ABB Suffers Huge Earnings Decline on Macroeconomic Woes

ABB Ltd.ABB reported fourth-quarter 2015 earnings per share of 9 cents, down a massive 69% from the year-ago tally of 29 cents.

For full-year 2015, operational earnings came in at 87 cents, down 22.3% year over year.

Broader macroeconomic challenges, especially volatility in the oil & gas industry and currency fluctuations, acted as major headwinds, significantly dragging the bottom-line performance. This apart, economic slowdown in China, coupled with softness in key markets like the U.S., added to the company's woes. These negatives weighed heavily on the company's earnings performance, resulting in the overall decline.

Inside the Headlines

Quarterly revenues were down 10.7% year over year to $9,242 million. On a constant currency basis, revenues fell 1%.

Unimpressive performance across all five company segments triggered an overall top-line decline. Furthermore, an unfavorable mix, weak demand and currency fluctuations significantly hurt revenue growth for the fourth quarter.

For full-year 2015, revenues were $35,481, down 10.9% year over year. Yearly decline in revenues was also led by broader macroeconomic concerns which impacted order rates and sales across segments.

Discrete Automation & Motion (down 11%): Sales in this segment primarily suffered from weak short-cycle business and low order backlog in Drives & Controls and Motors & Generators. Additionally, slowdown in the U.S. and Chinese markets hurt demand for standard products such as motors and drives, thereby impacting orders adversely (down 17%).

Low Voltage Products (down 9%): Sales reduced to $1,624 on account of poor orders and currency headwinds. Orders were down 11% on account of softness in AMEA, Americas, China, the U.S. and Canada.

Process Automation (down 20%): Revenues faced the steepest decline in this segment due to a decrease in orders, coupled with a slash in discretionary spending in oil & gas. Orders declined 17%, owing to lower spending in process industries.

Power Products (down 10%): Power Products were particularly hit by slower short-cycle demand in key industrial markets like China and the U.S. orders also went down 6% on account of industrial weakness.

Power Systems (down 11%): Currency fluctuations and lackluster orders dragged the revenues. Orders were down 7% on similar grounds.

Total orders fell 12% year over year to $8,262 million and 2% on a comparable basis. Sharp fall in base orders (down 15%) on a year-over-year basis was responsible for the overall order decline. On a geographic basis, European countries, namely Germany, Sweden and Turkey witnessed order growth. However, this was more than offset by order declines in Asia and the Middle East & Africa, with order slump in China proving to be the main culprit.

Book-to-bill ratio at the end of fourth quarter was 0.89, in line with the comparable quarter a year ago.

Operational earnings before interest, taxes, depreciation and amortization ("EBITDA") in the fourth quarter totaled $1,081 million, down 6% considering currency headwinds. However, on a comparable basis, the same improved 1%. The decrease in EBITA during the quarter was largely brought about by a decline in share of higher-margin standard products and lackluster revenue growth.

Next Level 2 Strategy

ABB's proven "Next Level Strategy" (that focuses on three areas, namely, profitable growth, relentless execution and business-led collaboration) is the backbone of its operating culture. Last September, ABB had come up with the blueprint for stage 2 of its 'Next Level Strategy.' Apart from continuing with its stage 1 initiative, the company sketched a plan for realigning its business divisions.

To drive profitable growth, ABB has planned to streamline its five divisions into four in order to better serve its customers through combined power & automation offering. In line with this strategy, effective from Jan 1, 2016, the company's four realigned divisions include Power Grids, Electrification Products, Discrete Automation and Motion and Process Automation.

As part of relentless execution, the company intends to reduce costs equivalent to 3-5 percent of cost of sales each year. In this regard, cost savings of approximately $1.2 billion were achieved in 2015. As for business-led collaboration, ABB rolled out in 30 countries which is expected to bolster its sales productivity in the near future.

Liquidity & Cash Flows

ABB's cash and cash equivalents as of Dec 31, 2015 were $4,565 million compared with $3,970 million as of Sep 30, 2015. Total long-term debt declined to $5,985 as of Dec 31, 2015 from $6,571 million as of Sep 30, 2015.

ABB's cash flow from operating activities came in at $1,994 million for the fourth quarter compared with $1,173 million in third-quarter 2015. Efficient management of working capital drove overall improvement in cash flow.

Share Repurchase and Dividend Payout

In Sep 2014, ABB had announced a $4-billion share buyback program; and under this, it purchased approximately 24 million shares for approximately $455 million during the fourth quarter of 2015.

As part of its Next Level Strategy, ABB returned $3.2 billion to its shareholders in the form of dividend payments and share repurchases. Additionally, to increase its shareholders' value, the company has proposed a 0.02-0.74 Swiss francs per share hike in dividend for 2015. The decision is subject to shareholders' approval at the company's annual general meeting on Apr 21, 2016.

To Conclude

Macroeconomic challenges have proved to be a drag on ABB's top-line performance over the past few quarters. Geopolitical tension around the globe indicates that the company will continue to suffer from volatility in oil prices as well as currency fluctuations in the short run. For full-year 2016, the company expects modest growth in the U.S. coupled with softness in China.

Based on the present market scenario, the company has lowered its revenue growth target for 2015-2020 and expects average annual revenue to grow within 3-6% (previously 4-7%). Softness in industrial production and projected slowdown, particularly in the emerging markets, has compelled the company to revise estimates.

However, in the long run, we expect the company's three major customers in utilities, industry, and transport & infrastructure to drive growth. This apart, positive development in electricity value chain, rapid progress of Internet of things, services and people, an anticipated impending Industry 4.0 revolution and a surge in energy-efficient transport and infrastructure bode well for the company in the long term.

ABB currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the industry include II-VI Inc. IIVI , CUI Global, Inc. CUI and Chicago Bridge & Iron Company N.V. CBI . While II-VI sports a Zacks Rank #1 (Strong Buy), both CUI Global and Chicago Bridge & Iron carry a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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