General Electric's (NYSE:GE) first attempt to turn itself around -- under the leadership of former CEO John Flannery -- was a bust. However, since new CEO Larry Culp took the helm last October, the storied conglomerate has started to make more measurable progress.

That progress continued last quarter. While GE's revenue, adjusted earnings, and free cash flow all declined on a year-over-year basis, the company raised its full-year forecast for all three metrics. This is an important signal that GE is finally stabilizing its business and could return to growth over the next few years.

Mixed results for the second quarter

In the second quarter, GE's revenue slipped 1.1% year over year to $28.8 billion. However, for its core industrial businesses, organic revenue -- a metric that strips out the impact of acquisitions, dispositions, and currency fluctuations -- jumped 7.4% to $27.7 billion.

Despite this strong organic revenue growth, GE's adjusted industrial profit fell by more than a quarter, as its profit margin contracted to 7.6% from 10.2% a year earlier. Nevertheless, adjusted earnings per share stayed roughly stable, ticking down to $0.17 from $0.18 in Q2 2018, driven in part by better results from the GE Capital financing business.

Finally, adjusted industrial free cash flow fell into negative territory, declining to $993 million from $316 million in the prior-year period. Higher cash taxes and working capital headwinds related to the Boeing (NYSE:BA) 737 MAX grounding drove most of the decline.

A Boeing 737 MAX 9 flying over clouds

The 737 MAX grounding is weighing heavily on GE Aviation's cash flow. Image source: Boeing.

While GE is certainly far from being fixed, its results during the first half of 2019 exceeded management's expectations. As a result, GE raised its full-year guidance. It now expects mid-single-digit revenue growth on an organic basis, roughly break-even industrial free cash flow (plus or minus $1 billion), and adjusted EPS between $0.55 and $0.65. The free cash flow and EPS targets rose by $1 billion and $0.05, respectively, driven by lower expected restructuring costs and signs of stabilization in the struggling power segment.

Highlights and lowlights of the quarter

The most impressive aspect of GE's performance last quarter was the continued progress it is making toward fixing its balance sheet. During the quarter, GE sold about half of its stake in Wabtec, generating net proceeds of $1.7 billion. It also received $400 million of proceeds from other asset sales. This more than offset GE's negative free cash flow of $993 million and its dividend, which now costs less than $100 million per quarter.

The improved balance sheet allowed GE to reduce its average commercial paper and credit line borrowings during the second quarter by more than $10 billion compared to Q2 2018. That should make the company less vulnerable to a potential market downturn.

On the flip side, the GE Aviation business -- General Electric's biggest long-term growth driver by far -- saw a sharp deceleration in growth last quarter. Revenue rose just 4.8%, orders fell 10% year over year, and segment profit declined 6.1%. Unfavorable mix changes and a decision to redesign a part for the new GE9X engine contributed to the subpar results. The grounding of the Boeing 737 MAX is also creating complications, as GE's CFM joint venture builds all of the engines for Boeing's troubled jet.

The good news is that while orders fell for accounting purposes, GE booked a slew of new deals for engines and services at the Paris Air Show in June. As a result, the aviation segment had a backlog of $243.9 billion by the end of last quarter -- up about 17% year over year.

Key things to watch for the rest of 2019

The second half of 2019 could be a critical inflection point for GE's turnaround. Most notably, the company is poised to make a lot of progress toward fixing its balance sheet over the next two quarters. The planned sale of GE's biopharma business to Danaher for about $21 billion is still on track to close later this year. The company is also likely to sell the rest of its Wabtec stock, trim its holdings of partly owned subsidiary Baker Hughes, a GE Company, and continue to sell noncore assets from its GE Capital subsidiary.

Meanwhile, General Electric will try to accelerate the turnarounds of its power and renewable energy segments. It will also try to get GE Aviation back on a better trajectory -- but its ability to do so will depend in large part on whether Boeing can avoid further setbacks and get the 737 MAX recertified this fall. That would allow the CFM joint venture to collect money it is owed for engines it has already delivered and to continue ramping up deliveries of its LEAP engine.

GE stock swung wildly between big gains and big losses on Wednesday. This indicates that many investors are struggling to make sense of the earnings report.

However, GE's increased full-year revenue, earnings, and cash flow forecasts, and its balance sheet improvements outweigh the negatives in the Q2 report. That should make investors cautiously optimistic about the company's prospects, provided that Boeing 737 MAX deliveries can resume later this year -- or in early 2020 at the very worst.