Mobile Drags Down Siemens Q3

MUNICH -- Siemens in the third quarter (April 1 to June 30) of fiscal 2003:

For the third quarter of fiscal 2003, Group profit from Operations was €1.023 billion, near the level a year earlier despite a €3.1 billion decline in sales. A majority of operating Groups improved both profits and earnings margins for the quarter. While Power Generation’s (PG) Group profit was lower due to the end of the gas turbine boom in the U.S., it remained among Siemens’ earnings leaders in the third quarter, along with Medical Solutions (Med), Automation and Drives (A&D), Siemens VDO Automotive (SV), and Osram.

Third-quarter net income of €632 million came in lower than the €725 million a year earlier. Non-allocated pension expense was €189 million compared to €61 million a year earlier, and Siemens’ equity share of the net loss at Infineon Technologies AG was higher in the current quarter, €43 million compared to €31 million a year earlier. In addition, the prior-year period included a €67 million gain on the sale of an investment. Earnings per share for the quarter were €0.71, compared to €0.81 a year earlier.

Net cash from operating and investing activities for the third quarter was €266 million, including an initial payment of €505 million to acquire the industrial turbine business of Alstom S.A. and €741 million in increases in investments and marketable securities. Excluding these items, net cash from operating and investing activities was €1.512 billion, compared to €1.466 billion in the same period a year earlier. For the first nine months of fiscal 2003, net cash from operating and investing activities was €527 million, including the items mentioned above as well as supplemental pension contributions totaling €442 million in the first quarter. Net cash from operating and investing activities in the first nine months a year earlier was €3.206 billion, including net cash provided from portfolio activities totaling €945 million related to transactions involving Infineon and Atecs Mannesmann.

Reflecting global macroeconomic conditions, all Siemens’ operating Groups reported weak sales and orders compared to the third quarter a year earlier, resulting in aggregate declines of 15% in sales, to €17.380 billion, and 10% in orders, to €17.215 billion. Negative currency translation effects, particularly involving the U.S. dollar, affected reported sales and orders across the board. Excluding currency translation and the net effect of acquisitions and dispositions, third-quarter sales declined 7% and orders edged down 1% year-over-year.

“I am satisfied with our third-quarter result,” said Siemens CEO Heinrich v. Pierer. “While the absence of demand growth in key markets, combined with significant currency translation effects, lowered sales and orders year-over-year, the trend is more gradual on a consecutive-quarter basis. It is even more satisfying that most of our Groups were able to move further toward their target earnings ranges for fiscal 2003. I expect a similarly positive performance in the fourth quarter. Clearly the Operation 2003 measures are taking effect, and they are being consistently applied.”

Operations in the third quarter of fiscal 2003

In the Information and Communications business area, Information and Communication Networks, (ICN) reported a loss of €125 million, including €72 million in charges primarily at Efficient Networks. On a consecutive quarter basis, ICN’s Group Profit margin improved. Third-quarter earnings at the Enterprise Networks division were €62 million, up from the prior-year period, but revenue declined to €893 million from €955 million a year earlier due to currency translation effects. ICN’s Carrier Networks and Services business also reported lower sales year-over-year, €801 million compared to €1.108 billion, and posted a loss of €128 million. The division’s third-quarter loss a year earlier was €183 million. For ICN as a whole, sales dropped 23% to €1.687 billion from €2.190 billion in the prior-year period, including a 6% negative currency translation effect. Third-quarter orders declined 13% year-over-year, to €1.756 billion, with nearly half the decrease due to currency translation.

Information and Communication Mobile (ICM) recorded Group profit of €17 million in the third quarter, including a number of one-time net positive effects at the Mobile Phones and Mobile Networks divisions. In the same period a year earlier, ICM posted a loss of €9 million. The Mobile Networks division posted a profit of €36 million on sales of €968 million, compared to a loss of €21 million on sales of €1.218 billion in the third quarter of the prior year. The Mobile Phones division recorded sales of €922 million on a volume of 8.1 million handsets, similar to the level a year earlier, but posted a loss of €42 million. For comparison, Mobile Phones posted a profit of €28 million in the same quarter a year earlier. Third-quarter sales for ICM as a whole fell 14%, to €2.160 billion. Orders were down 2%, at €2.313 billion. Excluding currency translation effects, sales fell 10% and orders grew 5%.

