Ready for Next Level The ABB Group Annual Report 2014 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. II Financial highlights Delivered robust results in a challenging environment; orders rose faster than the market on organic growth initiatives Took out $1 billion in costs for sixth consecutive year, and increased cash return on invested capital to 12.7 percent Regained momentum on large orders, with contracts including $800-million power project in Scotland and $200-million rail refurbishment project in Sweden Unveiled innovative new technologies, including the revolutionary YuMi robot and a record-breaking high-voltage 525-kV extruded cable system Increased customer satisfaction by 26 percent, as measured by the Net Promoter Score survey Forged new strategic partnerships to expand market presence and lower risks, including with Hitachi on power grids in Japan and with Philips on building automation Achieved break-even Operational EBITDA in Power Systems division through relentless execution of new business model Successfully divested businesses that have no substantial synergies with rest of portfolio, raising more than $1 billion in pre-tax proceeds Returned more than $2.8 billion to shareholders through share repurchases and dividend; Board proposes sixth consecutive increase in dividend Launched Next Level strategy with ambitious targets to accelerate sustain- able value creation, and implemented new organization Total ABB Group ($ in millions unless otherwise indicated) Orders Revenues Income from operations as % of revenues Operational EBITDA(1) as % of operational revenues(1) 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 (1) Refer to the Supplemental information section on page 187 for definitions III 2014 41,515 39,830 4,178 10.5% 5,400 13.5% 2,594 1.13 0.72 3,845 2,857 110% 12.7% 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% 140,400 147,700 Revenues 2014 by division (unconsolidated) Operational EBITDA 2014 by division Discrete Automation and Motion, 24% Low Voltage Products, 18% Process Automation, 18% Power Products, 24% Power Systems, 16% Discrete Automation and Motion, 31% Low Voltage Products, 25% Process Automation, 18% Power Products, 26% Power Systems, 0% Employees by region 2014 Orders 2014 by region Europe, 45% Americas, 23% Asia, 26% Middle East and Africa, 6% Europe, 34% Americas, 29% Asia, 27% Middle East and Africa, 10% Free cash flow and conversion rate, $ bn and % 2012 – 2014 Dividend payout (CHF per share) 2008 – 2014 120% 4 bn 0.8 110% 100% 94% 2.6 94% 2.6 3 bn 0.6 2.9 0.51 0.48 0.65 0.68 0.60 0.70 0.72 80% 40% 0 2 bn 0.4 1 bn 0.2 0 bn 0 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014* (*proposed) IV Contents F i n a n c i a l h i g h l i g h t s 02 Chairman and CEO letter 06 Next Level strategy 12 Customer segments 20 Business highlights 22 Executive Committee 23 Regional and country managers Corporate governance report 24 40 Compensation report 72 Financial review of ABB Group 168 ABB Ltd Statutory Financial Statements 186 Supplemental information 188 Investor information Chairman and CEO letter Dear shareholders, 2014 was a demanding and difficult year, in which we had to navigate in an uncertain, volatile market environment and to overcome internal challenges in our Power Systems division. Geopolitical tensions in the Ukraine and the Middle East, a slow world economy, turbulence in energy markets and the health crisis in West Africa made 2014 a particularly challenging year for global businesses. Our global team in ABB demonstrated in 2014 that our business of power and automation is well positioned in attractive markets with long-term prospects, and that our strategic alignment works. In the face of major external and internal challenges, we delivered on our promises to drive organic order growth through our “PIE” formula of Penetration, Innovation and Expansion, and to restore Power Systems to profitability. A major highlight of the year was the development and launch of our new strategy, “Next Level”, for the 2015–2020 period. We laid the foundations for its implementation and therefore for accelerated sustainable value creation. Strong orders and business execution In 2014, we delivered robust growth in orders of 10 percent on a like-for-like basis to $41.5 billion. Orders were steady to higher in all regions and divisions, driven by our organic growth initiatives and continued focused investments in innovation, customer service and sales. Base orders, the backbone of our business, grew every quarter on a like-for-like basis and we finished the year with an increased order backlog (in local currencies) that will support revenues in the years ahead. In Power Systems, we made solid progress in turning the division around by reducing its risk profile, changing the business model and setting it back on a path to long-term growth and profitability. This involved exiting engineering, procurement and construction (EPC) projects in the solar power generation sector and changing our business model in the offshore wind sector. We dealt with operational legacy issues and adjusted the focus of the division towards 02 Chairman and CEO letter | ABB Annual Report 2014 projects suited to our core competencies of power transmission and conversion. We delivered on our ambition of breaking even for the full year. The Power Systems division increased base orders and won significant milestone orders, e.g., two major orders worth $800 million and $400 million in Scotland and Canada respectively, for power transmission links to integrate renewable energy into the grid. The other four divisions continued to execute their businesses successfully, generating steady comparable margins. We improved cash generation and, for the sixth consecutive year, took out more than $1 billion in costs. We again increased customer satisfaction, reflecting our continuing efforts to improve customer service. We also raised more than $1 billion in 2014 from pruning non-core businesses that had no substantial synergies with the rest of the portfolio. To you, our shareholders, we returned more than $2.8 billion through share repurchases and the annual dividend. For the sixth consecutive year, we are proposing a dividend increase at our 2015 annual general meeting (AGM), honoring our dividend policy and in line with our commitment to long-term sustainable value creation. Investing in growth This year again we took important steps towards future growth. We unveiled groundbreaking new technologies, expanded our global presence with new manufacturing facilities and sales and service capabilities in high-growth markets, and forged partnerships with other leading global companies to increase value for our customers and enhance growth momentum as part of our new strategy. On the innovation side, we launched the world’s most powerful submersible power trans mission cable system. Our new 525-kilovolt extruded high-voltage direct current (HVDC) cable doubles power flow and extends range, enabling greater integration of distant renewable energy sources into the grid and improving inter-grid connections. Another groundbreaking innovation is our “YuMi” robot (pictured on the cover), a new dual-armed industrial robot that uses innovative force-sensing technology to work safely alongside humans for small-parts assembly. In April, we will have the official launch of YuMi at the Hanover fair, one of the world’s most important industrial trade shows. We announced a $300-million research and development and production hub in China for power and low-voltage products. We also extended our network of sales and service operations in China, targeting faster-growing cities in the country’s interior. In Brazil, we opened a production site as part of a $200-million expansion plan to further extend our offering of locally produced products. Finally, we made good progress in establishing partnerships with other leading global companies. Our most recent significant agreement is aimed at supplying – together with Hitachi in Japan – our leading HVDC systems to develop the country’s high-voltage power transmission network. Other important partnerships are with the Chinese technology group BYD on energy storage and electric mobility; and with Philips on building automation. Next Level: laying the foundations for the future In 2014, ABB laid the foundations to take the company to the next level, with a new strategy aimed at accelerating sustainable value creation. Our Next Level strategy is designed to make ABB Annual Report 2014 | Chairman and CEO letter 03 “We unveiled groundbreaking new technologies, expanded our global presence and forged partnerships with other leading global companies.” ABB more agile, to succeed in an uncertain world by strengthening our customer focus and building on our strong position in attractive markets. We are driving a fundamental shift in our performance culture. We have already taken decisive action on performance management, appointed the company’s top 1,000 leaders and strengthened the link between performance and compensation. With the building blocks of our three focus areas – profitable growth, relentless execution and business-led collaboration (see pages 6–11) – firmly in place, we are well positioned to capture opportunities in our markets, which we estimate will grow from about $600 billion in 2014 to $750 billion in 2020. Our Next Level strategy provides clear and actionable steps for moving forward. On profitable growth, our focus is to shift the company’s center of gravity towards greater competitiveness, higher organic growth and lower risk. We intend to drive organic growth through our “PIE” formula, further increase competitiveness in technology, service and software, and reduce intrinsic business risks, for example, by aligning business models more closely with ABB’s core competencies. Organic growth will be complemented by incremental strategic acquisitions and partnerships, such as those launched in 2014 with Philips, BYD and Hitachi. On the execution side, we are taking processes for improvement that are already successful in areas such as customer satisfaction and supply chain management, and making them more widely applicable in a leading operating model that covers the entire value chain of our business. We will maintain the momentum on customer satisfaction and cost while, for example, driving forward white-collar productivity and capital efficiency to free up more resources for growth. A key ambition of our Next Level strategy is to become more agile and responsive by increasing the focus on our markets and customers, and simplifying how the organization works. To achieve this, we streamlined our regional organization – reducing the number of regions from eight to three and taking out one organizational layer – and placed regional management on the Executive Committee to bring us all even closer to the market. At the same time, roles and responsibilities were clarified – including giving global business lines undiluted responsibility for their businesses – and processes put in place to strengthen cross-business collaboration. As of January 2015, the Next Level strategic direction and targets had been defined, broken down to the individual businesses and widely communicated and accepted. Our new organization is in place and we have instituted a “1,000-day” program office which is the primary vehicle for driving and coordinating large change initiatives across the company. Our Next Level strategic objectives and targets have been explicitly linked to a new perfor- mance management and compensation model. We have set ourselves ambitious targets. The Next Level strategy is targeting operational earnings per share (EPS) at a 10–15 percent compound annual growth rate (CAGR) and aims to deliver attractive cash return on invested capital (CROI) in the mid-teens over the period 2015–2020. Revenue targets are on average 4–7 percent per year on a like-for-like basis over six years, faster than forecasted GDP and market growth. Over the same time period, we plan to steadily increase profitability, measured in operational EBITA, within a bandwidth of 11 –16 percent while targeting an average free cash flow conversion rate above 90 percent. The new financial targets took effect on January 1, 2015. The margin target for Power Systems will be in effect as of January 1, 2016, after concluding the “step change” turnaround program. 04 Chairman and CEO letter | ABB Annual Report 2014 Outlook Looking ahead, 2015 marks a new era for ABB. The Board of Directors has unanimously nominated Peter Voser, former CEO of Royal Dutch Shell, as its new Chairman to succeed Hubertus von Grünberg, who will be stepping down at the next AGM in April after eight years in the role. A Swiss citizen, Peter Voser has intimate knowledge of ABB, having been CFO between 2002 and 2004 and a key leader behind the successful turnaround and repositioning of the company for long-term profitable growth. Peter Voser also brings a wealth of experience as a Board member of publicly listed companies such as Roche, IBM, UBS (until 2010) and Aegon (until 2006). His nomination as chairman of the Board will be voted on at the next AGM, together with that of David Constable, President and CEO of Sasol Limited, as a new Board member. Michael Treschow will be stepping down from the Board after 12 years of service. “Key opportunities include the big shift in the electricity value chain, industrial productivity improvements and the ‘internet of things, services and people’.” In 2015, the world will remain an uncertain and volatile place. We are prepared for more volatility on financial markets and for continued political and economic uncertainty. The fall in the oil price will affect our business by influencing customer and capital spending along the oil-and-gas value chain, but also offering opportunities in spending decisions by government and many other ABB customer segments. The recent changes in currency valuations found us well prepared – over the past several years we have worked hard to increase the resilience of our Swiss and global operations. Our Next Level strategy is well suited to drive our business momentum in the challenging environment in which we are operating. It will reinforce our position as a leading global provider of power and automation technologies, and drive growth in our main customer segments. Key opportunities include the big shift in the electricity value chain; industrial productivity improvements, where our strong and growing robotics capability is a key differentiator; the “internet of things, services and people”; as well as rapid urbanization and the need for energy efficiency in transport and infrastructure (see pages 13–19). ABB is well positioned to tap these opportunities for long-term profitable growth with its strong market presence, broad geographic and business scope, technology leadership and financial strength. Next Level transforms us into a more agile, market-focused, simplified organization, better able to meet and master the challenges ahead. Looking back on a difficult year, in which we addressed legacy issues, laid the foundation for a successful future and achieved a great deal, it remains only for us to thank our employees for their commitment, hard work and dedication, and to thank you, our shareholders, for your continuing trust and support. In 2015, we will drive momentum and execution across our business to make ABB stronger, better and more successful than ever – together. Hubertus von Grünberg Chairman March 5, 2015 Ulrich Spiesshofer CEO ABB Annual Report 2014 | Chairman and CEO letter 05 ABB is present across the entire power value chain: its technologies convert primary energy into electricity, and transport that power from the point of conversion to the point of consumption. Next Level strategy Shaping a global leader in power and automation In 2014, ABB laid the foundations to take the company to the next level, with a new strategy aimed at accelerating sustainable value creation to deliver attractive shareholder returns. The Next Level strategy is designed to build on ABB’s strong position in attractive markets. As a global leader in power and automation, ABB serves utilities, industry, and transport and infrastructure customers in a market worth more than $600 billion per year. From 2015 to 2020, that market is expected to grow by roughly $150 billion, implying growth rates above global GDP. To provide us with a systematic and robust approach for value creation, enhanced earnings per share (EPS) and cash return on invested capital (CROI), ABB defined three focus areas: profitable growth, relentless execution and business-led collaboration (see pages 8–11). ABB’s Next Level targets are to grow operational EPS at a 10–15 percent compound annual growth rate and deliver CROI in the mid-teens over the period 2015–2020. 06 Next Level strategy | ABB Annual Report 2014 ABB Annual Report 2014 | Next Level strategy 07 ABB is one of the world’s largest makers of solar inverters since our acquisition of Power-One in 2013. We provide a comprehensive portfolio of products, systems and solutions along the solar PV value chain that enables the generation, trans- mission and distribution of solar power. Profitable growth To achieve the next level, ABB is targeting profitable growth by shifting its center of gravity – through strengthening competitiveness, driving organic growth and lowering risk – and through incremental acquisitions and partnerships. Strengthening competitiveness We are further enhancing our strong competitive position by expanding our customer value proposition with new engineering and consulting services and advanced software-based services. As a technology pioneer and leading provider of software for industrial products and processes – the majority of our offerings are software related and we employ 2,600 software developers – ABB is well positioned to make software an even more important differentiator. In embedded software such as drives, for instance, we are enhancing the intelligence of products and increasing their value to improve ease of installation and integration, and enable condition monitoring. In automation system software, we continue to expand functionality, for example, with mobile interfaces and security, while maintaining our architecture leadership. And in application software, we are helping our customers in the planning, design and in the optimization of their operations through focused expansion of value-adding applications. Our offerings are also addressing the big shift in the electrical value chain – for instance, with more efficient, long-distance power transmission and micro-grids – and we are innovating to help our customers derive the benefits of the “internet of things, services and people” (see page 18). Driving organic growth momentum ABB’s strong global presence means we are well positioned to access high-growth segments. Examples in the utility sector include asset upgrades and retrofits, digital substations and solar and micro-grids; in industry, growth opportunities exist, for instance, in the further development of oil and gas, mining, new robotics applications such as electronics, and food and beverage packaging. In transport and infrastructure, promising areas include data-center electrification, rail retrofits and elec- tric-vehicle charging. ABB’s global growth opportunities across our businesses have been identified using the “heat map” approach, which gives us visibility on our position in all key markets and segments. We have clear action plans in place to operationalize growth. A key driver of profitable growth is our PIE concept, centered on Penetration, Innovation and Expansion, which was launched in 2014. With PIE, we are driving growth momentum 08 Next Level strategy | ABB Annual Report 2014 by selling more of our existing offering to accessible custom- ers (penetration), developing new offerings and value pro- positions with focused resource allocation (innovation), and expanding into additional, high-growth segments. Lowering risk Alongside our focus on organic growth, we are taking decisive steps to reduce intrinsic business risk by identifying relevant risks and implementing targeted risk mitigation; for instance, by standardizing approaches to reduce risks in specific areas. In doing so, we will deliver lower volatility, higher predictability and higher margins. Incremental acquisitions and partnerships We will complement our strong focus on organic growth by targeting incremental acquisitions that contribute value in line with the new strategy. We will also explore partnerships with other leading global companies along the lines of those with the Chinese technology group BYD on energy storage and electric mobility, with Philips on building automation, and our new joint venture with Hitachi in Japan to develop the country’s high-voltage power transmission network. Going forward, these partnerships will help us enhance growth momentum. ABB Annual Report 2014 | Next Level strategy 09 Sixty years ago, ABB pioneered high-voltage direct current (HVDC) transmission, an essential technology in the efficient transportation of large amounts of power over long distances with minimal losses. HVDC technology is ideal for linking offshore installations, such as wind farms or oil and gas platforms, to mainland grids. Relentless execution Our second focus area, relentless execution, is one in which ABB has an impressive track record. Our customer satisfac- tion ratings have improved year after year and we compare favorably with our competitors. On cost reduction, we have consistently been taking out $1 billion-plus in costs annually. We are now taking those successful improvement processes and making them more widely applicable in a leading operating model that covers the entire value chain of our business. We will maintain the momentum on customer satisfaction and cost, for example, while driving forward white-collar productivity and capital efficiency to free up more resources for growth. To ensure we meet our targets, we have implemented a relentless execution dashboard linked to performance and compensation and are seeing positive results. In our Power Systems division, we have ring-fenced the risks, changed the business model and are breaking even once again. To drive change in a focused way, we have initiated 1,000-day programs that focus on high-impact, strategic ABB-wide priorities. To strengthen the existing alignment among strategy, perfor- mance management and compensation, we have introduced a balanced scorecard with robust targets. Progress will be closely tracked through Group-wide program management, which includes dashboards of milestones and actions, and key financial and operational metrics. 10 Next Level strategy | ABB Annual Report 2014 Business-led collaboration Our third focus area is aimed at simplifying how we work together and at achieving a more streamlined, market-focused organization. We have introduced undiluted and clear business-line respon- sibility as the core of ABB, along with strengthened cross- business customer collaboration, and simple and fast internal processes. One key change has been to reduce the number of regions from eight to three: Americas, Europe and Asia, Middle East and Africa (AMEA). With this new structure and our clear focus on execution, we have the means to accelerate sustainable value creation now and in the future. ABB Annual Report 2014 | Next Level strategy 11 ABB technologies contribute to the development of a cleaner, more reliable and efficient power supply. Our high-voltage transmission systems help transport power and connect transmission grids over land, underground and even under the sea. 12 Customer segments | ABB Annual Report 2014 Customer segments Well positioned in attractive markets ABB is a leading provider of power and automation technologies for power utilities, industrial enterprises, and transport and infrastructure customers. They are attractive sectors – the market served by ABB is forecast to grow from about $600 billion in 2014 to $750 billion in 2020. Utilities ABB serves utilities and industrial and commercial customers with products, systems and services for the generation, transmission and distribution of elec- tricity. Turnkey solutions include power plant electrics and automation, bulk power transmission, substations and network management. The product offering across voltage levels includes circuit breakers, switchgear, capacitors, instrument transformers, power, distribution and traction transformers, and a complete range of medium-voltage products. With a 130-year heritage of technology and innovation and a presence in more than 100 countries, ABB continues to shape the grid of the future, by facilitating power capacity, enhancing reliability, improving energy efficiency and lowering environmental impact. Power generation ABB provides 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 including solar, wind and biomass. ABB tech- nologies help optimize performance, improve reliability, enhance efficiency and minimize emissions throughout the plant life cycle. Power transmission ABB’s comprehensive offering includes both AC and DC pro- ducts, systems and services, which help customers maxi- mize efficiency, reduce transmission losses, and improve grid reliability. Sixty years ago, ABB pioneered high-voltage direct current (HVDC) transmission, an essential technology in the efficient transportation of large amounts of power over long distances with minimal losses. Our high-voltage technologies, such as switchgear and transformers up to 1,200 kilovolts (kV), help transport power and connect transmission grids over land, underground and even under the sea. In 2014, ABB launched the world’s most powerful submersible power transmission cable system, a 525-kV extruded HVDC cable that doubles power flow and extends range significantly, enabling greater integration of distant renewable energy sources into the grid and improving grid interconnections. ABB’s substation offering includes flexible alternating current trans- mission systems (FACTS) technologies that help improve power quality and can significantly increase the capacity of existing AC transmission systems – by as much as 50 percent. FACTS solutions can also be used for the safe integration of inter- mittent power sources, such as wind and solar, into the grid. Power distribution ABB’s distribution offering includes a complete range of medium-voltage products as well as network management and utility communications solutions to monitor, control, operate and protect power systems. These solutions are designed to manage power networks intelligently, ensure the reliability of electricity supplies and enable real time man- agement of transmission grids and distribution networks. The portfolio also includes supervisory control and data acquisition (SCADA) systems, and enterprise software solutions that facilitate the convergence of operational and information technologies. ABB Annual Report 2014 | Customer segments 13 Industry ABB technologies are key enablers of industrial productivity, increasing the output, quality, variety and affordability of goods, and helping to raise living standards around the world. They power manufacturing and processing plants, monitor and manage the processes to maximize efficiency, ensure people, process and product safety, and drive key equipment. Energy efficiency and productivity are the hallmarks of ABB’s offerings for industry. Our energy efficient products, systems and services reduce consumption and therefore electricity bills and carbon emissions, while our automation systems in- crease productivity, quality and efficiency, and keep work- places safe. Productivity Thanks to its long history of developing automation solutions for industry, ABB is today the global leader in distributed control systems, with more than 20 percent market share*. Our systems measure, analyze, diagnose, and provide full control of industrial plants in industries from chemicals, pulp and paper, mining, minerals processing (e.g., cement making), to pharmaceuticals and food and beverage. market leader. Last year, our installed base of drives saved about 445 terawatt hours (TWh) in electricity, equivalent to the annual power consumption of 110 million European households. Only a small proportion of the world’s electric motors, which account for about 70 percent of industrial electricity consumption, are able to efficiently adjust their power use to match the required demand. This leaves significant room for continued market expansion, which is further supported by increasing minimum energy perfor- mance standards in many countries and industries. Redefining robotics As the company that pioneered the world’s first electrically powered industrial robot in 1974, ABB supplies robots for industries as diverse as automotive, packaging and palletizing, and consumer electronics. Now we are again redefining robotics with YuMi, an innovative dual-arm collaborative robot. YuMi is designed for a new era of automation; for example, in small parts assembly, where people and robots safely work alongside each other on the same tasks. Service Tying together ABB’s portfolio of automated systems is our comprehensive range of service offerings. Our life-cycle services ensure the health, reliability and continual evolution of installed equipment, while our experts can be called on to help customers reduce energy consumption and improve process efficiency and reliability. ABB also offers a host of remote monitoring and predictive maintenance services that can alert and dispatch service experts to resolve potential issues before a shutdown occurs. Energy efficient Complementing our portfolio of control systems are our energy efficient motors and drives, where we are also global * According to leading technology research and advisory firm ARC Advisory Group ABB provides systems and solutions for the automation and electrification ABB’s industrial motors drive key equipment, and frequency converters of industrial processes across industries as diverse as oil and gas (pictured), deliver precise and dependable motor control while helping to reduce energy pulp and paper, metals, minerals and mining, chemical and marine. consumption. 