Financial position

Balance sheets

 

December 31,

% Change

($ in millions)

2018

2017

Current assets

 

 

 

Cash and equivalents

3,445

4,526

(24)%

Marketable securities and short-term investments

712

1,083

(34)%

Receivables, net

6,386

5,861

9%

Contract assets

1,082

1,141

(5)%

Inventories, net

4,284

3,737

15%

Prepaid expenses

176

159

11%

Other current assets

616

585

5%

Assets held for sale

5,164

5,043

2%

Total current assets

21,865

22,135

(1)%

For a discussion on cash and equivalents, see sections “Liquidity and Capital Resources – Principal sources of funding” and “Cash flows” for further details.

Marketable securities and short-term investments decreased in 2018 as the amount of excess liquidity available for investments was reduced as funds were needed for acquisitions of businesses. The reduction resulted primarily in lower amounts deposited with banks with fixed deposit terms over three months (see “Cash flows – Investing activities”, below, and “Note 5 Cash and equivalents, marketable securities and short-term investments” to our Consolidated Financial Statements).

Receivables increased 9 percent (14 percent in local currencies). The increase was primarily due to the impact of the acquisition of GEIS. For details on the components of Receivables, see “Note 8 Receivables, net and Contract assets and liabilities” to our Consolidated Financial Statements.

Contract assets decreased 5 percent (2 percent in local currencies).

Inventories increased 15 percent (20 percent in local currencies). The increase in inventory was primarily due to the impact of the GEIS acquisition but also due to increases of inventories resulting from growth in certain businesses.

 

December 31,

% Change

($ in millions)

2018

2017

Current liabilities

 

 

 

Accounts payable, trade

4,424

3,736

18%

Contract liabilities

1,707

1,792

(5)%

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

2,031

726

180%

Provisions for warranties

948

909

4%

Other provisions

1,372

1,277

7%

Other current liabilities

3,780

3,509

8%

Liabilities held for sale

4,185

4,520

(7)%

Total current liabilities

18,447

16,469

12%

Accounts payable increased 18 percent (22 percent in local currencies) primarily as a result of the acquisition of GEIS, but as well as a result of continuing efforts to negotiate extended payment terms with suppliers. During 2018, we also enhanced our supplier payment processes and the changes resulted in generally longer payment times.

The increase in Short-term debt and current maturities of long-term debt was primarily due to increases in the U.S. and Euro commercial paper programs of $205 million and the reclassification to short-term debt of the EUR 1,250 million bond (having a book value of $1,431 million) partially offset by the repayment at maturity of the CHF 350 million bond.

Contract liabilities decreased 5 percent (flat in local currencies).

Provisions for warranties increased 4 percent (8 percent in local currencies). Warranties increased approximately 5 percent due to the acquisition of GEIS. In addition, we recorded an increase of $92 million in the warranty provision relating to a divested business. We also had higher claims paid in cash due to warranties in the solar business. For details on the change in the Provision for warranties, see “Note 15 Commitments and contingencies” to our Consolidated Financial Statements.

Other provisions increased 7 percent (10 percent in local currencies) as we recorded higher loss order provisions for certain EPC projects in the non-core business.

The increase in Other current liabilities of 8 percent (12 percent in local currencies) was primarily due to the impact on accrued liabilities of the acquired business of GEIS.

 

December 31,

% Change

($ in millions)

2018

2017

Non-current assets

 

 

 

Property, plant and equipment, net

4,133

3,804

9%

Goodwill

10,764

9,536

13%

Other intangible assets, net

2,607

2,425

8%

Prepaid pension and other employee benefits

83

143

(42)%

Investments in equity-accounted companies

87

72

21%

Deferred taxes

1,006

1,212

(17)%

Other non-current assets

469

571

(18)%

Non-current assets held for sale

3,427

3,560

(4)%

Total non-current assets

22,576

21,323

6%

In 2018, Property, plant and equipment increased 9 percent (13 percent in local currencies) predominately due to the acquisition of GEIS, but as well due to the significant capital expenditures in the recently acquired B&R as well as the expenditures for the Xiamen hub construction in China.

In 2018, Goodwill increased 13 percent (15 percent in local currencies) due primarily to the acquisition of GEIS.

Other intangible assets increased 8 percent (10 percent in local currencies) primarily due to the addition of intangibles related to the acquisition of GEIS, partially offset by the impact of amortization of intangibles in 2018. For additional information on intangible assets see “Note 11 Goodwill and other intangible assets” to our Consolidated Financial Statements.

In 2018, Deferred taxes, non-current, decreased 17 percent (11 percent in local currencies) primarily due to the impacts of the adoption of a new accounting standard affecting the income tax consequences of intra-entity transfer of assets other than inventory (see “Note 2 Significant accounting policies” to our Consolidated Financial Statements).

