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ABB emerges stronger from 2010 as growth accelerates on industrial demand
Thursday 17. February 2011 - Q4 growth accelerates: Orders up 18%1 , revenues 6% higher
Energy efficiency, industrial productivity and grid reliability drive demand
Q4 operational EBIT margin2 of 12.3% within target range on growth and cost savings
$1.8 billion in cash from operations close to previous year’s record Q4
Proposed dividend increase to CHF 0.60 per share shows confidence in the business
Additional cost savings of more than $1 billion targeted for 2011
ABB reported strong order growth in the fourth quarter of 2010 and higher revenues driven by strong industrial demand for energy efficiency and improved productivity as well as recovering investments into power infrastructure.
The positive trend was reflected in a 17-percent increase in base orders (less than $15 million) – higher in all divisions – as industrial customers expanded capacity and improved efficiency. Orders also increased for power distribution equipment used to deliver reliable power to industrial and commercial customers. Large orders (above $15 million) increased by 21 percent on the award of several large power transmission projects in Europe and the Middle East.
Earnings before interest and taxes (EBIT) rose 23 percent to $978 million. EBIT includes previously-announced provisions of approximately $120 million, mostly related to a large project in the Power Systems division. Restructuring-related costs in the quarter were approximately $120 million.
The operational EBIT margin was 12.3 percent in the quarter despite the project charges and continued price pressure. ABB’s operational EBIT margin for the full-year and fourth-quarter 2010 was well within its target range of 11-16 percent.
The company’s $3-billion cost take-out program was completed on target in the fourth quarter. ABB plans to further reduce costs in 2011 by more than $1 billion.
Net income increased 30 percent to reach $700 million, while cash from operations was near last year’s record. Net cash at the end of the quarter was $6.4 billion. ABB’s Board of Directors has recommended a dividend of 0.60 Swiss francs per share, up from 0.51 Swiss francs last year.
1 Management discussion of orders and revenues focuses on local currency changes. U.S.  dollar changes are reported in the results tables.
2 See Reconciliation of Non-GAAP financial measures at the end of this release
2010 Q4 and full-year key figures
Q4 10
Q4 09
Change
$ millions unless otherwise indicated
US$
Local
Orders
8,752
7,450
17%
18%
Order backlog (end Dec)
26,193
24,771
6%
4%
Revenues
9,179
8,761
5%
6%
EBIT
978
798
23%
as % of revenues
10.7%
9.1%
Net income
700
540
30%
Basic net income per share($)
0.31
0.24
Dividend per share (CHF)*
Cash flow from operations
1,759
1,783
-1%
Free cash flow
As % of net income
Return on capital employed
FY 2010
FY 2009
Change
$ millions unless otherwise indicated
US$
Local
Orders
32,681
30,969
6%
4%
Order backlog (end Dec)
Revenues
31,589
31,795
-1%
-2%
EBIT
3,818
4,126
-7%
as % of revenues
12.1%
13.0%
Net income
2,561
2,901
-12%
Basic net income per share($)
1.12
1.27
Dividend per share (CHF)*
0.60
0.51
Cash flow from operations
4,197
4,027
4%
Free cash flow
3,397
3,089
10%
As % of net income
133%
106%
Return on capital employed
21%
27%
* Proposed by the Board of Directors
Management comments
“We are satisfied with the 2010 results as ABB is today in a stronger position than before the financial crisis,” said Chief Executive Officer Joe Hogan. “Demand from industry and utility clients for short-cycle products gained momentum, contributing to the fastest base order growth in the past two years. Revenue growth accelerated compared to the third quarter, driven by strong industrial demand for energy efficiency and higher productivity. We achieved profitability well within our target range by leveraging our lower cost base. That allowed us to benefit from the ongoing recovery in automation and to successfully counter demand and price weakness in our longer-cycle businesses.
