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 April 2010

 

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 April 22, 2010.

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

 

Short cycle orders improve, infrastructure business more challenging

 

·                  Orders down 19%(1), but base orders indicate negative trends are reversing

·                  Revenues 11 percent lower, reflecting 2009 order declines

·                  EBIT at $709 million, down approximately $150 million

·                  Cash from operations improved by more than $500 million

 

Zurich, Switzerland, April 22, 2010 — ABB’s orders declined 19 percent in the first quarter of 2010 as a result of lower large orders (above $15 million) compared to a record intake last year, and overall weakness in the power infrastructure business.

 

Orders in most of ABB’s short-cycle businesses, however, were steady or higher on growing industrial demand. Base orders (below $15 million) showed the strongest increase since the beginning of the global economic crisis in the summer of 2008.

 

Revenues were 11 percent lower than the year-earlier period, mainly due to order declines in 2009 flowing through to sales in the first quarter.

 

Earnings before interest and taxes (EBIT) amounted to $709 million, resulting in an EBIT margin of 10.2 percent. The EBIT margin, excluding mainly gains and losses on derivative transactions as well as restructuring-related costs, was 11.5 percent.(2) Savings in the first quarter from the company’s $3-billion cost take-out program were in excess of $300 million.

 

Cash inflow from operations was $427 million compared to cash used in the same quarter a year earlier of $104 million. The improvement was due primarily to continued net working capital management efforts. Net income amounted to $464 million in the quarter.

 

“We had a challenging first quarter on the power side while seeing some encouraging signs of growth in our short-cycle businesses, mainly in the automation markets,” said Joe Hogan, ABB’s CEO. “Thanks to the progress we’ve made on our cost-out program, however, our profitability remains within the target range.

 

“Given the improving global economy, we’re cautiously optimistic that the momentum should continue to build for our short cycle businesses, especially in the emerging markets, driven by increasing industrial production. We expect to see a similar trend in our larger late-cycle business, however, only later in the year,” Hogan said.

 

2010 Q1 key figures

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Orders

 

8,067

 

9,150

 

-12

%

-19

%

Order backlog (end March)

 

25,454

 

25,017

 

2

%

-5

%

Revenues

 

6,934

 

7,209

 

-4

%

-11

%

EBIT

 

709

 

862

 

-18

%

 

 

as % of revenues

 

10.2

%

12.0

%

 

 

 

 

Net income

 

464

 

652

 

-29

%

 

 

Basic net income per share ($)

 

0.20

 

0.29

 

 

 

 

 

Cash flow from operating activities

 

427

 

-104

 

 

 

 

 

 


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

(2) Please refer to Appendix I

 

3



 

Summary of Q1 2010 results

 

Orders received and revenues

 

Especially in later cycle businesses driven by utility infrastructure projects and industrial capital expenditures, such as Power Products, Power Systems and Process Automation, customer spending remains cautious, reflecting the still uncertain business environment. Large orders decreased in the quarter by 55 percent in local currencies and accounted for 16 percent of total orders compared to 27 percent in the same period in 2009, which had a record large order intake of more than $2.5 billion.

 

These declines could not be compensated by demand in many of ABB’s short-cycle industrial markets, such as general industry and construction, that lifted orders in Discrete Automation and Motion and Low-Voltage Products. This is partly reflected in a 5-percent local currency decrease in base orders compared to the same quarter a year earlier and a 15-percent increase versus the fourth quarter of 2009.

 

Regionally, orders increased in the Americas, the result of higher automation-related orders in both North and South America, and stronger power orders in South America. In Europe, power orders were down significantly compared to the first quarter of 2009, which included a $550-million order for a high-power subsea link. Automation orders were stable in Europe, as an increase in Process Automation offset reductions in Discrete Automation and Motion and Low-Voltage Products.

 

Orders decreased in Asia, as higher automation orders — led by double-digit order increases in China across all three automation divisions — could not compensate for a reduction in large power orders, driven mainly by declines in power transmission investments in China.

 

Service orders decreased by 4 percent in local currencies. An increase in maintenance and repair service was offset by lower full-service orders as ABB withdrew from some less profitable longer-term service agreements.

 

The order backlog at the end of March amounted to $25 billion, a local-currency decrease of 5 percent compared to the end of the first quarter in 2009 and a 5-percent local currency increase compared to the end of the fourth quarter of 2009.

 

Total revenues decreased primarily as the lower order intake from 2009 flowed through into sales in the first quarter of this year. The shortest cycle division, Low-Voltage Products, reported higher revenues as industrial and construction demand improved. Delays in the execution of some large projects and in customer acceptance of products contributed to the revenue decrease in the two power divisions. Service revenues were 3 percent lower in the quarter in local currencies compared to the first quarter of 2009.

 

Earnings before interest and taxes and net income

 

EBIT in the first quarter of 2010 was lower than in the first quarter a year earlier, primarily due to the decrease in revenues.

 

The EBIT margin declined compared to the same quarter in 2009 as improvements in Discrete Automation and Motion and Low-Voltage Products — driven by a favorable product mix and the impact of cost savings measures taken in 2009 — were more than offset by lower EBIT margins in the longer-cycle divisions as a result of price erosion, project provisions and lower capacity utilization versus the same quarter a year ago.

 

4



 

Included in EBIT is a net negative impact of approximately $80 million from gains and losses on derivatives and foreign exchange movements on receivables and payables. Restructuring-related costs amounted to $7 million in the quarter.

 

Net income for the quarter developed in line with EBIT and resulted in basic earnings per share of $0.20 compared to $0.29 in the year-earlier period.

