ZURICH, Switzerland (Feb. 16, 2012) - ABB reported an increase in profitability in the fourth quarter of 2011 on a combination of strong revenue growth and cost savings. For 2011, the company reached $40 billion in orders for the first time and reported record revenues of $38 billion.
Operational EBITDA, the measure of profitability tracked by management, rose 18 percent from the fourth quarter a year earlier, to $1.6 billion, on a 16-percent increase in revenues (10 percent organic). The operational profit margin on this basis rose to 14.8 percent from 14.4 percent, due in large part to cost reductions of approximately $330 million and better project execution.
Cash from operations in the quarter amounted to approximately $1.7 billion, close to the record $1.8 billion generated in the same quarter of the last two years.
Orders rose 17 percent (10 percent organic), helped by increasing demand for low-loss power transmission systems in both mature and emerging markets. Demand from industrial customers for high-efficiency equipment used to reduce operating costs and increase product quality also grew.
“We continued to execute well in the fourth quarter, especially on our cost savings and project execution, allowing us to report record revenues and solid earnings in a volatile market environment,” said ABB Chief Executive Officer Joe Hogan. “We saw good demand for energy efficiency solutions in industry and for grid expansions and refurbishment, and we expect that to continue.
“At the same time, an unfavorable business mix and ongoing price pressure out of the order backlog will likely weigh on profit margins in the first quarter, but we are more optimistic about the rest of the year and will continue to aggressively pursue growth while retaining our uncompromising approach to cost control.”
Demand for ABB products and solutions continued to grow as industrial and utility customers focused on energy efficiency, industrial productivity and power reliability. In particular, orders improved in the oil, gas and petrochemicals and power utility sectors. Orders increased in the fourth quarter compared to the year earlier due to a significant jump in large orders (above $15 million), including a $900-million Ultra High Voltage Direct Current (UHVDC) power transmission order in India and a $160-million underground HVDC link in Sweden. Large orders increased by 38 percent and represented 23 percent of the total orders in the quarter, compared to about 20 percent in the year-earlier period. Base orders (below $15 million) increased 12 percent (4 percent organic). This was approximately the same growth rate as in the third quarter of 2011.
The Discrete Automation and Motion division reported the largest growth in orders, up 49 percent in local currencies, thanks in large part to continued robust demand for high-efficiency electrical motors from Baldor. On an organic basis, orders in Discrete Automation and Motion grew 11 percent. Orders were 6 percent higher in the Low Voltage Products division, mainly on increased demand for low-voltage systems to improve electrical efficiency in industry. The Process Automation division saw orders up 7 percent as commodity prices continued to drive customer investment in new capacity and services to improve the productivity of existing assets, especially in the oil and gas sector.
The Power Systems division had a very strong quarter in orders and revenues, confirming longer term trends to interconnect power grids and strengthen power transmission infrastructure in both mature and emerging markets. Power Products orders increased across all businesses, mainly the result of demand from the power distribution and industrial sectors.
Regionally, orders rose by 61 percent in Asia on the large power order in India and strong order increases in Australia and Singapore, as well as a 6-percent increase in China. In the Americas, orders grew by 41 percent (11 percent organic), with higher demand in both automation and power. Orders declined 8 percent in Europe, reflecting both slower economic growth and a more challenging comparison with the same quarter a year earlier, when ABB was awarded a $580-million HVDC power transmission order. Orders in the Middle East and Africa were down 18 percent on fewer large orders compared to the same period in 2010.
For the Group, service orders grew by 11 percent in the quarter and were 15 percent higher for the full year.
The order backlog at the end of December reached $27.5 billion, a local-currency increase of 9 percent compared with the end of the fourth quarter in 2010, and 2 percent lower than at the end of the third quarter in 2011.
Revenues continued to grow and were higher in all divisions, supported in large part by execution of the order backlog. Organic revenue growth was 10 percent. Service revenues grew by 12 percent and represented 16 percent of the Group’s total revenues in the fourth quarter. For the full year, service revenues increased 10 percent and represented 16 percent of total revenues.
EBIT in the fourth quarter of 2011 amounted to $1.1 billion, a 15-percent increase compared to the same quarter a year earlier.
Operational EBITDA in the fourth quarter of 2011 amounted to $1.6 billion, an increase of 18 percent over the year-earlier period. The increase in operational EBITDA and operational EBITDA margin mainly reflects the contribution of $525 million of revenues and $97 million of operational EBITDA from the Baldor acquisition, and the non-recurrence of some $120 million in project-related charges in the Power Systems division compared to the same quarter in 2010. Profitability was negatively impacted by continued price pressure in the power divisions—as lower margin orders were executed from the backlog—unfavorable business and product mix and continued investment in sales and research and development.
Net income for the quarter grew 19 percent to $830 million. Basic earnings per share amounted to $0.36.
As part of the company’s $1-billion cost savings initiative for 2011, savings of approximately $330 million were achieved in the quarter, of which about 50 percent were derived from optimized sourcing. For 2011, total cost savings amounted to $1.1 billion. Costs associated with the program in the fourth quarter were approximately $100 million, bringing the total cost for the full year to approximately $160 million.
As the company said at its Capital Markets Day in November, ABB intends to continue its cost savings initiatives in 2012 and aims to further reduce costs by approximately $1 billion, again primarily through global sourcing and operational excellence measures.
