UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of October 2009

 

Commission File Number 001-16429

 

ABB Ltd

(Translation of registrant’s name into English)

 

P.O. Box 1831, Affolternstrasse 44, CH-8050, Zurich, Switzerland

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F x

Form 40-F o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

 

Indication by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes o

No x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-

 

 

 



 

This Form 6-K consists of the following:

 

1.               Press release issued by ABB Ltd dated October 29, 2009.

2.               Announcements regarding transactions in ABB Ltd’s securities made by the directors or members of the Executive Committee.

 

The information provided by Item I above is deemed filed for all purposes under the Securities Exchange Act of 1934, including by reference in the Registration Statement on Form S-8 (Registration No. 333-129271).

 

2



 

Press Release

 

 

Cost take-out holds EBIT margin on target, strong cash flow of more than $1 bn

 

·                  $1 bn net income incl. $380-million gain from previously-announced provision adjustments

·                  EBIT margin excluding provision adjustments well within the 11-16% target range

·                  Cash from operations at $1.3 bn on lower inventories and improved cash collection

·                  Orders down double digits despite strong power infrastructure orders

 

Zurich, Switzerland, October 29, 2009 — ABB reported third-quarter net income of $1 billion, including a $380-million net gain for various previously-announced provision adjustments, and earnings before interest and taxes (EBIT) of $1.4 billion.

 

Orders declined to $7.1 billion, equivalent to a local-currency reduction of 15 percent, while revenues decreased to $7.9 billion, lower by 5-percent in local currency(1). Investments in power grids continued to grow but lower demand for shorter-cycle products in industrial markets resulted in a 23-percent local currency decrease in base orders (below $15 million). The order decrease also reflects price declines resulting from both lower material costs and weaker demand. The share of orders from emerging markets increased to 55 percent.

 

EBIT was positively impacted by previously-announced adjustments to provisions and the mark-to-market treatment of hedging transactions. Restructuring-related costs were approximately $40 million.

 

Excluding these factors, EBIT and EBIT margin were lower than in the same quarter in 2008, primarily reflecting the business mix, decreased capacity utilization and lower prices in short-cycle businesses. These impacts were partially offset by ABB’s cost take-out program which yielded savings in the quarter of approximately $500 million.

 

Net income of $1 billion includes the positive $380-million net contribution from the provision adjustments mentioned above. Cash from operations was $1.3 billion on a significant reduction in inventories and improved cash collection.

 

“We turned in a strong cash performance this quarter and held EBIT margins well within our target range thanks to the continued timely execution of the order backlog and further progress in our cost take-out program,” said Joe Hogan, ABB’s Chief Executive Officer.

 

“Order trends were in line with what we saw in the second quarter, with steady demand in power and oil and gas but lower base orders in industrial markets,” Hogan said. “We’ll continue to focus on making sure our costs are in line with market demand, but at the same time stay aggressively positioned to capture the significant growth opportunities in power infrastructure, renewables, energy efficiency and emerging markets.”

 

2009 Q3 key figures

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q3 09

 

Q3 08

 

US$ 

 

Local

 

Orders

 

7,060

 

8,885

 

-21

%

-15

%

Order backlog (end Sep)

 

26,159

 

27,211

 

-4

%

-4

%

Revenues

 

7,910

 

8,791

 

-10

%

-5

%

EBIT

 

1,419

 

1,291

 

10

%

 

 

as % of revenues

 

17.9

%

14.7

%

 

 

 

 

Net income

 

1,034

 

927

 

12

%

 

 

Basic net income per share ($)

 

0.45

 

0.41

 

 

 

 

 

Cash flow from operating activities

 

1,281

 

1,121

 

 

 

 

 

 


(1) Management discussion of orders and revenues focuses on local currency changes. U.S. dollar changes are reported in the results tables.

 

3



 

Summary of Q3 2009 results

 

Orders received and revenues

 

Orders decreased in the third quarter compared to the year-earlier period as utility investments to expand and refurbish power transmission grids were more than offset by lower demand from most of ABB’s industrial markets and the construction sector.

 

Regionally, orders in local currency were higher in the Americas due mainly to a large power transmission order from Brazil which more than compensated for lower orders in the U.S. Orders in the Middle East and Africa also increased as the result of growth in power orders. Orders were down 25 percent in local currencies in Europe as growth in the Power Systems division, driven mainly by power grid upgrades in western Europe, were more than offset by broad declines in all other divisions, reflecting the generally weak economic environment compared to the same quarter a year ago. Orders in Asia were down 24 percent in local currencies, mainly due to lower marine orders from South Korea and power orders in Australia. Orders in China declined at a single-digit pace in the quarter but were supported by double-digit growth in Automation Products.

 

Large orders (above $15 million) increased by 42 percent in local currencies compared to the same quarter in 2008.

 

Revenues declined in the quarter as execution of the order backlog was offset by weaker revenues in shorter-cycle businesses. Service revenues were 2 percent lower in local currencies compared to the third quarter of 2008, mainly reflecting reduced operational expenditures by industrial customers as they adjust costs to the current demand environment.

 

The order backlog at the end of September 2009 amounted to $26.2 billion, corresponding to a local-currency increase of 4 percent year to date. Compared to the end of the second quarter of 2009, the order backlog is down 3 percent in local currencies.

 

Earnings before interest and taxes

 

EBIT and EBIT margin increased compared to the same quarter a year earlier because of previously-announced adjustments to provisions. These adjustments, related to provisions for alleged anti-competitive practices as well as an increase in provisions with respect to ABB’s business in Russia, resulted in a net increase in EBIT of approximately $430 million.

 

Also included in third-quarter 2009 EBIT are restructuring-related costs of approximately $40 million related to the two-year, $2-billion cost take-out program announced earlier this year.

