ABB Reports Double-Digit Order and Revenue Growth
ABB's orders, revenues and earnings before interest and taxes (EBIT) rose sharply in the third quarter of 2005 compared to the same quarter in 2004 as a result of operational improvements and buoyant markets. Group EBIT rose 81 percent to $458 million and net income almost doubled to $188 million.
"ABB turned in a very strong third-quarter performance," said Fred Kindle, ABB President and CEO. "Operational improvements and our lead position in key markets produced solid order and revenue growth, and a group EBIT margin of 8.1 percent.
"In view of the positive market conditions and the expected results from our strong focus on execution, we're on track to hit or exceed the top end of our 2005 group EBIT margin target," Kindle said.
The Power Technologies (PT) division reported an 89-percent increase in EBIT, raising its margin to 9.0 percent from 5.5 percent in the year-earlier period, as both the product and systems business areas improved earnings. The Automation Technologies (AT) division increased EBIT by 21 percent, reflecting further operational improvements.
Net income rose sharply despite approximately $70 million in non-operational charges in discontinued operations and finance expense. Cash flow from operating activities amounted to $387 million in the quarter, including a negative impact of $246 million from reduced securitization activities.
The company cut net debt to $866 million and further decreased financial obligations by repaying maturing bonds and reducing some securitization activities.
Third-quarter market overview
The economic environment for ABB's businesses remained positive in the third quarter of 2005. In the power sector, utilities in Asia continued to invest in new infrastructure. In the Middle East, high oil prices fueled industrial development and the corresponding need for power infrastructure. Demand was also strong in the Americas and Europe, where utilities are replacing aging equipment and upgrading grid systems.
Most of ABB's industrial customer segments continued to increase investments, mainly to improve the performance of existing assets. Greenfield industrial investments continued to take place primarily in Asia. High oil prices and bottlenecks in refining drove investments in the oil and gas sector. The marine sector also experienced strong growth. Investments in the pulp and paper sector remained at low levels in most regions while robotics demand in the automotive sector softened as expected. Construction markets remained weak in Europe but grew in Asia.
Summary of third-quarter 2005 results
This strong economic environment in the third quarter, coupled with ABB's leading position in high-growth market sectors and regions, was reflected in a 15-percent increase in orders received (local currencies: 14 percent) to $5,740 million, with increases in both base orders (less than $15 million) and large orders (more than $15 million). Base orders grew to $4,972 million, up 11 percent (local currencies: 10 percent) compared to the same period in 2004. Large orders increased by 47 percent (local currencies: 43 percent) to $768 million, with most of the increase coming from the power systems business.
In both the Middle East and Africa and the Americas, demand for power infrastructure helped to lift orders during the quarter. Orders in the Middle East and Africa almost doubled (local currencies: up 90 percent) to $724 million, while orders in the Americas rose 15 percent (local currencies: 11 percent) to $1,173 million, driven mainly by South America where both divisions increased orders received.
Orders in Europe were 10 percent lower (local currencies: 9 percent) at $2,291 million. Orders in western Europe were unchanged from the year-earlier period, while orders from eastern Europe decreased due to a reduction in large orders compared to the same quarter in 2004. In Asia, orders grew 46 percent (local currencies: 43 percent) to $1,552 million, again led by growth in both divisions in China and India.
The order backlog for the group, including Non-core activities, at the end of the third quarter of 2005 was $12,915 million, unchanged compared to the end of the second quarter of 2005 (local currencies: up 3 percent). The combined order backlog for the two divisions amounted to $12,292 million at the end of September 2005, up 3 percent compared to the end of June 2005 (local currencies: 4 percent).
Revenues in the third quarter amounted to $5,648 million, an increase of 13 percent (local currencies: 12 percent), primarily the result of higher volumes, although some price increases were achieved, especially in power products with a high raw materials content.
EBIT was $458 million in the third quarter of 2005, up 81 percent compared to the same period in 2004. Higher revenues, ongoing productivity improvements, including further reductions in corporate costs, and cost migration to low-cost countries in both divisions contributed to the improvement. EBIT from Non-core activities improved by $31 million as a result of higher earnings in the oil, gas and petrochemicals business and lower losses in Building Systems.
As a result, the EBIT margin in the third quarter rose to 8.1 percent from 5.1 percent in the same quarter of 2004.
