Earnings Release • Apr 20, 2016
Earnings Release
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"In the first quarter, we improved our margin and increased cash flow," said CEO Ulrich Spiesshofer. "Our steady base order performance and book–to-bill ratio of 1.17x demonstrate that our focus on organic growth and the new market-oriented organization are yielding results in these challenging markets."
"Our strategic initiatives are driving enhanced productivity and capital management," he said. "We continue relentless execution and capacity adjustments, for example in Discrete Automation and Motion, where we have improved margins sequentially. Furthermore, the newly formed Power Grids and Electrification Products divisions started within the target margin corridor."
"The strategic portfolio review of our Power Grids division is on track and we will report on it during our Capital Markets Day on October 4, 2016."
"With our solid financial position and a leaner, more market-oriented organization, ABB is well positioned to weather continuing market headwinds and to drive profitable growth for the long term," he added.
| Key Figures | Change | |||||||
|---|---|---|---|---|---|---|---|---|
| (\$ in millions, unless otherwise indicated) | Q1 2016 | Q1 2015 | US\$ | Comparable2 | ||||
| Orders | 9,253 | 10,404 | -11% | -7% | ||||
| Revenues | 7,903 | 8,555 | -8% | -2% | ||||
| Operational EBITA4 | 943 | 949 | -1% | +2% | ||||
| % of operational revenues2 | 12.0% | 11.1% | +0.9pts | |||||
| Net income | 500 | 564 | -11% | |||||
| Basic EPS (\$) | 0.23 | 0.25 | -9%3 | |||||
| Operational EPS2 (\$) | 0.28 | 0.28 | +1%3 | +3%3 | ||||
| Cash flow from operating activities | 252 | 53 | +199 |
Macroeconomic and geopolitical developments are signaling a mixed picture with continued uncertainty. Some macroeconomic signs in the US remain positive and growth in China is expected to continue, although at a slower pace than in 2015. The market remains impacted by modest growth in Europe and geopolitical tensions in various parts of the world. Oil prices and foreign exchange translation effects are expected to continue to influence the company's results.
3 EPS growth rates are computed using unrounded amounts. Comparable operational earnings per share is in constant currency (2014 exchange rates and not adjusted for changes in the business portfolio) 4 For a reconciliation of Operational EBITA to income from continuing operations before taxes see Note 12 to the Interim Consolidated Financial Information (unaudited)
1 Growth rates for orders, revenues and order backlog are on a comparable basis (local currency adjusted for acquisitions and divestitures), previously referred to as 'like-for-like'. US\$ growth rates are presented in Key Figures table 2 For a reconciliation of non-GAAP measures, see "Supplemental Reconciliations and Definitions" in the attached Q1 2016 Financial Information
Demand in ABB's three major customer sectors reflects ongoing macroeconomic uncertainties and challenges. Utilities remained cautious but continued to make selective investments to foster grid integration of renewable energy and to enhance energy security. Continued focus on the integration of renewables, enhanced power exchange and security of supply are driving the need for HVDC interconnections, an area where ABB is a technology pioneer with an unparalleled track record. Demand from industrial customers was subdued, mainly driven by the process industries. Low oil prices resulted in continued restraint of spending by oil and gas customers in the quarter. However, the need to increase productivity by minimizing downtime and optimizing the efficiency of industrial facilities continued to be an important demand driver. The transport & infrastructure market was mixed, with continuing demand for solutions to increase energy efficiency to improve operational reliability and support infrastructure projects. Demand for datacenter energy solutions remains strong.
Demand in Europe was driven by the construction markets as well as by the integration of renewable energy. Industrial demand was stable and demand for specialty vessels was strong. Demand in the Americas was subdued due to a lower level of industrial activity, mainly related to oil and gas and mining and minerals. Construction and utility demand was mixed in the region. The US was slower as industrial demand year over year, especially related to large projects, was down, although short cycle demand showed some improvement on a sequential basis. Asia, Middle East and Africa (AMEA) saw some signs of positive demand as China invested in large grid interconnections for renewables and India continued to grow.
Total orders were 7 percent lower (11 percent in US dollars) compared with the first quarter of 2015, reflecting the significant large orders booked in the same period in 2015. The stronger US dollar versus the prior year period resulted in a negative translation impact on reported orders of 4 percent.
For utility customers, for example, ABB won \$300 million of orders in China to supply advanced converter transformers for two long-distance ultra-high-voltage direct current (UHVDC) transmission links setting a new world record by enabling 10GW of power to be transmitted at 800kV. ABB also won a \$250 million order to deliver a 220 kilovolt (kV) high-voltage submarine cable system to Danish company DONG Energy as well as a \$140 million order from Energinet.dk in Denmark and 50Hertz Transmission in Germany for a high-voltage direct current (HVDC) converter station.
For industry customers, for example, ABB won an order for 250 robots to build Mercedes's new GLC line of sports utility vehicles at Valmet Automotive in Finland. The company also won a five-year contract to deliver marine integrated solutions and services to Shell's Prelude, the world's first floating liquefied natural gas (FLNG) facility.
For transport & infrastructure customers, for example, ABB won system orders for specialty vessels specifically in cruise ships as well as in electric and hybrid ferries. The company also won a SCADA order to help manage the power network at Dubai International Airport. ABB will upgrade the control system at the airport by providing advanced automation of the power distribution network.
Base orders (below \$15 million) were flat (down 5 percent in US dollars) compared with the first quarter of 2015. At the division level, third-party base order growth in Power Grids offset declines in Electrification Products, Discrete Automation and Motion and Process Automation. Large orders (\$15 million and above) were 30 percent lower (32 percent in US dollars) compared with the same quarter of 2015. Large orders were lower in all divisions, reflecting the high level recorded in the same quarter last year. Large orders represented 17 percent of total orders compared with 23 percent a year earlier.
Total orders declined 7 percent (10 percent in US dollars) in Europe, reflecting the higher level of large orders that were booked in the region in the same period a year ago. Base orders were up 6 percent (1 percent in US dollars) in the region as a result of positive demand from Germany, Sweden, Denmark and Turkey. Total orders in the Americas declined 13 percent (18 percent in US dollars) due to soft short cycle demand, which was also reflected in the base order decline of 10 percent (14 percent in US dollars). Total orders in AMEA were down 2 percent (7 percent in US dollars) reflecting the lower level of large orders for the quarter, while base orders grew 3 percent (down 2 percent in US dollars). Total orders in China developed positively in the quarter, while base orders were slightly down.
Service orders increased 5 percent (down 1 percent in US dollars) compared with the first quarter last year and represented 17 percent of total orders compared with 15 percent a year ago.
The book-to-bill2 ratio in the first quarter was 1.17x compared with 1.22x in the same quarter a year earlier. The order backlog at the end of March 2016 amounted to \$26 billion, an increase of 4 percent (2 percent in US dollars) compared with the end of the first quarter in 2015.
Revenues in the first quarter declined 2 percent (8 percent in US dollars). Revenues were flat in Electrification Products while lower in the other divisions. This decline was primarily due to execution timing of the order backlog and the lower short-cycle volumes due to weak demand in process industries as well as in many parts of the distribution channels.
The stronger US dollar versus the prior year period resulted in a negative currency translation impact on revenues of 5 percent; exiting certain businesses had a negative impact on revenues of around 1 percent.
Total service revenues increased 4 percent (down 1 percent in US dollars) and were 18 percent of total revenues compared with 17 percent a year ago.
Operational EBITA improved 2 percent on a comparable basis (down 1 percent in US dollars). The operational EBITA margin increased 0.9 percentage points to 12.0 percent, reflecting the turnaround in Power Grids, ongoing Groupwide productivity and cost savings measures, as well as the positive impact from a cumulative elimination of certain intercompany insurance reserves.
Operational EPS was \$0.28, an increase of 3 percent in constant currency (1 percent in US dollars) compared with the same period a year earlier. Net income decreased to \$500 million from \$564 million and basic earnings per share was \$0.23 compared with \$0.25 for the same quarter of 2015. The reductions were mainly due to restructuring and related expenses as well as changes in foreign exchange and commodity timing differences.
Cash flow from operating activities improved by approximately \$200 million to \$252 million, primarily driven by stronger working capital management and lower income tax payments.
ABB announced a \$4 billion share buyback program in September 2014 in line with the Next Level strategy to accelerate sustainable value creation. During the first quarter of 2016, ABB purchased 27.7 million shares under the program with a buyback value of approximately \$500 million. Since the program was announced, the company has purchased a total of approximately 134 million shares with a buyback value of approximately \$2.7 billion.
ABB continues to execute its Next Level strategy along the three focus areas of profitable growth, relentless execution and business-led collaboration. Stage 2 of the Next Level Strategy was announced in September 2015 and comprises a significant set of actions to accelerate the transformation. The first quarter of 2016 continues to show positive results.
In line with shifting its center of gravity, ABB realigned its organizational structure and is driving towards higher growth, strengthened competitiveness and lower risk. ABB continued to drive profitable growth by focusing on the framework of penetration, innovation and expansion (PIE). The strategic portfolio review of the Power Grids division is well on track and we will report on it during ABB's Capital Markets Day on October 4, 2016.
In the first quarter, with regard to profitable growth, ABB continued to strengthen its competiveness by focusing on digitalized offerings "for the grid" and "for the site". In this context, ABB has been selected to participate in the "Future Intelligent Transmission Network Substation" project of SP Energy Networks, a UK network operator.
As part of the UKs first digital substation, ABB will upgrade an existing substation in Scotland with Intelligent Electronic Devices, allowing for interconnectivity between the power equipment using fiber optics instead of traditional copper cables. The digital communications technology with integrated information technology will improve system visibility, diagnostics and operations, resulting in increased reliability and safety.
At the Hannover Messe on April 25, ABB will be unveiling its smart sensing solution, which enables remote condition monitoring for low voltage motors through its concept of the Internet of Things, Services and People (IoTSP). The smart sensor accurately measures parameters like temperature or vibrations and sends the data via smartphone to a cloud-based secure server. Software from ABB analyzes the data and recommends predictive maintenance measures. The smart sensor will reduce unplanned downtime by up to 70 percent, extend motor lifetime by up to 30 percent and improve the energy efficiency by up to 10 percent - a measurable added value recovering its costs within one year.
ABB continued to drive expansion into new high-growth markets and launched its Dynamic AC concept - a new electrical power system for cruise ships that helps reduce annual fuel consumption by up to 6 percent.
ABB's strong focus on organic growth and the new market-oriented organization are continuing to yield positive results. ABB's systematic approach for driving organic growth through penetration is seen in Europe's underlying order development (i.e. excluding Nordlink). This stringent process entails detailed heat maps to identify opportunities followed by distinct action plans, which are then executed by the market oriented organization. Better account and channel management, combined with clear incentives are showing results.
In Stage 2 of the Next Level strategy, ABB aims to close the gap in its operating performance compared with its bestin-class peers, in addition to the ongoing program to reduce costs equivalent to 3-5 percent of cost of sales each year.