 

The mark-to-market impact from hedging transactions had a positive impact on EBIT in the third quarter equivalent to approximately 0.6 percentage points of EBIT margin. The impact in the same quarter last year was negative in an amount equivalent to approximately one percentage point of EBIT margin.

 

For purposes of comparison, the third-quarter 2009 EBIT margin, excluding the impact of provision adjustments, restructuring and the mark-to-market impact from hedging transactions, is approximately 3.5 percentage points lower than the EBIT margin in the same quarter in 2008, also adjusted for the impact of the mark-to-market impact from hedging transactions described above.

 

This decrease primarily reflects the combination of lower revenues from higher-margin product businesses, as well as lower capacity utilization and price pressure mainly in ABB’s short-cycle businesses compared to the same period a year earlier.

 

4



 

EBIT and EBIT margin were positively impacted by cost savings in sourcing, general and administrative expenses, as well as footprint adjustments and operational excellence initiatives, amounting to approximately $500 million in the quarter. Year-to-date, the cost take-out program has generated savings in excess of $1 billion.

 

Net income

 

Third-quarter net income of approximately $1 billion includes a positive $380-million impact resulting from previously-announced provision adjustments. This amount is comprised of the $430-million improvement to EBIT described above less approximately $50 million in interest and other finance expense and income taxes.

 

Balance sheet and cash flow

 

Net cash at the end of the third quarter was $5.8 billion compared to $5.7 billion at the end of the previous quarter. Cash flow from operations amounted to $1.3 billion while cash used in financing activities included a dividend payment of $1 billion in the form of a nominal value reduction, made at the end of July 2009, as approved by shareholders at the Annual General Meeting in May.

 

Compliance

 

As previously announced, ABB has disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission various suspect payments.

 

Also as previously announced, ABB has been cooperating with various anti-trust authorities regarding certain allegedly anti-competitive practices in the power transformer business. On October 7, 2009, the European Commission announced its decision on this matter and imposed a fine of €33.75 million on ABB. In addition, ABB’s cables business is under investigation for alleged anti-competitive practices.

 

With respect to these matters, there could be adverse outcomes beyond our provisions.

 

Cost reductions

 

ABB continued to execute its previously-announced cost take-out program during the third quarter. The program aims to sustainably reduce ABB’s costs — comprising both cost of sales as well as general and administrative expenses — from 2008 levels by a total of $2 billion by the end of 2010. The savings are focused on acceleration of ongoing initiatives in low-cost sourcing, general and administrative expenses, internal process improvements and adjustments to ABB’s global manufacturing and engineering footprint.

 

Cost reductions for the first three quarters of 2009 were significantly ahead of plan and exceeded $1 billion, equal to the original targeted take-out for the full year. Approximately 60 percent of these savings were achieved by optimizing global sourcing (excluding the impact of exchange-traded commodities). The remainder was achieved through reductions to general and administrative expenses, as well as global footprint and operational excellence measures.

 

The total cost of the program is expected to approach $1 billion — of which approximately $100 million was already recorded in 2008. Costs associated with the program in the third quarter of 2009 amounted to approximately $40 million, bringing the total cost so far in 2009 to approximately $170 million.

 

5



 

Management appointments

 

ABB announced in September the appointment of Brice Koch to the Group Executive Committee as Head of Marketing and Customer Solutions, a new role created to drive additional growth across the company’s markets and regions. The appointment is effective January 1, 2010.

 

Outlook

 

The outlook for ABB’s businesses over the rest of 2009 and into 2010 remains uncertain.

 

The need for energy-efficient power infrastructure remains in all regions, supported by political measures to address climate change and increasing demand for renewable power generation. Demand in ABB’s industrial end markets depends to a large extent on GDP growth and capital spending, together with commodity prices. Customers’ need to steadily improve energy efficiency and productivity also drives orders. Increasing commodity prices generally support ABB’s industrial businesses as they promote customer investment in capacity expansion.

 

However, it remains unclear when and how quickly capital investments by customers will recover from the downturn. In addition, the volatility of raw material prices and the limited availability of project funding continue to influence the timing of many power and industrial investment decisions, especially among small- to medium-sized companies.

 

Therefore, management’s priority for the next several quarters will be to ensure that the company has the flexibility to respond quickly to changing market conditions, taking advantage of its global footprint, strong balance sheet and leading technologies to improve its cost competitiveness while simultaneously tapping further opportunities for profitable growth.

 

Divisional performance Q3 2009

 

Power Products

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q3 09

 

Q3 08

 

US$

 

Local

 

Orders

 

2,553

 

3,409

 

-25

%

-21

%

Order backlog (end Sep)

 

8,712

 

9,081

 

-4

%

-4

%

Revenues

 

2,823

 

3,034

 

-7

%

-2

%

EBIT

 

477

 

536

 

-11

%

 

 

as % of revenues

 

16.9

%

17.7

%

 

 

 

 

Cash flow from operating activities

 

592

 

479

 

 

 

 

 

 

Orders received declined across all regions compared to the same quarter a year ago, mainly as a result of lower demand in industrial and construction-related markets. Order intake was further impacted by lower prices due both to weaker market conditions and pass-through of reduced commodity costs.

 

Revenues decreased in the quarter as execution of the order backlog in longer-cycle businesses, such as high-voltage equipment, was partly offset by lower revenues from shorter-cycle businesses related to the industrial and construction sectors, such as medium-voltage equipment and distribution transformers. Revenues were also negatively impacted by delays in customer acceptance of products.

 

EBIT and EBIT margin were lower mainly on reduced revenues but also reflecting the lower share of higher-margin short-cycle product revenues compared to the same quarter a year earlier.

 

Cash flow from operations improved in the quarter, largely due to a reduction in inventories.

