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ABB's Baldor acquisition has deteriorated its balance sheet
Posted by: Chandan Dubey (IP Logged)
Date: March 10, 2012 10:04AM
But it is not really a bad news.
ABB: key figures
ABB’s sales continue to grow at a very fast pace. Something which I recommended ABB for in my first take on the industrial giant (A turnaround story for the longterm investor). It is also very nice to see the growth in EPS and net income. The company continues to ratchet up the dividend and is now yielding 3.2% (share price:$20) or 2.34% after deducting the 35% swiss withholding tax. Two troubling things jump out from the above table. First is the drop in FCF and second is the increase in the interests paid..
Let us dig a bit more to find out why the FCF has dropped. We see that FCF is 85% of the net income now and it was 133% of the net income in 2010. For a large and consistent cash generator like ABB, FCF should be more or less equal to the income in the long run. So, a drop in FCF is a bit troubling as it means that either the OCF dropped or there was a significant increase in Cap-Ex. This calls for another table !
There has been a definite increase in Cap-ex, but not too much. This is to be expected as we saw in the previous article, ABB has significantly improved their balance sheet and want to grow through acquisitions as well as organically. They acquired the following companies in the last year
But the main culprit it seems is the drop in OCF. This especially needs a bit of explaining as ABB had better income this year than the last one ($3,315m in 2011 vs $2,715m in 2010). The culprits are (from the cash flow statement)
Nothing seems to be jumping out as odd. There is no note on the increase in provisions, so I cannot make a comment on that. We will need to wait for the full report.
The balance sheet on the other hand (as opposed to income statement) has clearly deteriorated. We see that the goodwill has increased by quite a bit (almost $3.2 billion) and the debt has also increased by almost $1.6 billion. The pension obligations are up and the total equity has only gone up by $1 billion.
For the increase in goodwill we need to look at the acquisitions of ABB in more detail. We already saw what ABB acquired. Let us look at the price it paid.
The split given by ABB about its acquisitions shows that the Baldor acquisition was the one for which ABB paid a goodwill of $2,728 million. Baldor also contributed to the intangibles by $1.4 billion. We will need to look at the Baldor acquisition to see if ABB overpaid or not. I alread covered ABB’s acquisition of Newave energy and concluded that ABB has done a good deal for itself (ABB acquires Newave).
The increase in debt was caused by selling bonds. ABB says the following in its press release
No reason was given on why the money was needed. But looking at the cash flow, we see that ABB has repaid $2.5 billion in debt in 2011 ($497 million in 2010) and has paid $4 billion for acquisitions (2010: $1.3 billion). This is probably the culprit behind a larger debt.
Overall, I am quite happy with my investment in ABB at a price of $19 per share. I will buy more if it drops below $17 and will probably make a very good position around a price of $15. Currently, I own only $500 worth of shares which are up 7% since I bought them.