ABB
Annual Report 2013

Plain-text annual report

Driving profitable growth The ABB Group Annual Report 2013 Contents 02 This is ABB . 04 Chairman and CEO letter . 08 Highlights . 10 What ABB does . 14 Our three focus areas . 20 Key achievements of 2013 . 24 Faces of ABB . 28 Executive Committee . 29 Regional and country managers . 31 Corporate governance report 47 Remuneration report . 61 Financial review of ABB Group . 157 ABB Ltd Statutory Financial Statements 177 Investor information . This is ABB ABB is one of the world’s leading power and automation technology companies. Our portfolio ranges from switches and sockets to robots, and from large transformers to control systems that manage entire power networks and factories. We provide solutions for secure, energy-efficient generation, transmission and distribution of electricity, and for increa sing productivity in industrial, commercial and utility operations. We help our customers meet their challenges with minimum environmental impact. That’s why ABB stands for “Power and productivity for a better world.” We are present throughout the entire renewables value chain, from power generation to transmission, distribution and electric mobility. 02 This is ABB | ABB Annual Report 2013 $ 42 billion revenues in 2013 $ 61 billion market capitalization at December 31, 2013 Operations in around 100 countries More than 300 manufacturing sites 150,000 employees 150 nationalities 1 company delivering power and productivity for a better world $ 1.5 billion invested in R&D in 2013 8,000 technologists in R&D More than 1.5 million products shipped per day 30,000 distributors 115 million page views to abb.com in 2013 1 million followers on social networks $ $ 8 million spent on community projects in 2013 500,000 raised for Philippines typhoon relief ABB Annual Report 2013 | This is ABB 03  Chairman and CEO letter Dear shareholders, We are pleased to present ABB’s Annual Report 2013, which has been expanded to help our shareholders, other stakeholders and potential investors to better understand what ABB does and what makes us successful. We’ve also included new sections to highlight ABB’s achievements and to introduce you to some ABB people from our businesses around the world, including our acquired companies. We hope you enjoy reading the new Annual Report. Record revenues, higher operating profits ABB turned in a solid performance in a challenging market in 2013. We achieved record revenues, higher operating profits and met our cost-reduction targets. We accomplished this during a year of mixed markets and continued economic uncertainty, as well as internal management transitions, demonstrating the company’s underlying strength and ability to exe cute. For the fifth year in a row, we will be proposing a dividend increase at our annual general meeting. Four of our five divisions performed well, with Power Products continuing to lead the sector in profitability. Our expanded product and geographic scope enabled us to increase profitability in automation across our Low Voltage Products, Discrete Automation and Motion and our Process Automation divisions. We are confident that our Power Systems division will deliver higher, more consistent returns under new leadership once certain legacy projects have been executed and actions to improve risk and project management are complete. On the order side, demand from early-cycle industry customers was higher in the second half of 2013, reflecting some improvement in business confidence, which gives us reason to be cautiously optimistic for the year ahead. Large orders, however, were significantly lower, primarily because utilities and industrial customers were still hesitant to make big invest- ments given the continuing economic and regulatory uncertainty, and this weighed on our order book. We were also more selective about accepting orders in Power Systems in line with the reset of this division. Video: Ulrich Spiesshofer comments on the 2013 results. To view the clip, install QR code reader on your mobile device, scan the code and see more. 04 Chairman and CEO letter | ABB Annual Report 2013 Among our best-performing businesses were low-voltage circuit breakers and switches as well as drives. The robotics business had an extremely successful year and continued its successful penetration of the general industry sector. All divisions posted revenue increases, which meant we ended the year with record revenues of nearly $42 billion overall, 7 percent higher than the previous year, in local currencies. Operational EBITDA for the Group was up a healthy 9 percent at $6 billion, even after the $260-million charge related to project delays and operational issues in Power Systems. Well-positioned for the future As in previous years, we did not let the economic uncertainty distract us from strengthening our competitive position and preparing our company for the future. We stayed focused on tech nology innovation with an investment of $1.5 billion in R&D, and we continued to see the fruits of our previous investments in products such as the Emax 2, the world’s first circuit breaker that not only protects electrical circuits but also adapts energy consumption to actual needs. In 2013, we made significant inroads into new markets and segments, such as electric- vehicle charging and renewable energy generation, and we continued our disciplined actions on savings, taking out $1.2 billion in costs for the year, and cash conversion. More customers than ever tell us that they are satisfied working with us; the number saying they would be highly likely to recommend ABB to a colleague rose to 35 percent in 2013 com- pared with 29 percent in 2012. We made substantial progress on the integration of our two biggest acquisitions, Baldor and Thomas & Betts, and we are pleased to report that both are well on target in terms of cost synergies and overall returns on our investments. Business integration will be an important focus in 2014 and in the future, and to strengthen our institutional capability in this area we have appointed one of our Executive Committee members, Greg Scheu, to steer the integration of our acquired companies across all businesses and regions. He will also drive forward our service business, which had another successful year, accounting for an increasing share of overall orders, and he will be based in and in charge of North America, our largest single geographical market. “We continue to see the fruits of our investments in technology.” Last year, we continued to expand our portfolio through strategic acquisitions, the most significant of which was solar inverter maker, Power-One, which makes ABB the number 2 global player in the most intelligent part of the solar photovoltaic value chain. Through other acquisitions, we expanded our presence in building automation (Newron), low-voltage products in Turkey and eastern Europe (ELBI Elektrik), measurement products (Los Gatos) and service offering for drives and motors (Dynamotive). Finally, 2013 was a year of internal transition and we are pleased to share with you that this was achieved smoothly and without any impact on the business, another indication of the underlying strength and robustness of our organization. The CEO transition from Joe Hogan to Ulrich Spiesshofer was seamless, as was the CFO handover from Michel Demaré to Eric Elzvik and the changes in leadership in the Discrete Automation and Motion division, from Ulrich Spiesshofer to Pekka Tiitinen, and in the Power Systems division from Brice Koch to Claudio Facchin. We were also very pleased to welcome on board a highly experienced human resources leader, Jean-Christophe Deslarzes, to succeed Gary Steel, who retired after a long and successful career. ABB Annual Report 2013 | Chairman and CEO letter 05 “Our markets offer tremendous growth opportunities through penetration, innovation and expansion.” We look back on a solid year in 2013 and say with confidence that, despite weaker than expected economic growth and lower industrial capital spending, ABB is well-positioned to drive future growth. We also are humble enough to realize that there is still tremendous potential to improve and do better in serving our customers around the world. Taking ABB to the next level In 2014, a key focus will be to set and implement the direction for the next phase of growth and improvement on returns. We have already started this process by conducting a rigorous navigation check on our position in key markets. We now have “heat maps” of customer sectors and geographies ready, so we know where our growth opportunities are and where our investments should be prioritized. At the same time, we defined three focus areas to provide us with a systematic and robust approach for value creation, enhanced earnings per share (EPS) and cash return on invested capital (CROI): 1. The first is profitable growth, which we are targeting through a formula known as PIE: penetration, innovation and expansion: Penetration is focused on selling more of our existing offering to accessible customers by strengthening customer intimacy and adapting our offerings to local requirements. As an example, we are investing in factories in emerging markets, such as India and Brazil, to ensure our products are available with high service levels and well-suited to specific market segments while keeping global scale and cost competitiveness. Innovation refers to the creation of new offerings and value propositions with focused resource allocation, especially on the technology and business model side. A good example is ABB’s collaboration with the Norwegian oil and gas company, Statoil, to develop subsea solutions for exploration and transmission of electrical power up to 100 megawatts (MW) over a distance of 600 kilometers and to depths of as much as 3,000 meters. This investment will make possible the development of remote oil and gas fields located far from other infrastructure. The third part of our growth formula is the expansion of our business into new markets and segments. One priority is infrastructure in Africa, which as a continent is growing fast. At its current stage of development, the big economic drivers are mining, oil and gas and power – all key markets for ABB. 2. Our second focus area is business-led collaboration, which refers to the creation of value across our businesses to better serve our customers. We are achieving this by working together across divisions and with our acquired companies to create integrated product offerings, and by collaborating with external suppliers and channel partners as well as along our own supply chain. “The global ABB team is motivated and committed to take ABB to the next level of profitable growth.” 3. Our third focus is relentless execution, which is already a hallmark of ABB, as evidenced by our strong performance on cost and cash flow. We are expanding the focus on white-collar productivity by improving efficiencies and streamlining processes so we can spend more time on value-adding activities and less on administration. You can read more about our three focus areas starting on page 14 of this report. 06 Chairman and CEO letter | ABB Annual Report 2013 Outlook While we remain cautiously optimistic for the short term, ABB’s growth prospects in the mid and longer term are excellent. We see an increasing need for efficient, reliable electricity transmission and distribution as well as growing demand for automation solutions. With ABB’s customer-oriented offering portfolio, we are well-positioned to tap these opportunities. Thanks to our acquisitions, we also have plenty of potential to increase sales of existing product lines through, for instance, the distribution networks of Thomas & Betts, which has a particularly strong presence in the North American low-voltage market. “ABB has developed a strong position in some of the most important and promising markets of the future.” ABB has also developed a strong position in some of the most important and promising markets and segments of the future. We are now present throughout the entire renewables value chain, from renewable power generation to efficient power transport and electric mobility, where we are a world leader in direct current (DC) fast-charging technology. Last year, we won a landmark contract to supply a nationwide fast-charging network for electric vehicles in the Netherlands, having already constructed a similar network in Estonia. This year, we will launch high-power DC chargers in China, initially for a new long-range electric car known as the DENZA, which is being manufactured jointly by Daimler and BYD Auto, one of China’s leading electric-vehicle (EV) firms. We are also further strengthening our global leadership position in high-voltage power transmission. Last year, we delivered the highest-capacity HVDC Light undersea power connection, linking the grids of Ireland and Wales and enabling wind power integration. We also integrated wind power from one of the largest offshore wind farms in Europe into the Belgian grid. And we continue to go from strength to strength in robotics. In 2013, we expanded our market share yet again and brought twelve significant new products, solutions and systems to market, one of which allows multiple automobile models to be built on the same production line with world-class flexibility. You can see more of our successful technologies from page 20 of this report. ABB is a strong player with a strong team in many markets and sectors. However, when we consider the size of our total potential market, it is clear that we have tremendous growth opportunities ahead. ABB has grown faster than the market throughout the past period charac - terized by the global crisis. In the next years, we look forward to continuing and accelerating that proud tradition. We would like to sincerely thank our employees for their commitment, dedication and hard work, and to thank you, our shareholders, for your trust and continuing support. Together, we are making ABB a stronger, more successful company and, in doing so, driving forward our vision of power and productivity for a better world. Hubertus von Grünberg Chairman March 7, 2014 Ulrich Spiesshofer CEO ABB Annual Report 2013 | Chairman and CEO letter 07 Highlights Solid performance in a challenging market Record revenues, higher operat- ing profits and earnings per share despite continued economic uncertainty Acquisition integration on track Integration of two biggest acquisitions, Baldor and Thomas & Betts, is well on target in terms of cost synergies Power Products division continues to lead the sector in profitability Attractive returns to shareholders via 5th consecutive dividend increase* * proposed by Board of Directors Good execution on costs Strong performance again on cost savings and cash conversion Improved customer satisfaction Proportion of customers saying they would recommend ABB to others rises to 35% compared with 29% in 2012 Service orders continue to outperform the rest of the business Innovation Steady flow of product innovations across the divisions; recognized as one of the world’s top 50 innovators by MIT Electric mobility Position in electric- vehicle charging market strengthened by important new orders in China, the Netherlands, and Denmark Expansion Strategic acquisitions, such as Power-One, strengthen offering in key segments and markets; new factories expand export base in emerging markets Total ABB Group ($ millions unless otherwise indicated) Orders Revenues Income from operations as % of revenues Operational EBITDA(1) as % of operational revenues Net income (attributable to ABB) Basic earnings per share ($) Dividend per share in CHF (proposed) Cash flow from operating activities Free cash flow(1) as % of net income Cash return on invested capital(1) Number of employees 2013 38,896 41,848 4,387 10.5% 6,075 14.5% 2,787 1.21 0.70 3,653 2,632 94% 11.6% 2012 40,232 39,336 4,058 10.3% 5,555 14.2% 2,704 1.18 0.68 3,779 2,555 94% 12.1% 147,700 146,100 (1) Please refer to pages 180–181 and to the “Supplemental Financial Information” under “Reports and Presentations” – “Quarterly Financial Releases” on our website at www.abb.com/investorrelations for a definition of Operational EBITDA, free cash flow and cash return on invested capital. 08 Highlights | ABB Annual Report 2013 Revenues 2013 by division (unconsolidated) Operational EBITDA 2013 by division Discrete Automation and Motion, 22% Low Voltage Products, 17% Process Automation, 19% Power Products, 24% Power Systems, 18% Discrete Automation and Motion, 28% Low Voltage Products, 23% Process Automation, 17% Power Products, 26% Power Systems, 6% Employees 2013 Orders 2013 by region Discrete Automation and Motion, 20% Low Voltage Products, 21% Process Automation, 18% Power Products, 24% Power Systems, 14% Corporate and Other, 3% Europe, 34% Americas, 29% Asia, 27% Middle East and Africa, 10% Emerging vs mature market orders 2013 Dividend payout 2005 – 2013 (CHF per share) Emerging markets, 46% Mature markets, 54% 0.8 0.6 0.4 0.2 0 2006 2005 (*proposed) 2007 2008 2009 2010 2011 2012 2013* ABB Annual Report 2013 | Highlights 09 What ABB does ABB technology improves control over electricity, enabling power networks to be more reliable, efficient, and accessible to renewable energy Energizing and controlling power plants Power transmission Substations Power plant operators aim to run their installa- tions at the highest possible level of efficiency, regardless of the energy source. With more than 130 years of experience and a vast installed base, ABB offers technologies for complete electrical and automation solutions as well as controls and instrumentation products for conventional and renewable-based power generation plants. ABB is a pioneer and market leader in technol- ogies for the efficient and reliable transmission of power over long distances with minimal losses. Our ultrahigh and high-voltage solutions up to 1,200 kilovolt (kV), including technolo- gies like HVDC, HVDC Light, FACTS and cable systems, help transport power and connect transmission grids over land, underground and even underwater. Transmission and distribution substations enable power transfers with a range of high- and medium-voltage products that ensure reliability and efficiency, such as surge arres- tors, protection equipment, switchgear and circuit breakers. Transformers adjust voltage levels higher or lower for a vast range of purposes, while special automation systems protect and optimize the flow of power within a substation. 10 What ABB does | ABB Annual Report 2013 Managing the distribution network Products across the power value chain Services ABB’s advanced energy management, automa- tion and communications solutions improve the reliability and efficiency of utility and industrial operations. Our products, systems and services boost capacity, enhance security and improve productivity. Coupled with enterprise software for asset management and business applica- tions, we bridge the gap between operations technology and IT, providing complete solu- tions for asset-intensive industries. ABB’s product offering across voltage levels includes circuit breakers, switchgear, capacitors, instrument transformers, power, distribution and traction transformers as well as a complete range of high- and medium-voltage products – enhancing reliability, improving energy efficiency and lowering environmental impact. With a global installed base and unparalleled domain expertise, ABB’s service offering encompasses the entire energy value chain, from consulting, repair, refurbishment and maintenance-related services to complete asset management solutions. ABB’s knowledge of installed electrical systems and equipment is unsurpassed, enabling us to design and build new power products and systems, or repair and modernize older ones. ABB Annual Report 2013 | What ABB does 11 Our solutions integrate power and automation technologies to improve the efficiency, productivity and quality of our customers’ operations while minimizing their environmental impact. Plant electrification and energy management Process automation Material handling and robotics ABB electrification solutions deliver and distrib- ute electricity safely and efficiently through- out manufacturing and processing plants. ABB energy management systems help customers reduce energy bills and carbon emissions by up to 20 percent by lowering energy consumption, minimizing distribution losses and improving generation efficiency. ABB automation systems increase productivity, improve energy efficiency, and keep workplaces safe. PLC and control systems reduce produc- tion costs with better scheduling, execution and management of industrial processes, improving customer service and product quality. Measure- ment products read essential parameters in real time, including pressure, temperature and flow. Online analyzers monitor critical pro- cesses to help manage production quality and emissions. ABB motors drive key equipment, and frequency converters deliver precise and dependable motor control while helping to reduce energy con- sumption. Together, motors and drives increase energy efficiency in fans, pumps, compressors, conveyors, kilns, centrifuges, mixers, extruders, hoists and cranes. Fast, cost-effective crane systems control lifting and handling for shipping and industrial applications. Since 1974, ABB has delivered 250,000 robots for a wide variety of industries. 12 What ABB does | ABB Annual Report 2013 Building automation and control Services Transportation and shipping Low-voltage circuit breakers, switches and control products protect people, buildings and equipment from electrical overloads. Line pro- tection products, wiring accessories, enclosures and cable systems control and protect building installations. When integrated with ABB intel- ligent building automation systems, energy con- sumption is optimized and controlled through automated adjustment of blinds, lighting, heat- ing, and ventilation. ABB services help customers improve the performance of automated systems and equip- ment. Life-cycle services provide preventive, predictive, and corrective maintenance and con- tinual evolution of installed automation equip- ment. Consulting services help customers use less energy, ensuring process efficiency and reliability. Full service contracts put ABB in charge of engineering, planning, and managing plant maintenance activities. ABB enables fast and efficient electric mobility while minimizing environmental impact. It pro- vides reliable, energy efficient electrical systems for high-speed trains and powerful DC charging technology that can charge electric vehicles and buses at roadside stops. It supplies flexible marine power and propulsion systems for ships and its turbocharging solutions improve gas and diesel engine performance while lowering fuel consumption and NOx emissions. ABB Annual Report 2013 | What ABB does 13 Our three focus areas ABB is building on its past successful development by placing a stronger focus on three areas: profitable growth, business-led collabo ration and relentless execution. Profitable growth Driving a robust growth agenda in an aligned way is a high priority in today’s volatile and uncertain economic environ- ment. We have therefore developed a growth formula called PIE, which stands for: – Penetration: Selling more of our existing offering to acces- sible customers – Innovation: Creating new offerings and value propositions – Expansion: Moving into new segments where we are not yet present or that do not yet exist In the future, all of ABB’s existing and new growth efforts will be driven in line with this formula. 14 Our three focus areas | ABB Annual Report 2013 Expansion The third part of our growth formula is the expansion of our business into new segments. We will continue to make acquisitions in areas where there are white spots to be filled and where there is value to be realized, but we will increase the focus on growing organically into new segments. This will require the right allocation of capital and resources, and decisions will be based on the attractiveness of the opportu- nity and our ability to succeed in the new segments. Penetration ABB has many strengths, thus a key focus is to build on these for further profitable market penetration. This requires even stronger relationships with customers and the continu- ous adaptation of our offering to local requirements. In recent months we have analyzed our position in every market and created “penetration heat maps” from which we have defined actions to improve market penetration and accelerate growth. Innovation Technology is one of ABB’s key differentiators, therefore our future depends on having groundbreaking solutions that open up new opportunities for our company. The recent develop- ment of the high voltage DC breaker is a good example of an ABB innovation that has created a new growth opportunity. Beyond product innovations, we will also look into innovation of services and processes that create incremental value for customers. ABB Annual Report 2013 | Our three focus areas 15 Business-led collaboration As a global organization, we are continually improving the way we bring teams in ABB together to make sure that whatever we do for our customers is optimally aligned and that we deliver significantly greater value by offering a more integrated set of solutions. Collaboration must be led by the business because it depends on an intimate understanding of the needs of our customers and then creating an ABB solution based on multiple business offerings across our portfolio. To encour- age business to drive the opportunities for collaboration, specific targets will be set and incentives aligned accordingly. 16 Our three focus areas | ABB Annual Report 2013 On projects where we have collaborated successfully across divisions and business units (BUs), we have been able to deliver greater value, operational efficiency and productivity to our customers, for example thanks to our in-depth process knowledge in different industry segments. The result has been long-term mutually beneficial customer relationships. One example of successful collaboration involving all five of our divisions, as well as our service business, is with an Australian gas company. Since 2011, we have been supplying equipment, solutions and now maintenance services for a project in Queensland to convert coal-seam gas into liquefied natural gas. So far, these contracts have generated revenues of over $110 million and we recently won additional service business under a framework agreement. Another collaboration success story, involving three divisions, culminated in a new order to supply Russian ice- breaker vessels with 3.5 MW Azipod units as well as main switchboards, drives, bow thrusters, and generators. Thanks to our Azipod technology and on-board power solutions, combined with our marine service teams, two out of three high ice-class vessels built today are fitted with ABB systems. ABB Annual Report 2013 | Our three focus areas 17 Relentless execution Relentless execution is a hallmark of ABB that has enabled the company to emerge from the market turbulence of recent years in a stronger position. We have a particular focus on the execution of activities that are critical to achieving faster profitable growth. One of the first actions taken under this new focus was to initiate a program to improve the management of our net working capital (NWC). The goal is to free up cash from our operations to make it available for investments in growth, and to steadily raise CROI. 18 Our three focus areas | ABB Annual Report 2013 We will continue to drive cost and productivity improve- ments to reduce our cost of sales by between 3 and 5 percent every year. At the same time, we are complementing existing productivity improvement efforts with a strong focus on white- collar productivity, for example by creating better tools for our sales staff so that they can spend less time on adminis- trative work and more time with customers. Customer service and quality in everything we do will become ever more important sources of competitiveness. Regular customer satisfaction surveys have shown us where we are doing well and where we have room for improvement, and we have put in place programs to find and eliminate the root causes of the weaknesses. The score from these surveys and other operational performance indicators demonstrates that we have created good improvement momentum, which we are now looking to accelerate and drive even harder. Another important aspect of relentless execution is the successful integration of the companies we have acquired in recent years. In November, we created a new position on the Executive Committee with a special focus on managing these integration efforts, to ensure that we are getting the best value for investors from the $10 billion we have invested in acquisitions since 2010. The goal of relentless execution is ensuring that ABB becomes or remains among the best in the world in all dimen- sions of business excellence. ABB Annual Report 2013 | Our three focus areas 19 Key achievements of 2013 ABB stands for “Power and productivity for a better world.” Here, we highlight some of our technologies and achievements that are contributing to the economic success of our customers, the development of society, and the minimization of environmental impact. ABB remains leader for distributed control systems ABB retained a leading global market position in Distributed Control Sys- tems, a core automation technology, according to researcher and consultant ARC Advisory Group. Smart substation enabled in China ABB’s innovative high-voltage disconnecting circuit breakers are being installed in China for the first time as part of a “smart substation” demonstration project. Offshore wind park connected ABB successfully commissioned the subsea transmission link connecting Thornton Bank, one of the largest offshore wind farms in Europe, to the Belgian grid. Education foundation expands An ABB foundation which supports talented engineering students from economically disadvantaged backgrounds has expanded into Indonesia. Harnessing solar power in Africa ABB will supply electrical and control systems for one of Africa’s largest solar photovoltaic power plants, a new 75 MW facility in South Africa. Oil and gas looks to subsea future ABB is working with Statoil to develop electrification solutions for subsea oil and gas production, including com- ponents that can operate at depths of 3,000 meters. Courtesy of Photo Øyvind Hagen – Statoil 20 Key achievements of 2013 | ABB Annual Report 2013 A world first in low voltage Low-voltage circuit breakers are ubiquitous, but the new Emax 2 is the only device that can both protect electrical circuits and adapt energy consumption to actual needs. New electric bus tested in Geneva With no overhead lines and ultrafast charging times, the bus enables new opportunities for silent, flexible, zero-emission urban mass trans- portation. Providing access to power in India In partnership with WWF India, ABB has set up a solar-powered, multi-purpose battery charging station which is providing electricity to a community in West Bengal. The next robot generation is born The new IRB 6700 is robust and easy to maintain, making it the highest- performing robot for the lowest total cost of ownership in the 150–300 kg class. Turbocharging makes a quantum leap Changes to the A200-L’s compressor stage enable up to 30 percent addi- tional volume flow, allowing customers to use smaller turbochargers and to save space and costs. ABB among leading global innovators ABB was named one of the world’s leading innovators by the MIT Technology Review, following several innovation milestones, including the recent hybrid HVDC breaker. ABB Annual Report 2013 | Key achievements of 2013 21 Marine technology wins award A flexible marine power and propul- sion system known as Onboard DC Grid won an innovation award at the Offshore Technology Conference, a leading industry event. ABB buys leader in solar inverters ABB acquired Power-One, becoming a leading supplier of inverters – the “intelligence” behind a solar photo- voltaic system – to a market growing faster than 10 percent/year. Smart home solutions get own home abb-livingspace.com was launched as the new platform for ABB’s products and solutions to make homes more energy efficient, secure and comfortable. Ultrahigh-voltage success in India ABB developed, tested and delivered a 1,200 kV power transformer and circuit breaker in India, deploying the highest alternating current (AC) volt- age level in the world. Best year for cruiser Azipod orders Six contracts make 2013 the best- ever year for cruise-liner orders of Azipod propulsion equipment, and confirm the system as the preferred option for cruise ships. Irish and Welsh grids connected ABB connected the power grids of Ireland and Wales with an under sea HVDC transmission link that facili- tates power trading and the integra- tion of renewable energy. 22 Key achievements of 2013 | ABB Annual Report 2013 Switchgear for smarter grids A new disconnecting circuit breaker with a fiber optic current sensor simplifies substation design while adding to the intelligence of the device. New simplified AF contactor range Delivers energy efficiency and logis- tics benefits, thanks to its simpli- fied design, fewer product variants and reduced number of coils. A boost for electric vehicles Estonia’s network of 165 web- connected fast chargers for electric vehicles was opened, and 200 fast chargers are being installed nation- wide in The Netherlands. Courtesy of Fastned Our experts’ knowledge in a box ServicePort links customer systems and ABB service experts, enabling equipment and process services to be delivered quickly, efficiently, securely, and cost-effectively. An intelligent solution for utilities The new Asset Health Center helps utilities establish enterprise-wide asset management processes to cut costs, minimize risks, improve reliability, and optimize operations. The latest gas-insulated switchgear A new line of 145 kV gas-insulated switchgear has a compact modular design, making it easier to install, and lowering life cycle costs and environ- mental impact. ABB Annual Report 2013 | Key achievements of 2013 23 Faces of ABB It’s great to be part of a company with such a global reach and at the same time a local business focus. I very much like the diversity of people and back- grounds; I learn new things every day. Sjoerd Marketing Director, Europe, Middle East & Africa, Thomas & Betts, Belgium ABB offers tremendous opportunities to women wanting to build a career. The company helped to fund my education after I joined in the 1970s, and I have al- ways felt able to pursue new challenges. Denise Operations Manager, USA ABB provides different types of training to help you develop. Employees are given the tools and flexibility to take charge of their own career development and expand their job scopes. Irwan Sales Manager, Singapore Since Power-One became part of ABB, our employees have more opportunities to develop their careers, and ABB’s global presence is allowing us to bring our products to a much wider market. Engineer, Power-One, Italy David 24 Faces of ABB | ABB Annual Report 2013 There is a lot of support and oppor- tunity built into career planning at ABB. Combined with the support of my managers and my colleagues, that has helped me get on very fast. Angela-Xia Country Security Manager, China As a project manager at ABB, you are encouraged to switch between managing projects and being a general manager so you get on-the-ground expertise as well as the international perspective. Project Director, Sweden Bo Since Ventyx became a part of ABB, the focus has shifted to longer-term solutions for sustainable growth. It’s an environment that enables us to address the needs of customers and employees. Bobby Ventyx corporate development team, USA The trainee program I started with was a huge help. And, thanks to the breadth of our offering, our world-class technol- ogy and the demands of our customers, I have been learning ever since. Divisional Head Sales for Service, Switzerland René ABB Annual Report 2013 | Faces of ABB 25 I feel part of a much bigger world, which helps to expand my thinking and, ultimately, to achieve more. ABB always tries to strike a balance between being too centralized or too decentralized. SweeSeng Regional HR Manager, North Asia, China In ABB, Supply Chain Management is recognized as much more than a support function. It’s a major role, and I’ve been surprised about the range of opportunities to expand my circle of influence. Supply Chain Manager, Germany Bernhard The way you get to expand your network and your thinking at ABB is unique. In my six years with the company, I have not once felt marginalized – that is an important achievement in South Africa. Phindokuhle Country HR manager, South Africa The personal development programs are excellent, and my managers have always encouraged me to take on new chal- lenges. I have also had job rotations in Europe and the United States. Research and Development Manager, China Chengyan 26 Faces of ABB | ABB Annual Report 2013 T&B brings much more to the table since we were acquired by ABB – a broader portfolio of products and solutions, more opportunities in markets overseas and many more possibilities for advancement. Liz National Account Sales Manager, Thomas & Betts, USA As a Baldor employee with experience of past integrations, I believe ABB has re- spected and valued Baldor’s culture and its brands while bringing in the benefits of the global ABB organization. Director of Packaging, Baldor, USA Mike I am lucky to have had great managers in my 30 years here. They have always believed in me and helped me when I needed a new challenge. Fatma Regional Assurance and Control Manager, Egypt ABB is a global company that has a great vision both in terms of business and technology as well as excellent develop- ment programs for employees. I’m looking forward to making a career here. Syukriansyah Project Manager, Indonesia ABB Annual Report 2013 | Faces of ABB 27 As of March 1, 2014 Executive Committee From left to right Jean-Christophe Deslarzes Human Resources Tarak Mehta Low Voltage Products division Frank Duggan Global Markets Bernhard Jucker Power Products division Veli-Matti Reinikkala Process Automation division Ulrich Spiesshofer Chief Executive Officer Eric Elzvik Chief Financial Officer Greg Scheu Business Integration, Group Service, and North America Diane de Saint Victor General Counsel Pekka Tiitinen Discrete Automation and Motion division Claudio Facchin Power Systems division 28 Executive Committee | ABB Annual Report 2013 As of March 1, 2014 Regional and country managers North America Greg Scheu Canada Daniel Assandri Mexico Pierre Comptdaer United States (including US Virgin Islands) Greg Scheu Northern Europe Trevor Gregory Denmark Claus Madsen Estonia Bo Henriksson Finland Tauno Heinola Ireland Tom O’Reilly Kazakhstan Yerlan Doskeyev Latvia Bo Henriksson Lithuania Bo Henriksson Norway Steffen Waal Russian Federation Anatoliy Popov Sweden Johan Soderstrom United Kingdom Trevor Gregory North Asia Chunyuan Gu China Chunyuan Gu Japan Tony Zeitoun Korea Yun-Sok Han Taiwan Kayee Ding (1) New country manager as of March 1, 2014 South America Enrique Santacana Argentina Christian Newton Bolívia Christian Newton Brazil Rafael Paniagua Central America & Caribbean Blas Gonzalez Chile José Paiva Colombia Ramon Monras Ecuador Ramon Monras Peru Vicente Magana Uruguay Christian Newton Venezuela Ramon Monras Mediterranean Matteo Marini Algeria Khaled Torbey Croatia Steffen Drausnigg France Pierre St-Arnaud Greece Apostolos Petropoulos Israel Ronen Aharon Italy Matteo Marini Morocco Christian Bogers Portugal Miguel Pernes Serbia Aleksandar Cosic Spain Carlos Marcos Tunisia Christian Bogers Turkey Sami Sevinc Central Europe Peter Terwiesch Austria Franz Chalupecky Belgium Alfons Goos Bulgaria Ekkehard Neureither Czech Republic Hannu Kasi Germany Peter Terwiesch Hungary Tanja Vainio Luxembourg Alfons Goos Moldova Tomasz Wolanowski Netherlands Alfons Goos Poland Pawel Lojszczyk Romania Tomasz Wolanowski Slovakia Marcel van der Hoek Slovenia Franz Chalupecky Switzerland Remo Luetolf Ukraine Dmytro Zhdanov South Asia Haider Rashid Australia Axel Kuhr Indonesia Richard Ledgard Malaysia Stephen Pearce Myanmar Chaiyot Piyawannarat New Caledonia Axel Kuhr New Zealand Ewan Morris(1) Papua New Guinea Axel Kuhr Philippines Min-Kyu Choi Singapore Haider Rashid Thailand Chaiyot Piyawannarat Vietnam Axel Kalt India, Middle East and Africa Frank Duggan Angola Antonio D’Oliveira Bahrain Mohammed Masri Bangladesh Joy-Rajarshi Banerjee Botswana Gift Nkwe Cameroon Pierre Njigui Central Africa Naji Jreijiri Congo Thryphon Mungono Côte d’Ivoire Magloire Elogne Eastern Africa Jose da Matta Egypt Naji Jreijiri Ethiopia Naji Jreijiri Gambia Issa Guisse Ghana Hesham Tehemer India Bazmi Husain Jordan Naji Jreijiri Kenya Samuel Chiira Kuwait Maroun Zakhour Lebanon Naji Jreijiri Mauritius Ajay Vij Mozambique Paulo David Namibia Hagen Seiler Nigeria Nitin Desai Oman Brian Hull Pakistan Najeeb Ahmad Qatar Mostafa Al Guezeri Saudi Arabia Mohammed Masri Senegal Issa Guisse Southern Africa Leon Viljoen Tanzania Michael Otonya Uganda Norah Kipwola United Arab Emirates Carlos Pone Zambia Russell Harawa Zimbabwe Charles Shamu ABB Annual Report 2013 | Regional and country managers 29 30 Corporate governance report | ABB Annual Report 2013 Corporate governance report Contents 32 Principles . 33 Group structure and shareholders . . 36 Capital structure . . 37 Shareholders’ participation . . 38 Board of Directors . 41 Executive Committee . 43 Business relationships . 43 Employee participation programs . 43 Duty to make a public tender offer . . 43 Auditors . 44 Information policy . . 45 Further information on corporate governance . ABB Annual Report 2013 | Corporate governance report 31 1. Principles 1.1 General principles ABB is committed to the highest international standards of corporate governance, and supports the general principles as set forth in the Swiss Code of Best Practice for Corporate Governance, as well as those of the capital markets where its shares are listed and traded. In addition to the provisions of the Swiss Code of Obliga­ tions, ABB’s key principles and rules on corporate gover­ nance are laid down in ABB’s Articles of Incorporation, the ABB Ltd Board Regulations & Corporate Governance Guide­ lines (which includes the regulations of ABB’s board com­ mittees and the ABB Ltd Related Party Transaction Policy), and the ABB Code of Conduct and the Addendum to the ABB Code of Conduct for Members of the Board of Directors and the Executive Committee. It is the duty of ABB’s Board of Directors (the Board) to review and amend or propose amendments to those documents from time to time to reflect the most recent developments and practices, as well as to ensure compliance with applicable laws and regulations. This section of the Annual Report is based on the Direc­ tive on Information Relating to Corporate Governance pub­ lished by the SIX Swiss Exchange. Where an item listed in the directive is not addressed in this report, it is either inappli­ cable to or immaterial for ABB. According to the New York Stock Exchange’s corporate governance standards (the Standards), ABB is required to disclose significant ways in which its corporate governance practices differ from the Standards. ABB has reviewed the Standards and concluded that its corporate governance prac­ tices are generally consistent with the Standards, with the following significant exceptions: – Swiss law requires that the external auditors be elected by the shareholders at the Annual General Meeting rather than by the finance and audit committee or the board of directors. – The Standards require that all equity compensation plans and material revisions thereto be approved by the sharehold­ ers. Consistent with Swiss law such matters are decided by our Board. However, the shareholders decide about the creation of new share capital that can be used in connec­ tion with equity compensation plans. 1.2 Duties of directors and officers The directors and officers of a Swiss corporation are bound, as specified in the Swiss Code of Obligations, to perform their duties with all due care, to safeguard the interests of the corporation in good faith and to extend equal treatment to shareholders in like circumstances. The Swiss Code of Obligations does not specify what standard of due care is required of the directors of a corporate board. However, it is generally held by Swiss legal scholars and jurisprudence that the directors must have the requisite capability and skill to fulfill their function, and must devote the necessary time to the discharge of their duties. Moreover, the directors must exercise all due care that a prudent and diligent director would have taken in like circumstances. Finally, the directors are required to take actions in the best interests of the corporation and may not take any actions that may be harmful to the corporation. Exercise of powers Directors, as well as other persons authorized to act on be­ half of a Swiss corporation, may perform all legal acts on behalf of the corporation which the business purpose, as set forth in the articles of incorporation of the corporation, may entail. Pursuant to court practice, such directors and officers can take any action that is not explicitly excluded by the business purpose of the corporation. In so doing, however, the directors and officers must still pursue the duty of due care and the duty of loyalty described above and must extend equal treatment to the corporation’s shareholders in like cir­ cumstances. ABB’s Articles of Incorporation do not contain provisions concerning a director’s power, in the absence of an independent quorum, to vote on the compensation to themselves or any members of their body. Conflicts of interest Swiss law does not have a general provision on conflicts of interest and our Articles of Incorporation do not limit our directors’ power to vote on a proposal, arrangement or con­ tract in which the director or officer is materially interested. However, the Swiss Code of Obligations requires directors and officers to safeguard the interests of the corporation and, in this connection, imposes a duty of care and loyalty on di­ rectors and officers. This rule is generally understood and so recommended by the Swiss Code of Best Practice for Cor­ porate Governance as disqualifying directors and officers from participating in decisions, other than in the shareholders’ meeting, that directly affect them. 32 Corporate governance report | ABB Annual Report 2013 Confidentiality Confidential information obtained by directors and officers of a Swiss corporation acting in such capacity must be kept confidential during and after their term of office. 2. Group structure and shareholders 2.1 Group structure ABB Ltd, Switzerland, is the ultimate parent company of the ABB Group, which at December 31, 2013, principally com­ prised 395 consolidated operating and holding subsidiaries worldwide. ABB Ltd’s shares are listed on the SIX Swiss Exchange, the NASDAQ OMX Stockholm Exchange and the New York Stock Exchange (where its shares are traded in the form of American depositary shares (ADS) – each ADS representing one registered ABB share). On December 31, 2013, ABB Ltd had a market capitalization of CHF 54 billion. The only consolidated subsidiary in the ABB Group with listed shares is ABB India Limited, Bangalore, India, which is listed on the BSE Ltd. (Bombay Stock Exchange) and the National Stock Exchange of India. On December 31, 2013, ABB Ltd, Switzerland, directly or indirectly owned 75 percent of ABB India Limited, Bangalore, India, which at that time had a market capitalization of INR 147 billion. Sanctions If directors and officers transact business on behalf of the corporation with bona fide third parties in violation of their statutory duties, the transaction is nevertheless valid, as long as it is not explicitly excluded by the corporation’s business purpose as set forth in its articles of incorporation. Directors and officers acting in violation of their statutory duties – whether transacting business with bona fide third parties or performing any other acts on behalf of the company – may, however, become liable to the corporation, its shareholders and its creditors for damages. The liability is joint and several, but the courts may apportion the liability among the directors and officers in accordance with their degree of culpability. In addition, Swiss law contains a provision under which payments made to a shareholder or a director or any person(s) associated therewith, other than at arm’s length, must be repaid to the company if the shareholder or director or any person associated therewith was acting in bad faith. If the board of directors has lawfully delegated the power to carry out day­to­day management to a different corporate body, e.g., the executive committee, it is not liable for the acts of the members of that different corporate body. Instead, the directors can be held liable only for their failure to prop­ erly select, instruct and supervise the members of that differ­ ent corporate body. Stock exchange listings Stock exchange SIX Swiss Exchange Security ABB Ltd, Zurich, share NASDAQ OMX Stockholm Exchange ABB Ltd, Zurich, share New York Stock Exchange ABB Ltd, Zurich, ADS BSE Ltd. (Bombay Stock Exchange) ABB India Limited, Bangalore, share National Stock Exchange of India ABB India Limited, Bangalore, share Ticker symbol ISIN code ABBN ABB ABB ABB* ABB CH0012221716 CH0012221716 US0003752047 INE117A01022 INE117A01022 * also called Scrip ID All data as of December 31, 2013. ABB Annual Report 2013 | Corporate governance report 33 The following table sets forth, as of December 31, 2013, the name, country of incorporation, ownership interest and share capital of the significant direct and indirect subsidiaries of ABB Ltd, Switzerland: ABB Ltd’s significant subsidiaries Company name/location ABB S.A., Buenos Aires ABB Australia Pty Limited, Sydney ABB AG, Vienna ABB N.V., Zaventem ABB Ltda., Osasco ABB Bulgaria EOOD, Sofia ABB Inc., St. Laurent, Quebec Thomas & Betts Limited, Montreal, Quebec ABB (China) Ltd., Beijing Asea Brown Boveri Ltda., Bogotá ABB Ltd., Zagreb ABB s.r.o., Prague ABB A/S, Skovlunde ABB Ecuador S.A., Quito Asea Brown Boveri S.A.E., Cairo ABB AS, Jüri ABB Oy, Helsinki ABB S.A., Les Ulis ABB AG, Mannheim ABB Automation GmbH, Mannheim ABB Automation Products GmbH, Ladenburg ABB Beteiligungs­ und Verwaltungsges. mbH, Mannheim ABB Stotz­Kontakt GmbH, Heidelberg Busch­Jaeger Elektro GmbH, Mannheim/Lüdenscheid Asea Brown Boveri S.A., Metamorphossis Attica ABB (Hong Kong) Ltd., Hong Kong ABB Engineering Trading and Service Ltd., Budapest ABB India Limited, Bangalore ABB Ltd, Dublin ABB Technologies Ltd., Haifa ABB S.p.A., Milan ABB K.K., Tokyo ABB Ltd., Seoul ABB Holdings Sdn. Bhd., Subang Jaya Asea Brown Boveri S.A. de C.V., San Luis Potosi S.L.P ABB B.V., Rotterdam ABB Finance B.V., Amsterdam ABB Holdings B.V., Amsterdam ABB Investments B.V., Amsterdam ABB Limited, Auckland ABB Holding AS, Billingstad ABB S.A., Lima ABB, Inc., Paranaque, Metro Manila ABB Sp. z o.o., Warsaw ABB (Asea Brown Boveri), S.A., Paco de Arcos 34 Corporate governance report | ABB Annual Report 2013 Country Argentina Australia Austria Belgium Brazil Bulgaria Canada Canada China Colombia Croatia Czech Republic Denmark Ecuador Egypt Estonia Finland France Germany Germany Germany Germany Germany Germany Greece Hong Kong Hungary India Ireland Israel Italy Japan Korea, Republic of Malaysia Mexico Netherlands Netherlands Netherlands Netherlands New Zealand Norway Peru Philippines Poland Portugal ABB Share capital interest % in thousands Currency 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 96.87 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 75.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 98.18 100.00 99.92 100.00 56,772 122,436 15,000 13,290 267,748 20,110 – (1) – (1) 310,000 486,440 2,730 400,000 100,000 325 116,000 1,663 10,003 45,921 167,500 15,000 10,620 61,355 7,500 1,535 1,721 20,000 444,090 423,817 635 420 107,000 1,000,000 18,670,000 4,490 667,686 9,200 20 119 100 34,000 240,000 29,119 123,180 350,656 4,117 ARS AUD EUR EUR BRL BGN CAD CAD USD COP HRK CZK DKK USD USD EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR HKD HUF INR EUR ILS EUR JPY KRW MYR MXN EUR EUR EUR EUR NZD NOK PEN PHP PLN EUR ABB Ltd’s significant subsidiaries, continued Company name/location ABB Ltd., Moscow ABB Contracting Company Ltd., Riyadh ABB Holdings Pte. Ltd., Singapore ABB Holdings (Pty) Ltd., Longmeadow Asea Brown Boveri S.A., Madrid ABB AB, Västerås ABB Norden Holding AB, Västerås ABB Asea Brown Boveri Ltd, Zurich ABB Schweiz AG, Baden ABB Technology Ltd., Zurich ABB LIMITED, Bangkok ABB Elektrik Sanayi A.S., Istanbul ABB Ltd., Kiev ABB Industries (L.L.C.), Dubai ABB Holdings Limited, Warrington ABB Limited, Warrington ABB Holdings Inc., Cary, NC ABB Inc., Cary, NC Baldor Electric Company, Fort Smith, AR Kuhlman Electric Corporation, Crystal Springs, MS Power-One, Inc., Camarillo, CA Thomas & Betts Corporation, Knoxville, TN (1) Shares without par value. Country interest % in thousands Currency ABB Share capital Russian Federation Saudi Arabia Singapore South Africa Spain Sweden Sweden Switzerland Switzerland Switzerland Thailand Turkey Ukraine United Arab Emirates United Kingdom United Kingdom United States United States United States United States United States United States 100.00 65.00 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.95 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 5,686 40,000 32,797 4,050 33,318 400,000 2,344,783 2,768,000 55,000 100 1,034,000 13,410 85,400 5,000 213,014 120,000 2 1 – – – 1 RUB SAR SGD ZAR EUR SEK SEK CHF CHF CHF THB TRY UAH AED GBP GBP USD USD USD USD USD USD ABB’s operational group structure is described in the “Finan- cial review of ABB Group” section of this Annual Report under “Operating and financial review and prospects – Organizational structure”. 2.2 Significant shareholders Investor AB, Sweden, held 186,580,142 ABB shares as of December 31, 2013. This holding represents approximately 8.1 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on that date. The number of shares held by Investor AB does not include shares held by Mr. Jacob Wallenberg (a director of ABB), the chairman of Investor AB, in his individual capacity. BlackRock Inc., New York, U.S., disclosed that as per July 25, 2011, it, together with its direct and indirect subsidiar- ies, held 69,702,100 ABB shares corresponding to 3.0 per- cent of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2013. For a full review of the disclosure report pursuant to which Black- Rock reported its ABB shareholdings, please refer to the search facility of the SIX Swiss Exchange Disclosure Office at www.six-swissexchange.com/shares/companies/major_ shareholders_en.html?fromDate=19980101&issuer=10881 To the best of ABB’s knowledge, no other shareholder held 3 percent or more of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2013. Under ABB’s Articles of Incorporation, each registered share represents one vote. Significant shareholders do not have different voting rights. To our knowledge, we are not directly or indirectly owned or controlled by any government or by any other corporation or person. ABB Annual Report 2013 | Corporate governance report 35 The acquisition of shares through the exercise of war­ rants and each subsequent transfer of the shares will be subject to the restrictions of ABB’s Articles of Incorporation (see “Limitations on transferability of shares and nominee registration” in section 4.2 below). In connection with the issuance of convertible or warrant­ bearing bonds or other financial market instruments, the Board is authorized to restrict or deny the advance subscrip­ tion rights of shareholders if such bonds or other financial market instruments are for the purpose of financing or refinanc­ ing the acquisition of an enterprise, parts of an enterprise, participations or new investments, or an issuance on national or international capital markets. If the Board denies advance subscription rights, the convertible or warrant­bearing bonds or other financial market instruments will be issued at the relevant market conditions and the new shares will be issued pursuant to the relevant market conditions taking into ac­ count the share price and/or other comparable instruments having a market price. Conversion rights may be exercised during a maximum ten­year period, and warrants may be exer­ cised during a maximum seven­year period, in each case from the date of the respective issuance. The advance sub­ scription rights of the shareholders may be granted indirectly. At December 31, 2013, ABB’s share capital may be in­ creased by an amount not to exceed CHF 96,859,964 through the issuance of up to 94,038,800 fully paid shares with a par value of CHF 1.03 per share to employees. In addition, the Board has decided to propose to the shareholders at the 2014 Annual General Meeting that the contingent share capi­ tal be increased to permit the issuance to employees of up to 150,000,000 shares with a par value of CHF 1.03 per share. The pre­emptive and advance subscription rights of ABB’s shareholders are excluded. The shares or rights to subscribe for shares will be issued to employees pursuant to one or more regulations to be issued by the Board, taking into ac­ count performance, functions, level of responsibility and profitability criteria. ABB may issue shares or subscription rights to employees at a price lower than that quoted on a stock exchange. The acquisition of shares within the context of employee share ownership and each subsequent trans­ fer of the shares will be subject to the restrictions of ABB’s Articles of Incorporation (see “Limitations on transferability of shares and nominee registration” in section 4.2 below). 3. Capital structure 3.1 Ordinary share capital On December 31, 2013, ABB’s ordinary share capital (including treasury shares) as registered with the Commercial Register amounted to CHF 2,384,185,561.92, divided into 2,314,743,264 fully paid registered shares with a par value of CHF 1.03 per share. 3.2 Changes to the share capital In 2011, ABB issued shares out of its contingent capital in connection with ABB’s Management Incentive Plan (MIP). For further details about the MIP, see “Note 18 Share­based payment arrangements” to ABB’s Consolidated Financial Statements contained in the “Financial review of ABB Group” section of this Annual Report. The resulting share capital of CHF 2,384,185,561.92, divided into 2,314,743,264 fully paid registered shares, was first reflected in ABB’s Articles of Incorporation dated December 5, 2011. Except as described in this section, there were no changes to ABB’s share capital during 2013, 2012 and 2011. 3.3 Contingent share capital At December 31, 2013, ABB’s share capital may be increased by an amount not to exceed CHF 206,000,000 through the issuance of up to 200,000,000 fully paid registered shares with a par value of CHF 1.03 per share through the exercise of conversion rights and/or warrants granted in connection with the issuance on national or international capital markets of newly or already issued bonds or other financial market instruments. At December 31, 2013, ABB’s share capital may be in­ creased by an amount not to exceed CHF 10,300,000 through the issuance of up to 10,000,000 fully paid registered shares with a par value of CHF 1.03 per share through the exercise of warrant rights granted to its shareholders. The Board may grant warrant rights not taken up by shareholders for other purposes in the interest of ABB. The pre­emptive rights of the shareholders are excluded in connection with the issuance of convertible or warrant­ bearing bonds or other financial market instruments or the grant of warrant rights. The then current owners of conver­ sion rights and/or warrants will be entitled to subscribe for new shares. The conditions of the conversion rights and/or war­ rants will be determined by the Board. 36 Corporate governance report | ABB Annual Report 2013 3.4 Authorized share capital At December 31, 2013, ABB had an authorized share capital in the amount of up to CHF 206,000,000 through the issu­ ance of up to 200,000,000 fully paid registered shares with a par value of CHF 1.03 each, which is valid until April 29, 2015. The Board is authorized to determine the date of issue of new shares, the issue price, the type of payment, the condi­ tions for the exercise of pre­emptive rights and the beginning date for dividend entitlement. In this regard, the Board may issue new shares by means of a firm underwriting through a banking institution, a syndicate or another third party with a subsequent offer of these shares to the shareholders. The Board may permit pre­emptive rights that have not been ex­ ercised by shareholders to expire or it may place these rights and/or shares as to which pre­emptive rights have been granted but not exercised at market conditions or use them for other purposes in the interest of the company. Further­ more, the Board is authorized to restrict or deny the pre­emp­ tive rights of shareholders and allocate such rights to third parties if the shares are used (1) for the acquisition of an enter­ prise, parts of an enterprise, or participations, or for new in­ vestments, or in case of a share placement, for the financing or refinancing of such transactions; or (2) for the purpose of broadening the shareholder constituency in connection with a listing of shares on domestic or foreign stock exchanges. The subscription and the acquisition of the new shares, as well as each subsequent transfer of the shares, will be subject to the restrictions of ABB’s Articles of Incorporation. 3.5 Convertible bonds and options ABB does not have any bonds outstanding that are convert­ ible into ABB shares. For information about options on shares issued by ABB, please refer to “Note 19 Stockholders’ Equity” to ABB’s Consolidated Financial Statements con­ tained in the “Financial review of ABB Group” part of this Annual Report. 4. Shareholders’ participation 4.1 Shareholders’ voting rights ABB has one class of shares and each registered share carries one vote at the general meeting. Voting rights may be exercised only after a shareholder has been registered in the share register of ABB as a shareholder with the right to vote, or with Euroclear Sweden AB (Euroclear), which maintains a subregister of the share register of ABB. A shareholder may be represented at the Annual General Meeting by its legal representative, by another shareholder with the right to vote or an independent proxy designated by ABB (unabhängiger Stimmrechtsvertreter). All shares held by one shareholder may be represented by one representa­ tive only. For practical reasons shareholders must be registered in the share register no later than 6 business days before the general meeting in order to be entitled to vote. Except for the cases described under section 4.2 below, there are no voting rights restrictions limiting ABB’s shareholders’ rights. 4.2 Limitations on transferability of shares and nominee registration ABB may decline a registration with voting rights if a share­ holder does not declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights. A person failing to expressly declare in its registration application that it holds the shares for its own account (a nominee) will be entered in the share register with voting rights, provided that such nominee has entered into an agreement with ABB concerning its status, and further pro­ vided that the nominee is subject to recognized bank or financial market supervision. In special cases the Board may grant exemptions. There were no exemptions granted in 2013. The limitation on the transferability of shares may be removed by an amendment of ABB’s Articles of Incorporation by a shareholders’ resolution requiring two­thirds of the votes represented at the meeting. ABB Annual Report 2013 | Corporate governance report 37 4.3 Shareholders’ dividend rights 4.4 General meeting The unconsolidated statutory financial statements of ABB Ltd are prepared in accordance with Swiss law. Based on these financial statements, dividends may be paid only if ABB Ltd has sufficient distributable profits from previous years or sufficient free reserves to allow the distribution of a dividend. Swiss law requires that ABB Ltd retain at least 5 percent of its annual net profits as legal reserves (which are comprised of ordinary reserves, capital contribution reserve and reserve for own shares), unless these reserves already amount to 20 percent of ABB Ltd’s share capital. Any net profits remain­ ing in excess of those reserves are at the disposal of the shareholders’ meeting. Under Swiss law, ABB Ltd may only pay out a dividend if it has been proposed by a shareholder or the Board of Directors of ABB Ltd and approved at a general meeting of shareholders, and the auditors confirm that the dividend conforms to statutory law and ABB Ltd’s Articles of Incorpo­ ration. In practice, the shareholders’ meeting usually ap­ proves dividends as proposed by the Board of Directors, if the Board of Directors’ proposal is confirmed by the statutory auditors. Dividends are usually due and payable no earlier than three trading days after the shareholders’ resolution and the ex­date for dividends is normally two trading days after the shareholders’ resolution approving the dividend. Dividends are paid out to the holders that are registered on the record date. Euroclear administers the payment of dividends on those shares registered with it. Under Swiss law, dividends not collected within five years after the due date accrue to ABB Ltd and are allocated to its other reserves. As ABB Ltd pays cash dividends, if any, in Swiss francs (subject to the exception for certain shareholders in Sweden described below), exchange rate fluctuations will affect the U.S. dollar amounts received by holders of ADSs upon conversion of those cash dividends by Citibank, N.A., the depositary, in accordance with the Amended and Restated Deposit Agreement dated May 7, 2001. For shareholders who are residents of Sweden, ABB has established a dividend access facility (for up to 600,004,716 shares). If these shareholders register with Euroclear, they may elect to receive the dividend from ABB Norden Holding AB in Swedish krona (in an amount equivalent to the dividend paid in Swiss francs) without deduction of Swiss withholding tax. For further information on the dividend access facility, see ABB Ltd’s Articles of Incorporation, a copy of which can be found at www.abb.com/about/corporate­governance 38 Corporate governance report | ABB Annual Report 2013 Shareholders’ resolutions at general meetings are approved with an absolute majority of the votes represented at the meeting, except for those matters described in article 704 of the Swiss Code of Obligations and for resolutions with re­ spect to restrictions on the exercise of the right to vote and the removal of such restrictions, which all require the ap­ proval of two­thirds of the votes represented at the meeting. At December 31, 2013, shareholders representing shares of a par value totaling at least CHF 412,000 may request items to be included in the agenda of a general meeting. Any such request must be made in writing at least 40 days prior to the date of the general meeting and specify the items and the motions of such shareholder(s). ABB’s Articles of Incorporation do not contain provisions on the convocation of the general meeting of shareholders that differ from the applicable legal provisions. 5. Board of Directors 5.1 Responsibilities and organization The Board defines the ultimate direction of the business of ABB and issues the necessary instructions. It determines the organization of the ABB Group and appoints, removes and supervises the persons entrusted with the management and representation of ABB. The internal organizational structure and the definition of the areas of responsibility of the Board, as well as the information and control instruments vis­à­vis the Executive Committee, are set forth in the ABB Ltd Board Regulations & Corporate Governance Guidelines, a copy of which can be found at www.abb.com/about/corporate­governance The Board meets as frequently as needed but at least four times per annual Board term. Board meetings are convened by the chairman or upon request by a director or the chief executive officer (CEO). Documentation covering the various items of the agenda for each Board meeting is sent out in advance to each Board member in order to allow each mem­ ber time to study the covered matters prior to the meetings. Decisions made at the Board meetings are recorded in written minutes of the meetings. The CEO shall regularly, and whenever extraordinary circumstances so require, report to the Board about ABB’s overall business and affairs. Further, Board members are entitled to information concerning ABB’s business and affairs. Additional details are set forth in the ABB Ltd Board Regu­ lations & Corporate Governance Guidelines which can be found at www.abb.com/about/corporate­governance 5.2 Term and members The members of the Board are elected individually at the annual general meeting of the shareholders for a term of one year; re­election is possible. Our Articles of Incorporation, a copy of which can be found at www.abb.com/about/ corporate­governance, do not provide for the retirement of directors based on their age. However, an age limit for mem­ bers of the Board is set forth in the ABB Ltd Board Regula­ tions & Corporate Governance Guidelines (although waivers are possible and subject to Board discretion), a copy of which can be found at www.abb.com/about/corporate­ governance As of December 31, 2013, the members of the Board (Board term April 2013 to April 2014) were: Hubertus von Grünberg has been a member and chairman of ABB’s Board of Directors since May 3, 2007. He is a member of the supervisory board Deutsche Telekom AG (Germany) and a member of the board of directors of Schindler Holding AG (Switzerland). Mr. von Grünberg was born in 1942 and is a German citizen. Roger Agnelli has been a member of ABB’s Board of Directors since March 12, 2002. He is a member of the board of directors of WPP plc (U.K.). He was previously president and chief executive officer of Vale S.A. (Brazil). Mr. Agnelli was born in 1959 and is a Brazilian citizen. Louis R. Hughes has been a member of ABB’s Board of Directors since May 16, 2003. He is the chairman of InZero Systems (formerly GBS Laboratories LLC) (U.S.) and also a member of the boards of directors of Akzo Nobel (the Nether­ lands) and Alcatel Lucent (France). Mr. Hughes was born in 1949 and is a U.S. citizen. Hans Ulrich Märki has been a member of ABB’s Board of Directors since March 12, 2002. He is the retired chairman of IBM Europe, Middle East and Africa (France), and a mem­ ber of the board of directors of Mettler Toledo International (U.S.), and Swiss Re Ltd and the Menuhin Festival Gstaad AG (both Switzerland). He is also a member of the foundation boards of the Schulthess Klinik, Zurich and Les Arts Gstaad (both Switzerland) and the board of trustees of the Hermitage Museum, St. Petersburg (Russia). Mr. Märki was born in 1946 and is a Swiss citizen. Michel de Rosen has been a member of ABB’s Board of Directors since March 12, 2002. He is the chief executive officer and chairman of the board of directors of Eutelsat Communications (France). Mr. de Rosen was born in 1951 and is a French citizen. Michael Treschow has been a member of ABB’s Board of Directors since May 16, 2003. He is chairman of the boards of directors of Unilever NV (the Netherlands), and Unilever PLC (U.K.). He is also a member of the board of directors of the Knut and Alice Wallenberg Foundation (Sweden). Mr. Treschow was born in 1943 and is a Swedish citizen. Jacob Wallenberg has been a member of ABB’s Board of Directors since June 26, 1999. From March 1999 to June 1999, he served as a member of the board of directors of ABB Asea Brown Boveri Ltd, the former parent company of the ABB Group. He is chairman of the board of directors of Inves­ tor AB (Sweden) and vice chairman of Telefonaktie­ bolaget LM Ericsson AB, SEB Skandinaviska Enskilda Banken and SAS AB (all Sweden). He is also a member of the boards of di­ rectors of the Knut and Alice Wallenberg Foundation and the Stockholm School of Economics (both Sweden), and The Coca­Cola Company (U.S.). Mr. Wallenberg was born in 1956 and is a Swedish citizen. Ying Yeh has been a member of ABB’s Board of Directors since April 29, 2011. She is a member of the boards of direc­ tors of InterContinental Hotels Group (U.K.), Volvo AB (Sweden) and Samsonite International S.A. (Luxembourg). Ms. Yeh was born in 1948 and is a Chinese citizen. As of December 31, 2013, all Board members were non­exec­ utive and independent directors (see also section 7 below), and none of ABB’s Board members held any official functions or political posts. Further information on ABB’s Board mem­ bers can be found by clicking on the ABB Board of Directors CV link which can be found at www.abb.com/about/ corporate­governance 5.3 Board committees From among its members, the Board has appointed two Board committees: the Governance, Nomination and Compensation Committee (GNCC) and the Finance, Audit and Compliance Committee (FACC). The duties and objectives of the Board committees are set forth in the ABB Ltd Board Regulations & Corporate Governance Guidelines, a copy of which can be found at www.abb.com/about/corporate­governance. These committees assist the Board in its tasks and report regularly to the Board. The members of the Board committees are required to be independent. ABB Annual Report 2013 | Corporate governance report 39 5.3.1 Governance, Nomination and Compensation Committee The GNCC is responsible for (1) overseeing corporate governance practices within ABB, (2) nominating candidates for the Board, the role of CEO and other positions on the Executive Committee, and (3) succession planning, employ­ ment and compensation matters relating to the Board and the Executive Committee. The GNCC is also responsible for maintaining an orientation program for new Board mem­ bers and an ongoing education program for existing Board members. The GNCC must comprise three or more independent directors. The chairman of the Board and, upon invitation by the committee’s chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. As of December 31, 2013, the members of the GNCC were: Hans Ulrich Märki (chairman) Michel de Rosen Michael Treschow Ying Yeh 5.3.2 Finance, Audit and Compliance Committee The FACC is responsible for overseeing (1) the integrity of ABB’s financial statements, (2) ABB’s compliance with legal, tax and regulatory requirements, (3) the independent audi­ tors’ qualifications and independence, (4) the performance of ABB’s internal audit function and external auditors, and (5) ABB’s capital structure, funding requirements and financial risk policies. The FACC must comprise three or more independent directors who have a thorough understanding of finance and accounting. The chairman of the Board and, upon invitation by the committee’s chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. In addition, the Chief Integrity Officer, the Head of Internal Audit and the external auditors participate in the meetings as appropriate. As required by the U.S. Securities and Ex­ change Commission (SEC) at least one member of the FACC has to be an audit committee financial expert. The Board has determined that each member of the FACC is an audit committee financial expert. 