ABB Q1 revenues steady despite economic challenges

  • April 23, 2009
  • ABB
  • News
April 23, 2009 – ABB’s first-quarter 2009 revenues rose 3 percent in local currencies as execution of the solid order backlog offset lower sales of standard products and declining base business compared to the same quarter in 2008.Orders decreased by 3 percent (16 percent in U.S. dollar terms) to $9.2 billion compared to the very high levels a year earlier as large orders (more than $15 million) in the power and oil and gas sectors could not compensate for lower base orders (less than $15 million) across all divisions. The order decline also reflects lower prices resulting from decreased raw material costs.Revenues amounted to $7.2 billion (up 3 percent in local currencies, down 9 percent in U.S. dollars). The sale of standard products and base orders that convert into revenues within the same quarter declined significantly compared to the same quarter in 2008.EBIT was $862 million with an EBIT margin of 12.0 percent. Excluding the mark-to-market treatment of hedging transactions in the respective quarters and certain other items, the EBIT margin deteriorated by approximately 3 percentage points versus the same quarter a year ago. The main driver of the deterioration was lower capacity utilization compared to the very high levels of a year ago, as well as a change in product mix and some price erosion in the short-cycle businesses.Net income was $652 million, while cash from operations was negative $104 million, declining in line with EBIT."Demand in the power, oil and gas sectors was relatively resilient in the quarter, which allowed us to maintain orders close to the near-record level of a year ago," said Joe Hogan, ABB's CEO. "Revenues benefited from our order backlog but earnings declined, partly on lower capacity utilization versus the very high levels of a year ago as well as some non-operational items such as asset write-offs and the mark-to-market of hedging transactions."We saw good momentum with our cost-out program in the first quarter and we’re expanding the program to $2 billion with continued focus on optimized sourcing, global footprint, G&A and operational excellence,” Hogan added. “We are determined to stay ahead of the market on cost while remaining alert for opportunities to grow the business.”Summary of Q1 2009 resultsOrders received and revenues1 1 Excluding the impact of acquisitions, orders in Q1 2009 declined 3 percent in local currencies (down 17 percent in U.S. dollars) compared to Q1 in 2008; revenues grew 2 percent in local currencies (U.S. dollars: down 11 percent). Orders received were modestly lower in local currencies compared to the near-record levels of the first quarter in 2008, despite the significant deterioration in most markets over the past 12 months. Demand from utilities for new and upgraded power infrastructure remained steady in most markets. ABB won two large power transmission orders in the first quarter of 2009 – a subsea high-voltage link in western Europe and a substation award in the Middle East – with a combined value of almost $1 billion. However, the limited availability of financing for large power projects, especially in the private sector, and the uncertainty over raw material prices and other project costs continued to delay the award of new projects. Demand for ABB’s industrial products and systems deteriorated in the quarter as global industrial production continued to contract and demand in the construction industry decreased further. The oil and gas business remained relatively resilient and ABB won a $490-million order in the sector in Algeria during the quarter. However, base orders for the Group decreased by 18 percent (28 percent in U.S. dollars) and were down in all divisions. Lower prices, primarily the result of the declining cost of raw materials, also contributed to the order decrease. Regionally, orders doubled in local currencies in the Middle East and Africa as large orders increased. In Europe, higher orders in Power Systems were more than offset by decreases in the other divisions. Orders decreased in the Americas, mainly the result of lower orders in the U.S. In Asia, orders also decreased in a mixed environment, with a broad decline in the systems businesses partly offset by order growth for Power Products in China and for Automation Products in India.Service orders increased by 14 percent in local currencies (U.S. dollars: down 1 percent) compared to the prior-year period.The volume of large orders rose 82 percent (47 percent in U.S. dollars) in the first quarter to $2.5 billion. Large orders accounted for 27 percent of total orders received in the quarter compared to 16 percent in the first quarter of 2008.The order backlog at the end of March amounted to $25 billion, a local-currency increase of 10 percent (7 percent lower in U.S. dollar terms) compared to the end of the first quarter in 2008 and a 9-percent local-currency increase compared to the end of the fourth quarter of 2008 (up 5 percent in U.S. dollars).Total revenues in local currencies continued to grow as execution of the order backlog more than offset lower sales of products and base business during the quarter. In divisions with longer business cycles and order backlogs, revenues were higher (Power Products and Process Automation) or flat (Power Systems), while revenues decreased in Automation Products and Robotics, which have shorter backlogs. Revenues were also affected by delays in project execution and postponements by customers in taking delivery of some products. These trends reflect the difficult financing environment that