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Chandan Dubey
Chandan Dubey
Articles (150) 

ABB's Baldor acquisition has deteriorated its balance sheet

March 10, 2012 | About:

But it is not really a bad news.

ABB: key figures

Key figures20112010% up
Sales$37,990 m$31,589 m20%
EBIT$4,667 m$3,818 m22%
Net income$3,168$2,56124%
Free cash flow$2,593 m$3,397-28%
Dividend0.65 CHF0.6 CHF8.3%
Cash RoIC14%21%
Shares outstanding2,291 m2,291 m0%
Interest paid$165 m$94 m

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 !

in $ millions20112010

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
  • Trasfor, a Switzerland-based specialty transformer manufacturer
  • Newave Energy International, a manufacturer of uninterrupted power supplies, for a total consideration of approximately $170 million.
  • U.S.-based industrial motor manufacturer Baldor Electric, completed in January and valued at $4.2 billion, including debt repayment.
  • Smaller acquisitions like Envitech, a Canadian supplier of electrical products for urban transit systems; Powercorp, an Australian renewable power automation company; Lorentzen & Wettre, a Swedish manufacturer of control solutions for the pulp and paper industry; Epyon, a Netherlands-based supplier of electrical vehicle charging solutions; and Mincom, a supplier of enterprise asset management software to the mining and other industries, based in Australia.
  • ABB announced in January 2012 an agreed offer to acquire U.S. low-voltage equipment manufacturer Thomas & Betts for a total cash consideration of $3.9 billion. The transaction, to be fully funded by cash and debt, is expected to be closed in the second quarter of 2012, pending approval of the deal by Thomas & Betts shareholders and customary regulatory approvals.

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)

Items in $ millions20112010
Trade payables+213+618
Deferred taxes-34+151
Trade receivables-731-407

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.

Balance sheet

Cash$4,819 m$5,897 m
Goodwill$7,269 m$4,085
Intangibles$2,273 m$701 m
LT debt$3,231 m$1,139 m
Pension and benefits$1,487 m$831 m
Total equity$16,336 m$15,458 m

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.

Items (in $ millions)20112010
No of acquisitions109
Acquisitions, net of cash3,8051,275
Increase in goodwill3,2611,091

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

ABB returned to the bond market in 2011 with the aim of extending the maturity profile of its long-term debt and securing long-term funding at attractive rates. The company issued two US-dollar denominated bonds in June, totaling $1,250 million—maturing in 2016 and 2021—followed in October by two Swiss franc-denominated bonds totaling CHF 850 million, also maturing in 2016 and 2021. In January 2012, ABB Ltd issued a further CHF 350-million bond, maturing in 2018. In addition, ABB redeemed on maturity a €650-million bond in November, 2011.

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.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 4.1/5 (10 votes)


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