 

Balance sheet and cash flow

 

Net cash at the end of the first quarter was $7.1 billion, basically unchanged versus the end of the previous quarter. Cash from operating activities increased, despite lower earnings, on a significant improvement in net working capital. Net working capital decreased by approximately $700 million compared to a year earlier.

 

Compliance

 

As previously announced, ABB has disclosed to the US Department of Justice and the US Securities and Exchange Commission various suspect payments. Also as previously announced, ABB has been cooperating with various antitrust authorities regarding their investigations into certain alleged anti-competitive practices. With respect to these matters, there could be adverse outcomes beyond our provisions.

 

Cost reductions

 

ABB is implementing a cost take-out plan to adjust the company’s cost base to rapidly changing market conditions and protect its profitability. The program aims to sustainably reduce ABB’s costs — comprising both cost of sales as well as general and administrative expenses — from end-2008 levels by a total of $3 billion by the end of 2010. The program focuses on optimizing global sourcing, improving internal processes and adjusting ABB’s global manufacturing and engineering footprint to reduce costs, increase our competitiveness and better match shifts in customer demand.

 

Savings in the first quarter were in excess of $300 million, with the largest contributions coming from global footprint adjustments and global sourcing initiatives. The total cost of the program is expected to amount to approximately $1.1 billion. Costs associated with the program in the first quarter of 2010 were not material but are expected to amount to approximately $500 million for the full year.

 

Outlook

 

The growth of base orders from the fourth quarter of 2009 to the first quarter of 2010, although partly reflecting normal seasonal trends, appears to indicate that ABB has seen the bottom of its short-cycle businesses in most regions. This view is supported by recent increases in GDP and industrial production, particularly in the emerging economies, which are key growth drivers for the company’s short-cycle businesses.

 

For ABB’s late-cycle businesses, which make up the majority of the portfolio, the outlook for the remainder of 2010 remains mixed.

 

New and upgraded power infrastructure is needed in all regions, including renewables and smart grids. Increasing energy and commodity prices are driving demand for ABB automation solutions that lower operating costs, improve product and process quality and increase productivity. Stable or increased customer spending in pulp and paper, marine, metals and

 

5



 

mining during the first quarter, although improving from a very low level, are further indications that some later cyclical businesses may begin to recover in 2010.

 

However, restrained utility spending, delays in the award of large power projects and increased competition in the power sector are expected to weigh on demand in the short term.

 

Therefore, in 2010 management will continue to 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.

 

Divisional performance Q1 2010

 

Power Products

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Orders

 

2,401

 

2,960

 

-19

%

-26

%

Order backlog (end March)

 

8,151

 

8,178

 

0

%

-7

%

Revenues

 

2,319

 

2,468

 

-6

%

-12

%

EBIT

 

348

 

442

 

-21

%

 

 

as % of revenues

 

15.0

%

17.9

%

 

 

 

 

Cash flow from operating activities

 

247

 

97

 

 

 

 

 

 

The need for new and upgraded power transmission and distribution infrastructure remains strong in most regions, but utility spending was restrained during the quarter, while demand related to industry continued at low levels.

 

As a result, both base and large orders declined in the quarter. Regionally, orders grew by more than 50 percent in local currency terms in Central and Eastern Europe and were higher in South America. These increases were more than offset by order declines in the mature markets. Additionally, the decrease in large orders was a main driver of lower orders in China and the Middle East. Orders were also lower in North America, although the pace of decline slowed significantly compared to the previous two quarters.

 

Revenues decreased as a result of lower short-cycle sales during the quarter, the impact of order declines from 2009 and delays by customers in accepting product delivery.

 

EBIT and EBIT margin were lower than the same period a year earlier, reflecting lower revenues, cost underabsorption and increased price pressure.

 

Power Systems

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Orders

 

1,758

 

2,279

 

-23

%

-30

%

Order backlog (end March)

 

9,861

 

8,332

 

18

%

10

%

Revenues

 

1,384

 

1,417

 

-2

%

-10

%

EBIT

 

-14

 

83

 

n/a

 

 

 

as % of revenues

 

-1.0

%

5.9

%

 

 

 

 

Cash flow from operating activities

 

-37

 

-150

 

 

 

 

 

 

Orders declined compared to a record first quarter in 2009, which included two orders valued at almost $1 billion. Base orders were lower as both utility and industrial demand was weaker. Project tendering activity in power transmission continued at high levels, however, as the fundamental demand drivers remain intact — new grid capacity and upgrades, regional interconnections and the integration of renewable energies.

 

Revenues decreased, mainly because of project delays and a lower base order intake in 2009.

 

6



 

In addition to lower revenues, the EBIT decline was due to the negative impact of derivative transactions, equivalent to approximately 4 percentage points of EBIT margin. Execution challenges on a small number of specific projects resulted in additional costs, offsetting the gains from cost reduction measures.

 

Discrete Automation & Motion

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Orders

 

1,408

 

1,285

 

10

%

2

%

Order backlog (end March)

 

3,162

 

3,386

 

-7

%

-12

%

Revenues

 

1,213

 

1,301

 

-7

%

-13

%

EBIT

 

168

 

165

 

2

%

 

 

as % of revenues

 

13.8

%

12.7

%

 

 

 

 

Cash flow from operating activities

 

59

 

-18

 

 

 

 

 

 

Orders increased modestly in the quarter as industrial production began to recover from low levels in some mature markets and remained robust in key emerging markets. Base orders improved in short-cycle businesses such as low-voltage motors and drives, more than offsetting a decline in large orders and orders in later-cycle businesses such as machines and power electronics. Robotics orders increased from a low level.

 

Regionally, orders increased the most in the Americas, led by the U.S., and in Asia, with China orders up more than 30 percent in local currencies. Orders were lower in Europe and the Middle East and Africa.

