Business News

Strong 2007 results on continued growth and operational improvement

Thursday 14. February 2008 - Full-year orders increased 27%, revenues grew 25%, order backlog up 44% 2007 EBIT rose 57% to $4.0 billion, EBIT margin at 13.8% vs 11.0% in 2006 Net income up to $3.8 billion, partly on tax effect and divestment gain Board of Directors proposes to double the dividend to Sfr. 0.48 per share and approves a Sfr. 2.2 billion share buyback program Michel Demaré appointed interim CEO

ABB’s net income increased to a record $3.8 billion in 2007 from $1.4 billion a year earlier as markets remained strong and further operational improvements were made. In addition, a gain on the sale of ABB Lummus Global and a tax benefit together contributed approximately $1 billion to the 2007 net income.

Full-year earnings before interest and taxes (EBIT) grew 57 percent to $4.0 billion on a 25-percent increase in revenues (local currencies: 18 percent) to $29.2 billion. Orders were 27 percent higher (local currencies: 19 percent), leading to an order backlog of $22.7 billion at the end of 2007, an increase of 44 percent (local currencies: 32 percent) versus the end of 2006.

Orders, revenues and EBIT grew in all divisions and regions as global demand remained strong for technology to increase power grid reliability, industrial productivity and energy efficiency.

Strong demand, strategic measures and operational improvements, such as more sourcing from emerging economies, helped lift the EBIT margin to 13.8 percent from 11.0 percent in 2006. Cash flow from operating activities increased 58 percent to $3 billion, reflecting both higher EBIT and improvements in working capital management.

“2007 was a great year for ABB,” said Michel Demaré, ABB’s interim Chief Executive Officer and its Chief Financial Officer. “Demand remained strong around the globe for the products and services at the heart of our business – to increase energy efficiency, deliver power more reliably, and improve industrial productivity. We also profited again from our improved operational performance and expansion in emerging markets. This puts us in a strong position heading into 2008.

“The good performance in 2007 is also reflected in our proposal to double the dividend and the decision to launch a share buyback program,” Demaré said. “These measures increase returns to shareholders, improve our capital efficiency and, at the same time, ABB retains full flexibility to follow our growth ambitions, both organic and external.”


In the fourth quarter ending Dec. 31, 2007, orders rose 24 percent (local currencies: 14 percent) while revenues were 27 percent higher (local currencies: 16 percent) compared to the fourth quarter of 2006. Fourth-quarter EBIT increased 50 percent to $1.1 billion, producing an EBIT margin of 13.1 percent versus 11.1 percent in the same quarter a year earlier.

Net income in the fourth quarter of 2007 amounted to $1.8 billion compared to $422 million in the same quarter in 2006. The reported net income includes a $530-million gain on the sale of ABB Lummus Global and a $475-million tax benefit from the recognition of deferred tax assets. Excluding those impacts, 2007 fourth-quarter net income amounted to $748 million, an increase of 77 percent compared to the same quarter in 2006. For the full year 2007, net income excluding the tax impact and ABB Lummus gain amounted to $2.8 billion, an increase of 98 percent compared to 20061. Full-year earnings per share in 2007, excluding the tax impact and the ABB Lummus gain, were $1.22 (versus $1.66 as reported), an increase of 88 percent (155 percent as reported).

1Please refer to Reconciliation of non-GAAP financial measures regarding fiscal year 2007 in Appendix IV to this release.

The ABB Board of Directors will propose a dividend of Sfr. 0.48 per share to the annual general meeting on May 8, 2008, double the dividend of Sfr. 0.24 per share paid out last year. The dividend will be in the form of a nominal value reduction. In addition, the company has decided to launch a share buyback program up to a maximum value of Sfr. 2.2 billion, equivalent at current exchange rates to approximately $2 billion. The share buyback is designed to allow shareholders to benefit from ABB’s improved profitability and strong cash generation, while maintaining sufficient financial flexibility for the company’s growth ambitions.