“The proposed dividend increase shows our confidence in the business. We see plenty of growth opportunities as we head into 2011 in both the short-term industry-driven businesses as well as later in the year when we expect utility spending on power equipment to begin a recovery,” Hogan said. “Long term trends for increased energy efficiency and flexible, more reliable power infrastructure remain very strong. ABB will seize these opportunities with a leaner cost base, an enhanced product portfolio and a more customer-focused organization.”
Summary of Q4 2010 results
Orders received and revenues
Orders increased strongly in the fourth quarter compared to the year-earlier period as industrial customers continued to invest in automation solutions to increase capacity and to improve productivity and energy efficiency. In particular, orders improved in the minerals, marine, pulp and paper and oil, gas and petrochemicals sectors. Utilities and industrial customers also invested more in power distribution systems and equipment in the fourth quarter in response to higher demand for reliable power.
Order growth was also supported by the award of several large power transmission projects in Europe and the Middle East during the quarter, confirming the longer-term trend to interconnect power grids and strengthen power transmission infrastructure in both mature and emerging economies. However, utility demand for standard power transmission products remained at low levels.
Base orders increased 17 percent in the quarter and were higher in all divisions. Large orders increased by 21 percent and represented about 19 percent of total orders in the quarter, as in the year-earlier period.
Regionally, orders in local currencies were 37 percent higher in Europe compared with the same period in 2009, as both large and base orders increased. These orders included a high-voltage direct current (HVDC) link between Sweden and Lithuania across the Baltic Sea valued at approximately $580 million.
In the Americas, orders grew by 22 percent. Orders in the U.S. increased by 13 percent and were higher in all divisions except Low-Voltage Products. Power orders and customer investments in the mining sector contributed to a 58-percent order increase in South America. Orders from the Middle East and Africa were up 8 percent, mainly on increased orders from power utilities.
Orders were down 5 percent in Asia as lower power orders in China and India offset strong increases in all three automation divisions across most of the region, reflecting the high level of industrial activity.
Revenues grew in the quarter, largely the result of strong growth in the short- to mid-cycle automation businesses as recent order increases flowed through to revenues. Power Systems revenues also increased on execution of the strong order backlog. Service revenues increased 8 percent in local currencies during the quarter. For the full year 2010, service revenues represented 17 percent of total revenues compared to 16 percent in 2009.
The order backlog at the end of December 2010 amounted to $26.2 billion, corresponding to a local-currency increase of 4 percent compared to the end of 2009. Compared to the end of the third quarter of 2010, the order backlog is down 2 percent.
Earnings before interest and taxes
EBIT and EBIT margin increased compared with the same quarter a year earlier, driven in part by the favorable impact of higher revenues in the early- and mid-cycle businesses-mainly on the automation side-where fixed cost reductions are most advanced. Restructuring-related costs of approximately $120 million in the quarter were significantly below the $350 million recorded in the same quarter in 2009. EBIT in the fourth quarter of 2010 included costs of approximately $120 million in the Power Systems division, most of which are related to a cable project that was the subject of previously-announced provisions.
The operational EBIT margin in the fourth quarter of 2010, which excludes from EBIT the impact of restructuring-related costs and the mark-to-market valuation of hedging transactions, was 12.3 percent compared with 12.7 percent the same quarter in 2009, mainly the result of the additional project provision taken in Power Systems.
Cost reductions
ABB completed its previously-announced cost take-out program in the fourth quarter and fully achieved its targets. The program was intended 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 $3 billion by the end of 2010.
Cost reductions in the fourth quarter of 2010 amounted to approximately $370 million, of which almost half were achieved by optimizing global sourcing (excluding the impact of commodity price changes) and approximately 20 percent from global footprint initiatives. The remainder was achieved through reductions to general and administrative expenses and operational excellence measures. For the full year 2010, savings amounted to approximately $1.5 billion.
Costs associated with the program in the fourth quarter of 2010 amounted to approximately $120 million, bringing the total cost of the program to approximately $840 million.
