As filed with the Securities and Exchange Commission on March 19, 2010
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
o |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
OR | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2009 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-16429
ABB Ltd
(Exact name of registrant as specified in its charter)
Switzerland
(Jurisdiction of incorporation or organization)
Affolternstrasse 44
CH-8050 Zurich
Switzerland
(Address of principal executive offices)
Richard A. Brown
Affolternstrasse 44
CH-8050 Zurich
Switzerland
Telephone: +41-43-317-7111
Facsimile: +41-43-317-7992
(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
---|---|---|
American Depositary Shares, each representing one Registered Share Registered Shares, par value CHF 1.54 |
New York Stock Exchange New York Stock Exchange* |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 2,329,324,797 Registered Shares (including treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
If this is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ý International Financial Reporting Standards as issued by the International Accounting Standards Board o Other o
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. item 17 o item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
i
INTRODUCTION
ABB Ltd is a corporation organized under the laws of Switzerland. In this Annual Report, "the ABB Group," "ABB," the "Company," "we," "our" and "us" refer to ABB Ltd and its consolidated subsidiaries (unless the context otherwise requires). We also use these terms to refer to ABB Asea Brown Boveri Ltd and its subsidiaries prior to the establishment of ABB Ltd as the holding company for the entire ABB Group in 1999, as described in this Annual Report under "Item 4. Information on the CompanyIntroductionHistory of the ABB Group." Our American Depositary Shares (each representing one registered share of ABB Ltd) are referred to as "ADSs." The registered shares of ABB Ltd are referred to as "shares." Our principal corporate offices are located at Affolternstrasse 44, CH-8050 Zurich, Switzerland, telephone number +41-43-317-7111.
FINANCIAL AND OTHER INFORMATION
ABB Ltd has prepared its statutory unconsolidated financial statements in accordance with the Swiss Code of Obligations. The Consolidated Financial Statements of ABB Ltd, including the notes thereto, as of December 31, 2009 and 2008 and for each of the years in the three-year period ended December 31, 2009 (our Consolidated Financial Statements) have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP).
In this Annual Report: (i)"$," "U.S. dollars" and "USD" refer to the lawful currency of the United States of America; (ii) "CHF" and "Swiss francs" refer to the lawful currency of Switzerland; (iii) "EUR" and "euro" refer to the lawful currency of the participating member states of the European Economic and Monetary Union (Eurozone); (iv) "SEK" and "Swedish krona" refer to the lawful currency of Sweden; (v) "GBP" and "pounds sterling" refer to the lawful currency of the United Kingdom; (vi) "Indian rupee" refers to the lawful currency of India; and (vii) "Chinese renminbi" refers to the lawful currency of the People's Republic of China.
Except as otherwise stated, all monetary amounts in this Annual Report are presented in U.S. dollars. Where specifically indicated, amounts in Swiss francs have been translated into U.S. dollars. These translations are provided for convenience only, and they are not representations that the Swiss franc could be converted into U.S. dollars at the rate indicated. These translations have been made using the twelve o'clock buying rate in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2009, unless otherwise indicated. The twelve o'clock buying rate for Swiss francs on December 31, 2009 was $1.00 = CHF 1.0358. The twelve o'clock buying rate for Swiss francs on March 12, 2010 was $1.00 = CHF 1.0599.
FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "anticipates," "expects," "intends," "may," "will," or "should" or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Annual Report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, dispositions, strategies and the countries and industries in which we operate.
These forward-looking statements include, but are not limited to the following:
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By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the countries and industries in which we operate, may differ materially from those described in or suggested by the forward-looking statements contained in this Annual Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the countries and industries in which we operate, are consistent with the forward-looking statements contained in this Annual Report, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause actual results to differ materially from our expectations are contained in cautionary statements in this Annual Report and include, without limitation, the following:
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We urge you to read the sections of this Annual Report entitled "Item 3. Key InformationRisk Factors," "Item 4. Information on the Company" and "Item 5. Operating and Financial Review and Prospects" for a more complete discussion of the factors that could affect our future performance and the countries and industries in which we operate. In light of these risks, uncertainties and assumptions, the forward-looking circumstances described in this Annual Report and the assumptions underlying them may not occur.
Except as required by law or applicable stock exchange rules or regulations, we undertake no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Annual Report.
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable
Item 2. Offer Statistics and Expected Timetable
Not applicable
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SELECTED FINANCIAL DATA
The following table presents our selected financial and operating information at the dates and for each of the periods indicated. You should read the following information together with the information contained in "Item 5. Operating and Financial Review and Prospects," as well as our Consolidated Financial Statements and the Notes thereto, included elsewhere in this Annual Report.
Our selected financial data are presented in the following tables in accordance with U.S. GAAP and have been derived from our published Consolidated Financial Statements. Our Consolidated Financial Statements as of and for each of the years ended December 31, 2009, 2008, 2007, 2006 and 2005 were audited by Ernst & Young AG.
INCOME STATEMENT DATA(1):
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2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
|
($ in millions, except per share data in $) |
||||||||||||||||
Total revenues |
31,795 | 34,912 | 29,183 | 23,281 | 20,964 | ||||||||||||
Total cost of sales |
(22,470 | ) | (23,972 | ) | (20,215 | ) | (16,537 | ) | (15,510 | ) | |||||||
Gross profit |
9,325 | 10,940 | 8,968 | 6,744 | 5,454 | ||||||||||||
Selling, general and administrative expenses |
(5,528 | ) | (5,822 | ) | (4,975 | ) | (4,326 | ) | (3,780 | ) | |||||||
Other income (expense), net |
329 | (566 | ) | 30 | 139 | 37 | |||||||||||
Earnings before interest and taxes |
4,126 | 4,552 | 4,023 | 2,557 | 1,711 | ||||||||||||
Interest and dividend income |
121 | 315 | 273 | 147 | 153 | ||||||||||||
Interest and other finance expense(2) |
(127 | ) | (349 | ) | (383 | ) | (307 | ) | (407 | ) | |||||||
Income from continuing operations before taxes and cumulative effect of accounting change |
4,120 | 4,518 | 3,913 | 2,397 | 1,457 | ||||||||||||
Provision for taxes |
(1,001 | ) | (1,119 | ) | (595 | ) | (686 | ) | (464 | ) | |||||||
Income from continuing operations before cumulative effect of accounting change, net of tax |
3,119 | 3,399 | 3,318 | 1,711 | 993 | ||||||||||||
Income (loss) from discontinued operations, net of tax(3) |
17 | (21 | ) | 586 | (142 | ) | (127 | ) | |||||||||
Income before cumulative effect of accounting change, net of tax |
3,136 | 3,378 | 3,904 | 1,569 | 866 | ||||||||||||
Cumulative effect of accounting change, net of tax(2)(4) |
| | (49 | ) | | (5 | ) | ||||||||||
Net income |
3,136 | 3,378 | 3,855 | 1,569 | 861 | ||||||||||||
Net income attributable to noncontrolling interests |
(235 | ) | (260 | ) | (244 | ) | (179 | ) | (126 | ) | |||||||
Net income attributable to ABB |
2,901 | 3,118 | 3,611 | 1,390 | 735 | ||||||||||||
Amounts attributable to ABB shareholders: |
|||||||||||||||||
Income from continuing operations before cumulative effect of accounting change, net of tax |
2,884 | 3,142 | 3,083 | 1,544 | 859 | ||||||||||||
Income (loss) from discontinued operations, net of tax |
17 | (24 | ) | 577 | (154 | ) | (119 | ) | |||||||||
Cumulative effect of accounting change, net of tax |
| | (49 | ) | | (5 | ) | ||||||||||
Net income |
2,901 | 3,118 | 3,611 | 1,390 | 735 | ||||||||||||
Basic earnings (loss) per share: |
|||||||||||||||||
Income from continuing operations before cumulative effect of accounting change |
1.26 | 1.37 | 1.37 | 0.73 | 0.42 | ||||||||||||
Income (loss) from discontinued operations, net of tax |
0.01 | (0.01 | ) | 0.25 | (0.08 | ) | (0.06 | ) | |||||||||
Cumulative effect of accounting change, net of tax |
| | (0.02 | ) | | | |||||||||||
Net income |
1.27 | 1.36 | 1.60 | 0.65 | 0.36 | ||||||||||||
Diluted earnings (loss) per share: |
|||||||||||||||||
Income from continuing operations before cumulative effect of accounting change |
1.26 | 1.37 | 1.34 | 0.70 | 0.41 | ||||||||||||
Income (loss) from discontinued operations, net of tax |
0.01 | (0.01 | ) | 0.25 | (0.07 | ) | (0.05 | ) | |||||||||
Cumulative effect of accounting change, net of tax |
| | (0.02 | ) | | | |||||||||||
Net income |
1.27 | 1.36 | 1.57 | 0.63 | 0.36 | ||||||||||||
Average number of shares (in millions) used to compute: |
|||||||||||||||||
Basic earnings (loss) per share attributable to ABB shareholders |
2,284 | 2,287 | 2,258 | 2,128 | 2,029 | ||||||||||||
Diluted earnings (loss) per share attributable to ABB shareholders |
2,288 | 2,296 | 2,308 | 2,248 | 2,138 |
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BALANCE SHEET DATA(1):
|
December 31, | |||||||||||||||
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2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
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($ in millions) |
|||||||||||||||
Cash and equivalents |
7,119 | 6,399 | 4,650 | 4,198 | 3,136 | |||||||||||
Marketable securities and short-term investments |
2,433 | 1,354 | 3,240 | 351 | 315 | |||||||||||
Total assets |
34,728 | 33,011 | 30,841 | 24,922 | 22,006 | |||||||||||
Long-term debt |
2,172 | 2,009 | 2,138 | 3,160 | 3,932 | |||||||||||
Total debt(5) |
2,333 | 2,363 | 2,674 | 3,282 | 4,096 | |||||||||||
Capital stock and additional paid-in capital |
3,943 | 4,841 | 5,780 | 4,514 | 3,121 | |||||||||||
Total stockholders' equity (including noncontrolling interests)(6) |
14,473 | 11,770 | 11,549 | 6,489 | 3,824 |
CASH FLOW DATA:
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2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
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($ in millions) |
|||||||||||||||
Net cash provided by operating activities |
4,027 | 3,958 | 3,054 | 1,939 | 1,012 | |||||||||||
Net cash provided by (used in) investing activities |
(2,220 | ) | 114 | (2,291 | ) | (694 | ) | (316 | ) | |||||||
Net cash provided by (used in) financing activities |
(1,301 | ) | (2,119 | ) | (625 | ) | (392 | ) | (896 | ) |
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DIVIDENDS AND DIVIDEND POLICY
Payment of dividends is subject to general business conditions, ABB's current and expected financial condition and performance and other relevant factors including growth opportunities. ABB's dividend policy is to pay a steadily rising, sustainable annual dividend over time.
Dividends may be paid only if ABB Ltd has sufficient distributable profits from previous fiscal years or sufficient free reserves to allow the distribution of a dividend. In addition, at least 5 percent of ABB Ltd's annual net profits must be retained and booked as legal reserves, unless these reserves already amount to 20 percent of ABB Ltd's share capital. As a holding company, ABB Ltd's main sources of income are dividend and interest from its subsidiaries. At December 31, 2009, of the CHF 12,901 million of stockholders' equity recorded in the unconsolidated statutory financial statements of ABB Ltd prepared in accordance with Swiss law, CHF 3,587 million was attributable to share capital, CHF 1,064 million was attributable to legal reserves, CHF 1,028 million was attributable to reserves for treasury shares, CHF 3,328 million was attributable to other reserves and CHF 3,894 million represents net income and retained earnings available for distribution.
ABB Ltd may only pay out a dividend if it has been proposed by a shareholder or the board of directors of ABB Ltd and approved at a general meeting of shareholders, and the auditors confirm that the dividend conforms to statutory law and the Articles of Incorporation of ABB Ltd. In practice, the shareholders' meeting usually approves dividends as proposed by the board of directors, if the board of directors' proposal is confirmed by the statutory auditors.
Dividends are usually due and payable no earlier than three trading days after the shareholders' resolution. Dividends not collected within five years after the due date accrue to ABB Ltd and are allocated to its other reserves. For information about the deduction of withholding taxes from dividend payments, see "Item 10. Additional InformationTaxation."
We have established a dividend access facility for shareholders who are resident in Sweden under which these shareholders may register with Euroclear Sweden AB, as a holder of up to 600,004,716 shares, and receive dividends in the Swedish kronor equivalent to the dividend paid in Swiss francs without deduction of Swiss withholding tax. For further information, see "Item 10. Additional InformationTaxation."
Because ABB Ltd pays cash dividends, if any, in Swiss francs (subject to the exception for certain shareholders in Sweden described above), exchange rate fluctuations will affect the U.S. dollar amounts received by holders of ADSs upon conversion of those cash dividends by Citibank, N.A., the depositary, in accordance with the Amended and Restated Deposit Agreement dated May 7, 2001.
With respect to the years ended December 31, 2005 and 2006, ABB Ltd paid a dividend of CHF 0.12 (USD 0.10) per share and CHF 0.24 (USD 0.20) per share, respectively. With respect to each of the years ended December 31, 2007, and 2008, ABB Ltd paid a dividend of CHF 0.48 (USD 0.46 for 2007 and USD 0.45 for 2008) per share by way of a nominal value reduction (reduction in the par value of each share). The USD amounts for each of the foregoing dividend payments made in CHF have been translated using the average rates of the month in which the dividends were paid.
With respect to the year ended December 31, 2009, ABB Ltd's board of directors has proposed to pay a dividend of CHF 0.51 per share by way of a nominal value reduction, subject to approval by shareholders at ABB's 2010 Annual General Meeting and certain subsequent actions required under Swiss law.
6
RISK FACTORS
You should carefully consider all of the information set forth in this Annual Report and the following description of risks and uncertainties that we currently believe may exist. Our business, financial condition or results of operations could be adversely affected by any of these risks. Additional risks of which we are unaware or that we currently deem immaterial may also impair our business operations. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those described below and elsewhere in this Annual Report. See "Forward-Looking Statements."
Our business is exposed to risks associated with the weakened global economy and political conditions.
Adverse changes in economic or political conditions, both inside and outside the U.S., could have a material adverse effect on our business, financial condition, results of operations and liquidity. During the last two years, the volatility in the global financial markets reached very high levels. Volatile oil prices, falling equity market values, declining business, weakened consumer confidence, risks of increased inflation and deflation and increased unemployment rates created fears of a severe recession. These disruptions may continue to have an ongoing adverse effect on the world economy. We are unable to predict how long the economic volatility will last. Continuing economic volatility and financial market disruptions may adversely impact the demand for our products and services. For example, the current lack of confidence and the shortage of credit in the financial markets may prevent our customers and suppliers from obtaining the financing required to pursue their business activities as planned, and thereby force them to modify, delay or cancel plans to purchase or supply our products or services or to execute transactions. Payment terms, especially the level of advance payments in large orders, may become less favorable. In addition, if our customers do not generate sufficient revenue, or fail to obtain access to the capital markets, they may not be able to pay, or may delay payment of, the amounts they owe us. Customers with liquidity issues may lead to additional bad debt expense for us, which may adversely affect our results of operations and cash flows. In addition, we are subject to the risk that the counterparties to our credit agreements and hedging transactions may go bankrupt if they suffer catastrophic demand on their liquidity that will prevent them from fulfilling their contractual obligations to us.
Apart from the effects of the credit crisis and the economic slowdown that it entailed, our business environment is influenced by numerous other economic or political uncertainties which will affect the global economy and the international capital markets. In periods of slow economic growth or decline, our customers are more likely to decrease expenditures on the types of products and systems we supply and we are more likely to experience decreased revenues as a result. Our power technology divisions are affected by the level of investments by utilities, and our automation technology divisions are affected by conditions in a broad range of industries, including the automotive, pharmaceutical, pulp and paper, marine, metals and minerals and manufacturing and consumer industries. At various times during the last several years, we also have experienced, and may experience in the future, gross margin declines in certain businesses, reflecting the effect of items such as competitive pricing pressures, inventory write-downs, charges associated with the cancellation of planned expansion, increases in pension and postretirement benefit expenses, and increases in component and manufacturing costs resulting from higher labor and material costs borne by our manufacturers and suppliers that, as a result of competitive pricing pressures or other factors, we are unable to pass on to our customers. Economic downturns also may lead to restructuring actions and associated expenses. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments.
In addition, we are subject to the risks that our business operations in or with certain countries, including those identified as state sponsors of terrorism, may be adversely effected by trade or economic sanctions or other restrictions imposed on these countries and that actual or potential
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investors that object to these business operations may adversely affect the price of our shares by disposing of, or deciding not to, purchase our shares.
Illegal behavior by any of our employees or agents could have a material adverse impact on our consolidated operating results, cash flows, and financial position as well as on our reputation and our ability to do business.
Certain of our employees or agents have taken, and may in the future take, actions that violate or are alleged to violate the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), legislation promulgated pursuant to the 1997 Organization for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, applicable antitrust laws and other applicable laws or regulations. For more information regarding investigations of past actions taken by certain of our employees, see "Item 8. Financial InformationLegal Proceedings." Such actions have resulted, and in the future could result, in governmental investigations, enforcement actions and civil and criminal penalties, including monetary penalties and other sanctions. It is possible that any governmental investigation or enforcement action arising from these matters could conclude that a violation of applicable law has occurred and the consequences of any such investigation or enforcement action may have a material adverse impact on our consolidated operating results, cash flows and financial position. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business.
Further, detecting, investigating and resolving such actions could be expensive and could consume significant time and attention of our senior management. While we are committed to conducting business in a legal and ethical manner, our internal control systems have not been, and in the future may not be, completely effective to prevent and detect such improper activities by our employees and agents.
Our operations in emerging markets expose us to risks associated with conditions in those markets.
A significant amount of our operations is conducted in the emerging markets of Latin America, Asia, the Middle East and Africa. In 2009, approximately 40 percent of our consolidated revenues were generated from these emerging markets. Operations in emerging markets can present risks that are not encountered in countries with well-established economic and political systems, including:
8
Additionally, political and social instability resulting from increased violence in certain countries in which we do business have raised concerns about the safety of our personnel. These concerns may hinder our ability to send domestic personnel abroad and to hire and retain local personnel. Such concerns may require us to increase security for personnel traveling to such facilities or to conduct more operations from our other facilities rather than from facilities located in these political and socially unstable countries, which may negatively impact our operations and result in higher costs and inefficiencies.
In addition, the legal and regulatory systems of many emerging market countries are less developed and less well-enforced than in industrialized countries. Therefore, our ability to protect our contractual and other legal rights in these countries could be limited. Consequently, our exposure to the conditions in or affecting emerging markets may adversely affect our business, financial condition, results of operations and liquidity.
Undertaking long-term, fixed price or turnkey projects exposes our businesses to risk of loss should our actual costs exceed our estimated or budgeted costs.
We derive a portion of our revenues from long-term, fixed price or turnkey projects that are awarded on a competitive basis and can take many months, or even years, to complete. Such contracts involve substantial risks, including the possibility that we may underbid and the fact that we typically assume substantially all of the risks associated with completing the project and the post-completion warranty obligations. These risks include the project's technical risk, meaning that we must tailor our products and systems to satisfy the technical requirements of a project even though, at the time we are awarded the project, we may not have previously produced such a product or system. The revenue, cost and gross profit realized on such contracts can vary, sometimes substantially, from our original projections because of changes in conditions, including but not limited to:
These risks are exacerbated if the duration of the project is extended because there is an increased risk that the circumstances upon which we originally bid and developed a price will change in a manner that increases our costs. In addition, we sometimes bear the risk of delays caused by unexpected conditions or events. Our project contracts often make us subject to penalties if we cannot complete portions of the project in accordance with agreed-upon time limits and guaranteed performance levels.
Our international operations expose us to the risk of fluctuations in currency exchange rates.
Exchange rate fluctuations have had, and could continue to have, a material impact on our operating results, the comparability of our results between periods, the value of assets or liabilities as
9
recorded on our Consolidated Balance Sheet and the price of our securities. The global financial crisis has led to increased volatility in exchange rates, which makes it harder to predict exchange rates and thus do accurate financial planning. Changes in exchange rates can unpredictably and adversely affect our consolidated operating results, and could result in exchange losses.
Currency Translation Risk. The results of operations and financial position of most of our non-U.S. companies are initially recorded in the currency, which we call "local currency," of the country in which the respective company resides. That financial information is then translated into U.S. dollars at the applicable exchange rates for inclusion in our Consolidated Financial Statements. The exchange rates between local currencies and the U.S. dollar can fluctuate substantially, which could have a significant translation effect on our reported consolidated results of operations and financial position.
Increases and decreases in the value of the U.S. dollar versus local currencies will affect the reported value of our local currency assets, liabilities, revenues and costs in our Consolidated Financial Statements, even if the value of these items has not changed in local currency terms. These translations could significantly and adversely affect our results of operations and financial position from period to period.
Currency Transaction Risk. Currency risk exposure also affects our operations when our sales are denominated in currencies that are different from those in which our manufacturing or sourcing costs are incurred. In this case, if after the parties agree on a price, the value of the currency in which the price is to be paid were to weaken relative to the currency in which we incur manufacturing or sourcing costs, there would be a negative impact on the profit margin for any such transaction. This transaction risk may exist regardless of whether or not there is also a translation risk as described above.
Currency exchange rate fluctuations in those currencies in which we incur our principal manufacturing expenses or sourcing costs may adversely affect our ability to compete with companies whose costs are incurred in other currencies. If our principal expense currencies appreciate in value against such other currencies, our competitiveness may be weakened.
Our hedging activities may not protect us against the consequences of significant fluctuations in exchange rates, interest rates or commodity prices on our earnings and cash flows.
Our policy is to hedge material currency exposures by entering into offsetting transactions with third party financial institutions. Given the effective horizons of our risk management activities and the anticipatory nature of the exposures intended to be hedged, there can be no assurance that our currency hedging activities will fully offset the adverse financial impact resulting from unfavorable movements in foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to a hedging instrument may not coincide with the timing of gains and losses related to the underlying economic exposures.
As a resource-intensive operation, we are exposed to a variety of market and asset risks, including the effects of changes in commodity prices and interest rates. We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our business. Nevertheless, changes in commodity prices and interest rates cannot always be predicted or hedged.
If we are unable to successfully manage the risk of changes in exchange rates, interest rates or commodity prices or if our hedging counterparties are unable to perform their obligations under our hedging agreements with them, then changes in these rates and prices could have an adverse effect on our financial condition and results of operations.
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Increases in costs or limitation of supplies of raw materials may adversely affect our financial performance.
We purchase large amounts of commodity-based raw materials, including steel, copper, aluminum, and oil. Prevailing prices for such commodities are subject to fluctuations due to changes in supply and demand and a variety of additional factors beyond our control, such as global political and economic conditions. Historically, prices for some of these raw materials have been volatile and unpredictable, and such volatility is expected to continue. Therefore, commodity price changes may result in unexpected increases in raw material costs, and we may be unable to increase our prices to offset these increased costs without suffering reduced volumes, revenues or operating income. We do not fully hedge against changes in commodity prices and our hedging procedures may not work as planned.
We depend on third parties to supply raw materials and other components and may not be able to obtain sufficient quantities of these materials and components, which could limit our ability to manufacture products on a timely basis and could harm our profitability. For some raw materials and components, we rely on a single supplier or a small number of suppliers. If one of these suppliers were unable to provide us with a raw material or component we need, our ability to manufacture some of our products could be adversely affected until we are able to establish a new supply arrangement. We may be unable to find a sufficient alternative supply channel in a reasonable time period or on commercially reasonable terms, if at all. If our suppliers are unable to deliver sufficient quantities of materials on a timely basis, the manufacture and sale of our products may be disrupted, we might have obligations under our performance guarantees and our sales and profitability could be materially adversely affected.
The weakening or unavailability of our intellectual property rights could adversely affect our business.
Our intellectual property rights are fundamental to all of our businesses. We generate, maintain, utilize and enforce a substantial portfolio of trademarks, trade dress, patents and other intellectual property rights. We use our intellectual property rights to protect the goodwill of our products, promote our product recognition, protect our proprietary technology and development activities, enhance our competitiveness and otherwise support our business goals and objectives. However, there can be no assurance that the steps we take to obtain, maintain and protect our intellectual property rights will be adequate. Our intellectual property rights may fail to provide us with significant competitive advantages, particularly in foreign jurisdictions that do not have, or do not enforce, strong intellectual property rights. The weakening or unavailability of our trademarks, trade dress, patents and other intellectual property rights could adversely affect our business.
We operate in very competitive markets and could be adversely affected if we fail to keep pace with technological changes.
We operate in very competitive environments in particular with respect to product performance, developing integrated systems and applications that address the business challenges faced by our customers, pricing, new product introduction time and customer service. The relative importance of these factors differs across the geographic markets and product areas that we serve. The markets for our products and services are characterized by evolving industry standards (particularly for our automation technology products and systems), rapidly changing technology and increased competition as a result of privatization (particularly for our power products and systems). For example, for a number of years, power transmission and distribution providers throughout the world have been undergoing substantial privatization. This has increased their need for timely product and service innovations that increase efficiency and allow them to compete in a deregulated environment. Additionally, the continual development of advanced technologies for new products and product enhancements is an important way in which we maintain acceptable pricing levels. If we fail to keep pace with technological changes in the industrial sectors that we serve, we may experience price erosion and lower margins.
