Analysis of results of operations

Our consolidated results from operations were as follows:

Orders and order backlog:

($ in millions)

2018

2017

2016

Orders

28,590

25,034

23,658

Order backlog at December 31,

13,084

12,491

12,950

Income statement data:

($ in millions)

2018

2017

2016

Revenues

27,662

25,196

24,929

Cost of sales

(19,118)

(17,350)

(17,396)

Gross profit

8,544

7,846

7,533

Selling, general and administrative expenses

(5,295)

(4,765)

(4,532)

Non-order related research and development expenses

(1,147)

(1,013)

(967)

Other income (expense), net

124

162

(105)

Income from operations

2,226

2,230

1,929

Net interest and other finance expense

(190)

(161)

(130)

Non-operational pension (cost) credit

83

33

(38)

Provision for taxes

(544)

(583)

(526)

Income from continuing operations, net of tax

1,575

1,519

1,235

Income from discontinued operations, net of tax

723

846

799

Net income

2,298

2,365

2,034

Net income attributable to noncontrolling interests

(125)

(152)

(135)

Net income attributable to ABB

2,173

2,213

1,899

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1,514

1,441

1,172

Income from discontinued operations, net of tax

659

772

727

Net income

2,173

2,213

1,899

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

0.71

0.67

0.54

Income from discontinued operations, net of tax

0.31

0.36

0.34

Net income

1.02

1.04

0.88

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

0.71

0.67

0.54

Income from discontinued operations, net of tax

0.31

0.36

0.34

Net income

1.02

1.03

0.88

A more detailed discussion of the orders, revenues, income from operations and Operational EBITA for our divisions follows in the sections of “Divisional analysis” below entitled “Electrification Products”, “Industrial Automation”, “Robotics and Motion”, 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)

2018

2017

2016

2018

2017

Electrification Products

11,867

10,143

9,780

17%

4%

Industrial Automation

7,631

6,553

5,990

16%

9%

Robotics and Motion

9,570

8,465

7,857

13%

8%

Operating divisions

29,068

25,161

23,627

16%

6%

Corporate and Other

 

 

 

 

 

Non-Core and divested businesses

364

643

933

(43)%

(31)%

Intersegment Eliminations and Other

(842)

(770)

(902)

n.a.

n.a.

Total

28,590

25,034

23,658

14%

6%

In 2018, total orders increased 14 percent (14 percent in local currencies). Orders grew organically in all divisions with the most significant growth in the Robotics and Motion division, supported by strong orders in the Drives business while the Industrial Automation division also received strong order levels in the Marine & Ports business. Order growth reflected a recovery of demand in certain end-markets as well as the demand for ABB Ability™. Orders also increased approximately 6 percent due to changes in the business portfolio as we acquired GE Industrial Solutions at the end of June 2018 and also benefitted from a full year of orders in B&R which we acquired in July 2017. For additional information about divisional order performance in all periods, please refer to the relevant sections of “Divisional analysis”.

In 2018, base orders increased 14 percent (13 percent in local currencies) with growth in all divisions. The increase in base orders reflects improvements in the global economic conditions across our key markets. Large orders also increased 20 percent (18 percent in local currencies).

In 2017, total orders were up 6 percent (6 percent in local currencies). Growth was driven by the Robotics and Motion division where demand was supported by strong orders in the Robotics business. Orders grew in the Electrification Products division as end-market demand improved in the second half of the year. In 2017, orders also reflected an increase in demand for ABB Ability™ solutions. Changes in the business portfolio had a limited impact on order growth as the increase in orders due to the acquisition of B&R was offset by the impacts of divestments which occurred in 2017.

In 2017, base orders increased 6 percent (7 percent in local currencies) with growth in all divisions. The increase in base orders reflects improvements in economic conditions across our key markets. Large orders decreased 3 percent (3 percent in local currencies).

