Annual Report • Feb 27, 2020
Annual Report
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ZURICH, SWITZERLAND, FEBRUARY 26, 2020
ABB Ltd has published its 2019 annual report on its website and has filed the annual report on Form 20-F with the United States Securities and Exchange Commission.
The 2019 annual report is now available electronically at www.abb.com/groupreports. It provides comprehensive information on the company and its strategy, business, governance and financial performance.
Shareholders may request a printed copy of the annual report via this link. It will be distributed when it becomes available.
ABB (ABBN: SIX Swiss Ex) is a technology leader that is driving the digital transformation of industries. With a history of innovation spanning more than 130 years, ABB has four, customerfocused, globally leading businesses: Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation, supported by the ABB Ability™ digital platform. ABB's Power Grids business will be divested to Hitachi in 2020. ABB operates in more than 100 countries with about 144,000 employees. www.abb.com
— For more information please contact:
Media Relations Phone: +41 43 317 71 11 Email: [email protected] Investor Relations Phone: +41 43 317 71 11 Email: [email protected] ABB Ltd Affolternstrasse 44 8050 Zurich Switzerland
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ABB is a technology leader that is driving the digital transformation of industries. With a history of innovation spanning more than 130 years, ABB has four customerfocused, globally leading Businesses: Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation, supported by the ABB Ability™ digital platform. ABB's Power Grids business will be divested to Hitachi in 2020. ABB operates in more than 100 countries with about 144,000 employees.
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2019
Annual report
| — | Introduction |
|---|---|
| 01 | 6–31 |
| — | Corporate governance report |
| 02 | 32–55 |
| — | Compensation report |
| 03 | 56–83 |
| — | Financial review of ABB Group |
| 04 | 84–217 |
| — | ABB Ltd statutory financial statements |
| 05 | 218–235 |
| — | Supplemental information |
| 06 | 236–240 |
— 6–31
The year 2019 was one of far-reaching organizational transformation for ABB. The impending sale of Power Grids, announced in December 2018, required us to devote significant attention and resources to the carve out of that business, which accounts for more than a quarter of ABB's revenue. Complementing our shift away from power transmission and large-scale infrastructure projects, we focused on simplifying our business model and operational structure to create a leaner, more agile and customer-focused ABB.
In geopolitical terms, 2019 was marked by uncertainty. Trade tensions between the United States and China, inconclusive Brexit negotiations, and continuing instability in the Middle East weighed on confidence, inhibiting in particular demand for robotics and automation solutions, which are core to our offering.
We delivered a resilient performance for the year while undertaking a very extensive transformation, slightly improving revenues and operating margins, against a backdrop of more challenging markets. Income from operations of \$1.9 billion, which was 13 percent lower year-on-year, was also impacted by restructuring, Power Grids' related transaction and separation costs and charges, as well as charges from the planned sale of the solar inverters business. We grew revenues by 1 percent and improved our profitability, posting an operational EBITA margin of 11.1 percent, impacted by a combined 130 basis points due to stranded costs and non-core activities, an increase of 0.2 percent over the previous year.
We continued our strategy of active portfolio management, announcing the acquisition of a majority stake in leading Chinese e-mobility solution provider, Shanghai Chargedot New Energy Technology Co., Ltd. to further strengthen our market-leading electric vehicle charging business. We also announced the divestment of businesses which are not compatible with our new business model and strategy, including our solar inverters business and two Shanghai-based joint ventures that were part of GE Industrial Solutions (GEIS), which we acquired in 2018.
These achievements came against the backdrop of the most wide-ranging internal reorganization since ABB was formed from the merger of ASEA AB of Sweden and Brown Boveri AG of
Switzerland in 1988. Over the course of 2019, we transformed ABB from a complex corporate-led organization into a simpler, streamlined company with four vertically integrated Businesses – Electrification, Industrial Automation, Motion and Robotics & Discrete Automation – and a lean corporate center.
In the process, we integrated our country organizations into our four Businesses, and moved all Group business and service functions into either the Businesses or into business services centers, which provide expert and transactional service offerings in areas such as tax, legal, human resources and finance. More than 90 percent of the previous group function headcount has been moved into the four Businesses as part of the ABB-OS simplification. These achievements are a credit to our people and our leaders and I would like to thank them.
Since January 2020, our four Businesses have been empowered with full operational responsibility for all business functions and territories. Power Grids is now operating as an independent business, in preparation for the handover to Hitachi, which is expected at the end of the second quarter of this year. Following the divestment, we intend to return the net cash proceeds to shareholders.
With our new organizational structure, ABB is competitively positioned in markets where we can grow our business over the long term.
We remain committed to delivering a sustainable dividend and this year the Board of Directors will propose a dividend of CHF 0.80 per share to shareholders at the Annual General Meeting on March 26.
We have a clear vision of the ABB that will emerge from our cultural transformation. Our company will be a technology leader in the digital transformation of industries. It will be an exemplary corporate citizen that safeguards essential infrastructure, contributes to a more sustainable world, and delivers superior customer experience and financial performance through a talented, motivated workforce and innovation. To make this vision a reality, we have defined five clear priorities to provide guidance for our people and to
keep us focused on ABB's role and the value it creates for its customers and stakeholders.
Our first priority is what we call our "license to operate" and it covers the fundamental requirements of running a business in today's digital world. First and foremost, we need a secure foundation on which to operate, both to protect our company and to maintain and build long-term, trust-based relationships with our partners.
That foundation is built on taking responsibility for health, safety & environment (HSE) and integrity. To set ABB on a long-term path of growth, our company must be a safe place to work, our operations and our offerings must be safe, cyber-secure and sustainable, and we must maintain the highest standards of integrity and ethical business practices.
In 2019, we made progress in securing our "license to operate". We improved our safety performance by reducing the number of serious incidents and lost-time injuries' cases compared with 2018. Tragically, we had two workplace fatalities in 2019 – one employee and one contractor – showing that we still have significant work to do. In 2018 and 2017, we had four fatalities in each of those years.
ABB is committed to improving the sustainability of its customers' and its own operations. Close to 60 percent of ABB's global revenues now come from solutions that improve energy efficiency and reduce environmental impact, and we are working to increase that percentage in the years to come. We have made solid progress on all of our nine sustainability objectives, defined in 2014, and are on track to meet or exceed them by the target date of end-2020 (see page 22). We reached our greenhouse gas emissions (GHG) target one year earlier in 2019, reducing emissions from our own operations by 41 percent from a 2013 baseline. And our total injury frequency rate (TIFR) for 2019 was significantly lower than the target. On integrity, we strengthened our internal control framework and continued to ensure compliance with all regulatory and financial reporting requirements.
In today's competitive and fast-growing digital world, growth depends on getting closer to our customers. The more we understand their businesses and operations, the better we are able to help them take advantage of new technologies and to partner with them for long-term mutual success.
A key goal of our transformation has been to create a simpler, more agile and externally focused ABB to better serve our customers. By empowering our four Businesses with full
operational responsibility for all functions and territories, we have given them the freedom to serve their markets and customers to the best of their ability.
A key achievement of the past year has been to develop our global account management organization to strengthen our relationship with key customers and support us in gaining market share and securing large projects. Within the new organization, each Business is responsible for defined key accounts and works closely with the customers concerned to ensure that we deliver the best possible customer experience through the entire lifecycle. As we develop this customer-centric approach, we will apply best practices across the Businesses with the express aim of becoming the no. 1 choice for industrial customers.
More than anything else, our strength at ABB is rooted in our people. We need to ensure, therefore, that they are empowered and motivated to perform their best, and that ABB continues to attract and retain the best talent globally. In 2019, my priority as CEO was to initiate a dialogue with employees that would foster a culture of openness and collaboration, which in turn would allow us to harness the collective creativity and experience of our talented global team.
To enable this culture, we started with CEO webcasts for employees, followed by a global employee engagement survey and the launch of a new internal social channel in which everyone in ABB, from executives to production employees, has the opportunity to share their views, best practices and ideas for improvement. Our survey showed high levels of engagement among ABB employees and that people take pride in working for ABB. There was also a clear message that employees want a better understanding of where the company is heading.
Today, I feel confident that we have established an ongoing dialogue across the company and that our senior leaders understand how people feel about working at ABB. Moreover, we are moving to a culture of greater collaboration where decisions and ideas are heard and acted upon on the basis of merit rather than on someone's position in the organizational hierarchy. We are not there yet, but I am confident that we are moving in the right direction.
Going forward, we will continue to provide our employees with attractive opportunities for personal and professional development, and to encourage inclusion, diversity and well-being in the workplace, as we foster an environment in which people have the confidence and are encouraged to take risks and aim at delivering results for a sustainable high performance.
Alongside people, our other great strength at ABB continues to be our technology and our capacity for innovation. Today, thanks to our talented teams and our position at the center of an innovation ecosystem consisting of other leading global companies, as well as universities and startups, we are actively supporting the digital transformation of industries in all markets in which we operate.
In 2019, we launched several groundbreaking technologies that will strengthen our leadership in key markets and segments and which you can read more about in our business chapters starting on page 12. Here, I would like to highlight NeoGear, the first major innovation in low-voltage switchgear since the 1980s. NeoGear solves many of the issues encountered with current technologies, namely busbar contact failures and human errors that can result in serious injuries. It allows for up to 25 percent space savings and can cut energy losses by up to 20 percent, further contributing to sustainability. Also, with ABB Ability™ connectivity, NeoGear enables digital condition monitoring that can reduce operating costs by up to 30 percent.
In 2019, we also reaffirmed our technology leadership in industrial robotics with the opening of our first research facility on the campus of the Texas Medical Center in Houston. The team in the new center will work with medical staff to develop non-surgical, medical robotics systems, with applications including logistics and next-generation automated laboratory technologies. By using robots to automate repetitive and low-value tasks, such as preparing slides and loading centrifuges, we should be able to free medical professionals to focus on higher-skilled work and ultimately to help more people receive treatment.
One of our key priorities is of course to generate long-term returns for our shareholders. In 2019, we demonstrated that, in the face of tough market conditions and a wide-ranging internal transformation, we were able to deliver top-line growth.
Going forward, we will drive continuous improvement across our Businesses and business lines, with the aim of achieving an improved financial performance in 2020 and beyond. Overall, our approach will be to set ambitious yet realistic targets for growth, profit, return on capital and free cash flow, and we will hold ourselves fully accountable for results.
In the face of tough market conditions and a wide-ranging transformation, we delivered top-line growth.
Having completed our organizational transformation, our focus in 2020 will be on our operations: we will strive to deliver a competitive performance in an uncertain environment and to close the Power Grids transaction with Hitachi on schedule while ensuring full business continuity.
I have been proud to lead this great company through the first phase of its transformation as CEO. I am delighted to welcome Björn Rosengren as our new CEO and to hand over the helm to him as of March 1, 2020. I feel confident that Björn is taking over an excellent team and a company that is primed for success. I am equally confident that, under his leadership, ABB will continue to go from strength to strength in the years ahead.
On behalf of the Board of Directors and the Executive Committee, I would like to thank you, our shareholders, for your trust and support during my time as CEO, and to thank our employees for their tremendous efforts and achievements in what has been an extremely challenging year. We truly have a world-class team.
I look forward to working with Björn and the entire ABB team in 2020 as we continue to develop our company to drive the digital transformation of industries.
Sincerely,
Peter Voser Chairman and CEO
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In our rapidly changing world, the electrification market is increasingly driven by the demands of urbanization and digitalization, and more voices are calling for solutions to address climate change. With expanding consumer energy demands and increasingly complex transport networks, the need for safe, smart and sustainable electrification has never been greater.
The global electrification market is expected to grow 3 percent annually to \$200 billion by 2025. ABB's Electrification Business is positioned to meet that demand, providing products, services and solutions throughout the electrical value chain. From the substation to the point of consumption, Electrification serves customers across a wide range of sectors, including buildings, data centers, rail, wind and solar, power distribution, food and beverage, marine, oil and gas, and e-mobility.
Disruptions will continue to transform our customers' expectations and the key end markets we serve, affecting how our customers buy and the way our channel partners sell. With our fast-growing portfolio of connected, digitally enabled solutions, the Electrification Business is ready to meet these challenges and help our customers adapt and thrive in this complex environment.
For more than 130 years, we have provided innovative electrification technologies, giving customers impactful, value-generating solutions, from the earliest electric streetcars to the Internet of Things and the artificially intelligent applications of today.
Electrification had approximately 53,000 employees at the end of 2019, and generated \$12.7 billion of revenue for the year, with innovations that enable a safer and more reliable electricity flow.
In 2019, Electrification offered a full range of low-voltage and medium-voltage products across five market-leading business lines:
• Smart Power: low-voltage breakers and switches, motor and power protection, and electric vehicle charging infrastructure and services
Electrification delivers its solutions to customers through a global network of channel partners and end-customers. Most of its revenue is derived from sales through distributors, original equipment manufacturers (OEMs), engineering, procurement and construction contracting companies, system integrators, utilities and panel builders, with some direct sales to end-users (utilities, customers in industry, transport and infrastructure) and to other ABB Businesses.
"We are well positioned to meet the growing global demands from industries, public services and communities for low-carbon solutions. We continuously strive to push the boundaries of technology to create innovative solutions, and to bring safer, smarter and more sustainable electrification for our customers and end consumers alike."
All of the solutions provided by the Business are developed with the pressing, long-term needs of society in mind. Electrification's portfolio helps solve the challenges presented by rising energy demand, climate change and pollution, as well as urban congestion and changing lifestyles. The Business is a leader in e-mobility systems, data center technologies, smart buildings and renewable energy systems, among many other technologies that are changing the world.
In the past year, the Electrification Business was recognized with several awards for its advanced offerings. The ABB Ability™ Electrical Distribution Control System was named "most valuable solution of the year." We received two Red Dot awards for outstanding design for the ABB-tacteo® sensor and ABB i-bus® KNX PEONIA® sensor. And Electrification's Chief Technology Officer Amina Hamidi was presented with the Chief Technology Officer of the Year Europe 2019 award by Orgalim, the association representing Europe's technology industries, in recognition of her leadership in driving European growth and prosperity through technology and innovation.
ABB NeoGear™, launched in June, is the most important innovation in low-voltage switchgear in more than 40 years. By applying laminated bus plate technology to conventional switchgear, NeoGear achieves a 92 percent reduction in busbar parts, space savings of up to 25 percent, up to 20 percent less energy loss, and up to a 30 percent reduction in operational cost. The design enables faster assembly, lower maintenance and increased lifetime.
Tru-Break™, a switchgear module launched in September, is a revolutionary design for medium-voltage switchgear with solid dielectric technology. Designed to provide an added level of safety allowing linemen to visually verify the system has been disconnected. Its unique design is completely modular and retrofittable, allowing it to be added on existing switchgears.
The Tmax XT range sets a new benchmark for Moulded Case Circuit Breakers, with its connectivity, intuitive design, fast installation and upgradeability via the ABB Marketplace. This cutting-edge platform technology shares the same logics, interfaces and features across the complete range.
ABB's solid-state circuit breaker makes electrical distribution systems more reliable and efficient and drives down maintenance costs while meeting the durability demands of next-generation electrical grids. These breakers are 100 times faster and more durable than conventional breakers, resulting in 70 percent lower power losses, ensuring zero exposure to arc energy.
Integrating the ABB Ability™ Electrical Distribution Control System and the ABB M4M "made for measure" Network Analyzer has made it possible to monitor all makes of electric meters while optimizing power consumption. This solution is the first range of fully connected network analyzers available on the market.
Welcome IP, a fully IP-based door entry package, now offers extension packages for access control and CCTV integration.
The new ABB Zenith ATS portfolio combines Zenith technology from GEIS with ABB's best-in-class TruONE automatic transfer switch. Together they maximize system reliability and provide advanced data connectivity and communications capabilities, while making installation and commissioning safer, easier and less expensive.
ABB's scalable GYBND "Give Your Buildings a New Dimension" portfolio integrates advanced digital technologies to reduce energy and maintenance costs for buildings. This portfolio of digitally enabled, low-voltage devices can achieve cost savings of up to 30 percent by making reliable predictions of system performance and scheduling proactive maintenance, thereby eliminating downtime.
Since the acquisition of GEIS on June 30, 2018, ABB has completed almost one third of the integration. The addition of GEIS strengthens ABB's global position in electrification. Using a "best of both ABB and GEIS" approach, ABB has:
To date, 13,000 GEIS employees have been incorporated into ABB's organizational structure; product integrations and substitutions are ahead of schedule; consolidations and divestitures have been announced; and four facility expansions are under way as part of ABB's growth investment in North America.
As of 2020, Industrial Solutions has been fully integrated into Electrification's four comprehensive business lines: Smart Power, Smart Buildings, Distribution Solutions and Installation Products.
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Industry 4.0 and the industrial internet of things have arrived; process and hybrid industries are leveraging the latest wave of automation technologies in order to remain competitive in the global marketplace. Driven by the growth of developing economies, by the need for better energy efficiency and true sustainability, and by calls for a higher level of workplace safety and product quality, safe and smart operations are of growing importance in operations worldwide.
This shift toward advanced production solutions has been forecasted to expand the market for industrial automation technologies by around 3 percent annually over the next several years. Today's total addressable market for these solutions amounts to \$100 billion and will rise to about \$115 billion by 2025.
ABB's Industrial Automation Business offers its customers in the process and hybrid industries the advantages of global execution and local proximity while serving them with a wide range of integrated automation, electrification and digitalization solutions. These cover production processes, electrical and motion requirements, measurement and analytics, as well as marine and turbocharging solutions. The Business generates value for its customers with its leading technologies, broad digital capabilities, deep industry expertise, extensive global footprint and the largest distributed control system installed base in the industry.
The global no. 2 player in the market, ABB's Industrial Automation Business is actively and continuously engaged with its customers throughout the asset lifecycle. Industrial Automation's portfolio of products, systems and services ranges from field devices through integration of industrial processes, assets and information to complete lifecycle management and Industry 4.0 solutions. Industrial Automation Collaborative Operations currently generates the highest organic business growth of any of ABB's digital solutions, connecting people with data to optimize performance, improve safety and reliability,
enhance efficiency and minimize environmental impacts from project startup through a plant's entire lifecycle.
Industrial Automation had approximately 22,300 employees at the end of 2019, and generated \$6.3 billion of revenue in 2019. From design and engineering, to complete project management and advanced services, the Business creates value for customers through its deep domain knowledge. Solutions include turnkey engineering, control systems, and integrated safety technology, measurement products, lifecycle services, and industry-specific products, such as electric propulsion for ships, mine hoists, turbochargers and pulp and paper quality control equipment. Industrial Automation's systems can link processes and information flows to allow customers to manage their manufacturing and business processes on the basis of real-time information.
"At the heart of our Business, we help our customers reduce their capital cost, project schedule and risk, and increase the safety, productivity and environmental sustainability of their operations, through our innovative and integrated automation, electrification and digitalization solutions and services."
Peter Terwiesch, President, Industrial Automation
Industrial Automation offers its products and services either separately or as part of an integrated automation, electrification instrumentation solution. In the latter case, these solutions integrate products from ABB's Electrification, Motion, Robotics & Discrete Automation and Power Grids Businesses. Industrial Automation offers and delivers its technologies, products, solutions and services primarily through its own sales force as well as through third-party channel partners.
Like ABB's other Businesses, Industrial Automation is proud to contribute to society by enabling the ongoing energy transition and reductions in emissions and environmental impact with automation, integration and digital technologies that are driving energy efficiency, renewables integration and electrification.
ABB Collaborative Operations connects customers' production facilities and management sites with ABB's Internet-of-Things applications and expertise. Asset and operational information is collected and analyzed 24/7 at ABB's Collaborative Operations Centers to identify, categorize and prioritize actions. Clients can connect with ABB experts anytime, anywhere, to make the very best data-driven decisions. Collaborative Operations solutions are being deployed by enterprises in a wide range of industries to improve asset availability, operational efficiency and increase profits.
A gold medal winner in the German Innovation Awards and a Hermes Award Finalist, ABB's non-invasive temperature sensor is the first temperature sensor of its kind, signaling a new era in temperature measurement. It provides a simple, non-invasive means of measuring the temperature of an industrial process without sacrificing the accuracy and responsiveness of conventional invasive sensors. Eliminating the risk of leakage, it significantly enhances the safety of people, plants and the environment. Moreover, customers can save up to 75 percent in engineering and installation costs as it takes away the need for inspections and has no impact on the process being measured.
In May 2019, ABB opened a CO₂-neutral and energy self-sufficient factory in Lüdenscheid, Germany, powered by a solar plant that will deliver approximately 1,100 MWh of electricity per year. The facility uses the OPTIMAX® scalable energy management system to manage 100 percent of its power requirements, reducing carbon emissions by 630 tons per year.
Following the completion of a 3,000-hour shallow water test, in 2019 ABB's pioneering subsea power distribution and conversion technology system signals a new era for offshore oil and gas production. For the first time worldwide, energy companies will be able to access a reliable supply of up to 100 MW of electricity, over distances up
to 600 km and down to 3,000 m underwater, at pressures that could shatter a brick. A single cable that requires little or no maintenance for up to 30 years, this solution makes oil and gas production feasible in distant and deep ocean environments. Remotely operated and increasingly autonomous subsea facilities powered by lower carbon energy are likely to become a reality in the near future, using Industrial Automation technology that enables cleaner, safer and more sustainable production.
The ABB Ability™ drone-mounted mobile gas leak detection system improves the safety of gas distribution infrastructure, better safeguarding the environment and protecting company assets and revenue. Leaks in gas distribution and transmission pipelines present serious safety risks and result in lost revenue and profits. The ABB Ability™ mobile gas leak detection system is a digital solution that, for the first time, enables the deployment of drones to identify gas leakages. Compared to other leak detection systems, Industrial Automation's solution enables the faster identification of leaks, requires less time to implement and costs less to operate, as it can cover a broad swath of difficult-to-reach areas.
At the end of 2018, ABB took an important step towards the development of more autonomous shipping systems with a groundbreaking remote control trial of a passenger ferry, piloted by a captain on shore. The trial, in Helsinki harbor, showed that as vessels become more electric, digital and connected, ABB is able to equip seafarers with solutions that augment their skillsets and enhance the overall safety of marine operations.
Since its launch in 1990, Azipod® electric propulsion has become the industry standard for a wide range of vessel segments ranging from smaller crafts to icebreakers capable of independently operating in the harshest conditions. In response to customer requests, ABB has filled the gap between the low and high-power range of Azipod® propulsors with the launch of a new series available in 7.5–14.5 MW. This new series allows ferry and roll-on/roll-off passenger (RoPax) operators to improve operational efficiency and reduce emissions. In addition to ferry and RoPax vessels, this new power range will also have applications for larger offshore construction vessels, midsize cruise ships and shuttle tankers.
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The process of turning electricity into motion plays a significant role in the lives of people everywhere. All over the world, hundreds of millions of electric motors and drives power pumps, fans, elevators, escalators, trains on which our industries, homes and infrastructure depend.
As market and technology leader in electric motors, generators, drives and power transmission solutions, ABB's Motion Business is forecasted to grow by ~3 percent annually over the next several years. At present, the total addressable market for these technologies is \$80 billion.
Building on over 130 years of experience, our deep domain expertise and comprehensive offering allow us to deliver optimum motion solutions for a wide range of applications in all industrial segments. Using digital connectivity and advanced data analytics, we are helping our customers improve the uptime, speed and yield of their operations. We partner with our customers through the entire project lifecycle, from design to deployment and operation. In this way, we can offer the best possible customer experience and support.
At the end of 2019, Motion had approximately 20,400 employees globally. The Business generated \$6.5 billion in revenue for the year. Key products and solutions include high-efficiency electric motors, synchronous motors, low- and high-voltage induction motors, low- and medium-voltage drives and drive systems, and digital asset management solutions that monitor the performance of and provide data on critical operating parameters. Services offered include design and project management, engineering, installation, training and lifecycle care, energy-efficiency appraisals, preventive maintenance and digital services such as remote monitoring and software tools.
Like ABB's other Businesses, Motion is proud to contribute to society by enabling the ongoing energy transition and major reductions in emissions and environmental impacts. The Motion Business is driving the low-carbon future for industries, cities and infrastructure, enabled by energy efficiency and emission-free energy production for the benefit of our customers and the world.
"Motion has the scale and coverage to support our customers and partners around the world with intelligent motion solutions. Through our domain expertise and comprehensive offering, we are enabling the highest possible level of energy efficiency – benefiting both our customers' bottom lines and the environment."
Below are some of the key solutions that are helping Motion to maintain and advance its market and technology leadership:
The ABB Ability™ Digital Powertrain is a suite of digital solutions including devices, software and services. Suitable for applications in the process industries, discrete manufacturing and infrastructure, the Digital Powertrain connects drives, motors, pumps and bearings to take uptime and productivity to new heights. The data insights gained from the powertrain allow customers to be better connected to their assets and make better decisions, ensuring safe, reliable and efficient operations. Through its integrated, one-stop portal, the ABB Ability™ Digital Powertrain lets users view a comprehensive range of operational variables and asset health indicators.
The ABB Ability™ Smart Sensor converts traditional motors, pumps and mounted bearings into wireless smart devices. It measures key parameters from the surface of the equipment, which can then be used to gain meaningful information on the condition and performance of the equipment; this data enables users to rapidly identify inefficiencies in their systems and to reduce risks related to operation and maintenance. By scheduling maintenance activities according to actual needs rather than generic timetables, operators
can extend the lifetime of their equipment, cut maintenance costs and reduce or prevent unplanned downtime from breakdowns.
ABB's new IEC Food Safe stainless steel motors for food and beverage plants can withstand high-pressure cleaning and maintain hygiene standards while reducing downtime. With smooth stainless-steel enclosures that are designed for applications that require frequent cleaning and sanitization, Motion's full range of IEC Food Safe motors have earned the IP69 water-protection rating. The encapsulated winding enables the motors to last much longer than general-purpose products in tough wash-down conditions.
ABB is pilot-testing the world's first industrial artificial intelligence (AI) application using 5G wireless technology to support the assembly of drives at its plant in Helsinki, Finland. The solution is being implemented in partnership with mobile phone operator Telia and software engineering firm Atostek Oy, which specializes in industrial applications. The use of AI supports the plant's workers by monitoring the assembly of the drives by camera and ensuring they are assembled correctly according to the customer order and applicable work instructions. The fast 5G connection provides workers with real-time feedback. By providing an easier alternative to following work instructions from a paper document, this AI application improves the quality of the facility's output.
The ABB Order Tracking Tool for drives, motors and generators provides customers with real-time information throughout the ordering process. Today, it is considered a must for any modern business-to-consumer online store to provide its customers with continuous information on the ordering process. Our business-to-business customers expect and deserve the same level of transparency for their orders.
As companies in every industrial sector transition to advanced, energy-efficient technologies and the digital solutions required to maximize their return on investment, the Motion Business is their partner of choice.
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Around the world, ongoing advances in digitalization in manufacturing have the potential to create enormous benefits. Digitalization improves the quality of goods produced and provides our customers with the flexibility they need to shift from mass production to mass customization. It leads to new business models, including in services, and reduces risk. It enables networked and learning-capable systems.
At ABB, digital innovation is part of our DNA. It was ABB that introduced the first commercial, microprocessor-controlled industrial robot in 1974. Since then, more than 400,000 ABB robots used in industries throughout the world have decisively changed manufacturing processes.
The acquisition of B&R (Bernecker + Rainer Industrie-Elektronik GmbH) in 2017 made us equally strong in the field of machine and factory automation, providing customers in virtually every industry with complete solutions for automation, motion control, human-machine interfaces, flexible transportation systems and integrated safety technology. With good reason, we can say that ABB's Robotics & Discrete Automation Business is at the forefront of the ongoing revolution in automation.
The Robotics & Discrete Automation Business combines ABB's machine and factory automation solutions with a comprehensive robotics solutions and applications suite. In its overall market segment, the Business is no. 2 globally and no. 1 in growth. In robotics, it is no. 2 globally and occupies the no. 1 position in the important Chinese market.
In 2019, Robotics & Discrete Automation generated \$3.3 billion in revenue. The Business had approximately 10,100 employees at the end of the year. The total addressable market for the Business was estimated at \$75 billion in 2019.
Robotics & Discrete Automation offers a wide range of automation products, solutions and services such as industrial robots, software, programmable logical controllers, industrial PCs, servo motion control, track systems, software, application solutions, engineered solutions and related services. This offering provides flexibility and productivity for operations to meet the challenge of making smaller lots of a larger number of specific products in shorter cycles for today's dynamic global markets, while also improving quality, productivity and reliability.
Robots are also used in activities or environments which may be hazardous to employee health and safety, such as repetitive or strenuous lifting, dusty, hot or cold rooms, or painting booths. In the automotive industry, robot products and systems are used in areas such as press shop, body shop, paint shop, power train assembly, trim and final assembly.
"In addition to the trend towards individualized production, product cycles are getting shorter. New technologies not only make it possible to customize production for individual consumers, but they mean you can manufacture goods more efficiently and improve the quality of our processes and products – all at the same time."
Robotics solutions are used in a wide range of segments from metal fabrication, foundry, plastics, food and beverage, chemicals and pharmaceuticals, electronics and warehouse/ logistics center automation. Typical robotic applications include welding, material handling, machine tending, painting, picking, packing, palletizing and small parts assembly automation.
Machine automation solutions are mainly used by machine builders for all types of machines, e.g. for plastics, metals, printing, packaging. The portfolio also includes software for engineering, simulation, commissioning, diagnostics and service. Sales are made both through direct sales forces and through third-party channel partners, such system integrators and machine builders. The proportion of direct sales compared to channel partner sales varies across different industries, product technologies and geographic markets.
In September, ABB broke ground on a new robotics manufacturing and research facility in China, the world's largest robotics market. The 67,000 square meter facility in Kangqiao, near Shanghai, is expected to open in the second half of 2021 and represents a total investment of \$50 million. This investment will significantly expand the innovation and production capacity of the Robotics & Discrete Automation Business deploying the latest manufacturing processes, including machine learning and collaborative solutions. It will be the most advanced, automated and flexible factory in the robotics industry worldwide and will also host an onsite research and development center. The center will serve as an open innovation hub where ABB closely collaborates with its customers to co-develop automation solutions that are tailored to their individual needs.
In October, ABB opened its first healthcare hub on the campus of the Texas Medical Center in Houston. The research facility will introduce the use of collaborative robots in medical laboratories. The team there is working with medical staff to develop non-surgical, medical robotics systems, with applications including logistics and next-generation automated laboratory technologies. Using robots to automate repetitive and low-value tasks, such as preparing slides and loading centrifuges, should enable medical professionals to focus on higher-skilled work, and ultimately help more people receive treatment.
A dual-arm YuMi® collaborative robot was used in September to showcase how digital solutions can address the challenge of recycling in China. ABB's AI waste separation prototype is a neural network of robots, computers and sensors that can classify and sort waste in the same way that a human brain does. Combining a vision system, artificial intelligence and machine learning with YuMi® and an IRB 1200 material-handling robot, a cloud-based dashboard presents images of waste to the YuMi® robot which learns the type of waste and sorts it into four categories. The trash is then moved down a conveyor belt where the IRB 1200 robot collects the different types for recycling.
Over the years, the Robotics & Discrete Automation Business has closely collaborated with customers to determine their specific needs. In doing so, it has adapted along with modern industry, developing sophisticated systems that are increasingly able to draw their own conclusions from all available data and then make autonomous operational decisions.
With Robotics & Discrete Automation solutions, digitalization and the transition from automatic to autonomous systems are changing the face of manufacturing. They are laying the ground for the factory of the future, which will be fully digital, with robots working beside humans. Human experts and artificial intelligence applications will collaborate on analyzing and evaluating enormous volumes of data to provide comprehensive physical and digital automation solutions enabling increased manufacturing productivity, efficiency and quality across the globe.
Sustainability, like innovation, is in the DNA of ABB. Our current sustainability framework, adopted in 2013, addresses leading technology, responsible operations and responsible relationships. It clearly articulates how ABB creates value across a wide range of stakeholder issues.
Seven years later, the climate crisis has put the world under greater pressure than ever to develop and implement sustainable solutions on a much larger scale. Sustainability will remain at the center of our activities and our value proposition. ABB is already recognized as a leading contributor to a sustainable world, but we can do more.
According to a report from the Business and Sustainable Development Commission (January 2017), key areas of activity for ABB – including smart building solutions, urban infrastructure, clean energy, energy efficiency and mobility systems – are projected to generate market opportunities valued at more than US\$5 trillion by 2030. ABB's business offering and sustainable practices help us capitalize on these opportunities, improving safety and efficiency while reducing social and environmental impacts, for the benefit of our customers, employees and other stakeholders.
In 2019, ABB underwent an extensive organizational transformation, involving the planned divestment of the Power Grids Business and the simplification of our structure and business model. This represents a fitting juncture at which to develop new targets and measures for our Group's approach to sustainability. To this end, we have launched a stakeholder engagement survey on the subject of sustainability, which will deliver its results in the first half of 2020. We are also working on defining science-based targets for greenhouse gas emissions. Once these
projects are complete, we will announce our new, post-2020 ambitions and sustainability strategy in the second half of this year.
ABB currently uses 11 measures to quantify its progress toward nine sustainability objectives, which were defined in 2014.
The objectives are grouped into three key areas:
Each of the nine objectives is linked to ABB's "license to operate" and its business success, and all contribute directly or indirectly to the 17 UN Sustainable Development Goals. Out of the 17 goals, we identified seven SDGs where ABB can make the most difference, either through our technology and solutions or through our high standards concerning integrity, ethical business practices and community engagement. We made good progress on our 11 measures in 2019 and remain on track to meet our targets by the end of 2020.
We reached our GHG target one year earlier than targeted in 2019, reducing emissions from our own operations by 41% from the 2013 baseline. And the total injury frequency rate for 2019 was significantly lower than the <0.7 target.
The 2019 Sustainability Report will be available from March 13, 2020, on: http://www. sustainabilityreport2019.abb.com Until then, visit our website: abb.com/sustainability
Reduction in GHG emissions (Scope 1&2) in 2019, compared to 2013 baseline 41% 0.47
Total injury frequency rate (TIFR) in 2019 (goal: <0.7)
— ABB commenced its transformation program to deliver a focused, agile and simplified business model and organizational structure:
ABB strengthened and expanded its digital leadership:
Key performance indicators:
—
—
The Board of Directors is proposing a CHF 0.80 dividend per share at the 2020 Annual General Meeting.
(1) Management estimate for full-year 2019, includes ABB Ability™ solutions, software and related services, digitally enabled products.
—
—
| \$ in millions, unless otherwise indicated | FY 2019 | FY 2018 | US\$ | Comparable(4) |
|---|---|---|---|---|
| Orders | 28,588 | 28,590 | 0% | +1% |
| Order backlog (end December) | 13,324 | 13,084 | +2% | +5% |
| Revenues | 27,978 | 27,662 | +1% | +1% |
| Income from operations | 1,938 | 2,226 | −13% | |
| Operational EBITA(1) | 3,107 | 3,005 | +3% | +7%(5) |
| as % of operational revenues | 11.1% | 10.9% | +0.2 pts | |
| Income from continuing operations, net of tax | 1,090 | 1,575 | −31% | |
| Net income attributable to ABB | 1,439 | 2,173 | −34% | |
| Basic Earnings per share (\$) | 0.67 | 1.02 | −34%(2) | |
| Operational Earnings per share (\$)(1) | 1.24 | 1.33 | −7%(2) | −7%(2) |
| Dividend per share | 0.80 | 0.80 | ||
| Cash flow from operating activities(3) | 2,325 | 2,924 | −20% | |
| Net debt (end December) | 4,949 | 4,461 |
Motion \$6.533 bn Industrial Automation \$6.273 bn Robotics & Discrete Automation \$3.314 bn
Revenues 2019 by Business(6)
Europe \$10.004 bn Americas \$8.919 bn AMEA \$8.842 bn
Revenues 2019 by region(6)
(6) Figures derived from ABB's consolidated financial statements prepared in accordance with US GAAP, and exclude sales to other segments.
global no. 2
• The Business offers low and medium voltage, buildings and infrastructure electrification solutions. Typical customers include electrical distributors, panel-builders and engineering, procurement and construction (EPCs).
—
—
• The Business specializes in process control, measurement and analytics and other industry specific solutions. Customers are concentrated in process industries.
— Key performance indicators
for full-year 2019:
Key performance indicators for full-year 2019:
Operational EBITA margin(2) 11.7%, impacted by project revaluation in South Africa
(1) On a comparable basis, see the "Supplemental information" section of this annual report.
global no. 1
• The business designs and manufactures electrical motors, generators, drives, and services, as well as offering integrated digital powertrain solutions.
Key performance indicators for full-year 2019:
—
—
Key performance indicators for full-year 2019:
Americas \$2.315 bn Europe \$1.879 bn AMEA \$1.827 bn
Revenues 2019 by region(3)
The Board of Directors is proposing a CHF 0.80 dividend per share at the 2020 Annual General Meeting.
—
(1) For non-GAAP measures, see the "Supplemental information" section of this annual report.
(2) Management estimate.
(3) Proposed.
—
—
ABB invested \$762 million in capex(1), primarily for maintenance and including investments to improve performance at former GEIS manufacturing facilities.
Non-order related R&D investment including digital expenses reached \$1.3 billion in 2019 or approximately 4.5 percent of revenues for the year.
The Group has introduced a new benchmark for the measurement of returns: return on capital employed (ROCE), which it will report henceforth(2). The Group's ROCE was 12.0 percent, reflecting stranded costs and acquisitions in prior years including GEIS and B&R.
Following the expected completion of the sale of 80.1 percent of our Power Grids business to Hitachi at the end of the second quarter of 2020, valuing the business at \$11 billion, ABB intends to return the net cash proceeds from the divestment to shareholders.
ABB intends to maintain the dividend level per share after the closing of the PG transaction and aims to maintain its "single A" credit rating in the long term.
2016–2019 USD BN
(1) Continuing operations only: A further \$167 million capex investment was made in discontinued operations.
(2) See the "Supplemental information" section of this annual report for definition.
(3) Continuing operations only.
PETER TERWIESCH President Industrial Automation Business
SYLVIA HILL Chief Human Resources Officer
30 ABB ANNUAL REPORT 2019 01 Introduction
TARAK MEHTA President Electrification Business
PETER VOSER Chairman of the Board Chief Executive Officer
SAMI ATIYA President Robotics & Discrete Automation Business
TIMO IHAMUOTILA Chief Financial Officer
MARIA VARSELLONA General Counsel
MORTEN WIEROD President Motion Business
ABB ANNUAL REPORT 2019 01 Introduction 31
DIANE DE SAINT VICTOR Company Secretary
CLAUDIO FACCHIN President Power Grids business
— 32–55
| — 34 |
Chairman's letter |
|---|---|
| — 36 |
Summary of corporate governance approach |
| — 36 |
Board of Directors |
| — 42 |
Executive Committee |
| — 44 |
Shares |
| — 48 |
Shareholders |
| — 51 |
Independent external auditors |
| — 52 |
Other governance information |
The year 2019 was one of wide-ranging change across ABB, with the result that today our company is fundamentally different to the ABB of one year ago. We have a new Chief Executive Officer (CEO), a smaller and streamlined Executive Committee (EC), and a simplified business model and organization. The Board of Directors has driven these changes to better position our company competitively in markets where we can grow our business and deliver sustainable results over the long term.
Our decision to divest our Power Grids business to Hitachi, announced in December 2018, opened up an opportunity to simplify our structure, reorganize our businesses and more closely match the way our customers operate. From our previous corporate-led organization, which was divided into divisions, functions and regions, we streamlined our company into four vertically integrated Businesses and a lean corporate center, which is today less than 10 percent of the size it was a year ago. Power Grids has been carved out as a separate business, and is now operating as a largely independent, standalone company in preparation for the handover to Hitachi.
In agreement with the Board of Directors, I took over from Ulrich Spiesshofer as CEO on April 17, 2019, with the clear understanding that the Board of Directors' Governance and Nomination Committee would seek a candidate with the right skills and qualities to lead ABB into the future. Among the key criteria for the role were: strategic industry leadership through technology, people and strategic thinking, and competitive operational performance drive. We were also looking for a CEO who has experience running a decentralized company and who is fully aligned with our leadership and culture model.
After a thorough selection process, in which both internal and external candidates were considered, the Board of Directors unanimously appointed Björn Rosengren as CEO, effective March 1, 2020.
The transformation of our company into a simpler, leaner organization meant that we were able to streamline our EC from twelve members to eight. Today, alongside the CEO, we have four Business Presidents and three corporate officers on the EC.
The regional presidents' roles were discontinued during 2019. Power Grids President Claudio Facchin stepped down from the EC at the end of 2019. He is leading Power Grids as a standalone business, ahead of the closing of the divestment, expected at the end of the second quarter 2020.
As well as the structural changes on the EC, we appointed three new EC members in 2019. Morten Wierod was appointed President of our newly formed Motion Business, Sylvia Hill succeeded Jean-Christophe Deslarzes as Chief Human Resources Officer, and Maria Varsellona succeeded Diane de Saint Victor as General Counsel.
In its annual review process, the Board of Directors concluded that the composition of its members is aligned with the company's strategic needs, business portfolio, geographic reach and culture. As a result, the Board decided not to propose any changes to its membership for the upcoming term. The Board's priority now is to focus on implementing the strategic agenda with the new executive team.
Over the years, ABB has steadily increased the performance orientation of its compensation structure, with a special focus on variable compensation. For 2020, our focus has been revising our short-term incentive plan to achieve better alignment with the new ABB operating model and an enhanced focus on operational delivery.
The new Annual Incentive Plan is designed to encourage focus on a limited number of key Business or functional priorities. It has a common Group return measure to help create a greater focus on profitability and the efficiency with which capital is used, and it has an individual component which for all EC members includes safety performance.
With the change of CEO, we took the opportunity to review the compensation for the CEO position, with the result that the Compensation Committee has set the target total direct compensation for the new CEO nearly 22 percent lower than for the former CEO to more closely represent competitive market practice as it has evolved.
—
In the next stage of our transformation, we will further strengthen our company culture for sustainable high performance. To that end, we enhanced our dialogue with employees in 2019 through, among other means, an employee Engagement Survey, in which our people sent a clear message that they want a better understanding of where the company is heading. In response, we are asking employees and other stakeholder groups how they perceive our company and what they think ABB should aspire to in the future. From their input, we will craft an overarching purpose that will guide our direction, our thinking and our everyday actions. We have no preconceived ideas
about what our purpose should be, but we expect it to be at the core of our long-term business strategy and to include ABB's sustainability agenda. We will inform you about the outcome in next year's annual report.
On behalf on the Board of Directors, I would like to thank you for your trust and support.
Chairman of the Board of Directors
Zurich, February 25, 2020
ABB is committed to the highest international standards of corporate governance and this is reinforced in its structure, processes and rules as outlined in this section of the annual report. In line with this, ABB complies with the general principles as set forth in the Swiss Code of Best Practice for Corporate Governance, as well as those of the capital markets where its shares are listed and traded. In addition to the provisions of the Swiss Code of Obligations, ABB's key principles and rules on corporate governance are laid down in ABB's Articles of Incorporation, the ABB Ltd Board Regulations & Corporate Governance Guidelines (which includes the regulations of ABB's Board committees and the ABB Ltd Related Party Transaction Policy, which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange), and the ABB Code of Conduct and the Addendum to the ABB Code of Conduct for Members of the Board of Directors and the
Executive Committee (EC) (together, the "Code of Conduct"). These documents are available on ABB's website at https://new.abb.com/about/ corporate-governance. It is the duty of ABB's Board of Directors (the Board) to review and amend or propose amendments to those documents from time to time to reflect the most recent developments and practices, as well as to ensure compliance with applicable laws and regulations. Shareholders and other interested parties may communicate with the Chairman of the Board by writing to ABB Ltd (Attn: Chairman of the Board), at Affolternstrasse 44, CH-8050 Zurich, Switzerland.
Information about ABB's compensation governance and Board and EC compensation and shareholdings is provided in the compensation report that can be found on pages 58 to 82 of this annual report.
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The Board defines the ultimate direction of the business of ABB and issues the necessary instructions. It determines the organization of the ABB Group and appoints, removes and supervises the persons entrusted with the executive management and representation of ABB. The internal organizational structure and the definition of the areas of responsibility of the Board, as well as the information and control instruments vis-à-vis the Executive Committee are set forth in the ABB Ltd Board Regulations & Corporate Governance Guidelines (available at https://new.abb.com/ about/events/corporate-governance).
The Board takes decisions as a whole, supported by its three committees: the Finance, Audit and Compliance Committee (FACC), the Governance and Nomination Committee (GNC), and the Compensation Committee (CC). These committees assist the Board in its tasks and report regularly to the Board. The members of the Board committees either are required to be independent or are elected directly by the shareholders. The Board and its committees meet regularly throughout the year.
The directors and officers of a Swiss corporation are bound, as specified in the Swiss Code of Obligations, to perform their duties with all due care, to safeguard the interests of the corporation in good faith and to extend equal treatment to shareholders in like circumstances.
The Swiss Code of Obligations does not specify what standard of due care is required of the directors of a corporate board. However, it is generally held by Swiss legal scholars and jurisprudence that the directors must have the requisite capability and skill to fulfill their function, and must devote the necessary time to the discharge of their duties. Moreover, the directors must exercise all due care that a prudent and diligent director would have taken in like circumstances. Finally, the directors are required to take actions in the best interests of the corporation and may not take any actions that may be harmful to the corporation.
Although the Swiss Code of Obligations does not discuss specifically conflicts of interest for board members, the ABB Ltd Board Regulations & Corporate Governance Guidelines (available at https://new.abb.com/about/events/ corporate-governance) state that board members shall avoid entering into any situation in which their personal or financial interest may conflict with the interests of ABB.
The Chairman is elected by the shareholders to represent their interests in creating sustainable value through effective governance. In addition, the Chairman (1) takes provisional decisions on behalf of the Board on urgent matters where a regular Board decision cannot be obtained, (2) calls for Board meetings and sets the related agendas, (3) interacts with the CEO and other EC members on a more frequent basis outside of Board meetings and (4) represents the Board internally and in the public sphere.
The Vice-Chairman is elected by the Board and handles the responsibilities of the Chairman to the extent the Chairman is unable to do so or would have a conflict of interest in doing so. He also acts as counselor/advisor to the Chairman on any matters that are Company or Board relevant and as appropriate or as the Chairman may require and with a particular focus on strategic aspects related to the Company and its business in general. In addition, the Vice-Chairman takes such other actions as may be decided by the Board or requested by the Chairman.
The FACC is responsible for overseeing (1) the integrity of ABB's financial statements, (2) ABB's compliance with legal, tax and regulatory requirements, (3) the independent auditors' qualifications and independence, (4) the performance of ABB's internal audit function and external auditors, and (5) ABB's capital structure, funding requirements and financial risk and policies.
The FACC must comprise three or more independent directors who have a thorough understanding of finance and accounting. The Chairman of the Board and, upon invitation by the committee's chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. In addition, the chief integrity officer, the head of internal audit and the external auditors participate in the meetings as appropriate. The Board has determined that each member of the FACC is an audit committee financial expert as such term is defined in Form 20-F.
The GNC is responsible for (1) overseeing corporate governance practices within ABB, (2) overseeing corporate social responsibility (including health, safety and environment as well as sustainability), (3) nominating candidates for the Board, the role of CEO and other positions on the Executive Committee, and (4) succession planning and employment matters relating to the Board and
| Board Experience |
Corporate Officer Experience |
Other Business Experience | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Name | Tenure (years) ABB Board |
Board Experience Other Public |
CEO | CFO | Operations | Risk Management | Sustainability | Technology Digital / |
Global Experience | Country of Origin / Nationality |
Gender | Non-Executive | Independent |
| Peter R. Voser | 5 | CH | M | No | No | ||||||||
| Jacob Wallenberg | 21 | SE | M | Yes | Yes | ||||||||
| Matti Alahuhta | 6 | FI | M | Yes | Yes | ||||||||
| Gunnar Brock | 2 | SE | M | Yes | Yes | ||||||||
| David Constable | 5 | CA | M | Yes | Yes | ||||||||
| Frederico Fleury Curado | 4 | BR | M | Yes | Yes | ||||||||
| Lars Förberg | 3 | SE | M | Yes | Yes | ||||||||
| Jennifer Xin-Zhe Li | 2 | CN, CA | F | Yes | Yes | ||||||||
| Geraldine Matchett | 2 | UK, FR, CH | F | Yes | Yes | ||||||||
| David Meline | 4 | US, CH | M | Yes | Yes | ||||||||
| Satish Pai | 5 | IN | M | Yes | Yes |
the Executive Committee. The GNC is also responsible for maintaining an orientation program for new Board members and an ongoing education program for existing Board members.
The GNC must comprise three or more independent directors. The Chairman of the Board (unless he is already a member) and, upon invitation by the committee's chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained.
The CC is responsible for compensation matters relating to the Board and the Executive Committee.
The CC must comprise three or more directors who are elected by the shareholders. The Chairman of the Board and, upon invitation by the committee's chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained.
In proposing individuals to be elected to the Board, the Board seeks to align the composition and skills of the Board with the company's strategic needs, business portfolio, geographic reach and culture. The Board must be diverse in all aspects including gender, nationalities, geographic/ regional experience and business experience. In
addition, the average tenure of the members of the Board should be well-balanced. The Board also considers the number of other mandates of each Board member to ensure that he/she will have sufficient time to dedicate to his/her role as an ABB Board member.
The members of the Board of Directors and the Chairman of the Board as well as the members of the Compensation Committee are elected by shareholders at the general meeting of shareholders for a term of office extending until completion of the next ordinary general meeting of shareholders. Members whose terms of office have expired shall be immediately eligible for re-election. Our Articles of Incorporation (available at https://new.abb.com/about/events/ corporate-governance) do not provide for the retirement of directors based on their age. However, an age limit for members of the Board is set forth in the ABB Ltd Board Regulations & Corporate Governance Guidelines (although waivers are possible and subject to Board discretion) (available at https://new.abb.com/about/events/ corporate-governance). If the office of the Chairman of the Board of Directors or any position on the Compensation Committee becomes vacant during a Board term, the Board of Directors may appoint (shall appoint in the case of the Chairman of the Board) another individual from among its members to that position for the remainder of that term. The Board of Directors shall consist of no less than 7 and no more than 13 members.
Peter R. Voser has been a member and Chairman of ABB's Board of Directors since April 2015 and ABB's Chief Executive Officer since April 2019. He is a member of the board
of directors of IBM Corporation (U.S.). He is also a member of the board of directors of Temasek Holdings (Private) Limited (Singapore) as well as chairman of the board of PSA International Pte Ltd (Singapore), one of its subsidiaries. In addition, he is the chairman of the board of trustees of the St. Gallen Foundation for International Studies. He was previously the chief executive officer of Royal Dutch Shell plc (The Netherlands). Mr. Voser was born in 1958 and is a Swiss citizen.
Jacob Wallenberg has been a member of ABB's Board of Directors since June 1999 and Vice-Chairman since April 2015. He is the chairman of the board of Investor AB (Swe-
den). He is vice-chairman of the boards of Telefonaktiebolaget LM Ericsson, FAM AB and Patricia Industries (all Sweden). He is also a member of the boards of directors of Nasdaq, Inc. (U.S.) and the Knut and Alice Wallenberg Foundation (Sweden) as well as a member of the nomination committee of SAS AB (Sweden). Mr. Wallenberg was born in 1956 and is a Swedish citizen.
Matti Alahuhta has been a member of ABB's Board of Directors since April 2014. He is the chairman of the boards of Outotec Corporation and of DevCo Partners Oy (both
Finland). He is also a member of the boards of directors of KONE Corporation (Finland) and AB Volvo (Sweden). He was previously the president and chief executive officer of KONE Corporation and he served in several executive positions at Nokia Corporation (Finland). Mr. Alahuhta was born in 1952 and is a Finnish citizen.
Gunnar Brock has been a member of ABB's Board of Directors since March 2018. He is currently chairman of the boards of Slättö Invest AB, Mölnlycke Health Care AB and
Stena AB (all Sweden). He is a member of the boards of directors of Investor AB and Patricia Industries (both Sweden). He was formerly president and chief executive officer of Atlas Copco AB (Sweden). Mr. Brock was born in 1950 and is a Swedish citizen.
David Constable has been a member of ABB's Board of Directors since April 2015. He is a member of the boards of directors of Rio Tinto plc (U.K.), Rio Tinto Limited (Austra-
lia) and Fluor Corporation (U.S.). He was formerly the chief executive officer and president as well as a member of the board of directors of Sasol Limited (South Africa). He joined Sasol after more than 29 years with Fluor Corporation (U.S.). Mr. Constable was born in 1961 and is a Canadian citizen.
Frederico Fleury Curado has been a member of ABB's Board of Directors since April 2016. He is the chief executive officer of Ultrapar Participações S.A. (Brazil) and a member
of the board of directors of Transocean Ltd. (Switzerland). He was formerly the chief executive officer of Embraer S.A. (Brazil). Mr. Curado was born in 1961 and is a Brazilian citizen.
Lars Förberg has been a member of ABB's Board of Directors since April 2017. He is co-founder and managing partner of Cevian Capital. Mr. Förberg is the chairman of the
Human Practice Foundation (Denmark). Mr. Förberg was born in 1965 and is a Swedish citizen.
Jennifer Xin-Zhe Li has been a member of ABB's Board of Directors since March 2018. She is a member of the boards of directors of Philip Morris International Inc.
(U.S.), HSBC Asia (Hong Kong) and Flex Ltd (Singapore/U.S.). Ms. Li is a founder and general partner of Changcheng Investment Partners (P.R.C.) and was previously the chief executive officer (general managing partner) of Baidu Capital (P.R.C.). She formerly served as chief financial officer of Baidu Inc. (P.R.C.). Ms. Li was born in 1967 and is a Canadian citizen.
Geraldine Matchett has been a member of ABB's Board of Directors since March 2018. She is the co-chief executive officer (since February 2020), the chief financial
officer and a member of the managing board of Royal DSM N.V. (The Netherlands). She was previously chief financial officer of SGS Ltd (Switzerland). Prior to joining SGS she worked as an auditor at Deloitte Ltd (Switzerland) and KPMG LLP (U.K.). Ms. Matchett was born in 1972 and is a Swiss, British and French citizen.
David Meline has been a member of ABB's Board of Directors since April 2016. From 2014 through 2019, he was the chief financial officer of Amgen Inc. (U.S.). Mr. Meline was
formerly with the 3M Company (U.S.), where he served as chief financial officer. Prior to joining 3M, Mr. Meline worked for more than 20 years for General Motors Company (U.S.). Mr. Meline was born in 1957 and is a Swiss and U.S. citizen.
Satish Pai has been a member of ABB's Board of Directors since April 2016. He is the managing director and a member of the board of directors of Hindalco Industries Ltd.
(India). He joined Hindalco in 2013 after 28 years with Schlumberger Limited (U.S.). Mr. Pai was born in 1961 and is an Indian citizen.
As of December 31, 2019, none of the Board members held any official functions or political posts. Further information on ABB's Board members can be found by clicking on the ABB Board of Directors link (available at https://new.abb.com/about/ events/corporate-governance).
The Board and its committees have regularly scheduled meetings throughout the year. These meetings are supplemented by additional meetings (either in person or by conference call), as necessary. Board meetings are convened by the Chairman or upon request by any other board member or the CEO. Documentation covering the various items of the agenda for each Board meeting is sent out in advance to each Board member in order to allow each member time to study the covered matters prior to the meetings. Each board meeting has a private session without management or others being present. Decisions made at the Board meetings are recorded in written minutes of the meetings. Some decisions are also taken by circular resolution.
2019 was an intensive year for the Board and its committees. The table below shows the number of meetings held during 2019 by the Board and its committees, their average duration, as well as the attendance of the individual Board members. The Board meetings shown include a strategic retreat attended by the members of the Board and the EC.
No member of the Board may hold more than ten additional mandates of which no more than four may be in listed companies. Certain types of mandates, such as those in our subsidiaries, those in the same group of companies and those in non-profit and charitable institutions, are not subject to those limits. Additional details can be found in Article 38 of ABB's Articles of Incorporation (available at https://new.abb.com/about/ events/corporate-governance).
This section describes important business relationships between ABB and its Board members, or companies and organizations represented by them. This determination has been made based on ABB Ltd's Related Party Transaction Policy. This policy is contained in the ABB Ltd Board
| 2019 Board and Board Committee Meetings | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Pre annual general meeting 2019 | Post annual general meeting 2019 | |||||||||
| Board | Board | |||||||||
| Meetings and attendance | Mtg. | Conf. Call |
FACC | GNC | CC | Mtg. | Conf. Call |
FACC | GNC | CC |
| Average duration (hours) | 7 | 1 | 2.38 | 1.5 | 1.75 | 7 | 1 | 2.75 | 1.75 | 2 |
| Number of meetings | 2 | 3 | 6 | 2 | 4 | 5 | 1 | 4 | 3 | 3 |
| Meetings attended: | ||||||||||
| Peter R. Voser | 2 | 3 | 2 | 5 | 1 | |||||
| Jacob Wallenberg | 2 | 3 | 2 | 5 | 1 | 3 | ||||
| Matti Alahuhta | 2 | 3 | 2 | 5 | 1 | 3 | ||||
| Gunnar Brock | 2 | 3 | 6 | 5 | 1 | 4 | ||||
| David Constable | 2 | 3 | 4 | 5 | 1 | 3 | ||||
| Frederico Fleury Curado | 2 | 3 | 4 | 5 | 1 | 3 | ||||
| Lars Förberg | 2 | 3 | 2 | 5 | 1 | 3 | ||||
| Jennifer Xin-Zhe Li | 2 | 3 | 4 | 5 | 1 | 3 | ||||
| Geraldine Matchett | 2 | 3 | 6 | 5 | 1 | 4 | ||||
| David Meline | 2 | 3 | 6 | 5 | 1 | 4 | ||||
| Satish Pai | 2 | 3 | 6 | 5 | 1 | 4 |
Regulations & Corporate Governance Guidelines (available at https://new.abb.com/about/events/ corporate-governance).
Fluor Corporation (Fluor) is an important customer of ABB. ABB supplies Fluor mainly through its Industrial Automation, Electrification and Power Grids businesses. David Constable is a director of Fluor.
Rio Tinto, including Rio Tinto plc and Rio Tinto Limited, is an important customer of ABB. ABB supplies Rio Tinto mainly through its Industrial Automation and Power Grids businesses. David Constable is a director of Rio Tinto plc and Rio Tinto Limited.
IBM Corporation (IBM) is an important supplier to ABB. IBM supplies ABB primarily with IT related hardware, software and services. Peter Voser is a director of IBM.
After reviewing the level of ABB's business with Fluor and Rio Tinto and the level of purchases from IBM, the Board has determined that ABB's business relationships with those companies are not unusual in their nature or conditions and do not constitute material business relationships. As a result, the Board concluded that all members of the Board are considered to be independent directors, except for Peter Voser who was also CEO for most of 2019. This determination was made in accordance with ABB Ltd's Related Party Transaction Policy which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange.
Information from the Executive Committee In accordance with the ABB Board Regulations and Corporate Governance Guidelines (available at https://new.abb.com/about/events/ corporate-governance), the CEO reports regularly to the Board about ABB's overall business and when circumstances require on any extraordinary events that may arise. This includes
At each Board meeting, Board members are briefed by the Chairman, CEO, CFO and other EC members on ABB's business performance and on material developments affecting ABB. Outside of Board meetings, Board members generally channel any requests for information through the Chairman. Board members also obtain information through offsite retreats with the Executive Committee and visits to ABB sites. In addition, Board members obtain information through the Board committees in which they participate and which are also attended by relevant EC members and management representatives from human resources, finance, legal and the business.
ABB has an Internal Audit team that provides independent objective assurance and other services to help ensure that ABB operates in accordance with applicable laws as well as internal policies and procedures. Internal Audit reports to the FACC and to the CFO. The FACC reviews and approves the internal audit plan, and material changes to the plan. Investigations of potential fraud and inappropriate business conduct are an integral part of the internal audit process. Depending on circumstances Internal Audit may act together with ABB's Office of Special Investigations which is part of ABB's integrity function. Internal Audit reports on a regular basis its main observations and recommendations to the relevant members of the EC and to the FACC as appropriate.
ABB has an enterprise risk management program (ERM) in place which takes into account ABB's size and complexity. ERM provides the EC and the Board with a comprehensive and holistic view of the risks facing the business. ERM involves managing the acceptance of risk to achieve the objectives of the business. The ERM process is typically cyclical in nature, conveying the idea of continuous refinement of the risk management approach in a dynamic business environment. Furthermore, ABB runs a mitigation process for the identified risks that is key to the success of this process. ERM assessments are both top down and bottom up. They cover strategic, financial, and operational risks, both current and long term. Key risks identified and managed in 2019 were those related to the transformation of the group (both the elimination of the regional matrix and the shift of most corporate resources into the businesses) as well as the activities related to the separation, and the preparation for the sale, of the Power Grids business. ERM results are reported to the FACC and the entire Board. This information becomes part of the overall strategic and risk discussions by the Board to help create value for stakeholders.
| Peter R. Voser Chief Executive Officer |
|||||
|---|---|---|---|---|---|
| CORPORATE OFFICERS | BUSINESS PRESIDENTS | REGION PRESIDENTS | |||
| Timo Ihamuotila | Tarak Mehta | Frank Duggan | |||
| Chief Financial Officer | Electrification | Europe | |||
| Sylvia Hill | Peter Terwiesch | Chunyuan Gu | |||
| Chief Human Resources Officer | Industrial Automation | Asia, Middle East and Africa | |||
| Maria Varsellona | Morten Wierod | ||||
| General Counsel | Motion | ||||
| Sami Atiya Robotics & Discrete Automation |
|||||
| Claudio Facchin Power Grids |
The Board has delegated the executive management of ABB to the CEO. The CEO and, under his direction, the other members of the Executive Committee are responsible for ABB's overall business and affairs and day-to-day management. The CEO reports to the Board regularly, and whenever extraordinary circumstances so require, on the course of ABB's business and financial performance and on all organizational and personnel matters, transactions and other issues material to the Group. Each member of the Executive Committee is appointed and discharged by the Board.
Peter R. Voser was appointed Chief Executive Officer in April 2019 and is chairman of ABB's Board of Directors. Additional information can be found together with the other
members of the Board of Directors.
Timo Ihamuotila was appointed Chief Financial Officer and member of the Executive Committee in April 2017. He is a member of the board
of directors of SoftwareONE AG (Switzerland). From 2009 to 2016, Mr. Ihamuotila was chief financial officer and an executive vice president of the Nokia Corporation (Finland). From 1999 to 2009, he held various senior roles with Nokia. Mr. Ihamuotila was born in 1966 and is a Finnish citizen.
Sylvia Hill was appointed Chief Human Resources Officer and member of the Executive Committee effective June 2019. From 2014 until June 2019 she was ABB's Head of
Global HR Services and HR Transformation. From 2011 to 2014 Ms. Hill was the Head of HR for ABB's Discrete Automation division. During 2005 to 2010 she was the Head of HR and Organization Health & Safety for ABB in France and for part of that time she was also the Head of HR for the Mediterranean region. From 1993 through 2005 she held various HR roles with ABB. Ms. Hill was born in 1960 and is a German citizen.
Maria Varsellona was appointed General Counsel and member of the Executive Committee effective November 2019. She is a member of the board of directors of Nor-
dea Bank Abp (Finland). From 2014 to 2019 she was the Chief Legal Officer of Nokia Corporation and from 2018 to 2019 she was also the president of Nokia Technologies. From 2013 to 2014 she was the General Counsel of Nokia Siemens Networks. During the period from 2011 to 2013 Ms. Varsellona was the Group General Counsel of Tetra Pak and from 2009 to 2010 she was the
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Group General Counsel of Sidel, both part of the Tetra Leval Group. From 2001 to 2009 she held various senior legal roles mainly with GE Oil & Gas. Ms. Varsellona was born in 1970 and is an Italian citizen.
Tarak Mehta was appointed President of the Electrification Business effective April 2019 and has been a member of the Executive Committee since October 2010. He had pre-
viously been President of the Electrification Products division since January 2016. From October 2010 through December 2015, he was President of the Low Voltage Products division. From 2007 to 2010, he was Head of ABB's transformers business. Between 1998 and 2006, he held several management positions with ABB. Mr. Mehta was born in 1966 and is a U.S. citizen.
Peter Terwiesch was appointed President of the Industrial Automation Business (formerly the Industrial Automation division) effective January 2017 and has been a mem-
ber of the Executive Committee since January 2015. He is a member of the board of directors of Metall Zug AG (Switzerland). He was the President of the Process Automation division from 2015 to 2016. From 2011 to 2014, Mr. Terwiesch was Head of ABB's Central Europe region. He was ABB's Chief Technology Officer from 2005 to 2011. From 1994 to 2005, he held several positions with ABB. Mr. Terwiesch was born in 1966 and is a Swiss and German citizen.
Morten Wierod was appointed President of the Motion Business and member of the Executive Committee effective April 2019. From 2015 until April 2019 he was the
Managing Director of the drives business unit in the Robotics and Motion division. During 2011 to 2015, Mr. Wierod was the Managing Director of the control products business unit in the Low Voltage Products division. Between 1998 to 2011, Mr. Wierod held various management roles with ABB. Mr. Wierod was born in 1972 and is a Norwegian citizen.
Sami Atiya was appointed President of the Robotics & Discrete Automation Business effective April 2019 and has been a member of the Executive Committee since June
as chief executive officer of the mobility and logistics division in the infrastructure and cities sector from 2011. Mr. Atiya was born in 1964 and is a German citizen.
Claudio Facchin was appointed President of the Power Grids business (formerly the Power Grids division) effective January 2016 and has been a member of the Execu-
tive Committee since December 2013. From December 2013 through December 2015, he was President of the Power Systems division. From 2010 to 2013, Mr. Facchin was Head of ABB's North Asia region. From 2004 to 2009, Mr. Facchin was the Head of ABB's substations global business unit and from 1995 to 2004, he held various management roles with ABB. Mr. Facchin was born in 1965 and is an Italian citizen.
Frank Duggan was appointed President of the Europe region in July 2017 and has been a member of the Executive Committee since 2011. From 2015 to June 2017, Mr. Duggan
held the role of President of the Asia, Middle East and Africa region. Prior to this from 2011 to 2014, he was Head of Global Markets. From 2008 to 2014, he was also ABB's Region Manager for India, Middle East and Africa. Between 1986 and 2011, he held several management positions with ABB. Mr. Duggan was born in 1959 and is an Irish citizen.
Chunyuan Gu was appointed President of the Asia, Middle East and Africa region and a member of the Executive Committee in July 2017. In addition, Mr. Gu was the Manag-
ing Director of ABB China from 2014 to 2018. From 2012 to 2013, he was the Regional Division Head of ABB's Discrete Automation and Motion division for North Asia and China. From 2010 to 2011, he was the Head of ABB's robotics business unit in China. Before this, Mr. Gu held various management and technical roles in ABB's robotics business in China and Sweden. Mr. Gu was born in 1958 and is a Swedish citizen.
As separately announced, as of December 31, 2019, Claudio Facchin, Frank Duggan, and Chunyuan Gu stepped down from their roles on the Executive Committee.
Effective as of March 1, 2020, Björn Rosengren has been appointed as Chief Executive Officer of ABB (press release available at https://new.abb.com/news/detail/29207/ abb-names-bjorn-rosengren-as-ceo). He was previously the president and chief executive officer of Sandvik AB. Mr. Rosengren was born in 1959 and is a Swedish citizen.
Further information about the members of the Executive Committee can be found by clicking on the Executive Committee link (available at https://new.abb.com/about/events/corporate -governance).
No member of the EC may hold more than five additional mandates of which no more than one may be in a listed company. Certain types of mandates, such as those in our subsidiaries, those in the same group of companies and those in non-profit and charitable institutions, are not subject to those limits. Additional details can be found in Article 38 of ABB's Articles of Incorporation (available at https://new.abb.com/about/ events/corporate-governance).
This section describes important business relationships between ABB and its EC members, or
companies and organizations represented by them. This determination has been made based on ABB Ltd's Related Party Transaction Policy. This policy is contained in the ABB Ltd Board Regulations & Corporate Governance Guidelines, (available at https://new.abb.com/about/events/ corporate-governance).
ABB has an unsecured syndicated \$2 billion, revolving credit facility. As of December 31, 2019, Nordea Bank Abp (Nordea) had committed to approximately \$105.7 million out of the \$2 billion total. In addition, ABB has regular banking business with Nordea. Maria Varsellona is a director of Nordea.
After reviewing the banking commitments of Nordea, the Board has determined that ABB's business relationships with Nordea are not unusual in their nature or conditions and do not constitute material business relationships. This determination was made in accordance with ABB Ltd's Related Party Transaction Policy which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange.
At December 31, 2019, ABB's ordinary share capital (including treasury shares) as registered with the Commercial Register amounted to CHF 260,177,791.68, divided into 2,168,148,264 fully paid registered shares with a par value of CHF 0.12 per share.
ABB Ltd's shares are listed on the SIX Swiss Exchange, the NASDAQ OMX Stockholm Exchange and the New York Stock Exchange (where its shares are traded in the form of American depositary shares (ADS) – each ADS representing one
registered ABB share). At December 31, 2019, ABB Ltd had a market capitalization based on outstanding shares (total number of outstanding shares: 2,133,501,111) of approximately CHF 50 billion (\$51 billion, SEK 480 billion). The only consolidated subsidiary in the ABB Group with listed shares is ABB India Limited, Bangalore, India, which is listed on the BSE Ltd. (Bombay Stock Exchange) and the National Stock Exchange of India. At December 31, 2019, ABB Ltd, Switzerland, directly or indirectly owned 75 percent of ABB India Limited, Bangalore, India, which at that time had a market capitalization of approximately INR 272 billion.
| Stock exchange listings (at December 31, 2019) | |||||||
|---|---|---|---|---|---|---|---|
| Stock exchange | Security | Ticker symbol | ISIN code | ||||
| SIX Swiss Exchange | ABB Ltd, Zurich, share | ABBN | CH0012221716 | ||||
| NASDAQ OMX Stockholm Exchange | ABB Ltd, Zurich, share | ABB | CH0012221716 | ||||
| New York Stock Exchange | ABB Ltd, Zurich, ADS | ABB | US0003752047 | ||||
| BSE Ltd. (Bombay Stock Exchange) | ABB India Limited, Bangalore, share | ABB(1) | INE117A01022 | ||||
| National Stock Exchange of India | ABB India Limited, Bangalore, share | ABB | INE117A01022 |
Under the share buyback program that ran from September 2014 to September 2016, ABB repurchased a total of 146,595,000 shares for cancellation. In 2016, 100 million shares were cancelled. At ABB's General Meeting of Shareholders in 2017, the shareholders approved the cancellation of 46.595 million shares. This was completed in July 2017. As a result of the share cancellation in 2017, the total number of ABB's Ltd's issued shares is 2,168,148,264.