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The principal competitors for our automation technology products, systems and services include Emerson Electric Co., Honeywell International, Inc., Invensys plc, Schneider Electric SA and Siemens AG. We primarily compete with Areva SA, Schneider Electric SA and Siemens AG in sales of our power technology products and systems. All of our primary competitors are sophisticated companies with significant resources that may develop products and services that are superior to our products and services or may adapt more quickly than we do to new technologies, industry changes or evolving customer requirements. Our failure to anticipate or respond quickly to technological developments or customer requirements could adversely affect our business, results of operations, financial condition and liquidity.
Many of our contracts contain performance obligations that require innovative design capabilities, are technologically complex, require state-of-the-art manufacturing expertise or are dependent upon factors not wholly within our control. Failure to meet these obligations could adversely affect our profitability and future prospects.
We design, develop and manufacture technologically advanced and innovative products and services applied by our customers in a variety of environments. Problems and delays in development or delivery as a result of issues with respect to design, technology, licensing and patent rights, labor, learning curve assumptions or materials and components could prevent us from achieving contractual requirements.
In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. Examples of unforeseen problems that could negatively affect revenue and profitability include premature failure of products that cannot be accessed for repair or replacement, problems with quality, country of origin, delivery of subcontractor components or services and unplanned degradation of product performance. Among the factors that may affect revenue and profits could be unforeseen costs and expenses not covered by insurance or indemnification from the customer, diversion of management focus in responding to unforeseen problems, loss of follow-on work, and, in the case of certain contracts, repayment to the customer of contract cost and fee payments we previously received.
Industry consolidation could result in more powerful competitors and fewer customers.
Competitors in the industries in which our business divisions operate are consolidating. In particular, the automation industry is undergoing consolidation that is reducing the number but increasing the size of companies that compete with us. As our competitors consolidate, they likely will increase their market share, gain economies of scale that enhance their ability to compete with us and/or acquire additional products and technologies that could displace our product offerings.
Our customer base also is undergoing consolidation. Consolidation within our customers' industries (such as the marine and cruise industry, the automotive, aluminum, steel, pulp and paper, pharmaceutical industries and the oil and gas industry) could affect our customers and their relationships with us. If one of our competitors' customers acquires any of our customers, we may lose its business. Additionally, as our customers become larger and more concentrated, they could exert pricing pressure on all suppliers, including us. For example, in an industry such as power transmission, which historically has consisted of large and concentrated customers such as utilities, price competition can be a factor in determining which products and services will be selected by a customer.
We are subject to environmental laws and regulations in the countries in which we operate. We incur costs to comply with such regulations, and our ongoing operations may expose us to environmental liabilities.
Our operations are subject to U.S., European and other laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Our
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manufacturing facilities use and produce paint residues, solvents, metals, oils and related residues. We use petroleum-based insulation in transformers, polyvinylchloride (PVC) resin to manufacture PVC cable and chloroparaffin as a flame retardant. We have manufactured and sold, and we are using in some of our factories, certain types of transformers and capacitors containing polychlorinated biphenyls (PCBs). These are considered to be hazardous substances in many jurisdictions in which we operate. We may be subject to substantial liabilities for environmental contamination arising from the use of such substances. All of our manufacturing operations are subject to ongoing compliance costs in respect of environmental matters and the associated capital expenditure requirements.
In addition, we may be subject to significant fines and penalties if we do not comply with environmental laws and regulations including those referred to above. Some environmental laws provide for joint and several strict liability for remediation of releases of hazardous substances, which could result in us incurring a liability for environmental damage without regard to our negligence or fault. Such laws and regulations could expose us to liability arising out of the conduct of operations or conditions caused by others, or for our acts which were in compliance with all applicable laws at the time the acts were performed. Additionally, we may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. Changes in the environmental laws and regulations, or claims for damages to persons, property, natural resources or the environment, could result in substantial costs and liabilities to us.
We may be the subject of product liability claims.
We may be required to pay for losses or injuries purportedly caused by the design, manufacture or operation of our products and systems. Additionally, we may be subject to product liability claims for the improper installation of products and systems designed and manufactured by others.
Product liability claims brought against us may be based in tort or in contract, and typically involve claims seeking compensation for personal injury or property damage. If the claimant runs a commercial business, claims are often made also for financial losses arising from interruption of operations. Based on the nature and application of many of the products we manufacture, a defect or alleged defect in one of these products could have serious consequences. For example:
If we were to incur a very large product liability claim, our insurance protection might not be adequate or sufficient to cover such a claim in terms of paying any awards or settlements, and/or paying for our defense costs. Further, some claims may be outside the scope of our insurance coverage. If a litigant were successful against us, a lack or insufficiency of insurance coverage could result in an adverse effect on our business, financial condition, results of operations and liquidity. Additionally, a well-publicized actual or perceived problem could adversely affect our market reputation which could result in a decline in demand for our products.
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We may encounter difficulty in managing our business due to the global nature of our operations.
We operate in approximately 100 countries around the world and, as of December 31, 2009, employed approximately 116,000 people. As of December 31, 2009, approximately 52 percent of our employees were located in Europe, approximately 15 percent in the Americas, approximately 26 percent in Asia and approximately 7 percent in the Middle East and Africa. In order to manage our day-to-day operations, we must overcome cultural and language barriers and assimilate different business practices. In addition, we are required to create compensation programs, employment policies and other administrative programs that comply with the laws of multiple countries. We also must communicate and monitor group-wide standards and directives across our global network. Our failure to manage successfully our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with group-wide standards and procedures.
We have retained liability for environmental remediation costs relating to businesses that we sold in 2000, and we could be required to make payments in respect of these retained liabilities in excess of established provisions.
We have retained liability for environmental remediation costs at two sites in the U.S. that were operated by our nuclear technology business, which we sold in April 2000 to British Nuclear Fuels plc (BNFL). We have retained all environmental liabilities associated with our Combustion Engineering subsidiary's Windsor, Connecticut facility and a portion of the liabilities associated with our former ABB C-E Nuclear Power, Inc. subsidiary's Hematite, Missouri facility. The primary environmental liabilities associated with these sites relate to the costs of remediating radiological and chemical contamination upon decommissioning the facilities. Based on information that BNFL has made available, we believe remediation may take until at least 2015 at the Hematite site. We estimate that the remediation will take at least until 2012 at the Windsor site. At the Windsor site, we believe that a significant portion of such remediation costs will be the responsibility of the U.S. government pursuant to U.S. federal law, although the exact amount of such responsibility cannot reasonably be estimated. In connection with the sale of the nuclear business in April 2000, we established a provision of $300 million in respect of estimated remediation costs related to these facilities. Expenditures charged to the remediation provision were $11 million and $4 million during 2009 and 2008, respectively. The provision balance was $230 million and $241 million at December 31, 2009 and 2008, respectively. Due to the nature of remediation activities, it is possible that we could be required to make expenditures in excess of the provision. Potential excess expenditures cannot reasonably be estimated at this time. See "Item 5. Operating and Financial Review and ProspectsEnvironmental Liabilities."
If we fail to make the payments required under the Modified Plan of Reorganization for Combustion Engineering (the CE Plan) we could trigger an injunction default which would lead to the termination of the channeling injunction under the CE Plan.
Our Combustion Engineering, Inc. subsidiary (CE) had been a co-defendant in a large number of lawsuits claiming damage for personal injury resulting from exposure to asbestos. Since early 2003, we and our subsidiaries have been seeking to resolve our asbestos-related personal injury liabilities related to CE. A plan of reorganization for CE was filed under Chapter 11 of the U.S. Bankruptcy Code and during 2006 the CE Plan became effective.
On the effective date of the CE Plan, the U.S. Bankruptcy Court issued an injunction, referred to as a channeling injunction, pursuant to which all asbestos-related personal injury claims against ABB Ltd and certain entities in the ABB group (including CE) arising out of CE's business operations will be settled or otherwise satisfied from the proceeds of the trust established for such purposes.
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Under the CE Plan, ABB Ltd and certain of its subsidiaries have contingent payment obligations of $50 million for which we established a provision. Failure to satisfy those payment obligations could lead to an injunction default which would lead to the termination of the channeling injunction under the plan. In such case, all claims which were previously subject to the injunction would need to be resolved through the tort system. This could also cause our credit ratings to be downgraded, restrict our access to the capital markets or otherwise have a material adverse effect on our financial condition, results of operations, cash flows and liquidity.
If we are unable to obtain performance and other guarantees from financial institutions, we may be prevented from bidding on, or obtaining, some contracts, or our costs with respect to such contracts could be higher.
In the normal course of our business and in accordance with industry practice, we provide a number of guarantees including bid-bonds, advance payment guarantees and performance guarantees, which guarantee our own performance. These guarantees may include guarantees that a project will be completed or that a project or particular equipment will achieve defined performance criteria. If we fail to attain the defined criteria, we must make payments in cash or in kind. Performance guarantees frequently are requested in relation to large projects in our core power and automation businesses.
Some customers require that performance guarantees be issued by a financial institution. In considering whether to issue a guarantee on our behalf, financial institutions consider our credit ratings. In addition, the global financial crisis has made it more difficult and expensive to obtain these guarantees. If, in the future, we cannot obtain such a guarantee from a financial institution on reasonable terms, we could be prevented from bidding on, or obtaining, some contracts, or our costs with respect to such contracts could be higher, which would reduce the profitability of the contracts. If we cannot obtain guarantees on commercially reasonable terms from financial institutions in the future, there could be a material impact on our business, financial condition, results of operations or liquidity.
Examinations by tax authorities and changes in tax regulations could result in lower earnings and cash flows.
We operate in approximately 100 countries and therefore are subject to different tax regulations. Changes in tax law could result in higher tax expense and payments. Furthermore, this could materially impact our tax receivables and liabilities as well as deferred tax assets and deferred tax liabilities. In addition, the uncertainty of tax environment in some regions could limit our ability to enforce our rights. As a globally operating organization, we conduct business in countries subject to complex tax rules, which may be interpreted in different ways. Future interpretations or developments of tax regimes may affect our tax liability, return on investments and business operations. We are regularly examined by tax authorities in various jurisdictions.
If we cannot successfully implement the planned integration of our different ERP systems, then we may be unable to produce reliable accounts, and our business and reputation may be adversely affected.
In a number of specific countries, we are integrating our various ERP systems into country-wide ERPs in an effort to standardize and consolidate our accounting and reporting processes. A significant portion of these remaining system integrations are planned to occur during 2010. If we cannot successfully implement the planned integration activities, we may be unable to produce reliable accounts and our business and reputation may be adversely affected.
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If we are unable to attract and retain qualified management and personnel then our business may be adversely affected.
Our success depends in part on the abilities of our personnel, particularly our senior management team and key employees. If we are unable to attract and retain members of our senior management team and key employees this could have an adverse effect on our business.
Anticipated benefits of mergers, acquisitions, joint ventures or strategic alliances may not be realized.
As part of our overall strategy, we may, from time to time, merge with or acquire businesses, or form joint ventures or create strategic alliances. Whether we realize the anticipated benefits from these transactions depends, in part, upon the integration between the businesses involved, the performance of the underlying products, capabilities or technologies and the management of the transacted operations. Accordingly, our financial results could be adversely affected from unanticipated performance issues, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets and partner performance. Although we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful.
We could be affected by future laws or regulations enacted to address climate change concerns as well as the physical effects of climate change.
Although we do not believe existing or pending laws and regulations intended to address climate change concerns will materially adversely affect our current business or operations, such laws and regulations could materially affect us in the future. We may need to incur additional costs to comply with these laws and regulations. We could also be affected indirectly by increased prices for goods or services provided to us by companies that are directly affected by these laws and regulations and pass their increased costs through to their customers. At this time, we cannot estimate what impact such costs may have on our business, results of operations or financial condition. We could also be affected by the physical consequences of climate change itself, although we cannot estimate what impact those consequences might have on our business or operations.
Item 4. Information on the Company
INTRODUCTION
About ABB
We are a global leader in power and automation technologies that are designed to improve performance and lower the environmental impact for our utility and industrial customers. We provide a broad range of products, systems, solutions and services that are designed to improve power grid reliability, increase industrial productivity and enhance energy efficiency. Our focus on power transmission, distribution and power-plant automation serves electric, gas and water utilities, as well as industrial and commercial customers. We also deliver automation systems that measure, control, protect and optimize plant applications across a full range of industries.
History of the ABB Group
The ABB Group was formed in 1988 through a merger between Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB was a major participant in the introduction of electricity into Swedish homes and businesses and in the development of Sweden's railway network. In the 1940s and 1950s, Asea AB expanded into the power, mining and steel industries. Brown Boveri and Cie. (later renamed BBC Brown Boveri AG) was formed in Switzerland in 1891 and initially specialized in power
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generation and turbines. In the early to mid 1900s, it expanded its operations throughout Europe and broadened its business operations to include a wide range of electrical engineering activities.
In January 1988, Asea AB and BBC Brown Boveri AG each contributed almost all of their businesses to the newly formed ABB Asea Brown Boveri Ltd, of which they each owned 50 percent. In 1996, Asea AB was renamed ABB AB and BBC Brown Boveri AG was renamed ABB AG. In February 1999, the ABB Group announced a group reconfiguration designed to establish a single parent holding company and a single class of shares. ABB Ltd was incorporated on March 5, 1999, under the laws of Switzerland. In June 1999, ABB Ltd became the holding company for the entire ABB Group. This was accomplished by having ABB Ltd issue shares to the shareholders of ABB AG and ABB AB, the two publicly traded companies that formerly owned the ABB Group. The ABB Ltd shares were exchanged for the shares of those two companies, which, as a result of the share exchange and certain related transactions, became wholly-owned subsidiaries of ABB Ltd and are no longer publicly traded. ABB Ltd shares are currently listed on the SIX Swiss Exchange, the NASDAQ OMX Stockholm Exchange and the New York Stock Exchange (in the form of American Depositary Shares).
Organizational structure
Our business is international in scope and we generate revenues in numerous currencies. We operate in approximately 100 countries and have structured our global organization into four regions: Europe, the Americas, Asia and the Middle East and Africa (MEA). We are headquartered in Zurich, Switzerland.
We manage our business based on a divisional structure. In 2009, our business comprised five divisions: Power Products, Power Systems, Automation Products, Process Automation and Robotics. For a breakdown of our consolidated revenues (i) by core division and (ii) derived from each geographic region in which we operate, see "Item 5. Operating and Financial Review and ProspectsAnalysis of Results of OperationsRevenues."
As of January 1, 2010, the automation divisionsprimarily the Automation Products and Robotics divisionswere realigned to better meet market demands. For 2010, therefore, our business comprises the Power Products, Power Systems, Low Voltage Products, Discrete Automation and Motion, and Process Automation divisions. See "Business DivisionsIndustry BackgroundAutomation Market" for additional information related to the realignment of certain business divisions. Except where the context otherwise requires or where otherwise indicated, the information below is presented to reflect our business prior to this realignment.
Following the sale of the majority of our non-core activities, Non-core and Other is no longer presented separately but included in Corporate and Other.
Our principal corporate offices are located at Affolternstrasse 44, CH-8050 Zurich, Switzerland, telephone number +41-43-317-7111. Our agent for U.S. federal securities law purposes is ABB Holdings Inc., located at 501 Merritt 7, Norwalk, Connecticut 06851.
Industry Background
Our five divisions operate across two key markets, the power market and the automation market. Revenue figures presented in this Business Divisions section are before interdivisional eliminations.
Power Market
The power market uses products, systems and services designed primarily to deliver electricity. Electricity is generated in power stations and is then fed into an electricity grid, from where it is transmitted and distributed to consumers. The portions of an electricity grid that operate at the highest
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voltages are "transmission" systems, while those that operate at lower voltages are "distribution" systems. Transmission systems link power generation sources to distribution systems, often over long distances. Distribution systems then branch out over shorter distances to carry electricity from the transmission system to end users. These electricity networks incorporate sophisticated devices to control and monitor operations and to prevent damage from failures or stresses.
Electricity is transformed at different stages in the delivery process between the source and the ultimate end user. For example, electrical power is often generated in large power plants at 10 to 20 kilovolts. Because this voltage is too low to be transmitted efficiently, transformers are used to increase the voltage (up to 1,000 kilovolts) for long-distance transmission. This reduces losses and increases the amount of power that can be carried per line.
Transformers are also used to decrease the voltage at the local end for distribution to end users, such as residential, commercial or industrial consumers. An electric utility distribution system comprises distribution substations and networks, both overhead and underground. Some large industrial and commercial facilities receive electricity at higher voltage levels from the transmission or distribution network, while most industrial, commercial and residential users receive electricity from distribution network feeders at lower voltages.
Drivers in the power market vary by region. In North America the focus is on replacing aged infrastructure and improving grid reliability. In Europe the focus is on replacement of aged infrastructure and the integration of renewable energy sources, such as wind farms in the North Sea. Another driver in Europe is the increased demand for interconnections between countries to facilitate the market for energy trading. Both in North America and in Europe, improving energy efficiency also stimulates power investment. In the Middle East, a high level of investments is driven by large infrastructure projects and the related need for electricity. In emerging markets, including most parts of Asia, there is a need for electricity grid increases to cope with rising energy needs.
There is a global trend toward deregulation and privatization of the power market, which is creating a more competitive environment for our customers. This trend is evident in the United States, parts of South America, and Europe, and is developing in other regions. The creation of a free market for electricity requires our customers to become more cost-efficient and reliable to compete as a lowest-cost provider among power suppliers. Grid operators must be able to deliver power to customers that are hundreds or thousands of miles away within a few minutes. As more disturbance-sensitive loads (such as computers and telecommunications systems) have been added to networks, demand for reliable, high-quality electricity and "smarter" grids has increased. Power suppliers can achieve this efficiency and reliability in a number of ways, including the following:
Another major trend is the discussion on climate change, which has created a strong interest in energy-efficient and environmentally-friendly solutions. Both drivers have a direct impact on our
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business as ABB delivers solutions to increase the energy efficiency of existing electrical infrastructure and to integrate renewable energy such as wind and solar power into the electricity grid.
Automation Market
The automation market uses products, systems and services designed primarily to improve product quality, energy efficiency and productivity in industrial and manufacturing applications. The automation market can be divided into three sectors:
Effective January 1, 2010, ABB reorganized its automation divisions to align their activities more closely with those of its customers. These changes are expected to enable ABB to better capture growth opportunities in service, expand its presence in the discrete manufacturing sector and better respond to the increasing demand for energy efficient solutions.
Under the realignment, the business units from the Automation Products and Robotics divisions were regrouped into two new divisionsDiscrete Automation and Motion, and Low Voltage Products. The Process Automation division remained unchanged except for the addition of the instrumentation business from the Automation Products division.
The new divisions are as follows:
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Power Products Division
Overview
Our Power Products division serves primarily electric utilities, as well as gas and water utilities and industrial and commercial customers, with a broad range of products and services for power transmission and distribution. Direct sales account for a majority of the division's total product sales, and sales through external channel partners, such as wholesalers, distributors and OEMs, account for the remainder. Key technologies include high- and medium-voltage switchgear, circuit breakers for various current and voltage levels, power and distribution transformers, as well as sensors and products to automate and control electrical and other utility networks. The division had approximately 33,300 employees and 110 manufacturing plants as of December 31, 2009 and generated $11.2 billion of revenues in 2009.
The Power Products Division
Our Power Products division manufactures three categories of products: High-voltage Products, Medium-voltage Products and Transformers. The division sells primarily to utilities, distributors, wholesalers, installers and OEMs in the utilities and power generation industries. Some of the division's products are integrated into the offerings of the Power Systems and Process Automation divisions or are sold through external channel partners such as engineering, procurement and construction (EPC) firms.
The division manufactures distribution transformers (up to 72.5 kilovolts) for use in industrial facilities, commercial buildings and utility distribution networks to step down electrical voltage to the levels needed by end users. Industrial transformers are mainly delivered to the steel and aluminum industry, which need their own high-voltage transformers and substations on-site to service their heavy electricity requirements. We manufacture and sell a full range of distribution transformers including oil-type, dry-type and special application distribution transformers. Although oil-type transformers are more commonly used, demand for dry-type transformers is growing because they minimize fire hazards and have applications in high-density office buildings, windmills, offshore drilling platforms, marine vessels and high-volume industrial plants.
We also design and manufacture power transformers (72.5 to 1,000 kilovolts) for utility, transportation and industrial customers, as well as transformer components such as bushings and tap changers. Generator transformers are used in power generation when it is necessary to increase power voltage from a power plant for long-distance transmission. We produce traction transformers used in electric locomotives and we provide a wide range of transformer service and retrofit solutions for utilities and industry customers. The division also produces insulation material.
In the medium-voltage area, the division develops products and systems that reduce outage times and improve power quality and control, which are key to improving operational efficiency of both utility and industrial customers. It supplies switching equipment both directly to end users and through distributors and OEMs. Some of its products provide connections between higher voltage substations and lower voltage uses. It produces a comprehensive line of medium-voltage equipment (1 to 50 kilovolts), including products such as indoor and outdoor switch disconnectors, breakers, reclosers, fuses, contactors, instrument transformers and sensors as well as air- and gas-insulated switchgear, motor control centers, and ring main units for primary and secondary distribution. It also produces indoor and outdoor modular systems, compact substations and power distribution centers. In addition, a significant portion of its products are sold through external channel partners such as OEMs.
The Power Products division also provides high-voltage transmission equipment to power utilities that enables them to operate more efficiently and with lower environmental impact, both of which are significant business concerns in the market in which our customers operate. We manufacture the principal components of power transmission systems (50 to 800 kilovolts), including air- and gas-insulated switchgear, capacitors, high-voltage circuit breakers, grounding switches and instrument transformers. The division also
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delivers the entire ABB portfolio of low-, medium- and high-voltage capacitors and surge arresters. Its products and components also include circuit breaker drives and cable accessories.
Customers
The Power Products division's principal customers are electric utilities, owners and operators of power transmission systems, utilities that own or operate networks and owners and operators of power generating plants. Other customers include gas and water utilities, gas transmission companies, local distribution companies and multi-utilities, which are involved in the transmission or distribution of more than one commodity. The division also serves industrial and commercial customers, such as operators of large commercial buildings and heavy industrial plants.
Sales and Marketing
The Power Products division sells its products individually and as part of larger systems through our Power Systems division. Direct sales account for a majority of the division's total product sales, and sales through external channel partners, such as wholesalers, distributors and OEMs, account for the remainder. Because the Power Products and Power Systems divisions share many of the same customers and technologies, and are influenced by the same market drivers, the two divisions share a common sales force in most regions and countries.
Competition
On a global basis, the Power Products division's principal competitors are Siemens AG and Areva SA, and, in the medium-voltage market, Schneider Electric SA. We also compete regionally with companies such as Cooper Industries, Eaton Corporation, Crompton Greaves and Bharat Heavy Electricals Ltd.
Capital Expenditures
The Power Products division's capital expenditures for property, plant and equipment were $272 million in 2009, compared to $305 million and $209 million in 2008 and 2007, respectively. Principal investments in 2009 were in China, Sweden, Germany and the United States. Geographically, in 2009, Europe accounted for 51 percent of our capital expenditures, followed by 24 percent in Asia, 15 percent in the Americas and 10 percent in Middle East and Africa.
Power Systems Division
Overview
Our Power Systems division serves utilities, industrial and commercial customers with system solutions and services for the generation, transmission and distribution of electricity. Turnkey solutions include power plant electrics and automation, bulk power transmission, substations and network management. The division had approximately 16,000 employees in 80 countries as of December 31, 2009 and generated $6.5 billion of revenues in 2009.
The Power Systems Division
Our Power Systems division delivers systems in four areas: grid systems, network management, power generation, and substations. The division sells primarily to utilities, EPC companies and power generation industries. Some of the Power Products division's products are integrated into the offering of the Power Systems division.
For grid systems, we provide power systems that are essential to grid reliability, including flexible alternating current transmission systems (FACTS) and we also sell high-voltage direct current (HVDC)
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systems. Critical components in these systems are power semiconductors and cables which are also manufactured by the Power Systems division.
We are a leading manufacturer of HVDC technology, which is an advanced technology for transporting electricity over long distances, feeding power from mainland sites to off-shore platforms or integrating large off-shore windpower into the power grid. It reduces power losses, increases system stability and provides a more controllable flow than high-voltage alternating current. An HVDC transmission system typically includes converters, which change alternating current to direct current and then back to alternating current when it reaches the terminal point, and transmission line cables, either above or below ground. Advances in converter and cable technology have enabled us to introduce a system called HVDC LightTM. Converter stations for HVDC LightTM are approximately one-fifth the size of conventional HVDC technology for the same rated power. HVDC LightTM extends the range of applications for underground or submarine high-voltage direct current. Typical applications include interconnection of separate networks that operate on different frequencies or provide variational power quality, such as wind parks. The system can also be used as a substitute for local power generation in remote areas, islands or oil platforms.
We also provide FACTS devices to enhance power grid stability, improve power quality and increase transmission capability. FACTS devices include series compensators, static volt-amperes reactive compensators (SVCs) and SVC LightTM (based on the same unique technology as HVDC LightTM).
HVDC, HVDC LightTM, FACTS, and SVC LightTM systems rely on advanced power semiconductor components. Our power semiconductor business develops and manufactures tailor-made components to maximize the performance of these systems. The Power Systems division supplies power semiconductor devices to other ABB businesses and to external customers in the power transmission and distribution, drives, and transportation markets.
Our cable business is specialized in sub-sea cable solutions and land-cables for bulk energy transfer over long distances.
Our network systems offering includes high-end supervisory control and data acquisition (SCADA) systems for power and gas customers. SCADA systems are used to monitor and control energy transmission, distribution and power generation. They are also used in market systems for power networks providing real time information about the status of the grid. SCADA systems allow utilities to optimize their business by improving the performance of their installed network equipment to meet changing customer requirements and new market conditions.
