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abb annual report 2006 operational review power and productivity for a better world
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table of contents 01 02 this is abb letter from the chairman and from the president and ceo 06 10 14 18 22 26 innovation grid reliability industrial productivity energy efficiency sustainability people 32 corporate governance caution concerning forward-looking statements the abb annual report 2006 includes forward-looking statements within the meaning of section 27a of the securities act of 1933 and section 21e of the securities exchange act of 1934 we have based these forward-looking statements largely on current expectations estimates and projections about future events financial trends and economic conditions affecting our business the words believe may will estimate continue target anticipate intend expect and similar words and the express or implied discussion of strategy plans or intentions are intended to identify forward-looking statements these forward-looking statements are subject to risks uncertainties and assumptions including among other things the following i the difficulty of forecasting future market and economic conditions ii the effects of and changes in laws regulations governmental policies taxation or accounting standards and practices iii changes in raw materials prices iv the effects of competition and changes in economic and market conditions in the product markets and geographic areas in which we operate v our ability to anticipate and react to technological change and evolving industry standards in the markets in which we operate vi the timely development of new products technologies and services that are useful for our customers vii unanticipated cyclical downturns in the industries that we serve viii the risks inherent in large long-term projects served by parts of our business ix the difficulties encountered in operating in emerging markets x the amount of revenues we are able to generate from backlog and orders received xi changes in interest rates and fluctuations in currency exchange rates and xii other factors described in documents that we may furnish from time to time with the u.s securities and exchange commission including our annual reports on form 20-f although we believe that the expectations reflected in any such forward-looking statements are based on reasonable assumptions we can give no assurance that they will be achieved we undertake no obligation to update publicly or revise any forward-looking statements because of new information future events or otherwise in light of these risks and uncertainties the forward-looking information events and circumstances might not occur our actual results and performance could differ substantially from those anticipated in our forward-looking statements.
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this is abb rising demand for energy and its impact on the environment are the defining challenges of this century abb is tackling these issues by providing solutions for the secure and energy-efficient transmission and distribution of electricity and for increasing productivity in industrial commercial and utility operations that s why abb stands for power and productivity for a better world total abb group millions unless otherwise indicated 2006 20051 orders revenues earnings before interest and taxes ebit as of revenues net income as of revenues diluted earnings per share dividend per share in chf proposed cash flow from operations free cash flow as of net income return on capital employed number of employees 1adjusted 28,401 24,412 2,586 10.6 1,390 5.7 0.63 0.24 1,939 1,598 115 20 108,000 23,194 22,012 1,778 8.1 735 3.3 0.36 0.12 1,012 902 123 14 104,000 to reflect the reclassification of activities to discontinued operations abb operational review 2006 1
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dear shareholders letter from the chairman and from the president and ceo the past year was truly successful for abb profitable organic growth was our goal for 2006 and that is what our company delivered we fulfilled our promise to focus more on execution in our operations quality cost and risk management were at the top of our internal agenda we continued to simplify the company s structure to align it with the requirements of this focus as well as the necessities of an open global market and we lowered corporate costs the results have vindicated our approach we met our key financial objectives for 2009 three years early and have made significant progress toward our goal of becoming the world s top engineering company in terms of growth profitability sustainability and ethical behavior achieving our goals has strengthened trust in abb among our customers investors the public and employees jürgen dormann chairman fred kindle president and ceo there are three main reasons for our success in 2006 the strength of our offering the strength of the markets and the strength of our culture strength of offering for several years now abb has focused on its core power and automation businesses we are number one two or three in all our major product lines in terms of market share our leading market position in power and automation technologies is the fruit of traditional abb strengths such as innovation quality proximity to customers and speed one of our biggest projects in 2006 the estlink power connection between estonia and finland demonstrated these virtues using environmentally friendly technology pioneered by abb we deliv 2 abb operational review 2006
