GE Aerospace (GE) Earnings

Management highlights

- Overall Strategic & Operational Priorities - Core priority remains customer focus, with safety, quality, delivery, and cost as ordered guiding principles for the company's Flight Deck operational improvement program. - The company holds a total backlog of over $210 billion, with a $170 billion commercial services backlog, and is focused on delivering against strong existing demand while investing in current and next-generation technologies to improve engine time on wing and lower customer cost of ownership. - Annual R&D spend is ~$3 billion, with over $1 billion in annual CapEx to advance new technologies and expand capacity. - Flight Deck Operational Improvements - Used process consolidation at the Lynn, MA site to cut F-110 critical component production lead time by ~60%, enabling 50%+ YoY F-110 delivery growth in Q2. - At the Selma, Brazil MRO site, reduced CFM56 final assembly lead time by nearly 50%, cutting overall shop visit turnaround times by ~1 week since end-2025. - Collaborated with key supplier GKN to implement 3D inspection and new work instructions, improving inspection time by 90% and increasing component capacity to ease supply constraints. - AI is integrated as a force multiplier for Flight Deck: for turbine airfoil parts, AI automation cut demand signals to suppliers by 50% and processing time by nearly 90%, driving double-digit sequential and YoY growth in priority supplier material input in Q2. - Commercial Aerospace Updates - First half 2026 commercial services revenue grew 32% YoY, with record internal shop visit output in Q2, and total engine deliveries up 31% YoY (LEAP deliveries up 41% YoY). - Aftermarket demand has remained resilient despite a dynamic macro environment; first half flight departures were roughly flat with no changes in customer behavior, and the company expects modest gradual departures growth in the second half. - LEAP, the company's fastest growing platform, saw strong demand (e.g., COVA Airlines ordered up to 120 LEAP-1B engines). The LEAP-1B durability kit (with upgraded HPT blade) received certification, expected to deliver ~2x improved time on wing, with full MRO and new engine cutover planned for early 2027. LEAP turnaround times have fallen to ~100 days (down over 2 weeks YoY), and grounded LEAP-powered aircraft due to engine issues are nearly zero. - Expanded LEAP aftermarket capacity: MTU opened a new LEAP maintenance facility in Fort Worth that has inducted its first LEAP-1B engine. The LEAP installed base is expected to more than double between 2026 and 2030. - Achieved a major milestone for the NASA EPFD hybrid electric flight demonstration program, completing ground testing for the megawatt-class hybrid electric demonstrator. The modified test aircraft will be displayed at the Farnborough Air Show. - Defense Aerospace Updates - Continued robust demand for defense products and services globally. Recent wins include F-404 engine supply for Turkish Aerospace's HerJet trainer program, and CP-7 engine selection for the UK MOD's new medium helicopter program. - Completed assembly readiness review for the XA-102 adaptive cycle engine, moving the program from design to assembly and test on schedule. - Two engine platforms for the collaborative combat aircraft (CCA) market (GEK-1500 for small thrust CCAs, GE-426 for medium thrust CCAs) completed preliminary design review milestones, advancing development.

Guidance

- Full-year 2026 overall revenue growth guidance was raised to high teens, from the prior outlook of low double digits. - CES full-year growth guidance was raised to ~20%, from the prior mid-teens outlook. Within CES, commercial services growth guidance was raised to low 20% from the prior mid-teens outlook, and commercial equipment growth guidance was raised to ~20% from the prior mid-to-high teens outlook. LEAP delivery growth guidance was raised to high teens from the prior 15% expectation. - DPT full-year growth guidance was raised to low double digits, from the prior mid-to-high single digits outlook. - Total company operating profit guidance is now $10.55 to $10.75 billion. CES operating profit guidance was raised to $10.25 to $10.35 billion, a $400 million increase at the prior high end of guidance, reflecting higher commercial services revenue partially offset by faster equipment growth. DPT operating profit guidance is now $1.6 to $1.7 billion, a $50 million increase at the midpoint from the prior guidance. Corporate costs and eliminations guidance is unchanged at $1.2 to $1.3 billion. - EPS guidance was raised to $7.65 to $7.85, a $0.35 increase at the midpoint from the prior high end of guidance, reflecting higher operating profit and a lower expected full-year tax rate (now projected below 16.5%). - Free cash flow guidance was raised to $8.9 to $9.2 billion, with 100%+ free cash flow conversion expected in the second half of 2026. - Management reaffirmed confidence in the medium-term outlook for double-digit commercial services growth into 2027 and beyond, driven by structural tailwinds from growing installed base and expanding work scope.