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)

2018

2017

2016

2018

2017

Europe

10,725

9,202

8,920

17%

3%

The Americas

8,243

7,006

6,520

18%

7%

Asia, Middle East and Africa

9,622

8,826

8,218

9%

7%

Total

28,590

25,034

23,658

14%

6%

Orders in 2018 increased in all regions. In Europe orders grew 17 percent (14 percent in local currencies) and grew in all divisions. In local currencies, orders increased in Finland, Switzerland, Germany, Sweden and Italy while they decreased in the United Kingdom. In the Americas orders increased 18 percent (19 percent in local currencies). In local currencies, orders increased in the U.S., Brazil, Mexico and Argentina while orders decreased in Canada, Chile and Panama. In Asia, Middle East and Africa orders grew 9 percent (8 percent in local currencies), driven by the Robotics and Motion division. Orders were higher in China, Japan, Egypt, Malaysia and India while they declined in Saudi Arabia, South Korea and South Africa. Growth in the Americas included a 12 percent impact due to acquisitions, including GEIS and B&R. In Europe, these acquisitions had a positive impact of 4 percent while the impact in Asia, Middle East and Africa was 2 percent.

Orders in 2017 were higher in all regions. Orders in Europe increased 3 percent (2 percent in local currencies) due primarily to an increase in base orders compared to 2016. Orders in Europe in the Electrification Products and Industrial Automation divisions grew in local currencies while they were flat in 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 7 percent (7 percent in local currencies). In local currencies, orders increased in the U.S. and Canada. In Asia, Middle East and Africa, orders grew 7 percent (8 percent in local currencies). Orders grew in local currencies in China, India and South Korea while orders decreased in Saudi Arabia.

Order backlog

 

December 31,

% Change

($ in millions)

2018

2017

2016

2018

2017

Electrification Products

4,113

3,098

2,839

33%

9%

Industrial Automation

5,148

5,301

5,230

(3)%

1%

Robotics and Motion

4,016

3,823

3,514

5%

9%

Operating divisions

13,277

12,222

11,583

9%

6%

Corporate and Other

 

 

 

 

 

Non-core and divested businesses

555

1,055

2,308

(47)%

(54)%

Intersegment Eliminations and Other

(748)

(786)

(941)

n.a.

n.a.

Total

13,084

12,491

12,950

5%

(4)%

Consolidated order backlog increased 5 percent (10 percent in local currencies) from December 31, 2017, to December 31, 2018. Order backlog increased in the Electrification Products division due to the acquisition of GEIS in June 2018 and in the Robotics and Motion division. In the Industrial Automation division, the order backlog decreased compared to the end of 2017 due to high levels of execution that could not be fully compensated with new orders. The net impact on order backlog from divestments and acquisitions was an increase of 4 percent.

Consolidated order backlog declined 4 percent (9 percent in local currencies) from December 31, 2016, to December 31, 2017. Order backlog declined in the Industrial Automation division in local currencies while increasing in the Electrification Products as well as in the Robotics and Motion divisions. The decrease in the order backlog was mainly due to the divestment of the cable business as the net impact on order backlog from divestments and acquisitions was a decrease of 7 percent

Revenues

 

 

 

 

% Change

($ in millions)

2018

2017

2016

2018

2017

Electrification Products

11,686

10,094

9,920

16%

2%

Industrial Automation

7,394

6,879

6,654

7%

3%

Robotics and Motion

9,147

8,396

7,888

9%

6%

Operating divisions

28,227

25,369

24,462

11%

4%

Corporate and Other

 

 

 

 

 

Non-core and divested businesses

273

661

1,595

(59)%

(59)%

Intersegment Eliminations and Other

(838)

(834)

(1,128)

n.a.

n.a.

Total

27,662

25,196

24,929

10%

1%

Revenues in 2018 increased 10 percent (9 percent in local currencies) with growth in all divisions, reflecting the trend in orders during 2018. In Electrification Products, the increase in revenues was mainly attributable to the acquisition of GEIS but also other revenues through distributors and to end-customer channels grew compared to 2017. The increase in revenues in the Industrial Automation division was mainly attributable to the inclusion of a full year of revenues for B&R which was acquired in July 2017 and a recovery in Measurement and Analytics business. The growth in the Robotics and Motion division was mainly attributable to the growth in the Drives business. For additional information about the divisional revenues performance in all periods, please refer to “Divisional analysis”.