In 2019, ABB paid a dividend of 0.80 Swiss francs per share relating to the year 2018. In 2018, ABB paid a dividend of 0.78 Swiss francs per share relating to the year 2017. In 2017, ABB paid a dividend of 0.76 Swiss francs per share relating to the year 2016.
Except for the share cancellation described above, there were no other changes to ABB's ordinary share capital during 2019, 2018 and 2017.
ABB does not have any bonds outstanding that are convertible into ABB shares. For information about options on shares issued by ABB, please refer to "Note 19 Stockholders' equity" to ABB's Consolidated Financial Statements.
At December 31, 2019, ABB's share capital may be increased by an amount not to exceed CHF 24,000,000 through the issuance of up to 200,000,000 fully paid registered shares with a par value of CHF 0.12 per share through the exercise of conversion rights and/or warrants granted in connection with the issuance on national or international capital markets of newly or already issued bonds or other financial market instruments. If this contingent share capital were fully issued this would increase the existing share capital by approximately 9.2 percent. The contingent share capital has not changed during the last three years.
At December 31, 2019, ABB's share capital may be increased by an amount not to exceed CHF 1,200,000 through the issuance of up to 10,000,000 fully paid registered shares with a par value of CHF 0.12 per share through the exercise of warrant rights granted to its shareholders. If this contingent share capital were fully issued this would increase the existing share capital by approximately 0.5 percent. This contingent share capital has not changed during the last three years. The Board may grant warrant rights not taken up by shareholders for other purposes in the interest of ABB.
The pre-emptive rights of the shareholders are excluded in connection with the issuance of convertible or warrant-bearing bonds or other financial market instruments or the grant of warrant rights. The then current owners of conversion rights and/or warrants will be entitled to subscribe for new shares. The conditions of the conversion rights and/or warrants will be determined by the Board.
The acquisition of shares through the exercise of warrants and each subsequent transfer of the shares will be subject to the restrictions of ABB's Articles of Incorporation (see "Limitations on transferability of shares and nominee registration" in Shareholders section below) (available at https://new.abb.com/about/events/ corporate-governance).
In connection with the issuance of convertible or warrant-bearing bonds or other financial market instruments, the Board is authorized to restrict or deny the advance subscription rights of shareholders if such bonds or other financial market instruments are for the purpose of financing or refinancing the acquisition of an enterprise, parts of an enterprise, participations or new investments or an issuance on national or international capital markets. If the Board denies advance subscription rights, the convertible or warrant-bearing bonds or other financial market instruments will be issued at the relevant market conditions and the new shares will be issued pursuant to the relevant market conditions taking into account the share price and/or other comparable instruments having a market price. Conversion rights may be exercised during a maximum ten-year period, and warrants may be exercised during a maximum seven-year period, in each case from the date of the respective issuance. The advance subscription rights of the shareholders may be granted indirectly.
At December 31, 2019, ABB's share capital may be increased by an amount not to exceed CHF 11,284,656 through the issuance of up to 94,038,800 fully paid shares with a par value of CHF 0.12 per share to employees. If this contingent share capital were fully issued this would increase the existing share capital by approximately 4.3 percent. This contingent share capital has not changed during the last three years.
The pre-emptive and advance subscription rights of ABB's shareholders are excluded. The shares or rights to subscribe for shares will be issued to employees pursuant to one or more regulations to be issued by the Board, taking into account performance, functions, level of responsibility and profitability criteria. ABB may issue shares or subscription rights to employees at a price lower than that quoted on a stock exchange. The acquisition of shares within the context of employee share ownership and each subsequent transfer of the shares will be subject to the restrictions of ABB's Articles of Incorporation (see "Limitations on transferability of shares and nominee registration" in Shareholders section below).
At December 31, 2019, ABB had an authorized share capital in the amount of up to CHF 24,000,000 through the issuance of up to 200,000,000 fully paid registered shares with a par value of CHF 0.12 each, which is valid through May 2, 2021. If the authorized share capital were fully issued, this would increase the existing share capital by approximately 9.2 percent. Aside from renewal at the 2019 AGM, the authorized share capital has not changed during the last three years. The Board is authorized to determine the date of issue of new shares, the issue price, the type of payment, the conditions for the exercise of pre-emptive rights and the beginning date for dividend entitlement. In this regard, the Board may issue new shares by means of a firm underwriting through a banking institution, a syndicate or another third party with a subsequent offer of these shares to the shareholders. The Board may
permit pre-emptive rights that have not been exercised by shareholders to expire or it may place these rights and/or shares as to which pre-emptive rights have been granted but not exercised at market conditions or use them for other purposes in the interest of the company. Furthermore, the Board is authorized to restrict or deny the pre-emptive rights of shareholders and allocate such rights to third parties if the shares are used (1) for the acquisition of an enterprise, parts of an enterprise, or participations, or for new investments, or in case of a share placement, for the financing or refinancing of such transactions; or (2) for the purpose of broadening the shareholder constituency in connection with a listing of shares on domestic or foreign stock exchanges. The subscription and the acquisition of the new shares, as well as each subsequent transfer of the shares, will be subject to the restrictions of ABB's Articles of Incorporation (available at https://new.abb.com/about/events/ corporate-governance).
During 2019, the price of ABB Ltd shares listed on the SIX Swiss Exchange increased 25 percent, while the Swiss Market Index increased 26 percent. The price of ABB Ltd shares on NASDAQ OMX Stockholm increased 32 percent, compared to the OMX 30 Index, which increased 26 percent. The price of ABB Ltd American Depositary Shares traded on the New York Stock Exchange increased 27 percent compared to the S&P 500 Index, which increased 29 percent.
— Source: Bloomberg
| 2019 | SIX Swiss Exchange (CHF) |
NASDAQ OMX Stockholm (SEK) |
New York Stock Exchange (USD) |
|---|---|---|---|
| High | 23.63 | 227.20 | 24.11 |
| Low | 17.39 | 168.20 | 17.89 |
| Year-end | 23.37 | 225.10 | 24.09 |
| Average daily traded number of shares, in millions | 7.06 | 1.48 | 2.20 |
With respect to the year ended December 31, 2019, ABB Ltd's Board of Directors has proposed to distribute a dividend to shareholders in the amount of CHF 0.80 per share. This is subject to
approval by shareholders at ABB Ltd's 2020 Annual General Meeting. The proposal is in line with the company's dividend policy to pay a rising, sustainable dividend over time.
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| 2019 | 2018 | 2017 | |
|---|---|---|---|
| Dividend per share (CHF) | 0.80(1) | 0.80 | 0.78 |
| Par value per share (CHF) | 0.12 | 0.12 | 0.12 |
| Votes per share | 1 | 1 | 1 |
| Basic earnings per share (USD)(2) | 0.67 | 1.02 | 1.04 |
| Total ABB stockholders' equity per share (USD)(3) | 6.34 | 6.54 | 6.93 |
| Cash flow from operations per share (USD)(2), (5) |
1.09 | 1.37 | 1.78 |
| Dividend payout ratio (%)(4) | 123% | 80% | 77% |
| Weighted-average number of shares outstanding (in millions) | 2,133 | 2,132 | 2,138 |
(1) Proposed by the Board of Directors and subject to approval by shareholders at the Annual General Meeting on March 26, 2020, in Zurich, Switzerland.
(2) Calculation based on weighted-average number of shares outstanding.
(3) Calculation based on the number of shares outstanding at December 31.
(4) Dividend per share (converted to U.S. dollars at year-end exchange rates) divided by basic earnings per share.
(5) Includes cash flow from operations for both continuing and discontinued operations.
As of December 31, 2019, the total number of shareholders directly registered with ABB Ltd was approximately 109,000 and another 369,000 shareholders held shares indirectly through nominees. In total as of that date, ABB had approximately 478,000 shareholders.
Investor AB, Sweden, held 254,915,142 ABB shares as of December 31, 2019 (refer to Investor's year-end 2019 report available at https://www.investorab. com/investors-media/reports-presentations/). This holding represents approximately 11.8 percent of ABB's total share capital and voting rights as registered in the Commercial Register on December 31, 2019. The number of shares held by Investor AB does not include shares held by Mr. Jacob Wallenberg, the chairman of Investor AB and a director of ABB, in his individual capacity.
Cevian Capital II GP Limited, Jersey, disclosed that as of September 8, 2017, it held 115,868,333 ABB shares (refer to https://www.six-exchange -regulation.com/en/home/publications/ significant-shareholders.html#notification-Id=TBH9800020). This holding represents approximately 5.34 percent of ABB's total share capital and voting rights as registered in the Commercial Register on December 31, 2019.
BlackRock Inc., U.S., disclosed that as of August 31, 2017, it, together with its direct and indirect subsidiaries, held 72,900,737 ABB shares (refer to https://www.six-exchange-regulation.com/en/ home/publications/significant-shareholders. html#notificationId=TAH91000F4). This holding represents 3.36 percent of ABB's total share capital and voting rights as registered in the Commercial Register on December 31, 2019.
Artisan Partners Limited Partnership, U.S., disclosed that as per April 10, 2019 it held 65,721,454 ABB Ltd shares (refer to https://www. six-exchange-regulation.com/en/home/ publications/significant-shareholders. html#notificationId=TAJ4C00035). This position represents approximately 3.03 percent of ABB Ltd's total share capital and voting rights as registered in the Commercial Register on December 31, 2019.
At December 31, 2019, to the best of ABB's knowledge, no other shareholder held 3 percent or more of ABB's total share capital and voting rights as registered in the Commercial Register on that date.
ABB Ltd has no cross shareholdings in excess of 5 percent of capital, or voting rights with any other company.
Announcements related to disclosure notifications made by shareholders during 2019 can be found via the search facility on the platform of the Disclosure Office of the SIX Swiss Exchange: https://www.six-exchange-regulation.com/en/ home/publications/significant-shareholders.html.
Under ABB's Articles of Incorporation (available at https://new.abb.com/about/events/ corporate-governance), each registered share
represents one vote. Significant shareholders do not have different voting rights. To our knowledge, we are not directly or indirectly owned or controlled by any government or by any other corporation or person.
Shareholders have the right to receive dividends, to vote and to execute such other rights as granted under Swiss law and the Articles of Incorporation (available at https://new.abb.com/ about/events/corporate-governance).
ABB has one class of shares and each registered share carries one vote at the general meeting. Voting rights may be exercised only after a shareholder has been registered in the share register of ABB as a shareholder with the right to vote, or with Euroclear Sweden AB (Euroclear), which maintains a subregister of the share register of ABB.
A shareholder may be represented at the Annual General Meeting by its legal representative, by another shareholder with the right to vote or by the independent proxy elected by the shareholders (unabhängiger Stimmrechtsvertreter). If the Company does not have an independent proxy, the Board of Directors shall appoint the independent proxy for the next General Meeting of Shareholders. All shares held by one shareholder may be represented by one representative only.
For practical reasons shareholders must be registered in the share register no later than 6 business days before the general meeting in order to be entitled to vote. Except for the cases described under "Limitations on transferability of shares and nominee registration" below, there are no voting rights restrictions limiting ABB's shareholders' rights.
The Ordinary General Meeting of Shareholders must be held each year within 6 months after the close of the fiscal year of the Company; the business report, the compensation report and the Auditors' reports must be made available for inspection by the shareholders at the place of incorporation of the Company by no later than 20 days prior to the meeting. Each shareholder is entitled to request immediate delivery of a copy of these documents.
The following powers shall be vested exclusively in the General Meeting of Shareholders:
• Adoption and amendment of the Articles of Incorporation
Shareholders' resolutions at general meetings are approved with an absolute majority of the votes represented at the meeting, except for those matters described in Article 704 of the Swiss Code of Obligations and for resolutions with respect to restrictions on the exercise of the right to vote and the removal of such restrictions, which all require the approval of two-thirds of the votes represented at the meeting.
At December 31, 2019, shareholders representing shares of a par value totaling at least CHF 48,000 may require items to be included in the agenda of a general meeting. Any such request must be made in writing at least 40 days prior to the date of the general meeting and specify the items and the motions of such shareholder(s).
ABB's Articles of Incorporation do not contain provisions on the convocation of the general meeting of shareholders that differ from the applicable legal provisions.
The unconsolidated statutory financial statements of ABB Ltd are prepared in accordance with Swiss law. Based on these financial statements, dividends may be paid only if ABB Ltd has sufficient distributable profits from previous years or sufficient free reserves to allow the distribution of a dividend. Swiss law requires that ABB Ltd retain at least 5 percent of its annual net profits as legal reserves until these reserves amount to at least 20 percent of ABB Ltd's share capital. Any
net profits remaining in excess of those reserves are at the disposal of the shareholders' meeting.
Under Swiss law, ABB Ltd may only pay out a dividend if it has been proposed by a shareholder or the Board of Directors and approved at a general meeting of shareholders, and the auditors confirm that the dividend conforms to statutory law and ABB's Articles of Incorporation. In practice, the shareholders' meeting usually approves dividends as proposed by the Board of Directors.
Dividends are usually due and payable no earlier than 2 trading days after the shareholders' resolution and the ex-date for dividends is normally 2 trading days after the shareholders' resolution approving the dividend. Dividends are paid out to the holders that are registered on the record date. Euroclear administers the payment of those shares registered with it. Under Swiss law, dividends not collected within 5 years after the due date accrue to ABB Ltd and are allocated to its other reserves. As ABB Ltd pays cash dividends, if any, in Swiss francs (subject to the exception for certain shareholders in Sweden described below), exchange rate fluctuations will affect the U.S. dollar amounts received by holders of ADSs upon conversion of those cash dividends by Citibank, N.A., the depositary, in accordance with the Amended and Restated Deposit Agreement dated May 7, 2001.
For shareholders who are residents of Sweden, ABB has established a dividend access facility (for up to 600,004,716 shares). With respect to any annual dividend payment for which this facility is made available, shareholders who register with Euroclear may elect to receive the dividend from ABB Norden Holding AB in Swedish krona (in an amount equivalent to the dividend paid in Swiss francs) without deduction of Swiss withholding tax. For further information on the dividend access facility, see ABB's Articles of Incorporation.
ABB may decline a registration with voting rights if a shareholder does not declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights. A person failing to expressly declare in its registration / application that it holds the shares for its own account (a nominee), will be entered in the share register with voting rights, provided that such nominee has entered into an agreement with ABB concerning its status, and further provided that the nominee is subject to recognized bank or financial market supervision. In special cases the Board may grant exemptions. There were no exemptions granted in 2019. The limitation on the transferability of shares may be removed by an amendment of ABB's Articles of Incorporation by a shareholders' resolution requiring two-thirds of the votes represented at the meeting.
No restrictions are imposed on the transferability of ABB shares. The registration of shareholders in the ABB Share register, Euroclear and the ADS register kept by Citibank does not affect transferability of ABB shares or ADSs. Registered ABB shareholders or ADR holders may therefore purchase or sell their ABB shares or ADRs at any time, including before a General Meeting regardless of the record date. The record date serves only to determine the right to vote at a General Meeting.
ABB's Articles of Incorporation do not contain any provisions raising the threshold (opting up) or waiving the duty (opting out) to make a public tender offer pursuant to Article 135 of the Swiss Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading.
On May 2, 2019, shareholders at the Annual General Meeting of ABB Ltd, approved the appointment of KPMG AG (KPMG) to be the auditors of the Company for the 2019 financial year.
KPMG are the auditors of ABB's statutory and consolidated financial statements. KPMG, Switzerland, assumed the sole auditing mandate of the consolidated financial statements of the ABB Group beginning in the year ended December 31, 2018. The auditor in charge and responsible for the mandate, Hans-Dieter Krauss, began serving in this capacity in respect of the financial year ended December 31, 2018. Pursuant to ABB's Articles of Incorporation (available at https://new. abb.com/about/events/corporate-governance), the term of office of ABB's auditors is one year.
Our auditors, KPMG, attend each meeting of the FACC and each meeting includes a private session between the auditors and the FACC without the management being present. In 2019, the FACC had 10 meetings (either in person or via telephone call). On at least an annual basis, the FACC reviews and discusses with the external auditors all significant relationships that the auditors have with the Company that could impair their independence. The FACC reviews the auditor engagement letter and the audit plan including discussion of scope, staffing, locations and general audit approach. The FACC also reviews and evaluates the auditors' judgment on the quality and appropriateness of the company's accounting principles as applied in the financial reporting. In addition, the FACC approves in advance any non-audit services to be performed by the auditors.
At least annually, the FACC obtains and reviews a report by the auditors that includes discussion on:
material issues, if any, raised by the most recent internal quality control review
critical accounting policies and practices of the company
Taking into account the opinions of management the FACC evaluates the qualifications, independence and performance of the auditors. The FACC reports the material elements of its supervision of the auditors to the Board and on an annual basis recommends to the Board the auditors to be proposed for election at the shareholders meeting.
The audit fees charged by KPMG for the legally prescribed audit amounted to \$37.5 million in 2019. Audit services are defined as the standard audit work performed each fiscal year necessary to allow the auditors to issue an opinion on the consolidated financial statements of ABB and to issue an opinion on the local statutory financial statements.
This classification may also include services that can be provided only by the auditors, such as preissuance reviews of quarterly financial results and comfort letters delivered to underwriters in connection with debt and equity offerings.
In addition, KPMG charged \$1.2 million for non-audit services during 2019. Non-audit services include primarily agreed-upon procedure reports, accounting consultations, audits of pension and benefit plans, accounting advisory services, other attest services related to financial reporting that are not required by statute or regulation, income tax and indirect tax compliance services and tax advisory services. In accordance with the requirements of the U.S. Sarbanes-Oxley Act of 2002 and rules issued by the SEC, ABB has, on a global basis, a process for the review and pre-approval of audit and non-audit services to be performed by KPMG.
There are no management contracts between ABB and companies or natural persons not belonging to the ABB Group.
Board members, Executive Committee members, and other members of senior management do not receive any special benefits in the event of a change of control. However, the conditional grants under the Long Term Incentive Plan and the Management Incentive Plan may be subject to accelerated vesting in the event of a change of control.
In order to align its employees' interests with the business goals and financial results of the Company, ABB operates a number of incentive plans, linked to ABB's shares, such as the Employee Share Acquisition Plan, the Management Incentive Plan and the Long Term Incentive Plan. For a more detailed description of these incentive plans, please refer to "Note 18 – Share-based payment arrangements" to ABB's Consolidated Financial Statements.
According to the New York Stock Exchange's corporate governance standards (the Standards), ABB is required to disclose significant ways in which its corporate governance practices differ from the Standards. ABB has reviewed the Standards and concluded that its corporate governance practices are generally consistent with the Standards, with the following significant exceptions:
decided by our Board. However, the shareholders decide about the creation of new share capital that can be used in connection with equity compensation plans.
ABB, as a publicly traded company, is committed to communicating in a timely and consistent way to shareholders, potential investors, financial analysts, customers, suppliers, the media and other interested parties. ABB is required to disseminate material information pertaining to its businesses in a manner that complies with its obligations under the rules of the stock exchanges where its shares are listed and traded.
ABB publishes an annual report that provides audited financial statements and information about ABB including our business results, strategy, products and services, corporate governance and executive compensation. ABB also submits an annual report on Form 20-F to the SEC. In addition, ABB publishes its results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the stock exchanges on which its shares are listed and traded. Press releases relating to financial results and material events are also filed with the SEC on Form 6-K. An archive containing annual reports, Form 20-F reports, quarterly results releases and related presentations can be found in the "Financial results and presentations" section at https://www.abb.com/ investorrelations. The quarterly results press releases contain unaudited financial information prepared in accordance with or reconciled to U.S. GAAP. To subscribe to important press releases, please click on the "Contacts and Services" and choose "Subscribe to updates" at https://www. abb.com/investorrelations. Ad-hoc notices can also be found in the press releases section at https://www.abb.com/news
ABB's official means of communication is the Swiss Official Gazette of Commerce (www.shab.ch). The invitation to the Company's Annual General Meeting is sent to registered shareholders by mail.
Inquiries may also be made to ABB Investor Relations:
Affolternstrasse 44 CH-8050 Zurich, Switzerland Telephone: +41 43 317 7111 Fax: +41 44 311 9817 Email: [email protected] ABB's website is: www.abb.com
The list below contains references to additional information concerning the corporate governance of ABB (available at https://new.abb.com/about/ events/corporate-governance).
Related Party Transaction Policy
ABB Code of Conduct
ABB's corporate calendar can be found at https://new.abb.com/investorrelations/ calendar-events-and-publications/ financial-calendar
| Share | ||||
|---|---|---|---|---|
| ABB | capital in | |||
| Company name/location | Country | interest % | thousands Currency | |
| ABB Australia Pty Limited, Moorebank, NSW | Australia | 100.00 | 131,218 | AUD |
| ABB Group Investment Management Pty. Ltd., Moorebank, NSW | Australia | 100.00 | 505,312 | AUD |
| B&R Holding GmbH, Eggelsberg | Austria | 100.00 | 35 | EUR |
| B&R Industrial Automation GmbH, Eggelsberg | Austria | 100.00 | 1,240 | EUR |
| ABB AUTOMACAO LTDA, SOROCABA | Brazil | 100.00 | 37,780 | BRL |
| ABB Ltda., São Paulo | Brazil | 100.00 | 854,784 | BRL |
| ABB Bulgaria EOOD, Sofia | Bulgaria | 100.00 | 65,110 | BGN |
| ABB Electrification Canada ULC, Edmonton, Alberta | Canada | 100.00 | —(1) | CAD |
| ABB Inc., Saint-Laurent, Quebec | Canada | 100.00 | —(1) | CAD |
| ABB (China) Ltd., Beijing | China | 100.00 | 235,000 | USD |
| ABB Beijing Drive Systems Co. Ltd., Beijing | China | 90.00 | 5,000 | USD |
| ABB Electrical Machines Ltd., Shanghai | China | 100.00 | 14,400 | USD |
| ABB Engineering (Shanghai) Ltd., Shanghai | China | 100.00 | 40,000 | USD |
| ABB Shanghai Free Trade Zone Industrial Co., Ltd., Shanghai | China | 100.00 | 6,500 | CNY |
| ABB Xiamen Low Voltage Equipment Co. Ltd., Xiamen | China | 100.00 | 15,800 | USD |
| ABB Xiamen Switchgear Co. Ltd., Xiamen | China | 66.52 | 29,500 | USD |
| ABB Xinhui Low Voltage Switchgear Co. Ltd., Xinhui | China | 90.00 | 6,200 | USD |
| ABB s.r.o., Prague | Czech Republic | 100.00 | 400,000 | CZK |
| ABB A/S, Skovlunde | Denmark | 100.00 | 100,000 | DKK |
| ABB for Electrical Industries (ABB ARAB) S.A.E., Cairo | Egypt | 100.00 | 353,479 | EGP |
| Asea Brown Boveri S.A.E., Cairo | Egypt | 100.00 | 166,000 | USD |
| ABB AS, Jüri | Estonia | 100.00 | 1,663 | EUR |
| ABB Oy, Helsinki | Finland | 100.00 | 10,003 | EUR |
| ABB France, Cergy Pontoise | France | 99.83 | 25,778 | EUR |
| ABB SAS, Cergy Pontoise | France | 100.00 | 45,921 | EUR |
| ABB AG, Mannheim | Germany | 100.00 | 167,500 | EUR |
| ABB Automation GmbH, Mannheim | Germany | 100.00 | 15,000 | EUR |
| ABB Automation Products GmbH, Ladenburg | Germany | 100.00 | 10,620 | EUR |
| ABB Beteiligungs- und Verwaltungsges. mbH, Mannheim | Germany | 100.00 | 61,355 | EUR |
| ABB Stotz-Kontakt GmbH, Heidelberg | Germany | 100.00 | 7,500 | EUR |
| B + R Industrie-Elektronik GmbH, Bad Homburg | Germany | 100.00 | 358 | EUR |
| Busch-Jaeger Elektro GmbH, Lüdenscheid | Germany | 100.00 | 1,535 | EUR |
| Industrial C&S Hungary Kft., Budapest | Hungary | 100.00 | 3,000 | HUF |
| ABB Global Industries and Services Private Limited, Bangalore | India | 100.00 | 190,000 | INR |
| ABB India Limited, Bangalore | India | 75.00 | 423,817 | INR |
| ABB S.p.A., Milan | Italy | 100.00 | 110,000 | EUR |
| Power-One Italy S.p.A., Terranuova Bracciolini (AR) | Italy | 100.00 | 22,000 | EUR |
| ABB K.K., Tokyo | Japan | 100.00 | 1,000,000 | JPY |
| ABB Ltd., Seoul | Korea, Republic of | 100.00 | 23,670,000 | KRW |
| ABB Electrical Control Systems S. de R.L. de C.V., Monterrey | Mexico | 100.00 | 315,134 | MXN |
| ABB Mexico S.A. de C.V., San Luis Potosi SLP | Mexico | 100.00 | 633,368 | MXN |
| Asea Brown Boveri S.A. de C.V., San Luis Potosi SLP | Mexico | 100.00 | 667,686 | MXN |
| ABB B.V., Rotterdam | Netherlands | 100.00 | 9,200 | EUR |
| ABB Capital B.V., Rotterdam | Netherlands | 100.00 | 1,000 | USD |
| ABB Finance B.V., Rotterdam | Netherlands | 100.00 | 20 | EUR |
| ABB Holdings B.V., Rotterdam | Netherlands | 100.00 | 119 | EUR |
| ABB AS, Billingstad | Norway | 100.00 | 134,550 | NOK |
| ABB Holding AS, Billingstad | Norway | 100.00 | 240,000 | NOK |
| ABB Business Services Sp. z o.o., Warsaw | Poland | 99.93 | 24 | PLN |
| ABB Industrial Solutions (Bielsko-Biala) Sp. z o.o., Bielsko-Biala | Poland | 99.93 | 328,125 | PLN |
| ABB Sp. z o.o., Warsaw | Poland | 99.93 | 245,461 | PLN |
| Industrial C&S of P.R. LLC, San Juan | Puerto Rico | 100.00 | — | USD |
| ABB Ltd., Moscow | Russian Federation | 100.00 | 5,686 | RUB |
| ABB Electrical Industries Co. Ltd., Riyadh | Saudi Arabia | 65.00 | 181,000 | SAR |
| ABB Holdings Pte. Ltd., Singapore | Singapore | 100.00 | 32,797 | SGD |
| ABB Pte. Ltd., Singapore | Singapore | 100.00 | 28,842 | SGD |
| Share | ||||
|---|---|---|---|---|
| ABB | capital in | |||
| Company name/location | Country | interest % | thousands Currency | |
| ABB Holdings (Pty) Ltd., Modderfontein | South Africa | 100.00 | 4,050 | ZAR |
| ABB South Africa (Pty) Ltd., Modderfontein | South Africa | 74.91 | 1 | ZAR |
| Asea Brown Boveri S.A., Madrid | Spain | 100.00 | 33,318 | EUR |
| ABB AB, Västerås | Sweden | 100.00 | 200,000 | SEK |
| ABB Norden Holding AB, Västerås | Sweden | 100.00 | 2,344,783 | SEK |
| ABB Power Grids Sweden AB, Västerås | Sweden | 100.00 | 400,000 | SEK |
| ABB Asea Brown Boveri Ltd, Zurich | Switzerland | 100.00 | 2,768,000 | CHF |
| ABB Capital AG, Zürich | Switzerland | 100.00 | 100 | CHF |
| ABB Information Systems Ltd., Zurich | Switzerland | 100.00 | 500 | CHF |
| ABB Investment Holding 2 GmbH, Zurich | Switzerland | 100.00 | 20 | CHF |
| ABB Management Holding Ltd, Zurich | Switzerland | 100.00 | 1,051 | CHF |
| ABB Management Services Ltd., Zurich | Switzerland | 100.00 | 571 | CHF |
| ABB Schweiz AG, Baden | Switzerland | 100.00 | 55,000 | CHF |
| ABB Turbo Systems AG, Baden | Switzerland | 100.00 | 10,000 | CHF |
| ABB LIMITED, Bangkok | Thailand | 100.00 | 1,034,000 | THB |
| ABB Elektrik Sanayi A.S., Istanbul | Turkey | 99.99 | 13,410 | TRY |
| ABB Industries (L.L.C.), Dubai | United Arab Emirates | 49.00(2) | 5,000 | AED |
| ABB Holdings Limited, Warrington | United Kingdom | 100.00 | 226,014 | GBP |
| ABB Limited, Warrington | United Kingdom | 100.00 | 120,000 | GBP |
| ABB Enterprise Software Inc., Atlanta, GA | United States | 100.00 | 1 | USD |
| ABB Finance (USA) Inc., Wilmington, DE | United States | 100.00 | 1 | USD |
| ABB Holdings Inc., Cary, NC | United States | 100.00 | 2 | USD |
| ABB Inc., Cary, NC | United States | 100.00 | 1 | USD |
| ABB Installation Products Inc, Memphis, TN | United States | 100.00 | 1 | USD |
| ABB Motors and Mechanical Inc, Fort Smith, AR | United States | 100.00 | — | USD |
| ABB Treasury Center (USA), Inc., Wilmington, DE | United States | 100.00 | 1 | USD |
| Edison Holding Corporation, Wilmington, DE | United States | 100.00 | — | USD |
| Industrial Connections & Solutions LLC, Cary, NC | United States | 100.00 | — | USD |
| Verdi Holding Corporation, Wilmington, DE | United States | 100.00 | — | USD |
(1) Shares without par value.
(2) Company consolidated as ABB exercises full management control.
56–83
—
| — | Letter from the Chairman of the |
|---|---|
| 58 | Compensation Committee |
| — 61 |
Compensation report |
| — | Report of the statutory auditor |
| 83 | on the compensation report |
On behalf of the Board of Directors and the Compensation Committee, I am pleased to present the compensation report ('the Report') for 2019.
Our Committee's focus remains to ensure that the compensation structure at ABB drives value creation for our shareholders, a motivating package for our executives and strives for best-practice corporate governance standards.
I appreciated the opportunity to meet with many of our shareholders to discuss compensation matters last year. During these meetings we discussed changes that could be made to our compensation structure to increase its shareholder alignment, market competitiveness and performance driven culture. Furthermore, we discussed ways in which we could simplify the presentation of the Report to create greater clarity for you, our stakeholders.
As such, we have made changes to our compensation structure, with a particular focus on the short-term incentive (STI) plan, and have restructured the Report to clearly differentiate between our compensation policies and their implementation.
Over recent years, ABB has steadily increased the performance orientation of its compensation structure, with a special focus on variable compensation. The main consideration in making these changes has been to provide a performance linkage in every pay component while ensuring that total compensation levels remain market competitive. These changes have been carefully phased to allow for the same principles to be cascaded throughout the organization.
In this context, and in the light of feedback from shareholders and other stakeholders, our STI structure has been revised for 2020. The result is a better alignment with the new ABB operating model and an enhanced focus on operational delivery.
The new plan, called the Annual Incentive Plan (AIP), is designed to create focus on key priorities. This will be achieved with a limited number of measures linked to specific Business or functional needs. It has a common Group return measure (ROCE) to help create a greater focus on profitability and the efficiency with which capital is used, tailored measures to better align with Business or functional priorities and an individual component which, for all Executive Committee (EC) members, will include safety performance.
Note that, for 2020, the limited number of measures applied to the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) will feature a free cash flow metric that includes the impact of non-operational charges, in order to reflect full accountability for cash performance and greater shareholder alignment.
This AIP approach complements the recent redesign of the Long Term Incentive Plan (LTIP), where the previous two-component LTIP was merged into a single performance share grant, designed to make it simpler and completely performance-oriented. The LTIP has two equally weighted performance measures, namely an average Earnings Per Share (EPS) measure in line with our Company strategy, and a relative Total Shareholder Return (TSR) measure to bring in the market competition perspective.
For LTIP grants made as from 2019, the application of malus and clawback has been expanded from illegal activities to also cover a serious financial misstatement of the Group's accounts. This is designed to give the Board greater discretion to adjust the vesting of awards in line with Business and shareholder interests, and is more closely aligned to market practice. The Committee was also given the ability to suspend the payment of awards if it is likely that the Board could determine that the malus or clawback provisions may potentially apply (e.g. if the employee is subject to an external investigation), in line with leading market practice.
As a reminder, ABB's executive shareholding requirement, already one of the highest in the market, was also recently strengthened to require our EC members to retain any shares vesting from our LTIPs until their respective requirement is met.
Finally, we have taken the opportunity to review the compensation package for the CEO position, and adjusted the target short-term opportunity from 150 percent to 100 percent of annual base salary, and target long-term opportunity from
—
200 percent to 150 percent of annual base salary, to more closely represent competitive market practice.
The revised compensation structure for the EC from 2020, its purpose and links to our strategy, are set out in the table below.
| Fixed compensation | ||||
|---|---|---|---|---|
| annual base salary | Short-term | Long-term | Wealth at Risk/ | |
| Compensation structure | and benefits | incentive | incentive | Share Ownership |
| Purpose and link to | Compensates | Rewards annual | Encourages creation of | Aligns individual's |
| strategy | EC members | Company and individual | long-term, sustainable | personal wealth at risk |
| for the role | performance. Drives | value for shareholders, | directly to the ABB | |
| annual strategy | and delivery of | share price | ||
| implementation | long-term strategic goals |
|||
| Operation | Cash salary, benefits | Annual awards, payable | Annual awards in shares | Individuals required |
| in kind, and pension | in cash after a 1-year | which may vest after | to hold ABB shares | |
| contribution | performance period | 3 years subject to | ||
| performance conditions | ||||
| Opportunity level | Based on scope of | Target: 100% | CEO | CEO wealth at risk: |
| (as % of annual base | responsibilities, | Maximum: 150% | Target at grant: 150% | 500% (net) |
| salary) | individual experience | Vesting: 0–300% | EC wealth at risk: | |
| and skillset | EC | 400% (net) | ||
| Target at grant: 100% | ||||
| Vesting: 0–200% | ||||
| Time period | Delivered in year | 1 year | 3 years | Total EC tenure |
| Performance measures | Changes to annual | All: Group ROCE | Relative TSR (50%) | Direct link to |
| base salary takes into | (20–25%); | Average EPS (50%) | ABB share price | |
| account the | Business/function | |||
| executive's | measures, which may | |||
| performance in the | include, for example: | |||
| preceding year and | Revenue, Op. EBITA %, | |||
| potential for the | Op. net income, OFCF | |||
| future | (55–60%); | |||
| All: individual objectives | ||||
| (20%) |
The Committee considered very carefully the compensation packages for both the newly appointed CEO, Björn Rosengren, and the interim CEO, Peter Voser, following the departure of the former CEO, Ulrich Spiesshofer, in 2019.
The Committee has set the target total direct compensation for the newly appointed CEO nearly 22 percent lower than for the former CEO. This is derived by a reduction in target short-term and target long-term incentive opportunity, to more closely represent competitive market practice.
The interim CEO, Peter Voser, receives a monthly payment equivalent to the same annual base salary and annual target STI as the former CEO. He does not receive any long-term incentive (LTI) grants or benefits, except legally required pension and social security contributions. This compensation is in addition to his fees as Chairman, given he is currently performing both roles.
The terms of departure of the former CEO, Ulrich Spiesshofer, were as per his contractual arrangements. Further details are set out in the Implementation section of the Report.
The terms of departure from ABB of other EC members, including the General Counsel (GC) and Chief Human Resources Officer (CHRO), were as per their respective contractual arrangements.
The Total Target Direct Compensation (TTDC) of replacement roles onto the EC in 2019 has, in each case, been lower than their respective predecessors.
There were no changes in the fees for Board members for the roles they perform. The aggregate Board compensation for the 2019–2020 term was in line with the amount approved at the 2019 Annual General Meeting.
Aggregate EC compensation was 29 percent higher in 2019 than in 2018, mainly influenced by the change in EC composition, which led to overlapping payments for the CEO, CHRO and GC and replacement cash and share awards to the incoming GC.
Four of the eleven EC members received a salary adjustment in 2019, which ranged from 1.9 percent to 11.1 percent, the latter being for an exceptional performance and market adjustment.
The STI in 2019, formulated to drive the achievement of challenging annual performance targets, reflected an average achievement award of 94.7 percent for the EC, compared to 85.1 percent in 2018. The range of outcomes from individual objectives ranged from 58.6 percent to 111.3 percent of target, reflecting the differential achievement levels against the performance targets.
The 2016 grant under the Long-Term Incentive Plan (LTIP) vested in 2019. The performance component, measured against demanding EPS targets, vested at 85 percent (out of a maximum of 200 percent), while the net income component vested fully, resulting in a weighted achievement of 92.5 percent of the target award.
During the reporting year, our Committee listened carefully to ideas and suggestions from our shareholders, and the main themes of this feedback have been used to continue the evolution of ABB's compensation system as described above, and to increase the clarity of our disclosures in the Report.
In terms of disclosures, we have provided an overview of the compensation structure and its links to our strategy in this letter and we have also restructured the Report to clearly differentiate between our compensation policies and their implementation.
Under the new Executive Committee Compensation Policy, we have updated the description of our benchmarking comparators in the Competitive positioning of compensation section, and have outlined the changes to the compensation structure for the new CEO, the new approaches adopted for our STI plan, and the changes to our LTIPs. The new Implementation of Executive Compensation Policy section includes an exhibit with an enhanced tabular presentation of the STI outcomes, an advance disclosure on the STI measures for the CEO, the terms of appointment of the new CEO, and the terms of departure of the former CEO.
During 2019, in addition to reviewing the terms of appointment and departure for members of the EC, the Compensation Committee performed its regular activities, including recommending performance targets to the Board which impact variable compensation, recommending the compensation of ABB's Board, CEO and EC members, formulating the compensation report, and preparing the "say-on-pay" vote at the Annual General Meeting (AGM). You will find further information on our activities and on ABB's compensation system and governance in the following pages.
At the AGM in March 2020, you will be asked to vote on the maximum aggregate compensation for the Board for its 2020–2021 term and on the maximum aggregate compensation for the EC for 2021. As signaled in last year's Report, the number of EC members has decreased due to the elimination of the legacy matrix structure, which has led to a reduction in the maximum aggregate compensation requested for approval by shareholders. This compensation report will also be submitted for a non-binding, consultative vote by shareholders.
We encourage and pursue an open and regular dialogue with all of our stakeholders. Your constructive input is highly valued and appreciated as we continue to improve the compensation system.
On behalf of ABB, the Compensation Committee and the Board, I thank you for your continued trust in ABB and for your consistently supportive feedback regarding our compensation framework.
Chairman of the Compensation Committee
Zurich, February 25, 2020
ABB's Articles of Incorporation, approved by its shareholders, contain provisions on compensation which govern and outline the principles of compensation relating to our Board and EC. They can be found on ABB's Corporate governance website new.abb.com/about/corporate-governance and are summarized below:
"Say-on-pay" vote (Article 34): Shareholders approve the maximum aggregate amount of compensation of the Board for the following Board term and of the EC for the following financial year.
• Supplementary amount for new EC members (Article 35): If the maximum approved aggregate compensation amount is not sufficient to also cover the compensation of newly promoted/ hired EC members, up to 30 percent of the last maximum approved aggregate amount shall be available as a supplementary amount to cover the compensation of such new EC members.
Shareholders also have a consultative vote on the prior year's compensation report at the AGM. The new Compensation Policy sections of this Report describe the compensation policies and programs as well as the governance framework related to the compensation of the Board and EC. The new Compensation Implementation sections of this Report provide details of the compensation paid to the members of the Board and of the EC in the prior calendar year.
The compensation report is prepared in accordance with the Ordinance against Excessive Remuneration in Listed Stock Corporations (Ordinance), the Directive on Information relating to Corporate Governance of the SIX Exchange Regulation, the rules of the stock markets of Sweden and the United States where ABB's shares are also listed, and the principles of the Swiss Code of Best Practice for Corporate Governance of economiesuisse.
The CC acts in an advisory capacity while the Board retains the decision authority on compensation matters, except for the maximum aggregate compensation amounts of the Board and of the EC, which are subject to the approval of shareholders at the AGM. The authority levels of the different bodies on compensation matters are detailed in Exhibit 1.
| CEO | CC | Board | AGM |
|---|---|---|---|
| Consultative vote | |||
Proposal Recommendation Approval
The CC meets as often as business requires but at least four times a year. In 2019, the CC held seven meetings and performed the activities described in Exhibit 2. Details on meeting attendance of the individual CC members are provided in the section titled "Board of Directors – Meetings and attendance" of the Corporate Governance Report.
The Chairman of the CC reports to the full Board after each CC meeting. The minutes of the meetings are available to the members of the Board.
The CC retains independent, external advisors for compensation matters. In 2019,
PricewaterhouseCoopers (PwC) were mandated to provide services related to executive compensation matters. Apart from its CC advisory role, PwC also provides human resources, tax and advisory services to ABB.
The CEO, the CHRO and the Head of Performance and Reward also attend all or part of the CC meetings in an advisory capacity. The Chairman of the CC may decide to invite other executives upon consultation with the CEO, as appropriate. Executives do not attend the meetings or the parts of the meetings in which their own compensation and/or performance are being discussed.
Review of benchmark data and recommendations on individual compensation for EC members
Review of the share ownership of EC members
Review and approval of compensation for new and departing EC members (including foregone benefits)
Performance – relating to past performance cycle
Assessment of STI for 2018
Assessment of achievement of performance targets for LTIP awards vesting in 2019
Performance – relating to forthcoming performance cycle
Setting of STI targets for 2019 and 2020
Setting of performance targets for LTIP awards granted in 2019
Review impact of Power Grids joint venture on LTIP targets
Updates on achievement against performance targets for 2019 STI and unvested LTIP awards
Compliance
Review of the LTIP rules
Review of feedback from Investor Engagement meetings
Regulatory and market updates
Review of the compensation report for publication
Preparation of maximum aggregate compensation for Board to be submitted for AGM vote
Preparation of maximum aggregate compensation for EC to be submitted for AGM vote
The compensation system for the members of the Board is designed to attract and retain experienced people in the Board. Compensation of Board members takes into account the responsibilities, time and effort required to fulfill their roles on the Board and its committees. From time to time, the levels and mix of compensation of Board members are compared against the compensation of non-executive board members of publicly traded companies in Switzerland that are part of the Swiss Market Index (i.e. Credit Suisse Group, Geberit, Givaudan, Lafarge Holcim, Nestlé, Novartis, Richemont, Roche, SGS, Swatch, Swiss Re, Swisscom and UBS).
The compensation of Board members is fixed. They do not receive variable compensation or pension benefits, underscoring their focus on
corporate strategy, supervision and governance. In accordance with Swiss law, Board members may not receive 'golden parachutes' or other special benefits in the event of a change of control. Board members are paid for their service over a 12-month period that starts with their election at the AGM. Payment is made in semi-annual installments in arrears. In order to further align the interests of the Board members with those of ABB's shareholders, half of their total compensation must be paid in ABB shares, although Board members may choose to receive all of their compensation in shares. The number of shares delivered is calculated prior to each semi-annual payment by dividing the monetary amount to which the Board members are entitled by the average closing price of the ABB share over a predefined 30-day period. The shares are subject to a three-year restriction period during which they cannot be sold, transferred or pledged. Any restricted shares are unblocked when the Board member leaves the Board.
The structure of Board compensation for the term of office from the 2019 AGM to the 2020 AGM is described in Exhibit 3 below.
| Board term fee (CHF) | |
|---|---|
| Chairman of the Board(1) | 1,200,000 |
| Vice-chairman of the Board(1) | 450,000 |
| Member of the Board | 290,000 |
| Additional committee fees: | |
| Chairman of FACC(2) | 110,000 |
| Chairman of CC or GNC(2) | 60,000 |
| Member of FACC(2) | 40,000 |
| Member of CC or GNC(2) | 30,000 |
(1) The Chairman and the Vice-chairman do not receive any additional committee fees for their roles on the GNC.
(2) CC: Compensation Committee,
FACC: Finance, Audit & Compliance Committee, GNC: Governance & Nomination Committee.
The compensation amounts paid to the Board members for the calendar year 2019 and for the term of office from the 2019 AGM to the 2020 AGM are disclosed in Exhibits 23 and 24, respectively, in the section "Compensation and share ownership tables".
At the 2019 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 4.70 million for the 2019–2020 Board term, the same as was approved for the previous Board term. The compensation agreed to be paid for that period amounts to CHF 4.67 million, unchanged from the amount paid for the previous Board term. The Board compensation is therefore within the amount approved by the shareholders. See Exhibit 4 below and Exhibit 24 in the section "Compensation and share ownership tables".
The Board compensation paid during the calendar year 2019 was slightly higher than the compensation paid during 2018. This was a result of the smaller Board size in the first part of 2018. See Exhibit 23 in the section "Compensation and share ownership tables".
| Exhibit 4: Board compensation (in CHF) | |||
|---|---|---|---|
| Board term | |||
| Board of Directors | 2019–2020 | 2018–2019 | |
| Number of members | 11 | 11 | |
| Total compensation | 4,670,000 | 4,670,000 | |
| Maximum aggregate compensation amount approved |
|||
| at AGM | 4,700,000 | 4,700,000 |
The members of the Board collectively owned less than 1 percent of ABB's total shares outstanding at December 31, 2019.
Exhibit 25 in the section "Compensation and share ownership tables" below, shows the number of ABB shares held by each Board member at December 31, 2019 and 2018. Except as described in this Exhibit, no member of the Board and no person closely linked to a member of the Board held any shares of ABB or options in ABB shares.
In 2019, ABB did not pay any fees or compensation to the members of the Board for services rendered to ABB other than those disclosed in this Report. Except as disclosed in the section titled "Board of Directors – Business relationships between ABB and its Board members" above, ABB did not pay any additional fees or compensation in 2018 to persons closely linked to a member of the Board for services rendered to ABB.
In 2019, no payment was made to any former Board member.
ABB's compensation system reflects its commitment to attract, motivate and retain people with the talent necessary to strengthen ABB's position as a pioneering technology leader in electrification, industrial automation, motion, robotics & discrete automation, and power grids, serving customers in utilities, industry and transport & infrastructure globally.
The compensation system is designed to provide competitive compensation and to encourage executives and employees to deliver outstanding results and create sustainable shareholder value without taking excessive risks. The compensation system balances:
| Exhibit 5: Structure of EC compensation as from 2020 | ||||
|---|---|---|---|---|
| Fixed compensation – | ||||
| Compensation structure | annual base salary and benefits |
Short-term incentive | Long-term incentive | Wealth at Risk/ Share Ownership |
| Purpose and link to strategy |
Compensates EC members for the role |
Rewards annual Company and individual performance. Drives annual strategy implementation |
Encourages creation of long-term, sustainable value for shareholders, and delivery of long-term strategic goals |
Aligns individual's personal wealth at risk directly to the ABB share price |
| Operation | Cash salary, benefits in kind, and pension contribution |
Annual awards, payable in cash after a 1-year performance period |
Annual awards in shares which may vest after 3 years subject to performance conditions |
Individuals required to hold ABB shares |
| Opportunity level (as % of annual base salary) |
Based on scope of responsibilities, individual experience and skillset |
Target: 100% Maximum: 150% |
CEO Target at grant: 150% Vesting: 0–300% EC Target at grant: 100% Vesting: 0–200% |
CEO wealth at risk: 500% (net) EC wealth at risk: 400% (net) |
| Time period | Delivered in year | 1 year | 3 years | Total EC tenure |
| Performance measures | Changes to annual base salary takes into account the executive's performance in the preceding year and potential for the future |
All: Group ROCE (20–25%); Business/function measures, which may include, for example: Revenue, Op. EBITA %, Op. net income, OFCF (55–60%); All: individual objectives (20%) |
Relative TSR (50%) Average EPS (50%) |
Direct link to ABB share price |
The structure for EC members consists of an annual base salary, a STI based on annual performance targets, a LTI based on three-year performance targets, and benefits.
This structure is linked to our strategy and, as illustrated in Exhibits 5 and 6, a significant portion of total compensation depends on variable pay components which require the achievement of challenging performance targets.
From 2020, the STI opportunity for the CEO has been aligned to the rest of the EC, moving from a target of 150 percent and a maximum of 225 percent of annual base salary in 2019, to a target of 100 percent and a maximum of 150 percent of annual base salary in 2020. In addition, to better align with competitive market practice, the LTI opportunity has been moved from a target of 200 percent and a maximum of 400 percent of annual base salary in 2019 to a target of 150 percent and a maximum of 300 percent of annual base salary in 2020.
The Board considers competitive market data when setting the compensation policy for the EC. This led to the downward adjustment of the target and maximum compensation for the CEO position from 2020 as described above. It is also one of several factors in positioning the target compensation for individual EC members which include:
The primary source of competitive market data used to assess the EC compensation is the general Pan-European Market. The EC compensation is benchmarked between the median to upper quartile of competitive market data. Comparisons are also made against Swiss and U.S. peers, as well as a global industry peer group (see Exhibit 7).
| Exhibit 7: Compensation benchmarking | ||
|---|---|---|
| Reference | Composition | Rationale |
| Main benchmark | ||
| General Pan-European Market |
399 largest European companies, of the FT Europe 500 listing. Represents companies in 20 countries and 16 different industries. The market cap of the companies represent a range from EUR 5 billion to EUR 217 billion |
Continuity and stability of data points |
| References to stress-test main benchmark | ||
| Global industry group |
Peer companies(1) selected based on business, geographic presence and size |
Specific peer group to benchmark compensa tion design |
| Swiss market | SMI and SMIM companies that are included in Hay's General Pan-European Market data(2) |
Comparison with other multinational Swiss com panies |
| U.S. market | U.S. peers of similar size and industry(3) |
Comparison with other multinational U.S. compa nies |
Fixed compensation – annual base salary and benefits
• Compensates the EC members for the role.
• When considering changes in annual base salary, the executive's performance during the preceding year against individual objectives as well as potential for the future are taken into account.
Purpose and link to strategy
• The STI is designed to reward EC members for the Group's results, the results of their business or function and their individual performance over a time horizon of one year.
• Annual cash awards based on performance assessment over the given year.
| Exhibit 8: Opportunity level (% of annual base salary) | ||
|---|---|---|
| Target | Maximum | |
| CEO(1) | 100% | 150% |
| EC | 100% | 150% |
(1) From 2020, the STI opportunity for the CEO has been aligned to the rest of the EC, lowering the target from 150 percent and the maximum from 225 percent of annual base salary in 2019, in order to more closely represent competitive market practice.
| Exhibit 9: 2020 Annual Incentive Plan for CEO – Measures and Weightings | |||
|---|---|---|---|
| Measure | Weighting (total 100%) |
Description | Link to Strategy |
| Group ROCE % | 25.00% | Operational EBITA after tax divided by the average of the period's opening and closing Capital employed, adjusted (as needed) to reflect impacts from significant acquisitions/ divestments occurring during the same period) |
Introduction of ROCE reflects the strong focus on delivering high return on capital employed in both business operations and corporate portfolio management |
| Group Revenues | 10.00% | Revenues realized from executing and fulfilling customer orders, before any costs or expenses are deducted |
Focus on value enhancing revenue streams and therefore decreasing the weighting on Group Revenues compared to 2019 |
| Group Operational EBITA % |
25.00% | Operational EBITA margin is Operational EBITA (as defined in "Note 23 – Operating segment and geographic data" to the Consolidated Financial Statements) as a percentage of Operational revenues, which is total revenues adjusted for foreign exchange/commodity timing differences in total revenues |
Increased weighting on Group Operational EBITA to focus on strategic execution and improving margin, resulting in a strong bottom line |
| Group FCF (Free cash flow) |
20.00% | Cash generated by the Company that can either be distributed to the shareholders (e.g. as dividends or share buy-backs), used to reduce debt (e.g. pay back bank loans or repurchase bonds) or spent on acquisitions |
Operating cash flow has been replaced with free cash flow to better focus on cash available to return to shareholders |
| Individual Measure | 20.00% | Linked to a maximum of three KPIs, which will include safety improvement targets for the Total Recordable Incident Frequency Rate (TRIFR). This is defined as the number of recordable incidents (fatal, serious injury, lost time, restricted work day case, medical treatment incidents and occupational diseases) × 200,000 / work hours (employees + contractors) |
Reflecting importance of safety agenda in keeping with the commitment to achieve excellence in health, safety and the environment at ABB |
the cap are determined by linear interpolations between these points.
• An illustration of the measures to be applied to the CEO for 2020 is set out in Exhibit 9. Note that the definition of free cash flow includes the impact of non-operational charges to reflect full accountability for cash performance and greater shareholder alignment. This principle will also be applied to the CFO. Also note that outcomes may be subject to appropriate adjustments (e.g. formulaic safety outcomes may be adjusted to reflect overall safety performance).
Purpose and link to strategy
• Aimed at driving long-term shareholder value creation in a sustainable manner. It rewards the achievement of predefined performance goals over a three-year period.
| Exhibit 10: Reference grant value (% of annual base salary) | |||
|---|---|---|---|
| EPS measure | TSR measure | Total | |
| CEO | 75% | 75% | 150% |
| EC | 50% | 50% | 100% |
Subject to malus and clawback rules. This means that the Board of Directors may decide not to pay any unpaid or unvested incentive compensation (malus), or may seek to recover incentive compensation that has been paid in the past (clawback).
For awards from 2019, malus and clawback is expanded from illegal activities to cover a serious financial misstatement of the Group's accounts. This to give the Board greater discretion to adjust the vesting of awards in line with business and shareholder interests and is more closely aligned to market practice.
TSR
Purpose and link to strategy
Share ownership program
| Exhibit 11: Share ownership requirement | |||
|---|---|---|---|
| CEO | 5 × annual base salary, net of tax | ||
| Other EC members | 4 × annual base salary, net of tax |
Operation
EC members received total compensation of CHF 51.4 million in 2019 compared with CHF 39.8 million in 2018, as summarized in Exhibit 12 below and presented in detail in Exhibits 26 and 27.
The increase in total compensation in 2019 was principally due to the change of 3 EC members (the CEO, the GC and the CHRO) plus the addition of one EC member to lead the Motion Business, which was spun off from the former Robotics division. Further details are provided in the footnote to Exhibit 13 below.
| 2019 | 2018 | |
|---|---|---|
| Base salaries | 12.1 | 9.9 |
| Pension benefits | 5.5 | 4.7 |
| Other benefits | 6.9 | 5.5 |
| Total fixed compensation | 24.5 | 20.1 |
| Short-term incentive (fair value at grant) | 12.7 | 9.1 |
| Long-term incentive | 12.6 | 10.6 |
| Replacement share grant | 1.6 | 0.0 |
| Total variable compensation | 26.9 | 19.7 |
| Total compensation | 51.4 | 39.8 |
For an overview of compensation by individual and component, please refer to Exhibit 26 and Exhibit 27 in "Compensation and share ownership tables" below.
At the 2018 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 52 million for the EC for the year 2019. The EC compensation for 2019 amounted to CHF 51.4 million and is within the approved amount. See Exhibit 13 below.
| Exhibit 13: EC compensation (in CHF) | |||
|---|---|---|---|
| Calendar year | |||
| Executive Committee | 2019 | 2018 | |
| Number of members | 11 | 11 | |
| Total compensation | 51,355,121(1) | 39,773,211 | |
| Maximum aggregate compensation amount approved at AGM |
52,000,000 | 52,000,000 |
(1) This amount includes CHF 1.6 million for the grant fair value of the replacement share grant provided to the incoming GC and CHF 0.5 million representing 10 months of a lost STI award, to compensate for benefits foregone from her previous employer. It also includes another CHF 8.7 million representing the additional cost related to the overlap in EC positions due the departure of 3 EC members plus the addition of one EC member to lead the Motion Business. Excluding these effects, the total would have been CHF 40.6 million.
Company and individual EC members against predefined performance objectives.
In 2019, the outgoing CEO's variable compensation was 52 percent of his total compensation (previous year: 61 percent) which is the direct result of the absence of an LTI grant. For the other EC members the variable compensation represented an average of 45 percent (previous year: 46 percent).
The compensation structure and levels for the CEO were changed during 2019, to reflect the appointment of an interim CEO, and will change again in 2020 to reflect the newly appointed CEO. This is summarized in Exhibit 14.
The interim CEO, Peter Voser, receives a monthly payment equivalent to the same annual base salary and annual target STI as the former CEO. He does not receive any LTI grants or benefits, except legally required pension and social security contributions, as specified in Exhibit 26. This compensation is in addition to his fees as Chairman, given he is currently performing both roles.
| Exhibit 14: CEO Total Annual Direct Compensation overview (in CHF) |
|||
|---|---|---|---|
| Ulrich Spiesshofer |
Peter Voser(1) |
Björn Rosengren(2) |
|
| Annual Total Direct Compensation |
|||
| at target level | 7,582,500 | 4,212,500 | 5,950,000 |
| Annual Total Direct Compensation at maximum |
|||
| opportunity level | 12,216,250 | 4,212,500 | 9,350,000 |
| Annual Base Salary (ABS) |
1,685,000 | 1,685,000 | 1,700,000 |
| Short-term Incentive (STI) | |||
| Target STI | 2,527,500 | 2,527,500 | 1,700,000 |
| Target STI as % of ABS |
150% | 150%(3) | 100% |
| Maximum STI opportunity |
3,791,250 | N/A | 2,550,000 |
| Maximum STI opportunity as a % of ABS |
225% | N/A | 150% |
| Long-term Incentive (LTI) | |||
| Target LTI | 3,370,000 | N/A | 2,550,000 |
| Target LTI as % of ABS |
200% | N/A | 150% |
| Maximum LTI opportunity |
6,740,000 | N/A | 5,100,000 |
| Maximum LTI opportunity as a % of ABS |
400% | N/A | 300% |
(1) In addition to the compensation for the interim CEO position, Peter Voser received payments related to his Board membership. See Exhibit 23.
(2) Björn Rosengren will receive, at the time joining ABB, a one-time replacement share grant representing 149,054 ABB shares, to compensate for his foregone Sandvik shares.
(3) STI is guaranteed at target level and paid monthly.
As noted in the Compensation Committee Chairman's letter, the compensation package for the incoming CEO, Björn Rosengren, constitutes a 21.5 percent reduction in TTDC compared to that of Ulrich Spiesshofer. This is driven by reducing the target STI from 150 percent to 100 percent of annual base salary and the target LTI from 200 percent to 150 percent of annual base salary. In addition, the Company will not be required to provide compensation for any contractually agreed one year non-compete period, following his employment with the Company.
He will receive standard EC benefits, including membership in the ABB Global Retirement Savings Plan. He will receive standard relocation support commensurate with a senior executive transfer to Switzerland, including temporary accommodation. There will be no ongoing housing allowance payments, again consistent with senior executives in Switzerland.
The Company will replace his forfeited, unvested LTI awards from 2017 to 2019, with a one-time replacement share grant, representing 149,054 ABB shares. The first tranche of this award, representing 130,150 ABB shares, will vest two years after grant and the second tranche of the award, representing 18,904 shares, will vest three years after grant. This award is subject to certain forfeiture clauses (e.g. employee giving notice of termination before vesting of awards).
The President, Motion Business, Morten Wierod, was appointed to the EC on April 1, 2019, with an annual base salary of CHF 700,000, a target short-term and long-term incentive each of 100 percent of annual base salary, leading to a TTDC of CHF 2,100,000. He is eligible for standard EC benefits.
The CHRO, Sylvia Hill, was appointed to the EC on June 1, 2019, with an annual base salary of CHF 700,000, a target short-term and long-term incentive each of 100 percent of annual base salary, leading to a TTDC of CHF 2,100,000. This represents a reduction in TTDC compared to the prior incumbent. She is eligible for standard EC benefits.
The GC, Maria Varsellona, was appointed to the EC on November 1, 2019, with an annual base salary of CHF 800,000, a target short-term and long-term incentive each of 100 percent of annual base salary, leading to a TTDC of CHF 2,400,000. This represents a reduction in TTDC compared to the prior incumbent. She is eligible for standard
EC benefits and received standard relocation support commensurate with a senior executive transfer to Switzerland, including temporary accommodation.
Maria Varsellona is eligible to receive compensation of CHF 0.5 million for 10 months of forfeited STI, representing the time served with her former employer in 2019, payable at the time of payment of the STI award to other EC members in 2020. This payment is subject to forfeiture clauses (e.g. employee giving notice of termination within 12 months of starting employment with ABB).
The Company has replaced her forfeited unvested LTI awards from her former employer, with a one-time ABB share grant representing a value of CHF 1.6 million. The foregone LTI awards have been valued applying a discount factor of 42 percent. The award will vest in two equal tranches, the first two years, and the second three years after the date of grant. Each tranche is subject to certain forfeiture clauses (e.g. employee giving notice of termination before vesting of awards).
In 2019, four out of eleven EC members received an adjustment of annual base salary, which ranged from 1.9 percent to 11.1 percent, the latter being for an exceptional performance and market adjustment.
STI awards were set in 2019 under the previous Incentive Plan. This has been redesigned for 2020, as described in the Executive Committee Compensation Policy.
Awards for all EC members were subject to the achievement of common Group objectives, as set out in Exhibit 15.
These Group objectives were complemented by individual objectives by EC member. For Business and Regional Presidents, the majority were quantifiable objectives based on financial and operational metrics for their area of responsibility; for the CEO and Corporate Officers, they are typically strategic objectives set by the Board.
Examples of quantitative individual measures included items such as Business or Regional Revenue, Operational EBITA Margin, Operating cash flow, Demand Orders and safety. Qualitative individual metrics include items such as the creation of the new ABB operating model, internal controls and functional effectiveness.
For each performance objective (Group and Individual), a target was set corresponding to the expected level of performance that will generate a 100 percent award. Further, a minimum level of performance, below which there is no award (threshold) and a maximum level of performance, above which the award is capped at 150 percent of the target (cap), were also defined. The award percentages for achievements between the threshold, the target and the cap are determined by linear interpolations between these points.
The relative weighting and composition of Group and Individual objectives are shown in Exhibit 16. The majority of objectives for all EC members are quantitative in nature.
| Exhibit 15: Group objectives and weighting in 2019 | |||
|---|---|---|---|
| Objective | Weighting | Description | |
| Revenues | 25% | Income realized from executing and fulfilling customer orders, before any costs or expenses are deducted |
|
| Operational EBITA margin | 15% | Operational EBITA margin is Operational EBITA (as defined in "Note 23 – Operating segment and geographic data" to the Consolidated Financial Statements) as a percentage of Operational revenues, which is total revenues adjusted for foreign exchange/commodity timing differences in total revenues |
|
| Operating cash flow (OCF) |
30% | Operating cash flow is defined as the net cash provided by operating activities, reversing the cash impact of interest, taxes and restructuring-related activities |
|
| Operational net income (ONC) |
15% | Operational net income is calculated as net income attributable to ABB after adjustments(1) |
|
| Cost savings | 15% | Savings generated from ABB group-wide cost reduction programs including supply chain management and operational excellence that have direct impact on the Group's Operational EBITA |
(1) Adjustments include: the after-tax effect of acquisition-related amortization, restructuring, related and implementation cost, non-operational pension cost (credit), changes in obligations related to divested businesses, changes in pre-acquisition estimates, gains and losses from sale of businesses (including fair value adjustment on assets and liabilities held for sale), acquisition- and divestment-related expenses and integration costs, certain other non-operational items and foreign exchange/commodity timing differences in income from operations, as well as certain other non-operational amounts recorded within Provision for taxes.
| Exhibit 16: Weighting and composition of objectives for EC members for 2019 |
|||
|---|---|---|---|
| CEO | Business and Region Presidents |
Corporate Officers(1) |
|
| Group objectives |
80% | 35% | 35% |
| Individual objectives |
20% | 65% | 65% |
| Typical composition of objectives: | |||
| Qualitative | 20% | 10% | 35% |
| Quantitative | 80% | 90% | 65% |
(1) CFO, CHRO and GC.
In 2019, the achievement against most objectives were below the challenging targets set by the Board. The award under the Revenue measure, with a weighting of 25 percent, amounted to 89.1 percent of target (2018: 99.3 percent).
The award under Operating cash flow, with a weighting of 30 percent, was 93.1 percent of target, an improvement against 2018, where the award amounted to 56.6 percent of target.
Operational EBITA margin and Operational net income, both with a weighting of 15 percent, led to awards of 82.8 percent and 79.4 percent, respectively, compared to the prior year of 81.1 percent and 82.6 percent, respectively.
The Group continues to deliver very strong operational Cost savings, which were above target. The Cost savings parameter, weighted at 15 percent, achieved a 149.0 percent award (2018: 150.0 percent).
The combined achievement of these performance measures resulted in a 96.9 percent (2018: 85.5 percent) achievement level at the Group level in 2019.
With respect to individual/team objectives for each EC member, the achievement ranges between 58.6 percent to 111.3 percent of target, reflecting the financial results of their respective areas of responsibility as well as their achievements on operational performance, strategic initiatives and leadership performance. This compared to a range of 35.5 percent to 112.0 percent in 2018.
The overall average award of STI for the entire EC was 94.7 percent of target (2018: 85.1 percent) with a range from 72.0 percent (lowest achievement) to 106.2 percent of target (highest achievement). This compared to a range of 52.3 percent to 102.4 percent in 2018.
These outcomes are summarized in Exhibit 17.
| 2019 (% of target) |
2018 (% of target) |
|
|---|---|---|
| Group Objectives | ||
| Revenues | 89% | 99% |
| Op EBITA % | 83% | 81% |
| Operational Cash Flow | 93% | 57% |
| Operational Net Income | 79% | 83% |
| Cost savings | 149% | 150% |
| Overall Group Result | 97% | 86% |
| EC Individual Objectives | ||
| Range of outcomes | 58.6%–111.3% | 35.5%–112.0% |
| Average | 93% | 88% |
| Combined Overall Group Result and EC Individual Objectives |
||
| Range of outcomes | 72.0%–106.2% | 52.3%–102.4% |
| Overall Average | 95% | 85% |
2019 Long-term incentive
The estimated value at grant of the share-based grants to EC members under the 2019 LTIP award was CHF 12.6 million, compared with CHF 10.6 million in 2018.
The 2019 LTIP comprises of two equally weighted performance factors, a three year average EPS and relative TSR, designed to be fully aligned with our strategy, which focuses on EPS delivery and attractive shareholder returns, both on an absolute and relative basis.
The companies approved by the Board to determine ABB's relative TSR performance for the 2019 LTIP were: 3M, Danaher, Eaton, Emerson Electric, Honeywell, United Technologies, General Electric, Rockwell, Rolls Royce, Schneider Electric, Siemens, ThyssenKrupp, Legrand, Yokogawa and Mitsubishi Electric. These were selected to provide an appropriate and very challenging set of peers, and influenced the payment point setting accordingly (see Exhibit 18).
The 2019 LTIP award curves are also illustrated in Exhibit 18.
The EPS performance target for vesting LTIP awards will be retrospectively disclosed in future ABB compensation reports.
The 2016 LTIP, which vested in 2019, was comprised of two measures – P1 (net income) and P2 (cumulative weighted EPS) measures.
The net income measure fully vested at 100 percent, same as in previous year. The cumulative weighted EPS measure vested at 85 percent (previous year: 61 percent) out of a potential 200 percent.
Threshold point: no award; target point: 100% award; maximum point: capped at 200% award; linear award between points. The actual EPS target is not disclosed for reasons of commercial sensitivity.
Threshold point: TSR performance within the lower (0–25%) quartile: no award. Target point: TSR performance at the median performing company: 100% award. Maximum point: TSR performance within the upper (75–100%) quartile: 200% award. Linear award between points.
The historical vesting percentages for the prior five years are shown in Exhibit 19 below.
| Exhibit 19: LTIP historical actual vesting percentages(1) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Plan Year of Award | |||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | |||||
| Vesting in % of target award |
80.4% | 77.2% | 74.8% | 80.5% | 92.5% | ||||
| Vesting in % of maximum |
|||||||||
| potential award | 57.4% | 55.1% | 53.4% | 53.7% | 61.7% |
(1) Average of P1 and P2 components.
The EC members owned collectively less than 1 percent of ABB's total shares outstanding at December 31, 2019.
At December 31, 2019, members of the EC held ABB shares and conditional rights to receive shares, as shown in Exhibit 30 in the section "Compensation and share ownership tables" below. Their holdings at December 31, 2018, are shown in Exhibit 31 in the section "Compensation and share ownership tables" below.
Members of the EC cannot participate in the Management Incentive Plan (MIP). Any MIP instruments held by EC members were awarded to them as part of the compensation they received in previous roles they held at ABB. For a more detailed description of MIP, please refer to "Note 18 – Share-based payment arrangements" in our Consolidated Financial Statements.
Except as described in Exhibits 30 and 31, no member of the EC and no person closely linked to a member of the EC held any shares of ABB or options on ABB shares at December 31, 2019 and 2018.
Members of the EC are eligible to participate in the Employee Share Acquisition Plan (ESAP), a savings plan based on stock options, which is open to employees around the world. Four members of the EC participated in the 16th annual launch of the plan in 2019. EC members who participated will, upon vesting, each be entitled to acquire up to 480 ABB shares at CHF 20.78 per share, the market share price at the start of the 2019 launch.
For a more detailed description of the ESAP, please refer to "Note 18 – Share-based payment arrangements" in our Consolidated Financial Statements.
In 2019, ABB did not pay any fees or compensation to the members of the EC for services rendered to ABB other than those disclosed in this compensation report. Except as disclosed in the section titled "Board of Directors – Business relations between ABB and its EC members" in the Corporate Governance Report, ABB did not pay any additional fees or compensation in 2019 to persons closely linked to a member of the EC for services rendered to ABB.
The terms of departure of the former CEO, Ulrich Spiesshofer, were as per his existing contractual arrangements.
He continues to receive annual base salary and benefits during his 12 months' notice period until April 30, 2020.
He will receive a STI payment for 2019, and a pro-rata payment until the end of his notice period in 2020, based on the average STI award percentages achieved in 2017 and 2018, at the time it is paid to the Company's EC members.
