The COVID-19 pandemic hit at a bad time for General Electric (GE 1.83%). GE finally seemed to be gaining momentum in early 2020 after several tough years, but the pandemic disrupted its business: particularly its ultra-profitable aviation unit.

The pandemic continued to take a toll on General Electric -- especially GE Aviation -- last quarter. However, while it will take at least two more years for GE to recover fully, the company's turnaround remains on track.

Decent Q2 results

GE generated $18.3 billion of revenue in the second quarter, including industrial organic revenue of $16.9 billion, sliding in just ahead of the analyst consensus. Revenue grew solidly on a year-over-year basis but remains well below pre-pandemic levels.

This improving revenue performance and GE's ongoing cost cuts enabled the industrial conglomerate to post a 5.3% adjusted industrial operating margin. A year ago, it lost money on that basis. Adjusted earnings per share totaled $0.05: a penny ahead of the consensus. (The EPS figure is based on GE's share count before the 1-for-8 reverse stock split that goes into effect this week.)

Finally, GE generated adjusted industrial free cash flow of $388 million last quarter: up both sequentially and year over year.

A wind power turbine in a green field, with a road in the foreground.

Image source: General Electric.

Healthcare shines again

All four of GE's industrial segments improved their earnings results on a year-over-year basis in the second quarter. However, GE's healthcare business has been its most important earnings driver recently.

The healthcare segment generated Q2 revenue of nearly $4.5 billion, up 10% organically from the prior-year period. That more than made up for a 4% organic revenue decline for GE's healthcare business in Q2 2020. Moreover, cost and productivity measures helped the unit generate an impressive segment margin of 18% and segment profit of $801 million.

By contrast, the other three industrial segments recorded combined segment profits of just $376 million. The long-running turnaround effort in GE's power business is starting to pay off, as that segment earned $299 million last quarter after posting a loss in Q1. The renewable energy unit is still losing money, though, and GE Aviation earned just $176 million, largely due to a non-cash charge related to expected losses for a single long-term service contract.

Balance sheet clean-up is going well

GE continued fixing its balance sheet last quarter, largely by using excess cash to execute a $7 billion debt tender offer. As a result, the company had just $63.5 billion of outstanding debt as of June 30: down from $134.6 billion at the end of 2017.

Additionally, management reiterated that it continues to expect to complete the sale of its aircraft leasing business to AerCap by year-end. That deal will generate at least $24 billion of cash proceeds, which GE will use to further reduce its debt.

An Airbus jet in the GECAS livery.

Image source: General Electric.

Finally, General Electric increased its full-year free cash flow guidance last week. The company now expects to generate $3.5 billion to $5 billion of industrial free cash flow in 2021, up from its prior guidance of $2.5 billion to $4.5 billion. GE will be able to apply this internally generated cash flow to debt reduction, as well.

Slow but steady progress

For a company with a $110 billion-plus market cap, GE didn't earn a big profit or generate a lot of free cash flow last quarter. Nevertheless, its second-quarter performance should give long-term investors confidence in the company's turnaround prospects.

GE's healthcare unit shined again and its power business achieved a strong margin recovery. While the renewables business lost money, it reduced its loss both sequentially and year over year. And excluding the one-time contract margin review charge, GE Aviation would have earned a double-digit profit margin for the second consecutive quarter.

It will probably take two or three years for aircraft engine maintenance volumes to return to pre-pandemic levels, supporting a recovery in GE Aviation's revenue and earnings. Meanwhile, GE still has work to do to turn its renewables segment around. But with the rest of the business gaining momentum and the balance sheet in good shape, GE stock could move significantly higher if the aviation and renewables units' results improve as expected over the next few years.