Crisis continues at ABB

ABB employs nearly 150,000 workers - more than 10,000 jobs have been cut in the past year Keystone Archive

The beleaguered electrical engineering group, ABB, saw its troubles continue on Wednesday with news that profits had fallen by 62 per cent in the first half of the year.

The group posted net profits of $101 million (SFr148.17 million) in the first six months, down from $266 million during the same period last year.

First half orders were $11.9 billion, down six per cent from $12.6 billion in the first half of 2001.

Analysts polled by Reuters had on average expected ABB to report first half earnings of $174 million.

Restructuring

In a statement from its Zurich headquarters, ABB said its financial restructuring and cost reduction programme announced last July was progressing as planned.

First half earnings before interest and taxes (EBIT) was $368 million after $185 million in restructuring costs, asset write-downs and charges.

The group said restructuring costs to date were $337 million. Excluding acquisitions and divestments, a total of 10,900 jobs had been cut over the past year, with 1,600 jobs reduced in the second quarter, partially through natural attrition.

The company employed 149,924 people at the end of June, compared with 156,865 at the end of last year.

ABB said that in the second quarter, its four divisions had all increased their earnings over the first quarter.

Centerman “confident”

“The positive order and revenues trend and the expected benefits from restructuring make us confident that we will reach our 2002 revenue and margin targets, while we continue to take measures to improve the company’s fundamentals,” commented ABB president and CEO Jörgen Centerman.

“We expect a stronger second half,” he added.

ABB said its outlook for the year as a whole remained “unchanged”, with revenues expected to be flat in comparison with 2001. The EBIT margin for the full year 2002 is expected to be in the range of four to five per cent.

The group reported that its net debt increased from $4.1 billion to $5.2 billion in the first half. However, it repeated its commitment to reducing net debt by at least $1.5 billion this year.

Asset sales

The debt reduction is to be achieved through improved cash earnings, asset sales and continuing portfolio management, the statement said.

ABB sold its Swedish real estate property portfolio in the second quarter for $300 million, while the announced divestment of its Structured Finance business is expected to take place in the third quarter.

Commenting on the figures, analyst Sebastien Petit at Barclays told swissinfo that the main disappointment came on the operating underlying profits.

“The EBIT margin was 2.2 per cent in the second quarter, down from 4.6 per cent in the first. This was slightly distorted by restructuring charges but it seems to indicate that the margins are being pressured by the downturn in Europe,” he said.

Petit added that the most worrying aspect about ABB currently was its net debt level.

“A big concern”

“The net debt increased to $5.2 billion at the end of June and that must be compared to shareholders’ funds of about $2.2 billion, so you can see that it’s quite a big concern,” he commented.

“ABB has promised that this should be down by $1.5 billion by the end of the year thanks essentially to the sale of the Structured Finance division.”

“Obviously if they can’t get rid of that division by the end of the third quarter, the cash flow generated in this downturn environment won’t be enough to make sure that they can reduce this debt,” he added.

However, Petit said the overall picture of ABB was not as black as the markets had been painting.

“It’s really a question of confidence and balance sheet at ABB. Overall, I would say the products and the competitive position are still good,” he said.

The group on Wednesday also gave an update on the claims for damages against it relating to asbestos at its United States subsidiary, Combustion Engineering.

Asbestos to remain a “drag”

A study of the issue produced by the Pictet Bank in Geneva in May said asbestos would remain “a drag on the company for years to come” and estimated liabilities at $2 billion.

ABB said that 20,300 claims were settled in the first half of 2002, more than 40 per cent without payment.

At the end of June, 102,700 claims were said to be pending, compared with 93,500 at the end of last year. Some 29,500 new claims were filed in the first half, compared with 29,300 in the second half of last year.

Settlement costs before insurance reimbursement were $107 million.

Pension scandal

ABB has been going through the worst crisis since it was founded in 1988 from the merger of Sweden’s Asea and Switzerland’s Brown Boveri.

In February, the company revealed that two former chief executives, Percy Barnevik and Göran Lindahl, had received pension and other retirement benefits of SFr233 million.

The high figure prompted public and shareholder outcry at a time when the company had reported a loss for 2001 of $691 million.

In March, the board of ABB reached a deal with the two, both of whom agreed to pay back a combined total of SFr137 million from their pension settlements. However, investigations are continuing.

by Robert Brookes