 

Revenues declined in the quarter, mainly reflecting the low opening order backlog in machines and robotics. However, the positive impact of cost saving measures combined with a more favorable product mix in the quarter contributed to an increase in EBIT and EBIT margin compared to the same quarter in 2009.

 

Low-Voltage Products

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Orders

 

1,106

 

1,020

 

8

%

2

%

Order backlog (end March)

 

816

 

774

 

5

%

1

%

Revenues

 

1,011

 

933

 

8

%

2

%

EBIT

 

150

 

127

 

18

%

 

 

as % of revenues

 

14.8

%

13.6

%

 

 

 

 

Cash flow from operating activities

 

76

 

-18

 

 

 

 

 

 

Orders grew on improved demand from construction and industry customers across most regions during the first quarter, led by double-digit growth in local currencies in Asia and the Middle East and Africa. China orders increased by 13 percent in local currency terms. Orders were also higher in Germany and Italy, the division’s two largest European markets, but Europe orders overall declined 4 percent in local currencies. Orders in the Americas were also higher.

 

Revenues grew in line with orders, as most sales are booked in the same quarter in which orders are placed. EBIT and EBIT margin increased on higher revenues, a positive product mix and the impact of cost measures taken during 2009.

 

7



 

Process Automation

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q1 10

 

Q1 09(1)

 

US$

 

Local

 

Orders

 

2,115

 

2,553

 

-17

%

-24

%

Order backlog (end March)

 

5,729

 

6,765

 

-15

%

-21

%

Revenues

 

1,735

 

1,878

 

-8

%

-15

%

EBIT

 

159

 

146

 

9

%

 

 

as % of revenues

 

9.2

%

7.8

%

 

 

 

 

Cash flow from operating activities

 

137

 

48

 

 

 

 

 

 


(1) Q1 2009 numbers include the instrumentation business transferred to the Process Automation division as part of the previously-announced automation realignment

 

Demand was steady or stronger in several key end markets in the first quarter, although total orders declined in comparison with the very strong quarter of a year earlier, which included a $490-million order from Algeria. Base orders returned to the high levels of a year ago and have grown at a double-digit pace in local currencies since the middle of 2009.

 

Orders from the oil, gas and petrochemicals sector declined in the quarter, reflecting the non-recurrence of the large Algerian order in the first quarter of the previous year. Marine orders increased from a very low level, mainly in oil-related segments and in Europe and Asia. Pulp and paper orders also grew, driven by demand for drives and electrification projects. Metals and minerals orders were steady, supported by an increase in metals orders in Asia. Service orders were mixed, with strong growth in oil and gas and turbocharging service offset by measures to reduce ABB’s exposure to a number of less profitable full-service orders.

 

Revenues declined on the decrease in orders in recent quarters. However, EBIT and EBIT margin improved, reflecting a larger proportion of service and product sales in revenues as well as benefits from the cost take-out program.

 

 

8



 

More information

 

The 2010 Q1 results press release is available from April 22, 2010, on the ABB News Center at www.abb.com/news and on the Investor Relations homepage at www.abb.com/investorrelations, where a presentation for investors will also be published.

 

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 (1) 866 416 2558 (U.S./Canada). The code is 15614, followed by the # key.

 

A conference call for analysts and investors is scheduled to begin today at 3:00 p.m. CET (2:00 p.m. in the UK, 9:00 a.m. EDT). Callers should dial +1 412 858 4600 (from the U.S./Canada) or +41 91 610 56 00 (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 24 hours commencing one hour after the conference call. Playback numbers: +1 866 416 2558 (U.S./Canada) or +41 91 612 4330 (Europe and the rest of the world). The code is 15754, followed by the # key.

 

Investor calendar 2010

 

 

Annual General Meeting of shareholders, Zurich

 

April 26, 2010

Annual information meeting for shareholders, Västerås

 

April 27, 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 117,000 people.

 

Zurich, April 22, 2010

Joe Hogan, CEO

 

Important notice about forward-looking information

 

This press release includes forward-looking information and statements including the sections entitled “Compliance,” “Cost reductions,” “Outlook, 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 associated with the weakened global economy and political conditions, costs associated with compliance activities, raw materials availability and 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 21 329 108

 

CH-8050 Zurich, Switzerland

Tel: +41 43 317 6568

 

USA: Tel. +1 203 750 7743

 

 

Fax: +41 43 317 7958

 

investor.relations@ch.abb.com

 

 

media.relations@ch.abb.com

 

 

 

 

 

9



 

ABB first-quarter (Q1) 2010 key figures

 

 

 

 

 

 

 

 

 

Change

 

$ millions unless otherwise indicated

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Orders

 

Group

 

8’067

 

9’150

 

-12

%

-19

%

 

 

Power Products

 

2’401

 

2’960

 

-19

%

-26

%

 

 

Power Systems

 

1’758

 

2’279

 

-23

%

-30

%

 

 

Discrete Automation & Motion

 

1’408

 

1’285

 

10

%

2

%

 

 

Low-Voltage Products

 

1’106

 

1’020

 

8

%

2

%

 

 

Process Automation

 

2’115

 

2’553

 

-17

%

-24

%

 

 

Corporate and other (Inter-division eliminations)

 

-721

 

-947

 

24

%

30

%

Revenues

 

Group

 

6’934

 

7’209

 

-4

%

-11

%

 

 

Power Products

 

2’319

 

2’468

 

-6

%

-12

%

 

 

Power Systems

 

1’384

 

1’417

 

-2

%

-10

%

 

 

Discrete Automation & Motion

 

1’213

 

1’301

 

-7

%

-13

%

 

 

Low-Voltage Products

 

1’011

 

933

 

8

%

2

%

 

 

Process Automation

 

1’735

 

1’878

 

-8

%

-15

%

 

 

Corporate and other (Inter-division eliminations)

 

-728

 

-788

 

8

%

15

%

EBIT

 

Group

 

709

 

862

 

-18

%

 

 

 

 

Power Products

 

348

 

442

 

-21

%

 

 

 

 

Power Systems

 

-14

 

83

 

n.a.

