Good day, ladies and gentlemen, welcome to the General Electric first quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. My name is Ellen, 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, 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 Cribbins, Vice President of Investor Communications. Please proceed.
Thank you, Ellen. Good morning, and welcome everyone. We're pleased to host today's first quarter webcast. Regarding the materials for this webcast, we issued the press release and presentation 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 Vice President, Subsea Systems, Rod Christie. We listened to your feedback and thought we'd try something new. To drive a more strategic discussion on the call, we'll be inviting business leaders to participate to talk about their business, markets, new product introductions and major initiatives.
We've asked Rod to join today to talk about Subsea. Now I'd like to turn it over to our Chairman and CEO, Jeff Immelt.
Thanks, Matt, good morning everybody. Hey, look, the GE team had a good quarter in a volatile but improving environment. The U.S. gets a little bit better every day. Europe is improving. The growth markets continue to expand and will provide growth during the year, even with volatility. We have strength across most of our portfolio as global infrastructure markets remain solid. We continue to benefit in energy, oil and gas, and aviation sectors, we saw some improvement in the demand for credit. At the same time, we encountered a few headwinds in the quarter. Weather impacted our appliances business, improved in March. Transportation was impacted by mining inventory corrections, the U.S. healthcare market continued to experience volatility. Some of this improved as the quarter progressed. Our execution was strong. Industrial segment growth was up 12% above our 10% goal.
Organic growth was up 8% above our 4%-7% goal. Margin growth was 50 basis points, and we're on track to meet our goal of 17% margins by 2016. Our capital earnings and cash were in line with our expectations for the year. We returned $3.4 billion to investors in dividends and buyback and announced $2 billion of foreign acquisitions. Finally, we submitted our SEC filing for Synchrony, the RFS spin-out. This is an important step as we head for our 70% industrial goal. We delivered $0.33 of operating EPS up 9%, excluding the impact of NBCU gains in 2013 and restructuring. This is the kind of quarter GE investors should like. The environment was not perfect, but we were able to deliver strong results due to the breadth of our portfolio.
Orders were flat overall. Backlog grew to $245 billion, orders pricing was up 0.4 points. While equipment orders can be lumpy, service orders, things like aviation spares, tend to be a good gauge of the underlying economy. We saw broad strength in our service businesses with four of six segments up double digits. six of nine growth regions grew orders by double digits in the quarter. Equipment orders were down in aviation and oil and gas versus tough comps in 2013, we have a great backlog and position in each market and feel good about their long-term growth. In transportation, we see a strengthening market for North American locomotives, we won a very large order for kits for South Africa. I would like to point out two other factors on orders.
First, we see the pipeline building, so we feel good about growth during the year. Second, we have grown backlog by $29 billion from the first quarter of 2013, with growth in every segment. This fortifies our ability to hit goals this year and in the future. The company executed well in the first quarter. Industrial operating profit growth of 12% is a good start to the year. Organic growth was up 8%. Growth markets continue to provide momentum with five of nine up double digits and 7% growth overall. We made great progress in services with aviation spares up 22% and 17 Advanced Gas Paths up from two last year. Equipment revenue grew by 12%. Our products are winning in the market with excellent growth in Power, Oil & Gas, and Aviation.
For instance, we're well positioned throughout our gas turbine product line, extending to the H-class turbine, which has more than 61% efficiency and more than 400 MW of output. Our Revolution CT just received FDA approval and should drive positive growth for the year. Europe grew by 14% in the first quarter, we are starting to get stabilization in that market as well. Our target is to grow margins this year, we're off to a good start. This is our fourth consecutive quarter of expansion with 50 basis points of growth. We're driving simplification throughout the company, our restructuring efforts are paying off. We generated about $250 million of structural costs out of the quarter, Value Gap had a positive 50 basis point impact on margins.
We're getting traction with our FastWorks initiative, which is improving R&D efficiency. Our productivity programs more than offset. We expect broader business participation in the future. Healthcare, Energy Management, and appliances and lighting should have positive margin and operating profit expansion for the rest of 2014 based on improving markets and restructuring. Our CFOA is off to a good start and on track for the year. We generated $1.7 billion, up from $200 million last year. The company has substantial financial strength with $87 billion of consolidated cash and close to $12 billion at parent. As you know, we issued $3 billion of debt in the quarter. GE Capital remains in great shape with a Tier One common ratio of 11.4%.
Meanwhile, commercial paper was at a very low level of $25 billion. The total E&I of $374 billion was down 7%. We've allocated capital in a disciplined and balanced way. We continue to invest in plant equipment to grow the company globally. Our dividend is up 16% year-over-year. We plan to reduce the float in 2014, and we're on track to reduce share count to 9 million shares to 9.5 million shares by the end of 2015, including the retail spin . We will continue to do bolt-on acquisitions like the three we announced so far this year. Our target remains $1 billion-$4 billion, but we have gone above on opportunistic deals that have excellent value, strong synergies, fit our growth strategies, and are immediately accretive.
For instance, Avio was above our range and accretive to investors. At the same time, we plan for about $4 billion of dispositions this year. I'll turn it over to Rod Christie, who runs our subsea business. As Matt said earlier, we plan to review an important segment or initiative each quarter. As the year goes on, we plan to cover topics like heavy-duty gas turbine technology, healthcare and life sciences, China, and other important operating initiatives or organic growth opportunities. Now I'll turn it over to Rod.
Thanks, Jeff. Starting on the left side of the page, I want to give you a flavor of how we see the long-term prospects for the oil and gas industry before we drill into the subsea sector specifically. The forecast is for global oil and gas demand to continue to grow through 2018, with oil mainly driven by the ongoing industrialization in emerging economies and the rise in living standards, while gas emerges across mainly all of the economies as a cleaner fuel source. In addition to the increasing demand, the other dynamic to consider here is well decline rates on existing operations of around 3%-4% onshore and 6%-10% offshore. The combination of both these factors makes ongoing investment necessary to develop new reserves and enhance the recovery in existing assets.
