Annual Report • Mar 1, 2022
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Download Source FileABB Ltd — Annua l re por t Operatio nal performance Str ongly incr eased demand f or ABB’s offering fr om the low lev el in the pr evious year period when the adverse bus ines s impact of the C O VID-1 9 pandemic w as significant. Or ders +20% (+1 7% comparable (1) ) and r evenues +11% (+8% c ompa - rable) incr eased in all Busines s Ar - eas and r egions. Adverse impact fr om imbalances in the supply chain t o some ex - ten t hamper ed the ability to c on - vert or ders into actual deliveries, r esulting in an or der backlog of $1 6.6 billion, +16% (+21% c ompa - rable), year-on- year . Str ong impr ov ement in Opera - tional EBIT A mar gin (1) to 14.2%, +31 0 basis points, higher in all Busines s Areas. Lifted long-term tar gets as ABB expects to drive thr ough-the-c ycle r evenue gr owth to 4-7% (3-5% or - ganic and 1-2% acquir ed ), in con - stan t curr ency , and sharpened Op - erat ional EBIT A margin tar get to be at leas t 15 % as fr om 2023, in an y given y ear . Portfolio management Mechanical P ow er T ransmis sion (Dodge) dives tment completed f or $2.9 bn in cash. Good pr ogr es s in T urbocharg- ing and E-mobility pr oces ses, ex- pected to be c ompleted during first half of 2022. Acquis ition of ASTI t o expand in Autonomous Mobile R obots. Impr ov ed por tfolio managemen t pr oces s to build up ac quisit ion pipelines in the divisions. Capital al location V er y strong uplift in cash genera- tion with cash flow fr om operat- ing activ ities in c ontinuing opera- tions of $3.3 billion impr oving by $1.5 billion year-o ver-y ear . Net cash posit ive a t the end of 2021. Acc elerated R&D in vestmen ts in f ocus ar eas. Boar d of Dir ectors propos ing a CHF 0 .82 div idend per share a t the 2022 Annual General Meeting. Returned $2. 7 billion of P ow er Grids proc eeds dur ing 2021. (1) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. — Highligh ts 202 1 Operational EBIT A (1) Revenues End-markets (2) 4 4% Electr ification 23% Motion 21% Proces s Automation 11% Robotics & Discrete Automation 48% Electrification 27% Motion 18% Proces s Automation 8% Robotics & Discrete Automation 3% Renew ables 6% Con v. Genera tion 6% Distribution 10% O&G, Chemicals 9% Mining, Metals 5% Automotive 5% F&B 20% Other Industry 19% Buildings 17 % Other T&I Geographies 36% Europe 22% USA 8% Rest of Americas 17 % China 17 % Rest of AMEA — ABB at a glance ABB (ABBN: SIX S wiss Ex) is a leading global t echnology compan y that ener gizes the transforma tion of society and industry to achieve a mor e pr oductive, sus tainable futur e. By c onnecting softwar e to its electr ification, r obotics, automat ion and motion portfolio, ABB pushes the boundaries of technology to drive perf ormance to ne w lev- els. With a hist or y of ex cellenc e str etching back mor e than 130 years, ABB’s succ ess is driven b y about 105,000 talen ted employees in o ver 1 00 countries. (1) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (2) Management estimat es. % of F Y 2 0 21 t hi rd p ar t y r ev en ue s ex cl . Co rp or ate a nd O t he r % of F Y 2 0 21 O p er at i on al EB I TA ex cl . Co rp or ate a nd O t he r % of F Y 2 0 21 t hi rd p ar t y r ev en ue s % of F Y 2 0 21 t hi rd p ar t y r ev en ue s 0 150 300 450 600 750 Ktons Year 20 19 2020 2021 Scope 1& 2 CO 2 Lost Time Injury Frequency Rate 0 0,1 0,2 0,3 LTIFR Year 20 19 2020 2021 CO s cop e 1 & 2 Ktons of C O equivalent emiss ions K ey f igures $ in millions, unle ss otherw ise indicat ed US$ Comp arable Orders Order backlog ( end Dec ember ) Revenues Income from operations Operational EBIT A Income from continuing operations, net of tax n.a. Net income attributable to A BB Ba s ic E ar ni ng s pe r sh ar e ($) Di v i de n d pe r sh ar e Cash flow fr om opera ting activities Ca sh f l ow fr om o pe r ati n g ac ti v i t ie s in c ont i nu in g operations Net ( cash) debt ( end Decemb er ) Chang e CO Los t Ti me I nj ur y Freq ue n c y Rat e (LTIFR ), Sh ar e of fe ma le s i n se nio r ma na ge m en t (1) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (2) EPS growth ra tes are c omputed using unrounded amounts. (3) Amount r epresents t otal for bo th con t inuing and discontinued operations. (4) G row t h rat es f or o rd e rs , or de r b ack l og a n d rev en u es a re o n a co mp ar ab l e ba si s, see the “Supplemental inf ormation” sec tion of th is a nn ua l re p or t . (5 ) Con st an t cu rr en c y (n ot ad ju st ed f or p or t fo l io c ha ng es). Los t Ti me I nj u r y Fre q ue n c y Rate L TIFR , frequency/200,000 w orking hours — T a b l e of co nte nt s — 01 Introduction 8 – 51 — 02 C orporat e gov ernance report 52 – 73 — 03 C om pensat ion report 7 4 – 111 — 04 Finan ci al revi ew of ABB G roup 112 – 24 3 — 05 ABB Ltd s tatutor y fi nanc ia l sta tem ents 244 – 2 61 — 06 Supple mental infor mat ion 262 – 26 6 — T a b l e of co nte nt s 01 In tro d u c tion 1 0 Chairman and CEO letter 14 T ar gets and t argets f ulf ilment 1 6 Sus taina bili t y: Cre a ting long- t erm value acros s the val ue chain 22 E x ecutive C ommittee 24 Diversity and i ncl usion: Ou r peopl e 28 Elec trif ication 34 Motion 38 Proces s Automa tion 42 R obotics & Discrete Automation 46 Sha re dev e lopm ents 48 Cash gen eration and capital a llocation 50 K ey inv estor questions 20 21 — CHAIRMAN AND C E O LETTE R Dear shareholde rs, cus tomers, partne rs an d em plo y ee s, The year 2021 w as also charac terized by uncer- tainty r elated to the con tinuing impacts of the C OVID-1 9 pandemic, especially in the second half . Although demand increased s ignificantly , as can be seen in ABB’s order perf ormance, br oad disrup- tions in the global supply chain – including c om- ponent shortages, challenging logistics and tigh t labor markets – hamper ed our ability to conv er t str ong order in take in to ac tual customer deliv er ies. W e expect supply-chain pr oblems to ease during the course of this y ear , and while rising inflation is a conc ern, it seems likely tha t the era of ultra-loose monetary polic y is coming to an end, which is good news f or the economy . When it comes to longer-t erm trends, ABB is well- positioned in v er y attractive markets. Despit e the absence of a global agr eement on ac tions to achieve the P ar is climate goal, the C OP26 climate conf erence showed tha t reducing emissions and making more efficient use of r esourc es are now a must f or governmen ts and businesses. F or ABB, as a pro vider of elec trification, automat ion and digital technologies, this r epresen ts a huge opportunity . Demand for electricity is growing twice as f ast as for an y other form of energy and softwar e-driven automat ion is the most effectiv e wa y to improv e energy and r esource efficiency . Posi tione d for stronger growth In 2021, ABB started to r eap the benef its of its on- going transf ormation. Impr oved efficienc y com- bined with higher demand resulted in a s ignificant increase in or ders as well as a marked impr ove- ment in pr ofitability . In our Business Ar eas, we ad- vanc ed on several fr onts, with the launch of im- portant innova tions f or the transport sector and the mining industry , a value-adding acquisit ion in robot ics, and the divestmen t of our Dodge busi- ness (Mechanical P ower Transmis sion Div ision) f or $2.9 billion in cash. W e made good progr ess in building a high-perfor- mance cultur e by empowering our Divisions, and we initia ted several important actions to r educe our own C O emissions and mak e ABB a more a t- tractive employ er . These achievements, which ar e cov ered in more detail belo w and in the follow- ing pages, pro vide a solid foundation f or future profitability and gr owth. They will also help to str engthen ABB’s position in k ey market segments as well as con tr ibute to susta inable development. In short, our company is no w mov ing forwar d str ongly and with a clear purpose and direction. Tragically , over the course of the y ear , we lost sev- eral colleagues due to c ontinued outbreaks of C OVID-1 9. However , our high level of prepar ed- ness helped us pr otect our people and keep our operations running. Thanks t o our str ong focus on safety , we saw a further reduction in w orkplace in- juries and recor ded no fatalities f or the f irst time since 2011. Financial performance Our str ong financial performance in 2021 show ed that our “ ABB W ay ” operating model, in troduc ed in 2020, is the right one for our c ompany . All of our four Bus iness Ar eas contributed to str ong order gro wth as well as increased pr ofitability . We also impro ved cash flow and s trengthened our balance sheet. F or the full-y ear 2021, Group orders wer e up 20 perc ent, revenues r ose by 11 percent, and w e in- creased our opera tional EBIT A margin by 3.1 per- cent t o 14.2 percent. Our order backlog incr eased, dr iven in part by str ong demand and but also due to supply -chain challenges hampering customer deliveries. W e wer e able to mitiga te some of them thanks to our global footprint and mult iple sourcing s trategy , but a worldwide shortage of semi-conductors, im- pacted logistics and a tigh t labor market in the United Stat es meant that deliv er ies to customers wer e delay ed starting in the third quarter . W e ex- pect the situation to ease o ver the course of this year . In light of our impr oved financial r esults, and in line with our polic y of paying a susta inable dividend over t ime, we will be proposing a dividend of CHF 0 .82 per share to our shar eholders to be voted on at the annual general meeting on Mar ch 24, 2022. At the AGM, we will also ask our shar eholders to appro ve the canc ellation of shar es purchased through a sec ond buyback program that was launched on April 9, 2021. The buybacks are to r e- turn $7 .8 billion of cash proceeds fr om the Po wer Grids divestment t o shareholders. We will also seek shareholder appr oval for the canc ellation of shares pur chased under the initial buyback pro- gram that wer e not proposed for canc ellation a t ABB’s 2021 AGM. Cult ural change A key objectiv e of our transformation is t o build a high-performance cultur e by empowering our 10 ABB ANNU AL REPORT 2021 01 INTRODUCTION 20 Divisions with full ownership and accoun tabil- ity for their r espec tive stra tegies, performance and resour ces. Under our decentralized ABB W ay op- erating model, perf ormance is measur ed through a scor ecard system, which pr ovides full transpar- ency on key measures. T o be able to deliver on our commitments t o our stak eholders, our Div isions are r equired to be sta- ble and profitable bef ore f ocusing on growth. At the end of 2021, around 60 per cent of our Divisions wer e in gro wth mode, which means that they focus both on organic gr ow th as well as M&A opportuni- ties to c onsolidate their market posit ion. Our long-term objective is t o shift to more a ttrac- tive mark ets, with better quality of revenues, which means better gr oss mar gins, less risk and lower earnings volat ility . Among the high-gro wth seg- ments we ar e targeting are: w ater and was tew ater , food and bev erage, sustainable transport and data cent ers. We aim to be number 1 or 2 in all of our customer segmen ts. Strengthening our por tfolio T o fur ther strengthen our pos ition in elec trification and automat ion, we pursue a stra tegy of active portfolio management with the aim of making at least five small- to mid-s ized acquisitions per year . In 2021, we acquir ed leading autonomous mobile robot manuf ac turer AS TI Mobile Robotics Group, which will help us to capture gr owing potential in areas such as logis tics and w arehouse aut omation. With ASTI, w e now ha ve the most compr ehensive portfolio of industrial robots on the mark et. In January 2022, we strengthened our E-mobility busines s by taking a con trolling stake in Unit ed States electric vehicle (EV) infrastructure compan y , In-Charge Ener gy , as well as increasing our majority stak e in Chinese EV charging provider , Chargedot 11 ABB ANNU AL REPORT 2021 01 INTRODUCTION T O BE A BLE T O DE LIV E R ON OUR C OMMI TM E NTS, OUR DIVISIO NS ARE REQU IRED T O BE ST ABLE AND PR OF IT ABLE BE FORE F OCUS ING O N GROW TH. A T T HE EN D OF 202 1, AROUND 60 PE RCE NT OF OU R DI VISI ON S WE RE IN GROW TH MODE. Shanghai New Ener gy T echnology Co., L td. to 80 perc ent. T o dr ive the further gro wth and expansion of our E-mobility busines s, we ar e moving ahead with ef- forts to separat ely list that business and w e aim to complete this during the sec ond quarter of 2022. As the world leader in electric vehicle charging in- frastructure, we ar e well-positioned in an extr emely attractive gr ow th market – b y 2035, EV s are e x- pected to be outselling combus tion cars. W e also made good progr ess with our planned di- vestmen ts. We succ ess fully closed the divestmen t of the Mechanical Po wer T ransmiss ion Division (Dodge) on November 1. This marks the c ompletion of the announced first st ep to focus our busines s portfolio on our leading position in electrification and automat ion. As part of these actions, we hav e appointed a ne w head of the Turbochar ging Div i- sion ahead of a lik ely spin of f . In 2021, ABB again demonstra ted its capacity f or groundbr eaking innovation with the launch of sev - eral new solutions tha t w ill further drive the shift to electrification and automation and c ontribute to a low-carbon society . One notable example fr om our E-mobility Div ision was the T erra 360, the world’s fas test electr ic-v e- hicle charger , capable of providing enough charge for 1 00 km of driv ing in less than thr ee minutes, or of fully charging an EV in les s than 15 minutes. Designed f or commer cial fleets and heav y-duty vehicles as well as electric cars, the T erra 360 has the capacity to char ge up to f our vehicles simulta- neously and can be installed in almost an y setting from the curbs ide to gas sta tions and motorwa y stops. Another important offering, from our Pr ocess Au- tomat ion Busines s Area, w as a por tfolio of tech- nologies under the name “ ABB Ability™ eMine” to electrif y and automate mines, including a r emote monitoring capability to optimize ener gy usage. F rom 2022, the solut ion will also include high- power electric chargers f or mining trucks as well as an automat ed trolley sys tem that can r educe diesel consumption b y up to 90 percent. Progress on sustainabil ity In 2021, we began implement ing our 2030 sus tain- ability strat egy , with the focus on reducing C O emiss ions acros s our value chain. In the past two years, we ha ve reduc ed emissions from our o wn operations b y 39 perc ent, in par t by using our o wn technologies. T o achieve our goal of carbon neu- trality by 20 30, we committ ed to elec trif ying our vehicle fleet, sour cing 100 perc ent of our energy from r enewables and installing ener gy manage- ment syst ems at our sit es around the w orld. Our carbon-neutrality commitment w as verified by the Science-Based T argets initiat ive as being in line with the 1.5°C scenario of the Paris Agr eement. T o help our customers reduc e their C O emiss ions – another key tar get of our 2030 sustainability s trat- egy – we ha ve identified products and solutions from our portfolio tha t deliver the most significant reductions in C O emissions. At the cor e of our offering are our ener gy-efficient electr ic motors and drives produc ed by our Motion Business Ar ea. Drives can reduc e the power consumption of mo- tors by up t o 25 perc ent and the Motion Business Area ’s flagship synchronous reluctance (S ynRM) motor and drive package has set a ne w standar d for ener gy ef ficienc y . Thanks to its innov ativ e mag- net-free des ign, the SynRM mot or also requir es no rare-earth materials in its manuf ac ture, further re- ducing resour ce consumption. 12 ABB ANNU AL REPORT 2021 01 INTRODUCTION Alongside r educing C O emiss ions, we also ha ve the goal of preserving resourc es for future gener- ations. In Dec ember 2021, we unveiled a ne w com- pany -wide approach to drive cir cularity in our own and our customers’ opera tions. By 20 30, at least 80 perc ent of ABB’s products and solutions will be evaluat ed against a clear set of key performanc e indicators (KPIs), c orresponding to each stage of the product lifecycle. W e will also send no waste to landfill, wherever this is c ompatible with local con- ditions. T oday , close to 40 percen t of our 4 40 sites around the w orld are alr eady sending no waste to landfill. T o suppor t a culture of div ersity and inclusion, in line with our 2030 susta inability goal of promot- ing social progr ess, we launched a gender-neu- tral paren tal leav e program for all ABB employ ees around the w orld. W e also increased the pr opor tion of women in senior management t o 1 6.3 perc ent, from 13.5 per cent in 2020 . By 2030, our goal is tha t 25 perc ent of senior management roles ar e filled by women. T o ensure that sustainability is tak en as seri- ously as our other performance tar gets, we are integra ting susta inability KPIs into our perf or- mance management planning and our bus inesses are r epor ting them at the same time as financial KPIs. Sustainability KPIs ar e now also part of se- nior management incen tives and a selection is in- cluded in our quarterly financial reports. Finally , to encourage our people t o get personally inv olved in driv ing ABB’s sustainability journey , we launched the “Sustainability Changemak er Awar d”, inviting ideas that support the achiev ement of our 2030 sus tainability goals. The winning individual or team will get the chance to turn their idea in to reality . Strong future prospects Having decen tralized our organization and succ ess - fully rolled out our ABB W ay operating model, w e are in a s trong pos ition to captur e future growth opportunities. The three k ey growth drivers for our busines ses are: r esource efficiency through electr i- fication and automa tion, wher e we ar e global lead- ers, occupying number 1 or 2 posit ions in the mar- ket; ne w ways of w orking, in which our Divisions are ac countable for gr ow th and decision-making has been moved closer t o the market; and the ac- celerat ion of environmental, social and gov ernance (ESG) drivers for ener gy eff iciency and automation. Acc ordingly , we hav e lif ted our rev enue growth tar- get to 4–7 per cent thr ough the economic cycle, in constan t currency . Of that, we e xpect 3–5 per- cent t o come from organic gr owth and 1–2 percent from ac quired growth. W e hav e also sharpened our operational EBIT A margin tar get to be at least 15 perc ent as of 2023. Previously , we had targeted 3–5 perc ent for rev enue growth through the cycle and an operational EBIT A margin in the upper half of a 13–1 6 perc ent range as of 2023. With our leading technologies and talent ed people, we ar e confident that ABB will c ontinue t o go from str ength to str ength while liv ing up to the expec- tations of its s takeholders and making a v aluable contribution t o a more sustainable society . On behalf of the Board of Dir ec tors and the Ex- ecutive C ommittee, we would lik e to thank our customers and shar eholders for their cont inued trust in ABB and to thank our emplo yees f or their tremendous c ommitment, engagement and hard work. W e are proud to lead them. Best r egards, PE TE R VOS E R Chairman o f the Board of D ire c tor s BJÖRN RO SENGREN Chi ef E xe c ut i ve O f f ic er 13 ABB ANNUAL REPORT 2021 01 INTRODUC TION ABB’s financial framework mirr ors the compan y ’s ambition for impr ov ed per formanc e and reflects increased ac countability , transpar ency and speed in decision making. With our 2030 sus- tainability s trat egy , we ar e enabling a low-carbon society , pre- ser ving resour ces, pr omoting social pr ogres s and dr iv ing in- tegrity and transpar ency acros s the value cha in. BA S I C EP S G ROW T H REVENUE GROWTH OPERA TIONAL EBI T A MARGIN FCF CO NV E R SI O N TO N ET I NCO M E ROCE — T ar gets f ulfilment T a rget: an n ua l aver ag e th ro ug h economic c ycle T a rget: T a rget: EPS gr ow th > r even u e gr ow th Gr ou p ta rg e t: as f rom 2 0 23 T a rget: 2021 perform ance: 2021 perform ance: 2021 perform ance: Ba si c EP S g row t h 2021 perform ance: 2021 perform ance: (1) Ca lc u late d to e xc lu d e F X im pa c ts a nd t ra ns fo rm at io na l ac qu is it i on s an d di ve st me nt s , in cl ud e s bo lt- o n ac qu is it io n s an d di ve st me nt s w i thi n divi sions. (2) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (3) In cl ud es i m pa ct f ro m Po we r G ri d s re lat ed b o ok g ai n in 2 02 0 a nd M e ch an ic al P ow er Tran sm iss io n re l ate d bo o k gai n in 2 0 21 . 14 ABB ANNUAL REPOR T 2 021 01 INTRO DUCTIO N Sel ec ted sustainabilit y targets a nd 20 21 progress WE E N AB L E A LOW- C A R BO N S OCI E T Y WE PROMO TE SOC IAL PROGRESS T a rget: Ac hi eve ca rb on n e ut ra li ty i n A B B’s own operations by 2030 T a rget: Do ub l e nu mb e r of wo me n i n se ni or Pro gr es s: Pro gr es s: Pro gr es s: WE PRESERV E RES OURC ES T a rget: Ze ro wa ste f ro m AB B’s ow n op er ati on s to be d i sp ose d of i n la n df i ll s by 2 03 0, wh er eve r th is i s co mp ati b le w i th l oc a l conditions and regulations — SUST AINABILIT Y C rea ting l ong -t e rm value acr oss the v a lue c hain ABB has alwa ys taken a sustainable appr oach to busines s. Our predeces sor companies wer e founded in the la te 1 9th century to take advan tage of electricity and since then ABB has been helping its customers electrif y their operations as w ell as impro ve ener gy ef ficienc y and productivity . T oday , sustainability is at the c enter of our com- pany Purpose and the v alue that we creat e for stak eholders. Last year , we began implementing our 2030 sus tainability stra tegy , having reduced our greenhouse gas emis sions by more than half in our previous strat egy per iod to 2020 . Focu s a re as o f ou r 20 30 s us tai na bi l it y st rate g y T o determine the focus areas of our 20 30 sustain- ability strat egy , we conducted some 400 hours of interviews with 300 stakeholders of ABB’s f our Busines s Areas, including cus tomers, suppliers, in- vest ors, public representa tives and NGOs in 201 9. W e also analyzed some 40,000 comments fr om ABB’s annual employee engagemen t sur vey . Drawing on the expectations and r equirements of those stak eholders, we defined areas where we can make the bigges t impac t: enabling a low-car- bon future, pr eser v ing resour ces, promoting so- cial progr ess, as well as str engthening our com- mitment to r esponsible business practices, and driving integrity and transparency across the value chain. Susta inability f ocus areas and t argets F or each of our sustainability f ocus areas, we de- fined at least thr ee main tar gets that apply to ABB, t o our customers, and t o our supply chain respectiv ely . Each target is supported by opera- tional tar gets and actions. From strategy to implementation Last year , we began implementing our 20 30 sus- tainability stra tegy with the focus on enabling a low-carbon society . T o support our custom- ers in reducing their C O emissions, we iden tified a basket of the pr oduc ts and solutions from our portfolio that deliv er the most significant r educ- tions in C O emissions for our cus tomers. The calculations ha ve been validat ed by a thir d party and the first measuremen ts will be reported in our 2021 sustainability r epor t. T o achieve carbon neutrality acros s our own oper- ations, w e are c ommitted to reducing our scope 1 and 2 emiss ions by at leas t 80 perc ent. T o achieve these targets, w e will electr ify our vehicle fleet, use rene wable energy to po wer our sit es and impro ve energy efficiency across our opera tions. When it comes to our supply cha in, we have mapped our emiss ions and started engaging with our suppliers through our supplier susta in- ability frame work. W e are curr ently defining more specific actions on the most impactful upstream emiss ions. T o perser ve resour ces, we are in troducing cir cu- larity into our busines s models, aimed at reducing was te at ev er y stage of the value chain. T o achieve this goal, we will cont inuously improve the r ec y- cling and reusability of our pr oduc ts and make them more durable, as w ell as design and r educe the use of virgin and hazardous mat er ials. T O ACHIE V E C A R BON NEUTR A LIT Y , W E W ILL ELE C TRIF Y OUR V EHICLE FLE ET , USE R ENE WABLE ENERGY T O POWE R OUR SIT ES A ND IM PRO VE EN ERGY E FF ICI E NC Y AC ROS S OUR OPER A TIONS. 16 ABB ANNUAL REPORT 2021 01 INTRODUCTION — S u stai n a bi li t y st rate g y 2 03 0 Ho w did w e get t her e * — Mate r i al topi c s • Products, solutions and serv ices • Sta k e holder engagement • Carbon reduc tion • Health & safety • Eth i c s • Emp loye e we ll be in g • Responsible s ourc ing • Human rights & labor • Operations – environment • Circular economy • Soc io - e conom ic impact • Business r esilience • Da ta pr ivac y • Diversity & inclusion Ho ur s of i nte r v i ew s to de te rmi n e th e fo cu s ar ea s of o ur 203 0 sustai nab ili ty strate gy Area s, inc lud ing customers, suppliers, inve sto rs , pu b li c re p re se ntat ive s a nd NGOs int erv iew ed Em p loye e co mm e nts a n al y ze d fr om our engagement survey 400 300 40,000 * Fi g ure s f ro m 20 19 i nte r na l an d e x ter n al s ta keh o ld e r en ga ge m en t pr oc ess u se d fo r su st ai na bi li t y mat er i al it y m atr i x . 17 ABB ANNU AL REPORT 2021 01 INTRODUCTION — Our 2030 commi tment Ena blin g a low- carbon soc iety Support our customers in reducing their annual CO emiss ions by at leas t 1 00 megatons . Achieve carbon neutrality acr oss our own Reduce C O emissions in our supply chain thr ough a systema tic appr oach with impactful suppliers. Pres er v ing resourc es Co ver at least 80 perc ent of ABB products and solutions with our Reduce Implement including environment spend in focus c ountries. 18 ABB ANNU AL REPORT 2021 01 INTRODUCTION Promotin g soci al p rogre ss Aim for Double the number of women in senior management employee engagemen t score in our industry . Pro vide impac tful support for community -building Implement including human rights , spend in focus c ountries. Int egr ity and t rans parency Extend ABB new C ode of Conduct-based approach Include complianc e with Supplier Code of C onduc t in procur ement terms and conditions. Include sustainability tar gets in senior management ABB ANNU AL REPORT 2021 01 INTRODUCTION T o promote social progr ess, we ar e creating saf e, fa ir , equitable and inclusive w orking envir onments in which our people can succ eed and develop. W e also work with suppliers to pr oactively ident ify , as- sess and addr ess human rights issues, and to driv e broader en v ironmental, social and go vernance performance. Each of our sustainability tar gets has one or more key perf ormance indicators (KPIs) to measur e progr ess. These are being pr ogressiv ely integrated into our perf ormance management planning and are r epor ted by the busines s at the same time as financial KPIs. Sustainability KPIs ar e now also part of senior management incen tives. — Action s to enab le a low- carbon soc iety ABB joined three init iativ es led by the interna- tional non-pr ofit Climate Gr oup to r educe its own emiss ions: • EV 1 00: ABB commits to electrif ying its fleet of more than 1 0,000 vehicles by 20 30 . • RE 1 00: ABB commits to sour cing 1 00 perc ent rene wable electr icity by 2030 . • EP 1 00: ABB commits to establishing ener gy efficienc y targets and con tinuing to deploy energy managemen t systems a t its sites. ABB’s carbon reduction tar gets received appr oval by the Science Based T argets initia tive (SB Ti) con- firming that they are in line with the 1.5°C scenario of the Paris Agr eement. ABB also joined the Busi- ness Ambit ion for 1.5°C Campa ign, a global coali- tion of UN agencies, busines s and industr y leaders, led by the UN Global C ompac t (UNGC). — How w e a re preser v ing resources W e aim to pr eser ve resour ces at all levels of the value chain b y eliminating wast e in our own oper- ations and making our pr oduc ts last longer . T o- day , among our 440 sites acros s the world, close to 40 per cent ar e already sending no was te to landfills. W e are also w orking with customers to r euse and recycle our pr oduc ts. We aim t o help them reduce their resour ce consumption thr ough more efficient proc esses and by replacing or upgrading old and outdat ed equipment. Our objective is to go bey ond compliance to be- come a leader in cir cular ity . That means setting specific, transparent k ey performance indicators for all aspects of the product lif ecycle to enable cont inuous improvement acr oss our portfolio. When it comes to our suppliers, our tar get is that 80 perc ent of our supply spend in focus countries is cov ered by Sustainable Supply Base Manage- ment (SSBM), which co vers all aspects of environ- mental, social and gov ernance (ESG) performance, including preserving resourc es. — Case studies Re du c i ng o ur c ar bo n fo otp r i nt w it h re c ycl e d plastic In the Netherlands, ABB intr oduced a range of sur- fac e-mounted junction boxes made entir ely from recycled plast ic waste. Hundr eds of millions of these boxes ar e installed across Eur ope every year and using r ecycled rather than new plas tic can r e- duce carbon emis sions by up to 70 perc ent. In the Netherlands, we est imate tha t this new range of reduction of up to 300,000 kilograms – the equi - valent of 500 fligh ts from London to Ne w Y ork. AB B fa c tor y in I ta ly a ch ieve s ze r o was te to landf ill t arget In 2021, ABB Smart Power’s manufacturing unit in F ros inone, Italy , stopped sending w aste to landfills, in line with ABB’s target to elimina te w aste t o land- fill by 2030 . The factor y , which produc es more than 3 million circuit br eakers per year , achieved the tar- get within two years thr ough r igorous w aste sort- ing and identificat ion. T oday , it separates pr oduc- tion w aste in to ar ound 150 categories of mat erial and every workstat ion has separate w aste conta in- ers for car dboard/paper and plastic. 20 ABB ANNU AL REPORT 2021 01 INTRODUCTION W a ste to landfi ll ha s gone Amon g our 4 40 sites across — E x e cutiv e C o mmittee A s o f Dec emb er 31, 2021 SAMI A TIY A President Robotics & Dis crete Automa t ion MARIA V ARSELLONA Ge ne r al Co un se l & Comp any Se creta r y THEODOR SWEDJEMARK Chief C ommunications and Sustainability Off icer BJÖRN RO SENGREN Chi ef E xe c ut iv e O f f ic er PETER TERWI ESCH President Process Automation 22 ABB ANNUAL REPORT 2021 01 INTRODUC TION CAROLINA GR ANA T Chief H uman Reso urces Of f ice r TIMO IHAMUOTILA Chief Financial Off icer MORTEN WIEROD President Motion T AR AK MEH T A President Electr ific ation 23 ABB ANNUAL REPORT 2021 01 INTRODUCTION The num ber of nationalities o f people — DIVERSIT Y AND INC LU S ION Our pe ople Inclusion means e ver yone At ABB, w e are cr eating an inclusive cultur e that repr esents our communities in all of their diver- sity . Our goal is that every one of our 105,000 colleagues ar ound the world feels that they ar e working in a saf e, fa ir , equitable and inclusive en v i- ronmen t, where they can suc ceed and develop. With our 2030 div ersity and inclusion (D&I) strat- egy , we seek to incr ease diversity acros s all dimen- sions, including gender , LGB TQ+, abilities, ethnic- ity and generations. Our c ommitment is reflected in the fact that each dimension is sponsor ed by a member of our Group Ex ecutive C ommittee, with our CEO Björn Rosengr en being the sponsor for gender diversity . ABB is already a div erse company , w ith 140 na- tionalities and five genera tions represen ted in the workf orc e. Here, we tell the st ories of nine col- leagues who hav e chosen to pursue their careers at ABB. 24 ABB ANNUAL REPORT 2021 01 INTRODUCTION A self-described people advocate and change agent, Bria joined ABB to bring people together , help them gro w and learn, and bring their authen- tic selves t o work. But to achieve her goals, Bria had to o vercome one big challenge – her fear of speaking in public. Bria ’s supportive manager made sur e that she f elt com- fortable talking with colleagues and pitching ideas. This meant Bria had to st ep out of her comf or t zone – an experience that changed her lif e and her career pr ospec ts. T oday , after succes sfully obtain- ing her HR certification thr ough the company’s de- velopment opportunities, Bria helps colleagues r e- alize their career plans and pot ential a t ABB. As a science studen t, Iga wanted to w ork in a role that would allo w her to combine her twin int erests in arts and physics. After her degree and an in ternship at ABB , Iga joined the ABB Ability team in P oland where she found an ideal en v ironment t o develop and learn as one of the gro wing number of women in STEM (science, technology , engineering and mathemat- ics) fields. Her current pr ogramming role also plays to her lov e of solv ing logic puzzles. Through ABB , she was able t o meet the famous as tronomer and Nobel Prize winner , Didier Queloz, providing fur- ther energy and mot ivat ion to keep taking on chal- lenges and cont inuing her learning journey . Gro wing up in China, Pedy w as inter ested in engi- neering, a traditionally male dominated field. Af- ter complet ing her master ’s degree, she joined the ABB Robotics R esearch & Dev elopment center . At ABB, P edy ’s manager trusted her with respon- sibility , allowing her to learn from her mentor and other experienced c olleagues. She felt empo wer ed to own her pr ojec ts and benefited from a support- ive learning en v ironment. The support system c on- tinued thr oughout her maternity lea ve, and she felt welcomed b y her manager and team on her return. In the decade that she has been at ABB , she has the opportunity to develop cobots tha t help customers increase efficiency , productivity and sustainability . She personally identifies with the IRB 1300 robot, agile and quick, just lik e her . BRIA W ILLIAMS HR busi ness partner , Electr ific ation (U S) IGA KACZMAREK -WRONA DevOps engineer and pro du c t ow ne r – A B B Ab ili t y, Process Automation (Poland) PE DY ZH U Z HU R&D program manager , Robotics and Dis crete Automa t ion ( China) 25 ABB ANNUAL REPORT 2021 01 INTRODUCTION Jorge’s journey with ABB began at a univ ersity job fa ir in Puerto Rico. Jor ge wan ted to learn more about the role of a mechanical engineer , and ABB offer ed him a summer internship. After finishing his degree, Jor ge was selected into the ABB R&D team in Milw aukee, WI. No w in Philadelphia, he is exploring the role of a Solut ions Product Manager in the Electrif ication busines s. Jorge is mot ivat ed by the oppor tunities to c on- tinue learning, but the motiv ation goes beyond that. At ABB , he can be himself at work. As a mem- ber of the L GBT Q+ community , and the spokesper- son of the internal emplo yee gr oup, Encompass Pride, Jorge has f elt welcomed b y ever yone at ABB and wan ts others to f eel as comf or table as he does at work. Subbaramaiah left a permanent job to join ABB on a short-term contract. Two decades lat er , he is still with ABB. Subbaramaiah has f aced man y challenges in life. He was diagnosed with polio as a child. Lat er he suffer ed an accident tha t lef t him partially immo- bile for a f ew months. Apart from his f amily , his ABB colleagues pr ov ided a strong support syst em at that t ough time. His manager ga ve him time to rec over fully befor e resuming work, and the man- aging director of ABB India visited him a t home to check on his health. “ ABB has stood by me, valued me, and giv en me ex- cellent opportunities,” he sa id. “Most importantly , the warm th, the feeling of a c ommunity here, is unmatched.” Zaher arrived in the Netherlands as a S yr ian refu- gee in 2015. Fac ed w ith learning a new language and culture, diff eren t from his Arabic heritage, Za- her embraced the challenge. After his first job in automat ion, Zaher joined ABB to ha ve more flexibility in his job as a softwar e spe- cialist and to w ork with a diverse team of talent ed engineers. By automa ting proces ses, such as the packaging of switches, Zaher w as able to incr ease production efficiency . Zaher believes in cont inuous learning, and that ther e are no limits t o developing new ideas and automa ting proces ses. JORGE PEREZ BUI TR AGO Planning & fulfilm ent specialist , Electr if ication (US) SUBBARAMAIAH GANESH Lea din g acc ou nt pay a bl es for A M E A , Gl ob al B us in ess Ser v ices (Ind ia) ZAHER RA JAB Automa t ion engineer , Electr if ication (Netherlands ) 26 ABB ANNUAL REPORT 2021 01 INTRODUCTION Farah has alw ays loved challenges. Gett ing into the field of electr ical engineering was one of them. After completing her degr ee program, Farah joined ABB to con tinue her development as an engineer , and to ha ve a positive impact on her local commu- nity and the environmen t. In 2020, she achieved a major win at ABB: securing a multi- year service contract with one of Malay - sia ’s leading utilities. The secret w as her ability to listen and unders tand what the cust omer needed. Farah cr edits her suppor tive c olleagues and a great working en vironment f or keeping her motiva ted to k eep learning and developing as a ser vice engi- neer at ABB. When Ali moved t o Australia from his home country of Iran, the future appear ed r isky , and very dif fer- ent fr om the languages and culture he had gr own up with. That changed when ABB gav e him an op- portunity to join the traction business as a sales manager . Ali’s manager gav e him the freedom to take init iatives to dev elop the traction business in Australia and New Z ealand. Ali loves the opportunity of working on inno va- tive solut ions w ith talented colleagues and win- ning over influen tial customers. As a person who is driven to learn ne w things, Ali has found both en- couragement and r ewar d at ABB, and views this as an immense value-add of working in a truly global compan y . Cristina studied electrical engineering and took her first career s teps in Rio de Janeir o. But she felt her career s talling, and one of the reasons w as there w ere v er y few women in the field. Cristina did not give up, and wen t to São Paulo, where she was hir ed by ABB to work on a project f or Usimi- nas, one of the biggest st eel produc ers in Bra zil. Since that da y 25 years ago, Cristina has been with ABB and is still e xcited about her w ork. In her cur- ren t role in the field of electrical engineering she is respons ible for dev eloping elec trical and instal- lation pr ojec ts for the ener gy industr y division in Brazil. She has proudly witnessed ho w women ar e playing a bigger r ole in engineering. Cristina ’s ad- vice to a younger genera tion of women joining the engineering workfor ce is to “follo w your goals, over come obstacles regar dless of gender , and never st op asking questions.” F ARAH W AHIDAH MAZL AN Ser v ice sales engineer, Electr ific ation (Malaysia) ALI PARVIZI T ract ion sales manager , Motion (Australia) CRISTINA D’ ÁVILA Senior electrif ication engineer , Process Automation (Bra z il) 27 ABB ANNUAL REPORT 2021 01 INTRODUCTION — Ele c tr if ica tion WR ITING THE FUTURE OF S A F E, S MART AND S U ST AI NABL E E L E C TR IFIC A TI ON . ABB’s Electr ification busines s offers a wide-ranging portfolio of pr oducts, digital solutions and ser v ices, fr om substat ion to sock et, enabling saf e, smart and sustainable electrif ication. 28 ABB ANNUAL REPORT 2021 01 INTRODUCTION End-markets (4) Geographies 4% Renewables 16% Distribution, Con v. Genera tion 5% O&G, Chemicals 4% F&B 15% Other Industr y 36% Buildings 7% Data Cen ters 13% Other T&I 35% Europe 25% USA 9% Rest of Americas 16% China 15% Rest of AMEA Market gr owth is dr iven by electricity demand that gro ws two times f aster than other energy sour ces as a result of urbaniza tion and populat ion gro wth. Additionally , digitalization is accelera ting demand for in telligent solut ions. Th e Bu si ne ss A re a co nsi st s of t he fo l low i n g six Divisions: • Dis tribution Solutions , GL OBAL NO. 1 IN MEDIUM- VOL T AGE. Medium-voltage electrical components and digital devices, medium- and low- voltage switchgear , energy systems, digital systems and service • Smart Po wer , GL OBAL NO. 3, NO . 2 IN LOW VOL T AGE. L ow- voltage break ers & sw itches, enclosures, mot or starter application and po wer prot ection • Smart Buildings , GL OBAL NO. 3, NO . 1–2 IN DISTRIBUTION ENCL OSURES AND DIN-RAIL PRODUCTS. Miniatur e breakers, dis tr ibution enclosures, wiring acc essories and building automat ion • Ins tallation Pr oducts , GLOBAL NO . 1, NO. 1 IN NORTH AMERICA . Wire & cable managemen t, terminat ion, fittings and other acc essories • P ower C onversion , NO . 4 IN DC POWER SOLUTIONS. P ower conv ersion products including embedded power pr oduc ts, DC power solutions and serv ices (T o be exited) • E-mobility , GL OBAL NO. 1 IN EV CHARGING SOLUTIONS. A C & DC charging har dware, B2C & B2B digital serv ices, advanc ed energy & fleet management Ke y figures Electrification $ in millions, unle ss otherw ise indicat ed US$ C omparable Orders Order backlog ( end Dec ember ) Revenues Income from operations Operational EBIT A No. o f em pl oy ee s (F T E eq ui v.) Rev enu es Operational EBIT A margin (1) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (2) Gr ow t h rat es fo r o rd er s , or de r ba ck l og a nd r ev en ue s ar e on a c om p ar ab le b a si s (l o ca l cu rr e nc y a dj us te d for a cq ui si t io ns a nd d iv es ti tu re s). (3) Con st an t cu rr en c y (no t ad ju ste d f or p or t fo li o c ha ng es). (4 ) Management estimates. % of F Y 2 0 21 t hi rd p ar t y r ev en ue s % of F Y 2 0 21 t hi rd p ar t y r ev en ue s ABB ANNUAL REPORT 2021 01 INTRODUC TION — ELE C TRIFICA TION P o w e r ing a sus tainable future A S A LE A DING PROVIDER OF ELE C TRIFIC A TION SOL UTIONS FOR INDU S TRY , INF R A STRUC TURE A ND TR ANSPOR T – SE C T ORS THA T A CC OUNT F OR TH R E E- QUARTE R S OF GL OB A L ENE RGY CON SUMPTION – ABB EL E C TRIF IC A TIO N IS A KE Y E N ABLER O F A L OW- C A RB ON SO CIE T Y . ABB’s Electrif ication Busines s Area is meeting gro wing demand for saf e, smart and sustainable electrif ication by tackling some of society’s great- est challenges. In the f ace of rising emis sions and pollution, populat ion gro wth and aging infrastruc- ture, cit ies are ha v ing to transf orm themselves. By f ar the most significant positive impact we can hav e is through innova tive t echnologies that re- duce ener gy consumption and emissions, which impro ves quality of lif e for citizens around the world. ABB technologies ar e found nearly ev er y where there is electricity . Operating in mor e than 1 00 countries, ABB Electrification employed 51,000 people and generated $13.2 billion in r eve- nue in 2021 through its s ix market-leading Divi- sions – Smart Pow er , Smar t Buildings, Installation Products, Distribution Solutions, E-mobility and Po wer C onversion. Global electricity demand is expec ted to mor e than double by 2050 . Unless drast ic ac tion is taken no w to r educe emis sions from power genera tion and consumption, t emperatures will continue t o r ise at unsustainable lev els. As a leading provider of elec- trification solutions f or industry , infrastructure and transport – sectors that accoun t for thr ee-quar ters of global energy c onsumption – ABB Elec trification is a key enabler of a lo w-carbon society . One such technology is the ABB Ability™ Ener gy and Asset Manager , which combines sensors and analytics software to pr ovide insights on energy consumption and the perf ormance of multiple sys- tems in a f actor y or plant. By adopt ing this solu- tion, a sit e that consumes 2 G Wh of power per year , can reduc e annual CO emiss ions by 40 tons. Another innova tion that dramatically r educes greenhouse gas (GHG) emis sions is ABB’s AirPlus™, a groundbr eaking eco-efficient gas mixture that replac es SF in gas-insulated switchgear (GIS) ap- plications. The importance of r eplacing SF cannot be underes timat ed. It is one of the world’s most powerful GHGs, 23,500 times mor e potent than CO , with a lifespan of 3,200 years. Sinc e 2002, the conc entrat ion of SF in the atmospher e has more than doubled. In 2021, ABB Electrif ication c ontinued t o intr oduce new technologies t o the market. In September , we launched the world’s f astest EV charger , the T erra 360, which can deliver 100km of range in les s than three minut es or fully charge an electric car in 15 minutes. This milest one for EV char ging w ill sup- port the rapidly growing global demand for emis- sions-fr ee vehicles and net-zer o goals. Digitalization c ontinues to be an important driver of the energy trans ition. ABB Electrification is in- creas ingly incorporat ing sof twar e and digital ser- vices into its off ering. The ABB Ability Market- place™ portal pro vides customers with acces s to over 1 00 cloud-connected digital applications. And the ABB Electrif ication Startup Challenge invites companies fr om around the globe to compete f or a $30,000 inv estment to work with our R&D teams. By 20 30, we expect that our market-leading innov a- tions and the pr omising technologies in our pipe- line will enable customers to r educe annual CO emiss ions by at leas t 1 00 megatons, equiv alent to the annual emis sions of 30 million combus tion cars. As part of our “Mission to Z ero” init iativ e, ABB Electrif ication is using our inno vative t echnologies to mak e our own sites carbon neutral, while reduc- ing emiss ions acros s our supply chain. 30 ABB ANNUAL REPORT 2021 01 INTRODUCTION — Case studies Cut ti ng e n er g y cost s at Vi e tn am telecommunica tions HQ by 20 percent ABB’s smart technology has been key t o realizing telecom gian t Viettel’s ambitions to sav e energy and reduc e its carbon footprint while maintaining operational efficiency at its Vietnam headquarters. The ABB i-bus® KNX solution in the Hanoi f acility contr ols all of the building’s func tions, from ligh t- ing and shutter con trol to heating, v entilation, se- curity , and energy management. The solution is installed via a single bus interf ace alongside the standar d power lines. Thanks to this ABB technology , energy cos ts hav e been reduc ed by up to 20 percen t, and the 1,000 people working in the building ha ve a much more comf or table and secure work en v ironment. This project sets a benchmark for ho w intelligent tech- nology can reduc e a building’s environmental impact. En a bl in g G e rma ny ’s f ir st fu l ly e l ec t r if i ed b u s term inal As part of Germany’s w ider envir onmental agenda, Hamburg is one of the first cit ies to commit t o the full electrif ication of its bus fleet. ABB Electrifica- tion equipment is helping the city meet its goal of with 1990 lev els. Public transport operator , Hamburger Hochbahn AG, is implement ing a w ide-reaching fleet electrifi- cation pr ogram that includes Germany’s f irst fully electrif ied bus terminal. ABB’s turnkey solut ion included the installation of transf ormer , switchgear , and heavy vehicle charging s tations in the c entral bus depot. These can simultaneously r echarge 44 buses, each with a range of up to 150 km. Additionally , ABB provided the planning and implementat ion of the electric in- frastructure and the c onnection of the bus depot to the grid. 31 ABB ANNUAL REPORT 2021 01 INTRODUCTION — E- mobil ity – the futu re of road transport Of 46 energy t echnologies and sectors identified by the Int ernational Ener gy Agenc y (IEA) as being “critical” t o achieve net-zero emiss ions by 2050, only two ar e on track, acc ording t o the IEA: lighting and e-mobility . Electric-vehicle (EV) registrat ions increased b y 41 perc ent globally in 2020, while sales of combust ion-engine cars dropped 16 per- cent. In the first quarter of 2021, global EV sales rose aga in by ar ound 140 perc ent, compared to the same period in 2020 . Rapid expansion of the w orld’s EV charging infra- structure is nec essary to support the burgeoning adoption of electric vehicles. By 2040, an est ima- ted 290 million additional char ging points will be requir ed, amounting to circa $500 billion in global inv estment. ABB inv ested early in its EV charging busi- ness. T oday , through har dwar e innovation, c om- bined with the expansion of our softwar e and digital offering, we ar e the market leader in EV charging infras tructure, ha ving sold more than 525,000 chargers acr oss 85 markets, including o ver 25,000 DC fas t chargers and 500,000 A C chargers as of December 31, 2021. In addition, dedica ted R&D cent ers such as our new E-mobility Innovat ion Lab in Delft in the Netherlands ensure the Divi- sion pr ovides charging infrastructur e that not only meets toda y ’s needs but anticipates futur e e-mo- bility requir ements. T o advance EV charging t echnology , we are also collaborat ing w ith leading software c ompanies. In 2021, ABB’s digital e-mobility ventur e, P ANION, and Amazon Web Services (A WS) began testing a newly dev eloped, cloud-based solution, “P AN- ION EV Charge Planning”. This solut ion is de- signed f or the real-t ime management of EV fleets and charging infras tructure and will be launched in 2022. ABB’s fas t DC chargers run with a C onnec ted Ser- vices Platf orm, which employs Micr osoft’s Azure cloud serv ices to enhanc e uptime, scalability , and operational efficiencies and to pr ovide real-time remot e support ser vices. ABB’s superior offering (1) https :/ /www.iea.org/ topics/ tracking- clean-e nergy-progress includes every thing from authorization and analyt- ics to r emote monitoring and con trol. The new T erra 360 charger is not only the most high-power char ging solution in the world, but also one of the most versa tile. Designed for commer cial fleets, heavy-duty vehicles as w ell as elec tric cars, it is capable of charging up t o four v ehicles at a time. ABB charging solut ions hav e also played a k ey role in enabling the rapid transition t o e-mobility of countries lik e Nor wa y , which has installed mor e than 1,000 ABB fas t chargers. Other c ountries, in- cluding the USA, Finland, and Qatar , are also turn- ing to ABB to support their ambitious emis sions reduction c ommitments. The Gulf sta te of Qa tar in- tends to fully electrif y its public transport network and has partnered with ABB to crea te one of the larges t e-bus networks in the world. A hea v y vehi- cle charging netw ork with capacity for 1,000 elec- tric buses to transport 50,000 passengers a da y is curren tly under construction, with f our bus depots, eight bus sta tions and 12 metro s tations. 32 ABB ANNUAL REPOR T 20 21 01 INTRODUC TION The num ber of cha rger s incl udi ng ov e r 25,0 00 DC fast charge rs an d 500,000 AC charge rs as 33 ABB ANNUAL REPORT 2021 01 INTRODUCTION — Mot ion WR ITING THE FUTURE OF MO TION . ABB’s Motion bus ines s is the lar gest supplier of drives and mot ors, globally . W e provide cust omers w ith the complete range of electrical motors, genera tors, drives, serv ices and in tegrated digital po wertrain solutions. 34 ABB ANNU AL REPORT 2021 01 INTRODUCTION End-markets (4) 7% Con v . Generation, Renew ables 11% O&G, Chemicals 16% Mining, Metals 8% W ater & Wastewater 11% F&B 21% Other Industry 13% Buildings 8% Rail 5% Other T&I Geographies 31% Europe 30% USA 6% Rest of Americas 18% China 15% Rest of AMEA Market gr owth is dr iven by megatr ends such as gro wing population, electrification, urbanization, decarbonization and digitaliza tion. This r equires further automation of industrial pr ocesses, ener gy efficienc y and electr ic mobility . Th e Bu si ne ss A re a co nsi st s of t he fo l low i n g sev en Divi sions: • Drive Pr oduc ts , GLOBAL NO . 1. Compr ehensive product portfolio of low -v oltage AC drives • S ystem Drives , GL OBAL NO. 1. Lo w- and medium- voltage A C drives and modules, wind con verters • Service , GL OBAL NO . 1. Base serv ices and spare parts, upgrades & replacemen ts, smart solutions • T rac tion , GL OBAL NO. 2. Traction sys tems incl. con verters and motors, battery energy st orage systems, auxiliary conv er ters • IEC L V Motors , GL OBAL NO. 2. C omprehensive portfolio of low v oltage motors f or any indus tr y and application, c ompliant with all ma jor markets globally • Lar ge Motors and Generat ors , GL OBAL NO. 2. Compr ehensive product portfolio of lar ge AC motors and generat ors • NEMA Mot ors , GL OBAL NO. 1. Compr ehensive product portfolio of low v oltage elec tric motors Rev enu es Operational EBIT A margin Key fi g ur es M ot io n $ in millions, unle ss otherw ise indicat ed US$ C omparable Orders Order backlog ( end Dec ember ) Revenues Income from operations Operational EBIT A No. o f em pl oy ee s (F T E eq ui v.) (1) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (2) Gr ow t h rat es fo r o rd er s , or de r ba ck l og a nd r ev en ue s ar e on a c om p ar ab le b a si s (l o ca l cu rr e nc y a dj us te d for a cq ui si t io ns a nd d iv es ti tu re s). (3) Con st an t cu rr en c y (no t ad ju ste d f or p or t fo li o c ha ng es). (4 ) Management estimates. % of F Y 2 0 21 t hi rd p ar t y r ev en ue s % of F Y 2 0 21 t hi rd p ar t y r ev en ue s 35 ABB ANNUAL REPORT 2021 01 INTRODUC TION — M OTI O N He lping cus tomers become ener gy e ff icien t In 2021, ABB Motion launched the Ener gy Effi- ciency Movement, a multi-s takeholder initiativ e both to raise a warenes s of the advanced technol- ogies that can mitiga te climat e change, and drive collective action t o reduc e energy consumption worldwide. At this critical moment f or the climate, roughly 45 per cent of the world’s electricity is used to pow er electric motors in industry and buildings, and much of the installed base is out of dat e and inefficient. ABB Motion enables major impro vements in ener gy efficienc y for industry , cities and transport with its leading portfolio of variable-speed drives, motors, generators, traction syst ems and digital ser v ices. Inv esting in more efficient technology is one of the simplest and mos t cost-eff ec tive w ays to lower en- ergy c onsumption and associated gr eenhouse gas emiss ions. As busines ses and transport networks seek to bridge the gap that divides us from a f os- sil-fr ee future, w e offer our cust omers practical and pro ven technologies tha t help. Our deep domain expertise, c omprehens ive offer- ing and unmatched global pr esence make ABB Mo- tion the partner of choice f or customers seeking the best solutions and support. In 2021, Motion employed 20,000 people and genera ted $6.9 bil- lion in rev enue. With the largest resear ch and de- velopment budget in the indus tr y , we are cons is- tently pushing the boundaries of motor and drive technology f or the benefit of our customers and society . ABB’s portfolio includes the most ener gy-efficient motors and drives on the mark et. Among these is a synchronous r eluc tance (SynRM) mot or and dr ive package that has set a new s tandard for efficiency . The SynRM mot or meets the IE5 ultra-premium ef- ficienc y rating, pr oviding the per formanc e advan- tages of permanent magnet technology without using rar e earth materials. Packaging a modern mot or w ith an ABB drive op- timizes its operat ion leading to even gr eater ef- ficienc y . Drives contr ol the speed and torque of a motor to ma tch the load r equiremen ts, typi- cally reducing ener gy consumption by 25 per cent or more in indus trial applications. ABB’s advanc ed drive offerings include our line of ultra-low-har- monic drives, which minimize electromagnetic dis- turbances in pow er networks, resulting in mor e re- liable operations, r educed maintenanc e needs and higher efficienc y . Se r v i n g a w id e ra ng e of a p pl ic ati o ns w i th effici ent s olutions Transport repr esents another field of opportu- nity for the la test electric motion technologies: It acc ounts f or about 25 perc ent of the world’s en- ergy use, and mor e than 99 percent of tha t cur- ren tly depends on the combust ion of fossil fu- els. ABB Motion pr ovides a variety of solutions for modern electric mobility , including systems used in electric trains, buses, ships and other heavy vehicles that ar e increasingly being pow- ered b y electricity . Our state-of-the-art traction, energy s torage and e-drivetrain t echnologies en- able energy -ef ficient and emission-fr ee mobility in numerous trans it systems, ra il networks and vehicle fleets. Alongside our technologies, w e deliver a c ompre- hensive range of services and digital solutions to maximize uptime, extend pr oduct lifecycles and enhance the performanc e and ef ficienc y of motors and drives. By ta iloring our ser vice offering and solutions to our cus tomers’ needs, we help them run their operations mor e profitably , safely and re- liably , allowing them to better tak e advantage of new busines s oppor tunities. INV ES TING IN MORE EFF ICIEN T TE CHNOL OG Y IS ONE OF TH E SIMP LEST A ND MO ST CO ST - EF FE C TIVE W A YS T O L OWE R EN E RGY CO NS UMPTI ON A ND ASSOC IA TE D G R EEN HO U SE G A S EM IS SI O N S . 36 ABB ANNUAL REPORT 2021 01 INTRODUCTION — Case studies Synchrono us c ondensers for greener energy ABB is working closely with Statkraft, Europe’s larges t generator of r enewable ener gy , to design, manufacture and ins tall two high-iner tia syn- chronous c ondenser systems for the List er Drive Greener Grid pr oject in Liverpool, England. The in- nova tive project will play a k ey role in stabilizing the local electricity network to handle an increas- ing amount of wind and solar power . This will help National Grid meet its tar get of operating a ze- ro-carbon electrical system in the UK by 2025. Statkraft has signed a 1 0-year service contract with ABB in which we will deploy digital condition moni toring solutions that opt imize performance and predict maint enance needs. By asses sing real- time data with cloud-based analytics, our ser vice team will be able to plan corr ec tive actions bef ore issues oc cur , ensuring the system is highly r eliable. ABB tra c tion t echnology to increase eff iciency of G er ma ny ’s hi gh - sp e ed t rai n s ABB traction con verters wer e selec ted in 2021 to upgrade 76 high-speed locomotiv es on Germany ’s Deutsche Bahn network. As part of a refurbishment program, our highly ener gy-efficient traction con- verters ar e replacing po wer electronics fr om the 1 990s. Upgrading the existing fleet will help ext end its operating lif e and improve ener gy ef ficiency , re- liability and ease of maint enance. AB B m oto rs a nd d r ive s re d uc e powe r consumption at leading f ertilizer company T o improve ener gy ef ficiency at its largest pr oduc- tion sit e, Norwegian mineral fertilizer produc er , Y ara, is upgrading its elec tric motors with high efficienc y ABB drives and motors. As part of a global frame agreement, Y ara has al- ready upgraded ar ound 1,000 motors to an IE3 ef- ficienc y rating, mos tly with drives. In the next step, some 2,500 motors will be replac ed w ith IE5 SynRM motor and drive technology . Nearly 70 percen t of these applications ar e for pumps and fans, which offer significant r oom for energy sa v ings. The an- nual power sa v ings at the Y ara Porsgrunn site in Norway ar e expected to be in the region of 32– 40 GWh, leading to C O emissions r educ tions of 12–19 kilot ons. In addition, Y ara expects to sav e some €300,000 per year in maint enance costs due to low er wear and tear . The Y ara Porsgrunn site is also part of a project with ABB and Stena Recycling to r ec ycle copper , aluminum and iron fr om old motors, helping to support the circular econom y . 37 ABB ANNUAL REPORT 2021 01 INTRODUCTION — Pr oces s Automa tion WR ITING THE FUTURE O F SA F E, S MART AN D S U ST AI NABL E O P E R A T I ON S. ABB’s Pr oces s Automat ion business off ers a broad range of solutions f or pr oces s and hybrid industries, including int egrated automa tion, electr ification and digital solutions, c ontr ol technologies, softw ar e and lif ecycle ser v ices, as w ell as measurement and analytics, marine and turbochar ging offerings. 38 ABB ANNU AL REPO RT 2021 01 INTRODUCTI ON End-markets (4) Geographies 15% Conv . Generation, Renew ables 14% O&G 11% Chemicals & refinery 22% Mining, Metals, Pulp & Paper 13% Other Industr y 22% Marine & Ports 3% Other 39% Europe 13% USA 10% Rest of Americas 12% China 26% Rest of AMEA Ke y figures Proces s Aut omation $ in millions, unle ss otherw ise indicat ed US$ C omparable Orders Order backlog ( end Dec ember ) Revenues Income from operations Operational EBIT A No. o f em pl oy ee s (F T E eq ui v.) Rev enu es Operational EBIT A margin Market gr owth is dr iven by need f or productivity , reliability and impr oved resour ce efficienc y as well as increas ing demand for decarbonized opera tions and safer w orkplaces. Th e Bu si ne ss A re a co nsi st s of t he fo l low i n g fi ve Divisions: • Ener gy Industries , NO . 1–2 IN DISTRIBUTED C ONTROL SY STEMS, NO . 1 IN POWER GENERA TION, NO. 3–5 IN OIL, GAS, CHEMICALS. Integra ted automa tion & electrical systems, safety , ser vice and digital solutions • Pr ocess Indus tr ies , NO. 1 IN DIS TRIBUTED C ONTROL SY STEMS, NO . 1–2 MINING, PULP & P APER. Automation, electrical & motion systems; quality c ontrol, mine hoists, gearles s mill drives, high power r ec tifiers, electromagnetic stirr ers • Marine & P orts , GLOBAL NO . 1. Azipod® propuls ion, ship and port electr ification & automat ion, digital • Measur ement & Analytics , NO. 1 IN ANAL Y TICS, FORCE MEASUREMENT , NO. 2–5 IN INSTRUMENT A TION. Gas and liquid analyzers, field instrumentat ion, for ce measurement, digital, serv ice • T urbocharging , NO. 1 IN L OW AND MEDIUM SPEED . Lo w , medium and high speed turbochargers, service, digital solutions ( T o be exited ) (1) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (2) Gr ow t h rat es fo r o rd er s , or de r ba ck l og a nd r ev en ue s ar e on a c om p ar ab le b a si s (l o ca l cu rr e nc y a dj us te d for a cq ui si t io ns a nd d iv es ti tu re s). (3) Con st an t cu rr en c y (no t ad ju ste d f or p or t fo li o c ha ng es). (4 ) Management estimates. % of F Y 2 0 21 t hi rd p ar t y r ev en ue s % of F Y 2 0 21 t hi rd p ar t y r ev en ue s ABB ANNUAL REPORT 2021 01 INTRODUC TION WE E NABLE INDU STRY T O OPE R A T E SAFE L Y , E FF ICIE NTL Y AND SU ST AINA BL Y – MAKING A WO RLD OF DI FFER EN C E T O G E TH ER . — PROCE SS AUT OMA TI ON Suppor ting a p ro spe rous, lo w- ca rbon soci et y Demand for ener gy and material is expanding in step with the world’s popula tion gr owth and the pursuit of higher living standards. At the same time, ther e is a need to r educe harmful emis sions from human activity . ABB’s Proc ess Automation Bus iness Ar ea suppor ts industries that addr ess a wide range of es sential needs – from supplying energy and w ater to manu- facturing goods and transporting them to market. Through our aut omation, electrification and digital technologies, we help our cus tomers in industry , transport and infrastructure sectors improv e the safety , eff iciency and sustainability of their opera- tions. With our R&D and innov ation pipeline, we are cont inuing to push the boundaries of how to ad- dres s the world’s energy challenges and con tribute to a cir cular econom y , together with our par tners and customers. With 22,000 employees and $6.3 billion in r evenue in 2021, Proc ess Automation enables efficient oper- ations tha t are saf er , smar ter and more sus tainable over the lif ec ycle of its customers’ in vestments – some of the larges t and most comple x industrial infrastructures on the planet. K ey to this is the ex- tensiv e por tfolio of solutions c ombined w ith the deep domain expertise of our five Divisions – Energy Indus tries, Proces s Industries, Marine & Ports, Measuremen t & Analy tics, and T urbocharg- ing. Our solutions include industry-specific prod- ucts such as mine hoists, gearless mill drives, ma- rine propulsion sys tems, high pow er rectifiers, or paper quality contr ol systems, but also an indus- try-agnostic automa tion platform in Distributed Con trol Syst ems (DCS), where ABB has been the market leader f or the past 22 years. All our solu- tions ar e supported by a wide range of advanced systems, r emote and digital ser vices. Lev eraging digitaliza tion Connectivity has been at the heart of our solutions for decades. Ov er the years, we hav e accelerated the use of digital technologies to c ontinuously expand our solutions and portfolio with Industry 4. 0 advances. Our Busines s Area is a trusted part- ner for cus tomers at ev er y stage of their digitaliza- tion journey , enabling them to max imize their ex- isting in vestments and installed infras tructure as well as int egrate ne w digital solutions, to take “bil- lions of better operat ional decisions”. In 2021, in response t o the challenges of the C OVID-1 9 pandemic, the use of digital technologies for r emote monitoring and contr ol of operations became the “new normal”. T oday , ABB’s remote technologies serve a gro wing number of custom- ers with asset health monitoring, pr edictive ana- lytics, enterprise-wide emissions tracking, and c on - tinuous acc ess to serv ice expertise, while enabling consis tent cost r educ tions and impro vements in productivity and safety . Our ABB Ability™ Collab- orativ e Operations network pro vides 24/ 7 re- mote support to more than 1,500 ships, 80 mines, 300 power genera tion sit es and over 1,200 other industrial facilit ies. Also in 2021, this remot e sup- port was critical to k eeping cr itical infrastructure and production running, and people c onnected during expansive lock down periods. Pushing the boundaries o f pr ocess technologies In 2021, we r eleased new applicat ions as par t of the ABB Ability™ Genix Industrial Analytics and AI Suite. ABB Ability™ Genix Da talyzer enables com- prehens ive analysis, c onsolidation, and utilization of emiss ions data fr om industrial plants, helping customers manage their emis sions and improv e environmen tal compliance while keeping c osts un- der contr ol. ABB Ability™ Genix Asset Perf ormance Management (APM) consolida tes ABB’s asset man- agement portfolio int o a single powerful system, pro viding ac tionable insigh ts that help impr ove equipment utiliza tion. In another major advance, Pr ocess Automa tion launched ABB Ability eMine™, a portfolio of solu- tions that mak es the all-elec tric mine a reality . It deploys a range of fully int egrated electrification, 40 ABB ANNU AL REPORT 2021 01 INTRODUCTION automat ion and digital systems fr om mine to port. The benefits of all-elec tric mining are signif- icant. Electrif ying a single mining truck eliminates take 46,000 tr ees to absorb. The launch of the world’s f astes t, most sensit ive drone-based gas leak det ection and emissions measure men t system, Ho verGuar d™, was yet an- other important milestone of 2021. Hov erGuard™ is capable of reliably det ecting, quantifying and mapping leaks of greenhouse gases fr om nat- ural gas pipelines and other potent ial sourc es from dis tances of up to 1 00 meters. In doing so, it can play a critical r ole in helping industr y , cities and communities t o reduce emiss ions and curb climate change. — Case studies affordable Cos t is currently a major barrier to the widespread adoption of gr een hy drogen, which is about three to six t imes more e xpensive than h ydrogen pr o- duced using f ossil fuels. In June 2021, ABB joined for ces with Switzerland’s largest pr oducer of r e- new able energy , Axpo, to develop modular hy dro- gen production plants in Italy , with the goal of pro- ducing affor dable green h ydrogen. ABB is building on its capabilities in automa tion, electrification and industrial operations, and c ombining them with Axpo’s experience as an ener gy provider . The work will include feas ibility studies and exploring strat egies for the s tandardiza tion, modularization, and efficient production of hy drogen solely from rene wable resour ces. Equipping an all-electr ic fer ry service in L isbon In the Portuguese capital, Lisbon, ABB is partner- ing with shipbuilder Astiller os Gondán GRP Division to r eplace 1 0 diesel-powered v essels of the public ferry operator T ranstejo, S. A . with an all-electr ic fleet. The new v essels, opera ting acr oss the T agus River , will begin to enter serv ice in 2022. ABB will deliver a c omprehens ive electric power solution, in- cluding energy s torage, and an int egrated marine and propuls ion automat ion system. Incr eased elec- trification of transport, including river vessels, will play a k ey role in helping Portugal meet its goal of achieving carbon neutrality by 2050 . ABB estimates that the new electric ferries will cut C O emiss ions by about 6,500 tons ev er y year . Usi ng p a pe r mi l l tec h no lo g y to e na bl e a m or e efficient wa y to recycle textiles ABB was chosen t o deliver an int egrated automa- tion, electrification, motion and quality con trol sys- tem f or Renew cell’s new industrial text ile recycling production f acility in Sweden. Renew cell, a special- ist in te xtile-to-t extile r ec ycling, is using the ABB solution to trans form a f ormer paper mill into the world’s first commer cial-scale recycling plant for cellulosic t extiles, which are manuf actured by dis- solving natural fibers. The proces s for recycling these materials is similar t o pulp dry ing, as the cel- lulose in cotton and viscose t extiles is brok en down for r euse in new materials. The recycled te xtiles would otherwise have been disposed of in landfills or incinerated. 41 ABB ANNU AL REPORT 2021 01 INTRODUCTION — Robo tics & D iscr ete A ut omat ion WR ITING THE FUTURE OF F LE XIB LE A UT OM A TION A ND SM A RT M A CHINES . ABB’s Robot ics & Discr ete Aut omat ion business pr ovides products, softwar e and solutions in robot ics, machine, and factor y automat ion. Our unparalleled expertise and the seamles s integrat ion of our pr oducts enable customers fr om all industries to unlock flexible automa tion. With our global pr esence in sales, engineering, and ser vice, we support our customers a t ever y step of their gr owth journey . 42 ABB ANNU AL REPORT 2021 01 INTRODUCTION End-markets (4) 33% Automotive 7% Electronics 23% General Industry 10% CSSR (5) 28% Machine Automation Geographies 48% Europe 9% USA 4% Rest of Americas 29% China 10% Rest of AMEA Market gr owth dr iven by megatr ends of individual- ized consumers, labor shortage, digitalization and uncertainty . Resulting in need f or automat ion solu- tions f or increased pr oduc tivity , highest flexibility , impro ved quality and maximum simplicity . Th e Bu si ne ss A re a co nsi st s of t he fo l low i n g two Divisions: • R obotics , GL OBAL NO. 2. Robots, r obotics application c ells and smar t systems, field serv ices, spare parts, digital services and softwar e • Machine Aut omation , GL OBAL NO. 5, NO . 2 IN HIGH-END SEGMENT . Solutions based on Programmable L ogic Contr ollers (PL Cs), Industrial PCs (IPCs), servo motion, industrial transport systems and vision, softwar e Rev enu es Operational EBIT A margin Key fi g ur es R ob oti c s & Di sc re te Au to mat io n $ in millions, unle ss otherw ise indicat ed US$ Comparable Orders Order backlog ( end Dec ember ) Revenues Income from operations n.a. Operational EBIT A No. o f em pl oy ee s (F T E eq ui v.) (1) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (2) Gr ow t h rat es fo r o rd er s , or de r ba ck l og a nd r ev en ue s ar e on a c om p ar ab le b a si s (l o ca l cu rr e nc y a dj us te d for a cq ui si t io ns a nd d iv es ti tu re s). (3) Con st an t cu rr en c y (no t ad ju ste d f or p or t fo li o c ha ng es). (4 ) Management estimates. (5) C onsumer Segments and Ser v ice Robo tics. % of F Y 2 0 21 t hi rd p ar t y r ev en ue s % of F Y 2 0 21 t hi rd p ar t y r ev en ue s 43 ABB ANNUAL REPORT 2021 01 INTRODUCTION — ROBO TIC S & DIS CRE TE A UTOMA TION Ope ning a new w orld of po ss ibilities w ith flex i ble aut omat ion (1) T he s ur vey, co mm iss io n ed b y AB B , w as c on du c te d by 3 G em G l ob a l Ma rke t Re se ar ch & I n si ght s b et w ee n D ec em b er 2 6 , 20 2 0, a nd J an ua r y 1 9, 2 0 21 . With 11,000 employees and $3.3 billion in r eve- nue in 2021, ABB Robotics & Discr ete Automation is a pioneer in robot ics, machine automat ion and digital serv ices, pro v iding innovat ive solutions for a diverse range of industries. The Busines s Area supports automotive OEMs, aut omotive t ier 1 sup- pliers, electronics manufactur ers, general industry and the consumer and service robotics segmen ts and pro vides machine automation solutions f or machine builders. Against the back drop of the Co v id-19 pandemic and result ing acc eleration in global mega tr ends – from labor shortages, to c onsumer demand for personalized products and gro w ing pres sure to op- erate sus tainably – busines ses across the boar d are seeking t o adapt their proc esses. In a sur vey of 1,650 large and small bus inesses in the Unit ed States, Eur ope and China, 84 percent sa id that they will introduc e or increase the use of robotics and machine automat ion in the next decade, with flexibility becoming a stra tegic need. Our intelligen t robot ics solutions support busi- nesses w ell beyond traditional manuf ac turing, in- creas ing productivity and flexibility in high-gro wth segments including healthcar e, logistics, f ood and beverage, c onstruction and reta il, including ecommer ce. Stra tegic expansion in 2021 Throughout 2021, w e succ ess fully expanded both our market and our off er . W e launched more than 20 major new pr oduc ts, cov er ing a broad range of applicat ions across mul- tiple industries. Our new OmniC ore™ robot c on- trollers off er fas ter , scalable, more energy effi- cient manuf acturing, while the speed of our new IRB 920T SCARA robot helps customers in elec- tronics launch ne w products faster . In our core automotiv e market, our new f ast and pr ecise Ul- trasonic Spot W eld quality inspection offers a 20x increase in pr oduc tivity , using cutting edge AI and ultrasound technology . Our Machine Automat ion division launched an in- nova tive magnetic levitation shuttle syst em, AC O- POS 6D , of fering up to f our times the shuttle den- sity of other syst ems on the market. In addition, we ha ve cont inued to develop solut ions target ing new , high-growth customer segments including e-commer ce, laboratories and logis- tics. These segments off er double-digit, profit- able gro wth by increasing aut omation lev els w ith our value-adding, flexible automa tion solutions. W e hav e made strong progr ess in our efforts to support long-term profitability by r educing expo- sure t o the automotiv e systems business. This curren t and future mark et expansion is under- pinned by significant s teps to br oaden our technol- ogy and application leadership. In F ebruary , we announced a new generat ion of str onger , fast er collaborative r obots that can work side-by -side with people on a broad range of tasks, dramatically e xpanding the reach of r obotics au- tomat ion and unlocking potent ial for sectors and busines ses that ha ve not previously had the oppor- tunity to automa te. W e further expanded our portfolio of flexible au- tomat ion solutions in August b y completing the acquisit ion of ASTI Mobile Robotics Gr oup, which has the lar ges t installed fleet of autonomous mo- bile robots (AMRs) in Eur ope, and a broad cus- tomer base in 20 coun tr ies. The market f or AMRs has sig nificant gr owth potential, with global sales expected to r each $14 billion by 2025, a CAGR of appro ximately 20 per cent. A T ABB ROBO TICS & DIS CRE TE A UT OMA TIO N, WE ARE LE A DING THE TR A NSF OR M A TION T O A UT OM A TION A ND HELPING OUR CUST OMERS RE A LIZ E NE W P OSSIBILITIES A ND OPP O RTUNITIE S . 44 ABB ANNU AL REPORT 2021 01 INTRODUCTION This acquisit ion means we are now the only com- pany with a compr ehensive and integra ted portfo- lio cov er ing robots, AMRs and machine automa tion solutions, designed and or chestrated by our v al- ue-crea ting softwar e. In November , we took another st ep to enhance our AMR offering, announcing a strat egic partnership and inv estment with Swiss-based start-up, Seven- sense Robotics. Their AI and 3D vision mapping softwar e will enable our mobile robots to na v igate autonomously in comple x, dynamic environments, helping to drive the next genera tion of flexible au- tomat ion for our cus tomers. W e cont inue to expand our software portf olio, for example enhancing our R obotStudio® simulation and programming softw are with a new Augmen ted Reality capability , advancing our integrat ion of dig- ital and phys ical worlds, and cr eating an in tuitive, easy to use int erface f or new customers. 2021 sa w double digit gro wth for RobotStudio®, doubling the number of active users. Cont r ib u ti ng to a b r i ght er f ut ur e At Robotics & Discr ete Automation, we pr ovide solutions that fr ee people from dull, dirty , danger- ous and repet itive tasks, enabling them t o develop their skills and pursue more fulfilling occupa tions. At the same time, we help our cus tomers sa ve en- ergy , reduce w aste and extend the lif etime of their equipment with solutions that incr ease product quality and durability . Our vision is of a world where r obots are as famil- iar in the workplace as lapt ops or smar tphones, and where, b y collaborat ing w ith humans, robots help make w ork more rew arding and productiv e, workplaces saf er and healthier , and contribute to a more sus tainable futur e. — Case studies In 2021, our Machine Automat ion division launched AC OPOS 6D, a ra il-free pr oduc t transport system, with intelligent shuttles tha t move independen tly between sta tions. Unlik e conven tional systems, the solution is not limited t o rigid, sequential pr o- ces ses. The solution integrates magnet ic levitation techno logy fr om Planar Motors Inc. (PMI) and helps customers trans ition to pr oducing smaller batch sizes and shorter product lif ecycles. The healthcare and pharmaceutical sectors, in particular , stand to benefit from this highly fle xible manufacturing solution. ABB Robotics & Discr ete Automation is helping to addres s the problem of plastic w aste by collabo- rating with Zume, a pr ovider of innovativ e sus- tainable packaging solutions, t o crea te fully com- postable packaging fr om plant-based agricultural was te. Over the ne xt f ive years, ABB r obots will be installed in mor e than 1,000 Zume packaging man- ufacturing cells worldwide, with the potent ial to turn thousands of tons of plant ma terial into mil- lions of pieces of susta inable packaging ever y year . With Zume’s solutions, enabled b y ABB robots, w e can potent ially replac e single-use plastics, reducing emiss ions, preserving scarce r esources, and cut- ting plast ic was te. 45 ABB ANNU AL REPORT 2021 01 INTRODUCTION — Sha re de v e lopme nts AB B Ltd sh a re p ri ce t re n d du r i ng 2 02 1 During 2021, the price of ABB L td shares list ed on the SIX Swis s Exchange incr eased 41 perc ent, while the Swis s Market Inde x increased 20 percen t. The price of ABB L td shares on NASD AQ OMX Stock- holm increased 51 per cent, compar ed to the OMX 30 Index, which incr eased 29 perc ent. The price of ABB L td American Depositary Shares traded on the New Y ork Stock Exchange increased 37 per cent, compar ed to the S&P 500 Index, which increased 27 perc ent. Dividends and t otal shareholder return During 2021, ABB distributed a dividend of 0 .80 Swiss francs per shar e to shareholders. T o- tal shareholder r eturn of ABB Lt d shares listed on the SIX Swis s Exchange w as 45 perc ent during the year . With respect to the year ended December 31, 2021, ABB L td’s Board of Dir ec tors has proposed to distribute a dividend to shar eholders in the amount of 0 .82 Swiss francs per shar e. This is sub- ject to approv al by shareholders at ABB L td’s 2022 Annual General Meeting. The pr oposal is in line with the Compan y ’s div idend policy to pay a rising, sustainable dividend per share o ver time. (1) Pro p os ed b y th e Bo ar d of D i re c tor s a nd su bj e c t to ap p rov al b y sh ar eh o ld er s at t he A n nu al G e ne r al M e et in g on M a rc h 24 , 20 2 2 . (2) Ca lc u lat io n b as ed o n we ig ht ed - av er ag e nu mb e r of sh ar es o u ts ta nd i ng . (3) Ca lc ul at io n ba s ed o n th e nu mb e r of s ha re s ou ts ta n di ng at D e ce mb e r 31 . (4) Di v i de n d pe r sh a re (co nve r te d to U. S . d ol la r s at ye ar- e nd e xc ha ng e r ate s) div i d ed b y ba si c ea r nin g s pe r sh ar e . Key d a ta Di v i de n d pe r sh ar e (CH F ) Votes p e r sha re Ba s ic e ar nin gs p e r sh are ( U SD) T ot a l AB B s toc k ho ld er s ’ eq ui t y pe r sh ar e (U S D) Weight ed- average numbe r of shares outstanding (in millions ) 46 ABB ANNUAL REPORT 2021 01 INTRODUCTION Share developments CHF USD 22 24 26 28 30 32 34 36 38 Jan 2021 Feb 2021 Mar 2021 Apr 2021 May 2021 Jun 2021 Jul 2021 Aug 2021 Sep 2021 Oct 2021 Nov 2021 Dec 2021 Jan 2021 Feb 2021 Mar 2021 Apr 2021 May 2021 Jun 2021 Jul 2021 Aug 2021 Sep 2021 Oct 2021 Nov 2021 Dec 2021 Jan 2021 Feb 2021 Mar 2021 Apr 2021 May 2021 Jun 2021 Jul 2021 Aug 2021 Sep 2021 Oct 2021 Nov 2021 Dec 2021 SEK 220 240 260 280 300 320 340 360 380 26 28 30 32 34 36 38 40 42 ABB Swiss Market Index Rebased ABB S&P 500 Index Rebased ABB OMX Stockholm 30 Index Rebased Zurich Average daily traded number of shares: 4,75 millions Stockholm Average daily traded number of shares: 1,04 millions New York Average daily traded number of shares: 1,45 millions High: 35.18 High: 38.65 High: 348 .5 Low : 24 .7 1 Low: 229.0 Year e nd : 34.90 Year e nd : 38 . 17 Year en d: 345 .4 L o w : 2 7. 9 6 — Sourc e: F actSet 47 ABB ANNUAL REPORT 2021 01 INTRODUCTION 4 3 2 1 0 250 200 150 100 50 US D bn 2019 2020 2021 2018 2 0 17 18 16 14 12 10 8 2019 2020 2021 2018 2 0 17 — Cash gene ra tion and capi tal alloca tion During 2021, ABB delivered a v er y strong cash flow for the full y ear . Cash flow fr om operating activities in cont inuing operations was $3,338 million, 78 per- cent higher y ear-on-year . The increase was driven by impr oved pr ofitability from all Business Ar eas, a str ong focus on net w orking capital management as well as f ewer it ems impac ting comparability , in- cluding transf ormational impacts such as res truc- turing or separation cos ts and cash outflow in the prior year due to the K usile settlement and pension plan transf ers. Cash flow vola tility between quar- ters declined during 2021 – a result of a high f ocus on net working capital management. F ree cash flo w (FCF) w as $2,603 million, 159 perc ent higher on a year-on-y ear basis, and FCF con version to net income 1 08 percen t despite 11 perc ent revenue gr ow th. The Group ’s benchmark for the measuremen t of re- turns is Return on Capital Employ ed (ROCE) . The Group ’s ROCE significantly increased to 14.9 per- cent, fr om 10 .3 perc ent in 2020, just sh y of ABB’s 15 by a higher Operat ional EBIT A and a lower ad- justed gr oup ef fective tax rat e compared to 2020 . The Group ’s ROCE was negativ ely impac ted by ownership int eres t in Hitachi Energy . Ret u rn on C a pit al E m pl oye d (1) A mount r epresents t otal f or both con tinuing and discontinued operations. (2) For n o n - G A AP m ea su re s, s e e th e “ Su pp le m en ta l in fo rm at io n” se c t io n of t hi s an nu al r ep o r t. (3) 20 21 , 2 0 20 a n d 20 19 a re n ot co m pa ra bl e to 2 01 8 a nd 2 017 du e to t he a do pt i on of t h e ne w le as e ac co unt i ng s ta n - da rd i n 20 19 . Fre e ca sh f low a n d con ver si on rat e Fre e ca sh f l ow ROCE )( Im pa c t of P G JV ow n er sh ip i nte re st 48 ABB ANNUAL REPORT 2021 01 INTRODUCTION 0.8 4 0.8 2 0.80 0.7 8 0.76 0 .74 CHF 2019 2020 2021 2018 2 0 17 10 8 6 4 2 0 20 17– 2 02 1 U SD b n ABB’s capital allocation priorities ar e: • F und organic gr ow th, resear ch and development (R&D), capex at a ttractive r eturns • Ris ing, sustainable dividend per share o ver time • V alue-creating ac quisitions • R eturning additional cash to shar eholders ABB inv ested $820 million in capital expenditure. Non-order r elated R&D inv estment w as $1,219 mil- lion in 2021 or 4.2 perc ent of revenues f or the year . ABB paid $1, 726 million in dividends dur ing 2021. The Board of Dir ec tors is propos ing a 0.82 S w iss francs dividend per share at the 2022 Annual Gen- eral Meeting. The pr oposal is in line with ABB’s divi- dend policy of paying a rising, sustainable dividend per share o ver time. In April 2021, the E-mobility Division acquired a majority stake in Enervalis, a smart energy con trol platf orm compan y . In August 2021, the Robotics Di- vision acquir ed ASTI Mobile R obotics Gr oup, a lead- ing global autonomous mobile r obot manufacturer with a broad portfolio acr oss all major applications enabled by the compan y ’s software suite. In April 2021, ABB launched a follow -up share buy - back program of up t o $4.3 billion to r eturn to shareholders cash pr oceeds following the comple- tion of the sale of 80 .1 perc ent of the P ower Grids busines s to Hitachi. Thr ough this follo w-up buy - back program, the C ompany purchased shar es in 2021 for appr oximately $2. 0 billion. T ogether with the initial shar e buyback program, which ran fr om July 2020 to Mar ch 2021, ABB spent appr oximately a combined $2. 7 billion dur ing the year 2021. ABB plans to con tinue its share buybacks for the full year of 2022, also in ex cess of the Po wer Grids capi- tal return pr ogram. (1) Continuing operations only. (2) Proposed. Dividends Al l oc ati on o f Ca pit a l Di v i de n d pe r sh ar e Organic investmen t (capital expenditure, R&D ) Divide nds Non- organic in vestment Share buybacks ABB ANNU AL REPORT 2021 01 INTRODUCTION — K e y i n v est or qu est ions 20 21 Q Y o u have move d to a d ec e ntr al i ze d op er ati n g mo de l d ur i ng 2 0 20 a n d 20 21 – Th e AB B Way – is t hi s now f ul l y im p le m en te d? A We have com e a lo ng w ay and h ave rea che d important milest ones. Under the ABB W ay , the D i v is ion s re pre se nt th e high es t le vel of o p - erating decisions ensuring speed and customer focu se d de c isi on s as t hey a re cl ose st to th e ma r - kets. A lean corpora te only foc uses on necessary stra tegic, financial and go vernance act iv ities. The Di v i sio ns ar e ful l y accou nta bl e for t hei r pe r fo r - man ce an d th e di v is ion al t arg et s ar e ali gn ed w i th their st rat egic mandat e o f stab ility , profitabil - it y b efor e grow t h. T o c om pl em ent t he d ece ntr al - ized o pe rat in g mo de l, w e app l y an im pr oved p e r - formance mana ge ment system. Th is facilitat e s transpar ency on divisional and Busines s Area pe r for man ce , ba se d on a st an da rdize d se t of Key Pe r form an ce In di cator s. T o ful ly c omp le te th e de - cent ra lize d way of wo rk in g at AB B , ou r foc us ar ea in 2 02 2 w i ll b e to make su re that we a lso h ave ac- countability , transparency and speed within all of the D i v is io ns. I n ma ny ca se s, it m akes s ens e to dr i ve gl oba l acco unt abi lit y e ven o ne l eve l lowe r for p rod uc t g rou ps w it hin D i v is ion s an d he re we st ill h ave pote nt ia l to imp rove . Q Wh at ar e th e l ever s to r eac h at l ea st 1 5 pe r - cent Operation al EBI T A margin in 2023? A We have made strong progres s towards our profitabil ity target dur ing 2021, impro v - - te r r esu lt s in al l B usi ne ss Ar ea s, su pp or te d by in - creased effic iency, goo d volu mes and part of the cost b as e st ill r un nin g at lowe r “pa nd emi c le vel s” , as we ll a s c lea rl y low er co rp or ate cost s an d lowe r spe c if i c ite ms w hic h imp ac t co mpa ra bil it y. We see f ur t he r pote nt ial i n al l of ou r Bu sin ess A re a s. Six o ut of 1 8 Di v i sio ns (excl ud ing D i v is io ns th at we pl an to e x it) have a s trate gi c man date to st a - biliz e their busines s or improv e profitability . The rem aini ng 1 2 D iv isi ons a re i nce nt iv i zed to d r ive prof i ta bl e grow th and t he ref ore i mp rove th e mix of the G ro up. A l l Di v is io ns have a n ann ua l pro - du c ti v it y t ar get o f 3 pe rce nt pe r an nu m and w ill focus on pus hing t hrough stra tegic pric ing ac - tions and further improv e operational effic ien - cies including f ootprint op t imiza t ions. Addition - all y, the e x it of ou r no n - co re bu si ne ss w il l als o be an important driver . 50 ABB ANNUAL REPOR T 2 021 01 INTRODUC TION Q Y o u ar e now ta r ge ti ng 3 t o 5 pe rc en t com pa ra b le g row t h th r ou gh t he c yc l e, cl ea rl y a bove w hat yo u have ac hi eve d ove r th e A In re ce nt yea rs , we have t aken s ign if ic an t organic and inorganic a c tions to align our business por tfolio t o more attractive gro wth mark ets, increasing our focus on dis crete indus - tr ie s a s wel l as t ra nsp or t an d in fra st ru c ture t hat offer better growth opportuni ties. This ongoing shif t tow ard s be tte r qu al it y of re ven ue s is pa r t of AB B ’s DNA w hic h ce nter s aro un d res our ce - eff icienc y in electrif ication and aut omation. Ad - ditionally , the res p onsibili ty for gr ow th has no w been fully trans ferred in to the bu siness es, clos e to cus tome r s. D iv isi ons h ave the b es t in sig hts into current and future customer needs and are acc ountable t o build their respec tive busines s acc ordingly . With mor e Divisions transition ing fro m sta bil it y an d pr of it abi lit y to g row th ov er ti me , we ex p ec t to se e a co nti nu ous s hif t i n the grow t h pro f ile o f AB B . Fin al ly, the u nde rl y i ng d e - man d for o ur p rod uc t s, s ys tem s and s er v ice s is supported by the escalating dr ivers from sus - tainab ility megatr e nds with more favorable r e gu - lations, improved t e chnology and cha nging c on - sumer pa tters. Q Wh at is t h e ti me l in e fo r th e re m ai ni ng p or t- fol i o ac ti o ns af te r t he d ive st me nt o f th e Mechanical Po wer T ransmission Division ? A Acti ve portfolio management is part of our pe r for man ce cu ltu re . On t he ba ck of s ys - tem ati c po r tfo li o rev i ews w e as cer t ain w he the r ult im atel y A BB i s th e be st own e r of the d if fe r- ent b usi ne sse s. A s a re sul t, we su cce ssf ull y di - ves ted th e Me c hani c al Powe r T r ans missi on D iv i - sio n du r in g 20 21 . We cont in ue to ma ke pro gre ss on th e ex it of th e T urb oc ha rgi ng D iv isi on , wh ere we are c urr ent ly r un nin g a du al tr ack p roc ess for a spin - of f or d ive stm en t w ith a s pin - of f cur re ntl y looking more lik ely and a pr eliminary timeline for sum me r 20 2 2 . We pl an to e x it th e Powe r Conve r- sion Division during H2 2022 upon impr oving per - form an ce . In ad di ti on , we ta rge t to com pl ete th e legal separa t ion o f the E- mobility Division during Q1 20 2 2 and wo rk tow ard s an I PO i n Q2 2 02 2 to cre ate a plat for m for ac cel e rated g row t h and va lu e cre ati on . We pla n to re main a c le ar maj or i t y own er of t he n ew com pa ny. At the sam e ti me , ou r active portfolio mana gement proc ess is driving de c isi on s w ith in th e Di v i sio ns to i mpr ove or e x it areas o f underperformance, supporting improv e d per formance amb it ions. F ur ther , the Group in - ten ds to pu rsu e st rateg ic p ar tn e rshi ps a s we ll a s bo lt-o n acq uis it io ns dr i ve n by the D i v is io ns. O ve r ti me i t is ou r am bit io n to comp l ete ap prox i mate ly five bolt - on acquisitions each year . Q Y o u en d ed t he ye ar 2 0 21 w i th a n et c as h pos iti o n an d have si g ni fi c an tl y im p rove d allocation priorities ? A We reite rate o ur c api tal a ll oc ati on p r in c ip les , whi ch ar e 1) fu ndi ng o rga nic g row t h, 2) pay - in g a r isi ng , sus tain ab le di v i de nd p e r sha re ove r time, 3) investing in value crea ting acquisitions and 4) re turni ng a ddi ti on al c as h to sha reh ol de rs , whi ch we h ave main ly d on e th rou gh bu y bac ks i n the p as t . We ex pe c t th at our i mp rove d ca sh g en - er ati on on t he b ack of t he A BB Way o pe rat in g mo de l w il l en ha nce o ur f le x ibi li t y to inves t in b oth organic growth and bolt - on acq uisitions, w hile prov idi ng at tra c ti ve re turn s to sha reh ol de rs . We aim to increase the pa ce o f acquisitions going for - war d, ad di ng te ch no log y, digi ta l kn ow- h ow an d further impro ve geographical footprint. Addition - all y, we pla n to cont in ue o ur sh are b uy ba ck s for ful l yea r of 20 2 2 , als o in e xcess of t he P G ca pit al return program. Q How a re yo u ma na gi n g th e va r io us s up p ly ch ai n im ba l an ce s th at you a r e cu rre nt l y fa c i n g? A Un de r the A B B Way, the Di v is io ns ar e in th e le ad to man age t he su pp ly c hai n imb al an ces . Mitigating measures include Divisions coopera t - in g whe re i t is an a dv ant ag e to po ol sup pl y vo l - umes and put the comb ined ABB weig ht beh ind supply cha in negotiations, including C-suit e dis - cuss io ns wh er e ne ed e d. D isr upt io ns tow ard s the en d of th e year w ere t an gi bl e, p red omi na ntl y in semiconductor shor tages but also in logis tics. Q Wh at ar e you r ex p ec ta ti on s fo r AB B i n 2022? A In fu ll ye ar 2 02 2 , we e xp ec t a stead y ma r - gin i mp rove me nt towa rds t he 2 02 3 t arg et of as we f ul ly i nco rp or ate the d ece nt ral ize d ope r at - in g mod e l and p e r for man ce cu ltu re in a ll ou r di - v is io ns. Fur t he rm ore , we e xp ec t su pp or t f rom a n anticipated positive market mome ntum and our strong order ba cklog. 51 ABB ANNU AL REPORT 2021 01 INTRODUCTION 02 C or por a t e go v er na nc e re p o r t 54 Chairman’ s letter 56 Summa r y of corpora te gov erna nce approach 56 Board of Directors 62 Ex e cutiv e C om mittee 64 Sh ar es 66 Share holde rs 7 0 Othe r go vernance i nfor mation 54 ABB ANNUAL REPORT 2021 02 CORPORATE GOVERNA NCE REPORT — C ha irman ’ s letter Dear Sharehold ers, 20 21 w as a not he r tur bul e nt yea r , du e to cont in ue d out bre ak s of COV ID -19. H oweve r , o ur hi gh le vel o f pre pa re dne ss he lp e d us p rotec t o ur p eo pl e an d keep o ur opera tions runn ing . S trong demand bo oste d ou r ord er a nd re ven ue g row th , bu t supply- chain disrup t ions caused delays in deliver - ie s to cus tome r s in th e se con d hal f of th e yea r . Ove ra ll , we are p l ea sed w ith A B B’s f ina nc i al pe r for man ce , whi ch h as i mp rove d sig nif i ca ntl y compared with pre- pandemic times. Agai nst t hat bac kdro p, we cont i nue d to tr ans for m AB B by m ov in g acco unt abi lit y to o ur D iv isi ons , increasing efficie ncy, mak ing our operations saf er and more s ustainable, and redesigning our leader - ship development and s ucces sion planning. W e als o pl an to spi n of f ou r T urb oc ha rgi ng D iv isi on and s ep ar atel y lis t ou r E- mo bil it y bu si ne ss. W ith the se ste ps , we are l iv ing u p to our P ur pos e of crea ting superior , sustain able value, and strength - ening our focus on electrif ication and automa t ion, bot h of whi ch ar e key tec hn ol ogi es to re d uce emissions and enable a mor e susta inab le futur e. Sust aina bil it y strateg y 203 0 In 2 02 1 , we b eg an im pl e me nti ng o ur 2 03 0 sus tain - abi lit y s trate gy, w ith t he fo cus o n re du c in g CO 2 - e qui v ale nt e missi on s acro ss our v al ue c hain . In th e pa st t wo ye ar s, we h ave red uce d e missi on s fro m our ow n op e rati on s by 3 9 pe rce nt, p ut t in g us we ll o n trac k to achi eve o ur g oal of c ar bo n ne utr ali t y by 20 3 0. In t he ye ars a he ad, w e ca n make an e ven b igg e r cont r ib ut ion i n ou r cus tom - er s’ o pe rat ion s th rou gh ma ny of ou r tec hn ol ogi es like A B B’s en erg y - ef f i c ie nt e le c tr i c moto rs a nd drives and electric-vehicle char ging solu tions. By 203 0, w e aim to he lp o ur cu sto me rs re d uce th ei r annual CO 2 - e qui v ale nt e missi on s by 10 0 me ga - tons , eq ui va le nt to the a nn ual e mi ssio ns of 3 0 million combustion cars. We also clarifie d roles and responsibil ities rela ted to sust ain abi lit y w i thi n the B o ard : The G ove r- nance a nd Nomina tion Committ e e is responsible for o verseeing corpora te social res ponsibility (including healt h, sa fety and environment as w e ll as susta inability) , wh ile ultima te responsib ilit y for ABB’s susta i nability strat egy, it s susta inability tar ge ts a nd i ts a nnu al su stai na bil it y re po r t li es w ith t he e nt ire B oa rd of D ire c tor s . At ne x t yea r ’s AGM , we inte nd to se e k sha reh ol de r support for our environmental, social and gover - nance ( ESG) go als. Thes e include emiss ions reductions acros s our value ch ain, increasing circular ity in our own and our customers’ opera - tions, and promoting social progr ess, including human rights and good go vernance, in our supply chai n an d the c omm uni ti es i n whi ch we o pe rate . In D ec em be r , we ap p ointe d a new h ea d of our T urb oc ha rgi ng D iv isi on ah ea d of a like ly s pin - of f , in th e eve nt of w hic h we woul d inv ite sh are ho ld er s to an e x trao rdi na r y g en er al m ee ti ng to se e k the ir app rov al . We are a lso m ov i ng ah ea d w ith e f for t s to sep ar atel y lis t ou r E- mo bil it y b usi ne ss and w e aim to com pl ete t his du r in g th e sec ond q ua r ter. AB B wou ld r et ain a maj or it y s har eh ol din g in t he futu re li ste d ent it y. A s a worl d le ad er i n el ec t r ic- vehi cl e (E V ) ch arg ing i nfr a str uc tu re, we a re wel l - po sit io ne d in a n ex t re me ly at tr ac ti ve g row th mar ket – by 20 35 , E Vs are e x pe c ted to b e ou tse l l - ing combus tion cars. Board ass essment and div ersity In 2 02 1 , an e x te rna l ass essm ent c on clu de d th at the B o ard ’s ef fe c ti ve ne ss wa s in th e top q ua r ti le of c omparable companies. The assess ment put for w ard a s mal l nu mb er of r eco mm en dat io ns con cer nin g th e Bo ard ’s rol e in E SG , r i sk an d reputation management, and future requirements in th e sk il ls m atr ix of n ew B oa rd me mb e rs , all of whi ch we re co mp reh e nsi vel y ad dre sse d by th e Bo ard d ur i ng th e cou rs e of la st ye ar . A s par t of this a sse ssme nt , we al so con du c te d a pe er r ev i ew w ith in th e Bo ar d in wh ich e ver y Bo ard m e mb er asse sse d th e ind iv idu al p er f orm an ce of al l othe r me mb er s. T he B oa rd w i ll co nti nu e to con du c t inte rn al se lf-a sse ssme nt s eve r y ye ar , co mp le - me nted p e r io dic al ly w ith e x ter na l rev i ews . La st y ear, we also hig hl ighte d th e ne e d to imp rove ge nd er d ive rs it y o n the B o ard of D ir ec to rs . In 20 21 , we s ou ght an d id e nti f ie d ca nd id ates th at woul d fu r th er s tre ng the n th e Bo ar d’s di ver si t y, ex pe r t ise a nd e xp er i en ce . T o acco mm od ate candidat es’ personal career plann ing and allow for board adjustments as necessary ( overboard - ing) , we w ill be propo sing one or more new 55 ABB ANNU AL REPORT 2021 02 CORPORATE GOVERNA NCE REPORT me mb er s for e le c t io n at the AG M in 2 0 23 . T his year, all ex i st in g Bo ard m em be r s w il l sta nd fo r re - el ec t io n, a nd n o new m em be rs w ill b e prop osed. Leadership development and succ ess ion planning Fin all y, as pa r t of the i mp le me nt ati on of th e A BB Wa y operating model, our leadership develop - ment and succession planning was redesigned and h a s be en r ev i ewe d by th e E xecu ti ve Co mmi t - tee and the Board of Direc tors, includ ing the Governance and Nomina tion Comm ittee. Instead of pos it io n - ba se d succ essi on p la nni ng , we have intr od uce d an o pe n jo b ma rket , wh er e all p osi - ti ons u p to E xec ut ive Co mmi tte e (EC ) le vel a re pos ted o n ou r inte rna l jo bs p latf orm . A s pa r t of the n ew ap pr oac h, EC- an d B usi ne ss A rea - le vel le ade rs hip te ams re v i ew th e stre n gth s and d eve l - op me nt ne ed s of al l tea m me mb er s an d sup po r t the ir d eve lo pm ent s o that th ey a re rea dy to pur su e new o pp or tu nit ie s wh en t hey a r ise . I n this way, we enab l e our l ead e rs to re ali ze the ir am bi - ti ons t hro ug h a fair a nd t ran spa re nt pro cess t hat promot es the best people for the job . On b eh al f on th e Bo ar d of Di re c tors , I wou ld l ike to tha nk yo u for yo ur co nti nu ed t rus t an d supp or t . Pet er V oser Chai rma n of th e Bo ard o f Di re c tors Zur ic h, Fe br ua r y 24 , 20 2 2 56 ABB ANNU AL REPO RT 2021 02 C ORP OR A TE GOVERNANCE REPORT — Sum mar y of c orpor at e go v e rnance appro ach C orporat e gov e rnance – ge neral princ iples AB B is c omm it ted to th e hig he st i nter nati on al sta nd ard s of cor po rate g over nan ce an d thi s is rei nforc ed i n it s str uc tu re , pro cess es an d ru le s as out lin e d in thi s se c ti on of t he A nn ual R e po r t. I n lin e w it h this , A BB co mp li es w i th th e ge ne ra l pr i nc ip le s a s set fo r th i n the Sw i ss Cod e of B es t Prac tic e for Co rp orate G ove rna nce , a s wel l a s tho se of th e ca pit al ma rket s wh er e it s sha res a re lis ted a nd tr ad ed . In a ddi ti on to th e pr ov is io ns of the Sw iss Cod e of Ob li gat io ns, A B B’s key pr i nc i - ples and r ules on corpora te governa nce ar e laid dow n in A BB ’s Ar t ic le s of In cor po rat io n, th e A BB Ltd Bo ard G ove rna nce R ul es (whi ch i nc lu de s the gove rn anc e rul es of A B B’s B oar d com mit tee s an d the A B B Ltd Re late d Par t y T r an sac t io n Pol ic y, whi ch w as p re par ed b as ed o n the Sw iss Cod e of Be st Pr ac t ice fo r Cor po rate G over na nce a nd th e independence criteria set f or th in the corporate gove rn anc e rul es of t he N ew York Stock E x- cha ng e), and th e AB B Co de of Co nd uc t . Th ese do cum ent s a re avai lab le o n A BB ’s webs ite at http s:/ /new .ab b.com/about/ corpora te- governanc e . It i s the d ut y of A B B’s Bo ard of D i rec to rs (th e Bo ard ) to re v ie w and amend or pr opose amendments t o those docu - me nts f rom t i me to t ime to r ef le c t th e mos t rec ent d eve lo pm en ts a nd p rac t ice s, a s we ll a s to en sure co mp li anc e w ith a pp li ca bl e laws a nd regulations. Shareholder s and other interes ted par t i es may co mm uni cate w i th th e Chai rm an of the Board or the independent directors by writing to AB B Ltd (At tn : Ch airm an of th e B oar d/ind e pe n - de nt di rec to rs), at Affo lte rns tra sse 4 4, CH - 8 05 0 Zur ic h, Sw it ze rl and . C om pensat ion gov e rnance and Board and EC compensa tion Informa tion about ABB’ s compens ation gover - nan ce a s wel l a s Bo ard a nd E xe cut i ve Com mit tee (EC) c omp e nsat io n and s har eh ol di ngs i s prov id ed in th e Com pe ns atio n Re p or t th at ca n be fo und o n pag es 74 to 110 of this A n nu al Re p or t . — Board o f Di rectors Bo ar d of D i re c to rs Ch air ma n: P ete r R . Vos er Gunnar Brock Je nn ife r X in -Z he Li Vice- Chairman: Jacob Wallenberg David C onstable Geraldine Mat chett Fr ederico Fleury Cura do David Meline La r s För be r g Sat i sh Pai Fi na n ce , A ud it a n d Complianc e Commi ttee Gov e rnance and Nomination Committ ee Compensation Com m it te e David Meline ( chairman) Pete r R . Vose r (ch air ma n) Frederico Fleury Curado ( c hairman ) Gunnar Brock La rs Fö rb e rg David Constable Geraldine Mat chett Je nn ife r X in -Z he Li Je nn ife r X in -Z he Li Sat i sh Pai Jacob Wallenberg 57 ABB ANNU AL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT Boar d governance Th e Bo ar d The Board def ines the ultima te direction of the business of ABB and is sues the neces sar y instruc - tions. It determines the organization of t he ABB Gro up a nd a pp oint s, re mo ves a nd sup e r v i ses t he pe rs ons e ntr uste d w i th th e exe cu ti ve ma nag e - me nt an d re pre se ntat ion o f AB B . Th e inte rn al organi zational structure and the def inition o f the are as of r esp on sibi li t y of the B o ard , as w el l as t he inform ation and co ntrol instruments vis-à -v is the E xec uti ve Co mmi tte e are s et fo r th in t he A B B Ltd Board Governance Rules ( available a t h t t p s : // n e w . abb.com / about/ corporate- governanc e ). The B o ard t akes d ec i sio ns a s a wh ol e, su pp or te d by it s thr ee c ommi t tee s: the F ina nce , Au di t and Com pli an ce Com mit tee ( FACC), the G ove rna nce and Nomin ation Comm ittee ( GNC), and the C om - pe nsat io n Com mit tee (CC). T he se co mmit te es ass ist t he B oa rd in i ts t a sk s and r ep or t r eg ula rl y to the B oa rd . Th e Bo ard a nd i ts co mmi tte es m e et regularly throughout the year . The d ire c tor s an d of f ic er s of a Sw iss c orp or ati on are b ou nd , as sp e c if ie d i n the Sw i ss Cod e of Ob lig ati on s, to pe r fo rm th ei r dut ie s w it h al l due ca re, to s afeg ua rd th e inte res ts of t he co rp or ati on in g oo d fait h and to e x te nd e qu al tre atm ent to shareholders in like circumstanc es. Prior t o pro - posing ne w candida tes for e lect ion t o the Board, che c ks a re p er fo rm ed to e nsu re that t hey a re in de pe nd ent a nd t hat th er e are n o conf li c ts o f inter est. The Sw iss Cod e of Ob li gat io ns do es n ot sp ec i f y wh at sta nda rd of d ue c are i s re qui re d of th e dir ec to rs of a co rp or ate boa rd . Howe ver , it is ge ne ra ll y he ld by Sw iss le ga l sch ol ar s an d jur i s- pru de n ce that t he di re c tor s mus t have th e requisite capability and skill to fulf ill their func - ti on , an d mus t dev ote the n ec essa r y t im e to the dis cha rge o f the ir d ut ies . Mo re ove r , th e dir ec to rs mus t exe rc is e all d ue c ar e that a p ru de nt an d dil ig ent d ire c tor wo ul d have t aken i n like c i rcu m - sta nce s. F ina ll y, the dir ec to rs a re re qui re d to ta ke actions in the best interes ts of the corporation and m ay not t ake any ac t io ns th at may be h ar mfu l to the c orporation. Al th oug h th e Sw iss Co de of O bl ig atio ns d oe s not dis cuss sp e c if ic al l y conf li c ts o f inte res t for b oa rd me mb er s, th e A BB Ltd B oa rd G over na nce R ul es (avail a bl e at ht tps:/ / n ew.abb.c om/ a bou t/ corpora te- governanc e ) s tate th at bo ard m em be rs sha ll avoid e nte r in g into a ny situ ati on in w hi ch their personal or financ ial int erests may conflict w ith t he i nter est s of A B B. Cha ir ma n of t he B oa rd The C hai rma n is e le c ted b y the s har eh ol de rs to represent their interes ts in cr eating susta inable va lu e thro ug h ef fe c t ive g ove rna nce . I n add it ion , the C hair ma n (1) ta kes pro v is ion al d ec i sio ns o n be ha lf of th e Bo ar d on ur ge nt mat ter s wh ere a r eg ul ar B oa rd de c is ion c an not b e obt aine d , (2) c all s for B oa rd m ee ti ngs a nd s et s the r el ated ag en da s, ( 3) inte rac t s w i th th e CEO and o the r EC me mb er s on a m or e fre qu ent b a sis out si de of B o ard m ee ti ng s and (4) repr ese nt s th e Bo ard i nte rna ll y an d in th e pu bl ic sp he re . Vi ce - Cha ir ma n of t he B oa rd The V i ce - Chai rma n is e le c te d by the B o ard a nd handles the responsibilities o f the Cha irman to the e x te nt th e Chai rma n is u nab le to d o so or woul d have a co nf lic t of inte res t in d oing s o. He als o ac ts a s co uns el or / adv iso r to the C hair ma n on any ma tters that are Company or Board relevant and a s a pp rop r iate or a s th e Ch airm an may re - qui re an d w it h a pa r ti cul ar fo cu s on st rate gic asp e c ts r el ated to th e Com pany a nd i ts b us ine ss in g en er al . In ad di ti on , the V i ce - Chai rma n ta kes suc h othe r ac t io ns a s may b e de c id ed by t he Bo ard o r re qu este d by th e Ch airm an . Finance, Audit and Compliance Committ ee The FACC is re spo ns ibl e fo r over se ei ng (1) th e inte gr i t y of AB B ’s fi nan c ia l state me nt s, (2) A B B’s compliance w ith legal, tax and r e gulat or y require - me nts , (3) t he e x ter nal a udi tor s’ qu al if ic ati on s and independence, ( 4) the performance and role of AB B ’s inter nal au di t fun c t ion a nd t he p er fo r- man ce of th e e x ter nal au di tor s, (5) A B B’s ca pit al structure, fu nding requir e ments and financial and r isk p ol ic ie s, a nd (6 ) AB B ’s impl em en tat ion a nd maint e nance o f an in tegrity program and internal contr ols designed to mitigate integrit y risk. The FACC mus t com pr i se th re e or mo re i nd ep en - de nt di rec to rs w ho h ave a tho rou gh u nd er- standing o f finance and ac counting. The Cha ir - man of t he B oa rd an d, u po n inv itat io n by the com mit tee ’s chair man , th e CEO or ot he r me mb e rs of the E xe cu ti ve Com mit te e may pa r ti c ip ate in th e com mit tee m e et ing s, p rov i de d th at any pote nt ia l conf li c t of inte re st is avoi de d an d con f id ent ia lit y of the d isc ussi on s is mai ntai ne d. I n ad dit io n, t he chi ef in teg r it y of f i cer, the hea d of inte rn al au dit and t he e x te rna l aud itor s pa r ti c ip ate in th e me et- in gs a s app ro pr iate . Th e B oar d ha s de ter min ed that e ach m em be r of th e FACC is an aud it co mmit- tee f i nan c ia l ex pe r t a s suc h ter m is d ef in e d in F o r m 2 0 - F. 58 ABB ANNU AL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT Gov ernance and Nomination C ommittee The GNC is responsible for (1) o verseeing c orpo - rate gove rn an ce pr ac t ice s w it hin A B B, ( 2) over- seeing c orporat e social responsib ilit y (including hea lt h, saf et y an d env iro nme nt a s we ll a s sus tain - ability) , (3) nominating candida tes for the Board, the r ol e of CEO an d oth er p osi ti ons o n th e E xec u - tive C ommittee, and ( 4 ) suc cession plann ing and em pl oym en t matte r s rel ati ng to t he B oa rd an d the E xe cu ti ve Com mit te e. T he G NC i s al so re spo n - sible f or ma intaining an orientation program for new Board memb ers and an ongoing education program f or ex isting Board members. The G N C mus t com pr i se th re e or mo re i nd ep en - dent dir ectors. Upon in v itation by the com mit tee ’s chair man , th e CEO or ot he r me mb e rs of the E xe cu ti ve Com mit te e may pa r ti c ip ate in th e com mit tee m e et ing s, p rov i de d th at any pote nt ia l conf li c t of inte re st is avoi de d an d con f id ent ia lit y of t he dis cuss ions is maintained. Compensa tion C ommittee The CC i s res po nsi bl e for co mp en sat ion m atte rs rel ati ng to t he B oa rd an d the E xe cu ti ve Com mit te e. The CC m us t com pr is e thr ee o r mo re di rec to rs wh o are e le c te d by the s har eh ol de rs . Th e Chai r - man of t he B oa rd an d, u po n inv itat io n by the com mit tee ’s chair man , th e CEO or ot he r me mb e rs of the E xe cu ti ve Com mit te e may pa r ti c ip ate in th e com mit tee m e et ing s, p rov i de d th at any pote nt ia l conf li c t of inte re st is avoi de d an d con f id ent ia lit y of t he dis cuss ions is maintained. Board me mb ershi p Board c omposition In p rop osi ng i ndi v i du als to b e el e c ted to th e Bo ard , th e Bo ard s ee k s to ali gn th e co mp osit io n and s k ill s of th e Bo ard w ith th e Com pa ny ’s strate - gic needs, bu siness por tfolio, geograph ic reach and c ul ture . Th e B oar d mus t be d ive rs e in al l aspect s including ge nder , na t ionalities, geo - graphic/ regional experie nce and business ex pe r ie nc e. I n ad dit io n, t he ave rag e ten ure of t he me mb er s of th e Bo ard s hou ld b e we ll - b ala nce d . The B o ard a lso co nsi de r s the n um be r of oth er man date s of eac h Bo ard m em be r to e nsur e that he/ she w i ll h ave suf f i ci e nt ti me to d ed ic ate to his/he r ro le a s an A B B Bo ard m em be r . El e c ti on s an d te rm of o f fi ce The m e mbe r s of th e Bo ard of D ir ec to rs a nd th e Chai rma n of th e Bo ard a s we ll a s th e me mb er s of the Co mp en sat ion Co mmi t tee a re el e c ted by t he shareholders a t the general meeting o f sharehold - er s for a te rm of of f i ce e x ten di ng u nti l com pl et io n of t he next ordinary general meeting o f share - hol d er s. M em be r s who se ter ms of of f i ce have expir ed sha ll be i mmedi a tely eligible for r e - elec - tion. ABB’s A rt icles of Incorporation ( available a t http s:/ /new .ab b.com/about/ corpora te- governanc e ) d o not p rov i de f or th e ret ir em ent of d ire c tor s ba se d on t he ir ag e. H ow - eve r , an ag e li mit fo r me mb er s of th e Bo ar d is set for th i n th e AB B Ltd B oa rd Gov er nan ce Ru le s (avail a bl e at ht tps:/ / n ew.abb.c om/ a bou t/ corpora te- governanc e ), a lth ou gh wai ve rs a re poss ib le an d sub je c t to Bo ard d isc ret io n. I f th e of f ice of t he C hair man o f the B oa rd of D ir ec to rs or any p osi t ion o n th e Com pe nsat io n Com mit tee be com es v ac ant d ur in g a B oar d ter m, t he B oa rd Board Member Bo ar d Experience Corpora te Officer Experience Other Business Experience Global Experience Cou nt r y o f Or i g in / Nationality Gender Non- Executive Independent AB B B oa rd Ot h er P ub l i c Board Experience CEO CFO Operations Susta inability Digital / T echnology Pe ter R . Vose r CH M Ye s Ye s Jacob Wallenberg SE M Ye s Ye s Gunnar Brock SE M Ye s Ye s David C onstable C A , U S M Ye s Yes Fr ederico Fleury Cura do BR , PT M Ye s Ye s La r s För be r g SE , C H M Ye s Ye s Je nn ife r X in -Z he Li CN , C A F Ye s Ye s Geraldine Mat chett CH , U K , FR F Ye s Ye s David Meline US , CH M Ye s Ye s Sat i sh Pai IN M Ye s Ye s ABB ANNU AL REPORT 2021 02 CORPORATE GOVERNA NCE REPORT of Di re c tor s may ap poi nt (shal l ap poi nt in th e ca se of t he Ch airm an of t he B oa rd ) anot he r in div idu al f rom a mo ng it s me m be rs to th at pos it io n for th e re main de r of th at ter m. T he B oa rd of Di re c tor s sha ll co nsi st of no l ess t han 7 a nd n o mor e tha n 1 3 me mb e rs . Mem ber s of the Board ha s b ee n a me mb e r and C hai rma n of A BB ’s Boa rd of Di re c tors s in ce A pr i l 201 5 . He w a s als o AB B ’s Chief E xe cut i ve Of fi ce r fro m Ap r il 2 01 9 to Feb ru ar y 2 02 0. He i s a me mb er of t he b oar d of dir ec to rs of I B M Corp or ati on ( U. S.). H e is al so a m em be r of th e bo ard of d ire c tor s of T e ma sek H ol di ng s (Pr i v ate) Limite d (Sin ga po re) as we ll a s ch airm an of th e bo ard of P S A Inte rn atio na l P te Ltd (Sing ap ore), on e of it s subs idi ar i es . In ad di ti on , he i s the chai rm an of th e bo ard of t ru ste es of th e St . Ga ll en Foun dat io n for I nter nat io nal Stu di es. H e w as pre v io usl y th e chi ef e xec ut ive o f f ice r of Roy al Du tch Sh e ll p lc ( T he N eth er la nds). Mr . Vose r wa s bo rn in 1 9 5 8 and i s a Sw iss c i tize n . Jac ob W allenberg has be en a m em be r of A B B’s Bo ard of Directors since June 199 9 and Vi ce - Chai rm an si nce A p r il 2 01 5. H e is th e ch airm an of th e bo ar d of Inve stor A B (Swe de n). He is v i ce - chai rma n of th e bo ard s of T el efo na kt i eb ol age t LM Er i css on , FAM AB a nd P atr ic i a In dus tr i es (all Swe de n). He is als o a me mb er of t he b oar ds of di re c tor s of Na sda q, I nc . ( U. S .) and th e K nut a nd A li ce Wal le n - be rg Fou nd ati on (Swed e n) as wel l a s a me mb er of the n omi nat io n com mit tee of S A S A B (Swed en). Mr . Wa ll en be rg w as b or n in 1 95 6 an d is a Swe di sh citiz en. h as b ee n a m em be r of AB B ’s Boa rd of D ire c tor s si nce Ma rch 2 01 8. H e is c hair ma n of th e bo ard s of Ne ptun ia Inv est A B , Mö lnl yc ke Hea lth C ar e AB a nd Ste na AB (all Swe de n). He is a m em be r of th e bo ard s of dir ec to rs of I nves tor A B an d Patr i c ia I ndu st r ie s (b oth Swe de n). He wa s fo rme rl y p res id ent a nd chi ef e xec ut ive of f i ce r of Atla s Co pco A B (Swed en). Mr . B ro ck w as b or n in 1 95 0 an d is a Swe dis h c it izen . Da vid Co nstable h as be en a m em be r of A B B’s Bo ard of Di re c tors s in ce A pr i l 201 5 . He i s th e chi ef e xec ut ive of f i ce r of Flu or Corp or ati on ( U. S.), for w hic h he als o ser ves a s a me mb e r of the b oa rd of di re c tor s. He w as fo rm er ly t he c hief e xe cut i ve of f ic er a nd pre si de nt as w el l as a m em be r of th e bo ard o f dir ec to rs of S a sol Li mite d (Sou th Af r ic a). He joi ne d Sa so l af ter m ore t han 2 9 ye ar s w it h Flu or Corp or ati on ( U. S.). M r . Con st abl e wa s b or n in 1 9 61 and i s a Ca nad ia n and U. S . c i tize n . Frederico Fleury Cura do has be en a m em be r of A B B’s Bo ard of Di re c tors s in ce A pr i l 2016 . H e is a me mb e r of the b oa rds o f dir ec to rs of U ltr ap ar S . A . (B r az i l) and T ran soc ean Ltd . (Sw it zer la nd ). He w a s for- me rl y th e chie f e xecu ti ve of f i cer o f Ult ra par S . A . and E mb rae r S . A . (b oth B ra z i l). M r . Cu rad o wa s bo rn in 1 9 61 a nd i s a Br a zi li an an d Po r tug ues e citiz en. Lars F örberg has b ee n a me mb er of AB B ’s Boa rd of Di re c tor s sin ce A pr i l 201 7 . He is co-founder and manag - in g par t ne r of Cev ian C api ta l. Mr . Fö rb er g wa s bo rn i n 19 6 5 an d is a Swe dis h and Sw iss c it ize n. Je n ni fe r Xi n -Zh e Li ha s be en a m em be r of A B B’s Bo ard of Di re c tors s in ce Ma rch 2 01 8 . Sh e is a me mb e r of the b oa rds o f directors o f Flex Ltd ( Singa - pore/ U. S.) , Kone Oy (Finland) and Full T ruck Al li anc e Co. Ltd. (Cay man I sl an ds/P . R .C .). Th rou gh May 20 2 1 , she w a s a me mb er of t he b oar ds of dir ec to rs of P hili p Mo rr i s Inte rn atio na l In c . (U. S .) and The H ongko ng and Shanghai B anking Corpo - rati on Li mite d (H on g Kong ). Ms . Li is a fou nd er and general partner o f Changcheng Inv estment Par t ne rs ( P .R .C .), a pr iv ate inve stm ent f un d. Fro m 20 0 8 to 201 8 , sh e ser ved a s c hief f i na nc i al of f i cer of Bai du I nc . ( P . R .C .) and chi ef e xec ut ive o f f ice r of Bai du C api ta l (P . R .C .). Pr io r to that , Ms . Li sp ent 1 4 year s w i th G en er al M otor s, ho l din g va r io us se nio r finance positions, including chief financial off icer of GM C hin a an d cor por ate cont rol le r for G M AC No r th A me r ic an O p er atio ns . Ms . Li wa s bo rn i n 19 6 7 an d is a C an adi an c it ize n. Geraldine Mat chett ha s be en a m em be r of A B B’s Bo ard of Di re c tors s in ce Ma rch 2 01 8 . Sh e is the c o - c hie f exe cu ti ve of f i cer , the chi ef f in an c ial o f f ice r an d a me mb er of t he m anag in g bo ard of R oya l DS M N.V . ( Th e Ne the rl an ds). She wa s p rev i ou sl y the c hie f f ina nc i al of f i ce r of SG S Ltd (Swi tze rl an d). P r io r to joi nin g SGS s he wo rked a s an au di tor at De l oit te Ltd (Swi tze rl an d) a nd K PM G LL P (U. K .). Ms . Matc h - et t wa s bo rn i n 19 7 2 and i s a Sw iss , Br i t ish an d F rench citizen. 