The division also provides wireless and fixed communication systems for power, water and gas utilities, including both operational and corporate communication networks. It offers fiber optics, microwave radio and power line applications for data networking and broadband network management, as well as teleprotection and substation communication networks and voice switching management systems.
In the area of power generation, the division offers complete system integration of instrumentation, control and electrical equipment for the power generation market. The services offered include combustion management, plant performance optimization, condition monitoring and asset management. We also offer turnkey water pumping stations including control systems.
Substations interconnect electricity grids operating on different voltage levels, sectionalize portions of the grid and protect the electrical system against damage from outside sources such as lightning and overload. By sectionalizing the grid, power can be rerouted from portions of the transmission system that are experiencing problems to sections that are functioning properly, thereby enhancing the overall reliability of the power supply.
We deliver complete air- and gas-insulated substations for power transmission. Substations are also necessary in a power distribution network to sectionalize and reduce the voltage of the main power lines
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and cables to the lower voltages required for efficient distribution and consumption. For power distribution, we sell traditional custom-engineered substations.
This division offers services and support for management of existing power transmission and distribution assets, including both ABB products and those manufactured by third parties.
In addition, the Power Systems division offers a range of services aimed at reducing the in-house operational and maintenance requirements of utility customers. Our services range from contracts for spare parts management, support agreements and retrofits, to service, consulting and training. The Power Systems division also undertakes analyses of the design of new transmission and distribution systems as well as optimization that take into account technical, economic and environmental considerations.
Customers
The Power Systems division's principal customers are electric utilities, owners and operators of power transmission systems, utilities that own or operate networks and owners and operators of power generating plants. Other customers include gas and water utilities, transmission companies, local distribution companies and multi-utilities, which are involved in the transmission or distribution of more than one commodity. The division also serves industrial and commercial customers, such as operators of large commercial buildings and heavy industrial plants.
Sales and Marketing
The Power Systems division sells its offering primarily through a direct sales force of specialized sales engineering teams. Some sales are also handled through third-party channels, such as OEMs and system integrators or EPC firms. Because the Power Systems and Power Products divisions share many of the same customers and technologies, and are influenced by the same market drivers, the two divisions share a common sales force in most regions and countries.
Competition
On a global basis, the Power Systems division's principal competitors are Siemens AG and Areva SA. In the power generation area, the division's principal competitors are Areva SA, Emerson Electric Co., General Electric Company, Invensys plc and Siemens AG.
Capital Expenditures
The Power Systems division's capital expenditures for property, plant and equipment were $131 million in 2009, compared to $89 million and $50 million in 2008 and 2007, respectively. Principal investments in 2009 included replacement of existing equipment as well as capacity expansion, particularly in Sweden and Switzerland. Geographically, in 2009, Europe accounted for 86 percent of our capital expenditures, followed by 9 percent in Middle East and Africa, 3 percent in the Americas and 2 percent in Asia.
Automation Products Division
Overview
The Automation Products division provides products, with related services, that are used as components in machinery, switchboards, distribution panels, and building and automation systems. The Automation Products offering covers a wide range of products and services including low-voltage switchgear, breakers, switches, control products, DIN-rail components, enclosures, wiring accessories, instrumentation, drives, motors, generators, and power electronics systems. These products help customers to improve productivity, save energy and increase safety. Key applications include power distribution, protection and control, energy conversion, data acquisition and processing, and actuation. The majority of these applications are for industrial applications, with others provided for building construction, rail transportation, and utilities.
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The Automation Products division had approximately 35,000 people worldwide as of December 31, 2009, and generated $8.9 billion of revenues in 2009 through sales activities in more than 100 countries. The division has more than 100 manufacturing sites in 50 countries. Each day, the division delivers around one million products.
A majority of the division's revenues comes from sales through distributors, wholesalers, machine builders and OEMs, system integrators, and panel builders, although a portion of the division's revenues come from direct sales to end-users.
The Automation Products Division
The Automation Products division manufactures low-voltage circuit breakers, switches and control products to protect people, installations and electronic equipment from electrical overloads. It also manufactures instrumentation products to measure and control the flow of fluids.
This division makes line protection products, wiring accessories and enclosures and cable systems that are primarily used for control and protection in building installations. It also produces European Installation Bus/Powernet systems, which integrate and automate a building's electrical installations, ventilation, security and data communication networks.
The process instrumentation products manufactured by this division interact with the Open Control System products from the Process Automation division and include products for the measurement of process variables such as pressure, temperature, volume and flow. The increasing sophistication of many process automation systems often requires thousands of measurement points for such variables. These instrumentation products are sold separately or in combination with control systems. The various analytical measurement devices produced by this division form an important part of instrumentation and control systems. These devices measure chemical characteristics while process instrumentation products measure physical characteristics.
This division also provides low-voltage and medium-voltage AC drive products and systems for industrial, commercial and residential applications. Drives provide motion and torque while adding control and efficiency to equipment such as fans, pumps, compressors, conveyors, kilns, centrifuges, mixers, hoists, cranes, extruders, printing machinery and textile machines. Our drives are used in the building automation, marine, power, transportation and manufacturing industries, among others.
The Automation Products division also produces a range of power electronics products. These include static excitation and synchronizing systems that provide stability for power stations, as well as high power rectifiers that convert AC power to DC power for very high-amperage applications such as furnaces in zinc plants and aluminum and magnesium smelters. The division also manufactures frequency converters that use semiconductor technology to convert electrical power into the type and frequency required by individual customers.
In addition, this division supplies a comprehensive range of electrical motors and generators, including high-efficiency motors that conform to leading environmental and efficiency standards. Efficiency is an important criterion for selection by customers, because electric motors account for nearly two-thirds of the electricity consumed by industrial plants. This division manufactures synchronous motors for the most demanding applications and a full range of low and high-voltage induction motors.
Customers
The Automation Products division serves a wide range of customers, primarily through channel partners such as distributors, wholesalers and OEMs. Customers include residential and commercial building contractors, process industries such as pulp and paper, oil and gas and metals and mining
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companies, rail equipment manufacturers, discrete manufacturing companies and renewable energy suppliers, particularly in the wind and solar sectors.
Sales and Marketing
Sales are made both through direct sales forces as well as through third-party channel partners, such as distributors, wholesalers, installers, machine builders and OEMs, system integrators, and panel builders. The proportion of direct sales compared to channel partner sales varies among the different industries, product technologies and geographic markets. For the division as a whole, the majority of products are sold through channel partners, with the remainder sold through the division's own direct sales channels.
Competition
The Automation Products division's principal competitors vary by product line but include Alstom, Baldor Electric Company, Eaton Corporation, Emerson Electric Co., Endress+Hauser, Legrand, Mitsubishi, Rockwell Automation, Schneider Electric SA, Siemens AG, Yokogawa Electric Corporation and WEG Industries.
Capital Expenditures
The Automation Products division's capital expenditures for property, plant and equipment were $264 million in 2009, compared to $305 million and $193 million in 2008 and in 2007, respectively. Principal investments in 2009 were primarily related to ordinary course replacements of machinery and equipment mainly in Germany, Finland, Italy and China plus expansion investments in China, India and Bulgaria. Geographically, in 2009, Europe accounted for 64 percent of the capital expenditure, followed by 26 percent in Asia, 9 percent in Middle East and Africa and 1 percent in the Americas.
Process Automation Division
Overview
The Process Automation division provides products, systems, and services for the automation and optimization of industrial processes. Our main offerings are process automation, plant electrification and quality control systems, analytical measurement devices, turbochargers and marine propulsion systems. Our key end markets are the oil and gas, pulp and paper, metals and minerals, chemicals and pharmaceuticals, turbocharging and marine industries. The division had approximately 25,500 employees as of December 31, 2009, and generated revenues of $7.3 billion in 2009.
The Process Automation division offers its products both as separately sold devices and as part of a total automation system. Our technologies are marketed both through direct sales forces and third party channels.
The Process Automation Division
The Process Automation division offers integrated process control systems, plant electrification systems, information management systems and industry-specific application knowledge for a variety of industries, primarily pulp and paper, minerals and mining, metals, chemicals and pharmaceuticals, oil and gas, turbocharging, power and the marine industry. Some of the Automation Products, Power Products and Robotics divisions' products are integrated into the offering of the Process Automation division.
Our control systems are used in applications such as batch management, asset optimization, energy management and safety control. They are the hubs that link instrumentation, devices and systems for control and supervision of industrial processes and enable customers to integrate their production
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systems with their enterprise, resource and planning systems, thereby providing a link to their ordering, billing and shipping processes. This link allows customers to manage their entire manufacturing and business process based on real-time access to plant information. Additionally, it allows customers to increase production efficiency, optimize their assets and reduce environmental waste.
This division emphasizes Open Control Systems, including batch control systems, supervisory control and data acquisition systems, and, to a lesser extent, programmable logic controls and remote terminal units.
Batch control systems control the production of a variety of products in shorter runs, such as certain pharmaceuticals and food and beverage products. Supervisory control and data acquisition systems are used to collect and manage data over wide areas or long distances such as those involved in operating electric power networks.
A key element of this division's product offering is its System 800xA process automation platform. This product extends the capability of traditional process control systems, introducing advanced functions such as batch management, asset optimization and field device integration which "plug in" to a common user environment. The same user interface may also be used to manage components of existing multiple ABB control systems that have been installed in the market over approximately the past 20 years. In this way, System 800xA gives customers a way to migrate to new functions one step at a time, rather than having to make a large-scale capital investment to replace their entire control system. By creating a common user interface that can be used to manage multiple systems, the System 800xA also reduces the research and development investment needed to achieve a "one size fits all" solution across our large installed systems base.
The division's product offerings for the pulp and paper industries include quality control systems for pulp and paper mills, control systems, drive systems, on-line sensors, actuators and field instruments. On-line sensors measure product properties, such as weight, thickness, color, brightness, moisture content and additive content. Actuators allow the customer to make automatic adjustments during the production process to improve the quality and consistency of the product. Field instruments measure properties of the process, such as flow rate, chemical content and temperature.
We offer our customers in the metals and minerals industries specialized products and services, as well as total production systems. We design, plan, engineer, supply, erect and commission electric equipment, drives, motors and equipment for automation and supervisory control within a variety of areas including mining, mineral handling, aluminum smelting, hot and cold steel applications and cement production.
In the oil and gas sector, we provide solutions for onshore and offshore production and exploration, refining, and petrochemical processes, and oil/gas transportation and distribution. In the pharmaceuticals and fine chemicals areas, we offer applications to support manufacturing, packaging, quality control and compliance with regulatory agencies.
In the marine field, we provide global shipbuilders with power and automation technologies for luxury cruise liners, ferries, tankers, offshore oil rigs and special purpose vessels. We design, engineer, build, supply and commission electrical systems for marine power generation, power distribution and diesel electric propulsion, as well as turbochargers to improve efficiency for diesel and gasoline engines.
We also offer full-service contracts across all of our customer segments, in which we take over in-house maintenance activities for customers and apply strategies to reduce overall maintenance costs and help optimize these investments. Demand for our process automation services is increasing as our customers seek to increase productivity by improving the performance of existing assets.
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Customers
The Process Automation division's end customers are primarily companies in the oil and gas, minerals and mining, metals, pulp and paper, chemicals and pharmaceuticals, turbocharging and the marine industries.
Sales and Marketing
The Process Automation division uses a direct sales force as well as third-party channel partners, such as distributors, system integrators and OEMs. For the division as a whole, the majority of revenues are derived through the division's own direct sales channels.
Competition
The Process Automation division's principal competitors vary by industry or product line but include, Emerson Electric Co., Honeywell International Inc., Invensys plc, Metso Automation, Rockwell Automation, Schneider Electric SA, Siemens AG, Voith AG, Aspen Technologies, and Yokogawa Electric Corporation.
Capital Expenditures
The Process Automation division's capital expenditures for property, plant and equipment were $90 million in 2009, compared to $79 million and $91 million in 2008 and in 2007, respectively. Principal investments in 2009 were primarily related to our turbocharging production facilities and service stations in Switzerland, China, Japan, the United States and project-related investments mainly in Algeria, Finland, India, Sweden and Germany. In 2009, Europe accounted for 63 percent of capital expenditures, followed by 23 percent in Asia, 8 percent in the Americas and 6 percent in Middle East and Africa.
Robotics Division
Overview
Our Robotics division offers robot products, systems and services for the automotive and manufacturing industries. The division develops standardized manufacturing cells for many applications including machine tending, welding, cutting, painting, finishing and packing. It also provides fully engineered systems to automobile manufacturers for press automation, paint process automation, body in white assembly and power train assembly. The division also provides a full range of robotics services, from product and system maintenance to system design. The division had approximately 4,200 employees as of December 31, 2009 and generated $970 million of revenues in 2009. The Robotics division's manufacturing and research and development locations are organized globally, with headquarters in China.
The Robotics Division
The Robotics division offers robot products, systems and services for the automotive manufacturers and their sub-suppliers as well as general manufacturing industries, to improve product quality, productivity and consistency in manufacturing processes. Robots are also used in inhospitable environments which may be hazardous to employee health and safety, such as repetitive lifting, cold rooms or painting booths.
In the automotive industry, the division's products and systems are used in such areas as press shop, body shop, paint shop, power train assembly, trim and final assembly. General industry segments in which robotics solutions are used range from metal fabrication, foundry, plastics, food and beverage,
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chemicals and pharmaceuticals to consumer electronics, solar and wood. Typical general industry applications include welding, material handling, painting, picking, packing and palletizing.
Shortened product life cycles and rapidly changing consumer preferences have brought new challenges to our robotics customers. They must be able to adapt their production lines to increasingly frequent changes in product design. At the same time, they have to continuously deliver their products faster and at higher quality standards. Furthermore, constant price pressure requires them to decrease production costs by improving manufacturing processes. Robots and robotics systems continue to play a key role in our customers' ability to adapt to their rapidly-changing business environment.
Our services include design and project management, engineering, installation, training and life-cycle care of the complete production line.
Customers
The Robotics division's end customers are primarily companies in the automotive and manufacturing industries.
Sales and Marketing
Sales are made through both direct and indirect sales forces and third-party channel partners, such as distributors, system integrators, OEMs and machine builders. The proportion of direct sales compared to indirect sales varies among the different industries, product technologies and geographic markets. Sales from the systems and service businesses are made almost entirely through direct sales forces.
Competition
The Robotics division's principal competitors vary by product and system but major competitors include Fanuc Robotics Inc., Kuka Robot Group, Yaskawa Electric Corporation, Dürr AG, Kawasaki Robotics and Stäubli AG, as well as a growing base of small and medium-sized system integrators.
Capital Expenditures
The Robotics division's capital expenditures for property, plant and equipment were $14 million in 2009, compared to $28 million and $14 million in 2008 and 2007, respectively. Geographically, in 2009, Asia accounted for 54 percent of the capital expenditure, followed by 38 percent in Europe and 8 percent in the Americas.
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Overview
The following businesses and costs are included in our Consolidated Financial Statements as discontinued operations at December 31, 2009, 2008 and 2007:
See "Note 3 Acquisitions, divestments and discontinued operations" to our Consolidated Financial Statements for additional information.
Total capital expenditures for property, plant and equipment including non-acquisition related intangible assets amounted to $967 million, $1,171 million and $756 million in 2009, 2008 and 2007, respectively. Compared to the depreciation expenses, capital expenditures were 48 percent higher in 2009, 77 percent higher in 2008 and 26 percent higher in 2007.
Due to the current geographic distribution of our production facilities, capital expenditures in 2009 remained at a significant level in mature markets, but were below the previous year's level. Capital expenditures in Europe were primarily driven by maintenance and upgrades of existing production facilities to improve productivity, mainly in Switzerland, Sweden and Germany. Capital expenditures in emerging markets also decreased somewhat from their record level in 2008, but are still significantly above the level of 2007. Expenditures were highest in China, India and Poland. Capital expenditures in emerging markets were mostly made to expand or build new facilities to increase the production capacity. The share of emerging markets capital expenditure as a percentage of total capital expenditure was 42 percent in 2009.
The carrying value of property, plant and equipment sold amounted to $22 million, $50 million and $30 million in 2009, 2008 and 2007, respectively.
Of the total sales of property, plant and equipment in 2009, a significant portion was related to real estate properties, mainly in Norway, France, Brazil and Switzerland. The remainder was related to machinery and equipment in various locations. Of the total sales of property, plant and equipment in 2008, the majority related to real estate properties in Switzerland, Brazil, Mexico, Poland and Italy. Of the total sales of property, plant and equipment in 2007, a significant portion was related to real estate properties in Norway, Sweden and Italy.
Construction in progress for property, plant and equipment at December 31, 2009 was $564 million, mainly in Switzerland, Sweden, Germany, China, India and Poland. Construction in
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progress for property, plant and equipment at December 31, 2008 was $534 million, mainly in Sweden, the United States, Switzerland, China and Germany. Construction in progress for property, plant and equipment at December 31, 2007 was $285 million, mainly in Sweden, the United States, China, India, Switzerland and Germany.
In 2010, we plan to reduce our capital expenditures, but estimate the amount will be higher than our annual depreciation and amortization charge. We anticipate higher investments in the Americas and correspondingly lower capital spending in Europe.
We purchase a variety of raw materials for use in our production and project execution processes. The primary materials used in our products, by weight, are steel, copper, aluminum, mineral oil and various plastics. We also purchase a wide variety of fabricated products and electronic components. We operate a worldwide supply chain management network with employees dedicated to this function in business units and key countries. Over twenty global, and many divisional commodity teams take advantage of opportunities to leverage the scale of ABB, to optimize the efficiency of our supply networks, and to capture lowest possible costs worldwide.
Our supply chain management organization's activities have continued to expand in recent years, to:
The price of raw materials is highly volatile, and has varied substantially, from year to year. For many commodities we purchase, such as steel, copper, aluminum and products derived from crude oil, continuing global economic growth in China and other emerging economies, coupled with the uncertainty brought upon the markets by the recent world financial crisis, and the volatility in foreign exchange rates, all led to significant fluctuations in raw material costs over the last few years. While some market volatility will be offset through the use of either long-term contracts or hedging, we expect global commodity prices to remain highly volatile.
We mitigate our exposure to commodity risk arising from changes in prices of raw materials by entering into hedges. For example, we manage copper and aluminum price risk using principally swap contracts based on London Metal Exchange prices or on New York Mercantile Exchange prices for these commodities. Our hedging policy is designed to minimize price volatility and create a stable cost base. Hedging has the effect of minimizing the unfavorable impact of price increases in commodities, but it also limits the favorable impact of decreasing prices. Certain gains and losses derived from our commodity hedging transactions are deferred and reflected in the cost of goods sold when the underlying physical transaction affects cost of goods sold. In addition to using hedging to reduce our exposure to fluctuations in raw materials prices, in some cases we can reduce this risk by incorporating changes in raw materials prices into the prices of our products.
The costs for most of our electronic components, subassemblies and fabricated products were in line with our cost reduction initiatives and in many cases reduced compared to 2008. Procurement personnel in the business units, and in the countries in which we operate, along with the global commodities teams, continued to focus on component cost reduction efforts in all areas.
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We believe that intellectual property is as important as tangible assets for a technology group such as ABB. Over the past ten years, we have almost doubled our total number of first patent filings, and we intend to continue our aggressive approach to seeking patent protection. Currently, we have about 18,000 patent applications and registrations, of which approximately 9,000 are pending applications. In 2009, we filed patent applications for approximately 800 new inventions. Based on our existing intellectual property strategy, we believe that we have adequate control over our core technologies. The "ABB" trademarks and logo are protected in all of the countries in which we operate. We aggressively defend the reputation associated with the ABB brand.
Sustainability management is one of our highest business priorities. We seek to address sustainability issues in all our business operations in order to improve our social and environmental performance continuously, and to enhance the quality of life in the communities and countries where we operate.
Our social and environmental efforts include:
To manage environmental aspects of our own operations, we have implemented environmental management systems according to the ISO 14001 standard at our manufacturing and service sites. Almost all such sites currently work in compliance with the requirements of the standard (approximately 360 sites) and our environmental management program now covers operations in 54 countries. For non-manufacturing sites we have implemented an adapted environmental management
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system in order to ensure management of environmental aspects and continual improvement of performance.
We have Environmental Product Declarations to communicate the environmental performance of our core products. These describe the significant environmental aspects and impacts of a product line, viewed over its complete life cycle. Declarations are based on Life Cycle Assessment studies, created according to the international standard ISO/TR 14025. More than 70 declarations for major product lines are published on our Web site (www.abb.com), some of which have been externally certified by agencies such as Det Norske Veritas (DNV) of Norway and the RINA Management System Certification Society in Italy.
In 2009, a total of 85 percent of our employees were covered by confirmed data gathered through ABB's formal environmental reporting system that is verified by an independent verification body. The parts of our business that are not yet covered by our reporting system, mainly sales offices in countries where we do not perform manufacturing, have very limited environmental exposure. A total of twelve environmental incidents were reported in 2009, none of which had a material environmental impact.
In 2009, a total of 95 percent of employees were covered by confirmed data gathered through ABB's formal social reporting system that is verified by an independent verification body. The parts of our business that are not yet covered by our reporting system, mainly sales offices in countries where we do not perform manufacturing, have very limited social exposure.
One of our corporate objectives is to phase out the use of the hazardous substances that are recorded on our list of "restricted" substances. Priorities for replacement are set by each business using criteria such as the environmental aspects of alternatives, the risk of the substance escaping into the environment, how hazardous the substance is, whether we can use the substance under strict control and whether there are any technically acceptable alternatives.
We have retained liability for environmental remediation costs at two sites in the United States that were operated by our former nuclear business, which we have sold to BNFL. The primary environmental liabilities associated with these sites relate to the costs of remediating radiological contamination upon decommissioning the facilities. See "Note 15 Commitments and contingencies" to our Consolidated Financial Statements.
Our operations are subject to numerous governmental laws and regulations including those governing antitrust and competition, corruption, the environment, securities transactions and disclosures, import and export of products, currency conversions and repatriation, taxation of foreign earnings and earnings of expatriate personnel and use of local employees and suppliers.
As a reporting company under Section 12 of the U.S. Securities Exchange Act of 1934, we are subject to the FCPA's antibribery provisions with respect to our conduct around the world.
Our operations are also subject to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, as implemented by the 34 signatory countries. The convention obliges signatories to adopt national legislation that makes it a crime to bribe foreign public officials. As of December 31, 2009, those countries which have adopted implementing legislation and have ratified the convention include the United States and several European nations in which we have significant operations.
We conduct business in certain countries known to experience governmental corruption. While we are committed to conducting business in a legal and ethical manner, our employees or agents have taken, and in the future may take, actions that violate the U.S. FCPA, legislation promulgated pursuant to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, antitrust laws or other laws or regulations. These actions have resulted and could result in monetary or other penalties against us and could damage our reputation and, therefore, our ability to do business. For more information, see "Item 8. Financial InformationLegal Proceedings."
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ABB Ltd, Switzerland, is the ultimate parent company of the ABB Group, which comprises 265 consolidated operating and holding subsidiaries worldwide as of February 28, 2010. ABB Ltd's shares are listed on the SIX Swiss Exchange, the NASDAQ OMX Stockholm Exchange and the NYSE (where its shares are traded in the form of ADSseach ADS representing one registered ABB share).
The only consolidated subsidiary in the ABB Group with listed shares is ABB Limited, Bangalore, India, which is listed on the Bombay Stock Exchange and the National Stock Exchange of India.