 

6



 

Power Systems

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q3 09

 

Q3 08

 

US$

 

Local

 

Orders

 

1,991

 

1,293

 

54

%

70

%

Order backlog (end Sep)

 

9,770

 

8,661

 

13

%

14

%

Revenues

 

1,612

 

1,601

 

1

%

7

%

EBIT

 

117

 

113

 

4

%

 

 

as % of revenues

 

7.3

%

7.1

%

 

 

 

 

Cash flow from operating activities

 

11

 

111

 

 

 

 

 

 

Orders increased significantly in the third quarter due to a strong increase in large orders from utilities to expand power transmission capacity that more than compensated for lower industrial demand. Regionally, orders were higher in the Americas, mainly the result of a $540-million order for a high-voltage direct current (HVDC) power link in Brazil. Orders also grew in Europe and the Middle East but decreased in Asia as lower orders in Australia and China more than offset strong growth in India.

 

Revenues increased on execution of the continuing strong order backlog, leading to higher EBIT and EBIT margin. The mark-to-market treatment of hedging transactions had a positive impact in the quarter that was offset by charges related to project execution and provisions related to the business in Russia.

 

Cash flow from operations was lower than in the same quarter a year earlier due to higher net working capital needed for projects in execution.

 

Automation Products

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q3 09

 

Q3 08

 

US$

 

Local

 

Orders

 

2,033

 

2,741

 

-26

%

-22

%

Order backlog (end Sep)

 

3,940

 

4,380

 

-10

%

-12

%

Revenues

 

2,234

 

2,612

 

-14

%

-10

%

EBIT

 

340

 

491

 

-31

%

 

 

as % of revenues

 

15.2

%

18.8

%

 

 

 

 

Cash flow from operating activities

 

536

 

509

 

 

 

 

 

 

Continued weakness in ABB’s industrial and construction end markets in the third quarter resulted in a decrease in both base and large orders received compared to the same period a year earlier. Orders increased in China but were lower than last year in the rest of Asia and in all other regions. Orders were also impacted by lower prices resulting from a decrease in material costs as well as reduced demand.

 

Revenues declined more slowly than orders in the quarter as execution of the strong order backlog in businesses such as machines and power electronics partly offset lower revenues in shorter-cycle businesses such as low-voltage products.

 

EBIT and EBIT margin in the quarter declined compared to the very strong third quarter in 2008. This was mainly due to lower revenues and restructuring-related costs of $12 million to adapt to the weaker demand environment.

 

Cash flow from operations was higher, primarily due to a reduction in net working capital, mainly lower inventories.

 

7



 

Process Automation

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q3 09

 

Q3 08

 

US$

 

Local

 

Orders

 

1,145

 

1,969

 

-42

%

-39

%

Order backlog (end Sep)

 

6,064

 

7,146

 

-15

%

-16

%

Revenues

 

1,809

 

1,920

 

-6

%

0

%

EBIT

 

164

 

218

 

-25

%

 

 

as % of revenues

 

9.1

%

11.4

%

 

 

 

 

Cash flow from operating activities

 

254

 

243

 

 

 

 

 

 

Orders continued to decline in the third quarter compared to the same quarter in 2008 as steady demand from the oil and gas sector was more than offset by ongoing weakness in other sectors. Large orders declined by more than 50 percent in both U.S. dollar and local currency terms and base orders were also down at a double-digit pace. Orders decreased in all regions except the Middle East and Africa, where demand from the oil and gas sector supported a local-currency order increase. Orders in Asia decreased on a reduction in marine orders, mainly from South Korea and Singapore.

 

Revenues were down (flat in local currencies) in the quarter as execution of the strong order backlog in the marine, minerals and oil and gas businesses was offset by lower revenues in pulp and paper and from lower book-and-bill product sales in the quarter. Service revenues were flat in local currencies.

 

EBIT and EBIT margin declined compared to the same quarter a year earlier, however, largely due to the high share of systems revenues that typically carry a lower EBIT margin. The mark-to-market treatment of hedging transactions also negatively impacted EBIT in the quarter.

 

Cash flow from operations increased in the quarter, mainly reflecting the timing of large project payments and measures to improve net working capital management.

 

Robotics

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q3 09

 

Q3 08

 

US$

 

Local

 

Orders

 

169

 

400

 

-58

%

-56

%

Order backlog (end Sep)

 

367

 

665

 

-45

%

-46

%

Revenues

 

211

 

431

 

-51

%

-49

%

EBIT

 

(36

)

28

 

n/a

 

 

 

as % of revenues

 

-17.1

%

6.5

%

 

 

 

 

Cash flow from operating activities

 

(5

)

(9

)

 

 

 

 

 

Robotics orders declined as the result of a significant drop in demand from the global manufacturing sector compared to the same period in 2008. Revenues decreased on a lower opening order backlog and reduced service business.

 

The division reported an EBIT loss related to low factory loading, declining service revenues and further capacity adjustments and changes to the operational footprint.

 

8



 

More information

 

The 2009 Q3 results press release and presentation slides are available from October 29, 2009, on the ABB News Center at www.abb.com/news and on the Investor Relations homepage at www.abb.com/investorrelations.

 

ABB will host a media conference call starting at 10:00 a.m. Central European Time (CET). U.K. callers should dial +44 20 7107 0611. From Sweden, +46 8 5069 2105, and from the rest of Europe, +41 91 610 56 00. Lines will be open 15 minutes before the start of the conference. Audio playback of the call will start one hour after the call ends and will be available for 96 hours: Playback numbers: +44 20 7108 6233 (U.K.), +41 91 612 4330 (rest of Europe) or +1 866 416 2558 (U.S./Canada). The code is 18172, followed by the # key.