 

December 31,

% Change

($ in millions)

2018

2017

Non-current liabilities

 

 

 

Long-term debt

6,587

6,682

(1)%

Pension and other employee benefits

1,828

1,589

15%

Deferred taxes

927

1,050

(12)%

Other non-current liabilities

1,689

1,849

(9)%

Non-current liabilities held for sale

429

470

(9)%

Total non-current liabilities

11,460

11,640

(2)%

Long-term debt decreased 1 percent. During 2018, we issued three new bonds with net proceeds totaling $1,494 million. This was offset by the reclassification to short-term debt of the EUR 1,250 million bond, which had a book value of $1,493 million at the end of 2017. See “Liquidity and Capital Resources – Debt and interest rates” for information on long-term debt.

The increase in the Pension and other employee benefits liability was primarily due to lower than expected returns on pension plan assets in 2018. For additional information, see “Note 17 Employee benefits” to our Consolidated Financial Statements.

For a breakdown of Other non-current liabilities, see “Note 13 Other provisions, other current liabilities and other non-current liabilities” to our Consolidated Financial Statements.

Cash flows

The Consolidated Statements of Cash Flows are shown on a continuing operations basis, with the effects of discontinued operations shown in aggregate for each major cash flow activity.

The Consolidated Statements of Cash Flows can be summarized as follows:

($ in millions)

2018

2017

2016

Net cash provided by operating activities

2,924

3,799

3,843

Net cash used in investing activities

(3,085)

(1,450)

(1,305)

Net cash used in financing activities

(789)

(1,735)

(3,355)

Effects of exchange rate changes on cash and equivalents

(131)

268

(104)

Net change in cash and equivalents

(1,081)

882

(921)

Operating activities

($ in millions)

2018

2017

2016

Net income

2,298

2,365

2,034

Less: Income from discontinued operations, net of tax

(723)

(846)

(799)

Depreciation and amortization

916

836

870

Total adjustments to reconcile net income to net cash provided by operating activities (excluding depreciation and amortization)

(189)

(406)

(26)

Total changes in operating assets and liabilities

50

639

528

Net cash provided by operating activities – continuing operations

2,352

2,588

2,607

 

 

 

 

Net cash provided by operating activities – discontinued operations

572

1,211

1,236

Cash flows from operating activities of continuing operations in 2018 provided net cash of $2,352 million, a decrease of 9 percent from 2017 as higher cash effective net income (net income adjusted for depreciation, amortization and other non-cash items) was offset by a lower improvement in working capital. Cash flow impacts from changes in working capital continued to show the impact of extending payment terms with suppliers and the changes in our supplier payment process, which resulted in an increase in trade payables. Payables and inventory also increased due to higher inventories to support growth. In addition, the timing of tax payments, including income taxes and value-added taxes, negatively impacted cash provided by operating activities.

Cash flows from operating activities in 2017 provided net cash of $2,588 million, a decrease of 1 percent from 2016 as lower cash effective net income mostly offset the positive cash effects of stronger net working capital management. Working capital improvements included a significant increase in trade and non-trade payables, resulting from continuing company-wide efforts to extend payment terms with suppliers. Partially offsetting these benefits were cash outflows resulting from higher inventories and trade receivables. In addition, the timing of tax payments positively impacted cash provided by operating activities.

Cash flows from operating activities of discontinued operations in 2018 decreased to $572 million from $1,211 million in 2017. The primary reason was lower income as well as negative impacts from the timing of cash collections on large projects and other receivables. Cash flows from operating activities of discontinued operations in 2017 was similar to 2016 as the impacts of higher income were offset by negative impacts from the timing of tax payments. The amount reported for cash flows from operating activities of discontinued operations benefits directly from the allocation of stranded costs to continuing operations.

Investing activities

($ in millions)

2018

2017

2016

Purchases of investments

(322)

(666)

(4,299)

Purchases of property, plant and equipment and intangible assets

(772)

(752)

(632)

Acquisition of businesses (net of cash acquired) and increases in cost- and equity-accounted companies

(2,664)

(2,011)

(26)

Proceeds from sales of investments

567

1,443

3,295

Proceeds from maturity of investments

160

100

539

Proceeds from sales of property, plant and equipment

72

61

59

Proceeds from sales of businesses (net of transaction costs and cash disposed) and cost- and equity-accounted companies

113

607

(1)

Net cash from settlement of foreign currency derivatives

(30)

63

(57)

Other investing activities

(32)

37

14

Net cash used in investing activities – continuing operations

(2,908)

(1,118)

(1,108)

 

