Strong execution lifts Q3 net income 26%

  • Double-digit growth in revenues, EBIT, net income and cash flow
  • EBIT up 25% despite ca. $100-mill. impact from hedging valuation
  • Orders stronger in product businesses; lower large systems orders
  • On target to deliver in line with 2008 growth guidance
Zurich, Switzerland, October 23, 2008 - ABB reported double-digit increases in revenues, earnings before interest and taxes (EBIT), net income and cash flow in the third quarter of 2008 as the company continued to improve its operational performance.

EBIT grew 25 percent to $1.3 billion, including a net expense of approximately $100 million, equivalent to roughly one percentage point of EBIT margin, resulting from the mark-to-market treatment of hedging transactions.

Net income rose 26 percent to $927 million and cash from operations increased to $1.1 billion.

Revenues grew 22 percent (local currencies: 16 percent) on the successful execution of the strong order backlog.

Orders received increased 7 percent (local currencies: 1 percent) to $8.9 billion. Orders for power equipment showed continued robust growth in all regions and orders for industrial automation products also increased at a double-digit pace in most markets. Large project orders declined significantly, reflecting in part a comparison with a very strong quarter a year ago. In addition, customers’ decisions on a number of industrial and infrastructure investments have been delayed as a result of the recent market uncertainty.

“Our solid revenue, earnings and cash flow growth in the third quarter demonstrate our ability to successfully execute across all of our businesses,” said Joe Hogan, ABB's chief executive officer. “We continue to benefit from long-term trends to expand and upgrade power infrastructure, improve industrial productivity and lower environmental impact.

“It’s too early to say how the recent financial-market turmoil will impact our markets in the short term but our operational strength and flexibility, leading technology, competitive cost base and solid balance sheet put us in a good position to meet a tougher market. We are on target to deliver on our 2008 growth guidance.”

2008 Q3 key figures
Q3 08
Q3 07
Change
$ millions unless otherwise indicated
US$
Local
Orders
8,885
8,321
7%
1%
Order backlog (end Sept.)
27,211
22,170
23%
25%
Revenues
8,791
7,190
22%
16%
EBIT
1,291
1,035
25%
as % of revenues
14.7%
14.4%
Net income
927
738
26%
Basic net income per share ($)
0.41
0.32
Cash flow from operating activities
1,121
886

Summary of Q3 2008 results

Orders received and revenues
Demand for power transmission and distribution products and energy-efficient industrial equipment remained solid in most markets during the third quarter of 2008, contributing to double-digit order growth in the Power Products and Automation Products divisions. Utility customers in mature markets continued to invest in grid refurbishment to improve reliability and in emerging markets to expand capacity. Demand in industries such as oil and gas and metals and minerals also remained positive, although some smaller customers in the mining industry began to delay investments in the face of the current market uncertainty. Shorter-cycle industries, such as construction and automotive, remained weak.

Orders were significantly lower in the Power Systems division and little changed in the Process Automation division, primarily the result of the timing of large project awards. Robotics orders were also little changed as lower demand from the automotive industry was offset by higher orders from other industry sectors.

Large orders (more than $15 million) decreased in the quarter by 29 percent (local currencies: 31 percent) and accounted for 11 percent of total orders compared to 17 percent in the same quarter in 2007. Base orders (less than $15 million) were up 14 percent (local currencies: 8 percent) and were higher in all divisions except Power Systems.

Regionally, orders grew strongest in the Americas (up 36 percent; 33 percent in local currencies), led by power infrastructure investments in the U.S., Canada, and Brazil. Asian orders grew 25 percent in the quarter (local currencies: 20 percent), mainly the result of demand for automation products and systems. In Europe, Power Products increased orders by 28 percent (local currencies: 19 percent) but overall orders were down 5 percent (local currencies: 13 percent), mainly the result of significantly lower order intake in Power Systems, which recorded a $400-million wind power order in the same quarter a year earlier.

