Analysis of results of operations

Our consolidated results from operations were as follows:

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

2017

2016

2015

Orders

33,387

33,379

36,429

Order backlog at December 31,

22,414

22,981

24,121

 

 

 

 

Revenues

34,312

33,828

35,481

Cost of sales

(24,046)

(24,081)

(25,347)

Gross profit

10,266

9,747

10,134

Selling, general and administrative expenses

(5,607)

(5,349)

(5,574)

Non-order related research and development expenses

(1,365)

(1,300)

(1,406)

Other income (expense), net

140

(111)

(105)

Income from operations

3,434

2,987

3,049

Net interest and other finance expense

(203)

(188)

(209)

Provision for taxes

(860)

(781)

(788)

Income from continuing operations, net of tax

2,371

2,018

2,052

Income (loss) from discontinued operations, net of tax

(6)

16

3

Net income

2,365

2,034

2,055

Net income attributable to noncontrolling interests

(152)

(135)

(122)

Net income attributable to ABB

2,213

1,899

1,933

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

2,219

1,883

1,930

Net income

2,213

1,899

1,933

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.04

0.88

0.87

Net income

1.04

0.88

0.87

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1.03

0.87

0.87

Net income

1.03

0.88

0.87

A more detailed discussion of the orders, revenues, Operational EBITA and income from operations for our divisions follows in the sections of “Divisional analysis” below entitled “Electrification Products”, “Robotics and Motion”, “Industrial Automation”, “Power Grids” and “Corporate and Other”. Orders and revenues of our divisions include interdivisional transactions which are eliminated in the “Corporate and Other” line in the tables below.

Orders

 

 

 

 

% Change

($ in millions)

2017

2016

2015

2017

2016

(1)

Includes interdivisional eliminations.

Electrification Products

10,143

9,780

10,610

4%

(8)%

Robotics and Motion

8,468

7,858

8,272

8%

(5)%

Industrial Automation

6,554

5,991

7,398

9%

(19)%

Power Grids

9,600

10,844

11,425

(11)%

(5)%

Operating divisions

34,765

34,473

37,705

1%

(9)%

Corporate and Other(1)

(1,378)

(1,094)

(1,276)

n.a.

n.a.

Total

33,387

33,379

36,429

0%

(8)%

In 2017, total orders were flat (flat in local currencies). The increase in orders in the Industrial Automation division mainly reflects the B&R acquisition in July 2017 as well as the increase in demand for ABB Ability™ solutions. A recovery in the end-market demand contributed to the increase in orders for the Electrification Products division. In the Robotics and Motion division demand was supported by strong orders in the Robotics business. The decrease in orders in the Power Grids division mainly reflects lower large orders compared to 2016 which included significant orders from India and China for ultra-high voltage direct current (UHVDC) transmission projects.

In 2017, base orders increased 6 percent (6 percent in local currencies) with positive impacts across all divisions. The increase in base orders reflects improvements in the global economic conditions across our key markets. Large orders decreased 37 percent (36 percent in local currencies), partly reflecting ABB’s business model shift but also reflecting the impact of the large UHVDC orders in 2016 from India and China referred to above. For additional information about divisional order performance in all periods, please refer to the relevant sections of “Divisional analysis” below.

In 2016, total orders declined 8 percent (5 percent in local currencies) with orders decreasing in all divisions. The decline reflects ongoing macro-economic and geopolitical uncertainties and challenges in many markets. The low demand from both the onshore and offshore oil segments negatively impacted many businesses, particularly the Industrial Automation division. This also contributed to the negative order development in the Robotics and Motion division, despite the strong demand from various industries for robotics. Weak market conditions impacted the orders in the Electrification Products and in the Power Grids divisions.

In 2016, base orders declined 5 percent (2 percent in local currencies) with negative impacts across all divisions. The decline of base orders reflects the uncertain global economic conditions across our key markets. Large orders decreased 27 percent (25 percent in local currencies), impacted by considerable investment delays.