14 Customer segments | ABB Annual Report 2014 ABB automation systems increase productivity, improve energy efficiency and keep workplaces safe. Our PLC (programmable logic control) systems reduce production costs with better scheduling, execution and management of industrial processes, and improve customer service and product quality. ABB Annual Report 2014 | Customer segments 15 ABB’s building automation systems allow full control of electrical systems, from blinds and lighting to heating, ventilation and air conditioning. When combined with ABB’s efficient motors and drives, energy savings can be dramatic. 16 Customer segments | ABB Annual Report 2014 Transport and infrastructure Alongside its offerings for utilities and industry, ABB plays an important role in providing technology for sustainable marine, rail and vehicle transport, and in powering the world’s cities and im- proving the urban environment. Our expertise in power and automation has given us the edge when it comes to providing clean and reliable power solutions for transport networks and infrastructure. Emission-free transport ABB’s electric traction systems for trains and high-speed locomotives support the construction of clean, safe railway networks, linking urban centers and districts. Our wayside energy management systems can reduce overall power consumption by 10–30 percent through recuperating energy normally lost when a train brakes. As the market and technology leader in electric-vehicle charging, we provide fast-charging infrastructure for electric vehicles and battery-powered buses, cutting carbon emissions and providing real alternatives to gasoline- powered cars. Power and propulsion systems for ships ABB technologies extend to electrical power and propulsion systems for ships, dramatically reducing marine emissions, while our turbochargers improve gas and diesel engine per- formance while lowering fuel consumption and nitrogen oxide (NOx) emissions. We also supply fast, cost-effective crane systems for loading and unloading vessels in port. Intelligent building systems In buildings, which account for about 40 percent of total energy consumption, ABB’s intelligent automation systems enable control of all electrical systems, including blinds, lighting, heating, air conditioning and ventilation, helping cut power consumption and reduce energy bills. Installing sys- tems powered by ABB’s energy efficient motors and drives (see page 14) can further cut power consumption by half, and in extreme cases by up to 90 percent. Power supply Our compact substations are designed to fit into built-up areas and can easily be installed underground, and their automated control systems mean they can be remotely monitored and left to run themselves. ABB’s power equip- ment ensures the safe, efficient and reliable distribution of electricity throughout cities and large buildings. ABB has a long history of providing innovative and energy-efficient technologies ABB also provides life-cycle service support including maintenance and retrofits to the rail sector, both for rail infrastructure and rolling stock. for its large, global installed base. ABB Annual Report 2014 | Customer segments 17 Big shifts in power and automation ABB’s future business prospects are promising, thanks to big shifts taking place in the electricity value chain and industrial automation. The rise of the emerging economies is also a tremen- dous opportunity; in Africa and India alone, nearly one billion people are waiting for access to electricity. The shifting electricity value chain The electricity supply is undergoing seismic changes, as the power-generation mix shifts towards renewables and more feed-in nodes increase the complexity of the grid. By 2035, renewables are expected to account for 40 percent of new power generation, meaning electricity will have to be trans- ported over longer distances and at higher voltages, an excellent opportunity for ABB, which is a world leader in high-voltage direct current transmission (see page 13). Renewables are also making stand-alone grids possible for remote, off-grid communities. Currently, these must be equipped with back-up (diesel) generators to cope with inter- mittent supply, but innovations in power storage technology, another key focus of ABB, promise to dramatically expand the application of these micro-grids. A new era in industrial automation Thanks to the internet, the world is on the cusp of a new revolution in digital technology. Developments in communica- tions technology, processing power and new sensors are allowing us to collect and process more information than ever before. This is already making it possible for ABB to remotely control offshore oil and gas platforms – meaning human operators no longer have to spend long periods out at sea – and to direct service operations for thousands of robots around the world from a single location. The next step will be the optimization of industry: from a central control center and using algorithmic reasoning, we will be able to help our customers get more out of their devices and maximize the performance of their plants and machinery. With our mastery of big data, human-friendly robots and remote servicing, a new era in industrial automation is just around the corner. High-growth markets In terms of markets, ABB is very well positioned in emerging economies, which are expected to account for two-thirds of global GDP growth in the next five years. With our broad geographical footprint and highly diverse workforce, we are embedded in or close to the most promising growth markets; combined, Asia, the Middle East and Africa already account for a larger share of our revenues than either Europe or the Americas. As the company that pioneered the world’s first electrically powered industrial ABB drives are used in industries of all kinds, from cement to water robot in 1974, ABB supplies robots for industries as diverse as automotive, purification (pictured) and help to boost process productivity, improve packaging and palletizing, and consumer electronics. energy efficiency and cut maintenance costs. 18 Customer segments | ABB Annual Report 2014 ABB is a leading supplier of industrial robots and modular manufacturing systems, and has installed more than 250,000 robots worldwide. Our strong solutions focus helps manufacturers improve productivity, product quality and worker safety. ABB Annual Report 2014 | Customer segments 19 Business highlights ABB stands for “Power and productivity for a better world.” Here, we highlight some of our technologies and achievements that are contributing to the success of our customers, the development of society, and the minimization of environmental impact. World’s most powerful submersible power transmission cable system ABB’s 525-kilovolt extruded HVDC cable system doubles power flow and extends range, enabling greater integration of distant renewables and interconnections. “YuMi” heralds new era of human-robot collaboration A new, dual-armed industrial robot from ABB is designed to work alongside humans for small parts assembly, using innovative force-sensing technology to ensure safety. Sweden’s next generation of high-speed trains In a $200-million contract with national railway operator SJ Rail, ABB will provide power conversion and control systems for a retrofit of all 36 of the operator’s SJ 2000 trainsets. 20 Business highlights | ABB Annual Report 2014 Scotland’s Caithness-Moray subsea power link ABB was awarded an $800-million contract to build a major transmission link, strengthening the region’s grid and enabling the integration of new sources of renewable energy. Partnering to develop new energy storage solutions ABB has formed an alliance with BYD, the Chinese maker of rechargeable batteries, to collaborate on energy storage challenges, including charging stations for electric cars. Controlling the home at the touch of a button ABB’s free@home® system provides full control of all electrical systems, from blinds to lighting, heating, air- conditioning and door communication via a switch, smartphone or tablet. Shell selects ABB as global supplier Under a new five-year contract, ABB is serving as the oil and gas com- pany’s global supplier of low-voltage switchgear, motor control centers and related services. Cruise ships maintained under long-term agreement Royal Caribbean signed a 15-year service agreement with ABB, covering the maintenance of ABB’s Azipod propulsion systems on six cruise ships, including the world’s largest. Microgrid solution for Spanish island ABB’s PowerStore system is employed on the Canary Island of La Gomera, where load fluctuations and variable supply from renewables have posed ongoing challenges. Technology that safeguards the world’s cultural treasures Russia’s Hermitage and the new Grand Egyptian Museum are using ABB systems to ensure a proper environment for some of the world’s most famous works of art. Automating the world’s largest iron ore mine Brazil’s Vale has hired ABB to install an extensive power system and conveyor-belt motors at the Carajás Mine to implement truck-free transportation of ore at the site. An environmentally friendly switchgear insulation gas A new gas mixture developed by ABB can replace sulfur hexafluoride in high-voltage switchgear, significantly reducing greenhouse gas emissions. Hitachi partnership to develop HVDC solutions in Japan With Japan strengthening its energy grid and increasing its use of renewables, ABB and Hitachi have formed a joint venture to provide HVDC solutions. Working with Volvo to build better electric buses ABB and Volvo, the world’s leading bus manufacturer, have entered a global partnership to develop standardized fast-charging systems for electric and hybrid buses. Building the Maritime Link in Canada In a $400-million order, ABB is building an HVDC link across the Cabot Strait, connecting Newfoundland and its supply of renewable energy to the mainland grid for the first time. ABB Annual Report 2014 | Business highlights 21 As of January 1, 2015 Executive Committee From left to right Peter Terwiesch Process Automation division Diane de Saint Victor General Counsel Greg Scheu Americas region Bernhard Jucker Power Products division Frank Duggan Asia, Middle East and Africa (AMEA) region Tarak Mehta Low Voltage Products division Ulrich Spiesshofer Chief Executive Officer Eric Elzvik Chief Financial Officer Pekka Tiitinen Discrete Automation and Motion division Claudio Facchin Power Systems division Jean-Christophe Deslarzes Chief Human Resources Officer Veli-Matti Reinikkala Europe region 22 Executive Committee | ABB Annual Report 2014 As of January 1, 2015 Regional and country managers AMERICAS Greg Scheu Argentina Christian Newton Bolívia Christian Newton Brazil Rafael Paniagua Canada Daniel Assandri Central America & Caribbean Blas Gonzalez Chile Marcelo Schumacker Colombia Ramon Monras Ecuador Ramon Monras Mexico Pierre Comptdaer Peru Vicente Magana United States (including US Virgin Islands) Greg Scheu Uruguay Christian Newton Venezuela Ramon Monras EUROPE Veli-Matti Reinikkala Austria Franz Chalupecky Belgium Alfons Goos Bulgaria Ekkehard Neureither Croatia Steffen Drausnigg Czech Republic Hannu Kasi Denmark Claus Madsen Estonia Bo Henriksson Finland Tauno Heinola France Ian Funnell (ad interim) Germany Hans-Georg Krabbe Greece Apostolos Petropoulos Hungary Tanja Vainio Ireland Tom O’Reilly Israel Ronen Aharon Italy Mario Corsi Kazakhstan Artur Czerniejewski Latvia Bo Henriksson Lithuania Bo Henriksson Luxembourg Alfons Goos Moldova Tomasz Wolanowski Netherlands Alfons Goos Norway Steffen Waal Poland Pawel Lojszczyk Portugal Miguel Pernes Romania Tomasz Wolanowski Russian Federation Anatoliy Popov Serbia Steffen Drausnigg Slovakia Marcel van der Hoek Slovenia Franz Chalupecky Spain Carlos Marcos Sweden Johan Soderstrom Switzerland Remo Luetolf Turkey Sami Sevinc Ukraine Dmytro Zhdanov United Kingdom Ian Funnell AMEA Frank Duggan Algeria Tarek Elgani Angola Antonio D’Oliveira Australia Axel Kuhr Bahrain Khaled Qudsi Bangladesh Joy-Rajarshi Banerjee Botswana Gift Nkwe Cameroon Pierre Njigui Central Africa Naji Jreijiri China Chunyuan Gu Congo Thryphon Mungono Côte d’Ivoire Magloire Elogne Egypt Naji Jreijiri Ghana Hesham Tehemer India Bazmi Husain Indonesia Richard Ledgard Japan Tony Zeitoun Jordan Loay Dajani Kenya Samuel Chiira Korea Min-Kyu Choi Kuwait Maroun Zakhour Laos Chaiyot Piyawannarat Lebanon Naji Jreijiri Madagascar Ajay Vij Malaysia Jukka Poutanen Mauritius Ajay Vij Morocco Khaled Torbey Mozambique Paulo David Myanmar Chaiyot Piyawannarat Namibia Hagen Seiler New Caledonia Axel Kuhr New Zealand Ewan Morris Nigeria Talal ElAssaad Oman Brian Hull Pakistan Najeeb Ahmad Papua New Guinea Axel Kuhr Philippines John Fyfe Qatar Mostafa Al Guezeri Saudi Arabia Mohammed Masri Singapore Johan DeVilliers Southern Africa Leon Viljoen Sri Lanka Dusyantha Rupasinha Taiwan Kayee Ding Tanzania Michael Otonya Thailand Chaiyot Piyawannarat Tunisia Khaled Torbey United Arab Emirates Carlos Pone Vietnam Axel Kalt Zambia Russell Harawa Zimbabwe Charles Shamu ABB Annual Report 2014 | Regional and country managers 23 24 Corporate governance report | ABB Annual Report 2014 Corporate governance report Contents 26 Principles 27 Group structure and shareholders. 30 Capital structure 31 Shareholders’ participation 33 Board of Directors 35 Executive Committee 37 Business relationships 37 Employee participation programs 37 Duty to make a public tender offer 37 Auditors 38 Information policy 39 Further information on corporate governance ABB Annual Report 2014 | Corporate governance report 25 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 Obli gations, 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 Guidelines (which includes the regulations of ABB’s Board committees 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 (EC). 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 Directive on Information Relating to Corporate Governance published by the SIX Swiss Exchange. Where an item listed in the directive is not addressed in this report, it is either inapplicable 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 practices 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 audit committee or the board of directors. – The Standards require that all equity compensation plans and material revisions thereto be approved by the share holders. Consistent with Swiss law such matters are de cided by our Board. However, the shareholders decide about the creation of new share capital that can be used in connection with equity compensation plans. – Swiss law requires that the members of the compensation committee are elected by the shareholders rather than appointed by our Board. – Swiss law requires shareholders to approve Board com pensation and Executive Committee compensation. 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 behalf 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, how ever, 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 circumstances. ABB’s Articles of Incorporation do not contain provisions concerning a director’s power, in the ab sence of an independent quorum, to vote on the compensa tion to each director; however, the maximum aggregate com pensation of the directors for each term of office is subject to shareholder approval. 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 directors and officers. This rule is generally understood and so recommended by the Swiss Code of Best Practice for Corporate Governance as disqualifying directors and officers from participating in decisions, other than in the shareholders’ meeting, that directly affect them. 26 Corporate governance report | ABB Annual Report 2014 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 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. 2.1 Group structure ABB Ltd, Switzerland, is the ultimate parent company of the ABB Group, which at December 31, 2014, principally com prised approximately 350 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, 2014, ABB Ltd had a market capitalization of CHF 48 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, 2014, 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 273 billion. Stock exchange listings (At December 31, 2014) Stock exchange SIX Swiss Exchange Security ABB Ltd, Zurich, share ABB Ltd, Zurich, share buyback SIX Swiss Exchange (second trading line) 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 * also called Scrip ID Ticker symbol ISIN code ABBN ABBNE ABB ABB ABB* ABB CH0012221716 CH0253301128 CH0012221716 US0003752047 INE117A01022 INE117A01022 ABB Annual Report 2014 | Corporate governance report 27 The following table sets forth, as of December 31, 2014, the name, place 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, Moorebank, NSW ABB AG, Vienna ABB N.V., Zaventem ABB Ltda., Osasco ABB Bulgaria EOOD, Sofia ABB Inc., SaintLaurent, Quebec Thomas & Betts Limited, SaintJeansurRichelieu, Quebec ABB (China) Ltd., Beijing ABB 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., Cergy Pontoise 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, 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 Limited, Dublin ABB Technologies Ltd., Haifa ABB S.p.A., Milan PowerOne Italy S.p.A., Terranuova Bracciolini ABB K.K., Tokyo ABB Ltd., Seoul ABB Holdings Sdn. Bhd., Subang Jaya Asea Brown Boveri S.A. de C.V., San Luis Potosi SLP ABB B.V., Rotterdam ABB Capital B.V., Rotterdam ABB Finance B.V., Rotterdam ABB Holdings B.V., Rotterdam ABB Investments B.V., Rotterdam ABB Limited, Auckland ABB Holding AS, Billingstad ABB S.A., Lima ABB, Inc., Paranaque, Metro Manila 28 Corporate governance report | ABB Annual Report 2014 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 Italy Japan Korea, Republic of Malaysia Mexico Netherlands Netherlands Netherlands Netherlands Netherlands New Zealand Norway Peru Philippines 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 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 98.18 100.00 278,860 131,218 15,000 13,290 590,314 65,110 – (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 22,000 1,000,000 18,670,000 4,490 667,686 9,200 9,080 20 119 100 34,000 240,000 29,116 123,180 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 EUR JPY KRW MYR MXN EUR EUR EUR EUR EUR NZD NOK PEN PHP ABB Ltd’s significant subsidiaries, continued Company name/location ABB Sp. z o.o., Warsaw ABB (Asea Brown Boveri), S.A., Oeiras 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 PowerOne, Inc, Delaware Thomas & Betts Corporation, Knoxville, TN (1) Shares without par value. Country Poland Portugal 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 ABB Share capital interest % in thousands Currency 99.92 100.00 100.00 65.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.95 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 350,656 4,117 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 5,000 226,014 120,000 2 1 – – – 1 PLN EUR 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 – Organiza tional structure”. 2.2 Significant shareholders Investor AB, Sweden, held 199,965,142 ABB shares as of December 31, 2014. This holding represents approximately 8.6 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on that date. The num ber of shares held by Investor AB does not include shares held by Mr. Jacob Wallenberg, the chairman of Investor AB and a director of ABB, in his individual capacity. BlackRock Inc., New York, U.S., disclosed that as per July 25, 2011, it, together with its direct and indirect subsid iaries, held 69,702,100 ABB shares. This holding represents 3.0 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on December 31, 2014. For a full review of the disclosure report pursuant to which BlackRock reported its ABB shareholdings, please refer to the search facility of the SIX Swiss Exchange Disclosure Office at www.sixswissexchange.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 Decem ber 31, 2014. 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 2014 | Corporate governance report 29 3. Capital structure 3.1 Ordinary share capital On December 31, 2014, ABB’s ordinary share capital (includ ing 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 ordinary share capital There were no changes to ABB’s ordinary share capital during 2014, 2013 and 2012. 3.3 Contingent share capital At December 31, 2014, 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, 2014, 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 con version rights and/or warrants will be entitled to subscribe for new shares. The conditions of the conversion rights and/or warrants will be determined by the Board. The acquisition of shares through the exercise of warrants and each subsequent transfer of the shares will be subject to the restrictions of ABB’s Articles of Incorporation (see “Limita tions 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 refi nancing the acquisition of an enterprise, parts of an enter prise, participations or new investments or an issuance on national or international capital markets. If the Board denies advance subscription rights, the convertible or warrantbear ing bonds or other financial market instruments will be issued at the relevant market conditions and the new shares will be issued pursuant to the relevant market conditions taking into account the share price and/or other comparable instru ments having a market price. Conversion rights may be exer cised during a maximum tenyear period, and warrants may be exercised during a maximum sevenyear period, in each case from the date of the respective issuance. The advance subscription rights of the shareholders may be granted indirectly. At December 31, 2014, 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. The preemptive and advance subscription rights of ABB’s share holders are excluded. The shares or rights to subscribe for shares will be issued to employees pursuant to one or more regulations to be issued by the Board, taking into account performance, functions, level of responsibility and profitability criteria. ABB may issue shares or subscription rights to employees at a price lower than that quoted on a stock ex change. The acquisition of shares within the context of employee share ownership and each subsequent transfer of the shares will be subject to the restrictions of ABB’s Articles of Incorporation (see “Limitations on transferability of shares and nominee registration” in section 4.2 below). 30 Corporate governance report | ABB Annual Report 2014 3.4 Authorized share capital At December 31, 2014, 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 through April 29, 2015. The Board is authorized to determine the date of issue of new shares, the issue price, the type of payment, the conditions for the exercise of preemptive rights and the be ginning 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 share holders. The Board may permit preemptive rights that have not been exercised 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 condi tions or use them for other purposes in the interest of the company. Furthermore, the Board is authorized to restrict or deny the preemptive rights of shareholders and allocate such rights to third parties if the shares are used (1) for the acquisition of an enterprise, parts of an enterprise, or par ticipations, or for new investments, or in case of a share place ment, for the financing or refinancing of such transactions; or (2) for the purpose of broadening the shareholder constitu ency 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. In addition, the Board has decided to pro pose to the Shareholders at the 2015 Annual General Meeting that the authorized share capital be renewed for another two years, through April 29, 2017. 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 contained in the “Financial review of the ABB Group” section of this Annual Report. 4. Shareholders’ participation 4.1 Shareholders’ voting rights ABB has one class of shares and each registered share car ries 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 elected by the shareholders (unabhängiger Stimmrechtsvertreter). All shares held by one shareholder may be represented by one repre sentative 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 share holder without voting rights. A person failing to expressly declare in its registration / application that it holds the shares for its own account (a nom inee), will be entered in the share register with voting rights, provided that such nominee has entered into an agreement with ABB concerning its status, and further provided that the nominee is subject to recognized bank or financial market supervision. In special cases the Board may grant exemp tions. There were no exemptions granted in 2014. The limitation on the transferability of shares may be re moved 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 2014 | Corporate governance report 31 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 until these reserves amount to at least 20 percent of ABB Ltd’s share capital. Any net profits remaining in excess of those reserves are at the disposal of the shareholders’ meeting. Under Swiss law, ABB Ltd may only pay out a dividend if it has been proposed by a shareholder or the Board of Directors 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 Incor poration. In practice, the shareholders’ meeting usually approves dividends as proposed by the Board of Directors, if the Board of Directors’ proposal is confirmed by the sta tutory auditors as compliant with Swiss law and ABB’s Articles of Incorporation. Dividends are usually due and payable no earlier than two 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 those shares reg istered 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). With respect to any annual dividend payment for which this facility is made available, shareholders who register with Euroclear may elect to receive the divi dend 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 infor mation 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 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, 2014, 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. 4.5 Compensation principles and “say on pay” Compensation for the members of the Board consists of fixed compensation and for members of the EC consists of fixed and variable compensation. Compensation may be paid in the form of cash, shares or other types of benefits and for the EC also in the form of sharebased instruments or units. The Board, or, to the extent delegated to it, the Compensation Committee, shall determine grant, vesting, exercise and for feiture conditions relating to sharebased instruments or units. Additional details on “ABB’s General Compensation Principles” can be found in Article 33 of ABB’s Articles of Incorporation and information about their implementation can be found in the Compensation report contained in this An nual Report. Shareholders must approve the maximum aggregate amount of compensation for the Board for the following Board term and for the EC for the following financial year. If the approved compensation is not sufficient to cover new EC members or newly promoted EC members following the approval, then up to 30% of the last approved maximum aggregate EC compensation shall be available for payment as a supplementary amount for such new members or such newly promoted members. Additional details on ABB’s “Approval of Compensation by the General Meeting of Share holders” and “Supplementary Amount for Changes to the Executive Committee” can be found respectively in Articles 34 and 35 of ABB’s Articles of Incorporation. 32 Corporate governance report | ABB Annual Report 2014 4.6 Mandates for Board and EC members outside of ABB No member of the Board may hold more than ten additional mandates of which no more than four may be in listed com panies. No member of the EC may hold more than five man dates of which no more than one may be in a listed company. Certain types of mandates, such as those in our subsidiaries and those in nonprofit and charitable institutions, are not subject to those limits. Additional details on “Mandates Out side the Group” can be found in Article 38 of ABB’s Articles of Incorporation. 4.7 Credits to Board and EC members Article 37 of ABB’s Articles of Incorporation states that credits may not be granted to a member of the Board or to a member of the EC. 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 member 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 Reg ulations & 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/corporate governance, do not provide for the retirement of directors based on their age. However, an age limit for members of the Board is set forth in the ABB Ltd Board Regulations & Corporate Governance Guidelines (although waivers are pos sible and subject to Board discretion), a copy of which can be found at www.abb.com/about/corporategovernance As at December 31, 2014, the members of the Board (Board term April 2014 to April 2015) were: Hubertus von Grünberg has been a member and chair man of ABB’s Board of Directors since May 2007. He is a member of the supervisory board of Deutsche Telekom AG (Germany) and vice chairman of the supervisory board of Sapinda Holding B.V. (The Netherlands). He is 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 2002. He is the founding partner and chief executive officer of AGN Holding (Brazil). He is the chairman of B&A, a joint venture between BTG Pactual and AGN Holding (Brazil) and a director of WPP plc (U.K.). Mr. Agnelli was born in 1959 and is a Brazilian citizen. Matti Alahuhta has been a member of ABB’s Board of Directors since April 2014. He is the chairman of the board of Outotec Corporation (Finland). He is also a member of the boards of directors of KONE Corporation and (through April 9, 2015) UPMKymmene Corporation (both Finland) and Volvo AB (Sweden). Mr. Alahuhta was born in 1952 and is a Finnish citizen. Louis R. Hughes has been a member of ABB’s Board of Directors since May 2003. He is the chairman of the board of InZero Systems (formerly GBS Laboratories LLC) (U.S.). He is also a member of the supervisory board of Akzo Nobel (The Netherlands) and a member of the board of directors of Alcatel Lucent (France). Mr. Hughes was born in 1949 and is a U.S. citizen. Michel de Rosen has been a member of ABB’s Board of Directors since March 2002. He is the chief executive officer of and chairman of the board of Eutelsat Communica ABB Annual Report 2014 | Corporate governance report 33 tions (France). He is also a member of the board of directors of Pharnext SAS (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 2003. He is the chairman of the boards 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 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 the chairman of the board of Investor AB (Sweden). He is vice chairman of the boards of Telefon aktie bolaget LM Ericsson AB and SAS AB (both Sweden). He is also a member of the boards of directors of the Knut and Alice Wallenberg Foundation and the Stockholm School of Economics (both Sweden). 