Moving to the top right of the page, we see these dynamics driving 4% and 2% CAGRs in production rates for oil and gas respectively through 2018. The expectation is for stronger growth in subsea and unconventional production. Translating all of this into total industry spend, we expect to see continued growth as IOCs, NOCs, and independents work to recover more hydrocarbons from existing assets and bring on new reserves to meet the growing demand. With respect to the subsea sector, the expectation for long-term development of deepwater reserves is supported by the robust activity we see in drilling and front-end engineering design through the cycle. Given this expectation, our Subsea Systems business is well positioned to serve customers with both technology and life-of-field services across the globe.
Our extensive capabilities enable us to provide everything from discrete components to full subsea production systems. We're also uniquely placed against our competitors in that we can leverage technology from other GE businesses and run joint technology programs specific to the critical need. To give you a couple examples here, we cooperate with GE's Measurement & Control business in the area of subsea integrity management and leverage their sensing and diagnostics technology specifically developed for our own space. We're also running a joint technology program with GE's Power Conversion business for subsea power and drives. This really enables us to develop value-added solutions under one roof, wherever the core competency actually exists inside GE. Likewise, GE gives us the ability to scale up. As many of you'll be aware, localization is often a mandatory requirement in our industry.
When we move into new geographies, it's not unusual to find other GE businesses are already there. Usually it's either Power & Water or another oil and gas business. This means we can leverage their relationships, their knowledge, and potentially their footprint. Additionally, we've been working with GE's Global Growth and Operations team to accelerate development in countries like Nigeria and Angola, where we can benefit from their high-level relationships and the back office support to get things up and running very quickly. Today, we're present in all the major deepwater basins around the world, such as Brazil, Sub-Saharan Africa, Asia, and Australia, while still retaining significant capability around both the U.K. and Norwegian continental shelves.
Our experience in extreme cold water and long step-out capabilities for controls and for power solutions position us well for future Arctic activity, a sector that's gonna require really no topside and has the added complexity, really, of an icebound environment. Two years ago, a major subsea industry survey took feedback from 135 customers and ranked each supplier against the top priorities of the subsea oil and gas operators. The chart on the left of this page details how GE was rated against our competitors back in 2012. As you can see, we perform well in the key areas like EHS, reliability, and technology. However, we were mid-pack when it came to on-time delivery. In fact, really none of the suppliers are performing consistently to an acceptable level in this critical requirement.
This is one of the main risks to both the supplier and the customer in this industry, and a significant number of large-scale subsea developments experience both schedule and cost overrun. Given that the timing and carrying costs for initial CapEx outlay on these projects is a key driver in overall returns, we have focused investments to differentiate performance around cycle and on-time delivery. As of today, we offer a suite of structured products that offer modular customization to our customers. Let me just expand a little bit on modularization. What that really means is we can provide exactly what a customer wants, and we do it with less engineering and less supply chain risk, as we use a standard module to do so. We've also completed significant process re-engineering to drive speed and transparency across our business operations.
We've created a Global Project CoE that interfaces directly to all of our sites and suppliers and supports our project teams wherever they're operating in the world. To underpin this, we've also invested in an integrated IT infrastructure enables us to scale the organization through industry cycles without losing either capability or impacting our operational excellence. The final piece of this jigsaw really has been the investments we've made in creating new capacity and unlocking latent capacity in a number of our factories. To date, using lean manufacturing disciplines, we've increased capacity for trees, controls, wellheads, and manifolds. In general, we've been able to realize capacity increases between 30% and 100% in our existing facilities and have commissioned new capacity in Indonesia and Brazil. In short, we feel we're very well placed to take on new commitments.
Growth in the deepwater oil and gas sector looks strong over the long term, and we feel very confident about our competitiveness of both our existing product lines and the technologies we have in development. The investments we've made in capacity and capability also put us in a great position to support our customers wherever they operate in the world. Just to give you some context on the evolution of the Subsea Systems business, in 2011, we were executing a handful of small projects and two subsea production EPC projects, the largest of which was around $600 million. Today, we're executing eight EPC projects, the largest of which exceeds $1.3 billion.
The programs we've undertaken to structure our products, lean out supply chain and project operations are yielding results in cycle time reduction and cost reduction. We expect to see further benefits come from these as we drive these deeper into our business. Just to give you some context here, 1Q revenue, we saw a 37% increase year-over-year and a 3x increase in both margin and in rate. On top of this, our global footprint really makes us local and capable in the main deepwater basins today. GE's reach means we can move quickly and at scale in any of the developing geographies.
Overall, we really feel very good about the fundamentals of this business, and it's, you know, really have to say that I'm very excited about the way this moves in the future. With that, I'll pass it over to Jeff.
Great. Thanks, Rod. I'm gonna start with operations in the quarter. We'll move through the segments. We had continuing operations revenues of $34.2 billion, down 2% from the first quarter of 2013. Industrial sales of $24 billion were up 8%. GE Capital revenues of $10.5 billion were down 8%. Operating earnings of $3.3 billion were down 18%, and operational earnings per share were $0.33, were down 15%, principally driven by NBC, as Jeff mentioned earlier. On the next page, I'll take you through more detail on the normalized EPS walk versus last year. Continuing EPS of $0.29 includes the impact of non-operating pensions, and net earnings per share of $0.30 includes the impact of discontinued operations.
We had $12 billion benefit in the quarter in discontinued operations with no material impact from WMC. Pending claims to WMC declined to $4.5 billion, reflecting $1.2 billion in resolutions, with reserves declining in line with expectations. New pending claims in the quarter were negligible. As Jeff said, first quarter CFOA was $1.7 billion. We had industrial cash flow of $1.2 billion and received $500 million of dividends from GE Capital. The GE tax rate for the quarter was 24%, and the GE Capital rate was 9%. For the year, we're still expecting the GE rate to be around 20% and the GE Capital rate to be in the single digits. On the right side, you can see the segment results.