Revenues increased at a double-digit rate in both U.S. dollar and local currency terms across all divisions, reflecting the execution of the strong order backlog. Price increases in previous quarters to offset higher raw material costs also supported the revenue improvement.

The order backlog at the end of September 2008 amounted to $27.2 billion, an increase of $5 billion, or 23 percent (local currencies: 25 percent) compared to the end of the same quarter in 2007. The order backlog was unchanged in local currencies compared to the end of the second quarter of 2008, down $2 billion in U.S. dollar terms.

Earnings before interest and taxes
The EBIT increase in the quarter was mainly the result of volume growth. The EBIT margin continued to benefit from increased sourcing from emerging economies and the focus on improved risk and project management. Included in EBIT is a cost of approximately $100-million representing the valuation of hedges not qualifying under hedge accounting rules. This impact was driven by a sharp decrease in commodity prices and the increase in the U.S. dollar compared to most European currencies during the quarter. On a year-to-date basis, the overall net impact of this accounting treatment is negligible.

Net income
Net income of $927 million also reflected ABB’s strong cash position and low debt levels, which resulted in a positive finance net of $13 million compared to an expense of $16 million in the third quarter of 2007. The effective tax rate was 25 percent, compared to 22 percent in the same quarter of 2007.

Balance sheet and cash flow
Net cash at the end of the third quarter was $4.8 billion compared to $6 billion at the end of the previous quarter. The decrease resulted mainly from the payment in July of the 2007 dividend of $1.1 billion (in the form of a nominal value reduction) and an acquisition in the quarter. In addition, the company made cash payments of approximately $160 million related to its 2.2-billion Swiss franc share buy-back program.

Cash flow from operations increased by $235 million compared to the third quarter of 2007, reflecting the higher volume of business and the effect of ongoing working capital management measures. Also included in cash flow from operations was a payment of $25 million to asbestos trusts.

Management changes
Joseph M. Hogan took up responsibilities as Chief Executive Officer of the ABB Group on September 1, 2008.
In August 2008, ABB announced the departure of Ravi Uppal, President of Global Markets and a member of the ABB Group Executive Committee. Effective immediately, the regional organization will be reporting to Michel Demaré in addition to his Chief Financial Officer role.

Acquisitions
During the third quarter, ABB completed its acquisition of U.S. transformer company Kuhlman Electric Corporation, aimed at expanding ABB’s power products portfolio in the Americas. Kuhlman’s September 2008 results have been consolidated into ABB’s third-quarter financial statements, resulting in a contribution of approximately $30 million in orders received and revenues.

Compliance
ABB continues to cooperate with the U.S. Department of Justice and the U.S. Securities and Exchange Commission regarding various suspect payments that have occurred across several years. ABB also continues to cooperate with various anti-trust authorities, including the European Commission, regarding certain allegedly anti-competitive practices. As previously communicated, the outcome of these matters as well as previously disclosed matters could have a material impact on the company's consolidated operating results, cash flows and financial position.

Outlook
Over the long-term, demand for the refurbishment and expansion of power transmission and distribution infrastructure is expected to remain strong in all regions. Demand for high-efficiency industrial automation systems and equipment that improves customer productivity and reduces environmental impacts, is expected to fuel future growth in automation activities.

However, the recent turbulence in the global banking sector and credit markets makes near-term forecasts difficult. The effect of recent developments on global macroeconomic growth in general, and on utility and industrial investments in particular, cannot yet be determined.

For the full-year 2008, ABB confirms its guidance of 15-20 percent growth for power-related activities and clearly above 10 percent growth in its automation activities.

Divisional performance Q3 2008
Power Products
Q3 08
Q3 07
Change
$ millions unless otherwise indicated
US$
Local
Orders
3,409
2,678
27%
21%
Order backlog (end Sept.)
9,081
6,977
30%
31%
Revenues
3,034
2,413
26%
20%
EBIT
536
405
32%
as % of revenues
17.7%
16.8%
Cash flow from operating activities
479
271

Third-quarter orders were higher in all business units as power infrastructure investments continued in every region. Base orders grew at a double-digit pace and large orders more than doubled compared to the same quarter a year earlier. Continued grid refurbishment fuelled a 43-percent growth in the Americas (local currencies: 40 percent), especially the U.S., more than offsetting the slowdown in housing and construction-related power investments. Both eastern and western Europe recorded double-digit order growth, while transformer demand supported double-digit order growth in Asia. Growth in the Middle East was led by higher orders for medium- and high-voltage equipment.

