• Orders up 5%1, base orders 15% higher.
• Revenues down 5%, pace of decline slows versus previous quarter.
• Operational performance lifted by more than $400 million savings in the quarter.
Industrial customers continued to invest in energy-efficient automation and power solutions to increase productivity and quality. Investments by utilities in large power transmission projects, however, remained cautious in most regions. As a result, base orders (below $15 million) grew 15 percent in local currencies while large orders (above $15 million) declined by 37-percent. The order backlog has grown 5 percent since the beginning of the year.
Revenues were 5 percent lower than the year-earlier period, mainly due to order declines in 2009 and the beginning of 2010 that flowed through to sales in the second quarter.
Earnings before interest and taxes (EBIT) decreased to $975 million, resulting in an EBIT margin of 12.9 percent. Included in EBIT are additional project costs in the Power Systems division of $80 million. Excluding net losses on derivative transactions and restructuring-related costs, the EBIT margin was 14.6 percent 2 . Savings in the quarter of more than $400 million from the company’s cost take-out program played a key role in maintaining profitability.
Cash from operations in the quarter was $649 million, down versus the same quarter a year earlier, while net income amounted to $623 million.
"The strong second quarter results show how we are using our improved cost base and leading position in key industrial markets to take maximum advantage of the global economic recovery,” said Joe Hogan, ABB's CEO. “It’s the great strength of ABB’s portfolio that automation can drive profitable growth during a period of lower power demand.
“We feel more confident about the recovery in most of our markets than three months ago and believe that our short-cycle businesses will continue to perform well over the rest of 2010. After the severe industrial recession of the last two years, customers have started again to invest in technologies for energy efficiency and productivity. We expect customer capital expenditures, especially on the power side, to recover later in 2010 and into 2011,” Hogan said.
1 Management discussion of orders and revenues focuses on local currency changes. U.S. dollar changes are reported in the results tables.
Summary of Q2 2010 results
Orders received and revenues
Demand for ABB’s industrial products and solutions continued to improve in the second quarter, reflecting the ongoing economic recovery in most regions. Capital spending by power utilities remained cautious. In both power and automation, most customer investments focused on improving the productivity and efficiency of their existing operations. Large capital expenditures to build new capacity remained at low levels.
Regionally, the largest order increase came in the Middle East and Africa (up 27 percent in local currencies) on higher demand mainly in the minerals and oil and gas sectors. Orders were also higher in Europe, led by a 7-percent increase in western Europe. Asia orders were higher, driven mainly by the need for industrial automation equipment. Orders in China were up 8 percent but declined 41 percent in India. Orders decreased in the Americas, where a 21-percent order increase in the U.S. – led by a 52-percent increase in Discrete Automation and Motion – was more than offset by lower power orders, mainly in Mexico and Brazil.
Orders in emerging markets were unchanged in local currencies in the second quarter compared to the same quarter a year ago and comprised 51 percent of total orders received.
Large orders as a share of total orders amounted to 11 percent, compared to 19 percent in the year-earlier period. Service orders grew in line with total orders and were up 6 percent in local currencies.
The order backlog at the end of June was $24 billion, a local-currency increase of 5 percent since the beginning of the year and unchanged compared to the end of the previous quarter.
Revenues decreased by 5 percent in local currencies as lower orders received during 2009 and the beginning of 2010, especially in ABB’s longer cycle businesses, were converted into sales. Compared to the first quarter of 2010, revenues increased 13 percent. Revenues were up 15 percent in Low-Voltage Products, reflecting the stronger recovery in its short-cycle end markets. Delays in the execution of some large projects contributed to the revenue decrease in the two power divisions. Service revenues were 5 percent higher in the quarter in local currencies compared to the second quarter of 2009.
Earnings before interest and taxes and net income
Included in EBIT in the second quarter is a negative impact of approximately $60 million from losses on derivatives and foreign exchange movements on receivables and payables. Restructuring-related costs amounted to approximately $70 million in the quarter.
Excluding these impacts in the respective periods, the EBIT margin in the second quarter of 2010 increased to 14.6 percent.
The improvement was driven primarily by higher margins in the automation businesses on a combination of volume growth, a favorable product mix and cost reduction benefits. Successful cost take-out measures allowed the Power Products division to maintain its EBIT margin – excluding net losses on derivative transactions and restructuring-related costs – at the same level as the year before. Power Systems EBIT margin was lower as the result of project costs related to a small number of subsea cable orders.
Net income for the quarter developed in line with EBIT and resulted in basic earnings per share of $0.27 compared to $0.30 in the year-earlier period.
ABB continues to implement a cost take-out plan aimed at sustainably reducing ABB’s costs – comprising both cost of sales as well as general and administrative expenses – from 2008 levels by a total of $3 billion by the end of 2010. The program focuses on optimizing global sourcing, improving internal processes and adjusting ABB’s global manufacturing and engineering footprint to reduce costs, increase our competitiveness and better match shifts in customer demand.
