ABB Ltd. (ABB) Q2 Earnings Improve, Revenues Down Y/Y

ABB Ltd. (NYSE:ABB) reported second-quarter 2016 earnings per share of 19 cents which represented a decline of 28% on a year-over-year basis.

The unimpressive bottom-line performance largely resulted from the poor sales recorded by the company during the second quarter. Also, expenses related to restructuring proved to be a drag on earnings.

However, the Zurich-based power-grid and automated-equipment maker came up with operational earnings per share of 35 cents up 16% from the year ago tally. Improvement in operational earnings is mainly attributable to diligent cost saving initiatives and improved efficiency resulting from restructuring.

Quarterly revenues were down 5.3% year over year to $8,677 million.

Lower short-cycle volumes and unfavorable timing of order backlog execution proved to be headwinds resulting in top-line decline during the quarter. Individually, revenues took a beating in all the four segments of the company, thereby worsening the fall.

Additionally, strengthening of the U.S. dollar caused revenues to fall 2% approximately. Moreover, ABB’s restructuring drive caused it to exit certain businesses in the Power Grids segment, which also impacted revenue by around 1%.

Revenue by Segments

Discrete Automation & Motion (down 5% to $2,221 million): Sales primarily suffered from lower volumes and unfavorable timing of order backlog execution. Orders of this segment declined 9% to $2,201 million on a year-over-year basis. Lower large orders and flat third-party base orders proved to be a drag on the order performance of this segment. Moreover, slowdown of capital expenditure in process industries, including oil and gas, hurt orders.

Electrification Products (down 4% to $2,397 million): Unfavorable demand pattern and lower orders in key end markets including China, Saudi Arabia and the U.S. impacted revenues. Orders were down 5% year over year on account of poor performance in the Americas and AMEA region.

Process Automation (down 8% to $1,717 million): Revenues declined in this segment due to a decrease in large and base orders, coupled with a slash in discretionary spending in oil & gas and related sectors. Orders declined 22% to $1,369 million, owing to lower capital spending in process industries.

Power Grids (down 6% to $2,779 million): Currency fluctuations and adverse timing of orders dragged the revenues. Orders were down 4% to $2,655 million as low large orders played spoilsport.

Total orders fell 7.6% year over year to $8,316 million and were down 5% on a comparable basis. While large order was down 41%, base orders fell 3%, both on a year-over-year basis. Strengthening of the U.S. dollar and declining large orders in all the four segments, were responsible for the overall order decline.

On a geographic basis, European countries, namely, Germany, Spain, Sweden and Denmark witnessed order growth, slightly offset by order declines in the U.K. due to the Brexit referendum. Orders declined in the U.S. largely due to lower investments in process industries. The Asia, Middle East and Africa (AMEA) witnessed a mixed performance with order improvements in China and India, offsetting order declines in Saudi Arabia and South Korea.

In terms of markets, the company received an order worth $300 million to deliver key equipment in China in the utilities domain, an order to supply high efficiency motors in South Korea for industry domain and an order to provide additional fast chargers for hybrid electric buses in transport and infrastructure domain.

Book-to-bill ratio at the end of the second quarter was 0.96, down from 0.98 in the comparable quarter a year ago.

Operational earnings before interest, taxes and amortization (“EBITA”) in the second quarter slid 5% year over year to $1,106 million.

Next Level 2 Strategy

ABB’s revamped version of the “Next Level Strategy” (that focuses on three areas, namely, profitable growth, relentless execution and business-led collaboration), is proving to be conducive to growth.

In terms of profitable growth, the company continues to forge ahead with its market penetration initiatives in Europe. Profitable growth strategies have also allowed the company to offset some of the declines in BRIC countries, stemming from macroeconomic headwinds. Innovation is another major aspect of the Profitable Growth philosophy and the company introduced two robotics offerings: “Connected Services” and “SafeMove2” to bolster the robotic portfolio. Also, ABB accessed the high voltage direct current (HVDC) in Japanese market during the quarter as part of its expansion drive.

As part of relentless execution, ABB is on track to deliver about $400 million of gross cost savings this year. Further, it aims to achieve a $1 billion run rate in gross cost savings by 2017-end. During the second quarter of 2016, ABB opened two global shared service centers in Bangalore, India, and Krakow, Poland to fulfill these objectives.

As for business-led collaboration, ABB appointed Sami Atiya to its Executive Committee as President of the Discrete Automation and Motion (DM) division. Mr. Atiya is expected to steer ABB into the next phase of transformation.

Liquidity & Cash Flows

ABB’s cash and cash equivalents as of Jun 30, 2016 were $4,085 million compared with $3,954 million as of Jun 30, 2015. Total long-term debt fell to $6,355 million at the quarter end, from $6,646 million as of Jun 30, 2015.

ABB’s cash flow from operating activities came in at $1,082 million for the second quarter compared with $598 million in second-quarter 2015. Efficient strong working capital management and lower income tax payments aided cash flow growth during the quarter.

Share Repurchase

In Sep 2014, ABB had announced a $4 billion share buyback program under which it purchased approximately 37.6 million shares for roughly $780 million during the second quarter of 2016.

Since the beginning of the program, ABB has returned $3.5 billion to its shareholders by buying back about 170 million shares.

To Conclude

ABB’s second-quarter earnings largely suffered from the uncertainties that are plaguing the process industries, from which the company derives a significant portion of its profits. Lower capital spending for ABB’s key upstream energy end-markets is likely to hurt its financials at least till the end of 2016. The energy markets are not expected to stabilize before 2017, thus dampening ABB’s short-term prospects. Additionally, softness in industrial production and the projected slowdown, particularly in the emerging markets, are adding to the company’s woes.

Despite the negatives, we believe the company’s long-term growth prospects are stable. The company’s three major customers in utilities, industry, and transport & infrastructure are expected to drive growth. Apart from this, positive development in electricity value chain, rapid progress of Internet of things, services and people and a surge in energy-efficient transport and infrastructure bode well.

ABB currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the same space include EnerSys (NYSE:ENS) , Franklin Electric Co., Inc. (NASDAQ:FELE) and Schneider Electric (PA:SCHN) SE (OTC:SBGSY) , each holding a Zacks Rank #2 (Buy).