UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of October 2018

 

Commission File Number 001-16429

 

ABB Ltd

(Translation of registrant’s name into English)

 

P.O. Box 1831, Affolternstrasse 44, CH-8050, Zurich, Switzerland

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F

Form 40-F

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

 

Indication by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes

No

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-

 

 

 

 

 


 

 

This Form 6-K consists of the following:

 

1.              Press release issued by ABB Ltd dated October 25, 2018 titled “Sustained growth”.

2.              Q3 2018 Financial Information.

 

The information provided by Item 2 above is hereby incorporated by reference into the Registration Statements on Form F-3 of ABB Ltd and ABB Finance (USA) Inc. (File Nos. 333-223907 and 333-223907-01) and registration statements on Form S-8 (File Nos. 333-190180, 333-181583, 333-179472, 333-171971 and 333-129271) each of which was previously filed with the Securities and Exchange Commission.

2 

  

 

 


 

 

 

ZURICH, SWITZERLAND, OCTOBER 25, 2018: THIRD QUARTER HIGHLIGHTS

Sustained growth

 

      Total orders +9%1 , up in all divisions and regions

      Base orders +7%, up in all divisions and regions

      Revenues +3%; service revenue up 11%

      Operational EBITA margin2  12.1% impacted by GEIS dilution

      Operational EPS2 +4%3

      Net income $603 million, +6%

      Cash flow from operating activities $565 million, solid cash delivery for the full year expected

“We demonstrated sustained growth, with total and base orders improving in all regions and all divisions”, said ABB CEO Ulrich Spiesshofer. “The continued execution of our strategy and steadily growing customer demand for our ABB Ability™ digital offering is driving order growth and increased revenues.”

“Our pioneering technology leadership is delivering solid results across all businesses, particularly in Robotics and Motion and Industrial Automation. Following the GE Industrial Solutions acquisition, Electrification Products is benefitting from a stronger presence in the important US market whilst the initial integration is dampening the operational EBITA margin as expected. Power Grids continues its transformation with good order momentum and is now at the target margin corridor of 10-14%.”

Key figures

 

 

ChangE

 

 

ChangE

($ in millions, unless otherwise indicated)

Q3 2018

Q3 2017

US$

Comparable1

9M 2018

9M 2017

US$

Comparable1

Orders

8,941

8,157

+10%

+9%

28,196

24,909

+13%

+7%

Revenues

9,257

8,724

+6%

+3%

26,773

25,032

+7%

+2%

Operational EBITA2

1,118

1,124

-1%

+4%4

3,345

3,109

+8%

+5%4

as % of operational revenues

12.1%

12.9%

-0.8pts

 

12.5%

12.5%

0.0pts

 

Net income

603

571

+6%

 

1,856

1,820

+2%

 

Basic EPS ($)

0.28

0.27

+6%3

 

0.87

0.85

+2%3

 

Operational EPS2 ($)

0.34

0.34

+0%3

+4%3

1.03

0.92

+12%3

+12%3

Cash flow from operating activities

565

954

-41%

 

1,057

1,930

-45%

 

Short-term outlook

Macroeconomic signs remain robust in Europe and are trending positively in the United States, with growth expected to continue in China. The overall global market is growing, with rising geopolitical uncertainties in various parts of the world. Oil prices and foreign exchange translation effects are expected to continue to influence the company’s results.

______

1  Growth rates for orders, third-party base orders and revenues are on a comparable basis (local currency adjusted for acquisitions and divestitures). US$ growth rates are presented in Key Figures table.

2  For non-GAAP measures, see the “Supplemental Financial Information” attachment to the press release.

3  EPS growth rates are computed using unrounded amounts. Comparable operational earnings per share is in constant currency (2014 exchange rates not adjusted for changes in the business portfolio).

4  Constant currency (not adjusted for portfolio changes).

 

 

1/6

 

 


 

 

Q3 2018 Group results

Orders

Total orders rose 9 percent (10 percent in US dollars), up in all divisions and regions compared to a year ago. Base orders (classified as orders below $15 million) increased 7 percent (12 percent in US dollars), up in all divisions and regions and supported by ABB’s comprehensive digital offering, ABB Ability™. Large orders represented 7 percent of total orders, compared to 9 percent in the same quarter of 2017. The order backlog was up 2 percent (flat in US dollars) compared to a year ago.

Service orders were up 8 percent (10 percent in US dollars). Service orders represent 18 percent of total orders, compared to 18 percent in the prior year period.

Changes in the business portfolio including impact from the acquisition of GE Industrial Solutions resulted in a net positive impact of 4 percent on total reported orders. Foreign exchange translation effects had a 3 percent negative impact on reported orders.

Market overview 

ABB saw robust demand from all regions in the quarter:

         Total orders from Europe rose 15 percent (10 percent in US dollars), with positive contributions from Germany, Italy, Sweden and Switzerland outpacing lower contributions from the United Kingdom and Russia. Base orders rose 6 percent (7 percent in US dollars).

 

         Total orders from the Americas increased 9 percent (23 percent in US dollars). Orders from the United States rose 10 percent (31 percent in US dollars), and orders were also higher in Brazil. Base orders from the Americas increased 9 percent (24 percent in US dollars).

 

         In Asia, Middle East and Africa (AMEA), total orders grew 4 percent (1 percent lower in US dollars) with strong orders from China, India, Vietnam and Egypt being dampened by lower demand from South Korea, Saudi Arabia and the UAE. In China, total orders increased 13 percent (15 percent in US dollars). Base orders for AMEA increased 5 percent (7 percent in US dollars).

Demand grew in the majority of ABB’s key customer segments:

         Utility demand was robust in the third quarter. Investments were driven by integration of renewables into the grid, digital solutions for smarter grid, and increasing focus on efficiency and reliability. A significant order was received in the quarter to enable integration and High Voltage Direct Current (HVDC) transmission of clean hydropower across Central Asia.

 

         Solid demand was seen across a broad spectrum of industries during the quarter. Investments by process industries, including mining and oil and gas, continued while orders from discrete industries such as food & beverage were healthy. Demand was strong for automation and robotics solutions, including from the automotive industry.

 

         Transport and infrastructure demand was positive, with data center investments growing well and continued investments in rail and specialty marine vessels. Construction demand was robust, with investment in commercial buildings such as hospitals and resorts.

Revenues

Revenues were up 3 percent (6 percent in US dollars), supported by continued strong growth in Robotics and Motion and good momentum in Electrification Products and Industrial Automation, while revenues in Power Grids remained steady. Service revenues were up 11 percent (14 percent in US dollars), bolstered by ABB’s leading digital portfolio, ABB Ability™ solutions. Services represented 18 percent of total revenues, up from 17 percent in the prior year period.

SUSTAINED GROWTH

2/6

 


 

 

Business portfolio changes including impact from the acquisition of GE Industrial Solutions contributed a net positive of 6 percent to reported revenues. Changes in exchange rates resulted in a translation impact on reported revenues of minus 3 percent.

The book-to-bill ratio increased to 0.97x at the end of the quarter compared with 0.94x in the previous year.

Operational EBITA

Operational EBITA of $1,118 million was steady in US dollars (up 4 percent in local currencies) in the third quarter compared to the prior year period. The operational EBITA margin of 12.1% was impacted 80 basis points by the acquisition of GE Industrial Solutions (GEIS) and also included an impact of 40 basis points from a charge related to the legacy non-core train retrofit business.

Net income, basic and operational earnings per share

Net income was $603 million, 6 percent higher year-on-year. ABB’s operational net income2 was steady at $727 million. Basic earnings per share of $0.28 was 6 percent higher year-on-year. Operational earnings per share of $0.34 was steady, and 4 percent better in constant currency terms3.

Cash flow from operating activities 

The cash flow from operating activities result of $565 million compares to $954 million in the third quarter of 2017. Relative to a year ago, cash flow reflects reductions in payables, timing of tax payments, as well as higher inventories and receivables due to order and revenue growth momentum. Cash delivery for the full year is expected to be solid overall while reflecting higher working capital in support of growth and due to the timing of project cash flows which are also impacted by the EPC business model change.

Q3 divisional performance

 ($ in millions, unless otherwise indicated)

Orders

Change

3rd party base orders

Change

Revenues

Change

Op EBITA %

CHANGE

US$

Comparable1

US$

Comparable1

US$

Comparable1

Power Grids

2,207

+7%

+11%

1,802

+9%

+13%

2,336

-5%

+0%

10.0%

-0.6pts

Electrification Products

3,215

+26%

+6%

3,008

+25%

+3%

3,199

+23%

+3%

13.5%

-2.6pts

Industrial Automation

1,643

+3%

+7%

1,451

+1%

+4%

1,758

-1%

+3%

14.1%

+0.7pts

Robotics and Motion

2,276

+12%

+15%

2,012

+8%

+12%

2,281

+4%

+7%

17.0%

+0.6pts

Corporate & other

(400)

 

 

(2)

 

 

(317)

 

 

 

 

ABB Group

8,941

+10%

+9%

8,271

+12%

+7%

9,257

+6%

+3%

12.1%

-0.8pts

Effective January 1, 2018, management responsibility and oversight of certain remaining engineering, procurement and construction (EPC) business, previously included in the Power Grids, Industrial Automation, Robotics and Motion operating segments, were transferred to a new non-core operating business within Corporate and Other. Previously reported amounts have been reclassified consistent with this new structure.

Power Grids

Continued order momentum in the quarter, with total orders rising 11 percent (7 percent higher in US dollars) and third-party base orders increasing 13 percent (9 percent higher in US dollars), was supported by Power Up initiatives. Orders included a large HVDC project, good orders from ABB Ability™ and Grid Automation as well as for services. The order backlog ended the third quarter 1 percent lower (5 percent lower in US dollars) year-on-year. Revenues were steady (5 percent lower in US dollars), with good service momentum mitigating the lower opening order backlog. The division delivered an operational EBITA margin of 10.0 percent, supported by cost reduction efforts and strong project execution.

 

SUSTAINED GROWTH

3/6

 

 


 

 

Electrification Products

Total orders increased 6 percent (26 percent in US dollars) and third-party base orders rose 3 percent (25 percent in US dollars). Growth was broad-based, with good orders for data centers in the quarter. Demand from process industries improved, and building orders were robust globally. Revenues improved 3 percent (23 percent in US dollars), driven mainly by growth in product revenues. Operational EBITA margin was 260 basis points lower year-on-year at 13.5 percent. The integration of GEIS diluted margins by 270 basis points, in line with expectations. Excluding GEIS, operating margins were supported by volume growth, pricing actions and ongoing cost control.

Industrial Automation

Total orders improved 7 percent (3 percent in US dollars), while third-party base orders grew 4 percent (1 percent in US dollars) compared to the prior year period. Recovery in process industries continued, with ongoing demand for ABB Ability™ enabled automation and control solutions. In addition, order activity for specialty marine vessels was strong. The order backlog ended the third quarter 2 percent lower (5 percent lower in US dollars) year-on-year. Revenues increased 3 percent (1 percent lower in US dollars), driven by strong book-and-bill business. Operational EBITA margins expanded by 70 basis points year-on-year to 14.1 percent, due to positive net savings, strong project execution and positive one-time effects.

Robotics and Motion

Order momentum was strong with total orders up 15 percent (12 percent in US dollars) and third-party base orders up 12 percent (8 percent in US dollars). Order growth was achieved across all businesses and regions, with double-digit growth in China and good demand from rail, process industries, automotive and food and beverage. Revenues improved 7 percent (4 percent in US dollars). Operational EBITA margin at 17.0 percent expanded 60 basis points year-on-year, driven by volume, mix and ongoing cost efforts.

Next Level strategy

ABB has been executing its Next Level strategy since 2014 through three focus areas: profitable growth, relentless execution, and business-led collaboration.

Profitable growth

ABB Ability™, the market leading industrial digital solutions offering, continues to power growth at ABB within its four entrepreneurial divisions. During the quarter, ABB Ability™ solutions were recognized as global leaders in Distributed Control Systems and Enterprise Asset Management software.

Large orders received in the quarter included a substantial order to supply HVDC converter stations that will transmit renewable energy from the Kyrgyz Republic and Tajikistan to Pakistan, and over $100 million of orders to supply state-of-the-art traction equipment to Swiss train manufacturer Stadler.

ABB continues to shift its center of gravity through ongoing portfolio management, driving towards greater competitiveness, higher growth and lower risk. In September, ABB acquired Intrion, which is headquartered in the Benelux. The transaction will advance ABB’s logistics robotics offering to gain a stronger foothold in a market that the International Federation of Robotics expects to grow at an annual rate of 20 to 25 percent from 2018 to 2020. In August, ABB sold its terminal block business in line with its ongoing active portfolio management.

The acquisition of GEIS was completed on June 30, 2018. It is expected that the integration of this business, now well underway, will have an approximately 30 basis points negative impact on ABB Group operating EBITA margins for the full year 2018 and approximately 130 basis points on the Electrification Products (EP) operating EBITA margin. ABB aims to bring the margin for the EP division, after the initial dampening effect, back into its operational EBITA margin target range of 15 to 19 percent during 2020.

Relentless execution

Throughout the third quarter, our focus on relentless execution continued to deliver net savings through ongoing cost management and productivity efforts.

SUSTAINED GROWTH

4/6

 

 

 


 

 

Business-led collaboration

In the third quarter, ABB transferred its turnkey AC Substation business to Linxon, a new joint-venture with SNC-Lavalin. This move delivers on ABB’s new business model for engineering, procurement and construction.

As part of the company’s brand development actions, Thomas & Betts, one of 20 ABB-owned brands, was officially migrated in the ABB global brand.

ABB was once again listed as the number one employer of choice in engineering sciences by Universum’s Swiss Student Research 2018. In the survey, ABB was pleased to have strengthened its position and increased its lead over competitors.

ABB is planning to provide a strategic update alongside its full year results on February 6, 2019.

Short- and long-term outlook

Macroeconomic signs remain robust in Europe and are trending positively in the United States, with growth expected to continue in China. The overall global market is growing, with rising geopolitical uncertainties in various parts of the world. Oil prices and foreign exchange translation effects are expected to continue to influence the company’s results.

The attractive long-term demand outlook in ABB’s three major customer sectors – utilities, industry and transport & infrastructure – is driven by the Energy and Fourth Industrial Revolutions. ABB is well-positioned to tap into these opportunities for long-term profitable growth with its market-leading digital offering ABB AbilityTM, strong market presence, broad geographic and business scope, technology leadership and financial strength.

More information

The Q3 2018 results press release and presentation slides are available on the ABB News Center at www.abb.com/news and on the Investor Relations homepage at www.abb.com/investorrelations.

 

ABB will host a media call today starting at 10:00 a.m. Central European Time (CET) (9:00 a.m. BST, 4:00 a.m. EST). The event will be accessible by conference call. The media conference call dial-in numbers are:

UK +44 207 107 0613

Sweden +46 8 5051 0031

Rest of Europe, +41 58 310 5000

US and Canada +1 866 291 4166 (toll-free) or +1 631 570 5613 (long-distance charges)

Lines will be open 10-15 minutes before the start of the call.

 

A conference call and webcast for analysts and investors is scheduled to begin today at 2:00 p.m. CET (1:00 p.m. BST, 8:00 a.m. EST). The webcast will be accessible on the ABB website at: new.abb.com/investorrelations/. Callers are requested to phone in 10 minutes before the start of the call. The analyst and investor conference call dial-in numbers are:

UK +44 207 107 0613

Sweden +46 8 5051 0031

Rest of Europe +41 58 310 5000

US and Canada +1 866 291 4166 (toll-free) or +1 631 570 5613 (long-distance charges)

 

A recorded session will be available as a webcast one hour after the end of the conference call.

 

ABB (ABBN: SIX Swiss Ex) is a pioneering technology leader in power grids, electrification products, industrial automation and robotics and motion, serving customers in utilities, industry and transport & infrastructure globally. Continuing a history of innovation spanning more than 130 years, ABB today is writing the future of industrial digitalization with two clear value propositions: bringing electricity from any power plant to any plug and automating industries from natural resources to finished products. As title partner in ABB Formula E, the fully electric international FIA motorsport class, ABB is pushing the boundaries of e-mobility to contribute to a sustainable future. ABB operates in more than 100 countries with about 147,000 employees. www.abb.com

 

SUSTAINED GROWTH

5/6

 

 

 

 


 

 

 

 

 

Investor calendar 2018/2019

Fourth quarter and full year 2018 results

February 6, 2019

Annual General Meeting

March 28, 2019

 

Important notice about forward-looking  information 

This press release includes forward-looking information and statements as well as other statements concerning the outlook for our business, including those in the sections of this release titled “Short-term outlook”, “Cash flow from operating activities”, “Next Level strategy” and “Short- and long-term outlook”. These statements are based on current expectations, estimates and projections about the factors that may affect our future performance, including global economic conditions, the economic conditions of the regions and industries that are major markets for ABB Ltd. These expectations, estimates and projections are generally identifiable by statements containing words such as “aims”, “expects,” “believes,” “estimates,” “targets,” “plans,” “is likely”, “intends” or similar expressions. However, there are many risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking information and statements made in this press release and which could affect our ability to achieve any or all of our stated targets. The important factors that could cause such differences include, among others, business risks associated with the volatile global economic environment and political conditions, costs associated with compliance activities, market acceptance of new products and services, changes in governmental regulations and currency exchange rates and such other factors as may be discussed from time to time in ABB Ltd’s filings with the U.S. Securities and Exchange Commission, including its Annual Reports on Form 20-F. Although ABB Ltd believes that its expectations reflected in any such forward-looking statement are based upon reasonable assumptions, it can give no assurance that those expectations will be achieved.

 

Zurich, October 25, 2018

Ulrich Spiesshofer, CEO

 


For more information, please contact:

Media Relations
Phone: +41 43 317 71 11
E-mail: media.relations@ch.abb.com

Investor Relations
Phone: +41 43 317 71 11
E-mail: investor.relations@ch.abb.com

ABB Ltd
Affolternstrasse 44
8050 Zurich
Switzerland

 

 

 

 

 

 

6/6

 


 

  

 

 

1              Q3 2018 Financial Information 


 

  

2              Q3 2018 Financial Information 


 

 

Key Figures

 

 

 

 

 

CHANGE

 

($ in millions, unless otherwise indicated)

Q3 2018

Q3 2017

US$

Comparable(1)

 

Orders

8,941

8,157

10%

9%

 

Order backlog (end September)

23,480

23,424

0%

2%

 

Revenues

9,257

8,724

6%

3%

 

Operational EBITA(1)

1,118

1,124

-1%

4%(2)

 

 

as % of operational revenues(1)

12.1%

12.9%

-0.8 pts

 

 

Net income attributable to ABB

603

571

6%

 

 

Basic earnings per share ($)

0.28

0.27

6%(3)

 

 

Operational earnings per share(1) ($)

0.34

0.34

0%(3)

4%(3)

 

Cash flow from operating activities

565

954

-41%

 



 

 

 

 

 

 

CHANGE

 

($ in millions, unless otherwise indicated)

9M 2018

9M 2017

US$

Comparable(1)

 

Orders

28,196

24,909

13%

7%

 

Revenues

26,773

25,032

7%

2%

 

Operational EBITA(1)

3,345

3,109

8%

5%(2)

 

 

as % of operational revenues(1)

12.5%

12.5%

0 pts

 

 

Net income attributable to ABB

1,856

1,820

2%

 

 

Basic earnings per share ($)

0.87

0.85

2%(3)

 

 

Operational earnings per share(1) ($)

1.03

0.92

12%(3)

12%(3)

 

Cash flow from operating activities

1,057

1,930

-45%

 

   

(1)  For a reconciliation of non-GAAP measures see “Supplemental Reconciliations and Definitions” on page 37.