Siemens Business Services (SBS) posted Group profit of €17 million, up from €5 million in the third quarter a year earlier. Continuing weak demand for information technology (IT) services caused third-quarter sales to decline 6%, to €1.283 billion, and orders to decline 7%, to €1.297 billion.

In the Automation and Control business area, A&D continued to produce outstanding earnings in a difficult environment, raising its Group profit to €203 million and its margin to nearly 10% in the third quarter. The Group’s Industrial Automation Systems and Motion Control Systems divisions again led the way. A&D also strengthened its overall market position with innovative new products across the Group that helped offset pricing pressure and weak demand in the U.S. Excluding currency translation effects, sales grew 3% and orders rose 6% year-over-year. Third-quarter sales of €2.074 billion were just 3% lower than a year ago, while orders held steady at €2.078 billion.

Industrial Solutions and Services (I&S) recorded €5 million in Group profit, compared to a loss of €32 million in the third quarter a year earlier, when the Group took charges to reduce capacity in a contracting market for industrial solutions. Market conditions remain difficult, as third-quarter sales declined 10%, to €959 million, and orders fell 8%, to €911 million. Both sales and orders included a five percentage point negative currency translation effect.

Siemens Dematic (SD) battled weak markets, project delays, and margin pressures, recording a Group loss of €64 million including €39 million in charges for capacity reduction, inventory write-downs, and increased contract loss provisions for existing project risks. Third-quarter Group profit a year earlier was €12 million. While the Electronics Assembly Systems division began to restore sales growth in its large pick-and-place business on a near-break-even basis, its smaller businesses posted losses. The Postal Automation division stayed in the black despite falling sales. The Material Handling Automation division, however, experienced volume-driven earnings declines in the U.S., took most of the charges mentioned above related to projects in Europe, and posted a significant loss compared to a profit a year earlier. SD’s third-quarter sales of €640 million were down 14% year-over-year, with currency translation accounting for 11 percentage points of the decrease. Orders dropped 24%, to €571 million, including eight percentage points due to currency translation.

Group profit at Siemens Building Technologies (SBT) was €18 million, including €20 million in charges primarily to reduce capacity. Group profit was €23 million in the third quarter a year earlier. Reflecting weakening demand in the construction market, sales fell 10% year-over-year, to €1.156 billion, and orders were down 11%, at €1.137 billion. Currency translation effects cut eight percentage points from SBT’s sales growth, and seven points from order growth.

In the Power business area, PG’s third-quarter Group profit of €279 million was down from the €476 million level a year earlier, near the peak of the U.S. gas turbine energy boom. The current period includes net gains of €65 million from customer cancellations, and the prior year period benefited from a €44 million gain related to revised estimates of project performance. While third-quarter sales were significantly lower than a year earlier, at €1.530 billion, orders were down just 3% year-over-year, at €1.596 billion. Excluding a 5% currency translation effect, orders rose as PG continued to expand its business with major new orders in Asia/Pacific, Europe, and the Middle East. The Group’s service business grew faster than PG as a whole, and accounted for approximately one-third of Group sales and delivered robust Group profit in the third quarter. PG’s acquisition of Alstom’s small gas turbine business, which was consolidated as of May 1, 2003, made only a modest contribution to sales and earnings growth during the period. PG’s order backlog was €14.5 billion, comparable to recent quarters.

Power Transmission and Distribution (PTD) delivered Group profit of €52 million compared to €43 million in the third quarter a year ago, and boosted its Group profit margin to 6.0% despite a decline in sales. The Group’s High Voltage and Medium Voltage divisions increased their profitability year-over-year. The aggregate effects of currency translation and the divestment of PTD’s Metering division between the two periods under review strongly influenced both sales and orders, by a negative 20% and 21%, respectively. Excluding these effects, PTD’s sales rose 7% and orders grew 11%. Including these effects, sales fell 13%, to €869 million, and orders declined 10%, to €868 million.