The following table sets forth, as of February 28, 2010, the name, country of incorporation, and ownership interest of ABB Ltd, in its significant subsidiaries:
Company Name
|
Country | ABB Group Interest % |
||||
---|---|---|---|---|---|---|
ABB S.A., Buenos Aires |
ARGENTINA | 100.00 | ||||
ABB Australia Pty Limited, Sydney |
AUSTRALIA | 100.00 | ||||
ABB AG, Vienna |
AUSTRIA | 100.00 | ||||
ABB N.V., Zaventem |
BELGIUM | 100.00 | ||||
ABB Ltda., Osasco |
BRAZIL | 100.00 | ||||
ABB Bulgaria EOOD, Sofia |
BULGARIA | 100.00 | ||||
ABB Inc., St. Laurent, Quebec |
CANADA | 100.00 | ||||
ABB (China) Ltd., Beijing |
CHINA | 100.00 | ||||
Asea Brown Boveri Ltda., Bogotá |
COLOMBIA | 99.99 | ||||
ABB Ltd., Zagreb |
CROATIA | 100.00 | ||||
ABB s.r.o., Prague |
CZECH REPUBLIC | 100.00 | ||||
ABB A/S, Skovlunde |
DENMARK | 100.00 | ||||
ABB Equador S.A., Quito |
ECUADOR | 96.87 | ||||
Asea Brown Boveri S.A.E., Cairo |
EGYPT | 100.00 | ||||
ABB AS, Tallinn |
ESTONIA | 100.00 | ||||
ABB Oy, Helsinki |
FINLAND | 100.00 | ||||
ABB S.A., Rueil-Malmaison |
FRANCE | 100.00 | ||||
ABB AG, Mannheim |
GERMANY | 100.00 | ||||
ABB Automation GmbH, Mannheim |
GERMANY | 100.00 | ||||
ABB Automation Products GmbH, Ladenburg |
GERMANY | 100.00 | ||||
ABB Beteiligungs- und Verwaltungsges. mbH, Mannheim |
GERMANY | 100.00 | ||||
ABB Stotz-Kontakt GmbH, Heidelberg |
GERMANY | 100.00 | ||||
Busch-Jaeger Elektro GmbH, Mannheim/Lüdenscheid |
GERMANY | 100.00 | ||||
Asea Brown Boveri S.A., Metamorphossis Attica |
GREECE | 100.00 | ||||
ABB (Hong Kong) Ltd., Hong Kong |
HONG KONG | 100.00 | ||||
ABB Engineering Trading and Service Ltd., Budapest |
HUNGARY | 100.00 | ||||
ABB Limited, Bangalore |
INDIA | 52.11 | ||||
ABB Ltd, Dublin |
IRELAND | 100.00 | ||||
ABB Technologies Ltd., Tirat Carmel |
ISRAEL | 99.99 | ||||
ABB S.p.A., Milan |
ITALY | 100.00 | ||||
ABB Technology SA, Abidjan |
IVORY COAST | 99.00 | ||||
ABB K.K., Tokyo |
JAPAN | 100.00 | ||||
ABB Ltd., Seoul |
KOREA, REPUBLIC OF | 100.00 | ||||
ABB Holdings Sdn. Bhd., Subang Jaya |
MALAYSIA | 100.00 | ||||
Asea Brown Boveri S.A. de C.V., Tlalnepantla |
MEXICO | 100.00 | ||||
ABB BV, Rotterdam |
NETHERLANDS | 100.00 | ||||
ABB Finance B.V., Amsterdam |
NETHERLANDS | 100.00 | ||||
ABB Holdings B.V., Amsterdam |
NETHERLANDS | 100.00 | ||||
ABB Investments B.V., Amsterdam |
NETHERLANDS | 100.00 | ||||
ABB Limited, Auckland |
NEW ZEALAND | 100.00 | ||||
ABB Holding AS, Billingstad |
NORWAY | 100.00 |
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Company Name
|
Country | ABB Group Interest % |
||||
---|---|---|---|---|---|---|
ABB S.A., Lima |
PERU | 80.60 | ||||
ABB Inc., Paranaque, Metro Manila |
PHILIPPINES | 100.00 | ||||
ABB Sp. z o.o., Warsaw |
POLAND | 99.88 | ||||
ABB (Asea Brown Boveri), S.A., Paco de Arcos |
PORTUGAL | 100.00 | ||||
Asea Brown Boveri Ltd., Moscow |
RUSSIAN FEDERATION | 100.00 | ||||
ABB Contracting Company Ltd., Riyadh |
SAUDI ARABIA | 65.00 | ||||
ABB Holdings Pte. Ltd., Singapore |
SINGAPORE | 100.00 | ||||
ABB Holdings (Pty) Ltd., Sunninghill |
SOUTH AFRICA | 80.00 | ||||
Asea Brown Boveri S.A., Madrid |
SPAIN | 100.00 | ||||
ABB AB, Västerås |
SWEDEN | 100.00 | ||||
ABB Norden Holding AB, Västerås |
SWEDEN | 100.00 | ||||
ABB Asea Brown Boveri Ltd, Zurich |
SWITZERLAND | 100.00 | ||||
ABB Schweiz AG, Baden |
SWITZERLAND | 100.00 | ||||
ABB LIMITED, Bangkok |
THAILAND | 100.00 | ||||
ABB Holding A.S., Istanbul |
TURKEY | 99.95 | ||||
ABB Ltd., Kiev |
UKRAINE | 100.00 | ||||
ABB Industries (L.L.C.), Dubai |
UAE | 49.00 | ||||
ABB Holdings Limited, Warrington |
UNITED KINGDOM | 100.00 | ||||
ABB Limited, Warrington |
UNITED KINGDOM | 100.00 | ||||
ABB Holdings Inc., Norwalk, CT |
UNITED STATES | 100.00 | ||||
ABB Inc., Norwalk, CT |
UNITED STATES | 100.00 | ||||
Kuhlman Electric Corporation, Crystal Springs MS |
UNITED STATES | 100.00 | ||||
Asea Brown Boveri S.A., Caracas |
VENEZUELA | 100.00 |
As of December 31, 2009, we occupied real estate in approximately 100 countries throughout the world. The facilities consist mainly of manufacturing plants, office buildings, research centers and warehouses. A substantial portion of our production and development facilities are situated in Germany, Sweden, the United States, Switzerland, China, Finland, India and Italy. We also own or lease other properties, including office buildings, warehouses, research and development facilities and sales offices in many countries. We own essentially all of the machinery and equipment used in our manufacturing operations.
From time to time, we have a surplus of space arising from acquisitions, production efficiencies and/or restructuring of operations. Normally, we seek to sell such surplus space which may involve leasing property to third parties for an interim period.
The net book value of our property, plant and equipment at December 31, 2009, was $4,072 million, of which machinery and equipment represented $1,780 million, land and buildings represented $1,728 million and construction in progress represented $564 million. We believe that our current facilities are in good condition and are adequate to meet the requirements of our present and foreseeable future industrial operations.
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion of our financial condition and results of operations in conjunction with our Consolidated Financial Statements and other financial information contained elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks
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and uncertainties, including those discussed in "Item 3. Key InformationRisk Factors." See "Forward-looking statements" at the beginning of this Annual Report.
During 2009, we continued to focus on our core strengths: power and automation products, systems and services that increase grid reliability and industrial productivity and result in significant energy savings.
Despite uncertainties surrounding the economic situation, we continued to benefit from the broad scope of our business portfolio across key infrastructure sectors, such as power transmission and oil and gas. Our strong positions in emerging markets, our flexible global production base and our technological leadership, as well as the operational improvements we continue to make in our businesses also supported our business in 2009.
Foremost among these improvements was the successful reduction of costs to adapt to changing demand. Savings were achieved in four areas: making better use of global sourcing opportunities, reducing general and administrative expenses, eliminating operational and process inefficiencies, and optimizing our global footprint in order to match the geographic scope of our business with changing demand patterns, such as rapid growth in emerging markets. Our cost reduction program was key to maintaining profitability in a challenging environment.
Our efforts for 2009 continued to be aimed at three key areas: Strategy, Execution and People.
Strategy
Our strategy continued to focus on delivering reliable and energy-efficient solutions to customers in the global power and industrial automation sectors, using our broad global footprintespecially in emerging marketsto achieve both growth and a more competitive cost base, and ensuring excellence in business execution and cost and risk management. We believe this strategy remained sound in 2009 and enabled us to deliver on our profitability targets.
Execution
Execution continued to be our top priority. Despite challenging market conditions during 2009, we were able to maintain revenues and gross margins close to 2008 levels through our range of superior technologies and service, a strong order backlog as well as disciplined cost control, productivity improvements and risk control in all of our divisions. Our execution framework has centered around our business processes, regular business and project reviews, a flat organizational structure and a focus on compliance.
People
During 2009, we continued to build on our strong foundation as an attractive, dynamic global employer. We focused on retaining and recruiting quality people for our growth areas. Together with our zero tolerance policy, we continued to implement our Code of Conduct through employee education programs focusing on values, leadership and business ethics.
Outlook
We believe we have seen a bottoming of our short cycle businesses. However, given the longer-term nature of our portfolio, management's outlook for our businesses for 2010 and the overall economy remains uncertain.
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The drivers of our businesses, fueled mainly by the need to build and upgrade energy infrastructure, the need to address climate change and the increasing importance of emerging markets in the global economy, continue to offer attractive growth opportunities.
The need for more efficient and reliable power transmission and distribution and the integration of renewable energies into existing power grids remains in all regions. As energy and commodity prices increase, and as globalization promotes more competition, industrial customers in all parts of the world require automation solutions for new capacity and to lower costs, improve quality and increase the productivity of their existing assets.
The recent global economic downturn, however, has resulted in overcapacity in certain customer sectors and has reduced the amount of capital available for investment in others. It remains unclear at this time when and how quickly customer investments in these sectors will recover.
As a result of these factors, management will maintain a cautious outlook for 2010 until there is a clearer view of the overall direction of the global economy.
Therefore, in 2010 management will focus both on adjusting costs and taking advantage of its global footprint, strong balance sheet and leading technologies to tap further opportunities for profitable growth.
As of January 1, 2010, the automation divisionsprimarily the Automation Products and Robotics divisionswere realigned to better meet market demands. For 2010, therefore, our business comprises the Power Products, Power Systems, Low Voltage Products, Discrete Automation and Motion and the Process Automation divisions. See "Item 4. Business DivisionsIndustry BackgroundAutomation Market" for additional information related to the realignment of certain business divisions. Except where the context otherwise requires or where otherwise indicated, the information in this Item 5 is presented to reflect our business prior to the realignment.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
General
We prepare our Consolidated Financial Statements in accordance with United States generally accepted accounting principles (U.S. GAAP).
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including, but not limited to, those related to: costs expected to be incurred to complete projects; costs of product guarantees and warranties; provisions for bad debts; recoverability of inventories, investments, fixed assets, goodwill and other intangible assets; income tax related expenses and accruals; provisions for restructuring; gross profit margins on long-term construction-type contracts; pensions and other postretirement benefit assumptions and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates and assumptions.
We deem an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. We also deem an accounting policy to be critical when the application of such policy is essential to our ongoing operations. We believe the following critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. These policies should be considered when reading our Consolidated Financial Statements.
Revenues and cost of sales recognition
We generally recognize revenues for the sale of goods when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to occur upon transfer of title and risks and rewards of ownership.
Revenues under long-term construction-type contracts are recognized using the percentage-of-completion method of accounting. We principally use the cost-to-cost method to measure progress towards completion on contracts. Under this method progress of contracts is measured by actual costs incurred in relation to management's best estimate of total estimated costs, which are reviewed and updated routinely for contracts in progress. The cumulative effects of such adjustments are reported in the current period.
The percentage-of-completion method of accounting involves the use of assumptions and projections, principally relating to future material, labor and overhead costs. As a consequence, there is a risk that total contract costs will exceed those we originally estimated and the margin will decrease. This risk increases if the duration of a contract increases because there is a higher probability that the circumstances upon which we originally developed estimates will change, resulting in increased costs that we may not recover. Factors that could cause costs to increase include:
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Changes in our initial assumptions, which we review on a regular basis between balance sheet dates, may result in revisions to estimated costs, current earnings and anticipated earnings. We recognize these changes in the period in which the changes in estimates are determined. By recognizing changes in estimates cumulatively, recorded revenue and costs to date reflect the current estimates of the stage of completion of each project. Additionally, losses on long-term contracts are recognized in the period when they are identified and are based upon the anticipated excess of contract costs over the related contract revenues.
Short-term construction-type contracts or long-term contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates difficult are accounted for under the completed-contract method. Revenues under the completed-contract method are recognized upon substantial completionthat is: acceptance by the customer, compliance with performance specifications demonstrated in a factory acceptance test or similar event.
Revenues from service transactions are recognized as services are performed. For long-term service contracts, revenues are recognized on a straight-line basis over the term of the contract or, if the performance pattern is other than straight-line, as the services are provided. Service revenues reflect revenues earned from our activities in providing services to customers primarily subsequent to the sale and delivery of a product or complete system. Such revenues consist principally of maintenance-type contracts.
We offer multiple solutions to meet our customers' needs. These solutions may involve the delivery of multiple products and/or performance of services and the delivery and/or performance may occur at different points in time or over different periods of time. In such circumstances, if certain criteria are met, we allocate revenues to each delivery of product or performance of service based on the individual elements' relative fair value. If there is no evidence for the fair value of the delivered item, the revenue is allocated based on the residual method, provided that the elements meet the criteria for treatment as a separate unit of accounting.
Unless the percentage-of-completion or completed contract method applies, revenues from contracts that contain customer acceptance provisions are deferred until customer acceptance occurs, or we have demonstrated the customer-specified objective criteria have been met, or the contractual acceptance period has lapsed.
These revenue recognition methods require the collectability of the revenues recognized to be reasonably assured. When recording the respective accounts receivable, allowances are calculated to estimate those receivables that will not be collected. These reserves assume a level of default based on historical information, as well as knowledge about specific invoices and customers. The risk remains that a different number of defaults will occur than originally estimated. As such, the amount of revenues recognized might exceed or fall below that which will be collected, resulting in a change in earnings in the future. The risk of deterioration is likely to increase during periods of significant negative industry or economic trends.
As a result of the above policies, judgment in the selection and application of revenue recognition methods must be made.
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Contingencies
As more fully described in the section below entitled "Environmental liabilities", in "Item 8. Financial InformationLegal Proceedings" and in "Note 15 Commitments and contingencies" to our Consolidated Financial Statements, we are subject to proceedings, litigation or threatened litigation and other claims and inquiries related to environmental, labor, product, regulatory and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution.
We record a provision for our contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an undiscounted basis using our best estimate of the amount of loss incurred or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, we may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, we record such amounts only when it is probable that they will be collected.
We provide for anticipated costs for warranties when we recognize revenues on the related products or contracts. Warranty costs include calculated costs arising from imperfections in design, material and workmanship in our products. Although we generally make assessments on an overall, statistical basis, we make individual assessments on contracts with risks resulting from order-specific conditions or guarantees. There is a risk that actual warranty costs may exceed the amounts provided for, which would result in a deterioration of earnings in the future when these actual costs are determined.
We may have a legal obligation to perform environmental clean-up activities as a result of the normal operation of our business or have other asset retirement obligations. In some cases, the timing or the method of settlement, or both are conditional upon a future event that may or may not be within our control, but the underlying obligation itself is unconditional and certain. We recognize a provision for these and other asset retirement obligations when a liability for the retirement or clean-up activity has been incurred and a reasonable estimate of its fair value can be made. These provisions are initially recognized at fair value, and subsequently adjusted for accrued interest and changes in estimates.
Pension and postretirement benefits
As more fully described in "Note 17 Employee benefits" to our Consolidated Financial Statements, we operate pension plans that cover a large percentage of our employees. We use actuarial valuations to determine our pension and postretirement benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates, mortality rates and expected return on plan assets. Under U.S. GAAP, we are required to consider current market conditions in making these assumptions. In particular, the discount rates are reviewed annually based on changes in long-term, highly-rated corporate bond yields. Decreases in the discount rates result in an increase in the projected benefit obligation to employees (PBO) and in pension costs. Conversely, an increase in the discount rates results in a decrease in the PBO and in pension costs. The mortality assumptions are reviewed annually by management. Decreases in mortality rates result in an increase in the PBO and in pension costs. Conversely, an increase in mortality rates results in a decrease in the PBO and in pension costs.
Holding all other assumptions constant, a 0.25 percentage point decrease in the discount rate would have increased the PBO related to our pension plans by approximately $271 million, while a
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0.25 percentage point increase in the discount rate would have decreased the PBO related to our pension plans by approximately $259 million.
The expected return on plan assets is reviewed regularly and considered for adjustment annually based on current and expected asset allocations and represents the long-term return expected to be achieved. Decreases in the expected return on plan assets result in an increase to pension costs. An increase or decrease of 0.5 percent in the expected long-term rate of asset return would have decreased or increased, respectively, the net periodic benefit cost in 2009 by approximately $35 million.
Under U.S. GAAP, we accumulate and amortize over future periods actual results that differ from the assumptions used. Therefore, actual results generally affect our recognized expense for pension and other postretirement benefit obligations in future periods.
The funded status, which can increase or decrease based on the performance of the financial markets or changes in our assumptions regarding rates, does not represent a mandatory short-term cash obligation. Instead, the funded status of a pension plan is the difference between the PBO and the fair value of the plan assets. At December 31, 2009, our pension plans were $765 million underfunded compared to an underfunding of $710 million at December 31, 2008. Our other postretirement plans were underfunded by $219 million and $207 million at December 31, 2009 and 2008, respectively.
We have multiple non-pension postretirement benefit plans. Our health care plans are generally contributory with participants' contributions adjusted annually. For purposes of estimating our health care costs, we have assumed health care cost increases to be 8.89 percent per annum for 2010, gradually declining to 5.00 percent per annum by 2017 and to remain at that level thereafter.
Income taxes
In preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. We account for deferred taxes by using the asset and liability method. Under this method, we determine deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred taxes are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We recognize a deferred tax asset when it is more likely than not that the asset will be realized. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. To the extent we increase or decrease this allowance in a period, we recognize the change in the allowance within "Provision for taxes" in the Consolidated Income Statements unless the change relates to discontinued operations, in which case the change is recorded in "Income (loss) from discontinued operations, net of tax". Unforeseen changes in tax rates and tax laws, as well as differences in the projected taxable income as compared to the actual taxable income, may affect these estimates.
We operate in numerous tax jurisdictions and, as a result, are regularly subject to audit by tax authorities. We provide for tax contingencies, including potential tax audits, on the basis of the technical merits of the contingency, including applicable tax law, Organisation for Economic Co-operation and Development (OECD) guidelines, as well as on items relating to potential audits by tax authorities based on our evaluations of facts and circumstances. Changes in the facts and circumstances could result in a material change to the tax accruals. We provide for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Although we believe that our tax estimates are reasonable and that appropriate tax reserves have been made, the final determination of tax audits and any related litigation could be different than that which is reflected in our income tax provisions and accruals.
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An estimated loss from a tax contingency must be accrued as a charge to income if it is more likely than not that a tax asset has been impaired or a tax liability has been incurred and the amount of the loss can be reasonably estimated. We apply a two-step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. The required amount of provisions for contingencies of any type may change in the future due to new developments.
Goodwill and other intangible assets
We review goodwill for impairment annually as of October 1, or more frequently if events or circumstances indicate the carrying value may not be recoverable. We perform a two-step impairment test on a reporting unit level.
Our reporting units are the same as our divisions for Power Systems, Automation Products and Robotics. For Power Products and Process Automation, we determined that the reporting units are one level below the division, as the different products produced or services provided by these divisions do not share sufficiently similar economic characteristics to permit testing of goodwill on a total operating segment level. In the case of Power Products, there are separate reporting units based on the category of product producedHigh-Voltage Products, Medium-Voltage Products and Transformers. In the case of Process Automation, we have determined that there are two reporting units, the Turbocharger product business and the remainder of Process Automation.
In the first step of the impairment test, we compare the fair value of each reporting unit to its carrying value. The fair value of each reporting unit is calculated using an income approach, whereby the fair value is calculated based on the present value of future cash flows, applying a discount rate that represents our weighted-average cost of capital. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. We assess the reasonableness of the fair value calculations of our reporting units by reconciling the sum of the fair values for all our reporting units to our total market capitalization. On October 1, 2009, the calculated fair values for each of our reporting units exceeded their respective carrying values. Consequently, the second step of the impairment test was not performed. The assumptions used in the fair value calculation are challenged each year (through the use of sensitivity analysis) to determine the impact on the resulting fair value of the reporting units. Our sensitivity analysis in 2009 showed no significant change in fair values if the assumptions change (a 1 percent increase in the discount rate would reduce the calculated fair values by approximately 12 percent).
However, if the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then we would perform the second step to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. Any goodwill impairment losses would be recorded as a separate line item in the income statement in continuing operations, unless related to a discontinued operation, in which case the losses would be recorded in "Income (loss) from discontinued operations, net of tax". There were no goodwill impairment charges in 2009, 2008 and 2007.
We review intangible assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable upon the occurrence of certain triggering events, such as a decision to divest a business or projected losses of an entity. We record impairment charges in "Other income (expense), net", in our Consolidated Income Statements, unless they relate to a
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discontinued operation, in which case the charges are recorded in "Income (loss) from discontinued operations, net of tax".
Cash flow models used in evaluating impairments are dependent on a number of factors including estimates of future cash flows and other variables and require that we make significant estimates and judgments, involving variables such as sales volumes, sales prices, sales growth, production and operating costs, capital expenditures, market conditions and other economic factors. Further, discount rates used in discounted cash flow models to calculate fair values require the determination of variables such as the risk-free rates and equity market risk premiums. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements, see "Note 2 Significant accounting policies" to our Consolidated Financial Statements.
Each year, we invest significantly in research and development. Our research and development area focuses on developing and commercializing the core technologies of our businesses that are of strategic importance to our future growth. In 2009, 2008 and 2007, we invested $1,037 million, $1,027 million and $871 million, respectively, or approximately 3.3 percent, 2.9 percent, and 3.0 percent of annual consolidated revenues, respectively, on research and development activities. We also had expenditures of $265 million, $214 million and $302 million, respectively, or approximately 0.8 percent, 0.6 percent and 1.0 percent, respectively, of annual consolidated revenues in 2009, 2008 and 2007, on order-related development activities. These are customer- and project-specific development efforts that we undertake to develop or adapt equipment and systems to the unique needs of our customers in connection with specific orders or projects. Order-related development amounts are initially recorded in inventories as part of the work in process of a contract and then are reflected in cost of sales at the time revenue is recognized in accordance with our accounting policies.
In addition to continuous product development, and order-related engineering work, we develop platforms for technology applications in our automation and power businesses in our Group research and development labs, which operate on a global basis. Through active management of our investment in research and development, we seek to maintain a balance between short-term and long-term research and development programs and optimize our return on investment.
Our research and development strategy focuses on three objectives:
Universities are the incubators of future technology, and a central task of our research and development team is to transform university research into industry-ready technology platforms. We collaborate with a number of universities and research institutions to build research networks and foster new technologies. We believe these collaborations shorten the amount of time required to turn basic ideas into viable products, and they additionally help us recruit and train new personnel. We have built
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more than 50 university partnerships in the U.S., Europe and Asia, including long-term, strategic relationships with institutions such as Stanford University, the Massachusetts Institute of Technology, Carnegie Mellon University, Cambridge University, ETH Zurich or Imperial College London. Our collaborative projects include research on materials, sensors, micro-engineered mechanical systems, robotics, controls, manufacturing, distributed power and communication. Common platforms for power and automation technologies are developed around advanced materials, efficient manufacturing, information technology and data communication, as well as sensor and actuator technology.
Common applications of basic power and automation technologies can also be found in power electronics, electrical insulation, and control and optimization. Our power technologies, including our insulation technologies, current interruption and limitation devices, power electronics, flow control and power protection processes, apply as much to large, reliable, blackout-free transmission systems as they do to everyday household needs. Our automation technologies, including our control and optimization processes, power electronics, sensors and microelectronics, mechatronics and wireless communication processes, are designed to improve efficiency in plants and factories around the world, including our own.
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ACQUISITIONS, INVESTMENTS AND DIVESTITURES
Acquisitions and investments
During 2009, 2008 and 2007, ABB invested $209 million, $653 million and $54 million in 8, 12 and 14 new businesses and joint ventures, respectively.
During 2009 and 2007, no individual acquisition was significant. In August 2008, we completed the acquisition of Kuhlman Electric Corporation (Kuhlman), a U.S. based transformer company. The acquisition was integrated into our Power Products division in North America and complements both our product range and geographical presence. Kuhlman manufactures a wide range of high-quality transformers for the industrial and electric utility sectors and has a strong reputation for innovative products and solid, long-term customer relationships. The final purchase price, including assumed debt, was $513 million (including $5 million cash acquired). The final purchase price allocation resulted in additions of $114 million to intangible assets subject to amortization and additions of $427 million to goodwill.
For more information on our acquisitions, see "Note 3 Acquisitions, divestments and discontinued operations" to our Consolidated Financial Statements.
Divestitures of businesses, joint ventures and affiliated companies
In 2009, 2008 and 2007, we received cash, net of cash disposed, from sales of businesses, joint ventures and affiliated companies of $16 million, $46 million and $1,142 million, respectively. In relation to transactions included in continuing operations, we recognized gains (losses) in 2009, 2008 and 2007, in "Other income (expense), net", of $(1) million, $24 million and $11 million, respectively. We also recognized gains from dispositions, net of tax, in 2009, 2008 and 2007, in "Income (loss) from discontinued operations, net of tax", of $18 million, $9 million and $530 million, respectively. The divestment of these businesses is discussed separately below under "Divestitures in 2008" and "Divestitures in 2007". Divestitures in 2009 were not significant. All revenues and income reported in the year of sale are through the date of divestment.
Divestitures in 2008
During 2008, we sold our 50 percent stake in the shares of ABB Powertech Transformers, located in South Africa, to Powertech, a wholly-owned subsidiary of the Altron Group at a gain of $11 million. This business was part of our Power Products division prior to being reclassified to discontinued operations. This business had revenues of $29 million and $167 million in 2008 and 2007, respectively. Income in 2008 and 2007 was $2 million and $15 million, respectively, recorded in "Income (loss) from discontinued operations, net of tax".
Divestitures in 2007
In November 2007, we completed the sale of Lummus Global (Lummus) to Chicago Bridge & Iron Company and received net cash proceeds of approximately $810 million. Lummus had revenues of $870 million in 2007. Income for 2007 was $9 million and we realized a gain on sale of $530 million, all recorded in "Income (loss) from discontinued operations, net of tax". In 2008, we recorded certain adjustments that reduced the gain on sale by $5 million. In 2009, certain provisions were released increasing the gain on sale by $21 million.
In April 2007, we completed the sale of our Building Systems business in Germany, which was reported in discontinued operations. The business had revenues of $47 million in 2007 and losses of $2 million, recorded in "Income (loss) from discontinued operations, net of tax".
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In May 2007, we completed the sale of our stake in Jorf Lasfar Energy Company S.C.A. (Jorf Lasfar), a power plant based in Morocco and our stake in S.T.CMS Electric Company Private Limited (Neyveli), a power plant in India. Our share of the pre-tax earnings of Jorf Lasfar and Neyveli in 2007 was $21 million and $4 million, respectively. The sale of these investments resulted in a gain of approximately $38 million which was included in continuing operations. In 2008, we recorded an additional gain of $16 million related to the favorable outcome on an outstanding tax case.
In February 2007, we sold our Power Lines businesses in Brazil and Mexico for a sales price of $20 million and at no gain or loss. These businesses had revenues of $39 million and losses of $3 million in 2007, recorded in "Income (loss) from discontinued operations, net of tax".