(2)  Constant currency (not adjusted for portfolio changes).

(3) Earnings per share growth rates are computed using unrounded amounts. Comparable Operational earnings per share growth is in constant currency (2014 foreign exchange rates and not adjusted for changes in the business portfolio).

3              Q3 2018 Financial Information 


 

 

 

 

 

CHANGE

 

($ in millions, unless otherwise indicated)

Q3 2018

Q3 2017

US$

Local

Comparable

 

Orders

ABB Group

8,941

8,157

10%

13%

9%

 

 

Power Grids

2,207

2,072

7%

11%

11%

 

 

Electrification Products

3,215

2,547

26%

30%

6%

 

 

Industrial Automation

1,643

1,592

3%

7%

7%

 

 

Robotics and Motion

2,276

2,031

12%

15%

15%

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(400)

(85)

 

Third-party base orders

ABB Group

8,271

7,384

12%

16%

7%

 

 

Power Grids

1,802

1,654

9%

13%

13%

 

 

Electrification Products

3,008

2,407

25%

29%

3%

 

 

Industrial Automation

1,451

1,436

1%

4%

4%

 

 

Robotics and Motion

2,012

1,857

8%

12%

12%

 

 

Corporate and Other

(2)

30

 

 

 

 

Order backlog (end September)

ABB Group

23,480

23,424

0%

4%

2%

 

 

Power Grids

10,272

10,833

-5%

-1%

-1%

 

 

Electrification Products

4,426

3,228

37%

42%

8%

 

 

Industrial Automation

5,307

5,595

-5%

-2%

-2%

 

 

Robotics and Motion

4,204

3,958

6%

10%

10%

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(729)

(190)

 

Revenues

ABB Group

9,257

8,724

6%

9%

3%

 

 

Power Grids

2,336

2,449

-5%

0%

0%

 

 

Electrification Products

3,199

2,596

23%

27%

3%

 

 

Industrial Automation

1,758

1,780

-1%

3%

3%

 

 

Robotics and Motion

2,281

2,197

4%

7%

7%

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(317)

(298)

 

Operational EBITA

ABB Group

1,118

1,124

-1%

4%

 

 

 

Power Grids

232

259

-10%

-2%

 

 

 

Electrification Products

431

417

3%

7%

 

 

 

Industrial Automation

246

237

4%

8%

 

 

 

Robotics and Motion

386

361

7%

9%

 

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(177)

(150)

 

Operational EBITA %

ABB Group

12.1%

12.9%

 

 

 

 

 

Power Grids

10.0%

10.6%

 

 

 

 

 

Electrification Products

13.5%

16.1%

 

 

 

 

 

Industrial Automation

14.1%

13.4%

 

 

 

 

 

Robotics and Motion

17.0%

16.4%

 

 

 

 

Income from operations

ABB Group

908

888

 

 

 

 

 

Power Grids

220

232

 

 

 

 

 

Electrification Products

391

393

 

 

 

 

 

Industrial Automation

223

164

 

 

 

 

 

Robotics and Motion

354

336

 

 

 

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(280)

(237)

 

Income from operations %

ABB Group

9.8%

10.2%

 

 

 

 

 

Power Grids

9.4%

9.5%

 

 

 

 

 

Electrification Products

12.2%

15.1%

 

 

 

 

 

Industrial Automation

12.7%

9.2%

 

 

 

 

 

Robotics and Motion

15.5%

15.3%

 

 

 

 

Cash flow from operating activities

ABB Group

565

954

 

 

 

 

 

Power Grids

(162)

182

 

 

 

 

 

Electrification Products

375

304

 

 

 

 

 

Industrial Automation

174

236

 

 

 

 

 

Robotics and Motion

300

247

 

 

 

 

 

Corporate and Other

(122)

(15)

 

 

 

4              Q3 2018 Financial Information 


 

 

 

 

 

CHANGE

 

($ in millions, unless otherwise indicated)

9M 2018

9M 2017

US$

Local

Comparable

 

Orders

ABB Group

28,196

24,909

13%

11%

7%

 

 

Power Grids

7,264

6,823

6%

5%

5%

 

 

Electrification Products

8,728

7,587

15%

13%

5%

 

 

Industrial Automation

5,765

4,758

21%

17%

8%

 

 

Robotics and Motion

7,395

6,426

15%

12%

12%

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(956)

(685)

 

 

 

 

Third-party base orders

ABB Group

25,816

22,663

14%

12%

7%

 

 

Power Grids

5,922

5,378

10%

9%

9%

 

 

Electrification Products

8,208

7,165

15%

12%

4%

 

 

Industrial Automation

4,953

4,198

18%

15%

4%

 

 

Robotics and Motion

6,688

5,814

15%

12%

12%

 

 

Corporate and Other

45

108

 

 

 

 

Order backlog (end September)

ABB Group

23,480

23,424

0%

4%

2%

 

 

Power Grids

10,272

10,833

-5%

-1%

-1%

 

 

Electrification Products

4,426

3,228

37%

42%

8%

 

 

Industrial Automation

5,307

5,595

-5%

-2%

-2%

 

 

Robotics and Motion

4,204

3,958

6%

10%

10%

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(729)

(190)

 

Revenues

ABB Group

26,773

25,032

7%

5%

2%

 

 

Power Grids

7,075

7,307

-3%

-4%

-4%

 

 

Electrification Products

8,366

7,398

13%

11%

3%

 

 

Industrial Automation

5,456

4,868

12%

10%

1%

 

 

Robotics and Motion

6,806

6,199

10%

7%

7%

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(930)

(740)

 

Operational EBITA

ABB Group

3,345

3,109

8%

5%

 

 

 

Power Grids

696

743

-6%

-6%

 

 

 

Electrification Products

1,238

1,112

11%

8%

 

 

 

Industrial Automation

768

654

17%

16%

 

 

 

Robotics and Motion

1,098

957

15%

12%

 

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(455)

(357)

 

Operational EBITA %

ABB Group

12.5%

12.5%

 

 

 

 

 

Power Grids

9.8%

10.2%

 

 

 

 

 

Electrification Products

14.8%

15.1%

 

 

 

 

 

Industrial Automation

14.1%

13.5%

 

 

 

 

 

Robotics and Motion

16.1%

15.4%

 

 

 

 

Income from operations

ABB Group

2,765

2,788

 

 

 

 

 

Power Grids

589

669

 

 

 

 

 

Electrification Products

1,069

1,034

 

 

 

 

 

Industrial Automation

683

584

 

 

 

 

 

Robotics and Motion

1,020

879

 

 

 

 

 

Corporate and Other

 

 

 

 

 

 

(incl. inter-division eliminations)

(596)

(378)

 

 

 

 

Income from operations %

ABB Group

10.3%

11.1%

 

 

 

 

 

Power Grids

8.3%

9.2%

 

 

 

 

 

Electrification Products

12.8%

14.0%

 

 

 

 

 

Industrial Automation

12.5%

12.0%

 

 

 

 

 

Robotics and Motion

15.0%

14.2%

 

 

 

 

Cash flow from operating activities

ABB Group

1,057

1,930

 

 

 

 

 

Power Grids

(184)

449

 

 

 

 

 

Electrification Products

753

768

 

 

 

 

 

Industrial Automation

461

509

 

 

 

 

 

Robotics and Motion

724

731

 

 

 

 

 

Corporate and Other

(697)

(527)

 

 

 

5              Q3 2018 Financial Information 


 

Operational EBITA

 

 

 

Power

Electrification

Industrial

Robotics

 

($ in millions, unless otherwise indicated)

ABB

Grids

Products

Automation

and Motion

 

 

Q3 18

Q3 17

Q3 18

Q3 17

Q3 18

Q3 17

Q3 18

Q3 17

Q3 18

Q3 17

 

Revenues

9,257

8,724

2,336

2,449

3,199

2,596

1,758

1,780

2,281

2,197

 

FX/commodity timing

 

 

 

 

 

 

 

 

 

 

 

differences in total revenues

(50)

(3)

(23)

(4)

(13)

(15)

(4)

7

 

Operational revenues

9,207

8,721

2,313

2,445

3,199

2,596

1,745

1,765

2,277

2,204

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

908

888

220

232

391

393

223

164

354

336

 

Acquisition-related amortization

80

74

7

8

32

24

22

21

16

16

 

Restructuring and

 

 

 

 

 

 

 

 

 

 

 

restructuring-related expenses(1)

44

92

7

12

19

(2)

2

40

11

2

 

Changes in retained obligations of

 

 

 

 

 

 

 

 

 

 

 

divested businesses

75

 

Changes in pre-acquisition estimates

1

(2)

1

(2)

 

Gains and losses from sale of businesses

(66)

1

(83)

 

Acquisition-related expenses and

 

 

 

 

 

 

 

 

 

 

 

integration costs

75

27

1

60

8

1

18

1

 

Certain other non-operational items

7

43

7

8

1

1

2

 

FX/commodity timing

 

 

 

 

 

 

 

 

 

 

 

differences in income from operations

(6)

1

(9)

(2)

11

(4)

(3)

(7)

2

7

 

Operational EBITA

1,118

1,124

232

259

431

417

246

237

386

361

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational EBITA margin (%)

12.1%

12.9%

10.0%

10.6%

13.5%

16.1%

14.1%

13.4%

17.0%

16.4%



 

 

 

 

Power

Electrification

Industrial

Robotics

 

($ in millions, unless otherwise indicated)

ABB

Grids

Products

Automation

and Motion

 

 

9M 18

9M 17

9M 18

9M 17

9M 18

9M 17

9M 18

9M 17

9M 18

9M 17

 

Revenues

26,773

25,032

7,075

7,307

8,366

7,398

5,456

4,868

6,806

6,199

 

FX/commodity timing

 

 

 

 

 

 

 

 

 

 

 

differences in total revenues

37

(108)

33

(45)

14

(27)

(7)

(30)

7

(3)

 

Operational revenues

26,810

24,924

7,108

7,262

8,380

7,371

5,449

4,838

6,813

6,196

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

2,765

2,788

589

669

1,069

1,034

683

584

1,020

879

 

Acquisition-related amortization

225

189

27

25

71

76

66

25

48

50

 

Restructuring and

 

 

 

 

 

 

 

 

 

 

 

restructuring-related expenses(1)

61

224

18

33

22

11

4

49

13

29

 

Changes in obligations related to

 

 

 

 

 

 

 

 

 

 

 

divested businesses

92

94

 

Changes in pre-acquisition estimates

2

2

 

Gains and losses from sale of businesses

(61)

(330)

(81)

3

(2)

 

Acquisition-related expenses and

 

 

 

 

 

 

 

 

 

 

 

integration costs

152

41

4

1

128

11

3

25

1

 

Certain other non-operational items

49

193

34

60

(2)

13

1

1

7

 

FX/commodity timing

 

 

 

 

 

 

 

 

 

 

 

differences in income from operations

60

(90)

24

(45)

29

(33)

8

(28)

9

(1)

 

Operational EBITA

3,345

3,109

696

743

1,238

1,112

768

654

1,098

957

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational EBITA margin (%)

12.5%

12.5%

9.8%

10.2%

14.8%

15.1%

14.1%

13.5%

16.1%

15.4%

 

(1) Amounts in 2017 also include the incremental implementation costs in relation to the White Collar Productivity program.





6              Q3 2018 Financial Information 


 

Depreciation and Amortization

 

 

 

Power

Electrification

Industrial

Robotics

 

($ in millions)

ABB

Grids

Products

Automation

and Motion

 

 

Q3 18

Q3 17

Q3 18

Q3 17

Q3 18

Q3 17

Q3 18

Q3 17

Q3 18

Q3 17

 

Depreciation

197

191

41

44

63

52

18

17

35

35

 

Amortization

106

96

14

16

41

27

22

23

17

19

 

including total acquisition-related amortization of:

80

74

7

8

32

24

22

21

16

16



 

 

 

 

Power

Electrification

Industrial

Robotics

 

($ in millions)

ABB

Grids

Products

Automation

and Motion

 

 

9M 18

9M 17

9M 18

9M 17

9M 18

9M 17

9M 18

9M 17

9M 18

9M 17

 

Depreciation

578

555

128

130

165

152

52

41

105

103

 

Amortization

290

253

47

46

85

85

69

29

52

59

 

including total acquisition-related amortization of:

225

189

27

25

71

76

66

25

48

50



Orders received and revenues by region

 

($ in millions, unless otherwise indicated)

Orders received

CHANGE

Revenues

CHANGE

 

 

 

 

 

 

Com-

 

 

 

 

Com-

 

Q3 18

Q3 17

US$

Local

parable

Q3 18

Q3 17

US$

Local

parable

 

Europe

3,037

2,760

10%

14%

15%

3,123

3,058

2%

6%

3%

 

The Americas

2,869

2,339

23%

26%

9%

2,882

2,400

20%

23%

6%

 

Asia, Middle East and Africa

3,035

3,058

-1%

2%

4%

3,252

3,266

0%

3%

1%

 

ABB Group

8,941

8,157

10%

13%

9%

9,257

8,724

6%

9%

3%



 

 

($ in millions, unless otherwise indicated)

Orders received

CHANGE

Revenues

CHANGE

 

 

 

 

 

 

Com-

 

 

 

 

Com-

 

9M 18

9M 17

US$

Local

parable

9M 18

9M 17

US$

Local

parable

 

Europe

10,088

8,730

16%

10%

7%

9,343

8,565

9%

5%

1%

 

The Americas

7,861

7,142

10%

11%

5%

7,817

7,204

9%

10%

4%

 

Asia, Middle East and Africa

10,247

9,037

13%

11%

8%

9,613

9,263

4%

1%

1%

 

ABB Group

28,196

24,909

13%

11%

7%

26,773

25,032

7%

5%

2%

7              Q3 2018 Financial Information 


 

 

 

 

Interim Consolidated Financial Information

 

 

  

 

 

ABB Ltd Interim Consolidated Income Statements (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

Three months ended

 

($ in millions, except per share data in $)

Sep. 30, 2018

Sep. 30, 2017

Sep. 30, 2018

Sep. 30, 2017

 

Sales of products

21,772

20,686

7,560

7,235

 

Sales of services and other

5,001

4,346

1,697

1,489

 

Total revenues

26,773

25,032

9,257

8,724

 

Cost of sales of products

(15,685)

(14,810)

(5,576)

(5,158)

 

Cost of services and other

(2,984)

(2,603)

(1,014)

(910)

 

Total cost of sales

(18,669)

(17,413)

(6,590)

(6,068)

 

Gross profit

8,104

7,619

2,667

2,656

 

Selling, general and administrative expenses

(4,455)

(4,085)

(1,553)

(1,402)

 

Non-order related research and development expenses

(1,027)

(968)

(328)

(358)

 

Other income (expense), net

143

222

122

(8)

 

Income from operations

2,765

2,788

908

888

 

Interest and dividend income

64

55

13

20

 

Interest and other finance expense

(244)

(227)

(91)

(74)

 

Non-operational pension (cost) credit

87

34

29

20

 

Income from continuing operations before taxes

2,672

2,650

859

854

 

Provision for taxes

(722)

(702)

(223)

(246)

 

Income from continuing operations, net of tax

1,950

1,948

636

608

 

Income (loss) from discontinued operations, net of tax

3

(6)

(5)

 

Net income

1,953

1,942

636

603

 

Net income attributable to noncontrolling interests

(97)

(122)

(33)

(32)

 

Net income attributable to ABB

1,856

1,820

603

571

 

 

 

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

1,853

1,826

603

576

 

Net income

1,856

1,820

603

571

 

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

0.87

0.85

0.28

0.27

 

Net income

0.87

0.85

0.28

0.27

 

 

 

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

0.87

0.85

0.28

0.27

 

Net income

0.87

0.85

0.28

0.27

 

 

 

 

 

 

 

Weighted-average number of shares outstanding (in millions) used to compute:

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders

2,132

2,138

2,132

2,134

 

Diluted earnings per share attributable to ABB shareholders

2,140

2,147

2,138

2,142

 

Due to rounding, numbers presented may not add to the totals provided.

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Interim Consolidated Financial Information

 

 

 

 

8              Q3 2018 Financial Information 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABB Ltd Interim Condensed Consolidated Statements of Comprehensive

 

Income (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

Three months ended

 

($ in millions)

Sep. 30, 2018

Sep. 30, 2017

Sep. 30, 2018

Sep. 30, 2017

 

Total comprehensive income, net of tax

1,458

2,727

474

855

 

Total comprehensive income attributable to noncontrolling interests, net of tax

(74)

(139)

(14)

(36)

 

Total comprehensive income attributable to ABB shareholders, net of tax

1,384

2,588

460

819

 

Due to rounding, numbers presented may not add to the totals provided.

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Interim Consolidated Financial Information

 

 

 

 

9              Q3 2018 Financial Information 


 

 

 

 

 

ABB Ltd Interim Consolidated Balance Sheets (unaudited)

 

 

 

 

 

 

 

 

 

 

 

($ in millions, except share data)

Sep. 30, 2018

Dec. 31, 2017

 

Cash and equivalents

2,604

4,526

 

Marketable securities and short-term investments

953

1,102

 

Receivables, net

8,935

8,267

 

Contract assets

2,350

2,149

 

Inventories, net

6,077

5,255

 

Prepaid expenses

316

189

 

Other current assets

720

647

 

Total current assets

21,955

22,135

 

 

 

 

 

Property, plant and equipment, net

5,580

5,363

 

Goodwill

12,426

11,199

 

Other intangible assets, net

2,894

2,622

 

Prepaid pension and other employee benefits

170

144

 

Investments in equity-accounted companies

168

158

 

Deferred taxes

962

1,250

 

Other non-current assets

497

587

 

Total assets

44,652

43,458

 

 

 

 

 

Accounts payable, trade

5,825

5,419

 

Contract liabilities

2,700

2,908

 

Short-term debt and current maturities of long-term debt

2,883

738

 

Provisions for warranties

1,184

1,231

 

Other provisions

1,733

1,882

 

Other current liabilities

4,233

4,291

 

Total current liabilities

18,558

16,469

 

 

 

 

 

Long-term debt

6,619

6,709

 

Pension and other employee benefits

1,760

1,882

 

Deferred taxes

1,190

1,099

 

Other non-current liabilities

1,876

1,950

 

Total liabilities

30,003

28,109

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

Common stock

 

 

 

(2,168,148,264 issued shares at September 30, 2018, and December 31, 2017)

188

188

 

Additional paid-in capital

43

29

 

Retained earnings

19,522

19,594

 

Accumulated other comprehensive loss

(4,826)

(4,345)

 

Treasury stock, at cost

 

 

 

(36,344,658 and 29,541,775 shares at September 30, 2018, and December 31, 2017, respectively)

(824)

(647)

 

Total ABB stockholders’ equity

14,103

14,819

 

Noncontrolling interests

546

530

 

Total stockholders’ equity

14,649

15,349

 

Total liabilities and stockholders’ equity

44,652

43,458

 

Due to rounding, numbers presented may not add to the totals provided.

