quarter, with revenue down 5% in April, up 1% in May, and up 5% in June. The trajectory is correct.
Lighting revenue was down 1%, with strong LED growth of 50%, offset by 9% down on traditional products, as retailers continue to bleed off incandescent inventories. Our profit of $102 million was up 23% on positive value gap and productivity. SG&A in the quarter was down 4%, and our profit rate improved 90 basis points in the quarter. GE Capital. Revenue of $10.2 billion was down 6%, primarily from lower assets and lower gains. Assets were down 2%, or $10 billion year-over-year. GE Capital's net income of $1.7 billion, which includes $161 million of preferred dividend payment, was down 5% on a comparable basis as impact from lower earning assets and gains more than offset lower losses, marks, and impairments and higher tax benefits. ENI of $371 billion was down $19 billion, or 5% from last year, and down $2 billion sequentially.
Non-core ENI was down 15% to $51 billion versus last year. Net interest margins in the quarter at 5% were essentially flat. GE Capital's liquidity and capital levels continue to be strong. We ended the quarter with $76 billion of cash and Tier 1 common ratio on a Basel I basis improved 28 basis points sequentially and 51 basis points year-over-year to 11.7%. On the right side of the page, asset quality trends continue to be stable. The only exception being the seasonality we expect in the U.K. mortgage, but delinquencies in the U.K. mortgage portfolio are actually down 160 basis points year-over-year. Now to walk through each of the segments. In CLL, Commercial Lending and Leasing business ended the quarter with $174 billion of assets, flat to last year. On-book core volume was $11 billion, down 3%, driven by the Americas, which was down 4%.
We do see pockets of strength in the U.S., largely in equipment financing with our transportation business up 25%, vendor equipment leasing up 7%, and our fleet business up 6%. Volume in CLL International was up 3%. The team is staying disciplined on pricing and risk hurdles, the new business returns were about 1.8%, roughly in line with the first quarter. Earnings of $541 million were down 34%, driven by lower tax benefits from the non-repeat of last year's Fleet Canada disposition and tax benefits we had in Europe. As well as lower assets. These were partially offset by improvement in losses, marks, and impairments. In the consumer segment, ended the quarter with $135 billion of assets, flat to last year. Earnings of $472 million were down 43%, driven by lower international assets, which were down 12%.
Year-over-year, including the impact of the Swiss IPO and BAY Thailand sale. In the current quarter, we also recorded roughly $85 million of after-tax loss provisions as a result of recent legislation on consumer pricing in Hungary. North American Retail Finance earned $512 million in the quarter, down 9%, driven by continued investment in its standalone capabilities, partially offset by 9% growth in its earning assets. Real estate assets at $37 billion were down 11% versus prior year and down $1 billion sequentially. The equity book is down 26% from a year ago to $13 billion. Net income of $289 million was down 34%, primarily from lower level of tax benefits and gains. In the current quarter, we sold 52 properties with a book value of about $420 million for $137 million in gains. That's down $65 million from last year.
The verticals, GECAS, are in $343 million, up 13%, as lower impairments and higher gains offset the impact of lower assets, which were down 9%. New volume was $1.5 billion, up 17%, with attractive returns of about 3% ROIs, and we ended the quarter with zero aircraft on the ground. Energy Finance had a good quarter, with earnings up 27% to $76 million, driven by core income and lower level of marks and impairments. As I mentioned earlier, the tax rate of GE Capital was negative for the quarter, that was driven by the planned Nordics transaction, with $260 million of tax true-up being booked to the GE Capital corporate. Excluding the tax true-up, the GE Capital tax rate would've been in the low single digits for the quarter. You look forward to the third quarter, we expect GE Capital to be around about $1.6 billion in earnings.
Overall, Keith and the team continue to execute the portfolio strategy and deliver solid operating results. The Nordics dispositions, which we expect to complete in the third quarter, and the IPO of Retail Finance, which I'll cover on the next page, are major steps in further reducing GE Capital's consumer footprint and focusing on the commercial core. With that, we're announcing today that we're targeting the IPO of our North American Retail Finance business for the end of July. We'll be putting out a prospectus or a Red Herring later this morning. We're limited to what we can say during the IPO process, but we're pleased to be at the final stages of the IPO. We're targeting a 15% offering for about $3.1 billion at the midpoint of the price range. There is a potential additional 2.25% for the greenshoe.
