Good day, ladies and gentlemen, and welcome to the General Electric third quarter 2013 earnings conference call. At this time, all participants are on a listen-only mode. My name is Shaquana, 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 slides' 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, Trevor Schauenberg, Vice President of Investor Communications. Please proceed, sir.
Thank you, Shaquana. Good morning, and welcome everyone. We're pleased to host today's third quarter webcast. Regarding the materials for this webcast, we issued the press release as well as the presentation slides at 6:30 this morning, which is something new for us. Slides are available for download and printing on our website at www.ge.com/investor. As always, elements of this presentation are forward-looking or based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. For today's webcast, we have our Chairman and CEO, Jeff Immelt, and our Senior Vice President and CFO, Jeff Bornstein. Now I'd like to turn it over to our Chairman and CEO, Jeff Immelt.
Great, Trevor. Thanks, and good morning, everyone. GE had a good third quarter in an improving environment. Our orders grew 19% with great balance. Our growth markets were up 22%, U.S. was up 18%, and Europe up 17%. Earnings per share was up 18% ex unusual items. Industrial earnings were up 11% with six of seven segments growing, four by double digits. Capital continues to execute on our strategic objectives. Earnings were up 13% while our financial position continued to strengthen. And we had $0.04 of uncovered charges in the quarter and no industrial gains. Operations were very strong. Margins grew by 120 basis points behind strong value gap performance and simplification. Our industrial cost out reached $1 billion through the third quarter, and we're significantly ahead of our plan. And CFOA is up 5% operationally.
This includes a $3.9 billion dividend from GE Capital year to date. We've returned about $14 billion to investors year to date, well on our way to our $18 billion goal. And at the same time, we continue to invest in strategic acquisitions like Avio and Lufkin. So overall, this was a good quarter for the GE team. Orders were a highlight for the quarter. Overall growth was up 19% with strength in equipment and services. Every business grew, and backlog reached $229 billion. Equipment orders grew 32% with strength across the board, and orders price was flat. The orders profile is very encouraging. Services was up 5%, with real strength in power gen services and aviation commercial spares. Total orders in the U.S. and Europe were both robust, and seven growth regions had double-digit orders growth.
These include Australia, Canada, Middle East and North Africa, and Turkey up 17%, Africa up 18%, Russia up 51%, China up 18%, and ASEAN up 100%. Power & Water had a solid orders performance with growth of 19%. Note, this number did not include any orders from Algeria. Those will be booked in the fourth quarter in 2014. Orders growth and backlog supports business expansion in fourth quarter and through 2014. We're making progress on our strategic growth initiatives. Growth market revenues were up 13%, with six of nine regions up double digits. This remains a key strength for the company due to our geographic diversity and strong share position. Services grew by 7% with margins up 60 basis points, and aviation spare shipments grew by 25%. Last week we had our second Minds + Machines Summit, where we announced 14 new service offerings in analytics and software.
Our industrial Internet orders should exceed $500 million for the year. We continue to drive our technical advantage. We announced eight gigawatt heavy duty gas turbine win in Algeria. We'll launch 50 healthcare NPIs for the year, and we're gaining share. The LEAP engine is ahead of schedule, and the GE9X recorded its first order and is well positioned for the Boeing 777 launch. We have the only locomotive to meet the Tier 4 standard, and we continue to launch new appliance products with strong acceptance in retail and contract channels. With a strong backlog and good growth initiatives, I think we're well positioned for solid organic growth in the fourth quarter in 2014. On margins, look, we're encouraged about our progress. GE's margins grew by 120 basis points in the quarter and are up 40 basis points year to date.
Five of seven businesses grew margins in the quarter, and all are flat or up for the year, excluding the impact of acquisitions. Our results are programmatic and sustainable. Our value gap is positive $660 million year to date and will continue to grow. We've achieved our $1 billion simplification goal in only three quarters and will drive substantial upside for the year. There'll be no industrial gains in this quarter. Power & Water had a solid quarter with improved mix, strong value gap, and good simplification efforts, and they should sustain this momentum into the fourth quarter. We're on track to achieve our 70 basis points goal. Our results in service margins, value gap, and simplification are accelerating, and all businesses should have positive margin growth in fourth quarter. We still have a slight hedge in our plan.
On cash, we had a solid quarter for cash. Our industrial CFOA has grown by 5% year to date, ex the NBCU deal-related taxes which show up in CFOA. We're still targeting to receive up to $6.5 billion of GE Capital dividends paid to the parent. We remain on track to achieve our $14 billion-$17 billion of CFOA goal for the year. We have significantly higher revenues in fourth quarter than third quarter, driving higher CFOA by year-end. Our balance sheet remains extremely strong with $87 billion of consolidated cash. Our capital allocation remains disciplined and balanced. Year-to-date, we've returned $13.9 billion to investors in dividends and buyback. Meanwhile, we have invested $8.6 billion in acquisitions that will improve our long-term growth rate. We're on track to return $18 billion to investors in 2013. Now over to Jeff to review operations.
Thanks, Jeff. Revenue from continuing operations of $35.7 billion was down 1% from last year. Industrial sales of $25.3 billion was up 2%, driven principally by oil and gas and Aviation, partly offset by Power & Water, as you can see on the right side of the page. GE Capital revenues were down 5% to $10.7 billion on much lower investment. Operating earnings of $3.7 billion were down 3%, and operating earnings per share were flat at $0.36. That includes $0.02 for the Avio acquisition charges and $0.02 of restructuring in the quarter. We also no longer have earnings from the NBCU JV, which was $0.02 in the third quarter of 2012. I'll cover these items on the next page.
