ABB Group results - First six months of 1998

Strong growth in net income, restructuring on target · Net income up 13 percent; continued good growth in earnings per share · Orders and revenues down 5 percent, flat in local currencies · Further improvement in operating margin

Zurich, Switzerland, July 23, 1998 - ABB, the international electrical engineering company, said today its net income continued to grow in the first half of 1998. Demand varied by region and industry but overall continued to grow in most of Europe, the Americas, the Middle East and Africa. As expected, ongoing economic and political uncertainties in Asia reduced demand in that region.

Orders received for the ABB Group in the first half of 1998 amounted to US$ 17,910 million and revenues were US$ 14,487 million, both 5 percent less than in the same period last year. In local currencies, orders and revenues were about the same as the first half of 1997. Operating earnings were about the same or higher in all segments, with Adtranz, the rail joint venture with Daimler-Benz, showing a negative result. Group operating earnings totaled US$ 1,050 million (1997: US$ 1,047 million), an increase of 5 percent expressed in local currencies. The operating margin increased to 7.2 percent from 6.9 percent in the first half of 1997. About half of the personnel reductions announced in the 1997 restructuring program have been completed.
Net income reached US$ 638 million, an increase of 13 percent over the same period in 1997. Expressed in local currencies, net income grew 16 percent. The net cash position at the end of June was considerably higher than at the end of June last year due to successful working capital reduction programs. Earnings per share for ABB AB rose 19 percent to SKr 2.69 from SKr 2.26 and 15 percent for ABB AG, to SFr 52.00 from SFr 45.40 compared to the first six months last year.
Excluding the impact of the 1997 restructuring charge, net income in 1998 is expected to exceed the 1997 level.

Group Review
Market Conditions and Sales
Privatization, deregulation and globalization continue to shift global patterns of industrial infrastructure development, while environmental concerns and increasing competition put a premium on cleaner and more efficient products and technologies.
North America is experiencing renewed demand for electric generation capacity in gas-fired combined-cycle plants. To improve competitiveness in a deregulated environment, many utilities are investing in service and revamping. At the same time, after several years of good growth, investments by industries such as automotive, steel, chemical and cement are showing signs of levelling out.
Good demand for infrastructure equipment and related systems is prevailing in South America and the Middle East and Africa. Both regions are seeing new capacity additions for generation, transmission and distribution of electricity. Investments in petrochemical plants and other ABB oil and gas related businesses are good. Low oil prices are causing some spending delays in countries dependent on oil exports and low commodity prices are delaying some investments in the pulp & paper and mining industries. Privately financed projects are gaining importance in these regions as customers require complete financial structures and turnkey capabilities from suppliers.
Western Europe showed stable growth, but continued low demand for large projects. Demand for transportation equipment is still growing in a competitive environment. The Nordic countries continued to show good demand for the contracting and installation business. The oil and gas exploration business is characterized by demand for new solutions in deepwater production facilities that enable profitable investments despite low oil prices. Although economic growth in Central and Eastern Europe has slowed, infrastructure demand was at a good level. Financing remains a key issue for successful completion of projects in that region.
Increased political uncertainties and financial turbulence offset the underlying need for improved power generation and industrial infrastructure in Asia. In countries like China, India and Australia, the availability of private financing is becoming increasingly important, but the average time for financial closing is increasing. New export opportunities derived from a lower cost base are not yet compensating for the reduced number of local infrastructure projects. Manufacturing capacity is being adjusted to meet lower demand levels in the Asian region.
Orders received for the ABB Group in the first six months of 1998 amounted to US$ 17,910 million, 5 percent less than the high level in the first six months of 1997 (1997 : US$ 18,920 million (1997 orders received figure adjusted for the indefinite delay of the Bakun hydro-power project in Malaysia. Unless stated otherwise, reference to "1997" in this report means the first six months of 1997.)). Compared to last year, the U.S. dollar, ABB’s reporting currency, continued to appreciate against many European currencies, which has a negative translation effect on ABB’s consolidated orders and earnings. Expressed in local currencies, orders received in the first half of 1998 were at the same level as at the same period last year.
Industrial and Building Systems reported a good increase in orders received due to several large projects in its oil, gas and petrochemical business. Power Generation reported lower orders received compared to the strong first half of 1997. Large orders included projects in the United Arab Emirates and Mexico. As a result of divestitures, orders received for Power Transmission & Distribution were lower than last year’s level. Large projects included power systems in Brazil, Argentina and Italy. Adtranz, the rail joint venture with Daimler-Benz, also reported an increase in orders received due to several large orders, including diesel trains in the United Kingdom.
The order backlog at the end of June 1998, was US$ 33,596 million, an increase of 3 percent compared to last year (end of June 1997: US$ 32,533 million). Expressed in local currencies, the order backlog increased by 8 percent. Revenues for the first six months of 1998 totaled US$ 14,487 million (1997: US$ 15,198 million). Expressed in local currencies, revenues increased by 1 percent.
Taking into account the net effect of changes in scope from divestitures and acquisitions and expressed in local currencies, the order volume increased by 3 percent and revenues by 5 percent compared to the same period last year.

