Business News

Revenues stable as markets continue to challenge, cost take-out supports margins

Thursday 23. July 2009 - Revenues of $7.9 billion on continued successful execution of the order backlog; $1 billion EBIT after ca. $120 million restructuring-related costs - EBIT margin at 13.2%; Orders down 27% in local currencies vs record Q2 in 2008 - base orders 25% lower; Cash from operations above $1 billion, net income at $675 million

ABB reported second-quarter revenues of $7.9 billion – a 2-percent decline in local currencies – and earnings before interest and taxes (EBIT) of $1 billion, despite higher restructuring-related costs to adapt to the challenging economic environment.

Orders decreased to $7.3 billion compared to the same record quarter in 2008, primarily the result of sharply lower demand in industrial markets. The EBIT margin decreased to 13.2 percent from 16.1 percent a year ago. The decrease was mainly the result of lower volumes in short-cycle businesses and restructuring-related costs of approximately $120 million.

Net income amounted to $675 million, mainly reflecting the decrease in EBIT. Cash from operations reached $1.1 billion, reflecting both the timing of large project payments and a focus on improving net working capital. Net cash at the end of June amounted to $5.7 billion, up from $4.8 billion at the end of the previous quarter.

“Thanks to the timely execution of our solid order backlog, we held revenues in local currencies close to last year’s high levels despite the unprecedented downturn in the global economy,” said Joe Hogan, ABB’s Chief Executive Officer. “We also maintained profitability well within our target range as we realized benefits of more than $500 million in the first two quarters from our $2-billion cost take-out program.

“The economic environment remains challenging, although there are growth opportunities driven by the need for more intelligence and automation in the power network, and the generation and integration of renewable energies,” Hogan said. “While we’ll continue to focus on adjusting costs quickly, we also aim to take advantage of these opportunities to extend our market leadership.”

2009 Q2 key figures

Q2 09
Q2 08
Change
$ millions unless
otherwise indicated
US$
Local
Orders
7,309
11,271
-35%
-27%
Order backlog (end June)
25,913
29,127
-11%
-1%
Revenues
7,915
9,025
-12%
-2%
EBIT
1,047
1,449
-28%

as % of revenues
13.2%
16.1%

Net income
675
975
-31%

Basic net income per share ($)
0.30
0.43

Cash flow from operating activities
1,067
978


Summary of Q2 2009 results

Orders received and revenues
Orders decreased across all divisions and regions compared to the high levels in the second quarter of 2008 on a combination of lower volumes as well as price decreases resulting from both lower raw material costs and reduced demand. Base orders (less than $15 million) continued the double-digit decline seen in the first quarter of 2009, mainly the result of continued weak demand in industrial, construction-related and automotive markets, and were 33 percent lower (25 percent in local currencies). Large orders (larger than $15 million) decreased 43 percent (35 percent in local currencies).

Regionally, orders were down 20 percent (9 percent in local currencies) in the Americas where higher utility investments in Brazil and Mexico to upgrade their power grids were more than offset by reduced customer spending in the U.S. across all divisions. In Europe, demand was lower in all businesses. Orders from Asia were down in all divisions in local currencies except Automation Products, where higher orders in India offset decreases in most other markets. Primarily the result of a decrease in large project awards compared to the same quarter a year ago, orders from the Middle East and Africa declined in local currencies in all divisions except Power Products.

Timely execution of the order backlog supported revenues and largely offset the impact of significantly weaker demand in the book-to-bill business during the second quarter. Revenues increased in local currency terms in the divisions with relatively longer order backlogs – Power Products, Power Systems and Process Automation. Revenues were down in the shorter-backlog Automation Products and Robotics divisions. Service revenues were 3 percent higher in local currencies (down 9 percent in U.S. dollars).

The order backlog at the end of June 2009 amounted to $25.9 billion, $3.2 billion lower (down 11 percent; 1 percent in local currencies) than at the end of the second quarter of 2008, and approximately $900 million higher than at the end of the first quarter of 2009 (up 4 percent; 2 percent lower in local currencies).

