Siemens Exceeds Estimates on Lower Revenue

| About: Siemens AG (SIEGY)

Siemens AG (SI) reported first quarter of 2010 earnings per share from continuing operations of €1.70 ($2.51), exceeding the Zacks Consensus Estimate of $1.44.

First-quarter revenue of €17.352 billion ($25.6 billion) was down 12% (8% organic) compared to the prior-year period, yet exceptional execution and a favorable revenue mix helped lift Total Sectors profit 11%, to €2.255 billion.

Orders of €18.976 billion ($28 billion) came in 15% lower than the prior-year period (11% organic), including an expected contraction in industrial and energy infrastructure markets that typically lag macroeconomic cycles.

The Industry Sector was the primary factor in lower revenue year-over-year, reporting a 13% decline in the first quarter on lower sales at Drive Technologies, Industry Solutions, Building Technologies and Industry Automation. Energy reported a revenue decline of 10% on lower volume in all divisions. Health care revenue declined modestly compared to the prior-year period, and rose on an organic basis. Revenue for the reported quarter declined year-over-year in all three regions. The sharpest decline came from the Americas, including strong negative currency translation effects. Amid the decline in Asia and Australia, India and China posted higher revenue compared to the first quarter a year ago.

Orders came in lower for all sectors than in the prior-year period. Order intake declined 19% in Energy due primarily to market contraction and increased pricing pressure. Orders increased strongly at Renewable Energy, including a high volume from large orders. Orders fell 16% in Industry, due mainly to a lower demand at Industry Solutions and Drive Technologies. Health care orders came in 1% below the prior-year level, and increased on an organic basis. On a geographic basis, orders declined in all regions, including substantially lower volume from large fossil power generation contracts in the region comprising Europe, the Commonwealth of Independent States, Africa and the Middle East (Europe/CAME).

Total Sectors profit for the first quarter climbed 11% year-over-year to €2.255 billion, despite the 12% decline in revenue mentioned above. A favorable revenue mix and cost situation lifted the Sectors’ combined gross margin, and functional costs were significantly lower, particularly for SG&A. Total Sectors profit also included a €45 million gain on the sale of a business. Health care was the primary driver of the increase in Total Sectors profit, with a double-digit profit increase in its imaging business and a profit rebound in the solutions business compared to the first quarter a year earlier. Energy’s contribution to the increase in Total Sectors profit came primarily from its fossil power generation business. While Industry accounted for the largest share of Total Sectors profit, its first-quarter result was lower than a year earlier.

Free cash flow at the Sector level climbed to €1.615 billion compared to €387 million in the same quarter a year earlier. The current period benefited from improved net working capital management and tight control of capital expenditures. Free cash flow from continuing operations was a positive €725 million compared to a negative €1.574 billion in the first quarter a year ago. The prior-year quarter included €1.008 billion in cash outflows associated with the settlement of legal proceedings.

Cash and cash equivalents were €10.4 billion ($15.4 billion) with long-term debt at €18.7 billion ($27.6 billion) and shareowners’ equity at €28.7 billion ($42.4 billion). The estimated underfunding of Siemens' principal pension plans as of December 31, 2009, amounted to approximately €4.2 billion, compared to an underfunding of approximately €4.0 billion at the end of fiscal 2009. A positive return on plan assets was more than offset by an increase in the defined benefit obligation.

Siemens Aktiengesellschaft, an electronics and electrical engineering company, operates in the industry, energy and health care sectors worldwide. In the industry sector, the company’s portfolio ranges from industry automation and drives products and services to building, lighting, and mobility solutions and services, besides including system integration and solutions for plant business. Major competitors are ABB Ltd (NYSE:ABB) and General Electric Company (NYSE:GE).

We currently have a Neutral recommendation on SI.