Analysis of results of operations

Our consolidated results from operations were as follows:

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

2016

2015

2014

Orders

33,379

36,429

41,515

Order backlog at December 31,

22,981

24,121

24,900

 

 

 

 

Revenues

33,828

35,481

39,830

Cost of sales

(24,081)

(25,347)

(28,615)

Gross profit

9,747

10,134

11,215

Selling, general and administrative expenses

(5,349)

(5,574)

(6,067)

Non-order related research and development expenses

(1,300)

(1,406)

(1,499)

Other income (expense), net

(111)

(105)

529

Income from operations

2,987

3,049

4,178

Net interest and other finance expense

(188)

(209)

(282)

Provision for taxes

(781)

(788)

(1,202)

Income from continuing operations, net of tax

2,018

2,052

2,694

Income from discontinued operations, net of tax

16

3

24

Net income

2,034

2,055

2,718

Net income attributable to noncontrolling interests

(135)

(122)

(124)

Net income attributable to ABB

1,899

1,933

2,594

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

1,883

1,930

2,570

Net income

1,899

1,933

2,594

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

0.88

0.87

1.12

Net income

0.88

0.87

1.13

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

Income from continuing operations, net of tax

0.87

0.87

1.12

Net income

0.88

0.87

1.13

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”, “Discrete Automation and Motion”, “Process 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)

2016

2015

2014

2016

2015

(1)

Includes interdivisional eliminations

Electrification Products

9,158

9,833

10,861

(7)%

(9)%

Discrete Automation and Motion

8,654

9,222

10,559

(6)%

(13)%

Process Automation

5,866

7,347

9,213

(20)%

(20)%

Power Grids

11,232

12,205

12,768

(8)%

(4)%

Operating divisions

34,910

38,607

43,401

(10)%

(11)%

Corporate and Other(1)

(1,531)

(2,178)

(1,886)

n.a.

n.a.

Total

33,379

36,429

41,515

(8)%

(12)%

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 Process Automation division. This also contributed to the negative order development in the Discrete Automation and Motion division, despite the strong demand from various industries for robotics. Weak market conditions impacted the orders in Electrification Products and in Power Grids.

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. For additional information about divisional order performance, please refer to the relevant sections of “Divisional analysis” below.

In 2015, total orders declined 12 percent (2 percent in local currencies) and decreased in all divisions. The decline in reported orders was driven both by lower base orders and lower large orders. The order development reflected ongoing macro-economic uncertainties and challenges in many markets as well as negative impacts from foreign exchange rate movements.

In 2015, orders decreased 9 percent in the Electrification Products division (steady in local currencies) as order growth in the Protection and Connection business was offset by decreases in orders in the Building Products and the Electrification Solutions businesses. Orders in the Discrete Automation and Motion division declined 13 percent (5 percent in local currencies) on lower orders in all businesses, except Robotics, where orders increased in local currencies. Orders in the Process Automation division declined 20 percent (9 percent in local currencies) mainly due to lower capital and operating expenditures in the oil and gas sectors compared to the previous year. Orders declined 4 percent (increased 8 percent in local currencies) in the Power Grids division. The increase in local currencies was driven primarily by the receipt of several large orders in the Grid Systems business.

During 2015, base orders declined 14 percent (5 percent in local currencies) reflecting the global economic conditions which remained mixed across our key markets. Large orders decreased 5 percent (increased 10 percent in local currencies) but were higher in local currencies than the strong large order intake in 2014. Large orders increased in the Power Grids division where several large projects were awarded in 2015.

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)

2016

2015

2014

2016

2015

Europe

11,213

12,568

14,319

(11)%

(12)%

The Americas

9,351

10,505

11,966

(11)%

(12)%

Asia, Middle East and Africa

12,815

13,356

15,230

(4)%

(12)%

Total

33,379

36,429

41,515

(8)%

(12)%

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 Discrete Automation 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.