We determine the geographic distribution of our orders based on the location of the ultimate destination of the products’ end use, if known, or the location of the customer. The geographic distribution of our consolidated orders was as follows:

 

 

 

 

% Change

($ in millions)

2017

2016

2015

2017

2016

Europe

11,737

11,213

12,568

5%

(11)%

The Americas

9,749

9,351

10,505

4%

(11)%

Asia, Middle East and Africa

11,901

12,815

13,356

(7)%

(4)%

Total

33,387

33,379

36,429

0%

(8)%

Orders in 2017 increased in Europe and the Americas but were lower in Asia, Middle East and Africa, mainly due to the booking in 2016 of the large UHVDC orders in India and China referred to above. Both the Electrification Products and Robotics and Motion divisions saw growth in all regions while the Power Grids division saw declines in Asia, Middle East and Africa. Orders in Europe increased 5 percent (4 percent in local currencies) due primarily to an increase in base orders compared to 2016. Orders in Europe for the Electrification Products, Industrial Automation and Power Grids divisions grew in local currencies while remained flat for the Robotics and Motion division. In local currencies, orders were lower in Germany, Italy, Norway and Switzerland while orders increased in the United Kingdom, France and Spain. In the Americas orders increased 4 percent (3 percent in local currencies). In local currencies, orders increased in the U.S. and Canada. In Asia, Middle East and Africa, orders decreased 7 percent (6 percent in local currencies) as higher base orders were offset by lower large orders. Orders in China, India and Saudi Arabia decreased while orders increased in South Korea and the United Arab Emirates in local currencies.

Orders in 2016 declined in all regions, although we achieved growth within some divisions in Europe and Asia, Middle East and Africa. Orders in Europe decreased 11 percent (9 percent in local currencies) due primarily to lower large orders compared to 2015. Orders in Europe for the Electrification Products and the Robotics and Motion divisions grew in local currencies but were offset by decreases in the other divisions. In local currencies, orders were lower in Germany, the United Kingdom, Norway, Switzerland, Russia, France, Finland, Turkey and the Netherlands while orders increased in Italy, Sweden and Spain. In the Americas orders declined 11 percent (9 percent in local currencies) on lower base and large orders. In local currencies, orders decreased in the U.S. (mainly due to lower large orders), Canada, Brazil, Chile and Argentina while orders increased in Mexico. In Asia, Middle East and Africa, orders decreased 4 percent (flat in local currencies) as lower base orders were offset by strong demand for our power offering and higher large orders. Orders in China and India increased mainly due to investment activities in the HVDC power transmission technology while orders declined in Saudi Arabia, South Korea, the United Arab Emirates, Australia, Japan, South Africa and Qatar.

Order backlog

 

December 31,

% Change

($ in millions)

2017

2016

2015

2017

2016

(1)

Includes interdivisional eliminations.

Electrification Products

3,098

2,839

3,136

9%

(9)%

Robotics and Motion

3,961

3,660

3,785

8%

(3)%

Industrial Automation

5,376

5,409

6,199

(1)%

(13)%

Power Grids

11,330

11,638

11,707

(3)%

(1)%

Operating divisions

23,765

23,546

24,827

1%

(5)%

Corporate and Other(1)

(1,351)

(565)

(706)

n.a.

n.a.

Total

22,414

22,981

24,121

(2)%

(5)%

As at December 31, 2017, the consolidated order backlog declined 2 percent (8 percent in local currencies). Order backlog declined in the Industrial Automation and Power Grids divisions while increased in the Electrification Products as well as in Robotics and Motion divisions. The decrease in the order backlog was mainly due to high levels of execution from the order backlog while orders received during the year remained flat compared to 2016. The net impact on order backlog from divestments and acquisitions was a decrease of 4 percent.

As at December 31, 2016, the consolidated order backlog declined 5 percent (2 percent in local currencies) and was lower in all divisions. The decline in the Electrification Products division was driven by the Medium Voltage Products and Building Products businesses. In the Robotics and Motion division, the backlog was flat in local currencies as the increase in the Robotics was offset by declines in the other businesses. In the Industrial Automation division, order backlog declined and was lower across all businesses, except for in the Measurement and Analytics business. In the Power Grids division, local currency order backlog increased, driven by the Transformers business.

Revenues

 

 

 

 

% Change

($ in millions)

2017

2016

2015

2017

2016

(1)

Includes interdivisional eliminations.

Electrification Products

10,094

9,920

10,275

2%

(3)%

Robotics and Motion

8,401

7,906

8,188

6%

(3)%

Industrial Automation

6,880

6,654

7,219

3%

(8)%

Power Grids

10,394

10,660

11,245

(2)%

(5)%

Operating divisions

35,769

35,140

36,927

2%

(5)%

Corporate and Other(1)

(1,457)

(1,312)

(1,446)

n.a.

n.a.

Total

34,312

33,828

35,481

1%

(5)%

Revenues in 2017 increased 1 percent (1 percent in local currencies) as growth in 2017 was generally hindered by a lower opening order backlog compared to 2016. Revenues in the Robotics and Motion division were positively impacted by growth in the Robotics business with strong demand from the automotive and general industry sectors. The increase in revenues in the Industrial Automation division was mainly attributable to the acquisition of B&R in July 2017, partially offset by lower revenues in the division’s other businesses. Revenues in the Electrification Products division increased from both the distributors as well as certain end-customer channels. Revenues in the Power Grids division were impacted by weaker large order intake as well as a lower opening order backlog. For additional information about the divisional revenues performance in all periods, please refer to “Divisional analysis” below.