 

 

 

 

 

Discrete Automation & Motion

 

168

 

165

 

2

%

 

 

 

 

Low-Voltage Products

 

150

 

127

 

18

%

 

 

 

 

Process Automation

 

159

 

146

 

9

%

 

 

 

 

Corporate and other

 

-102

 

-101

 

-1

%

 

 

EBIT margin (%)

 

Group

 

10.2

%

12.0

%

 

 

 

 

 

 

Power Products

 

15.0

%

17.9

%

 

 

 

 

 

 

Power Systems

 

-1.0

%

5.9

%

 

 

 

 

 

 

Discrete Automation & Motion

 

13.8

%

12.7

%

 

 

 

 

 

 

Low-Voltage Products

 

14.8

%

13.6

%

 

 

 

 

 

 

Process Automation

 

9.2

%

7.8

%

 

 

 

 

 

ABB Q1 2010 orders received and revenues by region

 

 

 

Orders received

 

Change

 

Revenues

 

Change

 

$ millions

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Q1 10

 

Q1 09

 

US$

 

Local

 

Europe

 

3,433

 

3,662

 

-6

%

-14

%

2,775

 

3,002

 

-8

%

-15

%

Americas

 

1,497

 

1,355

 

10

%

2

%

1,314

 

1,493

 

-12

%

-17

%

Asia

 

2,101

 

2,221

 

-5

%

-13

%

1,910

 

1,897

 

1

%

-6

%

Middle East and Africa

 

1,036

 

1,912

 

-46

%

-49

%

935

 

817

 

14

%

7

%

Group total

 

8,067

 

9,150

 

-12

%

-19

%

6,934

 

7,209

 

-4

%

-11

%

 

10



 

Appendix I

Reconciliation of non-GAAP financial measures

($ millions, unaudited)

 

EBIT margin

 

Q1 2010

 

= EBIT as % of revenues

 

 

 

Earnings before interest and taxes (EBIT)

 

709

 

Revenues

 

6,934

 

EBIT margin

 

10.2

%

Net cash

 

 

 

= Cash and equivalents plus marketable securities and short-term investments, less total debt

 

 

 

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

 

(205

)

Long-term debt

 

(2,061

)

Total debt

 

(2,266

)

Cash and equivalents

 

7,408

 

Marketable securities and short-term investments

 

2,005

 

Cash and marketable securities

 

9,413

 

Net cash

 

7,147

 

Adjustments to EBIT margin

 

 

 

EBIT

 

709

 

adjusted for the effects of

 

 

 

Unrealized gains (losses) on derivatives (FX, commodities, embedded derivatives)

 

69

 

Realized gains (losses) on derivatives where the underlying hedged transaction has not yet been realized

 

17

 

Unrealized foreign exchange movements on receivables/payables (and related assets/liabilities)

 

(4

)

Restructuring and restructuring-related expenses

 

7

 

EBIT after adjustments

 

798

 

Revenues

 

6,934

 

As % of revenues

 

11.5

%

 

11



 

ABB Ltd Interim Consolidated Income Statements (unaudited)

 

 

 

Three months ended

 

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

 

Mar. 31, 2010

 

Mar. 31, 2009

 

 

 

 

 

 

 

Sales of products

 

5,753

 

6,116

 

Sales of services

 

1,181

 

1,093

 

Total revenues

 

6,934

 

7,209

 

Cost of products

 

(4,058

)

(4,343

)

Cost of services

 

(790

)

(747

)

Total cost of sales

 

(4,848

)

(5,090

)

Gross profit

 

2,086

 

2,119

 

Selling, general and administrative expenses

 

(1,377

)

(1,277

)

Other income (expense), net

 

 

20

 

Earnings before interest and taxes

 

709

 

862

 

Interest and dividend income

 

24

 

38

 

Interest and other finance expense

 

(42

)

22

 

Income from continuing operations before taxes

 

691

 

922

 

Provision for taxes

 

(201

)

(240

)

Income from continuing operations, net of tax

 

490

 

682

 

Income from discontinued operations, net of tax

 

1

 

11

 

Net income

 

491

 

693

 

Net income attributable to noncontrolling interests

 

(27

)

(41

)

Net income attributable to ABB

 

464

 

652

 

 

 

 

 

 

 

Amounts attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

 

463

 

641

 

Income from discontinued operations, net of tax

 

1

 

11

 

Net income

 

464

 

652

 

 

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

 

0.20

 

0.28

 

Income from discontinued operations, net of tax

 

 

0.01

 

Net income

 

0.20

 

0.29

 

 

 

 

 

 

 

Diluted earnings per share attributable to ABB shareholders:

 

 

 

 

 

Income from continuing operations, net of tax

 

0.20

 

0.28

 

Income from discontinued operations, net of tax

 

 

0.01

 

Net income

 

0.20

 

0.29

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic earnings per share attributable to ABB shareholders

 

2,290

 

2,283

 

Diluted earnings per share attributable to ABB shareholders

 

2,295

 

2,285

 

 

See Notes to the Interim Consolidated Financial Information

 

12



 

ABB Ltd Interim Consolidated Balance Sheets (unaudited)

 

($ in millions, except share data)

 

Mar. 31, 2010

 

Dec. 31, 2009

 

 

 

 

 

 

 

Cash and equivalents

 

7,408

 

