ABB Ltd. reported better-than-expected bottom-line results for second-quarter 2018 on the back of strong growth in orders and improvement in the margin. Impressive results seem to have lifted investors’ sentiments for the stock, as evident from 2.7% gain in the share price yesterday.

The company’s operational earnings in the reported quarter were 38 cents per share, surpassing the Zacks Consensus Estimate of 36 cents by 5.6%. Also, the bottom line reflected 28% growth from the year-ago tally of 30 cents.

Revenues Expand on Solid Orders

In the reported quarter, ABB’s revenues totaled $8,889 million, up 5% from the year-ago tally on the back of strengthening business in Electrification Products, Industrial Automation, and Robotics and Motion segments. This, however, was partially offset by the weakness in Power Grids segment.

On a comparable basis, the top line grew just 1% year over year due to 2% adverse impacts from both unfavorable foreign currency movements and portfolio changes. The top line lagged the Zacks Consensus Estimate of $9.09 billion in the quarter under review.

Total orders were $9,483 million, increasing 14% year over year. The metric also improved 8% on a comparable basis, backed by strong growth across all regions and divisions. While base orders grew 14% on a year-over-year basis, large orders represented 7% of the company’s total orders. The order backlog at the reported quarter-end totaled $24.2 billion (up 3% year over year).

On a geographic basis, businesses in all key operating regions were solid in the quarter under review. Revenues from the European operations increased 9% year over year to $3,071 million. Orders in the region were solid and exhibited growth of 22%. Revenues of $2,545 million from the Americas reflected growth of 3%. Orders from this region expanded 7%. Asia, Middle East and Africa segment generated revenues of $3,273 million, increasing 3% year over year. Orders were solid in the reported quarter, growing 11% over the year-ago tally.

Book-to-bill ratio at the end of the second quarter was 1.0, up from 0.99 in the year-ago comparable quarter.

ABB reports its revenues under the segments discussed below:

Power Grids: Revenues in the reported quarter decreased 6% year over year to $2,354 million. The weakness was primarily due to the reduced opening order backlog. Orders increased 6% year over year to $2,577 million, mainly owing to strengthening renewable, industrial, transportation and grid digitization businesses. Also, the company’s ABB Ability solutions and Power Up strategies were advantageous.

Electrification Products: Revenues totaled $2,673 million, increasing 7% year over year. Strong market demand in the Americas, Europe, and Asia, Middle East and Africa (AMEA) drove revenues. Orders were up 9% year over year to $2,727 million, owing to the strong demand across all regions.

Industrial Automation: Revenues were $1,839 million, increasing 17% year over year. Orders recorded impressive growth of 34% year over year to $2,005 million. The uptick was owing to investments in specialty marine vessel solutions, as well as in process industries, mainly oil and gas.

Robotics and Motion: Revenues of $2,316 million increased 11% from the year-ago tally. Sales grew steadily on improving businesses in all geographical regions. Orders of this segment moved up 15% year over year to $2,540 million on a year-over-year basis, backed by reported growth across all segments and regions.

Operational EBITA Margin Improves

In the reported quarter, ABB’s total cost of sales increased 5.1% year over year to $6,160 million. It represented 69.3% of the second quarter’s revenues, flat compared with the year-ago tally. Gross margin was flat at 30.7%. Selling, general and administrative expenses grew 4.5% year over year and were 16.1% of revenues versus 16.2% in the year-ago quarter.

Operational earnings before interest, taxes and amortization (EBITA) in the quarter under review increased 12% year over year to $1,167 million. Operational EBITA margin grew 60 basis points (bps) year over year to 13%, mainly driven by the company’s productivity-enhancement initiatives.

Balance Sheet and Cash Flow

Exiting the second quarter of 2018, ABB had cash and cash equivalents of $3,283 million, down from $4,162 million recorded at the end of the last reported quarter. Long-term debt increased 26% sequentially to $6,661 million, mainly due to issuances of notes, with a principal amount of $1,500 million during the reported quarter.

In the second quarter, net cash generation from operating activities totaled $1,010 million, reflecting growth of 116% over the year-ago quarter. Capital spending on the purchase of property, plant, equipment and intangible assets was $197 million, lower than $225 million used in the year-ago quarter. Exiting the quarter under review, the company’s free cash flow conversion to net income was 110%.

During the reported quarter, the company paid dividends amounting to $1,717 million.

Next Level Strategy

ABB is progressing well on the third stage of its Next Level Strategy that focuses on three areas, namely — profitable growth, relentless execution and business-led collaboration. The third stage calls for the restructuring of the company’s divisions into four market-leading entrepreneurial businesses, unlocking its full digital potential, accelerating momentum in operational excellence and enhancing the company’s brand.

Growing acceptance of the ABB Ability solutions underpins the company’s profitable growth strategy. During the reported quarter, the company received an order to provide the ABB Ability solutions to Ørsted, a green energy company based in Denmark. Under another contract, the company will supply ABB Ability solutions to a China-based chemicals company, Yitai Group. Additionally, the company is committed toward making worthy investments, including €100 million investment in Austria and $30 million in Sweden.

It also completed acquiring GE Industrial Solutions during the second quarter. The assets acquired will be integrated with the Electrification Products segment. The company predicts negative 60 and 260 bps impacts, respectively, on the company’s operating EBITA margin and Electrification Products segment’s operating EBITA margin in the second half of 2018. However, annual cost synergies of $200 million are anticipated by the fifth year of the acquisition.

Per its relentless execution strategy, the company’s productivity-enhancement initiatives and cost-saving actions have been beneficial over time. Notably, inflation in raw material costs was more than offset by pricing actions and savings in the second quarter of 2018. The company targets to negate the impact of the cost of sales by 3-5% every year. It is also working on 1,500 improvement projects.

The company’s business-led collaboration strategy is underpinned by important partnerships, including — Rittal and Kawasaki Heavy Industries. Also, the company is focused on strengthening its brand image.

Outlook

Over the long haul, ABB believes that all its three major markets, namely — utilities, industry and transport & infrastructure, hold great potential. The company expects utility customers to invest further in transmission and distribution projects, and renewable sources like solar and wind.

Additionally, the company believes that strengthening business in China, favorable operating conditions in the United States and Europe, and overall growth in the global economy will benefit near-term performances. Also, foreign currency translation, oil prices and geopolitical tensions might impact results in the future.

ABB Ltd Price, Consensus and EPS Surprise