Earnings
Operating earnings after depreciation in the first six months of 1998 totaled US$ 1,050 million (1997: US$ 1,047 million (1997 adjusted for inclusion of taxes other than on income, such as on capital and property, in Other expenses. See footnote to Income Statement.)). Expressed in local currencies, operating earnings after depreciation increased by 5 percent. The operating margin increased to 7.2 percent during the first six months of 1998 (1997: 6.9 percent) due to higher margins from the order backlog, fast and successful execution of the restructuring measures announced in 1997, improved internal processes and a lower cost base.
Operating earnings from the business segments Power Generation and Financial Services were clearly above last year’s level. The business segments Industrial and Building Systems and Power Transmission and Distribution reported earnings at about the same level as compared to the same period last year. Adtranz showed a negative result.
Several countries reported good improvements in operating earnings, in particular Norway and Finland. The United Kingdom and Italy also increased their results while Germany, Switzerland, Sweden and Poland were at about last year’s level. Europe achieved higher operating earnings compared to the first half of last year. Earnings continued to improve in the Americas, with strong increases in North America due to good progress on the restructuring. Most South American countries also showed better results. Operating earnings for the Asian region were lower, while earnings for the Middle East and Africa increased compared to the first half of last year. Income before taxes in the first six months of 1998 amounted to US$ 926 million (1997: US$ 904 million (1997 adjusted for inclusion of taxes other than on income, such as on capital and property, in Other expenses. See footnote to Income Statement.)), an increase of 2 percent. Expressed in local currencies, income before taxes for the Group increased by 7 percent.
Net income for the first six months of 1998 reached US$ 638 million, an increase of 13 percent compared to the same period last year (1997: US$ 567 million). Expressed in local currencies, the increase was 16 percent. Return on capital employed reached 19.1 percent (1997: 17.8 percent).

Investments, Divestitures and Capital Expenditures
Acquisitions in the first half of 1998 totaled US$ 80 million (1997: US$ 158 million). Two acquisitions, one in the U.S. and one in the United Kingdom, were announced in ABB’s oil, gas and petrochemical activities. ABB has also announced plans to acquire a Swedish supplier of process control systems and automation. ABB established its 20th joint venture in China, expanding the scope of power transmission and distribution equipment and services in that important local market. Divestitures of non-core businesses, such as the Japanese trading house Gadelius KK, and real estate in the first six months of 1998 amounted to US$ 54 million (1997: US$ 217 million).
Capital expenditures for tangible assets in the first half of 1998 totaled US$ 424 million (1997: US$ 390 million). The majority of the investments were made in the capital intensive manufacturing countries in Western Europe and North America to further improve productivity. A significant portion has been invested in selected emerging markets to expand ABB’s local presence and benefit from the lower cost base.
The net cash position as of June 30, 1998, was considerably higher than at the corresponding time last year. Net working capital improved compared to the same period last year, resulting from successful working capital reduction programs with an improvement in advance payments from customers. In spite of the cash needed to carry out the restructuring programs, further improvements in the net cash position are expected for 1998 compared to the level reported at year-end 1997.