As Jeff mentioned, performance was mixed by business, but overall pretty good, with industrial segment revenues up 8% and operating profit up 12%. GE Capital earnings were flat in the quarter on lower assets. I'll take you through the dynamics of each of the segments on the pages that follow. First, on the other items page, I'll start with the adjusted EPS walk. Last year, as you'll recall, we had operating EPS of $0.39 in the first quarter. This included $0.10 of gains and income from NBC that was offset by $0.04 of industrial restructuring and other items. We also had a $0.05 gain at GE Capital from the sale of 30 Rock that was offset by other charges as well. That walk gets you to an adjusted operating EPS of $0.33 last year.
This quarter, we had $0.03 of industrial restructuring and other items. Making the same adjustment for 2014 gets you to $0.36, and that's up 9% on an adjusted basis. That's how we're thinking about operating performance in the quarter. On the right side, as I mentioned, we had $0.03 of charges related to industrial restructuring and other items as we continue to invest in simplification to improve the company's cost structure. The spend was broad-based, with projects in every business and corporate. We're executing more than 150 projects that average about a year-and-a-half payback. The projects relate to everything from manufacturing footprint reductions, service shop consolidations, SG&A actions, and exiting low-margin product lines, primarily in developed markets.
We're continuing to work through timing of European Works Council approvals, and on the positive side, some of the projects are coming in below our original cost estimates with no downgrade in benefits. For the year, we still anticipate $1 billion-$1.5 billion of restructuring, with about 60% of that in the first half, and we're still planning on delivering more than $1 billion in industrial cost out for the year. As we told you in November, we expect to have some dispositions in our industrial portfolio in 2014, and we're currently working on a transaction related to a non-core asset that may result in a small gain, likely in the 2Q, potentially in the 3Q. Now I'll take you through each of the segments, starting with Power & Water. Orders of $5.7 billion were up 9%.
Equipment orders of $2.6 billion were down 3%, driven by renewables down 13%. That was partially offset by distributed power, which was up 9%, and thermal was up 3%. Wind orders totaled 422 turbines versus 584 in the first quarter of 2013. Our view of wind orders for the year has not changed. We still expect strong growth. We took orders for 31 gas turbines in the first quarter of this year versus eight a year ago. Service orders were $3.1 billion, higher by 23%. The growth was primarily driven by PGS, up 32%, up 43% ex-Europe. The business had orders for 17 AGPs versus two a year ago, as well as a large $330 million upgrade order in Japan.
Europe continues to be very, very soft. Backlog and Power & Water continued to grow with equipment higher by 18% and services by 2% year-over-year. OPI in the quarter was negative 40 basis points driven by equipment. Revenue in the quarter of $5.5 billion was up 14%. Equipment revenues were up 41% driven by wind shipments of 646 units, 345 units higher than the first quarter of 2013. Thermal was up five gas turbines, shipping 17 versus 12 a year ago. We shipped all but one wind turbine associated with the blade quality issue in the fourth quarter. Service revenues were down 5% as AGP performance was offset by weakness in Europe. Segment operating profit was 24% higher on strong volume and simplification benefits, partly offset by negative mix associated with wind.
SG&A in the quarter was down 9% year-over-year. The wind blade quality issues in the quarter were negligible. Margins expanded for the quarter 120 basis points. Next is oil and gas. Oil and gas orders for the quarter of $4.6 billion were down 5%, with equipment orders down 17% and service growth of 11%. Equipment orders were down versus a tough comparison to last year when orders were up 24%. Subsea equipment was down 62%, principally on timing. As we've commented previously, orders in oil and gas tend to be very lumpy on a quarterly basis. As Rod shared with you, we expect Subsea orders to be up double digits for the total year.
We continued to see good growth in Turbomachinery Solutions, up 16% in the quarter on two large wins in the U.S. LNG space. Downstream Technology was also strong, up 48%. Service orders of $2.2 billion were higher by 11%, led by Turbom achinery, up 22%, and Downstream Technology Solutions up 20%. That was partly offset by M&C, which was down 7%. Backlog continues to grow in oil and gas with equipment up 15% and services up 4% versus prior year. Orders pricing was better by 140 basis points in the quarter. Revenue was up 27%, up 18% ex Lufkin, and Subsea was up 37%, Turbom achinery up 25%, Downstream Solutions up 24%, and Drilling & Surface was up 13%, while M&C was down 4%.
We expect M&C to be flat for the total year. Operating profit was strong in the quarter, up 37%, up 28% ex Lufkin. The growth was driven by volume, Value Gap, base cost productivity, and the absence of the FX charge we had last year in the first quarter. This was partly offset by negative mix on lower M&C volume. Our operating profit rate improved 80 basis points in the quarter, both with and without Lufkin. Turning to the next page, on aviation, just some context here. Air travel continued to grow strongly. Global revenue passenger kilometers grew 6.9% through February compared to 5.2% a year ago, with a particular strength in the Middle East, Asia, Europe and China.
Through February, freight growth was up 3.6% versus 1.4% a year ago. That growth was driven by Latin America, Europe, and the Middle East. Orders in the quarter of $5.5 billion were down 17% as expected, driven by equipment orders down 38% to $2.4 billion. The first quarter of 2013, we had $1.4 billion of CFM LEAP launch orders and two large China GE90 orders. Commercial engine backlog ended the quarter at $21 billion, that's 16% higher versus last year. Military equipment orders of $421 million were up 44% driven by demand for CT7 engines.