Revenues in 2017 increased 1 percent (flat 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 with growth from both the distributors as well as certain end-customer channels.

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)

2018

2017

2016

2018

2017

Europe

10,129

9,142

8,959

11%

2%

The Americas

8,042

6,870

6,807

17%

1%

Asia, Middle East and Africa

9,491

9,184

9,163

3%

0%

Total

27,662

25,196

24,929

10%

1%

In 2018, revenues increased in all regions. In Europe, revenues increased 11 percent (9 percent in local currencies) reflecting growth in the Robotics and Motion division, the Electrification Products division, which benefited from the acquisition of GEIS, as well as the Industrial Automation division, which benefited from the inclusion of a full year of revenues from B&R. In local currencies, revenues declined in Sweden, Norway and the United Kingdom, while revenues increased in Switzerland, Spain and Poland. Revenues in the Americas increased 17 percent (19 percent in local currencies), mainly driven by the acquisition of GEIS. In local currencies, revenues were higher in the U.S., Canada, Brazil, Mexico and Argentina. In Asia, Middle East and Africa, revenues increased 3 percent (3 percent in local currencies). In local currencies, revenues declined in Saudi Arabia, Qatar and South Korea while revenues increased in China, India, and Australia.

In 2017, revenues increased in Europe and in the Americas but were flat in Asia, Middle East and Africa. In Europe, revenues increased 2 percent (1 percent in local currencies) reflecting growth in the Robotics and Motion and Electrification Products 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, Spain and Sweden. Revenues in the Americas were up 1 percent (flat in local currencies). In local currencies, revenues decreased in Brazil, Canada, Chile and Peru, while revenues were higher in the United States. In Asia, Middle East and Africa, revenues were flat (also flat in local currencies). In local currencies, revenues declined in India, Japan, Saudi Arabia, South Korea and Singapore while revenues increased in China and Australia.

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 2018, cost of sales increased 10 percent (10 percent in local currencies) to $19,118 million, a similar increase as revenues. Growth was due to the acquisition of GEIS, a full year of inclusion of B&R and growth in the Robotics and Motion division. Cost of sales as a percentage of revenues increased slightly from 68.9 percent in 2017 to 69.1 percent in 2018, due to the impact of the lower gross margin business in the acquired GEIS business, the impact of higher commodity prices and certain project-related charges in the non-core EPC business. Cost of sales benefited from continued efforts to generate savings from supply chain and operational excellence programs.

In 2017, cost of sales was flat (flat in local currencies) at $17,350 million while revenues increased slightly. As a percentage of revenues, cost of sales decreased from 69.8 percent in 2016 to 68.9 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 $72 million in 2017 compared to $126 million in 2016. In addition, cost of sales continued to reflect improvements generated from supply chain programs aimed at reducing costs. In 2017, cost of sales also included additional charges recorded in the turnkey full train retrofit business, which is included as a non-core business within Corporate and Other.

Selling, general and administrative expenses

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

($ in millions, unless otherwise stated)

2018

2017

2016

Selling expenses

3,228

2,864

2,796

Selling expenses as a percentage of orders received

11.3%

11.4%

11.8%

General and administrative expenses

2,067

1,901

1,736

General and administrative expenses as a percentage of revenues

7.5%

7.5%

7.0%

Total selling, general and administrative expenses

5,295

4,765

4,532

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

19.1%

18.9%

18.2%

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

18.8%

19.0%

18.7%

In 2018, general and administrative expenses increased 9 percent compared to 2017 (8 percent in local currencies). As a percentage of revenues, general and administrative expenses remained at 7.5 percent. Despite a significant reduction in restructuring and restructuring-related expenses for the White Collar Productivity program of $131 million compared to last year, general and administrative expenses increased driven by the continuation of a series of strategic initiatives and additional general and administrative expenses from the acquired B&R and GEIS businesses. General and administrative expenses in 2018 includes $297 million of stranded corporate costs compared with $286 million in 2017. Stranded costs are overhead and other management costs which were previously allocated to the Power Grids business which is reported as discontinued operations.