As we've said in the past, the capital raise will remain within Synchrony to enhance its standalone capital and liquidity levels. There will be $1.5 billion of funded transitional financing from GE Capital. This is down from our previous estimate of about $3 billion. The team has been doing a lot of work to strengthen their standalone capabilities on capital liquidity and governance. You may have seen that S&P and Fitch published their investment grade ratings earlier this week for Synchrony. We're targeting the split off in late 2015, subject to regulatory reviews and approvals. Assuming a $3 billion IPO for 15%, we would retain an approximately $17 billion position in Synchrony. There are a lot of variables, and the GE share count reduction will be dependent on the price of GE and Synchrony shares at the time of the split.
We're still targeting 9.5 billion or less shares with this transaction. The process is on track, and we'll update you along the way. With that, I'll pass it back to Jeff. On the 2014 framework, we have no change to the operating framework for 2014. We expect double-digit industrial operating profit growth behind solid organic growth and margin expansion. GE Capital earnings are on track for $7 billion, excluding the impact of the preferred dividend. We will hit our simplification goals, including a $500 million reduction in corporate expense. We plan for restructuring to exceed gains, which is a drag on 2014, but will benefit 2015 and beyond. CFOA and revenue remain on track. I would say organic growth is probably closer to the high end of the range. We continue to move the company forward strategically.
Our long-term investments in technology are really paying off with solid share gains. With the Retail Finance IPO and Alstom acquisition, we're boldly reshaping the company. I'm proud of the GE team's ability to execute so well strategic and operationally on so many fronts, and we're well positioned for the future. Matt, now back to you, and let's take some questions.
Great. Christine, let's open it up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press *1 on your telephone. If your question has been answered or you wish to withdraw your question, please press the pound sign or hash key. Our first question comes from Scott Davis of Barclays. Please go ahead.
Hi. Good morning, guys.
Hey, Scott.
Appreciate that. I guess since we've got Steve there, I think just some logistical questions on Alstom. How do you keep the place from falling apart, I guess, from now until you close it? Do they still bid on projects and compete against you till you close? Do you have any control or oversight of how things are run between now and then? It's going to be a little while till everything gets approved.
Scott, listen, we are two separate companies. We'll be through closing. As we said, we have an integration planning effort that we have now kicked off. We have a process that we have to go through, works council approvals. They have a shareholder review. We have all the various regulatory steps to go through. At this point, Scott, they're separate. In some areas we do compete. As I mentioned earlier, these companies are largely complementary. Complementary in terms of geography, technology. It's a company we obviously know. As you know, Scott, back in 1999, we bought the packaging business. That was EGT that came to us, and some of our best leaders came from that. In the short term, we are separate and they're under their control.
Okay, understood. Then, couple of little nits here. When you think about Synchrony, and this is for Jeff and Jeff, are there any structural or tax reasons why this business can't be sold in the process or post the IPO versus spun?
Scott, the reason we focus and we're heading down a path on the split is it's very tax efficient for shareholders. There's real value creation in doing the split offer as shares versus selling the business outright.
Okay. Fair enough. Lastly, there's a lot of chatter on M&A in the space. There's press reports out there on Siemens and Dresser-Rand. Does Alstom really cut you guys out of being able to go after some of this stuff if it becomes opportunistic and you have a white knight type scenario with Dresser-Rand? It's a fairly unique asset. I don't think I'm asking you to comment just specifically on Dresser-Rand, but on an overall basis, does Alstom really keep you out of the market, or do you feel like you could still go in there and if need be, issue equity or be creative about how to finance it?
Scott, what I would say is in our oil and gas business, we feel like we've got a great coverage in terms of where we are right now. We really don't have any changes today on how we think about capital allocation and things like that. Look, we're always looking at the portfolio in terms of additional divestitures and things that we can do progressively inside the company. We're not done with that yet, and that could open up new capital allocation options. Our near-term focus is on the Alstom integration and doing a great job with that.
Okay, good answer. Thanks, guys, and good luck.
Thanks.
Thanks.
Thank you. Our next question is from Julian Mitchell of Credit Suisse. Please go ahead.
Hi. Thanks.
Hey, Julian.
Hey. Just had a question on the healthcare business. You talked back in December about how you might get close to a 10% profit growth this year in healthcare. First half, I think profits are down. Just maybe a quick update on your thoughts there.