Service orders were at $3.1 billion, up 10%. Commercial service orders were up 12% driven by strong commercial spare parts, up 17% to $29.7 million a day. Military service orders were up 18%, driven by spare parts up 19% on strong demand for T700 spares. Orders pricing was strong at 2.6% in the quarter. Revenue of $5.8 billion was up 14%, up 10% ex Avio. Equipment revenue was higher by 14% on strong price and shipments of 646 commercial engines versus 596 last year. We shipped 70 GEnx engines versus 41 a year ago. Military revenues were down 3% on 31 fewer engines in the quarter.
Service revenue, $2.9 billion, was up 14%, driven by commercial up 18% and military down 5%. Commercial spare shipments were $28.5 million a day. That was up 22% versus last year. Operating profit of $1.1 billion was up 19%, 14% ex Avio, on strong Value Gap and volume. Margin rates improved 90 basis points, 80 basis points ex Avio. Avio continues to perform very well and overall good execution in the aviation business in the quarter. Next, on healthcare, the 1st quarter in the U.S. was soft. Hospitals and clinics appear to be delaying purchases and responses to the ACA.
Patient inflows, outpatient visits, ER, surgeries, procedures were all down 1%-1.7% in the quarter. Preliminary NEMA data suggests the U.S. market was down single digits, excluding one big VA bulk order from several years ago. Our NEMA orders were down 2%. We believe we actually gained share in the quarter, a point or two. As a result of these dynamics, Healthcare's first quarter was softer than we expected. Orders of $4.2 billion were down 1%, driven by the U.S., down 4%, offset by continued strength in the emerging markets, which were up 10%. China was up 13%. Latin America was up 10%. The Middle East was up 47%. Europe was also strong, up 4%.
Equipment orders of $2.3 billion were flat. HCS emerging market orders were higher by 13%, offset by the U.S., down 12%. Life science orders were up 1% in the quarter. Service orders were $1.9 billion. They were down 2% in the quarter. First quarter backlog was $16.3 billion, which was up 7% versus prior year. Order pricing was down 1.5%. Revenues of $4.2 billion were down 2%, with equipment down 2% and services down 3%. Operating profit of $570 million was down 4% due by negative Value Gap, offset by strong base cost management. SG&A in our healthcare business was down 9% in the quarter.
The business expects U.S. softness to probably persist in the second quarter, expects to continue to gain share and deliver earnings growth for the year. With that, we'll move to Transportation. Transportation had a solid execution quarter given their environment. In terms of domestic activity, car loads were up 1% in the first quarter, driven by intermodal traffic, which was higher by 3%. Coal volume continues to be soft. It was down 1%, petroleum products and petroleum were higher at 6.5%. Orders for the quarter were $2.4 billion. That was up over 100%, led by equipment orders up four times. We had orders for 259 locos and 299 loco kits versus 80 locos last year and 25 kits a year ago.
We received a large order in South Africa for 233 kits and had orders for 176 locos in the U.S. Service orders were down 18% due to weak mining and no repeat of the large Amtrak signaling order we had in the first quarter of last year. Order price index was flat and backlog grew 6% versus the first quarter of 2013. Revenues for the quarter were down 14% as we anticipated, and equipment was down 20% driven by mining off-highway vehicles down 76%, partly offset by locomotives up 23%. We shipped 178 locos versus 143 a year ago. Service was down 7% on weaker mining parts demand. Op profit was down 24%. Very strong cost and productivity performance was more than offset by volume and mix.
Margins were down 230 basis points in the quarter. On Energy Management, the business continues to be a work in progress as we made a lot of gains in restructuring and resizing the business around its cost structure and footprint, were offset by sales softness and marine startup execution. Orders were $2.2 billion. That was down 1%. Digital Energy was up 20% on a large domestic meter order, and Industrial Solutions was up 1%. This was offset by Power Conversion down 16% with no repeat of first quarter 2013 Brazilian drill ship orders we took. The business did continue to build backlog in all its segments, with the total up 17% year-over-year to $4.9 billion.
Revenue was down 4% in the quarter, with Digital Energy down 20%, Industrial Solutions down 3% and Power Conversion down 2%. Operating profit was $5 million in the quarter. That's down from $15 million a year ago. Despite the poor performance, we continue to get restructuring benefits and reduce SG&A costs. This was more than offset by negative volume and execution challenges. We expect this business to improve its results throughout the year, particularly in the second half. Appliances and Lighting. Appliances and Lighting had a challenging quarter as well. Appliance revenues were down 3%. The appliance market was down 4% through February, but it was much stronger in March to end the quarter flat year-over-year. Housing starts were soft, with single family down 8%, offset by multifamily strength of up 9%.
Lighting revenue was down 4%. Our traditional channels in lighting were down 9%, partially offset by LED growth up 33%. Segment profit of $53 million was down 33% in the quarter. Appliance op profit was down 2%, with higher price offset by lower volume and negative productivity. Lighting op profit was down 44%, driven by strong material deflation, more than offset by productivity, price, and foreign exchange. For both businesses, the last two weeks of March and the first week of April were much stronger. We expect them to be back on track in the second quarter. Next, I'll cover GE Capital. Revenue of $10.5 billion was down 8%, primarily from non-repeat of the 30 Rock sale last year. Assets were down 3% or $18 billion year-over-year.
Net income of $1.9 billion was flat to prior year as lower losses and impairments offset reduced gains, lower earning assets and tax benefits. E&I ended the quarter at $374 billion and was down $28 billion or 7% from last year and down $7 billion sequentially. Non-core E&I was down 16% to $52 billion versus last year. Net interest margins decreased 11 basis points from 2013 to 4.9%, as a slight improvement in business margins was offset by the cost from carrying higher levels of cash. GE Capital's liquidity and capital levels continue to get stronger. We ended the quarter with $75 billion of cash, and reduced our commercial paper borrowings to $25 billion in the first quarter. That's nine months ahead of our year-end target.
