ABB Posts Weak Q4 Earnings; Revs Increase

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ABB Ltd. (ABB) reported full year and fourth-quarter 2013 earnings per share of 23 cents per share, a decline of 12.0% from the prior-year figure of 26 cents. The quarterly results included the effect of additional charges owing to stemming from certain projects in the Power Systems (:PS) division.

For 2013, ABB reported earnings of $1.21 per share, reflecting an increase of 3% year over year.

Even amid the prevalent macroeconomic challenges, the company continued to receive orders in key sectors across its footprint. This bellwether in power and automation technologies also benefited from the execution of its strong backlog and improved demand from earlier-cycle projects.

Total Revenue & Orders

Total revenue in the quarter increased 4% year over year in terms of local currency to $11.4 billion. The rise in revenues was primarily driven by stronger growth in early-cycle businesses and execution of the order backlog. In addition, service revenues in the quarter were in line and represented 16% of total revenue. The revenues fell short of the Zacks Consensus Estimate of $11.5 billion.

Order level in the quarter declined 4% in terms of local currency to $10.0 billion, with a backlog of $26.0 million. Orders in Europe grew on the back of a rise in the automotive and transmission investments in Germany. This increase more than offset the weakness in Eastern Europe and a decline in Nordic region. In the Americas, the automation industry remained strong with base orders in U.S. increasing in double digits. However, the growth was partially offset by decline in large orders in the US, Canada and Brazil. On the other hand, order growth in Asia resulted from an increased demand in Australia, India and South Korea. However, orders decreased in China due to a decrease in the number of large orders.  Orders in the Middle East and Africa rose on the back of growing demand for power equipment as well as upstream oil and gas facilities.

Segment Results

Power Products revenues were $3.0 billion, marking a rise of merely 1% in terms of local currency. This was due to a modest execution of the order backlog. The segment benefited from the increasing industrial and power distribution demand while utilities continued to make selective investments in power transmission. However, the segment’s order growth declined 6% to $2.6 million in the quarter.

Power Systems revenues were $2.3 billion, up 4% in terms of local currency. Revenue growth was again driven by execution of the order backlog. Orders in Power System fell 23% in local currency to $1.8 billion. The division’s strategic repositioning to increase project selectivity and enhance margins was the primary reason for lower orders in the quarter.

Discrete Automation & Motion revenues were $2.7 billion, up 8% over the previous year’s revenues of $2.5 million. The rise was due to execution of the order backlog and increased demand for early-cycle products. Additionally, the Power-One acquisition completed in last July contributed to growth in orders and revenues. Order level increased 10% to $2.5 billion. Orders during the quarter were driven mainly by continued investments in robotics equipment from automotive and general industry as well as demand for products to improve industrial productivity.

Low Voltage Products revenues were $2.0 billion, up 2% in terms of local currency. The segment gained from the increased demand for early cycle projects including circuit breakers, control products and wiring accessories. However, a decline in later-cycle projects partially offset this gain. Service orders and revenues grew more than total orders and revenues for the division. Orders declined 2% due to weak demand at its mining and power utilities sector.

Process Automation revenues increased 3% in local currency to $2.3 billion. The company’s performance reflected a strong backlog execution in its marine and mining businesses among others. However, the segment was negatively impacted by the decline in orders from most of the sectors excluding oil and gas. Order level decreased 7% in local currency to $2.0 billion. The decline was due to fewer large orders in the mining and marine sectors when compared with the prior-year period.

Income and Expenses

Income from operations declined to $0.8 billion from 0.9 billion in the prior year, while its operational earnings before interest, taxes, depreciation and amortization (:EBITDA) in the quarter totaled $1.4 billion, up 3% year over year. 

Balance Sheet and Cash Flow

In 2013, ABB reported cash flow from operations of $3.7 billion versus $3.8 billion in 2012. However, the net debt decreased to $1.5 billion from $1.6 billion at the end of 2012.

ABB’s free cash flow for 2013 was $2.6 billion, which included $1 billion of capital expenditures. Notably, the company’s capital expenditure decreased 18% in a year.

Outlook

ABB maintains a positive long-term outlook. The company aims to improve its efficiency by focusing on cash flow generation, cost containment and stabilizing its PS business in 2014. Moreover, rising investments in grid upgrades and the tendency of industries to spend more on automation solutions to increase energy efficiency and productivity bode well for the company. However, short-term uncertainties continue to linger with the persisting macroeconomic volatility.

However, ABB has lowered its compound annual growth rate (CAGR) for the plan period 2011-15, to be in the range of 4.0-5.0 percent compared to the previously expected 5.5-8.5 percent. The decrease is due to the ongoing slump in the capital expenditures and a sluggish Power Systems business. The company reaffirmed its long-term outlook for conversion rate of free cash flow to be more than 90% in the plan period.

Dividend Update

Along with the earnings release, ABB also revealed its plan to raise the dividend for 2013 by 3.0% to 0.70 Swiss francs per share.

Zacks Rank     

At present, ABB has a Zacks Rank #3 (Hold). However, some better-ranked stocks in the same sector include EnerSys (ENS), Quanta Services, Inc. (PWR) and Fluor Corp. (FLR). All of these have a Zacks Rank #2 (Buy).

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