7,119

 

Marketable securities and short-term investments

 

2,005

 

2,433

 

Receivables, net

 

9,211

 

9,451

 

Inventories, net

 

4,689

 

4,550

 

Prepaid expenses

 

288

 

236

 

Deferred taxes

 

852

 

900

 

Other current assets

 

568

 

540

 

Total current assets

 

25,021

 

25,229

 

 

 

 

 

 

 

Financing receivables, net

 

446

 

452

 

Property, plant and equipment, net

 

3,956

 

4,072

 

Goodwill

 

3,002

 

3,026

 

Other intangible assets, net

 

414

 

443

 

Prepaid pension and other employee benefits

 

109

 

112

 

Investments in equity method companies

 

51

 

49

 

Deferred taxes

 

1,031

 

1,052

 

Other non-current assets

 

298

 

293

 

Total assets

 

34,328

 

34,728

 

 

 

 

 

 

 

Accounts payable, trade

 

3,772

 

3,853

 

Billings in excess of sales

 

1,632

 

1,623

 

Accounts payable, other

 

1,307

 

1,326

 

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

 

205

 

161

 

Advances from customers

 

1,807

 

1,806

 

Deferred taxes

 

316

 

327

 

Provisions for warranties

 

1,228

 

1,280

 

Provisions and other current liabilities

 

2,440

 

2,603

 

Accrued expenses

 

1,434

 

1,600

 

Total current liabilities

 

14,141

 

14,579

 

 

 

 

 

 

 

Long-term debt

 

2,061

 

2,172

 

Pension and other employee benefits

 

1,147

 

1,179

 

Deferred taxes

 

303

 

328

 

Other non-current liabilities

 

1,978

 

1,997

 

Total liabilities

 

19,630

 

20,255

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Capital stock and additional paid-in capital (2,329,324,797 issued shares at March 31, 2010 and December 31, 2009)

 

3,951

 

3,943

 

Retained earnings

 

13,292

 

12,828

 

Accumulated other comprehensive loss

 

(2,359

)

(2,084

)

Treasury stock, at cost (39,173,474 shares at March 31, 2010 and 39,901,593 shares at December 31, 2009)

 

(885

)

(897

)

Total ABB stockholders’ equity

 

13,999

 

13,790

 

Noncontrolling interests

 

699

 

683

 

Total stockholders’ equity

 

14,698

 

14,473

 

Total liabilities and stockholders’ equity

 

34,328

 

34,728

 

 

See Notes to the Interim Consolidated Financial Information

 

13



 

ABB Ltd Interim Consolidated Statements of Cash Flows (unaudited)

 

 

 

Three months ended

 

($ in millions)

 

Mar. 31, 2010

 

Mar. 31, 2009

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

491

 

693

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

169

 

148

 

Pension and postretirement benefits

 

22

 

(12

)

Deferred taxes

 

24

 

6

 

Net gain from sale of property, plant and equipment

 

(6

)

(5

)

Loss from equity accounted companies

 

1

 

1

 

Other

 

9

 

(78

)

Changes in operating assets and liabilities:

 

 

 

 

 

Trade receivables, net

 

83

 

(70

)

Inventories, net

 

(280

)

(232

)

Trade payables

 

25

 

(375

)

Billings in excess of sales

 

42

 

55

 

Provisions, net

 

(93

)

(21

)

Advances from customers

 

37

 

(24

)

Other assets and liabilities, net

 

(97

)

(190

)

Net cash provided by (used in) operating activities

 

427

 

(104

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Changes in financing receivables

 

(7

)

2

 

Purchases of marketable securities (available-for-sale)

 

(244

)

(20

)

Purchases of marketable securities (held-to-maturity)

 

(15

)

(222

)

Purchases of short-term investments

 

(1,438

)

 

Purchases of property, plant and equipment and intangible assets

 

(148

)

(185

)

Acquisition of businesses (net of cash acquired)

 

(53

)

(48

)

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

 

71

 

21

 

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

 

137

 

855

 

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

 

186

 

 

Proceeds from short-term investments

 

1,643

 

92

 

Proceeds from sales of property, plant and equipment

 

14

 

8

 

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

 

(1

)

 

Net cash provided by investing activities

 

145

 

503

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net changes in debt with maturities of 90 days or less

 

22

 

21

 

Increase in debt

 

81

 

211

 

Repayment of debt

 

(64

)

(221

)

Dividends paid to noncontrolling shareholders

 

(16

)

(14

)

Other

 

(6

)

(13

)

Net cash provided by (used in) financing activities

 

17

 

(16

)

 

 

 

 

 

 

Effects of exchange rate changes on cash and equivalents

 

(300

)

(232

)

 

 

 

 

 

 

Net change in cash and equivalents - continuing operations

 

289

 

151

 

 

 

 

 

 

 

Cash and equivalents beginning of period

 

7,119

 

6,399

 

Cash and equivalents end of period

 

7,408

 

6,550

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

Interest paid

 

22

 

45

 

Taxes paid

 

228

 

255

 

 

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)

 

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

 

Noncontrolling
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

 

 

 

652

 

 

 

 

 

 

 

 

 

 

 

 

 

652

 

41

 

693

 

Foreign currency translation adjustments

 

 

 

 

 

(439

)

 

 

 

 

 

 

(439

)

 

 

(439

)

(11

)

(450

)

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

 

 

 

 

 

 

 

(85

)

 

 

 

 

(85

)

 

 

(85

)

 

 

(85

)

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

 

 

 

 

 

 

 

 

 

27

 

 

 

27

 

 

 

27

 

 

 

27

 

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

 

 

 

 

 

 

 

 

 

 

 

18

 

18

 

 

 

18

 

 

 