 

 

 

 

 

 

 

See Notes to the Interim Consolidated Financial Information

 

 

10              Q3 2018 Financial Information 


 

 

 

 

 

 

 

ABB Ltd Interim Consolidated Statements of Cash Flows (unaudited)

 

 

 

 

 

 

 

 

Nine months ended

Three months ended

 

($ in millions)

Sep. 30, 2018

Sep. 30, 2017

Sep. 30, 2018

Sep. 30, 2017

 

Operating activities:

 

 

 

 

 

Net income

1,953

1,942

636

603

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

868

808

303

287

 

Deferred taxes

38

40

(12)

(3)

 

Net loss (gain) from derivatives and foreign exchange

93

5

34

 

Net loss (gain) from sale of property, plant and equipment

(59)

(22)

(20)

(12)

 

Net loss (gain) from sale of businesses

(61)

(330)

(66)

1

 

Share-based payment arrangements

39

41

11

14

 

Other

(97)

21

(63)

(16)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Trade receivables, net

(261)

(148)

(119)

(5)

 

Contract assets and liabilities

(447)

(244)

(141)

(135)

 

Inventories, net

(623)

(306)

(176)

(72)

 

Accounts payable, trade

162

279

(56)

50

 

Accrued liabilities

178

101

337

234

 

Provisions, net

(107)

(87)

111

(66)

 

Income taxes payable and receivable

(96)

41

(9)

48

 

Other assets and liabilities, net

(523)

(211)

(171)

(8)

 

Net cash provided by operating activities

1,057

1,930

565

954

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of marketable securities (available-for-sale)

(309)

(300)

(275)

(26)

 

Purchases of short-term investments

(24)

(133)

(59)

 

Purchases of property, plant and equipment and intangible assets

(674)

(620)

(239)

(203)

 

Acquisition of businesses (net of cash acquired)

 

 

 

 

 

and increases in cost- and equity-accounted companies

(2,549)

(2,119)

(31)

(2,101)

 

Proceeds from sales of marketable securities (available-for-sale)

87

502

56

12

 

Proceeds from maturity of marketable securities (available-for-sale)

160

100

36

 

Proceeds from short-term investments

304

899

19

25

 

Proceeds from sales of property, plant and equipment

53

50

8

20

 

Proceeds from sales of businesses (net of transaction costs

 

 

 

 

 

and cash disposed) and cost- and equity-accounted companies

127

664

136

(9)

 

Net cash from settlement of foreign currency derivatives

(39)

92

(10)

59

 

Other investing activities

(137)

29

(14)

7

 

Net cash used in investing activities

(3,001)

(836)

(314)

(2,275)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net changes in debt with original maturities of 90 days or less

566

363

(677)

(47)

 

Increase in debt

1,915

901

14

11

 

Repayment of debt

(344)

(657)

(247)

(67)

 

Delivery of shares

42

86

 

Purchase of treasury stock

(250)

(251)

 

Dividends paid

(1,717)

(1,635)

 

Dividends paid to noncontrolling shareholders

(126)

(121)

(5)

 

Other financing activities

41

(14)

30

1

 

Net cash provided by (used in) financing activities

127

(1,328)

(880)

(107)

 

 

 

 

 

 

 

Effects of exchange rate changes on cash and equivalents

(105)

239

(50)

59

 

Net change in cash and equivalents – continuing operations

(1,922)

5

(679)

(1,369)

 

 

 

 

 

 

 

Cash and equivalents, beginning of period

4,526

3,644

3,283

5,018

 

Cash and equivalents, end of period

2,604

3,649

2,604

3,649

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

Interest paid

148

139

30

24

 

Taxes paid

781

651

250

208

 

Due to rounding, numbers presented may not add to the totals provided.

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Interim Consolidated Financial Information

 

 

 

 

11              Q3 2018 Financial Information 


 

 

 

 

 

 

 

 

 

 

 

ABB Ltd Interim Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

Common stock

Additional paid-in capital

Retained earnings

Accumulated

other comprehensive loss

Treasury stock

Total ABB

stockholders’ equity

Non-

controlling interests

Total stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

192

24

19,925

(5,187)

(1,559)

13,395

502

13,897

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Net income

 

 

1,820

 

 

1,820

122

1,942

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

adjustments, net of tax of $1

 

 

 

850

 

850

17

867

 

Effect of change in fair value of

 

 

 

 

 

 

 

 

 

available-for-sale securities,

 

 

 

 

 

 

 

 

 

net of tax of $1

 

 

 

3

 

3

 

3

 

Unrecognized income (expense)

 

 

 

 

 

 

 

 

 

related to pensions and other

 

 

 

 

 

 

 

 

 

postretirement plans,

 

 

 

 

 

 

 

 

 

net of tax of $(24)

 

 

 

(90)

 

(90)

 

(90)

 

Change in derivatives qualifying as

 

 

 

 

 

 

 

 

 

cash flow hedges, net of tax of $1

 

 

 

5

 

5

 

5

 

Total comprehensive income

 

 

 

 

 

2,588

139

2,727

 

Changes in noncontrolling interests

 

3

 

 

 

3

(4)

(1)

 

Dividends to

 

 

 

 

 

 

 

 

 

noncontrolling shareholders

 

 

 

 

 

(128)

(128)

 

Dividends paid to shareholders

 

 

(1,622)

 

 

(1,622)

 

(1,622)

 

Share-based payment arrangements

 

41

 

 

 

41

 

41

 

Cancellation of treasury shares

(4)

(27)

(922)

 

953

 

 

Purchase of treasury stock

 

 

 

 

(251)

(251)

 

(251)

 

Delivery of shares

 

(33)

 

 

119

86

 

86

 

Call options

 

4

 

 

 

4

 

4

 

Balance at September 30, 2017

188

11

19,201

(4,418)

(738)

14,244

509

14,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

188

29

19,594

(4,345)

(647)

14,819

530

15,349

 

Cumulative effect of changes in

 

 

 

 

 

 

 

 

 

accounting principles

 

 

(192)

(9)

 

(201)

 

(201)

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Net income

 

 

1,856

 

 

1,856

97

1,953

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

adjustments, net of tax of $(2)

 

 

 

(543)

 

(543)

(23)

(566)

 

Effect of change in fair value of

 

 

 

 

 

 

 

 

 

available-for-sale securities,

 

 

 

 

 

 

 

 

 

net of tax of $(1)

 

 

 

(5)

 

(5)

 

(5)

 

Unrecognized income (expense)

 

 

 

 

 

 

 

 

 

related to pensions and other

 

 

 

 

 

 

 

 

 

postretirement plans,

 

 

 

 

 

 

 

 

 

net of tax of $33

 

 

 

98

 

98

 

98

 

Change in derivatives qualifying as

 

 

 

 

 

 

 

 

 

cash flow hedges, net of tax of $(4)

 

 

 

(22)

 

(22)

 

(22)

 

Total comprehensive income

 

 

 

 

 

1,384

74

1,458

 

Changes in noncontrolling interests

 

 

 

 

 

(23)

(23)

 

Noncontrolling interests recognized in

 

 

 

 

 

 

 

 

 

connection with business combination

 

 

 

 

 

107

107

 

Dividends to

 

 

 

 

 

 

 

 

 

noncontrolling shareholders

 

 

 

 

 

(142)

(142)

 

Dividends paid to shareholders

 

 

(1,736)

 

 

(1,736)

 

(1,736)

 

Share-based payment arrangements

 

39

 

 

 

39

 

39

 

Purchase of treasury stock

 

 

 

 

(249)

(249)

 

(249)

 

Delivery of shares

 

(31)

 

 

73

42

 

42

 

Call options

 

5

 

 

 

5

 

5

 

Balance at September 30, 2018

188

43

19,522

(4,826)

(824)

14,103

546

14,649

 

Due to rounding, numbers presented may not add to the totals provided.

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Interim Consolidated Financial Information

12              Q3 2018 Financial Information 


 

Notes to the Interim Consolidated Financial Information (unaudited)

 

 

 

 

Note 1

The Company and basis of presentation

 

ABB Ltd and its subsidiaries (collectively, the Company) together form a pioneering technology leader in power grids, electrification products, industrial automation and robotics and motion, serving customers in utilities, industry and transport & infrastructure globally.

 

The Company’s Interim Consolidated Financial Information is prepared in accordance with United States of America generally accepted accounting principles (U.S. GAAP) for interim financial reporting. As such, the Interim Consolidated Financial Information does not include all the information and notes required under U.S. GAAP for annual consolidated financial statements. Therefore, such financial information should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report for the year ended December 31, 2017.

 

The preparation of financial information in conformity with U.S. GAAP requires management to make assumptions and estimates that directly affect the amounts reported in the Interim Consolidated Financial Information. The most significant, difficult and subjective of such accounting assumptions and estimates include:

·           estimates and assumptions used in determining the fair values of assets and liabilities assumed in business combinations,

·           assumptions used in determining inventory obsolescence and net realizable value,

·           estimates used to record expected costs for employee severance in connection with restructuring programs,

·           assumptions and projections, principally related to future material, labor and project related overhead costs, used in determining the percentage of completion on projects,

·           estimates of loss contingencies associated with litigation or threatened litigation and other claims and inquiries, environmental damages, product warranties, self-insurance reserves, regulatory and other proceedings,

·           assumptions used in the calculation of pension and postretirement benefits and the fair value of pension plan assets,

·           estimates to determine valuation allowances for deferred tax assets and amounts recorded for uncertain tax positions,

·           growth rates, discount rates and other assumptions used to determine impairment of long lived assets and in testing goodwill for impairment,

·           assessment of the allowance for doubtful accounts, and

·           the estimated effective annual tax rate applicable to the interim financial information.

 

The actual results and outcomes may differ from the Company’s estimates and assumptions.

 

A portion of the Company’s activities (primarily long-term construction activities) has an operating cycle that exceeds one year. For classification of current assets and liabilities related to such activities, the Company elected to use the duration of the individual contracts as its operating cycle. Accordingly, there are accounts receivable, contract assets, inventories and provisions related to these contracts which will not be realized within one year that have been classified as current.

 

Basis of presentation

In the opinion of management, the unaudited Interim Consolidated Financial Information contains all necessary adjustments to present fairly the financial position, results of operations and cash flows for the reported interim periods. Management considers all such adjustments to be of a normal recurring nature.

 

The Company has retained obligations (primarily for environmental and taxes) related to businesses disposed or otherwise exited that qualified as discontinued operations. Changes to these retained obligations are recorded in income/loss from discontinued operations, net of tax.

 

The Interim Consolidated Financial Information is presented in United States dollars ($) unless otherwise stated. Due to rounding, numbers presented in the Interim Consolidated Financial Information may not add to the totals provided.

 

Reclassifications

Certain amounts reported in the Interim Consolidated Financial Information for prior periods have been reclassified to conform to the current year’s presentation. These changes primarily relate to:

·           the reorganization of the Company’s operating segments (see Note 15), and

·           as a result of the adoption of a number of accounting pronouncements (see Note 2):

(i) the reclassification of Unbilled receivables from Receivables to Contract assets,

(ii) the reclassification of Billings in excess of sales, Advances from customers, certain advances to customers previously reported as a reduction in Inventories, and deferred revenues previously reported in Other current liabilities, to Contract liabilities, and

(iii) the reclassification of certain net periodic pension and postretirement benefits costs/credits from Total cost of sales, Selling, general and administrative expenses and Non-order related research and development expenses to Non-operational pension (cost) credit.



13              Q3 2018 Financial Information 


 

Note 2

Recent accounting pronouncements

 

Applicable for current periods

Revenue from contracts with customers

As of January 1, 2018, the Company adopted a new accounting standard for recognizing revenues from contracts with customers. The new standard, which supersedes substantially all previously existing revenue recognition guidance, provides a single comprehensive model for recognizing revenues on the transfer of promised goods or services to customers for an amount that reflects the consideration that is expected to be received for those goods or services. The adoption of this standard resulted in only immaterial differences between the identification of performance obligations and the unit of accounting determination. Therefore, the cumulative effect on retained earnings of retrospectively applying this standard was not significant. However, total assets and total liabilities increased by $196 million due to the reclassification of certain advances from customers, previously reported as a reduction in Inventories, to liabilities.

 

While comparative information has not been restated and continues to be measured and reported under the accounting standards in effect for those periods presented, the following prior period amounts have been reclassified in the Consolidated Balance Sheets to conform to the presentation requirements of the new standard:

  

 

December 31, 2017

 

 

 

Previously

As

 

 

 

Previously

As

 

($ in millions)

 

reported

adjusted

 

 

 

reported

adjusted

 

Consolidated Balance Sheet

 

 

 

 

 

 

Current assets

 

 

 

 

Current liabilities

 

 

 

 

Receivables, net(1)

 

10,416

8,267

 

Contract liabilities(2), (3), (4)

 

2,908

 

Contract assets(1)

 

2,149

 

Billings in excess of sales(2)

 

1,251

 

Inventories, net(3)

 

5,059

5,255

 

Advances from customers(2), (3)

 

1,367

 

 

 

 

 

 

Other current liabilities(4)

 

4,385

4,291

 

Total assets

 

43,262

43,458

 

Total liabilities

 

27,913

28,109

  

(1) $2,149 million of unbilled receivables previously included in Receivables, have been reclassified to Contract assets.

(2) Amounts previously presented as billings in excess of sales and advances from customers, have been reclassified to Contract liabilities.

(3) $196 million of advances from customers, previously recorded net within Inventories, have been reclassified to advances from customers and recorded within Contract liabilities.

(4) Certain amounts recorded as deferred revenues totaling $94 million, have been reclassified from Other current liabilities to Contract liabilities.

 

Other than the reclassifications of 2017 balances in the table above and the additional disclosure requirements, the impact of the adoption on the Company’s Interim Consolidated Financial Information for the nine and three months ended September 30, 2018, was not significant.

 

Income taxes – Intra-entity transfers of assets other than inventory

In January 2018, the Company adopted an accounting standard update requiring it to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset has been sold to an outside party. This update was applied on a modified retrospective basis and resulted in a net reduction in deferred tax assets of $201 million with a corresponding reduction in retained earnings.

 

Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost

In January 2018, the Company adopted an accounting standard update which changes how employers that sponsor defined benefit pension plans and other postretirement plans present the net periodic benefit cost in the income statement. Under this standard, the Company is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations. Under the amendment only the current service cost component is allowed to be capitalized as a cost of internally manufactured inventory or a self-constructed asset. This update was applied retrospectively for the presentation requirements, and prospectively for the capitalization of the current service cost component requirements. The Company has used the practical expedient, as the amount of other components of net periodic benefit cost capitalized in inventory for prior periods is not significant.

 

For the nine and three months ended September 30, 2017, the Company reclassified $34 million and $20 million, respectively, of income and presented it outside of income from operations relating to net periodic pension costs.

 

Recognition and measurement of financial assets and financial liabilities

In January 2018, the Company adopted two accounting standard updates enhancing the reporting model for financial instruments, which include amendments to address aspects of recognition, measurement, presentation and disclosure. The Company is required to measure equity investments (except those accounted for under the equity method) at fair value with changes in fair value recognized in net income. The adoption of these updates resulted in the reclassification of the net cumulative unrealized gains on available-for-sale equity securities of $9 million (net of tax) at December 31, 2017 from Total accumulated comprehensive loss to Retained earnings on January 1, 2018.

 

14              Q3 2018 Financial Information 


 

Classification of certain cash receipts and cash payments in the statement of cash flows

In January 2018, the company adopted an accounting standard update which clarifies how certain cash receipts and cash payments, including debt prepayment or extinguishment costs, the settlement of zero coupon debt instruments, contingent consideration paid after a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization, should be presented and classified in the statement of cash flows. This update was applied retrospectively and did not have a significant impact on the consolidated financial statements.

 

Statement of cash flows - Restricted cash

In January 2018, the Company adopted an accounting standard update which clarifies the classification and presentation of changes in restricted cash on the statement of cash flows. It requires the inclusion of cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This update did not have a significant impact on the consolidated financial statements.

 

Clarifying the definition of a business

In January 2018, the Company adopted an accounting standard update which narrows the definition of a business. It also provides a framework for determining whether a set of transferred assets and activities involves a business. This update was applied prospectively and did not have a significant impact on the consolidated financial statements.

 

Clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets

In January 2018, the Company adopted an accounting standard update which clarifies the scope of asset derecognition guidance, adds guidance for partial sales of nonfinancial assets and clarifies recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This update was applied retrospectively and did not have a significant impact on the consolidated financial statements.

 

Compensation—Stock Compensation

In January 2018, the Company adopted an accounting standard update which clarifies when to account for a change to the terms or conditions of a share‑based payment award as a modification. Under this update, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This update was applied prospectively and did not have a significant impact on the consolidated financial statements.

 

Applicable for future periods

Leases

In February 2016, an accounting standard update was issued that requires lessees to recognize lease assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12 months. The update, which supersedes existing lease guidance, will continue to classify leases as either finance or operating, with the classification determining the pattern of expense recognition in the income statement. This update is effective for the Company for annual and interim periods beginning January 1, 2019, and is applicable on a modified retrospective basis with various optional practical expedients.

 

In July 2018, a further accounting standard update was issued, allowing the Company the additional option of adopting the standard retrospectively with the cumulative-effect of initially applying the new standard recognized at the date of adoption in retained earnings.

 

The Company will elect to adopt the standard using the additional option outlined above and currently expects the update will increase total assets and total liabilities by approximately $1.5 billion. The Company continues to evaluate the impacts of the adoption of this update and therefore the expected impacts are subject to change.

 

Measurement of credit losses on financial instruments

In June 2016, an accounting standard update was issued which replaces the existing incurred loss impairment methodology for most financial assets with a new “current expected credit loss” model. The new model will result in the immediate recognition of the estimated credit losses expected to occur over the remaining life of financial assets such as trade and other receivables, held-to-maturity debt securities, loans and other instruments. Credit losses relating to available-for-sale debt securities will be measured in a manner similar to current GAAP, except that the losses will be recorded through an allowance for credit losses rather than as a direct write-down of the security.

 

This update is effective for the Company for annual and interim periods beginning January 1, 2020, with early adoption permitted for annual and interim periods beginning January 1, 2019. The Company is currently evaluating the impact of this update on its consolidated financial statements.

 

Derivatives and Hedging—Targeted improvements to accounting for hedging activities

In August 2017, an accounting standard update was issued which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. This update is effective for the Company for annual and interim periods beginning January 1, 2019. For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. The Company will adopt this update as of January 1, 2019, and is currently evaluating the impact of this update on its consolidated financial statements.

 

Reclassification of certain tax effects from accumulated other comprehensive income

In February 2018, an accounting standard update was issued which allows a reclassification of the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. This update is effective for the Company for annual and interim periods beginning January 1, 2019, with early adoption in any interim period permitted. The updated guidance is to be applied in the period of adoption or retrospectively to each period in which the effect of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income are recognized. The Company is currently evaluating the impact of this update on its consolidated financial statements.

 

Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract

In August 2018, an accounting standard update was issued which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective for the Company for annual and interim periods beginning January 1, 2020, with early adoption in any interim period permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

15              Q3 2018 Financial Information 


 

 

Disclosure Framework Changes to the disclosure requirements for defined benefit plans

In August 2018, an accounting standard update was issued which modifies the disclosure requirements for defined benefit pension or other postretirement benefit plans. The update removes certain disclosures relating to (i) amounts expected to be recognized in net periodic benefit cost over the next twelve months, (ii) plan assets expected to be returned to the Company, (iii) a one-percentage-point change in assumed health care costs, and (iv) related parties, including insurance and annuity contracts. It clarifies the disclosure requirements for both the projected and accumulated benefit obligations, as well as requiring additional disclosures for cash balance plans and explanations for significant gains and losses related to changes in the benefit obligations. This update is effective for the Company for all annual periods, beginning with the year ending December 31, 2020, on a retrospective basis, with early adoption permitted. This update will modify the Company’s disclosures but will not have a material effect on its consolidated financial statements.

 

Disclosure Framework — Changes to the disclosure requirements for fair value measurement

In August 2018, an accounting standard update was issued which modifies the disclosure requirements for fair value measurements. The update eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and 2 of the fair value hierarchy, the timing of transfers between levels and the Level 3 valuation process, while expanding the Level 3 disclosures to include the range and weighted average used to develop significant unobservable inputs and the changes in unrealized gains and losses on recurring fair value measurements. This update is effective for the Company for annual and interim periods beginning January 1, 2020, with early adoption permitted.  The changes and modifications to the Level 3 disclosures are to be applied prospectively, while all other amendments are to be applied respectively. The Company is currently evaluating the impact of this update on its disclosures but does not expect that it will have a material effect on its consolidated financial statements.