Earnings before interest and taxes
EBIT and EBIT margin decreased compared to the same quarter a year earlier on a combination of lower revenues and capacity utilization in ABB’s short-cycle businesses – mainly in the automation divisions – as well as higher restructuring-related charges. The decline in EBIT margin was partly offset by cost savings in sourcing, general and administrative expenses, footprint adjustments and through operational excellence initiatives. Adjusting EBIT in the second quarter of both 2008 and 2009 for restructuring-related charges, the EBIT margin declined by approximately 1.5 percentage points. The mark-to-market impact from hedging transactions was immaterial in both periods.

Net income
In addition to lower EBIT, net income was adversely affected by a reduction in the finance net to negative $25 million compared to a positive $41 million in the same quarter in 2008, primarily reflecting lower market rates on the company’s net cash balance compared to the same quarter a year ago.

Balance sheet and cash flow
Net cash at the end of the second quarter was $5.7 billion compared to $4.8 billion at the end of the previous quarter. Cash flow from operations amounted to $1.1 billion, slightly higher than the second quarter of 2008.

On May 5, ABB’s Annual General Meeting approved the payment of a dividend in the form of a nominal value reduction of Sfr. 0.48 per share. ABB expects the nominal value reduction to be registered with the Zurich Commercial Register on July 24, 2009, in which case shares traded on the SIX Swiss Exchange will begin trading with a reduced nominal value on July 27, 2009. Thereafter, the company will effect the dividend payment.

Acquisitions
ABB acquired Comem SpA, an Italy-based manufacturer of transformer components, with plants and operating units in Italy, Turkey, Brazil and China. The company employs about 400 people and generated revenues of more than $70 million in 2008. The acquisition is in line with ABB’s strategy to compliment organic growth with ‘bolt-on’ acquisitions and will expand the company’s transformer components portfolio.

Compliance
As 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. 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 reductions
ABB continued to execute its previously-announced cost take-out program during the second quarter. 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 $2 billion by the end of 2010. The savings are focused on acceleration of ongoing initiatives in low-cost sourcing, general and administrative expenses, internal process improvements and adjustments to ABB’s global manufacturing and engineering footprint and exceeded $500 million in the first two quarters.

The total cost of the program is expected to approach $1 billion – of which approximately $100 million was already recorded in 2008. Costs associated with the program in the second quarter of 2009 amounted to approximately $120 million. Costs in the first quarter of 2009 were not material.

Outlook
Visibility in ABB’s markets for the second half of 2009 remains limited. Significant uncertainty remains surrounding the key demand drivers for the company’s products and systems.

The need for power transmission infrastructure in all regions – both equipment replacement and new transmission projects – has not changed in recent quarters. However, uncertainty surrounding economic recovery, the stability of raw material prices and the availability of project funding continue to influence the timing of many power investment decisions. ABB is also 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. 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 remains 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 division, which is facing an unprecedented market downturn and requires further restructuring.

Divisional performance Q2 2009
Power Products

Q2 09
Q2 08
Change
$ millions unless otherwise indicated
US$
Local
Orders
2,760
3,592
-23%
-14%
Order backlog (end June)
8,664
8,954
-3%
7%
Revenues
2,839
3,026
-6%
4%
EBIT
555
586
-5%

as % of revenues
19.5%
19.4%

Cash flow from operating activities
534
324


Orders decreased in the second quarter, mainly the result of lower demand from industrial and construction-related markets. Utilities continued to invest in grid improvements but orders did not match the very high levels of a year ago. The order decline also reflects price reductions from lower raw material costs versus the same period in 2008. Orders were down in all regions except the Middle East and Africa, where large projects helped lift orders by almost 50 percent.

Revenues in local currencies grew primarily on execution of the order backlog. Delays by customers in taking delivery of some products continued to negatively impact revenues.

EBIT developed in line with revenues while the EBIT margin remained at the same high level as the year-earlier period, supported by cost adjustments that offset lower factory loadings in the shorter-cycle product areas, such as distribution transformers. Restructuring-related costs in the quarter amounted to $30 million compared to $9 million in the same quarter a year earlier.

Cash from operations benefited from lower net working capital in the quarter as inventories were reduced and collection of receivables improved.

