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ABB Ltd. (ABB - Analyst Report) reported first-quarter 2014 earnings per share of 24 cents, marking a decline of 17.2% from the prior-year figure of 29 cents. The quarterly results included the effect of additional charges from certain projects in the Power Systems (PS) division.

Total Revenue & Orders

Revenues for the first quarter were down 1% in local currency on a lower opening order backlog compared with the prior-year period and execution issues in the Power Systems division. Service revenues represented 16% of total revenues, which were flat year over year. Revenues fell short of the Zacks Consensus Estimate of $11.5 billion.

Total orders received during the quarter were steady. Base orders (order value below $15 million) were up 3% in local currency driven by growth in most of ABB’s early-cycle product businesses, primarily in the Discrete Automation and Motion and Low Voltage Products divisions. However, this was offset by a 12% decrease in large orders (order value above $15 million), mainly in the Process Automation and Power Products businesses due to continued delay of customer capital investments in grid infrastructure and greenfield industrial development projects.

Service orders declined 6% in local currency due to the ABB’s exit from a large full-service contract in Finland.

Segment Results

Power Products revenues were $2.4 billion, declining 2% in terms of local currency. This was due to lower opening of the order backlog. Orders for the segment also declined 3% in local currency to $2.7 billion as the growth from the increasing industrial and power distribution demand was fully offset by selective investments by utilities in power transmission.

Power Systems revenues were $1.6 billion, down 19% in terms of local currency. Revenues declined due to lower opening of the order backlog and execution delays in selected projects. Orders in Power Systems fell 6% in local currency to $1.5 billion. Although the large orders were at the same level as the previous year, Utilities were cautious, in their power transmission investments and ABB’s selectivity focus on margin and pull-through also continued which impacted the order growth.

Discrete Automation & Motion revenues were $2.4 billion, up 3% over the previous year’s revenues of $2.3 billion. The rise was due to execution of the order backlog and increased demand for early-cycle products which fully offset the unfavorable impact of a lower opening order backlog in large motors and medium-voltage drives compared with the same quarter in 2013.

Service revenues increased in double-digits during the first quarter. Order level increased 14% to $2.8 billion. Orders during the quarter were driven mainly by early-cycle businesses serving general industry and discrete manufacturing which continued to grow in the quarter, compensating lower demand for products used in later-cycle process industries. Orders also benefited from a large rail order in Sweden and from organic growth initiatives across the portfolio, especially in service.

Low Voltage Productsr evenues were $1.9 billion, up 7% in terms of local currency. The segment gained from revenue increase across all regions in the quarter as well as execution of system orders from the backlog. Orders grew 3% in the quarter, driven by a positive business environment in early-cycle industrial and building sectors in most regions, as well as measures to increase the penetration in a number of key markets.

Process Automation revenues increased 1% in local currency to $1.9 billion. The company’s performance reflected a strong backlog execution in its marine and mining businesses. Order level decreased 17% in local currency to $2.0 billion. The decline was due to fewer large orders in the mining sector compared with the prior-year period.

Income and Expenses

Income from operations declined to $855 million from $1.0 billion in the prior year. Operational earnings before interest, taxes, depreciation and amortization (EBITDA) in the quarter totaled $1.2 billion, down 13% year over year.

Balance Sheet and Cash Flow

Exiting the first quarter, ABB reported cash and cash equivalents of $6.4 billion versus $5.4 billion in the prior-year period. However, net debt increased to $1.8 billion from $1.5 billion at the end of 2013.

Step Change Program

Disappointed by the dismal performance of its Power Systems division, ABB announced the ‘Step Change Program’ for the Power Systems division to revive its performance.  

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 along with the persisting macroeconomic volatility.

ABB currently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the sector are NRG Yield, Inc. (NYLD - Snapshot Report), AGL Resources Inc. (GAS - Analyst Report) and Chesapeake Utilities Corp. (CPK - Snapshot Report). While NRG and AGL carry Zacks Rank #1 (Strong Buy), Chesapeake has a Zacks Rank #2 (Buy).

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