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ered the power link in just 19 months a record for this type of installation we spent about $1.1 billion on research and order-related development in the five divisions in 2006 to secure our leadership positions we believe that successful innovation and r&d have been and will be vital to abb s success and we are investing considerable resources in this field revenues and profitability also increased power systems had an excellent year culminating in a $450-million order from qatar general electricity and water corporation kahramaa in the fourth quarter the biggest transmission and substations order abb has ever received demand for automation products and systems was driven by the continued efforts of customers to expand capacity and to increase the efficiency and productivity of their facilities china and india led a 24-percent surge in orders in the automation products division and process automation benefited from strong demand particularly in the oil and gas industry and in the minerals industry but the picture is not as simple as it looks markets are not only growing they are changing and becoming more open and this is putting new demands on companies the traditional structure of multinationals with smaller versions of the parent company replicated in countries around the world will no longer do there is too much overlap and inefficiency to be successful and compete in the longer term abb is developing a globally integrated structure where jobs are allocated to those who best suit the challenge in some cases cost will be the deciding factor in others it will be expertise proximity to customers or other factors highlights net income rises 89 percent to $1.39 billion order backlog increases 42 percent to almost $17 billion earnings before interest and taxes ebit rise 45 percent to a record $2.59 billion ebit margin or ebit as a percentage of revenues increases to 10.6 percent from 8.1 percent in 2005 cash flow from operations almost doubles to $1.94 billion net cash total cash and marketable securities less total debt was $1.51 billion at the end of 2006 compared with net debt of $513 million a year earlier board of directors proposes doubling the dividend to chf 0.24 per share subject to the approval of shareholders at the annual general meeting two u.s subsidiaries combustion engineering and abb lummus global settle all asbestos claims against them strength of markets the markets have undoubtedly played an important part as well the expanding economies of asia the middle east and other regions are obvious contributors to abb s rapid organic growth and are also supporting growth in mature markets in europe and north america we have seen demand rising because the existing energy infrastructure is no longer meeting today s requirements industrial customers need solutions that will raise productivity and save energy while utilities are investing in equipment to provide reliable power supplies with low environmental impact abb s orders grew by double digits in all regions all divisions had excellent results except for robotics which faced continued weak demand in the important automotive sector aggressive measures were launched in 2006 to diversify our robotics business into more general industries and to streamline products and processes that will improve the division s competitive edge these included the establishment of the division s global headquarters in shanghai a step that followed the opening of an r&d center in the city and the migration of a production line from europe to china the power products division achieved order growth of about 25 percent and strength of culture the need to adopt a global approach is a tremendous opportunity for abb the changes required will not be achieved overnight although we have made considerable progress the ultimate goal is to enhance competitiveness by fostering innovation increasing customer orientation and driving efficiency by using our global reach and resources abb operational review 2006 3
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power products power systems automation products process automation robotics core division revenues 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 millions 7,422 6,307 4,544 4,085 6,837 5,897 5,448 4,996 1,288 1,699 in production we have assigned global responsibility for product development to particular factories around the world concentrating our resources to ensure quality internally we are streamlining our operations in human resources information technology and finance to raise efficiency at the individual level we are helping employees to play more active roles in the company more than 15,000 people have now taken part in our leadership challenge program which is available to employees at all levels and encourages participants to think as leaders to take decisions and to act and what is particularly pleasing is the extent to which the revitalized culture within the organization is contributing to our success amid the day-to-day pressure of helping our customers achieve their aims and ensuring the timely delivery of quality products and systems we have not lost sight of the tasks we set ourselves to improve the way we work we have maintained operational discipline we have continued to streamline our processes and we have delivered on our promise to reduce corporate costs and this target was achieved despite significant investments to successfully comply with the sarbanes-oxley act and launch an ambitious project to improve our internal processes and systems improved transparency communication and accountability are signs of this change a culture of responsibility respect and determination is taking hold these values permeate a new code of conduct that aims to ensure all employees understand the part that they as individuals can play in the company s success the code is built on an earlier guide to business ethics but goes much further it also emphasizes the importance of quality diversity and the highest health and safety standards abb today is a place where the competence and values of a person are important not their origin giving our company a truly global quality efforts to increase diversity particularly where it concerns gender have had some success we have attracted several highly qualified women to top positions in the company we have also expanded the executive committee to include our general counsel a reflection of the importance we place on excellence in legal and compliance matters we are pleased and relieved that the long and painful asbestos chapter in abb s history was closed in 2006 when combustion engineering and abb lummus global settled all claims