ABB Underperforms Estimate

ABB Ltd. (ABB - Snapshot Report) reported second-quarter 2012 earnings per share of 28 cents, 22.2% below the Zacks Consensus Estimate of 36 cents and down 28.2% below prior-year earnings of 39 cents. The decline in profits was primarily attributable to strengthening of the U.S. dollar and acquisition-related expenses.

Total Revenue

Total revenue during the quarter grew 6% year over year in terms of local currency to $9.7 billion, aided by increased sales in Discrete Automation and Motion business and Power Product business. Order level in the quarter surged 9% in terms of local currency to $10.1 billion, with a backlog of $29.0 million. Order level in the quarter was aided by higher demand in industries for Automation solutions and power distribution investments.

Segment Results

Power Products revenue was flat year over year in terms of local currency. Order rate also contracted 1%. Orders increased in the quarter driven by growth in emerging markets; however, orders were stable in Europe and grew in the Americas and the Middle East and Africa. This was partially offset by macroeconomic uncertainties.

Power Systems revenue was $1.8 billion, up 1% in terms of local currency. Orders in Power System were up 27%. Order growth was primarily driven by utility investments in transmission infrastructure and grid enhancement. Base and large orders both grew during the quarter, due to substations and grid system solutions.

Discrete Automation& Motion revenue was $2.4 billion, up 11% in terms of local currency. Order declined 2%, due to lower demand from the renewable energy and rail sectors in addition to reduced demand in China and southern Europe. However, this was offset by continued order growth in North America, including a double-digit increase in orders for ABB’s low-voltage drives. Baldor Electric was also a good contributor.

Low Voltage Products revenue was $1.6 billion, up 21% in terms of local currency. Orders grew a robust 23%, driven by the contribution from the acquisition of Thomas & Betts, a North American leader in low-voltage products, which was completed in May 2012.

Process Automation revenue increased 5% in local currency to $2.1 billion. Order level grew 3%, driven by large orders mainly in oil and gas and the marine sector. The order growth also includes harbor cranes.

Income and Expenses

The company achieved savings of approximately $280 million in the quarter. Costs associated with the program in the quarter were about $15 million.

EBITDA in the quarter amounted to $1.5 billion, down 5% year over year.

Balance Sheet and Cash Flow

For the first six months of 2012, net cash provided by operating activities was $ 573 million, down from $1.1 billion at the end of 2011. Long term debt year to date also increased to $7.0 billion from $3.2 billion at the end of 2011. The increase was primarily attributable to dividend payment of approximately $1.6 billion and the Thomas & Betts acquisition.

Outlook

ABB maintains a positive long-term outlook. Rising investment in grid upgrades and industries spending more on automation solutions to increase energy efficiency and productivity are the benefactors for the company. However, short-term uncertainties prevail with the continuing macroeconomic volatility.

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 - Analyst Report).

We maintain a Zacks #4 Rank (short-term Sell recommendation) on ABB Ltd.