- October 25, 2012
Earnings are down, but ABB reported steady orders and higher revenues in the third quarter of 2012 despite a challenging environment.
October 25, 2012 - ABB reported steady orders and higher revenues in the third quarter of 2012 despite a challenging macroeconomic environment, as the company benefited from its well-balanced market exposure, especially the improved access to the North American automation market gained through recent acquisitions.
Power orders were lower than the year-earlier period, which included a large offshore wind order. Excluding that order, power orders rose 10 percent, driven by utility and industry investments in power transmission. Automation orders were up 13 percent (flat organic), driven by demand for improved industrial productivity, mainly in Europe and North America and in the mining and marine sectors.
The Group’s operational EBITDA and operational EBITDA margin were lower than in the strong third quarter of last year, mainly due to the execution of lower-priced power orders from the backlog, but were higher than Q2 2012. The operational EBITDA margin in Power Products was steady compared to the second quarter of 2012. Cost savings for the Group amounted to about $280 million in the quarter. The stronger US dollar continued to negatively impact ABB’s reported results.
An increase in divisional cash flows was more than offset by cash outflows from hedging corporate exposures as a result of the stronger US dollar.
“We’re encouraged that we could grow the business and sustain profitability well within our target corridor despite a challenging macro environment,” said Joe Hogan, ABB’s CEO. “We continued to execute on cost reduction and grow the service business, two of our key strategic initiatives. The geographic rebalancing of our automation business towards North America, for example through the Thomas & Betts acquisition, is also paying off.
“That gives us reason for cautious optimism,” Hogan said. “Short-term market visibility is limited and volatility is high. In this environment, our near-term focus will continue to be on competitive costs and using our strong portfolio and geographic balance to tap profitable growth opportunities.”
Summary of Q3 2012 results
Orders received and revenues
ABB’s diverse geographic and business scope enabled the company to record steady orders received in the quarter, despite a challenging business environment and a 30-percent decline in large orders (above $15 million) compared to last year. The acquisition of US-based low-voltage product manufacturer Thomas & Betts in the second quarter made a significant contribution, especially to growth in base orders (below $15 million) of 8 percent. Excluding Thomas & Betts, total orders declined 6 percent and base orders were flat. Service orders grew faster than total orders and were up 9 percent.
On the power side, utility customers in most regions continued to selectively invest in power transmission projects in line with long-term trends to strengthen grid reliability and increase capacity. Power orders rose more than 20 percent in the US and Brazil in the quarter, and were more than 15 percent higher in China, and more than 50 percent higher in the Middle East and Africa. However, utility demand in the power distribution sector declined, reflecting weaker economic growth, mainly in Europe. Power orders declined in Germany and Italy, and were also lower in India compared to a strong quarter the year before. Increased order selectivity to secure profitability also affected the development of power orders.
Automation order growth was driven primarily by the acquisition of Thomas & Betts, which provided ABB with greater access to the large US industrial automation market and contributed approximately $620 million in orders in the quarter. Orders grew in the mining and marine sectors, and were supported by some large rail and automotive industry orders. Automation orders were higher in most regions, driven mainly by large orders. In the Americas, automation orders grew more than 50 percent (up 7 percent excluding Thomas & Betts). Automation orders were lower in China, flat in Germany, and higher in Italy and Brazil.
The order backlog at the end of September 2012 remained robust at $29 billion, a local-currency increase of 3 percent compared to the year-earlier period and a decrease of 2 percent versus the end of the second quarter of 2012.
Total power revenues increased in the quarter on the execution of the order backlog, mainly in power transmission. Growth in total automation revenues reflects the impact of the Thomas & Betts acquisition and execution of the order backlog, mainly in the marine, oil and gas and discrete automation sectors. Service revenues grew 6 percent in the quarter and comprised 16 percent of total revenues, unchanged versus the same quarter a year earlier. Currency translation effects reduced reported US-dollar revenues by approximately $570 million in the quarter compared to the same quarter in 2011.
Earnings and net income
The decline in operational EBITDA in the third quarter of 2012 mainly reflects lower earnings and margins in the power businesses compared to a strong third quarter in 2011, due primarily to execution of the lower-priced order backlog. Operational EBITDA this quarter also includes a negative foreign exchange translation impact of approximately $100 million. Margin declines in a number of projects in the Power Systems division also weighed on profitability. Margins were lower in the automation divisions on a combination of product mix effects and higher selling and R&D expenses aimed at securing future growth.
Roughly 45 percent of cost savings in the quarter came from global sourcing initiatives, 50 percent from operational excellence projects and about 5 percent from footprint changes. Savings initiatives provided significant support to profitability in the Low Voltage Products division, where the operational EBITDA margin exceeded 19 percent. Costs in the quarter associated with the savings measures amounted to approximately $20 million. For the first nine months of the year, savings reached approximately $820 million on associated costs of approximately $55 million.
Net income for the quarter decreased 4 percent to $759 million and resulted in basic earnings per share (EPS) of $0.33 compared to $0.34 in the year-earlier period.
Balance sheet and cash flow
Net debt at the end of the third quarter was $3.7 billion compared to $4 billion at the end of June 2012. Cash from operations was $768 million in the quarter, a decline of $43 million compared to Q3 last year. Cash generated by the divisions was up $160 million, more than offset by cash outflows on corporate hedges.
The stability of the third quarter results compared to the second quarter, despite a challenging business environment, again demonstrated the benefits of ABB’s diversified portfolio and provides reasons to be cautiously optimistic. Notable positive trends were the strength of the US market, the stability of orders in China and southern Europe, the sustainability of operational EBITDA margins in the Power Products division for the fourth consecutive quarter, and the faster growth of service orders compared to total orders in the quarter.
At the same time, uncertainty around the short-term growth prospects for Europe, the emerging markets and the US has started to affect short-cycle business growth, as reflected in the flat organic base order development in the third quarter. This continues to limit market visibility over the next several months. Developments to watch in coming quarters include the development of GDP and industrial production—specifically in the key markets of China, the US and western Europe—as well as the growth in electricity consumption, which is a key driver of demand for the company’s power businesses.
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.
On this basis, management confirms its 2011-2015 targets. The company continues to expect its balanced geographic and portfolio scope to support its profitable growth ambitions. Regardless of macro conditions, management will continue to focus on reducing costs and ensuring that investments in growth are generating returns in line with our longer-term targets.
Orders were lower than the same quarter in 2011, which included a $1-billion offshore wind order in Germany. Excluding this order, quarterly orders increased by approximately 25 percent, including a slight increase in base orders. Utility demand for transmission grid upgrades and expansions remains intact as reflected in a strong tender backlog but timing uncertainty persists due to the overall macroeconomic climate.
Orders increased significantly in North and South America, as well as in the Middle East and Africa, with several large orders won in Saudi Arabia and Iraq. Orders were lower in Europe due to the effect of the large German order last year. A lower level of large orders in India in the quarter could not be fully offset by order growth in China and other Asian countries.
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 145,000 people.
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