60 ABB ANNUAL REPORT 2021 02 CORPORATE GOVERNA NCE REPORT Da v id Meline h as b e en a m em be r of AB B ’s Boa rd of Di re c tor s sin ce A pr i l 2016 . H e is th e chi ef f i na nc ia l of f ice r of M od er na I nc . ( U. S.). From 201 4 thr oug h 201 9, M r . M el in e wa s the c hie f f in anc i al of f i ce r of A mg en I nc . ( U. S.). H e wa s for me rl y w it h the 3 M Co mp any (U. S .), wh ere he se r ve d a s chi ef f i nan c ia l of f ice r . P r io r to joini ng 3M , M r . M eli ne wo rke d for m ore th an 2 0 yea rs fo r Ge ne ra l Moto rs Co mp any ( U. S.). M r . Me li ne w as bo rn in 1 9 57 a nd is a U. S . a nd Sw i ss c it izen . Satish Pai has be e n a me mb er of AB B ’s Boa rd of Di re c tor s sin ce A pr i l 2016 . H e is th e ma nag ing d ire c tor and a m e mb er of t he b oar d of directors o f Hindalc o Industries Ltd. (I nd ia). H e joi ne d Hi nd alc o in 2 01 3 af ter 28 ye ar s w ith S ch lu mb er ge r Limite d ( U. S.). M r . Pai wa s bo rn i n 19 61 a nd i s an I ndi an c i tize n . A s of De ce mb er 3 1 , 20 2 1 , non e of th e B oar d me mb er s he ld a ny of f i ci al f un c ti ons o r po li ti ca l pos ts . Fur th er i nfor mat io n on A BB ’s Bo ard m em - be rs c an b e fou nd by c li ck in g on t he A BB B o ard of Directors link ( available at ht tps:/ / n ew.ab b.com/ about/ corporate- governanc e ). Board meeti ngs a nd attendan ce The B o ard a nd it s co mmi tte es h ave re gul ar ly scheduled meetings th roughout the year . These meetings are supplemented by additional meet - in gs (eith er i n pe rs on or b y confe re nce c al l ), as necessary . Board meetings ar e con vened by the Chai rma n or u po n re que st by a ny oth er b oa rd member or the CEO. D ocumenta t ion co ver ing the va r iou s ite ms of t he ag en da fo r eac h Bo ard m e et- in g is se nt ou t in ad v anc e to each B o ard m em be r in or de r to al low e ach m em be r ti me to s tud y th e cove red m atte rs p r io r to th e me et in gs. E ac h bo ard m ee ti ng h as a p r iv ate sess io n w ith ou t management or o thers being present. Decisions mad e at the B oa rd m ee ti ngs a re re co rde d in written minut es of the me etings. Some decisions are als o taken b y circular resolution. 20 21 w as a n inte ns ive ye ar fo r th e Bo ard a nd i ts com mit tee s. T he t ab le b el ow show s th e num be r of me et in gs h el d du r ing 2 0 21 by t he B oa rd an d it s com mit tee s, t hei r aver age d ur ati on , as we ll a s th e attendanc e of the indiv idual Board members. The Bo ard m ee ti ng s show n in cl ud e a str ateg ic re tre at atte nd ed by t he m em be rs of t he B oa rd an d th e EC . Mand ates of Board membe rs outside the A BB G roup No m em be r of th e Bo ard m ay ho ld m ore t han te n add it io nal m an dates , of whi ch n o mo re tha n fou r may be i n li ste d com pani es . Ce r tain t y p es of man date s, su ch a s tho se in o ur su bsi dia r ie s, tho se in t he sa me g rou p of com pa nie s and t hos e in no n - p rof it a nd ch ar i ta bl e ins ti tut io ns, a re not subj ec t to t hose l imi ts . Ad dit i ona l de tail s ca n be foun d in A r t ic le 3 8 of A B B’s A r ti cl es of I nco rp or a- ti on (availa bl e at http s:/ /new .ab b.com/about/ corpora te- governanc e ). Meetings and att endance Board FACC GNC CC Board FACC GNC CC Call Call Average duration (hours ) Number of meetings Meetings att e nded: Pe ter R . Vose r Jacob Wallenberg Matti Alahuhta Gunnar Brock David C onstable Fr ederico Fleury Cura do La r s För be r g Je nn ife r X in -Z he Li Geraldine Mat chett David Meline Sat i sh Pai 61 ABB ANNU AL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT Busine ss relationships betwee n ABB a nd its Board m emb ers This section describes important busines s rela - ti ons hips b et we e n AB B an d it s B oar d me mb er s, or compa nies a nd organ izations repres ented by the m . Fluor C orporation (Fluor ) is an impor tant cus - tome r of A B B. A B B se ll s pr im ar i ly e l ec t r ic al sw i tchg ea rs , cont rol s ys tem s and e l ec t r ic al solutions t hrough its Electrif ication and Process Automa tion businesses to Fluor . Da v id Constable is th e CEO an d a di rec to r of Fl uor. After reviewing the lev el of business with Fluor , the B o ard h as d ete rmi ne d that A B B’s bus in ess rel ati on ship w i th Fl uo r is no t unu sua l in it s n ature or co ndi ti on s an d doe s not c ons ti tute a m ater ia l business relationship . As a r esult, the Board con cl ud ed th at al l me mb er s of th e Bo ard a re independent. These det erminations w ere made in accordance w ith A B B Ltd ’s Rel ated Pa r t y T ra ns ac ti on P oli c y whi ch w as p re par ed b as ed o n the Sw iss Cod e of Be st Pr ac t ice fo r Cor po rate G over na nce a nd th e independence criteria set f or th in the corporate gove rn anc e rul es of t he N ew York Stock E xc han ge . This p ol ic y i s cont ain ed i n th e AB B Ltd B oar d Gove rn an ce Ru le s (a vail ab le at ht tps:/ /new.abb. com / about/ corporat e - governance ). Information and control systems of the Board v i s-à-v i s the Executive C om mittee Informa tion f rom the E xecutiv e Commit tee In acc ord an ce w it h the A B B B oar d Gove rn an ce Rul es (avail ab le at ht tps:/ /new.abb.co m/ ab out / corpora te- governanc e ), th e CEO re p or t s re gul ar ly to the B oa rd ab ou t AB B ’s overa ll b usi ne ss an d when circumstances require on an y ex traordin ary eve nts t hat may a r ise . Thi s in clu de s: • Reports on financial resul ts (including pr of it and l oss , bal an ce she et a nd c a sh fl ows); • Chan ge s in key me mb e rs of m ana ge me nt; • Inform ati on t hat may af fe c t th e sup er v iso r y o r monit or ing function of t he Board (including on mat ter s of str ateg y an d com pl ian ce); an d • S ignificant developments in legal ma t ters. At eac h Bo ard m ee ti ng , B oar d me mb er s ar e br i efe d by th e Chai rma n, C EO, CFO an d othe r EC members on ABB’ s busines s per formance and on mater i al d eve lo pm ent s af fe c ti ng A B B . Ou ts id e of Board meetings, Board members generall y chan - nel any requests for in forma tion through the Chairman. Board members also obtain informa - ti on th rou gh of f si te ret reat s w it h the E xe cu ti ve Com mit tee a nd v i si ts to A B B site s. I n add it io n, Board members obta in informa tion through the Bo ard c omm it tee s in w hic h the y par tic i pate an d whi ch ar e als o atte nd ed b y rel ev ant EC m em be rs and management representa ti ves fr om human resourc es, finance, legal and t he busines s. Internal Audit AB B ha s a n Inte rna l Au dit te am t hat pro v id es independent objective ass urance and o ther ser v ic es to he l p ens ure th at AB B o pe rates i n accor da nce w i th ap pl ic ab le l aws a s wel l as i nte r - nal p ol ic i es a nd pr oce du res . In tern al A udi t re po r ts to the FACC and to t he CFO. T he FACC rev i ews a nd app rove s th e inte rna l aud it p lan , an d mate r ia l cha ng es to th e pl an . Inv est ig ati on s of pote nt ial fraud and inappr opriate business conduct are an inte gr al pa r t of th e inte rn al au dit p roc ess . De - pe nd ing o n c ir cum sta nce s, I nte rna l Au dit m ay ac t toge th er w i th A B B’s Inte gr i t y Inve st ig atio ns a nd Mo nitor i ng d ep ar t me nt , whi ch is p ar t of A B B’s inte gr i t y fun c t ion . I nter nal A ud it re po r t s on a reg ul ar b as is it s mai n obs er vat ion s an d rec om - me nd atio ns to th e re le va nt me mb er s of th e EC and to t he FACC as ap pr op r iate . AB B ha s a n ente rp r ise r i sk ma nag em en t pro gr am (ER M) i n pl ace w hic h take s into acc ount A B B’s size and c omp l ex i t y . ERM p rov ide s th e EC and t he Bo ard w ith a co mp reh e nsi ve an d ho lis ti c v i ew of the risks facing t he busines s. ERM inv olves man - agin g th e acce pta nce o f r isk to ac hiev e the objectives of the bus iness. The ERM p roces s is t ypi ca ll y c yc lic al i n natur e, co nvey ing t he i dea o f continuous ref inement of the risk management approach in a dynamic bus iness environment. Fur the rm or e, A B B run s a mit ig ati on p roce ss for the i de nt if i ed r i sk s that i s key to the su cce ss of this p roc ess . ER M asse ssm ent s ar e both to p dow n and b ot tom u p. The y cove r str ateg ic , f in an c ial , and o pe rat io na l r isk s, b oth c urr ent a nd l on g ter m. Key r isk s i de nti f ie d an d ma nag ed i n 20 2 1 were tho se re late d to the co nt inu ati on of t he COV ID -19 pan de mi c, to c ons trai nts i n gl ob al su pp ly c hain s, as we ll a s to th e pr ep arat io n for t he se pa rat ion o f ABB’s turbocharg ing busines s and the planned ini ti al pu bl ic of fe r in g in Sw it zer lan d of A BB ’s elec tric-vehicle cha rging bu siness. ERM results are re p or te d to the FACC an d the e nt ire B o ard . This i nfo rmat io n be com es p ar t of t he ove ra ll str ategi c an d r isk d isc ussi on s by the B o ard to he lp c reate v alu e for s ta keho ld e rs . 62 ABB ANNUAL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT — E x e cutiv e C o mmittee C omposition of the E xecutiv e Committee Björn Rosengre n Chi ef E xe c ut iv e Of f ice r CORPORAT E OFFICERS BUSINESS AR EA PRESIDEN TS Timo Ih amuotila Chi ef F in an c ia l Of fi ce r El ect rifi cati on Carolina Granat Chief Human Resources Off icer Peter T er wiesch Process Automation Maria V arsellona General Cou nsel Morten Wierod Motion Chief C o mmunications and Sustainability Off icer Sami Atiya Robotics & Discr ete Automation Executive C om mittee responsibil ities an d organiza tion The B o ard h as d el e gated t he e xec ut ive m an age - me nt of A BB to t he CEO. Th e CEO an d, u nd er hi s dir ec t io n, t he oth e r me mb er s of th e E xec ut ive Com mit tee a re re spo nsi bl e for A B B’s ove ral l business and affairs and day-to- day mana ge ment. The C EO rep or ts to th e Bo ard r eg ul arl y, and whenever extraordinary circumstanc es so require, on the course of ABB’s business and financ ial performance and on all organi z ational and per - son ne l mat ter s, t ran sac t io ns an d oth er i ssue s mater i al to th e G rou p. Eac h me mb er o f the E xe cu - ti ve Com mit te e is ap poi nte d and d isc ha rge d by the Board. Mem ber s of the Executive C om mittee Bj ör n Ros en g re n wa s ap poi nted Chie f E xec ut ive O f f i cer a nd me mb er of t he E xe cut i ve Com mit- tee e f fec t i ve Ma rch 2 02 0. H e is a me mb er of t he b oar d of di rec to rs of the Wo rl d Chi ld hoo d Fou nd ati on (Swed e n). Be fore j oini ng A B B , he w as th e pr esi de nt a nd ch ief exe cut i ve of f ic er of S an dv ik A B (Swed en) sin ce 201 5 . Pr i or to th at, M r . Ro sen gr en w as t he c hief executive officer of W ärtsilä Corpora t ion (Fin - lan d ) fro m 201 1 to 20 1 5. H e he ld a v ar i et y of man age m ent ro le s at Atla s Co pco A B (Swed e n) fro m 19 9 8 to 201 1 . Mr . R ose ngr en w a s bor n in 19 59 a nd i s a Swed ish c it ize n . Timo Ihamuotila w as a pp ointe d Chie f Fin an c ial O f f i cer a nd m em be r of the E xe cu ti ve Com mit te e ef fe c- ti ve A pr i l 2017 . H e is a m em be r of the b oa rd of di re c tor s of Sof t w are O NE H ol din g AG an d Hit ac hi Ene rg y Ltd (b oth Sw i t zerl an d). Fro m 20 0 9 to 20 16, M r . I ham u - oti la w as c hie f f in anc i al of f i ce r an d an e xec uti ve vice president o f the Nokia Corpora tion (Finland). From 19 9 9 to 2 00 9, h e he l d va r iou s se nio r rol es w ith N ok i a . Mr. Ihamu ot ila w a s bo rn in 1 9 6 6 an d is a Fi nnis h c it izen . Carolina Granat w as a pp ointe d Chief Human Resources Of ficer and me mb er of t he E xe cut i ve Com mit- tee e f fec t i ve Ja nua r y 2 02 1 . S he joi ne d AB B i n 20 20 a s He ad of Pe opl e D eve lo pm ent . Pr i or to t hat, s he w as g lo b - all y re sp ons ib le fo r hum an re sou rce s at the Machin ing Solutions business area of Sandv ik AB (Swed en). Ms. G r anat w as b or n in 1 97 2 a nd is a Swe dis h c it izen . Maria V arsellona was ap poi nte d Ge ne ra l Cou nse l an d me mb er of t he Execu tive Comm itt ee e ffective Nove mb e r 201 9. From 2 014 to 2 01 9 she w as t he C hief L e gal O f f i cer of Nokia Corpora t ion (F inland) and f rom 20 1 8 t o 201 9 sh e wa s al so th e pre sid e nt of No k ia T e ch no l - ogi es . From 2 01 3 to 201 4 she w a s the G e ne ra l Coun se l of No k ia Si em en s Net wo rk s. D ur ing t he pe r io d fro m 201 1 to 2 01 3 Ms . Var sel lo na w as t he Gro up G e ne ra l Coun se l of T etr a Pa k and f rom 20 0 9 to 2010 s he w as t he G rou p G en er al Cou nse l of Sid el , bot h pa r t of the T etr a Lav al G ro up (Swed en). From 20 01 to 2 0 09 s he h el d va r io us sen ior l e gal r ol es mai nl y w it h GE O i l & Ga s. 63 ABB ANNU AL REPORT 2021 02 C ORPOR A TE GO VERNANCE REPORT Ms . Vars el lo na wa s b orn i n 1 970 an d is a n Ita lia n citiz en. w as a p - poi nted C hie f Com muni cat io ns Of f i ce r and m e mb er of t he E xe cu - ti ve Com mit te e ef fe c ti ve A ugu st 20 20. A s p e r Ma rch 2 02 1 his t it le wa s am en de d to Chi ef Co mmu nic ati on s and Sus tai nabi li t y Of f i ce r an d me mb er of t he E xe cu - ti ve Com mit te e. H e is a m em be r of th e bo ard of dir ec to rs of t he Swe dis h Sw iss Ch am be r of Com - me rce an d is t he c hair man of t he A B B Jü rge n Do rma nn Fo und ati on . Mr. Swedje ma rk ac te d as inte r im H ead of C orp or ate Comm uni cat io ns & Pub li c Af f airs f rom M ar ch 20 2 0 thr oug h Au gus t 20 20. P r io r to that , he a ssum e d the ro le o f Chie f of Staf f in 2 017 , late r add in g gro up re sp ons ibi lit y for go vernment rela tions and public affairs. Du r in g 2016 , M r . Swe dje ma rk m anag e d the St rate - gic P or t fol io R ev i ew of th e Powe r G r id s proj ec t . From 20 0 6 to 2 01 5, h e he l d va r iou s ma nag em ent pos it io ns at AB B i n dif fe re nt fu nc t io ns a nd bu si - ne sses . Mr . Sw edj e mar k wa s bo rn i n 19 8 0 an d is a Swe dis h c it izen . w a s ap poi nted P res i - de nt of th e Ele c tr i f ic ati on B us in ess ef fe c ti ve A pr i l 20 19 a nd ha s be en a m em be r of th e E xec ut ive Com mit tee s in ce Oc to be r 2010 . He is a me mb e r of the b oa rd of di re c tor s of Pr ysmia n S. p. A . ( Ita l y). He had p rev iou sl y be e n Pre sid e nt of the E le c tr i f ic ati on Pro du c t s div isi on si nc e Jan ua r y 2016 . From O c tob e r 2010 t hro ugh D e cem be r 2 01 5, he w as P res id ent of t he Lo w Voltag e Pro du c t s div isi on . From 2 0 07 to 2010, h e wa s H ead of A B B’s transfor mers busines s. Between 1998 and 2006, he h el d seve ra l ma nag em ent p osi ti on s w it h AB B . Mr . M e hta w as b or n in 1 9 6 6 and i s a U. S . and Sw iss citiz en. Pet er T e r w i e sch w a s app oin ted President of the Pr ocess Automa - ti on B us ine ss ( kn own a s In du str i al Auto mat ion f rom 2 017– 2 02 0) an d me mb er of t he E xe cut i ve Com mit- tee e f fec t i ve Ja nua r y 2 01 5. H e is a m em be r of th e bo ard of d ire c tor s of Me ta ll Zug AG (Sw i tze rl an d). From 201 1 to 2 014 , Mr . T e r w i es ch w as H ead o f AB B ’s Centr al Euro pe r eg io n. H e wa s A BB ’s Chie f T ec hn ol og y Of f i ce r fro m 20 0 5 to 201 1 . Fro m 19 9 4 to 20 0 5, h e he ld s eve ral p osi ti on s w ith A B B . Mr . T e r w i es ch w as b or n in 1 9 66 a nd i s a Ge rm an an d Sw iss c i ti zen . Morten Wier od was ap poi nte d President of the Motion B usiness and m e mb er of t he E xe cut iv e Com mit tee e f fec ti ve Ap r il 2 01 9. From 201 5 u nt il A pr i l 201 9 h e wa s the Mana ging Director of the drives bus iness unit in th e Ro bot ic s a nd M oti on di v i sio n . Du r ing 2 01 1 to 201 5 , Mr . Wi er od w as t he M anag in g Di re c tor of the c ontrol produc ts busines s un it in the Low Voltag e Pro du c t s div isi on . B et we en 1 9 9 8 to 201 1 , Mr . W i ero d he l d va r iou s ma nag em ent r ol es w i th AB B . Mr. Wie rod w as b or n in 1 97 2 a nd is a N or we - gian citizen. Sa mi At iy a wa s ap poi nte d Pre si - de nt of th e Ro bot ic s & D isc rete Automa tion Business effective Ap r il 2 01 9 an d ha s be en a m e mbe r of the E xe cu ti ve Com mit te e sin ce Ju ne 2 016 . He i s a me mb er of t he b oar d of dir ec- tor s of SGS S A (Sw it ze rl and ). H e had p rev iou sl y be en P res id ent o f the R ob oti c s and M ot io n div i - sio n si nce J anu ar y 2017 . From J un e to De cem be r 2016 h e wa s Pr esi de nt of t he D isc rete A utom ati on and M ot io n div isi on . Pr i or to joi nin g A BB , M r . At iy a he ld se ni or ro le s at Sie me ns in G e rm any fr om 1 99 7 to 201 5 , in cl udi ng a s chi ef e xe cut iv e of f ice r of th e mobility and logistic s division in t he inf rastruc - ture a nd c it i es se c tor f rom 2 01 1 . M r . At iy a wa s bo rn in 1 9 6 4 an d is a G e rma n c it ize n. Fur the r i nfor mati on a bo ut th e me mb er s of th e E xec uti ve Co mmi tte e ca n be fo un d by cl ick i ng o n the E xe cu ti ve Com mit te e lin k (availa bl e at h t t p s : // new . abb.com /about / corporate- governanc e ). Mand ates of E C mem bers outside the A BB G roup No m em be r of th e EC may ho ld m ore t han f i ve add it io nal m an dates , of whi ch n o mo re tha n on e may be i n a li ste d com pany. Cer t ain t y pe s of man date s, su ch a s tho se in o ur su bsi dia r ie s, tho se in t he sa me g rou p of com pa nie s and t hos e in no n - p rof it a nd ch ar i ta bl e ins ti tut io ns, a re not subj ec t to t hose l imi ts . Ad dit i ona l de tail s ca n be foun d in A r t ic le 3 8 of A B B’s A r ti cl es of I nco rp or a- ti on (availa bl e at http s:/ /new .ab b.com/about/ corpora te- governanc e ). Busine ss relationships betwee n ABB a nd its EC me mbe rs This section describes important busines s rela t ion- ship s bet we e n AB B a nd it s EC me mb e rs, o r companies and organiza tions represent e d by them . AB B ha s a mi no r it y st ake in H it achi En e rgy Ltd (Hi tac hi En erg y), the h ol di ng co mpa ny of A BB ’s form e r powe r gr i ds b usi ne ss. H ita chi En er gy i s bot h an im po r ta nt sup pl ie r to an d cus tome r of A B B. Tim o Ih amu ot il a is a di re c tor of Hi tac hi En erg y. 64 ABB ANNUAL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT Af te r rev i ew i ng t he l eve l of bus in ess w i th Hi tac hi Ene rg y, the Bo ard h as d ete rmi ne d th at AB B’s business relationship w ith Hitach i Energy is not unu sua l in it s n ature or c on dit io ns . These det erminations w ere made in accordance w ith A B B Ltd ’s Rel ated Pa r t y T ra ns ac ti on P oli c y whi ch w as p re par ed b as ed o n the Sw iss Cod e of Be st Pr ac t ice fo r Cor po rate G over na nce a nd th e independence criteria set f or th in the corporat e gove rn anc e rul es of t he N ew York Stock E xc han ge . This p ol ic y i s cont ain ed i n th e AB B Ltd B oar d Gove rn an ce Ru le s (a vail ab le at ht tps:/ /new.abb. com / about/ corporat e - governance ). — S ha res Sha re capital of ABB At De ce mb er 3 1 , 20 21 , A B B’s or din ar y s har e ca pi - tal ( i ncl ud in g tre asu r y sh are s ) as re gi ste re d w it h the Co mm er c ial R eg is ter a mou nted to CH F 24 6, 37 7, 791 .6 8 , div id ed i nto 2 ,05 3 , 14 8 , 2 6 4 ful l y paid r egi ste re d sha res w ith a pa r va lu e of CH F 0. 1 2 pe r sha re . AB B Ltd ’s share s are l is ted o n the S I X Sw iss E xcha ng e, t he N A SDAQ O MX Sto ck ho lm E xch an ge and t he N ew York Stock E xc han ge (wh e re it s sha res a re tr ade d in t he fo rm of A m er i ca n de pos i - tar y sha res ( A DS) – e ach A DS r ep res ent in g on e reg is tere d A BB s har e). At Dece m be r 31 , 2 02 1 , AB B Ltd had a m ar ket ca pit ali zat ion b a sed o n outstanding shares ( total number o f outstanding sha res: 1 , 9 5 8 , 3 4 4 ,4 0 0) of a pp rox imate l y CH F 68 bi ll io n ($75 bil li on , SEK 6 76 bi lli on). The onl y co nso li dated s ubs idi ar y in th e AB B G rou p w ith l is ted sh are s is A B B In dia Li mite d, B an ga lo re, In dia , w hic h is li ste d on th e BS E Ltd. ( B omb ay Stock E xc han ge) an d the N ati on al Stoc k E xch ang e of In dia . At D e ce mbe r 3 1 , 20 21 , A B B Ltd, Sw i tze r- lan d, d ire c tl y or i nd ire c tl y ow ne d 75 pe rce nt of AB B I ndi a Limi ted , Ba ng al ore , In di a, w hic h at that ti me h ad a ma rket c apit al izat io n of ap prox i mate ly IN R 47 4 bi lli on . Security IS I N co d e SI X Sw i ss E xch an g e AB B Ltd , Zu r ic h, s ha re ABBN SI X Sw i ss E xch an g e AB B Ltd , Zu r ic h, s ha re b uy ba ck (s e cond tr ading line ) ABBNE NAS DAQ OMX Stockholm Exchange A B B Ltd , Zur i ch , sh ar e ABB Ne w York Sto ck E xc ha ng e AB B Ltd , Zu r ic h, A D S ABB BSE Lt d. (Bombay St ock Exchange) AB B I nd ia Li mi te d, B an g al or e, s ha re National S tock Exchange o f India AB B I nd ia Li mi te d, B an g al or e, s ha re ABB (1) A ls o ca l le d Sc r i p ID. Sha re re purc hases a nd cancellation Un de r the s har e bu yb ack p ro gra m that r an fr om Ju ly 2 02 0 to Ma rch 2 0 21 , A B B rep ur cha se d a tota l of 1 28 ,6 2 0, 5 8 9 sha res . At A BB ’s An nua l Ge n er al Me et in g 20 21 , the sh are ho ld e rs ap pr oved t he pro pos al to c an cel 1 1 5 ,0 0 0,0 0 0 re pu rc ha sed sha re s . The se sh are s we re ca nce ll e d in J un e 20 21 , resu lt in g in a re du ce d tota l num be r of issu e d AB B Ltd shar es of 2 ,0 53 , 14 8, 26 4 . A BB i nten ds to p ro - pos e to the A nn ua l Ge n er al M ee ti ng 2 02 2 to c anc el the rema ining 13,6 20,5 89 repurchased shares. In A pr i l 20 2 1 , AB B l aun che d a fo ll ow- u p sha re bu yb ack p rog ra m of up to $ 4. 3 bil lio n to com pl ete AB B ’s plan to re tur n $7.8 bil lio n of ca sh p roc ee ds fro m the P ower G r i ds di ve stm ent to sh ar eh ol de rs . Under that share buyback program, ABB repur - cha se d a tota l of 5 8 ,6 2 7 ,6 0 0 sh are s as p e r De ce mb er 3 1 , 20 21 , a nd a tot al of 74,78 2 ,6 0 0 sha res a s p er Fe br uar y 1 5, 2 02 2 . A B B inte n ds to pro pos e to the A n nua l G en er al M ee ti ng 2 02 2 to cancel these shares. In ad dit i on , AB B re pu rch as ed a tot al of 3 2 ,6 6 8 , 9 87 sha res a s p er D ec em be r 31 , 2 02 1 , pr ima r il y for u se in co nn ec t io n w it h em pl oyee s har e pro gr ams . Fur the r i nfor mati on c an b e fou nd at h t t p s : // www . abb.c om/inv estorr e lations . 65 ABB ANNUAL REPORT 2021 02 CORPORATE GOVERNA NCE REPORT Changes to th e ordina r y share capi tal E xcept fo r th e sha re c anc el lati on d es cr ib e d ab ove, the re we re n o othe r c han ge s to AB B ’s ordin ar y sha re ca pit al d ur in g 20 2 1 , 20 20 a nd 2 01 9. C onv ertible bonds and options AB B do es n ot have a ny bo nd s out st an din g th at are c onvert ible int o ABB shares. F or informa tion ab out o pt ion s on sh are s issu ed b y AB B , pl ea se refe r to “ Note 1 9 – Stoc kh ol de r s’ eq ui t y ” to A BB ’s Consol idat e d Fin ancial Sta tements. C ontinge nt share capital At De ce mb er 3 1 , 20 21 , A B B’s sha re c api tal m ay be in cre as ed by a n amo unt n ot to exce e d CH F 24, 00 0 ,0 0 0 thr oug h th e issu anc e of up to 20 0,0 0 0 ,0 0 0 ful l y paid r eg iste re d sha res w ith a p ar va lu e of CH F 0. 1 2 pe r sha re th rou gh t he e xerc i se of conversion rights and/ or warrants grant ed in connection with the is suance on n ational or inter - nati on al c api tal m ar kets of n ew ly o r al read y i ssue d bonds or other financial mark et instruments. If this cont in ge nt sh are c api ta l wer e ful l y issu ed th is woul d in cr ea se th e ex i st in g sha re ca pit al by app rox im atel y 9.7 pe rce nt . Th e cont i nge nt sh are ca pit al ha s no t cha ng ed d ur i ng th e la st t hre e ye ar s. At De ce mb er 3 1 , 20 21 , A B B’s sha re c api tal m ay be in cre as ed by a n amo unt n ot to exc ee d CH F 1 , 2 0 0,0 0 0 th rou gh th e issu an ce of up to 10,0 0 0,0 0 0 f ull y p aid re gi ster ed s har es w i th a pa r va lu e of CH F 0. 1 2 pe r sha re th rou gh t he e xerc i se of wa rra nt r ig hts g ra nted to i ts s har eh ol de rs . If this c ont in ge nt sh are c api tal w ere f ul ly i ssue d thi s woul d in cr ea se th e ex i st in g sha re ca pit al by app rox im atel y 0. 5 p e rcen t. T his co nt in ge nt sha re ca pit al ha s no t cha ng ed d ur i ng th e la st t hre e years. The Board may grant warrant r ights not take n up by sh ar eh ol de rs fo r oth er p urp ose s in the i nte res t of AB B . The p re - em pt ive r i ght s of th e sha re hol d er s are exc lu de d in co nn ec t io n w it h the i ssua nce of conv e rtible or warrant - bearing bonds or o ther financ ial market instruments or the grant of war ra nt r ig hts . Th e th en cu rre nt ow ne rs of c on - ver si on r i ght s an d/ o r wa rr ant s w il l be e nt itl e d to subscribe f or new shar es. The conditions of the conve rs io n r ig hts a nd/ o r wa rra nts w ill b e de ter- min ed by t he B oa rd . The a cqu isi ti on of sh are s th rou gh th e e xerc i se of war ra nts a nd e ach su bse qu en t tra nsfe r of th e sha res w i ll b e subj e c t to the r est r ic t io ns of A B B’s Ar ticles of Incorporation ( see “Limita tions on transferab ilit y of shares and nom inee registra - ti on” i n the S ha re ho ld er s se c ti on b el ow) ( avail ab le at htt ps:/ /new.abb.co m/ ab out/ corpora te- governanc e ). In co nn ec t io n w it h the i ssua nce of c onve r ti bl e or warrant - bearin g bonds or other financial market ins tru me nt s, th e B oar d is aut ho r ized to r est r ic t o r de ny th e adv an ce su bscr i pt io n r igh ts of s har e - hol d er s if su ch b on ds or ot he r f in an c ial m ar ket instruments are f or the purpos e o f financing or ref i nan c in g th e acqu isi ti on of a n en terp r is e, par t s of a n ente rp r ise , pa r ti c ip ati ons o r ne w inves tments or an issuanc e on national or inte rn atio na l ca pit al ma rket s. I f th e Bo ard d en ies advance s ubscription rights, the co nvertible or warrant - bearing bonds or other financial market ins tru me nt s w il l be i ssue d at the r el ev ant m arket con dit io ns a nd th e ne w sha res w i ll b e issu ed pur su ant to th e re lev an t mar ket con di ti ons t ak i ng into acc ount t he sh are p r ic e and/ o r oth er c omp a - rab le i ns tru me nt s hav i ng a ma rket p r ice . Conve rs io n r igh ts m ay be e xerc i se d dur i ng a ma x i mum te n - yea r pe r io d, a nd w arr ant s may b e exe rc is ed d ur in g a ma xi mu m seve n -y ear p e r io d, in ea ch c as e fro m the d ate of the r esp ec t i ve issua nce . T he ad v anc e subs cr ip ti on r i ght s of th e shareholders may be gr anted indirectl y . At De ce mb er 3 1 , 20 21 , A B B’s sha re c api tal m ay be in cre as ed by a n amo unt n ot to exc ee d CH F 11 , 28 4 ,6 56 t hro ug h the i ssua nce of u p to 94 ,0 3 8, 8 0 0 f ull y pai d sha res w ith a p ar v alu e of CH F 0. 1 2 pe r sha re to e mp loye es . If t his co nti n - ge nt sha re c api tal w ere f ul ly i ssue d thi s woul d in cre as e the e x is ti ng sh ar e ca pita l by ap pr oxi - matel y 4 .6 p erc ent . Th is co nti ng ent s har e ca pit al ha s not c han ge d du r in g th e la st th re e yea rs . The pre - e mpt ive a nd ad v an ce sub scr i pti on r i ght s of AB B ’s share ho ld er s ar e exc lu de d. T he sh are s or r igh ts to su bsc r ib e for sh are s w il l be i ssue d to em pl oyee s pu rsu ant to o ne o r mo re re gul ati on s to be i ssue d by th e Bo ard , ta k in g into acc ount performance, functions, lev e l of responsibility and p rof i tab ili t y cr i ter i a . AB B m ay issue s har es or subs cr ip ti on r i ght s to em pl oye es at a pr i ce lo wer tha n that q uote d on a s tock e xch an ge . Th e acq ui - sit io n of sh are s w ith in th e conte x t of e mp loye e sha re own er shi p an d eac h subs eq ue nt tr ans fer of the s har es w i ll b e subj ec t to t he re str i c t ion s of ABB’s Ar ticles of Incorporation ( see “Limita tions on trans ferabili ty of s hares and nom inee regist ra - ti on” i n the S ha re ho ld er s se c ti on b el ow). Author ized sha re capital At De ce mb er 3 1 , 20 21 , A B B ha d an aut ho r ized sha re ca pit al i n the a mo unt of u p to CHF 24, 0 00 ,0 0 0 th rou gh th e issu anc e of up to 20 0,0 0 0 ,0 0 0 ful l y paid r eg iste re d sha res w ith a p ar v al ue of C HF 0. 1 2 e ach , whi ch i s va li d 66 ABB ANNUAL REPOR T 20 21 02 CORPOR A TE GO V ERNANCE REPORT thr oug h Ma rch 2 5 , 20 2 3 . If th e aut hor ized sh are ca pit al we re fu ll y issu ed , thi s woul d in cr ea se th e ex i st in g sha re ca pit al by a pp rox im atel y 9.7 pe r - cent . A s id e fro m re new al at th e 20 21 AG M , th e auth or ize d sh are c api ta l ha s not c han ge d d ur in g the l a st th ree y ear s. T he B oa rd is a uth or ize d to dete rm ine t he d ate of issue o f new sh ar es, t he issu e pr i ce, t he t y pe of p aym ent , th e con di ti ons for th e e xerc i se of pr e - e mp ti ve r ig ht s and t he be gi nnin g date fo r di v id e nd e nti tl em ent . I n this reg ar d, th e B oar d may issu e ne w sha res by m ea ns of a f irm underwr iting through a banking institu - ti on , a sy nd ic ate or an oth er t hird p ar t y w ith a s ubse q ue nt of fe r of the se sh are s to th e sha reh ol de r s. Th e B oar d may pe rm it pr e - e mp ti ve r igh ts t hat have n ot be en e xe rc ise d by sh are ho ld - er s to ex pir e or it m ay pl ace th ese r i ght s an d/ or sha res a s to whi ch p re - em pt ive r i ght s have b ee n gra nte d but n ot e xerc i sed at m arke t con dit io ns o r use t he m for ot he r pur po ses i n the i nte res t of th e Com pany. Furt he rm ore , th e Bo ard i s aut hor i zed to res tr ic t o r de ny th e pr e - e mp ti ve r ig hts o f sha re - hol d er s an d all oc ate suc h r ig hts to t hird p ar t ie s if the s har es ar e use d (1) fo r the ac qui si ti on of a n ente rp r ise , pa r ts o f an e nter pr is e, o r pa r ti c ip a- ti ons , or fo r new i nve stm ent s, o r in c a se of a sh are placement, f or the financing or refinancing of suc h tra nsa c ti ons; o r (2) fo r th e pur pos e of bro ad - ening the shareholder constit uency in connection with a listing of shares on domestic or f oreign stock e xchanges. The subscription and the acqui - sit io n of th e new s har es, a s we ll a s ea ch subs eq ue nt tr ans fer o f the sh ar es, w ill b e subj ec t to the r est r ic t io ns of A B B’s Ar t ic le s of In co rpo ra - ti on (availa bl e at http s:/ /new .ab b.com/about/ corpora te- governanc e ). — Sha r ehold ers Sha reh old er stru c ture A s of De ce mb er 3 1 , 20 2 1 , the tot al n umb e r of sha reh ol de r s dir ec t ly re gi ste re d w ith A B B Ltd wa s app rox im atel y 9 6 ,0 0 0 an d ano the r 51 3 ,0 0 0 shareholders held s hares indirectly through nom ine e s. I n total a s of th at date , AB B ha d ap - proximat e ly 609,0 00 shareholders. Significant shareholders Un de r the Sw iss Fin an c ial M ar ket Inf ra str uc tu re Act, shareholde rs and group s of sharehold ers acting in conc e rt who directly or indirectly acquir e or se ll s har es of a li ste d Sw iss co rp or ati on or r igh ts b as ed t he reo n an d the re by re ach , exc ee d or fal l be l ow the t hre sho ld s of 3 pe rce nt , 5 pe rce nt , 10 pe rce nt , 1 5 pe rce nt , 20 p erc ent , 2 5 pe rce nt , voti ng r i ght s of th e cor po rat io n mus t not if y the cor po rati on a nd th e S IX Sw i ss E xcha ng e of suc h holdings. C onsequently , sign if icant shar eholdings may have v ar i ed w i thi n the r el ev ant t hre sho ld leve l s sin ce th ey we re re po r ted . Inve stor A B , Swe de n, h el d 26 5 , 3 8 5, 1 4 2 A BB s har es as of D e cem be r 31 , 2 0 21 (refe r to Inve sto r ’s year- en d 20 2 1 rep or t av ail ab le at h t t p s : // www . inves torab .com/in vestors-media / reports- presentations ). Thi s ho ld ing r ep re sente d 1 2 . 9 pe rce nt of A BB ’s total sh are c ap ita l an d voti ng r i ght s a s re gis tere d in t he Co mm erc i al Re gis ter o n De ce mb er 3 1 , 20 2 1 . Th e nu mb er of shares he ld by Investor A B does no t include shares he ld by M r . J acob Wa ll en be rg , the c hai rma n of Inve stor A B a nd a di re c tor of A B B, i n his i ndi v i du al capacit y . The C ap ita l G rou p Comp ani es I nc . , US A , d isc los ed that a s of Ju l y 1 , 20 21 , i t, to ge the r w i th it s di re c t and indir ect affiliates, held 115, 841, 3 36 ABB sha res (refe r to h t t p s : // www . se r- a g .co m/en/ resources/ notif ications- market - par tic ipants / significant - shareholders . h t m l #/ shareholder - d etails /T AL 760002 0 ). This ho ld in g rep re sen ted 5 .6 4 p er cent o f AB B ’s total sha re ca pit al an d vot in g r igh ts a s re gis ter ed i n the Com me rc ia l Re gis ter at th at ti me . Cev i an C api ta l II G P Limi ted , Je r sey, discl ose d th at as of A ug ust 3 , 2 02 0, it h e ld 10 5, 9 8 8 ,6 6 2 A BB sha res (refe r to h t t p s : // w w w.se c .gov / Arc hive s/ edg ar / da ta/ 109 1587 /0000 9 026 6420002 862/ p20 -1467 sc13 da . htm ). This ho ld ing r ep re sente d 4. 8 9 pe rce nt of A BB ’s total sh ar e ca pit al an d voti ng r i ght s a s re gis tere d in t he Co mm erc i al Re gis ter at th at ti me . Bl ack Ro ck I nc . , U. S ., di scl ose d th at as of A ugu st 31 , 2 017 , i t, to ge th er w i th it s di re c t an d ind ire c t subs idi ar i es , he ld 7 2 , 9 0 0,7 3 7 AB B sh are s (refer to h t t p s : // www . s e r- a g .com/ en/ resources / notifications- market -par tic ipants / significant - shareholders . h t m l #/ shareholder - d etails /T AH91 00 0F4 ). This h ol di ng rep re sen ted 3 . 3 6 p er cen t of AB B ’s total sha re ca pit al an d vot in g r igh ts a s re gis ter ed i n the Com me rc ia l Re gis ter at th at ti me . 67 ABB ANNU AL REPORT 2021 02 C ORPOR A TE GO VERNANCE REPORT At De ce mb er 3 1 , 20 21 , to t he b es t of AB B ’s know l - ed ge , no ot he r sha re hol de r h el d 3 pe rce nt or m or e of AB B ’s total sh are c api ta l and vo ti ng r i ght s as reg is tere d in t he Co mm erc i al R eg iste r on t hat date . AB B Ltd ha s no c ross sh are ho ld in gs in e xce ss of 5 pe rce nt of c apit al , or vot in g r ig ht s w ith a ny other compan y. Announcements relat e d to disclosure no t ifications mad e by sha re ho ld er s du r in g 20 21 c an b e fou nd v ia t he se arc h fac i li t y on th e pl atfo rm of th e D isc lo - sure Of f ice of t he S IX Sw i ss E xcha ng e: h t t p s : // www . s e r- a g .com/ en/ resourc es / notifications-m arket - part icipants/ signifi cant -sharehold ers .ht ml # /. Under ABB’s A rt icles o f Incorpora tion ( available a t https: / /ne w . abb.c om/ about/ corpora te- governance ), eac h re gis tere d sh are r ep res ent s on e vote. Si gni f ic ant s har eh ol de rs d o not h ave dif f er - ent vot i ng r i ght s. T o o ur k now le dg e, we a re n ot directly or indir ectly owned or c ontrolled by any governmen t or by a ny other c orporation or person. Sharehol ders’ rights Sh are ho ld er s have t he r ig ht to re cei ve di v i de nd s, to vote and to e xe cute su ch ot he r r ig hts a s gra nte d und e r Sw iss law a nd t he A r t icl es o f Incorpora tion ( ava ilable a t ht tps:/ /new.abb.co m/ about/ corporate- governanc e ). Ri gh t to vote AB B ha s o ne cl a ss of sha res a nd e ach re gi ste re d share c arries one vo te a t the ge neral meeting. Votin g r ig hts m ay be e xerc i se d on ly af te r a sha re - hol d er h as b ee n re gi ste red i n th e sha re re gis ter of AB B a s a sha re hol d er w i th th e r ig ht to vote, o r w it h Euroclear S weden AB (Euroclear ), w hich ma in - tain s a sub re gis ter of t he sh are r egi ste r of A BB . A sha reh ol de r may b e re pre se nted at t he A nn ual Ge ne ra l Me et i ng by it s l eg al re pr ese nt ati ve, by anot he r sha re ho ld er w i th th e r ig ht to vote or b y the i nd ep e nd ent p rox y e le c te d by the s har eh ol d - er s (unab hän gi ge r Sti mm rec ht sve r tr ete r). If the Com pany d oe s not h ave an in de p en de nt pr ox y, the B o ard of D ir ec to rs sh al l app oin t the i nd ep e n - de nt pr ox y for t he ne x t G e ne ral M e et in g of Sh are ho ld er s. A l l sha res h el d by o ne sh are ho ld er may be r ep res ente d by o ne re pr ese ntat i ve on ly. For p rac t ic al re a son s sha reh ol de r s mus t be reg is tere d in t he sh are r eg iste r no l ater t han 6 business days befor e the ge neral meeting in order to be e nti tl ed to vote . E xce pt for t he c as es d e - scr i be d un de r “ Limi tat ion s on t ran sfe ra bili t y of sha res a nd n omi ne e re gis trat io n” be low, th ere a re no vo ting r ights r estrict ions lim iting ABB ’ s share - holders’ rights. AB B ’s top pr io r it y i s prote c t ing t he h ea lth of i ts sha reh ol de r s and e mp lo yee s. T he refo re , du e to the extraordinary circumstances and in ac cor - dan ce w i th ap pl ic ab le Sw i ss COVI D -1 9 le gi slat io n, sha reh ol de r s wer e not ab le to at ten d A BB ’s An nu al G en er al M e et ing 2 0 21 i n pe rs on , but co ul d exe rc is e the ir sh are ho ld e r r igh ts v i a th e in de pe n - de nt pr ox y on ly. The B oa rd of D ire c tor s ha s reso l ved t hat for A B B’s A nn ual G e ne ra l Me et in g 20 2 2, i n acco rda nc e w ith a pp li ca bl e Sw iss COVI D -1 9 le gi slat io n, th e sa me p roce du re s sha ll app l y. In addi ti on , AB B w i ll of fe r sh are ho ld er s th e opportunity to address questions on agenda ite ms to th e Bo ard of D i rec to rs i n wr i ti ng a hea d of t he meeting. Powe rs of G e n er al M e eti n g The O rd ina r y G e ne ral M e et in g of Sh are ho ld er s mus t be h el d eac h yea r w it hin 6 m onth s af ter t he cl ose of th e f isc al ye ar of t he Co mpa ny; t he b usi - ness report, the compensa tion report and the Aud ito rs’ r ep or t s mu st b e mad e avail ab le fo r ins pe c ti on by t he sh are ho ld e rs at th e pl ace of in corp or ati on of t he Co mpa ny by no l ater t han 20 d ays pr i or to th e me et in g . Eac h sha reh ol de r is ent it le d to re qu est i mm ed iate de li ve r y of a co py of t hese docu ments. The f oll ow i ng p ower s sh all b e ves ted e xcl us ive ly in the G eneral Meeting of S hareholders: • Adop tion and a mendment o f the A rt icles of Incorpora tion; • Ele c t io n of the m em be r s of the B o ard of Di re c tors , th e Chai rma n of th e Bo ard o f Di re c tors , the members o f the Compensation C ommittee, the Audit ors and the independent pro x y; • App rov al of th e an nu al ma nag em en t rep or t a nd consolida ted financial stat e ments; • App rov al of th e an nu al f in an c ial s tate me nt s and de c isi on o n th e all oc ati on of p rof it s sh own o n the b al anc e she et , in p ar t ic ul ar w i th re ga rd to div idends; • App rov al of th e ma xi mu m com pe nsat io n of th e Bo ard of D i rec to rs a nd of t he E xe cut i ve Com mit tee p ur sua nt to Ar tic le 3 4 o f the A r t ic le s of Inc orporation; • Gra nti ng d isc har ge to th e me mb er s of th e Bo ard of D i rec to rs a nd t he p er son s ent ru sted with management; • Passi ng r eso lut i ons a s to al l mat ter s res er ved to the au th or it y of t he G e ne ra l Me et in g by law o r und e r the A r t ic le s of In cor po rat io n or th at are sub mit ted to t he G en er al M e et ing b y the B oa rd of Di re c tor s, sub je c t to Ar t i cl e 71 6a of t he Sw i ss Cod e of Ob li gat ion s. 68 ABB ANNUAL REPOR T 2021 02 CORPOR A TE GOVERNANCE REPORT Re sol u ti on s an d e le c ti on s at G e ne ra l M ee ti ng s Shareholders’ resolu tions a t general meetings are app rove d w i th an a bso lute m ajor it y of th e votes rep re sen ted at th e me et in g, e xce pt for t hos e mat ter s de scr i be d in A r t ic le 70 4 of t he Sw i ss Code o f Obligations and for resolutions w ith resp e c t to res tr ic t i ons o n th e exe rc ise o f the r i ght to vote and t he r em ova l of suc h res tr i c ti ons , whi ch al l re qui re th e ap pr ova l of t wo -t hird s of th e vot es represent ed a t the me eting. At December 31, 2021, sh areho lders repr esen t ing sha res of a p ar v al ue tot ali ng at l ea st CH F 4 8 ,0 0 0 may re qui re i tems to b e in cl ud ed i n th e age nd a of a ge ne ra l me et in g. A ny su ch re q ues t mu st be mad e in w r it in g at lea st 4 0 d ays pr ior to th e date of the g e ne ral m e et in g and s pe c if y t he i tem s and the m ot ion s of suc h sha re ho ld er (s ). ABB’s Ar ticles of Incorporation do not conta in provisions on the conv ocation o f the general me et in g of sha re hol d er s that d if fe r fro m the applicable legal provisions. Shareholders’ dividend rights The unc onsolida ted stat utor y financial stat e - me nts o f AB B Ltd are p re pa red i n acco rda nce w ith Sw iss l aw . Ba se d on t he se f in an c ial s tate me nts , div id en ds m ay be pai d on ly i f AB B Ltd ha s suf f i - c ie nt dis tr i but ab le p rof it s fr om p rev i ou s yea rs o r suf f i c ie nt fre e re se r ves to a ll ow th e dis tr ib ut io n of a di v id en d . Sw iss l aw req uir es th at AB B Ltd ret ain at le as t 5 pe rce nt of i ts a nnu al n et p rof it s as l eg al re se r ve s unt il t he se res er ves am ou nt to at le as t 20 p erc ent of A B B Ltd ’s share c api ta l. A ny net p rof i ts re mai nin g in e xcess of t hos e res er ves are at th e di spos al of t he sh are ho ld er s’ m ee ti ng . Un de r Sw iss l aw, ABB Ltd may o nl y pay o ut a div id en d if it h a s be en p rop ose d by a sh are ho ld e r or th e B oar d of Di re c tor s and a pp rove d at a general meeting of shareholders, and the auditors conf i rm th at the d iv ide n d confo rms to s tatuto r y law an d A BB ’s Ar t ic le s of In cor po rati on . I n pra c- ti ce, t he sh are ho l de rs ’ me et in g usua ll y ap pr oves div id en ds a s pro po sed b y the B o ard of D ir ec to rs . Di v i de nd s are u sua ll y du e and p aya bl e no e arl ie r than 2 trading da ys a f ter the shareholders’ r esolu - ti on a nd th e ex- date for d iv i de n ds is n or mal ly 2 trading days after the s hareholders’ res olution app rov ing t he di v i de nd . D iv ide nd s are p aid o ut to the h ol de rs t hat ar e re gis tere d on t he r eco rd date . Euro cl ear a dmin iste rs t he p aym ent of t hos e sha res reg is tere d w i th it . U nde r Sw i ss law, div i de nd s not col le c ted w ithi n 5 yea rs af te r the d ue d ate accr ue to AB B Ltd an d are a ll oc ated to it s oth er r ese r ve s. A s AB B Ltd pay s ca sh di v i de nd s, if a ny, in Sw iss fra nc s (subje c t to th e exce pt io n for ce r t ain sh are - hol d er s in Swe de n de sc r ib ed b el ow), exch an ge rat e fluc tua tions will affect the U.S. dollar amo unt s re cei ve d by ho ld er s of A DSs u po n conve r - sio n of th ose c as h div id en ds by Ci ti ba nk , N . A ., t he depositary, in accor dance with t he Amended and Re state d De p osit A gr ee me nt date d May 7, 2001 . For sh are ho ld er s w ho ar e res id ent s of Swe de n, AB B ha s e sta bl ish ed a d iv ide nd a ccess f ac il it y (for up to 6 0 0,0 0 4,7 16 sh are s ). Wi th re spe c t to any ann ua l div id en d pay me nt for w hic h thi s fac i lit y i s mad e avail ab le , sha re ho ld er s wh o re gis ter w i th Euro cl ear m ay el ec t to r ece ive t he di v i de nd f rom AB B N ord en H ol di ng A B in Swe di sh k ron a (i n an amo unt e qu iv al ent to t he di v i de nd p aid i n Sw iss fra nc s) wit ho ut de du c t io n of Sw iss w i thh ol di ng tax . For fur ther inf orma tion on t he dividend acc ess facility , see A BB’s A rt icles of Incorporation. Limit ations on tr a nsferability of shares and nominee registr ation AB B may d ec li ne a re gi str ati on w i th vot in g r ig hts if a sh are ho ld er d oe s not d ec la re th at it ha s acqu ire d th e sha res i n it s ow n nam e an d for i ts own acc oun t. I f th e sha reh ol de r re fus es to ma ke suc h de cl arat io n, i t w il l be r egi ste re d as a s har e - hol d er w i tho ut vot in g r ig ht s. A p er son f aili ng to expres sly dec lar e in its r egist ration / applica tion that i t hol ds t he sh are s for i ts ow n acco unt (a nom ine e), wi ll b e en tere d in t he sh are r eg iste r w ith v oti ng r i ght s, p rov i de d th at such n omi ne e ha s ente re d into a n agr ee me nt w i th A BB co nc ern - in g it s statu s, an d fu r th er p rov i de d th at the nom ine e is s ubj ec t to re co gnize d ba nk o r f in anc i al mar ket sup er v is io n. I n spe c ia l ca se s th e Bo ard may gr ant e xem pt ion s. T he re we re no e xe mpt io ns gra nte d in 2 02 1 . Th e li mit ati on on t he t ran sfe r - abi lit y of s har es may b e re move d by an amendment o f ABB’ s Articles of Inc orporation by a shareholders’ resolution requiring two-thirds of t he v otes represented a t the meeting. No r est r ic t io n on t ra di ng o f sh ar es No re str ic ti on s are i mp ose d on t he tr ans fe rabi li t y of AB B sh are s. T he re gi str ati on of sh are ho l de rs i n the A B B sha re re gi ste r , Euro cl ea r and t he A DS reg is ter kep t by Cit ib an k do es not af f ec t t ran sfe r - abi lit y of A B B sha res o r A DSs . Re gis ter ed A B B sha reh ol de r s or A DR h ol de rs m ay the re fore p ur- cha se o r se ll th ei r AB B sh are s or A D Rs at a ny ti me , including bef ore a General Meeting regardles s of the r eco rd d ate. Th e re cor d date se r ve s on ly to dete rm ine t he r i ght to vote at a G en er al M e et ing . AB B ’s Ar t icl es of I nc orp or ati on d o not co ntai n any provisions ra ising the thr eshold ( opting up ) or wai v in g th e dut y (opt in g out) to ma ke a pub li c ten de r of fe r pu rsu ant to A r t icl e 1 3 5 of th e Sw iss Act on Financial Market Infrastruc tures and Ma rket Con du c t in S ec ur i ti es a nd D er i v ati ves T rading. ABB ANNUAL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT — Inde pe nde nt external audit ors Duration of the man date and term of offi ce of the auditors On M arc h 2 5, 2 02 1 , sh are ho ld er s at th e An nu al Ge ne ra l Me et i ng of A B B Ltd app rove d the a p - poi ntm ent of K PM G AG (K PM G) to be t he au dito rs of the Co mp any fo r the 2 0 21 f i nan c ia l yea r . KP MG a re th e aud itor s of A BB ’s statuto r y an d consolida ted financial stat e ments. KPMG, Swit - zerland, assumed the s ole aud iting manda te of the c onsolida ted financ ial sta tements of the ABB Gro up b eg in nin g in th e yea r en de d D ece m - be r 31 , 2 01 8. T he au di tor in c ha rge a nd responsible for the manda te, Hans-Dieter Krauss , be ga n ser v in g in t his c ap ac it y in r esp e c t of the f ina nc i al ye ar e nd ed D ec em be r 31 , 2 01 8 . Pur sua nt to AB B’s A r ti cl es of I nco rp or ati on (availa bl e at http s:/ /new .ab b.com/about/ corpora te- governanc e ), th e te rm of of f i ce of AB B ’s audito rs i s one y ear. Information to the Board an d the Fina nce, Aud it and C om pliance C ommittee Super visor y and c ontrol instruments v is-à -vis the audit ors Ou r aud itor s, K PM G , atte nd e ach m ee ti ng of t he F ACC and each meeting includes a pr ivate session bet we e n th e audi tor s an d the FACC w ith ou t the man age m ent b ei ng p rese nt . In 2 0 21 , t he FACC had 6 me et in gs (eith er i n pe rs on o r v ia te le p hon e ca ll ). On at l ea st an a nn ual b as is , the FACC rev i ews a nd discusses with the ex ternal audit or s all sign ific ant rel ati on ship s that th e aud ito rs have w ith th e Compan y tha t could impa ir their independence. The FACC rev iews t he au dito r en gag e me nt le tte r and the audit plan includi ng dis cussion of scope, staf f i ng , lo c atio ns a nd g en er al au dit a pp roac h. The FACC als o rev iews a nd e va luate s the a udi tor s’ judgment on the quality and appr opriatenes s o f the C ompany’ s a ccoun t ing principles as applied in the financial reporting. In addition, the F ACC app rove s in ad v an ce any n on - aud it se r v ice s to be performed by t he aud itors. At le as t ann ua ll y, the FACC obtains a nd r e - v ie ws a re po r t by th e aud itor s th at inc lu de s discussion on: • The Company’s int ernal con trol procedures ; • Mater ia l issu es, i f any, raise d by th e mos t re cent internal quality contr ol review; • Cri ti ca l acco unt in g po li c ie s and p rac t i ces of the Compan y; • All a lte rnat ive a ccou nti ng t reatm e nts of f ina nc i al i nfor mati on t hat we re dis cuss ed bet we e n th e audi tor s an d man age me nt a s we ll as t he re late d ra mif i cat io ns; an d • Mater ia l com mu nic ati ons b et we en t he au di tors and management s uch as any manageme nt let te r or sc he du le of au di t dif f ere nc es . T ak ing in to acc ount the op inions of management the F ACC evaluates the qualifications, indepen - de nce a nd p er fo rm an ce of th e audi tor s. T he FACC rep or t s th e mate r ia l el em en ts of i ts su pe r v isi on of the a udi tor s to the B oa rd an d on a n an nua l ba sis r eco mm en ds to th e B oar d the a udi tor s to be p rop ose d for e l ec t io n at the sh ar eh ol de rs meeting. Audit an d additiona l fees paid to t he a ud ito rs The a udi t fee s ch arg e d by KP MG fo r th e le ga ll y pre scr i be d au dit a mo unte d to $3 4. 5 mill io n in 20 21 . Aud it se r v ice s are d ef i ne d as t he st an da rd audi t wor k pe r for me d eac h f isc al y ear n ec essa r y to all ow th e aud itor s to issu e an op ini on on t he con sol idate d f in an c ial s tate me nt s of AB B an d to iss ue an opinion on the local s tat utor y financial stat ements. This c la ssi f ic ati on m ay also i nc lu de se r v ice s that ca n be p rov i de d on ly b y the au di tors , suc h a s pre -issu an ce rev iew s of qu ar te rl y f ina nc i al re sul ts and c omfo r t le tte rs d e li vere d to un de r w r ite rs i n con ne c ti on w i th d ebt a nd e qu it y of fe r in gs . In clu de d i n the 2 02 1 au dit fe e s were a pp rox i - matel y $ 4.7 mil li on re late d to aud it s fro m 20 20 and e ar lie r , w hic h we re not ag re ed u nti l af te r the Com pany h ad f il e d it s ann ua l rep or t o n For m 20 - F w ith t he S EC on Fe br uar y 26 , 20 2 1 . In ad dit i on , KP MG c har ge d $1 3 .6 mi lli on fo r non -au dit s er v ice s du r in g 20 21 . No n -au di t serv ices include primarily car ve- out financ ial state me nt au dit s in r el ati on to tr ans ac t ion al activ ities, serv ice organi zation att estation 70 ABB ANNU AL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT procedures, agreed -upon procedure reports, accou nt in g cons ult ati ons , aud it s of pe ns ion a nd benefit plans, a ccoun t ing advisor y serv ices and other a ttest serv ices rela ted to financial report ing that a re not re q uir ed by s tatute o r re gul ati on , income tax and indirect tax compliance ser v ices as we ll a s t a x ad v is or y s er v ice s. I n acco rda nc e w ith t he re q uir em ent s of th e U. S . Sa rba ne s Ox ley Ac t of 2 0 02 a nd ru le s issu ed b y the S EC , we ut ili ze a pro ced ur e for th e rev iew a nd p re ap prov al of any se r v ice s pe r for me d by K PMG . — Other g o v ernance inf orma tion ABB G roup org anizationa l struc ture AB B Ltd, Sw i t zer lan d, i s th e ult im ate par ent com pany o f the A B B Gr oup . It is t he so le sh are - hol d er of A B B A sea B row n B over i Ltd w hic h directly or indir ectly owns the other compan ies in the A B B G rou p. The t ab le i n th e app e ndi x to thi s Corp or ate Gov ern an ce Re p or t se ts fo r th , as of De ce mb er 3 1 , 20 21 , t he n am e, p lace of i nc orp or a- ti on , own er shi p inte res t an d sha re ca pit al of t he sig nif i ca nt di rec t a nd i nd ire c t sub sid ia r ie s of AB B Ltd. I n add it ion , A BB Ltd a lso ow ns 1 9. 9 pe rce nt of Hit achi E ne rg y Ltd. A B B’s op er atio na l gro up str uc tu re is d esc r ib ed i n th e “ Fin anc i al re v i ew of AB B G rou p” se c ti on of t his A nn ua l Re po r t un de r “O pe rat in g and f i na nc i al rev iew a nd p rosp ec t s – Organiza t ional structure” . Ma nag e me nt co ntrac t s The re a re no m an age me nt co ntra c ts b et we en A B B and comp anies or na tural persons no t belonging to the A B B Gr oup . Change o f contr ol clauses Bo ard m em be r s, E xe cut iv e Comm it tee m em be rs , and o the r me mb e rs of se ni or ma nag em e nt do n ot rec ei ve any sp ec i al b en ef i ts i n the e ven t of a change o f con trol. Howev e r , the condi tional gra nt s und e r the L on g T er m In cent i ve Pl an (L T IP) and t he M an age me nt In ce nt ive P lan ( MI P) may be subj ec t to ac cel er ated ve st in g in t he eve nt of a ch ang e of co ntro l. Fro m 20 21 , t he ru le s for t he L T IP h ave be en a me nd e d to no lo ng er p rov i de f or acce le rate d ves ti ng u po n a cha ng e in co ntro l. N o further grants are made under the MIP . Emp loy e e parti ci pation progr ams In o rde r to ali gn i ts e mp lo yee s’ in tere st s w it h th e business goals and financial results of the C om - pany, AB B op er ates a n umb e r of in cent i ve pl ans , lin ked to A BB ’s shar es, s uc h as t he Em pl oyee Sh are A cqu isi ti on Pl an , th e Ma nag em ent I nc ent iv e Pla n an d the L on g T er m In cen ti ve Pl an . For a m ore detailed des cr iption of these incentive plans, pl ea se re fer to “ N ote 18 – S ha re - b as ed p aym ent arrangements” t o ABB’s C onsolidated Financial Sta tements. trading A BB secur ities Du r in g the 3 0 d ays pr i or to th e day of p ub lic at ion of the A B B G rou p’s quar te rl y f i nan c ia l resu lt s, a s wel l as o n suc h day, the me m be rs of t he B oa rd of Di re c tors a nd t he E xe cut i ve Com mit tee a s we ll a s cer t ain e mp loye e s of AB B , a s spe c if i ed i n A BB ’s interna l policies, are prohibit ed from trading in AB B Ltd se cur i t ies a nd a ny re lated f i na nc i al instrument s. Governa nce d if fer en ces fro m NY SE St anda rds Acco rdi ng to th e Ne w Y o rk Stoc k E xch ang e’s corpora te governance standa rds ( the S tandards ), AB B is r eq uir ed to d isc lose s ig nif i ca nt ways i n whi ch it s co rp or ate gove rna nce p rac t i ces di f fe r fro m the St an dar ds . AB B ha s re v ie wed t he St an - dards and concluded that its corporat e gove rn anc e pr ac ti ces a re g en er al ly co nsi ste nt w ith t he St and ar ds, w ith th e fol low i ng s ig nif i ca nt except ion s: • Swiss l aw re qui re s that th e ex tern al au dito rs b e el ec te d by th e sh are ho ld er s at the A n nu al 71 ABB ANNUAL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT Ge ne ra l Me et i ng rat he r tha n by th e aud it com mit tee o r th e bo ard of d ire c tor s. • The Sta nd ard s req ui re th at all e qu it y com pe nsat io n pl ans a nd m ater i al rev isi on s the re to be ap pr oved b y the sh ar eh ol de rs . Cons iste nt w i th Sw iss l aw suc h mat ter s ar e de c id ed by o ur B oa rd . Howe ver , the sha reh ol de r s de c id e ab out t he c reat io n of new sha re ca pit al t hat ca n be u se d in co nne c t io n w ith e q uit y co mp en sat ion p la ns . • Swiss l aw re qui re s that th e me mb e rs of th e com pe nsat io n com mit te e are e le c te d by th e sha reh ol de r s rath er t han a pp ointe d by our Board. • Swiss l aw re qui re s sha reh ol de r s to app rove th e max imum aggregat e Board c ompensation and the m a x im um ag gre g ate Exe cu ti ve Committ ee compensa t ion. — Inf orma tion polic y AB B , a s a pub li cl y tr ade d co mpa ny, is commi tte d to com muni cat in g in a t im e ly a nd co nsi ste nt way to shareholders, po tential inv estors, f inancial analysts, customers, suppliers, the media and othe r i ntere ste d pa r ti es . A BB i s re qui re d to dis - semina te mat er ial inf orma tion pertaining to it s business es in a manner tha t compl ies with its obligations under the rules o f the st ock ex - cha ng es w he re it s sh are s are l iste d an d tr ade d . AB B pu bl ish es a n ann ua l rep or t that pr ov id es audit e d financial stat eme nts and information about ABB including our business results, stra t - eg y, prod uc t s an d ser v ic es, c orp or ate gove rn anc e and e xe cut i ve com pe ns atio n . AB B al so sub mit s an ann ua l rep or t on For m 20 - F to th e Se cu r it ies a nd E xcha ng e Com missi on (S EC). In a ddi ti on , A BB pub li she s it s re sult s on a q ua r ter ly b a sis a s pr ess rel ea se s, di str i bu ted p ur sua nt to the r ul es a nd reg ul ati ons of t he s tock e xch an ge s on w hic h it s sha res a re li ste d and t rad e d. P ress re l ea ses rel ati ng to f i nan c ia l resu lt s an d mate r ial e ven ts are a lso f i le d w it h the S EC on Fo rm 6 - K . A n a rchi ve conta ining Annual Reports, Form 20 - F reports, qua r te rl y resu lt s re le ase s an d re late d pre se nta - ti ons c an b e fou nd i n th e “F ina nc i al re sul ts a nd pre se ntat io ns” se c t io n at ww w.abb. com /inves - torrela tions . T he qu ar te rl y re sult s p ress r el ea ses contain unaudited financ ial informa tion prepared in acco rd anc e w it h or re con c il ed to U. S . G A A P . T o subs cr ib e to im po r ta nt pr ess re le as es , pl ea se cli ck o n the “ Cont ac t s an d Se r v ices ” an d cho ose “ Sub scr i be to u pd ates” at h t t p s : // w w w.a bb.com/ inves torr elations . Ad - ho c not ice s ca n al so be foun d in t he p ress r el ea ses s ec t io n at h t t p s : // w w w.ab b.com/news . AB B ’s off i c ial m ea ns of co mmu nic at ion i s th e Sw iss O f f ic i al G a zet te of Com me rce ( h t t p s : // w w w.sha b.ch ). The i nv it ati on to th e Com pa ny ’s An nu al G en er al M e et ing i s se nt to re gis tere d shareholders by ma i l. In qui r ie s may al so be m ad e to AB B Inv esto r Relations: Affolternstr asse 44 CH- 8050 Zurich, Swit zerland T el ep ho ne : +41 43 3 17 71 11 E-Mail: inv estor [email protected]. com AB B ’s websi te is: w w w .a bb.com F u rther informa tion on corporate gov erna nce The l ist b e low co ntai ns re fer en ces to ad di ti on al inform ation concern ing the corporate governance of AB B (availa bl e at http s:/ /new .ab b.com/about/ corpora te- governanc e ). • Articles of Inc orporation • ABB Ltd B oa rd G over na nce R ul es, which includes : – G ove rn an ce Ru le s of the F ina nce , Au di t and Compliance Committee – G ove rn an ce Ru le s of the G ove rn an ce an d Nomina tion Com mittee – G ove rn an ce Ru le s of the Co mp en sat ion Com mit te e – R e lated P ar t y T r an sac t io n Pol ic y • ABB Co de o f Con duc t • C omparison o f ABB’ s cor porat e governance pr ac ti ces to t he N ew Y ork Sto ck E xch an ge ru le s • Summ ar y of d if fe re nce s of sh are ho ld er r i ght s und e r Swed ish a nd Sw i ss law ap pl ic ab le to A BB • CVs of th e Bo ard m e mb er s • CVs of th e E xec ut ive Co mmi tte e me mb e rs AB B ’s corpo rate c al en da r ca n be fo und at h t t p s : // new .abb.com /investor relations / calendar - events-and- publications / financ ial- calendar . 72 ABB ANNUAL REPORT 2021 02 CORPOR A TE GOVERNANCE REPORT Appendix – ABB L td’ s s ig nifican t sub sidi aries Company name/location Cou ntr y AB B Sh a re ca pi ta l i n thousands Cu rre nc y AB B S . A ., B u en os A ir es Arg enti na ARS AB B A us tr al ia P t y Li mi ted , M oo re ba nk Australia AUD AB B G ro up H ol d in gs P t y. Ltd. , M oo re ba nk Australia AU D AB B G ro up I nve st me nt M an ag em e nt P t y. Ltd. , M oo re ba nk Australia AUD AB B AG , W i en e r Ne ud o r f Austr ia EUR B&R Holding GmbH, E gge lsberg Austria EUR B&R Industrial Automa tion GmbH , E ggelsberg Austria EUR AB B N .V . , Zav en te m Belgiu m EU R ABB Automacao L TDA , Soracaba Brazil BRL AB B E le tr i f ic ac ao L TDA , So rac a ba Brazil BRL AB B B ul g ar i a EOO D, So f ia Bulgaria BGN ABB Electrif ication Canada UL C , Edmont on Canada — C AD ABB Inc., Saint -L aurent Canada — C AD AB B S . A ., S a nt iag o Chile CLP ABB (C hina) Investment L imited, Beijing China USD ABB (China) Ltd., Beijing China USD AB B B ei ji ng D r i ve Sy ste ms C o. Ltd ., B e iji n g China USD ABB Beijing Switchgear Limited, Beijing China USD ABB Electrical Machines Lt d., Shangha i China US D ABB Engineering (Shanghai) L td., Shanghai China US D AB B LV Ins ta ll at io n Mate r i al s Co. Ltd . B ei ji ng , B ei ji ng China USD ABB Shanghai F ree T rade Zone I ndustrial Co., Ltd., Shanghai C hina CN Y ABB Shanghai Mot ors Co. L td., Shanghai China USD AB B X ia me n Lo w Volt ag e Eq uip m en t Co. Ltd ., X ia m en China USD AB B X ia me n Sw i tch ge a r Co. Ltd ., X ia me n China US D AB B X in hu i Low Vo lt ag e Sw itc h ge ar Co . Ltd ., X in hui China USD AB B s .r.o., P ra gu e Czech Republic C ZK AB B A /S , Sko vl un d e Denmark DKK AB B fo r El e c tr i ca l In du st r ie s ( A BB A R AB) S . A . E . , Cai ro Egypt EG P A se a Br own B ov er i S . A . E . , Cai ro Eg ypt USD AB B A S , J ür i Estonia EUR AB B O y, He ls in k i Finland EUR AB B Fr an ce , Ce rg y Po ntoi se Fra n ce EUR AB B S A S , Ce rg y Po ntoi se Fra n ce EUR AB B AG , M an nh ei m Germany EUR ABB Beteiligungs- u nd V er waltungsges. mbH, Mannheim Germany EU R AB B Sto tz - Kon ta k t Gm b H, H e id el b er g G ermany EU R B + R In du st r ie - El ek t ro nik G m bH , B ad H om bu rg Germany EUR Busch-Jaeger E lektro GmbH, Lüden scheid Germany EUR ABB Engineering T rading and Service Ltd., Budapest Hungar y HUF Industrial C&S Hungary Kft., Budapest Hungary HUF AB B G l ob al B us in es s Se r v i ce s an d Co ntr ac t i ng I nd ia P r iv ate Limit ed , Bangalore India INR AB B G l ob al I nd us tr i es a nd S e r v i ce s Pr i va te Lim ite d , Ba ng al o re India INR ABB India L imited, Bangalore India INR AB B S . p. A ., M il an Italy EU R AB B K . K ., T ok y o Japan J PY AB B Ltd . , Se ou l Kor ea , R ep ub li c of KRW AB B E le c tr i c al Co nt rol S ys tem s S . de R . L . de C .V., Mo nte rr ey Mex ico MXN AB B M e x ico S . A . d e C .V . , S an L uis P oto si M ex ico MXN A se a Br own B ov er i S . A . d e C .V . , S an L uis P oto si Mex ico MXN AB B B .V . , Ro tt er da m Netherlands EUR ABB Finance B. V ., Rotterdam Netherlands EUR ABB Holdings B. V ., Rotterdam Netherlands EUR AB B A S , Fo rn eb u No r way NOK AB B E le c tr i f ic at io n No r w ay A S , Sk i e n No r way NOK 73 ABB ANNUAL REPOR T 2 021 02 CORPOR A TE GOVERNANCE REPORT Company name/location Cou ntr y AB B Sh a re ca pi ta l i n thousands Cu rre nc y ABB Holding AS, For nebu No r way NOK AB B B us in es s Se r v ice s Sp . z o.o. , Wa rs aw Poland PLN AB B I nd us tr i al S ol ut i on s (B ie l sko - B ia la ) Sp . z o.o. , Bi el sko - Bi al a Poland PLN AB B I nd us tr i al S ol ut i on s (K l od zko) Sp. z o .o., K l o dzko Poland PL N AB B S p. z o.o ., Wa rs aw Poland PLN In du st r ia l C& S o f P . R . L LC , S an J ua n Puerto Rico — USD AB B Ltd . , Mo scow Russian Federation RUB AB B E le c tr i c al I nd us tr i es Co . Ltd ., R i ya dh Saudi Arabia SAR ABB Pte. Lt d., Singapore Singapore SGD AB B H ol di ng s (P ty) Lt d. , Mo d de r fo nte in South Africa Z AR AB B I nve st me nt s (P t y) Lt d, M od d er f ont ei n South Afr ica ZAR AB B S ou th A fr i ca ( P t y) Ltd ., M o dd er f on tei n South Afr ica ZAR A se a Br own B ov er i S . A . , Ma dr i d Sp ain EUR ABB AB, Västerås Swed en SEK AB B E le c tr i f ic at io n Swe d en A B , Vä s ter å s Swe de n SEK AB B N or de n H ol di ng A B , Vä s te rå s Swed en SEK AB B A s ea B row n B ove r i Ltd , Zur i ch Switzerland CHF AB B C an ad a EL H ol di n g Gm b H, Zu r ic h Switzerland CHF AB B C ap it al AG , Zu r ic h Switzerland CHF AB B I nfo rm at io n Sys te ms Ltd ., Z ur i ch Switzerland CHF Switzerland CHF AB B M an ag em e nt Se r v ice s Ltd ., Z ur i ch Switzerland CHF AB B S ch wei z AG , B ade n S w itzerland CHF AB B Ltd . , T ai pe i T aiwan (C hinese Ta i p e i ) TWD AB B E le k tr i k Sa na y i A . S . , Is ta nb ul Tu r k e y TRY AB B I nd us tr i es ( L . L .C .), Du bai United Arab E mira tes A ED ABB Holdings L imited, War rington United Kingdom GBP ABB Limited, W arr ington United Kingdom GBP ABB Finance (USA) Inc., Wilmington, DE Unite d States USD ABB Holdings Inc., Cary , NC Unite d States USD AB B I nc . , C ar y, NC United St ates USD AB B I ns ta ll at io n Pro d uc t s In c , M em ph is , TN Unite d States USD AB B M oto rs a nd M e ch an ic al I nc , F or t S mi th , AR United State s — USD AB B Trea sur y Cen ter ( U SA ), In c . , Wi lm in gto n , DE Unite d States USD Edison Hol ding C orporation, Wilmingt on, DE Unite d States — USD Industrial Connections & Solutions LLC, Car y, NC Unite d States — USD (1) Company cons olidated a s ABB exercises full management control. (2) Shares without par value. 03 C om pe ns a tion re p o r t 76 Letter from the Chairman of the Compensa tion C ommittee 78 C om pe nsation a t a Gla nce 81 C omp ensat ion gov e rnance 83 Board compe nsation polic y 84 Imple me nta ti on of Board compe nsation polic y 84 Shareholdin g o f Board m embers 85 Ex ecutive C om mittee compensation poli c y 100 V otes on compe nsation at the 2022 AGM 102 C ompe nsation tables a nd sh are ownershi p tabl es 111 Repo rt of the statutory aud itor 76 ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT — Let t er from the C hairman o f the C om pensa tion C ommitt ee Dear Sharehold ers, On b eh al f of the B o ard of D ir ec to rs a nd th e Com pe nsat io n Com mit tee , I am p le as ed to p res - ent t he A B B Comp e nsat io n Re po r t for 2 02 1 . Ou r foc us re mai ns to en sure t hat th e com pe ns a- ti on st ru c ture at A B B dr i ves v al ue c reat io n for ou r sha reh ol de r s, re pr ese nt s a mot iv ati ng p ack age for o ur e xecu ti ve s, me et s b est- pra c ti ce cor po rate governance standards and align s with ABB’s sustainability stra tegy . Su m ma r y of c ha n ge s fo r 20 2 2 On e of th e main su bje c t s of ou r ana ly sis t his ye ar wa s how to b est l in k our s ust ain abil it y s trate gy - and i ts a sso c iate d amb it iou s ta rge t s for 2 03 0 - to the sh or t- and l on g -te rm i nce nt ive p la ns of our E xe cu ti ve Com mit te e (EC) m e mb er s. T his an d othe r di scu ssio ns re sul ted i n a sui te of cha ng es whi ch we b el iev e w il l pl ace A BB i n li ne w i th le adi ng mar ket pr ac t ice s for e xec ut ive c omp e nsat io n and reinfor ce our commitment to wards susta inabilit y and long-term value crea tion . In brief: Al l EC me mb er s w i ll have t wo o r mor e KP Is r el at - ing t o environmental, social and corpora te gove rn anc e (E SG) mat te rs i n the p er so nal c om po - nent o f their short-t e rm incen tive plan, and the existing mechani sm of s ubj ectively adj usting i ts outc ome aga inst an ESG “ boundary condition” will be disc ontinued. • A Corpo rate E SG m ea sure w ill b e add e d to the L T IP of a ll EC m em be rs , w it h a mater i al weig ht in g of 20 p er cent , an d th e Com pany w il l set a nd p rosp ec t i vel y di scl ose a pp rop r iate ES G ta rge t(s ) on a n an nua l ba si s. Th e ta rg et for th e 20 2 2 L TI P is se t out i n thi s Compensa t ion Report; • Ther e w il l be n o ves ti ng of t he T ot al S har eh ol de r Retu rn ( T S R) po r t io n of our L T IP aw ard b el ow the m ed ia n (50 th p e rce nti le) of th e pe er g rou p; • A div i de nd e qu iv al ent (to th e div id en ds p aid during the v esting period) payment w ill be intr od uce d on t he f i nal n um be r of awa rde d sha res at th e t ime o f vest i ng . This w ill b e la rge l y of fse t by th e re du c ti on of ot he r benef it - related costs; • The ex i st in g dis cre ti on to i nc rea se o r de cre as e the t ar get p oo l size a pp li ca bl e to EC mem be r s w il l be di sco nti nu ed , a s wel l as t he d isc ret io n to increase or decrease individual target grants (except to gi ve n o gra nt in c er t ain circumstances ) and • The cl awba ck an d le aver p rov i si ons w i ll b e up dated to p rov i de g reate r cl ar i t y of the u se of dis cre ti on of th e Com pe ns ati on Com mit te e to adjust the formula ic out comes of t he achie vement le vel a gainst defined performance measures and targets. Policy and ge neral t erms and c onditions New j oin er s to th e EC w il l have an i nc rea se d variable, per formance or iented portion of com - pe nsat io n mix a nd , in tu rn , a red uce d f i xed po r ti on , wh en co mp are d to cu rre nt EC me mb er s . The c omp e nsat io n str uc tu re for t he EC , i ts p ur- pos e and l in ks to o ur Co mpa ny st rateg y, and asso c iate d pe r fo rma nce m ea sur es, v al id a s of 20 2 2, a re se t out i n E xhi bit 3 b e low. Compensa tion policy out comes Bo ard of D i rec to rs: t he a pp rove d ma x i mum agg reg ate com pe ns atio n for t he 2 02 1- 2 02 2 te rm is lo wer t han fo r th e pre v io us te rm , as a r esu lt of a re duc t i on in t he n umb e r of me mb er s of th e Bo ard (fr om e lev en to te n). The agg regat e Board compensa tion for the 20 21- 20 22 te rm i s in li ne w ith th e am oun t app rove d at th e 20 21 A n nua l Ge n er al M ee ti ng (AG M). T he re ha s b ee n no c ha nge to t he i ndi v i du al Bo ard f ee s sin ce 2 01 5 . Execu tive Comm itt ee : the ag gre g ate EC total com pe nsat io n wa s CH F 3 9. 2 mill io n in 20 2 1 , com par ed to C HF 3 5. 4 mil li on i n 20 20, a s su mma - r ized i n E xhi bit 2 1 be l ow an d pre se nted i n de tail i n E xhi bit s 3 8 an d 39 . This d if fe re nce i n tota l com - pe nsat io n wa s dr i ve n by th e inc re ase i n per formance r elated variabl e pa y elements. 77 ABB ANNUAL REPOR T 20 21 03 COMPENSA TION REPORT Thr ee of t he ni ne EC me mb e rs i n pl ace in M arc h 20 21 r ece ive d a sa la r y adj us tme nt , whi ch r an ge d fro m 2 . 1 to 6.7 pe rce nt , for e xce pt ion al p er fo r- mance and / or market a djustme nt. This cor resp on de d to an ave rag e 1 . 3 pe rce nt in cre as e on an nu al ag gre gate b ase s al ar i es fo r the EC me mb er s in p ost i n Ma rch 2 0 21 , w hic h wa s bro adl y co nsi ste nt w it h the s ala r y re v i ew bu dg et for t he wider Swiss employee popula tion. The ave ra ge awa rd fo r the c urr ent EC m em be rs und e r the A I P for 2 02 1 wa s 1 43 .4 p e rce nt (out of a ma x i mu m 1 50 p er cent), co mpa re d to 7 2 .4 p er cen t in 2 02 0. Thi s sig nif i ca nt ou tcom e wa s dr i ven b y a stro ng p er form an ce fro m all business es, lead ing t o an ov erachiev e ment r e - lated to t he m ajor i t y of th e 20 21 A I P f in anc i al tar ge ts . In co mp ar is on , the 2 0 20 p er fo rm anc e leve l s were h eav ily i nf lu en ce d by the i mp ac t on the busines s from the COVID -19 pandemic, and n o cha ng es i n ta rge ts we re m ade . The aver age weig hted achie veme nt leve l of the 201 8 L TI P , w hic h ves ted i n 20 2 1 , wa s 57.4 pe rce nt ( out of a m a x im um 2 0 0 pe rce nt). Th er e wa s no vesting under the EPS component, wh ich was imp ac te d by th e COVI D -1 9 pan de mi c that too k place dur ing the performance per iod, and for whi ch n o adju st me nts to t arg et s we re ap pl ie d. Disclosur e During the reporting year , the Compensa t ion Com mit tee l iste ne d c are ful l y to inp ut s an d sug - ge st ion s to in cre as e the c la r it y of di scl osu res i n our Co mp en sat ion R e po r ts . A s suc h, we i ntr o - du ced a n ew se c t ion “ Com pe ns atio n at a gl anc e” at the beginning o f the Compensation Report, wh ere w e prov ide a t ab ul ar ove r v iew of th e EC com pe nsat io n str uc tu re . We cont in ue to s tru c tur e the Co mp en sat ion R e po r t to cle ar ly d if fe re nti ate between our c ompensation polic ies and the ir implementation. It is also in tended to pr ogres - siv el y move f rom n ar rat ive a nd co mp le x ta bl es towar ds mo re si mp li f ie d ch ar t s w it h en han ce d disclo sures. Governance Du r in g 20 21 , t he CC al so re v ie wed t he Co mpa ny ’s ge nd er p ay po lic y a nd d isc losu re re qu ire me nt s and f ul ly p e r form e d it s reg ul ar ac t iv it ie s, wh ich include for mulating the Compensa tion Report, pre pa r in g the “ say- on - p ay ” vote for t he AG M, rev i ew i ng t he te rms of d ep ar tu re fo r me mb er s of the E C , and rec ommending t o the Board the pe r for man ce m ea sure s an d ta rge ts fo r th e EC as wel l as t he co mp en sat ion o f the B oa rd , the C EO and the EC members. Y ou w ill find further inf or - mati on o n ou r ac ti v i ti es a nd o n AB B ’s compensa tion syst em and governanc e in the following pa ges. At the AG M o n Mar ch 24 , 20 2 2 , you w i ll b e as ked to vot e on the m ax imum aggr egat e compens ation for th e B oar d for i ts 2 02 2 – 20 2 3 term a nd o n th e max imum aggr egat e co mpensation for the E C in 20 2 3 . It is i mp or t ant to no te that th e in cre a se in max imum aggr egat e co mpensation for 2023 , rath er t han a ny str uc tu ra l in cre as e to EC comp en - sati on , is t he re sul t of the a sso c iate d cost r el ated to the 2 02 0 L TI P ves ti ng i n 20 2 3 , inf lu en ce d by th e in cre as ed n umb e r of sha res su bje c t to ves ti ng com par ed to p r io r yea rs; th e cu rre nt , sol id p er fo r- man ce of th e Com pa ny agai nst i ts e arni ng s pe r sha re ta rge ts a nd tot al sh are ho l de r retu rn p ee r gro up; a nd th e st ron g sha re pr i ce d eve lo pme nt sin ce th e ti me of g ra nt, w ith a re fer en ce pr i ce of CH F 19. 36 . This Co mp en sat ion R e po r t w il l als o be su bmi tte d for a non -binding, cons ultativ e vo te by shareholders. We en cou rag e and p ur sue a n op en a nd r eg ula r dia lo gu e w ith a ll of o ur st ake ho ld er s. Your con - str uc t ive i np ut i s high l y va lu ed a nd ap pr ec i ated a s we cont i nue to i mp rove ou r com pe ns ati on sy stem . O n be ha lf of th e Com pe ns ati on Com mit- tee , I tha nk yo u for yo ur co nt inu ed t ru st in A B B and for your c o nsistent ly supportive feedback. Frederico Fleury Cura do Chairm an o f the Compensation C ommittee Zur ic h, Fe br ua r y 24 , 20 2 2 78 ABB ANNU AL REPO RT 2021 03 COMPENSA TI ON REPORT — C om pensa tion repor t C ompe nsation at a glance Board c ompensation Com pe n sati o n for t h e 20 21 - 20 2 2 te rm of o f fi ce The e f fe c ti ve B oa rd com pe ns atio n for t he 20 21- 20 22 te rm of of fi ce (CHF 4 , 3 8 0, 0 0 0) was w ith in th e ma x i mu m amo unt a pp rove d at the 20 21 AG M (CHF 4 , 40 0 ,0 0 0). Effective compensation Approved c ompensation amoun t Shareholding of Board members Al l B oar d me mb er s he ld A B B sh are s at De cem - be r 31 , 2 02 1 , wor th at lea st 2 0 0 pe rce nt of t hei r 20 21 B oa rd co mp en sati on . * Ba s ed o n sh ar e pr i ce of C HF 2 6 . 59 , th e 2 02 1 LTIP re fe re nc e pr i ce , an d sh are s h el d at D ec em be r 3 1, 2 0 2 1 . 0 Peter Voser Jacob Wallenberg Gunnar Brock David C onstable Fr ederico Cura do La r s För be r g Je nn ife r X in -Z he Li Geraldine Mat chett David Meline Sat i sh Pai Ap r i l 201 5 June 1999 March 2018 Ap r i l 201 5 Ap r i l 201 6 A p r i l 2 0 17 March 2018 March 2018 Ap r i l 201 6 Ap r i l 201 6 Bo ar d appoi ntment at 1417 % ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT Compensa tion s truc ture as from 2022 Fi xe d co mp e ns at io n - base salary and benefits Var i ab l e co mp e ns at io n – Var i ab l e co mp e ns at io n – Share ownership Purpose and Ba se s al a r y co mp en sat es for t he r ol e an d re l ev ant experience; Benefits pr ote c t aga in st r is k s. Fa c ilitates attraction an d re ten ti on o f ta le nte d EC members Rewards annual Company, Business Area, functional and individual pe r fo rm an ce . A li gn ed w ith the C ompany’s A nnual Performance Plan Re wa rd s th e ach ie ve me nt of Co mp any g oa ls o ve r a three-year period. Encourages creation of long-term, sustainable va lu e fo r sh are h ol de r s, a nd de li ve r y of l o ng - te rm st rate gi c g oa ls . Al ig n ed w it h th e Com pa ny ’s L on g - term Performance Plan Aligns individual’s pe r son al w ea lt h at r is k di re c tl y to th e A BB s ha re pr i ce , an d EC me m be r s’ int er es ts w i th t ho se of sha re h ol de r s in o rd er to mai nt ain fo c us o n AB B ’s lon g -ter m succe ss Operation S al ar y i n c as h, b e ne f it s in k i nd , an d pe n si on contribution Annual awards, payable in ca sh af ter a o ne -ye ar performance per iod Annual grants in shares whi c h may ve st a f ter th re e yea r s, su bj ec t to performance conditions In di v i du al s re qu ir ed to ho ld A B B sh ar es Oppor tunity leve l Ba se d o n sco p e of responsibi lities, pe r son al exp e r ie n ce an d skil lset * hi gh e r L TI P op po r tu ni t y to be la rge l y of f se t by l owe r f i xe d cost b enefits CEO Other EC Members Perfo rmance indicators Ch an ge s to ba s e sal a r y ta ke int o acco un t individual per formance, fu tur e po ten ti al a nd external benchmark ing E xp ose d to A B B sh ar e price T otal EC compensation for 2021 The e f fe c ti ve EC com pe ns ati on fo r 20 21 (CHF 3 9, 1 5 7 ,0 4 6 ) is w i thin t he m a x im um am ou nt app rove d at th e 20 20 AG M (CHF 3 9, 50 0,0 0 0). Effective aggregat e compensation Approved a ggregate compensation The l ar ge r po r ti on of t he CEO ’s 202 1 tota l com - pe nsat io n wa s de li ve re d v ia v ar i ab le com pe nsat io n (61 pe rce nt re pr ese nte d by short -term incentive and long-term incentive ). F or the ot he r EC me mb er s, o n an ag gre gate l eve l, va r iab le c omp e nsat io n re pre se nted 5 4 p er cen t of their 2021 c ompe nsa tion. The f ollow ing chart show s the c omp osi ti on of t he 2 02 1 tota l com pe n - sati on fo r th e cur re nt EC , w it hou t con sid e rati on of for me r EC me mb er s. Minimum Ta r g e t Max imum 0% 100 % 150% CEO Minimum Ta r g e t Max imum 0% 150% 300% Minimum Ta r g e t Max imum 0% 150% 300% Other current EC Members Minimum Ta r g e t Max imum 0% 80 –10 0% 160 – 20 0% CEO and Corporat e Officers 80% Group financial results 20% Individual results Exhibit 3: Structure of EC compensation as from 2022 CEO Other EC members Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 16: Mix of target compensation for current and new EC members L TIP measures 50% A verage EPS 30% Relativ e TSR 20% ESG (CO 2 emission reduction) Business Area Presidents 8,247 ,610 28,514,999 20% Group financial results 60% Business Area results 20% Individual results 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incent ive 31% Long-term incentiv e Current Other EC Members New Other EC Members V a r i a b l e c o m p e n s a t i o n 6 1 % 2 5 % 1 5 % 1 0 % 2 5 % 2 5 % 2 4 % 9 % 7 % 2 4 % 3 6 % F i x e d c o m p e n s a t i o n 3 9 % V a r i a b l e c o m p e n s a t i o n 5 4 % F i x e d c o m p e n s a t i o n 4 6 % Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term inc entiv e 22% L ong-term incen tive Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive Exhibit 22: Compensation mix CEO Other EC Members 2 0 % 9 % 1 0 % 3 0 % 3 1 % 2 2 % 1 2 % 1 2 % 3 2 % 2 2 % CEO and Corporat e Officers 80% Group financial results 20% Individual results Exhibit 3: Structure of EC compensation as from 2022 CEO Other EC members Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 16: Mix of target compensation for current and new EC members L TIP measures 50% A verage EPS 30% Relativ e TSR 20% ESG (CO 2 emission reduction) Business Area Presidents 8,247 ,610 28,514,999 20% Group financial results 60% Business Area results 20% Individual results 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incent ive 31% Long-term incentiv e Current Other EC Members New Other EC Members V a r i a b l e c o m p e n s a t i o n 6 1 % 2 5 % 1 5 % 1 0 % 2 5 % 2 5 % 2 4 % 9 % 7 % 2 4 % 3 6 % F i x e d c o m p e n s a t i o n 3 9 % V a r i a b l e c o m p e n s a t i o n 5 4 % F i x e d c o m p e n s a t i o n 4 6 % Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term inc entiv e 22% L ong-term incen tive Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive Exhibit 22: Compensation mix CEO Other EC Members 2 0 % 9 % 1 0 % 3 0 % 3 1 % 2 2 % 1 2 % 1 2 % 3 2 % 2 2 % 80 ABB ANNU AL REPOR T 2021 03 COMPENSA TION REPORT Realized variable c ompensa tion in 2021 Rea lize d v ar ia bl e com pe ns ati on co nsi de rs t he AI P awa rd an d th e L T IP aw ard at th e e nd of th ei r respective performance cycles, refle cting actual AI P pay me nt an d L TI P ves ti ng b as ed o n achi eve - ment o f the plan specif ic performance meas ures. While the outcome o f the 2021 short -term incen - ti ve wa s ab ove th e ta rg et fo r all c urr ent EC me mbe r s (14 3. 4 pe rce nt o n aver age), the lo ng -te rm i nce nt iv e that ve ste d in 2 02 1 (2 018 L T IP) re mai ne d sub sta nt ial ly b e low th e ta rg et , w ith a f i na l ves ti ng l eve l of 57.4 pe rce nt of ta rge t . Realized total compensa tion in 2021 Considering the stated variable components ab ove, t he re ali zed tot al co mp en sati on i n 20 21 wa s ab ove th e ta rge t tota l com pe nsat io n for a ll cur re nt EC me mb er s, d r ive n by st ron g pe r for- man ce in 2 0 21 . CEO and Corporat e Officers 80% Group financial results 20% Individual results Exhibit 3: Structure of EC compensation as from 2022 CEO Other EC members Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 16: Mix of target compensation for current and new EC members L TIP measures 50% A verage EPS 30% Relativ e TSR 20% ESG (CO 2 emission reduction) Business Area Presidents 8,247 ,610 28,514,999 20% Group financial results 60% Business Area results 20% Individual results 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incent ive 31% Long-term incentiv e Current Other EC Members New Other EC Members V a r i a b l e c o m p e n s a t i o n 6 1 % 2 5 % 1 5 % 1 0 % 2 5 % 2 5 % 2 4 % 9 % 7 % 2 4 % 3 6 % F i x e d c o m p e n s a t i o n 3 9 % V a r i a b l e c o m p e n s a t i o n 5 4 % F i x e d c o m p e n s a t i o n 4 6 % Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term inc entiv e 22% L ong-term incen tive Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive Exhibit 22: Compensation mix CEO Other EC Members 2 0 % 9 % 1 0 % 3 0 % 3 1 % 2 2 % 1 2 % 1 2 % 3 2 % 2 2 % 1,000 ,000 2,000, 000 3,000, 000 4,000 ,000 5,000, 000 6,000 ,000 7 ,000 ,000 8, 000,000 9,000 ,000 0 CEO 150% 143 % 150% 145 % CHF 2,465, 000 Ot he r EC members * T a rg et A I P awa rd Rea lize d A I P awa rd Ma ximum AIP award 100 % 100 % 5 7. 4% 0% 114 .8% 200% 200% 200% Re lat i ve T SR Average EP S L TIP V esting (tot a l ) T arg et achieve ment leve l Realized achie veme nt level Max im um achieve ment leve l 81 ABB ANNU AL REPORT 2021 03 C OMPENSA TION REPORT Fur the r d etai ls re l ated to th e rea lize d com pe ns a- ti on of e ach EC me m be r an d eac h com pe nsat io n com po ne nt are s pe c if i ed i n E xhi bit 4 4. Shareholding of EC members Thr ee o ut of ni ne EC me mb e rs h ave achi eve d or exceeded their share ownersh ip requirement, whi le th re e me mb er s have b ee n n ewl y ap poi nte d to the EC i n the l as t t wo yea rs , and o ne m em be r is le av in g the Co mp any. Note that EC m em be rs m ay not se ll t hei r sh are s (except to m ee t ta x a nd so c ia l sec ur i t y cost s) until t he y achi eve th e re qui re d shareholding level. C om pensat ion gov e rnance The Co mp en sat io n Re po r t is p rep are d in a ccor- dance with t he Ordinanc e agains t Exces sive Remuneration in Listed S tock C orporations, the Directi ve on Information relating to Corporat e Gove rn an ce of th e SI X E xch ang e Re g ulat io n, t he rul es of t he s tock m ar kets of Swe d en a nd th e Uni ted St ates, w he re A BB s har es ar e als o lis ted , and t he p r in c ip le s of the Sw iss Cod e of B est Prac tic e for Co rp orate G ove rna nce o f economies uiss e. ABB’s Ar ticles of I ncorpora tion AB B ’s Ar t icl es of I nc orp or ati on , ap prove d by i ts shareholders, c onta in pro v isions on c ompensa - tion which govern and o utline the principles of com pe nsat io n re lat ing to o ur B oa rd of D ire c tor s and E xe cu ti ve Com mit te e. T he y ca n be fo und o n AB B ’s Corpo rate G ove rna nce we bs ite ne w.ab b. com / about/ corporate- governance and are s um - marized below: • C ompe nsation Committee ( A r t icl es 2 8 to 31) : The Co mp en sat io n Comm it tee (CC) i s com pos ed of a mi nim um of t hre e me mb e rs of the B o ard a nd ar e el ec te d in di v i du all y by th e sha reh ol de r s at the A nn ua l Ge ne ra l Me et i ng for a p er i od of o ne ye ar . I t sup po r ts t he B oa rd in establish ing and rev iewing the compensa t ion stra tegy , princ iples and pr ograms, in preparing the p rop os als to t he AG M on co mp en sat ion matt ers and in determining the compensation of the B o ard a nd of th e EC . Th e re spo nsi bil it ie s of the CC a re d ef in ed i n mo re d etai l in th e B oar d Regulations and C orporate Go vernance gui de li ne s, w hic h are a lso av aila bl e on A B B’s Corporate G overnance w ebsite. CEO 5,000 ,000 0 10 ,000, 000 15, 000, 000 20 ,000 ,000 25,000, 000 1 1 5% C HF 5 ,716 ,78 2 10 8% CH F 2 4 , 8 4 6 , 17 1 Ot he r EC members T arget t otal compensation Realized t otal c omp ensation *B a se d on s ha re p r ice o f CH F 2 6. 5 9, t he 2 0 2 1 L T I P ref er en ce p r ic e, a nd s ha res h e ld at D e ce mb er 3 1 , 2 02 1 . CEO s ha re ho ld in g require ment (5 00 %) Ot he r EC m e mb er s shareholding require ment (40 0%) Held shares Sh areholding requireme nt Björn Rosen gren Timo Ihamuotila Carolina Granat Maria Varsellona Theodor Swedjemark Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod EC appoint ment March 2020 A p r i l 2 0 17 January 2021 November 2019 August 2020 Ju ne 2 01 6 October 20 10 January 2017 Ap r i l 201 9 82 ABB ANNUAL REPORT 202 1 03 COMPENSA TION REPORT • C ompe nsation pr inciples (A r t ic le 3 3): Com pe nsat io n of th e me mb er s of th e Bo ard con sis ts of f i xed c omp e nsat io n onl y, whic h is de li ver ed i n ca sh a nd sh are s (w ith a n opt io n to el ec t fo r sh are s on ly). Com pe ns ati on of th e me mb er s of th e EC cons ist s of f i xed a nd variable compensation. V ariable compensation may com pr i se sh or t-ter m and l on g -te rm el em en ts . Com pe nsat io n may b e paid i n ca sh , sha res o r oth er b en ef i ts . • “S ay- on - p ay ” vot e (A r t ic le 3 4): S har eh ol de rs approve the ma xi mum aggrega te amount o f compensa tion of the Board for the following Bo ard te rm a nd of t he EC for t he fo ll ow in g financ ial year . • Sup p le me n ta r y am ou nt f or n ew EC m e mb e rs (A r t ic le 3 5) : If th e ma x i mu m ap prove d agg reg ate com pe ns atio n am ou nt is no t suf f i c ie nt to als o cove r the c omp e nsat io n of new l y pro mote d/hir ed EC m em be rs , up to 3 0 pe rce nt of th e la st m a x im um ap pr oved aggregat e amount shall be available as a su pp le me nt ar y a mo unt to cove r th e com pe nsat io n of suc h ne w EC me mbe r s. • Loans (A r ti cl e 37 ): Lo ans m ay not b e gra nte d to me mb er s of th e Bo ard o r of th e EC . Authority lev e ls in compensation matters The CC ac ts in a n ad v is or y c ap ac it y w hil e th e Bo ard r etai ns th e de c is io n auth or i t y on co mp en - sati on m atte rs , exce pt fo r th e ma x i mum agg reg ate com pe ns atio n am ou nts of t he B oa rd and o f the EC , w hic h are s ubj ec t to th e ap prov al o f sha reh ol de r s at the AG M . The a uth or i t y leve ls o f the d if fe re nt bo di es o n com pe nsat io n mat ter s ar e det ail ed i n E xhi bit 10 . Sh are ho ld er s al so have a co nsul tat ive vote o n th e pr i or ye ar ’s Com - pe nsat io n Re po r t at the AG M a nd a bi ndi ng vote on th e ma x i mu m agg re gate am oun t of com pe nsa - ti on of t he B oa rd for t he fo ll ow in g Bo ard te rm a nd of t he E C for the following financ ial yea r . CEO CC Board AGM Compensa tion policy including incentive plans Ma x i mu m ag gr eg ate co mp e ns ati o n am ou nt fo r th e EC CEO compe nsation Individual compensation o f ot her EC membe rs Pe r fo rm an ce t arg et s et t in g an d a sse ssm e nt of th e C EO Pe r fo rm an ce t arg et s et t in g an d a sse ssm e nt of ot he r EC m em be r s Shareholding r equirements f or CE O and other EC members Max imum aggregat e compensation amount for t he Board Individual compensation o f Board me mbers Compensation R eport Consul tative vote Proposal Recommendation Approval Ac ti v it ie s of t he CC i n 2 02 1 The CC m ee t s as of te n a s bus in ess re qu ire s bu t at le as t four t i mes a y ear. In 202 1 , th e CC he ld s eve n meetings and performed t he activit ies described in E x hibi t 11 . The C EO, the Chi ef H um an R eso urce s Of f i ce r (CHRO) an d th e He ad of Pe r for ma nce a nd Rew ard a lso at te nd al l or p ar t of th e CC me et in gs in an a dv isor y ca pac i t y . The C hair ma n of the CC may de c id e to inv ite oth er e xe cut iv es up on c on - sult ati on w i th th e CEO, a s app ro pr iate . E xe cut iv es do no t atte nd th e me et in gs o r th e par t s of th e meetings in wh ich their own compensation and / or p er fo rm anc e are b ein g di scu ssed . D et ails o n meeting att e ndance o f the individual CC me m - be rs (num be r of m ee ti ng s he ld d ur in g 20 2 1 , th eir aver age d urat io n, a s we ll a s th e atte nd an ce of th e in div idu al m em be rs) are pr ov i de d in th e se c ti on ti tle d “ B oa rd of Di re c tor s – Me et in gs a nd at ten - dance” of the C orporate Go vernance Rep ort . The C hai rma n of th e CC rep or t s to th e ful l B oar d af ter e ach CC m ee ti ng . Th e min utes of t he m ee t- in gs are av ail ab le to th e me mb er s of th e B oar d. The CC r etai ns i nd ep en de nt , ex te rn al ad v i sor s for compensa tion ma t ters. Pricewa terhouseCoopers (P w C) w as m an date d to prov ide c onsu lt in g serv ices rela ted to ex ecutive compen sa tion mat ter s. A pa r t fro m it s CC ad v is or y r ol e, P w C al so prov ide s hu ma n reso urc es, t a x a nd ad v i sor y ser v ic es to A BB . 83 ABB ANNUAL REPORT 2021 03 COMPE NSA TION REPORT Str ateg y Re v ie w of L on g -T e r m In ce nt iv e pl an ( L T I P) Review of link bet ween En v ironmental, Social and C orporat e Governanc e (ESG) and compensation EC Compensation Review of r ecommendations on indiv idual compensation for EC members Re v ie w of t he sh ar e ow ne rs hi p of EC m em be r s Re v ie w an d ap p rov al o f com p en sat io n fo r de p ar t in g EC m em be r s Pe r fo rm an ce – re l ati ng t o pa st p e r for ma nc e c yc le Performance – relating to forthcoming performance c ycle Con si de r ati on o f for e ca st a ch iev em e nt ag ain st p e r for ma n ce ta rg et s fo r un ves te d L T IP g ra nt s Compliance Re v ie w of CC Terms o f Re fe re nc e an d an nu al p la n Re v ie w of t he g en de r p ay po li c y a nd d isc l osu re i n Sw it ze rl a nd Review of feedback from Stak ehol der Enga gement meetings Regulatory and mark et updates Review of the Compensation Report for pub lication Pre p ar ati on o f ma x i mu m ag gr eg ate co m pe ns ati o n for t he B o ar d to be s ub mit te d fo r AG M vote Pre p ar ati on o f ma x i mu m ag gr eg ate co m pe ns ati o n for t he EC t o be su bm it te d fo r AG M vote Pay e q ui t y AB B b el ieve s th at a cul ture of d ive rs it y, incl us io n and e q ual o pp or tu nit y i s cr it i ca l to our b usi ne ss succe ss an d ma kes us st ron ge r . T his mi nd set i s sup po r ted by o ur D ive r sit y & I nc lu sio n Strate gy 203 0, t hat cl ea rl y de f in es A BB p la ns to e nsur e an in clu si ve cu ltur e and e qu al t reatm en t of eve r yo ne , reg ar dle ss of ge n de r , ag e, e thni c or i gin , se xu al or i ent ati on , etc . Equ al p ay is a cr i ti c al com po ne nt of this s tr ateg y. In Sw i tze rl an d, u nd er th e rev ise d Sw iss Fe d er al Ac t on G e nd er Eq ua lit y (G E A) t hat c ame i nto for ce la st ye ar , l eg al e nt it ie s w ith m or e tha n 10 0 em - pl oyee s ar e req ui red to co nd uc t a n eq ua l pay ana ly si s. A BB h a s com pl ete d this a na ly sis fo r al l four r eq ui red l e gal e nt it ie s an d the r esu lt s of this ana ly si s were v er i f ie d by an e x te rna l acco unt in g f irm , K PM G . A s a res ult , th e t wo in - sco pe l eg al ent it ie s for min g pa r t of A BB Sw i t zer lan d (A B B Sc hweiz AG a nd A B B Powe r Prote c ti on S A , whi ch now is p ar t of A B B Sc hwei z AG), mee t the e qu al pay re qui re me nt s and a re w i thin t he a pp lic ab le thresholds for salary and ov e rall c ompensation (sala r y pl us ac tu al b on us). At AB B H ead qu ar te rs , AB B A se a Br own B ove r i Ltd me et s th e eq ual p ay re qui re me nts a nd i s w ith in the a pp li ca bl e thr esh ol ds fo r sal ar y and ove r all com pe nsat io n (sala r y p lu s ac tua l bon us). The sma ll er l eg al e nti t y in s cop e, A B B Ma nag em ent Se r v i ce s Ltd, me et s th e eq ua l pay re qu ire me nt s for sa la r y an d sl ight ly u nd er ach ieve s th e par i t y leve l fo r over al l com pe ns atio n (sala r y p lu s ac tua l bo nus), as it ha s e mp loye es f rom d if fe re nt bu si - ne sses a ssi gne d w i th di f fer ent b on us p la ns, le adin g to va r y ing l eve ls of b on us pay me nt s. I n accor da nce w i th th e Sw iss l aw, ABB w ill co nt inu e to monit or these requir e ments. Board c om pensat ion polic y The c omp e nsat io n po lic y for th e me mb er s of th e Bo ard i s de sig ne d to att rac t a nd re tai n ex pe r i - en ced p e op le to th e Bo ar d of Di re c tors . Compensa t ion tak es into account the responsibil - ities, time and ef fort required t o fulfill their r oles on th e B oar d and i ts C ommi t tee s, an d is g en er al ly pos it io ne d at leve ls s imi la r to othe r Sw iss l iste d com pan ies o f com par ab le s ize an d com pl ex i t y. Compensa tion s truc ture A f ixe d fee i s pay ab le fo r the C hair ma n, Vi ce - Chai rm an an d me mb er s of th e B oar d, an d additional f ees are pa yable for chairing or mem - be rs hip of a B oa rd Com mit te e, e xcep t for th e Chairman and Vice- Chairman. Board members are paid fo r th eir s er v ice o ver a 1 2- m ont h pe r io d th at sta r t s w ith t he ir e le c ti on at th e AG M. P aym ent o f fee s is m ade i n se mi -a nn ua l ins tal lm en ts i n arrears. 