40 Corporate governance report | ABB Annual Report 2013 As of December 31, 2013, the members of the FACC were: Louis R. Hughes (chairman) Roger Agnelli Jacob Wallenberg 5.4 Meetings and attendance The Board and its committees have regularly scheduled meetings throughout the year. These meetings are supple­ mented by additional meetings (either in person or by conference call), as necessary. The table below shows the number of meetings held during 2013 by the Board and its committees, their average duration, as well as the attendance of the individual Board members. In addition, members of the Board and the Execu­ tive Committee participated in a two­day strategic retreat. Meetings and attendance Board GNCC FACC Average duration (hours) 6.5 1.8 Regular Additional Number of meetings Meetings attended: Hubertus von Grünberg Roger Agnelli Louis R. Hughes Hans Ulrich Märki Michel de Rosen Michael Treschow Jacob Wallenberg Ying Yeh 6 6 6 6 6 6 6 6 6 3 3 3 3 3 3 3 3 3 3 8 – – – 8 7 8 – 8 2.8 6 – 6 6 – – – 6 – 5.5 Board Compensation and Shareholdings Information about Board compensation and shareholdings can be found in sections titled “Components of compensation”, “Board compensation in 2013” and “ABB shareholding of members of the Board and EC” of the Remuneration report contained in this Annual Report. 5.6 Secretary to the Board Diane de Saint Victor is the secretary to the Board. 6. Executive Committee 6.1 Responsibilities and organization The Board has delegated the executive management of ABB to the CEO and the other members of the Executive Com­ mittee. The CEO and under his direction the other members of the Executive Committee are responsible for ABB’s overall business and affairs and day­to­day management. The CEO reports to the Board regularly, and whenever extraordinary circumstances so require, on the course of ABB’s business and financial performance and on all organi­ zational and personnel matters, transactions and other issues relevant to the Group. Each member of the Executive Committee is appointed and discharged by the Board. 6.2 Members of the Executive Committee As of December 31, 2013, the members of the Executive Committee were: Ulrich Spiesshofer was appointed Chief Executive Officer in September 2013. From January 2010 to September 2013, Mr. Spiesshofer was Executive Committee member responsible for the Discrete Automation and Motion division. He joined ABB in November 2005 as Executive Committee member responsible for Corporate Development. From 2002 until he joined ABB, he was senior partner, global head of operations practice at Roland Berger AG (Switzerland). Prior to 2002, he held various management positions with A.T. Kearney Ltd. and its affiliates. Mr. Spiesshofer was born in 1964 and is a German citizen. Eric Elzvik was appointed Chief Financial Officer and member of the Executive Committee in February 2013. He is a member of the Foundation Board of IMD. From 2010 to 2013, Mr. Elzvik was the Chief Financial Officer of ABB’s Discrete Automation and Motion division. He joined ABB in 1984 and has held a variety of other leadership roles in Sweden, Singapore and Switzerland, including head of Cor­ porate Development, and head of Mergers & Acquisitions and New Ventures. Mr. Elzvik was born in 1960 and is a Swiss and Swedish citizen. Jean-Christophe Deslarzes was appointed Head of Human Resources and Executive Committee member in November 2013. From 2010 through 2013 he was the Chief Human Resources and Organization Officer of the Carrefour Group (France). From 2008 to 2010 he was President and CEO of the Downstream Aluminum Businesses of Rio Tinto (Canada). From 2006 to 2008, he was Senior Vice President Human Resources and a member of the executive committee of Alcan Inc. (Canada), including co­leader of the Rio Tinto– Alcan integration from 2007 to 2008. Between 1994 and 2008, he held various roles with Alcan (Switzerland and France). Mr. Deslarzes was born in 1963 and is a Swiss citizen. Diane de Saint Victor joined ABB’s Executive Committee as General Counsel in January 2007. She is a non­executive director of Barclays Bank PLC (U.K.). From 2004 to 2006, she was general counsel of European Aeronautic Defence and Space, EADS (France/Germany). From 2003 to 2004, she was general counsel of SCA Hygiene Products (Germany). From 1993 to 2003, she held various legal positions with Honey­ well International (France/Belgium). From 1988 to 1993, she held various legal positions with General Electric (U.S.). Ms. de Saint Victor was born in 1955 and is a French citizen. Frank Duggan was appointed Executive Committee member responsible for Global Markets in March 2011. Since 2008, he has also been ABB’s region manager for India, Middle East and Africa. From 2008 to 2011, he was ABB’s country manager for the United Arab Emirates. From 2004 to 2007, he was head of ABB’s Group Account Management and ABB’s country manager for Ireland. Between 1986 and 2004, he held several management positions with ABB. Mr. Duggan was born in 1959 and is an Irish citizen. Greg Scheu was appointed Executive Committee mem­ ber responsible for business integration, group service and North America in November 2013. He has been nominated to be a board member of the National Electrical Manufacturers Association (U.S.). Mr. Scheu joined the Executive Committee as the member responsible for Marketing and Customer So­ lutions in May 2012. Mr. Scheu, a former executive of Rockwell International, joined ABB in 2001 and was responsible for the integration of Baldor Electric Co., which ABB acquired in January 2011, and for the Integration of Thomas & Betts, which ABB acquired in 2012. Mr. Scheu was born in 1961 and is a U.S. citizen. Pekka Tiitinen was appointed Executive Committee member responsible for the Discrete Automation and Motion division in September 2013. Prior to joining the Executive Committee, Mr. Tiitinen was the head of ABB’s drives and controls business in 2013. From 2003 to 2012, Mr. Tiitinen was the head of ABB’s low voltage drives business and from 1990 to 2003, he held various management roles with ABB. Mr. Tiitinen was born in 1967 and is a Finnish citizen. ABB Annual Report 2013 | Corporate governance report 41 6.3 Executive Committee Compensation and Shareholdings Information about Executive Committee compensation and shareholdings can be found in sections titled “Components of EC compensation”, “EC compensation in 2013”, “Additional information on remuneration” and “ABB shareholdings of members of the Board and the EC” of the Remuneration report contained in this Annual Report. 6.4 Management contracts There are no management contracts between ABB and companies or natural persons not belonging to the ABB Group. Tarak Mehta was appointed Executive Committee member responsible for the Low Voltage Products division in October 2010. From 2007 to 2010, he was head of ABB’s transformers business. Between 1998 and 2006, he held several management positions with ABB. Mr. Mehta was born in 1966 and is a U.S. citizen. Veli-Matti Reinikkala was appointed Executive Commit­ tee member responsible for the Process Automation division in January 2006. He is a member of the board of directors of UPM­Kymmene (Finland). In 2005, he was head of ABB’s process automation business. From 1993 to 2005, he held several positions with ABB. Mr. Reinikkala was born in 1957 and is a Finnish citizen. Bernhard Jucker was appointed Executive Committee member responsible for the Power Products division in January 2006. From 2003 to 2005, he was ABB’s country manager for Germany. From 1980 to 2003, he held various positions in ABB. Mr. Jucker was born in 1954 and is a Swiss citizen. Claudio Facchin was appointed Executive Committee member responsible for the Power Systems division in December 2013. From 2010 to 2013, Mr. Facchin was head of ABB’s North Asia region. From 2004 to 2009, Mr. Facchin was the head of ABB’s substations business and from 1995 to 2004, he held various management roles with ABB. Mr. Facchin was born in 1965 and is an Italian citizen. Further information about the members of the Executive Committee can be found by clicking on the Executive Committee CV link at www.abb.com/about/corporate­ governance 42 Corporate governance report | ABB Annual Report 2013 7. Business relationships This section describes important business relationships be­ tween ABB and its Board and Executive Committee members, or companies and organizations represented by them. This determination has been made based on ABB Ltd’s Related Party Transaction Policy. This policy is contained in the ABB Ltd Board Regulations & Corporate Governance Guide­ lines, a copy of which can be found at www.abb.com/ about/corporate­governance Vale S.A. and its subsidiaries (Vale) and ABB have entered into a framework agreement establishing general terms and conditions for the supply of products, systems and services among their respective group subsidiaries. ABB supplies Vale primarily with process automation products for mineral systems. The total revenues recorded by ABB in 2013 relating to its contracts with Vale were approximately $80 mil­ lion. Roger Agnelli was president and CEO of Vale until May 2011. Atlas Copco AB (Atlas Copco) is an important customer of ABB. ABB supplies Atlas Copco primarily with drives and motors through its Discrete Automation and Motion divi­ sion. The total revenues recorded by ABB relating to busi­ ness with Atlas Copco were approximately $70 million in 2013. Jacob Wallenberg was vice chairman of Atlas Copco until April 2012. ABB has an unsecured syndicated $2­billion, revolving credit facility. As of December 31, 2013, SEB Skandinaviska Enskilda Banken AB (publ) (SEB) and Barclays Bank PLC (Barclays) had committed to $71 million out of the $2­billion total. In addition, ABB has regular banking business with SEB and Barclays. Jacob Wallenberg is the vice chairman of SEB and Diane de Saint Victor is a non­executive director of Barclays. After comparing the share of revenues generated from ABB’s business with Vale and Atlas Copco, and after re­ viewing the banking commitments of SEB and Barclays, the Board has determined that ABB’s business relationships with those companies are not unusual in their nature or con­ ditions and do not constitute material business relationships. As a result, the Board concluded that all members of the Board are considered to be independent directors. This deter­ mination was made in accordance with ABB Ltd’s Related Party Transaction Policy which was prepared based on the Swiss Code of Best Practice for Corporate Governance and the inde pendence criteria set forth in the corporate gov­ ernance rules of the New York Stock Exchange. 8. Employee participation programs In order to align its employees’ interests with the business goals and financial results of the company, ABB operates a number of incentive plans, linked to ABB’s shares, such as the Employee Share Acquisition Plan, the Management Incentive Plan and the Long­Term Incentive Plan. For a more detailed description of these incentive plans, please refer to “Note 18 Share­based payment arrangements” to ABB’s Consolidated Financial Statements contained in the “Financial review of ABB Group” section of this Annual Report. 9. Duty to make a public tender offer ABB’s Articles of Incorporation do not contain any provisions raising the threshold (opting­up) or waiving the duty (opting out) to make a public tender offer pursuant to article 32 of the Swiss Stock Exchange and Securities Trading Act. 10. Auditors 10.1 Auditors Ernst & Young are the auditors of ABB’s statutory and con­ solidated accounts. 10.2 Duration of the mandate and term of office of the auditor Ernst & Young assumed the sole auditing mandate of the consolidated financial statements of the ABB Group in the beginning of the year ended December 31, 2001 (having previously been joint auditors since 1994). The auditor in charge and responsible for the mandate, Leslie Clifford, began serving in this function in respect of the financial year ended December 31, 2013. Pursuant to the Articles of Incorporation, the term of office of ABB’s auditors is one year. ABB Annual Report 2013 | Corporate governance report 43 10.3 Auditing and additional fees paid to the auditor 11. Information policy The audit fees charged by Ernst & Young for the legally pre­ scribed audit amounted to approximately $29.9 million in 2013. Audit services are defined as the standard audit work performed each fiscal year necessary to allow the auditors to issue an opinion on the consolidated financial statements of ABB and to issue an opinion on the local statutory finan­ cial statements. This classification may also include services that can be provided only by the auditors, such as assistance with the application of new accounting policies, pre­issuance reviews of quarterly financial results and comfort letters delivered to underwriters in connection with debt and equity offerings. In addition, Ernst & Young charged approximately $4.6 million for non­audit services performed during 2013. Non­audit services include primarily accounting consulta­ tions and audits in connection with divestments, audits of pension and benefit plans, accounting advisory services, tax compliance and other tax services. In accordance with the requirements of the U.S. Sarbanes­Oxley Act of 2002 and rules issued by the SEC, ABB has, on a global basis, a process for the review and pre­approval of audit and non­ audit services to be performed by Ernst & Young. 10.4 Supervisory and control instruments vis­à­vis the auditors The FACC prepares proposals to the Board for the appoint­ ment and removal of the auditors. The FACC is also respon­ sible for supervising the auditors to ensure their qualifications, independence and performance. It meets regularly with the auditors to obtain reports about the results of their audit procedures. The FACC reports the material elements of its supervision of the auditors to the Board. ABB, as a publicly traded company, is committed to commu­ nicating in a timely and consistent way to shareholders, potential investors, financial analysts, customers, suppliers, the media and other interested parties. ABB is required to disseminate material information pertaining to its businesses in a manner that complies with its obligations under the rules of the stock exchanges where its shares are listed and traded. ABB publishes an annual report that provides audited financial statements and information about ABB including our business results, strategy, products and services, corporate governance and executive remuneration. In addition, ABB submits an annual report on Form 20­F to the SEC. ABB also publishes its results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the stock exchanges on which its shares are listed and traded. Press releases relating to financial results and material events are also filed with the SEC on Form 6­K. An archive containing Annual Reports, Form 20­F reports, quarterly results releases and related presentations can be found in the “Financial results and presentations” section at www.abb.com/investor­ relations. The quarterly results press releases contain unaudited financial information prepared in accordance with, or reconciled to U.S., GAAP. To subscribe to important press releases, please click on the “Contacts and Services” and choose “Subscribe to updates” at www.abb.com/investor­ relations. Ad hoc notices can also be found in the press releases section at www.abb.com/news ABB’s official means of communication is the Swiss Official Gazette of Commerce (www.shab.ch). The invitation to the company’s Annual General Meeting is sent to regis­ tered shareholders by mail. Inquiries may also be made to ABB Investor Relations: Affolternstrasse 44 CH­8050 Zurich, Switzerland Telephone: +41 (0)43 317 7111 Fax: +41 (0)44 311 9817 E­mail: investorrelations@ch.abb.com ABB’s website is: www.abb.com 44 Corporate governance report | ABB Annual Report 2013 12. Further information on corporate governance The list below contains references to additional informa­ tion concerning the corporate governance of ABB, which can be accessed at www.abb.com/about/corporate­ governance – Articles of Incorporation – ABB Ltd Board Regulations & Corporate Governance Guidelines – Regulations of the Governance, Nomination and Compensation Committee – Regulations of the Finance, Audit and Compliance Committee – Related Party Transaction Policy – ABB Code of Conduct – Addendum to the ABB Code of Conduct for Members of the Board of Directors and the Executive Committee – Comparison of ABB’s corporate governance practices to the New York Stock Exchange rules – CVs of the Board members – CVs of the Executive Committee members ABB Annual Report 2013 | Corporate governance report 45 46 Remuneration report | ABB Annual Report 2013 Remuneration report Contents 48 Board remuneration . 49 Executive Committee remuneration 57 Additional information . ABB Annual Report 2013 | Remuneration report 47 ABB’s success depends on its ability to attract and retain people who will drive the business to outperform competitors and create value for shareholders over the long term. These are important considerations behind ABB’s remuneration pol- icy. The Remuneration report presents the principles of this policy, the mechanisms for managing remuneration, and the compensation in 2013 for members of the Board of Directors (Board) and the Executive Committee (EC). 1. Board remuneration 1.1 Governance and principles The Board sets and periodically reviews compensation for its members based on a comparison of the compensation of non-executive board members of publicly-traded companies in Switzerland that are part of the Swiss Market Index. The Governance, Nomination and Compensation Committee (GNCC) is responsible for making recommendations to the Board. 1.2 Components of compensation Members of the Board are paid for their service over a 12-month period that starts with their election at the Annual General Meeting. Payment is made in two installments: one following the first six months of the term and one at the end. Board members do not receive pension benefits and are not eligible to participate in any of ABB’s employee incen- tive programs. To align the interests of Board members with those of ABB’s shareholders, half of each member’s compensation is paid in the form of ABB shares, though Board members can alternatively choose to receive all of their compensation in shares. The shares are kept in a blocked account for three years. Departing Board members are entitled to the shares when they leave the company unless agreed otherwise. The number of shares awarded is calculated prior to each semi-annual payment by dividing the sum to which the Board members are entitled by the average closing price of the ABB share over a predefined 30-day period. Compensation for Board members is outlined in the table below and has been unchanged since the 2007/2008 term of office. Function Chairman of the Board Member of the Board and Committee chairman Member of the Board Board term 2013–2014 2012–2013 (CHF) (CHF) 1,200,000 1,200,000 400,000 300,000 400,000 300,000 48 Remuneration report | ABB Annual Report 2013 1.3 Board compensation in 2013 The compensation amounts per individual are listed in the table below: November May Board term 2013–2014 Board term 2012–2013 Paid in 2013 Settled in shares – Settled in shares – Total Settled number of Settled number of compen sation Name Function in cash(1) shares received(2) in cash(1) shares received(2) paid 2013(3)(4) Hubertus von Grünberg Chairman of the Board Roger Agnelli(5) Member of the Board Louis R. Hughes Member of the Board and Chairman of the Finance, Audit (CHF) – 75,000 19,616 2,419 (CHF) – 75,000 19,739 2,442 (CHF) 1,200,000 300,000 and Compliance Committee 100,000 3,233 100,000 3,264 400,000 Hans Ulrich Märki Member of the Board and Chairman of the Governance, Nomination and Compensation Committee Michel de Rosen(6) Member of the Board Michael Treschow(6) Member of the Board Jacob Wallenberg(5) Member of the Board Ying Yeh(6) Total Member of the Board – 75,000 75,000 75,000 75,000 475,000 8,966 2,629 2,629 2,629 2,460 – 75,000 75,000 75,000 75,000 9,018 2,646 2,647 2,647 2,474 400,000 300,000 300,000 300,000 300,000 44,581 475,000 44,877 3,500,000 (1) (2) (3) (4) (5) (6) Represents gross amounts paid, prior to deductions for social security, withholding tax etc. Number of shares per Board member is calculated based on the net amount due after deductions for social security, withholding tax etc. For the Board terms 2013–2014 and 2012–2013, all members elected to receive 50% of their gross compensation in the form of ABB shares, except for Hubertus von Grünberg and Hans Ulrich Märki, who elected to receive 100% in shares. In addition to the Board remuneration stated in the above table, in 2013, the Company paid CHF 147,290 in employee social security payments. Member of the Finance, Audit and Compliance Committee. Member of the Governance, Nomination and Compensation Committee. Consistent with past practice, no loans or guarantees were granted to Board members in 2013. 2. Executive Committee remuneration 2.1 Governance and principles The Board and GNCC have direct oversight of compensation policy at ABB. The GNCC is responsible for developing the general remuneration principles and practices of ABB and for recommending them to the full Board, which takes the final decisions. The Board and GNCC are actively involved in the con- tinuous development of ABB’s executive remuneration system to reflect an equitable remuneration philosophy that is based on the following principles: – Market orientation – ABB conducts regular benchmarking reviews to ensure compensation is at a level that will attract and retain top talent. – Performance – ABB ensures that performance drives all compensation elements. Performance metrics include financial objectives, individual performance and behavior, as well as the share price performance. – Shareholder value – ABB’s compensation elements focus on rewarding the delivery of outstanding and sustainable results without inappropriate risk taking. – Retention – ABB grants a portion of its compensation through long-term oriented elements to attract and retain the key talent that ABB needs to drive its success globally. ABB Annual Report 2013 | Remuneration report 49 The GNCC acts on behalf of the Board in regularly reviewing the remuneration philosophy and structure, and in reviewing and approving specific proposals on executive compensation to ensure that they are consistent with ABB’s compensation principles. Hostettler, Kramarsch & Partner AG (hkp), an inde- pendent consultant specializing in performance management and compensation, provides advice to the GNCC in the area of remuneration. hkp has no other mandate with ABB. All senior positions in ABB have been evaluated using a consistent methodology developed by the Hay Group, whose job evaluation system is used by more than 10,000 compa- nies around the world. The Hay methodology goes beyond job titles and company size in assessing positions. It considers the know-how required to do the job, the problem-solving complexities involved, as well as the accountability for results and the freedom to act to achieve results. This approach provides a meaningful, transparent and consistent basis for comparing remuneration levels at ABB with those of equiva- lent jobs at other companies that have been evaluated using the same criteria. The Board primarily uses Hay’s data from the European market to set EC compensation, which is tar- geted to be above the median values for the market. Every year, the Board reviews the CEO’s performance while the CEO reviews the performance of other members of the EC and makes recommendations to the GNCC on their individual remuneration. The full Board takes the final decisions on compensation for all EC members, none of whom partici- pates in the deliberations on their remuneration. Information on the meetings held by the GNCC in 2013 can be found in section 5.4 of the Corporate governance report. 2.2 Components of EC compensation Compensation elements and performance considerations The compensation of EC members currently consists of the following elements: a base salary and benefits, a short- term variable component dependent on annual ABB per- formance objectives, and a long-term variable component designed to reward the creation of shareholder value and the executive’s commitment to the company. The main components of executive compensation in 2013 are summarized in the following chart and described in detail below: Base salary Cash Paid monthly Competitive in relevant labor markets Annual revisions, if any, partly based on performance Short-term variable compensation Long-term variable compensation (Long-Term Incentive Plan) Cash Conditional annual payment Payout depends on performance in previous year against predefined ABB objectives, with a cap on the payout for over performance Cash and shares Performance component: Retention component: Conditional grant made annually Conditional grant made annually Payout is in cash and depends on ABB’s weighted cumulative earnings per share over a three-year period Payout is in shares (70%) and cash (30%) and requires the executive to remain at ABB until the end of the vesting period (Executives can elect to receive 100% in shares) 50 Remuneration report | ABB Annual Report 2013 Performance considerations in each component of remuneration Performance period Year of award or review Performance period Year –3 Year –2 Year –1 Year Year +1 Year +2 Year +3 Individual performance and behavior Group performance Group and individual performance over previous three and one year(s) respectively Level of annual base pay Level of short- term variable compensation payout Retention component of LTIP grant Performance component of LTIP grant Weighted cumulative earnings per share over next three years In addition, members of the EC are required to build up a holding of ABB shares that is equivalent to a multiple of their base salary, to ensure that their interests are aligned with those of shareholders. Since 2010, the requirement has been five times base salary for the CEO and four times base salary for the other members of the EC. New members of the EC should aim to reach these multiples within four years of their appointment. These required shareholding amounts are reviewed annually, based on salary and expected share price developments. The chart above illustrates how performance consider- ations are reflected in each component of executive remu- neration. Annual base salary The base salary for members of the EC is set taking into account positions of comparable responsibility outside ABB, as determined using the Hay methodology described above. It is reviewed annually, principally on the basis of Hay’s annual Top Executive Compensation in Europe survey. When con- sidering changes in base salary, the executive’s performance during the preceding year against individual objectives is taken into account. Under its mandate with ABB, Hay also conducts job evaluations. ABB Annual Report 2013 | Remuneration report 51 Benefits Members of the EC receive pension benefits, payable into the Swiss ABB Pension Fund and the ABB Supplemen- tary Insurance Plans (the regulations are available at www.abbvorsorge.ch). The compensation of EC members also includes social security contributions and other benefits, as outlined in the table in section 2.3 of this Remuneration report. The Board has decided to provide tax equalization for EC members resident outside Switzerland to the extent that they are not able to claim a tax credit in their country of residence for income taxes they have paid in Switzerland. Short-term variable compensation Payment of the short-term variable component is conditional on the fulfillment of predefined annual objectives that are specific, quantifiable and challenging. Short-term variable compensation for members of the EC and most other senior managers throughout the company is based on ABB per- formance objectives. For some managers with regional or country-level responsibilities, short-term variable compensa- tion is based on related objectives adapted to ABB’s goals in these markets. The Board determines the short-term ABB performance objectives taking into account the recommen- dation of the GNCC. The 2013 ABB metrics, shown in the table below, were aligned with ABB’s 2015 strategic targets that have been communicated to shareholders. Objective(1) Orders received Revenues Operational EBITDA(2) Ratio of operating cash flow to operational EBIT(3) Net Promoter Score (NPS)(4) Cost savings Weighting 12.5% 12.5% 25% 25% 10% 15% (1) (2) (3) (4) The financial objectives exclude the impact of currency fluctuations and major acquisitions. See definition in “Note 23 Operating segment and geographic data” to ABB’s Consolidated Financial Statements. Operating cash flow is defined as net cash provided by operating activities, reversing the impact of interest, taxes and restructuring-related activities. Operational EBIT is defined as Operational EBITDA before excluding depreciation and amortization. NPS is a metric based on dividing customers into three categories: Promoters, Passives, and Detractors. This is achieved by asking customers in a one-question survey whether they would recommend ABB to a colleague. In 2013, ABB had a target to increase the pro- portion of countries that have improved their NPS compared to the previous year. The payout for fully achieving the predefined annual objec- tives is equivalent to 150 percent of the base salary for the CEO and 100 percent of the base salary for other members of the EC. Underperformance results in a lower payout, or none at all if performance is below a certain threshold. If the objectives are exceeded, the Board has the discretion to approve a payout that is up to 50 percent higher (represent- ing up to 225 percent of the base salary for the CEO and 150 percent of the base salary for other members of the EC). For 2013, the payout was 100 percent of the target short- term variable compensation, reflecting the company’s per- formance. Long-term variable compensation An important principle of executive compensation at ABB is that it should encourage the creation of value for the com- pany’s shareholders and enable EC members to participate in the company’s success. The company’s Long-Term Incentive Plan (LTIP) is the principal mechanism through which mem- bers of the EC and certain other executives are encouraged to create value for shareholders. Awarded annually, LTIPs comprise a performance component and a retention compo- nent whose proportions in relation to the base salary are explained below. Under the terms and conditions of the plan, the Board decides whether EC members who leave the company before the end of the three-year period forfeit the unvested award, or receive all or a portion of such awards. The Board also de- cides whether to award LTIPs to new participants or change the size of an LTIP award to an existing participant for up to six months after the launch of a plan. These Board decisions are made taking into account the recommendation of the GNCC. Performance component The performance component of the plan is designed to reward participants for increasing earnings per share(1) (EPS) over a three-year period. EPS was adopted as the performance measure in the performance component of the LTIP in 2012, replacing relative total shareholder return used in previous launches of LTIP. (1) Earnings per share is defined in the terms of the LTIP as diluted earnings per share attributable to ABB shareholders calculated using Income from continuing operations, net of tax, unless the Board decides to calculate using Net income for a particular year. 52 Remuneration report | ABB Annual Report 2013 The payout is based on ABB’s weighted cumulative EPS performance against predefined objectives. The weighted cumulative EPS is calculated as 33 percent of EPS in the first year plus 67 percent of EPS in the second year plus 100 percent of EPS in the third year. There is no payout if the lower threshold is not reached and payout is capped if performance exceeds the upper threshold. The payout fac- tors are shown in the chart on the right. At each launch, participants are allocated a reference number of shares that is linked to a percentage of their base salary. In 2013, the percentages were 67 percent for the current CEO and 42 percent for the other members of the EC. As shown in the chart on the right, the payout can range from zero to 200 percent of the reference number of shares granted under the performance component. The payout at the end of the three-year period, if any, will be made in cash. Historical payout of performance component Of the LTIPs launched since 2006 that have also vested, the only one whose performance component has paid out is the 2007 launch, under which participants, upon vesting, were entitled to receive 92 percent of the per- formance shares that they had been conditionally granted (see chart below). Payout % of reference number of shares under the performance component 200% 100% 0% Lower threshold (no payout) On target Upper threshold (maximum payout) Weighted cumulative earnings per share Historical payout of performance component 2006 2007 2008 2009 2010 2011 2012 2013 LTIP 2006 No payout LTIP 2007 92% of shares granted LTIP 2008 No payout LTIP 2009 No payout LTIP 2010 No payout ABB Annual Report 2013 | Remuneration report 53 2.3 EC compensation in 2013 The tables in this section provide an overview of the total compensation of members of the EC in 2013, comprising cash compensation and share-based compensation. Cash com- pensation included the base salary, accrued short-term vari- able compensation for 2013, pension benefits, as well as other benefits comprising mainly social security and health insurance contributions. Share-based compensation includes grants under the LTIP and other share-based awards. The performance component of LTIPs is valued at grant using the ABB share price and Monte Carlo modeling, a mathematical technique that calculates a range of outcomes and the prob- ability that they will occur. The model is an accepted simula- tion method under U.S. GAAP (the accounting standard used by ABB). The compensation is shown gross (before deduc- tion of employee’s social security and pension contributions). The base salary and benefits are fixed elements of the annual compensation packages, while the other compo- nents are variable. In 2013, fixed compensation represented 27 percent of the CEO’s remuneration and an average of 32 percent for the other EC members. The ratio of fixed to variable components in any given year will depend on the performance of the individuals and of the company against predefined ABB performance objectives. For the EC, the total cash-based compensation was 29.0 million Swiss francs in 2013 compared with 30.3 million Swiss francs in 2012, while the value at grant of the condi- tional LTIP award compensation was 13.1 million Swiss francs in 2013 compared with 13.4 million Swiss francs in 2012. The difference in compensation is mainly attributable to changes in the composition of the EC during 2013. Retention component The second component of the LTIP is designed to retain executives at ABB. Members of the EC are conditionally granted shares, which are awarded at the end of the vesting period, generally three years from grant date, subject to fulfillment of the vesting conditions. The reference grant size for the CEO is equivalent to 100 percent of base salary. The other EC members receive a grant from a pool whose reference size is equivalent to 65 percent of their combined base salaries. The Board allo- cates shares from this pool to each individual EC member, based on an assessment of their individual performance in the previous calendar year. The reference grant size for the CEO and the pool for the other EC members for any particular launch can each be increased or decreased by the Board by up to 25 percent, based on an assessment of ABB’s performance over the three years preceding the launch of the plan. The assessment considers ABB’s performance against its peers according to financial metrics (related to revenue growth, Operational EBITDA, P/E ratio, free cash flow, conversion ratio and share- price development) and non-financial measures (related to customer satisfaction, integrity, and health and safety). Based on its assessment of ABB’s performance in the period 2010–2012 (particularly its NPS development and cash flow generation), the Board increased the size of the retention component in the 2013 LTIP by 5 percent in aggregate for all EC participants. EC members receive 70 percent of the payout in shares and the remainder in cash, unless they elect to receive 100 percent in shares. Severance provisions Employment contracts for EC members contain notice periods of 12 months, during which they are entitled to com- pensation comprising their base salary, benefits and short- term variable compensation. Since January 1, 2013, contracts for new members of the EC no longer include a provision extending compensation for up to 12 additional months if their employment is terminated by ABB and if they do not find alternative employment within the notice period that pays at least 70 percent of their compensation. 54 Remuneration report | ABB Annual Report 2013 e l b a i r a v m r e t - t r o h S ) 1 ( n o i t a s n e p m o c y r a l a s e s a B s t i f e n e b n o i s n e P ) 2 ( s t i f e n e b r e h t O d e s a b - h s a c l a t o T n o i t a s n e p m o c 3 1 0 2 ) 3 ( 3 1 0 2 n i P I T L e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s E d e s a b - e r a h s l a i c e p s f o e u l a v d e t a m i t s E d n a t n e m e c a l p e r ) 3 ( 3 1 0 2 n i s t n a r g l a n o i t i d n o c . l c n i ( l a t o T ) s t n a r g d e s a b - e r a h s 3 1 0 2 (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013)(4) 1,097,346 1,336,375 247,293 232,225 2,913,239 2,859,135 – 5,772,374 Eric Elzvik (joined the EC on February 1, 2013) 779,173 779,167 238,437 228,478 2,025,255 981,672 – 3,006,927 Jean-Christophe Deslarzes (joined ABB on November 15, 2013)(5) 107,938 108,611 20,557 26,576 263,682 991,307 3,381,127 4,636,116 Diane de Saint Victor(6) 1,000,001 1,000,000 283,181 196,137 2,479,319 1,154,907 3,142,500 6,776,726 Frank Duggan(7) Greg Scheu(8) Pekka Tiitinen (joined the EC on September 15, 2013) Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin (joined the EC 666,322 731,259 676,257 742,500 322,308 634,447 2,299,334 251,428 341,149 2,066,336 206,508 760,424 770,006 206,111 766,500 770,000 965,842 969,000 55,892 230,159 270,799 287,455 49,545 518,056 363,814 2,120,897 204,648 2,015,453 239,366 2,461,663 1,246,516 910,437 881,952 801,222 910,437 585,598 – – – – – – 3,209,771 2,948,288 1,319,278 3,031,334 2,601,051 3,708,179 on December 1, 2013) 58,334 58,334 19,373 3,790 139,831 816,396 – 956,227 Total current Executive Committee members 7,143,153 7,412,855 2,226,882 2,520,175 19,303,065 12,139,579 6,523,627 37,966,271 Joe Hogan (CEO until September 15, 2013) Michel Demaré (CFO until January 31, 2013) Gary Steel (EC member until November 15, 2013) Prith Banerjee (EC member until May 31, 2013) Brice Koch (EC member 1,423,758 2,135,625 207,007 948,293 4,714,683 100,001 100,000 23,154 9,618 232,773 704,376 704,375 255,253 202,724 1,866,728 291,667 218,750 101,173 233,192 844,782 – – – – – 4,714,683 – 232,773 – 1,866,728 – 844,782 until November 30, 2013) 773,285 776,050 221,812 249,888 2,021,035 1,005,590 – 3,026,625 Total former Executive Committee members 3,293,087 3,934,800 808,399 1,643,715 9,680,001 1,005,590 – 10,685,591 Total 10,436,240 11,347,655 3,035,281 4,163,890 28,983,066 13,145,169 6,523,627 48,651,862 (1) (2) (3) (4) (5) (6) (7) (8) The table above shows accruals related to the short-term variable compensation for the year 2013 for all EC members, except for Prith Banerjee, who received, in May 2013, a pro-rata short-term variable compensation payment covering his period of service as an EC member in 2013. For all other EC members, the short-term variable compensation will be paid in 2014, after the publication of the financial results. In March 2013, the current and former EC members received the 2012 short-term variable compensation payments totaling CHF 12,641,252. Short-term variable compensation is linked to the objectives defined in the ABB Group’s scorecard. Upon full achievement of these objectives, the short-term variable compensation of the CEO corresponds to 150 percent of his base salary, while for all other EC members it represents 100 percent of their respective base salary. The Board has the discretion to approve a payout that is up to 50 percent higher (representing up to 225 percent of the base salary for the CEO and 150 percent of the base salary for other members of the EC), if the objectives are exceeded. Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. At the day of vesting (June 5, 2016) the value of the share-based awards granted under the LTIP may vary from the above numbers due to changes in ABB’s share price and the outcome of the performance (earnings per share) parameter. The LTIP is also subject to service conditions, while the other share-based awards are subject to service and/or other conditions. The above amounts have been calculated using the market value of the ABB share on the day of grant and in the case of the performance component of the LTIP, the Monte Carlo simula- tion model. The above compensation figures for Ulrich Spiesshofer represent compensation for the period January 1 to September 14, 2013, in his capacity as Head of the Discrete Automation and Motion division and thereafter for his role as Chief Executive Officer. His annual base salary as CEO is CHF 1,600,000. Jean-Christophe Deslarzes received a replacement share grant of 144,802 shares for foregone benefits with his previous employer, representing a grant date fair value of CHF 3,381,127. Of the total, 78,983 shares vest on November 15, 2016, while 65,819 shares vest on November 15, 2018. Diane de Saint Victor received a special retention share grant of 150,000 shares representing a grant date fair value of CHF 3,142,500. The shares vest on December 31, 2015. Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR at a fixed AED/EUR exchange rate for the period January to December 2013. All AED amounts were converted into Swiss francs at a rate of CHF 0.2422914 per AED. On May 16, 2013, Greg Scheu received a special bonus of CHF 168,750, which was settled in shares (7,942 shares). ABB Annual Report 2013 | Remuneration report 55 Furthermore, in 2013, certain former EC members received contractual compensation for the period after leaving the EC, as shown in the table below. The compensation included the base salary, accrued short-term variable compensation for 2013, pension benefits, as well as other benefits compris- ing mainly social security and health insurance contributions. The compensation is shown gross (i.e. before deduction of employee’s social insurance and pension contributions). Name Joe Hogan Base salary (CHF) Short-term variable compensation(1) Pension benefits Other benefits(2) 2013 Total cash-based compensation (CHF) (CHF) (CHF) (CHF) (CEO until September 15, 2013)(3) 586,253 879,375 85,239 323,314 1,874,181 Michel Demaré (CFO until January 31, 2013)(4) 1,100,006 1,100,000 255,549 428,053 2,883,608 Gary Steel (EC member until November 15, 2013)(4) 100,626 100,625 36,465 14,276 251,992 Brice Koch (EC member until November 30, 2013)(4) Total 70,551 1,857,436 70,550 2,150,550 20,174 397,427 34,447 800,090 195,722 5,205,503 (1) (2) (3) (4) The short-term variable compensation will be paid in 2014, after the publication of the financial results. Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. The above compensation figures of Joe Hogan represent compensation for the period September 16 to December 31, 2013, during which he was acting as a Senior Adviser to the ABB Board. The above compensation figures of Michel Demaré, Gary Steel and Brice Koch represent contractual compensation for the period following their departure from the EC to December 31, 2013. Details of the share-based compensation granted to members of the EC during 2013 are provided in a table of their share- holdings in section 3.2 on page 58. Consistent with past prac- tice, no loans or guarantees were granted to members of the EC in 2013. Members of the EC are eligible to participate in the Employee Share Acquisition Plan (ESAP), a savings plan based on stock options, which is open to employees around the world. Nine members of the EC participated in the 10th annual launch of the plan. EC members who participated in that launch are each entitled to acquire up to 440 ABB shares at 22.90 Swiss francs per share, the market share price at the start of that launch. In addition, to mark the 10-year anniver- sary of ESAP, for every 10 shares purchased at the end of the 10th ESAP, each participant will receive one ABB share for free. Members of the EC cannot participate in the Management Incentive Plan (MIP). Any MIP instruments – warrants, options and warrant appreciation rights (WARs) – held by EC members at December 31, 2013 (and disclosed in section 3.2 of this Remuneration report), were awarded to them as part of the compensation they received in earlier roles that they held in ABB. For a more detailed description of ESAP and MIP, please refer to “Note 18 Share-based payment arrangements” to ABB’s Consolidated Financial Statements contained in the Financial review of ABB Group section of this Annual Report. 56 Remuneration report | ABB Annual Report 2013 3. Additional information 3.1 Additional information on remuneration Additional fees and remuneration In 2013, ABB did not pay any fees or remuneration to the members of the Board or the EC for services rendered to ABB other than those disclosed above. Except as disclosed in section 7 of the Corporate governance report, ABB did not pay any additional fees or remuneration in 2013 to persons closely linked to a member of the Board or the EC for services rendered to ABB. Compensation to former members of the Board and EC Except as disclosed in this Remuneration report, ABB did not make any payments in 2013 to a former member of the Board or the EC in connection with such role. Change of control provisions Following the spirit of ABB’s remuneration philosophy, none of ABB’s Board members, EC members or members of senior management receives “golden parachutes” or other special benefits in the event of a change of control. 3.2 ABB shareholdings of members of the Board and EC The members of the Board and EC owned less than 1 per- cent of ABB’s total shares outstanding at December 31, 2013. Board ownership of ABB shares and options The table below shows the number of ABB shares held by each Board member: Name Hubertus von Grünberg Roger Agnelli Louis R. Hughes Hans Ulrich Märki Michel de Rosen Michael Treschow Jacob Wallenberg(1) Ying Yeh Total Total number of shares held Dec. 31, 2013 Dec. 31, 2012 212,725 165,533 70,425 428,176 133,870 102,782 180,158 13,843 173,370 160,672 63,928 410,192 128,595 97,506 174,882 8,909 1,307,512 1,218,054 (1) Share amounts provided in this section do not include the shares beneficially owned by Investor AB, of which Mr. Wallenberg is chairman. Except as described in this section, no member of the Board and no person closely linked to a member of the Board held any shares of ABB or options in ABB shares. EC ownership of ABB shares and options As of December 31, 2013, EC members held the following number of ABB shares (or ADSs representing such shares), the conditional rights to receive shares under the LTIP, op- tions and/or warrants (either vested or unvested as indicated) under the MIP, and unvested shares in respect of other compensation arrangements, as shown in the table opposite: ABB Annual Report 2013 | Remuneration report 57 Vested at Dec. 31, 2013 e h t r e d n u d l e h s t n a r r a w d n a s n o i t p o d e t s e v f o r e b m u N ) 1 ( I P M d l e h s e r a h s f o r e b m u n l a t o T Unvested at December 31, 2013 s n o i t p o d e t s e v n u f o r e b m u N ) 1 ( I P M e h t r e d n u d l e h s n o i t p o d e t s e v n u f o r e b m u N ) 1 ( I P M e h t r e d n u d l e h e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 1 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 2 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 3 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c r e d n u e l b a r e v i l e d s e r a h S ) 2 ( P E I A 2 1 0 2 e m i t - e n o e h t m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a l p e R ) 3 ( r e y o l p m e r e m r o f (vesting e r a h s n o i t n e t e r l a i c e p S ) 3 ( t n a r g (vesting (vesting (vesting (vesting (vesting (vesting 2016 and (vesting 2014) 2015) 2014) 2015) 2016) 2014) 2018) 2015) Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013) 148,179 – – – 31,104 67,293 78,395 72,603 Eric Elzvik (joined the EC on February 1, 2013) 23,284 201,250 221,375 287,500 – 27,071 – – – Jean-Christophe Deslarzes (joined ABB on November 15, 2013) – Diane de Saint Victor 201,707 – – Frank Duggan Greg Scheu(4) Pekka Tiitinen (joined the EC on September 15, 2013) Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin (joined the EC on 26,389 422,215 7,974 201,250 221,375 603,750 221,375 5,500 24,670 137,388 154,050 – – – – – – – – – – December 1, 2013) 1,883 Total Executive Committee members – – 26,359 21,326 – – 24,211 18,517 27,753 – – – – – – – – – 27,071 – 144,802 38,673 35,289 29,664 31,848 66,380 25,632 62,232 24,830 56,008 12,041 35,289 37,223 45,924 22,294 – 25,632 60,572 9,810 63,891 37,033 78,827 – – – – – – – – – – 150,000 – – – – – – – – 11,458 17,598 22,294 – – – as of December 31, 2013 731,024 1,428,465 664,125 287,500 160,728 318,994 331,910 460,513 144,802 150,000 (1) (2) (3) (4) Warrants and options may be sold or exercised/converted into shares at the ratio of 5 warrants/options for 1 share. The LTIP foresees delivering 30 percent of the value of the vested retention shares in cash and the Acquisition Integration Execution Plan (AIEP) foresees delivering 30 percent of the value of the vested shares in cash. However, under both plans participants have the possibility to elect to receive 100 percent of the vested award in shares. The Replacement share grant and the Special retention share grant foresee delivering 30 percent of the value of the vested shares in cash. However, under both plans participants have the possibility to elect to receive 100 percent of the vested award in shares. Total number of shares held includes 32 shares held by children. 58 Remuneration report | ABB Annual Report 2013 Furthermore, at December 31, 2013, the following members of the EC held vested WARs and conditionally granted ABB shares under the performance component of the LTIP 2013, 2012 and 2011, which at the time of vesting will be settled in cash. Except as described in this section, no member of the EC and no person closely linked to a member of the EC held any shares of ABB or options on ABB shares at December 31, 2013. Vested at Dec. 31, 2013 Unvested at December 31, 2013 s R A W d e t s e v y l l u f f o r e b m u N I P M e h t r e d n u d l e h – 434,380 – – – – – – – – Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013) Eric Elzvik (joined the EC on February 1, 2013) Jean-Christophe Deslarzes (joined ABB on November 15, 2013) Diane de Saint Victor Frank Duggan Greg Scheu Pekka Tiitinen (joined the EC on September 15, 2013) Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin (joined the EC on December 1, 2013) Total Executive Committee members 675,000 s e r a h s d e t n a r g y l l a n o i t i d n o c f o r e b m u n m u m x a M i e c n a m r o f r e p e h t r e d n u 1 1 0 2 e h t f o t n e n o p m o c P I T L e h t f o h c n u a l (vesting 2014) t n e n o p m o c e c n a m r o f r e p f o r e b m u n e c n e r e f e R e h t r e d n u s e r a h s h c n u a l 2 1 0 2 e h t f o P I T L e h t f o (vesting 2015) t n e n o p m o c e c n a m r o f r e p f o r e b m u n e c n e r e f e R e h t r e d n u s e r a h s h c n u a l 3 1 0 2 e h t f o P I T L e h t f o (vesting 2016) 15,460 22,588 – – 14,194 13,780 – – 12,516 11,965 17,933 7,639 – – 20,652 18,845 17,425 6,950 18,845 19,878 24,524 10,665 50,024 16,659 16,659 19,599 15,023 14,553 13,720 15,023 15,091 18,992 13,720 as of December 31, 2013 1,109,380 93,487 160,372 209,063 ABB Annual Report 2013 | Remuneration report 59 60 Financial review of ABB Group | ABB Annual Report 2013 Financial review of ABB Group Contents 62 Operating and financial review and prospects 62 About ABB 62 History of the ABB Group 62 Organizational structure 62 Business divisions 69 Capital expenditures 69 Supplies and raw materials 70 Management overview 72 Application of critical accounting policies 77 New accounting pronouncements 77 Research and development 77 Acquisitions 78 Exchange rates 79 Transactions with affiliates and associates 79 Orders 79 Performance measures 80 Analysis of results of operations 85 Divisional analysis 93 Restructuring 93 Liquidity and capital resources 96 Financial position 97 Cash flows 99 Disclosures about contractual obligations and commitments 99 Off balance sheet arrangements 100 Consolidated Financial Statements 106 Notes to the Consolidated Financial Statements 106 Note 1 The Company 106 Note 2 Significant accounting policies 113 Note 3 Acquisitions 116 Note 4 Cash and equivalents and marketable securities 117 Note 5 Financial instruments 121 Note 6 Fair values 123 Note 7 Receivables, net 124 Note 8 Inventories, net 124 Note 9 Other non-current assets 124 Note 10 Property, plant and equipment, net 125 Note 11 Goodwill and other intangible assets 126 Note 12 Debt 129 Note 13 Other provisions, other current liabilities 130 Note 15 Commitments and contingencies 133 Note 16 Taxes 136 Note 17 Employee benefits 141 Note 18 Share-based payment arrangements 146 Note 19 Stockholders’ equity 147 Note 20 Earnings per share 148 Note 21 Other comprehensive income 149 Note 22 Restructuring and related expenses 149 Note 23 Operating segment and geographic data 152 Note 24 Compensation 153 Report of management on internal control over financial reporting 154 Report of the Statutory Auditor on the Consolidated Financial Statements and other non-current liabilities 155 Report of the Group Auditor on internal control 129 Note 14 Leases over financial reporting ABB Annual Report 2013 | Financial review of ABB Group 61 Operating and financial review and prospects About ABB Organizational structure We are a global leader in power and automation technologies. We are committed to improving the performance and lowering the environmental impact for our industry and utility custom- ers. We provide a broad range of products, systems, solutions and services that are designed to boost industrial produc- tivity, increase power grid reliability, and enhance energy effi- ciency. Our automation businesses serve a full range of industries with process optimization, control, measurement and protection applications. Our power businesses focus on power transmission, distribution and power-plant automa- tion, and support electric, gas and water utilities, as well as industrial and commercial customers. History of the ABB Group The ABB Group was formed in 1988 through a merger be- tween Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB was a major participant in the introduction of electricity into Swedish homes and businesses and in the development of Sweden’s railway network. In the 1940s and 1950s, Asea AB expanded into the power, mining and steel industries. Brown Boveri and Cie. (later renamed BBC Brown Boveri AG) was formed in Switzerland in 1891 and initially specialized in power generation and turbines. In the early to mid-1900s, it expanded its operations throughout Europe and broadened its business operations to include a wide range of electrical engineering activities. In January 1988, Asea AB and BBC Brown Boveri AG each contributed almost all of their businesses to the newly formed ABB Asea Brown Boveri Ltd, of which they each owned 50 percent. In 1996, Asea AB was renamed ABB AB and BBC Brown Boveri AG was renamed ABB AG. In Febru- ary 1999, the ABB Group announced a group reconfiguration designed to establish a single parent holding company and a single class of shares. ABB Ltd was incorporated on March 5, 1999, under the laws of Switzerland. In June 1999, ABB Ltd became the holding company for the entire ABB Group. This was accomplished by having ABB Ltd issue shares to the shareholders of ABB AG and ABB AB, the two compa- nies that formerly owned the ABB Group. The ABB Ltd shares were exchanged for the shares of those two companies, which, as a result of the share exchange and certain related transactions, became wholly-owned subsidiaries of ABB Ltd. ABB Ltd shares are currently listed on the SIX Swiss Exchange, the NASDAQ OMX Stockholm Exchange and the New York Stock Exchange (in the form of American Depositary Shares). Our business is international in scope and we generate rev- enues in numerous currencies. We manage our business based on a divisional structure, with five divisions: Discrete Automation and Motion, Low Voltage Products, Process Automation, Power Products, and Power Systems. For a breakdown of our consolidated rev- enues (i) by operating division and (ii) derived from each geo- graphic region in which we operate, see “Analysis of results of operations – Revenues.” We operate in approximately 100 countries across four regions: Europe, the Americas, Asia, and the Middle East and Africa (MEA). We are headquartered in Zurich, Switzerland. A breakdown of our employees by geographic region is as follows: Europe The Americas Asia Middle East and Africa Total December 31, 2013 65,000 34,400 39,400 8,900 2012 64,000 34,400 38,300 9,400 2011 60,300 25,900 37,400 10,000 147,700 146,100 133,600 The proportion of our employees that are represented by labor unions or are the subject of collective bargaining agree- ments varies based on the labor practices of each country in which we operate. Business divisions Industry background Our five divisions operate across two key markets: automa- tion and power. Our divisions serve these markets through a global production, engineering and service base. The mar- kets and our divisions are discussed in more detail below. Revenue figures presented in this Business Divisions section are before interdivisional eliminations. Automation market We serve the automation market with a wide variety of prod- ucts, systems and services designed primarily to improve industrial productivity, energy efficiency and product quality in industrial and manufacturing applications. These also reflect the main demand drivers in the automation market, such as the need by our customers to reduce energy and 62 Financial review of ABB Group | ABB Annual Report 2013 raw material costs, improve product and process quality, increase process and manufacturing safety, lower their envi- ronmental impacts and improve the management of large assets such as manufacturing plants. The automation market can be divided into three sectors: – Process automation refers to measurement, control, electri- fication and other applications used in processes where the main objective is continuous production, such as in the oil and gas, power, chemicals, mining, metals, and pulp and paper industries. Product lines for this market include distributed control systems, plant electrification, instru- mentation, analytical measurement, control products and motors and drives. – Factory automation refers to discrete operations that man- ufacture individual items in applications such as material handling, picking and packing, metal fabrication, welding, painting and foundry. Typical industries where factory auto- mation is used include automotive, consumer electronics and food and beverage. Product lines for this market include robotic products, systems and services, modular manu- facturing solutions, control products and systems, as well as motors, drives and low-voltage products for control and power applications. – Building automation comprises product lines and applica- tions aimed at improving the energy efficiency of buildings through automated control of indoor climate, lighting and security. Product lines for this market include a wide range of low-voltage products. Power market We serve the power market with products, systems and ser- vices designed primarily to deliver electricity. Electricity is generated in power stations of various types, including ther- mal, wind, solar and hydro plants and is then fed into an electricity grid through which it is transmitted and distributed to consumers. Transmission systems link power generation sources to distribution systems, often over long distances. Distribution systems then branch out over shorter distances to carry electricity to end users. These electricity networks incorporate sophisticated devices to transmit electricity, con- trol and monitor the power flow and ensure efficiency, reli- ability, quality and safety. Discrete Automation and Motion division Overview The Discrete Automation and Motion division offers a wide range of products and services including drives, motors, generators, power electronics systems, rectifiers, power qual- ity and power protection products, mechanical power trans- mission of rotating equipment, traction converters, solar inverters, wind turbine converters, electric vehicle charging infrastructure, programmable logic controllers (PLCs), and industrial robots. These products help customers to improve productivity, quality, and energy efficiency, and generate energy. Key applications include energy conversion, data pro- cessing, actuation, automation, standardized manufacturing cells for applications such as machine tending, welding, cut- ting, painting, finishing, picking, packing and palletizing, and engineered systems for the automotive industry. The majority of these applications are for industrial applications including discrete manufacturing, process automation and hybrid or batch manufacturing, with others provided for infrastructure and buildings, transportation, and utilities. The division also provides a full range of life-cycle services, from product and system maintenance to system design, including energy efficiency appraisals and preventive maintenance services. Revenues are generated both from direct sales to end users as well as from indirect sales through distributors, machine builders and OEMs (original equipment manufactur- ers), system integrators, and panel builders. The Discrete Automation and Motion division had approx- imately 30,200 employees as of December 31, 2013, and generated $9.9 billion of revenues in 2013. Products and services The Discrete Automation and Motion division provides low- voltage and medium-voltage drive products and systems for industrial, commercial and residential applications. Drives provide speed, motion and torque control for equipment such as fans, pumps, compressors, conveyors, kilns, centrifuges, mixers, hoists, cranes, extruders, printing machinery and textile machines. The drives are used in the building automation, marine, power, transportation and manufacturing industries, among others. The primary demand driver in the power market is the The division also produces a range of power conversion growing need for reliable electricity supplies to support eco- nomic growth and address the global environmental chal- lenge. This is also driving increased demand for renewable energy and high-efficiency power systems and equipment. As new power sources and loads are added, there is a need for grids and power networks to become more flexible, reli- able and smarter. Power quality, stability and security of sup- ply become key priorities. Additional drivers vary by region. Capacity addition across the power value chain is the key market driver in emerging markets, mainly in Asia, the Middle East, South America and Africa. In North America, the focus is on upgrading and replacing aging infrastructure, improving grid reliability and enabling smarter power networks. In Europe, the focus is on upgrading the power infrastructure, integrating renewable energy sources such as wind power, and building interconnections to allow more efficient use of power. products. These include static excitation and synchronizing systems that provide stability for power stations, uninterrupt- ible power supply modular systems, as well as high power rectifiers that convert alternating current (AC) power to direct current (DC) power for very high-amperage applications such as furnaces in aluminum smelters. The division also man- ufactures solar inverters, wind turbine converters and con- verters for power protection, grid interconnections, and energy storage and grid stabilization. Rail traction converters and a range of solutions for the charging of electric vehicles are also part of the division’s portfolio. Discrete Automation and Motion supplies a comprehen- sive range of electrical motors and generators, including high- efficiency motors that conform to leading environmental and Minimum Energy Performance Standards (MEPS). Efficiency is an important selection criterion for customers, because electric motors account for nearly two-thirds of the electricity consumed by industrial plants. The Discrete Automation ABB Annual Report 2013 | Financial review of ABB Group 63 and Motion division manufactures synchronous motors for the most demanding applications and a full range of low- and high-voltage induction motors, for both IEC (International Electrotechnical Commission) and NEMA (National Electrical Manufacturers Association) standards. The Discrete Automation and Motion division offers robots, controllers and software systems and services for the automotive manufacturers and their sub-suppliers as well as for general manufacturing industries, to improve product quality, productivity and consistency in manufacturing pro- cesses. Robots are also used in activities or environments which may be hazardous to employee health and safety, such as repetitive lifting, dusty, hot or cold rooms, or painting booths. In the automotive industry, the robot products and systems are used in such areas as press shop, body shop, paint shop, power train assembly, trim and final assembly. General industry segments in which robotics solutions are used range from metal fabrication, foundry, plastics, food and beverage, chemicals and pharmaceuticals to consumer electronics, solar and wood. Typical general industry appli- cations include welding, material handling, painting, picking, packing and palletizing. The division also offers services that complement its products, including design and project management, engineer- ing, installation, training and life-cycle care, energy efficiency appraisals and preventive maintenance. Customers The Discrete Automation and Motion division serves a wide range of customers. Customers include machinery manu- facturers, process industries such as pulp and paper, oil and gas, and metals and mining companies, hybrid and batch manufacturers such as food and beverage companies, rail equipment manufacturers, discrete manufacturing compa- nies, utilities and renewable energy suppliers, particularly in the wind and solar sectors, as well as customers in the automotive industry. Sales and marketing Sales are made both through direct sales forces as well as through third-party channel partners, such as distributors, wholesalers, installers, machine builders and OEMs, system integrators, and panel builders. The proportion of direct sales compared to channel partner sales varies among the differ- ent industries, product technologies and geographic markets. Competition The Discrete Automation and Motion division’s principal competitors vary by product line but include Alstom, Fanuc Robotics, Kuka Robot Group, Rockwell Automation, Schneider, Siemens, Yaskawa, SMA and WEG Industries. Capital expenditures The Discrete Automation and Motion division’s capital expen- ditures for property, plant and equipment totaled $214 million in 2013, compared to $197 million and $202 million in 2012 and in 2011, respectively. Principal investments in 2013 were primarily related to equipment replacement and upgrades. Geographically, in 2013, the Americas represented 51 percent of the capital expenditures, followed by Europe (34 percent), Asia (13 percent) and MEA (2 percent). 