Revenues in 2016, decreased 5 percent (2 percent in local currencies) and declined in all divisions. Revenues were lower due to declining orders during the year and a lower opening order backlog compared to the beginning of 2015. In the Industrial Automation division, a continued low level of orders from the oil and gas industry, as well as from mining and metals, negatively impacted revenues. Revenues in the Power Grids division were impacted by weaker order intake, the exit from certain businesses as well as lower pull-through revenues from other divisions. Revenues were positively impacted by growth in the Robotics business, despite market challenges while revenues in the Electrification Products division slightly increased in local currencies.

We determine the geographic distribution of our revenues based on the location of the ultimate destination of the products’ end use, if known, or the location of the customer. The geographic distribution of our consolidated revenues was as follows:

 

 

 

 

% Change

($ in millions)

2017

2016

2015

2017

2016

Europe

11,840

11,315

11,602

5%

(2)%

The Americas

9,713

9,741

10,554

0%

(8)%

Asia, Middle East and Africa

12,759

12,772

13,325

0%

(4)%

Total

34,312

33,828

35,481

1%

(5)%

In 2017, revenues increased in Europe but were flat in the Americas and in Asia, Middle East and Africa. In Europe, revenues increased 5 percent (4 percent in local currencies) reflecting growth in the Electrification Products and Power Grids divisions, as well as in the Industrial Automation division, which benefited from the acquisition of B&R. In local currencies, revenues declined in Germany and the United Kingdom, while revenues increased in France, Italy, Norway and Sweden. Revenues in the Americas were flat (decreased 1 percent in local currencies). In local currencies, revenues decreased in Brazil, Canada, Chile and Peru while revenues were higher in the U.S. In Asia, Middle East and Africa, revenues were flat (flat in local currencies). In local currencies, revenues declined in Australia, Japan, Saudi Arabia, South Korea and Singapore while revenues increased in China and India.

In 2016, revenues decreased across all regions, although we achieved regional growth within some divisions. In Europe, revenues declined 2 percent (flat in local currencies) due to growth in the Electrification Products division and steady revenues in the Industrial Automation division. In local currencies, revenues declined in Sweden, Norway, Switzerland, Germany and France, while revenues increased in Russia, the United Kingdom, Italy and Spain. Revenues from the Americas decreased 8 percent (5 percent in local currencies). In local currencies, revenues decreased in the U.S. and Brazil while revenues were higher in Canada, Mexico, Argentina and Chile. In Asia, Middle East and Africa, revenues decreased 4 percent (1 percent in local currencies), supported by strong demand for our power offering. In local currencies, revenues declined in South Africa, Australia, Japan, Saudi Arabia and Singapore while revenues increased in China, India and Egypt.

Cost of sales

Cost of sales consists primarily of labor, raw materials and component costs but also includes indirect production costs, expenses for warranties, contract and project charges, as well as order-related development expenses incurred in connection with projects for which corresponding revenues have been recognized.

In 2017, cost of sales was flat (flat in local currencies) at $24,046 million. The Robotics and Motion division recorded the highest increase in cost of sales, which was due to revenue growth but also due to additional charges recorded in the turnkey full train retrofit business. As a percentage of revenues, cost of sales decreased from 71.2 percent in 2016 to 70.1 percent in 2017. The decrease in the cost of sales as a percentage of revenues occurred in all divisions except Robotics and Motion, and was impacted by the reversal in 2017 of previously recorded restructuring costs. Total restructuring costs in cost of sales, net of reversals, was $88 million in 2017 compared to $182 million in 2016. In addition, cost of sales continued to reflect improvements generated from supply chain programs aimed at reducing costs.

In 2016, cost of sales decreased 5 percent (2 percent in local currencies) to $24,081 million. As a percentage of revenues, cost of sales decreased from 71.4 percent in 2015 to 71.2 percent in 2016. In particular, the Industrial Automation and Power Grids divisions had a reduction in cost of sales as a percentage of revenues, resulting from improvement in project margins and savings from supply chain and operational excellence cost take-out programs. In 2016, cost of sales was negatively impacted by approximately 0.5 percent due to the charges recorded for a change in previously estimated warranty liabilities for certain solar inverters sold by Power-One in the Electrification Products division.