84 ABB ANNUAL REPORT 2021 03 C OM PENSA TION REPORT Eac h fee i s de li ve red i n c ash a nd sh are s, a lth ou gh Bo ard m em be r s may el e c t to rec eiv e all t hei r fe es in sh are s. T he nu mb er of s har es d el ive re d is ca lcu late d pr i or to ea ch se mi - an nua l pay me nt by div idi ng t he m one ta r y am ou nt to whi ch t he B oa rd me mb er s are e nt it le d by th e aver age c los ing p r ic e of the A B B sh are ove r a pr ed ef i ne d 3 0 - day pe r io d . The s har es a re subj ec t to a t hre e - yea r re str i c ti on pe r io d du r in g whi ch th ey c ann ot b e sol d, t ran s- fer re d or p le dg ed . A ny res tr i c ted sh are s ar e unb lo cke d wh en t he B oa rd me mb er l eave s the Board. Imp lem entation of Board compensa tion polic y Bo ar d fe es by r ol e A s me nt ion e d abo ve, th e le vel s an d mix of c om - pe nsat io n of B oar d me mb er s are r eg ul arl y compared aga inst t he compensa tion of non - exe cu ti ve B oar d me mb er s fro m a cr oss- sec t i on of p ubl ic ly t rad ed c om pani es i n Sw it ze r - lan d th at are pa r t of th e Sw iss M ar ket In de x (i .e ., Ad ecc o, Al con , G eb e r it , Giv au dan , H ol ci m, L onz a , Ri ch em ont , SG S , Sik a, Sw issco m, Sw i ss Life , Zur ic h In sura nc e). Such a re v i ew wa s la st u nd er- take n in 2 02 0, an d th er e wa s no ad ju stm ent m ade to Bo ard fe e s for th e ter m of of f ic e fro m the 2 0 21 AGM to th e 20 2 2 AG M, a s se t out i n E xhi bit 1 2 b e l ow. Chairman of the Board Vice- Chairman of t he Board Me mb e r of th e B oa rd Additional comm ittee fees : Chairman of F ACC Ch air ma n of CC o r GN C Me mb e r of FACC Me mb e r of CC o r G NC (1) Th e C hai rm an a n d th e Vi ce - Ch ai rm an d o no t re ce iv e any ad di ti on a l com mi t te e fe es f or t he ir r ol es o n th e G NC . (2) CC: Compensation Committee, FA CC: F inance, Audit and Compliance Committee, GNC: Governance and Nomination C ommittee. T otal Board compensation The c omp e nsat io n paid to t he B oa rd me mb e rs fo r the c al en da r yea r 20 21 a nd fo r th e ter m of of f ice fro m the 2 0 21 AG M to the 2 0 22 AG M a re dis cl ose d in E x hibi t 1 3 be low a nd i n E xhi bit s 3 5 and 3 6 , respectively, in the section “Compensa tion tables and share owner ship tables” . At the 2 0 21 AG M, t he sh ar eh ol de rs app rove d a ma xi mu m agg re gate com pe ns ati on amo unt of C HF 4 .4 0 mi ll ion f or th e 20 21 - 20 2 2 Bo ard te rm . Thi s am oun t wa s lowe r th an th e approved amoun t for the previous Board term, ref le c t in g the r ed uc t io n of th e total n um be r of me mb er s of th e Bo ard f rom e l eve n to ten . Th e Bo ard c omp e nsat io n to be pai d is C HF 4 . 3 8 mi l - lio n an d is th er efo re w it hin th e am ou nt ap prove d by the s har eh ol de rs . Th e B oar d com pe nsat io n paid fo r th e pre v io us 2 02 0 - 20 21 te rm of of fi ce wa s be low t he a mou nt ap pr oved by t he sh ar e - hol d er s du e to the vo lu nta r y d onat io n of 10 pe rce nt of fe es fo r a si x-m ont h pe r io d du r in g 20 20 to f i ght th e im pac t s of th e COV ID -19 pandemic. Board of Directors Board term Number o f members T otal c ompensation Max imum aggregat e compensation amount ap pr ove d at pr ev i o us AG M Compensa tion o f f ormer Board mem bers In 2 02 1 , no p aym ent w a s mad e to any for me r Board member . Compensa tion f or s erv ices rendered In 2 02 1 , A BB d id n ot pay any fe es o r co mp ens ati on to the m em be rs o f the B o ard fo r ser v i ces re n - de re d to AB B oth er t ha n thos e dis cl ose d in thi s Compensa t ion Report. Sha rehol ding of Boa rd mem bers The m e mbe r s of th e Bo ard co ll ec ti vel y ow ne d le ss tha n 1 pe rce nt of A BB ’s total s har es ou ts ta ndi ng at De cem be r 31 , 202 1 . E xhi bit 3 7 in th e se c ti on “ Com pe nsat io n ta bl es and s har e own er shi p ta bl es” s hows t he nu mb er o f AB B sh are s he ld by e ach B o ard m em be r at De ce m - be r 31 , 2 02 1 an d 20 20 . E xcept a s d esc r ib ed i n thi s E xhi bit , no m em be r of th e Bo ar d and n o pe r son cl ose ly l inke d to a me mb er of t he B oa rd he l d any sha res of A B B or o pti on s in A B B sha res . Sh are s de li ver ed to B oa rd me mb e rs a s pa r t of the ir co mp en sati on a re bl oc ked fo r a pe r io d of thr ee ye ar s. E x hibi t 14 sh ows th e wea lth at r i sk for eac h Bo ard m em be r , co mp ar i ng th e va lu e of he l d sha res at D ec em be r 31 , 2 02 1 w it h th e total c om - pe nsat io n for t he 2 02 1- 2 02 2 te rm of of f i ce . At De ce mb er 3 1 , 20 21 , a ll B oa rd m em be rs h el d A BB sha res wo r th at le a st 20 0 p e rce nt of th eir 2 02 1 total compensation. 85 ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT Executive C om mittee compensa tion polic y The EC co mp en sat ion p ol ic y r ef le c ts A B B’s com - mitm en t to attr ac t , mot iv ate an d ret ain p eo pl e w ith t he t al ent n ec essa r y to st re ngt he n it s po si - ti on a s a le adi ng g lo bal te ch no lo gy co mp any. Compensa tion s truc ture The c omp e nsat io n str uc tu re is d es ign ed to b e com pe ti ti ve, b a sed o n pe r fo rma nce , an d to en cou rag e exe cu ti ves to d el ive r ou ts ta ndi ng results and creat e sustainable shareholder value w ith ou t ta ki ng e xce ssive r isk s. T he EC com pe ns a- tion framew ork therefore balances fixed and variable compensation. V ariable compensation is prov ide d th rou gh s hor t-ter m an d lo ng - term in cent i ves b ase d o n str ategi c , f in an c ial a nd E SG objectives, recogn izing Group , Business Area and Corpora te F unction per formanc e as w e ll as ind i - v id ua l pe r for ma nce . This s tru c tur e is li nke d to our s trate g y and i s ill us trate d in E x hibi t 1 5. A sig nif i ca nt po r t ion of tot al c omp e nsat io n de pe nd s on v ar i ab le pay co mp on en ts , whi ch require the a chiev ement o f challenging pe rfor - man ce t arg et s, i n ali gnm e nt w it h AB B A nn ual a nd Long- T erm Performance P lans. The t ar get A I P awa rd is d ef i ne d as a p er cen tag e of ba se sa la r y, curre ntl y 10 0 p erc ent fo r al l EC me mb er s. T he re is n o awa rd un de r th e AI P if pe r for man ce is b e low t hre sho ld s on a ll f in an c ial performance measur es. When per formance exce e ds ta rg et s, th e ma x i mu m awar d is c ap pe d at 15 0 p erc ent of t he t arg ete d am oun t. The t ar get L T IP g ra nt size i s def i ne d a s a pe rce nt- age of b as e sal ar y , c ur rent ly 1 5 0 p erc ent fo r th e CEO an d 80 to 10 0 p e rce nt for a ll oth er EC m em - be rs . Th ere w ill b e no aw ard u nd er t he L TI P if pe r for man ce is b e low t hre sho ld s for a ll ap pl ic ab le mea su res . Wh e n pe r for man ce e xcee ds t ar get s , the m a x im um aw ard i s ca pp ed at 2 0 0 pe rce nt of the c onditional gran t . * B a se d on s ha re p r ice o f CH F 2 6. 5 9, t he 2 0 2 1 L T I P ref er en ce p r ic e, a nd s ha res h e ld at D e ce mb er 3 1 , 2 02 1 . Peter Voser Jacob Wallenberg Gunnar Brock David C onstable Fr ederico Cura do La r s För be r g Je nn ife r X in -Z he Li Geraldine Mat chett David Meline Sat i sh Pai at 1417 % 86 ABB ANNUAL REPOR T 2021 03 COMPENSA TION REPORT Fi xe d co mp e ns at io n - base salary and benefits Var i ab l e co mp e ns at io n – Var i ab l e co mp e ns at io n – Share ownership Purpose and Ba se s al a r y co mp en sat es for t he r ol e an d re l ev ant experience; Benefits pr ote c t aga in st r is k s. Fa c ilitates attraction an d re ten ti on o f ta le nte d EC members Rewards annual Company, Business Area, functional and individual pe r fo rm an ce . A li gn ed w ith the C ompany’s A nnual Performance Plan Re wa rd s th e ach ie ve me nt of Co mp any g oa ls o ve r a three-year period. Encourages creation of long-term, sustainable va lu e fo r sh are h ol de r s, a nd de li ve r y of l o ng - te rm st rate gi c g oa ls . Al ig n ed w it h th e Com pa ny ’s L on g - term Performance Plan Aligns individual’s pe r son al w ea lt h at r is k di re c tl y to th e A BB s ha re pr i ce , an d EC me m be r s’ int er es ts w i th t ho se of sha re h ol de r s in o rd er to mai nt ain fo c us o n AB B ’s lon g -ter m succe ss Operation S al ar y i n c as h, b e ne f it s in k i nd , an d pe n si on contribution Annual awards, payable in ca sh af ter a o ne -ye ar performance per iod Annual grants in shares whi c h may ve st a f ter th re e yea r s, su bj ec t to performance conditions In di v i du al s re qu ir ed to ho ld A B B sh ar es Oppor tunity leve l Ba se d o n sco p e of responsibi lities, pe r son al e xp e r ie n ce an d skil lset * hi gh e r L TI P op po r tu ni t y to be la rge l y of f se t by l owe r f i xe d cost b enefits CEO Other EC Members Perfo rmance indicators Ch an ge s to ba s e sal a r y ta ke int o acco un t individual per formance, fu tur e po ten ti al a nd external benchmark ing E xp ose d to A B B sh ar e price From 20 2 2 , the m ix of f i xed a nd v ar i ab le t arg et com pe nsat io n el e me nts fo r ne w EC me mb er s w il l be ad jus ted to p rov i de a g reate r em ph as is o n va r iab le p ay. This w il l be ac hie ved by i nc rea si ng the L T IP g ran t size fr om 10 0 p erc ent to 1 5 0 pe r- cent o f ba se sa lar y, while re d uc in g th e le vel of pension con tr ibutions and other benefits. The reduction of pension contributions and o ther be ne f it s subs ta nti al ly of f se ts t he in cr ea se of th e L T IP c omp on en t, a nd re pr ese nt s a shif t from gua ra ntee d pay e le m ent s to pay at r is k. F ixe d com pe nsat io n for n ew EC me mb e rs w i ll re pr ese nt 40 p e rce nt of th eir t ar get tot al co mp en sat ion , in com par i son to 5 0 p erc ent fo r cu rre nt EC me m - be rs . E xhi bit 16 b e low i ll ust rates t he ch an ge s for new EC m em be rs i n mo re de tai l. CEO Minimum Ta r g e t Max imum 0% 150% 300% Minimum Ta r g e t Max imum 0% 150% 300% Other current EC Members Minimum Ta r g e t Max imum 0% 80 –10 0% 160 – 20 0% CEO and Corporat e Officers 80% Group financial results 20% Individual results Exhibit 3: Structure of EC compensation as from 2022 CEO Other EC members Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 16: Mix of target compensation for current and new EC members L TIP measures 50% A verage EPS 30% Relativ e TSR 20% ESG (CO 2 emission reduction) Business Area Presidents 8,247 ,610 28,514,999 20% Group financial results 60% Business Area results 20% Individual results 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incent ive 31% Long-term incentiv e Current Other EC Members New Other EC Members V a r i a b l e c o m p e n s a t i o n 6 1 % 2 5 % 1 5 % 1 0 % 2 5 % 2 5 % 2 4 % 9 % 7 % 2 4 % 3 6 % F i x e d c o m p e n s a t i o n 3 9 % V a r i a b l e c o m p e n s a t i o n 5 4 % F i x e d c o m p e n s a t i o n 4 6 % Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term inc entiv e 22% L ong-term incen tive Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive Exhibit 22: Compensation mix CEO Other EC Members 2 0 % 9 % 1 0 % 3 0 % 3 1 % 2 2 % 1 2 % 1 2 % 3 2 % 2 2 % CEO and Corporat e Officers 80% Group financial results 20% Individual results Exhibit 3: Structure of EC compensation as from 2022 CEO Other EC members Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 16: Mix of target compensation for current and new EC members L TIP measures 50% A verage EPS 30% Relativ e TSR 20% ESG (CO 2 emission reduction) Business Area Presidents 8,247 ,610 28,514,999 20% Group financial results 60% Business Area results 20% Individual results 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incent ive 31% Long-term incentiv e Current Other EC Members New Other EC Members V a r i a b l e c o m p e n s a t i o n 6 1 % 2 5 % 1 5 % 1 0 % 2 5 % 2 5 % 2 4 % 9 % 7 % 2 4 % 3 6 % F i x e d c o m p e n s a t i o n 3 9 % V a r i a b l e c o m p e n s a t i o n 5 4 % F i x e d c o m p e n s a t i o n 4 6 % Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term inc entiv e 22% L ong-term incen tive Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive Exhibit 22: Compensation mix CEO Other EC Members 2 0 % 9 % 1 0 % 3 0 % 3 1 % 2 2 % 1 2 % 1 2 % 3 2 % 2 2 % Minimum Ta r g e t Max imum 0% 100 % 150% 87 ABB ANNU AL REPORT 2021 03 C OMPENSA TION REPORT Competit ive positioning o f compensation The B o ard co nsi de r s com pe ti ti ve ma rket d ata when setting the compensation policy f or the EC . It is a lso o ne of se ver al f ac tor s in p osi ti oni ng th e tar ge t com pe nsat io n for i nd iv i du al EC me m be rs which include: • market v al ue of t he ro le ( compensation benchmarking); • indi v i dua l pr of il e of the EC m em be r in te rm s of exper ience and sk ills; • personal performance and po tential. The CC c ond uc te d a co mp reh en si ve rev iew of i ts app ro ach to co mp et it ive b en ch ma rk in g in 2 02 0, whi ch l ed to th e cr eati on of t hre e b en ch mar k in g pe er g rou ps, d es ig ne d to match th e size , sco pe and c omp l ex i t y of AB B , an d exc lu de co mp ani es from t he financial serv ices sector . The u se of th es e pe er g rou ps d ep en ds o n the nature o f the r ol e and t he so urc e of rel ev an ce . For ex amp le , a st ron ge r em ph as is is p la ced o n th e Gl ob al I ndu st r y pe e r gro up fo r op er ati ona l rol es and in compensa t ion design, and on the Pan- European Mark et peer group for functional rol es . In a ll c ase s, t he oth e r two p e er g rou ps ar e use d to str ess te st th e f in din gs of t he p r ima r y pe er g rou p (see th e sum ma r y in E x hibi t 17 bel ow). Pe er G r ou p Composition Rationale Global Industr y nies , match in g th e sc al e an d co mp l ex i t y of A B B Focus for Business Area roles and benchmark - ing compensa t ion design Pan- European Mark et , matc hi ng t he s ca le a nd c om pl e x it y of A B B Foc us f or Co rp o rate r ol es ; con ti nu it y a nd st abi li t y of d ata p oi nt s Swiss Market , matc hi ng th e sc al e an d co mp le x i t y of A BB Sw is s lis t in g an d lo c ati on o f he ad qu ar t er s (1) A B SK F, Al sto m , Ai rb us , At la s Co pc o, D en so , Eat on , Em er s on E le c tr i c , Ho n ey w el l, M i ts ubi sh i El ec t r ic , M it su bi sh i He av y I n du st r ie s, S c hn ei de r El ec t r ic , S ch in dl e r, Sie me ns , Th e rm o Fi sh er S c ie nt i f ic , Toshi ba a nd Trato n . (2) A B I nB ev, A di da s , Ai r Li qu id e, A s so c iat ed B r i ti sh Fo o ds , A st ra Ze n ec a , B AE S ys te ms , Ba ye r, Bou yg ue s, B r i ti sh A m er i c an Toba cco , Co mp as s Gr ou p, Co nt i ne nt al , CR H , D an on e, E nd e sa , E ssi l or Lu xot t ic a , Fre se ni us , Fre se ni us M e di ca l C ar e, G l a xoS mi th K li ne , H ei de l be rg Ce m en t, He in e ken , H en ke l, H e nn es & M au r it z , Ib e rd ro la , I mp e r ia l Br a nd s, I nd us tr i a d e Di se no Tex t il , J er on im o Ma r t in s SG P S , Kue h ne & N ag e l, H ol c im , Lin d e, L ’ O re al , Mi ch e li n, N at io n al G r id , N atu rg y En er g y Gr ou p, N ok i a , No va r ti s , Nov o No rd is k , OM V, Phi li p s, R io T in to, S af ra n, S ai nt G o bai n, Sanofi, SAP , Schneider Elec tric, T elefonaktiebolaget LM Ericsson, Thales, Umicore, Veolia E nvironment, Vinci and Vodafone. (3) S MI : Sw i ss M ar ket I n de x ; SM I M: S w iss M a rke t In d ex M I D; Co m pa ni es i nc lu d e: A d ec co, G e be r i t, G iv au d an , G le nc or e, K ue h ne & N ag el , H ol c im , Nestle, Novartis, Richemont, Roche, Schindler, SGS, Sika, STMicroelectronics, Swa tch and S wisscom. Sin ce be nc hm ark r ev i ews a re pe r fo rme d eve r y othe r ye ar , t he co mpa r iso n of A BB to i ts c omp e n - sati on b en ch ma rk in g pe e r gro ups , show n in E xhi bit 1 8 be lo w is ba se d on t he l as t rev i ew i n 20 20. T his d ata sh ows th at AB B is t y pi ca ll y pos i - tioned at the median o f k ey compara tor indicat ors ( market c apitalization, revenues, number of employees ) aga inst the Global Industry and Pan- European Mark et peer groups, an d a t the upp e r qua r t il e of the Sw iss Ma rket p ee r gro up. It is t he in tent io n to pos it io n ta rge t com pe ns a- ti on fo r in div idu al EC m em be rs b et we en m e dia n and u pp er q ua r ti le of t he r el ev ant p ee r gro up (s ) considering the other fa c tors re ferenced a bove (e.g. , the EC m em be r ’s ski ll s, e xp er i en ce , pe r for- man ce , pote nt ial ). CEO and Corporat e Officers 80% Group financial results 20% Individual results Exhibit 3: Structure of EC compensation as from 2022 CEO Other EC members Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 16: Mix of target compensation for current and new EC members L TIP measures 50% A verage EPS 30% Relativ e TSR 20% ESG (CO 2 emission reduction) Business Area Presidents 8,247 ,610 28,514,999 20% Group financial results 60% Business Area results 20% Individual results 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incent ive 31% Long-term incentiv e Current Other EC Members New Other EC Members V a r i a b l e c o m p e n s a t i o n 6 1 % 2 5 % 1 5 % 1 0 % 2 5 % 2 5 % 2 4 % 9 % 7 % 2 4 % 3 6 % F i x e d c o m p e n s a t i o n 3 9 % V a r i a b l e c o m p e n s a t i o n 5 4 % F i x e d c o m p e n s a t i o n 4 6 % Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term inc entiv e 22% L ong-term incen tive Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive Exhibit 22: Compensation mix CEO Other EC Members 2 0 % 9 % 1 0 % 3 0 % 3 1 % 2 2 % 1 2 % 1 2 % 3 2 % 2 2 % 88 AB B ANNU AL REPORT 2021 03 C OMPENSA TION REPORT capitali- zati on Rev enues Nu m be r o f em pl oyee s ABB G lobal Industry Upper Quartile Median Lower Quartile Pan-European Upper Quartile Median Lower Quartile S Upper Quartile Median Lower Quartile (1) Da ta s ou rc es fo r m ar ket c ap it al iz at io n , rev en u es a nd n um b er o f employees are Thomson Reuters or Annual Reports. (2) M ar ket c a pi ta li zat i on a nd r ev en ue s ar e in C H F mi ll io ns . (3) M ar ket c ap it al iz at io n is a ve ra ge d ov er a p e ri o d of th re e m on th s (M ay 3 , 20 2 0 un ti l A ug us t 3 , 20 2 0). (4) Am ou nt s h ave b ee n t ra ns lat ed to C H F us in g th e on e - ye ar ave ra ge r ate f ro m Ju l y 1 , 20 19 u nt i l Ju ne 3 0 , 20 2 0. (5 ) Rev en u es a nd n um b er o f em pl oy ee s a s pe r l as t f in an c i al ye ar pr i or to O c to b er 2 0 20 . (6) N um be r of e m pl oye e s in f ul l -t i me e q ui va le nt ( F TE ) u nl e ss F TE in for ma ti on w a s no t ava il ab l e, t he n i n tot al n um be r of empl oyees . Compensa tion elements E xhi bit 1 5 ab ove se ts o ut th e pu rp ose a nd li nk to str ateg y, the op er ati on , the o pp or tu nit y l eve l an d the p e r form an ce me as ure s. I n add it io n, thi s sec t i on pr ov i de s fur t he r de tail s for e ach c omp e n - sati on e le m ent . Fi xed co m pe n sati o n - bas e sa la r y a nd b e ne f it s Pur pos e an d lin k to str ateg y Ba se s ala r y co mp en sates fo r th e rol e an d re lev ant ex pe r ie nc e; B en ef i ts p rote c t agai nst r i sk s, an d fac i lit ate the at tr ac ti on a nd re tent i on of t ale nte d EC me mbe r s. Ba se s ala r y i s paid i n ca sh . B en ef i ts co nsi st primar ily of retirement, insurance and healthcare pl ans t hat are d es ig ne d to prov ide a r ea son ab le leve l of su pp or t fo r th e em pl oyee s an d the ir de pe nd ant s in c a se of re ti re me nt, d isa bil it y or d e ath . Op po r tuni t y lev el s Ba se s ala r y i s set w i th re fer en ce to th e scop e of responsib ilities, personal experience and skills and c omp et it i ve ma rket dat a . Be ne f it p la ns are s et i n lin e w it h the l oc al c om - pet i ti ve an d le ga l env iro nme nt a nd ar e, at a minimu m, in a ccordance with the legal require - me nts o f the r esp ec t i ve cou ntr y. The m on et ar y v al ue of b a se sal ar y and b e nef i ts are d isc lose d i n E xhi bit 3 8 “ EC com pe ns ati on i n 2 0 2 1 ”. Performance meas ures and weighting Ba se s ala r y i s adj uste d co nsi de r in g the f ac tor s set o ut un de r op po r tuni t y le vel s ab ove, t he e xec u - ti ve’s pe r for ma nce a s we ll a s the ir f utur e pot ential. Var ia b le co m pe ns ati on - A n n ua l I nce nt ive P la n Pur pos e an d lin k to str ateg y The A I P is d esi gn ed to r ewa rd EC me mb er s for t he Gro up’s res ult s, t he re sul ts of t he ir B usi ne ss A rea or Co rporat e Function and t heir indiv idual perfor - man ce ove r a ti me h or izo n of on e yea r , an d is ali gn ed w i th th e A nn ual P er fo rm an ce Pla n ap - prove d by t he B oa rd. Oppor tunity levels The A I P op po r tuni t y lev el s for th e EC are 10 0 p e r - cent o f ba se sa lar y at tar ge t w ith a m a x im um op po r tunit y o f 1 50 p er cent . Performance meas ures and weighting The A I P str uc tu re is d es ig ne d to inc ent i v ize operational delivery and underpin our perfor - man ce cu ltu re . A s suc h, i t is foc use d o n key pr i or it i es, w ith a ma xi mu m of f ive m ea su res . • A commo n G rou p mea su re w it h a 20 to 25 p erce nt weight ing . • Up to thre e Corporat e or Business A rea mea su res , w it h a 55 to 6 0 pe rce nt wei ght in g. • An in di v id ua l me asu re w i th a 20 p er cen t weight in g. This persona l componen t is informed by up to th re e key pe r for man ce i ndi cato rs ( KP Is) whi ch m ay inc lu de a co mbi nat ion o f qua nt itat iv e and q ua lit ati ve go al s. – Fro m 20 2 2 , at lea st t wo of t he se K PIs w ill rel ate to ES G , e.g ., CO emissions, saf ety or female leader tar gets. – B u sin ess A re a Pre sid e nts w ill co nt inu e have a safet y K P I, a nd an e nv i ro nme nt K PI (CO e mis - sio ns) wi ll b e intr od uce d. – Co rp or ate Of f i ce rs w i ll h ave a soc ia l K PI (gender repr esenta tion on mana gement le vel) or a go ver nan ce K PI ( inte rn al co ntro ls), and an environment KPI ( CO emissions ). – The final outcome against this indiv idual mea - sure w i ll b e a di scre ti on ar y jud gm ent b as ed o n the c ombined performance against all per - sonal KPIs. • The CC/B oar d ha s a dis cre ti on ar y au tho r it y to adj ust t he re sul ts a nd/ o r the aw ard . Thi s specif ically includes a downwards a djustment based on s afe ty performance, including fatal ities. ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT A sum mar y of the c omp osi ti on a nd tot al we ight- in g of the m ea sur es fo r all EC m em be rs i s set o ut in E x hibi t 19. te rm i n ce nt ive m e as ur e s fo r EC m e mb e rs CEO a n d Cor p or ate Off ice rs Bu si n es s Ar ea Presiden ts Common Group measure Ot he r G ro u p measures Up to t hr ee measures n.a. Bu si n es s Ar ea measures n.a. Up to t hr ee measures Individual measure Function-spec ific Business-specific To t a l (1) Co rp o rat e Of f i ce r s in cl ud e : Chi e f Fi na nc i al O f f ic e r , Chi e f Hu ma n Re so ur ce s Of f i ce r, Ge ne ra l Co un se l an d C hie f Co mm un ic at i on s and Sustainab ility Officer. Other design f eatures For ea ch p er fo rm anc e mea su re, a t ar get w ill b e set c orresponding to the expec ted lev el of perfor - man ce th at w il l ge ne rate a t arg et (10 0 p erc ent) awar d. Fo r all e xce pt th e in di v id ua l mea - sure , a mini mu m le vel of p er form an ce, b el ow whi ch th er e is n o awar d (thres ho ld ) an d a ma x i - mum l eve l of p er fo rma nce , ab ove w hic h the aw ard is c app e d at 15 0 p erc ent of t he t arg et (cap), wi ll als o be d ef in e d. Fo r qu ant it ati ve Gr oup, B us in ess Ar ea an d Func t i ona l me asu re s, th e awar d per centag e - achie veme nts b et wee n thres hol d and tar ge t, a s we ll a s be t wee n ta rg et an d ca p are determined by linear in terpolations between these po ints. The out comes of financial AIP measur es are subj ec t to a pp rop r iate di scr et ion ar y upwa rd o r downwar d adjustments f or non- ope rational items and o ther adj ustment princ iples agr eed with the Board. In 2 02 1 , pr ogr ess ag ains t de f ine d E SG t arg et(s ) was a “boundary condition ” f or making AIP awar ds. U nd e r this a pp roac h, t he B oa rd agr ee d to rev i ew w he the r th e Com pany h ad ma de su f f ic i ent pro gre ss at the e nd o f the ye ar to j ust if y mak i ng the i nd ic ated A IP aw ard . I f , i n th e opi nio n of the Bo ard , in suf f i c ie nt pro gr ess ha d be en m ad e, th e AI P awa rd mig ht have b ee n re du ce d on a di scr e - ti on ar y b as is . Foll ow i ng fe e dbac k fro m sta keh ol de rs , this p rac t i ce w il l be d isco nt inu e d in 20 2 2 and r ep lac ed w i th th e ap pro ach to E SG i n th e AI P in di v i dua l me asu re d esc r ib ed a bove , an d in the L T IP d esc r ib ed b e low. Var ia b le co m pe ns ati on - L on g -T e rm I nc en ti ve Pur pos e an d lin k to str ateg y Rew ard s th e achi eve me nt of p red ef i ne d pe r fo r - man ce go al s over a t hre e ye ar p er i od . Enc our age s the crea t ion of long-term, sustainable shar e - hol d er v al ue c reat io n and i s ali gn ed w ith th e Company’s Long - T erm Per formance Plan ap - prove d by t he B oa rd. Oppor tunity levels The L T IP o pp or tu nit y l eve ls fo r the EC a re 8 0 to 10 0 pe rce nt of ba se s ala r y at t arg et , w it h a ma x i - mum o pp or tu nit y of 1 60 to 2 0 0 pe rce nt . For n ew EC me mbe r s fro m 20 2 2, t he o pp or tu nit y l eve ls w il l be 1 5 0 pe rce nt an d 3 0 0 pe rce nt , res pe c ti ve ly. This c ha ng e, to b e mos tl y of fse t by a re du c ti on i n pe nsi on a nd oth e r be ne f it s cost s, i s ta k ing i nto accou nt his tor i ca l L T IP ve st in g le vel s an d the r i sk s asso c iate d in m ov in g fro m f i xed to v ar ia bl e pay. For th e CEO th e op po r tuni t y lev el s are 1 5 0 pe r- cent o f ba se sa lar y at tar ge t, w i th a ma x imu m op po r tunit y o f 30 0 p er cen t. Performance meas ures and weighting The L T IP w i ll h ave, f rom 2 02 2 , th re e pe r for ma nce mea sure s: T otal Shareholder Return (TSR) • Achie vem en t again st th is me as ure i s dete rm ine d by A B B’s rel ati ve T SR p er fo rm anc e again st a d ef in e d pe er g rou p. • The con st itu ent s of th e pe e r gro up an d th e app ro pr i ate thre sho ld (ze ro), targ et (10 0 pe rce nt) an d ma x i mum ( 20 0 p er cen t) award poi nts a re re v ie wed by t he CC o n an annual basis. • The TS R c alc ul ati ons a re ma de fo r the r efe re nce period beginning in t he year of the conditional gra nt of th e sha re s and e nd in g thr ee ye ar s late r . The evalua tion is performed by an independe nt thir d par ty. • For gra nts f rom 2 0 22 , t he awa rd cu r ve fo r th e TS R me asu re w i ll b e adj uste d to be co me mo re challenging. The threshold point for awards, f or whi ch ve st in g sta r t s, w i ll mov e fro m the 2 5th pe rce nt ile to t he 5 0 th pe rce nt il e (P 50) of th e TS R pe er g rou p, i. e. , the re w i ll b e no aw ard fo r per formance below P5 0. • V e st in g for P 50 ac hie vem en t rem ains at 10 0 pe rce nt of ta rg et , an d vest i ng fo r a 75th pe rce nt ile ( P 75) ac hie vem en t leve l re mai ns at 20 0 p erc ent of t ar get (ca pp ed ). Th er e w il l be a li ne ar ve st in g for a n achi eve me nt be t wee n P5 0 and P 75 ( 10 0 to 20 0 pe rce nt of t arg et) ABB ANNU AL REPORT 2021 03 COMPENSA TION REPORT Earnings Per Share (EPS) • Achie vem en t again st th is me as ure i s dete rm ine d by A B B’s aver age EP S over a t hre e - yea r pe r io d . • The aver age E PS r esu lt is c al cu lated f rom t he sum of EP S fo r eac h of the t hre e re le va nt yea rs , div id ed by t hre e . • EPS is d ef i ne d as “ D il ute d ea rni ngs p e r sha re attr i bu ta bl e to AB B sh are ho ld er s, c al cu lated using Inc ome fr om con t inuing opera tions, net of ta x , un le ss th e Bo ard e le c t s to ca lc ulate u sin g Net income for a particular y ear” . • Appropriat e threshold (zero ), target (10 0 pe rce nt) an d ma x i mu m (20 0 p er cen t) awar d poi nts a re re v ie wed by t he CC o n an annual basis. • Per fo rma nce t arg et p oint s ar e set u sin g th e lo ng -te rm s trate gi c pl an , ca lib rate d agai nst a n “out sid e - in” v iew, tak i ng i nto acco unt th e grow t h ex pe c t atio ns , r isk p rof il e, i nve stm ent leve l s and p rof i tab ili t y lev el s that a re t yp ic al fo r the i nd ust r y. This “out si de -in ” app ro ach is prov ide d by e x te rna l ad v iso rs a nd a ssum es that i nvesto rs e x pe c t a r isk- adj uste d ret urn o n the ir i nves tme nt , whi ch i s ba se d on ma rket value ( and not on book value ) and transla tes suc h ex pe c te d retu rns ove r a th re e - yea r pe r io d int o EPS targets. • Adju stm ent s to th e ou tcom e of the E PS m ay be con sid er ed fo r ite ms w hic h are n ot pa r t or th e resu lt of t he no rm al co ur se of bu sin ess op er ati on an d/ or w hic h we re not co nsi de re d, either b y wa y of inclusion or exclusion, for t he tar ge t -se t ti ng of a sp e c if ic L T IP l aun ch . On l y the net i mp ac t of su ch adj us tme nt s ove r the ve st in g pe r io d of th e resp e c ti ve L TI P gr ant w i ll be considered . ESG • The B oar d w il l de term ine o n an a nnu al b as is L T IP s pe c if i c ES G me asu re (s ) an d re lated targets. • For 20 22 , t he E SG m ea sure w ill b e th e Com pany ’s scope 1 & 2 CO 2 emi ssio n re du c ti on at the e nd o f the t hre e - yea r pe r fo rma nce p er i od (20 2 2- 2 02 4), compa red to t he 2 019 b a sel in e. • Appropriat e threshold (zero ), target (10 0 pe rce nt) an d ma x i mu m (20 0 p er cen t) awar d poi nts a re re v ie wed a nd a pp rove d by the CC on an a nn ual b as is . The a pp rove d ES G ta rge t poi nt s for th e 20 2 2 L TI P , whi ch ar e de sig ne d to in ce nti v ize m ater i al p rog - ress towar ds our 2030 s ust ainability stra tegy com mitm e nts , are i ll ust rate d in E xh ibit 2 0 b el ow. Measure Wei gh - ting Thresh- old T arget Maximum CO emission reduction com p are d to At or b e lo w th re sh ol d p oin t: n o aw ar d; At ta rg e t po int : 10 0 p e rc en t awa rd ; At or a b ove m a x im u m poi nt : c ap p ed at 2 0 0 p er ce nt aw ar d; Linear award interpolations between poin t s. The r el ati ve wei ght in g of me as ure s for t he L TI P is as fol lows: • EPS me a sure : 50 p e rce nt • TSR m ea sure : 3 0 pe rce nt • ESG me a sure : 20 p e rce nt Other design f eatures The n um be r of sha re s to be gr ante d is d ete rmi ne d by di v id in g the g ra nt va lu e by th e aver age sh are pr i ce ove r the p er i od 2 0 tr adi ng d ays pr i or , and 2 0 tra din g days af te r , t he d ate of pub li cat io n of AB B ’s full ye ar f i nan c ia l resu lt s. S et tl em en t of the L T IP i s thr ee ye ar s af ter g ra nt, s ubj ec t to ac hiev e - ment o f performance conditions, defined prior to grant. The a c tual s et tl em ent of s har es awa rd ed w i ll v ar y bet we e n zero a nd 2 0 0 pe rce nt of th e sh are s grant ed, ac cording to ach i evement against t he per formance measur es sta ted abov e . De fau lt set tl e me nt of th e f in al L TI P awa rd is 10 0 pe rce nt in s har es, a nd a n autom ati c sel l -to - cove r is i n pl ace for e mp loy ee s wh o are subject t o w ithholding taxes. L T IP s har es ar e subj ec t to m al us an d cl awba ck rules, wh ich include illegal activ ities and any f ina nc i al mi sstate me nt th at have a mate r ial imp ac t on a ny G rou p com pany. This m ea ns th at the B o ard m ay de c id e not to awa rd any u nse tt le d or un vest ed incen tive compens ation ( malus ), or may se ek to re cove r l ong -ter m in cent i ve com pe n - sati on t hat ha s be e n set tl ed i n th e pa st ( clawback). The CC a lso h as t he a bil it y to susp e nd th e pay - me nt of awa rds i f it is l ike ly t hat th e Bo ard determines that the malus or cla wback provisions may pote nt ia ll y ap pl y (e.g. , if th e e mpl oye e is subj ec t to a n ex te rn al i nvest i gati on). For gr ant s fr om 2 02 1 , th ere i s no au tomat ic acce le rate d ves ti ng of aw ard s in th e eve nt of a ch ang e of co ntro l. For L TI P gr ant s a s of 20 2 2 pa r ti c ip ant s w il l al so be ent it le d to re cei ve a ca sh a mou nt on e ach v este d awar d sha re th at is eq ua l to the tot al di v i de nd s ABB ANNU AL REPORT 2021 03 C OMPENSA TION REPORT pe r sha re pai d by A BB o n th e AB B Ltd sha re b e - tw ee n th e gra nt date a nd th e de li ve r y date of t he ves ted awa rd (a “div i de nd e qu iv al ent p aym ent ” ). This w ill b e of fs et by re du c in g oth er be ne f it-re late d cos ts by a s imi lar l eve l ove r th e life of the s har e gr ant . CC disc ret i on w i ll b e ex te nd e d to all ow for d isc re - tionar y ad justments t o the f ormulaic L TIP vesting outc ome. Cla wback will be extended to include mater i al re p utat io nal d am age a nd w i ll a pp ly for a p er i od of u p to f ive ye ar s fol low i ng t he originally scheduled plan specif ic ves ting da te. Pur pos e an d lin k to str ateg y T o ali gn EC me m be rs ’ pe rso na l wea lth d ire c tl y w ith t he i nter est s of sh are ho ld e rs i n ord er to main tain focus on the long -term s u cces s of the Comp any. Share ownership p rogram EC me mbe r s are r eq uir ed to re tai n all s har es ves ted fr om th e Com pa ny ’s L TI P an d any ot he r share- based compensation until t heir share ownership requirement is me t. In circumstanc es where there is a withholding tax obligation, the num be r of sh are s re cei ved w ill b e con sid e red to be th e nu mb er of s har es ve ste d minu s th e sha res sol d un de r th e def aul t se ll -to - cove r fac i li t y . The s har e own er shi p req ui rem e nt is e qui v ale nt to a mul ti pl e of th e EC me mbe r ’s ann ua l ba se sal ar y , n et of t a x (see E x hibi t 1 5). These s hareholding requirements ar e aligned w ith mar ket pr ac t ice a nd re sul t in a we alt h at ri sk fo r eac h EC mem be r w hic h is al ign e d w ith s har e - holder int e rests. On ly ve ste d sha re s own ed by a n EC me mb er a nd the ir sp ou se cou nt fo r the co mp ar i son of t he ac tua l sha re own er shi p agai nst t he sh are ow ne r- ship requirement. Ves ted bu t unexer cised and unves ted s tock options under the Man agement In cent i ve Pl an (M IP) a re not co ns id ere d fo r this purp ose. The CC r ev i ews t he st atus of EC sh are ow ne rs hip on an a nn ual b a sis . It al so re v ie ws th e re qui re d shareholding amounts annually , based on salary and expected sh are price dev elopments. Not i ce pe r i od , seve ra nc e pr ov is io ns a n d no n - competition clauses Emp loy me nt co ntr ac ts f or EC me mb er s in - clu de a n ot ice p er i od of 1 2 mont hs, d ur i ng w hic h the y are e nt itl e d to the ir an nu al ba se s al ar y, benefits and short -term incentiv e. In a ccor dance w ith Sw iss law an d A BB ’s Ar t ic le s of Incorpora tion, the contra c ts for t he E C members do no t all ow for a ny seve r anc e paym en t. No n - co mp ete agr ee me nt s have b ee n e ntere d i nto w ith t he C EO and a ll oth e r EC mem be r s for a p er i od of 1 2 m ont hs af te r the ir e mp loy me nt . Com pe nsat io n for su ch ag re em ent s, i f any, may not e xcee d th e EC me mb er ’s la st tot al a nnu al c as h remuneration (comprising o f base salary , short -term incentive and benef its ). Imp lem entation of EC compensa tion polic y Ove r v i ew EC me mbe r s re cei ved tot al co mp en sati on of CH F 39 . 2 mi lli on i n 20 21 c om par ed w i th CH F 35 .4 mi ll ion i n 20 2 0, as s umm ar ize d in E x- hibi t 21 b el ow an d pre se nte d in de tai l in E x hibi ts 3 8 and 3 9 . Calendar y ear Nu m be r o f ac ti ve E C me m be r s Base salaries Pension benef its Other benef its T otal fix e d compensa tion Short-t e rm incen tives Long-term incen tives ( fair value at grant) Replacement share grants n.a. T otal v ariable compensation T otal c om pensation Maximum aggreg ate co mp e ns at io n ap p rov ed a t AGM 55,500,000 (1) For an ov e rv iew of compensation by indiv idual and component, pl ea s e ref e r to E xh ib it s 3 8 an d 3 9 in s ec t i on “ Co mp en sa ti on ta bl e s an d sh ar e own e rs hi p ta bl e s” b el ow. A n ov er v ie w of 2 02 1 re al ize d co mp e ns at io n by i nd iv id ua l is p rov id ed i n E xh ib it 4 4 i n th e sa me s ec t i on . The tot al co mp en sat ion f or th e EC in 2 02 1 in cre as ed by 10. 5 pe rce nt com pa re d to 20 20. Conte x t of th e ch ang e in c ost s, i n add it io n to the over - achie vement a gainst the challenging short -term incentive targets, includes: • The COVI D -19 pa nde mi c , whi ch n eg ati vel y imp ac te d achi eve me nt un de r th e 20 20 sho r t-term i nce nt ive - w he n ta rge t s were n ot adj uste d - com pa re d to the o utp er form an ce again st t arg et s in 2 02 1 . • In addi t ion , th e ta rge t sho r t-term i nce nt ive w a s de cre a sed i n 20 2 0 to ref le c t th e vol unt ar y 10 pe rce nt do nat io n of the EC m em be rs ’ sa lar y to f ight t he i mp ac t of th e COVI D -1 9 pan de mi c ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT and a p ro -r ata o utcom e wa s ap pl ie d for t hos e EC me mbe r s wh o join e d the EC d ur i ng th e yea r . • An in cre as e in b ase s al ar y r esu lt in g fro m a) the omis sion o f the volun tary 10 percen t dona tion of the EC m em be r s’ sa lar y to f igh t the i mp ac t of the COV I D -19 p an de mic f or a si x- mo nth p er i od dur i ng 2 0 20, b) that al l EC me mb er s pro v id ed ser v ic es fo r the f ul l yea r dur i ng 2 02 1 an d c) the increases in salar y for three E C members. • An incr ease in p ension c ontributions is solel y du e to cha ng es i n the co ns ti tut io n of the Executive C ommittee. T he con tr ibution ra tes in the p e nsi on p lan h ave not c han ge d fo r seve ra l year s, a nd o nl y age d r iv en ad ju stm ent s were applied. • A redu c ti on i n oth er b en ef i ts co st s giv en t hat 20 20 i nc lu de d cost s re late d to fou r form e r EC members, including t he int er im CEO , while in 20 21 t he cos ts r el ated to o nl y on e form e r EC member . • The in cre a se of th e gra nt fai r va lu e for th e 20 21 L T IP g ran t com par ed to th e 20 2 0 L TIP gra nt , is mai nl y dr i ve n by the p r ic e of th e AB B sh are at th e day of g ran t. At the 2 0 20 AG M, t he sh are h ol de rs a p - prove d a ma x imu m agg re gate com pe ns ati on amo unt of C HF 3 9. 5 mill io n for th e EC for t he ye ar 20 21 . The EC tot al co mp en sati on fo r 20 21 amo unte d to CH F 3 9. 2 m ill io n and i s th ere for e w ith in th e ap prove d a mou nt . Se e E xhi bit 2 1 ab ove. Compensa tion mix The r ati o of f ixe d to va r ia bl e com po ne nt s in any giv en ye ar d ep en ds o n the p e r for man ce of th e Compan y and indiv idual EC members aga inst predefined per formanc e objectives. In 2 02 1 , th e va r iab l e com pe nsat io n of th e CEO wa s 61 p erc ent of hi s tota l ann ua l com pe ns atio n (p rev iou s yea r: 51 p er cen t). For th e oth er EC me mb er s, th e v ar ia bl e com pe ns ati on w as 5 4 p er- cent o n aver ag e (p rev iou s year : 41 p erc ent). T o allow an ap propriate y ear-on -year comparison, the c al cu lat ion o f the tot al a nnu al co mp en sati on excludes t he value o f any one-time replacemen t grant to compensate for foregone compensa tion w ith t he p rev iou s em pl oyer. E xhi bit 2 2 be l ow show s the c omp os it ion of t he total a nn ual c om pe nsat io n in 2 02 1 for t he C EO and f or oth er c ur ren t EC mem be r s on an a ggr e - gate le vel , sp ec i f y i ng th e sp lit of i t s f ive compensa tion componen ts. Note th at com pe ns atio n pai d in 2 02 1 for fo rm er EC me mbe r s is no t inc lu de d in E x hib it 2 2 . Thi s ca n be fo und i n E xhi bit 3 8 . Compensa tion elements – 2021 h ighlights Base salar y Thr ee of t he ni ne EC me mb e rs i n pl ace in M arc h 20 21 r ece ive d a sa la r y adj us tme nt , whi ch r an ge d fro m 2 . 1 to 6.7 pe rce nt , ref l ec t in g e xcept io na l pe r for man ce a nd cl ose r ma rket a lig nm ent . T he ba se sa la r y of Ti mo I ham uot il a wa s in cr ea se d by 2 . 1 pe rce nt to CH F 970, 00 0 , T ar ak Me ht a by 3. 3 pe rce nt to CH F 93 0,0 0 0, a nd M or te n W ie rod by 6.7 p erc ent to C HF 8 0 0,0 0 0. Cons id er i ng t hat th e othe r si x cu rre nt EC me m - be rs h ad no s al ar y a dju stm en ts , this cor resp on de d to a 1 . 3 pe rce nt in cre as e on a nnu al ba se sa la r ies f or th e EC me mb er s po st Ma rch 20 21 , w hic h wa s b road ly c ons iste nt w i th th e sal ar y rev i ew bu dg et fo r th e w id er Sw i ss em - ployee population. E xhi bit 2 3 b el ow show s the c om pos it ion a nd weig ht in g of the m ea sur es a pp lie d in 2 0 21 fo r al l EC me mbe r s un de r the ir A I P , sp ec i f ie d by their r ol es. CEO and Corporat e Officers 80% Group financial results 20% Individual results Exhibit 3: Structure of EC compensation as from 2022 CEO Other EC members Exhibit 5: 2021 Total compensation mix for the CEO and other EC members on aggregate level Exhibit 16: Mix of target compensation for current and new EC members L TIP measures 50% A verage EPS 30% Relativ e TSR 20% ESG (CO 2 emission reduction) Business Area Presidents 8,247 ,610 28,514,999 20% Group financial results 60% Business Area results 20% Individual results 20% Base salary 9% Pension benefits 10% Other benefits 30% Short-term incent ive 31% Long-term incentiv e Current Other EC Members New Other EC Members V a r i a b l e c o m p e n s a t i o n 6 1 % 2 5 % 1 5 % 1 0 % 2 5 % 2 5 % 2 4 % 9 % 7 % 2 4 % 3 6 % F i x e d c o m p e n s a t i o n 3 9 % V a r i a b l e c o m p e n s a t i o n 5 4 % F i x e d c o m p e n s a t i o n 4 6 % Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive 22% Base salary 12% Pension benefits 12% Other benefits 32% Short-term inc entiv e 22% L ong-term incen tive Base salary Pension benefits Other benefits Short-term incentiv e Long-term inc entive Exhibit 22: Compensation mix CEO Other EC Members 2 0 % 9 % 1 0 % 3 0 % 3 1 % 2 2 % 1 2 % 1 2 % 3 2 % 2 2 % ABB ANNU AL REPORT 2021 03 C OMPENSA TION REPORT Foc us o f measure CE O an d Corpora te Officer s President Electrif ication President Motion President Process Automation President Robotics & Di sc re te Automation ES G b ou nd a r y co n di ti o n fo r sh or t- te rm i n ce nt i ve awa r ds : Common Group measure Bo tto m li n e earnings Op E BI TA margin Op E BI TA margin Op E BI TA margin Op E BI TA margin Op E BI TA margin Ot h er G r ou p measures Profitability an d ca pi ta l effic iency ROCE margin Ca sh generation Fre e Ca sh F lo w Bo tto m li n e output Pro d uc t iv it y grow th Bu si n es s Ar e a measures Bo tto m li n e earnings Op E BI TA margin Op E BI TA margin Op E BI TA margin Op E BI TA margin Cash generation Op Fr ee C a sh Flow Op Fr ee C a sh Flow Bo tto m li n e prof it Gr oss P rof i t on Orders T op line input Orde rs received Bo tto m li n e output Pro d uc t iv it y grow th Pro d uc t iv it y grow th Pro d uc t iv it y grow th Pro d uc t iv it y grow th Individual measure Saf et y, Cos t discipline, Str ate gy implementation Function- spec if ic Safety, Acquisi- tions, Digitalization Business- spec if ic Business- spec if ic Business- spec if ic Business- spec if ic To t a l (1) Co rp o rat e Of f i ce r s in cl ud e : Chi e f Fi na nc i al O f f ic e r , Chi e f Hu ma n Re so ur ce s O f f ice r, Ge ne r al Co u nse l a nd C hi ef Co m mu ni cat i on s an d Sustainability Offi cer . Un de r the A I P , a ll m em be rs of t he EC have a co mmo n G rou p mea su re, w ith a 2 0 to 2 5 pe rce nt wei ght in g. I n 20 2 1 , thi s wa s Gr oup O p er ati ona l EB IT A mar gin , ap pl ie d to cre ate a gre ater foc us o n prof i ta bil it y. In ad dit i on to th e com mo n Gr oup m ea sur e, th e CEO an d the Co rp or ate Of f i cer s sh are d th e sam e Group measur es, including ROCE m argin, F ree Ca sh Fl ow an d Pro du c ti v i t y grow th, w i th a tot al weig ht in g of 55 p erc ent . For B usi ne ss A rea P res id ent s, u p to thr ee m ea - sures were tailored to busines s impera tives, w ith a tot al we ig hti ng of 6 0 p erc ent . W hil e al l Bu sin ess A re a Pre si de nt s sha red t wo m ea sur es, (Ope rat io nal E BI T A m argi n an d Pro du c ti v i t y grow t h w it h 30 p e rce nt an d 10 pe rce nt wei ght in g, respectively), the third mea sure v aried, including Op er ati on al Free C a sh Fl ow, Gross Pr of it o n Ord e rs a nd O rde r s rec eiv ed , for th e re mai nin g 20 p erc ent . De f ini ti ons of t he q uan ti tat ive m ea sur es fo r EC me mb er s are s et ou t in E x hibi t 24, b e low. Al l EC me mb er s al so ha d an in di v id ua l me asu re w ith a 2 0 pe rce nt we ig hti ng . Thi s pe rs ona l com - po ne nt wa s in form e d by up to th re e KP Is , whi ch included a c ombina tion of quan titative and qualita tive ob jecti ves. T he final out come aga inst the i nd iv i du al m ea sur e wa s ba se d on a di scr et io n - ary judgment of the combined performanc e again st a ll th re e KP Is . • In 20 21 , a ll th e EC had a co mm on s afet y K PI – nam e ly th e p erc ent age i mp rove me nt in t he Lost T im e In c id ent Fre qu en c y Rate ( L TI FR), underpinned b y s ustaina bility obs er vation tour s. Fo r th e CEO an d the Co rp or ate Of f i cer s, this r el ated to G rou p le vel a nd fo r Bu sin ess Ar ea s Pre si de nts to t hei r re spe c t ive Business Areas. • For the C EO and Co rp or ate Of f i cer s, t he oth e r KP Is we re li nke d to the G ro up o r Func t io n cost s, to the s trate gy i mp le me nt ati on on G ro up o r Function lev e l, or to int ernal c ontrols. • F or the Business A rea Pr esidents, the other KPIs wer e bus in ess gr ow th , dig it ali zat io n or ma rket positioning targets. ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT Obj e ct ive Description Op e rat io na l EB I T A m a rgi n Op e rat io na l EB I T A , wh ic h is O p er ati o na l ea rni ng s b efo re i nte re st , t a x an d am or t iz at io n , as a pe rc en tag e of O p er at io na l rev en ue s, w hi ch i s tot al r eve n ue s adj us te d fo r for ei gn e xc ha ng e/ commodity timing dif ferences in total revenues Re tur n on C a pit al E mp l oye d Ca lc ul ate d a s Op e rat io na l EB I T A a f ter t a x d iv id ed b y th e aver ag e of t he p er i o d ’s ope ni ng a nd cl osi n g Ca pi ta l em pl oy ed , ad ju ste d to re f le c t i mp ac t s fro m si gn if i ca nt ac qu is it io ns/ di ves tm e nt s oc cur r i ng d ur i ng t he s am e pe r i od . C api ta l e mp lo ye d is c al cu lat ed a s th e su m of Ad ju ste d tot al f i xe d a sse ts a nd N e t Wor k in g Ca pi ta l Fre e Ca sh F lo w (FC F ) Free C a sh F low i s c al cu late d a s ne t c as h pr ov i de d by o pe r ati ng a c ti v i t ie s adj us te d fo r: ( i ) pu rc ha se s of p rop e r t y, pla nt a nd e qu ip m ent a n d int an gi b le a sse t s, a nd ( ii ) p ro ce ed s fr om s al es of pr op e r t y, pla nt an d e qu ip me nt Produc t iv it y growth wor k fo rce i n th e la s t th re e mo nth s. P ro du c t iv it y gr ow th i s th e c ha ng e of p rod u c ti v i t y ove r th e sa me p er i o d a yea r ea rl ie r, rep res e nte d as a p e rce nt ag e ch an g e Op e rat io na l Fre e C as h Fl ow (OF C F ) Ca sh g e ne rat ed b y bu si ne ss op e rat i on s af te r pay i n g ca pit a l ex pe n di tur es b ut b ef or e pay i ng interests and taxes ( O CF minus c apital expenditures ) Gr oss P rof i t on O rd e rs ( absolute) Gr oss P rof i t on O rd e rs i s ca l cul ate d by d e du c ti ng t he t ota l co st s to co mp le te t he o rd er f ro m th e tot al re ve nu e v al ue of t he o rd e r Order s received R e pre se nt s th e v al ue s of g oo ds a nd s er v ic es c ont ra c te d an d or de re d by c us tom e rs w i thi n a gi ve n acc ou nt in g pe r io d n et of c a nce l lat io ns (1) Applied to Robotics & Discrete Aut omation and Electrification only . (2) C a sh f lo w fr om o pe r ati n g ac t iv i t ie s e xcl ud i ng p ay me nt s fo r in te re st a nd i nc om e t a xes . (3) Applied to Pr ocess Automa tion only . (4) Applied to M otion only . Ou tcom es we re su bje c t to ap pro pr i ate adju st- ments for some non- operational it e ms and other adjustmen t principles agreed with the B oard. For 2021 , the “ boundary condition” was the set t ing o f pla ns i n eac h AB B D iv isi on to mit ig ate for A B B scop e 1 an d 2 CO 2 emissions, aligned with AB B ’s sustai nab ili t y str ateg y an d ass oc i ated targets. 20 2 1 An n ua l I nce nt ive P la n – ac hi eve me nt s In su mma r y, the ave rag e awar d for th e cu rre nt EC me mb er s un de r th e AI P for 2 0 21 w as 1 43 . 4 pe r - cent (out of a m a x im um 1 5 0 pe rce nt), com pa red to 7 2 .4 p er cent i n 20 2 0. In ad di ti on to ac hiev in g the c ha ll en gin g pe r fo rma nce t arg et s in 2 0 21 , t his improv ement in outcomes fr om the pr ior year wa s influenced b y the following factors: • In 20 21 , a ll ni ne EC me mb e rs se r ve d on a fu ll - yea r ba si s, co mpa re d to onl y se ven me mb er s wor k in g on a fu ll - yea r ba sis i n 20 2 0. AI P op po r tuni ti es a nd f i na l awar ds for 2 0 20 wer e pro rate d for th ose EC m em be rs w ho j oin ed the EC d ur i ng th e yea r . • EC memb er s vo lun tar i l y do nated 10 p e rce nt of the ir s ala r y to f ig ht th e im pac t s of th e COVI D -1 9 pan de mi c for a si x- mo nth p er i od d ur i ng 2 02 0. Consequent ly AIP opportunities a nd final awar ds fo r 20 20 we re b ase d o n the reduced s alaries. • In 20 20, t he n eg ati ve im pac t of t he CO VID -19 pandem ic on the bus iness pe r for man ce - w he n ta rge ts we re n ot adj uste d - wa s big ge r th an in 2 0 21 . The 2 0 21 A I P outco me s wer e ne t of the a pp li ca - tion of adjustments for some non- operational ite ms, a lig ne d w it h adj ust me nt pr i nc i pl es ag re ed w ith t he B oa rd . The se l ed to mi no r in cre as es in awar ds fo r two EC m em be rs . Common Group measure Achi eve me nt ag ains t th e 20 21 G ro up O pe rat io nal EB IT A m arg in m ea sure , wh ich a pp li ed to a ll EC me mb er s, w i th a wei ght i ng of 2 0 or 2 5 pe rce nt , wa s 1 50 p e rce nt (20 2 0: 5 3 pe rce nt). Th e 20 21 Gro up O pe r atio na l EB IT A m arg in w as 1 4. 2 pe rce nt com par ed to 1 1 . 1 p er cen t in 2 02 0, pr i ma r il y re - flec ting the increased busines s activ it y . The weig hte d achi eve me nt re late d to the c omm on Gro up m ea sur e wa s 37.5 p er cent f or th e CEO an d the Co rp or ate Of f i cer s, a nd 3 0 p erc ent fo r th e Business Area Presiden ts. Ot he r Gr oup m ea sur es The o utco me re l ated to al l oth er G rou p me as ure s, app li ed to t he CEO a nd Co rp orate O f f ic er s, w i th weig ht in gs of 10 to 2 5 pe rce nt , wa s at ma x i mu m. Achi eve me nt ag ains t th e Gro up R OC E tar ge t wa s 150 perc ent (2020: zero perc ent ), a chiev ement again st th e Free C a sh Fl ow ta rge t wa s 1 50 p e r - cent ( 20 20 : 10 9 p erc ent) a nd ac hie vem ent a gain st the P rod uc t i v it y g row th t ar get w a s als o 1 50 p er cent ( 20 20 : n . a .). The we ig hted ac hie ve - me nt re late d to the se G rou p me asu res w a s 82. 5 perc ent. Business Area measures Up to th re e qua nt itat i ve bus in ess m ea sure s we re app li ed to B us in ess A re a Pre sid e nts , w it h weig ht- in gs fro m 10 to 3 0 pe rce nt , and t he o utco mes ran ge d fr om 1 19 to 1 5 0 p erce nt of t arg et . Achi eve me nt ag ains t th e Op er ati ona l EB IT A mar gin m ea sur e ra ng ed f rom 1 1 9 to 15 0 p erc ent (20 2 0: ze ro to 9 5 pe rce nt), Op er ati on al Free C a sh Flow 1 5 0 pe rce nt fo r th e two B us in ess A re as ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT app li ca bl e (2 02 0 : 10 6 to 1 50 p er cent), G ross Pr of it on Or ders 150 perc ent (2020: zero perc ent ), Ord e rs re cei ve d 1 50 p e rce nt (2 02 0: ze ro to 8 3 pe rce nt) an d Pro du c ti v i t y grow t h 1 50 p er cen t for the fo ur B us in ess A rea s (2 0 20 : n .a .). Th e wei ghte d achie vement r e lat e d t o thes e Busines s Area mea su res r an ge d fro m 8 0. 8 to 90 p e rce nt (2 02 0: 21 to 6 6 pe rce nt). Indiv idual measure Tha nk s to th e Com pany ’s stron g foc us on s afet y, in 2 02 1 th e tar ge t set fo r the L ost T im e In ci de nt Freq ue nc y R ate (L TI FR) w as o ver achi eve d at Gro up l eve l, a s a re sul t of all B u sin ess A re as over achi ev ing t hei r ta rg et s. Th er e wer e no work - relat e d fa talities in 2021, for the f irst time sin ce 20 11 . The a sse sse d achi eve me nt of th e K PIs inform ing the out come of t he personal compo - ne nt for EC m em be rs , w it h a weig ht in g of 20 percent, inclus ive o f the sa fety out comes de - scr i be d, r an ge d fro m 10 0 to 1 50 p er cen t (20 2 0: 10 0 to 15 0 p erc ent). These ou tcomes are summariz ed in Exhib it 2 5 b e l ow. Categ or y T ar ge t po i nt s an d ac h ie vem e nt Common Group measure Group Op EBIT A margin Ot h er G r ou p measures ROCE Fre e Ca sh F low Produc t iv it y growth Individual measure Saf et y, Cos t di sc ip li n e, Stra tegy implementation Categ or y T ar ge t po i nt s an d ac h ie vem e nt Common Group measure Group Op EBIT A margin Business measures Op E BI TA marg in Op Fr ee C a sh Fl ow Gr oss P rof i t on O rd e rs Order s received Produc t iv it y growth Individual measure Safety, Acquisitions, Digitalization 150% 150% 150% 150% 150% 150% 150% 150% 150% 100 –1 25 % 119 –150 % 12 5 –15 0% ABB ANNUAL REPO RT 2021 03 COMPENSA TI ON REPORT E xhi bit 2 6 be low p rov i de s inf orm ati on re late d to the ov er all a c tual 2 0 21 A IP o utco me s, i n com par i son to t he t arg et 2 02 1 A IP fo r al l cur re nt EC members. Com m on G r ou p measure Ot h er G r ou p measures Business A rea measures Individual measure T ota l A I P ou tc om e percentag e Targ et A I P awa r d Ac tu a l A IP a wa rd Achieve ment Weighting Outco me Achieve ment Weighting Outco me Achieve ment Weighting Outco me Achieve ment Weighting Outco me Björn Rosengre n n.a. n.a . n.a. Timo Ihamuotila n.a. n.a . n.a. Carolina Granat n.a. n.a . n.a. Maria Varsellona n.a . n.a . n.a. Theodor Sw e djemark n.a . n.a . n.a. Sami Atiya n.a. n.a . n.a . T arak Mehta n.a. n.a . n.a . Peter T erw iesch n.a. n.a. n.a. Morten Wierod n.a. n.a. n.a. To t a l (1) R ep re se nt s ac cr ue d A I P awa rd f or t he y ea r 20 2 1 , wh ic h w i ll b e pai d i n 20 2 2 , af te r th e pu b li ca ti on o f AB B ’s f in an c ia l re su lt s . ESG boundary condition The B o ard a lso co nsi de re d th at the te rms f or th e 20 21 E SG “ bo un da r y co ndi ti on” we re f ul ly m et . Overall out comes The o ver all ave ra ge awa rd un de r th e A IP fo r the ent ir e cur re nt EC wa s 14 3. 4 p erc ent of t arg et (20 2 0: 7 2 .4 pe rce nt) w i th a ra ng e fro m 14 0. 8 pe rce nt ( lowe st ac hiev em ent) to 14 5. 0 pe rce nt of tar ge t (hi gh est a chi eve me nt). Thi s com par ed to a ran ge of 5 1 .0 to 9 5. 6 pe rce nt in 2 02 0. 20 2 1 L T IP g ra nt s The e st im ated v al ue at gr ant of t he sh are - ba se d gra nt s to EC mem be r s und e r the 2 0 21 L TI P wa s CH F 8.7 mil li on , com par ed w ith CH F 6 . 5 mi lli on i n 20 20. T his i nc rea se i n gra nt fai r va lu e for th e 20 2 1 L T IP g ra nt com pa red to 2 0 20 w as m ainl y dr ive n by the p r ic e of the A B B sha re o n the d ay of gr ant . In 20 20 t he p r ice of t he A B B sha re at the d ay of gra nt , wa s inf l ue nce d by si gni f ic ant m arket vol ati lit y at th e st ar t of t he COV ID -19 pa nd emi c whi ch i mpa c ted th e 20 2 0 L T IP g ra nt fair v al ue subs ta nti al ly at th at ti me . The 2 0 21 L TI P is b as ed o n t wo eq ua ll y wei ghte d pe r for man ce m ea sure s, o ne t ie d to A BB ’s TSR a nd the ot he r to A BB ’s EPS . The c omp ani es a pp rove d by th e Bo ard to d ete r - min e AB B ’s relat ive T S R pe r for man ce fo r the 20 21 L T IP we re : 3 M, D ana he r , E aton, E me rso n Ele c tr i c , Ge n er al El ec t r ic , H on ey we l l Intl . , Ho lc im , Le gra nd , Mi tsu bishi E le c tr i c , Ray t he on T e ch no lo - gie s, R oc k wel l, R ol ls Roy ce, S ch nei de r El ec t r ic , Sie me ns a nd Y okog awa . Th es e wer e sel e c ted to prov ide a n ap pro pr i ate and v er y cha ll en gin g set of peers, a nd influenced the vesting poin t setting accor din gl y. The 20 2 1 L TI P tar ge t poi nts a re ill us trate d in E x hibi t 2 7 be low. Measure Wei g h - ting Threshol d T arg et Maximum Re lat i ve TSR percen tile percen tile percen tile Average EPS Ta r g e t point Disclose d after per - formance period Ta r g e t point At or b e lo w th re sh ol d p oin t: n o aw ar d; At ta rg e t po int : 10 0 p e rc en t awa rd ; At or a b ove m a x im u m poi nt : c ap p ed at 2 0 0 p er ce nt aw ar d; Linear award interpolations between poin t s; Th e ac tu al E P S ta rg et i s no t pr os pe c t iv el y di sc l ose d fo r re a so ns of commercial sensitiv ity. The l atest c ha ng e in th e EP S ta rg et poi nt s (rang e red uc ed f rom p lu s/ min us 17 pe rce nt of ta rge t for 20 20 L T IP to p lus/minus 1 4 pe rce nt of ta rge t for the 2 0 21 L TI P) is a re fl ec t i on of th e pe rce ive d EP S vola tility during the performance per iod, and also ser ves to m ake the ac hie vem e nt of a th resh ol d award under the plan mor e demanding. The r efe re nce p r ice fo r th e 20 21 L T IP g ra nt whi ch is us ed to d ete rmin e th e nu mbe r of sh are s gra nte d to par t ic i pa nts w a s CH F 26 . 59 . 2018 L TIP ach ievements The f i na l num be r of sh are s ves ti ng u nd er t he 2 018 L T IP g ra nt in 2 02 1 wa s d ete rmin e d ba se d on th e achi eve me nt le vel a gain st th e de f in ed T SR a nd EPS targe ts. The r el ati ve TS R me a sure w as a chi eve d at 11 4. 8 p erc ent ( p rev i ou s yea r: n ot app li ca bl e) out of a pote nt ial o f 20 0 p erc ent . The ave ra ge EP S me a sure ve ste d at zero p e rce nt (p rev iou s yea r: 41 p er cent) o ut of a p otent i al 20 0 p erc ent , ne t of adj us tme nt s for i tem s ABB ANNU AL REPORT 2021 03 COMPE NSA TION REPORT con sid er ed o ut sid e th e no rma l cou rs e of bus in ess op er ati on an d/ or w hic h we re not co nsi de re d in the t ar get s et ti ng of t he 2 018 L T IP . O n this o cc a- sio n, a dju stm en ts we re m ade fo r th e imp ac t of divestments, integration costs and res tructuring cost s. T he E PS fo r 20 20 a pp li ca bl e to the 2 01 8 L T IP g ra nt af ter t he ap pl ic ati on of t he ap pr oved adj ust me nts , am oun ted to US D 1 .0 6 , l ead in g to pl an re le va nt aver age E PS of U SD 0. 9 8 , be in g be low t he th re sho ld t arg et p oint . The aver age weig hted achie veme nt leve l of the two p e r for man ce me a sure s un de r th e 201 8 L TI P wa s 57.4 per cen t ( out of a m a x im um 2 0 0 pe rce nt), as sp e c if i ed i n E xhi bit 2 8. The re w as n o awa rd un de r th e EP S mea su re, s in ce the performance pe riod for det ermining the v alue of the aw ard w a s fro m 201 8 to 20 2 1 and i n co nse - qu en ce, t he EP S ou tcom e wa s im pac te d by th e COVI D -1 9 pan de mi c , for w hic h no ad jus tme nt w as applied. A s ann ou nce d in o ur 2 01 9 Comp e nsat io n Re po r t, the E PS p er form an ce ta rge ts fo r ves ted L T IP awar ds w i ll b e retr osp ec t iv el y di scl ose d in o ur Com pe nsat io n Re po r ts . Th e th ree t ar get p oin ts (thre sho ld , ta rge t an d ma x i mum) an d the a c tual achi eve me nt for t he ad ju ste d 201 8 EP S pe r fo r - man ce me a sure a re sh own i n E xhi bit 2 8 be low. Sin ce th e Aver age E PS a mou nte d to USD 0 .9 8 , no ves ti ng o ccur ed a s th e th resh ol d ta rg et wa s no t met . T he re lat iv e ran k in g of A BB ’s TSR ag ains t th e pre de f in ed p e er g rou p of com pa nie s for th e 201 8 L T IP s et on t he 5 4th p e rce nti le , whi ch l ea ds to a vest i ng le ve l of 11 4. 8 p erc ent u nd er t his measure. The weighted combined vesting level cor resp on ds to 5 7 . 4 pe rce nt of th e ta rg et . Ove r v i ew of d i sc los ed a n d re al i ze d 201 8 L TI P value In th e 20 2 0 Comp e nsat io n Re po r t A BB i ntro - du ced a n ew t abl e , req ue ste d by st akeh ol de r s, to prov ide i nfo rmat io n re lated to t he p as t L T IP , th at ves ted i n the r ep or t in g yea r . Thi s ta bl e com pa res the p rev iou sl y dis cl ose d “ fai r va lu e” of th e gr ant to each EC m em be r an d th e ac tua l va lu e of the grant at the time of vesting. The following Exhibit 29 s hows su ch c omp ar i son fo r th e 201 8 L TI P , t hat ves ted i n 20 21 . The v al ue s pre se nted a re gr oss and b efo re p ayme nt of a ny ap pli c abl e ta xes ow in g by the r ec i pie nt . Thi s in dic ates t he ave rag e gross rea lize d L TI P va lu e wa s 76. 2 pe rce nt of t he di s- cl ose d gra nt fai r va lu e. Grant date Number of s ha re s granted re l ate d to the TSR measure Sh a re s granted re l ate d to the EPS measure To t a l number of s ha re s granted Disc losed grant fai r v al u e Vestin g date Ve st i n g percen t- ag e Number of vested shares Realized va l ue Björn Rosen gren n.a. Timo Ihamuotila Carolina Granat n.a. Maria Varsellona n.a. Theodor Swedjemark n.a . Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod To t a l (1) Ac t ua l ac hi eve m en t le ve l of t he T S R me as ur e wa s 1 14 . 8 p er ce nt . (2) A c tu al ac hi ev em e nt l eve l of t h e EP S me a sur e w as ze r o pe rc en t . (3) Va lu e d at CH F 2 2 .0 3 , th e gr an t fai r v al ue o f th e A BB s ha re o n th e da y of gr an t . (4) At th e t im e of d is cl osu re M o r te n Wi e ro d wa s no t me m be r of t he EC . (5 ) Val ue d at C HF 2 9 . 2 5, t h e cl os in g pr i ce o f th e AB B s ha re o n th e day o f ve st in g . Measure Wei ghting Threshold T a rget Max imum Ac tual Relativ e TSR Achieve me nt level Ave ra ge E PS ( US D) Achieve me nt level ABB ANNUAL REPOR T 2 021 03 COMPENSA TION REPORT L T IP ve st in g ou tco m es i n th e l ast f i ve yea rs The h istorical v esting percen tages f or the prior f ive ye ar s are s how n in E xh ibit 3 0 b el ow. Ove r th e la st f i ve yea rs ve st in g ha s aver age d at 75 .6 p er- cent o f tar ge t and 47 .8 p e rce nt of the max imum award. Realized total compensa tion - 2021 In th e 20 2 0 Comp e nsat io n Re po r t, A B B st ar te d to dis clo se th e rea lize d tota l com pe ns atio n for e ach EC me mbe r . R ea lize d com pe ns ati on m ean s that the A I P awar d an d the L T IP aw ard a re di scl ose d at the end of t heir r espective performance cycles, ref le c t in g ac tua l paym e nt an d set tl em ent , b ase d on ac hiev em ent s of th e pl an sp e c if ic p e r for man ce measures. Such transparency on r ealiz ed compen - sati on i s de sig ne d to aid s take ho ld er ’s und e rst an di ng of A B B’s lin k be t wee n pay a nd per formance. The f oll ow i ng E x hibi t 31 se ts o ut a hig h - le vel com par i son o f rea lize d an d tar ge t total c om pe n - sati on fo r eac h EC me mb er . Note th at the h igh er percentages relating to the CEO and Corpora te Of f i ce rs (exce pt for t he CF O) are dr i ven by t he fac t th at the y wer e not a n EC me mb er i n 201 8 , an d the re fore d id n ot re cei ve an L TI P gr ant i n 201 8 , ves ti ng i n 20 21 . A det ail ed su mm ar y t ab le i s spe c if i ed i n E xhi bit 4 4 in th e se c ti on “ Comp e nsa - tion tables and share ownersh ip tables” . Other compensa tion - 202 1 Me mb er s of th e EC are e li gib le to p ar t ic i pate in the E mp loye e Sh are A cqu isi ti on P la n (E SA P), a sav i ngs p la n ba se d on s tock o pt ion s, w hic h is op en to e mp loye es a rou nd t he wo rld . Fi ve me mb er s of th e EC par t i ci pate d in t he 1 8t h ann ua l lau nch o f the p la n in 2 02 1 . EC me m be rs w ho par t i c ipate d w il l, u po n ves ti ng , eac h be e nt itl ed to acqu ire u p to 33 0 A B B sha res at CH F 3 0. 3 2 p er sha re, t he m arket s har e pr i ce at the s ta r t of th e 20 21 l aun ch . (1) A ve r age o f re le v ant p e r fo rm an ce m ea su res . 80. 50% 53 .7 0% 2 0 1 4 LT I P 2 0 1 4 LT I P 2 0 1 5 LT I P 2 0 1 6 LT I P 2 0 17 LT I P 2 0 1 8 LT I P 92.50% 61 .70 % 5 7. 4 0 % 28 .70 % 73 .00% 41 .70 % 7 4.80% 53.40% T arget t otal compensation Realized total compensation 3,000 ,000 4,000 ,000 5,000, 000 6,000, 000 2,000 ,000 1,000 ,000 0 Björn Rosen gren Timo Ihamuotila Carolina Granat Maria Varsellona Theodor Swedjemark Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod 11 5% 105% 113% 11 4% 11 5% 108 % 105% 109 % 107% ABB ANNUAL REPORT 2021 03 COMPENSA TION REPORT For a mo re d et aile d d esc r ipt io n of th e ES A P , pl ea se re fer to “ N ote 18 – S ha re - b as ed p aym ent arrangements” in our Consolida ted Financial Sta tements. In 2 02 1 , A BB d id n ot pay any fe es o r co mp ens ati on to the m em be rs o f the EC fo r se r v i ces r en de re d to AB B oth e r tha n tho se dis cl ose d in th is Com pe ns a- ti on R ep or t . E xce pt a s dis clo sed i n th e se c ti on titled “E xecu tive C ommitt ee – Busines s rela tion - ship s bet we e n AB B a nd it s EC me mb e rs” i n th e Corp or ate Gov ern an ce Re p or t , A BB di d not p ay any ad dit io na l fee s or c omp e nsat io n in 2 02 1 to pe rs ons c los el y li nked to a m em be r of th e EC for ser v ic es re nd e red to A B B . Sha rehol ding of EC me mbe rs Thr ee o ut of ni ne EC me mb e rs h ave achi eve d or exce e de d th eir sh ar e own er ship r eq uir em en t. T wo me mb er s are c lo se to achi ev i ng t hei r re qu ire - me nt, a nd a f ur t he r thr ee m em be rs h ave be e n new l y app oin ted to th e EC in th e la st t wo ye ar s. Wh en co ns id er i ng th e nu mb er of g ra nted , bu t unve ste d sha res of c urr ent EC m em be rs a s p er De ce mb er 3 1 , 20 21 , i t is e xp e c ted th at th e majo r - it y of th es e me mb er s w il l me et o r exce e d the ir share ownership requirement. The EC m em be rs c ol le c ti ve ly ow ne d le ss th an 1 pe rce nt of A BB ’s total sh are s ou ts ta ndi ng at December 31, 2021. At De ce mb er 3 1 , 20 21 , EC m em be r s he ld A B B sha res a nd co nd it ion al r i ght s to re cei ve sha res , a s show n in E x hibi t 4 2 in t he se c t ion “ Com pe ns atio n tab l es an d sha re ow ne rsh ip ta bl es ” be low. Th eir hol di ng s at De cem be r 31 , 20 20, a re sho wn in E xhi bit 4 3 in th e sa me se c t ion . A s pre v io usl y co mm uni cate d, a s fro m 20 20 , gra nt s und e r the M an age me nt I nce nt ive P lan (M IP), a stoc k opt io n pl an w i th out p er f orm an ce con dit io ns , have be e n dis cont in ue d, a nd n o fur t he r gr ant s we re mad e . A ny MI P ins tru me nt s he ld by EC m em be rs w ere aw ard e d pr io r to th eir app oin tme nt a s EC me mb er s. Fo r a mo re de tai le d de scr i pti on of M I P , p le ase r efe r to “ Note 1 8 – Share -base d pa y ment arrangements” in our Consol idat e d Fin ancial Sta tements. E xcept a s d esc r ib ed i n E xhi bit s 4 2 an d 43 , n o me mb er of t he EC an d no p er so n cl ose ly l inke d to a me mb er of t he EC he l d any sh are s of AB B o r opt io ns on A B B sh are s at De cem be r 31 , 20 21 and 2020 . Changes applicable to EC member s T e rms o f ap po in tm e nt fo r ne w EC m em b er s The n ew Ch ief H um an R eso urce s O f f ice r (CHR O), Ca rol ina G r anat , wa s a pp ointe d to the EC e f fec - ti ve fro m Ja nu ar y 1 , 2 0 21 w i th an a nn ual b as e sal ar y of CHF 70 0 ,0 0 0, a ta rg et sh or t-term a nd lo ng -te rm i nce nt iv e of 10 0 pe rce nt of an nu al ba se sal ar y . T his re p rese nt s a re du c ti on i n total t ar get dir ec t co mp en sat ion ( T TDC ) co mpa re d to the pr i or CH RO i nc umb e nt . Ca rol ina G r anat i s el igi bl e for st an da rd EC be ne f it s an d, w he re ap pro pr i ate legacy relocation benefits. * B a se d on s ha re p r ic e of C HF 2 6 . 59 , th e 2 02 1 LTIP re fe re n ce p r ic e, a nd s ha re s he l d at D ec em b er 3 1 , 2 02 1 . Fu tu re al l oc at io n of g ra nte d , bu t unv es te d sh ar es i s ba s ed o n ta rg et a ch ie ve me nt l ev e l an d re le v ant p l an s pe c if i c se t tl em e nt : de fa ul t se tt l em en t of t he f i na l 20 1 9 L T I P awa rd i s 65 p e rce nt i n sh ar es (r ec i pi e nt s may e l ec t t o re ce iv e 10 0 pe r ce nt of t he v es te d L TI P aw ard i n sh a re s), def au lt s et tl e me nt o f th e f in al 2 0 20 LTIP an d 20 2 1 LTIP aw ar ds i s 10 0 p er ce nt i n sh ar es . De f aul t se t tl em e nt of r ep l ace m en t sh ar es i s 65 p e rce nt i n sh a re s (re ci pi e nt s may e l ec t t o re ce iv e 10 0 pe r ce nt of t he v es te d aw ar d in sh a re s). CEO s ha re ho ld in g re qu ir em en t (5 0 0 %) Other E C members sh arehold ing requir ement ( 4 00%) Held shares Granted, but unv ested s hares Sh ar eholding requireme nt Björn Rosen gren Timo Ihamuotila Carolina Granat Maria Varsellona Theodor Swedjemark Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod EC appoint ment March 2020 A p r i l 2 0 17 January 2021 November 2019 August 2020 Ju ne 2 01 6 October 20 10 January 2017 Ap r i l 201 9 100 ABB ANNU AL REPORT 2021 03 C OMPENSA TION REPORT T e rms o f de pa r tu re f or E C me m be r s The G e ne ra l Cou nse l & Com pany S e cre ta r y, Mar ia Vars el lo na , ha s re sig ne d fro m A BB a nd w i ll d ep ar t on M arc h 31 , 2 02 2 . S he w i ll b e en ti tle d to re cei ve com pe nsat io n an d be ne f it s up to th e poi nt of he r de pa r ture . Thi s in cl ud es a co ntr ac tua ll y agre e d pro -r ata sh or t-ter m in cen ti ve pay me nt of CH F 18 1 , 98 5 fo r the p e r io d Jan ua r y 1 to Ma rch 3 1 , 20 2 2 . A ll h er u nveste d L TI P sh are g ran ts and the unvested second t ranche o f her replace - me nt sha re gr ant w ere fo r fei ted . Compensa tion o f f ormer EC mem bers In 2 02 1 , ce r tai n form er EC m em be r s rec eiv ed cont rac tu al co mp en sati on fo r th e pe r io d af ter le av in g the EC , a s sh own i n E xhi bit 3 8 , fo otnote s (5) a nd (6). V otes on c om pensa tion a t the 2022 AGM A s il lus trate d in E x hibi t 33 , t he B oa rd ’s prop osa ls to shar eh ol de rs at t he 2 02 2 AG M w il l re late to Bo ard c omp e nsat io n for th e 20 2 2– 2 02 3 te rm of of f ice a nd EC co mp en sati on fo r th e ca le nd ar ye ar 20 2 3 . The re w i ll a lso b e a no n - bin di ng vote o n the 2021 Compensa tion Repor t. Bo ar d Compensation EC Compensation Compensation repor t Binding v ote on max i - mum aggrega te Board compensation for 2022– 20 2 3 te rm of o f f ic e Binding v ote on max imum aggregat e EC compensation for 2 0 2 3 Non- binding vot e on 2021 compensation repor t Ma rc h AG M Ma rc h AG M Ma rc h AG M E xhi bi t 3 3: S h ar eh o ld e rs w i l l hav e th re e se pa ra te vote s o n co mp e ns ati o n at th e 20 2 2 AG M 2021 2022 2023 Compensation period Date of vote 101 ABB ANNUAL REPORT 202 1 03 COMPENSA TION REPORT In det ermining the proposed max imum aggr egat e EC comp e nsat io n, th e B oar d ta kes into co nsi de r- atio n th e cr i ter i a ill us trate d in E x hibi t 3 4. G ive n the v ar i ab le n ature of a m ajor p or t io n of th e compensa tion componen ts, the proposed ma x i - mum ag gr eg ate EC comp e nsat io n w il l alm ost nor ma ll y be hi gh er t han t he ac tu al co mp en sati on paid o r awa rde d, a s i t mus t cove r the p ote nti al ma x i mum v al ue of e ach c omp on e nt of compensation. It is i mp or t ant to n ote that th e in cre a se in m a x i - mum ag gr eg ate com pe nsat io n for 2 02 3 i s main l y the r esu lt of th e ass oc i ated cos t re lated to t he 20 20 L T IP ve st in g in 2 02 3 , in fl ue nce d by : a) the i nc rea se d nu mb er of s har es su bje c t to ves ti ng co mp are d to pr i or ye ar s (see E x- hi b it 3 4) , b) the cur re nt, s oli d pe r fo rma nce of t he Co mp any again st i ts e arni ng s pe r sha re t arg et s an d total shareholder return peer group and c) the st ron g sha re p r ice d eve lo pm ent s in ce th e ti me of g ran t w ith a r efe re nce p r ice o f CHF 19. 3 6, rath er t han a ny str uc tu ra l in cre as e to EC compensation. Aggregate EC compensation in CHF ( millions ) Max imum ( approved AGM ) Max imum ( approved AGM ) Ac tual Ta r g e t Maximum ( approved AGM ) Max imum (app rov ed at Max imum (to be re q ue st ed Assumpt ions AIP awar d percentage Ad ju st me nt of L T IP g ra nt s ize n.a. Nu mb e r of L T IP s ha re s ves te d or p ote nt i al ly vesting in year n.a. n.a . Nu mb e r of EC me m be r s (1) N u mb er w i l l be p ro v id e d in t he AG M i nv i ta ti on . (2) Outc om e w it ho ut t he a l lo ca ti on o f fo rm er E C me mb e rs , bu t i nc lu di ng p r ev i ou s CH R O. Fo r fu ll d es cr i pt i on , se e pr ev iou s se c t io n “C om p en sa - tion elements – 2021 H ighlig hts” . (3) For e x am pl e , 35 4 , 8 69 LTIP s ha re s we re g r ant ed i n 2 02 0 th at p ote nt i al ly v es t in 2 0 2 3 , sub je c t to p e r for ma n ce co nd it i on s. 39. 2 35.8 39.5 55.5 52.0 40.0 xx.x 102 ABB ANNU AL REPORT 2021 03 C OMPENSA TION REPORT C ompe nsation tables a nd sha re o wner ship tabl es Name Nov ember Bo ar d te r m May Bo ar d te r m T otal c om pensation Nov ember Board term May Board term T otal c om pensation Settled in cash Se tt l ed i n s ha re s – nu m be r of s h ar es received Settled in cash Se tt l ed i n s ha re s – nu m be r of s h ar es received Settled in cash Se tt l ed i n s ha re s – nu m be r of s h ar es received Settled in cash Se tt l ed i n s ha re s – nu m be r of s h ar es received CHF CHF CH F CHF CHF CHF Peter V oser , Chairman — — — — Jacob Wallenberg Matti Alahuhta — — — — — Gunnar Brock — — — David C onstable Fr ederico Cura do — — — — La r s För be r g — — — — Je nn ife r X in -Z he Li Geraldine Mat chett David Meline Sat i sh Pai To t a l (1) R ep re se nt s g ros s am ou nt s pa id , pr i or t o de d uc t io ns f or s oc i al s ec ur i t y, w it hh ol di n g ta x e tc . (2) N um b er o f sh are s p er B o ar d me mb e r is c a lc ul ate d ba s ed o n ne t am o unt d u e af te r de d uc t io ns f or s oc i al s e cu r it y, w it hh ol d in g ta x e tc . (3) I n ad di ti on t o th e Bo a rd re m un er at io n st ate d i n th e ab ov e ta bl e , in 2 0 21 a nd 2 0 20 t he C om pa ny p ai d CH F 2 31 , 28 7 an d CH F 2 7 2 , 3 1 2, respectively , in relat ed ma ndat or y s ocial security paym ents. (4) Ch air ma n of t he A B B Ltd B o ar d for t h e 20 19 - 20 2 0, 2 02 0 -2 0 21 a n d 20 2 1- 2 02 2 b oa rd t er ms a nd C h air ma n of t he G ov er na n ce an d N om in at io n Com mi t te e for t h e 20 2 1- 2 02 2 b oa rd t er m; i s re ce iv in g 10 0 pe r ce nt of h is c om pe ns at io n i n th e fo rm of A B B sh ar es . (5 ) V i ce - Ch air ma n of t he A B B Ltd B o ar d for t h e 20 19 - 20 2 0, 2 02 0 - 20 21 a n d 20 2 1- 2 02 2 b oa rd t er ms ; Ch air ma n of t he G ov er n an ce a nd N om in at io n Com mi t te e for t h e 20 19 - 20 2 0 an d 20 2 0 - 2 0 21 b o ard t er ms a n d me mb e r of th at c om mi tt ee f or t he 2 0 21 - 20 2 2 b oa rd te rm ; is r e cei v i ng 5 0 pe rc en t of hi s co mp e ns at io n in t he f or m of A B B sh ar es . (6) M em be r of t h e Go ve rn an ce a nd N om in at io n Co mm it te e fo r th e 20 1 9 - 2 0 20 a nd 2 0 20 - 20 2 1 bo ar d te rm s; re c ei ve d 10 0 p er ce nt of h is co mp en sa ti on i n th e fo rm o f A BB s ha re s fo r th e 20 19 - 20 2 0 an d 2 02 0 - 20 21 b o ar d ter ms . D id n ot s ta nd f or e l ec t i on i n 20 2 1 . ( 7 ) Me mb e r of t he Fi n an ce , Au di t an d Co mp l ia nc e Co mmi t te e fo r th e 20 19 - 20 2 0, 2 02 0 -2 0 21 b o ar d te rm s; re ce i ve d 10 0 pe r ce nt of h is co mp en sa ti on i n th e fo rm o f A BB s ha re s fo r th e 20 19 - 20 2 0 an d 2 02 0 - 20 21 b o ar d ter m a nd i s re ce iv i n g 50 p e rce nt o f hi s co mp en sa ti on i n th e for m of A B B sh ar es f or t he 2 0 21 - 20 2 2 b oa rd te r m. (8) Ch ai rm an o f th e Co mp en sa ti on C om mi tt ee f or t he 2 01 9 - 20 20 , 20 2 0 - 2 0 21 b o ar d ter ms a n d me mb e r of t hat c om mi tt ee f or t he 2 0 21 - 20 2 2 bo ar d te rm ; is r ec ei v i ng 5 0 p er ce nt of h is c om pe n sat io n i n th e fo rm of A B B sh ar es . (9) M e mb e r of t he Co m pe ns at io n Co mm it te e fo r th e 20 1 9 - 2 02 0, 2 0 20 - 20 2 1 an d Ch ai rm an o f th e Co mp e ns ati on C om mi t tee f or t he 2 0 21 - 2 02 2 bo ar d te rm ; is r ec ei v i ng 1 00 p e rc en t of hi s co mp e ns ati o n in t he f or m of A BB s ha re s . (10) Me mb e r of t he G ov er na nc e an d No mi n ati on C om mi t tee f or t he 2 01 9 - 20 2 0, 2 02 0 - 2 0 2 1 an d 20 2 1- 2 02 2 b o ard t er ms ; is r ec ei v i ng 1 00 p e rc en t of hi s co mp e ns ati o n in t he f or m of A BB s ha re s . (1 1) M e mb er o f th e Co mp e ns ati on C om mi t tee f or t he 2 01 9 - 20 2 0, 2 02 0 - 20 21 a nd 2 0 2 1- 2 02 2 b oa rd t er ms a nd m e mb er o f G ove rn an ce a n d No mi nat i on C om mi tt ee f or 2 02 1- 20 2 2 bo ar d te rm ; is r ec ei v i ng 5 0 p er ce nt of h e r co mp en sa ti on i n th e fo rm o f A BB s ha re s. (1 2) Me mb e r of t he F in an ce , Au di t a nd Co m pl ia nc e Co mmi t te e fo r th e 20 19 - 20 2 0, 2 0 20 - 20 2 1 an d 20 2 1- 2 02 2 b o ard t er ms ; is r ec ei v i ng 5 0 p er ce nt of h er c om pe ns at io n i n th e fo rm of A B B sh ar es . (1 3) Cha ir ma n of t he Fi n an ce , Au di t an d Co mp l ia nc e Com mi t te e for 2 0 19 - 20 2 0, 2 02 0 - 20 21 a n d 20 2 1- 2 02 2 b oa rd t er ms ; is r ec ei v in g 5 0 pe r ce nt of his c om p en sat i on i n th e fo rm o f AB B s ha re s. (1 4) M em b er o f th e Fi na nc e, A u di t an d Co mp li an ce C om mi tt ee f or t he 2 01 9 - 2 0 20 , 2 02 0 - 2 0 21 a n d 20 2 1- 2 02 2 b oa rd t er ms ; is r ec ei v i ng 5 0 pe r ce nt of hi s co mp e ns ati o n in t he f or m of A BB s ha re s . 103 ABB ANNUAL REPORT 202 1 03 COMPENSA TION REPORT Name Specific Board Roles Bo ar d te r m Bo ar d te r m CHF CHF Peter Voser Jacob Wallenberg Matti Alahuhta n.a. Gunnar Brock David C onstable Fr ederico Cura do La r s För be r g Je nn ife r X in -Z he Li Geraldine Mat chett David Meline Sat i sh Pai To t a l (1) Th is r ef l ec t s a 10 p e rce nt C OV ID -19 r el ate d vo l un ta r y do n ati o n in B oa rd f ee s fo r th e f i rs t ha lf o f th e 20 2 0 - 2 0 21 B o ar d ter m . Key : CC: C ompensation C ommittee FA CC: F inance, Audit and Compliance Committee GNC: Governance and Nomination C ommittee Name T o ta l nu m be r o f sh ar e s he l d Peter Voser Jacob Wallenberg Matti Alahuhta n.a. Gunnar Brock David C onstable Fr ederico Cura do La r s För be r g Je nn ife r X in -Z he Li Geraldine Mat chett David Meline Sat i sh Pai To t a l (1) I nc lu de s 2 ,0 0 0 s ha re s he l d by sp o us e. (2) M at ti A l ah uh ta d id n ot s ta n d for r e - e l ec t i on at A B B’s A n nu al G e ne r al M e et in g in M a rc h 20 2 1 . (3) I nc lu de s 3 , 1 5 0 sh ar es h el d by s po us e . 104 ABB ANNUAL REPORT 202 1 03 COMPENSA TION REPORT Name Cash C ompe nsation Es ti ma te d va l ue o f sh a re - ba s ed Es ti ma te d va l ue o f re p la ce m en t Ba se s al a r y Short - term incen tive Pension be nefits Other benefits compensation CHF CH F CH F CH F CHF CHF CHF CHF Björn Rosen gren — Timo Ihamuotila — Carolina Granat (EC — Maria Varsellona — Theodor Swedjemark — Sa mi At i ya — T arak Mehta — Pet er T erw iesch — Morten Wierod — T o ta l E xec u ti ve Com m it te e me m be r s — Sylvia Hill (EC membe r — — T o ta l de p ar t i ng Ex ec ut iv e Com m it te e members — — To t a l — (1) R ep re se nt s ac cr ue d s ho r t-te rm v a ri a bl e co mp e ns ati o n fo r th e yea r 2 02 1 , w hi ch w i ll b e pa id i n 20 2 2 , af te r t he p ub li c ati o n of A BB ’s f i na nc i al re sul t s. S ho r t-te r m va r ia b le c om pe ns at io n i s li nke d to t he o bj ec t i ve s de f in e d in e ac h EC me m be r ’s A nn ua l In ce nt i ve P la n. U p on f ul l ac hie ve me n t of th es e ob je c t iv es , th e sh or t- te rm v ar i ab l e co mp en sa ti on o f th e EC m em be r s re pr es e nt s 10 0 p er ce nt of t he ir r es p ec t i ve ba s e sa la r y. Sy lv i a H il l re ce iv ed a s ho r t-te rm v a r ia bl e co mp e ns at io n pay m en t in D e ce mb e r 20 2 1 re la te d to he r te rm in at io n p er i od , i n acc or da nc e with the c ontractual obligations of ABB. (2) O th e r be n ef i ts m ai nl y co mp r is e pa ym e nt s re lat ed t o so c ia l se cu r it y, he a lt h in sur a nc e, c hi ld re n’s e du c at io n, t ra ns po r t ati o n, t a x ad v i ce a nd co mp en sa ti on f or f or eg on e d iv i d en ds o n re p la ce me nt s ha re g ra nt s an d ce r t ain o th er i te ms . (3) Pr e pa re d on a n ac cr ua l ba s is . (4) Th e es ti m ate d va lu e of t he s ha re -b a se d LTIP gr a nt s ar e ba se d o n th e pr i ce of A B B sh ar es o n t he g ra nt d ate , ad ju ste d f or e xp e c te d fo re go ne di v id e nd s du r i ng t he v es ti ng p e r io d . On t he d ay of v es t in g (A p r il 2 6 , 20 2 4), th e va lu e of t he s ha re -b a se d aw ar ds g ra nte d u nd er t h e L T I P may va r y f rom t h e ab ove a mo u nt s du e to c ha ng es i n A BB ’s sh a re p ri ce a n d th e ou tco me o f th e p er fo r ma nc e fa ct or s . (5 ) P ay me n ts to ta li n g CH F 2 9 6, 0 0 4 we re m ad e in 2 02 1 o n be h al f of ce r t ain o th er f or me r EC m e mb er s , re pr es en ti n g so c ia l se cu r it y p re mi um pay m en ts d ue o n t he LTIP 2 01 8 ve st i ng a nd t a x a dv i so r y s er v ice s fo r th e p er i od w h en t he y hav e be e n ac t i ve EC m em be r s. (6) U lr i ch S pi es sh ofe r re ce i ve d no n - co mp e te pa ym e nt s for t h e pe r io d J an ua r y 1 , 2 02 1 to A p r il 3 0, 2 0 21 a n d a ves t in g of t he 2 01 8 LTIP, wit h re lat ed s oc i al s e cu r it y p aym e nt s, to ta li n g to CH F 1 ,7 2 6, 8 9 6 . 105 ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT Name Cash C ompe nsation Es ti ma te d va l ue o f sh a re - ba s ed Es ti ma te d va l ue o f re p la ce m en t Ba se s al a r y Short - term incen tive Pension be nefits Other benefits compensation CHF CH F CH F CH F CHF CHF CHF CHF Bj ör n Ros e ng re n (EC m em b er a s of Timo Ihamuotila — Sylvia Hill — Maria Varsellona — Th eo do r Swe d je ma rk (EC m em b er a s of — Sa mi At i ya — T arak Mehta — Pet er T erw iesch — Morten Wierod — T o ta l E xec u ti ve Com m it te e me m be r s Pe ter Vos e r (EC m em be r — — Ulrich Spiesshof e r (EC member until — — Jean- Chr istophe Deslarzes (E C member — — Di an e de S ai nt V ic t or (EC m em b er u nt il — — T o ta l de p ar t i ng Ex ec ut iv e Com m it te e members — — To t a l (1) B as e sa l ar y a s we l l as t he t a rg et sh o r t-te rm i nc en t iv e we re ad ju st ed w h er e ap pr op r i ate fo r EC m em be r s wh o vo lu nt ar i l y do na te d 10 pe r ce nt of th ei r s al ar y t o f ig ht th e i mp ac t s of t he CO VI D - 19 c r is is f or a s ix- m o nth p e r io d du r i ng 2 02 0. (2) R ep r es en ts a cc ru ed s ho r t-te r m va r ia bl e co m pe ns at io n fo r th e ye ar 2 0 20 , wh ic h wa s p aid i n 2 02 1 , af te r t he p ub li c at io n of A B B’s 2 02 0 f in an c ia l re su lt s. S h or t-t er m v ar i ab le c om p en sat i on i s li nke d to t he o bj e c ti ve s de f in e d in e ac h EC m em be r ’s A nn ua l I nc en ti ve P la n . Up on f ul l ac hie ve me n t of th es e ob je c t iv es , th e sh or t- te rm v ar i ab l e co mp en sa ti on o f th e EC m em be r s re pr es e nt s 10 0 p er ce nt of t he ir r es p ec t i ve ba s e sa la r y. Th e sh or t-t er m v ar i ab le c om pe n sat i on of t h e for m er C EO, U lr i ch S pi es sh ofe r, cor re sp on de d to t he c on tr ac tu al l y ag re e d ave ra ge o f th e ye ar 2 017 an d 2 01 8 sh or t-t er m v ar i ab le c om p en sat i on aw a rd . Pe te r Vose r re c ei ve d hi s sh or t-t er m va r ia b le c om pe n sat io n p aym e nt mo nt hl y at t ar ge t ac hi eve m en t le ve l. D i an e de S ai nt V i c tor a nd J e an - Chr i st op he D e sl ar ze s re ce iv ed a p ro -r at a sh or t-t er m v ar i ab le co mp en sa ti on p ay me nt f or t he ir p e r io d of s er v ice a s a n EC m em be r, in ac cor da n ce w i th t he co nt ra c tu al o bl ig at io ns o f A BB . (3) O th er b e ne f it s co m pr i se p aym e nt s re l ate d to so c ia l se cu r it y, h ea lt h in su ra nc e, c hi ld re n’s e d uc at io n, t r an sp or t at io n, t a x ad v i ce a nd c er t ai n oth e r ite m s li ke co mp e ns ati o n for u nu se d v ac at io n ba la n ce s at th e ti m e of d ep ar t ur e fro m A B B. (4) Pr ep ar ed o n a n acc ru al b a si s. (5 ) T h e es ti ma te d va lu e of t he s ha re - b a se d LTIP g ra nt s ar e ba se d o n th e pr i ce o f AB B sh a re s on t he g ra nt d ate , ad ju st ed f or e xp e c te d fo re go ne di v id e nd s du r i ng t he v es ti ng p e r io d . On t he d ay of v es t in g (A p r il 2 7, 20 2 3), t he v al u e of th e sh ar e - b as ed a wa rd s gr an te d un de r t he LTIP m ay va r y f rom t h e ab ove a mo u nt s du e to c ha ng es i n A BB ’s sh a re p ri ce a n d th e ou tco me o f th e p er fo r ma nc e fa ct or s . (6) Pa ym e nt s tot al in g CH F 1 61 , 2 74 we re m ad e in 2 0 20 o n b eh al f of c er t ai n oth e r fo rm er EC m e mb e rs , re p re se nt in g so c ia l se cu r i ty p re mi u m paymen ts. ( 7 ) AB B p aid U l r ic h Sp ie ssh of er i n ad di t io n to t he co m pe ns at io n re l ate d to th e te rm in at io n p er i od , no n - c om pe te p ay me nt s fo r th e p er i od May 1 , 2 0 20 , to D ec em b er 3 1 , 2 02 0, a nd r e lat ed s oc i al s ec ur i t y pa ym e nt s tot al in g CH F 2 , 8 0 6, 1 1 1 . 106 ABB ANNU AL REPORT 2021 03 C OMPENSA TION REPORT Name Re fe re n ce n u mb e r of s ha re s under the EPS performance of t he LTIP T o ta l es ti m ate d v al u e of s ha re -b as e d grants under the E PS performance Re fe re n ce n u mb e r of s ha re s under the TSR performance of t he LTIP T o ta l es ti m ate d v al u e of s ha re -b as e d grants under the TS R performance T o ta l nu m be r o f sh ar e s gr an te d of t he LTIP T o ta l es ti m ate d v al u e of s ha re -b as e d CHF CHF CHF Björn Rosen gren Timo Ihamuotila Ca ro li na G r an at (EC m em b er Maria Varsellona Theodor Swedjemark Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod T o ta l E xec u ti ve Com m it te e me m be r s at (1) Ves t in g da te A pr i l 26 , 2 0 24 . (2) T he r ef er en ce n um b er o f sh ar es of t h e EP S an d T SR p e rf or ma n ce f ac to rs a re v al u ed u si ng t h e fai r v al ue o f th e AB B s ha re s on t he g ra nt d ate adjus ted for expected foregone dividends during the ves ting per iod. (3) D ef au lt s et tl e me nt o f th e f in al LTIP aw a rd i s 10 0 pe r ce nt i n sh are s , w it h an a uto mat i c se ll - to - cove r i n pl ac e fo r em pl oy ee s w ho a re su bj e c t to w it hh ol di n g ta x es . Th e pl a n for es e es a m a x im um p ayo ut o f 20 0 p e rce nt o f th e nu mb e r of r efe r en ce s ha re s gr an te d ba se d o n th e ac hie ve me n t aga in st t he p re - de f in ed a ve ra ge E PS a n d re lat i ve T SR t a rg et s. (4) In a dd it io n to t he a bo ve aw ar ds , f i ve me m be r s of th e EC p ar t i c ip ate d in t he 1 8 th l au nc h of t he E S A P in 2 02 1 , w hi ch w i ll a ll ow t he m to s ave ove r a 1 2- m on th p er i o d an d, i n N ove mb e r 20 2 2 , us e th ei r sa v in gs t o acq ui re A B B sh a re s un de r th e E SA P. Eac h EC me m be r w ho p ar t ic i pa te d in E S AP w i l l be e nt it l ed to a cq ui re u p to 3 3 0 AB B s ha re s at an e xe rc i se p r ic e of C HF 3 0. 32 p e r sh ar e. 107 ABB ANNU AL REPOR T 2021 03 COMPENSA TION REPORT Name Re fe re n ce n u mb e r of s ha re s u nd e r th e E PS p e r fo rm an c e fac t or o f T o ta l es ti m ate d v al u e of s ha re -b as e d grants under the E PS performance Re fe re n ce n u mb e r of s ha re s u nd e r th e TS R p e r fo rm an ce f ac t or o f T o ta l es ti m ate d v al u e of s ha re -b as e d grants under the TS R performance T o ta l nu m be r o f sh ar e s gr an te d u nd e r T o ta l es ti m ate d v al u e of s ha re -b as e d CHF CHF CHF Bj ör n Ros e ng re n (EC m em b er Timo Ihamuotila Sylvia Hill Maria Varsellona Th eo do r Swe d je ma rk (EC m em b er a s of Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod T o ta l E xec u ti ve Com m it te e me m be r s at (1) Ves t in g da te A pr i l 2 7, 202 3 . (2) T he r ef er en ce n um b er o f sh ar es of t h e EP S an d T SR p e rf or ma n ce f ac to rs a re v al u ed u si ng t h e fai r v al ue o f th e AB B s ha re s on t he g ra nt d ate adjus ted for expected foregone dividends during the ves ting per iod. (3) D ef au lt s et tl e me nt o f th e f in al LTIP aw a rd i s 10 0 pe r ce nt i n sh are s , w it h an a uto mat i c se ll - to - cove r i n pl ac e fo r em pl oy ee s w ho a re su bj e c t to w it hh ol di n g ta x es . Th e pl a n for es e es a m a x im um p ayo ut o f 20 0 p e rce nt o f th e nu mb e r of r efe r en ce s ha re s gr an te d ba se d o n th e ac hie ve me n t aga in st t he p re - de f in ed a ve ra ge E PS a n d re lat i ve T SR t a rg et s. (4) In a dd it io n to t he a bo ve aw ar ds , f i ve me m be r s of th e EC p ar t i c ip ate d in t he 17 th l au nc h of t he E S AP i n 2 02 0, w hi c h al low e d th em to s ave o ve r a 1 2- mo nt h pe r i od a nd , i n No ve mb er 2 0 21 , u se t he i r sav i n gs to a cq ui re A B B sh ar es u nd e r th e ES A P . Ea ch EC m e mb er w h o pa r ti c ip ate d i n ES A P wa s b e en t it le d to ac qu ir e up t o 4 4 0 AB B s ha re s at an e xe rc i se p r ic e of C HF 2 2 . 8 7 pe r sh a re . 108 ABB ANNUAL REPORT 2021 03 C OMPENSA TION REPORT Name To t a l nu m be r of sh ar e s he l d at De c em - Vest ed a t December Nu m be r o f ves te d op ti o ns he l d un d e r th e M IP Nu m be r o f unv es te d op ti o ns he l d un d e r th e M IP Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re p la ce m en t sh a re g ra nt for f oregone benefits from former employ er Re p la ce m en t sh a re g ra nt for f oregone benefits from former employ er (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g Björn Rosen gren — — — Timo Ihamuotila — — — — Carolina Granat (EC — — — — — — Maria Varsellona — — — — — — — Theodor Swedjemark — — — — Sa mi At i ya — — — — T arak Mehta — — — — Pet er T erw iesch — — — — Morten Wierod — — — — T o ta l E xec u ti ve Com m it te e me m be r s — (1) Th e f i na l L TI P 20 19 a wa rd w i ll b e se t tl ed 6 5 p er ce nt i n sh ar es a nd 3 5 p e rce nt i n c as h. T hi s ap p li es to b ot h p er f or ma nc e fa c tor s (E P S an d TS R) . Ho wev e r , th e pa r ti c i pa nt s hav e th e po ss ibi li t y to e le c t to r ec ei ve 1 0 0 pe rc en t of t he ve s ted a wa rd i n sh ar es . Th e f i na l L TI P 20 2 0 an d L T I P 20 2 1 awa rd w ill b e se t tl e d 10 0 pe r ce nt i n sha re s , w it h an au to mat i c se ll - to - cove r i n pl ac e for e m pl oy ee s wh o a re su bj e ct t o w it hh ol d in g taxes. (2) I t is e x pe c te d th at th e re p la ce me nt s ha re g ra nt s w i ll b e se tt l ed 6 5 p er ce nt i n sh ar es a nd 3 5 p er ce nt i n ca sh . H ow eve r, the p ar t i c ip an ts h ave th e po ssi bi li t y to e le c t to r ec ei ve 1 00 p e rc en t of th e ve st ed a wa rd i n sh ar es . (3) Th is i nc l ud es s ha re s he l d by t he s po us e . (4) Unv es te d sh ar e gr an ts w er e fo r fe ite d a s a re su lt o f th e re si gn at io n pr ov i de d a nd r em ov ed f ro m th e sh ar eh o ld in g ove r v iew. (5 ) I n ad d it io n , his s po u se h ol ds u nve s ted s ha re s an d o pt io ns g ra nt ed i n co nn e c ti on w ith h e r ro le i n th e co mp an y. ABB ANNUAL REPORT 2021 03 COMPE NSA TIO N REPORT Name To t a l number of s ha re s he l d at Decem - Vested at Decem - Nu m be r o f ves te d op ti o ns he l d un d e r th e M IP Nu m be r o f unv es te d op ti o ns he l d un d e r th e M IP Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re p la ce m en t sh a re g ra nt for f oregone benefits from former employ er Re p la ce m en t sh a re g ra nt for f oregone benefits from former employ er Re p la ce m en t sh a re g ra nt for f oregone benefits from former employ er (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g Bj ör n Ros e ng re n (EC me mb e r as o f — — — — — Timo Ihamuotila — — — — — Sylvia Hill — — — — Maria Varsellona — — — — — Th eo do r Swe d je ma rk (EC m em b er a s of — — — — — Sa mi At i ya — — — — — T arak Mehta — — — — — Pet er T erw iesch — — — — — Morten Wierod — — — — — T o ta l E xec u ti ve Com m it te e me m be r s at (1) Th e f i na l L TI P 20 18 a wa rd a nd LTIP 2 01 9 aw a rd w i ll b e se tt l ed 6 5 p er ce nt i n sh ar es a nd 3 5 p er ce nt i n ca s h. T hi s ap pl ie s to bo th p e r for ma n ce f ac to rs ( EP S a nd T S R). H ow eve r, the p ar t i c ip an ts h ave t he p os si bi li t y to e le c t to re c ei ve 10 0 pe r ce nt of t he v es te d aw ar d in sh a re s. T he f i na l LTIP 2 02 0 aw ar d w il l b e se tt le d 10 0 p e rce nt i n sh a re s, w i th a n aut om at ic s el l -t o - co ve r in p l ace f or e mp l oye e s wh o ar e su bje c t to w i th h ol di ng t a xe s. (2) I t is e x pe c te d th at th e re p la ce me nt s ha re g ra nt s w i ll b e se tt l ed 6 5 p er ce nt i n sh ar es a nd 3 5 p er ce nt i n ca sh . H ow eve r, th e pa r ti c i pa nt s hav e th e po ss ibi li t y to e le c t to r ec ei ve 1 0 0 pe rc en t of t he ve s ted a wa rd i n sh ar es . (3) I n ad di ti on , hi s sp ou se h o ld s un ve ste d sh ar es a n d op ti on s gr an te d in c on ne c t io n w i th h er r ol e in t h e com p any. 110 ABB ANNUAL REPORT 2021 03 COMPENSA TION REPORT Ba se salar y Pension benefits Other benefits T arget short-term in ce nti ve Grant fair va l ue o f T a r ge t to ta l variable compensation T a r ge t to ta l compensation Björn Rosen gren n.a. Timo Ihamuotila Ca ro li na G r an at (EC m em b er a s n.a. Maria Varsellona n.a. Theodor Swedjemark n.a. Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod To t a l Ba se salar y Pension benefits Other benefits Short-term in ce n ti ve Grant fair va l ue o f T o ta l va r i ab l e compensation To t a l compensation Björn Rosen gren n.a. Timo Ihamuotila Ca ro li na G r an at (EC m em b er a s n.a . Maria Varsellona n.a. Theodor Swedjemark n.a. Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod To t a l Realized achiev eme nt lev el Ba se salar y Pension benefits Other benefits Short-term in ce nti ve Grant fair va l ue o f T o ta l va r i ab l e compensation To t a l compensation Björn Rosen gren n.a. Timo Ihamuotila Ca ro li na G r an at (EC m em b er a s n.a. Maria Varsellona n.a. Theodor Swedjemark n.a. Sa mi At i ya T arak Mehta Pet er T erw iesch Morten Wierod Aver ag e (1) O th er b e ne f it s co m pr i se p aym e nt s re l ate d to so c ia l se cu r it y, h ea lt h in su ra nc e, c hi ld re n’s e d uc at io n, t r an sp or t at io n, t a x ad v i ce a nd c e rt ai n other items. (2) Targ et s ho r t-te rm i n ce nt iv e co rr es po nd s to 10 0 p e rce n t of th e la tes t a pp li ca b le a nn ua l b as e sa la r y. (3) R ep re se nt s th e LTIP 2 01 8 g ra nt d ate f air v al u e as p e r A pr i l 6, 2 01 8 , a s di sc lo se d in o u r an nu al r ep o r t 20 18 . (4) Re pr es e nt s acc ru e d ST I fo r th e ye ar 2 0 21 , w hi ch w i l l be p ai d in 2 0 22 , af t er t he p u bl ic at io n of A B B’s f i na n ci a l re sul t s. S TI i s li n ked t o th e ob je c ti ve s d ef i ne d i n eac h EC m em b er ’s A n nu al I nc en t iv e Pl an . (5 ) V al ue d at C HF 2 9 . 2 5 , th e cl os in g pr i ce o f th e A BB s ha re o n th e da y of ve st i ng . 111 1 Report of the Statutory Aud itor To the Gener al Meeting of A BB Ltd , Zurich We have au dited the acc ompanying c ompensat ion report of ABB Ltd for the year ended D ec ember 31, 2021 . T he audit was limited t o the inform ation according to arti c les 14 – 16 of t he Ord ina nce Agai nst Exces siv e Co mpens at ion in Stock Ex change List ed Companies (Ordin ance) cont ained i n the tables labele d “audited” on pages 102 to 109 of the compen sation report. Responsibility of the Board of Directors The Board of Directors is responsible for the preparati on and overall fair pre sentation of t he compensation repo rt in accordance w ith Swiss law a nd the Ordinance against Exce ssive co mpensation in Stock Exch ange Li sted Com pa- nies (Ordinan ce). The Board of Directors is also r esponsible for de signing the c ompensation sy stem and defi ning individual c om pens ati on packages. Auditor's Responsi bility Our respons ibility is to expr ess an opinio n on the accompanying compensatio n report. We conducted our a udit in accordance w ith Swis s Auditing Standar ds. Tho se standards require that we com ply with et hical requirement s and plan and per form the a udit to obtain rea sonable assurance about whether the c ompensati on report compl ies with Swiss law an d articles 14 – 16 of the Ordinance. An audit in volves perf orming procedure s to obtain audit evidence on t he disclosures m ade in the compen sation report w ith reg ard to compens ation, loans and cr edits in acc ordance with art icles 14 – 16 of t he Or dinan ce . The procedure s selecte d depend on the auditor’ s judgment , including the a ssessm ent of the risks of material misstate- ments in the compensat ion r eport, whether due to fr aud or error. Thi s audit also inclu des evaluating th e reasonable- ness of the meth ods applied to value compon ents of compensati on , as well a s assessing t he overa ll present ation of the compen s ation report. We believe t hat the audit e vidence we ha ve obtained is sufficient a nd appropriat e to prov ide a basis for our opinion. Opinion In our opinio n, the com pensation report for the year en ded December 31, 2021 of ABB Ltd com pl ies with Sw iss law and artic les 14 – 16 of the O rdinan ce. KPMG AG Hans - Dieter Krauss Mohammad Naf eie Licensed Aud it Expert Auditor in Ch arge Zurich, Swit zerland February 2 4 , 2 0 22 KPMG AG , Badenerstrasse 172 , CH - 8036 Zuric h © 2022 KPMG AG, a S wiss cor poration, is a s ubsidiary of KPMG Holdin g AG, which is a member of the KPMG global organiz ation of inde pendent member firms affiliated with K PMG Internati onal Limite d, a private English com pany limite d by guarant ee. All rights r eserved. 04 2021 Fina nc ia l r e v i e w o f ABB G r o up 114 2021 Ope rating and f ina nc ial rev iew and pros pects 1 62 C onsolidat ed Financ ial Sta tements of ABB G roup 114 ABB ANNUAL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP — Abou t AB B AB B is a l ea din g gl ob al te chn ol og y co mpa ny th at energizes the transfor mation of society and in dus tr y to ac hie ve a mo re pr od uc t ive , sus tai n - ab le fu ture . B y con ne c ti ng s of t war e to it s elec trific ation, r obotic s, a utoma tion and motion portfolio, ABB pushes the boundaries of t echnol - og y to dr i ve pe r for ma nce to n ew le vel s. Wi th a his tor y of exce ll en ce st retc hin g bac k mor e tha n 1 3 0 yea rs, A B B’s suc cess i s dr i ven by a bo ut 105,000 talent ed employ e es. — Organiza tional structure Our busines s is int ernational in scope and we ge ne rate re ven ue s in nu me rou s cu rre nc i es . We op er ate in ove r 10 0 cou ntr i es ac ross th re e reg io ns: Eur op e, th e A me r ic a s, an d A si a , Mid dl e Ea st a nd Af r ic a . We are h ead qu ar te re d in Zur i ch , Sw it ze rl an d. We manage our company through our four Busi - ness Areas: Electrifi cation, Mo t ion, Proc ess Auto mat ion , an d Ro bot ic s & D isc rete A utom ati on . For a b rea kdown of o ur co nso li dated r eve nu es (i ) by B usi ne ss A rea , ( ii ) by ge og ra phi c re gio n, a nd (i ii ) by pro du c t t yp e , see “An al ysi s of re sult s of op er ati ons — R eve nue s” a nd “ No te 23 - O p er atin g seg me nt an d ge og ra phi c dat a” to our Con sol i - dated F ina nc i al State me nt s. U nti l Ju ne 3 0, 2 02 0, we als o op er ated th e Powe r G r id s bu sin ess , whi ch is re po r ted a s di sco nti nu ed o pe rat io ns i n the Consol idat e d Fin ancial Sta tements ( see “Discon - ti nu ed o pe rat io ns” se c t io n be low). O n Ju ly 1 , 20 20, w e com pl ete d the d ive stm e nt of 8 0. 1 pe r- cent o f the P ower G r i ds b usi ne ss to Hit achi Ltd (Hi tac hi ). We ret ain a 1 9. 9 pe rce nt own e rshi p inter est thr ough our investment in Hitachi Energy Ltd, for me rl y Hi tac hi A BB P ower G r i ds Ltd (H ita chi Ene rg y) whi ch b en ef i c ial ly ow ns o r cont rol s al l the subsid iaries of t he Po wer Gr ids busines s. Ou r pr i nc ip al co rp or ate of f ice s are l oc ated at Af fo lter nst ra sse 4 4 , CH 8 0 50 Zu r ic h, Sw i tze rl an d, tel ep ho ne n umb e r +41 43 3 17 711 1 . Our ag e nt for U. S. f ed er al se cu r it ie s law pu rp ose s is A BB H ol d - in gs In c ., l oc ated at 3 0 5 Gr eg son D r iv e, C ar y , No r th C aro lin a 2 751 1 . O ur i nter ne t add ress i s w w w.ab b.com or global.abb. The information cont ain ed o n or acc essi bl e fro m ou r Web si te is not i nco rp orate d into t his an nu al re po r t , an d you sho ul d not co nsi de r it to b e a pa r t of this a nn ual rep or t . T he U nite d States S e cur i ti es a nd E x- cha ng e Com missi on (S EC) mai ntai ns a we bsi te at www .s ec. go v w hic h cont ain s in e le c tro nic fo rm eac h of the r ep or t s an d oth er i nfor mat io n that we have f il e d el ec t roni ca ll y w it h th e SEC . — E m p l oye e s A bre akdow n of ou r em pl oye es by g eo gr aph ic reg io n is a s fol low s: Eur op e Th e A me r ic a s A si a, M i dd le E a st a nd A fr i ca To t a l The p ro po r ti on of o ur e mp loye es t hat are r ep re - sen ted by l ab or un ion s or a re subj e c t to col le c ti ve barga ining a greeme nts varies based on the labor pr ac ti ces of e ach c oun tr y i n whi ch we o pe rate . 115 ABB ANNU AL REPORT 2021 0 4 FI N A NC I AL R E V I E W OF A B B G RO UP — Hist or y of the ABB G roup The A B B G rou p wa s for me d in 1 9 8 8 thr oug h a me rg er b et we en A s ea A B an d BB C Br own B ove r i AG . Ini ti all y fo un de d in 1 8 83 , A se a AB w a s a majo r par ti ci pa nt in t he i ntro du c ti on of elec tricit y int o S wedish homes and businesses and i n th e dev el op me nt of Swe de n’s rail way net wo rk . I n the 1 9 4 0s a nd 1 9 50 s, A s ea A B ex- pan de d in to the p owe r , mini ng a nd s tee l in dus tr ie s. B row n B over i a nd Ci e . (l ater re na me d BB C B rown B ove r i AG) wa s for me d in Sw it zer lan d in 1 89 1 an d init i all y sp ec i ali zed i n powe r g en er a- ti on a nd tur bin es . In t he ea rl y to mid -1 9 0 0s , it expanded its operations throughout E urope and broadened its business operations to in - clu de a w ide r an ge of e le c tr i c al e ngi ne er ing activ ities. In J anu ar y 19 8 8 , A sea A B an d B BC B row n Bov er i AG each contribut ed almost all of t heir busines ses to the n ew ly fo rm ed A B B A sea B row n B over i Ltd , of whi ch th ey e ach ow ne d 50 p e rce nt . In 1 9 9 6, A sea A B w as re n ame d A BB A B a nd B BC B row n Bov er i AG w as r en ame d A BB AG . In Feb ru ar y 19 9 9, the ABB Group announced a group reconfigura - tion designed t o establish a single parent hol ding com pany a nd a s in gle c la ss of sh are s. A B B Ltd wa s in corp or ated o n Ma rch 5 , 1 99 9, u nd er t he l aws of Sw it ze rla nd . In J un e 19 9 9, A B B Ltd be ca me th e hol di ng co mp any fo r the e nt ire A B B G rou p. Thi s wa s acco mp lis he d by hav i ng A B B Ltd issue s har es to the sh ar eh ol de rs of A B B AG an d AB B A B , the two c om pani es t hat for me rl y own e d the A B B Gro up. T he A B B Ltd shar es we re e xch ang e d for the s har es of th ose t wo co mp ani es, w hic h, as a r esul t of th e sha re e xcha ng e an d cer t ain relat e d tran sactions, became wholly-owned subs idi ar i es of A B B Ltd. A s de scr i be d ab ove , on J ul y 1 , 20 20 , we di veste d 80 . 1 pe rce nt of ou r own er shi p in th e Powe r G r id s business to Hitach i . AB B Ltd sha re s are c urr ent ly l iste d on t he S IX Sw iss E xch an ge , th e NA S DAQ OM X Stoc kh ol m E xcha ng e an d the N ew York Stock E xc han ge ( in the fo rm of A m er i ca n De p osit ar y Sha re s ). — A B B To d a y A s a gl oba l le ade r in r eso urc e ef f i ci e nc y, exce lli ng in e le c tr i f ic ati on an d auto mat ion , ou r of fe r in g is rel ev ant fo r th e gl oba l en e rgy t ra nsi ti on , in cre as ed e ne rg y ef f i c ie nc y, and t he tr an sit io n to more a daptive manufacturing and automa tion, put t in g us r ig ht in t he ce nte r of lo ng - ter m sec u - lar trends. The A BB Pu rpose The A B B Pu rp ose c aptu res w hat we d o, and t he AB B Way de scr i be s how w e do it . W it h our P ur- pos e at the co re , AB B st r ive s to cre ate sup er i or value for customers, employ ees and s hareholder s. The A B B Pu rp ose is su mm ar ize d a s: • We succee d by c reat in g sup er i or v al ue . • We push th e bo und ar i es of te ch no lo gy to d r ive pe r for man ce to ne w le vel s. • We ene rgize t he tr an sfor mat io n of soc i et y a nd in dus tr y to ac hie ve a mo re pr od uc t ive , sustainable future. Our cor e c ompetencies Ou r le ade rs hip i n reso ur ce ef f i c ie nc y i s ba se d on our c ore co mp ete nc i es , each o f whi ch con st itute s a bar r ie r to en tr y : de ca de s- l on g domain e xpert ise, cutting- edge technology and inn ov atio n a s wel l as t he a bil it y to sc al e op er a- tions and distribution. Wi th it s l ong h isto r y, ABB n ot on l y inve nted o r pioneered man y power and automa tion t echnolo - gie s bu t ha s ret ain ed te ch no lo gy a nd m arket le ade rs hip i n many of t he se ar ea s. B ei ng p res ent in v ar i ous ve r t ic al m arket s fo r de ca de s w ith c los e long-term rela t ionship s with cust omers and channel partner s has res ulted in our unique deep domain e xpert ise, enabling a thorough under - standing o f customers’ needs and opera t ions. We cont in uo usl y evo lve o ur of f er i ng to remain a relev ant and trusted partner to our 116 ABB ANNU AL REPORT 2021 0 4 F IN A N CI A L RE VI E W O F AB B G RO U P cus tom er s. O ur a nnu al n on - ord er re late d re sea rch and d eve lo pm e nt spe nd in g in 2 02 1 am oun ted to app rox im atel y 4 . 