ABB's white-collar productivity (WCP) program focuses on three structural pillars: lean business functions, global shared services and market-oriented complexity reduction. Leaner business functions are evidenced in marketing and sales as implementation of salesforce.com and planned consolidation of the related back office is leading to productivity gains. ABB is also strengthening its capabilities and doubling capacity at its global engineering center in Chennai, India, to enable load and scope expansion. The ramp up of the two global shared service centers is well on track. Bangalore, India, and Krakow, Poland, were identified as global shared service center locations and key management positions were filled in the quarter. Transfer of activities has started from Singapore, Australia and the Gulf region to the Bangalore global shared service center.
Furthermore, ABB successfully implemented the new divisional realignment and simplified the divisional management structure at regional and country level to reduce market-oriented complexity. The work streams are on track to deliver approximately \$400 million of gross cost savings in 2016 and the company aims to achieve a \$1 billion run rate by the end of 2017 in gross cost savings.
"As shown in Q1, our focused 1,000 day execution programs are working," said CFO Eric Elzvik. "We continue to deliver on cost reduction from the white collar productivity program and improving on working capital, at the same time as transforming ABB to become leaner, faster and more agile with enhanced customer service."
Through the 1,000 day working capital program, ABB is driving value chain excellence from product design through manufacturing and logistics as well as reducing unbilled receivables in large projects. For example, reducing inventories while improving customer service requires ABB's processes to become faster, more agile and more rigorous. The program is on track to free up at least \$2 billion in cash by the end of 2017.
ABB continued to drive its transformation, which delivers an improved customer focus and an increased agility to support the achievement of its 2015-2020 targets. The streamlined organization with the realigned divisional structure started operations in January 2016. In order to drive sales productivity and collaboration across the Group, Salesforce.com was rolled out further as a common sales platform and is now operational in 86 countries.
In addition, ABB has appointed Pasquale Abruzzese as Head of Quality and Operational Excellence for the ABB Group, effective June 2016. He is currently the Chief Operations Officer at Philips International. Before joining Philips, Pasquale spent 13 years at Honeywell, where he was instrumental in the development and global implementation of the Operating System, a world class standardized approach, which has been recognized as a key factor in the organization's performance turnaround.
Macroeconomic and geopolitical developments are signaling a mixed picture. Some macroeconomic signs in the US remain positive and growth in China is expected to continue, although at a slower pace than in 2015. The market remains impacted by modest growth in Europe and geopolitical tensions in various parts of the world.
The long-term demand outlook in ABB's three major customer sectors—utilities, industry and transport & infrastructure—remains positive. Key drivers are the big shift in the electricity value chain, industrial productivity improvements through the Internet of Things, Services and People (IoTSP), as well as rapid urbanization and the need for energy efficiency in transport & infrastructure.
ABB is well positioned to tap these opportunities for long-term profitable growth with its strong market presence, broad geographic and business scope, technology leadership and financial strength.
| (\$ in millions, | Change | Change | Operational | ||||||
|---|---|---|---|---|---|---|---|---|---|
| unless otherwise indicated) | Orders | US\$ | Comparable | Revenues | US\$ | Comparable | EBITA % | Change | |
| Electrification Products |
2,327 | -9% | -4% | 2,125 | -5% | 0% | 15.0% | -0.2pts | |
| Discrete Automation & Motion |
2,317 | -10% | -6% | 2,079 | -8% | -5% | 13.2% | -1.0pts | |
| Process Automation | 1,784 | -21% | -17% | 1,621 | -8% | -3% | 12.0% | -0.3pts | |
| Power Grids | 3,307 | -12% | -8% | 2,518 | -9% | -2% | 8.0% | +2.1pts | |
| Corporate & other (incl. inter-division elimination) |
-482 | -440 | |||||||
| ABB Group | 9,253 | -11% | -7% | 7,903 | -8% | -2% | 12.0% | +0.9pts |
Order declines in the US, China and Brazil were partially offset by good growth in Europe, where we are deriving the first benefits from the combination of low-voltage and medium-voltage sales channels. The medium voltage products business was affected by weaker industrial demand. Revenues were steady and operational EBITA margin was impacted by unfavorable mix. Actions to address capacity and geographic shift in demand were implemented in the quarter.
Total orders were lower in the quarter primarily due to a decline in large orders and weaker demand in sectors such as oil and gas, and minerals and mining. Strong order development for robotics solutions in Europe could not compensate for lower orders in key markets such as the US and China. Revenues were lower due to short-cycle business as well as the timing of the order backlog. Operational EBITA margin decreased compared with the same period last year as a result of lower volumes and capacity utilization. Initial results of implemented capacity adjustments and productivity measures started to positively drive division profitability, as Q1 margin was better than Q4 2015.
Total orders declined for the quarter on a comparable basis due to the substantial large order decline resulting from lower spending in process industries, primarily in oil and gas and related sectors. Revenues were lower as a steady performance in service revenues and the marine business only partially offset the decrease in discretionary spending in the oil and gas sector. Operational EBITA margin was lower in the quarter due to an unfavorable mix, which was partly offset by cost out and productivity measures.
The division booked \$3.3 billion of orders during the quarter; third party base orders increased 9 percent (3 percent in US dollars). Solid large order intake in the quarter could not completely compensate the exceptionally large Nordlink HVDC order from Q1 2015. Revenues were slightly lower reflecting the timing of the order backlog. The operational EBITA margin of 8 percent was significantly higher than in the first quarter of 2015 as a result of ongoing 'step change' efforts, improvements in project margins and continued cost out measures. Steady project execution and focus on receivables collection also resulted in improved cash flow from operating activities.
The Q1 2016 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 press conference today starting at 9:00 a.m. Central European Time (CET) (8:00 a.m. BST, 3:00 a.m. EDT). The event will be accessible by conference call. UK callers should dial +44 203 059 58 62. From Sweden, the number is +46 85 051 00 31, and from the rest of Europe, +41 58 310 50 00. Callers from the US and Canada should dial +1 866 291 41 66 (toll free) or +1 631 570 56 13 (long distance tariff). Lines will be open 10-15 minutes before the start of the conference. A podcast of the media conference will be available for one week afterwards. The podcast will be accessible here.
A conference call for analysts and investors is scheduled to begin today at 3:00 p.m. CET (2:00 p.m. BST, 9:00 a.m. EDT). UK callers should dial +44 203 059 58 62. From Sweden, the number is +46 85 051 00 31, and from the rest of Europe, +41 58 310 50 00. Callers from the US and Canada should dial +1 866 291 41 66 (toll-free) or +1 631 570 56 13 (long distance tariff). Callers are requested to phone in 10 minutes before the start of the call. The call will also be accessible on the ABB website and a recorded session will be available as a podcast one hour after the end of the conference call and can be downloaded from our website.
| Annual General Meeting (Zurich, Switzerland) | April 21, 2016 |
|---|---|
| Second-quarter 2016 results | July 21, 2016 |
| Capital Markets Day (Zurich, Switzerland) | October 4, 2016 |
| Third-quarter 2016 results | October 27, 2016 |
ABB (www.abb.com) is a leading global technology company in power and automation that enables utility, industry, and transport & infrastructure customers to improve their performance while lowering environmental impact. The ABB Group of companies operates in roughly 100 countries and employs about 135,000 people.
This press release includes forward-looking information and statements as well as other statements concerning the outlook for our business, including those in the Short-term outlook, Stage 2 of Next Level strategy and Outlook sections of this release. 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 "expects," "believes," "estimates," "targets," "plans," "aims," "is likely" 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, raw materials availability and prices, 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, April 20, 2016 Ulrich Spiesshofer, CEO
Media Relations Antonio Ligi, Sandra Wiesner Tel: +41 43 317 7111 [email protected] Investor Relations Tel. +41 43 317 71 11 [email protected] ABB Ltd Affolternstrasse 44 8050 Zurich Switzerland
| 3 | Key Figures |
|---|---|
| 6 | Interim Consolidated Financial Information (unaudited) |
| 6 | Interim Consolidated Income Statements |
| 7 | Interim Condensed Consolidated Statements of |
| Comprehensive Income |
|
| 8 | Interim Consolidated Balance Sheets |
| 9 | Interim Consolidated Statements of Cash Flows |
| 10 | Interim Consolidated Statements of Changes in |
| Stockholders' Equity |
|
| 11 | Notes to the Interim Consolidated Financial |
| Information | |
Supplemental Reconciliations and Definitions
| Change | ||||||
|---|---|---|---|---|---|---|
| (\$ in millions, unless otherwise indicated) | Q1 2016 | Q1 2015 | US\$ | Comparable (1) |
||
| Orders | 9,253 | 10,404 | -11% | -7% | ||
| Revenues | 7,903 | 8,555 | -8% | -2% | ||
| Operational EBITA(2) | 943 | 949 | -1% | +2% | ||
| as % of operational revenues(1) | 12.0% | 11.1% | +0.9 pts | |||
| Net income | 500 | 564 | -11% | |||
| Basic earnings per share (\$) | 0.23 | 0.25 | -9%(3) | |||
| Operational earnings per share(1) (\$) | 0.28 | 0.28 | +1%(3) | +3%(3) | ||
| Cash flow from operating activities | 252 | 53 | +199 |
(1) For a reconciliation of non-GAAP measures see "Supplemental Reconciliations and Definitions" on page 27.
(2) For a reconciliation of Operational EBITA to Income from continuing operations before taxes see Note 12 to the Interim Consolidated Financial Information (unaudited).