ABB intends to continue taking out costs in 2011 through supply management, footprint optimization and operational excellence measures. The level of savings is expected to exceed $1 billion and will be determined by market factors such as demand, raw material costs, capacity utilization and pricing environment in ABB’s various businesses. The cost associated with such measures is not expected to exceed a level equivalent to 0.8 percent of full-year 2011 revenues.
Acquisitions
In January 2011, ABB completed its acquisition of Baldor Electric, a North American leader in industrial motors. The transaction, which was originally announced on November 30, 2010, was valued at $4.2 billion, including approximately $1.2 billion of debt, and is an important step in ABB’s strategy to build its position in the key North American industrial automation market. The business is being integrated into the Discrete Automation and Motion division with results consolidated in ABB’s financial statements from late January, 2011.
In 2010, ABB acquired U.S.-based software supplier Ventyx to provide energy management software solutions globally to utilities and industry. The business is part of the Power Systems division and its results have been consolidated into the Group since June 2010.
In addition, ABB increased its share in ABB India from 52 percent to 75 percent in 2010 at a cost of approximately $950 million.
For the fiscal year 2010, ABB spent approximately $1.3 billion on acquisitions (excluding the India transaction) aimed at positioning itself for significant future growth opportunities.
Balance sheet and cash flow
Net cash at the end of the fourth quarter was $6.4 billion compared with $5.3 billion at the end of the previous quarter. Cash flow from operations amounted to $1.8 billion, close to the record level reported in the same quarter in 2009. The good performance reflects solid working capital management, especially improved receivables collection. The contribution to cash flow from customer advances also increased significantly compared to the same quarter in 2009.
ABB paid a total of approximately $4.2 billion in January 2011 to acquire all of the outstanding shares of Baldor Electric and repay Baldor’s outstanding debt.
Increased dividend
ABB’s Board of Directors has proposed a dividend for 2010 of 0.60 Swiss francs per share, compared to 0.51 Swiss francs per share in the prior year. The proposal is in line with the company’s dividend policy to pay a steadily rising but sustainable dividend over the cycle. The Board also proposes that the dividend is taken from the capital contribution reserve of ABB Ltd which, under recent changes to Swiss tax regulations, would not be subject to Swiss withholding tax. The company can draw on a total of approximately 6.4 billion Swiss francs under the capital contribution reserve from stockholders’ equity for current and future dividend payments. The proposal is subject to approval by shareholders at the company’s annual general meeting on April 29, 2011. This form of dividend would replace the nominal value reduction used in the previous three years. If approved, the ex-dividend date would be May 3, 2011 and the payout date in Switzerland would be May 6, 2011.
Outlook
For 2011, ABB expects continued demand growth in all regions for power and automation solutions that help customers build and upgrade power infrastructure and improve industrial efficiency and productivity.
Emerging markets will again be significant drivers of growth as they build up their electrical grids and expand industrial production with a major focus on improving energy efficiency and industrial process quality. An important demand driver in these countries is the development of power resources, such as hydro and wind, which are often long distances from end users and require reliable, high-efficiency power transmission technologies. Demand for commodities to fuel economic growth and the need to become more globally competitive in product quality is expected to drive demand for industrial automation solutions in the emerging markets.
Demand in mature markets is also expected to improve. Utilities are expected to continue investments in grid interconnections, the integration of renewable energies into existing grids, the replacement and refurbishment of existing grid assets, and smart grid technologies. Following two years of lower capital investment in power transmission in many regions, ABB expects an increase in utility spending on standard power transmission products, most likely beginning in the second half of the year.
Industrial customers in the mature economies are also expected to invest further in improving the productivity of their existing manufacturing assets. Increased construction activity in parts of northern Europe and the trend towards intelligent buildings is a further demand driver for ABB’s automation solutions in mature markets.
At the same time, recent competitive trends are expected to continue through 2011 and beyond. Increased capacity in the power equipment sector over the past several years will continue to exert price pressure on suppliers. This pressure is expected to persist for several quarters after demand begins to recover. Emerging market players are expected to continue to expand beyond their home markets with competitive products aimed mainly at the mid-quality segment and primarily in power equipment.