Note 3

Acquisitions and Divestments

 

Acquisitions

Acquisitions were as follows:

  

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions, except number of acquired businesses)

2018

2017

2018

2017

 

Acquisitions (net of cash acquired)(1)

2,525

2,108

27

2,099

 

Aggregate excess of purchase price over fair value of net assets

 

 

 

 

 

acquired(2)

1,429

1,338

62

1,334

 

Number of acquired businesses

3

4

2

2

 

(1) Excluding changes in cost and equity accounted companies

(2) Recorded as goodwill.

 

In the table above, the “Acquisitions” and “Aggregate excess of purchase price over fair value of net assets acquired” amounts for the nine months ended September 30, 2018, relate primarily to the acquisition of GE Industrial Solutions (GEIS). The amounts for the nine and

three months ended September 30, 2017, relate primarily to the acquisition of Bernecker + Rainer Industrie-Elektronik GmbH (B&R).

 

Acquisitions of controlling interests have been accounted for under the acquisition method and have been included in the Company’s Consolidated Financial Statements since the date of acquisition.

 

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the purchase price allocation for acquisitions is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the assets and liabilities becomes available.

 

On June 30, 2018, the Company acquired through numerous share and asset purchases substantially all the revenues, assets and liabilities of GEIS, GE’s global electrification solutions business. GEIS, headquartered in Atlanta, United States, provides technologies that distribute and control electricity and support the commercial, data center, health care, mining, renewable energy, oil and gas, water and telecommunications sectors. The resulting cash outflows for the Company amounted to $2,510 million (net of cash acquired of $192 million). The acquisition strengthens the Company’s global position in electrification and expands its access to the North American market through strong customer relationships, large installed base and extensive distribution networks and consequently the goodwill acquired represents expected operating synergies and cost savings as well as intangible assets that are not separable such as employee know-how and expertise. Given the complexity of the acquisition, the presentation of GEIS in the Company’s Financial Statements, including the allocation of the purchase price, is preliminary and likely to change in future periods.

 

On July 6, 2017, the Company acquired the shares of B&R. B&R is a worldwide provider of product- and software-based, open-architecture

solutions for machine and factory automation. This acquisition closes a gap in the Company’s industrial automation portfolio and consequently

the goodwill acquired represents the future benefits associated with product portfolio expansion.

 

16              Q3 2018 Financial Information 


 

The aggregate preliminary allocation of the purchase consideration for business acquisitions (including measurement period adjustments) in the nine months ended September 30, 2018 and 2017, was as follows:

  

 

Nine months ended September 30,

2018

 

2017

 

 

Allocated amounts

Weighted-

 

 

Weighted-

 

 

GEIS

Other

Total

average

 

Allocated

average

 

($ in millions)

 

 

 

useful life

 

 amounts 

useful life

 

Technology

87

-

87

7 years

 

412

7 years

 

Customer relationships

214

-

214

14 years

 

267

19 years

 

Trade names

122

-

122

13 years

 

85

10 years

 

Supply agreement

34

-

34

13 years

 

-

 

 

Order Backlog

-

-

-

 

 

1

3 months

 

Intangible assets

457

-

457

 

 

765

 

 

Fixed assets

411

15

426

 

 

131

 

 

Debt acquired

-

-

-

 

 

(50)

 

 

Deferred tax liabilities

(182)

(6)

(188)

 

 

(221)

 

 

Inventories

442

47

489

 

 

168

 

 

Other assets and liabilities, net(1)

(23)

(65)

(88)

 

 

(23)

 

 

Goodwill(2)

1,405

24

1,429

 

 

1,338

 

 

Total consideration (net of cash acquired)(3)

2,510

15

2,525

 

 

2,108

 

 

(1) Gross receivables from the GEIS acquisitions totaled $658 million; the fair value of which was $624 million after adjusting for contractual cash flows not expected to be collected.

(2) The Company does not expect the majority of the goodwill recognized to be deductible for income tax purposes.

(3) Primarily relates to the acquisition of GEIS in 2018 and B&R in 2017. Cash acquired in the GEIS acquisition totaled $192 million.

 

The Company’s Consolidated Income Statement for the three months ended September 30, 2018, includes total revenues of $634 million and a net loss of $24 million in respect of GEIS since the date of acquisition.

 

The unaudited pro forma financial information in the table below summarizes the combined pro forma results of the Company and GEIS for the nine and three months ended September 30, 2018 and 2017, as if GEIS had been acquired on January 1, 2017.

  

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions)

2018

2017

2018

2017

 

Total revenues

28,047

26,993

9,257

9,384

 

Income from continuing operations, net of tax

1,998

2,002

655

625

 

The pro forma results are for information purposes only and do not include any anticipated cost synergies or other effects of the planned integration of GEIS. Accordingly, such pro forma amounts are not necessarily indicative of the results that would have occurred had the acquisition been completed on the date indicated, nor are they indicative of the future operating results of the combined company.

 

The unaudited pro forma results above include certain adjustments related to the GEIS acquisition. The table below summarizes the adjustments necessary to present the pro forma financial information of the combined entity as if GEIS had been acquired on January 1, 2017.

  

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions)

2018

2017

2018

2017

 

Impact on cost of sales from additional amortization of intangible

 

 

 

 

 

assets

(10)

(16)

-

(5)

 

Impact on cost of sales from fair valuing acquired inventory

26

(26)

26

-

 

Impact on cost of sales from additional depreciation of fixed assets

(4)

(7)

-

(2)

 

Impact on selling, general and administrative expenses from

 

 

 

 

 

additional amortization of intangible assets

(5)

(11)

-

(2)

 

Impact on selling, general and administrative expenses from

 

 

 

 

 

acquisition-related costs

44

10

-

6

 

Impact on interest from financing costs

(15)

(48)

-

(15)

 

Taxation adjustments

(5)

26

(7)

6

 

Total pro forma adjustments

31

(72)

19

(12)

 

Business divestments

For the nine months ended September 30, 2017, the Company recorded net gains (including transaction costs) of $330 million in “Other income (expense), net” and an associated tax expense of $28 million in “Provision for taxes” relating primarily to the divestment in March 2017, of the Company’s high-voltage cable system and cable accessories businesses (the Cables business).

 

The Company has retained certain obligations of the Cables business and thus the Company remains directly or indirectly liable for these liabilities which existed at the date of the divestment. Subsequent to the divestment, in nine months ended September 30, 2017, the Company recorded a loss of $94 million for changes in the amounts recorded for these obligations. In addition, the Company has provided certain performance guarantees to third parties which guarantee the performance of the buyer under existing contracts with customers as well as for certain capital expenditures of the divested business (see Note 7).

 

17              Q3 2018 Financial Information 


 

Changes in total goodwill were as follows:

  

 

($ in millions)

 

 

 

Total Goodwill

 

Balance at January 1, 2017

 

 

 

9,501

 

Goodwill acquired during the year(1)

 

 

 

1,337

 

Goodwill allocated to disposals(2)

 

 

 

(2)

 

Exchange rate differences and other

 

 

 

363

 

Balance at December 31, 2017

 

 

 

11,199

 

Goodwill acquired during the year(3)

 

 

 

1,429

 

Goodwill allocated to disposals

 

 

 

(31)

 

Exchange rate differences and other

 

 

 

(171)

 

Balance at September 30, 2018

 

 

 

12,426

 

 (1) Includes primarily goodwill in respect of B&R, acquired in July 2017, which has been allocated to the Industrial Automation operating segment.

 (2) Goodwill allocated to the high-voltage cable system business sold in March 2017, within Corporate and Other (formerly reported in the Power Grids operating segment) was reported as assets held-for-sale at December 31, 2016.

 (3) Includes primarily goodwill in respect of GEIS, acquired in June 2018, which has been allocated to the Electrification Products operating segment.

  



Note 4

Cash and equivalents, marketable securities and short-term investments

 

Cash and equivalents, marketable securities and short-term investments consisted of the following:

  

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

Marketable

 

 

 

 

Gross

Gross

 

 

securities

 

 

 

 

unrealized

unrealized

 

Cash and

and short-term

 

($ in millions)

Cost basis

gains

losses

Fair value

equivalents

investments

 

Cash

1,908

 

 

1,908

1,908

 

Time deposits

715

 

 

715

696

19

 

Other short-term investments

295

 

 

295

295

 

Debt securities available-for-sale:

 

 

 

 

 

 

 

 

U.S. government obligations

213

(5)

208

208

 

 

European government obligations

33

33

33

 

 

Corporate

92

(2)

90

90

 

Equity securities available-for-sale

297

11

308

308

 

Total

3,553

11

(7)

3,557

2,604

953



 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

Marketable

 

 

 

 

Gross

Gross

 

 

 securities 

 

 

 

 

unrealized

unrealized

 

Cash and

and short-term

 

($ in millions)

Cost basis

gains

losses

Fair value

equivalents

investments

 

Cash

1,963

 

 

1,963

1,963

 

Time deposits

2,853

 

 

2,853

2,563

290

 

Other short-term investments

305

 

 

305

305

 

Debt securities available-for-sale:

 

 

 

 

 

 

 

 

U.S. government obligations

127

(2)

125

125

 

 

Other government obligations

2

2

2

 

 

Corporate

215

1

(1)

215

215

 

Equity securities available-for-sale

152

13

165

165

 

Total

5,617

14

(3)

5,628

4,526

1,102

 

Other short-term investments at September 30, 2018, and December 31, 2017, are receivables of $295 million and $305 million, respectively, representing reverse repurchase agreements. These collateralized lendings, made to a financial institution, have maturity dates of less than one year.



18              Q3 2018 Financial Information 


 

Note 5

Derivative financial instruments

 

The Company is exposed to certain currency, commodity, interest rate and equity risks arising from its global operating, financing and investing activities. The Company uses derivative instruments to reduce and manage the economic impact of these exposures.

 

Currency risk

Due to the global nature of the Company’s operations, many of its subsidiaries are exposed to currency risk in their operating activities from entering into transactions in currencies other than their functional currency. To manage such currency risks, the Company’s policies require the subsidiaries to hedge their foreign currency exposures from binding sales and purchase contracts denominated in foreign currencies. For forecasted foreign currency denominated sales of standard products and the related foreign currency denominated purchases, the Company’s policy is to hedge up to a maximum of 100 percent of the forecasted foreign currency denominated exposures, depending on the length of the forecasted exposures. Forecasted exposures greater than 12 months are not hedged. Forward foreign exchange contracts are the main instrument used to protect the Company against the volatility of future cash flows (caused by changes in exchange rates) of contracted and forecasted sales and purchases denominated in foreign currencies. In addition, within its treasury operations, the Company primarily uses foreign exchange swaps and forward foreign exchange contracts to manage the currency and timing mismatches arising in its liquidity management activities.

 

Commodity risk

Various commodity products are used in the Company’s manufacturing activities. Consequently it is exposed to volatility in future cash flows arising from changes in commodity prices. To manage the price risk of commodities, the Company’s policies require that the subsidiaries hedge the commodity price risk exposures from binding contracts, as well as at least 50 percent (up to a maximum of 100 percent) of the forecasted commodity exposure over the next 12 months or longer (up to a maximum of 18 months). Primarily swap contracts are used to manage the associated price risks of commodities.

 

Interest rate risk

The Company has issued bonds at fixed rates. Interest rate swaps are used to manage the interest rate risk associated with certain debt and generally such swaps are designated as fair value hedges. In addition, from time to time, the Company uses instruments such as interest rate swaps, interest rate futures, bond futures or forward rate agreements to manage interest rate risk arising from the Company’s balance sheet structure but does not designate such instruments as hedges.

 

Equity risk

The Company is exposed to fluctuations in the fair value of its warrant appreciation rights (WARs) issued under its management incentive plan. A WAR gives its holder the right to receive cash equal to the market price of an equivalent listed warrant on the date of exercise. To eliminate such risk, the Company has purchased cash-settled call options, indexed to the shares of the Company, which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs.

 

Volume of derivative activity

In general, while the Company’s primary objective in its use of derivatives is to minimize exposures arising from its business, certain derivatives are designated and qualify for hedge accounting treatment while others either are not designated or do not qualify for hedge accounting.

 

Foreign exchange and interest rate derivatives

The gross notional amounts of outstanding foreign exchange and interest rate derivatives (whether designated as hedges or not) were as follows:

  

 

Type of derivative

Total notional amounts at

 

($ in millions)

September 30, 2018

December 31, 2017

September 30, 2017

 

Foreign exchange contracts

13,548

17,280

16,562

 

Embedded foreign exchange derivatives

1,492

1,641

1,845

 

Interest rate contracts

3,590

5,706

5,310

 

Derivative commodity contracts

The Company uses derivatives to hedge its direct or indirect exposure to the movement in the prices of commodities which are primarily copper, silver, aluminum, steel and oil. The following table shows the notional amounts of outstanding derivatives (whether designated as hedges or not), on a net basis, to reflect the Company’s requirements for these commodities:

  

 

Type of derivative

Unit

Total notional amounts at

 

 

 

September 30, 2018

December 31, 2017

September 30, 2017

 

Copper swaps

metric tonnes

57,251

44,145

44,013

 

Silver swaps

ounces

2,692,781

1,966,729

2,074,213

 

Aluminum swaps

metric tonnes

13,960

7,700

5,300

 

Steel swaps

metric tonnes

22,408

 

Crude oil swaps

barrels

106,363

170,331

173,398

 

Equity derivatives

At September 30, 2018, December 31, 2017, and September 30, 2017, the Company held 41 million, 37 million and 43 million cash-settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of $23 million, $42 million and $35 million, respectively.

 

Cash flow hedges

As noted above, the Company mainly uses forward foreign exchange contracts to manage the foreign exchange risk of its operations, commodity swaps to manage its commodity risks and cash-settled call options to hedge its WAR liabilities. Where such instruments are designated and

19              Q3 2018 Financial Information 


 

qualify as cash flow hedges, the effective portion of the changes in their fair value is recorded in “Accumulated other comprehensive loss” and subsequently reclassified into earnings in the same line item and in the same period as the underlying hedged transaction affects earnings. Any ineffectiveness in the hedge relationship, or hedge component excluded from the assessment of effectiveness, is recognized in earnings during the current period.

 

At September 30, 2018, and December 31, 2017, “Accumulated other comprehensive loss” included net unrealized losses of $10 million and net unrealized gains of $12 million, respectively, net of tax, on derivatives designated as cash flow hedges. Of the amount at September 30, 2018, net losses of $3 million are expected to be reclassified to earnings in the following 12 months. At September 30, 2018, the longest maturity of a derivative classified as a cash flow hedge was 64 months.

 

The amount of gains or losses, net of tax, reclassified into earnings due to the discontinuance of cash flow hedge accounting was not significant in the nine and three months ended September 30, 2018 and 2017.

 

The pre-tax effects of derivative instruments, designated and qualifying as cash flow hedges, on “Accumulated other comprehensive loss” (OCI) and the Consolidated Income Statements were as follows:

  

 

 

Gains (losses) recognized in OCI

 

 

Gains (losses) reclassified from OCI

 

($ in millions)

on derivatives (effective portion)

 

 

into income (effective portion)

 

Nine months ended September 30,

2018

2017

 

 

2018

2017

 

Type of derivative

 

 

 

Location

 

 

 

Foreign exchange contracts

(7)

8

 

Total revenues

2

(2)

 

 

 

 

 

Total cost of sales

3

 

Commodity contracts

(7)

6

 

Total cost of sales

3

5

 

Cash-settled call options

(20)

11

 

SG&A expenses(1)

(13)

9

 

Total

(34)

25

 

 

(8)

15

 

 

 

Gains (losses) recognized in OCI

 

 

Gains (losses) reclassified from OCI

 

($ in millions)

on derivatives (effective portion)

 

 

into income (effective portion)

 

Three months ended September 30,

2018

2017

 

 

2018

2017

 

Type of derivative

 

 

 

Location

 

 

 

Foreign exchange contracts

(4)

(2)

 

Total revenues

(1)

1

 

 

 

 

 

Total cost of sales

 

Commodity contracts

(2)

4

 

Total cost of sales

1

 

Cash-settled call options

5

(1)

 

SG&A expenses(1)

4

 

Total

(1)

1

 

 

3

2

 

(1) SG&A  expenses  represent  “Selling,  general  and  administrative  expenses”.

 

The amounts in respect of gains (losses) recognized in income for hedge ineffectiveness and amounts excluded from effectiveness testing were not significant for the nine and three months ended September 30, 2018 and 2017.

 

Net derivative losses of $9 million and net derivative gains of $11 million, both net of tax, were reclassified from “Accumulated other comprehensive loss” to earnings during the nine months ended September 30, 2018 and 2017, respectively. During the three months ended September 30, 2018 and 2017, net derivative gains of $4 million and $1 million, both net of tax, respectively, were reclassified from “Accumulated other comprehensive loss” to earnings.

 

Fair value hedges

To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the fair value of these instruments, as well as the changes in the fair value of the risk component of the underlying debt being hedged, are recorded as offsetting gains and losses in “Interest and other finance expense”. Hedge ineffectiveness of instruments designated as fair value hedges for the nine and three months ended September 30, 2018 and 2017, was not significant.

 

The effect of interest rate contracts, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows:

  

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions)

2018

2017

2018

2017

 

Gains (losses) recognized in Interest and other finance expense:

 

 

 

 

 

 - on derivatives designated as fair value hedges

(36)

(3)

(16)

(3)

 

 - on hedged item

37

5

17

2

 

Derivatives not designated in hedge relationships

Derivative instruments that are not designated as hedges or do not qualify as either cash flow or fair value hedges are economic hedges used for risk management purposes. Gains and losses from changes in the fair values of such derivatives are recognized in the same line in the income statement as the economically hedged transaction.

 

Furthermore, under certain circumstances, the Company is required to split and account separately for foreign currency derivatives that are embedded within certain binding sales or purchase contracts denominated in a currency other than the functional currency of the subsidiary and the counterparty.

 

20              Q3 2018 Financial Information 


 

The gains (losses) recognized in the Consolidated Income Statements on derivatives not designated in hedging relationships were as follows:

  

 

Type of derivative not

Gains (losses) recognized in income

 

designated as a hedge

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions)

Location

2018

2017

2018

2017

 

Foreign exchange contracts

Total revenues

(231)

203

36

 

 

Total cost of sales

104

(40)

18

(14)

 

 

SG&A expenses(1)

10

(19)

6

(9)

 

 

Non-order related research

 

 

 

 

 

 

and development

(1)

(1)

 

 

Other income (expense), net

(1)

 

 

Interest and other finance expense

24

42

(13)

29

 

Embedded foreign exchange

Total revenues

84

(30)

17

(7)

 

contracts

Total cost of sales

(4)

1

(1)

1

 

 

SG&A expenses(1)

2

5

 

Commodity contracts

Total cost of sales

(39)

31

(24)

13

 

Other

Interest and other finance expense

3

(2)

(5)

1

 

Total

 

(48)

190

(3)

50

 

(1) SG&A  expenses  represent  “Selling,  general  and  administrative  expenses”.