(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).
| Change | |||||||
|---|---|---|---|---|---|---|---|
| (\$ in millions, unless otherwise indicated) | Q1 2016 | Q1 2015 | US\$ | Local | Comparable | ||
| Orders | ABB Group | 9,253 | 10,404 | -11% | -7% | -7% | |
| Electrification Products | 2,327 | 2,555 | -9% | -4% | -4% | ||
| Discrete Automation and Motion | 2,317 | 2,569 | -10% | -6% | -6% | ||
| Process Automation | 1,784 | 2,272 | -21% | -17% | -17% | ||
| Power Grids | 3,307 | 3,741 | -12% | -8% | -8% | ||
| Corporate and Other | |||||||
| (incl. inter-division eliminations) | (482) | (733) | |||||
| Third-party base orders | ABB Group | 7,643 | 8,034 | -5% | 0% | 0% | |
| Electrification Products | 2,181 | 2,347 | -7% | -2% | -2% | ||
| Discrete Automation and Motion | 2,021 | 2,204 | -8% | -5% | -5% | ||
| Process Automation | 1,404 | 1,508 | -7% | -2% | -2% | ||
| Power Grids | 2,024 | 1,957 | 3% | 9% | 9% | ||
| Corporate and Other | 13 | 18 | |||||
| Order backlog (end March) | ABB Group | 25,978 | 25,491 | 2% | 2% | 4% | |
| Electrification Products | 3,168 | 3,027 | 5% | 7% | 7% | ||
| Discrete Automation and Motion | 4,619 | 4,596 | 1% | 1% | 1% | ||
| Process Automation | 6,392 | 6,643 | -4% | -4% | -4% | ||
| Power Grids | 13,787 | 13,076 | 5% | 6% | 10% | ||
| Corporate and Other | |||||||
| (incl. inter-division eliminations) | (1,988) | (1,851) | |||||
| Revenues | ABB Group | 7,903 | 8,555 | -8% | -3% | -2% | |
| Electrification Products | 2,125 | 2,229 | -5% | 0% | 0% | ||
| Discrete Automation and Motion | 2,079 | 2,271 | -8% | -5% | -5% | ||
| Process Automation | 1,621 | 1,764 | -8% | -3% | -3% | ||
| Power Grids | 2,518 | 2,772 | -9% | -5% | -2% | ||
| Corporate and Other | |||||||
| (incl. inter-division eliminations) | (440) | (481) | |||||
| Operational EBITA | ABB Group | 943 | 949 | -1% | 2% | 2% | |
| Electrification Products | 318 | 340 | -6% | -3% | -3% | ||
| Discrete Automation and Motion | 274 | 318 | -14% | -12% | -12% | ||
| Process Automation | 196 | 216 | -9% | -5% | -5% | ||
| Power Grids | 199 | 164 | 21% | 24% | 22% | ||
| Corporate and Other | |||||||
| (incl. inter-division eliminations) | (44) | (89) | |||||
| Operational EBITA % | ABB Group | 12.0% | 11.1% | ||||
| Electrification Products | 15.0% | 15.2% | |||||
| Discrete Automation and Motion | 13.2% | 14.2% | |||||
| Process Automation | 12.0% | 12.3% | |||||
| Power Grids | 8.0% | 5.9% | |||||
| Income from operations | ABB Group | 784 | 859 | ||||
| Electrification Products | 288 | 310 | |||||
| Discrete Automation and Motion | 240 | 300 | |||||
| Process Automation | 170 | 205 | |||||
| Power Grids | 181 | 128 | |||||
| Corporate and Other | |||||||
| (incl. inter-division eliminations) | (95) | (84) | |||||
| Income from operations % | ABB Group | 9.9% | 10.0% | ||||
| Electrification Products | 13.6% | 13.9% | |||||
| Discrete Automation and Motion | 11.5% | 13.2% | |||||
| Process Automation | 10.5% | 11.6% | |||||
| Power Grids | 7.2% | 4.6% | |||||
| Cash flow from operating activities | ABB Group | 252 | 53 | ||||
| Electrification Products | 33 | 56 | |||||
| Discrete Automation and Motion | 114 | 182 | |||||
| Process Automation | 48 | 21 | |||||
| Power Grids | 83 | (122) | |||||
| Corporate and Other | (26) | (84) |
| Discrete | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Electrification | Automation | Process | Power | ||||||||
| (\$ in millions, unless otherwise indicated) | ABB | Products | and Motion | Automation | Grids | ||||||
| Q1 16 | Q1 15 | Q1 16 | Q1 15 | Q1 16 | Q1 15 | Q1 16 | Q1 15 | Q1 16 | Q1 15 | ||
| Revenues | 7,903 | 8,555 | 2,125 | 2,229 | 2,079 | 2,271 | 1,621 | 1,764 | 2,518 | 2,772 | |
| FX/commodity timing | |||||||||||
| differences in total revenues | (19) | (37) | (7) | 6 | (8) | (34) | 18 | (6) | (22) | (3) | |
| Operational revenues | 7,884 | 8,518 | 2,118 | 2,235 | 2,071 | 2,237 | 1,639 | 1,758 | 2,496 | 2,769 | |
| Income (loss) from operations | 784 | 859 | 288 | 310 | 240 | 300 | 170 | 205 | 181 | 128 | |
| Acquisition-related amortization | 71 | 83 | 24 | 25 | 31 | 32 | 3 | 3 | 9 | 17 | |
| Restructuring and | |||||||||||
| restructuring-related expenses(1) | 69 | 26 | 4 | 7 | 7 | 3 | 4 | 1 | 18 | 15 | |
| Gains and losses from sale of businesses, | |||||||||||
| acquisition-related expenses and certain | |||||||||||
| non-operational items | 2 | 11 | – | 1 | – | – | – | 3 | 2 | 2 | |
| FX/commodity timing | |||||||||||
| differences in income from operations | 17 | (30) | 2 | (3) | (4) | (17) | 19 | 4 | (11) | 2 | |
| Operational EBITA | 943 | 949 | 318 | 340 | 274 | 318 | 196 | 216 | 199 | 164 | |
| Operational EBITA margin (%) | 12.0% | 11.1% | 15.0% | 15.2% | 13.2% | 14.2% | 12.0% | 12.3% | 8.0% | 5.9% |
(1) Amounts also include the incremental implementation costs in relation to the White Collar Productivity program.
| Discrete | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Electrification | Automation | Process | Power | ||||||||||
| (\$ in millions, unless otherwise indicated) | ABB | Products and Motion |
Automation Grids |
||||||||||
| Q1 16 | Q1 15 | Q1 16 | Q1 15 | Q1 16 | Q1 15 | Q1 16 | Q1 15 | Q1 16 | Q1 15 | ||||
| Depreciation | 187 | 192 | 49 | 52 | 39 | 37 | 14 | 15 | 49 | 52 | |||
| Amortization | 93 | 103 | 26 | 28 | 35 | 37 | 4 | 5 | 16 | 23 | |||
| including total acquisition-related amortization of | 71 | 83 | 24 | 25 | 31 | 32 | 3 | 3 | 9 | 17 |
| (\$ in millions, unless otherwise indicated) | Orders received | Change | Revenues | Change | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Com- | Com | |||||||||
| Q1 16 | Q1 15 | US\$ | Local | parable | Q1 16 | Q1 15 | US\$ | Local | parable | |
| Europe | 3,546 | 3,962 | -10% | -7% | -7% | 2,617 | 2,804 | -7% | -3% | 0% |
| The Americas | 2,255 | 2,739 | -18% | -13% | -13% | 2,297 | 2,652 | -13% | -9% | -9% |
| Asia, Middle East and Africa | 3,452 | 3,703 | -7% | -2% | -2% | 2,989 | 3,099 | -4% | 1% | 1% |
| ABB Group | 9,253 | 10,404 | -11% | -7% | -7% | 7,903 | 8,555 | -8% | -3% | -2% |
| Three months ended | |||||
|---|---|---|---|---|---|
| (\$ in millions, except per share data in \$) | Mar. 31, 2016 | Mar. 31, 2015 | |||
| Sales of products | 6,503 | 7,130 | |||
| Sales of services | 1,400 | 1,425 | |||
| Total revenues | 7,903 | 8,555 | |||
| Cost of products | (4,711) | (5,194) | |||
| Cost of services | (834) | (860) | |||
| Total cost of sales | (5,545) | (6,054) | |||
| Gross profit | 2,358 | 2,501 | |||
| Selling, general and administrative expenses | (1,270) | (1,309) | |||
| Non-order related research and development expenses | (305) | (330) | |||
| Other income (expense), net | 1 | (3) | |||
| Income from operations | 784 | 859 | |||
| Interest and dividend income | 18 | 19 | |||
| Interest and other finance expense | (72) | (71) | |||
| Income from continuing operations before taxes | 730 | 807 | |||
| Provision for taxes | (201) | (230) | |||
| Income from continuing operations, net of tax | 529 | 577 | |||
| Income (loss) from discontinued operations, net of tax | (1) | 4 | |||
| Net income | 528 | 581 | |||
| Net income attributable to noncontrolling interests | (28) | (17) | |||
| Net income attributable to ABB | 500 | 564 | |||
| Amounts attributable to ABB shareholders: | |||||
| Income from continuing operations, net of tax | 501 | 560 | |||
| Net income | 500 | 564 | |||
| Basic earnings per share attributable to ABB shareholders: | |||||
| Income from continuing operations, net of tax | 0.23 | 0.25 | |||
| Net income | 0.23 | 0.25 | |||
| Diluted earnings per share attributable to ABB shareholders: | |||||
| Income from continuing operations, net of tax | 0.23 | 0.25 | |||
| Net income | 0.23 | 0.25 | |||
| Weighted-average number of shares outstanding (in millions) used to compute: | |||||
| Basic earnings per share attributable to ABB shareholders | 2,181 | 2,251 | |||
| Diluted earnings per share attributable to ABB shareholders | 2,184 | 2,256 |
| Three months ended | |||||
|---|---|---|---|---|---|
| (\$ in millions) | Mar. 31, 2016 | Mar. 31, 2015 | |||
| Total comprehensive income (loss), net of tax | 873 | (84) | |||
| Total comprehensive income attributable to noncontrolling interests, net of tax | (33) | (17) | |||
| Total comprehensive income (loss) attributable to ABB shareholders, net of tax | 840 | (101) |
| Cash and equivalents 3,966 4,565 Marketable securities and short-term investments 2,095 1,633 Receivables, net 10,131 10,061 Inventories, net 5,104 4,757 Prepaid expenses 268 225 Deferred taxes 827 881 Other current assets 692 638 Total current assets 23,083 22,760 Property, plant and equipment, net 5,347 5,276 Goodwill 9,823 9,671 Other intangible assets, net 2,282 2,337 Prepaid pension and other employee benefits 67 68 Investments in equity-accounted companies 183 178 Deferred taxes 440 423 Other non-current assets 589 643 Total assets 41,814 41,356 Accounts payable, trade 4,323 4,342 Billings in excess of sales 1,331 1,375 Short-term debt and current maturities of long-term debt 1,566 1,454 Advances from customers 1,601 1,598 Deferred taxes 210 249 Provisions for warranties 1,121 1,089 Other provisions 1,866 1,920 Other current liabilities 3,752 3,817 Total current liabilities 15,770 15,844 Long-term debt 6,126 5,985 Pension and other employee benefits 1,954 1,924 Deferred taxes 1,002 965 Other non-current liabilities 1,595 1,650 Total liabilities 26,447 26,368 Commitments and contingencies Stockholders' equity: Capital stock and additional paid-in capital (2,314,743,264 issued shares at March 31, 2016, and December 31, 2015) 1,454 1,444 Retained earnings 20,976 20,476 Accumulated other comprehensive loss (4,518) (4,858) Treasury stock, at cost (150,618,208 and 123,118,123 shares at March 31, 2016, and December 31, 2015, respectively) (3,074) (2,581) Total ABB stockholders' equity 14,838 14,481 Noncontrolling interests 529 507 Total stockholders' equity 15,367 14,988 Total liabilities and stockholders' equity 41,814 41,356 |
(\$ in millions, except share data) | Mar. 31, 2016 | Dec. 31, 2015 |
|---|---|---|---|
| Three months ended | ||||
|---|---|---|---|---|
| (\$ in millions) | Mar. 31, 2016 | Mar. 31, 2015 | ||
| Operating activities: | ||||
| Net income | 528 | 581 | ||
| Adjustments to reconcile net income to Net cash provided by operating activities: | ||||
| Depreciation and amortization | 280 | 295 | ||
| Deferred taxes | 15 | 31 | ||
| Net loss (gain) from derivatives and foreign exchange | 22 | (4) | ||
| Other | 17 | 26 | ||
| Changes in operating assets and liabilities: | ||||
| Trade receivables, net | 73 | (101) | ||
| Inventories, net | (165) | (360) | ||
| Trade payables | (106) | (21) | ||
| Accrued liabilities | (245) | (185) | ||
| Billings in excess of sales | (66) | 15 | ||
| Provisions, net | (114) | (73) | ||
| Advances from customers | (44) | (45) | ||
| Income taxes payable and receivable | 32 | (51) | ||
| Other assets and liabilities, net | 25 | (55) | ||
| Net cash provided by operating activities | 252 | 53 | ||
| Investing activities: | ||||
| Purchases of marketable securities (available-for-sale) | (399) | (469) | ||
| Purchases of short-term investments | (425) | (459) | ||
| Purchases of property, plant and equipment and intangible assets | (170) | (176) | ||
| Acquisition of businesses (net of cash acquired) and increases in cost- and equity-accounted companies | (3) | (36) | ||
| Proceeds from sales of marketable securities (available-for-sale) | 28 | 12 | ||
| Proceeds from maturity of marketable securities (available-for-sale) | 289 | 275 | ||
| Proceeds from short-term investments | 108 | 176 | ||
| Net cash from settlement of foreign currency derivatives | (35) | 94 | ||
| Other investing activities | 9 | 10 | ||
| Net cash used in investing activities | (598) | (573) | ||
| Financing activities: | ||||
| Net changes in debt with original maturities of 90 days or less | 83 | 164 | ||
| Increase in debt | 21 | 40 | ||
| Repayment of debt | (13) | (14) | ||