Selling, general and administrative expenses

The components of selling, general and administrative expenses were as follows:

($ in millions, unless otherwise stated)

2017

2016

2015

Selling expenses

3,585

3,480

3,729

Selling expenses as a percentage of orders received

10.7%

10.4%

10.2%

General and administrative expenses

2,022

1,869

1,845

General and administrative expenses as a percentage of revenues

5.9%

5.5%

5.2%

Total selling, general and administrative expenses

5,607

5,349

5,574

Total selling, general and administrative expenses as a percentage of revenues

16.3%

15.8%

15.7%

Total selling, general and administrative expenses as a percentage of the average of orders received and revenues

16.6%

15.9%

15.5%

In 2017, general and administrative expenses increased 8 percent compared to 2016 (8 percent in local currencies). As a percentage of revenues, general and administrative expenses increased from 5.5 percent to 5.9 percent. Although we recorded a reduction of $55 million in restructuring and restructuring-related expenses for the White Collar Productivity program compared to last year, general and administrative expenses increased driven by a series of strategic investments including the Power Up program and additional general and administrative expenses from the acquired B&R.

In 2016, general and administrative expenses increased 1 percent compared to 2015 (4 percent in local currencies). As a percentage of revenues, general and administrative expenses increased from 5.2 percent to 5.5 percent. General and administrative expenses were impacted by approximately $183 million of restructuring and restructuring-related expenses for the White Collar Productivity program. Restructuring-related expenses include the additional costs of running parallel operations during the relocation and transition phase, advisory costs for external consultants, expenses associated with our internal restructuring program implementation teams and costs for hiring and training personnel at new locations.

In 2017, selling expenses increased 3 percent compared to 2016 (2 percent in local currencies) primarily driven by extended sales activities in selective business units like Robotics, Grid Integration, Building Products and Grid Automation and additional selling expenses from the acquired B&R, despite a reduction of $32 million in expenses for the White Collar Productivity program. Selling expenses as a percentage of orders received increased from 10.4 percent to 10.7 percent on higher expenses.

In 2016, selling expenses decreased 7 percent compared to 2015 (4 percent in local currencies) primarily driven by lower restructuring expenses related to the White Collar Productivity program. Selling expenses as a percentage of orders received increased from 10.2 percent to 10.4 percent on lower orders. Selling expenses were impacted by approximately $34 million from costs for the White Collar Productivity program.

In 2017, selling, general and administrative expenses increased 5 percent compared to 2016 (4 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses increased from 15.9 percent to 16.6 percent mainly from the impact of the higher expenses described above.

In 2016, selling, general and administrative expenses decreased 4 percent compared to 2015 (2 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses increased from 15.5 percent to 15.9 percent mainly impacted by lower orders and revenues.

Non-order related research and development expenses

In 2017, non-order related research and development expenses increased 5 percent (5 percent in local currencies) compared to 2016 reflecting a focused increase in investment to build up competencies in certain new technologies. In 2016, non-order related research and development expenses decreased 8 percent (6 percent in local currencies) compared to 2015 and reflects the savings realized by reducing the number of employees.

Non-order related research and development expenses as a percentage of revenues increased in 2017 to 4.0 percent, after decreasing to 3.8 percent in 2016 from 4.0 percent in 2015.

Other income (expense), net

($ in millions)

2017

2016

2015

(1)

Excluding asset impairments.

Restructuring and restructuring-related expenses(1)

(49)

(49)

(67)

Net gain from sale of property, plant and equipment

36

38

26

Asset impairments

(29)

(61)

(33)

Net gain (loss) from sale of businesses

252

(10)

(20)

Misappropriation loss, net

(9)

(73)

Income from equity-accounted companies and other income (expense), net

(61)

44

(11)

Total

140

(111)

(105)

“Other income (expense), net” primarily includes certain restructuring and restructuring-related expenses, gains and losses from sale of businesses and sale of property, plant and equipment, recognized asset impairments, as well as our share of income or loss from equity-accounted companies.

In 2017, “Other income (expense), net” was an income of $140 million compared to an expense of $111 million in 2016. The change was mainly due to $252 million net gains recorded in 2017 from sales of businesses, primarily relating to the Cables business. In 2017, we also recorded higher charges in connection with certain legal claims (recorded within other expense) and lower asset impairments. The change compared to 2016 also reflects that in 2016 we recorded the large misappropriation loss described below.