Our Tier one common ratio on a Basel I basis improved 23 basis points sequentially, 32 basis points year-over-year to end at 11.4%. On the right side of the page, asset quality trends continue to be stable. I'll walk through the segment performances. The Commercial Lending and Leasing business ended the quarter with $175 billion of assets, flat to last year. On- book core volume was $8 billion, down 2%, as we continue to stay disciplined on pricing and risk hurdles with continued excess liquidity in the market. New business returns remain reasonably strong at above 1.8% ROI. Earnings of $564 million were up 42% as a result of not repeating a specific impairment we had last year in the 1st quarter, as well as from asset sales.
At consumer, the consumer segment ended the quarter with $132 billion of assets, down 3% from last year. We were up 8% in North American Retail Finance business. Earnings of $786 million were up 47% as a result of not repeating $300 million impact from the reserve modeling changes we implemented in the first quarter of 2013. North American Retail Finance earned $590 million in the quarter. That's up 54%, again, largely driven by not repeating the reserving changes and on strong asset growth of 8% year-over-year. Real estate had another solid quarter. Assets at $38 billion were down 11% versus prior year, and down $1 billion sequentially. The equity book is down 29% from a year ago to $13 billion.
Net income of $239 million was down 65%, primarily from not repeating the 30 Rock gain. In the current quarter, we sold 165 properties with a book value of $1 billion for about $117 million in gains. The debt business earned $120 million in the quarter and originated almost $2 billion of volume at attractive ROIs. In terms of verticals, GECAS earned $352 million, up 1%. Its higher core income offset the impact of lower assets, which were down 8%. The new volume was $1.5 billion, 36% higher year-over-year, with very attractive returns north of 3% ROIs. We ended the quarter with zero aircraft on the ground.
EFS had a solid quarter, with earnings up 84% to $153 million, driven by strong core income and gains, partially offset by impairments. The team continues to perform well here. As you look forward to the second quarter, we expect the run rate for GE Capital to be around $1.8 billion of earnings. With that, I'll turn it back to Jeff.
Great, Jeff. Thanks. Finally, on the framework, look, we're reaffirming the framework for the year. We feel good really about our progress on the industrial side, we think what you saw in the first quarter in terms of organic growth, solid organic growth and good margin expansion should continue in the second quarter and throughout the year. Capital is on track for its plan, and CFOA remains on track as well with the framework. There's a lot going on in corporate, and you understand our goals for restructuring, and we'll give you frequent updates on our progress. Look, with underlying EPS up 9% in the quarter and strong industrial segment profit growth, we think we're off to a good start. Matt, let me turn it back over to you, and let's take some questions.
Yeah. Thanks, Jeff, and Rod. Ellen, why don't we open it up for questions?
Ladies and gentlemen, if you wish to ask a question, please press star one 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 is from Scott Davis with Barclays. Please go ahead.
Hi. good morning, guys.
Hey, Scott.
The 8% core growth is a pretty big number. I mean, how do you think about the sustainability of those kind of levels? I mean, it's probably about 2x the sector overall. Then I wanna ask follow-up on margins, but let's just talk about core growth first.
Jeff, you want to start.
Yeah. Listen, I think we're very happy with the level of growth in the quarter. It reflects a lot of the order activity we had in 2013. As we said, the short cycle businesses were definitely impacted by weather in the first quarter, and we expect Industrial Solutions, Appliances and Lighting to get better as we move into the second quarter of the year. We're still on framework. We think we expect organic growth for the year to be between 4% and 7%, and I think we're pleased that we're off to a strong start here.
You know, Scott, I would just add, I think wind always adds a little bit of, you know, noise, plus or minus around each quarter. It was more on the plus side this quarter. Like I said at the outlook meeting in December, we have an internal plan that adds up to more than the range, and that's how we run the businesses. That's, I think, you know, we still believe in the framework for the year, but we have an internal plan that adds up to more than that.
Okay. Fair enough. You know, the 50 basis points of margins, when just kind of a back of the envelope, 8% core growth should kind of get you there already. You also talked about having, you know, Value Gap and cost out. I mean, is there any way to parse out the 50 basis points and how you guys think about it via, you know, fixed cost coverage from the volume leverage and, you know, the cost out, how do you think it breaks down, the 50 basis points?
Well, yeah. You know, mix was a bit of a headwind for us in the quarter, you know, more than 100 basis points in the quarter. That's the strength in wind, the strength you heard Rod talk about, with 37% sales growth in Subsea, while M&C volume was down 7%. Mix for us in the quarter was about 100 or 120 basis points of headwind. That was offset with, you know, value, strong Value Gap, a little bit of favorability in R&D, but principally by simplification. You know, we had 160 basis points of favorability and structural cost and getting at delivering on both the structural cost initiative and delivering on the restructuring investments we've made.
That was partially offset by base cost inflation that generally reflects increases in salary. I think we feel very good about the construct of the quarter. It's more or less how we thought about the year and what we described to you at year-end. We know that we're gonna grow equipment and revenue faster than services this year. Mix will be an item for the year. We have to deliver on simplification to overcome that and grow margins.
That's all. Just quick clarification, guys. I haven't heard you mention H-series turbine in a long time. Do you actually have a commercially viable product at this point?
Oh, yeah. No, I think, Scott, this is, you know, we've gotten a couple commitments and, you know, we're in the process of rolling that out, you know, as we speak. We think this is, this is gonna be a great product at really a good time.
Perfect. Okay. Thanks, guys.
The next question comes from Deane Dray with Citi Research.
Thank you. Good morning, everyone.
Hey, Deane. Good morning.
Hey, Jeff, I was hoping you could expand on your comments on the bolt-on acquisition outlook. I mean, you all have been operating on a self-imposed, investor-friendly, range of it was $1 billion-$3 billion and then got inched up for Avio, $1 billion-$4 billion, and you're clearly signaling a willingness to go a bit higher than that for the right acquisition. That's the same language you used when you just before you got Avio. Maybe if you could expand for us how much higher above $4 billion, what kind of applications or markets look interesting? Is it likely sounds like you've got something close.
