ABB 1998 Net Income Shows Double-Digit Growth at $ 1.3 Billion

- Adjustment of cost base successful - Operating cash flow up substantially

Zurich, Switzerland, February 4, 1999 - ABB, the international engineering and technology group, today reported improved results for 1998, with net income rising to $ 1.3 billion as most segments achieved higher earnings in a challenging business environment. The double-digit increase in net income also reflected significant gains from the Group cost adjustment program.



Operating earnings increased significantly in Power Generation, Power Transmission, Oil, Gas and Petrochemicals, and Financial Services. In Automation, earnings were lower due to cyclical weakness in demand in certain industries, exceptional project cost overruns and costs associated with preparing for the Year 2000 transition. Power Distribution increased profitability further from a high level, and Products and Contracting also posted higher earnings.

“We moved decisively in 1998 towards our goal of becoming a faster, more knowledge and service-based global company,” said ABB President and CEO Göran Lindahl. “We acquired several major players in the promising automation field, the largest being Elsag Bailey, and we divested our interest in Adtranz. We achieved a 17 percent higher operating cash flow and net income margins increased from 3.8 percent to 4.2 percent. With this momentum, I am confident that net income margins will continue to grow in 1999.”

In 1998, ABB Group net income rose to $ 1,305 million from $ 572 million reported in the previous year. Adjusting 1997 net income for the effects of the $ 866 million restructuring charge (to $ 1,176 million), the increase was 11 percent. Group operating earnings before depreciation reached $ 2,111 million, an increase of 5 percent excluding the 1997 charge. The growth in earnings also reflected gains yielded under the cost adjustment program announced in October 1997, which was fully covered by the 1997 restructuring charge.

Orders were down 10 percent and revenues stable (down 1 percent). On a comparable basis, orders were down 1 percent and revenues rose 8 percent. Key among the divestitures was the 50-percent share in Adtranz, which ABB discontinued to proportionally consolidate, except for the operating results up to the third quarter of 1998.

Net income per share (excluding the 1997 restructuring charge) for ABB AB increased by 16 percent to SEK 5.52 and by 10 percent to CHF 103.30 for ABB AG.

Positioning for Growth

ABB took several steps in 1998 towards its goal of becoming an even faster company, well positioned around the world for future growth in knowledge and service-based businesses. At the beginning of 1999, ABB also completed its acquisition of Elsag Bailey to become a market leader in a promising growth market.

In September 1998, ABB realigned its segments. At the same time, ABB further flattened its structure by dissolving its regional organizations, which had successfully fulfilled their roles to build up ABB’s deep local presence around the world. By creating new business segments for Distribution, Automation, Oil, Gas and Petrochemicals and Products and Contracting, ABB signaled its intention to expand into businesses with increasing growth and profitability prospects, where it can use its proven technology strengths and global presence to achieve market leadership in areas like industrial control systems, deepwater oil and gas exploration, intelligent electrical systems, and service.

The ABB Group Results in Detail

Market Environment

Demand trends for ABB’s broad range of infrastructure equipment and systems varied significantly by both business sector and region. Uncertainties as reflected by volatile financial markets prevailed throughout the year and changed global demand patterns, which resulted in delays in financial closing of certain projects. At the same time, increased volatility provided additional opportunities in the financial markets.

Customers in many industries emerged as truly global players with correspondingly high expectations for suppliers who provide complete solutions, not just individual products. Additionally, there was a tendency toward global pricing. The growing demand for high efficiency, low-emission solutions put a premium on suppliers who can deliver a steady stream of technological innovations.
Privatization and deregulation created new demand in North America, certain European countries, Australia and New Zealand, Latin America and Africa. After a period of uncertainty, market participants began positioning themselves in the competitive environment with new investments.

ABB performs approximately three-fourths of its business in OECD countries. Although slower than the previous year, industrial production in these countries continued to grow. Europe helped to compensate for a shortfall in demand in emerging markets, but did not experience the expected full recovery in demand. Economic growth in North America has slowed compared to the high levels of recent years. Japan showed reduced economic activity, but industrial production in Australia and New Zealand remained solid. In the emerging markets, the economies of Latin America also grew at a reduced rate. India’s economy slowed, whereas growth in China remained at a relatively good level. With reduced consumption and investments, the economies of Southeast Asia were gradually stabilizing at a low level. Several Middle East and African economies continued their high rates of growth.