18

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

173

 

30

 

203

 

Dividends paid to noncontrolling shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

(13

)

Share-based payment arrangements

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

17

 

Balance at March 31, 2009

 

4,858

 

10,579

 

(2,093

)

(2

)

(951

)

(143

)

(3,189

)

(900

)

11,348

 

629

 

11,977

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

($ in millions)

 

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

 

Noncontrolling
interests

 

Total
stockholders’
equity

 

Balance at January 1, 2010

 

3,943

 

12,828

 

(1,056

)

20

 

(1,068

)

20

 

(2,084

)

(897

)

13,790

 

683

 

14,473

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

464

 

 

 

 

 

 

 

 

 

 

 

 

 

464

 

27

 

491

 

Foreign currency translation adjustments

 

 

 

 

 

(362

)

 

 

 

 

 

 

(362

)

 

 

(362

)

4

 

(358

)

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

 

 

 

 

 

 

 

(9

)

 

 

 

 

(9

)

 

 

(9

)

 

 

(9

)

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

 

 

 

 

 

 

 

 

 

78

 

 

 

78

 

 

 

78

 

 

 

78

 

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

 

 

 

 

 

 

 

 

 

 

 

18

 

18

 

 

 

18

 

 

 

18

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

189

 

31

 

220

 

Changes in noncontrolling interests

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

2

 

4

 

Dividends paid to noncontrolling shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17

)

(17

)

Treasury stock transactions

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

Share-based payment arrangements

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

18

 

Balance at March 31, 2010

 

3,951

 

13,292

 

(1,418

)

11

 

(990

)

38

 

(2,359

)

(885

)

13,999

 

699

 

14,698

 

 

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, 2009.

 

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 and the fair value of pension plan assets,

 

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

 

·                  growth rates, discount rates and other assumptions used in the Company’s annual goodwill impairment test,

 

·                  assumptions used in determining inventory obsolescence and net realizable value,

 

·                  growth rates, discount rates and other assumptions used to determine impairment of long-lived assets, and

 

·                  assessment of the allowance for doubtful accounts.

 

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

 

In the opinion of management, the Interim Consolidated Financial Information contains all necessary adjustments to present fairly the financial position, results of operations and cash flows for the reported interim periods.

 

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.

 

Note 2. Recent accounting pronouncements

 

Applicable in current period

 

Fair value measurements

As of January 1, 2010, the Company adopted an accounting standard update that requires additional disclosure for fair value measurements. The update requires that significant transfers in and out of fair value Level 1 (observable quoted prices) and Level 2 (observable inputs other than Level 1 inputs) be disclosed together with a description of the reasons for the transfers. Adoption of this update did not result in additional disclosure for the three-month period ended March 31, 2010, as there were no significant transfers between Level 1 and Level 2.

 

16



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

Applicable for future periods

 

Fair value measurements

In January 2010, an accounting standard update was issued that requires additional disclosure for fair value measurements. The update requires disclosure, on a gross basis, about purchases, sales, issuances, and settlements of level 3 (significant unobservable inputs) instruments when reconciling the fair value measurements. This disclosure requirement is effective for the Company for periods beginning January 1, 2011. The Company does not believe that this new disclosure requirement will have a material impact on its consolidated financial statements.

 

Revenue recognition with multiple deliverable arrangements

In October 2009, an accounting standard update on revenue recognition with multiple deliverable arrangements was issued which amends the criteria for allocating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable that includes 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. This update also:

 

·                  eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement, and

 

·                  expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements.

 

This update is effective for arrangements entered into by the Company or materially modified on or after January 1, 2011. The Company is currently evaluating the impact of this update.

 

Revenue arrangements that include software elements

In October 2009, an accounting standard update for the accounting of certain revenue arrangements that include software elements was issued. This update amends the existing guidance on revenue arrangements that contain both hardware and software elements. This update modifies the existing rules to exclude from the software revenue guidance (i) non-software components of tangible products and (ii) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. Undelivered elements in the arrangement related to the non-software components also are excluded from this guidance. This update is effective for arrangements entered into by the Company or materially modified on or after January 1, 2011. The Company is currently evaluating the impact of this update.

 

17



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

Note 3. Cash and equivalents and marketable securities and short-term investments

 

At March 31, 2010, and December 31, 2009, cash and equivalents and marketable securities and short-term investments consisted of the following:

 

 

 

March 31, 2010

 

($ in millions)

 

Cost basis

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Fair value

 

Cash and
equivalents

 

Marketable
securities
and
short-term
investments

 

Cash

 

1,249

 

 

 

1,249

 

1,249

 

 

Time deposits

 

6,475

 

 

 

6,475

 

5,052

 

1,423

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

— Corporate commercial papers

 

155

 

 

 

155

 

100

 

55

 

— Other

 

 

 

 

 

 

 

Debt securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

— U.S. government obligations

 

120

 

4

 

(1

)

123

 

 

123

 

— European government obligations

 

369

 

 

(1

)

368

 

350

 

18

 

— Other government obligations

 

4

 

 

(1

)

3

 

 

3

 

— Corporate

 

996

 

6

 

 

1,002

 

657

 

345

 

Equity securities available-for-sale

 

33

 

5

 

 

38

 

 

38

 

Total

 

9,401

 

15

 

(3

)

9,413

 

7,408

 

2,005

 

 

 

 

December 31, 2009

 

($ in millions)

 

Cost basis

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Fair value

 

Cash and
equivalents

 

Marketable
securities
and
short-term
investments

 

Cash

 

1,381

 

 

 

1,381

 

1,381

 

 

Time deposits

 

6,170

 

 

 

6,170

 

4,474

 

1,696

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

— Corporate commercial papers

 

413

 

 

 

413

 

223

 

190

 

— Other

 

43

 

 

 

43

 

 

43

 

Debt securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

— U.S. government obligations

 

110

 

4

 

(1

)

113

 

 

113

 

— European government obligations

 

737

 

 

(2

)

735

 

717

 

18

 

— Other government obligations

 

4

 

 

(1

)

3

 

 

3

 

— Corporate

 

603

 

5

 

 

608

 

324

 

284

 

Equity securities available-for-sale

 

71

 

15

 

 

86

 

 

86

 

Total

 

9,532

 

24

 

(4

)

9,552

 

7,119

 

2,433

 

 

Note 4. Financial instruments

 

The Company is exposed to certain currency, commodity, interest rate and equity risks arising from its global operating, financing and investing activities. The Company uses derivative instruments to reduce and manage the economic impact of these exposures.