64 Financial review of ABB Group | ABB Annual Report 2013 Low Voltage Products division Overview The Low Voltage Products division helps customers to improve productivity, save energy and increase safety. The division offers a wide range of products and systems, with related services, that provide protection, control and mea- surement for electrical installations, enclosures, switch- boards, electronics and electromechanical devices for indus- trial machines and plants. The main applications are in industry, building, infrastructure, rail and sustainable trans- portation, renewable energies and e-mobility applications. The Low Voltage Products division had approximately 31,700 employees as of December 31, 2013, and generated $7.7 billion of revenues in 2013. A majority of the division’s revenues comes from sales through distributors, wholesalers, OEMs, system integrators, and panel builders, although a portion of the division’s revenues comes from direct sales to end users and utilities. Products and services The Low Voltage Products division offering covers a wide range of products and services including low-voltage switch- gears, breakers, switches, control products, DIN-rail com- ponents, automation and distribution enclosures, wiring acces- sories and installation material for any kind of application. The division offers solutions for restoring service rapidly in case of a fault and providing optimum protection of the electrical installation and people using such installation. The product offering ranges from miniature circuit breakers to high-capacity molded-case and air circuit breakers, and includes safety switches used for power distribution in facto- ries and buildings, fuse gear systems for short circuit and overload protection as well as cabling and connection com- ponents. The Low Voltage Products division also offers terminal blocks and printed circuit board connectors used by panel builders and OEMs to produce standard distribution and control panels as well as specialized applications in industries such as traction, energy, maritime, explosive atmospheres and electronics. In addition, the division offers a range of con- tactors, soft starters, starters, proximity sensors, safety prod- ucts for industrial protection, limit switches and manual motor starters, along with electronic relays and overload relays. The division provides smart home and intelligent building control systems, also known as KNX protocol, a complete system for all energy-reducing building application areas such as lighting and shutters, heating, ventilation, cooling and security. In addition, the division’s IEC and NEMA compliant switchgear technology integrates intelligent motor and feeder control solutions to enhance protection, digital control, condition monitoring and plant-wide data access by process control systems, electrical control systems and other plant computers. The Low Voltage Products division has also developed a range of products for new markets, such as those used by electric vehicles (e-mobility) and in photovoltaic, solar and wind applications. These include circuit breakers, energy meters, switch-disconnectors, residual current-operated cir- cuit breakers, interface relays and other products designed for outdoor installation. The division also supplies a wide range of electrical com- ponents including conduits, boxes, covers, fittings, connectors, fasteners, wiring ducts, terminals, cable trays, struts, ground- ing, insulation, switchgear, metal framing, earthing & lightning protection and industrial lighting products for various types of application. Customers The Low Voltage Products division serves a wide range of customers, including residential and commercial building contractors, process industries, rail equipment manufactur- ers, manufacturing companies, utilities and renewable energy suppliers, particularly in the wind and solar sectors. Sales and marketing Sales are made both through direct sales forces as well as through third-party channel partners, such as distributors, wholesalers, installers, machine builders and OEMs, system integrators, and panel builders. The proportion of direct sales compared to channel partner sales varies among the differ- ent industries, product technologies and geographic markets. Competition The Low Voltage Products division’s principal competitors vary by product line but include Eaton Corporation, Legrand, Mitsubishi, Schneider, Siemens, Leviton and Rittal. Capital expenditures The Low Voltage Products division’s capital expenditures for property, plant and equipment totaled $204 million in 2013, compared to $208 million and $149 million in 2012 and 2011, respectively. Investments in 2013 related to investments in production capacity and productivity improvements through- out the division’s global footprint. Geographically, in 2013, Europe represented 43 percent of the capital expenditures, followed by the Americas (34 percent), Asia (22 percent) and MEA (1 percent). Process Automation division Overview The Process Automation division provides products, systems, and services for the automation and electrification of indus- trial processes. Our core industries are pulp and paper, met- als, minerals and mining, chemical, oil and gas, and marine. Each industry has unique business drivers, yet shares common requirements for operational productivity, safety, energy effi- ciency, minimal project risk and environment compliance. The division’s core competence is the application of automation and electrification technologies to solve these generic require- ments, but tailored to the characteristics of each of its core industries. The division is organized around industry and prod- uct businesses along with a specialized business focusing on performance-based outsourced maintenance contracts. The division had approximately 25,900 employees as of December 31, 2013, and generated revenues of $8.5 billion in 2013. The Process Automation division offering is made available as separately sold products or as part of a total automation system. The division’s technologies are sold both through direct sales forces and third-party channels. Products and services The Process Automation division offers standalone prod- ucts, engineered systems and services for process control and measurement, safety, plant electrification, information management, asset management and industry-specific appli- cations for a variety of industries, primarily pulp and paper, metals, minerals and mining, chemical, oil and gas, marine, pharmaceuticals and the power industry. Some of the Discrete Automation and Motion, Power Products and Low Voltage Products divisions’ products are integrated into the process control and electrification systems offered by the Process Automation division. Our automation systems are used in applications such as continuous and batch control, asset optimization, energy management and safety. They are the hubs that link instru- mentation, measurement devices and systems for control and supervision of industrial processes and enable customers to integrate their production systems with their enterprise, resource and planning systems, thereby providing a link to their ordering, billing and shipping processes. This link allows customers to manage their entire manufacturing and busi- ness process based on real-time access to plant information. Additionally, it allows customers to increase production effi- ciency, optimize their assets and reduce environmental waste. A key element of this division’s product offering is its System 800xA process automation platform. This product ex- tends the capability of traditional process control systems, introducing advanced functions such as batch management, asset optimization and field device integration which “plug in” to a common user environment. The same user interface may also be used to manage components of existing mul- tiple ABB control systems that have been installed in the mar- ket over approximately the past 25 years. In this way, System 800xA gives customers a way to migrate to new functions one step at a time, rather than having to make a large-scale capital investment to replace their entire control system. By creating a common user interface that can be used to man- age multiple systems, the System 800xA also reduces the research and development investment needed to achieve a “one size fits all” solution across our large installed systems base. The division also offers a full line of instrumentation and analytical products to actuate, measure, record and control industrial and power processes. The division’s product offerings for the pulp and paper industries include quality control systems for pulp and paper mills, control systems, drive systems, on-line sensors, actua- tors and field instruments. On-line sensors measure product properties, such as weight, thickness, color, brightness, moisture content and additive content. Actuators allow the customer to make automatic adjustments during the pro- duction process to improve the quality and consistency of the product. Field instruments measure properties of the pro- cess, such as flow rate, chemical content and temperature. We offer our customers in the metals, cement and mining industries specialized products and services, as well as total production systems. We design, plan, engineer, supply, erect ABB Annual Report 2013 | Financial review of ABB Group 65 and commission electric equipment, drives, motors and equipment for automation and supervisory control within a variety of areas including mining, mineral handling, aluminum smelting, hot and cold steel applications and cement production. In the oil and gas sector, we provide solutions for onshore and offshore production and exploration, refining, and petro- chemical processes, and oil and gas transportation and dis- tribution. In the pharmaceuticals and fine chemicals areas, we offer applications to support manufacturing, packaging, quality control and compliance with regulatory agencies. In the marine industry, we provide global shipbuilders with power and automation technologies for luxury cruise liners, ferries, tankers, offshore oil rigs and special purpose vessels. We design, engineer, build, supply and commission electrical and automation systems for marine power generation, power distribution and diesel electric propulsion, as well as turbo- chargers to improve efficiency for diesel and gasoline engines. We also offer a complete range of lifecycle services across all of our customer segments to help customers opti- mize their assets. Demand for our process automation ser- vices is increasing as our customers seek to increase produc- tivity by improving the performance of existing equipment. Customers The Process Automation division’s end customers are pri- marily companies in the oil and gas, minerals and mining, metals, pulp and paper, chemicals and pharmaceuticals and the marine industries. Customers for this division are look- ing for complete automation and electrification solutions which demonstrate value mainly in the areas of lower capital costs, increased plant availability, lower lifecycle costs and reduced project costs. Sales and marketing The Process Automation division uses a direct sales force as well as third-party channel partners, such as distributors, system integrators and OEMs. For the division as a whole, the majority of revenues are derived through the division’s own direct sales channels. Competition The Process Automation division’s principal competitors vary by industry or product line. Competitors include Emerson, Honeywell, Invensys, Metso Automation, Rockwell Automa- tion, Schneider, Siemens, Voith, and Yokogawa Electric Corporation. Capital expenditures The Process Automation division’s capital expenditures for property, plant and equipment totaled $68 million in 2013, compared to $91 million and $72 million in 2012 and 2011, respectively. Principal investments in 2013 were in factory equipment, and training and service facilities. Geographically, in 2013, Europe represented 65 percent of the capital expenditures, followed by Asia (20 percent), the Americas (12 percent) and MEA (3 percent). Power Products division Overview Our Power Products division primarily serves electric, gas and water utilities as well as industrial and commercial cus- tomers, with a vast portfolio of products and services across a wide voltage range to facilitate power generation, trans- mission and distribution. Direct sales account for a significant part of the division’s total revenues, and external channel partners, such as wholesalers, distributors and OEMs, account for the rest. Key technologies include high- and medium- voltage switchgear, circuit breakers for a range of current rat- ings and voltage levels, power, distribution, traction and other special transformers, as well as products to help control and protect electrical networks. The division had approximately 35,600 employees as of December 31, 2013, and generated $11.0 billion of revenues in 2013. Products and services Our Power Products division manufactures products that can be placed in three broad categories: high-voltage products, medium-voltage products and transformers. The division sells primarily to utilities and also through channels such as dis- tributors, wholesalers, installers and OEMs. Some of the divi- sion’s products are also integrated into the turnkey offerings of systems divisions such as Power Systems and Process Automation or sold through engineering, procurement and construction (EPC) firms. The high-voltage products business supplies high-voltage equipment, ranging from 50 to 1,200 kilovolts, mainly to power transmission utilities and also serves industrial customers. This equipment primarily enables the transmission grid to operate more reliably and efficiently with minimum environ- mental impact. As part of its portfolio, this business designs and manufactures a range of air-, gas-insulated and hybrid switchgear, generator circuit breakers, capacitors, high-voltage circuit breakers, surge arresters, instrument transformers, cable accessories and a variety of high-voltage components. This is supported by a range of service solutions to support the products throughout their life cycle. The medium-voltage business offers products and ser- vices that largely serve the power distribution sector, often serving as the link between high-voltage transmission systems and lower voltage users. Medium-voltage products help utility and industrial customers to improve power quality and con- trol, reduce outage time and enhance operational reliability and efficiency. This business reaches customers directly and through channels such as distributors and OEMs. Its com- prehensive offering includes medium-voltage equipment (1 to 50 kilovolts), indoor and outdoor circuit breakers, reclosers, fuses, contactors, relays, instrument transformers, sensors, motor control centers, ring main units for primary and sec- ondary distribution, as well as a range of air- and gas-insulated switchgear. It also produces indoor and outdoor modular systems and other solutions to facilitate efficient and reliable power distribution. The transformers business of the division designs and manufactures power transformers (72.5 to 1,200 kilovolts) for utility and industrial customers that help to step up or step down voltage levels and include special applications such as high voltage direct current (HVDC) transformers or phase 66 Financial review of ABB Group | ABB Annual Report 2013 shifters. This business also supplies transformer components and insulation material, such as bushings and tap changers. It also manufactures a wide range of distribution transformers (up to 72.5 kilovolts) for use in the power distribution sector, industrial facilities and commercial buildings. These transform- ers are designed to step down electrical voltage bringing it to consumption levels. They can be oil- or dry-type and, although oil-type transformers are more commonly used, demand for dry-type transformers is growing because they minimize fire hazards and are well-suited for applications such as office buildings, windmills, offshore drilling platforms, marine vessels and large industrial plants. Another part of the offering includes traction transformers for use in electric locomotives, special application transformers, as well as a wide range of service and retrofit solutions for utilities and industry customers. Customers The Power Products division serves electric utilities, owners and operators of power generating plants and power trans- mission and distribution networks. It also serves industries across the spectrum. Customers include electric, gas, water and other utilities, as well as industrial and commercial customers. Sales and marketing The Power Products division sells its products individually and as part of wider solutions through our systems divisions. Direct sales account for a significant part of the division’s business and the rest are sold through external channel part- ners, such as wholesalers, distributors, system integrators, EPCs and OEMs. As the Power Products and Power Systems divisions share many of the same customers and technolo- gies and are influenced by similar market drivers, they also have a common front-end sales organization to maximize market synergies and coverage across countries, regions, and sectors for the entire power portfolio. Competition On a global basis, the main competitors for the Power Prod- ucts division are Siemens, Alstom and Schneider Electric. The division also faces global competition in some product categories from competitors in emerging markets. It also competes in specific geographies with companies such as Eaton Corporation, Hyundai, Hyosung, Crompton Greaves, Larsen & Toubro and Bharat Heavy Electricals. Capital expenditure The Power Products division’s capital expenditures for property, plant and equipment totaled $252 million in 2013, compared to $259 million and $192 million in 2012 and 2011, respectively. Principal investments in 2013 related to upgrades and expansion of existing facilities in Sweden, China, United States, Germany, and India as well as new fac- tories in China, India, Bulgaria and Poland. Geographically, in 2013, Europe represented 54 percent of the division’s cap- ital expenditures, followed by Asia (23 percent), the Americas (20 percent), and MEA (3 percent). Power Systems division Overview Our Power Systems division serves utilities, as well as indus- trial and commercial customers with system solutions and services for the generation, transmission and distribution of electricity. Turnkey solutions include power plant electrifi- cation and automation, bulk power transmission, substations and network management. The division had approximately 20,300 employees as of December 31, 2013, and generated $8.4 billion of revenues in 2013. Products and services Our Power Systems division delivers solutions through four businesses: Power Generation, Grid Systems, Substations and Network Management. The scope of work in a typical turnkey contract includes design, system engineering, supply, instal- lation, commissioning and testing of the system. As part of the business model, the Power Systems division integrates prod- ucts from both the Power Products division and external sup- pliers, adding value through design, engineering and project management to deliver turnkey solutions. Our Power Generation business is a leading provider of integrated power and automation solutions for all types of power generation plants, including coal, gas, combined-cycle, nuclear, waste-to-energy and a range of renewables includ- ing hydro, solar, wind and biomass. With an extensive offering that includes electrical balance of plant and instrumentation and control systems, ABB technologies help optimize perfor- mance, improve reliability, enhance efficiency and minimize environmental impact throughout the plant life cycle. The busi- ness also serves the water industry, including applications such as pumping stations and desalination plants. As part of the Grid Systems business, ABB provides a comprehensive offering of AC and DC transmission systems, which help customers to reduce transmission losses, maxi- mize efficiency and improve grid reliability. ABB pioneered HVDC technology nearly 60 years ago. HVDC technology is designed to reliably and efficiently transmit electrical power over long distances via overhead lines and underground or submarine cables with minimum losses. HVDC is also widely used for grid interconnections. HVDC Light®, a more com- pact form of ABB’s classic HVDC technology, is ideal for link- ing offshore installations, such as wind farms or oil and gas platforms, to mainland grids and for interconnections, often via subsea links. It is used to transmit electricity. The envi- ronmental benefits of HVDC Light®, include neutral electromag- netic fields, oil-free cables and compact converter stations. ABB also offers a comprehensive range of land and sub- marine cables through its Grid Systems business, as well as accessories and services for a range of applications from medium- to high-voltage AC and DC systems. The portfolio includes high-performance XLPE (cross-linked polyethylene) insulated cables for high efficiency transmission systems at voltages up to 320 kilovolts. When it comes to transmission grid solutions, ABB manufactures its own power semicon- ductors, which is a key enabler for HVDC, flexible alternating current transmission systems (FACTS) and other technolo- gies, serving a range of sectors including transportation and wind. ABB Annual Report 2013 | Financial review of ABB Group 67 the gap between information technologies (IT) and operational technologies (OT), enabling clients to make faster, better- informed decisions in both daily operations and long-term planning strategies. Some of the world’s largest private and public enterprises rely on Ventyx solutions to minimize risk, enhance operational and financial performance, and execute the right strategies for the future. In addition, the Power Systems division offers a range of services aimed at optimizing operations and reducing mainte- nance requirements of customers, across the value chain. These services range from support agreements and retrofits to spare parts, service and training. The division also under- takes consulting activities such as energy efficiency studies for power plants and grids, analyses and design of new transmission and distribution systems as well as asset opti- mization based on technical, economic and environmental considerations. Customers The Power Systems division’s principal customers include power generation utilities and companies, transmission and distribution utilities, owners and operators as well as indus- trial and commercial customers. Other customers include gas and water utilities including multi-utilities, which are involved in the transmission or distribution of more than one commodity. Sales and marketing The Power Systems division promotes its offering primarily through a direct sales force of specialized sales engineering teams. Some sales are also handled through third-party channels, such as EPC firms, OEMs and system integrators. As the Power Products and Power Systems divisions share many of the same customers and technologies and are influ- enced by similar market drivers, they also have a common front-end sales organization that helps maximize market syn- ergies across countries and regions. Competition On a global basis, the Power Systems division faces compe- tition mainly from Siemens and Alstom. Emerson, General Electric, Prysmian and Nexans are additional competitors in parts of the business. The division also sees emerging competitors in specific regions. Capital expenditure The Power Systems division’s capital expenditures for prop- erty, plant and equipment totaled $101 million in 2013, compared to $194 million and $136 million in 2012 and 2011, respectively. Principal investments in 2013 were related to capacity expansion as well as the replacement of existing equipment, particularly in Sweden and in Switzerland. Geo- graphically, in 2013, Europe represented 77 percent of the capital expenditures, followed by the Americas (14 percent), Asia (7 percent) and MEA (2 percent). Substations are key installations in the power grid that facilitate the efficient transmission and distribution of electric- ity with minimal environmental impact. They perform the vital function of monitoring and controlling power flows, feeding power from generating stations into the grid and providing the link between transmission and distribution networks as well as end consumers. ABB has successfully delivered air- and gas-insulated substations in all kinds of environments, from deserts and mountains to offshore rigs and crowded city centers. ABB’s substation automation offering is compliant with IEC 61850, the open communication standard, which provides a common framework for substation control and pro- tection and facilitates interoperability across devices and systems. ABB’s substation offering covers a range of voltage levels up to 1,100 kilovolts, serving utility, industry and com- mercial customers as well as sectors such as railways, urban transportation and renewables. FACTS technologies are also part of the Substations busi- ness offering. FACTS solutions help improve power quality and can significantly increase the capacity of existing AC trans- mission systems – by as much as 50 percent – while main- taining and improving system reliability. FACTS technologies also boost transmission efficiency, relieve bottlenecks and can be used for the safe integration of intermittent power sources, such as wind and solar, into the grid. By enhancing the capacity of existing transmission infrastructure, FACTS solutions can alleviate the need for capital investment, reduc- ing the time, cost and environmental impact associated with the construction of new generating facilities and transmission lines. By improving efficiency, FACTS technologies help to deliver more power to consumers, reducing the need for more electricity generation, and improving power supply and qual- ity. ABB is a global leader in the growing field of FACTS, and has delivered more than 800 such installations across the world. ABB’s Network Management business offers solutions to help manage power networks. The offering covers network management and utility communications solutions to monitor, control, operate and protect power systems. These solutions are designed to ensure the reliability of electricity supplies and enable real-time management of power plants, transmis- sion grids, distribution networks and energy trading markets. The portfolio includes control and protection systems for power generation, transmission and distribution, supervisory control and data acquisition (SCADA) systems, as well as software solutions for central electricity markets and mixed utilities (electricity, district heating, gas and water). The port- folio also covers wireless and fixed communication systems for power, water and gas utilities. It includes fiber optics, microwave radio and power line applications for data network- ing and broadband network management, as well as tele- protection and substation communication networks and voice switching management systems. Network management systems are key smart-grid enablers by providing automated power systems to incorporate and manage centralized and distributed power generation, inter- mittent sources of renewable energy, real-time pricing and load-management data. The Ventyx and Mincom acquisitions have made ABB a global leader in enterprise software and services for essential industries such as energy, mining, pub- lic infrastructure and transportation. These solutions bridge 68 Financial review of ABB Group | ABB Annual Report 2013 At December 31, 2013 and 2012, construction in prog- ress for property, plant and equipment was $645 million and $627 million, respectively, mainly in Sweden, the United States, Switzerland, Germany and Brazil, while at December 31, 2011, it was $548 million, mainly in Sweden, Switzerland, the United States, Brazil and China. Our capital expenditures relate primarily to property, plant and equipment. For 2014, we plan to increase our capital expenditures and estimate the expenditures for property, plant and equipment will be higher than our annual depreciation charge. We anticipate investments will be higher in the Amer- icas and Asia but will decrease in Europe. Supplies and raw materials We purchase a variety of raw materials and products which contain raw materials for use in our production and project execution processes. The primary materials used in our products, by weight, are copper, aluminum, carbon steel, mineral oil and various plastics. We also purchase a wide variety of fabricated products and electronic components. We operate a worldwide supply chain management network with employees dedicated to this function in our businesses and key countries. Our supply chain management network consists of a number of teams, each focusing on different product categories. These category teams, on global, divi- sional and/or regional level, take advantage of opportunities to leverage the scale of ABB and to optimize the efficiency of our supply networks, in a sustainable manner. Our supply chain management organization’s activities have continued to expand in recent years, to: – pool and leverage procurement of materials and services, – provide transparency of ABB’s global spending through a comprehensive performance and reporting system linked to all of our enterprise resource planning (ERP) systems, – strengthen ABB’s supply chain network by implementing an effective product category management structure and extensive competency-based training, and – monitor and develop our supply base to ensure sustainabil- ity, both in terms of materials and processes used. We buy many categories of products which contain steel, copper, aluminum, crude oil and other commodities. Continu- ing global economic growth in many emerging economies, coupled with the volatility in foreign currency exchange rates, has led to significant fluctuations in these raw material costs over the last few years. While we expect global commodity prices to remain highly volatile, some market volatility will be offset through the use of long-term contracts and global sourcing. Corporate and Other Corporate and Other includes headquarters, central research and development, our real estate activities, Group treasury operations and other minor business activities. Corporate headquarters and stewardship activities include the operations of our corporate headquarters in Zurich, Switzerland, as well as corresponding subsidiary operations in various countries. These activities cover staff functions with group-wide responsibilities, such as accounting and finan- cial reporting, corporate finance and taxes, planning and controlling, internal audit, legal affairs and compliance, risk management and insurance, corporate communications, information systems, investor relations and human resources. Corporate research and development primarily covers our research activities, as our development activities are orga- nized under the five business divisions. We have two global research laboratories, one focused on power technologies and the other focused on automation technologies, which both work on technologies relevant to the future of our five business divisions. Each laboratory works on new and emerging tech- nologies and collaborates with universities and other external partners to support our divisions in advancing relevant tech- nologies and in developing cross-divisional technology platforms. We have corporate research operations in eight countries (United States, Sweden, Switzerland, Poland, China, Germany, Norway and India). Corporate and Other had approximately 4,000 employ- ees at December 31, 2013. Capital expenditures Total capital expenditures for property, plant and equipment and intangible assets (excluding intangibles acquired through business combinations) amounted to $1,106 million, $1,293 million and $1,021 million in 2013, 2012 and 2011, respectively. In 2013 capital expenditures were 16 percent lower than depreciation and amortization, while in 2012 and 2011, capital expenditures exceeded total depreciation and amortization expenses for the respective year. This change is due partly to a reduction in capital expenditures but also to an increase in amortization expense from intan- gible assets acquired in business combinations. Capital expenditures in 2013 remained at a significant level in mature markets, reflecting the geographic distribu- tion of our existing production facilities. Capital expenditures in Europe and North America in 2013 were driven primarily by upgrades and maintenance of existing production facilities, mainly in the United States, Sweden, Switzerland and Ger- many, as well as new facilities in Sweden and the United States. Capital expenditures in emerging markets were reduced in 2013 compared to 2012, with expenditures, mainly for new facilities, being highest in China, Poland, Brazil and Bulgaria. Capital expenditures in emerging markets were made to increase production capacity by investment in new or ex- panded facilities. The share of emerging markets capital expenditures as a percentage of total capital expenditures in 2013, 2012 and 2011 was 33 percent, 31 percent and 34 percent, respectively. ABB Annual Report 2013 | Financial review of ABB Group 69 We seek to mitigate the majority of our exposure to com- modity price risk by entering into hedges. For example, we manage copper and aluminum price risk using principally swap contracts based on prices for these commodities quoted on leading exchanges. ABB’s hedging policy is designed to safeguard margins by minimizing price volatility and providing a stable cost base during order execution. In addition to using hedging to reduce our exposure to fluctuations in raw materials prices, in some cases we can reduce this risk by incorporating changes in raw materials prices into the prices of our products (through price escalation clauses). Overall, during 2013 supply chain management person- nel in our businesses, and in the countries in which we operate, along with the global category teams, continued to focus on value chain optimization efforts in all areas, while maintaining and improving quality and delivery performance. In August 2012, the United States Securities and Ex- change Commission (SEC) issued its final rules regarding “Conflict Minerals”, as required by section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We have initiated processes, including working with our suppliers, to enable us to comply with these rules, and to assist our customers regarding their disclosure obligations, as required by these “Conflict Minerals” rules. Further information on ABB’s Conflict Minerals policy and supplier requirements can be found under “Material Compliance” at www.abb.com/about/supplying Management overview During 2013, we continued to deliver power and automation solutions that help our customers meet the challenges of a rapidly-changing world. Foremost among these are climate change and the need to use electrical energy more efficiently and with less impact on the environment. We addressed the challenges in several ways, as described below. One is a long-term commitment to technology leadership in areas such as high-efficiency power transmission; auto- mation and control systems to manage complex industrial pro- cesses using less energy; and technologies to capture the full potential of renewable energies, such as wind and solar power. In 2013, for example, we launched Emax 2, the first low-voltage circuit breaker with integrated energy management functions. Replacing existing traditional breakers with the Emax 2 breaker has the potential to achieve annual electricity savings equivalent to the consumption of 1.4 million Euro- pean Union households per year, corresponding to a 4-million- ton reduction in CO2 emissions. We also entered a five-year joint industry program with the Norwegian oil and gas com- pany, Statoil, to develop transmission, distribution and power- conversion systems for subsea oil and gas installations at depths of up to 3,000 meters. Subsea pumping and gas compression contribute to improved utilization of oil and gas resources through greater recovery rates and reduced pro- duction costs. We won an order in April 2013 to provide the world’s largest-ever mine hoist system, including a new gen- eration of mine hoist braking technology, for a potash project in Canada by Australia-based mining company BHP Billiton. We also delivered the 262-kilometer East West Interconnec- tor to EirGrid, the Irish transmission system operator. The 500-megawatt transmission connection is the highest capac- ity link of its kind to go into commercial operation. The inter- connector enables cross-border power flows, enhances grid reliability, and allows Ireland to export surplus wind-generated electricity to the United Kingdom. In May 2013, we announced the development of a new technology to power the world’s first high-capacity flash charging electric bus system in Geneva, Switzerland. The ultrafast-charging system, with no overhead lines, enables new opportunities for next generation silent, flexible, zero-emission urban mass transportation. ABB was also recognized in February 2013 by the Massachusetts Insti- tute of Technology (MIT) Technology Review for the hybrid HVDC breaker developed in 2012, placing it among the ten most important technology milestones of the past year. A second way is our development and manufacturing presence in more than 100 countries around the world. This allows us to meet the needs of our customers faster and with solutions that are better suited to their local requirements. It positions us to benefit from the rapid growth expected in the emerging markets in the coming years while also support- ing our large and important markets in the world’s mature economies. In 2013, we took further actions to adjust our geo- graphic and portfolio balance, such as the acquisition in September 2013 of Turkey-based ELBI Elektrik to improve our position in the Turkish low-voltage products segment and to expand our existing business in Eastern Europe. We also invested $50 million in new high-voltage switchgear and distri- bution transformer factories in India and established a joint venture in China to design, manufacture and service high-volt- age instrument transformers. Furthermore, our geographic scope provides us with access to a large pool of talented and highly qualified people from very diverse cultural and busi- ness backgrounds – a key competitive advantage. In 2013, we generated approximately 46 percent of our revenues from emerging markets. A third way is our ability to combine both power and automation technologies into packaged solutions that meet the needs of new growth sectors – such as renewable power generation and electrically powered automobiles – as well as traditional markets, such as marine. For example, in 2013 we expanded our position in the global solar inverter market through the acquisition of U.S.-based Power-One Inc. (Power- One), aimed at creating the global leader in the most attrac- tive and “intelligent” part of the photovoltaic (PV) value chain. We also announced plans to begin production of solar invert- ers in South Africa to support the rapidly growing local PV market, adding to our existing capacities in Estonia, India and China. In addition, we were selected by Fastned to supply chargers to more than 200 electric vehicle fast-charging sta- tions in the Netherlands, bringing an electric vehicle fast charger – capable of charging electric vehicles in 15–30 min- utes – within 50 kilometers of all of the country’s 17 million inhabitants. We also launched the world’s first nationwide fast- charging network for electric vehicles in Estonia, using 165 web-connected DC fast chargers and in 2014, we announced a strategic collaboration with Shenzhen BYD Daimler New Technology to supply high-power DC chargers in China over the next six years for DENZA. In the marine industry, we delivered to a Norwegian ship owner our first Onboard DC Grid solution, a highly efficient power distribution, automation 70 Financial review of ABB Group | ABB Annual Report 2013 and electric propulsion system that reduces fuel consump- tion and emissions by up to 20 percent and the space needed onboard for electrical equipment by up to 30 percent. Economic uncertainties continued in 2013 in areas such as sovereign debt levels in Europe and the United States and the pace of economic recovery in various markets. As a result, some of our customers postponed the award of large infrastructure projects, mainly in the utility, mining and metals sectors, which was reflected in lower orders in our power divisions as well as our Process Automation division and, as a result, lower total orders in 2013. However, the broad scope of our business portfolio helped us mitigate some of these developments and we were able to take advantage of areas of growth. For example, our larger exposure to the North American automation market, through the acquisitions of Baldor Electric in 2011 and Thomas & Betts in 2012, allowed us to increase both orders and sales in our Discrete Automation and Motion, and Low Voltage Products divisions. The Process Automation division continued to benefit from investments in the oil and gas sector but experienced some order declines in the mining sector, where our customers have been reducing their capital expenditures in response to low commodity prices and overcapacity. In 2013, we main- tained the profitability of our Power Products division despite the continued challenging market environment through suc- cessful cost savings and productivity improvements as well as our ability to be more selective in the orders we take, thanks to our broad product and geographic scope. Our Power Sys- tems division experienced weather-related delays in the execution of certain offshore wind projects in December 2013 and some operational issues that affected profitability. Our new management team in the division began to take actions in the fourth quarter to address these issues, largely based on accelerating the repositioning of the division – first announced at the end of 2012 – to focus on higher-margin products, systems, services and software activities. Our strong positions in fast-growing emerging markets and selected mature markets, our flexible global production base and tech- nological leadership, as well as the operational improvements we continue to make in our businesses, also supported our business in 2013. Foremost among these improvements was the successful reduction of costs to adapt to changing demand. Savings in 2013 amounted to more than $1 billion and were principally achieved by making better use of global sourcing opportu- nities and eliminating operational and process inefficiencies. Strategy 2011–2015 In November 2011, we announced an updated strategy for the period 2011 to 2015, along with financial targets to mea- sure our success in achieving them. The strategy is based on five priorities: – Drive competitiveness in our current markets by develop- ing, producing, sourcing and selling to better match market needs, thereby profitably growing the business while increasing productivity and quality. – Capitalize on megatrends, such as the growing need for re- source and energy efficiency, increasing urbanization, elec- trification, digitization and growth in emerging economies. – Expand our core businesses to secure the next level of growth, for example, growing the service business by tap- ping opportunities in our installed base and by building the software business for our core power and automation customers. – Execute a disciplined approach to value-creating acquisi- tions that close key gaps across product, end market and geographic lines. – Find and exploit disruptive opportunities, such as the application of direct current electricity solutions to improve power efficiency and performance compared to conven- tional alternating current technologies. Furthermore, in 2011, we introduced a new target measure of cash return on invested capital (CROI) that we believe pro- vides a more accurate reflection of our operational perfor- mance by focusing on cash returns, which are less prone to non-operational accounting adjustments that may be applied to income from operations from time to time. CROI is defined as the total of net cash provided by operating activities and interest paid, as a percentage of capital invested. Capital invested is defined as the total of fixed assets (property, plant and equipment, goodwill, intangibles, and investments in equity-accounted companies) before accumulated depreciation and amortization plus net working capital less deferred tax liabilities recognized in certain acquisitions. In September 2013, Ulrich Spiesshofer assumed the role of CEO for the ABB Group and affirmed his intention to maintain continuity in the execution of the 2011-15 strategy. At the same time, he highlighted opportunities to improve the per- formance of the company in the areas of: – profitable growth through a combination of improved pene- tration of existing markets, innovation in technology and ways of going to market, and expansion into attractive markets through both organic growth and by continuing to fill gaps in the business portfolio through bolt-on acquisitions, – business-led collaboration across our business segments to create more customer value by delivering our combined automation and power portfolio, and – relentless execution to drive sustainable cost savings, cash flow and capital efficiency and to ensure successful integra- tions of our acquisitions to maximize the return on invest- ment. In February 2014, we announced that we are entering a new strategic planning phase and will communicate the out- come and new long-term targets to drive earnings per share and CROI at our Capital Markets Day in September 2014. Outlook The long-term demand outlook for our businesses remains clearly positive. The need for efficient and reliable electricity transmission and distribution will continue to increase, driven by factors such as: accelerating urbanization in emerging markets; actions to address global warming; the rapidly increasing power needs from digitization; and the refurbish- ment of aging power grids. At the same time, demand for industrial automation solutions will grow as customers strive ABB Annual Report 2013 | Financial review of ABB Group 71 to improve productivity, efficiency, product quality, and safety. ABB is well positioned to tap these opportunities for long-term profitable growth with its strong market presence, broad geographic and business scope, technology leader- ship and financial strength. In the short term, there are some positive early-cycle macroeconomic signs, such as strengthening growth in the U.S. and the more encouraging growth in many parts of Europe. However, there are also some uncertainties related to the impacts of quantitative easing and the speed and strength of economic development in the emerging markets, especially China. In this market environment, ABB’s management team aims to systematically drive profitable organic growth through increased market penetration, generating more revenues from our pipeline of new product innovations, and expanding into new attractive market segments. In addition, manage- ment intends to accelerate business-led collaboration, such as further developing the service business, driving the suc- cessful integration of acquired businesses and increasing ABB’s productivity by focusing internal support activities on the needs of customers. A third priority is relentless exe- cution, especially in the areas of cost savings, cash flow gen- eration and returning the Power Systems division to higher and more consistent returns. Application of critical accounting policies General We prepare our Consolidated Financial Statements in accor- dance with U.S. GAAP and present these in United States dollars unless otherwise stated. The preparation of our financial statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including, but not limited to, those related to: costs expected to be incurred to complete projects; costs of product guarantees and war- ranties; provisions for bad debts; recoverability of inventories, investments, fixed assets, goodwill and other intangible assets; the fair values of assets and liabilities assumed in business combinations; income tax related expenses and accruals; provisions for restructuring; gross profit margins on long-term construction-type contracts; pensions and other postretirement benefit assumptions and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be rea- sonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates and assumptions. is made and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. We also deem an accounting policy to be critical when the application of such policy is essential to our ongoing operations. We believe the following critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently un- certain. These policies should be considered when reading our Consolidated Financial Statements. Revenue recognition We generally recognize revenues for the sale of goods when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. With regards to the sale of products, delivery is not considered to have occurred, and therefore no revenues are recognized, until the customer has taken title to the products and assumed the risks and rewards of own- ership of the products specified in the purchase order or sales agreement. Generally, the transfer of title and risks and rewards of ownership are governed by the contractually- defined shipping terms. We use various International Commer- cial shipping terms (as promulgated by the International Chamber of Commerce) such as Ex Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP). Subsequent to delivery of the products, we generally have no further contractual per- formance obligations that would preclude revenue recognition. Revenues under long-term construction-type contracts are generally recognized using the percentage-of-completion method of accounting. We principally use the cost-to-cost method to measure progress towards completion on contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to management’s best esti- mate of total estimated costs, which are reviewed and updated routinely for contracts in progress. The cumulative effect of any change in estimate is recorded in the period in which the change in estimate is determined. The percentage-of-completion method of accounting involves the use of assumptions and projections, principally relating to future material, labor and project-related overhead costs. As a consequence, there is a risk that total contract costs will exceed those we originally estimated and the margin will decrease or the long-term construction-type contract may become unprofitable. This risk increases if the duration of a contract increases because there is a higher probability that the circumstances upon which we originally developed estimates will change, resulting in increased costs that we may not recover. Factors that could cause costs to increase include: – unanticipated technical problems with equipment supplied or developed by us which may require us to incur addi- tional costs to remedy, – changes in the cost of components, materials or labor, – difficulties in obtaining required governmental permits or We deem an accounting policy to be critical if it requires approvals, an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate – project modifications creating unanticipated costs, – suppliers’ or subcontractors’ failure to perform, 72 Financial review of ABB Group | ABB Annual Report 2013 – penalties incurred as a result of not completing portions of the project in accordance with agreed-upon time limits, and as revenue over the life of the contract or upon delivery of the undelivered element. – delays caused by unexpected conditions or events. We offer multiple element arrangements to meet our cus- Changes in our initial assumptions, which we review on a regular basis between balance sheet dates, may result in revisions to estimated costs, current earnings and antici- pated earnings. We recognize these changes in the period in which the changes in estimates are determined. By recogniz- ing changes in estimates cumulatively, recorded revenue and costs to date reflect the current estimates of the stage of completion of each project. Additionally, losses on long-term contracts are recognized in the period when they are iden- tified and are based upon the anticipated excess of contract costs over the related contract revenues. Short-term construction-type contracts, or long-term construction-type contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates difficult, are accounted for under the completed- contract method. Revenues under the completed-contract method are recognized upon substantial completion – that is: acceptance by the customer, compliance with performance specifications demonstrated in a factory acceptance test or similar event. For non construction-type contracts that contain customer acceptance provisions, revenue is deferred until customer acceptance occurs or we have demonstrated the customer- specified objective criteria have been met or the contractual acceptance period has lapsed. Revenues from service transactions are recognized as services are performed. For long-term service contracts, revenues are recognized on a straight-line basis over the term of the contract or, if the performance pattern is other than straight-line, as the services are provided. Service revenues reflect revenues earned from our activities in providing ser- vices to customers primarily subsequent to the sale and deliv- ery of a product or complete system. Such revenues consist of maintenance-type contracts, field service activities that include personnel and accompanying spare parts, and instal- lation and commissioning of products as a stand-alone ser- vice or as part of a service contract. Revenues for software license fees are recognized when persuasive evidence of a non-cancelable license agreement exists, delivery has occurred, the license fee is fixed or deter- minable, and collection is probable. In software arrange- ments that include rights to multiple software products and/ or services, the total arrangement fee is allocated using the residual method, under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence (VSOE) of fair value of such undelivered elements and the residual amounts of revenue are allocated to the delivered elements. Elements included in multiple element arrangements may consist of software licenses, maintenance (which includes customer support services and unspecified upgrades), hosting, and consulting services. VSOE is based on the price generally charged when an element is sold sepa- rately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change once the element is sold separately. If VSOE does not exist for an unde- livered element, the total arrangement fee will be recognized tomers’ needs. These arrangements may involve the delivery of multiple products and/or performance of services (such as installation and training) and the delivery and/or performance may occur at different points in time or over different periods of time. Deliverables of such multiple element arrangements are evaluated to determine the unit of accounting and if certain criteria are met, we allocate revenues to each unit of accounting based on its relative selling price. A hierarchy of selling prices is used to determine the selling price of each specific deliverable that includes VSOE (if available), third- party evidence (if VSOE is not available), or estimated selling price if neither of the first two is available. The estimated selling price reflects our best estimate of what the selling prices of elements would be if the elements were sold on a stand-alone basis. Revenue is allocated between the ele- ments of an arrangement consideration at the inception of the arrangement. Such arrangements generally include industry-specific performance and termination provisions, such as in the event of substantial delays or non-delivery. Revenues are reported net of customer rebates and simi- lar incentives. Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between us and our customers, such as sales, use, value- added and some excise taxes, are excluded from revenues. These revenue recognition methods require the collect- ability of the revenues recognized to be reasonably assured. When recording the respective accounts receivable, allow- ances are calculated to estimate those receivables that will not be collected. These reserves assume a level of default based on historical information, as well as knowledge about specific invoices and customers. The risk remains that actual defaults will vary in number and amount from those originally estimated. As such, the amount of revenues recognized might exceed or fall below the amount which will be collected, resulting in a change in earnings in the future. The risk of deterioration is likely to increase during periods of significant negative industry, economic or political trends. As a result of the above policies, judgment in the selection and application of revenue recognition methods must be made. Contingencies As more fully described in “Note 15 Commitments and con- tingencies” to our Consolidated Financial Statements, we are subject to proceedings, litigation or threatened litigation and other claims and inquiries related to environmental, labor, product, regulatory, tax (other than income tax) and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution. ABB Annual Report 2013 | Financial review of ABB Group 73 We record provisions for our contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally rec- ognized on an undiscounted basis using our best estimate of the amount of loss or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, we may be able to recover a portion of the costs relat- ing to these obligations from insurers or other third parties; however, we record such amounts only when it is probable that they will be collected. We provide for anticipated costs for warranties when we recognize revenues on the related products or contracts. Warranty costs include calculated costs arising from imper- fections in design, material and workmanship in our products. We generally make individual assessments on contracts with risks resulting from order-specific conditions or guaran- tees and assessments on an overall, statistical basis for similar products sold in larger quantities. There is a risk that actual warranty costs may exceed the amounts provided for, which would result in a deterioration of earnings in the future when these actual costs are determined. We may have legal obligations to perform environmental clean-up activities related to land and buildings as a result of the normal operations of our business. In some cases, the timing or the method of settlement, or both are conditional upon a future event that may or may not be within our control, but the underlying obligation itself is unconditional and cer- tain. We recognize a provision for these obligations when it is probable that a liability for the clean-up activity has been incurred and a reasonable estimate of its fair value can be made. The provision is initially recognized at fair value, and subsequently adjusted for accrued interest and changes in estimates. In some cases, we may be able to recover a por- tion of the costs expected to be incurred to settle these mat- ters. An asset is recorded when it is probable that we will collect such amounts. Provisions for environmental obligations are not discounted to their present value when the timing of payments cannot be reasonably estimated. Pension and other postretirement benefits plan. Otherwise, the actuarial gain or loss is not recognized in the Consolidated Income Statements. We use actuarial valuations to determine our pension and postretirement benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates, mortality rates and expected return on plan assets. Under U.S. GAAP, we are required to consider current market conditions in making these assumptions. In particular, the discount rates are reviewed annually based on changes in long-term, highly-rated corporate bond yields. Decreases in the discount rates result in an increase in the PBO and in pension costs. Conversely, an increase in the discount rates results in a decrease in the PBO and in pension costs. The mortality assumptions are reviewed annually by management. Decreases in mortality rates result in an increase in the PBO and in pension costs. Conversely, an increase in mortality rates results in a decrease in the PBO and in pension costs. Holding all other assumptions constant, a 0.25 percent- age-point decrease in the discount rate would have increased the PBO related to our defined benefit pension plans by $413 million, while a 0.25 percentage-point increase in the discount rate would have decreased the PBO related to our defined benefit pension plans by $372 million. The expected return on plan assets is reviewed regularly and considered for adjustment annually based on current and expected asset allocations and represents the long-term return expected to be achieved. Decreases in the expected return on plan assets result in an increase to pension costs. An increase or decrease of 0.25 percentage-points in the expected long-term rate of asset return would have decreased or increased, respectively, the net periodic benefit cost in 2013 by $25 million. The funded status, which can increase or decrease based on the performance of the financial markets or changes in our assumptions, does not represent a mandatory short-term cash obligation. Instead, the funded status of a defined ben- efit pension plan is the difference between the PBO and the fair value of the plan assets. At December 31, 2013, our defined benefit pension plans were $1,133 million underfunded com- pared to an underfunding of $1,781 million at December 31, 2012. Our other postretirement plans were underfunded by $236 million and $281 million at December 31, 2013 and 2012, respectively. As more fully described in “Note 17 Employee benefits” to our Consolidated Financial Statements, we have a number of defined benefit pension and other postretirement plans and recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in our Consolidated Balance Sheets. We measure such a plan’s assets and obligations that determine its funded status as of the end of the year. We have multiple non-pension postretirement benefit plans. Our health care plans are generally contributory with participants’ contributions adjusted annually. For purposes of estimating our health-care costs, we have assumed health- care cost increases to be 8.15 percent per annum for 2014, gradually declining to 5 percent per annum by 2028 and to remain at that level thereafter. Significant differences in actual experience or significant changes in assumptions may materially affect the pension obligations. The effects of actual results differing from assump- tions and the changing of assumptions are included in net actuarial loss within “Accumulated other comprehensive loss”. We recognize actuarial gains and losses gradually over time. Any cumulative unrecognized actuarial gain or loss that exceeds 10 percent of the greater of the present value of the projected benefit obligation (PBO) and the fair value of plan assets is recognized in earnings over the expected average remaining working lives of the employees participating in the Income taxes In preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. Tax expense from continuing opera- tions is reconciled from the weighted-average global tax rate (rather than from the Swiss domestic statutory tax rate), as the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland. Income which has been generated in jurisdic- 74 Financial review of ABB Group | ABB Annual Report 2013 tions outside of Switzerland (hereafter “foreign jurisdictions”) and has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. There is no requirement in Switzer- land for a parent company of a group to file a tax return of the group determining domestic and foreign pre-tax income and as our consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines our global weighted-average tax rate. We account for deferred taxes by using the asset and liability method. Under this method, we determine deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are mea- sured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We recognize a deferred tax asset when it is more likely than not that the asset will be realized. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of ex- isting temporary differences. To the extent we increase or decrease this allowance in a period, we recognize the change in the allowance within “Provision for taxes” in the Consoli- dated Income Statements unless the change relates to discon- tinued operations, in which case the change is recorded in “Income (loss) from discontinued operations, net of tax”. Unforeseen changes in tax rates and tax laws, as well as differences in the projected taxable income as compared to the actual taxable income, may affect these estimates. Certain countries levy withholding taxes, dividend dis- tribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. Switzerland has concluded double taxation treaties with many countries in which we operate. These treaties either eliminate or reduce such withholding taxes on dividend distributions. It is our policy to distribute retained earnings of subsidiaries, insofar as such earnings are not permanently reinvested or no other reasons exist that would prevent the subsidiary from distributing them. No deferred tax liability is set up, if retained earnings are considered as permanently reinvested, and used for financing current operations as well as business growth through working capital and capital expenditure in those coun- tries. We operate in numerous tax jurisdictions and, as a result, are regularly subject to audit by tax authorities. We provide for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Contingency provisions are recorded based on the technical merits of our filing position, considering the appli- cable tax laws and Organisation for Economic Co-operation and Development (OECD) guidelines and are based on our evaluations of the facts and circumstances as of the end of each reporting period. Changes in the facts and circum- stances could result in a material change to the tax accruals. Although we believe that our tax estimates are reasonable and that appropriate tax reserves have been made, the final determination of tax audits and any related litigation could be different than that which is reflected in our income tax provisions and accruals. An estimated loss from a tax contingency must be accrued as a charge to income if it is more likely than not that a tax asset has been impaired or a tax liability has been incurred and the amount of the loss can be reasonably estimated. We apply a two-step approach to recognize and measure uncer- tainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the posi- tion will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settle- ment. The required amount of provisions for contingencies of any type may change in the future due to new developments. Business combinations The amount of goodwill initially recognized in a business combination is based on the excess of the purchase price of the acquired company over the fair value of the assets acquired and liabilities assumed. The determination of these fair values requires us to make significant estimates and assumptions. For instance, when assumptions with respect to the timing and amount of future revenues and expenses associated with an asset are used to determine its fair value, but the actual timing and amount differ materially, the asset could become impaired. In some cases, particularly for large acquisitions, we may engage independent third-party appraisal firms to assist in determining the fair values. Critical estimates in valuing certain intangible assets include but are not limited to: future expected cash flows of the acquired business, brand awareness, customer retention, technology obsolescence and discount rates. In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated at the acquisition date. We reevaluate these items quarterly, based upon facts and circumstances that existed at the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the twelve-month mea- surement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingen- cy’s estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our Consolidated Income Statements and could have a material impact on our results of operations and financial position. The fair values assigned to the intangible assets acquired are described in “Note 3 Acquisitions” as well as “Note 11 Goodwill and other intangible assets”, to our Consolidated Financial Statements. ABB Annual Report 2013 | Financial review of ABB Group 75 Goodwill and other intangible assets We review goodwill for impairment annually as of October 1, or more frequently if events or circumstances indicate the carrying value may not be recoverable. We use either a quali- tative or quantitative assessment method for each reporting unit. The qualitative assessment involves determining, based on an evaluation of qualitative factors, whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on this qualitative assessment, it is determined to be more likely than not that the reporting unit’s fair value is less than its carrying value, the two-step quantitative impairment test is performed. If we elect not to perform the qualitative assessment for a reporting unit, then we perform the two-step impairment test. Our reporting units are the same as our business divi- sions for Discrete Automation and Motion, Low Voltage Prod- ucts, Power Products and Power Systems. For the Process Automation division, we determined the reporting units to be one level below the division, as the different products pro- duced or services provided by this division do not share suf- ficiently similar economic characteristics to permit testing of goodwill on a total division level. When performing the qualitative assessment, we first determine, for a reporting unit, factors which would affect the fair value of the reporting unit including: (i) macroeco- nomic conditions related to the business, (ii) industry and market trends, and (iii) the overall future financial perfor- mance and future opportunities in the markets in which the business operates. We then consider how these factors would impact the most recent quantitative analysis of the reporting unit’s fair value. Key assumptions in determining the value of the reporting unit include the projected level of business operations, the weighted-average cost of capital, the income tax rate and the terminal growth rate. If, after performing the qualitative assessment, we conclude that events or circumstances have occurred which would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value, or if we have elected not to perform a qualitative assessment, the two- step quantitative impairment test is performed. In the first step, we calculate the fair value of the reporting unit (using an income approach whereby the fair value is calculated based on the present value of future cash flows applying a discount rate that represents our weighted-average cost of capital) and compare it to the report unit’s carrying value. Where the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit is equal to or exceeds the reporting unit’s fair value, we would per- form the second step of the impairment test. In the second step, we would determine the implied fair value of the report- ing unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill were to exceed its implied fair value, then we would record an impairment loss equal to the difference. Any goodwill impairment losses would be recorded as a separate line item in the income statement in continuing operations, unless related to a discontinued operation, in which case the losses would be recorded in “Income (loss) from discontin- ued operations, net of tax”. 76 Financial review of ABB Group | ABB Annual Report 2013 In 2013, we performed a qualitative assessment for all of our reporting units except for Power Systems where we elected to perform a quantitative test. Based on the qualita- tive assessments performed in 2013 and 2012 (when the qualitative assessment covered all our reporting units), we determined that it was not more likely than not that the fair value was below the carrying value for these reporting units, and as a result, concluded that it was not necessary to perform the two-step quantitative impairment test. In 2011, under the previous accounting standard, we performed the first step of the two-step impairment test described above on all reporting units. As the fair values of all reporting units in 2011 exceeded their carrying values, we determined that none of the reporting units was at “risk” of failing the goodwill im- pairment test. Consequently, the second step of the impair- ment test was not performed and we concluded goodwill was not impaired in 2011. The quantitative test for Power Systems was undertaken in response to the low order intake in 2013. The calculated fair value of the Power Systems reporting unit on October 1, 2013, exceeded the reporting unit’s carrying value by more than 50 percent and as the carrying value was not zero or negative, we concluded that Power Systems was not “at risk” of failing the goodwill impairment test. Consequently, the second step of the impairment test was not performed. The projected future cash flows used in the fair value cal- culation for Power Systems were based on an approved business plan for the reporting unit which covered a period of four years plus a calculated terminal value. The projected future cash flows required significant estimates and judgments involving variables such as future sales volumes, sales prices, awards of large orders, production and other operating costs, capital expenditures, net working capital requirements and other economic factors. The after-tax weighted-average cost of capital used (9 percent) was based on variables such as the risk-free rate derived from the yield of 10-year U.S. treasury bonds, as well as an ABB-specific risk premium. The terminal value growth rate was assumed to be 1 percent. The mid-term tax rate used in the test was 27 percent. We based our fair value estimates on assumptions we believed to be reasonable, but which are inherently uncertain. Consequently, actual future results may differ from those estimates. The assumptions used in the fair value calculation were challenged through the use of sensitivity analysis to deter- mine the impact on the fair value of the reporting unit. Our sensitivity analysis for Power Systems in 2013 showed no significant change in fair values if the assumptions changed. A 1 percentage-point increase in the discount rate would have reduced the calculated fair value by approximately 11 per- cent, while a 1 percentage-point decrease in the terminal value growth rate would have reduced the calculated fair value by approximately 7.5 percent. Intangible assets are reviewed for recoverability upon the occurrence of certain triggering events (such as a decision to divest a business or projected losses of an entity) or when- ever events or changes in circumstances indicate that the carrying amount may not be recoverable. We record impair- ment charges in “Other income (expense), net”, in our Con- solidated Income Statements, unless they relate to a discon- tinued operation, in which case the charges are recorded in “Income (loss) from discontinued operations, net of tax”. New accounting pronouncements For a description of accounting changes and recent account- ing pronouncements, including the expected dates of adop- tion and estimated effects, if any, on our Consolidated Finan- cial Statements, see “Note 2 Significant accounting policies” to our Consolidated Financial Statements. Research and development Each year, we invest significantly in research and develop- ment. Our research and development focuses on developing and commercializing the technologies of our businesses that are of strategic importance to our future growth. In 2013, 2012 and 2011, we invested $1,470 million, $1,464 million and $1,371 million, respectively, or approximately 3.5 percent, 3.7 percent and 3.6 percent, respectively, of our annual con- solidated revenues on research and development activities. We also had expenditures of $274 million, $282 million and $338 million, respectively, or approximately 0.7 percent, 0.7 percent and 0.9 percent, respectively, of our annual con- solidated revenues in 2013, 2012 and 2011, on order-related development activities. These are customer- and project- specific development efforts that we undertake to develop or adapt equipment and systems to the unique needs of our customers in connection with specific orders or projects. Order-related development amounts are initially recorded in inventories as part of the work in process of a contract and then are reflected in cost of sales at the time revenue is rec- ognized in accordance with our accounting policies. In addition to continuous product development, and order- related engineering work, we develop platforms for technol- ogy applications in our automation and power businesses in our research and development laboratories, which operate on a global basis. Through active management of our invest- ment in research and development, we seek to maintain a balance between short-term and long-term research and development programs and optimize our return on invest- ment. Our research and development strategy focuses on three objectives: (i) to monitor and develop emerging technologies and create an innovative, sustainable technology base for ABB, (ii) to develop technology platforms that enable efficient product design for our power and automation customers, and (iii) to create the next generation of power and automation products and systems that we believe will be the engines of profitable growth. Universities are incubators of future technology, and a central task of our research and development team is to transform university research into industry-ready technology platforms. We collaborate with a number of universities and research institutions to build research networks and foster new technologies. We believe these collaborations shorten the amount of time required to turn basic ideas into viable products, and they additionally help us recruit and train new personnel. We have built numerous university part- nerships in the U.S., Europe and Asia, including long-term, strategic relationships with the Carnegie Mellon University, Massachusetts Institute of Technology, ETH Zurich, EPFL Lausanne, Chalmers Gothenburg, KTH Stockholm, Cambridge University and Imperial College London. Our collaborative projects include research on materials, sensors, micro-engi- neered mechanical systems, robotics, controls, manufactur- ing, distributed power and communication. Common platforms for power and automation technologies are developed around advanced materials, efficient manufacturing, information technology and data communication, as well as sensor and actuator technology. Common applications of basic power and automation technologies can also be found in power electronics, electrical insulation, and control and optimization. Our power technolo- gies, including our insulation technologies, current interruption and limitation devices, power electronics, flow control and power protection processes, apply as much to large, reliable, blackout-free transmission systems as they do to everyday household needs. Our automation technologies, including our control and optimization processes, power electronics, sen- sors and microelectronics, mechatronics and wireless com- munication processes, are designed to improve efficiency in plants and factories around the world, including our own. Acquisitions During 2013, 2012 and 2011, ABB paid $897 million, $3,643 mil- lion and $3,805 million to purchase 7, 9 and 10 new busi- nesses, respectively. The amounts exclude changes in cost and equity investments. There were no significant acquisitions in 2013; the largest being Power-One, acquired in July 2013. The principal acquisition in 2012 was Thomas & Betts, which was acquired in May 2012. Thomas & Betts designs, manufactures and markets components used to manage the connection, distribution, transmission and reliability of elec- trical power in industrial, construction and utility applications. The complementary combination of Thomas & Betts’ elec- trical components and ABB’s low-voltage protection, control and measurement products creates a broader low-voltage portfolio (in our Low Voltage Products division) that can be distributed through Thomas & Betts’ network of more than 6,000 distributor locations and wholesalers in North America, and through ABB’s well-established distribution channels in Europe and Asia. ABB Annual Report 2013 | Financial review of ABB Group 77 The principal acquisition in 2011 was Baldor Electric Company (Baldor), acquired in January 2011. Baldor markets, designs and manufactures industrial electric motors, mechan- ical power transmission products, drives and generators. The acquisition broadens the product offering of our Discrete Automation and Motion division, closing the gap in our auto- mation portfolio in North America by adding Baldor’s NEMA motors product line, as well as adding Baldor’s growing mechanical power transmission business. For more information on our acquisitions, see “Note 3 Acquisitions” to our Consolidated Financial Statements. Exchange rates We report our financial results in U.S. dollars. Due to our global operations, a significant amount of our revenues, expenses, assets and liabilities are denominated in other currencies. As a consequence, movements in exchange rates between cur- rencies may affect: (i) our profitability, (ii) the comparability of our results between periods, and (iii) the reported carrying value of our assets and liabilities. We translate non-USD denominated results of operations, assets and liabilities to USD in our Consolidated Financial Statements. Balance sheet items are translated to USD using year-end currency exchange rates. Income statement and cash flow items are translated to USD using the relevant monthly average currency exchange rate. Increases and decreases in the value of the USD against other currencies will affect the reported results of opera- tions in our Consolidated Income Statements and the value of certain of our assets and liabilities in our Consolidated Balance Sheets, even if our results of operations or the value of those assets and liabilities have not changed in their orig- inal currency. As foreign exchange rates impact our reported results of operations and the reported value of our assets and liabilities, changes in foreign exchange rates could signif- icantly affect the comparability of our reported results of operations between periods and result in significant changes to the reported value of our assets, liabilities and stockhold- ers’ equity. While we operate globally and report our financial results in USD, exchange rate movements between the USD and both the euro and the Swiss franc are of particular importance to us due to (i) the location of our significant operations and (ii) our corporate headquarters being in Switzerland. The exchange rates between the USD and the EUR and the USD and the CHF at December 31, 2013, 2012 and 2011, were as follows: Exchange rates into $ EUR 1.00 CHF 1.00 2013 1.38 1.12 2012 1.32 1.09 2011 1.29 1.06 The average exchange rates between the USD and the EUR and the USD and the CHF for the years ended December 31, 2013, 2012 and 2011, were as follows: Exchange rates into $ EUR 1.00 CHF 1.00 2013 1.33 1.08 2012 1.29 1.07 2011 1.39 1.13 When we incur expenses that are not denominated in the same currency as the related revenues, foreign exchange rate fluctuations could affect our profitability. To mitigate the im- pact of exchange rate movements on our profitability, it is our policy to enter into forward foreign exchange contracts to manage the foreign exchange transaction risk of our opera- tions. In 2013, approximately 81 percent of our consolidated reve- nues were reported in currencies other than USD. The follow- ing percentages of consolidated revenues were reported in the following currencies: – Euro, approximately 19 percent, – Chinese renminbi, approximately 10 percent, – Swedish krona, approximately 6 percent, and – Canadian dollar, approximately 5 percent. In 2013, approximately 79 percent of our cost of sales and selling, general and administrative expenses were reported in currencies other than USD. The following percentages of consolidated cost of sales and selling, general and adminis- trative expenses were reported in the following currencies: – Euro, approximately 18 percent, – Chinese renminbi, approximately 9 percent, – Swedish krona, approximately 5 percent, and – Canadian dollar, approximately 5 percent. We also incur expenses other than cost of sales and selling, general and administrative expenses in various currencies. The results of operations and financial position of many of our subsidiaries outside of the United States are reported in the currencies of the countries in which those subsidiaries are located. We refer to these currencies as “local curren- cies.” Local currency financial information is then translated into USD at applicable exchange rates for inclusion in our Consolidated Financial Statements. The discussion of our results of operations below pro- vides certain information with respect to orders, revenues, income from operations and other measures as reported in USD (as well as in local currencies). We measure period-to- period variations in local currency results by using a constant foreign exchange rate for all periods under comparison. Differences in our results of operations in local currencies as compared to our results of operations in USD are caused exclusively by changes in currency exchange rates. 