We report our financial results in U.S. dollars. Due to our global operations, a significant amount of our revenues, expenses, assets and liabilities are denominated in other currencies. As a consequence, movements in exchange rates between currencies may affect:
We translate non-USD denominated results of operations, assets and liabilities to USD in our Consolidated Financial Statements. Balance sheet items are translated to USD using year-end currency exchange rates. Income statement and cash flow items are translated to USD using the average currency exchange rate over the relevant period.
Increases and decreases in the value of the USD against other currencies will affect the reported results of operations in our Consolidated Income Statements and the value of certain of our assets and liabilities in our Consolidated Balance Sheets, even if our results of operations or the value of those assets and liabilities have not changed in their original currency. Because of the impact foreign exchange rates have on our reported results of operations and the reported value of our assets and liabilities, changes in foreign exchange rates could significantly affect the comparability of our reported results of operations between periods and result in significant changes to the reported value of our assets, liabilities and shareholders' equity, as has been the case during the period from 2007 through 2009.
While we operate globally and report our financial results in USD, exchange rate movements between the USD and both the euro and the Swiss franc are of particular importance to us due to (i) the location of our significant operations and (ii) our corporate headquarters being in Switzerland.
The exchange rates between the USD and the EUR and the USD and the CHF at December 31, 2009, 2008 and 2007, were as follows:
Exchange rates into $
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
EUR 1.00 |
1.44 | 1.40 | 1.47 | |||||||
CHF 1.00 |
0.97 | 0.94 | 0.89 |
The average exchange rates between the USD and the EUR and the USD and the CHF for the years ended December 31, 2009, 2008 and 2007, were as follows:
Exchange rates into $
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
EUR 1.00 |
1.40 | 1.47 | 1.37 | |||||||
CHF 1.00 |
0.93 | 0.93 | 0.84 |
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When we incur expenses that are not denominated in the same currency as the related revenues, foreign exchange rate fluctuations could affect our profitability. To mitigate the impact of exchange rate movements on our profitability, it is our policy to enter into forward foreign exchange contracts to manage the foreign exchange transaction risk of our operations.
In 2009, approximately 88 percent of our consolidated revenues were reported in currencies other than USD. Of that amount, the following percentages were reported in the following currencies:
In 2009, also approximately 88 percent of our cost of sales and selling, general and administrative expenses were reported in currencies other than USD. Of that amount, the following percentages were reported in the following currencies:
We also incur expenses other than cost of sales and selling, general and administrative expenses in various currencies.
The results of operations and financial position of many of our subsidiaries outside of the United States are reported in the currencies of the countries in which those subsidiaries are located. We refer to these currencies as "local currencies." Local currency financial information is then translated into USD at applicable exchange rates for inclusion in our Consolidated Financial Statements.
The discussion of our results of operations below provides certain information with respect to orders, revenues, earnings before interest and taxes and other measures as reported in USD (as well as in local currencies). We measure period-to-period variations in local currency results by using a constant foreign exchange rate for all periods under comparison. Differences in our results of operations in local currencies as compared to our results of operations in USD are caused exclusively by changes in currency exchange rates.
While we consider our results of operations as measured in local currencies to be a significant indicator of business performance, local currency information should not be relied upon to the exclusion of U.S. GAAP financial measures. Instead, local currencies reflect an additional measure of comparability and provide a means of viewing aspects of our operations that, when viewed together with the U.S. GAAP results and our reconciliations, provide a more complete understanding of factors and trends affecting the business. Because local currency information is not standardized, it may not be possible to compare our local currency information to other companies' financial measures that have the same or a similar title. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
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We book and report an order when a binding contractual agreement has been concluded with the customer covering, at a minimum, the price and scope of products or services to be supplied, the delivery schedule and the payment terms. The reported value of an order corresponds to the undiscounted value of revenues that we expect to recognize following delivery of the goods or services subject to the order, less any trade discounts and excluding any value added or sales tax. The value of orders received during a given period of time represents the sum of the value of all orders received during the period, adjusted to reflect the aggregate value of any changes to the value of orders received during the period and orders existing at the beginning of the period. These adjustments, which may in the aggregate increase or decrease the orders reported during the period, may include changes in the estimated order price up to the date of contractual performance, changes in the scope of products or services ordered and cancellations of orders.
The undiscounted value of revenues we expect to generate from our orders at any point in time is represented by our order backlog. Approximately 21 percent of the value of total orders we recorded in 2009 were "large orders," which we define as orders from third parties involving a value of at least $15 million for products or services. Approximately 63 percent of the large orders in 2009 were recorded by our Power Systems division and 20 percent in our Process Automation division. The Power Products and Automation Products divisions accounted for the remainder of the total large orders recorded during 2009. The remaining portion of total orders recorded in 2009 was "base orders," which we define as orders from third parties with a value of less than $15 million for products or services.
The level of orders fluctuates from year to year. Arrangements included in any particular order can be complex and unique to that order. Portions of our business involve orders for long-term projects that can take months or years to complete and many large orders result in revenues in periods after the order is booked. However, the level of large orders and orders generally cannot be used to accurately predict future revenues or operating performance. Orders that have been placed can be cancelled, delayed or modified by the customer. These actions can reduce or delay any future revenues from the order or may result in the elimination of the order.
The near-term outlook is highly uncertain due to the volatility of key drivers such as economic growth and costs of raw materials. The impact of the slow or declining global economy has caused a decrease in the demand for orders. It is still uncertain how the global economy will develop throughout 2010; however, we believe our portfolio of products and services is well-balanced both geographically and in terms of product diversity. Beyond the near-term market uncertainties, we anticipate the need for more energy-efficient products to remain stable in the course of a continued economic downturn as industrial customers address their need for productivity improvements in the face of low-cost competition.
We evaluate the performance of our divisions primarily based on orders received, revenues, earnings before interest and taxes (EBIT) and EBIT as a percentage of revenues (EBIT margin). EBIT is the amount resulting from the subtraction of our cost of sales, selling, general and administrative expenses and other income (expense), net, from our revenues.
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ANALYSIS OF RESULTS OF OPERATIONS
Our consolidated results from operations were as follows:
|
2009 | 2008 | 2007 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions, except per share data in $) |
||||||||||
Orders |
30,969 | 38,282 | 34,348 | ||||||||
Order backlog at December 31, |
24,771 | 23,837 | 22,715 | ||||||||
Revenues |
31,795 |
34,912 |
29,183 |
||||||||
Cost of sales |
(22,470 | ) | (23,972 | ) | (20,215 | ) | |||||
Gross profit |
9,325 | 10,940 | 8,968 | ||||||||
Selling, general and administrative expenses |
(5,528 | ) | (5,822 | ) | (4,975 | ) | |||||
Other income (expense), net |
329 | (566 | ) | 30 | |||||||
Earnings before interest and taxes |
4,126 | 4,552 | 4,023 | ||||||||
Net interest and other finance expense |
(6 | ) | (34 | ) | (110 | ) | |||||
Provision for taxes |
(1,001 | ) | (1,119 | ) | (595 | ) | |||||
Income from continuing operations before cumulative effect of accounting change, net of tax |
3,119 | 3,399 | 3,318 | ||||||||
Income (loss) from discontinued operations, net of tax |
17 | (21 | ) | 586 | |||||||
Cumulative effect of accounting change, net of tax |
| | (49 | ) | |||||||
Net income |
3,136 | 3,378 | 3,855 | ||||||||
Net income attributable to noncontrolling interests |
(235 | ) | (260 | ) | (244 | ) | |||||
Net income attributable to ABB |
2,901 | 3,118 | 3,611 | ||||||||
Basic earnings (loss) per share attributable to ABB shareholders: |
|||||||||||
Income from continuing operations before cumulative effect of accounting change, net of tax |
1.26 | 1.37 | 1.37 | ||||||||
Income (loss) from discontinued operations, net of tax |
0.01 | (0.01 | ) | 0.25 | |||||||
Cumulative effect of accounting change, net of tax |
| | (0.02 | ) | |||||||
Net income |
1.27 | 1.36 | 1.60 | ||||||||
Diluted earnings (loss) per share attributable to ABB shareholders: |
|||||||||||
Income from continuing operations before cumulative effect of accounting change, net of tax |
1.26 | 1.37 | 1.34 | ||||||||
Income (loss) from discontinued operations, net of tax |
0.01 | (0.01 | ) | 0.25 | |||||||
Cumulative effect of accounting change, net of tax |
| | (0.02 | ) | |||||||
Net income |
1.27 | 1.36 | 1.57 | ||||||||
A more detailed discussion of the orders, revenues and EBIT for our individual divisions and other businesses follows in the sections below entitled "Power Products," "Power Systems," "Automation Products," "Process Automation," "Robotics" 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.
48
Orders
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions) |
|
|
|||||||||||||
Power Products |
10,940 | 13,627 | 11,320 | (20 | )% | 20 | % | |||||||||
Power Systems |
7,830 | 7,408 | 7,744 | 6 | % | (4 | )% | |||||||||
Automation Products |
8,453 | 10,872 | 9,314 | (22 | )% | 17 | % | |||||||||
Process Automation |
6,200 | 8,657 | 7,935 | (28 | )% | 9 | % | |||||||||
Robotics |
758 | 1,658 | 1,488 | (54 | )% | 11 | % | |||||||||
Core divisions |
34,181 | 42,222 | 37,801 | (19 | )% | 12 | % | |||||||||
Corporate and Other(1) |
(3,212 | ) | (3,940 | ) | (3,453 | ) | n.a. | n.a. | ||||||||
Total |
30,969 | 38,282 | 34,348 | (19 | )% | 11 | % | |||||||||
Total orders in 2009 decreased 19 percent (13 percent in local currencies) compared to 2008 due to (i) the global economic downturn which has significantly weakened demand particularly in the industrial and construction related markets and (ii) price erosion in both utilities and industrial sectors in many geographical markets.
Orders in our Power Products division declined 20 percent (14 percent in local currencies) as most customers held back their investment plans as a response to market uncertainties amid the global financial crisis. The government-funded stimulus programs for funding electric power investments have not yet had a significant impact on orders in this division. Orders declined across all product lines in the Medium-Voltage Products, High-Voltage Products and Transformers businesses. Orders in our Power Systems division increased 6 percent (17 percent in local currencies), benefiting from strong demand in the power generation and transmission sectors where infrastructure projects, addressing the integration of renewals, energy efficiency improvement and environmental concerns, were realized. Orders in our Automation Products division declined 22 percent (18 percent in local currencies), primarily the result of contraction in industrial markets particularly the building, residential and commercial construction markets. In our Process Automation division, orders declined 28 percent (22 percent in local currencies) as investments in the process automation sector have mostly been delayed due to limited access to capital and increased uncertainty of future demand. Weak demand in the automotive sector resulted in orders decreasing 54 percent (51 percent in local currencies) in the Robotics division.
In spite of the weakened economic conditions in many countries around the world, large orders increased as power utilities continued to realize their high-priority project commitments particularly in the grid systems and substations sectors. Large orders in the industrial sectors however remained weak, as large scale investments in this area were mostly delayed due to unstable global demand.
Driven by higher investments in large scale utilities projects, large orders in 2009 increased 10 percent (25 percent in local currencies) to $6,603 million, compared to the 5 percent increase (flat in local currencies) reported in 2008. The share of large orders compared to total orders increased from 16 percent in 2008 to 21 percent in 2009. The increase in the share of large orders in 2009 was driven not only by growth in large orders volume, but also by a decline in base orders whose volume during the year decreased by 25 percent (20 percent in local currencies).
In 2008, total orders increased 11 percent (7 percent in local currencies) as demand for power transmission and distribution products and energy-efficient industrial equipment was strong in most markets during the first half of 2008 but weakened in the last few months of the year due to the global economic crisis. Orders in our Power Products division grew 20 percent (15 percent in local currencies),
49
as demand for Transformers, High-Voltage Products and Medium-Voltage Products was strong, particularly in the first half of 2008. Orders in our Power Systems division decreased 4 percent (8 percent in local currencies), primarily the result of a lower volume of large orders in the utilities sector compared to the prior year due to the timing of project awards. Orders in our Automation Products division rose 17 percent (11 percent in local currencies), benefiting from higher investments in the industrial sector as customers in this market looked for energy-efficient technologies to improve productivity. Our Process Automation division recorded an increase in orders of 9 percent (4 percent in local currencies), backed by higher demand in the marine, metal and turbocharging sectors. Orders in our Robotics division increased 11 percent (5 percent in local currencies) reflecting higher demand particularly in the Robot Automation and Systems businesses. In our Power Products and Automation Products divisions, order growth was also driven by sale price increases to offset higher raw material costs.
We determine the geographic distribution of our orders based on the location of the customer, which may be different from the ultimate destination of the products' end use. The geographic distribution of our consolidated orders was as follows:
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions) |
|
|
|||||||||||||
Europe |
11,983 | 16,633 | 15,655 | (28 | )% | 6 | % | |||||||||
The Americas |
5,996 | 7,235 | 6,013 | (17 | )% | 20 | % | |||||||||
Asia |
8,197 | 10,242 | 9,186 | (20 | )% | 11 | % | |||||||||
Middle East and Africa |
4,793 | 4,172 | 3,494 | 15 | % | 19 | % | |||||||||
Total |
30,969 | 38,282 | 34,348 | (19 | )% | 11 | % | |||||||||
Orders from Europe in 2009 were down 28 percent (20 percent in local currencies) as growth in the Power Systems division, driven mainly by power grid upgrades in Western Europe, was more than offset by broad declines in all other divisions, reflecting the generally weak economic environment. Orders in the Americas decreased 17 percent (11 percent in local currencies) driven by a 33 percent decline in the United States on account of weak demand in the utilities and industrial sectors. Orders however grew significantly in South America due to strong demand in the utilities sector particularly in Brazil. Orders in Asia were down 20 percent (16 percent in local currencies), mainly due to lower demand in all sectors in countries across the region especially for the Process Automation business. Orders in MEA increased 15 percent (22 percent in local currencies) resulting from higher investment in the utility and oil and gas sectors. In this region, orders grew strongly in Algeria driven primarily by a very large Process Automation project. Orders also increased significantly in Kuwait and Saudi Arabia as these countries benefited from higher investment in power infrastructure.
In 2008, orders from the Americas increased 20 percent (19 percent in local currencies) backed by strong demand in the U.S., Canada, Mexico, Brazil and Argentina. Orders in this region grew in all divisions except Robotics. Higher investments to install new power infrastructure and increased spending by industrial customers to improve production capacity in growing economies, particularly Korea, China and Singapore, contributed to the increase in orders in the Asian market which reported 11 percent (7 percent in local currencies) growth. Orders in this region increased strongly in all divisions except Power Systems in which orders decreased due to a lower volume of large orders. Orders in Europe increased 6 percent (decreased 1 percent in local currencies). Orders from Finland, Spain, Turkey, Iceland and Sweden were up significantly compared to 2007, but were offset by substantially lower orders in Germany and the United Kingdom, as no orders similar in size to the offshore windfarm project in Germany (approximately $400 million) and the cable order to connect the United Kingdom with the Netherlands (approximately $350 million), were received in 2008. Orders in MEA markets increased 19 percent (17 percent in local currencies) driven by higher investments for
50
new infrastructures in the utility and industrial sectors and higher demand in Saudi Arabia, United Arab Emirates (UAE), South Africa and the Republic of Congo.
Order backlog
|
December 31, | % Change | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions) |
|
|
|||||||||||||
Power Products |
8,226 | 7,977 | 6,932 | 3 | % | 15 | % | |||||||||
Power Systems |
9,675 | 7,704 | 8,209 | 26 | % | (6 | )% | |||||||||
Automation Products |
3,557 | 3,863 | 3,490 | (8 | )% | 11 | % | |||||||||
Process Automation |
5,412 | 6,111 | 5,951 | (11 | )% | 3 | % | |||||||||
Robotics |
331 | 545 | 529 | (39 | )% | 3 | % | |||||||||
Core divisions |
27,201 | 26,200 | 25,111 | 4 | % | 4 | % | |||||||||
Corporate and Other(1) |
(2,430 | ) | (2,363 | ) | (2,396 | ) | n.a. | n.a. | ||||||||
Total |
24,771 | 23,837 | 22,715 | 4 | % | 5 | % | |||||||||
Changes in the order backlog balance at the end 2009 as compared to the end of 2008 were mainly due to foreign currency exchange fluctuations. The order backlog in the Power Systems division, however, increased due to the high volume of large orders booked throughout 2009.
Order backlog at the end of 2008 increased 5 percent (14 percent in local currencies), from the end of 2007, despite strong revenue growth of 20 percent (16 percent in local currencies), as the amount of orders received during 2008 was 10 percent higher than the amount of revenues. Order backlog increased in all divisions except Power Systems which saw a decline due to a lower volume of large orders received in 2008, compared to 2007.
Revenues
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions) |
|
|
|||||||||||||
Power Products |
11,239 | 11,890 | 9,777 | (5 | )% | 22 | % | |||||||||
Power Systems |
6,549 | 6,912 | 5,832 | (5 | )% | 19 | % | |||||||||
Automation Products |
8,930 | 10,250 | 8,644 | (13 | )% | 19 | % | |||||||||
Process Automation |
7,347 | 7,815 | 6,420 | (6 | )% | 22 | % | |||||||||
Robotics |
970 | 1,642 | 1,407 | (41 | )% | 17 | % | |||||||||
Core divisions |
35,035 | 38,509 | 32,080 | (9 | )% | 20 | % | |||||||||
Corporate and Other(1) |
(3,240 | ) | (3,597 | ) | (2,897 | ) | n.a. | n.a. | ||||||||
Total |
31,795 | 34,912 | 29,183 | (9 | )% | 20 | % | |||||||||
Revenues in 2009 declined 9 percent (4 percent in local currencies), primarily driven by lower orders received in the shorter-cycle product business, price erosion, and to a lesser extent, delivery delays triggered by customer schedule changes.
Revenues in the Power Products division decreased 5 percent (1 percent in local currencies) despite a double-digit decline in orders as the division benefited from high initial backlog, particularly in Transformers and High-Voltage Products. The Power Systems division reported a decline in revenues
51
of 5 percent (1 percent increase in local currencies) where a significant increase of revenues from project implementation in Grid Systems mostly offset the decline of revenues in Substations projects. Revenues in the Automation Products division decreased 13 percent (9 percent in local currencies) driven primarily by lower orders received, as the division generated a significant portion of its revenues from the book-and-bill orders of standard products. Revenues in the Process Automation division declined 6 percent (1 percent in local currencies) as a result of declining backlog in Pulp and Paper, Process Industries Products and Turbocharging. Revenues, however, increased in the Oil and Gas and in the Minerals businesses upon execution of large projects. Revenues in the Robotics division declined 41 percent (38 percent in local currencies) due to declining orders and a weak backlog.
In 2008, revenues increased 20 percent (16 percent in local currencies) supported by all divisions, benefiting from the high order backlog available at the beginning of the year and high volume of book-and-bill orders received in the first two quarters of the year. Further, revenue growth was supported by efficiency improvements in the production and order execution processes. Revenues in the Power Products and Automation Products divisions grew 22 percent (18 percent in local currencies) and 19 percent (13 percent in local currencies), respectively, as these divisions continued operating at high capacity levels. The increase in revenues in the product divisions was also driven partly by increases in sales prices to compensate the increase of commodity costs. Power Systems and Process Automation divisions reported revenue growth of 19 percent (16 percent in local currencies) and 22 percent (18 percent in local currencies), respectively. The growth of revenues in our Power Systems and Process Automation divisions was primarily driven by progress made in the execution of large orders. High order backlog at the beginning of 2008 was also the main factor contributing to the growth of revenues in the Robotics division, which increased 17 percent (11 percent in local currencies).
We determine the geographic distribution of our revenues based on the location of the customer, which may be different from the ultimate destination of the products' end use. The geographic distribution of our consolidated revenues was as follows:
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions) |
|
|
|||||||||||||
Europe |
13,093 | 15,815 | 13,322 | (17 | )% | 19 | % | |||||||||
The Americas |
6,049 | 6,428 | 5,247 | (6 | )% | 23 | % | |||||||||
Asia |
8,684 | 8,967 | 7,480 | (3 | )% | 20 | % | |||||||||
Middle East and Africa |
3,969 | 3,702 | 3,134 | 7 | % | 18 | % | |||||||||
Total |
31,795 | 34,912 | 29,183 | (9 | )% | 20 | % | |||||||||
In 2009, revenues in Europe decreased 17 percent (10 percent in local currencies). Revenues were lower in all major countries within the region including Germany and Switzerland due to weak orders and declining backlog especially in the industrial sector. Revenues from the Americas were down 6 percent (2 percent in local currencies) driven by lower orders in the U.S. market. Revenues however increased in Brazil and Canada on the execution of large projects in the power utilities sector. Revenues from Asia decreased 3 percent (flat in local currencies) with growth in China and South Korea offset by declines in India, Australia and Japan. Revenues from MEA increased 7 percent (10 percent in local currencies) backed by strong orders and high initial backlog of large projects in the Power Products, Power Systems and Process Automation divisions.
In 2008, revenues in Europe increased 19 percent (13 percent in local currencies). In particular, we experienced significant revenue increases in Germany, the United Kingdom, Spain, Finland and Turkey. Revenues from Asia, which increased 20 percent (16 percent in local currencies), were driven mainly by increases in China, India, Korea and Singapore. Revenues from the Americas increased 23 percent (22 percent in local currencies), with strong increases in the U.S., Canada and Brazil. Strong growth in revenues was reported in Qatar, UAE, South Africa and Saudi Arabia. High revenues in these countries led to the 18 percent (16 percent in local currencies) growth in the MEA region. The increase in revenues in all regions was the result of high production efficiency and sound execution of projects from the initial backlog and book-and-bill orders received during 2008.
52
Cost of sales
Cost of sales consists primarily of labor, raw materials and components but also includes expenses for warranty, contract losses and project penalties, as well as order-related development expenses incurred in connection with projects for which corresponding revenues were recognized.
Cost of sales decreased 6 percent (1 percent in local currencies), to $22,470 million in 2009, mainly due to lower revenues. However, as a percentage of revenues, cost of sales increased to 70.7 percent from 68.7 percent in 2008. This increase was primarily attributable to higher under-absorption costs arising from lower business volumes, the impact of price erosion, higher restructuring-related charges, and changes in business and product mix (the proportion of revenues from high margin businesses is relatively lower in 2009). The impact of these factors was partly offset by savings realized from measures taken in the areas of supply management, global footprint and operational excellence.
In 2008, cost of sales increased 19 percent (15 percent in local currencies) to $23,972 million. Cost of sales as a percentage of revenues decreased to 68.7 percent from 69.3 percent in 2007 reflecting a continuing trend from earlier years as the operations benefited from increased business volume, higher capacity utilization, better project execution and process improvement programs in the areas of risk management and project cost control. Furthermore, the progress made in the implementation of our cost migration strategy delivered financial benefits through cost savings in 2008.
Selling, general and administrative expenses
The components of selling, general and administrative expenses were as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Selling expenses |
(2,868 | ) | (2,943 | ) | (2,531 | ) | ||||
Selling expenses as a percentage of orders received |
9.3 | % | 7.7 | % | 7.4 | % | ||||
General and administrative expenses |
(2,660 | ) | (2,879 | ) | (2,444 | ) | ||||
General and administrative expenses as a percentage of revenues |
8.4 | % | 8.2 | % | 8.4 | % | ||||
Total selling, general and administrative expenses |
(5,528 | ) | (5,822 | ) | (4,975 | ) | ||||
Total selling, general and administrative expenses as a percentage of revenues |
17.4 | % | 16.7 | % | 17.0 | % | ||||
Total selling, general and administrative expenses as a percentage of the average of orders received and revenues |
17.6 | % | 15.9 | % | 15.7 | % |
In 2009, selling, general and administrative expenses decreased 5 percent (increased 1 percent in local currencies), after increasing 17 percent (12 percent in local currencies), in 2008. Total selling, general and administrative expenses, which are related to both orders received and revenues, expressed as a percentage of the average of orders received and revenues, increased in 2009 by 1.7 percentage-points to 17.6 percent from 15.9 percent in 2008, after increasing 0.2 percentage-points from 2007.
Selling expenses in 2009 decreased 3 percent (but increased 3 percent in local currencies), from 2008. The local currency increase is the result of an increase in doubtful debt allowance, higher expenses associated with longer tender phases in our systems business, offset in part by strict cost controls leading to a reduction of expenses and lower volume-related expenses such as sales commissions. Expressed as a percentage of orders received, selling expenses increased 1.6 percentage-points in 2009, mainly the result of lower orders received.
Selling expenses in 2008 increased 16 percent (11 percent in local currencies), from 2007, primarily due to increased activities in sales and marketing and the growth of our sales personnel.
In 2009, general and administrative expenses decreased 8 percent (2 percent in local currencies), reflecting savings achieved from our cost takeout program. General and administrative expenses include
53
non-order related research and development expenses of $1,037 million, a $10 million increase from 2008. Total general and administrative expenses, as a percentage of revenues, remained at the same level as 2008, reflecting a decrease in revenues.
In 2008, general and administrative expenses increased 18 percent (13 percent in local currencies), primarily related to the growth of business. General and administrative expenses include non-order related research and development, which increased 18 percent (12 percent in local currencies) to $1,027 million in 2008, compared to 2007, reflecting the continued spending on product development activities, particularly in the Power Products, Automation Products and Process Automation divisions. Total general and administrative expenses, as a percentage of revenues, remained at the same level as 2007, despite increased growth during the period. This was partly due to increased focus on the monitoring and controlling of administrative costs both at the corporate and operating unit levels.