Savings in the second quarter exceeded $400 million, bringing the total for the program to date to approximately $2.3 billion. Costs for the full year 2010 are now expected to reach $350-400 million, compared to earlier estimates of $500 million. Costs associated with the program in the second quarter of 2010 amounted to approximately $70 million and total program costs to date amount to approximately $700 million.
Balance sheet and cash flow
Net cash at the end of the second quarter was $5.9 billion compared to $7.1 billion at the end of the previous quarter and $5.7 billion at the end of the second quarter of 2009. Cash from operating activities decreased in the quarter but was slightly higher for the first six months compared to the previous year. Cash payments in the quarter related to the company’s cost take-out program amounted to approximately $60 million.
Net cash used in investing activities includes a payment of more than $1 billion for the acquisition during the second quarter of Ventyx, a U.S.-based software provider to global energy, utility, communications, and other asset-intensive businesses.
In May, ABB also announced an offer to shareholders of ABB Limited, its publicly-listed subsidiary in India, of Rs. 900 per share in order to increase its stake in the company from approximately 52 percent to 75 percent. The potential total value of the transaction, if accepted, is approximately Rs. 44 billion ($965 million based on foreign exchange rates at the time of the announcement). The offer began on July 8, 2010 and is expected to end on July 27, 2010, with payment for the shares expected to take place on August 10, 2010.
On April 26, ABB’s Annual General Meeting approved the payment of a dividend in the form of a nominal value reduction of Sfr. 0.51 per share. The dividend payment date was July 15 for shares purchased through the SIX Swiss Exchange, July 19 for shares purchased through the NASDAQ OMX Stockholm Exchange and July 22 for American Depositary Shares purchased through the New York Stock Exchange.
Also as approved at the Annual General Meeting, approximately 23 million shares were cancelled in July following the end of the share repurchase program launched in 2008.
As previously announced, ABB has disclosed to the US Department of Justice and the US Securities and Exchange Commission various suspect payments. Also as previously announced, ABB has been cooperating with various antitrust authorities regarding their investigations into certain alleged anti-competitive practices. With respect to these matters, there could be adverse outcomes beyond our provisions.
In June, ABB announced the retirement of Anders Jonsson, a member of the ABB Executive Committee since 2006, effective as of the end of July 2010, after 34 years with the company. In his current position, Jonsson has been responsible for monitoring and coordinating ABB’s overall cost reduction and global footprint programs. These responsibilities will be assumed by the company’s head of quality and operational excellence who reports directly to ABB’s CEO.
The sequential quarterly growth of base orders since the middle of 2009 appears to confirm that ABB has seen the bottom of its short-cycle businesses. Industrial customers are spending more on automation and power equipment and solutions to increase the efficiency and productivity of their existing assets. Assuming a continuation of the current economic recovery in most regions, the company is confident that its short-cycle business will continue to support both top and bottom line growth over the remainder of the year.
For ABB’s late-cycle businesses, which make up the majority of the portfolio and which are driven by customer capital expenditure, the outlook for the remainder of 2010 remains mixed.
Upgrades and expansions of existing power infrastructure are needed in all regions, including renewables and smart grids. This is reflected in a near-record level of tendering activity in the Power Systems business. At the same time, lower electricity consumption in some regions has slowed the pace of power project awards in the short term. Furthermore, increased competition in the power sector continues to weigh on demand.
On the industrial side, ABB saw higher demand in the second quarter from some later-cycle sectors, such as minerals, pulp and paper and marine. Most customer spending in these industries, however, is focused on equipment upgrades, replacement and service rather than capital expenditures for new capacity.
The company believes it is well positioned to benefit from a sustained economic recovery. Growth initiatives are under way in selected business and countries, mainly in emerging markets. Significant fixed costs have been eliminated since the end of 2008, increasing the potential for incremental margin expansion as demand returns. Spending on research and development has remained steady through the downturn in order to secure the company’s technological leadership, and will continue.
Therefore, in the remainder of 2010 management will continue to focus both on adjusting costs and taking advantage of its global footprint, strong balance sheet and leading technologies to tap further opportunities for profitable growth.
The 2010 Q2 results press release is available from July 22, 2010, on the ABB News Center at abb.com/news and on the Investor Relations homepage at abb.com/investorrelations, where a presentation for investors will also be published.
ABB will host a media conference call starting at 10:00 am Central European Time (CET). U.K. callers should dial +44 20 7107 0611. From Sweden, +46 8 5069 2105, 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 96 hours: Playback numbers: +44 20 7108 6233 (U.K.), +41 91 612 4330 (rest of Europe) or +1 (1) 866 416 2558 (U.S./Canada). The code is 10133, followed by the # key.
A conference call for analysts and investors is scheduled to begin today at 3:00 pm CET (2:00 pm in the UK, 9:00 am 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 24 hours commencing one hour after the conference call. Playback numbers: +1 866 416 2558 (U.S./Canada) or +41 91 612 4330 (Europe and the rest of the world). The code is 15754, followed by the # key.
ABB (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 117,000 people.