ABB net income doubles in third quarter

  • Orders increase 19 percent on global growth and drive for energy efficiency
  • EBIT margin rises to 11.4 percent on higher volumes and strong execution
  • Net income doubles to $397 million, lifting net margin to 6.6 percent
Zurich, Switzerland, Oct. 26, 2006 - ABB's third-quarter net income more than doubled to $397 million from $188 million in the same period of 2005, helped by higher volumes and strong project execution.

Earnings before interest and taxes (EBIT) increased 48 percent to $686 million from $463 million a year earlier and the EBIT margin, or EBIT as a percentage of revenues, increased to 11.4 percent from 8.3 percent.

Orders rose 19 percent (16 percent in local currencies), spurred by a number of factors, such as continued strong global industrial demand, the need for reliable power supplies to sustain growth in emerging markets, and efforts to offset higher oil prices by improving energy efficiency and productivity.

"We are benefiting from our leading market positions in power technology and industrial automation," said Fred Kindle, ABB President and Chief Executive Officer. "The strong order development reflects investments by our customers to raise productivity and build modern energy-efficient power networks. Improvements in operational performance and project management are clearly showing up in our earnings."

2006 Q3 key figures
Q3 06
Q3 051
Change
$ millions unless otherwise indicated
US$
Local
Orders
6,768
5,684
19%
16%
Revenues
6,025
5,606
7%
5%
EBIT
686
463
48%
EBIT margin (%)
11.4%
8.3%
Net income
397
188
Net margin (%)
6.6%
3.4%
Basic and diluted net income per share ($)
0.18
0.09
Cash flow from operating activities
523
359
1 Adjusted to reflect the reclassification of activities to Discontinued operations

Summary of results
Order growth in the third quarter was driven by the two product divisions and by demand for automation solutions, particularly in the oil and gas industry.

Orders increased by at least 10 percent in all regions. The Middle East and Africa recorded the strongest growth, with several large contracts secured in Algeria and South Africa. Order growth remained high in Europe at 25 percent (19 percent in local currencies), with significant increases from Sweden, the U.K., Spain, Germany and Russia. Increased demand from South America supported the order intake in the Americas and business in Asia continued to benefit from the rapid pace of development in China and India.

Demand was strong for core products such as transformers and energy-saving motors and drives. The company also experienced an increase in orders for automation systems and equipment to increase factory productivity, and for services where ABB performs maintenance operations for customers.

Large orders (more than $15 million) rose 31 percent (30 percent in local currencies) and base orders (less than $15 million) were up 17 percent (14 percent in local currencies). Large orders now represent 15 percent of total orders compared with 13 percent in the third quarter of 2005. The order backlog at the end of September rose to $16,346 million from $15,671 million three months earlier and $12,915 million a year ago.

Revenues rose 7 percent (5 percent in local currencies) to $6,025 million, with the strongest performance coming from the two product divisions. Revenues increased in all regions, led by Asia and the Middle East and Africa.

Orders continued to increase faster than revenues, reflecting the high proportion of large projects in the order backlog, particularly in the Power Systems and Process Automation divisions, for which revenues will materialize over several quarters including periods beyond the end of 2007

The higher EBIT and EBIT margin was achieved through higher volumes, better execution in large projects and other operational improvements. All divisions except for Robotics were able to improve their EBIT margins, and corporate costs were further reduced.

Finance net1 decreased to minus $29 million in the third quarter from minus $59 million a year earlier, reflecting the reduction in overall debt levels. The effective tax rate in the quarter was 29 percent, down from 33 percent a year earlier, primarily due to increased earnings derived from lower-tax jurisdictions.

1 Finance net is the difference between interest and dividend income and interest and other finance expense.

A loss of $28 million was recorded in the third quarter of 2006 in discontinued operations, primarily related to the planned disposal of a business in the Power Products division.

Cash flow from operations was influenced by two main factors. Higher earnings and customer advances were offset by an increase in working capital due to higher business volumes, primarily in the Power Products division. The increased cash flow in the third quarter of 2006, relative to the comparable period of 2005, was mainly due to the cessation of our previous securitization program, which predominantly affected the Automation Products and Process Automation divisions.