| Purchase of treasury stock | (448) | (401) | ||
| Dividends paid to noncontrolling shareholders | (10) | (13) | ||
| Other financing activities | 9 | 7 | ||
| Net cash used in financing activities | (358) | (217) | ||
| Effects of exchange rate changes on cash and equivalents | 105 | (235) | ||
| Net change in cash and equivalents – continuing operations | (599) | (972) | ||
| Cash and equivalents, beginning of period | 4,565 | 5,443 | ||
| Cash and equivalents, end of period | 3,966 | 4,471 | ||
| Supplementary disclosure of cash flow information: | ||||
| Interest paid | 52 | 53 | ||
| Taxes paid | 150 | 256 |
(\$ in millions)
| Balance at January 1, 2015 | 1,777 | 19,939 | (2,102) | 13 | (2,131) | (21) | (4,241) | (1,206) | 16,269 | 546 | 16,815 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Comprehensive income: | |||||||||||
| Net income | 564 | 564 | 17 | 581 | |||||||
| Foreign currency translation | |||||||||||
| adjustments, net of tax of \$(1) | (831) | (831) | (831) | (831) | |||||||
| Effect of change in fair value of | |||||||||||
| available-for-sale securities, | |||||||||||
| net of tax of \$0 | 3 | 3 | 3 | 3 | |||||||
| Unrecognized income (expense) | |||||||||||
| related to pensions and other | |||||||||||
| postretirement plans, | |||||||||||
| net of tax of \$59 | 174 | 174 | 174 | 174 | |||||||
| Change in derivatives qualifying | |||||||||||
| as cash flow hedges, | |||||||||||
| net of tax of \$(3) | (11) | (11) | (11) | (11) | |||||||
| Total comprehensive income (loss) | (101) | 17 | (84) | ||||||||
| Dividends paid | |||||||||||
| to noncontrolling shareholders | – | (12) | (12) | ||||||||
| Share-based payment arrangements | 15 | 15 | 15 | ||||||||
| Purchase of treasury stock | (452) | (452) | (452) | ||||||||
| Balance at March 31, 2015 | 1,792 | 20,503 | (2,933) | 16 | (1,957) | (32) | (4,906) | (1,658) | 15,731 | 551 | 16,282 |
| Balance at January 1, 2016 | 1,444 | 20,476 | (3,135) | 7 | (1,719) | (11) | (4,858) | (2,581) | 14,481 | 507 | 14,988 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Comprehensive income: | |||||||||||
| Net income | 500 | 500 | 28 | 528 | |||||||
| Foreign currency translation | |||||||||||
| adjustments, net of tax of \$13 | 346 | 346 | 346 | 5 | 351 | ||||||
| Effect of change in fair value of | |||||||||||
| available-for-sale securities, | |||||||||||
| net of tax of \$0 | 6 | 6 | 6 | 6 | |||||||
| Unrecognized income (expense) | |||||||||||
| related to pensions and other | |||||||||||
| postretirement plans, | |||||||||||
| net of tax of \$(9) | (17) | (17) | (17) | (17) | |||||||
| Change in derivatives qualifying | |||||||||||
| as cash flow hedges, | |||||||||||
| net of tax of \$2 | 5 | 5 | 5 | 5 | |||||||
| Total comprehensive income | 840 | 33 | 873 | ||||||||
| Dividends paid | |||||||||||
| to noncontrolling shareholders | – | (11) | (11) | ||||||||
| Share-based payment arrangements | 13 | 13 | 13 | ||||||||
| Purchase of treasury stock | (496) | (496) | (496) | ||||||||
| Delivery of shares | (3) | 3 | – | – | |||||||
| Balance at March 31, 2016 | 1,454 | 20,976 | (2,789) | 13 | (1,736) | (6) | (4,518) | (3,074) | 14,838 | 529 | 15,367 |
Note 1 The Company and basis of presentation
ABB Ltd and its subsidiaries (collectively, the Company) together form a leading global technology company in power and automation that enables utility, industry, and transport & infrastructure customers to improve their performance while lowering environmental impact. The Company works with customers to engineer and install networks, facilities and plants with particular emphasis on enhancing efficiency, reliability and productivity for customers who generate, convert, transmit, distribute and consume energy.
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, 2015.
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:
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, inventories and provisions related to these contracts which will not be realized within one year that have been classified as current.
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 Interim Consolidated Financial Information is presented in United States dollars (\$) unless otherwise stated. Certain amounts have been reclassified to conform to the current period presentation.
Adjustment related to prior periods In the three months ended March 31, 2016, the Company recorded a cumulative correction to eliminate certain intercompany self-insurance reserves. The correction resulted in a \$50 million reduction in "Total cost of sales" in the Interim Consolidated Income Statements for the three months ended March 31, 2016, and is included in Corporate and Other Operational EBITA. The Company evaluated the impact of the correction on both a quantitative and qualitative basis under the guidance of ASC 250, Accounting Changes and Error Corrections, and determined that there were no material impacts on the trend of net income, cash flows or liquidity for previously issued annual financial statements. Additionally, the Company does not expect its consolidated financial statements for the current annual period to be materially impacted by the correction.
Note 2 Recent accounting pronouncements Applicable for current periods
As of January 1, 2016, the Company adopted an accounting standard update regarding fair value disclosures for certain investments. Under the update, the Company will no longer categorize within the fair value hierarchy any investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the Company has elected to measure the fair value using that practical expedient. This update was applied retrospectively and did not have a significant impact on the consolidated financial statements.
As of January 1, 2016, the Company early-adopted an accounting standard update simplifying the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The update was applied prospectively and did not have a significant impact on the consolidated financial statements.
In May 2014, an accounting standard update was issued to clarify the principles for recognizing revenues from contracts with customers. The update, which supersedes substantially all existing revenue recognition guidance, provides a single comprehensive model for recognizing revenues on the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Under the standard it is possible that more judgments and estimates would be required than under existing standards, including identifying the separate performance obligations in a contract, estimating any variable consideration elements, and allocating the transaction price to each separate performance obligation. The update also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Further updates were issued in March and April 2016 to clarify the guidance on identifying performance obligations and to enhance the implementation guidance on principle versus agent considerations and licensing.
In August 2015, the effective date for the update was deferred and the update is now effective for the Company for annual and interim periods beginning January 1, 2018, and is to be applied either (i) retrospectively to each prior reporting period presented, with the option to elect certain defined practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the update recognized at the date of adoption in retained earnings (with additional disclosure as to the impact on individual financial statement lines affected). Early adoption of the standard is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The Company is currently evaluating the impact of these updates on its consolidated financial statements.
In November 2015, an accounting standard update was issued which removes the requirement to separate deferred tax liabilities and assets into current and noncurrent amounts and instead requires all such amounts, as well as any related valuation allowance, to be classified as noncurrent in the balance sheet. This update is effective for the Company for annual and interim periods beginning January 1, 2017, with early adoption permitted, and is applicable either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company is currently evaluating which transition method it will adopt and the impact of this update on its consolidated financial statements.
In January 2016, an accounting standard update was issued to enhance the reporting model for f inancial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. Amongst others, the Company would be 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 and to present separately financial assets and financial liabilities by measurement category and form of financial asset. This update is effective for the Company for annual and interim periods beginning January 1, 2018, with early adoption permitted for certain provisions. The Company is currently evaluating the impact of this update on its consolidated financial statements.
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, with early adoption permitted, and is applicable on a modified retrospective basis with various optional practical expedients. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In March 2016, an accounting standard update was issued which eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence by the investor. It requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. This update is effective for the Company for annual and interim periods beginning January 1, 2017, with early adoption permitted, and is applicable prospectively. The Company does not believe that this update will have a significant impact on its consolidated financial statements.
In March 2016, an accounting standard update was issued which changes the accounting for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification in the statement of cash flows. This update is effective for the Company for annual and interim periods beginning January 1, 2017, with early adoption permitted. The Company does not believe that this update will have a significant impact on its consolidated financial statements.
Current assets Cash and equivalents, marketable securities and short-term investments consisted of the following:
| March 31, 2016 | ||||||
|---|---|---|---|---|---|---|
| Gross | Gross | Marketable securities | ||||
| unrealized | unrealized | Cash and | and short-term | |||
| (\$ in millions) | Cost basis | gains | losses | Fair value | equivalents | investments |
| Cash | 1,767 | 1,767 | 1,767 | – | ||
| Time deposits | 2,589 | 2,589 | 2,166 | 423 | ||
| Other short-term investments | 239 | 239 | – | 239 | ||
| Debt securities available-for-sale: | ||||||
| U.S. government obligations | 120 | 3 | – | 123 | – | 123 |
| European government obligations | 42 | – | – | 42 | – | 42 |
| Other government obligations | 2 | – | – | 2 | – | 2 |
| Corporate | 375 | 3 | (1) | 377 | 33 | 344 |
| Equity securities available-for-sale | 911 | 11 | – | 922 | – | 922 |
| Total | 6,045 | 17 | (1) | 6,061 | 3,966 | 2,095 |
| December 31, 2015 | ||||||
|---|---|---|---|---|---|---|
| Gross | Gross | Marketable securities | ||||
| unrealized | unrealized | Cash and | and short-term | |||
| (\$ in millions) | Cost basis gains |
losses | Fair value | equivalents | investments | |
| Cash | 1,837 | 1,837 | 1,837 | – | ||
| Time deposits | 2,821 | 2,821 | 2,717 | 104 | ||
| Other short-term investments | 231 | 231 | – | 231 | ||
| Debt securities available-for-sale: | ||||||
| U.S. government obligations | 120 | 2 | (1) | 121 | – | 121 |
| Other government obligations | 2 | – | – | 2 | – | 2 |
| Corporate | 519 | 1 | (1) | 519 | 11 | 508 |
| Equity securities available-for-sale | 658 | 9 | – | 667 | – | 667 |
| Total | 6,188 | 12 | (2) | 6,198 | 4,565 | 1,633 |
Included in Other short-term investments at March 31, 2016, and December 31, 2015, are receivables of \$233 million and \$224 million, respectively, representing reverse repurchase agreements. These collateralized lendings, made to a financial institution, have maturity dates of less than one year.
