Switzerland: ABB Releases Q3 Results

ABB reported a 24-percent increase in operational EBITDA in the third quarter on double-digit revenue growth compared with the third quarter of last year.

In addition to higher revenues, the increase reflects successful cost reductions that continued to more than offset price pressure. The recent Baldor acquisition also made a significant contribution to both revenues and earnings.

Customer investments to increase operational efficiency translated into higher orders for products such as electrical motors and robots, while capacity expansion and the need for service drove higher orders in the oil and gas sector. The need to strengthen power distribution networks, driven in part by industrial growth in emerging markets, as well as the integration of renewable energy supplies into power grids, lifted orders in the power businesses.

“This was a solid quarter where we continued to execute well,” said Joe Hogan, ABB’s CEO. “Our cost savings efforts again more than offset price pressure in power and we continued to build the order backlog, which will support growth in the coming quarters. Growth in our early-cycle businesses slowed this quarter, partly on comparisons to the very strong rates we saw a year ago as well as weaker demand in some industry sectors.

“Looking ahead, uncertainty around global growth makes it difficult to forecast. Based on recent developments and in line with slowing economic growth, however, we expect order growth in most of our early-cycle businesses to remain near current levels until confidence in the macroeconomic outlook improves. Meanwhile, the longer-term outlook remains positive. The world needs to get more from its power and industrial resources while reducing environmental impacts. ABB is in a great position, with our leading technology, broad global presence and strong balance sheet, to help our customers meet that challenge.”

Summary of Q3 2011 results

Orders received and revenues

Demand for ABB products that boost energy efficiency, industrial productivity and power reliability continued to grow in the third quarter, resulting in higher orders received in all divisions compared to the same quarter in 2010.

The Discrete Automation and Motion division recorded the strongest growth, up more than 50 percent in local currencies on strong orders from U.S.-based Baldor—acquired in the first quarter of 2011—and double-digit growth in the robotics and power electronics businesses. On an organic basis (excluding Baldor), orders in Discrete Automation and Motion increased 15 percent. For the ABB Group, organic order growth amounted to 6 percent.

Orders were slightly higher in Low Voltage Products, mainly on increased demand for low-voltage systems to improve electrical efficiency in industry. The pace of order growth in Low Voltage Products and in Discrete Automation and Motion excluding Baldor slowed versus the very strong third quarter in 2010 and was also below the growth rates in the second quarter of 2011. This trend partly reflects the more challenging year-over-year comparison as well as weaker demand for some standard industrial products. The Process Automation division saw orders up 5 percent, mainly on continuing favorable demand from the oil and gas industry.

Orders rose 6 percent in Power Products and were stable to higher in all businesses. Continuing investments in renewable energy sources fuelled an 9-percent order increase in the Power Systems division. In August, ABB won its largest-ever power transmission order, worth around $1 billion, to supply a power link connecting offshore North Sea wind farms to the German mainland grid.

Orders grew most in the Americas, mainly reflecting the acquisition of Baldor, but were also up double-digits on an organic basis. Orders were flat in Europe as increases in eastern Europe and Germany were offset by slowing markets in southern Europe, Switzerland and Sweden. In Asia, growth was led by double-digit increases in India, while orders in China fell 5 percent.

Base orders (below $15 million) increased 11 percent (3 percent organic) and were up in all divisions except Power Systems, where they were flat. Base orders in Power Products increased for the fourth consecutive quarter. Large orders (above $15 million) increased 17 percent in the quarter and represented 22 percent of total orders, up from 20 percent in the year-earlier period. Service orders increased 12 percent.

The order backlog at the end of September reached $28.5 billion, a local-currency increase of 8 percent compared with the end of the third quarter in 2010, and 1 percent higher than at the end of the second quarter in 2011.

Revenues continued growing and were higher in all divisions except Process Automation, where they were flat. The return to revenue growth reported by Power Products in the second quarter of 2011 was sustained in the third quarter. Excluding the Baldor acquisition, Group revenues rose by 4 percent. Service revenues grew 10 percent and represented 16 percent of the Group’s total revenues.