As per his contract, Ulrich Spiesshofer is subject to non-competition obligations, which will be effective from the end of his notice period, i.e. from May 1, 2020 to April 30, 2021. During this time, he will receive 12 monthly payments equivalent to his last annual base salary and the average of STI award percentages made in 2017 and 2018.
Outstanding and unvested LTI grants made for the years 2017–2019 will vest, according to the normal vesting schedule, subject to achievement against the relevant performance conditions.
The indicative total costs are summarized in Exhibit 20.
| Notice Period May 1, 2019 – April 30, 2020 |
Non-compete Period May 1, 2020 – April 30, 2021 |
|
|---|---|---|
| ABS | 1,685,000 | 1,685,000 |
| STI | 2,249,475 | 2,249,475 |
| LTI Grant | 2,967,911 | N/A |
| Total Direct Compensation |
6,902,386 | 3,934,475 |
| Pension | 639,222 | N/A |
| Other Benefits(1) | 1,033,613 | 540,000 |
| Total Compensation | 8,575,221 | 4,474,475 |
(1) These are indicative values mainly representing mandatory social security payments and school fees. Actual figures which will be disclosed in future ABB compensation reports may deviate, depending on the final value of the LTIP at vesting. In 2021 and 2022 there will also be additional charges representing mandatory social security payments related to the vesting of the LTIP 2018 and 2019. Note all numbers are indicative.
The terms of retirement from ABB of Greg Scheu, President, The Americas, on October 31, 2019, were as per his contractual arrangements.
As previously advised, Frank Duggan, President, Europe, and Chunyuan Gu, President, AMEA, and Claudio Facchin, President, Power Grids business stepped down from the EC on December 31, 2019, to take other positions within ABB.
The terms of departure from ABB of Jean-Christophe Deslarzes, CHRO on February 29, 2020, and Diane de Saint Victor on March 31, 2020, will be as per their contractual arrangements.
In 2019, certain former EC members received contractual compensation for the period after leaving the EC, as shown in Exhibit 26, footnote (5).
As illustrated in Exhibit 21, the Board's proposals to shareholders at the 2020 AGM will relate to Board compensation for the 2020–2021 term of office and EC compensation for the calendar year 2021. There will also be a non-binding vote on the 2019 compensation report.
In determining the proposed maximum aggregate EC compensation, the Board takes into consideration the criteria illustrated in Exhibit 22 below. Given the variable nature of a major portion of the compensation components, the proposed
maximum aggregate EC compensation will almost always be higher than the actual compensation paid or awarded, as it must cover the potential maximum value of each component of compensation.
(1) Numbers will be provided in the AGM invitation.
(2) The 2019 target amount was higher than the maximum approved, as it included CHF 8.7 million representing the additional cost related to overlapping EC positions, due the departure of three EC members, plus an additional EC member to lead the Motion Business. It also included CHF 1.6 million for the grant fair value of the replacement share grant provided to the incoming GC and CHF 0.5 million representing 10 months of a lost STI award, to compensate for benefits foregone from her previous employer. (3) For full description, see section "Executive Committee compensation".
award percentage(3) 95% 100% 150% 150% 150% Adjustment of LTIP grant size 0% 0% +12.5%(4) +12.5%(3) +12.5%(3) Number of EC members 11 11 11 12 9
(4) This 12.5 percent applied on the entire LTIP for EC members only and is not applicable to the CEO.
| Exhibit 23: Board compensation in 2019 and 2018 (audited) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Paid in 2019 | Paid in 2018 | |||||||||
| November Board term 2019–2020 |
May Board term 2018–2019 |
November Board term 2018–2019 |
May Board term 2017–2018 |
|||||||
| Name | Settled in cash(1) | Settled in shares – number of shares received(2) |
Settled in cash(1) | Settled in shares – number of shares received(2) |
Total compensation paid in 2019(3) |
Settled in cash(1) | Settled in shares – number of shares received(2) |
Settled in cash(1) | Settled in shares – number of shares received(2) |
Total compensation paid in 2018(3) |
| CHF | CHF | CHF | CHF | CHF | CHF | |||||
| Peter Voser, Chairman(4) | — | 29,156 | — | 29,943 1,200,000 | — 24,777 | — | 25,133 | 1,200,000 | ||
| Jacob Wallenberg(5) | 112,500 | 4,397 112,500 | 4,515 | 450,000 112,500 | 3,737 | 112,500 | 3,789 | 450,000 | ||
| Matti Alahuhta(6) | — | 6,384 | 80,000 | 3,210 | 320,000 | 80,000 | 2,657 | 80,000 | 2,694 | 320,000 |
| Gunnar Brock(7) | — | 6,584 | 82,500 | 3,311 | 330,000 | 82,500 | 2,740 | — | — | 165,000 |
| David Constable(8) | 87,500 | 3,420 | 87,500 | 3,511 | 350,000 | 87,500 | 2,906 | 87,500 | 2,947 | 350,000 |
| Frederico Curado(9) | — | 5,934 | 80,000 | 2,973 | 320,000 | 80,000 | 2,457 | 80,000 | 2,495 | 320,000 |
| Lars Förberg(10) | — | 7,755 | — | 7,970 | 320,000 | — | 6,590 | — | 6,690 | 320,000 |
| Louis R. Hughes(11) | — | — | — | — | — | — | — | 100,000 | 3,099 | 200,000 |
| Jennifer Xin-Zhe Li(12) | 80,000 | 2,892 | 80,000 | 2,973 | 320,000 | 80,000 | 2,454 | — | — | 160,000 |
| Geraldine Matchett(13) | 82,500 | 4,213 | 82,500 | 4,326 | 330,000 | 82,500 | 3,380 | — | — | 165,000 |
| David Meline(14) | 100,000 | 3,908 100,000 | 4,013 | 400,000 100,000 | 3,321 | 82,500 | 2,779 | 365,000 | ||
| Satish Pai(15) | 82,500 | 2,983 | 82,500 | 3,066 | 330,000 | 82,500 | 2,535 | 82,500 | 2,574 | 330,000 |
| Ying Yeh(16) | — | — | — | — | — | — | — | 80,000 | 2,281 | 160,000 |
| Total | 545,000 | 77,626 787,500 | 69,811 4,670,000 787,500 57,554 | 705,000 | 54,481 | 4,505,000 |
(1) Represents gross amounts paid, prior to deductions for social security, withholding tax etc.
(2) Number of shares per Board member is calculated based on net amount due after deductions for social security, withholding tax etc.
(3) In addition to the Board remuneration stated in the above table, in 2018 and 2019 the Company paid CHF 288,408 and CHF 270,993, respectively, in related mandatory social security payments.
(4) Chairman of the ABB Ltd Board for the 2017–2018, 2018–2019 and 2019–2020 board terms and Chairman of the Governance and Nomination Committee for the 2017–2018 and the 2018–2019 board terms; is receiving 100 percent of his compensation in the form of ABB shares.
(5) Vice-Chairman of the ABB Ltd Board for the 2017–2018, 2018–2019 and 2019–2020 board terms; Chairman of the Governance and Nomination Committee for the 2019–2020 board term and member of that committee for the 2017–2018 and 2018–2019 board terms; is receiving 50 percent of his compensation in the form of ABB shares.
(6) Member of the Governance and Nomination Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; received 50 percent of his compensation in the form of ABB shares for the 2017–2018 and 2018–2019 board terms and is receiving 100 percent of his compensation in shares for the 2019–2020 board term.
(7) Member of the Finance, Audit and Compliance Committee for the 2018–2019 and 2019–2020 board terms; received 50 percent of his compensation in shares for the 2018–2019 board term and is receiving 100 percent of his compensation in the form of ABB shares for the 2019–2020 board term.
(8) Chairman of the Compensation Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; is receiving 50 percent of his compensation in the form of ABB shares.
(9) Member of the Compensation Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; received 50 percent of his compensation in the form of ABB shares for the 2017–2018 and 2018–2019 board terms and is receiving 100 percent of his compensation in shares for the 2019–2020 board term.
(10) Member of the Governance and Nomination Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; is receiving 100 percent of his compensation in the form of ABB shares.
(11) Did not stand for re-election at the ABB Ltd 2018 AGM; Chairman of the Finance, Audit and Compliance Committee for the 2017–2018 board term; received 50 percent of his compensation in the form of ABB shares.
(12) Member of the Compensation Committee for the 2018–2019 and 2019–2020 board term; is receiving 50 percent of her compensation in the form of ABB shares.
(13) Member of the Finance, Audit and Compliance Committee for the 2018–2019 and 2019–2020 board terms; is receiving 50 percent of her compensation in the form of ABB shares.
(14) Chairman of the Finance, Audit and Compliance Committee for 2018–2019 and 2019–2020 board terms and member of that committee for the 2017–2018 board term; is receiving 50 percent of his compensation in the form of ABB shares.
(15) Member of the Finance, Audit and Compliance Committee for the 2017–2018, 2018–2019 and 2019–2020 board terms; is receiving 50 percent of his compensation in the form of ABB shares.
(16) Did not stand for re-election at the ABB Ltd 2018 AGM; member of the Compensation Committee for the 2017–2018 board term; received 50 percent of her compensation in the form of ABB shares.
| Exhibit 24: Board compensation for the Board terms 2019–2020 and 2018–2019 (audited) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Name | Specific Board Roles | Board term 2019–2020 |
Board term 2018–2019 |
||||||
| CHF | CHF | ||||||||
| Peter Voser | Chairman of the Board, Chairman of GNC (Board term 2018–2019) | 1,200,000 | 1,200,000 | ||||||
| Jacob Wallenberg(1) | Vice-Chairman of the Board, Chairman of GNC (Board term 2019–2020) | 450,000 | 450,000 | ||||||
| Matti Alahuhta | Member GNC | 320,000 | 320,000 | ||||||
| Gunnar Brock | Member FACC | 330,000 | 330,000 | ||||||
| David Constable | Chairman CC | 350,000 | 350,000 | ||||||
| Frederico Curado | Member CC | 320,000 | 320,000 | ||||||
| Lars Förberg | Member GNC | 320,000 | 320,000 | ||||||
| Jennifer Xin-Zhe Li | Member CC | 320,000 | 320,000 | ||||||
| Geraldine Matchett | Member FACC | 330,000 | 330,000 | ||||||
| David Meline | Chairman of FACC | 400,000 | 400,000 | ||||||
| Satish Pai | Member FACC | 330,000 | 330,000 | ||||||
| Total | 4,670,000 | 4,670,000 |
(1) Member of GNC for the 2018–2019 Board term.
Key:
CC: Compensation Committee
FACC: Finance, Audit & Compliance Committee
GNC: Governance & Nomination Committee
| Exhibit 25: Board ownership of ABB shares (audited as part of the financial statement stand-alone audit) | |||||
|---|---|---|---|---|---|
| Total number of shares held | |||||
| Name | December 31, 2019 | December 31, 2018 | |||
| Peter Voser(1) | 260,175 | 201,076 | |||
| Jacob Wallenberg | 226,021 | 217,109 | |||
| Matti Alahuhta | 51,466 | 41,872 | |||
| Gunnar Brock | 14,635 | 4,740 | |||
| David Constable | 27,581 | 20,650 | |||
| Frederico Curado | 21,298 | 12,391 | |||
| Lars Förberg | 35,499 | 19,774 | |||
| Jennifer Xin-Zhe Li | 8,319 | 2,454 | |||
| Geraldine Matchett | 11,919 | 3,380 | |||
| David Meline(2) | 25,463 | 17,542 | |||
| Satish Pai | 19,047 | 12,998 | |||
| Total | 701,423 | 553,986 |
(1) Includes 2,000 shares held by spouse.
(2) Includes 3,150 shares held by spouse.
Cash Compensation
| Name | Base salary | Short-term incentive(1) | Pension benefits | Other benefits(2) | 2019 Total cash-based compensation(3) |
Estimated value of share-based grants under the LTIP in 2019(4) |
Estimated value of replacement share-based grant in 2019 |
2019 Total (incl. conditional sharebased grants)(5) |
|---|---|---|---|---|---|---|---|---|
| CHF | CHF | CHF | CHF | CHF | CHF | CHF | CHF | |
| Peter Voser (CEO as of April 17, 2019) |
1,187,167 | 1,780,739 | 149,772 | 320,688 | 3,438,366 | — | — | 3,438,366 |
| Timo Ihamuotila | 945,005 | 960,450 | 500,830 | 581,983 | 2,988,268 | 836,661 | — | 3,824,929 |
| Sylvia Hill (EC member as of June 1, 2019) |
408,334 | 433,650 | 268,643 | 198,236 | 1,308,863 | 616,494 | — | 1,925,357 |
| Maria Varsellona (EC member as of November 1, 2019)(6) |
133,335 | 133,333 | 40,619 | 472,088 | 779,375 | 822,328 | 1,624,386 | 3,226,089 |
| Frank Duggan(7) | 667,708 | 707,103 | 363,173 | 552,220 | 2,290,204 | 704,559 | — | 2,994,763 |
| Chunyuan Gu(8) | 685,847 | 685,963 | 263,125 | 708,252 | 2,343,187 | 616,494 | — | 2,959,681 |
| Sami Atiya | 786,676 | 602,400 | 467,214 | 528,033 | 2,384,323 | 845,459 | — | 3,229,782 |
| Tarak Mehta | 860,004 | 747,340 | 478,990 | 570,644 | 2,656,978 | 757,396 | — | 3,414,374 |
| Claudio Facchin | 810,006 | 583,200 | 469,271 | 404,865 | 2,267,342 | 713,355 | — | 2,980,697 |
| Peter Terwiesch | 795,009 | 668,800 | 460,453 | 389,694 | 2,313,956 | 704,559 | — | 3,018,515 |
| Morten Wierod (EC member as of April 1, 2019) |
525,000 | 516,600 | 304,632 | 200,336 | 1,546,568 | 616,494 | — | 2,163,062 |
| Total current Executive Committee members at December 31, 2019 |
7,804,091 | 7,819,578 | 3,766,722 4,927,039 24,317,430 | 7,233,799 | 1,624,386 33,175,615 | |||
| Ulrich Spiesshofer (EC member until April 16, 2019) |
1,685,010 | 2,249,475 | 639,222 | 979,554 | 5,553,261 | 2,967,911 | — | 8,521,172 |
| Jean-Christophe Deslarzes (EC member until May 31, 2019) |
940,007 | 998,280 | 513,258 | 522,119 | 2,973,664 | 827,846 | — | 3,801,510 |
| Diane de Saint Victor (EC member until October 31, 2019) |
1,000,001 | 1,062,000 | 298,242 | 246,441 | 2,606,684 | 880,685 | — | 3,487,369 |
| Greg Scheu (EC member until October 31, 2019)(9) |
661,604 | 557,123 | 228,298 | 199,474 | 1,646,499 | 722,956 | — | 2,369,455 |
| Total departing Executive Committee members |
4,286,622 | 4,866,878 | 1,679,020 1,947,588 12,780,108 | 5,399,398 | — 18,179,506 | |||
| Total | 12,090,713 12,686,456 | 5,445,742 6,874,627 37,097,538 12,633,197 | 1,624,386 51,355,121 |
(1) Represents accrued STI for the year 2019, which will be paid in 2020, after the publication of ABB's financial results. The STI is linked to the objectives defined in each EC member's scorecard. Upon full achievement of these objectives, the STI of the EC members represents 100 percent of their respective annual base salary. The STI of the former CEO, Ulrich Spiesshofer, corresponds to the contractually agreed average of the year 2017 and 2018 STI award. Peter Voser received his STI payment monthly at target achievement level. Greg Scheu received a pro-rata STI payment for his period of service as an EC member, in accordance with the contractual obligations of ABB.
(2) Other benefits comprise payments related to social security, health insurance, children's education, transportation, tax advice and certain other items. Other benefits for Peter Voser include mandatory social security payments only.
(3) Prepared on an accrual basis.
(4) On the day of vesting (May 16, 2022), the value of the share-based awards granted under the LTIP may vary from the above amounts due to changes in ABB's share price and the outcome of the performance factors. The estimated value of the share based grants are based on the price of ABB shares on the grant date, adjusted for expected foregone dividends during the vesting period.
(5) Payments totaling CHF 216,069 were made in 2019 on behalf of certain other former EC members, mainly representing mandatory social security payments.
(6) In addition to the replacement share grant, Maria Varsellona will receive compensation in the amount of CHF 445,939 for 10 months of foregone STI payments from her previous employer, which is shown under other benefits.
(7) Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The Company purchased EUR with AED to meet this obligation. All AED amounts were converted into Swiss francs using a rate of CHF 0.2635992 per AED.
(8) Chunyuan Gu received for the period January to February 2019, 100 percent of his compensation in CNY and for the period March to December 2019, 100 percent of his base salary in HKD. All CNY amounts were converted into Swiss francs using a rate of CHF 0.1391052 per CNY and all HKD amounts were converted into Swiss francs using a rate of CHF 0.12434741 per HKD.
(9) Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 0.9682 per USD.
| Exhibit 27: EC compensation in 2018 (audited) | |||||||
|---|---|---|---|---|---|---|---|
| Cash Compensation | |||||||
| Name | Base salary | Short-term incentive(1) | Pension benefits | Other benefits(2) | 2018 Total cash-based compensation(3) |
Estimated value of share-based grants under the LTIP in 2018(4) |
2018 Total (incl. conditional sharebased grants)(5) |
| CHF | CHF | CHF | CHF | CHF | CHF | CHF | |
| Ulrich Spiesshofer | 1,685,010 | 2,082,660 | 631,775 | 989,918 | 5,389,363 | 3,153,750 | 8,543,113 |
| Timo Ihamuotila | 920,012 | 810,520 | 487,435 | 502,703 | 2,720,670 | 819,965 | 3,540,635 |
| Jean-Christophe Deslarzes | 940,007 | 908,980 | 506,036 | 718,111 | 3,073,134 | 1,005,365 | 4,078,499 |
| Diane de Saint Victor | 1,000,001 | 1,024,000 | 295,325 | 266,153 | 2,585,479 | 891,283 | 3,476,762 |
| Frank Duggan(6) | 697,573 | 643,163 | 354,222 | 569,854 | 2,264,812 | 699,649 | 2,964,461 |
| Greg Scheu(7) | 806,634 | 713,065 | 291,077 | 118,426 | 1,929,202 | 559,393 | 2,488,595 |
| Chunyuan Gu(8) | 715,357 | 688,888 | 263,125 | 499,338 | 2,166,708 | 748,669 | 2,915,377 |
| 720,008 | 576,720 | 441,235 | 427,729 | 2,165,692 | 513,368 | 2,679,060 | |
| Sami Atiya | |||||||
| Tarak Mehta | 860,004 | 540,940 | 472,097 | 566,773 | 2,439,814 | 766,494 | 3,206,308 |
(1) Represents accrued STI for the year 2018 for all current EC members, which will be paid in 2019, after the publication of ABB's financial results. The STI is linked to the objectives defined in each EC member's scorecard. Upon full achievement of these objectives, the STI of the CEO corresponds to 150 percent of his annual base salary, while for each other EC member it represents 100 percent of their respective annual base salary.
Claudio Facchin 810,006 423,630 462,386 463,666 2,159,688 577,548 2,737,236 Peter Terwiesch 770,006 726,110 446,435 377,080 2,319,631 823,534 3,143,165
Committee members 9,924,618 9,138,676 4,651,148 5,499,751 29,214,193 10,559,018 39,773,211
(2) Other benefits comprise payments related to social security, health insurance, children's education, transportation, tax advice and certain other items.
(3) Prepared on an accrual basis.
Total Executive
(4) On the day of vesting (April 6, 2021), the value of the share-based awards granted under the LTIP may vary from the above amounts due to changes in ABB's share price and the outcome of the performance factors. The estimated value of the share-based grants are based on a Monte Carlo simulation and the price of ABB shares on the grant date, adjusted for EPS factor for the expected foregone dividends during the vesting period.
(5) Payments totaling CHF 258,585 were made in 2018 on behalf of certain other former EC members, mainly representing mandatory social security payments.
(6) Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The Company purchased EUR with AED to meet this obligation. All AED amounts were converted into Swiss francs using a rate of CHF 0.2678411 per AED.
(7) Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 0.9837 per USD.
(8) Chunyuan Gu received 100 percent of his base salary in CNY. All CNY amounts were converted into Swiss francs using a rate of CHF 0.1430712 per CNY.
| Exhibit 28: LTIP grants in 2019 (audited) | ||
|---|---|---|
| -- | -- | ------------------------------------------- |
| Name | Reference number of shares under the EPS performance factor of the 2019 launch of the LTIP(1) |
factor of the 2019 launch of the LTIP(2),(3) Total estimated value of share-based grants under the EPS performance |
Reference number of shares under the TSR performance factor of the 2019 launch of the LTIP(1) |
factor of the 2019 launch of the LTIP(2),(3) Total estimated value of share-based grants under the TSR performance |
Total number of shares granted under the 2019 launch of the LTIP(1),(2) |
Total estimated value of share-based grants under the LTIP in 2019(2),(3) |
|---|---|---|---|---|---|---|
| CHF | CHF | CHF | ||||
| Timo Ihamuotila(4) | 24,535 | 418,322 | 24,536 | 418,339 | 49,071 | 836,661 |
| Sylvia Hill (EC member as of June 1, 2019) |
18,079 | 308,247 | 18,079 | 308,247 | 36,158 | 616,494 |
| Maria Varsellona (EC member as of November 1, 2019) |
20,661 | 411,154 | 20,662 | 411,174 | 41,323 | 822,328 |
| Frank Duggan(4) | 20,661 | 352,271 | 20,662 | 352,288 | 41,323 | 704,559 |
| Chunyuan Gu | 18,079 | 308,247 | 18,079 | 308,247 | 36,158 | 616,494 |
| Sami Atiya | 24,793 | 422,721 | 24,794 | 422,738 | 49,587 | 845,459 |
| Tarak Mehta | 22,211 | 378,698 | 22,211 | 378,698 | 44,422 | 757,396 |
| Claudio Facchin | 20,919 | 356,669 | 20,920 | 356,686 | 41,839 | 713,355 |
| Peter Terwiesch(4) | 20,661 | 352,271 | 20,662 | 352,288 | 41,323 | 704,559 |
| Morten Wierod (EC member as of April 1, 2019)(4) |
18,079 | 308,247 | 18,079 | 308,247 | 36,158 | 616,494 |
| Total current Executive Committee members at December 31, 2019 |
208,678 | 3,616,847 | 208,684 | 3,616,952 | 417,362 | 7,233,799 |
| Ulrich Spiesshofer (EC member until April 16, 2019) |
87,035 | 1,483,947 | 87,036 | 1,483,964 | 174,071 | 2,967,911 |
| Jean-Christophe Deslarzes (EC member until May 31, 2019) |
24,277 | 413,923 | 24,277 | 413,923 | 48,554 | 827,846 |
| Diane de Saint Victor (EC member until October 31, 2019) |
25,826 | 440,334 | 25,827 | 440,351 | 51,653 | 880,685 |
| Greg Scheu (EC member until October 31, 2019) |
21,201 | 361,478 | 21,201 | 361,478 | 42,402 | 722,956 |
| Total departing Executive Committee members |
158,339 | 2,699,682 | 158,341 | 2,699,716 | 316,680 | 5,399,398 |
| Total | 367,017 | 6,316,529 | 367,025 | 6,316,668 | 734,042 | 12,633,197 |
(1) Vesting date May 16, 2022.
(2) The valuation method of the share grant has been adjusted to reflect best practice, according to which, it is not recommended to use a Monte Carlo simulation at the time of grant to determine the fair value of a share grant. In response to that, the reference number of shares of the EPS and TSR performance factors are valued using the fair value of the ABB shares on the grant date adjusted for expected foregone dividends during the vesting period. Applying the 2019 valuation method to the 2018 LTIP grant, would lead to a CHF 1.4 million lower grant fair value for 2018, representing a reduction from CHF 10.6 million to CHF 9.2 million.
(3) The LTIP foresees delivering 65 percent of the value of vested performance shares (both performance factors EPS and TSR), if any, in shares and the remainder in cash. However, upon vesting participants have the possibility to elect to receive 100 percent of the vested award in shares. The plan foresees a maximum payout of 200 percent of the number of reference shares granted based on the achievement against the pre-defined average EPS and relative TSR targets.
(4) In addition to the above awards, four members of the EC participated in the 16th launch of the ESAP in 2019, which will allow them to save over a 12-month period and, in November 2020, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be entitled to acquire up to 480 ABB shares at an exercise price of CHF 20.78 per share.
| Name | Reference number of shares under the EPS performance factor of the 2018 launch of the LTIP(1) |
grants under the EPS performance factor Total estimated value of share-based of the 2018 launch of the LTIP(2),(3) |
Reference number of shares under the TSR performance factor of the 2018 launch of the LTIP(1) |
grants under the TSR performance factor Total estimated value of share-based of the 2018 launch of the LTIP(2),(3) |
under the 2018 launch of the LTIP(1),(2) Total number of shares granted |
Total estimated value of share-based grants under the LTIP in 2018(2),(3) |
|---|---|---|---|---|---|---|
| CHF | CHF | CHF | ||||
| Ulrich Spiesshofer | 71,572 | 1,646,443 | 71,572 | 1,507,307 | 143,144 | 3,153,750 |
| Timo Ihamuotila(4) | 18,608 | 428,059 | 18,609 | 391,906 | 37,217 | 819,965 |
| Jean-Christophe Deslarzes(4) | 22,816 | 524,860 | 22,816 | 480,505 | 45,632 | 1,005,365 |
| Diane de Saint Victor(4) | 20,227 | 465,302 | 20,227 | 425,981 | 40,454 | 891,283 |
| Frank Duggan(4) | 15,878 | 365,258 | 15,878 | 334,391 | 31,756 | 699,649 |
| Greg Scheu | 12,695 | 292,036 | 12,695 | 267,357 | 25,390 | 559,393 |
| Chunyuan Gu | 16,990 | 390,838 | 16,991 | 357,831 | 33,981 | 748,669 |
| Sami Atiya | 11,650 | 267,997 | 11,651 | 245,371 | 23,301 | 513,368 |
| Tarak Mehta(4) | 17,395 | 400,155 | 17,395 | 366,339 | 34,790 | 766,494 |
| Claudio Facchin | 13,107 | 301,514 | 13,107 | 276,034 | 26,214 | 577,548 |
| Peter Terwiesch(4) | 18,689 | 429,922 | 18,690 | 393,612 | 37,379 | 823,534 |
| Total Executive Committee members at December 31, 2018 |
239,627 | 5,512,384 | 239,631 | 5,046,634 | 479,258 | 10,559,018 |
(1) Vesting date April 6, 2021.
(2) The reference number of shares of the EPS and TSR performance factors are valued using the fair value of the ABB shares on the grant date and the Monte Carlo simulation model.
(3) The LTIP foresees delivering 65 percent of the value of vested performance shares (both performance factors EPS and TSR), if any, in shares and the remainder in cash. However, upon vesting participants have the possibility to elect to receive 100 percent of the vested award in shares. The plan foresees a maximum payout of 200 percent of the number of reference shares granted based on the achievement against the pre-defined average EPS and relative TSR targets.
(4) In addition to the above awards, six members of the EC participated in the 15th launch of the ESAP in 2018, which will allow them to save over a 12-month period and, in November 2019, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be entitled to acquire up to 490 ABB shares at an exercise price of CHF 20.38 per share.
| Total number of shares held at Decem ber 31, 2019 |
Vested at December 31, 2019 |
Unvested at December 31, 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| Name | Number of vested options held under the MIP |
Number of unvested options held under the MIP |
Reference number of shares deliverable under the 2017 performance components (P1 and P2) of the LTIP(1) |
Reference number of shares deliverable under the 2018 performance factors (EPS and TSR) of the LTIP(2) |
Reference number of shares deliverable under the 2019 performance factors (EPS and TSR) of the LTIP(2) |
Replacement share grant from former employer(3) for foregone benefits |
Replacement share grant from former employer(4) for foregone benefits |
|
| (vesting 2020/2021) |
(vesting 2020) |
(vesting 2021) |
(vesting 2022) |
(vesting 2020) |
(vesting 2021/2022) |
|||
| Timo Ihamuotila | 64,572 | — | — | 41,000 | 37,217 | 49,071 | 76,628 | — |
| Sylvia Hill (EC member as of June 1, 2019) |
2,265 | 743,750 | 584,375 | — | — | 36,158 | — | — |
| Maria Varsellona (EC member as of November 1, 2019) |
— | — | — | — | — | 41,323 | — | 80,019 |
| Frank Duggan | 269,846 | — | — | 34,984 | 31,756 | 41,323 | — | — |
| Chunyuan Gu | 45,577 | — | — | 31,196 | 33,981 | 36,158 | — | — |
| Sami Atiya | 24,435 | — | — | 34,735 | 23,301 | 49,587 | — | — |
| Tarak Mehta | 212,869 | — | — | 34,494 | 34,790 | 44,422 | — | — |
| Claudio Facchin | 163,219 | — | — | 39,076 | 26,214 | 41,839 | — | — |
| Peter Terwiesch | 122,242 | — | — | 37,147 | 37,379 | 41,323 | — | — |
| Morten Wierod (EC member as of April 1, 2019) |
1,064 | 398,440 | — | — | 15,292 | 36,158 | — | — |
| Total Executive Committee members at December 31, 2019(5) |
906,089 | 1,142,190 | 584,375 | 252,632 | 239,930 | 417,362 | 76,628 | 80,019 |
(1) It is expected that upon vesting, the LTIP 2017 will be settled 70 percent in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares.
(2) It is expected that the LTIP 2018 and 2019 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares.
(3) It is expected that the replacement share grants will be settled 70 percent in shares and 30 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares.
(4) It is expected that the replacement share grants will be settled 65 percent in shares and 35 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares.
(5) Departing Executive Committee members are not included in this table.
Exhibit 31: EC shareholding overview at December 31, 2018 (audited as part of the financial statement stand-alone audit) Total number of shares held at December 31, 2018 Unvested at December 31, 2018 Reference number of shares deliverable under the 2016 performance components (P1 and P2) of the LTIP(1) Reference number of shares deliverable under the 2017 performance components (P1 and P2) of the LTIP(1) Reference number of shares deliverable under the 2018 performance factors (EPS and TSR) of the LTIP(2) Replacement share grant for foregone benefits from former employer(3)
| Name | |||||
|---|---|---|---|---|---|
| (vesting 2019) | (vesting 2020) | (vesting 2021) | (vesting 2019 and 2020) |
||
| Ulrich Spiesshofer | 509,970 | 175,881 | 150,886 | 143,144 | — |
| Timo Ihamuotila | 22,000 | — | 41,000 | 37,217 | 119,200 |
| Jean-Christophe Deslarzes | 172,487 | 56,287 | 45,348 | 45,632 | — |
| Diane de Saint Victor | 569,132 | 47,745 | 40,109 | 40,454 | — |
| Frank Duggan | 224,941 | 48,028 | 34,984 | 31,756 | — |
| Greg Scheu | 146,130 | 43,144 | 32,775 | 25,390 | — |
| Chunyuan Gu | 28,722 | 25,799 | 31,196 | 33,981 | — |
| Sami Atiya | — | 37,693 | 34,735 | 23,301 | — |
| Tarak Mehta | 183,328 | 45,624 | 34,494 | 34,790 | — |
| Claudio Facchin | 131,987 | 47,722 | 39,076 | 26,214 | — |
| Peter Terwiesch | 92,811 | 44,969 | 37,147 | 37,379 | — |
| Total Executive Committee members at December 31, 2018 |
2,081,508 | 572,892 | 521,750 | 479,258 | 119,200 |
(1) It is expected that upon vesting, the LTIP 2016 and 2017 will be settled 70 percent in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares.
(2) It is expected that the LTIP 2018 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares.
(3) It is expected that the replacement share grant will be settled 70 percent in shares and 30 percent in cash. However, the participant has the possibility to elect to receive 100 percent of the vested award in shares.
To the General Meeting of ABB Ltd, Zurich
We have audited the accompanying compensation report of ABB Ltd for the year ended December 31, 2019. The audit was limited to the information according to articles 14 – 16 of the Ordinance against Excessive compensation in Stock Exchange Listed Companies (Ordinance) contained in the tables labeled "audited" on pages 75 to 80 of the compensation report.
The Board of Directors is responsible for the preparation and overall fair presentation of the compensation report in accordance with Swiss law and the Ordinance against Excessive compensation in Stock Exchange Listed Companies (Ordinance). The Board of Directors is also responsible for designing the compensation system and defining individual compensation packages.
Our responsibility is to express an opinion on the accompanying compensation report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the compensation report complies with Swiss law and articles 14 – 16 of the Ordinance.
An audit involves performing procedures to obtain audit evidence on the disclosures made in the compensation report with regard to compensation, loans and credits in accordance with articles 14 – 16 of the Ordinance. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatements in the compensation report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of compensation, as well as assessing the overall presentation of the compensation report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
In our opinion, the compensation report for the year ended December 31, 2019 of ABB Ltd complies with Swiss law and articles 14 – 16 of the Ordinance.
KPMG AG
Hans-Dieter Krauss Douglas Mullins Licensed Audit Expert Auditor in Charge
Zurich, February 25, 2020
— 84–216
| — 86 |
2019 Operating and financial review |
|---|---|
| and prospects |
Consolidated Financial Statements of ABB Group — 136
ABB is a technology leader that is driving the digital transformation of industries. With a history of innovation spanning more than 130 years, ABB has four, customer-focused, globally leading Businesses: Electrification, Industrial Automation,
Motion, and Robotics & Discrete Automation, supported by the ABB Ability™ digital platform. We plan to divest 80.1 percent of ABB's Power Grids business to Hitachi in 2020. ABB has approximately 144,000 employees.
The ABB Group was formed in 1988 through a merger between Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB was a major participant in the introduction of electricity into Swedish homes and businesses and in the development of Sweden's railway network. In the 1940s and 1950s, Asea AB expanded into the power, mining and steel industries. Brown Boveri and Cie. (later renamed BBC Brown Boveri AG) was formed in Switzerland in 1891 and initially specialized in power generation and turbines. In the early to mid-1900s, it expanded its operations throughout Europe and broadened its business operations to include a wide range of electrical engineering activities.
In January 1988, Asea AB and BBC Brown Boveri AG each contributed almost all of their businesses to the newly formed ABB Asea Brown Boveri Ltd, of which they each owned 50 percent. In 1996,
Asea AB was renamed ABB AB and BBC Brown Boveri AG was renamed ABB AG. In February 1999, the ABB Group announced a group reconfiguration designed to establish a single parent holding company and a single class of shares. ABB Ltd was incorporated on March 5, 1999, under the laws of Switzerland. In June 1999, ABB Ltd became the holding company for the entire ABB Group. This was accomplished by having ABB Ltd issue shares to the shareholders of ABB AG and ABB AB, the two companies that formerly owned the ABB Group. The ABB Ltd shares were exchanged for the shares of those two companies, which, as a result of the share exchange and certain related transactions, became wholly-owned subsidiaries of ABB Ltd. ABB Ltd shares are currently listed on the SIX Swiss Exchange, the NASDAQ OMX Stockholm Exchange and the New York Stock Exchange (in the form of American Depositary Shares).
Our business is international in scope and we generate revenues in numerous currencies. We operate in approximately 100 countries across three regions: Europe, the Americas, and Asia, Middle East and Africa (AMEA). We are headquartered in Zurich, Switzerland.
We manage our company through our four Businesses. For a breakdown of our consolidated revenues (i) by Business (ii) by geographic region (iii) by end-customer markets and (iv) by product type, see "Item 5. Operating and Financial Review and Prospects – Analysis of Results of Operations – Revenues" and "Note 23 – Operating segment and geographic data". We also operate our Power Grids business, which is reported as discontinued operations in the Consolidated Financial Statements (see "Discontinued operations" section below).
Our principal corporate offices are located at Affolternstrasse 44, CH-8050 Zurich, Switzerland, telephone number +41 43 317 71 11. Our agent for U.S. federal securities law purposes is ABB Holdings Inc., located at 305 Gregson Drive, Cary, North Carolina 27511. Our internet address is www.abb.com. The United States Securities and Exchange Commission (SEC) maintains a website at www.sec.gov which contains in electronic form each of the reports and other information that we have filed electronically with the SEC.
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A breakdown of our employees by geographic region is as follows:
| December 31, | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 68,400 | 68,300 | 63,000 |
| The Americas | 35,200 | 35,600 | 28,800 |
| Asia, Middle East and Africa | 40,800 | 42,700 | 43,000 |
| Total | 144,400 146,600 134,800 |
The proportion of our employees that are represented by labor unions or are subject to collective bargaining agreements varies based on the labor practices of each country in which we operate.
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ABB is a technology leader that is driving the digital transformation of industries, combining electrification, automation and robotics and digitalization solutions for industrial customers. We operate in attractive, growing markets with a focus on fast-growth segments including software and digital solutions, data centers, EV charging, robotics and machine and factory automation. We believe that our portfolio is well positioned to benefit from secular growth drivers, including urbanization, aging populations, the electrification of transport, the Internet of Things and other data and digitalization trends.
Approximately 40 percent of our orders are for digitally enabled products and services (including ABB Ability™ solutions, software and related services, digitally enabled products). As the end-markets we serve are still at an early stage of digitalization, including food and beverage, rail, buildings, oil and gas, chemicals, marine, utilities, and other discrete markets, we expect the demand for digitally enabled solutions from our customers to grow significantly in the coming years.
ABB Ability™ is our unified, cross-industry digital portfolio, extending from device to edge to cloud on an open architecture platform. ABB Ability™ provides over 160 solutions (excluding the Power Grids business) utilizing the latest software technologies, including artificial intelligence and machine learning, to improve productivity and efficiency, security, safety and reliability, ultimately unlocking value for customers. ABB Ability™ solutions cover the entire life-cycle of assets, from planning and building to performance management. ABB Ability™ is a globally recognized market leader for control systems for process industries and for utility- and mining-related asset management software. We also have a leading
offering in connected services, for example remote monitoring services for robots, motors and machinery and remote control solutions for buildings, EV charging networks and offshore platforms. Some of the more specialized offerings address energy management for data centers and navigation optimization and automation for maritime shipping fleets.
Following the agreement to divest the Power Grids business to Hitachi, which we announced on December 17, 2018, the exposure to utility customers for our continuing operations has decreased significantly. In 2019, ABB was focused on delivering solutions in the distribution and renewables segments within the sector, even while continuing to service conventional power generation customers with our control and automation solutions. Our continuing operations are not active in the high-voltage transmission segment. As a proportion of revenues, utility customers accounted for 15 percent in 2019.
Conventional power generation markets were challenged in 2019, with select investments focused in service activities as utilities looked to prolong asset-lives. Renewables investments grew, while capital expenditure in the distribution segment also increased owing to the increased scale of output from renewables assets.
We serve production facilities and factories all around the world from process to discrete industries with a comprehensive automation portfolio including robotics. Automation and digitalized solutions that achieve improved safety, uptime, energy efficiency and productivity are the intended hallmarks of our offerings in this customer segment. As a proportion of revenues, industrial customers accounted for 56 percent in 2019.
Investments in 2019 in robotics and machinery automation solutions were challenged by weak consumer demand for traditional automotive vehicles, a subdued consumer electronics market, and a tough machine builders market. Demand for new EV manufacturing lines and in service areas such as intra-logistics was not able to offset the headwinds from the aforementioned markets. Process industries, including pulp and paper, oil and gas and mining invested more in 2019 than in the prior year, investing predominantly in service and productivity improvements.
Our expertise provides efficient, reliable and sustainable solutions for transport & infrastructure customers. We believe our offerings are key to customers that are focused on energy efficiency and reduced operating costs. Other major growth drivers for this customer segment are urbanization, the move to electrify transportation, and growth in data centers and smart buildings. As a proportion of revenues, transport & infrastructure customers accounted for 29 percent in 2019.
Demand in transport & infrastructure markets was solid in 2019. Demand for building automation solutions and from data center customers was strong over the year, with ABB successful in offering bundled solutions to hyperscale and co-location customers in particular. Buildings demand was robust. Activity in rail for electrification and traction solutions grew well, while activity in specialty vessels, particularly cruise ships, was healthy.
EV charging markets accelerated sharply during 2019. We received multiple orders from customers for EV charging infrastructure, including for our high-voltage direct-current (DC) fast-charging station, the Terra HP. As of December 31, 2019, we have more than 11,000 installed fast-chargers in 76 countries.
Since April 1, 2019, we reorganized the compositions of our businesses and commenced serving our customers through four Businesses. Developments in these Businesses are discussed in more detail below. Revenue figures presented in this Business section are before intersegment eliminations.
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The Electrification Business provides products, services and connected solutions throughout the electrical value chain from the substation to the point of consumption across the world. The innovations from this business enable safer and more reliable electricity flow, with a full range of lowand medium-voltage products and solutions for intelligent protection and connection as well as pre-engineered packaged services and solutions tailored to customers' needs. The portfolio includes modular substation packages, distribution automation products, switchgear, circuit breakers, measuring and sensing devices, control products, solar power solutions, EV charging infrastructure, wiring accessories, and enclosures and cabling systems, including KNX systems (the recognized global standard for home and building control) and data communication networks.
The Business delivers products to customers through a global network of channel partners and end-customers. Most of the Business's revenue is
derived from sales through distributors, original equipment manufacturers (OEMs), engineering, procurement, construction (EPC) contracting companies, system integrators, utilities and panel builders, with some direct sales to end-users (utilities, customers in industries, transport & infrastructure segments) and to other ABB businesses.
The Electrification Business had approximately 53,000 employees on December 31, 2019, and generated \$12.7 billion of revenues in 2019.
The Electrification Business serves a wide range of customers, including buildings, data centers, rail, wind and solar, distribution utilities, food and beverage, marine, oil and gas, and e-mobility.
The Smart Power business offers low-voltage system orientated products that protect, control and connect people, plants and systems. ABB offers solutions to restore power rapidly in case of a fault and helps provide optimum protection for people and electrical installations. The product
offering includes molded-case and air-circuit breakers, safety switches used for power distribution in factories and buildings, switchgear systems for short circuit and overload protection as well as cabling and connection components. It also offers power protection solutions such as uninterruptible power supply (UPS) solutions, status transfer switches and power distribution units. In addition, the business offers a range of contactors, proximity sensors, safety products for industrial protection, limit switches, along with electronic relays and overload relays.
The Smart Buildings business provides low-voltage smart home and intelligent building control systems, including voice activated KNX systems to optimize efficiency, safety and comfort through the automated management of lighting, shutters and security. In addition, the business supplies conventional wiring accessories, industrial plugs and sockets, DIN-rail products, and enclosures ideal for single family homes, multiple dwellings, commercial buildings, infrastructure and industrial applications, including electric vehicle charging infrastructure from AC wall boxes through to DC fast charging stations and on-demand electric bus charging systems.
The Installation Products business offers products for low-voltage wire and cable management, making the task of fastening, protecting, insulating and connecting wires easier and quicker for industrial applications, construction, communications, utility and OEM professionals, as well as do-it-yourself specialists. The business offers emergency lighting and lighting for explosive environments, as well as lightning protection and earth grounding apparatus.
The Distribution Solutions business helps utility, industry and transport & infrastructure customers to improve power quality and control, reduce outage time and enhance operational reliability and efficiency. The business offers products and services that largely serve the power distribution sector, often providing the requisite medium-voltage link between high-voltage transmission systems and low-voltage users. Its comprehensive offering includes medium-voltage equipment (1 to 66 kilovolts), indoor and outdoor circuit breakers, reclosers, fuses, contactors, relays, instrument transformers, sensors, motor control centers, ring main units for primary and secondary distribution, as well as a range of airand gas-insulated switchgear. It also produces indoor and outdoor modular systems and other solutions to facilitate efficient and reliable power distribution, adding value through design, engineering, project management and service. The service offering spans the entire value chain, from the moment a customer makes the first inquiry to
disposal and recycling of the product. Throughout the value chain, ABB provides training, technical support and customized contracts. All of this is supported by an extensive global sales and service network.
The Solar business offers an extensive range of solar inverters for residential, commercial and utility applications designed to optimize the performance, reliability and return on investment of any solar installation. It also offers solar packages with integrated energy storage solutions, utility-scale turnkey solutions and microgrid solutions. During 2019, we reached an agreement to sell our solar inverters business to FIMER S.p.A. and the completion of the sale is expected to be in the first quarter of 2020. The Electrification Business remains fully committed to supporting the renewables industry with its leading energy protection, control and integration products and solutions.
The Industrial Solutions business includes the acquired GEIS business and offers product solutions, such as switchboards, panelboards, UPS and arc prevention technologies and engineered solutions, such as modular, cost-saving medium-voltage switchgear, motor control centers, vacuum circuit breakers, arc-resistant switchgear for industrial applications and industry leading telecom DC power.
Sales are primarily made through indirect sales channels such as distributors to end-customers including installers and system integrators. Direct customers range from electrical installers to large utilities, industrial end-users, customers in the transport & infrastructure sector, as well as other ABB businesses. The proportion of direct sales compared to channel partner sales varies among the different industries, product technologies and geographic markets. The business is focused on creating demand to support its channel sales, with a range of promotional activities and support services including configuration and digital solutions.
The Electrification Business's principal competitors vary by product group and include Eaton, Legrand, Schneider Electric, Siemens, Hubbell, Rittal and Chint.
The Electrification Business's capital expenditures for property, plant and equipment totaled \$279 million in 2019, compared to \$244 million and \$218 million in 2018 and 2017, respectively. Investments in 2019 were primarily related to footprint changes, equipment replacement and
upgrades. Geographically, in 2019, Europe represented 49 percent of the capital expenditures, followed by the Americas (36 percent) and Asia, Middle East and Africa (15 percent).
The Industrial Automation Business offers customers in process and hybrid industries a broad range of industry-specific integrated automation, electrification and digital solutions that are designed to optimize the productivity, energy efficiency and safety of their industrial processes and operations, based on deep domain knowledge and expertise of each end market. The solutions include turnkey engineering, control technologies, software and lifecycle services, measurement and analytics products, marine and turbocharging offerings, Human Machine Interfaces (HMI) and integrated safety technology. The systems can link various process and information flows allowing customers to manage and control their entire manufacturing and business process based on real-time facility or plant information. Additionally, the systems and solutions enable customers to increase production efficiency, optimize their assets and reduce environmental impact.
The Industrial Automation Business's offerings are available as separately sold products or as part of a total automation, electrification and/or instrumentation solution. For overall solutions, Industrial Automation integrates products and solutions from the Electrification, Motion, and Robotics & Discrete Automation Businesses as well as our Power Grids business. The Business's offering is sold primarily through its direct sales force as well as third-party channels.
The Business had approximately 22,300 employees as of December 31, 2019, and generated revenues of \$6.3 billion in 2019.
The Industrial Automation Business's end customers include companies in the oil and gas, minerals and mining, metals, pulp and paper, chemicals, plastics, pharmaceuticals, food and beverage, power generation and maritime industries. These customers are looking for automation, electrification, instrumentation and digitalization offerings that deliver value mainly through lower capital costs, increased plant availability, lower life-cycle costs and lower project risks.
Oil, gas and chemicals solutions cover the entire hydrocarbon value chain, from exploration and production to supply, transport and distribution, as well as refining, chemicals and petrochemicals. ABB specializes in mastering the control loop and transforming client operations through actionable insights that optimize performance in real time. From the well head to the refinery, ABB Ability™ solutions aim to connect people with data to optimize performance, improve reliability, enhance efficiency and minimize environmental impact from project start-up throughout the entire plant life cycle.
Other process industry markets served include mining, minerals processing, metals, pharmaceuticals and pulp and paper as well as their associated service industries. The Business's added value is deep industry expertise coupled with the ability to integrate both automation and electrical, resulting in faster start-up times, increased facility productivity and reduced overall capital and operating costs for customers. For mining, metals and cement industries, solutions include specialized products and services, as well as total production systems. The Business designs, plans, engineers, supplies, erects and commissions integrated electric equipment, drives, motors, high power rectifiers and equipment for automation and supervisory control within a variety of areas including mineral handling, mining operations, aluminum smelting, hot and cold steel applications and cement production. In the pharmaceuticals and fine chemicals areas, the Business offers applications to support manufacturing, packaging, quality control and compliance with regulatory agencies. The offering for the pulp and paper industries includes control systems, quality control systems, drive systems, on-line sensors, actuators and field instruments.
The Business serves the power generation market with leading automation solutions for all types of power generation. With an offering that includes instrumentation, excitation and control systems, our technologies are designed to help optimize performance, improve reliability, enhance efficiency and minimize environmental impact throughout the plant life cycle. The Business also serves the water industry, including applications such as pumping stations and desalination plants.
The Business serves the marine and ports industry through its leading solutions for specialty vessels, as well as container and bulk cargo handling. For the shipping industry, the Business offers an extensive portfolio of integrated marine systems and solutions that improve the flexibility, reliability and energy efficiency of vessels. By coupling power, automation and marine software, proven fuel-efficient technologies and services that ensure maximum vessel uptime, ABB is well positioned to help improve the profitability of a customer's business throughout the entire life cycle
of a fleet. The Business designs, engineers, builds, supplies and commissions automation and electrical systems for marine power generation, power distribution and electric propulsion, as well as turbochargers to improve efficiency. With ABB Ability™'s Collaborative Operations Centers around the world and marine software solutions, owners and operators can run their fleets at lower fuel and maintenance cost, while improving crew, passenger, and cargo safety and overall productivity of their operations. In addition, the Business delivers automation and electrical systems for container and bulk cargo handling, from ship to gate. These systems and services help terminal operators meet the challenge of larger ships, taller cranes and bigger volumes per call, and make terminal operations safer, greener and more productive.
The Business serves the hybrid and discrete market, focusing primarily on plastics, food and beverage, packaging and data centers. The Business combines state-of-the-art technology with advanced engineering to provide a wide range of customers with complete solutions for machine and factory automation, motion control, HMI and integrated safety technology. ABB is one of the largest providers focused on product- and software-based, open-architecture solutions for machine and factory automation worldwide.
The Business offers an extensive portfolio of products and software from stand-alone basic control to integrated collaborative systems for complex or critical processes. Solutions such as Distributed Control System (DCS) 800xA, provides a scalable extended automation system for process and production control, safety, and production monitoring. Freelance, another solution, is a full-fledged, easy-to-use DCS for small to medium size applications. The Programmable Logic Controller (PLC) automation portfolio offers a scalable range for small, middle and high-end applications. Components for basic automation solutions, process and safety controllers, field interfaces, panels, process recorders and HMI are available through our Compact Product Suite offering. The product portfolio is complemented by services such as Automation Sentinel, a subscription-based life-cycle management program that provides services to maintain and continually advance and enhance ABB Ability™ control systems (e.g. cyber security patches) and thus allows it to manage a customer's life-cycle costs. The ABB Ability™ Advanced Services offering portfolio provides individual software-based services to continuously improve automation and processes. The Business also offers Manufacturing Execution Systems that enable agility and transparency for production processes by
synchronizing and orchestrating a flow across individual automation islands.
The measurement and analytics business portfolio is designed to measure product properties, such as weight, thickness, color, brightness, moisture content and additive content and includes a full line of instrumentation and analytical products to analyze, measure and record industrial and power processes. Actuators allow the customer to make automatic adjustments during the production process to improve the quality and consistency of the product. Field instruments measure properties of the process, such as flow rate, chemical content and temperature.
The Business manufactures and maintains turbochargers for diesel and gas engines having power levels ranging from 500 kilowatts to over 80 megawatts. The Business provides engine builders and application operators with advanced turbocharging solutions for efficient and flexible application operations and in compliance with the most stringent environmental requirements.
The Industrial Automation Business primarily uses its direct sales force as well as third-party channel partners, such as distributors, system integrators and OEMs. The majority of revenues are derived through the Business's own direct sales channels.
The Industrial Automation Business's principal competitors vary by industry or product group. Competitors include: Emerson, Honeywell, Valmet, Rockwell Automation, Beckhoff, Schneider Electric, Siemens, Voith, and Yokogawa Electric Corporation.
The Industrial Automation Business's capital expenditures for property, plant and equipment totaled \$64 million in 2019, compared to \$58 million and \$54 million in 2018 and 2017, respectively. Principal investments in 2019 were in Turbocharging and the Measurement and Analytics business lines. Geographically, in 2019, Europe represented 70 percent of the capital expenditures, followed by the Americas (19 percent) and Asia, Middle East and Africa (11 percent).
The Motion Business provides pioneering technology, products, solutions and related services to industrial customers to increase energy efficiency, improve safety and reliability, and
maintain precise control over processes. The portfolio includes motors, generators and drives for a wide range of applications in all industrial sectors.
The Motion Business had approximately 20,400 employees as of December 31, 2019, and generated around \$6.5 billion of revenue in 2019.
The Motors and Generators business line supplies a comprehensive range of electrical motors, generators, and mechanical power transmission products. The range of electrical motors includes high efficiency motors that conform to leading environmental and Minimum Energy Performance Standards (MEPS). Efficiency is an important selection criterion for customers, because electric motors account for nearly two-thirds of the electricity consumed by industrial plants. The business line manufactures synchronous motors for the most demanding applications and a full range of low- and high-voltage induction motors, for both IEC (International Electrotechnical Commission) and NEMA (National Electrical Manufacturers Association) standards. The business line offers digitalized asset management solutions that monitor motor performance and provide vital intelligence on key operating parameters. These products and solutions are designed to help customers improve uptime, extend motor lifetimes, and increase productivity while becoming or remaining digitally connected.
The Drives business line provides low-voltage and medium-voltage drives and systems for industrial, commercial and residential applications. Drives provide speed, torque and motion control for equipment such as fans, pumps, compressors, conveyors, centrifuges, mixers, hoists, cranes, extruders, and printing and textile machines. They are used in industries such as building automation, marine, power, transportation, food and beverage, metals, mining, and oil and gas. The business line also supplies traction converters (propulsion converters and auxiliary converters) for the transportation industry and wind converters.
The Motion Business offers services that complement its products and solutions, including design and project management, engineering, installation, training and life cycle care, energy efficiency appraisals, preventive maintenance and digital services such as remote monitoring and software tools.
The Motion Business serves a wide range of customers, including OEMs, process industries such as pulp and paper, oil and gas, and metals and
mining companies, hybrid and batch manufacturers such as food and beverage companies, transportation equipment manufacturers, discrete manufacturing companies, logistics, utilities as well as customers in the automotive industry.
Sales are made both through direct sales forces and through channel partners, such as distributors and wholesalers, as well as installers, machine builders and OEMs, and system integrators. The proportion of direct sales compared to channel partner sales varies among the different industries, product technologies and geographic markets.
The principal competitors of the Motion Business include Siemens, Toshiba, WEG Industries, SEW-EURODRIVE and Danfoss.
Capital expenditures in the Motion Business for property, plant and equipment totaled \$110 million in 2019, compared to \$93 million and \$89 million in 2018 and 2017, respectively. Principal investments in 2019 were primarily related to equipment replacement, footprint adjustments and automation upgrades. Geographically, in 2019, Europe represented 44 percent of the capital expenditures, followed by the Americas (36 percent) and Asia, Middle East and Africa (20 percent).
The Robotics & Discrete Automation Business provides robotics, and machine and factory automation from single products to complete systems including services.
Revenues are generated both from direct sales to end users as well as from indirect sales mainly through system integrators and machine builders.
The Robotics & Discrete Automation Business had approximately 10,100 employees as of December 31, 2019, and generated \$3.3 billion of revenues in 2019.
The Robotics business offers a wide range of products, solutions and services such as industrial robots, software, application solutions, engineered solutions and related services. This offering provides flexibility and productivity for operations to meet the challenge of making
smaller lots of a larger number of specific products in shorter cycles for today's dynamic global markets, while also improving quality, productivity and reliability. Robots are also used in activities or environments which may be hazardous to employee health and safety, such as repetitive or strenuous lifting, dusty, hot or cold rooms, or painting booths. In the automotive industry, robot products and systems are used in areas such as press shop, body shop, paint shop, power train assembly, trim and final assembly. Robotics solutions are used in a wide range of segments from metal fabrication, foundry, plastics, food and beverage, chemicals and pharmaceuticals, electronics and warehouse/logistics center automation. Typical robotic applications in general industry include welding, material handling, machine tending, painting, picking, packing, palletizing and small parts assembly automation.
The Machine and Factory Automation business offers automation products and solutions such as programmable logical controllers, industrial PCs, servo motion control systems and track systems. The range of solutions are mainly used by machine builders for various types of series machines, e.g. for plastics, metals, printing and packaging.
Robotics & Discrete Automation serves a wide range of customers. The main customers are active in industries such as automotive, machine building, metalworking, electronics, food and beverage and logistics. They include end-users such as manufacturers, system integrators and machine builders.
Sales are made both through direct sales forces as well as through third-party channel partners, such as system integrators and machine builders. The proportion of direct sales compared to channel partner sales varies among the different industries, product technologies and geographic markets.
The principal competitors of the Robotics & Discrete Automation Business vary by offering and include companies such as Fanuc, Kuka, Yaskawa, Kawasaki, Dürr, Stäubli, Universal Robots, Rockwell Automation and Siemens.
The Robotics & Discrete Automation Business's capital expenditures for property, plant and equipment totaled \$59 million in 2019, compared to \$74 million and \$43 million in 2018 and 2017, respectively. Principal investments in 2019 were primarily related to production capacity, upgrades and equipment replacement. Geographically, in
2019, Europe represented 78 percent of the capital expenditures, followed by Asia, Middle East and Africa (17 percent) and the Americas (5 percent).
Corporate and Other includes headquarters, central research and development, real estate activities, Corporate Treasury Operations, Global Business Services (GBS) and other minor business activities. The remaining activities of certain EPC projects which we are completing and are in a wind-down phase are also reported in Corporate and Other. In addition, we have classified the historical business activities of significant divested businesses in Corporate and Other. These include the high-voltage cables business, the EPC business for turnkey electrical AC substations and certain EPC contracts relating to the oil and gas industry.
Corporate headquarters and stewardship activities include the operations of our corporate headquarters in Zurich, Switzerland, as well as corporate-related activities in various countries. These activities cover staff functions with group-wide responsibilities, such as accounting and financial reporting, corporate finance and taxes, planning and controlling, internal audit, legal and integrity, compliance, risk management and insurance, corporate communications, information systems, investor relations and human resources.
Corporate research and development primarily covers our research activities, as our development activities are organized under our Businesses. We have two global research laboratories, one focused on power technologies and the other focused on automation technologies, which both work on technologies relevant to the future of our business. Each laboratory works on new and emerging technologies and collaborates with universities and other external partners to support our Businesses in advancing relevant technologies and in developing cross-business technology platforms. We have corporate research centers in seven countries (China, India, Germany, Poland, Sweden, Switzerland and the U.S.).
GBS operates shared service centers globally through a network of five hubs and consists of both expert and transactional services in the areas of human resources, finance, information services, legal, real estate, procurement and logistics, customer contact centers, global travel services and other ancillary activities. GBS also staffs and maintains front offices in most countries.
A significant portion of the costs for GBS and other shared corporate overhead costs are allocated to the operating businesses. Overhead and other management costs, including GBS costs, which would have been allocated to our Power Grids business, and which are not directly attributable to this business, are not allocated to the
discontinued operation and are included in Corporate and Other and are considered "stranded costs".
Corporate and Other had approximately 4,200 employees at December 31, 2019.
In December 2018, the Company announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi valuing the business at \$11 billion. As a result, the Power Grids business is reported as discontinued operations in the Consolidated Financial Statements for all years presented. See "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements.
The Power Grids business is a global leader and aspires to be the partner of choice for enabling a stronger, smarter and greener grid. The Power Grids business provides product, systems, software and service solutions across the power value chain that are designed to help meet growing demand for electricity with minimum environmental impact. These solutions support utility, industry and transport & infrastructure customers to plan, build, operate and maintain their power infrastructure. They are designed to facilitate the safe, reliable and efficient integration, transmission and distribution of bulk and distributed energy generated from conventional and renewable sources.
The Power Grids business has a worldwide customer base, with a balanced geographic spread of revenues across the Americas, Europe, and Asia, Middle East and Africa. The business also has a globally diversified manufacturing, engineering, and research and development footprint to serve customers in the most efficient manner. Direct sales account for the majority of total revenues generated by the business while external channel partners such as EPCs, wholesalers, distributors and OEMs account for the rest.
The Grid Automation operation is at the forefront of digitalizing and automating the power grid. It supplies substation automation products, systems and services. It also provides Supervisory Control and Data Acquisition (SCADA) systems for transmission and distribution networks as well as
a range of wireless, fiber optic and powerline carrier-based telecommunication technologies for mission-critical applications. The operation offers grid-edge and microgrid solutions that are being increasingly deployed for remote and partially grid-connected applications. Its comprehensive enterprise software portfolio provides solutions for managing and optimizing assets, operations, logistics, financials and HR, reducing operating costs and improving productivity for customers.
The Grid Integration operation is among the world's leading providers of integration and transmission solutions such as High Voltage Direct Current (HVDC), a technology pioneered by ABB and now playing a key role around the world in integrating renewables and transmitting electricity efficiently and reliably over ever-increasing distances with minimal losses. Another key part of the portfolio is the Flexible Alternating Current Transmission Systems (FACTS) business, which comprises Static Var Compensation (SVC) and static compensator (STATCOM) technologies to address stability and power quality issues. The Grid Integration operation's portfolio also includes a range of high-power semiconductors, a core technology for power electronics deployed in HVDC, FACTS and rail applications. The Grid Integration operation is also among the world's leading providers of transmission and distribution substations and associated life-cycle services. These substations are used in utility and non-utility applications including rail, data centers and various industries. Battery energy storage solutions and shore-to-ship power supply are also part of the customer offering.
The High Voltage products operation is a global leader in high voltage switchgear up to 1200 kV AC and 1100 kV DC with a portfolio spanning air-insulated, gas-insulated and hybrid technologies. It manufactures generator circuit breakers, a key product for integrating large power plants into the grid. The portfolio also includes a broad range of capacitors and filters
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that facilitate power quality, instrument transformers and other substation components.
The Transformers operation supplies transformers that are an integral component found across the power value chain, enabling the reliable, efficient and safe conversion of voltages levels. The product range includes dry- and liquid-distribution transformers, traction transformers for rail applications and special application transformers plus related components, for example, insulation kits, bushings and other
transformer accessories. The business is also leading the way in digitalization of its transformer portfolio, equipping them with sensor-based technologies to facilitate asset optimization and enable smarter grids.
The Power Grids business also has an extensive portfolio of service offerings across the value chain. This is a growing focus area, leveraging the significant installed base. The portfolio includes spare parts, condition monitoring and maintenance services, on- and off-site repairs as well as retrofits and upgrades. Advanced software-based monitoring and advisory services further enhance the portfolio and support the increasing digitalization of grids.
In December 2018, as part of our ABB-OS program, we announced our intention to simplify our organizational structure through the discontinuation of the legacy matrix, country and regional structures, including regional Executive Committee roles. These changes were completed by January 1, 2020, and, effective January 1, 2020, the Executive Committee has been streamlined to reflect this new structure.
In addition, effective April 1, 2019, we changed the composition and operating model of our operating Businesses. Our new organization provides each Business with full operational ownership of
products, support functions, research and development, and geographic territories. The Businesses are the single interface to customers, maximizing proximity and speed. Corporate activities will focus on Group strategy, portfolio and performance management, capital allocation, core technologies and the ABB Ability™ platform, providing a common framework across the group.
In line with the simplification, as of April 1, 2019, we operate four customer-focused, entrepreneurial Businesses: Electrification, Industrial Automation, Motion and Robotics & Discrete Automation.
Total capital expenditures for property, plant and equipment and intangible assets (excluding intangibles acquired through business combinations) amounted to \$762 million, \$772 million and \$752 million in 2019, 2018 and 2017, respectively. In 2019, 2018 and 2017, capital expenditures were 21 percent, 16 percent and 10 percent lower, respectively, than depreciation and amortization. Excluding acquisition-related amortization, capital expenditures were 9 percent, 20 percent and 24 percent higher, respectively, than depreciation and amortization.
Capital expenditures in 2019 remained at a significant level in mature markets, reflecting the geographic distribution of our existing production facilities. Capital expenditures in Europe and North America in 2019 were driven primarily by upgrades and maintenance of existing production facilities, mainly in the U.S., Switzerland, Germany, Italy, Finland, Sweden and Austria. Expenditures in Austria included amounts for a state-of-the-art innovation and training campus, which is planned to become one of our largest research and development centers. Capital expenditures in emerging markets were highest in China, India and Poland. Capital expenditures in emerging markets
were made primarily to increase production capacity by investing in new or expanded facilities. We started construction of an advanced, automated and flexible robotics factory in China, which is designed to combine our connected digital technologies, state-of-the-art collaborative robotics and innovative artificial intelligence research. The share of emerging markets capital expenditures as a percentage of total capital expenditures in 2019, 2018 and 2017 was 27 percent, 31 percent and 28 percent, respectively.
At December 31, 2019, construction in progress for property, plant and equipment was \$500 million, mainly in the U.S., Switzerland, Finland,
Germany, Austria and Sweden. At December 31, 2018, construction in progress for property, plant and equipment was \$464 million, mainly in the U.S., China, Sweden, Finland and Germany while at December 31, 2017, construction in progress for property, plant and equipment was \$511 million, mainly in China, the U.S., Switzerland, Sweden and Germany.
Our capital expenditures relate primarily to property, plant and equipment. For 2020, we estimate the expenditures for property, plant and equipment will be lower than our annual depreciation and amortization charge, excluding acquisition-related amortization.
We purchase a variety of supplies and products which contain raw materials for use in our production and project execution processes. The primary materials used in our products, by weight, are copper, aluminum, steel, mineral oil and various plastics. We also purchase a wide variety of fabricated products, electronic components and systems. We operate a worldwide supply chain management network with employees dedicated to this function in our Businesses and key countries. Our supply chain management network consists of a number of teams, each focusing on different product categories. These category teams take advantage of opportunities to leverage the scale of ABB on a global, business and/or business line level, as appropriate, to optimize the efficiency of our supply networks in a sustainable manner.
Our supply chain management organization's activities and objectives include:
We buy many categories of products which contain steel, copper, aluminum, crude oil and other commodities. Continuing global economic growth in many emerging economies, coupled with the volatility in foreign currency exchange rates, has led to significant fluctuations in these raw material costs over the last few years. While we expect global commodity prices to remain highly volatile, we expect to offset some market volatility through the use of long-term contracts and global sourcing.
We seek to mitigate the majority of our exposure to commodity price risk by entering into hedges. For example, we manage copper, silver and aluminum price risk using principally swap contracts based on prices for these commodities quoted on leading exchanges. ABB's hedging policy is designed to safeguard margins by minimizing price volatility and providing a stable cost base during order execution. In addition to using hedging to reduce our exposure to fluctuations in raw materials prices, in some cases we can reduce this risk by incorporating changes in raw materials prices into the prices of our end products (through price escalation clauses).
Overall, during 2019 supply chain management personnel in our businesses, and in the countries in which we operate, along with the category teams, continued to focus on value chain optimization efforts in all areas, while maintaining and improving quality and delivery performance.
In August 2012, the SEC issued its final rules regarding "Conflict Minerals", as required by section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We initiated conflict minerals processes in 2013 and have continuously aimed at improving and tailoring the processes to our value chain. We continue to work with our
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suppliers and customers, to enable us to comply with the rules and disclosure obligations. Further information on ABB's Conflict Minerals policy and supplier requirements can be found under "Material Compliance" at new.abb.com/about/ supplying.
While we are not materially dependent on any one of our intellectual properties, as a
technology-driven company, we believe that intellectual property rights are crucial to protect the assets of our business. Over the past ten years, we have continued to substantially add new applications to our existing first patent filings, and we intend to continue our aggressive approach to seeking patent protection. As of December 31, 2019, we have approximately 33,500 patent applications and registrations, of which approximately 8,500 are pending applications. These patents include more than 3,800 utility model and design applications and registrations, of which approximately
400 are pending applications. In 2019, we filed more than 1,400 patent, utility model and design applications for more than 1,500 new inventions. Based on our existing intellectual property strategy, we believe that we have adequate control over our core technologies. The "ABB" trademarks and logo are protected in all of the countries in which we operate. We aggressively defend our intellectual property rights to safeguard the reputation associated with the ABB technology and brand. While these intellectual property rights are fundamental to all of our businesses, there is no dependency of the business on any single patent, utility model or design application.
The combined impact of the Energy and Fourth Industrial Revolution is profoundly influencing how we power the world, produce goods, work, live in cities and move in a sustainable way.
On December 17, 2018, we announced an agreed sale of our Power Grids business, expanding our existing partnership with Hitachi Ltd (Hitachi). We also announced our new strategy, with ABB proposing fundamental actions to focus, simplify and lead the digital transformation of industries, for enhanced customer value and shareholder returns. To deliver on our ambitions, we are introducing a new operating model, ABB Operating System (ABB-OS). ABB-OS provides a common framework across the Group, governing management processes, such as market validation, budgeting and portfolio management, in order to facilitate clear decision making and a balanced approach to value creation. Our new, simplified, operating model also positions the Businesses to be the single interface to customers, maximizing proximity and speed. Each Business is intended to have full entrepreneurial ownership of operations, functions, research and development, and territories. Significant amounts of company resources and management effort were dedicated to both of these areas in 2019.
We plan to demonstrate improved commercial quality of business and enhance exposure to faster growing markets with a greater emphasis on high value-add solutions, lower risk, less large-order volatility and more recurring revenue streams through digital solutions, software and services.
Our investment proposition is reflected in a new medium-term target framework for the Group:
In 2019, we successfully began implementing our new strategy.
Significant work was undertaken during 2019 to separate the Power Grids business from ABB. By December 31, 2019, the new Power Grids legal structure was substantially complete, allowing the business to commence operations within a stand-alone consolidated business. In addition, the transfer of resources from ABB to the Power Grids business progressed significantly. Overall, the separation of the Power Grids business is proceeding as planned and the divestment is on schedule with closing expected at the end of the second quarter of 2020.
Since April 1, 2019, we have been operating through four customer-focused Businesses: Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation. In particular, ABB has integrated group sales and the vast majority of other centrally managed functional activities into the Businesses, transferred country resources to the Businesses and worked to streamline the corporate center. At the end of 2019, regional structures were dismantled and the new operating model was fully effective as of January 1, 2020.