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 2011. She is a member of the boards of directors of InterContinental Hotels Group (U.K.) and Samsonite International S.A. (Luxembourg). Ms. Yeh was born in 1948 and is a Chinese citizen. As of December 31, 2014, 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/corporate governance 5.3 Board committees Beginning with the 2014−2015 Board term, the Board has created three Board committees: the Finance, Audit and Compliance Committee (FACC), the Governance and Nomi nation Committee (GNC), and the Compensation Committee (CC). For the 2013−2014 Board term, the duties of the GNC and the CC were handled by the Governance, Nomination & Compensation Committee (GNCC). The duties and objectives of the Board committees are set forth in the ABB Ltd Board Regulations and Corporate Governance Guidelines, a copy of which can be found at www.abb.com/about/corporate governance. These com mittees assist the Board in its tasks and report regularly to the Board. The members of the Board committees either are required to be independent or are elected directly by the shareholders. 34 Corporate governance report | ABB Annual Report 2014 5.3.1 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 finan cial 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 Exchange Commission (SEC) at least one member of the FACC has to be an audit committee financial expert. The Board has deter mined that each member of the FACC is an audit committee financial expert. As at December 31, 2014, the members of the FACC were: Louis R. Hughes (chairman) Roger Agnelli Jacob Wallenberg 5.3.2 Governance and Nomination Committee The GNC is responsible for (1) overseeing corporate gover nance practices within ABB, (2) nominating candidates for the Board, the role of CEO and other positions on the Execu tive Committee, and (3) succession planning and employ ment matters relating to the Board and the Executive Com mittee. The GNC is also responsible for maintaining an orientation program for new Board members and an ongoing education program for existing Board members. The GNC must comprise three or more independent directors. The chairman of the Board (unless he is already a member) and, upon invitation by the committee’s chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the discussions is maintained. As at December 31, 2014, the members of the GNC were: Michael Treschow (chairman) Matti Alahuhta Hubertus von Grünberg 5.3.3 Compensation Committee The CC is responsible for compensation matters relating to the Board and the Executive Committee. The CC must comprise three or more directors who are elected by the shareholders. The chairman of the Board and, upon invitation by the committee’s chairman, the CEO or other members of the Executive Committee may participate in the committee meetings, provided that any potential conflict of interest is avoided and confidentiality of the dis cussions is maintained. As at December 31, 2014, the members of the CC were: Michel de Rosen (chairman) Michael Treschow Ying Yeh 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 2014 by the Board and its committees, their average duration, as well as the attendance of the individual Board members. The regular meetings shown include a strategic retreat attended by all members of the Board and the Executive Committee. Meetings and attendance Board FACC GNCC GNC CC Reg. Add’l Average duration (hours) 7.7 1.2 2.8 3.33 1.75 1.9 Number of meetings Meetings attended: Hubertus von Grünberg Roger Agnelli Matti Alahuhta * Louis R. Hughes Hans Ulrich Märki ** Michel de Rosen Michael Treschow Jacob Wallenberg Ying Yeh 7 7 7 2 6 4 7 7 7 7 5 5 5 2 4 3 5 5 5 5 8 – 8 – 8 – – – 8 – 3 – – – – 3 3 3 – 3 3 3 – 3 – – – 3 – – 4 – – – – – 4 4 – 4 * ** Matti Alahuhta was elected at the April 2014 AGM. Hans Ulrich Märki did not stand for reelection at the April 2014 AGM. 5.5 Board compensation and shareholdings Information about Board compensation and shareholdings can be found in the section titled “Compensation and Share ownership tables” of the Compensation 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 at December 31, 2014, the members of the Executive Committee were (except for Peter Terwiesch who joined the Executive Committee effective January 1, 2015): Ulrich Spiesshofer was appointed Chief Executive Officer in September 2013 and has been a member of the Executive Committee since 2005. 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 and global head of operations practice at Roland Berger AG (Switzerland). From 1991 to 2002, he held various manage ment positions with A.T. Kearney Ltd. and its affiliates. Mr. Spiesshofer was born in 1964 and is a German citizen. ABB Annual Report 2014 | Corporate governance report 35 Eric Elzvik was appointed Chief Financial Officer and member of the Executive Committee in February 2013. 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 Corporate 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 Chief Human Resources Officer and member of the Executive Com mittee 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 Presi dent and CEO of the Downstream Aluminum Businesses of Rio Tinto (Canada). He was Senior Vice President Human Resources of Alcan Inc. (Canada) from 2006–2008 and in ad dition he coled the integration of Rio Tinto and Alcan from 2007 to 2008. Between 1994 and 2006, he held various human resources and management roles with Alcan Inc. Mr. Deslarzes was born in 1963 and is a Swiss citizen. Diane de Saint Victor was appointed General Counsel and member of the Executive Committee in January 2007. In March 2013, she was appointed as a nonexecutive director of Barclays plc and Barclays Bank plc (both U.K.). From 2004 to 2006, she was general counsel of the Airbus Group (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 Honeywell 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. Pekka Tiitinen was appointed President of the Discrete Automation and Motion division and member of the Executive Committee in September 2013 and was named Head of Group Marketing & Sales in January 2015. In 2013, prior to joining the Executive Committee, Mr. Tiitinen was the head of ABB’s drives and controls global business unit. From 2003 to 2012, Mr. Tiitinen was the head of ABB’s low voltage drives global business unit and from 1990 to 2003, he held various management roles with ABB. Mr. Tiitinen was born in 1967 and is a Finnish citizen. Tarak Mehta was appointed President of the Low Volt age Products division and member of the Executive Com mittee 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. Peter Terwiesch was appointed President of the Pro he was the head of ABB’s Central Europe region. He was ABB’s Chief Technology Officer from 2005 to 2011. From 1994 to 2005, he held several positions with ABB. Mr. Terwi esch was born in 1966 and is a Swiss and German citizen. Bernhard Jucker was appointed President of the Power Products division and member of the Executive Committee 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 President of the Power Systems division and member of the Executive Committee 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 global business unit and from 1995 to 2004, he held various management roles with ABB. Mr. Facchin was born in 1965 and is an Italian citizen. Frank Duggan was appointed President of the Asia, Mid dle East and Africa region in January 2015 and has been a member of the Executive Committee since 2011. From 2011 to 2014, Mr. Duggan was the head of Global Markets as well as a member of the Executive Committee. From 2008 to 2014, he was also 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. Between 1986 and 2008, he held several management positions with ABB. Mr. Duggan was born in 1959 and is an Irish citizen. Greg Scheu was appointed President of the Americas region as well as Head of Group Service and Business Integration in January 2015 and has been a member of the Executive Committee since 2012. From 2013 to 2014, he was the Executive Committee member responsible for busi ness integration, group service and North America. Mr. Scheu joined the Executive Committee as the member respon sible for Marketing and Customer Solutions in May 2012. Mr. Scheu, a former executive of Rockwell International, joined ABB in 2001 and was responsible for the integration of both Baldor Electric Co. and of Thomas & Betts into ABB. Mr. Scheu was born in 1961 and is a U.S. citizen. Veli-Matti Reinikkala was appointed President of the Europe region in January 2015 and has been a member of the Executive Committee since 2006. From 2006 to 2014, he was the Executive Committee member responsible for the Process Automation division. He is a member of the board of directors of UPMKymmene Corporation (Finland). In 2005, he was head of the Process Automation business area. From 1993 to 2005, he held several positions with ABB. Mr. Reinik kala was born in 1957 and is a Finnish citizen. cess Automation division and member of the Executive Committee in January 2015. He is a member of the board of directors of Metall Zug AG (Switzerland). From 2011 to 2014, 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/corporategovernance 36 Corporate governance report | ABB Annual Report 2014 6.3 Executive Committee compensation and shareholdings Information about Executive Committee compensation and shareholdings can be found in the section titled “Compensation and share ownership tables” of the Com pensation 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. 7. Business relationships This section describes important business relationships between ABB and its Board members, or companies and organizations represented by them. This determination has been made based on ABB Ltd’s Related Party Transac tion Policy. This policy is contained in the ABB Ltd Board Regulations & Corporate Governance Guidelines, a copy of which can be found in the section “Corporate governance – Further information on corporate governance” at www.abb.com/ investorrelations 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 division. The total revenues recorded by ABB relating to business with Atlas Copco were approximately $61 million in 2014. Jacob Wallenberg was vice chairman of Atlas Copco until April 2012. ABB has an unsecured syndicated $2 billion revolving credit facility. As of December 31, 2014, SEB Skandinaviska Enskilda Banken AB (publ) (SEB) and Barclays Bank plc had each committed to approximately $74 million out of the $2 billion total. In addition, ABB has regular banking business with SEB and Barclays. Jacob Wallenberg was the vice chairman of SEB until March 2014 and Diane de Saint Victor is a nonexecutive director of Barclays Bank plc and Barclays plc (collectively, “Barclays”). After comparing the share of revenues generated from ABB’s business with Atlas Copco, and after reviewing 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 conditions and do not con stitute material business relationships. As a result, the Board concluded that all members of the Board are considered to be independent directors. This determination was made in accordance with ABB Ltd’s Related Party Transaction Policy which was prepared based on the Swiss Code of Best Prac tice for Corporate Governance and the independence criteria set forth in the corporate governance 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 Con solidated 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 consolidated financial statements. ABB Annual Report 2014 | Corporate governance report 37 10.2 Duration of the mandate and term of office of the auditor 11. Information policy ABB, as a publiclytraded 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 compensation. ABB also submits an annual report on Form 20F to the SEC. In addition, ABB publishes its results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the stock exchanges on which its shares are listed and traded. Press releases relating to financial results and material events are also filed with the SEC on Form 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 un audited 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/ investorrelations. 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 Ernst & Young assumed the sole auditing mandate of the consolidated financial statements of the ABB Group begin ning in the year ended December 31, 2001 (having previ ously 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 Incorpora tion, the term of office of ABB’s auditors is one year. 10.3 Auditing and additional fees paid to the auditor The audit fees charged by Ernst & Young for the legally pre scribed audit amounted to $27.1 million in 2014. Audit ser vices are defined as the standard audit work performed each fiscal year necessary to allow the auditors to issue an opinion on the consolidated financial statements of ABB and to issue an opinion on the local statutory financial statements. This classification may also include services that can be provided only by the auditors, such as preissuance reviews of quarterly financial results and comfort letters delivered to underwriters in connection with debt and equity offerings. In addition, Ernst & Young charged $6.0 million for nonaudit services performed during 2014. Nonaudit services include primarily accounting consultations, audits of pension and benefit plans, accounting advisory services, other attest services related to financial reporting that are not required by statute or regulation, income tax and indirect tax compliance services, tax advisory services and consultations relating to conflict minerals compliance. In accordance with the require ments 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 nonaudit 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, at least four times each calendar year, to obtain re ports about the results of their audit procedures. The FACC reports the material elements of its supervision of the auditors to the Board. 38 Corporate governance report | ABB Annual Report 2014 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 Finance, Audit and Compliance Committee – Regulations of the Governance and Nomination Committee – Regulations of the Compensation 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 2014 | Corporate governance report 39 40 Compensation report | ABB Annual Report 2014 Compensation report Contents 42 Letter from the Chairman of the Compensation Committee 43 Compensation report 71 Report of the statutory auditor on the Compensation report ABB Annual Report 2014 | Compensation report 41 Letter from the Chairman of the Compensation Committee Highlights – Continuity in Executive Committee (EC) composition and compensation structure in 2014 – EC compensation governance and structure revised as of 2015 – in wake of new corporate strategy, stakeholder feedback and regulation – to increase performance orientation Dear shareholder, It is my pleasure as chairman of the Board’s Compensation Committee (CC) to have this opportunity to present our work, and in particular to draw your attention to highlights of the 2014 Compensation Report and changes to executive compen- sation taking effect in 2015. Your active interest and feed- back have been most valuable in shaping the new Executive Committee (EC) compensation model. My colleagues on the CC are Michael Treschow and Ying Yeh; the three of us were elected by you to serve on the Committee at the 2014 Annual General Meeting (AGM). Our primary role is to oversee the company’s compensation policy and the implementation of executive compensation programs. The Committee exists in its current form since the Board’s decision in April 2014 to split the Governance, Nomination and Compensation Committee into two separate committees – the CC and the Governance and Nomination Committee (GNC). One of the tasks we undertook in 2014 was to review the compensation of Board members in the light of this reorgani- zation and of current Board compensation at major Swiss companies. This resulted in the first increase in total Board compensation in seven years. Continuity in EC composition and compensation structure in 2014 The composition of the EC remained the same throughout 2014 and the Board made no changes to the design and mix of EC compensation. However, due to the absence of special share-based grants in 2014 and to numerous changes in the composition of the EC in 2013, total EC com- pensation was 20 percent lower in 2014 than in the previous year. Short-term variable compensation was also lower for 2014, reflecting company profitability and cash flows in that year that were below the performance objectives set by the Board. ABB and the landscape in which the company operates have evolved in ways that shape the executive compensation package that shareholders will vote on at the next AGM in April 2015. To provide some background for the vote, let me outline how ABB’s environment has changed, how the Board has revised EC compensation and why we believe the changes are in the interest of shareholders. Alignment of compensation with recently announced Next Level strategy First, ABB launched its Next Level strategy in September 2014, with the goal of accelerating sustainable value creation over the years 2015 to 2020, as explained in the Chairman and CEO letter on pages 2–5. This strategy builds on the com- pany’s strong positions in its core business areas of power and automation, and on the focus areas of profitable growth, relentless execution and business-led collaboration. Second, close interaction with stakeholders provided valuable feedback on the design, mix and levels of EC com- pensation. We consider this type of dialogue important to gather views on our current and developing compensation practices to ensure they continue to be aligned with the long-term interests of our shareholders. Third, changes to Swiss law expanded the rights of shareholders in publicly listed companies, giving them a binding vote on Board and executive compensation. 42 Compensation report | ABB Annual Report 2014 Strengthening ABB’s performance culture The CC’s main task in 2014 was therefore to adapt the ex- ecutive compensation system so that it is better aligned with the interests of shareholders and supports the Next Level strategy’s goals. Additionally, the CC sought to ensure that our compensation report provides the information and trans- parency that shareholders expect. I believe that the changes made to our compensation system will further strengthen ABB’s performance culture, and that the revised report will better enable shareholders to exercise their new rights. The revised executive compensation system, which takes effect in 2015, is designed to improve business speed, agility and customer focus. It places a greater emphasis on an indi- vidual’s targets in order to drive and reward outstanding per- formance, and to achieve a balance between an individual’s and ABB’s company-wide objectives. In addition, it broadens the set of targets used to measure performance to include objectives directly related to those of the Next Level strategy such as strengthening competitiveness, driving organic growth and lowering risk. Furthermore, we have refined ABB’s long-term variable compensation plan based on the feedback from stakeholders on the design and mix of our EC compensation. The weight- ing of the component that is linked to earnings-per-share per- formance has been increased and we have added a net income vesting criterion to the other component. We are confident that the changes made to executive compensation align well both with the changing environment in which ABB operates and with the company’s Next Level strategy. My CC colleagues and I hope that this report meets your expectations and we look forward to continuing our dialogue with you. Michel de Rosen Chairman of the Compensation Committee Zurich, March 5, 2015 Compensation highlights New regulation in 2014 ABB’s compensation report has been revised and expanded compared with previous years to address feedback from stakeholders and to reflect new regulation that requires, start- ing in 2015, shareholders of publicly listed companies in Switzerland to vote on compensation for the Board of Direc- tors and executive management. The report has been prepared in accordance with ap- plicable regulations, including the Swiss Code of Obligations, the Swiss Ordinance against Excessive Remuneration in Listed Companies Limited by Shares, and the rules of the stock markets where ABB’s shares are listed in Switzer- land, Sweden and the U.S. The report also fully adheres to the Swiss Code of Best Practice for Corporate Governance. Key facts 2014 Table 1: Overview of total compensation (in CHF) Board term Board of Directors Calendar year Executive Committee 2014−2015 2013−2014 3,630,000 3,500,000 2014 2013 38,699,707 48,651,862 For a breakdown of total Board compensation by individual and component see tables 3 and 9 on pages 46 and 60. For EC compensation by individual and component see tables 10 and 11 on pages 61 and 62. For the 2014−2015 term of office, aggregate Board compen- sation increased by 3.7 percent, the first increase in seven years. The EC’s total compensation was lower in 2014 than in 2013, due to the absence of special share grants in 2014, changes in the composition of the EC in 2013, and a below- target payout on short-term variable compensation of 85.8 percent in 2014 compared with 100 percent in 2013. ABB Annual Report 2014 | Compensation report 43 Revised compensation principles for 2015 Components of EC compensation in 2015 Based on the Next Level strategy launched in September 2014 and on the feedback received from stakeholders since the last AGM, the Board has revised the compensation principles. As of 2015, those principles are: ABB’s compensation structure is designed to be competitive in local labor markets, and to encourage executives to deliver outstanding results. Also, EC compensation is designed to be balanced in terms of fixed versus variable compensation and in terms of short- versus long-term incentives: Linked and Compensation linked to the Next Level strategy and balanced performance through ambitious objectives, robust Fixed compensation Variable compensation performance monitoring and a sound balance be- tween Group and individual performance Competitive Annual base salaries of top management set between market median and upper quartile in order to attract suitable talent Base salary Short-term Long-term Purpose Compensates Rewards Encourages executives based on performance creation their responsibili- against of long-term, ties, experience and specific KPIs sustainable Performance Ambitious targets set in the Group’s planning pro- skillset driven cesses, and variable pay aimed at upper quartile when these objectives are achieved value for the shareholders Performance Individual Financial and Corporate Comprehensive All performance metrics support development influencing performance non-financial (also vs peers) KPIs of earnings per share and cash return on invested grant size or and behavior corporate and individual capital; and cover financial, operational, change payout and behavioral performance and individual performance performance Market tested Compensation mix and levels tested annually against Delivery Cash Cash benchmarks that include selected ABB peers and appropriate markets Shares and cash Principal refinements in ABB’s executive compensation system as of 2015 The Board has also refined various elements of EC compen- sation as of 2015, including: – a more comprehensive set of key performance indicators to drive the execution of the strategy and the creation of shareholder value; – in short-term variable compensation, a better balance be- tween an individual’s and the Group’s performance. In ad- dition, the Board will no longer have discretion over the size of the payout where the Group targets are exceeded; and – in long-term variable compensation, stronger performance considerations including more emphasis on the earnings- per-share development and the addition of a net income objective threshold as a vesting condition. Votes at 2015 AGM At the AGM in April 2015, ABB’s shareholders will vote on maximum aggregate compensation to the Board for the term of office running from the AGM in 2015 until the AGM in 2016, and on maximum aggregate EC compensation for the calendar year 2016. In addition, shareholders will have a non-binding vote on the 2014 compensation report (see Chart 7 on page 59). In order to provide shareholders with information for these votes, this report includes a compensation outlook, in addition to the review of compensation in 2014. The report has three sections presenting: – the principles, governance and levels of Board and EC compensation in 2014; – the main changes to compensation governance and EC compensation as of 2015; and – tables of Board and EC compensation and share/option ownership in 2014 and 2013. 44 Compensation report | ABB Annual Report 2014 1. Compensation in 2014 1.1 Board compensation governance and levels In 2014, the CC was responsible for making recommenda- tions to the Board on the level of compensation of Board members, while the Board took the final decisions (see Table 2). The Board and CC regularly benchmark the levels and mix of compensation of Board members against the compensation of non-executive board members of pub- licly traded com panies in Switzerland that are part of the Swiss Market Index. In connection with the Board’s decision to increase the number of its committees from two to three by splitting the GNCC, the Board revised its compensation structure. As a result, overall Board compensation for the 2014−2015 term of office increased 3.7 percent, the first increase since 2007. Board members are paid for their service over a 12-month Half of each member’s compensation is paid in the form of ABB shares, though Board members can choose to re- ceive all of their compensation in shares. The shares are kept in a blocked account for three years. Departing Board mem- bers are entitled to the shares when they leave the company. 2014−2015 Board compensation In connection with the Board’s decision to increase the number of its committees, the Board decided to raise compensation of its members for the 2014−2015 term of office by 3.7 percent, the first increase in seven years. At least half of each Board member’s compen- sation is paid in the form of ABB shares kept in a blocked account for three years. period that starts with their election at the AGM. Payment is made in semi-annual installments. Board members do not receive pension benefits and are not eligible to participate in any of ABB’s employee incentive programs. The number of shares delivered 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. The Board is satisfied that the compensation structure aligns the interests of its members with those of ABB’s shareholders. Table 2: Clearly defined roles and responsibilities CC Board Board compensation Aggregate compensation Compensation of individual members Recommendation Approval The CC proposes the compensation both for the entire Board and its individual members; the Board takes the respective decisions. ABB Annual Report 2014 | Compensation report 45 The compensation amounts per Board member for the 2014–2015 and 2013–2014 terms of office are shown in Table 3 below. Table 3: Total compensation per Board member Name Function Hubertus von Grünberg (1) Chairman of the Board Roger Agnelli (2) Member of the Board Matti Alahuhta (1)(4) Member of the Board Louis R. Hughes (2) Member of the Board and Chairman of the Finance, Audit and Compliance Committee Hans Ulrich Märki (3)(5) Member of the Board and Chairman of the Governance, Nomination and Compensation Committee Michel de Rosen (3)(6) Member of the Board and Chairman of the Compensation Committee Michael Treschow (1)(3)(6) Member of the Board and Chairman of the Governance and Nomination Committee Board term Board term 2014–2015 2013–2014 (CHF) (CHF) 1,200,000 1,200,000 330,000 320,000 400,000 – 350,000 380,000 330,000 320,000 300,000 – 400,000 400,000 300,000 300,000 300,000 300,000 3,630,000 3,500,000 Jacob Wallenberg (2) Member of the Board Ying Yeh (3)(6) Total Member of the Board (1) (2) (3) (4) (5) (6) Member of the Governance and Nomination Committee since April 30, 2014. Member of the Finance, Audit and Compliance Committee. Member of the Governance, Nomination and Compensation Committee until April 30, 2014. Elected as new Board member at ABB Ltd AGM on April 30, 2014. Did not stand for re-election at ABB Ltd AGM on April 30, 2014. Member of the Compensation Committee since April 30, 2014. For compensation amounts per Board member in the calen- dar years 2014 and 2013, see Table 9 on page 60. 