78 Financial review of ABB Group | ABB Annual Report 2013 While we consider our results of operations as measured The undiscounted value of revenues we expect to gener- in local currencies to be a significant indicator of business performance, local currency information should not be relied upon to the exclusion of U.S. GAAP financial measures. In- stead, local currencies reflect an additional measure of com- parability and provide a means of viewing aspects of our operations that, when viewed together with the U.S. GAAP results, provide a more complete understanding of factors and trends affecting the business. As local currency informa- tion is not standardized, it may not be possible to compare our local currency information to other companies’ financial measures that have the same or a similar title. We encour- age investors to review our financial statements and publicly- filed reports in their entirety and not to rely on any single financial measure. Transactions with affiliates and associates In the normal course of our business, we purchase products from, sell products to and engage in other transactions with entities in which we hold an equity interest. The amounts involved in these transactions are not material to ABB Ltd. Also, in the normal course of our business, we engage in transactions with businesses that we have divested. We believe that the terms of the transactions we conduct with these companies are negotiated on an arm’s length basis. Orders Our policy is to book and report an order when a binding contractual agreement has been concluded with a customer covering, at a minimum, the price and scope of products or services to be supplied, the delivery schedule and the payment terms. The reported value of an order corresponds to the undiscounted value of revenues that we expect to recognize following delivery of the goods or services subject to the order, less any trade discounts and excluding any value added or sales tax. The value of orders received during a given period of time represents the sum of the value of all orders received during the period, adjusted to reflect the aggregate value of any changes to the value of orders received during the period and orders existing at the begin- ning of the period. These adjustments, which may in the aggregate increase or decrease the orders reported during the period, may include changes in the estimated order price up to the date of contractual performance, changes in the scope of products or services ordered and cancellations of orders. ate from our orders at any point in time is represented by our order backlog. Approximately 11 percent of the value of total orders we recorded in 2013 were “large orders,” which we define as orders from third parties involving a value of at least $15 million for products or services. Approximately 43 per- cent of the total value of large orders in 2013 were recorded by our Power Systems division and approximately 29 per- cent in our Process Automation division. The Power Products division and the Discrete Automation and Motion division accounted for the remainder of the total large orders recorded during 2013. The remaining portion of total orders recorded in 2013 was “base orders,” which we define as orders from third parties with a value of less than $15 million for products or services. The level of orders fluctuates from year to year. Portions of our business involve orders for long-term projects that can take months or years to complete and many large orders result in revenues in periods after the order is booked. Conse- quently, the level of large orders and orders generally cannot be used to accurately predict future revenues or operating performance. Orders that have been placed can be cancelled, delayed or modified by the customer. These actions can reduce or delay any future revenues from the order or may result in the elimination of the order. Performance measures We evaluate the performance of our divisions primarily based on orders received, revenues and Operational EBITDA. Operational EBITDA represents income from operations excluding depreciation and amortization, restructuring and restructuring-related expenses, and acquisition-related expenses and certain non-operational items, as well as for- eign exchange/commodity timing differences in income from operations consisting of: (i) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign exchange movements on receiv- ables/payables (and related assets/liabilities). See “Note 23 Operating segment and geographic data” to our Consolidated Financial Statements for a reconcilia- tion of the total consolidated Operational EBITDA to income from continuing operations before taxes. ABB Annual Report 2013 | Financial review of ABB Group 79 Analysis of results of operations Orders ($ in millions) 2013 2012 2011 2013 2012 % Change Our consolidated results from operations were as follows: ($ in millions, except per share data in $) Orders Order backlog at December 31, 2013 38,896 26,046 2012 40,232 29,298 2011 40,210 27,508 Discrete Automation and Motion Low Voltage Products 9,771 7,696 9,625 9,566 6,720 5,364 Process Automation 8,000 8,704 8,726 2% 15% (8)% (5)% 1% 25% – – Power Products Power Systems 10,459 11,040 11,068 5,949 7,973 9,278 (25)% (14)% Operating divisions 41,875 44,062 44,002 (5)% – Corporate and Other(1) (2,979) (3,830) (3,792) n.a. n.a. Revenues Cost of sales Gross profit 41,848 39,336 37,990 Total 38,896 40,232 40,210 (3)% – (29,856) (27,958) (26,556) 11,992 11,378 11,434 (1) Includes interdivisional eliminations Selling, general and administrative expenses (6,094) (5,756) (5,373) Non-order related research and development expenses Other income (expense), net Income from operations Net interest and other finance expense Provision for taxes Income from continuing (1,470) (41) 4,387 (321) (1,122) (1,464) (100) 4,058 (1,371) (23) 4,667 (220) (117) (1,030) (1,244) operations, net of tax 2,944 2,808 3,306 Income (loss) from discontinued operations, net of tax Net income Net income attributable to noncontrolling interests Net income attributable to ABB Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Net income Basic earnings per share attrib­ utable to ABB shareholders: Income from continuing operations, net of tax Net income Diluted earnings per share attrib­ utable to ABB shareholders: Income from continuing operations, net of tax Net income (37) 2,907 (120) 2,787 4 9 2,812 3,315 (108) 2,704 (147) 3,168 2,824 2,787 2,700 2,704 3,159 3,168 1.23 1.21 1.18 1.18 1.38 1.38 1.23 1.21 1.18 1.18 1.38 1.38 A more detailed discussion of the orders, revenues, Oper- ational EBITDA and income from operations for our divi- sions follows in the sections of “Divisional analysis” below entitled “Discrete Automation and Motion,” “Low Voltage Products,” “Process Automation,” “Power Products,” “Power Systems” and “Corporate and Other.” Orders and revenues of our divisions include interdivisional transactions which are eliminated in the “Corporate and Other” line in the tables below. In 2013, total order volume declined 3 percent (3 percent in local currencies) as lower large orders were not offset by base order growth. Orders were supported by our automation divisions where customer investments to improve operational efficiency and the demand for services increased during the year. The key demand drivers for the power divisions, such as capacity expansion in emerging markets, upgrading of aging infrastructure in mature markets and the integration of renew- able energy supplies into power grids, remain intact. Despite strong project tendering activity, some customers have delayed order awards due to macroeconomic uncertainties and this has resulted in order declines in the power divisions compared to 2012. Supported by growth in the second half of the year, orders in the Discrete Automation and Motion division grew 2 percent (2 percent in local currencies) in 2013, as higher orders in the Robotics business and the positive impact of acquiring Power-One more than compensated the decreases in the Motors and Generators business. Orders increased 15 percent (14 percent in local currencies) in the Low Voltage Products division, due primarily to the impact of including Thomas & Betts for the full year in 2013 (compared to approx- imately seven months in 2012). In addition, orders in all busi- nesses in this division grew except the Low Voltage Systems business. Orders in the Process Automation division de- creased 8 percent (8 percent in local currencies) as stable orders in the product businesses were more than offset by the impact of lower large orders. Orders decreased 5 percent (5 percent in local currencies) in the Power Products division, mainly driven by lower transformer orders. Significantly lower large orders led to a decline of 25 percent (25 percent in local currencies) in orders in the Power Systems division as customers postponed large investments and as a result of our order selectivity and focus on higher-margin business that is part of the division’s strategic repositioning (announced in December 2012). During 2013, base orders grew 2 percent (2 percent in local currencies) as the economic environment improved in the second half of 2013. As fewer large orders from projects in the Power Systems and Process Automation divisions were received, large orders declined 31 percent (31 percent in local currencies). In 2012, total order volume remained on the same level as 2011 (increased 4 percent in local currencies and was steady, in local currencies, excluding Thomas & Betts) despite challenging markets. 80 Financial review of ABB Group | ABB Annual Report 2013 In 2012, order growth was 1 percent (4 percent in local currencies) in the Discrete Automation and Motion division, reflecting the generally low growth in industrial production in most markets and weakness in the renewable energy sector in 2012. Orders were 25 percent higher in the Low Voltage Products division (29 percent in local currencies) mainly due to Thomas & Betts (flat in local currencies excluding Thomas & Betts). The Process Automation division’s orders reached the prior year’s level (increase of 4 percent in local currencies) supported by demand from the oil and gas and the mining sectors. Orders in the Power Products division were flat compared to the previous year (increased 3 percent in local currencies) as the distribution sector remained stable and industrial demand was supported by demand from the oil and gas sector. In the Power Systems division, orders declined 14 percent (10 percent in local currencies) as capital expendi- tures in power infrastructure continued to be restrained due to ongoing economic uncertainties, especially in certain mature economies. Transmission utilities invested selectively, with emerging markets focusing on capacity addition and mature markets focusing mainly on existing grid upgrades. Base orders growth slowed in the first half of 2012 as economic growth remained under pressure, however base orders remained on the same level as 2011, primarily driven by demand for industrial automation and energy-saving equip- ment. In the second half of 2012, base orders increased moderately due to Thomas & Betts. During 2012, base orders grew 3 percent (6 percent in local currencies or 1 percent, in local currencies, excluding Thomas & Betts). Following the double-digit growth in 2011, large orders in 2012 decreased 11 percent (7 percent in local currencies) as fewer large proj- ects were recorded in the power divisions. We determine the geographic distribution of our orders based on the location of the customer, which may be different from the ultimate destination of the products’ end use. The geographic distribution of our consolidated orders was as fol- lows: compensated declines in Italy, the United Kingdom, Russia as well as in most Nordic countries. Orders decreased in MEA by 8 percent (7 percent in local currencies) as large orders received in Kuwait and the United Arab Emirates could not offset lower large orders from the power sector in Saudi Arabia and Iraq, as well as from the oil and gas sector in Oman. In 2012, orders grew 28 percent (32 percent in local currencies) in the Americas due to Thomas & Betts (which operates primarily in the U.S. and Canada), as well as on organic growth in existing businesses. The U.S. recorded higher orders in every division. Additionally, Canada and Bra- zil remained significant growth areas in this region. In Asia, orders were down 15 percent (13 percent in local currencies) primarily on lower large orders from the power sector in China and India, as well as from the marine sector in South Korea. Europe declined 11 percent (6 percent in local curren- cies) despite increases in Finland and the United Kingdom, as a $1 billion offshore wind order in Germany received in 2011 was not repeated in 2012, as well as on lower orders in Sweden, Norway and Italy. Orders grew in MEA by 23 per- cent (28 percent in local currencies) on large orders from the power sector in Saudi Arabia, solar power orders in South Africa as well as orders from the oil and gas sector in Oman. Order backlog ($ in millions) 2013 2012 2011 2013 2012 December 31, % Change Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems 4,351 1,057 5,772 7,946 4,426 4,120 1,117 887 (2)% (5)% 6,416 5,771 (10)% 8,493 8,029 (6)% 9,435 12,107 11,570 (22)% Operating divisions 28,561 32,559 30,377 (12)% Corporate and Other(1) (2,515) (3,261) (2,869) n.a. 7% 26% 11% 6% 5% 7% n.a. 7% % Change Total 26,046 29,298 27,508 (11)% ($ in millions) Europe The Americas Asia 2013 2012 2011 2013 2012 13,334 13,512 15,202 (1)% (11)% 11,365 12,152 9,466 (6)% 28% 10,331 10,346 12,103 – (15)% Middle East and Africa 3,866 4,222 3,439 (8)% 23% Total 38,896 40,232 40,210 (3)% – Orders in 2013 declined 6 percent (5 percent in local curren- cies) in the Americas, driven by lower orders in Brazil and lower large orders in the power sector in the U.S. and Canada. However, orders in the U.S. remained stable as base order growth (due to the impact of including Thomas & Betts for the full year in 2013) compensated lower large power orders. In Asia, orders remained unchanged (increased 1 percent in local currencies) as growth in the automation divisions was offset by lower orders in the power businesses, primarily in India and Australia. China returned to growth as most divi- sions received higher orders than in the previous year from that country. Europe declined 1 percent (decrease of 3 per- cent in local currencies), as a moderate increase in the indus- trial sectors was offset by lower orders in the power divi- sions. Order growth in Germany, France and Spain mostly (1) Includes interdivisional eliminations In 2013, consolidated order backlog declined 11 percent (10 percent in local currencies) with decreases in all divisions but primarily decreases in the Power Systems and Process Automation divisions. The decrease in the Power Systems division was due mainly to customers postponing investments, resulting in delays in the award of large orders, as well as reduced order intake resulting from the division’s increased project selectivity, as part of the division’s repositioning announced in December 2012. Order backlog in the Process Automation division decreased primarily due to a reduction in large orders received in the industrial sector. Despite an im- provement of the macroeconomic environment in the second half of the year, order backlog in the Low Voltage Products division as well as in the Discrete Automation and Motion di- vision was below the respective levels at the end of 2012. ABB Annual Report 2013 | Financial review of ABB Group 81 In 2012, order backlog increased 7 percent (5 percent in local currencies) compared to 2011. Although global economic conditions remained challenging, order backlog increased in 2012 in the Discrete Automation and Motion division. While the Low Voltage Products division grew, a substantial portion of the increase in the order backlog was due to Thomas & Betts. The order backlog in the Process Automation division grew on orders from the mining as well as the oil and gas sectors. The order backlog in the Power Products division grew in all businesses in 2012 while the Power Systems division also increased its order backlog despite a lower level of large orders. Revenues ($ in millions) 2013 2012 2011 2013 2012 % Change Thomas & Betts, revenues decreased 4 percent (stable in local currencies) following double-digit growth in 2011. Rev- enues in the Process Automation division were 2 percent lower but increased 2 percent in local currencies supported by demand from oil and gas related sectors, while revenues declined in other businesses such as Turbochargers and Full Service. Revenues in the Power Products division declined 1 percent (increased 2 percent in local currencies) impacted by lower revenues from the Transformers business. In the Power Systems division, revenues were 3 percent lower but increased 2 percent in local currencies, as orders recorded in the previous year were executed and translated into revenues. We determine the geographic distribution of our revenues based on the location of the customer, which may be differ- ent from the ultimate destination of the products’ end use. The geographic distribution of our consolidated revenues was as follows: Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems 9,915 7,729 8,497 9,405 8,806 5% 6,638 5,304 16% 8,156 8,300 11,032 10,717 10,869 8,375 7,852 8,101 ($ in millions) Europe The Americas Asia 7% 25% (2)% (1)% (3)% 3% n.a. 4% 4% 3% 7% 7% n.a. 6% 2013 2012 2011 2013 2012 % Change 14,385 14,073 14,657 2% 12,115 10,699 9,043 13% 11,230 10,750 10,136 (4)% 18% 6% (8)% 4% 4% 8% 6% Middle East and Africa 4,118 3,814 4,154 Total 41,848 39,336 37,990 Operating divisions 45,548 42,768 41,380 Corporate and Other(1) (3,700) (3,432) (3,390) Total 41,848 39,336 37,990 (1) Includes interdivisional eliminations Revenues in 2013 increased 6 percent (7 percent in local currencies) due primarily to execution from prior year’s high order backlog and due to the impact of including Thomas & Betts for the full year in 2013. Revenues rose 5 percent (5 percent in local currencies) in the Discrete Automation and Motion division as the Robot- ics business grew for the fourth consecutive year. In the Low Voltage Products division, revenues grew 16 percent (16 percent in local currencies) as most businesses recorded higher revenues, and due to the impact of including Thomas & Betts for the full year in 2013. Revenues in the Process Automation division, were 4 percent (5 percent in local cur- rencies) higher in 2013, supported by the execution of orders from the 2012 order backlog, especially in the marine, min- ing, and oil and gas sectors. Revenues in the Power Products division increased 3 percent (3 percent in local currencies), as all businesses reported higher revenues, assisted by strong order execution from the 2012 order backlog. In the Power Systems division, revenues increased 7 percent (8 percent in local currencies) on execution from the 2012 order backlog, led by the Power Generation and Grid Systems businesses. In 2012, revenues increased 4 percent (7 percent in local currencies) based on a solid order level recorded in the previous year, as well as on the impact of Thomas & Betts. Excluding Thomas & Betts, revenues were steady, decreasing 1 percent despite a difficult economic environment (increase of 3 percent in local currencies). In 2012, revenues rose 7 percent (10 percent in local currencies) in the Discrete Automation and Motion division, as the Robotics business continued to grow at a double- digit rate. In the Low Voltage Products division, revenues grew 25 percent (29 percent in local currencies); excluding 82 Financial review of ABB Group | ABB Annual Report 2013 In 2013, revenues in Europe increased 2 percent (flat in local currencies) with higher revenues in all divisions except Power Systems. Revenue increases in Sweden, Norway, United Kingdom, Finland, France and the Netherlands more than offset revenue declines in Germany, Italy, Switzerland and Spain. Revenues from the Americas increased 13 percent (15 percent in local currencies) with higher revenues in all five divisions, and from the impact of including Thomas & Betts for the full year in 2013. Revenues increased at a double-digit rate in the U.S., Canada and Brazil, the main markets in this region. Revenues from Asia increased 4 per- cent (6 percent in local currencies) with stable or higher revenues in all divisions except Power Products. The revenue increase in Asia was due to higher revenues from the Low Voltage Products division, as well as the successful execution, in the Process Automation division, of marine orders for the oil and gas sector in China and South Korea. In India revenues grew moderately. Revenues in MEA grew by 8 percent (11 percent in local currencies) primarily from increases in the Power Products division, while revenues from the oil and gas sector declined. Saudi Arabia, South Africa and Iraq recorded significant revenue increases. In 2012, revenues in Europe decreased 4 percent (in- creased 2 percent in local currencies), despite growth in the Discrete Automation and Motion division, as the other divi- sions recorded lower revenues. Growth in Germany, Sweden, Norway and the United Kingdom was offset by declines in Italy, France and Spain. Revenues from the Americas increased 18 percent (20 percent in local currencies and 4 percent, in local currencies, excluding Thomas & Betts) on higher indus- trial demand for the automation divisions. The U.S. grew 25 percent (8 percent excluding Thomas & Betts), while Brazil recorded lower revenues than in the previous year. Revenues from Asia increased 6 percent (8 percent in local currencies) on growth in all divisions. Within this region, revenues in South Korea grew on the execution of large marine orders, while China recorded stable revenues and India recorded lower revenues. Revenues in MEA declined 8 percent (5 per- cent in local currencies) on lower revenues generated in the power and the oil and gas sectors in the region. Selling, general and administrative expenses The components of selling, general and administrative expenses were as follows: Cost of sales Cost of sales consists primarily of labor, raw materials and component costs but also includes indirect production costs, expenses for warranties, contract and project charges, as well as order-related development expenses incurred in con- nection with projects for which corresponding revenues have been recognized. ($ in millions) Selling expenses 2013 4,071 2012 3,862 2011 3,533 Selling expenses as a percentage of orders received 10.5% 9.6% 8.8% General and administrative expenses 2,023 1,894 1,840 General and administrative expenses as a percentage of revenues Total selling, general 4.8% 4.8% 4.8% In 2013, cost of sales increased 7 percent (8 percent in and administrative expenses 6,094 5,756 5,373 local currencies) to $29,856 million. As a percentage of revenues, cost of sales increased from 71.1 percent in 2012 to 71.3 percent in 2013. Despite margin improvements in the Low Voltage Products division, cost of sales as a percent- age of revenues increased due to a negative business mix and margin reductions on the execution of lower margin orders from the backlog in the Power Products division. Fur- thermore, additional negative impacts from project-related charges in the Power Systems division were recorded. Cost of sales as a percentage of service revenues decreased due to productivity gains and a positive business mix. Total selling, general and administrative expenses as a percentage of revenues 14.6% 14.6% 14.1% Total selling, general and administrative expenses as a percentage of the average of orders received and revenues 15.1% 14.5% 13.7% In 2013, selling expenses increased 5 percent (5 percent in local currencies) mainly due to the increase in the number of sales-related employees added in certain key markets. In 2012, cost of sales increased 5 percent (9 percent In 2012, selling expenses increased 9 percent (14 percent in local currencies) to $27,958 million. Excluding the impact from Thomas & Betts, cost of sales increased 1 percent (5 percent in local currencies). As a percentage of revenues, cost of sales increased to 71.1 percent from 69.9 percent in 2011. Higher cost of sales as a percentage of revenues is the result of price erosion on the execution of order backlog, an unfavorable business mix arising from a higher propor- tion of revenues generated from lower margin types of busi- ness, margin erosion in certain projects and charges asso- ciated with repositioning the Power Systems division. Such cost increases were partly compensated by cost saving initiatives. in local currencies); excluding Thomas & Betts, selling ex- penses increased 4 percent (9 percent in local currencies) compared to 2011. The increase in selling expenses in 2012 was mainly driven by additional sales force employees to develop new markets and implement sales and marketing pro- grams in order to secure market positions in a competitive environment. In 2013, general and administrative expenses increased 7 percent (7 percent in local currencies) driven partly by the incremental costs of newly-acquired companies and invest- ment in information technology infrastructure. However, gen- eral and administrative expenses as a percentage of reve- nues, remained unchanged. In 2012, general and administrative expenses increased 3 percent (6 percent in local currencies). Excluding Thomas & Betts, general and administrative expenses declined 5 per- cent (2 percent in local currencies), reflecting tighter cost con- trol throughout the organization. As a percentage of revenues, general and administrative expenses remained unchanged. In 2013, selling, general and administrative expenses in- creased 6 percent (6 percent in local currencies). As a percent- age of the average of orders and revenues, selling, general and administrative expenses increased 0.6 percentage-points to 15.1 percent, primarily due to the decrease in orders received and increased selling expenses (explained above). In 2012, selling, general and administrative expenses increased 7 percent (11 percent in local currencies). Excluding Thomas & Betts, selling, general and administrative ex- penses increased 1 percent (5 percent in local currencies). As a percentage of the average of orders and revenues, selling, general and administrative expenses increased 0.8 percent- age-points to 14.5 percent as orders intake was flat. ABB Annual Report 2013 | Financial review of ABB Group 83 Non-order related research and development expenses In 2013 and 2012, changes in income from operations were a result of the factors discussed above and in the divisional analysis below. In 2013, non-order related research and development expenses remained flat (declined 1 percent in local curren- cies). In 2012, non-order related research and development expenses increased 7 percent (11 percent in local curren- cies), mainly due to increased research and development activities, as well as to the incremental costs of newly- acquired companies. Non-order related research and development expenses as a percentage of revenues decreased to 3.5 percent in 2013, after increasing slightly to 3.7 percent in 2012 from 3.6 percent in 2011. Other income (expense), net ($ in millions) 2013 2012 2011 Restructuring and restructuring- related expenses(1) Net gains on sale of assets Asset impairments Income from equity-accounted companies and other income (expense) Total (1) Excluding asset impairments (45) 15 (29) 18 (41) (54) 28 (111) 37 (100) (26) 40 (29) (8) (23) “Other income (expense), net” primarily includes certain restructuring and restructuring-related expenses, gains or losses from the sale of businesses and sale of property, plant and equipment, recognized asset impairments, as well as license income and our share of income or loss from equity-accounted companies. “Other income (expense), net” decreased to an expense of $41 million from $100 million in 2012, mostly due to the impact in 2012 of $87 million of impair- ments recognized for certain equity-method investments. “Other income (expense), net” increased to an expense of $100 million in 2012 from $23 million in 2011, due primarily to the $87 million impairments recorded in 2012. Income from operations ($ in millions) 2013 2012 2011 2013 2012 % Change Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems 1,458 1,092 990 1,469 1,294 856 912 904 963 (1)% 28% 9% 14% (5)% (5)% 1,331 1,328 1,476 – (10)% 171 7 548 n.a. n.a. Operating divisions 5,042 4,572 5,185 10% (12)% Corporate and Other (650) (524) (542) 24% (3)% Intersegment elimination (5) 10 24 Total 4,387 4,058 4,667 8% (13)% 84 Financial review of ABB Group | ABB Annual Report 2013 Net interest and other finance expense Net interest and other finance expense consists of “Interest and dividend income” offset by “Interest and other finance expense”. “Interest and other finance expense” includes interest expense on our debt, the amortization of upfront costs asso- ciated with our credit facility and our debt securities, com- mitment fees on our credit facility and exchange losses on financial items, offset by gains on marketable securities and exchange gains on financial items. ($ in millions) Interest and dividend income Interest and other finance expense 2013 69 (390) 2012 73 (293) 2011 90 (207) Net interest and other finance expense (321) (220) (117) In 2013, “Interest and dividend income” declined compared to 2012, mainly resulting from lower cash and equivalents, and marketable securities and short-term investments bal- ances during 2013. In 2012, “Interest and dividend income” declined com- pared to 2011, due primarily to the impact of lower market interest rates for certain currencies, mainly the euro. In 2013, “Interest and other finance expense” increased compared to 2012, mainly resulting from (i) the increase in interest expense, as bonds issued in 2012 were outstanding for a full year in 2013, and (ii) interest expense in 2012 included a release of provisions for expected interest due on certain income tax obligations, primarily due to the favor- able resolution of a tax dispute – see “Note 16 Taxes” to our Consolidated Financial Statements. In 2012, “Interest and other finance expense” increased compared to 2011, primarily reflecting (i) higher interest expense due to higher debt (resulting from the issuance of bonds in 2012), partially offset by (ii) the impact of a net release of provisions for expected interest due on tax penal- ties, as described above. Provision for taxes ($ in millions) Income from continuing operations, before taxes Provision for taxes Effective tax rate for the year 2013 2012 2011 4,066 (1,122) 27.6% 3,838 (1,030) 26.8% 4,550 (1,244) 27.3% The provision for taxes in 2013 included a net increase in val- uation allowance on deferred taxes of $31 million, as we deter- mined it was not more likely than not that such deferred tax assets would be realized. This amount included an expense of $104 million related to certain of our operations in Central Eu- rope and South America. It also included a benefit of $42 mil- lion related to certain of our operations in Central Europe. The provision for taxes in 2012 included a net increase in valuation allowance on deferred taxes of $44 million, as we determined it was not more likely than not that such deferred tax assets would be realized. This amount included $36 mil- lion related to certain of our operations in Central Europe. The provision for taxes in 2011 included the net reduction in valuation allowance on deferred taxes of approximately $22 million, as we determined it was more likely than not that such deferred tax assets would be realized. The provision for taxes in 2013, 2012 and 2011, also included tax credits, arising in foreign jurisdictions, for which the technical merits did not allow a benefit to be taken. conditions under our share-based payment arrangements. See “Note 20 Earnings per share” to our Consolidated Finan- cial Statements. Divisional analysis Discrete Automation and Motion The financial results of our Discrete Automation and Motion division were as follows: Income from continuing operations, net of tax ($ in millions) Orders As a result of the factors discussed above, income from continuing operations, net of tax, increased $136 million to $2,944 million in 2013 compared to 2012, and decreased $498 million to $2,808 million in 2012 compared to 2011. Order backlog at Dec. 31, Revenues Income from operations Operational EBITDA % Change 2013 9,771 4,351 9,915 1,458 1,783 2012 2011 2013 2012 9,625 9,566 4,426 4,120 9,405 8,806 1,469 1,294 1,735 1,664 2% (2)% 5% (1)% 3% 1% 7% 7% 14% 4% Income (loss) from discontinued operations, net of tax The loss (net of tax) from discontinued operations for 2013 related primarily to provisions for certain environmental obligations. The income from discontinued operations, net of tax, for 2012 and 2011 was not significant. Net income attributable to ABB As a result of the factors discussed above, net income attributable to ABB increased $83 million to $2,787 million in 2013 compared to 2012, and decreased $464 million to $2,704 million in 2012 compared to 2011. Earnings per share attributable to ABB shareholders (in $) Income from continuing operations, net of tax: Basic Diluted Net income attributable to ABB: Basic Diluted 2013 2012 2011 1.23 1.23 1.21 1.21 1.18 1.18 1.18 1.18 1.38 1.38 1.38 1.38 Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding dur- ing the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilu- tive securities comprise: outstanding written call options; outstanding options and shares granted subject to certain Orders Orders in 2013 were up 2 percent (2 percent in local curren- cies) as both the growth in orders in our Robotics business and the impact of including Power-One (acquired July 2013) were partly offset by decreases in orders in our Motors and Generators business. Orders were negatively impacted by weak industrial demand in mature markets and reduced growth rates in emerging markets compared to 2012. In the Robotics business, strong demand from the automotive sector generated high levels of orders, while orders in the Motors and Generators business were lower due to weak market demand for industrial motors. In addition, orders in- creased due to large orders received from rail customers in our Power Conversion business. Orders in the Drives and Controls business were steady compared to 2012. In 2012, orders were flat (up 4 percent in local currencies) due to slower industrial growth globally in a more challeng- ing macroeconomic environment. Lower demand from the re- newable energy sector was offset by increased volumes from large orders in other sectors. The highest growth was achieved in the Robotics business due to several larger automotive orders. Growth was also recorded in our Motors and Generators business. The geographic distribution of orders for our Discrete Automation and Motion division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 38 32 27 3 37 34 26 3 37 32 28 3 100 100 100 In 2013, the geographic distribution of our orders remained similar to 2012. Large orders in the Robotics business contributed to the increase in the share of orders from Asia, while fewer large orders were received in the Americas, reducing its share. In addition, the weak demand for motors ABB Annual Report 2013 | Financial review of ABB Group 85 in the U.S. also reduced the share of orders from the Ameri- cas. The share of orders from Europe increased slightly due to several larger traction orders in our Power Conversion business. In 2012, the share of orders in the Americas increased due to double-digit growth in South America, as well as single-digit growth in North America. The share of orders in Europe was unchanged compared to 2011, as double-digit growth in the United Kingdom and Finland was offset by a decline in Germany and Spain. The share in Asia declined due to slower industrial growth and the weakening of the renewable energy business. Orders from MEA showed dou- ble-digit growth while its share of total orders remained at the same level, compared to 2011, as orders in other regions also increased. Order backlog Order backlog in 2013 was 2 percent lower (1 percent in local currencies) compared to 2012, as both an increase in order backlog in Robotics and the increase in order backlog from acquiring Power-One were offset by a decrease in order backlog in the Drives and Controls, and Motors and Genera- tors businesses. Order backlog in 2012 grew 7 percent (6 percent in local currencies) as the order intake from large orders increased in our Robotics and Motors and Generators businesses, which have a longer execution time. Revenues In 2013, revenues increased 5 percent (5 percent in local currencies) due to the impact of including Power-One as well as growth in the Robotics and Drives and Controls busi- nesses. However, revenue decreases in the Motors and Gen- erator business lowered the overall growth rate of the division. In 2012, revenues grew 7 percent (6 in local currencies) due to higher execution from the backlog in the Robotics busi- ness as well as in the Drives and Controls business. The Motors and Generators business reported single-digit growth in revenues compared to 2011. Asia achieved single-digit revenue growth but its share remained at the same level as 2011, as the revenues in other regions grew faster. Income from operations In 2013, income from operations was stable compared to 2012. The benefit of higher revenues was offset by a reduction in operating margins, primarily due to changes in product mix. In addition, higher depreciation expense, the costs of acquiring Power-One and higher restructuring-related costs compared with 2012, negatively impacted income from oper- ations in 2013. Depreciation and amortization increased to $285 million in 2013, mainly due to the acquisition of Power- One. In 2012, income from operations grew 14 percent com- pared to 2011, mainly due to higher revenues. The increase was primarily due to increases in the Robotics and Motors and Generators businesses. Acquisition-related expenses and certain non-operational items in 2012, of $8 million, were mainly transaction costs relating to the acquisition of Newave in Switzerland. Such acquisition-related expenses were sub- stantially lower than the $90 million recorded in 2011, which included expenses related to the acquisition of Baldor. Depre- ciation and amortization increased to $263 million in 2012, mainly due to the acquisition of Newave. Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Discrete Automation and Motion division was as follows: ($ in millions) Income from operations Depreciation and amortization Restructuring and restructuring-related expenses Acquisition-related expenses and certain non-operational items FX/commodity timing differences 2013 2012 2011 1,458 1,469 1,294 285 263 251 19 33 (12) (4) 8 (1) 10 90 19 The geographic distribution of revenues for our Discrete in income from operations Automation and Motion division was as follows: Operational EBITDA 1,783 1,735 1,664 (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 39 32 26 3 37 33 27 3 38 32 27 3 100 100 100 In 2013, Europe’s share of total revenues increased as several large projects were executed from the 2012 order backlog. Revenue growth was achieved in Sweden, Norway, Italy, Fin- land and Switzerland. The share of the Americas decreased as revenue growth in Brazil and Canada was offset by a revenue decrease in the U.S. Asia’s share of revenues declined as revenues in India, Australia and South Korea were lower than 2012, while China recorded moderate growth. In 2012, the share of revenues from the Americas in- creased due to higher orders. Revenues in Europe grew due to the solid execution of the order backlog but Europe’s share was lower as revenues in the other regions grew faster. In 2013, Operational EBITDA increased 3 percent compared to 2012, primarily due to the reasons described under “Income from operations”, and excluding the explanations related to the reconciling items in the table above. In 2012, Operational EBITDA increased 4 percent com- pared to 2011, primarily due to the reasons described under “Income from operations”, and excluding the explanations related to the reconciling items in the table above. Fiscal year 2014 outlook The uncertainty around the growth prospects in Europe and North America affects our business forecast. Orders and revenues are expected to grow in 2014, especially in emerg- ing markets. We expect that the need for improved energy efficiency and productivity in a wide range of industries will continue to support the demand for automation solutions and energy-efficient products provided by the Discrete Automa- tion and Motion division. 86 Financial review of ABB Group | ABB Annual Report 2013 Low Voltage Products The financial results of our Low Voltage Products division were as follows: % Change Revenues In 2013, revenues increased 16 percent (16 percent in local currencies), primarily due to the impact of including Thomas & Betts for the full year in 2013. In addition, revenues grew in our product businesses, while revenues were lower in the systems business. ($ in millions) Orders Order backlog at Dec. 31, Revenues Income from operations Operational EBITDA 2013 7,696 1,057 7,729 1,092 1,468 2012 2011 2013 2012 In 2012, revenues increased 25 percent (29 percent in local 6,720 5,364 1,117 887 6,638 5,304 856 904 1,219 1,059 15% (5)% 16% 28% 20% 25% 26% 25% (5)% 15% currencies). Excluding Thomas & Betts, revenues decreased 4 percent (flat in local currencies), as lower revenues from the product businesses were not fully offset by increased sys- tems business revenues. The geographic distribution of revenues for our Low Volt- age Products division was as follows: Orders Orders increased 15 percent (14 percent in local currencies) in 2013, driven primarily by the impact of including Thomas & Betts for the full year in 2013. In addition, orders grew mod- erately in most product businesses, while in the systems business orders decreased. Order growth in 2012 of 25 percent (29 percent in local currencies) was driven by the contribution from Thomas & Betts, which was acquired in May 2012. Excluding Thomas & Betts, orders decreased 4 percent (flat in local currencies). There was moderate growth in the systems business, while the product businesses decreased. The geographic distribution of orders for our Low Voltage Products division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 39 32 22 7 43 26 24 7 55 9 28 8 100 100 100 In 2013, the share of orders from the Americas increased and the share of orders from both Europe and Asia decreased, due primarily to the impact of including Thomas & Betts for the full year in 2013, which operates primarily in the U.S. and Canada. In 2012, orders in North America increased significantly due to Thomas & Betts, resulting in a more balanced geo- graphic distribution of orders worldwide. Excluding Thomas & Betts, orders increased in Northern Europe and South Asia, but at the same time the division faced weaker demand in industrial and construction sectors in several of ABB’s largest markets, such as Central and Southern Europe. Order backlog In 2013, order backlog decreased 5 percent (4 percent in local currencies), driven mainly by certain product busi- nesses. Excluding Thomas & Betts, order backlog increased 5 percent (4 percent in local currencies) in 2012. The higher backlog was driven by both product and systems busi- nesses. (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 39 33 22 6 43 26 24 7 56 9 28 7 100 100 100 In 2013, the share of revenues from the Americas increased and the share of revenues from both Europe and Asia de- creased, due primarily to the impact of including Thomas & Betts for the full year in 2013. In 2012, the share of revenues from the Americas increased significantly due to Thomas & Betts. Excluding Thomas & Betts, the geographical distribution of revenue reflects the weaker demand in certain key markets, such as Central and Southern Europe. Income from operations In 2013, income from operations increased 28 percent, due mainly to the impact of including Thomas & Betts for the full year in 2013 and also due to the inclusion in 2012 of $106 million of acquisition-related expenses and certain non- operational items (which mainly included certain employee- related expenses and transaction costs for Thomas & Betts). Depreciation and amortization of $323 million was higher than in 2012, due primarily to including Thomas & Betts for a full year. In addition, the change in geographic distribution of revenues in 2013, as well as a different revenue mix between products and systems, increased profitability. In 2012, income from operations decreased 5 percent due to an increased proportion of revenues from the lower margin systems business, and lower volumes in certain key markets partly offset by the benefits from including Thomas & Betts. Excluding Thomas & Betts, income from operations decreased 10 percent. Acquisition-related expenses and certain non-operational items of $106 million negatively im- pacted income from operations. Depreciation and amorti- zation of $250 million was substantially higher in 2012, com- pared to 2011 ($116 million), due to Thomas & Betts. ABB Annual Report 2013 | Financial review of ABB Group 87 Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Low Voltage Products division was as follows: ($ in millions) Income from operations Depreciation and amortization 2013 1,092 323 2012 2011 856 250 904 116 Despite economic uncertainty across many parts of the world, orders in 2012 reached the same level as 2011 (increased 4 percent in local currencies) driven by key markets in marine, mining, and oil and gas. Orders from pulp and paper, and metals sectors were weaker however, especially in Europe, China and India. Certain short-cycle product businesses, such as Measurement Products, also recorded lower volumes in the second half of the year. 23 20 The geographic distribution of orders for our Process Automation division was as follows: Restructuring and restructuring-related expenses Acquisition-related expenses and certain non-operational items FX/commodity timing differences in income from operations Operational EBITDA 31 16 6 106 – (in %) (16) 19 Europe 1,468 1,219 1,059 The Americas Asia Middle East and Africa Total 2013 2012 2011 37 23 31 9 37 25 27 11 39 23 30 8 100 100 100 In 2013, Operational EBITDA increased 20 percent compared to 2012, primarily due to the reasons described under “In- come from operations”, excluding the explanations related to the reconciling items in the table above. In 2012, Operational EBITDA increased 15 percent com- pared to 2011, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Excluding Thomas & Betts, Operational EBITDA declined 11 percent. Fiscal year 2014 outlook The outlook for 2014 continues to be uncertain, despite some positive early cycle macroeconomic signs. In emerging markets trends are improving but the level of growth depends on the strength of the economic development. Some key markets in Europe remain challenging, including the Mediter- ranean countries. Process Automation The financial results of our Process Automation division were as follows: ($ in millions) Orders Order backlog at Dec. 31, Revenues Income from operations 2013 8,000 5,772 8,497 990 % Change 2012 2011 2013 2012 8,704 8,726 (8)% 6,416 5,771 (10)% 8,156 8,300 912 963 4% 9% 9% – 11% (2)% (5)% (2)% Operational EBITDA 1,096 1,003 1,028 Orders Orders in 2013 declined 8 percent (8 percent in local curren- cies), reflecting the response of our customers to ongoing economic uncertainty. Order declines were primarily due to reductions in large orders as tender activity for major expan- sion projects decreased across most sectors. Orders during the year largely reflected customer investment in productivity improvements for existing assets rather than investment in capacity expansion. Orders from the oil and gas and marine sectors remained strong but were lower than in 2012, while orders from metals and pulp and paper customers decreased. 88 Financial review of ABB Group | ABB Annual Report 2013 In 2013, the share of orders from Asia grew while declining in the Americas and MEA. In Asia, the increase was primarily from China, where higher orders were mainly driven by the marine sector while the mining sector remained weak. South Korea also remained strong in the marine sector. In Europe, the offshore oil and gas market in the North Sea continued to see capital investments based on current high oil prices and improving reservoir assessment technology. The European shipbuilding sector also saw renewed activity, although eco- nomic constraints such as overcapacity and the lack of financ- ing have affected this sector. Overall, Europe, with the same share of orders as in 2012, had a moderate decrease in orders, although still at high levels. Orders in the Americas were impacted by a reduction in investments made by the mining sector, while the MEA region decreased primarily due to a reduction in large orders received from the oil and gas sector. Growth in 2012 was driven by the MEA region and the Americas, while Europe retained its high share of total orders. Growth in MEA was driven by several oil and gas investments across the region, as well as harbor cranes investments in the United Arab Emirates and a mining investment in Mozam- bique. In the Americas, South America recorded the stron- gest growth, driven by several mining investments in Chile and Peru, as well as a large marine order in Brazil. North America also continued to be strong, largely driven by mining invest- ments in Canada. Growth in Europe was overall low, as growth in Central Europe, driven by the marine and cranes sector, was offset by declines in Northern Europe. Asia recorded lower orders as the historically high activity level in the South Korean marine sector in 2011 was not repeated, while China grew moderately. Order backlog Order backlog at December 31, 2013, was 10 percent lower (8 percent in local currencies) than in 2012, reflecting the impact of a reduction in order intake during the year. Order backlog at December 31, 2012, was 11 percent higher (8 percent in local currencies) than in 2011. Order backlog growth was largely driven by our Marines and Cranes, Mining, and Oil, Gas and Petrochemical businesses. Revenues Although orders decreased in 2013, revenues were 4 per- cent higher than 2012 (5 percent in local currencies) as we executed on projects in the order backlog from 2012. Rev- enue growth resulted primarily from the systems businesses, particularly in the marine and mining sectors. The Oil, Gas and Petrochemical business also recorded modest growth, while revenues declined in the Paper, Metals & Cement business. Revenues in our product businesses grew moder- ately, particularly in Measurement Products and Control Technologies. Life-cycle services also showed modest growth. In 2012, revenues were down 2 percent (up 2 percent in local currencies) compared to 2011. We continued to execute from a strong order backlog. Revenue growth was led by the systems business, where the marine, and pulp and paper sectors recorded strong growth, while the metals and miner- als sectors were lower. Our Oil, Gas, and Petrochemical busi- ness was flat. Product businesses grew moderately, where growth in our Measurement Products business was offset by a decline in our Turbo Products business. Life-cycle services continued to be strong and recorded a moderate growth, while our Full Service business was down, as we continued to refocus our portfolio towards higher value-added activities. Income from operations In 2013, income from operations increased primarily due to higher revenues, as well as a favorable product mix resulting from stronger growth rates in our higher-margin businesses. Improved project execution in the systems businesses and strict cost control also contributed to the increase. In 2012, income from operations declined slightly com- pared to the previous year. The biggest driver for the decline was lower profitability in the Turbocharging business which was impacted by difficult market conditions, as well as $20 million additional restructuring expenses to further align our business structure to prevailing market conditions. Most of the restructuring expenses were recorded in the Turbo- charging and Full Service businesses, as well as the Paper Metals and Cement businesses. In the systems business, the margin was on the same level as in 2011, while in the ser- vices business, life-cycle services continued to be strong and achieved a higher margin. Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Process Automation division was as follows: The geographic distribution of revenues for our Process ($ in millions) Automation division was as follows: Income from operations Depreciation and amortization (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 Restructuring and restructuring-related 36 24 32 8 37 23 30 10 39 22 27 12 expenses Acquisition-related expenses and certain non-operational items FX/commodity timing differences 100 100 100 in income from operations 2013 2012 2011 990 87 912 82 963 83 31 (6) (6) 28 2 8 – (21) (26) In 2013, revenues grew across most regions. The share of revenues from Asia increased as revenues grew in South Korea and China with high demand from the marine sector, while in Australia revenues grew in the oil and gas and mining sec- tors. The share of revenues from the Americas also increased as revenues grew primarily in South America, driven by the mining sector in Chile and Peru, while revenue levels in North America were maintained. Although the share of revenues from Europe decreased, revenues from Europe increased, mainly from higher revenues in the oil and gas sector in North- ern Europe, while the rest of Europe was slightly lower. The share of revenues from MEA was lower, primarily due to the timing of large projects in Africa. In 2012, revenue growth was led by Asia and the Ameri- cas. In Asia, strong growth was recorded in South Korea, driven by the Marine business, as well as growth in Singapore and Australia. China and India however declined. In the Americas, revenue growth was driven by the mining sector in Chile, as well as the oil and gas sector in Canada. Europe’s share of revenues decreased, although still at high levels, as growth in the Oil and Gas, and Marine businesses in Northern Europe was offset by lower growth in Central Europe. Operational EBITDA 1,096 1,003 1,028 In 2013, Operational EBITDA increased 9 percent compared to 2012, primarily due to the reasons described under “In- come from operations”, excluding the explanations related to the reconciling items in the table above. In 2012, Operational EBITDA declined slightly compared to 2011, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Fiscal year 2014 outlook The outlook for 2014 is mixed and is industry dependent. The oil and gas industry is expected to be one key source of growth, not only because demand is expected to remain high and continue to grow, but also because new technolo- gies (such as hydraulic fracturing) and new challenges (such as subsea automation) will drive capital expenditure. However, the mining and metals industry suffers from both overcapacity and increasing exploration cost. The pulp and paper industry has invested in fiber production during last two years, however future growth in this industry is expected to be limited. ABB Annual Report 2013 | Financial review of ABB Group 89 Revenues In 2013, revenues increased 3 percent (3 percent in local currencies), mainly reflecting the execution of the 2012 order backlog. This included the execution of orders with longer lead times, as well as higher revenues from industries typically having a shorter lead time, such as the distribution and industry sectors. Service revenues continued to grow but represented the same share of total division revenues as in 2012. In 2012, revenues decreased 1 percent (increased 2 per- cent in local currencies), reflecting the timing of order back- log conversion and market conditions. Revenues from distri- bution- and industry-related sectors were steady while the decrease in transmission-related volumes reflected the order backlog conversion. Service revenues grew and represented an increased share of total division revenues. The geographic distribution of revenues for our Power Products division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 32 27 30 11 32 27 32 9 34 27 30 9 100 100 100 In 2013, the shares of revenues from both the Americas and Europe remained unchanged, reflecting the current economic environment. The share of revenues from Asia fell as revenues in certain key markets decreased slightly compared to 2012. The increase in the share of revenues from MEA was primarily driven by revenue increases in Saudi Arabia. In 2012, Asia increased its share of revenues reflecting the timing of order execution. The share of Europe declined due to continued economic uncertainty and selective capital investments by customers. The Americas maintained its share of revenues due to higher demand in the U.S. Income from operations In 2013, income from operations was at the same level as 2012, as benefits from higher revenues were mostly offset by higher non-operational charges and higher depreciation and amortization. Operating margins were maintained as price pressure from lower margin orders in the backlog was largely offset by cost savings. In 2013, the gains from FX/commodity derivative timing differences were lower than in 2012. Restruc- turing-related expenses were at the same level as 2012. In 2012, income from operations was lower than in 2011, primarily reflecting the execution of lower-margin order back- log as a result of pricing pressure. Cost saving initiatives helped to partially reduce the impact, as did a positive effect from FX/commodity timing differences and slightly lower re- structuring and restructuring-related expenses. Power Products The financial results of our Power Products division were as follows: ($ in millions) Orders 2013 2012 2011 2013 2012 % Change 10,459 11,040 11,068 (5)% (6)% 3% – 6% (1)% Order backlog at Dec. 31, 7,946 8,493 8,029 Revenues 11,032 10,717 10,869 Income from operations Operational EBITDA 1,331 1,637 1,328 1,476 – (10)% 1,585 1,782 3% (11)% Orders In 2013, orders decreased 5 percent (5 percent in local cur- rencies), as a result of a challenging market environment and restrained investment by power utilities. Although demand in the industrial and distribution sectors continued to offer opportunities, order intake was affected by lower demand in the power transmission sector. In 2012, order intake was maintained at the level of 2011 (increased 3 percent in local currencies) despite challenging economic and market conditions. Order intake was driven by steady demand in the industrial and distribution sectors and selective investments in the power transmission sector. The geographic distribution of orders for our Power Products division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 31 28 29 12 33 27 29 11 32 26 33 9 100 100 100 In 2013, the higher share of orders from MEA reflected continued development of power infrastructure in the region. The share of the Americas was steady, mainly driven by distribution upgrades. Asia maintained its share of total orders with China showing growth while Australia declined, as demand from industrial customers was lower, especially the mining sector. Europe’s share of orders declined, reflecting the current market uncertainty. In 2012, the share of orders from MEA increased as a result of power transmission infrastructure orders. The share of the Americas was driven by grid upgrades in North Amer- ica and capacity-related investments in South America. Asia’s share declined in comparison to 2011 which included a large order in China. Europe was steady despite continued economic challenges restraining large scale investments. Order backlog In 2013, order backlog decreased 6 percent (5 percent in local currencies) compared to 2012. This resulted from lower order intake (described above) and the higher revenues exe- cuted from the 2012 backlog. In 2012, order backlog increased 6 percent (4 percent in local currencies) compared to 2011. The increase was mainly driven by transmission orders, which have a longer order-to- revenue conversion cycle, and steady base orders. 90 Financial review of ABB Group | ABB Annual Report 2013 (18) 36 Order intake in 2012 decreased 14 percent (10 percent Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Power Products division was as follows: ($ in millions) Income from operations Depreciation and amortization 2013 2012 2011 1,331 1,328 1,476 223 209 200 Restructuring and restructuring-related expenses Acquisition-related expenses and certain non-operational items FX/commodity timing differences in income from operations Operational EBITDA 65 70 1 – 66 19 (2) 1,637 1,585 1,782 In 2013, Operational EBITDA increased 3 percent compared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. In 2012, Operational EBITDA decreased 11 percent com- pared to 2011, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Fiscal year 2014 outlook Utility transmission and distribution investments continue to be restrained, based on the overall macroeconomic environ- ment, as industrial growth varies across geographies and markets. Emerging markets are selectively investing in infra- structure projects, while mature markets focus on upgrades and essentials driven by power reliability, efficiency and envi- ronmental concerns. Industrial investment remains largely focused in sectors such as oil and gas. The power transmis- sion utility sector is still seeing selective project investments while distribution demand seems to be leveling out, driven by a deceleration in electricity consumption growth rates. The overall market remains competitive. Power Systems The financial results of our Power Systems division were as follows: ($ in millions) Orders 2013 5,949 2012 2011 2013 2012 7,973 9,278 (25)% (14)% % Change Order backlog at Dec. 31, 9,435 12,107 11,570 (22)% Revenues Income from operations Operational EBITDA 8,375 7,852 8,101 171 419 7 290 548 743 5% (3)% n.a. 7% n.a. 44% (61)% Orders Order intake in 2013 was 25 percent lower (25 percent lower in local currencies), as customers postponed investments and delayed the award of large orders. In addition, we increased our project selectivity and focused on higher-margin business as part of the division’s strategic repositioning (announced in December 2012). Power infrastructure spending was restrained due to economic uncertainties in most regions, while trans- mission utilities continued to invest selectively, focusing on additional capacity in emerging markets while mature markets focused mainly on grid upgrades. Large orders in 2013 included a $110 million order for a HVDC converter station to facilitate the connection of the Lithuanian and Polish power grids, an $80 million order to power Canada’s largest solar photovoltaic plant, and substation orders of $160 million in Kuwait to help strengthen the country’s power grid and sup- port its growing infrastructure. Continued price pressure, resulting from ongoing macroeconomic weakness in certain key geographical markets, also negatively impacted our order levels in 2013. in local currencies), mainly due to a lower volume of large orders compared with 2011, which had included a $1 billion offshore wind farm order in Germany and an Ultrahigh Voltage Direct Current (UHVDC) power transmission order in India of around $900 million. The level of base orders was slightly lower than in 2011, with decreases in all businesses except Network Management where software orders increased. Large orders secured in 2012 included a $260 million converter station upgrade from the U.S. to improve power reliability in Oregon, a $170 million contract for a power link between an oil and gas field in the North Sea and the Norwegian grid, and multiple power infrastructure-related orders in Saudi Ara- bia and Iraq with a combined value of around $700 million. Mincom (an Australia-based software company specializing in solutions for mining and other asset-intensive industries, acquired in the third quarter of 2011) contributed $137 million to orders in 2012, compared with $47 million in 2011. The geographic distribution of orders for our Power Systems division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 35 25 17 23 30 31 18 21 40 17 27 16 100 100 100 In 2013, orders declined across all regions compared to 2012. The change in the geographical share of orders primar- ily reflects changes in the geographical locations of large orders received during 2013 compared to 2012. The order decrease in the Americas mainly resulted from the strong level of large orders in 2012. Regionally, the percentage of our orders from Europe was the highest, although both large and base orders were lower than in the previous year. In 2012, the Americas was the largest region in terms of order intake, attributable to strong order growth in the U.S., Canada and Brazil. The order share of Europe decreased in 2012 compared with 2011, reflecting the $1 billion order in Germany booked in 2011. Growth in the MEA region was mainly driven by large orders in Saudi Arabia and Iraq. Asia’s share of orders in 2012 was lower than in the previous year, mainly due to a lower level of large orders from India, where the $900 million order was booked in 2011. ABB Annual Report 2013 | Financial review of ABB Group 91 Order backlog Order backlog at December 31, 2013, was $9,435 million, a decrease of 22 percent (21 percent in local currencies) compared with 2012. Order backlog was impacted signifi- cantly by the lower level of large orders received in 2013, particularly the lack of very large project orders which typi- cally have execution times stretching over several years. Order backlog at December 31, 2012, reached a record level of $12,107 million, corresponding to an increase of 5 percent (2 percent in local currencies) compared with 2011. Revenues Revenues in 2013 increased 7 percent (8 percent in local currencies), with growth in all businesses. The increase was achieved primarily through the execution of projects from the 2012 order backlog. The strong order backlog level at the beginning of 2013 provided the division a strong base from which to generate revenues in 2013 and more than compen- sated for the lower level of orders received in 2013. Revenues in 2012 decreased 3 percent (increased 2 per- cent in local currencies), mainly reflecting the scheduled execution of our order backlog. Lower revenues in the Power Generation business could not be fully offset by revenue growth in our Network Management business. Revenues in the Grid Systems and Substations businesses were margin- ally down in U.S. dollar terms, but showed a small increase in local currencies. Revenues in 2012 included $138 million from Mincom. The geographic distribution of revenues for the Power Systems division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2013 2012 2011 36 23 20 21 40 19 19 22 40 20 18 22 100 100 100 The regional distribution of revenues reflects the geographical end-user markets of the projects we are executing, and consequently varies over time. In 2013, Europe remained the largest region in terms of revenues, despite a decrease in share of revenues compared to previous year. The higher share of revenues from the Americas was due primarily to exe- cution in 2013 of projects from the 2012 order backlog in the U.S. and Brazil. In 2012, Europe was the largest region in terms of rev- enues, partly reflecting the execution of offshore wind projects. The share of revenues from MEA was stable, despite a minor revenue decline in the region compared to 2011, caused by a revenue decrease in the United Arab Emirates and Qatar which could only partly be compensated by growth in Saudi Arabia and Iraq. Revenues grew in Asia, mainly driven by Australia, while the Americas saw a drop due to the timing of execution of some projects in Brazil. tions in 2013 was also negatively impacted by operational charges in the fourth quarter of approximately $260 million, a significant portion of which related to certain offshore wind projects, where severe winter storms in the North Sea caused time delays and increased costs. The remaining operational charges in the fourth quarter related to project cost increases in certain projects in other businesses. Restructuring-related expenses in 2013 of $101 million were higher than the $52 mil- lion in 2012, and included charges to adjust the size of cer- tain operations in response to lower order intake. However, income from operations benefitted from the contribution of higher revenues and lower research and development spend- ing. Additionally, cost savings from supply chain manage- ment and operational excellence activities helped mitigate the impact of price pressures in projects executed from the order backlog. In 2012, income from operations decreased to $7 million. Income from operations was negatively impacted by the execution of lower margin projects from the order backlog, as well as charges totaling approximately $350 million relating to a repositioning of the Power Systems division. The $350 million included charges totaling approximately $100 million related to certain impairments and restructuring- related activities in connection with the closure of low value- adding contracting operations in a number of countries. However, overall, restructuring-related expenses in 2012 of $52 million were marginally lower than the amount recorded in 2011. An increase in sales expenses, as well as research and development spending, related mainly to the acquisitions of Mincom and Tropos Networks Inc. In addition to the impact from acquisitions, sales expenses were also affected by increased tender activity. The impact from lower prices on past orders, now flowing through to revenues, was miti- gated by cost savings from supply chain management and operational excellence activities. Income from operations was also impacted by higher depreciation and amortization ex- penses of $174 million in 2012, compared to $144 million in 2011, mainly resulting from additional depreciation from the Mincom acquisition. Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Power Systems division was as follows: ($ in millions) 2013 2012 2011 Income from operations Depreciation and amortization Restructuring and restructuring-related expenses Acquisition-related expenses and certain non-operational items FX/commodity timing differences in income from operations Operational EBITDA 171 183 101 4 (40) 419 7 174 52 70 548 144 54 – (13) 290 (3) 743 Income from operations In 2013, income from operations increased to $171 million, from $7 million in 2012, due partly to the impacts on 2012 from the repositioning of the Power Systems division (announced in December 2012 and described below). Income from opera- In 2013, Operational EBITDA increased 44 percent compared to 2012, primarily due to the reasons described under “In- come from operations”, excluding the explanations related to the reconciling items in the table above. In 2012, Operational EBITDA decreased 61 percent com- pared to 2011, primarily due to the reasons described under 92 Financial review of ABB Group | ABB Annual Report 2013 “Income from operations”, excluding the explanations related to the reconciling items in the table above. Restructuring Fiscal year 2014 outlook Fundamental market drivers for the Power Systems division remain intact; these include power infrastructure investments in emerging markets to add capacity, aging infrastructure upgrades in mature markets, a focus on renewables, energy efficiency, and the development of more reliable, flexible and smarter grids. There is, however, uncertainty in terms of the timing of investments, stemming from continued macro- economic challenges in several economies, as well as ongoing project execution risks in line with the nature of the systems business. Corporate and Other Income from operations for Corporate and Other was as follows: 2013 2012 2011 Cost savings initiative In 2013, 2012 and 2011, we executed cost saving measures to sustainably reduce ABB’s costs and protect our profitabil- ity. Costs associated with these measures amounted to $252 million, $180 million and $164 million in 2013, 2012 and 2011, respectively. Estimated cost savings initiatives amounted to around $1.2 billion in 2013, and $1.1 billion in each of 2012 and 2011. These savings were achieved by optimizing global sourcing (excluding changes in commodity prices), through reductions to general and administrative expenses, as well as adjustments to our global manufactur- ing and engineering footprint. Liquidity and capital resources ($ in millions) Corporate headquarters and stewardship Corporate research and development Corporate real estate Other Total Corporate and Other (372) (341) (342) Principal sources of funding (187) 49 (140) (650) (192) 50 (41) (524) (202) 56 (54) (542) In 2013, 2012 and 2011, we met our liquidity needs principally using cash from operations, proceeds from the issuance of debt instruments (bonds and commercial paper), short-term bank borrowings and the proceeds from sales of marketable securities. In 2013, Corporate headquarters and stewardship costs in- creased by $31 million, primarily due to increases in personnel expenses and additional investments in information systems infrastructure. In 2012, Corporate headquarters and steward- ship costs were in line with 2011. In 2013, Corporate research and development costs totaled $187 million, marginally lower than the costs reported in 2012. Corporate research and development costs decreased $10 million in 2012, as the amount spent on the growth fund was lower in 2012 than in 2011. During 2013, 2012 and 2011, our financial position was strengthened by the positive cash flow from operating activi- ties of $3,653 million, $3,779 million and $3,612 million, respectively. Our net debt is shown in the table below: December 31, ($ in millions) Cash and equivalents Marketable securities 2013 6,021 2012 6,875 and short-term investments 464 1,606 Corporate real estate primarily includes the income from Short-term debt and current maturities property rentals and gains from the sale of real estate proper- ties. In 2013, 2012 and 2011, income from operations in Corporate real estate includes gains of $23 million, $26 mil- lion, $37 million, respectively, from the sales of real estate property in various countries. “Other” consists of operational costs of our Global Trea- sury Operations, operating income or loss in non-core busi- nesses, and certain other charges. In 2013, “Other” included primarily certain legal compliance cases, certain environ- mental expenses, acquisition-related expenses, the loss on sale of a non-core business and the impairment of certain investments. In 2012, “Other” primarily included the release of a compliance-related provision, partially offset by a provi- sion for certain pension claims in the U.S. and charges from the impairments of our investments in the shares of a public company. In 2011, “Other” included losses from the non-core distributed energy business in the United Kingdom, an im- pairment of our investment in the shares of a public company, as well as charges related to the deconsolidation of a Russian subsidiary and a sale of another Russian subsidiary. of long-term debt Long-term debt Net debt (453) (7,570) (2,537) (7,534) (defined as the sum of the above lines) (1,538) (1,590) Net debt at December 31, 2013, decreased $52 million com- pared to December 31, 2012, as cash flows from operating activities during 2013 of $3,653 million were mostly offset by cash outflows for the payment of dividends ($1,667 million), the acquisition of businesses ($914 million, net of cash ac- quired), and purchases of property, plant and equipment ($1,106 million) during 2013. See “Financial position”, “Net cash used in investing activities” and “Net cash used in financing activities” for further details. ABB Annual Report 2013 | Financial review of ABB Group 93 Our Group Treasury Operations is responsible for provid- ing a range of treasury management services to our group companies, including investing cash in excess of current busi- ness requirements. At December 31, 2013 and 2012, the pro- portion of our aggregate “Cash and equivalents” and “Mar- ketable securities and short-term investments” managed by our Group Treasury Operations amounted to approximately 55 percent and 65 percent, respectively. Throughout 2013 and 2012, the investment strategy for cash (in excess of current business requirements) has been to predominantly invest in short-term time deposits with maturities of less than 3 months, supplemented at times by investments in corporate commercial paper, AAA-rated money market liquidity funds, and government securities, primarily in the U.S. With ongoing credit risk concerns in the eurozone economic area, we restrict bank exposures in the eurozone area. We continue to also restrict the counterparties with whom we are prepared to place cash and we limit our deposits with banks in the eurozone. We actively monitor credit risk in our investment portfolio and hedging activities. Credit risk exposures are controlled in accordance with policies approved by our senior management to identify, measure, monitor and control credit risks. We closely monitor devel- opments in the credit markets and make appropriate changes to our investment policy as deemed necessary. The rating criteria we require for our counterparts have remained unchanged during 2013 (compared to 2012) as follows – a minimum rating of A/A2 for our banking counterparts, while the minimum required rating for investments in short-term corporate paper is A-1/P-1. In addition to rating criteria, we have specific investment parameters and approved instru- ments as well as restricting the types of investments we make. These parameters are closely monitored on an ongoing basis and amended as we consider necessary. We believe the cash flows generated from our business, supplemented, when necessary, through access to the capital markets (including short-term commercial paper) and our credit facilities are sufficient to support business opera- tions, capital expenditures, business acquisitions, the payment of dividends to shareholders and contributions to pension plans. Due to the nature of our operations, our cash flow from operations generally tends to be weaker in the first half of the year than in the second half of the year. Consequently, we believe that our ability to obtain funding from these sources will continue to provide the cash flows necessary to satisfy our working capital and capital expenditure requirements, as well as meet our debt repayments and other financial com- mitments for the next 12 months. See “Disclosures about contractual obligations and commitments”. Debt and interest rates Total outstanding debt was as follows: December 31, ($ in millions) 2013 2012 Short-term debt including current maturities of long-term debt (including bonds) 453 2,537 Long-term debt: – bonds (excluding portion due within one year) – other long-term debt Total debt 7,414 156 8,023 7,380 154 10,071 The decrease in short-term debt in 2013 was primarily due to the repayment at maturity of our EUR 700 million 4.625% instruments due 2013 and the decrease in issued commer- cial paper ($100 million at December 31, 2013, compared to $1,019 million outstanding at December 31, 2012). Our debt has been obtained in a range of currencies and maturities and on various interest rate terms. We use deriva- tives to reduce the interest rate exposures arising on certain of our debt obligations. For example, we use interest rate swaps to effectively convert fixed rate debt into floating rate liabilities. After considering the effects of interest rate swaps, the effective average interest rate on our floating rate long- term debt (including current maturities) of $2,211 million and our fixed rate long-term debt (including current maturities) of $5,389 million was 1.2 percent and 3.1 percent, respec- tively. This compares with an effective rate of 1.6 percent for floating rate long-term debt of $2,353 million and 3.1 per- cent for fixed-rate long-term debt of $6,187 million at Decem- ber 31, 2012. For a discussion of our use of derivatives to modify the interest characteristics of certain of our individual bond issuances, see “Note 12 Debt” to our Consolidated Financial Statements. Credit facility We have a $2 billion multicurrency revolving credit facility, maturing in 2015. No amount was drawn under this committed credit facility at December 31, 2013 and 2012. The facility is for general corporate purposes and serves as a back-stop facility to our commercial paper programs to the extent that we issue commercial paper under the programs described below. The facility contains cross-default clauses whereby an event of default would occur if we were to default on indebtedness, as defined in the facility, at or above a speci- fied threshold. The credit facility does not contain significant covenants that would restrict our ability to pay dividends or raise additional funds in the capital markets. For further details of the credit facility, see “Note 12 Debt” to our Consolidated Financial Statements. 94 Financial review of ABB Group | ABB Annual Report 2013 Commercial paper Credit ratings Credit ratings are assessments by the rating agencies of the credit risk associated with ABB and are based on information provided by us or other sources that the rating agencies con- sider reliable. Higher ratings generally result in lower borrowing costs and increased access to capital markets. Our ratings are of “investment grade” which is defined as Baa3 (or above) from Moody’s and BBB− (or above) from Standard & Poor’s. At December 31, 2013 and 2012, our long-term company ratings were A2 and A from Moody’s and Standard & Poor’s, respectively. Limitations on transfers of funds Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where we operate, including: Algeria, Argentina, Chile, China, Colombia, Egypt, India, Indonesia, Korea, Malaysia, Peru, Russia, Tai- wan, Thailand and Turkey. Funds, other than regular dividends, fees or loan repayments, cannot be readily transferred off- shore from these countries and are therefore deposited and used for working capital needs in those countries. In addi- tion, there are certain countries where, for tax reasons, it is not considered optimal to transfer the cash offshore. As a consequence, these funds are not available within our Group Treasury Operations to meet short-term cash obligations outside the relevant country. The above described funds are reported as cash in our Consolidated Balance Sheets, but we do not consider these funds immediately available for the repayment of debt outside the respective countries where the cash is situated, including those described above. At Decem- ber 31, 2013 and 2012, the balance of “Cash and equivalents” and “Marketable securities and other short-term investments” under such limitations (either regulatory or sub-optimal from a tax perspective) totaled approximately $1,785 million and $1,985 million, respectively. During 2013, we continued to direct our subsidiaries in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. We continue to closely moni- tor the situation to ensure bank counterparty risks are mini- mized. At December 31, 2013, we had in place three commercial paper programs: – a $2 billion commercial paper program for the private placement of USD-denominated commercial paper in the United States, – a $1 billion Euro-commercial paper program for the issu- ance of commercial paper in a variety of currencies, and – a 5 billion Swedish krona program (equivalent to approxi- mately $778 million, using December 31, 2013, exchange rates), allowing us to issue short-term commercial paper in either Swedish krona or euro. At December 31, 2013, $100 million was outstanding under the $2 billion program in the United States, compared to $1,019 million outstanding at December 31, 2012. As described in “Note 12 Debt” to our Consolidated Financial Statements, the amount outstanding increased subsequent to Decem- ber 31, 2013. No amounts were outstanding under either the $1 billion Euro-commercial paper program or the 5 billion Swedish krona program at either December 31, 2013 or 2012. In February 2014, the $1 billion Euro-commercial paper program was terminated and replaced by a $2 billion Euro- commercial paper program, also for issuance in a variety of currencies. European program for the issuance of debt At December 31, 2013 and 2012, $1,722 million and $2,579 mil- lion, respectively, of our total debt outstanding, represented debt issuances under this program that allows the issuance of up to (the equivalent of) approximately $8 billion in certain debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and pos- sibility of issuing any debt under the program are determined with respect to, and as of the date of issuance of, each debt instrument. At December 31, 2013, it was more than 12 months since the program had been updated. New bonds could be issued under the program but could not be listed without us formally updating the program. Australian program for the issuance of debt During 2012, we set up a program for the issuance of up to AUD 1 billion (equivalent to approximately $892 million, using December 31, 2013 exchange rates) of medium-term notes and other debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the program are determined with respect to, and as of the date of issuance of, each debt instrument. At December 31, 2013 and 2012, debt issuance under this program amounted to $353 million and $413 million, respectively. ABB Annual Report 2013 | Financial review of ABB Group 95 Total current liabilities at December 31, 2013, decreased primarily due to the repayment on maturity of bonds, and a reduction in outstanding commercial paper and other short- term debt (see “Note 12 Debt” to our Consolidated Financial Statements). Accounts payable increased 2.4 percent (3.3 percent in local currencies) compared to 2012, mainly due to acquisi- tions. Billings in excess of sales decreased 15.8 percent (13.7 percent in local currencies) compared to 2012 due to the timing of billings and collections for contracts under the percentage-of-completion or completed-contract method. Advances from customers declined 10.9 percent (7.6 percent in local currencies) compared to 2012, due to the timing of cash receipts for advances on large projects with the largest decreases in the Power Systems and Process Automation divisions. Provisions for warranties increased 5.5 percent (5.4 percent in local currencies) compared to 2012, primarily due to acquisitions. Other provisions increased 14.7 percent (15.1 percent in local currencies), largely due to increased provisions for certain projects and increases in certain litiga- tion- and compliance-related provisions. Other current lia- bilities decreased 2.2 percent (1.4 percent in local currencies) primarily due to a reduction in non-trade payables and a reduction of other tax liabilities. Non­current assets December 31, ($ in millions) Property, plant and equipment, net Goodwill Other intangible assets, net Prepaid pension and other employee benefits Investments in equity-accounted companies Deferred taxes Other non-current assets Total non­current assets 2013 6,254 10,670 3,297 93 197 370 758 2012 5,947 10,226 3,501 71 213 334 776 21,639 21,068 Property, plant and equipment increased 5.2 percent (4.9 per- cent in local currencies), primarily due to acquisitions, and high levels of investment across all divisions and most regions. The investments in new manufacturing facilities and up- grades to existing facilities help to secure our technological competitiveness in the growth markets we serve and in- crease our capacity to meet our customers’ requirements. The increase in goodwill was mainly due to the acqui- sition of Power-One. Other intangible assets, net decreased 5.8 percent (5.1 percent in local currencies). See “Note 11 Goodwill and other intangible assets” to our Consolidated Financial Statements. 2,537 Non­current liabilities 1,937 December 31, ($ in millions) 270 Long-term debt 1,291 1,575 Pension and other employee benefits Deferred taxes 4,337 Other non-current liabilities 2013 7,570 1,639 1,265 1,707 2012 7,534 2,290 1,260 1,566 16,675 18,974 Total non­current liabilities 12,181 12,650 Financial position Balance sheets Current assets December 31, ($ in millions) Cash and equivalents Marketable securities and short-term investments Receivables, net Inventories, net Prepaid expenses Deferred taxes Other current assets Total current assets 2013 6,021 464 12,146 6,004 252 832 706 2012 6,875 1,606 11,575 6,182 311 869 584 26,425 28,002 For a discussion on cash and equivalents, see “Liquidity and capital resources – Principal sources of funding” for further details. Marketable securities and short-term investments de- creased as investments were sold during 2013 to provide cash required to fund investing and financing activities (see “Cash flows – Net cash used in investing activities”). Receivables increased 4.9 percent (7.2 percent in local currencies) compared to 2012, primarily due to an increase in unbilled receivables, net (see “Note 7 Receivables, net”), as several large projects experienced execution delays, thus delaying the timing of invoicing and collection. Ongoing work- ing capital improvement projects resulted in a reduction of 5 days sales outstanding in trade receivables but this was more than offset by the increase resulting from acquisitions and higher revenues. Working capital improvement programs also resulted in a reduction in inventories of 2.9 percent (3.8 percent in local currencies) compared to 2012, despite the increases due to acquisitions and higher revenues. For a summary of the components of deferred tax assets and liabilities, see “Note 16 Taxes” to our Consolidated Financial Statements. The increase in “Other current assets” primarily reflects higher income tax receivables and higher fair values for foreign currency derivatives. Current liabilities December 31, ($ in millions) Accounts payable, trade Billings in excess of sales Short-term debt and current maturities of long-term debt Advances from customers Deferred taxes Provisions for warranties Other provisions Other current liabilities Total current liabilities 2012 4,992 2,035 2013 5,112 1,714 453 1,726 259 1,362 1,807 4,242 96 Financial review of ABB Group | ABB Annual Report 2013 Pension and other employee benefits decreased 28.4 percent (28.9 percent in local currencies) due to decreases in the underfunded status of our defined benefit pension plans, pri- marily as a result of changes in actuarial assumptions affect- ing estimated projected benefit obligations (see “Note 17 Em- ployee benefits” to our Consolidated Financial Statements). For a breakdown of other non-current liabilities, see “Note 13 Other provisions, other current liabilities and other non-cur- rent liabilities” to our Consolidated Financial Statements. For further explanation regarding deferred taxes, refer to “Note 16 Taxes” to our Consolidated Financial Statements. Cash flows In the Consolidated Statements of Cash Flows, the effects of discontinued operations are not segregated. The Consolidated Statements of Cash Flows can be summarized as follows: Operating activities in 2012 provided net cash of $3,779 million, an increase from 2011 of 4.6 percent. The increase was primarily driven by a lower increase in work- ing capital requirements offset by the cash impacts of lower net income. Net cash used in investing activities ($ in millions) 2013 2012 2011 Purchases of marketable securities (available-for-sale) Purchases of short-term investments Purchases of property, plant and (526) (2,288) (2,809) (30) (67) (142) equipment and intangible assets (1,106) (1,293) (1,021) Acquisition of businesses (net of cash acquired) and changes in cost and equity investments (914) (3,694) (4,020) Proceeds from sales of marketable securities (available-for-sale) 1,367 1,655 3,717 ($ in millions) Net cash provided by operating activities Net cash used in investing activities 2013 2012 2011 Proceeds from maturity of market- able securities (available-for-sale) 118 3,653 3,779 3,612 Proceeds from short-term (717) (5,575) (3,253) Proceeds from sales of property, investments Net cash provided by (used in) financing activities (3,856) 3,762 (1,208) Effects of exchange rate changes on cash and equivalents 66 90 (229) Net change in cash and equiva­ lents – continuing operations (854) 2,056 (1,078) plant and equipment Proceeds from sales of businesses and equity-accounted companies (net of cash disposed) Other investing activities Net cash used in investing – 27 40 16 29 483 529 57 8 (55) 47 80 62 185 Net cash provided by operating activities ($ in millions) Net income Depreciation and amortization Total adjustments to reconcile net income to net cash provided by operating activities (excluding 2013 2,907 1,318 2012 2,812 1,182 2011 3,315 995 depreciation and amortization) (54) 196 (23) Total changes in operating assets and liabilities (518) (411) (675) Net cash provided by operating activities 3,653 3,779 3,612 Operating activities in 2013 provided net cash of $3,653 mil- lion, a decrease from 2012 of 3.3 percent. The decrease was partially due to higher net working capital requirements, particularly for unbilled receivables for long-term projects, but mitigated partly by cash inflows resulting from improved inventory management. Although net income increased dur- ing 2013, non-cash reconciling adjustments, primarily relating to deferred income taxes, resulted in a decrease in the cash impacts of net income compared to 2012. activities (717) (5,575) (3,253) Net cash used in investing activities in 2013 was an outflow of $717 million, compared to a $5,575 million outflow in 2012. The decrease in outflows is mainly attributable to lower amounts paid for the acquisition of businesses in 2013, lower purchases of property, plant and equipment, and the impact from net sales of marketable securities in 2013 compared with net purchases in 2012. Cash paid for acquisitions (net of cash acquired) during 2013 amounted to $914 million, primarily relating to the acqui- sition of Power-One for $737 million. Total cash disbursements for the purchase of property, plant and equipment and intangibles in 2013 decreased com- pared to 2012, as we reduced the amount of investment in capacity expansion compared to 2012. The total of $1,106 mil- lion included $776 million for construction in progress (gener- ally for buildings and other property facilities), $206 million for the purchase of machinery and equipment, $48 million for the purchase of land and buildings, and $76 million for the purchase of intangible assets. To obtain necessary funds to make dividend payments, bond repayments, and to fund acquisitions during the year, we reduced our amount invested in marketable securities and short-term investments, resulting in net proceeds of $976 million. ABB Annual Report 2013 | Financial review of ABB Group 97 Our financing activities primarily include debt transactions (both from the issuance of debt securities and borrowings directly from banks), dividends paid and share transactions. The 2013 net cash outflow from changes in debt with maturities of 90 days or less principally reflects a reduction in commercial paper outstanding. The 2012 and 2011 net cash inflow primarily reflects the net issuance of commercial paper under our commercial paper program in the United States. In 2013, the increase in debt primarily related to borrowings under borrowing facilities in various countries and issuance of commercial paper with maturities above 90 days. In 2012, the cash inflows from increases in debt primarily related to the issuance of the following bonds: EUR 1,250 million aggre- gate principal, $1,250 million aggregate principal, $750 mil- lion aggregate principal, $500 million aggregate principal, AUD 400 million aggregate principal and CHF 350 million aggregate principal. In 2011, the cash inflows from increases in debt principally related to the issuance of the following bonds: $600 million aggregate principal, $650 million aggre- gate principal, CHF 500 million aggregate principal and CHF 350 million aggregate principal. During 2013, $1,893 million of debt was repaid, primarily reflecting the repayment at maturity of the 700 million euro bonds (equivalent to $918 million at date of repayment). Other repayments during 2013 consisted mainly of repayments of commercial paper issuances having maturities above 90 days and repayments of other short-term debt. During 2012, $1,104 million of debt was repaid, mainly reflecting the repay- ment of part of the debt assumed from the acquisition of Thomas & Betts (approximately $320 million) and of other debt (primarily short-term bank borrowings). During 2011, $2,576 million of bonds and other debt was repaid, primarily reflecting the repayment of $1.2 billion in debt assumed upon the acquisition of Baldor in January 2011 and the repayment at maturity of 650 million euro (equivalent to $865 million at date of repayment). Net cash used in investing activities in 2012 increased compared to 2011 due to the sustained high level of cash out- flow for the acquisition of businesses, primarily Thomas & Betts. In addition, there were net cash outflows from market- able securities and short-term investments of $673 million compared to net inflows in the prior year of $1,778 million as acquisitions in 2012 were primarily financed through new corporate bonds issued, whereas in 2011, acquisitions were funded mainly by our excess liquidity. Capital expenditures for new plant, property and equipment were also higher in 2012, to support business growth. Total cash disbursements for the purchase of property, plant and equipment and intangibles in 2012 of $1,293 million included $885 million for construction in progress, $248 mil- lion for the purchase of machinery and equipment, $83 million for the purchase of land and buildings, and $77 million for the purchase of intangible assets. The net cash inflow from marketable securities and short-term investments in 2011 reflected the use of our excess liquidity in funding primarily the acquisition of businesses. Total cash disbursements for the purchase of property, plant and equipment and intangibles in 2011, included $268 mil- lion for the purchase of machinery and equipment, $128 mil- lion for the purchase of land and buildings, $57 million for the purchase of intangible assets and $568 million for construc- tion in progress. Acquisition of businesses (net of cash acquired) and changes in cost and equity investments in 2011, primarily related to the acquisition of Baldor, Mincom, Trasfor and Lorentzen & Wettre Group and other smaller acquisitions. Net cash provided by (used in) financing activities ($ in millions) 2013 2012 2011 Net changes in debt with maturities of 90 days or less Increase in debt Repayment of debt Delivery of shares Dividends paid Acquisition of noncontrolling (697) 492 (1,893) 74 570 5,986 (1,104) 90 450 2,580 (2,576) 110 (1,667) (1,626) (1,569) interests (13) (9) (13) Dividends paid to noncontrolling shareholders Other financing activities Net cash provided by (used in) (149) (3) (121) (24) (157) (33) financing activities (3,856) 3,762 (1,208) 98 Financial review of ABB Group | ABB Annual Report 2013 Disclosures about contractual obligations and commitments The contractual obligations presented in the table below represent our estimates of future payments under fixed con- tractual obligations and commitments. The amounts in the table may differ from those reported in our Consolidated Bal- ance Sheet at December 31, 2013. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual pay- ments in future periods may vary from those presented in the table. The following table summarizes certain of our con- tractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2013: Less than 1–3 3–5 More than Off balance sheet arrangements Commercial commitments We disclose the maximum potential exposure of certain guar- antees, as well as possible recourse provisions that may allow us to recover from third parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual expo- sure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assessment of the expected exposure. Guarantees The following table provides quantitative data regarding our third-party guarantees. The maximum potential payments represent a worst-case scenario, and do not reflect our ex- pected results. Payments due by period Total 1 year years years 5 years ($ in millions) Long-term debt obligations 7,616 30 1,217 1,281 5,088 Interest payments related to long-term debt obligations Operating lease obligations Capital lease obligations(1) 2,142 1,985 209 225 510 36 Purchase obligations 5,613 4,724 435 776 61 756 368 451 24 124 December 31, ($ in millions) 1,114 Performance guarantees 248 Financial guarantees 88 9 Indemnification guarantees Total Maximum potential payments 2013 149 77 50 276 2012 149 83 190 422 Total 17,565 5,525 3,245 2,248 6,547 (1) Capital lease obligations represent the total cash payments to be made in the future and include interest expense of $83 million and executory cost of $2 million. In the table above, the long-term debt obligations reflect the cash amounts to be repaid upon maturity of those debt obligations. The cash obligations above will differ from the long-term debt balance reflected in “Note 12 Debt” to our Consolidated Financial Statements due to the impacts of fair value hedge accounting adjustments and premiums or discounts on certain debt. We have determined the interest payments related to long-term debt obligations by reference to the payments due under the terms of our debt obligations at the time such obli- gations were incurred. However, we use interest rate swaps to modify the interest characteristics of certain of our debt obli- gations. The net effect of these swaps may be to increase or decrease the actual amount of our cash interest payment obligations, which may differ from those stated in the above table. For further details on our debt obligations and the related hedges, see “Note 12 Debt” to our Consolidated Financial Statements. Of the total of $864 million unrecognized tax benefits (net of deferred tax assets) at December 31, 2013, it is expected that $34 million will be paid within less than a year. However, we cannot make a reasonably reliable estimate as to the related future payments for the remaining amount. The carrying amounts of liabilities recorded in the Consoli- dated Balance Sheets in respect of the above guarantees were not significant at December 31, 2013 and 2012, and re- flect our best estimate of future payments, which we may incur as part of fulfilling our guarantee obligations. In addition, in the normal course of bidding for and exe- cuting certain projects, we have entered into standby letters of credit, bid/performance bonds and surety bonds (collec- tively “performance bonds”) with various financial institutions. Customers can draw on such performance bonds in the event that the Company does not fulfill its contractual obliga- tions. ABB would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2013, 2012 and 2011. For additional descriptions of our performance, financial and indemnification guarantees see “Note 15 Commitments and contingencies” to our Consolidated Financial Statements. ABB Annual Report 2013 | Financial review of ABB Group 99 Consolidated Financial Statements 2013 2012 35,282 32,979 6,566 6,357 41,848 39,336 2011 31,875 6,115 37,990 (25,728) (23,838) (22,649) (4,128) (4,120) (3,907) (29,856) (27,958) (26,556) 11,992 (6,094) (1,470) (41) 4,387 69 (390) 4,066 (1,122) 2,944 (37) 2,907 (120) 2,787 11,378 (5,756) (1,464) (100) 4,058 73 (293) 3,838 (1,030) 2,808 4 2,812 (108) 2,704 11,434 (5,373) (1,371) (23) 4,667 90 (207) 4,550 (1,244) 3,306 9 3,315 (147) 3,168 2,824 2,787 2,700 2,704 3,159 3,168 1.23 1.21 1.23 1.21 1.18 1.18 1.18 1.18 1.38 1.38 1.38 1.38 2,297 2,305 2,293 2,295 2,288 2,291 Consolidated Income Statements Year ended December 31 ($ in millions, except per share data in $) Sales of products Sales of services Total revenues Cost of products Cost of services Total cost of sales Gross profit Selling, general and administrative expenses Non-order related research and development expenses Other income (expense), net Income from operations Interest and dividend income Interest and other finance expense Income from continuing operations before taxes Provision for taxes Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Net income attributable to noncontrolling interests Net income attributable to ABB Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Net income Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Net income Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Net income Weighted-average number of shares outstanding (in millions) used to compute: Basic earnings per share attributable to ABB shareholders Diluted earnings per share attributable to ABB shareholders See accompanying Notes to the Consolidated Financial Statements 100 Financial review of ABB Group | ABB Annual Report 2013 Consolidated Statements of Comprehensive Income Year ended December 31 ($ in millions) Net income Other comprehensive income (loss), net of tax: Foreign currency translation adjustments Available-for-sale securities: Net unrealized gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Unrealized gains (losses) on available-for-sale securities Pension and other postretirement plans: Prior service costs arising during the year Net actuarial gains (losses) arising during the year Amortization of prior service cost included in net income Amortization of net actuarial loss included in net income Amortization of transition liability included in net income Pension and other postretirement plan adjustments Cash flow hedge derivatives: Net unrealized gains (losses) arising during the year Reclassification adjustments for net gains included in net income Unrealized gains (losses) of cash flow hedge derivatives Total other comprehensive income (loss), net of tax Total comprehensive income, net of tax Comprehensive income attributable to noncontrolling interests, net of tax Total comprehensive income, net of tax, attributable to ABB See accompanying Notes to the Consolidated Financial Statements 2013 2,907 2012 2,812 2011 3,315 141 383 (275) (4) (13) (17) (16) 291 23 99 – 3 1 4 (36) (601) 30 70 – (3) 5 2 (23) (593) 22 44 1 397 (537) (549) 28 (43) (15) 506 3,413 (115) 3,298 53 (28) 25 (125) 2,687 (98) 2,589 (19) (61) (80) (902) 2,413 (136) 2,277 ABB Annual Report 2013 | Financial review of ABB Group 101 Consolidated Balance Sheets December 31 ($ in millions, except share data) Cash and equivalents Marketable securities and short-term investments Receivables, net Inventories, net Prepaid expenses Deferred taxes Other current assets Total current assets Property, plant and equipment, net Goodwill Other intangible assets, net Prepaid pension and other employee benefits Investments in equity-accounted companies Deferred taxes Other non-current assets Total assets Accounts payable, trade Billings in excess of sales Short-term debt and current maturities of long-term debt Advances from customers Deferred taxes Provisions for warranties Other provisions Other current liabilities Total current liabilities Long-term debt Pension and other employee benefits Deferred taxes Other non-current liabilities Total liabilities Commitments and contingencies Stockholders’ equity: Capital stock and additional paid-in capital (2,314,743,264 issued shares at December 31, 2013 and 2012) Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (14,093,960 and 18,793,989 shares at December 31, 2013 and 2012, respectively) Total ABB stockholders’ equity Noncontrolling interests Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying Notes to the Consolidated Financial Statements 102 Financial review of ABB Group | ABB Annual Report 2013 2013 6,021 464 12,146 6,004 252 832 706 2012 6,875 1,606 11,575 6,182 311 869 584 26,425 28,002 6,254 10,670 3,297 93 197 370 758 5,947 10,226 3,501 71 213 334 776 48,064 49,070 5,112 1,714 453 1,726 259 1,362 1,807 4,242 4,992 2,035 2,537 1,937 270 1,291 1,575 4,337 16,675 18,974 7,570 1,639 1,265 1,707 7,534 2,290 1,260 1,566 28,856 31,624 1,750 19,186 (2,012) (246) 1,691 18,066 (2,523) (328) 18,678 16,906 530 19,208 48,064 540 17,446 49,070 Consolidated Statements of Cash Flows Year ended December 31 ($ in millions) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: 2013 2012 2011 2,907 2,812 3,315 Depreciation and amortization Pension and other employee benefits Deferred taxes Net gain from sale of property, plant and equipment Other Changes in operating assets and liabilities: Trade receivables, net Inventories, net Trade payables Billings in excess of sales Provisions, net Advances from customers Other assets and liabilities, net Net cash provided by operating activities Investing activities: Purchases of marketable securities (available-for-sale) Purchases of short-term investments Purchases of property, plant and equipment and intangible assets Acquisition of businesses (net of cash acquired) and changes in cost and equity investments Proceeds from sales of marketable securities (available-for-sale) Proceeds from maturity of marketable securities (available-for-sale) Proceeds from short-term investments Proceeds from sales of property, plant and equipment Proceeds from sales of businesses and equity-accounted companies (net of cash disposed) Other investing activities Net cash used in investing activities Financing activities: Net changes in debt with maturities of 90 days or less Increase in debt Repayment of debt Delivery of shares Dividends paid Acquisition of noncontrolling interests Dividends paid to noncontrolling shareholders Other financing activities Net cash provided by (used in) financing activities Effects of exchange rate changes on cash and equivalents Net change in cash and equivalents – continuing operations Cash and equivalents, beginning of period Cash and equivalents, end of period Supplementary disclosure of cash flow information: Interest paid Taxes paid See accompanying Notes to the Consolidated Financial Statements 1,318 6 (137) (18) 95 (571) 324 (43) (168) 199 (145) (114) 3,653 (526) (30) (1,106) (914) 1,367 118 47 80 62 185 (717) (697) 492 (1,893) 74 1,182 (13) 64 (26) 171 (310) 61 (57) 152 (109) 181 (329) 3,779 (2,288) (67) (1,293) (3,694) 1,655 – 27 40 16 29 995 (49) (34) (47) 107 (731) (600) 213 150 (391) 47 637 3,612 (2,809) (142) (1,021) (4,020) 3,717 483 529 57 8 (55) (5,575) (3,253) 570 5,986 (1,104) 90 450 2,580 (2,576) 110 (1,667) (1,626) (1,569) (13) (149) (3) (9) (121) (24) (13) (157) (33) (3,856) 3,762 (1,208) 66 (854) 6,875 6,021 90 2,056 4,819 6,875 (229) (1,078) 5,897 4,819 287 1,278 189 1,211 165 1,305 ABB Annual Report 2013 | Financial review of ABB Group 103 Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2013, 2012 and 2011 ($ in millions) Balance at January 1, 2011 Comprehensive income: Net income Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax Total comprehensive income Changes in noncontrolling interests Dividends paid to noncontrolling shareholders Dividends paid Share-based payment arrangements Delivery of shares Call options Replacement options issued in connection with acquisition Balance at December 31, 2011 Comprehensive income: Net income Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax Total comprehensive income Changes in noncontrolling interests Dividends paid to noncontrolling shareholders Dividends paid Share-based payment arrangements Delivery of shares Call options Replacement options issued in connection with acquisition Other Balance at December 31, 2012 Comprehensive income: Net income Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax Total comprehensive income Changes in noncontrolling interests Dividends paid to noncontrolling shareholders Dividends paid Share-based payment arrangements Delivery of shares Call options Replacement options issued in connection with acquisition Other Balance at December 31, 2013 See accompanying Notes to the Consolidated Financial Statements 104 Financial review of ABB Group | ABB Annual Report 2013 Retained earnings 15,389 3,168 (1,569) Capital stock and additional paid-in capital 1,454 (3) 67 93 (9) 19 1,621 16,988 (968) 20 (1,472) 12 (2,408) (424) 15,777 2,704 (1,626) 60 (6) 10 5 1 1,691 18,066 (580) 24 (2,004) 37 (2,523) (328) 16,906 2,787 (1,667) (17) 71 (8) 13 2 (2) 1,750 19,186 (431) 7 (1,610) 22 (2,012) (246) 18,678 530 19,208 Accumulated other comprehensive loss Foreign Unrealized gains Pension and Unrealized gains Total accu- currency (losses) on other post- (losses) of mulated other translation available-for-sale retirement plan cash flow hedge compre- Treasury stockholders’ controlling holders’ adjustment securities adjustments derivatives hensive loss (707) 18 (920) 92 (1,517) stock (441) Non- interests (261) 388 149 2 4 (552) (80) (532) 25 (261) 2 (552) (80) 388 4 (532) 25 (17) 394 149 (17) 394 (15) (15) 573 147 (14) 3 7 136 (157) 559 108 (5) (5) 98 6 (123) 540 120 (8) 3 115 25 (150) Total ABB equity 14,885 3,168 (261) 2 (552) (80) 2,277 (1,569) (3) – 67 110 (9) 19 2,704 388 4 (532) 25 2,589 (1,626) – – 60 90 10 5 1 2,787 149 (17) 394 (15) (17) – 3,298 (1,667) 71 74 13 2 (2) Total stock- equity 15,458 3,315 (275) (549) (80) 2,413 2 4 (157) (1,569) 67 110 (9) 19 16,336 2,812 383 4 (537) 25 2,687 6 (123) (1,626) 60 90 10 5 1 17,446 2,907 141 (17) 397 (15) 3,413 8 (150) (1,667) 71 74 13 2 (2) 17 96 82 Years ended December 31, 2013, 2012 and 2011 ($ in millions) Balance at January 1, 2011 Comprehensive income: Net income Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax Capital stock and additional paid-in capital 1,454 Retained earnings 15,389 3,168 Accumulated other comprehensive loss Foreign Unrealized gains Pension and Unrealized gains Total accu- currency (losses) on other post- (losses) of mulated other Total ABB Non- Total stock- translation available-for-sale retirement plan cash flow hedge compre- Treasury stockholders’ controlling holders’ adjustment securities adjustments derivatives hensive loss (707) 18 (920) 92 (1,517) stock (441) (261) 2 (552) (261) 2 (552) (80) (80) 17 equity 14,885 3,168 (261) 2 (552) (80) 2,277 (3) – (1,569) 67 110 (9) 19 1,621 16,988 (968) 20 (1,472) 12 (2,408) (424) 15,777 Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax 388 4 (532) 388 4 (532) 25 25 2,704 388 4 (532) 25 2,589 – – (1,626) 60 90 10 5 1 96 1,691 18,066 (580) 24 (2,004) 37 (2,523) (328) 16,906 Foreign currency translation adjustments, net of tax Effect of change in fair value of available-for-sale securities, net of tax Unrecognized income (expense) related to pensions and other postretirement plans, net of tax Change in derivatives qualifying as cash flow hedges, net of tax 149 (17) 394 149 (17) 394 (15) (15) 2,787 149 (17) 394 (15) 3,298 (17) – (1,667) 71 74 13 2 (2) 82 (1,569) 2,704 (1,626) 2,787 (1,667) (3) 67 93 (9) 19 60 (6) 10 5 1 (17) 71 (8) 13 2 (2) interests 573 147 (14) 3 136 7 (157) 559 108 (5) (5) 98 6 (123) 540 120 (8) 3 115 25 (150) equity 15,458 3,315 (275) 2 (549) (80) 2,413 4 (157) (1,569) 67 110 (9) 19 16,336 2,812 383 4 (537) 25 2,687 6 (123) (1,626) 60 90 10 5 1 17,446 2,907 141 (17) 397 (15) 3,413 8 (150) (1,667) 71 74 13 2 (2) 1,750 19,186 (431) 7 (1,610) 22 (2,012) (246) 18,678 530 19,208 ABB Annual Report 2013 | Financial review of ABB Group 105 Total comprehensive income Changes in noncontrolling interests Dividends paid to noncontrolling shareholders Share-based payment arrangements Dividends paid Delivery of shares Call options Replacement options issued in connection with acquisition Balance at December 31, 2011 Comprehensive income: Net income Total comprehensive income Changes in noncontrolling interests Dividends paid to noncontrolling shareholders Share-based payment arrangements Dividends paid Delivery of shares Call options Replacement options issued in connection with acquisition Other Balance at December 31, 2012 Comprehensive income: Net income Total comprehensive income Changes in noncontrolling interests Dividends paid to noncontrolling shareholders Share-based payment arrangements Dividends paid Delivery of shares Call options Replacement options issued in connection with acquisition Other Balance at December 31, 2013 See accompanying Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note 1 The Company ABB Ltd and its subsidiaries (collectively, the Company) together form a leading global company in power and auto­ mation technologies that enable utility and industry customers to improve their performance while lowering environmen­ tal impact. The Company works with customers to engineer and install networks, facilities and plants with particular emphasis on enhancing efficiency, reliability and productivity for customers who generate, convert, transmit, distribute and consume energy. The Company has a global integrated risk management process. Once a year, the Board of Directors of ABB Ltd performs a risk assessment in accordance with the Company’s risk management processes and discusses appropriate actions, if necessary. Note 2 Significant accounting policies The following is a summary of significant accounting policies followed in the preparation of these Consolidated Financial Statements. Basis of presentation Scope of consolidation Reclassifications Operating cycle Use of estimates The Consolidated Financial Statements are prepared in accordance with United States of America (United States or U.S.) generally accepted accounting principles (U.S. GAAP) and are presented in United States dollars ($ or USD) unless otherwise stated. The par value of capital stock is denominated in Swiss francs. The Consolidated Financial Statements include the accounts of ABB Ltd and companies which are directly or indirectly controlled by ABB Ltd. Additionally, the Company consolidates variable interest entities if it has determined that it is the primary beneficiary. Intercompany accounts and transactions are eliminated. Investments in joint ventures and affili­ ated companies in which the Company has the ability to exercise significant influence over operating and financial policies (generally through direct or indirect ownership of 20 percent to 50 percent of the voting rights), are recorded in the Consolidated Financial Statements using the equity method of accounting. Certain amounts reported for prior years in the Consolidated Financial Statements and Notes have been reclassified to conform to the current year’s presentation. These changes primarily relate to current liabilities, where amounts previ­ ously reported in “Employee and other payables” and “Accrued expenses” have been reclassified to “Other provisions” and “Other current liabilities”. A portion of the Company’s activities (primarily long­term construction activities) has an operating cycle that exceeds one year. For classification of current assets and liabilities related to such activities, the Company elected to use the duration of the individual contracts as its operating cycle. Accordingly, there are accounts receivable, inventories and provisions related to these contracts which will not be realized within one year that have been classified as current. The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes. The most significant, difficult and subjective of such accounting assumptions and estimates include: – assumptions and projections, principally related to future material, labor and project­related overhead costs, used in determining the percentage­of­completion on projects, – estimates of loss contingencies associated with litigation or threatened litigation and other claims and inquiries, environmental damages, product warranties, regulatory and other proceedings, – assumptions used in the calculation of pension and postretirement benefits and the fair value of pension plan assets, – recognition and measurement of current and deferred income tax assets and liabilities (including the measurement of uncertain tax positions), – growth rates, discount rates and other assumptions used in testing goodwill for impairment, – assumptions used in determining inventory obsolescence and net realizable value, – estimates and assumptions used in determining the fair values of assets and liabilities assumed in business combinations, – growth rates, discount rates and other assumptions used to determine impairment of long­lived assets, and – assessment of the allowance for doubtful accounts. The actual results and outcomes may differ from the Company’s estimates and assumptions. Cash and equivalents Cash and equivalents include highly liquid investments with maturities of three months or less at the date of acquisition. Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where the Company operates. Funds, other than regular dividends, fees or loan repayments, cannot be readily transferred abroad from these countries and are therefore deposited and used for working capital needs locally. These funds are included in cash and equivalents as they are not considered restricted. Marketable securities and short­term investments Management determines the appropriate classification of held­to­maturity and available­for­sale securities at the time of purchase. Debt securities are classified as held­to­maturity when the Company has the positive intent and ability to hold the securities to maturity. Held­to­maturity securities are stated at amortized cost, adjusted for accretion of discounts or amortization of premiums to maturity computed under the effective interest method. Such accretion or amortization is 106 Financial review of ABB Group | ABB Annual Report 2013 Note 2 Significant accounting policies, continued included in “Interest and dividend income”. Marketable debt securities not classified as held­to­maturity and equity securities that have readily determinable fair values are classified as available­for­sale and reported at fair value. Unrealized gains and losses on available­for­sale securities are excluded from the determination of earnings and are instead recognized in the “Accumulated other comprehensive loss” component of stockholders’ equity, net of tax, until realized. Realized gains and losses on available­for­sale securities are computed based upon the historical cost of these securities, using the specific identification method. Marketable debt securities are generally classified as either “Cash and equivalents” or “Marketable securities and short­term investments” according to their maturity at the time of acquisition. Marketable equity securities are generally classified as “Marketable securities and short­term investments”, however any marketable securities held as a long­term investment rather than as an investment of excess liquidity, are classified as “Other non­current assets”. The Company performs a periodic review of its debt and equity securities to determine whether an other­than­temporary impairment has occurred. Generally, when an individual security has been in an unrealized loss position for an extended period of time, the Company evaluates whether an impairment has occurred. The evaluation is based on specific facts and circumstances at the time of assessment, which include general market conditions, and the duration and extent to which the fair value is below cost. If the fair value of a debt security is less than its amortized cost, then an other­than­temporary impairment for the difference is recognized if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost base or (iii) a credit loss exists insofar as the Com­ pany does not expect to recover the entire recognized amortized cost of the security. Such impairment charges are generally recognized in “Interest and other finance expense”. If the impairment is due to factors other than credit losses, and the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of the security’s amortized cost, such impairment charges are recorded in “Accumulated other comprehensive loss”. In addition, for equity securities, the Company assesses whether the cost value will recover within the near­term and whether the Company has the intent and ability to hold that equity security until such recovery occurs. If an other­ than­temporary impairment is identified, the security is written down to its fair value and the related losses are recog­ nized in “Interest and other finance expense”, unless the impairment relates to equity securities classified as “Other non­current assets”, in which case the impairment is reported in “Other income (expense), net”. Accounts receivable are recorded at the invoiced amount. The Company has a group­wide policy on the management of credit risk. The policy includes a credit assessment methodology to assess the creditworthiness of customers and assign to those customers a risk category. Third­party agencies’ ratings are considered, if available. For customers where agency ratings are not available, the customer’s most recent financial statements, payment history, and other relevant information are considered in the assignment to a risk category. Customers are assessed at least annually or more frequently when information on significant changes in the customers’ financial position becomes known. In addition to the assignment to a risk category, a credit limit per customer is set. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance based on historical write­off experience and customer specific data. If an amount has not been settled within its contractual payment term then it is considered past due. The Company reviews the allowance for doubtful accounts regularly and past due balances are reviewed for collectability. Account balances are charged off against the related allowance when the Company believes that the amount will not be recovered. The Company, in its normal course of business, transfers receivables to third parties, generally without recourse. The transfer is accounted for as a sale when the Company has surrendered control over the receivables. Control is deemed to have been surrendered when (i) the transferred receivables have been put presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership, (ii) the third­party transferees have the right to pledge or exchange the transferred receivables, and (iii) the Company has relinquished effective control over the transferred receivables and does not retain the ability or obligation to repurchase or redeem the transferred receivables. At the time of sale, the sold receivables are removed from the Consolidated Balance Sheets and the related cash inflows are class­ ified as operating activities in the Consolidated Statements of Cash Flows. Costs associated with the sale of receivables, including the related gains and losses from the sales, are included in “Interest and other finance expense”. Transfers of receivables that do not meet the requirements for treatment as sales are accounted for as secured borrowings and the related cash flows are classified as financing activities in the Consolidated Statements of Cash Flows. The Company sells a broad range of products, systems and services to a wide range of industrial, commercial and utility customers as well as various government agencies and quasi­governmental agencies throughout the world. Concen­ trations of credit risk with respect to accounts receivable are limited, as the Company’s customer base is comprised of a large number of individual customers. Ongoing credit evaluations of customers’ financial positions are performed to determine whether the use of credit support instruments such as guarantees, letters of credit or credit insurance are nec­ essary; collateral is not generally required. The Company maintains reserves for potential credit losses as discussed above in “Accounts receivable and allowance for doubtful accounts”. Such losses, in the aggregate, are in line with the Company’s expectations. It is the Company’s policy to invest cash in deposits with banks throughout the world with certain minimum credit ratings and in high quality, low risk, liquid investments. The Company actively manages its credit risk by routinely reviewing the creditworthiness of the banks and the investments held, as well as maintaining such investments in time deposits or other liquid investments. The Company has not incurred significant credit losses related to such investments. ABB Annual Report 2013 | Financial review of ABB Group 107 Accounts receivable and allowance for doubtful accounts Concentrations of credit risk Note 2 Significant accounting policies, continued The Company’s exposure to credit risk on derivative financial instruments is the risk that the counterparty will fail to meet its obligations. To reduce this risk, the Company has credit policies that require the establishment and periodic review of credit limits for individual counterparties. In addition, the Company has entered into close­out netting agreements with most derivative counterparties. Close­out netting agreements provide for the termination, valuation and net settlement of some or all outstanding transactions between two counterparties on the occurrence of one or more pre­defined trigger events. In the Consolidated Financial Statements derivative transactions are presented on a gross basis. Revenue recognition The Company generally recognizes revenues for the sale of goods when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. With regards to the sale of products, delivery is not considered to have occurred, and therefore no revenues are recognized, until the cus­ tomer has taken title to the products and assumed the risks and rewards of ownership of the products specified in the purchase order or sales agreement. Generally, the transfer of title and risks and rewards of ownership are governed by the contractually­defined shipping terms. The Company uses various International Commercial shipping terms (as promulgated by the International Chamber of Commerce) in its sales of products to third­party customers, such as Ex Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP). Subsequent to delivery of the products, the Company generally has no further contractual performance obligations that would preclude revenue recognition. Revenues under long­term construction­type contracts are generally recognized using the percentage­of­completion method of accounting. The Company principally uses the cost­to­cost method to measure progress towards completion on contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to the Company’s best estimate of total estimated costs, which are reviewed and updated routinely for contracts in progress. The cumulative effect of any change in estimate is recorded in the period when the change in estimate is determined. Short­term construction­type contracts, or long­term construction­type contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates difficult, are accounted for under the completed­ contract method. Revenues under the completed­contract method are recognized upon substantial completion – that is: acceptance by the customer, compliance with performance specifications demonstrated in a factory acceptance test or similar event. For non construction­type contracts that contain customer acceptance provisions, revenue is deferred until customer acceptance occurs or the Company has demonstrated the customer­specified objective criteria have been met or the contractual acceptance period has lapsed. Revenues from service transactions are recognized as services are performed. For long­term service contracts, revenues are recognized on a straight­line basis over the term of the contract or, if the performance pattern is other than straight­ line, as the services are provided. Service revenues reflect revenues earned from the Company’s activities in providing services to customers primarily subsequent to the sale and delivery of a product or complete system. Such revenues consist of maintenance­type contracts, field service activities that include personnel and accompanying spare parts, and installation and commissioning of products as a stand­alone service or as part of a service contract. Revenues for software license fees are recognized when persuasive evidence of a non­cancelable license agreement exists, delivery has occurred, the license fee is fixed or determinable, and collection is probable. In software arrangements that include rights to multiple software products and/or services, the total arrangement fee is allocated using the residual method. Under this method revenue is allocated to the undelivered elements based on vendor­specific objective evidence (VSOE) of the fair value of such undelivered elements and the residual amounts of revenue are allocated to the delivered elements. Elements included in multiple element arrangements may consist of software licences, maintenance (which includes customer support services and unspecified upgrades), hosting, and consulting services. VSOE is based on the price generally charged when an element is sold separately or, in the case of an element not yet sold sepa­ rately, the price established by management, if it is probable that the price, once established, will not change once the element is sold separately. If VSOE does not exist for an undelivered element, the total arrangement fee will be recognized as revenue over the life of the contract or upon delivery of the undelivered element. The Company offers multiple element arrangements to meet its customers’ needs. These arrangements may involve the delivery of multiple products and/or performance of services (such as installation and training) and the delivery and/or performance may occur at different points in time or over different periods of time. Deliverables of such multiple element arrangements are evaluated to determine the unit of accounting and if certain criteria are met, the Company allocates revenues to each unit of accounting based on its relative selling price. A hierarchy of selling prices is used to determine the selling price of each specific deliverable that includes VSOE (if available), third­party evidence (if VSOE is not avail­ able), or estimated selling price if neither of the first two is available. The estimated selling price reflects the Company’s best estimate of what the selling prices of elements would be if the elements were sold on a stand­alone basis. Revenue is allocated between the elements of an arrangement at the inception of the arrangement. Such arrangements generally include industry­specific performance and termination provisions, such as in the event of substantial delays or non­delivery. Revenues are reported net of customer rebates and similar incentives. Taxes assessed by a governmental authority that are directly imposed on revenue­producing transactions between the Company and its customers, such as sales, use, value­added and some excise taxes, are excluded from revenues. Contract loss provisions Losses on contracts are recognized in the period when they are identified and are based upon the anticipated excess of contract costs over the related contract revenues. Shipping and handling costs Shipping and handling costs are recorded as a component of cost of sales. 108 Financial review of ABB Group | ABB Annual Report 2013 Note 2 Significant accounting policies, continued Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first­in, first­out method, the weighted­ average cost method, or in certain circumstances (for example, where the completed­contract method of revenue recognition is used) the specific identification method. Inventoried costs are stated at acquisition cost or actual production cost, including direct material and labor and applicable manufacturing overheads. Adjustments to reduce the cost of inventory to its net market value are made, if required, for decreases in sales prices, obsolescence or similar reductions in the estimated net realizable value. Impairment of long­lived assets Property, plant and equipment Long­lived assets that are held and used are assessed for impairment when events or circumstances indicate that the carrying amount of the asset may not be recoverable. If the asset’s net carrying value exceeds the asset’s net undis­ counted cash flows expected to be generated over its remaining useful life including net proceeds expected from disposi­ tion of the asset, if any, the carrying amount of the asset is reduced to its estimated fair value. The estimated fair value is determined using a market, income and/or cost approach. Property, plant and equipment is stated at cost, less accumulated depreciation and is depreciated using the straight­line method. The estimated useful lives of the assets are generally as follows: – factories and office buildings: 30 to 40 years, – other facilities: 15 years, – machinery and equipment: 3 to 15 years, – furniture and office equipment: 3 to 8 years, – leasehold improvements are depreciated over their estimated useful life or, for operating leases, over the lease term, if shorter. Goodwill and other intangible assets Goodwill is reviewed for impairment annually as of October 1, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Goodwill is evaluated for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. For the annual impairment review in 2013, the reporting units were the same as the operating segments for Discrete Automation and Motion, Low Voltage Products, Power Products and Power Systems, while for the Process Automation operating segment, the reporting units were determined to be one level below the operating segment. When evaluating goodwill for impairment, the Company uses either a qualitative or quantitative assessment method for each reporting unit. The qualitative assessment involves determining, based on an evaluation of qualitative factors, if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on this qualitative assessment, it is determined to be more likely than not that the reporting unit’s fair value is less than its carrying value, the two­step quantitative impairment test (described below) is performed, otherwise no further analysis is required. If the Company elects not to perform the qualitative assessment for a reporting unit, the two­step quantitative impairment test is performed. The two­step quantitative impairment test calculates the fair value of a reporting unit (based on the income approach whereby the fair value of a reporting unit is calculated based on the present value of future cash flows) and compares it to the reporting unit’s carrying value. If the carrying value of the net assets of a reporting unit exceeds the fair value of the reporting unit then the Company performs the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment charge equal to the difference. The cost of acquired intangible assets with a finite life is amortized using a method of amortization that reflects the pattern of intangible assets’ expected contributions to future cash flows. If that pattern cannot be reliably determined, the straight­line method is used. The amortization periods range from 3 to 5 years for software and from 5 to 20 years for customer­, technology­ and marketing­related intangibles. Intangible assets with a finite life are tested for impairment upon the occurrence of certain triggering events. Capitalized software costs Software for internal use Costs incurred in the application development stage until the software is substantially complete are capitalized and are amortized on a straight­line basis over the estimated useful life of the software, typically ranging from 3 to 5 years. Software for sale Costs incurred after the software has demonstrated its technological feasibility until the product is available for general release to the customers are capitalized and amortized on a straight­line basis over the estimated life of the product. The Company periodically performs an evaluation to determine that the unamortized cost of software to be sold does not exceed the net realizable value. If the unamortized cost of software to be sold exceeds its net realizable value, the Company records an impairment charge equal to the difference. Derivative financial instruments and hedging activities The Company uses derivative financial instruments to manage currency, commodity, interest rate and equity exposures, arising from its global operating, financing and investing activities (see Note 5). The Company recognizes all derivatives, other than certain derivatives indexed to the Company’s own stock, at fair value in the Consolidated Balance Sheets. Derivatives that are not designated as hedging instruments are reported at fair value with derivative gains and losses reported through earnings and classified consistent with the nature of the underlying transaction. If the derivatives are designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged item attributable to the risk being hedged through earnings (in the case of a fair value hedge) or recognized in “Accumulated other comprehensive loss” until the hedged item is recognized in earnings (in the case of a cash flow hedge). The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings consistent with the classification of the hedged item. ABB Annual Report 2013 | Financial review of ABB Group 109 Note 2 Significant accounting policies, continued Where derivative financial instruments have been designated as cash flow hedges of forecasted transactions and such forecasted transactions are no longer probable of occurring, hedge accounting is discontinued and any derivative gain or loss previously included in “Accumulated other comprehensive loss” is reclassified into earnings consistent with the nature of the original forecasted transaction. Gains or losses from derivatives designated as hedging instruments in a fair value hedge are reported through earnings and classified consistent with the nature of the underlying hedged transaction. Leases Sale­leasebacks Translation of foreign currencies and foreign exchange transactions Income taxes Certain commercial contracts may grant rights to the Company or the counterparties, or contain other provisions that are considered to be derivatives. Such embedded derivatives are assessed at inception of the contract and depending on their characteristics, accounted for as separate derivative instruments and shown at their fair value in the balance sheet with changes in their fair value reported in earnings consistent with the nature of the commercial contract to which they relate. Derivatives are classified in the Consolidated Statements of Cash Flows in the same section as the underlying item. Cash flows from the settlement of undesignated derivatives used to manage the risks of different underlying items on a net basis, are classified within “Net cash provided by operating activities”, as the underlying items are primarily operational in nature. Other cash flows on the settlement of derivatives are recorded within “Net cash used in investing activities”. The Company leases primarily real estate and office equipment. Rental expense for operating leases is recorded on a straight­line basis over the life of the lease term. Lease transactions where substantially all risks and rewards incident to ownership are transferred from the lessor to the lessee are accounted for as capital leases. All other leases are accounted for as operating leases. Amounts due under capital leases are recorded as a liability. The interest in assets acquired under capital leases is recorded as property, plant and equipment. Depreciation and amortization of assets recorded under capital leases is included in depreciation and amortization expense. The Company occasionally enters into transactions accounted for as sale­leasebacks, in which fixed assets, generally real estate and/or equipment, are sold to a third party and then leased for use by the Company. Under certain circum­ stances, the necessary criteria to recognize a sale of these assets may not occur and then the transaction is reflected as a financing transaction, with the proceeds received from the transaction reflected as a borrowing or deposit liability. When the necessary criteria have been met to recognize a sale, gains or losses on the sale of the assets are generally deferred and amortized over the term of the transaction, except in certain limited instances when a portion of the gain or loss may be recognized upon inception. The lease of the asset is accounted for as either an operating lease or a capital lease, depending upon its specific terms. The functional currency for most of the Company’s subsidiaries is the applicable local currency. The translation from the applicable functional currencies into the Company’s reporting currency is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for income statement accounts using average exchange rates prevailing during the year. The resulting translation adjustments are excluded from the determination of earnings and are recognized in “Accumulated other comprehensive loss” until the subsidiary is sold, substantially liquidated or evaluated for impairment in anticipation of disposal. Foreign currency exchange gains and losses, such as those resulting from foreign currency denominated receivables or payables, are included in the determination of earnings, except as they relate to intercompany loans that are equity­like in nature with no reasonable expectation of repayment, which are recognized in “Accumulated other comprehensive loss”. Exchange gains and losses recognized in earnings are included in “Total revenues”, “Total cost of sales”, “Selling, general and administrative expenses” or “Interest and other finance expense” consistent with the nature of the underly­ ing item. The Company uses the asset and liability method to account for deferred taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a deferred tax asset when it determines that it is more likely than not that the deduction will be sustained based upon the deduction’s technical merit. