ABB's Q3 Earnings Beat Estimates, Macro Issues Remain

ABB Ltd. (NYSE:ABB) reported operational earnings per share of 32 cents, down 1% year over year. Steady revenues and diligent cost-saving initiatives helped maintain earnings; however, it was more than offset by tough macroeconomic and geopolitical conditions which ultimately affected revenues. However, earnings beat the Zacks Consensus Estimate of 28 cents.

Quarterly revenues were down 3% year over year, and came in at $8,255 million, lagging the Zacks Consensus Estimate of $8,364 million. All round weakness and declines in such segments as mining and oil and gas proved to be headwinds, more than offsetting steady execution of a healthy order backlog in the Power Grids space. Individually, revenues took a beating in all the four segments of the company, thus dragging the overall top line.

Revenue by Segments

Discrete Automation & Motion (down 1% to $2,203 million): Sales remained steady on strong order execution; however orders of this segment declined 5% to $2,123 million on a year-over-year basis. Declining capital expenditures in process industries, including oil and gas, hurt the order performance of this segment.

Electrification Products (down 2% to $2,308 million): Unfavorable demand pattern and lower orders in key end markets affected revenues. Orders were down 6% year over year to $2,223 million on account of persistent poor performance in the Americas and AMEA region.

Process Automation (down 8% to $1,523 million): Revenues were down in this segment, particularly due to declines in discretionary spending in oil & gas and related sectors. Orders plunged 22% to $1,193 million, owing to lower capital spending in process industries and constrained discretionary spending in process industries.

Power Grids (down 6% to $2,636 million): Currency fluctuations and adverse timing of orders dragged the revenues. Orders were down 22% to $2,391 million mainly due to the timing of large order awards and sluggishness in markets like the U.S., Saudi Arabia and Brazil.

Total orders fell 14% year over year to $7,533 million and were down 13% on a comparable basis. Base orders shrunk 3% on a year-over-year basis, while the number of large orders was lower across all divisions. Timing of large order awards and lower short-cycle volumes were responsible for the fall.

On a geographic basis, European countries, namely Germany, Italy, Sweden and Switzerland witnessed order growth, slightly offset by order declines in the U.K. and Norway due to the Brexit referendum. Orders declined in the U.S. largely due to significant investment delays triggered by the U.S. election and sluggish industrial demand. The Asia, Middle East and Africa witnessed a mixed performance with order improvements in India, which somewhat offset order declines in China and the UAE.

Book-to-bill ratio at the end of the third quarter was 0.91, down from 1.03 in the comparable quarter a year ago.

Operational earnings before interest, taxes and amortization (“EBITA”) in the quarter under view slid 3% year over year to $1,046 million.

Next Level Strategy: Stage 3

At the end of the quarter, ABB launched the third stage of the revamped version of its “Next Level Strategy” which focuses on three areas, namely profitable growth, relentless execution and business-led collaboration. This stage calls for restructuring ABB’s divisions into four market-leading entrepreneurial businesses, unlocking ABB’s full digital potential, increasing momentum in operational excellence and boosting the company’s brand.

ABB will restructure its business into four segments: Electrification Products, Robotics and Motion, Industrial Automation and Power Grids, and the same will be effective from Jan 1, 2017. Further, in order to unlock its digital capabilities, ABB announced a strategic partnership with Microsoft Corporation (NASDAQ:MSFT) , to shore up its capabilities in the industrial internet market, by combining cloud technology with industrial digital technology. Together, the companies will develop next-generation digital solutions on an integrated open cloud platform.

Moreover, ABB is optimistic about its White-Collar Productivity savings program, which has surpassed expectations since its launch. Consequently, the company has raised the cost-reduction target under the program by 30% to $1.3 billion. Another transition that the company is launching is to adopt a single corporate brand, by consolidating all its brands across the world under one umbrella.

ABB LTD-ADR Price, Consensus and EPS Surprise

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Written By: Zacks Investment Research