GE Aerospace (NYSE:GE) announced an upward revision to its 2026 free cash flow guidance on Thursday, following a second-quarter performance that exceeded analyst expectations. The company now expects annual free cash flow in the range of $8.9 billion to $9.2 billion, up from the prior forecast of $8.0 billion to $8.4 billion. The revised midpoint of $9.05 billion represents an increase of $850 million.
Q2 Free Cash Flow Rises 43%, but Working Capital Dominates
Free cash flow for the second quarter reached $3.03 billion, a 43% year-over-year increase from $2.12 billion. However, a closer examination of the cash flow statement reveals that an $813 million swing in operating working capital accounted for nearly 90% of the $907 million improvement. Working capital contributed $241 million in the quarter after consuming $572 million in the same period last year. Net income rose a more modest 20%, indicating that the cash generation was heavily influenced by the timing of payments and collections.
This detail is significant given the stock's strong performance, with shares up 17% year-to-date and 36% over the past 12 months, setting elevated expectations for sustained cash flow growth.
Revenue and Earnings Beat Estimates
Adjusted earnings per share came in at $2.02 on adjusted revenue of $12.63 billion, surpassing Wall Street consensus estimates of $1.86 and roughly $11.9 billion, respectively. Orders surged 17% to $16.53 billion, underscoring robust demand. The company's backlog now exceeds $210 billion.
Commercial Engines & Services revenue climbed 27% to $9.77 billion, but operating margin contracted by 1.6 percentage points to 27.3%. This margin compression reflects a shift in mix toward equipment sales, which grew 30% (unit volume up 26%) and typically carry lower initial margins compared to services. Services revenue, which accounted for about 76% of segment revenue, rose 26% to $7.43 billion.
Guidance Raised Across the Board
CEO Larry Culp highlighted strong commercial services demand and record internal shop visits as key drivers. The company now expects full-year adjusted revenue growth in the high teens, up from low double digits. Adjusted earnings guidance was increased to $7.65-$7.85 per share from $7.10-$7.40, and operating profit forecast was raised to $10.55-$10.75 billion from $9.85-$10.25 billion.
The first-half free cash flow total of $4.69 billion implies that GE needs between $4.22 billion and $4.52 billion in the second half to meet the new target. At the midpoint, this is about 7% less than the first-half generation, suggesting some allowance for the working capital benefit to fade.
Outlook and Risks
Management now expects commercial services revenue to grow in the low-20% range and equipment revenue by about 20%, raising the commercial segment's profit forecast to $10.25 billion-$10.35 billion. However, risks remain, including potential reversals in working capital, pressure from lower-margin engine deliveries, and the impact of rising fuel costs on airline departures and maintenance demand.
The key question for investors is whether GE can sustain free cash flow conversion above 100% without another significant working capital tailwind. While the raised forecast lowers the second-half hurdle, it does not eliminate concerns around margin trends and cash timing.