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. Deferred taxes are provided on unredeemed retained earnings of the Company’s subsidiaries. However, deferred taxes are not provided on such unredeemed retained earnings to the extent it is expected that the earnings are permanently reinvested. Such earnings may become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. The Company operates in numerous tax jurisdictions and, as a result, is regularly subject to audit by tax authorities. The Company provides for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Contingency provisions are recorded based on the technical merits of the Company’s filing position, considering the applicable tax laws and Orga nisation for Economic Co­operation and Development (OECD) guidelines and are based on its evaluations of the facts and circumstances as of the end of each reporting period. Changes in the facts and circumstances could result in a material change to the tax accruals. The Company applies a two­step approach to recognize and measure uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. 110 Financial review of ABB Group | ABB Annual Report 2013 Note 2 Significant accounting policies, continued Research and development Earnings per share Share­based payment arrangements Fair value measures Contingencies Expense related to tax penalties is classified in the Consolidated Income Statements as “Provision for taxes”, while interest thereon is classified as “Interest and other finance expense”. Research and development costs not related to specific customer orders are generally expensed as incurred. Basic earnings per share is calculated by dividing income by the weighted­average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted­average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise: outstanding written call options, outstanding options and shares granted subject to certain conditions under the Company’s share­based payment arrangements. See further discussion related to earnings per share in Note 20 and of potentially dilutive securities in Note 18. The Company has various share­based payment arrangements for its employees, which are described more fully in Note 18. Such arrangements are accounted for under the fair value method. For awards that are equity­settled, total compensation is measured at grant date, based on the fair value of the award at that date, and recorded in earnings over the period the employees are required to render service. For awards that are cash­settled, compensation is initially measured at grant date and subsequently remeasured at each reporting period, based on the fair value and vesting percentage of the award at each of those dates, with changes in the liability recorded in earnings. The Company uses fair value measurement principles to record certain financial assets and liabilities on a recurring basis and, when necessary, to record certain non­financial assets at fair value on a non­recurring basis, as well as to deter­ mine fair value disclosures for certain financial instruments carried at amortized cost in the financial statements. Financial assets and liabilities recorded at fair value on a recurring basis include foreign currency, commodity and interest rate derivatives, as well as cash­settled call options and available­for­sale securities. Non­financial assets recorded at fair value on a non­recurring basis include long­lived assets that are reduced to their estimated fair value due to impairments. Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation techniques including the market approach (using observable market data for identical or similar assets and liabilities), the income approach (discounted cash flow models) and the cost approach (using costs a market participant would incur to develop a comparable asset). Inputs used to determine the fair value of assets and liabilities are defined by a three­level hierarchy, depending on the reliability of those inputs. The Company has categorized its financial assets and liabilities and non­financial assets measured at fair value within this hierarchy based on whether the inputs to the valuation tech­ nique are observable or unobservable. An observable input is based on market data obtained from independent sources, while an unobservable input reflects the Company’s assumptions about market data. The levels of the fair value hierarchy are as follows: Level 1: Valuation inputs consist of quoted prices in an active market for identical assets or liabilities (observable quoted prices). Assets and liabilities valued using Level 1 inputs include exchange­traded equity securities, listed derivatives which are actively traded such as commodity futures, interest rate futures and certain actively­traded debt securities. Level 2: Valuation inputs consist of observable inputs (other than Level 1 inputs) such as actively­quoted prices for similar assets, quoted prices in inactive markets and inputs other than quoted prices such as interest rate yield curves, credit spreads, or inputs derived from other observable data by interpolation, correlation, regression or other means. The adjustments applied to quoted prices or the inputs used in valuation models may be both observable and unobservable. In these cases, the fair value measurement is classified as Level 2 unless the unobservable portion of the adjustment or the unobservable input to the valuation model is significant, in which case the fair value measurement would be classified as Level 3. Assets and liabilities valued or disclosed using Level 2 inputs include investments in certain funds, certain debt securities that are not actively traded, interest rate swaps, commodity swaps, cash­settled call options, forward foreign exchange contracts, foreign exchange swaps and forward rate agreements, as well as financing receivables and debt. Level 3: Valuation inputs are based on the Company’s assumptions of relevant market data (unobservable input). The impairments of certain equity­method investments were calculated using Level 3 inputs. Whenever quoted prices involve bid­ask spreads, the Company ordinarily determines fair values based on mid­market quotes. However, for the purpose of determining the fair value of cash­settled call options serving as hedges of the Company’s management incentive plan (MIP), bid prices are used. When determining fair values based on quoted prices in an active market, the Company considers if the level of trans­ action activity for the financial instrument has significantly decreased, or would not be considered orderly. In such cases, the resulting changes in valuation techniques would be disclosed. If the market is considered disorderly or if quoted prices are not available, the Company is required to use another valuation technique, such as an income approach. Disclosures about the Company’s fair value measurements of assets and liabilities are included in Note 6. The Company is subject to proceedings, litigation or threatened litigation and other claims and inquiries, related to environmental, labor, product, regulatory, tax (other than income tax) and other matters, and is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue, often with assistance from both internal and external legal counsel and technical experts. The required amount of a provision for a contingency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution. ABB Annual Report 2013 | Financial review of ABB Group 111 Note 2 Significant accounting policies, continued The Company records a provision for its contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an undiscounted basis using the Company’s best estimate of the amount of loss incurred or at the lower end of an estimated range when a single best estimate is not determinable. In some cases, the Company may be able to recover a portion of the costs relating to these obligations from insurers or other third parties; however, the Company records such amounts only when it is probable that they will be collected. The Company provides for anticipated costs for warranties when it recognizes revenues on the related products or contracts. Warranty costs include calculated costs arising from imperfections in design, material and workmanship in the Company’s products. The Company makes individual assessments on contracts with risks resulting from order­ specific conditions or guarantees and assessments on an overall, statistical basis for similar products sold in larger quantities. The Company may have legal obligations to perform environmental clean­up activities related to land and buildings as a result of the normal operations of its business. In some cases, the timing or the method of settlement, or both, are conditional upon a future event that may or may not be within the control of the Company, but the underlying obligation itself is unconditional and certain. The Company recognizes a provision for these obligations when it is probable that a liability for the clean­up activity has been incurred and a reasonable estimate of its fair value can be made. The provision is initially recognized at fair value, and subsequently adjusted for accrued interest and changes in estimates. In some cases, a portion of the costs expected to be incurred to settle these matters may be recoverable. An asset is recorded when it is probable that such amounts are recoverable. Provisions for environmental obligations are not discounted to their present value when the timing of payments cannot be reasonably estimated. Pensions and other postretirement benefits The Company has a number of defined benefit pension and other postretirement plans. The Company recognizes an asset for such a plan’s overfunded status or a liability for such a plan’s underfunded status in its Consolidated Balance Sheets. Additionally, the Company measures such a plan’s assets and obligations that determine its funded status as of the end of the year and recognizes the changes in the funded status in the year in which the changes occur. Those changes are reported in “Accumulated other comprehensive loss”. The Company uses actuarial valuations to determine its pension and postretirement benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates and expected return on plan assets. Current market conditions are considered in selecting these assumptions. The Company’s various pension plan assets are assigned to their respective levels in the fair value hierarchy in accor­ dance with the valuation principles described in the “Fair value measures” section above. See Note 17 for further discussion of the Company’s employee benefit plans. Business combinations The Company accounts for assets acquired and liabilities assumed in business combinations using the acquisition method and records these at their respective fair values. Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in income. New accounting pronouncements Identifiable intangibles consist of intellectual property such as trademarks and trade names, customer relationships, patented and unpatented technology, in­process research and development, order backlog and capitalized software; these are amortized over their estimated useful lives. Such intangibles are subsequently subject to evaluation for potential impairment if events or circumstances indicate the carrying amount may not be recoverable. See “Goodwill and other intangible assets” above. Acquisition­related costs are recognized separately from the acquisition and expensed as incurred. Upon gaining control of an entity in which an equity method or cost basis investment was held by the Company, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in income. Deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax base of assets and liabilities as well as uncertain tax positions and valuation allowances on acquired deferred tax assets assumed in connection with a business combination are initially estimated as of the acquisition date based on facts and circumstances that existed at the acquisition date. These estimates are subject to change within the measurement period (a period of up to 12 months after the acquisition date during which the acquirer may adjust the provisional acqui­ sition amounts) with any adjustments to the preliminary estimates being recorded to goodwill. Changes in deferred taxes, uncertain tax positions and valuation allowances on acquired deferred tax assets that occur after the measurement period are recognized in income. Applicable in current period Disclosures about offsetting assets and liabilities As of January 2013, the Company adopted two accounting standard updates regarding disclosures about amounts of certain financial and derivative instruments recognized in the statement of financial position that are either (i) offset or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. The scope of these updates covers derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements. These updates are applicable retrospectively and did not have a significant impact on the Consolidated Financial Statements. Reporting of amounts reclassified out of accumulated other comprehensive income As of January 2013, the Company adopted an accounting standard update regarding the presentation of amounts reclassified out of accumulated other comprehensive income. Under the update, the Company is required to present, either in a single note or parenthetically on the face of the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective income statement line item (if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the reporting period). If a component is not required to be reclassified to net income in its entirety, the Company would instead cross­reference to other U.S. GAAP 112 Financial review of ABB Group | ABB Annual Report 2013 Note 2 Significant accounting policies, continued required disclosures that provide additional information about the amounts. This update is applicable prospectively and resulted in the Company presenting, in a single note, significant reclassifications out of accumulated other compre­ hensive income (see Note 21). Applicable for future periods Parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity In March 2013, an accounting standard update was issued regarding the release of cumulative translation adjustments of a parent when it ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity (for the Company, a foreign entity is an entity having a functional currency other than U.S. dollars). Under the update, the Company would release into net income the entire amount of a cumulative translation adjust­ ment related to its investment in a foreign entity when a parent no longer has control as a result of selling a part or all of its investment in the foreign entity or otherwise no longer holds a controlling financial interest in a subsidiary or group of assets within the foreign entity. For foreign equity­accounted companies, a pro rata portion of the cumulative translation adjustment would be recognized in net income upon a partial sale of the equity­accounted company. This update is effective for the Company for annual and interim periods beginning January 1, 2014, and is applicable prospectively. The Company does not believe that this update will have a material impact on its Consolidated Financial Statements. Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists In July 2013, an accounting standard update was issued regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under the update, the Company would present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain defined circumstances. This update is effective for the Company for annual and interim periods beginning January 1, 2014, and is applicable prospectively. The Company does not believe that this update will have a material impact on its Con­ solidated Financial Statements. Note 3 Acquisitions Acquisitions were as follows: ($ in millions, except number of acquired businesses) Acquisitions (net of cash acquired)(1) Aggregate excess of purchase price over fair value of net assets acquired (2) Number of acquired businesses 2013 897 525 7 2012 3,643 2,895 9 2011 3,805 3,261 10 (1) (2) Excluding changes in cost and equity investments but including $2 million in 2013, $5 million in 2012 and $19 million in 2011, representing the fair value of replacement vested stock options issued to Power­One, Thomas & Betts and Baldor employees, respectively, at the corresponding acquisition dates. Recorded as goodwill (see Note 11). Includes adjustments of $63 million in 2013 arising during the measurement period of acquisitions, primarily reflecting a reduction in certain deferred tax liabilities related to Thomas & Betts. In the table above, the “Acquisitions” and “Aggregate excess of purchase price over fair value of net assets acquired” amounts for 2013 relate primarily to the acquisition of Power­One Inc. (Power­One). For 2012, these amounts relate primarily to the acquisition of Thomas & Betts Corporation (Thomas & Betts), while for 2011, these amounts relate mainly to the acquisitions of Baldor Electric Corporation (Baldor) and EAM Software Holdings Pty Ltd (Mincom). Acquisitions of controlling interests have been accounted for under the acquisition method and have been included in the Company’s Consolidated Financial Statements since the date of acquisition. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the purchase price allocation for acquisitions is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the assets and liabilities becomes available. On July 25, 2013, the Company acquired all outstanding shares of Power­One for $6.35 per share in cash. The resulting cash outflows for the Company amounted to $737 million, representing $705 million for the purchase of the shares (net of cash acquired) and $32 million related to the cash settlement of Power­One stock options held at the acquisition date. Power­One is a designer and manufacturer of photovoltaic inverters, as well as a provider of renewable energy and energy­efficient power conversion and power management solutions. The aggregate preliminary allocation of the purchase consideration for business acquisitions in 2013, was as follows: ($ in millions) Intangible assets Fixed assets Deferred tax liabilities Other assets and liabilities, net Goodwill (2) Total consideration (net of cash acquired) (1) (2) Excludes measurement period adjustments related to prior year acquisitions. The Company does not expect the majority of goodwill recognized to be deductible for income tax purposes. Weighted-average useful life 7 years Allocated amounts (1) 206 135 (190) 158 588 897 ABB Annual Report 2013 | Financial review of ABB Group 113 Note 3 Acquisitions, continued ($ in millions) Customer relationships Technology Trade names Order backlog Intangible assets Fixed assets Debt acquired Deferred tax liabilities Inventories On May 16, 2012, the Company acquired all outstanding shares of Thomas & Betts for $72 per share in cash. The resulting cash outflows for the Company amounted to $3,700 million, representing $3,282 million for the purchase of the shares (net of cash acquired of $521 million), $94 million related to cash settlement of Thomas & Betts stock options held at acquisition date and $324 million for the repayment of debt assumed upon acquisition. Thomas & Betts designs, manufactures and markets components used to manage the connection, distribution, transmission and reliability of electrical power in industrial, construction and utility applications. The acquisition of Thomas & Betts supports the Com­ pany’s strategy of expanding its Low Voltage Products operating segment into new geographies, sectors and products, and consequently the goodwill acquired represents the future benefits associated with the expansion of market access and product scope. The final allocation of the purchase consideration for the Thomas & Betts acquisition in 2012 was as follows: Weighted-average useful life 18 years 5 years 10 years 7.5 months 15 years Allocated amounts 1,169 179 155 12 1,515 458 (619) (971) 300 49 2,649 3,381 Other assets and liabilities, net (1) Goodwill (2) Total consideration (net of cash acquired)(3) (1) (2) (3) Gross receivables from the acquisition totaled $387 million; the fair value of which was $344 million after rebates and allowance for estimated uncollectable receivables. Goodwill recognized is not deductible for income tax purposes. Cash acquired in the acquisition totaled $521 million. Additional consideration for the acquisition included $94 million related to the cash settlement of stock options held by Thomas & Betts employees at the acquisition date and $5 million representing the fair value of replacement vested stock options issued to Thomas & Betts employees at the acquisition date. The fair value of these stock options was estimated using a Black­Scholes model. The Company’s Consolidated Income Statement for 2012 includes total revenues of $1,541 million and a net loss (including acquisition­related charges) of $10 million in respect of Thomas & Betts since the date of acquisition. The unaudited pro forma financial information in the table below summarizes the combined pro forma results of the Company and Thomas & Betts for 2012 and 2011, as if Thomas & Betts had been acquired on January 1, 2011. ($ in millions) Total revenues Income from continuing operations, net of tax 2012 40,251 2,924 2011 40,288 3,381 The unaudited pro forma results above include certain adjustments related to the Thomas & Betts acquisition. The table below summarizes the adjustments necessary to present the pro forma financial information of the Company and Thomas & Betts combined, as if Thomas & Betts had been acquired on January 1, 2011. ($ in millions) Impact on cost of sales from additional amortization of intangible assets (excluding order backlog capitalized upon acquisition) Impact on cost of sales from amortization of order backlog capitalized upon acquisition Impact on cost of sales from fair valuing acquired inventory Impact on cost of sales from additional depreciation of fixed assets Interest expense on Thomas & Betts debt Impact on selling, general and administrative expenses from Thomas & Betts stock­option plans adjustments Impact on selling, general and administrative expenses from acquisition­related costs Impact on interest and other finance expense from bridging facility costs Other Income taxes Total pro forma adjustments Adjustments 2012 2011 (26) 11 31 (12) 5 16 56 13 (5) (7) 82 (69) (12) (31) (33) 21 – (20) – (15) 44 (115) The pro forma results are for information purposes only and do not include any anticipated cost synergies or other effects of the planned integration of Thomas & Betts. Accordingly, such pro forma amounts are not necessarily indicative of the results that would have occurred had the acquisition been completed on the date indicated, nor are they indicative of the future operating results of the combined company. 114 Financial review of ABB Group | ABB Annual Report 2013 Note 3 Acquisitions, continued The aggregate allocation of the purchase consideration for other business acquisitions in 2012, excluding Thomas & Betts, was as follows: ($ in millions) Intangible assets Fixed assets Deferred tax liabilities Other assets and liabilities, net Goodwill Total consideration (net of cash acquired) Allocated amounts 68 25 (24) 21 172 262 On January 26, 2011, the Company acquired 83.25 percent of the outstanding shares of Baldor for $63.50 per share in cash. On January 27, 2011, the Company exercised its top­up option contained in the merger agreement, bringing its shareholding in Baldor to 91.6 percent, allowing the Company to complete a short­form merger under Missouri, United States, law. On the same date, the Company completed the purchase of the remaining 8.4 percent of outstanding shares. The resulting cash outflows for the Company amounted to $4,276 million, representing $2,966 million for the purchase of the shares (net of cash acquired), $70 million related to cash settlement of Baldor options held at acqui ­ sition date and $1,240 million for the repayment of debt assumed upon acquisition. Baldor markets, designs and manu­ factures industrial electric motors, mechanical power transmission products, drives and generators. The final allocation of the purchase consideration for the Baldor acquisition in 2011 was as follows: ($ in millions) Customer relationships Technology Trade name Order backlog Other intangible assets Intangible assets Fixed assets Debt acquired Deferred tax liabilities Inventories Other assets and liabilities, net (1) Goodwill (2) Total consideration (net of cash acquired)(3) Weighted-average useful life 19 years 7 years 10 years 2 months 5 years 16 years Allocated amounts 996 259 121 15 15 1,406 382 (1,241) (693) 422 51 2,728 3,055 (1) (2) (3) Gross receivables from the acquisition totaled $266 million; the fair value of which was $263 million after allowance for estimated uncollectable receivables. The goodwill recognized is not deductible for income tax purposes. Cash acquired in the acquisition totaled $48 million. Additional consideration included $70 million related to the cash settlement of stock options held by Baldor employees at the acquisition date and $19 million representing the fair value of replacement vested stock options issued to Baldor employees at the acquisition date. The fair value of these stock options was estimated using a Black­Scholes model. The Company’s Consolidated Income Statement for 2011 includes total revenues of $1,950 million and net income (including acquisition­related charges) of $155 million in respect of Baldor since the date of acquisition. The aggregate allocation of the purchase consideration for business acquisitions in 2011, excluding Baldor, was as follows: ($ in millions) Intangible assets Fixed assets Deferred tax liabilities Other assets and liabilities, net (2) Goodwill Total consideration (net of cash acquired) (1) (2) The allocated amounts primarily relate to the acquisitions of Mincom, PGC Powergen Consulting SA (Trasfor) and AB Lorentzen & Wettre. Includes debt acquired of $202 million. Allocated amounts (1) 447 40 (99) (171) 533 750 ABB Annual Report 2013 | Financial review of ABB Group 115 Note 4 Cash and equivalents and marketable securities Current Assets Cash and equivalents and marketable securities and short­term investments consisted of the following: December 31, 2013 ($ in millions) Cost basis gains losses Fair value equivalents investments Gross Gross Marketable securities unrealized unrealized Cash and and short-term Cash Time deposits Other short­term investments Debt securities available-for-sale: U.S. government obligations European government obligations Other government obligations Corporate Equity securities available­for­sale Total 2,414 3,556 9 103 24 3 212 154 6,475 2,414 3,556 9 104 25 3 215 159 2,414 3,538 – – – 69 – 6,485 6,021 2 1 – 4 9 16 (1) – – (1) (4) (6) 18 9 104 25 3 146 159 464 December 31, 2012 ($ in millions) Cost basis gains losses Fair value equivalents investments Gross Gross Marketable securities unrealized unrealized Cash and and short-term Cash Time deposits Other short­term investments Debt securities available-for-sale: U.S. government obligations Other government obligations Corporate Equity securities available­for­sale Total Non­current assets 2,784 3,993 15 152 3 236 1,271 8,454 2,784 3,993 15 159 3 245 1,282 8,481 2,784 3,963 – – 128 – 6,875 8 – 9 12 29 (1) – – (1) (2) 30 15 159 3 117 1,282 1,606 Included in “Other non­current assets” are certain held­to­maturity marketable securities. At December 31, 2013, the amortized cost, gross unrecognized gain and fair value (based on quoted market prices) of these securities were $104 million, $17 million and $121 million, respectively. At December 31, 2012, the amortized cost, gross unrecognized gain and fair value (based on quoted market prices) of these securities were $97 million, $27 million and $124 million, respectively. These securities are pledged as security for certain outstanding deposit liabilities and the funds received at the respective maturity dates of the securities will only be available to the Company for repayment of these obligations. Gains, losses and contractual maturities Gross realized gains (reclassified from accumulated other comprehensive loss to income) on available­for­sale securities totaled $10 million, $3 million and $8 million in 2013, 2012 and 2011, respectively. Gross realized losses (reclassified from accumulated other comprehensive loss to income) on available­for­sale securities were not significant in 2013, 2012 and 2011. Such gains and losses were included in “Interest and other finance expense”. In 2013, 2012 and 2011, other­than­temporary impairments recognized on available­for­sale equity securities were not significant. At December 31, 2013, 2012 and 2011, gross unrealized losses on available­for­sale securities that have been in a continuous unrealized loss position were not significant and the Company does not intend and does not expect to be required to sell these securities before the recovery of their amortized cost. There were no sales of held­to­maturity securities in 2013, 2012 and 2011. Contractual maturities of debt securities consisted of the following: December 31, 2013 ($ in millions) Less than one year One to five years Six to ten years Total Available-for-sale Held-to-maturity Cost basis Fair value Cost basis Fair value 162 138 42 342 163 143 41 347 7 40 57 104 7 44 70 121 At December 31, 2013 and 2012, the Company pledged $97 million and $96 million, respectively, of available­for­sale marketable securities as collateral for issued letters of credit and other security arrangements. 116 Financial review of ABB Group | ABB Annual Report 2013 Note 5 Financial instruments Currency risk Commodity risk Interest rate risk Equity risk The Company is exposed to certain currency, commodity, interest rate and equity risks arising from its global operating, financing and investing activities. The Company uses derivative instruments to reduce and manage the economic impact of these exposures. Due to the global nature of the Company’s operations, many of its subsidiaries are exposed to currency risk in their operating activities from entering into transactions in currencies other than their functional currency. To manage such currency risks, the Company’s policies require the subsidiaries to hedge their foreign currency exposures from binding sales and purchase contracts denominated in foreign currencies. For forecasted foreign currency denominated sales of standard products and the related foreign currency denominated purchases, the Company’s policy is to hedge up to a maximum of 100 percent of the forecasted foreign currency denominated exposures, depending on the length of the forecasted exposures. Forecasted exposures greater than 12 months are not hedged. Forward foreign exchange contracts are the main instrument used to protect the Company against the volatility of future cash flows (caused by changes in exchange rates) of contracted and forecasted sales and purchases denominated in foreign currencies. In addition, within its treasury operations, the Company primarily uses foreign exchange swaps and forward foreign exchange contracts to manage the currency and timing mismatches arising in its liquidity management activities. Various commodity products are used in the Company’s manufacturing activities. Consequently it is exposed to volatility in future cash flows arising from changes in commodity prices. To manage the price risk of commodities other than electricity, the Company’s policies require that the subsidiaries hedge the commodity price risk exposures from binding contracts, as well as at least 50 percent (up to a maximum of 100 percent) of the forecasted commodity exposure over the next 12 months or longer (up to a maximum of 18 months). In certain locations where the price of electricity is hedged, up to a maximum of 90 percent of the forecasted electricity needs, depending on the length of the forecasted exposures, are hedged. Swap and futures contracts are used to manage the associated price risks of commodities. The Company has issued bonds at fixed rates. Interest rate swaps are used to manage the interest rate risk associated with certain debt and generally such swaps are designated as fair value hedges. In addition, from time to time, the Company uses instruments such as interest rate swaps, interest rate futures, bond futures or forward rate agreements to manage interest rate risk arising from the Company’s balance sheet structure but does not designate such instru­ ments as hedges. The Company is exposed to fluctuations in the fair value of its warrant appreciation rights (WARs) issued under its MIP. A WAR gives its holder the right to receive cash equal to the market price of an equivalent listed warrant on the date of exercise. To eliminate such risk, the Company has purchased cash­settled call options which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs. Volume of derivative activity In general, while the Company’s primary objective in its use of derivatives is to minimize exposures arising from its business, certain derivatives are designated and qualify for hedge accounting treatment while others either are not designated or do not qualify for hedge accounting. Foreign exchange and interest rate derivatives The gross notional amounts of outstanding foreign exchange and interest rate derivatives (whether designated as hedges or not) were as follows: Type of derivative December 31, ($ in millions) Foreign exchange contracts Embedded foreign exchange derivatives Interest rate contracts Total notional amounts 2013 19,351 3,049 4,693 2012 2011 19,724 16,503 3,572 3,983 3,439 5,535 Type of derivative December 31, Copper swaps Aluminum swaps Nickel swaps Lead swaps Zinc swaps Silver swaps Electricity futures Crude oil swaps Derivative commodity contracts The following table shows the notional amounts of outstanding commodity derivatives (whether designated as hedges or not), on a net basis, to reflect the Company’s requirements in the various commodities: Unit Total notional amounts metric tonnes metric tonnes metric tonnes metric tonnes metric tonnes ounces megawatt hours barrels 2013 42,866 3,525 18 7,100 300 2012 45,222 5,495 21 2011 38,414 5,068 18 13,025 13,325 225 125 1,936,581 1,415,322 1,981,646 279,995 334,445 326,960 113,000 135,471 113,397 Equity derivatives At December 31, 2013, 2012 and 2011, the Company held 67 million, 67 million and 61 million cash­settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of $56 million, $26 million and $21 million, respectively. ABB Annual Report 2013 | Financial review of ABB Group 117 Note 5 Financial instruments, continued Cash flow hedges Type of derivative designated as a cash flow hedge Foreign exchange contracts Commodity contracts Cash­settled call options Total Type of derivative designated as a cash flow hedge Foreign exchange contracts Commodity contracts Cash­settled call options Total Type of derivative designated as a cash flow hedge Foreign exchange contracts Commodity contracts Cash­settled call options Total As noted above, the Company mainly uses forward foreign exchange contracts to manage the foreign exchange risk of its operations, commodity swaps to manage its commodity risks and cash­settled call options to hedge its WAR liabilities. Where such instruments are designated and qualify as cash flow hedges, the effective portion of the changes in their fair value is recorded in “Accumulated other comprehensive loss” and subsequently reclassified into earnings in the same line item and in the same period as the underlying hedged transaction affects earnings. Any ineffectiveness in the hedge relationship, or hedge component excluded from the assessment of effectiveness, is recognized in earnings during the current period. At December 31, 2013, 2012 and 2011, “Accumulated other comprehensive loss” included net unrealized gains of $22 million, $37 million and $12 million, respectively, net of tax, on derivatives designated as cash flow hedges. Of the amount at December 31, 2013, net gains of $18 million are expected to be reclassified to earnings in 2014. At Decem­ ber 31, 2013, the longest maturity of a derivative classified as a cash flow hedge was 69 months. In 2013, 2012 and 2011, the amounts of gains or losses, net of tax, reclassified into earnings due to the discontinuance of cash flow hedge accounting and recognized in earnings due to ineffectiveness in cash flow hedge relationships were not significant. The pre­tax effects of derivative instruments, designated and qualifying as cash flow hedges, on “Accumulated other comprehensive loss” (OCI) and the Consolidated Income Statements were as follows: Gains (losses) recognized in OCI 2013 Gains (losses) recognized in income on derivatives Gains (losses) reclassified from OCI (ineffective portion and amount (effective portion) into income (effective portion) excluded from effectiveness testing) ($ in millions) Location ($ in millions) Location ($ in millions) 22 Total revenues Total cost of sales (5) Total cost of sales 16 SG&A expenses (1) 33 52 (1) (5) Total revenues Total cost of sales Total cost of sales 8 SG&A expenses (1) 54 – – – – – Gains (losses) recognized in OCI 2012 Gains (losses) recognized in income on derivatives Gains (losses) reclassified from OCI (ineffective portion and amount (effective portion) into income (effective portion) excluded from effectiveness testing) ($ in millions) Location ($ in millions) Location ($ in millions) 74 Total revenues Total cost of sales 4 Total cost of sales (4) SG&A expenses (1) 74 69 Total revenues (12) Total cost of sales (4) Total cost of sales (11) SG&A expenses (1) 42 – – – – – Gains (losses) recognized in OCI 2011 Gains (losses) recognized in income on derivatives Gains (losses) reclassified from OCI (ineffective portion and amount (effective portion) into income (effective portion) excluded from effectiveness testing) ($ in millions) Location ($ in millions) Location ($ in millions) 9 Total revenues Total cost of sales (13) Total cost of sales (17) SG&A expenses (1) (21) 113 Total revenues (9) Total cost of sales 2 Total cost of sales (18) SG&A expenses (1) 88 – – – – – (1) SG&A expenses represent “Selling, general and administrative expenses”. Net derivative gains of $43 million, $28 million and $61 million, net of tax, were reclassified from “Accumulated other comprehensive loss” to earnings during 2013, 2012 and 2011, respectively. 118 Financial review of ABB Group | ABB Annual Report 2013 Note 5 Financial instruments, continued Fair value hedges To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the fair value of these instruments, as well as the changes in fair value of the risk component of the underlying debt being hedged, are recorded as off setting gains and losses in “Interest and other finance expense”. Hedge ineffectiveness of instruments designated as fair value hedges in 2013, 2012 and 2011, was not significant. The effect of derivative instruments, designated and qualifying as fair value hedges, on the Consolidated Income State­ ments was as follows: Gains (losses) recognized in income on derivatives Gains (losses) recognized in income Type of derivative designated designated as fair value hedges on hedged item as a fair value hedge Location ($ in millions) Location Interest rate contracts Interest and other finance expense (34) Interest and other finance expense ($ in millions) 35 2013 Gains (losses) recognized in income on derivatives Gains (losses) recognized in income Type of derivative designated designated as fair value hedges on hedged item as a fair value hedge Location ($ in millions) Location Interest rate contracts Interest and other finance expense 6 Interest and other finance expense ($ in millions) (6) 2012 Gains (losses) recognized in income on derivatives Gains (losses) recognized in income Type of derivative designated designated as fair value hedges on hedged item as a fair value hedge Location ($ in millions) Location Interest rate contracts Interest and other finance expense (24) Interest and other finance expense ($ in millions) 24 2011 Derivatives not designated in hedge relationships Derivative instruments that are not designated as hedges or do not qualify as either cash flow or fair value hedges are economic hedges used for risk management purposes. Gains and losses from changes in the fair values of such deriva­ tives are recognized in the same line in the income statement as the economically hedged transaction. Furthermore, under certain circumstances, the Company is required to split and account separately for foreign currency derivatives that are embedded within certain binding sales or purchase contracts denominated in a currency other than the functional currency of the subsidiary and the counterparty. The gains (losses) recognized in the Consolidated Income Statements on derivatives not designated in hedging relation­ ships were as follows: Type of derivative not designated as a hedge Gains (losses) recognized in income ($ in millions) Foreign exchange contracts Embedded foreign exchange contracts Commodity contracts Interest rate contracts Cash­settled call options Total Location Total revenues Total cost of sales SG&A expenses (1) Interest and other finance expense Total revenues Total cost of sales Total cost of sales Interest and other finance expense Interest and other finance expense Interest and other finance expense (1) SG&A expenses represent “Selling, general and administrative expenses”. 2013 (95) 80 (1) 223 101 (10) (50) 1 (3) – 246 2012 318 (193) (3) 68 (148) 28 10 1 (1) – 80 2011 (93) (25) – 265 (31) 11 (59) 1 – (1) 68 ABB Annual Report 2013 | Financial review of ABB Group 119 Note 5 Financial instruments, continued The fair values of derivatives included in the Consolidated Balance Sheets were as follows: December 31, 2013 ($ in millions) assets” assets” liabilities” liabilities” Derivative assets Derivative liabilities Current in Non-current in Current in Non-current in “Other current “Other non-current “Other current “Other non-current Derivatives designated as hedging instruments: Foreign exchange contracts Commodity contracts Interest rate contracts Cash­settled call options Total Derivatives not designated as hedging instruments: Foreign exchange contracts Commodity contracts Cash­settled call options Embedded foreign exchange derivatives Total Total fair value Thereof, subject to close-out netting agreements 21 2 – 14 37 272 6 – 57 335 372 284 8 – 14 40 62 42 1 2 21 66 128 63 10 1 – – 11 121 15 – 55 191 202 130 3 – 7 – 10 30 1 – 11 42 52 40 December 31, 2012 ($ in millions) assets” assets” liabilities” liabilities” Derivative assets Derivative liabilities Current in Non-current in Current in Non-current in “Other current “Other non-current “Other current “Other non-current Derivatives designated as hedging instruments: Foreign exchange contracts Commodity contracts Interest rate contracts Cash­settled call options Total Derivatives not designated as hedging instruments: Foreign exchange contracts Commodity contracts Cash­settled call options Embedded foreign exchange derivatives Total Total fair value Thereof, subject to close-out netting agreements 34 1 15 9 59 204 7 – 26 237 296 245 20 – 31 16 67 62 1 1 13 77 144 113 14 1 – – 15 84 11 – 86 181 196 93 6 – 2 – 8 20 1 – 40 61 69 28 Close­out netting agreements provide for the termination, valuation and net settlement of some or all outstanding transactions between two counterparties on the occurrence of one or more pre­defined trigger events. Although the Company is party to close­out netting agreements with most derivative counterparties, the fair values in the tables above and in the Consolidated Balance Sheets at December 31, 2013 and 2012, have been presented on a gross basis. 120 Financial review of ABB Group | ABB Annual Report 2013 Note 6 Fair values Recurring fair value measures December 31, 2013 ($ in millions) Assets The fair values of financial assets and liabilities measured at fair value on a recurring basis were as follows: Level 1 Level 2 Level 3 Total fair value Available­for­sale securities in “Cash and equivalents”: Debt securities – Corporate Available­for­sale securities in “Marketable securities and short­term investments”: Equity securities Debt securities – U.S. government obligations Debt securities – European government obligations Debt securities – Other government obligations Debt securities – Corporate Derivative assets – current in “Other current assets” Derivative assets – non­current in “Other non­current assets” Total Liabilities Derivative liabilities – current in “Other current liabilities” Derivative liabilities – non­current in “Other non­current liabilities” Total December 31, 2012 ($ in millions) Assets Available­for­sale securities in “Cash and equivalents”: Debt securities – Corporate Available­for­sale securities in “Marketable securities and short­term investments”: Equity securities Debt securities – U.S. government obligations Debt securities – Other government obligations Debt securities – Corporate Available­for­sale securities in “Other non­current assets”: Equity securities Derivative assets – current in “Other current assets” Derivative assets – non­current in “Other non­current assets” Total Liabilities Derivative liabilities – current in “Other current liabilities” Derivative liabilities – non­current in “Other non­current liabilities” Total – – 104 25 – – – – 129 3 – 3 69 159 – – 3 146 372 128 877 199 52 251 – – – – – – – – – – – – 69 159 104 25 3 146 372 128 1,006 202 52 254 Level 1 Level 2 Level 3 Total fair value – 3 159 – – 2 – – 128 1,279 – 3 117 – 296 144 164 1,967 4 – 4 192 69 261 – – – – – – – – – – – – 128 1,282 159 3 117 2 296 144 2,131 196 69 265 The Company uses the following methods and assumptions in estimating fair values of financial assets and liabilities measured at fair value on a recurring basis: – Available-for-sale securities in “Cash and equivalents”, “Marketable securities and short-term investments” and “Other non-current assets”: If quoted market prices in active markets for identical assets are available, these are considered Level 1 inputs; however, when markets are not active, these inputs are considered Level 2. If such quoted market prices are not available, fair value is determined using market prices for similar assets or present value techniques, applying an appropriate risk­free interest rate adjusted for nonperformance risk. The inputs used in present value techniques are observable and fall into the Level 2 category. – Derivatives: The fair values of derivative instruments are determined using quoted prices of identical instruments from an active market, if available (Level 1). If quoted prices are not available, price quotes for similar instruments, appro­ priately adjusted, or present value techniques, based on available market data, or option pricing models are used. Cash­settled call options hedging the Company’s WAR liability are valued based on bid prices of the equivalent listed warrant. The fair values obtained using price quotes for similar instruments or valuation techniques represent a Level 2 input unless significant unobservable inputs are used. There were no significant non­recurring fair value measurements during 2013. During 2012, impairment charges of $87 million were recorded as an adjustment to the fair value of certain equity­method investments. The non­recurring fair value measures were determined using a discounted cash flow model adjusted for industry and market conditions using Level 3 inputs and the resulting fair value of those assets remeasured during 2012 and still held at December 31, 2012, was not significant. Other non­recurring fair value measurements in 2012 were not significant. ABB Annual Report 2013 | Financial review of ABB Group 121 Non­recurring fair value measures Note 6 Fair values, continued Disclosure about financial instruments carried on a cost basis The fair values of financial instruments carried on a cost basis were as follows: December 31, 2013 ($ in millions) Carrying value Level 1 Level 2 Level 3 Total fair value Assets Cash and equivalents (excluding available­for­sale securities with original maturities up to 3 months): Cash Time deposits Marketable securities and short­term investments (excluding available­for­sale securities): Time deposits Other short­term investments Short­term loans in “Receivables, net” Other non­current assets: Loans granted Held­to­maturity securities Restricted cash and cash deposits Liabilities Short­term debt and current maturities of long­term debt (excluding finance lease liabilities) Long­term debt (excluding finance lease liabilities) Non­current deposit liabilities in “Other non­current liabilities” 2,414 3,538 18 9 6 54 104 276 2,414 – – 9 – – – 95 424 7,475 279 107 7,540 – – 3,538 18 – 6 52 121 219 317 34 338 – – – – – – – – – – – 2,414 3,538 18 9 6 52 121 314 424 7,574 338 December 31, 2012 ($ in millions) Carrying value Level 1 Level 2 Level 3 Total fair value Assets Cash and equivalents (excluding available­for­sale securities with original maturities up to 3 months): Cash Time deposits Marketable securities and short­term investments (excluding available­for­sale securities): Time deposits Other short­term investments Short­term loans in “Receivables, net” Other non­current assets: Loans granted Held­to­maturity securities Restricted cash and cash deposits Liabilities Short­term debt and current maturities of long­term debt (excluding finance lease liabilities) Long­term debt (excluding finance lease liabilities) Non­current deposit liabilities in “Other non­current liabilities” 2,784 3,963 2,784 – – 3,963 30 15 7 58 97 271 – 15 – – – 80 30 – 7 59 124 242 2,512 7,449 283 1,328 7,870 – 1,184 39 359 – – – – – – – – – – – 2,784 3,963 30 15 7 59 124 322 2,512 7,909 359 122 Financial review of ABB Group | ABB Annual Report 2013 The Company uses the following methods and assumptions in estimating fair values of financial instruments carried on a cost basis: – Cash and equivalents (excluding available-for-sale debt securities with original maturities up to 3 months), Marketable securities and short-term investments (excluding available-for-sale securities), and Short-term loans in “Receivables, net”: The carrying amounts approximate the fair values as the items are short­term in nature. – Other non-current assets: Includes (i) loans granted whose fair values are based on the carrying amount adjusted using a present value technique to reflect a premium or discount based on current market interest rates (Level 2 inputs), (ii) held­to­maturity securities (see Note 4) whose fair values are based on quoted market prices in inactive markets (Level 2 inputs), (iii) restricted cash whose fair values approximates the carrying amounts (Level 1) and (iv) cash deposits pledged in respect of certain non­current deposit liabilities whose fair values are determined using a discounted cash flow methodology based on current market interest rates (Level 2 inputs). – Short-term debt and current maturities of long-term debt, excluding finance lease liabilities: Includes commercial paper, bank borrowings and overdrafts as well as bonds maturing in the next 12 months. The carrying amounts of short­term debt and current maturities of long­term debt, excluding finance lease liabilities, approximate their fair values. – Long-term debt excluding finance lease liabilities: Fair values of outstanding bonds are determined using quoted market prices (Level 1 inputs). The fair values of other debt are determined using a discounted cash flow methodology based upon borrowing rates of similar debt instruments and reflecting appropriate adjustments for non­performance risk (Level 2 inputs). – Non-current deposit liabilities in “Other non-current liabilities”: The fair values of non­current deposit liabilities are determined using a discounted cash flow methodology based on risk­adjusted interest rates (Level 2 inputs). “Receivables, net” consisted of the following: Note 6 Fair values, continued Note 7 Receivables, net December 31, ($ in millions) Trade receivables Other receivables Allowance Unbilled receivables, net: Costs and estimated profits in excess of billings Advance payments consumed Total 2013 8,360 802 (317) 8,845 4,552 (1,251) 3,301 12,146 2012 8,233 801 (271) 8,763 3,955 (1,143) 2,812 11,575 “Trade receivables” in the table above includes contractual retention amounts billed to customers of $552 million and $390 million at December 31, 2013 and 2012, respectively. Management expects that the substantial majority of related contracts will be completed and the substantial majority of the billed amounts retained by the customer will be collected. Of the retention amounts outstanding at December 31, 2013, 71 percent and 21 percent are expected to be collected in 2014 and 2015, respectively. “Other receivables” in the table above consists of value added tax, claims, rental deposits and other non­trade receivables. “Costs and estimated profits in excess of billings” in the table above represents revenues earned and recognized for contracts under the percentage­of­completion or completed­contract method of accounting. Management expects that the majority of the amounts will be collected within one year of the respective balance sheet date. The reconciliation of changes in the allowance for doubtful accounts is as follows: ($ in millions) Balance at January 1, Additions Deductions Exchange rate differences Balance at December 31, 2013 271 147 (92) (9) 317 2012 227 155 (113) 2 271 2011 215 157 (131) (14) 227 ABB Annual Report 2013 | Financial review of ABB Group 123 “Inventories, net” consisted of the following: 2013 2,403 1,893 1,834 246 6,376 (372) 6,004 2012 2,427 2,075 1,741 246 6,489 (307) 6,182 “Work in process” in the table above contains inventoried costs relating to long­term contracts of $358 million and $363 million at December 31, 2013 and 2012, respectively. “Advance payments consumed” in the table above relates to contractual advances received from customers on work in process. “Other non­current assets” consisted of the following: Note 8 Inventories, net December 31, ($ in millions) Raw materials Work in process Finished goods Advances to suppliers Advance payments consumed Total Note 9 Other non-current assets December 31, ($ in millions) Pledged financial assets Derivatives (including embedded derivatives) (see Note 5) Investments Restricted cash Loans granted (see Note 6) Other Total 2013 285 128 72 95 54 124 758 2012 288 144 57 80 58 149 776 The Company entered into structured leasing transactions with U.S. investors prior to 1999. Certain amounts were received at the inception of the transaction and are included above as “Pledged financial assets”. These assets are pledged as security for certain outstanding deposit liabilities included in “Other non­current liabilities” (see Note 13) and the funds received upon maturity of the respective pledged financial assets will only be available to the Company for repayment of these obligations. “Investments” represents shares and other equity investments carried at cost. “Loans granted” is reported in the balance sheet at outstanding principal amount less any write­offs or allowance for uncollectible loans and primarily represents financing arrangements provided to customers (relating to products manufactured by the Company). Note 10 Property, plant and equipment, net “Property, plant and equipment, net” consisted of the following: December 31, ($ in millions) Land and buildings Machinery and equipment Construction in progress Accumulated depreciation Total December 31, ($ in millions) Land and buildings Machinery and equipment Accumulated depreciation Total Assets under capital leases included in “Property, plant and equipment, net” were as follows: 2013 4,478 8,258 645 13,381 (7,127) 6,254 2013 112 98 210 (115) 95 2012 4,316 7,603 627 12,546 (6,599) 5,947 2012 88 95 183 (103) 80 In 2013, 2012 and 2011, depreciation, including depreciation of assets under capital leases, was $842 million, $733 million and $660 million, respectively. 124 Financial review of ABB Group | ABB Annual Report 2013 Note 11 Goodwill and other intangible assets Changes in “Goodwill” were as follows: ($ in millions) Cost at January 1, 2012 Accumulated impairment charges Balance at January 1, 2012 Goodwill acquired during the year (1) Exchange rate differences Balance at December 31, 2012 Goodwill acquired during the year (1) Goodwill allocated to disposals Exchange rate differences Balance at December 31, 2013 Discrete Low Automation Voltage Process Power Power Corporate and Motion Products Automation Products Systems and Other 3,293 – 3,293 112 15 3,420 485 (9) 18 407 – 407 2,723 17 3,147 (45) – (43) 1,130 – 1,130 (1) 11 1,140 85 (2) 6 712 – 712 17 5 734 – – 2 3,914 3,059 1,229 736 1,705 – 1,705 44 13 1,762 – – (53) 1,709 Total 7,287 (18) 7,269 2,895 62 10,226 525 (11) (70) 40 (18) 22 – 1 23 – – – 23 10,670 (1) Amounts include adjustments arising during the twelve­month measurement period subsequent to the respective acquisition date. In 2013, goodwill acquired primarily relates to Power­One, acquired in July 2013, which has been allocated to the Discrete Automation and Motion operating segment. In 2012, goodwill acquired primarily included $2,723 million in respect of Thomas & Betts (allocated to the Low Voltage Products operating segment) with the remainder representing goodwill in respect of Newave Energy Holding SA (allocated to the Discrete Automation and Motion operating segment), as well as a number of smaller acquisitions. Intangible assets other than goodwill consisted of the following: 2013 2012 Gross carrying Accumulated Net carrying Gross carrying Accumulated Net carrying amount amortization amount amount amortization amount 767 432 2,773 867 400 63 (618) (384) (481) (374) (99) (49) 149 48 2,292 493 301 14 688 401 2,733 768 378 73 (533) (346) (319) (240) (59) (43) 5,302 (2,005) 3,297 5,041 (1,540) 155 55 2,414 528 319 30 3,501 Additions to intangible assets other than goodwill consisted of the following: 2013 2012 66 26 82 110 16 300 71 – 1,204 222 161 1,658 December 31, ($ in millions) Capitalized software for internal use Capitalized software for sale Intangibles other than software: Customer­related Technology­related Marketing­related Other Total ($ in millions) Capitalized software for internal use Capitalized software for sale Intangibles other than software: Customer­related Technology­related Marketing­related Total ABB Annual Report 2013 | Financial review of ABB Group 125 Note 11 Goodwill and other intangible assets, continued Included in the additions of $300 million and $1,658 million in 2013 and 2012, respectively, were the following intangible assets other than goodwill related to business combinations: ($ in millions) Customer­related (1) Technology­related Marketing­related Total (1) Includes the fair value of order backlog acquired in business combinations. 2013 2012 Amount Weighted-average Amount Weighted-average acquired useful life acquired useful life 82 108 16 206 11 years 4 years 10 years 7 years 1,200 222 161 1,583 18 years 5 years 10 years 15 years Amortization expense of intangible assets other than goodwill consisted of the following: ($ in millions) Capitalized software for internal use Capitalized software for sale Intangibles other than software Total ($ in millions) 2014 2015 2016 2017 2018 Thereafter Total Note 12 Debt Short­term debt and current maturities of long­term debt December 31, ($ in millions) 2013 2012 2011 81 34 361 476 79 38 332 449 87 48 200 335 In 2013, 2012 and 2011, impairment charges on intangible assets other than goodwill were not significant. At December 31, 2013, future amortization expense of intangible assets other than goodwill is estimated to be: 466 403 356 266 219 1,587 3,297 The Company’s total debt at December 31, 2013 and 2012, amounted to $8,023 million and $10,071 million, respectively. The Company’s “Short­term debt and current maturities of long­term debt” consisted of the following: Short­term debt (weighted­average interest rate of 6.9% and 1.7%, respectively) Current maturities of long­term debt (weighted­average nominal interest rate of 3.6% and 4.8%, respectively) Total 2013 423 30 453 2012 1,531 1,006 2,537 Short­term debt primarily represented short­term loans from various banks and issued commercial paper. At December 31, 2013 and 2012, the Company had in place three commercial paper programs: a $1 billion Euro­ commercial paper program for the issuance of commercial paper in a variety of currencies (which in February 2014, was terminated and replaced with a $2 billion Euro­commercial paper program, also for the issuance of commercial paper in a variety of currencies); a 5 billion Swedish krona commercial paper program for the issuance of Swedish krona and euro­denominated commercial paper and, a $2 billion commercial paper program for the private placement of U.S. dollar denominated commercial paper in the United States. At December 31, 2013 and 2012, $100 million and $1,019 million, respectively, was outstanding under the $2 billion program in the United States. At February 28, 2014, the amount outstanding under the United States program was $1,275 million, with a corresponding increase in cash and equivalents. 126 Financial review of ABB Group | ABB Annual Report 2013 Note 12 Debt, continued In addition, the Company has a $2 billion multicurrency revolving credit facility, maturing in 2015. The facility is for general corporate purposes, including as a back­stop for the above­mentioned commercial paper programs. Interest costs on drawings under the facility are LIBOR, STIBOR or EURIBOR (depending on the currency of the drawings) plus a margin of between 0.425 percent and 0.625 percent (depending on the Company’s credit rating), while commitment fees (payable on the unused portion of the facility) amount to 35 percent of the margin, which, given the Company’s credit ratings at December 31, 2013, represents commitment fees of 0.166 percent per annum. Utilization fees, payable on drawings, amount to 0.15 percent per annum on drawings over one­third but less than or equal to two­thirds of the facility, or 0.3 percent per annum on drawings over two­thirds of the facility. No utilization fees are payable on drawings representing one­third or less of the total facility. No amount was drawn at December 31, 2013 and 2012. The facility contains cross­default clauses whereby an event of default would occur if the Company were to default on indebtedness as defined in the facility, at or above a specified threshold. Long­term debt The Company utilizes derivative instruments to modify the interest characteristics of its long­term debt. In particular, the Company uses interest rate swaps to effectively convert certain fixed­rate long­term debt into floating rate obligations. The carrying value of debt, designated as being hedged by fair value hedges, is adjusted for changes in the fair value of the risk component of the debt being hedged. The following table summarizes the Company’s long­term debt considering the effect of interest rate swaps. Conse­ quently, a fixed­rate debt subject to a fixed­to­floating interest rate swap is included as a floating rate debt in the table below: December 31, ($ in millions, except % data) Balance Nominal rate Effective rate Balance Nominal rate Effective rate 2013 2012 Floating rate Fixed rate Current portion of long­term debt Total 2,211 5,389 7,600 (30) 7,570 2.7% 3.1% 1.2% 3.1% 3.6% 3.6% 2,353 6,187 8,540 (1,006) 7,534 3.4% 3.1% 4.8% At December 31, 2013, the principal amounts of long­term debt repayable at maturity were as follows: ($ in millions) Due in 2014 Due in 2015 Due in 2016 Due in 2017 Due in 2018 Thereafter Total 1.6% 3.1% 1.3% 30 44 1,173 886 395 5,088 7,616 Details of the Company’s outstanding bonds were as follows: December 31, (in millions) Bonds: 4.625% EUR Instruments, due 2013 2.5% USD Notes, due 2016 1.25% CHF Bonds, due 2016 1.625% USD Notes, due 2017 4.25% AUD Notes, due 2017 1.50% CHF Bonds, due 2018 2.625% EUR Instruments, due 2019 4.0% USD Notes, due 2021 2.25% CHF Bonds, due 2021 5.625% USD Notes, due 2021 2.875% USD Notes, due 2022 4.375% USD Notes, due 2042 Total outstanding bonds 2013 2012 Nominal Carrying Nominal outstanding value (1) outstanding Carrying value (1) USD CHF USD AUD CHF EUR USD CHF USD USD USD 600 500 500 400 350 1,250 650 350 250 1,250 750 EUR USD CHF USD AUD CHF EUR USD CHF USD USD USD 700 600 500 500 400 350 1,250 650 350 250 1,250 750 $ $ $ $ $ $ $ $ $ $ $ $ 598 568 498 353 393 1,722 642 396 287 1,230 727 7,414 $ $ $ $ $ $ $ $ $ $ $ $ $ 931 597 557 497 413 383 1,648 641 402 291 1,224 727 8,311 (1) USD carrying values include bond discounts or premiums, as well as adjustments for fair value hedge accounting, where appropriate. ABB Annual Report 2013 | Financial review of ABB Group 127 Note 12 Debt, continued During 2013, the Company repaid the 4.625% EUR Instruments, due 2013. The Company had entered into interest rate swaps to hedge its interest obligations on these bonds. After considering the impact of such swaps, these bonds effec­ tively became floating rate euro obligations and consequently are shown as floating rate debt at December 31, 2012, in the table of long­term debt above. The 2.5% USD Notes, due 2016, and the 4.0% USD Notes, due 2021, pay interest semi­annually in arrears, at fixed annual rates of 2.5 percent and 4.0 percent, respectively. The Company may redeem these notes prior to maturity, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the pres­ ent values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. The 1.25% CHF Bonds, due 2016, and the 2.25% Bonds, due 2021, pay interest annually in arrears, at fixed annual rates of 1.25 percent and 2.25 percent, respectively. The Company has the option to redeem the bonds prior to maturity, in whole, at par plus accrued interest, if 85 percent of the aggregate principal amount of the bonds has been redeemed or purchased and cancelled. The Company entered into interest rate swaps to hedge its interest obligations on these bonds. After considering the impact of such swaps, these bonds effectively became floating rate Swiss franc obligations and consequently have been shown as floating rate debt in the table of long­term debt above. The 1.50% CHF Bonds, due 2018, were issued in January 2012, and the Company recorded net proceeds of CHF 346 million (equivalent to approximately $370 million on date of issuance). The bonds have an aggregate principal of CHF 350 million and pay interest annually in arrears at a fixed annual rate of 1.5 percent. The Company has the option to redeem the bonds prior to maturity, in whole, at par plus accrued interest, if 85 percent of the aggregate principal amount of the bonds has been redeemed or purchased and cancelled. The 2.625% EUR Instruments, due 2019, were issued in March 2012, and the Company recorded proceeds (net of fees) of EUR 1,245 million (equivalent to approximately $1,648 million on date of issuance). The instruments have an aggregate principal of EUR 1,250 million and pay interest annually in arrears at a fixed rate of 2.625 percent per annum. In May 2012, the Company issued the following notes (i) $500 million of 1.625% USD Notes, due 2017, paying interest semi­annually in arrears at a fixed annual rate of 1.625 percent, (ii) $1,250 million of 2.875% USD Notes, due 2022, paying interest semi­annually in arrears at a fixed annual rate of 2.875 percent, and (iii) $750 million of 4.375% USD Notes, due 2042, paying interest semi­annually in arrears at a fixed annual rate of 4.375 percent. The Company may redeem these notes prior to maturity, in whole or in part, at the greater of (i) 100 percent of the principal amount of the notes to be redeemed and (ii) the sum of the present values of remaining scheduled payments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. The aggregate net proceeds of these bond issues, after underwriting discount and other fees, amounted to $2,431 million. These notes, registered with the U.S. Securities and Exchange Commis­ sion, were issued by ABB Finance (USA) Inc., a 100 percent owned finance subsidiary, and were fully and uncondition­ ally guaranteed by ABB Ltd. There are no significant restrictions on the ability of the parent company to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 3­10 of Regulation S­X, the separate financial statements of ABB Finance (USA) Inc. are not provided. During the third quarter of 2013, the Company entered into interest rate swaps to hedge obligations on an aggregate principal of $850 million of the 2.875% USD Notes, due 2022. After consid­ ering the impact of such swaps, $850 million of the outstanding principal became floating rate obligations and conse­ quently are shown as floating rate debt at December 31, 2013, in the table of long­term debt above. The 5.625% USD Notes, due 2021, were assumed in May 2012, upon the acquisition of Thomas & Betts and pay interest semi­annually in arrears at a fixed annual rate of 5.625 percent. These notes, with an aggregate principal of $250 million, were recorded at their fair value on the date the Company acquired Thomas & Betts and are being amortized to par over the period to maturity. The Company has the option to redeem the notes prior to maturity at the greater of (i) 100 percent of the principal amount of the notes to be redeemed, and (ii) the sum of the present values of remaining scheduled pay­ ments of principal and interest (excluding interest accrued to the redemption date) discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the redemption date. The 4.25% AUD Notes, due 2017, were issued in November 2012. Net issuance proceeds (after underwriting fees) totaled AUD 398 million (equivalent to approximately $412 million on date of issuance). The notes, with an aggregate principal of AUD 400 million, pay fixed interest of 4.25 percent semi­annually in arrears. The Company entered into interest rate swaps to hedge its interest obligations on these bonds. After considering the impact of such swaps, these bonds effectively became floating rate Australian dollar obligations and consequently have been shown as floating rate debt in the table of long­term debt above. The Company’s bonds contain cross­default clauses which would allow the bondholders to demand repayment if the Company were to default on any borrowing at or above a specified threshold. Furthermore, all such bonds constitute unsecured obligations of the Company and rank pari passu with other debt obligations. In addition to the bonds described above, included in long­term debt at December 31, 2013 and 2012, are capital lease obligations, bank borrowings of subsidiaries and other long­term debt, none of which is individually significant. 128 Financial review of ABB Group | ABB Annual Report 2013 Note 13 Other provisions, other current liabilities and other non-current liabilities December 31, ($ in millions) Contract­related provisions “Other Provisions” consisted of the following: Provisions for contractual penalties and compliance and litigation matters Restructuring and restructuring­related provisions Provision for insurance­related reserves Other Total “Other current liabilities” consisted of the following: December 31, ($ in millions) Employee­related liabilities Accrued expenses Income taxes payable Non­trade payables Other tax liabilities Derivative liabilities (see Note 5) Accrued customer rebates Deferred income Pension and other employee benefits (see Note 17) Accrued interest Other Total “Other non­current liabilities” consisted of the following: December 31, ($ in millions) Income tax related liabilities Non­current deposit liabilities (see Note 9) Environmental provisions (see Note 15) Provisions for contractual penalties and compliance and litigation matters Employee­related liabilities Deferred income Derivative liabilities (see Note 5) 2013 2012 762 327 247 232 239 684 223 227 215 226 1,807 1,575 2013 1,854 2012 1,786 694 357 328 269 202 162 155 82 79 60 652 369 365 312 196 163 164 164 103 63 4,242 4,337 2013 830 279 116 71 68 57 52 234 1,707 2012 732 283 73 94 55 48 69 212 1,566 Other Total Note 14 Leases ($ in millions) 2014 2015 2016 2017 2018 Thereafter Sublease income Total The Company’s lease obligations primarily relate to real estate and office equipment. Rent expense was $602 million, $610 million and $601 million in 2013, 2012 and 2011, respectively. Sublease income received by the Company on leased assets was $22 million, $25 million and $41 million in 2013, 2012 and 2011, respectively. At December 31, 2013, future net minimum lease payments for operating leases, having initial or remaining non­cancelable lease terms in excess of one year, consisted of the following: 510 429 347 248 203 248 1,985 (55) 1,930 ABB Annual Report 2013 | Financial review of ABB Group 129 At December 31, 2013, the future net minimum lease payments for capital leases and the present value of the net minimum lease payments consisted of the following: Note 14 Leases, continued ($ in millions) 2014 2015 2016 2017 2018 Thereafter Total minimum lease payments Less: amount representing estimated executory costs included in total minimum lease payments Net minimum lease payments Less: amount representing interest Present value of minimum lease payments 36 35 26 14 10 88 209 (2) 207 (83) 124 Note 15 Commitments and contingencies Contingencies – Environmental December 31, ($ in millions) Other provisions Other non­current liabilities Total environmental provisions Contingencies – Regulatory, Compliance and Legal Minimum lease payments have not been reduced by minimum sublease rentals due in the future under non­cancelable subleases. Such minimum sublease rentals were not significant. The present value of minimum lease payments is included in “Short­term debt and current maturities of long­term debt” or “Long­term debt” in the Consolidated Balance Sheets. The Company is engaged in environmental clean­up activities at certain sites arising under various United States and other environmental protection laws and under certain agreements with third parties. In some cases, these environmental remediation actions are subject to legal proceedings, investigations or claims, and it is uncertain to what extent the Company is actually obligated to perform. Provisions for these unresolved matters have been set up if it is probable that the Company has incurred a liability and the amount of loss can be reasonably estimated. The lower end of an esti­ mated range is accrued when a single best estimate is not determinable. The required amounts of the provisions may change in the future as developments occur. If a provision has been recognized for any of these matters, the Company records an asset when it is probable that it will recover a portion of the costs expected to be incurred to settle them. Management is of the opinion, based upon information presently available, that the resolution of any such obligation and non­collection of recoverable costs would not have a further material adverse effect on the Company’s Consolidated Financial Statements. The Company is involved in the remediation of environmental contamination at present or former facilities, primarily in the United States. The clean­up of these sites involves primarily soil and groundwater contamination. A significant portion of the provisions in respect of these contingencies reflects the provisions of acquired companies. A portion of one of the acquired entities’ remediation liability is indemnified by a prior owner. Accordingly, an asset equal to that portion of the remediation liability is included in “Other non­current assets”. The impact of environmental obligations on “Income from continuing operations, net of tax” was not significant in 2013, 2012 and 2011. The impact on “Income (loss) from discontinued operations, net of tax” was a charge of $41 million in 2013 and was not significant in 2012 and 2011. The effect of environmental obligations on the Company’s Consolidated Statements of Cash Flows was not significant in 2013 and 2012, and amounted to an outflow of $149 million in 2011, primarily related to the Company’s former nuclear technology business. Environmental provisions included in the Company’s Consolidated Balance Sheets were as follows: 2013 37 116 153 2012 33 73 106 Provisions for the above estimated losses have not been discounted as the timing of payments cannot be reasonably estimated. Antitrust The Company’s cables business is under investigation for alleged anticompetitive practices in a number of jurisdictions, including Brazil and the European Union. In December 2013, the Company agreed with the Brazilian Antitrust Authority (CADE) to settle its ongoing investigation into the Company’s involvement in these anticompetitive practices and the Company agreed to pay a fine of approximately 1.5 million Brazilian reals (equivalent to approximately $1 million on date of payment). In the European Union, the Company has received the European Commission’s Statement of Objections concerning its investigation into the cables business and in June 2012 participated in the related Oral Hearing. An informed judgment about the outcome of this investigation or the amount of potential loss or range of loss for the Company, if any, relating to this investigation cannot be made at this stage. 