ABB Ltd. (ABB) reported second-quarter 2011 earnings per share of 39 cents, above the Zacks Consensus Estimate of 37 cents and prior-year earnings of 27 cents. Strong industrial growth, high profits from Power System division and good returns from recent acquisitions contributed to impressive net income gains, up 43% year over year.
Increasing demand for industrial efficient products, robots and low voltage systems with rising investment in operationally efficient products aided order growth in the quarter.
Total Revenue
Total revenue in the quarter increased 17% year over year in terms of local currency to $9.7 billion. The company performed well in both mature as well as emerging markets. Order level in the quarter increased by 18% in terms of local currency to $9.9 billion, with a backlog of $30.0 million. Baldor acquisition was a major contributor in the quarter.
Segment Results
Power Products revenue was $2.8 billion, up 1% in terms of local currency. Order rate increased by 4%, led by increased demand for utility and industrial products.
Power Systems revenue was $2.0 billion, up 12% in terms of local currency led by strong execution of order backlog. Orders in Power System was up 11% with rapid upgrade and growth of power grids by customers.
Discrete Automation& Motion revenue was $2.2 billion, up 61% in terms of local currency. Order level increased by 63%, driven by worldwide rise in demand for energy-efficient automation solutions and contributions from Baldor Electric, acquired in the first quarter of 2011.
Low Voltage Products revenue was $1.4 billion, up 16% in terms of local currency, led by increased sales in all businesses. Orders surged by 6% in local currency, aided by increased demand for low-voltage systems partially offset by low demand in renewable energy sector for control products. Orders in the quarter increased at a slower pace than in the prior quarters.
Process Automation revenue increased by 9% in local currency to $2.1 billion, led by execution of the stronger order backlog as well as the recent growth in service orders. Order level was up by 15% led by rising demand in the marine and oil and gas sectors.
Income and Expenses
The company achieved savings of approximately $270 million in the quarter, of which about 50% were derived from optimized sourcing. This was a part of ABB’s $1 billion cost savings program for 2011. A total cost of about $30 million was incurred for the program during the quarter.
EBIT in the quarter amounted to $1.3 billion, an increase of 37% year over year.
Balance Sheet and Cash Flow
At the end of the quarter, ABB had net cash balance of $1.2 billion, down from $2.2 billion at the end of the first quarter of 2011. Cash balance declined due to dividend payment of approximately $1.6 billion in May 2011. High net earnings and advances from customers offset the high expenditure for inventories, leading to significant growth in cash from operating activities.
Outlook
Business in the emerging markets are seen as prime benefactors for the company though rising demand levels in mature markets also support ABB’s future growth prospects. Price increases initiated by the company to meet the rising raw material costs will lead to margin improvement. ABB focuses on attaining profitable growth opportunities by maintaining a competitive cost position, strong balance sheet, strong presence in global market and a leading technology.
The company sees good prospect in early cycle businesses with rising industrial demand. Moreover, it expects its infrastructure-related businesses in both power and automation to recover later in 2011. Increasing demand for energy efficihency, industrial productivity and more reliable power infrastructure in both the mature and emerging economies will support the company’s future growth prospects.
However, certain macroeconomic concerns have increased especially public debt issues in the U.S. and Europe and inflation in China. More than 80% of the company's orders are derived from outside the US and ABB is quite vulnerable to such macroeconomic weakness.
ABB Ltd. is a Zurich (Switzerland) based power and automation technology company. The company operates in approximately 100 countries, structuring its global organization into five regions: Europe, Americas, Asia, the Middle East and Africa. A major competitor of ABB Ltd. is Siemens AG (SI).
We maintain a Zacks #2 Rank (short-term Buy recommendation) on ABB Ltd.
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