ABB continued to strengthen its financial position during the quarter. Cash and marketable securities increased to $3,888 million at the end of September from $3,569 million three months earlier. The net cash position improved to about $700 million from about $300 million at the end of the previous quarter. Gearing was 34 percent at the end of September 2006, compared with 36 percent at the end of the second quarter of 2006.

Divisional performance Q3 2006
Power Products division
2006 Q3 key figures
Q3 06
Q3 05
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,984
1,606
24%
21%
Revenues
1,852
1,516
22%
19%
EBIT
253
180
41%
EBIT margin (%)
13.7%
11.9%
Cash flow from operating activities
130
191

Order growth remained strong in the third quarter, primarily on higher base orders. Investments continued by utility customers in western Europe to refurbish existing power infrastructure and in Asia to expand their networks. Demand in the Middle East and Africa remained strong with many projects sourced through European and Asian partners.

Revenues increased in all businesses, with particularly strong growth in the transformer and high-voltage products businesses. Price increases to compensate for higher raw material costs also contributed to the growth. Expenses related to the transformer consolidation program announced last year were $4 million in the third quarter of 2006 (third-quarter 2005: $14 million), bringing costs for the first nine months of the year to $24 million (January-September 2005: $80 million). EBIT and EBIT margin rose significantly for the division as the strength of demand enabled plants to operate at higher capacity, as well as from operational improvements.

Power Systems division
2006 Q3 key figures
Q3 06
Q3 05
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,050
1,209
-13%
-13%
Revenues
1,072
1,031
4%
2%
EBIT
76
38
100%
EBIT margin (%)
7.1%
3.7%
Cash flow from operating activities
73
35

Orders declined in the third quarter due to both the timing of project awards this year and the high level of large orders in the same period of 2005, particularly in the Middle East. Base orders, which on average account for about three-quarters of total division orders, rose 14 percent (12 percent in local currencies). A drop in orders in the Americas and Europe was partially offset by an increase in Asia, where India and China are investing to expand and strengthen their power networks to meet demand spurred by the rapid pace of economic growth.

Revenues grew moderately versus the same quarter in 2005, reflecting the scheduled project progress from the existing order backlog. EBIT and EBIT margin increased significantly, primarily due to improved project selection and execution, and higher capacity utilization.

Automation Products division
2006 Q3 key figures
Q3 06
Q3 05
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,857
1,535
21%
17%
Revenues
1,700
1,440
18%
14%
EBIT
270
211
28%
EBIT margin (%)
15.9%
14.7%
Cash flow from operating activities
289
71

Industrial markets continued to develop favorably in the third quarter, leading to a further increase in demand. Orders were higher in all business units, with the strongest growth in the low-voltage drives, motors, breakers and switches businesses. Orders rose in all regions, led by Asia on demand from China and India. There was also a strong increase in the Americas, driven by the U.S., as well as in eastern Europe and the Middle East.

Revenues increased in the period due to continued strong market demand, yielding higher volumes and prices. Revenue growth and high capacity utilization contributed to a further increase in EBIT and EBIT margin.

Process Automation division
2006 Q3 key figures
Q3 06
Q3 05
Change
$ millions unless otherwise indicated
US$
Local
Orders
1,828
1,227
49%
44%
Revenues
1,322
1,183
12%
9%
EBIT
139
88
58%
EBIT margin (%)
10.5%
7.4%
Cash flow from operating activities
171
45

Demand for automation solutions grew in all sectors and regions. This was primarily driven by the continued efforts of customers to expand capacity and to increase the efficiency and productivity of their facilities. The trend resulted in an exceptional increase in large orders. The businesses with the strongest growth were oil and gas and minerals, supported by marine, pulp and paper and performance services.

Regionally, orders were higher in the Middle East and Africa, driven mainly by large orders from the oil and gas industry. Orders in Europe increased as customers expanded in the emerging markets of the east, and the Americas benefited from demand in the pulp and paper sector and for performance services. Orders declined in Asia, mainly reflecting a reduction in the scope of work on a previously booked project in Thailand.

Revenues rose in the third quarter, reflecting the progress made on the significant backlog of large orders and an increase in the service business. Strong execution of large projects and increased revenues from services contributed to the improvement in EBIT and EBIT margin compared with the third quarter of 2005.