Segment performance

1. Commercial Engines & Services (CES): - Q2 2026 orders grew 18% year-over-year (YoY); first half orders grew over 50% YoY. Within CES, Q2 services orders rose 22% (first half up 34% YoY), and Q2 equipment orders rose 7% (first half up nearly 100% YoY). - Q2 2026 revenue increased 27% YoY: services revenue grew 26% (internal shop visit revenue up 25%, spare part sales up over 25%), and equipment revenue grew 30%. Total engine deliveries rose 26% YoY, including LEAP deliveries up 24% and GE9X deliveries up significantly more than the 30% widebody delivery growth. - Q2 2026 operating profit was $2.7 billion, up 20% YoY. Operating margin was 27.3%, down 160 basis points YoY due to installed engine growth, GE9X investments, and inflation. Year-to-date operating profit is $5 billion, up ~$900 million YoY. CES contributes approximately 78% of total company operating profit at the midpoint of 2026 guidance. 2. Defense & Power Technologies (DPT): - Q2 2026 orders increased 12% YoY; first half orders grew 40% YoY. DPT backlog exceeded $30 billion at quarter end, up ~$5 billion since the start of 2026. Defense book-to-bill was 1.0 in Q2 and 1.7 in the first half. - Q2 2026 revenue grew 16% YoY: defense and systems revenue up 12% (engine deliveries up 7%), and propulsion and additive technologies revenue up 23% led by RVO Arrow. First half revenue grew 17% YoY. - Q2 2026 operating profit grew 18% YoY. Operating margin was 13.8%, up 30 basis points YoY from higher volume and price, partially offset by mix, investments, and inflation. First half operating profit was ~$900 million, up 17% YoY. DPT contributes approximately 15% of total company operating profit at the midpoint of 2026 guidance. Total Company: Q2 revenue grew 24% YoY (5th consecutive quarter of 20%+ growth), operating profit was $2.7 billion (up 18% YoY), operating margin 21.7% (down 130bps YoY), EPS was $2.02 (up 22% YoY), and free cash flow was $3 billion (up 43% YoY). First half total orders up 49% YoY, revenue up 27% YoY, EPS up 24% YoY, free cash flow up 31% YoY with 115% conversion.

Risks & headwinds

- Spare parts delinquency (delayed shipments due to material availability constraints) grew 20% sequentially in Q2 2026, even as demand remains robust. - Ongoing supply chain constraints remain the primary limiting factor for growth, rather than weak demand; management noted that continued progress unlocking supplier capacity is required to meet backlogged demand. - The macro environment remains dynamic, with continued uncertainty around near-term airline flight demand, though current customer behavior has shown unexpected resiliency. - Sustained higher fuel prices putting financial pressure on airlines could impact demand for aftermarket services and new engine orders, though management has not observed material impacts to date. - The LEAP fleet durability upgrade program will take multiple years to complete, with full retrofit of the global LEAP fleet not expected until the early 2030s, and near-term costs associated with the upgrade program put pressure on near-term margins. - GE9X initial production has higher unit costs that will pressure CES margins through 2028, when losses are expected to peak and begin declining.

Analyst Q&A

• Q: Sheila Caillou (Jefferies): With very strong Q2 and first half service order growth, what macro assumptions underpin the updated guidance, and what accounts for slower implied second half services growth? /

  A: Management noted the environment remains dynamic, but customer demand and behavior have been far more resilient than expected, with parked CFM56 aircraft declining since March. The MRO footprint is oversubscribed, with 95% of Q3 spare parts revenue already in backlog and full-year shop visit guidance 40% oversubscribed. Management raised full-year services guidance to low 20% growth ($5 billion YoY growth, up $1 billion from April guidance). Second half services growth is low double-digit YoY against a very strong second half 2025 comparables, and management remains comfortable with the outlook and expects momentum to carry into 2027.

• Q: Miles Walton (Wolf): Given strong 2026 free cash flow performance that is already hitting 2028 prior targets, should investors expect free cash flow to continue growing with earnings, or will conversion normalize and FCF stabilize at current levels? /

  A: Management noted Q2 FCF growth of 43% YoY included a $100 million one-time tariff refund, but core working capital performance (improved receivables and inventory) was strong even with 24% revenue growth. Full-year 2026 guidance already incorporates the stronger working capital performance, with over 100% conversion expected in the second half. Management expects FCF conversion to normalize over time, but FCF will continue to grow alongside earnings, with meaningful cash growth expected as earnings expand.

• Q: Seth Seidman (JP Morgan): Is 2026 strong demand a pull-forward of future demand, what is the 2027 growth outlook, and how much does supply chain capacity constrain future services growth? /

  A: Management stated supply chain progress has been substantial, with nine consecutive quarters of double-digit input growth from critical suppliers, and deep collaborative problem solving with suppliers has unlocked additional capacity. Demand is not pulled forward: the commercial installed base grows 2-4% annually through the decade, with structural tailwinds from expanding work scope and steady pricing. Management sees no reason 2027 will diverge from the medium-term outlook for double-digit commercial services growth, even with a higher 2026 starting point, and reducing backlog delinquency will provide an additional revenue and cash flow kicker over coming years.

• Q: David Strauss (Wells Fargo): What is the long-term trajectory for LEAP shop visit growth, and how do LEAP durability kits impact this trajectory? /

  A: LEAP shop visits are expected to grow at a 25% CAGR through 2030, driven by the existing installed base (most new LEAP deliveries will not require shop visits before 2030). The external LEAP spare parts channel will grow from mid-teens share currently to 30% by 2030, with ongoing capacity investment and repair development (20% CAGR in repair improvements this year) reducing shop visit costs. Durability kits do not pull forward future work: engines will be upgraded during their scheduled first shop visit on a predictable timeline, with full retrofit of both LEAP-1A and LEAP-1B fleets expected by the early 2030s. Certification of the LEAP-1B kit is a major milestone, with good field performance already seen from LEAP-1A kits that have been installed on over 40% of the LEAP-1A fleet.