Siemens SI delivered mixed results in the second quarter as the company managed to hold income flat in light of declining revenue, but strong order growth offers some promise for the future. As is the case with typical quarters with the company, Siemens had several impairment and restructuring related charges in the second quarter that muted operating earnings, but free cash flow from operations increased more than 150% in the quarter. This quarter’s performance does not alter our narrow moat rating or our fair value estimate for Siemens.

The effects of a weak global economic environment hit Siemens in the quarter as revenue declined 6%. Revenue in every region declined versus the prior year and the United States was clearly the weakest region as revenue dropped 16% versus the prior year. All product lines also experienced year-over-year declines, with health care declining 1%, but the energy and industry segments were both down 9%, contributing to the weakness. While the anemic economic environment held back revenue, we were surprised by the strength in orders particularly as new wind and rail projects buoy results. It is difficult to gauge the actual success of the company’s 2014 operating improvement initiatives, but we are impressed by the strength in free cash flow in light of declining revenue.

The balance sheet remains Siemens’ greatest asset and finished the quarter with nearly EUR 8 billion of cash on hand. Given the Siemens 2014 initiative should improve cash flow, we expect Siemens’ ability to drive cash flow and reinvest will improve, allowing the company to reshape the portfolio to adjust to a changing economy.