 

The fair values of derivatives included in the Consolidated Balance Sheets were as follows:

  

 

 

September 30, 2018

 

 

Derivative assets

 

Derivative liabilities

 

 

Current in

Non-current in

 

Current in

Non-current in

 

 

“Other current

“Other non-current

 

“Other current

“Other non-current

 

($ in millions)

assets”

assets”

 

liabilities”

liabilities”

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

Foreign exchange contracts

1

 

3

4

 

Commodity contracts

 

2

 

Interest rate contracts

19

 

17

 

Cash-settled call options

14

9

 

 

Total

15

28

 

5

21

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

Foreign exchange contracts

134

20

 

186

37

 

Commodity contracts

10

1

 

24

 

Embedded foreign exchange derivatives

52

24

 

12

2

 

Total

196

45

 

222

39

 

Total fair value

211

73

 

227

60



 

 

 

December 31, 2017

 

 

Derivative assets

 

Derivative liabilities

 

 

Current in

Non-current in

 

Current in

Non-current in

 

 

“Other current

“Other non-current

 

“Other current

“Other non-current

 

($ in millions)

assets”

assets”

 

liabilities”

liabilities”

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

Foreign exchange contracts

4

 

3

1

 

Commodity contracts

6

 

 

Interest rate contracts

42

 

4

 

Cash-settled call options

25

16

 

 

Total

35

58

 

3

5

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

Foreign exchange contracts

142

25

 

190

63

 

Commodity contracts

35

1

 

6

 

Cross-currency interest rate swaps

 

2

 

Cash-settled call options

1

 

 

Embedded foreign exchange derivatives

32

16

 

22

7

 

Total

209

43

 

220

70

 

Total fair value

244

101

 

223

75

 

Close-out netting agreements provide for the termination, valuation and net settlement of some or all outstanding transactions between two counterparties on the occurrence of one or more pre-defined trigger events.

 

 

21              Q3 2018 Financial Information 


 

Although the Company is party to close-out netting agreements with most derivative counterparties, the fair values in the tables above and in the Consolidated Balance Sheets at September 30, 2018, and December 31, 2017, have been presented on a gross basis.

 

The Company’s netting agreements and other similar arrangements allow net settlements under certain conditions. At September 30, 2018, and December 31, 2017, information related to these offsetting arrangements was as follows:

  

 

($ in millions)

September 30, 2018

 

 

Gross amount

Derivative liabilities

Cash

Non-cash

 

 

Type of agreement or

of recognized

eligible for set-off

collateral

collateral

Net asset

 

similar arrangement

assets

in case of default

received

received

exposure

 

Derivatives

208

(123)

85

 

Reverse repurchase agreements

295

(295)

 

Total

503

(123)

(295)

85

 

 

 

 

 

 

 

 

($ in millions)

September 30, 2018

 

 

Gross amount

Derivative liabilities

Cash

Non-cash

 

 

Type of agreement or

 of recognized

eligible for set-off

collateral

collateral

Net liability

 

similar arrangement

liabilities

in case of default

pledged

pledged

exposure

 

Derivatives

273

(123)

150

 

Total

273

(123)

150

 

 

($ in millions)

December 31, 2017

 

 

Gross amount

Derivative liabilities

Cash

Non-cash

 

 

Type of agreement or

 of recognized

eligible for set-off

collateral

collateral

Net asset

 

similar arrangement

 assets 

in case of default

received

received

exposure

 

Derivatives

297

(172)

125

 

Reverse repurchase agreements

305

(305)

 

Total

602

(172)

(305)

125

 

 

 

 

 

 

 

 

($ in millions)

December 31, 2017

 

 

Gross amount

Derivative liabilities

Cash

Non-cash

 

 

Type of agreement or

 of recognized

eligible for set-off

collateral

 collateral 

Net liability

 

similar arrangement

liabilities

 in case of default

pledged

pledged

exposure

 

Derivatives

269

(172)

97

 

Total

269

(172)

97



Note 6

Fair values

 

The Company uses fair value measurement principles to record certain financial assets and liabilities on a recurring basis and, when necessary, to record certain non‑financial assets at fair value on a non‑recurring basis, as well as to determine fair value disclosures for certain financial instruments carried at amortized cost in the financial statements. Financial assets and liabilities recorded at fair value on a recurring basis include foreign currency, commodity and interest rate derivatives, as well as cash‑settled call options and available‑for‑sale securities. Non‑financial assets recorded at fair value on a non‑recurring basis include long‑lived assets that are reduced to their estimated fair value due to impairments.

 

Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation techniques including the market approach (using observable market data for identical or similar assets and liabilities), the income approach (discounted cash flow models) and the cost approach (using costs a market participant would incur to develop a comparable asset). Inputs used to determine the fair value of assets and liabilities are defined by a three‑level hierarchy, depending on the reliability of those inputs. The Company has categorized its financial assets and liabilities and non‑financial assets measured at fair value within this hierarchy based on whether the inputs to the valuation technique are observable or unobservable. An observable input is based on market data obtained from independent sources, while an unobservable input reflects the Company’s assumptions about market data.

 

The levels of the fair value hierarchy are as follows:

 

Level 1:  Valuation inputs consist of quoted prices in an active market for identical assets or liabilities (observable quoted prices). Assets and liabilities valued using Level 1 inputs include certain actively traded debt securities.

Level 2:  Valuation inputs consist of observable inputs (other than Level 1 inputs) such as actively quoted prices for similar assets, quoted prices in inactive markets and inputs other than quoted prices such as interest rate yield curves, credit spreads, or inputs derived from other observable data by interpolation, correlation, regression or other means. The adjustments applied to quoted prices or the inputs used in valuation models may be both observable and unobservable. In these cases, the fair value measurement is classified as Level 2 unless the unobservable portion of the adjustment or the unobservable input to the valuation model is significant, in which case the fair value measurement would be classified as Level 3. Assets and liabilities valued or disclosed using Level 2 inputs include investments in certain funds, reverse repurchase agreements, certain debt securities that are not actively traded, interest rate swaps, commodity swaps,

22              Q3 2018 Financial Information 


 

cash‑settled call options, forward foreign exchange contracts, foreign exchange swaps and forward rate agreements, time deposits, as well as financing receivables and debt.

Level 3:  Valuation inputs are based on the Company’s assumptions of relevant market data (unobservable input).

 

Whenever quoted prices involve bid‑ask spreads, the Company ordinarily determines fair values based on mid‑market quotes. However, for the purpose of determining the fair value of cash‑settled call options serving as hedges of the Company’s management incentive plan, bid prices are used.

 

When determining fair values based on quoted prices in an active market, the Company considers if the level of transaction activity for the financial instrument has significantly decreased, or would not be considered orderly. In such cases, the resulting changes in valuation techniques would be disclosed. If the market is considered disorderly or if quoted prices are not available, the Company is required to use another valuation technique, such as an income approach.

 

Recurring fair value measures

The fair values of financial assets and liabilities measured at fair value on a recurring basis were as follows:

  

 

 

September 30, 2018

 

($ in millions)

Level 1

Level 2

Level 3

Total fair value

 

Assets

 

 

 

 

 

Available-for-sale securities in “Marketable securities and short-term investments”:

 

 

 

 

 

Equity securities

308

308

 

Debt securities—U.S. government obligations

208

208

 

Debt securities—European government obligations

33

33

 

Debt securities—Corporate

90

90

 

Derivative assets—current in “Other current assets”

211

211

 

Derivative assets—non-current in “Other non-current assets”

73

73

 

Total

241

682

923

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Derivative liabilities—current in “Other current liabilities”

227

227

 

Derivative liabilities—non-current in “Other non-current liabilities”

60

60

 

Total

287

287



 

 

 

December 31, 2017

 

($ in millions)

Level 1

Level 2

Level 3

Total fair value

 

Assets

 

 

 

 

 

Available-for-sale securities in “Marketable securities and short-term investments”:

 

 

 

 

 

Equity securities

165

165

 

Debt securities—U.S. government obligations

125

125

 

Debt securities—Other government obligations

2

2

 

Debt securities—Corporate

215

215

 

Receivable in “Other non-current assets”:

 

 

 

 

 

Receivable under securities lending arrangement

79

79

 

Derivative assets—current in “Other current assets”

244

244

 

Derivative assets—non-current in “Other non-current assets”

101

101

 

Total

204

727

931

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Derivative liabilities—current in “Other current liabilities”

223

223

 

Derivative liabilities—non-current in “Other non-current liabilities”

75

75

 

Total

298

298

 

The Company uses the following methods and assumptions in estimating fair values of financial assets and liabilities measured at fair value on a recurring basis:

 

·           Available-for-sale securities in “Marketable securities and short-term investments” and “Other non-current assets”: If quoted market prices in active markets for identical assets are available, these are considered Level 1 inputs; however, when markets are not active, these inputs are considered Level 2. If such quoted market prices are not available, fair value is determined using market prices for similar assets or present value techniques, applying an appropriate risk-free interest rate adjusted for nonperformance risk. The inputs used in present value techniques are observable and fall into the Level 2 category. The fair value of the receivable under the securities lending arrangement has been determined based on the fair value of the security lent.

 

·           Derivatives: The fair values of derivative instruments are determined using quoted prices of identical instruments from an active market, if available (Level 1). If quoted prices are not available, price quotes for similar instruments, appropriately adjusted, or present value techniques, based on available market data, or option pricing models are used. Cash-settled call options hedging the Company’s WAR liability are valued based on bid prices of the equivalent listed warrant. The fair values obtained using price quotes for similar instruments or valuation techniques represent a Level 2 input unless significant unobservable inputs are used.

 

23              Q3 2018 Financial Information 


 

Non-recurring fair value measures

There were no significant non-recurring fair value measurements during the nine and three months ended September 30, 2018 and 2017.

 

Disclosure about financial instruments carried on a cost basis

The fair values of financial instruments carried on a cost basis were as follows:

  

 

 

September 30, 2018

 

($ in millions)

Carrying value

 

Level 1

Level 2

Level 3

Total fair value

 

Assets

 

 

 

 

 

 

 

Cash and equivalents (excluding available-for-sale securities

 

 

 

 

 

 

 

with original maturities up to 3 months):

 

 

 

 

 

 

 

Cash

1,908

 

1,908

1,908

 

Time deposits

696

 

696

696

 

Marketable securities and short-term investments

 

 

 

 

 

 

 

(excluding available-for-sale securities):

 

 

 

 

 

 

 

Time deposits

19

 

19

19

 

Receivables under reverse repurchase agreements

295

 

295

295

 

Other non-current assets:

 

 

 

 

 

 

 

Loans granted

40

 

41

41

 

Restricted time deposits

36

 

36

36

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Short-term debt and current maturities of long-term debt

 

 

 

 

 

 

 

(excluding capital lease obligations)

2,850

 

1,881

969

2,850

 

Long-term debt (excluding capital lease obligations)

6,460

 

5,828

721

6,549



 

 

 

December 31, 2017

 

($ in millions)

Carrying value

 

Level 1

Level 2

Level 3

Total fair value

 

Assets

 

 

 

 

 

 

 

Cash and equivalents (excluding available-for-sale securities

 

 

 

 

 

 

 

with original maturities up to 3 months):

 

 

 

 

 

 

 

Cash

1,963

 

1,963

1,963

 

Time deposits

2,563

 

2,563

2,563

 

Marketable securities and short-term investments

 

 

 

 

 

 

 

(excluding available-for-sale securities):

 

 

 

 

 

 

 

Time deposits

290

 

290

290

 

Receivables under reverse repurchase agreements

305

 

305

305

 

Other non-current assets:

 

 

 

 

 

 

 

Loans granted

32

 

33

33

 

Restricted time deposits

38

 

38

38

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Short-term debt and current maturities of long-term debt

 

 

 

 

 

 

 

(excluding capital lease obligations)

704

 

400

304

704

 

Long-term debt (excluding capital lease obligations)

6,569

 

6,046

775

6,821

 

The Company uses the following methods and assumptions in estimating fair values of financial instruments carried on a cost basis:

 

·           Cash and equivalents (excluding available-for-sale securities with original maturities up to 3 months), and Marketable securities and short-term investments (excluding available-for-sale securities): The carrying amounts approximate the fair values as the items are short-term in nature.

·           Other non-current assets: Includes (i) loans granted whose fair values are based on the carrying amount adjusted using a present value technique to reflect a premium or discount based on current market interest rates (Level 2 inputs), and (ii) restricted time deposits whose fair values approximate the carrying amounts (Level 1 inputs).

·           Short-term debt and current maturities of long-term debt (excluding capital lease obligations): Short-term debt includes commercial paper, bank borrowings and overdrafts. The carrying amounts of short-term debt and current maturities of long-term debt, excluding capital lease obligations, approximate their fair values.

·           Long-term debt (excluding capital lease obligations): Fair values of bonds are determined using quoted market prices (Level 1 inputs), if available. For bonds without available quoted market prices and other long-term debt, the fair values are determined using a discounted cash flow methodology based upon borrowing rates of similar debt instruments and reflecting appropriate adjustments for non-performance risk (Level 2 inputs).



24              Q3 2018 Financial Information 


 

Note 7

Commitments and contingencies

  

Contingencies—Regulatory, Compliance and Legal

Antitrust

In April 2014, the European Commission announced its decision regarding its investigation of anticompetitive practices in the cables industry and granted the Company full immunity from fines under the European Commission’s leniency program.

 

In Brazil, the Brazilian Antitrust Authority (CADE) has opened an investigation into certain power businesses of the Company, including flexible alternating current transmission systems (FACTS) and power transformers. With respect to these matters, management is cooperating fully with the authorities. An informed judgment about the outcome of these investigations or the amount of potential loss or range of loss for the Company, if any, relating to these investigations cannot be made at this stage.

 

Suspect payments

As a result of an internal investigation, the Company self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DoJ) in the United States as well as to the Serious Fraud Office (SFO) in the United Kingdom concerning certain of its past dealings with Unaoil and its subsidiaries, including alleged improper payments made by these entities to third parties. The SFO has commenced an investigation into this matter. The Company is cooperating fully with the authorities. At this time, it is not possible for the Company to make an informed judgment about the outcome of these matters.

 

General

In addition, the Company is aware of proceedings, or the threat of proceedings, against it and others in respect of private claims by customers and other third parties with regard to certain actual or alleged anticompetitive practices. Also, the Company is subject to other various legal proceedings, investigations, and claims that have not yet been resolved. With respect to the above mentioned regulatory matters and commercial litigation contingencies, the Company will bear the costs of the continuing investigations and any related legal proceedings.

 

Liabilities recognized

At September 30, 2018, and December 31, 2017, the Company had aggregate liabilities of $242 million and $233 million, respectively, included in “Other provisions” and “Other non-current liabilities”, for the above regulatory, compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it is not possible to make an informed judgment on the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be material adverse outcomes beyond the amounts accrued.

 

Guarantees

General

The following table provides quantitative data regarding the Company’s third-party guarantees. The maximum potential payments represent a “worst‑case scenario”, and do not reflect management’s expected outcomes.

 

 

Maximum potential payments ($ in millions)

September 30, 2018

December 31, 2017

 

Performance guarantees

1,601

1,775

 

Financial guarantees

11

17

 

Indemnification guarantees

62

72

 

Total

1,674

1,864

 

The carrying amount of liabilities recorded in the Consolidated Balance Sheets reflects the Company’s best estimate of future payments, which it may incur as part of fulfilling its guarantee obligations. In respect of the above guarantees, the carrying amounts of liabilities at September 30, 2018, and December 31, 2017, were not significant.

 

The Company is party to various guarantees providing financial or performance assurances to certain third parties. These guarantees, which have various maturities up to 2027, mainly consist of performance guarantees whereby (i) the Company guarantees the performance of a third party’s product or service according to the terms of a contract and (ii) as member of a consortium/joint-venture that includes third parties, the Company guarantees not only its own performance but also the work of third parties. Such guarantees may include guarantees that a project will be completed within a specified time. If the third party does not fulfill the obligation, the Company will compensate the guaranteed party in cash or in kind. The original maturity dates for the majority of these performance guarantees range from one to eight years.

 

In conjunction with the divestment of the high-voltage cable and cables accessories businesses, the Company has entered into various performance guarantees with other parties with respect to certain liabilities of the divested business. At September 30, 2018 and December 31, 2017, the maximum potential payable under these guarantees amounts to $790 million and $929 million, respectively, and these guarantees have various maturities ranging from one to ten years.

 

Commercial commitments

In addition, in the normal course of bidding for and executing certain projects, the Company has entered into standby letters of credit, bid/performance bonds and surety bonds (collectively “performance bonds”) with various financial institutions. Customers can draw on such performance bonds in the event that the Company does not fulfill its contractual obligations. The Company would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. At September 30, 2018, and December 31, 2017, the total outstanding performance bonds aggregated to $7.4 billion and $7.7 billion, respectively. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in the nine and three months ended September 30, 2018 and 2017.

 

25              Q3 2018 Financial Information 


 

Product and order-related contingencies

The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts.

The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was as follows:

  

 

($ in millions)

2018

2017

 

Balance at January 1,

1,231

1,142

 

Net change in warranties due to acquisitions and divestments

11

30

 

Claims paid in cash or in kind

(268)

(247)

 

Net increase in provision for changes in estimates, warranties issued and warranties expired

258

184

 

Exchange rate differences

(48)

91

 

Balance at September 30,

1,184

1,200

 

During 2018, the Company recorded changes in the estimated amount for a product warranty relating to a divested business. This warranty liability was increased by a total of $92 million during the nine months ended September 30, 2018, of which $75 million was recorded in the three months ended September 30, 2018. The corresponding increases were included in Cost of sales of products and resulted in a decrease in earnings per share of $0.03 (basic and diluted) for both the nine and three months ended September 30, 2018. As these costs relate to a divested business, they have been excluded from the Company’s primary measure of segment performance, Operational EBITA (See Note 15). The warranty liability has been recorded based on the information currently available and is subject to change in the future.



Note 8

Contract assets and liabilities

 

The following table provides information about Contract Assets and Contract Liabilities:

 

 

($ in millions)

September 30, 2018

December 31, 2017

September 30, 2017

 

Contract assets

2,350

2,149

2,410

 

Contract liabilities

2,700

2,908

3,017

 

Contract assets primarily relate to the Company’s right to receive consideration for work completed but for which no invoice has been issued at the reporting date. Contract assets are transferred to receivables when rights to receive payment become unconditional.

 

Contract liabilities primarily relate to up-front advances received on orders from customers as well as amounts invoiced to customers in excess of revenues recognized predominantly on long-term projects. Contract liabilities are reduced as work is performed and as revenues are recognized.

 

The significant changes in the Contract assets and Contract liabilities balances were as follows:

  

 

 

Nine months ended September 30,

 

 

2018

 

2017

 

 

Contract

 

Contract

 

Contract

 

Contract

 

($ in millions)

assets

 

liabilities

 

assets

 

liabilities

 

Revenue recognized, which was included in the Contract liabilities balance at Jan 1, 2018/2017

 

 

(2,084)

 

 

 

(1,869)

 

Additions to Contract liabilities - excluding amounts recognized as revenue during the period

 

 

1,690

 

 

 

2,712

 

Receivables recognized that were included in the Contract asset balance at Jan 1, 2018/2017

1,064

 

 

 

1,397

 

 

 

The Company considers unfulfilled orders (order backlog) from customers to be unsatisfied performance obligations. At September 30, 2018, unfulfilled orders were $23,480 million and, of this amount, the Company expects to recognize approximately 33 percent in 2018, approximately 45 percent in 2019 and the balance thereafter.



Note 9

Debt

 

The Company’s total debt at September 30, 2018, and December 31, 2017, amounted to $9,502 million and $7,447 million, respectively.

 

Short-term debt and current maturities of long-term debt

The Company’s “Short-term debt and current maturities of long-term debt” consisted of the following:

  

 

($ in millions)

September 30, 2018

December 31, 2017

 

Short-term debt

1,031

327

 

Current maturities of long-term debt

1,852

411

 

Total

2,883

738

 

26              Q3 2018 Financial Information 


 

Short-term debt primarily represented issued commercial paper and short-term loans from various banks. At September 30, 2018, and December 31, 2017, $782 million and $259 million, respectively, was outstanding under the $2 billion commercial paper program in the United States. In addition, at September 30, 2018, $87 million was outstanding under the $2 billion Euro-commercial paper program.