2 p erc ent of r eve nu es. We fo cu s our res earch and dev elopment expenditur es on key are as of i nn ovat io n an d have sp ent a pp rox i - matel y $ 7 bil lio n si nce th e be gi nni ng of 2 016 , focusing on developing best -in - class pr oducts and s er v ice s in t he f i el ds of e le c tr i f ic ati on a nd aut omation with the goal of helping our cust om - er s to in cre as ed p rod uc t i v it y a nd l ower t he ir ecological f ootprint. Al l ou r fou r Bu sin ess A re as a re ma rket l ead e rs i n the ir re sp ec t iv e are as b ei ng i n eit he r the n um be r 1 or 2 p osit i ons . Ou r gl ob al re ach a lon g w i th ou r ex te ns ive l oc al p res en ce ass is ts u s in sc al ing inn ov atio ns to ac hie ve stro ng e r retu rns , whi ch supports higher ab solute inv estments for f uture growth. Acti ve globally , our rev e nues are wel l - ba lan ce d acro ss re gio ns w i th cu stom er s ser ved d ire c tl y an d th rou gh a st ron g ch ann e l partner network. The ABB Wa y The A B B Way is th e gl ue t hat uni tes ou r G rou p and com pr i ses a se l ec t n umb e r of com mo n pro cess es cov ering our busines s model, our people and culture, t he ABB brand and our governance fram e - work. It fa cilitates a ccountability, transparenc y and s pe ed i n A BB . In ou r op er ati ng m od el , th e Di v i sio ns re pr ese nt the hi gh es t leve l of o pe rat in g de c isi on s. Th ey a re cl oses t to the ir re sp ec t iv e mar kets a nd c usto me r needs. Each Div ision progr esses throug h the stra tegic mandat es and prioriti es o f stab ility and prof i ta bil it y be for e grow t h. M ea nin g, i n ord e r to de pl oy fu ll fo cus o n org ani c an d acq uir ed g row th to the e x te nt of con sol id ati ng th e ma rket , th e business’ structure should be robust and pro f it - abi lit y sh ou ld b e at lea s t in li ne w i th i ndu str y pe er s. We h ave mad e go od p rog ress o n th e tra nsi - ti on th rou gh t he se pr i or i ti es w i th t wo thi rds of our D i v is io ns, re p rese nt in g ap prox i matel y 6 0 pe r- cent o f Gro up r eve nue s, n ow on a g row th mandate. Eac h Di v i sio n ha s fu ll acc ount abi li t y for i ts re sul ts and carries the responsibility for business dev el - opment, and research and development f or le adin g te chn ol og y to se cu re a nu mbe r 1 o r 2 mar ket po sit io n. T o f ul ly c omp le te th e de cen tra l - ized w ay of wor k in g at AB B , our fo cu s are a in 2 02 2 w il l be to ma ke sure t hat we al so have ac coun t - abi lit y, tran spa re nc y a nd sp ee d w i thin a ll of t he Div isions. S trong performance ma nagement i s key in a d ece ntr al ized b usi ne ss mo de l . We app l y a mo nthl y sc ore ca rd s yste m for t he D iv i - sio ns an d B usi ne ss A rea s, b as ed on a st an da rdize d se t of Key Pe r for man ce I ndi ca - tors, t o suppor t full t ransparency of performance. It is ac com pani e d by a man dato r y ta rg et to ma ke ann ua l pro du c ti v i t y im prove me nt s of at le as t 3 pe rce nt eac h yea r . The cor porat e funct ions f ocus on necess ary stra tegic, financial and go vernance act iv ities, w ith a l ea n he adc ount o f app rox im atel y 80 0 e mpl oyee s. En h an ce d gr ow th p ro f il e Ove r th e pa st se ver al ye ar s, we h ave take n sig nif i - ca nt org ani c an d in org ani c ac ti on s to ali gn ou r business por tfolio t o more attractive gro wth mark ets, increasing our focus on dis crete indus - tr ie s, a s we ll a s tr ansp or t a nd i nfr as tru c tur e, t hat of fer b et te r grow th op po r tuni ti es . Ad dit io na ll y, we have in cr ea se d the p rop or tio n of sa le s ste m - ming f rom s hor t -c ycle busines ses, meaning a reduced propor tion from proj ec t- rel ated ac t i v it ie s, w hic h sho ul d re du ce th e risk and v olatility in our e arnings. This ongoing shif t tow ard s be tte r qu al it y of re ven ue s is pa r t of AB B ’s DNA w hic h ce nter s aro un d resourc e - ef fic ienc y in electrif ication a nd aut omation. The r esp on sibi li t y for g row th h as b e en f ull y tra nsf er red to t he D iv isi ons , as t hey a re cl ose st to customers. This includes bot h organ ic and ac - qui re d grow t h. T he D iv isi on s have th e be st ins ig hts i nto cu rre nt an d futu re cu sto me r ne ed s and are accountable for building t heir res pe cti ve business accordingly . With mor e Div isions transi - tioning o ver time from stability and profitability to grow t h, we e xp e c t to see a c ont in uou s shi f t in our gro wth profile. Fin all y, the un de rl y i ng d em and f or ou r pro du c t s, sy stem s an d ser v i ces is s upp or ted by st ron g susta inability megatrends with more fa vorable regulations, improved t echnolog y and changing con sume r pat te rns a ll b ein g po sit iv e dr i ver s. A n ex amp le of s uch a m e gatre nd i s sus tain ab le tra nsp or t . We es ti mate th at ap prox im atel y 10 p er- cent o f our o rd er i nta ke come s fro m thi s are a an d that we h ave outg rown t he ma rket i n re cen t year s. The r el ated se gm e nts h ave dif f ere nt co mm erc i al mat ur ity, including more ma ture t echnologies which alr eady generat e sign ificant orders, includ - in g trac t io n sy ste ms i n rail o r hyb r id s hips u si ng Az ipod® propulsion. Segments tha t are in com - me rc ia l ta ke - of f ( i.e . c urr ent ly se e ve r y hi gh grow t h rates) inc lu de e le c tr i c veh icl e ch arg in g solutions or robotic solutions for elec tric vehicle 1 17 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P man uf ac tur i ng . Th ere a re al so ve r y e arl y -s tag e seg me nt s whi ch a re st il l em er gin g an d whi ch mig ht of fe r a high p ote nti al i n the f utu re suc h a s ful l y el ec t r ic mi ne s (“eM in es” ) or al ter nati ve fu e ls suc h as hyd rog e n. — AB B is a l ea din g gl ob al te chn ol og y co mpa ny with a compr ehensive and increasingly digitaliz ed offering of electrif ication, mo tion and aut oma - ti on so lu ti ons . O ur e xp osur e to cus tome r s is geographically balanc ed while c at er ing to multi - pl e en d - ma rket s and s eg me nt s. We b eli eve t hat our p or t fo lio i s we ll p osit io ne d to be n ef it f rom secular growth drivers, including urbaniza t ion, lab or s hor tage , shi f t to el ec t r if i cat io n, au toma - ti on a nd ro bot iz ati on , as we ll a s oth e r data a nd digitalization trend s. We are fo cus ed o n cre ati ng su pe r io r cus tom er value through our comprehe nsive, modular o ffer - ing, comb ining traditional produc ts and serv ices w ith s of t wa re - ena bl ed p ro du c ts a nd s yste ms a s wel l as d igi ta l se r v i ces a nd so f tw ar e that we se l l both separat el y and combined a s scalable solu - ti ons . Su pe r io r sof t wa re is a key d if fe re nt iati on of our d igi ta l of fe r in g and a bo ut 6 0 pe rce nt of o ur app rox im atel y 7 , 0 0 0 em pl oyee s in r ese arc h an d development are active in soft ware de velopment. The m ajo r it y of ou r bu sin ess es ar e mar ket le ad er s w ith in th ei r resp e c ti ve se gm ent s . We be lie ve mar ket le ade r ship i s cr i ti ca l, a s it p rov i de s th e op po r tunit y f or pr ice le ad er shi p, whi ch in tu rn sup po r ts p rof it abi li t y , en abl in g us to inv est i n fur t he r re sea rch a nd d eve lo pm ent to su st ain ou r tec hno lo gi ca l le ade r ship. Fo r a dis cuss io n of th e ge og rap hic d ist r ib ut io n of our tot al r eve nue s, se e “ An al ys is of re sul ts of o pe rat io ns — Rev en ue s.” Approximately half o f our customers are in dus - tr ia l cus tom er s. We se r v e pro du c ti on f ac ili t ies and facto ries all arou nd the world, from proces s in dus tr ie s su ch a s oil a nd ga s , pul p an d pap e r as well as mining, to discr ete industr ies including autom ot ive , foo d an d be ver age a nd co nsu me r el ec t roni c s. A utom atio n, s of t wa re an d dig it al ser v ic es th at he lp cu sto me rs ac hie ve im prove d safet y, upt im e, e ne rg y ef f i c ie nc y a nd p rod uc t i v it y are key to th e suc cess of o ur of fe r in gs i n this mark et. The ongo ing COVID-19 pandemic ha s ser ved a s a p romi ne nt re min de r for c omp ani es of the importance o f simplicit y and flex ibility in autom ated p rod uc t io n an d ha s acce le rate d cus tom er d em an d for th e di git al se r v ice s and solutions w e offer . Industri al end- markets recov e red from the initial pandemic-relat ed impacts. In discre te industries, en d - ma rket s suc h as fo od a nd b eve rag e, c on - sumer electronics, m achine builders and general industry grew s trongly . Inv estments in robo tics by the au tom oti ve in du str y rec over ed a nd we a p - pli e d a str ategi c se le c t ive o rde r ap pr oac h aime d at improv ing long-term pr of itability in the segm ent . Later - c ycle proc ess industries segments pick e d up es pe c ia ll y du r ing t he se co nd h alf of 2 0 21 , benefiting from a rebound in commodity pri ces and generally easing int ernational travel r estric - ti ons . Thi s wa s pa r ti cu la rl y the c a se for t he oi l and ga s se gme nt , whi le t he re cove r y i n se gm ent s su ch as p ul p and p ap er, mining o r wate r and w a stew a- ter h ad al read y st ar te d ea rl ie r . Approximat e ly one-third o f our cust omers oper - ate in th e tra nsp or t & i nfr as tru c tur e mar ket . Ou r expert ise pr ov ides effic ient, reliable and susta in - able solutions for these customers, with a f ocus on energy effic iency and reduced opera ting costs. T ra nsp or t & i nfr as tru c ture m ar kets we re s tro ng in 20 21 . Bui ld in gs ac t iv it y re bo un de d fro m th e w id esp re ad lo ckdow ns of t he p rev i ou s yea r . Dat a cente r ma rket s co nti nu ed to e xp an d, w i th A BB succ essful in offering bundled solutions t o hyper - scale and co - location cu stomers in particular . Underly ing demand in rail for e lectr ification and trac t i on so lut i ons w as a lso h igh , wh ile m od es t grow t h rates w ere i mp ac ted b y the s tro ng o rde r int ake in 2 02 0. I n the m ar i ne se c tor , we saw continued s trong order demand for o ur market - leading elec tric propulsion systems. Se r v i ce s in th e cr uis e seg me nt st ar te d to pic k-u p in th e se con d ha lf of 2 02 1 in a nti c ip ati on of a rec over y in c rui sin g ac t iv i t ies . E V c har gin g ma r - kets a lso co nt inu e d to see ve r y s tro ng gr ow t h rat es . 118 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P ABB delivers solutions mainly for distribution utilities and renewables cu stomers, while c ontinu - in g to ser v ice c onve nt ion al p owe r ge ne rat ion customers w ith our c ontrol and aut omation solutions. F ollow ing the divestment of our Power Gr i ds b usi ne ss to Hit ach i in J ul y 20 20, o ur e xp o - sure to t he ut il it ie s ma rket ha s d ec rea se d signifi cantly. Du r in g 20 21 , t he re ne wa bl es ma rket s saw ve r y strong growth a f ter a challenging, pandem ic- imp ac te d 20 20. B u sin ess l eve ls i n the conve nt io nal p owe r ge ne rat io n mar ket im prov ed , alb ei t fro m a low l eve l. D e man d fro m el e c tr ic al distribution utilities was strong, with ongoing inves tments t o increase grid reliab ilit y and r esil - ience with in tegra t ing increased renewables. We ser ve in dus tr y, tra nsp or t & i nfra s tru c ture a nd utilities thro ugh our ope rating Div isions wh ich are included in our B usiness A reas. Developments in th es e Bu sin ess A re as a re di scu sse d in mo re det ail b el ow. Reve nu e f ig ure s pre se nted i n thi s Businesses sec tion are bef ore intersegment elimina t ions. — Busines s es Ele ct rif ication Bu siness Area Ove r v i ew The p ro du c ts of t he El ec t r if i cat io n Bu si ness A re a po r tfo li o are d es ign ed to e na bl e safe , sma r t , and sust ain ab le e le c tr i f ic ati on , w ith a f ul l ran ge o f low- and me dium-voltage pr oducts and solutions, along with pre- engineered packaged ser v ices and tailored solutions for in telligent pro tection and connection. The E le c tr i f ic ati on B usi ne ss A rea d el ive r s pro d - uc t s thr ou gh a gl ob al n et wor k of ch ann el p ar t ne rs and e n d cus tome r s. M ost of t he B usi ne ss A rea’s reve nu e is d er i ve d from d is tr ib utor s an d ap prox i - matel y a q uar te r is d e r ive d fro m di rec t s al es to end- users. The r emain ing re venues ar e generat ed from original e quipment ma nufacturers ( O EMs ), engineering , procu rement, con struction (EPC) contra c ting companies, system int e grat ors, utilities and panel builders. The propor tion of dir ec t co mp are d to ch an ne l par tne r sal es v ar i es by se gme nt , pr od uc t te chn ol og y an d ge og ra phi c markets. The E le c tr i f ic ati on B usi ne ss A rea h ad ap prox i - matel y 5 0, 8 0 0 em pl oyee s on D e cem be r 31 , 2 0 21 , and g e ne rate d $1 3 . 2 bi lli on of r eve nue s in 2 0 21 . Custome rs The E le c tr i f ic ati on B usi ne ss A rea se r v es a w i de range of customer segments, including residen - tial, commercial, a nd industrial buildings, elec tric ut ili ti es , oil a nd ga s , che mi ca ls, d ata ce nte rs , e- mobility , renewables, food and beverage, and other indu stries and in fra structure. Products and Serv ices The E le c tr i f ic ati on B usi ne ss A rea’s pro duc t s an d ser v ic es ar e de li ver ed t hro ug h six o pe rat in g Div isio ns. The Distribution Solutions D iv ision helps utilit y , industr y and trans p ort & infrastructure cust om - er s im prove p owe r qu ali t y an d cont rol , re du ce outage time and enhance opera tional reliab ilit y and e f f ic i en c y. The D iv i si on of fe rs p ro du c ts , sol ut io ns an d se r v i ces t hat la rg el y se r ve t he power distribution sector , often pr ov iding the req ui site m ed ium -vo lta ge li nk b et we en hig h -vo lt age t ran smiss io n sys tem s an d low -vo lt age u se rs . Wi th A B B Abi li t y TM enabled digital solutions a t its cor e, the offering includes low -vo lt age s w itc hg ea r (up to 1 kil ovo lt) an d me diu m - volt ag e eq uip me nt (1 to 6 6 k il ovol ts), indoor and outdoor c ircuit br eakers, reclosers, fuses, conta ctors, rela ys, instrument transform - er s, se nso rs , moto r cont rol c ente rs , a s wel l as a w i de r an ge of ai r - a nd g as -i nsu late d sw i tch - gear . The Division also pr oduces indoor and outdoor modular systems and other seg me nt-sp ec i f ic so lu ti ons to f ac il itate e f f ic i ent and reliable distribution, protection and c ontrol of po wer , adding value throu gh design, e ngineer - in g, p roje c t ma nag em en t and s er v ice . T he se r v ice of fer ing sp an s the e nt ire v al ue c hai n, fr om th e moment a customer mak es the first inquiry to disp os al an d re c ycl in g of the p ro du c t, e nr i ch ed by adv an ce d dig it al se r v ice s for a sset m an age me nt . Thr oug ho ut th e va lu e ch ain, t he D iv isi on p rov i de s train ing, technical s uppor t and cust omized contrac t s. ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A B B GR OU P The S ma r t Powe r D iv i si on h el ps pro tec t , co ntro l, and c onn e c t pe op le , pl ant s, a nd s yste ms w ith a p or t fo li o of low -vo lt age p ro du c ts a nd systems. The pr oduct offering includes, mol d ed - ca se an d air-c i rcu it b rea kers , safe t y products including sens or s, switches, contactors, rel ays , and p owe r prote c t io n sol ut io ns suc h a s uni nter rup ti bl e powe r sup pl y ( UP S) so lu ti on s, statu s tra nsf er s w itc he s and p owe r dis tr i bu - tion units. The Smart Buildings D iv ision helps optimize eff icienc y , sa fety, security and com fort in homes and o ther buildings. The Div ision offers d igitally en ab le d cont rol s for H VAC , lig ht in g, sh ut ter s, a nd sec ur i t y in ad dit i on to low - vol tag e pro du c t s including c onven tional wiring acces sor ies, indus - trial plugs and sockets, emergency lighting, DI N - rai l pro du c t s, an d en cl osu res i de al for s in gl e family homes, multiple dwellings, c omme rcial buildings, infrastructure and industrial applica - tions. The Div ision’ s highly i nnova tive solu tions serve rising global demand among developers, owners, and investors for smart building technol - ogy , offering significant sustainable and financ ial be ne f it s, a s wel l a s ans wer i ng s oc ia l an d env iron - mental needs, and addr essing cust ome rs’ carbon reduction strategies. The I ns tal lat io n Pro du c ts D i v is ion h e lps m ana ge the c onnection, protection and d istribution of el ec t r ic al p owe r . Th e Di v i sio n’s prod uc t s ar e en gin e ere d to pr ov i de ea se of i ns tal lat io n and perform in demanding and harsh cond itions, helping t o ensure s af ety and con tinuous opera - ti on fo r our c us tome r s and p e opl e ar oun d th e worl d . The c omm e rc ia l esse nt ial s pro du c t se g - ment includes e lectr ical junction box es, com me rc ia l f it ti ng s, st ru t and c ab le t ray me ta l framing systems for commercial and residential con str uc t io n. T he p rem ie r in dus tr ia l pr odu c t segment includes multiple product lines, such as T y- Rap ®, T&B Liqu idt ig ht Sys tem s®, PVC coated and n ylon condui t syst e ms, po wer c onne ction and gro und in g sy ste ms, c ab le p rote c ti on s yste ms of conduits a nd fittings for harsh and industrial app li cat io ns . The D i v is ion a lso m an ufa c ture s solutions f or medium- voltage applications used in ut il it y a nd in du str i al a pp lic at ion s un de r it s marquee brands including Elastimold TM rec lo ser s and switchgear , capacitor switches, current limi ti ng f use s, t he Hi gh T e ch Va lia nt TM full- range cur re nt lim it ing f us e for f i re mit ig ati on , fau lte d current indicators and distribution connectors, ca bl e acce ssor i es a nd ap pa ratus w ith p rod uc t s for o verhead and underground distribution. The Po wer Conv e rsion Division supplies innova - ti ve cr i ti ca l pow er so lu ti ons to i nfr as tr uc tur e cus tom er s an d man uf ac ture rs o f a w id e ra ng e of equipment. The Division supports its c ustomers in t elecom/ 5G , networking, da ta centers, a nd in dus tr ia l ap pl ic ati ons (suc h as oi l an d ga s, u ti lit y, powe r ge ne r atio n, a nd ro bo ti cs) in ra pid ly c han g - ing, disr uptive environments where in formation, acc ess and res p onse times are redef ining the mar kets . Th e Powe r Conve r sio n Di v i sio n al so prov ide s cu stom er s w i th re li abl e an d ef f i c ie nt power tha t su pports increasing infrastructur e req ui rem e nts , en sur i ng th at data f l ows 24/ 7 , while op t imizing f ootprint, energy costs and operations. The Division supports cust omers by providing the lat est industry insights and technol - ogy , partner ing to co - develop solutions to tackle evolving challenges. The E-mobility Division engineers electr ification sol ut io ns to en ab le g lo bal , acce ssib l e, re li ab le , sma r t an d emi ssio n -f ree m obi li t y . The D i v is io n of fer s to it s cu stom e rs a tot al e le c tr i c vehi cl e charging solution fr om compact AC wall box es and D C fa st c ha rgi ng st ati on s to on - d e man d el ec t r ic b us ch ar gin g sy ste ms. T he D iv isi on a lso prov ide s cu stom er s w i th se r v i ce s suc h as i nfr a- structure i nstalla tion and main tenance to meet the r eq uir em ent s of t he ne x t g en er ati on of sma r ter m obi lit y. AB B A bil it y™ co nne c te d ch ar- ge rs e na bl e fa st g lo bal s er v ice a nd p ro - ac t ive maint e nance. The E le c tr i f ic ati on B usi ne ss A rea’s glo bal m ar kets common s ales and marketing organ ization cre - ates de ma nd ac ross a ll ch an ne ls an d pr od uc t s, w ith a r an ge of p rom ot ion al ac t i v it ie s an d sup - port ser v ices includ ing a ccoun t , channel, and segment sa les mana gement, commercial opera - tions, and digital exper tise. Competit ion The Electrifi cation Busi ness Area’ s principal com pe ti tors v ar y by pro du c t gr oup a nd i nc lud e Chin t, E aton , Hub be ll , Le gr an d, L S El e c tr ic , P ana - sonic, Rittal, S chneider E lectr ic and Siemens. Capital Expe nditu res The E le c tr i f ic ati on B usi ne ss A rea’s capi ta l ex pe n - ditu res fo r pr op er t y, pla nt an d eq uip me nt tot al ed $3 45 mi ll ion i n 20 2 1 , com par ed to $ 316 mi lli on i n 20 20. I nves tm ent s in 2 0 21 we re hi gh er th an i n 20 20 a s so me i nvest me nt s wer e pre v io usl y d e - laye d in 2 02 0 du e to the COV I D -19 p an de mic . Inve stm en ts i n 20 21 p r in c ip all y re late d to ca pac i t y expansion f or e -mobility products, including the con str uc t io n of a new f ac tor y in It al y, and to foot print changes, equ ipment repla cement a nd up gra de s. G eo gr ap hic al ly, in 20 21 , Eu rop e re pr e - sen ted 5 4 p er cent o f the c api ta l ex pe nd itu res , 120 ABB ANNUAL REPORT 2021 0 4 FI N AN C IA L R E V I E W OF A B B GR O UP fol lowe d by th e A me r ic as ( 3 4 p erc ent) a nd A si a , Mid dl e Ea st a nd A fr ic a (1 2 p er cent). Motion B usines s Area Ove r v i ew The Motion B usiness A rea pro v ides pioneering technology , products, solutions and rela ted serv ices to industr ial cust omers to incr ease en er gy e f f ic i en c y, improv e safet y a nd re li abi li t y , and ma intain precise c ontrol ov er processes. The portfolio includes mo tors, ge nerat or s and drives for a w i de r an ge of a pp lic ati on s in al l in du str i al se c tor s . The M ot io n Bu sin ess A re a had a pp rox im atel y 20, 00 0 e mp lo yee s as o f De ce mb er 3 1 , 20 21 , a nd ge ne rate d aro un d $6 .9 b ill io n of reve nu es i n 20 21 . Products and Serv ices The Motion B usiness A rea design s, manu factures and s el ls d r ive s, mo tors , ge ne rato rs a nd tr ac t ion conv e rters. Building on l ong-standing exper ience in electric powertrains, the Busines s Area com - bines doma in exper tise and technology to deliv er the o pt imu m so lut io n for a w ide r an ge of a pp lic a - ti ons f or a co mpr eh en si ve ra ng e of ind us tr ia l segments. In addition, t he Busines s Area, along w ith i ts c ha nn el p ar tn e rs, h a s an in du str y- l ead ing global serv ice pres e nce. At De ce mb er 3 1 , 20 21 , t he M ot ion B us in ess A re a’s pro du c ts a nd se r v ice s are d el ive re d th rou gh seven op erating Divisions. The B usiness A rea div este d it s M ec han ic al Pow er T r ans missi on Di v i sio n on N ovem be r 1 , 2 02 1 , whi ch d es ig ne d, manufactured and s old various mechanical power tra nsmi ssio n pr od uc t s sol d un de r th e Do dg e® brand. The D r i ve Pro du c ts D i v is io n ser ves th e in du str i es and i nfr a str uc tu re se gm ent s w it h wor ld - cla ss dr i ves a nd pr og ram ma bl e lo gic c ontr ol le rs ( PLC). Wi th it s p rod uc t s, g lo bal s ca le an d lo c al pr ese nc e, the D i v is ion h e lps c usto me rs to i mp rove e ne rg y eff ic ienc y , produc ti vit y and safety . The Sy ste m Dr i ves D i v is io n sup pli es hi gh - p owe r , high- per formance drives, drive syst ems and packages for industrial proc ess and large infra - str uc tu re ap pl ic ati ons . Th e Di v i sio n of fe rs g lo bal support to help customers, partners and e quip - me nt ma nuf ac tur er s w it h asse t re lia bil it y, performance impro vement and energy e ff icienc y in m issio n critical applica tions. The S e r v i ce D iv isio n se r ve s cus tom er s wor ld w id e and a ims to help customers by ma x imizing uptime, extending li fe cycle and enhancing the performance and e nergy effic ienc y of their elec - trical motion s olutions. The D ivision is leading the way in d igi ta liz ati on by se cu re ly c onn e c ti ng motor s an d dr i ves to h el p cu stom er s pr eve nt expensive do wntime wh ile als o optim izing opera - ti ons ’ prof ita bl y, safel y and r el iab l y. The T rac t io n Di v i sio n is a re co gnize d le ad er i n traction technologies tha t drive innovation in ra il, bus a nd ot he r mo de s of el e c tr ic t ra nsp or t a- ti on . A com pr eh en siv e ran ge of hi gh p er form an ce propulsion, auxiliary and energy st orage s olutions help impro ve energy effi cienc y and c ontributes to making transportation more susta i nable. The I EC Low Volt ag e Moto rs D iv isi on is a g lo ba l mar ket le ade r th at prov ide s a fu ll r ang e of e ne rg y eff icient low v oltage mot or s, including ultra- eff icie nt mo tors such as synchronous rel uc t an ce moto rs (Sy nR M) to h el p cus tom er s red uc e powe r bil ls a nd cu t em issi ons . Thr oug h a gl ob al fo otpr i nt , ap pli c atio n ex p er t ise and w ith r ugg e d de sig ns, t he D iv isi on’s pro du c ts sup po r t cus tom er s w it h IEC lo w- vol tag e moto r sol ut io ns th at imp rove re li abi lit y a nd p ro duc t i v it y in the most demanding applica t ions. The L a rge M otor s an d G en er ators D i v is io n of fer s a co mp reh e nsi ve pro du c t po r t fol io of l arg e AC mot or s and generat ors. The Div ision’ s robust, rel ia bl e and h igh l y ef f ic i e nt of fe r in gs pow er cr it i ca l infr a str uc tu re an d tra nsp or t ati on ac ross all m ajo r ind us tr ie s an d ap pli c atio ns of te n in remot e and d emanding loca t ions. The N EM A M otor s Di v is io n is a ma rkete r , d esi gn er and manufacturer tha t offers Baldor-Reliance® industrial electr ic mo tors, primaril y in North Amer ica. The Div ision f ocuses on quality , reliab il - it y an d ef f i c ie nc y to p rov i de a c omp re he nsi ve of fer ing of N EM A moto rs i n th e mar ket acr oss most ind ustrial segments and applica t ions. Custome rs The M ot io n Bu sin ess A re a se r ve s a w id e ra ng e of cus tom er s in di f fe ren t in dus tr ia l se gm ent s su ch as p ul p and p ap er, oil and g as , met al s an d mini ng , foo d an d beve r age , HVAC , w ater an d wa ste water, transportation, po wer generation, marine and of fsho re . Sa le s are m ade b oth t hro ugh d ire c t sa le s forc es and through channel partner s, such a s distribu - tor s and w ho le sal e rs , as we ll a s in st all e rs, O EM s and syst e m int egrators. T he proportion of direc t sal es to e nd u se rs co mp are d to ch ann el p ar t ne r 121 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P sales varies among the di fferent industries, products and geogra phic mark ets. Competit ion The principal competit ors of the Motion Busines s Ar ea i ncl ud e Sc hn ei de r , Sie m en s, T oshi ba , W EG In dus tr i es, S E W EU RO DR I VE a nd D anfoss . Capital Expe nditu res Capital expendit ures in the Motion Busines s Area for p rop er t y, pla nt an d eq ui pm ent tot al ed $2 3 0 mil li on in 2 0 21 , co mp are d to $1 18 m ill io n in 2020. Principal inv estments in 20 21 rela ted to the pur ch ase o f a form er l y lea se d pr op er t y i n Chi na a s well as equipment repla cement, f ootpr int a djust - ments and aut omation upgrades. Geographically, in 2 02 1 , A si a, M id dl e Ea st a nd A fr ic a re pr ese nte d 49 pe rce nt of t he c api tal e x pe ndi tur es, fo ll owe d by Euro pe ( 3 4 pe rce nt) an d th e Am er i c as (17 perce nt). — Process Automa ti on Busine ss Area Ove r v i ew In 2 02 1 , th e for me r In dus tr i al Au tomat io n Bu si - ness Area was renamed Process Au toma tion and the re w as n o ch an ge in t he co mp osi ti on of t he Div isions. The Process Automa tion Business Area offers cust ome rs in proces s, hybrid and maritime in dus tr ie s a br oad r an ge of i nteg rate d autom a - ti on , el ec t r ic al , mot io n an d dig it al sy ste ms , solutions a nd rela ted serv ices that are designed to opt imize p ro du c ti v i t y , en erg y ef fi c ie nc y , susta inability and sa fety of industrial process es and opera tions, based on the B usiness A rea ’ s de ep d om ain k now le dg e an d ex pe r t ise of e ach end market. The B u sin ess A re a’s offe r in g ca n be g roup e d, w i th about half relating t o solutions for new and brow nf ie l d proj ec t s an d ha lf re lat in g to se r v i ce, main ly f or in st all e d own p rod uc t s. I n som e c ase s, the Busines s Area integra tes offerings from the Ele c tr i f ic ati on , Mot io n an d Ro bot ic s & D isc rete Automa tion Business Areas int o its in tegrated sy stem s. T he B usi ne ss A rea’s of fer i ng s are so ld pr i mar i l y thro ug h it s dir ec t s al es fo rce with a smaller share through partne rs and distributors. The B u sin ess A re a had a pp rox im atel y 22 , 00 0 e mp lo yee s as o f De ce mb er 3 1 , 20 21 , a nd ge ne rate d reve nu es of $ 6. 3 bil lio n in 2 02 1 . Custome rs The Pr ocess Automation B usiness A rea’ s end customers include companies a cross pr oces s, hybrid and maritime indust ries. These indus tries include oil, gas, chemicals and plastics, mining and minerals, metals, pulp and paper , pharmaceu - ti ca ls, f oo d and b eve ra ge , powe r ge ne r atio n, marine and ports. Products and Serv ices The o ffer ing of the Proces s Automa t ion Busines s Ar ea i ncl ud es a n ex te ns ive p or t fo lio of p ro du c ts , solutions, digital applications and ser v ices f or the cont rol of t he si mp le st to th e mos t com pl e x and critical of proc esses and infrastructure. T hese sy stem s ca n li nk v ar io us p roc ess an d info rm ati on fl ows, a ll ow in g cu stom er s to ma nag e an d cont rol their en tire busines s process based on real-time inform ation. The Business Area ’ s control platform includes ABB Ability™ Distributed C ontr ol Syste m (D C S), Syste m 8 0 0x A® , w hic h is al so an el ec t r ic al co ntro l sy ste m, a s afet y s yste m and a c ol lab or ati on e na bl er w i th th e ca pac i t y to improv e engineering effic ienc y , operator pe rfor - mance a nd ass et utili zation. Other contr ol solutions inc lude S ymphony® Plus ( designed to addres s the ope n au toma tion platform needs of the H ydr op ower a nd Wate r in dus tr y s eg me nt s ) and our Freelance DCS s olut ion. Componen ts for basic au toma tion solutions, proc ess cont rollers, I/ O modules, panels, and Human Mach ine Int er - face s (H MI ), are av aila bl e thr oug h th e Com pac t Pro du c t Sui te of fe r ing . Th e pr od uc t p or t fol io i s com pl em ente d by a su ite of A BB A bi li t y™ Ad va nce d D igi ta l Se r v ices a nd by A B B C are , a subscription- based lifec ycle management pro gr am th at prov ide s se r v i ce s to maint ain an d continually advance and enhance ABB’s distrib - uted c ontrol syst e ms and optimize c ustomers’ life c yc le co st s. Th e A BB A bi lit y™ G e nix I nd us tr ia l An al y t ic s an d A r ti f ic i al I ntel li ge nce S uite u nl oc ks grea ter value by cont ex tualizing and integrating data from IT , engineer ing, and operations sys - tems to p rov i de d e ep, m ean ing fu l and a c ti on abl e insights. The portfolio is complemented by a ra ng e of in dus tr y - spe c if i c pr od uc t s in e ach Division. The Pr ocess Automation B usiness A rea has five operating Divisions. The E ne rg y In dus tr i es D iv isi on e nab le s safe , smart, and sustainable pr ojects and operations for bu siness es acr oss the oil and gas, chemicals, life s c ie nce s, p ower g e ne rat ion a nd w ater se c tor s . It is co mmi tte d to dr i v i ng m ore su st aina bl e use of our p lanet’s resour ces through innova tive sol ut io ns th at ena bl e en e rgy e f f ic i e nt and l ow carbon operations across traditional industries 122 ABB ANNUAL REPORT 2021 0 4 FI NA N CI A L R E V IE W OF A BB G R OU P and su pport the dev elopment of new and renew - ab le e ne rg y mo de ls . The D i v is io n ser ves th e energy mark et w ith lea ding in tegrated solutions that au tomate , dig it ali ze and e le c tr i f y o pe rat io ns acro ss ind us tr ie s. T he D iv isi on’s goa l is to h el p cus tom er s ada pt an d succ ee d in t he r api dl y changing globa l energy tran sition . Harnes sing data, ma chine learning and AI, the D iv ision brings over 5 0 ye ars o f dom ain e xp er tis e de li ver i ng solutions des igned t o impro ve energy , process and p ro du c ti on ef fi c ie nc y , a s we ll a s re du ce r isk , op er ati ona l cost a nd c api ta l cost , w hil e mini miz- in g wa ste fo r all c usto me rs , fro m proj e c t sta r t-up and t hro ug hou t th e ent ir e pl ant li fe c ycl e. The Pr ocess Industries Div ision serves the m ining, minerals pr ocessing, metals, aluminum, cement, pulp and paper , battery manufacturing , and f o od and b eve ra ge , as we ll a s th ei r ass oc iate d se r v i ce industries. The Division brings deep industry do main e xp e r ti se cou pl ed w ith th e abi li t y to inte gr ate both au tom atio n an d el e c tr ic al , in cre a se pro du c ti v i t y an d red uce o ver al l ca pit al an d operating c osts for cust omers. For m ining, me tals and cement customers, solu tions include special - ized p ro du c ts a nd se r v ice s, a s wel l as tot al pro du c ti on s ys tems . Th e Di v i sio n de si gns , pl ans , engineers, supplies, e rects and comm issions integra ted electr ical and mo t ion syst e ms, includ - in g el ec t r ic e qui pm e nt, d r ive s, m otor s, hi gh powe r re c ti f ie rs a nd e qu ip me nt for au tom atio n and s upe r v iso r y co ntro l w it hin a v ar i et y of ar ea s including m ineral handling, mining opera tions, aluminum smelting, hot and cold st ee l applica - tions and cement pr oduc tion. The offering for the pulp and pape r industries includes control sys - tems, quality control s ystems, drive systems, on- line sens ors, actua tors and field instruments. Digitaliza t ion solutions , including collaborative operations and a ugmented reality, help impro ve pl ant an d e nter pr i se pro du c t iv i t y, and re duc e maint e nance and energy costs. The Marine & Ports Div ision serves the shipping in dus tr y t hro ug h it s ex te ns ive p or t fol io of i nte - grate d ma r in e sy stem s an d sol ut io ns th at improv e the f lexibility, reliability and energy ef f i c ie nc y of ve sse ls . By co up lin g powe r , p ro pul - sion, a utoma tion, marine software and serv ices that e nsu re ma x i mu m vesse l up ti me , we are w el l pos it io ne d to he lp i mpr ove th e prof i ta bil it y an d susta inability of our customers’ busines s thr oug ho ut th e ent i re lif ec yc le of a f l ee t. W i th AB B A bil it y™ M ar i ne sof t w are s olu ti on s and AB B A bil it y™ Co ll abo rat ive O p er ati ons Ce nte rs around the w orld, shipowners and operators can run t he ir f le et s at lowe r fu el a nd m ainte na nce cost s, w hil e im prov in g crew, pa sse ng er a nd c arg o safet y a s we ll a s ove ra ll pr od uc t iv it y of th eir op er ati ons . Fur th er , the D i v is ion d e liv er s autom ati on , el ec t r ic al s ys tems a nd d igi ta l sol u - tions for container and bulk c argo hand ling, fr om ship to gat e. These solutions help terminal opera - tor s me et th e ch all e nge o f lar ge r shi ps, t all e r cranes and bigger volumes per call, and mak e ter mina l op er ati on s safe r , gr ee ne r an d mo re productive. The p or t fo lio o f the M ea su rem en t & An al y t ic s Div ision co nsists o f analyzers (me asuring compo - sitions o f gases and liqu ids ), in strumenta tion ( mea suring the typical proces s var iables of tem - pe ratur e, p ressu re , fl ow, and l eve l) a s we ll a s specialized meas urements f or spec ific industries. Wi th thi s of fe r in g the D i v is ion s er ves v i r tua ll y al l proces s, h y brid and marine industries, t he largest among them b eing the oil, gas and chemical value chain, w at er and power ge neration indu stries. The Di v i sio n als o prov id es ad v anc ed d igi ta l sol ut io ns to he lp cu stom e rs i mpr ove pr odu c t iv it y, safet y and environmental susta inability. The T urbocharging Div ision manufactures and serv ices turbochar gers for diesel and gas engines w ith p owe r le vel s ra ngi ng f rom 5 0 0 k il owat ts to over 8 0 m eg awat ts . Key e nd se c tor s are m ar i ne - and land-based power genera t ion. The Division provides engine builders a nd opera tors advanced solutions a nd serv ices fo r effic ient and flexib le application operations, in c ompliance with the most s tringent environmental r equirements. The Pr ocess Automation B usiness A rea’ s sales are pr i mar i l y mad e thr oug h it s di rec t s al es fo rce a s wel l as t hir d - par t y c ha nn el p ar tn er s, s uch a s distributors, s ystem int egrat ors and OEMs. The majo r it y of re ven ue s are d e r ive d th rou gh th e Business Area’ s own direc t sales channels. Competit ion The Pr ocess Automation B usiness A rea’ s principal com pe ti tors v ar y by in du str y or pro du c t gr oup. Competit ors include: E me rson, Honeywell, Schneider Electric, Siemens, Siemens Energy , Y okoga wa , Endres s + Haus er , Kongsberg, Valmet and Garrett. Capital Expe nditu res The Pr ocess Automation B usiness A rea’ s capital expenditures for propert y , plant and e quipment total e d $8 5 mil li on in 2 0 21 , co mp are d to $7 5 mil - lion in 20 20. Principal inv estments in 2021 wer e in the T urbocharging and the Measurement & Ana - ly ti cs D iv isi on s. G eo gr ap hic al ly, in 20 21 , Eu rop e rep re sen ted 7 3 p er cen t of the c api ta l 123 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P ex pe nd itur es , fol lowe d by A si a , Mid dl e Ea st a nd Afr i ca (1 8 p er cent) a nd th e A me r ic a s (9 pe rce nt). — Robotics & Di screte Automa tion Busines s A rea Ove r v i ew The Robo tics & Discre te Autom ation Business Ar ea p rov i de s rob oti c s, an d mac hin e an d fac to r y aut omation including pr o ducts, software, solu - ti ons a nd s er v ice s. R eve nu es ar e ge ne rate d bot h fro m dir ec t s ale s to en d us er s as we l l as f rom indirect sales ma inly through syst em integra tors and ma chine bu il ders. The Robo tics & Discre te Autom ation Business Ar ea ha d ap prox i matel y 10, 60 0 e mp loy ee s as of De ce mb er 3 1 , 20 21 , a nd g en e rated $ 3 . 3 bil li on of reve nu es i n 20 21 . Products and Serv ices The Robo tics & Discre te Autom ation Business Ar ea’s prod uc t s an d se r v i ces a re d el ive re d through t wo opera t ing Divisions. The R ob ot ic s Di v i sio n of fe rs a w i de r an ge of products, solutions a nd serv ices including robots, rob oti c s ap pli c atio n ce lls a nd s mar t s ys tem s, f ie ld s er v ice s, sp are p ar t s, d igi ta l ser v ic es, e ng i - neering and operations soft ware. This of fering prov ide s cu stom er s w i th in cre a sed p ro du c ti v i t y , quality , flex ibility and s implicity for opera tions, e.g . to me et t he c hal le ng e of ma k in g sma lle r l ots of a la rge r nu mb er of s pe c if i c pro du c ts i n sho r te r c ycl es fo r tod ay ’s dyn ami c gl ob al ma rket s an d coping w ith increasing uncertainty . Robots are als o use d in ac t i v it ie s or e nv i ron me nt s whi ch m ay be h az ar dou s to em pl oye e he alt h and s afet y, such as r ep et it ive o r str en uo us li f ti ng , du st y, hot or cold r ooms, or painting boot hs and can help customers address labor shortages. Robo tics sol ut io ns ar e use d in a w i de r an ge of se g me nts fro m autom oti ve O EMs , auto mot ive s upp li er s, elec tronics, ge neral industry , consumer goods, foo d an d beve r age , an d war eh ou se/lo gi st ic s cent er aut omation. They are increasingly de - pl oyed i n se r v i ce ap pl ic ati on s for h eal th c are , restau rants a nd re tail. T ypical robotic applica - tions include welding, ma terial handling, mach ine tending, m achin ing, painting, p ick ing, packing, pal le ti zi ng a nd a sse mb ly. In 20 2 1 , we acqu ire d A ST I Mo bil e Rob ot ic s G rou p (A S TI ) add in g a bro ad portfolio of aut onomous mobile r obot v ehicles and solu tions. The Mach ine Automa t ion Division offers int e - grat e d a utoma tion solutions based on programmable logical con trollers, industrial PCs, ser vo mot io n, i nd ust r ial t ra nsp or t s yste ms a nd mac hin e v is ion . It a lso p rov i de s sof t w are fo r engineering and optimi zation. The range of solutions a re ma inly used by machine builders f or va r iou s t yp es o f ser i es m achi ne s, e .g. f or p la st ic s, metals, printing and packaging. Custome rs Rob ot ic s & D isc rete A utom ati on se r ve s a w id e ran ge of c us tome r s. Th e mai n cus tom er s are ac ti ve in i nd us tr ie s suc h a s autom oti ve , mac hin e building, metalw ork ing, electronics, food and beverage and logistics. They include e nd- users suc h as m anu fac tu re rs , sy stem i nte gr ators a nd machine builders. Sa le s are m ade b oth t hro ugh d ire c t sa le s as w el l as through th ird - part y channel partners, such as system i ntegra tors and m achine builders. The pro po r ti on of d ire c t sa le s com pa red to c ha nne l partner sales varies among the different indus - tries, product t e chnologies and geograph ic markets. Competit ion Com pet ito rs of t he R ob oti c s & Di scre te Au toma - tion Business A rea vary by offering and include com pan ies s uch a s Fanu c , Kuka , Yask awa , Ep son , Dürr , Stäubli, Universal Robots, Rockwell Automa - ti on , Sie me ns , Mit sub ishi El e c tr ic a nd B e ck hof f. Capital Expe nditu res The Robo tics & Discre te Autom ation Business Ar ea’s capi ta l ex pe nd itur es fo r pro pe r t y, plant and e q uip me nt tota le d $9 6 mi ll ion i n 20 2 1 , compared to $65 million in 20 20. Principal inv est - me nts i n 20 2 1 wer e pr i mar i ly r el ated to re sea rc h and dev elopment and training fa c ilities, especially the new Machine Aut omation Division global innova tion and train ing campus in Aust ria, and up gra de s and e qu ip me nt re pl ace me nt . In 2 02 1 , Euro pe re pr ese nte d 75 pe rce nt of c api ta l ex pe nd i - ture s, fo ll owed by A sia , Mi dd le E as t an d Afr i ca (2 3 pe rce nt) an d th e Am e r ic as ( 2 pe rce nt). — C orporat e and Other Corpora te and Other includes cor e headqua rter funct ions, real esta te a c ti v ities, Corporate T rea - sury Operations, Global B usiness S er vi ces ( GBS), the in vestment in H itachi Energy and ot her minor business ac tiv ities. Certain s trat egic investmen t s man age d by A B B T ec hn ol og y Ventur es ar e als o 124 ABB ANNUAL REPORT 202 1 04 F IN A NC I A L RE VI E W OF A B B G RO UP included in C orporate. The remaining a c tiv ities of cer t ain E PC p roje c t s whi ch we a re co mpl et in g an d are i n a w in d - d own p ha se ar e rep or ted a s non- core busines ses within Cor porat e and Other . In addition, the hist orical business activ ities of certain div ested business es are presented in Corpora te and Other . These include the high-voltage cables business, st e el structures and cer t ain E PC co ntr ac ts r el ati ng to th e oil a nd g as industry. Corpora te headquarters and stewardsh ip a ctiv i - ties include the operations of our corporat e hea dq uar ters i n Zur i ch , Sw it ze rla nd , as w el l as limit e d corpora te- related activ ities in some cou ntr ie s. T he se ac t iv iti es c over s taf f f unc tio ns w ith g rou p - w i de re spo ns ibi lit ie s, su ch a s acc ounting and f inancial reporting, corporat e finance and c orporate treasury , ta xes, financial pl anni ng a nd a nal y sis , inte rna l aud it , le ga l an d integrity, compliance, risk management and insuranc e, corpora te comm unica tions, in forma - tion system s and inves tor relations. GB S op er ates sh are d se r v ice ce nter s gl ob al ly thr oug h a ne tw ork of f i ve hu bs a nd co nsi st s of bot h ex pe r t an d tra ns ac ti on al se r v ices i n th e areas of human resour ces, finance, inf ormation ser v ic es, l e gal , re al es tate , cus tom er co ntac t cente r s, gl ob al tr avel s er v ice s an d oth er a nc i lla r y ac ti v i ti es . GB S al so st af fs a nd m aintai ns fr ont of f ice s in m ost co unt r ie s. Th e cos ts i n GB S ar e incurred primarily for t he benef it of the Business Ar ea s, w ho ar e ch arg ed fo r th eir u se of th e ser v ic es an d th e re lated n um be r of e mpl oye es a re all oc ated to t he B usi ne ss A rea s. G B S als o prov id es ser v ic es to thi rd - p ar t ie s und e r tra nsi ti on al ser v ic e agre e me nts i n re lat io n to cer t ain di ve ste d business es, the largest of which i s the Power Grids business. A sig nif i ca nt po r t ion of t he co st s for G BS a nd othe r sh are d co rpo rate ove rh ead c ost s are charged t o the operating business es. Up until the div est me nt of th e Powe r G r ids b us in ess on J ul y 1 , 20 20, o ver hea d an d othe r ma nag em e nt cost s, in clu di ng G BS co st s, w hic h woul d have b ee n all oc ated o r ch arg ed to o ur P ower G r i ds bu si ness , and w hi ch we re not d ire c tl y at tr ib ut ab le to thi s bus in ess, h ave not b ee n al lo cate d to th e disc on - tinued operation and are included in Corpora te and O th e r as “s tra nd ed c ost s” . Corp or ate an d Ot he r had a pp rox imate l y 10 0 0 em pl oyee s at De ce mb er 3 1 , 20 2 1 , of whi ch app rox im atel y 20 0 p e r tain to o ur n on - c ore business es. — Disc ontinued ope ra tions In J ul y 20 20 , we di veste d 8 0. 1 p erc ent of o ur Powe r Gr i ds b usi ne ss to Hit ac hi Ltd. A s a re sul t, the P ower G r i ds b usi ne ss is re po r ted a s di sco n - tinued operations in the Cons olidated F inancial Statem en ts fo r al l year s p rese nte d. S e e “N ote 3 - Disc ontinued opera tions” t o our Con solida ted Financial S tatements. Powe r G ri d s bu si ne ss The f orm er P ower G r i ds b usi ne ss of AB B d el ive re d pro du c ts , sy ste ms, s of t war e an d ser v ic e sol u - ti ons a cross t he p ower v al ue c hai n for ut il it y, in dus tr y a nd t ran spo r t & in fra st ru c ture customers. The Po wer Gr ids busines s operated worldwide w ith a g lo ba ll y di ver si f ie d man uf ac tur i ng , en gi - neering , and resear ch and d evelopment foot print. Di re c t sal es ac cou nted fo r th e majo r it y of tot al revenues ge nerat ed by the business while exter - nal c ha nn el p ar tn er s su ch a s EP Cs , wh ol esa le rs , distributors and OEMs account e d for the rest. Products and Serv ices The G r i d Auto mat io n ope r atio n sup pl ie d sub sta - ti on au tomat io n pro du c ts , sy ste ms an d se r v i ce s. It al so pr ov id e d Sup e r v i sor y Contr ol an d Dat a Acquisition (SC ADA) systems for transmission and d ist r ib ut io n net wo rk s a s wel l as a r an ge of wireless, fiber optic and powerline carrier - based telecommun ication t echnologies for missi on - cr it ic al a pp li cat io ns an d al so of fe re d gr i d - e dg e and mi cr ogr i d so lut i ons . It s ente rp r ise software portfolio pro v ide d solution s for manag - ing and optimizing assets, op erations, logistic s, financ ials and HR , reducing operating c osts and improving productiv ity for cust omers. The G r i d Inte gr ati on o pe rat ion w a s a le adi ng provider of in tegration and transmiss ion solu - ti ons s uch a s H igh Vol tag e Di re c t Cur rent ( H VD C). An oth er key p ar t of t he p or t fol io w as t he Fl ex i bl e Alternating Current T ransmission Syst e ms (FACT S) b usi ne ss, w hic h com pr is es Stat ic Va r Com pe nsat io n (SVC ) an d stat ic co mp e nsator (ST AT CO M) te ch no lo gie s to ad dre ss sta bil it y a nd 125 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P powe r qu ali t y issu es . Th e Gr i d Inte gr ati on o pe ra - ti on’s po r tfo li o als o in clu de d a r ang e of high-power semic onductors, a core technology for p ower e l ec t roni cs d e pl oyed i n H VD C , FACT S and r ail a pp lic at ion s. T he G r id I nteg rat io n op er a- ti on al so p rov i de d tr ansm issi on a nd di str i bu ti on subs tat io ns an d ass oc iate d li fec y cl e ser v ic es. The se su bst ati ons a re us ed i n ut ili t y an d non- utility applications including ra il, data cen - ter s an d va r iou s in du str i es . Bat te r y e ne rg y stora ge solu tions and shore-to-ship pow e r supply wer e als o par t of t he c usto me r of fe r in g. The H ig h Volta ge p rod uc t s op er ati on w as a prov ide r of hi gh vo lt age s w itc hge ar u p to 1 20 0 k V AC and 1 10 0 k V DC w i th a p or t fol io sp an nin g air -insulat e d, gas-insula ted and h yb rid technolo - gie s. I t als o man uf ac ture d g en er ator c irc ui t bre aker s, a key p ro duc t f or in teg rat ing l ar ge powe r pl ant s in to the g r id . Th e po r tfo li o als o in clu de d a b road r an ge of c ap ac itor s an d f il ter s that f ac ili tate p ower q ua lit y, ins tru me nt tr ans - formers and other substa tion components. The T ransformers operation s upplied transform - er s that a re an i nteg ra l com po ne nt fou nd ac ross the p owe r va lu e chai n, e na bl ing t he r eli ab le , ef f i c ie nt an d safe co nver si on of vo lt age l eve ls . The p ro du c t ran ge i nc lu de d dr y- an d liquid - distr ibutio n transformers, trac tion trans - form e rs fo r rail a pp li cat io ns an d spe c i al application transfo rmers plus r elat e d compo - nents, f or example, i nsula tion kit s, bus hings and other t ransfor mer ac cess or ies. The P owe r Gr i ds b usi ne ss als o had a n ex te ns ive po r tfo li o of se r v i ce of fe r in gs ac ross th e va lu e chain. The portfolio included spare par ts, condi - tion monit or ing and main tenance ser v ices, on - a nd of f-s ite re pair s a s wel l a s retr of it s an d upgrades. Advanced software -based monit oring and a dv iso r y se r v i ce s fur t he r en ha nce d th e portfolio. — Ca pital e xp e n ditu res T ota l ca pit al e xp en ditu re s for p rop er t y, pla nt an d equipment and intangible assets ( excluding intangibles acquir ed throu gh busines s combina - ti ons) amo unte d to $8 2 0 mill io n, $ 69 4 mi lli on a nd $76 2 mil li on i n 20 21 , 2 02 0 an d 201 9, r esp ec t i vel y. In 2 02 1 an d 20 20 , ca pit al e xp en ditu res w ere 8 pe rce nt an d 24 pe rce nt l ower, respe c ti ve ly, tha n depreciation and a mortization. Excluding ac quis ition-relat ed amortiza tion, ca pi tal expendi - ture s wer e 28 p erc ent hi gh er i n 20 2 1 and 6 p er cen t hig he r in 2 02 0, re spe c t ive l y , tha n de pr ec i atio n and amortization. Capital expendit ures in 202 1 rema ined pr imarily foc use d in m ature m arket s, r ef le c ti ng t he g eo - gra phi c di str i bu ti on of o ur e x ist in g pr od uc t io n facilities. Capital e xpenditures in Europe and No r th A me r ic a in 2 0 21 we re d r ive n pr i ma r il y by upgrades and maintenanc e of existing production fac i lit ie s, m ainl y i n the U. S . , Aus tr ia , I tal y, Swi t zer- land, Finla nd and Sweden. Capital expenditu res in Austria included co ntinued in vestment in the stat e - of- the- art innovation and train ing campus, whi ch is p la nn ed to b ec om e one o f our l arg es t res ear ch an d de vel op me nt ce nter s fo r new au to - mati on te ch no lo gie s. We a lso a re con str uc t in g a new f ac il it y i n Ita ly fo r ou r E- mo bil it y D iv isi on . Thi s inve stm ent ai ms to se r ve as a g lo bal c ente r of e xcel le nc e and p ro duc tio n site fo r el e c tr ic v ehi cl e cha rgi ng i nfr as tru c tur e. Ou r ca pit al e xp en ditu re s in e me rgi ng m arket s continued t o remain pr imaril y conc entra ted in China and f ocus on increasing existing produc - ti on c ap ac it y. In A sia , we co nt in ue d our s ig nif i ca nt inves tments in China inv esting in the new auto - mated a nd f le x i bl e rob oti c s fac to r y an d al so pur ch as ing a s ig nif i ca nt for me rl y le as ed p rop er t y. The s har e of em er gin g ma rket s ca pit al e xp en di - ture s as a p e rce ntag e of tota l ca pit al ex pe nd itur es i n 20 21 a nd 2 02 0 wa s 3 3 pe rce nt an d 22 per cen t, resp ectively . At De ce mb er 3 1 , 20 21 , c ons tru c t ion i n pr ogr ess for p rop er t y, pla nt an d eq ui pm ent w a s $52 2 mi l - lio n, m ain ly i n the U. S . , Sw it ze rla nd , Ge rm any, Swed en , It al y, China a nd In di a whi le at D ece m - be r 31 , 2 02 0, co nst ru c ti on i n pro gre ss for pro pe r t y, plant a nd e qu ip me nt wa s $5 05 m ill io n, main ly i n th e U. S. , Sw it ze rl an d, Au str i a , G erm any and China. Ou r ca pit al e xp en ditu re s rel ate pr i mar i l y to pro pe r t y, plant a nd e qu ip me nt an d are f un de d primar ily through ca sh flow s fr om opera ting ac ti v i ti es . For 2 02 2 , we e st imate t he e xp en dit ure s for p rop er t y, pla nt an d eq ui pm ent w ill b e hig he r than our annual de preciation and amortization charge, ex cluding acquisition-related amortiza tion. 126 ABB ANNUAL REPORT 2021 0 4 FI N AN CI A L R E V IE W OF A B B GR OU P — Supp lies a nd ra w ma t e r ia ls We pur cha se a v ar i et y of su pp li es an d pr od uc t s whi ch co ntai n raw mate r ia ls fo r use i n our p ro du c- tion and pr ojec t execution proces ses. The primar y mater i al s use d in o ur p rod uc t s, by w eig ht, a re cop pe r , a lumi nu m, s tee l, mi ne ra l oil a nd v ar i ous pl as ti cs . We al so pu rch as e a w id e va r ie t y of fabricated products, electronic components and sy stem s. We o pe rate a wor ld w i de su pp ly c hain man age m ent n et wor k w it h em pl oye es de di c ated to this f un c ti on i n our B us in ess A re as , Di v i sio ns and i n key cou ntr i es . Ou r sup pl y ch ain o pe rat ion s con sis ts of a n umb e r of team s, e ach fo cus in g on different pr oduct categories. These category team s ta ke adv ant age of o pp or tu nit ie s to le ver- age t he sc al e of A BB o n a gl oba l, B us in ess A re a and/ o r D iv i si on l eve l, a s ap pro pr i ate, to opt i mize the e f f ic i en c y of ou r sup pl y n et wor ks i n a sus tain - able manner . Our supply chain manageme nt organ ization’ s activ ities and objectives include: • pool a nd l eve rag e pr ocu re me nt of mate r ia ls and serv ices, • prov i de tr an spa ren c y of A BB ’s glo ba l spe nd in g through a comprehensive performanc e and rep or t i ng s yste m li nked to o ur e nter pr i se resource p lanning (ERP ) systems, • stren gt he n AB B ’s supp ly c hain n et wo rk by implementing an e ffec tive product ca tegor y management structure and e xtensive competency-based training, and • monito r an d deve l op ou r sup pl y ba se to e nsu re sust ain abi lit y, both i n ter ms of mate r ia ls an d proces ses us e d. We bu y many c ateg or i es of p ro du c ts w hic h con - tain s tee l , cop pe r , al umi nu m, c rud e oil a nd ot he r commodities. C ontinuing global ec onomic growth in man y emerging economies, coupled with the vola tility in f oreign currency exchange rates, h as le d to sig nif i ca nt f luc tuati ons i n th ese r aw mate - r ial c ost s ove r the l as t few ye ar s. W hil e we e xp ec t global c ommodity prices to remain h ighly vola tile, we ex pe c t to of f set so me m arke t vol atil it y thr oug h th e use of l on g -te rm co ntr ac ts a nd g lo bal sourc ing . We see k to mit ig ate the m ajo r it y of ou r e xp osure to com mod it y p r ice r i sk by e nter i ng i nto de r iv a - ti ve co ntra c ts . For e xam pl e, w e man age c opp e r , silver and aluminum price risk us ing principally sw ap co ntra c ts b ase d o n pr i ces fo r the se co m - modities quot ed on leading e xchanges. ABB’s hedging policy is des igned t o sa feguard margins by m inimizing price v olatility and prov iding a sta bl e cos t ba se du r in g ord er e xe cut io n . In add it io n to usi ng d er i vat ive s to re du ce ou r ex po - sure to f lu c tuat io ns in r aw mate r ial s pr i ces , in som e ca se s we ca n re du ce thi s r isk by i nco rp or at - in g cha ng es i n raw mate r ia ls pr i ce s into th e pr i ces of our e n d pro du c ts (th rou gh p r ice e sca la - tion claus es) . Ove ra ll , du r in g 20 21 , su pp ly c hai n man age m ent personnel in our businesses, a nd in the c ountries in w hic h we op er ate, al on g w it h the c ate gor y teams, continued to focus on value chain optimi - zation e ffort s in all ar eas, while maintain ing and improving quality and de livery per formance. Responding t o the challenges of o verall global sup pl y ch ain co nst raint s, e ach B us in ess A re a qui ck l y im pl em ente d a ta sk fo rce to mi ti gate supply cha in shortages. The Busines s Areas experie nced s ome dela ys in suppl ie r deliveries and product sh ortages for various cat e gories suc h as s emi con du c tor s and o the r raw m ater i als as we ll a s co nst rain ts i n the t ra nsp or t ati on of inb ou nd su pp li es . Howev er , w e resp on de d to these ch allenges and t ook mitiga ting actions such as building up buffer st ock s, appro v ing new suppliers, cha nging s upplier spli ts, comb ine d w ith d ail y, week l y an d mon thl y t ask fo rce p roje c t fol low u ps. We h ave, to a la rg e ex te nt , be en a bl e to mit ig ate most d isr upt io ns, m aint ain a co mp et i - ti ve se r v i ce l eve l and s upp or t our b usi ne ss growth, while mainta ining deliv er y schedules to our cust omers. In Au gu st 2 01 2 , the S EC issu ed i ts f i na l rul es regarding “Conflict Minerals ” , as required b y sec t i on 1 5 02 of t he D od d - Fran k Wal l Stre et Ref orm a nd Co nsum e r Prote c ti on A c t . We init i - ated co nfl ic t mi ne ra ls p roce sse s in 20 1 3 an d have continuous ly aimed at impro ving and tailoring the pro cess es to ou r va lu e chai n. We c ont in ue to wor k w ith o ur su pp li er s an d cus tom er s, to e nab le u s to com pl y w it h the r ul es a nd di scl osu re ob li gati on s. Further in formation on A BB’s Conflict Minerals po lic y and su pp li er re qu ire me nt s ca n be fo un d und e r “M ater i al Co mp lia nce ” at global.abb/ group / en/ about. supply ing . 127 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P — Whi le we a re no t mater i al ly d ep e nde nt o n any o ne of our i nte ll ec tu al p rop er t i es, a s a tec hno lo g y- dr iv en co mp any, we bel ieve t hat inte ll ec tu al p rop er ty r i ght s ar e cru c ia l to prote c t the a sse ts of o ur b usi ne ss. O ve r the p as t ten year s, w e have con ti nu ed to su bst ant ia ll y add n ew app li cat io ns to ou r ex i st in g f ir st p atent f i lin gs, and w e inte nd to co nti nu e ou r agg ress ive app ro ach to se ek i ng p atent p rote c ti on . A s of De ce mb er 3 1 , 20 21 , w e have ap prox i mate ly 25 ,0 0 0 p atent ap pl ic ati on s and r eg ist rat ion s, of which appro x imat ely 5,50 0 are p ending appl ica - tions. These patents include more than 3, 50 0 ut i lit y m od el a nd d esi gn a pp li cat ion s an d reg is trat io ns, of w hic h ap prox i mate ly 2 0 0 are pe nd ing a pp li cat io ns. I n 20 2 1 , we f il ed m ore t ha n 2, 2 50 p atent s, u ti lit y m od el a nd d es ign a pp li ca - ti ons f or mo re th an 1 , 25 0 inv ent io ns . Ba se d on our e x is ti ng i nte lle c tu al pr op er t y s trate g y , we be li eve th at we have ad eq uate co ntro l over o ur core te ch no lo gi es . The “AB B” t rad em ar ks a nd lo go ar e prote c te d in al l of th e cou ntr i es i n whi ch we op er ate. We p roac t i vel y a sser t our i ntel le c tua l pro pe r t y r ig ht s to safe gua rd th e re put ati on asso c iate d w it h the A B B tec hn ol og y an d br an d. While thes e in tellectual property rights are fu nda - me nta l to all of o ur b usi ne sses , th ere i s no dependenc y of the bus iness on an y single pa tent, ut ili t y mo de l or d es ign a pp li cat io n. — Man ag emen t o v er v ie w Du r in g 20 21 , we s aw a str ong r eco ver y from t he pan de mi c- re lated d isr upt io ns of 2 02 0. It a lso w a s the f i rs t fu ll f is ca l year w he re we o pe rate d un de r our d e cent ra lize d op er ati ng m od el , the A B B Way. In 2 02 1 , we have s ee n im prov ed e f f ic i en c ie s fro m this n ew w ay of ope r atin g an d we e xp ec t t he increased transparency , ac countability and speed to further support future grow th and pr ofitability. Ad dit io na ll y, we made pr og ress i n res hapi ng o ur business por tfolio, c omplet ing the divestment of the M e cha nic al P ower T ran smiss io n bus in ess, a s we cont i nue to b e fu ll y foc use d on e le c tr i f ic ati on and au toma tion. This tran saction complet es the f ir st of th e th ree p la nn ed D i v is ion al e x it s pr ev i - ously announced in 2020. Acti ve portfolio management is part of our per - form an ce cu ltur e. O n th e bac k of sy ste mat ic po r tfo li o rev i ew s we as cer t ain w he the r ul ti mate ly AB B is t he b es t own er of t he di f fe ren t bus in esse s. A s a resu lt , we have su cce ssfu ll y di ves ted t he Me ch ani ca l Powe r T ra nsmi ssio n Di v i sio n du r in g 20 21 . We cont in ue to ma ke pro gre ss on th e e x it of the T u rb oc har gin g D iv i si on , wh ere w e are cu r- ren tl y run nin g a du al tr ack p roc ess fo r a spin - of f or di ves tm ent , an d pl an to e x it t he Powe r Co nver- sio n Di v i sio n . At the s am e ti me , we are car ving - out the E -mobility Div ision and work towar ds an i nit ia l pu bli c of fe r in g to cre ate a pl atfo rm for a cce le rate d grow t h an d va lue c re - atio n . We pla n to re main a m ajor i t y own e r of the new compan y . In ad dit i on , our ac ti ve po r tfo li o man ag em ent proces s is dr iv ing decisions within the Div isions to imp rove o r ex i t are as o f und e rpe r fo rma nce , supporting improv e d performance ambitions. Fur the r , w e inte nd to pu rs ue st rate gic p ar t ne r - ship s as we ll a s b ol t - on ac qui sit i ons d r ive n by th e Di v i sio ns. I n 20 2 1 , we acq uir ed A S TI M obi le R ob ot- ic s G rou p, a glo ba l le ade r in t he hi gh - g row t h auton om ous m obi le r ob ots m arket w ith a b road po r tfo li o of veh icl es a nd so f tw ar e. A s p ar t of o ur futu re st rate gy we ai m to com pl ete f i ve or m ore bolt - on acquisitions each y ear . Business progress Du r in g 20 21 , d em an d for A B B’s of fe r ing r ec over ed fro m the l ow le vel i n 20 2 0 wh en th e ad ve rse bus in ess i mpa c t of the p an de mic w a s mos t sig nif i ca nt . Or de rs a nd re ven ue s in cre as ed i n all Business Areas. Demand increased year - on -year in all r eg ion s w it h the A m er i ca s se ei ng t he hi ghe st grow t h, w hil e th e in cre as e wa s lowe r in A s ia , Mid dl e Ea st a nd A fr ic a a s Chi na ha d alr ead y sta r te d to reco ver i n 20 20 . Whi le sh or t- c ycl e pro du c t de ma nd re cove re d re lat ive l y qui ck l y fro m the s har p dow ntur n se en at th e ons et of th e pandemic, pro jec t activ ities, particularly in pro - cess industries, predominantly pick e d- up during the s eco nd h alf o f 20 21 . The l oos eni ng of v ar i ou s pandem ic-rela ted tr avel restrictions allow ed for a m ore s igni f ic ant i mp rove me nt in serv ice-rela ted activ ities. 128 ABB ANNU AL REPOR T 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP Whi le o ur o rde rs i nc rea se d 20 p e rce nt in 2 02 1 , reve nu es o nl y gre w by 1 1 pe rce nt . Sup pl y c hain constra ints, and imbalanc es in the o verall supply chai n li mite d our a bil it y to co nver t o rd er s into ac tua l de li ver i es r esul ti ng i n an i nc rea se of o ur ord er b ack l og by 16 p er cen t to $16 .6 bil li on at th e en d of th e year. Gro up p rof it abi li t y showe d st ron g im prov em ent dur i ng 2 0 21 w i th se gm ent p rof i t (Ope rat io nal EB IT A ) hig he r in a ll B usi ne ss A rea s an d con ti nu ed pro gre ss towa rds a l ea n cor po rate fu nc t io n. T he result wa s driven by better volumes, continuous improv ements, impro ved internal ef fic ienc y and the a bse nc e of cer t ain l arg er n on - core p roj ec t losse s in cu rre d in 2 02 0. A c ti ve pr i ce ma nag em e nt and p ro du c ti v i t y gain s wer e abl e to of f set i n - cre as in g raw mate r ia l cost s an d ge ne ra l cos t inf lat io n em ph as ized by t he t ig ht sup pl y si tuat io n over t he ye ar . W hi le so me co st s suc h as d isc re - ti on ar y t rave l or ce r tai n ma rket ing c ost s are s ti ll ex pe c te d to reb al anc e fro m low p and em ic l eve ls, we be li eve we a re on t rac k to achi eve ou r fu ture business targets. The p rof i tab ili t y im prove m ent a s we ll a s lowe r ca sh cos ts f or tr ans for mat ion i nit iat iv es have a lso all owe d us to ac hieve s tro ng c a sh ge ne rat io n, w ith c a sh f lows f rom o pe rat in g ac t iv iti es i n continuing ope rations improv ing t o $3. 3 billion in 20 21 , a n in cre as e of 78 p er cent c omp ar ed to 2 02 0. We cont in ue d to ma ke orga nic g row th i nves t- ments in a dis ciplined manner , pr ioritizing research and development wh ile reducing admin - ist rat ive co st s. T ot al no n - o rd er re late d re sea rch and d eve lo pm e nt wa s $1 . 2 bil lio n in 2 02 1 , or 4. 2 pe rce nt of reve nu es . We al so com pl ete d key acquisitions and divestme nts in 2021 , strengthen - ing our p ortfolio. Capital allocation Our capital allocation priorities are unchanged: • funding organic gro w th, resear ch and deve l op me nt, a nd c api ta l ex pe nd itu res at attractive returns, • pay ing a r i si ng , sust ain ab le di v i de nd p e r sha re over t ime, • in vesting in value- creating a cquisitions , and • returni ng a ddi ti on al c as h to shar eh ol de rs . We ex pe c t th at our i mp rove d ca sh g en er ati on , on the b ack of t he A B B Way ope r atin g mo de l, w ill en han ce ou r f le x ibi lit y to i nves t in b oth o rga nic growth and bolt-on acqu isitions, wh ile providing attr ac t ive r etur ns to sh are ho ld er s. At the 2 0 22 A n nua l G en er al M ee ti ng ( AG M), the Bo ard of D i rec to rs i s pro po sin g a di v id e nd of 0. 82 Sw iss fr anc s p er s har e. We a lso p la n to continue our announced share b uyback to return $7.8 bill io n of ca sh p roc ee ds f rom t he Pow er G r id s div est me nt to sha re ho ld er s. At D e cem be r 31 , 20 21 , u nd er t he i nit ial a nd fo ll ow - up sh are b uy - back programs, we had cumula t ively purchased shares for appro ximately $ 5.5 billion. Du r in g 20 21 , we r aise d ou r grow th ta rge t to 4 to 7 pe rce nt (up from 3 to 5 p er cent) a nn ual aver age re ven ue g row th , th rou gh a n eco no mic cycle and in constant cur rencies. This includes 3 to 5 pe rce nt org ani c gro w th an d 1 to 2 pe rce nt fro m acqu ire d gr ow th . For th e Op e rat ion al EB ITA margi n, we h ave re - move d th e pre v io us m arg in ra ng es a nd r aise d our tar ge t to at lea st 1 5 p er cen t as f rom 2 02 3 (fro m upp e r hal f of 1 3 to 16 p erc ent r an ge i n 20 2 3). The o the r ta rg et s w ith in ou r f in anc i al f ram ewo rk remain unchanged: • Retur n on C api tal E mp loye d (R OC E) o f 1 5 to 20 perc e nt, • Cash conv e rsion t o net income of appro ximately 10 0 pe rce nt , and • Bas ic EP S g row th a bove r eve nu e grow t h. Sust aina bil it y strateg y 203 0 Wi th ou r 20 30 s ust ain abi lit y s trate gy, we are actively contributing t o a more s ustainable w orld, le adin g by e xam pl e in o ur ow n op er ati ons a nd par t ne r in g w it h cus tom er s an d sup pli e rs to en ab le a l ow- car bo n soc i et y, pres er ve res our ces and promo te social progr ess. Our sus tainab ilit y foc us is p ar t of A B B’s com mitm e nt to resp on sib l e bus in ess p rac t ice s, w hic h are at t he ce nter o f our comprehensive governance framewor k, based on integrity and transparency. Am on gst o the r foc us a rea s in 2 0 21 , we u nvei le d, at the C api ta l Ma rket s Day 20 2 1 , our c i rcu la r it y fra me work c over i ng e ver y stag e of th e pro du c t life c yc le to p res er ve reso urc es. I t in cl ud es fou r stages: circular design and sourcing, resourc e ef f i c ie nt op er ati ons , opt im ized u se ph a se an d resp on si bl e en d of lif e. T he g oal i s to have 80 p e rce nt of A BB p rod uc t s, s olu ti on s an d ser- v ic es cove re d by th e c irc ul ar it y f ra mewo rk by 203 0, w ith o ur pr ogr ess m ea sure d ag ains t a set of KPIs. For fur ther inf ormation on sustaina bility see the S us tain abi lit y s ec t io n in t he I ntro du c ti on to this Annual Report . ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P — C ritical ac count i ng polic i es and es tima t es Gener al We prepare our C onsolidated Financial S tat e - me nts i n acco rda nce w ith U. S . G A A P and p re sen t these in U.S . dollars unless otherw ise sta ted. The p re pa rati on of o ur f i na nc ia l st ateme nt s req ui res u s to make a ssum pti on s an d est im ates that af fe c t th e re po r ted a mou nt s of ass et s, liabilities, revenues and expenses and the rela ted dis clo sure of c ont in ge nt a sset s an d lia bil it ie s. We evaluat e our estima tes on an ongoing basis ( see “N ote 2 - Si gnif i c ant acco unt i ng p oli c ie s” to ou r Consol idat e d Fin ancial Sta tements for a listing of our most significant acc ounting estimat es) . Wh er e app ro pr iate , we ba se o ur e st imate s on histo r ic al e xp e r ie nce a nd o n va r iou s oth er a s - sum pti ons t hat we b el iev e to be re aso na bl e un de r the c i rcu mst an ces , th e resu lt s of whi ch fo rm t he basis f or making judgments about the carry ing va lu es of a sset s an d li abi lit ie s th at are not r ead il y apparent from other sources. Actual r esults ma y differ from our estimates and assump tions. We de em a n accou nt in g po lic y to b e cr i ti c al if i t req ui res a n acco unt in g est i mate to be m ade ba se d on a ssum pti on s abo ut m atte rs t hat are hig hl y un cer t ain at th e ti me t he e st imate i s mad e and i f di f fer ent e st im ates th at rea son ab ly c oul d have be e n use d, o r if c han ge s in t he acc oun ti ng est im ates th at are r ea son ab ly l ikel y to oc cur per iodically, could materially impact our Cons oli - dated F ina nc i al State me nt s. We al so d ee m an accou nt in g po lic y to b e cr i ti ca l wh en t he a pp lic a - ti on of su ch p ol ic y i s esse nt ial to o ur o ngoi ng op er ati ons . We be li eve th e fol low i ng c r it ic al accou nt in g po lic i es re q uir e us to ma ke subje c t ive ju dgm en ts , of ten a s a re sul t of the n e ed to ma ke estimat es regarding ma tters that are inherently uncertain and ma terial to our Cons o lidat ed Finan - c ial St atem ent s. T he se p oli c ie s sho ul d be considered when read ing our Consolidat ed Finan - cial Sta tements. Rev e nu e recog nition A cus tom er co ntr ac t ex i st s if co ll ec t abi li t y und e r the c ontr ac t is c ons id ere d p rob ab le , the c ontr ac t has commercial s ubstance, con tains payment ter ms, t he r ig ht s and c om mitm en ts of b oth par t i es, a nd h as b e en a pp rove d. B y ana l y zi ng t he t yp e, te rm s and c on dit io ns of e ach co ntr ac t or arr an ge me nt w i th a cu stom er, we deter min e which rev enue rec ognition method applies. We rec ogni ze reve nu es w he n con trol o f go ods o r ser v ic es is t ra nsfe rr ed to c usto me rs i n an am ou nt that re fl e c ts t he co nsi de rat io n we ex pe c t to be ent it le d to in e xch ang e for t he se go od s or se r- v ic es . Contr ol is t ra nsfe rr ed w he n th e cus tom er ha s the a bil it y to di re c t the u se an d ob tain t he benefits from the goods or serv ices. The p e rce ntag e - of-co mp le ti on m eth od of a c- counting is generally used when rec ognizing reve nu e on a n over t im e ba si s an d invo lve s th e use of as sumptions and projections, principally relating to future ma ter ial, labor , subc ontra ctor and p roj ec t-r el ated ove rh ead c ost s as w el l as est im ates of t he am ou nt of va r ia bl e con sid e rati on to whi ch we e xp ec t to b e en ti tle d . A s a con se - qu en ce, t he re is a r i sk th at total co ntr ac t cos ts o r the a mo unt of v ar i ab le co nsi de rat io n w il l, re sp ec- ti ve ly, eith er e xce ed o r be l owe r tha n tho se we originally estimat e d (based on all informa tion rea so nab l y avail ab le to us) and t he ma rgi n w il l de cre a se or th e co ntra c t may be co me un pr of it- ab le . Thi s r isk i nc rea se s if th e du rati on of a cont rac t i nc rea se s be ca use th e re is a hi gh er pro ba bili t y th at the c i rcu mst an ces u po n whi ch we originally developed our estimates will change, resu lt in g in i ncr ea se d cost s th at we may not rec over. F ac to rs th at cou ld c aus e cost s to in - crease include: • unant ic i pate d tec hni ca l pro bl em s w it h eq uip me nt su pp lie d or d eve l op ed by u s whi ch may re qui re u s to inc ur ad di ti ona l cos ts to r e m e d y, • chan ge s in th e cos t of com po ne nt s, mate r ia ls or labor , • difficulties in ob tain ing requir e d gov e rnmental permits or approvals, • pro je ct modific ations creating unanticipated co sts, • suppl ie rs ’ or su bco ntr ac tor s’ f ailu re to pe r fo rm, and • del ay s caus ed by unexpect ed c ondition s or event s. Cha ng es i n our i nit ia l ass umpt i ons , whi ch we rev i ew o n a re gul ar b as is b et wee n b ala nce s he et dates , may re sult i n rev isi ons to e st im ated cos ts , cur re nt ear nin gs a nd an ti c ip ated ea rni ngs . We rec og nize th ese c han ge s in t he p er i od i n whi ch the changes in estimates are determ ined. By 130 ABB ANNU AL REPOR T 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP recogni zing changes in estimates cumula tively , rec ord ed r eve nu e and c ost s to date re fl ec t t he cur re nt est i mates of t he st ag e of com pl et io n of eac h proj ec t . A dd it ion al ly, losse s on su ch co n - trac t s a re re cog nize d in th e pe r io d wh e n the y are id ent if i ed a nd a re ba se d up on t he an ti c ip ated exce ss of con trac t c ost s ove r the r el ated co ntr ac t revenues. Pension a nd other postretireme nt benef its A s mo re fu ll y de scr i be d in “ N ote 17 - Empl oye e benefits” to ou r C onsolida ted Financial S tate - me nts , we have a n umb e r of de f ine d b en ef i t pension and other postretirement plans and rec og nize an a sset f or a pl an’s ove r fun de d st atus or a li abi lit y f or a pl an’s un de r fu nd ed s tatus i n ou r Consol idat e d Balance She ets. We measure suc h a pl an’s asse ts a nd o bl igat io ns th at dete r- min e it s fun de d st atus a s of th e en d of th e yea r . Sign if ic an t dif fe re nc es b et we en a ssum pt ion s an d ac tua l ex pe r ie nc e, o r sig nif i ca nt ch an ge s in assu mpt io ns , may mate r ial l y af fec t t he p en sio n ob lig ati ons . Th e ef fe c t s of ac tua l resu lt s di f fer i ng from as sumptions and the chang ing o f ass ump - ti ons a re in cl ud ed i n ne t ac tua r ia l loss w i thi n “ Accumulat ed other compr ehensive lo ss” . We rec ogni ze ac tua r ial g ain s and l osse s gr adu al ly over t im e . A ny cum ul ati ve unr ec ogni zed ac tu ar i al gain o r lo ss that e xcee ds 10 p e rce nt of th e gre ater of the p re sen t va lu e of the p roj ec te d be ne f it ob lig ati on ( PBO) an d the f air v al ue of p la n ass et s is re cog nize d in e arni ng s ove r the e xp e c ted av erage r emain ing w orking lives of the employ e es par t i c ipat in g in t he p lan , or t he e xp ec te d ave rag e remain ing lifetime o f the inac tive plan partic i - pan ts i f the p la n is co mp r ise d of al l or a lmo st al l inactive part icipants. Other w ise, the actuarial gain o r lo ss is not r eco gni zed i n the Co nso li date d Income S tatements. We use ac tu ar i al v alu ati ons to d ete rmi ne o ur pe nsi on a nd p ost ret ire m ent b en ef i t cost s an d cre di ts . Th e amo unt s c alc ul ated d ep en d on a va r iet y o f key assu mpt io ns, i nc lu di ng di scou nt rates , mo r tal it y r ates an d ex pe c te d retu rn o n pla n asse t s. Un de r U. S . G A AP , we a re re qui re d to consider c urrent market c onditions in mak ing these ass umptions. In particular , the dis count rates a re rev iewe d an nu al ly b as ed o n cha ng es i n long-term, highly-rat ed corpora te bond yields. De cr ea ses i n th e disc oun t rates re sul t in a n in - cre as e in th e PB O an d in p ens io n cost s. Conve rs el y, an inc rea se i n the d isc ount r ates resu lt s in a d ec rea se i n th e PBO a nd i n pe ns ion cost s. T he m or t ali t y ass ump ti ons a re rev iew ed ann ua ll y by ma nag em ent . D e cre as es in m or t al it y rates r esul t in a n in cre as e in th e PB O an d in pe n - sio n cost s . Conve rs el y, an inc rea se i n mo r ta lit y rates r esul ts i n a de c rea se i n the P BO a nd in pension costs. Ho ldi ng a ll ot he r assu mpt io ns co nst ant , a 0. 2 5 p erc ent age - poi nt de cr ea se in t he di sco unt rate wou ld h ave inc re ase d th e PB O re lated to o ur def i ne d b en ef it p e nsi on p lan s by $2 6 2 mil lio n whi le a 0. 25 p e rce ntag e - p oint i nc rea se i n the dis coun t rate wou ld h ave de cre as ed t he PB O rel ated to o ur d ef in e d be nef it pe nsi on p la ns by $25 4 million. The e x pe c ted r etur n on p la n asse ts i s rev iewe d reg ul arl y a nd co nsi de re d for ad ju stm ent a nn ual l y ba se d upo n th e ta rge t ass et al lo cat io ns an d rep re sen ts t he l ong - ter m retu rn e xp e c ted to b e achi eve d. D e cre as es i n the e xp e c ted r etur n on pl an a sset s re sult i n an i nc rea se to p en sio n cost s . Holding all other assump tions con stant, a n in - cre as e or d ec rea se of 0. 2 5 pe rce ntag e poi nt s in the e x pe c ted l on g -te rm r ate of asse t retu rn wo uld have de cr ea se d or i ncr ea se d, re sp ec t iv el y, the ne t pe r io di c be ne f it cos t in 2 02 1 by $2 1 mi lli on . The f un de d st atus, w hic h ca n in cre as e or d ec rea se ba se d on th e pe r fo rma nce of t he f i nan c ia l mar- kets o r ch ang es i n ou r assu mpt io ns , do es no t represent a mandat ory short-t erm cash obliga - ti on . In stea d, th e fu nd ed s tatus of a d ef i ne d be ne f it p ens io n pl an is t he di f fe re nce b et we en the P BO a nd th e fai r va lu e of the p la n ass et s. At De ce mb er 3 1 , 20 21 , o ur d ef i ne d be ne f it p en sio n pl ans we re $ 2 7 mil lio n ove r fun de d co mpa re d to an un de r fu nd in g of $6 56 mi ll ion at D ec em be r 31 , 20 20. O ur o the r po str et ire me nt p lan s wer e un de r - fun de d by $ 71 m ill io n and $ 9 8 mil lio n at De ce mb er 3 1 , 20 21 a nd 2 02 0, re sp ec t iv el y. Income t a xes In preparing our Consolidat ed Financial Sta te - ments, w e are required to est imat e income taxes in ea ch of th e ju r isd ic t io ns in w hic h we op e rate . T a x expense fr om con tinuing operations is recon - c il ed f rom th e wei ghte d - aver age g lo bal t a x r ate ( rather than from the S w iss domestic stat utor y ta x r ate). As th e pa ren t com pany of t he A B B Gro up, A B B Ltd, is d omi c il ed i n Sw it ze rl and , in com e whi ch ha s b ee n ge n er ated in j ur i sdi c ti on s out si de of Sw i t zer la nd ( he reaf te r “ fo rei gn j ur is - dic t io ns ” ) an d ha s alr ead y b ee n subj ec t to corpora te income tax in those foreign jurisdic - ti ons i s, to a l arg e ex te nt , ta x exem pt i n Switzerland. Theref ore, generally no or only limi ted Sw iss in com e ta x h a s to be pr ov i de d for on th e re patr i ated e arni ng s of fore ig n subs idi ar- ie s. Th er e is no r eq ui rem en t in Sw i tze rl an d 131 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P for a p are nt com pa ny of a gro up to f i le a t a x retur n of the group de termin ing domestic and foreign pre -ta x income and as our co nsolida ted income fr om continuing operations is predom i - nan tl y ear ne d ou tsi de o f Sw it ze rla nd , cor po rate income tax in foreign jur isdictions largely det e r - min es ou r gl ob al wei ghte d - aver age t a x r ate. We accou nt for d efe rr ed t a xes by u si ng th e ass et and l ia bili t y me tho d . Un de r this m et ho d, we dete rm ine d efe rr ed t a x a sset s an d lia bil it ie s ba se d on te mp ora r y d if fe re nce s be tw ee n th e f ina nc i al re po r t in g and t he t a x ba se s of ass et s and l ia bili ti es . D efe rre d ta x asse ts a nd li abi li ti es are m ea sur ed u sin g th e en ac ted t a x rate s an d laws t hat are e x pe c ted to b e in e f fec t w he n th e dif fe re nc es ar e ex pe c te d to reve rs e. We re co g - nize a de fer re d ta x a sse t wh en i t is mo re li kel y tha n not t hat th e asse t w il l be r eal ize d. We re gu - lar ly r ev i ew ou r de fe rre d ta x a sse ts fo r rec over abi li t y and e st ab lis h a va luat io n al low anc e ba se d upo n his tor i ca l losse s, p roj ec te d fu ture taxable income and the expec ted timing of the reve rs al s of ex i st in g tem po rar y dif f ere nc es . T o the e x te nt we in cr ea se or d ec re ase t his a llo wan ce in a p er i od , we re cog nize th e ch ang e in t he a llo w- anc e w ith in “ In com e ta x ex pe nse ” in th e Consol idat e d Income Stat ements unles s the change rela tes to discontinued opera t ions, in whi ch c as e the c ha ng e is re cor de d in “ I nco me from d iscon t inued operations, net of tax” . Unfor e - see n c han ge s in t a x rate s and t a x l aws, a s we ll a s differences in the projected taxable income a s com par ed to t he ac tu al ta xab le i nco me , may affect these es timat es. Certain c ountries levy withholding taxes, dividend distribution taxes or additional corpora te income taxes (hereafter “withholding taxes”) on dividend dis tr ib ut io ns . Suc h ta xes ca nn ot al ways b e fu ll y rec lai me d by th e sha re hol de r , a lth ou gh th ey h ave to be d ec lar ed a nd w i thh e ld by t he sub si dia r y. Switzerland has c onclude d double taxa tion tre ati es w i th ma ny cou ntr i es in w hic h we op e rate . The se tr eat ies e ith e r el imi nate or re du ce su ch withholding taxes on d ivid end distributions. It is our p ol ic y to d ist r ib ute ret ain ed e ar nin gs of subs idi ar i es , ins ofar a s su ch e arni ng s are n ot pe rm ane ntl y re inve ste d or n o othe r re as ons e x is t that wo ul d pre vent t he su bsi dia r y f rom di st r ibu t- in g the m . No d efe rre d ta x lia bili t y is se t up, i f retained earnings are considered as indefinitely reinv ested, and us ed for f inancing current o pera - tions as w e ll as bus iness growth thr ough working ca pit al an d ca pit al e xp en di ture i n tho se cou ntr i es . We ope r ate in nu me rou s ta x j ur is di c ti ons a nd , as a r esul t , are re gu la rl y subj ec t to au di t by ta x authorities, including for transf er pricing. We provide for tax contingencies whenever it is de em ed m or e like ly t han n ot th at a ta x a sset h a s be en i mp aire d or a t a x li abi lit y h a s be en i nc urr ed for ev ent s suc h a s ta x c laim s or c han ge s in t a x laws. Contingenc y pro v isions are recorded based on th e tec hni ca l me r it s of ou r f il in g pos it io n, con sid er i ng t he a pp lic ab le t a x l aws an d OECD gui de li ne s an d are b ase d o n our e va lu atio ns of t he fac t s an d c irc ums ta nce s as of t he e nd of e ach reporting per iod. Changes in the facts and cir - cum st anc es co ul d resu lt in a m ater i al c han ge to the t a x acc ru als . A lth ou gh we b el iev e that o ur ta x estimates are reasonable and that appropr iate ta x r ese r ve s have b ee n mad e , the f i na l dete rmi na - ti on of t a x aud it s an d any re late d li ti gat ion c oul d be di f fe ren t tha n that w hic h is re fl e c ted i n our income tax pro v isions and a ccruals. An e st im ated l oss fro m a ta x cont in ge nc y m ust b e accr ue d a s a cha rg e to inc ome i f it i s mor e like ly tha n not t hat a ta x a sse t ha s be e n imp aire d or a t a x lia bil it y h as b ee n in cu rre d an d th e amo unt of the l oss c an b e rea so nab l y est i mated . We app l y a t wo - ste p app ro ach to re co gnize a nd measure uncertainty in income taxes. The fir st ste p is to ev al uate th e ta x p osi ti on fo r re cog nit io n by de ter mini ng if t he we igh t of avail ab le e v id e nce in dic ates th at it is m or e like ly t han n ot th at the position will be susta ine d on audit, inc luding resolution of r e lat e d appeals or litigation pro - cesse s, i f any. The se con d ste p is to m ea sure t he ta x b en ef i t as t he l arg es t amo unt w hic h is m ore tha n 50 p er cen t like ly of b ei ng re al ized u po n ult im ate set tl em en t. T he re q uir ed a mou nt of prov isi ons fo r con ti ng en c ie s of any t y pe m ay cha ng e in t he fu ture d ue to n ew d eve lop me nt s. Goodw i ll and i ntangi ble assets We rev i ew g oo dw i ll fo r imp air me nt an nua ll y a s of Oc to be r 1 , or m ore f re que ntl y i f eve nts o r c irc um - sta nce s in di cate th e ca rr y in g va lu e may not b e rec over ab le . We us e eit he r a qua li tat ive o r qua nt i - tative a sses sment method f or each reporting unit . A s eac h of ou r Di v is io ns have f ull o wne r ship a nd acc ountabil ity for their r espec tive stra tegies, performance and resources, w e have determined our r ep or t in g uni ts to b e at the D i v is io n leve l , whi ch is o ne l eve l be l ow our o pe rat in g se gm ent s of E l ectr ification, Motion, Pr ocess Aut omation and R ob ot ic s & Di scr ete Au tom atio n . When performing the qualitative as sessment, we f ir st de ter min e, fo r a re po r ti ng u nit , fac to rs w hic h woul d af fe c t th e fair v al ue of t he re po r t in g unit including: (i) ma croeconomic cond itions rela ted to the bus iness, ( ii) industry and ma rke t tr ends, and ( ii i) t he ove ra ll f utur e f in anc i al p er fo rm an ce and f utu re op po r tuni ti es i n th e mar kets i n whi ch the busines s operates. We then c onsider how 132 ABB ANNU AL REPOR T 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP the se fa c tor s woul d im pac t t he m ost re ce nt qua nt it ati ve ana ly si s of the r ep or t in g uni t ’s fair value. Ke y ass umptions in det e rmining the fair value of the reporting unit include the pr ojected level o f business opera tions, the reporting unit’ s weig hte d -ave rag e cos t of ca pit al , the i nco me t a x rate an d the te rm ina l grow th rate . Du r in g 20 21 , we a dd ed t hre e ne w Di v i sio ns by splitting two existing ones int o multiple stand - alo ne D i v is ion s an d ann ou nce d ( in J ul y 20 21) t he div est me nt of th e Me ch ani ca l Powe r T ra nsmi ssi on Div ision, res ulting in twenty reporting units in total f or th e Gr oup at O c tob er 1 , 2 0 21 . For eac h cha ng e in re p or t in g uni t whi ch ar ose du r in g 20 2 1 , an in ter i m qua nt it ati ve im pair me nt tes t wa s con du c ted b efo re an d af ter t he c han ge . I n both the “ b efor e” an d “af ter ” te st s, i t wa s con cl ud ed that th e fai r va lu e of the r ep or t in g uni ts e xce ed e d the c ar r y i ng v al ue by a s ig nif ic an t amo unt . In 2 02 0, pr i or to t he ad opt io n of th e new “AB B Way ” op er ati ng mo d el o n Ju ly 1 , 2 02 0, g oo dw i ll wa s ge ne ra ll y a ssesse d at th e lev el of A B B’s operating s egments ( one level above the Div ision, w ith t he e xce pti on of P roce ss Au tomat io n wh er e the r ep or t in g uni ts we re t he sa me a s th e Di v i - sions ) while after the change, goo dwill imp air me nt wa s a ssesse d at th e Di v i sio n le vel . Although the new operating model r esult e d only in an allocation of goodwill w ithin the operating seg me nt s an d did n ot ch an ge th e se gm ent l eve l goodwill, an int erim quantitativ e impa irment test wa s con du c ted b efo re an d af ter t he J ul y 1 ch an ge . In th e “b efo re” te st , it w as c on clu de d th at the f air va lu e of our r ep or t in g uni ts e xce ed e d the c ar r y i ng va lu e und e r the hi stor i c al re po r ti ng u nit s tru c tur e. For the impa irment test pe rformed immedia tely af ter th e ch an ge i n rep or t i ng un it s, th e fair v al ue of eac h of th e eig htee n re po r t ing u nit s wa s dete rm ine d us in g a dis cou nted c a sh fl ow fai r value estima te ba sed on objective info rmation at the m ea sur em ent d ate. T he s ign if ic an t assu mp - ti ons u se d to deve l op th e es ti mates of f air v al ue for e ach r e porting unit included o ur best esti - mates of t he e xp ec te d fu ture r esu lt s an d disc oun t rat es specif ic to the report ing un it. Determ ining the p roj ec te d fu ture c a sh fl ows r eq uir ed s igni f i - cant judgmen ts and es timat es involving variables suc h as f utur e sal es vo lu me s, sa le s pr i ces , pro - du c ti on an d oth er o pe rat in g cos ts , ca pit al expenditures, net working capital requirements and o the r e con omi c fac to rs su ch a s th e cont in ue d imp ac t of th e COV ID -19 pa nd emi c . Th e fair v al ue est im ates we re b ase d o n assu mpt io ns th at we be li eve d to be re as ona bl e, b ut w hic h wer e in he r - ent ly u nce r t ain an d thu s, ac tu al re sul ts m ay dif fe r fro m tho se es ti mates . Se ns it iv i t y an al yse s we re performed around c er tain o f these assumptions in or de r to ass ess th e re aso na bl en ess of t he assump tions and the resulting es timat e d fair v alues. The 2020 in ter im quantita tive impairmen t t est in dic ated t hat , w ith t he e xce pti on of t he M achi ne Automa tion report ing un it within the Robo t ics & Discret e Aut omation operating segment, the est im ated f air v al ues o f our r ep or t in g uni ts we re subs ta nti al ly i n exce ss of th eir c ar r y ing v al ue . Th e cont rac t io n of th e gl oba l ec ono my in 2 0 20, p ar t ic- ularly in end- customer indust ries and considerable u ncertainty around the continued pace of m acr oe con omi c re cove r y ge n er all y l ed to a red uc t io n in t he f air va lu es of t he re po r t in g unit s, t hu s als o af fec t in g th e Mac hin e Auto mat io n rep or t i ng un it . At th e Di v is io n lev el , this r ep or t in g unit d oe s not b e nef i t fro m sha re d ca sh f low s ge ne rate d w it hin an e nt ir e ope r atin g se gm ent . I n addition, the book value of the Ma chine Automa - ti on D iv isi on in cl ud es a s ign if ic an t amo unt of int an gib le a sse ts re co gnize d in p a st acq uis it io ns, resulting in a proportionately h igher book value tha n the o the r re po r ti ng u nit w i thi n the R ob ot ic s & Discre te Automa tion operating segmen t. These fac to rs l ed to th e c arr y in g va lu e of the M ac hin e Automa tion report ing un it ex ceeding its fair value. During 2020, a goodwill impa irment charge of $2 9 0 mi lli on w as r eco rd ed to re du ce th e ca rr y- in g va lue o f this r ep or t in g uni t to it s imp li ed f air value. The rema ining goodwill for t he Mach ine Auto mat ion r ep or t in g uni t wa s $5 5 4 mill io n as of De ce mb er 3 1 , 20 20 . Sinc e the c ar r y i ng v al ue of this r ep or t in g uni t wa s re du ced to i ts f air v al ue a s of Ju ly 1 , 2 0 20, a ny mater i al ad ve rs e cha ng es su ch as mark et deterioration or changes in the c om - petitive landscape could res ult in fu ture impairmen t char ges. At Oc to be r 1 , 20 21 a nd 2 0 20, re sp ec t iv el y, we performed qualita tive ass essments and det er - min ed t hat it w as n ot mo re li kel y tha n not t hat th e fair v al ue fo r eac h of th ese r ep or t in g uni ts w as be low t he c arr y in g va lu e . A s a resu lt , we co n - clu de d th at it w as n ot ne cess ar y to per f orm t he quantita tive impa irment test. Int an gib le a sse ts a re rev iewe d fo r rec over abi lit y upon the occurrence o f certain tr igger ing ev ents (such a s a de c isi on to d ive st a b usi ne ss or pr o - je c ted l osse s of an e nt it y) or w he nev er ev ent s or changes in c ircumstances indicate tha t the carry - in g amo unt m ay not b e rec over ab le . We re cor d impairmen t char ges ot her than impairments of goodwill in “Other income (expense ), ne t” in our Consol idat e d Income Stat ements, unles s they rel ate to a dis cont in ue d op er ati on , in w hic h ca se the char ges are recorded in “Income from d iscon - ti nu ed o pe rat io ns, n et of t a x ” . 133 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P — New a cc ounting pronounc eme nts For a description o f accoun t ing changes and recent acc ounting pr onouncements, including the expected da tes of adoption and estima ted ef fe c ts , if a ny , on ou r Con sol id ated Fi nan c ia l Statem en ts , see “ N ote 2 - Sig nif i ca nt acco unt in g policies” to our Consolida ted Financial Sta tements. — Res earch an d de v elopm ent Eac h yea r , we inv est s ig nif ic an tl y in re sea rch a nd development. Our r esearch and de velopment focuses on developing and commer cializing the technologies, products and solu tions of our bus in esse s that a re of st rate gic i mp or t an ce to ou r futu re gr ow th . In 2 02 1 , we i nves ted $1 , 21 9 mi lli on , or ap pr oxi mate ly 4 . 2 per cen t of our 2 0 21 co nso li - dat e d rev enues, on resear ch and development activ ities in our continuing operations. We also had e xp en di ture s of $53 m ill io n, o r app rox im atel y 0. 2 p er cen t of our 2 0 21 co nso li dated r eve nu es, o n order -related dev e lopment activit ies. These are cust omer - and pr ojec t -spec ific development ef fo r ts t hat we un de r ta ke to deve lo p or a dap t eq uip me nt an d s yste ms to th e uni qu e ne ed s of our c us tome rs i n co nne c t io n w ith s pe c if i c ord e rs or pro jec ts. In add ition t o continuous produc t dev e lopment, and order - relat ed engineering work, we develop platform s f or t echnology applications in our business es in our res earch and dev e lopment lab or ator i es, w hic h op er ate on a g lob al b as is, suc h as o ur A B B Abi li t y™ pl atfo rm . Thr oug h ac t ive man age m ent of o ur i nves tme nt in r ese arc h an d deve l op me nt, w e see k to mai ntai n a bal an ce bet we e n sho r t-term a nd l on g -te rm re sea rch a nd deve l op me nt pro gr ams a nd o pt imize o ur re turn on in vestment. We p rot ec t these r esults by hold - in g patent s, c opy r ig hts a nd ot he r ap pro pr i ate int ellectual property pro tection. T o complement our business-focus ed product development, our businesses in vest toget her in collabora tive res earch activ ities cov ering topics suc h as a r ti f ic i al in tel lig e nce , sof t wa re , sen sor s, contr ol and optimi zation, mecha tronics and rob oti c s, p ower e l ec tr oni cs , com mu nic ati on technologies, mat er ial and ma nufacturing, elec - tro dy na mic s an d e le c tr i cal s w itc hin g technologies. This results in advancing the state - of-the -a r t tec hn ol og ies u se d in o ur pr od - ucts and in c ommon t e chnology pla tforms that ca n be a pp lie d in m ul ti pl e pro du c t li ne s. Universities a re incu bat ors of fut ure technology , and o ne t a sk of ou r res ear ch an d de vel op me nt team s is to tr ans for m uni ver si t y res ear ch in to industry- ready t echnology platf orms. W e collabo - rate w it h mul ti pl e uni ve rs it ie s and r ese arc h institutions to build r esearch networks and foster new t e chnologies. W e believe thes e col laborations sho r ten t he am ou nt of t ime r eq ui red to tu rn b as ic id ea s into v i ab le p ro duc t s, a nd t hey a ddi ti on al ly he lp u s to rec rui t an d trai n new p e rso nn el . We hav e built numerous university collaborations in several continents, including long-term, stra tegic rel ati on ship s w ith a n um be r of le adi ng i nst itu - tions in the U . S., the Unit ed Kingdom, Sw e den, Germany , Switzerland, Poland, India and Ch ina. We are al so l eve ragi ng o ur e cos yste m to e nha nce our i nn ovat io n ef fo r ts a nd g ain sp ee d w i th st rate - gic partners with complementary compet e ncies. In ad dit i on , we inve st an d co lla bo rate w i th sta r t-up s wor ld w id e v i a our c orp or ate ventu re arm A B B T ec hn ol og y Ventur es a nd ou r st ar t-u p collabora tion arm SynerLeap. The r esu lt of ou r inve st me nt in re se arc h and deve l op me nt is th at AB B is w ide l y re cog nize d for its world- class t e chnology . T echnology has been de ep l y em be dd ed i n ou r DN A si nce o ur fo un din g and has carried us through our centur y-l ong histo r y. It is on e of th e main r ea son s why c usto m - er s an d par t ne rs tu rn to u s for h el p on th ei r biggest challenges. T ogether with them, w e continuous ly push technology frontiers t o make thin gs p ossi bl e that we re n ot poss ib le b efo re . We are co mmi tte d to st ay ah ead to he l p our c usto m - er s add re ss the wo rl d ’s ene rg y cha ll en ge s, tra nsfo rm i nd ust r ie s to reac h new l eve ls of p e r - form an ce an d em be d sus tai nab ili t y, all to leave be hin d a wor ld fo r futu re g en er ati ons t hat is at le as t as h ea lthy a nd p rosp ero us a s th e on e we inherited. 134 ABB ANNUAL REPORT 2021 0 4 FI N A NC I AL R E V I E W OF A B B G RO UP — Ac qu isi tions and d iv e s tm ents Acquis itions Du r in g 20 21 a nd 2 02 0, A BB p aid $ 21 2 mi ll io n and $79 million to purchase t wo and three business es, res pectively . The p r in c ip al acq ui sit io n in 2 02 1 wa s A S TI M obi le Rob ot ic s G rou p SL ( A ST I). A S TI , he adq ua r ter ed i n Bu rgo s, S pain , is a g lo bal au ton omo us m obi le robot (AMR) manufacturer and e mploys appro x i - matel y 3 0 0 pe op le . S ee “ N ote 4 - Ac qui sit io ns , div est me nt s and e qu it y - accou nte d com pani es ” to our C onsolida ted Financial S tatements. The re we re n o sig nif i ca nt acq uis it io ns in 2 0 20 or 201 9. Div estments Di vest m en t of M ec ha ni c al Pow er Trans mi ssi on Division In N ovem be r 2 02 1 , we com pl ete d th e sal e of ou r Me ch ani ca l Powe r T ra nsmi ssio n Di v i sio n (D od ge) to RB C Be ar i ng s In c . for c as h pro ce ed s of $2 , 8 62 m ill io n, n et of tr an sac t io ns cos ts a nd c as h disp ose d an d re cog niz in g a ne t gain o n sa le of $2 , 1 95 mi ll io n. P r ior to i ts d isp osa l, t he D od ge business wa s part of our Motion opera ting seg me nt . Se e “ N ote 4 - Acq uis it io ns, d ive stm en ts and equity- accoun ted companies” t o our C onsoli - dat e d Fina ncial Sta tements. Di vest m en t of Powe r G r id s On J ul y 1 , 20 2 0, A BB co mp le ted t he di ves tm ent of 80 . 1 pe rce nt of it s for me r Powe r G r id s bus in ess to Hit achi . A s th is di ves tme nt re p rese nte d a st rate - gic s hif t th at had a m ajor e f fe c t on o ur op er ati on s and financial resul ts, the results of operations for this business are presented as d iscon tinued op er ati ons a nd th e a sset s an d lia bil it ie s are ref le c te d as h el d fo r sal e for a ll p er i od s pre se nted . For more in formation on the divestment of the Powe r Gr i ds b usi ne ss se e “ Note 3 - D isc ont in ue d operations” to our C onsolidated Financial Sta tements. Dives tme nt o f solar in verters In Fe br uar y 20 20 , AB B co mpl ete d th e sa le of it s sol ar i nver te r s bus in ess to FI MER S . p. A . ( Ita ly) fo r no co nsi de rat io n. U nd er t he ag re em ent , w hic h wa s rea che d i n Jul y 2 019 , AB B w as o bl igate d to tra nsf er $1 43 mi lli on of c a sh to th e bu yer o n th e cl osin g date . In a ddi ti on , fu r th er p ayme nt s tota l - in g EUR 1 3 2 mi ll ion ($14 5 mil li on at th e div est me nt date) are re qui re d to be t ran sfe rre d to th e bu ye r fro m 20 20 t hro ugh 2 0 25 . In c on ne c ti on w i th thi s div est me nt , in 2 019 , we re cord e d a loss of $42 1 mill ion, repres e nting the e xc ess of t he ca rr y ing v al ue ove r th e es ti mate d fair v al ue of t his bus in ess . In 2 02 0, a fu r th er $3 3 mi lli on w as recorded f or additional changes in fair value occ urr i ng p r io r to the d ate of sal e . Bot h am oun ts , in th e re spe c t ive ye ar s are r ep or te d in “ Ot he r in com e (expe ns e), net ” . S ee “ N ote 4 - Acq uis it io ns, div est me nt s and e qu it y - accou nte d com pani es ” to our C onsolida ted Financial S tatements. Other In 2019, we recorded net ga ins (including transa c - ti on cos ts) of $55 mi lli on , pr i ma r il y du e to the divestment of two bus inesses in China. — E x c hange ra tes We rep or t o ur f i nan c ia l resu lt s in U. S . d oll ar s. D ue to our global operations, a significant amount of our r eve nu es, e xp e nse s, a sset s an d lia bil it ie s are denomina ted in other currencies. As a c onse - qu en ce, m ove me nts i n exc ha ng e rates b et we en cur re nc ie s may af fe c t : (i ) ou r prof i ta bil it y, (ii ) the comparability of our resul ts between per iods and (i ii ) the r ep or te d ca rr y in g va lu e of our a sse ts a nd liabilities. We tra nsl ate non - USD d e nomi nate d res ult s of op er ati ons , ass et s and l ia bili ti es to U SD i n ou r Consol idat e d Fin ancial Sta tements. Balance s he et ite ms are t ra nsl ated to US D us in g year- en d cu r - rency exchange ra tes. Income statement and cash fl ow ite ms ar e tra nsl ated to U SD u sin g th e rel e - va nt mo nthl y ave rag e cu rre nc y e xch an ge r ate. 135 ABB ANNUAL REPORT 2021 04 F IN A NC I A L RE V I E W O F AB B G RO U P In cre as es an d de cr ea ses i n th e va lu e of the U SD aga inst o ther currencies will affect the reported results of operations in our Consolidat ed Income Statem en ts a nd th e va lu e of ce r tai n of our a sse ts and liab ilities in our C onsolidated B alance Sheets, eve n if ou r res ult s of op e rat ion s or th e v alu e of tho se ass et s an d lia bil it ies h ave not c ha ng ed i n their original currency . As foreign ex change rat es imp ac t ou r re po r ted r esu lt s of op er ati ons a nd th e rep or te d v al ue of o ur a sset s an d lia bil it ie s, changes in for eign exchange ra tes could sign if i - ca ntl y af fec t the co mp ara bil it y of o ur re po r ted resu lt s of op er ati on s bet we e n pe r io ds a nd re sul t in si gni f ic ant c ha nge s to th e rep or ted v alu e of ou r assets, liabilities and st o ckholde rs’ equity. Whi le we o pe rate g lo bal ly a nd r ep or t o ur f in an c ia l resu lt s in U SD, exc ha ng e rate move m ent s bet we e n th e USD a nd t he EU R , th e CN Y an d th e CH F are of p ar t ic ula r im po r ta nce to u s due to (i ) th e lo cat io n of our s ig nif i ca nt op er ati ons a nd (i i) o ur co rp orate h ead qu ar te rs b ei ng i n Sw it ze rl an d. The e xch an ge r ates be t wee n th e US D an d the EUR , the US D an d th e CH F and t he U SD a nd th e CN Y at De ce mbe r 3 1 , 20 21 , 2 0 20 an d 20 19, w ere a s foll ows: Ex ch a ng e ra te s in to $ The ave ra ge e xcha ng e rates b et we e n the U SD a nd the EU R , t he US D an d th e CH F and t he U SD a nd the C NY f or th e yea rs e nd ed D e cem be r 31 , 20 21 , 20 20 a nd 2 019 , wer e as fo ll ows: Ex ch a ng e ra te s in to $ Wh en we i nc ur e xp en ses t hat ar e not d en omi - nated i n th e sam e cu rre nc y a s th e re late d reve nu es , fore ign e xch an ge r ate fl uc tu atio ns cou ld af fe c t ou r prof i ta bil it y. T o mit i gate th e imp ac t of e xch ang e rate m ovem en ts o n our prof i ta bil it y, it is our p o lic y to e nte r into fo r wa rd fore ig n exc han ge co ntr ac t s to man age t he fo rei gn exc han ge t ra nsac t io n r isk o f our o pe rat io ns. In 2 02 1 , ap prox i mate ly 7 7 per cen t of our c ons oli - dated r eve nu es we re re po r te d in cu rre nc i es ot he r tha n the U SD. T he fo ll ow in g pe rce nta ges o f consolida ted rev e nues wer e reported in the following curr e ncies: • Euro, app rox im atel y 2 3 pe rce nt , an d • Ch inese renminbi, approximately 1 7 percent. In 2 02 1 , ap prox i mate ly 74 perc ent of o ur co st of sales and selling, general and adm inistrative ex pe nse s we re re po r ted i n cu rre nc i es ot he r tha n the USD . The follo w ing percentages of consol i - dated c ost of s al es an d se lli ng , ge ne r al an d admi nis trat ive e x pe nse s wer e re po r ted i n the following curr e ncies: • Euro, app rox im atel y 20 p er cen t, a nd • Ch inese renminbi, approximately 1 4 percen t. We also i nc ur e xp en ses ot he r th an cos t of sa les and selling, ge neral and admin istrative expenses in various currencies . The r esu lt s of op er ati ons a nd f i na nc ia l pos it io n of our su bsi di ar i es ou ts id e of th e U. S. a re ge n er all y accou nte d for i n the c urr en c ie s of th e cou ntr ie s in whi ch th ose su bsi di ar ie s ar e loc ate d. We re fer to these c urrencies as “local cur rencies” . Local currency financial informa tion is then tr ansla ted into US D at ap pl ic ab le e xcha ng e rate s for in cl u - sion in our Consolida ted Financial S tatements. The d isc ussi on of o ur re sul ts of o pe rat io ns b el ow prov ide s ce r tai n info rmat io n w it h res pe c t to orders, re venues, inc ome from opera tions and othe r m ea sure s a s rep or te d in U SD (as we ll a s in lo ca l cur re nc ie s). W e mea su re pe r io d -to - pe r io d va r iat ion s in l oc al cu rre n c y resu lt s by us in g a con sta nt for eig n exc ha ng e rate for a ll p er i od s und e r com par i son . D if fe re nce s in o ur re sul ts of op er ati ons i n lo ca l cur re nc i es a s com pa red to o ur resu lt s of op er ati on s in US D ar e cau se d excl u - siv el y by ch an ge s in cu rre n c y exc han ge r ates . Whi le we c ons id er o ur re sul ts of o pe rat io ns a s mea su re d in lo c al cu rre nc i es to b e a sig nif i ca nt indicat or of busines s per formanc e, local cur rency info rmat io n sho ul d not b e re lie d u pon to t he exc lus io n of U. S. G A A P f in an c ia l mea su res . In - stead, local currencies reflec t an additional mea su re of co mpa ra bil it y an d pro v id e a me ans o f v ie w in g as pe c ts o f our o pe rat io ns th at, w he n v ie wed to ge the r w i th th e U. S. G A A P re sul ts , prov ide a m or e com pl ete un de r sta nd ing o f fac- tors and tr ends a ffec ting the business. A s local cur re nc y i nfor mati on i s not s tan da rdi zed , it may not b e poss ib le to co mpa re o ur lo ca l cu rre nc y inform ation to other companies ’ financial mea - sure s that h ave the s am e or a si mil ar t it le . We en cou rag e inve stor s to rev iew o ur f i nan c ia l state - ments and publicly filed reports in their e ntirety and n ot to re ly o n any s in gle f i na nc i al me as ure . 