still prevails in most markets. Service revenues were 6 percent higher in the quarter in local currencies (U.S. dollars: down 10 percent) compared to the first quarter of 2008.Earnings before interest and taxesEBIT and EBIT margins in the first quarter of 2009 were substantially lower across most divisions. The decline resulted from a number of factors, including lower capacity utilization compared to the very high levels in the first quarter of 2008 as well as a lower share of revenues from higher-margin products and base business, reflecting the significant weakening of industrial markets.EBIT was also reduced by the write-off of approximately $35 million of assets, mainly from operations in Russia, and to some extent by a weaker pricing environment in some short-cycle businesses.EBIT was further impacted by the mark-to-market treatment of hedging transactions which did not qualify for hedge accounting, which had a negative impact equivalent to approximately 0.5 percentage point of EBIT margin in the first quarter of 2009 compared to a positive impact of approximately 1 percentage point in the same quarter a year earlier.Net incomeNet income for the quarter developed in line with EBIT. The effective tax rate in the quarter was 26 percent, compared to 25 percent in the same quarter of 2008 resulting mainly from a favorable tax ruling in the prior year. Balance sheet and cash flowNet cash at the end of the first quarter was $4.8 billion compared to $5.4 billion at the end of the previous quarter. Approximately half of the change is attributable to currency translation effects. In addition, cash from operating activities decreased, reflecting both lower earnings and a seasonal weakness in net working capital, which was impacted primarily by the timing of large project payments and a build up of inventories. Net working capital as a share of revenues was 13.7 percent in the first quarter, up from 12.3 percent in the same quarter a year earlier.ComplianceAs previously announced, ABB has disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission various suspect payments. In addition, ABB has continued to cooperate with various anti-trust authorities, including the European Commission, regarding certain allegedly anti-competitive practices in the power transformer business. With regard to one of the anti-trust matters, ABB received in December 2008 from the European Commission a Statement of Objections, which is a preliminary assessment of alleged anti-competitive practices.ABB’s cables business is also under investigation for alleged anti-competitive practices. With respect to these matters, there could be adverse outcomes beyond our provisions.Cost reductionsABB announced in December 2008 a cost take-out plan to adjust the company’s cost base to rapidly changing market conditions and protect its profitability. The program aims to sustainably reduce ABB’s costs – comprising both cost of sales as well as general and administrative expenses – from 2008 levels by a total of $1.3 billion by the end of 2010. As a result of the ongoing deterioration of ABB’s markets, the cost take-out goal has been expanded to $2 billion. The additional savings will remain focused on the acceleration of ongoing initiatives, such as low-cost sourcing, internal process improvements and further measures to adjust ABB’s global manufacturing and engineering footprint to shifts in customer demand.The total cost of the program is expected to increase from approximately $600 million – of which approximately $100 million was already recorded in 2008 – towards $1 billion. Costs associated with the program in the first quarter of 2009 were not material.OutlookVisibility in ABB’s markets for the remainder of 2009 remains limited. Significant uncertainty remains surrounding the key demand drivers for the company’s products and systems. The business environment in March improved but it is too early to say whether this represents a bottom to the market downturn. In addition, the year-on-year comparison of results in the second quarter of 2009 will be particularly challenging because of the very high levels of growth and earnings reported in the prior-year period.The need for power transmission infrastructure in all regions – both equipment replacement and new transmission projects – has not changed in recent quarters. However, the cost and scarcity of project funding have delayed many power investment decisions, and ABB is unable to precisely forecast when the various government stimulus programs will have an impact or when the availability of funding will improve.Demand in ABB’s industrial end markets depends to a large extent on GDP growth and capital spending, together with commodity prices. Our customers’ need to steadily improve efficiency and productivity to meet increasing competition also drives orders, along with demand in construction and in general industry. Therefore, management’s priority for 2009 will be to ensure that the company has the flexibility to respond quickly to changing market conditions, taking advantage of its global footprint, strong balance sheet and leading technologies to improve its cost competitiveness while simultaneously tapping further opportunities for profitable growth.ABB also confirms its previously published targets for the period 2007 to 2011, with the exception of the Robotics business which requires further restructuring before re-assessing whether the targets fixed in 2007 can be achieved.Underlying demand for power infrastructure remained steady in the quarter but orders were lower than last year’s very high levels, partly due to reduced demand in