Yeah, Julian, I think what we talked about was healthcare profit growth of high single digits, low double digits. I think given how we started the year, particularly in the U.S., and particularly in HCS, our expectations as of now are that we're going to grow operating profit in healthcare single digits this year. I would say, Julian, the U.S. market continues to be tough. Outside the U.S., I think the team's executing pretty well overall. I would agree with Jeff's assessment on where healthcare will come in on the year. I think the good part about GE is we have other segments that'll be higher than our original expectations, so that in total, we still feel good about the overall framework of double-digit operating profit growth, industrial operating profit growth for the year.
Within healthcare, we still expect that we have expectations the growth markets will continue to grow for us, most of them double-digits. Life sciences will have a great year. The U.S. is going to be a real headwind.
Thanks. Just on the kind of GE-wide EBIT margin bridge. I think in the first half you've had a value GAP benefit to EBIT of about $200 million. I think in January you talked about a $200 million benefit for the year as a whole. What should we expect for value GAP in the second half as a EBIT driver?
Yeah. I think the guidance we gave is a couple of $100 million for the year. We're in very good shape through the first half. We still expect value GAP to contract a bit in the second half as it relates to prices we ship backlog, particularly in Power & Water. There's a chance we could be a little bit better for the year on value GAP, but I wouldn't expect it to be markedly different than what we've shared with you previously.
Thank you.
simplification. I think simplification's still on track for $1 billion plus for the year.
Great. Then just lastly, for Stephen, on the grid business, Chinese competitors have made very big inroads there, even on areas like HVDC in the last decade. How confident are you about the ability to bring up the grid margins given the competitive landscape is so different now?
I think what you saw from the results in the quarter is that team is making progress. One other thing that business also needs long term is scale. That's one of the things we talked about with Alstom in our integration planning. One of the joint ventures we have is right in that space. We'll be putting our Digital Energy business with the Alstom grid business to have more scale globally and be able to compete with people like ABB and Siemens. I think we're on the right track.
Julian, if you look in the industry, ABB is 15+, Siemens is double digits. Our combined business will be 5-6. If we can get from 5-6 to 10, we're going to create a bunch of shareholder value here in terms of where we need to go. I think that's our game plan in terms of how do you be a more competitive enterprise on a combined basis.
Great. Thank you.
Thanks.
Thank you. Our next question is from Nigel Coe of Morgan Stanley. Please go ahead.
Oh, thanks. Good morning.
Hey, Nigel.
Yeah, just a quick question on Synchrony. Obviously, you're pushing the button today on the roadshow, but once that IPOs, what happens to the accounting for the retail finance business? Does that move as an investment, or does it qualify for discontinuation?
We'll continue to account for it in continuing operations, and we'll account for the public ownership, roughly 15%, as minority interest.
Okay. That's very clear. Just switching to the H, you've got nine units in the order book. I'm just wondering, Jeff, you mentioned that EPG, that's I think roughly 35 on the proposal. I'm just wondering how that number's changed.
The H, just to follow up on your question there, Nigel, as we said, we have nine now in the process, and our first one ship next year. The demand is around the world, and you see demand also in this high-efficiency segment continuing to move forward and a lot of focus on area. There are multiple people in the space, we are happy with our progress. As you heard from Jeffrey Bornstein, if you look at our gas turbine orders through the first half, we're 41 versus 32 last year. We're making headway towards the framework that we put out earlier this year of about 125 for the year.
How many in the bid cycle?
In the bid cycle? Probably north of 45, 50. There's a lot of activity around the world.
Thank you. Our next question is from Jeff Sprague of Vertical Research. Please go ahead.
Thank you. Good morning.
Hey, Jeff.
Hey. Just a couple kind of deal-related questions. First, just Steve, or perhaps Jeffrey Bornstein, the JV structure, and the put structure as it relates to that at Alstom, can you give us a little more color on how that works and how this floor mechanism works?
Absolutely, Jeff. The mechanics, two different structures, it's clear on how Alstom gets liquidity. In each case, Alstom would have the right to sell all of its shares in the JVs to GE at a price that would return Alstom's investment, plus an annual accretion in line approximately with our borrowing costs. Additionally, there is an opportunity for Alstom to share in some potential upside based on a predetermined EBITDA multiple. The timing, really different grid and renewables, more in the three or four-year timeframe. For the nuclear and French steam JV, more in the year five, six, seven timeframe. It's clear, we know how it works, and pretty straightforward.