We reached the run-rate savings targeted for 2019 and continue to target annualized net savings of approximately \$500 million in the medium term from our new operating model. ABB continuing operations headcount was 113,900 at the beginning of the year and 110,000 at the end of 2019, partly also reflecting stranded cost elimination. Continuous improvement plans are now in place within each Business and fully integrated into the annual planning process to support delivery of this objective.
During 2019, the Group performed with resilience in the context of a tougher market environment, slightly improving revenues and gross margin while undertaking an extensive transformation.
Orders and revenues were higher in the Electrification and Motion Businesses while they decreased in the Industrial Automation and Robotics & Discrete Automation Businesses. These developments reflect some easing in global economic growth in 2019, while more substantial headwinds in discrete markets, particularly automotive and machine builders, resulted in larger declines in orders and revenues in the Robotics & Discrete Automation Business. During 2019, the order backlog increased 2 percent.
The performance of our Businesses was mixed during 2019 with increases in segment profit (Operational EBITA) in both the Electrification and Motion Businesses and decreases in the other two Businesses. Group profitability was supported by solid execution in the Motion Business, lower losses in non-core businesses and reductions in costs in Corporate, including \$72 million of stranded corporate costs, and some realized savings from the ABB-OS simplification program. Group profitability was hampered by some specific headwinds in other businesses. In the Electrification Business, this included dilutive impact of including a full year of the GEIS business, which was acquired in June 2018 as well as a large loss recorded in connection with the planned divestment of the solar inverters business. In the Industrial Automation Business, the segment profit was impacted specifically by operational challenges in the Kusile power generation project in South Africa as well as adverse mix. The segment profit of the Robotics & Discrete Automation Business was impacted by lower volumes and adverse mix stemming from the downturn in its key end-markets.
Within the Electrification Business, the integration of GEIS progressed well. ABB aims to deliver approximately \$200 million of annual cost synergies by 2022, of which approximately 80 percent is anticipated to come from product and technology portfolio harmonization and footprint optimization. To support this transformation, we plan to expend approximately \$480 million for the GEIS business through 2022. By the end of 2019, the 13,000 employees from GEIS had been transitioned into ABB, while product substitutions were proceeding ahead of plan with 100 new products planned for commercial launch in 2020. In North America, 13 facilities have been designated for closure while 4 facilities have been identified for expansion.
Agreements for a number of divestments and acquisitions were secured in 2019 to strengthen our portfolio. Of note, the Electrification Business announced in July 2019 an agreement to divest the solar inverters business to FIMER S.p.A (Italy). The transaction will enable the Electrification Business to focus its business portfolio on other growth markets. In December 2019, the Electrification Business completed the divestment of two Shanghai-based joint ventures, acquired in 2018 as part of the GEIS transaction, reducing the complexity of the Electrification Business in China. In October 2019, we also announced the planned acquisition of a majority stake in Shanghai Chargedot New Energy Technology Co., Ltd, a leading Chinese e-mobility solution provider. The acquisition will extend our relationships with leading Chinese EV manufacturers and broaden our e-mobility portfolio with hardware and software developed specifically for local requirements.
We also continued to make organic growth investments in a disciplined manner, prioritizing research and development and sales expenditure while reducing administrative costs. Total non-order related research and development was \$1.2 billion in 2019, or approximately 4 percent of revenues. Organic investment highlights from 2019 include the opening of the Robotics business's first dedicated healthcare research center at the Texas Medical Center in Houston, United States. This laboratory will focus on developing non-surgical medical robotics systems. The Motion Business unveiled a semi-autonomous production plant in Baden, Switzerland, that makes energy storage systems for railways, e-buses/ trolleybuses and e-trucks, incorporating latest battery technologies that allow diesel engines to be efficiently converted to hybrid.
ABB continued to expand its digital ecosystem, announcing several important partnerships over the year, including entering a global software partnership with Dassault Systèmes, a world-leading provider of 3D and digital twin software, and the establishment of a global alliance with Ericsson, the Swedish networking and telecommunications company, focused on exploring future 5G technologies. We also partnered with Huawei, the Chinese information and communication technology provider, for the industrial cloud in China. Partnerships help ensure ABB Ability™ solutions consistently utilize latest high-tech developments, maximizing the value proposition of digital solutions for our customers.
The Board of Directors is proposing a dividend of 0.80 Swiss francs per share at the 2020 Annual General Meeting.
Our sustained capital allocation priorities are unchanged:
Following the expected completion of the sale of 80.1 percent of our Power Grids business to Hitachi at the end of the second quarter of 2020, valuing the business at \$11 billion, we intend to commence a share buyback program returning to shareholders approximately \$7.6–7.8 billion of proceeds from the divestment. We intend to maintain the level of dividend per share after the divestment and aim to maintain our "single A" credit rating long term.
Macroeconomic indicators suggest weaker growth in Europe and the U.S., while China's stabilizing trend might be impacted by the novel coronavirus outbreak. The global economy remains affected by geopolitical uncertainties.
The end-markets we operate in are showing resilience, with headwinds in some markets, particularly the automotive, machine builders, and conventional power generation sectors. Foreign exchange translation effects are expected to continue to influence our results.
We prepare our Consolidated Financial Statements in accordance with U.S. GAAP and present these in U.S. dollars unless otherwise stated.
The preparation of our financial statements requires us to make assumptions and estimates
that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including, but not limited to, those related to: fair value of assets and liabilities assumed in business combinations; determination of corporate costs directly attributable to discontinued operations;
loss contingencies associated with litigation or threatened litigation and other claims and inquiries, environmental damages, product warranties, self-insurance reserves, regulatory and other proceedings; calculation of pension and postretirement benefits and the fair value of pension plan assets; valuation allowances for deferred tax assets and amounts recorded for uncertain tax positions; assumptions used to determine impairment of long-lived assets and in testing goodwill for impairment; inventory obsolescence and net realizable value; the allowance for doubtful accounts; and the percentage-of-completion of projects as well as the amount of variable consideration the Company expects to be entitled to. Where appropriate, we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates and assumptions.
We deem an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. We also deem an accounting policy to be critical when the application of such policy is essential to our ongoing operations. We believe the following critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. These policies should be considered when reading our Consolidated Financial Statements.
A customer contract exists if collectability under the contract is considered probable, the contract has commercial substance, contains payment terms, the rights and commitments of both parties, and has been approved. By analyzing the type, terms and conditions of each contract or arrangement with a customer, we determine which revenue recognition method applies.
We offer arrangements with multiple performance obligations to meet our customers' needs. These arrangements may involve the delivery of multiple products and/or performance of services (such as installation, training and maintenance) and the delivery and/or performance may occur at different points in time or over different periods of time. Goods and services under such arrangements are evaluated to determine whether they form distinct performance obligations and should be accounted for as separate revenue transactions. We allocate the sales price to each distinct performance obligation based on the stand-alone selling price of each product or service of the arrangement.
We recognize revenues when control of goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for these goods or services. Control is transferred when the customer has the ability to direct the use and obtain the benefits from the goods or services.
Control transfer for non-customized products is not considered to have occurred, and therefore no revenues are recognized, until the customer has taken title to the products and assumed the risks and rewards of ownership of the products specified in the purchase order or sales agreement. Generally, the transfer of title and risks and rewards of ownership are governed by the contractually defined shipping terms. We use various International Commercial shipping terms (as promulgated by the International Chamber of Commerce) in our sales of products to third party customers, such as Ex Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP).
We generally recognize revenues for the sale of customized products, including integrated automation and electrification systems and solutions, on an over time basis using the percentage-of-completion method of accounting. These systems are generally accounted for as a single performance obligation as we are required to integrate equipment and services into one deliverable for the customer. Revenues are recognized as the systems are customized during the manufacturing or integration process and as control is transferred to the customer as evidenced by our right to payment for work performed or by the customer's ownership of the work in process. We use the cost-to-cost method to measure progress towards completion on contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to management's best estimate of total estimated costs, which are reviewed and updated routinely for contracts in progress. The cumulative effect of any change in estimate is recorded in the period in which the change in estimate is determined.
The percentage-of-completion method of accounting involves the use of assumptions and projections, principally relating to future material, labor, subcontractor and project-related overhead
include:
costs as well as estimates of the amount of variable consideration to which we expect to be entitled. As a consequence, there is a risk that total contract costs or the amount of variable consideration will either exceed or be lower than, respectively, those we originally estimated (based on all information reasonably available to us) and the margin will decrease or the contract may become unprofitable. This risk increases if the duration of a contract increases because there is a higher probability that the circumstances upon which we originally developed our estimates will change, resulting in increased costs that we may not recover. Factors that could cause costs to increase
Changes in our initial assumptions, which we review on a regular basis between balance sheet dates, may result in revisions to estimated costs, current earnings and anticipated earnings. We recognize these changes in the period in which the changes in estimates are determined. By recognizing changes in estimates cumulatively, recorded revenue and costs to date reflect the current estimates of the stage of completion of each project. Additionally, losses on such contracts are recognized in the period when they are identified and are based upon the anticipated excess of contract costs over the related contract revenues.
Revenues from service transactions are recognized as services are performed. For long-term service contracts, revenues are recognized on a straight-line basis over the term of the contract or, if the performance pattern is other than straight-line, as the services are provided. Service revenues reflect revenues earned from our activities in providing services to customers primarily subsequent to the sale and delivery of a product or complete system. Such revenues consist of maintenance-type contracts, field service activities that include personnel and accompanying spare parts, training and installation and commissioning of products as a stand-alone service or as part of a service contract.
Revenues are reported net of customer rebates, early settlement discounts, and similar incentives. Rebates are estimated based on sales terms, historical experience and trend analysis. The most common incentives relate to amounts paid or credited to customers for achieving defined volume levels.
Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between us and our customers, such as sales, use, value-added and some excise taxes, are excluded from revenues.
As a result of the above policies, judgment in the selection and application of revenue recognition methods must be made.
As more fully described in "Item 8. Financial Information – Legal Proceedings" and in "Note 15 – Commitments and contingencies" to our Consolidated Financial Statements, we are subject to proceedings, litigation or threatened litigation and other claims and inquiries related to environmental, labor, product, regulatory, tax (other than income tax) and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution.
We record provisions for our contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an undiscounted basis using our best estimate of the amount of loss or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, we may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, we record such amounts only when it is probable that they will be collected.
As more fully described in "Note 17 – Employee benefits" to our Consolidated Financial
Statements, we have a number of defined benefit pension and other postretirement plans and recognize an asset for a plan's overfunded status or a liability for a plan's underfunded status in our Consolidated Balance Sheets. We measure such a plan's assets and obligations that determine its funded status as of the end of the year.
Significant differences between assumptions and actual experience, or significant changes in assumptions, may materially affect the pension obligations. The effects of actual results differing from assumptions and the changing of assumptions are included in net actuarial loss within "Accumulated other comprehensive loss".
We recognize actuarial gains and losses gradually over time. Any cumulative unrecognized actuarial gain or loss that exceeds 10 percent of the greater of the present value of the projected benefit obligation (PBO) and the fair value of plan assets is recognized in earnings over the expected average remaining working lives of the employees participating in the plan, or the expected average remaining lifetime of the inactive plan participants if the plan is comprised of all or almost all inactive participants. Otherwise, the actuarial gain or loss is not recognized in the Consolidated Income Statements.
We use actuarial valuations to determine our pension and postretirement benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates, mortality rates and expected return on plan assets. Under U.S. GAAP, we are required to consider current market conditions in making these assumptions. In particular, the discount rates are reviewed annually based on changes in long-term, highly-rated corporate bond yields. Decreases in the discount rates result in an increase in the PBO and in pension costs. Conversely, an increase in the discount rates results in a decrease in the PBO and in pension costs. The mortality assumptions are reviewed annually by management. Decreases in mortality rates result in an increase in the PBO and in pension costs. Conversely, an increase in mortality rates results in a decrease in the PBO and in pension costs.
Holding all other assumptions constant, a 0.25 percentage point decrease in the discount rate would have increased the PBO related to our defined benefit pension plans by \$419 million while a 0.25 percentage point increase in the discount rate would have decreased the PBO related to our defined benefit pension plans by \$414 million.
The expected return on plan assets is reviewed regularly and considered for adjustment annually based upon the target asset allocations and
represents the long-term return expected to be achieved. Decreases in the expected return on plan assets result in an increase to pension costs. Holding all other assumptions constant, an increase or decrease of 0.25 percentage points in the expected long-term rate of asset return would have decreased or increased, respectively, the net periodic benefit cost in 2019 by \$24 million.
The funded status, which can increase or decrease based on the performance of the financial markets or changes in our assumptions, does not represent a mandatory short-term cash obligation. Instead, the funded status of a defined benefit pension plan is the difference between the PBO and the fair value of the plan assets. At December 31, 2019, our defined benefit pension plans (in both continuing and discontinued operations) were \$1,751 million underfunded compared to an underfunding of \$1,677 million at December 31, 2018. Our other postretirement plans were underfunded by \$110 million and \$120 million at December 31, 2019 and 2018, respectively.
We have multiple non-pension postretirement benefit plans. Our health care plans are generally contributory with participants' contributions adjusted annually. For purposes of estimating our health care costs, we have assumed health care cost increases to be 6.3 percent per annum for 2020, gradually declining to 5.0 percent per annum by 2028 and to remain at that level thereafter.
In preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. Tax expense from continuing operations is reconciled from the weighted-average global tax rate (rather than from the Swiss domestic statutory tax rate). As the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland, income which has been generated in jurisdictions outside of Switzerland (hereafter "foreign jurisdictions") and has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. There is no requirement in Switzerland for a parent company of a group to file a tax return of the group determining domestic and foreign pre-tax income and as our consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines our global weighted-average tax rate.
We account for deferred taxes by using the asset and liability method. Under this method, we determine deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We recognize a deferred tax asset when it is more likely than not that the asset will be realized. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. To the extent we increase or decrease this allowance in a period, we recognize the change in the allowance within "Provision for taxes" in the Consolidated Income Statements unless the change relates to discontinued operations, in which case the change is recorded in "Income from discontinued operations, net of tax". Unforeseen changes in tax rates and tax laws, as well as differences in the projected taxable income as compared to the actual taxable income, may affect these estimates.
Certain countries levy withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter "withholding taxes") on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. Switzerland has concluded double taxation treaties with many countries in which we operate. These treaties either eliminate or reduce such withholding taxes on dividend distributions. It is our policy to distribute retained earnings of subsidiaries, insofar as such earnings are not permanently reinvested or no other reasons exist that would prevent the subsidiary from distributing them. No deferred tax liability is set up, if retained earnings are considered as indefinitely reinvested, and used for financing current operations as well as business growth through working capital and capital expenditure in those countries.
We operate in numerous tax jurisdictions and, as a result, are regularly subject to audit by tax authorities. We provide for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Contingency provisions are recorded based on the technical merits of our filing position, considering the applicable tax laws and OECD guidelines and are based on our evaluations of the facts and circumstances as of the end of each reporting period. Changes in the facts and circumstances could result in a material change to the tax accruals. Although we believe that our tax
estimates are reasonable and that appropriate tax reserves have been made, the final determination of tax audits and any related litigation could be different than that which is reflected in our income tax provisions and accruals.
An estimated loss from a tax contingency must be accrued as a charge to income if it is more likely than not that a tax asset has been impaired or a tax liability has been incurred and the amount of the loss can be reasonably estimated. We apply a two-step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. The required amount of provisions for contingencies of any type may change in the future due to new developments.
The amount of goodwill initially recognized in a business combination is based on the excess of the purchase price of the acquired company over the fair value of the assets acquired and liabilities assumed. The determination of these fair values requires us to make significant estimates and assumptions. For instance, when assumptions with respect to the timing and amount of future revenues and expenses associated with an asset are used to determine its fair value, but the actual timing and amount differ materially, the asset could become impaired. In some cases, particularly for large acquisitions, we may engage independent third-party appraisal firms to assist in determining the fair values.
Critical estimates in valuing certain intangible assets include but are not limited to: future expected cash flows of the acquired business, brand awareness, customer retention, technology obsolescence and discount rates.
In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated at the acquisition date. We re-evaluate these items quarterly, based upon facts and circumstances that existed at the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the twelve-month measurement period. Subsequent to the measurement period or our final determination of the tax allowance's or
contingency's estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our Consolidated Income Statements and could have a material impact on our results of operations and financial position. The fair values assigned to the intangible assets acquired are described in "Note 4 – Acquisitions and business divestments" as well as "Note 11 – Goodwill and other intangibles assets", to our Consolidated Financial Statements.
We review goodwill for impairment annually as of October 1, or more frequently if events or circumstances indicate the carrying value may not be recoverable.
We use either a qualitative or quantitative assessment method for each reporting unit. The qualitative assessment involves determining, based on an evaluation of qualitative factors, whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on this qualitative assessment, it is determined to be more likely than not that the reporting unit's fair value is less than its carrying value, then a quantitative impairment test is performed. If we elect not to perform the qualitative assessment for a reporting unit, then we perform the quantitative impairment test.
Our reporting units are the same as our Businesses for the Electrification, Motion and Robotics & Discrete Automation Businesses. For the Industrial Automation Business, we determined the reporting units to be one level below the Business, as the different products produced or services provided by this business do not share sufficiently similar economic characteristics to aggregate into a single reporting unit.
When performing the qualitative assessment, we first determine, for a reporting unit, factors which would affect the fair value of the reporting unit including: (i) macroeconomic conditions related to the business, (ii) industry and market trends and (iii) the overall future financial performance and future opportunities in the markets in which the business operates. We then consider how these factors would impact the most recent quantitative analysis of the reporting unit's fair value. Key assumptions in determining the fair value of the reporting unit include the projected level of business operations, the weighted-average cost of
capital, the income tax rate and the terminal growth rate.
If, after performing the qualitative assessment, we conclude that events or circumstances have occurred which would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value, or if we have elected not to perform a qualitative assessment, then a quantitative impairment test is performed. First, we calculate the fair value of the reporting unit using an income approach based on the present value of future cash flows, applying a discount rate that represents our weighted-average cost of capital, and compare it to the reporting unit's carrying value. Where the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit exceeds the reporting unit's fair value, we would record an impairment loss equal to the difference, up to the full amount of goodwill. Any goodwill impairment losses would be recorded as a separate line item in the income statement in continuing operations, unless related to a discontinued operation, in which case the losses would be recorded in "Income from discontinued operations, net of tax".
In 2019, we performed a qualitative assessment and determined that it was not more likely than not that the fair value for each of these reporting units was below the carrying value. As a result, we concluded that it was not necessary to perform the quantitative impairment test.
In 2018, we performed a quantitative impairment test for all of the reporting units applicable at that time. The test reflected assumptions and forecasts resulting from our strategic plan for the period from 2019 to 2023. We concluded that the estimated fair values for each of our reporting units exceeded their respective carrying values and that none of the reporting units were impaired.
The projected future cash flows used in the 2018 fair value calculation for all reporting units, except for the Machine and Factory Automation business within the Industrial Automation Business, were based on approved business plans for the reporting units which covered a period of five years plus a calculated terminal value. The after-tax weighted-average cost of capital of 8 percent was based on variables such as the risk-free rate derived from the yield of 10-year U.S. treasury bonds as well as an ABB-specific risk premium. The terminal value growth rate was assumed to be 1 percent. The mid-term tax rate used in the test was 27 percent.
For Machine and Factory Automation, which includes the acquisition in 2017 of B&R, the projected future cash flows used in the 2018 fair value calculation were based on an approved business plan which covered a period of eight years plus a calculated terminal value. The business plan covered a longer projected period due to a higher growth trajectory as well as a longer term view for the business which was available following the acquisition process. The terminal value growth rate was assumed to be 3 percent and the after tax weighted-average cost of capital was 9.4 percent. The mid-term tax rate used in the test was 25 percent which is based on tax rates in countries where the business is primarily operating.
Determining the projected future cash flows required significant judgments and estimates involving variables such as future sales volumes, sales prices, awards of large orders, production and other operating costs, capital expenditures, net working capital requirements and other economic factors.
We based our fair value estimates on assumptions we believed to be reasonable, but which were inherently uncertain. Consequently, actual future results may differ from those estimates.
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We assessed the reasonableness of the fair value calculations of our reporting units by reconciling the sum of the fair values for all our reporting units to our total market capitalization. Through the use of sensitivity analysis, the assumptions used in the fair value calculation were stressed to determine the impact on the fair value of the reporting units. Our sensitivity analysis in 2018 showed that, holding all other assumptions constant, a 1 percentage point increase in the discount rate would have reduced the calculated fair value by approximately 13.0 percent, while a 1 percentage point decrease in the terminal value growth rate would have reduced the calculated fair value by approximately 9.3 percent.
Intangible assets are reviewed for recoverability upon the occurrence of certain triggering events (such as a decision to divest a business or projected losses of an entity) or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We record impairment charges in "Other income (expense), net", in our Consolidated Income Statements, unless they relate to a discontinued operation, in which case the charges are recorded in "Income from discontinued operations, net of tax".
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Consolidated Financial
Statements, see "Note 2 – Significant accounting policies" to our Consolidated Financial Statements.
Each year, we invest significantly in research and development. Our research and development focuses on developing and commercializing the technologies, products and solutions of our businesses that are of strategic importance to our future growth. In 2019, we invested \$1,198 million, or approximately 4.3 percent of our 2019 consolidated revenues, on research and development activities in our continuing operations. We also had expenditures of \$50 million, or approximately 0.2 percent of our 2019 consolidated revenues, on order-related development activities. These are customer- and project-specific development
efforts that we undertake to develop or adapt equipment and systems to the unique needs of our customers in connection with specific orders or projects.
In addition to continuous product development, and order-related engineering work, we develop platforms for technology applications in our businesses in our research and development laboratories, which operate on a global basis, such as our ABB Ability™ platform. Through active management of our investment in research and development, we seek to maintain a balance between
short-term and long-term research and development programs and optimize our return on investment.
Universities are incubators of future technology, and a central task of our research and development team is to transform university research into industry-ready technology platforms. We collaborate with multiple universities and research institutions to build research networks and foster new technologies. We believe these collaborations shorten the amount of time required to turn basic ideas into viable products, and they additionally help us to recruit and train new personnel. We have built numerous university collaborations in the U.S., Europe and Asia, including long-term, strategic relationships with Carnegie Mellon University, North Carolina State University, Virginia Polytechnic Institute and State University, Massachusetts Institute of Technology, Imperial College London, ETH Zurich, Royal Institute of Technology (KTH) Stockholm, Cambridge University, Dresden University of Technology, Huazhong University of Science & Technology (HUST), Zhejiang University and Xi'an Jiaotong University (XJTU).
We are further leveraging our ecosystem to enhance our innovation efforts and gain speed with strategic partners by investing and collaborating with start-ups worldwide via our corporate
venture arm ABB Technology Ventures and our start-up collaboration arm SynerLeap.
Our collaborative research and development projects include research on artificial intelligence, materials, sensors, micro-engineered mechanical systems, robotics, controls, manufacturing, distributed power and communication. Common platforms for power and automation technologies are developed around advanced materials, efficient manufacturing, information technology and data communication, as well as sensor and actuator technology.
Common applications of basic power and automation technologies can also be found in power electronics, electrical insulation, and control and optimization. Our power technologies, including our insulation technologies, current interruption and limitation devices, power electronics, flow control and power protection processes, apply as much to large, reliable, blackout-free transmission systems as they do to everyday household needs. Our automation technologies, including our control and optimization processes, power electronics, sensors and microelectronics, mechatronics, wireless communication processes as well as advanced artificial intelligence solutions are designed to improve efficiency in plants and factories around the world, including our own.
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There were no acquisitions in 2019. During 2018 and 2017, ABB paid \$2,638 million and \$1,992 million to purchase three and four businesses, respectively. The amounts exclude increases in investments made in cost- and equity-accounted companies.
The principal acquisition in 2018 was GE Industrial Solutions (GEIS), GE's global electrification solutions business, which was acquired in June. GEIS, headquartered in the U.S., provides technologies that distribute and control electricity and support the commercial, data center, health care, mining, renewable energy, oil and gas, water and telecommunications sectors. At the time of the acquisition, GEIS had approximately 13,500 employees.
The principal acquisition in 2017 was Bernecker + Rainer Industrie-Elektronik GmbH (B&R), a worldwide provider of product- and software-based,
open-architecture solutions for machine and factory automation. At the time of the acquisition, B&R employed more than 3,000 people, including about 1,000 research and development, and application engineers, and operated across 70 countries in the machine and factory automation market segment.
In 2019, we recorded net gains (including transaction costs) of \$55 million, primarily due to the divestment of two businesses in China. There were no significant divestments in 2018.
On March 1, 2017, we divested our high-voltage cable system business. Total cash proceeds from all business divestments during 2017 amounted to \$605 million, net of transaction costs and cash disposed.
In December 2018, ABB announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi, valuing the business at \$11 billion. The business also includes certain real estate properties which were previously reported within Corporate and Other. The divestment is expected to be completed at the end of the second quarter of 2020, following the receipt of customary regulatory approvals. As this divestment represents a strategic shift that will have a major effect on the Company's operations and financial results, the results of operations for this business have been presented as discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented. For more information on our discontinued operations, see "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements.
During 2019, ABB reached an agreement to sell its solar inverters business to FIMER S.p.A. (Italy) for no consideration. Under the agreement ABB is obligated to transfer cash on the closing date and make additional cash payments to the purchaser through to 2025. As a result, in 2019, we recorded a loss, of \$421 million in "Other income (expense), net", representing the excess of the carrying value over the estimated fair value of this business. The carrying value at December 31, 2019, includes a loss arising from the cumulative translation adjustment of \$99 million. The assets and liabilities of this business are included within assets and liabilities held for sale in our Consolidated Balance Sheet as at December 31, 2019. For more information on assets held for sale, see "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements.
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We report our financial results in U.S. dollars. Due to our global operations, a significant amount of our revenues, expenses, assets and liabilities are denominated in other currencies. As a consequence, movements in exchange rates between currencies may affect: (i) our profitability, (ii) the comparability of our results between periods and (iii) the reported carrying value of our assets and liabilities.
We translate non-USD denominated results of operations, assets and liabilities to USD in our Consolidated Financial Statements. Balance sheet items are translated to USD using year-end currency exchange rates. Income statement and cash flow items are translated to USD using the relevant monthly average currency exchange rate.
Increases and decreases in the value of the USD against other currencies will affect the reported results of operations in our Consolidated Income Statements and the value of certain of our assets and liabilities in our Consolidated Balance Sheets, even if our results of operations or the value of those assets and liabilities have not changed in their original currency. As foreign exchange rates impact our reported results of operations and the reported value of our assets and liabilities, changes in foreign exchange rates could significantly affect the comparability of our reported results of operations between periods and result in significant changes to the reported value of our assets, liabilities and stockholders' equity.
While we operate globally and report our financial results in USD, exchange rate movements between the USD and both the EUR and the CHF are of particular importance to us due to (i) the location of our significant operations and (ii) our corporate headquarters being in Switzerland.
The exchange rates between the USD and the EUR and the USD and the CHF at December 31, 2019, 2018 and 2017, were as follows:
| Exchange rates into \$ | 2019 | 2018 | 2017 |
|---|---|---|---|
| EUR 1.00 | 1.12 | 1.15 | 1.20 |
| CHF 1.00 | 1.03 | 1.02 | 1.02 |
The average exchange rates between the USD and the EUR and the USD and the CHF for the years ended December 31, 2019, 2018 and 2017, were as follows:
| Exchange rates into \$ | 2019 | 2018 | 2017 |
|---|---|---|---|
| EUR 1.00 | 1.12 | 1.18 | 1.13 |
| CHF 1.00 | 1.01 | 1.02 | 1.02 |
When we incur expenses that are not denominated in the same currency as the related revenues, foreign exchange rate fluctuations could affect our profitability. To mitigate the impact of exchange rate movements on our profitability, it is our policy to enter into forward foreign exchange contracts to manage the foreign exchange transaction risk of our operations.
In 2019, approximately 74 percent of our consolidated revenues were reported in currencies other than the USD. The following percentages of consolidated revenues were reported in the following currencies:
In 2019, approximately 72 percent of our cost of sales and selling, general and administrative expenses were reported in currencies other than the USD. The following percentages of consolidated cost of sales and selling, general and administrative expenses were reported in the following currencies:
We also incur expenses other than cost of sales and selling, general and administrative expenses in various currencies.
The results of operations and financial position of our subsidiaries outside of the United States are generally accounted for in the currencies of the countries in which those subsidiaries are located. We refer to these currencies as "local currencies". Local currency financial information is then translated into USD at applicable exchange rates for inclusion in our Consolidated Financial Statements.
The discussion of our results of operations below provides certain information with respect to orders, revenues, income from operations and other measures as reported in USD (as well as in local currencies). We measure period-to-period variations in local currency results by using a constant foreign exchange rate for all periods under comparison. Differences in our results of operations in local currencies as compared to our results of operations in USD are caused exclusively by changes in currency exchange rates.
While we consider our results of operations as measured in local currencies to be a significant indicator of business performance, local currency information should not be relied upon to the exclusion of U.S. GAAP financial measures. Instead, local currencies reflect an additional measure of comparability and provide a means of viewing aspects of our operations that, when viewed together with the U.S. GAAP results, provide a more complete understanding of factors and trends affecting the business. As local currency information is not standardized, it may not be possible to compare our local currency information to other companies' financial measures that have the same or a similar title. We encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
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Our policy is to book and report an order when a binding contractual agreement has been concluded with a customer covering, at a minimum, the price and scope of products or services to be supplied, the delivery schedule and the payment terms. The reported value of an order corresponds to the undiscounted value of revenues that we expect to recognize following delivery of the goods or services subject to the order, less any trade discounts and excluding any value added or sales tax. The value of orders received during a given period of time represents the sum of the value of all orders received during the period, adjusted to reflect the aggregate value of any changes to the value of orders received during the period and orders existing at the beginning of the period. These adjustments, which may in the aggregate increase or decrease the orders reported during the period, may include changes in
the estimated order price up to the date of contractual performance, changes in the scope of products or services ordered and cancellations of orders. The undiscounted value of future revenues we expect to generate from our orders at any point in time is represented by our order backlog.
The level of orders fluctuates from year to year. Portions of our business involve orders for long-term projects that can take months or years to complete and many larger orders result in revenues in periods after the order is booked. Consequently, the level of orders generally cannot be used to accurately predict future revenues or operating performance. Orders that have been placed can often be cancelled, delayed or modified by the customer. These actions can reduce or delay any future revenues from the order or may result in the elimination of the order.
In the normal course of our business, we purchase products from, sell products to and engage in other transactions with entities in which we hold an equity interest. The amounts involved in these transactions are not material to ABB Ltd. Also, in
the normal course of our business, we engage in transactions with businesses that we have divested. We believe that the terms of the transactions we conduct with these companies are negotiated on an arm's length basis.
We evaluate the performance of our Businesses based on orders received, revenues and Operational EBITA.
Operational EBITA represents income from operations excluding:
• foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related assets/ liabilities).
Certain other non-operational items generally includes: certain regulatory, compliance and legal costs, costs for planned divestment of the Power Grids business, certain asset write downs/impairments, non-operational gains, as well as other items which are determined by management on a case-by-case basis.
See "Note 23 – Operating segment and geographic data" to our Consolidated Financial Statements for a reconciliation of the total Operational EBITA to income from continuing operations before taxes.
Orders and order backlog were as follows:
Orders and order backlog:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Orders | 28,588 | 28,590 | 25,034 |
| Order backlog at December 31, | 13,324 | 13,084 | 12,491 |
Our consolidated results from operations were as follows:
| (\$ in millions, except | |||
|---|---|---|---|
| per share data in \$) | 2019 | 2018 | 2017 |
| Revenues | 27,978 | 27,662 | 25,196 |
| Cost of sales | (19,072) (19,118) (17,350) | ||
| Gross profit | 8,906 | 8,544 | 7,846 |
| Selling, general and | |||
| administrative expenses | (5,447) | (5,295) | (4,765) |
| Non-order related research and | |||
| development expenses | (1,198) | (1,147) | (1,013) |
| Other income (expense), net | (323) | 124 | 162 |
| Income from operations | 1,938 | 2,226 | 2,230 |
| Net interest and other finance expense |
(148) | (190) | (161) |
| Non-operational pension (cost) credit |
72 | 83 | 33 |
| Provision for taxes | (772) | (544) | (583) |
| Income from continuing | |||
| operations, net of tax | 1,090 | 1,575 | 1,519 |
| Income from discontinued | |||
| operations, net of tax | 438 | 723 | 846 |
| Net income | 1,528 | 2,298 | 2,365 |
| Net income attributable to | |||
| noncontrolling interests | (89) | (125) | (152) |
| Net income attributable to ABB | 1,439 | 2,173 | 2,213 |
| Amounts attributable | |||
| to ABB shareholders: | |||
| Income from continuing | |||
| operations, net of tax | 1,043 | 1,514 | 1,441 |
| Income from discontinued | |||
| operations, net of tax | 396 | 659 | 772 |
| Net income | 1,439 | 2,173 | 2,213 |
| Basic earnings per share attributable to ABB shareholders: |
|||
| Income from continuing | |||
| operations, net of tax | 0.49 | 0.71 | 0.67 |
| Income from discontinued |
| Diluted earnings per share attributable | ||
|---|---|---|
| to ABB shareholders: | |||
|---|---|---|---|
| Income from continuing operations, net of tax |
0.49 | 0.71 | 0.67 |
| Income from discontinued operations, net of tax |
0.19 | 0.31 | 0.36 |
| Net income | 0.67 | 1.02 | 1.03 |
operations, net of tax 0.19 0.31 0.36 Net income 0.67 1.02 1.04 A more detailed discussion of the orders, revenues, income from operations and Operational EBITA for our Businesses follows in the sections of "Business analysis" below entitled "Electrification", "Industrial Automation", "Motion", "Robotics & Discrete Automation", and "Corporate and Other". Orders and revenues of our businesses include intersegment transactions which are eliminated in the "Corporate and Other" line in the tables below.
| % Change | |||||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 |
| Electrification | 13,050 | 11,867 10,143 | 10% | 17% | |
| Industrial Automation |
6,432 | 6,697 | 6,113 | (4)% | 10% |
| Motion | 6,782 | 6,725 | 5,966 | 1% | 13% |
| Robotics & Discrete Automation |
3,260 | 3,808 | 2,977 | (14)% | 28% |
| Operating | |||||
| Businesses | 29,524 | 29,097 25,199 | 1% | 15% | |
| Corporate and Other | |||||
| Non-core and divested businesses |
(91) | 364 | 643 | n.a. | (43)% |
| Intersegment eliminations and other |
(845) | (871) | (808) | n.a. | n.a. |
| Total | 28,588 | 28,590 25,034 | 0% | 14% |
In 2019, total orders remained stable compared to 2018 (increased 4 percent in local currencies). Total orders reflects the moderate organic growth in the Electrification and Motion Businesses, dampened by lower orders in the Industrial Automation and Robotics & Discrete Automation Businesses. Order declines were most significant in the Robotics & Discrete Automation Business as several of its primary industry sectors reduced order levels. Changes in the business portfolio, mainly from the inclusion of GEIS for a full year in 2019, positively impacted total orders by approximately 3 percent. For additional information about Business order performance in all periods, refer to the relevant sections of "Business analysis" below.
In 2018, total orders increased 14 percent (14 percent in local currencies). Orders grew organically in all Businesses with the most significant growth in the Motion Business, while the Industrial Automation Business also received strong order levels in the Marine & Ports business line. Orders increased approximately 6 percent due to changes
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in the business portfolio including GEIS, acquired at end June 2018 and a full year of contribution from B&R, acquired in July 2017.
We determine the geographic distribution of our orders based on the location of the ultimate destination of the products' end use, if known, or the location of the customer. The geographic distribution of our consolidated orders was as follows:
| % Change | |||||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 |
| Europe | 10,509 | 10,725 | 9,202 | (2)% | 17% |
| The Americas | 9,057 | 8,243 | 7,006 | 10% | 18% |
| Asia, Middle East and Africa |
9,022 | 9,622 | 8,826 | (6)% | 9% |
| Total | 28,588 | 28,590 25,034 | 0% | 14% |
Orders in 2019 grew in the Americas but decreased in Asia, Middle East and Africa and in Europe. In the Americas orders increased 10 percent (11 percent in local currencies). Orders increased in Chile, Brazil, Argentina, Canada, Mexico, Peru and the United States. In Asia, Middle East and Africa orders declined 6 percent (4 percent in local currencies), negatively impacted by the Motion and Robotics & Discrete Automation Businesses. Orders were higher in Qatar, Singapore, Japan, Australia and South Korea while they declined in China, India, Saudi Arabia, the United Arab Emirates and South Africa. In Europe orders declined 2 percent (increased 4 percent in local currencies). Orders in local currencies increased in the Industrial Automation and Motion Businesses. Orders declined in Norway, the United Kingdom, Switzerland, Finland, Italy and Sweden. Orders remained flat in Switzerland while they increased in France, Denmark, Germany, the Netherlands, Russia and Spain. Growth in the Americas included a 10 percent increase due to changes in the business portfolio, primarily due to the inclusion of GEIS for a full year. In Europe, these changes had a positive impact of 2 percent while these changes had a negative impact of 3 percent in Asia, Middle East and Africa.
Orders in 2018 increased in all regions. In Europe orders grew 17 percent (14 percent in local currencies) and grew in all of the Businesses. In local currencies, orders increased in Finland, Switzerland, Germany, Sweden and Italy while they decreased in the United Kingdom. In the Americas orders increased 18 percent (19 percent in local currencies). In local currencies, orders increased in the U.S., Brazil, Mexico and Argentina while orders decreased in Canada, Chile and Panama. In Asia, Middle East and Africa orders grew 9 percent (8 percent in local currencies), driven by the Robotics & Discrete Automation Business. Orders were higher in China, Japan, Egypt, Malaysia and India while they declined in Saudi Arabia, South
Korea and South Africa. Growth in the Americas included a 12 percent impact due to acquisitions, including GEIS and B&R. In Europe, these acquisitions had a positive impact of 4 percent while the impact in Asia, Middle East and Africa was 2 percent.
| December 31, | % Change | |||||
|---|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | |
| Electrification | 4,488 | 4,113 | 3,098 | 9% | 33% | |
| Industrial Automation |
5,077 | 4,986 | 5,171 | 2% | (4)% | |
| Motion | 2,967 | 2,740 | 2,674 | 8% | 2% | |
| Robotics & Discrete Automation |
1,356 | 1,438 | 1,279 | (6)% | 12% | |
| Operating Businesses |
13,888 | 13,277 12,222 | 5% | 9% | ||
| Corporate and Other | ||||||
| Non-core and divested businesses |
192 | 555 | 1,055 | (65)% | (47)% | |
| Intersegment eliminations |
(756) | (748) | (786) | n.a. | n.a. | |
| Total | 13,324 | 13,084 12,491 | 2% | 5% |
Consolidated order backlog increased 2 percent (2 percent in local currencies) from December 31, 2018, to December 31, 2019. Order backlog increased in the Electrification Business, supported by order growth in all regions, especially in Asia, Middle East and Africa as well as in Europe. Order backlog also increased in the Motion Business driven by higher order intake in Europe mainly from Germany, Spain, Russia, Finland and France. Order backlog in the Industrial Automation Business increased slightly due to the order intake in the system business and in Turbocharging. Order backlog declined in the Robotics & Discrete Automation Business as a result of the weak order intake in the Robotics business.
Consolidated order backlog increased 5 percent (10 percent in local currencies) from December 31, 2017, to December 31, 2018. Order backlog increased in the Electrification Business due to the acquisition of GEIS in June 2018 and in the Motion and Robotics & Discrete Automation Businesses. In the Industrial Automation Business, the order backlog decreased compared to the end of 2017 due to high levels of execution that could not be fully compensated with new orders. The net impact on order backlog from divestments and acquisitions was an increase of 4 percent.
| % Change | |||||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 |
| Electrification | 12,728 | 11,686 10,094 | 9% | 16% | |
| Industrial Automation |
6,273 | 6,500 | 6,472 | (3)% | 0% |
| Motion | 6,533 | 6,463 | 5,877 | 1% | 10% |
| Robotics & Discrete |
|||||
| Automation | 3,314 | 3,611 | 2,957 | (8)% | 22% |
| Operating | |||||
| Businesses | 28,848 | 28,260 25,400 | 2% | 11% | |
| Corporate and Other | |||||
| Non-core and divested |
|||||
| businesses | 37 | 273 | 661 | (86)% | (59)% |
| Intersegment eliminations |
|||||
| and other | (907) | (871) | (865) | n.a. | n.a. |
| Total | 27,978 | 27,662 25,196 | 1% | 10% |
In 2019, revenues increased 1 percent (5 percent in local currencies). Revenues were higher in the Electrification and Motion Businesses while revenues decreased in the Industrial Automation and Robotics & Discrete Automation Businesses. In the Electrification Business, higher revenues were mainly attributable to the inclusion of a full year of revenues from GEIS. The revenue decrease in the Robotics & Discrete Automation Business was due to weakness in automotive-related sectors and weak book-and-bill business. For additional information about the Business revenues performance in all periods, please refer to "Business analysis" below.
Revenues in 2018 increased 10 percent (9 percent in local currencies) with growth in all Businesses except Industrial Automation, reflecting the trend in orders during 2018. In Electrification, the increase in revenues was mainly attributable to the acquisition of GEIS in June 2018. The increase in revenues in the Robotics & Discrete Automation Business was mainly attributable to the inclusion of a full year of revenues for B&R which was acquired in July 2017.
We determine the geographic distribution of our revenues based on the location of the ultimate destination of the products' end use, if known, or the location of the customer. The geographic distribution of our consolidated revenues was as follows:
| % Change | |||||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 |
| Europe | 10,097 | 10,129 | 9,142 | 0% | 11% |
| The Americas | 8,955 | 8,042 | 6,870 | 11% | 17% |
| Asia, Middle East and Africa |
8,926 | 9,491 | 9,184 | (6)% | 3% |
| Total | 27,978 | 27,662 25,196 | 1% | 10% |
In 2019, revenue growth was mixed across the regions. In Europe, revenues remained flat (increased 6 percent in local currencies) with higher local currency revenues in the Electrification, Motion and Robotics & Discrete Automation Businesses and lower revenues in the Industrial Automation Business. Revenues increased in the Netherlands, Spain, Poland, Switzerland and Belgium, while they were lower in Finland, Turkey, Italy, Germany and Sweden. Revenues in the Americas increased 11 percent (13 percent in local currencies) largely due to the impact of including GEIS for a full year. Revenues were higher in the U.S., Mexico, Canada, Peru and Chile. In Asia, Middle East and Africa, revenues decreased 6 percent (3 percent in local currencies) due to lower revenues in the Robotics and Energy Industries business lines. Revenues declined in Saudi Arabia, South Korea, South Africa, India and China but increased in Australia, Japan and Singapore.
In 2018, revenues increased in all regions. In Europe, revenues increased 11 percent (9 percent in local currencies) reflecting growth in the Motion Business as well as the Electrification Business, which benefited from the acquisition of GEIS. Revenues grew in the Robotics & Discrete Automation Business which benefited from the inclusion of a full year of revenues from B&R. In local currencies, revenues declined in Sweden, Norway and the United Kingdom, while revenues increased in Switzerland, Spain and Poland. Revenues in the Americas increased 17 percent (19 percent in local currencies), mainly driven by the acquisition of GEIS. In local currencies, revenues were higher in the U.S., Canada, Brazil, Mexico and Argentina. In Asia, Middle East and Africa, revenues increased 3 percent (3 percent in local currencies). In local currencies, revenues declined in Saudi Arabia, Qatar and South Korea while revenues increased in China, India, and Australia.
Cost of sales consists primarily of labor, raw materials and component costs but also includes indirect production costs, expenses for warranties, contract and project charges, as well as order-related development expenses incurred in connection with projects for which corresponding revenues have been recognized.
In 2019, cost of sales was steady (increased 3 percent in local currencies) at \$19,072 million and the gross margin improved by 0.9 percent as cost of sales as a percentage of revenues decreased from 69.1 percent in 2018 to 68.2 percent in 2019. Gross margins improved in the Electrification Business, despite the dilutive impacts of the GEIS business and were also higher in the Motion Business.
Margins were lower in the Industrial Automation and Robotics & Discrete Automation Businesses. Lower losses in Non-core businesses also reduced cost of sales. Continued price-erosion was lower than in 2018 and we had some positive impacts from changes in commodity prices. We also benefited from the results of supply chain and operational excellence initiatives.
In 2018, cost of sales increased 10 percent (10 percent in local currencies) to \$19,118 million, a similar increase as Revenues. Growth was due to the acquisition of GEIS, a full year of inclusion of B&R and growth in the Motion Business. Cost of sales as a percentage of revenues increased slightly from 68.9 percent in 2017 to 69.1 percent in 2018, due to the impact of the lower gross margin business in the acquired GEIS business, the impact of higher commodity prices and certain project-related charges in the non-core EPC business. Cost of sales benefited from continued efforts to generate savings from supply chain and operational excellence programs.
The components of selling, general and administrative expenses were as follows:
| (\$ in millions, unless otherwise stated) |
2019 | 2018 | 2017 |
|---|---|---|---|
| Selling expenses | 3,383 | 3,228 | 2,864 |
| Selling expenses as a percentage of orders received |
11.8% | 11.3% | 11.4% |
| General and administrative expenses |
2,064 | 2,067 | 1,901 |
| General and administrative expenses as a percentage of |
|||
| revenues | 7.4% | 7.5% | 7.5% |
| Total selling, general and administrative expenses |
5,447 | 5,295 | 4,765 |
| Total selling, general and administrative expenses as a percentage of revenues |
19.5% | 19.1% | 18.9% |
| Total selling, general and administrative expenses as a percentage of the average of |
|||
| orders received and revenues | 19.3% | 18.8% | 19.0% |
In 2019, general and administrative expenses remained at the same level as in 2018 (increased 3 percent in local currencies). As a percentage of revenues, general and administrative expenses decreased to 7.4 percent from 7.5 percent in 2018. General and administrative expenses were impacted by approximately \$240 million of restructuring and implementation expenses for the OS program and additional general and administrative expenses from the integration of the acquired GEIS business. General and administrative expenses were also impacted by the costs
associated with the planned divestment of the Power Grids business. General and administrative expenses in 2019 benefited from a \$72 million reduction of stranded corporate costs compared to 2018. Stranded costs are overhead and other management costs which could previously be allocated to the Power Grids business.
In 2018, general and administrative expenses increased 9 percent compared to 2017 (8 percent in local currencies). As a percentage of revenues, general and administrative expenses remained at 7.5 percent. Despite a significant reduction in restructuring and restructuring-related expenses for the White Collar Productivity program of \$131 million compared to 2017, general and administrative expenses increased driven by the continuation of a series of strategic initiatives and additional general and administrative expenses from the acquired B&R and GEIS businesses. General and administrative expenses in 2018 includes \$297 million of stranded corporate costs compared with \$286 million in 2017.
In 2019, selling expenses increased 5 percent compared to 2018 (8 percent in local currencies) and includes \$27 million of restructuring and implementation expenses for the OS program. We also increased investments in sales efforts in selective businesses including Machine and Factory Automation, Process Industries, Installation Products, Measurement & Analytics and Drives and also had higher selling expenses from the impact of including a full year of the acquired GEIS business. These factors resulted in increasing selling expenses as a percentage of orders received from 11.3 percent to 11.8 percent.
In 2018, selling expenses increased 13 percent compared to 2017 (12 percent in local currencies) primarily driven by extended sales activities in selective businesses like Robotics, Drives and Motors & Generators and additional selling expenses from the acquired B&R and GEIS businesses. Selling expenses as a percentage of orders received decreased from 11.4 percent to 11.3 percent on higher orders received.
In 2019, selling, general and administrative expenses increased 3 percent compared to 2018 (6 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses increased from 18.8 percent to 19.3 percent mainly from the impact of the higher selling expenses described above.
In 2018, selling, general and administrative expenses increased 11 percent compared to 2017 (10 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses decreased from 19.0 percent to 18.8 percent mainly from the impact of the higher average orders and revenues.
In 2019, non-order related research and development expenses increased 4 percent (9 percent in local currencies) compared to 2018 driven by a continued focus on investments in promising key technologies.
In 2018, non-order related research and development expenses increased 13 percent (11 percent in local currencies) compared to 2017 due to expanded investment in specific future growth areas.
Non-order related research and development expenses as a percentage of revenues increased in 2019 to 4.3 percent, after increasing to 4.1 percent in 2018 from 4.0 percent in 2017.
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Restructuring and restructuring related expenses(1) |
(69) | (37) | (35) |
| Net gain from sale of property, plant and equipment |
51 | 57 | 37 |
| Asset impairments | (61) | (36) | (27) |
| Fair value adjustment on assets and liabilities held for sale |
(421) | — | — |
| Favorable resolution of an uncertain purchase price adjustment |
92 | — | — |
| Net gain (loss) from sale of businesses |
55 | 57 | 252 |
| Gain on liquidation of foreign subsidiary |
— | 31 | — |
| Income from equity-accounted companies and other income |
|||
| (expense), net | 30 | 52 | (65) |
| Total | (323) | 124 | 162 |
(1) Excluding asset impairments
"Other income (expense), net" primarily includes certain restructuring and restructuring-related expenses, gains and losses from sale of businesses and sale of property, plant and equipment, recognized asset impairments, our share of income or loss from equity-accounted companies as well as other losses.
In 2019, "Other income (expense), net" was a loss of \$323 million, while it was a gain of \$124 million in 2018. In 2019, the amount includes the impact of recording a loss of \$421 million for a fair value adjustment to the net assets of the solar inverters business which was classified as held for sale in June 2019. See "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements for additional information. Partially offsetting this was a gain of \$92 million due to a favorable resolution of an uncertain purchase price adjustment relating to the acquisition of GEIS. See "Note 4 – Acquisitions and business divestments" to our Consolidated Financial Statements for additional information.
In 2018, "Other income (expense), net" was an income of \$124 million, lower than in 2017. The primary reason was that 2017 included a significant gain on sale of the Cables business. Partially offsetting this was that 2018 included lower costs for legal claims (recorded within other expense) and a currency-related gain on a substantial liquidation of a foreign subsidiary.
| % Change | |||||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 |
| Electrification | 1,049 | 1,290 1,352 | (19)% | (5)% | |
| Industrial Automation |
700 | 853 | 829 | (18)% | 3% |
| Motion | 1,009 | 924 | 707 | 9% | 31% |
| Robotics & Discrete Automation |
298 | 456 | 387 | (35)% | 18% |
| Operating Businesses |
3,056 | 3,523 3,276 | (13)% | 8% | |
| Corporate and Other |
(1,113) (1,302)(1,052) | n.a. | n.a. | ||
| Intersegment elimination |
(5) | 5 | 6 | n.a. | n.a. |
| Total | 1,938 | 2,226 2,230 | (13)% | 0% |
In 2019 and 2018, changes in income from operations were a result of the factors discussed above and in the divisional analysis below.
Net interest and other finance expense consists of "Interest and dividend income" offset by "Interest and other finance expense".
"Interest and other finance expense" includes interest expense on our debt, the amortization of upfront transaction costs associated with long-term debt and committed credit facilities, commitment fees on credit facilities, foreign exchange gains and losses on financial items and gains and losses on marketable securities. In addition, interest accrued relating to uncertain tax positions is included within interest expense. "Interest and other finance expense" excludes
interest expense which has been allocated to discontinued operations.
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Interest and dividend income | 67 | 72 | 73 |
| Interest and other finance expense |
(215) | (262) | (234) |
| Net interest and other finance expense |
(148) | (190) | (161) |
In 2019, "Interest and other finance expense" decreased compared to 2018 primarily due to lower foreign exchange losses compared to 2018 as well as lower effective interest rates on outstanding long-term debt.
In 2018, "Interest and other finance expense" increased compared to 2017 primarily due to an increase in average outstanding commercial paper borrowings and the interest expense associated with the bonds issued in 2018.
The Non-operational pension credit of \$72 million in 2019 was lower than the \$83 million recorded in 2018 primarily due to a smaller pension asset base used in the computation of the expected return on assets and in increase in the settlement charges, partially offset by the change in approach used to calculate the interest cost as described in "Note 17 – Employee benefits" to our Consolidated Financial Statements.
The Non-operational pension credit of \$83 million in 2018 was higher than the \$33 million recorded in 2017 primarily due to a reduction in 2018 of the discount rate applicable to the computation of the defined benefit pension obligation and a larger pension asset base used in the computation of the expected return on plan assets.
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Income from continuing operations before taxes |
1,862 | 2,119 | 2,102 |
| Provision for taxes | (772) | (544) | (583) |
| Effective tax rate for the year | 41.5% | 25.7% | 27.7% |
In 2019, the effective tax rate increased from 25.7 percent to 41.5 percent. The distribution of income within the group resulted in a lower weighted-average global tax rate, including the impact of recording a loss for the planned sale of the solar inverters business which reduced the weighted-average global tax rate by
approximately 2 percent. In connection with this loss, we also recorded a change in a valuation allowance which increased the effective tax rate by approximately 6 percent. During 2019, the effective tax rate also increased further due to impacts relating to the planned divestment of the Power Grids business, primarily including non-deductible expenses, taxes payable due to the reorganization of the business in connection with the planned sale, changes to valuation allowances and additional taxes for unremitted earnings. Additionally, the effective tax rate also increased due to changes in valuation allowances and changes in taxes due to interpretation of tax law and double tax treaty agreements by competent tax authorities. See "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements for additional information.
In 2018, the effective tax rate decreased from 27.7 percent to 25.7 percent. The distribution of income within the group resulted in a lower weighted-average global tax rate. In addition, the impact from changes in interpretation of law and double tax treaty agreements by competent tax authorities decreased the effective tax rate. These impacts were partially offset by a negative impact from changes in valuation allowance and a lower positive impact compared to 2017 from non-taxable amounts for net gains from sale of businesses.
As a result of the factors discussed above, income from continuing operations, net of tax, decreased by \$485 million to \$1,090 million in 2019 compared to 2018, and increased by \$56 million to \$1,575 million in 2018 compared to 2017.
Income from discontinued operations, net of tax, was \$438 million, \$723 million and \$846 million for 2019, 2018 and 2017, respectively.
In December 2018, we announced an agreement to divest 80.1 percent of our Power Grids business to Hitachi. The business also includes certain real estate properties which were previously reported within Corporate and Other. The divestment is expected to be completed at the end of the second quarter of 2020, following the receipt of customary regulatory approvals. As this divestment
represents a strategic shift that will have a major effect on our operations and financial results, the results of operations for this business have been presented as discontinued operations for all periods presented. In addition, consistent with the presentation of the business as discontinued operations, during 2019, we have not recorded depreciation or amortization on the property, plant and equipment, and intangible assets reported as discontinued operations. In 2018 and 2017, respectively, a total of \$258 million and \$265 million of depreciation and amortization expense was recorded for such assets.
Income from discontinued operations excludes certain costs which were previously allocated to the Power Grids business as these costs were not directly attributable to the business. As a result, \$225 million, \$297 million and \$286 million, for 2019, 2018 and 2017, respectively, of allocated overhead and other management costs (stranded corporate costs), which were previously able to be included in the measure of segment profit for the Power Grids business are now reported as part of Corporate and Other. In 2019 and 2018, income from discontinued operations, before taxes, included \$28 million and \$18 million, respectively, for costs incurred to execute the transaction.
Income from discontinued operations for 2019, 2018 and 2017 included income from operations of \$605 million, \$951 million and \$1,119 million, respectively. In addition, in 2019, 2018 and 2017 we recorded \$167 million, \$228 million and \$273 million, respectively, as provision for taxes within discontinued operations.
For additional information on the planned divestment and discontinued operations see "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements.
As a result of the factors discussed above, net income attributable to ABB decreased by \$734 million to \$1,439 million in 2019 compared to 2018, and decreased by \$40 million to \$2,173 million in 2018 compared to 2017.
| (in \$) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Basic earnings per share attributable to ABB shareholders: |
|||
| Income from continuing operations, net of tax |
0.49 | 0.71 | 0.67 |
| Income from discontinued operations, net of tax |
0.19 | 0.31 | 0.36 |
| Net income | 0.67 | 1.02 | 1.04 |
| Diluted earnings per share attributable to ABB shareholders: |
|||
| Income from continuing operations, net of tax |
0.49 | 0.71 | 0.67 |
| Income from discontinued operations, net of tax |
0.19 | 0.31 | 0.36 |
| Net income | 0.67 | 1.02 | 1.03 |
Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise: outstanding written call options and outstanding options and shares granted subject to certain conditions under our share-based payment arrangements. See "Note 20 – Earnings per share" to our Consolidated Financial Statements.
—
The financial results of our Electrification Business, including the operations of GEIS which was acquired in June 2018, were as follows:
| % Change | |||||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 |
| Orders | 13,050 11,867 10,143 | 10% | 17% | ||
| Order backlog at December 31, |
4,488 | 4,113 3,098 | 9% | 33% | |
| Revenues | 12,728 11,686 10,094 | 9% | 16% | ||
| Income from operations |
1,049 | 1,290 1,352 | (19)% | (5)% | |
| Operational EBITA | 1,688 | 1,626 | 1,510 | 4% | 8% |
Approximately two-thirds of the Business's orders are for products with short delivery times; orders are usually recorded and delivered within a three-month period and thus are generally considered as short-cycle. The remainder of orders is comprised of smaller projects that require longer lead times, as well as larger solutions requiring engineering and installation. Approximately half of the Business's orders are received via third-party distributors; as a consequence, end-customer market data is based partially on management estimates.
In 2019, orders increased 10 percent (14 percent in local currencies) with broad-based growth across regions and business lines. The increase in orders was mostly due to acquisitions, primarily as GEIS was included in 2019 for a full year. The order growth was driven mainly by systems and long-cycle businesses, with utilities, oil and gas, renewables, electric vehicle infrastructure and data centers demand contributing strongly to the order intake. Construction demand overall remained positive with signs of easing in some key markets, particularly in terms of residential developments. Demand from transport & infrastructure remained positive with strong demand for electric vehicle infrastructure and continued investment in rail infrastructure. Data centers continued to be an attractive market with key investments in hyperscale and co-location developments. The oil and gas and distribution utilities sectors showed signs of recovery with large project orders in the second half of the year.
In 2018, orders increased 17 percent (16 percent in local currencies) with growth across business lines and regions. The increase in orders was positively impacted by 12 percent due to acquisitions, primarily GEIS. Orders for products grew stronger than the orders for systems. Construction demand was robust, driven by continued investment in residential and commercial buildings. Transport & infrastructure demand was positive with continued investment in rail infrastructure and strong demand for electric vehicles infrastructure. Demand for data centers was also strong and resulted in the award of a few significant orders. From an industry perspective, stronger oil prices earlier in the year contributed to a return to investment in oil and gas projects. Solar orders improved slightly from the low levels recorded in 2017.
The geographic distribution of orders for our Electrification Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 33 | 35 | 37 |
| The Americas | 36 | 32 | 27 |
| Asia, Middle East and Africa | 31 | 33 | 36 |
| Total | 100 | 100 | 100 |
In 2019, orders grew in all regions. The relative share of orders from the Americas increased due to strong order growth in the United States driven mainly by the impact of including GEIS for a full year, which has a significant portion of its operations in the United States. Although the share of orders from Europe decreased compared with the previous year, orders in Europe developed positively with order growth led by Germany, Netherlands and Finland. The relative share of orders from Asia, Middle East and Africa decreased slightly compared with 2018, despite an order increase in the region supported by sustained growth in China and India.
In 2018, orders grew in all regions. The relative share of orders from the Americas increased due to strong order growth in the United States following the acquisition of GEIS. Although the share of orders from Europe decreased slightly compared with the previous year, orders in Europe developed positively with order growth in key markets such as Germany and Italy compensating for lower order volumes in Turkey. Order growth in Asia, Middle East and Africa was supported by growth in China, Taiwan and Egypt, whereas orders from Saudi Arabia and Qatar were significantly lower than in 2017.
In 2019, the order backlog increased 9 percent (9 percent in local currencies) mainly reflecting growth for long-cycle businesses in the Distribution Solutions business. The majority of this order backlog is planned to be converted to revenues during 2020.
In 2018, the order backlog increased 33 percent (39 percent in local currencies). The acquisition of the GEIS business contributed 36 percentage points to the growth of the order backlog. The remaining order backlog increase in local currencies reflected the receipt of orders for electric vehicle charging infrastructure with deliveries scheduled to occur after 2018.
In 2019, revenues increased 9 percent (12 percent in local currencies). The inclusion of GEIS for a full year contributed 10 percentage points of the revenue growth. Revenues in local currencies grew
across all business lines, with long-cycle businesses such as the electric vehicle charging infrastructure business and Solar growing at a higher pace than our short-cycle product businesses. Revenues developed positively in most end-customer sectors, with strong growth in e-mobility, renewables and data centers. Growth in the transportation sectors was driven particularly by investments in urban transport. Revenues also grew in industries such as oil and gas, whereas the construction sector benefited from continued public investments in hospitals and education facilities.
In 2018, revenues increased by 16 percent (16 percent in local currencies). The acquisition of the GEIS business contributed 13 percentage points of the revenue growth. Revenues grew in the short-cycle low-voltage product businesses, with growth broad-based across end-customer markets including construction, specifically non-residential construction, and industries such as oil and gas. Revenue growth from the distributor channel was strong. There was significant revenue growth in our electric vehicle charging infrastructure business, although the business remains a small portion of total revenues. Revenues from the medium-voltage systems business decreased, negatively impacted by longer lead times for the conversion of orders into revenues. Revenues decreased in Solar, reflecting a lower opening order backlog and the impact of continued price pressure across the Solar business.
The geographic distribution of revenues for our Electrification Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 33 | 35 | 37 |
| The Americas | 37 | 32 | 27 |
| Asia, Middle East and Africa | 30 | 33 | 36 |
| Total | 100 | 100 | 100 |
In 2019, the relative share of revenues from the Americas increased primarily due to the impact of the inclusion of GEIS for a full year, which has a significant portion of its operations in the United States. Although the share of revenues from Europe decreased compared with the previous year, orders in Europe developed positively supported by growth in the Netherlands, Switzerland and Germany. Revenues from Asia, Middle East and Africa decreased compared with 2018 reflecting a lower level of revenues particularly from South Korea.
In 2018, the relative share of revenues from the Americas increased primarily due to the impact of the acquisition of GEIS. Although the relative share of revenues from Europe decreased, revenues were higher as growth in multiple markets such as Germany, Switzerland and Netherlands
helped offset a lower revenue level from Turkey. Although the share of revenues from Asia, Middle East and Africa decreased, revenues for this region were steady as a positive revenue development in China and Egypt offset lower revenue volumes from Saudi Arabia and Qatar.
In 2019, income from operations decreased 19 percent, mainly reflecting a loss of \$421 million recognized to record the solar inverters business at fair value. During 2019, we announced an agreement to sell the solar inverters business to FIMER S.p.A. At December 31, 2019, this business is presented as held-for-sale and completion of the sale is expected in the first quarter of 2020. The loss from this sale was partly offset by gains from sales of businesses of \$42 million. We also recognized a gain of \$92 million relating to the receipt of cash from General Electric for a favorable resolution of an uncertainty with respect to the price paid to acquire GEIS. In 2019, we had \$49 million lower acquisition-related expenses and post-acquisition integration costs compared to 2018, whereas restructuring and related expenses were \$14 million higher than the previous year. Pricing actions across the product businesses and the benefits from savings from ongoing restructuring and cost savings programs had a positive impact on the operating margin. In addition, the Business recorded lower warranty costs in the solar inverters business than in 2018, and also benefited from slightly lower commodity prices. These positives were partly offset by pricing pressures in the Distribution Solutions and Solar businesses. Changes in foreign currencies, including the impacts from FX/commodity timing differences summarized in the table below, negatively affected income from operations by 1 percent.
In 2018, income from operations decreased 5 percent, mainly reflecting a \$145 million increase of acquisition-related expenses and post-acquisition integration costs compared with 2017, due to the acquisition of GEIS. Pricing actions across the product businesses and the benefits from savings from ongoing restructuring and cost savings programs had a positive impact on the operating margin. The Business realized a gain of \$81 million on the sale of a business. These benefits were offset by the negative impact of higher commodity prices and pricing pressures for distribution solutions and Solar. The Business also recorded significant warranty costs for certain solar inverters. In addition, restructuring, related and implementation costs in 2018 of \$98 million were \$70 million higher than in 2017, reflecting manufacturing footprint changes as well as organizational simplification. Acquisition-related amortization was 8 percent higher than in 2017, mainly due to the GEIS acquisition. Changes in foreign currencies, including the
impacts from FX/commodity timing differences summarized in the table below, negatively affected income from operations by 2 percent.
The reconciliation of Income from operations to Operational EBITA for the Electrification Business was as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Income from operations | 1,049 | 1,290 | 1,352 |
| Acquisition-related amortization | 115 | 106 | 98 |
| Restructuring, related and implementation costs(1) |
112 | 98 | 28 |
| Changes in pre-acquisition estimates |
22 | 19 | 8 |
| Gains and losses from sale of businesses |
(42) | (81) | — |
| Fair value adjustment on assets and liabilities held for sale |
421 | — | — |
| Favorable resolution of an uncertain purchase price adjustment |
(92) | — | — |
| Acquisition- and divestment-related expenses and integration costs |
119 | 168 | 23 |
| Certain other non-operational items |
3 | (2) | 21 |
| FX/commodity timing differences in income from |
|||
| operations Operational EBITA |
(19) 1,688 |
28 1,626 |
(20) 1,510 |
(1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program.
In 2019, Operational EBITA increased 4 percent (8 percent excluding the impacts from changes in foreign currencies) compared to 2018, primarily due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above.
In 2018, Operational EBITA increased 8 percent (6 percent excluding the impacts from changes in foreign currencies) compared to 2017, primarily due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above.
The financial results of our Industrial Automation Business were as follows:
| % Change | ||||||
|---|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | |
| Orders | 6,432 | 6,697 | 6,113 | (4)% | 10% | |
| Order backlog at December 31, |
5,077 | 4,986 | 5,171 | 2% | (4)% | |
| Revenues | 6,273 | 6,500 | 6,472 | (3)% | 0% | |
| Income from operations |
700 | 853 | 829 | (18)% | 3% | |
| Operational EBITA | 732 | 914 | 902 | (20)% | 1% |
Orders in 2019 decreased 4 percent (flat in local currencies) primarily reflecting the impact of selective large capital expenditure projects in oil and gas, and mining which continued to be at low levels. The underlying base business continued to be strong as investment in maintenance activities, digitalization upgrades and other discretionary projects improved, in particular for oil and gas, chemical and process industry customers. Orders were steady in almost all industries with the exception of conventional power generation which was depressed as seen in the order levels for Energy Industries and Turbocharging.
Orders in 2018 increased 10 percent (8 percent in local currencies) and was supported by selective demand for cruise ships and specialty vessels. Large capital expenditure projects in some end-markets like oil and gas, and mining continued to be selective and at low levels. In 2018, demand for Measurement and Analytics products was quite strong. Demand for ABB Ability™ solutions and services contributed to positive order momentum.
The geographic distribution of orders for our Industrial Automation Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 40 | 42 | 40 |
| The Americas | 25 | 23 | 24 |
| Asia, Middle East and Africa | 35 | 35 | 36 |
| Total | 100 | 100 | 100 |
In 2019, orders decreased slightly in Europe reflecting the larger orders in 2018 from the cruise ship sector and resulted in a reduction in the share of orders in Europe. The share of orders in the Americas increased slightly, supported by positive development in Marine and Ports business in the U.S., as well as the Process Industries business in South America. In Asia, Middle East and Africa, the share of orders remained stable as a result of large capital expenditures for specialty vessels and strong demand in China.
In 2018, orders from all regions increased. In Europe, the share of orders increased due to strong demand for cruise and specialty vessels. Orders in the Americas grew but the share of orders decreased as Europe had significant increases. In Asia, Middle East and Africa, growth was steady but lower than the other regions, thus reducing this region's share.
The order backlog at the end of 2019 was 2 percent higher (2 percent higher in local currencies) than at the end of 2018. The backlog continued to benefit from orders for specialty vessels which are executed over multiple years. In addition, the Business continued to see recovery in demand for oil and gas, chemical and the Process Industries as well as strong demand for shorter cycle products. Demand for conventional power generation was depressed putting negative pressure on the positive order backlog development.
The order backlog at the end of 2018 was 4 percent lower (1 percent higher in local currencies) than at the end of 2017. The local currency increase reflects the benefit from orders for cruise and specialty vessels which are executed over multiple years.
In 2019, revenues decreased 3 percent (flat in local currencies). Process Industries realized high revenue levels benefiting from strong book-and-bill business and good execution of the order backlog. This was offset by lower revenues across other businesses predominantly in Energy Industries and Turbocharging driven by weaknesses in the conventional power generation market. Energy Industries were also impacted by the project-related challenges in the Kusile power generation project in South Africa.
In 2018, revenues were steady (steady in local currencies). The majority of the business lines recorded higher revenues, especially the Process Industries, Measurement and Analytics and Turbocharging business lines. Revenues were lower in the Energy Industries business line. During the year, the Business realized higher revenues from book-and-bill business and good execution of the backlog. Notwithstanding, the lower order backlog at the beginning of 2018 dampened revenue growth.
The geographic distribution of revenues for our Industrial Automation Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 40 | 39 | 39 |
| The Americas | 25 | 23 | 21 |
| Asia, Middle East and Africa | 35 | 38 | 40 |
| Total | 100 | 100 | 100 |
In 2019, revenues were higher in the Americas, slightly weaker in Europe and grew strongly in Asia, Middle East and Africa. Despite revenue declines in Europe across most business lines, the share of revenues in Europe increased slightly. In the Americas, the share of revenues grew benefiting from strong book-and-bill business and higher execution from the order backlog compared to a year ago. Revenues in the U.S. grew primarily on strong development in Process Industries and
Marine and Ports. In Asia, Middle East and Africa, weaker revenues were impacted by slower growth in Energy Industries and Turbocharging. The Process Industries business was lower in China and South Korea while the Marine and Ports business declined in the United Arab Emirates. Revenues in the Energy Industries business were negatively impacted by project-related challenges in the Kusile power generation project in South Africa.