Continuing EPS of $0.32 includes the impact of non-operating pension and net earnings per share includes discontinued operations, which I'll also cover on the next page. As Jeff said, CFOA year-to-date was $7.8 billion with solid industrial performance and $2 billion of GE Capital dividends were paid in the quarter. The GE tax rate in the quarter was 20% and the GE Capital tax rate was zero. GE Capital continued to have benefits associated with loss recapture and real estate and tax-efficient asset reductions. In the second quarter, we said that we expected GE Capital tax rate to be in the mid-single digits for the year, but that could be lower depending upon IRS resolutions that could happen in the fourth quarter, as well as expected dispositions in the fourth quarter, which could impact tax rates. On the right side of the page, segment results were positive.
Industrial segment profit was up 11% with six of seven industrial segments improving. GE Capital also had a positive quarter, growing earnings 13% versus 2012. I'll cover all the segments in more details on the following pages. For one-time items, in total, we had $0.04 of charges in the quarter, $0.02 related to Avio, as we discussed in September. Avio had a number of preexisting contractual arrangements with GE Aviation, and U.S. GAAP requires us to record the fair value impact of effectively settling those preexisting contracts. We also had an inventory fair value adjustment in the quarter. These resulted in a $0.02 charge. Going forward, we'll benefit from the efficiency that Avio has achieved over time. We also had $0.02 of restructuring and other charges as we continue to take actions to reduce our cost structure.
This was $0.01 higher than we had originally planned for the third quarter as we continue to identify attractive projects that will lower our structural costs and rationalize our footprint. On the right side of the page, we included a walk from reported to adjusted operating results. In the third quarter of 2012, we earned $0.36, which included $0.02 of income related to NBC. In the third quarter of this year, we earned $0.36, as discussed, that included $0.02 of the Avio-related charges and $0.02 of restructuring. If you adjust for those items, operating EPS is $0.40 in the third quarter of 2013 versus $0.34 in the third quarter of 2012, up 18%. For discontinued operations, we had an $82 million after-tax impact in the quarter driven by GE Money Japan. We booked $79 million of additional reserves to reflect ongoing claims related to Gray Zone.
We ended the quarter with $527 million in total reserves. There was really no material change in WMC in the quarter with a very slight reserve adjustment. On the bottom of the page is a summary of our operating EPS and the Industrial NBC gain and restructuring. With $0.02 of restructuring charges in the third quarter, that brings our year-to-date to a net zero impact between the first quarter gain and year-to-date restructuring. With that, I'll begin covering business results, and we'll start with Power & Water. Orders of $5.9 billion were up 19%. European orders were up 9%, led by renewables and water. PGS was down 18%. Equipment orders were 37% higher at $3 billion. Thermal orders were $886 million, down 15%. The business had orders for 27 heavy-duty gas turbines in the quarter versus 29 a year ago.
Renewable orders were strong, up over 100% to $1.2 billion, with continuing strength in the U.S. Distributed power was also strong with orders of $700 million, up 62%, driven by aero demand. Service orders were up 4% to $2.9 billion, up 7% excluding Europe. Despite continuing European softness, PGS orders were up 8% to $1.8 billion, and we booked 15 Advanced Gas Path upgrades versus four a year ago. Overall, orders pricing was down 80 basis points, driven by equipment down 2.9%, partially offset by services, up 1.4%. Thermal OPI was down 1.4% and wind was down 1.2%. Revenue of $6.5 billion was down 10%, driven by lower volume. Equipment revenue was down 13% on lower gas and wind volume. We shipped 22 gas turbines versus 35 in the third quarter of 2012, and we shipped 407 fewer wind turbines, down 40%.
This was partially offset by distributed power strength, up 44%, with 76 unit deliveries versus 48 a year ago. Service revenue of $2.8 billion was down 5%, driven by PGS down 6%. Higher ATP volume was offset by lower new unit spares. Segment profit of $1.289 billion was up 9% in the quarter. The improvement was driven by positive value gap and distributed power strength and better cost performance. SG&A was down 10% in the quarter and margins improved 330 basis points. Oil & Gas orders were $4.4 billion, up 4%. Equipment orders were $2.3 billion, up 3%. We saw strong turbomachinery orders growth up 17%, led by a large midstream LNG order in Russia, and Lufkin orders of $243 million, partially offset by subsea, down 41%. Subsea orders tend to be very lumpy and are up 17% over the last 12 months. Service orders grew 6% in the quarter.
Drilling and surface was up 21%, subsea up 27%, partially offset by Measurement & Control, down 8%. Total backlog was up 35% versus prior year, orders pricing was down 20 basis points, with year-to-date remaining positive and up 70 basis points. Revenue of $4.3 billion was up 18%, up 9% ex acquisitions. Equipment was up 19%, driven by subsea up 16%, and drilling and surface up 13%, offset by Measurement & Control, down 3% in the quarter. Measurement & Control was a disappointment in the quarter as we saw continued softness in the market. Service revenues grew 18%, with strength in global services up 13%, subsea up 43%, and drilling and surface up 23%. Segment profit of $519 million was up 11%. That's up 7% ex acquisitions, primarily driven by higher volume and a strong value gap.
Margins were down 90 basis points on a reported basis, down 30 basis points excluding the impact of Lufkin in the quarter. This is lower than expected, primarily driven by a softer measurement and control market, and there were some project delays. With that, we'll talk about aviation and healthcare. First, aviation. Aviation had another really strong quarter. Orders of $7.8 billion were up 51%, with equipment orders up 92%. Commercial engine orders were $3.8 billion, up four times, led by $1.6 billion of CFM orders, up nine times, including $1.4 billion of LEAP orders. GE90 orders were $1.2 billion, also up four times. Military orders continued their expected weakness, down 30%. Service orders of $2.7 billion were up 9%. Commercial service orders were up 15%. The average daily order rate for commercial spares was $24 million, up 9% in the quarter.
