Steady Improvement in Profitability

02.11.2004

ABB, the leading power and automation technology group, today reported a steady improvement in orders and revenues, earnings before interest and taxes (EBIT) as well as cash flow from operations in the third quarter of 2004.

Net income amounted to $98 million in the third quarter and $188 million for the first nine months of 2004, compared to losses of $283 million and $388 million, respectively, in the same periods of 2003. Cash flow from operating activities increased to $322 million, up $205 million from the same quarter last year.

“We continue to strengthen our performance,” said Jürgen Dormann, ABB chairman and CEO. “We are on track to deliver a positive net income for 2004 and are confident that we will reach a Group EBIT margin of eight percent in 2005, even though the Power Technologies division faces challenges to achieve its 2005 margin target.”

The Automation Technologies division turned in a strong performance, reporting a 54-percent increase in EBIT. Power Technologies division EBIT was lower, mainly due to the remaining underutilization in the power lines business and in other parts of the systems business.

Summary of third quarter results

Orders received in the core divisions amounted to $4,853 million, up 17 percent (11 percent in local currencies) in the third quarter of 2004 compared to the same quarter last year. The improvement was driven by continued growth in base orders (less than $15 million) in both divisions and a significant increase in large orders (more than $15 million) in the Automation Technologies division.

Both divisions saw strong order growth in both U.S. dollar and local currency terms in China, the U.S., Latin America and eastern Europe. Local currency orders from western Europe were slightly higher in Automation Technologies and lower in Power Technologies.

Group orders grew 9 percent to $4,782 million compared to the same quarter in 2003 (5 percent higher in local currencies). Orders were sharply lower in Non-core activities as a result of the divestment of most of the Building Systems businesses in the third quarter of last year. Excluding the difference in orders resulting from the Buildings Systems divestment, Group orders were 16 percent higher (12 percent in local currencies).

Base orders (less than $15 million) in the core divisions were up 15 percent (9 percent in local currencies), with increases seen in all regions, led by the Americas and Asia.

Large orders (more than $15 million) were up by more than a third in the quarter, led by more than 50-percent growth in the Automation Technologies division. Large orders in the Power Technologies division were down in the quarter. Large orders in the core divisions amounted to 10 percent of total core division orders in the third quarter, compared to 8 percent in the same quarter in 2003.

The combined order backlog for the core divisions at the end of the third quarter amounted to $11,322 million, 14 percent higher than at the end of the same quarter in 2003 (10 percent higher in local currencies). The order backlog was up 13 percent in the Power Technologies division (8 percent in local currencies) and 16 percent (11 percent in local currencies) in the Automation Technologies division. The Group order backlog at the end of the third quarter was $11,242 million.

Revenues in the core divisions grew a combined 13 percent; 14 percent for the Power Technologies division (9 percent in local currencies) and 12 percent in Automation Technologies (6 percent in local currencies) compared to the same quarter in 2003. The improvement reflects the strong growth in base orders in recent quarters. Strong double-digit revenue growth was reported by the core divisions in China, India and eastern Europe.

Group revenues in the third quarter grew 5 percent (flat in local currencies) to $4,796 million, as higher revenues in the core divisions offset the 70-percent drop in Non-core revenues resulting from the divestment of most of the Building Systems business in the third quarter of 2003. Building Systems reported revenues of $118 million in the third quarter of 2004 compared to $425 million in the same period in 2003.

Group EBIT in the third quarter increased 11 percent to $255 million from $230 million in the same quarter in 2003. The improvement was driven by a 54-percent earnings increase in the Automation Technologies division, which more than offset a 13-percent EBIT decrease in the Power Technologies division. Non-core activities reduced EBIT by $10 million, while the Corporate result amounted to an EBIT loss of $111 million in the third quarter.

The Group EBIT margin in the quarter was 5.3 percent compared to 5.1 percent in the same quarter of 2003. The Power Technologies EBIT margin decreased to 5.1 percent in the quarter from 6.8 percent in the third quarter of 2003, while the Automation Technologies EBIT margin rose from 7.2 percent to 9.9 percent.