 

A conference call for analysts and investors is scheduled to begin today at 3:00 p.m. CET (10:00 a.m. EDT). Callers should dial +1 412 858 4600 (from the U.S./Canada) or +41 91 610 5600 (Europe and the rest of the world). Callers are requested to phone in 15 minutes before the start of the call. The audio playback of the call will start one hour after the end of the call and be available for two weeks. Playback numbers: +1 866 416 2558 (U.S./Canada) or +41 91 612 4330 (Europe and the rest of the world). The code is 10636, followed by the # key.

 

Investor calendar 2010

 

 

Q4 2009 results

 

Feb. 18, 2010

Q1 2010 results

 

April 22, 2010

Annual General Meeting of shareholders

 

April 26, 2010

Q2 2010 results

 

July 22, 2010

Q3 2010 results

 

Oct. 28, 2010

 

ABB (www.abb.com) is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 120,000 people.

 

Zurich, Oct. 29, 2009

 

Joe Hogan, CEO

 

Important notice about forward-looking information

 

This press release includes forward-looking information and statements including the sections entitled “Cost reductions,” “Outlook,” and “Compliance,” as well as other statements concerning the outlook for our business. These statements are based on current expectations, estimates and projections about the factors that may affect our future performance, including global economic conditions, the economic conditions of the regions and industries that are major markets for ABB Ltd. These expectations, estimates and projections are generally identifiable by statements containing words such as “expects,” “believes,” “estimates,” “targets,” “plans” or similar expressions. However, there are many risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking information and statements made in this press release and which could affect our ability to achieve any or all of our stated targets. The important factors that could cause such differences include, among others, business risks related to the financial crisis and economic slowdown, costs associated with compliance activities, the amount of revenues we are able to generate from backlog and orders received, raw materials prices, market acceptance of new products and services, changes in governmental regulations and currency exchange rates and such other factors as may be discussed from time to time in ABB Ltd’s filings with the U.S. Securities and Exchange Commission, including its Annual Reports on Form 20-F. Although ABB Ltd believes that its expectations reflected in any such forward-looking statement are based upon reasonable assumptions, it can give no assurance that those expectations will be achieved.

 

For more information please contact:

 

Media Relations:

Investor Relations:

ABB Ltd

Thomas Schmidt, Wolfram Eberhardt

Switzerland: Tel. +41 43 317 7111

Affolternstrasse 44

(Zurich, Switzerland)

Sweden: Tel. +46 21 325 000

CH-8050 Zurich, Switzerland

Tel: +41 43 317 6568

USA: Tel. +1 203 750 7743

 

media.relations@ch.abb.com

investor.relations@ch.abb.com

 

 

9



 

ABB Q3 and nine-months (9M) 2009 key figures

 

 

 

 

 

 

 

 

 

Change

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q3 09

 

Q3 08

 

US$

 

Local

 

9M 09

 

9M 08

 

US$

 

Local

 

Orders

 

Group

 

7,060

 

8,885

 

-21

%

-15

%

23,519

 

31,099

 

-24

%

-15

%

 

 

Power Products

 

2,553

 

3,409

 

-25

%

-21

%

8,273

 

11,012

 

-25

%

-16

%

 

 

Power Systems

 

1,991

 

1,293

 

54

%

70

%

5,967

 

5,952

 

0

%

17

%

 

 

Automation Products

 

2,033

 

2,741

 

-26

%

-22

%

6,392

 

8,778

 

-27

%

-20

%

 

 

Process Automation

 

1,145

 

1,969

 

-42

%

-39

%

4,912

 

7,205

 

-32

%

-23

%

 

 

Robotics

 

169

 

400

 

-58

%

-56

%

557

 

1,359

 

-59

%

-55

%

 

 

Corporate (consolidation)

 

(831

)

(927

)

 

 

 

 

(2,582

)

(3,207

)

 

 

 

 

Revenues

 

Group

 

7,910

 

8,791

 

-10

%

-5

%

23,034

 

25,772

 

-11

%

-1

%

 

 

Power Products

 

2,823

 

3,034

 

-7

%

-2

%

8,130

 

8,682

 

-6

%

3

%

 

 

Power Systems

 

1,612

 

1,601

 

1

%

7

%

4,641

 

5,010

 

-7

%

4

%

 

 

Automation Products

 

2,234

 

2,612

 

-14

%

-10

%

6,482

 

7,766

 

-17

%

-8

%

 

 

Process Automation

 

1,809

 

1,920

 

-6

%

0

%

5,439

 

5,727

 

-5

%

7

%

 

 

Robotics

 

211

 

431

 

-51

%

-49

%

739

 

1,235

 

-40

%

-34

%

 

 

Corporate (consolidation)

 

(779

)

(807

)

 

 

 

 

(2,397

)

(2,648

)

 

 

 

 

EBIT

 

Group

 

1,419

 

1,291

 

10

%

 

 

3,328

 

4,093

 

-19

%

 

 

 

 

Power Products

 

477

 

536

 

-11

%

 

 

1,474

 

1,656

 

-11

%

 

 

 

 

Power Systems

 

117

 

113

 

4

%

 

 

322

 

411

 

-22

%

 

 

 

 

Automation Products

 

340

 

491

 

-31

%

 

 

979

 

1,486

 

-34

%

 

 

 

 

Process Automation

 

164

 

218

 

-25

%

 

 

486

 

686

 

-29

%

 

 

 

 

Robotics

 

(36

)

28

 

n/a

 

 

 

(108

)

82

 

n/a

 

 

 

 

 

Corporate

 

357

 

(95

)

 

 

 

 

175

 

(228

)

 

 

 

 

EBIT margin

 

Group

 

17.9

%

14.7

%

 

 

 

 