Our fleet utilization year-to-date is up 3.1%, and overhauls in the quarter were up 23%. Military service orders fell 6% as flight hours continue to decline and destocking continues across the military. Orders pricing in the quarter was up 1.9%, with improvements in both equipment and service. Revenue of $5.4 billion was up 12%, up 10% excluding Avio. Equipment revenue was 10% higher. We shipped 273 military engines, up 12%. We also shipped 559 commercial engines in the quarter, up 8%, including 26 GEnx engines. Service revenues were 14% higher, driven by strong spare parts sales of $25.9 million a day, which was up 25%. Military service revenue was down 17%. Segment profit of $1.1 billion was up 18%, driven by strong volume and value gap, with sales price up 3%. Margin rates improved 100 basis points versus last year, and were up 70 basis points excluding Avio.
Just as a note, Avio helped margins and Lufkin was a hurt on margins in the quarter. Overall, acquisitions were about a 10 basis points drag in the quarter on segment margins. Next is healthcare. Orders in healthcare of $4.7 billion were up 2%. Equipment orders were up 6% to $2.7 billion. Developed markets were up 1%, driven by strong U.S. equipment orders up 8%. Europe was flat, and Japan was down 24%, down 6% excluding the effect of FX. Emerging markets were up 14%, driven by China, up 33%, Latin America up 28%, partially offset by Asia Pacific, down 16%. Just a little bit on modality. HCS was up 5%, MR was up 13%, CT down 8%, and ultrasound was very strong, up 14%. Life sciences was up 10%, diagnostic guidance up 5%. Pretty good strength across the modalities. Service orders of $1.9 billion were down 4%.
Revenue of $4.3 billion was flat, driven by growth markets up 5%, led by China up 13%, offset by developed markets down 2%. Both the U.S. and Europe were up 2%, offset by Japan. Segment profit of $665 million was higher by 7%, as cost productivity from our restructuring efforts more than offset lower price. Margin rates expanded in the quarter 110 basis points. Moving on to transportation. Orders of $1.6 billion were up 34%. Equipment orders were up 65%, driven by a large North American locomotive order for 275 units deliverable in 2014, and mining really continues to be soft. Service orders were 8% higher, driven by solid growth in locomotive services, partly offset by very weak demand for mining parts. Revenues of $1.4 billion were flat year-over-year. The strong service growth of 17% was offset by equipment revenue down 14%.
Locomotive shipments were approximately flat with the third quarter deliveries of 147 compared to 146 a year ago. Operating profit of $306 million was up 15%, with margins better by 300 basis points. The improvement was principally driven by positive value gap and services growth. Energy Management, orders of $2 billion were up 16%, with strength and power conversion up 19%, digital energy up 23%, and intelligent platforms up 16%. Backlog of $4.6 billion is up 29% versus prior year. Despite the order strength, operations were disappointing in the third quarter. Revenues were down 3%, driven by digital energy down 27% on weak meter demand and some project execution. As a result, op profit was down 57% to $18 million. Positive value gap was more than offset by the negative volume leverage. Home and Business Solutions had a very strong quarter driven by appliances.
Housing starts were up 19%, with single-family better by 16%, multi-family up 27%. Revenues of $2.1 billion were higher by 7%, led by an 11% increase in appliances, partly offset with a 1% decrease in lighting. Segment profit of $77 million was up 28%. The appliances op profit was up 73%, driven by positive value gap and productivity, partly offset by lighting. Margins improved 60 basis points in the quarter. Next, I'll cover GE Capital. GE Capital revenue was $10.7 billion, down 5%, driven by lower assets. Assets were down 7% or $40 billion year-over-year. Net income of $1.9 billion was up 13% from prior year, primarily driven by lower losses, better portfolio performance, and higher tax benefits, which more than offset lower assets and gains. We ended the quarter with $385 billion of ending net investment, down $39 billion from last year and down $7 billion sequentially.
Our net interest margin increased 22 basis points versus the third quarter of 2012 to 5% and was flat with the second quarter. Volume was up 6% in the quarter with new business ROI over 2%. Our Tier 1 common on a Basel 1 basis improved to 11.3%, driven by reduction in assets, and that's after paying $2 billion of dividends in the quarter. On the right side of the page, asset quality trends continue to be strong, with delinquency rates stable to improving across the portfolio. In addition, non-earning assets total $6.4 billion, down $1.9 billion versus third quarter of 2012. We have substantially completed all our debt issuance for 2013 at $32 billion, and we've reduced our CP balance to $33 billion, ahead of the plan to bring down CP by $35 billion by year-end.
Liquidity was very strong, ending the quarter at $76 billion, up $7 billion from the second quarter. To walk through segment performance. CLL, the Commercial Lending and Leasing business, ended the third quarter with $170 billion of assets, down 5% from last year, driven by a reduction of non-core assets of $5 billion, as well as $4 billion in our core book, primarily from asset sales, including the Fleet Canada or franchise real estate transactions we've spoken about. On-book core volume in Americas was 2% higher than the third quarter of 2012, and new business returns remain attractive at above 2% returns on investment, despite continued excess liquidity in the market. Earnings of $479 million were down 15%, driven by lower assets and impairments in our corporate aircraft portfolio in the Americas business. Asset quality was stable.
Consumer segment ended the quarter with $136 billion of assets, flat with last year. Net income of $889 million was up 19%, primarily driven by lower losses as a result of not repeating the reserve modeling changes that we implemented last year in this quarter and in the first quarter of this year. Lower losses were partially offset by no repeat of the $80 million gain on a partial sale of our interest in the Thai bank in the third quarter of 2012. The U.S. retail business earned $665 million in the third quarter, up 50% from last year, again, largely driven by not repeating the reserving change and on strong asset growth of 11% in the quarter. Our current European business earned $111 million in the quarter. The real estate team had another very solid quarter.