against them the resolution of this matter draws a line under the uncertainty surrounding the asbestos liabilities bringing benefits to both claimants and abb this paved the way for our decision in early 2007 to start the process of divesting lummus whose processing technologies for the oil and gas industry don t fit our strategy of focusing on our strengths in the power and automation businesses core division ebit 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 millions 961 616 279 187 1,053 822 541 398 1 91 core division cash flow from used in operations 20052006 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 millions 736 566 293 122 916 484 525 237 30 11 continuous improvement our employees deserve special thanks for the achievements of 2006 these have demanded a particular effort at a abb orders rose 22 percent in 2006 to revenues by region europe 47 asia 25 the americas 18 middle east and africa 10 $28.4 billion and revenues increased 11 percent time when the pace of order growth already required exceptional commitment to meet the needs of our customers of course there are still areas for improvement group employees by region europe 56 asia 21 the americas 17 middle east and africa 6 4 abb operational review 2006
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the return on capital employed roce increased to 20 abb is now in an enviable position the comprehensive review of our strategy this year will be made from a position of strength now that the balance sheet is stronger and above all now that abb is a more robust and homogeneous business we have the leeway to consider acquisitions again some gaps remain in the geographical presence of our businesses and in the company s portfolio of products so that the goal would be to acquire new technology or new product lines free cash flow rose to $1.6 billion equivalent to aging power transmission and distribution networks while emerging economies are expanding their grids as demand rises secondly increasingly global markets are forcing companies to become more competitive this is driving investment in products and systems to raise productivity and reduce costs and thirdly pressure to improve energy efficiency and combat climate change will increase employing available energyefficient technologies including abb drives motors and high-voltage direct current transmission of electricity reduces costs and is an effective way to stabilize emissions of greenhouse gases we are working to cut our own energy use and continue to design products with their impact on the environment in mind sustainability which requires balancing economic success with care for the environment and social progress is part of our business and future success abb s ability to meet the needs represented by these trends is why the company stands for power and productivity for a better world in 2006 from 14 percent a year earlier we must do more to make abb a safer work environment we have the structures in place to ensure employees are getting effective training the statistics on work-related incidents trend in the right direction yet colleagues still lost their lives or were seriously injured in 2006 our zero tolerance approach to breaches of ethical business rules has been well publicized and strictly enforced yet incidents still occur we will continue to enforce full compliance in the firm belief that proper business conduct is the hallmark of a sound organization and as mentioned the world is changing fast and requires us to change with it thinking on our feet in order to remain competitive the acceleration of economic growth in many emerging markets is an opportunity for abb to achieve a better balance in its global presence 115 of 2006 net income the main focus will be on finding acquisition opportunities that will expand the power products and automation products divisions we will also evaluate opportunities that arise in the power systems and process automation divisions although the priority in these businesses remains the internal work to improve their operations we have built a reputation for delivering on our promises and will not put that at risk we will approach potential targets with caution to make sure that any business we buy will generate value and not burden the company with undue risk whether we can meet our ambitions with the right acquisitions remains to be seen with or without acquisitions it is already clear that there are several long-term trends set to support abb for years to come addressing the need for reliable supplies of electricity is a top priority the world over mature markets are upgrading enviable position in 2006 the strength of our offering our markets and our culture resulted in our best financial results in years in addition we moved from a position of net debt to one of net cash further increased the ratio of equity to total assets and continued to reduce gearing the improvements have been recognized and rewarded by the financial markets after a rapid increase in 2005 our share price rose again substantially in 2006 and the rating agencies restored our debt to a solid investment grade rating jürgen dormann chairman abb ltd fred kindle president and ceo abb ltd abb operational review 2006 5
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innovation abb spent a total of $1.1 billion on research and order-related development in 2006 about 10 percent more than in 2005 to strengthen and maintain our leadership role in power and automation technologies in a world of ever-diminishing resources and soaring energy demand the focus of abb research is fixed on developing efficient sustainable ways to generate transmit distribute and use electrical energy our 6,000 scientists and engineers are driven by the knowledge that the energyefficient products systems and solutions they develop and bring to market will help our world as well as our customers they have already created a broad range of abb products for almost all industrial applications based on our nine major areas of technology research electrical insulation and current limiting current interruption power electronics mechatronics control and protection