Swiss engineering firm ABB Ltd (ABB: Quote) on Friday said it expects a reduction of approximately $350 million in fourth-quarter earnings before interest and tax or EBIT, as it is repositioning its Power Systems division to secure higher and more consistent profitability. ABB also raised the division's 2011-2015 operational EBITDA margin target corridor, while it lowered organic revenue CAGR target. The company's 2015 targets remain unchanged.
Under the planned changes, the division will shift its focus to higher-margin products, systems, services and software activities. It is closing low value-added engineering, procurement and construction operations in more than 10 countries where project returns do not reflect the execution risks involved. The company noted that the division has made key leadership and organizational changes to implement this new strategic focus on higher value and lower risk businesses.
The Zurich - based firm said the decision to reposition the Power Systems division was after a strategic review, which was triggered by performance that has been volatile and below management expectations, despite significant investments made during the past three years. According to the company, these investments have included product development, capacity expansions and acquisitions in software businesses to enhance its product portfolio.
Joe Hogan, ABB's CEO, today said, "We've made substantial investments recently to increase Power Systems' potential for value creation. However, Power Systems has not generated consistent returns. This is not acceptable; therefore we are recalibrating the growth, profitability and cash return ambitions for this division."
With the repositioning, ABB now expects the division's 2011-2015 operational EBITDA margin target corridor to be 9-12 percent, higher than the current level of 7-11 percent, with the division expected to reach the lower end of the new corridor by the fourth quarter of 2013.
At the same time, the organic revenue CAGR target has been lowered to 7-11 percent from 10-14 percent to reflect reduced low value-added engineering, procurement and construction activities and increased project selectivity.
Of the total reduction in EBIT of approximately $350 million, about $100 million is related to restructuring-related expenses and other non-operational write-offs, and is not included in operational EBITDA. The company said the remainder reflects additional costs expected from closing some local units as well as further overruns on a small number of projects. The costs of the program are expected to have a payback period in the range of two and a half years.
In Power Systems, third-quarter revenue climbed 4 percent to $1.90 billion, while orders dropped 31 percent.
While announcing third-quarter results in October, ABB had confirmed its 2011-2015 targets and said that macro indicators in most markets are mixed and visibility is limited, and that short-cycle business growth is being challenged. The company then said the longer-term outlook in its major end markets remains favorable, driven by the need for greater resource efficiency, increasing urbanization in emerging markets and the growing demand for more and more efficient and reliable, power delivery.
ABB closed Thursday's regular trading session at $20.19, up $0.10 or 0.50 percent.
by RTT Staff Writer
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