Summary of Q4 and full-year 2007 results
Orders received and revenues
ABB’s markets remained robust in 2007, leading to strong double-digit order growth in all divisions for the full year. In OECD countries, utility customers continued to replace ageing equipment and build regional interconnections to use power more efficiently. Grid upgrades were also needed to handle new load requirements and integrate alternative sources of electricity, such as wind power. The build-up of new power infrastructure to support economic growth continued at high levels in the emerging markets. Sustained high raw material and energy costs fuelled further capacity expansions in many process industries in 2007 and, at the same time, drove investments to improve productivity and efficiency.

These trends were also reflected in ABB’s fourth-quarter 2007 order development. The Process Automation division recorded a $660-million increase in large orders (more than $15 million), led by the metals and minerals, oil and gas and marine sectors, resulting in a 70-percent increase (local currencies: 54 percent) in total orders compared to the same quarter in 2006. Automation Products orders increased 21 percent (local currencies: 10 percent) in the quarter on industrial demand for equipment to improve energy efficiency and productivity.

Strong demand for power equipment, especially transformers, supported a 37-percent rise in Power Products orders (local currencies: 26 percent) in the quarter. Orders were 4 percent lower in the Power Systems division (local currencies: 12 percent lower) compared to the very high level in the fourth quarter of 2006. Orders were flat in the Robotics division (lower in local currencies) because of lower demand in the North American automotive sector.

Large orders increased 27 percent in the fourth quarter and represented 19 percent of total orders received, the same as the fourth quarter in 2006. Base orders (less than $15 million) were up 24 percent (local currencies: 14 percent).

Revenues increased across all divisions for the full year and fourth quarter. Revenues were supported by the strong order backlog, increased volume resulting from high demand, and a favorable business environment in which increased raw material costs could be offset by higher prices.

The order backlog at the end of December 2007 stood at $22.7 billion, 44 percent higher than at the end of 2006 (local currencies: 32 percent).

Earnings before interest and taxes
The higher EBIT and EBIT margin in both the fourth quarter and full year were achieved through higher revenues and factory loadings, better execution of large projects and lower-cost sourcing. As a result, the gross margin2 increased to 30.7 percent for the full year compared to 29.0 percent in 2006. EBIT and EBIT margin also benefited from a decrease in selling, general and administrative (SG&A) expenses as a percentage of revenues to 17.0 percent versus 18.6 percent the year before as the result of measures to improve business processes and further reduce corporate costs.

2Gross margin is calculated as revenues less cost of sales, divided by revenues

Finance expense, taxes and discontinued operations
Below the EBIT line, a strong cash position and lower debt as a result of the conversion of ABB’s Sfr. 1-billion convertible bonds reduced net finance expense for the full year to $13 million from $160 million in 2006. For the fourth quarter, the strong cash position on the balance sheet produced a positive finance net of $28 million compared to an expense of $24 million in the same quarter in 2006.

The fourth-quarter tax rate benefited from the recognition of deferred tax assets in certain countries, especially the U.S., leading to an unusually low full-year tax rate of 15 percent versus 29 percent in 2006. Excluding this tax benefit, the full-year tax rate was 27 percent.

Income of $554 million was reported in discontinued operations in the quarter, reflecting primarily the gain on the sale of ABB Lummus Global that was announced in November. The Lummus gain was also positively affected by the recognition of deferred tax assets. For the full year, discontinued operations reported income, net of tax, of $586 million.

Cash flow
Cash flow from operations in the fourth quarter improved by more than $400 million compared to the same quarter in 2006, in line with the EBIT growth. Working capital decreased during the quarter, reflecting the successful implementation of capital efficiency measures and the seasonal year-end fulfillment of delivery commitments. Included in fourth-quarter cash from operations is an outflow of $204 million paid as part of ABB’s asbestos agreement in connection with the sale of ABB Lummus Global. Full-year cash flow from operations also included previously-announced payments to asbestos trusts of $382 million, compared to $75 million in 2006.

Free cash flow for the full year increased by 52 percent compared to 2006. Free cash flow as a share of net income, excluding the recognition of deferred tax assets and the gain on the sale of ABB Lummus Global, was 88 percent in 2007 compared to 115 percent in 20063. Including these items, free cash flow as a share of net income was 65 percent. Also contributing to the difference in free cash flow between 2006 and 2007 was a 41-percent increase in cash flows for capital expenditure in 2007, to $756 million, used mainly to increase capacity.

3Please refer to Reconciliation of non-GAAP financial measures regarding fiscal year 2007 in Appendix IV to this release.