Organization and Personnel
The restructuring program announced in 1997 is proceeding according to plan with about half of the costs incurred and a corresponding reduction of personnel at ABB and Adtranz completed. The remaining restructuring initiatives will be completed within the next six to nine months.
At the end of June 1998, ABB employed 218,569 people compared to 213,057 people at the end of December 1997, an increase of 3 percent. On a comparable basis, the total number of employees decreased by 2 percent, a reduction mainly related to the restructuring program.

Outlook
As expected, economic uncertainties will likely prevail for the near future, mainly as a result of developments in Asia. Higher demand in other parts of the world will help to compensate for the present lower demand in Asia. Global demand will continue to grow in the power generation and transmission sectors as well as in oil and gas. Growth for industrial systems and equipment in Europe and North America is slowing.
Selective tendering, successful implementation of restructuring measures and comprehensive expertise in financial services are expected to have a positive impact on Group results. Transportation activities will not reach positive results before 1999.
Excluding the impact of the 1997 restructuring charge, ABB expects 1998 net income to exceed the 1997 level.
The financial results of ABB’s parent companies ABB AB and ABB AG are included at the end of this report.

Business Segment Review

Power Generation
Total orders received for the Power Generation segment in the first half of 1998 were below the exceptionally high orders received level for the same period in 1997. Compared to the corresponding period last year, orders received decreased by 19 percent during the first half of 1998 (15 percent expressed in local currencies). Demand for combined-cycle power plants and service and retrofit remained good worldwide, and the trend toward turnkey solutions in a deregulated environment continued. Major orders received included a 480-megawatt combined-cycle plant in Mexico, using advanced GT24/GT26 gas turbine technology. In total, 27 units of the advanced high efficiency turbines have been sold around the world. In the United Arab Emirates, ABB was awarded a turnkey order to build a 500-megawatt gas-fired power and desalination plant. As expected, demand in the steam and nuclear power plant businesses was lower than the corresponding period last year.
The Americas showed a good increase in demand, in particular for gas turbines in combined-cycle plant applications. The order volume in the Middle East and Africa also increased significantly, again mostly driven by gas turbine applications. Europe remained at the previous year’s level. Demand in Asia was clearly lower due to the economic situation in several Asian countries. Delays in the decision making process and related financing for new power projects have reduced demand despite the considerable need for additional capacity.
In June, ABB took into operation the world’s first high-voltage generator at a hydro-power test station in Sweden. Called the Powerformer, it represents a completely new concept in generator technology.
For the first six months of 1998, revenues increased compared to the same period last year. Operating earnings were higher, already reaching 1997’s full year level. The restructuring programs are proceeding according to plan. These programs adjust capacity to prevailing market demand and improve competitiveness through a lower cost base and improved efficiency in production and administration. In 1998, these efforts are expected to lead to substantially increased earnings for the Power Generation segment. Orders are expected to be at the same level as 1997.