Assets ended the quarter at $40 billion, down 28% and down $2 billion sequentially. The equity book is down 27% from a year ago to $16 billion. Net income of $464 million was up more than two times versus 2012. That was driven by lower losses and marks, as well as impairments, as well as higher tax benefits. The business sold 77 properties with a book value of $2.1 billion for about $100 million of gains in the quarter. That's down slightly year-over-year. The business originated $1.8 billion of debt volume in the quarter with an average ROI of 2.3%. Asset quality continues to improve with 30-day delinquencies at 141 basis points, 68 basis points lower sequentially. The verticals, GECAS, earned $173 million. That's down 31%, driven by higher impairments as part of our annual impairment review. Impairments were $55 million higher in 2013 at $190 million.
The impairments were principally driven by valuations on cargo aircraft, specifically MD-11s. Overall, the portfolio is in great shape, with only 10 MD-11 freighters remaining in our fleet with a value of about $150 million. We ended the quarter with zero delinquency and no aircraft on the ground. EFS earnings were up 14% to $150 million, driven by higher operating income. Overall, GE Capital continues to perform well. Its results were in line with our strategy. As we look ahead to the fourth quarter in terms of runway, I expect the business to earn around $2 billion plus or minus. In line with the third quarter and adjusting for impairments in GECAS, which should not repeat, and some tax benefits.
We're working on a number of transactions in the fourth quarter, most notably the sale of our remaining interest in Bank of Ayudhya, the Thai bank, and the IPO of our Swiss consumer business. At this point, we expect that any benefits from these transactions will largely offset with continued portfolio repositioning, but they could impact the tax rate in the quarter and the year. With that, let me turn it back to Jeff.
Great, Jeff. Thanks. We really have no material changes to the 2013 operating objective framework. Our industrial earnings will expand by double digits in the second half, and we're on track for solid growth in the year. We have no change to our expectations in GE Capital. We continue to originate business at high returns while repositioning our capital portfolio, and earnings growth remains solid in GE Capital. Corporate costs reflect our Avio adjustment that Jeff described earlier, and we continue to see good opportunities for restructuring and have positioned these efforts to continue. Cash and revenues remain on track. We should see earnings growth accelerate in the fourth quarter with more volume and lower costs. With the large backlog and improving margins, we feel good about 2014. We'll have several communication sessions with investors in the fourth quarter.
In November, Keith and Jeff will update our portfolio and business strategy at GE Capital and give you a sense for our long-term goals and simplification across the company. In December, I'll give you a strategic update for GE and our outlook for 2014. We look forward to those sessions. In summary, we're making progress on our investor objectives for the year. Our industrial earnings grew by double digits in third quarter, and we expect a stronger fourth quarter. Strength is broad-based, and we expect Power & Water to be a key contributor going forward in the fourth quarter and into 2014. We grew margins by 120 basis points in the quarter, and we expect to hit 70 basis points for the year. In the event we have any gains in the fourth quarter, we expect them to be applied to restructuring.
GE Capital continues to strengthen, and we're on track for up to $6.5 billion of cash to be returned to the parent. We expect organic growth of at least 5% in the fourth quarter for the industrial segments, and we have solid momentum in growth markets, services, and NPI, and we have more favorable comparisons in Power & Water. We're on track, and we're on track to return substantial cash for investors this year. The team executed well in the quarter, and with the strong backlog and expanding margins, investors should be confident in GE's future. Trevor, with that, let's turn it over to you and take some questions.
Great. Thanks, Jeff. I know there's another earnings call coming up, so Shaquana, let's open the phone lines.
Yes, sir. Ladies and gentlemen, if you wish to pose an audio question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star two. Please press star once to begin. Your first question comes from the line of John Inch representing Deutsche Bank. Please proceed.
Good morning, everyone.
Hey, John.
Morning, guys. The fact that we did $100 million more restructuring this quarter, do you anticipate more restructuring in the fourth quarter? I realize, Jeff, you just said if there were gains, you would offset that, but how does it pertain to your plan, and how are you thinking about the restructuring opportunity?
Maybe why don't I start and then Jeff turn it to you, we continue to have good opportunities for restructuring throughout the company, and I would expect us to do some in the fourth quarter. Again, I think if we have gains, we expect those to be offset with restructuring.
Okay.
I don't have a lot to add to that. I think that's right. I think that the more we get deeper into the simplification effort, we just see increasing numbers of opportunities to take costs out of the company and make the company faster and more customer-centric. I think we will do restructuring in the fourth quarter, and as Jeff said, more likely than not will reflect the gains in the quarter we expect as well.
Jeff Bornstein, you've been at this for a little bit of time now. As you said, are you finding more opportunity, or is it still a little early in the process before you would care to comment? In terms of costs out, sorry.
Yeah. I would say around the simplification effort, I think every day we identify more opportunities to do what we do smarter, more shared services, a smaller manufacturing footprint, rationalizing capacity, executing our functions in a more consolidated way. I would say the list is growing with time, and we are in the early innings of the simplification effort in this company. I am quite emboldened with what we can accomplish over the next few years.
I want to go back to the fourth quarter. You guys had great results this quarter. It still is a pretty big V, though, in terms of-- and I think the delta's really expectations around power shipments. Is that really still on track, or it just looks like it's a very high contributive quarter versus even historical years. Although you did put up the big margins this quarter. Is there anything you could say to us about the fourth quarter? I don't know, progress to date or what you're seeing or anything like that?