Net cash proceeds of approximately $800 million from the sale of ABB Lummus Global are accounted for in cash from investing activities.

Balance sheet
Net cash was $5.4 billion at the end of 2007, compared to net cash of $3.3 billion at the end of the third quarter and $1.4 billion at the end of 2006. The fourth-quarter increase reflects mainly the growth in cash from operating activities and proceeds from the ABB Lummus Global transaction. The full-year increase also reflects the lower debt resulting from the conversion of the company’s 1-billion Swiss franc convertible bond.

Gearing decreased to 19 percent at the end of December 2007, versus 34 percent a year earlier, primarily the result of higher earnings during the year, combined with the lower debt and higher equity following the 1-billion Swiss franc bond conversion.

ABB’s pension funding further improved in 2007, mainly the result of higher discount rates. At the end of 2007, ABB’s pension position was overfunded in the amount of $22 million compared to an underfunding of $115 million at the end of 2006.

Both Standard & Poor’s and Moody’s increased their credit ratings for ABB since the beginning of 2007. Standard & Poor’s increased the rating to A- from BBB+, while Moody’s lifted its rating to A3 from Baa1, citing the company’s improving margins and reduced debt.

Dividend and share buyback program
For 2007, ABB’s Board of Directors proposes to double the dividend to Sfr. 0.48 per share compared to Sfr. 0.24 per share in 2006. The proposal is subject to approval by shareholders at the company’s annual general meeting on May 8, 2008, in Zurich, Switzerland. If approved, the dividend would take the form of a reduction in the nominal (par) value of the shares from Sfr. 2.50 to Sfr. 2.02 and the ex-dividend and payout date is expected to be at the end of July, 2008.

In addition, the company has decided to launch a share buyback program up to a maximum value of Sfr. 2.2 billion, equivalent at current exchange rates to approximately $2 billion. ABB intends to complete it prior to the annual general meeting of shareholders in 2010 and to propose the cancellation of the shares at that meeting. The share buyback is designed to allow shareholders to benefit from ABB’s improved profitability and strong cash generation, while maintaining sufficient financial flexibility for the company’s growth ambitions.

Divestitures
ABB continued to divest non-core activities in 2007. In February, the company announced the sale of its equity investments in two power projects, part of its Equity Ventures holdings, for $490 million. In November, ABB announced the completion of the sale of its ABB Lummus Global oil and gas business which resulted in a gain of approximately $530 million reported in the fourth quarter in Discontinued operations. With these transactions, the portfolio realignment begun in 2003 is almost complete.

Management appointments
On February 13, 2008, ABB announced that former CEO Fred Kindle is leaving ABB due to irreconcilable differences about how to lead the company. Michel Demaré has been appointed interim CEO in addition to his role as Chief Financial Officer. The search for a permanent successor has commenced.

Ravi Uppal, previously regional manager of South Asia and country manager for India, was appointed to the ABB Group Executive Committee as president of Global Markets, effective July 1, 2007.

Strategy 2007 to 2011
On September 5, the company announced its strategy and financial plan for the period 2007 to 2011. The company aims to achieve a compound annual growth rate (CAGR) for revenues over the period of between 8 and 11 percent and an EBIT margin between a minimum of 11 percent and 16 percent. Earnings per share are expected to grow at a CAGR of 15-20 percent while return on capital employed, after tax, is forecast to exceed 30 percent by 2011. ABB expects free cash flow to amount to 100 percent of net income, on average, over the period.

Compliance
As a result of its ongoing internal investigations, in the course of 2007 ABB disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission various additional suspect payments that occurred across several years. In addition, ABB has continued to cooperate with various anti-trust authorities, including the European Commission, regarding certain allegedly anti-competitive practices. The outcome of these matters as well as previously disclosed matters could have a material impact on the company’s consolidated operating results, cash flows and financial position.

Employment
ABB employed approximately 112,000 people at the end of December 2007, an increase of 4,000 compared to the end of 2006. The sale of ABB Lummus Global in the fourth quarter of 2007 reduced the number of employees by approximately 2,400.