 

Long-term debt

The Company’s long-term debt at September 30, 2018, and December 31, 2017, amounted to $6,619 million and $6,709 million, respectively.

 

Outstanding bonds (including maturities within the next 12 months) were as follows:

  

 

 

September 30, 2018

December 31, 2017

 

(in millions)

Nominal outstanding

 Carrying value(1)

Nominal outstanding

 Carrying value(1)

 

Bonds:

 

 

 

 

 

 

 

 

 

1.50% CHF Bonds, due 2018

CHF

350

$

358

CHF

350

$

358

 

2.625% EUR Instruments, due 2019

EUR

1,250

$

1,448

EUR

1,250

$

1,493

 

2.8% USD Notes, due 2020

USD

300

$

299

 

 

 

 

4.0% USD Notes, due 2021

USD

650

$

645

USD

650

$

644

 

2.25% CHF Bonds, due 2021

CHF

350

$

376

CHF

350

$

378

 

5.625% USD Notes, due 2021

USD

250

$

266

USD

250

$

270

 

2.875% USD Notes, due 2022

USD

1,250

$

1,226

USD

1,250

$

1,256

 

3.375% USD Notes, due 2023

USD

450

$

448

 

 

 

 

0.625% EUR Notes, due 2023

EUR

700

$

809

EUR

700

$

834

 

0.75% EUR Notes, due 2024

EUR

750

$

862

EUR

750

$

889

 

3.8% USD Notes, due 2028

USD

750

$

746

 

 

 

 

4.375% USD Notes, due 2042

USD

750

$

723

USD

750

$

723

 

Total  

 

 

$

8,206

 

 

$

6,845

 

(1) USD carrying values include unamortized debt issuance costs, bond discounts or premiums, as well as adjustments for fair value hedge accounting, where appropriate.

 

In April 2018, the Company issued the following notes with a principal of:

·           $300 million, due 2020, paying interest semi-annually in arrears at a fixed rate of 2.8 percent per annum,

·           $450 million, due 2023, paying interest semi-annually in arrears at a fixed rate of 3.375 percent per annum, and

·           $750 million, due 2028, paying interest semi-annually in arrears at a fixed rate of 3.8 percent per annum.

The aggregate net proceeds of these bond issues, after underwriting discount and other fees, amounted to $1,494 million.



Note 10

Employee benefits

 

The Company operates defined benefit pension plans, defined contribution pension plans, and termination indemnity plans, in accordance with local regulations and practices. These plans cover a large portion of the Company’s employees and provide benefits to employees in the event of death, disability, retirement, or termination of employment. Certain of these plans are multi-employer plans. The Company also operates other postretirement benefit plans including postretirement health care benefits, and other employee-related benefits for active employees including long-service award plans. The measurement date used for the Company’s employee benefit plans is December 31. The funding policies of the Company’s plans are consistent with the local government and tax requirements.

 

Net periodic benefit cost of the Company’s defined benefit pension and other postretirement benefit plans consisted of the following:

  

 

($ in millions)

Defined pension benefits

Other postretirement benefits

 

Nine months ended September 30,

2018

2017

2018

2017

 

Operational pension cost:

 

 

 

 

 

Service cost

159

178

1

 

Operational pension cost

159

178

1

 

Non-operational pension cost (credit):

 

 

 

 

 

Interest cost

168

193

3

3

 

Expected return on plan assets

(316)

(311)

 

Amortization of prior service cost (credit)

(11)

14

(3)

(3)

 

Amortization of net actuarial loss

72

69

(1)

(1)

 

Curtailments, settlements and special termination benefits

1

2

 

Non-operational pension cost (credit)

(86)

(33)

(1)

(1)

 

Net periodic benefit cost

73

145

(1)

 

27              Q3 2018 Financial Information 


 

 

($ in millions)

Defined pension benefits

Other postretirement benefits

 

Three months ended September 30,

2018

2017

2018

2017

 

Operational pension cost:

 

 

 

 

 

Service cost

51

56

1

 

Operational pension cost

51

56

1

 

Non-operational pension cost (credit):

 

 

 

 

 

Interest cost

55

68

1

1

 

Expected return on plan assets

(104)

(109)

 

Amortization of prior service cost (credit)

(4)

(4)

(1)

(1)

 

Amortization of net actuarial loss

24

25

(1)

(1)

 

Curtailments, settlements and special termination benefits

1

1

 

Non-operational pension cost (credit)

(28)

(19)

(1)

(1)

 

Net periodic benefit cost

23

37

(1)

 

The components of net periodic benefit cost other than the service cost component are included in the line “Non-operational pension (cost) credit” in the income statement.

 

Employer contributions were as follows:

  

 

($ in millions)

Defined pension benefits

Other postretirement benefits

 

Nine months ended September 30,

2018

2017

2018

2017

 

Total contributions to defined benefit pension and

 

 

 

 

 

other postretirement benefit plans

152

145

6

7

 

Of which, discretionary contributions to defined benefit pension plans

10

 

 

($ in millions)

Defined pension benefits

Other postretirement benefits

 

Three months ended September 30,

2018

2017

2018

2017

 

Total contributions to defined benefit pension and

 

 

 

 

 

other postretirement benefit plans

57

50

2

3

 

Of which, discretionary contributions to defined benefit pension plans

10

 

The Company expects to make contributions totaling approximately $220 million and $12 million to its defined benefit pension plans and other postretirement benefit plans, respectively, for the full year 2018.



Note 11

Stockholders’ equity

In the nine months ended September 30, 2018, the Company purchased on the open market an aggregate of 10 million of its own shares resulting in an increase in Treasury stock of $249 million. Also in the nine months ended September 30, 2018, the Company delivered, out of treasury stock, 2.4 million shares for options exercised in connection with its Management Incentive Plan.

 

At the Annual General Meeting of Shareholders on March 29, 2018, shareholders approved the proposal of the Board of Directors to distribute 0.78 Swiss francs per share to shareholders. The declared dividend amounted to $1,736 million and was paid in April 2018.

28              Q3 2018 Financial Information 


 

Note 12

Earnings per share

 

Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the period, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options, and outstanding options and shares granted subject to certain conditions under the Company’s share-based payment arrangements.

  



 

 

Basic earnings per share

 

 

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions, except per share data in $)

2018

2017

2018

2017

 

Amounts attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

1,853

1,826

603

576

 

Income (loss) from discontinued operations, net of tax

3

(6)

(5)

 

Net income

1,856

1,820

603

571

 

 

 

 

 

 

 

Weighted-average number of shares outstanding (in millions)

2,132

2,138

2,132

2,134

 

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

0.87

0.85

0.28

0.27

 

Income (loss) from discontinued operations, net of tax

 

Net income

0.87

0.85

0.28

0.27

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions, except per share data in $)

2018

2017

2018

2017

 

Amounts attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

1,853

1,826

603

576

 

Income (loss) from discontinued operations, net of tax

3

(6)

(5)

 

Net income

1,856

1,820

603

571

 

 

 

 

 

 

 

Weighted-average number of shares outstanding (in millions)

2,132

2,138

2,132

2,134

 

Effect of dilutive securities:

 

 

 

 

 

Call options and shares

8

9

6

8

 

Adjusted weighted-average number of shares outstanding (in millions)

2,140

2,147

2,138

2,142

 

 

 

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

0.87

0.85

0.28

0.27

 

Income (loss) from discontinued operations, net of tax

 

Net income

0.87

0.85

0.28

0.27



29              Q3 2018 Financial Information 


 

Note 13

Reclassifications out of accumulated other comprehensive loss

 

The following table shows changes in “Accumulated other comprehensive loss” (OCI) attributable to ABB, by component, net of tax:

  

 

 

 

Unrealized gains

Pension and

Unrealized gains

 

 

 

Foreign currency

(losses) on

other

(losses) of cash

 

 

 

translation

available-for-sale

postretirement

flow hedge

 

 

($ in millions)

adjustments

securities

plan adjustments

derivatives

Total OCI

 

Balance at January 1, 2017

(3,592)

7

(1,601)

(1)

(5,187)

 

Other comprehensive (loss) income:

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

before reclassifications

862

3

(156)

19

728

 

Amounts reclassified from OCI

60

(11)

49

 

Changes attributable to divestments

5

6

(3)

8

 

Total other comprehensive (loss) income

867

3

(90)

5

785

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

Amounts attributable to

 

 

 

 

 

 

noncontrolling interests

17

17

 

Balance at September 30, 2017(1)

(2,741)

10

(1,691)

4

(4,418)



 

 

 

 

Unrealized gains

Pension and

Unrealized gains

 

 

 

Foreign currency

(losses) on

other

(losses) of cash

 

 

 

translation

available-for-sale

postretirement

flow hedge

 

 

($ in millions)

adjustments

securities

plan adjustments

derivatives

Total OCI

 

Balance at January 1, 2018

(2,693)

8

(1,672)

12

(4,345)

 

Cumulative effect of changes in

 

 

 

 

 

 

 accounting principles

(9)

(9)

 

Other comprehensive (loss) income:

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

before reclassifications

(547)

(5)

57

(31)

(526)

 

Amounts reclassified from OCI

(31)

41

9

19

 

Changes attributable to divestments

12

12

 

Total other comprehensive (loss) income

(566)

(5)

98

(22)

(495)

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

Amounts attributable to

 

 

 

 

 

 

noncontrolling interests

(23)

(23)

 

Balance at September 30, 2018

(3,236)

(6)

(1,574)

(10)

(4,826)

   

(1) Due to rounding, numbers presented may not add to the totals provided.



The following table reflects amounts reclassified out of OCI in respect of Foreign currency translation adjustments and Pension and other postretirement plan adjustments:

  

 

 

 

Nine months ended

Three months ended

 

($ in millions)

Location of (gains) losses

September 30,

September 30,

 

Details about OCI components

reclassified from OCI

2018

2017

2018

2017

 

Foreign currency translation adjustments:

 

 

 

 

 

 

Gain on liquidation of foreign subsidiary

Other income (expense), net

(31)

(31)

 

 

 

 

 

 

 

 

Pension and other postretirement plan adjustments:

 

 

 

 

 

 

Amortization of prior service cost (credit)

Non-operational pension (cost) credit(1)

(14)

11

(5)

(5)

 

Amortization of net actuarial loss

Non-operational pension (cost) credit(1)

71

68

23

24

 

Total before tax

 

57

79

18

19

 

Tax

Provision for taxes

(16)

(19)

(6)

(5)

 

Amounts reclassified from OCI

 

41

60

12

14

 

(1) These  components  are  included  in  the  computation  of  net  periodic  benefit  cost  (see  Note  10).

 

The amounts in respect of Unrealized gains (losses) on available-for-sale securities and Unrealized gains (losses) of cash flow hedge derivatives were not significant for the nine and three months ended September 30, 2018 and 2017.

30              Q3 2018 Financial Information 


 

 

Note 14

Restructuring and related expenses

 

White Collar Productivity program

In September 2015, the Company announced a two-year program aimed at making the Company leaner, faster and more customer-focused. Productivity improvements include the rapid expansion and use of regional shared service centers as well as the streamlining of global operations and head office functions, with business units moving closer to their respective key markets. In the course of this program, the Company has implemented and executed various restructuring initiatives across all operating segments and regions.

 

As of December 31, 2017, the Company had incurred substantially all costs related to the White Collar Productivity program.

 

Liabilities associated with the White Collar Productivity program are primarily included in “Other provisions”. The following table shows the activity from the beginning of the program to September 30, 2018, by expense type.

  

 

 

Employee

Contract settlement,

 

 

($ in millions)

severance costs

loss order and other costs

Total

 

Liability at January 1, 2015

 

Expenses

364

5

369

 

Cash payments

(34)

(1)

(35)

 

Liability at December 31, 2015

330

4

334

 

Expenses

232

3

235

 

Cash payments

(106)

(3)

(109)

 

Change in estimates

(102)

(1)

(103)

 

Exchange rate differences

(23)

(23)

 

Liability at December 31, 2016

331

3

334

 

Expenses

35

3

38

 

Cash payments

(110)

(5)

(115)

 

Change in estimates

(164)

(164)

 

Exchange rate differences

28

28

 

Liability at December 31, 2017

120

1

121

 

Cash payments

(56)

(1)

(57)

 

Change in estimates and exchange rate differences

(14)

1

(13)

 

Liability at September 30, 2018

50

1

51

 

The change in estimates during 2016 of $103 million is due to significantly higher than expected rates of attrition and internal re-deployment and a lower than expected severance cost per employee for the employee groups affected by the first phase of restructuring initiated in 2015.

 

The change in estimates during 2017 of $164 million is mainly due to higher than expected rates of attrition and internal re‑deployment. During the nine months ended September 30, 2017, $118 million of the 2017 change in estimates, was recorded primarily as reductions in Cost of sales of $65 million and in Selling, general and administrative expenses of $44 million and related to restructurings initiated in both 2015 and 2016. During the three months ended September 30, 2017, $58 million of the 2017 change in estimates, was recorded primarily as reductions in Cost of sales of $36 million and in Selling, general and administrative expenses of $20 million and related to restructurings initiated in both 2015 and 2016.

 

The change in estimates for the nine months and three months ended September 30, 2017, of $118 million and $58 million, respectively, resulted in an increase in earnings per share (basic and diluted) of $0.04 and $0.02, in the respective periods.

 

The following table outlines the net costs incurred in the nine and three months ended September 30, 2017, and the cumulative net costs incurred to December 31, 2017:

  

 

 

Net cost incurred

Net cost incurred

Cumulative net

 

 

Nine months ended

Three months ended

cost incurred up to

 

($ in millions)

September 30, 2017(1)

September 30, 2017(1)

December 31, 2017(1)

 

Power Grids

(25)

(14)

60

 

Electrification Products

(11)

(5)

72

 

Industrial Automation

(19)

(11)

106

 

Robotics and Motion

(10)

(7)

56

 

Corporate and Other

(27)

(10)

91

 

Total

(92)

(47)

385

 

(1) Net costs incurred in 2017 and Cumulative net costs incurred up to December 31, 2017 have been recast to reflect the reorganization of the Company’s operating segments as outlined in Note 15.

 

31              Q3 2018 Financial Information 


 

The Company recorded the following expenses, net of changes in estimates, under this program:

  

 

 

 

 

Cumulative costs

 

 

Nine months ended

Three months ended

 incurred up to

 

($ in millions)

September 30, 2017(1)

September 30, 2017(2)

December 31, 2017

 

Employee severance costs

(94)

(48)

365

 

Estimated contract settlement, loss order and other costs

1

10

 

Inventory and long-lived asset impairments

1

1

10

 

Total

(92)

(47)

385

 

(1)  Of which $55 million was recorded in Total cost of sales and $32 million in Selling, general and administrative expenses.

(2)  Of which $32 million was recorded in Total cost of sales and $15 million in Selling, general and administrative expenses.

 

Other restructuring-related activities

In the nine months ended September 30, 2018 and 2017, the Company executed various other restructuring‑related activities and incurred expenses of $71 million and $140 million, respectively. In the three months ended September 30, 2018 and 2017, expenses relating to these various other restructuring‑related activities amounted to $45 million and $82 million, respectively. In the nine and three months ended September 30, 2018, these expenses mainly relate to employee severance costs, contract settlement and other costs and are primarily recorded in “Total cost of sales”, “Selling, general and administrative expenses” and “Other income (expense), net”. In the nine and three months ended September 30, 2017, these expenses mainly relate to employee severance costs, primary recorded in “Total cost of sales”.



Note 15

Operating segment data

 

The Chief Operating Decision Maker (CODM) is the Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment using the information outlined below. The Company’s operating segments consist of Power Grids, Electrification Products, Industrial Automation, and Robotics and Motion. The remaining operations of the Company are included in Corporate and Other.

 

Effective January 1, 2018, management responsibility and oversight of certain remaining engineering, procurement and construction (EPC) businesses, previously included in the Power Grids, Industrial Automation and Robotics and Motion operating segments, were transferred to a new non-core operating business within Corporate and Other. In addition, the results of certain divested businesses have been reclassified to Corporate and Other for all periods presented.

 

The segment information for the nine and three months ended September 30, 2017 and at December 31, 2017, has been recast to reflect these organizational changes.

 

A description of the types of products and services provided by each reportable segment is as follows:

 

·           Power Grids: offers a range of products, systems, service and software solutions across the power value chain of generation, transmission and distribution, to utility, industry, transport & infrastructure customers. These offerings address existing and evolving grid needs such as the integration of renewables, digital substations, network control solutions, microgrids and asset management. The division portfolio includes AC and DC transmission systems, substations, as well as a wide range of power, distribution and traction transformers and an array of high-voltage products, such as circuit breakers, switchgear and capacitors.

 

·           Electrification Products: manufactures and sells products and solutions which are designed to provide smarter and safer electrical flow from the substation to the socket. The portfolio of increasingly digital and connected solutions includes electric vehicle charging infrastructure, solar power solutions, modular substation packages, distribution automation products, switchboard and panelboards, switchgear, UPS solutions, circuit breakers, measuring and sensing devices, control products, wiring accessories, enclosures and cabling systems and intelligent home and building solutions, designed to integrate and automate lighting, heating, ventilation, security and data communication networks.

 

·           Industrial Automation: develops and sells integrated automation and electrification systems and solutions, such as process and discrete control solutions, advanced process control software and manufacturing execution systems, sensing, measurement and analytical instrumentation and solutions, electric ship propulsion systems, as well as solutions for modern machine and factory automation and large turbochargers. In addition, the division offers a comprehensive range of services ranging from repair to advanced services such as remote monitoring, preventive maintenance and cybersecurity services.

 

·           Robotics and Motion: manufactures and sells robotics, motors, generators, drives, wind converters, components and systems for railways and related services and digital solutions for a wide range of applications in industry, transportation and infrastructure, and utilities.

 

·           Corporate and Other: includes headquarters, central research and development, the Company’s real estate activities, Group Treasury Operations, non-core operating activities, historical operating activities of certain divested businesses and other minor business activities.

 

The Company evaluates the profitability of its segments based on Operational EBITA, which represents income from operations excluding:

 

·           amortization expense on intangibles arising upon acquisitions (acquisition-related amortization),

·           restructuring and restructuring-related expenses,

·           changes in the amount recorded for obligations related to divested businesses occurring after the divestment date (changes in obligations related to divested businesses),

32              Q3 2018 Financial Information 


 

·           changes in estimates relating to opening balance sheets of acquired businesses (changes in pre-acquisition estimates),

·           gains and losses from sale of businesses,

·           acquisition-related expenses and integration costs,

·           certain other non-operational items, as well as

·           foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related assets/liabilities).

 

The CODM primarily reviews the results of each segment on a basis that is before the elimination of profits made on inventory sales between segments. Segment results below are presented before these eliminations, with a total deduction for intersegment profits to arrive at the Company’s consolidated Operational EBITA. Intersegment sales and transfers are accounted for as if the sales and transfers were to third parties, at current market prices.

 

The following tables present disaggregated segment revenues from contracts with customers, Operational EBITA, and the reconciliations of consolidated Operational EBITA to Income from continuing operations before taxes for the nine and three months ended September 30, 2018 and 2017, as well as total assets at September 30, 2018, and December 31, 2017.

