July 26, 2012 - ABB reported higher orders and revenues in the second quarter of 2012 despite short-term macroeconomic volatility as customers in almost all regions continued to invest in power grid upgrades and improved industrial productivity. Orders received grew 9 percent (6 percent organic) to $10.1 billion while revenues rose to $9.7 billion, representing a 6 percent increase (3 percent organic). Utilities continued to invest in transmission grids, while industrial customers, especially in oil and gas, increased spending to secure reliable power and improve productivity.
Operational EBITDA amounted to $1.5 billion, a 5 percent decrease compared to the same quarter in 2011 (-9 percent organic). The operational EBITDA margin was 15.1 percent versus 16.0 percent the previous year.
Cost savings of about $280 million offset the impact of lower prices and project margin slippages, while growth investments in selling and R&D supported volume increases. An unfavorable business mix also impacted the operational EBITDA margin, while significant differences in foreign exchange rates compared with the second quarter of 2011 reduced our US-dollar reported revenues by approximately $600 million and operational EBITDA by approximately $100 million. Cash flow from operations was approximately $300 million lower than Q2 last year. Total divisional cash from operations increased by $40 million. Group cash flow reflects lower cash generation from hedging of corporate exposures as a result of the strengthening US dollar.
Net income amounted to $656 million, including the negative impact of the strengthening US dollar and transaction and amortization-related charges4 of approximately $100 million related to the acquisition of US low voltage product manufacturer Thomas & Betts, which was completed on May 16 of this year. “These results clearly show how our balanced business and regional scope, together with good execution on cost, allow us to produce solid results even in a mixed market,” said Joe Hogan, ABB’s CEO. “We’re also satisfied to see operational profitability improve compared to the first quarter.
The macroeconomic view remains uncertain, but the positive developments we’ve seen in China, the continued strength of the US market and our resilience in Europe make us more confident about the short-term outlook than we were three months ago.”
Summary of Q2 2012 results
Orders received and revenues
Macroeconomic uncertainties continued to impact the timing of large power investments in most regions during the second quarter. Nevertheless, utility customers continued to invest in selected projects to strengthen grid reliability and increase capacity. Oil and gas customers also invested in power equipment to secure reliable power supplies for production and processing. As a result, orders in the power divisions were steady to higher in most key markets, such as the US, Brazil, China, and India. Power orders were steady in Europe.
On the automation side, the need for energy-efficient solutions and higher productivity and quality drove order growth across several businesses and regions. The acquisition of Thomas & Betts significantly expanded ABB’s access to the key North American automation market and supported strong automation order growth in the region. The acquisition had no material impact on automation orders in other regions. North American automation orders also increased on an organic basis. Orders for Low Voltage Products in China rebounded in the quarter.
Automation orders increased in Europe as demand in countries like the UK, Norway and in eastern Europe more than offset lower industrial activity in southern Europe. Automation orders declined in Germany compared to the same quarter in 2011 when a large order was won for rail equipment. Base orders (below $15 million) increased 4 percent (1 percent organic). Large orders (above $15 million) increased 43 percent in the quarter and represented 15 percent of total orders compared to 12 percent in the year-earlier period. The order backlog at the end of June 2012 amounted to $29 billion, a local-currency increase of 6 percent compared to the year-earlier period and an increase of 1 percent versus the end of the first quarter of 2012.
Revenues in the power divisions were flat compared to the same quarter a year ago, mainly reflecting the variable timing of large projects being executed out of the backlog. Revenues were higher in both Discrete Automation and Motion and in Process Automation, supported by the backlog, and were slightly lower in Low Voltage Products on an organic basis. Service revenues outgrew total revenues and were 11 percent higher in the quarter, amounting to 16 percent of total revenues, unchanged versus the same quarter a year earlier. Currency translation effects reduced reported US-dollar revenues by approximately $600 million in the quarter compared to the same quarter in 2011.
Earnings and net income
Operational EBITDA in the second quarter of 2012 amounted to $1.5 billion, a decline of 5 percent over the year-earlier period. Included in operational EBITDA is a contribution of approximately $60 million from Thomas & Betts. The decline was mainly due to negative foreign exchange translation impacts of approximately $100 million and an unfavorable business mix; cost savings effectively offset pricing pressure and net project margin slippages in the Power Systems division, while higher investments in sales and R&D helped generate offsetting volume gains. Cost savings of approximately $280 million were achieved in the quarter, of which roughly 50 percent came from global sourcing initiatives, 45 percent from operational excellence projects and about 5 percent from footprint changes.
Costs associated with the savings measures in the quarter amounted to approximately $15 million. For the first half of the year, savings reached approximately $540 million on associated costs of approximately $35 million. Net income for the quarter decreased 27 percent to $656 million and resulted in basic earnings per share of $0.29 compared to $0.39 in the year-earlier period.
Most of the difference results from the strengthening of the US dollar and acquisition-related expenses.
Balance sheet and cash flow
Net debt at the end of the second quarter was $4 billion compared to a net cash position at the end of the previous quarter of $1.4 billion. The change primarily reflects the dividend payment in May of approximately $1.6 billion as well as the Thomas & Betts acquisition. Cash from operating activities decreased compared to the same quarter of 2011, as higher aggregate cash from the operating divisions was more than offset by significant foreign exchange movements on derivatives used to manage Corporate balance sheet exposures.
In May of 2012, ABB issued US-dollar bonds totaling $2.5 billion—its largest ever bond offering—with favorable rates on 5-, 10- and 30-year maturities.
Acquisitions
During the second quarter, ABB completed the acquisition of US-based Thomas & Betts, a North American leader in low voltage products, first announced in January 2012. Thomas & Betts contributed revenues of approximately $310 million and operational EBITDA of approximately $60 million to ABB’s second quarter results.
Outlook
Uncertainty around the short-term growth prospects for Europe, the emerging markets and the US continues to challenge the company’s ability to reliably forecast its business performance over the next several months.
At the same time, the second quarter results provided several reasons to be more optimistic, such as the stability in operational EBITDA margins in the Power Products division over the past three quarters in the face of significant competitive challenges; the resilience of orders in Europe despite ongoing economic weakness in southern Europe; higher orders in key power and automation businesses in China (including construction); sustained order growth across the portfolio in the US; continued significant investments in power transmission around the world; and further indications that price pressure on new power orders is easing.
The longer-term outlook in ABB’s major end markets remains favorable, driven by megatrends such as the need for greater resource efficiency, increasing urbanization in the emerging markets, and the growing demand for more, and more efficient and reliable, power delivery. Therefore, management is cautiously optimistic that the business environment over the remainder of 2012 will support continued growth and profitability in line with its 2011-2015 targets, provided that there is no further deterioration in the macroeconomic environment. Management will nevertheless continue to focus on reducing costs and ensuring that investments in growth are generating returns in line with our longer-term targets.