136 ABB ANNU AL REPOR T 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP — Ord e rs Ou r po lic y is to bo ok an d re po r t an o rde r wh en a bi nd ing c ontr ac tu al agr ee me nt h as b ee n concluded with a cust omer co ver ing, at a mini - mum , th e pr i ce an d sco pe of p rod uc t s or s er v ice s to be su pp lie d, t he d el ive r y s che d ule a nd t he paym e nt ter ms. T he re p or te d va lu e of an o rde r corres ponds t o the undiscount ed value o f reve - nue s th at we ex pe c t to re cog nize fo llo w in g de li ver y of the g oo ds o r se r v i ces su bje c t to th e ord er, less any tr ad e disc oun ts a nd e xclu di ng a ny va lu e add ed o r sa le s ta x . Th e v alu e of or de rs rec ei ved d ur i ng a gi ve n pe r io d of ti me r ep res ent s the su m of th e va lu e of al l ord er s re cei ve d dur i ng the p e r io d, ad jus ted to re fl e c t the a ggr eg ate va lu e of any ch an ge s to the v al ue of o rd er s re - cei ved d ur i ng th e pe r i od an d or de rs e x is ti ng at the beginn ing of the period . These adjustments, whi ch may i n th e agg reg ate in cre as e or d ec rea se the o rd er s re po r ted d ur i ng th e pe r io d, m ay include changes in the estimated order pr ice up t o the da te of contractual performance, changes in the s cop e of pro du c t s or se r v ice s ord er ed a nd ca nce ll ati ons of o rd er s. T he u ndi scou nte d va lu e of futu re re ven ue s we ex pe c t to ge n er ate from o ur ord er s at any p oint i n ti me i s re pre se nted by o ur order bac klog. The l eve l of or de rs f l uc tuate s fro m yea r to year. Portions of o ur busines s involve orders for lo ng -te rm p roj ec t s th at can t ake mo nth s or ye ar s to com pl ete an d ma ny lar ge r ord e rs re sul t in reve nu es i n pe r io ds af te r th e ord er i s bo oked . Cons eq ue ntl y, the le vel of o rd er s ge ne ra ll y ca nn ot be u sed to ac cur atel y pr ed ic t fu ture r eve nu es or op er ati ng p er fo rm anc e. O rd er s th at have be en pl aced c an o f ten b e ca nce ll e d, d el ayed o r mo di - f ie d by th e cus tom er . T he se ac t io ns c an re du ce or de lay any f utu re reve nu es f rom t he o rde r or m ay result in the elimina tion of the order . — T ransa c tions w ith a f f iliat es an d a sso c iate s In th e no rma l cou rs e of ou r bus in ess, we p ur cha se pro du c ts f rom , se ll p rod uc t s to an d en gag e in othe r tr an sac t io ns w it h ent it i es i n whi ch we h ol d an e qui t y inte re st . Th e amo unt s inv ol ved i n th ese tra nsa c ti ons a re no t mater i al to A BB Ltd . O ur mos t sig nif i ca nt eq ui t y met ho d inve stm en t is in Hit achi E ne rg y Ltd (see “ Note 4 - A cqu isi ti ons , divestments and equity-account ed companies” for d etai ls). Als o, in th e no rma l cou rs e of our business, we engage in transactions with busi - ne sses th at we have di ve ste d. We b el ieve t hat th e ter ms of th e tra ns ac ti ons w e con du c t w ith t he se com pan ies a re n eg oti ated o n an ar m’s length basi s. — P er formanc e mea sures We eva lu ate the p er f orm an ce of ou r op er ati ng seg me nt s ba se d on o rde rs r ec eiv ed , reve nu es a nd Operational EBIT A . Operational E BIT A repres ents income from opera - tions exclud ing: • amortization e xpense on intangibles arising upon acquisitions ( acqu isition-rela ted am ortiza tion) , • res tructuring, relat e d and implementation costs, • changes in the amount recorded for obligations relat e d t o divested bu siness es occu rring after the div estment dat e ( changes in obliga tions relat e d t o divested bu siness es ), • changes in estimates relating t o opening balance sheets of acquired bus inesses (changes in pre-acquisition es timat es) , 137 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P • ga ins and los ses from sa le of businesses (including fa ir value adjustmen t on assets and liabilities he ld for sale) , • a cquisition- and divestmen t - relat e d expenses and int egration cos ts, • o ther income / expense relating to the P ower Gr id s joint ve nture, • cer tai n othe r n on - o pe rat io na l ite ms, a s we ll a s • f oreign exchange / commodity timing differences in income from opera tions consisting of: ( a) unreali zed gains and losses on deriv atives (foreig n exch ange, commodi ties, em be dd ed d e r iv ati ves), (b) realize d gai ns an d loss es on deriv atives where the underlying he dg ed t ran sac t io n ha s not ye t be e n rea lize d, and (c) unre al ized fo rei gn e xch an ge mo vem ent s on rece ivables / payables ( and rela ted assets / liabilities) . Certain o ther non-op erational items ge nerally includes: c e rtain regula tor y , compliance and legal cost s, ce r t ain a sset w r ite d owns/im pai rme nt s (including impa irment of goodwill) and c e rtain othe r f air va lu e ch ang es , as w el l as ot he r ite ms whi ch ar e de ter min ed by m ana ge me nt on a c as e - by - c as e ba sis . Se e “ Note 2 3 - O pe rat in g se gme nt a nd g eo gra phi c data ” to our C onsolida ted Financial S tatements for a re co nc il iat io n of the tot al O pe r atio na l EB IT A to income from c ontinuing operations before ta xes. 138 ABB ANNU AL REPORT 2021 04 FI N A NC I AL R E V I E W OF A B B G RO UP — Ana lys is of res u lts of opera tions The dis cuss ion in the f ollow ing sections below prov ide s a co mpa rat ive a na ly sis b et we en 2 0 21 and 2 0 20. S ee t he se c t io ns un de r “O p er atin g an d f ina nc i al re v ie w an d pros pe c ts“ i n ou r 20 20 An nu al R ep or t fo r a com pa rati ve di scu ssi on an d ana ly si s bet we e n 20 20 a nd 2 01 9. Ou r con sol idate d re sult s fr om o pe rat ion s wer e as foll ows: Income s tat eme nt da ta: ($ in m il l io n s, e xce p t Revenues Cos t of sa le s Gross profit Selling, general and adm in ist rat i ve e xp e nse s No n - o rd er r el ate d re se ar ch a nd development expe nses Impairment of goodwill — — Other income (expense ), net Income fr om opera tions Interest and dividend income Interest and other finance expe nse Los ses f ro m e x ti ng ui sh me nt of debt — — Non- operational pension ( cost) credit Income tax expense In co m e fr om c on ti nu i ng op e rat io n s, n et o f ta x In co me ( lo ss) fro m di sco nt in ue d op er at io ns , ne t of t a x Ne t i nc om e Net income attributable to noncontr olling in terests Ne t i nc om e at tr i bu t ab l e to A BB Amounts attributable to A BB s ha re ho ld e rs : Income fr om continuing op er at io ns , ne t of t a x In co me ( lo ss) fro m di sco nt in ue d op er at io ns , ne t of t a x Net income Ba s ic e ar nin gs p e r sh are a tt r ib ut ab l e to A BB s ha re ho ld e rs : Income fr om continuing op er at io ns , ne t of t a x In co me ( lo ss) fro m di sco nt in ue d op er at io ns , ne t of t a x Net income Di lu te d ea rni n gs p er s ha re at tr i bu ta b le to A BB s ha re ho ld e rs : Income fr om continuing op er at io ns , ne t of t a x In co me ( lo ss) fro m di sco nt in ue d op er at io ns , ne t of t a x Net income A mor e de tail e d disc ussi on of t he o rde r s, rev e - nues, inc ome from operations and Opera t ional EB IT A fo r ou r Bu sin ess A re a s fol lows i n th e sec - ti ons o f “B us in ess a nal ys is” b e low fo r Electr ification, Motion, P roces s Automa t ion, Rob ot ic s & D isc rete A utom ati on an d Cor po rate and Other . Orders and r evenues of our busines ses include int er segment t ransactions wh ich are elimina ted in the “Corpora te and Other” line in the tables below . Orde rs El ect rifi cati on Motion Process Automa tion Ro bo ti c s & Discrete Automa tion T o ta l B us in e ss Areas Corporat e and Other No n - co re a nd di ves te d businesses n.a. n.a . Inter segm ent eliminations and o ther n.a. n.a . To t a l In 2 02 1 , tota l ord e rs i ncr ea se d 20 p er cent c om - par ed to 2 02 0 (17 per cent i n lo c al cu rre nc i es). T ota l ord er s re fl ec t t he g row th ac ross a ll B usi ne ss Ar ea s as t he p an de mic- r el ated sl owdo wn af fe c ted mos t of our b us in esse s acro ss all r eg ion s in th e pre v io us ye ar . T he g row th r ate wa s hig he st in t he Rob ot ic s & D isc rete A utom ati on B usi ne ss A rea , whi le th e am ou nt of ord e rs i ncr ea se d the m ost i n Ele c tr i f ic ati on , ou r lar ge st B usi ne ss A rea . O rd er grow t h rates w ere a lso s tro ng i n the M ot io n and Proces s Automa t ion Busines s Areas. The increase in or de rs w a s mos t sig nif i ca nt in t he se con d qua r te r of the ye ar w i th g row th r ates de c lini ng over t he re mai nd er of t he ye ar . T he s ign if ic an t grow t h wa s v i sib le a cross a ll re gi ons . For a ddi - tional inf ormation about individual Business Area ord er p e r form an ce, r efe r to th e rel ev ant s ec t io ns of “Business analysis” below . ABB ANNUAL REPORT 2021 04 F IN A NC I A L RE V I E W O F AB B G RO UP We dete rmi ne t he g eo gra phi c di str i bu ti on of o ur ord er s ba se d on t he l oc ati on of th e ul ti mate de st inat io n of th e pro du c ts ’ en d use , if k no wn , or the loca t ion of the customer . The geograph ic dis tr ib ut io n of ou r con sol idate d or de rs w as a s foll ows: Euro pe Th e A me r ic a s of wh ic h: Unite d States 7, 4 5 3 5 ,97 1 6,804 Asia, Middle Ea st a nd A fr i c a of wh ic h: China 5,036 4,1 21 4, 118 To t a l In 2 02 1 , tota l ord e rs i ncr ea se d in al l re gi ons a s al l reg io ns ma de st ron g re cove r ie s fro m the pan de mi c- re lated d own turn i n th e pre v io us ye ar . In th e A me r ic a s, or de rs i nc rea se d 2 5 pe rce nt (24 pe rce nt in l oc al c urr en c ie s ) a nd i nc rea se d acr oss all B us in ess A re as . Or de rs g rew i n the U. S . , Ca nad a , Br a zi l an d Me x ic o. In Eur op e, o rde r s in cre as ed 2 3 p erc ent (1 9 p erc ent i n lo ca l cur re n - cies ) with all B usiness A reas reporting order grow t h. O rd er s in cr ea sed i n G er many, Franc e, Switzerland, Italy a nd Finla nd while they declined in Po la nd . In A s ia , Mi dd le E as t an d Afr i ca , o rde r s in cre as ed 1 3 p er cen t (8 pe rce nt in l oc al cu rre n - c ie s ) a nd we re hi gh er ac ross al l B usi ne ss Ar ea s. T ota l ord er s in cr ea sed i n Chi na , I ndi a an d Aus tr a- lia w hil e th ey de c rea se d in S out h Kore a , Sing ap or e and S au di A ra bia . El ect rifi cati on Motion Process Automa tion Ro bo ti c s & Discrete Automa tion T o ta l B us in e ss Areas Corporat e and Other No n - co re a nd di ves te d businesses Inter segm ent eliminations n.a. n. a. To t a l At De ce mb er 3 1 , 20 21 , c ons oli date d ord e r bac kl og wa s 16 pe rce nt hi gh er ( 21 p erc ent i n lo ca l cu rre n - c ie s ) c omp are d to D ece mb e r 31 , 2 02 0. O rde r backlog increased significantly in most Business Ar ea s w it h a mo de rate gr ow th i n the P roce ss Automa tion Business Area. The order backlog in the M ot io n Bu sin ess A re a wa s dr i ve n by bot h short and long-c ycle busines s order growth in mos t Di v is io ns. O rd er b ack l og i ncr ea se d acro ss all Div isions in the Electr ification Business A rea w ith a v er y stro ng o rde r in take , but a lso r ef le c t ing exe cut i on ch al le ng es . Gr ow th w as s tro ng i n the E-mobility and Po wer Conv e rsion Divisions but grew only moderat el y in t he Distribution Solu - ti ons D i v is io n. T he gr ow th i n the P roc ess Auto mat ion B u sin ess A re a wa s dr i ve n by a stro ng ord er i nc rea se i n mos t Di v i sio ns e xcep t the Ma r ine & P or t s D iv i si on , whi ch d ec rea se d, m ain ly on th e exe cu ti on of l arg e or de rs r ece ive d in 2 0 20. The increase in the order backlog in the Robotics & Di scr ete Au tomat io n Bu si ness A r ea wa s d r ive n by s trong growth in the Machine Automa tion Di v i sio n, w hil e th e Rob ot ic s Di v i si on de c rea se d sli ghtl y d ue to lo wer d em an d fro m the au tom oti ve systems end mark et . Re venues El ect rifi cati on Motion Process Automa tion Ro bo ti c s & Discrete Automa tion T o ta l B us in e ss Areas Corporat e and Other No n - co re a nd di ves te d businesses n.a. n.a . Inter segm ent eliminations and o ther n.a. n.a. To t a l In 2 02 1 , reve nu es i nc rea se d 1 1 pe rce nt (8 pe rce nt in l oc al cu rre nc i es). Reve nu es in cr ea se d acro ss all Business Areas, reco vering from the pan de mi c- re lated i mp ac t s of the p rev iou s yea r . The E le c tr i f ic ati on an d Ro bot ic s & D isc rete A uto - mation Business A reas reported str ong gro w th, largely driven by the short -c ycle busines ses. F or add it io nal a nal y sis of r eve nue s for e ach of t he Bu sin ess A re a s, ref er to th e re le va nt se c ti ons o f "Busin ess analysis " below . 140 ABB ANNU AL REPORT 2021 0 4 FI N AN CI A L R E V I E W OF A B B GR O UP We dete rmi ne t he g eo gra phi c di str i bu ti on of o ur reve nu es b ase d o n the l oc ati on of t he u lt imate de st inat io n of th e pro du c ts ’ en d use , if k no wn , or the loca t ion of the customer . The geograph ic dis tr ib ut io n of ou r con sol idate d rev en ues w a s as foll ows: Eur op e Th e A me r ic a s of wh ic h: Unite d States 6, 3 97 6 ,027 6 ,75 3 Asia, Middle Ea st a nd A fr i c a of wh ic h: China 4,932 4,09 8 4 ,0 47 To t a l In 2 02 1 , reve nu es i nc rea se d ac ross al l re gio ns, reflecting the reco very from the pandemic-related cha ll en ge s of th e pre v io us ye ar . I n th e A me r ic as reve nu es i nc rea se d 9 pe rce nt (9 pe rce nt i n loc al cur re nc ie s) and wer e hig he r acro ss all B us in ess Ar ea s. R eve nu es in cr ea se d in th e U. S ., C ana da , Br a zi l, M e x ico, A rg en ti na an d Chi le w hil e th ey de cre a sed s lig htl y in P er u an d Pan am a . In Eu rop e reve nu es i nc rea se d 8 pe rce nt (5 p erc ent i n lo ca l currencies ) and increased acro ss all Business Areas excep t the Process Au toma tion Business Ar ea . S al es we re l ower i n Fin la nd a nd Fran ce w hil e revenues grew in Germany , the Uni ted K ingdom, Ita ly, Swed en , T ur key, Austr i a, N et he rl and s an d Sw it ze rla nd . In A s ia , Mi dd le E as t an d Afr i ca r eve - nue s in cr ea sed 1 6 pe rce nt (1 1 pe rce nt in l oc al currencies ) and increased acro ss all Business Ar ea s. R eve nu es in cr ea se d in Chi na , I ndi a , Au str a- lia a nd S ou th Kore a whi le t hey d ec rea se d in J ap an . Cos t of sal es Cost of s al es co nsi st s pr i mar i ly o f lab or, raw mat e rials and c omponent c osts but also includes indirect production costs, e xpenses f or warran - ti es , cont rac t a nd p roje c t ch arg es , as we l l as order -related dev e lopment expenses incurred in connection with projects for which c orresponding reve nu es h ave be en re co gnize d . In 2 02 1 , cos t of sal es i nc rea se d 7 pe rce nt (4 per- cent i n lo c al cu rre nc i es) to $19,478 m ill io n. Cos t of sal es a s a p erc ent age of r eve nu es d ec rea se d to 67.3 p er cen t fro m 69. 9 p erc ent i n 20 2 0, an in cre as e in th e gro ss mar gin of 2 .6 pe rce nt , pr i mar i l y dr iv en by l owe r loss es in n on - core business es, and be cause 2020 included sign if i - ca nt wa rra nt y ch arg es r el ated to a di ves ted bus in ess a s we ll a s loss es on s pe c if i c proj e c ts . The i nc rea se i n gro ss mar gin a lso r ef le c ts h igh er reve nu e vol um es, a p osi ti ve p or t fol io mi x a s wel l as p r ice i nc rea se s an d cer tain cos t sav i ng s ac- ti ons t ake n to mit ig ate high er co mm od it y p r ice s and f rei ght co st s. I n 20 21 , g ross m arg in p erc ent- age s wer e hig he r in th e El ec t r if ic at ion , Ro bot i cs & Discret e Aut omation and P roces s Automa t ion Bu sin ess A re a s. Th e gro ss mar gin p e rce ntag e in the M ot io n Bu sin ess A re a wa s low er i n 20 21 com par ed to 2 02 0 du e to th e imp ac t of hi ghe r com mo dit y p r ice s. Fo r A BB , th e gro ss mar gin d id be ne f it pa r ti al ly f rom t he re sul ts of s av in g ini ti a - ti ves i n th e are as of su pp l y chai n an d op er ati ona l excel len ce. Sel lin g, ge nera l and adminis tra tive ex penses The com ponents of selling, general and a dmini s - trat ive e x pe nse s wer e as fo ll ows: Selling expenses Ge n er al a nd a dm ini st rat i ve ex pe n se s To t a l In 2 02 1 , ge ne r al an d admi nis trat iv e ex pe nse s in cre as ed 4 p er cent (1 p e rce nt in l oc al c urr en c ie s ) com par ed to 2 02 0. A s a p erc ent age o f reve nu es , ge ne ra l and a dmi nist rat ive e xp e nse s de cre a sed to 6. 5 per cen t fro m 6. 9 p er cent i n 20 2 0. Ge n er al and a dmi nist rat ive e xp e nse s in 2 02 1 be ne f ite d par t i all y fr om a $ 4 0 mil lio n re du c ti on of s tra nd ed cor po rate cost s co mp are d to 20 20 b ut co nt inu e to include the ongoing costs required to deliver ser v ic es to Hi tac hi En erg y Ltd un de r tr ans it io n ser v ic e agre e me nts , for w hic h we ar e com pe n - sat ed and recorded $1 7 3 mi llion in O ther income (expe ns e), net dur i ng 2 02 1 co mpa re d to $91 mi l - lio n in t he p rev i ou s yea r . Stra nd ed c ost s we re over he ad an d oth er m anag e me nt cos ts w hic h cou ld p rev i ou sl y be a llo c ated to th e Powe r Gr i ds business. In 2 02 1 , se lli ng e x pe nse s in cre as ed 6 p er cent (3 p erc ent i n lo ca l cu rre nc i es) compa re d to 20 20 acro ss all B us in ess A re as a s pa nd emi c- re late d res tr ic t i ons we re g rad ua ll y re la xe d an d we in - cre as ed s ale s ac t iv iti es to ke ep p ace w it h th e strong recov e ry in demand. Selling expenses as a p er cen tag e of ord e rs re cei ve d de cr ea se d fro m 11 .6 pe rce nt i n 20 20 to 10. 3 pe rce nt in 2 02 1 main ly d ue to s tro ng or de r grow th. 141 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P Non - ord er re lated research and dev elopme nt expenses In 2 02 1 , no n - o rde r re late d res ear ch a nd d eve lop - me nt ex pe ns es i ncr ea se d 8 pe rce nt (4 perc ent i n lo ca l cur re nc ie s) compa re d to 20 20. N on - ord er relat e d res earch and dev elopment expenses increased ma inly due to higher invest ment a ctiv i - ti es re l ated to se le c t ive g row th a rea s i n cer t ain operating Divisions such as Distribution Solu - tions, Robo tics, Proces s Industries, Smart Buildings and E- mobility . In 2 02 1 , th e hig he r no n - or de r re late d rese arc h an d deve l op me nt ex pe ns es we re co nsi ste nt w it h the hig he r reve nu es a nd a s a pe rce nta ge of re ven ue s the se e xp en di ture s de cre a sed i n 20 2 1 to 4. 2 pe r - cent f rom 4 . 3 p e rce nt com par ed to t he previous year . Impa irment o f good will In 2 02 0, a s a resu lt of t he ne w com po sit io n of th e reporting units and realloca tion of goodw ill, we rec ord ed a n im pair me nt ch ar ge of $3 1 1 mill io n, the m ajo r it y of w hic h rel ated to o ur M achi ne Auto mat ion D i v is io n w ithi n th e Ro bot ic s & D is - cre te Auto mat ion B u sin ess A re a . In 2 02 1 , no imp air me nt wa s re cor de d as a r esu lt of th e an nu al rev i ew. Se e “ Note 1 1 - G oo dw i ll a nd in tan gi bl e assets” to our Consolida ted Financial S tatements. Ne t gai n ( lo ss) from s al e of businesses In co me f ro m pro v is io n of se r v i ce s un de r tr an si t io n services ag reemen ts — Gai n ( lo ss) from c ha n ge i n fai r va lu e of i nve st me nt s in e q ui t y securiti es Br an d i nco m e fro m Hi ta ch i Energ y — Ne t gai n fr om s al e of p ro pe r t y, plant and equipment Favor ab le r es ol ut io n of a n un ce r tai n pu rc ha se p r i ce adjustment Fair v al ue a dju st me nt o n a sse ts an d li abi li t ie s he l d for s al e — Asset impa irments — Restructuring and r estruc turing- relat ed expenses In co me ( lo ss) fro m eq ui t y- account e d compan ies Other income (expense ) To t a l (1) Excluding asset impairments In 2 02 1 , O the r in com e (exp en se), net , wa s an income o f $2,63 2 milli on compa red t o $4 8 million in 2 02 0. In 2 0 21 , we re co rde d g ains of $ 2 , 19 3 mil - lion in O ther income (expense ), ne t for net gains fro m sal es of b us ine sse s. Thi s is p r im ar il y d ue to the d ive stm e nt of th e Do dg e bus in ess . In 2 02 1 , we als o rec ord ed a f ul l yea r of bot h br and i nco me a nd income f or provision of transition serv ices relat - in g to Hit achi E ne rg y , comp ar ed to o nl y si x mon ths of i nco me i n 20 20 . In 2 02 1 , we re cor de d hig he r in cre as es in t he f air v alu e of v ar io us e qu it y inves tments in our ABB T e chnology V entures po r tfo li o, the m ost s ig nif ic an t of whi ch re l ated to CM R Sur gic al Ltd . Th e amo unt i n 20 2 1 als o ref le c t s lower restructuring and restructuring- relat e d ex pe nse s an d lowe r a sset i mp airm ent s . Par t i all y of fse t ti ng thi s we re hig he r lo sses f rom equity-account ed compan ies mainly re flec ting the loss r eco rde d fr om th e Hi tac hi Ene rg y joi nt venture . Income f rom opera tions El ect rifi cati on Motion Process Automation Ro bo ti c s & Di sc re te Automa tion n.a. n.a. T o ta l B us in e ss Areas Corporat e and Other n.a. n.a. Inter segm ent elimination n.a. n.a. To t a l In 2021 and 2 020, changes in income from opera - ti ons w ere a r esu lt of th e fac to rs d isc usse d ab ove and in “Business analysis” below . Financial income and expenses Financial income and expenses include “Int e rest and dividend income” , “Interest and other finance expense” and “ Losses from extinguishment o f d e b t ”. “Interest and o ther finance expense” includes inte res t ex pe ns e on ou r de bt , th e amo r t izat io n of upfr ont t ran sac t io n cost s a ssoc i ated w i th lo ng -te rm d e bt an d com mit ted c re dit f ac il it ie s, commit ment f ees on cr e dit fa c ilities, fore ign exchange gains and losses on financ ial it ems and gain s an d losse s on m ar ketab le s ec ur i ti es . In addition, in terest accrued rela ting t o uncertain ta x p osi ti on s is in cl ud ed w ithi n inte res t ex pe ns e. “Interest and o ther finance expense” ex cludes 142 ABB ANNU AL REPORT 2021 0 4 F IN A N CI A L RE VI E W O F AB B G RO U P inte res t ex pe ns e whi ch h as b ee n al lo cate d to discon t inued operations. Interest and dividend income Interest and other finance ex pe n se Losses from extinguishment of de bt — — In 2 02 0, we re de e me d th e ful l am oun t out st an d - in g for t wo bo nd s acco rdi ng to th e ter ms of th e ins tru me nt s an d exe cute d p ubl ic te nd er s for t wo additional bonds resulting in a partial reduction of t he principal outstanding. Thes e tran sactions resu lte d in l osse s on e x ti ng uis hme nt of d eb t in 20 20 tot ali ng $1 62 m ill io n (see “ Note 1 2 - D e bt ” to our C onsolida ted Financial S tatements ). The reduction of outstand ing debt from these pu blic ten de rs a s we ll a s matu r it ie s of bo nds i n bo th 20 21 a nd 2 02 0 re du ced “ I nte res t and o the r f i - nan ce e xp en se” by a pp rox im atel y $70 mi lli on com par ed to 2 02 0. Thi s wa s pa r t ial ly o f fse t by higher in terest expense f or income tax relat ed contingencies and the elimination o f the alloca - ti on of i nter est e x pe nse to di sco nti nu ed op er ati ons su bse qu en t to the d ive stm en t of the Power G rids business. cred it A non - op er ati on al pe ns io n cre di t of $16 6 mil lio n wa s re cord e d in 2 02 1 com pa re d to a $4 01 mi lli on cost i n 20 20 . No n - op e rat ion al p en sio n cre di ts pr i mar i l y resu lt fr om hi ghe r e xp ec te d re turn s on pl an a sset s com pa re d to inte res t cost s on b e nef i t ob lig ati ons . Th e ne t cost i n 20 20 w a s main ly d ue to cha rge s of $5 2 0 mill io n for se tt le me nt s of cer t ain i nter nat io nal p en sio n pl an s (see “ Note 17 - Emp loye e b en ef it s” to o ur Co nso lid ated Fi na n - c ial St atem ent s). Income t ax expense Income fr om continuing operations bef ore taxes Income tax expense Ef fe c ti ve t a x r ate fo r th e yea r In 2 02 1 , th e ef fe c t ive t a x rate d ec rea se d fro m 59. 0 pe rce nt in 2 02 0 to 1 8. 3 pe rce nt pr i ma r il y du e to spe c if i c ite ms w hic h in cre as ed th e ef f ec t ive t a x rate in 2 02 0. I n 20 20, t he i nco me t a x rate w as hig he r by 9 pe rce nt du e to th e imp air me nt of non - de du c ti bl e go od w i ll, 1 0 pe rce nt du e to non- deduc tible charges r elating t o the settlement of cer tain d ef in e d be ne f it p ens io n pl ans a nd 5 pe rce nt du e to loss es fr om e x ti ng uis hm ent of de bt whi ch we re i nc urr ed i n jur isdi c ti on s w ith a f ul l va lu atio n al low an ce. I n 20 2 1 , th e ta x imp ac t s re lated to t he sa le of t he D od ge b usi ne ss red uc ed t he ef f ec t iv e ta x r ate by app rox im atel y 5 pe rce nt . We als o rea lize d ce r tain b e nef i ts f rom interna l reorgan izations in antic ipation o f this div est me nt whi ch r ed uce d th e ef fe c t ive t a x rate by a fu r the r 4 p erce nt . Se e “ Note 16 - I nc ome t a xe s” to ou r Cons oli date d Financial S tatements f or add itional in forma t ion. Income from continu ing operations, net of ta x A s a resu lt of t he f ac tor s disc usse d ab ove , compared to 2 020, Income from con tinuing op er ati ons , net o f ta x , in cr ea se d by $4 , 3 8 5 mi lli on to $4 ,7 30 mi ll io n in 2 02 1 . Income from di scontinued operations, net of ta x Income (los s) from disc ontinued opera t ions, net of ta x , i n 20 21 , 2 02 0 an d 20 19 w as a s fo llo ws: T ot a l rev en ue s — T ot a l cos t of sa le s — Gross profit — E xp en se s Ch an ge to n et g ai n re co gni ze d on s al e of th e Po we r Gr i ds business — Net int erest income ( expense) an d oth e r f in an ce e xp e nse Non- operational pension ( cost) credit — operations before ta xes In co me t a x op e rat io n s, n et o f ta x On J ul y 1 , 20 2 0, we com pl ete d th e di vest me nt of 80 . 1 pe rce nt of ou r for me r Powe r Gr i ds b us ine ss to Hit achi . A s a re sul t of the s al e, su bst ant ia ll y al l Powe r Gr i ds r el ated a sset s an d li abi lit ie s have be en s ol d. A s t his di ves tm ent r ep res ente d a str ategi c shi f t that wo ul d have a maj or ef f ec t o n our o pe rat io ns an d f in an c ial r esu lt s, th e res ult s of operations for t his business ha ve been present e d as d isco nt inu e d op er atio ns fo r al l pe r io ds p re - sen ted . In ad di ti on , we al so have re tai ne d obligations ( primar ily for env ironmental and 143 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L RE VI E W O F AB B G RO U P taxes ) relat e d t o ot her busines ses disposed or othe r w i se e x ite d that q ua lif i ed a s di sco nti nu ed operations. Changes t o these re tained obl iga - tions are also included in Inc ome (loss ) from dis cont in ue d op er ati on s, ne t of ta x. In 2 02 0, a s a resu lt of t he sa le of t he Po wer G r id s business, we recogn ized a net gain of $5, 141 m il - lio n, n et of t ran sac t io n cost s, f or th e sa le of th e entire Po wer Grids business wh ich is included in Income fr om discontinued operations, net of tax. Certain amoun t s included in the net ga in are est im ated o r oth er w ise su bje c t to ch ang e in v al ue and , a s a resu lt , we have r eco rd ed ad di ti ona l adj ust me nts i n 20 2 1 , pr i mar i l y du e to the i mpa c ts of the f i na l pu rch as e pr i ce set tl em en t agre e d w it h Hit achi a nd n et fo rei gn cu rre n c y loss es on c er t ain ob lig ati ons . We may re co rd add it io nal a dju st- me nts i n fu ture p er i od s to th e gain w hic h are n ot ex pe c te d to have a mate r ial i mp ac t on t he Co nso l - idat e d Fina ncial Sta tements. The a mo unt s show n in t he t ab le a bove fo r th e ful l -y ear 2 0 20 p r ima r il y re pr ese nt th e op er ati ons of the P owe r Gr i ds b usi ne ss for s ix mo nth s, com par ed to a f ull y ear of o pe rat io ns fo r 201 9. Income fr om discontinued operations for 2020 included income from operations, before ta x, of $5, 1 8 2 mi lli on . In 2 0 20, we r eco rd ed $ 32 2 mi ll ion as income tax expense within dis continued operations, which included $262 million in Income tax w ithin discontinued operations in connection w ith t he re or ga nizat io n of th e le ga l ent it y s tru c- ture of t he Pow er G r id s bu sin ess r eq uir ed to facilitate its sale. For additional inform ation on the divestment and dis cont in ue d op er ati on s, se e “ Note 3 - D isc ont in - ued operations” to our Cons olidat ed Financial Sta tements. Net incom e attribu table to AB B A s a resu lt of t he f ac tor s disc usse d ab ove , com par ed to 2 02 0, N et in co me at tr ib ut abl e to AB B d ec rea se d by $6 0 0 mil li on to $ 4, 54 6 mi ll io n in 2 02 1 . Earning s per sha re attrib utable to ABB shareholders Ba s ic e ar nin gs p e r sh are att r ib ut ab l e to A BB s ha re ho ld e rs : Income fr om continuing op er at io ns , ne t of t a x In co me ( lo ss) fro m di sco nt in ue d op er at io ns , ne t of t a x Net income Di lu te d ea rni n gs p er s ha re att r ib ut ab l e to A BB s ha re ho ld e rs : Income fr om continuing op er at io ns , ne t of t a x In co me ( lo ss) fro m di sco nt in ue d op er at io ns , ne t of t a x Net income Ba si c ea rni ngs p er s har e is c al cul ated by d iv idi ng in com e by the w eig hted -ave rag e num be r of shares outstanding during the ye ar . Diluted ear nin gs p er sh are i s ca lc ul ated by di v i di ng in com e by the w eig hted -ave rag e num be r of shares outstanding during the ye ar , assuming that a ll po tent ia ll y di lut i ve se cur i ti es we re e xer- c ise d, i f dil ut iv e. P otent ia ll y di lut i ve se cur i ti es comprise: outstanding wr itten call op t ions and outstanding options and s hares grant e d sub ject to cer t ain co nd it ion s un de r ou r sha re - b ase d paym e nt arr an ge me nt s. S ee “ N ote 20 - E ar nin gs pe r sha re” to o ur Con sol id ated Fi na nc ia l Sta tements. 144 ABB ANNUAL REPORT 202 1 04 F IN A NC I A L RE VI E W OF A B B G RO UP — Bus ines s analy s is Ele ct rif ication Bu siness Area The f i na nc i al re sult s of o ur El ec t r if i cat io n Bu sin ess A re a we re as f oll ows: Orders and Revenues Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in million s Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in million s Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in million s Income fr om operation & Ope rational EB IT A Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in millions Orders Or de r ba ck l og at Revenues In co me f ro m operations Operational EBIT A Orders Ap pr oxi mate ly t wo -thi rds of t he B us in ess A rea’s ord er s ar e for p rod uc t s w it h sho r t de li ve r y t im es; ord er s ar e usua ll y re cor de d an d de li ver ed w ith in a th re e - mo nth p er i od a nd t hus a re g en er- all y co nsi de re d as s ho r t - c yc le . Th e re main de r of ord er s is co mp r ise d of sm al le r proj e c ts t hat require longer lead times, as w e ll as lar ger solu - tions requiring engineering and in stallation. Ap pr oxi mate ly h al f of the B us in ess A re a’s orde rs are re ce ive d v i a thir d - pa r t y dis tr ib uto rs; a s a con seq ue nc e, e nd - cus tome r ma rket d ata is b as ed part ially on management estima tes. In 2 02 1 , or de rs i nc rea se d 21 p er cen t (18 p e rce nt in lo ca l cur re nc ie s) as de man d im prov ed ac ross mos t en d - use r se gm ent s an d ma rket s in b oth short - c ycle and long- c ycle busi nesses. A lthough gl oba l ec ono mic o utp ut r ecove re d du r in g th e year and i s now a bove t he p re - p an de mic l eve l of 20 19, grow t h wa s ge og ra phi ca ll y un eve n, l arg e ly d ue to diverse ongo ing pandemic impa cts, especially in emerging econom ies. Demand in the buildings segment, the Elec trif ication Busines s Area ’s largest end-user segment, was r obust with strong grow t h in t he re sid e nti al m arket a nd re cove r y o f the non-residential building sec tor with incr eas - ing in vestments in commercial and healt hc are. Substantial growth continues in the e- mobility seg me nt al on g w it h str ong g row t h in fo od a nd bev er age , ut il it ies , re new ab le s an d data c ente rs . Ad dit io na ll y, dema nd i n the oi l an d ga s se gm ent increased f ollowing higher oil prices. The g e ogr ap hic d ist r ib ut ion of o rd er s for o ur Ele c tr i f ic ati on B us ine ss A rea w a s as fo ll ows: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 3 ,8 91 3 ,06 5 3, 501 A si a, M i dd le E a st a nd A fr i ca of which : China 2,1 41 1,81 9 1,885 To t a l In 2 02 1 , or de rs i nc rea se d in a ll re gi ons . O rde rs i n the A m er i ca s i ncr ea se d 29 p e rce nt (2 8 pe rce nt in lo ca l cur re nc ie s) , w ith s tron g gr ow th i n Me x ico, Ca nad a an d in th e U. S . Ord e rs i n Euro pe i ncr ea se d 21 p er cent (1 8 p er cent i n lo c al cu rre nc i es) wi th w id esp re ad de ma nd pi cku p acr oss th e reg io n in clu di ng key ma rket s su ch a s Ge rm any a nd It al y. De ma nd i n A sia , M id dl e Ea st an d Af r ic a in cre as ed 1 2 pe rce nt (8 pe rce nt in l oc al c ur ren c ie s) wit h China and India contributing strongly des pite continuing pandemic-related cha llenges. 145 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P In 2 02 1 , th e ord er b ack l og i ncr ea se d 25 p e rce nt (2 9 pe rce nt in l oc al c ur ren c ie s ). The o rd er b ack lo g be ne f ite d fro m the s tro ng o rde r int ake , but a lso reflect ed execu tion cha llenge s ca used b y ma teria l sho r tag es , tra nsp or t ati on co nst rai nts a s we ll a s pandemic-relat ed product ion pres sures in s ome local markets. Rev enu es In 2 02 1 , reve nu es i nc rea se d 1 1 pe rce nt (8 pe rce nt in l oc al cu rre nc i es). Reve nu es in cr ea se d in al l Di v i sio ns re fl ec t i ng w i de spr ead m arket r ecov er y acro ss all r egi on s, ho weve r grow t h wa s ha mp er ed by c ompone nt s hor tage and log istic challenges, particularly for the project business. Revenue growth in shor t - c ycle busines ses was higher than in long- cycle business es, reflec ting some cus - tomer s tockpil ing. Pricing actions taken to mitiga te increasing ma terial and trans p ortation cost s al so co ntr ib ute d to th e high e r reve nu e lev el . The r eve nu e grow t h rate wa s l ed by t he E - mobi li t y Di v i sio n mir ror i ng th e ve r y hi gh de ma nd i n thi s seg me nt . Th er e wa s al so do ub le - dig it re ven ue grow t h in t he In st all ati on P rod uc t s D iv i si on ref le c t in g de ma nd re cove r y i n the U. S . a nd Ca nad a , as we ll a s i n the S ma r t Powe r Di v i si on . Reve nu e gr ow th w as so li d for t he S mar t B ui ld in gs Di v i sio n, w he rea s re ven ue s gre w mor e mo de stl y for t he Distribution Solutions and Power Con ver - sion Div isio ns. The g e ogr ap hic d ist r ib ut ion of r eve nu es fo r our Ele c tr i f ic ati on B us ine ss A rea w a s as fo ll ows: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 3,322 3,115 3,555 A si a, M i dd le E a st a nd A fr i ca of which : China 2, 1 10 1,858 1 , 74 9 To t a l In 2 02 1 , reve nu es i n th e Am e r ic as i nc rea se d 10 pe rce nt (9 pe rce nt in l oc al c ur ren c ie s ) le d by a str ong r eco ver y in C ana da an d Me x i co, whi le reve nu es i n the U. S . re co rde d hi gh si ng le - dig it grow t h. R eve nu es i nc rea se d 1 1 pe rce nt ( 7 p erc ent in l oc al cu rre nc i es) in A sia , M id dl e Ea st a nd Af r ic a , dr i ven by g row t h in Chi na a nd I ndi a . Re ven ue s in Euro pe i ncr ea se d 10 pe rce nt (8 pe rce nt i n lo ca l cur re nc ie s) refl ec t in g w id es pre ad gr ow th ac ross the r eg ion , in cl ud ing key m ar kets su ch a s G er- many and Ital y . Income fr om operations In 2021, income fr om operations incre ased 38 per - cent , su pp or te d by hig he r rev en ues . Pr i c in g actions acr oss the product business es and the benefits of sa v ings realiz ed from ongoi ng rest ruc - tur in g an d cos t sav in gs p rog ra ms al so p osit i vel y influenced the income from o perations. Res truc - turing rela ted expenses and im plementation cost s in o ur o pe rat in g Di v i sio ns we re lo wer i n 20 21 t han i n 20 2 0, main l y as t he i nteg rat ion o f GEIS is nearing c omplet ion. These positives were par t i all y da mp en e d by hig he r com mo dit y p r ic es in 2 02 1 , a s wel l as i nc rea se d cos ts fo r tr ansp or t a - tion and log istics. The inc ome from opera tions wa s bu rde ne d by hi gh er p er so nne l e xp en ses dr i ven by a r am p - u p of man uf ac tur i ng c apa c it y to me et hi ghe r d em and . Th e re wa s al so ne g ati ve comparable impact from the discon tinuance o f various pandemic- related g overnment s upp ort pro gr ams t hat we re mo re si gnif ica nt in 2 0 20 com par ed to 2 02 1 . C han ge s in fo rei gn c urr en c ie s, including the impact s from F X/ commodity timing dif fe re nc es su mma r ize d in th e ta bl e be low, pos i - tively impacted t he income from operations by appro x imat ely 1 perc e ntage point. Operational EBIT A The rec onciliation o f Income from ope rations to Operational E BIT A for the Electr ification Business Ar ea w as a s fol low s: Income fr om opera tions Acquisition-related amortization Restructuring, relat e d and implementation co sts Ch an ge s in o bl ig at io ns r el ate d to divested businesses — — Ch an ge s in p re -ac qu is it io n estimates Gai ns a nd l os ses f ro m sa le o f businesses Fair v al ue a dju st me nt o n a sse ts an d li abi li t ie s he l d for s al e — Favor ab le r es ol ut io n of a n un ce r tai n pu rc ha se p r i ce adjustment Acquisition - and divestment- re late d e xp e ns es a nd i nte gr at io n costs Certain ot her non- operational item s — FX/ commodit y timing differences in income from operations Op e rat i on a l EB I T A In 2 02 1 , Op e rat ion al EB I T A in cre a sed 2 6 p erc ent (20 percen t excluding the impact from changes in fore ig n cur ren c y e xcha ng e rate s ) c omp are d to 20 20, p r im ar i ly d ue to th e re as ons d esc r ib e d under “Income fr om operations” , excluding the explanations relat ed to the reconciling items in the t ab le a bove . 146 ABB ANNU AL REPORT 2021 0 4 FI N AN CI A L R E V IE W OF A B B GR OU P Orders Or de r ba ck l og at Revenues In co me f ro m operations Operational EBIT A Orders In 2 02 1 , or de rs i nc rea se d 16 p erc ent (1 3 p e rce nt in lo ca l cur re nc ie s) compa re d to 20 20. O rd er d eve l - op me nt had a s tro ng p er fo rm anc e acro ss mos t of the mark et segments and Div isions. The Busines s Ar ea b en ef ite d fr om hi gh de m and i n foo d an d beverage, HVA CR (heating, v entilation, air condi - tioning and refrige ration ), chem ic als, metals , pulp and paper , cement, m ining, wind and wat er seg - me nts . O il an d ga s d em and w a s fl at but s howe d sig ns of re cove r y d ue to hi gh er oi l pr i ces a nd emerging tr ends. The g e ogr ap hic d ist r ib ut ion of o rd er s for o ur Mot io n Bu si ne ss Ar ea wa s a s fol low s: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 2, 20 0 1 ,8 97 2,0 4 8 A si a, M i dd le E a st a nd A fr i ca of which : China 1,23 2 1 ,077 987 To t a l In 2 02 1 , or de rs i nc rea se d 18 p e rce nt (14 p er cent i n local currencies ) in E urope as orders incr eased main ly i n Sw it ze rl an d, S pain , It al y, Austr i a, T urkey and Fra nc e par t ia ll y of f set by a d ec re ase i n Pol an d. I n A si a, M id dl e Ea st a nd A fr ic a , or de rs in cre as ed 1 2 p er cent ( 7 pe rce nt in l oc al c urr en - c ie s ) d r ive n by g row th i n Chi na an d In di a . In th e Am e r ic as , ord er s in cr ea se d 18 p er cen t (17 perce nt in l oc al cu rre nc i es) as a re sult o f rec over i es i n th e U. S. , Ca nad a an d Me x i co. The o rd er b ack lo g in 2 0 21 i ncr ea se d 1 3 pe rce nt (19 p er cen t in l oc al cu rre nc i es) comp are d to 20 2 0. The o rd er b ack lo g in cre a sed a cross m ost D i v i - sio ns, d r iv en by b oth sh or t a nd l on g - c yc le ord er g row t h. Rev enu es In 2 02 1 , reve nu es i nc rea se d 8 p erc ent (5 p e rce nt in l oc al cu rre nc i es) comp are d to 20 2 0 and w ere hig he r acro ss all D i v is ion s, re cove r in g fro m th e pan de mi c- re lated d e cli ne i n 20 20 . Reve nu es a lso ref le c te d stro ng e xe cut io n fro m th e ord er b ack l og as well as resilienc e in the sh ort-cycle business. The g e ogr ap hic d ist r ib ut ion of r eve nu es fo r our Mot io n Bu si ne ss Ar ea wa s a s fol low s: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 1 , 9 74 1,867 2 ,00 9 A si a, M i dd le E a st a nd A fr i ca of which : China 1,256 1 ,0 40 955 To t a l In 2 02 1 , reve nu es i n Euro pe i nc rea se d 3 pe rce nt (fla t in local curr e ncies ) dr iven b y increases in T urkey , Germany , Poland, Switzerland, Austria and Spain while sales v olumes declined in Sweden, Motion B usines s Area The f i na nc i al re sult s of o ur M oti on B us ine ss A rea wer e as fo ll ows: Orders and Revenues Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in millions Income fr om operation & Ope rational EB IT A Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in millions 147 ABB ANNU AL REPOR T 2021 0 4 F IN A NC I A L RE V I E W O F AB B G RO UP Esto nia , It al y an d Fin la nd . In A s ia , Mi dd le E as t an d Afr i ca r eve nue s in cr ea sed 1 4 pe rce nt (9 pe rce nt i n lo ca l cur re nc ie s) compa re d to 20 20 d r ive n by stro ng r eve nue g row t h in Chi na , I ndi a an d Au str a- lia . I n th e A me r ic as , reve nu es i nc rea se d 8 pe rce nt ( 7 pe rce nt i n lo ca l cur re nc ie s) on high er r eve nue s in the U. S., particularly in the book-and- bill bus i - ne ss in th e NE MA M otor s Di v i si on . The M e ch anic al Powe r T ra nsmi ssio n Di v i sio n al so re po r ted s tro ng ord er g row t h pr io r to it s di ves tme nt i n Nove m - ber 2021. Income fr om operations In 2021, income fr om operations incre ased 23 1 pe rce nt co mp are d to 20 20 a nd i nc lu de d th e gain of $ 2 , 1 95 mi ll ion r eco gni zed o n sal e of th e Mechanical Pow e r T ransmis sion Division. Exclud - ing th is ga in, income from operations increased 9 pe rce nt dr i ve n pr i mar i ly b y hig he r reve nu es . The higher bus iness volumes reflect the reco ver y from the p an de mic- rel ated sl owdow n in 2 0 20. P rof it- abi lit y w as a lso s upp or te d by ac t iv e pr i ce management, c ontinued cost d iscipline, a f ocus on op e rat ion al p er fo rm an ce an d a pos it ive d iv i- sional m ix which offset increasing c ommodities and f rei ght e xp e nse s and o the r cos t inf lat io n. Changes in foreign curr encies, including the impacts from FX/ commodity timing d ifferences sum mar i zed i n the t ab le b el ow, had no s ig nif ic an t impact on t he change in income from operations. Operational EBIT A The rec onciliation o f Income from ope rations to Op er ati on al EB IT A for th e Mo ti on B usi ne ss A rea wa s as f oll ows: Income fr om opera tions Acquisition-related amortization Restructuring, relat e d and implementation co sts Gai ns a nd l os ses f ro m sa le o f businesses — — Acquisition - and divestment- re late d e xp e ns es a nd i nte gr at io n costs — — Certain ot her non- operational item s FX/ commodit y timing differences in income from operations Op e rat i on a l EB I T A In 2 02 1 , Op e rat ion al EB I T A in cre a sed 1 0 pe rce nt (6 p ercent e xcluding the impact from changes in fore ig n cur ren c y e xcha ng e rate s ) p r im ar i ly d ue to the reas ons described under “Income from opera - tions” , excluding t he explana t ions rela ted to the reconciling it ems in the table above. Process Automa ti on Busine ss Area The financial resul ts of our Proces s Aut omation Bu sin ess A re a we re as f oll ows: Orders and Revenues Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in million s Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in million s Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in million s Income fr om operation & Ope rational EB IT A Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in millions 148 ABB ANNUAL REPORT 2021 0 4 FI N A NC I AL R E V I E W OF A B B G RO UP Orders Or de r ba ck l og at Revenues In co me f ro m operations Operational EBIT A Orders In 2 02 1 , or de rs i nc rea se d 10 pe rce nt ( 7 p e rce nt in lo ca l cur re nc ie s) compa re d to 20 20. O rd er s gre w dou bl e di git i n al mos t all D i v is ion s exce pt t he Marine & Ports Div ision where orders declined du e to the re ce ipt of a l arg e ca pit al i nves tme nt ord er i n 20 2 0. Ma rket s re cover ed to p re - p an de mic leve l s and c usto me rs m ad e ca pit al an d op er a - tional investments acro ss almos t all mark et seg me nt s. D em an d for p rod uc t s, s ys tem s and serv ices improv e d in t he proc ess- relat ed seg - ments lik e mining, pulp and paper , chemicals, and oil an d ga s . De ma nd fo r pro du c ts a nd se r v ice s rec over ed i n th e powe r ge ne rat io n ma rket an d operational inves tments impr oved in the marine sector . The g e ogr ap hic d ist r ib ut ion of o rd er s for o ur Proces s Automa t ion Busines s Area was as foll ows: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 1 ,0 47 7 70 995 A si a, M i dd le E a st a nd A fr i ca of which : China 8 21 590 631 To t a l Ord e rs i n Euro pe i ncr ea se d 11 p e rce nt (6 pe rce nt in l oc al cu rre nc i es) dr ive n by st ron g or de rs i n the proces s-related business es and increases in ser v ic e ac ti v i t y. In loc al c urr en c ie s, or de rs in cre as ed i n Ge rm any, Nor w ay, F r an ce, R ussi a an d the Un ited Kingdom wh ile orders decre ased in Swed en a nd I tal y. Ord er s in A s ia , Mi dd le E as t an d Afr i ca i nc rea se d 4 pe rce nt (rem ain ed f lat i n lo ca l cur re nc ie s). High er o rde r s in Chi na , I ndi a an d Aus tra li a wer e par t ly o f fse t pr i mar i l y by th e lowe r order volu mes in South K orea and S ingapore due to lar ge o rde rs b oo ked i n 20 20 . In th e A me r ic a s, ord er s in cr ea se d 21 p erc ent ( 20 p er cent i n lo ca l currencies ) supported by strong inv estments in the U. S . ac ross al l D iv i si ons . In 2 02 1 , th e ord er b ack l og i ncr ea se d 5 pe rce nt (10 pe rce nt in l oc al c ur ren c ie s ) com par ed to 2 02 0. Stron g or de r grow th drove s ig nif i ca nt in cre as es in or de r bac k lo g for al l Di v i sio ns e xce pt th e Ma r ine & P or t s D iv i si on w hic h de cre as ed m ainl y on low er orders and str ong backlog execution. Rev enu es In 2 02 1 , reve nu es i nc rea se d 8 p erc ent (5 p e rce nt in l oc al cu rre nc i es) comp are d to 20 2 0. Rev en ue s increased in all Div isions, reflecting strong e xecu - ti on of t he or de r bac kl og i n th e lo ng - cy cle business es, partially offset b y challenges from supply cha in constra ints. The g e ogr ap hic d ist r ib ut ion of r eve nu es fo r our Proces s Automa t ion Busines s Area was as foll ows: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 836 808 950 A si a, M i dd le E a st a nd A fr i ca of which : China 74 2 629 61 2 To t a l In 2 02 1 , reve nu es w ere 1 5 p e rce nt hig he r (11 p e r - cent i n lo c al cu rre nc i es) in A sia , M id dl e Ea st an d Afr i ca , 8 p er cent h igh e r ( 7 pe rce nt i n lo cal c ur ren - c ie s ) i n th e Am er ica s a nd 2 p erc ent hi gh er (decr ea se of 2 p erc ent i n lo ca l cur re nc i es) in Euro pe co mp are d to 20 20 . In A si a , Mi ddl e E as t and A fr i ca , th e Ma r in e & Po r ts D iv isi on re gi ste re d stro ng g row t h in S out h Korea a nd C hin a whi le reve nu es a lso i ncr ea se d in th e Uni ted A r ab Emi r- ates an d So uth A fr ic a i n the E ne rg y Ind us tr ie s Di v i sio n. I n Euro pe , rev en ues w ere h igh er i n Russia and the Unit ed Kingdom while lower in Fra nce, F inland and Germany . In t he America s, reve nu es we re hi gh er i n the U. S . , Br a zi l an d Ca nad a whi le re ven ue s de cl in ed i n Me x ic o. Income fr om operations In 2021, income fr om operations incre ased 10 7 pe rce nt com pa re d to 20 20 p r im ar il y d ue to th e sig nif i ca nt ch arg es r eco rd ed i n 20 20 fo r th e Kusi le powe r ge ne r atio n pr oje c t in S out h Afr i c a, l e gac y proj ec t s i n Ind ia a nd oth e r sig nif i ca nt res tr uc tu r - in gs. T his w as p ar t ia ll y of fs et by hi gh er divestment - relat ed expenses, m ainly r e lat e d t o the planned exit of the T urbocharging Division. Excluding thes e it e ms, inc ome from opera tions imp rove d si gni f ic ant ly d r ive n by vo lum e, s tro ng execution, sa v ings from supply and operation excellence initiatives and continued overhea d cost structure i mprov ements. Changes in foreign currencies, including the effect from changes in the FX/ commodity timing differences summa - r ized i n th e ta bl e be low, de cre a sed i nco me f rom o pe rat io ns by 3 p er cent com par ed to 2 02 0. ABB ANNUAL REPOR T 20 21 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP Operational EBIT A The rec onciliation o f Income from operations to Operational E BIT A for the Proces s Automa t ion Bu sin ess A re a wa s a s fol low s: Income fr om opera tions Acquisition-related amortization Restructuring, relat e d and implementation co sts Gai ns a nd l os ses f ro m sa le o f businesses — — Acquisition - and divestment- re late d e xp e ns es a nd i nte gr at io n costs — Certain ot her non- operational item s FX/ commodit y timing differences in income from operations Op e rat i on a l EB I T A In 2 02 1 , Op e rat ion al EB I T A in cre a sed 7 8 pe rce nt (70 percent excluding the impacts from cha nges in fo rei gn cu rre nc i es) comp are d to 20 2 0. The cha ng e is d ue to th e rea so ns d esc r ib ed u nd er “Income from ope rations” , ex cluding the exp lana - tions rela ted to the r econciling items in the table above. Robotics & Di screte Automa tion Bu siness Area The f i na nc i al re sult s of o ur Ro bot i cs & D is cre te Automa tion Business Area were as follo ws: Orders and Revenues Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in millions Income fr om operation & Ope rational EB IT A Orders and Revenues Orders Revenues Orders 12M rolling 400 600 800 1,000 1,200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2,000 2,500 3,000 3,500 4,000 Robotics & Discrete Automation Business Area Elec trification Business Area Income from operation & Operational EBITA Operational EBITA Income from operations Income from operations % -150 0 150 300 450 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -5% 0% 5% 10 % 15% 20% Elec trification Business Area Orders and Revenues Orders Revenues Orders 12M rolling 2,400 2,800 3,200 3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 11,000 12,000 13,000 14,000 15,000 Elec trification Business Area Income from operation & Operational EBITA -240 -40 0 40 80 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 -30% -1 5% 0% 15% Robotics & Discrete Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0 5% 10 % 15% 20% Proc ess Automation Business Area Operational EBITA Income from operations Income from operations % Income from operation & Operational EBITA 0 10 0 200 300 400 2,400 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 0% 5% 10 % 15% 20% 140% 14 5% Motion Business Area Operational EBITA Income from operations Income from operations % $ in millions $ in millions 12M $ in millions $ in millions $ in millions $ in millions $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 5,500 6,000 6,500 7 ,000 7, 500 Proc ess Automation Business Area $ in millions 12M $ in millions Orders and Revenues Orders Revenues Orders 12M rolling 500 1,000 1,500 2,000 2,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 6,000 6,500 7 ,000 7, 500 8,000 Motion Business Area $ in millions 12M $ in millions Orders Or de r ba ck l og at Revenues In co me ( lo ss) fro m operations n.a. Operational EBIT A Orders In 2 02 1 , or de rs i nc rea se d 3 4 pe rce nt (2 9 p er cent in l oc al cu rre nc i es). Dem an d le vel s in b oth th e Robotics and Machine Automation Div isions rec over ed i n 20 21 af te r 2 02 0 wa s im pac te d by th e CO VID -19 pandem ic. Commencing in the second qua r te r , bot h Di v i sio ns re p or te d sig nif i ca nt increases in demand, including from traditional aut omotive and a utomo t ive- relat ed sectors, general industry , machine bu il ders and electron - ic s ma rket se c tor s. O rd er s con ti nu ed to gr ow in the s eco nd h alf o f the ye ar b en ef i ti ng f rom l arg er inves tments b y cust omers in the ma chine aut o - mation sector . 150 ABB ANNU AL REPORT 2021 04 FI N A NC I AL R E V I E W OF A B B G RO UP The g e ogr ap hic d ist r ib ut ion of o rd er s for o ur Rob ot ic s & D isc rete A utom ati on B usi ne ss A rea wa s as f oll ows: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 371 277 310 A si a, M i dd le E a st a nd A fr i ca of which : China 976 781 729 To t a l In 2 02 1 , or de rs i nc rea se d in a ll re gi ons . O rde rs i n Euro pe i ncr ea se d 39 p e rce nt (3 5 pe rce nt i n lo ca l currencies ) driven by incr eases in de mand in Ge rm any, Ital y, Neth er la nds a nd A ust r ia . O rd er s in the A m er i ca s i ncr ea se d 37 p er cen t (3 5 pe rce nt in lo ca l cur re nc ie s) compa re d to 20 20, d r ive n by th e stro ng o rd er i nta ke in th e U. S. i n bot h Di v i sio ns . Ord e rs i n A sia , M id dl e Ea st an d Af r ic a in cre as ed 27 p e rce nt (2 0 pe rce nt in l oc al c urr en c ie s ) w ith strong demand in China and India. In 2 02 1 , th e ord er b ack l og i ncr ea se d 37 p er cen t (43 per cen t in lo c al cu rre nc i es) comp are d to 20 20 . The order backlog increased in t he Mach ine Automa tion Div ision, but was negatively im - pac te d by ou r se le c ti v i t y of ord e rs i n the autom ot ive se gm e nt par tia ll y of f set by p osi ti ve momentum in the general indust ry and cons umer segmen ts. Rev enu es In 2 02 1 , reve nu es i nc rea se d 1 3 p erc ent (9 p er cent in l oc al cu rre nc i es) comp are d to 20 2 0. Rev en ue s increased in b oth D iv isions due to higher volumes from book -and -bill busines s, howev er gro w th was hampered by component shortages (primarily relat e d t o semiconductors ), l ogistic challenges which t riggered longer lead times for some cus tom er d el ive r ie s an d a ti ght l ab or m arket . Se r v i ce re ven ue s als o in cre as ed , dr i ven b y stro ng de ma nd fr om al l in dus tr y seg me nts b ut e spe c i all y from general industr y . The g e ogr ap hic d ist r ib ut ion of r eve nu es fo r our Rob ot ic s & D isc rete A utom ati on B usi ne ss A rea wa s as f oll ows: Eur op e Th e A me r ic a s of wh ic h: U ni te d State s 309 273 2 93 A si a, M i dd le E a st a nd A fr i ca of which : China 950 719 829 To t a l In 2 02 1 , reve nu es i nc rea se d in a ll re gi on s. Th e reve nu es f rom A s ia , Mi dd le E as t an d Afr i ca i n - cre as ed 2 3 p erc ent (17 pe rce nt in l oc al c ur ren c ie s ) com par ed to 2 02 0 du e to hig he r bo ok-a nd - bi ll reve nu es a nd a hi ghe r l eve l of exe cu ti on of au to - mot ive s eg me nt or de rs , par t i cul ar ly i n Chi na . Reve nu es i n Euro pe i nc rea se d 7 pe rce nt (4 per cen t in l oc al cu rre nc i es) wi th A ust r ia an d Sp ain p er- forming strongly while revenues de clined in the Unit ed Kingdom a nd F rance. In the A mer icas, reve nu es i nc rea se d 1 3 pe rce nt (1 2 p er cent i n lo c al cur re nc ie s) due to str ong d e man d in t he U. S . in bot h Di v is io ns af te r rec over y fro m the l ow le vel s in 2020. In 2021, the Busines s Area recorded inc ome from op er ati ons of $ 26 9 mil li on co mp are d to a loss of $163 mi ll ion i n 20 2 0, as t he i mp rove me nt in u nd er- ly ing operating pe rformance in 20 20 was mor e tha n of fs et by th e $2 9 0 mi lli on i mp airm en t of goodwill recorded in the Ma chine Automa tion Div ision in 2 020. The ope rational pe rformance in 2021 reflected impro ved sales volumes, a fa vor - ab le ch an ge i n the r eve nu e mix a nd th e be ne f it of cost r ed uc t io n me asu res t ake n in 2 02 0. Ch ang es in for eign currencies, including t he impa cts from FX/ commodity timing di fferences summ arized in the t ab le b el ow, posi ti ve ly i mp ac ted t he i nco me fro m op er ati ons by a pp rox im atel y 6 pe rce nt . Operational EBIT A The rec onciliation o f Income (loss ) from opera - ti ons to O pe r atio na l EB IT A fo r th e Rob ot ic s & Di scr ete Au tomat io n Bu si ness A r ea wa s a s foll ows: Acquisition-related amortization Restructuring, relat e d and implementation co sts Acquisition - and divestment- re late d e xp e ns es a nd i nte gr at io n costs — Impairment of goodwill — — Certain ot her non- operational item s — FX/ commodit y timing differences in income from operations Op e rat i on a l EB I T A In 2 02 1 , Op e rat ion al EB I T A in cre a sed 5 0 p erc ent ( 41 percent e xcluding the impact from changes in fore ig n cur ren c y e xcha ng e rate s ) c omp are d to 20 20, p r im ar i ly d ue to th e re as ons d esc r ib e d under “Income (los s) from operations” , exc luding the explana t ions rela ted to the reconciling items in th e ta bl e ab ove . 151 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P C orporat e and Other Ne t loss f rom o pe rat io ns for Co rp or ate and O th er wa s as f oll ows: Corporat e headquarters and stewardsh ip In co me ( lo ss) fro m eq ui t y- account e d compan ies Other corpora te costs Restructuring Fair v al ue a dju st me nt o n e qu it y securiti es Corporat e brand income f rom Hi tac hi E ne rg y — Corporat e real esta te Cos ts f or d ive st me nt o f Pow er Grids — Corporat e research and development — Digital program costs — OS implementation costs — Stranded c orp orat e co sts — Divested businesses and other non- core activities T o ta l Co rp or ate a n d Ot h er In 2 02 1 , th e net l oss f rom o pe rat io ns w it hin Corp or ate an d Ot he r de cre a sed by $ 531 m ill io n to $3 81 mi lli on c omp are d to 2 02 0. Thi s ref le c te d several items including an elimi nation of stranded cor po rate cost s a nd th e hig h cost s in 2 0 20 re l ated to the d ive stm en t of the P owe r Gr i ds b usi ne ss. Ad dit io na ll y, corpo rate cos ts i n 20 21 r ef le c t th e ending in 2020 of the remaining corporate res ear ch an d de vel op me nt an d di git al p rog ra m cost s, w hic h we re el imi nate d as p ar t of t he A BB Way pro gra m. I n 20 2 1 , loss es i n non - cor e bus i - ne sses d ec rea se d co mpa re d to 20 20 a s pr oje c ts wer e com pl ete d and c er t ain l arg e loss es we re no t rep eate d. T his w as p ar t ia ll y of f set by a hi gh er l oss fro m eq uit y - acco unte d com pa nie s in 20 2 1 com - par ed to 2 02 0 whi le c orp or ate br and i nco me of $8 9 mil li on wa s hi gh er th an 2 02 0 fo r the u se of the A B B br an d by the H it achi E ne rg y Ltd. joi nt venture . Corpor ate In 2 02 1 , cor po rate h ead qu ar te rs a nd ste war dshi p cost s in cr ea se d com par ed to 2 02 0, mai nl y dr i ve n by res id ual u na ll oc ated cos ts fo r th e Gl ob al Business Ser v ices opera t ions and continuous imp le m ent ati on of A B B Way . Ou r inve stm en t in th e Hi tac hi Ene rg y Ltd. j oint ventu re is a ccou nted f or us in g the e qu it y m eth od and p re sen ted a s In com e ( loss) from equity -account e d companies. The amount in 202 1 is for a f ul l yea r com par ed to s ix m onth s in 2 02 0 and primarily represents the amor tization o f the notional purchase price ac counting adjustments (net of ta x) whi ch we re re co rde d du e to th e fair value ac counting applied on initial inves tment in the j oint v entu re (see “ N ote 4 - Acq uis it io ns, div est me nt s and e qu it y - accou nte d com pani es ” to our C onsolida ted Financial S tatements f or infor - mation on the accounting for the in vestment in Hit achi E ne rg y Ltd). During 2021 , we recorded net re valuation gains to taling $94 million on investments in equity sec ur i ti es i n our e q uit y ve ntur es i nves tme nt portfolio. Corpora te brand inc ome res ults from the granting of the u se of th e A BB b ra nd to Hi tac hi En erg y Ltd ., the f air v al ue of w hic h wa s ini ti al ly d ete rmi ne d on the d ate of the d ive st me nt . A po r ti on of t he pro ce ed s rec eiv ed fo r th e sal e of th e Powe r Gr ids bus in ess w as a ll oc ated to th e fai r va lue o f the gra nt in g of the u se of th e br an d an d is be in g amo r t ized ov er th e e xp ec te d pe r i od of u se by Hit achi E ne rg y Ltd. Corpora te real estat e primar ily includes income fro m pro pe r t y re nta ls a nd gai ns fr om th e sa le of real es tat e proper ties. In 2021, income from operations in cor porat e real esta te included ga ins fro m the s al e of rea l es tate pro pe r t ie s of $2 2 mi l - lio n com pa re d to $2 7 mil li on in 2 0 20. Ot he r cor po rate cos ts co nsi st s of op er ati on al cost s of ou r Cor po rate T re asu r y O pe rat io ns an d other m inor items includ ing elim ination of cha ng es to e li min ated in tern al p rof it of I nve ntor y . Ot he r - D ive ste d bu si n ess es a nd o th e r no n - co re activ ities The r esu lt s of op er ati ons fo r ce r tai n div este d business es and other non- core activit ies are present e d in Corpora te and Other . Divested business es include the h igh -voltage cables bu si - ne ss, ste el s tr uc tur es b usi ne ss as we l l as t he oil & gas EPC busi ness. Other con tinuing non- core activ ities include the execution a nd wind- down of cer t ain l eg ac y EP C an d oth er c ontr ac t s. In b oth 2 02 1 an d 20 20, t he a mou nt s rep re sen t charges and losses r elating t o divest ed busi - nesses and the winding down of the rema ining EP C proj ec t s . In 2 02 1 , we re cor de d loss es of $6 7 mil lio n whi ch we re m ost ly r el ated to th e fu ll trai n ret rof it b usi ne ss bu t als o rel ated to l eg ac y EP C proj ec t s an d th e di veste d oi l & ga s EP C bus in ess . In 2 02 0, we re co rde d $14 3 mil li on fo r certain reta ined warranty obliga t ions rela ting to the st e el structures business and also recorded charges f or certain reta ine d comm itments and gua ra ntee s in co nn ec t i on w i th th e oil & g as E PC bus in ess . The l oss i n 20 20 a lso re fl e c ts f ur th e r operational challenges and customer obligations 152 ABB ANNU AL REPORT 2021 0 4 FI N AN CI A L R E V I E W OF A B B GR O UP relating to several legacy pro jects including the full tra in retro fit business , su bsta tions and off - shore wind. At De ce mb er 3 1 , 20 21 , o ur r em ainin g no n - co re activ ities primar ily include the completion of t he rem aini ng EP C co ntr ac ts fo r sub st atio ns a nd oi l & ga s as w el l as t he co mp let i on of th e re main ing obligations for the ful l tra in retro fit business. Restructu ri ng an d other cost sa v i ngs i nitiativ e s OS p rogram From De ce mb er 2 01 8 to De ce mb er 2 02 0, we exe cute d a t wo - yea r re str uc tu r in g pro gra m w it h the ob jecti ve o f simplify ing our busines s model and structur e thr ough the impleme nta tion of a new o rg aniz ati on al st ruc ture dr i ve n by ou r business es. The p rogram result ed in the elim ina - ti on of t he co untr y and r eg io nal s tru c tur es w i thin the pre vious matrix organ ization, including the el imi nati on of t he th re e re gio na l E xec ut ive Co m - mittee roles. The operating business es are now responsible for both their cu stomer -facing activ i - ties and bus iness suppor t functions, while the remain ing Group -level corpora te activ ities pri - mar i l y focu s on G ro up st rate gy, por t fo lio a nd per formance mana ge ment and capital all ocation. A s of De ce mb er 3 1 , 20 2 0, we had i nc urr ed su b - sta nt ial l y all r est ru c tur in g an d re late d ex pe nse s rel ated to t he OS p rog ra m. Du r in g the co ur se of th e pr ogr am , we im pl e - mented and executed various restructuring initia tives a cros s all busines s su pport functions and all ope rating segments. The cumulative restructuring and r e lat e d expenses u nder thi s pro gr am , or ig in all y e st imate d to be $ 35 0 mil li on , wer e red uc ed by $ 41 mi lli on to $3 0 9 mi lli on , main ly d ue to t he re du c t ion s in b oth e st imate d cost s an d nu mb er of p roje c t s pl an ne d. The f ollowing table out lines the costs incurred in 20 20, 2 01 9 an d the c um ulat iv e cost s in cu rre d under the program per ope rating segment and Corp or ate an d Ot he r as of D e cem be r 31 , 2 0 20 : Cos ts incurred in Cum u la ti ve cos ts i n cu rr e d up t o De ce m b er El ect rifi cati on Motion Process Automa tion Ro bo ti c s & Di sc re te Automa tion Cor po r ate an d O th er To t a l (1) Formerly named the Industrial Automa t ion operating segment . The restructuring program result e d in run-rate cost s av in gs of a pp rox imate l y $59 0 mi lli on , impacting all Busines s Areas and Cor porat e and Ot he r . Th es e cost s av in gs we re re ali zed m ainl y a s red uc t io ns i n cost of s al es , sel li ng , ge ne ra l an d admin istrative expenses, and non- order relat ed research and development expenses. The m ajo r it y of th e re main ing c a sh ou tlay s at De ce mb er 3 1 , 20 20 , occ urr ed i n 20 21 a nd we re primar ily for e mployee severanc e benef its. — L iquidity and capi tal res ourc es Principal sourc es of f unding We me et ou r li qui dit y n e ed s pr i nc ip al ly u si ng c ash fro m op er ati ons , pro ce ed s fro m the i ssua nce of debt inst ruments (bonds and com mercial paper ), and s ho r t -te rm ba nk b orr ow in gs . In 2 02 1 , we al so rec ei ved s igni f ic an t fun ds f rom th e sa le of t he Me ch ani ca l Powe r T ra nsmi ssio n Di v i sio n, w hi ch wa s com pl ete d on N ove mb er 1 , 2 02 1 . Ou r net d e bt/ c a sh is sh own i n th e tab le b e low : Sh or t-te r m de bt a nd c ur re nt m atur i t ie s of lo ng - te rm d eb t Lo ng - te rm d eb t Ca sh a nd e q ui va l ent s Re st r ic te d c a sh - cu rr en t Marketable securities and short-t e rm investmen ts Re st r ic te d c a sh - no n - c ur re nt 153 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L RE VI E W O F AB B G RO U P Du r in g 20 21 , we b e nef i ted f rom a s ig nif i ca nt in cre as e in c ash p rov ide d by o pe rat in g ac ti v i ti es com par ed to 2 02 0 an d ca sh p roc ee ds f rom s ale s of bu sin esse s. A s ign if ic an t amo unt of t he se fun ds w as p aid to sh are ho ld e rs d ur in g 20 2 1 thr oug h bot h the p aym en t of the a nn ual d iv ide n d and t he co nt inu ati on of s har e bu yb ack ac t i v it ie s. Du r in g 20 21 , we c ha ng ed f rom a n et d ebt p osi ti on of $1 1 2 mil lio n at De ce mb er 3 1 , 20 20, to a n et c a sh pos it io n of $9 8 mil lio n at De ce mb er 3 1 , 20 2 1 . Ap pr oxi mate ly $170 mil li on of thi s move m ent i s du e to move me nts i n for eig n e xcha ng e rates w i th seve ra l othe r si gni f ic ant m ove me nts m ost ly of fse t ti ng ove r th e yea r . In 2 0 21 , we r ece ive d ne t pro ce ed s of $2 , 8 6 2 mil lio n for t he sa le of t he Dodge busines s la ter in the year . We gene rat e d ca sh f low s fro m op er ati ng ac t iv it ies d ur i ng 2 02 1 of $3 , 3 3 0 mil lio n an d sol d tre a sur y s toc k in re la - ti on to ou r em pl oye e sha re pl an s for $ 8 26 mi lli on . Mos tl y of fs et ti ng th es e ite ms we re am oun ts fo r pur ch ase s of tr ea sur y s har es of $3 ,70 8 mil li on , including $2,680 million relating to the announced bu yb ack s of o ur sh are s, a s wel l a s $1 ,7 26 mi lli on for th e pay me nt of th e di v i de nd to ou r sha re ho ld - er s. We m ade n et pu rc ha ses of p rop e r t y, plant a nd equipment and intangible assets of $72 7 mil lion and m ad e paym e nts of d iv ide nd s to no nco n - trolling shareholders totaling $98 million. See “Financial position” , “Inves ting activ ities” and “Financing activ ities” for further details. Ou r Corp or ate T rea su r y O pe rat io ns is re sp ons ib le for p rov i din g a ra ng e of tre as ur y m an age me nt serv ices to our group c ompanies, including in - vesting cash in excess of current business req ui rem e nts . At De ce mb er 3 1 , 20 2 1 an d 20 20, t he pro po r ti on of o ur ag gre gate “ Ca sh a nd e qui v a- lents” (including restr icted cash ) and “Marketable securiti es and s hort-t erm inv estments” managed by ou r Corp or ate T rea su r y O pe rat ion s am oun ted to app rox im atel y 4 4 p erc ent a nd 47 pe rce nt , res pectively . Ou r inve stm en t str ateg y for c a sh (i n exce ss of current business requirements ) has generally be en to i nves t in sh or t-ter m ti me d ep osi ts w ith matur i ti es of l ess t han 3 m ont hs, su pp le me nte d at t imes by investments in money mark et funds, and in some cases, government s ecurities. We ac ti ve ly m oni tor cr ed it r is k in o ur inve st me nt po r tfo li o an d de r iv ati ve po r t fol io. Cr ed it r isk exposures are contr olled in a ccordance with po lic i es a pp rove d by ou r sen ior m an age me nt to id ent if y , mea su re, m oni tor an d con tro l cre di t r isk s. We h ave mini mu m rati ng r eq uir em ent s fo r our coun terparts and closely monit or develop - me nts i n th e cre di t mar ket s mak i ng a pp rop r iate cha ng es to o ur inv est me nt po li c y as d e em ed ne cess ar y. In ad dit io n to mini mu m rat ing c r ite r ia , we have st r ic t i nves tme nt p ara me ter s an d spe c if i c ap prov ed i nst rum e nts a s we ll a s re str i c- ti ons o n th e t yp es of i nves tm ent s we ma ke. T he se parameters are clo sel y mon itored on an ongoing ba sis a nd a me nd ed a s we co nsi de r ne ce ssar y . Ou r ca sh is h e ld i n va r iou s cu rre nc i es a rou nd th e worl d . Ap pr oxi mate ly 4 0 p er cen t of our c a sh an d ca sh e qui v al ent s he l d at De cem be r 31 , 2 0 21 , w as in U. S . do ll ar s, wh ile t he m ost s igni f ic ant f ore ign cur re nc y c as h an d ca sh e qui v ale nt s we re he ld i n Chin es e ren min bi (17 per cen t). We be lie ve th e on goin g c ash f l ows ge n er ated from o ur busines s, supplemented, when neces - sar y , thro ug h acce ss to the c api ta l mar kets (including short -term c ommercial paper ) and our cre di t fac i lit ie s ar e suf f ic i e nt to sup po r t bus in ess operations, capital expenditures, business acq ui - sit io ns, t he p aym ent of d iv ide n ds to sha re ho ld er s and con tr ibutions t o pension plans. Consequently , we be li eve th at our a bil it y to ob tain f un din g fro m the se so urce s w i ll co nti nu e to prov ide t he c as h fl ows n ece ssa r y to sat isf y our wo rk i ng c api tal a nd ca pit al e xp en ditu re re qu ire me nt s, a s we ll a s me et our d e bt re paym en ts a nd ot he r f ina nc i al co mmi t - me nts f or th e ne x t 1 2 mo nth s. S ee “ Cont rac tu al obligations and commitmen ts” . Du e to the n ature of o ur o pe rat io ns, i nc lud in g th e ti min g of an nua l in cen ti ve pay me nt s to em pl oy- ee s, ou r ca sh f l ow fro m op er atio ns g en er al ly ten ds to be w eake r in th e f ir st h alf o f the ye ar tha n in th e se con d ha lf of th e yea r . De bt an d i nte re st rate s T ota l out st an din g de bt w as a s fo ll ows: Sh or t-te r m de bt a nd c ur re nt m atur i t ie s of lo ng - te rm d eb t Long-ter m debt: Bo nd s Ot he r l on g -te r m de bt T o ta l de b t The i nc rea se i n sho r t-term d eb t in 2 02 1 wa s du e to the r ec la ssif i c atio n to sho r t-term of t he the r ep aym ent at m atur it y of b oth t he - At De ce mb er 3 1 , 20 21 , L on g -te rm d ebt d e cre as ed $6 51 mil lio n com pa re d to the e nd of 2 0 20 d ue to the reclas sification t o short-t erm described ab ove of fs et pa r tl y by th e issu anc e in 2 02 1 of 154 ABB ANNU AL REPORT 2021 04 FI N A NC I AL R E V I E W OF A B B G RO UP Ou r de bt ha s b ee n obt ain ed i n a ra ng e of cur re n - c ie s and m atur it i es an d w it h va r io us in tere st r ate ter ms. Fo r ce r tain o f our d eb t ob lig ati ons , we use de r iv ati ves to m an age t he f i xed i nter est r ate ex pos ure . For e xa mp le , we use i nte res t rate sw aps to ef fe c ti ve ly c onve r t f ixe d rate d ebt i nto f loat in g rate li abi lit ie s. A f ter co nsi de r i ng th e ef fe c t s of inte res t rate sw ap s, at De ce mb er 3 1 , 20 2 1 , the ef fe c ti ve ave rag e inte re st rate o n our f l oati ng r ate long-term debt (including curr e nt ma turities) of $3 , 59 8 mi lli on a nd o ur f i xed r ate lon g -te rm d ebt (including curr ent ma turities) of $1,88 5 mill ion wa s 0. 3 p er cen t and 3 . 1 p er cen t, re sp ec t i vel y. This com par es w i th an e f fe c ti ve rate of 0. 2 pe rce nt fo r fl oat in g rate lo ng - ter m de bt of $3 , 3 3 0 mil li on an d 3. 3 pe rce nt for f i xe d rate lo ng - ter m de bt of $2 ,6 3 8 mil lio n at De ce mb er 3 1 , 20 2 0. For a di scu ssio n of ou r use of d e r iv ati ves to mo dif y the i nter est c ha rac te r is ti cs o f cer t ain of our i nd iv idu al b on d issua nce s, se e “ N ote 1 2 - De bt ” to ou r Con sol id ated Fi nan c ia l Statem e nts . Credit fac il ity In D ec em be r 201 9, we r ep lace d ou r pr ev i ous mul ti cu rre nc y r evol v ing c re dit f ac il it y w i th a ne w $2 bill ion multicurr e ncy revolving credit fa c ility, matur i ng i n 20 24 . In 2 02 1 we exe rc i sed o ur o pt ion to fur t he r ex te n d the m atur it y to 2 02 6 . No amo unt w a s draw n un de r th e fac il it y at D ece mb e r 31 , 2 02 1 an d 20 20. T he f ac il it y is av ail ab le fo r general corpora te purposes and conta ins cross - d ef ault c lau ses w he re by an e ven t of def aul t woul d oc cur i f we we re to de fau lt on i nd eb ted - ne ss, a s def i ne d in t he f ac il it y, at or ab ove a spe c if i e d thr esh ol d. The credit facilit y does no t contai n financial covenan ts that would restric t our ab ility to pa y div id en ds o r raise a ddi t ion al f und s in t he c api tal mar kets . For f ur t he r de tail s of th e cre di t fac i lit y, see “ N ote 1 2 - D ebt ” to our Co nso lid ated Fi na nc ia l Sta tements. C om mercial paper At De ce mb er 3 1 , 20 21 , w e had t wo co mm erc i al paper programs in place: • a $2 bill io n com me rc ia l pa pe r pro gr am fo r the private pla cement of U . S. dollar denomina ted commercial paper in the Unit ed S tat es, and • a $2 bill io n Euro - com me rc i al pa pe r pr ogr am fo r the i ssua nce of c omm er c ial p ap er i n a va r ie t y of currencies. At De ce mb er 3 1 , 20 21 , n o am ou nt wa s ou ts tan d - ing under t he $2 b illion program in the Unit ed States , com par ed to $3 2 mi ll io n out st an din g at December 31, 2020 . At De ce mb er 3 1 , 20 21 a nd 2 02 0, n o amo unt w as outstanding under the $2 billion Euro- commercial paper program. Europea n program for th e issua nce of de bt The Eu rop ea n pro gr am fo r the i ssua nce of d e bt all ows t he issu an ce of up to t he e qui v al ent of $8 bi lli on i n ce r tain d e bt ins tr ume nt s. T he te rms of the p ro gra m do n ot ob li gate any th ird p ar t y to ex te nd c re dit to u s an d the te rm s and p ossi bil it y of issui ng a ny de bt un de r th e pro gr am a re de ter- min ed w i th re sp ec t to, an d a s of the d ate of issua nce o f , e ach d e bt ins tr ume nt . At D ece mb e r 31 , 2 02 1 , th ree b on ds ( pr inc i pal a mo unt of EU R 70 0 mil lio n, d ue i n 20 2 3 , pr i nc ip al a mou nt of EU R 750 m ill io n, d ue i n 20 24, a nd p r in c ip al am ou nt of EUR 8 0 0 mi lli on , du e in 2 03 0) hav i ng a co mbi ne d ca rr y ing a mo unt of $ 2 , 5 22 m ill io n wer e out st an d - in g und er t he p rog ra m. T he c ar r y i ng am ou nt of the bonds outstanding under the pr ogram at De ce mb er 3 1 , 20 20 , wa s $1 , 8 21 mi lli on . Credit rating s Cre di t rati ng s are a sse ssme nt s by th e rati ng age nc i es of t he c red it r is k ass oc iate d w it h AB B and a re ba se d on i nfo rmat io n prov id ed by u s or other s ources tha t the ra ting agencies cons ider rel ia bl e. H ig he r rat ing s ge ne ra ll y re sul t in lo wer bo rrow i ng co st s and i nc rea se d acce ss to ca pit al mar kets . O ur rat in gs a re of “ i nvest me nt gr ad e” whi ch is d ef i ne d a s Ba a 3 (or ab ove) from M oo dy ’s At De ce mb er 3 1 , 20 21 a nd 2 02 0, o ur lo ng - ter m de bt wa s rate d A 3 by M oo d y ’s and cu rre ntl y w ith a St ab le o utl oo k . At De ce mb er 3 1 , 20 21 a nd 20 20, o ur l on g -te rm d ebt w as r ated A - b y Stan - dar d & Poo r ’s and c urr ent ly w i th a St abl e ou tl ook . L imitat ions on tr ansfers o f fund s Currency and other local regula tor y limi tations rel ated to t he tr ans fe r of fun ds e x is t in a n umb e r of c ountries where we operat e, including: China, Egypt, India, Malaysi a, the Ph ilippines, the Ru ssian Fed er ati on , So uth A fr ic a , So ut h Korea , T ai wa n ( Chinese T aipei), Thailand and T urkey . Funds, other than regular divide nds, fees or loan repa y - me nts , ca nn ot be r eadi l y tra nsf er red of fsho re 155 ABB ANNU AL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP fro m the se co untr i es a nd a re th er efor e de pos ite d and u se d for wo rk in g c apit al n ee ds i n th ose cou ntr ie s. I n ad dit io n, t he re ar e cer t ain co unt r ie s wh ere , for t a x re a sons , it i s not co nsi de re d opt i - mal to t ran sfe r th e ca sh of f sho re . A s a con seq ue nc e, th es e fun ds a re not av ail ab le w ith in ou r Cor po rate T re asu r y O pe rat io ns to me et sho r t-term c as h ob lig ati ons o ut si de th e re le va nt cou ntr y. The a bove d es cr ib e d fun ds a re re po r ted as c a sh in o ur Co nso lid ated B al an ce Sh ee ts , bu t we do n ot con sid er t he se fu nd s im me diate ly avail ab le fo r th e rep aym ent o f de bt ou tsi de t he resp e c ti ve co untr i es w he re th e c ash i s si tuated , in clu di ng th ose d esc r ib e d abo ve. At D e cem be r 31 , 20 21 a nd 2 02 0, th e ba lan ce of “ Ca sh a nd e qui v a- le nts ” an d “ Mar keta bl e se cur i ti es a nd ot he r short -term inv estments” u nder such limitations (eithe r re gu lator y or sub - op ti mal f rom a t a x pe rs pe c ti ve) total ed a pp rox im atel y $2 ,0 7 4 mi ll ion and $ 1,751 million, respectively . Du r in g 20 21 , we c ont in ue d to dir ec t o ur su bsi dia r - ie s in co untr i es w ith re str i c t ion s to pl ace suc h ca sh w i th ou r cor e ban k s or i nvest me nt gr ad e ban k s, in o rd er to mi nimi ze cre di t r isk o n suc h ca sh p osi ti ons . We cont i nue to c los el y mo nito r the s itu atio n to en sure b an k cou nter par ty r i sk s are mini mized . — Financ ia l pos ition Balance shee ts Current asse ts Ca sh a nd e q ui va l ent s Restricted cash n. a. Marketable securities and short- term investmen t s Re ce iv ab l es , ne t Contrac t asset s Inv en tor i es , ne t Pre p aid e x pe ns es Ot he r cu rr e nt a sse ts Cur re nt a sse t s he ld f or s al e an d in d isc on ti nu e d operations T o ta l cu rr e nt a ss et s For a di scu ssio n on C a sh an d eq ui va le nt s, se e sections “Liquidity and Capital Res ources— Prin - c ipa l sou rce s of fu ndi ng ” an d “C as h fl ows” f or further details. In 2 02 1 , th e amo unt of c a sh sub je c t to sho r t-term res tr ic t i ons d ec re ase d a s res tr i c ti ons o n c ash o f $2 9 0 mil li on we re re mov ed u po n AB B co mp let in g certain obliga tions in connection with the s ale o f Powe r Gr i ds to H ita chi . Se e “ Note 3 - D is cont in ue d operations” to our C onsolidated Financial Sta tements. Marketable securities and short-term investments de cre a sed i n 20 2 1 . Th e re du c ti on p r ima r il y re - fl ec t s l ower a mo unt s pl ace d in mo ne y mar ket fun ds c la ssi f ie d as e qu it y se cu r it ie s (see “ Note 5 - Ca sh a nd e qui v ale nt s, m arket ab le s ec ur it ie s an d short -term inv estments” t o our C onsolida ted Financial S tatements ). Re cei va bl es , net , d ec rea se d 4 pe rce nt p r im ar il y du e to cha ng es i n fore ign c ur ren c ie s. I n lo ca l currency , Receivables, net, rema ine d fla t. Cont rac t a sset s in cr ea se d 1 pe rce nt (5 pe rce nt i n lo ca l cur re nc ie s). The in cre as e ref le c t s hig he r levels in the Proces s Automa t ion and M otion Bu sin ess A re a s. Thi s wa s pa r ti al ly of fset b y lowe r levels in the non- core busines ses and in the Robotics & Dis cret e Aut omation Business A rea. Inve ntor i es , net , i nc rea se d 9 pe rce nt (1 5 p erc ent in l oc al cu rre nc i es). The i ncr ea se re fl ec t s a si gni f i - ca nt bui ld -u p of raw m ater ia ls a nd so me i nc rea se s in th e pr i ce of co mp on ent s. S up pl y ch ain c hal - lenges and s hortages in t he a v ailab ilit y of some ite ms have c reate d the n e ed to sto ck pi le ce r tai n key com po ne nts a nd a lso h ave resu lte d in so me delays in completing and delivering finished goods. Curr ent a sse ts h el d for s al e an d in di sco nti nu ed op er ati ons d ec re ase d to $1 3 6 mi lli on f rom $2 8 2 mil lio n. T he se am ou nts p r im ar il y re l ate to work i ng c api ta l for ce r t ain con trac t s w hic h rem ain w i th A BB a nd a re be in g exe cu ted fo r th e dir ec t b en ef i t of the P owe r Gr i ds b usi ne ss. Fo r the d et ails o f the a sse ts of t he Pow er G r id s bu si - ne ss see “ N ote 3 - Di sco nti nu ed o pe rat io ns” to our C onsolida ted Financial S tatements. 156 ABB ANNU AL REPORT 2021 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP Curr ent liabiliti es Accounts payable, trade Contract liabilities Sh or t-te r m de bt a nd c ur re nt matu r it i es of l o ng - te rm d eb t Current ope rating leases Provisions for warranties Other prov isions Ot he r cu rr e nt li ab il it ie s Cur re nt l ia bil it i es h el d fo r sa le a nd i n di sco nt in u ed operations T otal curr e nt liabilities Acco unt s pay ab le , tra de , in cre as ed 8 p er cen t (11 p e rce nt in l oc al cu rre n c ies) due p r im ar i ly to higher in ventory purchases. The i nc rea se i n sho r t-term d eb t in 2 02 1 wa s du e to the r ec la ssif i c atio n to sho r t-term of t he the r ep aym ent at m atur it y of b oth t he US D Curren t opera ting leases inc ludes the portion of the o pe rat in g le as e lia bil it ie s that a re du e to be paid i n th e ne x t 1 2 mo nths . For a su mm ar y of op er ati ng l ea se li abi lit ie s, se e “ No te 14 - Le as es” to our C onsolidated Financial Sta tements. Prov isio ns fo r wa rra nt ie s de cre as ed 3 p er cen t ( remained flat in local currencies ). For details on the c ha ng e in th e Prov isi ons f or wa rr ant ie s, se e “Note 15 - Commitments and contingencies” to our C onsolida ted Financial S tatements. Curr ent l ia bili ti es h el d fo r sal e an d in di sco nti nu ed op er ati ons d ec re ase d to $3 8 1 mil lio n fro m $6 4 4 mi ll ion . Th es e amo unt s p r ima r il y re late to certain w orking capital balances of the Po wer Gr i ds b usi ne ss as d es cr i be d ab ove as w el l as amo unt s re cor de d for c er t ain gu ar ante es p ro - v id e d for th e be ne f it of P ower G r i ds . Non - curre nt assets Restric ted cash, non- current Pro p er t y, pl an t an d equipment, net Op e rat in g l ea se r i gh t-o f-u se asse ts Investmen ts in e quity- account e d compan ies n.a. Pre p aid p e nsi o n an d oth e r em pl oy ee b e ne f it s Int a ng ib le a ss et s, n et Goodw ill De fe rr ed t a xe s Ot he r n on - c ur re nt a sse t s T o ta l no n - c ur re n t as set s Re str i c ted c a sh at De ce mb er 3 1 , 20 21 a nd 2 0 20, rep re sen ts ce r t ain am ou nts r ece ive d on t he s ale of the P owe r Gr i ds b usi ne ss whi ch h ave be en placed in escrow , pending res olution of cer tain of our c ontr ac tua l ob li gat ion s to Hit ach i Ltd. Se e “N ote 3 - D isco nt in ue d op er ati ons ” to our Co nso li - dat e d Fina ncial Sta tements. In 2 02 1 , Pro pe r t y, plan t and e q uip me nt , net , de cre a sed 3 p e rce nt (i nc rea se d 1 pe rce nt in l oc al cur re nc ie s). The sal e of th e Me ch ani ca l Powe r T ra nsmi ssio n Di v i sio n de cr ea se d Pro pe r t y, plant and e q uip me nt , ne t, by 3 p er cen t. In 2 02 1 , G oo dw i ll d ec rea se d 3 pe rce nt (2 p e rce nt in l oc al cu rre nc i es). The sa le of t he M ec ha nic al Powe r T ra nsmi ssio n Di v i sio n re du ce d Go od w il l by 3 percen t. Acquisi tions o f busines ses increased Go od w il l by 1 pe rce nt . Int an gib le a sse ts , net , d ec rea se d 2 5 pe rce nt (2 2 pe rce nt in l oc al c ur ren c ie s ). The s al e of th e Me ch ani ca l Powe r T ra nsmi ssio n Di v i sio n re du ce d Int an gib le a sse ts , net , by 10 p er cen t. A cqu isi ti on s of bu sinesses increased Intangible as sets, net, by 3 percen t. For additional inform ation on goodwill and i nt ang ib le a sset s se e “ Note 1 1 - G oo dw ill a nd intangible assets” to our Consolida ted Financial Sta tements. The balanc e for Inv estment in equity-accoun ted com pan ies at D e cem be r 31 , 2 0 21 an d 20 2 0, pr i - mar i l y rep re sen ts o ur re mai nin g 19. 9 p er cen t inte res t in t he Hi tac hi En erg y j oint ve ntur e. Fo r additional in formation on investments i n eq uit y - acco unte d com pa nie s see “ N ote 4 - Ac qui - sitions, divestme nts and equit y-accounted companies ” t o our Cons olidat ed Financial Sta tements. Pre pai d pe nsi on a nd oth e r em pl oyee b e nef i ts in cre as ed 1 4 8 pe rce nt (1 5 0 pe rce nt in l oc al c urr en - cies ). For additional inform ation on Pension and em pl oyee b e nef i t s see “ N ote 17 - Empl oye e be ne - fits” to our C onsolidated Financ ial S tatements. In 2 02 1 , De fe rre d ta xes, i ncr ea se d 4 0 pe rce nt (50 p er cen t in l oc al cu rre nc i es). For de tail s on def er red t a x a sset s se e “ Note 1 6 - In com e ta xe s” to our C onsolidated Financial Sta tements. 157 ABB ANNUAL REPORT 2021 0 4 FI NA N CI A L R E V IE W O F A B B GR OU P Non-current liabilitie s Lo ng - te rm d eb t Non- current operating lease s Pe ns io n an d oth e r em pl oy ee benef its De fe rr ed t a xe s Other non- current l iabilities No n - c ur re nt li ab il it ie s h el d for s al e an d i n dis co nt in ue d operations T otal non-current liabilities Lon g -te rm d ebt d e cre as ed 1 3 p e rce nt. T his d e - cre as e ref le c t s the r ec la ssi f ic ati on to sh or t-term de scr i be d ab ove of f set m ost ly by t he iss uan ce in de bt al so de cr ea se d 6 pe rce nt du e to ch ang es i n currency exchange rates. F or additional in forma - ti on o n Lon g -te rm d ebt , se e “ Liq ui dit y a nd C api tal Re sou rces — D eb t and i nte res t rates ” as we ll a s “N ote 1 2 - D eb t ” to our Co nso li date d Fin anc i al Sta tements. Non- current opera ting leases inc ludes the portion of the o pe rat in g le as e lia bil it ie s that a re du e to be paid i n mo re th an 1 2 m onth s. Pe nsi on an d e mpl oye e be ne f it s de cr ea se d 17 per- cent ( 1 2 pe rce nt in l oc al c urr en c ie s ). F or ad dit io na l inform ation on Pension and employee benefits see “ N ote 17 - Empl oye e be ne f it s” to ou r Con sol i - dat e d Fina ncial Sta tements. For a b rea kdown of O th er n on - cur re nt lia bil it ie s, see “ N ote 1 3 - O th er p rov i sio ns, o the r cu rre nt lia bil it ie s and o the r no n - c urr ent l iab ili ti es ” to our Consol idat e d Fin ancial Sta tements. Non- current liab ilities held for sa le and in dis con - ti nu ed o pe rat io ns re late to th e sal e in 2 0 20 of th e Power G rids business. The balance decreased com par ed to 2 02 0 du e to re cla ssi f ic ati on to cur re nt of ce r tain a mo unt s ex pe c te d to be p aid w ith in th e ne x t yea r . T he re mai nin g amo unt at De ce mb er 3 1 , 20 21 , r el ates to ce r tai n amo unt s whi ch ar e ex pe c te d to be p ayab le i n mo re th an on e year. For the d etai ls of t he li abi lit i es of th e Powe r Gr i ds b usi ne ss se e “ Note 3 - D isc ont in ue d operations” to our C onsolidated Financial Sta tements. Cash flo ws The Co nso li date d Statem en ts of C a sh Fl ows ar e show n on a co nt inu in g op er ati ons b as is, w ith th e ef fe c ts o f disc ont in ue d op er ati ons s how n in agg reg ate for e ach m ajor c a sh f low ac t iv it y an d also inc lude the impact from changes in re - stricted cash. The Co nso li date d Statem en ts of C a sh Fl ows c an be su mma r ize d as fo ll ows: Ne t ca sh p ro v id e d by o pe rat i ng activities Ne t ca sh p ro v id e d by (use d i n) investing ac tivit ies Ne t ca sh u se d i n f in an c in g activities Ef fe c ts o f exc ha n ge r ate ch an g es on c a sh an d e qu iv al e nt s Ne t ch a ng e i n ca s h an d equivalents and restricted cash Operating activ ities Net income Los s (i nc om e) fro m di sco nt in u ed operations, net of tax Depreciation and amortization T ot a l adj us tm en ts t o re co nc i le ne t in co me to n et c a sh p rov ide d by op e rat i ng ac t i v it i es ( excluding depreciation and amortization) T otal ch anges in ope rating ass et s a nd l ia bil it i es Ne t ca s h pr ov i de d by op e rat i ng a c ti v it ie s — continuing opera tions Ne t ca s h pr ov i de d by (u se d discontinued oper ations Cash flows from operating a c tiv ities in con tinuing op er ati ons i n 20 21 p rov ide d ne t ca sh of $3 , 3 3 8 mil lio n, a n in cre as e of 78 p er cent c om - par ed to 2 02 0. I n 20 21 , we h ad si gni f ic ant ly hi gh er cash effective net income (i.e. net income from continuing ope rations adjusted f or depreciation, amo r t izat io n an d othe r no n - c a sh ite ms). The hig he r ca sh ef fec t ive n et i nco me i s du e par t ly to the n eg ati ve i mpac t s i n 20 20 of p aym ent s m ade to set tl e cer t ain i nter nat io nal p en sio n pl an s. Th e hig he r amo unt i n 20 2 1 wa s als o dr i ven by g e ne r - ally higher business volumes and higher prof i ta bil it y. In 20 21 , c han ge s in o pe rat in g ass et s and l ia bili ti es p osi t ive ly i mp ac te d ca sh f low s pr i mar i l y due to t he t imi ng of p aym ent s of hi gh er accrued liabilities, including employee bonus es. Cash pa id for income taxes increased to $1, 29 2 mill ion fr om $905 m illion, r eflect ing higher current income taxes, including tax impacts from the s al es of b usi ne sses . In 2 02 0, n et c as h pro - v id e d by op er ati ng ac t iv it ie s be ne f ite d fro m a red uc t io n of inv ento r y l eve ls ( in lo c al cur re nc ie s) and a mo re favo rab le t i min g of ca sh flows on long-term projects. 158 ABB ANNU AL REPORT 2021 0 4 FI N AN C IA L R E V I E W OF A B B GR O UP In 2 02 1 , th er e were n o si gnif ica nt c ash f l ows fro m operating a c tiv ities of dis continued operations whi le i n 20 20, t he re we re ne t ou tf low s of $1 8 2 mil - lio n. T he a mo unt in 2 0 20 p r im ar il y re fl ec ts th e ca sh f low s of the P owe r Gr i ds b usi ne ss in th e f ir st hal f of th e yea r . Investing activ ities Purchases of in vestments Pu rc ha se s of p rop e r t y, pla nt a nd equipment and intangible assets Acquisition of businesses (net o f cash ac quired) and increases in cos t- and e qu it y - acc ou nte d companies Pro ce e ds f ro m sal e s of investmen ts Pro ce e ds f ro m matu r it y o f investmen ts Pro ce e ds f ro m sal e s of pr op e r t y, plant and equipment Pro ce e ds f ro m sal e s of businesses (net o f transaction cos ts a nd c a sh d is pos e d) a nd cos t- and e qu it y - acc ou nte d companies Ne t ca sh f ro m se tt le m en t of fore ign curr enc y deriva tives Other inv esting activities Ne t ca s h pr ov i de d by (u se d continuing opera tions Ne t ca s h pr ov i de d by (u se d discontinued oper ations Ne t ca sh p rov i de d by inve st in g ac t iv i ti es f or continuing ope rations in 2021 was $2,671 million compared to $ 2, 27 2 million used in inv esting ac ti v i ti es d ur i ng 2 02 0. In 2 0 21 , we re ce ive d pr o - cee ds o f $2 , 9 58 mi ll ion i n co nne c t io n w ith s al es of business es, primarily from the sale of t he Dodge bus in ess . The a mo unt i n 20 20 r ef le c ts t he n et investment in money market fun ds of amounts rec ei ved f rom t he sa le of t he Po wer G r id s bu si - ne ss as we ll a s c as h paym e nts fo r pu rch as es of pro pe r t y, plant a nd e qu ip me nt . In 2 02 1 , we al so rec ord ed n et i nves ti ng c a sh out f low s of $1 21 m il - lio n for s et tle m ent s of de r i vat ive s com pa re d to net i nf low s of $1 3 8 mil lio n in 2 0 20. The f ollowing presents purchases of pr ope rt y , plant and equipment and in tangible ass et s by significant asset ca tegor y: Con st ru c t io n in p ro gre ss Purchase of machiner y and equipment Purchase of la nd and buildings Purchase of intangible assets Purchases of property , plant and equipment and intangible assets Cash expenditures for acqu isitions o f businesses in 2 02 1 pr i ma r il y ref le c t s th e amo unt p aid to acquir e ASTI. The div estment of the sola r in vert - er s bu sin ess r esul ted i n a ne t ca sh o ut fl ow of $14 3 mill io n in 2 02 0. Cash flows from inves ting activ ities for discontin - ue d op er ati ons r el ates to th e Powe r Gr ids business. We sold this business in 2020 and ge ne rate d ne t ca sh p roce e ds of $9 , 16 8 mil lio n. Cer t ain a mou nt s rel ated to t he pu rc ha se pr i ce were s ubjec t t o ad justment, includ ing the f inal settlement f or working capital balances. In 2021 , cer t ain e le me nt s of th e pu rch as e pr i ce wer e f ina lize d an d we ma de pay me nt s re late d to the purchase price and c ertain other obligations to taling $364 mill ion. Financing activities Ne t ch an ge s i n de bt w i th In cr ea se i n de bt Repaym ent of debt De li ve r y o f sha re s Pu rc ha se of t re as ur y stoc k — Divide nds pa id Div idends pa id t o noncontrolling shareholders Other financing activit ies Ne t ca s h us ed i n f i na n ci n g ac ti v i ti es — c on ti n ui n g operations Ne t ca s h pr ov i de d by (u se d discontinued oper ations — Our financing cash flow a c tiv ities primar ily in - clu de d e bt tra ns ac ti on s (b oth fr om th e issu an ce of de bt se cu r it ie s and b or row i ngs d ire c tl y fr om banks ), share transactions and pa yments of distributions t o controlli ng and noncont rolling shareholders. In 2 02 1 , th e net o ut f low fo r de bt w it h matur i ti es of 9 0 days o r le ss re lated to n et re pay me nt s of amounts ou tstanding under the U . S. commercial paper program and various local count r y borrowings. In 2 02 1 , “ In cre as e in d ebt ” pr im ar i ly r ep res ent s 2030 and borr owings under c ommercial paper pro gr ams fo r ter ms l ong e r tha n 9 0 days . In 2 02 1 , “ Re pay me nt of d ebt ” i nc lu de s the r ep ay- repayments under commercial paper programs for te rms l on ge r th an 9 0 day s. ABB ANNU AL REPORT 2021 0 4 FI N A NC I AL R E V I E W OF A B B G RO UP “D e li ver y of sha res ” in 2 02 1 ref l ec t s c ash r ece ive d fro m the e xe rc ise of o pt io ns in co nn ec t i on w i th our M an age me nt I nce nt ive P la n (result i ng in a de li ver y of 36 m ill io n sha res) and i n con ne c ti on with our Employee Shar e Acquisition P lan ( result - in g in a de li ve r y of 1 .7 milli on sh are s ). Al l sha res wer e de li ver ed o ut of T re as ur y s toc k. In 2 02 1 , “ Pu rch as e of tre asu r y sto ck ” r ef le c ts $2 ,6 8 0 mi lli on of c a sh pay me nts to p urc ha se 78 mi lli on of o ur ow n sha res i n con ne c t ion w ith both o f the announced share buyback programs. It al so ref l ec t s $1 ,0 28 m ill io n paid to p urc ha se 33 mi lli on s har es o n the o pe n ma rket d ur in g 20 2 1 . C ontractual obligations and commitmen ts The con tractual obliga tions pres ented in the table be low r ep res ent o ur e st imate s of fut ure p ay- ments under fixed contr actual obli gations and com mitm e nts . Th ese a mou nt s may di f fer f rom those repor ted in o ur C onsolida ted Balance Sheet at De cem be r 31 , 202 1 . C ha ng es in o ur b usi ne ss needs, cancella tion pro v isions and changes in inte res t rates , a s wel l as a c ti ons by t hir d par t i es and o the r fac tors , may ca use th es e est i mates to cha ng e . The re fore , ou r ac tua l pay me nts i n fu ture pe r io ds m ay var y fro m tho se pre se nted b e low. The t ab le b e low su mma r izes c er t ain of o ur c ash requirements f or known con tractual obligation s and principal and in terest payments under our debt inst ruments and purchase obligation s a t De ce mb er 3 1 , 20 21 a nd t he t imi ng th e reof. For det ail s of fu ture o pe rat in g and f i na nce l ea se paym e nts , se e “N ote 14 - L ea se s” to ou r Cons oli - dat e d Fina ncial Sta tements. Cu rre nt Non- curre nt To t a l Long-term debt obligations Int er es t pay m en ts r el ate d to long-term debt obliga tions Purchase obliga tions To t a l In th e ta bl e ab ove, t he L ong -ter m de bt ob li ga - ti ons r ef le c t th e ca sh a mou nt s to be re pai d up on matur i t y of tho se de bt o bli gat io ns. T he c a sh ob lig ati ons a bov e w il l dif fe r fr om Lo ng - ter m de bt du e to the i mpa c ts of f air v al ue h ed ge acc oun ti ng adj ust me nts a nd p re miu ms or d isco unt s on cer tain d ebt . We have de ter min ed t he in tere st p aym ent s re - lated to l on g -te rm d ebt o bl ig ati ons by r efe re nce to the p aym ent s du e un de r th e ter ms of ou r de bt obligations at the time such obligations wer e in cur re d. H oweve r , we u se inte re st rate s wa ps to mo dif y the i nter est c ha rac te r is ti cs o f cer t ain of our d e bt ob lig ati ons . Th e ne t ef fe c t of th ese sw aps m ay inc rea se o r de cr ea se th e ac tua l amo unt of o ur c a sh inte re st pay me nt ob li gat io ns, whi ch may d if fe r fro m th ose st ated i n the a bov e tab l e. Fo r fur the r de tail s on o ur d ebt o bl ig atio ns and t he re l ated he d ge s, se e “ Note 1 2 - D e bt ” to our C onsolida ted Financial S tatements. Pur cha se o bl ig atio ns a re de f in ed a s agr ee me nt s to pur cha se g oo ds a nd se r v ice s that ar e enf orce - ab le an d le ga ll y bi ndi ng , that sp e c if y a ll sig nif i ca nt ter ms, i nc lu din g th e qu ant it ie s to be pur ch ase d , pr i ce prov isi ons a nd t he a ppr ox imate timing o f the transa ctions. Purchase obligations includes procur e ment c ontracts f or ra w materials, sub - cont rac te d wor k , sup pli es a nd se r v ice s. Purchase obligations include amounts rec orded as we ll a s a mou nt s that ar e not re co rde d in t he Consol idat e d Balance She ets. Off-balance s heet arr ange ments Commercial commi tm ents We disc lo se th e ma x i mum p ote nti al e xp osu re of cer t ain g ua rante e s, a s wel l as p ossi bl e re cou rs e prov isi ons t hat may a llo w us to re cove r fro m thir d part ies amounts pa id out under such guarant ee s. The m a x i mum p ote nti al e xp osur e do es n ot all ow any di scou nt in g of our a sse ssme nt of ac tu al exposure unde r the guarantees. The infor mation be low r ef le c ts o ur m a x im um p otent ia l ex p osure und e r the g ua ran tee s, w hic h is hig he r th an ou r asse ssm ent of t he e xp e c ted e xp osu re. Gua rantee s The f ollow ing table prov ides quan t itativ e da ta regarding our th ird -par t y guarantees. T he max i - mum p ote nti al p ayme nt s re pre se nt a wor st- ca se sce nar i o, an d do n ot ref le c t ou r e xp ec te d outc omes. Maximum potentia l payments Performance guarantees Financial guarantees Indemnification guarantees To t a l (1) M a x im um p ote n ti al p ay me nt s i nc lu d e am ou nt s in b ot h co nt in u - ing and discontinued operations. (2) Cer tain indemnifications pro vided to Hita chi in connec tion with th e di ve st me nt o f Pow er G r i ds a re w i th ou t li mi t . The c ar r y i ng a mo unt of l iabi li ti es re co rde d in t he Consol idat e d Balance She ets reflects our best est im ate of fu ture p aym ent s, w hic h we may i ncu r as p ar t of f ulf i ll in g our g ua ran tee o bli gat io ns. I n 160 ABB ANNUAL REPORT 2021 0 4 FI N AN CI A L R E V IE W OF A B B GR OU P resp e c t of th e abo ve gu ara ntee s, t he c arr y in g amo unt s of li abi lit i es at De ce mb er 3 1 , 20 2 1 an d 20 20, a mo unte d to $1 56 m ill io n and $ 1 35 mi ll ion , resp e c ti ve ly, the m ajor i t y of whi ch i s in clu de d i n discon t inued operations. In ad dit i on , in th e no rma l cou rs e of bid din g for and e xe cut in g ce r tai n proj ec t s, w e have en tere d into st an dby l et ter s of c red it , bid/per f orm an ce bonds and surety bonds (collectively “perfor - mance bonds”) with var ious financ ial institutions. Custo me rs c an d raw o n suc h pe r for man ce b on ds in th e eve nt th at we do no t ful f il l our c ontr ac tu al ob lig ati ons . We wou ld th e n have an o bl igat io n to reimburse the financ ial instit ution f or amoun t s paid u nd er t he p er fo rm anc e bo nd s. At D ece m - be r 31 , 2 02 1 an d 20 20 , the tot al o ut st and in g performance bonds aggrega ted to $3 .6 bil lion and $ 4 . 3 bi lli on , re spe c t ive l y , of whi ch $0 . 1 bil lio n and $0 .3 billion, res pecti vely , relat e to dis contin - ue d op er ati ons . Th er e have be e n no si gni f ic ant amounts reimbursed t o f inancial institutions und e r the se t y pe s of arr an ge me nt s in 2 02 1 and 2020 . For additional descriptions of our performance, financ ial and inde mnification gua rant ees see “Note 15 - Commitments and contingencies” to our C onsolida ted Financial S tatements. 