Orders and Revenues

Orders received for the ABB Group reached $ 31,462 million (1997: $ 34,803 million). On a comparable basis, particularly taking into account ABB’s divestiture of Adtranz, orders decreased 1 percent compared to 1997. Power Generation reported lower orders in 1998 compared to the previous year with an increase for its gas turbine activities. The segment Oil, Gas and Petrochemicals reported the strongest order increase. Power Transmission reported higher orders and Power Distribution, Products and Contracting and Automation reported unchanged or lower orders than in the previous year. On a comparable basis, standard orders were flat and large orders decreased 6 percent in 1998.

Revenues in 1998 amounted to $ 30,872 million, a decrease of 1 percent (1997: $ 31,265 million). On a comparable basis, revenues increased by 8 percent compared to 1997.

Fourth quarter orders received decreased in 1998 by 3 percent to $ 7,633 million and revenues increased by 9 percent to $ 9,749 million, when adjusted for major acquisitions and divestitures and compared to the same period last year.

Earnings

Operating earnings after depreciation in 1998 amounted to $ 2,111 million (1997: $ 1,137 million), an increase of 5 percent compared to 1997 when excluding the 1997 restructuring charge. As a percent of revenues11 Including changes in work in progress and finished goods. , personnel expenses decreased further from last year’s low level to 29.4 percent (1997: 30.2 percent) and material expenses decreased to 44.3 percent (1997: 45.3 percent). Reflecting the increased level of outsourcing and deconsolidation of Adtranz, other expenses increased to 16.5 percent (1997: 15.8 percent). Power Generation increased operating earnings substantially. Power Transmission increased profitability further from a high level and Power Distribution also increased operating earnings. Automation reported lower results due to cyclical weakness in demand in certain industries, exceptional project cost overruns and costs for the millennium change. Oil, Gas and Petrochemicals showed a substantial increase in operating earnings, following the strong order volume of previous years. Focus on service and specialized contracting, together with successful restructuring led to higher operating earnings in Products and Contracting. Financial Services reported a strong increase in earnings.

On a regional basis, the largest contributors to Group profits were Sweden, Norway, Finland, Switzerland, Germany and the U.S. Europe improved the most with strong support from Germany, Italy and Switzerland; aided by successful restructuring, each posted significant improvements over the previous year. While earnings from the Nordic countries declined from last year’s high level, these countries continued to contribute significantly to results. Eastern Europe increased profitability. Earnings in the Americas declined as a result of additional restructuring and project cost overruns. In Australia, New Zealand and China, profitability improved whereas most other Asian countries posted lower earnings. Several large projects helped to push earnings higher in the Middle East and Africa and in particular, Saudi Arabia showed higher profitability. Regional operating margins, based on domestic and export revenues within the respective region, developed as follows in 1998: Europe 8.0 percent (1997: 7.8 percent); the Amercias 4.1 percent (1997: 4.1 percent); Asia 2.2 percent (1997: 4.1 percent); Middle East and Africa 9.4 percent (1997: 8.5 percent).

Net unusual items were $ 32 million (1997: $ -608 million). Unusual income, mostly capital gains from divestitures and real estate sales, amounted to $ 114 million. Unusual costs of $ 82 million included costs for rationalization activities related to several ABB companies and additional provisions to cover the possible outcome of a fine from the EU commission.

The preparation of computers and microprocessors for the millennium change resulted in costs of about $ 100 million in 1998 and costs of $ 150 million are expected in 1999. More than half of these costs relate to services for customer systems and the remaining for ABB internal preparations.

Income before taxes reached $ 1,865 million (1997: $ 853 million), an increase of 8 percent compared to the previous year excluding the restructuring charge. In 1998, ABB’s income-related taxes amounted to $ 543 million (1997: $ 258 million), corresponding to an overall tax rate for 1998 of 29.1 percent (1997: 30.2 percent).