Other income (expense), net
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Restructuring-related expenses(1) |
(111 | ) | (5 | ) | (8 | ) | ||||
Capital gains, net |
14 | 73 | 95 | |||||||
Asset write-downs |
(50 | ) | (11 | ) | (66 | ) | ||||
Income from licenses, equity accounted companies and other income (expense) |
476 | (623 | ) | 9 | ||||||
Total |
329 | (566 | ) | 30 | ||||||
"Other income (expense), net", typically consists of restructuring-related expenses, gains or losses from the sale of businesses, gains or losses from the sale or disposal of property, plant and equipment, asset write-downs, our share of income or loss from equity accounted companies and license income.
Restructuring-related costs are recorded in various lines within the Consolidated Income Statements depending on the nature of the charges. In 2009, restructuring-related costs reported in "Other income (expense), net" amounted to $111 million, and were incurred for restructuring projects in all of our divisions with the highest expenses recorded in the Robotics, Process Automation and Automation Products divisions.
In 2008, restructuring-related costs reported in "Other income (expense), net" amounted to $5 million, incurred for restructuring projects mainly in the Power Products, Automation Products and Process Automation divisions. In 2007, restructuring-related costs reported in "Other income (expense), net" amounted to $8 million that primarily consisted of $3 million costs incurred to streamline the operations in the Power Products division, $2 million restructuring-related costs for capacity expansion in the Power Systems division and $2 million restructuring-related costs in real estate operations.
In 2009, "Capital gains, net" consisted primarily of gains from the sale of real estate properties, mainly in Norway, France, Switzerland and the Netherlands.
In 2008, "Capital gains, net" consisted mainly of $14 million in gains from the sale of shares and participations, $10 million income from the release of a provision from a legal claim settlement related to the sold Air Handling business and $47 million capital gains from the sale of real estate properties, mainly in Switzerland, Brazil, Italy, Norway, the United Kingdom, Mexico, and Poland. Additionally, in 2008, we recorded adjustments to the gain on sale of Jorf Lasfar and Neyveli of $16 million related to the favorable outcome on an outstanding tax case.
54
In 2007, "Capital gains, net" consisted of $49 million in gains from the sale of equity investments, including a $38 million gain from the divestment of our equity investments in Jorf Lasfar and Neyveli, a $41 million gain from the sale of real estate properties mainly in Switzerland, Italy and to a lesser extent in Brazil, Norway and France and a $5 million gain on sale of various machinery and equipment in Europe.
Asset write-downs in 2009 included the impairment of the certain fixed assets in the United States ($10 million) and other impairments and write-downs of tangible and intangible assets primarily relating to ongoing restructuring programs in various countries. Asset write-downs in 2008 mainly related to the Distributed Energy business in Great Britain and other minor impairments. Asset write-downs during 2007 included an impairment charge of $42 million in respect of one of our equity investments, which we intend to divest, as the anticipated market value was less than our book value.
In 2009, "Income from licenses, equity accounted companies and other income (expense)" primarily consisted of the partial release of provisions related to the investigations in the Power Transformers business after the European Commission imposed a fine of 33.75 million euros (equivalent to $49 million on date of payment) in October 2009. Additionally, license income of approximately $5 million mainly from Switzerland and Germany was included in this line item.
In 2008, "Income from licenses, equity accounted companies and other income (expense)" primarily consisted of provisions for the ongoing investigations in the Power Transformer business by the European Commission, the German Federal Cartel Office, as well as the investigations by the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DoJ) which were recorded in Corporate and Other (see "Note 15 Commitments and contingencies" to our Consolidated Financial Statements.) Income from equity accounted companies in 2008 was generated from our equity ventures investment in Colombia and other investments in Italy, Finland and Germany and license income was generated mainly from Japan. Income from equity accounted companies in 2007 included $36 million, which was primarily related to Jorf Lasfar prior to its sale in the second quarter of 2007. During 2007, this income was also offset by charges towards several businesses that were sold or closed in earlier years.
Earnings before interest and taxes
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions) |
|
|
|||||||||||||
Power Products |
1,969 | 2,100 | 1,596 | (6 | )% | 32 | % | |||||||||
Power Systems |
388 | 592 | 489 | (34 | )% | 21 | % | |||||||||
Automation Products |
1,330 | 1,908 | 1,477 | (30 | )% | 29 | % | |||||||||
Process Automation |
685 | 926 | 683 | (26 | )% | 36 | % | |||||||||
Robotics |
(296 | ) | 9 | 79 | n.a. | n.a. | ||||||||||
Core divisions |
4,076 | 5,535 | 4,324 | (26 | )% | 28 | % | |||||||||
Corporate and Other |
50 | (983 | ) | (301 | ) | n.a. | n.a. | |||||||||
Total |
4,126 | 4,552 | 4,023 | (9 | )% | 13 | % | |||||||||
In 2009 and 2008, EBIT decreased 9 percent (8 percent in local currencies) and increased 13 percent (6 percent in local currencies), as a result of the factors discussed above.
55
EBIT margins were as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Power Products |
17.5 | 17.7 | 16.3 | |||||||
Power Systems |
5.9 | 8.6 | 8.4 | |||||||
Automation Products |
14.9 | 18.6 | 17.1 | |||||||
Process Automation |
9.3 | 11.8 | 10.6 | |||||||
Robotics |
(30.5 | ) | 0.5 | 5.6 | ||||||
Core divisions |
11.6 | 14.4 | 13.5 | |||||||
Total |
13.0 | 13.0 | 13.8 | |||||||
In 2009, EBIT margins in the divisions were negatively impacted by restructuring-related costs, price pressures mainly in our short-cycle businesses, lower volume and decreased capacity utilization, and lower revenues from higher-margin product businesses. These impacts were partly offset by cost savings in sourcing, general and administrative expenses as well as footprint adjustments and operational excellence initiatives. The release of compliance provisions recorded in "Corporate and Other" positively impacted the consolidated margin in 2009 compared to 2008.
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 costs associated with our credit facility and our debt securities, commitment fees on our bank facility and exchange losses on financial items, offset by gains on marketable securities and exchange gains on financial items.
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Interest and dividend income |
121 | 315 | 273 | |||||||
Interest and other finance expense(1) |
(127 | ) | (349 | ) | (383 | ) | ||||
Net interest and other finance expense |
(6 | ) | (34 | ) | (110 | ) | ||||
Interest and dividend income decreased in 2009 compared to 2008 due to the continued fall in market interest rates and despite the increase of $1,829 million in our net cash (defined as "Cash and equivalents" and "Marketable securities and short-term investments" less the sum of "Short-term debt and current maturities of long-term debt" and "Long-term debt"see "Liquidity and Capital Resources" for further discussion.)
"Interest and dividend income" increased in 2008 compared to 2007, reflecting (i) the improvement in our liquidity during the first half of 2008 through cash generated from operations and (ii) the change in investment strategy compared to 2007 with more cash placed in time deposits. In the first three quarters of 2007, we invested a significant amount of our excess liquidity in accumulating net asset value money-market funds, where the income is not distributed but is reflected by an increase in value of the funds' shares and is realized upon the sale of such investments. Gains on sales of securities are netted against "Interest and other finance expense" while interest on deposits is recorded in
56
"Interest and dividend income". Consequently, this change in investment strategy explains part of the increase in interest and dividend income in 2008 compared to 2007. During the second half of 2008, however, our interest income was impacted by falling interest rates, our acceptance of lower yields in favor of security in an increasingly difficult market and, despite positive cash flow from operations, a lower excess cash balance as cash was expended for, amongst other, the dividends paid in the form of nominal value reduction, acquisitions and the share buyback program. (See "Liquidity and Capital Resources" for discussion of our investment strategy.)
Both "Interest and dividend income" and "Interest and other finance expense" in 2007 include a gross-up in the amount of $44 million, related to interest income and expense on certain balance sheet items that were economically related but did not meet the criteria for presentation on a net basis. This should be considered when comparing 2008 figures with 2007.
"Interest and other finance expense" decreased in 2009 compared to 2008 primarily due to the non-recurrence of the one-off items described below and the overall fall in market interest rates over the period.
Excluding the effect of the adoption of the new accounting standard for convertible debt that resulted in an additional charge of $97 million in 2007, "Interest and other finance expense" increased in 2008 compared to 2007, despite a reduction in overall debt levels. This increase was primarily due to two items in 2008. Firstly, we recorded a $20 million other-than-temporary impairment on available-for-sale equity fund securities held by our Captive Insurance business, as we did not expect the market values of these securities to recover to their cost basis in the near term, given the market conditions at that time. Secondly, at December 31, 2008, we recorded $102 million in foreign exchange losses on the remeasurement into U.S. dollars of funding (in euros) of our euro-denominated investment in government bonds, designated as available-for-sale securities. The corresponding foreign exchange gains on these securities were part of their change in market values recorded in "Accumulated other comprehensive loss" in equity and were released to the income statement in the first quarter of 2009, when these securities matured. The unrealized losses at December 31, 2008, were the result of the significant move in the EUR/USD exchange rate in the month of December 2008 and the amount of the EUR-denominated funding of these securities (1.06 billion euros).
Provision for taxes
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Income from continuing operations, before taxes |
4,120 | 4,518 | 3,913 | |||||||
Provision for taxes |
(1,001 | ) | (1,119 | ) | (595 | ) | ||||
Effective tax rate for the year |
24.3 | % | 24.8 | % | 15.2 | % |
Certain provisions recorded as an expense in 2008 and the release of certain of these provisions in 2009, primarily related to alleged anti-competitive practices, originated in jurisdictions with a tax rate other than the weighted-average tax rate.
The provision for taxes in 2009 represented an effective tax rate of 24.3 percent and included:
57
The provision for taxes in 2008 represented an effective tax rate of 24.8 percent and included:
The provision for taxes in 2007 represented an effective tax rate of 15.2 percent and included:
Income from continuing operations before cumulative effect of accounting change, net of tax
The reduction of $280 million in 2009 compared to 2008 was primarily the result of the decrease in EBIT as discussed above. The improvement of $81 million in 2008 compared to 2007 was the result of higher EBIT and lower net interest and other finance expense, largely offset by an increase in provision for taxes.
Income (loss) from discontinued operations, net of tax
For a detailed discussion of income (loss) from discontinued operations, net of tax, as well as a detailed discussion of the results of our discontinued operations, see "Discontinued operations," and "Note 3 Acquisitions, divestments and discontinued operations" to our Consolidated Financial Statements.
Cumulative effect of accounting change, net of tax
In 2009, we adopted a new accounting standard that changed the accounting for convertible debt instruments that contained cash settlement features. Although we did not have any convertible debt instruments outstanding at December 31, 2009, 2008 and 2007, we adopted the provisions of this new standard on a retroactive basis to January 1, 2007, as they related to our 1 billion Swiss francs 3.5% convertible bonds (issued 2003) fully converted by bondholders in 2007. The impact on our Consolidated Income Statement in 2007 was (i) a loss of $49 million reported as "Cumulative effect of accounting change, net of tax" and (ii) a loss of $97 million from the conversion of bonds and amortization of discount, recorded in "Interest and other finance expense". See "Note 2 Significant accounting policiesNew accounting pronouncements" to our Consolidated Financial Statements for additional information.
58
Net income attributable to ABB
As a result of the factors discussed above, net income attributable to ABB decreased by $217 million to $2,901 million in 2009 as compared to 2008 and decreased by $493 million to $3,118 million in 2008 as compared to 2007.
Earnings (loss) per share attributable to ABB shareholders
|
2009 | 2008 | 2007 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
(in $) |
||||||||||
Income from continuing operations before cumulative effect of accounting change, net of tax: |
|||||||||||
Basic |
1.26 | 1.37 | 1.37 | ||||||||
Diluted |
1.26 | 1.37 | 1.34 | ||||||||
Income (loss) from discontinued operations, net of tax: |
|||||||||||
Basic |
0.01 | (0.01 | ) | 0.25 | |||||||
Diluted |
0.01 | (0.01 | ) | 0.25 | |||||||
Cumulative effect of accounting change, net of tax: |
|||||||||||
Basic |
| | (0.02 | ) | |||||||
Diluted |
| | (0.02 | ) | |||||||
Net income attributable to ABB: |
|||||||||||
Basic |
1.27 | 1.36 | 1.60 | ||||||||
Diluted |
1.27 | 1.36 | 1.57 |
Basic earnings (loss) per share is calculated by dividing income (loss) by the weighted-average number of shares outstanding during the year. Diluted earnings (loss) per share is calculated by dividing income (loss) by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise: outstanding written call options; outstanding options and shares granted subject to certain conditions under our share-based payment arrangements and, prior to September 2007, shares issuable in relation to our outstanding convertible bonds. (See "Note 20 Earnings per share" to our Consolidated Financial Statements.)
Divisional analysis
Power Products
The financial results of our Power Products division were as follows:
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions except EBIT Margin %) |
|
|
|||||||||||||
Orders |
10,940 | 13,627 | 11,320 | (20 | )% | 20 | % | |||||||||
Order backlog at December 31, |
8,226 | 7,977 | 6,932 | 3 | % | 15 | % | |||||||||
Revenues |
11,239 | 11,890 | 9,777 | (5 | )% | 22 | % | |||||||||
EBIT |
1,969 | 2,100 | 1,596 | (6 | )% | 32 | % | |||||||||
EBIT Margin %(1) |
17.5 | % | 17.7 | % | 16.3 | % | n.a. | n.a. |
59
Orders
Orders were down 20 percent (14 percent in local currencies) in 2009 primarily due to lower demand from industrial and construction-related markets as well as from the distribution sector. Order intake was further impacted by lower price levels due to weaker market conditions and pass-through of reduced commodity costs. In 2008, improvements were primarily due to growth in demand for electricity, particularly in emerging markets, and the expansion and improvement of power grid infrastructure, with a focus on environmental sustainability.
The geographic distribution of orders as a percentage of total orders for our Power Products division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
34 | 38 | 39 | |||||||
The Americas |
23 | 24 | 24 | |||||||
Asia |
33 | 30 | 30 | |||||||
Middle East and Africa |
10 | 8 | 7 | |||||||
Total |
100 | 100 | 100 | |||||||
In 2009, the share of orders from Europe and the Americas decreased due to unfavorable macro-economic conditions. However, these regions continue to generate over 50 percent of our order volume. Meanwhile, emerging markets in Asia and MEA showed relatively greater resilience and continued to invest in infrastructure projects, leading to an increase in their share of the total order volume.
In 2008, the share of orders from Europe, the largest region, decreased marginally, even though they grew in absolute terms. This growth was driven by the need to replace aging infrastructure and the increased demand for power grid interconnections and renewable energies. The share of orders from the Americas remained flat and was considerably influenced by orders from the United States, driven by the need to replace aging infrastructure and to meet capacity and reliability requirements. The share of orders from Asia remained stable compared to 2007. Demand was driven by the growth in energy needs, particularly in China and India, resulting from increasing levels of industrialization and urbanization. The share of orders from MEA improved in 2008, reflecting increased investment in infrastructure, supported by high oil prices.
Order backlog
Order backlog in 2009 increased 3 percent (decreased 2 percent in local currencies), after increasing 15 percent (24 percent in local currencies) in 2008. In 2009, the slight decrease in local currency order backlog was due to reduced order intake across all businesses. In 2008, the increase was due to higher order intake, led by the Transformers business which typically has longer delivery schedules.
Revenues
Revenues decreased 5 percent (1 percent in local currencies) in 2009 due to the lower contribution of shorter-cycle businesses mainly related to the industrial and construction sectors, as reflected in the order intake. This includes businesses such as medium-voltage equipment and distribution transformers.
Revenues increased 22 percent (18 percent in local currencies) in 2008 as a result of continued order growth and strong opening order backlog in almost all market segments, particularly in transformers.
60
The geographic distribution of revenues for our Power Products division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
35 | 38 | 39 | |||||||
The Americas |
25 | 24 | 24 | |||||||
Asia |
31 | 30 | 30 | |||||||
Middle East and Africa |
9 | 8 | 7 | |||||||
Total |
100 | 100 | 100 | |||||||
In 2009, the geographical distribution of revenues followed similar trends as orders but Europe's share declined slightly due to lower revenues in Russia and an overall challenging market environment. The Americas reported marginal positive growth in local currencies mainly due to increased revenues from transmission products which compensated for the decline in sales of distribution products. In Asia revenues dipped marginally due to delays in customer acceptance of deliveries resulting from a slowdown in execution of infrastructure projects due to a weaker market environment. MEA recorded positive growth in revenue as several large projects were executed in the current year.
The relative share of revenues among geographic regions in 2008 and 2007 remained similar to the distribution of orders, while all regions recorded growth in revenues as compared to the previous year. In Europe, the growth in revenues was led by Spain, Switzerland and the United Kingdom. Revenue growth in Asia in 2008 was led by China and India, while revenue growth in the Americas was particularly strong in the United States. In MEA, the share of revenues remained similar to 2007 with the increase in revenues driven by Saudi Arabia.
Earnings before interest and taxes
EBIT decreased 6 percent (2 percent in local currencies), in 2009, after increasing 32 percent (24 percent in local currencies), in 2008. The EBIT margin for the division was 17.5 percent in 2009, as compared to 17.7 percent in 2008 and 16.3 percent in 2007. EBIT and EBIT margin in 2009 were lower mainly due to reduced revenues and also reflected the lower share of higher-margin short-cycle product revenues compared to 2008. Total restructuring-related charges in 2009 amounted to $77 million. In 2008 and 2007, total costs related to the transformer consolidation program amounted to $46 million and $34 million, respectively. EBIT and EBIT margin in 2008 benefited from increased revenues, improved capacity utilization across businesses, operational and productivity improvements, supply chain savings and a positive impact of the transformer consolidation program.
Fiscal year 2010 outlook
Continued uncertainty in the market environment could contribute to project delays. Moreover, the time lag in the recovery of investment in the industrial, construction-related and power distribution sectors may stifle demand in the near term. However, the medium and long-term growth drivers for this business remain intact. This includes growth in emerging markets, the need for power availability and efficiency, climate change concerns, integration of renewables, development of smarter, more reliable and flexible grids as well as economic stimulus packages targeted at grid investments.
61
Power Systems
The financial results of our Power Systems division were as follows:
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions except EBIT Margin %) |
|
|
|||||||||||||
Orders |
7,830 | 7,408 | 7,744 | 6 | % | (4 | )% | |||||||||
Order backlog at December 31, |
9,675 | 7,704 | 8,209 | 26 | % | (6 | )% | |||||||||
Revenues |
6,549 | 6,912 | 5,832 | (5 | )% | 19 | % | |||||||||
EBIT |
388 | 592 | 489 | (34 | )% | 21 | % | |||||||||
EBIT Margin %(1) |
5.9 | % | 8.6 | % | 8.4 | % | n.a. | n.a. |
Orders
Order intake in 2009 increased 6 percent (17 percent in local currencies), as a strong increase in power transmission orders from utility customers compensated for lower demand in the industrial and power distribution sectors. A slow-down in base orders was more than offset by a strong growth in large orders. The growth in large orders partly reflects a general trend towards larger projects, sometimes resulting from a bundling of smaller projects. Large orders secured in 2009 included the $550 million EirGrid power link project where our HVDC LightTM technology will connect and enhance capacity and stability of both the Irish and the U.K. transmission grids, as well as facilitate the integration of renewable energy. A $540 million HVDC contract was received for the world's longest power transmission link to be constructed in Brazil, bringing remote hydro power to urban centers around São Paulo. Orders in 2009 also included a $400 million substation project in Kuwait to further enhance the country's electrical transmission grid.
Order intake in 2008 decreased 4 percent (8 percent in local currencies) when compared to 2007, due to a lower volume of large orders, while the base order volume was maintained at the previous year's level. Large projects secured in 2008 included a $233 million order from Hyundai Engineering and Construction of Korea to supply power systems and grid connections for a natural gas and steam turbine (combined-cycle) power plant to be built in Qatar. A $170 million order was received from Svenska Kraftnät and Fingrid Oyj, the transmission system operators in Sweden and Finland, for two HVDC converter stations for the Fenno-Skan 2 power link. A $150 million order was received from Dutch utility Nuon to provide power systems and grid connections for a new power plant to be built in the Netherlands.
The geographic distribution of orders as a percentage of total orders for our Power Systems division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
33 | 39 | 46 | |||||||
The Americas |
22 | 16 | 11 | |||||||
Asia |
16 | 20 | 21 | |||||||
Middle East and Africa |
29 | 25 | 22 | |||||||
Total |
100 | 100 | 100 | |||||||
Europe remained the largest region in terms of order intake in 2009. There is a strong political commitment in Europe to increase the share of renewables and adapt the grids to make them smarter
62
and more reliable. During 2009 there was a growing tendency to translate these commitments into actions, in some cases as part of governments' economic stimulus plans. Significant growth in the Americas was led by an order increase in Brazil. Orders also grew in Mexico as further investments were made to meet the rising demand for energy and to enhance the reliability and efficiency of the power grid. MEA continued to grow, as growing demand in several countries in the Middle East, led by Kuwait and Saudi Arabia, more than offset a slower order intake in Southern Africa. The order share from Asia decreased as lower volumes in China and Australia could not be fully compensated by an increased order intake in India.
The order decrease in Europe in 2008 mainly reflected the high volume of large projects received in this region in 2007, which could not be matched in 2008. MEA continued to show significant market growth for the division, as high fuel prices triggered investments in large infrastructure projects. Orders were also strong in the Americas, particularly in the United States, Canada and Brazil, resulting in a higher percentage share for the Americas region as compared to the previous year. The order share from Asia decreased marginally, mainly due to a relatively lower volume of large orders from China. Orders also decreased in India, primarily as the Power Systems division decided to discontinue its involvement in the rural electrification business due to safety concerns.
Order backlog
Order backlog at December 31, 2009, increased 26 percent (20 percent in local currencies), due mainly to the strong growth in large order intake. Large projects stay longer than base orders in the order backlog, as the project execution time is considerably longer. The order backlog decreased by $505 million, or 6 percent (increased 4 percent in local currencies), at December 31, 2008, compared with December 31, 2007, mainly due to a lower volume of large order intake.
Revenues
Revenues decreased 5 percent (increased 1 percent in local currencies), in 2009 as compared with an increase of 19 percent (16 percent in local currencies), in 2008. The revenue development in 2009, as in 2008, mainly reflected the scheduled project execution of the order backlog. The lower share of base orders led to a lower book and bill ratio in 2009 than in 2008 and 2007, i.e. a lower share of orders with a shorter execution cycle, which could be converted to revenues within the same calendar year.
The geographic distribution of revenues for our Power Systems division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
39 | 42 | 40 | |||||||
The Americas |
15 | 14 | 15 | |||||||
Asia |
18 | 18 | 20 | |||||||
Middle East and Africa |
28 | 26 | 25 | |||||||
Total |
100 | 100 | 100 | |||||||
In Europe, revenues were lower in both Western and Eastern Europe, reflecting scheduled project execution, as well as lower book and bill volumes. There was a small revenue increase in the Americas, led by growth in Mexico and Brazil. In the MEA region, revenues increased on project progress particularly in Namibia, Saudi Arabia and Kuwait, which more than compensated for the postponements of a few projects in the United Arab Emirates.
In 2008, all regions recorded growth in revenues over the previous year with Europe and MEA taking the lead. The higher revenues from Europe in 2008 compared to 2007 were mainly attributable to strong revenue growth in Germany, the United Kingdom and Italy, driven by the execution of large projects booked in 2007 and 2006. Similarly the revenue growth from MEA was also largely due to the execution of large orders booked in the region in prior years.
63
Earnings before interest and taxes
EBIT of the Power Systems division decreased 34 percent (29 percent in local currencies) in 2009, compared with growth of 21 percent (19 percent in local currencies) in 2008. The EBIT margin for the division decreased to 5.9 percent in 2009 compared with 8.6 percent and 8.4 percent in 2008 and 2007, respectively.
The lower EBIT and EBIT margin in 2009 was primarily the result of restructuring-related charges, lower revenues, higher research and development spending, as well as increased sales cost from higher tendering activity. The increase in EBIT and EBIT margin in 2008 was mainly attributed to higher revenues and capacity utilization, bidding selectivity, project execution and the cost benefit from expanding engineering resources in emerging markets.
Fiscal year 2010 outlook
Key market drivers for the Power Systems division continue to be economic growth and infrastructure spending on new capacities in emerging markets, upgrades of aging infrastructure, power reliability and quality improvements, increased focus on energy efficiency, the integration of renewable energy sources and the development of more flexible and smarter grids. Looking ahead, we believe that governments are likely to focus on infrastructure investments in the energy sector. Political commitments in Europe, U.S., and Asia to increase the share of energy from renewable sources, is expected to spur activity in the power sector.
Automation Products
The financial results of our Automation Products division were as follows:
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions except EBIT Margin %) |
|
|
|||||||||||||
Orders |
8,453 | 10,872 | 9,314 | (22 | )% | 17 | % | |||||||||
Order backlog at December 31, |
3,557 | 3,863 | 3,490 | (8 | )% | 11 | % | |||||||||
Revenues |
8,930 | 10,250 | 8,644 | (13 | )% | 19 | % | |||||||||
EBIT |
1,330 | 1,908 | 1,477 | (30 | )% | 29 | % | |||||||||
EBIT Margin %(1) |
14.9 | % | 18.6 | % | 17.1 | % | n.a. | n.a. |
Orders
Orders decreased 22 percent (18 percent in local currencies) in 2009 and increased 17 percent (11 percent in local currencies) in 2008.
In 2009, the demand in industrial and construction markets deteriorated leading to a decline in orders received. Both base orders and large orders were lower than 2008. However, the order trend improved at the end of 2009 for some standard products such as wiring accessories as the construction markets started recovering from a low level.