In 2018, revenues improved in the Americas, benefiting from a selective market recovery in Process Industries. The share of revenues from Europe was steady. The Americas increased their share of revenues benefiting from an upturn in mining as well as continued demand for Measurement and Analytics and Turbocharging products. The share of revenues from Asia, Middle East and Africa was lower as the region recorded lower revenue growth compared to the other regions, impacted by the lower opening backlog and lower book-and-bill orders.
In 2019, income from operations decreased 18 percent compared to 2018 on weaker sales volumes in the Turbocharging business and losses resulting from project-related challenges in the Kusile power generation project in South Africa. Income from operations was also impacted by legal costs relating to challenges in certain projects, unfavorable business mix as well as investments in growth. These impacts could not be offset by the positive results of ongoing business rationalization efforts and other cost saving measures. The impact from changes in foreign currencies, including the impact from changes in the FX/ commodity timing differences summarized in the table below, negatively impacted income from operations by 2 percent.
In 2018, income from operations increased 3 percent compared to 2017, benefiting from an improved revenue mix, ongoing progress in the Business's rationalization efforts and benefits realized from cost savings measures, productivity improvements and solid project execution. Income from operations was also higher due to a reduction of restructuring and restructuring-related expenses compared to 2017. The impact from changes in foreign currencies, including the impacts from changes in FX/commodity timing differences summarized in the table below, negatively impacted income from operations by 4 percent.
The reconciliation of Income from operations to Operational EBITA for the Industrial Automation Business was as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Income from operations | 700 | 853 | 829 |
| Acquisition-related amortization | 4 | 6 | 7 |
| Restructuring, related and implementation costs(1) |
21 | 35 | 85 |
| Gains and losses from sale of businesses |
— | 3 | (2) |
| Acquisition- and divestment-related expenses and integration costs |
— | 4 | 9 |
| Certain other non-operational items |
2 | 3 | — |
| FX/commodity timing differences in income from operations |
5 | 10 | (26) |
| Operational EBITA | 732 | 914 | 902 |
(1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program.
In 2019, Operational EBITA decreased 20 percent (18 percent excluding the impacts from changes in foreign currencies) compared to 2018. The change is due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above.
In 2018, Operational EBITA increased 1 percent (1 percent excluding the impacts from changes in foreign currencies) compared to 2017. The change is due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above.
The financial results of our Motion Business were as follows:
| % Change | ||||||
|---|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | |
| Orders | 6,782 | 6,725 5,966 | 1% | 13% | ||
| Order backlog at December 31, |
2,967 | 2,740 | 2,674 | 8% | 2% | |
| Revenues | 6,533 | 6,463 5,877 | 1% | 10% | ||
| Income from operations |
1,009 | 924 | 707 | 9% | 31% | |
| Operational EBITA | 1,082 | 1,023 | 838 | 6% | 22% |
In 2019, orders increased 1 percent (4 percent in local currencies). Order growth was driven by increased demand from process industries such as oil, gas and chemicals as well as rising demand from transport & infrastructure sectors with rail, water and waste water, and wind growing strongly. The Business experienced a slightly slower demand from traditional heavy industries
such as mining and metals, minerals, and pulp and paper.
In 2018, orders increased 13 percent (12 percent in local currencies). Order growth was driven by demand from process industries such as oil, gas, mining and metals as well as demand from discrete industries such as food and beverage. The Business noted rising demand from light industries for smaller-sized drives and motor solutions as well as solid significant order intake for traction solutions from the rail industry.
The geographic distribution of orders for our Motion Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 35 | 34 | 33 |
| The Americas | 36 | 37 | 39 |
| Asia, Middle East and Africa | 29 | 29 | 28 |
| Total | 100 | 100 | 100 |
In 2019, Europe increased its relative share of orders on growth across the main countries including Germany, Italy and Spain. The Asia, Middle East and Africa share remained stable with good performance in China which was partly offset by other markets. The Americas share of orders declined as a result of slight decrease of the orders in the United States.
In 2018, orders grew in all regions. The relative share of orders from Asia, Middle East and Africa increased on double-digit growth in China and India. The European market performed well with order growth across the majority of countries including Germany, Italy and Switzerland. The relative share of orders from the Americas declined despite solid growth in the United States.
The order backlog in 2019 increased 8 percent (9 percent in local currencies) compared to 2018. The order backlog increased in all business lines, reflecting strong long-cycle order growth in 2019.
The order backlog in 2018 increased 2 percent (7 percent in local currencies) compared to 2017. The backlog improved in all business lines on strong order growth in 2018.
In 2019, revenues grew 1 percent (4 percent in local currencies) compared to 2018. Revenue growth was driven by Drives while revenues in Motors & Generators decreased slightly. The revenue increase was driven by strong execution of the order backlog as well as book-and-bill business. Service revenues continued to improve as the Business continued to leverage its installed base
and increased customer demand for ABB Ability™ solutions.
In 2018, revenues increased 10 percent (10 percent in local currencies) compared to 2017. Revenues grew in all business lines driven by steady execution of the order backlog as well as book-and-bill business. Service revenues improved as the Business leveraged its installed base with increased customer demand for ABB Ability™ solutions.
The geographic distribution of revenues for our Motion Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 33 | 33 | 33 |
| The Americas | 36 | 38 | 39 |
| Asia, Middle East and Africa | 31 | 29 | 28 |
| Total | 100 | 100 | 100 |
In 2019, revenue growth in Asia, Middle East and Africa is reflected in the increase in the relative share of revenues from this region as revenues grew in China, India and Japan. The share of revenues from Europe remained stable despite revenue growth across many countries including Germany and France. Revenues from the Americas declined as revenues were lower in the U.S., lowering the relative market share of the region compared to 2018.
In 2018, revenues were higher in all regions. The relative share of revenues from Asia, Middle East and Africa increased on double-digit revenue growth in China and India. The share of revenues from Europe remained steady despite revenue growth across the majority of countries including Germany, Italy and Switzerland. The relative share of revenues from the Americas declined despite generating higher revenues including moderate growth in the U.S.
In 2019, income from operations increased 9 percent compared to 2018 driven by higher sales volumes, continued cost discipline and operational performance. In 2019, the Business also benefited from lower restructuring and
restructuring-related expenses. Changes in foreign currencies, including the impacts from FX/ commodity timing differences summarized in the table below, negatively impacted income from operations by 3 percent.
In 2018, income from operations increased 31 percent compared to 2017, driven by positive volumes and continued cost discipline. Restructuring and restructuring-related expenses were lower in 2018 than in 2017, positively impacting income from operations. Acquisition-related amortization was slightly lower as certain acquired intangible
assets were fully amortized in early 2018. These positive effects were partly offset by the effects of higher commodity prices and pricing pressures. Changes in foreign currencies, including the impacts from FX/commodity timing differences summarized in the table below, positively impacted income from operations by 2 percent.
The reconciliation of Income from operations to Operational EBITA for the Motion Business was as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Income from operations | 1,009 | 924 | 707 |
| Acquisition-related amortization | 53 | 61 | 64 |
| Restructuring, related and implementation costs(1) |
12 | 17 | 63 |
| Gains and losses from sale of businesses |
— | 4 | — |
| Acquisition- and divestment-related expenses and integration costs |
— | 2 | — |
| Certain other non-operational items |
14 | 10 | — |
| FX/commodity timing differences in income from |
|||
| operations Operational EBITA |
(6) 1,082 |
5 1,023 |
4 838 |
(1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program.
In 2019, Operational EBITA increased 6 percent (9 percent excluding the impact from changes in foreign currency exchange rates) primarily due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above.
In 2018, Operational EBITA increased 22 percent (21 percent excluding the impact from changes in foreign currency exchange rates) primarily due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above.
The financial results of our Robotics & Discrete Automation Business were as follows:
| % Change | |||||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 |
| Orders | 3,260 | 3,808 2,977 | (14)% | 28% | |
| Order backlog at December 31, |
1,356 | 1,438 1,279 | (6)% | 12% | |
| Revenues | 3,314 | 3,611 2,957 | (8)% | 22% | |
| Income from operations |
298 | 456 | 387 | (35)% | 18% |
| Operational EBITA | 393 | 528 | 473 | (26)% | 12% |
In 2019, orders decreased 14 percent (11 percent in local currencies). Demand was weakened by headwinds in traditional automotive and automotive-related sectors as well as in the machine builders and electronics markets. Demand for warehouse automation was strong in 2019. The Business continued to benefit from a large order intake for robot systems from certain parts of the automotive sector, including for new electric vehicle manufacturing lines, although on lower levels than in 2018.
In 2018, orders grew 28 percent (25 percent in local currencies), primarily due to the impact of including B&R for a full year in 2018 which contributed 15 percent to order growth. Order growth was also driven by demand from discrete industries such as automotive and food and beverage as well as machine builders. The Business also benefited from solid order intake for robot systems from the automotive sector.
The geographic distribution of orders for our Robotics & Discrete Automation Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 53 | 49 | 45 |
| The Americas | 14 | 13 | 16 |
| Asia, Middle East and Africa | 33 | 38 | 39 |
| Total | 100 | 100 | 100 |
In 2019, orders decreased in all regions. The relative share of orders from Asia, Middle East and Africa decreased due to weak demand in China which then resulted in an increase in the relative share of orders from both the Americas and Europe.
In 2018, orders grew in all regions. The relative share of orders from Europe increased, reflecting the impact of including B&R for a full year in 2018. The relative share of orders from Asia, Middle East and Africa remained steady due to strong growth in China. The relative share of orders from the Americas decreased.
The order backlog in 2019 decreased 6 percent (5 percent in local currencies) compared to 2018. The backlog decrease reflected the reduced order intake in all businesses due to a decline in market demand in 2019.
The order backlog in 2018 increased 12 percent (18 percent in local currencies) compared to 2017. The backlog improved in all businesses on strong order growth in 2018.
In 2019, revenues decreased 8 percent (4 percent in local currencies) compared to 2018. Revenues decreased in all businesses due to lower volumes from book-and-bill business, partially offset by steady execution of the order backlog. Service revenues decreased, driven by weak demand from automotive and automotive-related sectors.
In 2018, revenues increased 22 percent (20 percent in local currencies) compared to 2017, partially due to the impact of including B&R for a full year in 2018 which contributed 14 percent to the revenue increase. Revenues grew in all businesses driven by steady execution of the order backlog as well as book-and-bill business. Service revenues continued to improve as the Business leveraged its installed based and increased customer demand for ABB Ability™ solutions.
The geographic distribution of revenues for our Robotics & Discrete Automation Business was as follows:
| (in %) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Europe | 51 | 49 | 43 |
| The Americas | 14 | 13 | 18 |
| Asia, Middle East and Africa | 35 | 38 | 39 |
| Total | 100 | 100 | 100 |
In 2019, revenues decreased in all regions. The relative share of revenues from Asia, Middle East and Africa decreased due to weak demand in China which resulted in a shift in the relative share of revenues to both the Americas and Europe.
In 2018, revenues were higher in all regions. The relative share of revenues from Europe increased, reflecting the impact of including B&R for a full year in 2018. The relative share of revenues from Asia, Middle East and Africa remained steady following strong growth in China. The relative share of revenues from the Americas decreased.
In 2019, income from operations decreased 35 percent compared to 2018, driven by lower sales volumes, an adverse change in the revenue mix, partially offset by benefits of cost reduction measures. Acquisition-related amortization was slightly lower than 2018. Changes in foreign currencies, including the impacts from FX/commodity timing differences summarized in the table below, negatively impacted income from operations by 4 percent.
In 2018, income from operations increased 18 percent compared to 2017. Of this increase, B&R contributed approximately 17 percent which included both the inclusion of the operations for a full year as well as the negative comparative impact in 2017 of purchase price adjustments (primarily for inventories) which reduced income in 2017. Restructuring and restructuring-related expenses were slightly higher in 2018 than in 2017, negatively impacting income from operations. Acquisition-related amortization was higher as certain acquired intangible assets were fully amortized in 2017. There was no significant impact on income from operations due to changes in foreign currencies.
The reconciliation of Income from operations to Operational EBITA for the Robotics & Discrete Automation Business was as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Income from operations | 298 | 456 | 387 |
| Acquisition-related amortization | 77 | 82 | 42 |
| Restructuring, related and implementation costs(1) |
12 | 4 | 1 |
| Changes in pre-acquisition estimates |
— | (11) | — |
| Acquisition- and divestment-related expenses and integration costs |
1 | — | 45 |
| Certain other non-operational items |
4 | 1 | 1 |
| FX/commodity timing differences in income from operations |
1 | (4) | (3) |
| Operational EBITA | 393 | 528 | 473 |
(1) Amount in 2017 also includes the incremental implementation costs in relation to the White Collar Productivity program.
In 2019, Operational EBITA decreased 26 percent (22 percent excluding the impact from changes in foreign currency exchange rates) primarily due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above.
In 2018, Operational EBITA increased 12 percent (10 percent excluding the impact from changes in foreign currency exchange rates) primarily due to the reasons described under "Income from operations", excluding the explanations related to the reconciling items in the table above. The acquisition of B&R increased Operational EBITA by 5 percent after consideration of the related adjustments in the table above relating to that business.
Net loss from operations for Corporate and Other was as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Corporate headquarters and stewardship |
(407) | (496) | (430) |
| Stranded corporate costs | (225) | (297) | (286) |
| Corporate research and development |
(155) | (170) | (128) |
| Costs for planned divestment of Power Grids |
(141) | — | — |
| OS program costs | (83) | (11) | — |
| Corporate real estate | 60 | 75 | 45 |
| Net gain (loss) from sale of businesses |
13 | (17) | 250 |
| White Collar Productivity program costs |
— | — | (107) |
| Other corporate costs | (11) | (70) | (92) |
| Divested businesses and other non-core activities |
(164) | (316) | (304) |
| Total Corporate and Other | (1,113) | (1,302) (1,052) |
In 2019, the net loss from operations within Corporate and Other decreased by \$189 million to \$1,113 million. This reflected corporate cost decreases offset by costs for current strategic projects while the losses incurred within the non-core businesses decreased significantly. Costs were lower for corporate headquarters and stewardship costs and corporate research and development expenses while the amount recorded for stranded corporate costs also decreased. In 2019, we incurred restructuring and implementation costs for the OS program and also incurred costs relating to the planned divestment of the Power Grids business.
In 2018, the net loss from operations within Corporate and Other was \$1,302 million compared to \$1,052 million in 2017. The primary reason for the increase was that 2017 included a significant net gain on sales of businesses, primarily a gain of \$338 million for the sale of the high-voltage cables business. In addition, lower White Collar Productivity costs were offset by an increase in corporate headquarters and stewardship costs.
In 2019, corporate headquarters and stewardship costs declined by \$89 million to \$407 million from \$496 million, benefiting from savings generated from results of the OS restructuring program efforts. Costs were lower for communications and information technology and also reflected the benefits of a reduction in country-level general management costs. In 2018, corporate headquarters and stewardship costs were \$496 million, an increase of \$66 million from 2017. Higher costs were due to higher costs relating to ABB Digital and the sponsorship of the ABB FIA Formula E Championship.
Stranded corporate costs includes the amount of allocated general and administrative and other overhead costs previously included in the measure of segment profit (Operational EBITA) for the Power Grids business which is presented as discontinued operations. These allocated costs do not qualify for being reported as costs within the discontinued operation. During 2019, we reduced the amount of stranded corporate costs by eliminating certain costs and transferring certain previously centralized functions directly to the Power Grids business.
At the end of 2018, we announced the OS program and the implementation of the program in 2019 resulted in higher costs than were incurred in 2018. As of December 31, 2017, we had incurred substantially all costs related to the White Collar Productivity program which we executed from 2015 through 2017. In 2017, costs incurred in connection with this program amounted to \$107 million, including program implementation costs. The program costs relate mainly to employee severance and both external and internal costs relating to the execution of the program. For further information on the OS Program and the White Collar Productivity program see "Restructuring and other cost savings initiatives" below.
Corporate real estate primarily includes income from property rentals and gains from the sale of real estate properties. In 2019, 2018 and 2017, income from operations in Corporate real estate included gains from the sale of real estate properties of \$48 million, \$49 million and \$28 million, respectively.
Other corporate costs consist of operational costs of our Corporate Treasury Operations and certain other charges such as costs and penalties associated with legal cases, environmental expenses and impairment charges related to investments.
The results of operations for certain divested businesses and other non-core activities are presented in Corporate and Other. Divested businesses include the high-voltage cables business, which was divested in March 2017. Also, certain EPC contracts relating to the oil and gas industry were divested to an unconsolidated joint venture at the end of 2017. In addition, in 2018 and 2019, we transferred certain projects in our EPC business for turnkey electrical AC substations to a new unconsolidated joint venture, Linxon, which is controlled by the SNC-Lavalin Group. Other non-core activities includes amounts relating to the execution and wind-down of certain legacy EPC and other contracts.
In 2019, Divested businesses and other non-core activities reflects challenges in winding down several legacy projects as well as charges for certain retained liabilities of divested businesses. In 2019, we recorded additional losses for legacy substations, plant electrification EPC contracts and the full train retrofit business, which were driven by additional project cost overruns. We also incurred certain customer credit-related losses and a contract termination loss resulting from an unfavorable legal decision.
In 2018, the amount primarily reflects losses incurred in legacy substations and plant electrification EPC contracts and were driven by project cost overruns and contractual costs relating to delayed project completion. The amount in 2018 also reflects project cost overruns in the full train retrofit business.
In 2017, the loss includes charges of \$94 million recorded for certain retained liabilities associated with the divested cables businesses and losses for project cost overruns in the full train retrofit business. In 2017, the amount also includes losses incurred in legacy substations and plant electrification EPC contracts driven by cost overruns, credit losses and contractual costs for delayed project completion.
At December 31, 2019, our remaining non-core activities primarily include the completion of the remaining EPC contracts for substations and plant electrification and the completion of the remaining obligations for the full train retrofit business.
In December 2018, ABB announced a two-year restructuring program with the objective of simplifying its business model and structure through the implementation of a new organizational structure driven by its Businesses. The program includes the elimination of the country and regional structures within the current matrix organization, including the elimination of the three regional Executive Committee roles. The Businesses will each be responsible for both their customer-facing activities and business support functions, while the remaining Group-level corporate activities will primarily focus on Group strategy, portfolio and performance management, capital allocation, core technologies and the ABB Ability™ platform.
Over the course of the program, we will execute a number of restructuring activities across all operating segments and functions. The following
table outlines the cumulative amount of costs incurred to date and the total amount of costs expected under the program:
| Costs incurred in(1) |
Cumulative costs in curred up to December 31, |
Total expected |
||
|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2019(1) | costs(1) |
| Electrification | 18 | 32 | 50 | 80 |
| Industrial Automation |
3 | 21 | 24 | 40 |
| Motion | 6 | 1 | 7 | 50 |
| Robotics & Discrete Automation |
8 | — | 8 | 20 |
| Corporate and Other |
54 | 11 | 65 | 160 |
| Total | 89 | 65 | 154 | 350 |
(1) Amounts in the table above have been recast to reflect the reorganization of the Company's operating segments in 2019. See "Note 23 – Operating segment and geographic data" to our Consolidated Financial Statements.
By the completion of the program, we estimate that we will achieve a run-rate cost savings of approximately \$500 million, impacting all Businesses and Corporate and Other. These cost savings are expected to mainly impact cost of sales, selling, general and administrative expenses, and non-order related research and development expenses, and are planned to be achieved during 2021. In 2019, we achieved cost savings of approximately \$160 million in line with the target set for the program.
For details of the nature of the costs incurred and the impact on the Consolidated Financial Statements, see "Note 22 – Restructuring and related expenses" to our Consolidated Financial Statements.
The majority of the remaining cash payments, primarily for employee severance benefits, are expected to occur in 2020 and 2021. We expect that our cash provided by operating activities will be sufficient to cover any expenditures for this restructuring program.
From September 2015 to December 2017, we executed a restructuring program to make ABB leaner, faster and more customer-focused. The program involved the rapid expansion and use of regional shared service centers as well as a streamlining of global operations and head office functions, with business units moving closer to their respective key markets. The program involved various restructuring initiatives across all operating segments and regions.
The restructuring program resulted in total annual cost savings of \$1.2 billion in continuing operations. The savings were realized as reductions in cost of sales, selling, general and administrative expenses and non-order related research and development expenses.
As of December 31, 2017, we had incurred substantially all costs related to the White Collar Productivity program.
The following table outlines the costs incurred in 2017 as well as the cumulative amount of costs incurred under the program:
| Cumulative costs |
||
|---|---|---|
| (\$ in millions) | Net costs incurred in 2017(1) |
incurred up to December 31, 2017(1) |
| Electrification | (17) | 72 |
| Industrial Automation | (23) | 106 |
| Motion | (10) | 42 |
| Robotics & Discrete Automation |
(4) | 14 |
| Corporate and Other | (32) | 91 |
| Total | (86) | 325 |
(1) Amounts in the table above have been recast to reflect the reorganization of our operating segments as outlined in "Note 23 – Operating segment and geographic data" to our Consolidated Financial Statements.
During the course of the restructuring program, total expected costs were reduced mainly due to the realization of significantly higher than originally expected attrition and internal redeployment rates. The reductions were made across all operating Businesses as well as for corporate functions.
In 2017, a change in estimate of \$118 million was recorded to adjust the amount of our estimated liability for restructuring which was recorded in 2016 and 2015. This change in estimate resulted in a reduction primarily in cost of sales of \$53 million and in selling, general and administrative expenses of \$55 million in the year.
For details of the nature of the costs incurred and their impact on the Consolidated Financial Statements, see ''Note 22 – Restructuring and related expenses'' to our Consolidated Financial Statements.
In 2019, 2018 and 2017, we also executed other restructuring-related and cost savings measures to sustainably reduce our costs and protect our profitability. Costs associated with these other measures amounted to \$114 million, \$116 million and \$181 million in 2019, 2018 and 2017, respectively.
We meet our liquidity needs principally using cash from operations, proceeds from the issuance of debt instruments (bonds and commercial paper), and short-term bank borrowings.
During 2019, 2018 and 2017, our financial position benefited from positive cash flow from operating activities (both from continuing and discontinued operations) of \$2,325 million, \$2,924 million and \$3,799 million, respectively.
Our net debt is shown in the table below:
| December 31, | ||
|---|---|---|
| (\$ in millions) | 2019 | 2018 |
| Short-term debt and current maturities of | ||
| long-term debt | 2,287 | 2,031 |
| Long-term debt | 6,772 | 6,587 |
| Cash and equivalents | (3,544) | (3,445) |
| Marketable securities and short-term | ||
| investments | (566) | (712) |
| Net debt (defined as the | ||
| sum of the above lines) | 4,949 | 4,461 |
Net debt at December 31, 2019, increased \$488 million compared to December 31, 2018, as cash flows from operating activities during 2019 of \$2,325 million was more than offset by cash outflows for the dividend payment to our shareholders (\$1,675 million) and net purchases of property, plant and equipment and intangible assets (\$839 million for both continuing and discontinued operations). We also made payments of dividends to noncontrolling shareholders totaling \$90 million. In addition, net debt decreased by \$32 million due to movements in foreign exchange rates. See "Financial position", "Investing activities" and "Financing activities" for further details.
Our Corporate Treasury Operations is responsible for providing a range of treasury management services to our group companies, including investing cash in excess of current business requirements. At December 31, 2019 and 2018, the proportion of our aggregate "Cash and equivalents" and "Marketable securities and short-term investments" managed by our Corporate Treasury Operations amounted to approximately 34 percent and 38 percent, respectively.
Throughout 2019 and 2018, the investment strategy for cash (in excess of current business requirements) has generally been to invest in
short-term time deposits with maturities of less than 3 months, supplemented at times by investments in corporate commercial paper, money market funds, and in some cases, government securities. During 2018 and the first quarter of 2019, we also continued to place limited funds in connection with reverse repurchase agreements. We actively monitor credit risk in our investment portfolio and derivative portfolio. Credit risk exposures are controlled in accordance with policies approved by our senior management to identify, measure, monitor and control credit risks. We have minimum rating requirements for our counterparts and closely monitor developments in the credit markets making appropriate changes to our investment policy as deemed necessary. In addition to minimum rating criteria, we have strict investment parameters and specific approved instruments as well as restrictions on the types of investments we make. These parameters are closely monitored on an ongoing basis and amended as we consider necessary.
Our cash is held in various currencies around the world. Approximately 22 percent of our cash and cash equivalents held at December 31, 2019, was in U.S. dollars, while other significant amounts were held in Chinese renminbi (24 percent), euro (15 percent) and Indian rupee (8 percent).
We believe the cash flows generated from our business, supplemented, when necessary, through access to the capital markets (including short-term commercial paper) and our credit facilities are sufficient to support business operations, capital expenditures, business acquisitions, the payment of dividends to shareholders and contributions to pension plans. Consequently, we believe that our ability to obtain funding from these sources will continue to provide the cash flows necessary to satisfy our working capital and capital expenditure requirements, as well as meet our debt repayments and other financial commitments for the next 12 months. See "Disclosures about contractual obligations and commitments".
Due to the nature of our operations, including the timing of annual incentive payments to employees, our cash flow from operations generally tends to be weaker in the first half of the year than in the second half of the year.
Total outstanding debt was as follows:
| December 31, | ||
|---|---|---|
| (\$ in millions) | 2019 | 2018 |
| Short-term debt and current maturities of | ||
| long-term debt | 2,287 | 2,031 |
| Long-term debt: | ||
| Bonds | 6,587 | 6,411 |
| Other long-term debt | 185 | 176 |
| Total debt | 9,059 | 8,618 |
The increase in short-term debt in 2019 was due to the reclassification to short-term of the USD 300 million 2.8% Notes, the issuance of EUR 1,000 million floating rate notes, an increase in outstanding commercial paper of \$244 million mostly offset by the repayment at maturity of the EUR 1,250 million 2.625% instruments. Commercial paper outstanding was \$706 million at December 31, 2019, compared to \$464 million outstanding at December 31, 2018.
At December 31, 2019, Long-term debt increased \$185 million compared to the end of 2018 due primarily to the issuance in 2019 of two new long-term notes with net proceeds totaling \$449 million partially offset by the reclassification to short-term debt of the USD 300 million notes discussed above.
Our debt has been obtained in a range of currencies and maturities and with various interest rate terms. For certain of our debt obligations, we use derivatives to manage the fixed interest rate exposure. For example, we use interest rate swaps to effectively convert fixed rate debt into floating rate liabilities. After considering the effects of interest rate swaps, at December 31, 2019, the effective average interest rate on our floating rate long-term debt (including current maturities) of \$2,221 million and our fixed rate long-term debt (including current maturities) of \$6,000 million was 1.1 percent and 2.4 percent, respectively. This compares with an effective rate of 1.1 percent for floating rate long-term debt of \$3,106 million and 3.6 percent for fixed rate long-term debt of \$4,951 million at December 31, 2018.
For a discussion of our use of derivatives to modify the interest characteristics of certain of our individual bond issuances, see "Note 12 – Debt" to our Consolidated Financial Statements.
In December 2019, we replaced our \$2 billion multicurrency revolving credit facility, maturing in
2021, with a new \$2 billion multicurrency revolving credit facility, maturing in 2024. In 2020 and 2021, we have the option to extend the maturity of the new facility to 2025 and 2026, respectively.
No amount was drawn under either of the committed credit facilities at December 31, 2019 and 2018. The replacement facility is for general corporate purposes and contains cross-default clauses whereby an event of default would occur if we were to default on indebtedness, as defined in the facility, at or above a specified threshold.
The credit facility does not contain financial covenants that would restrict our ability to pay dividends or raise additional funds in the capital markets. For further details of the credit facility, see "Note 12 – Debt" to our Consolidated Financial Statements.
At December 31, 2019, we had two commercial paper programs in place:
At December 31, 2019, \$706 million was outstanding under the \$2 billion program in the United States, compared to \$292 million outstanding at December 31, 2018.
At December 31, 2019, no amount was outstanding under the \$2 billion Euro-commercial paper program compared to \$172 million outstanding at December 31, 2018.
The European program for the issuance of debt allows the issuance of up to the equivalent of \$8 billion in certain debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the program are determined with respect to, and as of the date of issuance of, each debt instrument. During 2017, we issued EUR 750 million 0.75% Notes, due 2024. At December 31, 2019, two bonds (principal amount of EUR 700 million, due in 2023 and principal amount of EUR 750 million, due in 2024) having a combined carrying amount of \$1,658 million, were outstanding under the program. At December 31, 2018, in addition to these two bonds, one additional bond (principal amount of EUR 1,250 million due in 2019) was outstanding and the combined carrying amount of the three bonds was \$3,100 million.
Credit ratings are assessments by the rating agencies of the credit risk associated with ABB and are based on information provided by us or other sources that the rating agencies consider reliable. Higher ratings generally result in lower borrowing costs and increased access to capital markets. Our ratings are of "investment grade" which is defined as Baa3 (or above) from Moody's and BBB− (or above) from Standard & Poor's.
At both December 31, 2019 and 2018, our long-term debt was rated A2 by Moody's and A by Standard & Poor's.
Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where we operate, including: China,
Egypt, India, Malaysia, Russian Federation, South Africa, South Korea, Taiwan (Chinese Taipei), Thailand, Turkey and Viet Nam. Funds, other than regular dividends, fees or loan repayments, cannot be readily transferred offshore from these countries and are therefore deposited and used for working capital needs in those countries. In addition, there are certain countries where, for tax reasons, it is not considered optimal to transfer the cash offshore. As a consequence, these funds are not available within our Corporate Treasury Operations to meet short-term cash obligations outside the relevant country. The above described funds are reported as cash in our Consolidated Balance Sheets, but we do not consider these funds immediately available for the repayment of debt outside the respective countries where the cash is situated, including those described above. At December 31, 2019 and 2018, the balance of "Cash and equivalents" and "Marketable securities and other short-term investments" under such limitations (either regulatory or sub-optimal from a tax perspective) totaled approximately \$1,843 million and \$1,796 million, respectively.
During 2019, we continued to direct our subsidiaries in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. We continue to closely monitor the situation to ensure bank counterparty risks are minimized.
—
| December 31, | ||||
|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | % Change | |
| Current assets | ||||
| Cash and equivalents | 3,544 | 3,445 | 3% | |
| Marketable securities and short-term investments |
566 | 712 | (21)% | |
| Receivables, net | 6,434 | 6,386 | 1% | |
| Contract assets | 1,025 | 1,082 | (5)% | |
| Inventories, net | 4,184 | 4,284 | (2)% | |
| Prepaid expenses | 191 | 176 | 9% | |
| Other current assets | 674 | 616 | 9% | |
| Assets held for sale and in discontinued operations |
9,840 | 5,164 | 91% | |
| Total current assets | 26,458 | 21,865 | 21% |
For a discussion on Cash and equivalents, see sections "Liquidity and Capital Resources – Principal
sources of funding" and "Cash flows" for further details.
Marketable securities and short-term investments decreased in 2019. The reduction primarily reflects lower amounts placed in reverse repurchase agreements (see "Note 5 – Cash and equivalents, marketable securities and short-term investments" to our Consolidated Financial Statements).
Contract assets decreased 5 percent (4 percent in local currencies). The decrease reflects lower amounts in the non-core businesses and the Robotics & Discrete Automation Business. This was partially offset by higher levels in the Industrial Automation Business.
Inventories, net, decreased 2 percent (1 percent in local currencies). The decrease primarily reflects
the impact of the reclassification to held for sale of the inventory in the solar inverters business which decreased inventory by 3 percent.
Current assets held for sale and in discontinued operations increased to \$9,840 million from \$5,164 million due to the reclassification from non-current assets to current assets of the non-current assets in the Power Grids business, which is reported as discontinued operations. This reclassification reflects that this business is expected to be divested within the next 12 months. For the details of the assets of the Power Grids business see "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements.
| December 31, | |||
|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | % Change |
| Current liabilities | |||
| Accounts payable, trade | 4,353 | 4,424 | (2)% |
| Contract liabilities | 1,719 | 1,707 | 1% |
| Short-term debt and current maturities of long-term debt |
2,287 | 2,031 | 13% |
| Current operating leases | 305 | — | n.a. |
| Provisions for warranties | 816 | 948 | (14)% |
| Other provisions | 1,375 | 1,372 | 0% |
| Other current liabilities | 3,761 | 3,780 | (1)% |
| Liabilities held for sale and in discontinued operations |
5,650 | 4,185 | 35% |
| Total current liabilities | 20,266 | 18,447 | 10% |
Accounts payable, trade, decreased 2 percent (1 percent in local currencies) primarily reflecting the impact of reclassifying payables of the solar inverters business to liabilities held for sale, which decreased Accounts payable, trade, by 2 percent.
The increase in Short-term debt and current maturities of long-term debt was primarily due a net increase in the balance for the U.S. and Euro commercial paper programs of \$242 million, the amount outstanding for the newly-issued EUR 1,000 million floating-rate notes of \$1,122 million and the reclassification to short-term debt and current maturities of long-term debt of the USD 300 million Notes. This was mostly offset by the repayment in 2019 of the EUR 1,250 million Instruments (\$1,431 million at December 31, 2018).
Current operating leases includes the portion of the operating lease liabilities that are due to be paid in the next 12 months. The amount in 2019 reflects the adoption of a new accounting standard on leases. For a description of the adoption of the new accounting standard and summary of operating lease liabilities, see "Note 2 – Significant accounting policies" and "Note 14 – Leases" to our Consolidated Financial Statements.
Provisions for warranties decreased 14 percent (13 percent in local currencies). The decrease was mainly due to the reclassification of the solar inverters business to held for sale which resulted in a decrease of 11 percent. The remaining decrease was due to cash payments for warranties exceeding the expense recognized in the period. For details on the change in the Provision for warranties, see "Note 15 – Commitments and contingencies" to our Consolidated Financial Statements.
Current liabilities held for sale and in discontinued operations increased to \$5,650 million from \$4,185 million due to the reclassification from non-current liabilities to current liabilities of the non-current liabilities in the Power Grids business, which is reported as discontinued operations. For the details of the liabilities of the Power Grids business see "Note 3 – Basis of presentation and assets held for sale" to our Consolidated Financial Statements.
| December 31, | |||
|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | % Change |
| Non-current assets | |||
| Property, plant and equipment, net |
3,972 | 4,133 | (4)% |
| Operating lease right-of-use assets |
994 | — | n.a. |
| Goodwill | 10,825 | 10,764 | 1% |
| Other intangible assets, net | 2,252 | 2,607 | (14)% |
| Prepaid pension and other employee benefits |
133 | 83 | 60% |
| Investments in equity accounted companies |
33 | 87 | (62)% |
| Deferred taxes | 910 | 1,006 | (10)% |
| Other non-current assets | 531 | 469 | 13% |
| Assets held for sale and in discontinued operations |
— | 3,427 | n.a. |
| Total non-current assets | 19,650 | 22,576 | (13)% |
In 2019, Property, plant and equipment, net decreased 4 percent (3 percent in local currencies) partly due to the reclassification of the assets of the solar inverters business to held for sale.
In 2019, Goodwill increased 1 percent (1 percent in local currencies). The local increase was due to adjustments recorded to the purchase price of GEIS before the end of the measurement period.
Other intangible assets, net decreased 14 percent (14 percent in local currencies) due to the amortization recorded during the year. For additional information on goodwill and other intangible assets see "Note 11 – Goodwill and other intangibles assets" to our Consolidated Financial Statements.
In 2019, Deferred taxes, decreased 10 percent (7 percent in local currencies). For details on deferred tax assets (see "Note 16 – Income taxes" to our Consolidated Financial Statements).
| December 31, | |||
|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | % Change |
| Non-current liabilities | |||
| Long-term debt | 6,772 | 6,587 | 3% |
| Non-current operating leases |
717 | — | n.a. |
| Pension and other employee benefits |
1,793 | 1,828 | (2)% |
| Deferred taxes | 911 | 927 | (2)% |
| Other non-current liabilities | 1,669 | 1,689 | (1)% |
| Liabilities held for sale and in discontinued operations |
— | 429 | n.a. |
| Total non-current liabilities | 11,862 | 11,460 | 4% |
Long-term debt increased 3 percent. During 2019, we issued two CHF-denominated bonds having a value of \$463 million at December 31, 2019. This was mostly offset by the reclassification to Short-term debt and current maturities of long-term debt of the USD 300 million Notes. There were no significant impacts from changes in foreign currency rates on Long-term debt. For additional information on Long-term debt, see "Liquidity and Capital Resources – Debt and interest rates".
Non-current operating leases includes the portion of the operating lease liabilities that are due to be paid in more than 12 months. The amount in 2019 reflects the adoption of a new accounting standard on leases as described above.
For a breakdown of Other non-current liabilities, see "Note 13 – Other provisions, other current liabilities and other non-current liabilities" to our Consolidated Financial Statements.
The Consolidated Statements of Cash Flows are shown on a continuing operations basis, with the effects of discontinued operations shown in aggregate for each major cash flow activity.
The Consolidated Statements of Cash Flows can be summarized as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Net cash provided by operating activities |
2,325 | 2,924 | 3,799 |
| Net cash used in investing activities |
(815) | (3,085) | (1,450) |
| Net cash used in financing activities |
(1,383) | (789) | (1,735) |
| Effects of exchange rate changes on cash and equivalents |
(28) | (131) | 268 |
| Net change in cash and equivalents |
99 | (1,081) | 882 |
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Net income | 1,528 | 2,298 | 2,365 |
| Less: Income from discontinued operations, net of tax |
(438) | (723) | (846) |
| Depreciation and amortization | 961 | 916 | 836 |
| Total adjustments to reconcile net income to net cash provided by operating activities (excluding depreciation and amortization) |
220 | (189) | (406) |
| Total changes in operating assets and liabilities |
(372) | 50 | 639 |
| Net cash provided by operating activities – continuing operations |
1,899 | 2,352 | 2,588 |
| Net cash provided by operating activities – discontinued operations |
426 | 572 | 1,211 |
Cash flows from operating activities of continuing operations in 2019 provided net cash of \$1,899 million, a decrease of 19 percent from 2018 mainly due to a lower cash effective net income (net income adjusted for depreciation, amortization and other non-cash items) which includes the impacts of the costs associated with the planned divestment of the Power Grids business as well as the OS restructuring program. The amount in 2019 also includes the impacts of net cash outflows for an increase in working capital. The higher amount in 2018 also reflected the impacts from extending payment terms with suppliers and the changes in our supplier payment process, which resulted in an increase in trade payables and this impact was not repeated in 2019. The cash flows from operating activities in 2019 was also lower due to the timing of cash payments for accrued liabilities. This was partially offset by more favorable timing of income tax payments which negatively impacted cash flows from operating activities in 2018.
Cash flows from operating activities of continuing operations in 2018 provided net cash of \$2,352 million, a decrease of 9 percent from 2017 as higher cash effective net income was offset by a lower improvement in working capital. Cash flow impacts from changes in working capital showed the impact of extending payment terms with suppliers and the changes in our supplier payment process. Payables and inventory also increased due to higher inventories to support growth. In addition, the timing of tax payments, including income taxes and value-added taxes, negatively impacted cash provided by operating activities.
Cash flows from operating activities of discontinued operations in 2019 decreased to \$426 million from \$572 million in 2018. The primary reason was lower net income from discontinued operations in 2019, mostly offset by more favorable changes in
working capital in 2019 compared to 2018, including the impacts in 2018 of the timing of cash collections on large projects and other receivables. Cash flows from operating activities of discontinued operations in 2018 decreased to \$572 million from \$1,211 million in 2017. The primary reason was lower net income from discontinued operations as well as negative impacts from the timing of cash collections on large projects and other receivables. The amount reported for cash flows from operating activities of discontinued operations benefits directly from the allocation of stranded costs to continuing operations.
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Purchases of investments | (748) | (322) | (666) |
| Purchases of property, plant and equipment and intangible assets |
(762) | (772) | (752) |
| Acquisition of businesses (net of cash acquired) and increases in cost- and equity-accounted companies |
(22) | (2,664) | (2,011) |
| Proceeds from sales of investments |
749 | 567 | 1,443 |
| Proceeds from maturity of investments |
80 | 160 | 100 |
| Proceeds from sales of property, plant and equipment |
82 | 72 | 61 |
| Proceeds from sales of businesses (net of transaction costs and cash disposed) and cost- and equity-accounted companies |
69 | 113 | 607 |
| Net cash from settlement of foreign currency derivatives |
(76) | (30) | 63 |
| Other investing activities | (23) | (32) | 37 |
| Net cash used in investing activities – continuing operations |
(651) | (2,908) (1,118) | |
| Net cash used in investing activities – discontinued |
|||
| operations | (164) | (177) | (332) |
Net cash used in investing activities for continuing operations in 2019 was \$651 million, compared to \$2,908 million in 2018. The decrease in 2019 was due to the higher amounts for acquisitions of businesses in 2018 (primarily GEIS). This was offset partially by lower net sales of marketable securities and short-term investments and slightly lower purchases of property, plant and equipment in 2019 compared to 2018.
Net cash used in investing activities for continuing operations in 2018 was \$2,908 million, compared to \$1,118 million in 2017. The amount in 2018 reflects the higher amounts used to fund acquisitions of businesses. In addition, cash used in investing activities was higher in 2018 as 2017 included the positive cash flows resulting from reducing investments in marketable securities and short-term investments. Purchases of property, plant and equipment and intangible assets
were slightly higher in 2018 with higher spending on information technology as well as large investments in the U.S. and China. We also had higher capital expenditures in Austria with large investments in the B&R business. In addition, changes in the impacts from derivative cash flows classified as investing activities increased cash used in investing activities by \$93 million. These cash flows primarily result from the maturity and settlement of derivatives that are in place to hedge foreign currency exposures on internal subsidiary funding and the amount of the settlement results from movements in foreign currency exchange rates throughout the year.
The following presents purchases of property, plant and equipment and intangibles by significant asset category:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Construction in progress | 536 | 523 | 520 |
| Purchase of machinery and equipment |
156 | 152 | 125 |
| Purchase of land and buildings | 26 | 28 | 32 |
| Purchase of intangible assets | 44 | 69 | 75 |
| Purchases of property, plant and equipment and |
|||
| intangible assets | 762 | 772 | 752 |
In 2019, we reduced the level of our excess liquidity invested in marketable securities and short-term investments with net cash inflows of \$81 million. In 2018 and 2017, we decreased the amount of our excess liquidity invested in marketable securities and short-term investments as funds were needed for acquisitions of businesses. In 2018 and 2017, the net decrease in investments during the year resulted in inflows of \$405 million and \$877 million, respectively. Marketable securities and short-term investments at December 31, 2019 and 2018, consisted primarily of money market funds, and U.S. Government and other corporate bonds. The balance at December 31, 2018, also included amounts placed in reverse repurchase agreements.
In 2019, there were no significant business acquisitions or divestments while in 2018, acquisitions of businesses primarily represents the purchase of GEIS, which was acquired in June. In 2017, acquisitions of businesses primarily represents the purchase of B&R, which was acquired in July, while proceeds from sales of businesses primarily represents the divestment of the high-voltage cables and cable accessories businesses.
Cash used in investing activities from discontinued operations primarily represents net purchases of property, plant and equipment. The higher amount in 2017 was due to cash paid for acquisition of a business.
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Net changes in debt with | |||
| maturities of 90 days or less | 164 | 221 | 204 |
| Increase in debt | 2,406 | 1,914 | 920 |
| Repayment of debt | (2,156) | (830) (1,000) | |
| Delivery of shares | 10 | 42 | 163 |
| Purchase of treasury stock | — | (250) | (251) |
| Dividends paid | (1,675) | (1,717) | (1,635) |
| Dividends paid to noncontrolling | |||
| shareholders | (90) | (86) | (83) |
| Other financing activities | 13 | (35) | (6) |
| Net cash used in financing | |||
| activities – continuing | |||
| operations | (1,328) | (741) (1,688) | |
| Net cash used in financing | |||
| activities – discontinued | |||
| operations | (55) | (48) | (47) |
Our financing cash flow activities primarily include debt transactions (both from the issuance of debt securities and borrowings directly from banks), share transactions and payments of distributions to controlling and noncontrolling shareholders. Net cash used in financing activities for discontinued operations represents primarily distributions paid to noncontrolling shareholders of certain subsidiaries classified in discontinued operations.
In 2019, 2018 and 2017, the net inflow for debt with maturities of 90 days or less related primarily to net increases of commercial paper borrowings.
In 2019, the increase in debt was due primarily to the issuance of the following: CHF 280 million 0.3% Notes due 2024, CHF 170 million 1.0% Notes due 2029 and EUR 1,000 million floating rate notes due 2020. In 2018, the increase in debt was due primarily to the issuance of the following: USD 300 million 2.8% Notes due 2020, USD 450 million 3.375% Notes due 2023 and USD 750 million 3.8% Notes due 2028. In 2019 and 2018, the increase also included \$774 million and \$316 million, respectively, for commercial paper borrowings having an original maturity of more than 90 days. In 2017, the increase in debt was due primarily to the issuance of our EUR 750 million 0.75% Notes due 2024.
During 2019, \$2,156 million of debt was repaid, reflecting primarily the repayment at maturity of the EUR 1,250 million 2.625% Instruments as well as repayments at maturity of \$606 million in commercial paper borrowings having an original maturity of more than 90 days. During 2018, the CHF 350 million 1.50% bonds (equivalent to \$350 million on the date of repayment) were repaid as well as repayments at maturity of \$316 million in commercial paper borrowings. During 2017, \$1,000 million of debt was repaid, reflecting primarily the repayment at maturity of both the USD 500 million 1.625% Notes and the AUD 400 million 4.25% Notes (in total equivalent to \$803 million at dates of repayment).
In 2018 and 2017, "Purchase of treasury stock" reflects the cash paid to purchase 10 million of our own shares on the open market in each period.
The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. These amounts may differ from those reported in our Consolidated Balance Sheet at December 31, 2019. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented below. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2019:
| Less | More | ||||
|---|---|---|---|---|---|
| than | 1–3 | 3–5 | than | ||
| (\$ in millions) | Total | 1 year | years | years | 5 years |
| Payments due by period | |||||
| Long-term debt |
|||||
| obligations | 8,019 | 1,433 | 2,532 | 2,373 | 1,681 |
| Interest payments related to long-term debt |
|||||
| obligations | 1,952 | 179 | 343 | 199 | 1,231 |
| Operating lease obligations(1) |
1,125 | 308 | 377 | 209 | 231 |
| Finance lease obligations(1) |
233 | 37 | 66 | 46 | 84 |
| Purchase obligations |
2,380 | 2,043 | 332 | 5 | — |
| Total | 13,709 | 4,000 | 3,650 | 2,832 | 3,227 |
(1) Lease obligations represent total cash payments to be made in the future, and include an implied interest expense, being the difference between undiscounted cash flows and discounted cash flows, of \$103 million and \$61 million, for operating and finance leases, respectively, as well as including executory costs of \$1 million for finance leases. See "Note 14 – Leases" to our Consolidated Financial Statements.
In the table above, the long-term debt obligations reflect the cash amounts to be repaid upon maturity of those debt obligations. The cash obligations above will differ from the long-term debt balance reflected in "Note 12 – Debt" to our Consolidated Financial Statements due to the impacts of fair value hedge accounting adjustments and premiums or discounts on certain debt. In
addition, finance lease obligations are shown separately in the table above while they are combined with long-term debt amounts in our Consolidated Balance Sheets.
We have determined the interest payments related to long-term debt obligations by reference to the payments due under the terms of our debt obligations at the time such obligations were incurred. However, we use interest rate swaps to modify the interest characteristics of certain of our debt obligations. The net effect of these swaps may be to increase or decrease the actual amount of our cash interest payment obligations, which may differ from those stated in the above table. For further details on our debt obligations and the related hedges, see "Note 12 – Debt" to our Consolidated Financial Statements.
Of the total of \$1,294 million unrecognized tax benefits (net of deferred tax assets) at December 31, 2019, it is expected that \$76 million will be paid within less than a year. However, we cannot make a reasonably reliable estimate as to the related future payments for the remaining amount.
We disclose the maximum potential exposure of certain guarantees, as well as possible recourse provisions that may allow us to recover from third parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual exposure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assessment of the expected exposure.
The following table provides quantitative data regarding our third-party guarantees. The maximum potential payments represent a worst-case scenario, and do not reflect our expected outcomes.
| Maximum potential payments(1) |
||||
|---|---|---|---|---|
| 2019 | 2018 | |||
| 1,860 | 1,584 | |||
| 10 | 10 | |||
| 64 | 64 | |||
| 1,934 | 1,658 | |||
| December 31, (\$ in millions) Performance guarantees Financial guarantees Indemnification guarantees Total |
(1) Maximum potential payments include amounts in both continuing and discontinued operations
The carrying amounts of liabilities recorded in the Consolidated Balance Sheets in respect of the above guarantees were not significant at December 31, 2019 and 2018, and reflect our best estimate of future payments, which we may incur as part of fulfilling our guarantee obligations.
In addition, in the normal course of bidding for and executing certain projects, we have entered into standby letters of credit, bid/performance bonds and surety bonds (collectively "performance bonds") with various financial institutions. Customers can draw on such performance bonds in the event that ABB does not fulfill its contractual obligations. ABB would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. At December 31, 2019 and 2018, the total outstanding performance bonds aggregated to \$6.8 billion and \$7.4 billion, respectively, of which \$3.7 billion and \$4.3 billion, respectively, relate to discontinued operations. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2019, 2018 and 2017.
For additional descriptions of our performance, financial and indemnification guarantees see "Note 15 – Commitments and contingencies" to our Consolidated Financial Statements.
— EMPTY PAGE ADDED INTENTIONALLY
136 ABB ANNUAL REPORT 2019 04 FINANCIAL REVIEW OF ABB GROUP
—
The Board of Directors and Management of ABB Ltd and its consolidated subsidiaries ("ABB") are responsible for establishing and maintaining adequate internal control over financial reporting. ABB's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the published Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with ABB's policies and procedures may deteriorate.
Management conducted an assessment of the effectiveness of internal control over financial reporting based on the criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management has concluded that ABB's internal control over financial reporting was effective as of December 31, 2019.
KPMG AG, the independent registered public accounting firm who audited the Company's consolidated financial statements, has issued an opinion on the effectiveness of ABB's internal control over financial reporting as of December 31, 2019, which is included on pages 142–143 of this annual report.
Peter Voser Chairman of the Board of Directors and Chief Executive Officer Timo Ihamuotila Chief Financial Officer
Zurich, February 25, 2020
To the General Meeting of ABB Ltd, Zurich
As statutory auditor, we have audited the accompanying consolidated financial statements of ABB Ltd and subsidiaries (the Group), which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders' equity for each of the years in the two-year period ended December 31, 2019, and the related notes (pages 145 to 216). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in accordance with U.S. Generally Accepted Accounting Principles, and comply with Swiss law.
As discussed in Note 2 to the consolidated financial statements, the Group has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Codification (ASC), 842 Leases.
The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm and are required to be independent with respect to the Group. We conducted our audits in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to fraud or error.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity's preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of estimated costs to complete related to revenue recognition for long-term fixed price contracts
Evaluation of unrecognized tax benefits related to transfer pricing
Evaluation of estimated costs to complete related to revenue recognition for long-term fixed price contracts
As discussed in Note 2 to the consolidated financial statements, revenues from the sale of customized products, including long-term fixed price contracts for integrated automation and electrification systems and solutions are generally recognized on an over time basis using the percentage of completion method of accounting.
We identified the evaluation of estimated costs to complete related to revenue recognition of longterm fixed price contracts using the percentageof-completion method of accounting as a critical audit matter. In particular, a high degree of subjective auditor judgment was required to evaluate the Group's estimates regarding the amount of future direct materials, labor and subcontract costs, and indirect costs to complete the contracts.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Group's long-term fixed price contract revenue recognition process, including controls over the development of estimates regarding the amount of future direct materials, labor and subcontract costs, and indirect costs. We assessed the Group's historical ability to accurately estimate costs to complete by comparing historical estimates to actual results for a sample of contracts. We evaluated the estimate of remaining costs to be incurred for a sample of contracts by assessing progress to date and the nature and complexity of work to be performed through interviewing project managers and inspecting correspondence, if any, between the Group and the customer and/or subcontractors.
For further information on revenue recognition on long-term projects refer to the following:
— Note 2 "Significant accounting policies"
As discussed in Note 2 to the consolidated financial statements, the Group operates across multiple tax jurisdictions, is exposed to numerous tax laws and is regularly subject to tax audits by local tax authorities. Unrecognized tax benefits related to transfer pricing are recorded by the Group based on management's assessment of the technical merits of tax filings and considering applicable tax laws of the relevant jurisdictions. The unrecognized tax benefits related to transfer pricing represent a portion of the Group's total unrecognized tax benefits related to various matters.
We identified the evaluation of unrecognized tax benefits related to transfer pricing as a critical audit matter as a high degree of subjective auditor judgment and specialized skills was required in assessing the Group's interpretation of international tax practice and developments in relation to intragroup charges and intragroup sales of goods and services and the Group's ability to estimate the ultimate resolution of the tax positions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Group's unrecognized tax benefits process, including controls related to the Group's interpretation of international tax practice and developments in relation to intragroup charges and intragroup sale of goods and services and the estimate of the related unrecognized tax benefits. We tested the identified costs that have a higher likelihood of being challenged by tax authorities associated with intragroup arrangements and potential price adjustments for intragroup sales of goods and services. We involved our tax professionals with specialized skills and knowledge, who assisted in evaluating (i) the Group's historical ability to accurately estimate the unrecognized tax benefits related to transfer pricing by comparing historical tax positions to subsequent settlements (ii) transfer pricing documentation and methodology for compliance with applicable laws and regulations by reviewing the documentation and relevant agreements, (iii) the impact of new information or changes in international tax practice and developments on historical tax positions, and (iv) performing an independent assessment of unrecognized tax benefits relating to the Group's intragroup sales of goods and services and comparing the results to the Group's assessment.
For further information on unrecognized tax benefits refer to the following:
The consolidated financial statements of the Group for the year ended December 31, 2017 were audited by other auditors who expressed an unmodified opinion on those statements on February 22, 2018, except for Note 3 for which the date is March 27, 2019 and except for Note 23 for which the date is February 25, 2020.
We are a public accounting firm registered with the Swiss Federal Audit Oversight Authority (FAOA) and the PCAOB and we confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA). We are independent of the Group in accordance with Swiss law (article 728 CO and article 11 AOA) and U.S. federal securities laws as well as the applicable rules and regulations of the Swiss audit profession, the U.S. Securities and Exchange Commission and the PCAOB, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.
We recommend that the consolidated financial statements submitted to you be approved.
We have also audited, in accordance with the standards of the PCAOB, the Group's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated February 25, 2020, expressed an unqualified opinion on the effectiveness of the Group's internal control over financial reporting.
We have served as the Group's auditor since 2018.
KPMG AG
Hans-Dieter Krauss Douglas Mullins Licensed Audit Expert Auditor in Charge
Zurich, Switzerland February 25, 2020
To the Board of Directors and Stockholders of ABB Ltd
We have audited ABB Ltd's (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in COSO.
We also have audited, in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income, cash flows and changes in stockholders' equity for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2020 expressed an unqualified opinion on those consolidated financial statements.
The Company's Board of Directors and management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
KPMG AG
Hans-Dieter Krauss Douglas Mullins Licensed Audit Expert Auditor in Charge
Zurich, Switzerland February 25, 2020
KPMG AG, Räffelstrasse 28, PO Box, CH-8036 Zurich
KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss legal entity. All rights reserved.
We have audited the accompanying consolidated statements of income, comprehensive income, cash flows and changes in stockholders' equity for the year ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated results of operations and cash flows for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
—
These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Ernst & Young AG
We served as the Company's auditor from 1994 to 2018.
Zurich, Switzerland February 22, 2018
Except for Note 3 for the aforementioned period, as to which the date is March 27, 2019, and
Except for Note 23 for the aforementioned period, as to which the date is February 25, 2020.
This report of Ernst & Young AG has been provided in connection with the Company's Consolidated Financial Statements included in its annual report filed on Form 20-F with the United States Securities and Exchange Commission. It is provided here for information purposes.
| Year ended December 31 (\$ in millions, except per share data in \$) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Sales of products | 22,554 | 22,366 | 20,438 |
| Sales of services and other | 5,424 | 5,296 | 4,758 |
| Total revenues | 27,978 | 27,662 | 25,196 |
| Cost of sales of products | (15,811) | (15,961) | (14,485) |
| Cost of services and other | (3,261) | (3,157) | (2,865) |
| Total cost of sales | (19,072) | (19,118) | (17,350) |
| Gross profit | 8,906 | 8,544 | 7,846 |
| Selling, general and administrative expenses | (5,447) | (5,295) | (4,765) |
| Non-order related research and development expenses | (1,198) | (1,147) | (1,013) |
| Other income (expense), net | (323) | 124 | 162 |
| Income from operations | 1,938 | 2,226 | 2,230 |
| Interest and dividend income | 67 | 72 | 73 |
| Interest and other finance expense | (215) | (262) | (234) |
| Non-operational pension (cost) credit | 72 | 83 | 33 |
| Income from continuing operations before taxes | 1,862 | 2,119 | 2,102 |
| Provision for taxes | (772) | (544) | (583) |
| Income from continuing operations, net of tax | 1,090 | 1,575 | 1,519 |
| Income from discontinued operations, net of tax | 438 | 723 | 846 |
| Net income | 1,528 | 2,298 | 2,365 |
| Net income attributable to noncontrolling interests | (89) | (125) | (152) |
| Net income attributable to ABB | 1,439 | 2,173 | 2,213 |
| Amounts attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 1,043 | 1,514 | 1,441 |
| Income from discontinued operations, net of tax | 396 | 659 | 772 |
| Net income | 1,439 | 2,173 | 2,213 |
| Basic earnings per share attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 0.49 | 0.71 | 0.67 |
| Income from discontinued operations, net of tax | 0.19 | 0.31 | 0.36 |
| Net income | 0.67 | 1.02 | 1.04 |
| Diluted earnings per share attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 0.49 | 0.71 | 0.67 |
| Income from discontinued operations, net of tax | 0.19 | 0.31 | 0.36 |
| Net income | 0.67 | 1.02 | 1.03 |
| Weighted-average number of shares outstanding (in millions) used to compute: | |||
| Basic earnings per share attributable to ABB shareholders | 2,133 | 2,132 | 2,138 |
| Diluted earnings per share attributable to ABB shareholders | 2,135 | 2,139 | 2,148 |
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
| Year ended December 31 (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Net income | 1,528 | 2,298 | 2,365 |
| Other comprehensive income (loss), net of tax: | |||
| Foreign currency translation adjustments: | |||
| Foreign currency translation adjustments | (130) | (627) | 912 |
| Gain on liquidation of foreign subsidiary | — | (31) | — |
| Changes attributable to divestments | (2) | 12 | 12 |
| Foreign currency translation adjustments | (132) | (646) | 924 |
| Available-for-sale securities: | |||
| Net unrealized gains (losses) arising during the year | 14 | (4) | 1 |
| Reclassification adjustments for net losses included in net income | — | 1 | — |
| Unrealized gains (losses) on available-for-sale securities | 14 | (3) | 1 |
| Pension and other postretirement plans: | |||
| Prior service (costs) credits arising during the year | 6 | (7) | (16) |
| Net actuarial gains (losses) arising during the year | (220) | (352) | (139) |
| Amortization of prior service cost (credit) included in net income | (28) | (24) | 6 |
| Amortization of net actuarial loss included in net income | 68 | 69 | 63 |
| Net (gains) losses from pension settlements included in net income | 32 | 19 | 9 |
| Changes attributable to divestments | — | — | 6 |
| Pension and other postretirement plan adjustments | (142) | (295) | (71) |
| Cash flow hedge derivatives: | |||
| Net unrealized gains (losses) arising during the year | 20 | (49) | 38 |
| Reclassification adjustments for net (gains) losses included in net income | (9) | 21 | (22) |
| Changes attributable to divestments | — | — | (3) |
| Unrealized gains (losses) of cash flow hedge derivatives | 11 | (28) | 13 |
| Total other comprehensive income (loss), net of tax | (249) | (972) | 867 |
| Total comprehensive income, net of tax | 1,279 | 1,326 | 3,232 |
| Comprehensive income attributable to noncontrolling interests, net of tax | (83) | (110) | (177) |
| Total comprehensive income, net of tax, attributable to ABB | 1,196 | 1,216 | 3,055 |
Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements
| December 31 (\$ in millions, except share data) | 2019 | 2018 |
|---|---|---|
| Cash and equivalents | 3,544 | 3,445 |
| Marketable securities and short-term investments | 566 | 712 |
| Receivables, net | 6,434 | 6,386 |
| Contract assets | 1,025 | 1,082 |
| Inventories, net | 4,184 | 4,284 |
| Prepaid expenses | 191 | 176 |
| Other current assets | 674 | 616 |
| Current assets held for sale and in discontinued operations | 9,840 | 5,164 |
| Total current assets | 26,458 | 21,865 |
| Property, plant and equipment, net | 3,972 | 4,133 |
| Operating lease right-of-use assets | 994 | — |
| Goodwill | 10,825 | 10,764 |
| Other intangible assets, net | 2,252 | 2,607 |
| Prepaid pension and other employee benefits | 133 | 83 |
| Investments in equity-accounted companies | 33 | 87 |
| Deferred taxes | 910 | 1,006 |
| Other non-current assets | 531 | 469 |
| Non-current assets held for sale and in discontinued operations | — | 3,427 |
| Total assets | 46,108 | 44,441 |
| Accounts payable, trade | 4,353 | 4,424 |
| Contract liabilities | 1,719 | 1,707 |
| Short-term debt and current maturities of long-term debt | 2,287 | 2,031 |
| Current operating leases | 305 | — |
| Provisions for warranties | 816 | 948 |
| Other provisions | 1,375 | 1,372 |
| Other current liabilities | 3,761 | 3,780 |
| Current liabilities held for sale and in discontinued operations | 5,650 | 4,185 |
| Total current liabilities | 20,266 | 18,447 |
| Long-term debt | 6,772 | 6,587 |
| Non-current operating leases | 717 | — |
| Pension and other employee benefits | 1,793 | 1,828 |
| Deferred taxes | 911 | 927 |
| Other non-current liabilities | 1,669 | 1,689 |
| Non-current liabilities held for sale and in discontinued operations | — | 429 |
| Total liabilities | 32,128 | 29,907 |
| Commitments and contingencies | ||
| Stockholders' equity: | ||
| Common stock, CHF 0.12 par value (2,168,148,264 issued shares at December 31, 2019 and 2018) |
188 | 188 |
| Additional paid-in capital | 73 | 56 |
| Retained earnings | 19,640 | 19,839 |
| Accumulated other comprehensive loss | (5,590) | (5,311) |
| Treasury stock, at cost | ||
| (34,647,153 and 36,185,858 shares at December 31, 2019 and 2018, respectively) | (785) | (820) |
| Total ABB stockholders' equity | 13,526 | 13,952 |
| Noncontrolling interests | 454 | 582 |
| Total stockholders' equity | 13,980 | 14,534 |
| Total liabilities and stockholders' equity | 46,108 | 44,441 |
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
| Year ended December 31 (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Operating activities: | |||
| Net income | 1,528 | 2,298 | 2,365 |
| Less: Income from discontinued operations, net of tax | (438) | (723) | (846) |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||
| Depreciation and amortization | 961 | 916 | 836 |
| Deferred taxes | (83) | (142) | (199) |
| Net loss from derivatives and foreign exchange | 1 | 93 | 29 |
| Net gain from sale of property, plant and equipment | (51) | (57) | (37) |
| Net gain from sale of businesses | (55) | (57) | (252) |
| Fair value adjustment on assets and liabilities held for sale | 421 | — | — |
| Share-based payment arrangements | 46 | 50 | 49 |
| Other | (59) | (76) | 4 |
| Changes in operating assets and liabilities: | |||
| Trade receivables, net | (202) | (144) | (178) |
| Contract assets and liabilities | 128 | (18) | 6 |
| Inventories, net | (182) | (336) | (66) |
| Accounts payable, trade | 130 | 454 | 474 |
| Accrued liabilities | (76) | 252 | 99 |
| Provisions, net | (36) | 87 | (4) |
| Income taxes payable and receivable | (3) | (102) | 202 |
| Other assets and liabilities, net | (131) | (143) | 106 |
| Net cash provided by operating activities – continuing operations | 1,899 | 2,352 | 2,588 |
| Net cash provided by operating activities – discontinued operations | 426 | 572 | 1,211 |
| Net cash provided by operating activities | 2,325 | 2,924 | 3,799 |
| Investing activities: | |||
| Purchases of investments | (748) | (322) | (666) |
| Purchases of property, plant and equipment and intangible assets | (762) | (772) | (752) |
| Acquisition of businesses (net of cash acquired) and increases in cost- and equity-accounted companies |
(22) | (2,664) | (2,011) |
| Proceeds from sales of investments | 749 | 567 | 1,443 |
| Proceeds from maturity of investments | 80 | 160 | 100 |
| Proceeds from sales of property, plant and equipment | 82 | 72 | 61 |
| Proceeds from sales of businesses (net of transaction costs and cash disposed) and cost- and equity-accounted companies |
69 | 113 | 607 |
| Net cash from settlement of foreign currency derivatives | (76) | (30) | 63 |
| Other investing activities | (23) | (32) | 37 |
| Net cash used in investing activities – continuing operations | (651) | (2,908) | (1,118) |
| Net cash used in investing activities – discontinued operations | (164) | (177) | (332) |
| Net cash used in investing activities | (815) | (3,085) | (1,450) |
| Year ended December 31 (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Financing activities: | |||
| Net changes in debt with maturities of 90 days or less | 164 | 221 | 204 |
| Increase in debt | 2,406 | 1,914 | 920 |
| Repayment of debt | (2,156) | (830) | (1,000) |
| Delivery of shares | 10 | 42 | 163 |
| Purchase of treasury stock | — | (250) | (251) |
| Dividends paid | (1,675) | (1,717) | (1,635) |
| Dividends paid to noncontrolling shareholders | (90) | (86) | (83) |
| Other financing activities | 13 | (35) | (6) |
| Net cash used in financing activities – continuing operations | (1,328) | (741) | (1,688) |
| Net cash used in financing activities – discontinued operations | (55) | (48) | (47) |
| Net cash used in financing activities | (1,383) | (789) | (1,735) |
| Effects of exchange rate changes on cash and equivalents | (28) | (131) | 268 |
| Net change in cash and equivalents | 99 | (1,081) | 882 |
| Cash and equivalents, beginning of period | 3,445 | 4,526 | 3,644 |
| Cash and equivalents, end of period | 3,544 | 3,445 | 4,526 |
| Supplementary disclosure of cash flow information: | |||
| Interest paid | 284 | 243 | 205 |
| Income taxes paid | 1,005 | 1,026 | 894 |
Due to rounding, numbers presented may not add to the totals provided.
See accompanying Notes to the Consolidated Financial Statements
| Common | Additional | |
|---|---|---|
| Years ended December 31, 2019, 2018 and 2017 (\$ in millions) | stock | paid-in capital |
| Balance at January 1, 2017 | 192 | 24 |
| Comprehensive income: | ||
| Net income | ||
| Foreign currency translation adjustments, net of tax | ||
| Effect of change in fair value of available-for-sale securities, net of tax | ||
| Unrecognized expense related to pensions and other postretirement plans, net of tax | ||
| Change in derivatives qualifying as cash flow hedges, net of tax | ||
| Total comprehensive income | ||
| Changes in noncontrolling interests | 17 | |
| Dividends to noncontrolling shareholders | ||
| Dividends paid to shareholders | ||
| Share-based payment arrangements | 58 | |
| Cancellation of treasury shares | (4) | (27) |
| Purchase of treasury stock | ||
| Delivery of shares | (46) | |
| Call options | 4 | |
| Balance at December 31, 2017 | 188 | 29 |
| Cumulative effect of changes in accounting principles | ||
| Comprehensive income: | ||
| Net income | ||
| Foreign currency translation adjustments, net of tax | ||
| Effect of change in fair value of available-for-sale securities, net of tax | ||
| Unrecognized expense related to pensions and other postretirement plans, net of tax | ||
| Change in derivatives qualifying as cash flow hedges, net of tax | ||
| Total comprehensive income | ||
| Changes in noncontrolling interests | (4) | |
| Noncontrolling interests recognized in connection with business combination | ||
| Dividends to noncontrolling shareholders | ||
| Dividends paid to shareholders | ||
| Share-based payment arrangements | 60 | |
| Purchase of treasury stock | ||
| Delivery of shares | (35) | |
| Call options | 5 | |
| Balance at December 31, 2018 | 188 | 56 |
| Adoption of accounting standard update | ||
| Comprehensive income: | ||
| Net income | ||
| Foreign currency translation adjustments, net of tax | ||
| Effect of change in fair value of available-for-sale securities, net of tax | ||
| Unrecognized expense related to pensions and other postretirement plans, net of tax | ||
| Change in derivatives qualifying as cash flow hedges, net of tax | ||
| Total comprehensive income | ||
| Changes in noncontrolling interests | (17) | |
| Fair value adjustment to noncontrolling interests recognized in business combination | ||
| Changes in noncontrolling interests in connection with divestments | ||
| Dividends to noncontrolling shareholders | ||
| Dividends paid to shareholders | ||
| Share-based payment arrangements | 55 | |
| Delivery of shares | (24) | |
| Call options | 4 | |
| Balance at December 31, 2019 | 188 | 73 |
Due to rounding, numbers presented may not add to the totals provided. See accompanying Notes to the Consolidated Financial Statements
—
| Retained earnings |
Accumulated other comprehensive loss |
Treasury stock | Total ABB stockholders' equity |
Non-controlling interests |
Total stockholders' equity |
|---|---|---|---|---|---|
| 19,925 | (5,187) | (1,559) | 13,395 | 502 | 13,897 |
| 2,213 | 2,213 | 152 | 2,365 | ||
| 899 | 899 | 25 | 924 | ||
| 1 | 1 | ||||
| (71) | (71) | (71) | |||
| 13 | 13 | 13 | |||
| 3,055 | 177 | 3,232 | |||
| 17 | (14) | ||||
| — | (134) | (134) | |||
| (1,622) | (1,622) | (1,622) | |||
| 58 | |||||
| (922) | 953 (251) |
— (251) |
(251) | ||
| 209 | 163 | 163 | |||
| 4 | |||||
| 19,594 | (4,345) | (647) | 14,819 | 530 | 15,349 |
| (192) | (9) | (201) | |||
| 2,173 | 2,173 | 125 | |||
| (631) | (631) | (15) | 2,298 (646) |
||
| (3) | (3) | ||||
| (295) | (295) | ||||
| (28) | (28) | ||||
| 1,216 | 110 | ||||
| (4) | (19) | ||||
| — | 107 | ||||
| — | (146) | ||||
| (1,736) | (1,736) | (1,736) | |||
| 60 | |||||
| (249) | (249) | ||||
| 77 | 42 | ||||
| 5 | |||||
| 19,839 | (5,311) | (820) | 13,952 | 582 | |
| 36 | (36) | — | |||
| 1,439 | 1,439 | 89 | 1,528 | ||
| (126) | (126) | (6) | |||
| 14 | 14 | ||||
| (142) | (142) | ||||
| 11 | 11 | ||||
| 1,196 | 83 | ||||
| (17) | 12 | ||||
| — | (44) | ||||
| — | (55) | ||||
| — | (122) | ||||
| (1,675) | (1,675) | (1,675) | |||
| 55 | |||||
| 34 | 10 | ||||
| 4 | |||||
| 19,640 | (5,590) | (785) | 13,526 | 454 |
ABB Ltd and its subsidiaries (collectively, the Company) together form a technology leader that is driving the digital transformation of industries with its four customer-focused, globally leading businesses.