130 Financial review of ABB Group | ABB Annual Report 2013 Note 15 Commitments and contingencies, continued In Brazil, the Company’s Gas Insulated Switchgear business is under investigation by the CADE for alleged anticompetitive practices. In addition, the CADE has opened an investigation into certain other power businesses of the Company, including flexible alternating current transmission systems (FACTS) and power transformers. An informed judgment about the outcome of these investigations or the amount of potential loss or range of loss for the Company, if any, relating to these investigations cannot be made at this stage. In Italy, one of the Company’s recently acquired subsidiaries was raided in October 2013 by the Italian Antitrust Agency for alleged anticompetitive practices. An informed judgment about the outcome of this investigation or the amount of potential loss or range of loss for the Company, if any, relating to this investigation cannot be made at this stage. In September 2012, the German Antitrust Authority (Bundeskartellamt) fined one of the Company’s German subsidiaries euro 8.7 million (equivalent to approximately $11 million on date of payment) for its involvement in anticompetitive practices in the German power transformers business. With respect to those aforementioned matters which are still ongoing, management is cooperating fully with the antitrust authorities. Suspect payments In April 2005, the Company voluntarily disclosed to the United States Department of Justice (DoJ) and the United States Securities and Exchange Commission (SEC) certain suspect payments in its network management unit in the United States. Subsequently, the Company made additional voluntary disclosures to the DoJ and the SEC regarding suspect payments made by other Company subsidiaries in a number of countries in the Middle East, Asia, South America and Europe (including to an employee of an Italian power generation company) as well as by its former Lummus business. These payments were discovered by the Company as a result of the Company’s internal audit program and compliance reviews. In September 2010, the Company reached settlements with the DoJ and the SEC regarding their investigations into these matters and into suspect payments involving certain of the Company’s subsidiaries in the United Nations Oil­for­Food Program. In connection with these settlements, the Company agreed to make payments to the DoJ and SEC totaling $58 million, which were settled in the fourth quarter of 2010. One subsidiary of the Company pled guilty to one count of conspiracy to violate the anti­bribery provisions of the U.S. Foreign Corrupt Practices Act and one count of violating those provisions. The Company entered into a deferred prosecution agreement and settled civil charges brought by the SEC. These settlements resolved the foregoing investigations. In lieu of an external compliance monitor, the DoJ and SEC agreed to allow the Company to report on its continuing compliance efforts and the results of the review of its inter­ nal processes through September 2013. Further to the Fraud Section of the DoJ determining that the Company has fully complied with all its obligations under the deferred prosecution agreement, on October 1, 2013, the competent court in the U.S. agreed to dismiss all criminal charges against the Company in relation to these matters. General In addition, the Company is aware of proceedings, or the threat of proceedings, against it and others in respect of private claims by customers and other third parties with regard to certain actual or alleged anticompetitive practices. Also, the Company is subject to other various legal proceedings, investigations, and claims that have not yet been resolved. With respect to the above­mentioned regulatory matters and commercial litigation contingencies, the Company will bear the costs of the continuing investigations and any related legal proceedings. Liabilities recognized At December 31, 2013 and 2012, the Company had aggregate liabilities of $245 million and $211 million, respectively, included in “Other provisions” and “Other non­current liabilities”, for the above regulatory, compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it is not possible to make an informed judgment on the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be material adverse outcomes beyond the amounts accrued. General The following table provides quantitative data regarding the Company’s third­party guarantees. The maximum potential payments represent a “worst­case scenario”, and do not reflect management’s expected results. The carrying amount of liabilities recorded in the Consolidated Balance Sheets reflects the Company’s best estimate of future payments, which it may incur as part of fulfilling its guarantee obligations. Maximum potential payments 2013 149 77 50 276 2012 149 83 190 422 In respect of the above guarantees, the carrying amounts of liabilities at December 31, 2013 and 2012, were not significant. ABB Annual Report 2013 | Financial review of ABB Group 131 Guarantees December 31, ($ in millions) Performance guarantees Financial guarantees Indemnification guarantees Total Note 15 Commitments and contingencies, continued Performance guarantees Performance guarantees represent obligations where the Company guarantees the performance of a third party’s product or service according to the terms of a contract. Such guarantees may include guarantees that a project will be completed within a specified time. If the third party does not fulfill the obligation, the Company will compensate the guaranteed party in cash or in kind. Performance guarantees include surety bonds, advance payment guarantees and standby letters of credit. The significant performance guarantees are described below. The Company retained obligations for guarantees related to the Power Generation business contributed in mid­1999 to the former ABB Alstom Power NV joint venture (Alstom Power NV). The guarantees primarily consist of performance guarantees and other miscellaneous guarantees under certain contracts such as indemnification for personal injuries and property damages, taxes and compliance with labor laws, environmental laws and patents. These guarantees have no fixed expiration date. In May 2000, the Company sold its interest in Alstom Power NV to Alstom SA (Alstom). As a result, Alstom and its subsidiaries have primary responsibility for performing the obligations that are the subject of the guarantees. Further, Alstom, the parent company and Alstom Power NV, have undertaken jointly and severally to fully indemnify and hold harmless the Company against any claims arising under such guarantees. Management’s best esti­ mate of the total maximum potential amount payable of quantifiable guarantees issued by the Company on behalf of its former Power Generation business was $65 million and $78 million at December 31, 2013 and 2012, respectively, and is subject to foreign exchange fluctuations. The Company has not experienced any losses related to guarantees issued on behalf of the former Power Generation business. The Company is engaged in executing a number of projects as a member of consortia that include third parties. In certain of these cases, the Company guarantees not only its own performance but also the work of third parties. The original maturity dates of these guarantees range from one to six years. At December 31, 2013 and 2012, the maximum potential amount payable under these guarantees as a result of third­party non­performance was $70 million and $57 million, respectively. Financial guarantees and commercial commitments Financial guarantees represent irrevocable assurances that the Company will make payment to a beneficiary in the event that a third party fails to fulfill its financial obligations and the beneficiary under the guarantee incurs a loss due to that failure. At December 31, 2013 and 2012, the Company had a maximum potential amount payable of $77 million and $83 million, respectively, under financial guarantees outstanding. Of these amounts, $15 million and $19 million at December 31, 2013 and 2012, respectively, was in respect of guarantees issued on behalf of companies in which the Company formerly had or has an equity interest. The guarantees outstanding have various maturity dates up to 2020. In addition, in the normal course of bidding for and executing certain projects, the Company has entered into standby letters of credit, bid/performance bonds and surety bonds (collectively “performance bonds”) with various financial institu­ tions. Customers can draw on such performance bonds in the event that the Company does not fulfill its contractual obligations. The Company would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2013, 2012 and 2011. Indemnification guarantees The Company has indemnified certain purchasers of divested businesses for potential claims arising from the operations of the divested businesses. To the extent the maximum potential loss related to such indemnifications could not be calculated, no amounts have been included under maximum potential payments in the table above. Indemnifications for which maximum potential losses could not be calculated include indemnifications for legal claims. The significant indemnification guarantees for which maximum potential losses could be calculated are described below. The Company issued to the purchasers of Lummus Global guarantees related to assets and liabilities divested in 2007. The maximum potential amount payable relating to this business, pursuant to the sales agreement, at each of Decem­ ber 31, 2013 and 2012, was $50 million. The Company issued to the purchasers of its interest in Jorf Lasfar Energy Company S.C.A. guarantees related to assets and liabilities divested in 2007. The maximum potential amount payable under such guarantees was $140 million at December 31, 2012. During 2013, a settlement agreement was reached and at December 31, 2013, the Company had no further obligations with respect to these guarantees. Product and order­related contingencies The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts. The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was as follows: ($ in millions) Balance at January 1, Warranties assumed through acquisitions Claims paid in cash or in kind Net increase in provision for changes in estimates, warranties issued and warranties expired Exchange rate differences Balance at December 31, 2013 1,291 111 (294) 245 9 2012 1,324 4 (219) 149 33 1,362 1,291 132 Financial review of ABB Group | ABB Annual Report 2013 Note 15 Commitments and contingencies, continued Related party transactions The Company conducts business with certain companies where members of the Company’s Board of Directors or Executive Committee act, or in recent years have acted, as directors or senior executives. The Company’s Board of Directors has determined that the Company’s business relationships with those companies do not constitute material business relationships. This determination was made in accordance with the Company’s related party transaction policy which was prepared based on the Swiss Code of Best Practice and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange. Note 16 Taxes ($ in millions) Current taxes Deferred taxes “Provision for taxes” consisted of the following: Tax expense from continuing operations Tax benefit from discontinued operations 2013 1,258 (136) 1,122 (8) 2012 967 63 1,030 – 2011 1,278 (34) 1,244 (1) Tax expense from continuing operations is reconciled below from the Company’s weighted­average global tax rate (rather than from the Swiss domestic statutory tax rate), as the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland and income generated in jurisdictions outside of Switzerland (hereafter “foreign jurisdictions”) which has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. There is no requirement in Switzerland for any parent company of a group to file a tax return of the consolidated group determining domestic and foreign pre­tax income. As the Company’s consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines the global weighted­average tax rate of the Company. The reconciliation of “Tax expense from continuing operations” at the weighted­average tax rate to the effective tax rate is as follows: ($ in millions, except % data) Income from continuing operations before taxes Weighted-average tax rate Income taxes at weighted­average tax rate Items taxed at rates other than the weighted­average tax rate Changes in valuation allowance, net Effects of changes in tax laws and enacted tax rates Other, net Tax expense from continuing operations Effective tax rate for the year 2013 4,066 22.7% 922 110 31 1 58 2012 3,838 23.6% 906 60 44 (27) 47 2011 4,550 24.9% 1,134 103 (22) (17) 46 1,122 27.6% 1,030 26.8% 1,244 27.3% In 2013, 2012 and 2011, the “Items taxed at rates other than the weighted­average tax rate” predominantly related to tax credits arising in foreign jurisdictions for which the technical merits did not allow a benefit to be taken. In 2013, 2012 and 2011, “Changes in the valuation allowance, net” included reductions in valuation allowances recorded in certain jurisdictions where the Company determined that it was more likely than not that such deferred tax assets (recognized for net operating losses and temporary differences in those jurisdictions) would be realized, as well as increases in the valuation allowance in certain other jurisdictions. In 2013, the “Changes in valuation allowance, net” included an amount of $104 million related to certain of the Company’s operations in Central Europe and South America. It also included a benefit of $42 million related to certain of the Company’s operations in Central Europe. In 2012, the “Changes in valuation allowance, net” included an expense of $36 million related to certain of the Company’s operations in Central Europe and in 2011, the “Changes in valuation allowance, net” included a benefit of $47 million, related to certain of the Company’s operations in Northern Europe. In 2013, 2012 and 2011, “Other, net” of $58 million, $47 million and $46 million, respectively, included expenses of $71 million, $94 million and $60 million, respectively, in relation to items that were deducted for financial accounting purposes, but were not tax deductible, such as interest expense, local taxes on productive activities, disallowed meals and entertainment expenses and other similar items. ABB Annual Report 2013 | Financial review of ABB Group 133 Deferred income tax assets and liabilities consisted of the following: Note 16 Taxes, continued December 31, ($ in millions) Deferred tax assets: Unused tax losses and credits Pension and other accrued liabilities Inventories Property, plant and equipment Other Total gross deferred tax asset Valuation allowance Total gross deferred tax asset, net of valuation allowance Deferred tax liabilities: Property, plant and equipment, and intangible assets Pension and other accrued liabilities Inventories Other current assets Unremitted earnings Other Total gross deferred tax liability Net deferred tax liability Included in: “Deferred taxes” – current assets “Deferred taxes” – non­current assets “Deferred taxes” – current liabilities “Deferred taxes” – non­current liabilities Net deferred tax liability 2013 2012 1,000 1,335 302 83 140 2,860 (589) 2,271 1,009 1,395 287 125 104 2,920 (550) 2,370 (1,433) (1,366) (206) (135) (161) (598) (60) (252) (118) (169) (766) (26) (2,593) (2,697) (322) (327) 832 370 (259) (1,265) (322) 869 334 (270) (1,260) (327) Certain entities have deferred tax assets related to net operating loss carry­forwards and other items. As recognition of these assets in certain entities did not meet the more likely than not criterion, valuation allowances have been recorded and amount to $589 million and $550 million, at December 31, 2013 and 2012, respectively. “Unused tax losses and credits” at December 31, 2013 and 2012, in the table above, included $172 million and $155 million, respectively, for which the Company has established a full valuation allowance as, due to limitations imposed by the relevant tax law, the Company determined that, more likely than not, such deferred tax assets would not be realized. At December 31, 2013 and 2012, deferred tax liabilities totaling $598 million and $766 million have been provided for in respect of withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on unremitted earnings, as well as for limited Swiss income taxes on any such repatriated earnings. Income which has been generated outside of Switzerland and has already been subject to corporate income tax in such foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. The decrease during 2013 was mainly due to repatriation of earnings. Certain countries levy withholding taxes on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. In 2013 and 2012, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At December 31, 2013 and 2012, approximately $200 million and $400 million, respectively, of foreign subsidiary retained earnings subject to withholding taxes upon distribution were considered as permanently reinvested, as these funds are used for financing current operations as well as business growth through working capital and capital expenditure in those countries, and consequently, no deferred tax liability was recorded. At December 31, 2013, net operating loss carry­forwards of $2,685 million and tax credits of $239 million were available to reduce future taxes of certain subsidiaries. Of these amounts, $1,779 million of loss carry­forwards and $238 million of tax credits will expire in varying amounts through 2033. The largest amount of these carry­forwards related to the Company’s Central Europe operations. 134 Financial review of ABB Group | ABB Annual Report 2013 Note 16 Taxes, continued Unrecognized tax benefits consisted of the following: ($ in millions) Classification as unrecognized tax items on January 1, 2011 Net change due to acquisitions and divestments Increase relating to prior year tax positions Decrease relating to prior year tax positions Increase relating to current year tax positions Decrease relating to current year tax positions Decrease due to settlements with tax authorities Decrease as a result of the applicable statute of limitations Exchange rate differences Balance at December 31, 2011, which would, if recognized, affect the effective tax rate Net change due to acquisitions and divestments Increase relating to prior year tax positions Decrease relating to prior year tax positions Increase relating to current year tax positions Decrease relating to current year tax positions Decrease due to settlements with tax authorities Decrease as a result of the applicable statute of limitations Exchange rate differences Balance at December 31, 2012, which would, if recognized, affect the effective tax rate Net change due to acquisitions and divestments Increase relating to prior year tax positions Decrease relating to prior year tax positions Increase relating to current year tax positions Decrease relating to current year tax positions Decrease due to settlements with tax authorities Decrease as a result of the applicable statute of limitations Exchange rate differences Balance at December 31, 2013, which would, if recognized, affect the effective tax rate Penalties and interest related Unrecognized to unrecognized tax benefits tax benefits Total 714 9 52 (31) 128 (2) (78) (135) (4) 653 10 51 (73) 141 (3) (89) (29) 8 669 17 43 (30) 90 (1) (18) (46) 9 733 178 2 61 (11) 2 – (27) (35) (1) 169 – 26 (56) 1 – (11) (7) 5 127 2 36 – 4 – (5) (13) 3 154 892 11 113 (42) 130 (2) (105) (170) (5) 822 10 77 (129) 142 (3) (100) (36) 13 796 19 79 (30) 94 (1) (23) (59) 12 887 In 2013, the “Increase relating to current year tax positions” included a total of $62 million in taxes related to the interpre­ tation of tax law and double tax treaty agreements by competent tax authorities. In 2012, the “Decrease relating to prior year tax positions” included a total of $87 million relating to the release of provisions due to favorable resolution of a tax dispute in Northern Europe. In 2012, the “Increase relating to current year tax posi­ tions” included a total of $108 million in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2012, the “Decrease due to settlements with tax authorities” included a total of $47 million relating to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2011, the “Increase relating to prior year tax positions”, in unrecognized tax benefits above, related primarily to a tax dispute in Asia. The “Increase relating to prior year tax positions”, in penalties and interest related to unrecognized tax benefits above, mainly reflected the interest accrual on prior years’ tax positions. Also in 2011, the “Increase relating to current year tax positions” included a total of $97 million in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2011, the “Decrease due to settlements with tax authorities” included $49 million in tax, penalty and interest relating to a tax dispute in Northern Europe, while the “Decrease as a result of the applicable statute of limitations” included both the effect of the statute of limitations in certain jurisdictions, as well as instances where tax audits had been concluded by taxing authorities and the corresponding tax years were conse­ quently considered closed. At December 31, 2013, the Company expected the resolution, within the next twelve months, of uncertain tax positions related to pending court cases amounting to $34 million for taxes, penalties and interest. Otherwise, the Company had not identified any other significant changes which were considered reasonably possible to occur within the next twelve months. ABB Annual Report 2013 | Financial review of ABB Group 135 Note 16 Taxes, continued Region Europe The Americas Asia Middle East & Africa Note 17 Employee benefits At December 31, 2013, the earliest significant open tax years that remained subject to examination were the following: Year 2007 2010 2004 2004 The Company operates defined benefit and defined contribution pension plans and termination indemnity plans, in accordance with local regulations and practices. These plans cover a large portion of the Company’s employees and provide benefits to employees in the event of death, disability, retirement, or termination of employment. Certain of these plans are multi­employer plans. The Company also operates other postretirement benefit plans including post­ retirement health care benefits, and other employee­related benefits for active employees including long­service award plans. The measurement date used for the Company’s employee benefit plans is December 31. The funding policies of the Company’s plans are consistent with the local government and tax requirements and several of the plans are not required to be funded according to local government and tax requirements. The Company recognizes in its Consolidated Balance Sheets the funded status of its defined benefit pension plans, postretirement plans, and other employee­related benefits measured as the difference between the fair value of the plan assets and the benefit obligation. Obligations and funded status of the plans The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the Consolidated Balance Sheets were as follows: ($ in millions) Benefit obligation at January 1, Service cost Interest cost Contributions by plan participants Benefit payments Benefit obligations of businesses acquired Actuarial (gain) loss Plan amendments and other Exchange rate differences Benefit obligation at December 31, Fair value of plan assets at January 1, Actual return on plan assets Contributions by employer Contributions by plan participants Benefit payments Plan assets of businesses acquired Plan amendments and other Exchange rate differences Fair value of plan assets at December 31, Funded status – underfunded Defined pension Other postretirement benefits benefits 2013 12,063 249 373 81 (612) 7 (273) (50) 225 2012 9,817 221 396 77 (559) 684 1,124 (12) 315 12,063 10,282 12,063 8,867 621 403 81 (612) – (57) 212 839 347 77 (559) 482 (44) 273 10,930 10,282 2013 281 2012 260 1 9 – (15) – (41) 2 (1) 236 – – 15 – (15) – – – – 1 11 – (15) 17 2 4 1 281 – – 15 – (15) – – – – 1,133 1,781 236 281 The amounts recognized in “Accumulated other comprehensive loss” and “Noncontrolling interests” were: Defined pension benefits Other postretirement benefits December 31, ($ in millions) Net actuarial loss Prior service cost Amount recognized in OCI (1) and NCI (2) 2013 (2,050) (21) 2012 (2,574) (32) 2011 (1,826) (34) (2,071) (2,606) (1,860) Taxes associated with amount recognized in OCI (1) and NCI (2) 459 631 415 Amount recognized in OCI (1) and NCI (2), net of tax (3) (1,612) (1,975) (1,445) (1) (2) (3) OCI represents “Accumulated other comprehensive loss”. NCI represents “Noncontrolling interests”. NCI, net of tax, amounted to $(3) million, $(7) million and $(2) million at December 31, 2013, 2012 and 2011, respectively. 2013 (25) 24 (1) – (1) 2012 2011 (69) 33 (36) – (36) (71) 42 (29) – (29) 136 Financial review of ABB Group | ABB Annual Report 2013 Note 17 Employee benefits, continued In addition, the following amounts were recognized in the Company’s Consolidated Balance Sheets: December 31, ($ in millions) Overfunded plans Underfunded plans – current Underfunded plans – non­current Funded status – underfunded December 31, ($ in millions) Non-current assets Overfunded pension plans Other employee­related benefits Prepaid pension and other employee benefits December 31, ($ in millions) Current liabilities Underfunded pension plans Underfunded other postretirement benefit plans Other employee­related benefits Pension and other employee benefits (see Note 13) December 31, ($ in millions) Non-current liabilities Underfunded pension plans Underfunded other postretirement benefit plans Other employee­related benefits Pension and other employee benefits Defined pension Other postretirement benefits benefits 2013 (66) 20 1,179 1,133 2012 (49) 27 1,803 1,781 2013 2012 – 18 218 236 – 20 261 281 2013 2012 (66) (27) (93) (49) (22) (71) 2013 2012 20 18 44 82 27 20 117 164 2013 2012 1,179 218 242 1,639 1,803 261 226 2,290 December 31, ($ in millions) PBO exceeds assets Assets exceed PBO Total December 31, ($ in millions) ABO exceeds assets Assets exceed ABO Total The funded status, calculated using the projected benefit obligation (PBO) and fair value of plan assets, for pension plans with a PBO in excess of fair value of plan assets (underfunded) or fair value of plan assets in excess of PBO (overfunded), respectively, was: 2013 2012 PBO Assets Difference PBO Assets Difference 11,054 1,009 12,063 9,855 1,075 10,930 1,199 (66) 1,133 11,378 685 9,548 734 12,063 10,282 1,830 (49) 1,781 The accumulated benefit obligation (ABO) for all defined benefit pension plans was $11,594 million and $11,668 million at December 31, 2013 and 2012, respectively. The funded status, calculated using the ABO and fair value of plan assets for pension plans with ABO in excess of fair value of plan assets (underfunded) or fair value of plan assets in excess of ABO (overfunded), respectively, was: ABO 9,112 2,482 8,161 2,769 2013 2012 Assets Difference ABO Assets Difference 951 (287) 664 10,700 968 9,237 1,045 11,668 10,282 1,463 (77) 1,386 11,594 10,930 All of the Company’s other postretirement benefit plans are unfunded. ABB Annual Report 2013 | Financial review of ABB Group 137 Net periodic benefit cost consisted of the following: Note 17 Employee benefits, continued Components of net periodic benefit cost ($ in millions) Service cost Interest cost Expected return on plan assets Amortization of transition liability Amortization of prior service cost/(credit) Amortization of net actuarial loss Curtailments, settlements and special termination benefits Net periodic benefit cost Defined pension benefits Other postretirement benefits 2013 249 373 (479) – 34 136 1 314 2012 221 396 (494) – 42 98 2 2011 242 402 (507) – 44 52 3 265 236 2013 2012 2011 1 9 – – (9) 4 2 7 1 11 – – (9) 4 – 7 2 12 – 1 (9) 3 – 9 The net actuarial loss and prior service cost for defined pension benefits estimated to be amortized from “Accumulated other comprehensive loss” into net periodic benefit cost in 2014 is $115 million and $29 million, respectively. The net actuarial loss and prior service (credit) for other postretirement benefits estimated to be amortized from “Accumulated other comprehensive loss” into net periodic benefit cost in 2014 is $1 million and $(9) million, respectively. Assumptions The following weighted­average assumptions were used to determine benefit obligations: December 31, (in %) Discount rate Rate of compensation increase Pension increase assumption Defined pension Other postretirement benefits benefits 2013 3.58 1.81 1.14 2012 3.22 1.71 1.04 2013 4.17 – – 2012 3.35 – – The discount rate assumptions are based upon AA­rated corporate bonds. In those countries with sufficient liquidity in corporate bonds, the Company used the current market long­term corporate bond rates and matched the bond duration with the average duration of the pension liabilities. In those countries where the liquidity of the AA­rated corporate bonds was deemed to be insufficient, the Company determined the discount rate by adding the credit spread derived from an AA corporate bond index in another relevant liquid market, as adjusted for interest rate differentials, to the domestic government bond curve or interest rate swap curve. The following weighted­average assumptions were used to determine the “Net periodic benefit cost”: (in %) Discount rate Expected long­term rate of return on plan assets Rate of compensation increase Defined pension benefits Other postretirement benefits 2013 3.22 4.79 1.71 2012 3.91 5.38 1.62 2011 4.29 5.45 2.05 2013 3.35 – – 2012 4.07 – – 2011 5.03 – – The “Expected long­term rate of return on plan assets” is derived for each benefit plan by considering the expected future long­term return assumption for each individual asset class. A single long­term return assumption is then derived for each plan based upon the plan’s current and target asset allocation. The Company maintains other postretirement benefit plans, which are generally contributory with participants’ contributions adjusted annually. The assumptions used were: December 31, Health care cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate 2013 8.15% 5.00% 2028 2012 8.60% 5.00% 2028 A one­percentage­point change in assumed health care cost trend rates would have the following effects at December 31, 2013: ($ in millions) Effect on total of service and interest cost Effect on postretirement benefit obligation 138 Financial review of ABB Group | ABB Annual Report 2013 1-percentage-point Increase Decrease 1 18 (1) (15) Note 17 Employee benefits, continued Plan assets The Company has pension plans in various countries with the majority of the Company’s pension liabilities deriving from a limited number of these countries. The pension plans’ structures reflect local regulatory environments and market practices. Asset Class Equity Fixed income Real estate Other The pension plans are typically funded by regular contributions from employees and the Company. These plans are typi­ cally administered by boards of trustees (which include Company representatives) whose primary responsibility is to ensure that the plans meet their liabilities through contributions and investment returns. The boards of trustees have the responsibility for key investment strategy decisions. The accumulated contributions are invested in a diversified range of assets that are managed by third­party asset managers, in accordance with local statutory regulations, pension plan rules and the respective plans’ investment guidelines, as approved by the boards of trustees. Plan assets are generally segregated from those of the Company and invested with the aim of meeting the respective plans’ projected future pension liabilities. Plan assets are measured at fair value at the balance sheet date. The boards of trustees manage the assets of the pension plans in a risk­controlled manner and assess the risks embed­ ded in the pension plans through asset/liability modeling. The projected future development of pension liabilities is assessed relative to various alternative asset allocations in order to determine a strategic asset allocation for each plan that provides a balance between risk and return. Asset/liability management studies typically take place every three years. However, the risks of the plans are monitored on an ongoing basis. The assets of the major plans are reviewed at least quarterly, while the plans’ liabilities are reviewed in detail at least annually. The board of trustees’ investment goal is to maximize the long­term returns of plan assets within specified risk parameters, while considering the future liabilities and liquidity needs of the individual plans. Risk parameters taken into account include: – the funding ratio of the plan, – the likelihood of extraordinary cash contributions being required, and – the risk embedded in each individual asset class, and the plan asset portfolio as a whole. The Company’s investment policy is to achieve a balance between risk and return on the plans’ investments through the diversification of asset classes, the use of various external asset managers and the use of differing investment styles. This has resulted in a diversified portfolio with a mix of actively and passively managed investments. The Company’s global pension asset allocation is the result of the asset allocations of the individual plans, which are set by the respective boards of trustees. The target asset allocation of the Company’s plans on a weighted­average basis is as follows: Target percentage 23 57 11 9 100 The actual asset allocations of the plans are in line with the target asset allocations. Fixed income assets include corporate bonds of companies from diverse industries and government bonds mainly from mature­market issuers. Equity assets primarily include investments in large­cap and mid­cap listed companies. Both fixed income and equity assets are invested either via funds or directly in individual securities, and include an allocation to emerging markets. Real estate investments consist largely of domestic real estate in Switzerland held in the Swiss plans. The “Other” asset class includes investments in private equity, hedge funds, commodities, and cash and reflects a variety of investment strategies. Based on the above global asset allocation, the expected long­term return on assets at December 31, 2013, is 4.60 per­ cent. The Company and the local boards of trustees regularly review the investment performance of the asset classes and individual asset managers. Due to the diversified nature of the investments, the Company is of the opinion that no significant concentration of risks exists in its pension fund assets. The Company does not expect any plan assets to be returned to the employer during 2014. At December 31, 2013 and 2012, plan assets include ABB Ltd’s shares (as well as an insignificant amount of the Company’s debt instruments) with a total value of $18 million and $16 million, respectively. ABB Annual Report 2013 | Financial review of ABB Group 139 Note 17 Employee benefits, continued The fair values of the Company’s pension plan assets by asset class are presented below. For further information on the fair value hierarchy and an overview of the Company’s valuation techniques applied see the “Fair value measures” section of Note 2. December 31, 2013 ($ in millions) Level 1 Level 2 Level 3 Total fair value Asset Class Equity Equity securities Mutual funds/commingled funds Emerging market mutual funds/commingled funds Fixed income Government and corporate securities Government and corporate – mutual funds/commingled funds Emerging market bonds – mutual funds/commingled funds Insurance contracts Cash and short­term investments Private equity Hedge funds Real estate Commodities Total 387 – – 586 – – – 143 – – – – – 2,287 515 1,011 3,442 645 69 505 – – 82 47 – – – – – – – – 155 158 866 32 387 2,287 515 1,597 3,442 645 69 648 155 158 948 79 1,116 8,603 1,211 10,930 December 31, 2012 ($ in millions) Level 1 Level 2 Level 3 Total fair value Asset Class Equity Equity securities Mutual funds/commingled funds Emerging market mutual funds/commingled funds Fixed income Government and corporate securities Government and corporate – mutual funds/commingled funds Emerging market bonds – mutual funds/commingled funds Insurance contracts Cash and short­term investments Private equity Hedge funds Real estate Commodities Total 296 – – 701 – – – 170 – – – – – 1,893 443 1,056 3,367 707 76 252 – – 87 52 – – – – – – – – 164 153 830 35 296 1,893 443 1,757 3,367 707 76 422 164 153 917 87 1,167 7,933 1,182 10,282 In the above table of pension assets at December 31, 2012, certain assets, previously disclosed as Level 1, have been disclosed as Level 2, to conform with the current year’s presentation. The following table represents the movements of those asset categories whose fair values use significant unobservable inputs (Level 3): ($ in millions) Balance at January 1, 2012 Return on plan assets: Assets still held at December 31, 2012 Assets sold during the year Purchases (sales) Transfers into Level 3 Exchange rate differences Balance at December 31, 2012 Return on plan assets: Assets still held at December 31, 2013 Assets sold during the year Purchases (sales) Transfers into Level 3 Exchange rate differences Balance at December 31, 2013 Private equity Hedge funds Real estate Commodities Total Level 3 177 4 13 (31) – 1 164 6 8 (24) – 1 155 113 9 (7) 35 – 3 153 28 (7) (19) – 3 158 741 15 – 40 9 25 830 10 – 4 8 14 866 – (1) – 35 – 1 35 (3) – – – – 32 1,031 27 6 79 9 30 1,182 41 1 (39) 8 18 1,211 140 Financial review of ABB Group | ABB Annual Report 2013 Note 17 Employee benefits, continued Real estate properties are valued under the income approach using the discounted cash flow method, by which the market value of a property is determined as the total of all projected future earnings discounted to the valuation date. The discount rates are determined for each property individually according to the property’s location and specific use, and by considering initial yields of comparable market transactions. Private equity investments include investments in partnerships and related funds. Such investments consist of both publicly­traded and privately­held securities. Publicly­traded securities that are quoted in inactive markets are valued using available quotes and adjusted for liquidity restrictions. Privately­held securities are valued taking into account various factors, such as the most recent financing involving unrelated new investors, earnings multiple analyses using comparable companies and discounted cash flow analyses. Hedge funds are normally not exchange­traded and the shares of the funds are not redeemed daily. Depending on the fund structure, the fair values are derived through modeling techniques based on the values of the underlying assets adjusted to reflect liquidity and transferability restrictions. Contributions Employer contributions were as follows: ($ in millions) Total contributions to defined benefit pension and other postretirement benefit plans Of which, discretionary contributions to defined benefit pension plans Defined pension benefits Other postretirement benefits 2013 403 164 2012 347 83 2013 15 – 2012 15 – In 2013, the discretionary contributions included non­cash contributions totaling $160 million of available­for­sale debt securities to certain of the Company’s pension plans in Germany and the United Kingdom. In 2012, the discretionary contributions included non­cash contributions totaling $42 million of available­for­sale securities to the Company’s pension plans in the United Kingdom and the U.S. The Company expects to contribute approximately $310 million, including $75 million of discretionary contributions, to its defined benefit pension plans in 2014. $25 million of the 2014 discretionary contributions are expected to be non­cash contributions. The Company expects to contribute approximately $18 million to its other postretirement benefit plans in 2014. The Company also contributes to a number of defined contribution plans. The aggregate expense for these plans was $243 million, $220 million and $144 million in 2013, 2012 and 2011, respectively. Contributions to multi­employer plans were not significant in 2013, 2012 and 2011. Estimated future benefit payments The expected future cash flows to be paid by the Company’s plans in respect of pension and other postretirement benefit plans (net of Medicare subsidies) at December 31, 2013, are as follows: ($ in millions) 2014 2015 2016 2017 2018 Years 2019–2023 Note 18 Share-based payment arrangements Defined pension benefits Other postretirement benefits 699 687 697 666 661 3,238 18 18 18 19 19 88 The Company has three principal share­based payment plans, as more fully described in the respective sections below. Compensation cost for equity­settled awards is recorded in “Total cost of sales” and in “Selling, general and administrative expenses” and totaled $71 million, $60 million, and $67 million in 2013, 2012 and 2011, respectively. Compensation cost for cash­settled awards is recorded in “Selling, general and administrative expenses” and is dis­ closed in the “WARs”, “LTIP” and “Other share­based payments” sections of this note. The total tax benefit recog­ nized in 2013, 2012 and 2011, was not significant. At December 31, 2013, the Company had the ability to issue up to 94 million new shares out of contingent capital in connection with share­based payment arrangements. In addition, 14 million shares held by the Company in treasury stock at December 31, 2013, could be used to settle share­based payment arrangements. As the primary trading market for the shares of ABB Ltd is the SIX Swiss Exchange, on which the shares are traded in Swiss francs, certain data disclosed below related to the instruments granted under share­based payment arrange­ ments are presented in Swiss francs. MIP Under the MIP, the Company offers options and cash­settled WARs (and prior to the 2010 launch offered also physically­ settled warrants) to key employees for no consideration. The warrants and options granted under the MIP allow participants to purchase shares of ABB Ltd at predetermined prices. Participants may sell the warrants and options rather than exercise the right to purchase shares. Equivalent war­ rants are listed by a third­party bank on the SIX Swiss Exchange, which facilitates pricing and transferability of instru­ ments granted under this plan. The options entitle the holder to request that the third­party bank purchase such options at the market price of equivalent listed warrants related to that MIP launch. If the participant elects to sell the warrants or options, the instruments will thereafter be held by a third party and, consequently, the Company’s obligation to deliver ABB Annual Report 2013 | Financial review of ABB Group 141 Note 18 Share-based payment arrangements, continued shares will be toward this third party. Each WAR gives the participant the right to receive, in cash, the market price of an equivalent listed warrant on the date of exercise of the WAR. The WARs are non­transferable. Participants may exercise or sell warrants and options and exercise WARs after the vesting period, which is three years from the date of grant. Vesting restrictions can be waived in certain circumstances such as death or disability. All warrants, options and WARs expire six years from the date of grant. Warrants and options The fair value of each warrant and option is estimated on the date of grant using a lattice model that uses the weighted­ average assumptions noted in the table below. Expected volatilities are based on implied volatilities from equivalent listed warrants on ABB Ltd shares. The expected term of the warrants and options granted has been assumed to be the con­ tractual six­year life of each warrant and option, based on the fact that after the vesting period, a participant can elect to sell the warrant or option rather than exercise the right to purchase shares, thereby realizing the time value of the war­ rants and options. The risk­free rate is based on a six­year Swiss franc interest rate, reflecting the six­year contractual life of the warrants and options. In estimating forfeitures, the Company has used the data from previous comparable MIP launches. Expected volatility Dividend yield Expected term Risk­free interest rate 2013 21% 2.90% 6 years 0.57% 2012 27% 3.60% 6 years 0.30% 2011 26% 2.44% 6 years 1.59% Presented below is a summary of the activity related to warrants and options under the MIP: Weighted- Weighted-aver- Aggregate Number Number average exer- age remaining intrinsic value of instruments of shares cise price (in contractual (in millions of (in millions) (in millions)(1) Swiss francs)(2) term (in years) Swiss francs)(3) Outstanding at January 1, 2013 Granted Forfeited Expired Outstanding at December 31, 2013 Vested and expected to vest at December 31, 2013 Exercisable at December 31, 2013 242.5 88.1 (4.8) (27.9) 297.9 282.5 95.6 48.5 17.6 (1.0) (5.5) 59.6 56.5 19.1 22.38 21.50 19.60 26.74 21.76 21.81 25.07 (1) (2) (3) Information presented reflects the number of shares of ABB Ltd that can be received upon exercise, as warrants and options have a conversion ratio of 5:1. Information presented reflects the exercise price per share of ABB Ltd. Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price per share of ABB Ltd. 3.7 3.7 1.8 185 175 36 At December 31, 2013, there was $79 million of total unrecognized compensation cost related to non­vested options granted under the MIP. That cost is expected to be recognized over a weighted­average period of 2.0 years. The weighted­average grant­date fair value (per instrument) of options granted during 2013, 2012 and 2011 was 0.66 Swiss francs, 0.59 Swiss francs and 0.83 Swiss francs, respectively. In 2011 the aggregate intrinsic value (on the date of exercise) of instruments exercised was 11 million Swiss francs ($13 million). There were no exercises in 2013 and the aggregate intrinsic value in 2012 was not significant. Presented below is a summary, by launch, related to instruments outstanding at December 31, 2013: Exercise price (in Swiss francs)(1) 36.40 19.00 22.50 25.50 15.75 17.50 21.50 Total number of instruments and shares (1) (2) Information presented reflects the exercise price per share of ABB Ltd. Information presented reflects the number of shares of ABB Ltd that can be received upon exercise. Number of Number Weighted-average instruments of shares remaining contractual (in millions) (in millions)(2) term (in years) 25.1 22.8 36.7 43.4 68.2 14.7 87.0 297.9 5.0 4.6 7.3 8.7 13.7 2.9 17.4 59.6 0.4 1.4 2.4 3.4 4.4 4.4 5.4 3.7 142 Financial review of ABB Group | ABB Annual Report 2013 Note 18 Share-based payment arrangements, continued Outstanding at January 1, 2013 Granted Exercised Forfeited Expired Outstanding at December 31, 2013 Exercisable at December 31, 2013 ESAP WARs As each WAR gives the holder the right to receive cash equal to the market price of the equivalent listed warrant on date of exercise, the Company records a liability based upon the fair value of outstanding WARs at each period end, accreted on a straight­line basis over the three­year vesting period. In “Selling, general and administrative expenses”, the Com­ pany recorded an expense of $26 million and income of $8 million in 2013 and 2011, respectively, as a result of changes in both the fair value and vested portion of the outstanding WARs. The amount recorded in 2012 was not significant. To hedge its exposure to fluctuations in the fair value of outstanding WARs, the Company purchased cash­settled call options, which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs. The cash­settled call options are recorded as derivatives measured at fair value (see Note 5), with subsequent changes in fair value recorded through earnings to the extent that they offset the change in fair value of the liability for the WARs. In 2013, the Company recorded an income of $16 million and in 2011, an expense of $24 million, in “Selling, general and administrative expenses” related to the cash­settled call options. The amount recorded in 2012 was not significant. The aggregate fair value of outstanding WARs was $56 million and $26 million at December 31, 2013 and 2012, respec­ tively. The fair value of WARs was determined based upon the trading price of equivalent warrants listed on the SIX Swiss Exchange. Presented below is a summary of the activity related to WARs: Number of WARs (in millions) 66.8 18.8 (13.6) (0.4) (4.3) 67.3 23.3 The aggregate fair value at date of grant of WARs granted in 2013, 2012 and 2011, was $13 million, $10 million and $10 million, respectively. In 2013, 2012 and 2011, share­based liabilities of $9 million, $7 million and $7 million, respec­ tively, were paid upon exercise of WARs by participants. The employee share acquisition plan (ESAP) is an employee stock­option plan with a savings feature. Employees save over a twelve­month period, by way of regular payroll deductions. At the end of the savings period, employees choose whether to exercise their stock options using their savings plus interest to buy ABB Ltd shares (American Depositary Shares (ADS) in the case of employees in the United States and Canada – each ADS representing one registered share of the Company) at the exercise price set at the grant date, or have their savings returned with interest. The savings are accumulated in bank accounts held by a third­party trustee on behalf of the participants and earn interest. Employees can withdraw from the ESAP at any time during the savings period and will be entitled to a refund of their accumulated savings. The fair value of each option is estimated on the date of grant using the same option valuation model as described under the MIP, using the assumptions noted in the table below. The expected term of the option granted has been determined to be the contractual one­year life of each option, at the end of which the options vest and the participants are required to decide whether to exercise their options or have their savings returned with interest. The risk­free rate is based on one­year Swiss franc interest rates, reflecting the one­year contractual life of the options. In estimating forfeitures, the Company has used the data from previous ESAP launches. Expected volatility Dividend yield Expected term Risk­free interest rate 2013 20% 2.84% 1 year 0% 2012 23% 3.45% 1 year 0% 2011 33% 3.13% 1 year 0% ABB Annual Report 2013 | Financial review of ABB Group 143 Note 18 Share-based payment arrangements, continued Presented below is a summary of activity under the ESAP: Weighted- Weighted- Aggregate Number of average exercise average remaining intrinsic value shares price (in contractual (in millions of (in millions)(1) Swiss francs)(2) term (in years) Swiss francs)(2)(3) Outstanding at January 1, 2013 Granted Forfeited Exercised (4) Not exercised (savings returned plus interest) Outstanding at December 31, 2013 Vested and expected to vest at December 31, 2013 Exercisable at December 31, 2013 4.4 4.7 (0.2) (3.7) (0.5) 4.7 4.5 – 17.08 20.82 17.08 17.08 17.08 20.82 20.82 – 0.8 0.8 – 12.6 12.0 – (1) (2) (3) (4) Includes shares represented by ADS. Information presented for ADS is based on equivalent Swiss franc denominated awards. Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price of each option in Swiss francs. The cash received upon exercise was approximately $70 million and the corresponding tax benefit was not significant. The shares were delivered out of treasury stock. LTIP The exercise prices per ABB Ltd share and per ADS of 22.90 Swiss francs and $25.21, respectively, for the 2013 grant, 17.08 Swiss francs and $18.30, respectively, for the 2012 grant, and 15.98 Swiss francs and $18.10, respectively, for the 2011 grant were determined using the closing price of the ABB Ltd share on SIX Swiss Exchange and ADS on the New York Stock Exchange on the respective grant dates. For the 2013 grant, the exercise price has been effectively reduced as for every ten shares bought through exercise of the options one additional free share will be delivered; therefore the effective exercise prices per ABB Ltd share and per ADS are 20.82 Swiss francs and $22.92, respectively. The table above reflects the effective exercise price. At December 31, 2013, there was $12 million of total unrecognized compensation cost related to non­vested options granted under the ESAP. That cost is expected to be recognized over the first ten months of 2014 in “Total cost of sales” and in “Selling, general and administrative expenses”. The weighted­average grant­date fair value (per option) of options granted during 2013, 2012 and 2011, was 2.79 Swiss francs, 1.29 Swiss francs and 1.89 Swiss francs, respectively. The total intrinsic value (on the date of exercise) of options exercised in 2013 was $24 million while in 2012 and 2011 it was not significant. The Company has a long­term incentive plan (LTIP) for members of its Executive Committee and selected other execu­ tives (Eligible Participants), as defined in the terms of the LTIP and determined by the Company’s Governance, Nomination and Compensation Committee. The LTIP involves annual conditional grants of the Company’s stock to such Eligible Participants that are subject to certain conditions. The 2013, 2012 and 2011 launches under the LTIP are each composed of two components: (i) a performance component (earnings per share performance for the 2013 and 2012 launches and share­price performance for the 2011 launch) and (ii) a retention component. Under the performance component, the number of shares granted is dependent upon the base salary of the Eligible Participant. For the 2013 and 2012 LTIP launches, the actual number of shares that will vest at a future date is dependent on (i) the Company’s weighted cumulative earnings per share performance over three financial years, beginning with the year of launch, and (ii) the fulfillment of the service condition as defined in the terms and conditions of the LTIP. The cumulative earnings per share performance is weighted as follows: 33 percent of the first year’s result, 67 percent of the second year’s result and 100 percent of the third year’s result. The actual number of shares that ultimately vest will vary depending on the weighted cumulative earnings per share outcome, interpolated between a lower threshold (no shares vest) and an upper threshold (the number of shares vesting is capped at 200 percent of the conditional grant). For the 2011 LTIP launch, the actual number of shares that will vest at a future date is dependent on (i) the performance of ABB Ltd shares during a defined three­year period (Evaluation Period) compared to those of a selected peer group of publicly­listed multinational companies and (ii) the fulfillment of the service condition as defined in the terms and con­ ditions of the LTIP. The actual number of shares that ultimately vest cannot exceed 100 percent of the conditional grant. The performance of the Company compared to its peers over the Evaluation Period will be measured as the sum, in percentage terms, of the average percentage price development of the ABB Ltd share price over the Evaluation Period (from a reference price of 22.25 Swiss francs for the 2011 launch) and an average annual dividend yield percent­ age (the Company’s Performance). In order for shares to vest, the Company’s Performance over the Evaluation Period must be equal to or better than half of the defined peers. The actual number of shares to be delivered by the Company, after the end of the Evaluation Period, will be dependent on the Company’s ranking in comparison with the defined peers. The full amount of the grant will vest if the Company’s Performance is positive and better than three­quarters of the defined peers. If the Company’s Performance is negative but other conditions are met, a reduced number of shares will vest. In addition, if the Company’s net income (adjusted for the financial impact of items that are, in the opinion of the Company’s Board, non­operating, non­recurring or unforeseen – such as divestments and acquisitions) is nega­ tive for the year preceding the year in which the Evaluation Period ends, no shares will vest, irrespective of the outcome of the Company’s Performance. 144 Financial review of ABB Group | ABB Annual Report 2013 Note 18 Share-based payment arrangements, continued Under the retention component of the 2013, 2012 and 2011 LTIP launches, each Eligible Participant was conditionally granted an individually defined maximum number of shares which fully vest at the end of the respective vesting periods (if the participant remains an Eligible Participant until the end of such period). For the 2013, 2012 and 2011 LTIP launches, under the performance component, an Eligible Participant receives, in cash, 100 percent of the value of the shares that have vested. Under the retention component, an Eligible Participant receives 70 percent of the shares that have vested in the form of shares and 30 percent of the value of the shares that have vested in cash, with the possibility to elect to receive the 30 percent portion also in shares rather than cash. Presented below is a summary of activity under the LTIP: Nonvested at January 1, 2013 Granted Vested Expired (3) Forfeited Nonvested at December 31, 2013 Number of shares Equity & Cash or choice of 100% Only Cash Weighted-average grant-date Equity Settlement (1) Settlement (2) Total fair value per share (in millions) (in millions) (in millions) (Swiss francs) 1.6 0.5 (0.3) – (0.1) 1.7 1.0 0.4 – (0.2) (0.1) 1.1 2.6 0.9 (0.3) (0.2) (0.2) 2.8 15.72 20.92 19.54 4.87 16.92 17.65 (1) (2) (3) Shares that, subject to vesting, the Eligible Participant can elect to receive 100 percent in the form of shares. Shares that, subject to vesting, the Eligible Participant can only receive in cash. Expired as the criteria for the Company’s performance condition were not satisfied. Equity­settled awards are recorded in the “Capital stock and additional paid­in capital” component of stockholders’ equity, with compensation cost recorded in “Selling, general and administrative expenses” over the vesting period (which is from grant date to the end of the vesting period) based on the grant­date fair value of the shares. Cash­settled awards are recorded as a liability, remeasured at fair value at each reporting date for the percentage vested, with changes in the liability recorded in “Selling, general and administrative expenses”. At December 31, 2013, there was $14 million of total unrecognized compensation cost related to equity­settled awards under the LTIP. That cost is expected to be recognized over a weighted­average period of 2.0 years. The compensation cost recorded in 2013, 2012 and 2011, for cash­settled awards was not significant. The aggregate fair value, at the dates of grant, of shares granted in 2013, 2012 and 2011, was approximately $22 million, $22 million and $16 million, respectively. The total grant­date fair value of shares that vested during 2013, 2012 and 2011 was not significant. The weighted­average grant­date fair value (per share) of shares granted during 2013, 2012 and 2011, was 20.92 Swiss francs, 15.21 Swiss francs and 17.91 Swiss francs, respectively. For the earnings per share performance component of the 2013 and 2012 LTIP launches, the aggregate fair value of the conditionally granted shares is based on the market price of the ABB Ltd share at each reporting date and the probable outcome of the earnings per share achievement that would result in the vesting of the highest number of shares, as computed using a Monte Carlo simulation model. The main inputs to this model are the Company’s and financial analysts’ revenue growth rates and Operational EBITDA margin expectations. The aggregate fair value of the shares relating to the (cash­settled) share­price performance component under the 2011 LTIP launch is based on the market price of the ABB Ltd share at each reporting date adjusted for the probability of vesting as computed using a Monte Carlo simulation model at each reporting date. The main inputs to the Monte Carlo simulation model for the December 31, 2013 and 2012, fair values for the Company and each peer company were as follows: Cash-settled awards at December 31, Input ranges for: Option implied volatilities (%) Risk­free rates (%) Equity betas Equity risk premiums (%) 2013 From 2012 To From 16.8 1.7 0.85 5.0 36.7 4.0 1.31 7.0 16.2 1.0 0.85 5.0 To 48.4 3.1 1.24 7.0 For the retention component under the 2013, 2012 and 2011 LTIP launches, the fair value of granted shares for equity­settled awards is the market price of the ABB Ltd share on grant date and the fair value of granted shares for cash­settled awards is the market price of the ABB Ltd share at each reporting date. Other share­based payments The Company has other minor share­based payment arrangements with certain employees. The compensation cost related to these arrangements in 2013, 2012 and 2011 was not significant. ABB Annual Report 2013 | Financial review of ABB Group 145 Note 19 Stockholders’ equity At both December 31, 2013 and 2012, the Company had 2,819 million authorized shares, of which 2,315 million were registered and issued. At the Annual General Meeting of Shareholders (AGM) held in April 2013, at the AGM held in April 2012 and at the AGM held in April 2011, shareholders approved the payment of a dividend of 0.68 Swiss francs per share, 0.65 Swiss francs per share and 0.60 Swiss francs per share, respectively, out of the capital contribution reserve in stockholders’ equity of the unconsolidated statutory financial statements of ABB Ltd, prepared in accordance with Swiss law. The dividends were paid in May 2013 (amounting to $1,667 million), May 2012 (amounting to $1,626 million) and May 2011 (amounting to $1,569 million), respectively. Upon and in connection with each launch of the Company’s MIP, the Company sold call options to a bank at fair value, giving the bank the right to acquire shares equivalent to the number of shares represented by the MIP warrant and WAR awards to participants. Under the terms of the agreement with the bank, the call options can only be exercised by the bank to the extent that MIP participants have either sold or exercised their warrants or exercised their WARs. In 2012 and 2011, the bank exercised certain of the call options it held. As a consequence, in 2012, the Company delivered 2.7 million shares out of treasury stock and in 2011 the Company delivered 6.0 million shares from contingent capital. No call options were exercised by the bank in 2013. At December 31, 2013, such call options representing 9.6 million shares and with strike prices ranging from 15.75 to 36.40 Swiss francs (weighted­average strike price of 23.12 Swiss francs) were held by the bank. The call options expire in periods ranging from May 2014 to May 2019. However, only 1.0 million of these instruments, with strike prices ranging from 15.75 to 36.40 Swiss francs (weighted­average strike price of 31.40 Swiss francs), could be exercised at December 31, 2013, under the terms of the agreement with the bank. In addition to the above, at December 31, 2013, the Company had further outstanding obligations to deliver: – up to 2.6 million shares relating to the options granted under the 2008 launch of the MIP, with a strike price of 36.40 Swiss francs, vested in May 2011 and expiring in May 2014, – up to 4.5 million shares relating to the options granted under the 2009 launch of the MIP, with a strike price of 19.00 Swiss francs, vested in May 2012 and expiring in May 2015, – up to 7.3 million shares relating to the options granted under the 2010 launch of the MIP, with a strike price of 22.50 Swiss francs, vested in May 2013 and expiring in May 2016, – up to 8.7 million shares relating to the options granted under the 2011 launch of the MIP, with a strike price of 25.50 Swiss francs, vesting in May 2014 and expiring in May 2017, – up to 16.6 million shares relating to the options granted under the 2012 launches of the MIP, with a weighted­average strike price of 16.06 Swiss francs, vesting in May 2015 and expiring in May 2018, – up to 17.4 million shares relating to the options granted under the 2013 launch of the MIP, with a strike price of 21.50 Swiss francs, vesting in May 2016 and expiring in May 2019, – up to 4.7 million shares relating to the ESAP, vesting and expiring in November 2014, – up to 1.7 million shares to Eligible Participants under the 2013, 2012 and 2011, launches of the LTIP, vesting and expiring in June 2016, May 2015 and March 2014, respectively, and – up to 2.3 million shares in connection with certain other share­based payment arrangements with employees. See Note 18 for a description of the above share­based payment arrangements. In November 2013 and 2012, the Company delivered 3.7 million and 2.3 million shares, respectively, from treasury stock, under the ESAP. In 2011, the number of shares delivered under the ESAP was not significant. Amounts available to be distributed as dividends to the stockholders of ABB Ltd are based on the requirements of Swiss law and ABB Ltd’s Articles of Incorporation, and are determined based on amounts presented in the unconsolida t ­ ed financial statements of ABB Ltd, Zurich, prepared in accordance with Swiss law. At December 31, 2013, of the 11,637 million Swiss francs ($13,076 million) total stockholders’ equity reflected in such unconsolidated financial statements, 2,384 million Swiss francs ($2,679 million) represents share capital and 9,253 million Swiss francs ($10,397 million) represent reserves. Of these reserves, legal reserves for own shares of 296 million Swiss francs ($333 million) and ordinary legal reserves of 1,000 million Swiss francs ($1,124 million) are restricted. In February 2014, the Company announced that a proposal will be put to the 2014 AGM to distribute 0.70 Swiss francs per share to shareholders. 146 Financial review of ABB Group | ABB Annual Report 2013 Note 20 Earnings per share Basic earnings per share is calculated by dividing income by the weighted­average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted­average number of shares outstanding during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options and outstanding options and shares granted subject to certain conditions under the Company’s share­based payment arrangements. In 2013, 2012 and 2011, outstanding securities representing a maximum of 47 million, 56 million and 39 million shares, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been anti­dilutive. Basic earnings per share ($ in millions, except per share data in $) Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 2013 2012 2011 2,824 (37) 2,787 2,700 3,159 4 9 2,704 3,168 Weighted-average number of shares outstanding (in millions) 2,297 2,293 2,288 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Diluted earnings per share ($ in millions, except per share data in $) Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 1.23 (0.02) 1.21 1.18 – 1.18 1.38 – 1.38 2013 2012 2011 2,824 (37) 2,787 2,700 3,159 4 9 2,704 3,168 Weighted­average number of shares outstanding (in millions) 2,297 2,293 2,288 Effect of dilutive securities: Call options and shares Dilutive weighted-average number of shares outstanding Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 8 2 3 2,305 2,295 2,291 1.23 (0.02) 1.21 1.18 – 1.18 1.38 – 1.38 ABB Annual Report 2013 | Financial review of ABB Group 147 Note 21 Other comprehensive income The following table includes amounts recorded within “Total other comprehensive income (loss)” including the related income tax effects. ($ in millions) tax effect of tax tax effect of tax tax effect of tax 2013 2012 2011 Before Tax Net Before Tax Net Before Tax Net Foreign currency translation adjustments: Net change during the year Available-for-sale securities: Net unrealized gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Net change during the year Pension and other postretirement plans: Prior service (costs) credits arising during the year Net actuarial gains (losses) arising during the year Amortization of prior service cost included in net income Amortization of net actuarial loss included in net income Amortization of transition liability included in net income Net change during the year Cash flow hedge derivatives: Net gains (losses) arising during the year Reclassification adjustments for net (gains) losses included in net income Net change during the year 133 (4) (14) (18) (20) 423 8 – 1 1 4 (132) 25 (2) 140 (41) – – 568 (171) 33 (54) (21) (5) 11 6 141 389 (6) 383 (280) 5 (275) (4) (13) (17) (16) 291 23 99 – 397 5 1 6 (2) – (2) 3 1 4 (2) 3 1 (42) (846) 6 (36) 245 (601) (35) (750) 33 (3) 102 (32) – – 30 70 – 35 55 1 (753) 216 (537) (694) (1) 2 1 12 157 (13) (11) – 145 (3) 5 2 (23) (593) 22 44 1 (549) 28 74 (21) 53 (21) 2 (19) (43) (15) (42) 32 14 (7) (28) 25 (88) (109) 27 29 (61) (80) Total other comprehensive income (loss) 662 (156) 506 (326) 201 (125) (1,082) 180 (902) The following table shows changes in “Accumulated other comprehensive loss” (OCI) attributable to ABB, by component, net of tax: ($ in millions) Balance at January 1, 2013 Other comprehensive (loss) income before reclassifications Amounts reclassified from OCI Total other comprehensive (loss) income Less: Amounts attributable to noncontrolling interests Balance at December 31, 2013 Unrealized Unrealized gains (losses) Pension gains (losses) Foreign currency on available- and other post- of cash flow translation for-sale retirement plan hedge adjustments securities adjustments derivatives (580) 141 – 141 (8) (431) 24 (4) (13) (17) – 7 (2,004) 275 122 397 3 (1,610) 37 28 (43) (15) – 22 Total OCI (2,523) 440 66 506 (5) (2,012) 148 Financial review of ABB Group | ABB Annual Report 2013 Note 21 Other comprehensive income, continued The following table reflects amounts reclassified out of OCI in respect of Pension and other postretirement plan adjustments and Unrealized gains (losses) of cash flow hedge derivatives: Details about OCI components, ($ in millions) Pension and other postretirement plan adjustments: Amortization of prior service costs Amortization of net actuarial losses Total before tax Tax Amounts reclassified from OCI Unrealized gains (losses) of cash flow hedge derivatives: Foreign exchange contracts Commodity contracts Cash­settled call options Total before tax Tax Amounts reclassified from OCI Location of (gains) losses reclassified from OCI 2013 Net periodic benefit cost (1) Net periodic benefit cost (1) Provision for taxes Total revenues Total cost of sales Total cost of sales SG&A expenses (2) Provision for taxes 25 140 165 (43) 122 (52) 1 5 (8) (54) 11 (43) (1) (2) These components are included in the computation of net periodic benefit cost (see Note 17). SG&A expenses represent “Selling, general and administrative expenses”. The amounts reclassified out of OCI in respect of Unrealized gains (losses) on available­for­sale securities were not significant in 2013. Note 22 Restructuring and related expenses Restructuring­related activities ($ in millions) Employee severance costs Estimated contract settlement, loss order and other costs Inventory and long­lived asset impairments Total In 2013, 2012 and 2011, the Company executed minor restructuring­related activities and incurred charges of $252 million, $180 million and $164 million, respectively, which were mainly recorded in “Total cost of sales”. 