The increase in 2008 as compared to 2007 was the result of high demand during the first three quarters of the year for all business units except wiring accessories which experienced a weakening construction market. In the fourth quarter of 2008, demand for standard industrial and building products declined, reflecting the general global economic downturn. Orders for low-voltage (LV) drives, machines and LV systems increased in the last quarter of 2008, due to orders for energy conservation and renewable energy (mainly wind).
64
The geographic distribution of orders as a percentage of total orders for our Automation Products division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
54 | 60 | 63 | |||||||
The Americas |
10 | 11 | 11 | |||||||
Asia |
29 | 23 | 21 | |||||||
Middle East and Africa |
7 | 6 | 5 | |||||||
Total |
100 | 100 | 100 | |||||||
In 2009, the share of orders from Europe and the Americas declined as the recession affected these regions more than the emerging markets in Asia. Orders from U.S. were 32 percent lower than 2008 and many West European countries reported similar reductions. The share from Asia increased to 29 percent as the orders from China grew 10 percent compared to 2008. Orders from MEA increased mainly due to Saudi Arabia.
The share of orders from Europe in 2008 decreased as total orders only grew 13 percent (5 percent in local currencies). The lower growth rate in orders reflected the weak construction market particularly in Germany and Spain. Furthermore, in 2007, we secured a $110 million order for traction converters in Germany which was not repeated. The share of orders in the Americas was stable as high order growth in South America compensated for the weakening construction sector in the United States. The share of orders from Asia increased as a result of industrial infrastructure investments in China and India.
Order backlog
Order backlog in 2009 decreased 8 percent (12 percent in local currencies) as revenues were higher than orders for several business units, especially in power electronics and medium-voltage (MV) drives, machines, LV drives and LV motors.
Order backlog in 2008, when compared to 2007, increased 11 percent (18 percent in local currencies), as orders were higher than revenues for most business units, especially in power electronics and MV drives which booked several larger MV drive projects during the second half of the year.
Revenues
Revenues in 2009 decreased 13 percent (9 percent in local currencies). Revenues declined more slowly than orders as execution of the strong backlog in business units such as machines and power electronics and MV drives partly offset lower revenues in shorter-cycle businesses such as low-voltage products. Revenues were also impacted by lower prices resulting from a decrease in material costs as well as reduced demand.
Revenues in 2008 increased 19 percent (13 percent in local currencies). This increase was a result of higher order intake and execution of a strong order backlog. The revenue growth came from higher volumes as only minor price increases were made in 2008.
65
The geographic distribution of revenues for our Automation Products division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
56 | 62 | 61 | |||||||
The Americas |
11 | 11 | 12 | |||||||
Asia |
27 | 22 | 22 | |||||||
Middle East and Africa |
6 | 5 | 5 | |||||||
Total |
100 | 100 | 100 | |||||||
Europe's share of revenues in 2009 was reduced, as the orders from this region were strongly influenced by the recession. The increased share of revenues from Asia was the result of order growth and the build-up of local resources in sales, service and production in this region.
In 2008, the regional split was basically the same as in 2007, as all regions achieved double-digit growth in revenues. The weakening construction markets in Western Europe and North America led to lower growth rates for standard products in these regions. High growth was achieved in Asia mainly as a result of good order intake and a high backlog in China and India.
Earnings before interest and taxes
In 2009, the decline in EBIT was due to lower revenues, reduced capacity utilization and restructuring-related costs to adapt to weaker demand. Machines and power electronics and MV drives improved EBIT, supported by their strong backlog while all other business units were lower. Although the EBIT margin decreased from 18.6 percent in 2008 to 14.9 percent in 2009, high EBIT margins were achieved in LV drives, breakers and switches and wiring accessories although the levels were lower than 2008. Furthermore, cost reductions offset the negative impact from price erosion.
In 2008, EBIT increased 29 percent (21 percent in local currencies) as a result of increased revenues and continued operational improvements. All businesses improved their EBIT except wiring accessories which suffered from lower revenues due to the weakening construction market. The largest margin improvements were made in power electronics and MV drives, machines, LV drives and enclosures and DIN-rail products due to increased capacity utilization and operational improvements.
Fiscal year 2010 outlook
We believe the general global economic slowdown will flatten out and stabilize at a low level during 2010. However, in renewable energy and energy efficiency applications we expect continued investments. Continued growth is expected in China and India.
Process Automation
The financial results of our Process Automation division were as follows:
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions except EBIT Margin %) |
|
|
|||||||||||||
Orders |
6,200 | 8,657 | 7,935 | (28 | )% | 9 | % | |||||||||
Order backlog at December 31, |
5,412 | 6,111 | 5,951 | (11 | )% | 3 | % | |||||||||
Revenues |
7,347 | 7,815 | 6,420 | (6 | )% | 22 | % | |||||||||
EBIT |
685 | 926 | 683 | (26 | )% | 36 | % | |||||||||
EBIT Margin %(1) |
9.3 | % | 11.8 | % | 10.6 | % | n.a. | n.a. |
66
Orders
In 2009, orders decreased 28 percent (22 percent in local currencies) to $6,200 million. Both large orders and base orders were down during 2009 compared with the strong performance in 2008. The market slowdown noted in the fourth quarter of 2008 continued during 2009 with some stabilization of orders at the end of the year. The market was still driven by cost savings and energy and production efficiency requirements.
Lower investments in the marine, minerals, metals, and pulp and paper markets, as a result of the financial crisis and customers reducing investments due to uncertainty of future demand and limited access to project financing, was the main reason for lower orders recorded during 2009. Orders from the oil and gas sector remained strong in 2009 and grew 16 percent (29 percent in local currencies) due to several large orders from the MEA region. The performance services business grew 1 percent (10 percent in local currencies) due to the joint venture formed with Stora Enso to provide maintenance operations and improve efficiency at six pulp, paper and board mills in Finland. Service orders remained stable in 2009, while both systems and products orders were significantly reduced compared with 2008.
In 2008, orders increased 9 percent (4 percent in local currencies), with growth in large orders of 9 percent (1 percent in local currencies), compared to 2007. Our Process Automation division also reported an increase in base orders of 9 percent (5 percent in local currencies), in 2008, compared to 2007. Strong orders during the first quarter together with continued high activity in the market during the second quarter contributed to the growth, while in the second half of 2008 the growth in products and services was more than offset by lower large orders in the systems business. The oil, gas and petrochemical, metals, marine and turbocharging sectors recorded the strongest growth, while the pulp and paper and minerals sectors recorded lower order intake.
The geographic distribution of orders as a percentage of total orders for our Process Automation division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
40 | 40 | 42 | |||||||
The Americas |
19 | 19 | 19 | |||||||
Asia |
21 | 29 | 30 | |||||||
Middle East and Africa |
20 | 12 | 9 | |||||||
Total |
100 | 100 | 100 | |||||||
In 2009, European orders were down due to lower investments in the marine and minerals markets, however the region continued to represent the largest share of orders for Process Automation. In the Americas, the higher demand in Peru and Colombia was not enough to offset the lower order intake from the United States, Brazil, Canada and Mexico. The strong growth in Asia during 2007 and 2008 could not be repeated during 2009 due to lack of large orders from the marine, metals and pulp and paper market sectors. MEA recorded significant order growth during 2009 led by strong oil and gas investments in Algeria.
In 2008, investments in the marine sector, mainly from the cruise ship builders, contributed to the orders in Europe as well as several orders from the minerals and metals sectors. The Americas experienced strong growth driven by our minerals business in Canada and Brazil, our oil and gas business in the United States and Mexico and our service business in the United States. Orders in Asia were also at a high level coming mainly from our marine and metals businesses in China, Singapore and Korea. MEA experienced significant growth during 2008 supported by high commodity prices at the beginning of the year which drove industrial investments especially in the oil and gas and minerals sectors.
67
Order backlog
Order backlog at December 31, 2009 decreased 11 percent (17 percent in local currencies) to $5,412 million, compared to a year earlier. This reduction was the result of lower order intake combined with strong execution of projects in our opening backlog principally in the marine, minerals and metals business sectors. Order cancellations of approximately $300 million were received from customers in 2009, reducing our orders received and order backlog correspondingly.
Order backlog at December 31, 2008 increased 3 percent (12 percent in local currencies), compared to December 31, 2007. The growth in the order backlog was driven by large system orders received in the oil and gas, minerals and marine sectors with delivery schedules extending into 2010 and beyond.
Revenues
Revenues in 2009 from our systems business decreased 6 percent (increased 4 percent in local currencies). The local currency increase was led by minerals and oil and gas due to the strong backlog built up in the systems business during 2008. Revenues in pulp and paper were down due to the low activity levels in the market already prior to the financial crisis with several customers shutting down mills in America and Europe. Service revenues were at the same level as a year earlier in local currencies, due to the strong installed base and the contribution from the newly formed joint venture with Stora Enso. The products business was lower across all product lines during 2009 due to the short revenue conversion cycle (from orders received into revenues). Higher operational expenditure in the maintenance areas supported revenue growth in marine and metals services.
In 2008, revenues increased strongly as a result of the execution of the large order backlog in our systems business as well as strong revenues in both our service and products businesses. All regions and sectors recorded strong revenues but the highest growth was in our marine, metals, minerals, oil and gas and turbocharging businesses. Overall revenues were up across the systems business with 19 percent, the products business with 18 percent and the service business with 14 percent growth.
The geographic distribution of revenues for our Process Automation division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
41 | 44 | 46 | |||||||
The Americas |
19 | 19 | 17 | |||||||
Asia |
27 | 27 | 26 | |||||||
Middle East and Africa |
13 | 10 | 11 | |||||||
Total |
100 | 100 | 100 | |||||||
Higher revenues in 2009 from Finland and Norway were insufficient to maintain the same high level of revenues recorded in 2008 in Europe, as revenues were lower in the United Kingdom, Germany and Russia. Revenues in the Americas were slightly lower when compared with a strong performance a year earlier; Canada and Chile recorded significant growth while revenues from the U.S. and Brazil were lower. In Asia revenues were down mainly from Japan, Australia and Vietnam while Singapore experienced double-digit growth. Revenues in 2009 from MEA recorded significant growth due to the execution of several large projects in Congo, Qatar and Pakistan.
In 2008, revenues increased in all regions with the Americas, Asia and Europe showing strong growth. Europe experienced an increase in revenues driven by projects executed in Germany, Finland, Norway, the United Kingdom and Italy. The increase in revenues in the Americas was driven by the U.S., Brazil, Canada and Mexico. Revenues in Asia were driven by Korea, China, Japan and Singapore.
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Earnings before interest and taxes
EBIT for our Process Automation division decreased 26 percent (23 percent in local currencies) in 2009, compared with an increase of 36 percent in 2008. The EBIT margin decreased to 9.3 percent from 11.8 percent in 2008 after improving from 10.6 percent in 2007. EBIT in 2009 includes restructuring-related charges of $81 million, compared with $26 million recorded during 2008.
Fiscal year 2010 outlook
We expect the oil and gas industry to continue to invest in 2010 while most other process industries will only gradually recover during next year depending on the development of commodity prices and access to capital. Energy efficiency will continue to drive investments during next year as cost reduction initiatives will continue to be high on our customers' agenda. Some of the emerging economies have entered transition from recession to recovery and this will also benefit the Process Automation division in 2010.
Robotics
The financial results of our Robotics division were as follows:
|
|
|
|
% Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||
|
($ in millions except EBIT Margin %) |
|
|
|||||||||||||
Orders |
758 | 1,658 | 1,488 | (54 | )% | 11 | % | |||||||||
Order backlog at December 31, |
331 | 545 | 529 | (39 | )% | 3 | % | |||||||||
Revenues |
970 | 1,642 | 1,407 | (41 | )% | 17 | % | |||||||||
EBIT |
(296 | ) | 9 | 79 | n.a. | (89 | )% | |||||||||
EBIT Margin %(1) |
(30.5 | )% | 0.5 | % | 5.6 | % | n.a. | n.a. |
Orders
Orders in 2009 decreased 54 percent (52 percent in local currencies) compared to 2008. The automotive industry (including related industries and the entire supplier base) was affected by the economic downturn, resulting in orders being postponed. The weakening market also impacted the previously strong general industries segment, such as packaging, electronics and food processing, resulting in declining order intake. In 2008, orders increased 11 percent (5 percent in local currencies) as overall growth in general industries offset the accelerated downturn in the automotive industry in the second half of the year.
The geographic distribution of orders as a percentage of total orders for our Robotics division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
52 | 58 | 56 | |||||||
The Americas |
19 | 20 | 24 | |||||||
Asia |
28 | 21 | 20 | |||||||
Middle East and Africa |
1 | 1 | | |||||||
Total |
100 | 100 | 100 | |||||||
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In 2009, orders decreased across all regions as the downturn in the North American market reached the European and the Asian markets. Europe remained the largest region in terms of order intake, however, its share of total division orders decreased as the demand from the general industries segment declined in conjunction with continued weak demand from the automotive industry. The share of orders from Asia increased as the decline in order intake was less sharp than in Europe and the Americas.
In 2008, orders in Europe increased as a proportion of total division orders due to continuous order growth in both Western and Eastern Europe. Orders in the Americas decreased, driven mainly by the downturn in the North American automotive industry, which could not be offset by the order increase in South America. Orders in Asia continued to increase especially in markets such as India, Malaysia, Thailand and Singapore. The domestic market in China showed a stable development.
Order backlog
Order backlog in 2009 decreased 39 percent (42 percent in local currencies), due to lower base order intake across all businesses and regions and a high volume of large orders in 2008.
Order backlog in 2008 increased 3 percent (6 percent in local currencies), mainly reflecting an increase in orders in the systems business.
Revenues
In 2009, revenues decreased 41 percent (38 percent in local currencies). Revenues decreased across all business units and market segments, due to weak order backlog and low order intake.
In 2008, revenues increased 17 percent (11 percent in local currencies), mainly driven by a strong order backlog and strong order growth in general industries especially during the first nine months of 2008.
The geographic distribution of revenues for our Robotics division was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in %) |
|||||||||
Europe |
53 | 58 | 58 | |||||||
The Americas |
21 | 21 | 23 | |||||||
Asia |
26 | 20 | 18 | |||||||
Middle East and Africa |
| 1 | 1 | |||||||
Total |
100 | 100 | 100 | |||||||
In 2009, revenues decreased across all regions reflecting the downward trend in orders. Europe and MEA saw a decrease in the share of total revenues as Asia gained a higher share. Strong order backlog from 2008 and relatively lower decline in orders were the main reasons for the higher share of Asian revenues. The Americas' share of total revenues remained stable compared to 2008 mainly due to the weak automotive business having already impacted the second half of 2008.
In 2008, revenues increased in Europe mainly due to a strong order backlog as well as sales to general industries both in Western and Eastern Europe. The Americas recorded lower revenues as a result of the weakening automotive sector in North America, which is reflected in the lower share of revenues in the Americas. The share of revenues in Asia continued to grow due to increased local presence, adapted products and solutions as well as favorable market conditions, gaining more importance for the division.
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Earnings before interest and taxes
In 2009, EBIT for the Robotics division decreased $305 million after decreasing $70 million in 2008. The EBIT margin for the division was negative in 2009, compared with a positive margin of 0.5 percent and 5.6 percent in 2008 and 2007, respectively.
The EBIT decrease in 2009 was mainly a result of low factory loading, declining service revenues and further capacity adjustments and footprint changes. The decrease in 2008 EBIT was mostly a result of restructuring-related charges for moving manufacturing and engineering capacity to low cost countries.
Fiscal year 2010 outlook
Across all regions the automotive industry and general industries have been affected by the economic downturn. We believe that the general willingness to commit for investments in the robotics market will remain modest during 2010.
Corporate and Other
Corporate and Other comprises corporate headquarters and stewardship, corporate research and development, corporate real estate, equity investments primarily in Colombia and the Ivory Coast that are being considered for sale as well as other activities. EBIT for Corporate and Other was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Corporate headquarters and stewardship |
(296 | ) | (277 | ) | (202 | ) | ||||
Corporate research and development |
(115 | ) | (118 | ) | (98 | ) | ||||
Corporate real estate |
30 | 49 | 43 | |||||||
Equity ventures |
(8 | ) | (1 | ) | 10 | |||||
Other |
439 | (636 | ) | (54 | ) | |||||
Total Corporate and Other |
50 | (983 | ) | (301 | ) | |||||
Corporate headquarters and stewardship costs in 2009 increased mainly due to higher pension funding costs related to divested business. This increase was partly offset by lower expenses for our executive committee, lower corporate costs in the countries and an improved result in our captive insurance company. Corporate headquarters and stewardship costs in 2008 were higher than 2007 due mainly to higher pension and insurance costs and specific costs incurred related to programs such as brand promotion.
Corporate research and development costs in 2009 remained at a similar level as last year. In 2008, Corporate research and development costs increased due to higher research and development activities.
Corporate real estate EBIT consists primarily of rental income. In addition, in 2009, gains of $12 million from the sale of facilities mainly in Switzerland, the Netherlands and Norway were offset by a $10 million asset impairment charge in the United States. EBIT of real estate operations in 2008 included a $33 million gain from the sale of properties mainly in Switzerland, Brazil, Italy, Mexico and Poland, while in 2007 it mainly resulted from the gain on the sale of real estate properties in Switzerland, Norway, Brazil and Australia.
In 2009, EBIT from equity investments was an $8 million loss, primarily representing an operating loss of our equity investment in a power plant in Colombia. EBIT from equity investments decreased in 2008 as most investments were sold in previous years. In 2007, EBIT from equity investments was generated mainly from equity investments in Jorf Lasfar and Neyveli which were sold mid 2007. The
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gain on sale of these equity investments of $38 million was more than offset by a $42 million impairment charge in respect of another equity investment which we intend to divest.
In 2009, EBIT from "Other" in the table above was positive primarily due to the partial release of provisions (related to the investigations into our Power Transformers business) following the European Commission's decision to impose a fine in October 2009. It also included the costs of our Group Treasury Operations. The negative EBIT from "Other" in 2008 was the result of provisions related to the investigations into our Power Transformers business and the voluntary disclosures to the SEC and DoJ regarding suspect payments (see "Note 15 Commitments and contingencies" to our Consolidated Financial Statements). Also included are the costs of our Group Treasury Operations, which are part of our corporate finance function, of $10 million in 2008 and 2007. Further, "Other" in 2008 included $7 million in losses mainly related to the write-down of assets of our Distributed Energy business in Great Britain, and in 2007, losses related to projects in Building Systems and other businesses.
Discontinued operations
"Income (loss) from discontinued operations, net of tax" was as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Downstream Oil and Gas business |
21 | (5 | ) | 539 | ||||||
Building Systems business Germany |
| | (2 | ) | ||||||
Transformer business South Africa |
| 13 | 15 | |||||||
Cable business Ireland |
| | (1 | ) | ||||||
Upstream Oil, Gas and Petrochemicals |
| | 21 | |||||||
Asbestos |
| (31 | ) | | ||||||
Others |
(4 | ) | 2 | 14 | ||||||
Total |
17 | (21 | ) | 586 | ||||||
For further discussion on the discontinued operations, see "Acquisitions, divestments and discontinued operations", "Note 3 Acquisitions, divestments and discontinued operations", and "Note 15 Commitments and contingencies" to our Consolidated Financial Statements.
Restructuring programs
Cost take-out program
In December 2008, we announced a cost take-out program to adjust our cost base to rapidly changing market conditions and protect our profitability. The program's original target was to reduce our costscomprising both cost of sales and general and administrative expensesfrom 2008 levels by a total of $1.3 billion by the end of 2010. As a result of the ongoing deterioration of ABB's markets over most of 2009, the cost take-out goal has been expanded to $3 billion. The savings are focused on low-cost sourcing, reduced general and administrative expenses, internal process improvements and adjustments to our global manufacturing and engineering footprint.
Cost reductions for 2009 were significantly ahead of plan and exceeded $1.5 billion. Approximately 50 percent of these savings were achieved by optimizing global sourcing (excluding changes in commodity prices). The remainder was achieved through reductions to general and administrative expenses, as well as global footprint and operational excellence measures.
We expect to complete the cost take-out program by the end of 2010 with total charges approaching $1 billion.
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The following table outlines the total amount of costs expected to be incurred as well as the costs incurred in 2009 and the cumulative amount of costs incurred to date under the program.
|
Costs incurred in 2009 |
Cumulative costs incurred to December 31, 2009 |
Total expected costs |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Power Products |
77 | 78 | 210 | |||||||
Power Systems |
90 | 91 | 150 | |||||||
Automation Products |
130 | 142 | 260 | |||||||
Process Automation |
81 | 105 | 160 | |||||||
Robotics |
124 | 191 | 200 | |||||||
Corporate and Other |
14 | 16 | 20 | |||||||
Total |
516 | 623 | 1,000 | |||||||
During 2009, we recorded an expense of $516 million under this program of which $293 million was recorded in "Total cost of sales", $75 million in "Selling, general and administrative expenses" and $148 million in "Other income (expense), net". This expense consisted of $342 million related to employee severance costs, $129 million of estimated contract settlement, loss order and other costs and $45 million related to inventory and long-lived asset impairments.
During 2008, we recorded an expense of $107 million under this program of which $72 million was recorded in "Total cost of sales", $32 million in "Selling, general and administrative expenses" and $3 million in"Other income (expense), net". This expense consisted of $99 million related to employee severance costs, $3 million of estimated contract settlement, loss order and other costs and $5 million related to inventory and long-lived asset impairments.
The majority of the related cash outlays, primarily for employee severance benefits, are expected to occur in 2010 as the employees leave ABB. We expect to finance these restructuring activities from our cash flow from operations.
In the course of this program, we have implemented and will continue to execute various restructuring initiatives across all divisions and regions. The most significant individual exit plans within this program relate to the Robotics reorganization, the downsizing of the Automation Products business in France and Germany as well as the Power Systems business in Germany.
Robotics reorganization
In 2008, we initiated our plan to adjust our engineering, manufacturing and service capacities in the Robotics division, primarily in Western Europe and the U.S. as a result of the economic downturn in some of the division's key markets and to increase the presence in emerging markets. This plan includes closing certain production lines as well as employment reductions.
Downsizing the Automation Products business in France and Germany
In 2008, we started to formulate our plan to downsize the production capacities in the Automation Products division in France and Germany as a result of the economic downturn in some of the division's key markets. This plan includes closing certain production lines in both countries as well as employment reductions.
In addition, we are executing numerous, individually insignificant restructuring initiatives in our Automation Products business across many countries.
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Downsizing the Power Systems business in Germany
In 2009, we initiated our plan to adjust our engineering and service capacities in the Power Systems division in Germany as a result of the economic downturn in some of the division's key markets and to increase the presence in emerging markets. This plan mainly includes employment reductions.
In addition, we are executing numerous, individually insignificant restructuring initiatives in our Power Systems business across many countries.
For further information regarding these exit plans see "Note 21 Restructuring and related expenses" to our Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of funding
In 2009, 2008 and 2007, we met our liquidity needs principally using cash from operations and bank borrowings.
During 2009, 2008 and 2007, our financial position was strengthened by the positive cash flow from operating activities of $4,027 million, $3,958 million and $3,054 million, respectively. The cash generated in 2009 and 2008, and our overall cash position, allowed us to pay dividends in the form of a nominal value reduction, invest in property, plant and equipment and acquire businesses (see "Note 3 Acquisitions, divestments and discontinued operations" to our Consolidated Financial Statements). The cash generated in 2007 enabled us to pay an increased dividend to shareholders.
Our financial position is shown in the table below:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
|
($ in millions) |
||||||
Cash and equivalents |
7,119 | 6,399 | |||||
Marketable securities and short-term investments |
2,433 | 1,354 | |||||
Short-term debt and current maturities of long-term debt |
(161 | ) | (354 | ) | |||
Long-term debt |
(2,172 | ) | (2,009 | ) | |||
Net cash (defined as the sum of the above lines) |
7,219 | 5,390 | |||||
Net cash at December 31, 2009, increased compared to the balance at December 31, 2008, primarily due to the cash generated by operations during 2009 of $4,027 million. See "Financial Position", "Net cash provided by (used in) investing activities" and "Net cash used in financing activities" for further details.
Our Group Treasury Operations is responsible for providing a range of treasury management services to our group companies and is also responsible for investing cash in excess of current business requirements. At December 31, 2009 and 2008, the proportion of our aggregate "Cash and equivalents" and "Marketable securities and short-term investments" managed by our Group Treasury Operations amounted to 78 percent and 73 percent, respectively.
In 2009, we followed the same overall investment strategy of maintaining diversification (and flexibility) in our investment portfolio with a mix of government securities, highly-rated corporate short-dated paper and time deposits of short duration with banks. In the first half of 2009, the market in general rebounded and with investors' risk appetites returning, equities improved and credit spreads tightened. Consequently, we increased our investments in corporate papers (and removed maximum investment tenor of 90 days for such investments) and extended the duration on our time deposits with
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banks to enhance the return on our investments. Towards the end of 2009, we again invested in government securities as better returns could be made than with some banks who were offering low rates due to the amount of liquidity in the market.
At the beginning of 2009, we continued, as in 2008, to invest funds in their currency of origination. However, as of mid-2009, in view of Swiss franc interest rates being close to zero, wide bid-offer rates on deposits, and there being more favorable interest rates for euro-denominated deposits, we have swapped Swiss francs into euros at little or no cost, thereby significantly increasing the weighting of euros and reducing the proportion of Swiss francs in our total short-term investments. Consequently, by the end of 2009, the currency profile of the excess cash invested by our Group Treasury Operations, has changed compared to the prior year. At December 31, 2009, approximately 78 percent of such cash has been placed in euros, 9 percent in U.S. dollars and the remainder in other currencies. This compares to 47 percent in euros, 32 percent in Swiss francs, 10 percent in Swedish krona, with Norwegian krona, U.S. dollars and other currencies making up the balance at December 31, 2008.
