'New ABB' shows strong '99 earnings, cash generation

    - Operating earnings up 16 percent
    (excluding capital gain)
    - Operating cash flow 76 percent higher
    - Preparing for U.S. listing

Zurich, Switzerland, February 3, 2000 – ABB, the global technology company, said today earnings and cash flow showed significant growth in 1999, a milestone year of rapid change to its business portfolio and the introduction of a single-class ABB share. As the shift to higher value-added, more knowledge-based businesses continues, the company expects 2000 to be a year of strong growth. The company is currently preparing for a U.S. listing.

*) In local currencies, revenues increased by 8 percent and earnings by 34 percent.
1 All figures reflect the “new” ABB composition following the contribution of most of the power generation business to the ABB ALSTOM POWER joint venture.
2 1999 dividend per share as proposed. 1998 pro forma dividend per share, based on new single-class share structure.

“We’re facing a new world where speed, flexibility and brain power are the keys to delivering greater value, and we’re reinventing ABB to be a leader in that world,” said Göran Lindahl, ABB’s President and CEO. “We’re expanding into businesses where we can be leaders and leaving businesses where we can’t. Our 1999 results show that we’re heading in the right direction and that we can look forward to solid growth in the future. Our target is to increase the Group’s operating margin to 12 percent within the next four years, based on an annual revenue growth of six to seven percent.”

All of ABB’s industrial segments reported higher operating earnings and most showed stable or higher revenues, reflecting both growing demand for ABB’s complete technology and service solutions as well as successful cost management. Operating cash flow, a key indicator of ABB’s ability to generate more value, was 76 percent higher at $ 1,823 million. Net income reached an all-time high of $ 1,614 million.

ABB’s 1999 earnings were lifted by a capital gain from the transfer of most of its power generation business to a 50-50 joint venture with ALSTOM of France, called ABB ALSTOM POWER. Excluding this gain, operating earnings were 16 percent higher, leading to an operating margin of 8.7 percent, up from 7.8 percent; net income was up 11 percent.

Long-term Targets1
ABB’s improved position in knowledge- and service-related technologies will drive growth in the coming years:

    • Major drivers for Power Transmission will be customers outsourcing service and retrofit, cross-border grid interconnection opportunities, advances in high-voltage technology and growing demand for electricity-trading systems.
    • Power Distribution will continue to target liberalized markets and focus on modular, intelligent products, systems and solutions for the electrical distribution industry, including distributed power.
    • In Automation, additional eCommerce applications and a single open software platform together with selected strategic alliances will allow us to create new solutions and further scale economies.
    • New subsea processing and smart well technologies in the upstream (development and production of oil and gas) market and new process technologies for the refining and petrochemical industries in the downstream market will be the focus for Oil, Gas and Petrochemicals.
    • Global sales of low-voltage products, integrated technology solutions for buildings, and full service will be the key growth areas for Building Technologies (the former “Products and Contracting” segment).
    • Financial Services will expand further in key regional markets, develop new financing packages to support ABB sales, and create additional eCommerce market channels.

ABB’s long-term targets by segment are summarized in the table below.

1The 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.

For the ABB Group, revenues are expected to grow on average 6-7 percent annually during the next four years. With ABB’s continued focus on profitable growth, operating margin is targeted to reach 12 percent by 2003.

The New ABB
From the very beginning of 1999, ABB continued its transformation by acquiring Elsag Bailey Process Automation to take market leadership in the automation industry. ABB divested its 50-percent share in Adtranz, formed the joint company ABB ALSTOM POWER, a new supplier to the global power generation industry, and agreed to sell its nuclear activities to British-based BNFL, pending regulatory approvals. ABB expanded in the high-growth area of full-service by acquiring a major player in Brazil. The company introduced its single-class ABB share and is now preparing for a U.S. listing. The former business segment “Products and Contracting” was renamed Building Technologies to better reflect its focus on delivering complete technology solutions, including products, service and maintenance for buildings and factories.

