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ABB Reports Q3 Earnings

October 24, 2013 – ABB reported higher revenues, earnings and cash flows in the third quarter of 2013, on improved performance across all divisions.

Orders in early-cycle businesses, driven mainly by customer investments in improved productivity and efficiency, grew compared to the same quarter in 2012, while further delays in large project awards – mainly the result of ongoing economic uncertainties - and the strategic repositioning of the Power Systems division resulted in lower large orders.

“It was a solid quarter where we executed well to grow revenues, earnings, cash and net income despite the continued mixed business climate,” said Ulrich Spiesshofer, ABB’s CEO. “We drove good order growth in a number of key markets, including China and Germany, and our base orders returned to year-over-year growth. Project tendering activity in sectors like power transmission and oil and gas continues to increase but the award of large orders remained slow.

“At the same time, we can do more to improve our performance and deliver greater value to all of our stakeholders,” he said. “For example, we have significant opportunities to drive profitable growth through increased market penetration—delivering more to our existing customer segments—and by accelerating the development and marketing of innovative products and packaged solutions. We will also continue to expand into attractive markets, both by growing organically, as well as continuing to fill gaps in the portfolio through bolt-on acquisitions.

“The second focus area will be to improve our collaboration across the businesses to create more customer value by selling and delivering ABB’s combined automation and power portfolio. Enhanced collaboration in operations will allow us to drive productivity to the next level.

“Relentless execution will be the third focus area. We will drive sustainable cost savings momentum, cash flow as well as capital efficiency even harder. In addition, we are stepping up the focus on the successful integration of our acquisitions to maximize the return on our investments. The announcement earlier this week that Greg Scheu will lead our global acquisition integration efforts from the senior executive team reflects our commitment to realizing the value of our acquisitions.

“Looking ahead, the long-term growth drivers are fully intact but several forward-looking indicators are mixed and we still face some near-term market uncertainty,” Spiesshofer said. “But even in a volatile environment, our strong market positions, leading technologies and broad business portfolio will allow us to capture profitable growth opportunities. Therefore, we will continue to drive the top line in a very targeted way while executing on cost, business-led collaboration and improved capital efficiency.”

Summary of Q3 results

Growth overview
The global business environment remained mixed in the third quarter. Demand in early-cycle businesses grew in line with macroeconomic developments. Growth was led by demand from both industrial and utility customers for products and solutions that help them increase the productivity and reliability of existing assets.

ABB’s ability to tap these early-cycle growth opportunities is reflected in the 5-percent increase in base orders, driven in part by ABB’s improved geographic balance, especially in the US through its successful integrations of the Thomas & Betts and Baldor Electric acquisitions. Sustained investments in sales and research and development through the cycle have also supported base order growth. Base orders were up in all divisions except Power Systems, where greater selectivity—part of the division’s repositioning towards higher value-added projects—impacted base orders in businesses such as substations.

Late-cycle capital investments by customers in markets such as power utilities and mining continued to be delayed, partly due to overcapacity in some markets as well as economic uncertainties. As a result of this and the timing of project awards, large orders (above $15 million) declined 43 percent. However, tendering activity in these markets is increasing as the underlying need for industrial productivity, infrastructure upgrades as well as grid reliability improvements remained intact across all regions. Large orders represented 9 percent of total orders, compared to 15 percent in the year-earlier period.

Service orders increased by 2 percent in the quarter and represented 17 percent of total orders, up from 16 percent in the same quarter in 2012.

Revenues rose 9 percent and were higher in all divisions, primarily on the combination of stronger growth in early-cycle businesses as well as execution of the order backlog. Service revenues increased by 5 percent in the quarter compared with a year ago and represented 15 percent of total revenues.

Orders grew in Europe as double-digit increases in markets like Norway, Sweden, Germany and Switzerland more than compensated for continued weakness in southern Europe—mainly Italy—and a decline in the UK. In the Americas, US orders were unchanged versus the same period a year earlier, as lower large orders were compensated by solid growth in base orders. Order growth in China, India and South Korea contributed to higher Asia orders in the quarter, while orders in the Middle East and Africa declined due to the delay in large project awards.

Discrete Automation and Motion: Orders were driven mainly by continued investments in robotics equipment from automotive and general industry as well as demand for products to improve industrial productivity. Revenues improved on execution of the order backlog and increased sales of products such as variable-speed drives. Service orders and revenues grew at a double-digit pace. The Power-One acquisition, completed in July, also contributed to the growth in orders and revenues.

Low Voltage Products: Orders and revenues increased in all product businesses and were higher in all regions, in line with economic developments. Revenue growth was led by Europe and Asia—including a double-digit increase in China—and was modestly higher in the Americas. Service orders and revenues grew significantly faster than total orders and revenues for the division.

Process Automation: Base orders grew across most businesses in the quarter—led by North America and China—but were offset by continuing delays in the award of large projects, especially in the mining and oil and gas sectors. Strong revenue growth was driven by the execution of the order backlog. Service revenues remained stable versus the same quarter a year ago.

Power Products: Industrial and power distribution demand remained steady in the quarter and utilities continued to make selective investments in power transmission. Higher revenues reflect delivery from the order backlog while service volumes grew faster than total revenues.