If those things go south hard, you still end up making them whole at their investment plus some accretion.
That's correct, in terms of their whole and some slight return as we talked about. At this point, we maintain operational control. We name the CEO, we know how to get after the synergies.
I was also just wondering, shifting gears on Synchrony, I was a little surprised to hear late 2015 as the split-off target, given that it looks like you're getting this done mid 2014. I would have thought maybe six, nine months of seasoning would have been enough, this would be an early 2015 split. Can you share any thought or philosophy on that?
Yeah. We're on the timeline we talked about for the IPO. We're talking the second half of 2015 now. I think just based on the amount of work to get this standalone ready and to get to where we need to be with regulators and get through the approval process, we think that's probably closer to the second half of 2015. Jeff, we're not going to keep it a day longer than when we get approval to do the split. It's just really letting it season is all we're trying to just allow for a little timeframe for that.
Thank you. Our next question is from John Inch of Deutsche Bank. Please go ahead.
Thank you. Good morning, everyone.
Hey, John.
Morning. Back to Alstom, when do we get a full handle on the EPC liability risks, bad project debts, and the like? With the Crawley, do you have to wait until the deal closes to communicate that if there's something that could be material that you might have to true up or top up with GE funding?
Why don't I jump in on that one, John? Listen, there's nothing new to report here today. You're talking, I think, about the turnkey projects that they have. Listen, we did public company due diligence, so there's a certain amount of detail that we got exposure to. With that, we've accounted for that in our financial model. There's always going to be things we find as we go through the process. I'd say at this point, this is a business we know well. We factored that in, and we have some synergies to offset as we go forward. At this point, we think we got it covered.
John, I would just add that and say, really a business in an industry that we've been in for 100 years. We've done it once with Alstom, we knew a little bit from 1999. Deals like this come around infrequently, particularly at this kind of valuation, 4.5x EBITDA after synergies and a synergy pipeline that adds up to more than $1.2 billion. There's always a lot of discussion around deals like this, the overall economics are extremely compelling for investors and right in our sweet spot vis-à-vis the ability to execute.
Thank you. Our next question is from Stephen Tusa of J.P. Morgan. Please go ahead.
Hey, good morning.
Hey, Steve.
just at a high level first, then I have a follow-up on Power & Water and mix. What offsets the healthcare vision in the framework?
Well, we generally expect the businesses within the framework that Jeff shared with you in December to be within that framework. I'd say, Steve, Aviation is certainly doing better and Oil & Gas is off to a good start for the year.
We expect energy to deliver.
We expect Energy Management to deliver and stuff like that.
Across the portfolio, we think we're still within the framework we shared with you.
Okay. Just on power and water, I guess this kind of goes to the mix question. When you look out to the second half, I think you have the thermal deliveries are going to be up. It looks like distributed power, its face is pretty much tougher comps, and the orders aren't holding up there. Maybe that's a little bit lower. How much better are Advanced Gas Path going to be in the second half? Is that enough to offset what would seem like ongoing negative mix when you look at thermal being up and distributed power being down?
Steve, as we look at Advanced Gas Path, we've got 19 shipped in the quarter, 36 year to date versus 14 last year. We're clearly on a better path this year on Advanced Gas Path. My guess is we look at the second half of the year, we're going to see the second half more level loaded with the first half, therefore it might be 70-ish, maybe a little more. That's why when Jeffrey Bornstein talked about Advanced Gas Path, we feel a little better, but we do have probably some softness in the distributed power area. That's kind of how we look at that.
Thank you. Our next question is from Joe Ritchie of Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Hey, Joe.
To date, I think you've announced dispositions of roughly or a little bit over $1 billion. I think you've got a targeted number of $4 billion. I was just wondering if you could give us any update on the timing there. Jeff, you made a comment earlier that you like where your portfolio is today on oil and gas. I was wondering what areas you would be looking at specifically to add across your industrial portfolio?
Well, Joe, again, I think we never like to talk about dispositions until we actually see them. I would say we are on track for the $4 billion, and we would expect additional announcements as you look at how the year unfolds. Those things happen as they happen. On the buy side, look, we always have a list of stuff that we do. I think the question that Scott asked earlier was really more along the lines of turbomachinery and packaging and things like that. In oil and gas, we feel like we've got a great portfolio in that particular segment of oil and gas. I would just circle back to the big priority of the team really is the Alstom integration, that's where the main focus is right now.