Well, I think Power was obviously a big contributor in the third quarter. We were ahead a little bit on aeroderivatives and the fourth quarter ramp for Power & Water, I think we feel very good about. When we think about units for the fourth quarter, the large units, gas turbines, et cetera, most of that is in backlog, better than 95% of it. I think we feel very good about how we feel Power is moving into the fourth quarter. We've de-risked the fourth quarter a little bit with the outperformance here in the third quarter.
John, I think you start at 40, not 36. You go from 40 and march from there. We typically get a lot more revenue in Q4 than Q3. It's typical for us to get 300 basis points on margin Q4 versus Q3, Power & Water is very back-end loaded, as we've always said. You got a bunch of stuff that really, I think, a little bit better in GE Capital. I think you got a lot of stuff that says we're kind of ready for a very strong fourth quarter.
Perfect. Thanks very much.
Your next question comes from the line of Scott Davis representing Barclays. Please proceed.
Hi. Good morning, everybody.
Hey, Scott.
Wanted to get a sense. When I look at the results, one of the things that really stands out to me was the Power & Water orders, particularly excluding Algeria, up 37%. I really wasn't aware that anybody in the world was buying a gas turbine right now, or distributed power for that matter. Can you give us a little granularity, help us understand where geographically these orders are coming from, and just a little help here.
Yeah. When you look at orders in the quarter geographically, we'll start with gas turbines. In the resource-rich regions, we were 18 units in the quarter versus 22, down 4 there. Middle East were down 10 units from 11 to 21. A little bit better in Asia. We were flat, five units versus five units year-over-year. Most of the order strength, really, for Power & Water has been around our aero derivatives units, have been very strong, and our wind units have been incredibly strong. In the third quarter, we had 477 orders in the developed markets on wind. That's up 390 units, and that explains most of the strength around wind, and the balance is really aero. I'd say, Scott, if you look at Q4, we expect Power & Water orders to be at the high end of the range of what we talked about.
My hunch is that the orders will be closer to the 115 than the 100, and a lot of that's Middle East. We'll book some of the Algerian orders in Q4. We've got some big orders in Saudi, some nice orders in Russia, a couple in Africa, a couple in Brazil. On the aeroderivative market, we're seeing pretty good growth in places like Canada, Middle East. I think it's the GGO and the investment we've made in emerging markets, I think, has really helped us collect the orders.
Okay. That's very helpful. Lastly, guys, Jeff, the big theme of the year really for your communications has been simplification. You put a couple sentences on that in the annual report last year, and you were able to sell the other half of NBC, which I think helps a lot. We haven't seen a lot of other portfolio actions. What's holding you back? The Wall Street Journal reported that there's chatter around spinning off the credit card business, we haven't seen any announcements there. Is this stuff all just being vetted at present, and we're likely to see some announcements in the next couple of months? Or maybe you can just help us understand what's happening.
Scott, these things always take a little bit of time, we're still planning staged exits of the value-maximizing platforms at GE Capital. We've got a big meeting set November 15th with Keith and Jeff. I think there'll be more clarity at that time on the capital side. The rest of the company continue to look at ways to make the company more streamlined and more effective. You're going to see those in good time. I think we just want to be thorough in our planning, and you'll get a lot more details soon.
Okay. Very helpful. Thanks, guys, and congrats on the margin line.
Great. Thanks.
Thanks, Scott.
Your next question comes from the line of Nigel Coe representing Morgan Stanley. Please proceed.
Yeah, thanks. Good morning.
Hey, Nigel.
Yeah. Hi. Just going back to Power & Water, that was obviously the big driver of upside this quarter, and congratulations on the margins there. $100 million of EBIT growth year-over-year with sales down $700 million. I understand price gap was a big benefit as well as simplification. Just want to confirm that with services down 5%, that's a negative mix and big volume deleverage on gas and wind. I just want to confirm that 3Q was a good run rate for 4Q and beyond.
Well, Nigel, what I'd say is, I'd say the third quarter was slightly better than even what I had thought, just by a little bit, but a little bit better. We had better mix, so when you have more aero derivatives and less wind, that's a mix adder. We've got the simplification efforts, which Jeff said with margins or with value gap and with SG&A down 10%, it's a much leaner organization. When you look at Q4, you're going to get kind of a bow wave of more wind business. Aero derivatives are still pretty strong. Heavy-duty gas turbines are still pretty strong. I think what you're going to see in Q4 is revenue growth, op profit growth, and margin growth.
What you're going to see in Q4 in Power & Water, I think, is pretty typical of what you're going to see, I think, going forward in the business into 2014.
Okay. Understood. Just obviously, you broke apart the old energy business into, I guess, two and a half segments, Power & Water, Energy Management, and a little bit Oil & Gas . Are we seeing the benefit of that simplification through here, or is it more the restructuring actions you're taking year-to-date?
Oh, gosh. I would say, Nigel, as we took out the layer, we got hundreds of millions of dollars of benefits, as we did that. I think that was just a starting point. Then inside each business, look, we're committed to getting SG&A as a percentage of revenue down to a world-class, best-in-class level. We're on our way. We made good progress, but we're not where we want to be yet. You're seeing some of that benefits for sure, show up in the businesses, but we've got a ways to go yet.
Okay. Just finally, going back to Jeff Bornstein's comments on the BAY. If that creeps into 4Q, obviously, the intention is to offset that with restructuring. That could be a pretty meaningful gain. I'm just wondering, do you have pipeline opportunities already set to absorb that kind of gain? Maybe any color in terms of the focus areas from here for that kind of restructuring action?
Yeah. We're constantly in flight on the value maximizing and the red book and GE Capital non-core book that we've talked about. The gain could be sizable. We expect that it'll be quite profitable for us. We're working a list of items to position the portfolio for how we want to take it forward. I think the team's got a pipeline of stuff they're working.
Thank you very much.