1.2 Executive Committee compensation 1.2.1 Principles and governance The Board considers the Group’s compensation system to be an important factor in attracting, motivating and retaining people with the talent necessary to strengthen the company’s position as a global leader in power and automation. The system therefore aims to provide compensation that is competitive in local labor markets and encourages employ- ees to deliver outstanding results. At the same time, a balance between fixed and variable compensation and between short- and long-term incentives is designed to align the inter- ests of employees with those of other stakeholders and ensure that performance is sustainable. 46 Compensation report | ABB Annual Report 2014 For several years, executive compensation at ABB has been based on the principles that it should be market oriented and competitive, drive performance and reward the creation of shareholder value. Benchmarking ensured that compensa- tion was at a level that would attract and retain the key talent that ABB needs to drive its success globally, and performance metrics including financial objectives, individual performance and behavior, and the evolution of the share price, determined the compensation levels in 2014. In addition, compensation elements were focused on rewarding the delivery of outstanding and sustainable results without inappropriate risk taking. Alignment of strategy, performance and compensation The Board defines the ultimate direction of the business of ABB and regularly reviews progress on the strategy. Based on these reviews, the Board sets annual budgets and per- formance targets, and ensures that the company’s compen- sation arrangements support implementation of the strategy and reflect performance (see Chart 1). Chart 1: Cycle of alignment by the Board of strategy, performance and compensation Business cycle External engagement on compensation governance Performance cycle Business reviews and forward planning Annual results Quarter results Quarter results Quarter results Stakeholder roadshow Regular update and review of external benchmarks and compensation trends including dialogue with external stakeholders and evaluation of feedback Performance review Setting of objectives for short-term variable compensation 3 year look-back assessment and setting of objectives for LTIP Annual grant of LTIP awards Annual performance development appraisal of individuals Compensation decisions Annual salary review Short-term variable compen- sation payout To effectively align strategy, performance and compensation, the target setting and review processes are directly linked to the financial and budget processes. Jan Dec The Board and its Compensation Committee (CC) have direct oversight of compensation principles and of executive com- pensation at ABB. The CC is responsible for developing the general compensation principles and practices of ABB and for recommending them to the full Board, which takes the final decisions (see Table 4 on page 48). The Board’s responsibility for compensation governance The Board sets the compensation principles for ABB and the compensation of members of the Executive Committee (EC). It ensures that strategy, performance and compensation are aligned. The CC, on behalf of the Board, regularly reviews the compensation policy and structure, and recommends to the Board specific proposals on executive compensation to ensure that they are consistent with ABB’s compensation principles. Information on the meetings held in 2014 by the CC and its predecessor, the GNCC, can be found in section 5.4 of the Corporate governance report. Annual reviews Each year, the Board reviews the CEO’s performance while the CEO reviews the performance of other EC members and makes recommendations to the CC on their individual compensation. For 2014, the full Board took the final deci- sions on compensation for all EC members, none of whom participated in the deliberations on their own compensation. The Board also sets the ABB annual objectives that determine short-term variable compensation, taking into ac- count the recommendations of the CC. The Board and CC drive and steer the continuous develop- ment of ABB’s executive compensation system to ensure that it attracts, motivates and retains people with the talent necessary to strengthen the company’s position as a global leader in power and automation. The Board sets the overall grant size of the Long-Term Incentive Plan (LTIP), the principal mechanism through which ABB encourages executives to create shareholder value over the long term, and approves the individual grants made to the CEO and other EC members. ABB Annual Report 2014 | Compensation report 47 Table 4: The Board decides on EC compensation CEO CC Board EC compensation Maximum aggregate compensation CEO compensation Compensation of other EC members Proposal Recommendation Approval Compensation levels for the CEO are proposed by the CC, while those of the other EC members are proposed by the CEO. The Board is responsible for all approvals. Benchmarks ABB uses benchmarks and third-party consultants to evaluate positions throughout the company; assess the competitive- ness of EC compensation levels; analyze market trends with regard to executive compensation design and mix; and pro- vide advice on compensation. The objective is to encourage outstanding performance that delivers sustainable results without excessive risk taking. In addition to the benchmarks mentioned above, the Board considered individual performance, experience, poten- tial and the prevailing conditions in the market, when setting each EC member’s compensation. All senior positions in ABB have been evaluated using a The main components of executive compensation in 2014 consistent methodology developed by the Hay Group, whose job evaluation system is used by more than 10,000 compa- nies around the world. This approach provides a meaningful, transparent and consistent basis for comparing compensa- tion levels at ABB with those of equivalent jobs at other com- panies that have been evaluated using the same criteria. In 2014, the Board primarily used the General Pan-Euro- pean Market data in Hay’s annual Top Executive Compensa- tion in Europe survey to set EC compensation, which was targeted to be above the median values for the market. Other indicators considered included Hay’s data on the Swiss and European industry markets and on U.S. peers. Hostettler & Company (HCM), an independent consultant specializing in performance management and compensation, provides advice to the CC in the area of compensation. HCM has no other mandate with ABB. 1.2.2 Components of EC compensation ABB aims for total EC compensation to be competitive, as well as balanced in terms of fixed versus variable compensa- tion and in terms of short- versus long-term incentives. It also aims to reflect performance considerations in each com- ponent of executive compensation, as shown in Chart 2. 48 Compensation report | ABB Annual Report 2014 were unchanged from the previous year and consisted of: cash compensation including base salary, short-term variable compensation, pension and other benefits; and share-based compensation in the form of grants under the LTIP. Fixed compensation – Annual base salary and benefits The base salary for members of the EC is set taking into account positions of comparable responsibility outside ABB. When considering changes in base salary, the executive’s performance during the preceding year against individual objectives is taken into account. Members of the EC received pension benefits, paid into the Swiss ABB Pension Fund and the ABB Supplemen- tary Insurance Plans (the regulations are available at www.abbvorsorge.ch), except for one member who is cov- ered under the plans of ABB Inc. in the U.S. The compensa- tion of EC members also included social security contribu- tions and other benefits, as outlined in Table 10 on page 61. Tax equalization was provided for EC members resident outside Switzerland to the extent that they were not able to claim a tax credit in their country of residence for income taxes they paid in Switzerland. Chart 2: Linkage of EC compensation components to performance Fixed compensation Variable compensation Base salary Benefits Short-term variable compensation Long-Term Incentive Plan Performance component Long-Term Incentive Plan Retention component Performance period Previous 1 year Next 1 year Next 3 years Performance measures affecting allocation Individual objectives Performance measures affecting payout ABB financial and non-financial objectives Earnings per share Previous 1 year and 3 years Size of EC grant: ABB performance in previous 3 years Size of individual grant: performance in previous year Payment Cash Cash-based Cash Cash Shares and cash The compensation of EC members consists of a base salary and benefits, a short-term variable component dependent on annual performance objectives, and a long-term variable component. Variable compensation Short-term variable compensation Payment of the short-term variable component of compensa- tion for 2014 was conditional on the fulfillment of predefined ABB performance objectives that were specific, quantifiable and challenging. The 2014 objectives, shown in Table 5 on page 51, were aligned with strategic targets that had been communicated to shareholders. Fully achieving the objectives would have resulted in a payout 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 would have resulted in a lower payout, or none at all if performance had been below the defined threshold for each of the objectives. If the objectives had been exceeded, the Board would have had the authority to approve a payout that was up to 50 percent higher, repre- senting up to 225 percent of the base salary for the CEO and 150 percent of the base salary for other members of the EC. Under the terms and conditions of the LTIP, the Board decides whether EC members who leave the company before the end of the three-year period forfeit the unvested grant, or receive all or a portion of such grants. The Board also decides whether to grant LTIPs to new participants or Continuity in 2014 Executive compensation in 2014 consisted of a base salary and benefits, a short-term variable component and a long-term variable component. Neither the components of executive compensation nor the EC structure changed in 2014 compared with the previous year. Long-term variable compensation An important principle of executive compensation at ABB is that it should encourage EC members to drive the creation of long-term value for the company’s shareholders in a sustainable way. Granted annually, LTIPs are the principal mechanism through which this is achieved. change the size of an LTIP grant to an existing participant for up to six months after the launch of a plan, if the existing participant’s responsibilities change. These Board decisions are made taking into account the recommendations of the CC. The LTIP granted in 2014 comprised a performance component and a retention component. Their proportions in relation to the base salary are explained in Section 1.2.3. ABB Annual Report 2014 | Compensation report 49 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. The payout is based on ABB’s weighted cumulative EPS performance against predefined objectives. This EPS objec- tive is primarily based on an investor’s perspective and is derived taking into account the growth expectations, risk pro- files, investment levels and profitability levels that are typical for the industry (ie, outside-in view). The EPS target-setting process assumes that investors expect a risk-adjusted return on their investment which is based on market value (and not book value), and translates such expected returns over a three-year period into EPS targets. The weighted cumulative EPS result 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 at 200 percent of the reference number of shares conditionally granted if performance exceeds the upper threshold. The payout per- centages are shown in Chart 3. The payout at the end of the three-year period, if any, will be made in cash. (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. Chart 3: Alignment with shareholders by linking payout of performance component to EPS development Retention component This component of the LTIP granted in 2014 aimed to retain executives at ABB. Members of the EC were conditionally granted shares, which are delivered at the end of the vesting period generally three years from grant date, subject to ful- fillment of the vesting conditions, which required them to be employed by ABB as of the vesting date. Upon vesting, EC members will receive 70 percent of the payout in shares and the remainder in cash, unless they elect to receive 100 percent in shares. Share delivery under LTIP Shares under our LTIP are typically delivered from treasury shares. Our contingent share capital, together with our treasury shares, is used to cover our obligations in connection with our share plans, including our conditional share grants under the LTIP. In addition, the Board has determined that any dilution of shareholders in connection with LTIP share deliveries shall not exceed 1 percent annually. Vesting in 2014 of performance component of 2011 LTIP There was no payout for the performance component of the 2011 LTIP that vested in 2014. This was the last LTIP in which the value created for the company’s shareholders was measured in terms of total shareholder return, which is the percentage change in the value of the ABB share plus divi- dends over a three-year period relative to a specific group of peers. EPS was adopted as the relevant measure for the performance component of LTIP launches beginning in 2012. Payout % of reference number of shares under the performance component 1.2.3 Level of EC compensation Overview There were no changes to the composition of the EC during 2014, nor to the design and mix of compensation. Due mainly to factors in 2013 that were not repeated in 2014, total EC compensation was lower in 2014 than in the previous year. For a breakdown of compensation by individual and compo- nent in each of these years, see Table 10 on page 61 and Table 11 on page 62. Total cash-based compensation was 25.8 million Swiss francs in 2014 compared with 29.0 million Swiss francs in 2013. The difference is mainly attributable to ABB not achieving the target performance in some of the 2014 objectives for short-term variable compensation. 200% 100% 0% Lower On target threshold (no payout) Upper threshold (maximum payout) Weighted cumulative earnings per share The LTIP rewards participants for increasing EPS over a three-year period. The payout of the performance component is based on ABB’s weighted cumulative EPS performance against predefined objectives. 50 Compensation report | ABB Annual Report 2014 Share-based compensation was 12.9 million Swiss francs in 2014 compared with 19.7 million Swiss francs in 2013. The difference is mainly attributable to the absence of special share-based grants in 2014 and changes in the composition of the EC during 2013. In 2014, fixed compensation represented 33 percent of the CEO’s compensation and an average of 46 percent for the other EC members. The ratio of fixed to variable compo- nents in any given year will depend on the performance of the individuals and of the company against predefined ABB performance objectives. Base salary and benefits The base salary and benefits are fixed elements of the annual EC compensation packages, while the other components are variable. The benefits consist primarily of pension contri- butions. Other benefits comprise mainly social security and health insurance contributions. Short-term variable compensation Although the company exceeded the short-term objectives for orders, cost savings and Net Promoter Score (NPS) set by the Board, it was below target but above threshold on revenues, operational EBITDA and operating cash flow (see Table 5). This resulted in a payout of 85.8 percent of the target short-term compensation, compared with 100 percent in 2013. Long-term variable compensation Performance component At the launch of the 2014 LTIP, participants were allocated a reference number of conditionally granted shares for the performance component that was equivalent to 67 percent of base salary for the CEO (compared with 100 percent for the previous CEO in 2012) and 42 percent for the other members of the EC. Table 5: Group-wide 2014 objectives and performance for short-term variable compensation Objective(1) Orders received Revenues Operational EBITDA(2) Operating cash flow(3) Cost savings Net Promoter Score(4) Weighting Performance 12.5% 12.5% 25% 25% 15% 10% On or above target Above threshold and below target Below threshold (1) (2) (3) (4) The financial objectives exclude the impact of currency fluctuations, major acquisitions and divestments, and the impact of discontinued operations where appropriate. 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 cash impact of interest, taxes, restructuring-related activities and one-time pension contributions. Net Promoter Score (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 2014, ABB had a target to increase the proportion of countries that have improved their NPS compared to the previous year. Short-term variable compensation payout is dependent on performance. ABB Annual Report 2014 | Compensation report 51 The performance component of LTIP is valued at the grant date using the ABB share price and Monte Carlo mod- eling, a mathematical technique that calculates a range of outcomes and the probability that they will occur. The model is an accepted simulation method under U.S. generally accepted accounting principles (U.S. GAAP – the accounting standard used by ABB). Retention component For the retention component in 2014, the reference grant size for the CEO was equivalent to 100 percent of base salary. The other EC members received a grant from a pool whose reference size was equivalent to 65 percent of their com- bined base salaries. 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 against its peers over the three years preceding the launch of the plan. In 2014, the Board assessed ABB’s 2011–2013 performance on: revenue growth, cash return on invested capital, EBITDA margin, share price development, share price to earnings ratio, NPS development, integrity and safety performance. Compensation of former EC members Furthermore, in 2014, certain former EC members received contractual compensation for the period after leaving the EC. The compensation included the base salary, benefits and short-term variable compensation for 2014. The compensation is shown gross (ie, before deduction of employee’s social insurance and pension contributions) in Table 12 on page 63. Compensation to former EC members in 2013 is shown in Table 13 on page 63. 1.2.4 Share ownership and severance provisions Share ownership requirement To further strengthen the alignment of executives’ interests with those of shareholders, EC members are required to build up a holding of ABB shares that is equivalent to a multiple of their base salary, as set out in Table 6. Table 6: Share ownership requirements for EC members Based on the strong NPS development, revenue growth Other EC members Chief Executive Officer 5 × base salary 4 × base salary and cash return ratios identified in the assessment, and on a significant improvement in integrity processes, the Board increased the reference grant size of the retention component in the 2014 LTIP launch by 22 percent in aggregate for all EC participants. The Board allocated shares from this pool to each indi- vidual EC member, based on an assessment of their individual performance in 2013. The number of shares conditionally granted to EC members under LTIP during 2014 is included in Table 14 on page 64. Other compensation 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. Seven members of the EC participated in the 11th annual launch of the plan. EC members who participated in that launch are each entitled to acquire up to 480 ABB shares at 20.97 Swiss francs per share, the market share price at the start of that launch. For a more detailed description of ESAP, 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. Only shares owned by an EC member and the member’s spouse are included in the share ownership calculation. Vested and unvested options are excluded. As the level of the shareholding requirement is high relative to market practice, the Board has determined that members of the EC should aim to reach these multiples within five years of their appointment. The CC reviews the status of EC share ownership on an annual basis. It also reviews the required shareholding amounts annually, based on salary and expected share price developments. Notice and severance provisions Employment contracts for EC members contain notice periods of 12 months, during which they are entitled to compensation comprising their base salary, benefits and short-term variable compensation. Since January 1, 2013, contracts for new EC members no longer include a provision extending compensa- tion for up to 12 additional months if their employment is terminated by ABB and if they do not find alternative employ- ment within the notice period that pays at least 70 percent of their compensation. In accordance with Swiss law and ABB’s Articles of Incorporation, the contracts for the other EC members will be amended in 2015 to exclude this provision. 52 Compensation report | ABB Annual Report 2014 As of December 31, 2014, members of the EC held ABB shares (or American Depositary Shares – ADS – representing such shares), the conditional rights to receive shares under the LTIP, options (either vested or unvested as indicated) under the Management Incentive Plan (MIP), and unvested shares in respect of other compensation arrangements, as shown in Table 17 on page 67. Their holdings as of December 31, 2013, are shown in Table 18 on page 68. Furthermore, as of December 31, 2014, members of the EC held Warrant Appreciation Rights (WARs) and conditionally granted ABB shares under the performance component of the LTIP 2014, 2013 and 2012, which at the time of vesting will be settled in cash, as shown in Table 19 on page 69. Their equivalent holdings as of December 31, 2013, are shown in Table 20 on page 70. Members of the EC cannot participate in the MIP. Any MIP instruments held by EC members were awarded to them as part of the compensation they received in earlier roles that they held in ABB. Except as described in tables 17–20, 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 as of December 31, 2014 and 2013. 2. Revisions taking effect in 2015 Effective as of 2015, the Board is modifying ABB’s compen- sation system to reflect valuable feedback from our stake- holders and to align it with the Next Level strategy presented in September 2014. In addition changes were made to ABB’s Articles of Incorporation at the 2014 AGM to reflect a change in Swiss law giving shareholders a greater say on Board and executive compensation. These changes include the right to elect the members of the CC as well as to approve the maximum aggregate amounts of Board and EC compensation. 1.3 Additional information about 2014 1.3.1 Additional compensation information In 2014, ABB did not pay any fees or compensation 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 compensation in 2014 to per- sons closely linked to a member of the Board or the EC for services rendered to ABB. Except as disclosed in this Compensation report, ABB did not make any payments in 2014 to former members of the Board or the EC in connection with such roles. Following the spirit of ABB’s compensation policy, 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. No loans or guarantees were granted to members of the Board or the EC in 2014. 1.3.2 Holdings of ABB shares The members of the Board and EC owned less than 1 percent of ABB’s total shares outstanding as of December 31, 2014. Table 16 on page 66 shows the number of ABB shares held by each Board member as of December 31, 2014 and 2013. Except as described in this table, 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. No additional fees and com- pensation; Board and EC owned <1% of ABB’s shares In 2014, ABB did not pay any additional fees or compensation to members of the Board or EC, to people closely linked with them, or to former members of the Board or EC in con- nection with such role. The members of the Board and EC owned less than 1 percent of ABB’s shares at the end of 2014. ABB Annual Report 2014 | Compensation report 53 2.1 Changes to compensation governance Starting in 2015, the process for approval of maximum aggregate compensation of each of the Board and the EC will be as follows: Table 7: Shareholders vote on maximum aggregate compensation of both Board and EC CEO CC Board Shareholders Board compensation Maximum aggregate compensation Compensation of individual members EC compensation Maximum aggregate compensation CEO compensation Compensation of other EC members Proposal Recommendation Approval The table shows the new levels of decision-making authority as of 2015. Up to and including 2014, the Board took the final decision on the level of compensation for its members and the EC, as illustrated in Tables 2 and 4 on pages 45 and 48. The Board’s proposals to shareholders at the 2015 AGM will relate to compensation in the 12 months following the AGM for the Board and in the calendar year 2016 for the EC. The Board will propose a fixed level of compensation for its own members. For the EC, the Board will propose a compensation package in which some components are dependent on per- formance. The EC’s maximum aggregate compensation for 2016 will consist of the total base salary and benefits of its members, the maximum possible payout of the short-term variable com- pensation component, and the value of the maximum pos- sible LTIP grant calculated according to the method described in Section 1.2.3. Shareholders will have a non-binding, consultative vote on the compensation report for 2014. 2.2 Changes to executive compensation structure 2.2.1 Guiding principles The new executive compensation system is designed to support the achievement of financial targets and improvements in key operations, and to drive focused change and the related leadership behaviors required. To help achieve these goals, the Board has further devel- oped ABB’s key principles of executive compensation: – Linked and balanced: Compensation is linked to the Next Level strategy and performance through ambitious objec- tives, robust performance monitoring and a sound balance between Group and individual performance 54 Compensation report | ABB Annual Report 2014 Stronger linkage of pay to performance The Board has adapted executive compensa- tion to take into account feedback from stake- holders and align performance objectives with those of the company’s Next Level strategy. All performance metrics support the interest of shareholders by driving earnings per share and cash return on invested capital. – Competitive: Annual base salaries of top management are set between the market median and upper quartile in order to attract suitable talent – Performance driven: Ambitious objectives are set in ABB’s planning processes, and variable pay is aimed at the upper quartile level when these objectives are met – Comprehensive KPIs: All performance metrics support the development of earnings per share and cash return on invested capital, and cover financial, operational, change and behavioral performance – Market tested: Compensation mix and levels are tested an- nually against benchmarks that include selected ABB peers and appropriate markets in which the company operates These principles represent an evolution of the principles that governed executive compensation at ABB until 2014 (see Section 1.2.1), and their adaptation to the requirements of the company’s new strategic objectives. 