Net income for 1998 increased to $ 1,305 million (1997: $ 572 million). Excluding the previous year’s restructuring charge, net income increased by 11 percent.

Reported return on equity in 1998 was 23.2 percent (1997: 10.3 percent; excluding restructuring charge, 21.1 percent) and return on capital employed was 21.1 percent (1997: 12.2 percent; excluding restructuring charge, 19.4 percent).

Personnel and Organization

At the end of 1998, ABB employed 199,232 people compared to 213,057 at year-end 1997. The total number of employees decreased by 6 percent. On a comparable basis, employees decreased by 4 percent. Employment increased in service and maintenance related areas, Oil, Gas and Petrochemicals, Financial Services and in certain activities within Automation.

The adjustment of the cost base announced in October 1997 included the closure of 12 factories, one in the U.S. and the remaining in Europe as well as the downsizing of several more units, particularly in Germany, Italy and Sweden. By the end of 1998, this resulted in an overall reduction of 12,600 employees and another 1,000 will follow in the first half of 1999. Accordingly, some 2,000 positions more than originally planned under this program will have been removed. Program costs remained below budget with more than 90 percent of the planned reductions and costs completed and incurred by the end of 1998, nine months faster than planned. The early and fast adjustment of the cost base with an average payback of two years continued to enhance the Group’s competitiveness.

Financial Position

At the end of 1998, ABB’s net cash position (defined as cash and cash equivalents minus short, medium, and long-term loans) was $ 1,573 million, about the same amount as at the end of 1997, in spite of the funds needed for restructuring measures in 1998 in excess of $ 400 million. In addition, net working capital as a percent of revenues improved to 8.7 percent (1997: 10.2 percent).

Acquisitions during 1998 amounted to $ 274 million (1997: $ 302 million). ABB also made a public offer in cash to acquire Elsag Bailey Process Automation. The transaction was completed after the end of the reporting period upon receiving all of the necessary approvals. The acquisition was valued at approximately $ 2,100 million, including debt of about $ 600 million.

In January 1999, DaimlerChrysler agreed to acquire ABB’s 50-percent share of Adtranz for cash compensation of $ 472 million. ABB discontinued the proportionate consolidation of its 50 percent share in Adtranz, but recognized a $ 69 million operating loss for the first nine months and did not realize any related capital gains in 1998. In 1999, ABB will realize a net capital gain of $ 41 million. In accordance with the Group’s strategy, various non-core activities were divested in Japan, Sweden and the U.S., totaling $ 202 million (1997: $ 748 million).

Capital expenditures for tangible assets in 1998 reached $ 865 million (1997: $ 1,093 million).

Research and Development

In 1998, ABB’s spending on R&D reached $ 2,463 million, representing 8.0 percent of Group revenues (1997: $ 2,657 million or 8.5 percent). With a strong commitment to technology leadership, ABB focuses on development of core competencies and skills of strategic importance for future growth. Continuous product development and improvement in combination with special high risk, high impact projects assure a steady flow of innovative products addressing the future needs of customers.

Outlook for 1999 and Beyond 11)The statements in this release relating to matters that are not historical facts are forward-looking statements that are not guarantees of future performance and involve risks and uncertainties, including but not limited to future global economic conditions, foreign exchange rates, regulatory approvals, market conditions, the actions of competitors and other factors beyond the control of the Company.

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The growth in demand for Power Generation’s gas-fired power stations will continue, particularly in North America. Orders and earnings in 1999 are expected to exceed the 1998 level. Orders and earnings are also expected to increase in Power Transmission and Power Distribution. Power Transmission expects steady, moderate growth in demand with an increasing focus on systems and comprehensive solutions. Power Distribution markets are expected to show high growth in an increasingly deregulated environment. In Products and Contracting, demand for standardized low-voltage products is expected to remain stable, but growth will be above-average in service and in some specialized contracting activities. Orders and earnings are expected to exceed the 1998 level.

