ABB today announced a stunning 86% increase in net income in its third quarter, on a 26% increase in revenue. This was the automation giant's 11th consecutive quarter of double-digital order growth, as demand for power and automation technologies remained strong in all of the regions the company serves.
Third-quarter revenue totaled $7.19 billion, compared with $5.68 billion in last year's third quarter, and net income was $738 million, up from $397 million a year earlier. Earnings before interest and taxes (EBIT) rose to $1.03 billion from a year-earlier $669 million. The company reported $8.32 billion in orders during the Sept. 30-ended quarter -- up 33% from $6.28 billion.
"A combination of strong market growth and operational discipline has once again paid off," said Fred Kindle, ABB president and CEO, in a prepared statement. "Our market and technology leadership, together with performance improvements, are helping us to reap the full benefits from continuing global growth and heightened concerns about climate change and energy efficiency."
Leading the increase in orders was a drive by customers to refurbish and expand power infrastructures, as well as demand for energy-efficient technologies in most industrial sectors. In ABB's Automation Products and Process Automation divisions, developed countries exhibited a need to improve process efficiency while emerging markets were focused on capacity expansions. Demand in the automation divisions was strongest in the metals and minerals sector, particularly steel and aluminum, the company said. Orders in the oil and gas business were lower as a result of fewer large project orders during the quarter, compared with the 2006 period.
In discussing the strong third-quarter results with analysts this morning, ABB's Kindle pointed to the "successful end" to its program to sell non-core operations in order to focus on its power and automation businesses. Most recently, ABB sold Lummus Global to Chicago Bridge & Iron for $950 million.
An expanding order backlog — $22.2 million at the end of September — gives the company "good visibility and confidence" looking into 2008, Kindle said. He expects the current, positive business conditions to carry into the first half of next year and said ABB has seen no signs of stagnation or recession. Meanwhile, he said, "It's not easy to manage double-digit growth." The continuing challenge for the company is to manage the backlog -- maintaining quality, securing supplies, and delivering on time, he said.
The company ended the quarter with $3.33 billion in cash, up roughly $1 billion from the second quarter, and Kindle reiterated statements he made in September that ABB is pursuing strategic acquisitions. "We know what we have to do," he told analysts today. "We will do either acquisitions, if they make sense, or look for other things to do with the cash. There will be some action in 2008."
In the Process Automation division, which sells the System 800xA distributed control system, revenue rose 14% to $1.51 billion, from $1.32 billion in Q3 2006. Lower orders in pulp and paper and a reduction in large oil and gas orders largely offset order increases from the metals and minerals sectors, ABB reported. By region, process automation orders rose modestly in the Americas and nearly doubled in Asia, led by China, India, and South Korea. And orders in Eastern Europe declined in the quarter. ABB's Kindle said market demand continues at a high level, though perhaps not as high as a year ago, when ABB received a couple of significant orders.
In response to a question regarding ABB's ability to meet its target of 14% margins in the Process Automation business, Kindle remarked that it would take a few years to achieve the goal. "We're not yet best in class. We know what we have to do. We have to take more operating and strategic measures." Specifically, he mentioned increasing product sales and improving its services business.
Looking ahead, Kindle said, "We believe the market is still positive. We will continue to grow, but not at the 20% level of the past few years. In Process Automation and Automation Products, especially, 10% is more natural, more sustainable."
Revenue in the Automation Products division, which includes drives, power electronics, and low-voltage systems, totaled $2.2 billion, up 30% from $1.7 billion in the 2006 third quarter. The order backlog at the end of September was $3.41 billion, 46% higher than $2.34 billion a year earlier. The company noted growing demand in the quarter for both standard products and engineered products and systems. Demand for energy-efficient industrial products in a variety of industries also fueled order growth. In addition, ABB noted, revenue grew from price increases imposed to cover higher raw material costs.
When ABB delivered its five-year growth plan in September, it said the Automation Products division's revenue would grow 8% a year through 2011, with an EBIT margin ranging from 14% to 19%. And the Process Automation group was expected to grow revenue at a rate of 8% a year over the five years, with EBIT increasing at a compound annual rate of 9.9% through 2011. Today, Kindle said he saw no reason to alter those predictions.