 

 

 

Net cash used in investing activities – discontinued operations

(177)

(332)

(197)

Net cash used in investing activities for continuing operations in 2018 was $2,908 million, compared to $1,118 million in 2017. The amount in 2018 reflects higher amounts used to fund acquisitions of businesses (primarily GEIS). In addition, cash used in investing activities was higher in 2018 as 2017 included the positive cash flows resulting from reducing investments in marketable securities and short-term investments. Purchases of property, plant and equipment and intangible assets were slightly higher in 2018 with continued global investment including high spending on information technology as well as large investments in the U.S. and China. We also increased our capital expenditures in Austria with large investments in the B&R business. In addition, changes in the impacts from derivative cash flows classified as investing activities increased cash used in investing activities by $93 million. These cash flows primarily result from the maturity and settlement of derivatives that are in place to hedge foreign currency exposures on internal subsidiary funding and the amount of the settlement results from movements in foreign currency exchange rates throughout the year.

Net cash used in investing activities in 2017 was $1,118 million, compared to $1,108 million in 2016. Cash used to fund acquisitions of businesses (primarily B&R) was significantly higher than in 2016 but was partially offset by sales of marketable securities and short-term investments as well as the proceeds received from sales of businesses (primarily the high-voltage cables business). We also had higher purchases of property, plant and equipment and intangible assets due to higher investments in information technology assets as well as specific investments in facilities in the U.S. and China. In addition, changes in the impacts from derivative cash flows classified as investing activities reduced cash used in investing activities by $120 million.

The following presents purchases of property, plant and equipment and intangibles by significant asset category:

($ in millions)

2018

2017

2016

Construction in process

523

520

459

Purchase of machinery and equipment

152

125

126

Purchase of land and buildings

28

32

10

Purchase of intangible assets

69

75

37

Purchases of property, plant and equipment and intangible assets

772

752

632

In 2018 and 2017, we decreased the amount of our excess liquidity invested in marketable securities and short-term investments as funds were needed for acquisitions of businesses while, in 2016, we increased the amounts invested in marketable securities and short-term investments. Marketable securities and short-term investments at December 31, 2018 and 2017, consisted primarily of fixed-term deposits with banks, available-for-sale debt securities as well as amounts placed in reverse repurchase agreements. At December 31, 2016, amounts were placed primarily in fixed-term deposits with banks and in short-term money market funds. In 2018 and 2017, the net decrease in investments during the year resulted in inflows of $405 million and $877 million, respectively, while in 2016, the net increase in investments resulted in outflows of $465 million.

In 2018, acquisitions of businesses primarily represents the purchase of GEIS, which was acquired in June. In 2017, acquisitions of businesses primarily represents the purchase of B&R, which was acquired in July, while proceeds from sales of businesses primarily represents the divestment of the high-voltage cables and cable accessories businesses. In 2016, there were no significant acquisitions or divestments of businesses.

Cash used in investing activities from discontinued operations primarily represents net purchases of property, plant and equipment. Cash used in investing activities was higher in 2017 compared to both 2018 and 2016 as 2017 also included cash paid for acquisition of a business.

Financing activities

($ in millions)

2018

2017

2016

Net changes in debt with maturities of 90 days or less

221

204

(144)

Increase in debt

1,914

920

911

Repayment of debt

(830)

(1,000)

(1,242)

Delivery of shares

42

163

192

Purchase of treasury stock

(250)

(251)

(1,299)

Dividends paid

(1,717)

(1,635)

Reduction in nominal value of common shares paid to shareholders

(1,610)

Dividends paid to noncontrolling shareholders

(86)

(83)

(89)

Other financing activities

(35)

(6)

(27)

Net cash used in financing activities – continuing operations

(741)

(1,688)

(3,308)

 

 

 

 

Net cash used in financing activities – discontinued operations

(48)

(47)

(47)

Our financing cash flow activities primarily include debt transactions (both from the issuance of debt securities and borrowings directly from banks), share transactions and payments of distributions to controlling and noncontrolling shareholders. Net cash used in financing activities for discontinued operations represents primarily distributions paid to noncontrolling shareholders of certain subsidiaries classified in discontinued operations.

In 2018, the net inflow for debt with maturities of 90 days or less related primarily to combined increases of $194 million for borrowings outstanding under our commercial paper programs in the U.S. and Europe. In 2017, a net increase of $202 million related to borrowings outstanding under our commercial paper program in the U.S.