Employees in ABB numbered approximately 103,000 on September 30, 2004 – about 10,000 fewer than at the end of the second quarter of 2004. The reduction was primarily due to the divestment in July of ABB’s upstream oil and gas business, which employed about 8,000 people, as well as the customary seasonal reduction in the number of temporary employees.

Finance net was negative $25 million compared to negative $122 million in the third quarter of 2003. The improvement reflects higher interest income (resulting from the increase in cash and marketable securities), a decrease in interest expense (due to the lower debt levels) and the non-recurrence of the $43-million expense taken in the corresponding 2003 quarter related to the mark-to-market accounting treatment of the equity option embedded in the $968 million of convertible bonds issued in 2002. The need for this accounting treatment was eliminated following a meeting of bondholders in May 2004, who agreed to a change in the terms of the bonds allowing them to be converted into American Depositary Shares instead of ordinary shares denominated in Swiss francs. Included in the line Interest and other finance expense in the third quarter of 2004 was an amortization expense for the discount on the bonds of $7 million.

The net loss in Discontinued operations amounted to $24 million, compared to a net loss of $325 million in the third quarter of 2003. The improvement was mainly the result of sharply lower losses in the downstream oil and gas business compared to the same quarter in 2003, when the business reported significant project write-downs. A further contribution to the improvement in the quarter was a decrease of $97 million in expenses related to asbestos, including a $48-million reduction in the expense on the mark-to-market treatment of the approximately 30 million ABB shares reserved to cover part of the company’s asbestos liabilities, as well as the non-recurrence of a $41-million provision taken in the third quarter last year to cover future asbestos payments.

ABB’s net income for the third quarter amounted to $98 million, compared to a net loss of $283 million for the same period in 2003.

Balance sheet

Cash and marketable securities at the end of September 2004 amounted to $3.6 billion (excluding Discontinued operations), up from $3.4 billion at the end of June 2004. A cash increase resulting from the approximately $800 million net cash proceeds on the closure of the sale of the upstream oil and gas business, plus improved cash flow from operations in the third quarter, were partly offset by cash outflows to complete the announced tender offer and call of the outstanding Euro 300 million 5.375-percent bonds (due in June 2005) and the Euro 475 million 5.125-percent bonds (due in January 2006), amounting to approximately Euro 275 million and Euro 368 million, respectively.

At the end of September 2004, total debt (defined as total short and long-term borrowings) was $5.2 billion, compared to $6.1 billion at June 30, 2004, and $7.9 billion at the end of December 2003.

Gearing, defined as total debt divided by total debt plus shareholders’ equity (including minority interest), amounted to 61 percent at the end of September compared to 66 percent at the end of June 2004 and 71 percent at the end of December 2003.

Stockholders’ equity at September 30, 2004, was $3,121 million compared to $2,922 million at the end of June 2004.

Net cash from operating activities for the Group in the third quarter of 2004 improved by $205 million compared to the year-earlier period, mainly the result of higher earnings, as well as the impact of the change from lump-sum large project orders to lower-risk reimbursable orders in the downstream oil and gas business, which has stabilized the cash flow cycle in that business.

Cash flow from operations in the core divisions developed in line with their earnings in the quarter – higher in the Automation Technologies division and lower in the Power Technologies division.

Cash used in Non-core activities amounted to $24 million, related primarily to the loss in the Building Systems businesses. Corporate generated cash flow of $62 million in the quarter, mainly from treasury-related operations. Total asbestos cash outflows amounted to $1 million in the quarter ($56 million in the same quarter of 2003).

Divestments

As already announced, ABB closed the sale of its upstream oil and gas business on July 12, 2004, which resulted in net cash proceeds of approximately $800 million (included in Cash from investing activities in the cash flow statement) and a breakeven result on the transaction. ABB and the buyers of the business are currently in the process of determining the final sales price, based on the final adjusted accounts as of the closing date. This is part of a customary process in such transactions.

2 Please refer to Note 3 – Significant Divestitures, in the notes to the summary consolidated financial statements attached to this press release.

Asbestos

ABB is awaiting the results of a hearing held on June 3, 2004, before the U.S. 3rd Circuit Court of Appeals to review a pre-packaged Chapter 11 protection plan that was filed in 2003 by a U.S. subsidiary of ABB, Combustion Engineering Inc. The plan has already been approved by both a federal bankruptcy court and a U.S. district court and ABB remains confident that the Circuit Court will also approve the plan.