Earnings and net income

EBIT in the third quarter of 2011 amounted to $1.2 billion, a 3-percent increase compared to the same quarter a year earlier. The mark-to-market treatment of derivative transactions reduced EBIT by approximately $100 million in the quarter, compared to a positive impact of $83 million in the third quarter 2010.

As part of the company’s previously-announced $1-billion cost savings initiative for 2011, savings of approximately $270 million were achieved in the quarter, of which about 60 percent were derived from optimized sourcing. For the first nine months of 2011, savings amounted to approximately $750 million. Costs associated with the program in the third quarter were approximately $30 million, bringing the total cost for the first nine months of the year to approximately $55 million.

Operational EBITDA in the third quarter of 2011 amounted to $1.6 billion, an increase of 24 percent over the year-earlier period. The increase in operational EBITDA and operational EBITDA margin compared to the year-earlier period mainly reflects the contribution of more than $500 million of revenues and approximately $110 million of operational EBITDA from the Baldor acquisition, as well as the return to profitability in the cables business. Improved profitability in the Power Products division along with strong earnings in the robotics business further supported the operational EBITDA margin, which increased in all divisions compared to the second quarter of 2011.

Net income for the quarter grew in line with EBIT and was 2 percent higher at $790 million. Basic earnings per share amounted to $0.34, the same as in the year-earlier period.

Balance sheet and cash flow

Net cash at the end of the third quarter was approximately $1 billion, compared with $1.2 billion at the end of the previous quarter.

Short-term debt and cash increased through the issue of approximately $1 billion of commercial paper in the third quarter.

ABB launched two Swiss franc-denominated bonds during the third quarter, one of CHF500 million with a 1.25-percent coupon maturing in 2016 and the second of CHF350 million with a 2.25-percent coupon maturing in 2021. As the bond issues were settled in October, they had no impact on the third-quarter consolidated balance sheet or statements of cash flows.

An increase in net working capital, mainly higher receivables and inventories, contributed to the decline in cash from operating activities compared to the same quarter of 2010.

Acquisitions

During the third quarter, ABB completed the previously-announced acquisitions of Brisbane, Australia-based software company Mincom—a provider of enterprise asset management software and services—as well as Sweden-based pulp and paper systems and equipment supplier Lorentzen & Wettre. The acquisitions had no material impact on ABB’s third-quarter results or financial position. The acquisition of Switzerland-based specialty transformer manufacturer Trasfor Group was completed in October 2011.

Outlook

Macroeconomic concerns, particularly around public debt and the availability of capital in Europe, continue to weigh on the global business environment. This uncertain environment makes short-term forecasting more challenging.

Over the long term, ABB sees no change to the positive outlook in its major end markets. Utility spending on power transmission to integrate renewable energy into existing grids and interconnect power grids continues to gain momentum. High oil prices are expected to further increase the need for energy-efficient power and automation technologies. While commodity prices have fallen recently, growing demand from the emerging markets is expected to drive them higher over the long term. ABB expects that trend to drive customer capital expenditure, as well as spending on efficiency and productivity improvements, including service.

Emerging markets will remain the principal drivers of growth and demand in the mature economies across all of ABB’s portfolio is also expected to continue to grow.

The near-term view is mixed. Based on recent developments and in line with slowing economic growth, demand is softening in some early-cycle sectors such as construction and general industry, while industrial demand for robotics solutions remains robust. Early-cycle sales typically account for about 20 percent of ABB’s revenues. Demand has also weakened for products used in renewable power generation. ABB’s mid- to later-cycle markets depend more on customer capital spending than short-term GDP growth. Current uncertainty around the economic outlook over the next several months may prolong this investment cycle.

Against this background, management expects order growth in most of its early-cycle businesses to remain near current levels until confidence in the macroeconomic outlook improves. The focus on flexibility and steady productivity improvements will remain a key priority. At the same time, ABB will continue to tap profitable growth opportunities, both organic and inorganic, based on its leading technology, broad global presence and strong balance sheet.

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Source: ABB, October 27 , 2011