In 2017, general and administrative expenses increased 10 percent compared to 2016 (9 percent in local currencies). As a percentage of revenues, general and administrative expenses increased from 7.0 percent to 7.5 percent. Although we recorded a reduction of $48 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 business. General and administrative expenses in 2017 includes $286 million of stranded corporate costs compared with $252 million in 2016.

In 2018, selling expenses increased 13 percent compared to 2017 (12 percent in local currencies) primarily driven by extended sales activities in selective business units like Robotics, Drives and Motors & Generators and additional selling expenses from the acquired B&R and GEIS businesses. Selling expenses as a percentage of orders received decreased from 11.4 percent to 11.3 percent on higher orders received.

In 2017, selling expenses increased 2 percent compared to 2016 (2 percent in local currencies) primarily driven by extended sales activities in selective business units like Robotics and Building Products and additional selling expenses from the acquired B&R business, despite a reduction of $29 million in expenses for the White Collar Productivity program. Selling expenses as a percentage of orders received decreased from 11.8 percent to 11.4 percent on higher orders received.

In 2018, selling, general and administrative expenses increased 11 percent compared to 2017 (10 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses decreased from 19.0 percent to 18.8 percent mainly from the impact of the higher average orders and revenues.

In 2017, selling, general and administrative expenses increased 5 percent compared to 2016 (5 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses increased from 18.7 percent to 19.0 percent mainly from the impact of the higher expenses described above.

Non-order related research and development expenses

In 2018, non-order related research and development expenses increased 13 percent (11 percent in local currencies) compared to 2017 due to expanded investment in specific future growth areas. In 2017, non-order related research and development expenses increased 5 percent (4 percent in local currencies) compared to 2016 reflecting a focused increase in investment to build up competencies in certain new technologies.

Non-order related research and development expenses as a percentage of revenues increased in 2018 to 4.1 percent, after increasing to 4.0 percent in 2017 from 3.9 percent in 2016.

Other income (expense), net

($ in millions)

2018

2017

2016

(1)

Excluding asset impairments.

Restructuring and restructuring-related expenses(1)

(37)

(35)

(35)

Net gain from sale of property, plant and equipment

50

37

37

Asset impairments

(36)

(27)

(57)

Net gain (loss) from sale of businesses

57

252

(10)

Misappropriation (loss) recovery, net

18

(9)

(73)

Gain on liquidation of foreign subsidiary

31

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

41

(56)

33

Total

124

162

(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 2018, “Other income (expense), net” was an income of $124 million, lower than in 2017. The primary reason was that 2017 included a significant gain on sale of the Cables business. Partially offsetting this was that 2018 included lower costs for legal claims (recorded within other expense), a currency-related gain on a substantial liquidation of a foreign subsidiary and a partial recovery of funds misappropriated by the former treasurer of our subsidiary in South Korea in previous years.

In 2017, “Other income (expense), net” was an income of $162 million compared to an expense of $105 million in 2016. The change was mainly due to a significant gain recorded on the sale of the Cables business in 2017. In 2017, we also recorded higher charges in connection with certain legal claims and lower asset impairments. The change compared to 2016 also reflects that in 2016 we recorded a large misappropriation loss, for the misappropriation of cash by the treasurer of our subsidiary in South Korea.

Income from operations

 

 

 

 

% Change

($ in millions)

2018

2017

2016

2018

2017

Electrification Products

1,290

1,352

1,094

(5)%

24%

Industrial Automation

887

798

772

11%

3%

Robotics and Motion

1,346

1,126

1,048

20%

7%

Operating divisions

3,523

3,276

2,914

8%

12%

Corporate and Other

(1,302)

(1,052)

(989)

n.a.

n.a.

Intersegment elimination

5

6

4

n.a.

n.a.

Total

2,226

2,230

1,929

0%

16%

In 2018 and 2017, changes in income from operations were a result of the factors discussed above and in the divisional analysis.