ABB launched a major value creation initiative with management focus on value drivers such as volume and margin growth, reduced working capital, and the elimination of non-performing assets. The company evaluates all of its investments to ensure they bring a return that is significantly higher than the average cost of capital in that particular business. Value creation principles also drive ABB’s research and development (R&D). R&D investments reached 8.4 percent of revenues in 1999 (1998: 8.2 percent), with a number of important developments in molecular-level nanotechnologies, fully automated and robotized manufacturing processes, and powerful high-voltage semiconductors.

Alliances and long-term partnerships are also taking on a new importance in ABB as a vehicle for developing new technologies and delivering complete solutions. Partnerships with other technology companies allow us to achieve the economies of scale needed in product development to compete at the global level. In all of our business segments, we are teaming up with our customers, often through long-term supply agreements, to provide them with a broad range of technology, products, systems and services.

In the area of eCommerce, ABB will take further major steps in 2000 to harness its full potential, rapidly expanding its capability to serve customers online. Inside the decentralized Group, new IT-based tools and shared processes – such as administrative, finance and IT services – are being introduced worldwide to drive deeper efficiency gains, and to exploit economies of scale and scope.

ABB Group’s total number of employees at year-end 1999 was 164,154 compared to 199,232 at the end of 1998. Excluding employees included in the ABB ALSTOM POWER joint venture, the number of employees in 1998 was 162,793. Employment in Automation, Building Technologies and Financial Services increased mainly due to acquisitions. Building Technologies also added employees at customer sites through new full-service contracts. On a comparable basis, adjusted for acquisitions and divestitures, the number of employees decreased by 4 percent.

Market Environment and Revenues
ABB’s transformation comes at a time when world markets are improving. Industrial production growth is rebounding in most of the OECD countries, where ABB conducts more than 80 percent of its business. Economic growth improved throughout most of Europe, including Central and Eastern Europe. The economies of the U.S. and Canada showed high growth, which fuelled a recovery in South America. However, low commodity prices, especially in the first half of the year, slowed investments by ABB customers in several North American commodity-based industries, such as mining or pulp and paper. An economic recovery is also well under way throughout Asia and growth in China remained robust.

Revenues2 increased by 4 percent, led by increases in Automation, Power Distribution and Oil, Gas and Petrochemicals.

Orders received increased 4 percent, with large orders (those exceeding $ 15 million) 14 percent higher. Base orders, now representing about 80 percent of Group revenues, were 2 percent up. Excluding currency effects (the effect of translating local currencies into the U.S. dollar, ABB’s consolidation currency), base orders increased 6 percent and large orders by 17 percent. Large orders included the upgrade of a major U.S. power grid, high-voltage systems in China, significant full-service projects in the pulp and paper industry, robots for the U.S. postal service and gas compressor stations in Poland. The order backlog reached $ 14,886 million (1998: $ 14,934 million).

Both revenues and orders received increased by 8 percent when expressed in local currencies.

ABB’s expansion into higher margin businesses, rigorous cost control and improved internal processes led to further improvements of earnings and margins. Operating earnings after depreciation were up 30 percent at $ 2,416 million (1998: $ 1,858 million). Excluding the capital gain3 from the formation of ABB ALSTOM POWER, operating earnings increased by 16 percent. The corresponding operating margin increased to 8.7 percent in 1999 from 7.8 percent last year. Personnel and material expenses decreased as a percent of revenues4. Personnel expenses decreased to 30.0 percent (1998: 30.8 percent) and material expenses decreased to 41.2 percent (1998: 41.8 percent). Other expenses rose to 16.8 percent of revenues (1998: 16.6 percent) as outsourcing increased.

All industrial segments lifted operating earnings, with Power Transmission’s operating margin exceeding 11 percent. Building Technologies and Power Distribution also increased their margins. Oil, Gas and Petrochemicals maintained its profitability in a difficult market environment. As expected, Automation did not reach last year’s margin level because of integrating Elsag Bailey and carrying the major share of the Group’s $ 150 million costs for Year 2000 preparations in 1999. Financial Services again reported a high operating result.