sensing and analyzing software communication manufacturing and engineering processes thanks to this research technology has been developed to transmit ultrahigh-voltage ac alternating current and dc direct current electricity over long distances with low energy losses motors and drives at the heart of abb industrial solutions are now even more energy efficient so plant production flexibility and quality go up while energy consumption goes down new technology also lets utilities manage their power generation and their transmission and distribution grids more efficiently and to improve reliability our product innovations also reach into space abb s analytical instruments business was recently honored by contractor northrop grumman corporation for its work on sensing devices for satellites monitoring the environment our research teams cooperate closely with abb customers to develop the products and systems that will satisfy present and future needs and ensure a constant flow of innovative products coming to market in 2006 abb spent about $1.1 billion on research and order-related development a 10 percent increase compared with 2005 our people also have a finger on the pulse of new technology through cooperative projects with about 70 of the best universities in the world so that we can be sure abb s core technologies are based on the latest knowledge available in the scientific community and in view of dynamic global markets and the consistently high quality of research staff in emerging countries in asia abb has significantly expanded its research base in india and china where about 40 percent of abb s research resources are now spent 7 esa-silicon worlds
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innovation to grow our technology leadership abb innovations must have just the right mix of ingredients they must significantly advance the state of the art and provide economic solutions that meet the needs of our customers and of society with this recipe in mind we are constantly searching for new ways to expand and enhance abb s existing technologies and push the limits of what we can do for our customers in 2006 we unveiled a number of innovations and advances in sweden abb opened the world s first facility for testing ultrahigh-voltage direct current uhvdc power transmission technology this lab can test direct current dc rated at 800 kilovolts kv which is another major step forward on a road abb pioneered with the development of hvdc technology more than 50 years ago and the delivery of the first hvdc installation in 1954 abb s new ultrahigh-voltage transmission technology cuts energy losses by up to makes it up to 30 percent cheaper than alternative systems which lose more energy during transmission uhvdc is therefore tailor-made for emerging markets like china india brazil and africa and could deliver electricity to millions of consumers in addition to low-loss and low-cost transmissions uhvdc is environmentally friendly since it requires narrower transmission highways and fewer power lines underground power transmission another unique abb innovation is our hvdc-light transmission technology developed to send power over shorter distances below ground or water new cables and advanced semiconductor technology developed by abb have tripled the amount of electricity that can be transmitted this way up to 1,100 megawatts mw over oil-free cables equivalent to the output of a nuclear power plant the largest hvdc light installation so far is the abb-built 350-mw estlink connection between estonia and finland which went live in december 2006 estlink is helping secure european energy supplies by connecting the electricity networks of finland and the baltic states of latvia estonia and lithuania hvdc light is a versatile alternative for utilities struggling to win planning permission for overhead lines because it can transport electricity via underground cables with no electromagnetic fields for up to 600 kilometers 30 compared to conventional transmission methods uhvdc is the technology of choice for reliable energy-efficient electrical transmission over long distances up to 2,000 kilometers particularly in regions where generation sites are located far from the population centers that need power uhvdc technology will transmit huge quantities of power up to 6,400 megawatts with fewer losses that efficiency it can help rapidly growing cities meet rising power needs by safely and efficiently transporting high power into densely populated areas using only a few underground cables and since it can efficiently transmit electrical power in the gigawatt range it can connect large offshore wind farms to consumers onshore 8 abb operational review 2006
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recognized test center substations are the crossroads of electrical energy in a power system but have suffered from a lack of international standards overseeing data exchange abb systems are now adapted to the iec 61850 global standard which offers significant advantages for global customers abb is in a unique position having been awarded official conformance test center status allowing it to certify that products are compliant to the iec 61850 standard for substations we also developed waveguide a simple reliable wireless device that uses low-power electromagnetic waves instead of copper or fiberoptic cables to transmit vast amounts of data in medium-voltage switchgear waveguide can send up to 22 times more information than traditional cables with virtually no losses and protects against wiring errors and electromagnetic compatibility issues it s cheaper and easier to install virtually maintenance free and robust enough to withstand the harsh environment of a substation substations and other vital power network systems exchange data over the network s power lines for these power line carrier plc signals which control and protect the entire network reliability and real-time accuracy are essential abb has developed a plc system that set a new data transmission record over a 380-kilovolt kv high-voltage power line over a 100-kilometer distance an important innovation is this new system