ABB reported solid operational results in the fourth quarter on strong revenue growth and steady cash flow, despite a difficult global market that impacted orders. Earnings before interest and taxes (EBIT) and net income in the quarter were reduced by previously-announced provisions, but full-year EBIT nevertheless reached a record $4.6 billion.
Orders decreased 19 percent in the fourth quarter (local currencies: 11 percent) to $7.2 billion, mainly the result of lower orders for large new power infrastructure projects, especially in emerging markets, and reduced investments in new industrial capacity. Orders to upgrade power grids and replace equipment continued to grow in mature markets. Demand for energy efficient technologies also increased.
Revenues rose 5 percent (local currencies: 15 percent) to $9.1 billion as the company continued to successfully execute the order backlog, which included no significant order cancellations.
EBIT in the quarter was $459 million, a decrease of 60 percent versus the same quarter a year earlier. Included in EBIT are provisions of approximately $870 million related to ongoing compliance investigations, a value-added tax (VAT) charge and restructuring-related charges. Fourth-quarter net income amounted to $213 million. Full-year net income was $3.1 billion.
Cash flow from operations was $1.4 billion in the quarter and reached a record $4 billion for the full year, while free cash flow for the full year amounted to $2.9 billion.
“Our solid revenue growth and cash flow in the quarter show the underlying operational strength of the company,” said Joe Hogan, ABB’s Chief Executive Officer. “Orders were down as customers delayed projects or cut capital expenditures. But the long-term drivers of our business – to increase energy efficiency, secure reliable power and improve industrial productivity – have not changed.
“The outlook for 2009 remains uncertain,” Hogan said. “We are taking steps now to ensure that we remain competitive, no matter how the market develops. With our leading market positions and technology, combined with a flexible global production base, we aim to come out of this downturn in a stronger competitive position and we confirm our 2011 targets.”
Dividend and share buy-back
ABB’s Board of Directors proposes an unchanged dividend for 2008 of CHF 0.48 per share. The Board also proposes that the dividend takes the form of a reduction in the nominal (par) value of the shares from CHF 2.02 to CHF 1.54. The proposal is subject to approval by shareholders at the company’s annual general meeting on May 5, 2009. If approved, the ex-dividend and payout date in Switzerland is expected to be at the end of July, 2009.
Given the current market uncertainty, ABB is not actively pursuing new purchases under the CHF 2.2-billion share buyback program announced last year. The company has so far spent approximately CHF 650 million on the program, which has not been active since September 2008.
Compliance
As has been previously announced, ABB has disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission various suspect payments. In addition, ABB has continued to cooperate with various anti-trust authorities, including the European Commission, regarding certain allegedly anti-competitive practices in the power transformer business. With regard to one of the anti-trust matters, ABB received in December 2008 from the European Commission a Statement of Objections, which is a preliminary assessment of alleged anti-competitive practices.
In addition, ABB’s cables business is under investigation for alleged anti-competitive practices. With respect to these matters, there could be adverse outcomes beyond our provisions.
Cost reductions
ABB announced in December 2008 a cost take-out plan to adjust the company’s cost base to rapidly changing market conditions and protect its profitability. The program aims to sustainably reduce ABB’s costs – comprising both cost of sales as well as general and administrative expenses – from 2008 levels by a total of $1.3 billion by the end of 2010. The savings are expected through ongoing initiatives, such as internal process improvements, low-cost sourcing, and further measures to adjust ABB’s global manufacturing and engineering footprint to shifts in customer demand.
The total cost of the program is estimated in excess of $600 million, of which more than $100 million was recorded in 2008. About $300 million is expected to be taken in 2009 and the remainder in 2010.
Summary of Q4 and full-year 2008 results
Orders received and revenues
ABB’s markets were strong through most of 2008 but demand began to weaken following the global financial crisis that developed during the third quarter. In the fourth quarter, this trend was reflected primarily by lower large orders (above $15 million) for major infrastructure and industrial developments compared to the same quarter in 2007. Base orders (below $15 million) were steady in the quarter.
In the power divisions, utilities in mature markets continued to invest in grid upgrades and equipment replacement to improve reliability. This improvement was offset by lower investments by both utilities and industrial customers, mainly in emerging markets, for new power infrastructure in response to the rapid decline in economic growth.
Orders for industrial automation products and systems decreased more quickly than for power-related technologies in the fourth quarter after a very strong first half of 2008. Orders for products used to increase efficiency, such as low-voltage drives, or for renewable energy applications were higher. However, reduced investments for new capacity in the commodities and marine sectors resulted in lower large orders. Continued weakness in the construction industry, as well as the rapid downturn in consumer-related sectors, such as automotive, further reduced automation-related orders.