161 ABB ANNU AL REPORT 2021 0 4 FI N A NC I AL R E V I E W OF A B B G RO UP — EM PT Y PA G E ADD ED INTE NTIO NAL L Y 162 C o n so l i d ate d F i nanc ia l S t a t em en t s o f ABB G r oup 163 ABB ANNU AL REPOR T 2021 0 4 F IN A NC I A L RE V I E W O F AB B G RO UP — Repor t of mana g eme nt on in t e rnal c on trol o v e r f inanc ial repor ting The B o ard of D ir ec to rs a nd M anag e me nt of A BB Ltd and i ts co nso li date d subs idi ar i es ( “ AB B ” ) are responsible for establish ing and maintain ing adequat e internal control o ver financ ial reporting. ABB’s interna l con trol over f inancial report ing is de sig ne d to prov id e rea so nab le a ssu ran ce regarding the relia bility o f financial reporting and the p re pa rati on a nd f air pr ese nt atio n of th e published C onsolidat ed Financial S tatements i n accordan ce w ith U. S. ge ne rall y accepte d acc ounting principles. Be c ause of i ts i nh er ent l imi tat ion s, i nter nal cont rol ove r f i nan c ia l rep or t i ng may n ot pr eve nt or d ete c t misst atem ent s . Al so, pr oje c ti on s of any eva lu ati on of e f fec t i ven ess to f utur e pe r io ds ar e subj ec t to t he r is k that co ntro ls m ay be com e inadequat e because o f changes in conditions, or that th e de gr ee of c omp li an ce w it h AB B ’s poli c ie s and proc e dures ma y deteriorat e. Ma nag em ent c ond uc te d an a sse ssme nt of t he effec tiveness of in ternal con trol over f inancial reporting based on the cr iteria established in Inte rn al Con trol — Inte gr ated Fra mewo rk iss ue d by the C ommittee of Sponsoring Organi zations of the T read way Co mmi ssio n (2 01 3 fr ame wor k). Ba se d on t his a ssess me nt , man age me nt h as con cl ud ed th at AB B ’s inter nal c ontr ol ove r f ina nc i al re po r t in g wa s ef fe c t ive a s of D ece m be r 31 , 2 02 1 . KP MG AG , th e in de pe n de nt re gis ter ed p ub lic accou nt in g f irm w ho au di ted th e Com pa ny ’s con sol idate d f in an c ial s tate me nt s, ha s issu e d an opinion on the effectiveness of A BB’s internal cont rol ove r f i nan c ia l rep or t i ng a s of De ce mb er 31 , 2 02 1 , whi ch i s in cl ud ed o n pag e 16 8 -16 9 of this Annual Repor t . Björn Roseng ren Chie f E xec ut ive O f f i cer Timo Ihamuotila Chie f Fin an c ial O f f i cer Zur ic h, Fe br ua r y 24 , 20 2 2 164 R eport o f the St at ut ory Aud it or To the Gen eral Meetin g of ABB Ltd, Zurich Report of the Sta t ut ory A udi t or on the Consolidated Financial Statements Opinion As statu tory au ditor, w e have audited the accompanying consolidat ed fi nancial statements of ABB Ltd and its subsidiarie s (the Group), w hich compri se the consolidate d balance sheet s a s of Dece m ber 31, 20 2 1 a nd 2020 , and the related c onsolida ted income statement s , statements of com prehens ive income , cash f lows and c hanges i n stockholder s’ equity for each of the year s in the thr ee - year pe riod ended December 31, 20 2 1 , and th e related notes ( collectiv ely, the cons olidated finan c ial statem ents on pages ( 17 1 to 243 ). In our opinion, t he consolidated f inancial statements present fairly, in all mater ial re spects, th e consolidated financial po s ition of the Group as of D ecember 31, 20 21 and 20 20 , and t he consolidated re sults of its o perations and its cash flow s f or each of t he year s in the three - year p eriod ended December 3 1, 20 21, in ac cordance with U.S. Generall y Accepted Account ing P rincip les , and comply with Sw iss law. Bo ard of Directors’ R esp onsibilit y The Board of D irectors i s respons ible for the prepar ation of the consolida ted financial sta tements in ac cordance with U.S. G enerall y Accept ed Account ing Prin c iples an d the requirements of Swiss law. Thi s respon sibility in c lude s designing, i mplementing and main taining an interna l control system rele vant to the preparat ion and fair presentat ion of consolid ated financial st atements that ar e free from mate rial misstatement, whether du e to fraud or err or. The Board of Dir ectors i s further r esponsible for s electing an d applying appr opriate a c counti ng policie s and making accounting estimates that ar e reaso nable in t he circu mstances. Auditor’s R esponsibilit y Our respons ibility is to ex press an opinion on these consoli dated financia l statemen ts based on our audit s . We a re a public a ccounting fir m and ar e required to be indep endent with re spect to t he Group. We conducted our audit s in accordance wi th Swiss law, Swiss Auditing Standar ds and the stan dards of the Publi c Company Accounting Oversight Bo ard (United Stat es) (PC AOB). Thos e standards requir e that we plan an d perform th e audit to obtai n reasonable a ssurance about whether t he consoli dated financial st atements are free fr om mater ial misstatement, whether due t o fraud or error. An audit in v olves per forming procedure s to obtain audi t evidence about t he amounts and d isclosure s in the consolidat ed financial state ments. The pro cedures selecte d depend on the au ditor’s judgment, i ncluding the assessment of th e ris ks of mat erial misstate ment of the consolid ated financial state ments, whether due to fraud or error. In m aking those r isk as s essment s , the auditor considers the internal contro l system rele vant to the entity’s preparatio n of the con solidate d financial s tatement s in or der to design audit pr ocedur es that are ap propriate in th e circumstan c es. An a udit al so include s evaluating the appr opriateness of the accounting poli cies used and the reasonablene ss of accountin g estimates made, as well as evalu ating t he over all pre s entat ion of th e consolidated financial st atements. We beli eve that the audit e vidence w e have obta ined is suffici ent and appropriate t o provide a basis for o ur audit opinio n. 165 Critical Audit Matters The critical audit matters communi c ated below are matter s arising from the current period audit of the consolidat ed financial state ments that wer e communi cated or required t o be communicate d to the audit committee a nd that: (1) re late t o accounts or disclosures th at are material t o the consolid ated fin ancial statements and (2) involve d our es pecially c hallengin g, subjective, or comple x judgments . The commun ication of critical audit matters do es not alter in any way our opi nion on the conso lidated financ ial statem ents taken as a whole, and we are not, by co mmunicating the c ritica l audit matters below, pr oviding separat e opinions on th e cri tic al a u dit matters or on the account s or disclosures to whi ch they relate. Revenue recognition f or long - term fix ed price con tracts using the percen tage - of - co mpletion method Valuation of unre cognized t a x benefits related to transfer pricing Revenue recognition f or long - term fix ed price con tracts using the percen tage - of - co mpletion method Critical Audit Matter Our response As discus s ed in Not e 2 to the consol idated financia l statements, r evenues from t he sale of custo mi zed products, includin g long - term f ixed pr ice contra cts for integrated automation and el ectrification systems and solutions ar e generally rec ogni zed on an ov er time basis usin g the per c ent age of completion met hod of accounting. For the year ende d December 31, 202 1 , the Group r eported $ 23,745 m illion of revenu e from sales of pro ducts, a portion of which related t o long - term fixed pr ice contracts. We identi fied the evaluatio n of estimated co sts to complete rel ated to revenue r ecognition of long - te rm fixed price contracts using t he per centag e of - completion m ethod of account ing as a criti cal audit matter. In particular, a hi gh degree of su bjective auditor ju dgment w as requir ed to evaluate t he G roup ’s estimates re garding the amo unt of future dir ect materials, l abor and subco ntract c osts, and i ndirect costs to co m plete the contr act s. The followi ng are the primar y procedures we p erformed to addres s this crit ical audit matt er. We e valuated the desig n and t ested the op erating effe ctivenes s of cert ain internal control s related to the Group’s revenue pro cess including controls over th e develop ment of estimat es regarding t he amount of fut ure dire ct materials, l abor and subcontract co sts, and indirect cos ts. We assesse d the Group’s histori cal ability to accurate ly estimate cost s to complete by comparing his torical estimate s to actual results for a select ion of contra cts. We evaluated th e estimate of r emaining costs t o be incurred for a selection o f contrac ts by as s essing progress to dat e and the nature and compl exity of work to be perfor med through in terviewin g project manager s and ins pecting correspon dence, if a ny, between the Group and t he customer and/or subcontr actor s. For further infor m ation o n revenue r ecognit ion on long - term projects refer t o the following: — Note 2 “Signific ant accounting policie s” 166 Valuation of unre cognized t a x benefits related to transfer pricing Critical Aud it Matter Our response As discussed in Note 2 to the consolidated finan cial statements, the Group operat es across mult iple tax jurisdictio ns, is exposed to numerous tax laws and is regularly subject to tax audits by l ocal tax author ities. As discus s ed in Not e 16, the Gr oup reported total unrecognize d tax benefits of $1, 322 milli on, a portion of which re lated to unrecog nized tax be nefits related to transfer pricin g. We identified the valuation of unrec ognized ta x benefits r elated t o transf er pricing as a critical a udit matter. A hig h degre e of subje ctive auditor ju dgment and specia li zed ski lls and knowledge w as required in assessing the Group’ s interpretat ion of internati onal tax pract ice and de velopments in re lation to intragr oup charges and intra group sale s of goods and services an d the Group’s abilit y to estimate the ulti m ate resolution of the tax positi ons. The followi ng are the primar y procedures we p erformed to addres s this crit ical audit matt er. We e valuated the design and t ested the operat ing effectiven ess of cert ain internal control s related to the Group’s tax process including controls related to the G roup’s int erpretat ion of internatio nal tax practice a nd developments i n relation to intragroup charg es and intragroup sale of goods and services a nd the e stimat e of th e related unrecogniz ed tax benefit s. We t ested t he ident ified cost s that have a higher likel ihood of being challenged by tax authorit ies associated with intragroup ar range m ents and p otential price adjust ments for intragr oup sales of g oods and service s. We invo lved t ax prof essionals with s peciali zed skills an d knowled ge, who a ssisted in eva luating ( 1) the Group’s hi s torica l abilit y to acc urately estimate t he unrecognize d tax benefits r elated to transfer pricing by comparing h istorical tax pos itions to subsequ ent settl ements (2) the Gr oup’s tr ansfer pricing documentati on and methodo logy for complian c e with applicable laws and regulat ions by assessing t he documentati on and relevant a greements, (3) the impact of new infor mation or chang es in inter natio nal tax practice and developm ents on historic al tax positions, and (4) de v eloping an independent e x pectat ion of t he unrecognize d tax benefits estimate r elating to current year tax positi ons in con nection with the Group’s intragroup charg es a nd intragroup sales of goods and services a nd compar ing the r esult s to the Gro up’s assessment. For further infor m ation o n unre cognized ta x benefits refer to the following: — Note 2 “Signific ant accounting policie s” — Note 16 “ Income taxes” Report on O ther L egal an d R egulatory R equiremen ts We are a public ac counting fir m regist ered with the Swiss Fe deral Audit Over sight Authority (FAOA) and t he PCAOB and we co nfirm t hat we m eet the legal req uirements on lic ensing accordin g to the Auditor Oversight Act (AO A). We are inde pendent of the Group i n accorda nce with Swi s s law (artic le 728 CO a nd arti cle 11 AOA) and U.S. f ederal securities laws as well a s the applicable r ules and regul ations of the Sw iss aud it profession, the U.S. S ecurities an d Exchange C ommissi on and the PCA OB, and w e have fulfille d our other eth ical responsibi lities in accord ance with these req uirement s. In accordan ce with arti cle 728a paragraph 1 ite m 3 CO and S wiss Auditing Sta ndard 890, we co nfirm that an internal control system e x ists, w hich has b een designed for the pr eparation of cons olidate d finan cial state ments accord ing to the in structio ns of th e Board of Directors. We recommen d that the cons olidated f inancial state ments su bmitted to you b e approv ed. 167 We have also audite d, in accordance with the sta ndards of the PCAOB, the Gro up’s internal c ontrol ov er fi nancial r eporting as of D ecember 31, 20 21 , based on criteria e s tabli shed in Int ernal Control – Integrated Framework 201 3 issued by th e Committee of Sp ons oring Or gani zations of th e Treadway Com mission, a nd our repo rt dated February 24, 20 22 , expressed an u nqualified opinion o n the effectivene ss of the G roup’ s intern al control over fina nc ial reporting. We have serv ed as the Group’ s auditor since 2018. KPMG AG Hans - Dieter Krau ss Mohammad Naf eie Licensed Aud it Expert Auditor in Ch arge Zurich , Swit zerland February 24 , 20 22 KPMG AG, Badenerstrasse 172 , PO Box, CH - 8036 Z u rich © 202 2 KPMG AG, a Sw iss corporati on, is a s ubsidiary of KPMG Holdin g AG, which is a member fi rm of the KPMG global orga nization of i ndepende nt member firms affi liated with KPMG International Li mited, a private English company limited by guarantee. All rights res e rved. 168 Report of Ind ependent R egis t er ed Public A ccount ing F ir m To the Board of Dir ectors and St ockholders of A BB Ltd Opinion on Internal Control Over Financial Repor ting We have audite d ABB Ltd and its subsidiarie s ’ (the Group ) internal contro l over financial re porting a s of December 31, 20 21 , based on criteria establi shed in Interna l Control – Integrated Fr amework (2013) i s sued by the Committee of Spo nsoring Organizati ons of the Tr eadway Commiss ion (CO SO) . In our opinion the Group maintained, in all ma terial respect s, effe c tive in ternal contr ol over finan ci al r eporting as of Decem ber 31, 20 21 , based on cri teria establis hed in I nternal C ontrol – Integrated Framework (2013) issued by COSO. We also have audited, in accor dance wit h Swiss law, S wis s A uditing S tandard s and the standard s of the Pub lic Company Ac counting O v ersig ht Board (Uni ted States) (PCAO B), the consolidated b alance sheets of the G roup as of December 3 1, 20 21 and 20 20 , the related con solidate d income stateme nts, statement s of comprehensiv e income, cash flows a nd chan ges in stockh olders’ equit y fo r each of th e year s in t he t hree - ye ar period ended December 31, 20 21 , an d the related not es (collecti vely, the consolidated f inancial s tatem ents), and our report date d February 24 , 20 22, expres sed an unqualified opin ion on those conso lidated fina ncial state ments . Basis for Opinion The Group ’s Boar d of Direct ors and management is resp onsible for maint aining ef fective in ternal control ov er financial r eporting and for its asse ssment of the effectiv eness of internal contro l over finan c ial re porting, included in the accompa ny ing Rep ort of management on internal c ontrol over finan cial reporting . Our res po nsi bilit y is to expr ess an opinion on the Group ’s internal control over f inancia l reporting ba sed on our audit. We a re a pu blic ac counting firm regi stered wi th the PCAO B and are required to be independent wi th respect to the Group i n accordance with the U.S. fed eral secur ities law s and the ap plicable rul es and regulatio ns of the Securities and Exchange Commission and the PCAOB. We conduct ed our audit in accordan ce with the st andards of t he PCAOB . Thos e stan dards r equi re th at we plan and perform the au dit to obtain reason able assurance about w hether effective i nternal c ontrol over financia l reportin g was maintai ned in all materia l respe cts. Our audit of int ernal control ov er f inancial report ing inclu ded obtaining an understan ding of int ernal cont rol over financial rep orting, as sessing the risk that a mat eri al wea kne ss e xis ts, and testing and evaluating the de sign and operat ing ef fecti veness of internal co ntrol b as ed o n the assessed risk. Our audit also included per formin g such o ther procedure s as we c onsidere d neces s ary i n the circumst ances. We beli eve that our audit provide s a rea sonable ba sis for our opin ion. Definition and L imitations of Inter nal Control O ver Financial Rep orting A company’ s intern al control over financial r eporting is a process designed to provide reaso nable ass urance regarding t he reliability of fina ncial repor ting an d the prep aration of finan c ial stat ements f or external purpos es in accordance w ith generally a ccepted account ing principles. A company’s interna l control over f inancial report ing includes th ose policies and procedures that (1) per tain to the maintenance o f records that , in reasonable d etail, accurately and fairly ref lect the tran sactions and di spositions of th e assets of the co mpany; (2) provide re asonable assurance tha t transactions ar e recorded as necessary t o permit preparat ion of fina ncial sta tements in accordanc e with genera lly accepted a cc ou nting pri nc iples, and that recei pts and expendit ures of the company are being made only in accor dance with autho rizations of managem ent and directors of the compan y; and (3) provide r easonabl e assurance r egarding preve ntion or timel y detectio n of unauth orized acquisitio n, use, or di s position of the comp any’s assets that could hav e a material effe ct on the financial sta tement s. Because of its inherent limit ations, int ernal contr ol ove r finan cial report ing may not prevent or detect misstat ements. Also, proj ec tion s of any eva luation of effe c tivenes s to future periods are subject to t he risk that contr ols may b ec ome inadequate because of changes in conditio ns, or that the degr ee of compliance wi th the policies or p rocedure s may deteriorate . KPMG AG Hans - Dieter Krauss Mohammad Naf eie Licensed Au dit Expert Auditor in C harge Zurich, Swit zerland February 2 4, 2022 KPMG AG, Badenerstrasse 172 , PO Box, CH - 8036 Z u rich © 2022 KPMG AG, a S wiss cor poration, is a s ubsidiary of KPMG Holdin g AG, which is a member fi rm of the KPMG global orga nization of independe nt member firms affiliate d with KPMG International Limited, a priv ate Engli sh company li mited by gu arantee. All rights reserv ed. 170 — EM PT Y PA G E ADD ED INTE NTIO NAL L Y 17 1 ABB ANNU AL REPORT 2021 0 4 FI NA N CI A L R E V IE W O F A B B GR OU P — EM PT Y PA G E ADD ED INTE NTIO NAL L Y — ABB L td C onsolida t e d Income S t a t emen ts 2021 2020 Sales of products 23, 7 45 21,214 22,554 Sales of serv ices and other 5,200 4,920 5,424 T otal revenues 26,134 Cost of sales of pr oduc ts (16,364) (15,229) (15,811) Cost of services and other (3,114) (3,027) (3,261) T otal cost of sales Gross profit 7 ,878 Selling, general and administrativ e expenses (5,162) (4,895) (5,447) Non-order r elated r esearch and development expenses (1,219) (1,127) (1,198) Impairment of goodwill — (311) — Other income (expense), net 2,632 48 (323) Income from operat ions 5, 718 Inter est and dividend income 51 51 67 Inter est and other finance expense (148) (240) (215) Los ses from ext inguishment of debt — (162) — Non-operational pension (c ost) credit 166 (401) 72 Income from c ontinuing operat ions before taxes 5, 787 841 1,862 Income tax expense (1,057) (496) (7 72) Income from c ontinuing operat ions, net of ta x 4, 730 345 Income (loss) from disc ontinued operations, net of tax (80) 4,860 438 Net income 4,650 5,205 1,528 Net income attributable to nonc ontrolling in terests (104) (59) (89) Net income attributable to ABB 4,546 5,146 Amounts attributable to ABB shar eholders: Income from c ontinuing operations, net of tax 4,625 294 1,043 Income (loss) from disc ontinued operations, net of tax (79) 4,852 396 Net income 4,546 5,146 1,439 Basic earnings per share a ttributable to ABB shareholders: Income from c ontinuing operations, net of tax 2.31 0 .14 0 .49 Income (loss) from disc ontinued operations, net of tax (0 .04) 2.30 0. 19 Net income 2.27 2.44 0. 6 7 Diluted earnings per share a ttributable to ABB shareholders: Income from c ontinuing operations, net of tax 2.29 0 .14 0 .49 Income (loss) from disc ontinued operations, net of tax (0 .04) 2.29 0. 19 Net income 2.25 2.43 0. 6 7 Weigh ted-a verage number of shar es outstanding (in millions) used to c ompute: Basic earnings per share a ttributable to ABB shareholders 2,001 2,111 2,133 Diluted earnings per share a ttributable to ABB shareholders 2,019 2,119 2,135 Due to rounding, numbers pr esented may not add to the totals pr ovided. See accompan y ing Notes to the C onsolidated Financial Statements 17 2 ABB ANNUAL REPORT 2021 0 4 FI N AN C IA L R E V I E W OF A B B GR O UP — ABB L td C onsolida t e d S ta teme nts of C omprehe ns iv e I ncome 2021 2020 Net income 4,650 5,205 1,528 For eign currency translation adjustments: For eign currency translation adjustments (521) 498 (130) Changes attributable to divestmen ts (9) 5 19 (2) For eign currency translation adjustments 1,01 7 Ava ilable-for-sale securities: Net unrealized gains (losses) arising during the year (10) 24 14 Reclass ification adjustments f or net (gains) losses included in net income (5) (14) — Changes attributable to divestmen ts — (3) — 7 14 Pension and other pos tretir ement plans: Prior serv ice credits arising during the year — 43 6 Net actuarial gains (losses) arising during the year 411 (200) (220) Amortization of prior service credit included in net income (14) (11) (28) Amortization of net actuarial loss included in net income 69 88 68 Net losses fr om settlements and curtailments included in net inc ome 7 518 32 Changes attributable to divestmen ts (6) 151 — Pension and other pos tretiremen t plan adjustments 467 Derivativ e instruments and hedges: Net unrealized gains arising during the year 8 2 20 Reclass ification adjustments f or net (gains) losses included in net income (13) — (9) Changes in derivativ e instruments and hedges 2 11 1,615 T otal comprehensiv e income, net of tax 4,567 6,820 T otal comprehens ive income a ttr ibutable to noncontr olling interests, net of tax (108) (86) (83) T otal comprehensiv e income attributable to ABB, net of tax 6 ,7 3 4 Due to rounding, numbers pr esented may not add to the totals pr ovided. See accompan y ing Notes to the C onsolidated Financial Statements 17 3 ABB ANNUAL REPORT 202 1 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP — ABB L td C onsolida t e d Bal ance S he ets 2021 2020 Cash and equivalents 4,15 9 3,278 Restricted cash 30 323 Marketable securities and short-term in vestments 1,1 70 2,1 08 Receiv ables, net 6,551 6,820 Contract as sets 990 985 Inv entories, net 4,880 4,469 Prepaid e xpenses 206 201 Other current as sets 573 760 Current as sets held for sale and in discontinued opera tions 136 282 T otal current assets Restricted cash, non-current 300 300 Property , plant and equipment, net 4,045 4,1 7 4 Operating lease right-of-use as sets 895 969 Inv estments in equity -accounted companies 1,670 1, 784 Prepaid pens ion and other employee benefits 892 360 Intangible assets, net 1,561 2,0 78 Goodwill 10,482 10,850 Deferr ed taxes 1,1 7 7 843 Other non-current as sets 543 504 T otal assets 40,260 41,088 Accoun ts pay able, trade 4,921 4,571 Contract liabilities 1,894 1,903 Short-term debt and current ma turities of long-term debt 1,384 1,293 Current opera ting leases 230 270 Provisions f or warranties 1,005 1,035 Other provisions 1,386 1,51 9 Other current liabilit ies 4,367 4,181 Current liabilit ies held for sale and in disc ontinued operat ions 381 644 T otal current liabilities 15,568 15,416 Long-term debt 4,1 7 7 4,828 Non-current opera ting leases 689 7 31 Pension and other emplo yee benefits 1,025 1,231 Deferr ed taxes 685 661 Other non-current liabilit ies 2,116 2,025 Non-current liabilit ies held for sale and in disc ontinued operat ions 43 197 T otal liabilities 24,303 Commitments and c ontingencies Stockholders’ equity: Common st ock, CHF 0.12 par value (2,053 million and 2,168 million shar es issued at December 31, 2021 and 2020, r espectively) 17 8 188 Additional paid-in capital 22 83 Retained earnings 22,477 22,946 Accumulated other c omprehensive los s (4,088) (4,002) Tr easury stock, at cost (95 million and 137 million shares at Dec ember 31, 2021 and 2020, respectively) (3,010) (3,530) 15,685 Noncontr olling interests 378 314 40,260 41,088 Due to rounding, numbers pr esented may not add to the totals pr ovided. See accompan y ing Notes to the C onsolidated Financial Statements 174 ABB ANNU AL REPOR T 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP — ABB L td C onsolida t e d S ta teme nts of C a sh F lo ws 2021 2020 Operating activities: Net income 4,650 5,205 1,528 Los s (income) fr om discont inued operations, net of tax 80 (4,860) (438) Adjustments to r econcile net income to net cash pro v ided by operating activities: Depreciat ion and amortization 893 915 961 Impairment of goodwill — 311 — Changes in fair v alues of investments (123) (99) (5) Pension and other emplo yee benefits (216) 50 (102) Deferr ed taxes (289) (280) (83) Los ses from ext inguishment of debt — 16 2 — Los s (income) fr om equity-ac count ed companies 100 66 (8) Net loss (gain) fr om der ivat ives and f oreign ex change 49 (2) 1 Net gain from sale of pr oper ty , plant and equipment (38) (37 ) (51) Net loss (gain) fr om sale of businesses (2,19 3) 2 (55) Fair v alue adjustment on assets and liabilities held f or sale — 33 421 Other 1 17 57 10 2 Changes in operating as sets and liabilities: Trade r eceivables, net (142) (100) (202) Contract as sets and liabilities 29 186 128 Inv entories, net ( 771) 19 6 (182) Accoun ts pay able, trade 659 (13) 130 Accrued liabilities 454 (92) (76) Provisions, net (48) 243 (36) Income taxes pa yable and r eceivable 1 17 (76) (3) Other assets and liabilities, net 10 8 (131) Net cash provided by operat ing ac tivities — continuing opera tions 3,338 1,8 75 426 Net cash provided by operat ing ac tivities 3,330 2,325 Invest ing ac tivities: Purchases of in vestments (1,528) (5,933) (7 48) Purchases of pr operty , plant and equipment and intangible assets (820) (694) (762) Acquisition of bus inesses (net of cash acquired) and increases in c ost- and equity-acc ounted companies (241) (121) (22) Proceeds fr om sales of investments 2,272 4,341 74 9 Proceeds fr om maturity of investments 81 11 80 Proceeds fr om sales of property , plant and equipment 93 114 82 Proceeds fr om sales of businesses (net of transaction costs and cash disposed) and cost- and equity -accounted companies 2,958 (136) 69 Net cash from settlement of f oreign currency derivatives (121) 138 ( 76) Other inv esting activities (23) 8 (23) 2,671 2,307 6, 760 175 ABB ANNUAL REPORT 2021 0 4 FI NA N CI A L R E V IE W O F A B B GR OU P 2021 2020 Financing activities: Net changes in debt with maturities of 90 days or les s (83) (58 7) 164 Increase in debt 1,400 343 2,406 Repaymen t of debt (1,538) (3,459) (2,156) Delivery of shares 826 412 10 Purchase of tr easury stock (3, 708) (3,048) — Dividends paid (1, 726) (1, 7 36) (1,675) Dividends paid to noncontr olling shareholders (98) (82) (90) Other financing activities (41) (49) 13 Net cash used in financing activities — continuing operations — 31 Net cash used in financing activities Effects of exchange rate changes on cash and equiv alents and restricted cash (81) 79 (28) Net change in cash and equivalents and res tr icted cash 588 357 Cash and equivalents and r estric ted cash, beginning of period 3,901 3,544 3,445 Cash and equivalents and res tr icted cash, end of period 3,544 Supplementary disclosure of cash flow informat ion: Inter est paid 132 189 284 Income taxes paid 1,292 905 1,005 Due to rounding, numbers pr esented may not add to the totals pr ovided. See accompan y ing Notes to the C onsolidated Financial Statements 176 ABB ANNU AL REPOR T 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP — ABB L td C onsolida t e d S ta teme nts Common Additional paid-in capital Retained earnings Accumulated other comprehensiv e loss T otal ABB Noncontrolling interest s equity Balance at January 1, 2019 188 56 19,839 (5,311) (820) 582 14,534 Adoption of acc ounting standar d update 36 (36) — — Compr ehensive income: Net income 1,439 89 1,528 For eign currency translation adjustments, net of tax (126) (6) Effect of change in fair v alue of av ailable-for-sale securities, net of tax 14 14 14 Unrecognized inc ome (expense) related to pens ions and other postretiremen t plans, net of tax (142) Change in derivativ e instruments and hedges, net of tax 11 11 11 T otal comprehensiv e income 83 Changes in noncontr olling interests ( 17 ) 12 Fair v alue adjustment to noncontr olling interests r ecognized in busines s combination — (4 4) Changes in noncontr olling interests in connection with dives tments — (55) Dividends to noncontr olling shareholders — (122) Dividends to shareholders (1,675) Share-based pa yment arrangements 55 55 55 Delivery of shares (24) 34 10 10 Call options 4 4 4 188 73 13,526 454 Adoption of acc ounting standar d update (82) (9) Compr ehensive income: Net income 5,146 5,146 59 5,205 For eign currency translation adjustments, net of tax 990 27 1,01 7 Effect of change in fair v alue of av ailable-for-sale securities, net of tax 7 7 7 Unrecognized inc ome (expense) related to pens ions and other postretiremen t plans, net of tax 589 Change in derivativ e instruments and hedges, net of tax 2 2 2 T otal comprehensiv e income 6 ,7 3 4 86 6,820 Changes in noncontr olling interests (16) 19 3 Changes in noncontr olling interests in connection with dives tments — (138) Dividends to noncontr olling shareholders — (98) Dividends to shareholders (1, 758) Share-based pa yment arrangements 54 54 54 Purchase of tr easury stock (3,181) Delivery of shares (24) 436 412 412 Other (3) Balance at Dec ember 31, 2020 188 83 15,685 314 Compr ehensive income: Net income 4,546 4,546 10 4 4,650 For eign currency translation adjustments, net of tax (534) 4 Effect of change in fair v alue of av ailable-for-sale securities, net of tax (15) Unrecognized inc ome (expense) related to pens ions and other postretiremen t plans, net of tax 467 467 467 Change in derivativ e instruments and hedges, net of tax (5) T otal comprehensiv e income 10 8 4,567 Changes in noncontr olling interests (37) (20) 55 Dividends to noncontr olling shareholders — (98) Dividends to shareholders (1, 7 30) Cancellation of tr easur y shares (1 0) ( 17 ) (3,130) 3,157 — — Share-based pa yment arrangements 60 60 60 Purchase of tr easury stock (3,682) Delivery of shares (84) (136) 1,046 826 826 Other 16 16 16 Balance at Dec ember 31, 2021 17 8 22 22,477 378 Due to rounding, numbers pr esented may not add to the totals pr ovided. See accompan y ing Notes to the C onsolidated Financial Statements 17 7 ABB ANNUAL REPORT 202 1 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP — ABB L td C onsolida t e d S ta teme nts Common Additional paid-in capital Retained earnings Accumulated other comprehensiv e loss T otal ABB Noncontrolling interest s equity Balance at January 1, 2019 188 56 19,839 (5,311) (820) 582 14,534 Adoption of acc ounting standar d update 36 (36) — — Compr ehensive income: Net income 1,439 89 1,528 For eign currency translation adjustments, net of tax (126) (6) Effect of change in fair v alue of av ailable-for-sale securities, net of tax 14 14 14 Unrecognized inc ome (expense) related to pens ions and other postretiremen t plans, net of tax (142) Change in derivativ e instruments and hedges, net of tax 11 11 11 T otal comprehensiv e income 83 Changes in noncontr olling interests ( 17 ) 12 Fair v alue adjustment to noncontr olling interests r ecognized in busines s combination — (44) Changes in noncontr olling interests in connection with dives tments — (55) Dividends to noncontr olling shareholders — (122) Dividends to shareholders (1,675) Share-based pa yment arrangements 55 55 55 Delivery of shares (24) 34 10 10 Call options 4 4 4 188 73 13,526 454 Adoption of acc ounting standar d update (82) (9) Compr ehensive income: Net income 5,146 5,146 59 5,205 For eign currency translation adjustments, net of tax 990 27 1,01 7 Effect of change in fair v alue of av ailable-for-sale securities, net of tax 7 7 7 Unrecognized inc ome (expense) related to pens ions and other postretiremen t plans, net of tax 589 Change in derivativ e instruments and hedges, net of tax 2 2 2 T otal comprehensiv e income 6 ,7 3 4 86 6,820 Changes in noncontr olling interests (16) 19 3 Changes in noncontr olling interests in connection with dives tments — (138) Dividends to noncontr olling shareholders — (98) Dividends to shareholders (1, 758) Share-based pa yment arrangements 54 54 54 Purchase of tr easury stock (3,181) Delivery of shares (24) 436 412 412 Other (3) Balance at Dec ember 31, 2020 188 83 15,685 314 Compr ehensive income: Net income 4,546 4,546 10 4 4,650 For eign currency translation adjustments, net of tax (534) 4 Effect of change in fair v alue of av ailable-for-sale securities, net of tax (15) Unrecognized inc ome (expense) related to pens ions and other postretiremen t plans, net of tax 467 4 67 467 Change in derivativ e instruments and hedges, net of tax (5) T otal comprehensiv e income 10 8 4,567 Changes in noncontr olling interests (37) (20) 55 Dividends to noncontr olling shareholders — (98) Dividends to shareholders (1, 7 30) Cancellation of tr easur y shares (1 0) ( 17 ) (3,130) 3,157 — — Share-based pa yment arrangements 60 60 60 Purchase of tr easury stock (3,682) Delivery of shares (84) (136) 1,046 826 826 Other 16 16 16 Balance at Dec ember 31, 2021 17 8 22 22,477 378 Due to rounding, numbers pr esented may not add to the totals pr ovided. See accompan y ing Notes to the C onsolidated Financial Statements 17 8 ABB ANNUAL REPO RT 2021 0 4 F IN A NC I A L RE VI E W O F AB B G RO UP — Not es to the C ons olidat ed Financ ia l S ta tements — Note 1 Th e Co m pa n y AB B Ltd an d it s subs id iar i es (col le c ti ve ly, the Co mp any) tog eth er fo rm a l ead in g glo ba l tec hn ol og y com pany, con ne c ti ng so f tw ar e to its e l ec t r if ic at ion , ro bot ic s, a utom ati on an d mot io n po r t foli o to dr i ve pe r for man ce to ne w le vel s. — Note 2 Signi ficant a ccoun ting policies The f oll ow i ng is a s umm ar y of sig nif i ca nt acco unt in g po lic i es fo ll owe d in th e pr ep arat io n of th ese Consol idat e d Fin ancial Sta tements. Basis of presentati on The C onsolida ted Financial S tatements ar e prepar ed in a ccordance with Un ited Sta tes of A meric a (U nite d States o r U. S.) g en er al ly ac cepte d acc ount i ng p r inc i pl es ( U. S . G A AP) an d are p re sen ted i n Uni ted States d ol lar s ($ or US D) unl ess ot he r w is e st ated . Du e to rou ndi ng , nu mb er s pre se nted m ay not ad d to the tot al s prov id ed . Th e par v al ue of c ap ita l sto ck is d en omi nate d in Sw i ss fra nc s . Reclassifications Certain amoun t s reported f or pr ior y ears in the C onsolidated Financial Sta tements and the accom pa ny in g No tes have b ee n re cl a ssif i ed to co nfor m to th e cur ren t yea r ’s prese nt atio n . The se cha ng es p r im ar il y re l ate to the re all oc ati on of c er t ain re al e state a sset s, p re v io usl y re po r te d w ithi n Corpora te and Other , int o the operating segments wh ich utiliz e the ass ets. Scope o f c onsolidation The Co nso li date d Fin anc i al St ateme nt s in cl ud e the a ccou nts of A B B Ltd an d com pan ies w hi ch ar e directly or indir ectly controlled by ABB Lt d . Additionally , the Compan y consolida tes variable interes t ent it ie s if i t ha s de ter min ed t hat it i s the p r im ar y b e nef i c ia r y. Inter com pany a ccou nts a nd t ran sac t io ns are e li min ated . Inve stm en ts i n joi nt ven ture s an d af f ili ated co mp ani es in w hi ch th e Com pany h a s the ability t o exercise sign ificant influence over operating a nd financial policies (generally thro ugh dir ect or in dir ec t ow ne rs hip of 2 0 pe rce nt to 50 p e rce nt of th e voti ng r i ght s) , are re co rde d in t he Co nso lid ated Financial S tatements using the equity method o f a ccoun t ing. T ranslation of foreign currencies and foreign exchange transactions The f un c ti on al cu rre nc y for mo st of th e Com pany ’s subsi dia r ie s is th e ap pli c abl e lo c al cu rre nc y . T he transla tion from the applicabl e functional curr e ncies into the Compan y’s r eporting currency is performed for ba lance s he et a ccoun t s using e xchange rates in ef fect at the balanc e sheet da te and f or income sta tement ac counts using av e rage ex change rat es preva iling during the y ear . The res ulting tra nsl ati on ad jus tm ent s ar e exc lud e d fro m the d ete rmi nat ion o f ear nin gs an d ar e rec ogn ized i n “ Accu mu late d othe r co mp reh en si ve loss ” unt il t he su bsi dia r y i s sol d, su bst ant ia ll y li qu idate d or evaluat ed for impa irment in anticipation of disposa l. ABB ANNU AL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP Fore ign c ur ren c y e xcha ng e gai ns an d loss es, s uch a s th ose r esul t ing f rom fo rei gn c urr en c y denomina ted r eceivables or payables, are included in t he det ermina t ion of earnings, ex cept as they rel ate to inte rco mpa ny lo ans t hat ar e eq uit y - li ke in natu re w it h no re as ona bl e e xp ec t ati on of re pay me nt , whi ch ar e re cog nize d in “Accum ul ated oth e r com pre he ns ive l oss” . E xcha ng e gain s an d losse s re cog nize d in ea rni ng s are i nc lud e d in “ T ot al rev en ues ” , “ T ot al cos t of sal es ” , “ S el lin g, g e ne ral a nd a dmin ist rati ve ex pe nse s” o r “ Inte res t an d othe r f i nan ce e xp en se” co nsi ste nt w it h the n ature of t he u nd er ly ing i tem . Discontinued ope rations The Co mp any re p or t s a dis pos al , or p lan ne d di spo sal , of a com po ne nt o r a gro up of co mp one nt s as a d isco nt inu e d op er atio n if t he di spo sal r ep res ent s a st rate gic s hif t th at ha s or w i ll h ave a majo r ef fe c t on t he Co mpa ny ’s ope rat io ns an d f in an c ial r esu lt s. A st rate gic s hif t co ul d in clu de a d isp osa l of a majo r ge og ra phi ca l are a , a majo r li ne of b usi ne ss or oth er m ajo r par ts of th e Com pany. A comp on en t may be a r ep or t ab le se gm e nt or a n ope r atin g se gm ent , a re po r t in g unit , a su bsi dia r y, or an a sset g rou p. The a sse ts a nd l iabi li ti es of a co mp on ent r ep or te d a s a dis cont in ue d op e rati on a re pr ese nte d separat el y as held for s ale and in discontinued operations in the Company’s Consol idat ed Balance Sheets. Interes t expense that is not d irectly attributable t o or relat ed to the Company’s continuing business or dis cont in ue d bu sin ess i s al loc ate d to disc ont in ue d op er ati ons b as ed o n th e rati o of ne t ass et s to be sol d le ss de bt th at is re qu ire d to be p aid a s a res ult of t he p la nne d di sp osal t ra nsac t io n to th e sum of total n et a sse ts of t he Co mpa ny pl us co nso li dated d e bt . Ge ne ra l cor po rate ove rh ead i s not al lo cate d to dis cont in ue d op er ati on s (see Note 3). Operating c ycle A po r ti on of t he Co mpa ny ’s ac ti v it i es ( pr i mar ily l on g -te rm s ys tem i nteg rat io n ac ti v i ti es) has a n op er ati ng c yc le th at exce e ds o ne ye ar . Fo r cl ass if ic ati on of c ur ren t asse ts a nd l iab ili ti es r el ated to su ch ac ti v i ti es , the Co mp any e le c te d to use th e du rat ion o f the i nd iv i du al co ntr ac ts a s i ts o pe rat in g c ycl e. Acco rdi ng ly, the re ar e accou nt s rec ei va bl e, i nvento r ie s an d prov isi ons r el ated to th ese c ont rac t s whi ch w il l not b e rea lize d w it hin o ne ye ar th at have be e n cl ass if ie d a s cu rre nt . Use o f est im ate s The p re pa rati on of f i na nc i al st atem ent s in c onfo rmi t y w ith U. S . G A A P re qui re s man age me nt to ma ke assump tions and estimates t hat direc tly affect the a mounts r eported in the Consolidat ed Financial Sta tements and the accompanying Not es. These ac counting ass umptions a nd estima tes include: • grow th r ates, d isco unt r ates an d oth er a ssum pt ion s use d to de ter min e im pair me nt of l ong - l ive d assets a nd in testing goodwill for impa irment, • esti mate s to dete rmi ne v al uat ion a ll owa nce s for d efe rr ed t a x a sset s an d amo unt s re co rde d for unrecognized tax benef its, • ass umptions used in determining inv entory obsoles cence and net realizable value, • estima tes and as sumptions used in det e rmining the initial fa ir value of retained noncon trolling inter est and cer tain obliga tions in connection with dives tments, • estima tes and as sumptions used in det e rmining the fair v alues of assets and li abilities assumed in business combinations, • assum pti on s use d in t he d eter min ati on of co rp or ate cost s dir ec t ly at tr i but ab le to discon t inued operations , • estima tes of loss con tingencies associated w ith litigation or threat ene d litiga t ion and other claims and inquiries, en vironmental damages, produc t warran ties, self -insurance reser ves, regula tor y and other pr oceedings, • esti mate s use d to re cord e x pe c ted c ost s for e mp loye e se ver an ce in co nn ec t io n w it h restructuring programs, • esti mate s rel ated to c re dit l osse s ex pe c te d to occu r ove r the r em ainin g li fe of f in an c ial a sse ts su ch a s tra de an d oth er r ece iv ab le s, l oan s an d oth er i nst rum en ts , • assum pti on s use d in t he c al cul ati on of p en sio n an d pos tre ti re me nt be ne f it s an d the f air v al ue of pe nsi on p la n asse t s, an d 180 ABB ANNUAL REPORT 2021 0 4 FI NA N CI A L R E V IE W OF A BB G R OU P • assum pti on s and p roj ec t io ns, p r in c ip al ly re l ated to fu ture m ater i al, l ab or a nd p roje c t-re late d over he ad cos ts , use d in d ete rmi nin g the p e rce ntag e - of-co mp le ti on o n proj ec t s w he re rev en ue is rec og nized ov er t im e, a s we ll a s th e amo unt of v ar i ab le co ns id er atio n th e Com pany e x pe c ts to b e ent it le d to. The actual results and outc omes ma y differ from t he Company’s estimates and ass umptions. Cash and equivalen ts Ca sh a nd e qui v ale nt s in cl ud e hig hl y liq ui d inve stm en ts w i th matu r it ie s of th ree m ont hs or l ess at t he date of acq uis it io n. Curr en c y an d oth er l oc al re gu lator y lim itat io ns re late d to the t ra nsfe r of f und s ex i st i n a num be r of cou ntr ie s wh e re th e Comp any o pe rate s. Fun ds, ot he r th an re gu lar d iv ide n ds, fe e s or l oan r ep aym ent s, ca nno t be re adi ly t ra nsfe rr ed a bro ad fro m th ese co unt r ie s and a re th e refo re de p osite d an d us ed fo r work i ng c api ta l ne ed s lo ca ll y. These f un ds a re in cl ud ed i n ca sh a nd e qui v ale nt s as t he y are n ot considere d restric ted. Ca sh a nd e qui v ale nt s th at are sub je c t to cont rac tu al re str i c t ion s or ot he r le ga l ob lig ati on s and a re no t read il y avai lab l e are c la ssif i e d as “ R est r ic te d ca sh”. Management de termines the appropriate classification of held-to -maturity and a v ailable-for -sale debt sec ur i ti es at th e ti me of p ur cha se . D ebt s ec ur it i es ar e cla ssi f ie d a s he ld - to - m atur it y w he n th e Comp any ha s the p os it ive i ntent a nd a bil it y to ho ld t he se cu r it ie s to matur i t y. Hel d -to - m atur it y d eb t sec ur i ti es are c ar r ie d at amo r t ized co st , adj uste d fo r accr et ion of d isc ount s o r amo r t izat io n of pre mi ums to mat ur ity computed under the effect ive in terest method. Such ac cretion or amor tization is included in “I nte res t an d div id en d in com e” . M ar keta bl e de bt se cur i t ies n ot cl a ssif i ed a s he l d -to - m atur it y a re classified as a v ailable-for -sale and r eported at fair value. Unrealiz ed gains and losses on available-for -sale debt securities are excluded from t he det e rmina t ion o f earnings and are inst ead recogni zed in the “Acc umula ted o ther comprehensive loss” component of stoc kh ol de r s’ e qui t y, net of ta x , un ti l rea lize d. R ea lize d gai ns an d lo sses o n avail ab le -for-sa le d ebt sec ur i ti es a re com pu ted b as ed u po n the hi sto r ic al cos t of th ese s ec ur it ie s, u sin g th e spe c if i c identification met hod. Ma rketa bl e de bt se cu r it ie s are c la ssi f ie d as e ith e r “C ash a nd e qu iv al ent s” o r “ Ma rket ab le se cu r it ie s an d short -term inv estments” a ccording t o their ma turit y a t the t ime of acquisition. Marketable equity securit ies are generally classif ied as “Marketable securit ies and short -term inve stm ent s”, however, any market ab le se cu r it ie s he l d as a l on g -te rm inv est me nt rath e r tha n as a n inve stm ent o f exce ss li qui dit y a re cl a ssif i ed a s “ Ot he r non - cu rre nt a sset s” . Eq ui t y sec ur i ti es a re measured a t fair value with fa ir value changes reported in net income. F air value changes f or equity sec ur i ti es a re ge ne ra ll y re po r ted i n “ Inte re st an d oth er f i na nce e xp e nse”, however , fair v al ue c ha ng es for certain equity securities class ified as long-term in vestments are reported in “Other income ( e xpense ), n e t ”. For d ebt s ec ur it ie s cl ass if i ed a s avai la bl e -fo r-sal e wh ere f air v al ue h as d ec li ne d be low a mo r ti zed co st du e to cre dit l osse s, th e Com pa ny re cord s an a llo wan ce fo r ex pe c te d cre di t losse s an d adj ust s th e all owa nce i n sub se que nt p er i od s in “ I ntere st a nd ot he r f ina nc e ex pe nse ” . A ll f air v alu e ch an ge s othe r tha n tho se re late d to cre di t r isk a re re po r ted i n “Accumu late d oth er co mp re he nsi ve lo ss” unt i l the securit y is sold. In ad dit i on , eq uit y s ec ur it ie s w it ho ut re adi ly d ete rmi nab le f air v al ue s are re m ea sure d if t he re is a n obs er vab le p r ic e cha ng e in a n ord er ly t ra nsac t io n for t he s ame i nves tm ent , or i f a qu ali tat ive asses sment indicat es that the in vestment is impaired and t he fa ir value of t he in vestment is less t han it s ca rr y ing a mo unt . Sim ila r to oth er f air v alu e ch an ge s as d esc r ib e d abo ve, d ep en di ng o n the n ature of the in vestment, this fair value change is either rec orded in “Other income (expense ), net” or “ Interest and o ther finance expense ” . 181 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P Acc ounts receivable and allowance for expected credit losses Acco unt s re cei va bl e are r eco rd ed at th e invoi ce d am oun t. T he Co mpa ny ha s a gr oup -w i de p ol ic y o n th e management of credit risk. The p olicy includes a credit as sess me nt met ho dology to assess t he creditworthiness of cust omers and as sign to t hose customers a risk cat egor y . Third-par ty agencies’ ratings are considered, if available. F or customers where agenc y ratings are not ava ilable , the cus tom er ’s mos t rec ent f i na nc ia l st atem ent s, p aym ent hi sto r y an d oth er r el ev ant in form ati on a re con sid er ed i n th e assi gn me nt to a r isk c ate gor y . Custo me rs a re a ssess ed at l ea st an nu all y o r mor e frequently when infor mation on significant changes in the customer’s financial posi tion becomes kn own . In a ddi ti on to t he a ssig nm ent to a r i sk c ateg or y, a cre dit l imi t pe r cu stom er i s set . The Co mp any re co gnize s an a llo wan ce fo r cre di t losse s to pr ese nt th e ne t amo unt of r ece iv ab le s ex pe c te d to be co ll ec te d at the b al an ce she et d ate. T he a llo wan ce is b a sed o n th e cre di t loss es ex pe c te d to ar ise o ver t he a sset ’s con trac tual te rm t ak in g into ac cou nt histo r ic al l oss e xp er i en ce , cus tom er-spe c if i c dat a as we l l as fo r wa rd l oo ki ng e st im ates. T he Co mp any ’s accou nt s rec ei va bl e are f ir st gr oup e d by the i nd iv idu al l eg al e nti t y whi ch g en e ral ly h a s a ge og rap hic c onc ent rat ion o f rec ei va bl es, r esu lt ing i n di f fer ent r i sk l eve ls for d if fe re nt e nti ti es . Re cei v abl es a re th en f ur t he r sub div id ed w i thi n the e nt it y i nto po ol s ba se d on si mil ar r i sk ch ara c ter i st ic s to est i mate ex pe c te d cre di t losse s. E x pe c te d cre di t loss es ar e es ti mated i nd iv idu al ly w he n th e rel ated a sse ts d o not sh are s imi la r risk character istic s. Acco unt s re cei va bl e are w r it te n of f wh en d ee m ed u nco ll ec t ib le a nd a re re cog nize d as a d e duc tio n fro m the a ll owa nce fo r cre di t loss es . E xp ec te d re cove r ie s, w hic h are n ot to exce e d the a mo unt p rev i ou sl y wr it te n of f, are cons id er ed i n dete rm ini ng th e al low anc e bal an ce at the b al an ce she et d ate. The Co mp any, in it s no rma l cou rse of b us in ess, t ra nsfe rs r ec eiv ab le s to thi rd pa r ti es , ge ne ra ll y w it ho ut rec our se . Th e tr ans fer i s acco unte d for a s a sa le w he n th e Comp any h as su rre nd e red c ont rol ove r th e rec ei va bl es. C ontr ol is d e em ed to h ave be en su rre nd e red w he n ( i) t he tr an sfe rre d re cei va bl es h ave be en put p re sump ti ve ly b eyo nd th e re ach of th e Com pa ny an d it s cre di tors , eve n in b an kr uptc y o r oth er rec ei ver shi p, (ii ) th e thi rd - pa r t y tr ans fer ee s have th e r ig ht to pl ed ge o r e xcha ng e the t ra nsfe rr ed rec ei va bl es, a nd ( iii ) t he Com pa ny ha s re lin qu ish ed e f fe c ti ve con tro l over t he tr an sfe rre d re cei va bl es and d oe s not r et ain th e abi lit y o r ob lig ati on to re pu rc ha se or r ed ee m th e tra nsf er red r ec eiv ab le s. At t he ti me of s ale , th e so ld re cei v ab les a re re mov ed f rom th e Con sol id ated B al an ce Sh ee ts a nd t he re late d ca sh i nfl ows a re cl ass if i ed a s op er ati ng ac t i v it ie s in t he Co nso lid ated St atem ent s of C as h Flow s. Cos ts associat e d with the sale of rec eivables, including the relat ed ga ins and losses fr om the sales, are in clu de d in “ I nte res t and o the r f in an ce ex pe ns e” . T r an sfe rs of r ece iv ab le s that d o not m ee t the req ui rem e nts fo r tre atme nt a s sa le s are acc oun ted fo r as s ec ure d bo rrow ing s an d the r el ated c as h fl ows a re cl ass if ie d a s f in an c ing a c ti v it i es i n the Co nso li dated St atem ent s of C a sh Flow s. The Co mp any se ll s a br oad r ang e of p rod uc t s, s yste ms , se r v i ces a nd so f tw ar e to a w id e ran ge o f industrial, commercial a nd utility cust omers as well as various go vernment agencies and qua si - gove rn me nta l age n ci es t hro ug hou t th e worl d . Con cent rat io ns of cr ed it r is k w ith r esp ec t to accou nt s rec ei va bl e are l imite d , as t he Com pa ny ’s custo me r ba se i s com pr i sed of a l ar ge nu mb er o f individual customers. Ongo ing credit evalua t ions o f customers’ financial positions are performed to dete rm ine w he th er th e us e of cre di t sup po r t ins tru me nt s suc h as g ua ra ntee s, l et ter s of cr ed it or c re dit insu ra nce a re ne ce ssar y; co ll atera l is n ot ge ne ra ll y re qui re d. T he Co mpa ny mai ntai ns an a ll owan ce fo r cre di t loss es a s dis cuss ed a bove i n “Account s re cei v ab le an d al low an ce for e xp e c ted c re dit l osse s” . S uc h loss es, in the aggregat e, are in line with the Company’s e xpect ations. It is t he Co mpa ny ’s pol ic y to i nves t ca sh i n de pos it s w it h ban k s thr oug ho ut th e wor ld w i th ce r tai n mini mum c re dit r ati ng s and i n hig h qu ali t y, low ri sk , li qui d inve st me nts . Th e Com pany a c ti ve ly m ana ge s its credit r isk by routinely review ing the cr editworthiness of the banks a nd the investments held. The Com pany h as n ot in cu rre d si gnif i c ant c red it l osses r el ated to su ch i nvest me nt s. The Co mp any ’s ex po sure to c re dit r i sk on d er ivat i ve f ina nc i al i nst rum en ts i s the r i sk th at the cou nter par t y w ill f ail to me et i t s obl ig ati ons . T o re du ce thi s r isk , th e Com pa ny ha s cre di t po lic i es t hat req ui re th e est ab li shm ent a nd p er i od ic re v i ew of cr ed it li mit s for i nd iv i du al co unte rp ar t ie s. I n add it io n, the Co mp any h as e nte red i nto cl ose - ou t net t in g agre e me nts w ith m ost d er i vat iv e cou nter par t i es . Close- out netting a greements pro v ide for the termination, valuation and net settleme nt o f some or all 182 ABB ANNUAL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP outstanding tr ansactions between two counterparties on the occurrence o f one or more pre - define d tr ig ge r eve nt s. D er i v ati ve in str ume nt s are p re sen ted o n a gross b a sis i n the Co nso li date d Financial S tatements. Revenue recognition A cus tom er co ntr ac t ex i st s if co ll ec t abi li t y und e r the c ontr ac t is c ons id ere d p rob abl e , the co ntr ac t ha s com me rc ia l subs ta nce , co ntain s pay me nt ter ms, a s we ll a s th e r ig hts a nd co mmi tm ent s of b oth pa r ti es , and h a s be en a pp rove d. The C ompany of fers arrangements w ith multiple performance obligations t o meet i ts cust ome rs’ ne ed s. T he se arr an ge me nt s may inv ol ve th e de li ver y of mul ti pl e pr od uc t s an d/ o r pe r fo rma nce of ser v ic es (such a s i nst al lati on a nd t raini ng ) and t he d el ive r y a nd/ o r pe r for ma nce m ay occu r at dif f ere nt poi nts i n ti me o r ove r dif f ere nt p er i od s of ti me . G oo ds a nd se r v ices u nd er s uch a rr ang e me nts a re evaluat ed to det e rmine whether the y for m distinct performance obligations and should be ac counted for a s se par ate reve nu e tr ans ac ti on s. Th e Com pa ny all oc ates t he sa le s pr i ce to eac h dis ti nc t pe r for man ce o bli gat io n ba se d on th e pr i ce of ea ch ite m so ld i n se par ate tra nsa c ti ons at th e in ce pti on of t he arrangement. The C ompany ge nerally recogn izes revenues for the sale o f non- custom ized products including circui t bre aker s, m od ul ar sub st atio n pac kag es , con trol p ro du c ts , moto rs, g e ne rator s, d r ive s, ro bot s, turbochargers, measurement and ana ly tical instrumentation, and o ther goods which ar e manufactured on a st an da rdize d ba si s at a poi nt in t im e. R eve nu es a re re cog nize d at the p oint i n t ime t hat th e cus tom er o btai ns con tro l of the g oo ds , whi ch i s whe n it h a s take n ti tl e to the p ro duc t s an d a ssum ed the r i sk s an d rew ard s of own er shi p of th e pro du c ts s pe c if i ed i n the p urc ha se o rde r or s al es ag re em ent . Ge ne ra ll y, the tr ans fer of t it le a nd r i sk s and r ewa rds of o wne r ship a re go ver ne d by th e cont rac tu al ly def i ne d shi ppi ng te rm s. Th e Com pa ny use s va r io us In tern ati on al Com me rc i al T e rms (as p rom ulg ated by the I nte rnat io nal C ha mb er of Co mm erc e) in its s al es of p rod uc t s to thi rd pa r t y cu stom er s, su ch a s E x Work s (E X W ), Free C a rr ie r (FC A) an d De li ve re d Du t y Paid ( DD P). Billing t erms for thes e point in time contracts vary but generally co inc ide with delivery to t he cust omer . Paym e nt is g en er al ly d ue u po n rec eipt o f the i nvoic e, pay ab le w ithi n 9 0 days o r le ss. The C ompany ge nerally recogn izes revenues for the sale o f cust omized pr o ducts, including int egrated aut omation and electrif ication syst ems and solutions, on an ov er time basis using the pe rce ntag e - of-c omp le t ion m et hod o f accou nt in g. Th es e sy ste ms are g e ne ral l y accou nte d for a s a si ngl e performance obliga tion as the C ompany is required t o integra te equipment and ser v ices int o one de li ver ab le fo r the c us tome r . R eve nu es a re re cog nize d as t he s yste ms a re cu stomi zed d ur i ng th e man uf ac tur i ng o r inte gr atio n pr oce ss and a s co ntro l is t ran sfe rre d to th e cus tom er a s ev ide nc ed by t he Com pany ’s rig ht to pay me nt for wo rk p er fo rm ed o r by th e cus tom er ’s own er shi p of the wo rk i n pro cess . The C ompany pr incipall y uses the cost -to - cost method to meas ure pr ogress t owards completion on cont rac t s. U nd er t his m eth od , pro gr ess of co ntr ac ts i s me asu re d by ac tua l cost s i ncu rre d in r el ati on to the Co mp any ’s be st e st imate of tot al cos ts b a sed o n th e Com pany ’s histor y of m an ufa c tur i ng or constructing sim ilar as sets f or cust omers. Estimated costs are r ev iewed and upda ted routinely f or cont rac t s in p rog re ss to ref le c t ch an ge s in qu ant it y o r pr i c in g of th e inp ut s. T he c umu lat ive e f fe c t of any ch an ge i n est i mate is re co rde d in t he p er i od w he n th e ch ang e in e st im ate is de ter min ed . Con trac t cost s in cl ud e al l dir ec t m ater ia ls , lab or a nd su bco ntr ac t cos ts a nd i ndi re c t cost s re late d to cont rac t performance, such as indirect labor , supplies , t ools and depreciation co sts. The n ature of t he Co mp any ’s cont rac t s for t he s ale of c us tomize d pr odu c t s gi ves r is e to seve ra l t yp es of variable consideration, including claims, unpr iced change orders, liquida ted damages and penalties. The se a mou nts a re e st imate d ba se d up on t he mo st li kel y am ount o f cons id er ati on to w hic h the cus tom er o r the Co mp any w i ll b e ent it le d . The e st im ated am ou nts a re i ncl ud e d in th e sal es p r ic e to the ex te nt it i s pro ba bl e that a s igni f ic an t reve rs al of cu mu lat ive re ven ue s re cog nize d w il l not o ccu r wh en the u nce r t aint y a ssoc i ated w i th th e va r ia bl e con sid e rati on i s res ol ve d. A ll e st im ates of v ar ia bl e con sid er ati on a re rea sse sse d pe r io di ca ll y. Back ch ar ge s to supp li er s or su bc ontr ac tor s ar e rec ogn ized as a r ed uc t io n of cost w he n it i s de ter min ed t hat re cove r y of su ch cos t is p rob ab le an d th e am ount s c an be r eliably e stima ted. Bil li ng te rms fo r th ese ov er-ti me co ntra c ts v ar y but a re ge ne r all y ba se d on a chi ev i ng sp ec i f ie d milest ones. The dif ferences between the timing of rev enues recogn ized and cu stomer billings resul t in 183 ABB ANNUAL REPORT 2021 0 4 FI NA N CI A L R E V IE W O F A B B GR OU P cha ng es to co ntr ac t ass et s an d cont rac t l iabi li ti es . Pay me nt is g en er al ly d ue u po n rec eip t of the i nvoic e, paya bl e w it hin 9 0 d ays or l ess . Cont rac tu al re tent i on am ou nts bi ll ed to c usto me rs a re g en er al ly d ue up on e xpi rat ion o f the co ntr ac tua l wa rra nt y p er i od . Se r v i ce re ven ue s ref le c t re ven ue s ear ne d fro m th e Com pany ’s act iv iti es i n pro v id in g ser v ic es to cus tom er s pr i mar i l y subs eq ue nt to th e sal e an d de li ver y of a pro du c t or co mp le te sy ste m. S uc h reve nu es co nsi st of m ainte nan ce t y pe co ntr ac t s, re pair s er v ice s, e qu ip me nt up gr ade s, f i el d se r v i ce activ ities that include personnel and a ccompan y ing spare parts, train ing, and installa t ion and com missi oni ng of p ro duc t s a s a st an d -a lo ne se r v ice o r as p ar t of a se r v ice co ntr ac t . Th e Comp any ge ne ra ll y re cog nizes r eve nue s fro m se r v i ce tr an sac t io ns a s ser v ic es ar e pe r for me d or at th e po int i n time tha t the cust ome r obta ins contr ol of the spare parts. For long-term serv ice con trac ts including mon itor i ng a nd mai nte nan ce se r v ices , reve nu es a re re cog nize d on a s trai ght l ine b a sis ove r th e ter m of the c ontr ac t co nsi ste nt w it h the n ature , ti min g an d ex te nt of t he se r v ices o r , i f the p e r form an ce pat ter n is oth er t ha n str aigh t lin e, a s th e se r v i ces a re p rov i de d ba se d on co st s inc ur red r el ati ve to tota l expected costs. In li mite d c ir cum st anc es th e Com pan y sel ls e x te nde d w arr ant ie s th at ex te nd t he wa rr ant y cov er age beyo nd t he s tan da rd cove rag e of fe re d on sp e c if ic p ro du c ts . Rev en ue s for th es e war ra nti es a re rec ord ed o ver t he l en gth of t he w arr ant y p er iod b as ed o n the ir s ta nd - al on e sel li ng p r ice . Bil li ng te rms fo r se r v i ce co ntr ac ts v ar y but a re ge n er all y b ase d o n the o ccu rre nc e of a ser v ic e eve nt . Paym e nt is g en er al ly d ue u po n rec eipt o f the i nvoic e, pay ab le w ithi n 9 0 days o r le ss. Revenues a re r eported net o f cust omer rebat es, early settleme nt d iscoun t s, and similar incentives. Re bates a re es ti mate d ba se d on sa le s ter ms, h isto r ic al e xp er i e nce a nd tr en d ana ly si s. Th e mo st common inc e ntives relat e to amo unts pa id or credit e d t o cust omers for ach iev ing defined volume levels. T a xes a sse ssed b y a gove rn me nta l auth or i t y that a re di rec t ly i mp ose d on r eve nu e - pr od uc in g tra nsa c ti ons b et we e n the Co mp any an d it s cu stom er s, su ch a s sa le s, u se, v al ue ad de d a nd so me e xc ise taxes, are excluded from revenues. The Co mp any d oe s not ad jus t th e cont rac t p r ice fo r th e ef fe c t s of a f ina nc i ng co mp on ent i f th e Com pany e xp e c ts , at cont rac t i nce pt ion , th at the t im e be t wee n co ntro l tra ns fer a nd c as h re ceip t is le ss than 12 months. Sa le s com missi on s are e xp en se d imm e diate ly w he n th e am or t iz atio n pe r i od fo r the c ost s to obt ain th e cont rac t i s le ss tha n a yea r . Con tract los s provisions Losse s on co ntr ac ts a re re co gnize d in t he p er i od w he n th ey ar e id ent if i ed a nd a re ba se d up on t he ant ic i pate d exce ss of cont rac t c ost s ove r the r el ated co ntr ac t reve nu es . Shipping and handling costs Shi ppi ng a nd ha nd lin g cos ts a re re cor de d as a c om po ne nt of cos t of sal es . Inve nt or i es Inve ntor i es a re st ated at th e lowe r of cos t or n et re ali za bl e va lu e. Co st is d ete rmi ne d usi ng t he f i rs t -in , f ir st-o ut m eth od , th e weig hte d -ave rag e cos t me tho d, o r the s pe c if i c id ent if i c atio n me th od . Inve ntor i ed cost s ar e state d at acqu isi ti on c ost o r ac tua l pro du c ti on co st , in clu di ng di re c t mate r ial a nd l ab or an d app li ca bl e ma nuf ac tur i ng ove rh ea ds. A dj ust me nt s to red uce t he co st of inv ento r y to it s ne t rea liz ab le value are made, if required, for decreases in sales prices, obsolesc ence or similar reductions in value. Impair ment of long-liv ed as sets Lon g - li ve d asse ts t hat ar e he ld a nd us ed a re ev al uate d for i mpai rm ent fo r eac h of th e Com pany ’s asset gro ups w he n eve nt s or c ir cum st anc es i ndi cate t hat th e ca rr y ing a mo unt of th e lo ng - l ive d a sset o r ass et gro up may n ot be r ecove r abl e . If th e a sset g rou p’s net ca rr y in g va lu e exce e ds th e ass et gr oup ’s net 184 ABB ANNU AL REPORT 2021 0 4 FI N AN CI A L R E V I E W OF A B B GR O UP und isc ounte d c as h fl ows e xp ec te d to be g e ne rate d over i ts r em ainin g us efu l lif e in clu di ng n et pr oce e ds ex pe c te d fro m disp osi ti on of t he a sset g rou p, if a ny , the c ar r y i ng a mo unt of th e a sset g rou p is re du ce d to its estima ted fair value. The estima ted fair value is determ ine d using a market, income and/ or cost appro ach. Property , plant and equipment Pro pe r t y, plant a nd e qu ipm e nt is st ated at cos t , le ss accu mul ated d ep re c iat ion a nd i s de pre c i ated us in g the s trai ght-l in e me tho d. T he e st im ated us efu l li ves of t he a sset s ar e ge ne ra ll y as f oll ows: • fac tor ie s an d of f ic e bui ld in gs: 3 0 to 4 0 year s, • other f ac il it ie s: 1 5 yea rs , • machin e r y an d eq ui pm ent : 3 to 1 5 yea rs , • furni ture a nd of f i ce e qui pm ent : 3 to 8 yea rs , an d • lea seh ol d im prov em ent s ar e de pr ec i ated ove r th eir e st im ated us efu l li fe or , f or op e rati ng l ea se s, ove r the l ea se te rm , if sh or te r . Goodwill and intangible assets Go od w il l is re v i ewe d for i mpai rm ent a nnu al ly a s of O c tob er 1 , o r mo re fre q ue ntl y if ev ent s or c irc ums ta nce s in dic ate that t he c arr y in g va lu e may no t be re cove ra bl e. Goodw ill is evaluat ed for impa irment at the report ing un it lev e l. A r eport ing un it is an operating segment or one level below an operating segment. F or the annual impairment r eviews performed in 20 21 a nd 2 02 0, re spe c t ive l y, the rep or t i ng un it s were d ete rmi ne d to be o ne l eve l be l ow the operating s egments. When evalua ting goodwill for imp airmen t, the C ompany uses either a qualita tive or quantita tive asses sment method f or each reporting unit. T he qualita tive asses sment involv es det e rmining, based on an ev al uat ion o f qua li tati ve f ac tor s, if i t is m ore l ikel y th an n ot that th e fai r va lu e of a re po r ti ng u nit is le ss tha n it s ca rr y ing v al ue . I f , b as ed o n thi s qua li tati ve a ssess me nt , it is d ete rmi ne d to be m ore l ikel y tha n not t hat th e rep or t i ng uni t ’s fair v al ue is l ess t ha n it s ca rr y ing v al ue , a qu ant it ati ve im pair me nt tes t is p er fo rm ed , oth er w ise no f ur t he r ana l ysi s is re qu ire d . If th e Com pany e l ec t s not to p er f orm t he qualita tive ass essment f or a reporting unit, then a quan titative impairment t est is performed. When performing a quantitative impa irment test, the C ompany calcula tes the fa ir value of a repor ting unit u si ng an i nc ome a pp roa ch ba se d on t he p res ent v al ue of f utu re ca sh f low s, a pp ly ing a d isco unt r ate that re pr ese nt s th e rep or t i ng uni t ’s weig hted - ave rag e cos t of ca pit al, a nd c omp are s it to th e re po r ti ng unit ’s carr y in g va lu e. I f the c ar r y ing v al ue of t he n et a sset s of a re po r ti ng u nit e xce ed s the f air v al ue of the r ep or t in g uni t the n th e Com pa ny rec ord s an i mpai rm ent c ha rge e qu al to th e di f fer en ce, p rov i de d that th e lo ss rec og nized d oe s not e xce ed t he tot al am ou nt of go od w il l al lo cate d to that re po r t in g unit . The c ost of ac qui re d int an gib le a sse ts w i th a f i nite li fe is a mor tize d us ing a m et ho d of amo r t izat io n that re fl e c ts t he pat ter n of int an gi bl e ass et s’ e xp ec te d con tr ib ut io ns to fu ture c a sh fl ows . If t hat pat tern c an not b e re li abl y d ete rmin e d, th e st raig ht-li ne m eth od i s use d . The a mo r ti zat ion p e r io ds ra ng e fro m 3 to 5 year s for s of t wa re an d fro m 5 to 20 ye ars f or cu stom e r - , tec hn olo g y- a nd m arket in g - re late d intangibles. In tangible assets with a f inite life are t ested for impairment upon the occurrence of certain trigger ing even t s. Derivativ e financia l ins truments and hedging a c tivities The Co mp any u ses d er i v ati ve f in anc i al i nst rum en ts to m anag e cu rre nc y , c omm od it y, intere st r ate and equity exposures, ar ising from its global operating, f inancing and inv esting activit ies ( see Not e 6). The Co mp any re co gnize s al l de r iv ati ves , oth er t han c er t ain d er i vat iv es in de xe d to the Co mp any ’s own stock, a t fair value in the C onsolidated B alance Sheets. Derivatives that are not designa ted as he dging ins tru me nt s are r ep or te d at fair v al ue w i th d er i vat i ve gain s an d losse s re po r ted t hro ug h ear nin gs a nd cla ssi f ie d co nsi ste nt w ith t he n ature of t he un de rl y i ng t ran sac t io n. If th e de r iv at ive s are d es ign ated a s a he d ge , de pe nd in g on th e natur e of th e he dg e, c han ge s in t he f air va lu e of the d e r iv ati ves w i ll e ith er b e of f set ag ains t th e cha ng e in f air v alu e of th e he dg ed i tem 185 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L RE VI E W O F AB B G RO U P attr i bu ta bl e to the r i sk be in g he dg ed t hro ug h ear nin gs ( in th e ca se of a f air v al ue h ed ge) or re co gnize d in “Accum ul ated oth e r com pre he ns ive l oss” u nti l th e he dg ed i tem i s re cog nize d in ea rni ng s (i n the c a se of a ca sh f low h e dge). Wh e re de r i vat ive f i na nc ia l in str ume nt s have b ee n de si gnate d a s ca sh f low h ed ge s of fore c as ted t ran sac t io ns a nd su ch fo rec a ste d tra ns ac ti ons a re n o lon ge r p rob abl e of o ccur r in g, hedge acc ounting is dis continued and an y der ivative ga in or los s prev iously included in “ Accumula ted othe r co mp reh e nsi ve lo ss” is re cl a ssif i ed i nto ea rni ngs c ons iste nt w i th th e natur e of the o r ig in al forecasted transaction. Gain s or loss es from derivatives designa ted as hedging instruments in a fair va lu e he dg e are re p or te d thr ou gh ea rni ngs a nd c la ssi f ie d con sis tent w ith th e natur e of th e und e rl y in g hedged transa c tion. Cer t ain co mm er c ial co ntr ac t s may gr ant r i ght s to th e Comp any o r the c oun terp ar t ie s, o r cont ain ot he r prov isi ons t hat ar e cons id er ed to b e de r iv ati ve s. Su ch e mb e dd ed d er i v ati ves a re ass esse d at in cep ti on of the c ontr ac t an d de p en din g on t hei r ch ar ac ter i st ic s, ac cou nted fo r as s ep ar ate der i v ati ve instruments and sh own a t their fa ir value in t he Co nsolida ted Balance Sheets with changes in their fa ir va lu e rep or te d in e ar nin gs co nsi ste nt w it h the n ature of t he co mm erc i al co ntr ac t to whi ch t hey re l ate. De r iv ati ve s are c la ssif i e d in th e Con sol id ated State me nt s of Ca sh Fl ows i n th e sam e se c ti on a s th e und e rl y in g ite m. C a sh f low s fro m the s et tle me nt of u nd esi gn ated d er i vat iv es us ed to m anag e th e r isk s of dif f ere nt u nd erl y i ng i tem s on a n et ba si s are c la ssi f ie d w it hin “ N et c ash p rov ide d by o pe rat in g ac ti v i ti es ” , a s the u nd er ly ing i tem s are p r im ar i ly o pe rat io nal i n natur e. O th e r ca sh f low s on th e set tl em en t of de r iv ati ves a re re co rde d w i thin “ N et c as h prov id ed by (use d in) inve st in g ac ti v i ti es”. Lease s The C ompany lea ses primarily real esta te, veh icles and machi ner y . The Co mp any ev al uate s if a co ntra c t cont ains a l ea se at i nce pt ion o f the co ntr ac t . A cont rac t i s or cont ains a l ea se i f it co nveys t he r i ght to co ntro l th e use of i de nt if i ed p rop er ty, pla nt , or e qui pm en t ( an id ent if i ed a sse t) for a p er i od of t im e in e xch an ge fo r con sid er ati on . T o de ter min e thi s, th e Com pany asse sse s wh eth er , thro ug ho ut th e pe r io d of us e, it h a s both t he r i ght to o btai n subs ta nti al ly a ll of th e eco no mic b en ef i ts f rom t he us e of th e id ent if i ed a sse t an d the r i ght to d ire c t th e use of t he i de nt if ie d asset. Leases are classified as eit her finance or ope rating, with t he class ification det ermining the patt ern of exp ense r ecognition in the Cons olidat ed Income S tat eme nts. Lease e xpense f or opera t ing le ase s is re co rde d o n a str aigh t - lin e ba si s over t he l ea se te rm . Lea se e xp e nse fo r f ina nc e lea se s is sep ar ated b et we en a mor tiz ati on of r i ght- of-u se a sset s an d le ase i nte res t ex pe nse . In ma ny c ase s, t he Co mpa ny ’s lea se s in clu de o ne o r mo re op ti ons to r en ew, wi th re ne wal te rm s that c an ex te nd u p to 5 yea rs . The e xe rc ise of l ea se r en ewa l opt io ns i s at the Co mpa ny ’s disc ret i on . Re new al pe r io ds a re in cl ud ed i n the e x pe c ted l ea se te rm i f the y are re a son ab ly ce r t ain of be in g exe rc is ed by t he Com pany. Cer t ain le a ses a lso i nc lu de op ti ons to p urc ha se th e le a sed p ro pe r t y. None of t he Co mpa ny ’s le ase a gre em e nts co nt ain mate r ial r esi du al v al ue g uar ante es o r mate r ia l res tr ic t io ns o r cove nan ts . Lon g -te rm l ea ses ( l ea ses w ith te rms g reate r th an 1 2 mo nth s ) a re re co rde d in t he Co nso lid ated B al an ce Sh ee ts at th e com me nc em ent d ate of th e lea se b as ed o n th e pre se nt va lu e of the m ini mum l ea se paym e nts . Th e pre se nt va lu e of th e le ase p aym en ts i s dete rmi ne d by us in g the i nte res t rate im pl ic it i n the l ea se i f avail ab le . A s mo st of th e Com pa ny ’s lea ses d o not p rov ide a n im pli c it r ate, th e Com pa ny ’s in cre me nta l bo rrow ing r ate is us ed fo r mos t le as es an d is d ete rmi ne d for p or t fol ios o f lea se s ba se d on the r em ainin g le a se ter m, c urr en c y of th e le as e, an d th e inte rn al cr ed it rat in g of th e subs id iar y whi ch ente re d into t he l ea se . Sh or t-term l ea se s (l ea se s w it h an ini t ial l ea se te rm of 1 2 m ont hs or l ess a nd w he re it i s rea so nab l y cer t ain t hat th e pro pe r t y w i ll not b e le a sed f or a te rm gr eater t han 1 2 mont hs) are not re cor de d in t he Cons oli date d B ala nce S he et s an d ar e ex pe nse d on a s tr aight-l in e ba sis o ver t he l ea se ter m . The m ajor it y of sho r t-term l ea se s rel ate to rea l est ate an d mach ine r y. A sset s un de r op er ati ng l ea se ar e in cl ud ed i n “O pe rat in g le ase r i ght- of-u se a sset s” . Op er ati ng l ea se lia bil it ie s are re p or te d bot h as c urr ent a nd n on - cur ren t ope r atin g le a se li abil it ie s. R ig ht-of- us e asse ts rep re sen t the Co mp any ’s r ig ht to use a n un de rl y in g a sset fo r the l ea se te rm a nd l ea se li abi lit ie s rep re sen t it s ob lig ati on to ma ke lea se p aym ent s ar isin g fro m th e le as e. 186 ABB ANNUAL REPORT 202 1 04 F IN A NC I A L RE VI E W OF A B B G RO UP Assets under finance lea se ar e included in “ Propert y , plant and equipment, net” while finance lease liabilities are included in “Long-term debt” (including “Current ma turities of long-term debt” as applicable ). Lea se a nd n on - l ea se co mp one nt s for l ea se s othe r th an re al e st ate are not a ccou nted f or se pa ratel y. Income t a xes The Co mp any u ses t he a sset a nd li abi li t y met ho d to accou nt for d efe rr ed t a xes . Un de r thi s met ho d, def er red t a x a sset s an d li abi lit ie s ar e dete rmi ne d ba se d on te mp or ar y dif fe re nce s be t wee n th e f ina nc i al re po r t in g and t he t a x ba se s of ass et s an d lia bil it ie s. D efe rre d ta x asse ts a nd l iabi li ti es a re mea su re d usi ng e nac te d ta x rates a nd law s that a re ex pe c te d to be i n ef fe c t wh en t he d if fe re nce s are ex pe c te d to reve rse . T he Co mpa ny re cord s a de fe rre d ta x a sse t wh en i t de term ine s th at it is m ore l ikel y tha n not t hat th e de du c ti on w i ll b e sus tain ed b a sed u po n th e de du c ti on’s tec hni ca l me r it . D efe rre d t a x asse t s and l iab ili ti es t hat ca n be of fset a gain st ea ch oth er a re re p or te d on a n et ba si s. A v al uat ion all owa nce i s re cor de d to red uc e def er red t a x a sset s to th e am ount t hat is m ore l ike ly t han n ot to be re al ize d. De fer re d ta xe s are p rov i de d on u nre d ee me d re tain e d ear nin gs of th e Com pa ny ’s subsi di ar ie s. H oweve r , def er red t a xe s are n ot prov id ed o n suc h unr ed ee m ed re tai ne d ea rnin gs to th e e x tent i t is e xp ec te d th at the e ar nin gs ar e pe rma ne ntl y re inve ste d. S uc h ear nin gs may b ec om e ta x abl e up on t he sa le o r liquida tion of these subsid iaries or upon the r emittance of d ivid ends. The Co mp any o pe rates i n nu me rou s ta x j ur i sdi c ti on s and , a s a resu lt , is re gu la rl y subj ec t to au di t by ta x authorities. The Compan y provides for tax con tingencies whenever it i s deemed more likely than not that a t a x a sset ha s b ee n im pai red o r a ta x lia bili t y ha s be e n in cur re d. Co nti ng e nc y p rov i sio ns ar e rec ord ed b a sed o n th e tec hni ca l me r it s of th e Com pany ’s fil in g pos it io n, co nsi de r in g th e app li ca bl e ta x laws and Organisa t ion for Economic Co- operation and Development ( OECD ) guidelines and are based on it s ev al uat io ns of th e fac t s an d c irc um sta nce s a s of the e n d of eac h rep or t i ng p er i od . The Co mp any a pp lie s a t wo - ste p ap pro ach to re co gnize a nd m ea sure u nc er t aint y i n in com e ta xe s. Th e f ir st ste p is to ev al uate th e ta x posi t ion fo r re cog nit io n by de ter mini ng i f the w eig ht of avai lab l e ev i de nce i nd ic ates th at it is m ore l ike ly t han n ot th at the p osi ti on w i ll b e sust ain ed o n aud it , in cl udi ng reso lu ti on of r el ated a pp eal s or l it igat io n pro ce sses , if any. The se co nd ste p is to m ea sur e the t a x be ne f it a s the l ar ge st am oun t whi ch is m or e tha n 50 p er cen t like ly of b ei ng re al ized u po n ul ti mate settlement. Uncertain tax positions tha t could be settled against ex isting loss carr y forwards or income ta x c re dit s ar e rep or te d n et . Expenses relat ed to tax penalties are classified in the C onsolidated Income Sta tements as “Income tax ex pe nse ” whi le i nter est t he re on i s cla ssi f ie d a s “I nte res t an d othe r f in an ce e xp en se” . Cu rre nt i nco me t a x rel ati ng to ce r t ain ite ms i s rec ogn ized d ire c tl y in “Accu mu lated o the r co mpr eh en si ve loss ” an d not i n earnings. In general, the C ompany applies the individual items approach when releasing income tax ef fe c ts f rom “Accu mu lated o the r co mpr eh en si ve loss ” . Research and dev elopment Re sea rch a nd d eve lo pm ent co st s not re late d to sp ec i f ic cu stom e r ord er s ar e ge ne ra ll y ex pe nse d as incurred. Ea rn in gs p e r sh ar e Ba si c ea rni ngs p er s har e is c al cul ated by d iv idi ng i nco me by th e wei ghte d - aver age n um be r of sha re s outstanding during t he yea r . Diluted earn ings per share is calcula ted by dividing income b y the weig hte d -ave rag e nu mb er of s har es o ut sta nd ing d ur i ng t he ye ar , a ssumi ng t hat al l pote nt ial l y dil ut ive sec ur i ti es we re e xer c ise d, i f dil ut ive . P otent ia ll y di lut i ve se cur i ti es c omp r is e out st an din g wr i tte n c all options, o utstanding op t ions and shares grant ed subject to cer tain c onditions under the Company’ s sha re - b as ed p aym ent a rra ng em e nts . Se e fu r th er d isc ussi on re late d to ea rnin gs p er s har e in N ote 20 and o f pote nt ial ly d il ut ive se c ur it ie s in N ote 1 8. 187 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P Sha re - based payme nt arran ge ment s The Co mp any h as v ar i ou s sha re - b ase d p ayme nt a rra ng em en ts fo r it s em pl oye es, w hi ch ar e de scr i be d mor e fu ll y in N ote 18 . S uc h arr an ge me nt s are acc oun ted fo r un de r the f air v al ue m eth od . For aw ard s that a re eq ui t y- set tl e d, tota l com pe ns ati on is m ea sur ed at g ran t date, b as ed o n th e fair v al ue of t he awar d at that date , an d rec ord ed i n ea rni ngs o ver t he p er i od th e e mpl oye es a re re qui re d to re nd er ser v ic e. Fo r awa rds t hat are c a sh - set tl ed , com pe ns ati on is i nit ia ll y me as ure d at gra nt date a nd subs eq ue ntl y re me asu re d at each r ep or t in g pe r i od , ba sed o n th e fair v al ue a nd ve st in g pe rce nt age of the aw ard at e ach of t hose d ates, w ith c han ge s in t he li abi lit y r eco rd ed i n ea rnin gs . F air value measures The C ompany uses fair v alue measur ement principles to r e cord certain financial assets and liabilities on a re cu rr i ng ba si s an d, w he n ne cess ar y , to re co rd ce r tai n non -f in an ci al a sse ts at fai r va lu e on a no n - re cu rr in g ba si s, a s we ll a s to dete rmi ne f air v al ue di scl osu res fo r ce r tain f i na nc i al in str um ent s ca rr ie d at am or t ize d cost i n th e f in anc i al s tatem en ts . Fin an c ial a sse ts a nd li abi li ti es re co rde d at fai r va lu e on a re cu rr in g ba si s in clu de f ore ign c ur ren c y, commo di t y an d inte res t rate de r i vat ive s, a s we ll a s cash- settled call options a nd a v ailable-for -sale securities. Non-f inancial assets recorded at fair value on a no n - re cu rr in g ba si s in cl ud e lon g - li ve d ass et s that ar e re duc ed to t hei r es ti mated f air v al ue d ue to impair ments. Fair val ue i s the p r ic e that wou ld b e re cei ve d wh en se ll in g an a sset o r pai d to tra nsfe r a li abi lit y i n an ord er ly t ra nsac t io n be t wee n ma rket p ar t ic i pan ts at th e me as ure me nt date . In d ete rmi nin g fai r va lue , the C ompany uses various valuation techniques including the mark et approach (using obser vable mar ket dat a for i de nti c al or s imi la r asse ts a nd l iab ili ti es), the in com e ap pro ach (disco unte d c ash f l ow models ) and t he cost approach ( using costs a mark et part icipant would incur to de velop a c omparable asse t). In put s us ed to d ete rmi ne th e fai r va lu e of ass et s and l ia bili ti es a re d ef in ed b y a thr ee -l eve l hie ra rchy, dep e ndi ng o n the n ature of t hos e inp ut s. T he Co mp any ha s c ateg or ize d it s f in an c ial a sse ts and l ia bili ti es a nd n on - f in anc i al a sset s m ea sure d at fai r va lue w ithi n this h ie rar chy b ase d o n wh eth er the i np ut s to the v al uat io n tec hni qu e are o bse r v ab le o r uno bse r v ab le . A n ob ser va bl e in put i s ba se d on mark et da ta obtained from i ndependent sourc es, while an unobservable input reflects the C ompany ’ s assumptions about market da ta. The l eve ls of t he f air v alu e hie r arc hy are a s fol low s: Leve l 1 : Valu ati on in pu ts c ons ist of q uote d pr i ce s in an a c ti ve ma rket fo r id ent ic al a sse ts o r li abil it ie s ( obser vable quot ed prices ). Assets and liabilities valued using Le vel 1 inputs include e xchange-traded eq uit y s ec ur it i es, l iste d d er i vat ive s whi ch a re ac t ive l y tr ade d suc h a s com mo dit y f utur es , inte res t rate fu ture s an d cer t ain ac t i vel y tr ade d d ebt s ec ur it i es. Leve l 2 : Valu ati on in pu ts c ons ist of o bse r v ab le i np ut s (other t han L eve l 1 in put s) such a s ac ti ve ly q uote d pr i ces fo r sim ila r a sset s, q uote d pr i ces i n in ac ti ve ma rket s an d in put s ot he r tha n qu oted p r ice s suc h as i nter est r ate y ie l d cur ves , cre di t spr ead s, or i np ut s de r ive d fr om oth e r obs er vab le d ata by interpola tion, correlation, regres sion or other means. The adjustments applied to quoted prices or the i np ut s use d in v al uat io n mo de ls m ay be bo th ob ser va bl e and u no bse r v ab le . In t he se c ase s, t he fair v al ue m ea sur em ent i s cl ass if i ed a s Le vel 2 u nl ess th e un obs er vab le p or t i on of th e adj us tme nt or the u no bse r v ab le i npu t to th e va luat io n mo de l is s igni f ic ant , i n whi ch c as e the f air v al ue mea su re me nt wou ld b e cl assi f ie d a s Leve l 3 . A sse ts a nd li abi li ti es v al ue d or di scl ose d us in g Leve l 2 inp ut s in cl ud e inve stm en ts i n cer tain f und s, ce r t ain de bt se cu r it ie s that a re not a c ti ve ly t rad ed , inte res t rate sw ap s, cr oss- cur ren c y in tere st r ate swa ps, c omm od it y s wap s, c as h -s et tle d c all o pt io ns, for w ard f ore ign e xch an ge co ntr ac ts , for eig n exc ha nge s wa ps an d for war d rate agr ee me nt s, t im e de pos it s, a s we ll a s f in anc i ng r ece iv ab le s an d de bt . Leve l 3 : Valu ati on in pu ts a re ba se d on t he Co mpa ny ’s assu mpt io ns of re l eva nt ma rket d ata (unob se r v abl e input) . Inve stm en ts i n pr i vate e qui t y, real es tate an d co lle c t ive f un ds h el d w it hin th e Com pa ny ’s pen sio n pl an s are g en er al ly v al ue d us in g the n et a sset v al ue ( N AV ) pe r sha re a s a pr ac ti ca l ex p edi e nt for f air v alu e 188 ABB ANNU AL REPO RT 2021 0 4 F IN A NC I A L RE VI E W O F AB B G RO UP prov ide d ce r tai n cr i ter i a are m et . Th e N AV s are d ete rmi ne d ba se d on th e fai r va lu es of th e un de rl y i ng inve stm ent s i n the f un ds . The se a sset s ar e not c la ssif i ed i n th e fair v al ue hi e rar chy b ut are separ ately disclose d. Whenever quo ted prices involv e b id-a sk spr eads, the C ompany ordinarily det ermines fa ir values based on mi d - mar ket qu otes . Howe ver, for the p urp ose of d ete rmi nin g the f air v al ue of c a sh -s et tl ed c al l opt io ns se r v ing a s he d ge s of the Co mp any ’s ma nag em ent i nc ent iv e pl an (M IP), bid p r ic es ar e use d . Wh en d ete rmi nin g fair v al ue s ba se d on q uote d pr i ces i n an ac t i ve ma rket , the Co mp any co nsi de r s if th e leve l of t ran sac t io n ac ti v i t y for t he f i nan c ia l ins tru me nt ha s si gni f ic ant ly d ec re ase d , or wo uld n ot be con sid er ed o rde rl y. In suc h ca se s, th e re sult in g ch an ge s in v alu ati on te ch niq ue s wou ld b e dis clo sed . I f the m ar ket is co nsi de re d dis ord er ly o r if q uote d pr i ces a re no t avail ab le , the C omp any i s req ui re d to use another valua t ion t echnique, such a s an inc ome approa ch. Di scl osur es a bou t th e Comp any ’s fair va lue m ea su rem en ts of a sse ts a nd li abi lit i es ar e in clu de d i n N o t e 7. Con tingencies The C ompany is subject to proceedings, litiga t ion or threa tened litigation and other claim s and inquiries, relat ed to en vironmental, labor , product, regulat or y, ta x ( other than income tax) and o ther mat ter s, an d is re q uir ed to a ssess t he l ikel iho od o f any ad ve rse j ud gm ent s or o utco me s to the se mat ter s, a s wel l a s pote nt ial r an ge s of pro ba bl e loss es. A d ete rmi nat io n of the p rov isio n re qui re d, i f any, for th es e cont in ge nc i es i s mad e af ter a na ly sis of e ach i nd iv idu al iss ue , of ten w ith a ssis ta nce f rom b oth inte rn al an d ex te rn al l eg al co uns el a nd te ch nic al e xp er ts. T he r eq uir ed a mou nt of a p rov i sio n for a co nti ng e nc y of a ny t yp e may ch an ge i n the f utu re du e to new d eve lo pm en ts i n the p ar t ic ul ar matt er , including changes in the approach to its res olut ion. The Co mp any re co rds a p rov i sio n for i ts c ont in ge nt ob li gat io ns wh en i t is p rob ab le th at a loss w i ll b e in cur re d and t he a mou nt ca n be r ea son ab ly e st im ated . A ny suc h prov isi on is g e ne ra ll y re cog nized o n an und isc ounte d ba si s us ing t he Co mp any ’s be st es ti mate of th e am ou nt of loss i nc urr ed o r at the l owe r en d of an e st imate d ra ng e wh en a s in gle b es t es ti mate is n ot de ter min abl e . In so me c a ses , the Com pany m ay be a bl e to reco ver a p or t io n of th e cost s re lat in g to the se o bli gat io ns fro m in sure r s or othe r thi rd p ar t ie s; howev er , t he Co mp any re cor ds su ch a mou nt s onl y w he n it is p ro bab le t hat th ey w i ll be c ollected. The Co mp any g en er al ly p rov i de s for a nt ic ip ated co st s for w arr ant ie s wh en i t de li ve rs th e re late d pro du c ts . War ran t y cost s in cl ud e ca lc ulate d cos ts a r isi ng f rom i mp er fe c t io ns in d es ign , mate r ia l and workmansh ip in the C ompany’s pr oducts. The Compan y makes indiv idual asses sments on contracts with risks resulting from o rder -spec ific conditions or guaran tees and ass essmen ts on an overall, stat is ti ca l ba si s for si mil ar p rod uc t s so ld i n la rge r qu ant it ie s. The Co mp any m ay have le ga l ob lig ati on s to pe r for m env i ro nme nt al cl ea n - up ac t i v it i es re late d to lan d and buildings as a result of the nor mal opera t ions o f its business. In some cases, the timing or the met ho d of set tl em e nt, o r bot h, a re co ndi ti on al up on a f utu re eve nt th at may or m ay not be w ithi n the contr ol of the Company , but the underl ying obligation i tself is unconditional and certain. The C ompany rec og nizes a p rov i sio n for t he se ob li gat ion s wh en i t is p rob abl e th at a lia bil it y for t he c le an - up a c ti v i t y ha s be en i nc ur red a nd a re a son ab le e st imate of i ts f air v alu e c an b e mad e. I n so me c ase s, a p or t io n of the c ost s ex pe c te d to be i ncu rre d to se tt le th ese m atte r s may be r ecov er ab le . A n asse t is re co rde d wh en i t is pr oba bl e th at such a mo unt s are r eco ver ab le . Prov isi ons f or e nv ir onm e nta l ob lig ati ons a re not dis coun ted to th ei r pre se nt va lu e wh en t he t imi ng of p aym ent s c ann ot be r ea son ab ly e st im ated . Pensions and other postretirement benefits The C ompany ha s a number of def ined benefit pension plans, def ined cont ribution pension plans and ter minat io n in de mni t y pl ans . Th e Com pany r ec ogni zes a n asse t for su ch a p la n’s over fu nd ed s tatu s or a li abi lit y f or su ch a pl an’s un de r fu nd ed s tatus i n it s Con sol id ated B al anc e Sh ee ts . Ad dit i ona ll y, the Com pany m ea sur es su ch a p lan ’s asset s an d ob lig ati on s that d ete rmin e it s fu nd ed s tatus a s of t he e nd of the y ear a nd re co gnize s th e cha ng es i n th e fun de d st atus in t he ye ar i n whi ch th e ch an ge s occ ur . Tho se ch an ges a re re po r te d in “Accum ul ated oth e r com pre he ns ive l oss”. ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P The Co mp any u ses ac tu ar i al v al uati on s to dete rmi ne i ts p e nsi on an d po stre t ire me nt b en ef it c ost s an d cre di ts . Th e amo unt s c alc ul ated d ep en d on a v ar i et y of key a ssum pt ion s, i ncl ud in g dis cou nt rates a nd ex pe c te d retu rn on p la n ass et s. Cu rre nt ma rket co nd it ion s are c ons id ere d in s el e c ti ng these as sumptions. The Co mp any ’s va r io us p en sio n pl an a sset s ar e ass ign e d to the ir re spe c t ive l eve ls i n th e fair v al ue hierarch y in acc ordance with the valua tion princ iples described in the “ Fa ir value measures” section above. Se e Note 17 for f ur th er d isc ussi on of t he Co mpa ny ’s em pl oyee b e nef i t pl ans . Business c ombinations The C ompany accounts f or assets a cquired and liab ilities assumed in business comb inations using the acquis ition method and records t hese a t their r espective fair v alues. C ontingent c onsideration is rec ord ed at f air v alu e a s an e le me nt of p urc ha se pr i ce w i th sub se que nt ad ju stm ent s re co gnize d in income. Id ent if i ab le i nta ng ib les c ons ist o f inte ll ec tu al p rop er t y s uch a s tr ad em ark s a nd tr ad e nam es , cus tom er relations hips, patent e d and unpat ented technology , in-process r esearch and development, order bac kl og a nd c api tal ize d sof t wa re; t he se ar e amo r t ized ov er th ei r est i mated u sef ul l ive s. S uch intangibles are s ubsequently subject t o evaluation f or potential impairment if events or circumstanc es in dic ate the c ar r y ing a mou nt may n ot be r ecov er abl e . Se e “G oo d w il l and i nta ng ib le a sset s” a bove . Acq uis it io n - re lated c ost s are r eco gni zed se pa rate ly f rom t he ac qui sit io n an d ex pe ns ed a s in cu rre d. Up on gai nin g con tro l of an e nti t y in w hic h an e qui t y me tho d or c ost b as is inve st me nt wa s he l d by the Com pany, the c arr y in g v alu e of th at inves tm ent i s adj uste d to fai r va lu e w ith t he r el ated gai n or l oss recorded in income. De fer re d ta x a sse ts a nd li abi lit i es ba se d on te mp or ar y dif fe re nce s be t wee n th e f in an c ial r ep or t in g an d the t a x ba se of a sse ts a nd l iabi li ti es a s we ll a s un cer t ain t a x p osit io ns a nd v al uati on a ll owa nce s on acquir ed deferr ed tax assets as sumed in connection with a bus iness combina tion are in it ially estima ted as of t he ac qui sit io n date ba se d on f ac t s an d c irc ums ta nce s that e x is ted at th e acq uis it ion d ate. T he se est im ates a re subj ec t to chan ge w ithi n the m ea sur em en t pe r io d (a per io d of up to 1 2 m ont hs af te r the acqu isi ti on d ate dur i ng w hic h th e acqu ire r may ad ju st th e prov isi on al acq uis it io n amo unt s) wit h any adjustmen ts to the preliminary estimat es being recor ded t o goodwill. Changes in deferred taxes, unc er t ain t a x po sit io ns an d v alu ati on a llo wan ces o n acq uir ed d efe rr ed t a x a sset s th at occu r af ter t he measurement period are recogn ized in inc ome . New accou ntin g prono unce me nts Applicable for current period Simplify ing the acc ounting f or income taxes In J anu ar y 20 21 , th e Com pa ny ado pte d a new ac coun ti ng s tan da rd up date , whi ch e nh an ces a nd simplifies various aspects of the income tax accoun t ing guidanc e rela ted to intraper iod tax allocations, ownership changes in inv estments and certain aspects of int er im period ta x ac counting. Depending on the a me nd me nt , the a do pti on w as a pp li ed o n eit he r a ret rosp ec t i ve, m od if ie d re tros pe c ti ve , or pros pe c ti ve b as is. T his u pd ate doe s not h ave a sig nif i ca nt im pac t o n th e Com pany ’s Consol id ated Financial S tatements. Applicable for future periods F ac ilitation of the effects of r eference ra te reform on financ ial reporting In M arc h 20 20 , an acco unt in g st an dar d up date wa s issu e d whi ch p rov i de s tem po rar y opt io na l ex pe di ent s an d e xcept i ons to th e cu rre nt gu id an ce on co ntr ac t mo dif i c atio ns a nd h ed ge acc oun ti ng to ease the f inancial report ing burdens related t o the expected mark et transition fr om the London Inte rb ank O f fe re d Rate (L IB O R) an d oth er i nter ba nk of fe re d rates to a lte rnat iv e refe re nce r ates . This up date, a lo ng w i th cl ar i f ic ati ons o utl in ed i n a sub seq ue nt up date i ssue d in J an uar y 20 21 , c an b e ado pted a nd a pp li ed n o later t ha n De ce mb er 3 1 , 20 2 2 , w ith e ar ly ad opt i on p er mit ted . Th e Com pan y do es no t ex pe c t thi s up date to have a si gni f ic ant i mp ac t on i ts Co nso lid ated Fi na nc i al State me nt s. ABB ANNU AL REPO RT 2021 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP Business Combin ations — Accounting for contra c t assets and c ontract l iabilities from contra c ts with customers In O c tob er 2 02 1 , an ac cou nti ng s ta nda rd up date w as i ssue d w hic h prov ide s gu id anc e on th e acco unt in g for r evenue contra c ts acquir ed in a business comb ination. The upda te requires contract asse ts and liabilities acquired in a business co mbina t ion t o be recogni zed and measur ed a t the date o f acquisition in ac cordance with the pr incip les for recognizing re venues f rom c ontracts w ith cus tomers. T his updat e is ef f ec t iv e pros pe c ti ve ly fo r th e Com pany f or an nu al an d inte r im r ep or t in g pe r i ods b e gin nin g Jan ua r y 1 , 2 02 3 , w i th ea rl y ado pt ion p e rmit te d in a ny inte r im p er i od . Th e Com pa ny do es no t ex pe c t thi s up date to have a si gni f ic ant i mp ac t on it s Co nso lid ated Fi na nc i al State me nt s. Disclosures about gov e rnment assistance In N ovem be r 2 02 1 , an acc oun ti ng st an da rd up date w as i ssue d whi ch r eq uir es e nti ti es to d isc los e cer t ain t yp es of g ove rnm en t ass ist an ce . Und e r the u pd ate, th e Com pa ny is re qu ire d to an nua ll y di scl ose ( i) t he t yp e of th e ass ist an ce re cei ve d, in cl ud in g any si gni f ic ant te rms a nd co nd it io ns, ( ii ) it s re late d accou nt in g po lic y, and ( ii i) t he ef fec t su ch tr an sac t io ns have o n it s f in anc i al s tate me nts . Th e up date is ef fe c ti ve ei th er p rosp ec t i vel y fo r all i n - scop e tr ans ac t io ns at the d ate of ado pt io n or re trosp e c ti ve ly, for ann ua l pe r io ds b eg in nin g Jan ua r y 1 , 2 02 2 , w it h ea rl y ado pti on p e rmit te d. T he Co mpa ny w il l ad opt th is up date pro spe c t ive l y as of J an uar y 1 , 20 2 2 . Th e Com pany d oe s not e x pe c t thi s upd ate to have a significant imp act on its Consolidat ed Financial Sta tements. — Note 3 Disc ontinued opera tions Di vest m en t of th e Powe r G r id s b usi n ess On J ul y 1 , 20 2 0, th e Comp any co mp le ted t he sa le of 8 0. 1 p e rce nt of it s Powe r G r ids b us in ess to Hi tac hi Ltd (Hi tac hi). T he t ran sac t io n wa s e xecu ted t hro ug h the s al e of 8 0. 1 pe rce nt of th e sha res o f Hit achi Ene rg y Ltd, fo rme rl y Hi tac hi A BB P owe r Gr i ds Ltd (“ H ita chi En er gy ” ). Ca sh co nsi de rat io n re cei ved at th e cl osin g date w as $ 9, 2 41 mil lio n ne t of ca sh d isp ose d. Fur t he r , fo r acco unt in g pur po ses , the 1 9. 9 p er cent own er shi p inte res t ret ain ed by t he Co mpa ny wa s d ee me d to have b ee n bo th di ves ted a nd re acq uir ed at it s fair v al ue o n Ju ly 1 , 2 0 20. T he Co mpa ny al so obt ain ed a p ut o pti on , exe rc i sab le w ith th re e - mo nth s’ not ice c omm e nc in g in A p r il 2 02 3 (to be ef fec t ive f rom J ul y 2 02 3), al low i ng t he Com pa ny to re qui re Hit achi to p urc ha se t he re mai nin g inte res t for f air v al ue , subj ec t to a mi nim um f lo or p r ice e qu iv al ent to a 10 pe rce nt di scou nt com pa re d to the p r ice p aid fo r the i nit ia l 8 0. 1 pe rce nt . Th e com bin ed f air v al ue of the r et aine d inv est me nt an d th e rel ated p ut o pti on , whi ch a mou nte d to $1 ,7 79 mi ll ion , wa s re co rde d as a n eq uit y - m eth od i nves tme nt an d al so acco unte d for a s pa r t of th e pro ce ed s for t he sa le of t he ent ir e Powe r Gr i ds b us ine ss (see N ote 4). In connection with the divestmen t, the C ompany recor ded liab ilities in discon t inued operations for est im ated f utu re cost s a nd oth er c a sh pay me nt s of $4 87 mil li on fo r va r iou s con trac tu al i tem s rel ati ng to the sale of the bus iness, including r equired fut ure cost reimbursements payable to Hitach i Energy , cost s to be i nc urr ed by t he Co mp any for t he d ire c t be ne f it of H it achi En e rgy a nd a n amo unt d ue to Hit achi Ltd i n con ne c t ion w ith th e e xp ec te d pu rch as e pr i ce f in ali zat io n of the c lo sin g de bt an d wor k in g ca pit al ba la nce s. I n Oc to be r 20 21 , the Co mpa ny an d Hit ac hi con cl ud ed a n agre e me nt to set tl e th e va r iou s am oun ts ow i ng by t he Co mp any. The ne t dif f ere n ce be tw ee n th e agre e d amo unt s an d th e amo unt s in it ial ly e st im ated by t he Co mpa ny wa s re cor de d in 2 02 1 in d isc ont in ue d op er ati ons a s an adj ust me nt to “ Ne t gain r eco gni zed o n sal e of th e Powe r G r ids b us ine ss” i n the t ab le b e low. Dur i ng 2 0 21 and 2 0 20, tot al c as h pay me nts ( in cl ud ing t he a mou nt s paid u nd er t he se tt le me nt ag re em ent) of $3 6 4 mil lio n an d $3 3 mil lio n, r esp ec t i vel y, were ma de i n con ne c ti on w i th th es e lia bil it ie s. At De ce mb er 3 1 , 20 21 , t he re m ainin g am oun t rec ord ed w a s $1 50 mi ll ion . ABB ANNU AL REPORT 2021 0 4 FI NA N CI A L R E V IE W O F A B B GR OU P A s a resu lt of t he Pow er G r id s sa le , the Co mp any re co gnize d an i nit ia l ne t gain of $ 5, 1 41 mil lio n, n et of transaction co sts, for the sale of the entire Pow er Grids business in Income from discontinued op er ati ons , net o f ta x , in 2 0 20. I nc lu de d in th e c alc ul ati on of th e ne t gain w a s a cum ul ati ve tr ansl ati on loss r el ati ng to th e Powe r Gr ids b usi ne ss of $ 4 20 mi lli on w hic h wa s re cl ass if i ed f rom A ccum ul ated ot he r com pre he ns ive l oss (see N ote 21). C er t ain am ou nts i nc lu de d in t he n et gai n wer e est i mated o r otherw ise s ubjec t to change in value and in 2021 the C ompany recorded adjustmen ts, including the agre e d set tl em en t amo unt r efe rre d to ab ove, r ed uc i ng th e tota l ne t gain b y $65 m ill io n. Ce r t ain remain ing minor obliga tions relating t o the div estment continue to be subject to uncer tainty and w ill be adj uste d in f utu re pe r io ds b ut th es e adju st me nts a re no t ex pe c ted to h ave a mate r ial i mp ac t on t he Consol idat e d Fin ancial Sta tements. In 2 02 0, th e Com pany r eco rd ed $ 26 2 mi lli on i n In com e ta x ex pe nse w i thi n disc ont in ue d op er ati on s in con ne c ti on w i th th e re org ani zat ion o f the l eg al e nt it y st ru c ture of t he P ower G r i ds bu si ness r eq uir ed to facilitate the sal e. Certain entities of the Po wer Gr ids busines s for wh ich the le gal proc ess or o ther regula tor y delay s resu lte d in t he Com pa ny not ye t hav i ng tr an sfe rre d le g al t itl es to Hi tac hi we re acco unte d for a s b ein g sol d fro m th e init i al di ves tme nt d ate sin ce con tro l of the b us ine ss a s wel l as a ll r i sk s an d rew ard s of the bus in ess we re fu ll y tr ans fe rre d to Hit ach i Ene rg y. At Dece mb er 3 1 , 20 2 1 , subs ta nti al ly a ll of t hes e de laye d ent i ti es h ave be en l eg al ly t ran sfe rre d to Hi tac hi. T he p roc ee ds fo r th ese e nt it ie s wer e in clu de d in th e ca sh p roc ee ds d esc r ib e d abo ve an d cer t ain f und s we re pl ace d in e scro w pe ndi ng c omp le ti on of the t ra nsfe r pr oce ss. At D ec em be r 31 , 2 02 1 an d 20 2 0, cur re nt res tr i c ted c a sh in cl ud es $1 2 mi lli on a nd $302 million, respec tively , rela t ing t o these proc eeds. In connection with the divestmen t, the C ompany recogn ized liabil ities in discon t inued operations for cer t ain i nd em nit ie s (see N ote 1 5 for ad di ti ona l info rm ati on) and a lso re co rde d an i nit ia l li abi lit y of $2 5 8 mil lio n re pre se nti ng t he f air v alu e of th e r ig ht gr ante d to Hit ach i Ene rg y for t he us e of the A B B br and fo r up to 8 ye ar s. Up on cl osi ng of t he s ale , th e Com pa ny ente re d into v ar i ou s tra nsi ti on se r v ice s agre e me nt s ( TS A s). Pur sua nt to th ese T S A s, th e Com pan y and H it achi En e rgy p rov ide to e ach ot he r , on a n inte r im , tra nsi ti on al ba si s, v ar i ous s er v ice s. T he se r v ice s prov id ed by t he Co mpa ny pr i ma r il y in cl ud e f ina nce , inform ation technology , human r esources and cer tain o ther administ rative ser v ices. Under the current ter ms, t he T SA s w i ll co nt in ue fo r up to 3 yea rs , an d ca n onl y b e ex te nd e d on an e xce pt ion al b as is for bus in ess - cr i ti c al se r v ices fo r an a ddi ti on al p er i od w hic h is re as ona bl y n ece ssa r y to avoid a m ater ia l adverse imp act on t he busines s. In 2021 and 2020, the Compan y recogn ized within its continuing op er ati ons , ge ne ra l an d admi nist rat ive e x pe nse s in cur re d to pe r for m the T S A s, of f set by $17 3 mil lio n and $9 1 mi llion, res p ecti vely , in TSA- relat e d income for such serv ices tha t is repor ted in Other income (e x p e n s e) , n e t . Discontinued ope rations A s a resu lt of t he sa le of t he Po wer G r id s bu sin ess , sub sta nt ial ly a ll P ower G r i ds- rel ated a sset s an d lia bil it ie s have be e n sol d . A s this d ive stm e nt re pre se nted a s trate gi c shif t t hat wou ld h ave a majo r effec t on the C ompany ’ s operations and f inancial results, t he results o f opera tions f or th is business have be e n pre se nted a s di sco nti nu ed o pe rat io ns an d th e ass et s and l ia bili t ies a re p rese nte d a s he ld fo r sale and in discontinued operations for all periods presen ted. C ertain of the business contracts in the Powe r Gr i ds b usi ne ss con ti nu e to be e xec uted b y subs idi ar i es of t he Co mpa ny for t he b en ef it /risk o f Hit achi E ne rg y. Asset s an d li abi lit ie s re lat in g to, as we ll a s th e ne t f ina nc i al re sul ts of, the se con trac t s will continue t o be included in disco ntinued opera tions un til they have been c ompl eted or ot herw ise transferred to Hit achi E n ergy. Pr io r to th e dive st me nt , inte res t ex pe ns e that w as n ot di rec t ly at tr i but ab le to o r re lated to t he Compan y’s c ontinuing business or discon tinued busines s was alloca ted to discontinued opera tions ba se d on th e rat io of n et a sset s to be s ol d le ss de bt th at wa s req ui red to b e pai d as a r esu lt of th e pl ann e d disp osa l tr ans ac ti on to t he su m of total n et a sse ts of t he Co mpa ny pl us co nso li dated d e bt . General corpora te overhead was no t allocated to disc ontinued opera tions. ABB ANNU AL REPO RT 2021 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP Op er ati ng re sul ts of t he d isco nt inu ed o pe r atio ns a re sum mar ized a s fol low s: T ot a l rev en ue s — T ot a l cos t of sa le s — Gross profit — E xp en se s Ch an ge to n et g ai n re co gni ze d on s al e of th e Po wer G r i ds b us in es s — Net int erest income ( expense) and other finance exp ense Non- operational pension ( cost) credit — Income tax Of t he tot al in com e ( loss) from di sco nti nu ed o pe rat io ns b efor e ta xe s in t he t abl e ab ove , $(8 0) mill io n, $5, 170 mil li on an d $5 66 m ill io n in 2 02 1 , 20 2 0, an d 201 9, re sp ec t ive l y, are attr i bu tab le to t he Co mpa ny, while t he rema inde r is attributable to nonc ontrolling int erests. Until the date o f the dives tment, Income income (loss ) from di scon tinued operations before taxes exc lu de d str an de d cost s w hic h wer e pre v io usl y ab le to b e al lo cate d to the P owe r Gr i ds o pe rat in g seg me nt . A s a re sul t, $ 4 0 mil li on an d $2 2 5 mi lli on i n 20 20 a nd 2 019 , res pe c ti ve ly, of all oc ated ov erh ea d and o the r ma nag em en t cost s wh ich w ere p rev iou sl y in clu de d i n the m ea sur e of se gme nt p rof it fo r th e Powe r Gr i ds o pe rat in g se gme nt a re now r ep or te d a s par t of Co rp or ate and O th er. In the t ab le ab ove , Net int erest income ( e xpense ) and other f inance expense in 2020 and 2019 includes $20 mi llion and $4 4 mill io n, re sp ec t ive l y, of intere st e xp en se wh ich h a s be en r eco rd ed o n an al lo cate d ba si s in acc ordance w ith the C ompany ’ s accoun ting policy election until the divestmen t da te. In clu de d i n the r ep or te d T ota l reve nu es of t he Co mp any for 2 0 20 a nd 2 019 a re rev en ue s for sa le s fro m the C ompany’ s opera ting segments to the Power Grids business of $ 108 million a nd $213 million, resp e c ti ve ly, whic h re pre se nt inte rco mp any tr an sac t io ns th at, p r ior to P ower G r i ds b ein g cl ass if i ed as a di scon tinued operation, w ere eliminat ed in the C ompany’s C onsolidated Financ ial S tatements ( see Note 2 3). Su bse qu en t to the d ive stm en t, s ale s to Hi tac hi Ene rg y ar e rep or te d a s thi rd - pa r t y reve nu es . In addition, the Company also has reta ined obligations (primar ily for environmental and taxes ) relat e d to othe r bu si ness es di sp ose d or oth e r w is e ex i ted t hat qu ali f ie d a s disc ont in ue d op er ati ons . Ch an ge s to these r etained obligations are also included in Inc ome (loss ) from discontinued operations , net of tax , above . The ma jor components of assets and l iabilities held for sale and in d iscon tinued operations in the Compan y’s C onsolidat ed Balance Sheets are summarized a s follo ws: Re ce iv ab l es , ne t Inv en tor i es , ne t — Ot he r cu rr e nt a sse ts Cur re n t as se ts h e ld f or s al e a n d in d i sco nt i nu e d op e rat io n s Accounts payable, trade Ot he r li ab il it i es Curr ent liabiliti es held for s ale and in disc ontinued operations Other non- current l iabilities Non-current liabilitie s held for sale and in discontinued operations (1) At D e ce mb e r 31 , 2 0 21 a nd 2 0 20 , th e ba la n ce s re po r te d as h e ld f or s al e an d i n di sco nt i nu ed o p er at io ns p e r tai n to P owe r G r id s ac t i v it i es a nd oth e r ob li ga ti on s w hic h w i ll r em ai n w it h th e Co mp an y unt i l su ch t im e a s th e ob l ig at io n is s et tl e d or t he a c ti v i ti es a re f u ll y wo un d do wn . ABB ANNU AL REPORT 2021 0 4 FI NA N CI A L R E V IE W O F A B B GR OU P — Note 4 Acquis itions, div e stments and equity-acc ounted compan ies Acquisition of contr olling interes ts Acquisitions of cont rolling int erests wer e as f ollows: Pu rc ha se p r ic e for a cq ui sit i on s (net o f ca sh a cq ui re d) — Ag gr eg ate e xce ss of p ur ch as e pr i ce ov er f ai r va lu e of n et a sse t s acq ui re d Number of acquired busines ses — (1) R ec or de d a s go od w i ll (s ee N ote 1 1 ). I nc lu de s ad ju st m en ts o f $9 2 mi ll io n i n 20 19 a r is in g du r i ng t he m ea su re m en t pe r i od of a cq ui si t io ns , pr i ma r il y re f le c t in g ch an g es i n th e v al uat i on o f ne t wo rk i ng c ap it al , d efe r re d ta x l ia bi li t ie s an d in ta n gi bl e a sse ts a cq ui re d . In th e ta bl e ab ove, t he “ P urc ha se pr i ce fo r acqu isi ti on s” an d “Aggre gate e xcess of p urc ha se p r ice ov er fair v al ue of n et a sset s acq ui re d” a mo unt s for 2 0 21 , re late p r im ar il y to th e acq uis it io n of A ST I Mo bil e Rob ot ic s G rou p SL ( A ST I). I n 20 20 a nd 2 019 , the re we re n o sig nif i ca nt acq uis it io ns. Acq uis it io ns of co ntro lli ng i nter est s h ave be en ac coun ted fo r un de r th e acqu isi ti on m eth od a nd h ave been included in t he C ompany’ s Co nsolida ted Financial S tatements sinc e the dat e of a cquisition. On A ugu st 2 , 2 02 1 , th e Com pany ac qui re d th e sha res of A S TI . A S TI i s hea dq uar te re d in B ur gos , Sp ain , and i s a gl ob al auto no mou s mo bil e rob ot ( AM R) m anu fac tu re r . Th e re sult i ng c ash o ut f lows f or th e Com pany a mo unte d to $18 6 mi lli on (ne t of ca sh ac qui re d). T he acq ui sit io n ex pa nd s the Co mp any ’s robotics and automa tion offering in its Robotic s & Discret e Aut omation operating segment. Whi le t he Co mpa ny use s it s be st e st im ates an d assu mpt io ns a s pa r t of th e pur ch ase p r ic e all oc ati on pro cess to v al ue a sset s acq ui red a nd l iab ili ti es a ssum e d at the ac qui sit io n date , the p ur cha se p r ice all oc ati on fo r acq uis it io ns is p re limi na r y fo r up to 1 2 mo nth s af ter th e acq uis it io n date an d is su bje c t to refinement as more detailed analyses are c ompl eted and addi tional inf ormation about the fair values of the a cquired assets and liab ilities becomes ava ilable. The purchase price allocation relating to the acqu isi ti on i n 201 8 of G EI S (Ge ne ra l Ele c tr i c ’s glob al e le c tr i f ic ati on so lu ti ons b us ine ss) was f in al ized dur i ng t he se co nd q uar te r of 2 019 a nd re sul ted i n $9 2 mil li on of n et me a sure me nt p er i od ad ju stm ent s, increasing goodwill, primarily related to changes in the valuation o f net working cap ital, deferred tax liabilities and intangible ass et s ac quired. In ad dit i on , in N ovem be r 20 19, t he Co mp any re cog nize d a gai n of $9 2 mil lio n re lat in g to the re ce ipt of ca sh fr om G en e ral E le c tr i c for a f avora bl e res ol ut ion of a n un ce r tain t y w ith r esp ec t to t he p r ice p aid to acqu ire G EI S . Thi s occ urr ed af te r th e en d of th e mea su rem en t pe r io d an d as a r esul t , the Co mp any recorded a gain in “ Other income (expense ), net” . Acquisition of noncontr olling interes ts In co nn ec t io n w it h the d ive st me nt of it s Powe r G r id s bus in ess to Hi tac hi (see N ote 3), the Co mpa ny retained a 19.9 percent in terest in t he busines s. For a ccoun t ing purpos es the 19.9 percent interest is de em ed to h ave be en b oth d ive ste d an d reac qui re d, w i th a f air va lu e at the t ra nsac t io n date of $1 ,6 61 mi lli on . Th e fair v al ue w a s ba se d on a di scou nte d ca sh f low m od el c ons id er i ng th e e xp ec te d resu lt s of th e futu re b usi ne ss op er ati ons of H it achi En e rgy a nd u sin g re le va nt mar ket in pu ts in clu di ng a r i sk-adj us ted we ig hted - ave rag e cost of c ap ita l. T he Co mp any al so ob tain e d a r igh t to req ui re Hi tac hi to pu rch as e this i nves tme nt (see N ote 3) w it h a fl oo r pr i ce e qui v ale nt to a 10 p erc ent dis coun t com par ed to t he pr ice pai d by Hi tac hi for t he in it ial 8 0. 1 p er cen t. T his o pti on w a s va lue d at $118 million using a standar d option pr icing model with inputs considering the nature of the in vestment and t he e xp e c ted p er i od u nti l op ti on e xerc i se . A s thi s opt io n is no t sep ar ab le fr om th e inve st me nt th e value has been c ombined with t he value o f the underlying investmen t and is accoun ted for t ogether . Hit achi a lso h ol ds a c al l opt io n whi ch wo ul d re qui re th e Com pa ny to sel l the r em aini ng 1 9. 9 pe rce nt inte res t in H it achi En er gy at a p r ice co ns iste nt w i th wh at wa s pai d by Hit ach i to acqu ire t he ini t ial 80 . 1 pe rce nt or at f air va lu e, i f hig he r . Th e opt i on is e xe rc isa bl e w it h th ree - mon ths ’ not ice f rom A p r il 20 2 3, to b e ef f ec t ive f rom J ul y 2 02 3 . ABB ANNUAL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP The C ompany ha s concluded that based on its continuing in volvement with the Pow er Grids business, including membership in its gov erning boa rd o f directors, it has significant influence o ver Hitachi Energy . As a res ult, the investment (including the value of the option ) is acc ounted for using the equit y method. The d if fe re nce b et we e n the i nit ia l ca rr y ing v al ue of t he Co mp any ’s inve stm en t in Hi tac hi En erg y at fai r va lu e and i ts p ro po r ti on ate shar e of the u nd er ly ing n et a sse ts c reate d ba si s dif fe re nce s of $8 , 5 70 mil lio n ($1 ,705 mi lli on fo r the C omp any ’s 1 9. 