Cyclical demand variations will continue for Automation during 1999. Overall, orders are expected to increase and, excluding the effect of the Elsag Bailey integration, earnings are expected to increase as well. The integration of Elsag Bailey will somewhat dilute earnings for the next two years. Demand for Oil, Gas and Petrochemicals is expected to grow at a lower rate as a consequence of low oil prices. With the segment’s focus on areas such as deepwater and subsea activities, as well as upgrades and expansion of refineries, orders are expected to exceed and earnings to reach about the same level as 1998. Financial Services will continue its expansion into areas requiring financial structuring solutions often combined with industrial projects, and operating earnings are not expected to reach the same level as in 1998.

In a difficult economic environment, orders and revenues for ABB Group are expected to increase. The 1999 net cash position will not reach the same level as at the end of 1998, primarily because of cash outlays for the Elsag Bailey acquisition.

Net income in 1999 is expected to exceed the level of 1998.

ABB’s longer term targets remain unchanged. The Group’s strategic shift during the last two years will continue with a clear focus on expanding in knowledge- and service-based sectors as well as reducing our dependence on heavy asset businesses. This strategic shift will continue to result in a reduction of the capital needed. Further improved efficiency in our resource utilization will remain a priority. We also expect continued improvement of key financial ratios. Annual growth of at least 6 percent on average over the business cycle, considerable reduction of working capital in relation to revenues and an increase in net income margin from 4.2 percent in 1998 to the 6-7 percent level within 3 years remain major objectives for the Group.

Dividends

ABB’s dividend policy is to pay out between 30 and 50 percent of consolidated net income for the year. The Board of Directors proposes a dividend for 1998 of CHF 740 million to its two parent companies ABB AB and ABB AG (1997: CHF 700 million). Translated into dollars at the time of the decision, the dividend corresponds to 40 percent of ABB net income for 1998 (1997: 41 percent when excluding the restructuring charge from 1997 net income).

Proposed Changes in the ABB Board of Directors

Messrs. Björn Svedberg and Lodewijk C. van Wachem will resign from the ABB Group Board of Directors at the Annual General Meeting on March 18, 1999. The Board thanks them for their outstanding contributions to the company.

The Board intends to propose to the shareholders on March 18, 1999 to newly elect to the ABB Group Board Mr. Martin Ebner, Chairman of BZ Group Holding and President of BZ Bank, Switzerland and Mr. Jacob Wallenberg, Chairman of Skandinaviska Enskilda Banken and member of the management group of Investor AB, Sweden. In addition, the President and CEO of the ABB Group, Mr. Göran Lindahl is proposed to join the Board.

Further, the following persons will be proposed for reelection to the ABB Group Board:

Percy N. Barnevik, Sweden
Gerhard Cromme, Germany
Jürgen Dormann, Germany
Robert A. Jeker, Switzerland
Yotaro Kobayashi, Japan
Agostino Rocca, Argentina
Donald H. Rumsfeld, United States
Edwin Somm, Switzerland
Peter D. Sutherland, Ireland

The ABB Group Board has also declared its intention to reelect Mr. Percy N. Barnevik as Chairman of the ABB Group Board and Mr. Robert A. Jeker as Vice-Chairman.













ABB Parent Companies’ Financial Results 1998
ABB AB (Sweden) and ABB AG (Switzerland) are the two sole owners in equal parts of ABB Asea Brown Boveri Ltd, Zurich (Switzerland), which is the holding company of the ABB Group with approximately 1,000 companies around the world. The two parent companies each provide a transparent vehicle for investing in ABB as virtually all of their income and stockholders’ equity comes from their respective 50-percent shares of the ABB Group income and equity. For a full report on the development of the ABB Group, please refer to the first part of this Press Release.

ABB companies throughout the world report their financial results in local currencies, which are then translated to U.S. dollars to establish the ABB Group’s consolidated accounts. In order to compute the income of the two parent companies, ABB AB (Sweden) and ABB AG (Switzerland), their 50-percent shares of ABB Group income are translated from U.S. dollars to Swedish Krona (SEK) and Swiss Francs (CHF), respectively.