Regionally, orders increased in the Americas in local currencies (unchanged in U.S. dollars) as continued investments in power grid improvements more than made up for flat to lower orders in automation. Orders were down in Europe as lower industrial and construction demand offset order increases related mainly to power generation. Orders in Asia were down in all divisions on a combination of lower industrial activity, project delays in power infrastructure and the comparison with the very high growth levels seen last year, especially in China and India. In the Middle East and Africa, orders were down in a mixed environment, with lower orders for large power infrastructure projects only partly offset by increases driven mainly by industrial investments.
Overall, large orders declined by 55 percent in the fourth quarter (local currencies: 49 percent) and represented 11 percent of total orders received compared to 19 percent in the same quarter of 2007. Base orders were slightly lower (down 10 percent in U.S. dollars and 2 percent in local currencies).
For the full year ending Dec. 31, 2008, orders rose 11 percent (local currencies: 7 percent) to $38.3 billion and were up in all divisions except Power Systems.
Local-currency revenues were higher in all divisions for the fourth quarter and full year. Revenues were supported in the fourth quarter by the strong order backlog, which ended the year at $23.8 billion, up 5 percent (local currencies: 14 percent) compared to the end of 2007. The order backlog decreased 12 percent in both U.S. dollar and local currency terms versus the end of the third quarter.
Earnings before interest and taxes
EBIT and EBIT margin in the fourth quarter were negatively impacted by previously-announced provisions of approximately $870 million. Of these, about $140 million were related to restructuring measures needed to adapt operations to weakening demand. The majority of the restructuring-related charges were recorded in the Robotics and Power Products divisions. The provisions also included approximately $100 million associated with an adjusted VAT payment and write-downs.
The negative impact on EBIT expected in the fourth quarter from the mark-to-market accounting treatment of hedging transactions was not material.
Finance expense, taxes and discontinued operations
Below the EBIT line, finance net in the fourth quarter was negatively affected by the accounting treatment of fair value movements on certain securities held at the end of the year. This temporary effect amounted to approximately $100 million, and will be fully reversed when the securities mature in the first quarter of 2009.
The benefit from recognition of deferred tax assets in the fourth quarter was partly offset by income tax provisions related to a pending tax dispute. The full year tax rate was 25 percent.
Discontinued operations results reflect the net accrual of the last two asbestos payments of $25 million each, which are due in 2010 and 2011 as ABB expects its EBIT margin to exceed 9 percent in 2009 and 9.5 percent in 2010.
Cash flow
Cash flow from operations in the fourth quarter amounted to $1.4 billion, roughly the same as a year earlier. Significant contributors to the development of cash flow in the quarter were the timing of customer payments on large projects, higher inventories in some short-cycle businesses, and the reduction in large orders with a subsequent decrease in customer advance payments. Included in fourth-quarter cash from operations is an outflow of $25 million paid as part of ABB’s asbestos agreement. For the full year, cash flow from operations increased to $4 billion, reflecting higher earnings and improved net working capital management. Full-year cash flow from operations included asbestos-related payments of $100 million.
Free cash flow for the full year amounted to $2.9 billion compared to $2.4 billion in 2007. Free cash flow as a share of net income amounted to 93 percent, including the impact of provisions and tax costs. Free cash flow in 2008 also reflected a 59-percent increase in capital expenditures to $1.2 billion, supporting the strong backlog and the company’s global footprint initiatives. The share of capital expenditures in emerging economies increased to 43 percent in 2008 from 37 percent the year before.
Balance sheet
Net cash was $5.4 billion at the end of 2008, compared to net cash of $4.8 billion at the end of the third quarter and $5.4 billion at the end of 2007. The fourth-quarter increase mainly reflects the growth in cash from operating activities. Net cash compared to the end of the previous year was impacted by a shareholder dividend payment of about $1 billion, expenditures of approximately $650 million for acquisitions, and cash payments of about $620 million related to the ABB share repurchase program.
Gearing remained at low levels, decreasing to 17 percent at the end of December 2008 versus 19 percent a year earlier.
Acquisitions
ABB continued to focus its growth efforts primarily on organic opportunities in its existing markets, while making small acquisitions to close product or geographic gaps in its business portfolio. In the fourth quarter of 2008, ABB acquired Ber-Mac Electrical and Instrumentation Ltd, a Canadian supplier of industrial automation and field services to the oil and gas sector. The acquisition had no material impact on ABB’s fourth-quarter results.
Employment
ABB employed approximately 120,000 people at the end of December 2008, an increase of about 8,000 compared to the end of 2007.
Outlook for 2009
Visibility in ABB’s markets in 2009 remains limited because of significant uncertainty surrounding the key demand drivers for the company’s products and systems.
The need for power transmission infrastructure in all regions – both equipment replacement and new transmission projects – has not changed in recent quarters. However, the cost and scarcity of project funding have delayed many power investment decisions, and ABB is unable to forecast when the various government stimulus programs will have an impact and when the availability of funding will improve.