Power Systems: Orders declined on a combination of the postponement of large order awards and increased project selectivity that is part of the division’s strategic repositioning. Revenues were higher across most businesses in the quarter on execution of the order backlog. Service revenues also grew.

Earnings overview

Operational EBITDA
Operational EBITDA in the third quarter of 2013 amounted to $1.6 billion, an increase of 10 percent versus the same period a year earlier.

The Group’s operational EBITDA margin increased to 15.7% from 15.3%, mainly reflecting the positive impact of higher volumes. Cost savings and productivity improvements more than compensated price pressure.

Income from operations and net income
Income from operations amounted to approximately $1.3 billion, 16 percent higher compared to the same quarter in 2012.

Net income for the quarter increased 10 percent to $835 million, in line with operational EBITDA. Basic earnings per share in the third quarter amounted to $0.36 versus $0.33 a year earlier. Year to date, basic EPS increased 8 percent and operational EPS5 increased 7 percent.

Discrete Automation and Motion: Operational EBITDA increased on higher revenues, while margins remained steady.

Low Voltage Products: The operational EBITDA margin increased through a combination of successful cost management and growth in a number of higher-margin product businesses.

Process Automation: The growth in operational EBITDA and margins primarily reflects the strong revenue increase as well as improved project execution compared to the same quarter in 2012.

Power Products: Operational EBITDA increased on higher revenues while the operational EBITDA margin reflects a different revenue mix compared to the same period a year ago.

Power Systems: The increase in operational EBITDA margin reflects the combination of higher revenues, better project execution and improved cost management compared to the same period in 2012.

Cash flow and balance sheet
ABB reported cash from operations of $1,241 million compared to $768 million in the third quarter of 2012. Net working capital as a percentage of revenues5 amounted to 18 percent, an increase of 1 percentage point versus the end of the same quarter a year earlier.

ABB’s net debt5 at the end of the quarter was $3.4 billion, as at the end of June, and includes the impact from the net payment in July of approximately $750 million for the acquisition of Power-One.

Management changes and organizational update
ABB announced earlier this week a realignment of responsibilities in the Group Executive Committee (EC) to put a strong focus on acquisition integration and the significantly expanded North American business portfolio. Under these changes, Greg Scheu, who is currently responsible for Marketing and Customer Solutions (MC) on the EC, will lead the Group’s global acquisition integration efforts and take over responsibility for North America, ABB’s largest geographical market. Scheu will retain responsibility for ABB’s service business, while the remaining activities of MC will be taken up by other members of the EC. All changes will be effective November 1, 2013.

Earlier in the third quarter, ABB announced the appointment of Jean-Christophe Deslarzes to its Executive Committee as Head of Human Resources (HR), effective November 15, 2013. He brings a proven track record as a successful leader of HR in global companies to the role and has significant operational and integration experience. He succeeds Gary Steel, who is retiring.

In an orderly internal succession, Pekka Tiitinen was appointed to ABB’s Executive Committee as head of the Discrete Automation and Motion division as of September 15, 2013. He previously led ABB’s global Drives and Controls business through a period of significant organic growth and profitability improvement. He succeeded Ulrich Spiesshofer, who took over as ABB CEO.

Strategic initiatives
Ulrich Spiesshofer, who assumed the role of CEO on September 15, 2013, said the executive team intends to focus on three key areas in the coming quarters: driving profitable organic and inorganic growth; stronger collaboration across the organization to improve ABB’s offering to its customers and lift productivity; and “relentless execution” across the business operations.

“We have made good progress against our 2011 to 2015 goals and will continue to execute on that plan,” Spiesshofer said. “At the same time, there are significant opportunities for us to step up our performance and deliver even greater value to our customers—together.”

Profitable growth will be driven by increasing the market penetration of existing customer segments by combining offerings across different businesses more effectively and continuously enhancing customer intimacy and service. This will include both new products and innovative packages and solutions of existing offerings and services.

Greater collaboration across businesses will deliver significantly greater value to customers by offering a more integrated set of solutions. It will also lift productivity in areas like sales, product development and order fulfillment. “It’s clear that we can do more to make our customers more competitive, to improve our own productivity and to accelerate profitable growth,” Spiesshofer said.

Management focus on execution will include not only consistent delivery of cost savings equivalent to 3-5 percent of cost of goods sold every year, but also stricter management of net working capital to lift cash flow as well as driving excellence in the integration of newly acquired businesses.

Our long-term demand drivers—such as the need for greater industrial productivity, more reliable and efficient power delivery and the development of renewable energies—remain in place. Early-cycle macroeconomic developments remain positive but several forward-looking indicators contain mixed signals and we still face some near-term market uncertainty.

In this environment, we will continue to execute on our 2011-15 plan. Growth will be supported by delivering from our large order backlog as well as increasing the focus on market penetration, innovation and expansion. We will continue to drive cost savings and productivity improvements equivalent to 3-5 percent of cost of sales every year through improved supply management, better quality and higher returns on investments in sales and R&D.

We remain committed to delivering higher cash to shareholders and improving the cash return on our invested capital.

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 150,000 people.

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