Therefore, in 2011 management will focus on taking advantage of the significant growth opportunities that are emerging across its technology and geographic portfolio. ABB intends to increase its capital expenditures, again with a focus on building its position in emerging markets. Investment in sales and research and development activities will also increase to support both growth and profitability. Cost control will also remain a high priority to ensure both ABB’s competitiveness in the market as well as securing profitability within the company’s target ranges.
Divisional performance Q4 2010
Power Products
Q4 10
Q4 09
Change
$ millions unless otherwise indicated
US$
Local
Orders
2,533
2,667
-5%
-5%
Order backlog (end Dec)
7,930
8,226
-4%
-5%
Revenues
2,913
3,109
-6%
-6%
EBIT
453
495
-8%
as % of revenues
15.6%
15.9%
Cash flow from operating activities
658
754
FY 2010
FY 2009
Change
$ millions unless otherwise indicated
US$
Local
Orders
9,778
10,940
-11%
-13%
Order backlog (end Dec)
Revenues
10,199
11,239
-9%
-11%
EBIT
1,622
1,969
-18%
as % of revenues
15.9%
17.5%
Cash flow from operating activities
1,756
1,977
Orders for medium-voltage products and distribution transformers increased during the quarter, driven by industrial growth and a recovery in the power distribution sector, notably in North America. Orders also grew at a double-digit pace in western Europe, mainly the result of higher transformer orders. However, these increases could not compensate order declines in large power transformers and some high-voltage equipment resulting from fewer large power transmission projects, mainly in China.
Revenues decreased during the quarter compared with the high levels of the same period in the previous year, reflecting the lower level of orders received during recent quarters.
The lower EBIT in the quarter reflects the decrease in revenues. The EBIT margin remained in-line with the year-earlier period as cost-reduction measures offset the impacts of lower volumes and price levels.
Power Systems
Q4 10
Q4 09
Change
$ millions unless otherwise indicated
US$
Local
Orders
2,626
1,863
41%
40%
Order backlog (end Dec)
10,929
9,675
13%
12%
Revenues
2,088
1,908
9%
10%
EBIT
5
66
-92%
as % of revenues
0.2%
3.5%
Cash flow from operating activities
512
242
FY 2010
FY 2009
Change
$ millions unless otherwise indicated
US$
Local
Orders
7,896
7,830
1%
-1%
Order backlog (end Dec)
Revenues
6,786
6,549
4%
2%
EBIT
111
388
-71%
as % of revenues
1.6%
5.9%
Cash flow from operating activities
443
333
Strong increases in both base and large orders contributed to a record quarter for orders received in the Power Systems division and further strengthened the order backlog. Large orders increased by more than 20 percent and included a $580-million order to link the power grids of Sweden and Lithuania across the Baltic Sea, as well as a number of substation orders in the Middle East. Base orders were higher in all business units, helped by the industrial recovery and the ongoing focus on renewable energy and grid reliability. Orders grew at a double-digit pace in all regions except Asia, where orders in India declined from a high level the year before.
Revenue growth reflected mainly execution of the strong order backlog and was supported by the acquisition earlier in the year of U.S.-based energy software company Ventyx.
EBIT and EBIT margin were negatively impacted by charges of approximately $120 million, most of which are related to a cable project that was the subject of previously-announced provisions.