Revenue growth continued to benefit from increased productivity, the execution of the order backlog and higher service revenues.

EBIT and EBIT margin rose primarily on higher revenues and operational improvements, despite negative impacts from the mark-to-market valuation of foreign exchange and commodity hedging transactions.

Cash flow from operations increased as a result of higher cash effective earnings and improved working capital management.

Power Systems
Q3 08
Q3 07
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,293
1,828
(29%)
(32%)
Order backlog (end Sept.)
8,661
8,136
6%
9%
Revenues
1,601
1,401
14%
9%
EBIT
113
121
(7%)
as % of revenues
7.1%
8.6%
Cash flow from operating activities
111
151

Orders received decreased significantly in the third quarter, mainly due to the lower volume of large orders in the Middle East and Europe compared to the same quarter in 2007, when the division won a $400-million wind power order in Germany. This decline could not be offset by a doubling of orders in North and South America. Orders in Asia increased by 12 percent (local currencies: 9 percent) compared to the same quarter in 2007 as growth in China and Australia made up for a decrease in India.

Revenue growth reflected execution of the order backlog. The lower EBIT and EBIT margin resulted primarily from the negative impacts from the mark-to-market valuation of foreign exchange and commodity hedging transactions.

Cash flow from operations was negatively affected by the timing of project payments.

Automation Products
Q3 08
Q3 07
Change
$ millions unless otherwise indicated
US$
Local
Orders
2,741
2,322
18%
12%
Order backlog (end Sept.)
4,380
3,413
28%
29%
Revenues
2,612
2,203
19%
12%
EBIT
491
384
28%
as % of revenues
18.8%
17.4%
Cash flow from operating activities
509
390

Orders continued to increase at a double-digit pace as demand for more efficient industrial equipment such as breakers, motors and drives grew strongly. Base orders increased by 20 percent (local currencies: 13 percent). Orders from Asia grew by 40 percent (local currencies: 36 percent), mainly the result of industrial infrastructure investments in China and India. Orders from the Middle East also reported good growth. Higher orders in Brazil, Canada and the U.S. contributed to a 26-percent increase in the Americas (local currencies: 22 percent). In Europe, orders were higher in most business units but large orders were lower compared to the same quarter in 2007, which included a $110-million power electronics order. As a result, total orders from Europe increased 8 percent (local currencies: flat).

Higher revenues reflected the order growth during the quarter and execution of the strong order backlog. Revenue growth along with continued high capacity utilization led to a further increase in EBIT and EBIT margin.

Cash from operations increased in line with the growth in EBIT.

Process Automation
Q3 08
Q3 07
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,969
1,914
3%
(3%)
Order backlog (end Sept.)
7,146
5,435
31%
33%
Revenues
1,920
1,512
27%
20%
EBIT
218
157
39%
as % of revenues
11.4%
10.4%
Cash flow from operating activities
243
120

Orders were down in the third quarter (3 percent higher in U.S. dollar terms), largely reflecting the timing of project awards. Orders in the marine sector increased during the quarter as did turbocharging and industrial after sales service orders. These were largely offset by a lower volume of large orders in oil and gas and metals compared to the same quarter a year ago.

Regionally, growth was up 16 percent in Asia (local currencies: 10 percent), led by China, Singapore and Korea. Mexico, Brazil and the U.S. contributed to higher orders in the Americas. European orders were up 8 percent (local currencies: unchanged) in a mixed environment, with higher orders in Norway, Finland and Germany and lower orders in Italy and Switzerland. Orders from the Middle East and Africa were lower, reflecting lower large orders from the minerals sector.