In 2018, the increase in debt was due primarily to the issuance of the following: USD 300 million 2.8% Notes due 2020, USD 450 million 3.375% Notes due 2023 and USD 750 million 3.8% Notes due 2028. In 2018, the increase also included $316 million for commercial paper borrowings having an original maturity of more than 90 days. In 2017, the increase in debt was due primarily to the issuance of our EUR 750 million 0.75% Notes due 2024 (equal to $824 million at date of issuance). In 2016, the increase in debt was due primarily to the issuance of our EUR 700 million 0.625% Notes due 2023 (equal to $807 million at date of issuance).

During 2018, the CHF 350 million 1.50% bonds (equivalent to $350 million on the date of repayment) were repaid as well as repayments at maturity of $316 million in commercial paper borrowings having an original maturity of more than 90 days. During 2017, $1,000 million of debt was repaid, reflecting primarily the repayment at maturity of both the USD 500 million 1.625% Notes and the AUD 400 million 4.25% Notes (in total equivalent to $803 million at dates of repayment). During 2016, $1,242 million of debt was repaid, reflecting primarily the repayment at maturity of the USD 600 million 2.5% Notes and CHF 500 million 1.25% Bonds (in total equivalent to $1,106 million at dates of repayment).

In 2018 and 2017, “Purchase of treasury stock” reflects the cash paid to purchase 10 million of our own shares on the open market in each period. In 2016, the amount reflects the cash paid to purchase 65 million of our own shares in connection with the share buyback program which was announced in September 2014 and completed in September 2016. For additional information on the share buyback program see “Note 19 Stockholders’ equity” to our Consolidated Financial Statements.

Disclosures about contractual obligations and commitments

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. The amounts in the table may differ from those reported in our Consolidated Balance Sheet at December 31, 2018. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented in the table. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2018.

($ in millions)

Total

Less than 1 year

1–3 years

3–5 years

More than 5 years

(1)

Capital lease obligations represent the total cash payments to be made in the future and include interest expense of $87 million and executory costs of $1 million.

Payments due by period

 

 

 

 

 

Long-term debt obligations

7,911

1,448

1,595

2,502

2,366

Interest payments related to long-term debt obligations

1,496

221

346

187

742

Operating lease obligations

1,278

329

445

237

267

Capital lease obligations(1)

239

34

51

43

111

Purchase obligations

2,862

2,419

407

22

14

Total

13,786

4,451

2,844

2,991

3,500

In the table above, the long-term debt obligations reflect the cash amounts to be repaid upon maturity of those debt obligations. The cash obligations above will differ from the long-term debt balance reflected in “Note 12 Debt” to our Consolidated Financial Statements due to the impacts of fair value hedge accounting adjustments and premiums or discounts on certain debt. In addition, capital lease obligations are shown separately in the table above while they are combined with Long-term debt amounts in our Consolidated Balance Sheets.

We have determined the interest payments related to long-term debt obligations by reference to the payments due under the terms of our debt obligations at the time such obligations were incurred. However, we use interest rate swaps to modify the interest characteristics of certain of our debt obligations. The net effect of these swaps may be to increase or decrease the actual amount of our cash interest payment obligations, which may differ from those stated in the above table. For further details on our debt obligations and the related hedges, see “Note 12 Debt” to our Consolidated Financial Statements.

Of the total of $1,163 million unrecognized tax benefits (net of deferred tax assets) at December 31, 2018, it is expected that $52 million will be paid within less than a year. However, we cannot make a reasonably reliable estimate as to the related future payments for the remaining amount.

Off-balance sheet arrangements

Commercial commitments

We disclose the maximum potential exposure of certain guarantees, as well as possible recourse provisions that may allow us to recover from third parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual exposure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assessment of the expected exposure.

Guarantees

The following table provides quantitative data regarding our third-party guarantees. The maximum potential payments represent a worst-case scenario, and do not reflect our expected outcomes.

 

2018

2017

December 31, ($ in millions)

Maximum potential payments(1)

(1)

Maximum potential payments include amounts in both continuing and discontinued operations.

Performance guarantees

1,584

1,775

Financial guarantees

10

17

Indemnification guarantees

64

72

Total

1,658

1,864

The carrying amounts of liabilities recorded in the Consolidated Balance Sheets in respect of the above guarantees were not significant at December 31, 2018 and 2017, and reflect our best estimate of future payments, which we may incur as part of fulfilling our guarantee obligations.

In addition, in the normal course of bidding for and executing certain projects, we have 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 ABB does not fulfill its contractual obligations. ABB would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. At December 31, 2018 and 2017, the total outstanding performance bonds aggregated to $7.4 billion and $7.7 billion, respectively, of which $4.3 billion and $4.7 billion, respectively, relate to discontinued operations. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2018, 2017 and 2016.

For additional descriptions of our performance, financial and indemnification guarantees see “Note 15 Commitments and contingencies” to our Consolidated Financial Statements.