Non-current assets Included in "Other non-current assets" are certain held-to-maturity marketable securities. At March 31, 2016, the amortized cost, gross unrecognized gain and fair value (based on quoted market prices) of these securities were \$101 million, \$12 million and \$113 million, respectively. At December 31, 2015, the amortized cost, gross unrecognized gain and fair value (based on quoted market prices) of these securities were \$99 million, \$11 million and \$110 million, respectively. These securities are pledged as security for certain outstanding deposit liabilities and the funds received at the respective maturity dates of the securities will only be available to the Company for repayment of these obligations.
| Note 4 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.
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) | March 31, 2016 | December 31, 2015 | March 31, 2015 | ||
| Foreign exchange contracts | 17,724 | 16,467 | 17,871 | ||
| Embedded foreign exchange derivatives | 3,205 | 2,966 | 2,972 | ||
| Interest rate contracts | 4,013 | 4,302 | 4,057 |
The following table shows the notional amounts of outstanding commodity derivatives (whether designated as hedges or not), on a net basis, to reflect the Company's requirements in the various commodities:
| Type of derivative | Unit | Total notional amounts at | |||
|---|---|---|---|---|---|
| March 31, 2016 | December 31, 2015 | March 31, 2015 | |||
| Copper swaps | metric tonnes | 49,500 | 48,903 | 53,237 | |
| Aluminum swaps | metric tonnes | 6,042 | 5,455 | 5,225 | |
| Nickel swaps | metric tonnes | 12 | 18 | – | |
| Lead swaps | metric tonnes | 11,750 | 14,625 | 14,325 | |
| Zinc swaps | metric tonnes | 250 | 225 | 125 | |
| Silver swaps | ounces | 1,889,230 | 1,727,255 | 1,707,460 | |
| Crude oil swaps | barrels | 127,000 | 133,500 | 150,700 |
At March 31, 2016, December 31, 2015, and March 31, 2015, the Company held 53 million, 55 million and 59 million cash-settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of \$13 million, \$13 million and \$26 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 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 March 31, 2016, and December 31, 2015, "Accumulated other comprehensive loss" included net unrealized losses of \$6 million and \$11 million, respectively, net of tax, on derivatives designated as cash flow hedges. Of the amount at March 31, 2016, net losses of \$2 million are expected to be reclassified to earnings in the following 12 months. At March 31, 2016, the longest maturity of a derivative classified as a cash flow hedge was 48 months.
The amount of gains or losses, net of tax, reclassified into earnings due to the discontinuance of cash flow hedge accounting and the amount of ineffectiveness in cash flow hedge relationships directly recognized in earnings were not significant in the three months ended March 31, 2016 and 2015.
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 | ||||||
|---|---|---|---|---|---|---|
| (\$ in millions) | on derivatives (effective portion) | into income (effective portion) | ||||
| Three months ended March 31, | 2016 | 2015 | 2016 | 2015 | ||
| Type of derivative: | Location: | |||||
| Foreign exchange contracts | 4 | (22) | Total revenues | (3) | (13) | |
| Total cost of sales | 4 | 5 | ||||
| Commodity contracts | 1 | (2) Total cost of sales | (2) | (3) | ||
| Cash-settled call options | – | (4) SG&A expenses(1) | (1) | (3) | ||
| Total | 5 | (28) | (2) | (14) |
(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 three months ended March 31, 2016 and 2015, respectively.
Net derivative losses of \$1 million and \$11 million, both net of tax, respectively, were reclassified from "Accumulated other comprehensive loss" to earnings during the three months ended March 31, 2016 and 2015, respectively.
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 instrume nts designated as fair value hedges for the three months ended March 31, 2016 and 2015, was not significant.
The effect of Interest rate contracts, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows:
| Three months ended March 31, | ||||
|---|---|---|---|---|
| (\$ in millions) | 2016 | 2015 | ||
| Gains (losses) recognized in Interest and other finance expense: | ||||
| - on derivatives designated as fair value hedges | 37 | 31 | ||
| - on hedged item | (37) | (31) |
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.
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 | Three months ended March 31, | ||||||
| (\$ in millions) | Location | 2016 | 2015 | ||||
| Foreign exchange contracts | Total revenues | 133 | (78) | ||||
| Total cost of sales | (61) | (66) | |||||
| SG&A expenses(1) | (12) | 12 | |||||
| Non-order related research and development | – | (1) | |||||
| Interest and other finance expense | (47) | 177 | |||||
| Embedded foreign exchange contracts | Total revenues | (52) | 27 | ||||
| Total cost of sales | 6 | (17) | |||||
| SG&A expenses(1) | 3 | – | |||||
| Commodity contracts | Total cost of sales | 2 | (1) | ||||
| Other | Interest and other finance expense | – | (1) | ||||
| Total | (28) | 52 |
(1) SG&A expenses represent "Selling, general and administrative expenses".
The fair values of derivatives included in the Consolidated Balance Sheets were as follows:
| March 31, 2016 | ||||
|---|---|---|---|---|
| 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 | 17 | 3 | 14 | 4 |
| Commodity contracts | 1 | – | 1 | – |
| Interest rate contracts | 4 | 127 | – | – |
| Cash-settled call options | 8 | 5 | – | – |
| Total | 30 | 135 | 15 | 4 |
| Derivatives not designated as hedging instruments: | ||||
| Foreign exchange contracts | 193 | 35 | 212 | 62 |
| Commodity contracts | 4 | – | 19 | 7 |
| Cross-currency interest rate swaps | – | – | – | 1 |
| Embedded foreign exchange derivatives | 65 | 30 | 50 | 33 |
| Total | 262 | 65 | 281 | 103 |
| Total fair value | 292 | 200 | 296 | 107 |
| December 31, 2015 | |||||
|---|---|---|---|---|---|
| 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 | 15 | 10 | 8 | 16 | |
| Commodity contracts | – | – | 3 | – | |
| Interest rate contracts | 6 | 86 | – | – | |
| Cash-settled call options | 8 | 5 | – | – | |
| Total | 29 | 101 | 11 | 16 | |
| Derivatives not designated as hedging instruments: | |||||
| Foreign exchange contracts | 172 | 32 | 237 | 81 | |
| Commodity contracts | 2 | – | 29 | 9 | |
| Cross-currency interest rate swaps | – | – | – | 1 | |
| Embedded foreign exchange derivatives | 94 | 53 | 41 | 27 | |
| Total | 268 | 85 | 307 | 118 | |
| Total fair value | 297 | 186 | 318 | 134 |
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.
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 March 31, 2016, and December 31, 2015, have been presented on a gross basis.
The Company's netting agreements and other similar arrangements allow net settlements under certain conditions. At March 31, 2016, and December 31, 2015, information related to these offsetting arrangements was as follows:
| (\$ in millions) | March 31, 2016 | ||||||
|---|---|---|---|---|---|---|---|
| Derivative liabilities | |||||||
| Type of agreement or | Gross amount of | eligible for set-off in | Cash collateral | Non-cash collateral | |||
| similar arrangement | recognized assets | case of default | received | received | Net asset exposure | ||
| Derivatives | 397 | (229) | – | – | 168 | ||
| Reverse repurchase | |||||||
| agreements | 233 | – | – | (233) | – | ||
| Total | 630 | (229) | – | (233) | 168 |
| (\$ in millions) | March 31, 2016 | |||||
|---|---|---|---|---|---|---|
| Derivative liabilities | ||||||
| Type of agreement or | Gross amount of | eligible for set-off in | Cash collateral | Non-cash collateral | ||
| similar arrangement | recognized liabilities | case of default | pledged | pledged | Net liability exposure | |
| Derivatives | 320 | (229) | (2) | – | 89 | |
| Total | 320 | (229) | (2) | – | 89 |
| (\$ in millions) | December 31, 2015 | |||||
|---|---|---|---|---|---|---|
| Derivative liabilities | ||||||
| Type of agreement or | Gross amount of | eligible for set-off in | Cash collateral | Non-cash collateral | ||
| similar arrangement | recognized assets | case of default | received | received | Net asset exposure | |
| Derivatives | 336 | (215) | – | – | 121 | |
| Reverse repurchase | ||||||
| agreements | 224 | – | – | (224) | – | |
| Total | 560 | (215) | – | (224) | 121 |
| (\$ in millions) | December 31, 2015 | |||||
|---|---|---|---|---|---|---|
| Derivative liabilities | ||||||
| Type of agreement or | Gross amount of | eligible for set-off in | Cash collateral | Non-cash collateral | ||
| similar arrangement | recognized liabilities | case of default | pledged | pledged | Net liability exposure | |
| Derivatives | 384 | (215) | (3) | – | 166 | |
| Total | 384 | (215) | (3) | – | 166 |
Note 5 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 ass ets 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:
Whenever quoted prices involve bid-ask spreads, the Company ordinarily determines fair values based on midmarket 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:
| March 31, 2016 | ||||
|---|---|---|---|---|
| (\$ in millions) | Level 1 | Level 2 | Level 3 | Total fair value |
| Assets | ||||
| Available-for-sale securities in "Cash and equivalents": | ||||
| Debt securities—Corporate | – | 33 | – | 33 |
| Available-for-sale securities in "Marketable securities and short-term investments": | ||||
| Equity securities | – | 922 | – | 922 |
| Debt securities—U.S. government obligations | 123 | – | – | 123 |
| Debt securities—European government obligations | 42 | – | – | 42 |
| Debt securities—Other government obligations | – | 2 | – | 2 |
| Debt securities—Corporate | – | 344 | – | 344 |
| Derivative assets—current in "Other current assets" | 1 | 291 | – | 292 |
| Derivative assets—non-current in "Other non-current assets" | – | 200 | – | 200 |
| Total | 166 | 1,792 | – | 1,958 |
| Liabilities | ||||
| Derivative liabilities—current in "Other current liabilities" | 1 | 295 | – | 296 |
| Derivative liabilities—non-current in "Other non-current liabilities" | – | 107 | – | 107 |
| Total | 1 | 402 | – | 403 |
| December 31, 2015 | ||||
|---|---|---|---|---|
| (\$ in millions) | Level 1 | Level 2 | Level 3 | Total fair value |
| Assets | ||||
| Available-for-sale securities in "Cash and equivalents": | ||||
| Debt securities—Corporate | – | 11 | – | 11 |
| Available-for-sale securities in "Marketable securities and short-term investments": | ||||
| Equity securities | – | 667 | – | 667 |
| Debt securities—U.S. government obligations | 121 | – | – | 121 |
| Debt securities—Other government obligations | – | 2 | – | 2 |
| Debt securities—Corporate | – | 508 | – | 508 |
| Derivative assets—current in "Other current assets" | 1 | 296 | – | 297 |
| Derivative assets—non-current in "Other non-current assets" | – | 186 | – | 186 |
| Total | 122 | 1,670 | – | 1,792 |
| Liabilities | ||||
| Derivative liabilities—current in "Other current liabilities" | 3 | 315 | – | 318 |
| Derivative liabilities—non-current in "Other non-current liabilities" | – | 134 | – | 134 |
| Total | 3 | 449 | – | 452 |
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:
Non-recurring fair value measures There were no significant non-recurring fair value measurements during the three months ended March 31, 2016 and 2015.