Power Systems

Q2 09
Q2 08
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,697
2,611
-35%
-25%
Order backlog (end June)
8,918
9,695
-8%
4%
Revenues
1,612
1,736
-7%
6%
EBIT
122
123
-1%

as % of revenues
7.6%
7.1%

Cash flow from operating activities
230
141


Orders declined in the second quarter, mainly reflecting the timing of large order awards. Base orders decreased versus the previous year but order levels have stabilized over the last three quarters. Orders were lower in all regions except the Americas, where a project to expand and improve the reliability of the power grid in Mexico contributed to an order increase in the region.

Revenues in local currencies continued to grow on the execution of the order backlog. EBIT was steady while the EBIT margin improved as cost-reduction measures helped offset higher selling expenses related to the increased level of tendering activity. Restructuring-related costs in the quarter were not material.

Cash from operations improved, reflecting mainly the timing of project payments.

Automation Products

Q2 09
Q2 08
Change
$ millions unless otherwise indicated
US$
Local
Orders
2,146
2,967
-28%
-19%
Order backlog (end June)
3,969
4,602
-14%
-5%
Revenues
2,206
2,751
-20%
-10%
EBIT
329
538
-39%

as % of revenues
14.9%
19.6%

Cash flow from operating activities
450
341


Orders decreased compared to the same quarter in 2008 on reduced demand in most market segments. Industrial and construction-related demand was significantly weaker as the economic environment remained challenging in most regions, a trend that could only be partly offset by infrastructure investments in areas such as wind energy, rail and water. Demand was generally higher in emerging markets than in mature economies in the quarter.

Revenues were also lower, mainly reflecting reduced sales of short-cycle products, such as low-voltage equipment. This was partly offset by higher revenues in longer-backlog businesses, such as power electronics and high-voltage motors. Service revenues increased in the quarter. EBIT decreased significantly on both lower revenues and restructuring-related costs of approximately $50 million aimed mainly at reducing capacity in western Europe.

Cash from operations improved mainly as a result of lower inventories.

Process Automation

Q2 09
Q2 08
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,342
2,681
-50%
-43%
Order backlog (end June)
6,442
7,730
-17%
-7%
Revenues
1,865
2,058
-9%
4%
EBIT
173
243
-29%

as % of revenues
9.3%
11.8%

Cash flow from operating activities
59
370


Orders declined across all regions compared to a strong second quarter last year. Customers continue to postpone investments due to uncertainties surrounding future demand and limited access to funding for capital expenditures. Large orders were significantly lower. Base orders also declined as customers significantly reduced spending for small- and medium-sized capital projects in the marine, metals and pulp and paper sectors. Orders for industrial services remained at the same level as last year. Demand in the oil and gas sector was stable at high levels as our customers continued to invest in exploration and development of new energy resources.

Revenues increased in local currencies on the execution of a number of large projects in the order backlog. Service revenues were stable compared to the same quarter a year ago. EBIT and EBIT margin decreased on a combination of restructuring-related costs of $24 million, lower capacity utilization and an increase in the share of systems revenues, which typically carry a lower margin than the product and service businesses.

Cash from operations was lower in the quarter, reflecting higher net working capital related to project execution and lower customer advances resulting from the decrease in large orders.

Robotics

Q2 09
Q2 08
Change
$ millions unless otherwise indicated
US$
Local
Orders
182
503
-64%
-60%
Order backlog (end June)
397
760
-48%
-44%
Revenues
234
417
-44%
-37%
EBIT
-51
29

as % of revenues
-21.8%
7.0%

Cash flow from operating activities
-50
30


Orders declined significantly versus the same quarter a year earlier as a result of the severe downturn in the global automotive sector and general industry. Orders sharply decreased in all regions compared to the same quarter in 2008, primarily Europe and North America.

Revenues were partly supported by the order backlog but decreased in most business units. The resulting low factory loadings and decline in service business, combined with restructuring-related costs of approximately $10 million, all contributed to an EBIT loss in the quarter.

Cash flow from operations in the quarter reflects payment conditions in the automotive sector as well as some project delays.