s ability to adjust to unfavorable weather conditions automatically running at maximum speed whenever possible slowing down only temporarily in response to bad weather fast and reliable data exchange and communication between parts of an automation system is also crucial for industrial applications which is why ethernet industrial protocols that handle large amounts of data at high speed are becoming essential here abb has pioneered a communication backbone for industry with the acs 350 the first compact generalmachinery drive with profinet support using enhanced diagnostic features and central engineering schemes available in networked technology abb s extended automation system 800xa is a universal control system which plant and system operators maintenance personnel and managers can use to see behind the individual pieces of an entire process machinery controls etc with a single mouse click we are continually introducing new adaptations to this system uniting production processes with plant engineering teams version 5.0 launched in november 2006 has extended engineering capabilities that let customers evaluate and implement system modifications without interrupting production or incurring costly downtime tions like conveyors cranes paper mills and plastics processing plants a new line of low-voltage switchgear series mns is improves connectivity for motor control applications through intelligent ethernet communication with process control systems abb s wireless waveguide mediumvoltage technology can transmit up to 22 times more switchgear data than conventional cables advanced control features the automation products division continues to expand its offering with innovative technologies for end users and channel partners the new acsm1 machinery drive combines conventional ac drive performance with advanced control features and is suitable for demanding applicaabb s automation products catalog offers some flexlean is abb s new-generation robotic manufacturing system that is easily set up and features an extremely flexible production line multiple car bodies with design variants can be built on a single flexlean production line which uses modular configurable and standardized cells that incorporate controls programmable positioners and fixtures drives robots programmable grippers and motion systems designed primarily for car-body assembly it can be extended to any application of single-line multiple-product manufacturing meanwhile abb s groundbreaking safemove software and hardware is the missing link that helps humans and robots work safely and effectively together where market pull meets technology push you need just the right mix of insight and ingenuity every day abb s global r&d staff step up to the challenge of creating the pioneering products systems and services that enhance energy efficiency power reliability and industrial productivity 170,000 choices for managing energy productivity and comfort abb operational review 2006 9
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grid reliability abb is the world s biggest maker of power transmission and distribution equipment with a range of advanced products and systems that enhance grid reliability and industrial productivity when power systems fail as they have in north america europe and asia in recent times we recognize electricity for what it truly is the essential glue that holds our modern world together remove it and our world grinds to a halt cities come to a standstill work ends communications stop transport stalls food spoils small wonder everybody wants reliable electricity with rapid growth in emerging markets the need for electricity is soaring and power networks are stretched meanwhile aging power infrastructures in mature markets are coping with heavy demand they are increasingly ill-equipped to satisfy global electricity consumption is expected to double to an estimated 30 million megawatt-hours by 2030 from about 15 million in 2003 large increases are projected in the united states the world s largest economy and china s consumption is set to nearly triple over the next two decades some 1.6 billion people around the world still have no access to electricity at all keeping pace with demand on transmission and distribution systems the world will also need to double its power-generating capacity by 2030 when it comes to ensuring reliable power abb can help we are the world s number one supplier of power products and systems with state-ofthe-art technologies to protect and strengthen the electrical networks that hold our world together our high-voltage direct current hvdc technology connects separate power systems and efficiently transmits power over long distances our hvdclight system brings onshore-generated electricity to offshore oil rigs connects offshore wind farms and offers a new alternative for underground transmission our flexible ac transmission systems facts increase the security capacity and flexibility of transmission systems advanced switchgear transformers cable systems control and monitoring systems help utilities make the most of transmission capacity and avoid the spread of disturbances abb designs sophisticated energytrading systems so that electricity can be bought and sold as a commodity abb has the knowledge experience and products to strengthen and improve power networks and to protect the glue that keeps our world together 11