Orders in 2015 declined in all regions on lower orders in all divisions. Orders in Europe decreased 12 percent (increased 5 percent in local currencies). Orders in Europe were higher in local currencies due to the receipt of large orders for HVDC interconnections. In local currencies, orders were lower in the United Kingdom, Sweden, Finland, Switzerland, France, Spain and Russia, offset by higher orders in Germany, Norway, Italy, Turkey and the Netherlands. Orders declined 12 percent (6 percent in local currencies) in the Americas on lower base and large orders. In local currencies, orders decreased in the U.S., Canada and Brazil but were higher in Mexico, Chile and Argentina. In Asia, Middle East and Africa, orders decreased 12 percent (7 percent in local currencies) on lower base and large orders. In local currencies, orders declined in China, Saudi Arabia, South Korea, Australia and Japan while orders were higher in India, the United Arab Emirates, South Africa and Qatar.

Order backlog

 

December 31,

% Change

($ in millions)

2016

2015

2014

2016

2015

(1)

Includes interdivisional eliminations

Electrification Products

2,612

2,872

2,798

(9)%

3%

Discrete Automation and Motion

4,078

4,232

4,385

(4)%

(3)%

Process Automation

5,258

6,036

6,515

(13)%

(7)%

Power Grids

12,437

12,502

12,619

(1)%

(1)%

Operating divisions

24,385

25,642

26,317

(5)%

(3)%

Corporate and Other(1)

(1,404)

(1,521)

(1,417)

n.a.

n.a.

Total

22,981

24,121

24,900

(5)%

(3)%

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 Discrete Automation and Motion division, the backlog was flat in local currencies as the increase in the Robotics and Power Conversion businesses were offset by declines in the other businesses. In the Process 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 and Grid System businesses.

As at December 31, 2015, the consolidated order backlog decreased 3 percent (increased 5 percent in local currencies). Order backlog in all divisions was impacted by the effects of changes in foreign currency rates as the U.S. dollar strengthened against all major currencies during 2015. In local currencies, order backlog increased in all divisions. The increase in the Electrification Products division was driven by the Medium Voltage Products business. In the Discrete Automation and Motion division, the increase was driven by the Robotics and Power Conversion businesses. In the Process Automation division, orders were lower but order backlog increased due to the receipt of higher large orders near the end of 2015. In the Power Grids division, order backlog increased in the High Voltage and Transformers businesses and also benefitted from higher large orders received in the Grid Systems business during the year.

Revenues

 

 

 

 

% Change

($ in millions)

2016

2015

2014

2016

2015

(1)

Includes interdivisional eliminations

Electrification Products

9,292

9,547

10,572

(3)%

(10)%

Discrete Automation and Motion

8,714

9,127

10,142

(5)%

(10)%

Process Automation

6,598

7,224

8,618

(9)%

(16)%

Power Grids

10,975

11,621

12,518

(6)%

(7)%

Operating divisions

35,579

37,519

41,850

(5)%

(10)%

Corporate and Other(1)

(1,751)

(2,038)

(2,020)

n.a.

n.a.

Total

33,828

35,481

39,830

(5)%

(11)%

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 Process 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. For additional information about the divisional revenues performance, please refer to “Divisional analysis” below.

In 2015, revenues decreased 11 percent (1 percent in local currencies) and declined in all divisions. The decrease was due primarily to the impacts of the lower orders and lower opening order backlog in the Power Grids and Process Automation divisions compared to the beginning of 2014. In addition, the decrease was also due to the impacts of divestments made in 2014 and negative impacts from foreign exchange rate movements.