Revenues grew at a record pace in the third quarter mainly reflecting execution of the order backlog in the system business as well as growth in the product and service businesses. Higher revenues and continued emphasis on project execution resulted in higher EBIT and EBIT margin, despite negative impacts from the mark-to-market valuation of foreign exchange and commodity hedging transactions.

Cash flow from operations doubled in the quarter as higher earnings compensated for an increase in working capital needed to support growth.

Robotics
Q3 08
Q3 07
Change
$ millions unless otherwise indicated
US$
Local
Orders
400
370
8%
2%
Order backlog (end Sept.)
665
627
6%
6%
Revenues
431
344
25%
18%
EBIT
28
20
40%
as % of revenues
6.5%
5.8%
Cash flow from operating activities
(9)
41

Order growth from general industry, mainly in foundry applications, the solar industry and consumer-related manufacturing, offset a significant downturn in the automotive market in the third quarter. Regionally, orders grew at a double-digit pace in Asia as customers in emerging markets focused on improving process and product quality. Orders decreased in the more heavily automotive-related markets of Europe and North America.

Revenues increased in the third quarter, mainly reflecting execution of the order backlog. Higher revenues and the higher proportion of sales to general industry contributed to the improvement in EBIT and EBIT margin.

The negative cash flow from operations reflects the timing of customer payments.


More information
The 2008 Q3 results press release and presentation slides are available from October 23, 2008 on the ABB News Center at www.abb.com/news and on the Investor Relations homepage at www.abb.com/investorrelations.

ABB will host a conference call for media today starting at 10:00 a.m. Central European Time (CET). U.K. callers should dial +44 20 7107 0611. From Sweden, +46 8 5069 2105, and from the rest of Europe, +41 91 610 56 00. Lines will be open 15 minutes before the start of the conference. Audio playback of the call will start one hour after the call ends and will be available for 6 days: Playback numbers: +44 20 7108 6233 (U.K.), +41 91 612 4330 (rest of Europe) or +1 (1) 866 416 2558 (U.S./Canada). The code is 12523, followed by the # key.

A conference call for analysts and investors is scheduled to begin today at 2:00 p.m. CET (8:00 a.m. EDT). Callers should dial +1 412 858 4600 (from the U.S./Canada) or +41 91 610 5600 (Europe and the rest of the world). Callers are requested to phone in 15 minutes before the start of the call. The audio playback of the call will start one hour after the end of the call and be available for two weeks. Playback numbers: +1 866 416 2558 (U.S./Canada) or +41 91 612 4330 (Europe and the rest of the world). The code is 10633, followed by the # key.

ABB (www.abb.com) 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 120,000 people.

Zurich, October 23, 2008
Joe Hogan, Chief Executive Officer

Important notice about forward-looking information
This press release includes forward-looking information and statements including the sections entitled “Outlook” and “Appendix I,” as well as other statements concerning the outlook for our business. These statements are based on current expectations, estimates and projections about the factors that may affect our future performance, including global economic conditions, the economic conditions of the regions and industries that are major markets for ABB Ltd. These expectations, estimates and projections are generally identifiable by statements containing words such as “expects,” “believes,” “estimates,” “targets,” “plans” or similar expressions. However, there are many risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking information and statements made in this press release and which could affect our ability to achieve any or all of our stated targets. The important factors that could cause such differences include, among others, costs associated with compliance activities, the amount of revenues we are able to generate from backlog and orders received, raw materials prices, market acceptance of new products and services, changes in governmental regulations, fluctuations in interest rates and currency exchange rates and such other factors as may be discussed from time to time in ABB Ltd’s filings with the U.S. Securities and Exchange Commission, including its Annual Reports on Form 20-F. Although ABB Ltd believes that its expectations reflected in any such forward-looking statement are based upon reasonable assumptions, it can give no assurance that those expectations will be achieved.


You can download/view the PDF format of this press release and the financial statements. These are also available in the attachment section in the right margin. Appendices are not included in this web page.

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