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the power trade grid reliability abb is a world leader in the development of sophisticated computer software and systems needed to provide secure internet power trading between producers and consumers a decade ago buying and selling electricity as a commodity was technically impossible but advances in computing and internet-based trading have encouraged the deregulation of utilities and introduced the world to competitive electricity markets such systems use advanced computational techniques to minimize total power production costs while maintaining the security of the grid they continuously monitor networks for potential problems using sophisticated look-ahead and contingency-analysis techniques and enable different power commodities to be traded in the different markets with the launch in 2006 of energy trading markets in the philippines and western australia abb has now put seven such systems into operation around the world based on its network manager bms solution the australian power trading system set a new record just 14 months from contract to commercial operation including an eight-month trial period while the abb s transformer management helps the tennessee valley authority achieve a compact abb substation in the heart of manila provides reliable safe power for 30,000 people system in the philippines has attracted considerable interest from other countries planning to open up their own power markets it is the first in asia to provide week-ahead day-ahead and real-time markets for energy and ancillary services and financial settlement management a global substation standard substations and their automation systems play a vital role in the regulation of electrical power supplies with mounting pressure on supplies and widespread deregulation of utilities the need for flexible automated control and protection has never been greater that is why abb has taken a lead role in the implementation of the new global communications standard iec 61850 the standard replaces a plethora of communications protocols that require automation devices to be compatible with several programming languages in order to communicate with one another the use of a single communications standard reduces the cost of automation devices and removes a significant source of error 99.99 grid reliability 12 abb operational review 2006
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in may 2006 abb completed its first automation substation system in which all equipment uses iec 61850 the project was carried out for the dubai electricity water authority and is the first of 30 such substations to be automated for the company by abb abb s adoption of this single standard for substation automation helps customers to reduce operating and maintenance costs it also means abb equipment is compatible with any device that complies with the new standard and can be reconfigured to accommodate new technologies or expanded operations enhancing reliability and long-term flexibility scada-based control and monitoring equipment from abb is a highly flexible system that provides up-to-the-minute data-monitoring and archiving functions and directs preventative actions in the event of disturbances abb will also improve reliability and energy efficiency in jsw s steel plants with a state-of-the-art process automation system and variable-speed drives projects or locations with extreme climatic conditions the materials used make them non-explosive and highly flame resistant so they don t require vaults dikes or other expensive firesuppression systems resibloc transformers are widely used in the marine industry and were also selected for their durability and reliability in 2006 for projects including the shanghai transit system and berlin s main train station powering the tallest buildings record-breaking skyscrapers are showcases of engineering achievement they can t afford to have anything but the most reliable power supplies the 492-meter shanghai world financial center will house a luxury hotel offices apartments and shops when completed and tens of thousands of people will pass through the building every day the burj dubai will set a new record for the tallest building when it is finished rising more than twice as high as the empire state building both have turned to abb transformers for the safe and reliable distribution of power they will use resibloc a registered trademark of an abb family of compact distribution transformers made with glass fiber and using cast-resin insulation instead of oil abb makes various dry-type transformers vacuum cast coil resibloc and open wound which are the distribution transformers of choice for demanding since 2004 power and industry customers have selected abb s system 800xa to control more than abb switchgear for ferrari ferrari the celebrated maker of italian sports cars selected abb s compact and easy-to-install switchgear when it modernized the substation that provides power to its main production complex museum and test track in maranello abb s plug and switch system pass hybrid switchgear has revolutionized substation design by combining the functions of air-insulated ais and metal-clad gas-insulated gis switchgear units into a single rugged indoor/outdoor module it requires 60 percent less space than conventional switchgear units takes just hours to install and is virtually maintenance free ferrari engineers insisted on pass after visiting abb s new high-voltage factory at lodi near milan abb makes two modules pass m0 for high voltages up to 170 kv and pass m00 for lower voltages between 72.5 and 100 kv in addition to its unique hybrid features pass modules can be pre-assembled and factory tested prior to installation ferrari liked the innovative simplicity and proven reliability of this abb-pioneered technology a steely resolve to boost production the indian steelmaker jsw plans to increase productivity by more than 75 percent by 2008 with the help of abb power and automation solutions abb is delivering power protection and control equipment and a network management system based on supervisory control and data acquisition scada technology to ensure that jsw has enough reliable power to increase steel production to 6.8 million tons annually from 3.8 million this includes a range of switchgear and transformers to strengthen the steelmaker s power generation facilities in the states of karnataka and tamil nadu which supply its steel plants and feed surplus electricity into the local grid at the same time abb s electrical balance of plant ebop will ensure the safe and coordinated operation of the power plants maximizing performance and reliability ebop is the sum of all electrical equipment required for safe and coordinated operation of various parts of a power plant 2,500 installations abb operational review 2006 13
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