The following is a summary of significant accounting policies followed in the preparation of these Consolidated Financial Statements.
The Consolidated Financial Statements are prepared in accordance with United States of America (United States or U.S.) generally accepted accounting principles (U.S. GAAP) and are presented in United States dollars (\$ or USD) unless otherwise stated. Due to rounding, numbers presented may not add to the totals provided. The par value of capital stock is denominated in Swiss francs. See Note 3 for a summary of changes in presentation and other reclassifications affecting these financial statements compared to the previous year.
The Consolidated Financial Statements include the accounts of ABB Ltd and companies which are directly or indirectly controlled by ABB Ltd. Additionally, the Company consolidates variable interest entities if it has determined that it is the primary beneficiary. Intercompany accounts and transactions are eliminated. Investments in joint ventures and affiliated companies in which the Company has the ability to exercise significant influence over operating and financial policies (generally through direct or indirect ownership of 20 percent to 50 percent of the voting rights), are recorded in the Consolidated Financial Statements using the equity method of accounting.
The Company reports a disposal, or planned disposal, of a component or a group of components as a discontinued operation if the disposal represents a strategic shift that has or will have a major effect on the Company's operations and financial results. A strategic shift could include a disposal of a major geographical area, a major line of business or other major parts of the Company. A component may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group.
The assets and liabilities of a component reported as a discontinued operation are presented separately as held for sale in the Company's Consolidated Balance Sheets.
Interest expense that is not directly attributable to or related to the Company's continuing business or discontinued business is allocated to discontinued operations based on the ratio of net assets to be sold less debt that is required to be paid as a result of the planned disposal transaction to the sum of total net assets of the Company plus consolidated debt. General corporate overhead is not allocated to discontinued operations (see Note 3).
—
—
A portion of the Company's activities (primarily long-term system integration activities) has an operating cycle that exceeds one year. For classification of current assets and liabilities related to such activities, the Company elected to use the duration of the individual contracts as its operating cycle. Accordingly, there are accounts receivable, inventories and provisions related to these contracts which will not be realized within one year that have been classified as current.
The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes. These accounting assumptions and estimates include:
The actual results and outcomes may differ from the Company's estimates and assumptions.
Cash and equivalents include highly liquid investments with maturities of three months or less at the date of acquisition.
Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where the Company operates. Funds, other than regular dividends, fees or loan repayments, cannot be readily transferred abroad from these countries and are therefore deposited and used for working capital needs locally. These funds are included in cash and equivalents as they are not considered restricted.
Management determines the appropriate classification of held-to-maturity and available-for-sale debt securities at the time of purchase. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity debt securities are carried at amortized cost, adjusted for accretion of discounts or amortization of premiums to maturity computed under the effective interest method. Such accretion or amortization is included in "Interest and dividend income". Marketable debt securities not classified as held-to-maturity are classified as available-for-sale and reported at fair value.
Unrealized gains and losses on available-for-sale debt securities are excluded from the determination of earnings and are instead recognized in the "Accumulated other comprehensive loss" component of stockholders' equity, net of tax, until realized. Realized gains and losses on available-for-sale debt securities are computed based upon the historical cost of these securities, using the specific identification method.
Marketable debt securities are classified as either "Cash and equivalents" or "Marketable securities and short-term investments" according to their maturity at the time of acquisition.
Marketable equity securities are generally classified as "Marketable securities and short-term investments", however, any marketable securities held as a long-term investment rather than as an investment of excess liquidity are classified as "Other non-current assets". Equity securities are measured at fair value with fair value changes reported in net income. Fair value changes for equity securities are reported in "Interest and other finance expense".
The Company performs a periodic review of its debt securities to determine whether an other-than-temporary impairment has occurred. Generally, when an individual security has been in an unrealized loss position for an extended period of time, the Company evaluates whether an impairment has occurred. The evaluation is based on specific facts and circumstances at the time of assessment, which include general market conditions, and the duration and extent to which the fair value is below cost.
If the fair value of a debt security is less than its amortized cost, then an other-than-temporary impairment for the difference is recognized if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost base, or (iii) a credit loss exists insofar as the Company does not expect to recover the entire recognized amortized cost of the security. Such impairment charges are generally recognized in "Interest and other finance expense". If the impairment is due to factors other than credit losses, and the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of the security's amortized cost, such impairment charges are recorded in "Accumulated other comprehensive loss".
In addition, equity securities without readily determinable fair value are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying amount. The impairment charge is recorded in "Interest and other finance expense".
Accounts receivable are recorded at the invoiced amount. The Company has a group-wide policy on the management of credit risk. The policy includes a credit assessment methodology to assess the creditworthiness of customers and assign to those customers a risk category. Third-party agencies' ratings are considered, if available. For customers where agency ratings are not available, the customer's most recent financial statements, payment history and other relevant information are considered in the assignment to a risk category. Customers are assessed at least annually or more frequently when information on significant changes in the customer's financial position becomes known. In addition to the assignment to a risk category, a credit limit per customer is set.
The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance based on historical write-off experience and customer-specific data. If an amount has not been settled within its contractual payment term then it is considered past due. The Company reviews the allowance for doubtful accounts regularly and past due balances are reviewed for collectability. Account balances are charged off against the related allowance when the Company believes that the amount will not be recovered.
The Company, in its normal course of business, transfers receivables to third parties, generally without recourse. The transfer is accounted for as a sale when the Company has surrendered control over the receivables. Control is deemed to have been surrendered when (i) the transferred receivables have been put presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership, (ii) the third-party transferees have the right to pledge or exchange the transferred receivables, and (iii) the Company has relinquished effective control over the transferred receivables and does not retain the ability or obligation to repurchase or redeem the transferred receivables. At the time of sale, the sold receivables are removed from the Consolidated Balance Sheets and the related cash inflows are classified as operating activities in the Consolidated Statements of Cash Flows. Costs associated with the sale of receivables, including the related gains and losses from the sales, are included in "Interest and other finance expense". Transfers of receivables that do not meet the requirements for treatment as sales are accounted for as secured borrowings and the related cash flows are classified as financing activities in the Consolidated Statements of Cash Flows.
The Company sells a broad range of products, systems, services and software to a wide range of industrial, commercial and utility customers as well as various government agencies and quasi-governmental agencies throughout the world. Concentrations of credit risk with respect to accounts receivable are limited, as the Company's customer base is comprised of a large number of individual customers. Ongoing credit evaluations of customers' financial positions are performed to determine whether the use of credit support instruments such as guarantees, letters of credit or credit insurance are necessary; collateral is not generally required. The Company maintains reserves for potential credit losses as discussed above in "Accounts receivable and allowance for doubtful accounts". Such losses, in the aggregate, are in line with the Company's expectations.
It is the Company's policy to invest cash in deposits with banks throughout the world with certain minimum credit ratings and in high quality, low risk, liquid investments. The Company actively manages its credit risk by routinely reviewing the creditworthiness of the banks and the investments held. The Company has not incurred significant credit losses related to such investments.
The Company's exposure to credit risk on derivative financial instruments is the risk that the counterparty will fail to meet its obligations. To reduce this risk, the Company has credit policies that require the establishment and periodic review of credit limits for individual counterparties. In addition, the Company has entered into close-out netting agreements with most derivative counterparties. Close-out netting agreements provide for the termination, valuation and net settlement of some or all outstanding transactions between two counterparties on the occurrence of one or more pre-defined trigger events. In the Consolidated Financial Statements derivative instruments are presented on a gross basis.
A customer contract exists if collectability under the contract is considered probable, the contract has commercial substance, contains payment terms, as well as the rights and commitments of both parties, and has been approved.
The Company offers arrangements with multiple performance obligations to meet its customers' needs. These arrangements may involve the delivery of multiple products and/or performance of services (such as installation and training) and the delivery and/or performance may occur at different points in time or over different periods of time. Goods and services under such arrangements are evaluated to determine whether they form distinct performance obligations and should be accounted for as separate revenue transactions. The Company allocates the sales price to each distinct performance obligation based on the price of each item sold in separate transactions at the inception of the arrangement.
The Company generally recognizes revenues for the sale of non-customized products including switchgear, circuit breakers, modular substation packages, control products, motors, generators, drives, robots, turbochargers, measurement and analytical instrumentation, and other goods which are manufactured on a standardized basis at a point in time. Revenues are recognized at the point in time that the customer obtains control of the good which is when it has taken title to the products and assumed the risks and rewards of ownership of the products specified in the purchase order or sales agreement. Generally, the transfer of title and risks and rewards of ownership are governed by the contractually defined shipping terms. The Company uses various International Commercial shipping terms (as promulgated by the International Chamber of Commerce) in its sales of products to third party customers, such as Ex Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP).
Billing terms for these point in time contracts vary but generally coincide with delivery to the customer. Payment is generally due upon receipt of the invoice, payable within 90 days or less.
The Company generally recognizes revenues for the sale of customized products, including integrated automation and electrification systems and solutions, on an over time basis using the percentage-of-completion method of accounting. These systems are generally accounted for as a single performance obligation as the Company is required to integrate equipment and services into one deliverable for the customer. Revenues are recognized as the systems are customized during the manufacturing or integration process and as control is transferred to the customer as evidenced by the Company's right to payment for work performed or by the customer's ownership of the work in process. The Company principally uses the cost-to-cost method to measure progress towards completion on
contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to the Company's best estimate of total costs based on the Company's history of manufacturing or constructing similar assets for customers. Estimated costs are reviewed and updated routinely for contracts in progress to reflect changes in quantity or pricing of the inputs. The cumulative effect of any change in estimate is recorded in the period when the change in estimate is determined. Contract costs include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools and depreciation costs.
The nature of the Company's contracts for the sale of customized products gives rise to several types of variable consideration, including claims, unpriced change orders, liquidated damages and penalties. These amounts are estimated based upon the most likely amount of consideration to which the customer or the Company will be entitled. The estimated amounts are included in the sales price to the extent it is probable that a significant reversal of cumulative revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. All estimates of variable consideration are reassessed periodically. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated.
Billing terms for these over-time contracts vary but are generally based on achieving specified milestones. The differences between the timing of revenues recognized and customer billings result in changes to contract assets and contract liabilities. Payment is generally due upon receipt of the invoice, payable within 90 days or less. Contractual retention amounts billed to customers are generally due upon expiration of the contractual warranty period.
Service revenues reflect revenues earned from the Company's activities in providing services to customers primarily subsequent to the sale and delivery of a product or complete system. Such revenues consist of maintenance type contracts, repair services, equipment upgrades, field service activities that include personnel and accompanying spare parts, training, and installation and commissioning of products as a stand-alone service or as part of a service contract. The Company generally recognizes revenues from service transactions as services are performed or at the point in time that the customer obtains control of the spare parts. For long-term service contracts including monitoring and maintenance services, revenues are recognized on a straight line basis over the term of the contract consistent with the nature, timing and extent of the services or, if the performance pattern is other than straight line, as the services are provided based on costs incurred relative to total expected costs.
In limited circumstances the Company sells extended warranties that extend the warranty coverage beyond the standard coverage offered on specific products. Revenues for these warranties are recorded over the length of the warranty period based on their stand-alone selling price.
Billing terms for service contracts vary but are generally based on the occurrence of a service event. Payment is generally due upon receipt of the invoice, payable within 90 days or less.
Revenues are reported net of customer rebates, early settlement discounts, and similar incentives. Rebates are estimated based on sales terms, historical experience and trend analysis. The most common incentives relate to amounts paid or credited to customers for achieving defined volume levels.
Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between the Company and its customers, such as sales, use, value added and some excise taxes, are excluded from revenues.
The Company does not adjust the contract price for the effects of a financing component if the Company expects, at contract inception, that the time between control transfer and cash receipt is less than 12 months.
Sales commissions are expensed immediately when the amortization period for the costs to obtain the contract is less than a year.
Losses on contracts are recognized in the period when they are identified and are based upon the anticipated excess of contract costs over the related contract revenues.
Shipping and handling costs are recorded as a component of cost of sales.
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method, the weighted-average cost method, or the specific identification method. Inventoried costs are stated at acquisition cost or actual production cost, including direct material and labor and applicable manufacturing overheads. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for decreases in sales prices, obsolescence or similar reductions in value.
Long-lived assets that are held and used are assessed for impairment when events or circumstances indicate that the carrying amount of the asset may not be recoverable. If the asset's net carrying value exceeds the asset's net undiscounted cash flows expected to be generated over its remaining useful life including net proceeds expected from disposition of the asset, if any, the carrying amount of the asset is reduced to its estimated fair value. The estimated fair value is determined using a market, income and/or cost approach.
Property, plant and equipment is stated at cost, less accumulated depreciation and is depreciated using the straight-line method. The estimated useful lives of the assets are generally as follows:
Goodwill is reviewed for impairment annually as of October 1, or more frequently if events or circumstances indicate that the carrying value may not be recoverable.
Goodwill is evaluated for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. For the annual impairment review performed in 2019, the reporting units were the same as the operating segments for Electrification, Motion and Robotics & Discrete Automation, while for the Industrial Automation operating segment the reporting units were determined to be one level below the operating segment.
When evaluating goodwill for impairment, the Company uses either a qualitative or quantitative assessment method for each reporting unit. The qualitative assessment involves determining, based on an evaluation of qualitative factors, if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on this qualitative assessment, it is determined to be more likely than not that the reporting unit's fair value is less than its carrying value, a quantitative impairment test (described below) is performed, otherwise no further analysis is required. If the Company elects not to perform the qualitative assessment for a reporting unit, then a quantitative impairment test is performed.
The quantitative impairment test calculates the fair value of a reporting unit using an income approach based on the present value of future cash flows, applying a discount rate that represents the Company's weighted-average cost of capital, and compares it to the reporting unit's carrying value. If the carrying value of the net assets of a reporting unit exceeds the fair value of the reporting unit then the Company records an impairment charge equal to the difference, provided that the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit.
The cost of acquired intangible assets with a finite life is amortized using a method of amortization that reflects the pattern of intangible assets' expected contributions to future cash flows. If that
pattern cannot be reliably determined, the straight-line method is used. The amortization periods range from 3 to 5 years for software and from 5 to 20 years for customer-, technology- and marketing-related intangibles. Intangible assets with a finite life are tested for impairment upon the occurrence of certain triggering events.
When developing software for internal use, costs incurred in the application development stage until the software is substantially complete are capitalized and are amortized on a straight-line basis over the estimated useful life of the software, typically ranging from 3 to 5 years.
The Company uses derivative financial instruments to manage currency, commodity, interest rate and equity exposures, arising from its global operating, financing and investing activities (see Note 6).
The Company recognizes all derivatives, other than certain derivatives indexed to the Company's own stock, at fair value in the Consolidated Balance Sheets. Derivatives that are not designated as hedging instruments are reported at fair value with derivative gains and losses reported through earnings and classified consistent with the nature of the underlying transaction.
If the derivatives are designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged item attributable to the risk being hedged through earnings (in the case of a fair value hedge) or recognized in "Accumulated other comprehensive loss" until the hedged item is recognized in earnings (in the case of a cash flow hedge). The ineffective portion of a derivative's change in fair value is immediately recognized in earnings consistent with the classification of the hedged item. Where derivative financial instruments have been designated as cash flow hedges of forecasted transactions and such forecasted transactions are no longer probable of occurring, hedge accounting is discontinued and any derivative gain or loss previously included in "Accumulated other comprehensive loss" is reclassified into earnings consistent with the nature of the original forecasted transaction. Gains or losses from derivatives designated as hedging instruments in a fair value hedge are reported through earnings and classified consistent with the nature of the underlying hedged transaction.
Certain commercial contracts may grant rights to the Company or the counterparties, or contain other provisions that are considered to be derivatives. Such embedded derivatives are assessed at inception of the contract and depending on their characteristics, accounted for as separate derivative instruments and shown at their fair value in the Consolidated Balance Sheets with changes in their fair value reported in earnings consistent with the nature of the commercial contract to which they relate.
Derivatives are classified in the Consolidated Statements of Cash Flows in the same section as the underlying item. Cash flows from the settlement of undesignated derivatives used to manage the risks of different underlying items on a net basis are classified within "Net cash provided by operating activities", as the underlying items are primarily operational in nature. Other cash flows on the settlement of derivatives are recorded within "Net cash used in investing activities".
The Company leases primarily real estate, vehicles and machinery.
In January 2019, the Company adopted a new lease accounting standard. Prior to the adoption of the new accounting standard, lease transactions where substantially all risks and rewards incident to ownership were transferred from the lessor to the lessee were accounted for as capital leases. All other leases were accounted for as operating leases. The periodic rent expense for operating leases was recorded on a straight-line basis over the life of the lease term. Amounts due under capital leases were recorded as a liability. The value of the assets under capital leases were recorded as property, plant and equipment. Depreciation and amortization of assets recorded under capital leases was included in depreciation and amortization expense.
Under the new lease accounting standard, the Company evaluates if a contract contains a lease at inception of the contract. A contract is or contains a lease if it conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. To determine this, the Company assesses whether, throughout the period of use, it has both the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. Leases are classified as either finance or operating, with the classification determining the pattern of expense recognition in the Consolidated Income Statements. Lease expense for operating leases continues to be recorded on a straight-line basis over the lease term. Lease expense for finance leases is separated between amortization of right-of-use assets and lease interest expense.
In many cases, the Company's leases include one or more options to renew, with renewal terms that can extend up to 5 years. The exercise of lease renewal options is at the Company's discretion. Renewal periods are included in the expected lease term if they are reasonably certain of being exercised by the Company. Certain leases also include options to purchase the leased property. None of the Company's lease agreements contain material residual value guarantees or material restrictions or covenants.
Long-term leases (leases with terms greater than 12 months) are recorded in the Consolidated Balance Sheets at the commencement date of the lease based on the present value of the minimum lease payments. The present value of the lease payments is determined by using the interest rate implicit in the lease if available. As most of the Company's leases do not provide an implicit rate, the Company's incremental borrowing rate is used for most leases and is determined for portfolios of leases based on the remaining lease term, currency of the lease, and the internal credit rating of the subsidiary which entered into the lease.
Short-term leases (leases with an initial lease term of 12 months or less and where it is reasonably certain that the property will not be leased for a term greater than 12 months) are not recorded in the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term. The majority of short-term leases relate to real estate and machinery.
Assets under operating lease are included in "Operating lease right-of-use assets". Operating lease liabilities are reported both as current and non-current operating lease liabilities. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.
Assets under finance lease are included in "Property, plant and equipment, net" while finance lease liabilities are included in "Long-term debt" (including "Current maturities of long-term debt" as applicable).
Lease and non-lease components for leases other than real estate are not accounted for separately.
The functional currency for most of the Company's subsidiaries is the applicable local currency. The translation from the applicable functional currencies into the Company's reporting currency is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for income statement accounts using average exchange rates prevailing during the year. The resulting translation adjustments are excluded from the determination of earnings and are recognized in "Accumulated other comprehensive loss" until the subsidiary is sold, substantially liquidated or evaluated for impairment in anticipation of disposal.
Foreign currency exchange gains and losses, such as those resulting from foreign currency denominated receivables or payables, are included in the determination of earnings, except as they relate to intercompany loans that are equity-like in nature with no reasonable expectation of repayment, which are recognized in "Accumulated other comprehensive loss". Exchange gains and losses recognized in earnings are included in "Total revenues", "Total cost of sales", "Selling, general and administrative expenses" or "Interest and other finance expense" consistent with the nature of the underlying item.
The Company uses the asset and liability method to account for deferred taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a deferred tax asset when it determines that it is more likely than not that the deduction will be sustained based upon the deduction's technical merit. Deferred tax assets and liabilities that can be offset against each other are reported on a net basis. A valuation
allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.
Deferred taxes are provided on unredeemed retained earnings of the Company's subsidiaries. However, deferred taxes are not provided on such unredeemed retained earnings to the extent it is expected that the earnings are permanently reinvested. Such earnings may become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.
The Company operates in numerous tax jurisdictions and, as a result, is regularly subject to audit by tax authorities. The Company provides for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred. Contingency provisions are recorded based on the technical merits of the Company's filing position, considering the applicable tax laws and Organisation for Economic Co-operation and Development (OECD) guidelines and are based on its evaluations of the facts and circumstances as of the end of each reporting period.
The Company applies a two-step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. Uncertain tax positions that could be settled against existing loss carryforwards or income tax credits are reported net.
Expenses related to tax penalties are classified in the Consolidated Income Statements as "Provision for taxes" while interest thereon is classified as "Interest and other finance expense". Current income tax relating to certain items is recognized directly in "Accumulated other comprehensive loss" and not in earnings. In general, the Company applies the individual items approach when releasing income tax effects from "Accumulated other comprehensive loss".
Research and development costs not related to specific customer orders are generally expensed as incurred.
Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options, outstanding options and shares granted subject to certain conditions under the Company's share-based payment arrangements. See further discussion related to earnings per share in Note 20 and of potentially dilutive securities in Note 18.
The Company has various share-based payment arrangements for its employees, which are described more fully in Note 18. Such arrangements are accounted for under the fair value method. For awards that are equity-settled, total compensation is measured at grant date, based on the fair value of the award at that date, and recorded in earnings over the period the employees are required to render service. For awards that are cash-settled, compensation is initially measured at grant date and subsequently remeasured at each reporting period, based on the fair value and vesting percentage of the award at each of those dates, with changes in the liability recorded in earnings.
The Company uses fair value measurement principles to record certain financial assets and liabilities on a recurring basis and, when necessary, to record certain non-financial assets at fair value on a non-recurring basis, as well as to determine fair value disclosures for certain financial instruments carried at amortized cost in the financial statements. Financial assets and liabilities recorded at fair value on a recurring basis include foreign currency, commodity and interest rate derivatives, as well as cash-settled call options and available-for-sale debt and equity securities. Non-financial assets recorded at fair value on a non-recurring basis include long-lived assets that are reduced to their estimated fair value due to impairments.
Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation techniques including the market approach (using observable market data for identical or similar assets and liabilities), the income approach (discounted cash flow models) and the cost approach (using costs a market participant would incur to develop a comparable asset). Inputs used to determine the fair value of assets and liabilities are defined by a three-level hierarchy, depending on the nature of those inputs. The Company has categorized its financial assets and liabilities and non-financial assets 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.
The levels of the fair value hierarchy are as follows:
Valuation inputs consist of quoted prices in an active market for identical assets or liabilities (observable quoted prices). Assets and liabilities valued using Level 1 inputs include exchange-traded equity securities, listed derivatives which are actively traded such as commodity futures, interest rate futures and certain actively traded debt securities.
Valuation inputs consist of observable inputs (other than Level 1 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 valued or disclosed using Level 2 inputs include investments in certain funds, reverse repurchase agreements, certain debt securities that are not actively traded, interest rate swaps, commodity swaps, cash-settled call options, forward foreign exchange contracts, foreign exchange swaps and forward rate agreements, time deposits, as well as financing receivables and debt.
Valuation inputs are based on the Company's assumptions of relevant market data (unobservable input).
Investments in private equity, real estate and collective funds held within the Company's pension plans are generally valued using the net asset value (NAV) per share as a practical expedient for fair value provided certain criteria are met. The NAVs are determined based on the fair values of the underlying investments in the funds. These assets are not classified in the fair value hierarchy but are separately disclosed.
Whenever quoted prices involve bid-ask spreads, the Company ordinarily determines fair values based on mid-market quotes. However, for the purpose of determining the fair value of cash-settled call options serving as hedges of the Company's management incentive plan (MIP), bid prices are used.
When determining fair values based on quoted prices in an active market, the Company considers if the level of transaction activity for the financial instrument has significantly decreased, or would not be considered orderly. In such cases, the resulting changes in valuation techniques would be disclosed. If the market is considered disorderly or if quoted prices are not available, the Company is required to use another valuation technique, such as an income approach.
Disclosures about the Company's fair value measurements of assets and liabilities are included in Note 7.
The Company is subject to proceedings, litigation or threatened litigation and other claims and inquiries, related to environmental, labor, product, regulatory, tax (other than income tax) and other matters, and is required to assess the likelihood of any adverse judgments or outcomes to these
matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution.
The Company records a provision for its contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an undiscounted basis using the Company's best estimate of the amount of loss incurred or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, the Company may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, the Company records such amounts only when it is probable that they will be collected.
The Company provides for anticipated costs for warranties when it recognizes revenues on the related products or contracts. Warranty costs include calculated costs arising from imperfections in design, material and workmanship in the Company's products. The Company makes individual assessments on contracts with risks resulting from order-specific conditions or guarantees and assessments on an overall, statistical basis for similar products sold in larger quantities.
The Company may have legal obligations to perform environmental clean-up activities related to land and buildings as a result of the normal operations of its business. In some cases, the timing or the method of settlement, or both, are conditional upon a future event that may or may not be within the control of the Company, but the underlying obligation itself is unconditional and certain. The Company recognizes a provision for these obligations when it is probable that a liability for the clean-up activity has been incurred and a reasonable estimate of its fair value can be made. In some cases, a portion of the costs expected to be incurred to settle these matters may be recoverable. An asset is recorded when it is probable that such amounts are recoverable. Provisions for environmental obligations are not discounted to their present value when the timing of payments cannot be reasonably estimated.
The Company has a number of defined benefit pension and other postretirement plans. The Company recognizes an asset for such a plan's overfunded status or a liability for such a plan's underfunded status in its Consolidated Balance Sheets. Additionally, the Company measures such a plan's assets and obligations that determine its funded status as of the end of the year and recognizes the changes in the funded status in the year in which the changes occur. Those changes are reported in "Accumulated other comprehensive loss".
The Company uses actuarial valuations to determine its pension and postretirement benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates and expected return on plan assets. Current market conditions are considered in selecting these assumptions.
The Company's various pension plan assets are assigned to their respective levels in the fair value hierarchy in accordance with the valuation principles described in the "Fair value measures" section above.
See Note 17 for further discussion of the Company's employee benefit plans.
The Company accounts for assets acquired and liabilities assumed in business combinations using the acquisition method and records these at their respective fair values. Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in income.
Identifiable intangibles consist of intellectual property such as trademarks and trade names, customer relationships, patented and unpatented technology, in-process research and development, order backlog and capitalized software; these are amortized over their estimated useful lives. Such intangibles are subsequently subject to evaluation for potential impairment if events or circumstances indicate the carrying amount may not be recoverable. See "Goodwill and other intangible assets" above. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred.
Upon gaining control of an entity in which an equity method or cost basis investment was held by the Company, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in income.
Deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax base of assets and liabilities as well as uncertain tax positions and valuation allowances on acquired deferred tax assets assumed in connection with a business combination are initially estimated as of the acquisition date based on facts and circumstances that existed at the acquisition date. These estimates are subject to change within the measurement period (a period of up to 12 months after the acquisition date during which the acquirer may adjust the provisional acquisition amounts) with any adjustments to the preliminary estimates being recorded to goodwill. Changes in deferred taxes, uncertain tax positions and valuation allowances on acquired deferred tax assets that occur after the measurement period are recognized in income.
In January 2019, the Company adopted a new accounting standard that requires lessees to recognize lease assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12 months with several practical expedients. The new accounting standard continues to classify leases as either finance or operating, with the classification determining the pattern of expense recognition in the income statement. It also requires additional disclosures about the Company's leasing activities. The Company has elected to not recognize lease assets and lease liabilities for leases with terms of less than 12 months and to not separate lease and non-lease components for leases other than real estate.
The Company has adopted the standard on a modified retrospective basis and has therefore recorded a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. It has elected to apply the package of practical expedients which permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. While the adoption of this standard only had an insignificant impact on the Company's results of operations and cash flows, total assets and total liabilities increased by \$1,344 million and \$1,360 million, respectively, of which \$148 million and \$153 million, respectively, relate to assets and liabilities held for sale. Comparable information has not been restated to reflect the adoption of this new standard and continues to be measured and reported under the accounting standard in effect for those periods presented.
In January 2019, the Company adopted an accounting standard update which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. This update was applied on a modified retrospective basis for cash flow and net investment hedges and prospectively for the amended presentation and disclosure guidance but did not have a significant impact on the consolidated financial statements.
In January 2019, the Company adopted an accounting standard update which allows a reclassification of the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. The updated guidance was applied in the period of adoption and resulted in a reclassification of \$36 million from Accumulated other comprehensive loss to retained earnings.
In June 2016, an accounting standard update was issued which replaces the existing incurred loss impairment methodology for most financial assets with a new "current expected credit loss" model. Additional related updates with targeted improvements and clarifications were issued subsequently. The new model will result in the immediate recognition of the estimated credit losses expected to occur over the remaining life of financial assets such as trade and other receivables, held-to-maturity debt securities, loans and other instruments. Measurement of expected credit losses will be based on
historical experience, current conditions, and reasonable and supportable forecasts. The update also requires additional disclosures related to estimates and judgments used to measure credit losses. Credit losses relating to available-for-sale debt securities will be measured in a manner similar to current GAAP, except that the losses will be recorded through an allowance for credit losses rather than as a direct write-down of the security.
This update is effective for the Company for annual and interim periods beginning January 1, 2020. For financial assets carried at amortized cost a cumulative-effect adjustment for the changes in the allowances for credit losses will be recognized in retained earnings on the consolidated balance sheet as of January 1, 2020. The Company does not expect the update to have a significant impact on its consolidated financial statements.
In August 2018, an accounting standard update was issued which modifies the disclosure requirements for fair value measurements. The update eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and 2 of the fair value hierarchy, the timing of transfers between levels and the Level 3 valuation process, while expanding the Level 3 disclosures to include the range and weighted average used to develop significant unobservable inputs and the changes in unrealized gains and losses on recurring fair value measurements. The changes and modifications to the Level 3 disclosures are to be applied prospectively, while all other amendments are to be applied retrospectively. The Company will adopt this update as of January 1, 2020, and does not believe that this update will have a significant impact on its consolidated financial statements.
In December 2019, an accounting standard update was issued which simplifies the accounting for income taxes by removing certain exceptions to the general principles in this topic. The amendments also improve consistent application of existing guidance by clarifying certain aspects. This update is effective for the Company for annual and interim periods beginning January 1, 2021, with early adoption in any interim period permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company is currently evaluating the impact of this update on its consolidated financial statements.
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In December 2018, the Company announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi Ltd. (Hitachi) valuing the business at \$11 billion. The business also includes certain real estate properties which were previously reported within Corporate and Other as the Company primarily manages real estate assets centrally as corporate assets. As a result, this business, along with the related real estate assets previously included in Corporate and Other, have been reported as discontinued operations. The divestment is expected to be completed at the end of the second quarter of 2020, following the receipt of customary regulatory approvals as well as the completion of certain legal entity reorganizations expected to be completed before the sale.
As this planned divestment represents a strategic shift that will have a major effect on the Company's operations and financial results, the results of operations for this business have been presented as discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented. In addition, amounts relating to stranded corporate costs have been separately disclosed as a component of Corporate and Other (see Note 23). Stranded costs represent overhead and other management costs which were previously included in the measure of segment profit (Operational EBITA) for the former Power Grids operating segment but are not directly attributable to the discontinued operation and thus do not qualify to be recorded as part of income from discontinued operations.
Operating results of the discontinued operations are summarized as follows:
| (\$ millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Total revenues | 9,037 | 9,698 | 10,028 |
| Total cost of sales | (6,983) | (7,378) | (7,501) |
| Gross profit | 2,054 | 2,320 | 2,527 |
| Expenses | (1,394) | (1,326) | (1,376) |
| Income from operations | 660 | 994 | 1,152 |
| Net interest and other finance expense | (61) | (55) | (42) |
| Non-operational pension (cost) credit | 5 | 12 | 9 |
| Income from discontinued operations before taxes | 605 | 951 | 1,119 |
| Provision for taxes | (167) | (228) | (273) |
| Income from discontinued operations, net of tax | 438 | 723 | 846 |
Of the total Income from discontinued operations before taxes in the table above, \$566 million, \$874 million and \$1,034 million in 2019, 2018 and 2017, respectively, are attributable to the Company, while the remainder is attributable to noncontrolling interests.
Income from discontinued operations before taxes excludes the stranded costs previously allocated to the Power Grids operating segment. As a result, \$225 million, \$297 million and \$286 million, for 2019, 2018 and 2017, respectively, of allocated overhead and other management costs which were previously included in the measure of segment profit for the Power Grids operating segment are now reported as part of Corporate and Other. In the table above, Net interest and other finance expense in 2019, 2018 and 2017 includes \$44 million, \$43 million and \$33 million, respectively, of interest expense which has been recorded on an allocated basis in accordance with the Company's accounting policy election. In addition, as required by U.S.GAAP, subsequent to December 17, 2018, the Company has not recorded depreciation or amortization on the property, plant and equipment and intangible assets reported as discontinued operations. In 2018 and 2017, respectively, a total of \$258 million and \$265 million of depreciation and amortization expense was recorded for such assets. In 2019 and 2018, Income from discontinued operations before taxes includes \$28 million and \$18 million, respectively, for costs incurred to execute the transaction.
Included in the reported Total revenues of the Company for 2019, 2018 and 2017 are revenues for sales from the Company's operating segments to the Power Grids business of \$213 million, \$243 million and \$263 million, respectively, which represent intercompany transactions that, prior to Power Grids being classified as a discontinued operation, were eliminated in the Company's Consolidated Financial Statements (see Note 23).
| The major components of the assets and liabilities which are classified as held for sale and in |
|---|
| discontinued operations in the Company's Consolidated Balance Sheets are summarized as follows: |
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Receivables, net | 2,541 | 2,377 |
| Contract assets | 1,243 | 1,236 |
| Inventories, net | 1,667 | 1,457 |
| Property, plant and equipment, net | 1,754 | — |
| Goodwill | 1,631 | — |
| Other current assets | 1,004 | 94 |
| Current assets held for sale and in discontinued operations | 9,840 | 5,164 |
| Property, plant and equipment, net | — | 1,477 |
| Goodwill | — | 1,620 |
| Other non-current assets | — | 330 |
| Non-current assets held for sale and in discontinued operations | — | 3,427 |
| Accounts payable, trade | 1,722 | 1,732 |
| Contract liabilities | 1,121 | 998 |
| Pension and other employee benefits | 419 | — |
| Other current liabilities | 1,984 | 1,455 |
| Current liabilities held for sale and in discontinued operations | 5,246 | 4,185 |
| Pension and other employee benefits | — | 268 |
| Other non-current liabilities | — | 161 |
| Non-current liabilities held for sale and in discontinued operations | — | 429 |
The Company classifies its long-lived assets or disposal groups to be sold as held for sale in the period in which all of the held for sale criteria are met. The Company initially measures a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any resulting loss is recognized in the period in which the held for sale criteria are met, while gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. The Company assesses the fair value of a long-lived asset or disposal group less any costs to sell at each reporting period and until the asset or disposal group is no longer classified as held for sale.
During 2019, the Company reached an agreement to sell its solar inverters business to FIMER S.p.A. for no consideration. Under the agreement the Company is obligated to transfer cash on the closing date and make additional cash payments to the purchaser through 2025. At December 31, 2019, a total of EUR 266 million (\$299 million) is estimated to be due to the buyer. As a result, in 2019, the Company recorded a loss, of \$421 million in "Other income (expense), net", representing the excess of the carrying value over the estimated fair value of this business. The carrying value at December 31, 2019, includes a loss arising from the cumulative translation adjustment of \$99 million.
The fair value is based on the estimated current market values using Level 3 inputs, considering the agreed-upon sale terms with the buyer. The solar inverters business, which includes the solar inverter business acquired as part of the Power-One acquisition in 2013, is part of the Company's Electrification operating segment.
The estimated loss is based on current exchange rates and net assets of the business. Any changes to these factors through to the closing date of the transaction will result in adjustments to the loss recognized on the planned sale.
The divestment is expected to be completed in the first quarter of 2020.
As this planned divestment does not qualify as a discontinued operation, the results of operations for this business are included in the Company's continuing operations for all periods presented. The assets and liabilities of this business are shown as assets and liabilities held for sale in the Company's Consolidated Balance Sheet at December 31, 2019. The carrying amounts of the major classes of assets and liabilities held for sale relating to this planned divestment are as follows:
| December 31, (\$ in millions) | 2019 |
|---|---|
| Assets | |
| Receivables, net | 70 |
| Inventories, net | 127 |
| Property, plant and equipment, net | 69 |
| Other intangible assets, net | 27 |
| Other assets | 26 |
| Valuation allowance on assets held for sale | (319) |
| Current assets held for sale | — |
| Liabilities | |
| Accounts payable, trade | 86 |
| Contract liabilities | 59 |
| Provisions for warranties | 108 |
| Other liabilities | 49 |
| Fair value adjustment on disposal group | 102 |
| Current liabilities held for sale | 404 |
Including the above loss of \$421 million in 2019, Income from continuing operations before taxes includes net losses of \$490 million, from the solar inverters business. In 2018, net losses of \$94 million from this business were included in Income from continuing operations before taxes.
Changes in presentation and disclosure relating to the adoption of new accounting pronouncements Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost In January 2018, the Company adopted an accounting standard update which changes how employers that sponsor defined benefit pension plans and other postretirement plans present net periodic benefit cost in the income statement. As a result, the Company now presents the total Non-operational pension cost/credit as a total outside of income from operations. The components of Non-operational pension cost/credit are summarized in Note 17. The amounts disclosed for 2017 were previously included as a component of income from operations.
—
Acquisitions were as follows:
| (\$ in millions, except number of acquired businesses) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Purchase price for acquisitions (net of cash acquired)(1) | — | 2,638 | 1,992 |
| Aggregate excess of purchase price over fair value of net assets acquired(2) | 92 | 1,472 | 1,267 |
| Number of acquired businesses | — | 3 | 4 |
(1) Excluding changes in cost- and equity-accounted companies.
(2) Recorded as goodwill (see Note 11). Includes adjustments of \$92 million in 2019 arising during the measurement period of acquisitions, primarily reflecting changes in the valuation of net working capital, deferred tax liabilities and intangible assets acquired.
In the table above, the "Purchase price for acquisitions" and "Aggregate excess of purchase price over fair value of net assets acquired" amounts for 2018, relate primarily to the acquisition of GE Industrial Solutions (GEIS), and for 2017, relate primarily to the acquisition of Bernecker + Rainer Industrie-Elektronik GmbH (B&R).
Acquisitions of controlling interests have been accounted for under the acquisition method and have been included in the Company's Consolidated Financial Statements since the date of acquisition.
On June 30, 2018, the Company acquired through numerous share and asset purchases substantially all the assets, liabilities and business activities of GEIS, General Electric's global electrification solutions business. GEIS, headquartered in Atlanta, United States, provides technologies that distribute and control electricity and support the commercial, data center, health care, mining, renewable energy, oil and gas, water and telecommunications sectors. The resulting cash outflows for the Company amounted to \$2,622 million (net of cash acquired of \$192 million). The acquisition strengthens the Company's global position in electrification and expands its access to the North American market through strong customer relationships, a large installed base and extensive distribution networks. Consequently, the goodwill acquired represents expected operating synergies and cost savings as well as intangible assets that are not separable such as employee know-how and expertise.
While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the purchase price allocation for acquisitions is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the acquired assets and liabilities becomes available. The purchase price allocation relating to the GEIS acquisition was finalized during the second quarter of 2019 and resulted in \$92 million of net measurement period adjustments, increasing goodwill, primarily related to changes in the valuation of net working capital, deferred tax liabilities and intangible assets acquired.
In addition, in November 2019, the Company recognized a gain of \$92 million relating to the receipt of cash from General Electric for a favorable resolution of an uncertainty with respect to the price paid to acquire GEIS. This occurred after the end of the measurement period and as a result, the Company recorded a gain in "Other income (expense), net".
On July 6, 2017, the Company acquired the shares of B&R, a worldwide provider of product- and software-based, open-architecture solutions for machine and factory automation. This acquisition closes a gap in the Company's industrial automation portfolio and consequently the goodwill acquired represents the future benefits associated with product portfolio expansion.
The final allocation of purchase consideration for GEIS and the aggregate allocation of the purchase consideration for business acquisitions in 2017, was as follows:
| GEIS | 2017 | |||
|---|---|---|---|---|
| (\$ in millions) | Allocated amounts |
Weighted average useful life |
Allocated amounts(1) |
Weighted average useful life |
| Technology | 92 | 7 years | 412 | 7 years |
| Customer relationships | 178 | 12 years | 264 | 20 years |
| Trade names | 135 | 13 years | 61 | 10 years |
| Supply agreement | 32 | 13 years | — | |
| Intangible assets | 437 | 737 | ||
| Property, plant and equipment | 373 | 131 | ||
| Debt acquired | — | (50) | ||
| Deferred tax liabilities | (45) | (249) | ||
| Inventories | 405 | 176 | ||
| Other assets and liabilities, net(2) | (19) | (20) | ||
| Goodwill(3) | 1,534 | 1,267 | ||
| Noncontrolling interest | (63) | — | ||
| Total consideration (net of cash acquired)(4) | 2,622 | 1,992 |
(1) Excludes measurement period adjustments related to prior year acquisitions.
(2) Gross receivables from the GEIS acquisition totaled \$658 million; the fair value of which was \$624 million after adjusting for contractual cash flows not expected to be collected.
(3) The amount of goodwill which is tax deductible is \$769 million.
(4) Primarily relates to the acquisition of B&R in 2017. Cash acquired in the GEIS acquisition totaled \$192 million.
The Company's Consolidated Income Statement for 2018, includes total revenues of \$1,317 million and net income of \$1 million in respect of GEIS since the date of acquisition.
The unaudited pro forma financial information in the table below summarizes the combined pro forma results of the Company and GEIS for 2018 and 2017, as if GEIS had been acquired on January 1, 2017.
| (\$ in millions) | 2018 | 2017 |
|---|---|---|
| Total revenues | 28,936 | 27,881 |
| Income from continuing operations, net of tax | 1,622 | 1,631 |
The pro forma results are for information purposes only and do not include any anticipated cost synergies or other effects of the planned integration of GEIS. Accordingly, such pro forma amounts are not necessarily indicative of the results that would have occurred had the acquisition been completed on the date indicated, nor are they indicative of the future operating results of the combined company.
The unaudited pro forma results above include certain adjustments related to the GEIS acquisition. The table below summarizes the adjustments necessary to present the pro forma financial information of the combined entity as if GEIS had been acquired on January 1, 2017.
| (\$ in millions) | 2018 | 2017 |
|---|---|---|
| Impact on cost of sales from additional amortization of intangible assets | (10) | (20) |
| Impact on cost of sales from fair valuing acquired inventory | 26 | (26) |
| Impact on cost of sales from additional depreciation of property, plant and equipment | (4) | (8) |
| Impact on selling, general and administrative expenses from additional amortization of intangible assets |
(5) | (12) |
| Impact on selling, general and administrative expenses from acquisition-related costs | 44 | 20 |
| Impact on interest expense from financing costs | (15) | (62) |
| Taxation adjustments | (5) | 33 |
| Total pro forma adjustments | 31 | (75) |
In 2019, the Company recorded net gains (including transactions costs) of \$55 million, primarily due to the divestment of two businesses in China.
In 2017, the Company received proceeds (net of transaction costs and cash disposed) of \$605 million, relating to divestments of consolidated businesses and recorded net gains of \$252 million in "Other income (expense), net" on the sale of such businesses. These are primarily due to the divestment of the Company's high-voltage cables and cable accessories businesses (the Cables business) in March 2017 and the divestment of the Oil & Gas EPC business in December 2017. The assets and liabilities of the Cables business were classified as held for sale in the Company's Consolidated Balance Sheets at December 31, 2016.
The Company has retained certain obligations of the Cables business and thus the Company remains directly or indirectly liable for these liabilities which existed at the date of the divestment. Subsequent to the divestment, the Company recorded a loss of \$94 million in 2017 for changes in the amounts recorded for these obligations. In addition, the Company has provided certain performance guarantees to third parties which guarantee the performance of the buyer under existing contracts with customers as well as for certain capital expenditures of the divested business (see Note 15).
In 2018, there were no significant amounts recognized from divestments of consolidated businesses.
Cash and equivalents and marketable securities and short-term investments consisted of the following:
| December 31, 2019 (\$ in millions) | Cost basis | Gross unrealized gains |
Gross unrealized losses |
Fair value | Cash and equivalents |
Marketable securities and short term in vestments |
|---|---|---|---|---|---|---|
| Changes in fair value recorded in net income | ||||||
| Cash | 2,111 | 2,111 | 2,111 | |||
| Time deposits | 1,433 | 1,433 | 1,433 | |||
| Equity securities | 294 | 10 | 304 | 304 | ||
| 3,838 | 10 | — | 3,848 | 3,544 | 304 | |
| Changes in fair value recorded in other comprehensive income | ||||||
| Debt securities available-for-sale: | ||||||
| – U.S. government obligations | 191 | 7 | (1) | 197 | 197 | |
| – Corporate | 61 | 4 | 65 | 65 | ||
| 252 | 11 | (1) | 262 | — | 262 | |
| Total | 4,090 | 21 | (1) | 4,110 | 3,544 | 566 |
| December 31, 2018 (\$ in millions) | Cost basis | Gross unrealized gains |
Gross unrealized losses |
Fair value | Cash and equivalents |
Marketable securities and short term in vestments |
|---|---|---|---|---|---|---|
| Changes in fair value recorded in net income | ||||||
| Cash | 1,983 | 1,983 | 1,983 | |||
| Time deposits | 1,463 | 1,463 | 1,462 | 1 | ||
| Other short-term investments | 206 | 206 | 206 | |||
| Equity securities | 206 | (3) | 203 | 203 | ||
| 3,858 | — | (3) | 3,855 | 3,445 | 410 | |
| Changes in fair value recorded in other comprehensive income | ||||||
| Debt securities available-for-sale: | ||||||
| – U.S. government obligations | 217 | (3) | 214 | 214 | ||
| – Corporate | 90 | (2) | 88 | 88 | ||
| 307 | — | (5) | 302 | — | 302 | |
| Total | 4,165 | — | (8) | 4,157 | 3,445 | 712 |
Included in Other short-term investments at December 31, 2018, are receivables of \$206 million, representing reverse repurchase agreements.
Contractual maturities of debt securities consisted of the following:
| December 31, 2019 (\$ in millions) | Available-for-sale | |
|---|---|---|
| Cost basis | Fair value | |
| One to five years | 125 | 126 |
| Six to ten years | 74 | 77 |
| Due after ten years | 53 | 59 |
| Total | 252 | 262 |
At December 31, 2019 and 2018, the Company pledged \$66 million and \$68 million, respectively, of available-for-sale marketable securities as collateral for issued letters of credit and other security arrangements.
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.
Due to the global nature of the Company's operations, many of its 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. For forecasted foreign currency denominated sales of standard products and the related foreign currency denominated purchases, the Company's policy is to hedge up to a maximum of 100 percent of the forecasted foreign currency denominated exposures, depending on the length of the forecasted exposures. Forecasted exposures greater than 12 months are not hedged. 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. In addition, within its treasury operations, the Company primarily uses foreign exchange swaps and forward foreign exchange contracts to manage the currency and timing mismatches arising in its liquidity management activities.
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 the price risk of commodities, the Company's policies require that its subsidiaries hedge the commodity price risk exposures from binding contracts, as well as at least 50 percent (up to a maximum of 100 percent) of the forecasted commodity exposure over the next 12 months or longer (up to a maximum of 18 months). Primarily swap contracts are used to manage the associated price risks of commodities.
The Company has issued bonds at fixed rates. Interest rate swaps are used to manage the interest rate risk associated with certain debt and generally such swaps are designated as fair value hedges. In addition, from time to time, the Company uses instruments such as interest rate swaps, interest rate futures, 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.
The Company is exposed to fluctuations in the fair value of its warrant appreciation rights (WARs) issued under its MIP (Management Incentive Plan) (see Note 18). 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, indexed to the shares of the Company, 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.
The gross notional amounts of outstanding foreign exchange and interest rate derivatives (whether designated as hedges or not) were as follows:
| Type of derivative (\$ in millions) | Total notional amounts at December 31, |
|||
|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||
| Foreign exchange contracts | 15,015 | 13,612 | 16,261 | |
| Embedded foreign exchange derivatives | 924 | 733 | 899 | |
| Interest rate contracts | 5,188 | 3,300 | 5,706 |
The Company uses derivatives to hedge its direct or indirect exposure to the movement in the prices of commodities which are primarily copper, silver and aluminum. The following table shows the notional amounts of outstanding derivatives (whether designated as hedges or not), on a net basis, to reflect the Company's requirements for these commodities:
| Total notional amounts at December 31, |
||||
|---|---|---|---|---|
| Type of derivative | Unit | 2019 | 2018 | 2017 |
| Copper swaps | metric tonnes | 42,494 | 46,143 | 28,976 |
| Silver swaps | ounces | 2,508,770 | 2,861,294 | 1,966,729 |
| Aluminum swaps | metric tonnes | 8,388 | 9,491 | 1,869 |
At December 31, 2019, 2018 and 2017, the Company held 40 million, 41 million and 37 million cash-settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of \$26 million, \$6 million and \$42 million, respectively.
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 December 31, 2019, 2018 and 2017, "Accumulated other comprehensive loss" included net unrealized losses of \$5 million, \$16 million and net unrealized gains of \$12 million, respectively, net of tax, on derivatives designated as cash flow hedges. Of the amount at December 31, 2019, net losses of \$2 million are expected to be reclassified to earnings in 2020. At December 31, 2019, the longest maturity of a derivative classified as a cash flow hedge was 49 months.
In 2019, 2018 and 2017, the amounts of gains or losses, net of tax, reclassified into earnings due to the discontinuance of cash flow hedge accounting and the amount of ineffectiveness in cash flow hedge relationships directly recognized in earnings were not significant.
The pre-tax effects of derivative instruments, designated and qualifying as cash flow hedges, on "Accumulated other comprehensive loss" (OCI) and the Consolidated Income Statements in 2019, 2018 and 2017, were not significant.
To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the 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 of instruments designated as fair value hedges in 2019, 2018 and 2017, was not significant.
The effect of Interest rate contracts, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Gains (losses) recognized in Interest and other finance expense: | |||
| – on derivatives designated as fair value hedges | 38 | (4) | (23) |
| – on hedged item | (38) | 5 | 27 |
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 derivatives not designated in hedging relationships were as follows:
| (\$ in millions) | Gains (losses) recognized in income | ||||
|---|---|---|---|---|---|
| Type of derivative not designated as a hedge | Location | 2019 | 2018 | 2017 | |
| Foreign exchange contracts | Total revenues | (7) | (121) | 92 | |
| Total cost of sales | (64) | 46 | (41) | ||
| SG&A expenses(1) | 2 | 10 | (18) | ||
| Non-order related research and development |
1 | (1) | — | ||
| Interest and other finance expense |
(122) | 40 | 22 | ||
| Embedded foreign exchange contracts | Total revenues | 17 | 58 | 7 | |
| Total cost of sales | (6) | (4) | (2) | ||
| SG&A expenses(1) | — | 2 | 5 | ||
| Commodity contracts | Total cost of sales | 12 | (33) | 31 | |
| Other | Interest and other finance expense | — | 3 | (2) | |
| Total | (167) | — | 94 |
(1) SG&A expenses represent "Selling, general and administrative expenses".
| December 31, 2019 | ||||||
|---|---|---|---|---|---|---|
| Derivative assets | Derivative liabilities | |||||
| (\$ in millions) | Current in "Other current assets" |
Non-current in "Other non-current assets" |
Current in "Other current liabilities" |
Non-current in "Other non-current liabilities" |
||
| Derivatives designated as hedging instruments: | ||||||
| Foreign exchange contracts | — | — | 2 | 6 | ||
| Interest rate contracts | — | 72 | — | — | ||
| Cash-settled call options | 11 | 14 | — | — | ||
| Total | 11 | 86 | 2 | 6 | ||
| Derivatives not designated as hedging instruments: | ||||||
| Foreign exchange contracts | 85 | 14 | 127 | 14 | ||
| Commodity contracts | 17 | — | 2 | — | ||
| Embedded foreign exchange derivatives | 7 | 3 | 12 | 3 | ||
| Total | 109 | 18 | 141 | 17 | ||
| Total fair value | 120 | 104 | 143 | 23 |
| December 31, 2018 | ||||||
|---|---|---|---|---|---|---|
| Derivative assets | Derivative liabilities | |||||
| (\$ in millions) | Current in "Other current assets" |
Non-current in "Other non-current assets" |
Current in "Other current liabilities" |
Non-current in "Other non-current liabilities" |
||
| Derivatives designated as hedging instruments: | ||||||
| Foreign exchange contracts | — | — | 1 | 4 | ||
| Commodity contracts | — | — | 2 | — | ||
| Interest rate contracts | — | 35 | — | 1 | ||
| Cash-settled call options | 3 | 3 | — | — | ||
| Total | 3 | 38 | 3 | 5 | ||
| Derivatives not designated as hedging instruments: | ||||||
| Foreign exchange contracts | 117 | 14 | 160 | 30 | ||
| Commodity contracts | 8 | 1 | 21 | 1 | ||
| Embedded foreign exchange derivatives | 15 | 10 | 8 | 1 | ||
| Total | 140 | 25 | 189 | 32 | ||
| Total fair value | 143 | 63 | 192 | 37 |
Close-out netting agreements provide for the termination, valuation and net settlement of some or all outstanding transactions between two counterparties on the occurrence of one or more pre-defined trigger events.
Although the Company is party to close-out netting agreements with most derivative counterparties, the fair values in the tables above and in the Consolidated Balance Sheets at December 31, 2019 and 2018, have been presented on a gross basis.
The Company's netting agreements and other similar arrangements allow net settlements under certain conditions. At December 31, 2019 and 2018, information related to these offsetting arrangements was as follows:
| December 31, 2019 (\$ in millions) | |||||
|---|---|---|---|---|---|
| Type of agreement or similar arrangement |
Gross amount of recognized assets |
Derivative liabilities eligible for set-off in case of default |
Cash collateral received |
Non-cash collateral received |
Net asset exposure |
| Derivatives | 214 | (102) | — | — | 112 |
| Total | 214 | (102) | — | — | 112 |
| December 31, 2019 (\$ in millions) | |||||
| Type of agreement or similar arrangement |
Gross amount of recognized liabilities |
Derivative liabilities eligible for set-off in case of default |
Cash collateral pledged |
Non-cash collateral pledged |
Net liability exposure |
| Derivatives | 151 | (102) | — | — | 49 |
| Total | 151 | (102) | — | — | 49 |
| December 31, 2018 (\$ in millions) | |||||
| Type of agreement or similar arrangement |
Gross amount of recognized assets |
Derivative liabilities eligible for set-off in case of default |
Cash collateral received |
Non-cash collateral received |
Net asset exposure |
| Derivatives | 181 | (121) | — | — | 60 |
| 206 | — | — | (206) | — | |
| Reverse repurchase agreements | (206) | 60 |
| Type of agreement or similar arrangement |
Gross amount of recognized liabilities |
Derivative liabilities eligible for set-off in case of default |
Cash collateral pledged |
Non-cash collateral pledged |
Net liability exposure |
|---|---|---|---|---|---|
| Derivatives | 220 | (121) | — | — | 99 |
| Total | 220 | (121) | — | — | 99 |
The fair values of financial assets and liabilities measured at fair value on a recurring basis were as follows:
| Total fair | ||||
|---|---|---|---|---|
| December 31, 2019 (\$ in millions) | Level 1 | Level 2 | Level 3 | value |
| Assets | ||||
| Securities in "Marketable securities and short-term investments": | ||||
| Equity securities | — | 304 | — | 304 |
| Debt securities – U.S. government obligations | 197 | — | — | 197 |
| Debt securities – Corporate | — | 65 | — | 65 |
| Derivative assets – current in "Other current assets" | — | 120 | — | 120 |
| Derivative assets – non-current in "Other non-current assets" | — | 104 | — | 104 |
| Total | 197 | 593 | — | 790 |
| Liabilities | ||||
| Derivative liabilities – current in "Other current liabilities" | — | 143 | — | 143 |
| Derivative liabilities – non-current in "Other non-current liabilities" | — | 23 | — | 23 |
| Total | — | 166 | — | 166 |
| Total fair | ||||
|---|---|---|---|---|
| December 31, 2018 (\$ in millions) | Level 1 | Level 2 | Level 3 | value |
| Assets | ||||
| Securities in "Marketable securities and short-term investments": | ||||
| Equity securities | — | 203 | — | 203 |
| Debt securities – U.S. government obligations | 214 | — | — | 214 |
| Debt securities – Corporate | — | 88 | — | 88 |
| Derivative assets – current in "Other current assets" | — | 143 | — | 143 |
| Derivative assets – non-current in "Other non-current assets" | — | 63 | — | 63 |
| Total | 214 | 497 | — | 711 |
| Liabilities | ||||
| Derivative liabilities – current in "Other current liabilities" | — | 192 | — | 192 |
| Derivative liabilities – non-current in "Other non-current liabilities" | — | 37 | — | 37 |
| Total | — | 229 | — | 229 |
During 2019, 2018 and 2017 there have been no reclassifications for any financial assets or liabilities between Level 1 and Level 2.
The Company uses the following methods and assumptions in estimating fair values of financial assets and liabilities measured at fair value on a recurring basis:
In June 2019, the Company adjusted the carrying value of the solar inverters business which is classified as held for sale (see Note 3). The fair value is based on the estimated current market values using Level 3 inputs, considering the agreed-upon sale terms with the buyer. There were no other significant non-recurring fair value measurements during 2019 and 2018.
The fair values of financial instruments carried on a cost basis were as follows:
| Carrying | Total fair | ||||
|---|---|---|---|---|---|
| December 31, 2019 (\$ in millions) | value | Level 1 | Level 2 | Level 3 | value |
| Assets | |||||
| Cash and equivalents (excluding securities with original maturities up to 3 months): |
|||||
| Cash | 2,111 | 2,111 | — | — | 2,111 |
| Time deposits | 1,433 | — | 1,433 | — | 1,433 |
| Other non-current assets: | |||||
| Loans granted | 30 | — | 31 | — | 31 |
| Restricted cash and cash deposits | 37 | 37 | — | — | 37 |
| Liabilities | |||||
| Short-term debt and current maturities of long-term debt (excluding finance lease obligations) |
2,270 | 1,534 | 736 | — | 2,270 |
| Long-term debt (excluding finance lease obligations) | 6,618 | 6,267 | 692 | — | 6,959 |
| Carrying | Total fair | ||||
|---|---|---|---|---|---|
| December 31, 2018 (\$ in millions) | value | Level 1 | Level 2 | Level 3 | value |
| Assets | |||||
| Cash and equivalents (excluding securities with original maturities up to 3 months): |
|||||
| Cash | 1,983 | 1,983 | — | — | 1,983 |
| Time deposits | 1,462 | — | 1,462 | — | 1,462 |
| Marketable securities and short-term investments (excluding securities): |
|||||
| Time deposits | 1 | — | 1 | — | 1 |
| Receivables under reverse repurchase agreements | 206 | — | 206 | — | 206 |
| Other non-current assets: | |||||
| Loans granted | 30 | — | 31 | — | 31 |
| Restricted cash and cash deposits | 39 | 39 | — | — | 39 |
| Liabilities | |||||
| Short-term debt and current maturities of long-term debt | |||||
| (excluding finance lease obligations) | 2,008 | 1,480 | 528 | — | 2,008 |
| Long-term debt (excluding finance lease obligations) | 6,457 | 5,839 | 707 | — | 6,546 |
The Company uses the following methods and assumptions in estimating fair values of financial instruments carried on a cost basis:
• Long-term debt (excluding finance lease obligations): Fair values of bonds are determined using quoted market prices (Level 1 inputs), if available. For bonds without available quoted market prices and other long-term debt, the fair values are determined using a discounted cash flow methodology based upon borrowing rates of similar debt instruments and reflecting appropriate adjustments for non-performance risk (Level 2 inputs).
"Receivables, net" consisted of the following:
| December 31, (\$ in millions) 2019 |
2018 |
|---|---|
| Trade receivables 5,967 |
5,970 |
| Other receivables 695 |
635 |
| Allowance (228) |
(219) |
| Total 6,434 |
6,386 |
"Trade receivables" in the table above includes contractual retention amounts billed to customers of \$151 million and \$176 million at December 31, 2019 and 2018, respectively. Management expects that the substantial majority of related contracts will be completed and the substantial majority of the billed amounts retained by the customer will be collected. Of the retention amounts outstanding at December 31, 2019, 76 percent and 17 percent are expected to be collected in 2020 and 2021, respectively.
"Other receivables" in the table above consists of value added tax, claims, rental deposits and other non-trade receivables.
The reconciliation of changes in the allowance for doubtful accounts is as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Balance at January 1, | 219 | 202 | 202 |
| Additions | 93 | 126 | 61 |
| Deductions | (81) | (93) | (74) |
| Exchange rate differences | (3) | (16) | 13 |
| Balance at December 31, | 228 | 219 | 202 |
The following table provides information about Contract assets and Contract liabilities:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Contract assets | 1,025 | 1,082 | 1,141 |
| Contract liabilities | 1,719 | 1,707 | 1,792 |
Contract assets primarily relate to the Company's right to receive consideration for work completed but for which no invoice has been issued at the reporting date. Contract assets are transferred to receivables when rights to receive payment become unconditional. Management expects that the majority of the amounts will be collected within one year of the respective balance sheet date.
Contract liabilities primarily relate to up-front advances received on orders from customers as well as amounts invoiced to customers in excess of revenues recognized predominantly on long-term projects. Contract liabilities are reduced as work is performed and as revenues are recognized.
The significant changes in the Contract assets and Contract liabilities balances were as follows:
| 2019 | 2018 | ||||
|---|---|---|---|---|---|
| (\$ in millions) | Contract assets |
Contract liabilities |
Contract assets |
Contract liabilities |
|
| Revenue recognized, which was included in the Contract liabilities balance at Jan 1, 2019/2018 |
(1,158) | (879) | |||
| Additions to Contract liabilities - excluding amounts recognized as revenue during the period |
1,255 | 518 | |||
| Receivables recognized that were included in the Contract assets balance at Jan 1, 2019/2018 |
(786) | (633) |
The Company considers its order backlog to represent its unsatisfied performance obligations. At December 31, 2019, the Company had unsatisfied performance obligations totaling \$13,324 million and, of this amount, the Company expects to fulfill approximately 75 percent of the obligations in 2020, approximately 14 percent of the obligations in 2021 and the balance thereafter.
—
"Inventories, net" consisted of the following:
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Raw materials | 1,760 | 1,823 |
| Work in process | 819 | 837 |
| Finished goods | 1,499 | 1,525 |
| Advances to suppliers | 106 | 99 |
| Total | 4,184 | 4,284 |
—
"Property, plant and equipment, net" consisted of the following:
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Land and buildings | 3,568 | 3,573 |
| Machinery and equipment | 5,620 | 5,624 |
| Construction in progress | 500 | 464 |
| 9,688 | 9,661 | |
| Accumulated depreciation | (5,716) | (5,528) |
| Total | 3,972 | 4,133 |
Assets under finance leases included in "Property, plant and equipment, net" were as follows:
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Land and buildings | 142 | 171 |
| Machinery and equipment | 62 | 69 |
| 204 | 240 | |
| Accumulated depreciation | (99) | (122) |
| Total | 105 | 118 |
In 2019, 2018 and 2017 depreciation, including depreciation of assets under finance leases, was \$616 million, \$578 million and \$549 million, respectively. In 2019, 2018 and 2017 there were no significant impairments of property, plant or equipment.
The changes in "Goodwill" below have been recast to reflect the reorganization in 2019 of the Company's operating segments as outlined in Note 23:
| Robotics & | ||||||
|---|---|---|---|---|---|---|
| (\$ in millions) | Electrification | Industrial Automation |
Motion | Discrete Automation |
Corporate and Other |
Total |
| Cost at January 1, 2018 | 2,969 | 1,631 | 2,470 | 2,445 | 39 | 9,554 |
| Accumulated impairment charges | — | — | — | — | (18) | (18) |
| Balance at January 1, 2018 | 2,969 | 1,631 | 2,470 | 2,445 | 21 | 9,536 |
| Goodwill acquired during the year | 1,442 | — | — | 30 | — | 1,472 |
| Goodwill allocated to disposals | (31) | — | — | — | — | (31) |
| Exchange rate differences and other | (104) | (15) | (29) | (65) | — | (213) |
| Balance at December 31, 2018 | 4,276 | 1,616 | 2,441 | 2,410 | 21 | 10,764 |
| Goodwill acquired during the year(1) | 92 | — | — | — | — | 92 |
| Goodwill allocated to disposals | (18) | — | — | — | — | (18) |
| Exchange rate differences and other | 22 | (1) | (5) | (29) | — | (13) |
| Balance at December 31, 2019 | 4,372 | 1,615 | 2,436 | 2,381 | 21 | 10,825 |
(1) Amount consists of adjustments arising during the twelve-month measurement period subsequent to the respective acquisition date (see Note 4).
In 2018, goodwill acquired primarily relates to GEIS, acquired in June 2018, which has been allocated to the Electrification Business.
Intangible assets other than goodwill consisted of the following:
| 2019 | 2018 | ||||||
|---|---|---|---|---|---|---|---|
| December 31, (\$ in millions) | Gross carrying amount |
Accumu lated amor tization |
Net carrying amount |
Gross carrying amount |
Accumu lated amor tization |
Net carrying amount |
|
| Capitalized software for internal use | 790 | (628) | 162 | 779 | (586) | 193 | |
| Capitalized software for sale | 29 | (29) | — | 30 | (30) | — | |
| Intangibles other than software: | |||||||
| Customer-related | 2,513 | (1,005) | 1,508 | 2,609 | (909) | 1,700 | |
| Technology-related | 1,056 | (722) | 334 | 1,131 | (701) | 430 | |
| Marketing-related | 501 | (286) | 215 | 483 | (240) | 243 | |
| Other | 59 | (26) | 33 | 67 | (26) | 41 | |
| Total | 4,948 | (2,696) | 2,252 | 5,099 | (2,492) | 2,607 |
Additions to intangible assets other than goodwill consisted of the following:
| (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Capitalized software for internal use | 42 | 139 |
| Intangibles other than software: | ||
| Customer-related | — | 214 |
| Technology-related | — | 87 |
| Marketing-related | — | 122 |
| Other | — | 34 |
| Total | 42 | 596 |
The additions of \$42 million in 2019 were not related to business combinations. Included in the additions of \$596 million in 2018 were the following intangible assets other than goodwill related to business combinations:
| 2018 | ||
|---|---|---|
| (\$ in millions) | Amount acquired | Weighted-average useful life |
| Capitalized software for internal use | 65 | 2 years |
| Intangibles other than software: | ||
| Customer-related | 214 | 14 years |
| Technology-related | 87 | 7 years |
| Marketing-related | 122 | 13 years |
| Other | 34 | 13 years |
| Total | 522 |
Amortization expense of intangible assets other than goodwill consisted of the following:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Capitalized software for internal use | 74 | 59 | 50 |
| Intangibles other than software | 271 | 279 | 237 |
| Total | 345 | 338 | 287 |
In 2019, 2018 and 2017, impairment charges on intangible assets other than goodwill were not significant.
At December 31, 2019, future amortization expense of intangible assets other than goodwill is estimated to be:
| (\$ in millions) | |
|---|---|
| 2020 | 337 |
| 2021 | 301 |
| 2022 | 253 |
| 2023 | 233 |
| 2024 | 211 |
| Thereafter | 917 |
| Total | 2,252 |
—
The Company's total debt at December 31, 2019 and 2018, amounted to \$9,059 million and \$8,618 million, respectively.
The Company's "Short-term debt and current maturities of long-term debt" consisted of the following:
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Short-term debt | ||
| (weighted-average interest rate of 2.8% and 2.3%, respectively) | 838 | 561 |
| Current maturities of long-term debt | ||
| (weighted-average nominal interest rate of 0.7% and 2.7%, respectively) | 1,449 | 1,470 |
| Total | 2,287 | 2,031 |
Short-term debt primarily represents short-term loans from various banks and issued commercial paper.
At December 31, 2019, the Company had in place two commercial paper programs: a \$2 billion Euro-commercial paper program for the issuance of commercial paper in a variety of currencies, and a \$2 billion commercial paper program for the private placement of U.S. dollar denominated commercial paper in the United States. At December 31, 2018, \$172 million was outstanding under the \$2 billion Euro-commercial paper program. No amount was outstanding under this program at December 31, 2019. At December 31, 2019 and 2018, \$706 million and \$292 million, respectively, was outstanding under the \$2 billion program in the United States.
In addition, in December 2019, the Company replaced its \$2 billion multicurrency revolving credit facility, maturing in 2021, with a new \$2 billion 5-year multicurrency credit facility maturing in 2024. The new credit facility provides an option in 2020 and 2021 to extend the maturity to 2025 and 2026, respectively. The facility is for general corporate purposes. Interest costs on drawings under the facility are LIBOR or EURIBOR (depending on the currency of the drawings) plus a margin of 0.175 percent, while commitment fees (payable on the unused portion of the facility) amount to 35 percent of the margin, which represents commitment fees of 0.06125 percent per annum. Utilization fees, payable on drawings, amount to 0.075 percent per annum on drawings up to one-third of the facility, 0.15 percent per annum on drawings in excess of one-third but less than or equal to two-thirds of the facility, or 0.30 percent per annum on drawings over two-thirds of the facility. The facility contains cross-default clauses whereby an event of default would occur if the Company were to default on indebtedness as defined in the facility, at or above a specified threshold. No amount was drawn at December 31, 2019 and 2018, under either the new or the old facility. The old facility was terminated in December 2019.