14.4

%

15.9

%

 

 

 

 

 

 

Power Products

 

16.9

%

17.7

%

 

 

 

 

18.1

%

19.1

%

 

 

 

 

 

 

Power Systems

 

7.3

%

7.1

%

 

 

 

 

6.9

%

8.2

%

 

 

 

 

 

 

Automation Products

 

15.2

%

18.8

%

 

 

 

 

15.1

%

19.1

%

 

 

 

 

 

 

Process Automation

 

9.1

%

11.4

%

 

 

 

 

8.9

%

12.0

%

 

 

 

 

 

 

Robotics

 

-17.1

%

6.5

%

 

 

 

 

-14.6

%

6.6

%

 

 

 

 

 

Q3 2009 orders received and revenues by region

 

 

 

Orders received

 

Change

 

Revenues

 

Change

 

$ millions

 

Q3 09

 

Q3 08

 

US$

 

Local

 

Q3 09

 

Q3 08

 

US$

 

Local

 

Europe

 

2,624

 

3,803

 

-31

%

-25

%

3,371

 

4,072

 

-17

%

-10

%

Americas

 

1,723

 

1,845

 

-7

%

4

%

1,495

 

1,571

 

-5

%

0

%

Asia

 

1,864

 

2,512

 

-26

%

-24

%

2,177

 

2,266

 

-4

%

0

%

Middle East and Africa

 

849

 

725

 

17

%

20

%

867

 

882

 

-2

%

0

%

Group total

 

7,060

 

8,885

 

-21

%

-15

%

7,910

 

8,791

 

-10

%

-5

%

 

10



 

Reconciliation of non-GAAP financial measures regarding Q3 2009

($ millions, unaudited)

 

EBIT margin

 

 

 

Earnings before interest and taxes (EBIT)

 

1,419

 

Revenues

 

7,910

 

EBIT margin (EBIT as % of revenues)

 

17.9

%

 

 

 

 

Net cash

 

 

 

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

 

(218

)

Long-term debt

 

(2,219

)

Total debt

 

(2,437

)

 

 

 

 

Cash and equivalents

 

5,502

 

Marketable securities and short-term investments

 

2,779

 

Cash and marketable securities

 

8,281

 

Net cash

 

5,844

 

 

EBIT margin is calculated by dividing EBIT by revenues. Management believes EBIT margin is a useful measure of profitability and uses it as a performance target.

 

Net cash is a financial measure that is calculated as the total of cash and equivalents, marketable securities and short-term investments minus our total debt.

 

11



 

ABB Ltd Interim Consolidated Income Statements (unaudited)

 

 

 

Nine months ended

 

Three months ended

 

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

 

Sep. 30, 2009

 

Sep. 30, 2008

 

Sep. 30, 2009

 

Sep. 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Sales of products

 

19,522

 

21,926

 

6,713

 

7,499

 

Sales of services

 

3,512

 

3,846

 

1,197

 

1,292

 

Total revenues

 

23,034

 

25,772

 

7,910

 

8,791

 

Cost of products

 

(13,816

)

(14,909

)

(4,803

)

(5,241

)

Cost of services

 

(2,363

)

(2,520

)

(800

)

(844

)

Total cost of sales

 

(16,179

)

(17,429

)

(5,603

)

(6,085

)

Gross profit

 

6,855

 

8,343

 

2,307

 

2,706

 

Selling, general and administrative expenses

 

(3,972

)

(4,320

)

(1,333

)

(1,432

)

Other income (expense), net

 

445

 

70

 

445

 

17

 

Earnings before interest and taxes

 

3,328

 

4,093

 

1,419

 

1,291

 

Interest and dividend income

 

93

 

250

 

25

 

75

 

Interest and other finance expense

 

(96

)

(139

)

(63

)

(62

)

Income from continuing operations before taxes

 

3,325

 

4,204

 

1,381

 

1,304

 

Provision for taxes

 

(831

)

(1,114

)

(297

)

(331

)

Income from continuing operations, net of tax

 

2,494

 

3,090

 

1,084

 

973

 

Income (loss) from discontinued operations, net of tax

 

26

 

(1

)

4

 

6

 

Net income

 

2,520

 

3,089

 

1,088

 

979

 

Net income attributable to noncontrolling interests

 

(159

)

(184

)

(54

)

(52

)

Net income attributable to ABB

 

2,361

 

2,905

 

1,034

 

927

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

2,335

 

2,908

 

1,030

 

921

 

Income (loss) from discontinued operations, net of tax

 

26

 

(3

)

4

 

6

 

Net income

 

2,361

 

2,905

 

1,034

 

927

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

1.02

 

1.27

 

0.45

 

0.40

 

Income (loss) from discontinued operations, net of tax

 

0.01

 

0.00

 

0.00

 

0.01

 

Net income

 

1.03

 

1.27

 

0.45

 

0.41

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

1.02

 

1.26

 

0.45

 

0.40

 

Income (loss) from discontinued operations, net of tax

 

0.01

 

0.00

 

0.00

 

0.00

 

Net income

 

1.03

 

1.26

 

0.45

 

0.40

 

 

 

 

 

 

 

 

 

 

 

Average number of shares (in millions) used to compute:

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders

 

2,283

 

2,289

 

2,283

 

2,285

 

Diluted earnings per share attributable to ABB shareholders

 

2,286

 

2,301

 

2,289

 

2,294

 

 

See Notes to the Interim Consolidated Financial Information

 

12



 

ABB Ltd Interim Consolidated Balance Sheets (unaudited)

 

(in millions of $, except share data)

 

Sep. 30, 2009

 

Dec. 31, 2008

 

 

 

 

 

 

 

Cash and equivalents

 

5,502

 

6,399

 

Marketable securities and short-term investments

 