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. “Interest and other finance expense” excludes interest expense which has been allocated to discontinued operations.

($ in millions)

2018

2017

2016

Interest and dividend income

72

73

71

Interest and other finance expense

(262)

(234)

(201)

Net interest and other finance expense

(190)

(161)

(130)

In 2018, “Interest and other finance expense” increased compared to 2017 primarily due to an increase in average outstanding commercial paper borrowings and the interest expense associated with the bonds issued in 2018.

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.

Non-operational pension (cost) credit

The Non-operational pension credit of $83 million in 2018 was higher than the $33 million recorded in 2017 primarily due to a reduction in 2018 of the discount rate applicable to the computation of the defined benefit pension obligation and a larger pension asset base used in the computation of the expected return on plan assets. The change in the amount in 2017 compared to the Non-operational pension cost of $38 million in 2016 was due primarily to changes in actuarial assumptions, including the discount rate but also lower curtailment and settlement costs in 2017 compared to 2016.

Provision for taxes

($ in millions)

2018

2017

2016

Income from continuing operations before taxes

2,119

2,102

1,761

Provision for taxes

(544)

(583)

(526)

Effective tax rate for the year

25.7%

27.7%

29.9%

In 2018, the effective tax rate decreased from 27.7 percent to 25.7 percent. The distribution of income within the Group resulted in a lower weighted-average global tax rate. In addition, the impact from changes in interpretation of law and double tax treaty agreements by competent tax authorities decreased the effective tax rate. These impacts were partially offset by a negative impact from changes in valuation allowance and a lower positive impact compared to 2017 from non-taxable amounts for net gains from sale of businesses.

In 2017, the effective tax rate decreased from 29.9 percent to 27.7 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.

Income from continuing operations, net of tax

As a result of the factors discussed above, income from continuing operations, net of tax, increased by $56 million to $1,575 million in 2018 compared to 2017, and increased by $284 million to $1,519 million in 2017 compared to 2016.

Income from discontinued operations, net of tax

Income from discontinued operations, net of tax, was $723 million, $846 million and $799 million for 2018, 2017 and 2016, respectively.

In December 2018, we announced an agreement to divest 80.1 percent of our Power Grids business to Hitachi. The business also includes certain real estate properties which were previously reported within Corporate and Other. The divestment is expected to be completed in the first half of 2020, following the receipt of customary regulatory approvals. As this divestment represents a strategic shift that will have a major effect on our operations and financial results, the results of operations for this business have been presented as discontinued operations for all periods presented.

Income from discontinued operations before taxes excludes certain costs which were previously allocated to the Power Grids division as these costs were not directly attributable to the business. As a result, $297 million, $286 million and $252 million, for 2018, 2017 and 2016, respectively, of allocated overhead and other management costs (stranded corporate costs), which were previously included in the measure of division profit for Power Grids are now reported as part of Corporate and Other. In 2018, income from discontinued operations, before taxes, includes $18 million for costs incurred to execute the transaction.

Income from discontinued operations for 2018, 2017 and 2016 included income from operations of $951 million, $1,119 million and $1,050 million, respectively. In addition, in 2018, 2017 and 2016 we recorded $228 million, $273 million and $251 million, respectively, as provision for taxes within discontinued operations.

For additional information on the planned divestment and discontinued operations see “Note 3 Changes in presentation of financial statements” to our Consolidated Financial Statements.

Net income attributable to ABB

As a result of the factors discussed above, net income attributable to ABB decreased by $40 million to $2,173 million in 2018 compared to 2017, and increased by $314 million to $2,213 million in 2017 compared to 2016.

Earnings per share attributable to ABB shareholders

(in $)

2018

2017

2016

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

0.71

0.67

0.54

Income from discontinued operations, net of tax

0.31

0.36

0.34

Net income

1.02

1.04

0.88

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

0.71

0.67

0.54

Income from discontinued operations, net of tax

0.31

0.36

0.34

Net income

1.02

1.03

0.88

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.