ABB Q3 income rises 86% to $738 million

  • October 25, 2007
  • ABB
  • News
Zurich, Switzerland, October 25, 2007 - ABB's net income rose 86 percent in the third quarter to $738 million on continued growth in market demand, particularly for power infrastructure, and further operational improvements.Earnings before interest and taxes (EBIT) rose to $1 billion on a 26-percent increase in revenues (19 percent in local currencies), leading to an EBIT margin of 14.4 percent compared with 11.8 percent in the same quarter of 2006. Cash flow from operating activities increased to $886 million versus $523 million in the third quarter a year ago.Orders increased 33 percent (25 percent in local currencies) to $8.3 billion, reflecting investments to expand power infrastructure in emerging markets and to replace aging equipment and strengthen grids in mature markets. Industrial businesses also continued to invest in productivity improvements and cost reductions by lowering energy consumption."A combination of strong market growth and operational discipline has once again paid off," said Fred Kindle, ABB President and CEO. "Our market and technology leadership together with performance improvements are helping us to reap the full benefits from continuing global growth and heightened concerns about climate change and energy efficiency."Summary of resultsOrders continued to grow strongly in the third quarter, led by very high demand for products and systems needed to refurbish and expand power infrastructure. Demand for more energy-efficient technologies also continued to grow in most industrial sectors. It was the eleventh consecutive quarter of double-digit order growth for the group.Power interconnections in Europe to improve the reliability and efficiency of existing grids, along with infrastructure expansion in the Middle East, were the main growth drivers for the power divisions in the third quarter. Asian markets were also strong as utility customers continued to invest in new power equipment. In the automation divisions, customer investments in developed countries during the third quarter continued to be driven by the need to improve process efficiency, while in emerging markets, capacity expansion fuelled most growth. Demand was strongest in the metals and minerals sector, particularly the steel and aluminum industries. Orders were also higher for products to improve the energy efficiency of many industrial processes. Orders were lower in the oil and gas business as the result of fewer large project orders in the quarter compared to one year ago. For the Group, the volume of large orders (more than $15 million) grew 96 percent to $1.4 billion (84 percent in local currencies) and accounted for 17 percent of total orders received compared to 12 percent in the same quarter in 2006. Base orders (less than $15 million) increased by 24 percent (17 percent in local currencies).Higher revenues in the third quarter reflect both the increase in base orders during the quarter, as well as execution of the growing order backlog. Price increases to offset higher raw material costs compared to the same quarter a year ago, also contributed to the revenue growth. The order backlog amounted to more than $22 billion at the end of September 2007, compared to $20 billion at the end of the previous quarter and $15 billion at the end of the same quarter in 2006.EBIT increased across all divisions, mainly the result of higher revenues. High capacity utilization, strong project execution and increased production and engineering in low cost countries lifted EBIT margins in all divisions except Process Automation, where it remained stable. The increase in net income was primarily the result of higher EBIT and a lower tax rate, mainly reflecting the geographic distribution of earnings and the accelerated use of tax-loss carry forwards. Net income also benefited from an improved net finance expense resulting from lower debt levels.Cash flow from operating activities improved compared to the third quarter of 2006 as higher earnings more than offset increases in working capital to support growth.ABB's financial position further improved in the third quarter, with net cash growing by approximately $1 billion from the end of the previous quarter to $3.3 billion. Gearing at the end of September was 22 percent compared with 25 percent at the end of the second quarter (see Appendix II for more information). The remainder of the company's Swiss franc 1-billion convertible bond maturing in 2010 was converted in the third quarter, which increased ABB's equity by approximately $170 million.DivestmentsIn August 2007, ABB announced it had agreed to sell its ABB Lummus Global business to Chicago Bridge & Iron Company (CB&I) for $950 million, subject to approvals from regulators and CB&I's shareholders. As previously reported, ABB discovered in connection with the divestment certain suspect payments in a number of countries, which it reported to the U.S. Department of Justice and the Securities and Exchange Commission. ABB retains liability for related potential fines and penalties.ABB Lummus Global serves the upstream and downstream oil and gas, petrochemical and refining industries worldwide and employs about 2,400 people, with revenues in 2006 of $988 million. Third-quarter orders grew in all businesses, led by transformers, and in all regions. Investments by utility customers in Europe to strengthen and refurbish grid infrastructure fuelled strong order growth. Orders also grew strongly in Asia and the Middle East as customers continued to invest in new infrastructure to support economic growth. Orders continued to grow in the Americas but at a slower pace than in the previous several quarters as demand eased in the U.S., due in part to the slowdown in the housing sector.Revenues grew at a double-digit pace in all businesses compared to the same quarter in 2006 on both higher