In 2016, “Other income (expense), net” was an expense of $111 million compared to an expense of $105 million in 2015. In 2016, we recorded lower restructuring costs, higher gains on sale of property, plant and equipment, and lower losses from sale of businesses. In addition, higher asset impairments negatively impacted Other income (expense), net in 2016. We also recorded a loss of $73 million, net of expected insurance recoveries, for the misappropriation of cash by the treasurer of our subsidiary in South Korea, which was uncovered in February 2017. In addition, in 2016, other income included gains on certain foreign currency derivatives entered into in connection with the planned sale of the Cables business.

Income from operations

 

 

 

 

% Change(1)

($ in millions)

2017

2016

2015

2017

2016

(1)

Certain percentages are stated as n.a. as the computed change would not be meaningful.

Electrification Products

1,349

1,091

1,247

24%

(13)%

Robotics and Motion

1,035

1,034

1,058

0%

(2)%

Industrial Automation

782

769

793

2%

(3)%

Power Grids

797

830

554

(4)%

50%

Operating divisions

3,963

3,724

3,652

6%

2%

Corporate and Other

(535)

(741)

(617)

n.a.

n.a.

Intersegment elimination

6

4

14

n.a.

n.a.

Total

3,434

2,987

3,049

15%

(2)%

In 2017 and 2016, changes in income from operations were a result of the factors discussed above and in the divisional analysis below.

Net interest and other finance expense

Net interest and other finance expense consists of “Interest and dividend income” offset by “Interest and other finance expense”.

“Interest and other finance expense” includes interest expense on our debt, the amortization of upfront transaction costs associated with long-term debt and committed credit facilities, commitment fees on credit facilities, foreign exchange gains and losses on financial items and gains and losses on marketable securities. In addition, interest accrued relating to uncertain tax positions is included within interest expense.

($ in millions)

2017

2016

2015

Interest and dividend income

74

73

77

Interest and other finance expense

(277)

(261)

(286)

Net interest and other finance expense

(203)

(188)

(209)

In 2017, “Interest and other finance expense” increased compared to 2016. Interest expense on issued bonds and other outstanding borrowings was lower than 2016 but was offset by higher interest charges for uncertain tax positions.

In 2016, “Interest and other finance expense” decreased compared to 2015. Interest expense on bonds and other debt was lower and interest charges for uncertain tax positions were lower in 2016 compared to 2015. This was partially offset by higher foreign exchange losses.

Provision for taxes

($ in millions)

2017

2016

2015

Income from continuing operations before taxes

3,231

2,799

2,840

Provision for taxes

(860)

(781)

(788)

Effective tax rate for the year

26.6%

27.9%

27.7%

In 2017, the effective tax rate decreased from 27.9 percent to 26.6 percent. The distribution of income within the group resulted in a higher weighted-average global tax rate. In addition, the impact from changes to the interpretation of law and double tax treaty agreements by competent tax authorities increased the effective tax rate. However, these were more than offset primarily by the positive impact from non-taxable amounts for the net gain from sale of businesses and the net benefit from a change in tax rate.

In 2016, the effective tax rate increased to 27.9 percent from 27.7 percent. The distribution of income within the group resulted in a lower weighted-average global tax rate. Changes in the valuation allowance in 2016 compared to 2015 lowered the effective tax rate, as did the impact of the interpretation of tax law and double tax treaty agreements by competent tax authorities. However, these were offset by the negative impacts of changes in enacted tax rates and lower benefits arising from research and development activities.

In 2015, the effective tax rate of 27.7 percent included a net increase in valuation allowance of deferred taxes of $57 million, as we determined it was not more likely than not that such deferred tax assets would be realized. In addition, we recorded a benefit of $50 million relating to tax credits arising from research and development activities and a charge of $74 million relating to the interpretation of tax law and double tax treaty agreements by competent tax authorities.

Income from continuing operations, net of tax

As a result of the factors discussed above, income from continuing operations, net of tax, increased by $353 million to $2,371 million in 2017 compared to 2016, and decreased $34 million to $2,018 million in 2016 compared to 2015.

Income (loss) from discontinued operations, net of tax

Income (loss) from discontinued operations, net of tax, for 2017, 2016 and 2015, was not significant.

Net income attributable to ABB

As a result of the factors discussed above, net income attributable to ABB increased by $314 million to $2,213 million in 2017 compared to 2016, and decreased by $34 million to $1,899 million in 2016 compared to 2015.

Earnings per share attributable to ABB shareholders

(in $)

2017

2016

2015

Income from continuing operations, net of tax:

 

 

 

Basic

1.04

0.88

0.87

Diluted

1.03

0.87

0.87

Net income attributable to ABB:

 

 

 

Basic

1.04

0.88

0.87

Diluted

1.03

0.88

0.87

Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, 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 our share-based payment arrangements. See “Note 20 Earnings per share” to our Consolidated Financial Statements.