The Company raises long-term debt in various currencies, maturities and on various interest rate terms. For certain of its debt obligations, the Company utilizes derivative instruments to modify its interest rate exposure. In particular, the Company uses interest rate swaps to effectively convert certain fixed-rate long-term debt into floating rate obligations. The carrying value of debt, designated as being hedged by fair value hedges, is adjusted for changes in the fair value of the risk component of the debt being hedged.
The following table summarizes the Company's long-term debt considering the effect of interest rate swaps. Consequently, a fixed-rate debt subject to a fixed-to-floating interest rate swap is included as a floating rate debt in the table below:
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| December 31, (\$ in millions, except % data) |
Balance | Nominal rate |
Effective rate |
Balance | Nominal rate |
Effective rate |
| Floating rate | 2,221 | 1.5% | 1.1% | 3,106 | 1.7% | 1.1% |
| Fixed rate | 6,000 | 2.8% | 2.4% | 4,951 | 3.6% | 3.6% |
| 8,221 | 8,057 | |||||
| Current portion of long-term debt | (1,449) | 0.7% | 0.6% | (1,470) | 2.7% | 2.7% |
| Total | 6,772 | 6,587 |
At December 31, 2019, the principal amounts of long-term debt repayable (excluding finance lease obligations) at maturity were as follows:
| (\$ in millions) | |
|---|---|
| 2020 | 1,433 |
| 2021 | 1,273 |
| 2022 | 1,259 |
| 2023 | 1,237 |
| 2024 | 1,136 |
| Thereafter | 1,681 |
| Total | 8,019 |
Details of the Company's outstanding bonds were as follows:
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Nominal | Carrying | Nominal | Carrying | |||
| December 31, (in millions) | outstanding | value(1) | outstanding | value(1) | ||
| Bonds: | ||||||
| 2.625% EUR Instruments, due 2019 | EUR | 1,250 | \$ 1,431 |
|||
| 2.8% USD Notes, due 2020 | USD | 300 | \$ 300 |
USD | 300 | \$ 299 |
| Floating EUR Notes, due 2020 | EUR | 1,000 | \$ 1,122 |
|||
| 4.0% USD Notes, due 2021 | USD | 650 | \$ 648 |
USD | 650 | \$ 646 |
| 2.25% CHF Bonds, due 2021 | CHF | 350 | \$ 373 |
CHF | 350 | \$ 373 |
| 5.625% USD Notes, due 2021 | USD | 250 | \$ 260 |
USD | 250 | \$ 265 |
| 2.875% USD Notes, due 2022 | USD | 1,250 | \$ 1,267 |
USD | 1,250 | \$ 1,242 |
| 3.375% USD Notes, due 2023 | USD | 450 | \$ 448 |
USD | 450 | \$ 448 |
| 0.625% EUR Instruments, due 2023 | EUR | 700 | \$ 799 |
EUR | 700 | \$ 807 |
| 0.75% EUR Instruments, due 2024 | EUR | 750 | \$ 859 |
EUR | 750 | \$ 862 |
| 0.3% CHF Notes, due 2024 | CHF | 280 | \$ 288 |
|||
| 3.8% USD Notes, due 2028 | USD | 750 | \$ 746 |
USD | 750 | \$ 746 |
| 1.0% CHF Notes, due 2029 | CHF | 170 | \$ 175 |
|||
| 4.375% USD Notes, due 2042 | USD | 750 | \$ 724 |
USD | 750 | \$ 723 |
| Total | \$ 8,009 |
\$ 7,842 |
(1) USD carrying values include unamortized debt issuance costs, bond discounts or premiums, as well as adjustments for fair value hedge accounting, where appropriate.
During 2019, the Company repaid at maturity its 2.625% EUR Instruments. The 2.625% EUR Instruments paid fixed rate interest annually in arrears.
The 2.8% USD Notes, due 2020, pay interest semi-annually in arrears at a fixed rate of 2.8 percent per annum.
In April 2019, the Company issued 18-month floating rate notes with an aggregate principal of EUR 1,000 million, due in October 2020. These notes pay interest quarterly in arrears at a variable interest rate of 35 basis points above the 3-month EURIBOR, with a floor rate of zero. The aggregate net proceeds amounted to EUR 1,002 million (equivalent to approximately \$1,129 million on date of issuance).
The 4.0% USD Notes, due 2021, pay interest semi-annually in arrears, at a fixed annual rate of 4.0 percent. The Company may redeem these notes prior to maturity, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date.
The 2.25% CHF Bonds, due 2021, pay interest annually in arrears, at a fixed annual rate of 2.25 percent. The Company has the option to redeem the bonds prior to maturity, in whole, at par plus accrued interest, if 85 percent of the aggregate principal amount of the bonds has been redeemed or purchased and cancelled. The Company entered into interest rate swaps to hedge its interest obligations on these bonds. After considering the impact of such swaps, these bonds effectively became floating rate Swiss franc obligations and consequently have been shown as floating rate debt in the table of long-term debt above.
The 5.625% USD Notes, due 2021, pay interest semi-annually in arrears at a fixed annual rate of 5.625 percent. The Company has the option to redeem the notes prior to maturity at the greater of (i) 100 percent of the principal amount of the notes to be redeemed, and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date.
The 2.875% USD Notes, due 2022, pay interest semi-annually in arrears at a fixed annual rate of 2.875 percent. The 4.375% USD Notes, due 2042, pay interest semi-annually in arrears at a fixed annual rate of 4.375 percent. The Company may redeem both of these notes (which were issued together in
May 2012) prior to maturity, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. These notes, registered with the U.S. Securities and Exchange Commission, were issued by ABB Finance (USA) Inc., a 100 percent owned finance subsidiary, and were fully and unconditionally guaranteed by ABB Ltd. There are no significant restrictions on the ability of the parent company to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 3-10 of Regulation S-X, the separate financial statements of ABB Finance (USA) Inc. are not provided. The Company has entered into interest rate swaps for an aggregate nominal amount of \$1,050 million to partially hedge its interest obligations on the 2.875% USD Notes, due 2022. After considering the impact of such swaps, \$1,050 million of the outstanding principal is shown as floating rate debt in the table of long-term debt above.
The 0.625% EUR Instruments, due 2023, were issued in May 2016, with total net issuance proceeds of EUR 697 million (equivalent to approximately \$807 million on date of issuance). These Instruments pay interest annually in arrears at a fixed rate of 0.625 percent per annum. The Company may redeem these notes three months prior to maturity (Par call date), in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. The Company may redeem these instruments in whole or in part, after the Par call date at 100 percent of the principal amount of the notes to be redeemed. The Company entered into interest rate swaps to hedge its interest on these bonds. After considering the impact of such swaps, these notes effectively became floating rate euro obligations and consequently have been shown as floating rate debt, in the table of long-term debt above.
The 0.75% EUR Instruments, due 2024, were issued in May 2017, with total net issuance proceeds of EUR 745 million (equivalent to approximately \$824 million on date of issuance). These Instruments pay interest annually in arrears at a fixed rate of 0.75 percent per annum and have the same early redemption terms as the 0.625% EUR Instruments above. The Company entered into interest rate swaps to hedge its interest on these bonds. After considering the impact of such swaps, these bonds effectively became floating rate euro obligations and consequently have been shown as floating rate debt in the table of long-term debt above.
In April 2018, the Company issued the following notes (i) \$300 million of 2.8% USD Notes, due 2020, (ii) \$450 million of 3.375% USD Notes, due 2023, and (iii) \$750 million of 3.8% USD Notes, due 2028. Each of the respective notes pays interest semi-annually in arrears. The aggregate net proceeds of these bond issues, after underwriting discount and other fees, amounted to \$1,494 million. The Company may redeem the notes at any time prior to their maturity date in the case of the 2020 Notes, up to one month prior to their maturity date in the case of the 2023 Notes, and up to three months prior to their maturity date in the case of the 2028 Notes, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the Notes terms, plus interest accrued at the redemption date. On or after March 3, 2023 (one month prior to their maturity date) in the case of the 2023 Notes and on or after January 3, 2028 (three months prior to their maturity date) in the case of the 2028 Notes, the Company may also redeem the notes of the applicable series, in whole or in part, at any time at a redemption price equal to 100 percent of the principal amount of the notes to be redeemed plus unpaid accrued interest to, but excluding, the redemption date. These notes, registered with the U.S. Securities and Exchange Commission, were issued by ABB Finance (USA) Inc., a 100 percent owned finance subsidiary, and were fully and unconditionally guaranteed by ABB Ltd. There are no significant restrictions on the ability of the parent company to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 3-10 of Regulation S-X, the separate financial statements of ABB Finance (USA) Inc. are not provided.
In February 2019, the Company issued the following notes: (i) CHF 280 million of 0.3% CHF Notes, due 2024 and (ii) CHF 170 million of 1.0% CHF Notes, due 2029. Each of the respective notes pays interests annually in arrears. The Company recorded aggregate net proceeds, after underwriting discount and other fees, of CHF 449 million (equivalent to approximately \$449 million on date of issuance).
The Company's various debt instruments contain cross-default clauses which would allow the bondholders to demand repayment if the Company were to default on any borrowing at or above a specified threshold. Furthermore, all such bonds constitute unsecured obligations of the Company and rank pari passu with other debt obligations.
In addition to the bonds described above, included in long-term debt at December 31, 2019 and 2018, are finance lease obligations, bank borrowings of subsidiaries and other long-term debt, none of which is individually significant.
"Other provisions" consisted of the following:
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Contract-related provisions | 607 | 590 |
| Restructuring and restructuring-related provisions | 234 | 277 |
| Provisions for contractual penalties and compliance and litigation matters | 209 | 209 |
| Provision for insurance-related reserves | 168 | 166 |
| Other | 157 | 130 |
| Total | 1,375 | 1,372 |
"Other current liabilities" consisted of the following:
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Employee-related liabilities | 1,396 | 1,506 |
| Accrued expenses | 592 | 546 |
| Non-trade payables | 442 | 477 |
| Income taxes payable | 355 | 260 |
| Accrued customer rebates | 287 | 299 |
| Other tax liabilities | 282 | 277 |
| Derivative liabilities (see Note 6) | 143 | 192 |
| Accrued interest | 44 | 73 |
| Pension and other employee benefits | 36 | 34 |
| Deferred income | 25 | 36 |
| Other | 159 | 80 |
| Total | 3,761 | 3,780 |
"Other non-current liabilities" consisted of the following:
| 2019 | 2018 |
|---|---|
| 1,218 | 1,111 |
| 112 | 132 |
| 72 | 74 |
| 48 | 56 |
| 23 | 37 |
| 7 | 12 |
| 189 | 267 |
| 1,669 | 1,689 |
—
The Company's lease obligations primarily relate to real estate, machinery and equipment. Prior to the adoption of the new lease standard in 2019, rent expense was \$364 million and \$385 million in 2018 and 2017, respectively. Sublease income received by the Company on leased assets was \$7 million and \$11 million in 2018 and 2017, respectively.
Under the new accounting standard, adopted in January 2019, the components of lease expense were as follows:
| 2019 | |||||
|---|---|---|---|---|---|
| (\$ in millions) | Land and buildings |
Machinery and equipment |
Total | ||
| Finance lease cost: | |||||
| Amortization of right-of-use assets | 13 | 20 | 33 | ||
| Interest on lease liabilities | 1 | 2 | 3 | ||
| Variable lease cost(1) | — | 5 | 5 | ||
| Short-term lease cost | 19 | 29 | 48 | ||
| Sub-lease income | (2) | — | (2) | ||
| Total lease expense | 299 | 157 | 456 |
(1) Primarily relates to variable payments that are tied to the consumer price index and are therefore included in the measurement of the right-of-use asset or lease liability.
The following table presents supplemental cash flow information related to leases:
| 2019 | |||
|---|---|---|---|
| (\$ in millions) | Land and buildings |
Machinery and equipment |
Total |
| Cash paid for amounts included in the measurement of lease liabilities: | |||
| Operating cash flows from operating leases | 252 | 96 | 348 |
| Operating cash flows from finance leases | 1 | 2 | 3 |
| Financing cash flows from finance leases | 8 | 12 | 20 |
| Right-of-use assets obtained in exchange for new liabilities: | |||
| Under operating leases | 153 | 52 | 205 |
| Under finance leases | 23 | 18 | 41 |
At December 31, 2019, the future net minimum lease payments for operating and finance leases and the related present value of the net minimum lease payments consisted of the following:
| Operating Leases | Finance Leases | |||
|---|---|---|---|---|
| (\$ in millions) | Land and buildings |
Machinery and equipment |
Land and buildings |
Machinery and equipment |
| 2020 | 222 | 86 | 23 | 14 |
| 2021 | 178 | 41 | 24 | 11 |
| 2022 | 137 | 21 | 23 | 8 |
| 2023 | 105 | 10 | 20 | 4 |
| 2024 | 86 | 8 | 21 | 1 |
| Thereafter | 226 | 5 | 84 | — |
| Total minimum lease payments | 954 | 171 | 195 | 38 |
| Less amount representing estimated executory costs included in total minimum lease payments |
— | — | (1) | — |
| Net minimum lease payments | 954 | 171 | 194 | 38 |
| Difference between undiscounted cash flows and discounted cash flows | (98) | (5) | (59) | (2) |
| Present value of minimum lease payments | 856 | 166 | 135 | 36 |
The following table presents certain information related to lease terms and discount rates for leases as of December 31, 2019:
| (\$ in millions) | Operating Leases | Finance Leases | ||
|---|---|---|---|---|
| Land and buildings |
Machinery and equipment |
Land and buildings |
Machinery and equipment |
|
| Weighted-average remaining term (months) | 78 | 29 | 110 | 33 |
| Weighted-average discount rate | 3.0% | 2.2% | 8.2% | 2.8% |
Minimum lease payments have not been reduced by minimum sublease rentals due in the future under non-cancelable subleases. Such minimum sublease rentals were not significant. The present value of minimum finance lease payments included in "Short-term debt and current maturities of long-term debt" and "Long-term debt" in the Consolidated Balance Sheets at December 31, 2019, amounts to \$17 million and \$154 million, respectively.
Regulatory
In April 2014, the European Commission announced its decision regarding its investigation of anticompetitive practices in the cables industry and granted the Company full immunity from fines under its leniency program.
In February 2019, the Brazilian Antitrust Authority (CADE) announced its decision regarding its investigation of anticompetitive practices in certain power businesses of the Company, including flexible alternating current transmission systems (FACTS) and power transformers, and granted the Company full immunity from fines under its leniency program.
As a result of an internal investigation, the Company self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DoJ) in the United States as well as to the Serious Fraud Office (SFO) in the United Kingdom concerning certain of its past dealings with Unaoil and its subsidiaries, including alleged improper payments made by these entities to third parties. The SFO has commenced an investigation into this matter. The Company is cooperating fully with the authorities. At this time, it is not possible for the Company to make an informed judgment about the outcome of these matters.
Based on findings during an internal investigation, the Company self-reported to the SEC and the DoJ, to various authorities in South Africa and other countries as well as to certain multilateral financial institutions potential suspect payments and other compliance concerns in connection with some of the Company's dealings with Eskom and related persons. Many of those parties have expressed an interest in, or commenced an investigation into, these matters and the Company is cooperating fully with them. Although the Company believes that there may be an unfavorable outcome in one or more of these compliance-related matters, at this time it is not possible for the Company to make an informed judgment about the possible financial impact.
The Company is aware of proceedings, or the threat of proceedings, against it and others in respect of private claims by customers and other third parties with regard to certain actual or alleged anticompetitive practices. Also, the Company is subject to other claims and legal proceedings, as well as investigations carried out by various law enforcement authorities. With respect to the above-mentioned claims, regulatory matters, and any related proceedings, the Company will bear the related costs, including costs necessary to resolve them.
At December 31, 2019 and 2018, the Company had aggregate liabilities of \$157 million and \$221 million, respectively, included in "Other provisions" and "Other non-current liabilities", for the above regulatory, compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it is not possible to make an informed judgment on, or reasonably predict, the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be material adverse outcomes beyond the amounts accrued.
The following table provides quantitative data regarding the Company's third-party guarantees. The maximum potential payments represent a "worst-case scenario", and do not reflect management's expected outcomes.
| December 31, (\$ in millions) | Maximum potential payments(1) |
|||
|---|---|---|---|---|
| 2019 | 2018 | |||
| Performance guarantees | 1,860 | 1,584 | ||
| Financial guarantees | 10 | 10 | ||
| Indemnification guarantees | 64 | 64 | ||
| Total | 1,934 | 1,658 |
(1) Maximum potential payments include amounts in both continuing and discontinued operations
The carrying amount of liabilities recorded in the Consolidated Balance Sheets reflects the Company's best estimate of future payments, which it may incur as part of fulfilling its guarantee obligations. In respect of the above guarantees, the carrying amounts of liabilities at December 31, 2019 and 2018, were not significant.
The Company is party to various guarantees providing financial or performance assurances to certain third parties. These guarantees, which have various maturities up to 2027, mainly consist of performance guarantees whereby (i) the Company guarantees the performance of a third party's product or service according to the terms of a contract and (ii) as member of a consortium/joint venture that includes third parties, the Company guarantees not only its own performance but also the work of third parties. Such guarantees may include guarantees that a project will be completed within a specified time. If the third party does not fulfill the obligation, the Company will compensate the guaranteed party in cash or in kind. The original maturity dates for the majority of these performance guarantees range from one to eight years.
In conjunction with the divestment of the high-voltage cable and cables accessories businesses, the Company has entered into various performance guarantees with other parties with respect to certain liabilities of the divested business. At December 31, 2019 and 2018, the maximum potential payable under these guarantees amounts to \$898 million and \$771 million, respectively, and these guarantees have various maturities ranging from one to ten years.
In addition, in the normal course of bidding for and executing certain projects, the Company has entered into standby letters of credit, bid/performance bonds and surety bonds (collectively "performance bonds") with various financial institutions. Customers can draw on such performance bonds in the event that the Company does not fulfill its contractual obligations. The Company would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. At December 31, 2019 and 2018, the total outstanding performance bonds aggregated to \$6.8 billion and \$7.4 billion, respectively, of which \$3.7 billion and \$4.3 billion, respectively, relate to discontinued operations. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2019, 2018 and 2017.
The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts.
The reconciliation of the "Provisions for warranties", including guarantees of product performance, was as follows:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Balance at January 1, | 948 | 909 | 815 |
| Net change in warranties due to acquisitions, divestments and liabilities held for sale(1) |
(88) | 41 | 30 |
| Claims paid in cash or in kind | (310) | (307) | (243) |
| Net increase in provision for changes in estimates, warranties issued and warranties expired |
276 | 341 | 234 |
| Exchange rate differences | (10) | (36) | 73 |
| Balance at December 31, | 816 | 948 | 909 |
(1) Includes adjustments to the initial purchase price allocation recorded during the measurement period.
During 2018, the Company recorded changes in the estimated amount for a product warranty relating to a divested business which is included within Corporate and Other. The relevant product had an unexpected level of product failure which requires higher than expected costs to remediate. As a result, warranty expenses of \$92 million, were recorded in "Cost of sales of products" in 2018. As these costs relate to a divested business, in accordance with the definition of the Company's primary measure of segment performance, Operational EBITA (see Note 23), the costs have been excluded from this measure.
The warranty liability has been recorded based on the information currently available and is subject to change in the future.
The Company conducts business with certain companies where members of the Company's Board of Directors or Executive Committee act, or in recent years have acted, as directors or senior executives. The Company's Board of Directors has determined that the Company's business relationships with those companies do not constitute material business relationships. This determination was made in accordance with the Company's related party transaction policy which was prepared based on the Swiss Code of Best Practice and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange.
"Provision for taxes" consisted of the following:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Current taxes | 855 | 686 | 782 |
| Deferred taxes | (83) | (142) | (199) |
| Tax expense from continuing operations | 772 | 544 | 583 |
| Tax expense from discontinued operations | 167 | 228 | 273 |
Income tax expense from continuing operations is reconciled below from the Company's weighted-average global tax rate (rather than from the Swiss domestic statutory tax rate) as the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland and income generated in jurisdictions outside of Switzerland (hereafter "foreign jurisdictions") which has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. There is no requirement in Switzerland for any parent company of a group to file a tax return of the consolidated group determining domestic and foreign pre-tax income. As the Company's consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines the weighted-average global tax rate of the Company.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code. The SEC staff issued Staff Accounting Bulletin No. 118, which allowed the Company to record provisional amounts in income tax expense from continuing operations in the 2017 financial statements. The estimated impact included a benefit of \$30 million due to changes in tax rates, valuation allowance on foreign tax credits and undistributed earnings of subsidiaries, offset by \$26 million charge for one-time transition tax. The amounts were finalized in 2018 and no material change to the estimated figures was recorded.
The reconciliation of "Tax expense from continuing operations" at the weighted-average tax rate to the effective tax rate is as follows:
| (\$ in millions, except % data) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Income from continuing operations before taxes | 1,862 | 2,119 | 2,102 |
| Weighted-average global tax rate | 18.3% | 22.2% | 23.6% |
| Income taxes at weighted-average tax rate | 341 | 470 | 497 |
| Items taxed at rates other than the weighted-average tax rate | (7) | (43) | (114) |
| Changes in valuation allowance, net | 198 | 41 | 763 |
| Effects of changes in tax laws and (enacted) tax rates | 63 | 1 | (747) |
| Non-deductible expenses | 44 | 86 | 58 |
| Other, net | 133 | (11) | 126 |
| Tax expense from continuing operations | 772 | 544 | 583 |
| Effective tax rate for the year | 41.5% | 25.7% | 27.7% |
The allocation of consolidated income from continued operations, which is predominantly earned outside of Switzerland, impacts the "weighted-average global tax rate". In 2019, based on the enacted tax rates in the applicable jurisdictions, the loss recorded for the planned sale of the solar inverters business reduced the weighted-average global tax rate by approximately 2 percent.
In 2018 and 2017, the benefit reported in "Items taxed at rates other than the weighted-average tax rate" included positive impacts of \$17 million and \$72 million, respectively, relating to non-taxable amounts for net gains from sale of businesses. In 2019, the amount was not significant.
In 2019, "Changes in valuation allowance, net" includes adjustments to the valuation allowance in certain jurisdictions where the Company updated its assessment that it was more likely than not that such deferred tax assets would be realized. In 2019, the Company recorded an increase of \$158 million to the valuation allowance in certain operations in North America including an amount to provide for certain deferred tax assets arising in 2019.
In 2018, the "Changes in valuation allowance, net" included adjustments in valuation allowance recorded in certain jurisdictions where the Company updated its assessment that it was more likely than not that such deferred tax assets would be realized. The amount included an increase of \$40 million relating to certain operations in Central Europe.
In 2019, "Effects of changes in tax laws and (enacted) tax rates" primarily reflects a change in tax law applicable to a country in Europe. The benefit was mostly offset by a related change in the valuation allowance, resulting in a net benefit of \$17 million. In 2017, the relevant tax rate applicable to one of the Company's subsidiaries increased and in connection with this change, the Company benefited from an increase of \$721 million in deferred tax assets relating to certain long-term assets. This benefit was also offset by a related change in the valuation allowance of \$668 million as the Company determined that it was more likely than not that such deferred tax assets would not be realized.
In 2019, 2018 and 2017, "Non-deductible expenses" includes \$44 million, \$86 million and \$58 million, respectively, in relation to items that were deducted for financial accounting purposes but were not tax deductible, such as interest expense, local taxes on productive activities, disallowed meals and entertainment expenses and other similar items.
In 2019 and 2017, "Other, net" in the table above included net charges of \$91 million and \$148 million, respectively, related to the interpretation for tax law and double tax treaty agreements by competent tax authorities while in 2018, "Other, net" included a net benefit of \$22 million.
Deferred income tax assets and liabilities (excluding amounts held for sale and in discontinued operations) consisted of the following:
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Deferred tax assets: | ||
| Unused tax losses and credits | 507 | 600 |
| Provisions and other accrued liabilities | 650 | 769 |
| Pension | 592 | 476 |
| Inventories | 463 | 253 |
| Intangibles and other non-current assets | 972 | 1,031 |
| Other | 300 | 122 |
| Total gross deferred tax asset | 3,484 | 3,251 |
| Valuation allowance | (1,632) | (1,535) |
| Total gross deferred tax asset, net of valuation allowance | 1,852 | 1,716 |
| Deferred tax liabilities: | ||
| Property, plant and equipment | (244) | (202) |
| Intangibles and other assets | (679) | (770) |
| Pension and other liabilities | (538) | (153) |
| Inventories | (39) | (67) |
| Unremitted earnings | (353) | (445) |
| Total gross deferred tax liability | (1,853) | (1,637) |
| Net deferred tax asset (liability) | (1) | 79 |
| Included in: | ||
| "Deferred taxes" – non-current assets | 910 | 1,006 |
| "Deferred taxes" – non-current liabilities | (911) | (927) |
| Net deferred tax asset (liability) | (1) | 79 |
Certain entities have deferred tax assets related to net operating loss carry-forwards and other items. As recognition of these assets in certain entities did not meet the more likely than not criterion, valuation allowances have been recorded and amount to \$1,632 million and \$1,535 million, at December 31, 2019 and 2018, respectively. "Unused tax losses and credits" at December 31, 2019 and 2018, in the table above, included \$126 million and \$145 million, respectively, for which the Company has established a full valuation allowance as, due to limitations imposed by the relevant tax law, the Company determined that, more likely than not, such deferred tax assets would not be realized.
The valuation allowance at December 31, 2019, 2018 and 2017 was \$1,632 million, \$1,535 million and \$1,303 million, respectively.
At December 31, 2019 and 2018, deferred tax liabilities totaling \$353 million and \$445 million, respectively, have been provided for primarily in respect of withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter "withholding taxes") on unremitted earnings which will be payable in foreign jurisdictions on the repatriation of earnings to Switzerland. Income which has been generated outside of Switzerland and has already been subject to corporate income tax in such foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries.
Certain countries levy withholding taxes on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. In 2019 and 2018, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At December 31, 2019 and 2018, foreign subsidiary retained earnings subject to withholding taxes upon distribution of approximately \$100 million and \$100 million, respectively, were considered as indefinitely reinvested, as these funds are used for financing current operations as well as business growth through working capital and capital expenditure in those countries and, consequently, no deferred tax liability was recorded.
At December 31, 2019, net operating loss carry-forwards of \$1,999 million and tax credits of \$78 million were available to reduce future taxes of certain subsidiaries. Of these amounts, \$1,203 million of loss carry-forwards and \$52 million of tax credits will expire in varying amounts through 2039, while the remainder will not expire. The largest amount of these carry-forwards related to the Company's Europe operations.
| Penalties and | |||
|---|---|---|---|
| interest related | |||
| (\$ in millions) | Unrecognized tax benefits |
to unrecognized tax benefits |
Total |
| Classification as unrecognized tax items on January 1, 2017 | 760 | 172 | 932 |
| Increase relating to prior year tax positions | 115 | 103 | 218 |
| Decrease relating to prior year tax positions | (76) | (37) | (113) |
| Increase relating to current year tax positions | 223 | — | 223 |
| Decrease due to settlements with tax authorities | (23) | (2) | (25) |
| Decrease as a result of the applicable statute of limitations | (75) | (12) | (87) |
| Exchange rate differences | 101 | 18 | 119 |
| Balance at December 31, 2017, | |||
| which would, if recognized, affect the effective tax rate | 1,025 | 242 | 1,267 |
| Net change due to acquisitions and divestments | 8 | — | 8 |
| Increase relating to prior year tax positions | 35 | 37 | 72 |
| Decrease relating to prior year tax positions | (99) | 14 | (85) |
| Increase relating to current year tax positions | 126 | 5 | 131 |
| Decrease due to settlements with tax authorities | (44) | (17) | (61) |
| Decrease as a result of the applicable statute of limitations | (66) | (31) | (97) |
| Exchange rate differences | (24) | (11) | (35) |
| Balance at December 31, 2018, | |||
| which would, if recognized, affect the effective tax rate | 961 | 239 | 1,200 |
| Net change due to acquisitions and divestments | 11 | 7 | 18 |
| Increase relating to prior year tax positions | 202 | 85 | 287 |
| Decrease relating to prior year tax positions | (82) | (63) | (145) |
| Increase relating to current year tax positions | 163 | 6 | 169 |
| Decrease due to settlements with tax authorities | (57) | (8) | (65) |
| Decrease as a result of the applicable statute of limitations | (83) | (28) | (111) |
| Exchange rate differences | (9) | (5) | (14) |
| Balance at December 31, 2019, which would, if recognized, affect the effective tax rate |
1,106 | 233 | 1,339 |
Unrecognized tax benefits consisted of the following:
In 2019, 2018 and 2017, the "Increase relating to current year tax positions" included a total of \$163 million, \$111 million and \$193 million, respectively, in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities.
In 2019, the "Increase relating to prior year tax positions" is predominantly related to the interpretation of tax law and double tax treaty agreements by competent tax authorities.
At December 31, 2019, the Company expected the resolution, within the next twelve months, of unrecognized tax benefits related to pending court cases amounting to \$76 million for taxes, penalties and interest. Otherwise, the Company had not identified any other significant changes which were considered reasonably possible to occur within the next twelve months.
At December 31, 2019, the earliest significant open tax years that remained subject to examination were the following:
| Region | Year |
|---|---|
| Europe | 2011 |
| The Americas | 2016 |
| Asia, Middle East and Africa | 2010 |
The Company operates defined benefit pension plans, defined contribution pension plans, and termination indemnity plans, in accordance with local regulations and practices. The Company's most significant defined benefit pension plans are in Switzerland as well as in Germany, the United Kingdom, the U.S., Sweden and Finland. These plans cover a large portion of the Company's employees and provide benefits to employees in the event of death, disability, retirement, or termination of employment. Certain of these plans are multi-employer plans. The Company also operates other postretirement benefit plans including postretirement health care benefits and other employee-related benefits for active employees including long-service award plans. The measurement date used for the Company's employee benefit plans is December 31. The funding policies of the Company's plans are consistent with the local government and tax requirements.
The Company recognizes in its Consolidated Balance Sheets the funded status of its defined benefit pension plans, postretirement plans, and other employee-related benefits measured as the difference between the fair value of the plan assets and the benefit obligation.
Unless otherwise indicated, the following tables include amounts relating to both continuing and discontinued operations.
The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the Consolidated Balance Sheets were as follows:
| Defined pension benefits |
Other postretirement benefits |
|||||
|---|---|---|---|---|---|---|
| Switzerland | International | International | ||||
| (\$ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 |
| Benefit obligations at January 1, | 3,993 | 4,055 | 7,429 | 7,892 | 120 | 132 |
| Service cost | 76 | 92 | 113 | 122 | 1 | 1 |
| Interest cost | 15 | 30 | 174 | 198 | 4 | 4 |
| Contributions by plan participants | 75 | 69 | 19 | 16 | — | — |
| Benefit payments | (244) | (239) | (404) | (318) | (10) | (11) |
| Benefit obligations of businesses acquired (divested) |
— | 10 | (21) | 60 | — | 8 |
| Actuarial (gain) loss | 323 | 6 | 617 | (92) | (1) | (12) |
| Plan amendments and other | — | (4) | 9 | (119) | (5) | — |
| Exchange rate differences | 70 | (26) | (58) | (330) | 1 | (2) |
| Benefit obligation at December 31, | 4,308 | 3,993 | 7,878 | 7,429 | 110 | 120 |
| Fair value of plan assets at January 1, | 3,879 | 4,020 | 5,866 | 6,514 | — | — |
| Actual return on plan assets | 320 | (41) | 689 | (184) | — | — |
| Contributions by employer | 91 | 89 | 115 | 152 | 10 | 11 |
| Contributions by plan participants | 75 | 69 | 19 | 16 | — | — |
| Benefit payments | (244) | (239) | (404) | (318) | (10) | (11) |
| Plan assets of businesses acquired (divested) | — | 7 | (12) | 39 | — | — |
| Plan amendments and other | — | — | — | (94) | — | — |
| Exchange rate differences | 68 | (26) | (27) | (259) | — | — |
| Fair value of plan assets at December 31, | 4,189 | 3,879 | 6,246 | 5,866 | — | — |
| Funded status — underfunded | (119) | (114) | (1,632) | (1,563) | (110) | (120) |
The amounts recognized in "Accumulated other comprehensive loss" and "Noncontrolling interests" were:
| Defined pension benefits |
Other postretirement benefits |
|||||
|---|---|---|---|---|---|---|
| December 31, (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 |
| Net actuarial (loss) gain | (2,777) | (2,628) | (2,321) | 28 | 30 | 20 |
| Prior service credit | 62 | 74 | 99 | 13 | 23 | 27 |
| Amount recognized in OCI(1) and NCI(2) | (2,715) | (2,554) | (2,222) | 41 | 53 | 47 |
| Taxes associated with amount recognized in OCI and NCI |
571 | 535 | 503 | — | — | — |
| Amount recognized in OCI and NCI, net of tax(3) |
(2,144) | (2,019) | (1,719) | 41 | 53 | 47 |
(1) OCI represents "Accumulated other comprehensive loss".
(2) NCI represents "Noncontrolling interests".
(3) NCI, net of tax, amounted to \$0 million, \$(1) million, and \$0 million at December 31, 2019, 2018 and 2017.
| (\$ in millions) | Defined pension benefits |
Other postretirement benefits |
|||||
|---|---|---|---|---|---|---|---|
| Switzerland | International | International | |||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||
| Overfunded plans | 62 | 24 | 71 | 59 | — | — | |
| Underfunded plans – current | (78) | — | (295) | (19) | (14) | (11) | |
| Underfunded plans – non-current | (103) | (138) | (1,408) | (1,603) | (96) | (109) | |
| Funded status – underfunded | (119) | (114) | (1,632) | (1,563) | (110) | (120) | |
| Amounts reported as assets and liabilities held for sale |
(78) | (93) | (277) | (120) | (5) | — |
| December 31, (\$ in millions) | 2018 | |
|---|---|---|
| Non-current assets | ||
| Overfunded pension plans | 132 | 83 |
| Other employee-related benefits | 1 | 1 |
| Pension and other employee benefits | 133 | 84 |
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Current liabilities | ||
| Underfunded pension plans | (374) | (19) |
| Underfunded other postretirement benefit plans | (14) | (11) |
| Other employee-related benefits | (72) | (10) |
| Pension and other employee benefits | (460) | (40) |
| Amounts reported as Current liabilities held for sale | (424) | (4) |
| December 31, (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Non-current liabilities | ||
| Underfunded pension plans | (1,510) | (1,741) |
| Underfunded other postretirement benefit plans | (96) | (109) |
| Other employee-related benefits | (186) | (246) |
| Pension and other employee benefits | (1,792) | (2,096) |
| Amounts reported as Non-current liabilities held for sale | — | (266) |
The accumulated benefit obligation (ABO) for all defined benefit pension plans was \$11,981 million and \$11,249 million at December 31, 2019 and 2018, respectively. The projected benefit obligation (PBO), ABO and fair value of plan assets, for pension plans with a PBO in excess of fair value of plan assets or ABO in excess of fair value of plan assets, was:
| PBO exceeds fair value of plan assets | ABO exceeds fair value of plan assets | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | Switzerland International |
Switzerland | International | |||||||
| (\$ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||
| PBO | 3,769 | 3,482 | 7,346 | 6,897 | 3,769 | 3,482 | 7,228 | 6,872 | ||
| ABO | 3,769 | 3,482 | 7,156 | 6,743 | 3,769 | 3,482 | 7,054 | 6,724 | ||
| Fair value of plan assets | 3,588 | 3,344 | 5,643 | 5,275 | 3,588 | 3,344 | 5,537 | 5,254 |
All of the Company's other postretirement benefit plans are unfunded.
Net periodic benefit cost consisted of the following:
| Defined pension benefits |
Other postretirement benefits |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Switzerland | International | International | ||||||||
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |
| Operational pension cost: | ||||||||||
| Service cost | 76 | 92 | 106 | 113 | 122 | 122 | 1 | 1 | 1 | |
| Operational pension cost | 76 | 92 | 106 | 113 | 122 | 122 | 1 | 1 | 1 | |
| Non-operational pension cost (credit): | ||||||||||
| Interest cost | 15 | 30 | 41 | 174 | 198 | 208 | 4 | 4 | 5 | |
| Expected return on plan assets | (112) | (117) | (112) | (276) | (305) | (295) | — | — | — | |
| Amortization of prior service cost (credit) | (14) | (15) | 10 | 2 | 1 | 1 | (5) | (5) | (5) | |
| Amortization of net actuarial loss | — | — | — | 108 | 92 | 91 | (3) | (1) | (1) | |
| Curtailments, settlements and special termination benefits |
11 | — | — | 27 | 23 | 16 | (10) | — | (1) | |
| Non-operational pension cost (credit) | (100) | (102) | (61) | 35 | 9 | 21 | (14) | (2) | (2) | |
| Net periodic benefit cost | (24) | (10) | 45 | 148 | 131 | 143 | (13) | (1) | (1) |
The components of net periodic benefit cost other than the service cost component are included in the line "Non-operational pension (cost) credit" in the income statement. Net periodic benefit cost includes \$47 million, \$45 million and \$55 million in 2019, 2018 and 2017, respectively, related to discontinued operations.
The following weighted-average assumptions were used to determine benefit obligations:
| December 31, (in %) | Defined pension benefits | Other postretirement benefits |
|||||
|---|---|---|---|---|---|---|---|
| Switzerland | International | International | |||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||
| Discount rate | 0.2 | 0.8 | 2.0 | 2.8 | 2.8 | 3.9 | |
| Rate of compensation increase | — | — | 2.2 | 2.4 | 0.2 | 0.2 | |
| Rate of pension increase | — | — | 1.3 | 1.4 | — | — | |
| Cash balance interest credit rate | 1.0 | 1.0 | 1.6 | 1.6 | — | — |
For the Company's significant benefit plans, the discount rate used at each measurement date is set based on a high-quality corporate bond yield curve – derived based on bond universe information sourced from reputable third-party index and data providers and rating agencies – reflecting the timing, amount and currency of the future expected benefit payments for the respective plan. Consistent discount rates are used across all plans in each currency zone, based on the duration of the applicable plan(s) in that zone. For plans in the other countries, the discount rate is based on high quality corporate or government bond yields applicable in the respective currency, as appropriate at each measurement date with a duration broadly consistent with the respective plan's obligations.
At the end of 2018, the Company changed the approach used to calculate the service and interest components of net periodic benefit cost for its significant benefit plans to provide a more precise measurement of service and interest costs. This change compared to the previous approach resulted in a net decrease in the service and interest components for benefit cost in 2019. Previously, the Company calculated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company has elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. This change does not affect the measurement of our total benefit obligations.
The following weighted-average assumptions were used to determine the "Net periodic benefit cost":
| (in %) | Defined pension benefits |
Other postretirement benefits |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Switzerland | International | International | |||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||
| Discount rate | 0.8 | 0.8 | 1.1 | 2.8 | 2.6 | 2.9 | 3.9 | 3.2 | 3.3 | ||
| Expected long-term rate of return on plan assets |
3.0 | 3.0 | 3.0 | 4.9 | 4.9 | 5.0 | — | — | — | ||
| Rate of compensation increase | — | — | — | 2.4 | 2.5 | 2.5 | 0.2 | — | — | ||
| Cash balance interest credit rate | 1.0 | 1.0 | 1.0 | 1.6 | 1.7 | 1.7 | — | — | — |
The "Expected long-term rate of return on plan assets" is derived for each benefit plan by considering the expected future long-term return assumption for each individual asset class. A single long-term return assumption is then derived for each plan based upon the plan's target asset allocation.
The Company maintains other postretirement benefit plans, which are generally contributory with participants' contributions adjusted annually. The assumptions used were:
| December 31, | 2019 | 2018 |
|---|---|---|
| Health care cost trend rate assumed for next year | 6.3% | 6.7% |
| Rate to which the trend rate is assumed to decline (the ultimate trend rate) | 5.0% | 5.0% |
| Year that the rate reaches the ultimate trend rate | 2028 | 2028 |
The Company has pension plans in various countries with the majority of the Company's pension liabilities deriving from a limited number of these countries.
The pension plans are typically funded by regular contributions from employees and the Company. These plans are typically administered by boards of trustees (which include Company representatives) whose primary responsibilities include ensuring that the plans meet their liabilities through contributions and investment returns. The boards of trustees have the responsibility for making key investment strategy decisions within a risk-controlled framework.
The pension plan assets are invested in diversified portfolios that are managed by third-party asset managers, in accordance with local statutory regulations, pension plan rules and the respective plans' investment guidelines, as approved by the boards of trustees.
Plan assets are generally segregated from those of the Company and invested with the aim of meeting the respective plans' projected future pension liabilities. Plan assets are measured at fair value at the balance sheet date.
The boards of trustees manage the assets of the pension plans in a risk-controlled manner and assess the risks embedded in the pension plans through asset/liability management studies. Asset/liability management studies typically take place every three years. However, the risks of the plans are monitored on an ongoing basis.
The board of trustees' investment goal is to maximize the long-term returns of plan assets within specified risk parameters, while considering the future liabilities and liquidity needs of the individual plans. Risk measures taken into account include the funding ratio of the plan, the likelihood of
extraordinary cash contributions being required, the risk embedded in each individual asset class, and the plan asset portfolio as a whole.
The Company's global pension asset allocation is the result of the asset allocations of the individual plans, which are set by the respective boards of trustees. The target asset allocation of the Company's plans on a weighted-average basis is as follows:
| Target | ||
|---|---|---|
| (in %) | Switzerland | International |
| Asset class | ||
| Equity | 19 | 19 |
| Fixed income | 54 | 64 |
| Real estate | 22 | 7 |
| Other | 5 | 10 |
| Total | 100 | 100 |
The actual asset allocations of the plans are in line with the target asset allocations.
Equity securities primarily includes investments in large-cap and mid-cap publicly traded companies. Fixed income assets primarily include corporate bonds of companies from diverse industries and government bonds. Both fixed income and equity assets are invested either via funds or directly in segregated investment mandates, and include an allocation to emerging markets. Real estate consists primarily of investments in real estate in Switzerland held in the Swiss plans. The "Other" asset class includes investments in private equity, hedge funds, commodities, and cash, and reflects a variety of investment strategies.
Based on the above global asset allocation and the fair values of the plan assets, the expected long-term return on assets at December 31, 2019, is 3.8 percent. The Company and the local boards of trustees regularly review the investment performance of the asset classes and individual asset managers. Due to the diversified nature of the investments, the Company is of the opinion that no significant concentration of risks exists in its pension fund assets.
At December 31, 2019 and 2018, plan assets include ABB Ltd's shares (as well as an insignificant amount of the Company's debt instruments) with a total value of \$10 million and \$8 million, respectively.
The fair values of the Company's pension plan assets by asset class are presented below. For further information on the fair value hierarchy and an overview of the Company's valuation techniques applied, see the "Fair value measures" section of Note 2.
| Not subject | Total | |||
|---|---|---|---|---|
| December 31, 2019 (\$ in millions) | Level 1 | Level 2 | to leveling(1) | fair value |
| Asset class | ||||
| Equity | ||||
| Equity securities | 224 | 7 | — | 231 |
| Mutual funds / commingled funds | — | 1,687 | 23 | 1,710 |
| Emerging market mutual funds / commingled funds | — | 339 | — | 339 |
| Fixed income | ||||
| Government and corporate securities | 521 | 1,013 | — | 1,534 |
| Government and corporate – mutual funds / commingled funds | — | 3,738 | 31 | 3,769 |
| Emerging market bonds – mutual funds / commingled funds | — | 805 | — | 805 |
| Real estate | — | — | 1,433 | 1,433 |
| Insurance contracts | — | 123 | — | 123 |
| Cash and short-term investments | 101 | 152 | — | 253 |
| Private equity | — | — | 211 | 211 |
| Hedge funds | — | — | 1 | 1 |
| Commodities | — | 26 | — | 26 |
| Total | 846 | 7,890 | 1,699 | 10,435 |
| December 31, 2018 (\$ in millions) | Level 1 | Level 2 | Not subject to leveling(1) |
Total fair value |
|---|---|---|---|---|
| Asset class | ||||
| Equity | ||||
| Equity securities | 209 | — | — | 209 |
| Mutual funds / commingled funds | — | 1,433 | 39 | 1,472 |
| Emerging market mutual funds / commingled funds | — | 363 | — | 363 |
| Fixed income | ||||
| Government and corporate securities | 524 | 997 | — | 1,521 |
| Government and corporate – mutual funds / commingled funds | — | 3,496 | — | 3,496 |
| Emerging market bonds – mutual funds / commingled funds | — | 729 | — | 729 |
| Real estate | — | — | 1,381 | 1,381 |
| Insurance contracts | — | 121 | — | 121 |
| Cash and short-term investments | 202 | 86 | — | 288 |
| Private equity | — | — | 139 | 139 |
| Hedge funds | — | — | 2 | 2 |
| Commodities | — | 24 | — | 24 |
| Total | 935 | 7,249 | 1,561 | 9,745 |
(1) Amounts relate to assets measured using the NAV practical expedient which are not subject to leveling.
The Company applies accounting guidance related to the presentation of certain investments using the net asset value (NAV) practical expedient. This accounting guidance exempts investments using this practical expedient from categorization within the fair value hierarchy.
Employer contributions were as follows:
| Defined pension benefits |
Other postretirement benefits |
||||||
|---|---|---|---|---|---|---|---|
| Switzerland | International | International | |||||
| (\$ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |
| Total contributions to defined benefit pension and other postretirement benefit plans |
91 | 89 | 115 | 152 | 10 | 11 | |
| Of which, discretionary contributions to defined benefit pension plans |
2 | — | 8 | 25 | — | — |
In 2019, 2018 and 2017, total contributions included non-cash contributions totaling \$13 million, \$31 million and \$31 million, respectively, of available-for-sale debt securities to certain of the Company's pension plans.
The Company expects to contribute approximately \$356 million, including \$167 million in discretionary contributions, to its defined benefit pension plans in 2020. Of these discretionary contributions \$156 million are expected to be non-cash contributions. The Company expects to contribute approximately \$10 million to its other postretirement benefit plans in 2020.
The Company also contributes to a number of defined contribution plans. The aggregate expense for these plans was \$245 million, \$245 million and \$233 million in 2019, 2018 and 2017, respectively. Contributions to multi-employer plans were not significant in 2019, 2018 and 2017. Defined contribution expense includes \$55 million, \$59 million and \$61 million in 2019, 2018 and 2017, respectively, related to discontinued operations.
The expected future cash flows to be paid by the Company's plans in respect of pension and other postretirement benefit plans at December 31, 2019, are as follows:
| Defined pension benefits |
Other postretirement benefits |
||
|---|---|---|---|
| (\$ in millions) | Switzerland | International | International |
| 2020 | 335 | 341 | 10 |
| 2021 | 254 | 347 | 9 |
| 2022 | 239 | 346 | 9 |
| 2023 | 226 | 343 | 9 |
| 2024 | 215 | 344 | 8 |
| Years 2025–2029 | 961 | 1,727 | 34 |
—
The Company has three principal share-based payment plans, as more fully described in the respective sections below. Compensation cost for equity-settled awards is recorded in "Total cost of sales" and in "Selling, general and administrative expenses" and totaled \$46 million, \$50 million and \$49 million in 2019, 2018 and 2017, respectively. Compensation cost for cash-settled awards is recorded in "Selling, general and administrative expenses" and is disclosed in the "WARs", "LTIP" and "Other share-based payments" sections of this note. The total tax benefit recognized in 2019, 2018 and 2017 was not significant.
At December 31, 2019, the Company had the ability to issue up to 94 million new shares out of contingent capital in connection with share-based payment arrangements. In addition, 35 million shares held by the Company as treasury stock at December 31, 2019, could be used to settle share-based payment arrangements.
As the primary trading market for the shares of ABB Ltd is the SIX Swiss Exchange (on which the shares are traded in Swiss francs) and substantially all the share-based payment arrangements with employees are based on the Swiss franc share or have strike prices set in Swiss francs, certain data disclosed below related to the instruments granted under share-based payment arrangements are presented in Swiss francs.
Under the MIP, the Company offers options and cash-settled WARs to key employees for no consideration.
The options granted under the MIP allow participants to purchase shares of ABB Ltd at predetermined prices. Participants may sell the options rather than exercise the right to purchase shares. Equivalent warrants are listed by a third-party bank on the SIX Swiss Exchange, which facilitates pricing and transferability of options granted under this plan. The options entitle the holder to request that the third-party bank purchase such options at the market price of equivalent listed warrants related to that MIP launch. If the participant elects to sell the options, the options will thereafter be held by a third party and, consequently, the Company's obligation to deliver shares will be toward this third party.
Each WAR gives the participant the right to receive, in cash, the market price of an equivalent listed warrant on the date of exercise of the WAR. Participants may exercise or sell options and exercise WARs after the vesting period, which is three years from the date of grant. All options and WARs expire six years from the date of grant.
The fair value of each option is estimated on the date of grant using a lattice model that uses the assumptions noted in the table below. Expected volatilities are based on implied volatilities from equivalent listed warrants on ABB Ltd shares. The expected term of the options granted is the contractual six-year life of each option, based on the fact that after the vesting period, a participant can elect to sell the option rather than exercise the right to purchase shares, thereby also realizing the time value of the options. The risk-free rate is based on a six-year Swiss franc interest rate, reflecting the six-year contractual life of the options. In estimating forfeitures, the Company has used the data from previous comparable MIP launches.
| 2019 | 2018 | 2017 | |
|---|---|---|---|
| Expected volatility | 19% | 17% | 19% |
| Dividend yield | 4.7% | 3.1% | 4.7% |
| Expected term | 6 years | 6 years | 6 years |
| Risk-free interest rate | -0.9% | -0.1% | -0.1% |
Presented below is a summary of the activity related to options under the MIP:
| Number of options (in millions) |
Number of shares (in millions)(1) |
Weighted average exercise price (in Swiss francs)(2) |
Weighted average remaining contractual term (in years) |
Aggregate intrinsic value (in millions of Swiss francs)(3) |
|
|---|---|---|---|---|---|
| Outstanding at January 1, 2019 | 444.9 | 89.0 | 21.54 | ||
| Granted | 63.5 | 12.7 | 19.00 | ||
| Forfeited | (9.9) | (2.0) | 22.87 | ||
| Expired | (81.0) | (16.2) | 21.50 | ||
| Outstanding at December 31, 2019 | 417.6 | 83.5 | 21.13 | 3.0 | 189 |
| Vested and expected to vest at December 31, 2019 |
413.6 | 82.7 | 21.15 | 3.0 | 185 |
| Exercisable at December 31, 2019 | 239.6 | 47.9 | 20.78 | 1.8 | 124 |
(1) Information presented reflects the number of ABB Ltd shares that can be received upon exercise, as options have a conversion ratio of 5:1.
(2) Information presented reflects the exercise price per ABB Ltd share.
(3) Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price of each option in Swiss francs.
At December 31, 2019, there was \$39 million of total unrecognized compensation cost related to non-vested options granted under the MIP. That cost is expected to be recognized over a weighted-average period of 2.0 years. The weighted-average grant-date fair value (per option) of options granted during 2019, 2018 and 2017 was 0.34 Swiss francs, 0.46 Swiss francs and 0.47 Swiss francs, respectively. In 2018 and 2017, the aggregate intrinsic value (on the date of exercise) of options exercised was \$13 million and \$38 million, respectively, while the amount in 2019 was not significant.
Presented below is a summary, by launch, related to options outstanding at December 31, 2019:
| Exercise price (in Swiss francs)(1) | Number of options (in millions) |
Number of shares (in millions)(2) |
Weighted-average remaining contractual term (in years) |
|---|---|---|---|
| 21.00 | 72.3 | 14.5 | 0.7 |
| 19.50 | 78.1 | 15.6 | 1.6 |
| 21.50 | 72.7 | 14.5 | 2.7 |
| 22.50 | 66.1 | 13.2 | 3.6 |
| 23.50 | 65.0 | 13.0 | 4.7 |
| 19.00 | 63.4 | 12.7 | 5.7 |
| Total number of options and shares | 417.6 | 83.5 | 3.0 |
(1) Information presented reflects the exercise price per share of ABB Ltd.
(2) Information presented reflects the number of shares of ABB Ltd that can be received upon exercise.
As each WAR gives the holder the right to receive cash equal to the market price of the equivalent listed warrant on date of exercise, the Company records a liability based upon the fair value of outstanding WARs at each period end, accreted on a straight-line basis over the three-year vesting period. In "Selling, general and administrative expenses", the Company recorded income of \$14 million in 2018 and an expense of \$19 million in 2017, as a result of changes in both the fair value and vested portion of the outstanding WARs. The amount in 2019 was not significant. To hedge its exposure to fluctuations in the
fair value of outstanding WARs, the Company purchased cash-settled call options, which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs. The cash-settled call options are recorded as derivatives measured at fair value (see Note 6), with subsequent changes in fair value recorded in earnings to the extent that they offset the change in fair value of the liability for the WARs. In "Selling, general and administrative expenses", the Company recorded an expense of \$18 million in 2018 and income of \$15 million in 2017, related to the cash-settled call options. The amount in 2019 was not significant.
The aggregate fair value of outstanding WARs was \$26 million and \$6 million at December 31, 2019 and 2018, respectively. The fair value of WARs was determined based upon the trading price of equivalent warrants listed on the SIX Swiss Exchange.
Presented below is a summary of the activity related to WARs:
| (in millions) | Number of WARs |
|---|---|
| Outstanding at January 1, 2019 | 41.2 |
| Granted | 10.9 |
| Exercised | (8.9) |
| Forfeited | (0.3) |
| Expired | (3.0) |
| Outstanding at December 31, 2019 | 39.9 |
| Exercisable at December 31, 2019 | 11.5 |
The aggregate fair value at date of grant of WARs granted in 2019, 2018 and 2017 was not significant. In 2018 and 2017, share-based liabilities of \$6 million and \$10 million, respectively, were paid upon exercise of WARs by participants. The amount in 2019 is not significant.
The employee share acquisition plan (ESAP) is an employee stock-option plan with a savings feature. Employees save over a twelve-month period, by way of regular payroll deductions. At the end of the savings period, employees choose whether to exercise their stock options using their savings plus interest, if any, to buy ABB Ltd shares (American Depositary Shares (ADS) in the case of employees in the United States and Canada – each ADS representing one registered share of the Company) at the exercise price set at the grant date, or have their savings returned with any interest. The savings are accumulated in bank accounts held by a third-party trustee on behalf of the participants and earn interest, where applicable. Employees can withdraw from the ESAP at any time during the savings period and will be entitled to a refund of their accumulated savings.
The fair value of each option is estimated on the date of grant using the same option valuation model as described under the MIP, using the assumptions noted in the table below. The expected term of the option granted has been determined to be the contractual one-year life of each option, at the end of which the options vest and the participants are required to decide whether to exercise their options or have their savings returned with interest. The risk-free rate is based on one-year Swiss franc interest rates, reflecting the one-year contractual life of the options. In estimating forfeitures, the Company has used the data from previous ESAP launches.
| 2019 | 2018 | 2017 | |
|---|---|---|---|
| Expected volatility | 18% | 19% | 17% |
| Dividend yield | 4.1% | 4.1% | 3.1% |
| Expected term | 1 year | 1 year | 1 year |
| Risk-free interest rate | -0.7% | -0.6% | -0.6% |
| Number of shares (in millions)(1) |
Weighted average exercise price (in Swiss francs)(2) |
Weighted average remaining contractual term (in years) |
Aggregate intrinsic value (in millions of Swiss francs)(2)(3) |
|
|---|---|---|---|---|
| Outstanding at January 1, 2019 | 3.6 | 20.38 | ||
| Granted | 2.3 | 20.78 | ||
| Forfeited | (0.3) | 20.38 | ||
| Exercised(4) | (0.5) | 20.38 | ||
| Not exercised (savings returned plus interest) | (2.8) | 20.38 | ||
| Outstanding at December 31, 2019 | 2.3 | 20.78 | 0.8 | 6.0 |
| Vested and expected to vest at | ||||
| December 31, 2019 | 2.2 | 20.78 | 0.8 | 5.7 |
| Exercisable at December 31, 2019 | — | — | — | — |
(1) Includes shares represented by ADS.
(2) Information presented for ADS is based on equivalent Swiss franc denominated awards.
(3) Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price of each option in
Swiss francs.
(4) The cash received upon exercise was approximately \$10 million. The shares were delivered out of treasury stock.
The exercise prices per ABB Ltd share and per ADS of 20.78 Swiss francs and \$21.17, respectively, for the 2019 grant, 20.38 Swiss francs and \$20.37, respectively, for the 2018 grant, and 26.26 Swiss francs and \$26.24, respectively, for the 2017 grant were determined using the closing price of the ABB Ltd share on the SIX Swiss Exchange and ADS on the New York Stock Exchange on the respective grant dates.
At December 31, 2019, the total unrecognized compensation cost related to non-vested options granted under the ESAP was not significant. The weighted-average grant-date fair value (per option) of options granted during 2019, 2018 and 2017 was 1.05 Swiss francs, 1.10 Swiss francs and 1.37 Swiss francs, respectively. The total intrinsic value (on the date of exercise) of options exercised in 2017 was \$17 million, while in 2019 and 2018 it was not significant.
The Company has a long-term incentive plan (LTIP) for members of its Executive Committee and selected other senior executives (Eligible Participants), as defined in the terms of the LTIP. The LTIP involves annual conditional grants of the Company's stock to such Eligible Participants that are subject to certain conditions. The ultimate amount delivered under the LTIP is based on achieving certain results against targets, as set out below, over a three-year period from grant and the final amount is delivered to Eligible Participants at the end of this period.
The 2019 and 2018 LTIP launches are composed of a performance component, based on the Company's earnings per share performance, and a market component, based on the Company's relative total shareholder return. The 2017 LTIP launch is composed of two performance components: (i) a component which is based on the average percentage achievement of income from continuing operations, net of tax, versus budget and (ii) a component which is based on the Company's earnings per share performance.
For the relative total shareholder return component of the 2019 and 2018 LTIP launches, the actual number of shares that will be delivered at a future date is based on the Company's total shareholder return performance relative to a peer group of companies over a three-year period starting with the year of grant. The actual number of shares that will ultimately be delivered will vary depending on the relative total shareholder return outcome achieved between a lower threshold (no shares delivered) and an upper threshold (the number of shares delivered is capped at 200 percent of the conditional grant). For the average percentage achievement of income versus budget component of the 2017 LTIP launch, the actual number of shares that will be delivered at a future date is dependent on the average percentage (of each year in a three-year period starting with the year of grant) of the Company's income from continuing operations, net of tax, divided by the Company's budgeted income from operations, net of tax. The actual number of shares that will ultimately be delivered will vary depending on the average percentage that is achieved between a lower threshold (no shares delivered) and an upper threshold (the number of shares delivered is capped at 150 percent of the conditional grant).
For the earnings per share performance component of the 2019 and 2018 LTIP launches, the actual number of shares that will be delivered at a future date is based on the Company's average earnings per share over three financial years, beginning with the year of launch. For the earnings per share performance component of the 2017 LTIP launch, the actual number of shares that will be delivered at a future date is dependent on the Company's weighted cumulative earnings per share performance over three financial years, beginning with the year of launch. The cumulative earnings per share performance is weighted as follows: 33 percent of the first year's result, 67 percent of the second year's result and 100 percent of the third year's result. Under all LTIP launches, the actual number of shares that will ultimately be delivered will vary depending on the earnings per share outcome as computed under each LTIP launch, interpolated between a lower threshold (no shares delivered) and an upper threshold (the number of shares delivered is capped at 200 percent of the conditional grant).
Under each component of the 2019 and 2018 LTIP launches, an Eligible Participant receives 65 percent of the shares that have vested in the form of shares and 35 percent of the value of the shares that have vested in cash, with the possibility to elect to also receive the 35 percent portion in shares rather than in cash. Under each component of the 2017 LTIP launch, an Eligible Participant receives 70 percent of the shares that have vested in the form of shares and 30 percent of the value of the shares that have vested in cash, with the possibility to elect to also receive the 30 percent portion in shares rather than in cash.
In addition, for certain awards to vest, the Eligible Participant has to fulfill a three-year service condition as defined in the terms and conditions of the LTIP.
| Number of Shares Conditionally Granted (in millions) |
Weighted-average grant-date fair value per share (Swiss francs) |
|
|---|---|---|
| Nonvested at January 1, 2019 | 1.3 | 21.61 |
| Granted | 1.1 | 15.94 |
| Vested | (1.1) | 18.49 |
| Forfeited | (0.3) | 19.68 |
| Nonvested at December 31, 2019 | 1.0 | 19.26 |
Presented below is a summary of activity under the LTIP:
Equity-settled awards are recorded in the "Additional paid-in capital" component of stockholders' equity, with compensation cost recorded in "Selling, general and administrative expenses" over the vesting period (which is from grant date to the end of the vesting period) based on the grant-date fair value of the shares. Cash-settled awards are recorded as a liability, remeasured at fair value at each reporting date for the percentage vested, with changes in the liability recorded in "Selling, general and administrative expenses".
At December 31, 2019, total unrecognized compensation cost related to equity-settled awards under the LTIP was not significant. The compensation cost recorded in 2019, 2018 and 2017 for cash-settled awards was not significant.
The aggregate fair value, at the dates of grant, of shares granted in 2019, 2018 and 2017 was \$18 million, \$19 million and \$22 million, respectively. The total grant-date fair value of shares that vested during 2019, 2018 and 2017 was \$21 million, \$17 million and \$22 million, respectively. The weighted-average grant-date fair value (per share) of shares granted during 2019, 2018 and 2017 was 15.94 Swiss francs, 21.97 Swiss francs and 22.13 Swiss francs, respectively.
For the relative total shareholder return component of the 2019 and 2018 LTIP launches, the fair value of granted shares at grant date, for equity-settled awards, and at each reporting date, for cash-settled awards, is determined using a Monte Carlo simulation model. The main inputs to this model are the Company's share price and dividend yield, the volatility of the Company's and the peer group's share price as well as the correlation between the peer companies. For the average percentage achievement of income versus budget component of the 2017 LTIP launch the fair value of granted shares is based on the market price of the ABB Ltd share at grant date for equity-settled awards and at each reporting date for cash-settled awards, as well as the probable outcome of the average percentage achievement of income versus budget, as computed using a Monte Carlo simulation model. The main inputs to this model are the Company's and external financial analysts' revenue growth rates and Operational EBITA margin expectations. For the earnings per share component of the LTIP launches, the fair value of
granted shares is based on the market price of the ABB Ltd share at grant date for equity-settled awards and at each reporting date for cash-settled awards, as well as the probable outcome of the earnings per share achievement, as computed using a Monte Carlo simulation model. The main inputs to this model are the Company's and external financial analysts' revenue growth rates and Operational EBITA margin expectations.
The Company has other minor share-based payment arrangements with certain employees. The compensation cost related to these arrangements in 2019, 2018 and 2017 was not significant.
At both December 31, 2019 and 2018, the Company had 2,672 million authorized shares, of which 2,168 million were registered and issued.
At the Annual General Meeting of Shareholders (AGM) in May 2019, shareholders approved the proposal of the Board of Directors to distribute a total of 0.80 Swiss francs per share. The approved dividend distribution amounted to \$1,675 million and was paid in May 2019. At the AGM in March 2018, shareholders approved the proposal of the Board of Directors to distribute a total of 0.78 Swiss francs per share. The approved dividend distribution amounted to \$1,736 million and was paid in April 2018. At the AGM in April 2017, shareholders approved the proposal of the Board of Directors to distribute a total of 0.76 Swiss francs per share. The approved dividend distribution amounted to \$1,622 million and was paid in April 2017.
In the first quarter of 2018, the Company purchased on the open market an aggregate of 10 million of its own shares to be available for delivery under its employee share programs. These transactions resulted in an increase in Treasury stock of \$249 million. In the second quarter of 2017, the Company purchased on the open market an aggregate of 10 million of its own shares to be available for delivery under its employee share programs. These transactions resulted in an increase in Treasury stock of \$251 million.
At the AGM in April 2017, shareholders approved the proposal of the Board of Directors to reduce the share capital of the Company by cancelling 46,595,000 treasury shares which were acquired under a \$4 billion share buyback program (executed between September 2014 and September 2016). This cancellation was completed in July 2017, resulting in a decrease in Treasury stock of \$953 million and a corresponding combined decrease in Capital stock, Additional paid-in capital and Retained earnings.
Upon and in connection with each launch of the Company's MIP, the Company sold call options to a bank at fair value, giving the bank the right to acquire shares equivalent to the number of shares represented by the MIP WAR awards to participants. Under the terms of the agreement with the bank, the call options can only be exercised by the bank to the extent that MIP participants have exercised their WARs. At December 31, 2019, such call options representing 11.8 million shares and with strike prices ranging from 19.00 to 23.50 Swiss francs (weighted-average strike price of 21.11 Swiss francs) were held by the bank. The call options expire in periods ranging from August 2020 to August 2025. However, only 3.9 million of these instruments, with strike prices ranging from 19.50 to 23.50 Swiss francs (weighted-average strike price of 20.69 Swiss francs), could be exercised at December 31, 2019, under the terms of the agreement with the bank.
In addition to the above, at December 31, 2019, the Company had further outstanding obligations to deliver:
—
See Note 18 for a description of the above share-based payment arrangements.
In 2018 and 2017, the Company delivered 2.4 million and 6.3 million shares, respectively, out of treasury stock, for options exercised in relation to the MIP, while in 2019 the amount was not significant. In addition, in 2019 and 2017 the Company delivered 0.5 million and 2.8 million shares from treasury stock under the ESAP. No shares were delivered in 2018 under the ESAP.
Amounts available to be distributed as dividends to the stockholders of ABB Ltd are based on the requirements of Swiss law and ABB Ltd's Articles of Incorporation, and are determined based on amounts presented in the unconsolidated financial statements of ABB Ltd, prepared in accordance with Swiss law. At December 31, 2019, the total unconsolidated stockholders' equity of ABB Ltd was 8,420 million Swiss francs (\$8,696 million), including 260 million Swiss francs (\$269 million) representing share capital, 8,920 million Swiss francs (\$9,212 million) representing reserves and 760 million Swiss francs (\$785 million) representing a reduction of equity for own shares (treasury stock). Of the reserves, 760 million Swiss francs (\$785 million) relating to own shares and 52 million Swiss francs (\$54 million) representing 20 percent of share capital, are restricted and not available for distribution.
In February 2020, the Company announced that a proposal will be put to the 2020 AGM for approval by the shareholders to distribute 0.80 Swiss francs per share to shareholders.
Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options and outstanding options and shares granted subject to certain conditions under the Company's share-based payment arrangements. In 2019, 2018 and 2017, outstanding securities representing a maximum of 81 million, 88 million and 31 million shares, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been antidilutive.
| Basic earnings per share: | |||
|---|---|---|---|
| (\$ in millions, except per share data in \$) | 2019 | 2018 | 2017 |
| Amounts attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 1,043 | 1,514 | 1,441 |
| Income from discontinued operations, net of tax | 396 | 659 | 772 |
| Net income | 1,439 | 2,173 | 2,213 |
| Weighted-average number of shares outstanding (in millions) | 2,133 | 2,132 | 2,138 |
| Basic earnings per share attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 0.49 | 0.71 | 0.67 |
| Income from discontinued operations, net of tax | 0.19 | 0.31 | 0.36 |
| Net income | 0.67 | 1.02 | 1.04 |
| Diluted earnings per share: (\$ in millions, except per share data in \$) |
2019 | 2018 | 2017 |
| Amounts attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 1,043 | 1,514 | 1,441 |
| Income from discontinued operations, net of tax | 396 | 659 | 772 |
| Net income | 1,439 | 2,173 | 2,213 |
| Weighted-average number of shares outstanding (in millions) | 2,133 | 2,132 | 2,138 |
| Effect of dilutive securities: | |||
| Call options and shares | 2 | 7 | 10 |
| Adjusted weighted-average number of shares outstanding (in millions) | 2,135 | 2,139 | 2,148 |
| Diluted earnings per share attributable to ABB shareholders: | |||
| Income from continuing operations, net of tax | 0.49 | 0.71 | 0.67 |
| Income from discontinued operations, net of tax | 0.19 | 0.31 | 0.36 |
| Net income | 0.67 | 1.02 | 1.03 |
—
The following table includes amounts recorded within "Total other comprehensive income (loss)" including the related income tax effects:
| 2019 | 2018 | 2017 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Before | Tax | Net of | Before | Tax | Net of | Before | Tax | Net of | |
| (\$ in millions) | tax | effect | tax | tax | effect | tax | tax | effect | tax |
| Foreign currency translation adjustments: | |||||||||
| Foreign currency translation adjustments | (130) | — | (130) | (641) | 14 | (627) | 911 | 1 | 912 |
| Gain on liquidation of foreign subsidiary | — | — | — | (31) | — | (31) | — | — | — |
| Changes attributable to divestments(1) | (2) | — | (2) | 12 | — | 12 | 12 | — | 12 |
| Net change during the year | (132) | — | (132) | (660) | 14 | (646) | 923 | 1 | 924 |
| Available-for-sale securities: | |||||||||
| Net unrealized gains (losses) arising during the year |
16 | (2) | 14 | (5) | 1 | (4) | 1 | — | 1 |
| Reclassification adjustments for net (gains) losses included in net income |
1 | (1) | — | 1 | — | 1 | — | — | — |
| Net change during the year | 17 | (3) | 14 | (4) | 1 | (3) | 1 | — | 1 |
| Pension and other postretirement plans: | |||||||||
| Prior service (costs) credits | |||||||||
| arising during the year | 3 | 3 | 6 | (11) | 4 | (7) | (20) | 4 | (16) |
| Net actuarial gains (losses) | |||||||||
| arising during the year | (293) | 73 | (220) | (411) | 59 | (352) | (184) | 45 | (139) |
| Amortization of prior service cost (credit) included in net income |
(25) | (3) | (28) | (19) | (5) | (24) | 6 | — | 6 |
| Amortization of net actuarial loss | |||||||||
| included in net income | 99 | (31) | 68 | 91 | (22) | 69 | 90 | (27) | 63 |
| Net losses from pension settlements | |||||||||
| included in net income | 38 | (6) | 32 | 23 | (4) | 19 | 13 | (4) | 9 |
| Changes attributable to divestments(1) | — | — | — | — | — | — | 8 | (2) | 6 |
| Net change during the year | (178) | 36 | (142) | (327) | 32 | (295) | (87) | 16 | (71) |
| Cash flow hedge derivatives: | |||||||||
| Net gains (losses) arising during the year | 20 | — | 20 | (51) | 2 | (49) | 45 | (7) | 38 |
| Reclassification adjustments for net (gains) | |||||||||
| losses included in net income | (9) | — | (9) | 20 | 1 | 21 | (26) | 4 | (22) |
| Changes attributable to divestments(1) | — | — | — | — | — | — | (4) | 1 | (3) |
| Net change during the year | 11 | — | 11 | (31) | 3 | (28) | 15 | (2) | 13 |
| Total other comprehensive income (loss) | (282) | 33 | (249) | (1,022) | 50 | (972) | 852 | 15 | 867 |
(1) Changes attributable to divestments are included in the computation of the net gain or loss on sale of businesses (see Note 4).