2.2.2 Compensation link with Next Level strategy and performance Following the revision of the key principles of executive com- pensation, the Board has changed the design of certain ele- ments to strengthen the focus on performance that directly supports the Next Level strategy’s goals. The system therefore places greater emphasis on an individual’s objectives than in the past, and introduces a broader set of performance metrics (see Chart 4). These changes will help management ensure that the results are achieved in a sustainable way. Base salary The annual review of individual performance assesses each EC member’s results and behavior with respect to the Next Level strategy’s objectives. Short-term variable compensation Formerly based entirely on ABB Group’s performance, short- term variable compensation for each EC member will from 2015 be based on a balance between the Group’s results and the member’s individual performance. The change reflects the Board’s aim to align incentives more closely to the role of each EC member in implementing the Next Level strategy in his or her areas of responsibility, to strengthen rewards for outstanding individual performance, and to achieve a better balance in compensation between company and individual performance. Individual objectives will cover key performance indica- tors that go beyond the Group’s results. They will include metrics that help the management to assess whether the results are achieved in a sustainable way, and with the appropriate processes and changes required to deliver the intended long-term results. These individual objectives will include the following types of objectives aligned with the Next Level strategy: Financial Operational eg, drivers of earnings per share and cash return on invested capital eg, improvements in costs, cash, customer satisfaction and safety Change Leadership eg, contribution to imple- mentation of the Next Level strategy and its attendant change programs eg, behavior that supports strategic direction ABB Annual Report 2014 | Compensation report 55 Chart 4: Short-term variable compensation linked to clearly defined objectives Performance measures Payout % Group objectives 4–6 parameters (eg, orders received, revenues, EBITA, operational cash flow) 150% Individual objectives – Additional financial objective – Operational execution metrics – Goals under change programs – Leadership objectives 100% 50% 0% Above target payout calculated, not discretionary Lower threshold (no payout) On target point for 100% payout Performance The short-term variable compensation component will be based on a balance between Group and individual performance as of 2015. Payout, if any, is proportional to the calculated performance up to the level at which it is capped. This component will continue to be settled in shares (70 percent) and cash (30 percent), although beneficiaries can elect to receive 100 percent in shares. Performance component 2 (P2) The component based on earnings-per-share performance has been given a larger weighting of 50 percent (previously 40 percent). This component, previously settled in cash, will be settled in shares (70 percent) and cash (30 percent), although beneficiaries can elect to receive 100 percent in shares, to further strengthen the alignment of EC members’ interests with those of shareholders. Payment will continue to be conditional on the fulfillment of predefined annual objectives that are specific and challenging. Performance that is below these objectives results in a lower payout, or none at all if performance is below a certain thresh- old. If the objectives are exceeded, the payout may be up to 50 percent higher. However, the short-term variable compen- sation payout for 2015 will be directly proportional to the degree of performance achieved up to the level at which it is capped. Previously, the size of the payout for exceeding the objectives was at the Board’s discretion, up to the cap of 150 percent. Long-term variable compensation ABB has also revised the structure of LTIP, starting with the plan to be launched in 2015, to improve the emphasis on performance measures (see Table 8 on page 57). Performance component 1 (P1) The size of this component at the grant date will continue to depend on ABB’s performance in the preceding three years and on the individual’s performance in the preceding year, but its weighting has been reduced to 50 percent from 60 percent. The vesting of this component is subject to ABB achieving a net income threshold in the financial year prior to the year in which the plan vests. 56 Compensation report | ABB Annual Report 2014 Table 8: LTIP components with increased emphasis on performance Design up to 2014 Retention component... Performance component... Weighting Delivery 60% Shares and cash 40% Cash Design as of 2015 ... becomes Performance component 1 (P1) ... becomes Performance component 2 (P2) Weighting Delivery 50% Shares and cash 50% Shares and cash As of 2015 the weighting of the component based on EPS performance has been increased and a net income threshold has been introduced for the other component. More of the LTIP will be settled in shares to better align the interests of EC members with those of shareholders. 2.2.3 Illustration of compensation amounts in 2014, 2015 and 2016 Relative size of compensation components The components of EC compensation can vary in size. Chart 5 shows the relative proportions of the components under minimum, target and maximum scenarios under the revised EC compensation system taking effect in 2015. Chart 5: Size of compensation components under different scenarios Base salary and benefits t u o y a P Short-term variable compensation Minimum Target Maximum Base salary and benefits are generally stable. 100% 100% 150% There will be no payout of this component if performance is below threshold in all performance criteria. When performance exceeds targets, this component is capped at 150% of the targeted amount. 0% 87.5% t Long-term variable n compensation a r g l a n o i t i d n o C 100% 112.5% The reference grant size of half of the LTIP (Performance com- ponent 1) may be increased or decreased by 25% depending on ABB’s performance in the preceding three years. Consequently, the total fair value at grant of ABB’s LTIP may vary from 87.5% to 112.5% of the fair value of the unadjusted reference grant size. However, the ultimate payout on vesting depends on meeting the performance criteria of the plan. ABB Annual Report 2014 | Compensation report 57 Chart 6: Overview of considerations in calculation of maximum aggregate EC compensation Aggregate EC compensation in Swiss francs (millions) 2014 38.7 39.3 46.3 2015 xx 2016 xx Factor in normal salary increases and addition of 1 EC member Factor in normal salary increases Actual Target Maximum Maximum Maximum 11 EC members 12 EC members 100% 150% 0% +25% 150% +25% 150% +25% Assumptions Short-term variable compensation payout percentage Adjustment of LTIP retention component (2014) and performance component 1 (P1) (2015, 2016). Considerations in shareholder proposal Chart 6 illustrates the considerations in the proposal for the maximum aggregate compensation for the EC for 2016, which will be submitted to shareholders for their approval at the 2015 AGM. The maximum aggregate compensation amount submitted to shareholders for approval will almost always be higher than the actual payout, as it must cover the potential maxi- mum value of each component of compensation. 2.3 Responding to shareholder expectations The new design of executive compensation described above is the outcome of a thorough review of stakeholder expectations undertaken by the CC and the Board. It takes into account the feedback provided in dialogue with stakeholders as well as the goals of a new strategy fully focused on delivering value for shareholders in the form of higher earnings per share and cash return on invested capital. Our independent consultant and the use of benchmarks have helped to ensure that the revised system is also well- aligned with practices at ABB’s peers and other companies of similar size operating in comparable markets. 58 Compensation report | ABB Annual Report 2014 Chart 7: Shareholders will have three separate votes on compensation at 2015 AGM d r a o B C E n o i t a s n e p m o c n o i t a s n e p m o c n o i t a s n e p m o C t r o p e r Binding vote on maximum aggregate compensation for Board in 2015 − 2016 term of office Binding vote on maximum aggregate compensation for EC in 2016 Non-binding vote on 2014 compensation report 2014 April AGM Compensation period Date of vote 2015 2016 April AGM April AGM At the 2015 AGM there will be separate binding votes on maximum aggregate compensation for the Board in its 2015−2016 term of office and on maximum aggregate compensation for the EC in 2016. There will also be a non-binding vote on the 2014 Compensation report. With its stronger emphasis on performance, on a balance of Group and individual objectives, on behavioral change and on metrics that directly reflect the Next Level strategy’s goals, the Board believes that the new system of executive compensation is fully aligned with the interests of ABB’s shareholders. Finally, the Swiss Ordinance against Excessive Remu- neration in Listed Companies Limited by Shares means ABB’s shareholders will have greater influence on compensation, as illustrated by Chart 7 above. ABB Annual Report 2014 | Compensation report 59 3. Compensation and share ownership tables Table 9: Board compensation in 2014 and 2013 Paid in 2014 Paid in 2013 November May November May Board term 2014–2015 Board term 2013–2014 Board term 2013–2014 Board term 2012–2013 – 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 ( ) 4 ( ) 3 ( 4 1 0 2 n i 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 1 0 2 n i d i a p (CHF) Name/Function Hubertus von Grünberg (6) Chairman of the Board – 20,976 – 19,563 1,200,000 – 19,616 – 19,739 1,200,000 Roger Agnelli (7) Member of the Board 82,500 2,779 75,000 2,359 315,000 75,000 2,419 75,000 2,442 300,000 Matti Alahuhta (6)(8) Member of the Board 80,000 2,912 – – 160,000 – – – – – Louis R. Hughes (7) Member of the Board and Chairman of the Finance, Audit and Compliance Committee 100,000 3,417 100,000 3,172 400,000 100,000 3,233 100,000 3,264 400,000 Hans Ulrich Märki (9)(10) Member of the Board and Chairman of the Gover- nance, Nomination and Compensation Committee – – – 8,229 200,000 – 8,966 – 9,018 400,000 Michel de Rosen (9)(11) Member of the Board and Chairman of the Compensation Committee 87,500 3,185 75,000 2,547 325,000 75,000 2,629 75,000 2,646 300,000 Michael Treschow (6)(9)(11) Member of the Board and Chairman of the Gover- nance and Nomination Committee Jacob Wallenberg (7) 95,000 3,458 75,000 2,547 340,000 75,000 2,629 75,000 2,647 300,000 Member of the Board 82,500 3,003 75,000 2,547 315,000 75,000 2,629 75,000 2,647 300,000 Ying Yeh (9)(11) Member of the Board 80,000 2,736 75,000 2,391 310,000 75,000 2,460 75,000 2,474 300,000 Total 607,500 42,466 475,000 43,355 3,565,000 475,000 44,581 475,000 44,877 3,500,000 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Represents gross amounts paid, prior to deductions for social security, withholding tax etc. Number of shares per Board member is calculated based on net amount due after deductions for social security, withholding tax etc. For the 2014–2015 Board term, all members elected to receive 50% of their gross compensation in the form of ABB shares, except for Hubertus von Grünberg who elected to receive 100%. For the 2013–2014 and 2012–2013 Board terms, 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 addition to the Board remuneration stated in the above table, the Company paid in 2014 and 2013, CHF 664,870 and CHF 147,290, respectively, in related social security payments. The increase in 2014 compared to 2013 was primarily related to the reassessment and settlement of social security payments in various jurisdictions. Member of the Governance and Nomination Committee since April 30, 2014. Member of the Finance, Audit and Compliance Committee. Elected as new Board member at ABB Ltd AGM on April 30, 2014. Member of the Governance, Nomination and Compensation Committee until April 30, 2014. Did not stand for re-election at ABB Ltd AGM on April 30, 2014. Member of the Compensation Committee since April 30, 2014. 60 Compensation report | ABB Annual Report 2014 Table 10: EC compensation in 2014 Name Ulrich Spiesshofer (4) Eric Elzvik Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan (5) Greg Scheu (6) Pekka Tiitinen Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin 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) 1,600,004 2,059,200 850,007 850,007 1,000,001 748,145 792,670 700,001 794,426 770,006 969,009 700,001 729,300 729,300 858,000 641,908 680,111 600,600 686,400 660,660 831,402 600,600 ) 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 4 1 0 2 ) 3 ( 4 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 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 4 1 0 2 (CHF) (CHF) (CHF) (CHF) 633,857 4,558,386 3,020,437 7,578,823 287,769 280,473 410,421 607,503 192,980 192,747 622,037 303,877 510,281 263,397 2,131,667 2,110,886 991,551 991,551 3,123,218 3,102,437 2,555,877 1,166,531 3,722,408 2,326,074 1,673,480 1,721,393 894,155 849,085 816,592 3,220,229 2,522,565 2,537,985 2,338,640 1,053,812 3,392,452 2,009,871 898,250 2,908,121 2,602,421 1,250,933 3,853,354 1,800,949 937,166 2,738,115 s t i f e n e b n o i s n e P (CHF) 265,325 264,591 251,106 287,455 328,518 7,719 228,045 235,777 275,328 291,729 236,951 Total current Executive Committee members as of Dec. 31, 2014 9,774,277 9,077,481 2,672,544 4,305,342 25,829,644 12,870,063 38,699,707 (1) (2) (3) (4) (5) (6) Represents accruals of the short-term variable compensation for the year 2014 for all EC members, which will be paid in 2015, after the publication of the financial results. 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. 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 (August 12, 2017), 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. The estimated values have been calculated using the market value of the ABB share on the day of grant and additionally, in the case of the performance component of the LTIP, the Monte Carlo simulation model. The above compensation figures for Ulrich Spiesshofer represent compensation in respect to his first full calendar year of service as CEO. His annual base salary remained unchanged at CHF 1,600,000. 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 2014. All AED amounts were converted into Swiss francs at a rate of CHF 0.2694219 per AED. Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 0.9896 per USD. ABB Annual Report 2014 | Compensation report 61 Table 11: EC compensation in 2013 Name Ulrich Spiesshofer (appointed 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) 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 as of Dec. 31, 2013 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)(9) 1,423,758 2,135,625 207,007 948,293 4,714,683 Michel Demaré (CFO until January 31, 2013)(9) 100,001 100,000 23,154 9,618 232,773 Gary Steel (EC member until November 15, 2013)(9) 704,376 704,375 255,253 202,724 1,866,728 Prith Banerjee (EC member until May 31, 2013)(9) 291,667 218,750 101,173 233,192 844,782 Brice Koch (EC member – – – – – 4,714,683 – 232,773 – 1,866,728 – 844,782 until November 30, 2013)(9) 773,285 776,050 221,812 249,888 2,021,035 1,005,590 – 3,026,625 Total former Executive Committee members as of Dec. 31, 2013 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) (9) Represents accruals of 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 was paid in 2014, after the publication of the final results. 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. 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 additionally, in the case of the performance component of the LTIP, the Monte Carlo simulation 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 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). The compensation of former EC members was for their period of service as an EC member during 2013. 62 Compensation report | ABB Annual Report 2014 Table 12: Compensation to former EC members in 2014 Name Joe Hogan Base salary (CHF) Short-term variable compensation(1) Pension benefits Other benefits(2) 2014 Total cash-based compensation (CHF) (CHF) (CHF) (CHF) (CEO until September 15, 2013)(3) 502,503 753,750 74,194 1,126,823 2,457,270 Michel Demaré (CFO until January 31, 2013)(4) – Gary Steel (EC member until November 15, 2013)(4) 422,515 Brice Koch – – – 186,950 186,950 121,549 402,535 946,599 (EC member until November 30, 2013)(4) 33,785 35,250 20,547 179,815 269,397 Prith Banerjee (EC member until May 31, 2013)(5) Total – 958,803 – 789,000 – 2,700 216,290 1,898,823 2,700 3,862,916 (1) (2) (3) (4) (5) The short-term variable compensation was paid in 2014 at the time of departure from ABB. Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items. The compensation of Joe Hogan was for the period January 1 to March 31, 2014, during which he was acting as a Senior Adviser to the ABB Board. The compensation of Michel Demaré, Gary Steel and Brice Koch represents contractual obligations of ABB to those individuals in 2014, up to the time of their departure from ABB. Prith Banerjee received tax advice related to his period of employment with ABB. Table 13: Compensation to former EC members in 2013 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 was 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 up to December 31, 2013. ABB Annual Report 2014 | Compensation report 63 Table 14: LTIP grants in 2014 Name Ulrich Spiesshofer Eric Elzvik Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu Pekka Tiitinen Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin 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 0 2 e h t f o t n e n o p m o c ) 4 ( ) 1 ( P I T L e h t f o h c n u a l 51,489 17,147 17,147 20,173 15,463 14,684 14,122 16,139 15,534 19,548 14,122 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 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 ( 4 1 0 2 n i P I T L e h t f o (CHF) 1,110,670 369,878 369,878 435,152 333,553 316,749 304,626 348,135 335,084 421,670 304,626 s e r a h s n o i t n e t e r f o r e b m u N 4 1 0 2 e h t r e d n u d e t n a r g ) 3 ( ) 1 ( P I T L e h t f o h c n u a l 93,846 30,549 30,549 35,940 27,548 26,159 25,158 34,677 27,674 40,750 31,083 r e d n u s t n a r g d e s a b - e r a h s t n e n o p m o c n o i t n e t e r e h t f o e u l a v d e t a m i t s e l a t o T ) 2 ( 4 1 0 2 n i P I T L e h t f o (CHF) s e r a h s f o r e b m u n l a t o T 4 1 0 2 e h t r e d n u d e t n a r g ) 1 ( P I T L e h t f o h c n u a l 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 ( 4 1 0 2 n i P I T L e h t (CHF) 1,909,767 145,335 3,020,437 621,673 621,673 731,379 560,602 532,336 511,966 705,677 563,166 829,263 632,540 47,696 47,696 56,113 43,011 40,843 39,280 50,816 43,208 60,298 45,205 991,551 991,551 1,166,531 894,155 849,085 816,592 1,053,812 898,250 1,250,933 937,166 Total Executive Committee members as of December 31, 2014 215,568 4,650,021 403,933 8,220,042 619,501 12,870,063 (1) (2) (3) (4) Vesting date August 12, 2017. 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 delivering 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 addition to the above awards, seven members of the EC participated in the 11th launch of ESAP which will allow them to save over a 12-month period and, in November 2015, use their savings to acquire ABB shares under the ESAP. All EC members who participated in ESAP are each entitled to acquire up to 480 ABB shares at an exercise price of CHF 20.97 per share. No parties related to any of the EC members received any fees or remuneration for services rendered to ABB, other than on an arm’s length basis. A related party includes a spouse, children below the age of 18, legal or natural per- sons acting as a fiduciary and legal entities controlled by a member of the EC. No loans or guarantees were granted to EC members in 2014. 64 Compensation report | ABB Annual Report 2014 Table 15: LTIP grants in 2013 Name Ulrich Spiesshofer 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 3 1 0 2 e h t f o t n e n o p m o c ) 4 ( ) 1 ( P I T L e h t f o h c n u a l 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 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 f o (CHF) 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 0 2 e h t r e d n u d e t n a r g ) 3 ( ) 1 ( P I T L e h t f o h c n u a l r e d n u s t n a r g d e s a b - e r a h s t n e n o p m o c n o i t n e t e r e h t 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 f o (CHF) s e r a h s f o r e b m u n l a t o T 3 1 0 2 e h t r e d n u d e t n a r g ) 1 ( P I T L e h t f o h c n u a l 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) (appointed as 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) 16,593 421,250 28,311 584,340 44,904 1,005,590 Total former Executive Committee members as of December 31, 2013 16,593 421,250 28,311 584,340 44,904 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, nine members of the EC participated in the 10th launch of ESAP allowing them to save over a 12-month period and, in November 2014, use their savings to acquire ABB shares under the ESAP. All EC mem- bers who participated in ESAP were 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 condi- tions of the 10th launch of ESAP, each participant would receive one share free of charge for every 10 shares purchased. No parties related to any of the EC members received any fees or remuneration for services rendered to ABB, other than on an arm’s length basis. A related party includes a spouse, children below the age of 18, legal or natural persons acting as a 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 2014 | Compensation report 65 Table 16: Board ownership of ABB shares Name Hubertus von Grünberg Roger Agnelli Matti Alahuhta (1) Louis R. Hughes Hans Ulrich Märki (2) Michel de Rosen Michael Treschow Jacob Wallenberg (3) Ying Yeh Total Total number of shares held December 31, 2014 December 31, 2013 253,264 170,671 17,912 72,742 – 139,602 108,787 185,708 18,970 967,656 212,725 165,533 – 70,425 428,176 133,870 102,782 180,158 13,843 1,307,512 (1) (2) (3) Matti Alahuhta was elected to the Board at the AGM in April 2014. Hans Ulrich Märki left the Board at the end of the 2013−2014 term of office. Share amounts provided in the section do not include the shares beneficially owned by Investor AB, of which Mr Wallenberg is chairman. 66 Compensation report | ABB Annual Report 2014 Table 17: EC ownership of ABB shares and options as of December 31, 2014 Vested at Dec. 31, 2014 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 Unvested at December 31, 2014 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 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 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 4 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 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 2016 and (vesting 2015) – 2015) 67,293 – 422,625 287,500 – – 212,500 221,375 422,625 – – – – – – – – – – – – – – – 38,673 35,289 29,664 12,041 35,289 37,223 45,924 17,598 2016) 78,395 27,071 27,071 31,848 25,632 24,830 22,294 25,632 9,810 37,033 22,294 2017) 93,846 30,549 30,549 35,940 27,548 26,159 25,158 34,677 27,674 40,750 31,083 2018) 2015) – – 144,802 – – – – – – – – – – – 150,000 – – – – – – – d l e h s e r a h s f o r e b m u n l a t o T 241,943 23,768 – 286,773 97,607 63,137 8,000 91,275 176,119 235,702 9,903 Name Ulrich Spiesshofer Eric Elzvik Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu (4) Pekka Tiitinen Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin Total Executive Committee members as of Dec. 31, 2014 1,234,227 1,279,125 287,500 318,994 331,910 403,933 144,802 150,000 (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 delivering 30 percent of the value of the vested retention shares in cash. However, 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 awards 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. ABB Annual Report 2014 | Compensation report 67 Table 18: EC ownership of ABB shares and options as of December 31, 2013 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 – – – – – – – – 26,389 422,215 7,974 201,250 221,375 603,750 221,375 5,500 24,670 137,388 154,050 1,883 – – – – 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 December 1, 2013) 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 Dec. 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, while 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 awards 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. 68 Compensation report | ABB Annual Report 2014 Table 19: EC ownership of WARs and conditionally granted ABB shares (all cash-settled) as of December 31, 2014 Vested at Dec. 31, 2014 Unvested at December 31, 2014 I P M e h t r e d n u d l e h s R A W d e t s e v y l l u f f o r e b m u N – 201,250 – – – – – – – – 387,500 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 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 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) 22,588 – – 20,652 18,845 17,425 6,950 18,845 19,878 24,524 10,665 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 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 h c n u a l 3 1 0 2 e h t f o P I T L e h t f o 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 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 h c n u a l 4 1 0 2 e h t f o P I T L e h t f o (vesting (vesting 2016) 50,024 16,659 16,659 19,599 15,023 14,553 13,720 15,023 15,091 18,992 13,720 2017) 51,489 17,147 17,147 20,173 15,463 14,684 14,122 16,139 15,534 19,548 14,122 Name Ulrich Spiesshofer Eric Elzvik Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu Pekka Tiitinen Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin Total Executive Committee members as of December 31, 2014 588,750 160,372 209,063 215,568 ABB Annual Report 2014 | Compensation report 69 Table 20: EC ownership of WARs and conditionally granted ABB shares (all cash-settled) as of December 31, 2013 Vested at Dec. 31, 2013 Unvested at December 31, 2013 I P M e h t r e d n u d l e h s R A W d e t s e v y l l u f f o r e b m u N 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) Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013) – 15,460 22,588 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 434,380 – – – – – – – – (joined the EC on December 1, 2013) Total Executive Committee members 675,000 – – 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 70 Compensation report | ABB Annual Report 2014 Report of the statutory auditor on the Compensation report We believe that the audit evidence we have obtained is sufficient and appro- priate to provide a basis for our opinion. Opinion In our opinion, the Compensation report for the year ended December 31, 2014 of ABB Ltd complies with Swiss law and articles 14–16 of the Ordinance. Ernst & Young AG Leslie Clifford Licensed audit expert (Auditor in charge) Zurich, Switzerland March 5, 2015 Robin Errico Licensed audit expert To the General Meeting of ABB Ltd, Zurich We have audited pages 60–70 of the accompanying Compensation report dated March 5, 2015 of ABB Ltd, for the year ended December 31, 2014. Responsibility of the Board of Directors The Board of Directors is responsible for the preparation and overall fair presentation of the Compensation report in accordance with Swiss law and the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance). The Board of Directors is also responsible for designing the compensation system and defining individual remuneration packages. Auditor’s responsibility Our responsibility is to express an opinion on the accompanying Compensation report. We conducted our audit in accordance with Swiss Auditing Stan- dards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Compensation report complies with Swiss law and articles 14–16 of the Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the Compensation report with regard to compensation, loans and credits in accordance with articles 14–16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assess- ment of the risks of material misstatements in the Compensation report, whether due to fraud or error. This audit also includes evaluating the reason- ableness of the methods applied to value components of compensation, as well as assessing the overall presentation of the Compensation report. ABB Annual Report 2014 | Compensation report 71 72 Financial review of ABB Group | ABB Annual Report 2014 Financial review of ABB Group Contents 74 Operating and financial review and prospects 74 About ABB 74 History of the ABB Group 74 Organizational structure 74 Business divisions 82 Capital expenditures 82 Supplies and raw materials 83 Management overview 85 Application of critical accounting policies 90 New accounting pronouncements 90 Research and development 90 Acquisitions and divestments 91 Exchange rates 92 Transactions with affiliates and associates 92 Orders 92 Performance measures 93 Analysis of results of operations 98 Divisional analysis 107 Restructuring 107 Liquidity and capital resources 109 Financial position 114 Consolidated Financial Statements of ABB Group 165 Report of management on internal control over financial reporting 166 Report of the Statutory Auditor on the Consolidated Financial Statements 167 Report of the Group Auditor on internal control over financial reporting ABB Annual Report 2014 | Financial review of ABB Group 73 Operating and financial review and prospects About ABB Organizational structure Our business is international in scope and we generate revenues in numerous currencies. We are headquartered in Zurich, Switzerland. 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). A breakdown of our employees by geographic region is as follows: Europe The Americas Asia Middle East and Africa Total December 31, 2014 63,000 32,200 37,100 8,100 2013 65,000 34,400 39,400 8,900 2012 64,000 34,400 38,300 9,400 140,400 147,700 146,100 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 As a global leader in power and automation, we serve utilities, industry, and transport and infrastructure customers through our five divisions. The markets and our divisions are discussed in more detail below. Revenue figures presented in this Busi- ness divisions section are before interdivisional eliminations. We are a global leader in power and automation technologies that improve the performance and lower the environmental impact of our customers in the utility, industry and transporta- tion & infrastructure sectors. We provide a broad range of products, systems, solutions and services that are designed to boost productivity, increase power reliability and enhance energy efficiency. We operate in roughly 100 countries and employ about 140,000 people. History of the ABB Group The ABB Group was formed in 1988 through a merger between Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB was a major participant in the introduction of electricity into Swedish homes and businesses and in the development of Sweden’s railway network. In the 1940s and 1950s, Asea AB expanded into the power, mining and steel industries. Brown Boveri and Cie. (later renamed BBC Brown Boveri AG) was formed in Switzerland in 1891 and initially specialized in power generation and turbines. In the early to mid-1900s, it expanded its operations throughout Europe and broadened its business operations to include a wide range of electrical engineering activities. In January 1988, Asea AB and BBC Brown Boveri AG each contributed almost all of their businesses to the newly formed ABB Asea Brown Boveri Ltd, of which they each owned 50 percent. In 1996, Asea AB was renamed ABB AB and BBC Brown Boveri AG was renamed ABB AG. In 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 companies that formerly owned the ABB Group. The ABB Ltd shares were exchanged for the shares of those two companies, which, as a result of the share exchange and certain related transac- tions, 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). 