Outlook for 2008
The global market for power transmission and distribution infrastructure is expected to remain buoyant in 2008. Demand is forecast to be driven in Europe and North America by the need for equipment replacement, improved grid reliability and efficiency and further grid interconnections. In Asia and the Middle East and Africa, demand is expected to be driven by the development of new power infrastructure.

The industrial automation market is expected to remain attractive in the emerging economies, driven by high commodity prices and the need for greater energy efficiency and process quality. In the mature economies, some countries or early-cycle sectors may see a dampening of demand related to slower overall economic growth.

Based on these assumptions, and barring an extended recession in the global economy, ABB expects growth rates in 2008 of about 15-20 percent for its power-related activities and about 10 percent in its automation activities

Order growth remained at high levels in the fourth quarter across all businesses, led by transformers. Refurbishment of power grids and equipment for grid interconnections helped lift orders by more than 30 percent in Europe versus the fourth quarter of 2006. Orders were also strongly higher in the Americas, fuelled by utility spending in the U.S. and Brazil. New infrastructure investments supported double-digit order growth in Asia, while orders decreased in the Middle East and Africa, mainly the result of fewer large orders compared to the same quarter a year ago. Base orders for the division increased 36 percent (local currencies: 26 percent) compared to the fourth quarter of 2006.

Revenues increased in all businesses in the quarter, reflecting higher volumes from the strong order backlog and price increases to compensate for higher raw material costs. The increase in fourth-quarter EBIT and EBIT margin resulted mainly from higher revenues, continued operational improvements and the positive impact from expanding capacity in lower-cost economies compared to the same period a year earlier.

Costs from the $240-million transformer consolidation program announced in 2005 amounted to $19 million in the fourth quarter of 2007 compared to $14 million in the fourth quarter of 2006. Program costs for the full year 2007 amounted to $34 million (2006: $38 million). Total transformer consolidation costs as of the end of 2007 amounted to $195 million.

Orders decreased in the fourth quarter of 2007 compared to a very strong quarter a year earlier. The volume of large orders decreased but base orders continued to increase, up 15 percent (local currencies: 5 percent). Orders more than doubled in Asia compared to the fourth quarter of 2006, due to a large order for a 2,000-kilometer ultrahigh-voltage power link in China. This was offset by fewer large orders compared to the same quarter a year ago, especially in the Americas and the Middle East.

Revenues rose in the fourth quarter on increased project execution from the strong order backlog. Both EBIT and EBIT margin increased significantly compared to the same period in 2006 on the combination of higher revenues, strong improvements in project selection and execution, greater capacity utilization and the expansion of engineering capacity in emerging markets.

Fourth-quarter orders continued to grow as most industrial customers increased their investments in efficiency improvements in the face of high raw material and energy costs. Growth was strongest in Asia and the Middle East and Africa, where orders were more than 50 percent higher (local currencies: more than 40 percent) than the same quarter in 2006. Orders in Europe increased only slightly as strong growth in eastern Europe was offset by flat order development in western Europe. In the Americas, strong order growth in South America more than compensated for slightly lower orders in North America that resulted from slower economic growth in the U.S. during the quarter.

Revenues increased in the quarter mainly due to higher volumes resulting from execution of the high order backlog and continued strong demand. Increased revenues, high factory loadings and further migration to lower-cost countries were the prime drivers of an increase in EBIT and EBIT margin versus the same quarter in 2006.

Orders declined in the fourth quarter as continued demand growth in general industry, such as packaging, consumer electronics and food processing, could not offset decreased orders from the automotive sector, primarily in the U.S. Order growth in western Europe was offset by a decline in eastern Europe. Asian orders were more than 50 percent higher, led by Japan, South Korea and China.

Revenue growth in the fourth quarter reflected execution of the improved order backlog that developed over the first three quarters of 2007. The higher fourth-quarter EBIT and EBIT margin resulted from higher revenues. The increase versus the same period in 2006 also reflects efforts taken to improve project execution, reduce costs and refocus the product offering.

Non-core activities and Corporate
Non-core activities consist mainly of three equity investments in South America and Africa and the company’s corporate real estate activities. Non-core EBIT declined to $9 million in 2007 from $65 million the year before, mainly the result of asset writedowns and other adjustments to businesses that have been sold or closed. Corporate costs decreased in 2007 to $310 million from $321 million in 2006.