Money machines

ABB's weakening cash generation is concerning

ABB makes robots and power grids rather well. Something it doesn't make quite so well: cash.

Quarterly results from the Swiss engineering group showed a nine per cent decline in cash from operations from January to September compared to the previous year, and said that restructuring costs could add another hit before year-end. The absolute amounts aren't so worrying: operating cashflow was a still-decent $1.8 billion. What is concerning is that this drop happened despite ABB reducing working capital by $845 million in the third quarter alone, mainly by cutting inventory.

The question is where that cash went. To an extent, this is just a knock-on effect of a 12 per cent drop in new orders over the first nine months, which involved a fall in advance payments. It also reflects that stricken customers, many of them in the oil and gas industry, are trying to delay paying their bills as long as possible.

ABB can't do much about orders, though it can get tougher on payment. Chief Executive Ulrich Spiesshofer also wants to chop net working capital by another $1.2 billion by 2017. This should at least offset temporary headwinds caused by restructuring costs. Plans to axe $1 billion a year through "white-collar productivity increases" over the next two years will involve one-off outflows of $1.2 billion or so over the same period. Implementing the second half of a $4-billion share buyback announced a year ago will generate further outflows.

For now, low leverage means the group can accommodate the drain. While ABB's net debt has more than doubled to $2.3 billion this year, it still equals only 0.5 times expected 2015 EBITDA, Thomson Reuters data shows. Moreover, analysts forecast a cash flow of $1.39 per share for the whole of 2015, about twice the expected dividend.

British engineer Rolls-Royce offers a cautionary tale over why cash matters. It used to be like ABB: a high-margin, cash-rich company. Then in July, after its cash flow fell sharply, it abandoned its share buyback scheme half way, sending its shares down 11 per cent in two days. Rolls-Royce's experience should warn ABB that cashflows are an engine it is very important to maintain.