74 Financial review of ABB Group | ABB Annual Report 2014 Utilities Market We serve the utilities 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. The primary demand driver in the utilities market is the growing need for reliable electricity supplies to support eco- nomic growth and address global environmental challenges. 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, reliable and smarter. Power quality, stability and security of supply 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 upgrad- ing and replacing aging infrastructure, improving grid reli- ability 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. Industry Market We serve the industry market with a wide variety of automa- tion products, systems and services designed primarily to increase industrial productivity and energy efficiency, deliver more reliable and efficient electrical power to industrial end users, and improved process and product quality in industrial and manufacturing processes. We serve industrial customers who mainly use process or discrete manufacturing processes. 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. Discrete automation refers to operations that manufacture individual items, such as automotive, con- sumer electronics and food and beverage. In addition, we offer power solutions to ensure that electricity is delivered within the plant safely, with low losses and at optimal quality and reliability levels. The primary demand drivers in the industry market include the need by our customers to reduce energy and raw material costs, improve product and process quality, increase process and manufacturing safety, lower their environmental impacts and improve the management of large assets such as manufacturing plants. There are additional regional demand drivers. In North America, for example, the emergence of shale gas and shale oil as economically viable fuel sources and feedstock for the petrochemical industry is creating more demand both for oil and gas processing as well as encouraging general industrial investments to take advantage of lower energy input costs. Development of the largely untapped natu- ral resources base in Africa combined with the ambitions of many African countries to expand economic growth through industrial diversification is another regional demand driver in our industry market. A further example is the shift in policy in China to promote more efficient and cleaner industrial production, which increases demand for our industrial auto- mation solutions. Transport and Infrastructure Market We serve the transport and infrastructure market with products, systems and services designed primarily to increase energy efficiency, thereby reducing our customers’ operating costs and environmental impact. Our primary transport markets are the marine, rail and electrical vehicle markets. Our solutions ensure that electrical power is delivered and used efficiently in, for example, liquefied natural gas vessels, offshore oil and gas production vessels, cruise ships, conventional and high-speed electrical locomotives, electrically-powered urban transit systems and electric cars and buses. Our infra- structure market includes the building industry, especially building automation where we offer products and applications aimed at improving the energy efficiency of buildings through automated control of indoor climate, lighting and security. Data centers that require large amounts of electrical power delivered at extremely high reliability levels is another impor- tant infrastructure market. The primary demand drivers in the transport and infra- structure market are increasing urbanization, the need for increased energy efficiency to reduce costs and lower environmental impacts, the rise in demand for electrically- powered forms of transportation, and the need for reliable and high-quality power delivery to commercial buildings. Discrete Automation and Motion Division Overview The Discrete Automation and Motion division offers a wide range of products and services including variable-speed drives, motion control solutions, motors, generators, power electronics systems, rectifiers, power quality and power pro- tection products, mechanical power transmission of rotating equipment, traction converters, solar inverters, wind turbine converters, electric vehicle charging infrastructure, program- mable 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 processing, actuation, auto- mation, standardized manufacturing cells for applications ABB Annual Report 2014 | Financial review of ABB Group 75 such as machine tending, welding, cutting, painting, finishing, picking, packing and palletizing, and engineered systems for the automotive industry. The majority of these applications are for industrial applications including discrete manufactur- ing, process automation and hybrid or batch manufacturing, with others provided for infrastructure and buildings, trans- portation, and utilities. The division also provides a full range of life-cycle services, from product and system maintenance to application design, including energy efficiency appraisals, preventive maintenance and remote monitoring 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 approximately 31,100 employees as of December 31, 2014, and generated $10.1 billion of revenues in 2014. 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, torque and motion control for equipment such as fans, pumps, compressors, conveyors, centrifuges, mix- ers, hoists, cranes, extruders, printing and textile machines. They are used in industries such as building automation, marine, power, transportation, food and beverage, metals, mining, and oil and gas. The division also produces a range of power conversion 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 manufactures solar inverters, wind turbine converters and converters for power protection. Rail traction converters, DC wayside power solutions 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 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 (Inter- national 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, engineering, 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 companies such as ‘3C’ (computer, communication and consumer elec- tronic), utilities and renewable energy suppliers, particularly in the wind and solar sectors, as well as customers in the automotive industry and electric vehicle charging networks. 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 different 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 $192 million in 2014, compared to $214 million and $197 million in 2013 and in 2012, respectively. Principal investments in 2014 were primarily related to equipment replacement and upgrades. Geographically, in 2014, Europe represented 43 percent of the capital expenditures, followed by the Americas (35 percent), Asia (19 percent) and MEA (3 percent). 76 Financial review of ABB Group | ABB Annual Report 2014 Low Voltage Products Division Overview The Low Voltage Products division helps customers to improve productivity, use energy efficiently 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, switchboards, electronics and electromechanical devices for industrial machines and plants. The main applications are in industry, building, infrastructure, rail and sustainable transportation, renewable energies and e-mobility applications. The Low Voltage Products division had approximately 29,900 employees as of December 31, 2014, and generated $7.5 billion of revenues in 2014. 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 switchgears, breakers, switches, control products, DIN-rail components, automation and distribution enclosures, wiring accessories and installation material for many kinds of applications. 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 factories and buildings, fuse gear systems for short circuit and overload protection as well as cabling and connection components. 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 products 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 con- trol, 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, con- nectors, fasteners, wiring ducts, terminals, cable trays, struts, grounding, 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 different 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 $184 million in 2014, compared to $204 million and $208 million in 2013 and 2012, respectively. Investments in 2014 primarily related to equipment replacement and upgrades in recently acquired businesses. Geographically, in 2014, Europe represented 48 percent of the capital expenditures, followed by the Amer- icas (34 percent), Asia (16 percent) and MEA (2 percent). Process Automation Division Overview The Process Automation division is a leading provider of fully-engineered solutions, products and services for process control, safety, instrumentation, plant electrification and energy management for the key process industry sectors of chemical, oil and gas, marine, mining, minerals, metals, cement, and pulp and paper. Each industry has certain unique business drivers, yet all share common requirements for operational productivity, safety, energy efficiency, minimized risk and environment compliance. The Process Automation division’s core competencies are the applications of automa- tion and electrification technologies to address these generic requirements and are tailored to the characteristics of each of its key industries. Additionally, this business has a number of industry-specific services and anchor products (e.g. gearless mill drives, mine hoists, Azipods, turbochargers) that differ- entiate the business from its competitors. These products make ABB more relevant to its customers in these industries ABB Annual Report 2014 | Financial review of ABB Group 77 and represent significant components of a larger automation and electrification scope. The division is organized around industry systems, product businesses and life cycle services. The division had approximately 23,100 employees as of December 31, 2014, and generated revenues of $7.9 billion in 2014. The Process Automation division offering is made avail- able as separately sold products or as part of a total electrifi- cation, instrumentation and/or automation system. The divi- sion’s technologies are sold both through direct sales forces and third-party channels. Products and Services The Process Automation division offers standalone products, engineered systems and services for process control and measurement, safety, plant electrification, information manage- ment, assets management and industry-specific applications for a variety of industries, primarily pulp and paper, metals, minerals and mining, chemical, oil and gas, marine, pharma- ceuticals and the power industry. Some of the Discrete Automation and Motion, Power Systems, Power Products and Low Voltage Products divisions’ products are integrated into the process control and electrification systems offered by the Process Automation division. 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, actuators and field instruments. On-line sensors measure product properties, such as weight, thickness, color, bright- ness, moisture content and additive content. Actuators allow the customer to make automatic adjustments during the production process to improve the quality and consistency of the product. Field instruments measure properties of the process, such as flow rate, chemical content and temperature. 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 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 pro- duction. 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 distribution. In the pharmaceuticals and fine chemicals areas, we offer applications to support manufacturing, packaging, quality control and compliance with regulatory agencies. Our automation systems are used in applications such as In the marine industry, we provide global shipbuilders with continuous and batch control, asset optimization, energy management and safety. They are the hubs that link instrumen- tation, 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 efficiency, 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 extends 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 multiple ABB control systems that have been installed in the market 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 manage multiple systems, 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 analyze, measure and record industrial and power processes. 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 services is increasing as our customers seek to increase pro- ductivity by improving the performance of existing equip- ment. Customers The Process Automation division’s end customers are primar- ily 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 looking for complete instrumentation, 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. 78 Financial review of ABB Group | ABB Annual Report 2014 Competition The Process Automation division’s principal competitors vary by industry or product line. Competitors include Emerson, Honeywell, Metso Automation, Rockwell Automation, Schneider, Siemens, Voith, and Yokogawa Electric Corpo- ration. Capital Expenditures The Process Automation division’s capital expenditures for property, plant and equipment totaled $49 million in 2014, compared to $68 million and $91 million in 2013 and 2012, respectively. Principal investments in 2014 were in the mea surement products and turbocharging businesses. Geo- graphically, in 2014, Europe represented 66 percent of the capital expen ditures, followed by the Americas (16 per- cent), Asia (14 percent) and MEA (4 percent). Power Products Division Overview The Power Products division primarily serves electric, gas and water utilities as well as industrial and commercial customers, with a vast portfolio of products and services across a wide voltage range to facilitate power generation, transmission and distribution. Direct sales account for a sig- nificant 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 ratings 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 35,400 employees as of December 31, 2014, and generated $10.3 billion of revenues in 2014. Products and Services The Power Products division manufactures products that can be placed in three broad categories: high-voltage products, medium-voltage products and transformers. The division sells directly to end customers and also through channels such as distributors, wholesalers, installers and OEMs. Some of the division’s products are also integrated into the turnkey offer- ings 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 custom- ers. 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-volt- age circuit breakers, surge arresters, instrument transform- ers, cable accessories and a variety of high-voltage compo- nents. This is supported by a range of service solutions to support the products throughout their life cycle. The medium-voltage business offers products and servi- ces that largely serve the power distribution sector, often providing the link between high-voltage transmission systems and low-voltage users. Medium-voltage products help utility and industrial customers to improve power quality and control, 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 second- ary distribution, as well as a range of air- and gas-insulated switchgear. It also produces indoor and outdoor modular sys- tems 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 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 transmission and distribution networks. It also serves indus- tries 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 techno- logies 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. ABB Annual Report 2014 | Financial review of ABB Group 79 Competition On a global basis, the main competitors for the Power Products division are Siemens, Alstom and Schneider. 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 Expenditures The Power Products division’s capital expenditures for prop- erty, plant and equipment totaled $220 million in 2014, compared to $252 million and $259 million in 2013 and 2012, respectively. Principal investments in 2014 related to upgrades and expansion of existing facilities in Sweden, China, United States, Germany and Czech Republic as well as a new factory in Saudi Arabia. Geographically, in 2014, Europe represented 58 percent of the division’s capital expenditures, followed by the Americas (19 percent), Asia (17 percent) and MEA (6 percent). Power Systems Division Overview The Power Systems division serves public and private utili- ties, as well as industrial and commercial customers with solutions for power and water plants, grid integration and automation as well as a complete range of systems 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 18,900 employees as of December 31, 2014, and generated $7.0 billion of revenues in 2014. Products and Services The 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, sup- ply, installation, commissioning and testing of the system. As part of the business model, the Power Systems division integrates products from both the Power Products division and external suppliers, adding value through design, engi- neering and project management to deliver turnkey solutions. The 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, waste-to-energy and a range of renewables including hydro, solar, wind and biomass. With an extensive offering that includes electrical balance of plant as well as instrumen- tation and control systems, ABB technologies help optimize performance, improve reliability, enhance efficiency and mini- mize environmental impact throughout the plant life cycle. The business also serves the water industry, including appli- cations 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. The environmental benefits of HVDC Light®, include neutral electromagnetic 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 525 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. 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 offering spans a range of volt- age levels up to 1,100 kilovolts, serving utility, industry and commercial customers as well as sectors such as railways, urban transportation and renewables. FACTS technologies are also part of the Substations business offering. FACTS solutions help improve power quality and can significantly increase the capacity of existing AC transmission 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 solu- tions can alleviate the need for capital investment, reducing 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 quality. ABB is a global leader in the growing field of FACTS, and has delivered more than 800 such installations across the world. 80 Financial review of ABB Group | ABB Annual Report 2014 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). It also encompasses the substation automation offering, compliant with IEC 61850, the open communication standard, which provides a common framework for substation control and protection and facilitates interoperability across devices and systems. The Network Management portfolio 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 networking and broadband network management, as well as teleprotection and substation communication networks and voice switching management systems. Network management systems are key smart-grid enablers by providing automated power systems to incorpo- rate and manage centralized and distributed power genera- tion, intermittent sources of renewable energy, real-time pricing and load-management data. The Ventyx and Mincom acqui- sitions have made ABB a global leader in enterprise software and services for essential industries such as energy, mining, public infrastructure and transportation. These solutions bridge the gap between information technologies (IT) and opera- tional 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 such solutions to minimize risk, enhance operational and financial performance and execute the right strategies for the future. The Power Systems division also has a global footprint and installed base that helps drive the service business. The offering includes a range of services aimed at optimizing operations and reducing maintenance requirements across the value chain. These services range from support agreements and retrofits to spare parts, asset health, management, data analytics and training. The division also undertakes consulting activities such as energy efficiency studies for power plants and grids, analyses and design of new transmission and dis- tribution systems as well as asset optimization based on technical, regulatory, economic and environmental consider- ations. Customers The Power Systems division’s principal customers include public and private power generation utilities and companies, transmission and distribution utilities, owners and operators as well as industrial and commercial customers. Other cus- tomers 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. The breadth of its portfolio, technology and innovation, a global footprint and a vast installed base, enable the division to maintain its leading position in the power sector. Capital Expenditures The Power Systems division’s capital expenditures for prop- erty, plant and equipment totaled $92 million in 2014, compared to $101 million and $194 million in 2013 and 2012, respectively. Principal investments in 2014 were related to capacity expansion as well as the replacement of existing equipment, particularly in Sweden. Geographically, in 2014, Europe represented 81 percent of the capital expenditures, followed by the Americas (10 percent), Asia (7 percent) and MEA (2 percent). 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 corporate-related activities in various countries. These activities cover staff functions with group- wide responsibilities, such as accounting and fi nancial report- ing, corporate finance and taxes, planning and controlling, internal audit, legal and integrity, compliance, risk manage- ment and insurance, corporate communications, information systems, investor relations and human resources. ABB Annual Report 2014 | Financial review of ABB Group 81 Corporate research and development primarily covers our research activities, as our development activities are organized under the five business divisions. We have two global research laboratories, one focused on power tech- nologies 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 technologies and collaborates with universities and other external partners to support our divisions in advanc- ing relevant technologies and in developing cross-divisional technology platforms. We have corporate research centers in seven countries (the U.S., Sweden, Switzerland, Poland, China, Germany and India). Corporate and Other had approximately 2,000 employees at December 31, 2014. Capital expenditures Total capital expenditures for property, plant and equipment and intangible assets (excluding intangibles acquired through business combinations) amounted to $1,026 million, $1,106 million and $1,293 million in 2014, 2013 and 2012, respectively. In 2014 and 2013, capital expenditures were 21 percent and 16 percent lower, respectively, than depre - ciation and amortization while in 2012 capital expenditures exceeded total depreciation and amortization expenses. This change, commencing in 2013, is due partly to a reduc- tion in capital expenditures but also due to an increase in depreciation and amortization (including amortization of intangible assets acquired in acquisitions). Capital expenditures in 2014 remained at a significant level in mature markets, reflecting the geographic distribution of our existing production facilities. Capital expenditures in Europe and North America in 2014 were driven primarily by upgrades and maintenance of existing production facilities, mainly in Sweden, the U.S., Germany and Switzerland. Capital expenditures in emerging markets were lower in 2014 compared to 2013, with expenditures being highest in China, Saudi Arabia, the Czech Republic and Poland. Capital expen- ditures in emerging markets were made primarily to increase production capacity by investment in new or expanded facili- ties. The share of emerging markets capital expenditures as a percentage of total capital expenditures in 2014, 2013 and 2012 was 29 percent, 33 percent and 31 percent, respectively. At December 31, 2014, construction in progress for property, plant and equipment was $653 million, mainly in Sweden, the U.S., Switzerland, Saudi Arabia and China, while 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 U.S., Switzerland, Germany and Brazil. Our capital expenditures relate primarily to property, plant and equipment. For 2015, we estimate the expenditures for property, plant and equipment will be higher than our annual depreciation charge. 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 prod- ucts, 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, divisional 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 sustaina- bility, both in terms of materials and processes used. We buy many categories of products which contain steel, copper, aluminum, crude oil and other commodities. Continuing global economic growth in many emerging econo- mies, 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 com- modity prices to remain highly volatile, some market volatility will be offset through the use of long-term contracts and global sourcing. We seek to mitigate the majority of our exposure to commodity price risk by entering into hedges. For example, we manage copper and aluminum price risk using principally swap contracts based on prices for these commodities quoted on leading exchanges. ABB’s hedging policy is de- signed 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 fluc- tuations 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 2014 supply chain management personnel 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 Exchange 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 initiated conflict minerals processes in 2013 and we continue to work with our suppliers and customers, to enable us to comply with the rules and disclosure obligations. Further information 82 Financial review of ABB Group | ABB Annual Report 2014 on ABB’s Conflict Minerals policy and supplier require- ments can be found under “Material Compliance” at new.abb.com/about/supplying Management overview During 2014, we continued to deliver power and automation solutions that help our utility, industry, and transport and infrastructure customers meet the challenges and opportuni- ties of a rapidly-changing world. These include significant shifts in the electricity value chain, such as the growth in renewable power generation. Wind and solar power sources are often located far from the centers of power consumption, and they often increase the number of feed-in points into a grid, creating instability and increased grid complexity. Our high- efficiency power transmission and intelligent grid solutions help utilities address these challenges. For example, we won large orders for HVDC power transmission in the United Kingdom and Canada that will link remote renewable energy sources to existing grids. An ABB substation using compact gas-insulated switchgear will integrate power from a solar park in Dubai into the local grid. We also signed a partnership agreement with wind power company Vestas to deliver affordable and clean wind-diesel micro-grid power systems to remote communities in Africa. Among the new opportunities facing our industrial cus- tomers is the possibility to interconnect people, processes, equipment and services, sometimes referred to as “Indus- try 4.0” or “the Internet of Things”. This trend is having profound impacts on many of our key end markets, such as oil and gas, mining, discrete automation and building automation, where the ability to monitor and control assets and pro- cesses in real time and across large geographic spaces is opening new opportunities to increase industrial productivity, reduce environmental impacts and improve the quality of work life for people. In 2014, we won an order from Brazilian mining company Vale to install electrical and automation systems at an iron ore mine to support their development of a sustain- able “mine of the future” with truckless transport systems pow- ered through intelligent digital substations. We were also awarded a large contract from Statoil of Norway for telecom- munications systems used to remotely monitor and control offshore oil and gas platforms. We also continued to roll out internet-based remote monitoring, preventive maintenance and service solutions for robotics applications, power equip- ment diagnostics and the control of underground mining ventilation using mobile devices. Market conditions were mixed in 2014. Utility customers remained cautious in their capital expenditures in the face of macroeconomic and policy uncer- tainties, especially in Europe. Nevertheless, several large power transmission projects were awarded during the year and many utilities continued to invest in their power distribu- tion activities. Industrial demand varied by sector. Many industry cus- tomers took a more cautious approach to large capital expen- ditures in light of ongoing macroeconomic uncertainties. However, operational spending to maintain and improve the performance of existing assets remained generally stable. Demand from the oil and gas sector remained steady as con- tinuing high oil prices supported customer investments through most of the year. The oil price declines seen late in the year resulted in some uncertainty around short-term capital investment trends, however. Mining and metals demand remained at low levels, mainly the result of overcapacity in the industry. General industry customers continued to invest in automation solutions to improve efficiency and productivity. In the transport and infrastructure sectors, marine demand for specialty vessels continued to grow, mainly the result of demand