In the Transportation business area, Transportation Systems (TS) improved third-quarter Group profit to €74 million from €61 million a year earlier, and raised its earnings margin more than a point to 6.7%. Third-quarter sales of €1.100 billion were unchanged from the level a year earlier, as TS continued to convert previous large orders into current business. While third-quarter orders of €732 million were down 19% year-over-year, including six percentage points due to currency translation, the Group’s order backlog kept pace with recent quarters, at €11.2 billion.

SV further stabilized its earnings position, achieving €111 million in Group profit and improving its earnings margin more than two full points. Diesel injection systems and onboard infotainment systems supported profitability. Both sales and orders were €2.090 billion, down 6% year-over-year, partly caused by the previously communicated transfer of SV’s approximately €800 million (annualized) automotive cockpit module business to an existing joint venture with Faurecia on May 31, 2003. Excluding this transfer and a 6% negative currency translation effect, SV’s sales and orders grew year-over-year.

In the Medical business area, Med led all Siemens Groups with €332 million in Group profit, including a €74 million gain related to the contribution of a portion of its electromedical systems business to its joint venture with Dräger Medical. For comparison, Group profit a year earlier was €243 million. Healthy demand for Med’s innovative imaging systems contributed strongly to quarterly results. Excluding currency translation effects that cut 13 percentage points from sales growth and 12 points from order development, Med increased sales 4% and orders 1% compared to the prior-year quarter despite slower market growth, particularly in the U.S. Including currency translation, third-quarter sales of €1.721 billion were down 9% and orders of €1.702 billion declined 11% year-over-year.

In the Lighting business area, Osram raised its earnings margin above 10% and recorded Group profit of €98 million, compared to €102 million a year earlier. Higher-margin new products continued to brighten Osram’s profitability picture, especially at the Opto Semiconductors division. Excluding currency translation effects that cut 12 percentage points from sales and order growth, volume grew 2% compared to the prior-year quarter. Including currency translation, third-quarter sales and orders of €968 million were down 10% year-over-year.

Other operations consist primarily of non-Group-related operating activities and centrally-held operating equity investments. For the third quarter, other operations contributed Group profit of €6 million, compared to a negative €3 million in the same period a year earlier.

Corporate items, pensions and eliminations

Corporate items, pensions, and eliminations were a negative €377 million in the third quarter, compared to a negative €206 million in the same period a year earlier, which included a gain of €67 million on the sale of an investment. Corporate costs were €150 million, down from €165 million a year earlier. Non-allocated pension expense was higher in the current period, €189 million compared to €61 million a year earlier, and Siemens’ equity share of Infineon’s net loss was also higher, at €43 million compared to €31 million a year earlier.

Financing and Real Estate

Income before income taxes at Siemens Financial Services (SFS) was €71 million, down from €83 million in the third quarter a year earlier, a period that included a high level of investment income. Third-quarter results for Siemens Real Estate (SRE) rose year-over-year, to €77 million from €53 million, as gains from dispositions of real estate assets and reduced financing costs from lower interest rates more than offset the effects of lower occupancy rates.

Income Statement highlights for the third quarter

Net sales for Siemens worldwide were €17.380 billion in the third quarter, compared to €20.482 billion in the same period a year earlier. Net income for Siemens worldwide was €632 million compared to €725 million in the same quarter a year ago.

In Operations, net sales were €17.249 billion, down from €20.308 billion a year earlier. Gross profit margin increased to 28.9% from 28.0%. Among the Groups, in particular Med and SV recorded significantly higher margins as SD and PG reported lower results. Research and development expense was 7.2% of sales, compared to 7.0% in the third quarter a year earlier. Marketing, selling and general administrative expense was 18.1% of sales, up from 17.4% a year ago. Other operating income (expense), net was a positive €81 million, including €65 million in net gains from customer cancellations at PG and a €74 million gain arising from Med’s contribution of assets to a joint venture. Other operating income last year was €43 million, which included a €56 million gain on the sale of a business. Income from investments in other companies was a negative €3 million, down from €48 million in the prior-year period which included a €67 million gain on the sale of an investment.