Board of Directors and Group management

Louis R. Hughes, a member of ABB’s Board of Directors, has taken a temporary leave of absence from the Board to serve the United States government in Afghanistan. In addition, the company is in the final stages of appointing a new chief financial officer and plans to make an announcement shortly.

Group outlook

From 2002 through to the end of 2005, ABB expects compound average annual revenue growth of 4 percent in local currencies. The Power Technologies division expects compound average annual revenue growth of 5.3 percent in local currencies. The Automation Technologies division expects compound average annual revenue growth of 3.3 percent in local currencies.

For 2005, the EBIT margin targets remain unchanged at 8 percent for the Group and 10.7 percent for the Automation Technologies division. Achieving the 10-percent EBIT margin target in the Power Technologies division depends partly on the timely resolution of the remaining underutilization in the power lines business.

The company intends to further reduce total debt to about $4 billion and gearing to approximately 50 percent by the end of 2005.

Revenue and margin targets exclude major acquisitions, divestitures and business closures.

Orders received in the Power Technologies division rose 13 percent to $2,103 million in the third quarter of 2004 (up 9 percent in local currencies) as the growth in base orders more than offset lower large orders in the quarter. Local currency orders were higher in all business areas except Utility Automation Systems.

Regionally, orders from China again grew strongly, up by more than a third in both U.S. dollar and local currency terms compared to the third quarter of 2003, and orders from India more than doubled in both U.S. dollars and local currencies. Orders in local currency terms were almost 50 percent higher in the U.S. and grew significantly in eastern Europe. In western Europe, orders were lower in both U.S. dollars and local currencies. The market remained favorable in the Middle East and Africa but orders were down from the very high 2003 levels. Orders in Latin America were up.

Orders in the quarter included a $60-million order, announced in October, for high-voltage switchgear and transformers for the Three Gorges project in China, and a $24-million order in Algeria to upgrade part of the country’s power grid.

Revenues in the quarter were 14 percent higher at $2,142 million (up 9 percent in local currencies). Revenues were up in all business areas, led by Transformers, Medium-Voltage Products and High-Voltage Products. Asia and the Middle East were the main drivers of the revenue improvement.

Third-quarter EBIT decreased to $110 million from $127 million in the same period in 2003. Higher EBIT in the High-Voltage Products and Transformers business areas, plus lower restructuring charges than the same period in 2003, were offset primarily by the remaining underutilization in the power lines business and in other parts of the systems business. There was an additional effect from higher raw material costs that could not yet be reflected in higher prices.

As a result, the division’s EBIT margin in the quarter amounted to 5.1 percent compared to 6.8 percent in the same quarter last year. The EBIT margin before restructuring was 5.7 percent compared to 7.9 percent in the same quarter last year.

Cash flow from operations for the division decreased to $67 million in the third quarter from $81 million in the same quarter of 2003, mainly the result of lower earnings.

The Power Technologies division announced plans in August to accelerate profitable growth by streamlining its five business areas into two, organized around products and systems. The Power Technology Products business area will incorporate ABB’s manufacturing network for power technologies. The Power Technology Systems business area will offer systems for power transmission and distribution grids, and for power plants. The changes will take effect as of January 1, 2005.

The Automation Technologies division recorded a 19-percent increase in orders compared to the same quarter last year (up 13 percent in local currencies), with strong growth in all business areas in both U.S. dollar and local currency terms.

Order growth was strong across most product businesses, as well as the oil and gas and marine sectors. Regionally, orders were significantly higher in the U.S., Latin America, and both eastern and western Europe, all of which showed strong double-digit local currency growth. Orders continued to grow at a double-digit pace in China.

Both base and large orders grew in the quarter. Large orders in the quarter included two contracts valued at a total of $174 million for gas compressor stations in Poland and Algeria.

Demand for ABB’s new System 800xA process control system continued to grow, including significant recent orders from a large aluminium refinery in Brazil, a paper company in China, fertilizer manufacturers in Egypt and a water treatment utility in The Netherlands.