9 pe rce nt own er shi p) , whi ch ar e all oc ate d as fo ll ows: Allocated amounts Weighted -average us ef ul l i fe Inventor ie s Order ba cklog Property, plant a nd equipment Intangible a ssets Other contra c tual rights Other assets Deferred tax liabilities Goodw ill Less: A mount attributed to noncontr olling in terest Basis dif ference (1) Pr op e r t y, pla nt a n d eq ui pm e nt i nc lu d es a ss et s su bj ec t to a mo r t iz at io n hav in g an i ni ti al f ai r va lu e d if fe r en ce o f $6 8 6 mi ll io n an d a wei g hte d - ave ra ge u se fu l li fe o f 14 ye a rs . (2) Intangible assets include brand licens e ag reement, technology and customer relationships. For a sset s sub je c t to de pre c iat io n or a mo r tiz ati on , th e Com pany a mo r ti zes th ese b a sis d if fe re nce s over t he e st imate d re main ing u sef ul l ive s of th e asse ts t hat gave r i se to thi s dif f ere n ce, re co rdi ng th e amo r t izat io n, n et of re late d de fe rre d ta x b e nef i t , as a re d uc t io n of in com e fro m eq uit y - acco unte d com pan ies . Ce r tai n othe r a sset s ar e rec ord ed a s an e x pe nse a s th e be ne f it s fro m th e asse ts a re rea lize d. At D e cem be r 31 , 2 0 21 , t he Co mpa ny de ter min ed t hat no i mp airm ent of i t s eq uit y - accou nte d investments existed. The carry ing value o f the Compan y ’s inv estments in e quity-account ed companies a nd res pecti ve pe rce ntag e of ow ne rsh ip is a s fo ll ows: Ow ne r sh i p as o f Hi tac hi E ne rg y Ltd Others To t a l In 2 02 1 , 20 2 0 and 2 01 9, th e Com pany r eco rd ed i ts s har e of the e ar nin gs of inv este es a ccou nted f or under the equity method o f accoun ting in Other income ( ex pense ), net, as follows: In co me f ro m eq ui t y- ac co unt ed c om pa nie s, n e t of ta xes Ba s is di f fe re n ce am or tiz at io n (ne t of de fe rr ed i n com e t a x be n ef i t) — ABB ANNU AL REPO RT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP Business divestments In 2 02 1 , th e Com pany r ece ive d p roce e ds (net of t ran sac t io ns co st s and c a sh di spos ed ) of $ 2, 9 5 8 mil li on , relating to divestments of consolidat e d busines ses and recor d ed ga ins o f $2, 193 million in “Other income ( e xpense ), net” on t he sales of such bu sinesses. These are primar ily due t o the dives tment o f the Com pany ’s Mech ani ca l Powe r T ra nsmi ssi on D iv isio n (D od ge) to RB C B ear ing s In c . Cer t ain a mou nt s included in the net gain for the sale of the Dodge business are estimat ed or otherw ise s ubjec t to change in v alu e an d, a s a re sul t, t he Co mpa ny may re cor d add it io nal a dju stm e nts to t he gai n in f utur e pe r io ds whi ch ar e not e xp e c ted to have a m ater i al im pac t o n th e Cons oli date d Fin an c ial St atem ent s . In 2 02 1 , 2020 and 20 19 “Income fr om continuing opera tions before taxes” , included net income of $11 5 million, $9 6 mil li on an d $1 11 m ill io n, re sp ec t iv el y, from th e Do dg e bu sin ess w hic h, p r io r to it s sal e wa s pa r t of the C ompany’ s Motion ope rating segment. In 2 02 0, th e Com pany c omp l eted t he s al e of it s Powe r Gr i ds b us ine ss (see N ote 3 for d et ails) and it s solar in ver ters busines s. In 2019, the Company recorded net ga ins (including trans actions cos ts ) of $55 m illion, primar ily due t o the divestmen t of two bu siness es in China. Dives tme nt o f the solar inverters bus iness In Fe br uar y 20 20 , the Co mp any co mp lete d th e sa le of i ts so la r inve r te rs b usi ne ss for n o cons id er ati on . Un de r the a gre em e nt, w hic h wa s re ach ed i n Ju ly 2 01 9, th e Com pany w a s req ui re d to tra nsfe r $14 3 mill io n of ca sh to th e bu ye r on t he cl osi ng d ate. I n ad dit io n, p aym ent s tot ali ng EU R 1 3 2 mil li on ($145 mi lli on) are re qu ire d to b e tra nsfe rr ed to t he bu ye r fro m 20 20 t hro ug h 20 2 5. I n 201 9, t he Com pa ny recorded a loss of $4 21 million, in “Other income ( expense) , net” , representing the excess of the carrying va lu e, w hic h in clu de s a lo ss of $9 9 mil lio n ar i sin g fro m th e cum ul ati ve tra nsl ati on ad ju stm ent , ove r th e est im ated f air v al ue of th is bu sin ess . In 2 0 20, a f ur th er l oss of $3 3 mi lli on w as r eco rd ed i n “O th er income ( e xpense ), net” for changes in fai r value o f this bus iness. The loss in 202 0 includes the $99 millio n reclass ification from other comprehensiv e income of the c urrency transla tion adjustment relat e d t o the busines s. The f air v al ue w as b as ed o n the e st im ated c urr ent m arke t va lue s us in g Leve l 3 in pu ts , con sid er i ng t he agreed- upon sale terms with the buy er . The solar inverters bu siness, which includes the solar inverter bus in ess acq ui re d as p ar t of th e Powe r-O n e acqu isi ti on i n 201 3 , w as p ar t of t he Co mpa ny ’s Electr ification operating segment . A s this d ive st me nt do es n ot qu ali f y a s a dis cont in ue d op e rati on , th e resu lt s of op e rati on s for th is business pr ior to its disposal are included in the Company’s continuing operations for all periods pr esent ed. In clu di ng th e ab ove l oss of $3 3 mil lio n an d $4 2 1 mi lli on i n 20 20 a nd 2 01 9, res pe c ti ve ly, Inc om e from continuing ope rations before taxes includes net losses of $63 mi llion and $ 490 million, from the sola r inverters bus iness. ABB ANNU AL REPO RT 2021 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP — Note 5 inv estments Cash and equivalents and marketable secur ities and s hort -term inves tments c onsist e d of the following: Co st b as is Gr os s unrealized gains Gr os s unrealized losses Fair value Ca sh a n d equivalent s securities an d short-term inves tme nts Ch an g es i n fa ir v a lu e r ec or de d i n n et i nc om e Ca sh Ti me d ep os it s Equity securities — Ch an g es i n fa ir v a lu e r ec or de d i n ot h er c om p re h en si ve i nc om e Debt securities available-for-sale: — U.S. government obligations — Corporate — To t a l Of which: — Restri cted cash, current — Restri cted cash, non- current Cost b as is Gr os s unrealized gains Gr os s unrealized losses Fair value Ca sh a n d equivalent s securities an d short-term inves tme nts Ch an g es i n fa ir v a lu e r ec or de d i n n et i nc om e Ca sh Ti me d ep os it s Equity securities — Ch an g es i n fa ir v a lu e r ec or de d i n ot h er c om p re h en si ve i nc om e Debt securities available-for-sale: — U.S. government obligations — European government ob ligations — Corporate — — To t a l — Of which: — Restri cted cash, current — Restri cted cash, non- current ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P Con tractual ma tur ities Cont rac tu al matu r it ie s of de bt se cu r it ie s cons is ted of t he fo llo w in g: Availabl e-fo r-sale Cost b a si s Fair value Less than one year On e to f i ve ye ar s Six t o ten y ea rs Du e af te r te n ye ar s To t a l At De ce mb er 3 1 , 20 21 a nd 2 02 0, th e Com pa ny pl ed ge d $6 6 mi lli on a nd $6 6 mi lli on , re spe c t ive l y , of avail ab le -for-sa le m arket ab le se cu r it ie s a s col later al fo r issu ed l et te rs of c red it a nd oth er securit y arrangeme nts. — Note 6 Der ivativ e fi nanc ia l instrume nts The Co mp any i s ex pos ed to ce r t ain cu rre nc y, comm od it y, inter est r ate and e q uit y r i sk s ar is in g fro m it s global opera t ing, financing and inv esting activ ities. The Compan y uses derivative ins truments t o red uc e and m an age t he e con omi c im pac t of t hes e ex po sure s. Du e to the g lo ba l nature of t he Co mp any ’s op er ati ons , ma ny of it s subs idi ar i es a re e xp ose d to cur re nc y risk in the ir opera ting activ ities from entering into transactions in currencies o ther than their func tional cur re nc y. T o m anag e su ch cu rre nc y ri sk s, th e Com pa ny ’s pol ic i es re qu ire i ts su bsi di ar i es to he dg e th ei r foreign currenc y exposu res fr om binding sales and purchase c ontracts denomin at e d in foreign currencies. For forecasted fore ign curr e ncy denominat e d sales of standard products and the related fore ig n cur ren c y d en omi nated p ur cha se s, th e Com pa ny ’s pol ic y i s to he dg e up to a ma x i mu m of 10 0 pe rce nt of th e fore c as ted fo rei gn c urr en c y de no min ated e xp osu res , de pe nd in g on th e le ng th of t he fore c as ted e xp osu res . Fore c as ted e x posu res g re ater th an 1 2 m onth s are n ot he dg e d. Fo r wa rd for eig n exc han ge c ontr ac t s are t he mai n in str ume nt u sed to p rote c t th e Comp any ag ains t th e vol atil it y of futu re c as h fl ows (caus ed by c ha nge s in e xch an ge r ates) of contrac te d an d for ec a ste d sal es a nd purchases denom inated in foreign curr encies. In addition, within its tr ea sury operations, the C ompany primar ily uses foreign e xchange swaps and forward foreign e xchange c ontracts to manage the currenc y and timing mismat ches arising in its liq uidity management act iv ities. Var io us co mm odi t y pro du c t s are u sed i n th e Com pany ’s manuf ac tur i ng ac t i v it i es. Co nse q ue ntl y it i s ex pos ed to vo lat ili t y in f utur e ca sh f low s ar i sin g fro m ch ang es i n com mo di t y pr i ces . T o man ag e the pr i ce r isk of c omm od it ie s, th e Com pa ny ’s pol ic i es re qu ire t hat it s sub sid iar ies h ed ge t he co mm odi t y pr i ce r isk e xp osu res f rom bi nd in g cont rac t s, a s we ll a s at le as t 50 p er cent (up to a ma xi mu m of 10 0 pe rce nt) of th e fore c as ted co mm od it y e xp osur e over t he n ex t 1 2 m ont hs or l on ge r (up to a ma x i mum of 1 8 m onth s ). Pr im ar i ly s wa p cont rac t s ar e use d to man ag e the a sso c iated p r ic e r isk s of c ommo dities. The Co mp any h as i ssue d bo nd s at f ixe d rates . Inte re st rate s wa ps an d cro ss- c urr en c y in tere st r ate sw aps a re use d to ma nag e th e inte res t rate an d for eig n cu rre nc y r i sk a ssoc i ated w i th ce r tai n de bt an d ge ne ra ll y suc h sw aps a re de si gnate d a s fair v al ue h ed ge s. I n add it io n, f rom t im e to ti me , th e Com pany use s ins tru me nt s suc h as i nte res t rate sw aps , inte re st rate f utur es , bon d fu ture s or fo r w ard r ate agre e me nts to m an age i nter est r ate r isk a r isi ng f rom t he Com pa ny ’s bal anc e she et s tru c tur e but d oe s not des ignat e such ins truments as hedges. ABB ANNU AL REPORT 2021 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP The Co mp any i s ex pos ed to f lu c tuat io ns in t he f air v alu e of it s wa rr ant a pp rec i ati on r i ght s ( WA R s ) issu ed u nd er i ts M IP ( Ma nag em ent I nc ent i ve Pla n) ( see N ote 1 8). A WAR gi ve s it s hol d er th e r ig ht to rec ei ve ca sh e qu al to th e mar ket pr i ce of a n eq uiv al e nt lis ted w ar ran t on th e date of e xerc i se . T o el imi nate suc h r isk , t he Com pa ny ha s pu rch as ed c a sh - set tl ed c al l opt io ns, i nd e xed to th e sha res o f the Com pany, whic h en ti tle t he Co mp any to re cei ve am oun ts e qu iv al ent to i ts o bl ig atio ns u nd er th e outstanding W AR s. Volu me o f de r iv ati ve ac ti v i ty In g en er al , whi le th e Com pa ny ’s pr im ar y o bje c t ive i n it s us e of de r iv ati ves i s to mini mize e xp osur es arising from it s busines s, certain derivatives are designated and qualif y f or hedge a ccounting tre atme nt whi le ot he rs e ith e r are n ot de sig nate d or d o not qu al if y fo r he dg e acco unt in g . Fore i gn e xch an g e an d i nte re st rat e de r iv ati ves The g ross n oti on al am ou nts of o ut st an din g for eig n exc ha nge a nd i nte res t rate de r iv at ive s (whe the r de sig nate d as h ed ge s or n ot) wer e as fo ll ows: T otal no tiona l amounts Foreign e xchange contracts Emb e dd e d for ei gn e xc ha ng e de r i vat i ve s Cro ss - cu rr en c y i nte re st r ate sw ap s — — Intere st rate contrac ts Derivative commodity contr acts The Co mp any u ses d er i v ati ves to he d ge it s di re c t or i ndi re c t ex po sure to t he m ovem en t in th e pr i ces of commodities wh ich are primarily copper , silver and alum inum. The follo wing table sho ws the notional amo unt s of ou ts ta ndi ng d e r iv ati ves (wh et he r de sig nate d as h ed ge s or n ot), on a ne t ba sis , to ref le c t the C ompany’ s requir e ments for these commodities : T otal no tiona l amounts T y p e of d e ri va ti ve Unit Cop p er s wa ps metric tonnes Sil ve r s wa ps ounces Aluminum swaps metr ic ton nes Equity der ivatives At De ce mb er 3 1 , 20 21 , 2 0 20 a nd 2 019 , the Co mp any h el d 9 mil lio n, 2 2 mi ll ion a nd 4 0 mi lli on c a sh - set tl ed ca ll op ti ons i nd exe d to A BB Ltd sh are s (conver si on r atio 5 :1 ) w ith a tot al f air v alu e of $ 29 mi ll io n, $21 millio n and $26 mill ion, res pect ively . Ca sh f low h e dg es A s note d ab ove, t he Co mp any mai nl y use s for war d fore ig n exc han ge co ntr ac t s to man age t he fo rei gn exc han ge r i sk of it s o pe rat ion s, co mm odi t y sw aps to m an age i ts co mm odi t y r isk s a nd c as h -s et tle d c al l options t o hedge its W A R liab ilities. The Company applies c ash flow he dge ac counting in only limit e d ca se s. I n the se c as es, t he e f fec t i ve po r ti on of t he c han ge s in t hei r fai r va lue i s re cor de d in “Accu mul ated othe r co mp reh e nsi ve lo ss” an d subs eq ue ntl y re cl ass if i ed i nto ear nin gs i n the s am e lin e ite m an d in th e sam e pe r io d a s the u nd er ly ing h e dg ed t ran sac t io n af fec t s e arni ng s. I n 20 21 , 2 0 20 an d 20 19, t he re we re no si gni f ic ant a mou nt s re cord e d for c as h fl ow he dg e acco unt in g ac t iv i ti es . ABB ANNUAL REPORT 202 1 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP F air value hedges T o red uc e it s inte res t rate e xp osur e ar is in g pr i mar i l y fro m it s de bt issu an ce ac t iv i ti es , th e Comp any use s inte re st rate s wap s an d cross - c urr en c y inte re st rate s wa ps. W he re su ch i nst rum e nts a re de sig nate d as f air v alu e he d ges , th e cha ng es i n th e fair v al ue of t he se in str ume nt s, a s we ll a s th e changes in the fair value of the risk component of t he underlying debt being he dged, are recorded as offsetting gains and losses in “Interest a nd ot he r finance expense” . The e f fe c t of de r iv at ive i nst rum en ts , de sig nate d and q ua lif y in g as f air v al ue h ed ge s, o n the Consol idat e d Income Stat ements was as f ollows: Intere st rate contrac ts Designat ed as fa ir value hedges Hedged ite m Cro ss - cu rr en c y i nte re st r ate sw ap s Designated as fair value hedges — — Hedged ite m — — De r iv ati ves n ot d es ig nat ed i n h ed ge r e lat io ns hi ps De r iv ati ve i nst rum en ts t hat are n ot de si gnate d a s he dg es o r do not q ua lif y as e ith er c a sh f low o r fair value hedges are economic hedges us ed for r isk mana gement purpo ses. Ga ins and los ses f rom cha nges in the fair values o f such der ivatives are recogniz ed in t he same line in the inc ome stat ement as the economically hedged t ransaction. Fur the rm or e, u nd er ce r tai n c irc ums ta nce s, th e Com pa ny is re qu ire d to sp lit a nd acc oun t sep ar atel y for fore ig n cur ren c y d er i vat iv es th at are e mb ed de d w i thin c er t ain bi ndi ng s al es or p ur cha se co ntr ac t s denominated in a c urrency other than the fun ctional currenc y of t he subs idiar y and the counterpart y . The ga ins (losses ) recogniz ed in the C onsolidated Income Sta tements on derivatives no t designa ted in hedging rela t ionship s were as f ollows: T y p e of d e ri va ti ve n ot d es ig n ate d a s a he d ge Location Foreign e xchange contracts T otal revenues T otal cost of sales — SG & A e x pe n ses No n - o rd er r el ate d re se ar ch a nd development Interest and other finance expe nse Embedded foreign exchange contracts T otal revenues T otal cost of sales Commodity cont racts T otal cost o f sales Other Interes t and other finance expense — — To t a l (1) SG& A expen ses represent “Selling, genera l a nd a dministr ativ e expe nses” . 200 ABB ANNU AL REPORT 2021 0 4 FI N AN CI A L R E V I E W OF A B B GR O UP The fa ir values of derivatives include d in t he C onsolida ted Balance Sheets w ere as follow s: Derivative assets Derivative liabilities Cur re n t in “Other curre nt assets” No n - c ur re nt in “ O th e r non- current assets” Cur re n t in “Other cu rr e nt liabilities ” No n - c ur re nt in “ O th e r non- current liabilities ” Derivatives designa ted as hedging instruments: Foreign e xchange contracts — — Int er es t rate c on tr ac t s — — Cro ss - cu rr en c y i nte re st r ate sw ap s — — — Cash- settled call options — — — To t a l Derivatives not designated as he dging ins truments: Foreign e xchange contracts Commodity cont racts — — Intere st rate contrac ts — — Emb e dd e d for ei gn e xc ha ng e de r i vat i ve s To t a l T o ta l fa ir v a lu e Derivative assets Derivative liabilities Cur re n t in “ O th e r cu rr e nt assets” No n - c ur re nt in “ O th e r non- current assets” Cur re n t in “ O th e r cu rr e nt liabilities ” No n - c ur re nt in “ O th e r non- current liabilities ” Derivatives designa ted as hedging instruments: Foreign e xchange contracts — Int er es t rate c on tr ac t s — — Cash- settled call options — — To t a l Derivatives not designated as he dging ins truments: Foreign e xchange contracts Commodity cont racts — — Intere st rate contrac ts — — Emb e dd e d for ei gn e xc ha ng e de r i vat i ve s To t a l T o ta l fa ir v a lu e Close- out netting a greements pro v ide for the termination, valuation and net settleme nt o f some or all outstanding tr ansactions between two counterparties on the occurrence o f one or more pre - define d tr igg er eve nts . Al th oug h th e Comp any i s par ty to c los e - o ut n et ti ng ag re em ent s w i th mo st de r i vat ive c ounte rp ar t ie s, the f air v al ue s in th e ta bl es a bove a nd i n the Co nso li dated B a lan ce S he et s at De ce mb er 3 1 , 20 21 a nd 20 20, h ave be e n pre se nted o n a gro ss ba sis . The C ompany’ s netting a greements and other similar arrangeme nts allo w net settlements under cer tain con dit io ns . At De ce mb er 3 1 , 20 2 1 and 2 0 20, i nfor mat ion r el ated to th es e of fse tt i ng ar ra ng em ent s w as as fol lows: T y p e of a gr ee m e nt o r similar arrangement Gr os s am o un t of recog nize d assets Derivati ve liabilities el i gi b le f o r set - of f i n ca se o f de fa ul t Ca sh collater al received Non- cash collater al received Ne t a sse t exposure Derivatives — — To t a l — — 201 ABB ANNU AL REPO RT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP T y p e of a gr ee m e nt o r similar arrangement Gr os s am o un t of recognized liabilities Derivati ve liabilities el i gi b le f o r set - of f i n ca se o f de fa ul t Ca sh collater al pledged Non- cash collater al pledged Net li ability exposure Derivatives — — To t a l — — T y p e of a gr ee m e nt o r similar arrangement Gr os s am o un t of recog nize d assets Derivati ve liabilities el i gi b le f o r set - of f i n ca se o f de fa ul t Ca sh collater al received Non- cash collater al received Ne t a sse t exposure Derivatives — — To t a l — — T y p e of a gr ee m e nt o r similar arrangement Gr os s am o un t of recognized liabilities Derivati ve liabilities el i gi b le f o r set - of f i n ca se o f de fa ul t Ca sh collater al pledged Non- cash collater al pledged Net li ability exposure Derivatives — — To t a l — — — Note 7 F air v alues Recurring fair value measures The f air v al ue s of f in anc i al a sset s an d li abi lit ie s me as ure d at fair v al ue o n a re cur r in g ba si s were as fol lows: T otal fair value Asset s Secur ities in “Marketable securities and short -term inv e stments” : Equity securities Debt securities— U. S. government obligations Debt securities — Corporate De r i vat i ve a sse ts — c urr e nt in “ O th er c ur re nt a sse t s” De r i vat i ve a sse ts — no n - c ur re nt i n “O th er n o n - cu rr en t as set s ” To t a l — Liab ilities De r i vat i ve li ab il it ie s — cu rre nt i n “ Ot he r cu rr en t li abi li t ie s” Deriv ative liabilities— non- current in “O ther non- current liabilities” To t a l — — 202 ABB ANNUAL REPORT 202 1 04 F IN A NC I A L RE VI E W OF A B B G RO UP T otal fair value Asset s Secur ities in “Marketable securities and short -term inv e stments” : Equity securities Debt securities— U. S. government obligations Debt securities— Other government obligations Debt securities — Corporate De r i vat i ve a sse ts — c urr e nt in “ O th er c ur re nt a sse t s” De r i vat i ve a sse ts — no n - c ur re nt i n “O th er n o n - cu rr en t as set s ” To t a l — Liab ilities De r i vat i ve li ab il it ie s — cu rre nt i n “ Ot he r cu rr en t li abi li t ie s” Deriv ative liabilities— non- current in “Other non- current liabilities” To t a l — — Du r in g 20 21 , 2 0 20 an d 20 19 th e re have b ee n no r ec la ssif i c atio ns fo r any f i nan c ia l ass et s or li abi lit i es bet we e n Leve l 1 a nd Le vel 2 . The C ompany uses the f ollowing methods and ass umptions in estima ting fair values of financ ial ass et s and l ia bili ti es m ea sur ed at f air v alu e on a r ec urr i ng b as is: • Securiti es in “Marketable securities and short-t erm investments” : If qu oted m ar ket pr i ces i n ac t ive mar kets f or id e nti ca l a sset s are av ail abl e , the se ar e con sid er ed L eve l 1 in put s; ho weve r , wh e n mar kets are n ot ac t ive , th ese i np ut s are co nsi de re d Le vel 2 . I f suc h qu oted m ar ket pr i ces a re not av ail abl e , fair value is determined using mark et prices f or similar as sets or present value t e chniques, apply ing an app ro pr i ate ri sk-fre e in tere st r ate adju ste d for n on - p er fo rm anc e r isk . T he in pu ts u se d in pr ese nt v al ue tec hni qu es ar e obs er vab le a nd f al l into th e Lev el 2 c ateg or y . • Deriva t ives : The f air v al ue s of de r iv ati ve i nstr um en ts a re de ter min ed u sin g qu oted p r ic es of i de nti c al ins tru me nt s fro m an ac t ive m ar ket, i f avai lab le ( Lev el 1 i np ut s ). I f qu oted p r ic es ar e not av aila bl e, p r ice quot es for similar instr uments, appr opriately a djust ed, or pr esent value techn iques, based on ava ilable market data, or option pric ing models ar e used. Cash- settled call options hedging the Com pany ’s W AR l iab ili t y are v al ue d ba se d on bi d pr i ce s of the e qu iv al en t lis ted w arr ant . T he fai r va lu es obtained using price quot es f or sim ilar ins truments or valuation techn iques repres ent a Level 2 input unless sign ificant unobser vable inputs are used. Non-recurring fa ir value measures The Co mp any e le c t s to rec ord p r iv ate eq uit y i nves tm ent s w i tho ut re adi ly d ete rmi nab l e fair v al ue s at cost , l ess im pai rme nt , adj uste d fo r obs er vab le p r ic e cha ng es . Th e Comp any re a ssesse s at eac h rep or t i ng p er i od w he the r th ese i nves tm ent s co nti nu e to qua lif y for th is tre atm ent . I n 20 21 a nd 2 02 0, the C ompany recognized, in “Other i ncome ( e xpense ), net” , net fair value gains o f $108 m illion and $7 3 mi lli on , re spe c t ive l y , rel ated to ce r t ain of it s pr i v ate equ it y i nves tme nt s ba se d on o bse r v ab le mar ket pr i ce ch an ge s for a n id ent ic al o r si mil ar inv est me nt of th e sam e issu e r . Th e fair v al ue s we re determined using Level 2 inputs. The carry ing values of these inv estments a t December 31, 2021 and 20 20 tot al ed $1 69 mi lli on a nd $10 5 mil li on . Ba se d on v al uat io ns at Ju ly 1 , 2 0 20, t he Co mpa ny re cord e d go od w il l im pair me nt ch arg es of $ 31 1 mil li on in th e thi rd qu ar te r of 20 2 0. Th e fair v al ue m ea sur em ent s us ed i n the a na ly ses w ere c al cu late d usi ng th e in com e app ro ach (disco unte d c ash f l ow met ho d). T he d isco unte d ca sh f l ow mo de ls we re c al cul ated usi ng u nob se r v abl e in pu ts , whi ch c la ssif i e d the f air v al ue m ea sure me nt a s Lev el 3 (see N ote 1 1 for additional in formation includ ing further deta ile d inf ormation rela ted to these ch arges and significant unobservable inputs ). In J un e 201 9, up on m ee t ing t he c r ite r ia a s he ld fo r sa le , th e Comp any ad ju ste d the c ar r y i ng v al ue of t he sol ar i nver te r s bus in ess w hic h wa s sol d in Fe br ua r y 2 02 0 (Se e Note 4 fo r de tail s). Apar t f rom t he tra nsa c ti ons a bov e, th er e wer e no ad dit i ona l si gnif i c ant no n - re cu rr in g fai r va lu e me asu re me nts d ur i ng 2021 and 20 20. 203 ABB ANNU AL REPOR T 2021 0 4 F IN A NC I A L RE V I E W OF A B B G RO UP Di sc lo su re a bo ut f i na n ci a l in st ru me nt s ca rr i e d on a co st ba si s The f air v al ue s of f in anc i al i nst rum en ts c ar r ie d on a co st ba si s wer e as fo ll ows: Carrying value T otal fair value Asset s Ca sh a nd e q ui va l ent s (ex cl ud in g se cu r it i es w i th o r ig in al Ca sh Ti me d ep os it s Restricted cash Marketable securities and short-t e rm inv estments ( excluding secur ities ): Time deposits Restric ted cash, non- current Liab ilities Sh or t-te r m de bt a nd c ur re nt m atur i t ie s of lo n g -te rm d e bt ( excluding finance lea se obliga t ions ) Long-term debt ( excluding finance lease obliga tions) Carrying value T otal fair value Asset s Ca sh a nd e q ui va l ent s (ex cl ud in g se cu r it i es w i th o r ig in al Ca sh Ti me d ep os it s Restricted cash Restric ted cash, non- current Liab ilities Sh or t-te r m de bt a nd c ur re nt m atur i t ie s of lo n g -te rm d e bt ( excluding finance lea se obliga t ions ) Long-term debt ( excluding finance lease obliga tions) The C ompany uses the f ollowing methods and ass umptions in estima ting fair values of financ ial ins tru me nt s ca rr i ed o n a cost b as is: • Cas h and e qu iv al en ts (excl ud in g sec ur i ti es w i th or i gi nal m atur it i es up to 3 m ont hs) , Res tr i c ted c a sh, current and non- current, and Mark etable securities and s hort-t erm investmen t s ( excluding s ecurities ): The c ar r y i ng a mo unt s ap prox i mate th e fair v al ue s as t he i tems a re sh or t-ter m in n ature or, for ca sh he ld i n ban k s, a re eq ua l to the d ep osi t am oun t. • Short -term debt and curr e nt ma turities of long-term debt ( e xcluding f inance lease obligations ): Short-t erm debt includes c omme rcial paper , bank borr owings and o verdrafts. The carry ing amounts of sho r t-term d ebt a nd c urr ent m atur i ti es of l on g -te rm de bt , e xclu di ng f i nan ce le a se ob li gati on s, appro ximate their fair values. • Long-term de bt ( e xcluding f inance lease obligations ): F air values o f bonds are de termined using quo ted m arket p r ic es (L eve l 1 in put s), if availa bl e. Fo r bo nd s w it hou t avai lab le q uote d ma rket p r ice s and o ther long-term deb t, the fa ir values are determined using a dis counted cash flow met hodology based upon borr ow ing ra tes of s imilar debt inst ruments and reflec ting appropriate adjustments f or non -p e r form an ce r isk ( Le vel 2 i np ut s ). 204 ABB ANNUAL REPORT 202 1 04 F IN A NC I A L RE VI E W OF A B B G RO UP — Note 8 Receivabl es, net an d Con tract assets and l iabil ities “Receivables, net” consist ed of the follo wing: T r ad e re ce iv ab l es Ot he r re ce iv a bl es Allowance To t a l “Trade re cei va bl es ” in th e ta bl e ab ove in cl ud es co ntr ac tua l rete nti on a mo unt s bil le d to cu stom er s of $11 9 mi lli on a nd $1 4 6 mill io n at De ce mbe r 3 1 , 20 21 a nd 2 02 0, re spe c t ive l y. Manag em en t ex pe c t s that the su bst ant i al maj or it y of rel ated co ntr ac ts w ill b e com pl ete d an d th e subs ta nti al maj or i t y of the b ill e d amo unt s re tain e d by the c us tome r w i ll b e col le c ted . O f the r ete nti on a mou nt s out st an di ng at De ce mb er 3 1 , 20 21 , 6 0 p er cent a nd 2 9 p erc ent a re e xp ec te d to be c oll e c ted i n 20 2 2 an d 20 2 3, res pectively . “O the r re cei v ab les ” in t he t abl e ab ove co nsi st s of va lu e add e d ta x , cl aims , re nta l de po sit s an d oth er non-trade rec eivables. The rec onciliation o f changes in the allowanc e for doub tful ac counts is as follow s: T ransitio n adjustment — — Cur re nt- pe r io d p rov i si on f or e x pe c te d cr ed it l oss es Wr ite - of f s ch ar ge d ag ain st t he a ll ow an ce E xch an ge r ate d if fe re n ce s — The f ollowing table pro v ides informa tion about Con tract assets and Contract liabi lities: Contrac t asset s Contract liabilities Cont rac t a sset s pr ima r il y re late to th e Comp any ’s rig ht to rec ei ve con sid er ati on fo r wor k com pl ete d but for w hic h no inv oice h as b e en i ssue d at the r ep or t in g date . Cont rac t a sset s a re tr ans fer re d to rec ei va bl es wh e n r igh ts to re cei ve p aym ent b ec ome u nc ond it io nal . M ana ge me nt ex p ec t s th at the majo r it y of t he am ou nts w ill b e col le c te d w ith in on e yea r of th e res pe c ti ve ba la nce s he et date . Cont rac t li abi lit i es p r ima r il y re late to up -fr ont ad v anc es re cei ve d on o rde r s fro m cus tome r s as we ll a s amo unt s inv oice d to cus tom er s in e xcess o f reve nu es re co gnize d pr ed omi na ntl y on l on g -te rm pr oje c ts . Cont rac t li abi lit i es ar e re du ced a s wor k is p er fo rm ed a nd a s rev en ue s are re co gnize d . The sign if icant changes in the Contract ass ets and Cont ract liab ilities balanc es w ere as f ollows: Contract assets Contract liabilities Contract assets Contract liabilities Re ve nu e re co gni ze d, w hi ch w as i nc l ud ed i n th e Co ntr ac t l ia bi li ti es Ad di ti on s to Co nt rac t l ia bi li ti es - e xc lu di ng a mo un ts r e cog ni zed a s rev en ue d ur i n g th e pe r io d Re ce iv ab l es r ec og nize d t hat we re i n cl ud e d in th e Co nt rac t a ss et s 205 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L RE VI E W O F AB B G RO U P The Co mp any co nsi de r s it s ord er b ack l og to re pr ese nt it s un sati sf i ed p e r form an ce ob li gat ion s. At De ce mb er 3 1 , 20 21 , t he Co mp any ha d uns ati sf ie d p er fo rm anc e obl ig ati ons tot al ing $ 16, 60 7 mil lio n an d, of this a mo unt , th e Com pany e x pe c ts to f ulf i ll a pp rox im atel y 75 pe rce nt of t he ob li gat io ns in 2 02 2 , app rox im atel y 14 p er cen t of the o bl ig ati ons i n 20 2 3 an d the b al an ce the re af ter. — Inv e ntorie s, net “Invent or ies, net” consist ed of the following: Raw m ate r ia ls Work in process Finished goods Ad v an ce s to sup p li er s To t a l — N ot e 10 Proper ty , pla nt and e quip ment , net “Propert y , plant and equipment, net” consi sted of t he f ollowing: Land and buildings Machinery and equi pment Con st ru c t io n in p ro gre ss Accumulat ed depreciation To t a l Assets under finance lea ses included in “Property, p lant and equipment, net” were as follo ws: Land and buildings Machinery and equi pment Accumulat ed depreciation To t a l In 2 02 1 , 20 2 0 and 2 01 9 de pr ec i atio n, i nc lu di ng de p rec i ati on of a sse ts u nd er f i nan ce l ea ses , wa s $575 m ill io n, $5 8 6 mi lli on a nd $6 16 mil li on , resp e c ti ve ly. In 20 2 1 , 20 20 a nd 2 019 t he re we re no s ig nif i ca nt impairmen ts of proper ty, p lant or equipment. 206 ABB ANNUAL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP — Note 11 Goodw i ll and i ntangi ble assets The changes in “Goodw ill” were as f ollows: E lectrification Motio n Process Automation Ro bo ti c s & Disc rete Automation Corpora te and Other To t a l G ood will acquired during the y ear — — — Impairment of Goodw ill — — — Exchange ra te differences and o ther — — Goodw ill ac quired during the year — — — Goodw ill allocated t o disposals — — — Exchange ra te differences a nd o ther — B — (1) At D e ce mb e r 31 , 2 0 21 a nd 2 0 20 , th e gr oss g o od w il l a mo unt ed t o $10 ,76 0 mi ll io n an d $1 1 , 1 5 2 mi ll io n , re sp ec t i ve ly. T he a ccu m ul ate d im pa ir- me nt c ha rg es a m ou nte d to $ 2 78 m il li on a nd $ 3 02 m il li o n, r es pe c t iv el y, an d re la te d to th e Ro b ot ic s & D is cr ete A ut om at io n se gm e nt . The Co mp any ad opte d a n ew op er ati ng m od el o n Ju ly 1 , 2 0 20, w hic h res ulte d in a c ha ng e to the id ent if i cat io n of th e go od w il l re po r ti ng u nit s. Pr ev i ou sly, the r ep or t in g uni ts we re t he sa me a s th e operating s egments for Elec trif ication, Mo tion and R obotics & Dis crete Automation, w hile for t he Proces s Automa t ion opera ting segment the report ing un its were determined t o be at the Div ision level, whi ch is o ne l eve l be l ow the o pe rat in g se gm ent . T he ne w op er ati ng m od el p rov i de s th e Di v is io ns w it h full o wnership and a ccoun t ability f or their respective stra tegies, performance and resources and based on these changes, the C ompany concluded t hat the report ing un its wo uld change and be the r espective Div isions within each operating s e gment. This change result e d only in an allocation o f goodw ill within the o pe rat in g se gm ent s an d thu s th ere i s no c ha nge to s eg me nt le vel g oo dw ill i n the t ab le a bove . A s a resu lt of t he n ew al lo cat io n of go od w il l, an i nte r im q uan ti tati ve i mpai rm ent te st w as co nd uc te d bot h bef ore a nd af te r the c ha ng es w hic h wer e ef fe c ti ve J ul y 1 , 20 20 . In th e “b efo re” te st , it w as concluded tha t the fa ir value of t he Company’s repor ting units exceeded the c arry ing value under the historical repor ting unit structure. The i mp airm en t test w a s pe r for me d for t he n ew re po r ti ng u nit s an d the f air v al ue of e ach w as dete rm ine d us in g a dis cou nted c a sh fl ow fai r va lu e es ti mate ba se d on o bje c t ive i nfor mat ion av ail ab le at the m ea sur em ent d ate. T he s ign if ic an t assu mpt io ns us ed to d eve lo p th e est im ates of f air v alu e for e ach reporting unit included management’ s best estimat es of the e xpected future results and discou nt ra tes spe c if i c to th e rep or t i ng uni t . Th e fair v al ue e st im ates wer e ba se d on a ssum pti on s that t he Com pa ny be li eve d to be re as ona bl e, b ut w hic h are i nh er ent ly u nce r tai n an d thu s, ac tu al re sul ts m ay dif fe r fr om those estimates. The fair values f or each o f the indiv idual reporting units and their as soc iat e d goodwill were de termined using Level 3 measurements. The in terim quantita ti ve imp airment test indica ted that the estimat ed fa ir values of t he repor ting units wer e subs ta nti al ly i n exce ss of th eir c ar r y i ng v al ue fo r al l re por tin g uni ts e xce pt for t he M achi ne Automa tion report ing un it within the Robo t ics & Discr ete Automation operating s e gment. The contra c tion of t he global e conomy in 2020, particularly in end- customer industr ies rela ted to this reporting unit and considerable uncertainty ar ound the continued pace of macroeco nomic r e cov er y ge ne ra ll y le d to a re du c ti on i n the f air v al ues o f the r ep or t in g uni ts , thu s af fe c ti ng thi s re po r ti ng u nit . Al so, at th e Di v i sio n le vel , this r ep or t in g uni t do es n ot be ne f it f rom sh are d c as h fl ows g en er ated w i thin an entire ope rating segme nt. In addition, the book value of the Ma chine Automa tion Div ision includes a significant a mount of i ntangible assets r e cogni zed in past acquisitions , res ult ing in a p rop or t io nate ly hi gh er b oo k va lu e tha n th e othe r re po r t ing u nit w i thi n the R ob ot ic s & Di scr ete Auto mat ion B u sin ess A re a . Wi th th e fai r va lu e of th e rep or t in g uni t lowe r d ue to th e ec ono mic conditions, the ex isting book value of the intangible as sets combined with the newly allocated reporting unit goodwill led t o the carry ing value of the Machine Automation reporting unit ex cee ding its fair v al ue . D ur in g 20 2 0, a go od w il l im pair me nt ch ar ge of $ 29 0 m ill io n wa s re cord e d to red uce t he carry ing value of this repor ting unit t o its implied fa ir value. The rema ining goodwill for the Machine Auto mat ion r ep or t in g uni t wa s $5 5 4 mill io n as of D e cem be r 31 , 20 20. 207 ABB ANNUAL REPORT 2021 04 F IN A N CI A L RE VI E W O F AB B G RO U P Du r in g 20 21 , ce r t ain re po r t ing u nit s we re sp lit i nto se par ate re po r ti ng u nit s. Fo r eac h cha ng e, a n inte r im q uan ti tat ive i mp airm ent te st w as c ond uc te d b efor e an d af ter th e ch an ge an d in a ll c a ses , it wa s con cl ud ed th at the f air v al ue of t he re le va nt re po r ti ng u nit s exc ee de d th e ca rr y ing v al ue by a signif icant amount. At Oc to be r 1 , 20 21 a nd 2 0 20, re sp ec t iv el y, the Com pany p e r for me d qu ali tat ive a sse ssme nt s and dete rm ine d th at it wa s n ot mo re li kel y tha n not th at the f air v al ue fo r eac h of th ese re p or t in g uni ts w as be low t he c arr y in g va lu e . A s a resu lt , th e Com pany c onc lu de d th at it wa s no t ne cess ar y to p er f orm t he quantita tive impa irment test. “Intangible ass ets, net” cons isted of the f ollowing: Gr os s carrying amount Accumu - lated a mort- ization Ne t carrying amount Gr os s carrying amount Accumu - lated a mor - tization Ne t carrying amount Ca pi ta liz ed s of t wa re f or i nte rn al u se Ca pi ta liz ed s of t wa re f or s al e Intangibles other than so ftware: Cust omer - related T echnology- related Marketing-related Ot he r To t a l In 2 02 1 an d 20 20 , add it ion s to int an gib le a sse ts we re $9 5 mi lli on a nd $ 78 mi lli on , re spe c t ive l y . There w ere no significant intangible assets a cquired in busi ness combina tions during 2021 and 2020. Amor tization expense of intangible asse ts cons isted of t he following: Ca pi ta liz ed s of t wa re f or i nte rn al u se Int a ng ib le s ot he r th an s of t wa re To t a l In 2 02 1 , 20 2 0 and 2 01 9, im pai rme nt c har ge s on in tan gi bl e ass et s wer e not si gni f ic ant . At De ce mb er 3 1 , 20 21 , f utu re am or t iz ati on e xp en se of int an gi bl e asse t s is es ti mate d to be : Therea f ter To t a l 208 ABB ANNUAL REPORT 2021 0 4 FI N A NC I AL R E V I E W OF A B B G RO UP — Note 12 De bt The Co mp any ’s tota l de bt at De ce mb er 3 1 , 20 2 1 and 2 0 20, a mo unte d to $5, 561 mi ll io n and $6,1 21 million, respectively. Sh or t- te rm d eb t an d cu rr e nt mat u ri ti es o f lo ng - te rm d e bt “ Sh or t-term d e bt an d cur re nt matur i ti es of l on g -te rm d ebt ” cons iste d of th e fol low ing : Sh or t-te r m de bt Cur re nt m atur i t ie s of l on g -te r m de bt To t a l Short-term d ebt primari ly represents short -term loans from v arious banks and issued commercial paper . At De ce mb er 3 1 , 20 21 , t he Co mp any ha d in p lace t wo co mm er c ial p ap er p rog ra ms: a $ 2 bil lio n Euro - com me rc ia l pa pe r pro gr am fo r the i ssua nce of c omm e rc ia l pap e r in a v ar ie t y of cu rre nc i es , and a $ 2 bi lli on co mm er ci al p ap er p rog ra m for th e pr i v ate plac em ent o f U. S. d ol la r de no minate d com me rc ia l pa pe r in th e Uni ted St ates . At De ce mb er 3 1 , 20 21 a nd 2 02 0, n o amo unt w as o ut st an din g und e r the $ 2 bil li on Eur o - c omm er c ial p ap er p ro gra m. At D e ce mbe r 3 1 , 20 21 , n o am oun t wa s outstanding under the $2 billion program in the United S tat es, while $32 m illion was outstanding a t December 31, 2020 . In D ec em be r 201 9, t he Com pa ny re pl aced i ts p rev iou s mu lt ic urr en c y revo lv in g cre di t fac i lit y w i th a n ew $2 bi lli on m ult i cur re nc y re vol v i ng c red it f ac ili t y matu r ing i n 20 24 . In 2 02 1 , th e Com pa ny exe rc is ed i ts opt io n to fur t he r e x ten d the m atur i t y of this f ac il it y to 20 2 6. T he f ac il it y is fo r ge ne r al cor po rate pur po ses . Inte re st cos ts o n dr aw in gs un de r th e fac i lit y a re LI B OR (for d raw i ngs i n cu rre nc i es fo r whi ch LI BO R is st il l pu bl ish ed ) an d EU RI BO R for E UR O draw i ng s, p lus a m ar gin of 0 . 175 perc ent , wh ile com mitm e nt fee s ( paya bl e on t he un use d p or t io n of the f ac il it y) am ou nt to 35 p er cen t of the m arg in , whi ch re pr ese nt s com mit me nt fe es of 0.0 6 1 25 p e rce nt pe r an num . Ut i liz ati on fe es , paya bl e on draw i ng s, a mou nt to 0.075 p e rce nt pe r an num o n dr aw in gs up to o ne -thi rd of th e fac i li t y , 0 . 1 5 pe rce nt pe r an num o n dr aw in gs in e xce ss of on e -t hird b ut l ess th an o r eq ua l to two -thi rds o f the f ac il it y, or 0. 3 0 pe rce nt p er a nn um on d raw i ng s over t wo -thi rds of t he f ac il it y. The fac i lit y c ont ains c ross - d efau lt cla use s wh ere by a n eve nt of de fau lt wou ld o ccu r if th e Com pa ny wer e to def aul t on i nde bte dn ess a s def i ne d in t he f ac il it y, at or above a s pe c if i ed t hre sho ld . No a mo unt w as d raw n at De cem be r 31 , 20 21 and 2 0 20, u nd er t his fa c ili t y. Long -term debt The Co mp any r aise s lon g -te rm d eb t in v ar i ous c urr en c ie s, matu r it ie s an d on v ar io us i nter est r ate ter ms. For ce r tai n of it s de bt o bli gat io ns, t he Co mpa ny ut il izes d er i v ati ve ins tru me nt s to mo dif y its i nte res t rate ex p osure . I n par tic ul ar , t he Co mpa ny use s inte re st r ate swa ps to ef fe c t ive l y conve r t ce r tai n fixed- rate long -term debt into floa t ing ra te obligation s. For cer tain non- U.S. dollar denomina ted debt, the Co mp any ut i lize s cross - c urr en c y inte re st rate s wap s to ef fe c t ive l y conve r t th e de bt in to a U.S . d ol lar obligation. T he carry ing value o f debt, designa ted as being hedged b y fair value hedges, is adjust e d f or changes in the fair value of the risk component of t he debt being hedged. ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P The f ollowing table s ummarizes the C ompany ’ s long-term deb t con sidering the effect of inter est ra te and c ross - c urre n c y inte re st rate s wap s. Co nse qu ent ly, a f ixe d - rate de bt su bje c t to a f ixe d -to -f loat in g inte res t rate sw ap i s in clu de d a s a fl oat in g rate d ebt i n th e tab le b e low: Balance Nominal rate Ef fe c ti ve rate Balance Nominal rate Ef fe c ti ve rate Fl oat in g rat e Fix ed r ate Cur re nt p or t i on of l on g - ter m d ebt To t a l At De ce mb er 3 1 , 20 21 , t he p r in c ip al am ou nts of l on g -te rm d ebt r ep aya bl e (exclu din g f in an ce le as e ob lig ati ons) at matur it y we re a s fol low s: — Therea f ter To t a l Details of outstanding bonds were as follo ws: Nominal outstanding Carrying value Nominal outstanding Carrying value Bon ds: — USD $ — CHF $ USD $ USD $ EUR $ EUR $ EUR $ EUR $ CHF $ CHF $ USD $ USD $ CH F $ CHF $ EU R $ — USD $ USD $ To t a l $ $ (1) U SD c ar r y i ng v a lu es i n cl ud e un am o r ti ze d de bt i ssu a nce c os ts , b on d di sc ou nt s or p re mi um s, a s w el l a s adj us tm e nt s fo r fai r v al ue h e dg e accoun t ing, where appropriate. (2) ann ua ll y in a rre ar s. Th e Com pa ny had e nter ed i nto inte re st rate s wa ps to he dg e it s inte re st o bli gat io ns fl oat in g rate Sw iss f ran c ob li gat ion s an d con seq ue ntl y have b e en sh own a s f lo atin g rate d ebt at De ce mb er 3 1 , 20 20 , in th e ta bl e of lo ng - ter m de bt ab ove . Com pany r eco gni zed l osse s on e x ti ng uis hme nt of d eb t of $16 2 mil lio n, r ep res ent in g th e pre mi um asso c iate d w it h the e ar ly re d em pti on , a s wel l as t he re co gni ti on of t he re le va nt re maini ng u na mor t ize d issua nce p re miu m or d isco unt s an d issu anc e cost s. 210 ABB ANNU AL REPORT 2021 0 4 FI N AN CI A L R E V I E W OF A B B GR O UP rate of 4. 375 p e rce nt . The Co mp any m ay red ee m b oth of th ese n otes (w hic h were i ssue d tog et he r in M ay 201 2) p r io r to matur i t y, in who le or i n pa r t , at the g reate r of (i ) 10 0 pe rce nt of t he p r in ci pa l am ount o f the n otes to b e re de em ed a nd ( ii ) th e sum of t he p res ent v al ue s of re maini ng s che d ule d pay me nt s of princ ipal and interest ( excluding inter est a ccrued t o the redemption da te ) discount ed to the red e mpt io n date at a rate de f in ed i n th e note te rms , pl us i nter est ac cru e d at the re d em pti on d ate. The se n otes, r eg iste re d w it h the U. S . S ec ur i ti es a nd E xch an ge Co mmi ssio n, we re i ssue d by A BB Fi na nce (US A ) In c ., a 10 0 p erc ent ow ne d f in an ce sub sid ia r y, and we re fu ll y an d unc on dit io na ll y gu ara ntee d by AB B Ltd. T he re a re no s igni f ic ant r est r ic t io ns o n the a bil it y of th e pa re nt com pa ny to obt ain fu nd s fro m it s subs idi ar i es by d iv ide nd o r lo an . In r el ian ce on R ul e 1 3 - 01 of R eg ul atio n S -X , t he se p arate f i nan c ia l state me nt s of A BB Fi na nce ( US A) I nc . a re not p rov i de d . Th e Comp any h as e nte re d into i ntere st r ate sw aps fo r an ag gre gate n omi nal a mo unt of $1 , 05 0 mil li on to pa r ti al ly h ed ge i ts i nte res t ob lig ati ons o n out st an din g pr i nc i pa l is sh own a s fl oat in g rate de bt i n the t ab le of l on g -te rm d eb t abo ve. D ur i ng 2 0 20, US D Note s du e 20 4 2 issu e d. pe r an num . Th e Com pa ny may re de em t he se note s th ree m ont hs p r ior to m atur it y ( Pa r ca ll d ate) , i n wh ole o r in p ar t , at th e gre ater of ( i) 10 0 p e rce nt of th e pr in c ip al a mou nt of th e note s to be re d ee me d and (ii) the sum of the present values of remain ing scheduled paymen ts of pr inc ipal and interest (exclu din g inte re st acc ru ed to t he re de mp ti on d ate) discou nted to t he re de m pti on d ate at a rate def i ne d in t he n ote ter ms, p lu s inte re st acc ru ed at th e re de mpt io n date . Th e Com pany m ay re de em the se i nstr um ent s i n wh ole o r in p ar t , af te r the P ar c al l date at 10 0 pe rce nt of th e pr i nc i pal a mo unt of the n otes to b e re de em ed . Th e Com pa ny ente re d into i nte res t rate sw aps to h ed ge i ts i nte res t on th ese bo nds . Af te r con si de r in g the i mp ac t of su ch sw ap s, th ese n otes e f fec ti vel y be c am e fl oat in g rate eu ro ob lig ati ons a nd co nse qu e ntl y have b ee n show n a s fl oat in g rate de bt , in t he t abl e of l ong - ter m de bt ab ove . ente re d into i nter est r ate sw aps to h ed ge i ts i nter est o n th ese b on ds . Af te r con sid e r ing t he i mp ac t of suc h sw aps , the se b ond s ef fe c t ive l y be c ame f l oati ng r ate eu ro ob lig ati on s and c ons eq ue ntl y have b ee n show n as f l oati ng r ate de bt in t he t ab le of l on g -te rm de bt a bove . of the r esp e c ti ve note s pays i nte res t sem i -a nn ual ly i n ar rea rs . Th e 20 20 N otes we re r ep aid at matur i t y in Oc to be r 20 20 a nd t he 2 02 3 N otes we re re de e me d in f ul l in D ece mb e r 20 20. T he Co mp any may re d ee m the rema ining principal outstanding on the 2028 No tes up t o three mont hs prior t o their ma turit y dat e, in w hol e or i n pa r t, at t he gr eater o f (i ) 10 0 pe rce nt of th e pr i nc i pa l amo unt of t he n otes to b e red e em ed and (ii) the sum of the present values of remain ing scheduled paymen ts of pr inc ipal and interest (exclu din g inte re st acc ru ed to t he re de mp ti on d ate) discou nted to t he re de m pti on d ate at a rate def i ne d in t he N otes te rm s, pl us i nter est a ccr ue d at the r ed em pt ion d ate. O n or af te r J anu ar y 3 , 2 0 28 (thre e mo nths p r io r to the ir m atur it y d ate) , the Co mp any may a lso re d ee m th e 20 28 N otes , in w ho le o r in pa r t , at any ti me at a re d em pti on p r ice e q ual to 10 0 p er cen t of the p r in c ip al am ou nt of th e note s to be re d ee me d pl us u npai d acc rue d i ntere st to, b ut e xclu di ng , the r ed em pt io n date . Du r ing 2 0 20 by w ay du e 20 28 i ssue d. T he se note s, re gi ste re d w ith t he U. S . S ec ur it ie s an d E xch ang e Com miss ion , we re issu ed by A B B Fin an ce (U SA ) In c ., a 10 0 p er cent ow ne d f i nan ce sub si dia r y, and we re fu ll y an d unc on dit io na ll y gu ara ntee d by A B B Ltd. Th e re are n o si gnif i c ant re str i c t ion s on t he ab ili t y of th e par ent com pany to o btai n fu nds f rom i ts s ubs idi ar i es by d iv i de nd o r lo an . In r el ian ce on R ul e 1 3 - 01 of Re gu lati on S -X , th e sep ar ate fi na nc i al st atem ent s of A B B Fina nce ( US A ) In c . are n ot prov id ed . ann ua ll y in a rre ar s. Th e Com pa ny rec ord ed a ggr eg ate net p ro cee ds , af ter u nd er wr it in g dis cou nt an d othe r fe es , of CH F 4 49 mi ll ion (eq uiv al e nt to ap prox im atel y $ 4 49 mi ll ion o n date of i ssuan ce). 211 ABB ANNU AL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP In J anu ar y 20 21 , th e Com pa ny issu ed ze ro in tere st N otes h av in g a pr i nc i pal a mo unt of EU R 8 0 0 mil lio n and d ue i n 20 3 0. The C omp any re co rde d n et pr oce e ds (afte r und e r wr i ti ng fe es) of EUR 7 91 mi lli on (equi va le nt to $9 6 0 mil li on on t he d ate of issua nce). Th ese i nst ru me nts d o not p ay inte res t an d have th e of re duc i ng i ts c ur ren c y an d inte re st rate e xp osu res , cross - c urr en c y inte re st r ate swa ps have b ee n us ed to mod if y the c har ac te r ist ic s of t hes e ins tr ume nt s. A f ter co nsi de r in g th e im pac t of t hes e cross - c urr en c y inte re st rate s wa ps, t he Com pa ny ef fe c t ive l y ha s a fl oat in g rate U. S . do lla r ob li gati on . The Co mp any ’s va r io us d ebt i nst ru me nts c ont ain cr oss- def aul t cla use s whi ch wo ul d all ow th e bo ndh ol de r s to de man d re pay me nt if th e Com pa ny wer e to def aul t on a ny bo rrow i ng at or ab ove a spe c if i e d thr esh ol d. Fur t he rm ore , al l suc h bo nds c ons ti tute u nse cur ed o bl ig atio ns of t he Com pany a nd r ank p ar i p assu w ith ot he r de bt ob li gati on s. In ad dit i on to th e bo nd s de scr i be d ab ove, i nc lu de d in l on g -te rm d ebt at D e cem be r 31 , 2 0 21 an d 20 2 0, are f i nan ce l ea se ob li gat ion s, b ank b or row i ngs of s ubs idi ar i es an d oth er l on g -te rm d eb t, n on e of whi ch is individually significant. Sub sequ ent events At Feb ru ar y 2 3 , 2 02 2 , th e am ount o ut st an din g un de r th e $2 bi lli on Eu ro - comm er c ial p ap er p ro gra m wa s $475 million. — Note 1 3 Othe r provision s, other cu rrent liabil ities a nd other non- curr e nt li abili ties “Other pro visions” consis ted o f the follo w ing: Contract - relat ed provisions Restructuring and r estruc turing- relat ed pro visions Provision f or ins urance -related r eserves Provisions for contractual penalties and compliance and litigation ma tters Ot he r To t a l “Other curren t liab ilities” consist e d of the following: Employee-related liabilities Accrued expenses Non-trade payables Income taxes payable Accrued customer rebates Ot he r t a x li abi li t ie s Deferred inc ome Pe ns io n an d oth e r em pl oy ee b e ne f it s Accrued int erest Ot he r To t a l 212 ABB ANNUAL REPORT 2021 0 4 FI N AN C IA L R E V I E W OF A B B GR O UP “Other non- current liabilities” consisted o f the follo w ing: In co me t a x re l ated l ia bi li ti es Provisions for contractual penalties and compliance and litigation ma tters Deferred inc ome Employee-related liabilities Environmental pro visions Ot he r To t a l — Note 14 Lea se s The C ompany’ s lease obligations pr imarily relate to real estate, ma chiner y and equipment. T he com po ne nts o f lea se e x pe nse we re a s fol low s: Land and buildings Ma ch i ne r y a n d equipment To t a l Op e rat in g l ea se c ost Fin an ce l ea s e cos t Short-term lease cost Sub- lease income — T otal leas e expense The f ollowing table pres e nts s upplemental cash flo w in forma tion related to leases: Land and buildings Ma ch i ne r y a n d equipment To t a l Operating leases: Ca sh p ai d un de r op e rat i ng c a sh f low s Ri gh t-o f-u se a ss et s ob tai ne d in e xch a ng e for n ew l ia bi li ti es : In 2 02 1 , 20 2 0 and 2 01 9 the c a sh f low a mou nt s und e r f ina nce l ea se s wer e not s igni f ic ant . At De ce mb er 3 1 , 20 21 , t he f utur e ne t mini mum l ea se p aym ent s for o pe rat in g an d f in anc e le ase s an d th e relat e d pres ent value of the net minimum lease payments consisted o f the follo w ing: Operating Leases Finance L eases La n d an d buildings Ma ch i ne r y an d equipment La n d an d buildings Ma ch i ne r y an d equipment Therea f ter — T o ta l mi n im u m le a se pay m e nt s Di f fe re nc e be t we en u nd is co unt ed c a sh f lo ws an d di sc ou nte d ca s h fl ow s Pr es en t va l ue o f mi ni m u m le as e pay m e nt s 213 ABB ANNU AL REPORT 2021 04 F IN A N CI A L RE VI E W O F AB B G RO U P The f oll ow i ng t abl e pr ese nt s ce r tain i nfor mat io n rel ated to l ea se te rms a nd d isco unt r ates: Land and buildings Machinery and equip ment Operating Leases: Weighted - average re maining ter m (months ) Weighted - average dis count rate Finance Leases: Weighted - average re maining ter m (months ) Weighted - average dis count rate The p re sen t va lu e of mini mum f i na nce l ea se p aym ent s in cl ud ed i n “ Sh or t-ter m de bt an d cur re nt mat ur ities of long-term de bt” and “Long-term debt” in the Consolida ted Balance Sheets at De ce mb er 3 1 , 20 21 , a mo unt s to $2 7 mi lli on a nd $1 3 4 mi ll io n, re sp ec t ive l y, and at De ce mb er 3 1 , 20 20, amo unt s to $2 7 mi ll ion a nd $1 60 mi ll ion , re spe c t ive l y. — Note 15 C om mitments and c ontingenc ies Con tingenc ies— Regulatory , Complianc e and Legal Regulat or y A s a resu lt of a n inte rn al inv est ig ati on , th e Comp any s el f-re po r ted to t he S ec ur i ti es an d E xch an ge Com missi on (SEC ) an d the D e par tme nt of J ust ic e (D oJ) in t he U nite d States a s we ll a s to th e Se r io us Fraud O f f ic e (SFO) in th e Uni ted K ing do m con ce rni ng ce r tai n of it s pa st d ea lin gs w i th U naoi l and i ts subs idi ar i es , in clu di ng al le g ed i mp rop er p aym ent s ma de by t he se ent i ti es to thi rd pa r t ie s. I n May 20 2 0, the S FO cl ose d it s inv est ig ati on , whi ch i t or i gin al ly a nno un ce d in Fe bru ar y 2017 , a s the c a se di d not me et th e re le va nt test f or pr ose cut io n . The Co mp any co nt inu es to co op er ate w ith t he U. S . aut ho r it ie s as r eq ue ste d. At th is t ime , it i s not p ossi bl e for t he Co mpa ny to ma ke an info rm ed j ud gme nt a bou t th e outco me of t his m atte r . Based on findings during an internal in vestigation, the Compan y self-reported t o the SEC and the DoJ, in the United S tat es, to t he Special Inv estigating Unit (SIU) and the National Pro secuting Aut horit y (N PA) in So uth A fr i ca a s we ll a s to va r io us aut ho r it ie s in oth er c oun tr ie s pote nt ia l susp ec t p aym en ts and o ther compli ance c oncerns in co nnection w ith some of the C ompany’s deali ngs with Esk om and rel ated p er so ns . Many of t hos e par tie s have e xp re ssed a n inte re st in , or c omm e nce d an i nves ti gat ion into, th es e matte r s and t he Co mp any is co op e rati ng f ul ly w i th th e m. T he Co mpa ny pai d $10 4 mill io n to Eskom i n De ce mb er 2 0 20 a s pa r t of a fu ll an d f in al se tt le me nt w i th Es kom an d the S pe c i al Inve st ig ati ng Unit relating to improper payments and other complianc e is sues associat e d with the Controls a nd Ins tru me nt atio n Con trac t , an d it s Var i ati on O rde r s for U nit s 1 and 2 at Ku sil e . The Co mp any co nt inu es to coo pe rate fu ll y w it h th e auth or i ti es i n the ir re v ie w of th e Kusi le p roje c t an d is i n dis cuss io ns w it h them regard ing a coordina ted resolu tion. Although the Company believ es that there c ould be an unfa vorable outc ome in one or more of thes e ongoing re views, at this time it is not pos sible for the Company to make an informed judgment about the possible financ ial impact. General The Co mp any i s awar e of pro ce ed ing s, o r the t hre at of pro ce ed ing s, ag ains t it a nd oth er s in r esp e c t of pr i vate cl aim s by cus tom er s an d othe r th ird p ar t ie s w ith r eg ard to c er t ain ac tu al or a ll eg e d ant ico mp et it iv e pra c ti ces . A lso, t he Com pa ny is su bje c t to oth er c laim s an d le ga l pro ce edi ng s, a s we ll as i nves ti gat io ns ca rr i ed o ut by v ar i ous l aw en force m ent au tho r it ie s. W it h res pe c t to th e above-mentioned claims, regulat or y matt ers, and a ny relat ed proceedings, the Company will bear the relat e d co st s, including costs necess ary to r esolve t hem. 214 ABB ANNU AL REPORT 2021 0 4 F IN A N CI A L RE VI E W O F AB B G RO U P Liab ilities r ecognized At De ce mb er 3 1 , 20 21 a nd 2 02 0, th e Com pa ny had ag gre g ate lia bili ti es of $1 04 m ill io n and $ 10 0 mill io n, respectively, included in “Other pro visions” and “Other non - current li abilities” , for the above regula tory , compliance and legal contingencies, and none of the indiv idual liabilities recogni zed was significant. As it is n ot po ssib le to m ake an i nfor me d ju dgm e nt on , or re as on abl y p red ic t , th e ou tcom e of cer t ain mat ter s an d as i t is not p ossi bl e , ba sed o n inf orm ati on cu rre nt ly av aila bl e to ma nag em ent , to es ti mate the m a x im um p oten ti al li abi lit y o n oth er m atte rs , th ere c oul d be a dve r se ou tcom es b eyon d th e amounts ac crued. Gua rantee s General The f ollowing table pro v ides quantitative data regard ing the Company’s third-part y guarant e es. The ma x i mum p ote nti al p aym ent s re pr ese nt a “ wor st- ca se s cen ar i o” , an d do n ot ref le c t m anag e me nt ’s expec ted ou tcomes. Max im um potentia l payments Performance guarantees Financial guarantees Indemnification guarantees To t a l (1) Ma ximum potential payments include amoun ts in both continuing and dis continued opera tions. (2) C er t ai n in de m nif i c at io ns p rov id ed t o Hi ta chi i n co n ne c ti o n w it h th e di ve st me nt o f Po we r Gr i ds a re w i th o ut l imi t . The carry ing amount of liabil ities recor ded in t he C onsolida ted Balance Sheets r eflect s the Company’s be st es ti mate of f utur e paym e nts , whi ch i t may in cur a s p ar t of f ulf i lli ng i ts g ua ra ntee o bl igat io ns . In resp e c t of th e abo ve gu ara ntee s, t he c arr y in g am oun ts of l iab ili ti es at D ec em be r 31 , 2 02 1 an d 20 2 0, amo unte d to $1 5 6 mil lio n an d $1 35 m ill io n, re sp ec t iv el y, the majo r it y of w hic h is i nc lu de d in discon t inued operations. The Compan y is part y to v arious guarantees providing financ ial or performance ass urances t o certain thir d par tie s. T he se gu ar ante es , whi ch have v ar i ou s matur i ti es u p to 203 5 , mai nl y con sis t of pe r for man ce g uar ante es w he re by ( i) t he Co mpa ny gu ara nte es th e pe r fo rma nce of a t hird p ar t y ’s pro du c t or se r v ice acc ord in g to the te rms o f a cont rac t a nd ( ii ) as m em be r of a co nso r ti um/j oint ventu re th at in clu de s thi rd pa r ti es , th e Comp any g ua ran tee s not o nl y it s own p er f orm an ce bu t als o the work o f thir d par t i es . Suc h gu ar ante es m ay inc lu de g uar ante es t hat a pr oje c t w il l be c omp le ted w ith in a sp ec i f ie d t ime . I f the t hird p ar t y d oe s not f ulf i ll t he o bli gat io n, th e Com pa ny w il l com pe ns ate the g ua ran tee d pa r t y in c as h or i n k ind . Th e or i gi nal m atur it y d ates fo r the m ajo r it y of th es e pe r for man ce g uar ante es r an ge f rom o ne to te n year s . In con junc tion with the div estment of t he h igh-voltage cable and cables acces sor ies busines ses, the Com pany h as e nte re d into v ar i ous p er form an ce gu ara nte es w i th oth er p ar t ie s w it h res pe c t to cer t ain lia bil it ie s of the d ive ste d bu sin ess . At De ce mb er 3 1 , 20 2 1 an d 20 20, t he m a x im um p otent ia l pay ab le und e r the se gu ar ante es a mo unt s to $91 1 mil li on an d $9 9 4 mil li on , resp e c ti ve ly, and th es e gu ara ntee s have v ar io us m atur it ie s ra ngi ng f rom f i ve to ten y ear s. The C ompany retained obliga t ions f or f inancial, performance and indemnific ation guarant e es rela ted to the P ower G r i ds b usi ne ss sol d on J ul y 1 , 20 2 0 (see No te 3 for d etai ls). The pe r fo rma nce a nd f i nan c ia l gua ra ntee s have b ee n in de mn if ie d by H ita chi at th e sam e pr op or t io n of it s own er shi p in Hi tac hi En erg y Ltd, for me rl y Hi tac hi A BB P ower G r i ds (8 0. 1 pe rce nt). Th ese g ua ra ntee s, w hic h have v ar io us m atur it ie s up to 20 35 , p r ima r il y co nsi st of ba nk g ua rante e s, st an dby l et ter s of cr ed it , bus in ess p er fo rm anc e gua ra ntee s an d oth er t rad e - re late d gu ar ante es, t he m ajor i t y of whi ch h ave or i gin al m atur it y d ates ran gi ng fr om o ne to te n year s. T he m a x im um a mou nt pay ab le u nd er th es e gua ra ntee s at De ce mb er 3 1 , 20 21 a nd 2 02 0, is a pp rox im atel y $3 . 2 b ill io n and $ 5. 5 bill io n, re sp ec t iv el y, and th e ca rr y ing a mo unt s of lia bil it ie s (recor de d in d isco nt inu e d op er atio ns) at Dece mb e r 31 , 2 02 1 an d 20 20, a mo unte d to $136 million and $ 135 million, res p ecti vely . 215 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P Commercial commi tm ents In ad dit i on , in th e no rma l cou rs e of bid din g for a nd e xe cut in g ce r tain p roj ec t s, t he Co mpa ny ha s ente re d into s ta ndby l et te rs of c re dit , bi d/ p e r form an ce bo nd s an d sure t y bo nd s (colle c t ive l y “performance bonds”) w ith various financ ial institutions. Cust ome rs can draw on such performance bo nds i n th e eve nt th at the Co mpa ny do es n ot fu lf il l it s con tra c tual o bl ig atio ns . Th e Comp any wo ul d then ha ve an obliga tion to r eimburse the financial institu tion for amounts paid under the performance bo nds . At D ece mb e r 31 , 2 02 1 an d 20 20, t he tot al o ut sta nd ing p e r for man ce b ond s agg re gate d to $3 .6 bi lli on a nd $ 4. 3 bil lio n, re sp ec t i vel y, of whic h $0. 1 bi lli on a nd $ 0. 3 bi lli on , res pe c ti ve ly, rel ate to dis cont in ue d op er ati on s. Th er e have b ee n no s igni f ic ant a mo unt s rei mb ur se d to fi na nc i al in st itut i ons und e r the se t y pe s of arr an ge me nt s in 2 02 1 an d 20 20 . Product and order-related c ontingencies The Co mp any c al cul ates it s p rov i sio n for p ro duc t w ar ra nti es b as ed o n histo r ic al c laim s ex pe r i en ce an d spe c if i c rev iew of ce r t ain co ntra c ts . The rec onciliation o f the “ Provisions f or warran t ies” , including guaran tees of pr oduct performance, was as fo ll ows: Ne t ch an ge i n w ar ra nt ie s du e to ac qu isi t io ns , di ves tm e nt s an d li abi li t ie s he l d for s al e Cl aim s pai d in c a sh o r in k i nd Net increase in provision fo r changes in estimates, warranties issued and warranties expired E xch an ge r ate d if fe re n ce s (1) I nc lu de s ad j us tm en ts t o th e in it ia l pu rc ha s e pr i ce a ll oc at i on r ec or de d du r i ng t he m ea su re m en t pe r i od . In 2 02 0, th e Com pany d ete rmi ne d th at the p rov i sio n for a p ro du c t war ra nt y re late d to a dive ste d bus in ess w as n o lo ng er su f f ic i ent to co ver e xp e c ted w arr ant y c ost s in t he re mai nin g war ra nt y pe r io d . Du e to an un e xp ec te d le vel of p ro du c t fail ure , th e pre v i ous ly e st im ated pr od uc t w arr ant y p rov i si on wa s increased b y $ 143 mil lion during 2020. The corresponding increase was included in “Cost of sales of pro du c ts ” . A s th es e cost s re late to a di ves ted b usi ne ss, i n acco rda nce w i th th e de f ini ti on of t he Com pany ’s pri ma r y me a sure of s eg me nt pe r fo rma nce , Op e rat ion al EB I T A (see N ote 2 3), the cos ts h ave be en e xcl ud ed f rom t his m ea sure . The w ar ran t y lia bil it y ha s b ee n re cor de d ba se d on t he in form ati on c urr ent ly av aila bl e an d is su bje c t to change in the future. Related par ty transactions The C ompany conduc ts busines s with certain companies where members of t he C ompany’ s Board of Di re c tors o r E xec ut ive C ommi t tee ac t , or i n re ce nt yea rs h ave ac ted , as d ire c tor s or s eni or e xec ut ive s. The C ompany’ s Board of Directors has det ermined th at the Company’ s business r e lationsh ips with those companies do not constit ute material busines s rela t ionshi ps. Th is determina tion was made in accor da nce w i th th e Com pa ny ’s rel ated pa r t y tr ans ac ti on p ol ic y w hic h wa s pr ep are d ba se d on t he Sw iss Co de of B es t Pr ac ti ce an d th e in de pe nd en ce cr i ter i a set f or th i n th e cor po rate gove rn an ce ru le s of the N ew York Stock E xc ha ng e. 216 ABB ANNUAL REPORT 2021 0 4 FI N AN CI A L R E V IE W OF A B B GR OU P — No te 16 Income t a xes “Income tax expense” con sisted of the following: Cur re nt t a xe s De fe rr ed t a xe s Income tax expense allocat e d t o con ti nuing operations Income tax expense allocat e d t o disc ontinued opera tions Income tax expense f rom c ontinuing operations is rec onciled below from the Compan y’s weig hte d -ave rag e gl ob al t a x rate (rath er th an f rom t he Sw iss d om es ti c st atutor y ta x r ate ) as t he pa re nt com pany o f the A B B Gr oup, A B B Ltd, i s dom ic il e d in Sw i tze rl an d an d inc om e ge ne rate d in ju r isd ic t io ns out si de of Sw i t zer la nd ( he reaf te r “ fo rei gn j ur is dic t i ons ” ) whi ch h as a lre ad y be en s ubj ec t to co rp orate in com e ta x i n tho se for eig n ju r isd ic t io ns is , to a lar ge e x ten t, t a x e xem pt in Sw i t zerl an d. T he re is n o req ui rem e nt in Sw i tze rl an d for a ny par ent c om pany of a g rou p to f il e a ta x r etur n of th e con sol idate d group determin ing domestic and f oreign pre-ta x income. As the Company’s consolida ted income from continuing ope rations is predominantly earned outside of Switzerland, the weighted-average global ta x rat e of the Company res ults from enacted corporate income tax rates in foreign jur isdictions. The rec onciliation o f “Income tax expense from continuing operations” a t the weigh ted -average ta x rate to th e ef fe c ti ve t a x rate is a s fo ll ows: Income fr om con tin uing operations before income ta xes Wei gh te d - ave rag e g l ob al t a x rat e In co me t a xe s at wei gh te d -av er ag e ta x r ate Ite ms t a xe d at rat es ot he r t ha n th e wei gh ted -ave r ag e ta x r ate Unrecogniz ed tax benefit s Changes in valuation allowanc e, net Ef fe c ts o f ch an ge s in t a x l aws a nd e na c te d ta x r ate s Non- deductible / non-taxable item s Ot he r, net — Income tax expense fr om c ontinuing opera tions Ef fe c ti ve t a x rat e fo r th e ye ar The alloca t ion of consolidat ed income fro m con t inuing opera t ions, wh ich is predominan tl y earned out si de of Sw i t zer la nd, i mp ac t s the “ we ig hted - ave rag e gl oba l ta x rate” . I n 20 21 , gains o n sa le s of bus in esse s in cre as ed t he we igh ted - aver ag e glo ba l ta x r ate by ap prox i matel y 1 p erc ent . I n 201 9, b ase d on th e en ac te d ta x r ates in t he a pp lic ab le j ur i sdi c ti on s, th e loss r eco rd ed fo r th e pl ann ed s al e of th e sol ar i nver te r s bus in ess re du ce d the w eig hted - ave rag e gl ob al ta x rate by ap prox i matel y 2 p er cent . In 2 02 1 , “ Ite ms ta xed at rates o the r th an th e wei ghte d - aver age t a x rate ” inc lu de d $107 mi ll ion , for cer t ain a mou nt s re lated to t he di ve stm ent of t he D od ge b usi ne ss. I n 20 20 a nd 2 01 9, th e amo unt w a s not sig nif ic ant . In 2021, “Changes in v aluation allowance, net” included posi tive impa cts from changes in certain outlooks in E urope of $ 82 million. In 2020, “ Changes in v aluation allowance, net” predominan tly reflec ts increases in the v aluation allowance resulting from changes in the expec tations at tha t time of fu ture economic conditions due to impacts at that time on the Company’s business from the C OVID -19 pandemic. In 2019, “Changes in valua t ion allo wance, net” included a djustments to the valuation allo wance in cer t ain j ur is dic tio ns w he re th e Com pany u pd ated i ts a sse ssme nt th at it wa s m ore l ikel y th an n ot that suc h def er red t a x a sset s wou ld b e re ali zed . In 2 01 9, th e Comp any r eco rd ed a n inc re ase o f $1 58 mi ll io n to the valua tion allowance in certain ope rations in Nor th America , including an amount t o provide for cer t ain d efe rre d t a x ass et s ar is in g in 2 019 . 2 17 ABB ANNU AL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP The re we re n o sig nif i ca nt im pac t s fr om “ Ef fec t s of c han ge s in t a x law s an d en ac ted t a x rate s” in 2 0 21 . In 2 02 0, th e am ount p r im ar i ly r ef le c ts t he i mp ac t of ch ang es to t a x rate s in ce r tai n cou ntr i es i n A sia fo r $16 mil li on . In 2 019 , the a mo unt p r im ar il y re fl e c ts a c han ge i n ta x law ap pli ca bl e to a cou ntr y in Euro pe . The b e nef i t in 2 01 9 wa s mos tl y of fs et by a re late d ch an ge in t he v al uat ion a ll owa nce , re sult i ng in a n et be ne f it of $17 mill io n. In 2 02 1 , “ No n - d ed uc t ib le / n on - ta x ab le ite ms ” in clu de s $5 6 7 mill io n in b en ef i ts p r im ar il y d ue to im pac t s of d ivestments and internal reorganizations whe re the repor ted net gain from sale of busines ses exce e de d th e rel ated t a xa bl e gain a s we ll a s th e im pac t of a re co gni ti on of p rev iou sl y unr eco gni zed out si de b as is di f fe ren ce s. In 2 0 20, t he n eg ati ve im pac t w as $ 2 3 2 mil lio n, a nd i nc lu de d $8 2 mi lli on fo r the impa irment of non- deduc tible goodwill . In addition, the amount in 2020 includes $62 million relating to non - operational pension costs resul ting from the settlement o f certain d efined benefit plans whi ch we re p r inc i pa ll y not d ed uc t ib le . “ N on - ded uc t i bl e / non - ta xab le ite ms ” als o in clu de s oth er i tem s that we re d ed uc te d for f i na nc ia l acco unt in g pu rpo ses b ut a re t yp ic all y n ot ta x d ed uc t ib l e, su ch a s cer t ain i nter est e x pe nse co st s, l oc al ta xes on p rod uc t i ve ac t iv i ti es , dis al lowe d am ou nts fo r me als a nd entertainment e xpenses and other similar items. The amo unts in 2019 relat ed primarily to thes e typically non- deduct ible it e ms. In 2 02 1 an d 201 9, “ U nre co gnize d ta x be nef i ts ” in th e ta bl e ab ove in cl ud ed a n et co st of $1 5 0 mil lio n an d $91 mi lli on , res pe c ti ve ly, rel ated to th e in terp re tat ion fo r ta x law an d dou bl e ta x treat y ag re em ent s by com pe tent t a x aut ho r it ie s. I n 20 20, “ U nre co gnize d t a x be ne f it s” i ncl ud e d a be ne f it of $ 20 mi lli on . In 2 02 0, “O th er, net ” in cl ud es an e x pe nse of $ 5 4 mill io n, re l ated to f in ali zat io n of ta x au di ts i n Euro pe . De fer re d ta x a sse ts a nd li abi lit i es (excl udi ng a mo unt s he ld fo r sa le a nd in d isc ont in ue d op er ati ons) consist ed of the following: Deferred tax assets: Un us ed t a x l osse s an d c re di ts Pro v is io ns a nd o th er a ccr u ed l ia bi lit i es Other curren t ass ets including receivables Pension Inventor ie s Intangible a ssets Ot he r T o ta l gr os s de fe r re d ta x a ss et Valua tion allowanc e T o ta l gr os s de fe r re d ta x a ss et , n et o f va l ua ti on a l l owa n ce Deferred tax liabilities: Pro p er t y, pl an t an d eq ui pm e nt Intangible a ssets Other assets Pension Ot he r li ab il it i es Inventor ie s Unre mitte d earni ngs of subsi diar ie s T o ta l gr os s de fe r re d ta x l i ab i li t y Included in: “Deferred ta xes”—no n- current assets “Deferred ta xes”—no n- current liabilities Cer t ain e nt it ie s have de fer re d ta x a sse ts r el ated to ne t op er ati ng l oss c arr y-fo r w ard s an d othe r ite ms . A s re cog nit io n of the se a sset s in c er t ain e nti t ies d id n ot me et t he mo re li kel y th an no t cr ite r io n, va luat io n al low an ces h ave be en re co rde d . “ Un use d ta x l osse s an d cre di ts ” at De ce mb er 3 1 , 20 21 a nd 20 20, i n th e ta bl e ab ove, i nc lu de d $93 mi ll ion a nd $170 mil lio n, r esp e c ti vel y, for whi ch t he Co mpa ny ha s est ab li she d a va lu ati on al low an ce a s, du e to li mit atio ns i mp ose d by th e rel ev ant t a x law, the Co mp any dete rm ine d th at, m ore l ikel y th an n ot, s uc h def err ed t a x a sset s wou ld n ot be r eal ize d. 218 ABB ANNUAL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP The v al uat io n all owa nc e at De cem be r 31 , 2 0 21 , 2 02 0 an d 201 9, w as $1 , 26 3 mil li on , $1 , 51 8 mil li on an d $1,632 million, res pect ively . At De ce mb er 3 1 , 20 21 a nd 2 02 0, d efe rre d ta x lia bil it ies tot al in g $3 08 m ill io n and $ 33 3 mil li on , respectively, have been pr ov ided for withholding taxes, dividend distribution taxes or a dditional corpora te income taxes (hereafter “withholding taxes”) on unr emitted e arnings which will be pa yable in fore ig n jur i sdi c ti on s in th e eve nt of re patr i ati on of t he fo rei gn ea rni ng s to Sw it zer la nd . In com e whi ch ha s be en g e ne rate d out si de of Sw i t zer lan d an d ha s al rea dy b ee n sub je c t to cor po rate in com e ta x in suc h fore ig n jur i sdi c ti on s is, to a l arg e e x tent , t a x exe mpt i n Sw it ze rl an d and t he refo re , ge ne ra ll y no o r onl y l imite d Sw i ss inc om e ta x h as to b e prov id ed fo r on t he re patr i ated e arn ing s of for eig n sub sid iar ies . Certain c ountries levy withholding taxes on dividend distributions and these taxes cannot always be ful l y rec lai me d by th e Comp any ’s relev an t subs idi ar y rece iv ing t he d iv i de nd a lt hou gh t he t a xes have to be w i thh e ld an d pai d by th e rel ev ant su bsi di ar y d ist r ib ut in g suc h div id en d. I n 20 2 1 and 2 0 20, ce r t ain ta xe s aros e in ce r tai n for eig n ju r isdi c t ion s for w hic h th e tec hni ca l me r it s do n ot all ow ut il iz atio n of be ne f it s. At D ec em be r 31 , 2 02 1 an d 20 20 , fore ig n subs idi ar y ret aine d ea rni ng s subj ec t to w i thh ol di ng ta xe s up on di str i bu ti on of a pp rox im atel y $10 0 mil lio n an d $10 0 mil li on, r esp e c ti ve ly, were co nsi de re d as indefinitely r einv ested, as these funds are us ed for f inancing current opera tions as well as business grow t h thr ou gh wor k in g ca pit al an d ca pit al e xp e ndi ture i n th ose co untr i es a nd , con seq ue ntl y, no def er red t a x li abi li t y wa s re cord e d. At De ce mb er 3 1 , 20 21 , n et o pe rat in g loss c ar r y -fo r wa rds o f $2 , 170 mill ion a nd t a x cr ed it s of $6 9 mil lio n wer e avail ab le to re du ce fu ture i nc ome t a xes o f cer t ain su bsi di ar ie s. O f th ese a mo unt s, $1 , 2 58 mi ll io n of op er ati ng l oss ca rr y -fo r w ard s an d $4 8 mi ll ion o f ta x c re dit s w i ll e xpi re in v ar y in g am ount s th rou gh 2045, while the remainder are available f or carr y forward indefinitely . The lar g est amoun t of thes e carr y-forw ards rela ted to the Company’ s Eur o pe operations. Unrecogni zed tax benef its consi sted of t he f ollowing: Unrecognize d tax benefits Pe na l ti e s an d inter est relate d to unrecognized tax benefits To t a l Ne t ch an ge d u e to acq ui si ti on s an d di ve st me nt s In cr ea se r el at in g to pr i o r yea r ta x pos it io ns De c rea s e re lat in g to p r io r ye ar t a x po si ti on s In cr ea se r el at in g to cu rr en t yea r t a x po si ti on s De c rea s e du e to se tt le m en ts w i th t a x au th or i ti e s De c rea s e as a r esu lt o f th e ap pl ic a bl e st atu te of li mi tat i on s Exchange ra te differences wh ic h wo ul d , i f re co gn iz e d, a f fe c t th e ef f ec t iv e ta x ra te Ne t ch an ge d u e to acq ui si ti on s an d di ve st me nt s — In cr ea se r el at in g to pr i o r yea r ta x pos it io ns De c rea s e re lat in g to p r io r ye ar t a x po si ti on s In cr ea se r el at in g to cu rr en t yea r t a x po si ti on s De c rea s e du e to se tt le m en ts w i th t a x au th or i ti e s De c rea s e as a r esu lt o f th e ap pl ic a bl e st atu te of li mi tat i on s E xch an ge r ate d if fe re n ce s wh ic h wo ul d , i f re co gn iz e d, a f fe c t th e ef f ec t iv e ta x ra te Ne t ch an ge d u e to acq ui si ti on s an d di ve st me nt s In cr ea se r el at in g to pr i o r yea r ta x pos it io ns De c rea s e re lat in g to p r io r ye ar t a x po si ti on s In cr ea se r el at in g to cu rr en t yea r t a x po si ti on s De c rea s e du e to se tt le m en ts w i th t a x au th or i ti e s De c rea s e as a r esu lt o f th e ap pl ic a bl e st atu te of li mi tat i on s E xch an ge r ate d if fe re n ce s wh ic h wo ul d , i f re co gn iz e d, a f fe c t th e ef f ec t iv e ta x ra te ABB ANNU AL REPO RT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP In 2 02 1 , “ In cre as e re lati ng to c urr ent ye ar t a x p osit io ns ” inc lu de d a tota l of $7 2 mill ion i n ta xes re late d to the i nte rpr etat io n of ta x law an d dou bl e ta x treat y ag re em ent s by co mp ete nt ta x autho r it ie s. In 2 02 0 an d 201 9, “ In cr ea se re lat in g to cur re nt yea r ta x p osi ti on s” in cl ud ed a tot al of $3 8 1 mil li on an d $163 mi ll ion , re spe c t ive l y, in ta xes re l ated to th e inte rp ret ati on of t a x law a nd d oub le t a x tr eat y agre e me nts b y com pe tent t a x aut ho r it ie s. In 2 0 20, $ 30 1 mil lio n of th e $3 81 mi lli on i s re po r ted a s Income tax expense in discontinued opera t ions. In 2 02 1 , “ In cre as e re lati ng to p r io r yea r ta x p osi ti on s” in cl ud ed a tot al of $ 24 0 mil li on re late d to the inte rp ret ati on of t a x law a nd do ub le t a x tr eat y agr ee me nt s by com pe tent t a x au tho r it ie s in Eur op e. In 2 02 0, “ In cre a se re lat ing to p r io r yea r ta x p osi ti on s” is p re do min antl y re late d to the i nte rpr et atio n of ta x l aw and d ou bl e ta x t reat y ag re em ent s by co mp ete nt ta x auth or it i es in Eu rop e, o f whi ch $ 7 3 mil lio n is reported as Income tax expense in dis continued opera tions. In 2 02 1 , “ De cr ea se re lat in g to pr i or ye ar ta x posi ti on s” in cl ud ed a tot al of $ 4 2 mi lli on r el ated to t a x r isk asses sments in Europe o f $33 million. In 2 02 0, “ De c rea se re lat in g to pr i or ye ar ta x pos it ion s” i ncl ud e d a total of $ 8 5 mil lio n re late d to a cha ng e of inte rp ret ati on of t a x law i n A sia a nd c ha ng ed t a x r isk a sse ssme nt s in Eu rop e of $59 m ill io n. In 2 02 1 , “ De cr ea se du e to set tl e me nts w ith t a x aut hor i ti es ” is p red omi na ntl y re late d to ta x a sse ssme nt s rec ei ved i n Euro pe . In 2 02 0, “ De c rea se d ue to se tt le me nts w ith t a x aut hor i t ies ” is p re dom ina ntl y re late d to clo se d ta x audi t s in Euro pe . At De ce mb er 3 1 , 20 21 , t he Co mp any e xp ec te d th e res ol ut ion , w i thin t he n ex t t we l ve mo nths , of unrecogni zed tax benef its rela ted t o pending court cases amounting t o $63 mi llion f or income taxes, pe na lt ies a nd i nter es t. O th er w ise , th e Com pany h ad not i de nt if i ed a ny oth er s igni f ic ant c ha ng es w hic h wer e cons id er ed re a son ab ly p ossi bl e to occ ur w i thin t he n ex t t we l ve mo nths . At De ce mb er 3 1 , 20 21 , t he e arl ie st si gni f ic ant o pe n ta x year s th at rem aine d su bje c t to ex ami nati on we re the f ollowing: Region Ye a r Eur op e Unite d States Re st of A m e r ic a s China Re st of A s ia , M id d le E as t an d Af r ic a 220 ABB ANNUAL REPORT 202 1 04 F IN A NC I A L RE VI E W OF A B B G RO UP — N o t e 17 Emp loy e e benef its The C ompany ope rat es define d benefit pension plan s, define d con tr ibution pension plan s, and ter minat io n in de mni t y pl ans , in ac cord an ce w it h lo ca l re gul ati ons a nd p rac t i ces . At De ce mb er 3 1 , 20 21 , the Co mp any ’s mos t sig nif i ca nt de f in ed b e nef i t pe ns ion p la ns a re in Sw i t zerl an d a s wel l as i n G er many, the Un ited Kingdom, and the Un ited Sta tes. These plans c over a large portion of t he C ompany’ s em pl oyee s an d pro v id e be ne f it s to em pl oye es i n the e vent o f deat h, di sa bili t y, reti rem e nt, o r ter minat io n of e mpl oy me nt . Cer t ain of t he se pl an s are m ult i - e mp loy er p la ns. T he Co mpa ny al so operat es ot her postr et irement benefit plans including postretirement health care benefits and other employee- relat e d benefits for active employees including long- serv ice awar d plans. The measurement date use d fo r the Co mp any ’s em pl oye e be ne f it p lan s is D ec em be r 31 . T he f un din g po li c ie s of the Com pany ’s plans a re co nsi ste nt w it h lo ca l gove rn me nt an d ta x r eq uir em ent s . Du r in g 20 20, t he Co mpa ny too k ste ps to tr ans fer t he d ef i ne d be ne f it p ens io n r isk s i n thr ee Inte rn atio na l cou ntr i es to e x ter nal f i na nc i al in st itut io ns . T wo of th ese p la ns we re se tt le d ent i rel y fo r acc ounting pur poses while t he th ird plan inv ol ved the settlement of s p ecif ic obliga t ions f or certain form e r em pl oyee s. I n con ne c t io n w ith t he se tr ans ac ti on s, th e Com pa ny mad e net p aym en ts of $309 million and rec orded non-op erational pension char g es o f $520 m illion which w e re included in net pe r io di c be ne f it cos t as c ur t ailm en ts , set tl em en ts a nd sp ec i al te rmi nat ion b e nef i ts . Th e Com pan y also mad e ca sh p aym ent s of $14 3 mi lli on a nd re cor de d no n - o pe rat io nal p e nsi on ch arg es o f $101 mil li on in 2020 for the s ettlement o f pension ob ligations in discon tinued operations. The C ompany recognizes in its Cons olidat ed Balance Sheets the funded sta tus of its defined benefit pe nsi on p la ns, p ost ret ir em ent p la ns an d oth er e mp l oyee - rel ated b en ef i ts m ea sur ed a s th e dif f ere n ce bet we e n th e fair v al ue of t he p lan a sse ts a nd t he b en ef it o bl ig atio n . Unless otherw ise indica ted, the f ollow ing tables include amounts relating to both continuing and discon t inued operations. Obligations and funded s tatus o f the plans The c ha ng e in b en ef it o bl ig ati on , cha ng e in f air v alu e of pl an a sse ts , and f un de d st atus re cog nize d in the C onsolida ted Balance Sheets w ere as follow s: Defined pension benefits Other pos tretirement benefits Switze rland International International Ser v ice cost Interest co st Contributions by p lan participants — — Benefit p aymen ts Settlemen t s — — Benefit obligations o f businesses acquired ( divested) — Ac tu ar i al ( gai n) lo ss Plan amendments and other — — Exchange ra te differences — — — — Ac tu al r etu rn o n p la n ass et s — — Contributions b y employer Contributions by p lan participants — — Benefit p aymen ts Settlemen t s — — Plan as sets o f busines ses acquired (divest e d) — — — Plan amendments and other — — — — Exchange ra te differences — — — — 221 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P The amoun t s recogn ized in “ Accumulat e d ot her compr ehensive lo ss” and “Noncontrolling int erests” were : Defined pension benefits Other pos tretirement benefits Ne t ac tu ar i al ( l oss) gai n Prior serv ice credit Am o un t re co gn i ze d i n OC I a n d NC I T a xe s a sso c iat ed w i th am ou nt re co gn ize d in O CI a n d NC I — — — Amount recognized in OC I an d N CI , n et o f ta x (1) OCI rep resen ts “A ccumu lated other comprehens ive loss” . (2) NCI represents “Noncontrolling interests” . (3) N CI , ne t of t a x , am ou nt ed to $ 0 mi ll io n , $(1 ) mi ll io n an d $( 1) mi l li on at D e ce mb e r 31 , 2 0 21 , 2 0 20 a nd 2 01 9 . In addition, the following amoun ts were recognized in the Company’s Consolidat e d Balance She ets: Defined pension benefits Other pos tretirement benefits Switze rland International International Overfunde d plans — — Underfun ded plans — current — — Underfun ded plans — non - current Non - curre nt assets Over funded pensio n plans Other employ ee -relat ed ben efits Pension a nd other employee benefits Curr ent liabiliti es Underfunded pension plans Underfunded other pos tretirement b enefit plans Other employ ee -relat ed ben efits Pension a nd other employee benefits Non-current liabilitie s Underfunded pension plans Underfunded other pos tretirement b enefit plans Other employ ee -relat ed ben efits Pension a nd other employee benefits 222 ABB ANNU AL REPORT 2021 0 4 F IN A N CI A L RE VI E W O F AB B G RO UP The a ccum ul ated b en ef i t obl ig ati on ( AB O) for al l de f in ed b en ef i t pe nsi on p la ns wa s $ 8, 45 2 mi lli on a nd $9, 3 10 mil li on at D ece mb e r 31 , 2 02 1 an d 20 20, r esp e c ti vel y. The p roje c te d be ne f it ob li gat ion ( PB O), ABO and f air v al ue of p la n asse t s, for p e nsi on p lan s w it h a PBO i n e xcess of f air va lu e of pl an a sset s o r AB O in exce ss of fai r va lu e of pl an a sset s, w as: PB O exc ee d s fa ir v a lu e of p l an a ss et s A B O exc ee d s fa ir v a lu e of p l an a ss et s Switze rland I nternational Switze rland Int ernational PBO ABO Fair v al ue of p l an a sse t s Al l of th e Com pany ’s other p ost ret ir em en t be nef it pl ans a re un fun de d . Com po ne nt s of n et p e ri od i c be n ef it c ost Ne t pe r io dic b e nef i t cos t cons is ted of t he fo llo w in g: Defined pension benefits Other pos tretirement benefits Switze rland International International Operational pension cost: Ser v ice cost Operational pension cost Interest co st E xp ec t ed r etu rn o n p la n as set s — — — Amort ization of prior s erv ice cost (credit) Amort ization of net actuar ial los s — — Curta ilments , settlemen ts and special termination benef its — — Net periodic benefit co st The c omp on e nts of n et p er i od ic b en ef i t cost ot he r tha n th e ser v ic e cost c omp on en t are i nc lud e d in th e line Non- operational pension ( cost ) credit in the C onsolidated Income Sta tements. Net periodic benefit cost i nc lu de s $1 21 mi ll ion a nd $ 47 mill io n in 2 02 0 an d 201 9, re sp ec t iv el y, relate d to dis cont in ue d operations. Assumptions The f ollowing weigh ted -average a ss umptions w ere used t o det e rmine benefit obligations : Defined pension benefits Other pos tretirement benefits Switze rland International International Discount ra te — Rate of compensation increase — — Rate of pension increase — — — — Ca sh b al an ce i nte re st c re di t ra te — — For th e Com pa ny ’s signi f ic ant b e nef i t pl an s, th e dis cou nt rate us ed at ea ch me a sure me nt d ate is set ba se d on a hi gh - q ua lit y c orp or ate bo nd y i el d cu r ve (der ive d ba se d on b ond u ni ver se in form ati on sourc ed from reputable third-par ty index and da ta providers and rating agenc ies ) reflecting the timing, amo unt a nd c urr en c y of th e futu re e xp ec te d b en ef it p aym ent s fo r the r esp ec ti ve pl an . Cons iste nt dis coun t rates a re us ed ac ross al l pl an s in ea ch cu rre nc y zone , ba se d on th e du rat io n of the a pp li ca bl e pl an(s) in th at zone . Fo r pl ans i n the o the r co untr i es , the d isc ount r ate is ba se d on h igh q ua lit y c orp or ate or g over nm ent b on d y i el ds ap p lic ab le i n th e resp e c ti ve cu rre nc y , a s ap pr opr iate at each m ea sur em ent date w it h a du rati on b roa dl y con sis tent w ith th e re spe c t ive p la n’s obli gat io ns. 223 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A B B GR OU P The f oll ow i ng wei ghte d - aver age a ssu mpt io ns we re us ed to d ete rmin e th e “ Ne t pe r io di c be ne f it cos t ”: Defined pension benefits Other pos tretirement benefits Switze rland International International Discount ra te — E xp ec t ed l on g - ter m rat e of re tur n on p l an a sse t s — — — Rate of compensation increase — — — Ca sh b al an ce i nte re st c re di t ra te — — — The “ E x pe c te d lo ng -te rm r ate of retu rn o n pl an a sset s” i s de r ive d for e ach b e nef i t pl an by co ns id er i ng the e x pe c ted f utu re lo ng - ter m retu rn a ssum pti on fo r eac h in div id ual a sse t cla ss . A sin gl e lo ng - ter m retu rn a ssum pti on i s the n d er i ved f or ea ch pl an b as ed u po n the p la n’s targ et a sse t all oc ati on . The C ompany maintain s ot her postr et irement benefit plans, which are generally cont ributory w ith part icipants’ contributions adjusted annually . The ass umptio ns used were: He al th c ar e cos t tr en d rat e as sum e d for n e x t yea r Rate t o whi ch t he t re n d rate i s as sum e d to de c li ne (th e ul t im ate tr en d r ate) Year th at th e rate r ea ch es t he u lt i mate t re nd r ate Pla n a sse ts The Co mp any h as p en sio n pl an s in v ar io us co unt r ie s w ith t he m ajor i t y of th e Com pany ’s pens io n liabilities de riv ing from a limited number of these c ountries. The p e nsi on p lan s are t y pi ca ll y fu nde d by re g ula r con tr ib ut io ns fro m e mpl oye es a nd th e Com pa ny . The se p lan s are t y pi ca ll y admi nis ter ed by b oa rds of t rus tee s (whi ch in cl ud e Com pan y rep re sent ati ve s ) whose primar y responsib ilities include ensuring tha t the plans me et the ir liab ilities through contributions a nd in vestment returns. T he boards of trust e es ha ve the res p onsibili ty for m aking ke y inves tment s trat eg y decisions within a risk - controlled f ramework. The p e nsi on p lan a sse ts a re inv este d in d ive r sif i ed p or t fo lio s that a re ma nag ed by t hird - par t y a sset managers, in accordance w ith local sta tutory regula tions, pension plan rules and t he res pect ive plan s’ inve stm ent g ui de li ne s, a s app rove d by th e bo ard s of tr uste es . Pla n ass et s are g en e ral ly s eg re gated f rom t hos e of the C omp any a nd i nveste d w i th th e aim of m ee ti ng the r esp ec t i ve pl ans ’ proj e c ted f utur e pe nsi on l iab ili ti es . Pl an a sset s are m ea su red at f air v alu e at th e balance sheet da te. The b oa rds of t ru ste es ma nag e th e ass et s of the p e nsi on p lan s in a r i sk- cont rol le d ma nn er a nd a ssess the r i sk s em be d de d in th e pe ns io n pl ans t hro ugh a sse t/l ia bili t y ma nag em ent s tud ie s. A sse t/l ia bili t y man age m ent s tudi es t y pi ca ll y ta ke plac e eve r y th re e year s. H owev er , t he r i sk s of th e pla ns a re monit ored on an ongo ing basis. The b oa rds of t ru ste es’ i nves tm ent g oal i s to ma x i mize th e lo ng - ter m retu rns of p la n a sset s w it hin spe c if i ed r i sk pa ra me ter s, w hil e con sid er i ng t he f utur e lia bil it ie s and l iq uid it y n ee ds of t he i ndi v i du al plans. Risk mea sures taken int o accoun t include the fund ing ra t io o f the plan, the lik e lihood o f extraordinary cash cont ributions being requir e d, the risk embedded in ea ch indiv idual asse t class , and the p la n ass et p or t fol io a s a wh ol e. 224 ABB ANNU AL REPORT 2021 0 4 F IN A N CI A L RE VI E W O F AB B G RO U P The Co mp any ’s gl ob al pe ns io n asse t al lo cat io n is th e res ult of t he a sset a ll oc ati ons o f the i nd iv i du al pl ans , whi ch a re set by t he re sp ec t i ve bo ard s of tru ste es . Th e tar ge t asse t al lo cat io n of the Co mp any ’s pl ans o n a wei ghte d - avera ge b as is is a s fo llow s: T arget Switze rland Interna tiona l Asset cl ass Equit y Fixed income Real estat e Other To t a l The a c tual a sse t all oc at ion s of th e pl ans a re in l in e w ith t he t arg et a sset a ll oc ati on s. Equity securities primarily include inv estments in large- cap and m id - cap publicly traded companies. Fixed income assets primarily include cor porat e bonds of companies from diverse industr ies and gove rn me nt bo nd s. B oth f i xed i nco me a nd e qu it y a sset s ar e inve ste d eit he r v ia f un ds o r dir ec t ly i n segregat ed investment mandates, and include an alloca tion to emerging markets. Real estate consists pr i mar i l y of inve stm ent s i n rea l est ate in Sw i t zerl an d he ld i n th e Sw iss p lan s. T he “ Ot he r ” ass et cl ass in clu de s inve st me nts i n pr i v ate equ it y, hed ge f und s, co mm od it ies , an d ca sh , an d ref le c t s a va r ie t y of inves tment s trat egies. Ba se d on t he a bove g lo bal a sse t all oc ati on a nd t he fai r va lu es of t he p lan a sse ts , the e x pe c ted lo ng -te rm r etur n on a sset s at D ece mb e r 31 , 2 02 1 , is 3 . 4 pe rce nt . The C omp any a nd th e lo ca l bo ard s of trustees regularly review the in vestment per formance of the ass et classes and indiv idual asset man age r s. D ue to th e di ver si f ie d natur e of th e inve stm ent s , the Co mp any is of t he o pini on t hat no sig nif i ca nt con ce ntr atio n of r is ks e x is ts i n it s pe ns io n fun d a sset s. At De ce mb er 3 1 , 20 21 a nd 2 02 0, p lan a sse ts i nc lu de A B B Ltd’s sha res (as we ll a s an i ns igni f ic ant a mo unt of the Co mp any ’s de bt i nst rum en ts) wi th a tota l va lu e of $8 mi ll ion a nd $ 8 mil li on , resp e c ti ve ly. The f air v al ue s of the Co mp any ’s pe ns ion p la n a sset s by a sset c la ss are p res ente d b el ow. For fur t he r info rmat io n on t he fai r va lu e hie ra rchy a nd a n over v ie w of th e Comp any ’s valu ati on te chn iqu es a pp li ed , see t he “ Fair va lu e me asu res ” se c ti on of N ote 2 . No t su bj e ct to leveling To t a l fair value Asset cl ass Equit y Equity securities Mutual funds / commingled funds Emerging mark et mutual funds / commingled funds Fixed income Government and corpora te s ecuriti es Government and corporate — mutual funds / commingled funds Emerging mark et bonds — mutual funds / commingled funds Real estat e Insurance contracts Cash and shor t -term invest ments Pr i vat e eq ui t y To t a l 225 ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P No t su bj e ct to leveling To t a l fair value Asset cl ass Equit y Equity securities Mutual funds / commingled funds Emerging mark et mutual funds / commingled funds Fixed income Government and corpora te s ecuriti es Government and corporate — mutual funds / commingled funds Emerging mark et bonds — mutual funds / commingled funds Real estat e Insurance contracts Cash and shor t -term invest ments Pr i vat e eq ui t y Hedge funds To t a l (1) A mo un ts r e lat e to a sse ts m e as ur ed u si ng t h e NAV p ra c ti c al e x pe di e nt w hic h a re n ot su bj ec t t o le ve li ng . The C ompany applies accoun t ing guidanc e related to the pr esenta t ion of cer tain i nves tments using the net a sse t va lu e (N AV ) pr ac t ic al e xp ed ie nt . Thi s accou nt ing g ui da nce e xem pt s inve stm ent s us in g this pr ac ti ca l ex pe di e nt fro m cate go r izat io n w it hin th e fai r va lu e hie ra rchy. Inves tm ent s me as ure d at NAV are p r im ar il y n on e xcha ng e - trad e d com min gl ed o r col le c t ive f und s in p r iv ate eq ui t y and r eal e st ate where the fair value o f the unde rlying assets is determ ined by the invest ment mana ge r . Investmen ts in pr i vate e qui t y ca n ne ver b e re de em e d, b ut in stea d the f un ds w i ll ma ke dis tr ib ut io ns th rou gh l iqu id ati on of the u nd er ly in g asse ts . T ot al unf un de d com mit me nts f or th e pr i vate e qu it y fu nd s wer e ap prox i matel y $1 25 m ill io n an d $11 5 mi ll io n at De cem be r 31 , 2 0 21 a nd 2 02 0, re spe c t ive l y . The r eal e st ate fun ds a re t ypi ca ll y sub je c t to a lo ck-in p er iod of u p to thr ee ye ar s af ter su bsc r ibi ng . Af te r thi s pe r io d, th e re al est ate fu nds t y pi ca ll y of fe r a red e mpt io n not ice o f thr ee to t we lve m ont hs . Con tributions Employ er con tributions were a s fol lows : Defined pension benefits Other pos tretirement benefits Switze rland International International T ot a l con tr i bu ti on s to d ef i ne d be n ef i t pe ns io n and o ther post retirement benefit plans Of which, discretionary contributions to de f in e d be ne f it p e ns io n pl an s — — — The t otal contributions included non- cash cont ributions to t aling $ 53 m illion and $224 m illion, resp e c ti ve ly, for 20 2 1 and 2 0 20, of av ail abl e - for-sa le d ebt s ec ur it ie s to ce r tai n of the Co mp any ’s pension pla ns. The Co mp any e xp ec ts to con tr ib ute a pp rox imate l y $108 m ill io n to it s def i ne d b en ef it p e nsi on p lan s in 2022 . Of these discretionary contributions, $5 million are e xpected to be non- cash con tributions. The Com pany e xp e c ts to co ntr i bu te app rox im atel y $7 mi ll io n to its o the r po str et ire me nt b en ef it p la ns in 2 02 2 . The C ompany also contribut es t o a number of def ined cont ribution plans. The aggregate e xpense f or these plan s in continuing operations wa s $278 m illion, $205 m illion and $190 m illion in 20 21, 2020 and 201 9, re sp ec t ive l y. Contr ib ut io ns to mu lt i - e mp loye r pl ans w ere n ot si gni f ic ant i n 20 21 , 2 0 20 an d 20 19 . 226 ABB ANNU AL REPO RT 2021 0 4 F IN A NC I A L RE VI E W O F AB B G RO UP Est im ate d fu tu re b e ne f it pay me nt s The e x pe c ted f utu re ca sh f lo ws to be p aid by th e Com pa ny ’s pla ns in r esp ec t of pe nsi on an d oth er pos tre ti re me nt be ne f it p lan s at De ce mb er 3 1 , 20 21 , a re a s fol low s: Defined pension benefits Other pos tretirement benefits Switze rland I nternational International — Note 18 Sh ar e - base d paym e nt a rran ge m ent s The Compan y has grant ed share -ba sed instruments t o its employees under three princ ipal share-ba sed paym e nt pl ans , as m or e ful ly d es cr i be d in th e re spe c t ive s ec t io ns b el ow. Compe ns ati on cos t for eq uit y - set tl ed aw ard s is re co rde d in T o tal c ost of s ale s an d in S el li ng , ge ne ra l an d admi nist rat ive ex pe nse s an d tota le d $59 mi ll ion , $ 4 4 mi lli on a nd $ 4 6 mil lio n in 2 02 1 , 2 02 0 an d 201 9, re sp ec t iv el y, while com pe nsat io n cos t for c as h -s et tle d awa rds , re cor de d in S el lin g , ge ne ra l and a dmi nist rat ive e xp e nse s, wa s not s ign if ic an t, a s me nt io ne d in th e WA Rs , L TI P an d Ot he r sha re - b as ed p aym ent s se c ti on s of this note . Th e total t a x b en ef i t rec ogn ized i n 20 2 1 , 20 20 a nd 2 019 w a s not si gni f ic ant . At De ce mb er 3 1 , 20 21 , t he Co mp any ha d the a bil it y to issu e up to 9 4 mi lli on n ew sh are s out of cont in ge nt c api tal i n co nne c t io n w ith s har e - b ase d pay me nt a rra ng em en ts . In ad di ti on , 2 3 mill io n of th e 95 mi ll ion s har es h el d by th e Com pany a s tr ea sur y stoc k at De cem be r 31 , 20 21 , co ul d be u sed to s et tle share- based payment arrangements. A s the p r im ar y trad in g mar ket for t he sh are s of A BB Ltd i s the S IX Sw iss E xcha ng e (on whic h th e sha res are t rad ed i n Sw iss f ran c s ) a nd su bst ant i all y al l th e sha re - b ase d p ayme nt a rra ng em en ts w i th e mp loye es are b as ed o n the Sw iss fr anc s har e or have s tr i ke pr ice s set i n Sw iss f ra nc s, ce r tai n dat a disc lo sed b e low rel ated to t he in str um ent s g rante d un de r sh are - ba sed p aym en t arr an ge me nt s are p res ente d in Sw iss f ra nc s. Management Incen tiv e Plan Up to 20 19, t he Co mp any of fe re d, u nd er t he M IP , opt io ns a nd c as h -s et tle d WA R s to key emp lo yee s for no co nsi de rat io n. St ar t in g in 2 02 0, th e em pl oye e gro up p rev i ou sl y eli gi bl e to rec ei ve gra nt s un de r the MI P wer e gr ante d sha res u nd er t he L TI P (see L T IP se c t ion b e low) an d con seq ue ntl y n o gra nt s wer e mad e in 2 02 1 an d 20 20 u nd er t he M IP . The o pt io ns gr ante d un de r th e MI P al low p ar t ic i pant s to pu rch a se sha re s of AB B Ltd at pre d eter min ed pr i ces . Par ti ci pa nt s may se ll th e opt io ns r athe r th an e xerc i se th e r ig ht to pur ch ase s har es . Equi v ale nt war ra nts a re li ste d by a thi rd - pa r t y ba nk o n the S IX Sw iss E xcha ng e, w hic h fac i li tates p r ic i ng a nd tra nsf er abi lit y of o pt ion s gr ante d un de r this p la n . The o pt ion s en ti tle t he h ol de r to req ue st t hat th e thir d - pa r t y ban k pu rch as e suc h opt io ns at th e ma rket pr i ce of e qu iv al ent l iste d wa rr ant s re late d to that MI P lau nc h. I f the p ar t ic i pa nt el e c ts to se ll t he o pti on s, th e opt io ns w i ll t he reaf te r be h e ld by a th ird par t y a nd , con se qu ent ly, the Co mpa ny ’s obl ig ati on to de li ve r sha res w i ll b e towa rd thi s thi rd pa r t y. Eac h WAR g ive s the p ar t ic i pa nt th e r igh t to rec eiv e, i n ca sh , the m ar ket pr i ce of an e qu iv al ent l iste d war ra nt on t he date of e xe rc ise of t he WA R . P ar t ic i pant s m ay exe rc ise o r se ll op ti ons a nd e xer c ise WA R s af ter th e ve st ing p e r io d, w hic h is th re e year s fr om th e date of gr ant . A l l opt io ns an d WAR s e xp ire s ix year s fr om th e date of g ran t. 227 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P Options The f air v al ue of e ach o pti on w as e st im ated o n the d ate of gr ant u sin g a lat ti ce mo de l th at use d th e assu mpt io ns n oted i n th e tab le b e low. Ex pe c te d vol ati lit ie s we re ba se d on i mp lie d vo lat ili ti es f rom eq ui va le nt lis ted w ar ran ts o n AB B Ltd sh are s. Th e e xp ec te d ter m of th e opt io ns g ran ted is t he cont rac tu al si x-ye ar l ife of e ach o pti on , ba se d on t he fa c t that af te r the v est in g pe r i od , a par t i c ipa nt c an el ec t to s el l the o pt ion r ath er th an e xer c ise t he r ig ht to pu rch as e sha res , th ere by al so re ali zi ng t he t im e va lu e of the o pt io ns. T he r i sk-fre e rate w as b as ed o n a si x-yea r Sw iss f ran c in tere st r ate, re fl ec t in g th e six- yea r cont rac tu al l ife of th e op ti ons . In e st im ati ng fo r feitu re s, th e Com pany u se d data f rom p rev iou s comparable MIP launches. Expected v olatili ty Divide nd yield E xp ec t ed t er m Ri sk-f re e i nte re st r ate Pre sen ted b el ow is a su mm ar y of t he ac t i v it y r el ated to op ti ons u nd er t he M IP : Nu m be r o f options Nu m be r o f shares Wei g ht ed - ave rag e exe r ci se price (i n Sw i ss Wei g ht ed - ave rag e remaining contrac tual Ag gr e gat e intrinsic value (i n mi l l io ns o f Exerc ised For fei ted Vest ed a n d ex pe c te d t o ves t (1) I nfo rm at io n pr es e nte d re f le c t s th e nu mb e r of A BB L td sh ar es t hat c a n be r ec ei ve d u po n ex er c is e, a s o pt io ns h ave a c on ve rs io n rat i o of 5 :1 . (2) I nfo r mat i on p re se nte d r ef le c t s th e e xer c is e pr i ce p e r AB B Lt d sha re . . (3) Co mp ut ed u si n g th e cl os in g pr i ce , i n Sw is s fr an c s, o f AB B Ltd s ha re s o n th e SI X Sw i ss E xc ha ng e a nd t he e xe rc i se p r ic e of ea ch o pt i on i n Swi ss fran cs. (4) Th e ca sh r e cei ve d u po n e xe rc is e am ou nt ed to a p pr ox im ate l y $6 93 m il li on . T he s ha re s we re d e li ve re d ou t of t re as ur y s to ck . At De ce mb er 3 1 , 20 21 , t he tot al u nre cog nize d com pe ns ati on cos t re lated to n on - ves ted o pt io ns gr ante d und e r the M I P wa s not si gni f ic ant . T he we ighte d - aver age g ra nt-d ate fair v al ue ( pe r o pti on) of opt io ns gra nte d dur i ng 2 01 9 wa s 0. 3 4 Sw i ss fr anc s . A s me nt ion e d pre v io usl y, no opt io ns we re gr ante d in 2 0 21 and 2 0 20. I n 20 2 1 and 2 0 20, t he ag gre gate i ntr in si c va lue (on th e date of e xerc i se) of opt io ns e xerc i se d wa s ap prox i matel y $3 1 3 mil li on an d $3 8 mi lli on , re spe c t ive l y , whi le th e am oun t in 2 019 w a s not sig nif ic ant . Pre sen ted b el ow is a su mm ar y, by laun ch , re late d to opt io ns ou ts ta ndi ng at D ec em be r 31 , 2 02 1 : Number of options Number o f s hares Weighted -average remai ning contrac tual T o ta l nu m be r o f op ti o ns a n d sh ar es (1) I nfo rm at io n pr es e nte d re f le c t s th e exe r c ise p r i ce p er s ha re o f AB B Lt d. (2) I nfo r mat i on p re se nte d r ef le c t s th e nu mb e r of sh a re s of A BB L td th at c an b e re ce i ve d up on e xe rc i se . 