EBITDA (earnings before interest, taxes, depreciation and amortization) increased to $ 3,234 million (1998: $ 2,592 million), another indication of the improved earnings and cash flow generation. Operating cash flow increased by 76 percent to $ 1,823 million (1998: $ 1,037 million). This increase was not influenced by the capital gain.

Net income amounted to $ 1,614 million (1998: $ 1,305 million). Excluding the capital gain, net income increased by 11 percent. Income taxes amounted to $ 665 million, corresponding to a tax rate of 28.8 percent (1998: 29.1 percent).

Return on equity reached 27.9 percent (1998: 23.2 percent) and return on capital employed was 21.8 percent, burdened by the recent acquisitions still under integration (1998: 21.1 percent).

2 To facilitate comparison, ABB excluded the power generation business contributed to the ABB ALSTOM POWER joint venture in both 1998 and 1999 figures for revenues, expenses, and operating earnings.
3 Capital gain of $ 262 million at the operating earnings level or $162 million at net income level after taxes.
4 Revenues including changes in work in progress and finished goods.

The joint venture with ALSTOM of France reported strong growth in orders received during its first half year of operation, particularly for gas turbines. A major project was a 2x800 megawatt combined-cycle power plant in Spain. As previously stated, the company’s targets are a net operating margin of 3-4 percent during 2000 (the first full year of operation) and a longer-term margin of 7-8 percent. ABB ALSTOM POWER’s operating results from July through December 1999 reached EUR 26 million ($ 28 million). ABB’s 50 percent share, net of financial items, amounted to $ 6 million and is recorded under “Earnings from equity accounted companies.”

Balance Sheet
ABB continued to reduce its dependence on heavy assets, with total machinery and equipment plus land and buildings in relation to total assets reaching 11.5 percent in 1999. It was the third year in a row with a two percentage-point reduction of these assets in relation to total assets. Acquisitions during 1999 totaled $ 1,745 million (1998: $ 274 million), the largest being the Elsag Bailey acquisition, valued at $ 2,204 million, including $ 648 million of debt. The goodwill related to the acquisition of Elsag Bailey amounted to $ 2,206 million. Capital expenditures for tangible fixed assets in 1999 reached $ 679 million (1998: $ 738 million), including $ 74 million for land and buildings and $ 475 million for machinery and equipment.

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 1999 of CHF 900 million (SEK 4,800 million). Translated into U.S. dollars at the time of the decision, the dividend corresponds to 38 percent of ABB net income for 1999 excluding the capital gain (1998: 40 percent).

Outlook for 2000 1
For 2000, recoveries in emerging markets are expected to increase orders and revenues for Power Transmission while earnings are expected to increase slightly. Ongoing deregulation and privatization as well as demand for system solutions should increase both volume and earnings for Power Distribution. A recovery in most of Automation’s markets plus substantial cost reductions and synergies associated with Elsag Bailey, the newly acquired company, are expected to increase revenues and operating earnings in the Automation segment. Revenues of Oil, Gas and Petrochemicals are expected to increase slightly and operating earnings should remain at about the same level, although both will be weak in the first half due to lower orders in 1999. Revenues and earnings are expected to increase for Building Technologies. Income before taxes for Financial Services is expected to increase from the 1999 level.

The current economic upturn in basically all regions is expected to further support ABB’s business. ABB expects the benefit from the upturn in Europe and other major regions to become visible by mid-2000.

ABB Group’s revenues are expected to increase in 2000. Operating earnings are also expected to increase compared to 1999, excluding the capital gain. Cash flow will grow at least in line with earnings. Guided by clear value-creation targets, ABB will continue its strategic transformation in 2000 and beyond.

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    Contact us

    Page information:
    • John Fox
      ABB Corporate Communications
      Tel: +41 1 317 7371
      Fax: +41 1 317 7958
    • Manfred Ebling
      ABB Investor Relations, Zürich
      Tel: +41 1 317 7266
      Fax: +41 1 311 7918
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