Power Transmission and Distribution
Largely due to last year’s divestitures, orders received for the first six months of 1998 were 6 percent lower compared to the first six months of 1997 (unchanged, expressed in local currencies). Revenues were also lower for the same period. On a comparable basis, taking into account the net effect of changes in scope from divestitures and acquisitions and expressed in local currencies, orders received increased by 5 percent and revenues were unchanged compared to the first half of last year.
Strong demand for power transmission resulted in several large orders in various regions. Large projects included a 1,000-megawatt power transmission system connecting the electricity networks of Argentina and Brazil, key parts of which ABB will build, operate and maintain. In addition, the business area Power Systems received a major order to link the power grids of northern and southern Brazil. In Europe, ABB was awarded a contract to supply converter stations for the planned High-Voltage Direct Current (HVDC) power link between Italy and Greece. This project is the first of its kind to be implemented within the European Union’s Trans-European Networks program. Besides the strong demand in Latin America, economic drivers in North America, such as housing starts and replacement demand, led to higher orders, especially for distribution equipment and systems. The regions Asia and the Middle East and Africa reported lower demand, while demand rose in Europe. Power Systems reported strong order growth, whereas the remaining business areas reported unchanged to slightly lower order levels.
The segment continued to strengthen its global presence by establishing a joint venture in Chongqing, China, which employs close to 1,000 people. ABB will manufacture power transformers for utilities and industrial customers.
An innovation for air insulated switchgear, the ABB Plug and Switch System (PASS), was introduced with the first commercial installation in Australia. The compact design replaces multiple conventional high-voltage apparatus with one system, allowing for integrated monitoring, diagnostics, intelligent switching and very fast erection time.
Operating earnings for Power Transmission and Distribution in the first six months of 1998 were about the same level as for the first six months of 1997. In local currencies, operating earnings increased in the first half of 1998. Restructuring activities are proceeding well. Orders and earnings are expected to increase in 1998 compared to 1997.


Industrial and Building Systems
Demand patterns for this segment differed widely by region, as well as by industry. Strong demand was reported especially for equipment and system solutions in the oil, gas and petrochemical industries. Several industries, such as automotive, steel, pulp & paper and cement, particularly in Asia and North America, are experiencing lower commodity prices with slowing demand for new systems and products. Demand for marine equipment showed good growth. The markets for electrical installations improved, especially in the Nordic countries. Regionally, the markets in Asia continued to decline while Western Europe and North America were stable. Emerging markets in South America, Central and Eastern Europe, the Middle East and Africa reported strong growth.
Orders received in the first half of 1998 increased by 5 percent (in local currencies up 12 percent) compared to the same period last year. The good increase in orders received derived from several large orders, especially in the business area Oil, Gas and Petrochemical. Major contracts included a turnkey order to build an ethylene production plant in Saudi Arabia and an order to design and build complete deep-sea installations for an oil field in the Norwegian sector of the North Sea. In Uzbekistan, the turnkey contract for a gas chemical complex has been concluded. Segment orders for service and revamping continued to increase as a number of full service and maintenance contracts, as well as several small acquisitions, were made in this field. Sales of standard products such as installation material, motors, drives and instrumentation, grew compared to last year. The business area Contracting increased orders received. For example, ABB will build a water treatment facility in Egypt. Automation and Drives and Flexible Automation reported lower order levels, influenced by reduced demand in Asia.
An acquisition was announced which complements ABB’s current position as a leading supplier of process control and automation products, systems and services, broadening the scope in the important pharmaceutical and food sectors. Two other acquisitions further strengthened ABB’s leading global position in certain areas in the oil and gas industry. A leading provider of industrial safety systems for petrochemical and petroleum operations was acquired. In addition, ABB acquired a leader in the development and deployment of deepwater floating systems for the offshore oil and gas industry, thereby completing ABB’s capabilities as a single-source supplier for the full range of subsea and floating oil and gas services in deep water.
Revenues and operating earnings in the first six months of 1998 were at about the same level as in the first six months of 1997. Expressed in local currencies, revenues and operating earnings increased. The segment will focus on further improvements in its cost structure and continue to strengthen its position in above-average growth activities. Orders received and earnings are expected to be higher in 1998 compared to 1997.

Financial Services
Operating earnings in the first half of 1998 for the business segment Financial Services improved to US$ 189 million, an increase of 18 percent (in local currencies 23 percent) compared to the first half of 1997 (US$ 161 million). The business area Energy Ventures reported the strongest improvement in earnings. The Insurance business area also had a good increase in earnings due to higher investment income and underwriting results. The business area Treasury Centers reported higher earnings compared to the first six months of 1997, whereas results for Leasing and Financing were lower. The segment’s earnings for 1998 are expected to exceed the level of 1997.