Finance net was an expense of $55 million in the third quarter, compared to an expense of $29 million recorded in the third quarter of 2004. Interest and other finance expense in this year's quarter included a net negative impact of $18 million from a number of exceptional items, the largest of which was an adjustment in the fair value calculation of hedged bonds issued in 2002.
The loss in Discontinued operations amounted to $50 million, including a $26-million loss related to the planned sale of a portfolio of finance leases in Finland and a $23-million expense on the mark-to-market treatment of the approximately 30 million ABB shares reserved to cover part of the company's asbestos liabilities (please refer to the table in Appendix I to this release for more information).
Despite the negative impact from Discontinued operations and finance expense, ABB's net income for the third quarter increased to $188 million from $98 million in the same period in 2004.
Net debt (total debt less cash and marketable securities) was $866 million at the end of the third quarter of 2005, compared to approximately $1.2 billion at the end of the second quarter of 2005. Positive cash flows in the third quarter, despite the negative impact of reduced securitization, were the main contributors to the lower net debt.
Gearing, defined as total debt divided by total debt plus stockholders' equity (including minority interest), was reduced to 56 percent at the end of September 2005, from 59 percent at the end of the previous quarter. Contributing to the decrease was the positive net income in the quarter and the repayment of approximately $200 million in maturing bonds during the third quarter of 2005.
Total debt of approximately $170 million in the lease portfolio that ABB intends to divest was reclassified in the balance sheet from borrowings to Liabilities held for sale and in discontinued operations.
In addition, outstanding bonds with a nominal value of 392 million Swiss francs were repurchased at the beginning of October 2005. The transaction is expected to result in an expense of $17 million on the income statement in the fourth quarter of 2005 to reflect the premium paid by ABB above the book value of the bonds.
Cash flow from operating activities
Net cash generated from operating activities for the group in the third quarter of 2005 amounted to $387 million, compared to $322 million for the same period in 2004. Reduced securitization negatively affected cash flow from operations by $246 million in the third quarter of 2005, and by $16 million in the third quarter of 2004. Excluding the impact of reduced securitization in both quarters, cash flow from operations increased by $295 million from the same quarter last year. The reduction of securitization activities in the group decreased cash flow from operations over the first nine months of 2005 by more than $400 million.
Following a hearing on September 28, 2005, before the U.S. Bankruptcy Court in Pittsburgh, Pennsylvania, ABB and all other parties filed with the court a consensual proposed confirmation order with respect to the Combustion Engineering revised plan of reorganization. The revised plan is based on an agreement in March 2005 with various asbestos claimants, and was subsequently approved in a vote by more than 95 percent of claimants.
The company is currently awaiting the issuance of the confirmation order by the Bankruptcy Court.
In a parallel asbestos-related process, claimants to a pre-packaged Plan of Reorganization for another U.S. subsidiary, ABB Lummus Global Inc., participated in a preliminary vote, which was completed in September 2005 with 96 percent of claimants voting in favor of the plan.
Publication of 2005-2009 targets and new executive management
On September 6, 2005, ABB published new performance targets for the period 2005 to 2009. The targets cover revenue growth, EBIT margin, net margin, free cash flow conversion and return on capital employed. In connection with the new targets, ABB also announced that the two core divisions, Power Technologies and Automation Technologies, will be eliminated, and their respective business areas will become the new divisions, effective January 1, 2006. As a result, a number of changes to the company's executive management were also announced. Please refer to Appendix II to this press release for more information.
Delisting of shares in London and Frankfurt
ABB announced on August 4, 2005, its intention to delist its shares from trading on the Frankfurt Stock Exchange (FWB) and the London Stock Exchange (LSE). ABB made the decision because the average daily trading volume of its shares on the FWB and the LSE has become insignificant over the past three years. The delisting process at the LSE was completed on September 2, 2005. The FWB delisting is expected to be complete on December 21, 2005.
At the end of June 2005, ABB adjusted its EBIT margin guidance for 2005 to 6.6-7.1 percent for the group and to 6.8-7.3 percent for the Power Technologies division. The company reconfirmed the 10.7 percent EBIT margin target for the Automation Technologies division.
ABB continues to make good progress towards the previously communicated guidance on corporate costs ($450 million or less for the full year 2005) and the operational performance of Non-core activities (break-even for the full year 2005).
In view of the ongoing positive market conditions and the expected results from ABB's strong focus on execution, management believes the company is on track to reach or exceed the top end of the 2005 group EBIT margin target communicated in June.
Source: ABB Group