We actively monitor credit risk in our investment portfolio and hedging activities. Credit risk exposures are controlled in accordance with policies approved by our senior management to identify, measure, monitor and control credit risks. We continue to closely monitor ongoing developments in the credit markets and will make appropriate changes to our investment policy as deemed necessary. The rating criteria we require for our counterparts have remained unchanged during 2009 as followsa minimum of A rating for our banking counterparts, while the minimum required rating for investments in short-term corporate paper is A-1/P-1. In addition to rating criteria, we continue to have specific investment criteria and restrictions on the sectors we invest in. These parameters are closely monitored on an ongoing basis and amended as we consider necessary.
We believe the cash flows generated from our business are sufficient to support business operations, capital expenditures, the payment of dividends to shareholders and contributions to pension plans. Due to the nature of our operations, our cash flow from operations generally tends to be weaker in the first half of the year than in the second half of the year. We have the ability to supplement this near-term liquidity, if necessary, through access to the capital markets (including short-term commercial paper) and credit facilities. Consequently, we believe that our ability to obtain funding from these sources will continue to provide the cash flows necessary to satisfy our working capital and capital expenditure requirements, as well as meet our debt repayments and other financial commitments for the next 12 months. (See "Contractual obligations".)
Debt and interest rates
Total outstanding debt was as follows:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
|
($ in millions) |
||||||
Short-term debt including current maturities of long-term debt (including bonds) |
161 | 354 | |||||
Long-term debt |
|||||||
bonds |
1,961 | 1,856 | |||||
other long-term debt |
211 | 153 | |||||
Total debt |
2,333 | 2,363 | |||||
The small overall decrease in debt in 2009 was primarily due to a decrease in debt from bond maturities being largely offset by net adverse exchange rate movements and a small net increase in other debt.
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Our debt has been obtained in a range of currencies and maturities and on various interest rate terms. We use derivatives to reduce the interest rate and/or foreign currency exposures arising on our debt. For example, we use interest rate swaps to effectively convert fixed rate debt into floating rate liabilities.
After considering the effects of interest rate swaps, the effective average interest rate on our floating rate long-term debt (including current maturities) of $2,072 million and our fixed rate long-term debt (including current maturities) of $133 million was 3.0 percent and 5.0 percent, respectively. This compares with an effective rate of 5.8 percent for floating rate long-term debt of $2,124 million and 4.8 percent for fixed-rate long-term debt of $80 million at December 31, 2008.
For a discussion of our use of derivatives to modify the characteristics of our individual bond issuances, see "Note 12 Debt" to our Consolidated Financial Statements.
Credit facilities
During 2009, we replaced our $2 billion multicurrency revolving credit facility, maturing 2010, with a new 3-year, $2 billion multicurrency facility maturing 2012. For further details of this credit facility, see "Note 12 Debt" to our Consolidated Financial Statements.
No amount was drawn under either facility at December 31, 2009 and 2008. The facility is for general corporate purposes and will serve as a back-stop facility to our commercial paper programs in the event that we issue commercial paper under the programs described below. The facility contains cross-default clauses whereby an event of default would occur if we were to default on indebtedness, as defined in the facility, at or above a specified threshold.
Commercial paper
We have in place 3 commercial paper programs:
At December 31, 2009 and 2008, no amounts had been issued or were outstanding under these commercial paper programs.
Medium Term Note Program (MTN)
At December 31, 2009 and 2008, $1,961 million and $1,918 million, respectively, of our total debt outstanding, were debt issuances under the MTN Program that allows the issuance of up to (the equivalent of) $5,250 million in certain debt instruments. The terms of the MTN Program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the MTN Program are determined with respect to, and as of the date of issuance of, each debt instrument. At December 31, 2009, it was more than 12 months since the Program was last updated. New bonds could be issued under the Program but could not be listed without us formally updating the Program.
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Credit ratings
Credit ratings are assessments by the rating agencies of the credit risk associated with ABB and are based on information provided by us or other sources that the rating agencies consider reliable. Higher ratings generally result in lower borrowing costs and increased access to capital markets. Our ratings are of "investment grade" which is defined as Baa3 (or above) from Moody's and BBB- (or above) from Standard & Poor's.
At December 31, 2009 and 2008, our long-term company ratings were A3 and A- from Moody's and Standard & Poor's, respectively.
Limitations on transfers of funds
Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where we operate, including Algeria, China, Egypt, India, Korea, Kuwait, Malaysia, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and Venezuela. Funds, other than regular dividends, fees or loan repayments, cannot be readily transferred offshore from these countries and are therefore deposited and used for working capital needs locally. In addition, there are certain countries where, for tax reasons, it is not considered optimal to transfer the cash offshore. As a consequence, these funds are not available within our Group Treasury Operations to meet short-term cash obligations outside the relevant country. The above described funds are reported as cash in our Consolidated Balance Sheets, but we do not consider these funds immediately available for the repayment of debt outside the respective countries where the cash is situated, including those described above. At December 31, 2009 and 2008, the balance of "Cash and equivalents" and "Marketable securities and other short-term investments" under such limitations (either regulatory or sub-optimal from a tax perspective) totaled approximately $1,460 million and $1,490 million, respectively.
During 2009, we continued to direct our subsidiaries in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. Consequently, cash placed with non-rated or sub-investment grade banks has been reduced to less than 5 percent (at December 31, 2008, less than 10 percent) of cash outside of our Group Treasury Operations. We continue to closely monitor the situation to ensure bank counterparty risks are minimized.
Balance sheet
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
Current assets
|
2009 | 2008 | |||||
|
($ in millions) |
||||||
Cash and equivalents |
7,119 | 6,399 | |||||
Marketable securities and short-term investments |
2,433 | 1,354 | |||||
Receivables, net |
9,451 | 9,245 | |||||
Inventories, net |
4,550 | 5,306 | |||||
Prepaid expenses |
236 | 237 | |||||
Deferred taxes |
900 | 920 | |||||
Other current assets |
540 | 776 | |||||
Total current assets |
25,229 | 24,237 | |||||
For a discussion on cash and equivalents and marketable securities and short-term investments, see "Liquidity and capital resourcesPrincipal sources of funding" for further details.
Receivables, net, at the end of 2009, increased from the end of 2008 by approximately 2 percent, but decreased by approximately 2 percent in local currencies. The decrease in local currencies reflects
77
the declining business volume, the impact from lower sales prices and better cash collection from customers.
Inventories, net, decreased 14 percent compared to the level at the end of 2008. Excluding the effect of the fluctuation of local currencies relative to the U.S. dollar, the change was a decrease of approximately 18 percent. The decrease in inventories was recorded in all our divisions, but was particularly high in our Power Products and Automation Products divisions reflecting lower business volume and inventory optimization initiatives.
For a discussion on deferred taxes see "Note 16 Taxes" to our Consolidated Financial Statements.
Other current assets include derivative and embedded derivative assets and income tax receivables. The decrease primarily reflects lower derivative assets due to changes in the market value of outstanding derivatives.
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
Current liabilities
|
2009 | 2008 | |||||
|
($ in millions) |
||||||
Accounts payable, trade |
3,853 | 4,451 | |||||
Billings in excess of sales |
1,623 | 1,224 | |||||
Accounts payable, other |
1,326 | 1,292 | |||||
Short-term debt and current maturities of long-term debt |
161 | 354 | |||||
Advances from customers |
1,806 | 2,014 | |||||
Deferred taxes |
327 | 428 | |||||
Provisions for warranties |
1,280 | 1,105 | |||||
Provisions and other current liabilities |
2,603 | 3,467 | |||||
Accrued expenses |
1,600 | 1,569 | |||||
Total current liabilities |
14,579 | 15,904 | |||||
Total current liabilities at December 31, 2009, decreased 8 percent (12 percent in local currencies) compared to December 31, 2008 due to decreases in business volume, the release of compliance-related provisions, lower derivative liabilities and the repayment of bonds.
Accounts payable, trade, at December 31, 2009, decreased 13 percent compared to December 31, 2008, due primarily to a decrease in business volume in all of the core divisions.
Short-term debt and current maturities of long-term debt were lower than at the end of 2008, as several debt obligations were paid back at maturity.
The major drivers behind the decrease in provisions and other current liabilities were the release of part of the provisions recorded in 2008 for potential costs primarily related to investigations into alleged anti-competitive practices in our Power Transformers business and lower derivative liabilities due to changes in the market value of outstanding derivatives. The decrease was partly offset by
78
increases in provisions for restructuring-related activities, the reclassification of certain asbestos obligations from non-current to current liabilities and higher provisions for loss orders.
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
Non-current assets
|
2009 | 2008 | |||||
|
($ in millions) |
||||||
Financing receivables, net |
452 | 445 | |||||
Property, plant and equipment, net |
4,072 | 3,562 | |||||
Goodwill |
3,026 | 2,817 | |||||
Other intangible assets, net |
443 | 411 | |||||
Prepaid pension and other employee benefits |
112 | 73 | |||||
Investments in equity method companies |
49 | 68 | |||||
Deferred taxes |
1,052 | 1,120 | |||||
Other non-current assets |
293 | 278 | |||||
Total non-current assets |
9,499 | 8,774 | |||||
Property, plant and equipment, net, increased 14 percent (9 percent in local currencies) between December 31, 2008 and December 31, 2009. The major capital expenditures during 2009 were investments in machinery and equipment in China, Switzerland, Germany, Sweden and India.
The increase in goodwill and other intangible assets, net was mainly due to the acquisition in Power Products of Comem, in several countries, the acquisition in Automation Products of Ensto Busch-Jaeger in Finland, and subsequent changes to the purchase accounting of Kuhlman, an acquisition made in 2008. (See "Note 3 Acquisitions, divestments and discontinued operations" and "Note 10 Goodwill and other intangible assets" to our Consolidated Financial Statements.) The increase in prepaid pension and other employee benefits reflects the change in the funded status of our overfunded pension plans. (See "Note 17 Employee benefits" to our Consolidated Financial Statements.)
Other non-current assets mainly include derivative and embedded derivative assets.
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
Non-current liabilities
|
2009 | 2008 | |||||
|
($ in millions) |
||||||
Long-term debt |
2,172 | 2,009 | |||||
Pension and other employee benefits |
1,179 | 1,071 | |||||
Deferred taxes |
328 | 355 | |||||
Other non-current liabilities |
1,997 | 1,902 | |||||
Total non-current liabilities |
5,676 | 5,337 | |||||
The increase in our long-term debt was driven by (i) foreign exchange movements on outstanding debt (a large part being bonds denominated in euros), (ii) fair value hedge adjustments on our outstanding bonds and (iii) increases in bank debt in certain countries. (See "Liquidity and Capital ResourcesDebt and interest rates".)
The increase in pension and other employee benefits substantially reflects the remeasurement of benefit obligations for updated assumptions and plan assets to fair value of our defined benefit pension plans, partly offset by regular employer contributions, see "Note 17 Employee benefits" to our Consolidated Financial Statements.
Other non-current liabilities in the table above increased slightly, as the increase in income tax related liabilities from $701 million to $854 million and the increase in other liabilities from $384 million to $428 million was partly offset by decreases in derivative liabilities from $180 million to
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$67 million at December 31, 2009 and 2008, respectively. (See "Note 13 Provisions and other and non-current other liabilities" to our Consolidated Financial Statements.)
Cash flows
In the Consolidated Statements of Cash Flows, the effects of discontinued operations are not segregated.
The Consolidated Statements of Cash Flows can be summarized as follows:
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Net cash provided by operating activities |
4,027 | 3,958 | 3,054 | |||||||
Net cash provided by (used in) investing activities |
(2,220 | ) | 114 | (2,291 | ) | |||||
Net cash used in financing activities |
(1,301 | ) | (2,119 | ) | (625 | ) | ||||
Effects of exchange rate changes on cash and equivalents |
214 | (230 | ) | 275 | ||||||
Adjustment for the net change in cash and equivalents in assets held for sale and in discontinued operations |
| 26 | 39 | |||||||
Net change in cash and equivalentscontinuing operations |
720 | 1,749 | 452 | |||||||
Net cash provided by operating activities
Operating activities in 2009 provided net cash of $4,027 million. Net cash provided by operating activities included a $135 million cash outflow related to our ongoing restructuring-related activities. Net cash provided by operating activities was particularly high in our Automation Products and Power Products divisions, mainly due to lower inventories and improved cash collection. This was partially offset by lower advance payments from customers in the wake of decreasing orders, exceeding cash releases from project completion.
In 2008, operating activities provided net cash of $3,958 million despite cash outflows of $1,266 million from an increase in trade receivables, net, and $800 million from an increase in inventories, net, resulting from increased business volumes. The increase in inventories, net, was a result of high factory loading and material procurements to support the execution of the high order backlog. Net cash provided by operating activities was particularly high in our Power Products and Automation Products divisions.
Net cash provided by operating activities in 2008 included $100 million of asbestos payments (see "Note 15 Commitments and contingencies" to our Consolidated Financial Statements). In 2007, $382 million of asbestos payments were made, of which $204 million was paid upon the sale of Lummus.
In 2007, operating activities provided net cash of $3,054 million. Net cash provided by operating activities increased in all of our core divisions. Higher cash outflow requirements for working capital, as a result of the significant increase in the volume of operations, were more than offset by the significant increase in cash-effective earnings. In the Power Systems division, high advances from customers on major projects and closer management of trade payables contributed to net cash provided by operating activities. In the Power Products division, working capital improvements were driven by improved inventory management. Due to our improved liquidity we terminated the securitization activities in the United States during the third quarter of 2007. This termination had a negative impact on the 2007 full year cash flows from operations of $178 million. Approximately 50 percent of this impact was in our Power Products division.
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Net cash provided by (used in) investing activities
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Changes in financing receivables, net |
(7 | ) | 7 | 56 | ||||||
Purchases of marketable securities (available-for-sale) |
(243 | ) | (1,081 | ) | (6,428 | ) | ||||
Purchases of marketable securities (held-to-maturity) |
(918 | ) | | | ||||||
Purchases of short-term investments |
(3,824 | ) | (2,512 | ) | (3,679 | ) | ||||
Purchases of property, plant and equipment and intangible assets |
(967 | ) | (1,171 | ) | (756 | ) | ||||
Acquisitions of businesses (net of cash acquired) |
(209 | ) | (653 | ) | (54 | ) | ||||
Proceeds from sales of marketable securities (available-for-sale) |
79 | 110 | 6,492 | |||||||
Proceeds from maturity of marketable securities (available-for-sale) |
855 | | | |||||||
Proceeds from maturity of marketable securities (held-to-maturity) |
730 | | | |||||||
Proceeds from short-term investments |
2,253 | 5,305 | 868 | |||||||
Proceeds from sales of property, plant and equipment |
36 | 94 | 75 | |||||||
Proceeds from sales of businesses and equity accounted companies (net of cash disposed) |
16 | 46 | 1,142 | |||||||
Other |
(21 | ) | (31 | ) | (7 | ) | ||||
Net cash provided by (used in) investing activities |
(2,220 | ) | 114 | (2,291 | ) | |||||
Investing activities include (i) accounts receivable from leases and third party loans (financing receivables), (ii) net investments in marketable securities that are not held for trading purposes, (iii) asset purchases, net of disposals and iv) acquisitions of, investments in, and divestitures of businesses.
Net cash flow used in investing activities during 2009 was $2,220 million. Aggregate purchases of marketable securities and short-term investments amounted to $4,985 million in 2009. During the first quarter of 2009, the government papers that were held at year-end 2008 matured and in 2009, we placed additional cash in time deposits with banks and in short-term commercial paper compared to year-end 2008. During the second and third quarter of 2009, we started to extend the maturity of our investments by investing in time deposits and corporate paper with original maturities longer than 3 months, not classified as cash and equivalents.
Total cash disbursements for the purchase of property, plant and equipment and intangibles amounted to $967 million reflecting capital expenditures to expand our manufacturing footprint in emerging markets and selective expenditures to refocus our facilities in mature markets. Capital expenditures in 2009 included $258 million for the purchase of machinery and equipment, $48 million for the purchase of land and buildings, $77 million for the purchase of intangible assets and $584 million capital expenditures for construction in progress.
Acquisitions of businesses (net of cash acquired), in 2009, mainly included the acquisition of Comem, the acquisition of an additional stake in ABB Xinhui Low Voltage Switchgear Company and the purchase of the remaining shares in Ensto Busch-Jaeger in Finland, a company in which ABB previously had a noncontrolling ownership stake.
Aggregate proceeds from the sales of marketable securities and short-term investments during 2009 amounted to $3,917 million as compared with $5,415 million for 2008. The decrease reflects the change in investment strategy discussed under "Liquidity and Capital Resources".
Cash received from the sale of property, plant and equipment during 2009 included $23 million of proceeds from the sale of real estate properties, mainly in Norway, France, Brazil and Switzerland, and $13 million from the sale of machinery and equipment in various locations.
In 2009, net cash inflows from the sale of businesses and equity accounted companies amounted to $16 million, which included approximately $8 million net proceeds from the sale of the mechanical marine thruster business in Poland.
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Net cash flow provided by investing activities during 2008 was $114 million. Aggregate purchases of marketable securities and short-term investments amounted to $3,593 million in 2008. During the first half of 2008, we invested a lower amount of our excess liquidity in time deposits with a maturity of more than three months (given the prevailing volatility in financial markets) and instead invested in time deposits with maturities of three months or less, classified as cash and equivalents. In the second half of 2008, we invested part of our excess cash in AAA-rated Government bonds of which the majority had an original maturity of more than 3 months.
Total cash disbursements for the purchase of property, plant and equipment and intangibles amounted to $1,171 million, reflecting high capital expenditures due to new growth projects and increasing capacity requirements. Capital expenditures in 2008 included $308 million for the purchase of machinery and equipment, $78 million for the purchase of land and buildings, $134 million for the purchase of intangible assets, mainly software, and $651 million capital expenditures for construction in progress.
Acquisitions and divestments, net, in 2008, mainly included the acquisition of Kuhlman in the United States. The preliminary purchase price for Kuhlman was $520 million including assumed debt, which was subsequently adjusted in 2009.
Aggregate proceeds from sales of marketable securities and short-term investments during 2008 amounted to $5,415 million as compared with $7,360 million for 2007. The decrease reflects the change in investment strategy discussed under "Liquidity and Capital Resources".
Cash received from the sale of property, plant and equipment during 2008 included $78 million proceeds from the sale of real estate properties, mainly in Switzerland, Italy, Mexico and Poland and $15 million from the sale of machinery and equipment in various locations.
Net cash inflows from the sale of businesses and equity accounted companies amounted to $46 million in 2008. This net inflow included approximately $14 million net proceeds from the sale of the distributed energy business in Germany, $16 million net proceeds from the sale of the ABB Powertech Transformer business in South Africa, as well as $11 million net proceeds from two businesses in Norway, $10 million net proceeds from the sale of the Lighting business in the United Kingdom, and approximately $15 million net proceeds from the sale of other minor businesses during 2008. These inflows were partly offset by a claim settlement payment of approximately $20 million related to the former Air-Handling business that was sold in 2002.
Net cash provided by (used in) investing activities during 2007 was $2,291 million. Net cash inflows from the sale of businesses and equity accounted companies amounted to $1,142 million in 2007. This net inflow included approximately $810 million net proceeds from the sale of Lummus, as well as $483 million net proceeds from the sale of our interests in Jorf Lasfar and Neyveli. These inflows were offset by a cash outflow of $173 million related to the sale of Building Systems in Germany. Net cash outflows for acquisitions amounted to $54 million in 2007, including $26 million for the acquisition of Raman Boards Ltd in India.
Total cash disbursements for the purchase of property, plant and equipment and intangibles, net of disposals, in 2007 increased approximately $270 million, reflecting higher capital expenditures due to new growth projects and increasing capacity requirements. Capital expenditure payments during the year amounted to $756 million, which included $457 million towards the purchase of machinery and equipment, $128 million for land and buildings, $84 million for the purchase of intangible assets, mainly software and $87 million for projects which are under construction. Cash received from the sale of property, plant and equipment during 2007 included $58 million proceeds from the sale of real estate properties, mainly in Italy and France and $16 million from the sale of machinery and equipment in various locations.
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Outflows of marketable securities and short-term investments in 2007 included $49 million in purchases of marketable securities to contribute to the pension funds in Germany and $30 million in additional net cash invested by our captive insurance company.
Net cash used in financing activities
|
2009 | 2008 | 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||
Net changes in debt with maturities of 90 days or less |
(59 | ) | (10 | ) | (19 | ) | ||||
Increase in debt |
586 | 458 | 210 | |||||||
Repayment of debt |
(705 | ) | (786 | ) | (247 | ) | ||||
Issuance of shares |
89 | 49 | 241 | |||||||
Purchase of treasury shares |
| (621 | ) | (199 | ) | |||||
Dividends paid in the form of nominal value reduction/dividends paid |
(1,027 | ) | (1,060 | ) | (449 | ) | ||||
Dividends paid to noncontrolling shareholders |
(193 | ) | (152 | ) | (117 | ) | ||||
Other |
8 | 3 | (45 | ) | ||||||
Net cash used in financing activities |
(1,301 | ) | (2,119 | ) | (625 | ) | ||||
Our financing activities primarily include debt, both from the issuance of debt securities and borrowings directly from banks, capital and treasury stock transactions and dividends paid.
The cash inflows from increases in debt of $586 million, $458 million and $210 million in 2009, 2008 and 2007, respectively, primarily relate to short-term borrowings.
During 2009, $705 million of bonds and other debt was repaid at maturity, including the 108 million Swiss francs of 3.75% CHF bonds, due 2009, (equivalent to $105 million at date of repayment) and 20 million pounds sterling 10% GBP Instruments, due 2009, (equivalent to $33 million at date of repayment, excluding the effect of cross-currency swaps).
During 2008, $786 million of bonds and other debt was repaid at maturity. This amount included the repayment of the remaining (77 million euros) 9.5% EUR Instruments, due 2008, as well as the repayment of several private placements and short-term debt upon maturity. In 2007, the repayment of debt primarily related to movements in short-term debt as there were no bond repayments in that year.
The cash inflow of $89 million in 2009 from the issuance of shares represented the issuance of shares to employees in connection with our Employee Share Acquisition Plan (ESAP), as well as the exercise of call options by a bank. The exercise by employees of the options they held under the ESAP (with a strike price of CHF 15.30) resulted in the issuance of 5.5 million shares and net proceeds of $83 million. The call options, related to our management incentive plan launches, and with strike prices of CHF 7.00 and CHF 7.50, had been issued by us at fair value during 2003 and 2004. As a result of the exercise, approximately 1 million shares were issued.
In 2008, the cash inflow of $49 million from the issuance of shares also represented the exercise of such call options by a bank and resulted in the issuance of approximately 6.8 million shares.
In 2007, the cash inflow of $241 million from the issuance of shares represented the exercise of call options by a bank, as well as the issuance of shares to employees in connection with our ESAP. The call options held by the bank (and related to our management incentive plan launches in 2001, 2003 and 2004) had been issued at fair value with strike prices ranging from CHF 7.00 to CHF 13.49. The exercise by the bank resulted in the issuance of approximately 19.6 million shares and net proceeds of $181 million. The exercise by employees of the options they held under the ESAP resulted in the issuance of 3.7 million shares and net proceeds of $60 million.
Dividends paid in the form of a nominal value reduction in 2009 and 2008 of $1,027 million and $1,060 million, respectively, represented a reduction in nominal value of CHF 0.48 per share in each year, approved at our Annual General Meetings in May 2009 and 2008. Consequently, the nominal
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value of each of our shares was reduced from CHF 2.02 to CHF 1.48 in 2009 and from CHF 2.50 to CHF 2.02 in 2008. In 2007, dividends paid of $449 million represented a dividend of CHF 0.24 per share.
Dividends paid to noncontrolling shareholders amounted to $193 million, $152 million and $117 million in 2009, 2008 and 2007, respectively.
During 2008, we purchased 22.675 million ABB shares at a cost of $621 million in connection with the share buyback program launched in 2008 to repurchase shares up to a maximum value of 2.2 billion Swiss francs (equivalent to $2.1 billion at December 31, 2009 exchange rates). In February 2009, we announced that given the market uncertainty, we were not actively pursuing new purchases under the program and consequently no purchases took place during 2009. In February 2010, we announced that we intend to propose the cancellation of the shares repurchased under the program at our 2010 Annual General Meeting.
During 2007, we purchased, on the open market, 10 million of our own shares for use in connection with our employee share-based payment programs, resulting in a cash outflow of $199 million and a corresponding increase in treasury stock.
Disclosures about contractual obligations and commitments
The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. The amounts in the table may differ from those reported in our Consolidated Balance Sheet at December 31, 2009. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented in the table. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2009:
Payments due by period
|
Total | Less than 1 year |
13 years |
35 years |
More than 5 years |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
($ in millions) |
|||||||||||||||
Long-term debt obligations |
2,205 | 33 | 1,051 | 1,014 | 107 | |||||||||||
Interest payments related to long-term debt obligations |
475 | 124 | 183 | 69 | 99 | |||||||||||
Operating lease obligations |
2,131 | 461 | 718 | 492 | 460 | |||||||||||
Capital lease obligations(1) |
302 | 42 | 73 | 39 | 148 | |||||||||||
Purchase obligations |
5,015 | 4,421 | 445 | 94 | 55 | |||||||||||
Total |
10,128 | 5,081 | 2,470 | 1,708 | 869 | |||||||||||
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 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 $866 million unrecognized tax benefits (net of deferred tax assets) at December 31, 2009, it is expected that $12 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. See "Note 16 Taxes" to our Consolidated Financial Statements.
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