2,779

 

1,407

 

Receivables, net

 

9,580

 

9,245

 

Inventories, net

 

5,347

 

5,306

 

Prepaid expenses

 

261

 

237

 

Deferred taxes

 

986

 

1,020

 

Other current assets

 

495

 

733

 

Total current assets

 

24,950

 

24,347

 

 

 

 

 

 

 

Financing receivables, net

 

450

 

445

 

Property, plant and equipment, net

 

3,967

 

3,562

 

Goodwill

 

3,035

 

2,817

 

Other intangible assets, net

 

461

 

411

 

Prepaid pension and other employee benefits

 

106

 

73

 

Investments in equity method companies

 

48

 

68

 

Deferred taxes

 

1,122

 

1,190

 

Other non-current assets

 

287

 

268

 

Total assets

 

34,426

 

33,181

 

 

 

 

 

 

 

Accounts payable, trade

 

3,935

 

4,451

 

Billings in excess of sales

 

1,385

 

1,224

 

Accounts payable, other

 

1,264

 

1,292

 

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

 

218

 

354

 

Advances from customers

 

2,105

 

2,014

 

Deferred taxes

 

480

 

528

 

Provisions for warranties

 

1,171

 

1,105

 

Provisions and other current liabilities

 

2,624

 

3,467

 

Accrued expenses

 

1,593

 

1,569

 

Total current liabilities

 

14,775

 

16,004

 

 

 

 

 

 

 

Long-term debt

 

2,219

 

2,009

 

Pension and other employee benefits

 

1,128

 

1,071

 

Deferred taxes

 

417

 

425

 

Other non-current liabilities

 

1,959

 

1,902

 

Total liabilities

 

20,498

 

21,411

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Capital stock and additional paid-in capital

 

3,893

 

4,841

 

Retained earnings

 

12,288

 

9,927

 

Accumulated other comprehensive loss

 

(1,954

)

(2,710

)

Treasury stock, at cost (39,938,859 shares at September 30, 2009, and 40,108,014 shares at December 31, 2008)

 

(897

)

(900

)

Total ABB stockholders’ equity

 

13,330

 

11,158

 

Noncontrolling interests

 

598

 

612

 

Total stockholders’ equity

 

13,928

 

11,770

 

Total liabilities and stockholders’ equity

 

34,426

 

33,181

 

 

See Notes to the Interim Consolidated Financial Information

 

13



 

ABB Ltd Interim Consolidated Statements of Cash Flows (unaudited)

 

 

 

Nine months ended

 

Three months ended

 

(in millions of $)

 

Sep. 30, 2009

 

Sep. 30, 2008

 

Sep. 30, 2009

 

Sep. 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

2,520

 

3,089

 

1,088

 

979

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

467

 

483

 

169

 

166

 

Pension and postretirement benefits

 

(1

)

46

 

(10

)

1

 

Deferred taxes

 

(11

)

222

 

(10

)

49

 

Net gain from sale of property, plant and equipment

 

(11

)

(34

)

(2

)

(6

)

Income (loss) from equity accounted companies

 

1

 

(12

)

1

 

(4

)

Other

 

(13

)

64

 

16

 

25

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Trade receivables

 

172

 

(1,193

)

137

 

(311

)

Inventories

 

398

 

(1,017

)

413

 

(454

)

Trade payables

 

(703

)

401

 

(198

)

51

 

Billings in excess of sales

 

56

 

434

 

(14

)

176

 

Provisions, net

 

(370

)

(137

)

(433

)

(39

)

Advances from customers

 

(18

)

349

 

15

 

192

 

Other assets and liabilities, net

 

(243

)

(132

)

109

 

296

 

Net cash provided by operating activities

 

2,244

 

2,563

 

1,281

 

1,121

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Changes in financing receivables

 

(2

)

(1

)

 

3

 

Purchases of marketable securities (available-for-sale)

 

(81

)

(420

)

(19

)

(300

)

Purchases of marketable securities (held-to-maturity)

 

(799

)

 

(238

)

 

Purchases of short-term investments

 

(2,071

)

(2,410

)

(1,720

)

(1,150

)

Purchases of property, plant and equipment and intangible assets

 

(624

)

(736

)

(215

)

(263

)

Acquisition of businesses (net of cash acquired)

 

(155

)

(552

)

(100

)

(525

)

Proceeds from sales of marketable securities (available-for-sale)

 

63

 

80

 

21

 

25

 

Proceeds from maturity of marketable securities (available-for-sale)

 

855

 

 

 

 

Proceeds from maturity of marketable securities (held-to-maturity)

 

273

 

 

273

 

 

Proceeds from short-term investments

 

448

 

4,196

 

356

 

 

Proceeds from sales of property, plant and equipment

 

23

 

45

 

5

 

6

 

Proceeds from sales of businesses and equity accounted companies (net of cash disposed)

 

10

 

46

 

3

 

23

 

Other

 

2

 

 

2

 

 

Net cash provided by (used in) investing activities

 

(2,058

)

248

 

(1,632

)

(2,181

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Net changes in debt with maturities of 90 days or less

 

(28

)

32

 

(34

)

(59

)

Increase in debt

 

440

 

323

 

123

 

146

 

Repayment of debt

 

(523

)

(641

)

(174

)

(157

)

Issuance of shares

 

3

 

49

 

3

 

49

 

Purchase of treasury shares

 

 

(606

)

 

(161

)

Dividends paid in the form of nominal value reduction

 

(1,027

)

(1,060

)

(1,027

)

(1,060

)

Dividends paid to noncontrolling shareholders

 

(191

)

(149

)

(85

)

(46

)

Other

 

(14

)

63

 

20

 

32

 

Net cash used in financing activities

 

(1,340

)

(1,989

)