Thank you. Our next question is from Deane Dray of Citi Research. Please go ahead.
Thank you. Good morning, everyone.
Hey, Deane.
Hey, Jeff. In your opening remarks, you touched on, there were some push-outs and you said wind, oil and gas, and sub-sea, and I was hoping you could quantify a bit as to what the size of those were, maybe by geographies, any reasons, and is this project timing or customer confidence?
Yeah, Deane, I'll give you a few pieces of it. Within power and water on wind, we had four or 500 wind units that moved out of the quarter, really just awaiting clarification from the Treasury Department on what constitutes start of construction to be eligible for PTC. These are projects that involve bank financing and tax equity investors. Very tough to move those projects along until they're absolutely certain that they're going to qualify for the PTC. We expect that clarification to come from the Treasury in the next week or two. We've seen that clarification, and we think it's helpful. That's one example. That's over $1 billion of orders. In subsea, we have a couple of big projects that we're hopeful that we'll see here, certainly in the second half. As soon as possible would be great.
That's well over $1 billion as well.
Deane, on these, there's, I think, three big subsea deals. Two of them have been awarded to us, it's just a function of getting-
Yeah.
-the final project approval and stuff like that.
We're waiting for financial close.
We're just waiting for financial close to book the order.
Thank you. Our next question is from Andrew Obin of Bank of America. Please go ahead.
Hi. Yes, good morning.
Hey, Andrew.
Good morning. Yeah. Just with Alstom and with Synchrony, and also you guys are going to do divestitures, what is the risk that some of the restructuring actions get pushed back with active portfolio reshaping going on? Just thinking about management bandwidth this year.
Zero. Andrew, I just think zero. Our intent is to get to the 75, 25 by 2016 and still do the simplification that we've got going right now, and the teams are executing along that track.
I would just add, Andrew, as long as we've got a project list that looks like year and a half paybacks, those returns on investment are incredible, and we will do every one of them.
Thank you. Our final question is from Steven Winoker of Sanford Bernstein. Please go ahead.
Thanks. Hey, Steve.
Hey, good morning. Thanks for fitting me in.
Yeah.
Appreciate the transparency and speed with which you're moving through this. A couple of questions here. The first one, just clarification on GE Capital. The $3 billion of dividend, how much special's in there?
We're estimating a $2 billion income dividend and about a $1 billion special.
Okay. Is there any room for movement around that special in your view, up or down?
Not likely.
Okay. All right. Then Steve, since I've got you on power gen, we look at the thermal rate which is always lumpy and down again this quarter. What headwinds are you starting to see or anticipate in the future on the distributed generation and rooftop solar front versus the impact on power gen? You've got energy efficiency, you've got solar finally making inroads. Are you guys thinking about that as a headwind at all to growth in the core area?
I think it's a great question. I'd say you are seeing the impact of less load growth, electricity load growth because of the distributed generation technologies, solar, energy storage, et cetera. What I would say is in aggregate, though, there's still electricity load growth. Again, a lot of those technologies still are less than 1% or 2% of the total load on the system. Still, 70% of all new power generation, new equipment purchases in the world are in developing regions. This is something we've got to look at on a global scale. Overall, I'd say is we play in pieces of that, and I think you'll see us over time build out the portfolio in spaces, but that's a wrap.
The DP businesses, Algeria, Brazil-
Yep.
-Thailand, those aren't solar places. That's where the DP business really goes.
Right. I'd say overall, it's an opportunity for us, and we go from there.
Okay. Great. We're bumping up against 9:30 A.M. The replay of today's webcast will be available this afternoon on our website. We'll also be distributing our quarterly supplemental data for GE Capital later today. A couple of announcements regarding upcoming investor events. First, on Wednesday, September 10th, we will hold our oil and gas investor meeting in New York City. On Thursday, October ninth, we will hold our services and Industrial Internet investor meeting in conjunction with the Minds + Machines 2014 conference in New York City. We hope to see you at these events. Finally, our third quarter 2014 earnings webcast will be on Friday, October 17th, and as always, we'll be available today to take your questions. Thank you. Thank you. This concludes your conference call. Thank you for your participation today. You may now disconnect.