Revenues and EBIT grew for the eighth consecutive quarter. Revenues rose to $2,684 million, up 12 percent (6 percent in local currencies) compared to the third quarter of last year. Revenues in U.S. dollars were higher in all business areas. In local currencies, revenues were higher in Automation Products and Process Automation, and slightly lower in Manufacturing Automation as the result of a weak order backlog at the beginning of the year.

Revenues in local currencies in the Americas and western Europe were flat for the third quarter, and significantly higher in Asia, eastern Europe and the Middle East and Africa.

EBIT rose 54 percent to $266 million compared to the same quarter in 2003, driven by double-digit improvements in all business areas. The EBIT margin reached 9.9 percent from 7.2 percent in the same quarter in 2003. The main contributors were ongoing productivity improvements, increased product revenues and a $29-million reduction in restructuring costs. The EBIT margin before restructuring increased to 10.3 percent in the third quarter of 2004 from 8.9 percent in the same period last year.

Cash flow from operating activities in the quarter amounted to $239 million, up 9 percent, mainly the result of higher earnings.

Non-core activities reported negative EBIT of $10 million in the third quarter compared to positive EBIT of $6 million in the same period of 2003, driven primarily by the Building Systems businesses, which reported a negative EBIT of $12 million compared to a positive EBIT of $18-million in the same period in 2003. The quarterly result in 2003 included a $30-million capital gain on the sale of the Nordic part of the business. A near break-even EBIT from the German Building Systems business in the quarter was more than offset by costs associated with the disposal or winding down of business in some other countries. Other Non-core activities improved due to the elimination of the former Group Processes business area.

Headquarters and stewardship activities resulted in an EBIT loss of $85 million in the third quarter, compared to $38 million in the same quarter in 2003, which included a $65-million capital gain on the divestment of the Nordic Building Systems business. Adjusted for this effect, the EBIT loss from headquarters was $18 million less than the same quarter in 2003, as a result of lower corporate costs. Corporate results will not improve significantly over the remainder of 2004 but are expected to improve gradually through 2005.

Asset write-downs in the quarter were $16 million and included the write-down of an investment in a venture capital business. Net capital gains were lower in the quarter, compared to the third quarter of 2003, which included a $95-million gain on the sale of ABB’s Nordic Building Systems business. Income from licenses and equity-accounted companies increased to $28 million, reflecting primarily income from the company’s Equity Ventures portfolio. In the third quarter of 2003, income from licenses and equity-accounted companies was offset by losses in the Swedish Export Credit Corporation, in which ABB held a 35-percent stake that it has since divested.

The difference in the Reinsurance result reflects the divestment of this business in the second quarter of 2004.

Expenses related to asbestos decreased in the quarter, primarily due to a reduction in the expense from the mark-to-market treatment of the approximately 30 million ABB shares reserved to cover part of the company’s asbestos liabilities. That expense decreased from $67 million in the third quarter of 2003 to $19 million in the same period this year. Additionally, the third quarter of 2003 included an expense of $41 million relating to a contingent payment for asbestos.

The oil, gas and petrochemicals result in Discontinued operations for this quarter includes various items in addition to the result of the remaining downstream business, such as compliance costs associated with the upstream business. The divestment of the upstream business, completed in July 2004, resulted in net cash proceeds of some $800 million and a break-even result on the transaction. Results for the downstream oil and gas business are presented in the next section.

The improvement in net income on the line Other in Discontinued operations in the third quarter was primarily the result of the release of provisions related to the final settlement during the quarter of the sale of the Structured Finance business in 2002. The loss in the 2003 quarter included a $24-million charge ahead of the sale of ABB Export Bank, which has since been divested.

Demand for ethylene technologies in the downstream oil, gas and petrochemicals business continued to grow in the third quarter. The strategic shift in the large project business to lower-risk reimbursable contracts rather than large scope fixed-price contracts, however, resulted in a 10-percent reduction in orders and 42-percent lower revenues in the third quarter of 2004 compared to the same period in 2003.

The net loss in the quarter amounted to $12 million compared to a loss of $122 million in the same period in 2003, which included a number of non-cash project write-offs, including a large petrochemicals project in India and a refinery in The Netherlands.

More information is available on the ABB website.

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 103,000 people.

Source: ABB Group

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