ABB AB (Sweden) and associated company

ABB AB’s share of ABB Group’s income before taxes and after minority interests for 1998 was US$ 920 million (1997: US$ 409 million), an increase of 125 percent. The average U.S. dollar exchange rate increased 4 percent from SEK 7.61/US$ during 1997 to SEK 7.95/US$ in 1998. The year-end exchange rate was up 3 percent from SEK 7.90/US$ at the close of 1997 to SEK 8.13/US$ at December 31, 1998. After translation, ABB AB’s share of ABB Group income before taxes and after minority interests increased from SEK 3,116 million in 1997 to SEK 7,318 million in 1998. ABB AB’s income before taxes, including associated company, amounted to SEK 7,311 million in 1998 (1997: SEK 3,114 million). After taxes of SEK 2,130 million (1997: SEK 940 million), net income amounted to SEK 5,181 million (1997: SEK 2,174 million) for the year, an increase of 138 percent.

ABB AB’s net income per share amounted to SEK 5.52 in 1998 (1997: SEK 2.32).

ABB AB, parent company

For fiscal year 1998, ABB AB will receive a dividend of CHF 370 million from ABB Asea Brown Boveri Ltd. In order for ABB Group’s 1998 profits to be made available to ABB AB shareholders in the spring of 1999, the amount in SEK of 2,042 million was anticipated in the parent company’s 1998 financial statements.

Administrative expenses increased from SEK 11 million in 1997 to SEK 14 million in 1998, and interest net decreased from SEK 9 million to SEK 7 million. Net income amounted to SEK 2,046 million (1997: SEK 1,925 million) for the year.

The Board of Directors proposes a dividend to shareholders of SEK 2.18 per share (1997: SEK 2.10), totaling SEK 2,045 million (1997: SEK 1,970 million).





ABB AG (Switzerland) and associated company

ABB AG´s share of ABB Group’s income before taxes and after minority interests for 1998 was US$ 920 million (1997: US$ 409 million), an increase of 125 percent. The average U.S. dollar exchange rate was slightly up from CHF 1.44/US$ during 1997 to CHF 1.45/US$ in 1998. The year-end exchange rate was down 5 percent from CHF 1.45/US$ at the close of 1997 to CHF 1.38/US$ at December 31, 1998. After translation, ABB AG´s share of ABB Group income before taxes and after minority interests increased from CHF 590 million in 1997 to CHF 1,335 million in 1998. ABB AG´s income before taxes, including associated company, amounted to CHF 1,346 million (1997: CHF 612 million) in 1998. After taxes of CHF 390 million (1997: CHF 180 million), net income amounted to CHF 956 million (1997: CHF 432 million) for the year, an increase of 121 percent.

ABB AG´s net income per bearer share amounted to CHF 103.30 in 1998 (1997: CHF 46.80) and CHF 20.66 (1997: CHF 9.36) per registered share.

ABB AG, parent company

The dividend from ABB AG´s shareholding in ABB Asea Brown Boveri Ltd amounted to CHF 350 million in 1998 (1997: CHF 325 million). For fiscal year 1998, ABB AG will receive a dividend of CHF 370 million from ABB Asea Brown Boveri Ltd. This amount was anticipated in the parent company’s 1998 financial statements. Therefore, a total of CHF 720 million results as dividend income in fiscal 1998. Interest income totaled CHF 20 million (1997: CHF 30 million). Interest income divided by average cash and cash equivalents of CHF 435 million amounts to a return of 4.6 percent. Total expenditures decreased to CHF 11 million (1997: CHF 15 million). Net income amounted to CHF 730 million (1997: CHF 345 million) for the year.

The Board of Directors proposes that the dividend to shareholders be increased to CHF 41.00 gross per bearer share (1997: CHF 40.00) and CHF 8.20 gross per registered share (1997: CHF 8.00), a total of CHF 379 million (1997: CHF 370 million).





Attachment No. 1 to Press Release 99/05:
ABB Group - Business Segment Data for Yearend 1998 and Proforma Figures for Prior Years

seg_rest1.xls

Attachment No. 2 to Press Release 99/05:
ABB Group - Business Segment Data according to Previous Structure

seg_rest2.xls

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