volumes and higher prices to offset increases in raw materials costs. EBIT and EBIT margin increased strongly as the result of higher revenues and factory loading and productivity improvements. Costs associated with the transformer consolidation program announced in 2005 amounted to $15 million in the third quarter, compared to $5 million in the same quarter in 2006.Orders increased strongly in the third quarter, mainly the result of power infrastructure investments in Europe, including a project in Germany valued at more than $400-million to connect the world's largest offshore wind farm to the mainland grid. Base orders increased 25 percent (17 percent in local currencies), reflecting continued favorable demand. Customer investments in the Middle East to develop the electricity-intensive aluminum industry also contributed to the order growth. Orders were lower in the Americas, reflecting the timing of orders and not a change in demand. Orders in Asia were flat.Revenues were higher across all businesses versus the same quarter in 2006 on execution of the strong order backlog. EBIT and EBIT margin increased on higher revenues, improved capacity utilization and ongoing benefits from improved project selection and execution.Demand continued to grow in the third quarter of 2007 with higher orders for both standard products and engineered products and systems, including a $110-million order for an advanced railway power converter system in Germany. Orders grew across all regions. Demand for energy-efficient industrial products in a variety of industries also contributed to the order growth.Revenues increased versus the same quarter in 2006 due to higher volumes resulting from the continued good order intake and execution of the growing order backlog. Revenues also grew from price increases necessary to cover higher raw material costs. EBIT rose on higher revenues while the EBIT margin primarily reflects strong capacity utilization.Higher orders for process automation solutions in the metals and minerals sectors were largely offset by lower orders in pulp and paper and a reduction in large oil and gas orders. Orders were higher in the Americas, driven by the U.S., Canada and Chile, and almost doubled in Asia, led by China, India, and South Korea. Orders in Europe decreased mainly as the result of lower orders from eastern Europe in the quarter. Large orders decreased from last year's very high level while base orders grew by 14 percent in the quarter (6 percent in local currencies).Revenue growth in the quarter mainly reflects the timing of the execution of system orders. EBIT grew in line with revenues and the EBIT margin remained at a similar level as a year ago.Cash flow from operations decreased from a year ago, reflecting the working capital required to execute large systems orders.Orders increased in the third quarter compared to the low levels of the year-earlier period, led by higher demand from general industry, such as packaging, consumer electronics and food. Orders from the automotive industry remained at low levels reflecting both weak market demand and improved project selection. Orders were higher in all regions and were strongest for paint systems.The significant third-quarter revenue growth reflects the increasing order backlog that has developed in the past several quarters. EBIT and EBIT margin improved due to cost-cutting initiatives, better project execution and the non-recurrence of costs taken in the same quarter last year associated with a large project.Cash flow from operating activities was higher, reflecting higher earnings and customer payments on a large project. Non-core activities and CorporateNon-core activities generated EBIT of $12 million in the third quarter, primarily the result of real estate activities, while Corporate costs continued to decline.Strategy 2007 to 2011On September 5, the company announced its strategy and financial plan for the period 2007 to 2011. The company aims to achieve a compound annual growth rate (CAGR) for revenues over the period of between 8 and 11 percent and an EBIT margin between a minimum of 11 percent and 16 percent. Earnings per share are expected to grow at a CAGR of 15-20 percent while return on capital employed, after tax, is forecast to exceed 30 percent by 2011. ABB expects free cash flow to amount to 100 percent of net income, on average, over the period.OutlookThe business environment for ABB during the rest of 2007 and into the first half of 2008 is expected to remain in line with the positive market conditions seen in the first nine months of this year.Overall demand for power transmission and distribution infrastructure is expected to continue on a high level in all regions. Equipment replacement and improved network efficiency and reliability are forecast to drive higher demand in Europe and North America. The current slowdown in the U.S. construction sector may result in some easing of demand in power distribution in the U.S. in the next several quarters but the impact on the ABB Group is not expected to be significant.Automation-related industrial investments are expected to continue at a high level in most sectors, although below the growth rates seen in 2006. Overall, automation-related demand growth is expected to be strongest in Asia, with more modest growth in Europe and the Americas. The company expects a further significant decline in the tax rate in the fourth quarter of 2007 as it expects to recognize additional deferred tax assets for tax-loss carry forwards. The mid-term guidance for a sustainable 27-percent tax rate, however, remains unchanged.ABB is well-positioned to benefit from increasing customer investments to reduce costs and mitigate climate change by using more energy-efficient products and systems.ABB is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 112,000 people. Learn More

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