 

Currency risk

Due to the global nature of its operations, many of the Company’s subsidiaries are exposed to currency risk in their operating activities from entering into transactions in currencies other than their functional currency. To manage such currency risks, the Company’s policies require its subsidiaries to hedge their foreign currency exposures from binding sales and purchase contracts denominated in foreign currencies, as well as at least fifty percent of the anticipated foreign currency denominated sales volume of standard

 

18



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

products and related foreign currency denominated purchases over the next twelve months. Forward foreign exchange contracts are the main instrument used to protect the Company against the volatility of future cash flows (caused by changes in exchange rates) of contracted and forecasted sales and purchases denominated in foreign currencies.

 

Commodity risk

Various commodity products are used in the Company’s manufacturing activities. Consequently it is exposed to volatility in future cash flows arising from changes in commodity prices. To manage such commodity price risk, the Company’s policies require that its subsidiaries hedge commodity price risk exposures from binding purchase contracts, as well as at least fifty percent of the anticipated commodity purchases over the next twelve months. Swap contracts on various commodities (primarily copper) are used to manage the associated price risks.

 

Interest rate risk

The Company has issued bonds at fixed rates and in currencies other than the issuing entity’s functional currency. Interest rate swaps and cross-currency swaps are used to manage the interest rate and foreign currency risk associated with such debt. In addition, from time to time, the Company uses instruments such as interest rate swaps, bond futures or forward rate agreements to manage interest rate risk arising from the Company’s balance sheet structure but does not designate such instruments as hedges.

 

Equity risk

The Company is exposed to fluctuations in the fair value of its warrant appreciation rights (WARs) issued under its management incentive plan. A WAR gives its holder the right to receive cash equal to the market price of an equivalent listed warrant on the date of exercise. To eliminate such risk, the Company has purchased cash-settled call options which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs.

 

In general, while the Company’s primary objective in its use of derivatives is to minimize exposures arising from its business, certain derivatives are designated and qualify for hedge accounting treatment while others either are not designated or do not qualify for hedge accounting.

 

Volume of derivative activity

The gross notional amounts of outstanding derivatives (whether designated as hedges or not) were as follows:

 

Foreign exchange and interest rate derivatives:

 

Type of derivative

 

Total notional amount

 

($ in millions)

 

March 31, 2010

 

December 31, 2009

 

Foreign exchange contracts

 

13,007

 

14,446

 

Embedded foreign exchange derivatives

 

3,355

 

3,951

 

Interest rate contracts

 

2,557

 

2,860

 

 

Derivative commodity contracts:

 

 

 

 

 

Total notional amount

 

Type of derivative

 

Unit

 

March 31, 2010

 

December 31, 2009

 

Copper swaps

 

metric tonnes

 

22,275

 

22,002

 

Aluminum swaps

 

metric tonnes

 

3,464

 

2,193

 

Nickel swaps

 

metric tonnes

 

16

 

24

 

Electricity futures

 

megawatt hours

 

1,454,348

 

1,330,978

 

Crude oil swaps

 

barrels

 

139,580

 

154,632

 

 

Equity derivatives:

At March 31, 2010 and December 31, 2009, the Company held 57 million and 64 million cash-settled call options on ABB Ltd shares with a total fair value of $66 million and $64 million respectively.

 

19



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

Cash flow hedges

As noted above, the Company mainly uses forward foreign exchange contracts to manage the foreign exchange risk of its operations, commodity swaps to manage its commodity risks and cash-settled call options to hedge its WAR liabilities. Where such instruments are designated and qualify as cash flow hedges, the effective portion of the changes in their fair value is recorded in “Accumulated other comprehensive loss” and subsequently reclassified into earnings in the same line item and in the same period as the underlying hedged transaction affects earnings. Any ineffectiveness in the hedge relationship, or hedge component excluded from the assessment of effectiveness, is recognized in earnings during the current period.

 

At March 31, 2010 and December 31, 2009, “Accumulated other comprehensive loss” included $38 million and $20 million, respectively, of unrealized gains, net of tax, on derivatives designated as cash flow hedges. Of the amount at March 31, 2010, net gains of $18 million are expected to be reclassified to earnings in the following twelve months. At March 31, 2010, the longest maturity of a derivative classified as a cash flow hedge was 71 months.

 

During the three months ended March 31, 2010 and 2009, no amounts were reclassified into earnings as a result of the discontinuance of cash flow hedge accounting, and net of tax gains of $0 million and $1 million, respectively, were included in earnings due to ineffectiveness in cash flow hedge relationships.

