ZURICH, SWITZERLAND -- ABB reported a solid double digit rise in orders, revenues and earnings, driven by strong industrial efficiency demand, continued utility investment in grid interconnections and upgrades, and a more competitive cost base.
Net income rose 41 percent to $655 million while operational EBITDA amounted to approximately $1.3 billion, a 37-percent increase over the same quarter in 2010. The operational EBITDA margin was 15.7 percent compared to 13.8 percent on the strong revenue increase and the success of ongoing cost savings.
Orders increased 25 percent and were higher in all divisions. Base orders (below $15 million) were up in all divisions for the second consecutive quarter to reach the highest level since the second quarter of 2008. Revenues increased 18 percent -- the strongest growth in two years -- on execution of the large order backlog and higher short-cycle product sales.
Earnings before interest and taxes (EBIT) increased 43 percent to approximately $1 billion. EBIT includes $107 million of charges related to the Baldor acquisition.
“Our results show we’re gaining traction in both growth and profitability,” said Joe Hogan, ABB’s CEO. “We are successfully targeting growth areas and the Baldor acquisition made a great contribution to the results. Our lower cost base also continued to pay off by lifting profitability in our growing businesses and holding margins steady where we’re still waiting for recovery.”
“Looking ahead, we expect continued strong industrial demand to support our early cycle businesses and we see positive signs that our infrastructure-related businesses in both power and automation are on track for recovery later this year,” Hogan said. “ABB’s long-term key growth drivers remain intact -- the increasing need for energy efficiency, industrial productivity and more reliable power infrastructure in both the mature and emerging economies.”
Summary of Q1 2011 results
Orders received and revenues
Industrial growth in most regions continued to drive demand for ABB products that boost energy efficiency, improve process and power quality and help customers increase the productivity of their production and power assets. This positive demand environment was further supported by high commodity prices, which drives both customer capital expenditures to expand capacity as well as operational investments to improve efficiency and productivity.
The continuing trend among utilities in many regions to increase investments for renewable energies and to link power grids was another positive demand driver in the quarter. Orders from utilities in China for technologically advanced equipment used in high- and ultrahigh-voltage direct current transmission systems was a further growth driver and a positive early indicator for the more substantial recovery in demand for power transmission equipment that the company expects in the second half of 2011.
Orders were higher in all divisions. The largest improvement was recorded in Discrete Automation and Motion, where the acquisition of Baldor Electric contributed just under half of the 63-percent local-currency increase in orders received. Orders grew 15 percent in Power Products, due in large part to higher orders for transformers in China. Orders rose at a double-digit pace in Low-Voltage Products and Process Automation and were 5 percent higher in Power Systems.
Base orders increased 25 percent (19 percent organic) and were up in all divisions. Base orders in Power Products increased for the second consecutive quarter and were 7 percent higher than the first quarter of 2010.
Regionally, orders grew 18 percent in Europe and were up in all divisions except Power Products, where orders were steady compared to the same period last year. The acquisition of Baldor Electric contributed to a 41-percent order increase in the Americas, which was further supported by order growth of 11 percent in Power Products and 22 percent in Process Automation. Orders in Asia rose 39 percent, led by 70-percent growth in China. A strong increase in Process Automation orders in the Middle East and Africa could not compensate an order decline in Power Systems in the region, where total orders were 6 percent lower.
Emerging market orders rose 22 percent in the quarter while orders from mature markets were 27 percent higher (17 percent organic) than the year before.
The order backlog at the end of March reached a record $29 billion, a local-currency increase of 8 percent (7 percent organic) compared to both the end of the first quarter 2010 and the end of 2010.
Revenues continued the growth begun in the second half of 2010 on execution of the strong order backlog combined with higher sales of short cycle products and services.