You know, I wouldn't read, you know, too much into it, Deane, other than this is the way we answer the question typically from a standpoint of, we do the vast majority of our acquisitions in that range. People ask, if you saw something that was strategic, added to the growth rate, bolt-on, well priced, accretive, would you go above that? Clearly, when we did Avio, that was $4.2, and we had $1-$3 type of range. It's typically the way we answer the question and, you know, in investor meetings and at the outlook meeting and things like that. Again, I think we have discipline on capital allocation. We're committed to dividend growth, the buyback that we talked about. If we saw unique value in the marketplace, like we did with Avio, we would do transactions like that.
Great. That makes lots of sense. Since we have Rod on the call today, I would love to hear from you about, you know, if you could frame for us how much of the portfolio do you have in place today? The whole idea that GE was able to take a lot of the proceeds from NBC and very quickly add some strategic assets into oil and gas, and then you would stop and see how's the portfolio, where are the gaps. From your perspective, how much of your portfolio do you have today in order to be effective? Do you have half? Do you have three quarters? I'm not asking specific gaps, but maybe just frame for us how complete the portfolio is.
Sure. I think when I look at the portfolio that we have today for subsea, we feel very good about it. We can compete pretty much anywhere that we choose to. I think what you've seen over the last six months around us moving more into the subsea power and processing really gives you an idea of the breadth that we can bring from GE broadly. Power Conversion, you know, Turbomachinery, water, really allows us to step into those spaces. At this point in time, I feel very good about where we are. Anything going forward is really a discussion about internal versus, you know, external with a bit more scale. It's really about timing.
Very similar to what Jeff had talked about with if we see something that looks very attractive to us, then potentially, but we don't feel like there's any major miss at this point in time.
Great. Thank you.
The next question is from Steve Tusa with JP Morgan.
Hey, good morning.
Hey, Steve. How you doing?
Good. Can you maybe just talk about, you know, you talked about the 50 bps continuing throughout the year. Anything, you know, you guys have, I guess every company has become, you know, kind of seasonal with, you know, bigger quarters in the back half of the year. Anything kind of lumpy in the second quarter that we need to be aware of, whether it's, you know, timing of some of these advanced gas power stuff or, you know, wind, you know, that we have to consider when thinking about the second quarter?
Yeah. No, I don't think so, Steve. I don't think Jeff said he was carrying the 50 basis points all year, but thank you for that. We will have slightly higher restructuring charges in the 2nd quarter. You know, I said we're still on track for the 1- 1.5. We're gonna spend 60% of that spend in the 1st half of the year. The 2nd quarter will be a little bit bigger than the 1st quarter. We will ship more GEnx engines in the 2nd quarter than we shipped in the 1st quarter. But other than that, not a lot of. I did mention that we're working on one disposition. Not sure whether that's gonna be 2nd or 3rd quarter yet, quite yet, but not that big a deal.
Other than that, I don't have a lot of other items to call out for you.
Okay. Just on the organic growth calc, can we get the contribution from the deals and then ForEx, or, you know, the negative from ForEx for the quarter.
Yes.
Revenue contribution
Yep.
ForEx? I know they're in the back of the supplement or whatever on the press release, but just the data.
Yeah, sure, Steve. Reported revenue up 8%. Acquisitions added two points. Dispositions had a one point four-point impact, foreign exchange was a half a point. That's how you go from 8- 8.
Okay.
2.
Okay. Then the Okay. That's great. Thanks.
Thanks, Steve.
The next question is from Jeff Sprague with Vertical Research Partners.
Thank you. Good morning, everyone.
Hey, Jeff. How you doing?
I'm doing great. You?
Good.
Just a question on the industrial balance sheet. I guess dovetailing with, you know, maybe opening the aperture a little bit on deals. You did do the $3 billion debt raise on the industrial balance sheet. How would you size that relative to the capacity that you have, right? You kind of teased us a little bit in December with some juice there. Is $3 billion the number, or is it something larger than that?
The $3 billion was in the context of the capital allocation plan that we put together for 2014. You know, we saw the 1st quarter where markets were very opportunistic. You know, we issued the $3 billion. We were immensely oversubscribed, and we're very pleased with the rates that we took the $3 billion at, well inside, on an after-tax basis, our dividend yield. That's how we kind of sized it within the context of our capital allocation game plan for the year. You know, we're constantly reevaluating the capital allocation game plan with the team and the board, and we'll continue to do that.
That's roughly kind of the comfortable number relative to the commitments, cross-commitments to capital and everything.
No, it's the relevant comfortable number within the context of the capital allocation plan we've pulled together for the year.
Okay. Can you just size for us the gains that you had in CLL and Energy Financial Services?
Yeah. You know, CLL, we did sell about 18,000 boxcars per diems, meaning daily rental boxcars in the quarter, that was worth a little north of $100 million. We did sell some private equity investments that we do reasonably routinely, and just a little bit of volume-driven the first quarter. That was a much smaller gain. Energy Finance, you know, it's pretty routine for us. We had about, I don't know, $150 million of gains associated with properties that we sold in Energy Finance in the first quarter.
Great. Thank you very much.
The next question is from John Inch with Deutsche Bank.
Thank you. Good morning, everyone.
Hey. Hey, John.
Morning, guys. Jeffrey, could we flesh out a little bit of the playbook for the Energy Management business? I mean, it looks like you guys made a leadership change there. How are you thinking about, you know, really just the portfolio and maybe as Jeff Bornstein, you've gotten into further the restructuring, how that kind of maybe complements that segment or your focus on it? Just something that might provide us a little bit more color.