ABB continued to execute on its strategy to fill key gaps in its product portfolio, geographic coverage and end-market exposure with bolt-on acquisitions. During the fourth quarter, ABB completed the acquisition of Trasfor, a Switzerland-based specialty transformer manufacturer. In December, the company also announced an offer to acquire Switzerland-based Newave Energy International, a manufacturer of uninterrupted power supplies, for a total consideration of approximately $170 million. The deal is expected to be completed in the first quarter of 2012.
ABB made a number of other acquisitions in 2011, the largest of which was U.S.-based industrial motor manufacturer Baldor Electric, completed in January and valued at $4.2 billion, including debt repayment. Since being consolidated into ABB’s financial results as of the end of January 2011, Baldor has contributed approximately $2 billion in revenues and approximately $390 million of operational EBITDA.
Other acquisitions during the year included Envitech, a Canadian supplier of electrical products for urban transit systems; Powercorp, an Australian renewable power automation company; Lorentzen & Wettre, a Swedish manufacturer of control solutions for the pulp and paper industry; Epyon, a Netherlands-based supplier of electrical vehicle charging solutions; and Mincom, a supplier of enterprise asset management software to the mining and other industries, based in Australia.
ABB announced in January 2012 an agreed offer to acquire U.S. low-voltage equipment manufacturer Thomas & Betts for a total cash consideration of $3.9 billion. The transaction, to be fully funded by cash and debt, is expected to be closed in the second quarter of 2012, pending approval of the deal by Thomas & Betts shareholders and customary regulatory approvals.
Total debt amounted to $4.0 billion compared to $2.2 billion at the end of 2010 and $4.6 billion at the end of the third quarter of 2011.
Net cash at the end of the fourth quarter was $1.8 billion compared with $1 billion at the end of the previous quarter. Cash flow from operations amounted to $1.7 billion, close to the record levels reported in the same quarter in 2010 and 2009. The good performance reflects solid working capital management, mainly reduced inventories and improved receivables collection, partly offset by higher tax payments.
At its Capital Markets Day in November 2011, ABB introduced a new measure of return on investment as part of its 2011-2015 financial targets, replacing return on capital employed (ROCE) with cash return on invested capital (CROI). The target is to achieve a CROI above 20 percent by 2015. At the end of 2011, the first year of the five-year target period, CROI was 14 percent, down from 21 percent in 2010 as a result of the $4-billion acquisition of Baldor Electric completed in the first quarter of 2011.
ABB returned to the bond market in 2011 with the aim of extending the maturity profile of its long-term debt and securing long-term funding at attractive rates. The company issued two US-dollar denominated bonds in June, totaling $1,250 million—maturing in 2016 and 2021—followed in October by two Swiss franc-denominated bonds totaling CHF 850 million, also maturing in 2016 and 2021. In January 2012, ABB Ltd issued a further CHF 350-million bond, maturing in 2018. In addition, ABB redeemed on maturity a €650-million bond in November, 2011.
ABB’s Board of Directors has proposed a dividend for 2011 of 0.65 Swiss francs per share, compared to 0.60 Swiss francs per share in the prior year. The proposal is in line with the company’s dividend policy to pay a steadily rising, sustainable dividend over time. As it did in 2011, the Board proposes that the dividend be paid from ABB Ltd’s capital contribution reserve, a form of payment that would be exempt from Swiss withholding tax. If approved by shareholders at the company’s annual general meeting on April 26, 2012, the ex-dividend date would be April 30, 2012, for shares traded on the SIX and OMX Nasdaq exchanges and May 1, 2012, for American Depositary Shares traded on the New York Stock Exchange. The respective dividend payout dates would be May 4, 2012, in Switzerland, May 8, 2012 in Sweden, and May 11, 2012 in the United States.
In February 2011, ABB announced that Frank Duggan was appointed to the ABB Executive Committee (EC) as Head of Global Markets, effective March 1, 2011. In December 2011, ABB announced the appointment of Brice Koch, the EC member responsible for Marketing and Customer Solutions, as the Head of the Power Systems division, effective March 1, 2012. He succeeds Peter Leupp, who is retiring. At the same time, Greg Scheu, the head of the Discrete Automation and Motion division in North America, was appointed to the EC to succeed Koch as Head of Marketing and Customer Solutions, effective July 1, 2012.
The long-term outlook for ABB remains positive, with utilities continuing to invest in grid upgrades and industries spending more on automation solutions to increase energy efficiency and productivity.
Macroeconomic volatility makes short-term forecasts more challenging. There are signs of recovery in the North American economy and China appears to be returning to a focus on growth, while uncertainty around government budget deficits in Europe remains high.
From the perspective of ABB’s short-term business development, management expects low single-digit growth in most of its early-cycle businesses until confidence in the macroeconomic outlook improves. Price pressure is expected to continue in parts of the power business, in line with the company’s previous guidance. The unfavorable business mix seen in most divisions in the fourth quarter of 2011 is expected to continue into the first quarter of 2012, weighing on margins. This trend is not expected to continue over the rest of the year. Management will continue to drive further improvements in cost and productivity going forward.
At the same time, the company’s strong order backlog and continued customer investments in areas such as power distribution and oil and gas, as well as its exposure to fast-growing emerging markets, are expected to provide ample opportunities for profitable growth in 2012 and the company will continue to expand sales forces and accelerate product development in order to capture these opportunities.
Orders increased across all businesses during the quarter, driven primarily by demand from the power distribution and industrial sectors. Market uncertainty persists and a recovery in the transmission sector depends on an overall improvement in economic conditions and utilities becoming more active on capital investment.
Regionally, orders were higher in the Americas and Asia, mainly due to a growth in base orders, and declined in Europe as a result of delayed investments. Revenues grew in all businesses with service revenues growing faster than total revenues.