 

The pre-tax effects of derivative instruments, designated and qualifying as cash flow hedges, on “Accumulated other comprehensive loss” and the Consolidated Income Statements were as follows:

 

Three months ended March 31, 2010

 

Type of derivative
designated as
a cash flow hedge

 

Gains recognized in
OCI
(1) on derivatives
(effective portion)

 

Gains (losses) reclassified
from OCI
(1) into income
(effective portion)

 

Gains recognized in income
(ineffective portion and amount
excluded from effectiveness testing)

 

 

 

($ in millions)

 

Location

 

($ in millions)

 

Location

 

($ in millions)

 

Foreign exchange contracts

 

28

 

Total revenues

 

15

 

Total revenues

 

 

 

 

 

 

Total cost of sales

 

(1

)

Total cost of sales

 

 

Commodity contracts

 

4

 

Total cost of sales

 

1

 

Total cost of sales

 

 

Cash-settled call options

 

5

 

Selling, general and administrative expenses

 

(1

)

Selling, general and administrative expenses

 

 

Total

 

37

 

 

 

14

 

 

 

 

 

Three months ended March 31, 2009

 

Type of derivative
designated as
a cash flow hedge

 

Gains (losses)
recognized in
OCI
(1) on derivatives
(effective portion)

 

Gains (losses) reclassified
from OCI
(1) into income
(effective portion)

 

Gains recognized in income
(ineffective portion and amount
excluded from effectiveness testing)

 

 

 

($ in millions)

 

Location

 

($ in millions)

 

Location

 

($ in millions)

 

Foreign exchange contracts

 

(51

)

Total revenues

 

(28

)

Total revenues

 

2

 

 

 

 

 

Total cost of sales

 

 

Total cost of sales

 

 

Commodity contracts

 

12

 

Total cost of sales

 

(12

)

Total cost of sales

 

 

Cash-settled call options

 

(5

)

Selling, general and administrative expenses

 

(7

)

Selling, general and administrative expenses

 

 

Total

 

(44

)

 

 

(47

)

 

 

2

 

 


(1) OCI represents “Accumulated other comprehensive loss”.

 

The amount of derivative gains (losses), net of tax, reclassified from “Accumulated other comprehensive loss” to earnings during the three months ended March 31, 2010 and 2009, was $11 million and $(35) million, respectively.

 

Fair value hedges

To reduce its interest rate and foreign currency exposures arising primarily from its debt issuance activities, the Company uses interest rate and cross-currency swaps. Where such instruments are designated as fair value hedges, the changes in fair value of these instruments, as well as the changes in fair value of the risk component of the underlying debt being hedged, are recorded as offsetting gains and losses in “Interest and other finance expense”. Hedge ineffectiveness in the three months ended March 31, 2010 and 2009, was not significant.

 

20



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

The effect of derivative instruments, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows:

 

Three months ended March 31, 2010

 

Type of derivative
designated as a
fair value hedge

 

Gains recognized in income
on derivatives designated as
fair value hedges

 

Losses recognized in
income on hedged item

 

 

 

Location

 

($ in millions)

 

Location

 

($ in millions)

 

Interest rate contracts

 

Interest and other finance expense

 

11

 

Interest and other finance expense

 

(11

)

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

Interest and other finance expense

 

 

Interest and other finance expense

 

 

Total

 

 

 

11

 

 

 

(11

)

 

Three months ended March 31, 2009

 

Type of derivative
designated as a
fair value hedge

 

Gains (losses) recognized in income
on derivatives designated as
fair value hedges

 

Gains (losses) recognized in
income on hedged item

 

 

 

Location

 

($ in millions)

 

Location

 

($ in millions)

 

Interest rate contracts

 

Interest and other finance expense

 

45

 

Interest and other finance expense

 

(45

)

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

Interest and other finance expense

 

(1

)

Interest and other finance expense

 

1

 

Total

 

 

 

44

 

 

 

(44

)

 

Derivatives not designated in hedge relationships

Derivative instruments that are not designated as hedges or do not qualify as either cash flow or fair value hedges are economic hedges used for risk management purposes. Gains and losses from changes in the fair values of such derivatives are recognized in the same line in the income statement as the economically hedged transaction.

 

Furthermore, under certain circumstances, the Company is required to split and account separately for foreign currency derivatives that are embedded within certain binding sales or purchase contracts denominated in a currency other than the functional currency of the subsidiary and the counterparty. The gains (losses) recognized in the Consolidated Income Statements on such derivatives are included in the table below:

 

($ in millions)

 

Gains (losses) recognized in income

 

Type of derivative

 

 

 

Three months ended March 31,

 

not designated as a hedge

 

Location

 

2010

 

2009

 

Foreign exchange contracts:

 

Total revenues

 

94

 

(9

)

 

 

Total cost of sales

 

(95

)

(79

)

 

 

Interest and other finance expense

 

83

 

24

 

Embedded foreign exchange contracts:

 

Total revenues

 

(94

)

(51

)

 

 

Total cost of sales

 

9

 

(8

)

Commodity contracts:

 

Total cost of sales

 

6

 

28

 

Cross-currency swaps:

 

Interest and other finance expense

 

 

(3

)

Total

 

 

 

3

 

(98

)

 

21



 

Notes to the Interim Consolidated Financial Information (unaudited)

 

The fair values of derivatives included in the Consolidated Balance Sheets were as follows:

 

 

 

March 31, 2010

 

 

 

Derivative assets

 

Derivative liabilities

 

($ in millions)

 

Current in
“Other current
assets”

 

Non-current
in “Other
non-current
assets”

 

Current in
“Provisions and
other current
liabilities”

 

Non-current
in “Other
non-current
liabilities”

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

48

 

51

 

22

 

11

 

Commodity contracts

 

7

 

 

 

 

Interest rate contracts

 

 

85

 

 

 

Cash-settled call options

 

36

 

27

 

 

 

Total

 

91

 

163

 

22

 

11

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

256

 

37

 

124

 

32

 

Commodity contracts

 

27

 

1