(1,174

)

(1,256

)

 

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash and equivalents

 

257

 

(151

)

205

 

(424

)

Adjustment for the net change in cash and equivalents in assets held for sale and in discontinued operations

 

 

26

 

 

 

Net change in cash and equivalents - continuing operations

 

(897

)

697

 

(1,320

)

(2,740

)

 

 

 

 

 

 

 

 

 

 

Cash and equivalents beginning of period

 

6,399

 

4,650

 

6,822

 

8,087

 

Cash and equivalents end of period

 

5,502

 

5,347

 

5,502

 

5,347

 

 

 

 

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Interest paid

 

122

 

175

 

37

 

63

 

Taxes paid

 

829

 

793

 

275

 

236

 

 

See Notes to the Interim Consolidated Financial Information

 

14



 

ABB Ltd Interim Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

(in millions of $)

 

Capital
stock and
additional
paid-in
capital

 

Retained
earnings

 

Foreign
currency
translation
adjustment

 

Unrealized
gain (loss)
on
available-
for-sale
securities

 

Pension
and other
postretirement
plan
adjustments

 

Unrealized
gain (loss)
of cash
flow hedge
derivatives

 

Total
accumulated
other
comprehensive
loss

 

Treasury
stock

 

Total ABB
stockholders’
equity

 

Non-
controlling
interests

 

Total
stockholders’
equity

 

Balance at January 1, 2008

 

5,780

 

6,809

 

(906

)

7

 

(486

)

55

 

(1,330

)

(302

)

10,957

 

592

 

11,549

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

2,905

 

 

 

 

 

 

 

 

 

 

 

 

 

2,905

 

184

 

3,089

 

Foreign currency translation adjustments

 

 

 

 

 

(461

)

 

 

 

 

 

 

(461

)

 

 

(461

)

(29

)

(490

)

Foreign currency translation adjustments related to divestments of businesses

 

 

 

 

 

6

 

 

 

 

 

 

 

6

 

 

 

6

 

 

 

6

 

Effect of change in fair value of available-for-sale securities, net of tax

 

 

 

 

 

 

 

(29

)

 

 

 

 

(29

)

 

 

(29

)

 

 

(29

)

Unrecognized gain related to pensions and other postretirement plans, net of tax

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

 

 

11

 

 

 

11

 

Change in derivatives qualifying as cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

(110

)

(110

)

 

 

(110

)

 

 

(110

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,322

 

155

 

2,477

 

Dividends paid to noncontrolling shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(152

)

(152

)

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(42

)

(42

)

Treasury stock transactions

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

Dividends paid in the form of nominal value reduction

 

(1,060

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,060

)

 

 

(1,060

)

Issuance of shares

 

49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

49

 

Shares repurchased under buyback program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(619

)

(619

)

 

 

(619

)

Share-based payment arrangements

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

45

 

Call options

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

30

 

Balance at September 30, 2008

 

4,824

 

9,714

 

(1,361

)

(22

)

(475

)

(55

)

(1,913

)

(901

)

11,724

 

553

 

12,277

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

(in millions of $)

 

Capital
stock and
additional
paid-in
capital

 

Retained
earnings

 

Foreign
currency
translation
adjustment

 

Unrealized
gain (loss)
on available-
for-sale
securities

 

Pension and
other
postretirement
plan
adjustments

 

Unrealized
gain (loss)
of cash flow
hedge
derivatives

 

Total
accumulated
other
comprehensive
loss

 

Treasury
stock

 

Total ABB
stockholders’
equity

 

Non-
controlling
interests

 

Total
stockholders’
equity

 

Balance at January 1, 2009

 

4,841

 

9,927

 

(1,654

)

83

 

(978

)

(161

)

(2,710

)

(900

)

11,158

 

612

 

11,770

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

2,361

 

 

 

 

 

 

 

 

 

 

 

 

 

2,361

 

159

 

2,520

 

Foreign currency translation adjustments

 

 

 

 

 

672

 

 

 

 

 

 

 

672

 

 

 

672

 

6

 

678

 

Effect of change in fair value of available-for-sale securities, net of tax

 

 

 

 

 

 

 

(62

)

 

 

 

 

(62

)

 

 

(62

)

 

 

(62

)

Unrecognized loss related to pensions and other postretirement plans, net of tax

 

 

 

 

 

 

 

 

 

(24

)

 

 

(24

)

 

 

(24

)

(3

)

(27

)

Change in derivatives qualifying as cash flow hedges, net of tax

 

 

 

 

 

 

 

 

 

 

 

170

 

170

 

 

 

170

 

 

 

170

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,117

 

162

 

3,279

 

Dividends paid to noncontrolling shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(193

)

(193

)

Changes in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

17

 

Treasury stock transactions

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

Dividends paid in the form of nominal value reduction

 

(1,024

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,024

)

 

 

(1,024

)

Issuance of shares

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

Share-based payment arrangements

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

 

 

54

 

Call options

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

22

 

Balance at September 30, 2009

 

3,893

 

12,288

 

(982

)

21

 

(1,002

)

9

 

(1,954

)

(897

)

13,330

 

598

 

13,928

 

 

See Notes to the Interim Consolidated Financial Information

 

15



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

Note 1. The Company and basis of presentation

 

ABB Ltd and its subsidiaries (collectively, the Company) together form a leading global company specializing in power and automation technologies that improve the performance of utility and industry customers, while lowering environmental impact. The Company works with customers to engineer and install networks, facilities and plants with particular emphasis on enhancing efficiency, reliability and productivity for customers who generate, convert, transmit, distribute and consume energy.