March 31, 2016 (\$ 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 1,767 1,767 – – 1,767 Time deposits 2,166 – 2,166 – 2,166 Marketable securities and short-term investments (excluding available-for-sale securities): Time deposits 423 – 423 – 423 Receivables under reverse repurchase agreements 233 – 233 – 233 Other short-term investments 6 6 – – 6 Other non-current assets: Loans granted 30 – 31 – 31 Held-to-maturity securities 101 – 113 – 113 Restricted cash deposits 85 58 28 – 86 Liabilities Short-term debt and current maturities of long-term debt (excluding capital lease obligations) 1,546 631 915 – 1,546 Long-term debt (excluding capital lease obligations) 6,023 5,503 770 – 6,273 Non-current deposit liabilities in "Other non-current liabilities" 127 – 138 – 138
The fair values of financial instruments carried on a cost basis were as follows:
| December 31, 2015 | ||||||
|---|---|---|---|---|---|---|
| (\$ 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 | 1,837 | 1,837 | – | – | 1,837 | |
| Time deposits | 2,717 | – | 2,717 | – | 2,717 | |
| Marketable securities and short-term investments | ||||||
| (excluding available-for-sale securities): | ||||||
| Time deposits | 104 | – | 104 | – | 104 | |
| Receivables under reverse repurchase agreements | 224 | – | 224 | – | 224 | |
| Other short-term investments | 7 | 7 | – | – | 7 | |
| Other non-current assets: | ||||||
| Loans granted | 29 | – | 30 | – | 30 | |
| Held-to-maturity securities | 99 | – | 110 | – | 110 | |
| Restricted cash deposits | 176 | 55 | 138 | – | 193 | |
| Liabilities | ||||||
| Short-term debt and current maturities of long-term debt | ||||||
| (excluding capital lease obligations) | 1,427 | 614 | 817 | – | 1,431 | |
| Long-term debt (excluding capital lease obligations) | 5,899 | 5,307 | 751 | – | 6,058 | |
| Non-current deposit liabilities in "Other non-current liabilities" | 215 | – | 244 | – | 244 |
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), (ii) held-to-maturity securities (see Note 3) whose fair values are based on quoted market prices in inactive markets (Level 2 inputs), (iii) restricted cash whose fair values approximate the carrying amounts (Level 1 inputs) and restricted cash deposits pledged in respect of certain non-current deposit liabilities whose fair values are determined using a discounted cash flow methodology based on current market interest rates (Level 2 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 outstanding bonds are determined using quoted market prices (Level 1 inputs), if available. For other bonds 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).
Non-current deposit liabilities in "Other non-current liabilities": The fair values of non-current deposit liabilities are determined using a discounted cash flow methodology based on risk-adjusted interest rates (Level 2 inputs).
Note 6
Commitments and contingencies
Contingencies—Regulatory, Compliance and Legal
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 December 2013, the Company agreed with the Brazilian Antitrust Authority (CADE) to settle its ongoing investigation into the Company's involvement in anticompetitive practices in the cables industry and the Company agreed to pay a fine of approximately 1.5 million Brazilian reals (equivalent to approximately \$1 million on date of payment).
In Brazil, the Company's Gas Insulated Switchgear business is under investigation by the CADE for alleged anticompetitive practices. In addition, the CADE has opened an investigation into certain other 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.
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.
At March 31, 2016, and December 31, 2015, the Company had aggregate liabilities of \$165 million and \$160 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.
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) | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Performance guarantees | 202 | 209 |
| Financial guarantees | 78 | 77 |
| Indemnification guarantees | 50 | 50 |
| Total | 330 | 336 |
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 March 31, 2016, and December 31, 2015, 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 2020, 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 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 six years.
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 March 31, 2016 and December 31, 2015 the total outstanding performance bonds aggregated to \$8.9 billion and \$9.5 billion, respectively. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in the three months ended March 31, 2016 and 2015.
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) | 2016 | 2015 |
|---|---|---|
| Balance at January 1, | 1,089 | 1,148 |
| Claims paid in cash or in kind | (61) | (70) |
| Net increase in provision for changes in estimates, warranties issued and warranties expired | 61 | 45 |
| Exchange rate differences | 32 | (60) |
| Balance at March 31, | 1,121 | 1,063 |
Note 7 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:
| Defined pension | Other postretirement | |||
|---|---|---|---|---|
| (\$ in millions) | benefits | benefits | ||
| Three months ended March 31, | 2016 | 2015 | 2016 | 2015 |
| Service cost | 63 | 66 | – | – |
| Interest cost | 71 | 75 | 2 | 2 |
| Expected return on plan assets | (102) | (113) | – | – |
| Amortization of prior service cost (credit) | 10 | 9 | (3) | (2) |
| Amortization of net actuarial loss | 22 | 28 | – | – |
| Net periodic benefit cost | 64 | 65 | (1) | – |
| Defined pension | Other postretirement | ||||
|---|---|---|---|---|---|
| (\$ in millions) | benefits | benefits | |||
| Three months ended March 31, | 2016 | 2015 | 2016 | 2015 | |
| Total contributions to defined benefit pension and other postretirement benefit plans | 52 | 49 | 3 | 4 |
The Company expects to make contributions totaling approximately \$255 million and \$15 million to its defined benefit pension plans and other postretirement benefit plans, respectively, for the full year 2016.
| Note 8 Stockholders' equity |
In September 2014, the Company announced a share buyback program for the purchase of up to \$4 billion of its own shares over a period ending no later than September 2016. The Company intends that approximately three quarters of the shares to be purchased will be held for cancellation (after approval from shareholders) and the remainder will be purchased to be available for delivery to employees under its employee share programs. Shares acquired for cancellation are acquired through a separate trading line on the SIX Swiss Exchange (on which only the Company can purchase shares), while shares acquired for delivery under employee share programs are acquired through the ordinary trading line. |
|---|---|
| In the three months ended March 31, 2016, under the announced share buyback program, the Company purchas ed 24.630 million shares for cancellation and 3.040 million shares to support its employee share programs. These transactions resulted in an increase in Treasury stock of \$496 million. In the three months ended March 31, 2015, under the announced share buyback program, the Company purchased 17.380 million shares for cancellation and 4.125 million shares to support its employee share programs. These transactions resulted in an increase in Treasury stock of \$452 million. |
|
| As of March 31, 2016, under this program, the Company has purchased a total of 110.855 million shares for cancellation and 22.840 million shares to support its employee share programs. |
|
| Note 9 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. |
| Three months ended March 31, | |||
|---|---|---|---|
| (\$ in millions, except per share data in \$) | 2016 | 2015 | |
| Amounts attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 501 | 560 | |
| Income (loss) from discontinued operations, net of tax | (1) | 4 | |
| Net income | 500 | 564 | |
| Weighted-average number of shares outstanding (in millions) | 2,181 | 2,251 | |
| Basic earnings per share attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 0.23 | 0.25 | |
| Income (loss) from discontinued operations, net of tax | – | – | |
| Net income | 0.23 | 0.25 |
| Three months ended March 31, | ||||
|---|---|---|---|---|
| (\$ in millions, except per share data in \$) | 2016 | 2015 | ||
| Amounts attributable to ABB shareholders: | ||||
| Income from continuing operations, net of tax | 501 | 560 | ||
| Income (loss) from discontinued operations, net of tax | (1) | 4 | ||
| Net income | 500 | 564 | ||
| Weighted-average number of shares outstanding (in millions) | 2,181 | 2,251 | ||
| Effect of dilutive securities: | ||||
| Call options and shares | 3 | 5 | ||
| Adjusted weighted-average number of shares outstanding (in millions) | 2,184 | 2,256 | ||
| Diluted earnings per share attributable to ABB shareholders: | ||||
| Income from continuing operations, net of tax | 0.23 | 0.25 | ||
| Income (loss) from discontinued operations, net of tax | – | – | ||
| Net income | 0.23 | 0.25 |
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, 2015 | (2,102) | 13 | (2,131) | (21) | (4,241) |
| Other comprehensive (loss) income | |||||
| before reclassifications | (831) | 3 | 147 | (22) | (703) |
| Amounts reclassified from OCI | – | – | 27 | 11 | 38 |
| Total other comprehensive (loss) income | (831) | 3 | 174 | (11) | (665) |
| Less: | |||||
| Amounts attributable to noncontrolling interests | – | – | – | – | – |
| Balance at March 31, 2015 | (2,933) | 16 | (1,957) | (32) | (4,906) |
| 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, 2016 | (3,135) | 7 | (1,719) | (11) | (4,858) |
| Other comprehensive (loss) income | |||||
| before reclassifications | 351 | 6 | (40) | 4 | 321 |
| Amounts reclassified from OCI | – | – | 23 | 1 | 24 |
| Total other comprehensive (loss) income | 351 | 6 | (17) | 5 | 345 |
| Less: | |||||
| Amounts attributable to noncontrolling interests | 5 | – | – | – | 5 |
| Balance at March 31, 2016 | (2,789) | 13 | (1,736) | (6) | (4,518) |
The following table reflects amounts reclassified out of OCI in respect of pension and other postretirement plan adjustments:
| (\$ in millions) | Three months ended March 31, | ||
|---|---|---|---|
| Details about OCI components | Location of (gains) losses reclassified from OCI | 2016 | 2015 |
| Pension and other postretirement plan adjustments: | |||
| Amortization of prior service cost | Net periodic benefit cost(1) | 7 | 7 |
| Amortization of net actuarial loss | Net periodic benefit cost(1) | 22 | 28 |
| Total before tax | 29 | 35 | |
| Tax | Provision for taxes | (6) | (8) |
| Amounts reclassified from OCI | 23 | 27 |
(1) These components are included in the computation of net periodic benefit cost (see Note 7).