The following table shows changes in "Accumulated other comprehensive loss" (OCI) attributable to ABB, by component, net of tax:
| (\$ in millions) | Foreign currency translation adjustments |
Unrealized gains (losses) on available for-sale securities |
Pension and other post retirement plan adjustments |
Unrealized gains (losses) of cash flow hedge derivatives |
Accumulated other compre hensive loss |
|---|---|---|---|---|---|
| Balance at January 1, 2017 | (3,592) | 7 | (1,601) | (1) | (5,187) |
| Other comprehensive (loss) income before reclassifications |
912 | 1 | (155) | 38 | 796 |
| Amounts reclassified from OCI | — | — | 78 | (22) | 56 |
| Changes attributable to divestments | 12 | — | 6 | (3) | 15 |
| Total other comprehensive (loss) income | 924 | 1 | (71) | 13 | 867 |
| Less: | |||||
| Amounts attributable to noncontrolling interests |
25 | — | — | — | 25 |
| Balance at December 31, 2017 | (2,693) | 8 | (1,672) | 12 | (4,345) |
| Cumulative effect of changes in accounting principles(1) |
— | (9) | — | — | (9) |
| Other comprehensive (loss) income before reclassifications |
(627) | (4) | (359) | (49) | (1,039) |
| Amounts reclassified from OCI | (31) | 1 | 64 | 21 | 55 |
| Changes attributable to divestments | 12 | — | — | — | 12 |
| Total other comprehensive (loss) income | (646) | (3) | (295) | (28) | (972) |
| Less: | |||||
| Amounts attributable to noncontrolling interests |
(15) | — | — | — | (15) |
| Balance at December 31, 2018 | (3,324) | (4) | (1,967) | (16) | (5,311) |
| Adoption of an accounting standard update(2) | — | — | (36) | — | (36) |
| Other comprehensive (loss) income before reclassifications |
(130) | 14 | (214) | 20 | (310) |
| Amounts reclassified from OCI | — | — | 72 | (9) | 63 |
| Changes attributable to divestments | (2) | — | — | — | (2) |
| Total other comprehensive (loss) income | (132) | 14 | (142) | 11 | (249) |
| Less: | |||||
| Amounts attributable to noncontrolling interests |
(6) | — | — | — | (6) |
| Balance at December 31, 2019 | (3,450) | 10 | (2,145) | (5) | (5,590) |
(1) Amounts relate to the adoption of two accounting standard updates in 2018 regarding the Recognition and measurement of financial assets and financial liabilities and Revenue from contracts with customers.
(2) Amounts relate to the adoption of an accounting standard update in 2019 regarding the Tax Cuts and Jobs Act of 2017. See "Applicable for current periods" section of Note 2 for more details.
| (\$ in millions) | Location of (gains) losses | |||
|---|---|---|---|---|
| Details about OCI components | reclassified from OCI | 2019 | 2018 | 2017 |
| Foreign currency translation adjustments: | ||||
| Gain on liquidation of foreign subsidiary | Other income (expense), net | — | (31) | — |
| Pension and other postretirement plan adjustments: | ||||
| Amortization of prior service cost (credit) | Non-operational pension (cost) credit(1) | (25) | (19) | 6 |
| Amortization of net actuarial loss | Non-operational pension (cost) credit(1) | 99 | 91 | 90 |
| Net losses from pension settlements | Non-operational pension (cost) credit(1) | 38 | 23 | 13 |
| Total before tax | 112 | 95 | 109 | |
| Tax | Provision for taxes | (40) | (31) | (31) |
| Amounts reclassified from OCI | 72 | 64 | 78 |
(1) Amounts include a total of \$6 million, \$12 million and \$9 million in 2019, 2018 and 2017, respectively, reclassified from OCI to Income from discontinued operations.
The amounts reclassified out of OCI in respect of Unrealized gains (losses) on available-for-sale securities and Unrealized gains (losses) of cash flow hedge derivatives were not significant in 2019, 2018 and 2017.
In December 2018, the Company announced a two-year restructuring program with the objective of simplifying its business model and structure through the implementation of a new organizational structure driven by its Businesses. The program includes the planned elimination of the country and regional structures within the current matrix organization, including the elimination of the three regional Executive Committee roles. The Businesses will each be responsible for both their customer-facing activities and business support functions, while the remaining Group-level corporate activities will primarily focus on Group strategy, portfolio and performance management, capital allocation, core technologies and the ABB Ability™ platform. The program is expected to be performed over two years and incur restructuring expenses of \$350 million, primarily relating to employee severance costs.
The following table outlines the costs incurred in 2019 and 2018, the cumulative costs incurred to date and the total amount of costs expected to be incurred under the program per operating segment:
| Costs incurred in(1) | Cumulative costs | Total | |||
|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | incurred up to December 31, 2019(1) |
expected costs(1) |
|
| Electrification | 18 | 32 | 50 | 80 | |
| Industrial Automation | 3 | 21 | 24 | 40 | |
| Motion | 6 | 1 | 7 | 50 | |
| Robotics & Discrete Automation | 8 | — | 8 | 20 | |
| Corporate and Other | 54 | 11 | 65 | 160 | |
| Total | 89 | 65 | 154 | 350 |
(1) Amounts in the table above have been recast to reflect the reorganization of the Company's operating segments in 2019 as outlined in Note 23.
| (\$ in millions) | Costs incurred in | Cumulative costs | ||
|---|---|---|---|---|
| 2019 | 2018 | incurred up to December 31, 2019 |
||
| Employee severance costs | 81 | 65 | 146 | |
| Estimated contract settlement, loss order and other costs | 1 | — | 1 | |
| Inventory and long-lived asset impairments | 7 | — | 7 | |
| Total | 89 | 65 | 154 |
Restructuring expenses recorded for this program are included in the following line items in the Consolidated Income Statements:
| (\$ in millions) | 2019 | 2018 |
|---|---|---|
| Total cost of sales | 8 | 35 |
| Selling, general and administrative expenses | 46 | 23 |
| Non-order related research and development expenses | 1 | 3 |
| Other income (expense), net | 34 | 4 |
| Total | 89 | 65 |
Liabilities associated with the OS program are primarily included in "Other provisions". The following table shows the activity from the beginning of the program to December 31, 2019:
| Contract settlement, | |||
|---|---|---|---|
| Employee | loss order and | ||
| (\$ in millions) | severance costs | other costs | Total |
| Liability at January 1, 2018 | — | — | — |
| Expenses | 65 | — | 65 |
| Liability at December 31, 2018 | 65 | — | 65 |
| Expenses | 111 | 1 | 112 |
| Cash payments | (44) | (1) | (45) |
| Change in estimates | (30) | — | (30) |
| Exchange rate differences | (3) | — | (3) |
| Liability at December 31, 2019 | 99 | — | 99 |
From September 2015 to December 2017, the Company executed a restructuring program to make the Company leaner, faster and more customer-focused. The program involved the rapid expansion and use of regional shared service centers as well as a streamlining of global operations and head office functions, with business units moving closer to their respective key markets. The program involved various restructuring initiatives across all operating segments and regions.
As of December 31, 2017, the Company had incurred substantially all costs related to the White Collar Productivity program.
The following table shows the activity from the beginning of the program to December 31, 2018:
| Contract settlement, | |||
|---|---|---|---|
| Employee | loss order and | ||
| (\$ in millions) | severance costs | other costs | Total |
| Liability at January 1, 2015 | — | — | — |
| Expenses | 300 | 3 | 303 |
| Cash payments | (27) | — | (27) |
| Liability at December 31, 2015 | 273 | 3 | 276 |
| Expenses | 182 | 3 | 185 |
| Cash payments | (91) | (2) | (93) |
| Change in estimates | (85) | (1) | (86) |
| Exchange rate differences | (17) | (1) | (18) |
| Liability at December 31, 2016 | 262 | 2 | 264 |
| Expenses | 28 | 3 | 31 |
| Cash payments | (92) | (4) | (96) |
| Change in estimates | (118) | — | (118) |
| Exchange rate differences | 21 | — | 21 |
| Liability at December 31, 2017 | 101 | 1 | 102 |
| Cash payments | (55) | — | (55) |
| Change in estimates and exchange rate | |||
| differences | (13) | — | (13) |
| Liability at December 31, 2018 | 33 | 1 | 34 |
The change in estimates during 2017 of \$118 million is mainly due to higher than expected rates of attrition and internal redeployment. The reduction in the liability was recorded in income from operations, primarily as reductions in "Total cost of sales" of \$53 million and in "Selling, general and administrative expenses" of \$55 million.
The change in estimates during 2016 of \$86 million is due to significantly higher than expected rates of attrition and internal redeployment and a lower than expected severance cost per employee for the employee groups affected by the first phase of restructuring initiated in 2015.
The following table outlines the net costs incurred in 2017 and the cumulative net costs incurred up to December 31, 2017:
| (\$ in millions) | Net costs incurred in 2017(1) |
Cumulative costs incurred up to December 31, 2017(1) |
|---|---|---|
| Electrification | (17) | 72 |
| Industrial Automation | (23) | 106 |
| Motion | (10) | 42 |
| Robotics & Discrete Automation | (4) | 14 |
| Corporate and Other | (32) | 91 |
| Total | (86) | 325 |
(1) Amounts in the table above have been recast to reflect the reorganization of the Company's operating segments in 2019 as outlined in Note 23.
The Company recorded the following expenses, net of changes in estimates, under this program:
| (\$ in millions) | 2017 | Cumulative costs incurred up to December 31, 2017 |
|---|---|---|
| Employee severance costs | (90) | 307 |
| Estimated contract settlement, loss order and other costs | 3 | 8 |
| Inventory and long-lived asset impairments | 1 | 10 |
| Total | (86) | 325 |
Expenses, net of changes in estimates, associated with this program are recorded in the following line items in the Consolidated Income Statements:
| (\$ in millions) | 2017 |
|---|---|
| Total cost of sales | (47) |
| Selling, general and administrative expenses | (35) |
| Non-order related research and development expenses | (5) |
| Other income (expense), net | 1 |
| Total | (86) |
In 2019, 2018 and 2017, the Company executed various other restructuring-related activities and incurred charges of \$114 million, \$116 million and \$181 million, respectively.
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Employee severance costs | 55 | 74 | 130 |
| Estimated contract settlement, loss order and other costs | 37 | 29 | 32 |
| Inventory and long-lived asset impairments | 22 | 13 | 19 |
| Total | 114 | 116 | 181 |
Expenses associated with these activities are recorded in the following line items in the Consolidated Income Statements:
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Total cost of sales | 46 | 24 | 119 |
| Selling, general and administrative expenses | 4 | 52 | 10 |
| Non-order related research and development expenses | — | 2 | — |
| Other income (expense), net | 64 | 38 | 52 |
| Total | 114 | 116 | 181 |
At December 31, 2019 and 2018, \$189 million and \$245 million, respectively, was recorded for other restructuring-related liabilities and is primarily included in "Other provisions".
The Chief Operating Decision Maker (CODM) is the Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment using the information outlined below. The Company is organized into operating segments based on products and services and these operating segments consist of Electrification, Industrial Automation, Motion, and Robotics & Discrete Automation. The remaining operations of the Company are included in Corporate and Other.
Effective April 1, 2019, the Company announced a reorganization of its operating segments into four customer-focused, entrepreneurial businesses. The Electrification Products segment was renamed the Electrification segment. The Industrial Automation segment remains unchanged except that it now excludes the Machine and Factory Automation business line, which has been transferred, along with the Robotics business line from the former Robotics and Motion segment, to the new Robotics & Discrete Automation segment. The new Motion segment contains the remaining business lines of the former Robotics and Motion segment.
The segment information for 2018 and 2017, and at December 31, 2018 and 2017, has been recast to reflect these changes. In addition, the segment level information for restructuring and related expenses included in Note 22 has been recast to reflect these changes.
A description of the types of products and services provided by each reportable segment is as follows:
The primary measure of profitability on which the operating segments are evaluated is Operational EBITA, which represents income from operations excluding:
gains and losses from sale of businesses (including fair value adjustment on assets and liabilities held for sale),
acquisition- and divestment-related expenses and integration costs,
Certain other non-operational items generally includes: certain regulatory, compliance and legal costs, certain asset write downs/impairments as well as other items which are determined by management on a case-by-case basis.
The CODM primarily reviews the results of each segment on a basis that is before the elimination of profits made on inventory sales between segments. Segment results below are presented before these eliminations, with a total deduction for intersegment profits to arrive at the Company's consolidated Operational EBITA. Intersegment sales and transfers are accounted for as if the sales and transfers were to third parties, at current market prices.
The following tables present disaggregated segment revenues from contracts with customers for 2019, 2018 and 2017.
| 2019 | |||||||
|---|---|---|---|---|---|---|---|
| (\$ in millions) | Electrification | Industrial Automation |
Motion | Robotics & Discrete Automation |
Corporate and Other |
Total | |
| Geographical markets | |||||||
| Europe | 4,039 | 2,416 | 1,879 | 1,634 | 36 | 10,004 | |
| The Americas | 4,568 | 1,582 | 2,315 | 453 | 1 | 8,919 | |
| Asia, Middle East and Africa | 3,665 | 2,153 | 1,827 | 1,157 | 40 | 8,842 | |
| 12,272 | 6,151 | 6,021 | 3,244 | 77 | 27,765 | ||
| End Customer Markets | |||||||
| Utilities | 2,355 | 1,057 | 696 | — | 18 | 4,126 | |
| Industry | 4,798 | 3,606 | 3,890 | 3,165 | 35 | 15,494 | |
| Transport and infrastructure | 5,119 | 1,488 | 1,435 | 79 | 24 | 8,145 | |
| 12,272 | 6,151 | 6,021 | 3,244 | 77 | 27,765 | ||
| Product type | |||||||
| Products | 10,315 | 1,439 | 5,152 | 1,785 | 65 | 18,756 | |
| Systems | 958 | 1,648 | — | 968 | 12 | 3,586 | |
| Services and software | 999 | 3,064 | 869 | 491 | — | 5,423 | |
| 12,272 | 6,151 | 6,021 | 3,244 | 77 | 27,765 | ||
| Third-party revenues | 12,272 | 6,151 | 6,021 | 3,244 | 77 | 27,765 | |
| Intersegment revenues(1) | 456 | 122 | 512 | 70 | (947) | 213 | |
| Total Revenues | 12,728 | 6,273 | 6,533 | 3,314 | (870) | 27,978 |
| 2018 | ||||||||
|---|---|---|---|---|---|---|---|---|
| (\$ in millions) | Electrification | Industrial Automation |
Motion | Robotics & Discrete Automation |
Corporate and Other |
Total | ||
| Geographical markets | ||||||||
| Europe | 3,881 | 2,475 | 1,862 | 1,737 | 58 | 10,013 | ||
| The Americas | 3,650 | 1,467 | 2,389 | 476 | 21 | 8,003 | ||
| Asia, Middle East and Africa | 3,680 | 2,449 | 1,699 | 1,339 | 236 | 9,403 | ||
| 11,211 | 6,391 | 5,950 | 3,552 | 315 | 27,419 | |||
| End Customer Markets | ||||||||
| Utilities | 2,452 | 1,174 | 746 | — | 176 | 4,548 | ||
| Industry | 4,395 | 3,573 | 3,877 | 3,510 | 98 | 15,453 | ||
| Transport and infrastructure | 4,364 | 1,644 | 1,327 | 42 | 41 | 7,418 | ||
| 11,211 | 6,391 | 5,950 | 3,552 | 315 | 27,419 | |||
| Product type | ||||||||
| Products | 9,679 | 1,528 | 5,111 | 2,019 | 118 | 18,455 | ||
| Systems | 617 | 1,853 | — | 1,001 | 197 | 3,668 | ||
| Services and software | 915 | 3,010 | 839 | 532 | — | 5,296 | ||
| 11,211 | 6,391 | 5,950 | 3,552 | 315 | 27,419 | |||
| Third-party revenues | 11,211 | 6,391 | 5,950 | 3,552 | 315 | 27,419 | ||
| Intersegment revenues(1) | 475 | 109 | 513 | 59 | (913) | 243 | ||
| Total Revenues | 11,686 | 6,500 | 6,463 | 3,611 | (598) | 27,662 |
| 2017 | ||||||||
|---|---|---|---|---|---|---|---|---|
| (\$ in millions) | Electrification | Industrial Automation |
Motion | Robotics & Discrete Automation |
Corporate and Other |
Total | ||
| Geographical markets | ||||||||
| Europe | 3,514 | 2,470 | 1,657 | 1,259 | 132 | 9,032 | ||
| The Americas | 2,613 | 1,349 | 2,219 | 534 | 116 | 6,831 | ||
| Asia, Middle East and Africa | 3,464 | 2,515 | 1,473 | 1,125 | 493 | 9,070 | ||
| 9,591 | 6,334 | 5,349 | 2,918 | 741 | 24,933 | |||
| End Customer Markets | ||||||||
| Utilities | 2,597 | 1,273 | 628 | — | 575 | 5,073 | ||
| Industry | 4,022 | 3,398 | 3,488 | 2,891 | 155 | 13,954 | ||
| Transport and infrastructure | 2,972 | 1,663 | 1,233 | 27 | 11 | 5,906 | ||
| 9,591 | 6,334 | 5,349 | 2,918 | 741 | 24,933 | |||
| Product type | ||||||||
| Products | 8,322 | 1,406 | 4,595 | 1,489 | 169 | 15,981 | ||
| Systems | 614 | 2,089 | — | 926 | 565 | 4,194 | ||
| Services and software | 655 | 2,839 | 754 | 503 | 7 | 4,758 | ||
| 9,591 | 6,334 | 5,349 | 2,918 | 741 | 24,933 | |||
| Third-party revenues | 9,591 | 6,334 | 5,349 | 2,918 | 741 | 24,933 | ||
| Intersegment revenues(1) | 503 | 138 | 528 | 39 | (945) | 263 | ||
| Total Revenues | 10,094 | 6,472 | 5,877 | 2,957 | (204) | 25,196 |
(1) Intersegment revenues include sales to the Power Grids business which is presented as discontinued operations and are not eliminated from Total revenues (see Note 3).
Revenues by geography reflect the location of the customer. Approximately 24 percent, 22 percent and 20 percent of the Company's total revenues in 2019, 2018 and 2017, respectively, came from customers in the United States. In each of 2019, 2018 and 2017 approximately 15 percent of the Company's total revenues were generated from customers in China. In each of 2019, 2018 and 2017 more than 98 percent of the Company's total revenues were generated from customers outside Switzerland.
The following tables present Operational EBITA, the reconciliations of consolidated Operational EBITA to Income from continuing operations before taxes, as well as Depreciation and amortization, and Capital expenditure for 2019, 2018 and 2017, as well as Total assets at December 31, 2019, 2018 and 2017.
| (\$ in millions) | 2019 | 2018 | 2017 |
|---|---|---|---|
| Operational EBITA: | |||
| Electrification | 1,688 | 1,626 | 1,510 |
| Industrial Automation | 732 | 914 | 902 |
| Motion | 1,082 | 1,023 | 838 |
| Robotics & Discrete Automation | 393 | 528 | 473 |
| Corporate and Other: | |||
| – Non-core and divested businesses | (145) | (291) | (163) |
| – Stranded corporate costs | (225) | (297) | (286) |
| – Corporate costs and Other intersegment elimination | (418) | (498) | (457) |
| Total | 3,107 | 3,005 | 2,817 |
| Acquisition-related amortization | (265) | (273) | (229) |
| Restructuring, related and implementation costs(1) | (300) | (172) | (300) |
| Changes in obligations related to divested businesses | (36) | (106) | (94) |
| Changes in pre-acquisition estimates | (22) | (8) | (8) |
| Gains and losses from sale of businesses | 55 | 57 | 252 |
| Fair value adjustment on assets and liabilities held for sale | (421) | — | — |
| Acquisition- and divestment-related expenses and integration costs | (121) | (204) | (81) |
| Foreign exchange/commodity timing differences in income from operations: Unrealized gains and losses on derivatives (foreign exchange, commodities, |
|||
| embedded derivatives) | 20 | (1) | 56 |
| Realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized |
8 | (23) | 8 |
| Unrealized foreign exchange movements on receivables/payables (and related assets/liabilities) |
(7) | (9) | (30) |
| Certain other non-operational items: | |||
| Costs for planned divestment of Power Grids | (141) | — | — |
| Regulatory, compliance and legal costs | (7) | (34) | (102) |
| Business transformation costs | (19) | (17) | — |
| Executive Committee transition costs | (14) | — | — |
| Favorable resolution of an uncertain purchase price adjustment | 92 | — | — |
| Gain on sale of investments | 15 | — | — |
| Gain on liquidation of a foreign subsidiary | — | 31 | — |
| Asset write downs/impairments | (4) | (25) | (40) |
| Other non-operational items | (2) | 5 | (19) |
| Income from operations | 1,938 | 2,226 | 2,230 |
| Interest and dividend income | 67 | 72 | 73 |
| Interest and other finance expense | (215) | (262) | (234) |
| Non-operational pension (cost) credit | 72 | 83 | 33 |
| Income from continuing operations before taxes | 1,862 | 2,119 | 2,102 |
(1) Amounts in 2019 include \$97 million of implementation costs in relation to the OS Program.
| Depreciation and amortization |
Capital expenditure(1) | Total assets(1)(2) at December 31, |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| (\$ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 |
| Electrification | 414 | 355 | 315 | 279 | 244 | 218 | 11,671 | 12,052 | 8,881 |
| Industrial Automation | 55 | 57 | 61 | 64 | 58 | 54 | 4,559 | 4,287 | 4,478 |
| Motion | 169 | 184 | 193 | 110 | 93 | 89 | 6,149 | 6,016 | 6,051 |
| Robotics & Discrete Automation | 124 | 127 | 73 | 59 | 74 | 44 | 4,661 | 4,760 | 4,848 |
| Corporate and Other | 199 | 193 | 194 | 250 | 303 | 347 | 19,068 | 17,326 | 19,200 |
| Consolidated | 961 | 916 | 836 | 762 | 772 | 752 | 46,108 | 44,441 | 43,458 |
(1) Capital expenditures and Total assets are after intersegment eliminations and therefore reflect third-party activities only.
(2) At December 31, 2019, 2018 and 2017, Corporate and Other includes \$9,840 million, \$8,591 million and \$8,603 million, respectively, of assets in the Power Grids business which is reported as discontinued operations (see Note 3).
Geographic information for long-lived assets was as follows:
| (\$ in millions) | Long-lived assets at December 31, |
|||
|---|---|---|---|---|
| 2019 | 2018 | |||
| Europe | 2,565 | 2,110 | ||
| The Americas | 1,469 | 1,168 | ||
| Asia, Middle East and Africa | 932 | 855 | ||
| Total | 4,966 | 4,133 |
Long-lived assets represent "Property, plant and equipment, net" and, with effect from 2019 as a result of adopting the new leasing standard (see Note 2), "Operating lease right-of-use assets" and are shown by location of the assets. At December 31, 2019, approximately 23 percent, 10 percent and 10 percent of the Company's long-lived assets were located in the U.S., China, and Switzerland, respectively. At December 31, 2018, approximately 22 percent, 11 percent and 11 percent of the Company's long-lived assets were located in the U.S., China and Switzerland, respectively.
— EMPTY PAGE ADDED INTENTIONALLY
— 218–235
| — 220 |
ABB Ltd Management Report 2019 |
|---|---|
| — 221 |
Financial Statements 2019 |
| — 223 |
Notes to Financial Statements |
| — 233 |
Proposed appropriation of available earnings |
| — 234 |
Report of the Statutory Auditor on the Financial Statements |
ABB Ltd is the holding company of the ABB Group, owning directly or indirectly all subsidiaries globally.
The Company provided management services to a Group company of CHF 28 million.
• share deliveries for employee share programs of CHF 34 million.
In 2019, the Company issued bonds in the amount of CHF 280 respectively CHF 170 million and repaid loan in the amount of USD 325 million.
• from retained earnings of CHF 1,324 million.
In 2019, the Company employed on average 23 employees.
Once a year, the Company's Board of Directors performs a risk assessment in accordance with the Group's risk management process and discusses appropriate actions if necessary.
The Company does not carry out any research and development business.
In 2020, the Company will continue to operate as the holding company of the ABB Group. No change of business is expected.
February 25, 2020
| Year ended December 31 (CHF in thousands) | Note | 2019 | 2018 |
|---|---|---|---|
| Dividend income | 7 | 1,200,000 | 1,300,000 |
| Finance income | 27,660 | 37,921 | |
| Other operating income | 8 | 98,274 | 83,902 |
| Finance expense | (31,788) | (52,755) | |
| Personnel expenses | (51,857) | (39,826) | |
| Other operating expenses | (40,076) | (31,542) | |
| Net income before taxes | 1,202,213 | 1,297,700 | |
| Income taxes | (3,842) | (116) | |
| Net income | 1,198,371 | 1,297,584 |
| December 31 (CHF in thousands) | Note | 2019 | 2018 |
|---|---|---|---|
| Cash | 243 | 318 | |
| Cash deposit with ABB Group Treasury Operations | 345,299 | 11,522 | |
| Non-trade receivables | 76 | 46 | |
| Non-trade receivables – Group | 24,190 | 12,143 | |
| Short-term loans – Group | 24,205 | 344,703 | |
| Accrued income and prepaid expenses | 582 | 737 | |
| Accrued income and prepaid expenses – Group | 4,092 | 3,927 | |
| Total current assets | 398,687 | 373,396 | |
| Long-term loans – Group | 387,280 | 417,665 | |
| Participation | 2 | 8,973,229 | 8,973,229 |
| Other long-term assets | 2,530 | 1,552 | |
| Total non-current assets | 9,363,039 | 9,392,446 | |
| Total assets | 9,761,726 | 9,765,842 | |
| Interest-bearing liabilities – Group | 4 | 24,205 | 344,703 |
| Non-trade payables | 9,416 | 10,699 | |
| Non-trade payables – Group | 3,204 | 3,018 | |
| Deferred income and accrued expenses | 115,134 | 126,577 | |
| Deferred income and accrued expenses – Group | 756 | 1,989 | |
| Total current liabilities | 152,715 | 486,986 | |
| Interest-bearing liabilities | 4 | 800,292 | 350,000 |
| Interest-bearing liabilities – Group | 4 | 387,280 | 417,665 |
| Long-term provision | 1,850 | — | |
| Total non-current liabilities | 1,189,422 | 767,665 | |
| Total liabilities | 1,342,137 | 1,254,651 | |
| Share capital | 6 | 260,178 | 260,178 |
| Legal reserves | |||
| Legal reserves from capital contribution | 6 | 30,430 | 30,430 |
| Legal reserves from retained earnings | 6 | 1,000,000 | 1,000,000 |
| Free reserves | |||
| Other reserves | 6 | — | — |
| Retained earnings | 6 | 6,690,847 | 6,716,999 |
| Net income | 1,198,371 | 1,297,584 | |
| Own shares | 6 | (760,237) | (794,000) |
| Total stockholders' equity | 8,419,589 | 8,511,191 | |
| Total liabilities and stockholders' equity | 9,761,726 | 9,765,842 |
| Year ended December 31 (CHF in thousands) | Note | 2019 | 2018 |
|---|---|---|---|
| Operating activities: | |||
| Net income | 1,198,371 | 1,297,584 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||
| Other non-cash-effective items | (1,881) | (11,611) | |
| Changes in operating assets and liabilities: | |||
| Receivables, accrued income and prepaid expenses | (12,087) | (4,759) | |
| Current liabilities (excl. interest-bearing liabilities) | (13,773) | 3,629 | |
| Net cash provided by operating activities | 1,170,630 | 1,284,843 | |
| Investing activities: | |||
| Repayments of loan granted to group companies | 344,064 | 49,774 | |
| Cash deposit with ABB Group Treasury Operations | (333,777) | 492,346 | |
| Net cash provided by investing activities | 10,287 | 542,120 | |
| Financing activities: | |||
| Repayment of Bond 2012–2018 | 4 | (350,000) | |
| New Bond 280MCHF 2019–2024 | 4 | 280,115 | — |
| New Bond 170MCHF 2019–2029 | 4 | 170,214 | — |
| Repayments of loan granted by group companies | 4 | (344,064) | (49,774) |
| Purchase of own shares | 6 | — | (232,300) |
| Delivery of own shares | 6 | 36,479 | 86,290 |
| Dividends paid | 6 | (1,323,736) | (1,281,550) |
| thereof from retained earnings | (1,323,736) | (1,281,550) | |
| thereof from nominal value reduction | — | — | |
| Net cash used in financing activities | (1,180,993) | (1,827,334) | |
| Net change in cash and equivalents | (75) | (371) | |
| Cash and equivalents, opening balance | 318 | 689 | |
| Cash and equivalents, closing balance | 243 | 318 |
—
—
ABB Ltd, Zurich, Switzerland (the Company) is the parent company of the ABB Group. Its stand-alone financial statements are prepared in accordance with Swiss law.
The financial statements have been prepared in accordance with Article 957 et seqq. of Title 32 of the Swiss Code of Obligations.
In December 2018, ABB Group announced an agreement to divest 80.1 percent of its Power Grids business to Hitachi Ltd. (Hitachi) valuing the business at \$11 billion. The divestment is expected to be completed at the end of the second quarter of 2020, following the receipt of customary regulatory approvals as well as the completion of certain legal entity reorganizations.
Group companies are all companies which are directly or indirectly controlled by the Company and variable interest entities if it is determined that the Company is the primary beneficiary.
Certain prior-year amounts have been reclassified to conform to the current year's presentation.
—
| December 31, 2019 and 2018 | ||||
|---|---|---|---|---|
| Ownership and | ||||
| Company name | Purpose | Domicile | Share capital | voting rights |
| ABB Asea Brown Boveri Ltd | Holding | CH-Zurich | CHF 2,768,000,000 | 100% |
The participation is valued at the lower of cost or fair value, using generally accepted valuation principles.
The following tables set forth the name, country of incorporation, ownership and voting rights, as well as share capital, of the significant indirect subsidiaries of the Company, as of December 31, 2019 and 2018.
| ABB | ABB | |||||
|---|---|---|---|---|---|---|
| ownership | Share | ownership | Share | |||
| and voting | capital in | and voting | capital in | |||
| Company name/location | Country | rights % 2019 |
thousands 2019 |
rights % 2018 |
thousands | 2018 Currency |
| ABB Australia Pty Limited, Moorebank, NSW | Australia | 100.00 | 131,218 | 100.00 | 131,218 | AUD |
| ABB Group Investment Management Pty. Ltd., | ||||||
| Moorebank, NSW | Australia | 100.00 | 505,312 | 100.00 | 505,312 | AUD |
| B&R Holding GmbH, Eggelsberg | Austria | 100.00 | 35 | 100.00 | 35 | EUR |
| B&R Industrial Automation GmbH, Eggelsberg | Austria | 100.00 | 1,240 | 100.00 | 1,240 | EUR |
| ABB Industrial Solutions (Belgium) BVBA, Gent | Belgium | —(3) | —(3) | 100.00 | 24 | EUR |
| ABB N.V., Zaventem | Belgium | —(3) | —(3) | 100.00 | 13,290 | EUR |
| ABB AUTOMACAO LTDA, SOROCABA | Brazil | 100.00(5) | 37,780(5) | — | — | BRL |
| ABB Ltda., São Paulo | Brazil | 100.00 | 854,784 | 100.00 | 689,793 | BRL |
| ABB Bulgaria EOOD, Sofia | Bulgaria | 100.00 | 65,110 | 100.00 | 65,110 | BGN |
| ABB Canada Holding Limited Partnership, | ||||||
| Saint-Laurent, Quebec | Canada | —(4) | —(4) | 100.00 | — | CAD |
| ABB Electrification Canada ULC, Edmonton, Alberta(6) |
Canada | 100.00 | —(1) | 100.00 | —(1) | CAD |
| ABB Inc., Saint-Laurent, Quebec | Canada | 100.00 | —(1) | 100.00 | —(1) | CAD |
| ABB Beijing Drive Systems Co. Ltd., Beijing | China | 90.00 | 5,000 | 90.00 | 5,000 | USD |
| ABB (China) Ltd., Beijing | China | 100.00 | 235,000 | 100.00 | 310,000 | USD |
| ABB Electrical Machines Ltd., Shanghai | China | 100.00 | 14,400 | 100.00 | 14,400 | USD |
| ABB Engineering (Shanghai) Ltd., Shanghai | China | 100.00 | 40,000 | 100.00 | 40,000 | USD |
| ABB High Voltage Switchgear Co., Ltd. Beijing, Beijing |
China | —(3) | —(3) | 60.00 | 11,400 | USD |
| ABB Shanghai Free Trade Zone Industrial Co., Ltd., | ||||||
| Shanghai | China | 100.00 | 6,500 | 100.00 | 6,500 | CNY |
| ABB Xiamen Low Voltage Equipment Co. Ltd., Xiamen |
China | 100.00 | 15,800 | 100.00 | 15,800 | USD |
| ABB Xiamen Switchgear Co. Ltd., Xiamen | China | 66.52 | 29,500 | 64.30 | 23,500 | USD |
| ABB Xinhui Low Voltage Switchgear Co. Ltd., Xinhui | China | 90.00 | 6,200 | 90.00 | 6,200 | USD |
| ABB s.r.o., Prague | Czech Republic | 100.00 | 400,000 | 100.00 | 400,000 | CZK |
| ABB A/S, Skovlunde | Denmark | 100.00 | 100,000 | 100.00 | 100,000 | DKK |
| ABB for Electrical Industries (ABB ARAB) S.A.E., | ||||||
| Cairo | Egypt | 100.00 | 353,479 | 100.00 | 353,479 | EGP |
| Asea Brown Boveri S.A.E., Cairo | Egypt | 100.00 | 166,000 | 100.00 | 166,000 | USD |
| ABB AS, Jüri | Estonia | 100.00 | 1,663 | 100.00 | 1,663 | EUR |
| ABB Oy, Helsinki | Finland | 100.00 | 10,003 | 100.00 | 10,003 | EUR |
| ABB France, Cergy Pontoise | France | 99.83 | 25,778 | 99.83 | 25,778 | EUR |
| ABB SAS, Cergy Pontoise | France | 100.00 | 45,921 | 100.00 | 45,921 | EUR |
| ABB AG, Mannheim | Germany | 100.00 | 167,500 | 100.00 | 167,500 | EUR |
| ABB Automation GmbH, Mannheim | Germany | 100.00 | 15,000 | 100.00 | 15,000 | EUR |
| ABB Automation Products GmbH, Ladenburg | Germany | 100.00 | 10,620 | 100.00 | 10,620 | EUR |
| ABB Beteiligungs- und Verwaltungsges. mbH, | ||||||
| Mannheim | Germany | 100.00 | 61,355 | 100.00 | 61,355 | EUR |
| ABB Stotz-Kontakt GmbH, Heidelberg | Germany | 100.00 | 7,500 | 100.00 | 7,500 | EUR |
| B + R Industrie-Elektronik GmbH, Bad Homburg | Germany | 100.00 | 358 | —(3) | —(3) | EUR |
| Busch-Jaeger Elektro GmbH, Lüdenscheid | Germany | 100.00 | 1,535 | 100.00 | 1,535 | EUR |
| Industrial C&S Hungary Kft., Budapest | Hungary | 100.00 | 3,000 | 100.00 | 3,000 | HUF |
| ABB Global Industries and Services Private Limited, | ||||||
| Bangalore | India | 100.00 | 190,000 | 100.00 | 190,000 | INR |
| ABB India Limited, Bangalore | India | 75.00 | 423,817 | 75.00 | 423,817 | INR |
| ABB S.p.A., Milan | Italy | 100.00 | 110,000 | 100.00 | 110,000 | EUR |
| Power-One Italy S.p.A., Terranuova Bracciolini (AR) | Italy | 100.00 | 22,000 | 100.00 | 22,000 | EUR |
| ABB K.K., Tokyo | Japan | 100.00 | 1,000,000 | 100.00 | 1,000,000 | JPY |
| Korea, Republic | ||||||
| ABB Ltd., Seoul | of | 100.00 23,670,000 | 100.00 | 23,670,000 | KRW |
| ABB | ABB | |||||
|---|---|---|---|---|---|---|
| ownership | Share | ownership | Share | |||
| and voting | capital in | and voting | capital in | |||
| rights % | thousands | rights % | thousands | |||
| Company name/location | Country | 2019 | 2019 | 2018 | 2018 Currency | |
| ABB Electrical Control Systems S. de R.L. de C.V., Monterrey |
Mexico | 100.00 | 315,134 | 100.00 | 315,134 | MXN |
| ABB Mexico S.A. de C.V., San Luis Potosi SLP | Mexico | 100.00 | 633,368 | 100.00 | 633,368 | MXN |
| Asea Brown Boveri S.A. de C.V., San Luis Potosi SLP | Mexico | 100.00 | 667,686 | 100.00 | 667,686 | MXN |
| ABB B.V., Rotterdam | Netherlands | 100.00 | 9,200 | 100.00 | 9,200 | EUR |
| ABB Capital B.V., Rotterdam | Netherlands | 100.00 | 1,000 | 100.00 | 1,000 | USD |
| ABB Finance B.V., Rotterdam | Netherlands | 100.00 | 20 | 100.00 | 20 | EUR |
| ABB Holdings B.V., Rotterdam | Netherlands | 100.00 | 119 | 100.00 | 119 | EUR |
| ABB Investments B.V., Rotterdam | Netherlands | —(4) | —(4) | 100.00 | 100 | EUR |
| ABB AS, Billingstad | Norway | 100.00 | 134,550 | 100.00 | 250,000 | NOK |
| ABB Holding AS, Billingstad | Norway | 100.00 | 240,000 | 100.00 | 240,000 | NOK |
| ABB Business Services Sp. z o.o., Warsaw | Poland | 99.93 | 24 | 99.93 | 50 | PLN |
| ABB Industrial Solutions (Bielsko-Biala) Sp. z o.o., Bielsko-Biala |
Poland | 99.93 | 328,125 | 99.99 | 328,124 | PLN |
| ABB Sp. z o.o., Warsaw | Poland | 99.93 | 245,461 | 99.93 | 350,656 | PLN |
| Industrial C&S of P.R. LLC, San Juan | Puerto Rico | 100.00 | — | 100.00 | — | USD |
| Russian | ||||||
| ABB Ltd., Moscow | Federation | 100.00 | 5,686 | 100.00 | 5,686 | RUB |
| ABB Contracting Company Ltd., Riyadh | Saudi Arabia | —(3) | —(3) | 95.00 | 40,000 | SAR |
| ABB Electrical Industries Co. Ltd., Riyadh | Saudi Arabia | 65.00 | 181,000 | 65.00 | 181,000 | SAR |
| ABB Holdings Pte. Ltd., Singapore | Singapore | 100.00 | 32,797 | 100.00 | 32,797 | SGD |
| ABB Pte. Ltd., Singapore | Singapore | 100.00 | 28,842 | 100.00 | 28,842 | SGD |
| ABB Holdings (Pty) Ltd., Modderfontain | South Africa | 100.00 | 4,050 | 100.00 | 4,050 | ZAR |
| ABB South Africa (Pty) Ltd., Modderfontein | South Africa | 74.91 | 1 | 74.91 | 1 | ZAR |
| Asea Brown Boveri S.A., Madrid | Spain | 100.00 | 33,318 | 100.00 | 33,318 | EUR |
| ABB AB, Västerås | Sweden | 100.00(5) | 200,000(5) | — | — | SEK |
| ABB Norden Holding AB, Västerås | Sweden | 100.00 | 2,344,783 | 100.00 | 2,344,783 | SEK |
| ABB Power Grids Sweden AB, Västerås(7) | Sweden | 100.00 | 400,000 | 100.00 | 400,000 | SEK |
| ABB Capital AG, Zurich | Switzerland | 100.00(5) | 100(5) | — | — | CHF |
| ABB Information Systems Ltd., Zurich | Switzerland | 100.00 | 500 | 100.00 | 500 | CHF |
| ABB Investment Holding GmbH, Zurich | Switzerland | —(4) | —(4) | 100.00 | 92,054 | CHF |
| ABB Investment Holding 2 GmbH, Zurich | Switzerland | 100.00(5) | 20(5) | — | — | CHF |
| ABB Management Holding Ltd., Zurich | Switzerland | 100.00 | 1,051 | 100.00 | 1,051 | CHF |
| ABB Management Services Ltd., Zurich | Switzerland | 100.00 | 571 | 100.00 | 571 | CHF |
| ABB Schweiz AG, Baden | Switzerland | 100.00 | 55,000 | 100.00 | 55,000 | CHF |
| ABB Turbo Systems AG, Baden | Switzerland | 100.00 | 10,000 | 100.00 | 10,000 | CHF |
| ABB LIMITED, Bangkok | Thailand | 100.00 | 1,034,000 | 100.00 | 1,034,000 | THB |
| ABB Elektrik Sanayi A.S., Istanbul | Turkey | 99.99 | 13,410 | 99.99 | 13,410 | TRY |
| United Arab | ||||||
| ABB Industries (L.L.C.), Dubai | Emirates | 49.00(2) | 5,000 | 49.00(2) | 5,000 | AED |
| ABB Holdings Limited, Warrington | United Kingdom | 100.00 | 226,014 | 100.00 | 226,014 | GBP |
| ABB Limited, Warrington | United Kingdom | 100.00 | 120,000 | 100.00 | 120,000 | GBP |
| ABB Enterprise Software Inc., Atlanta, GA | United States | 100.00 | 1 | —(3) | —(3) | USD |
| ABB Finance (USA) Inc., Wilmington, DE | United States | 100.00 | 1 | 100.00 | 1 | USD |
| ABB Holdings Inc., Cary, NC | United States | 100.00 | 2 | 100.00 | 2 | USD |
| ABB Inc., Cary, NC | United States | 100.00 | 1 | 100.00 | 1 | USD |
| ABB Installation Products Inc, Memphis, TN | United States | 100.00 | 1 | 100.00 | 1 | USD |
| ABB Motors and Mechanical Inc, Fort Smith, AR | United States | 100.00 | — | 100.00 | — | USD |
| ABB Treasury Center (USA), Inc., Wilmington, DE | United States | 100.00 | 1 | 100.00 | 1 | USD |
| Edison Holding Corporation, Wilmington, DE | United States | 100.00 | — | 100.00 | — | USD |
| Industrial Connections & Solutions LLC, Cary, NC | United States | 100.00 | — | 100.00 | — | USD |
| Verdi Holding Corporation, Wilmington, DE | United States | 100.00 | — | 100.00 | — | USD |
(1) Shares without par value.
(2) Company consolidated as ABB exercises full management control.
(3) Based on the internal defined thresholds, these indirect participations are considered not significant, and therefore no details to these participations are disclosed in the respective year.
(4) Participation was either sold or liquidated in 2019.
(5) Participation newly incorporated in 2019.
(6) In 2019, renamed from ABB Installation Products Ltd., Saint-Jean-sur-Richelieu, Quebec.
(7) In 2019, renamed from ABB AB, Västerås.
| December 31 (CHF in thousands) | 2019 | 2018 | |
|---|---|---|---|
| Bonds 2019–2024 0.3% coupon | nominal value | 280,000 | — |
| premium on issuance | 96 | — | |
| Bonds 2019–2029 1.0% coupon | nominal value | 170,000 | — |
| premium on issuance | 196 | — | |
| Bonds 2011–2021 2.25% coupon | nominal value | 350,000 | 350,000 |
| Loan 2016–2024 \$450 million (in 2018 \$450 million) | Group | 411,485 | 442,665 |
| Loan 2017–2019 \$325 million (in 2018 \$325 million) | Group | — | 319,703 |
| Total | 1,211,777 | 1,112,368 |
In February 2019, the Company issued the following bonds: (i) CHF 280 million 0.3% bonds due 2024 and (ii) CHF 170 million 1.0% bonds due 2029. Each of the respective bonds pays interest annually in arrears in August and May respectively. The Company has the option, one month before their maturity date in case of the 2024 bonds and three months before their maturity date in the case of the 2029 bonds, to redeem the bonds, in whole but not in part, at par plus accrued interest.
The 2.25% bonds, due 2021, also pay interest annually in arrears, at a fixed annual rate of 2.25%. The Company has, through Group Treasury Operations, entered into an interest rate swap with a bank to effectively convert the bonds maturing 2021 into floating rate obligations. The interest swap is treated as an off-balance sheet item and is therefore not recorded.
The Company has the option to redeem all the above bonds prior to maturity, in whole but not in part only, at par plus accrued interest, if 85% of the aggregate principle amount of the relevant bond issue has been redeemed or purchased and cancelled at the time of the option exercise notice.
The bonds, issued prior to January 1, 2013, are stated at their nominal value less any discount or plus any premium on issuance. Bonds are accreted/amortized to par over the period to maturity.
In 2016, the Company entered into a loan agreement of USD 500 million with Group Treasury Operations due in 2024 to hedge the USD 500 million loan granted to a Group company. In 2019 and 2018, the Company repaid USD 25 million in both years. The average interest in 2019 and 2018 was 3.40% and 3.11%, respectively.
In 2017, the Company entered into a loan agreement of USD 350 million with Group Treasury Operations due in 2027 to hedge the USD 350 million loan granted to a Group company. In 2018, the Company repaid USD 25 million. In 2019, the Company repaid the full remaining amount of USD 325 million. The average interest in 2019 and 2018 was 3.61% and 3.08% respectively.
—
The Company has issued a support letter to a surety institution for the issuance of surety bonds on behalf of Group companies. The amount issued under this letter was CHF 726,150 thousand as of December 31, 2019 and CHF 737,775 thousand as of December 31, 2018.
With certain Group companies, the Company has keep-well agreements. A keep-well agreement is a shareholder agreement between the Company and a Group company. These agreements provide for maintenance of a minimum net worth in the Group company and the maintenance of 100% direct or indirect ownership by the Company.
The keep-well agreements additionally provide that if at any time the Group company has insufficient liquid assets to meet any payment obligation on its debt (as defined in the agreements) and has insufficient unused commitments under its credit facilities with its lenders, the Company will make
—
available to the Group company sufficient funds to enable it to fulfill such payment obligation as it falls due. A keep-well agreement is not a guarantee by the Company for payment of the indebtedness, or any other obligation, of a Group company. No party external to the ABB Group is a party to any keep-well agreement.
The Company has also provided certain guarantees securing the performance of Group companies in connection with commercial paper programs, indentures or other debt instruments to enable them to fulfill the payment obligations under such instruments as they fall due. The amount guaranteed under these instruments was CHF 7,605,596 thousand as of December 31, 2019 and CHF 7,567,523 thousand as of December 31, 2018.
Additionally, the Company has provided certain guarantees securing the performance of contracts and undertakings of Group companies with third parties entered into in the normal course of business of an aggregate value of approximately CHF 76,966 thousand as per December 31, 2019 and CHF 78,336 thousand as per December 31, 2018.
Furthermore, the Company is the guarantor in the Group's USD 2 billion multicurrency revolving credit facility ("Group Facility"). In December 2019, the Group Facility maturing in 2021 was replaced with a new Group Facility maturing in 2024, with the option in 2020 and 2021 to extend the maturity to 2025 and 2026, respectively. No amounts were outstanding at December 31, 2019 and 2018.
The Company through certain of its direct and indirect subsidiaries is involved in various regulatory and legal matters. The Company's direct and indirect subsidiaries have made certain related provisions as further described in "Note 15 – Commitments and contingencies" to the Consolidated Financial Statements of ABB Ltd. As described in the note, there is a remote risk of material adverse outcomes beyond the provisioned amounts.
The Company is part of a value added tax Group and therefore is jointly liable to the Swiss Federal Tax Department for the value added tax liabilities of the other members.
| Legal reserves | Free reserves | |||||||
|---|---|---|---|---|---|---|---|---|
| (CHF in thousands) | Share capital |
from capital contri bution |
from retained earnings |
Other reserves |
from retained earnings |
Net income |
Own shares |
Total |
| Opening balance as of January 1, 2019 |
260,178 | 30,430 1,000,000 | — | 6,716,999 | 1,297,584 | (794,000) | 8,511,191 | |
| Allocation to retained earnings |
1,297,584 | (1,297,584) | — | |||||
| Dividend payment CHF 0.80 per share |
(1,323,736) | (1,323,736) | ||||||
| Purchases of own shares |
— | |||||||
| Delivery of own shares | 33,763 | 33,763 | ||||||
| Net income for the year | 1,198,371 | 1,198,371 | ||||||
| Closing balance as of December 31, 2019 |
260,178 | 30,430 1,000,000 | — | 6,690,847 | 1,198,371 | (760,237) | 8,419,589 |
| Total | ||
|---|---|---|
| registered shares | Par value (CHF) | (CHF in thousands) |
| 2,168,148,264 | 0.12 | 260,178 |
| 304,038,800 | 0.12 | 36,485 |
| 200,000,000 | 0.12 | 24,000 |
| Total | ||
| registered shares | Par value (CHF) | (CHF in thousands) |
| 2,168,148,264 | 0.12 | 260,178 |
| 304,038,800 | 0.12 | 36,485 |
| 200,000,000 | 0.12 | 24,000 |
| Number of Number of |
The own shares are valued at acquisition cost. During 2019 and 2018, a loss from the delivery of own shares of CHF 2,716 thousand and CHF 12,701 thousand, respectively, was recorded in the income statement under finance expenses.
During 2019, no call options related to ABB Group's management incentive plan (MIP) by a bank, were exercised. During 2018, a bank holding call options related to ABB Group's management incentive plan (MIP) exercised a portion of these options. Such options had been issued in 2012 by the Group company that facilitates the MIP at fair value and had a strike price of CHF 15.75 and CHF 17.50. At issuance, the Group company had entered into an intercompany option agreement with the Company, having the same terms and conditions to enable it to meet its future obligations. As a result of the exercise by the bank, the Company delivered 1,708,620 shares at CHF 15.75 and 416,373 shares at CHF 17.50, respectively, out of own shares.
The ABB Group has an annual employee share acquisition plan (ESAP) which provides share options to employees globally. To enable the Group company that facilitates the ESAP to deliver shares to employees who have exercised their stock options, the Group company entered into an agreement with the Company to acquire the required number of shares at their then market value from the Company. Consequently, in 2019, the Company issued, out of own shares, to the Group company 396,323 shares at CHF 21.92 and 78,591 at USD 22.21. No shares were delivered in 2018, in connection with ESAP.
In 2019 and 2018, the Company transferred 1,063,791 and 1,230,924 own shares at an average acquisition price per share of CHF 21.94 and CHF 21.90, respectively, to fulfill its obligations under other share-based arrangements.
During 2019 there was no purchase of shares by the Company. In 2018, the Company purchased 10 million shares, for CHF 232.3 million, to support its employee share programs globally.
The movement in the number of own shares during the year was as follows:
| 2019 | 2018 | |||
|---|---|---|---|---|
| Number of shares | Average acquisition price per share (in CHF) |
Number of shares | Average acquisition price per share (in CHF) |
|
| Opening balance as of January 1 | 36,185,858 | 21.94 | 29,541,775 | 21.50 |
| Purchases for employee share programs | — | 10,000,000 | 23.23 | |
| Purchases for cancellation | — | — | — | — |
| Cancellation | — | — | — | — |
| Delivery for employee share programs | (1,538,705) | 21.94 | (3,355,917) | 21.93 |
| Closing balance as of December 31 | 34,647,153 | 21.94 | 36,185,858 | 21.94 |
| Thereof pledged for MIP | 11,881,394 | 13,336,804 |
The Company received in 2019 and 2018, a dividend payment from ABB Asea Brown Boveri Ltd of CHF 1.2 billion and CHF 1.3 billion, respectively.
—
—
Other operating income includes mainly outgoing charges for division management services and guarantee compensation fees to Group companies.
Investor AB, Sweden, held 254,915,142 ABB Ltd shares as of December 31, 2019, and 232,165,142 shares as per December 31, 2018, respectively. This corresponds to 11.76 percent of ABB Ltd's total share capital and voting rights as registered in the Commercial Register on December 31, 2019 and 10.71 as per December 31, 2018.
Pursuant to its disclosure notice, Cevian Capital II GP Limited, Channel Islands, announced that, on behalf of its general partners it held 115,868,333 ABB Ltd shares as of September 8, 2017 which corresponds to 5.34 percent of ABB Ltd's total share capital and voting rights as registered in the Commercial Register on December 31, 2019 and 2018, respectively.
Pursuant to its disclosure notice, BlackRock, Inc., USA, disclosed that, as per August 31, 2017, it, together with its direct and indirect subsidiaries, held 72,900,737 ABB Ltd shares. This corresponds to 3.36 percent of ABB Ltd's total share capital and voting rights as registered in the Commercial Register on December 31, 2019 and 2018, respectively.
Pursuant to its disclosure notice, Artisan Partners Limited Partnership, USA, disclosed that, as per April 10, 2019, it, together with its direct and indirect subsidiaries, held 65,721,454 ABB Ltd shares. This corresponds to 3.03 percent of ABB Ltd's total share capital and voting rights as registered in the Commercial Register on December 31, 2019.
To the best of the Company's knowledge, no other shareholder holds 3 percent or more of ABB Ltd's total share capital and voting rights on December 31, 2019 and 2018, respectively.
At December 31, 2019 and 2018, the members of the Board of Directors as of that date, held the following numbers of shares (or ADSs representing such shares):
| Board ownership of ABB shares (audited) | Total number of shares held at December 31 |
|
|---|---|---|
| Name | 2019 | 2018 |
| Peter Voser(1) | 260,175 | 201,076 |
| Jacob Wallenberg | 226,021 | 217,109 |
| Matti Alahuhta | 51,466 | 41,872 |
| Gunnar Brock | 14,635 | 4,740 |
| David Constable | 27,581 | 20,650 |
| Frederico Curado | 21,298 | 12,391 |
| Lars Förberg | 35,499 | 19,774 |
| Jennifer Xin-Zhe Li | 8,319 | 2,454 |
| Géraldine Matchett | 11,919 | 3,380 |
| David Meline(2) | 25,463 | 17,542 |
| Satish Pai | 19,047 | 12,998 |
| Total | 701,423 | 553,986 |
(1) Includes 2000 shares held by spouse.
(2) Includes 3,150 shares held by spouse.
At December 31, 2019, the members of the Executive Committee, as of that date, held the following number of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP and options (either vested or unvested as indicated) under the MIP and unvested shares in respect of other compensation arrangements.
| Unvested at December 31, 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Total number of shares held at December 31, 2019 |
Number of vested options held under the MIP |
Number of unvested options held under the MIP |
Reference number of shares performance components deliverable under the 2017 (P1 and P2) of the LTIP(1) |
Reference number of shares deliverable under the 2018 performance factors (EPS and TSR) of the LTIP(2) |
Reference number of shares deliverable under the 2019 performance factors (EPS and TSR) of the LTIP(2) |
Replacement share grant from former employer(3) for foregone benefits |
Replacement share grant from former employer(4) for foregone benefits |
|
| Name | (vesting 2020/2021) |
(vesting 2020) |
(vesting 2021) |
(vesting 2022) |
(vesting 2020) |
(vesting 2020/2021) |
||
| Timo Ihamuotila | 64,572 | 41,000 | 37,217 | 49,071 | 76,628 | — | ||
| Sylvia Hill (EC member as of June 1, 2019) |
2,265 | 743,750 | 584,375 | — | — | 36,158 | — | — |
| Maria Varsellona (EC member as of November 1, 2019) |
— | — | — | 41,323 | — | 80,019 | ||
| Frank Duggan | 269,846 | 34,984 | 31,756 | 41,323 | — | — | ||
| Chunyuan Gu | 45,577 | 31,196 | 33,981 | 36,158 | — | — | ||
| Sami Atiya | 24,435 | 34,735 | 23,301 | 49,587 | — | — | ||
| Tarak Mehta | 212,869 | 34,494 | 34,790 | 44,422 | — | — | ||
| Claudio Facchin | 163,219 | 39,076 | 26,214 | 41,839 | — | — | ||
| Peter Terwiesch | 122,242 | 37,147 | 37,379 | 41,323 | — | — | ||
| Morten Wierod (EC member as of |
Committee members 906,089 1,142,190 584,375 252,632 239,930 417,362 76,628 80,019 (1) It is expected that upon vesting, the LTIP 2017 will be settled 70 percent in shares and 30 percent in cash for the performance components
April 1, 2019) 1,064 398,440 — — 15,292 36,158 — —
(P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares.
(2) It is expected that upon vesting, the LTIP 2018 and 2019 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However, participants have the possibility to elect to receive 100 percent of the vested award in shares.
(3) It is expected that the replacement share grants will be settled 70 percent in shares and 30 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares.
(4) It is expected that the replacement share grants will be settled 65 percent in shares and 35 percent in cash. However, the participants have the possibility to elect to receive 100 percent of the vested award in shares.
(5) Departing Executive Committee members are not included in this table.
Total Executive
At December 31, 2018, the members of the Executive Committee, as of that date, held the following number of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP and options (either vested or unvested as indicated) under the MIP and unvested shares in respect of other compensation arrangements.
| Unvested at December 31, 2018 | |||||
|---|---|---|---|---|---|
| Total number of shares held at December 31, 2018 |
shares deliverable under the 2016 performance Reference number of components (P1 and P2) of the LTIP(1) |
shares deliverable under the 2017 performance Reference number of components (P1 and P2) of the LTIP(1) |
shares deliverable under the 2018 performance Reference number of factor (EPS and TSR) of the LTIP(2) |
Replacement share grant from former employer(3) for foregone benefits |
|
| Name | (vesting 2019) |
(vesting 2020) |
(vesting 2021) |
(vesting 2019 and 2020) |
|
| Ulrich Spiesshofer | 509,970 | 175,881 | 150,886 | 143,144 | — |
| Timo Ihamuotila | 22,000 | — | 41,000 | 37,217 | 119,200 |
| Jean-Christophe Deslarzes | 172,487 | 56,287 | 45,348 | 45,632 | — |
| Diane de Saint Victor | 569,132 | 47,745 | 40,109 | 40,454 | — |
| Frank Duggan | 224,941 | 48,028 | 34,984 | 31,756 | — |
| Greg Scheu | 146,130 | 43,144 | 32,775 | 25,390 | — |
| Chunyuan Gu | 28,722 | 25,799 | 31,196 | 33,981 | — |
| Sami Atiya | — | 37,693 | 34,735 | 23,301 | — |
| Tarak Mehta | 183,328 | 45,624 | 34,494 | 34,790 | — |
| Claudio Facchin | 131,987 | 47,722 | 39,076 | 26,214 | — |
| Peter Terwiesch | 92,811 | 44,969 | 37,147 | 37,379 | — |
| Total Executive Committee members as of December 31, 2018 |
2,081,508 | 572,892 | 521,750 | 479,258 | 119,200 |
(1) It is expected that upon vesting, the LTIP 2016 and 2017 will be settled 70 percent in shares and 30 percent in cash for the performance components (P1 and P2). However, participants have the possibility to elect to receive 100 percent of the vested award in shares.
(2) It is expected that the LTIP 2018 will be settled 65 percent in shares and 35 percent in cash for the performance factors (EPS and TSR). However, the participants have the possibility to elect to receive 100 percent of the vested award in shares.
(3) It is expected that the replacement share grant will be settled 70 percent in shares and 30 percent in cash. However, the participant has the possibility to elect to receive 100 percent of the vested award in shares.
—
During 2019 and 2018, the Company employed on average 23 and 20 employees, respectively.
| Proposed appropriation of retained earnings (CHF in thousands) | 2019 | 2018 |
|---|---|---|
| Net income for the year | 1,198,371 | 1,297,584 |
| Carried forward from previous year | 6,690,847 | 6,716,999 |
| Cancellation of shares | — | — |
| Retained earnings available to the Annual General Meeting | 7,889,218 | 8,014,583 |
| Gross dividend of CHF 0.80 per share on total number of registered shares(1) |
(1,734,519) | (1,323,736) |
| Balance to be carried forward | 6,154,699 | 6,690,847 |
(1) Shareholders who are resident in Sweden participating in the established dividend access facility received and will receive an amount in Swedish kronor from ABB Norden Holding AB which corresponds to the dividend resolved on a registered share of ABB Ltd without deduction of the Swiss withholding tax. This amount however is subject to taxation according to Swedish law. However, no dividend was and will be paid on own shares held by the Company.
On February 05, 2020, the Company announced that the Board of Directors will recommend for approval at the March 26, 2020, Annual General Meeting that a dividend of CHF 0.80 per share be distributed out of the retained earnings available, to be paid in April 2020.
To the General Meeting of ABB Ltd, Zurich
As statutory auditor, we have audited the accompanying financial statements of ABB Ltd, which comprise the balance sheet, income statement, cash flow statement and notes (pages 221 to 232) for the year ended December 31, 2019.
The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company's articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements for the year ended December 31, 2019 comply with Swiss law and the company's articles of incorporation.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. We have determined that there are no key audit matters to communicate in our report.
We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors.
We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company's articles of incorporation. We recommend that the financial statements submitted to you be approved.
KPMG AG
Hans-Dieter Krauss Douglas Mullins Licensed Audit Expert Auditor in Charge
Zurich, February 25, 2020
— 236–240 Supplemental information — 238
The following are definitions of key financial measures used to evaluate ABB's operating performance. These financial measures are referred to in this annual report and are not defined under United States generally accepted accounting principles (U.S. GAAP).
While ABB's management believes that the non-GAAP financial measures herein are useful in evaluating ABB's operating results, this information should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with U.S. GAAP.
For a full reconciliation of ABB's non-GAAP measures, refer to Supplemental Reconciliations and Definitions, ABB Q4 2019 Financial Information on new.abb.com/investorrelations/ calendar-events-and-publications/ financial-results-and-presentations/ quarterly-results-and-annual-reports.
Growth rates for certain key figures may be presented and discussed on a "comparable" basis. The comparable growth rate measures growth on a constant currency basis. Since we are a global company, the comparability of our operating results reported in U.S. dollars is affected by foreign currency exchange rate fluctuations. We calculate the impacts from foreign currency fluctuations by translating the current-year periods' reported key figures into U.S. dollar amounts using the exchange rates in effect for the comparable periods in the previous year.
Comparable growth rates are also adjusted for changes in our business portfolio. Adjustments to our business portfolio occur due to acquisitions, divestments, or by exiting specific business activities or customer markets. The adjustment for portfolio changes is calculated as follows: where the results of any business acquired or divested have not been consolidated and reported for the entire duration of both the current and comparable periods, the reported key figures of such business are adjusted to exclude the relevant key figures of any corresponding quarters which are not comparable when computing the comparable growth rate. Certain portfolio changes which do not qualify as divestments under U.S. GAAP have been treated in a similar manner to divestments.
Changes in our portfolio where we have exited certain business activities or customer markets are adjusted as if the relevant business was divested in the period when the decision to cease business activities was taken. We do not adjust for portfolio changes where the relevant business has annualized revenues of less than \$50 million.
Operational EBITA margin is Operational EBITA as a percentage of Operational revenues.
Operational earnings before interest, taxes and acquisition-related amortization (Operational EBITA) represents Income from operations excluding:
Certain other non-operational items generally includes: certain regulatory, compliance and legal costs, certain asset write downs/impairments as well as other items which are determined by management on a case-by-case basis.
Operational EBITA is our measure of segment profit but is also used by management to evaluate the profitability of the Company as a whole.
Amortization expense on intangibles arising upon acquisitions.
Restructuring, related and implementation costs consists of restructuring and other related expenses, as well as internal and external costs relating to the implementation of group-wide restructuring programs.
ABB presents Operational revenues solely for the purpose of allowing the computation of Operational EBITA margin. Operational revenues are total revenues adjusted for foreign exchange/commodity timing differences in total revenues of: (i) unrealized gains and losses on derivatives, (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign exchange movements on receivables (and related assets). Operational revenues are not intended to be an alternative measure to Total revenues, which represent our revenues measured in accordance with U.S. GAAP.
Operational EPS is calculated as Operational net income divided by the weighted-average number of shares outstanding used in determining basic earnings per share.
Operational net income is calculated as Net income attributable to ABB adjusted for the following: (i) acquisition-related amortization, (ii) restructuring, related and implementation costs, (iii) non-operational pension cost (credit), (iv) changes in obligations related to divested businesses, (v) changes in pre-acquisition estimates, (vi) gains and losses from sale of businesses (including fair value adjustment on assets and liabilities held for sale), (vii) acquisition- and divestment-related expenses and integration costs, (viii) certain other non-operational items, (ix) foreign exchange/commodity timing differences in income from operations consisting of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (c) unrealized foreign exchange movements on receivables/payables
(and related assets/liabilities), (x) the amount of income tax on operational adjustments either estimated using the Adjusted Group effective tax rate or in certain specific cases, computed using the actual income tax effects of the relevant item in (i) to (ix) above, and (xi) Certain other non-operational amounts recorded within Provision for taxes.
Adjustments are made for certain amounts recorded within Provision for taxes primarily when the amount recorded has no corresponding underlying transaction recorded within income from continuing or discontinued operations before taxes. This would include the amounts recorded in connection with internal reorganizations of the corporate structure of the Company.
Amortization expense on intangibles arising upon acquisitions.
Restructuring, related and implementation costs consists of restructuring and other related expenses, as well as internal and external costs relating to the implementation of group-wide restructuring programs.
The Adjusted Group effective tax rate is computed by dividing a combined adjusted provision for taxes (for both continuing and discontinued operations) by a combined adjusted pre-tax income (from both continuing and discontinued operations). Certain amounts recorded in income before taxes and the related provision for taxes (primarily gains and losses from sale of businesses) are excluded to arrive at the computation. Amounts recorded in Provision for taxes for certain non-operational items are also excluded from the computation of the Adjusted Group effective tax rate.
In connection with ABB's 2015–2020 targets, Operational EPS growth is measured assuming 2014 as the base year and uses constant exchange rates. We compute the constant currency operational net income for all periods using the relevant monthly exchange rates which were in effect during 2014 and any difference in computed Operational net income is divided by the relevant weighted-average number of shares outstanding to identify the constant currency Operational EPS adjustment.
Free cash flow conversion to net income is calculated as adjusted free cash flow divided by Net income attributable to ABB.
Adjusted free cash flow is calculated as net cash provided by operating activities adjusted for: (i) purchases of property, plant and equipment and intangible assets, (ii) proceeds from sales of property, plant and equipment, and (iii) changes in financing and other non-current receivables, net (included in other investing activities).
Return on Capital employed is calculated as Operational EBITA after tax, divided by the average of the period's opening and closing Capital employed, adjusted (as needed) to reflect impacts from significant acquisitions/divestments occurring during the same period.
Capital employed is calculated as the sum of Adjusted total fixed assets and Net working capital (as defined below).
Adjusted total fixed assets is the sum of (i) property, plant and equipment, net, (ii) goodwill, (iii) other intangible assets, net, (iv) investments in equity-accounted companies, and (v) operating lease right-of-use assets, less (vi) deferred tax liabilities recognized in certain acquisitions.
Net working capital is the sum of (i) receivables, net, (ii) contract assets, (iii) inventories, net, and (iv) prepaid expenses; less (v) accounts payable, trade, (vi) contract liabilities, and (vii) other current liabilities (excluding primarily: (a) income taxes payable, (b) current derivative liabilities, and (c) pension and other employee benefits); and including the amounts related to these accounts which have been presented as either assets or liabilities held for sale but excluding any amounts included in discontinued operations.
The Notional tax on operational EBITA is computed using an adjusted group effective tax rate applicable to continuing operations. The rate applied is computed as described above in Operational EPS and excludes any impacts from discontinued operations.
Book-to-bill ratio is calculated as Orders received divided by Total revenues.
Parts of the ABB annual report 2019 have been translated into German and Swedish. Please note that the English-language version of the ABB annual report is the binding version.
The ABB annual report 2019 includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have based these forward-looking statements largely on current expectations, estimates and projections about the factors that may affect our future performance, including global economic conditions as well as the economic conditions of the regions and the industries that are major markets for ABB. The words "believe," "may," "will," "estimate," "continue," "target," "anticipate," "intend," "expect", "plans" and similar words and the express or implied discussion of strategy, plans or intentions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, including among other things, the following: (i) business risks related to the global volatile economic environment; (ii) costs associated with compliance activities; (iii) difficulties encountered in operating in emerging markets; (iv) risks inherent in large, long term projects served by parts of our business; (v) the timely development of new products, technologies, and services that are useful for our customers; (vi) our ability to anticipate and react to technological change and evolving industry standards in the markets in which we operate; (vii) changes in interest rates and fluctuations in currency exchange rates; (viii) changes in raw materials prices or limitations of supplies of raw materials; (ix) the weakening or unavailability of our intellectual property rights; (x) industry consolidation resulting in more powerful competitors and fewer customers; (xi) effects of competition and changes in economic and market conditions in the product markets and geographic areas in which we operate; (xii) effects of, and changes in, laws, regulations, governmental policies, taxation, or accounting standards and practices and (xiii) other factors described in documents that we may furnish from time to time with the US Securities and Exchange Commission, including our Annual Reports on Form 20-F. Although we believe that the expectations reflected in any such forward-looking statements are based on reasonable assumptions, we can give no assurance that they will be achieved. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.
— ABB Ltd Corporate Communications Affolternstrasse 44 8050 Zurich Switzerland
Tel: +41 (0)43 317 71 11 Fax: +41 (0)43 317 79 58
www.abb.com
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