Nigel, the point Jeff made earlier, I think on both, we still have to see how the Swiss IPO goes and BAY, but we could have gains in both those.
Yeah.
Okay, great. Thanks.
The next question comes from the line of Julian Mitchell representing Credit Suisse. Please proceed.
Hi. Thank you.
Hey, Julian.
Hey. Just on the margin performance again, the overall industrial margin was up, as you say, 120 basis points. Services was up 60. That means equipment was up, 160, 170 basis points off flat revenues. When you're thinking about the mix going forwards, or, well, the mix in your equipment backlog today and what that means for revenue going forwards, do you think that kind of equipment margin growth is sustainable? Obviously you'll have a lot of mix hit coming into that equipment margin from wind and so on in the next six months.
Yeah. What I would say right now is that we are running ahead of the game on value gap. Through three quarters of the year, we're almost $700 million of value gap. We expect that to continue to accelerate into the fourth quarter. On simplification and restructuring, Jeff talked about the fact that we're at the $1 billion goal through the third quarter. We expect that to continue and accelerate into fourth quarter. I think on the cost side of the equation, we've got enough levers that we're working very dramatically to deal with the fact that we're going to have more equipment shipments as we move into the fourth quarter. I think those cost opportunities are going to accelerate into 2014.
Got it. Thanks. Within oil and gas, 18% revenue growth, much more subdued profit growth, and obviously the margins were down. I guess what's behind the confidence that the margins in oil and gas year-over-year will be up in Q4? Because you had a pretty good margin in Q4 last year, and you're coming off a Q3 where the margin was down year-over-year.
Again, I would say, we did have some execution issues in the third quarter, getting the backlog out, getting it out at the cost structure it was supposed to go out. We expect that we're going to improve on that in the fourth quarter. We got a volume lift in the fourth quarter versus the third quarter. With all the cost actions and the value gap we've created in the business over the first three quarters, we expect to get some leverage on that in the fourth quarter. I think we feel pretty good about the fact that we'll grow margin rates in the fourth quarter in oil and gas. They will not grow to the levels we thought they would for the year, and that's really mostly about the M&C business.
We came into the year thinking the business was going to grow something like 16% or low single digits, that's a real mixed challenge for us. We're trying to get it done with better execution in the shop and better execution on the cost structure.
Got it. Thanks. Lastly, very quickly, just U.S., your gas turbine aftermarket business. Gas-fired power gen consumption's down, I don't know, 9% or 10% year to date. What are you thinking about your U.S. gas services business looking out from here?
The orders were pretty good. We can probably get back to you with that.
I could tell you.
Do you have it, Jeff?
Yeah. Just give me one second.
Yeah. I would say what Jeff's getting at, the quoting activity in North America is actually higher now in gas turbines than we've seen in a while. I think we're guardedly optimistic, at least on the unit side for 2014.
Okay.
I think, in the U.S., we've been pretty strong. I think we're up 8% PGS in the U.S., in the third quarter. There's still some strength in the U.S. As we said, Europe was top down 18% on services related to heavy-duty gas turbine. But sequentially, that's a bit of an improvement from where we were in the first and second quarter. I think really what's driving us here in the third and fourth quarter in North America around PGS growth is our Advanced Gas Path upgrades. We did 15 in the third quarter versus four a year ago. We expect to do more than that in the fourth quarter. That's very good business for us at very high margins. I think we see a way forward here around services.
Great. Thank you.
Your next question comes from the line of Joe Ritchie representing Goldman Sachs. Please proceed.
Hi, good morning, everyone.
Hey, Joe.
I want to just tackle this margin question a little differently. If you look at the 4Q, in order to hit your 70 basis point target, margins have to expand by about 170 basis points, the comp is a little bit tougher. Did about 17.3% last year. Can you help me understand across each of these different industrial segments, which segments do you think are going to be above or below that 170 number? Is it going to be disproportionately skewed towards Power & Water getting much better?
Joe, I can start, and then maybe Jeff kicks in, but I think we see pretty broad-based expansion in Q4. Power & Water expands, but it's not the biggest driver, and we've got every business up a bit, and a couple, maybe three or four businesses up 100 basis points plus. I don't know, Jeff, you want to-
Well, let me go back to the framework we set for people. We described the businesses in one of three ways. We said the businesses we thought would grow margins for the year better than 70 basis points, those that would grow zero to 70, and those that we expected to be flat. I think if we re-look that framework today, we'd say oil and gas is clearly going to grow margins less than 70 basis points. We thought they would do better than that. Energy Management, I would say, is on a trend today to grow margins between zero and 70 basis points, not the greater than 70 basis points we thought. In contrast to that, I think transportation is going to be much stronger than what we originally said.
We originally thought they'd be flat, we think they're going to grow margins pretty substantially for the year. We have a shot here. We'll see how appliance strength looks in the fourth quarter, but the appliance business actually may push through the zero to 70 category to better than 70. Aviation, healthcare, as well as Power & Water, are going to be right about where we said they would be. I think those are really the changes, which is better than a zero to 70 improvement.
Okay. No, that's helpful color, I guess a follow-up to that is, I know that you booked the big Algeria order, and there's some short cycle-
Joe, we didn't book the Algeria order in the quarter.
Right. It's going to book. It's going to come through orders in 4Q. It's also book and ship on the aeroderivatives. I think there are 26 aeroderivatives that are going to book and ship in 4Q. My question is, based on what you either already have in backlog today or what you know is going into backlog in 4Q, how much more do you have to do to get to the margin targets that you set out?
I think the Power & Water is almost all in backlog.
Yeah. What I'd say is on the unit side, gas turbines, wind turbines, more than 95% of what we'll do in the fourth quarter is in backlog today.
Yeah.