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 three months ended March 31, 2016 and 2015.
In September 2015, the Company announced a two-year program aimed at making the Company leaner, faster and more customer-focused. Planned 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 will implement and execute various restructuring initiatives across all operating segments and regions.
The following table outlines the costs incurred in the three months ended March 31, 2016, the cumulative costs incurred to date and the total amount of costs expected to be incurred under the program per operating segment:
| Costs incurred in the | Cumulative costs | ||
|---|---|---|---|
| three months ended | incurred up to | ||
| (\$ in millions) | March 31, 2016 | March 31, 2016 | Total expected costs(1) |
| Electrification Products | 1 | 74 | 175 |
| Discrete Automation and Motion | – | 45 | 169 |
| Process Automation | – | 96 | 148 |
| Power Grids | (1) | 69 | 177 |
| Corporate and Other | (1) | 85 | 183 |
| Total | (1) | 369 | 852 |
(1) Total expected costs have been recast to reflect the reorganization of the Company's operating segments as outlined in No te 12.
Of the total expected costs of \$852 million the majority is related to employee severance costs.
The Company recorded the following expenses under this program:
| Three months ended | Cumulative costs incurred | |
|---|---|---|
| (\$ in millions) | March 31, 2016 | up to March 31, 2016 |
| Employee severance costs | (2) | 362 |
| Estimated contract settlement, loss order and other costs | 1 | 6 |
| Inventory and long-lived asset impairments | – | 1 |
| Total | (1) | 369 |
Expenses associated with this program for the three months ended March 31, 2016 are recorded in "Total cost of sales".
Liabilities associated with the White Collar Productivity (WCP) program are primarily included in "Other provisions". The following tables show the activity during the three months ended March 31, 2016, 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 | 4 | – | 4 |
| Cash payments | (32) | (1) | (33) |
| Change in estimates | (6) | 1 | (5) |
| Exchange rate differences | 8 | 1 | 9 |
| Liability at March 31, 2016 | 304 | 5 | 309 |
Other restructuring-related activities In the three months ended March 31, 2016 and 2015, the Company executed various other minor restructuring-related activities and incurred expenses of \$27 million and \$26 million, respectively. These expenses mainly related to employee severance costs and were primarily recorded in "Total cost of sales".
The Chief Operating Decision Maker (CODM) is the Company's Executive Committee. 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 Electrification Products, Discrete Automation and Motion, Process Automation and Power Grids. The remaining operations of the Company are included in Corporate and Other.
Effective January 1, 2016, the Company reorganized its operating segments with the aim of delivering more customer value in a better, more focused way from its combined power and automation offering. The new Electrification Products segment includes the business of the former Low Voltage Products segment and the Medium Voltage Products business from the former Power Products segment. The Process Automation segment has been expanded to include the Distributed Control Systems business from the former Power Systems segment, while the remaining businesses of the former Power Products and Power Systems segments were combined to form the new Power Grids segment. There were no significant changes to the Discrete Automation and Motion segment.
In addition, commencing in 2016, the Company changed its method of allocating income taxes to its operating segments whereby tax assets are primarily accounted for in Corporate and Other. As a result, certain amounts relating to current and deferred tax assets previously reported within the total segment assets of each individual operating segment have been allocated to Corporate and Other.
The segment information for the three months ended March 31, 2015 and at December 31, 2015, has been recast to reflect these organizational and allocation changes.
A description of the types of products and services provided by each reportable segment is as follows:
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, gains and losses from sale of businesses, acquisition-related expenses and certain non-operational items, as well as foreign exchange/commodity timing differences in income from operations consisting of: (i) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded 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/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 segment revenues, Operational EBITA, and the reconciliations of consolidated Operational EBITA to Income from continuing operations before taxes for the three months ended March 31, 2016 and 2015, as well as total assets at March 31, 2016, and December 31, 2015.
| Three months ended March 31, 2016 | Three months ended March 31, 2015 | ||||||
|---|---|---|---|---|---|---|---|
| Third-party | Intersegment | Total | Third-party | Intersegment | Total | ||
| (\$ in millions) | revenues | revenues | revenues | revenues | revenues | revenues | |
| Electrification Products | 1,986 | 139 | 2,125 | 2,084 | 145 | 2,229 | |
| Discrete Automation and Motion | 1,942 | 137 | 2,079 | 2,146 | 125 | 2,271 | |
| Process Automation | 1,579 | 42 | 1,621 | 1,733 | 31 | 1,764 | |
| Power Grids | 2,385 | 133 | 2,518 | 2,571 | 201 | 2,772 | |
| Corporate and Other | 11 | 375 | 386 | 21 | 347 | 368 | |
| Intersegment elimination | – | (826) | (826) | – | (849) | (849) | |
| Consolidated | 7,903 | – | 7,903 | 8,555 | – | 8,555 |
| Three months ended March 31, | ||
|---|---|---|
| (\$ in millions) | 2016 | 2015 |
| Operational EBITA: | ||
| Electrification Products | 318 | 340 |
| Discrete Automation and Motion | 274 | 318 |
| Process Automation | 196 | 216 |
| Power Grids | 199 | 164 |
| Corporate and Other and Intersegment elimination | (44) | (89) |
| Consolidated Operational EBITA | 943 | 949 |
| Acquisition-related amortization | (71) | (83) |
| Restructuring and restructuring-related expenses(1) | (69) | (26) |
| Gains and losses from sale of businesses, acquisition-related expenses and certain non-operational items | (2) | (11) |
| Foreign exchange/commodity timing differences in income from operations: | ||
| Unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives) | 27 | (16) |
| Realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized | 4 | (8) |
| Unrealized foreign exchange movements on receivables/payables (and related assets/liabilities) | (48) | 54 |
| Income from operations | 784 | 859 |
| Interest and dividend income | 18 | 19 |
| Interest and other finance expense | (72) | (71) |
| Income from continuing operations before taxes | 730 | 807 |
(1) Amounts also include the incremental implementation costs in relation to the White Collar Productivity program.
| Total assets(1) | |||
|---|---|---|---|
| (\$ in millions) | March 31, 2016 | December 31, 2015 | |
| Electrification Products | 9,877 | 9,474 | |
| Discrete Automation and Motion | 8,962 | 9,223 | |
| Process Automation | 4,650 | 4,662 | |
| Power Grids | 9,478 | 9,422 | |
| Corporate and Other | 8,847 | 8,575 | |
| Consolidated | 41,814 | 41,356 |
(1) Total assets are after intersegment eliminations and therefore reflect third-party assets only.
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 three months ended March 31, 2016.
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 also adjust 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. Generally Accepted Accounting Principles 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.
| Q1 2016 compared to Q1 2015 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 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 | |
| Electrification Products | -9% | 5% | 0% | -4% | -5% | 5% | 0% | 0% | |
| Discrete Automation and Motion | -10% | 4% | 0% | -6% | -8% | 3% | 0% | -5% | |
| Process Automation | -21% | 4% | 0% | -17% | -8% | 5% | 0% | -3% | |
| Power Grids | -12% | 4% | 0% | -8% | -9% | 4% | 3% | -2% | |
| ABB Group | -11% | 4% | 0% | -7% | -8% | 5% | 1% | -2% |
| Q1 2016 compared to Q1 2015 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 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% | 3% | 0% | -7% | -7% | 4% | 3% | 0% | |
| The Americas | -18% | 5% | 0% | -13% | -13% | 4% | 0% | -9% | |
| Asia, Middle East and Africa | -7% | 5% | 0% | -2% | -4% | 5% | 0% | 1% | |
| ABB Group | -11% | 4% | 0% | -7% | -8% | 5% | 1% | -2% |
| March 31, 2016 compared to March 31, 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|
| US\$ | Foreign | |||||||
| (as | exchange | Portfolio | ||||||
| Division | reported) | impact | changes | Comparable | ||||
| Electrification Products | 5% | 2% | 0% | 7% | ||||
| Discrete Automation and Motion | 1% | 0% | 0% | 1% | ||||
| Process Automation | -4% | 0% | 0% | -4% | ||||
| Power Grids | 5% | 1% | 4% | 10% | ||||
| ABB Group | 2% | 0% | 2% | 4% |
| Q1 2016 compared to Q1 2015 | ||||
|---|---|---|---|---|
| US\$ | Foreign | |||
| (as | exchange | Portfolio | ||
| Division | reported) | impact | changes | Comparable |
| Electrification Products | -6% | 3% | 0% | -3% |
| Discrete Automation and Motion | -14% | 2% | 0% | -12% |
| Process Automation | -9% | 4% | 0% | -5% |
| Power Grids | 21% | 3% | -2% | 22% |
| ABB Group | -1% | 3% | 0% | 2% |
| Q1 2016 compared to Q1 2015 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| US\$ | |||||||||
| (as | exchange | Portfolio | |||||||
| reported) | impact | changes | Comparable | ||||||
| Large orders | -32% | 2% | 0% | -30% | |||||
| Base orders | -5% | 5% | 0% | 0% | |||||
| Service orders | -1% | 6% | 0% | 5% | |||||
| Service revenues | -1% | 5% | 0% | 4% |
Division realignment: Effective January 1, 2016, we have realigned our organizational structure to better address customer needs and deliver operational efficiency. Our new streamlined structure is comprised of four operating divisions: Power Grids, Electrification Products, Discrete Automation and Motion and Process Automation. In addition, the operations of certain previously divested businesses have been excluded from the results of the four divisions (but are included in the total ABB Group) for the periods prior to their respective divestment. Please see Note 12 to the Interim Consolidated Financial Information (unaudited) for further details on the realignment.
The following information presents a reconciliation of growth rates of orders and revenues for 2015 compared with 2014 to reflect these organizational changes:
| Q1 2015 compared to Q1 2014 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 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 | ||
| Electrification Products | -9% | 9% | 0% | 0% | -10% | 10% | 0% | 0% | ||
| Discrete Automation and Motion | -9% | 8% | 0% | -1% | -5% | 9% | 0% | 4% | ||
| Process Automation | 6% | 17% | 0% | 23% | -16% | 11% | 0% | -5% | ||
| Power Grids | 28% | 22% | -1% | 49% | -4% | 10% | -2% | 4% | ||
| ABB Group | 0% | 13% | 3% | 16% | -10% | 10% | 2% | 2% |
Operational EBITA margin Operational EBITA margin is Operational EBITA as a percentage of Operational revenues.
Operational earnings before interest, taxes and acquisition-related amortization (Operational EBITA) represents Income from operations excluding acquisition-related amortization (as defined below), restructuring and restructuringrelated expenses, gains and losses from sale of businesses, acquisition-related expenses and certain nonoperational items, as well as foreign exchange/commodity timing differences in income from operations consisting of: (i) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded 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/payables (and related assets/liabilities).
Amortization expense on intangibles arising upon acquisitions.