 

The Company’s Interim Consolidated Financial Information is prepared in accordance with United States of America generally accepted accounting principles (U.S. GAAP) for interim financial reporting. As such, the Interim Consolidated Financial Information does not include all the information and notes required under U.S. GAAP for annual consolidated financial statements. Therefore, such financial information should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2008.

 

The preparation of financial information in conformity with U.S. GAAP requires management to make assumptions and estimates that directly affect the amounts reported in the Interim Consolidated Financial Information. The accounting estimates that require the Company’s most significant, difficult and subjective judgments include:

 

·                  Assumptions and projections, principally related to future material, labor and project-related overhead costs, used in determining the percentage-of-completion on projects.

 

·                  Estimates of loss contingencies associated with litigation or threatened litigation and other claims and inquires, environmental damages, product warranties, regulatory and other proceedings.

 

·                  Assumptions used in the calculation of pension and postretirement benefits.

 

·                  Recognition and measurement of current and deferred income tax assets and liabilities (including the measurement of uncertain tax positions).

 

The actual results and outcomes may differ from the Company’s estimates and assumptions.

 

In the opinion of management, the Interim Consolidated Financial Information contain all necessary adjustments to present fairly the financial position, results of operations and cash flows for the reported interim periods. However, such Interim Consolidated Financial Information may not necessarily be indicative of annual results.

 

The Interim Consolidated Financial Information is presented in United States dollars ($) unless otherwise stated. Certain amounts reported for prior periods in the Interim Consolidated Financial Information have been reclassified to conform to the current year’s presentation.

 

The Company has evaluated subsequent events up to close of business on October 26, 2009.

 

Note 2. Accounting pronouncements

 

As of January 1, 2009, the Company adopted Accounting Standards Codification 810-10-65, Consolidation (ASC 810-10-65), previously Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. ASC 810-10-65 changes the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. ASC 810-10-65 is effective prospectively as of January 1, 2009, except for the presentation and disclosure requirements which apply retrospectively for all periods presented. As a result of the adoption, noncontrolling interests of $612 million were reclassified to stockholders’ equity in 2008. Income attributable to noncontrolling interests of $159 million and $184 million for the nine months ended September 30, 2009 and 2008, respectively, and $54 million and $52 million for the three months ended September 30, 2009 and 2008, respectively, is included in net income and is deducted to arrive at net income attributable to ABB.

 

The Company applies the provisions of Accounting Standards Codification 805, Business Combinations (ASC 805), previously Financial Accounting Standards No. 141, Business Combinations, revised, to

 

16



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

business combinations in which the acquisition date is on or after January 1, 2009. Under ASC 805 an entity is required to recognize assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date. It further requires that acquisition related costs are recognized separately from the acquisition and expensed as incurred; restructuring costs generally are expensed in periods subsequent to the acquisition date. Further, ASC 805 requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense in periods subsequent to the acquisition date. In addition, under ASC 805, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.

 

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2009-13 (ASU 2009-13), Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force. ASU 2009-13 provides amendments to the criteria in Accounting Standards Codification 605-25, Revenue Recognition, Multiple-Element Arrangements, by establishing a hierarchy to determine the selling price of each specific deliverable. The selling price used is based on vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available), or estimated selling price if neither of the first two are available. ASU 2009-13 also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at its inception. ASU 2009-13 also expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. ASU 2009-13 is effective for arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact from ASU 2009-13.

 

Note 3. Financial instruments

 

The Company uses the fair value measurement principle to record certain of its financial instruments at fair value on a recurring basis. These instruments include foreign currency, commodity and interest rate derivatives and available-for-sale securities.

 

The Company applies the provisions of Accounting Standards Codification 820, Fair Value Measurements and Disclosures (ASC 820), previously Financial Accounting Standards No. 157, Fair Value Measurements, for fair value measurements of its financial assets and financial liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhanced disclosure requirements for fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.

 

In determining fair value, the Company applies various valuation techniques including market and income approaches. ASC 820 establishes a three-level hierarchy for inputs used in measuring assets and liabilities recorded at fair value, based on the reliability of those inputs. The Company has categorized its financial instruments measured at fair value within this hierarchy based on whether the inputs to the valuation technique are observable or unobservable. An observable input is based on market data obtained from independent sources, while an unobservable input reflects the Company’s assumptions about market data.

 

·                  Level 1: Valuation inputs consist of (unadjusted) quoted prices in an active market for identical assets or liabilities (observable quoted prices). Assets and liabilities using Level 1 inputs include exchange-traded equity securities, listed derivatives which are actively traded such as foreign exchange futures and most U.S. government securities.

 

·                  Level 2: Valuation inputs consist of other observable inputs such as actively quoted prices for similar assets, quoted prices in inactive markets and inputs other than quoted prices such as interest rate yield curves, credit spreads, or inputs derived from other observable data by interpolation, correlation, regression or other means. The adjustments applied to quoted prices or the inputs used in valuation models may be both observable and unobservable. In these cases, the fair value measurement is classified as Level 2 unless the unobservable portion of the adjustment or the unobservable input to the valuation model is significant in which case the fair value measurement would be classified as Level 3. Assets and liabilities using Level 2

 

17



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

inputs include interest rate swaps, cross-currency swaps and commodity swaps as well as foreign exchange forward contracts and foreign exchange swaps.

 

·                  Level 3: Valuation inputs are based on the Company’s assumptions of relevant market data (unobservable input).

 

Whenever quoted prices involve bid-ask spreads, the Company ordinarily determines fair values based on mid-market quotes. However, for the purposes of determining the fair values of cash-settled call options serving as hedges of the Company’s management incentive plan, bid prices are used.

 

The following table shows the fair value of financial assets and liabilities measured at fair value on a recurring basis:

 

 

 

September 30, 2009

 

($ in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total
 fair value

 

 

 

 

 

 

 

 

 

 

 

Assets