Our service business runs 50%-60% backlog. That's kind of where we sit today. I think within that, we have very good line of sight to what we're going to do on the AGPs in the quarter. I think we're largely in pretty good shape. We'll probably do about 70 distributed power units in the quarter. We're in reasonable shape on those two. They tend to be a little bit shorter cycle. I think we have pretty good visibility.
Okay, great. Thanks, guys.
Your next question comes from the line of Steven Winoker, representing Sanford C. Bernstein. Please proceed.
Thanks.
Hey, Winoker.
Hey, I've been called worse.
Is that you, Winoker?
That'd be me, right?
Okay.
As I said, I've been called worse, and not only by you guys.
Never by us.
Two things I'd love to dig into. The first one is this pricing versus cost value gap. What was the shipping price index, the industrial price index for shipments overall in the quarter?
Do you have that, Borns?
Yeah. Give me one second, Steve.
Okay. While you're doing that, my question here is, this has been such a tremendous tailwind across the businesses. As we look out and we look at the sustainability based on the order pricing over time, I start staring into next year and relative to commodities, just the question is, I know you guys say you feel good about it. Maybe give us a little more confidence about what drives your conviction that you can continue to create a positive value gap there as we look out longer term past the fourth quarter.
Well, Steve, we've got to do detailed business plans for 2014. We've been running positive OPI on pricing on orders. I think we expect across most of the businesses that's going to continue. In the early reads I've gotten on direct material deflation for next year and material productivity, direct material deflation for next year is still pretty favorable to us. I think this year, I don't know, last year we were at $350 million, something like that on value gap. This year, we're at 660-
Just under $700 million.
Just under $700 million on the way-
Through three quarters. Right.
to a higher number than that.
Right.
I think, Steve, we're going to be positive again next year. That'll be something I'll give you more flavor for in the outlook meeting in December.
Okay.
Steve, the selling price index for the quarter was 70 basis points positive.
Okay, great. Another question. When you think about Avio and some of the capital deployment, and I guess the pricing, the $0.02 charges, you fair market value the pricing on GAAP. Did that change your view of the financial metrics for the deal originally, and how do you think about that, maybe also broader context on oil and gas and some of those, that M&A that you now have got a lot more track record now behind you. How are you thinking about that, Jeff, in terms of performance relative to your original expectations?
Well, let me give Jeff the Avio question, yeah.
Yeah. What I say, Steve, on Avio is, I think what part of those fair value adjustments tell you is the business was actually more profitable than what we thought we were buying when we finally got in there to see a lot of the detail. Because of antitrust constraints, we couldn't see a lot of detail around parts of their aviation business. The adjustments were larger than we expected initially, but they're larger for all the right reasons, meaning the margins on the parts, particularly GE90, they've gotten a ton of productivity, over the last number of years since they've been in the GE90 program. That'll work well with us or for us going forward.
I think the Avio is kind of a unique accounting convention given their supplier relationship with us. I think that's all goodness that's going to come back to us. This is actually, I think, good, helpful. On the oil and gas stuff, look, we like the places that we're in and the deals we've done. I think they're two different things.
Yeah. Sorry.
Go ahead, Steve. I'm sorry.
I just was trying to get a sense of the financial metrics also as you look back on the track record for the oil and gas deals a couple of years ago.
I think when we do reviews with our board, if you look at the deals we've done starting in 2011, 2012, and 2013, versus deal case, we're still running ahead on those.
Okay. Great. Thank you.
Great. Thanks, Steve.
Your next question comes from the line of Deane Dray representing Citi Research. Please proceed.
Thank you. Good morning, everyone.
Good day.
Hey, can we go back to get some color on the order pricing on Power & Water equipment, coming in negative in the quarter and also in slightly negative in Oil and Gas. Just put this in context. Is there any change in the competitive environment? Is there some FX impact? It does break a streak of some of the positive pricing that you've had.
Yeah. As it relates to Power & Water, I don't think there's a huge trend change here. I think, thermal pricing, on units was just under 7% down. I think it's an extraordinarily competitive market globally. I don't think anything's really changed there. Those dynamics haven't changed. On wind, it really is a bifurcated world. In the U.S., we've gotten really good price over the first six months of the year, and we feel good about where we're going with our U.S. wind. Internationally, it's more competitive around price, and wind in the quarter on OPI was down 130 basis points. PGS services was better. It was up 1.4% on thermal. Oil and Gas, we had two specific dynamics going on. We had a really profitable order that we took in the third quarter of 2012 in the U.S. around an LNG facility that we didn't repeat.
We had the big Russian Yamal order here in this quarter that was not nearly as profitable as that as well. That really drove Oil and Gas OPI down in the quarter. We expect Oil and Gas OPI in the fourth quarter to get back to a positive, and we expect it to be positive for the year on a year-to-date basis.
Great. I like that last point you made. Just thinking about the fourth quarter, Jeff, you said that you're tracking well for solid organic revenue growth. The slide says you're biased towards the low end of the range, but clearly you've got more momentum here, and I like your comment that you've got a slight hedge in the plan, so more contingency. How has that contingency changed, let's say, versus the first quarter? Because you certainly look like you've got a lot more buffer in hitting these margin targets today versus where we were in the first quarter.
It's about the same hedge we had at the end of the second quarter. For us on the revenue side, basically you've got the whole company ex Power & Water, which has operated pretty well all year. What you're going to see in fourth quarter is just a more normal run rate for Power & Water. If you think about the range we had on the page and how I talk about the business going forward, really the only difference is Power & Water. You're going to see a more normal quarter for Power & Water from a revenue standpoint, and that should carry forward into next year.
Great. Thank you.
Great.
Your next question comes from the line of Steve Tusa representing JP Morgan. Please proceed.
Hey, good morning.
Hey, Steve. How you doing?
