Siemens Gains on Areva Stake Sale

Siemens AG (SI) reported earnings per share from continuing operations of €3.58 ($4.89 per ADR) for the second quarter of fiscal 2011 compared with €1.62 per ADR in the year-ago quarter. These increases were due predominantly to higher Total Sectors profit including the pretax €1.520 billion gain from the sale of the Energy Sector’s 34% stake in Areva NP to Areva S.A.

Revenue

All Sectors delivered higher orders and revenue in the second quarter. Revenue increased 7% with growth in all three reporting regions to €17.7 billion ($24.2 billion).

Orders climbed 28% to €20.6 billion ($28.1 billion) on growth across all Sectors and large contract wins, which led to a new high in order intake in the Energy Sector. All regions delivered double-digit order growth, led by the region comprising Europe, the Commonwealth of Independent States, Africa and the Middle East (Europe/CAME) and Asia, Australia.

Within Europe, strong growth in Germany included several large Energy orders. Globally, emerging markets again grew significantly faster than orders overall, at 52%, and accounted for €7.475 billion, or 36%, of total orders for the quarter.

The book-to-bill ratio was 1.17 and the backlog for the sectors totaled €92 billion.

Sectoral and Regional Performance

The company has three operating sectors, Industry, Energy and Healthcare.

Energy orders climbed more than 50% on the strength of a number of large contract wins at Fossil Power Genera-tion, Renewable Energy and Power Transmission. Double-digit order growth in Industry included strong increases at all Divisions. Order growth in Healthcare was solid across its businesses.

All regions delivered double-digit order growth, led by the region comprising Europe, the Commonwealth of Independent States, Africa and the Middle East (Europe/CAME) and Asia, Australia. Within Europe/CAME, strong growth in Germany included several large Energy orders. Globally, emerging markets again grew significantly faster than orders overall, at 52%, and accounted for €7.475 billion, or 36%, of total orders for the quarter.

Income and Expenses

In the second quarter, Total Sectors profit climbed to €3.695 billion, up from €1.849 billion a year earlier. The increase was driven mainly by higher Sector profit at Energy of €2.421 billion. This result was due largely due to a pretax €1.520 billion gain from the sale of the Sector’s 34% share in Areva NP to Areva S.A.

Cash Flow

Free cash flow from continuing operations decreased from €1.311 billion in the second quarter a year ago to €354 million in the current quarter. The decline was due primarily to a build-up of net working capital at the Sector level associated with broad-based growth, and also lower billings in excess.

Furthermore, the current period included higher cash outflows in connection with personnel-related expenses comprising the previously disclosed special remuneration for non-management employees.

The estimated underfunding of Siemens’ pension plans as of Mar 31, 2011, amounted to approximately €5.3 billion, compared to an under-funding of approximately €6.1 billion at the end of the first quarter. The improvement in funded status since Dec 31, 2010, is due mainly to a decrease in Siemens’ defined benefit obligation (DBO) resulting from an increase in the discount rate assumption as of Mar 31, 2011.

Outlook

Siemens expects order levels in fiscal 2011 to increase organically from the level in fiscal 2010 with improving market conditions. Strong backlog will support organic revenue growth in fiscal 2011 and income from continuing operations is expected to increase by 25% to 35% year over year, excluding effects of legal and regulatory issues.

Siemens AG is a German industrial conglomerate with interests in information services, automation and controls, medical equipment, power generation, transportation systems, automotive electronics, lighting, and many other areas. With a focus on electronics and electrical engineering, the company is a major multinational with over 405,000 employees in more than 190 countries.  ABB Ltd (ABB) is a major competitor.

We currently have a Neutral recommendation on Siemens AG.

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