2013 154 78 20 252 2012 2011 92 72 16 180 83 53 28 164 At December 31, 2013 and 2012, the balance of restructuring and related liabilities is primarily included in “Other provisions”. Note 23 Operating segment and geographic data The Chief Operating Decision Maker (CODM) is the Company’s Executive Committee. The CODM allocates resources to and assesses the performance of each operating segment using the information outlined below. The Company’s operating segments consist of Discrete Automation and Motion, Low Voltage Products, Process Automation, Power Products and Power Systems. The remaining operations of the Company are included in Corporate and Other. A description of the types of products and services provided by each reportable segment is as follows: – Discrete Automation and Motion: manufactures and sells motors, generators, variable speed drives, programmable logic controllers, robots and robotics, solar inverters, wind converters, rectifiers, excitation systems, power quality and protection solutions, electric vehicle fast charging infrastructure, components and subsystems for railways, and related services for a wide range of applications in discrete automation, process industries, transportation and utilities. – Low Voltage Products: manufactures products and systems that provide protection, control and measurement for electrical installations, as well as enclosures, switchboards, electronics and electromechanical devices for industrial machines, plants and related service. In addition the segment manufactures products for wiring and cable management, cable protection systems, power connection and safety. The segment also makes intelligent building control systems for home and building automation. – Process Automation: develops and sells control and plant optimization systems, automation products and solutions, including instrumentation, as well as industry­specific application knowledge and services for the oil, gas and petrochemicals, metals and minerals, marine and turbocharging, pulp and paper, chemical and pharmaceuticals, and power industries. – Power Products: manufactures and sells high­ and medium­voltage switchgear and apparatus, circuit breakers for all current and voltage levels, power and distribution transformers and sensors for electric, gas and water utilities and for industrial and commercial customers. ABB Annual Report 2013 | Financial review of ABB Group 149 Note 23 Operating segment and geographic data, continued – Power Systems: designs, installs and upgrades high­efficiency transmission and distribution systems and power plant automation and electrification solutions, including monitoring and control products, software and services and incorporating components manufactured by both the Company and by third parties. – Corporate and Other: includes headquarters, central research and development, the Company’s real estate activities, Group treasury operations and other minor business activities. The Company evaluates the profitability of its segments based on Operational EBITDA, which represents income from operations excluding depreciation and amortization, restructuring and restructuring­related expenses, and acquisition­ related expenses and certain non­operational items, as well as foreign exchange/commodity timing differences in income from operations consisting of: (i) unrealized gains and losses on derivatives (foreign exchange, commodities, embed­ ded derivatives), (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign exchange movements on receivables/payables (and related assets/liabilities). The CODM primarily reviews the results of each segment on a basis that is before the elimination of profits made on inventory sales between segments. Segment results below are presented before these eliminations, with a total deduction for intersegment profits to arrive at the Company’s consolidated Operational EBITDA. Intersegment sales and transfers are accounted for as if the sales and transfers were to third parties, at current market prices. The following tables present segment revenues, Operational EBITDA, the reconciliations of consolidated Operational EBITDA to income from continuing operations before taxes, as well as depreciation and amortization, and capital expenditures for 2013, 2012 and 2011, as well as total assets at December 31, 2013, 2012 and 2011. Third-party revenues Intersegment revenues Total revenues 8,909 7,338 8,287 9,096 8,025 193 – 41,848 1,006 391 210 1,936 350 1,583 (5,476) – 9,915 7,729 8,497 11,032 8,375 1,776 (5,476) 41,848 Third-party revenues Intersegment revenues Total revenues 8,480 6,276 7,946 8,987 7,575 72 – 39,336 925 362 210 1,730 277 1,505 (5,009) – 9,405 6,638 8,156 10,717 7,852 1,577 (5,009) 39,336 Third-party revenues Intersegment revenues Total revenues 8,047 4,953 8,078 9,028 7,833 51 – 37,990 759 351 222 1,841 268 1,508 (4,949) – 8,806 5,304 8,300 10,869 8,101 1,559 (4,949) 37,990 2013 ($ in millions) Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Corporate and Other Intersegment elimination Consolidated 2012 ($ in millions) Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Corporate and Other Intersegment elimination Consolidated 2011 ($ in millions) Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Corporate and Other Intersegment elimination Consolidated 150 Financial review of ABB Group | ABB Annual Report 2013 Note 23 Operating segment and geographic data, continued ($ in millions) Operational EBITDA: Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Corporate and Other and Intersegment elimination Consolidated Operational EBITDA Depreciation and amortization Restructuring and restructuring­related expenses Acquisition­related expenses and certain non­operational items Foreign exchange/commodity timing differences in income from operations: Unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives) Realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized Unrealized foreign exchange movements on receivables/payables (and related assets/liabilities) Income from operations Interest and dividend income Interest and other finance expense Income from continuing operations before taxes ($ in millions) 2013 2012 2011 2013 2012 2011 Depreciation and amortization Capital expenditure (1) Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Corporate and Other Consolidated 285 323 87 223 183 217 263 250 82 209 174 204 1,318 1,182 251 116 83 200 144 201 995 214 204 68 252 101 267 197 208 91 259 194 344 202 149 72 192 136 270 2013 2012 2011 1,783 1,468 1,096 1,637 419 (328) 6,075 1,735 1,219 1,003 1,585 290 (277) 5,555 (1,318) (1,182) (252) (181) 60 14 (11) (180) (199) 135 (28) (43) 1,664 1,059 1,028 1,782 743 (262) 6,014 (995) (164) (107) (158) (32) 109 4,387 4,058 4,667 69 (390) 4,066 73 (293) 3,838 90 (207) 4,550 Total assets (1) at December 31, 2013 10,931 9,389 4,537 7,669 7,905 7,633 2012 9,416 9,534 4,847 7,701 8,083 9,489 2011 9,195 3,333 4,777 7,355 7,469 7,519 1,106 1,293 1,021 48,064 49,070 39,648 (1) Capital expenditure and Total assets are after intersegment eliminations and therefore reflect third­party activities only. Geographic information Geographic information for revenues and long­lived assets was as follows: ($ in millions) Europe The Americas Asia Middle East and Africa Revenues Long-lived assets at December 31, 2013 14,385 12,115 11,230 4,118 41,848 2012 14,073 10,699 10,750 3,814 2011 14,657 9,043 10,136 4,154 2013 3,798 1,450 850 156 2012 3,543 1,347 883 174 39,336 37,990 6,254 5,947 ABB Annual Report 2013 | Financial review of ABB Group 151 Note 23 Operating segment and geographic data, continued Revenues by geography reflect the location of the customer. Approximately 18 percent, 17 percent and 14 percent of the Company’s total revenues in 2013, 2012 and 2011, respectively, came from customers in the United States. Approxi­ mately 12 percent, 12 percent, and 13 percent of the Company’s total revenues in 2013, 2012, and 2011, respectively, were generated from customers in China. In 2013, 2012 and 2011, more than 98 percent of the Company’s total revenues were generated from customers outside Switzerland. Long­lived assets represent “Property, plant and equipment, net” and are shown by location of the assets. At December 31, 2013, approximately 17 percent, 17 percent and 15 percent of the Company’s long­lived assets were located in Switzerland, the U.S. and Sweden, respectively. At December 31, 2012, approximately 17 percent, 17 percent and 14 percent were located in Switzerland, the U.S. and Sweden, respectively. The Company does not segregate revenues derived from transactions with external customers for each type or group of products and services. Accordingly, it is not practicable for the Company to present revenues from external customers by product and service type. Note 24 Compensation The disclosures required by the Swiss Code of Obligations on compensation to the Board of Directors and Executive Committee are shown in Notes 10, 11 and 12 to the Financial Statements of ABB Ltd, Zurich. 152 Financial review of ABB Group | ABB Annual Report 2013 Report of management on internal control over financial reporting The Board of Directors and management of ABB Ltd and its consolidated subsidiaries (“ABB”) are responsible for establishing and maintaining adequate internal control over financial reporting. ABB’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the published Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with ABB’s policies and procedures may deteriorate. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (COSO). Based on this assess­ ment, management has concluded that ABB’s internal control over financial reporting was effective as of December 31, 2013. Ernst & Young Ltd, an independent registered public accounting firm, has issued an opinion on the effectiveness of ABB’s internal control over financial reporting as of December 31, 2013, which is included on page 155 of this Annual Report. Ulrich Spiesshofer Chief Executive Officer Eric Elzvik Chief Financial Officer Zurich, Switzerland March 7, 2014 ABB Annual Report 2013 | Financial review of ABB Group 153 Report of the Statutory Auditor on the Consolidated Financial Statements To the General Meeting of ABB Ltd, Zurich As statutory auditor, we have audited the consolidated financial statements of ABB Ltd, which are comprised of the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity, and notes thereto, for each of the three years in the period ended December 31, 2013. Board of Directors’ Responsibility The Board of Directors is responsible for the preparation and fair presenta­ tion of the consolidated financial statements in accordance with U.S. generally accepted accounting principles and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consoli­ dated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Com­ pany Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The proce­ dures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to pro­ vide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of ABB Ltd as of Decem­ ber 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in accordance with U.S. generally accepted accounting principles and comply with Swiss law. Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ABB Ltd’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsor­ ing Organizations of the Treadway Commission (1992 framework) (COSO), and our report dated March 7, 2014, expressed an unqualified opinion on the effec­ tiveness of ABB Ltd’s internal control over financial reporting. Ernst & Young Ltd Leslie Clifford Licensed audit expert (Auditor in charge) Zurich, Switzerland March 7, 2014 John Cassidy U.S. Certified Public Accountant 154 Financial review of ABB Group | ABB Annual Report 2013 Report of the Group Auditor on internal control over financial reporting Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, ABB Ltd maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria. We also have audited, in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States), the 2013 consolidated financial statements of ABB Ltd and our report dated March 7, 2014, expressed an unqualified opinion thereon. Ernst & Young Ltd Leslie Clifford Licensed audit expert (Auditor in charge) Zurich, Switzerland March 7, 2014 John Cassidy U.S. Certified Public Accountant To the Board of Directors and Stockholders of ABB Ltd, Zurich We have audited ABB Ltd’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). ABB Ltd’s Board of Directors and management are responsible for maintaining effective internal control over financial reporting, and management is responsible for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of management on internal control over financial reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Com­ pany Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accor­ dance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the com­ pany; (2) provide reasonable assurance that transactions are recorded as nec­ essary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assur­ ance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. ABB Annual Report 2013 | Financial review of ABB Group 155 156 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 ABB Ltd Statutory Financial Statements 158 Financial Statements of ABB Ltd, Zurich Contents 159 Notes to the Financial Statements 159 Note 1 General 159 Note 2 Receivables 159 Note 3 Loans – Group 159 Note 4 Participation 159 Note 5 Current liabilities 160 Note 6 Stockholders’ equity 161 Note 7 Contingent liabilities 161 Note 8 Bonds 162 Note 9 Significant shareholders 162 Note 10 Board of Directors compensation 164 Note 11 Executive Committee compensation 169 Note 12 Share ownership of ABB by Board members and members of the Executive Committee 173 Note 13 Risk assessment 174 Proposed appropriation of available earnings 175 Report of the Statutory Auditor ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 157 Financial Statements of ABB Ltd, Zurich Income Statement Year ended December 31 (CHF in thousands) Dividend income Finance income Other income Finance expense Personnel expenses Other expenses Revaluation gain on own shares Net income before taxes Income taxes Net income Balance Sheet December 31 (CHF in thousands) Cash and equivalents Cash deposit with ABB Group Treasury Operations Receivables Total current assets Long-term loans – Group Participation Own shares Other assets Total non-current assets Total assets Current liabilities Bonds Total liabilities Share capital Legal reserves Ordinary reserves Capital contribution reserve Reserve for own shares Free reserves Other reserves Retained earnings Net income Total stockholders’ equity Total liabilities and stockholders’ equity 158 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 2013 2012 600,000 1,200,000 35,914 39,660 (32,062) (50,608) (25,946) 42,887 609,845 (2,792) 607,053 26,054 55,521 (70,701) (42,906) (32,962) 38,674 1,173,680 (500) 1,173,180 2013 853 2012 553 2,697,167 3,347,513 13,127 21,415 2,711,147 3,369,481 900,000 900,000 8,973,229 8,973,229 296,423 9,474 352,387 11,449 10,179,126 10,237,065 12,890,273 13,606,546 54,119 1,199,299 1,253,418 50,351 1,199,040 1,249,391 2,384,186 2,384,186 1,000,000 2,641,522 296,423 1,000,000 3,968,875 395,274 236,973 138,122 4,470,698 607,053 3,297,518 1,173,180 11,636,855 12,357,155 12,890,273 13,606,546 Notes to Financial Statements Note 1 General Note 2 Receivables December 31 (CHF in thousands) Non-trade receivables Non-trade receivables – Group Accrued income Accrued income – Group Total Note 3 Loans – Group December 31 (CHF in thousands) Long-term loans – Group Note 4 Participation December 31 Company name ABB Asea Brown Boveri Ltd Note 5 Current liabilities December 31 (CHF in thousands) Non-trade payables Non-trade payables – Group Accrued expenses Accrued expenses – Group Total ABB Ltd, Zurich (the Company) is the parent company of the ABB Group whose consolidated financial statements include 100 percent of the assets, liabilities, revenues, expenses, income and cash flows of ABB Ltd and group compa- nies in which the Company has a controlling interest, as if the Company and its group companies were a single com- pany. The consolidated financial statements are of overriding importance for the purpose of the economic and financial assessment of the Company. The unconsolidated financial statements of the Company are prepared in accordance with Swiss law and serve as complementary information to the consolidated financial statements. Certain prior-year amounts have been reclassified to conform to current year’s presentation. 2013 559 7,630 1,600 3,338 13,127 2012 144 17,412 – 3,859 21,415 2013 900,000 2012 900,000 The Company maintains interest bearing credit agreements with ABB Asea Brown Boveri Ltd, Zurich, Switzerland. These loans are stated at the lower of cost or fair value. Purpose Holding Domicile CH-Zurich Share capital CHF 2,768,000,000 Ownership interest 2013 100% 2012 100% The participation is valued at the lower of cost or fair value, using valuation models accepted under Swiss law. 2013 5,092 1,270 46,460 1,297 54,119 2012 3,284 465 44,990 1,612 50,351 ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 159 Note 6 Stockholders’ equity Share capital Legal reserves Capital Free reserves Total 2013 (CHF in thousands) reserves reserve own shares reserves earnings Net income Opening balance as of January 1 2,384,186 1,000,000 3,968,875 395,274 138,122 3,297,518 1,173,180 12,357,155 Ordinary contribution Reserve for Other Retained Allocation to retained earnings Allocation to other reserves Release to other reserves Release to other reserves Dividend payment Net income for the year (1,327,353) (98,851) 98,851 1,327,353 (1,327,353) 1,173,180 (1,173,180) – – – – (1,327,353) 607,053 607,053 Closing balance as of December 31 2,384,186 1,000,000 2,641,522 296,423 236,973 4,470,698 607,053 11,636,855 Share capital as of December 31, 2013 Issued shares Contingent shares Authorized shares Share capital as of December 31, 2012 Issued shares Contingent shares Authorized shares Number of Par value Total registered shares 2,314,743,264 304,038,800 200,000,000 (CHF) 1.03 1.03 1.03 (CHF in thousands) 2,384,186 313,160 206,000 Number of Par value Total registered shares 2,314,743,264 304,038,800 200,000,000 (CHF) 1.03 1.03 1.03 (CHF in thousands) 2,384,186 313,160 206,000 During 2013, no call options related to ABB Group’s management incentive plan (MIP), were exercised. During 2012, a bank holding call options related to ABB Group’s management incentive plan (MIP), exercised a portion of the options. Such options had been issued by the group company that facilitates the MIP (related to MIP launches during 2006) at fair value and with a strike price of CHF 15.30. At issuance, the group company had entered into an intercompany option agreement with the same terms and conditions to enable it to meet its future obligations. As a result of the exercise by the bank, the Company issued 2,726,800 shares at CHF 15.30 out of own shares. The ABB Group has an employee share acquisition plan (ESAP). To enable the group company that facilitates the ESAP to deliver shares to employees who have exercised their stock options, the group company entered into an agreement with the Company to acquire the required number of shares at their then market value from the Company. Consequently in November 2013 and 2012, the Company issued, out of own shares, to the group company, 3,734,428 and 2,344,733 shares at CHF 23.10 and CHF 17.23, respectively. In 2013 and 2012, the Company transferred 965,601 and 466,622 own shares at an average price per share of CHF 21.03 in both cases to fulfill its obligations under other share-based arrangements. The average acquisition price of the own shares at both December 31, 2013 and 2012, was CHF 21.03. The movement in the number of own shares during the year was as follows: Opening balance as of January 1 Cancellation Purchases Transfers Closing balance as of December 31 Thereof pledged 2013 2012 18,793,989 24,332,144 – – – – (4,700,029) (5,538,155) 14,093,960 18,793,989 7,173,989 3,467,250 160 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Note 6 Stockholders’ equity, continued The own shares are stated at the lower of cost or fair value. As a consequence of the increase in the fair value, the own shares were revalued at December 31, 2013 to CHF 21.03 from CHF 18.75 per share, resulting in a write-up of CHF 42,887 thousand in 2013. As a result of the Swiss corporate tax reform II that became effective on January 1, 2011, qualifying contributions from the shareholders exceeding the nominal share capital can be distributed without deduction of Swiss withholding tax. According to the corresponding guidelines, such contributions have been recorded in a specific account (Capital contri- bution reserve) within the legal reserves in order to benefit from the favorable tax treatment. Note 7 Contingent liabilities The Company has issued a support letter to a surety institution for the issuance of surety bonds on behalf of group companies. The amount issued under this letter was CHF 667,425 thousand as of December 31, 2013 (CHF 274,515 thousand as of December 31, 2012). Furthermore, the Company has Keep-well agreements with certain group companies. A Keep-well agreement is a shareholder agreement between the Company and a group company. These agreements provide for maintenance of a minimum net worth in the group company and the maintenance of 100 percent direct or indirect ownership by the Company. The Keep-well agreements additionally provide that if at any time the group company has insufficient liquid assets to meet any payment obligation on its debt (as defined in the agreements) and has insufficient unused commitments under its credit facilities with its lenders, the Company will make available to the group company sufficient funds to enable it to fulfill such payment obligation as it falls due. A Keep-well agreement is not a guarantee by the Company for payment of the indebtedness, or any other obligation, of a group company. No party external to the ABB Group is a party to any of these Keep-well agreements. In addition, the Company has provided certain guarantees securing the performance of Group companies in connection with commercial paper programs, indentures or other debt instruments to enable them to fulfill the payment obligation under such instruments as they fall due. The amount guaranteed under these instruments was CHF 5,499,517 thousand as of December 31, 2013 (CHF 6,481,807 thousand as of December 2012). Furthermore, the Company is the guarantor in the Group’s $2 billion multicurrency revolving credit facility, maturing in 2015 but no amounts were outstanding at December 31, 2013 and 2012. The Company through certain of its direct and indirect subsidiaries is involved in various regulatory and legal matters. The Company’s direct and indirect subsidiaries have made certain related accruals as further described in “Note 15 Commitments and contingencies” to the Consolidated Financial Statements of ABB Ltd. There could be material adverse outcomes beyond the accrued liabilities. The Company is part of a value added tax group and therefore is jointly liable to the Swiss Federal Tax Department for the value added tax liabilities of the other members. 2013 499,213 350,000 350,086 2012 498,937 350,000 350,103 1,199,299 1,199,040 The 1.25% CHF Bonds, due 2016, the 2.25% Bonds, due 2021 and the 1.5% Bonds, due 2018, pay interest annually in arrears, at fixed annual rates of 1.25 percent, 2.25 percent and 1.5 percent, respectively. The bonds are stated at their nominal value less any discount or plus any on issuance. Bonds are accreted to par over the period to maturity. The Company has, through Group Treasury Operations, entered into interest rate swaps with banks to effectively convert the bonds maturing 2016 and 2021 into floating rate obligations. Note 8 Bonds December 31 (CHF in thousands) Bond 2011–2016 1.25% coupon Bond 2011–2021 2.25% coupon Bond 2012–2018 1.5% coupon Total ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 161 Note 9 Significant shareholders Investor AB, Sweden, held 186,580,142 and 182,030,142 ABB Ltd shares as of December 31, 2013 and 2012, respectively. These holdings represent 8.1 percent and 7.9 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2013 and 2012, respectively. Pursuant to its disclosure notice, BlackRock, Inc., USA, disclosed that, as per July 25, 2011, it, together with its direct and indirect subsidiaries, held 69,702,100 ABB Ltd shares. These holdings correspond to 3.0 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2013 and 2012, respectively. To the best of the Company’s knowledge, no other shareholder holds 3 percent or more of the total share capital and voting rights on December 31, 2013 and 2012, respectively. Note 10 Board of Directors compensation The compensation levels of members of the Board of directors were as follows: Function Chairman of the Board Member of the Board and Committee chairman Member of the Board Board term Board term 2013/2014 2012/2013 (CHF) (CHF) 1,200,000 1,200,000 400,000 300,000 400,000 300,000 Board compensation is payable in semi-annual installments in arrears. The first payment is made in November, for the period of Board membership from election at the Annual General Meeting to October of that year. The second payment is made in May of the following year for the period of Board membership from November to the end of that Board term. Board members elect to receive either 50 percent or 100 percent of their compensation in ABB shares. The reference price for the shares to be delivered (and hence the calculation of the number of shares to be delivered) is the average closing price of the ABB share during a defined 30-day period which is different for each installment. The ABB shares are kept in a blocked account for three years after the date of original delivery and may only be disposed of earlier (with limited exception) if the respective person has left the Board of directors. 162 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Note 10 Board of Directors compensation, continued The compensation amounts per individual Board member are listed in the table below: Paid in 2013 Paid in 2012 November May November May Board term 2013–2014 Board term 2012–2013 Board term 2012–2013 Board term 2011–2012 – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S n o i t a s n e p m o c l a t o T ) 5 ( ) 3 ( 3 1 0 2 d i a p – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S – s e r a h s n i d e l t t e S s e r a h s f o r e b m u n ) 2 ( d e v i e c e r ) 1 ( h s a c n i d e l t t e S (CHF) (CHF) (CHF) (CHF) (CHF) n o i t a s n e p m o c l a t o T ) 5 ( ) 4 ( ) 3 ( 2 1 0 2 d i a p (CHF) Name/Function Hubertus von Grünberg Chairman of the Board – 19,616 – 19,739 1,200,000 – 23,298 – 22,685 1,200,000 Roger Agnelli (6) Member of the Board 75,000 2,419 75,000 2,442 300,000 75,000 2,873 75,000 2,807 300,000 Louis R. Hughes Member of the Board and Chairman of the Finance, Audit and Compliance Committee Hans Ulrich Märki Member of the Board and Chairman of the Gover- nance, Nomination and 100,000 3,233 100,000 3,264 400,000 100,000 3,840 100,000 3,751 400,000 Compensation Committee – 8,966 – 9,018 400,000 – 10,649 Michel de Rosen(7) Member of the Board 75,000 2,629 75,000 2,646 300,000 75,000 2,873 Michael Treschow(7) – – 10,364 400,000 5,614 300,000 Member of the Board 75,000 2,629 75,000 2,647 300,000 75,000 2,922 75,000 2,843 300,000 Jacob Wallenberg(6) Member of the Board 75,000 2,629 75,000 2,647 300,000 75,000 2,873 75,000 2,807 300,000 Ying Yeh(7) Member of the Board 75,000 2,460 75,000 2,474 300,000 75,000 2,905 75,000 2,807 300,000 Total 475,000 44,581 475,000 44,877 3,500,000 475,000 52,233 400,000 53,678 3,500,000 (1) (2) (3) (4) (5) (6) (7) Represents gross amounts paid, prior to deductions for social security, withholding tax etc. Number of shares per Board member is calculated based on the net amount due after deductions for social security, withholding tax etc. For the Board terms 2013–2014 and 2012–2013, all members elected to receive 50% of their gross compensation in the form of ABB shares, except for Hubertus von Grünberg and Hans Ulrich Märki, who elected to receive 100%. For the 2011–2012 Board term, all members elected to receive 50% of their gross compensation in the form of ABB shares, except for Hubertus von Grünberg, Hans Ulrich Märki and Michel de Rosen who elected to receive 100%. In addition to the Board remuneration stated in the above table, the Company paid, in 2013 and 2012, CHF 147,290 and CHF 211,008, respectively, in employee social security payments. Member of the Finance, Audit and Compliance Committee Member of the Governance, Nomination and Compensation Committee Board members do not receive pension benefits and are not eligible to participate in any of ABB’s employee incentive programs. No loans or guarantees were granted to Board members in 2013 and 2012. Except as disclosed herein, no payments were made to former Board members in 2013 and 2012. Other than as disclosed herein, no members of the Board received any additional fees and remuneration for services rendered to ABB. Also, in 2013 ABB did not pay any additional fees or remuneration to persons closely linked to a member of the Board for services rendered to ABB. A related party includes a spouse, children below the age of eighteen, legal or natural persons acting as a fiduciary and legal entities controlled by a member of the Board. ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 163 Note 11 Executive Committee compensation The table below provides an overview of the total compensation of members of the Executive Committee (EC) in 2013, comprising cash-based compensation and share-based compensation. Cash-based compensation included the base salary, accrued short-term variable compensation for 2013, pension benefits, as well as other benefits represent- ing mainly social security and health insurance contributions. Share-based compensation includes an estimate of the value of the grants under the LTIP and other share-based awards. The compensation is shown gross (i.e. before deduction of employee’s social insurance and pension contributions). e l b a i r a v m r e t - t r o h S ) 1 ( n o i t a s n e p m o c y r a l a s e s a B s t i f e n e b n o i s n e P ) 2 ( s t i f e n e b r e h t O d e s a b - h s a c l a t o T n o i t a s n e p m o c 3 1 0 2 ) 3 ( 3 1 0 2 n i P I T L e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s E d e s a b - e r a h s l a i c e p s f o e u l a v d e t a m i t s E d n a t n e m e c a l p e r ) 3 ( 3 1 0 2 n i s t n a r g l a n o i t i d n o c . l c n i ( l a t o T ) s t n a r g d e s a b - e r a h s 3 1 0 2 (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013)(4) 1,097,346 1,336,375 247,293 232,225 2,913,239 2,859,135 – 5,772,374 Eric Elzvik (joined the EC on February 1, 2013) 779,173 779,167 238,437 228,478 2,025,255 981,672 – 3,006,927 Jean-Christophe Deslarzes (joined ABB on November 15, 2013)(5) 107,938 108,611 Diane de Saint Victor(6) 1,000,001 1,000,000 20,557 283,181 26,576 263,682 991,307 3,381,127 4,636,116 196,137 2,479,319 1,154,907 3,142,500 6,776,726 Frank Duggan(7) Greg Scheu(8) Pekka Tiitinen (joined the EC on September 15, 2013) Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin (joined the EC 666,322 731,259 676,257 742,500 322,308 634,447 2,299,334 251,428 341,149 2,066,336 206,508 760,424 770,006 965,842 206,111 766,500 770,000 969,000 55,892 230,159 270,799 287,455 49,545 518,056 363,814 2,120,897 204,648 2,015,453 239,366 2,461,663 1,246,516 910,437 881,952 801,222 910,437 585,598 – – – – – – 3,209,771 2,948,288 1,319,278 3,031,334 2,601,051 3,708,179 on December 1, 2013) 58,334 58,334 19,373 3,790 139,831 816,396 – 956,227 Total current Executive Committee members 7,143,153 7,412,855 2,226,882 2,520,175 19,303,065 12,139,579 6,523,627 37,966,271 Joe Hogan (CEO until September 15, 2013) Michel Demaré (CFO until January 31, 2013) Gary Steel (EC member until November 15, 2013) Prith Banerjee (EC member until May 31, 2013) Brice Koch (EC member until November 30, 2013) Total former 1,423,758 2,135,625 207,007 948,293 4,714,683 100,001 100,000 23,154 9,618 232,773 704,376 704,375 255,253 202,724 1,866,728 291,667 218,750 101,173 233,192 844,782 – – – – – 4,714,683 – 232,773 – 1,866,728 – 844,782 773,285 776,050 221,812 249,888 2,021,035 1,005,590 – 3,026,625 Executive Committee members 3,293,087 3,934,800 808,399 1,643,715 9,680,001 1,005,590 – 10,685,591 Total 10,436,240 11,347,655 3,035,281 4,163,890 28,983,066 13,145,169 6,523,627 48,651,862 (1) (2) (3) (4) (5) (6) (7) (8) The table above shows accruals related to the short-term variable compensation for the year 2013 for all EC members, except for Prith Banerjee, who received, in May 2013, a pro-rata short-term variable compensation payment covering his period of service as an EC member in 2013. For all other EC members, the short-term variable compensation will be paid in 2014, after the publication of the financial results. In March 2013, the current and former EC members received the 2012 short-term variable compensation payments totaling CHF 12,641,252. Short-term variable compensation is linked to the objectives defined in the ABB Group’s scorecard. Upon full achievement of these objectives, the short-term variable compensation of the CEO corresponds to 150 percent of his base salary, while for all other EC members it represents 100 percent of their respective base salary. The Board has the discretion to approve a payout that is up to 50 percent higher (representing up to 225 percent of the base salary for the CEO and 150 percent of the base salary for other members of the EC), if the objectives are exceeded. Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. At the day of vesting (June 5, 2016) the value of the share-based awards granted under the LTIP may vary from the above numbers due to changes in ABB’s share price and the outcome of the performance (earnings per share) parameter. The LTIP is also subject to service conditions, while the other share-based awards are subject to service and/or other conditions. The above amounts have been calculated using the market value of the ABB share on the day of grant and in the case of the performance component of the LTIP, the Monte Carlo simula- tion model. The above compensation figures for Ulrich Spiesshofer represent compensation for the period January 1 to September 14, 2013, in his capacity as Head of the Discrete Automation and Motion division and thereafter for his role as Chief Executive Officer. His annual base salary as CEO is CHF 1,600,000. Jean-Christophe Deslarzes received a replacement share grant of 144,802 shares for foregone benefits with his previous employer, representing a grant date fair value of CHF 3,381,127. Of the total, 78,983 shares vest on November 15, 2016, while 65,819 shares vest on November 15, 2018. Diane de Saint Victor received a special retention share grant of 150,000 shares representing a grant date fair value of CHF 3,142,500. The shares vest on December 31, 2015. Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR at a fixed AED/EUR exchange rate for the period January to December 2013. All AED amounts were converted into Swiss francs at a rate of CHF 0.2422914 per AED. On May 16, 2013, Greg Scheu received a special bonus of CHF 168,750, which was settled in shares (7,942 shares). 164 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Note 11 Executive Committee compensation, continued Furthermore, in 2013, certain former EC members received contractual compensation for the period after leaving the EC, as shown in the table below. The compensation included the base salary, accrued short-term variable compensation for 2013, pension benefits, as well as other benefits comprising mainly social security and health insurance contributions. The compensation is shown gross (i.e. before deduction of employee’s social insurance and pension contributions). Name Joe Hogan Base salary (CHF) Short-term variable compensation(1) Pension benefits Other benefits(2) 2013 Total cash-based compensation (CHF) (CHF) (CHF) (CHF) (CEO until September 15, 2013)(3) 586,253 879,375 85,239 323,314 1,874,181 Michel Demaré (CFO until January 31, 2013)(4) 1,100,006 1,100,000 255,549 428,053 2,883,608 Gary Steel (EC member until November 15, 2013)(4) 100,626 100,625 36,465 14,276 251,992 Brice Koch (EC member until November 30, 2013)(4) Total 70,551 1,857,436 70,550 2,150,550 20,174 397,427 34,447 800,090 195,722 5,205,503 (1) (2) (3) (4) The short-term variable compensation will be paid in 2014, after the publication of the financial results. Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. The above compensation figures of Joe Hogan represent compensation for the period September 16 to December 31, 2013, during which he was acting as a Senior Adviser to the ABB Board. The above compensation figures of Michel Demaré, Gary Steel and Brice Koch represent contractual compensation for the period following their departure from the EC to December 31, 2013. ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 165 Note 11 Executive Committee compensation, continued The table below provides an overview of the total compensation of members of the EC in 2012, comprising cash-based compensation and an estimate of the value (at grant date) of shares conditionally granted under the 2012 one-time Acquisition Integration Execution Plan (AIEP) that vest in January 2014 and the three-year Long-Term Incentive Plan (LTIP) that vest in 2015. Cash-based compensation includes the base salary, accrued short-term variable compensation for 2012, pension benefits, as well as other benefits comprising mainly social security and health insurance contributions. The compensation is shown gross (i.e. before deduction of employee’s social insurance and pension contributions). e l b a i r a v m r e t - t r o h S ) 1 ( n o i t a s n e p m o c y r a l a s e s a B (CHF) (CHF) 2,010,011 3,316,500 1,200,007 1,320,000 805,002 865,673 791,993 885,500 962,500 880,000 950,004 1,045,000 770,006 816,669 718,837 641,963 847,000 913,000 803,000 697,279 Name Joe Hogan Michel Demaré Gary Steel Ulrich Spiesshofer Diane de Saint Victor Bernhard Jucker Veli-Matti Reinikkala Brice Koch Tarak Mehta Frank Duggan(4) Greg Scheu (joined on May 1, 2012) 450,002 495,000 Prith Banerjee ) 2 ( s t i f e n e b r e h t O d e s a b - h s a c l a t o T n o i t a s n e p m o c 2 1 0 2 ) 3 ( 2 1 0 2 n i P I T L e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s E P E I A e m i t - e n o e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s E ) 3 ( 2 1 0 2 n i l a n o i t i d n o c . l c n i ( l a t o T ) s t n a r g d e s a b - e r a h s 2 1 0 2 (CHF) (CHF) (CHF) (CHF) (CHF) 431,284 6,042,665 4,115,136 377,968 3,169,425 – – – 10,157,801 3,169,425 172,054 2,149,494 851,003 896,656 3,897,153 164,948 2,228,801 1,363,655 974,623 4,567,079 138,762 2,084,338 899,193 891,085 3,874,616 179,220 2,454,596 1,067,784 1,058,174 4,580,554 145,236 2,026,134 865,483 857,673 3,749,290 212,479 2,176,573 1,099,345 924,511 4,200,429 369,734 2,113,752 405,734 2,058,353 42,727 1,149,545 820,512 820,512 713,574 813,119 3,747,383 835,403 3,714,268 751,851 2,614,970 s t i f e n e b n o i s n e P (CHF) 284,870 271,450 286,938 235,680 273,583 280,372 263,892 234,425 222,181 313,377 161,816 (joined ABB on May 7, 2012) 456,523 500,914 137,742 401,148 1,496,327 740,017 389,860 2,626,204 Total Executive Committee members as of December 31, 2012 10,476,690 12,665,693 2,966,326 3,041,294 29,150,003 13,356,214 8,392,955 50,899,172 Peter Leupp (retired from the EC on March 1, 2012)(5) Total former Executive Committee 496,694 291,960 167,900 206,794 1,163,348 members as of December 31, 2012 496,694 291,960 167,900 206,794 1,163,348 – – – 1,163,348 – 1,163,348 Total 10,973,384 12,957,653 3,134,226 3,248,088 30,313,351 13,356,214 8,392,955 52,062,520 (1) (2) (3) (4) (5) The table above shows accruals related to the short-term variable compensation for the year 2012 for all EC members, except for Peter Leupp, who received in July 2012 a pro-rata short- term variable compensation payment covering the period of his service as an EC member. For all other EC members, the short-term variable compensation will be paid in 2013, after the publication of the financial results. In March 2012, the current and former EC members received the 2011 short-term variable compensation payments totaling CHF 12,102,149. Short-term variable compensation is linked to the objectives defined in the ABB Group’s scorecard. Upon full achievement of these objectives, the short-term variable compensation of the CEO corresponds to 150 percent of his base salary, while for all other EC members it represents 100 percent of their respective base salary. The Board has the discretion to approve a payout that is up to 50 percent higher (representing up to 225 percent of the base salary for the CEO and 150 percent of the base salary for other members of the EC), if the objectives are ex- ceeded. For 2012, the Board exercised its discretion and awarded a 10 percent higher payout, reflecting the Company’s performance against the objectives. Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. The estimated value of the share-based awards is subject to performance and other parameters (e.g. earnings per share) and may therefore vary in value from the above numbers at the date of vesting, January 3, 2014 (AIEP) and May 31, 2015 (LTIP). The above amounts have been calculated using the market value of the ABB share on the day of grant and, in the case of the AIEP and the performance component of the LTIP, the Monte Carlo simulation model. Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR at a fixed AED/EUR exchange rate for the period January to December 2012. All AED amounts were converted into Swiss francs at a rate of 0.2491288 per AED. The above compensation figures for Peter Leupp include contractual payments for the period March 1, 2012 to July 31, 2012, but exclude payments to him, after his retirement from the EC, in his capacity as director of ABB in China and of ABB Limited, India. 166 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Note 11 Executive Committee compensation, continued LTIP awards granted to members of the EC during 2013 are summarized in the table below. The vesting date of the respective award is listed in the footnotes to the table. h c n u a l 3 1 0 2 e h t f o t n e n o p m o c s e r a h s f o r e b m u n e c n e r e f e R e c n a m r o f r e p e h t r e d n u ) 4 ( ) 1 ( P I T L e h t f o e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s e l a t o T t n e n o p m o c e c n a m r o f r e p ) 2 ( 3 1 0 2 n i P I T L e h t f o (CHF) h c n u a l 3 1 0 2 e h t r e d n u d e t n a r g s e r a h s n o i t n e t e r f o r e b m u N ) 3 ( ) 1 ( P I T L e h t f o e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s e l a t o T t n e n o p m o c n o i t n e t e r ) 2 ( 3 1 0 2 n i P I T L e h t f o (CHF) h c n u a l 3 1 0 2 e h t r e d n u d e t n a r g s e r a h s f o r e b m u n l a t o T ) 1 ( P I T L e h t f o r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s e l a t o T ) 2 ( 3 1 0 2 n i P I T L e h t (CHF) Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013) 50,024 1,172,858 78,395 1,686,277 128,419 2,859,135 Eric Elzvik (joined the EC on February 1, 2013) 16,659 422,926 27,071 558,746 43,730 981,672 Jean-Christophe Deslarzes (joined ABB on November 15, 2013) Diane de Saint Victor Frank Duggan Greg Scheu Pekka Tiitinen (joined the EC on September 15, 2013) Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin 16,659 19,599 15,023 14,553 13,720 15,023 15,091 18,992 393,579 497,564 381,392 369,460 321,678 381,392 383,119 482,154 27,071 31,848 25,632 24,830 22,294 25,632 9,810 37,033 597,728 657,343 529,045 512,492 479,544 529,045 202,479 764,362 43,730 51,447 40,655 39,383 36,014 40,655 24,901 56,025 991,307 1,154,907 910,437 881,952 801,222 910,437 585,598 1,246,516 (joined the EC on December 1, 2013) 13,720 324,144 22,294 492,252 36,014 816,396 Total Executive Committee members as of December 31, 2013 209,063 5,130,266 331,910 7,009,313 540,973 12,139,579 Brice Koch (EC member until November 30, 2013)(5) Total former Executive Committee members 16,593 16,593 421,250 421,250 28,311 28,311 584,340 584,340 44,904 44,904 1,005,590 1,005,590 Total 225,656 5,551,516 360,221 7,593,653 585,877 13,145,169 (1) (2) (3) (4) (5) Vesting date June 5, 2016. The shares of the performance component are valued using the market value of the ABB share on the grant date and the Monte Carlo Simulation Model. The estimated value applied to the shares of the retention component represents the market value of the ABB share on the grant date of the award. The LTIP foresees to deliver 30 percent of the value of the vested retention shares in cash. However participants have the possibility to elect upon vesting to receive 100 percent of the vested award in shares. The vested performance component under the plan, if any, will be fully settled in cash. The plan foresees a maximum payout of 200 percent of the number of reference shares, based on the weighted cumulative EPS performance against predefined objectives. In connection with his resignation from ABB, Brice Koch forfeited all unvested share grants under the LTIP. In addition to the above awards, 9 members of the EC, participated in the tenth launch of ESAP which will allow them to save over a twelve-month period and, in November 2014, use their savings to acquire ABB shares under the ESAP. All EC members who participated in ESAP are each entitled to acquire up to 440 ABB shares at an exercise price of CHF 22.90 per share. In addition, in accordance with the terms and conditions of the tenth launch of ESAP, each partici- pant will receive one share free of charge for every 10 shares purchased. No parties related to any member of the EC received any fees or remunerations for services rendered to ABB, other than on an arm’s length basis. A related party includes a spouse, children below the age of eighteen, legal or natural persons acting as fiduciary and legal entities controlled by a member of the EC. No loans or guarantees were granted to members of the EC in 2013. ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 167 Note 11 Executive Committee compensation, continued LTIP share based grants to members of the EC during 2012 are summarized in the table below. The vesting date of the respective award is listed in the footnotes to the table. - n u s e r a h s f o r e b m u n e c n e r e f e R t n e n o p m o c e c n a m r o f r e p e h t r e d h c n u a l 2 1 0 2 e h t f o ) 4 ( ) 1 ( P I T L e h t f o e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s e l a t o T t n e n o p m o c e c n a m r o f r e p ) 2 ( 2 1 0 2 n i P I T L e h t f o (CHF) h c n u a l 2 1 0 2 e h t r e d n u d e t n a r g s e r a h s n o i t n e t e r f o r e b m u N ) 3 ( ) 1 ( P I T L e h t f o n o i t n e t e r e h t r e d n u s t n a r g d e s a b ) 2 ( 2 1 0 2 n i P I T L e h t f o t n e n o p m o c - e r a h s f o e u l a v d e t a m i t s e l a t o T (CHF) h c n u a l 2 1 0 2 e h t r e d n u d e t n a r g s e r a h s f o r e b m u n l a t o T ) 1 ( P I T L e h t f o e h t r e d n u s t n a r g d e s a b - e r a h s f o e u l a v d e t a m i t s e l a t o T ) 2 ( 2 1 0 2 n i P I T L (CHF) 123,541 1,860,269 148,249 2,254,867 271,790 4,115,136 – 20,781 22,588 20,652 24,524 19,878 21,426 18,845 18,845 17,425 18,071 – 312,919 340,128 310,976 369,280 299,321 322,631 283,767 283,767 262,384 272,112 – – – – 35,377 67,293 38,673 45,924 37,223 51,066 35,289 35,289 29,664 30,763 538,084 1,023,527 588,217 698,504 566,162 776,714 536,745 536,745 451,190 467,905 56,158 89,881 59,325 70,448 57,101 72,492 54,134 54,134 47,089 48,834 851,003 1,363,655 899,193 1,067,784 865,483 1,099,345 820,512 820,512 713,574 740,017 Name Joe Hogan Michel Demaré Gary Steel Ulrich Spiesshofer Diane de Saint Victor Bernhard Jucker Veli-Matti Reinikkala Brice Koch Tarak Mehta Frank Duggan Greg Scheu (joined on May 1, 2012) Prith Banerjee (joined ABB on May 7, 2012) Total Executive Committee members as of December 31, 2012 326,576 4,917,554 554,810 8,438,660 881,386 13,356,214 (1) (2) (3) (4) Vesting date May 31, 2015. The shares of the performance component are valued using the market value of the ABB share on the grant date and the Monte Carlo Simulation Model. The estimated value applied to the shares of the retention component, represents the market value of the ABB share on the grant date of the award. The LTIP foresees to deliver 30 percent of the value of the vested retention shares in cash, but participants have the possibility to elect upon vesting to receive 100 percent of the vested award in shares. The vested performance component under the plan, if any, will be fully settled in cash. The plan foresees a maximum payout of 200% of the number of reference shares, based on the weighted cumulative EPS performance against predefined objectives. Share-based awards granted to members of the EC under the one-time AIEP during 2012 are summarized in the table below. The vesting date of the award is listed in the footnotes to the table. Number of conditionally granted Total estimated value of shares under the one-time 2012 share-based grants under the launch of AIEP(1)(3) one-time AIEP in 2012(2) Name Joe Hogan Michel Demaré Gary Steel Ulrich Spiesshofer Diane de Saint Victor Bernhard Jucker Veli-Matti Reinikkala Brice Koch Tarak Mehta Frank Duggan (CHF) – – 66,795 72,603 66,380 78,827 63,891 68,870 60,572 62,232 56,008 29,042 – – 896,656 974,623 891,085 1,058,174 857,673 924,511 813,119 835,403 751,851 389,860 8,392,955 Greg Scheu (joined on May 1, 2012) Prith Banerjee (joined ABB on May 7, 2012) Total Executive Committee members as of December 31, 2012 625,220 (1) (2) (3) Vesting date January 3, 2014. The shares are valued using the market value of the ABB share on the grant date and the Monte Carlo Simulation Model. The AIEP foresees to deliver 30 percent of the value of the vested shares in cash, but participants have the possibility to elect, prior to vesting, to receive 100 percent of the vested award in shares. The plan foresees a maximum payout of 768,286 shares, subject to the fulfillment of the plan objectives and the assessment by the CEO of the individual’s performance. 168 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Note 12 Share ownership of ABB by Board members and members of the Executive Committee Name Hubertus von Grünberg Roger Agnelli Louis R. Hughes Hans Ulrich Märki Michel de Rosen Michael Treschow Jacob Wallenberg(1) Ying Yeh Total At December 31, 2013 and 2012, the members of the Board of directors as of that date, held the following numbers of shares (or ADSs representing such shares): Total number of shares held(1) December 31, 2013 December 31, 2012 212,725 165,533 70,425 428,176 133,870 102,782 180,158 13,843 173,370 160,672 63,928 410,192 128,595 97,506 174,882 8,909 1,307,512 1,218,054 (1) Share amounts provided in this section do not include the shares beneficially owned by Investor AB, of which Mr. Wallenberg is chairman. ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 169 Note 12 Share ownership of ABB by Board members and members of the Executive Committee, continued At December 31, 2013 and 2012, the members of the Executive Committee, as of that date, held the following number of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP, options and/or warrants (either vested or unvested as indicated) under the MIP, and unvested shares in respect of other compensation arrangements: Vested at Dec. 31, 2013 e h t r e d n u d l e h s t n a r r a w d n a s n o i t p o d e t s e v f o r e b m u N ) 1 ( I P M d l e h s e r a h s f o r e b m u n l a t o T Unvested at December 31, 2013 s n o i t p o d e t s e v n u f o r e b m u N ) 1 ( I P M e h t r e d n u d l e h s n o i t p o d e t s e v n u f o r e b m u N ) 1 ( I P M e h t r e d n u d l e h e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 1 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 2 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 3 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c r e d n u e l b a r e v i l e d s e r a h S ) 2 ( P E I A 2 1 0 2 e m i t - e n o e h t m o r f s t i f e n e b e n o g e r o f r o f t n a r g e r a h s t n e m e c a l p e R ) 3 ( r e y o l p m e r e m r o f (vesting e r a h s n o i t n e t e r l a i c e p S ) 3 ( t n a r g (vesting (vesting (vesting (vesting (vesting (vesting 2016 and (vesting 2014) 2015) 2014) 2015) 2016) 2014) 2018) 2015) Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013) 148,179 – – – 31,104 67,293 78,395 72,603 Eric Elzvik (joined the EC on February 1, 2013) 23,284 201,250 221,375 287,500 – 27,071 – – – Jean-Christophe Deslarzes (joined ABB on November 15, 2013) – Diane de Saint Victor 201,707 – – Frank Duggan Greg Scheu(4) Pekka Tiitinen (joined the EC on September 15, 2013) Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin (joined the EC on 26,389 422,215 7,974 201,250 221,375 603,750 221,375 5,500 24,670 137,388 154,050 – – – – – – – – – – December 1, 2013) 1,883 Total Executive Committee members – – 26,359 21,326 – – 24,211 18,517 27,753 – – – – – – – – – 27,071 – 144,802 38,673 35,289 29,664 31,848 66,380 25,632 62,232 24,830 56,008 12,041 35,289 37,223 45,924 22,294 – 25,632 60,572 9,810 63,891 37,033 78,827 – – – – – – – – – – 150,000 – – – – – – – – 11,458 17,598 22,294 – – – as of December 31, 2013 731,024 1,428,465 664,125 287,500 160,728 318,994 331,910 460,513 144,802 150,000 (1) (2) (3) (4) Warrants and options may be sold or exercised/converted into shares at the ratio of 5 warrants/options for 1 share. The LTIP foresees delivering 30 percent of the value of the vested retention shares in cash and the Acquisition Integration Execution Plan (AIEP) foresees delivering 30 percent of the value of the vested shares in cash. However, under both plans participants have the possibility to elect to receive 100 percent of the vested award in shares. The Replacement share grant and the Special retention share grant foresee delivering 30 percent of the value of the vested shares in cash. However, under both plans participants have the possibility to elect to receive 100 percent of the vested award in shares. Total number of shares held includes 32 shares held by children. 170 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Note 12 Share ownership of ABB by Board members and members of the Executive Committee, continued Name Joe Hogan Michel Demaré(4) Gary Steel Ulrich Spiesshofer Diane de Saint Victor Bernhard Jucker Veli-Matti Reinikkala Brice Koch Tarak Mehta Frank Duggan Greg Scheu (joined on May 1, 2012) Prith Banerjee Vested at Dec. 31, 2012 s n o i t p o d e t s e v f o r e b m u N ) 1 ( I P M e h t r e d n u d l e h – – – – – – – – 190,850 631,930 d l e h s e r a h s f o r e b m u n l a t o T 255,046 397,772 219,365 164,191 179,189 134,118 122,763 30,424 15,771 15,803 Unvested at December 31, 2012 s n o i t p o d e t s e v n u f o r e b m u N ) 1 ( I P M e h t r e d n u d l e h e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 0 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 1 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c e l b a r e v i l e d s e r a h s n o i t n e t e R n o i t n e t e r 2 1 0 2 e h t r e d n u ) 2 ( P I T L e h t f o t n e n o p m o c s n o i t p o d e t s e v n u f o r e b m u N ) 1 ( I P M e h t r e d n u d l e h r e d n u e l b a r e v i l e d s e r a h S ) 3 ( P E I A 2 1 0 2 e m i t e n o e h t s u n o b n o - n g i s f o t c e p s e r n i d e t n a r g s e r a h s f o r e b m u N (vesting (vesting (vesting (vesting (vesting (vesting (vesting 2015) 2014) 2013) 2013) 2014) – – – – – – – – – – – – – – – – – – – – 2013) 87,841 41,609 23,140 23,440 21,938 27,647 20,065 21,036 12,714 14,309 2014) 99,371 40,450 23,517 31,104 26,359 27,753 18,517 27,388 24,211 21,326 148,249 – 35,377 67,293 – – 66,795 72,603 38,673 66,380 45,924 78,827 37,223 63,891 51,066 35,289 68,870 60,572 35,289 62,232 189,682 – – – – – – – – – – – (joined ABB on May 7, 2012) – – – – Total Executive Committee 32 544,920 201,250 221,375 – – – – 29,664 56,008 30,763 29,042 members as of December 31, 2012 1,534,474 1,367,700 201,250 221,375 293,739 339,996 554,810 625,220 189,682 (1) (2) (3) (4) Options may be sold or exercised/converted into shares at the ratio of 5 options for 1 share. The LTIP foresees to deliver 30 percent of the value of the vested retention shares in cash, but participants have the possibility to elect to receive 100 percent of the vested award in shares. The AIEP foresees to deliver 30 percent of the value of the vested shares in cash, but participants have the possibility to elect to receive 100 percent of the vested award in shares. The actual number of shares to be delivered could be increased up to a total maximum amount of 768,286 shares. Total number of shares held includes 4,500 shares held jointly with spouse. ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 171 Note 12 Share ownership of ABB by Board members and members of the Executive Committee, continued Furthermore, at December 31, 2013, the following members of the Executive Committee held vested WARs and conditionally granted ABB shares under the performance component of the LTIP 2013, 2012 and 2011, which at the time of vesting will be settled in cash. Vested at Dec. 31, 2013 Unvested at December 31, 2013 s R A W d e t s e v y l l u f f o r e b m u N I P M e h t r e d n u d l e h – 434,380 – – – – – – – – Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013) Eric Elzvik (joined the EC on February 1, 2013) Jean-Christophe Deslarzes (joined ABB on November 15, 2013) Diane de Saint Victor Frank Duggan Greg Scheu Pekka Tiitinen (joined the EC on September 15, 2013) Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin (joined the EC on December 1, 2013) Total Executive Committee members 675,000 s e r a h s d e t n a r g y l l a n o i t i d n o c f o r e b m u n m u m x a M i e c n a m r o f r e p e h t r e d n u 1 1 0 2 e h t f o t n e n o p m o c P I T L e h t f o h c n u a l (vesting 2014) t n e n o p m o c e c n a m r o f r e p f o r e b m u n e c n e r e f e R e h t r e d n u s e r a h s h c n u a l 2 1 0 2 e h t f o P I T L e h t f o (vesting 2015) t n e n o p m o c e c n a m r o f r e p f o r e b m u n e c n e r e f e R e h t r e d n u s e r a h s h c n u a l 3 1 0 2 e h t f o P I T L e h t f o (vesting 2016) 15,460 22,588 – – 14,194 13,780 – – 12,516 11,965 17,933 7,639 – – 20,652 18,845 17,425 6,950 18,845 19,878 24,524 10,665 50,024 16,659 16,659 19,599 15,023 14,553 13,720 15,023 15,091 18,992 13,720 as of December 31, 2013 1,109,380 93,487 160,372 209,063 172 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Note 12 Share ownership of ABB by Board members and members of the Executive Committee, continued At December 31, 2012, the following members of the Executive Committee held conditionally granted ABB shares under the performance component of the LTIP 2012, 2011 and 2010, which at the time of vesting will be settled in cash. Unvested at December 31, 2012 t n e n o p m o c e c n a m r o f r e p f o h c n u a l 0 1 0 2 e h t f o f o r e b m u n m u m x a M i d e t n a r g y l l a n o i t i d n o c e h t r e d n u s e r a h s P I T L t n e n o p m o c e c n a m r o f r e p f o h c n u a l 1 1 0 2 e h t f o f o r e b m u n m u m x a M i d e t n a r g y l l a n o i t i d n o c e h t r e d n u s e r a h s P I T L t n e n o p m o c e c n a m r o f r e p f o h c n u a l 2 1 0 2 e h t f o f o r e b m u n e c n e r e f e R e h t r e d n u s e r a h s P I T L (vesting 2013) (vesting 2014) (vesting 2015) 58,854 27,740 14,952 15,146 14,175 17,865 12,965 13,593 8,392 9,444 – – 60,526 26,967 15,196 15,460 14,194 17,933 11,965 14,158 12,516 13,780 – – 123,541 – 20,781 22,588 20,652 24,524 19,878 21,426 18,845 18,845 17,425 18,071 Name Joe Hogan Michel Demaré Gary Steel Ulrich Spiesshofer Diane de Saint Victor Bernhard Jucker Veli-Matti Reinikkala Brice Koch Tarak Mehta Frank Duggan Greg Scheu (joined on May 1, 2012) Prith Banerjee (joined ABB on May 7, 2012) Total Executive Committee members as of December 31, 2012 193,126 202,695 326,576 The members of the Board of directors and Executive Committee owned less than 1 percent of the Company’s total shares outstanding at December 31, 2013 and 2012. Other than as disclosed, at December 31, 2013 and 2012, no party related to any member of the Board of directors or Executive Committee held any shares of ABB or options in ABB shares. Note 13 Risk assessment Once a year, the Company’s Board of directors performs a risk assessment in accordance with the group’s risk man- agement process and discusses appropriate actions if necessary. ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 173 Proposed appropriation of available earnings (CHF in thousands) Net income for the year Carried forward from previous year Earnings available to the Annual General Meeting Ordinary reserves Capital contribution reserve Balance to be carried forward 2013 607,053 4,470,698 5,077,751 2012 1,173,180 3,297,518 4,470,698 – – – – 5,077,751 4,470,698 The Board of directors proposes to carry forward the available earnings in the amount of CHF 5,077,751 thousand. On February 13, 2014, the Company announced that a proposal will be put to the April 2014 Annual General Meeting to convert capital contribution reserve to other reserves in the amount of CHF 0.70 per share and distribute a dividend for the 2013 fiscal year of CHF 0.70 per share. 174 ABB Ltd Statutory Financial Statements | ABB Annual Report 2013 Report of the Statutory Auditor To the General Meeting of ABB Ltd, Zurich As statutory auditor, we have audited the financial statements of ABB Ltd, which comprise the balance sheet, income statement and notes, for the year ended December 31, 2013, presented on pages 157 to 174. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the financial state- ments in accordance with the requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of finan- cial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and apply- ing appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appro- priate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended December 31, 2013 comply with Swiss law and the company’s articles of incorporation. Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. Ernst & Young Ltd Leslie Clifford Licensed audit expert (Auditor in charge) Zurich, Switzerland March 7, 2014 Thomas Stenz Licensed audit expert ABB Annual Report 2013 | ABB Ltd Statutory Financial Statements 175 176 Investor information | ABB Annual Report 2013 Investor information ABB Annual Report 2013 | Investor information 177 Investor information ABB Ltd share price trend during 2013 During 2013, the price of ABB Ltd shares listed on the SIX Swiss Exchange increased 25 percent, while the Swiss Per­ formance Index increased 25 percent. The price of ABB Ltd shares on NASDAQ OMX Stockholm increased 27 percent, while the OMX Stockholm 30 Index increased 21 percent. The price of ABB Ltd American Depositary Shares traded on the New York Stock Exchange increased 28 percent while the Dow Jones Industrial Average increased 26 percent. Source: Bloomberg Share price (data based on closing prices) 2013 High Low Year­end Average daily traded number of shares, in millions Source: Bloomberg Annual highs and lows 2009 2010 2011 2012 Source: Bloomberg Market capitalization Shareholder structure Major shareholders Dividend proposal 178 Investor information | ABB Annual Report 2013 SIX Swiss Exchange Stockholm Stock Exchange NASDAQ OMX New York (CHF) 23.53 19.20 23.48 5.06 (SEK) 172.30 133.50 170.00 1.82 (US$) 26.56 20.87 26.56 1.54 SIX Swiss Exchange Stockholm Exchange Stock Exchange NASDAQ OMX New York High (CHF) 22.20 23.86 23.88 20.12 Low (CHF) 13.16 18.43 15.00 14.83 High (SEK) 151.50 161.30 170.20 146.70 Low (SEK) 98.50 129.00 112.40 109.00 High (US$) 21.90 22.69 27.49 21.91 Low (US$) 10.97 16.05 16.42 15.42 On December 31, 2013, ABB Ltd’s market capitalization based on outstanding shares (total number of outstanding shares: 2,300,649,304) was approximately CHF 54 billion ($61 billion, SEK 391 billion). As of December 31, 2013, the total number of shareholders directly registered with ABB Ltd was approximately 172,000. In addition, another approximately 229,000 shareholders hold shares indirectly through nominees. In total, ABB has approximately 401,000 shareholders. As of December 31, 2013, Investor AB, Stockholm, Sweden, owned 186,580,142 shares of ABB Ltd, corresponding to 8.1 percent of total capital and votes of ABB Ltd as registered in the Commercial Register on December 31, 2013. As of July 25, 2011, BlackRock Inc., New York, USA, owned 69,702,100 shares of ABB Ltd, corresponding to 3.0 percent of total capital and votes of ABB Ltd as registered in the Commercial Register on December 31, 2013. To the best of ABB’s knowledge, no other shareholder held 3 percent or more of the total voting rights as of December 31, 2013. ABB’s Board of Directors has proposed a dividend with respect to 2013 of CHF 0.70 per share, compared to CHF 0.68 per share with respect to the prior year. Translated into US dollars using year­end 2013 exchange rate, the dividend cor­ responds to approximately 65 percent of ABB’s 2013 net income per share. The proposal is in line with the Company’s dividend policy to pay a steadily rising but sustainable dividend over time. As it did in 2013, the Board proposes that the dividend be paid from ABB Ltd’s capital contribution reserve, a form of payment that would be exempt from Swiss withholding tax. If approved by shareholders at the company’s Annual General Meeting on April 30, 2014, the ex­dividend date would be May 5, 2014, for shares traded on the SIX Swiss Exchange and NASDAQ OMX Stockholm as well as for American Depositary Shares traded on the New York Stock Exchange. The respective dividend pay­out dates would be May 8, 2014, in Switzerland, May 12, 2014, in Sweden, and May 15, 2014, in the United States. Key data Dividend per share (CHF) Par value per share (CHF) Votes per share Earnings per share (USD)(2) Total ABB stockholders’ equity per share (USD)(3) Cash flow from operations per share (USD)(2) Dividend pay out ratio (%)(4) Weighted­average number of shares outstanding (in millions) Dilutive weighted­average number of shares outstanding (in millions) 2013 0.70(1) 1.03 1 1.21 8.12 1.58 65% 2,297 2,305 2012 0.68 1.03 1 1.18 7.36 1.65 63% 2,293 2,295 2011 0.65 1.03 1 1.38 6.89 1.58 50% 2,288 2,291 (1) (2) (3) (4) Proposed by the Board of Directors and subject to approval by shareholders at the Annual General Meeting on April 30, 2014, in Zurich, Switzerland Calculation based on dilutive weighted­average number of shares outstanding Calculation based on the number of shares outstanding as of December 31 Dividend per share (converted to US dollars at year­end exchange rates) divided by basic earnings per share ABB Ltd Annual General Meeting The 2014 Annual General Meeting of ABB Ltd will be held at 10:00 a.m. on Wednesday, April 30, 2014, at the Messe Zurich hall in Zurich­Oerlikon, Switzerland. The Annual General Meeting will be held principally in German and will be simultaneously translated into English and French. Shareholders entered in the share register, with the right to vote, by April 22, 2014, are entitled to participate in the Annual General Meeting. Admission cards Holders of registered shares of ABB Ltd will receive their admission cards on request using the reply form enclosed with the invitation. The reply form or a corresponding notification must reach the company no later than April 24, 2014. For technical reasons, notifications arriving after that date can no longer be taken into consideration. The full text of the invitation in accordance with Article 700 of the Swiss Code of Obligations will be published in the Schweizerisches Handelsamtsblatt of April 4, 2014. ABB shareholders’ calendar 2014 For shareholders in Sweden an Information Meeting will be held in Västerås, Sweden, on May 05, 2014, at 10:00 a.m. First­quarter 2014 results ABB Ltd Annual General Meeting, Zurich ABB Ltd Information Meeting, Västerås Second­quarter 2014 results Capital Markets Day Third­quarter 2014 results April 29 April 30 May 05 July 23 September 9 October 22 ABB Annual Report 2013 | Investor information 179 Stock exchange listings ABB Ltd is listed on the SIX Swiss Exchange, NASDAQ OMX Stockholm, and the New York Stock Exchange. The global ISIN code for the ABB share Ticker symbols for ABB Ltd Ticker symbols for ABB Ltd at Bloomberg Ticker symbols for ABB Ltd at Reuters Credit rating for ABB Ltd as of February 28, 2014 Standard & Poor’s Moody’s CH 001 222 171 6 SIX Swiss Exchange NASDAQ OMX Stockholm New York Stock Exchange (NYSE) SIX Swiss Exchange NASDAQ OMX Stockholm New York Stock Exchange (NYSE) SIX Swiss Exchange NASDAQ OMX Stockholm New York Stock Exchange (NYSE) ABBN ABB ABB ABBN VX ABB SS ABB US ABBN.VX ABB.ST ABB.N Long­term corporate credit rating Long­term senior unsecured debt Short­term corporate credit rating Outlook: Stable A A A–1 Long­term senior unsecured rating Short­term debt rating Outlook: Stable A2 Prime­1* * ABB Ltd’s financing subsidiaries have also a Prime­1 rating, with the exception of ABB Capital B.V. which has a Prime­2 rating. These credit ratings are subject to revision at any time. ABB does not have any other agreements with internationally recognized statistical rating organizations to provide long­term and short­term credit ratings. 2011–2015 Financial targets and definitions ABB has published financial targets for the period 2011 to 2015, which are available at www.abb.com/2015targets. These comprise compound annual growth rates for revenues and earnings per share, as well as free cash flow as a percentage of net income, cash return on invested capital and operational EBITDA margin. At the divisional level, ABB provides organic revenue growth targets on a compound annual growth rate basis as well as profitability targets in the form of Operational EBITDA margins. Operational EBITDA represents income from operations excluding depreciation and amortization, restructuring and restructuring­related expenses, and acquisition­related expenses and certain non­operational items, as well as foreign exchange/commodity timing differences in income from operations consisting of: (i) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded derivatives), (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign exchange movements on receivables/payables (and related assets/liabilities). Operational EBITDA margin is Operational EBITDA as a percentage of Operational revenues. Operational revenues are total revenues adjusted for foreign exchange/commodity timing differences in total revenues of: (i) unrealized gains and losses on derivatives, (ii) realized gains and losses on derivatives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign exchange movements on receivables (and related assets). 180 Investor information | ABB Annual Report 2013 Free cash flow is calculated as net cash provided by operating activities adjusted for: i) purchases of property, plant and equipment and intangible assets, ii) proceeds from sales of property, plant and equipment, and iii) changes in financing and other non­current receivables, net (included in other investing activities). Cash return on invested capital (CROI) is calculated as Adjusted cash return divided by Capital invested. Adjusted cash return is calculated as the sum of i) net cash provided by operating activities and ii) interest paid. Capital invested is the sum of i) Adjusted total fixed assets, ii) Net working capital and iii) Accumulated depreciation and amortization. Adjusted total fixed assets is the sum of i) property, plant and equipment, net, ii) goodwill, iii) other intangible assets, net, and iv) investments in equity­accounted companies less v) deferred tax liabilities recognized in certain acquisitions. Outstanding public bonds, as of February 28, 2014, are listed in the table below. Bondholder Information Issuer ABB Ltd ABB Ltd ABB Ltd ABB Finance (Australia) Pty Limited ABB Finance (USA) Inc. ABB Finance (USA) Inc. ABB Finance (USA) Inc. ABB Finance B.V. Issued Principal Amount Coupon CHF 500 million CHF 350 million CHF 350 million AUD 400 million USD 500 million USD 1,250 million USD 750 million EUR 1,250 million 1.25% 1.50% 2.25% 4.25% 1.625% 2.875% 4.375% 2.625% Due 10/11/2016 11/23/2018 10/11/2021 11/22/2017 05/08/2017 05/08/2022 08/08/2042 03/26/2019 ISIN CH0139264961 CH0146696528 CH0139265000 AU3CB0202216 US00037BAA08 US00037BAB80 US00037BAC63 XS0763122578 144A: US00038AAA16 ABB Treasury Center (USA), Inc. USD 600 million 2.50% 06/15/2016 RegS: USU00292AA73 144A: US00038AAB98 ABB Treasury Center (USA), Inc. Thomas & Betts Corporation USD 650 million USD 250 million 4.00% 5.625% 06/15/2021 RegS: USU00292AB56 11/15/2021 US884315AG74 ABB Annual Report 2013 | Investor information 181 2013 price trend for ABB Ltd shares Price trend for ABB Ltd shares Swiss Performance Index rebased 1/13 2/13 3/13 4/13 5/13 6/13 7/13 8/13 9/13 10/13 11/13 12/13 Price trend for ABB Ltd shares OMX 30 Index rebased 1/13 2/13 3/13 4/13 5/13 6/13 7/13 8/13 9/13 10/13 11/13 12/13 Price trend for ABB Ltd shares Dow Jones Index rebased Zurich CHF 25 24 23 22 21 20 19 18 17 16 15 Stockholm SEK 180 173 166 159 152 145 138 131 124 117 110 New York USD 28 27 26 25 24 23 22 21 20 19 18 1/13 2/13 3/13 4/13 5/13 6/13 7/13 8/13 9/13 10/13 11/13 12/13 Source: Bloomberg 182 Investor information | ABB Annual Report 2013 For an additional copy of this report, please use the contact information on the back cover or download copies from our website at www.abb.com. An interactive version of the report is also available on our website. Parts of the ABB Annual Report 2013 have been translated into German and/or Swedish. Please note that the English­ language version of the ABB Annual Report is the binding version. Caution concerning forward-looking statements The ABB Annual Report 2013 includes “forward­ looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have based these forward­looking statements largely on current expectations, estimates and projections about the factors that may affect our future perfor­ mance, including global economic conditions as well as the economic conditions of the regions and the industries that are major markets for ABB. The words “believe,” “may,” “will,” “estimate,” “continue,” “target,” “anticipate,” “intend,” “expect” and similar words and the express or implied dis­ cussion of strategy, plans or intentions are intended to identify forward­looking statements. These for­ ward­looking statements are subject to risks, uncer­ tainties and assumptions, including among other things, the following: (i) business risks related to the global volatile economic environment; (ii) costs associated with compliance activities; (iii) difficul­ ties encountered in operating in emerging markets; (iv) risks inherent in large, long­term projects served by parts of our business; (v) the timely de­ velopment of new products, technologies, and services that are useful for our customers; (vi) our ability to anticipate and react to technological change and evolving industry standards in the mar­ kets in which we operate; (vii) changes in interest rates and fluctuations in currency exchange rates; (viii) changes in raw materials prices or limitations of supplies of raw materials; (ix) the weakening or unavailability of our intellectual property rights; (x) industry consolidation resulting in more powerful competitors and fewer customers; (xi) effects of competition and changes in economic and market conditions in the product markets and geographic areas in which we operate; (xii) effects of, and changes in, laws, regulations, governmental policies, taxation, or accounting standards and practices and (xiii) other factors described in documents that we may furnish from time to time with the US Secu­ rities and Exchange Commission, including our Annual Reports on Form 20­F. Although we believe that the expectations reflected in any such forward­ looking statements are based on reasonable as­ sumptions, we can give no assurance that they will be achieved. We undertake no obli gation to update publicly or revise any forward­looking statements because of new information, future events or other­ wise. In light of these risks and uncertainties, the forward­looking information, events and circum­ stances might not occur. Our actual results and performance could differ substantially from those anticipated in our forward­looking statements. ABB Ltd Corporate Communications P.O. Box 8131 CH­8050 Zurich Switzerland Tel: +41 (0)43 317 71 11 Fax: +41 (0)43 317 79 58 www.abb.com © C o p y r i g h t 2 0 1 3 A B B . A l l r i g h t s r e s e r v e d . 

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