Demand in ABB’s industrial end markets depends to a large extent on GDP growth and capital spending, together with commodity prices. Our customers’ need to steadily improve efficiency and productivity to meet increasing competition also drives orders, along with demand in construction and in general industry.
Therefore, management’s priority for 2009 will be to ensure that the company has the flexibility to respond quickly to changing market conditions, taking advantage of its global footprint, strong balance sheet and leading technologies to improve its cost competitiveness while simultaneously tapping further opportunities for profitable growth.
Orders received remained steady in the fourth quarter versus the same period in 2007 as project delays and reductions in power utility spending in Asia and Europe were offset by increases in the Americas and the Middle East and Africa. Uncertainty in the lending environment contributed to project delays and the general global economic slowdown resulted in weakened industrial and construction-related demand. Many utilities, however, continued to invest in equipment replacement and grid upgrades. These trends were reflected in a decrease in distribution sector orders in the quarter that was offset by higher demand for transmission sector orders.
Regionally, orders grew in the Americas, led by North America, where orders increased by 17 percent (local currencies: 23 percent). The acquisition of Kuhlman Electric in the U.S. contributed 10 percentage points to this increase. Orders were also higher in the Middle East as investments continued in both power infrastructure and industrial development. Orders decreased in Asia, largely in response to the economic downturn, reduced industrial investments and the absence of a large order booked in China in the same period of the previous year. In Europe, project delays and some reductions in utility capital expenditures, primarily in eastern Europe, resulted in lower orders.
Revenues increased in all businesses in the quarter, reflecting higher volumes from the strong order backlog. Fourth-quarter EBIT was lower than a year earlier, mainly the result of the previously-announced provisions amounting to approximately $100 million associated with an adjusted VAT charge and related write-downs. EBIT also included restructuring charges of $35 million, of which $33 million was related to the transformer consolidation program announced in 2005. The total cost of the program, which has now been completed, amounted to approximately $240 million.
Orders declined in the fourth quarter on lower large orders, while the base business remained steady. Orders increased strongly in the U.S. as utilities continued to invest in grid upgrades. Western European utilities also increased spending in power generation-related systems, resulting in higher orders in Europe compared to the same quarter in 2007. Delays in large new infrastructure projects resulted in lower orders in Asia and the Middle East and Africa.
Revenues in the fourth quarter, which were down 4 percent in U.S. dollar terms but 7 percent higher in local currencies, were driven by the execution of projects in the order backlog. The EBIT margin was supported mainly by improved project execution.
The reduction in cash from operations reflects the timing of project payments and a lower level of customer advances as the result of fewer large orders.
Fourth-quarter orders were down 11 percent in U.S. dollar terms and 3 percent in local currencies as demand weakened across most regions and industry segments. Orders for low-voltage drives, machines and low-voltage systems increased in the quarter, driven by energy-efficiency requirements in industry and demand from the renewable energy sector, mainly wind. Demand for standard industrial and building products declined, reflecting the general global economic downturn. Overall, orders were slightly lower in Europe and in the Middle East and Africa while the Americas increased. Orders in Asia were lower than the high levels in the fourth quarter of 2007, which included a large order in India.
Revenues increased in the quarter supported by higher volumes from execution of the order backlog. Service revenues grew significantly faster than total revenues. EBIT increased versus the same quarter in 2007 on the combination of higher revenues and continued operational improvements.
Lower cash from operations was the result of an increase in working capital, mainly due to higher inventories of standard products.
Orders decreased across most customer segments and regions in the fourth quarter due to a significant reduction in large orders compared to last year. Customer investments were delayed due to reduced commodity prices, limited access to project financing and increased uncertainty regarding future demand. The reduction in new investments was most pronounced in the mineral and metals sectors as customers were unable to obtain financing for their projects or commodity prices made investments in new production unattractive. Orders also declined in the marine business, reflecting uncertainty in the demand outlook related to oil prices as well as comparisons with record order levels in recent quarters. Service and turbocharger orders remained steady while orders were lower in oil and gas and pulp and paper.
Revenues increased strongly in the fourth quarter as the result of the execution of the large order backlog as well as strong revenues in both service and products, reflecting the less cyclical nature of those businesses. EBIT and EBIT margin increased versus the fourth quarter of 2007 on higher volumes and improved project execution.
Earnings were higher than a year ago but cash flow from operations was lower, mainly reflecting the timing of project payments.
Orders declined in the fourth quarter as demand weakened in both the automotive and general industry sectors and across all regions, reflecting the general global economic downturn, especially in the shorter-cycle industries served by the Robotics division.
Revenues were down 3 percent in U.S. dollars and up 3 percent in local currencies on execution of the order backlog. EBIT and EBIT margin were down as the result of restructuring-related charges and asset write-downs of approximately $70 million for shifting manufacturing and engineering to low-cost emerging countries as well as adapting capacity to the rapid market downturn.
ABB 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.
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