ABB Ltd. (ABB - Analyst Report) reported third-quarter 2014 earnings per share of 32 cents, surpassing the Zacks Consensus Estimate of 31 cents but declining 11.1% from the prior-year figure of 36 cents.

The company focused on profitable organic growth and related strategic initiatives which led to strong order growth across all regions in the third quarter. The company’s shares have gained 1.61% on Oct 24 following the earnings announcement on Oct 22. 

However, the year-over-year earnings were impacted to the tune of $190 million owing to pre-tax charges for foreign exchange and commodity timing differences in the current quarter.

Total Revenue & Orders

Revenues in the quarter were down 4% year over year to $9.8 billion and also lagged the Zacks Consensus Estimate of $10.4 billion. Service revenues represented 16% of the total revenue, which was up 1% year over year.

Total orders received during the quarter increased to $11.2 billion, reflecting a 25% increase from the last-year quarter. Large orders (order value above $15 million) grew significantly, representing 25% of total orders received in the quarter, compared with 9% in the year-ago quarter.  Base orders (order value below $15 million) were up 3% driven by growth in most of ABB’s early-cycle product businesses. Meanwhile, service orders rose 10%, constituting about 15% of the total orders, down from the prior-year quarter.

Segment Results

Discrete Automation & Motion revenues increased 4% in local currency to $2.6 billion. Orders at the segment augmented 13% to $2.7 billion driven by increased robotics revenues and power conversion and service. Further, orders increased across all businesses and regions on the back of growth initiatives to gain orders, including service as well as continued demand growth in sectors such as rail and marine.

Low Voltage Products revenues totaled $1.9 billion, up 1% in terms of local currency.The segment reported a 1% decline (in local currency) in orders to $1.9 billion and gained from revenue increase in product businesses and systems.

Process Automation revenues decreased 10% in local currency to $1.9 billion. Order level was flat year over year in local currency at $1.9 billion. Region wise, growth was driven by Asia, the Americas, the Middle East and Africa. However, orders from Europe remained stable.

Power Products revenues were $2.5 billion, declining 8% in terms of local currency. This was due to lower opening of the order backlog. However, orders at the segment increased 13% in local currency to $2.7 billion as the demand for large and base orders rose in most markets supported by the industry sector and continued selective investments in large transmission projects. Moreover, orders grew at a double-digit pace in Europe, the Americas, the Middle East and Africa. Meanwhile, orders were marginally lower in Asia but improved in China.

Power Systems revenues were $1.6 billion, down 19% in terms of local currency. Revenues declined owing to lower opening of the order backlog and execution delays in some projects. Orders in Power Systems surged 84% in local currency to $2.2 billion. Both base and large orders increased in number, including an $800-million order for an HVDC (high-voltage direct current) connection in the U.K. In addition, initiatives to drive base order growth contributed to a double-digit increase.

Income and Expenses

Income from operations declined 8% year over year to $1.2 billion. Operational earnings before interest, taxes, depreciation and amortization (EBITDA) in the quarter totaled $1.4 billion, down 13% year over year.

Other Financial Aspects

ABB’s cash flow from operations declined 6% year over year to $1.2 billion during the quarter. However, net debt increased to $1.7 billion at the end of the third quarter of 2014 from $1.5 billion at the end of 2013.

This apart, ABB initiated a $4-billion share buyback program. In Sep 2014, ABB purchased approximately 15.4 million shares under the program with a buyback value of approximately $350 million.

Divestiture

During the quarter, ABB completed its previously-announced divestiture of Thomas & Betts’ steel structures business for approximately $590 million in an all-cash deal. In August, the company announced an agreement to divest its Full Service business for an undisclosed amount. This sale is expected to close in the fourth quarter of 2014, subject to regulatory approval.

Next Level Strategy

In Sep 2014, ABB announced the Next Level strategy and financial targets for the 2015-2020 period. The strategy builds on ABB’s three focus areas of profitable growth, relentless execution and business-led collaboration. The company intends to drive profitable growth by shifting its focus toward high-growth end markets, enhancing competitiveness and lowering risk in business models.

As per the strategy, ABB expects to grow operational earnings per share (EPS) by 10-15% compound annual growth rate (CAGR) and deliver attractive cash returns on investment (CROI) in the mid-teens over the period 2015-2020. On a constant currency basis, it aims to grow revenues on an average 4-7% per year, higher than the forecasted GDP and market growth. ABB further plans to steadily increase its operational EBITA, in the range of 11–16%, while targeting an average conversion of the annual free cash flow above 90%. The new financial targets are with effect from Jan 1, 2015.

Outlook

ABB maintains a positive long-term outlook. The company aims to improve its efficiency by focusing on cash flow generation, cost containment and the stabilization of its Systems business by the end of 2014. Moreover, increasing demand for reliable electricity, 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 #3 (Hold). Some better-ranked stocks that can be considered at present include CUI Global Inc. (CUI - Snapshot Report), AO Smith Corp. (AOS - Snapshot Report) and CLARCOR Inc. (CLC - Snapshot Report). All three carry a Zacks Rank #2 (Buy).