industrial and construction-related sectors. Lower prices in some product lines, reflecting the decrease in raw material costs, also contributed to the order decline.Demand in emerging markets held up better than in mature economies. Orders in local currencies grew at a double-digit pace in the Middle East and Africa and were flat in Asia. Orders were down in the Americas by 22 percent in local currencies. In Europe, higher orders in Germany were more than offset by decreases in all other major markets.Local-currency revenues were higher in the quarter as execution of the strong order backlog continued. The revenue improvement was led by a double-digit increase in transformers. Service revenues increased faster than total revenues. The rate of revenue growth also reflects slower execution of some large projects and customer delays in accepting product delivery.EBIT and EBIT margin were lower than the same period a year earlier, primarily due to a write-down of assets amounting to approximately $35 million, mainly in Russia.Cash flow from operations was impacted by an increase in net working capital related to more challenging market conditions.Large orders more than doubled during the first quarter, led by a high-voltage subsea link between Ireland and the U.K. and a major substation project in Kuwait that together contributed almost $1 billion to the order intake. This more than offset a decrease in base orders resulting primarily from lower demand from the industrial sector.Orders were up in all regions except Asia. In Europe, order growth was driven by the Ireland-U.K. project and double-digit growth in Germany. Stable orders in the U.S. plus increases in Canada and Mexico led to an order improvement in the Americas. Orders were lower in China and India, leading to a decrease in Asia.Revenues were steady in local currencies compared to the high level reported in the same quarter in 2008 as execution of large projects in the order backlog helped offset the lower level of base orders received in recent quarters.The lower EBIT and EBIT margin mainly reflect a less favorable project mix compared to the same quarter in 2008. In addition, EBIT was affected by higher selling costs required to meet the increased tendering activity as well as a negative impact from the mark-to-market treatment of hedging transactions. The development of cash flow from operations reflects the timing of large project payments during the quarter.Industrial and construction markets weakened significantly compared to the same quarter in 2008 as the severe economic slowdown reduced demand for most products. Both base and large orders were down in the quarter. Demand improved in some emerging markets and local-currency orders were up in Asia and in the Middle East and Africa. These increases were more than offset by a decline in orders in the Americas and Europe. Compared to the fourth quarter of 2008, total orders were higher.Revenues declined less than orders, mainly the result of the solid order backlogs in longer-cycle businesses, such as power electronics and low-voltage systems. Decreased revenues and lower factory loadings compared to the very high levels of the prior year period were the main factors leading to the decline in EBIT and EBIT margin in the quarter.Cash flow from operations was lower than last year’s quarter mainly due to the reduced EBIT.Orders received in local currencies increased in the first quarter, largely the result of a $490-million oil and gas project award in Algeria. Demand in most other end markets was significantly weaker than the same quarter in 2008, especially in pulp and paper, marine and metals. The reduced demand reflects the sharp decline in commodity prices and the rapid deterioration of global industrial production over the past nine months.Regionally, orders were sharply higher in the Middle East and Africa on the large project in Algeria. Orders were down approximately 10 percent in local currencies in the Americas and Europe, while orders in Asia decreased by almost 50 percent compared to the very high levels in the region a year ago. The revenue increase in the quarter mainly reflected execution of the strong order backlog, especially in the metals and minerals businesses. EBIT and EBIT margin declined, however, largely due to a reduction in the share of total revenues from higher-margin service activities in the quarter. The mark-to-market treatment of hedging transactions had a negative impact on EBIT margin in the first quarter of 2009 compared to a positive impact in the same quarter in 2008.Cash flow from operations developed in line with EBIT.Demand remained very weak in the Robotics business. Both automotive and general industry customers significantly reduced expenditures on manufacturing automation solutions. Orders were significantly lower in all regions compared to the first quarter of 2008. Revenues decreased on the combination of both a lower opening order backlog and reduced base business. Earnings were negative due to the significantly lower volumes and resulting sharp decrease in capacity utilization. Service revenues and margins also declined in the quarter as customers postponed some operating expenses. The $70-million restructuring begun in the fourth quarter last year is on target and a positive impact on earnings is expected by the end of the fourth quarter of 2009.Cash flow was negative, reflecting some project delays and the very weak financing environment within the automotive industry. 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 120,000 people. Learn More

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