 

 

 

Nine months ended September 30, 2018

 

 

Power

Electrification

Industrial

Robotics

Corporate

 

 

($ in millions)

Grids

Products

Automation

and Motion

and Other

Total

 

Geographical markets 

 

 

 

 

 

 

 

Europe

1,980

2,833

2,320

2,143

67

9,343

 

The Americas

2,058

2,466

1,156

2,104

33

7,817

 

Asia, Middle East and Africa

2,649

2,710

1,877

2,189

188

9,613

 

 

6,687

8,009

5,353

6,436

288

26,773

 

End Customer Markets 

 

 

 

 

 

 

 

Utilities

4,631

2,195

855

543

171

8,395

 

Industry

1,491

3,279

3,261

4,870

70

12,971

 

Transport & infrastructure

565

2,535

1,237

1,023

47

5,407

 

 

6,687

8,009

5,353

6,436

288

26,773

 

Product type 

 

 

 

 

 

 

 

Products

3,808

6,965

1,775

4,639

63

17,250

 

Systems

1,667

437

1,407

786

225

4,522

 

Services and other

1,212

607

2,171

1,011

5,001

 

 

6,687

8,009

5,353

6,436

288

26,773

 

 

 

 

 

 

 

 

 

Third-party revenues

6,687

8,009

5,353

6,436

288

26,773

 

Intersegment revenues

388

357

103

370

(1,218)

 

Total Revenues

7,075

8,366

5,456

6,806

(930)

26,773

 

 

 

Nine months ended September 30, 2017

 

 

Power

Electrification

Industrial

Robotics

Corporate

 

 

($ in millions)

Grids

Products

Automation

and Motion

and Other

Total

 

Geographical markets 

 

 

 

 

 

 

 

Europe

2,045

2,565

1,936

1,895

124

8,565

 

The Americas

2,131

1,963

965

2,051

94

7,204

 

Asia, Middle East and Africa

2,646

2,517

1,856

1,864

380

9,263

 

 

6,822

7,045

4,757

5,810

598

25,032

 

End Customer Markets 

 

 

 

 

 

 

 

Utilities

4,980

1,963

931

465

452

8,791

 

Industry

1,356

2,954

2,630

4,341

124

11,405

 

Transport & infrastructure

486

2,128

1,196

1,004

22

4,836

 

 

6,822

7,045

4,757

5,810

598

25,032

 

Product type 

 

 

 

 

 

 

 

Products

3,926

6,140

1,197

4,190

72

15,525

 

Systems

1,915

440

1,569

718

519

5,161

 

Services and other

981

465

1,991

902

7

4,346

 

 

6,822

7,045

4,757

5,810

598

25,032

 

 

 

 

 

 

 

 

 

Third-party revenues

6,822

7,045

4,757

5,810

598

25,032

 

Intersegment revenues

485

353

111

389

(1,338)

 

Total Revenues

7,307

7,398

4,868

6,199

(740)

25,032

 

33              Q3 2018 Financial Information 


 

 

 

Three months ended September 30, 2018

 

 

Power

Electrification

Industrial

Robotics

Corporate

 

 

($ in millions)

Grids

Products

Automation

and Motion

and Other

Total

 

Geographical markets 

 

 

 

 

 

 

 

Europe

689

971

740

701

22

3,123

 

The Americas

673

1,119

373

705

12

2,882

 

Asia, Middle East and Africa

851

994

609

751

47

3,252

 

 

2,213

3,084

1,722

2,157

81

9,257

 

End Customer Markets 

 

 

 

 

 

 

 

Utilities

1,550

950

273

188

45

3,006

 

Industry

455

1,141

1,079

1,621

19

4,315

 

Transport & infrastructure

208

993

370

348

17

1,936

 

 

2,213

3,084

1,722

2,157

81

9,257

 

Product type 

 

 

 

 

 

 

 

Products

1,234

2,684

546

1,553

27

6,044

 

Systems

574

139

485

264

54

1,516

 

Services and other

405

261

691

340

1,697

 

 

2,213

3,084

1,722

2,157

81

9,257

 

 

 

 

 

 

 

 

 

Third-party revenues

2,213

3,084

1,722

2,157

81

9,257

 

Intersegment revenues

123

115

36

124

(398)

 

Total Revenues

2,336

3,199

1,758

2,281

(317)

9,257

 

 

 

Three months ended September 30, 2017

 

 

Power

Electrification

Industrial

Robotics

Corporate

 

 

($ in millions)

Grids

Products

Automation

and Motion

and Other

Total

 

Geographical markets 

 

 

 

 

 

 

 

Europe

703

908

762

664

21

3,058

 

The Americas

690

670

332

687

21

2,400

 

Asia, Middle East and Africa

904

900

648

702

112

3,266

 

 

2,297

2,478

1,742

2,053

154

8,724

 

End Customer Markets 

 

 

 

 

 

 

 

Utilities

1,642

695

309

180

117

2,943

 

Industry

474

1,114

998

1,570

31

4,187

 

Transport & infrastructure

181

669

435

303

6

1,594

 

 

2,297

2,478

1,742

2,053

154

8,724

 

Product type 

 

 

 

 

 

 

 

Products

1,306

2,143

570

1,461

23

5,503

 

Systems

658

170

502

271

131

1,732

 

Services and other

333

165

670

321

1,489

 

 

2,297

2,478

1,742

2,053

154

8,724

 

 

 

 

 

 

 

 

 

Third-party revenues

2,297

2,478

1,742

2,053

154

8,724

 

Intersegment revenues

152

118

38

144

(452)

 

Total Revenues

2,449

2,596

1,780

2,197

(298)

8,724

 

34              Q3 2018 Financial Information 


 

 

 

Nine months ended

Three months ended

 

 

September 30,

September 30,

 

($ in millions)

2018

2017

2018

2017

 

Operational EBITA:

 

 

 

 

 

Power Grids

696

743

232

259

 

Electrification Products

1,238

1,112

431

417

 

Industrial Automation

768

654

246

237

 

Robotics and Motion

1,098

957

386

361

 

Corporate and Other and Intersegment elimination

(455)

(357)

(177)

(150)

 

Consolidated Operational EBITA

3,345

3,109

1,118

1,124

 

Acquisition-related amortization

(225)

(189)

(80)

(74)

 

Restructuring and restructuring-related expenses(1)

(61)

(224)

(44)

(92)

 

Changes in obligations related to divested businesses

(92)

(94)

(75)

 

Changes in pre-acquisition estimates

(2)

(1)

2

 

Gains and losses from sale of businesses

61

330

66

(1)

 

Acquisition-related expenses and integration costs

(152)

(41)

(75)

(27)

 

Certain other non-operational items

(49)

(193)

(7)

(43)

 

Foreign exchange/commodity timing differences in income from operations:

 

 

 

 

 

Unrealized gains and losses on derivatives (foreign exchange,

 

 

 

 

 

commodities, embedded derivatives)

(16)

138

50

(31)

 

Realized gains and losses on derivatives where the underlying hedged

 

 

 

 

 

transaction has not yet been realized

(29)

40

(17)

22

 

Unrealized foreign exchange movements on receivables/payables (and

 

 

 

 

 

related assets/liabilities)

(15)

(88)

(27)

8

 

Income from operations

2,765

2,788

908

888

 

Interest and dividend income

64

55

13

20

 

Interest and other finance expense

(244)

(227)

(91)

(74)

 

Non-operational pension (cost) credit

87

34

29

20

 

Income from continuing operations before taxes

2,672

2,650

859

854

 

(1) Amounts in 2017 also include the incremental implementation costs in relation to the White Collar Productivity program.

 

 

 

Total assets(1)

 

($ in millions)

September 30, 2018

December 31, 2017

 

Power Grids

8,350

8,387

 

Electrification Products

13,991

10,314

 

Industrial Automation

6,777

7,258

 

Robotics and Motion

8,674

8,134

 

Corporate and Other

6,860

9,365

 

Consolidated

44,652

43,458

 

(1) Total assets are after intersegment eliminations and therefore reflect third-party assets only.

  

 

35              Q3 2018 Financial Information 


 

  

36              Q3 2018 Financial Information 


 

 

 

 

Supplemental Reconciliations and Definitions

 

 

 

 

The following reconciliations and definitions include measures which ABB uses to supplement its Interim Consolidated Financial Information (unaudited) which is prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). Certain of these financial measures are, or may be, considered non-GAAP financial measures as defined in the rules of the U.S. Securities and Exchange Commission (SEC).

 

While ABB’s management believes that the non-GAAP financial measures herein are useful in evaluating ABB’s operating results, this information should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with U.S. GAAP. Therefore these measures should not be viewed in isolation but considered together with the Interim Consolidated Financial Information (unaudited) prepared in accordance with U.S. GAAP as of and for the nine and three months ended September 30, 2018.

 

On January 1, 2018, the Company adopted a new accounting standard, Revenue from contracts with customers, and consistent with the method of adoption elected, comparative information has not been restated and continues to be reported under the accounting standards previously in effect for those periods (see Note 2 to the Interim Consolidated Financial Information).

 

Comparable growth rates

 

Growth rates for certain key figures may be presented and discussed on a “comparable” basis. The comparable growth rate measures growth on a constant currency basis. Since we are a global company, the comparability of our operating results reported in U.S. dollars is affected by foreign currency exchange rate fluctuations. We calculate the impacts from foreign currency fluctuations by translating the current-year periods’ reported key figures into U.S. dollar amounts using the exchange rates in effect for the comparable periods in the previous year.

 

Comparable growth rates are also adjusted for changes in our business portfolio. Adjustments to our business portfolio occur due to acquisitions, divestments, or by exiting specific business activities or customer markets. The adjustment for portfolio changes is calculated as follows: where the results of any business acquired or divested have not been consolidated and reported for the entire duration of both the current and comparable periods, the reported key figures of such business are adjusted to exclude the relevant key figures of any corresponding quarters which are not comparable when computing the comparable growth rate. Certain portfolio changes which do not qualify as divestments under U.S. GAAP have been treated in a similar manner to divestments. Changes in our portfolio where we have exited certain business activities or customer markets are adjusted as if the relevant business was divested in the period when the decision to cease business activities was taken. We do not adjust for portfolio changes where the relevant business has annualized revenues of less than $50 million.

 

The following tables provide reconciliations of reported growth rates of certain key figures to their respective comparable growth rate.

 

Divisional comparable growth rate reconciliation

 

 

Q3 2018 compared to Q3 2017

 

 

Order growth rate

 

Revenue growth rate

 

 

US$

Foreign

 

 

 

US$

Foreign

 

 

 

 

(as

exchange

Portfolio

 

 

(as

exchange

Portfolio

 

 

Division

reported)

impact

changes

Comparable

 

reported)

impact

changes

Comparable

 

Power Grids

7%

4%

0%

11%

 

-5%

5%

0%

0%

 

Electrification Products

26%

4%

-24%

6%

 

23%

4%

-24%

3%

 

Industrial Automation

3%

4%

0%

7%

 

-1%

4%

0%

3%

 

Robotics and Motion

12%

3%

0%

15%

 

4%

3%

0%

7%

 

ABB Group

10%

3%

-4%

9%

 

6%

3%

-6%

3%



 

 

 

9M 2018 compared to 9M 2017

 

 

Order growth rate

 

Revenue growth rate

 

 

US$

Foreign

 

 

 

US$

Foreign

 

 

 

 

(as

exchange

Portfolio

 

 

(as

exchange

Portfolio

 

 

Division

reported)

impact

changes

Comparable

 

reported)

impact

changes

Comparable

 

Power Grids

6%

-1%

0%

5%

 

-3%

-1%

0%

-4%

 

Electrification Products

15%

-2%

-8%

5%

 

13%

-2%

-8%

3%

 

Industrial Automation

21%

-4%

-9%

8%

 

12%

-2%

-9%

1%

 

Robotics and Motion

15%

-3%

0%

12%

 

10%

-3%

0%

7%

 

ABB Group

13%

-2%

-4%

7%

 

7%

-2%

-3%

2%



37              Q3 2018 Financial Information 


 

Regional comparable growth rate reconciliation

 

 

Q3 2018 compared to Q3 2017

 

 

Order growth rate

 

Revenue growth rate

 

 

US$

Foreign

 

 

 

US$

Foreign

 

 

 

 

(as

exchange

Portfolio

 

 

(as

exchange

Portfolio

 

 

Region

reported)

impact

changes

Comparable

 

reported)

impact

changes

Comparable

 

Europe

10%

4%

1%

15%

 

2%

4%

-3%

3%

 

The Americas

23%

3%

-17%

9%

 

20%

3%

-17%

6%

 

Asia, Middle East and Africa

-1%

3%

2%

4%

 

0%

3%

-2%

1%

 

ABB Group

10%

3%

-4%

9%

 

6%

3%

-6%

3%



 

 

 

9M 2018 compared to 9M 2017

 

 

Order growth rate

 

Revenue growth rate

 

 

US$

Foreign

 

 

 

US$

Foreign

 

 

 

 

(as

exchange

Portfolio

 

 

(as

exchange

Portfolio

 

 

Region

reported)

impact

changes

Comparable

 

reported)

impact

changes

Comparable

 

Europe

16%

-6%

-3%

7%

 

9%

-4%

-4%

1%

 

The Americas

10%

1%

-6%

5%

 

9%

1%

-6%

4%

 

Asia, Middle East and Africa

13%

-2%

-3%

8%

 

4%

-3%

0%

1%

 

ABB Group

13%

-2%

-4%

7%

 

7%

-2%

-3%

2%



Order backlog growth rate reconciliation

 

 

September 30, 2018 compared to September 30, 2017

 

 

 

US$

Foreign

 

 

 

 

 

(as

exchange

Portfolio

 

 

 

Division

reported)

impact

changes

Comparable

 

 

Power Grids

-5%

4%

0%

-1%

 

 

Electrification Products

37%

5%

-34%

8%

 

 

Industrial Automation

-5%

3%

0%

-2%

 

 

Robotics and Motion

6%

4%

0%

10%

 

 

ABB Group

0%

4%

-2%

2%

 



Other growth rate reconciliations

 

 

Q3 2018 compared to Q3 2017

 

9M 2018 compared to 9M 2017

 

 

US$

Foreign

 

 

 

US$

Foreign

 

 

 

 

(as

exchange

Portfolio

 

 

(as

exchange

Portfolio

 

 

 

reported)

impact

changes

Comparable

 

reported)

impact

changes

Comparable

 

Large orders

-13%

4%

60%

51%

 

6%

-2%

4%

8%

 

Base orders

12%

4%

-9%

7%

 

14%

-2%

-5%

7%

 

Service orders

10%

4%

-6%

8%

 

10%

-3%

-1%

6%

 

Service revenues

14%

4%

-7%

11%

 

15%

-2%

-2%

11%

38              Q3 2018 Financial Information 


 

Division realignment

 

Effective January 1, 2018, management responsibility and oversight of certain remaining engineering, procurement and construction (EPC) businesses, previously included in the Power Grids, Industrial Automation and Robotics and Motion operating segments, were transferred to a new non-core operating business within Corporate and Other. See Note 15 to the Interim Consolidated Financial Information for further details on the realignment.

 

The following information presents a reconciliation of growth rates of orders and revenues for 2017 compared with 2016 to reflect these organizational changes:

 

Divisional comparable growth rate reconciliation

 

 

Q3 2017 compared to Q3 2016

 

 

Order growth rate

 

Revenue growth rate

 

 

US$

Foreign

 

 

 

US$

Foreign

 

 

 

 

(as

exchange

Portfolio

 

 

(as

exchange

Portfolio

 

 

Division

reported)

impact

changes

Comparable

 

reported)

impact

changes

Comparable

 

Power Grids

-8%

-1%

0%

-9%

 

2%

-1%

0%

1%

 

Electrification Products

7%

0%

0%

7%

 

5%

0%

0%

5%

 

Industrial Automation

30%

-3%

-17%

10%

 

15%

-2%

-12%

1%

 

Robotics and Motion

5%

-1%

0%

4%

 

10%

-2%

0%

8%

 

ABB Group

8%

0%

-3%

5%

 

6%

-2%

-1%

3%



 

 

 

9M 2017 compared to 9M 2016

 

 

Order growth rate

 

Revenue growth rate

 

 

US$

Foreign

 

 

 

US$

Foreign

 

 

 

 

(as

exchange

Portfolio

 

 

(as

exchange

Portfolio

 

 

Division

reported)

impact

changes

Comparable

 

reported)

impact

changes

Comparable

 

Power Grids

-12%

2%

0%

-10%

 

1%

1%

0%

2%

 

Electrification Products

1%

2%

0%

3%

 

2%

1%

0%

3%

 

Industrial Automation

7%

1%

-5%

3%

 

-1%

1%

-4%

-4%

 

Robotics and Motion

7%

1%

0%

8%

 

5%

1%

0%

6%

 

ABB Group

-1%

1%

1%

1%

 

1%

1%

0%

2%

39              Q3 2018 Financial Information 


 

Operational EBITA margin

 

Definition

Operational EBITA margin

Operational EBITA margin is Operational EBITA as a percentage of Operational revenues.

 

Operational EBITA

Operational earnings before interest, taxes and acquisition-related amortization (Operational EBITA) represents Income from operations excluding:

·           acquisition-related amortization (as defined below),

·           restructuring and restructuring-related expenses,

·           changes in the amount recorded for obligations related to divested businesses occurring after the divestment date (changes in obligations related to divested businesses),

·           changes in estimates relating to opening balance sheets of acquired businesses (changes in pre-acquisition estimates)  ,

·           gains and losses from sale of businesses,

·           acquisition-related expenses and integration costs,

·           certain other non-operational items, as well as

·           foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related assets/liabilities).

 

Operational EBITA is our measure of segment profit but is also used by management to evaluate the profitability of the Company as a whole.

 

Acquisition-related amortization

Amortization expense on intangibles arising upon acquisitions.

 

Operational revenues

The Company presents Operational revenues solely for the purpose of allowing the computation of Operational EBITA margin. Operational revenues are total revenues adjusted for foreign exchange/commodity timing differences in total revenues of: (i) unrealized gains and losses on derivatives, (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign exchange movements on receivables (and related assets). Operational revenues are not intended to be an alternative measure to Total Revenues, which represent our revenues measured in accordance with U.S. GAAP.

 

Reconciliation

The following tables provide reconciliations of consolidated Operational EBITA to Net Income and Operational EBITA Margin by division.

 

Reconciliation of consolidated Operational EBITA to Net Income

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions)

2018

2017

2018

2017

 

Operational EBITA

3,345

3,109

1,118

1,124

 

Acquisition-related amortization

(225)

(189)

(80)

(74)

 

Restructuring and restructuring-related expenses(1)

(61)

(224)

(44)

(92)

 

Changes in obligations related to divested businesses

(92)

(94)

(75)

 

Changes in pre-acquisition estimates

(2)

(1)

2

 

Gains and losses from sale of businesses

61

330

66

(1)

 

Acquisition-related expenses and integration costs

(152)

(41)

(75)

(27)

 

Certain other non-operational items

(49)

(193)

(7)

(43)

 

Foreign exchange/commodity timing differences in income from operations:

 

 

 

 

 

Unrealized gains and losses on derivatives (foreign exchange,

 

 

 

 

 

commodities, embedded derivatives)

(16)

138

50

(31)

 

Realized gains and losses on derivatives where the underlying hedged

 

 

 

 

 

transaction has not yet been realized

(29)

40

(17)

22

 

Unrealized foreign exchange movements on receivables/payables (and

 

 

 

 

 

related assets/liabilities)

(15)

(88)

(27)

8

 

Income from operations

2,765

2,788

908

888

 

Interest and dividend income

64

55

13

20

 

Interest and other finance expense

(244)

(227)

(91)

(74)

 

Non-operational pension (cost) credit

87

34

29

20

 

Income from continuing operations before taxes

2,672

2,650

859

854

 

Provision for taxes

(722)

(702)

(223)

(246)

 

Income from continuing operations, net of tax

1,950

1,948

636

608

 

Income (loss) from discontinued operations, net of tax

3

(6)

(5)

 

Net income

1,953

1,942

636

603

 

(1) Amounts in 2017 also include the incremental implementation costs in relation to the White Collar Productivity program.