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).
| Three months ended March 31, 2016 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Corporate and | |||||||||
| Discrete | Other and | ||||||||
| Electrification | Automation | Process | Power | Intersegment | |||||
| (\$ in millions, unless otherwise indicated) | Products | and Motion | Automation | Grids | elimination | Consolidated | |||
| Total revenues | 2,125 | 2,079 | 1,621 | 2,518 | (440) | 7,903 | |||
| Foreign exchange/commodity timing | |||||||||
| differences in total revenues: | |||||||||
| Unrealized gains and losses | |||||||||
| on derivatives | (18) | (17) | (7) | (49) | – | (91) | |||
| Realized gains and losses on derivatives | |||||||||
| where the underlying hedged | |||||||||
| transaction has not yet been realized | – | 1 | 5 | (5) | – | 1 | |||
| Unrealized foreign exchange movements | |||||||||
| on receivables (and related assets) | 11 | 8 | 20 | 32 | – | 71 | |||
| Operational revenues | 2,118 | 2,071 | 1,639 | 2,496 | (440) | 7,884 | |||
| Income (loss) from operations | 288 | 240 | 170 | 181 | (95) | 784 | |||
| Acquisition-related amortization | 24 | 31 | 3 | 9 | 4 | 71 | |||
| Restructuring and | |||||||||
| restructuring-related expenses(1) | 4 | 7 | 4 | 18 | 36 | 69 | |||
| Gains and losses from sale of businesses, | |||||||||
| acquisition-related expenses and certain | |||||||||
| non-operational items | – | – | – | 2 | – | 2 | |||
| Foreign exchange/commodity timing | |||||||||
| differences in income from operations: | |||||||||
| Unrealized gains and losses on derivatives | |||||||||
| (foreign exchange, commodities, | |||||||||
| embedded derivatives) | – | (7) | 3 | (34) | 11 | (27) | |||
| Realized gains and losses on derivatives | |||||||||
| where the underlying hedged | |||||||||
| transaction has not yet been realized | – | – | – | (4) | – | (4) | |||
| Unrealized foreign exchange movements | |||||||||
| on receivables/payables | |||||||||
| (and related assets/liabilities) | 2 | 3 | 16 | 27 | – | 48 | |||
| Operational EBITA | 318 | 274 | 196 | 199 | (44) | 943 | |||
| Operational EBITA margin (%) | 15.0% | 13.2% | 12.0% | 8.0% | n.a. | 12.0% |
(1) Amounts also include the incremental implementation costs in relation to the White Collar Productivity program.
| Three months ended March 31, 2015 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Corporate and | |||||||||
| Discrete | Other and | ||||||||
| Electrification | Automation | Process | Power | Intersegment | |||||
| (\$ in millions, unless otherwise indicated) | Products | and Motion | Automation | Grids | elimination | Consolidated | |||
| Total revenues | 2,229 | 2,271 | 1,764 | 2,772 | (481) | 8,555 | |||
| Foreign exchange/commodity timing | |||||||||
| differences in total revenues: | |||||||||
| Unrealized gains and losses | |||||||||
| on derivatives | 8 | (13) | (8) | (5) | – | (18) | |||
| Realized gains and losses on derivatives | |||||||||
| where the underlying hedged | |||||||||
| transaction has not yet been realized | 1 | (29) | 20 | 23 | – | 15 | |||
| Unrealized foreign exchange movements | |||||||||
| on receivables (and related assets) | (3) | 8 | (18) | (21) | – | (34) | |||
| Operational revenues | 2,235 | 2,237 | 1,758 | 2,769 | (481) | 8,518 | |||
| Income (loss) from operations | 310 | 300 | 205 | 128 | (84) | 859 | |||
| Acquisition-related amortization | 25 | 32 | 3 | 17 | 6 | 83 | |||
| Restructuring and | |||||||||
| restructuring-related expenses(1) | 7 | 3 | 1 | 15 | – | 26 | |||
| Gains and losses from sale of businesses, | |||||||||
| acquisition-related expenses and certain | |||||||||
| non-operational items | 1 | – | 3 | 2 | 5 | 11 | |||
| Foreign exchange/commodity timing | |||||||||
| differences in income from operations: | |||||||||
| Unrealized gains and losses on derivatives | |||||||||
| (foreign exchange, commodities, | |||||||||
| embedded derivatives) | 11 | 7 | 7 | 7 | (16) | 16 | |||
| Realized gains and losses on derivatives | |||||||||
| where the underlying hedged | |||||||||
| transaction has not yet been realized | 1 | (29) | 15 | 21 | – | 8 | |||
| Unrealized foreign exchange movements | |||||||||
| on receivables/payables | |||||||||
| (and related assets/liabilities) | (15) | 5 | (18) | (26) | – | (54) | |||
| Operational EBITA | 340 | 318 | 216 | 164 | (89) | 949 | |||
| Operational EBITA margin (%) | 15.2% | 14.2% | 12.3% | 5.9% | n.a. | 11.1% |
(1) Amounts also include the incremental implementation costs in relation to the White Collar Productivity program.
Operational EPS is calculated as Operational net income divided by the weighted-average number of shares used in determining basic earnings per share.
Operational net income is calculated as Net income attributable to ABB adjusted for the net-of-tax impact of:
Amortization expense on intangibles arising upon acquisitions.
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), as well as certain other amounts included solely in provision for taxes, 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.
| Three months ended March 31, | |||||
|---|---|---|---|---|---|
| (\$ in millions, except per share data in \$) | 2016 | 2015 | |||
| EPS(1) | EPS(1) | ||||
| Net income (attributable to ABB) | 500 | 0.23 | 564 | 0.25 | |
| Restructuring and restructuring-related expenses(2), (3) | 51 | 0.02 | 19 | 0.01 | |
| Gains and losses from sale of businesses, | |||||
| (4) acquisition-related expenses and certain non-operational items |
2 | – | 8 | – | |
| FX/commodity timing differences in income from operations(2) | 11 | 0.01 | (21) | (0.01) | |
| Acquisition-related amortization(2) | 51 | 0.02 | 59 | 0.03 | |
| Operational net income / Operational EPS | 615 | 0.28 | 629 | 0.28 | |
| Constant currency Operational EPS adjustment | 0.04 | 0.03 | |||
| Operational EPS (constant currency basis - 2014 exchange rates) | 0.32 | 0.31 | |||
(1) EPS amounts are computed individually, therefore the sum of the per share amounts shown may not equal to the total.
(2) Net of tax at the Adjusted Group effective tax rate.
(3) Amounts also include the incremental implementation costs in relation to the White Collar Productivity program.
(4) Net of tax at the Adjusted Group effective tax rate, except for gains and losses from sale of businesses and certain other non-operational items, which are net of the actual related provision for taxes.
3%
(5) Operational EPS growth rate is Q1 2016 compared to Q1 2015 and is computed using unrounded amounts.
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.
| (\$ in millions) | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Short-term debt and current maturities of long-term debt | 1,566 | 1,454 |
| Long-term debt | 6,126 | 5,985 |
| Total debt | 7,692 | 7,439 |
| Cash and equivalents | 3,966 | 4,565 |
| Marketable securities and short-term investments | 2,095 | 1,633 |
| Cash and marketable securities | 6,061 | 6,198 |
| Net debt | 1,631 | 1,241 |
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) inventories, net, and (iii) prepaid expenses; less (iv) accounts payable, trade, (v) billings in excess of sales, (vi) advances from customers, and (vii) 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 th e 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) | March 31, 2016 | March 31, 2015 |
| Net working capital: | ||
| Receivables, net(1) | 10,131 | 10,599 |
| Inventories, net | 5,104 | 5,346 |
| Prepaid expenses | 268 | 289 |
| Accounts payable, trade | (4,323) | (4,473) |
| Billings in excess of sales | (1,331) | (1,396) |
| Advances from customers | (1,601) | (1,503) |
| Other current liabilities(2) | (2,949) | (2,900) |
| Net working capital | 5,299 | 5,962 |
| Total revenues for the three months ended: | ||
| March 31, 2016 / 2015 | 7,903 | 8,555 |
| December 31, 2015 / 2014 | 9,242 | 10,346 |
| September 30, 2015 / 2014 | 8,519 | 9,823 |
| June 30, 2015 / 2014 | 9,165 | 10,190 |
| Adjustment to annualize/eliminate revenues of certain acquisitions/divestments | (372) | |
| Adjusted revenues for the trailing twelve months | 34,829 | 38,542 |
| Net working capital as a percentage of revenues (%) | 15.2% | 15.5% |
(1) At March 31, 2016 and 2015 Receivables, net, included \$2,569 million and \$2,885 million, respectively, of unbilled receivables.
(2) Amounts exclude \$803 million and \$1,017 million at March 31, 2016 and 2015, respectively, related primarily to (a) income taxes payable, (b) current derivative liabilities, (c) pension and other employee benefits, and (d) payables under the share buyback program.
Free cash flow conversion to net income is calculated as Free cash flow divided by Net income attributable to ABB.
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.
| Purchase of | Proceeds | Changes in | |||
|---|---|---|---|---|---|
| Net cash | property, plant | from sale of | financing | ||
| provided by | and equipment | property, | receivables and | Net income | |
| operating | and intangible | plant and | other non-current | attributable | |
| (\$ in millions, unless otherwise indicated) | activities | assets | equipment | receivables | to ABB |
| Q2 2015 | 598 | (182) | 18 | 11 | 588 |
| Q3 2015 | 1,173 | (189) | 20 | (5) | 577 |
| Q4 2015 | 1,994 | (329) | 24 | 3 | 204 |
| Q1 2016 | 252 | (170) | 12 | (3) | 500 |
| Total for the trailing twelve months to March 31, 2016 | 4,017 | (870) | 74 | 6 | 1,869 |
| (\$ in millions, unless otherwise indicated) | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Net cash provided by operating activities | 4,017 | 3,818 |
| Adjusted for the effects of: | ||
| Purchases of property, plant and equipment and intangible assets | (870) | (876) |
| Proceeds from sale of property, plant and equipment | 74 | 68 |
| Changes in financing receivables and other non-current receivables | 6 | 9 |
| Free cash flow | 3,227 | 3,019 |
| Net income attributable to ABB | 1,869 | 1,933 |
| Free cash flow conversion to net income | 173% | 156% |
Finance net Definition
Finance net is calculated as Interest and dividend income less Interest and other finance expense.
| Three months ended March 31, | |||
|---|---|---|---|
| (\$ in millions) | 2016 | 2015 | |
| Interest and dividend income | 18 | 19 | |
| Interest and other finance expense | (72) | (71) | |
| Finance net | (54) | (52) |
Book-to-bill ratio is calculated as Orders received divided by Total revenues.
| Three months ended March 31, | |||
|---|---|---|---|
| (\$ in millions, unless otherwise indicated) | 2016 | 2015 | |
| Orders received | 9,253 | 10,404 | |
| Total revenues | 7,903 | 8,555 | |
| Book-to-bill ratio | 1.17 | 1.22 |
Corporate Communications P.O. Box 8131 8050 Zurich Switzerland Tel: +41 (0)43 317 71 11 Fax: +41 (0)43 317 79 58
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