Yeah, you know, John, here's the way I'd look at it. You know, first, from a technical standpoint, there are pieces of the Energy Management business that are great fits for the rest of the company, like Power Conversion. You know, as Rod said, that's a great complement to oil and gas and some of the other things we're doing. Technically, these are industries we understand and can compete in. Our relevant competitors have margin rates that are 10% plus. Some of that's scale, and some of that's our own complexity. What Jeff Bornstein said today is that we're committed to restructure, and that's gonna provide some big margin lift in that business. I just think we can execute better.
You know, Mark Begor is a guy that's well known inside the company of being a great recruiter and an extremely experienced operator, turnaround guy. He's in place, and we're hiring people from the industry. My intent is to run this business and make it better and make it accretive to investors and drive earnings in it. Could there be a couple segments in there that aren't long-term fits for GE? Could be. We'll sort that out and be very tough-minded about it. This segment can do better than what you're seeing right now, and that's our commitment to you, is to make it better, both from a cost standpoint and from a market standpoint.
Just on that front, I'd just add that they actually. You can't see it in the results yet. It's getting eaten up in operations, but they are making progress in restructuring. We had close to $25 million of benefits in restructuring in the first quarter. We expect that to accelerate throughout the year. There is some progress here. I mean, our manufacturing delinquencies are down 50% versus year-end. We are making progress. I understand, completely understand you can't see it in results yet. Our expectations that this business is gonna improve dramatically from an operating earnings perspective over the balance of the year.
Okay. That was my other part of the question. It's the sequential improvement. It sounds like, Jeff, you know, there's no reason this business can't be running at double-digit margins. Is that fair?
Look, everybody, you know, I think, John, everybody else, you know, unlike our other businesses where our margins are ahead of our peers, this is one where we trail our peers, and we can do better.
Can I just ask about the oil and gas business for a second? There's kind of a broad level concern in the industry about sort of flattish CapEx budgets for the integrated, and obviously just the global economy is still not particularly helpful. Price of oil doesn't seem to be going anywhere. Maybe you could provide a little bit more color given that you featured oil and gas on the call. How does that context of these big integrated companies with flat, if not even maybe declining CapEx budgets, how does that dovetail with your own business? Why is your own business sort of either more or less impervious to that?
Rod, why don't you take the question?
Sure. I think, and I'm gonna talk specifically around what I'm seeing in Subsea today.
Yes.
Really what I see is a lot more front-end engagement. Customers that I'm talking to aren't really looking at dialing back the number of projects. They're looking at how do they get better capital efficiency. We see more front-end engagement around technology, the selection of that technology configuration, and how can we deploy with less risks, shorter cycle, and potentially at a lower cost. In many cases, what I talked about with the structuring our product really plays to that. We've taken cycle out, which obviously means there's a shorter carrying, you know, period for any capital investment in the subsea area from my perspective. I think most of the customers are looking to continue to drive as many of the projects as they can.
It's making it much easier for us from a point of view of actually early engagement, early dialogue, early engineering, so we can take more risk out.
John, can I'd add to that, you know, kind of the reinforcement of the way we've built our oil and gas business by really invest very specific segments that had faster growth rates than the industry itself. Things like Subsea, Turbomachinery in the LNG train, some of our Downstream technologies. We really are in the places where, there's gonna be a lot of capital continue to be spent.
Okay. Looking at Shell's CapEx deployment is not really the-
Correct.
proxy, in other words, is what you're saying.
Exactly. Yeah.
Got it. Thanks very much.
Great, John. Thanks.
The next question comes from Julian Mitchell with Credit Suisse. Please go ahead.
Hi. Thanks.
Hey, Julian.
Hi. I just had a couple of questions on the margin bridge. I mean, I think firstly, you know, value gap was maybe what, about $100 million tailwind in Q1. Just wanted to check that. Back in January, you talked about a $200 million tailwind for the year in value gap. Is that still the case, or have you kind of updated those assumptions?
Yeah, no, I think that's what we guided at year-end, that we expected the Value Gap for the year to be $100 million-$200 million. You know, in the quarter, you're not too far off the mark here in terms of Value Gap. I think, what you gotta bear in mind is within our Value Gap this quarter, Power & Water was negative, but not extraordinarily negative. We expect price, particularly in thermal, to be much tougher as we work through the backlog for the balance of the year. You're correct. The framework was up to $200 million, and you're not far off the mark on the impact in the quarter.
Okay. Just on the mix effect, can you just remind us, I guess, what the view is now on wind deliveries for the year, and how much more those are kind of ramping up in the back half?
No change on the framework that I gave you at year-end on wind deliveries. I said that we'd do about 3,000 units, and that's still what we expect to do. In terms of first half, second half, it's a little bit heavier weighted to the second half of the year. We'll do, I don't know, about 1,800 of those 3,000 in the third and fourth quarter.
Got it. Thanks. Lastly, just quickly, I guess for Jeff Immelt. On the, you know, the sort of the divestments in industrial, you know, you talked a little bit about that in the slides. You know, also in the annual report, there was some kind of a commitment or comment around, you know, targeting a minimum 10% margin for the industrial businesses. I just wondered sort of what, you know, was that equipment plus service combined and what the timeframe for that 10% minimum threshold was? Because I guess you have some businesses that have, you know, never been at 10%.
I think, Julian, what I would focus on is the $4 billion number. I think it's our expectation that, you know, we're more active on the divestiture front this year and kind of leave it at that. You know, we continue to be tough-minded around the portfolio, and I would expect our divestitures to be a little bit more active this year than they were last.
Great. Thank you.
Thanks.
The next question comes from Steven Winoker with Sanford Bernstein.
Thanks, and good morning, everybody.
Hey, Steve.
Hey, just Rod, while I've got you here, I really appreciate the focus in on the business unit during the call. I guess one of the primary debates in around subsea is that production tree order trend starting to rise again in 2015. You addressed sort of your mix benefit, but this emerging capital discipline by the majors, I guess, is a real question of even in those more attractive subsegments. To what extent do you think that risks the growth, and to what extent also are you seeing the outlook for production tree pricing deteriorate in any way?