On a divisional basis, revenues in the Electrification Products division decreased 10 percent (steady in local currencies) and were lower in most businesses. Revenues declined 10 percent (2 percent in local currencies) in the Discrete Automation and Motion division on lower order intake in the short-cycle businesses such as low voltage motors and drives offset partly by local currency revenue increases in the Robotics and Power Conversion businesses. In the Process Automation division revenues decreased 16 percent (5 percent in local currencies) and were lower in local currencies in most businesses. Revenues were impacted primarily by decreases in the systems businesses such as the Marine and Ports and the Oil, Gas and Chemicals businesses but also by the divestment of the Full Service business at the end of 2014. Revenues in the Power Grids division decreased 7 percent (increased 3 percent in local currencies). In local currencies revenues grew, driven by service revenues and by steady execution of the order backlog.

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)

2016

2015

2014

2016

2015

Europe

11,315

11,602

13,745

(2)%

(16)%

The Americas

9,741

10,554

11,490

(8)%

(8)%

Asia, Middle East and Africa

12,772

13,325

14,595

(4)%

(9)%

Total

33,828

35,481

39,830

(5)%

(11)%

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 Process 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 by 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.

In 2015, revenues declined in all regions. In Europe, revenues decreased 16 percent (increased 1 percent in local currencies). In local currencies, revenues declined in Norway, France, Switzerland, Spain and Russia. Revenues were flat in Italy, while revenues increased in Germany, the United Kingdom, Sweden and Finland. Revenues from the Americas declined 8 percent (2 percent in local currencies). In local currencies, revenues decreased in the U.S., Canada and Brazil but were higher in Mexico, Chile and Peru. In Asia, Middle East and Africa revenues decreased 9 percent (2 percent in local currencies). In local currencies, revenues declined in China, South Korea, Australia and Singapore while revenues increased in Saudi Arabia, India, the United Arab Emirates, Japan and South Africa.

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 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 Process 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 Discrete Automation and Motion division.

In 2015, cost of sales decreased 11 percent (2 percent in local currencies) to $25,347 million. As a percentage of revenues, cost of sales decreased from 71.8 percent in 2014 to 71.4 percent in 2015. Cost of sales as a percentage of revenues decreased as benefits from higher cost savings and benefits from ongoing measures taken in the former Power Systems division’s ‘step change’ program more than offset the impact from price erosion in the market and impacts from restructuring and related costs for the White Collar Productivity program.

Selling, general and administrative expenses

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

($ in millions)

2016

2015

2014

Selling expenses

3,480

3,729

4,054

Selling expenses as a percentage of orders received

10.4%

10.2%

9.8%

General and administrative expenses

1,869

1,845

2,013

General and administrative expenses as a percentage of revenues

5.5%

5.2%

5.1%

Total selling, general and administrative expenses

5,349

5,574

6,067

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

15.8%

15.7%

15.2%

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

15.9%

15.5%

14.9%

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 2015, general and administrative expenses decreased 8 percent (increased 4 percent in local currencies) compared to 2014. As a percentage of revenues, general and administrative expenses increased from 5.1 percent to 5.2 percent. General and administrative expenses included approximately $121 million from costs for the White Collar Productivity program and restructuring-related expenses of approximately $18 million.

In 2016, selling expenses decreased 7 percent compared to 2015 (decreased 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 2015, selling expenses have decreased 8 percent (increased 3 percent in local currencies) compared to 2014. Selling expenses as a percentage of orders have increased from 9.8 percent to 10.2 percent. Selling expenses were impacted by approximately $89 million from costs for the White Collar Productivity program.

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.

In 2015, selling, general and administrative expenses decreased 8 percent (increased 3 percent in local currencies) compared to 2014 and as a percentage of the average orders and revenues, selling, general and administrative expenses increased from 14.9 percent to 15.5 percent on both lower revenues and orders and higher costs.

Non-order related research and development expenses

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. In 2015, non-order related research and development expenses decreased 6 percent (increased 6 percent in local currencies) compared to 2014. Non-order related research and development expenses as a percentage of revenues decreased in 2016 to 3.8 percent, after increasing to 4.0 percent in 2015 from 3.8 percent in 2014.