Sales and order trends in the first nine months

Orders for the first nine months were €56.444 billion, down 16% from €66.854 billion a year earlier, and sales fell 13% to €54.455 billion from €62.726 billion. Excluding currency and the net effect of acquisitions and dispositions, the declines in orders and sales were 8% and 5%, respectively. Orders in Germany for the first nine months of fiscal 2003 were €12.654 billion, down 7% compared to the same period a year earlier. Sales in Germany decreased 7% to €12.282 billion. International orders dropped 18% year-over-year, to €43.790 billion. Excluding currency translation and the net effects of acquisitions and dispositions, the decline in international orders was 9%. International sales of €42.173 billion declined 15% year-over-year. Excluding currency translation and the net effects of acquisitions and dispositions, international sales decreased 5%.

Orders in the U.S. for the first nine months were down 36%, to €10.786 billion. Sales in the U.S. declined 25%, to €11.517 billion, driven by expected volume declines at PG following the end of the gas turbine energy boom and by a negative 15% currency translation effect. Nine-month orders in Asia-Pacific fell 7% to €7.526 billion and sales fell 17% year-over-year, to €6.106 billion, in part due to currency translation and the net effect of acquisitions and dispositions. Sales in China fell 19% to €1.922 billion in the first nine months of the current fiscal year, due in large part to the effect of currency translation and dispositions.

Income and earnings per share in the first nine months

Net income for the first nine months of fiscal 2003 was €1.721 billion. Net income for the first nine months a year earlier was €2.544 billion, including non-taxable gains of €936 million related to the sale of shares in Infineon. On a comparable basis, net income improved year-over-year, as did Group profit from Operations, which rose to €3.193 billion from €3.049 billion a year earlier. Earnings per share for the first nine months of this year were €1.93 compared to €2.86 for the same period a year ago.

Liquidity and Balance Sheet highlights for the first nine months

For Siemens worldwide, net cash from operating and investing activities for the first nine months of fiscal 2003 was €527 million. Net cash provided by the operating activities of the Operations component for the first nine months of fiscal 2003 was €1.532 billion after €442 million in supplemental cash contributions to Siemens’ pension trusts in Germany and the U.K. Changes in net working capital (current assets less current liabilities) within Operations used cash of €1.897 billion due in part to a decrease in other current liabilities in particular at PG, as a result of lower advance payments resulting from order cancellations in the U.S. Changes in net working capital in the current period also reflect an increase of inventories, particularly at SD and TS.

Net cash used in investing activities within Operations was €2.482 billion in the first nine months of this fiscal year, including PG's €505 million initial payment for the acquisition of Alstom’s industrial turbine business and the majority of the worldwide total of approximately €850 million in increases of investments and marketable securities. Investing activities in the first nine months a year ago included transactions related to Siemens’ acquisition of Atecs Mannesmann, most prominently a cash payment of €3.7 billion to Vodafone AG, partially offset by approximately €3.1 billion received from the disposition of Atecs businesses held for sale. The prior-year period also included sales of Infineon shares that generated proceeds totaling €1.522 billion.

Net cash provided by operating activities within the Financing and Real Estate component for the first nine months of fiscal 2003 was €388 million supported by strong earnings, in particular from SFS. Investing activities for the Financing and Real Estate component provided €15 million in net cash during the current nine-month period.

Net cash provided by operating activities of Siemens worldwide was €3.310 billion for the first nine months of fiscal 2003. In addition to the factors noted above, net cash includes a decrease in other current assets of €823 million, primarily from financial instruments related to our international business activities. Net cash used in investing activities of Siemens worldwide was €2.783 billion, influenced primarily by the investing activities of Operations, as noted above. Total assets decreased to €77.220 billion from €77.939 billion at September 30, 2002.

Funding Status of Pension Plans

During the nine-month period ended June 30, 2003, the funding status of Siemens’ principal pension plans improved by approximately €500 million compared to their status on September 30, 2002. The improvement is due primarily to a contribution of €377 million in real estate plus supplemental cash contributions totaling €442 million in the first quarter of fiscal 2003, combined with an increase in the market value of pension plan assets, whose asset allocation was modified during the current fiscal year, reduced by service and interest costs during the nine-month period.

Economic Value Added

Siemens worldwide EVA for the first nine months of fiscal 2003 was positive but lower compared to the same period a year ago, due primarily to nontaxable gains of €936 million on sales of shares in Infineon which occurred in the first two quarters a year earlier. Excluding these gains, EVA increased compared to the prior-year period.