I mean, if you look at the forecast this year for trees overall globally, it's down. I mean, you have to look at the mix between Brazil and the rest of the world. Brazil was a large buy for a large commitment made for trees in 2013. The rest of world demand actually increases slightly year-over-year. You see the total demand back up again or forecast to go back up again in 2015. The other thing that you really see is, you know, the projects have got larger, things have got lumpier. You look at the total number of projects that are going for development into the future. There's less projects more tree count per project.
I think, again, sort of the early engagement pre-FEED activities and FEED activities are really gonna be critical to driving some of the efficiency in this area from, you know, capital deployment.
Okay. The pricing, outlook for pricing?
I think we still feel that, you know, pricing, you know, the, the demand for the future is still increasing, so, it's really about delivery cycle at this point in time.
On healthcare, the pricing in healthcare, I guess, Jeff, you know, how should we think about this? Do you see this as any kind of structural change in the industry? Is this a function in the Americas in North America of the transition we're all going through and hospitals? Can you maybe give us some color on how we should sort of think about this?
You know, Steven, I think it's a good question. You know, I'd say first, you know, if you look outside the U.S., the markets are all, you know, normal with Europe bouncing back and the growth market's still pretty strong. I think it's too soon to say on the, just the impact of the Affordable Care Act. There's just so damn much going on in the U.S. healthcare market right now. You know, we're kind of thinking about the next two years as being, you know, flat to up slightly, you know? We're not really thinking much about robust growth and, you know, more industry consolidation of hospital systems, more integration between insurers and hospitals. There's just a ton going on in the industry.
You know, at the same time, you know, when you launch a new product like the Revolution CT, like we're launching in the second quarter, it's gonna build a huge backlog. It's gonna have positive growth. You know, with all the stuff that's going on in the industry, when you have new technology, you still can differentiate yourself, and you still get good growth and good margins. I think we're just gonna kind of wait and see and watch how the industry evolves.
Okay. Can I just sneak one in for Jeff Bornstein, or maybe it's two, I suppose. This tax rate that we got this quarter, should we think about that as sort of more normalized now? With the orders, have those Algerian orders come through yet in the official order numbers?
Yeah. The tax rate, I think what I said was we still expect the industrial tax rate to be about 20%, and we still expect the GE Capital tax rate to be single digits in the year. I don't think our view of taxes has changed at all for the total year. The Algerian units on the mega deal are in our orders book.
Well, I think, Steve, if you look at heavy-duty gas turbine orders, I think we said in December, what, 125 or something like that?
Yeah.
I think we're tracking at least to that, you know. That's this is a slightly improving market, is what I would say, broadly speaking.
I wanna clean one thing up before you, we move on to the next question. On Energy Finance, I think Jeff Sprague asked me on gains in Energy Finance. I said, I think I said $150. It was $120. That's about $60 higher year-over-year. That was partly offset by about $100 million of increased higher impairments this year versus last year. I just wanna make sure that's clear.
Okay. We know everyone has a busy morning. Ellen, why don't we take one more question?
Thank you. Our final question comes from Nigel Coe with Morgan Stanley.
Thanks. Good morning.
Thanks, Nigel.
Thanks for fitting me in. Hey, guys. Jeff, you mentioned the H-frame, which is obviously a very important product. You mentioned two commitments. Were they U.S. commitments? Dovetailing on the back of your comments about a gradually improving market, what are you seeing in the U.S. right now in terms of the front logs for 15 and 16?
The answer, I think the first question is no. The answer to the second question, I think is just a slow improvement in the U.S., you know, starting with peakers. You know, we haven't seen big demand for base load units yet, but, you know, a ton more interest in the U.S., than we've seen in the last two years is the way I would describe it, Nigel.
Okay. Okay. great. Moving on to GECAS. Assets are down by about 10% from early last year. I'm wondering, you know, what do you think is the right level for assets in GECAS? Is there, you know, a sort of a longer tail of decarbonization within GECAS going forward?
Well, I, you know, the GECAS business, order of magnitude is roughly the size within the context of GE Capital and the company, that it's probably gonna be long term, plus or minus. They'll continue to originate. They'll continue to grow. I talked about their volume in the first quarter being very strong year-over-year at very attractive returns. They'll continue to be very active and write new business. At the same time, they'll continue to prune the portfolio they have. That creates the capacity for them to continue to be in the market and write volume. Assets year-over-year, I think are flat for GECAS.
I think they're down 8% year-over-year, but I can check that.
Okay.
Just, Jeff, on the, you know, you mentioned $1.8 billion run rate for GE Capital, per quarter going forward. That takes you slightly above the $7 billion kind of, pace order for the year.
Yeah.
Do you think there's more upside by that $7 billion at this stage?
No, I think we're still kind of in that $7 billion framework. You got a number of items to go here where we still plan on doing the initial IPO of retail, so you'll lose 20% of those earnings. We'll still continue to invest in that business to- -to create the standalone capability around risk and governance. That will come at some cost. We'll still do the GECAS impairments here in the third quarter. I think that we're still focused on the $7 billion framework that Keith shared with you in November.
Understood. Thank you very much.
Great. Thanks. Okay, thanks, everybody.
Thank you. The replay of today's webcast will be available this afternoon on our website. We will be distributing our quarterly supplemental data for GE Capital later today. I have some announcements regarding upcoming investor events. Next Wednesday, April 23rd is our 2014 annual shareowners meeting in Chicago. We hope to see you there. On Wednesday, May 21st, Jeff Immelt will present at the 2014 EPG conference. Finally, our 2Q 2014 earnings webcast will be on Friday, July 18th. As always, we'll be available today to take questions. Thank you.
This concludes your conference call.