Robotics division
2006 Q3 key figures
Q3 06
Q3 05
Change
$ millions unless otherwise indicated
US$
Local
Orders
295
301
-2%
-6%
Revenues
281
426
-34%
-36%
EBIT
5
25
-80%
EBIT margin (%)
1.8%
5.9%
Cash flow from (used in) operating activities
7
(13)

Revenues declined in the third quarter, reflecting continued weak demand from the automotive market, which accounts for about three-quarters of the division's business. Orders rose in certain non-automotive general industry sectors, including packaging, consumer electronics and food processing. Orders were lower in all regions although the decline slowed from previous quarters.

The division is continuing to apply operational measures announced in the first quarter of 2006, including higher spending on research and development. These led to additional costs in the period that affected EBIT and EBIT margin, which were lower than in the same quarter of 2005.

Non-core activities and Corporate
In the third quarter of 2006, Non-core activities generated EBIT of $24 million compared with $10 million a year earlier.

Lummus, which is part of our oil, gas and petrochemicals business, recorded large orders of about $270 million on the strength of industry demand. Operational improvements were offset primarily by a loss provision for a previous project. In addition, Lummus is in negotiations toward resolving outstanding claims for a large project. Equity Ventures reported stable income and Building Systems had a break-even result in the quarter.

Corporate costs fell to $81 million from $89 million in the same period of 2005 as cost reductions continued at the local and Zurich head offices.

Asbestos
In April 2006, following the resolution of Combustion Engineering's asbestos liabilities, ABB Lummus Global Inc., another U.S. subsidiary, filed a separate asbestos-related pre-packaged Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Lummus Plan of Reorganization became final and effective on Aug. 31, 2006.

Management
ABB recently announced two new appointments to the Executive Committee with effect from Jan. 1, 2007. Peter Leupp, manager of ABB in China, was named head of the Power Systems division and Diane de Saint Victor, currently general counsel at European Aeronautic Defence and Space Company (EADS), was appointed general counsel.

ABB also hired Clarissa Haller from Roche as head of Corporate Communications with effect from Oct. 1.

Outlook
ABB's outlook for the remainder of 2006 and into 2007 remains strong. Demand for power transmission and distribution infrastructure is expected to continue growing in Asia and the Middle East. Equipment replacement and improved network efficiency and reliability are forecast to be the key drivers of higher demand in Europe and North America.

ABB expects the pace of automation-related industrial investments to continue into early 2007 in most sectors, notably metals and minerals, marine, and oil and gas. Overall, automation-related demand growth is expected to be strongest in Asia and the Americas, with more modest growth in Europe.

While ABB's overall market environment is currently very favorable, business risks include the impact of price volatility for oil and other commodities on the global economy and the potential for further political instability in several regions of the world. The global outlook remains strong. While the current rapid pace of growth in order intake is expected to slow in 2007, we expect ABB to continue to take advantage of the favorable global investment environment.

More information
The 2006 Q3 results press release and presentation slides are available from Oct. 26, 2006, 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 media call 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; from the U.S. and Canada +1 866 291 4166; 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 72 hours: Playback numbers: +44 20 7108 6233 (U.K.), +41 91 612 4330 (rest of Europe) or +1 866 416 2558 (U.S./Canada). The code is 577, followed by the # key.

A conference call for analysts and investors is scheduled to begin today at 3:00 p.m. CET (9:00 a.m. EDT). Callers should dial +1 412 858 4600 (from the U.S./Canada) or +41 91 610 56 00 (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 96 hours. Playback numbers: +1 866 416 2558 (U.S./Canada) or +41 91 612 4330 (Europe and the rest of the world). The code is 563, followed by the # key.

Investor calendar 2007
Q4/Full Year 2006 results
Feb. 15, 2007
Q1 2007 results
April 26, 2007
ABB Ltd Annual General Meeting
May 3, 2007
Q2 2007 results
July 26, 2007
Q3 2007 results
Oct. 25, 2007

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 107,000 people.

Zurich, Oct. 26, 2006
Fred Kindle, CEO

Important notice about forward-looking information
This press release includes forward-looking information and statements including the section entitled "Outlook," 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, 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 and costs associated with compliance activities, interest rates, fluctuations in 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.


Download/view complete press release including appendices in PDF format. Appendices are not included on this web page.

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