Adtranz
Adtranz’ orders received for the first six months of 1998 increased by 4 percent compared to the same period in 1997 (expressed in local currencies the improvement was 10 percent). Large orders included a follow-on order in Sweden for the Stockholm subway. In the U.S., Adtranz has been awarded an order for the San Francisco airport’s people mover system. Several orders were received for diesel trains in the United Kingdom. Margins on orders are improving.
In China, Adtranz established a joint venture for local metro production to serve the growing need for efficient urban transit systems in China and within the Asian region.
Revenues increased during the first half of 1998 compared to the first half of 1997. Operating earnings in the first six months of 1998 were negative, partially due to fulfillment of older, less profitable projects, reduced results in the signaling business due to lower demand in Asia, and accelerated restructuring initiatives. Concentration of European manufacturing operations and increased efficiency in production and administration will lead to improved profitability. For 1998, orders received are expected to be higher and operating earnings better than in 1997. Adtranz will not report positive results before 1999.


ABB Group

Consolidated Income Statement




Note: The exchange rates used in the above income statement are average rates for the periods shown. The average exchange rates for the Swiss Franc, Swedish Krona, German Mark and the European Currency Unit are stated below:




For the first six months of 1998, changes in average exchange rates had a significant effect on reported results. The strong appreciation of the U.S. dollar against many major currencies during the first six months of 1998, compared to the first six months of 1997, reduced ABB’s orders received, revenues and result figures by 3 to 6 percent.


ABB Group Revenues per Region 1)


1) Total third-party revenues in each region, excluding exports, which are accounted for in the revenue figures of the imported region.


Orders Received and Revenues per Business Segment



1) Orders received 1997 restated to reflect the indefinite delay of the Bakun hydro-power project.
2) Divestitures in the second half of 1997 corresponded to activities with annual orders and revenues of about
US$ 1,200 million.
3) 50% of ABB Daimler-Benz Transportation Group.


Parent Companies Financial Results

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, please refer to the first part of this report.
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 (SKr) and Swiss Francs (SFr), respectively.

Parent Companies Financial Results
ABB AB (Sweden) and associated company

ABB AB and associated company
ABB AB’s share of ABB Group earnings before taxes and after minority interests for the first six months of 1998 was US$ 459 million, an increase of 3 percent (1997: US$ 445 million). The average rate of the U.S. dollar has strengthened against the Swedish Krona which had a positive effect when translating ABB AB’s share in ABB Group earnings into Swedish Krona. After translation, ABB AB’s share of ABB Group earnings before taxes and after minority interests for the first six months of 1998 increased to SKr 3,636 million (1997:SKr 3,336 million). ABB AB’s income before taxes, including associated company, amounted to SKr 3,631 million for the first six months of 1998, an increase of 9 percent (1997: SKr 3,334 million). Net income for the first six months of 1998 amounted to SKr 2,525 million, an increase of 19 percent (1997: SKr 2,121 million). ABB AB’s net cash position decreased by SKr 46 million to SKr 140 million at June 30, 1998 (June 30, 1997: SKr 184 million).
ABB AB’s net income per share for the first six months of 1998 amounted to SKr 2.69 (1997: SKr 2.26).

ABB AB, parent company
Net income for the first six months of 1998 amounted to SKr 6 million (1997: SKr 5 million). The dividend for the fiscal year 1997 was anticipated in the 1997 accounts and thus only the difference (SKr 11 million) between dividend actually received and dividend anticipated is included in the first six months of 1998.

Auditors´ examination
The report has not been subject to examination by the Company’s auditors.

_______________________________
The reports for the first nine months 1998 of ABB AB and ABB Group will be published on October 21, 1998 and the full year reports for 1998 on February 4, 1999. The Annual General Meeting of ABB AB will take place on March 18, 1999 in Västerås, Sweden.