The strongest revenue growth was reported in Discrete Automation and Motion–due in large part to the Baldor acquisition–and in Power Systems, where execution of the strong order backlog, especially in the high-voltage direct current (HVDC) and power generation businesses, drove 27-percent revenue growth. Revenues were lower in Power Products as an increase in power distribution-related businesses could not compensate for the lower level of power transmission revenues coming from the weaker order backlog.
On an organic basis, first-quarter orders increased 19 percent and revenues grew 12 percent.
Operational earnings and net income
EBIT in the first quarter of 2011 amounted to $1 billion, a 43-percent increase compared to the same quarter a year earlier. Higher revenues–including an approximately $420-million contribution from acquisitions–and the favorable impact on profitability from a lower cost base were the main contributors to the improvement.
As part of the company’s previously-announced $1-billion cost savings initiative for 2011, savings of approximately $215 million were achieved in the first quarter, of which some 60 percent were derived from low-cost sourcing.
As announced with the fourth quarter results in February 2011, ABB will present and discuss its financial results using operational EBITDA as its principle performance indicator starting with the first quarter 2011 results. Management believes that operational EBITDA provides a better measure of operating earnings performance as acquisitions begin to make a larger contribution to ABB’s results.
Operational EBITDA in the first quarter of 2011 amounted to $1.3 billion, an increase of 37 percent over the year-earlier period. The operational EBITDA margin was 15.7 percent versus 13.8 percent in the same quarter a year earlier.
Net income for the quarter developed in line with EBIT and resulted in basic earnings per share of $0.29 compared to $0.20 in the year-earlier period.
Balance sheet and cash flow
Net cash at the end of the first quarter was $2.2 billion, down from $6.4 billion at the end of the previous quarter. The decrease mainly reflects the acquisition, completed at the end of January 2011, of Baldor Electric resulting in a total cash outflow of about $4.2 billion. Cash from operating activities declined compared to the strong first quarter of 2010, mainly because of higher working capital needed to support growth. Net working capital increased by approximately $1 billion in the quarter compared to the first quarter of 2010. Excluding acquisitions, net working capital was approximately $600 million higher.
Management appointments and board nominations
In February 2011, ABB announced the appointment of Frank Duggan to the Group Executive Committee as Head of Global Markets. Duggan succeeded Chief Financial Officer (CFO) Michel Demaré in this role, which represents the company’s market and regional organizations on the Executive Committee. Demaré continues in his role as ABB’s CFO.
In March, ABB’s Board of Directors unanimously proposed Ying Yeh as a new member. She is Vice President of Nalco Company and Chairperson of Nalco’s Greater China region, as well as a non-executive director of AB Volvo in Sweden and of the Intercontinental Hotels Group in the UK. The shareholders will vote on her nomination at the company’s next annual general meeting on April 29, 2011.
Dr. Bernd W. Voss, who has been a member of the ABB board and chairman of the Finance, Audit and Compliance Committee since 2002, will not seek re-election to the board.
Outlook
The global macroeconomic environment in ABB’s major end markets remains favorable. High commodity prices are driving increased customer capital expenditures, while simultaneously supporting spending on efficiency and productivity improvements, including service. Utility spending on power transmission to integrate renewable energy into existing grids and to interconnect national and regional power grids continues to gain momentum. Recent events in Japan and high oil prices are expected to further increase the need for energy-efficient power and automation technologies.
Emerging markets will remain the principal drivers of growth in the medium term but demand in the mature economies across all of ABB’s portfolio is also expected to continue growing over the coming quarters.
While overcapacity remains in some later-cycle infrastructure-related businesses, prices have stabilized in many sectors and ABB has initiated price increases in selected businesses in 2011, partly to offset increasing raw material costs. Supply bottlenecks related either to increasing demand or to recent events in Japan do not currently pose a significant risk to ABB’s business, but are being monitored closely.
Therefore, over the rest of 2011, management will continue to focus on adjusting costs while seeking profitable growth opportunities, both organic and inorganic, based on its leading technology, broad global presence, competitive cost base and strong balance sheet.
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