40              Q3 2018 Financial Information 


 

Reconciliation of Operational EBITA margin by division

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

Corporate and

 

 

 

 

 

 

 

Other and

 

 

 

Power

Electrification

Industrial

Robotics

Intersegment

 

 

($ in millions, unless otherwise indicated)

Grids

Products

Automation

and Motion

elimination

Consolidated

 

Total revenues

7,075

8,366

5,456

6,806

(930)

26,773

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in total revenues:

 

 

 

 

 

 

 

Unrealized gains and losses

 

 

 

 

 

 

 

on derivatives

26

20

(15)

8

(3)

36

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

24

3

12

1

(5)

35

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables (and related assets)

(17)

(9)

(4)

(2)

(2)

(34)

 

Operational revenues

7,108

8,380

5,449

6,813

(940)

26,810

 

 

 

 

 

 

 

 

 

Income (loss) from operations

589

1,069

683

1,020

(596)

2,765

 

Acquisition-related amortization

27

71

66

48

13

225

 

Restructuring and

 

 

 

 

 

 

 

restructuring-related expenses

18

22

4

13

4

61

 

Changes in obligations related to

 

 

 

 

 

 

 

divested businesses

92

92

 

Changes in pre-acquisition estimates

2

2

 

Gains and losses from sale of businesses

(81)

3

17

(61)

 

Acquisition-related expenses and

 

 

 

 

 

 

 

integration costs

4

128

3

1

16

152

 

Certain other non-operational items

34

(2)

1

7

9

49

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in income from operations:

 

 

 

 

 

 

 

Unrealized gains and losses on derivatives

 

 

 

 

 

 

 

(foreign exchange, commodities,

 

 

 

 

 

 

 

embedded derivatives)

14

27

(19)

3

(9)

16

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

18

3

12

(4)

29

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables/payables

 

 

 

 

 

 

 

(and related assets/liabilities)

(8)

(1)

15

6

3

15

 

Operational EBITA

696

1,238

768

1,098

(455)

3,345

 

 

 

 

 

 

 

 

 

Operational EBITA margin (%)

9.8%

14.8%

14.1%

16.1%

n.a.

12.5%

 

41              Q3 2018 Financial Information 


 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

Corporate and

 

 

 

 

 

 

 

Other and

 

 

 

Power

Electrification

Industrial

Robotics

Intersegment

 

 

($ in millions, unless otherwise indicated)

Grids

Products

Automation

and Motion

elimination

Consolidated

 

Total revenues

7,307

7,398

4,868

6,199

(740)

25,032

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in total revenues:

 

 

 

 

 

 

 

Unrealized gains and losses

 

 

 

 

 

 

 

on derivatives

(69)

(36)

(35)

(6)

(3)

(149)

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

(30)

(11)

2

(39)

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables (and related assets)

54

9

16

1

80

 

Operational revenues

7,262

7,371

4,838

6,196

(743)

24,924

 

 

 

 

 

 

 

 

 

Income (loss) from operations

669

1,034

584

879

(378)

2,788

 

Acquisition-related amortization

25

76

25

50

13

189

 

Restructuring and

 

 

 

 

 

 

 

restructuring-related expenses(1)

33

11

49

29

102

224

 

Changes in obligations related to

 

 

 

 

 

 

 

divested businesses

94

94

 

Changes in pre-acquisition estimates

 

Gains and losses from sale of businesses

(2)

(328)

(330)

 

Acquisition-related expenses and

 

 

 

 

 

 

 

integration costs

1

11

25

4

41

 

Certain other non-operational items

60

13

1

119

193

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in income from operations:

 

 

 

 

 

 

 

Unrealized gains and losses on derivatives

 

 

 

 

 

 

 

(foreign exchange, commodities,

 

 

 

 

 

 

 

embedded derivatives)

(80)

(36)

(36)

(9)

23

(138)

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

(32)

(7)

2

(3)

(40)

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables/payables

 

 

 

 

 

 

 

(and related assets/liabilities)

67

3

15

6

(3)

88

 

Operational EBITA

743

1,112

654

957

-357

3,109

 

 

 

 

 

 

 

 

 

Operational EBITA margin (%)

10.2%

15.1%

13.5%

15.4%

n.a.

12.5%

 

(1) Amounts in 2017 also include the incremental implementation costs in relation to the White Collar Productivity program.

 

42              Q3 2018 Financial Information 


 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

Corporate and

 

 

 

 

 

 

 

Other and

 

 

 

Power

Electrification

Industrial

Robotics

Intersegment

 

 

($ in millions, unless otherwise indicated)

Grids

Products

Automation

and Motion

elimination

Consolidated

 

Total revenues

2,336

3,199

1,758

2,281

(317)

9,257

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in total revenues:

 

 

 

 

 

 

 

Unrealized gains and losses

 

 

 

 

 

 

 

on derivatives

(38)

(7)

(22)

(15)

(9)

(91)

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

8

3

6

2

19

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables (and related assets)

7

4

3

9

(1)

22

 

Operational revenues

2,313

3,199

1,745

2,277

(327)

9,207

 

 

 

 

 

 

 

 

 

Income (loss) from operations

220

391

223

354

(280)

908

 

Acquisition-related amortization

7

32

22

16

3

80

 

Restructuring and

 

 

 

 

 

 

 

restructuring-related expenses

7

19

2

11

5

44

 

Changes in obligations related to

 

 

 

 

 

 

 

divested businesses

75

75

 

Changes in pre-acquisition estimates

1

1

 

Gains and losses from sale of businesses

(83)

17

(66)

 

Acquisition-related expenses and

 

 

 

 

 

 

 

integration costs

60

1

1

13

75

 

Certain other non-operational items

7

1

2

(3)

7

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in income from operations:

 

 

 

 

 

 

 

Unrealized gains and losses on derivatives

 

 

 

 

 

 

 

(foreign exchange, commodities,

 

 

 

 

 

 

 

embedded derivatives)

(25)

5

(20)

(1)

(9)

(50)

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

8

2

5

2

17

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables/payables

 

 

 

 

 

 

 

(and related assets/liabilities)

8

4

12

3

27

 

Operational EBITA

232

431

246

386

(177)

1,118

 

 

 

 

 

 

 

 

 

Operational EBITA margin (%)

10.0%

13.5%

14.1%

17.0%

n.a.

12.1%

 

43              Q3 2018 Financial Information 


 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

Corporate and

 

 

 

 

 

 

 

Other and

 

 

 

Power

Electrification

Industrial

Robotics

Intersegment

 

 

($ in millions, unless otherwise indicated)

Grids

Products

Automation

and Motion

elimination

Consolidated

 

Total revenues

2,449

2,596

1,780

2,197

(298)

8,724

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in total revenues:

 

 

 

 

 

 

 

Unrealized gains and losses

 

 

 

 

 

 

 

on derivatives

10

6

(8)

13

9

30

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

(17)

(9)

1

(1)

(26)

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables (and related assets)

3

(6)

2

(7)

1

(7)

 

Operational revenues

2,445

2,596

1,765

2,204

(289)

8,721

 

 

 

 

 

 

 

 

 

Income (loss) from operations

232

393

164

336

(237)

888

 

Acquisition-related amortization

8

24

21

16

5

74

 

Restructuring and

 

 

 

 

 

 

 

restructuring-related expenses(1)

12

(2)

40

2

40

92

 

Changes in pre-acquisition estimates

(2)

(2)

 

Gains and losses from sale of businesses

1

1

 

Acquisition-related expenses and

 

 

 

 

 

 

 

integration costs

1

8

18

27

 

Certain other non-operational items

8

1

34

43

 

Foreign exchange/commodity timing

 

 

 

 

 

 

 

differences in income from operations:

 

 

 

 

 

 

 

Unrealized gains and losses on derivatives

 

 

 

 

 

 

 

(foreign exchange, commodities,

 

 

 

 

 

 

 

embedded derivatives)

12

3

8

8

31

 

Realized gains and losses on derivatives

 

 

 

 

 

 

 

where the underlying hedged

 

 

 

 

 

 

 

transaction has not yet been realized

(19)

(5)

2

(22)

 

Unrealized foreign exchange movements

 

 

 

 

 

 

 

on receivables/payables

 

 

 

 

 

 

 

(and related assets/liabilities)

5

(7)

(2)

(3)

(1)

(8)

 

Operational EBITA

259

417

237

361

(150)

1,124

 

 

 

 

 

 

 

 

 

Operational EBITA margin (%)

10.6%

16.1%

13.4%

16.4%

n.a.

12.9%

 

(1) Amounts in 2017 also include the incremental implementation costs in relation to the White Collar Productivity program.

44              Q3 2018 Financial Information 


 

Operational EPS

 

Definition

Operational EPS

Operational EPS is calculated as Operational net income divided by the weighted-average number of shares outstanding used in determining basic earnings per share.

 

Operational net income

Operational net income is calculated as Net income attributable to ABB adjusted for the following:

(i)         acquisition-related amortization,

(ii)       restructuring and restructuring-related expenses,

(iii)      non-operational pension cost (credit),

(iv)      changes in retained obligations of divested businesses,

(v)        changes in pre-acquisition estimates,

(vi)      gains and losses from sale of businesses,

(vii)     acquisition-related expenses and integration costs,

(viii)   certain other non-operational items,

(ix)      foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related assets/liabilities), and

(x)        The amount of income tax on operational adjustments either estimated using the Adjusted Group effective tax rate or in certain specific cases, computed using the actual income tax effects of the relevant item in (i) to (viii) above.

 

Acquisition-related amortization

Amortization expense on intangibles arising upon acquisitions.

 

Adjusted Group effective tax rate

The Adjusted Group effective tax rate is computed by dividing an adjusted provision for taxes by an adjusted income from continuing operations before taxes. Certain amounts recorded in income from continuing operations before taxes and the related provision for taxes (primarily gains and losses from sale of businesses) are excluded from the computation.

 

Constant currency Operational EPS adjustment and Operational EPS growth rate (constant currency)

In connection with ABB’s 2015-2020 targets, Operational EPS growth is measured assuming 2014 as the base year and uses constant exchange rates. We compute the constant currency operational net income for all periods using the relevant monthly exchange rates which were in effect during 2014 and any difference in computed Operational net income is divided by the relevant weighted-average number of shares outstanding to identify the constant currency Operational EPS adjustment.

 

Reconciliation

 

 

Nine months ended September 30,

 

 

($ in millions, except per share data in $)

2018

2017

Growth(3)

 

Net income (attributable to ABB)

1,856

1,820

 

 

Operational adjustments:

 

 

 

 

Acquisition-related amortization

225

189

 

 

Restructuring and restructuring-related expenses(1)

61

224

 

 

Non-operational pension cost (credit)

(87)

(34)

 

 

Changes in obligations related to divested businesses

92

94

 

 

Changes in pre-acquisition estimates

2

 

 

Gains and losses from sale of businesses

(61)

(330)

 

 

Acquisition-related expenses and integration costs

152

41

 

 

Certain other non-operational items

49

193

 

 

FX/commodity timing differences in income from operations

60

(90)

 

 

Tax on operational adjustments(2)

(143)

(138)

 

 

Operational net income

2,206

1,969

12%

 

 

 

 

 

 

Weighted-average number of shares outstanding (in millions)

2,132

2,138

 

 

 

 

 

 

 

Operational EPS

1.03

0.92

12%

 

Constant currency Operational EPS adjustment

0.14

0.13

 

 

Operational EPS (constant currency basis - 2014 exchange rates)

1.17

1.05

12%

 

45              Q3 2018 Financial Information 


 

 

 

Three months ended September 30,

 

 

($ in millions, except per share data in $)

2018

2017

Growth(3)

 

Net income (attributable to ABB)

603

571

 

 

Operational adjustments:

 

 

 

 

Acquisition-related amortization

80

74

 

 

Restructuring and restructuring-related expenses(1)

44

92

 

 

Non-operational pension cost (credit)

(29)

(20)

 

 

Changes in obligations related to divested businesses

75

 

 

Changes in pre-acquisition estimates

1

(2)

 

 

Gains and losses from sale of businesses

(66)

1

 

 

Acquisition-related expenses and integration costs

75

27

 

 

Certain other non-operational items

7

43

 

 

FX/commodity timing differences in income from operations

(6)

1

 

 

Tax on operational adjustments(2)

(57)

(62)

 

 

Operational net income

727

725

0%

 

 

 

 

 

 

Weighted-average number of shares outstanding (in millions)

2,132

2,134

 

 

 

 

 

 

 

Operational EPS

0.34

0.34

0%

 

Constant currency Operational EPS adjustment

0.05

0.03

 

 

Operational EPS (constant currency basis - 2014 exchange rates)

0.39

0.37

4%

 

(1) Amounts in 2017 also include the incremental implementation costs in relation to the White Collar Productivity program.

(2) Tax amount is computed by applying the Adjusted Group effective tax rate to the operational adjustments, except for gains and losses from sale of businesses for which the actual provision for taxes resulting from the gain or loss has been computed.

(3) Growth is computed using unrounded EPS amounts.

  

 

Net debt

 

Definition

Net debt

Net debt is defined as Total debt less Cash and marketable securities.

 

Total debt

Total debt is the sum of Short-term debt and current maturities of long-term debt, and Long-term debt.

 

Cash and marketable securities

Cash and marketable securities is the sum of Cash and equivalents, and Marketable securities and short-term investments.

 

Reconciliation

 

($ in millions)

September 30, 2018

December 31, 2017

 

Short-term debt and current maturities of long-term debt

2,883

738

 

Long-term debt

6,619

6,709

 

Total debt

9,502

7,447

 

Cash and equivalents

2,604

4,526

 

Marketable securities and short-term investments

953

1,102

 

Cash and marketable securities

3,557

5,628

 

Net debt

5,945

1,819

46              Q3 2018 Financial Information 


 

Net working capital as a percentage of revenues

 

Definition

Net working capital as a percentage of revenues

Net working capital as a percentage of revenues is calculated as Net working capital divided by Adjusted revenues for the trailing twelve months.

 

Net working capital

Net working capital is the sum of (i) receivables, net, (ii) contract assets,  (iii) inventories, net, and (iv) prepaid expenses; less (v) accounts payable, trade, (v) contract liabilities, and (vi) other current liabilities (excluding primarily: (a) income taxes payable, (b) current derivative liabilities, (c) pension and other employee benefits, and (d) payables under the share buyback program); and including the amounts related to these accounts which have been presented as either assets or liabilities held for sale.

 

Adjusted revenues for the trailing twelve months

Adjusted revenues for the trailing twelve months includes total revenues recorded by ABB in the twelve months preceding the relevant balance sheet date adjusted to eliminate revenues of divested businesses and the estimated impact of annualizing revenues of certain acquisitions which were completed in the same trailing twelve-month period.

 

Reconciliation

 

($ in millions, unless otherwise indicated)

September 30, 2018

September 30, 2017

 

Net working capital:

 

 

 

Receivables, net

8,935

8,328

 

Contract assets

2,350

2,410

 

Inventories, net

6,077

5,491

 

Prepaid expenses

316

276

 

Accounts payable, trade

(5,825)

(5,081)

 

Contract liabilities

(2,700)

(3,017)

 

Other current liabilities(1)

(3,650)

(3,450)

 

Net working capital

5,503

4,957

 

Total revenues for the three months ended:

 

 

 

September 30, 2018 / 2017

9,257

8,724

 

June 30, 2018 / 2017

8,889

8,454

 

March 31, 2018 / 2017

8,627

7,854

 

December 31, 2017 / 2016

9,280

8,993

 

Adjustment to annualize/eliminate revenues of certain acquisitions/divestments

1,622

366

 

Adjusted revenues for the trailing twelve months

37,675

34,391

 

Net working capital as a percentage of revenues (%)

14.6%

14.4%

 

(1)  Amounts exclude $583 million and $622 million at September 30, 2018 and 2017, respectively, related primarily to (a) income taxes payable, (b) current derivative liabilities, and (c) pension and other employee benefits.

47              Q3 2018 Financial Information 


 

Free cash flow conversion to net income

 

Definition

Free cash flow conversion to net income

Free cash flow conversion to net income is calculated as Free cash flow divided by Net income attributable to ABB.

 

Free cash flow (FCF)

Free cash flow is calculated as net cash provided by operating activities adjusted for: (i) purchases of property, plant and equipment and intangible assets, (ii) proceeds from sales of property, plant and equipment, and (iii) changes in financing and other non-current receivables, net (included in other investing activities).

 

Free cash flow for the trailing twelve months

Free cash flow for the trailing twelve months includes free cash flow recorded by ABB in the twelve months preceding the relevant balance sheet date.

 

Net income for the trailing twelve months

Net income for the trailing twelve months includes net income recorded by ABB in the twelve months preceding the relevant balance sheet date.

 

Free cash flow conversion to net income

 

 

Twelve months to

 

($ in millions, unless otherwise indicated)

September 30, 2018

December 31, 2017

 

Net cash provided by operating activities

2,926

3,799

 

Adjusted for the effects of:

 

 

 

Purchases of property, plant and equipment and intangible assets

(1,003)

(949)

 

Proceeds from sale of property, plant and equipment

69

66

 

Changes in financing receivables and other non-current receivables

(3)

10

 

Free cash flow

1,989

2,926

 

Net income attributable to ABB

2,249

2,213

 

Free cash flow conversion to net income

88%

132%



Reconciliation of the trailing twelve months to September 30, 2018

 

 

 

Purchases of

 

Changes in

 

 

 

Net cash

property, plant

Proceeds

financing

 

 

 

provided by

and equipment

from sale of

receivables and

Net income

 

 

 operating 

and intangible

property, plant

other non-current

attributable

 

($ in millions)

 activities 

 assets 

and equipment

receivables

to ABB

 

Q4 2017

1,869

(329)

16

3

393

 

Q1 2018

(518)

(238)

26

(1)

572

 

Q2 2018

1,010

(197)

19

1

681

 

Q3 2018

565

(239)

8

(6)

603

 

Total for the trailing twelve months

to September 30, 2018

2,926

(1,003)

69

(3)

2,249

48              Q3 2018 Financial Information 


 

Finance net

 

Definition

Finance net is calculated as Interest and dividend income less Interest and other finance expense.

 

Reconciliation

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions)

2018

2017

2018

2017

 

Interest and dividend income

64

55

13

20

 

Interest and other finance expense

(244)

(227)

(91)

(74)

 

Finance net

(180)

(172)

(78)

(54)



Book-to-bill ratio

 

Definition

Book-to-bill ratio is calculated as Orders received divided by Total revenues.

 

Reconciliation

 

 

Nine months ended September 30,

Three months ended September 30,

 

($ in millions, unless otherwise indicated)

2018

2017

2018

2017

 

Orders received

28,196

24,909

8,941

8,157

 

Total revenues

26,773

25,032

9,257

8,724

 

Book-to-bill ratio

1.05

1.00

0.97

0.94

49              Q3 2018 Financial Information 


 

 

 

 

 

 

 

 

 

ABB  Ltd

Corporate Communications

P.O.  Box  8131

8050 Zurich 

Switzerland

Tel:        +41  (0)43  317  71  11

Fax:       +41  (0)43  317  79  58

 

www.abb.com     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

50              Q3 2018 Financial Information 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

ABB LTD

 

 

 

 

 

 

Date: October 25, 2018.

By:

/s/ Jessica Mitchell

 

 

Name:

Jessica Mitchell

 

 

Title:

Group Senior Vice President and
Head of Investor Relations

 

 

 

 

 

 

Date: October 25, 2018.

By:

/s/ Richard A. Brown

 

 

Name:

Richard A. Brown

 

 

Title:

Group Senior Vice President and
Chief Counsel Corporate & Finance