Siemens Misses on Q2 Earnings, Shares Up Slightly - Analyst Blog

Industrial goods manufacturer Siemens AG SI reported relatively modest second-quarter fiscal 2014 results with net income of €1,153 million ($1,579.8 million) or €1.32 per share ($1.81), up from €1,030 million ($1,411.3 million) or €1.18 per share ($1.62) in the year-earlier quarter. The healthy year-over-year increase in earnings is primarily attributable to higher sector profit and significant contribution from outside the sectors. Although earnings increased year over year, it failed to meet the Zacks Consensus Estimate of $1.87. However, share prices were up marginally after the earnings release, on the back of healthy year-over-year improvement in sector profit and all-time high order backlog.

Total sector profit improved 16% year over year to €1,566 million ($2,145.7 million), largely driven by a strong performance by the Infrastructure & Cities segment. In addition, higher sector profits were buoyed by productivity improvements resulting from the ‘Siemens 2014' program.

Total revenue in the reported quarter decreased 2% year over year to €17,449 million ($23,908.6 million), primarily due to a lower volume from large orders. However, excluding currency translation and portfolio effects, revenues for the reported quarter were up 1% year over year on an organic basis. From a geographical perspective, revenues decreased significantly in Europe/ CAME (the Commonwealth of Independent States, Africa and the Middle East), partially offset by an improvement in Asia, Australia and the Americas.

For second-quarter fiscal 2014, orders declined 13% year over year to €18,430 million ($25,252.8 million) due to higher orders in the year-ago quarter. The book-to-bill ratio for the quarter was 1.06, while order backlog reached a record high of €103 billion ($141.1 billion) at quarter end.

Segment Results

In the Energy sector, Siemens recorded an 11% year-over-year decline in revenues to €5,600 million ($7,673.1 million), dragged by a significant drop in revenues in Europe/ CAME region and hefty project charges in the transaction business. Orders reduced 28% year over year, due to higher volume in the prior-year period and a decrease in demand for large gas turbines. The segment profit for the reported quarter dropped 54% year over year to €255 million ($349.4 million) largely due to €310 million ($424.8 million) in project charges for two high voltage direct current (HVDC) transmission projects in Canada.

Healthcare sector profit increased 19% year over year to €531 million ($727.6 million), largely driven by a €66 million ($90.4 million) push from the expected sale of a particle therapy installation. Revenues dipped marginally to €3,256 million ($4,461.4 million) in the wake of lower revenues and orders from the Americas.

In the Industry sector, revenues were up 1% year over year to €4,430 million ($6,070.0 million) due to higher orders. Sector profit improved 32.2% year over year to €456 million ($624.8 million). The year-over-year increase in sector profit was primarily due to higher charges in the year-earlier quarter related to the ‘Siemens 2014' program.

Infrastructure & Cities sector recorded a dramatic year-over-year improvement in sector profit from €6 million ($8.2 million) to €325 million ($445.3 million) with healthy contributions from all businesses due to a favorable business mix. The healthy sector profit was also attributable to higher productivity from solid execution of the ‘Siemens 2014' program, which reduced the sector's cost structure, adjusted capacity and optimized regional footprint as per demand. Revenues were up 9% year over year to €4,422 million ($6,059.0 million) due to effective project execution in the Transportation & Logistics business. On a geographic basis, double-digit increases in revenue in Europe/CAME, Asia and Australia were partly offset by a decline in the Americas.

Balance Sheet and Cash Flow

Net cash from operating activities at quarter-end stood at €1,791 million ($2,454.0 million), while free cash flow from continuing operations increased modestly to €1,390 million ($1,904.6 million) from €1.360 billion ($1,863.5 million) in the prior-year period. Cash and cash equivalents at quarter-end were €8,585 million ($11,763.2 million), while long-term debt was €18,587 million ($25,467.9 million). For the reported quarter, adjusted ROCE (return on capital employed) was 14.7%, compared with 12.7% in the year-ago quarter.

Outlook

The company expects markets to remain challenging in fiscal 2014 with recovery in short-cycle businesses occurring in the latter half of the fiscal. Siemens reiterated its earlier guidance for fiscal 2014 and expects orders to exceed revenues for a book-to-bill ratio above 1. Earnings per share for fiscal 2014 are anticipated to increase by at least 15% from €5.08 in fiscal 2013.

Siemens presently has a Zacks Rank #3 (Hold). Players in the industry worth reckoning include GrafTech International Ltd. GTI, Universal Electronics Inc. UEIC and Garmin Ltd. GRMN. While GrafTech and Universal Electronics carry a Zacks Rank #1 (Strong Buy) each, Garmin carries a Zacks Rank #2 (Buy).

Note: 1 € = $1.3702 (period average from Jan 1, 2014 to Mar 31, 2014)

         One Siemens ADR corresponds to one Siemens share.