Other income (expense), net

($ in millions)

2016

2015

2014

(1)

Excluding asset impairments

Restructuring and restructuring-related expenses(1)

(49)

(67)

(37)

Net gain from sale of property, plant and equipment

38

26

17

Asset impairments

(61)

(33)

(34)

Net gain (loss) from sale of businesses

(10)

(20)

543

Misappropriation loss, net

(73)

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

44

(11)

40

Total

(111)

(105)

529

“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 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 (see ‘‘Note 22 Restructuring and related expenses’’), higher gains on sale of property, plant and equipment, and lower losses from sale of businesses. Higher asset impairments also negatively impacted Other income (expense), net. 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. 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.

In 2015, “Other income (expense), net” was an expense of $105 million, compared with an income of $529 million in 2014, and changed primarily due to higher restructuring costs and lower gains from sale of businesses.

Income from operations

 

 

 

 

% Change(1)

($ in millions)

2016

2015

2014

2016

2015

(1)

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

Electrification Products

1,335

1,356

1,562

(2)%

(13)%

Discrete Automation and Motion

831

991

1,422

(16)%

(30)%

Process Automation

696

685

931

2%

(26)%

Power Grids

888

613

257

45%

139%

Operating divisions

3,750

3,645

4,172

3%

(13)%

Corporate and Other

(767)

(609)

(5)

n.a.

n.a.

Intersegment elimination

4

13

11

n.a.

n.a.

Total

2,987

3,049

4,178

(2)%

(27)%

In 2016 and 2015, 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 millions)

2016

2015

2014

Interest and dividend income

73

77

80

Interest and other finance expense

(261)

(286)

(362)

Net interest and other finance expense

(188)

(209)

(282)

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.

In 2015, “Interest and other finance expense” decreased compared to 2014, mainly due to a reduction in foreign exchange losses and lower interest expense on debt. Interest expense on debt was lower due to lower effective interest rates and lower foreign currency exchange rates. In addition, interest charges for uncertain tax positions were lower in 2015 compared to 2014.

Provision for taxes

($ in millions)

2016

2015

2014

Income from continuing operations before taxes

2,799

2,840

3,896

Provision for taxes

(781)

(788)

(1,202)

Effective tax rate for the year

27.9%

27.7%

30.9%

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.

In 2014, the effective tax rate of 30.9 percent included the effects of taxes on net gains on sale of businesses. Included in the provision for taxes of $1,202 million were taxes of $279 million relating to $543 million of gains on sale of businesses. These divestment transactions increased the effective tax rate as gains were realized primarily in higher-tax jurisdictions and the goodwill allocated to the divested businesses was not deductible for tax purposes. Excluding the effects of these divestment transactions, the effective tax rate for 2014 would have been 27.5 percent.

The provision for taxes in 2014 included a net increase of valuation allowance on deferred taxes of $52 million, as we determined it was not more likely than not that such deferred tax assets would be realized. This amount included an expense of $31 million related to certain of our operations in South America.

The provision for taxes in 2014 also included tax credits, arising in foreign jurisdictions, for which the technical merits did not allow a benefit to be taken.

Income from continuing operations, net of tax

As a result of the factors discussed above, income from continuing operations, net of tax, decreased by $34 million to $2,018 million in 2016 compared to 2015, and decreased $642 million to $2,052 million in 2015 compared to 2014.

Income from discontinued operations, net of tax

The income from discontinued operations, net of tax, for 2016, 2015 and 2014, was not significant.

Net income attributable to ABB

As a result of the factors discussed above, net income attributable to ABB decreased by $34 million to $1,899 million in 2016 compared to 2015, and decreased $661 million to $1,933 million in 2015 compared to 2014.

Earnings per share attributable to ABB shareholders

(in $)

2016

2015

2014

Income from continuing operations, net of tax:

 

 

 

Basic

0.88

0.87

1.12

Diluted

0.87

0.87

1.12

Net income attributable to ABB:

 

 

 

Basic

0.88

0.87

1.13

Diluted

0.88

0.87

1.13

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.