228 ABB ANNU AL REPORT 2021 0 4 F IN A NC I A L RE VI E W OF A B B G RO UP WA R s A s eac h WAR g ive s the h ol de r th e r ig ht to re cei ve ca sh e qu al to th e ma rket pr i ce of t he e qui v ale nt li ste d war ra nt on d ate of exe rc is e, th e Com pa ny rec ord s a lia bil it y b ase d up on t he f air v alu e of ou ts ta ndi ng WAR s at eac h pe r io d e nd , accr eted o n a st raig ht-li ne b as is ove r th e thr ee -yea r ves ti ng p er i od . I n Se lli ng , ge ne ra l and a dmi nist rat ive e xp e nse s, th e Com pany r ec ord s the c ha ng es i n both t he f air v alu e an d ves ted p or t io n of th e out st an din g WAR s . T o he dg e it s e xp osur e to fl uc tu atio ns i n the f air v al ue of out st an din g WA Rs , th e Comp any p urc ha se d ca sh - se tt le d ca ll o pti on s, wh ich e nt it le th e Com pa ny to rec ei ve amo unt s e qui v ale nt to it s o bli gat io ns un de r th e out st an di ng WA Rs . Th e ca sh - se tt le d ca ll opt io ns ar e re cord e d as d er i v ati ves m ea sure d at fai r va lu e (see Note 6 ), w ith s ubse q ue nt ch ang es i n fai r va lu e rec ord ed i n Se ll in g, g en er al a nd ad mini str ati ve e xp en ses to th e e x tent t hat th ey of f set t he ch an ge in fai r va lu e of th e lia bil it y for t he WA R s. Th e tota l im pac t i n Se ll ing , g en er al an d adm inis tr ati ve ex pe nse s in 2 02 1 , 20 2 0 and 2 01 9 wa s not s ig nif ic an t. The a ggr eg ate fair v al ue of o ut st and in g WAR s w as $ 2 9 mil lio n an d $2 1 mil lio n at De ce mb er 3 1 , 20 2 1 and 20 20, r esp e c ti vel y. The fai r va lu e of WAR s w as d ete rmi ne d ba se d up on t he tr adi ng p r ice of e q uiv al e nt war ra nts l iste d o n the S IX Sw iss E xch ang e . Pre sen ted b el ow is a su mm ar y of t he ac t i v it y r el ated to WA Rs : N u m be r of WA R s Exerc ised For fei ted The a ggr eg ate fair v al ue at d ate of gra nt of WAR s g ra nted i n 201 9 wa s n ot sig nif i ca nt . A s me nt io ne d pre v io usl y, no gra nt s wer e mad e in 2 02 1 an d 20 20 u nd er t he M IP . I n 20 21 a nd 2 02 0, sh are -b as ed lia bil it ie s of $2 5 mi lli on a nd $1 3 mi lli on , re spe c t ive l y , were p aid u po n exe rc is e of WAR s by p ar t ic i pan ts . The a mo unt s in 2 01 9 wer e not si gni f ic ant . Employ ee Share Ac q uisiti on P lan The e mp lo yee s har e acqu isi ti on p la n (E SA P) is a n em pl oyee s toc k-o pt io n pl an w it h a sav i ng s featur e. Emp loye e s save ove r a tw el ve - m ont h pe r io d, by w ay of re gu lar p ayro ll d ed uc t io ns . At the e n d of the savings period, employees c hoose whether t o exercise their stock options using their sa v ings plus inte res t, i f any, to buy A B B Ltd sha res ( A me r ic an D e pos ita r y S ha res ( A DS) i n the c a se of e mp loye es i n the U nite d State s and C an ad a — eac h AD S rep re se nti ng o ne re gi ste red s har e of th e Com pany) at th e exe rc is e pr i ce set at th e gr ant d ate, o r have th eir s av in gs re tur ne d w it h any in tere st . Th e sav i ng s are accumula ted in bank ac counts held b y a t hird-par t y trust ee on behalf o f the participants and earn inte res t, w he re a pp li ca bl e. Em pl oye es c an w i th draw f rom t he E SA P at any t im e du r in g the s av in gs pe r io d an d w il l be e nt itl ed to a r efu nd of t hei r accu mu late d sav in gs . The f air v al ue of e ach o pti on i s est i mated o n th e date of gr ant u sin g th e sam e op ti on v al uati on m od el a s de scr i be d un de r th e MI P , u sin g th e assu mpt i ons n oted i n th e ta bl e be low. The e x pe c ted te rm of t he opt io n gr ante d ha s be e n dete rmi ne d to be t he co ntr ac tua l on e - year l ife of e ach o pt ion , at th e en d of whi ch th e opt i ons ve st a nd th e pa r ti c ip ant s are r eq ui red to d ec i de w he th er to e xerc i se th ei r opt io ns or have th eir s av in gs re tur ne d w it h inte res t . The r i sk-fr ee r ate is ba se d on o ne - ye ar Sw iss f ra nc i ntere st rat es, reflect ing the one-year contra c tual li fe o f the options. In estimating fo rfeitures, the Compan y has used the data from prev ious ESAP launches. Expected v olatili ty Divide nd yield E xp ec t ed t er m Ri sk-f re e i nte re st r ate ABB ANNUAL REPORT 2021 04 F IN A NC I AL R E V I E W OF A B B G RO UP Pre sen ted b el ow is a su mm ar y of a c ti v i t y und e r the E S AP : Nu m be r o f sh ar e s Wei g ht ed - ave rag e e xe rc i se pr i ce ( in S w is s Wei g ht ed - ave rag e remaining contrac tual Ag gr e gat e intrinsic value (i n mi l l io ns o f Gr ante d For fei ted Exerc ised Not exercised ( sav ings returned plus interest ) Vest ed a n d ex pe c te d t o ves t at — — — — (1) Includes shares represented by ADS. (2) I nfo r mat i on p re se nte d fo r A DS i s ba s ed o n eq u iv al e nt Sw i ss f ra nc d e no mi nat ed aw a rd s. (3) Co mp ut ed u si n g th e cl os in g pr i ce , i n Sw is s fr an c s, o f AB B Ltd s ha re s o n th e SI X Sw i ss E xc ha ng e a nd t he e xe rc i se p r ic e of ea ch o pt i on i n Swi ss fran cs. (4) Th e ca sh r e cei ve d i n 20 2 1 fr om e xe rc i se s wa s a pp rox i ma tel y $ 4 2 mi ll i on . Th e sh ar es w er e de l iv er ed o u t of tr ea su r y s toc k . The e xe rc ise p r ic es p er A B B Ltd shar e and p e r AD S of 3 0. 3 2 Sw i ss fra nc s an d $3 3 . 3 5, re sp ec t i vel y, for the 20 21 g ra nt, 2 2 . 8 7 Sw iss f ran c s and $ 24 . 93 , res pe c ti ve ly, for th e 20 20 g ra nt , and 2 0.78 Sw i ss fra nc s an d $2 0. 17 , r esp e c ti vel y, for th e 201 9 gr ant we re d ete rmi ne d usi ng t he cl osi ng p r ic e of the A B B Ltd sha re on the S I X Sw iss E xch an ge a nd A DS on t he N ew York Stock E xc han ge o n th e resp e c ti ve gr ant d ates . At De ce mb er 3 1 , 20 21 , t he tot al u nre cog nize d com pe ns ati on cos t re lated to n on - ves ted o pt io ns gr ante d und e r the E S AP w a s not si gni f ic ant . T he wei ghte d - aver age g ra nt-d ate fair v al ue ( pe r op ti on) of opt io ns gra nte d dur i ng 2 0 21 , 2 02 0 an d 201 9 wa s 1 . 9 6 Sw i ss fr anc s , 1 .6 7 Sw iss f ra nc s an d 1 .0 5 Sw iss f ran c s, resp e c ti ve ly. The tot al i ntr in si c val ue (on th e date of e xerc i se) of opt io ns e xerc i se d in 20 2 1 wa s app rox im atel y $14 mi ll io n, w hil e in 2 02 0 an d 201 9 it w as n ot si gni f ic ant . Long- T erm Incen tive Plan The l on g -te rm i nce nt ive p la n (L TI P) invo lv es an nu al gr ant s of th e Com pa ny ’s stock su bje c t to ce r tai n con dit io ns ( Pe r form an ce Sh ar es) to memb er s of th e Com pa ny ’s Exe cut i ve Com mit tee a nd s el ec te d othe r se nio r e xecu ti ve s, a s def i ne d in t he te rm s of the L T IP . Sta r ti ng w ith 2 02 0, ce r tai n of the e mp l oyee gro up pr ev i ou sly e li gi bl e to rec eiv e gra nt s und e r the M I P have be e n in clu de d in t he L T IP . Th e ult i mate amo unt d el ive re d un de r th e L TI P ’s Per fo rm an ce Sh are s gr ant is b a sed o n achi ev ing ce r t ain re sul ts again st t arg et s, a s set o ut b el ow, over a th re e - year p e r io d fro m gra nt an d th e f ina l am oun t is de li ve re d to the p ar t ic i pa nts at th e en d of thi s pe r io d . In ad dit i on , for ce r tai n awar ds to ve st , the p ar t ic i pa nt ha s to ful f il l a thr ee -yea r se r v i ce co ndi ti on a s d ef in ed i n th e ter ms an d con di ti ons of t he L T IP . The Performance Shares under the 2 021, 2020 and 2019 L TIP launches include a per formance com po ne nt , ba sed o n th e Com pany ’s earni ngs p e r sha re pe r fo rma nce , an d a ma rket co mp one nt , ba se d on th e Com pa ny ’s rel ati ve tota l sha reh ol de r re turn . For th e re lat ive tot al sh are ho ld e r retu rn co mp one nt of t he Pe r fo rma nce S ha res , th e ac tua l num be r of sha res t hat w il l be d e liv ere d at a fu ture d ate is ba se d on t he Co mpa ny ’s total s har eh ol de r retu rn pe r for man ce re lat iv e to a pe er g rou p of com pa nie s over a t hre e - yea r pe r io d st ar t in g w it h the y ear of gra nt . Th e ac tua l num be r of sh are s that w i ll u lt im atel y be d el ive re d w il l v ar y d ep e ndi ng o n the r el ati ve total s har eh ol de r ret urn o utco me ac hiev ed b et we en a l owe r thr esh ol d (no sha res d el ive re d) a nd a n upp e r thr esh ol d (the nu mb er of s har es d el ive re d is c ap pe d at 20 0 p erc ent of t he co nd it ion al g ra nt). For th e ea rni ngs p er s ha re pe r for ma nce co mp on ent o f the P er fo rm an ce Sh are s, th e ac tua l nu mb er of sha res t hat w il l be d e liv ere d at a fu ture d ate is ba se d on t he Co mpa ny ’s avera ge ea rni ng s pe r sha re ove r thr ee f i nan c ia l yea rs , be gin nin g w it h th e year o f laun ch . Th e ac tua l nu mb er of s har es th at w il l ult im atel y be d el ive re d w il l va r y d ep en di ng o n the e ar nin gs pe r sh are o utco me a s com pu ted u nd er e ach L TI P lau nch , in terp o lated b et we e n a lowe r th resh ol d (no sha res d e liv ere d ) an d an up pe r th res hol d (the num be r of sh are s de li ver ed i s ca pp ed at 2 0 0 pe rce nt of th e con di ti ona l gr ant). 230 ABB ANNUAL REPORT 202 1 04 F IN A NC I A L RE VI E W OF A B B G RO UP Un de r the 2 01 9 L TI P lau nch es , pa r ti c ip ant s re cei ve 65 p er cen t of the s har es th at have ve sted i n th e for m of sha res a nd 3 5 pe rce nt of t he v alu e of th e sha re s that have v este d in c a sh, w ith th e po ssibi li t y to el ec t to also r ec eiv e the 3 5 p erc ent p or t io n in sh ar es rat he r tha n in c as h. U nd er t he 2 02 1 an d 20 20 L T IP lau nch es , pa r ti c ip ant s ge ne ra ll y do n ot have th e abi li t y to rec eiv e any of th e awa rd in c a sh, su bje c t to legal restrictions in c ertain jurisdictions. Pre sen ted b el ow is a su mm ar y of a c ti v i t y und e r the P er fo rm anc e Sh are s of th e L T IP : Nu m be r o f Performance Shares Weighted -average gr an t- d ate f ai r va l u e pe r Gr ante d Ves t e d For fei ted The a ggr eg ate fair v al ue , at the d ates of g ran t, of P er fo rm anc e Sh are s gr ante d in 2 02 1 an d 201 9 wa s $37 m ill io n and $ 18 mi ll ion , re spe c t ive l y, while i n 20 20 i t wa s not s ig nif i ca nt. T he tot al g ran t - date f air va lu e of sha res t hat ves ted d ur i ng 2 019 w a s $2 1 mil lio n . The a mo unt s in 2 02 1 an d 20 20 w ere n ot sig nif i ca nt . Th e weig hte d -ave rag e gr ant- date fai r va lu e (p e r sha re) of share s gr ante d du r in g 20 21 , 2 0 20 and 2 01 9 wa s 3 8 . 92 Sw iss fra nc s, 10 . 5 0 Sw iss fr an cs a nd 1 5 . 9 4 Sw iss fr an cs , re spe c t ive l y . Star t i ng in 2 0 20, key e mp loy ee s whi ch we re p rev i ou sl y el igi bl e to par t i c ipate i n the M I P and w hi ch we re not i ncl ud e d in th e em pl oye e gro up gr ante d th e Pe r for man ce S har es d esc r ib ed a bov e, we re gr ante d Re str i c ted S ha res of t he Co mp any un de r th e L TI P . T he R est r ic te d Sh are s do n ot have p er fo rm anc e con dit io ns a nd ve st ove r a th ree -ye ar p er i od f rom th e gr ant d ate. Pre sen ted b el ow is a su mm ar y of a c ti v i t y und e r the R es tr ic te d S har es of th e L TI P: Nu m be r o f Re st r ic te d Weighted -average gr an t- d ate f ai r va l u e pe r Gr ante d For fei ted The a ggr eg ate fair v al ue , at the d ates of g ran t, of R es tr ic te d S har es gr ante d i n 20 21 a nd 2 02 0 wa s $2 6 mil lio n an d $2 2 mi lli on , res pe c t ive ly. The we ig hted - ave rag e gr ant- date fai r va lu e (p er s har e) of sha res g ra nted d ur i ng 2 02 1 an d 20 20 w as 2 6 . 3 9 Sw iss f ra nc s an d 1 5.76 Sw iss f ra nc s, re sp ec t ive l y. Equi t y- se tt le d awar ds a re re cord e d in th e Ad di ti ona l pai d -i n ca pit al com po ne nt of Stoc k ho ld er s’ e qui t y, with compensa tion co st rec orded in S elling, general and administra ti ve expenses over the vesting pe r io d (whic h is f rom g ran t date to th e en d of the v est in g pe r i od ) ba se d on th e gr ant- date fai r va lu e of the s har es . Ca sh - set tl e d awar ds ar e rec ord ed a s a li abi li t y , rem ea sur ed at f air va lu e at eac h rep or t i ng date for t he p er cent ag e veste d , w ith c ha ng es i n the l iab ili t y re cord e d in S el lin g, g e ne ral a nd admini strat ive e xp ense s. At De ce mb er 3 1 , 20 21 , tot al u nre co gnize d co mp ens ati on co st re late d to eq uit y - set tl ed aw ard s un de r th e L T IP w a s $59 mi lli on a nd is e x pe c ted to b e re cog nize d ove r a weig hte d -ave rag e pe r i od of 2 ye ar s. Th e com pe nsat io n cos t rec ord ed i n 20 2 1 , 20 20 a nd 2 019 f or c ash -se tt le d awa rds w as n ot si gnif i c ant . 231 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P For th e re lat ive tot al sh are ho ld e r retu rn co mp one nt of t he L TI P lau nc he s, th e fai r va lu e of gra nte d sha res at g rant d ate, fo r eq ui t y- set tl e d awar ds, a nd at ea ch re po r t ing d ate, fo r ca sh - se tt le d awa rds , is dete rm ine d us in g a Mo nte Ca rl o sim ul ati on mo de l . Th e main i np ut s to this m od el a re th e Com pany ’s sha re pr i ce an d di v i de nd y i e ld , the vo lat il it y of th e Com pa ny ’s and th e pe e r gro up’s sha re pr i ce a s wel l as t he co rre lat io n be tw ee n th e pe er c omp ani es . For th e ea rni ngs p e r sha re com po ne nt of th e L TI P lau nch es , th e fair v al ue of g ra nted sh ar es is b as ed o n th e mar ket pr i ce of th e A BB Ltd sh are at gr ant date for e qu it y -s et tle d awa rd s and at e ach re p or t in g date for c a sh - set tl ed aw ard s, a s we ll a s the pro ba bl e outco me of t he e arni ng s pe r sha re ac hiev em ent , a s com pu ted u sin g a Mo nte C arl o si mul ati on mo de l. T he m ain in pu ts to thi s mo de l ar e the Co mp any ’s an d ex te rn al f i nan c ia l ana ly st s’ re ven ue g row th rates a nd O pe rat io nal E BI T A m arg in e xp ec t ati ons . Other share-based pa yments The Co mp any h as ot he r min or sh are - ba se d paym e nt arr an ge me nt s w it h cer t ain e mp loye es . Th e com pe nsat io n cos t rel ated to th es e arr an ge me nt s in 2 02 1 , 20 2 0 and 2 01 9 wa s not s ig nif i ca nt. — At De ce mb er 3 1 , 20 21 , t he Co mp any ha d 2, 557 mi ll io n auth or ize d sh are s, of w hic h 2 ,05 3 mil lio n we re reg is tere d an d issu ed . At D ece m be r 31 , 2 02 0, th e Com pan y had 2 ,6 7 2 mi lli on au tho r ize d sha res , of whi ch 2, 168 mi ll io n were r eg iste re d an d issu ed . At the A n nua l G en er al M ee ti ng of S ha re hol de r s (AG M) i n Ma rch 2 0 21 , th e sh are ho ld er s ap prov ed t he pro pos al of t he B oa rd of D ire c tor s to dis tr i bute a tot al of 0. 8 0 Sw i ss fra nc s pe r sh are . Th e ap prov ed div id en d dis tr i but io n am oun ted to $1 ,7 3 0 mil li on w i th th e Com pany d isb ur sin g a po r t ion i n Ma rch 2 0 21 and t he re mai nin g am oun ts i n Ap r il 2 0 21 . At the AG M in M arc h 20 2 0, the s har eh ol de rs a pp rove d th e pro pos al of t he B oa rd of D ire c tor s to dis tr i bute a tot al of 0. 8 0 Sw i ss fra nc s pe r sh are . Th e ap prov ed div id en d dis tr i but io n am oun ted to $1 ,75 8 mil li on an d wa s pai d in A p r il 2 02 0. At th e AGM i n Ma rch 2 01 9, the s har eh ol de rs a pp rove d th e pro pos al of th e B oar d of Di re c tor s to dis tr ib ute a tot al of 0. 8 0 Sw iss fra nc s p er sh are . Th e ap pro ved d iv ide nd d ist r ib ut io n amo unte d to $1 ,6 75 mi lli on a nd w as p aid i n May 2019. In J ul y 20 20 , the Co mp any an no un ced i t ini ti al ly i nten ds to b uy 10 p e rce nt of it s sha re c apit al (wh ich at the t im e re pr ese nte d a ma x i mum of 1 8 0 mi lli on sh are s, i n add it io n to thos e alr ead y he l d in tr ea sur y) thr oug h th e sha re bu y bac k pro gr am th at sta r ted i n Ju ly 2 0 20. T he i nit ial s har e bu yb ack p ro gra m wa s exe cute d o n a sec ond t rad in g lin e on t he S IX Sw i ss E xch ang e an d wa s co mpl ete d in M ar ch 20 2 1 . Thr oug h thi s bu yb ack p rog ra m, t he Com pa ny pu rch as ed a tot al of a pp rox imate l y 1 29 mi ll io n sha res fo r app rox im atel y $3 . 5 bi ll io n, of w hic h ap prox im atel y 2 0 mill io n sha res (res ult in g in a n in cre as e in T re a sur y stoc k of $6 2 8 mil lio n) were pu rc ha se d in 20 2 1 an d app rox im atel y 10 9 mil lio n sh are s (resul ti ng i n an in cre as e in T re as ur y Sto ck of $ 2, 8 3 5 mil lio n) were p urc ha se d in 2 02 0. At th e AGM o n Ma rch 2 5 , 20 21 , sha reh ol de r s app rove d th e ca nce ll ati on of 1 1 5 mi lli on of t he sh are s pu rch as ed u nd er t his bu y bac k pro gr am an d th e ca nce ll ati on w as co mp le ted i n th e sec ond q ua r ter of 2 0 21 , r esul ti ng i n a de cr ea se in T rea su r y sto ck of $3 , 1 5 7 mil li on an d a cor res po ndi ng tot al d ec rea se i n Ca pit al s tock , A dd it ion al p aid - in capital and Retained earnings. In M arc h 20 21 , t he Co mp any an no unc ed a fo ll ow- up sha re bu y bac k pro gr am of u p to $4 . 3 bi lli on . Thi s bu yb ack p rog ra m, w hic h wa s lau nc he d in A p r il 2 02 1 , is b ei ng e xec ute d on a se con d tr adi ng li ne o n th e SI X Sw iss E xc han ge a nd i s pl ann ed to r un u nti l th e Comp any ’s AGM in Ma rch 2 0 22 . Thro ug h this follow-up buyback p rogram, t he Company purchased, in 2021, approximat el y 59 million shares, resulting in an i nc rea se i n T re asu r y s tock of $ 2 ,0 2 2 mill io n. At t he M arc h 20 2 2 AGM , th e Com pa ny inte nd s to request shareholder approval t o cancel the shares purchased through t his f o llow-up share buyback pro gr am a s wel l a s thos e sha res p urc ha se d un de r th e ini ti al sh are b uy bac k pr ogr am t hat we re not pro pos ed fo r ca nce l lati on at th e Com pa ny ’s AGM in M ar ch 2 02 1 . 232 ABB ANNUAL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP In ad dit i on to th e on goi ng sh are b uy ba ck pr og ram , in 2 0 21 an d 20 2 0, th e Comp any p urc ha se d 33 mi ll io n and 1 3 mill io n, re sp ec t ive l y, of its own s ha res o n the o pe n ma rket , mai nl y for u se in c onn e c ti on w i th it s em pl oyee s har e pl ans , res ult in g in a n in cre as e in T re a sur y s toc k of $1 ,03 2 mi ll ion a nd $ 3 4 6 mil lio n, res pectively . Up on an d in c onn ec tio n w it h eac h lau nc h of the Co mp any ’s MI P , t he Co mp any so ld c al l opt io ns to a ba nk at fair v al ue , gi v in g th e ban k th e r igh t to acqu ire sh ar es e qui va le nt to th e nu mb er of sh are s re pr ese nte d by the M I P WAR aw ard s to par t i ci pa nt s. Un de r th e ter ms of th e agr ee me nt w i th th e ba nk , th e ca ll opt io ns c an on l y be e xer c ise d by th e ban k to th e ex te nt th at MI P par tic i pa nts h ave exe rc i sed t he ir WA Rs . At De ce mb er 3 1 , 20 21 , s uch c al l opt i ons r ep res ent in g 5. 4 mi lli on sh are s an d w it h str i ke pr ic es ra ng in g fro m 19. 0 0 to 23 . 5 0 Sw i ss fra nc s (weig hte d -ave ra ge st r ike pr i ce of 2 1 . 93 Sw i ss fra nc s) were he l d by the ban k . Th e ca ll op ti ons e x pire i n pe r io ds r an gin g fro m Au gu st 20 2 2 to Au gus t 20 2 5. H oweve r , o nl y 3. 5 mill io n of th ese i nst rum e nts , w it h str i ke pr ic es ra ng in g fro m 19. 0 0 to 23 . 5 0 Sw i ss fra nc s (weigh ted - ave rag e str i ke pr ic e of 2 2 .6 4 Sw i ss fra nc s) , c oul d b e exe rc ise d at D ece mb e r 31 , 2 02 1 , un de r the te rm s of the a gre e me nt w it h the b an k . In ad dit i on to th e ab ove, at D ec em be r 31 , 2 02 1 , th e Com pa ny had f ur th er o ut st an din g ob li gati on s to de li ve r : • up to 2 mill ion s har es re lat in g to th e opt io ns gr ante d un de r th e 201 6 laun ch of t he M IP , w i th a st r ike pr i ce of 21 . 50 Sw iss fr anc s, v este d in A ug ust 2 01 9 an d ex pir i ng i n Au gus t 20 2 2 , • up to 13 mi ll io n sha res re l atin g to th e opt io ns gr ante d un de r th e 2017 lau nc h of the M I P , w i th a st r ike pr i ce of 2 2 . 5 0 Sw iss f ran c s, ves ted i n Au gu st 20 2 0 and e x pir i ng i n Aug us t 20 2 3, • up to 12 mi ll io n sha res re l atin g to th e opt io ns gr ante d un de r th e 201 8 l aun ch of th e MI P , w ith a s tr i ke pr i ce of 2 3 . 50 Sw iss fr anc s , veste d i n Aug us t 20 21 a nd e xpi r in g in A ugu st 2 02 4, • up to 8 mill ion s har es re lat in g to th e opt io ns gr ante d un de r th e 201 9 la unc h of th e MI P , w ith a st r ike pr i ce of 19 .0 0 Sw iss f ran c s, ve st in g in Au gu st 2 02 2 an d e xpi r in g in Au gu st 2 02 5 , • up to 2 m illion s hares relating to the ESA P , vesting and expiring in October 2022, • up to 8 mill ion s har es to El igi bl e Pa r ti c ip ant s un de r th e 20 21 , 2 0 20 an d 20 19 l aun ch es of th e L TI P , vesting and expir ing in April 2024, April 2023 and Ma y 202 2, respectively , and • appr oximat el y 1 m illion shares in connect ion with certain other share-ba sed pa y ment arra ngements w ith e mpl oyee s. Se e Note 1 8 fo r a de scr i pti on of t he a bove s har e - ba se d pay me nt ar ra ng em ent s . In 2 02 1 an d 20 20 , the Co mp any d el ive re d ap prox i matel y 3 6 mil li on an d 17 milli on s har es, r esp ec t i vel y, out of t rea su r y sto ck , for o pt io ns e xerc i se d in re lat io n to the M IP , w hil e in 2 019 t he a mou nt wa s no t sig nif i ca nt . In ad di ti on , in 2 02 1 , 20 2 0 and 2 01 9, th e Com pany d e liv ere d 1 .7 mil li on , 1 .4 m ill io n an d 0. 5 mi lli on sh are s, re sp ec t i vel y, out of tre as ur y s tock u nd er t he E S AP . Am ou nts av ail ab le to be d is tr ib ute d as d iv ide nd s to th e stoc kh ol de r s of AB B Ltd ar e ba sed o n th e req ui rem e nts of Sw iss law an d A BB Ltd ’s Ar t i cle s of In co rpo rat io n, a nd ar e de term in ed b ase d o n amo unt s pr ese nte d in th e un con sol id ated f i nan c ia l state me nt s of A BB Ltd , pre pa re d in acco rd anc e w ith Sw iss l aw . At De ce mb er 3 1 , 20 21 , t he tot al u nco nso lid ated s tock h ol de rs ’ eq uit y of A B B Ltd wa s 6,837 million S w iss francs ( $7 ,490 million ), including 2 46 million Sw iss francs ( $2 70 m illion) representing sha re ca pit al , 9,4 43 mi lli on Sw i ss fra nc s ($10, 3 4 5 mil lio n) rep rese nt in g res er ves an d 2 , 85 3 mil lio n Sw iss fra nc s ($3 , 1 2 5 mil lio n) repr ese nt in g a re duc t i on of e qui t y for ow n sha re s (trea sur y stoc k). O f the res er ves, 2 , 8 53 mi lli on Sw i ss fra nc s ($3 , 1 2 5 mil lio n) relat in g to own sh ar es an d 49 mi lli on Sw i ss fr anc s ($54 mi ll io n) repre se nt ing 2 0 pe rce nt of s har e ca pit al, a re re str i c te d and n ot avai lab le f or di str i bu ti on . In Fe br uar y 20 2 2 , the Co mp any an no un ced t hat a pr op osal w ill b e pu t to the 2 0 22 AG M fo r app rov al by the s har eh ol de rs to d ist r ib ute 0. 8 2 Sw iss f ran c s pe r sha re to sha re ho ld er s. Sub sequ ent events Sub se que nt to D ec em be r 31 , 2 02 1 , an d up to Fe br ua r y 2 3 , 20 2 2, t he Co mp any pu rch a sed , un de r th e fol low - up sh are b u yb ack p rog ra m, an a dd it ion al 2 1 mil lio n sh are s, fo r app rox im atel y $7 3 5 mi lli on , an d, on th e op en m ar ket, a n add it io nal 9 m ill io n sha res , for a pp rox imate l y $3 26 mi ll ion . 233 ABB ANNUAL REPORT 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP — Not e 20 Earnin gs pe r share Ba si c ea rni ngs p er s har e is c al cul ated by d iv idi ng i nco me by th e wei ghte d - aver age n um be r of sha re s outstanding during t he yea r . Diluted earn ings per share is calcula ted by dividing income b y the weig hte d -ave rag e nu mb er of s har es o ut sta nd ing d ur i ng t he ye ar , a ssumi ng t hat al l pote nt ial l y dil ut ive sec ur i ti es we re e xer c ise d, i f dil ut ive . P otent ia ll y di lut i ve se cur i ti es c omp r is e out st an din g wr i tte n c all options and outstanding options and sha res gran ted subject t o certain conditions under the Company’s share - based payment arrangements. In 2020 and 2 019, outstanding securities rep re sen ti ng a m a x im um of 7 9 mil lio n an d 93 mi lli on s har es, r esp ec t i vel y, were e xcl ud ed f rom th e calculation of diluted earnings per sha re as their inclu sion w ould have be en antidilutiv e. None w ere exc lu de d in 2 02 1 . Basic earnings per share: Amounts attributable to A BB shareholders: In co me f ro m con ti nu in g op e rat i on s, n et of t a x In co me ( lo ss) fro m di sco nt in ue d o pe ra ti on s, n et o f ta x Ne t i nc om e Ba s ic e ar nin gs p e r sh are a tt r ib ut ab l e to AB B s ha re ho ld e rs : In co me f ro m con ti nu in g op e rat i on s, n et of t a x In co me ( lo ss) fro m di sco nt in ue d o pe ra ti on s, n et o f ta x Ne t i nc om e Diluted earnings per s hare: Amounts attributable to A BB shareholders: In co me f ro m con ti nu in g op e rat i on s, n et of t a x In co me ( lo ss) fro m di sco nt in ue d o pe ra ti on s, n et o f ta x Ne t i nc om e Wei ght ed - ave r ag e nu mb er o f sh are s ou t st an di ng ( in m il li on s) Ef fe c t of di lu t ive s e cu r it ie s: Ca ll o pt io ns a nd s ha re s Di lu te d ea rni n gs p er s ha re at tr i bu ta b le to A B B sh ar eh ol d er s: In co me f ro m con ti nu in g op e rat i on s, n et of t a x In co me ( lo ss) fro m di sco nt in ue d o pe ra ti on s, n et o f ta x Ne t i nc om e 234 ABB ANNU AL REPORT 2021 0 4 FI NA N CI A L R E V IE W OF A BB G R OU P — Not e 21 Other comprehens ive inc ome The f ollowing table includes amounts recorded within “ T otal other comprehensive income ( loss )” including the related inc ome ta x effects: Be fo re tax Ta x effec t Ne t of tax Be fo re tax Ta x effec t Ne t of tax Be fo re tax Ta x effec t Ne t of tax Foreign currenc y transla t ion adjust ments: Foreign currenc y transla t ion adjust ments — — Changes a ttr ibutable to divestments — — — Net c hange during the year — — Available-for-sale s ecurit ies: Ne t un re al ize d gai ns ( l oss es) ar is in g during the y ear Reclassification adjustments for net (gains ) losses include d in net income — Changes a ttr ibutable to divestments — — — — — — — Net c hange during the year Pension and other postretirement plans: Pr i or s er v ice (co st s) cre di ts arising during the year — Ne t ac tu ar i al g ain s ( lo sse s) arising during the year Amort ization of prior s erv ice cost (credit) included in net inc ome — — Amort ization of net actuar ial los s included in net inc ome Ne t lo sse s fr om se t tl em e nt s an d cu r tai lm e nt s included in net inc ome — Changes a ttr ibutable to divestments — — — Net c hange during the year Derivative instruments and hedges: Net ga ins (los ses) ar ising during t he y ear — — Re cl a ssi f ic at io n ad ju st me nt s fo r ne t (g ain s) losses included in net income — — — Net c hange during the year — — 235 ABB ANNUAL REPORT 2021 0 4 FI NA N CI A L R E V IE W O F A B B GR OU P The f oll ow i ng t abl e sh ows ch an ge s in “Accum ul ated oth e r com pre he ns ive l oss” (OC I) at tr ib ut ab le to AB B , by co mp one nt , ne t of ta x : For ei g n cu rr e nc y translation adjustments Unrealized on a vailable- for-sal e securities Pe ns io n a nd other po st- retirement pl a n adjustments Derivative instruments and hedges Acc u mu l ate d other c ompre - he n si ve lo ss Cum ul at iv e ef fe c t of c ha ng e s in accoun t ing principles — — — Other comprehensiv e (los s) income before reclassifications Am ou nt s re c la ssi f i ed f ro m OC I — Less: Amounts attributable to noncontr olling in terests — — — Other comprehensiv e (los s) income before reclassifications Am ou nt s re c la ssi f i ed f ro m OC I — Less: Amounts attributable to noncontr olling in terests — — — Other comprehensiv e (los s) income before reclassifications Am ou nt s re c la ssi f i ed f ro m OC I Less: Amounts attributable to noncontr olling in terests — — — (1) A mo un ts r e lat e to th e ad op ti o n of an a cc ou nt in g st a nd ar d up da te in 2 01 9 r eg ar di ng t he Ta x Cut s a nd J ob s Ac t o f 20 17. (2) D ue t o ro un di ng , n um be r s pr es en te d may n ot a dd to t h e tot al s pr ov i de d . 236 ABB ANNU AL REPOR T 2021 04 F IN A NC I A L RE VI E W OF A B B G RO UP The f oll ow i ng t abl e re fl ec t s am ou nts r ec la ssi f ie d out of O CI i n res pe c t of For eig n cu rre nc y t ra nsl atio n adjustmen ts and P ension and other postre tirement plan adjustments: Details about OCI components re cl a ssi f i ed f ro m OC I Foreign currenc y transla t ion adjust ments: Changes a ttr ibutable to divestments: - Los ses (gains ) on other divestments, net Other income ( e xpense ), net — - Los s on solar inverters business O ther income (expense ), net — — - Los s on P owe r G r id s bu si ne ss In co me ( lo ss) fro m di sco nt in ue d operations, net of tax — — Am o un ts r ec l as si f ie d fr o m OC I Pension and other postretirement plan adjustments: Amort ization of prior s erv ice cost (credit) Non- operational pension ( cost) credit Amort ization of net actuar ial los s Non- operational pension ( cost) credit Ne t lo sse s fr om se t tl em e nt s an d curtailments Non -op erational pension (cost ) credit Changes a ttr ibutable to divestments: - Los ses (gains ) on other divestments, net Other income ( e xpense ), net — — - Los s on P owe r G r id s bu si ne ss In co me ( lo ss) fro m di sco nt in ue d operations, net of tax — — T o ta l be fo re t a x Ta x Income tax expense Changes in ta x attributable to divestments : - Los ses (gains ) on other divestments, net Other income ( e xpense ), net — — - Los s on P owe r G r id s bu si ne ss In co me ( lo ss) fro m di sco nt in ue d operations, net of tax — — Am o un ts r ec l as si f ie d fr o m OC I (1) A mo un ts i n 2 02 0 a nd 2 01 9, i n cl ud e a tot al o f $9 4 m il li on a nd $ 6 mi ll io n , re sp ec t i ve ly, r ec la ss if i e d fro m O CI to I n co me ( lo ss) fr om d is co nt in - ue d op e rat i on s (se e No te 3) . (2) A m ou nt s re pr es e nt th e re c la ss if i ca ti on o f OC I re l ati n g to pe n si on s, i nc l ud in g ta x , o n di ve st me nt o f th e Po we r Gr i ds b u si ne ss . The a mo unt s re cl ass if ie d ou t of OC I in re sp ec t of U nre al ized g ain s (l osse s ) o n avai lab le -fo r - sa le sec ur i ti es a nd D er i v ati ve ins tru me nt s an d he dg es we re no t sig nif i ca nt in 2 02 1 , 2 02 0 an d 201 9. — Note 2 2 Rest ructuring and relat ed expenses OS p rogram From De ce mb er 2 01 8 to De ce mb er 2 02 0, th e Com pa ny exe cu ted a t wo - ye ar re str uc tu r in g pro gr am w i th the ob jecti ve o f simplify ing its busines s model and struc ture through the im plementation o f a new organi zational structure driven by its busines ses. The program resulted in the elimina t ion of the country and regiona l structur es within t he pre vious matrix organ ization, including t he elim ination of the thr e e regional Executiv e C ommittee roles. The operating businesses ar e no w res ponsible f or both their customer -facing activ ities and busines s support functions, while the remaining Group- level cor porat e activ it ies primar ily focus on G roup stra teg y , por tfolio and performance mana gement and capital allocation. A s of De ce mb er 3 1 , 20 2 0, the C omp any h as i nc urr ed su bst ant ia ll y al l cost s re late d to the O S pro gr am . 237 ABB ANNU AL REPORT 2021 04 F IN A N CI A L RE VI E W O F AB B G RO U P Liab ilities ass oc iated w ith the OS program are included primarily in Other pro visions. The f ollowing tab l e shows t he ac t i v it y f rom t he b eg inn ing o f the p rog ra m to De ce mb er 3 1 , 20 21 : Em pl oyee severance costs Contract settl eme nt, lo ss o rd e r an d other c osts To t a l — — — E xp en se s — — E xp en se s Ca sh p ay me nt s Change in estimates — E xch an ge r ate d if fe re n ce s — — E xp en se s Ca sh p ay me nt s Change in estimates — E xch an ge r ate d if fe re n ce s — Expenses, net of c hange in estimates Ca sh p ay me nt s E xch an ge r ate d if fe re n ce s — The f ollowing table out lines the costs incurred in 2020 and 2019, and the cumula ti ve c osts incurred und e r the p rog ra m pe r op er ati ng s eg me nt as w el l as Co rp or ate and O th er : Cos ts incurred in Cum u la ti ve co st s in cu r re d u p to El ect rifi cati on Motion Process Automation Robotics & Discr ete Automation Cor po r ate an d O th er To t a l (1) Formerly named the Industrial Automation op erating segment. The C ompany recorded the f ollowing expenses, net of change in estimates, under th is prog ram: Cos ts incurred in Cum u la ti ve co st s in cu r re d u p to Employee sever ance costs Es ti mat ed c ont ra c t se tt le m en t, l oss o rd e r an d oth e r cos ts Invent or y and long-lived ass et impa irments To t a l Restructuring expenses recor de d for this program are included in t he fol lowing line it ems in the Consol idat e d Income Stat ements: T ot a l cos t of sa le s Selling, general and administra t ive expenses No n - o rd er r el ate d re se ar ch a nd d eve l op me nt e x pe ns es Other income (expense ), net To t a l 238 ABB ANNU AL REPORT 2021 04 FI N A NC I AL R E V I E W OF A B B G RO UP Other res tructuring- related activ ities In ad dit i on , dur i ng 2 02 1 , 2 02 0 an d 201 9, th e Com pa ny exe cu ted v ar i ous o the r re str uc tu r in g - rel ated activ ities and incurr ed the following char ges, net of changes in est imat es: Emp l oye e se ve ra nc e cos ts Es ti mat ed c ont ra c t se tt le m en t, l oss o rd e r an d oth e r cos ts Inv en tor y and l o ng - l iv ed a sse t i mp air me nt s To t a l Expenses associat ed w ith thes e activit ies are recorded in the following line it ems in the C onsolidated Income S tatements: T ot a l cos t of sa le s Selling, general and administra t ive expenses No n - o rd er r el ate d re se ar ch a nd d eve l op me nt e x pe ns es — Other income (expense ), net To t a l In 2 02 1 , th e Com pany i nit iate d a pl an to fu ll y e x it a p rod uc t g rou p w ith in on e of it s no n - co re b usi ne sses . The e x it a c ti v i ti es a re ex pe c te d to be co mp le ted by t he e nd of 2 02 2 a nd i ncu r re str uc tu r ing -r el ated ex pe nse s of be t wee n $1 5 0 mil lio n an d $2 0 0 mil li on, p r im ar i ly r el ati ng to co ntra c t set tl em en ts . Th e majo r it y of t hes e cost s w i ll b e re cord ed i n 20 2 2 a s cer t ain r eq uir ed co ntr ac tua l el em e nts w i ll o nl y be ef fe c ti ve i n 20 2 2 . At De ce mb er 3 1 , 20 21 a nd 2 02 0, $ 21 2 mi ll ion a nd $ 2 33 mi ll io n, re spe c t ive l y, was re cor de d for ot he r restructuring- relat ed liab ilities and is primarily included in “Other provisions” . — Note 23 Ope rating segment an d geog raphic data The C hie f Op er ati ng D e c isi on M aker (COD M) i s the C hie f E xec ut ive O f f ic er . The CO DM a ll oc ates resourc es to and a sses ses the performance of each operating s egment using the inform ation outlined be low. The Co mp any i s org anize d in to the fo ll ow in g se gm ent s, b as ed o n pro du c t s and s er v ice s: Electr ification, Motion, P roces s Automa t ion and Robotics & Discret e Aut omation. The r emain ing operations of t he C ompany are included in C orporate a nd Other . Eff ec t iv e Jan ua r y 1 , 2 02 1 , th e In dus tr ia l Au tomat io n se gme nt w as r en ame d th e Pro cess A uto mati on seg me nt . In a ddi ti on , th e Com pany c ha ng ed i ts m eth od of a ll oc ati ng re al e st ate asse ts to i ts o pe rat in g seg me nt s wh er eby t hes e ass et s are n ow acco unte d for d ire c tl y in t he i ndi v i du al op e rati ng s eg me nt whi ch ut i lizes t he a sse t rath er th an a s a cos t re cha rg ed to th e op er ati ng s eg me nt fro m Cor po rate an d Ot he r . A s a re sul t, w hil e thi s cha ng e had n o im pac t o n se gme nt re ven ue s or p rof it s (Op er ati ona l EB IT A), certain rea l esta te assets ( including c orresponding de preciation and c apital expenditure ), previously rep or te d w i thin C orp or ate and O th er h ave be e n all oc ated to t he tot al se gm ent a sse ts of e ach i nd iv idu al op er ati ng se gm ent . Ce r t ain se gm ent i nfor mat io n for 2 02 0 an d 201 9, a s we ll a s T ota l ass et s at De ce mb er 3 1 , 20 20 a nd 2 01 9, have b ee n re ca st to r ef le c t this a ll oc ati on c han ge . ABB ANNUAL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P A de scr i pti on of t he t y pe s of pr od uc t s an d ser v ic es p rov i de d by eac h re po r ta bl e se gme nt i s as fo ll ows: • E lect rifi ca ti on : manu fac tu re s and s el ls e le c tr i ca l pro du c ts a nd s olu ti on s whi ch a re de sig ne d to prov ide s afe, s mar t and su st aina bl e el ec t r ic al f low f rom t he su bst ati on to th e so cket . Th e po r tf oli o of increasingly digi tal and connec ted solu tions includes elec tric vehicle charging infrastructure, renewable po wer s olutions, modula r su bsta tion packa ges, distribution aut omation products, switchboard and panelboards, switchgear , UPS solutions, circuit break ers, measuring and s ensing devices, contr ol products, w iring acces sori es, enclos ures and cabling systems and intelligent home and building solutions, designed t o integra te and a utomat e ligh t ing, hea t ing, ventila tion, securit y and data c omm uni cat io n ne two rk s . The p ro duc ts an d se r v i ces a re d el ive re d thr ou gh si x op er ati ng Div isions: D istribution Solutions, Smart Po wer , Smart Buildings, E-mobili ty , Installa tion Products and Powe r Conve rsi on . • Motion: m an ufa c ture s an d sel ls d r ive s, m otor s, ge n er ators , tra c ti on co nver ters a nd m ec ha nic al p owe r tra nsmi ssio n pr od uc t s that a re dr i v i ng th e low - c ar bo n fu ture fo r in dus tr i es, c i ti es , inf ra str uc tu re an d transportation. Thes e product s, digi tal t e chnology and r elat e d serv ices enable indus trial cust ome rs to inc re ase e ne rg y ef f i c ie n c y , imp rove s afet y an d re li abi lit y, and ac hie ve pre c is e cont rol of t hei r pro cess es. B ui ld in g on ove r 1 3 0 yea rs of c um ulat iv e ex pe r ie nc e in e le c tr i c powe r tr ains , th e Business Area comb ines domain expertise and t echnolog y t o deliver the op timum solu tion for a w ide ran ge of a pp li cat io ns in a ll i nd ust r ial s eg me nt s. I n add it ion , th e Bu si ne ss Ar ea , al on g w it h par t ne rs , ha s le adi ng gl ob al se r v ice p res en ce . The se p rod uc t s an d se r v i ces a re d eli ve re d thr oug h ei ght op er ati ng D iv isio ns: L a rge M otor s & G en er ators , IEC LV Motors , NE MA M otor s, D r iv e Pro duc t s , Syste m Dr i ves , Se r v ice , T rac t io n an d, u nti l Oc to be r 20 2 1 , Me ch ani ca l Powe r T ra nsmi ssi on . • Pr ocess Automation: d eve lo ps an d se ll s a bro ad ra ng e of in du str y- spe c if i c , inte gr ated au tomat io n an d el ec t r if i cat io n and d igi ta l sy ste ms an d sol ut io ns, a s we ll a s di git al s olu ti on s, li fec ycle s er v ice s, advanced indust rial analyt ics and artific ial int elligence applications and suites for the pr ocess , marine and h ybrid industries. Products and solu tions include proces s and discre te cont rol t echnologies, advanced proc ess cont rol s oftware and man ufacturing execution s ystems, sensing, measurement and analy tical instrumentation, marine propulsion systems and large t urbo chargers. In addition, the Bu sin ess A re a of fe rs a co mp re he nsi ve ra ng e of se r v i ce s ran gi ng fr om re pai r to adv an ce d se r v i ces suc h as r em ote mon itor i ng , pr eve nti ve mai nten an ce, a sse t pe r for ma nce m anag e me nt , emi ssio n mon itor i ng a nd c y be r sec ur i t y ser v ic es . The p ro duc ts, s ys tem s and s er v ice s are d e li vere d th rou gh f i ve operating Divisions: E ne rgy Industries, P roces s Industries, Marine & Ports, T urbocharging, and Me asu re me nt & A nal y t i cs . • Robot i cs & D is cre te Auto mati on : de li ve rs it s p rod uc t s, s olu ti on s and s er v ice s th rou gh t wo op e rat ing Div isions: Robotics and Machine Automation. R obotics includes: industrial robots, s oftware, robotic sol ut io ns an d sy ste ms, f i el d se r v ices , spa re p ar t s, an d di git al se r v ice s. M achi ne A utom ati on spe c ia lize s in so lu ti ons b a sed o n it s pr ogr am ma bl e lo gic co ntr oll e rs ( PLC), in du str i al P Cs ( IP C ), ser vo motion, tra nsport systems and machine v ision. Both Divisions offer engineering and s imula tion sof t wa re a s wel l as a c omp re he ns ive r an ge of di gi tal s ol ut ion s. Corpora te and Other: includes headquar ter c osts, the C ompany’ s cor porat e real esta te activ ities, Corpora te T reasury Operations, his torical opera ting activ ities of cer tain d ivested businesses and other non- core opera ting activ ities. The p r im ar y mea sur e of pro f ita bil it y o n whi ch th e op er ati ng se gm e nts a re ev al uate d is O pe rat ion al EBIT A , which represen t s income from operations e xcluding: • amortization e xpense on intangibles arising upon a cquisition ( acquisition-related a mortization ), • res tructuring, relat e d and implementation costs, • changes in the amount recorded for obligations rela ted to divest ed busines ses occurring a fter the divestment date ( changes in obliga t ions r elat ed t o div ested bu siness es ), • changes in estimates relating t o opening balance sheets o f ac quired businesses (changes in pre- acquis ition estima tes ), • ga ins and los ses from sa le of businesses (including fair value a djustment on as sets and liabilities held for sale ), • a cquisition- and divestmen t - relat e d expenses a nd int egration cos ts, • o ther income / expense relating to the P ower G rids joint venture, • cer tai n othe r n on - o pe rat io na l ite ms, a s we ll a s 240 ABB ANNUAL REPORT 2021 0 4 FI N A NC IA L R E V I E W OF A B B G RO UP • f oreign exchange / commodity timing differences in income fr om opera tions con sisting o f: (a) unrea lize d gai ns an d loss es o n de r iv ati ves (fo rei gn e xcha ng e, co mm od it ie s, e mb ed de d deriv atives ), (b ) reali zed ga ins and los ses on derivatives where the underly ing hedged transa c tion has not ye t be en r eal ize d, an d (c) unrea lize d for eig n exc han ge m ove me nt s on re cei v abl es/payab les (and rela ted as sets /liab ilities ). Certain o ther non-op erational items ge nerally includes c ertain regula tor y , compliance and legal costs, certain ass et wr ite downs /impai rments (including impairment o f goodwill) and certain other fair v alue cha ng es , as we ll a s ot he r ite ms whi ch a re d ete rmin e d by man age m ent o n a ca se -b y- c a se ba si s. The CO DM p r im ar i ly r ev i ews t he re sul ts of e ach s eg me nt on a b as is th at is be for e the e li min ati on of prof i ts m ad e on inv ento r y sa le s be tw ee n se gm ent s. S e gm ent re sul ts b e low a re pr ese nte d bef ore t hes e el imi nati on s, w i th a tota l de du c ti on fo r inte r seg me nt p rof it s to arr i ve at th e Com pany ’s conso lid ated Op er ati on al EB IT A . I nter se gm ent s al es a nd tr ans fe rs ar e acco unte d for a s if t he sa le s an d tra nsfe r s wer e to thir d par t i es, at c urr ent m arke t pr i ces . The f ollowing tables pres e nt di saggrega ted segment r evenues from c ontracts with customers f or 2021 , 2020 and 2019: Electrif ication Moti on Process Automation Ro bo ti c s & Disc rete Automation Corpora te and Other To t a l Euro pe The Americas of wh ic h: U ni te d State s 3,304 1 ,952 833 308 — A si a, M i dd le E a st a nd A fr i ca of which : China 2,08 7 1,1 56 74 0 949 — Pr od uc t t y pe Produc t s Syste ms — Se r v i ce s an d so f tw a re — Third-par ty revenues Inter segm ent reven ues — T otal rev enues Electrif ication Moti on Process Automation Ro bo ti c s & Disc rete Automation Corpora te and Other To t a l Euro pe The Americas of wh ic h: U ni te d State s 3,093 1,846 805 2 70 5 A si a, M i dd le E a st a nd A fr i ca of which : China 1 ,820 926 6 28 714 3 Pr od uc t t y pe Produc t s Syste ms — Se r v i ce s an d so f tw a re — Third-par ty revenues Inter segm ent reven ues T otal rev enues 241 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L R E V IE W O F A BB G R OU P Electrif ication Moti on Process Automation Ro bo ti c s & Disc rete Automation Corpora te and Other To t a l Euro pe The Americas of wh ic h: U ni te d State s 3, 522 1, 972 948 290 3 6 ,7 3 5 A si a, M i dd le E a st a nd A fr i ca of which : China 1 ,7 2 9 876 608 825 1 Pr od uc t t y pe Produc t s Syste ms — Se r v i ce s an d so f tw a re — Third-par ty revenues Inter segm ent reven ues T otal rev enues (1) I nte r se gm en t re ve nu es u nt i l Ju ne 3 0 , 20 2 0, i nc lu d e sa le s to th e P owe r G r id s bu si ne ss , wh ic h is p re se nt ed a s d is co nt in ue d o pe ra ti on s, a n d ar e not e l im in ate d fr om Tota l re ve nu es (s ee N ote 3 ). Reve nu es b y ge ogr ap hy ref l ec t t he l oc ati on of th e cu stom er. In 202 1 , 2 02 0 an d 201 9 th e Uni ted St ates and C hin a are t he o nl y cou ntr i es w he re rev en ue e xcee d ed 10 p er cent o f T o tal r eve nu es. I n ea ch of 2 02 1 , 20 20 a nd 2 019 m or e tha n 98 p e rce nt of th e Com pany ’s total reve nu es we re g en er ated f rom c usto me rs out si de Sw it ze rl and . 242 ABB ANNU AL REPORT 2021 0 4 F IN A N CI A L RE VI E W O F AB B G RO U P The f ollowing tables pres e nt Opera tional EBIT A , the r econciliations of consol idat e d Operational EBIT A to Income f rom c ontinuing operations before ta xes, as w e ll as Depreciation and amortization, and Ca pit al e xp en ditu re fo r 20 21 , 2 0 20 a nd 20 19, a s we ll a s T ot al a sset s at De ce mb er 3 1 , 20 2 1 , 20 20 and 2 01 9 : Operational EBIT A : El ect rifi cati on Motion Process Automation Robotics & Discr ete Automation Corporat e and Other: — Non-core and d ivested businesses — S tranded corpora te costs — — Cor po r ate cos t s an d Ot he r i nte rs eg m ent e l imi na ti on To t a l Acquisition-related amortization Restructuring, relat e d and impleme ntation costs Changes in obligations rela ted to divested businesses Changes in pre -acquisition es timates Gains and los ses from sale o f busines ses Fair v al ue a dju st me nt o n a sse ts a nd l ia bi li ti e s he ld f or s al e — Acquisition- and divestment - related expenses and integration c osts Other income /expenses relating to the Pow er Grids join t v enture — Foreign e xchange / commodity timing differences in income from operations: Un re al ize d gai ns a nd l os ses o n d er i v ati ve s (for ei gn e xc ha ng e, commodities, embedded derivatives ) Realized gains and losses on derivatives where the underlying hedged tra nsaction ha s no t yet b e en r ea li zed Un re al ize d fo rei gn e xc ha ng e mo ve me nt s on r e cei v ab le s/paya bl es (an d re l ated assets/liabilities ) Certain ot her non- operational it e ms: Cos ts f or p la nn e d di ves tm e nt of P owe r G r id s — Regulatory , compliance and le gal co sts — Business tran sforma tion cos ts Executive Comm ittee tran sition cos ts Favor ab le r es ol ut io n of a n un ce r tai n p urc ha s e pr i ce ad ju st me nt Gai n on s al e of i nve st me nt s — — Certain o ther fa ir value changes, including as set i mpairments Other non- operational it ems Income fr om opera tions Interest and dividend income Interest and other finance expe nse Los ses f ro m e x ti ng ui sh me nt of d e bt — — Non- operational pension ( cost) credit I ncome from c ontinuing operations bef ore t axes (1) A mo un ts i n 2 02 0 a nd 2 01 9 in c lu de $ 6 7 mi ll io n an d $9 7 mi ll io n , re sp ec t i ve ly, of i mp l em e nt ati o n cos t s in r el at io n to t he O S pr og ra m . (2) A m ou nt s in 2 0 21 i nc l ud es A B B Way p ro ce ss t ra ns fo rm at io n cos t s of $ 80 m il li o n. (3) Amount in 2020 includes goodwill impa irment charges of $311 mill ion. 243 ABB ANNU AL REPORT 2021 0 4 FIN A N CI A L RE VI E W O F AB B G RO U P Depreciation and amortization C apita l expenditure s T ota l assets El ect rifi cati on Motion Process Automation Ro bo ti c s & Di sc re te Automa tion Corporat e and Other Consol idated (1) A mo un ts i n 2 02 0 a nd 2 01 9 ha ve b ee n re st ate d to r ef l ec t t he r ea ll o cat i on o f ce r tai n re a l es tat e as se ts , pr ev i o us ly r ep o r te d in Co rp o rat e an d Other , to t he individual opera ting segments utilizing these assets. (2) C ap it al e x pe n di tur e s an d T ota l a sse t s ar e af te r in te rs eg me nt e l im in at io ns a nd t he re fo re r ef l ec t t hi rd - p ar t y ac t i v it i es o nl y. (3) At D e ce mb e r 31 , 2 0 21 , 2 0 20 a nd 2 01 9, C or po r ate a nd O th e r in cl u de s $1 3 6 mi ll io n , $2 8 2 mi ll io n an d $9 , 8 4 0 mi ll io n, r es pe c t iv el y, of a ss et s in th e Pow er G r i ds b us i ne ss w hic h i s re po r te d a s di sco nt i nu ed o p er at io ns (s ee N ote 3 ). I n ad di ti on , at D e ce mb e r 31 , 2 0 21 a nd 2 0 20 , Co rp or ate an d Ot h er i nc lu d es $ 1 ,6 0 9 mi ll io n an d $1 ,7 1 0 mil li o n re lat ed t o th e eq ui t y in ve st me nt i n Hi ta ch i En er g y Ltd (se e N ote 4). Other geographic in forma tion Geographic inf ormation for long -lived assets was as follo ws: Lo ng - l i ved a ss et s at Euro pe The Americas A si a, M i dd le E a st a nd A fr i ca To t a l Lon g - li ve d asse ts r ep res ent “ P rop er t y, pla nt an d e qui pm ent , n et ” an d “O p er atin g le a se r ig ht-of- use asse t s” an d are s hown b y lo cat io n of the a sse ts . At De ce mb er 3 1 , 20 2 1 , ap prox im atel y 1 9 pe rce nt , 1 2 pe rce nt an d 1 1 pe rce nt of th e Com pany ’s long - l ive d a sset s we re lo cate d in t he U nite d States , Chi na and Sw it zer lan d, r esp ec t i vel y. At Dec em be r 31 , 2 02 0, ap pr oxi mate ly 2 1 p erc ent , 10 p erc ent a nd 11 p e rce nt of the C omp any ’s lo ng - l ive d a sset s we re lo cate d in t he U nite d States , Chi na an d Sw it ze rl and , res pectively . 05 A B B L t d St at u t o r y F i nanc ia l S t a t em en t s 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 245 ABB ANNUAL REPORT 2021 246 ABB L td Ma nagem ent Repor t 20 21 24 7 Fi nanc ia l Sta teme nts 2021 248 Not e s to Financ ia l St at e me nts 260 Proposed appropr iation of a vaila ble earnings 261 Repor t of the Sta tutor y Au ditor on the Financial Sta tements 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 246 ABB ANNUAL REP ORT 2021 — ABB L td Manageme nt Report 202 1 AB B Ltd is t he ho ld in g com pa ny of the A B B G rou p, owning direc tly or ind irectly all subsidiaries globally . The major busine ss activ ities dur ing 2 021 ca n be summ ar ized as fol lows: Managem ent services The Co mp any p rov i de d ma nag em en t ser v ic es to a Gro up co mp any fo r CH F 17 millio n . Share transa ctions • share d el ive r ie s in r el ati on to e mpl oye e sha re pro gr ams of C HF 9 6 3 mil lio n • share c an cel lat io ns of CH F 2 ,7 78 mi ll ion : th ose shares w ere repurchased under a share buyback program in 2020 - 2021 • fur th er sh are r ep urc ha se s of CH F 2, 4 2 5 mil li on for canc e llation purposes • shar e repurchases f o r employee s hare programs of CH F 93 9 mil li on Dividend pa yment to ex ternal shareholders • fr om reta ined earnings of CHF 1,436 million Di vest m en t of th e Powe r G r id s b usi n ess Hit achi E ne rg y Ltd on J ul y 1 , 20 20, t he Co mp any tra nsf er red i n 20 2 1 AB B Powe r T e ch no log y Se r v i ce s Pr i vate Limi ted , In di a, A B B Powe r Pro du c ts A n d Syste ms I ndi a Limi ted , In dia , a nd AB B Pow er G r id s So uth A fr i ca ( P t y) Ltd to Hitac hi Ener gy L td. Other informa tion In 2 02 1 , th e Com pany e mp lo yed o n aver age 19 e mpl oyee s. On ce a yea r , th e Com pa ny ’s Boa rd of D ire c tor s pe r for ms a r is k asse ssm ent i n acco rda nce w ith the G ro up’s r isk m ana ge me nt pro ce ss and discus ses appropriate ac tions if ne cessa r y . The Co mp any d oe s not c arr y out a ny re sea rch a nd development act ivit ies. In 2 02 2 , th e Com pany w ill co nt in ue to op e rate as the h ol di ng co mpa ny of th e A BB G ro up. N o change o f busines s is expected. Feb ru ar y 2 4, 2 02 2 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 247 ABB ANNU AL REPORT 2021 — Financia l S ta tements 2021 Income S tat eme nt No te Div idend income Finance income Other operating income Finance expense Personn el exp enses Other operating e xpenses Wr ite d ow n of p ar t ic i pat i on Gai n an d Lo ss o n sal e of p ar t i c ip ati o n Ne t i nc om e be fo r e ta xe s Income taxes — Net income Balance Sheet No te Cash Ca sh d e po si t w it h AB B C ap it al Ltd Non-trade receivables Non-trade receivables – Group Short-term l oans – G roup Accrued inc ome and prepaid expenses Acc ru e d in co me a nd p re pa id e xp e ns es – G ro up Ot he r sh or t-t er m as set s T o ta l cu rr e nt a ss et s Long-term loans – G roup Partic ipations Ot he r l on g -te r m ass et s T o ta l no n - c ur re n t as set s T otal asset s Interest -bear ing liab ilities — Interest - bearing liabilities – Group Non-trade payables Non-trade payables – Group Deferred inc ome and accrued expenses De fe rr ed i nc om e an d acc r ue d e xp en se s – G rou p Short-term prov isions T otal curr e nt liabilities Interest -bear ing liab ilities Interest - bearing liabilities – Group Long-term provisions T otal non-current liabilities T otal liabili ties Share capital Legal res erves Legal ot her reserves — Legal res erves from r etained earnings Free reserves Retained earnings Net income Own shares 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 248 ABB ANNUAL REPORT 2021 — Not es to F i nanc ia l S ta teme nts — Note 1 Gener al AB B Ltd, Zu r ich , Sw i tze rl an d (the Com pa ny) is th e par ent c omp any of t he A B B Gro up. I ts s tan d - al on e f ina nc i al st atem en ts a re pr ep are d in ac cord an ce w it h Sw iss l aw. The f i na nc i al st atem ent s have b e en p rep ar ed i n acco rda nce w i th A r t ic le 9 57 e t seq q . of Tit le 3 2 of th e Sw iss Co de of O bl ig atio ns . Gro up co mp ani es a re al l com pan ies w hi ch ar e dir ec t ly o r in dir ec t ly co ntro ll ed b y the Co mp any a nd va r iab le i nte res t ent it i es if i t is d ete rmi ne d that th e Com pa ny is th e pr i ma r y be n ef ic i ar y . — Note 2 Participations Comp any name Purpose Domicile Share capital Ow ne r sh i p an d voting rig hts Share capital Ow ne r sh i p an d voting rig hts AB B A s ea B row n B ove r i Ltd . Holding CH - Zur ic h Hi tac hi E ne rg y Ltd . Holding C H -Zur i ch Development of participations CH F i n th ou sa n ds Additions Disposals Wr ite o f fs (1) th e re of d iv i d en d in k i n d fro m A B B A se a Br ow n Bo ve r i Ltd C HF 5 6 8 ,70 5 in 2 0 21 a n d CH F 6 ,745, 61 9 i n 20 2 0 The p ar t ic i pat io n is v alu e d at the l ower o f cost o r fair v al ue , us in g ge ne ra ll y acce pted v al uat io n princ iples. On J ul y 1 , 20 2 0, th e Comp any co mp le ted t he sa le of 8 0. 1 p e rce nt of Hit ac hi Ene rg y Ltd (form er ly H it achi AB B Pow er G r id s Ltd). T he tr an sac t io n wa s exe cu ted t hro ugh t he s ale o f 80. 1 p e rce nt of th e sha res of Hit achi E ne rg y Ltd. C as h con sid e rati on r ece ive d di re c tl y by the C omp any at th e cl osi ng d ate wa s US D 5, 674 milli on (CH F 5, 376 mi lli on) and U SD 1 , 1 76 mill io n (CHF 1 , 1 14 mi ll io n) restr i c ted c a sh . The Co mp any also ob tained a put option allowing the C ompany to require Hitach i to pur chase the remaining i nteres t for f air va lu e, su bje c t to a mi nimu m f loo r pr i ce e qui v al ent to a 10 p er cent d isc ount c om par ed to th e total p r ic e paid fo r th e ini ti al 8 0. 1 p erc ent . Th e pu t opt io n ca n be e xe rc ise d co mme n c ing A p r il 2 02 3 . It i s not re co gnize d in t he acc oun ts of t he Co mpa ny. The bo ok v al ue of th e ret ain ed 1 9. 9 p er cent i nves tm ent for Hi ta chi En er gy Ltd w as C HF 1 , 37 9 mil lio n an d CH F 1 , 3 7 7 mil li on , as of D e cem be r 31 , 2 0 21 a nd 2 02 0, res pectively . 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S ABB ANNU AL REPOR T 2021 Liab ilities for est imated p aymen ts C H F in t h ou sa n ds Deferred inc ome Short-term prov isions Acc ru e d ex p en se s - Gr ou p (1) Delayed closing countries (2) Retention Bonus, T ransitional Serv ice Agreement, W ork ing Capital (only in 2 020) (3) Internal cost r eimbursement For certain entities of t he Po wer Gr ids busines s, the legal pr oces s or other r e gulat or y delays r esult e d in the Com pany n ot hav i ng t ran sfe rre d l eg al t itl e to Hi tac hi as at t he date of t his re po r t . Th e pro ce ed s for th es e ent it ie s ar e inc lu de d in O th e r sho r t-term a sset s of CH F 1 1 mil lio n an d CH F 26 6 mil li on at D ece mb e r 31 , 2 02 1 and 2 0 20, r esp ec t i vel y. In 2 02 1 , th e Com pany t ra nsfe rr ed A B B Powe r T ec hn ol og y Se r v ice s Pr iv ate Limi ted , In di a, a nd A B B Powe r Pro du c ts A n d Syste ms I ndi a Limi ted , In dia , a nd A B B Powe r Gr i ds S ou th Af r ic a (P t y) Ltd to Hit ach i Ene rg y Ltd. The r em aini ng Powe r G r id s ent it y AB B Eng g . T e c hno lo gi es Co. ( KS CC) i n Kuw ait is e xp e c ted to b e tra ns fer re d by the f i r st ha lf of 2 02 2 . — Note 3 Indirect Participa tions The f oll ow i ng t abl e se ts fo r th th e na me , cou ntr y o f inc orp or ati on , own er shi p an d voti ng r i ght s, a s we ll a s sha re ca pit al , of th e sig nif i ca nt in dir ec t su bsi di ar i es of th e Com pa ny , as of D e cem be r 31 , 2 0 21 a nd 20 2 0. Company name/location Cou ntr y Comp any ownership an d vo ti ng Sh a re ca pi ta l i n thousands Comp any ownership an d vo ti ng Sh a re ca pi ta l i n thousands Cu rre nc y AB B S . A ., B u en os A ir es Arg ent ina ARS AB B A us tr al ia P t y Li mi ted , M oo re ba nk Austr alia AUD AB B G ro up H ol d in gs P t y. Ltd. , M oo re ba nk Australia AUD AB B G ro up I nve st me nt M an ag em e nt P t y. Ltd. , Moorebank Australia AUD AB B AG , W i en e r Ne ud o r f Austria EUR B&R Holding GmbH, E gge lsberg Austria EUR B&R Industrial Automa tion GmbH , E ggelsberg Austria EUR AB B N .V . , Zav en te m Belgium EU R ABB Automacao Ltda, Sorocaba Bra zil BRL AB B E le tr i f ic ac ao Ltd a , So ro ca ba Bra zil BRL AB B B ul g ar i a EOO D, So f ia Bulgaria BGN ABB Electrif ication Canada UL C , Edmont on Canada — CAD ABB Inc., Saint -L aurent Canada — C AD AB B S . A ., S a nt iag o Chil e CLP ABB (C hina) Investment L imited, Beijing Chin a USD ABB (China) Ltd., Beijing China USD AB B B ei ji ng D r i ve Sy ste ms C o. Ltd ., B e iji n g China USD ABB Beijing Switchgear Limited, Beijing Chi na US D ABB Electrical Machines Lt d., Shangha i Chi na USD ABB Engineering (Shanghai) L td., Shanghai Chin a US D AB B LV Ins ta ll at io n Mate r i al s Co. Ltd . B ei ji ng , B ei ji ng China USD AB B S ha ng hai Fr ee Trad e Zon e In du st r ia l Co. , Ltd ., Shanghai China CNY ABB Shanghai Mot ors Co. L td., Shanghai China US D AB B X ia me n Lo w Volt ag e Eq uip m en t Co. Ltd ., Xiamen China USD AB B X ia me n Sw i tch ge a r Co. Ltd ., X ia me n C hina USD AB B X in hu i Low Vo lt ag e Sw itc h ge ar Co . Ltd ., X in hui China USD AB B s .r.o., P ra gu e Czech Republic C ZK 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 250 ABB ANNUAL REPOR T 2021 Company name/location Cou ntr y Comp any ownership an d vo ti ng Sh a re ca pi ta l i n thousands Comp any ownership an d vo ti ng Sh a re ca pi ta l i n thousands Cu rre nc y AB B A /S , Sko vl un d e De nmark DKK AB B fo r El e c tr i ca l In du st r ie s ( A BB A R AB) S . A . E . , Cai ro Eg ypt EG P A se a Br own B ov er i S . A . E . , Cai ro Eg ypt US D AB B A S , J ür i Estonia EUR AB B O y, He ls in k i Finland EU R AB B Fr an ce , Ce rg y Po ntoi se Fra n ce EUR AB B S A S , Ce rg y Po ntoi se Fran c e EU R AB B AG , M an nh ei m Germany EU R ABB Automa t ion GmbH, Mannheim Ge rmany — — EUR ABB Automa t ion Products GmbH, Ladenburg Germany — — EUR AB B B et ei li gu ng s- u nd Ve r wa lt un gs ge s. m bH , Mannheim Germany EUR AB B Sto tz - Kon ta k t Gm b H, H e id el b er g G ermany EUR B + R In du st r ie - El ek t ro nik G m bH , B ad H om bu rg Germany EUR Busch-Jaeger E lektro GmbH, Lüden scheid Germany EU R ABB Engineering T rading and Service Ltd., Budapest Hungar y HUF Industrial C&S Hungary Kft., Budapest Hungar y HUF ABB Global Busines s Serv ices and Contracting India Private Limit ed , Bangalore India — — INR AB B G l ob al I nd us tr i es a nd S e r v i ce s Pr i va te Lim ite d , Bangalore India INR ABB India L imited, Bangalore Indi a INR AB B S . p. A ., M il an Italy EU R AB B K . K ., T ok y o Japan JPY AB B Ltd . , Se ou l Kor ea , R ep ub li c of KRW AB B E le c tr i c al Co nt rol S ys tem s S . de R . L . de C .V., Mon terr ey Me xi co MXN AB B M e x ico S . A . d e C .V . , S an L uis P oto si Me x ico MXN A se a Br own B ov er i S . A . d e C .V . , S an L uis P oto si Mex ico MXN AB B B .V . , Ro tt er da m Netherlands EUR ABB Finance B. V ., Rotterdam Netherlands EUR ABB Holdings B. V ., Rotterdam Netherlands EUR AB B A S , Fo rn eb u N or w ay NOK AB B E le c tr i f ic at io n No r w ay A S , Sk i e n No r way NOK ABB Holding AS, For nebu N or w ay NOK AB B B us in es s Se r v ice s Sp . z o.o. , Wa rs aw Poland PLN AB B I nd us tr i al S ol ut i on s (B ie l sko - B ia la ) Sp . z o.o. , Bielsko- Biala Poland PLN AB B I nd us tr i al S ol ut i on s (K l od zko) Sp. z o .o., K lo dz ko Poland PLN AB B S p. z o.o ., Wa rs aw Poland PLN In du st r ia l C& S o f P . R . L LC , S an J ua n Puerto R ico — — USD AB B Ltd . , Mo scow Russian Federation RUB AB B E le c tr i c al I nd us tr i es Co . Ltd ., R i ya dh S audi Arabia SAR ABB Pte. Lt d., Singapore Singapore SGD AB B H ol di ng s (P ty) Lt d. , Mo d de r fo nte in S outh Africa Z AR AB B I nve st me nt s (P t y) Lt d, M od d er f ont ei n So uth Africa — — ZAR AB B S ou th A fr i ca ( P t y) Ltd ., M o dd er f on tei n South Afr ica ZAR A se a Br own B ov er i S . A . , Ma dr i d Spai n EUR ABB AB, Västerås Swe de n SEK AB B E le c tr i f ic at io n Swe d en A B , Vä s ter å s Swede n — — SEK AB B N or de n H ol di ng A B , Vä s te rå s Swed en SEK AB B C an ad a EL H ol di n g Gm b H, Zu r ic h Switzerland CH F AB B C ap it al AG , Zu r ic h S wit zerland CH F AB B I nfo rm at io n Sys te ms Ltd ., Z ur i ch Switzerland CHF Swit zerland CHF AB B M an ag em e nt Se r v ice s Ltd ., Z ur i ch Swit zerland CHF AB B S ch wei z AG , B ade n Switzerland CHF AB B Ltd . , T ai pe i T aiwan (C hinese Ta i p e i ) TWD 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 251 ABB ANNUAL REPORT 2021 Company name/location Cou ntr y Comp any ownership an d vo ti ng Sh a re ca pi ta l i n thousands Comp any ownership an d vo ti ng Sh a re ca pi ta l i n thousands Cu rre nc y AB B E le k tr i k Sa na y i A . S . , Is ta nb ul Tu r k e y TRY AB B I nd us tr i es ( L . L .C .), Du bai Uni te d A ra b Emira tes AED ABB Holdings L imited, War rington Un ited Kingdom GBP ABB Limited, W arr ington United Kingdom GBP ABB Finance (USA) Inc., Wilmington, DE Unite d States USD ABB Holdings Inc., Cary , NC Unite d States USD AB B I nc . , C ar y, NC U nite d States USD AB B I ns ta ll at io n Pro d uc t s In c , M em ph is , TN Unite d States USD ABB Installation Products Interna t ional LL C ., Wilmington, DE Unite d States — — — USD AB B M oto rs a nd M e ch an ic al I nc , F or t S mi th , AR U nite d States — — USD AB B Trea sur y Cen ter ( U SA ), In c . , Wi lm in gto n , DE United St ates USD Edison Hol ding C orporation, Wilmingt on, DE U nite d States — — USD Industrial Connections & Solutions LLC, Car y, NC Unite d States — — USD (1) Shares without par value. (2) Company consolida ted as ABB exercises full manageme nt c ontrol. (3) B as e d on t he i nte r na ll y d ef i ne d th re sh ol d s, t he se i nd ir e c t pa r ti c ip at io ns a re c on si d er ed n ot s ig ni f ic an t , an d th er ef or e no d et ai ls to t h es e pa r ti c ip a - ti on s ar e di sc lo se d i n th e re sp ec t i ve ye ar. (4) Pa r ti c ip at io n w as e it he r so l d, l iq ui d ate d or m e rg ed i n 2 02 1 . (5 ) Par ticipation was renamed from ABB Substations Contracting India Private Limited, Bangalore in 2021 . — Note 4 Int erest - bearing liab ilities nominal value — nominal value premium on issuanc e nominal value premium on issuanc e To t a l arr ear s. T he Co mp any ha d, th rou gh A B B Ca pit al Ltd, e nte re d into an i nte res t rate sw ap w i th a ba nk to ef fe c ti ve ly c onve r t th ose b ond s into f l oati ng r ate obl ig ati ons . Th e inte re st sw ap w as t reate d as a n of f-b ala nce s he et i tem an d wa s th e refo re not r eco rd ed . Th e sw ap ag ree m ent e nd ed u po n re pay me nt of the bonds. in Au gu st an d May r esp ec t i vel y. The Com pa ny ha s th e opt io n, o ne m onth b efo re th ei r matur i t y date in ca se of t he 20 24 b on ds a nd th re e mo nths b efo re th eir m atur i t y date in t he c as e of the 2 0 29 b on ds , to red e em t he b ond s, i n wh ol e but n ot in p ar t , at pa r plu s acc rue d i nter est . Fur t he r , th e Com pany h a s the opt io n to red e em t he ab ove b on ds pr ior to m atur it y, in wh ol e but n ot in p ar t , at par p lu s acc rue d red e em ed o r pu rch as ed a nd c an cel le d at th e ti me of t he op ti on e xerc i se no ti ce . In 2 016 , the Co mp any e nter ed i nto a bo rrow ing ag re em ent o f US D 50 0 mi lli on w i th A B B Ca pit al Ltd that ex pir es in 2 0 24 (w ith a n amo r t izat io n sch e dul e of US D 2 5 mil lio n pe r an nu m) to hedg e th e US D 50 0 mi lli on l oa n gra nte d to a Gro up co mp any. In eac h of 20 21 a nd 2 02 0, th e Com pa ny rep aid 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 252 ABB ANNU AL REPORT 2021 — Note 5 C ontinge nt liabi lities The Co mp any h as i ssue d a sup po r t le tte r to a sur et y in st itu ti on fo r the i ssua nce of su ret y b on ds o n be ha lf of G rou p com pa nie s. N o amo unt w as i ssue d un de r thi s le tte r at De ce mb er 3 1 , 20 2 1 , com par ed w ith C HF 8 8 9. 9 mi lli on a s of D ece mb e r 31 , 2 02 0. Wi th ce r tai n Gr oup c omp ani es , the Co mp any h as ke ep -we ll ag re em ent s . A keep -we ll a gre em e nt is a sh are ho ld er a gre em en t be twe e n th e Comp any a nd a G rou p com pa ny. These ag re em ent s p rov i de fo r indirect ownershi p by the Compan y . The ke ep -we ll a gre em en ts ad di ti on all y p rov i de th at if at any t im e th e Gr oup c omp any h as i nsuf fi c ie nt liq ui d ass et s to me et any p aym ent o bl ig atio n on i ts d e bt (as def i ne d in t he ag re em ent s) and ha s insu f f ic i en t unu se d com mitm en ts u nd er i ts c re dit f ac il it ie s w ith i ts l e nd er s, th e Com pa ny w il l make avail ab le to th e G rou p com pany s uf f ic i e nt fun ds to e na bl e it to fu lf i ll su ch pay me nt o bli gat io n as i t fa lls du e. A ke ep -we ll ag re em ent i s not a g ua ran tee by t he Com pa ny for p aym ent of t he i nd ebte dn ess , or a ny othe r o bli gat io n, of a G ro up co mpa ny. No par t y e x te rna l to the A B B G rou p is a pa r t y to any k eep-well a greement. The Co mp any h as a lso p rov i de d ce r tai n gua ra ntee s se cu r ing t he p er f orm an ce of G rou p com pani es i n con ne c ti on w i th co mm erc i al p ap er p rog ra ms, i nd entu re s or oth er d e bt in str ume nt s to en ab le th e m to ful f il l the p aym en t obl ig ati ons u nd er su ch i nst ru me nts a s th ey f all d ue . Th e am ou nt gu ara ntee d u nde r the se i nstr um ent s w as C HF 4 , 3 7 1 . 2 mill io n as of D e cem be r 31 , 2 0 21 a nd CH F 4, 14 4 .0 mil lio n a s of December 31, 2020 . Ad dit io na ll y, the Comp any h as p rov i de d ce r tai n gu ara nte es se cu r in g the p er form an ce of cont rac t s an d und e r ta ki ng s of G rou p com pani es w ith thi rd p ar t ie s ente re d into i n the n or mal c our se of b usi ne ss of an agg reg ate va lu e of CH F 7 2 . 8 mil lio n a s pe r De ce mb er 3 1 , 20 2 1 and C HF 70 . 3 mil li on a s pe r December 31, 2020. Fur the rm or e, th e Com pa ny is th e gu ar antor i n th e Gr oup’s US D 2 bil lio n mu lt ic urr en c y revo l v in g cre di t fac i lit y ( “G rou p Faci lit y ” ). In D ece m be r 201 9, th e G rou p Faci lit y m atur in g in 2 02 1 w as re p lace d w ith a n ew G rou p Faci lit y m atur i ng i n 20 24, w ith th e op ti on in 2 0 20 a nd 2 02 1 to ex te nd t he m atur it y to 20 2 5 and 2 0 26 , res pe c t ive l y . The Co mp any e xerc i se d it s opt io n in 2 02 1 to e x ten d the m atur it y o f the fac i lit y to 2 02 6 . No a mou nt s wer e draw n un de r thi s Gro up Fac ili t y at De ce mb er 3 1 , 20 21 a nd 2 02 0. The Co mp any th rou gh c er t ain of it s di re c t an d in dir ec t su bsi dia r ie s is i nvol ve d in v ar i ous r eg ul ator y an d le ga l matte r s. Th e Com pa ny ’s dire c t an d in di rec t su bsi di ar i es have m ade c er t ain re late d pr ov is io ns a s further described in “Note 1 5 Comm itments and contingencies” to t he Con solidated F inanc ial Statem en ts of A B B Ltd. A s d esc r ib e d in th e note , th ere i s a r isk of a dve r se ou tcom es b eyon d th e provisioned amounts. The Co mp any i s par t of a v al ue a dd ed t a x G rou p an d the re fore i s joi ntl y lia bl e to th e Sw iss Fe de ra l T a x De pa r tme nt fo r th e va lue a dd ed t a x li abi lit i es of th e oth er m em be r s. 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 253 ABB ANNU AL REPO RT 2021 — Note 6 Sh a re capital Legal res e rves Free re ser ve s Own shares To t a l Other reserves fr om retaine d earnings from retaine d earnings Net income Opening balance Allocation t o reta ined earnings — Cancellation of shares — share Purchases of own shares De li ve r y o f own s ha re s Ne t in co me f or th e ye ar Closing balance — Nu m be r o f registered shares To t a l Issued s hares Contingent shares Authorized shares Number o f registered shares To t a l Issued s hares Contingent shares Authorized shares The ow n sh are s are v al ue d at acqu isi t ion c ost . D ur in g 20 2 1 and 2 0 20, a l oss fr om th e de li ver y of own sha res of C HF 1 5 5 mil lio n an d CH F 14 mi lli on , res pe c ti ve ly, wa s re cord ed i n th e In com e State me nt un de r Finance expense. Du r in g 20 21 , a b an k hol di ng c al l opt io ns re late d to A BB G rou p’s man age me nt in ce nti ve p la n (MI P) exe rc is ed a p or t io n of th ese o pt ion s. S uc h opt io ns ha d be en i ssue d in 2 01 5 , 2016 a nd 2 01 9 by th e Gro up com pany t hat fa c ili tates t he M IP at f air v alu e an d had a s tr ike p r ice of C HF 1 9. 5 0, C HF 2 1 . 5 0 an d CH F 19. 0 0, res pe c ti ve ly. At issua nce , th e Gr oup c omp any h ad en tere d i nto an inte rco mp any o pti on agre e me nt w it h the Co mp any, hav in g the s am e ter ms an d con di ti ons to e na bl e it to m ee t it s futu re ob lig ati ons . A s a re sul t of the e xe rc ise by t he b ank , t he Co mpa ny de li ve red 17 , 507,403 s har es at CH F 19. 50, 1 4, 1 9 4, 3 05 sh are s at CH F 21 . 50 a nd 4 , 2 17 , 9 1 3 sha res at C HF 1 9.0 0, o ut of ow n sha res . Du r in g 20 20, a b an k ho ldi ng c al l opt io ns re l ated to A BB G ro up’s MI P exe rc is ed a p or t io n of th ese o pt ion s. S uc h opt io ns ha d be en i ssue d in 2 014 b y the G ro up co mp any th at fac il it ates th e MI P at fair v al ue a nd had a s tr ike p r ice of C HF 2 1 .0 0. At i ssua nce , th e Gro up co mp any h ad ente re d in to an inte rco mp any opt io n agre e me nt w it h th e Comp any, hav in g th e sam e ter ms an d co ndi ti on s to ena bl e it to m ee t it s futu re ob li gat io ns. A s a r esu lt of th e exe rc i se by th e ban k , th e Comp any d el ive re d 16 ,4 31 , 56 5 sha res at CH F 21 . 00 , out of o wn sh are s. The A B B G rou p ha s an an nu al e mp loye e sh are ac qui sit io n pl an ( ES A P) whic h pr ov id es s har e opt io ns to em pl oyee s gl ob all y. T o e na bl e the G ro up co mp any th at fac il it ates th e ES A P to de li ver s har es to em pl oyee s wh o have e xer c ise d th eir s tock o pt io ns, t he G rou p com pa ny ente re d into a n agre e me nt w it h the Co mp any to acq ui re th e req ui red n um be r of sh are s at the ir th en m ar ket va lu e fro m the Co mp any. Cons eq ue ntl y, in 20 21 , th e Com pa ny de li ver ed , ou t of own sh are s, to th e G rou p com pany 1 ,4 58 , 1 2 8 sha res at C HF 3 2 . 24 an d 27 0, 5 04 s har es at US D 3 4 .8 8 . I n 20 20, t he Co mp any de li ve re d, ou t of own sh are s, to th e G rou p com pany 1 , 149, 8 91 sh are s at CHF 2 4. 91 a nd 2 3 7 , 25 9 sha res at US D 2 7 . 2 7 . In 2 02 1 an d 20 20 , the Co mp any tr ans fe rre d 9 49,7 95 a nd 1 , 38 9,7 1 5 own s har es at an ave rag e acq uis it io n pr i ce pe r sh are of C HF 2 5 . 50 a nd C HF 2 1 . 97, respe c ti ve ly, to ful f ill i ts o bl ig ati ons u nd er ot he r share- based arrangements. 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 254 ABB ANNUAL REPOR T 2021 In 2 02 1 , th e Com pany p urc ha se d 33 m ill io n sha res , for C HF 9 39 mi ll io n, to sup po r t it s e mp loye e sha re pro gr ams g lo bal l y and 7 8 mil li on sh are s, fo r CHF 2 , 4 2 5 mil lio n, a s p ar t of it s sh are b uy ba ck p rog ram fo r ca pit al re du c ti on p ur pose s a s pub li cl y di scl ose d on A p r il 8 , 20 2 1 , and J ul y 2 2 , 20 2 0. In 2 02 0, th e Com pany p urc ha se d 1 3 mil li on sh are s, fo r CH F 31 2 mi lli on , to sup po r t it s em pl oye e sha re pr ogr am s gl oba ll y an d 10 9 mil lio n sha res , for C HF 2 , 5 78 mi ll ion , a s par t of its s har e bu yb ack p ro gra m for c api ta l red uc t io n pu rp ose s as p ub lic l y disc lo sed o n Ju l y 22 , 2 02 0. At the AG M i n Mar ch 2 02 1 , sha re ho ld er s ap prov ed t he pr op osa l of the B o ard of D ir ec to rs to re du ce th e sha re ca pit al of t he Co mpa ny by c anc el lin g 1 1 5,0 0 0 ,0 0 0 tre asu r y sh are s whi ch we re ac qui re d un de r the sha re bu y bac k pro gr am . This c an ce ll atio n wa s co mp lete d i n Jun e 20 2 1 , res ult in g in a d ec re ase i n T rea su r y sto ck (own sha res) of CHF 2 ,7 7 8 mil lio n an d a cor resp on di ng co mbi ne d de cr ea se in s har e capital and reta ined earnings. The m ove me nt in t he nu mb er o f own sh are s du r in g the ye ar w as a s fo ll ows: Number o f s hares Ave rag e acq u i sit i on p r ic e N umber o f shares Ave rag e acq u i sit i on p r ic e Purchases for em ployee shar e programs Purchases f or int end ed cancellation Cancellation De li ve r y f or e mp l oye e sh are p ro gr am s Th er e of p le d ge d f or M I P — Note 7 Divide nd income The Co mp any re ce ive d in 2 02 1 , di v i de nd p aym ent s fr om A BB A sea B rown B ove r i Ltd of CH F 1 . 2 bil lio n in ca sh an d CH F 5 69 mi lli on i n k in d (see note 2). T he Co mpa ny re cei ved i n 20 2 0, a di v id e nd pay me nt fr om AB B A se a Br own B ove r i Ltd of CH F 1 . 3 bi ll ion i n c ash a nd C HF 6 .7 bill io n in k i nd (see n ote 2). — Note 8 Other operat ing income Other operating income inc ludes ma inl y out going charges f or Business Area and Div ision management serv ices, income from s hare deliveries and guaran tee c ompe nsa tion fees to G roup c ompanies. — Sharehol ders Share holde r structure A s of De ce mb er 3 1 , 20 2 1 , the tot al n umb e r of sha re hol de r s dir ec t ly r eg iste re d w it h AB B Ltd wa s appro ximately 96,000 and another 51 3,00 0 shareholders held shares indirec tly through nominees. In total a s of t hat date , AB B ha d app rox im atel y 6 09 ,0 0 0 sha re ho ld er s. Significan t s hareholders Inve stor A B , Swe de n, h el d 26 5 , 3 8 5, 1 4 2 A BB s har es a s of De ce mb er 3 1 , 20 2 1 (refer to I nves tor ’s year- en d 20 21 r ep or t av aila bl e at h t t p s : // w w w. inves torab .com/in vestors-media / r eport s-presentations ). T his 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 255 ABB ANNUAL REPORT 202 1 hol di ng r ep res ente d 1 2 . 9 pe rce nt of A B B’s total s har e ca pit al an d vot in g r ig hts a s re gi ste red i n th e Com me rc ia l Re gis ter o n De ce mb er 3 1 , 20 2 1 . Th e nu mb er of sh are s he l d by Inve stor A B d oe s not i nc lud e sha res h el d by M r . Jac ob Wal le nb e rg, t he c hair man of I nve stor A B an d a di re c tor of A BB , i n his indiv idual capacit y. The C ap ita l G rou p Comp ani es I nc . , US A , d isc los ed t hat as o f Ju ly 1 , 2 02 1 , it , tog et he r w it h it s dir ec t a nd in dir ec t af f i liate s, he l d 11 5 , 8 41 , 3 3 6 A BB s har es (refe r to h t t p s : // www . s e r- a g .com/ en/ resources / notifications- market -par tic ipants / signif icant -sharehol ders . ht m l #/ shareholder - details /T AL 76000 20 ). This h ol di ng re pr ese nte d 5. 6 4 pe rce nt of A BB ’s total sh ar e ca pit al an d vot ing r i ght s a s re gis ter ed i n the Com me rc ia l Re gis ter at th at ti me . Cev i an C api ta l II G P Limi ted , Je r sey, discl ose d th at as of A ug ust 3 , 2 02 0, it h el d 10 5, 9 8 8 ,6 6 2 AB B sh are s (refer to h t t p s : // w w w.sec.gov / A rchives / edgar / data/1091587 / 00 009 0266 4 200 0286 2/ p20 -1467 sc1 3da . htm ). This ho ld in g rep re sente d 4 .8 9 p er cent o f AB B ’s total sha re c api tal a nd vot i ng r ig ht s as r eg iste re d in th e Com me rc ia l Re gi ste r at that t ime . Bl ack Ro ck I nc . , U. S ., di scl ose d th at as of A ugu st 3 1 , 2017 , it , to get he r w it h it s dir ec t a nd i ndi re c t subs idi ar i es , he ld 7 2 , 9 0 0,7 3 7 AB B sh are s (refer to h t t p s : // www . s e r- a g .com / en/ resources / notifications- market -par tic ipants / signif icant -sharehol ders . ht m l #/ shareholder - details /T AH91000F 4 ). This h ol di ng re pr ese nte d 3 . 3 6 pe rce nt of A B B’s total s har e ca pit al an d vot in g r igh ts a s re gis ter ed i n the Com me rc ia l Re gis ter at th at ti me . At De ce mb er 3 1 , 20 21 , to t he b es t of AB B ’s know le dg e, n o oth er sh are h ol de r he ld 3 p er cen t or mo re of AB B ’s total sha re c api tal a nd vot i ng r ig ht s as r eg iste re d in th e Com me rc i al Re gi ste r on th at date . AB B Ltd ha s no c ross sh are ho ld in gs in e xce ss of 5 pe rce nt of c api tal , or vot i ng r i ght s w it h any other compan y. An no un cem en ts re l ated to di scl osur e not if i cat io ns mad e by sh are ho ld e rs d ur in g 20 2 1 ca n be fo und v ia the s ear ch f ac ili t y on t he p latf orm of t he D isc lo sure O f f i ce of th e SI X Sw iss E xc han ge : h t t p s : // www . s e r- a g .com/ en/ resources / no t ific ations-market -par tic ipants / signif icant - shareholders . html # /. Under ABB’s A rt icles of Incorporation ( available a t http s:/ /new .ab b.com/about/ corporate- governanc e ), eac h reg iste re d sh are re p rese nt s on e vote . Sign if ic an t sha reh ol de r s do no t have di f fer ent vot i ng r ig ht s. T o our k n owl ed ge , we ar e not di re c tl y or i ndi re c tl y own ed o r con trol le d by a ny gove rn me nt or by a ny other c orporation or person. Shareholders’ rights Sh are ho ld er s have t he r ig ht to re cei ve di v i de nd s, to vote an d to exe cu te suc h oth er r i ght s as g ra nted under Swiss law and t he Articles of Inco rporation (a v ailable at https:/ / n ew.ab b.com/ a bou t/ corpora te- governanc e ). Ri gh t to vote AB B ha s o ne cl a ss of sha res a nd e ach re gi ste re d sha re ca rr i es o ne vote at th e ge ne ra l me et in g. Vot in g r igh ts m ay be e xerc i se d on ly af te r a sha re ho ld er h as b ee n re gi ste red i n th e sha re re gis ter o f AB B as a sh ar eh ol de r w it h the r i ght to vote , or w ith Eur ocl ea r Swed e n AB ( Euro cl ear), whi ch maint ain s a sub reg iste r of th e sh are re gi ste r of A BB . A sha reh ol de r may b e re pre se nted at t he A nn ual G e ne ra l Me et in g by it s le g al re pr ese ntat iv e, by a noth e r sha reh ol de r w i th th e r ig ht to vote or by t he in de p en de nt pr ox y el e c ted by t he sh are ho ld er s (unabh än gig e r Sti mmr ec ht sve r tre ter). If t he Com pa ny do es n ot have an i nd ep e nd ent p rox y, the B oa rd of Di re c tor s sha ll ap poi nt th e in de pe nd e nt prox y for th e ne x t G en er al M ee ti ng of S ha re hol de r s. A ll sha res h el d by on e sh are ho ld er m ay be re p rese nte d by on e re pre se ntat ive o nl y. For p rac t ic al re a son s sha reh ol de r s mus t be re gi ste re d in th e sha re re gi ste r no late r th an 6 bu si ness days b efo re th e ge ne ra l me et in g in o rde r to be e nt it le d to vote. E xc ept fo r th e ca se s de scr i be d un de r “Li mit ati ons o n tr ans fer abi li t y of sha res a nd n omi ne e re gis trat io n” be l ow, there a re n o voti ng r i ght s restrictions limiting ABB’ s shareholders’ rights. 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 256 ABB ANNU AL REPORT 2021 AB B ’s top pr io r it y i s prote c t ing t he h ea lth of i ts sh ar eh ol de rs a nd e mp loye es . Th er efo re, d ue to th e extraordinary circumstances and in accor dance with applicable Swiss COVID -19 legis lation, sha reh ol de r s wer e not ab le to at ten d A BB ’s An nua l Ge n er al M ee ti ng 2 02 1 in p er so n, b ut co ul d exe rc is e the ir sh are ho ld e r r igh ts v ia th e ind e pe nd ent p rox y o nl y. The B oar d of Di re c tor s ha s res ol ved t hat for AB B ’s Ann ual G e ne ra l Me et in g 20 2 2 , in acc ord an ce w it h ap pli ca bl e Sw iss COV I D -19 l e gisl ati on , th e sam e pro ce dur es sh all a pp l y . In ad dit io n, A B B w i ll of fe r sha re ho ld er s th e op por tunit y to ad dr ess qu es ti on s on agenda it e ms t o the Board of Dir ectors in writing ahead of the meeting. — Note 1 0 Sha rehol ding s of Board and E xecutive C ommittee At De ce mb er 3 1 , 20 21 a nd 2 02 0, th e me mb e rs of t he B oa rd of Di re c tor s as o f that d ate, he l d the following numbers o f shares ( or Amer ican Depository Shares ( ADSs ) represen ting such shares ): T o ta l nu m be r o f sh ar e s he l d Name December December Peter Voser Jacob Wallenberg Matti Alahuhta n.a. Gunnar Brock David C onstable Fr ederico Cura do La r s För be r g Je nn ife r X in -Z he Li Geraldine Mat chett David Meline Sat i sh Pai To t a l (1) I nc lu de s 2 ,0 0 0 s ha re s he l d by sp o us e. (2) M at ti A l ah uh ta d id n ot s ta n d for r e - e l ec t i on at A B B’s A n nu al G e ne r al M e et in g in M a rc h 20 2 1 . (3) I nc lu de s 3 , 1 5 0 sh ar es h el d by s po us e . 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 257 ABB ANNU AL REPORT 2021 At De ce mb er 3 1 , 20 21 , t he m em be rs o f the E xe cu ti ve Com mit te e, a s of th at date, h el d th e fol low i ng num be r of sh are s (or ADS s rep re sent i ng su ch sh are s ), the co ndi ti on al r i ght s to re cei ve AB B sh are s un de r the L on g -te rm In ce nti ve Pl an ( L TI P) and o pti on s (eithe r ves ted o r unve ste d as i nd ic ated ) un de r th e MI P and un vest e d shar es in respec t of other compensa tion arrangements. Name T o ta l nu m be r o f sh ar e s he l d Vested at December Nu m be r o f ves te d op ti o ns he l d un d e r th e M IP Nu m be r o f unv es te d op ti on s h el d u n de r t he M I P Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re p la ce m en t sh a re g ra nt for f oregone benefits fr om f or me r e m pl oye r Re p la ce m en t sh a re g ra nt for f oregone benefits fr om f or me r e m pl oye r (ves ti ng (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g Bj ör n Ros e ng re n — — — Timo Ihamuotila — — — — Carolina Granat (EC m em b er a s of — — — — — — Maria Varsellona — — — — — — — Theodor Swedjemark — — — — Sa mi At i ya — — — — T arak Mehta — — — — Pet er T erw iesch — — — — Morten Wierod — — — — T o ta l E xec u ti ve Com m it te e me m be r s — (1) Th e f i na l L TI P 20 19 a wa rd w i ll b e se t tl ed 6 5 p er ce nt i n sh ar es a nd 3 5 p e rce nt i n c as h. T hi s ap p li es to b ot h p er f or ma nc e fa c tor s (E P S an d TS R) . Ho wev e r , th e pa r ti c i pa nt s hav e th e po ss ibi li t y to e le c t to r ec ei ve 1 0 0 pe rc en t of t he ve s ted a wa rd i n sh ar es . Th e f i na l L TI P 20 2 0 awa rd a nd LTI P 20 2 1 awa rd w i l l be s et tl e d 10 0 p er ce nt i n sh ar es , w it h an a uto ma ti c se l l- to - cov er i n pl ac e fo r em pl oy ee s w ho a re su bj e c t to withholding taxes. (2) I t is e x pe c te d th at th e re p la ce me nt s ha re g ra nt s w i ll b e se tt l ed 6 5 in s ha re s an d 3 5 pe r ce nt i n ca sh . H owe ve r, the p ar t ic i pa nt s h ave t he po ssi bi li t y to e le c t to r ec ei ve 1 00 p e rc en t of th e ve st ed a wa rd i n sh ar es . (3) Th is i nc l ud es s ha re s he l d by t he s po us e . (4) Unv es te d sh ar e gr an ts w er e fo r fe ite d a s a re su lt o f th e re si gn at io n pr ov i de d a nd r em ov ed f ro m th e sh ar eh o ld in g ove r v iew. (5 ) I n ad d it io n , his s po u se h ol ds u nve s ted s ha re s an d o pt io ns g ra nt ed i n co nn e c ti on w ith h e r ro le i n th e co mp an y. 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 258 ABB ANNU AL REPORT 2021 At De ce mb er 3 1 , 20 20 , the m em be r s of the E xe cu ti ve Com mit te e, a s of th at date, h el d th e fol low i ng num be r of sh are s (or ADS s rep re sent i ng su ch sh are s ), the co ndi ti on al r i ght s to re cei ve AB B sh are s un de r the L T IP a nd o pti on s (eithe r ves ted o r unve ste d as i nd ic ated ) un de r th e MI P an d unve ste d sha res i n respect of other compensa tion arrangements. Name T o ta l nu m be r o f sh ar e s he l d Vested at December Nu m be r o f ves te d op ti o ns he l d un d e r th e M IP Nu m be r o f unv es te d op ti on s h el d u n de r t he M I P Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re fe re n ce n u mb e r of s ha re s performance fa ctors (EPS Re p la ce m en t sh a re g ra nt for f oregone benefits fr om f or me r e m pl oye r Re p la ce m en t sh a re g ra nt for f oregone benefits fr om f or me r e m pl oye r Re p la ce m en t sh a re g ra nt for f oregone benefits fr om f or me r e m pl oye r (ves ti ng (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g (ves ti n g Bj ör n Ros e ng re n (EC m em b er a s of — — — — — Timo Ihamuotila — — — — — Sylvia Hill — — — — Maria Varsellona — — — — — Th eo do r Swe d je ma rk (EC m em b er a s of — — — — — Sa mi At i ya — — — — — T arak Mehta — — — — — Pet er T erw iesch — — — — — Morten Wierod — — — — — T o ta l E xec u ti ve Com m it te e me m be r s (1) Th e f i na l L TI P 20 18 a wa rd a nd LTIP 2 01 9 aw a rd w i ll b e se tt l ed 6 5 p er ce nt i n sh ar es a nd 3 5 p er ce nt i n ca s h. T hi s ap pl ie s to b ot h pe r fo rm an ce f ac to r s (E PS a n d TS R) . Ho wev er, th e pa r ti c i pa nt s hav e th e po ss ibi l it y to e l ec t to r e cei ve 1 0 0 pe rc en t of t he ve s te d awa rd i n sh ar es . T he f i na l L TI P 20 2 0 aw ar d w il l be s et tl e d 10 0 p er ce nt i n sh ar es , w it h an a uto m ati c se l l -to - cov er i n p lac e fo r em pl oy ee s w ho a re su bj e c t to w it hh o ld in g ta xes . (2) I t is e x pe c te d th at th e re p la ce me nt s ha re g ra nt s w i ll b e se tt l ed 6 5 p er ce nt i n sh ar es a nd 3 5 p er ce nt i n ca sh . H ow eve r, the pa r ti c ip a nt s hav e th e po ssi bi li t y to e le c t to r ec ei ve 1 0 0 pe rc en t of th e ve st ed a wa rd i n sh ar es . (3) I n ad di ti on , hi s sp ou se h o ld s un ve ste d sh ar es a n d op ti on s gr an te d in c on ne c t io n w i th h er r ol e in t h e com p any. — Note 11 F ull ti me em ploy e es Du r in g eac h of 20 21 a nd 2 02 0, th e Com pa ny em pl oyed o n aver age 1 9 e mp loye es . At AB B , we be li eve t hat a cu ltur e of di ver si t y , inc lu sio n an d eq ua l op po r tuni t y is cr i ti ca l to ou r bus in ess succe ss an d ma kes us st ron ge r . A B B ha s no n - d isc r imi nator y pay po lic i es w hic h pl ay an im po r ta nt pa r t in mi nimiz i ng a ny pay dis par i t ies b a sed o n ge nd e r . A s pa r t of it s D ive rs it y a nd In cl us ion St rateg y 2 03 0 and i n li ne w i th nat io na l le gis lat ion , A BB c ar r ie d ou t an e qu al pay a nal ys is fo r it s Sw iss e nt it ies w ith at le as t 10 0 em pl oyee s. I t showe d th at thr ee of t he i n scop e e nti ti es m ee t th e eq ual p ay re qui re me nts a nd are w i thi n the a pp li ca bl e thr esh ol ds an d th e fou r th e nti t y, the sma lle st , me et s th e e qua l pay req ui rem e nts fo r sa lar y an d sli ghtl y un de ra chi eves t he p ar it y l eve l for o ver al l com pe nsat io n (sala r y p lus ac tua l bo nus). 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S ABB ANNU AL REPORT 2021 — Note 12 Su bse qu e nt events Sub se que nt to D ec em be r 31 , 2 02 1 , an d up to Fe br ua r y 2 3 , 20 2 2, t he Co mp any pu rch a sed , und e r the fo ll ow - up sh are b uy ba ck pr ogr am , an ad di ti on al 2 1 mill io n sha res , for a pp rox im atel y CH F 67 7 mill ion , an d, o n th e op en m arket , a n add it ion al 9 mi ll ion s har es, f or ap pr oxi mate ly CH F 30 0 mi ll ion . Th e pu rch a ses we re p ar t ia ll y f ina nc ed v i a bo rrow ing s fro m AB B C api ta l Ltd. 05 A B B L T D S T A T U TORY F IN A NC I A L STA T EME NT S 260 ABB ANNU AL REPORT 2021 — Pr opos e d appropr ia tion of a va ilable e arn ings Ne t in co me f or th e ye ar Carrie d forward fr om previous year Cancellation of shares — Reta ined e arnings available to the Annual General Meeting di re c tl y by t he Co mp an y — tot al n um be r of re g is ter ed s ha re s — Ba l an ce t o be c a rr i ed f or w a rd (1) N o di v id e nd w i l l be p ai d on ow n sh ar es h e ld b y A BB Lt d. S h ar eh ol d er s w ho a re r es id en t in S we de n p ar t ic i pa ti ng i n th e e st ab li sh e d di v id e nd acc es s fac i li t y w i ll r ec ei ve a n am ou nt i n Swe di sh k r on or f ro m A BB P ar t i c ip at io n AB w hi c h cor re sp o nd s to th e di v i d en d re so l ve d on a r eg is - te re d sh ar e of A BB L td w it ho u t de du c t io n of t he Sw i ss w i th ho l di ng t a x . Th is a mo un t ho wev er i s su bj ec t t o ta x at io n acc or di ng t o Swe di sh la w. On Fe br ua r y 3 , 20 2 2 , the Co mp any a nno un ced t hat th e B oar d of Di re c tor s w il l rec om me nd fo r app rov al at the M arc h 24 , 20 2 2, A n nua l G en er al M ee ti ng t hat a di v id e nd of CH F 0. 8 2 pe r sh are b e di str i bute d ou t of the r et aine d ea rni ng s avail ab le , to be p aid in M arc h 20 2 2 an d in A p r il 2 02 2 fo r res id ent s in Swe d en partic ipating in the divid end ac cess facilit y . 261 R eport o f the St at ut ory Au dit or To the Gen eral Meetin g of ABB Ltd , Zurich Report of the Statutory Auditor on the Financial Statements As statutor y auditor, we have audited the accompan ying financ ial stateme nts of ABB L td , which co mprise t he balance sheet, inc ome state ment and notes to financi al statement s (pages 247 to 2 59 ) for the year ende d December 31, 202 1 . Board of Director s’ Responsibility The B oard of D ir ectors is re sponsible for the prepar ation of the financial statem ents in accordan ce with the requireme nts of Swiss law and the co m pany’s a rticles of incorporat ion. This re sponsibil ity includes de s igning , implementi ng and maintai ning an interna l control s yste m relevant to t he preparation of financial st atement s that are free from mat erial misstateme nt, whether due to frau d or error. The Board of D irectors is further respo nsible for selecting an d applying appropr i ate account ing policies and m aking accounting est imates that are rea sonable in the circum stances. Auditor’s Responsi bility Our responsi bility is to expres s an opinion on these fi nancial statement s based on our audit. W e conducted our audit in accor dance with Swiss law a nd Swiss Auditing St andards. Those sta ndards require that w e plan and perform the audit to obtain reasonable assuranc e whether the fi nancial statement s are free from mate rial misstatem ent. An audit in volves perf orming procedures to obtain audit ev idence about t he amounts and d isclosure s in the financia l statements. The procedures selected depend o n the auditor’s j udgment, includin g the assessmen t of the risks o f material misstate m ent of th e financial stat ements, w hether d ue to fraud or error . In making t hos e ris k assess ments, the audito r consider s the inter nal contr ol system releva nt to the en tity’s preparati on of the finan cial statements in order to desi gn audit pr ocedures that are ap propriate in the circ umstances, but not for the purpose of e xpressing an opinion on the effe ctivene ss o f the entity’ s inter nal co ntrol system. An audi t also includes evaluating the appropriat eness of the acco unting policies us ed an d the rea sonableness of a ccounting estimates made, as well as evaluating the overall pr esentation of the fin ancial st atements. W e bel i eve that the audit evid ence we have obtai ned is suffici ent and appropriat e to provide a ba sis for our audit opini on. Opinion In our opinio n, the finan c ial stat ements for the year end ed Decem ber 31, 202 1 comply wit h Swiss law and th e company’s ar ticle s of incor poration. 262 Report on Key Audit M atters based on the circular 1/2015 of the Federal Aud it Oversight Authority Key audit matter s are t hose matters that , in o ur profe ss ional j udgment, were of most significance in our audit of t he financial stat ements of the current per iod. We have determine d that there ar e no key au dit matters to communicate in our repor t. Report on Other Legal Requirements We confir m th at we meet the lega l requir ements on lic ensing accordin g to the Aud itor Oversig ht Act (AOA) and independenc e (article 728 C O and article 11 AOA) and that ther e are no cir c umstanc es incompatible with our independenc e . In accordance w ith arti cle 728a paragraph 1 ite m 3 CO and Swiss Auditing Standard 89 0, we confirm that an int ernal control system ex ists, wh i ch has been designed f or the p reparation of f inancial statements accord ing to the instruction s of the Board of Di rect ors . We further confirm that the proposed appropr iation of avai lable earning s compli es with Sw iss law and th e compan y ’s articles of incorporation. W e re commend th at the financia l stat ements sub m itted t o you be approved. KPMG AG Hans - Dieter Krauss Mohammad Naf eie Licensed Aud it Expert Auditor in Ch arge Zurich, Swit zerland February 2 4 , 2 0 22 KPMG AG , Badenerstrasse 172 , CH - 8036 Zuric h © 2022 KPMG AG, a S wiss cor poration, is a s ubsidiary of KPMG Holdin g AG, which is a member of the KPMG global organiz ation of inde pendent member firms affili ated with KPMG Internati onal Limited, a private E nglish company limited by guarantee. All rights reserved. 263 — EM PT Y PA G E ADD ED INTE NTIO NAL L Y 06 Supple me n t al i n f or ma tion 26 6 S up pl e me ntal info rmation 06 SUPPLEMENT AL INFORMA TION 266 ABB ANNU AL REPORT 2021 — Supp le mental inf orma tion The f ollowing are definitions of key financial mea su res u se d to eva lu ate AB B’s op er ati ng performance. These f inancial measures ar e re - fer re d to in thi s A nnu al R ep or t a nd a re not d ef i ne d und e r Uni ted St ates ge ne ra ll y acce pte d acco unt- ing principles (U.S. GA AP). Whi le A B B’s man age m ent b el ie ves th at the non- G A A P financial measures he rein ar e useful in evaluating A BB’s operating r esults, this informa - ti on sh ou ld b e con sid er ed a s su pp le me nta l in nature a nd n ot a s a subs ti tute fo r the r el ated financ ial in forma tion prepared in a ccordance with U.S. GA AP . For a fu ll r eco nc i liat io n of A BB ’s non - GA A P m ea - sure s, p le ase r efe r to Su pp le me nta l Reconciliations and Definitions, ABB Q4 2021 Financial Inf ormation on global.abb/ group / en/ inves tors / results-and -repor ts /2021 . C omparab le growt h ra tes Gro w th r ates for ce r t ain key f ig ure s may b e pre se nted a nd d iscu sse d on a “com pa ra bl e” ba si s. The c omp ar ab le g row th r ate mea su res g row th on a co nst ant c urr en c y ba si s. Si nce we a re a gl ob al company , the c omparability of our ope rating resu lt s re po r ted i n U. S . dol la rs i s af fec te d by fore ig n cur ren c y e xcha ng e rate f lu c tuat io ns. We ca lcu late th e im pac t s fro m for eig n cu rre nc y fluctuations b y transla ting the current -year pe r io ds’ r ep or te d key f ig ure s into U. S . d ol lar amo unt s us in g the e xch an ge r ates in e f fec t for the comparable periods in the pre vi ous year . Com par ab le g row th r ates ar e als o adj uste d for changes in our business portfolio . Adjust ments t o our busines s port folio occur due t o acquisitions, divestments, or by exiting specific business activ it ies or customer mark ets . The ad justment for p or t fol io c han ge s is c al cul ated a s fo ll ows: where the results of any business acq uired or div este d have n ot be e n con sol idate d an d re po r ted for th e e nti re du rat io n of bot h the c urr ent a nd com par ab le p er i od s, t he re po r te d key fi gu res o f suc h bus in ess a re adj uste d to e xclu de t he re l eva nt key f igu re s of any co rre spo nd in g qua r ter s w hic h are no t comparable when c omputing the compa - rab le g row t h rate . Cer t ain p or t fol io c han ge s whi ch d o not qu al if y a s di ve stm ent s un de r U. S . G A AP h ave be en t reate d in a si mil ar m ann e r to divestments. Changes in our portfolio where w e hav e ex ited c ertain busines s acti vit ies or cus - tome r ma rket s ar e adju ste d a s if th e re lev ant business wa s dives ted in the period when the de c isi on to ce as e bu sin ess ac t i v it ie s wa s ta ken . We do not a dju st fo r po r tfo li o ch ang es w he re th e rel ev ant b us ine ss ha s an nu ali zed re ven ue s of le ss tha n $5 0 mil lio n. Ope rational EB IT A ma rgin Operational EBIT A margin Op er ati on al EB IT A mar gin i s Op e rati on al EB ITA as a p er cen tag e of Op e rati on al re ven ue s. Operational EBIT A Operational ear nings before interest, taxes and acquisition-related amortization ( Operational EBIT A) represents Inc ome from operations excluding: • a cquisition-related amortization ( as defined be lo w), • res tructuring, relat e d and implementation costs (as def i ne d be l ow), • changes in the amount recorded for obligations relat e d t o divested bu siness es occu rring after the div estment dat e ( changes in obliga tions relat e d t o divested bu siness es ), • changes in estimates relating t o opening balance sheets of acquired bus inesses (changes in pre-acquisition es timat es) , • ga ins and los ses from sa le of businesses (including fa ir value adjustmen t on assets and lia bil it ie s he ld fo r sal e), • a cquisition- and divestmen t - relat e d expenses and int egration cos ts, • o ther income / expense relating to the P ower Gr id s joint ve nture, • cer tai n othe r n on - o pe rat io na l ite ms, a s we ll a s • f oreign exchange / commodity timing differences in income from opera tions consisting of: ( a) unreali zed gains and losses on deriv atives (foreig n exch ange, commodi ties, em be dd ed d e r iv ati ves), (b) realize d gai ns an d loss es on deriv atives where the underlying he dg ed t ran sac t io n ha s not ye t be e n rea lize d, and (c) unre al ized fo rei gn e xch an ge mo vem ent s on rece ivables / payables ( and rela ted assets / lia bil it ie s ). 06 SUPPLEMENT AL INFORMA TION 267 ABB ANNUAL REPORT 2021 Certain o ther non- operational items ge nerally includes: c e rtain regula tor y , compliance and legal costs, certain as set imp airmen ts (including impairmen t o f goodwill) and certain other fair va lu e cha ng es , as we ll a s oth e r ite ms whi ch a re dete rm ine d by m anag e me nt on a c as e - by - c as e ba sis . Op er ati on al EB IT A is ou r me asu re of se gm e nt prof i t bu t is al so us ed by m ana ge me nt to ev al uate the p rof i tab ili t y of th e Comp any a s a wh ol e . Acquisition-related amortization Amor tization expense on intangibles arising upon acquisitions. Restructuring, rela ted and implementa tion c osts Restructuring, relat e d and impl ementation costs consists of restructuring and o ther relat ed ex - pe nse s, a s we ll a s inte rn al an d ex tern al cos ts relating to the implementation o f group- wide restructuring programs. Ot he r i nc om e/ ex pe n se re l ati ng t o th e Powe r Gr ids joi nt venture Other income / expe nse r e lating t o the Po wer Gr i ds j oint ve ntu re con sis ts of a mo unt s re cor de d in Income from continuing operations befor e ta xe s re lati ng to t he di ves ted P owe r Gr i ds b usi - ness including the income/los s under the equity met ho d for t he inv est me nt in H it achi En e rgy Ltd . (Hi tac hi En erg y), amo r t izat io n of de fer re d br and income as well as changes in value of other obli - gations relating to the divestment. Operational r ev e nues We pre sen t Op er ati on al rev en ue s sol el y fo r the purpose of allowing the c omputation of O pera - ti on al EB IT A mar gin . O pe rat io nal r eve nue s ar e T ota l reve nu es ad jus ted f or for eig n e xcha ng e/ commodity timing dif ferences in T otal r evenues of: ( i) u nre al ized g ain s and l osse s on d er i v ati ves, (i i) re al ized g ain s and l osse s on d er i vat i ves w he re the u nd er ly ing h e dg ed tr an sac t io n ha s not ye t be en r eal ize d, an d (i ii ) un rea lize d for eig n ex- cha ng e move me nt s on r ece iv ab le s (and re lated asse t s ). O pe r atio na l reve nu es a re not i nte nde d to be a n alte rn ati ve me asu re to T ot al rev en ues , whi ch re pr ese nt ou r rev en ues m ea su red i n acco r - dan ce w i th U. S . G A AP . Fr ee cash f low con version to net income Fre e ca sh f low c onve r sio n to n et i nc om e Free c as h fl ow conv er sio n to ne t in com e is c alc u - lated a s f ree c a sh f low di v i de d by A dju ste d net income a ttr ibutable t o ABB. Adj u ste d ne t in co me a tt ri b ut ab le t o AB B Adj us ted n et in co me at tr ib ut abl e to A BB i s ca lc u - lated a s n et in co me at tr ib ut abl e to A BB a dju ste d for: (i) imp airmen t of goodw ill, (ii) los ses fr om ext inguishment of debt, and (iii) the gains arising on th e sa le of b oth th e Me c hani ca l Powe r T r ans - missi on D iv isi on ( Do dg e) and Powe r G r id s business, the latter being included in dis contin - ued operations. Fre e ca sh f low Free c as h fl ow is c al cul ated a s ne t ca sh p rov i de d by op er ati ng ac t iv it ie s adj uste d for : ( i) p urc ha se s of pr op ert y , plant and e quipment and intangible asse t s, an d (i i) p ro cee ds f rom s al es of p rop er t y, plant and equipment. 06 SUPPLEMENT AL INFORMA TION 268 ABB ANNU AL REPORT 2021 Return on Capital e mpl oy ed Retu rn o n Ca pit al e mp loye d is c al cu lated a s Op er ati on al EB IT A af ter t a x , div id ed by t he ave r - age of t he p er i od ’s op eni ng a nd cl osi ng C api ta l em pl oyed , adj us ted to re fl e c t imp ac t s fro m the timing of signific ant acquisitions/ divestment s occurring during the p eriod. Capit al employ ed Ca pit al e mp loye d is c al cu lated a s th e sum of Adj us ted tot al f i xed a sset s an d Ne t wor k in g ca pit al (as de f in ed b el ow). Adju sted tota l fixe d assets Adj us ted tot al f i xed a sset s is t he su m of (i ) p rop - ert y , plant and equipment, net, (ii) goodwill, (iii) other intangible assets, net , (iv ) in vestments in equity-accoun ted c ompanies, and ( v) opera t ing le ase r i ght- of-u se a sset s, l ess (v i ) d efe rre d ta x liabilities recognized in certain acquisitions. Ne t work i ng c api ta l is th e sum of ( i ) rec ei va bl es, net , ( ii ) cont rac t a sse ts , (i ii ) inve ntor i es , net , a nd (i v) pre pai d ex pe nse s; le ss (v) accou nts p aya bl e, tra de , (v i) c ontr ac t li abi lit i es, a nd (v i i) o the r current liabilities ( excluding primarily: ( a) income ta xe s paya bl e, ( b) curr ent d e r iv ati ve li abi lit ie s, (c ) p e nsi on an d oth er e mp lo yee b en ef i ts), ( d ) pay - ables under the shar e buyback program and (e ) li abi li ti es re late d to th e div est me nt of th e Power G rids business ); and including the amounts rel ated to t hes e acco unt s whi ch h ave be en p re - sen ted a s ei the r a sset s or l iab ili ti es h el d for s al e but ex cluding an y amounts included in discontin - ued operations. Notional t ax on Opera tional EBIT A The N ot io nal t a x on O p er ati ona l EB IT A is com - pute d us in g the a dju ste d gro up ef fec t ive t a x r ate mul ti pl ie d by O pe rat ion al E BI T A . Adj u ste d G ro up e ff ec t ive t a x rate The A dj uste d G rou p ef fe c t ive t a x rate i s com - pute d by di v i di ng an a dju ste d in com e ta x e x pe nse by an ad jus ted p re - ta x inco me . Ce r tai n amo unt s recorded in income before ta xes and the relat ed income tax expense (primarily due t o ga ins and losse s fro m sa le of b usi ne sses) are re move d fr om the reported am ounts when computing t hese adjusted amoun t s. Certain other amounts re - cord e d in in co me t a x ex pe ns e are a lso e xcl ud ed from t he com putation to determ ine the Adjusted Gro up e f fe c ti ve ta x rate Bo ok-to - b ill r ati o is c al cul ated a s O rde rs r ece ive d divided by T otal revenues. Par t s of t he A BB a nn ual r ep or t 2 0 21 have b e en tra nsl ated i nto Ge rm an . Pl ea se note t hat th e Eng lis h - la ngu age v er sio n of th e A BB a nnu al re p or t is the binding version. The ABB annual report 2021 includes “forwar d-looking statemen ts” within the meaning of Section 27A of the Securities Act of 19 33 and Sec tion 21E of the Securities Exchange Act of 19 34. We hav e based these forwar d-looking statemen ts largely on curr ent expectations, estimates and projections about the factors tha t may aff ect our future performance, including global ec onomic conditions as w ell as the economic condit ions of the regions and the industries that are major mark ets for ABB. The words “believe,” “ma y ,” “will,” “estimate,” “ continue,” “tar get,” “anticipat e,” “intend,” “expect”, “plan ” and similar wor ds and the express or implied discussion of s trategy , plans or intentions are in tended to identify forwar d-looking statements. These f orward- looking statemen ts are subject to risks, uncertaint ies and assumptions, including among other things, the f ollowing: (i) business risks r elated to the global v olatile economic environmen t; (ii) costs as sociated with compliance activities; (iii) difficulties encounter ed in operating in emerging markets; (iv) risks inherent in lar ge, long term projects served by parts of our business; (v) the t imely development of ne w products, technologies, and services that are useful for our cus tomers; (vi) our ability to anticipate and r eac t to technological change and evolving industry standards in the mark ets in which we operate; (vii) changes in inter est rates and fluctuations in currency exchange rat es; (viii) changes in raw materials prices or limitations of supplies of ra w materials; (ix) the weak ening or unav ailability of our intellectual pr operty rights; (x) industry consolidation r esulting in more powerful compet itors and few er customers; (xi) effects of competition and changes in economic and mark et conditions in the pr oduc t markets and geographic areas in which we opera te; (xii) effects of , and changes in, laws, r egulations, gov ernmental policies, taxation, or ac count ing standards and practic es and (x iii) other factors described in documents that we ma y furnish from time t o time with the US Securities and Exchange Commis sion, including our Annual Reports on Form 20-F . Although we believe that the e xpec tations reflected in an y such forwar d-looking statemen ts are based on reasonable assumptions, w e can give no as surance that they will be achieved. W e under take no obligat ion to update publicly or revise any f or ward-looking s tatements because of ne w informat ion, future ev ents or otherwise. In light of these risks and uncertainties, the f or ward-looking inf ormation, events and cir cumstances might not occur . Our ac tual results and performanc e could differ substantially fr om those anticipat ed in our forwar d-looking statements. White — Th e Sp ac e fo r I nve nt io n White — Th e Sp ac e fo r I nve nt io n — A B B Ltd Corpora te C ommunications Af folt ernstrasse 4 4 8050 Z uric h Sw it ze rl a n d T el: +4 1 ( 0 ) 43 31 7 7 1 11 F a x: +4 1 (0 ) 43 31 7 79 5 8
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