Not too bad. I think you said 5% industrial revenue growth as you were exiting the slide deck before Q&A for the fourth quarter.
Yeah.
That's organic?
Yeah, that's the expectation, around 5% for Q4.
Okay. For the year, you guys are going to end up around flat for the year to up 1%, 0% to 1% type of thing?
We'll think we'll be at the low end of the range in there, Steve.
Okay. Then I'm just curious as to, ultimately, there were some moving parts here with the slide you gave in the first quarter on Power & Water. I think it was slide five, where you guys laid out the first to the second half and you kind of underperformed a bit in the second quarter on pure profit, of $1.1 billion versus $1.3 billion. You had $2.9 billion for the second half. Maybe could you just tell us where you're going to be relative to that $2.9 billion for profit for Power & Water?
Yeah. Steve, I don't think we're going to guide on that.
You're obviously going to be above it, though, right? I would assume.
Yeah, I don't think I can give you an answer on that. We don't provide guidance. I don't think I can give you that number. Here's what I'd say about third quarter to fourth quarter is, the way I would think about it, and Power is a piece of this construct, is we'll end the third quarter here on an adjusted basis of $0.40 a share. We typically get a big volume ramp from third quarter to fourth quarter. Last year, that was $0.08. This year, we've got a bigger ramp, volume-wise, going from third quarter to fourth quarter. We're going to do that with a much better cost structure than what we did last year, third quarter to fourth quarter. More value gap. We're ahead of the curve on SG&A and cost savings.
That's going to give us additional incrementals, additional volume leverage as we move from third to fourth quarter. Power & Water is a piece of that framework. They're a big piece of it because they have a very large volume ramp from third to fourth quarter. I think we feel very good about the construct that we have around that. All of that should help us achieve the 70 basis points for the year.
Okay.
Steve, Power & Water is going to have positive revenue, positive op profit, and positive margins in Q4.
Yeah, right.
It's going to perform well.
Steve, the last thing I would add is, if you go back the last seven years, five of the last seven years we've grown margins from third to fourth quarter better than 250 basis points. In four of the last seven years, we've grown to more than 310 basis points from third quarter to fourth quarter.
Yeah. Clearly. Just on the distributed power stuff, I didn't quite, again, kind of going back to that slide where you had aero of 100 units. It sounds like you're dramatically kind of outperforming. First of all, could you just maybe talk about where the distributed power stuff came from this quarter? Is this a timing issue for this year, or is that pure upside this year relative to what you expected in the fourth quarter? I know there was a big group of distributed power stuff coming in the fourth quarter. Seemed to come a bit early.
Again, Steve, a lot of the stuff, it's pretty global business. I'd say there's more opportunities in the Middle East and Asia and places like that. I would say there was some more in the third quarter than what we expected, I still expect them to have a good solid growth in Q4 as well. I would say we probably, at the end of the day, had a few more aero drivers in Q3 than we originally expected.
Okay. Thanks a lot.
Okay, Steve. Thanks.
Your next question comes from the line of Shannon O'Callaghan, representing Nomura. Please proceed.
Morning, guys.
Hey, Shannon.
Hey, just in terms of the restructuring and gains in the fourth quarter, it sounds like you might go ahead and do some restructuring. If you do, you'll have some gains in industrial. As it plays into the 70 basis points, right, the restructuring is in corporate, the gains are in the segments. Is that all gravy on top of it? There's none of that sort of baked into getting to the 70?
Shannon, the way that I talked about it today and the way we're planning is the 70 is without gains. Basically, the intent is to use the gains we have to do additional restructuring.
Okay. Yeah, like I said, restructuring, I know there weren't any in the quarter, there's none in the fourth.
If we have them, right?
Just on the framework, the high single-digits to low double-digits operating earnings. Back at EPG, you also used to show that that translated to double-digit EPS growth, and now no one's sort of there in terms of consensus. Is this double-digit part of the equation sort of not on the table anymore? I know it still says high single-digits to double-digit on operating earnings, but it doesn't seem like we're getting there on the EPS basis. Is that kind of off the table at this point?
Look, we don't give guidance anymore, okay? Let's start with that. I think you've got some stuff in Avio and stuff in corporate, when you look at industrial and capital, I actually view those exactly the same way we've looked at them when I was at EPG.
Okay. All right. Thanks, guys.
Shaquana, we are running up against another earnings call, why don't we take one more question here?
Yes, sir. Your next question comes from the line of Christopher Glynn, representing Oppenheimer. Please proceed.
Hi, thanks for fitting me in.
Hey, Chris.
Hi. Last year, late in the year, things got a little variable out there in the economy, customers taking delivery. If we look at your backlog, wondering what the key variables are in terms of how backlog execution could play out. Just for example, I think from healthcare orders, it would seem we'd be seeing positive growth there by now.
Yeah. Look, Chris, I give you a view. I actually think the backlog is pretty firm. I don't think there's commercial issues, really. I think what Jeff talked about, like in oil and gas, is stuff that we could have executed better on. We're not seeing really any kind of variability in the marketplace in terms of customers pushing back on deliveries.
Great. Thanks.
Great. Why don't we wrap up today? Thank you everyone for attending. The replay of today's webcast will be available this afternoon on our website. We'll be distributing our quarterly supplemental data for GE Capital later this morning. I have some announcements regarding the upcoming investor events. On Friday, November 15th, we'll host a GE Capital Investor Meeting in Norwalk, Connecticut. This meeting will begin at 10:00 A.M. We hope to see you there. Second, our Annual Outlook Investor Meeting with our chairman will be held in New York City again on Wednesday, December 18th. We'll send a little more information closer to that date. Finally, our fourth quarter 2013 earnings webcast will be available on Friday, January 17th. As always, we're available today to take your questions. Thank you, everyone.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.