Discrete Automation and Motion
Q4 10
Q4 09
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,505
1,142
32%
34%
Order backlog (end Dec)
3,350
3,046
10%
8%
Revenues
1,657
1,470
13%
14%
EBIT
285
43
n/a
as % of revenues
17.2%
2.9%
Cash flow from operating activities
204
236
FY 2010
FY 2009
Change
$ millions unless otherwise indicated
US$
Local
Orders
5,862
4,702
25%
23%
Order backlog (end Dec)
Revenues
5,617
5,405
4%
3%
EBIT
926
557
66%
as % of revenues
16.5%
10.3%
Cash flow from operating activities
573
745
Orders increased in the fourth quarter as industrial customers continued to invest in automation solutions to increase productivity and energy efficiency. Orders increased in all business units and were particularly strong in robotics and in the mid- to later-cycle businesses, such as power electronics, medium-voltage drives and generators. Orders for low-voltage drives also grew strongly. Regionally, orders grew at a strong double-digit pace in Europe, the Americas and Asia. Orders in China were up more than 40 percent compared to the same quarter in 2009.
The revenue increase was driven primarily by execution of the strong order backlog in the shorter-cycle businesses such as robotics, low-voltage motors and drives.
EBIT and EBIT margin increased substantially due in part to a return to profitability in robotics, which reported an EBIT loss in the same period last year, mainly due to restructuring-related costs of some $110 million. Successful operational cost reduction measures and footprint changes towards the emerging markets during the year also contributed to the improved earnings.
Low Voltage Products
Q4 10
Q4 09
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,142
1,027
11%
14%
Order backlog (end Dec)
838
734
14%
14%
Revenues
1,254
1,109
13%
16%
EBIT
198
149
33%
as % of revenues
15.8%
13.4%
Cash flow from operating activities
280
285
FY 2010
FY 2009
Change
$ millions unless otherwise indicated
US$
Local
Orders
4,686
4,079
15%
15%
Order backlog (end Dec)
Revenues
4,554
4,071
12%
13%
EBIT
806
519
55%
as % of revenues
17.7%
12.7%
Cash flow from operating activities
717
665
Orders and revenues increased across all businesses as demand from general industry and construction improved in most regions. In particular, demand increased for low-voltage components used in solar power generation and critical power applications to ensure the delivery of reliable and high-quality electricity to “mission-critical” businesses such as data centers, hospitals and electronic trading rooms. Service orders grew at the same pace as total orders.
Order growth in Europe was led by increased demand in the construction and industry sectors. Order growth was strong in Asia and the Americas, while orders were slightly lower in the Middle East and Africa.
EBIT and EBIT margin reflect both higher revenues and the sustained cost savings achieved during 2010.
Process Automation
Q4 10
Q4 09
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,764
1,422
24%
25%
Order backlog (end Dec)
5,530
5,523
0%
-1%
Revenues
2,101
2,054
2%
4%
EBIT
200
170
18%
as % of revenues
9.5%
8.3%
Cash flow from operating activities
222
327
FY 2010
FY 2009
Change
$ millions unless otherwise indicated
US$
Local
Orders
7,383
6,684
10%
7%
Order backlog (end Dec)
Revenues
7,432
7,839
-5%
-6%
EBIT
755
643
17%
as % of revenues
10.2%
8.2%
Cash flow from operating activities
738
695
Growth in large orders continued in the fourth quarter, especially in minerals, marine and oil, gas and petrochemicals, reflecting ongoing investments in the energy and commodity sectors. Orders for products such as turbochargers and measurement products also grew. Lifecycle services – including installation and commissioning, spare parts, retrofit and replacement and training – saw higher orders, driven by oil, gas and petrochemicals, metals, and pulp and paper.
Regionally, order growth was strong in South America – led by minerals investments in Chile and Peru – and Asia, where demand increased from the minerals sector in China and the marine sector in South Korea. Orders were also up at a double-digit pace in Europe and North America.
The revenue increase was driven by stronger product volumes and lifecycle services, as well as the ongoing execution of projects from the order backlog, especially in the oil, gas and petrochemicals and pulp and paper businesses.
Higher EBIT and EBIT margin reflect the successful implementation of cost reduction measures and the higher share of revenues from product and service sales compared to the same quarter a year earlier. Included in fourth quarter EBIT is approximately $30 million in restructuring-related costs compared to some $80 million in the same quarter of 2009.