ABB AB Income Statements

Swedish Krona in millions
ABB AB and
associated company 1)
ABB AB
parent company
1-6/981-6/971-6/981-6/97
Administrative expenses-9-7-9-7
Share in ABB Group earnings before taxes and after minority interests 2)3,6363,336--
Dividend income--117
Interest income4545
Interest expense0000
Income before Taxes 2)3,6313,33465
Taxes 2)-1,106-1,213--
Net Income2,5252,12165

1) ABB AB’s share in the ABB Group results recognized according to the equity method.
2) As previously reported, as of year-end 1997, the line “Taxes” in the ABB Group income statement contains only income taxes, while other taxes on items such as capital and property, are included in Other expenses. This change, following International Accounting Standards (IAS), reduces Income before Taxes but has no effect on Net Income. Previous year’s figures have been restated accordingly.


ABB AB Balance Sheet


____________________________
1) ABB AB's participation in the ABB Group recognized according to the equity method.



Parent Companies Financial Results
ABB AG (Switzerland) and associated company

ABB AG and associated company

ABB AG’s share of ABB Group income before taxes and after minority interests for the first six months of 1998 was US$ 459 million, an increase of 3 percent (1997: US$ 445 million). The average rate of the U.S. dollar has strengthened against the Swiss Franc which had a positive effect when translating ABB AG’s share in ABB Group earnings into Swiss Franc. After translation, ABB AG’s share of ABB Group earnings before taxes and after minority interests for the first six months of 1998 increased to SFr 684 million (1997: SFr 637 million). ABB AG’s income before taxes, including associated company, amounted to SFr 692 million for the first six months of 1998, an increase of 6 percent (1997: SFr 654 million). Net income for the first six months of 1998 amounted to SFr 481 million, an increase of 15 percent (1997: SFr 420 million). ABB AG’s net cash position decreased by SFr 325 million to SFr 284 million at June 30, 1998 (June 30, 1997: SFr 609 million).
ABB AG’s net income per bearer share for the first six months of 1998 amounted to SFr 52.00 (1997: SFr 45.40).

ABB AG, parent company

Net income for the first six months of 1998 amounted to SFr 356 million (1997: SFr 339 million) including SFr 350 million (1997: SFr 325 million) dividend received from ABB Asea Brown Boveri Ltd.

Auditors’ examination

The report has not been subject to examination by the Company’s auditors.


____________________

The reports for the first nine months 1998 of ABB AG and ABB Group will be published on October 21, 1998 and the full year reports for 1998 on February 4, 1999. The Annual General Meeting of ABB AG will take place on March 18, 1999 in Wettingen, Switzerland.

ABB AG Income Statements

Swiss Francs in millions

ABB AG and
associated company 1)
ABB AG
parent company
1-6/981-6/971-6/981-6/97
Share in ABB Group earnings before taxes and after minority interests 2)684637--
Dividend income--350325
Other operating income1313
Administrative expenses-2-3-2-3
Interest income12201220
Interest expense-3-3-3-3
Income before Taxes 2)692654358342
Taxes 2)-211-234-2-3
Net Income481420356339

_________________________
1) ABB AG’s share in the ABB Group results recognized according to the equity method.
2) As previously reported, as of year-end 1997, the line “Taxes” in the ABB Group income statement contains only income taxes, while other taxes on items such as capital and property, are included in Other expenses. This change, following International Accounting Standards (IAS), reduces Income before Taxes but has no effect on Net Income. Previous year’s figures have been restated accordingly.


ABB AG Balance Sheets




___________________________
1) ABB AG’s participation in the ABB Group recognized according to the equity method.

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    Contact us

    • John Fox
      ABB Corporate Communications, Zurich
      Tel. +41 1 317 7371
      Fax +41 1 317 7956
    • Manfred Ebling
      ABB Investor Relations, Zurich
      Tel. +41 1 317 7313
      Fax +41 1 311 98 17
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