for oil and gas-related vessels, such as offshore production vessels and liquefied natural gas ships. There was also a steady demand for high efficiency electrical rail equipment. In this mixed environment, we combined our broad geo- graphic and business scope with the successful execution of profitable growth initiatives across the company to increase orders received in every division except Low Voltage Prod- ucts, where the disposal of businesses offset order increases in most of the division’s other businesses. The Discrete Auto- mation and Motion division achieved a record level of orders, more than $10 billion, partly the result of growth initiatives to sell packaged industrial solutions that combine, for example, robots, motors and drives for packaging applications in general industry. The Process Automation division tapped growth opportunities in the marine, upstream oil and gas and pulp and paper sectors, which more than offset lower demand in mining. Low Voltage Products orders were sup- ported by increased penetration of the U.S. market through the distribution channels of the Thomas & Betts acquisition it completed in 2012. In 2014, we maintained the profitability of our Power Prod- ucts division, despite the continued challenging market environment, through successful 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 geo- graphic scope. Our Power Systems division experienced continuing project execution issues which impacted profit- ability in 2014. We therefore launched a “step change” pro- gram to reduce the risk profile of the business and secure higher and more consistent returns. Under the program, we decided to discontinue our future participation in EPC projects in the solar power generation sector. We are also changing our business model in the offshore wind power sector to reduce execution risks and we are adjusting capacity in the business to reflect this repositioning. We continue to focus the ongoing business on projects with lower risk profiles and greater pull-through of our higher value-added content. Our strong positions in fast-growing emerging markets and selected mature markets, our flexible global production base and technological leadership, as well as the operational improvements we continue to make in our businesses, also supported our business in 2014. ABB Annual Report 2014 | Financial review of ABB Group 83 Foremost among these improvements was the successful reduction of costs to adapt to changing demand. Savings in 2014 amounted to more than $1 billion and were principally achieved by making better use of global sourcing opportuni- ties and eliminating operational and process inefficiencies. We expanded our cost savings efforts in 2014 to take greater account of improvement opportunities in white-collar produc- tivity, such as streamlining back-office and sales-support activities. Next Level strategy 2015–2020 In September 2014, ABB laid the foundations to take the company to the next level, with a new strategy aimed at accelerating sustainable value creation to deliver attractive shareholder returns. The Next Level strategy is designed to build on ABB’s strong position in attractive markets. The strategy builds on the three focus areas of profitable growth, relentless execution and business-led collaboration. To achieve the next level, ABB is targeting profitable growth by shifting its center of gravity through strengthening competitiveness, higher organic growth and lowering risk. We intend to drive organic growth through the PIE concept (penetration, innovation, expansion), further increase com- petitiveness in areas such as technology, service and software, and reduce intrinsic business risks by, for example, aligning business models more closely with our core competencies. Organic growth will be complemented by incremental strategic acquisitions and partnerships. Our second strategic focus area is relentless execution. We have been successful in executing our programs to reduce costs and improve customer service. We intend to broaden those efforts by developing a leading operating model across ABB, starting with the areas of white-collar productivity, net working capital management, and quality. For 2015, the completion of the Power Systems “step change” program will remain a high priority. Major Group-wide change management will be implemented through 1,000-day programs that drive and coordinate change across all busi- nesses and regions. The strategic objectives and targets have been explicitly linked to a new performance management and compensation model. Our third focus area is aimed at simplifying how the organization works together and at achieving a more market- focused organization. To achieve this, as of January 1, 2015, we have streamlined our regional organization – reducing the number of regions from eight to three – with regional man- agement on the Executive Committee to bring us closer to the market. At the same time, roles and responsibilities have been clarified – including giving global business lines undiluted responsibility for their businesses – and processes put in place to strengthen cross-business collaboration. The Next Level strategy includes the following financial targets: ABB expects to grow operational earnings per share at a 10–15 percent compound annual growth rate and deliver attractive cash return on invested capital in the mid- teens over the period 2015–2020. It targets to grow revenues on a like-for-like basis on average 4–7 percent per year over six years, faster than forecasted GDP and market growth. Over the same time period, ABB plans to steadily increase its 84 Financial review of ABB Group | ABB Annual Report 2014 profitability, measured in Operational EBITA, within a band- width of 11–16 percent while targeting an average free cash flow conversion rate above 90 percent. The new financial targets took effect on January 1, 2015. We have changed our profitability targets from Operational EBITDA to Operational EBITA. This new measure includes depreciation expense as well as amortization charges that are not related to intangibles recorded in acquisitions which were previously excluded under the Operational EBITDA measure. This change ensures that the costs of capital expenditures invested to drive organic growth will be reflected in the profitability measure on which our businesses are evaluated. Outlook The long-term demand outlook in our three major customer sectors – utilities, industry, and transport and infrastructure – remains clearly positive. Key drivers are the big shift in the electricity value chain, industrial productivity improvements and Industry 4.0, as well as rapid urbanization and the need for energy efficiency in transport and infrastructure. We are well-positioned to tap these opportunities for long-term profitable growth, with our strong market presence, broad geographic and business scope, technology leader- ship and financial strength. In the short term, macroeconomic and geopolitical devel- opments are signaling a mixed picture with increased uncer- tainty. Some macroeconomic signs in the U.S. remain positive and growth in China is expected to continue. At the same time, the market remains impacted by slow growth in Europe and geopolitical tensions in various parts of the world. Oil prices and foreign exchange effects Current oil prices will influence customer operating and capital expenditures along the oil and gas value chain, and influence spending by many other of our customer seg- ments and government spending in different ways. Govern- ment spending on energy subsidies may be reallocated to other infrastructure development and certain customer seg- ments will benefit from lower energy costs. However, the current oil price will have a dampening effect on the oil and gas value chain, mainly in the upstream sector. Currency volatility has increased over the last 12 months, including the weakening of the Euro against the U.S. dollar and Swiss franc. Changes in foreign exchange rates have two effects on our financial results, translational and structural. Translational impacts result from converting local-currency financial information from ABB companies around the world into U.S. dollars at average exchange rates for the purpose of reporting results in U.S. dollars. If exchange rates stay around the current levels, we expect a negative translation effect in 2015. Structural effects are related to the export of products and services from one currency zone into another. Our well-balanced local operations (including sourcing) in all key markets mean these structural effects have a limited impact. Further, our policy to actively hedge all significant foreign exchange exposures means these effects are largely mitigated in the short to medium term. Application of critical accounting policies General We prepare our Consolidated Financial Statements in accor- dance with U.S. GAAP and present these in U.S. dollars unless otherwise stated. The preparation of our financial statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including, but not limited to, those related to: gross profit margins on long-term construction-type contracts; costs of product guar- antees and warranties; provisions for bad debts; recover- ability of inventories, investments, fixed assets, goodwill and other intangible assets; the fair values of assets and liabilities assumed in business combinations; income tax expenses and provisions related to uncertain tax positions; pensions and other postretirement benefit assumptions; and legal and other contingencies. Where appropriate, we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the cir- cumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates and assumptions. We deem an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. We also deem an accounting policy to be critical when the application of such policy is essential to our ongoing operations. We believe the following critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. These policies should be considered when reading our Consolidated Financial Statements. 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 Car- rier (FCA) and Delivered Duty Paid (DDP). Subsequent to delivery of the products, we generally have no further contrac- tual performance 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 use the cost-to-cost method to measure progress towards completion on contracts. Under this method, progress of contracts is measured by actual costs incurred in relation to management’s best estimate of total estimated costs, which are reviewed and updated routinely for contracts in progress. The cumulative effect of any change in estimate is recorded in the period in which the change in estimate is determined. The percentage-of-completion method of accounting involves the use of assumptions and projections, principally relating to future material, labor 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 additional costs to remedy, – changes in the cost of components, materials or labor, – difficulties in obtaining required governmental permits or approvals, – project modifications creating unanticipated costs, – suppliers’ or subcontractors’ failure to perform, and – delays caused by unexpected conditions or events. Changes in our initial assumptions, which we review on a regular basis between balance sheet dates, may result in revisions to estimated costs, current earnings and anticipated earnings. We recognize these changes in the period in which the changes in estimates are determined. By 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 identified 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 com- pleted-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 accep- tance test or similar event. ABB Annual Report 2014 | Financial review of ABB Group 85 For non construction-type contracts that contain custo- mer 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 service 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 separately 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 undelivered element, the total arrangement fee will be recognized as revenue over the life of the contract or upon delivery of the undelivered element. We offer multiple element arrangements to meet our cus- 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 sell- ing 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 elements of an arrangement consideration at the inception of the arrange- ment. 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 col- lected, resulting in a change in earnings in the future. The risk of deterioration is likely to increase during periods of sig- nificant 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 contin- gency of any type may change in the future due to new developments in the particular matter, including changes in the approach to its resolution. We record provisions for our contingent obligations when it is probable that a loss will be incurred and the amount can be reasonably estimated. Any such provision is generally 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 prod- ucts. 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 simi- lar 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 86 Financial review of ABB Group | ABB Annual Report 2014 timing or the method of settlement, or both are conditional upon a future event that may or may not be within our con- trol, but the underlying obligation itself is unconditional and certain. 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. In some cases, we may be able to recover a portion of the costs expected to be incurred to settle these matters. 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 pay- ments cannot be reasonably estimated. Pension and other postretirement benefits As more fully described in “Note 17 Employee benefits” to our Consolidated Financial Statements, we have a number of defined benefit pension and other postretirement plans and recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in our Consolidated Balance Sheets. We measure such a plan’s assets and obligations that determine its funded status as of the end of the year. Significant differences between assumptions and actual experience, or significant changes in assumptions, may materially affect the pension obligations. The effects of actual results differing from assumptions and the changing of assumptions are included in net actuarial loss within “Accumu- lated other comprehensive loss”. We recognize actuarial gains and losses gradually over time. Any cumulative unrecognized actuarial gain or loss that exceeds 10 percent of the greater of the present value of the projected benefit obligation (PBO) and the fair value of plan assets is recognized in earnings over the expected average remaining working lives of the employees participating in the plan, or the expected average remaining lifetime of the inac- tive plan participants if the plan is comprised of all or almost all inactive participants. Otherwise, the actuarial gain or loss is not recognized in the Consolidated Income Statements. We use actuarial valuations to determine our pension and postretirement benefit costs and credits. The amounts cal- culated depend on a variety of key assumptions, including dis- count 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 $456 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 $431 million. The expected return on plan assets is reviewed regularly and considered for adjustment annually based upon the target asset allocations and represents the long-term return expected to be achieved. Decreases in the expected return on plan assets result in an increase to pension costs. Holding all other assumptions constant, an increase or decrease of 0.25 percentage-points in the expected long-term rate of asset return would have decreased or increased, respec- tively, the net periodic benefit cost in 2014 by $27 million. The funded status, which can increase or decrease based on the performance of the financial markets or changes in our assumptions, does not represent a mandatory short-term cash obligation. Instead, the funded status of a defined benefit pension plan is the difference between the PBO and the fair value of the plan assets. At December 31, 2014, our defined benefit pension plans were $1,890 million under- funded compared to an underfunding of $1,133 million at December 31, 2013. Our other postretirement plans were underfunded by $245 million and $236 million at December 31 , 2014 and 2013, respectively. We have multiple non-pension postretirement benefit plans. Our health care plans are generally contributory with participants’ contributions adjusted annually. For purposes of estimating our health care costs, we have assumed health care cost increases to be 8 percent per annum for 2015, gradually declining to 5 percent per annum by 2028 and to remain at that level thereafter. 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 operations is reconciled from the weighted-average global tax rate (rather than from the Swiss domestic statutory tax rate) as the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland. Income which has been generated in jurisdic- 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 Switzerland for a parent company of a group to file a tax return of the group determining domestic and foreign pre-tax income and as our consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines our global weighted-average tax rate. We account for deferred taxes by using the asset and liability method. Under this method, we determine deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are 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 ABB Annual Report 2014 | Financial review of ABB Group 87 taxable income and the expected timing of the reversals of existing temporary differences. To the extent we increase or decrease this allowance in a period, we recognize the change in the allowance within “Provision for taxes” in the Consolidated Income Statements unless the change relates to discontinued operations, in which case the change is recorded in “Income (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 com- pared to the actual taxable income, may affect these esti- mates. Certain countries levy withholding taxes, dividend distri- bution 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 countries. We operate in numerous tax jurisdictions and, as a result, are regularly subject to audit by tax authorities. We provide for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Contingency provisions are recorded based on the technical merits of our filing position, considering the 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 uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. The required amount of provisions for contingencies of any type may change in the future due to new developments. 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 apprais- al 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 valua- tion 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 measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contin- gency’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 and business divestments” as well as “Note 11 Goodwill and other intangible assets”, to our Consolidated Financial Statements. 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 divisions for Discrete Automation and Motion, Low Voltage Products, Power Products and Power Systems. For the Process Auto- mation division, we determined the reporting units to be one level below the division, as the different products produced or services provided by this division do not share sufficiently similar economic characteristics to permit testing of goodwill on a total division level. 88 Financial review of ABB Group | ABB Annual Report 2014 When performing the qualitative assessment, we first determine, for a reporting unit, factors which would affect the fair value of the reporting unit including: (i) macroeconomic conditions related to the business, (ii) industry and market trends, and (iii) the overall future financial performance and future opportunities in the markets in which the business operates. We then consider how these factors would impact the most recent quantitative analysis of the reporting unit’s fair value. Key assumptions in determining the value of the reporting unit include the projected level of business oper- ations, the weighted-average cost of capital, the income tax rate and the terminal growth rate. If, after performing the qualitative assessment, we con- clude 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 calcu- lated based on the present value of future cash flows apply- ing a discount rate that represents our weighted-average cost of capital) and compare it to the reporting unit’s carrying value. Where the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit is equal to or exceeds the reporting unit’s fair value, we would perform the second step of the impairment test. In the second step, we would determine the implied fair value of the reporting 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 oper- ation, in which case the losses would be recorded in “Income (loss) from discontinued operations, net of tax”. In 2014, we performed the two-step quantitative impair- ment test for all of our reporting units to reflect new assumptions and forecasts resulting from our newly-devel- oped strategic plan for the period 2015 to 2020. The quan- titative test concluded that the estimated fair values for each of our reporting units exceeded their respective carrying values by at least 60 percent and as no reporting unit had a zero or negative carrying value, we concluded that none of the reporting units was “at risk” of failing the goodwill impair- ment test. Consequently, the second step of the impairment test was not performed. bonds, as well as an ABB-specific risk premium. The terminal value growth rate is assumed to be 1 percent. The mid-term tax rate used in the test is currently 27 percent. We base our fair value estimates on assumptions we believe to be reason- able, but which are inherently uncertain. Consequently, actual future results may differ from those estimates. We assess the reasonableness of the fair value calcula- tions of our reporting units by reconciling the sum of the fair values for all our reporting units to our total market capitaliza- tion. The assumptions used in the fair value calculation are challenged each year (through the use of sensitivity analysis) to determine the impact on the fair value of the reporting units. Our sensitivity analysis in 2014 showed that, holding all other assumptions constant, a 1 percentage-point increase in the discount rate would have reduced the calculated fair value by approximately 11.6 percent, while a 1 percentage- point decrease in the terminal value growth rate would have reduced the calculated fair value by approximately 7.3 percent. 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. 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 in 2013, 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 vol- umes, 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. The projected future cash flows used in the fair value Intangible assets are reviewed for recoverability upon the calculation are based on approved business plans for the reporting units which cover a period of six years plus a calculated terminal value. The projected future cash flows require significant judgments and estimates involving vari- ables 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 capi- tal, currently 9 percent, is based on variables such as the risk-free rate derived from the yield of 10-year U.S. treasury occurrence of certain triggering events (such as a decision to divest a business or projected losses of an entity) or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We record impairment charges in “Other income (expense), net”, in our Consolidated Income Statements, unless they relate to a dis- continued operation, in which case the charges are recorded in “Income (loss) from discontinued operations, net of tax”. ABB Annual Report 2014 | Financial review of ABB Group 89 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 Financial Statements, see “Note 2 Significant accounting policies” to our Consolidated Financial Statements. Research and development Each year, we invest significantly in research and development. Our research and development focuses on developing and commercializing the technologies of our businesses that are of strategic importance to our future growth. In 2014, 2013 and 2012, we invested $1,499 million, $1,470 million and $1,464 million, respectively, or approximately 3.8 percent, 3.5 percent and 3.7 percent, respectively, of our annual consolidated revenues on research and development activi- ties. We also had expenditures of $310 million, $274 million and $282 million, respectively, or approximately 0.8 percent, 0.7 percent and 0.7 percent, respectively, of our annual consolidated revenues in 2014, 2013 and 2012, 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 tech- nology 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 technol- ogy 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 90 Financial review of ABB Group | ABB Annual Report 2014 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, North Carolina State University, ETH Zurich, EPFL Lausanne, University of Zurich, Chalmers Technical University Gothenburg, Royal Institute of Technology (KTH) Stockholm, TU Dresden, TU Delft, Cambridge University and Imperial College London. Our col- laborative projects include research on materials, sensors, micro-engineered mechanical systems, robotics, controls, man- ufacturing, distributed power and communication. Common platforms for power and automation technologies are devel- oped 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 techn- ologies, including our insulation technologies, current interrup- tion and limitation devices, power electronics, flow control and power protection processes, apply as much to large, reli- able, blackout-free transmission systems as they do to everyday household needs. Our automation technologies, including our control and optimization processes, power electronics, sensors and microelectronics, mechatronics and wireless communication processes, are designed to improve efficiency in plants and factories around the world, including our own. Acquisitions and divestments Acquisitions During 2014, 2013 and 2012, ABB paid $58 million, $897 mil - lion and $3,643 million to purchase six, seven and nine businesses, respectively. The amounts exclude changes in cost- and equity-accounted companies. There were no significant acquisitions in 2014 or 2013; the largest acquisition during this two-year period was 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 electrical power in industrial, construction and utility appli- cations. The complementary combination of Thomas & Betts’ electrical 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 distribu- tion channels in Europe and Asia. Divestments During 2014, ABB divested several businesses which were primarily its Full Service business, the Meyer Steel Structures business of Thomas & Betts, the heating, ventilation and air conditioning (HVAC) business of Thomas & Betts and the Power Solutions business of Power-One. Total cash pro- ceeds from all business divestments during 2014 amounted to $1,090 million, net of transaction costs and cash disposed. There were no significant divestments in 2013 and 2012. For more information on our divestments, see “Note 3 Acquisitions and business divestments” 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 currencies may affect: (i) our profitability, (ii) the comparability of our results between periods, and (iii) the reported carrying value of our assets and liabilities. We translate non-USD denominated results of operations, assets and liabilities to USD in our Consolidated Financial Statements. Balance sheet items are translated to USD using year-end currency exchange rates. Income statement and cash flow items are translated to USD using the relevant monthly average currency exchange rate. Increases and decreases in the value of the USD against other currencies will affect the reported results of operations in our Consolidated Income Statements and the value of cer- tain of our assets and liabilities in our Consolidated Balance Sheets, even if our results of operations or the value of those assets and liabilities have not changed in their original cur- rency. As foreign exchange rates impact our reported results of operations and the reported value of our assets and lia- bilities, changes in foreign exchange rates could significantly affect the comparability of our reported results of opera- tions between periods and result in significant changes to the reported value of our assets, liabilities and stockholders’ equity. While we operate globally and report our financial results in USD, exchange rate movements between the USD and both the EUR and the CHF are of particular importance to us due to (i) the location of our significant operations and (ii) our corporate headquarters being in Switzerland. The exchange rates between the USD and the EUR and the USD and the CHF at December 31, 2014, 2013 and 2012, were as follows: Exchange rates into $ EUR 1.00 CHF 1.00 2014 1.22 1.01 2013 1.38 1.12 2012 1.32 1.09 The average exchange rates between the USD and the EUR and the USD and the CHF for the years ended December 31, 2014, 2013 and 2012, were as follows: Exchange rates into $ EUR 1.00 CHF 1.00 2014 1.33 1.09 2013 1.33 1.08 2012 1.29 1.07 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 2014, approximately 81 percent of our consolidated revenues were reported in currencies other than the USD. The following percentages of consolidated revenues were reported in the following currencies: – Euro, approximately 20 percent, – Chinese renminbi, approximately 11 percent, and – Swedish krona, approximately 5 percent. In 2014, approximately 79 percent of our cost of sales and selling, general and administrative expenses were reported in currencies other than the USD. The following percentages of consolidated cost of sales and selling, general and admin- istrative expenses were reported in the following currencies: – Euro, approximately 19 percent, – Chinese renminbi, approximately 10 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 provides certain information with respect to orders, revenues, income from operations and other measures as reported in USD (as well as in local currencies). We measure period-to- period variations in local currency results by using a con- stant foreign exchange rate for all periods under comparison. Differences in our results of operations in local currencies as compared to our results of operations in USD are caused exclusively by changes in currency exchange rates. While we consider our results of operations as measured in local currencies to be a significant indicator of business performance, local currency information should not be relied upon to the exclusion of U.S. GAAP financial measures. Instead, local currencies reflect an additional measure of comparability and provide a means of viewing aspects of our operations that, when viewed together with the U.S. GAAP results, provide a more complete understanding of factors and trends affecting the business. As local currency informa- tion is not standardized, it may not be possible to compare ABB Annual Report 2014 | Financial review of ABB Group 91 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. Con- sequently, the level of large orders and orders generally can- not be used to accurately predict future revenues or ope- rating 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, gains and losses on sale of businesses, acquisition-related expenses and certain non- operational 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 ex change movements on receivables/payables (and related assets/liabilities). From 2015, performance of our divisions will be primarily based on orders received, revenues and Operational EBITA. Operational EBITA represents income from operations excluding amortization of intangibles acquired in business combinations, restructuring and restructuring-related expenses, gains and losses on sale of businesses, acquisition- related expenses and certain non-operational 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). See “Note 23 Operating segment and geographic data” to our Consolidated Financial Statements for a reconciliation of the total consolidated Operational EBITDA to income from continuing operations before taxes. our local currency information to other companies’ financial measures that have the same or a similar title. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. 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 trans- actions with businesses that we have divested. We believe that the terms of the transactions we conduct with these com- panies 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 beginning of the period. These adjustments, which may in the aggregate increase or decrease the orders reported during the period, may include changes in the estimated order price up to the date of contractual performance, changes in the scope of products or services ordered and cancellations of orders. The undiscounted value of revenues we expect to gener- ate from our orders at any point in time is represented by our order backlog. Approximately 16 percent of the value of total orders we recorded in 2014 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 percent of the total value of large orders in 2014 were recorded by our Power Systems division and approximately 35 percent in our Process Automation division. The other divisions accounted for the remainder of the total large orders recorded during 2014. The remaining portion of total orders recorded in 2014 was “base orders,” which we define as orders from third parties with a value of less than $15 million for products or services. 92 Financial review of ABB Group | ABB Annual Report 2014 Analysis of results of operations Orders ($ in millions) 2014 2013 2012 2014 2013 % Change Our consolidated results from operations were as follows: Discrete Automation and Motion 10,559 9,771 9,625 8% ($ in millions, except per share data in $) Orders Order backlog at December 31, Revenues Cost of sales Gross profit 2014 41,515 24,900 2013 38,896 26,046 2012 40,232 29,298 39,830 41,848 39,336 (28,615) (29,856) (27,958) 11,215 11,992 11,378 Selling, general and administrative expenses (6,067) (6,094) (5,756) Non-order related research and development expenses (1,499) (1,470) (1,464) Other income (expense), net Income from operations Net interest and other finance expense Provision for taxes Income from continuing opera 529 4,178 (41) 4,387 (100) 4,058 (282) (1,202) (321) (1,122) (220) (1,030) tions, net of tax 2,694 2,944 2,808 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 24 2,718 (124) 2,594 (37) 2,907 (120) 2,787 4 2,812 (108) 2,704 2,570 2,594 2,824 2,787 2,700 2,704 1.12 1.13 1.23 1.21 1.18 1.18 1.12 1.13 1.23 1.21 1.18 1.18 A more detailed discussion of the orders, revenues, Op- erational EBITDA and income from operations for our divisions 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 di- visions include interdivisional transactions which are elimi- nated in the “Corporate and Other” line in the tables below. 2% 15% (8)% (5)% 7% 3% Low Voltage Products Process Automation 7,550 8,577 7,696 6,720 (2)% 8,000 8,704 Power Products Power Systems 10,764 10,459 11,040 6,871 5,949 7,973 15% (25)% Operating divisions 44,321 41,875 44,062 6% (5)% Corporate and Other(1) (2,806) (2,979) (3,830) n.a. n.a. Total 41,515 38,896 40,232 7% (3)% (1) Includes interdivisional eliminations In 2014, total order volume increased 7 percent (9 percent in local currencies) and increased across all divisions except Low Voltage Products. Orders increased primarily due to higher large orders while base orders also increased. In the automation divisions, orders were supported by customer investments to improve operational efficiency and an increase in the demand for services. In the power divisions, the key demand drivers such as capacity expansion in emerging markets, upgrading of aging infrastructure in mature markets and the integration of renewable energy supplies into power grids, remained intact. In 2014, orders in the Discrete Automation and Motion division grew 8 percent (10 percent in local currencies) on higher orders in all businesses and supported by the impact of including Power-One for the full year in 2014. Orders decreased 2 percent in the Low Voltage Products division (flat in local currencies) as the impacts of divesting the HVAC and Steel Structures businesses offset the order increases which were realized in most of the division’s other businesses. Orders in the Process Automation division increased 7 percent (10 percent in local currencies) on significantly higher large orders in the marine sector compared to the previous year. Orders increased 3 percent (5 percent in local currencies) in the Power Products division, supported by the industry sector and continued selective investments in large transmission projects. In the Power Systems division, orders grew 15 percent (20 percent in local currencies), driven primarily by the receipt of several large orders. During 2014, base orders grew 2 percent (4 percent in local currencies) reflecting the global economic conditions which showed positive trends but remained mixed in certain markets. Following a weak large order intake in 2013, large orders increased 45 percent (50 percent in local currencies) in 2014. Successful sales efforts resulted in orders from the 2013 tender backlog successfully turning into orders in 2014. This allowed large orders to grow significantly, particularly in the Process Automation and Power Systems divisions. 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. Despite strong project tendering activity, some cus- tomers delayed order awards due to macroeconomic un certainties and this resulted in order declines in the power divisions compared to 2012. ABB Annual Report 2014 | Financial review of ABB Group 93 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 businesses in this division grew except the Low Voltage Sys- tems business. Orders in the Process Automation division decreased 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). We determine the geographic distribution of our orders 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 orders was as follows: Orders in 2013 declined 6 percent (5 percent in local currencies) 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 primarily 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 divisions received higher orders than in the previous year from that country. Europe declined 1 percent (decrease of 3 percent in local currencies), as a moderate increase in the industrial sectors was offset by lower orders in the power divisions. Order growth in Germany, France and Spain mostly 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. Order backlog ($ in millions) 2014 2013 2012 2014 2013 December 31, % Change Discrete Automation and Motion 4,385 4,351 4,426 1% Low Voltage Products 891 1,057 1,117 (16)% (2)% (5)% Process Automation Power Products Power Systems 5,661 7,791 8,246 5,772 6,416 (2)% (10)% 7,946 8,493 (2)% (6)% 9,435 12,107 (13)% (22)% Operating divisions 26,974 28,561 32,559 (6)% (12)% % Change Corporate and Other(1) (2,074) (2,515) (3,261) n.a. n.a. 2014 2013 2012 2014 2013 Total 24,900 26,046 29,298 (4)% (11)% ($ in millions) Europe The Americas Asia 14,246 13,334 13,512 11,957 11,365 12,152 11,215 10,331 10,346 7% 5% 9% 6% (1)% (6)% – (8)% Middle East and Africa 4,097 3,866 4,222 Total 41,515 38,896 40,232 7% (3)% Orders in 2014 grew in all regions on higher orders in both power and automation. Orders in Europe increased 7 percent (9 percent in local currencies) driven by increases in large orders. Orders were higher in the United Kingdom, Sweden, Finland, France, Switzerland, Spain and the Netherlands, offsetting lower orders in Germany, Italy, Norway and Russia. Orders increased 5 percent (9 percent in local currencies) in the Americas on higher base and large orders in the U.S., Canada, Brazil and Argentina. In Asia, orders grew 9 percent (11 percent in local currencies) on higher orders in China, South Korea, India and Japan while orders were lower in Aus- tralia. Orders increased in MEA by 6 percent (9 percent in local currencies) supported by growth in Saudi Arabia while orders decreased in the United Arab Emirates and South Africa. 94 Financial review of ABB Group | ABB Annual Report 2014 (1) Includes interdivisional eliminations In 2014, consolidated order backlog decreased 4 percent (increased 5 percent in local currencies). Order backlog in all divisions reflected the effects of significant foreign currency changes as the U.S. dollar strengthened during 2014 against substantially all currencies. In the Discrete Automation and Motion, Process Automation and Power Products divisions, order backlog increased in local currencies as a result of growth in global industrial demand. Order backlog in the Pro- cess Automation division also increased due to large orders received in the marine and oil and gas sectors. Order back- log in the Low Voltage Products division decreased in local currencies due to divestments during 2014. Order backlog in the Power Systems division decreased 4 percent in local currencies as the impacts of higher large orders during 2014 were more than offset by the impacts of the run off of the order backlog in the businesses affected by the Power Sys- tems repositioning announced in 2012 and the exit from the solar EPC business announced in 2014. 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 invest- ments, 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 divi- sion was below the respective levels at the end of 2012. Revenues ($ in millions) 2014 2013 2012 2014 2013 % Change Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems 10,142 9,915 9,405 7,532 7,948 7,729 6,638 8,497 8,156 10,333 11,032 10,717 2% (3)% (6)% (6)% 7,020 8,375 7,852 (16)% Operating divisions 42,975 45,548 42,768 (6)% Corporate and Other(1) (3,145) (3,700) (3,432) n.a. Total 39,830 41,848 39,336 (5)% (1) Includes interdivisional eliminations 5% 16% 4% 3% 7% 7% n.a. 6% Revenues in 2014 decreased 5 percent (2 percent in local currencies) due primarily to the impacts of the lower opening order backlog in the Power Systems and Process Automation divisions compared to the beginning of 2013 and the impacts of business divestments. On a divisional basis, revenues grew 2 percent (4 percent in local currencies) in the Discrete Automation and Motion division, supported by growth in the Robotics business and also due to the impact of including Power-One for the full year in 2014. In the Low Voltage Products division, revenues decreased 3 percent (flat in local currencies) as steady to higher revenues in most businesses were offset by decreases in revenues resulting from divestments. Revenues in the Pro- cess Automation division decreased 6 percent (4 percent in local currencies) due to the effects of the lower opening order backlog, primarily in the systems businesses and were also impacted by the exit from a large service contract in the fourth quarter of 2013. Revenues in the Power Products division decreased 6 percent (4 percent in local currencies) mainly reflecting the low opening order backlog. In the Power Sys- tems division, revenues decreased 16 percent (13 percent in local currencies) due to the lower opening order backlog in all businesses. 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 in 2013 rose 5 percent (5 percent in local currencies) in the Discrete Automation and Motion division as the Robotics business grew for the fourth consecutive year. In the Low Voltage Products division, revenues grew 16 per- cent (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 higher (5 percent in local currencies) in 2013, supported by the execution of orders from the 2012 order backlog, especially in the marine, mining, 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. We determine the geographic distribution of our revenues 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 revenues was as follows: ($ in millions) Europe The Americas Asia 2014 2013 2012 2014 2013 % Change 13,674 14,385 14,073 11,482 12,115 10,699 10,874 11,230 10,750 (5)% (5)% (3)% (8)% 2% 13% 4% 8% 6% Middle East and Africa 3,800 4,118 3,814 Total 39,830 41,848 39,336 (5)% In 2014, revenues declined in all regions. In Europe, revenues decreased 5 percent (3 percent in local currencies) as revenue increases in Norway, the United Kingdom, France, Switzerland and Spain were more than offset by revenue declines in Germany, Italy, Sweden, Finland, Russia and the Netherlands. Revenues from the Americas declined 5 per- cent (2 percent in local currencies). Revenues were steady in the U.S. and included the impacts of including Power-One for a full year in 2014 while revenues declined in Canada and Brazil. Revenues from Asia decreased 3 percent (1 percent in local currencies) as revenues were flat in China while decreases were realized in India, South Korea and Australia. Revenues in MEA declined 8 percent (6 percent in local cur- rencies) as a result of lower revenues in Saudi Arabia and South Africa in the power divisions while revenues increased in the United Arab Emirates. ABB Annual Report 2014 | Financial review of ABB Group 95 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, the 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 percent (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 Auto- mation 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 cur- rencies) 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. 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 2014, cost of sales decreased 4 percent (1 percent in local currencies) to $28,615 million. As a percentage of revenues, cost of sales increased from 71.3 percent in 2013 to 71.8 percent in 2014. Cost of sales as a percentage of revenues decreased in most divisions as benefits from cost savings more than offset the impacts from price pressures in certain markets. However, the consolidated cost of sales as a percentage of revenues was higher due to high project- related costs in the Power Systems division and the dilutive impact on margins from the Power-One acquisition in the Discrete Auto mation and Motion division. In 2013, cost of sales increased 7 percent (8 percent in local currencies) to $29,856 million. As a percentage of revenues, cost of sales increased from 71.1 percent in 2012 to 71.3 percent in 2013. Despite margin improvements in the Low Voltage Products division, cost of sales as a percent- age of revenues increased due to a negative business mix and margin reductions on the execution of lower margin orders from the backlog in the Power Products division. Further- more, additional negative impacts from project-related charges in the Power Systems division were recorded. Cost of sales as a percentage of service revenues decreased due to produc- tivity gains and a positive business mix. Selling, general and administrative expenses The components of selling, general and administrative expenses were as follows: ($ in millions) Selling expenses 2014 4,054 2013 4,071 2012 3,862 Selling expenses as a percentage of orders received 9.8% 10.5% 9.6% General and administrative expenses 2,013 2,023 1,894 General and administrative expenses as a percentage of revenues 5.1% 4.8% 4.8% Total selling, general and administrative expenses 6,067 6,094 5,756 Total selling, general and administrative expenses as a percentage of revenues 15.2% 14.6% 14.6% Total selling, general and administrative expenses as a percentage of the average of orders received and revenues 14.9% 15.1% 14.5% In 2014, general and administrative expenses remained stable compared to 2013 (increased 2 percent in local currencies). As a percentage of revenues, general and administrative ex- penses increased from 4.8 percent to 5.1 percent mainly due to the impact of lower revenues. 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, general and administrative expenses as a percentage of rev- enues, remained unchanged. In 2014, selling expenses remained stable compared to 2013 (increased 2 percent in local currencies). Selling ex- penses as a percentage of orders received decreased from 10.5 percent to 9.8 percent mainly due to the impact of higher orders received. In 2013, selling expenses increased 5 percent (5 percent in local currencies) mainly due to the increase in the num- ber of sales-related employees added in certain key markets. In 2014, selling, general and administrative expenses remained stable compared to 2013 (increased 2 percent in local currencies) and as a percentage of the average of orders and revenues, selling, general and administrative expenses decreased from 15.1 percent to 14.9 percent as the impact of lower revenues was more than offset by the impact of higher orders. In 2013, selling, general and administrative expenses increased 6 percent (6 percent in local currencies). As a per- centage of the average of orders and revenues, selling, general and administrative expenses increased 0.6 percent- age-points to 15.1 percent, primarily due to the decrease in orders received and increased selling expenses (explained above). 96 Financial review of ABB Group | ABB Annual Report 2014 Non-order related research and development expenses In 2014, non-order related research and development ex- penses increased 2 percent compared to 2013 (4 percent in local currencies). In 2013, non-order related research and development expenses remained flat (declined 1 percent in local currencies). Non-order related research and development expenses as a percentage of revenues increased to 3.8 percent in 2014, after decreasing to 3.5 percent in 2013 from 3.7 percent in 2012. Other income (expense), net ($ in millions) 2014 2013 2012 Restructuring and restructuring- related expenses(1) Net gain from sale of property, plant and equipment Asset impairments Net gain (loss) from sale of businesses Income from equity-accounted companies and other income (expense) Total (1) Excluding asset impairments (37) 17 (34) 543 40 529 (45) 18 (29) (16) 31 (41) (54) 26 (111) (2) 41 (100) “Other income (expense), net” primarily includes certain restructuring and restructuring-related expenses, gains and losses from sale of businesses and sale of property, plant and equipment, recognized asset impairments, as well as our share of income or loss from equity-accounted com- panies. “Other income (expense), net” was an income of $529 million in 2014, compared with an expense of $41 mil- lion in 2013, mostly due to the impact of the net gains re- corded in 2014 from the sale of HVAC, Power Solutions, Steel Structures and Full Service businesses. In 2013, “Other income (expense), net” decreased to an expense of $41 million from $100 million in 2012, mostly due to the impact in 2012 of $87 million of impairments rec- ognized for certain equity-method investments. Income from operations ($ in millions) 2014 2013 2012 2014 2013 % Change (1) Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Operating divisions Corporate and Other 1,422 1,475 1,003 1,204 (360) 4,744 (569) 1,458 1,469 1,092 990 856 912 (2)% 35% 1% 1,331 1,328 (10)% (1)% 28% 9% – 171 7 n.a. n.a. 5,042 4,572 (6)% 10% (650) (524) n.a. n.a. n.a. n.a. 8% Intersegment elimination 3 (5) 10 Total 4,178 4,387 4,058 (5)% (1) Certain percentages are stated as n.a. as the computed change would not be meaningful. In 2014 and 2013, changes in income from operations were a result of the factors discussed above and in the divisional analysis below. Net interest and other finance expense Net interest and other finance expense consists of “Interest and dividend income” offset by “Interest and other finance expense”. “Interest and other finance expense” includes interest expense on our debt, the amortization of upfront transaction costs associated with long-term debt and committed credit facilities, commitment fees on credit facilities, foreign exchange gains and losses on financial items and gains and losses on marketable securities. ($ in millions) Interest and dividend income Interest and other finance expense Net interest and other finance 2014 80 (362) 2013 69 (390) 2012 73 (293) expense (282) (321) (220) In 2014, “Interest and other finance expense” decreased compared to 2013, mainly resulting from (i) the maturity of a bond in June 2013 and (ii) the reduction in interest expense resulting from an additional interest rate swap entered into during 2014 – see “Note 12 Debt” to our Consolidated Finan- cial Statements. 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. ABB Annual Report 2014 | Financial review of ABB Group 97 Provision for taxes ($ in millions) 2014 2013 2012 Income from continuing operations before taxes Provision for taxes Effective tax rate for the year 3,896 (1,202) 30.9% 4,066 (1,122) 27.6% 3,838 (1,030) 26.8% In 2014, the tax rate of 30.9% included the effects of taxes on net gains on sale of businesses. Included in the provision for taxes of $1,202 million were taxes of $279 million relating to $543 million of gains on sale of businesses. These divest- ment transactions increased the effective tax rate as gains were realized primarily in higher-tax jurisdictions and the good- will allocated to the divested businesses was not deductible for tax purposes. Excluding the effects of these divestment transactions, the effective tax rate for 2014 would have been 27.5%. The provision for taxes in 2014 included a net increase of valuation allowance on deferred taxes of $52 million, as we determined it was not more likely than not that such deferred tax assets would be realized. This amount included an expense of $31 million related to certain of our operations in South America. The provision for taxes in 2013 included a net increase in valuation allowance on deferred taxes of $31 million, as we determined 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 Europe and South America. It also included a benefit of $42 million 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 million related to certain of our operations in Central Europe. The provision for taxes in 2014, 2013 and 2012, also included tax credits, arising in foreign jurisdictions, for which the technical merits did not allow a benefit to be taken. 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 2014 and 2012 was not significant. Net income attributable to ABB As a result of the factors discussed above, net income attributable to ABB decreased $193 million to $2,594 million in 2014 compared to 2013, and increased $83 million to $2,787 million in 2013 compared to 2012. Earnings per share attributable to ABB shareholders (in $) Income from continuing operations, net of tax: Basic Diluted Net income attributable to ABB: Basic Diluted 2014 2013 2012 1.12 1.12 1.13 1.13 1.23 1.23 1.21 1.21 1.18 1.18 1.18 1.18 Basic earnings per share is calculated by dividing income by the weighted-average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weighted-average number of shares out- standing during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive secu- rities comprise: outstanding written call options and outstand- ing options and shares granted subject to certain conditions under our share-based payment arrangements. See “Note 20 Earnings per share” to our Consolidated Financial Statements. Income from continuing operations, net of tax Divisional analysis As a result of the factors discussed above, income from continuing operations, net of tax, decreased $250 million to $2,694 million in 2014 compared to 2013, and increased $136 million to $2,944 million in 2013 compared to 2012. Discrete Automation and Motion The financial results of our Discrete Automation and Motion division were as follows: ($ in millions) Orders % Change 2014 2013 2012 2014 2013 10,559 9,771 9,625 8% 1% 2% (2)% (1)% 2% (2)% 5% (1)% 3% Order backlog at Dec. 31, 4,385 4,351 4,426 Revenues Income from operations Operational EBITDA 10,142 9,915 9,405 1,422 1,760 1,458 1,469 1,783 1,735 98 Financial review of ABB Group | ABB Annual Report 2014 Orders Orders in 2014 increased 8 percent (10 percent in local cur- rencies) as orders were higher in all businesses. Order increases in the Power Conversion business were driven by strong rail orders and the inclusion of Power-One for a full year in 2014 compared to 5 months in 2013. Orders grew in the Robotics business as demand increased from general industry while large order demand from the automotive sector was lower. Orders in the Drives and Controls and the Motors and Generators businesses increased due to higher service orders as well as the receipt of large marine orders in 2014. Orders in 2013 were up 2 percent (2 percent in local currencies) as both the growth in orders in our Robotics busi- ness 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 increased 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. The geographic distribution of orders for our Discrete Automation and Motion division was as follows: Order backlog Order backlog in 2014 increased 1 percent (9 percent in local currencies) assisted by the receipt of large rail orders in Sweden and Switzerland which will primarily be delivered after 2015. 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 more than offset by a decrease in order backlog in the Drives and Controls, and Motors and Generators businesses. Revenues In 2014, revenues grew 2 percent (4 percent in local curren - cies) due to the impact of including Power-One for a full year in 2014 and growth in the Robotics business. Revenues were also supported by a 9 percent increase in service rev- enues (12 percent in local currencies). Revenues in the Drives and Controls, and Motors and Generators businesses declined due to a weak opening order backlog for mid- and large-sized medium voltage drives and high voltage motors. 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 Generators business lowered the overall growth rate of the division. The geographic distribution of revenues for our Discrete 2014 2013 2012 Automation and Motion division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 39 32 26 3 38 32 27 3 37 34 26 3 (in %) Europe The Americas 100 100 100 Asia Middle East and Africa Total 2014 2013 2012 37 33 27 3 39 32 26 3 37 33 27 3 100 100 100 In 2014, the geographical split of orders was consistent with 2013. Larger rail orders in the Power Conversion business from Sweden and Switzerland compensated for other market weakness in Europe. The Americas maintained their share of global orders as orders received in the U.S. increased due to the inclusion of the solar business of Power-One for a full year while the rest of the Americas was steady. The share of orders from Asia was supported by growth in China offsetting the impacts of order declines in India. In 2013, the geographic distribution of our orders remained similar to 2012. Large orders in the Robotics busi- ness 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 in the U.S. also reduced the share of orders from the Americas. The share of orders from Europe increased slightly due to several larger traction orders in our Power Conversion busi- ness. In 2014, the share of revenues from Europe declined due to lower revenues in the Drives and Controls, and Motors and Generators businesses. The Americas’ share of revenues increased and was supported by the inclusion of Power-One for a full year in 2014. Revenues in Asia were supported by high automotive revenues in Robotics in China. 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, Finland and Switzerland. The share of the Americas decreased as revenue growth in Brazil and Canada was off- set by a revenue decrease in the U.S. Asia’s share of reve- nues declined as revenues in India, Australia and South Korea were lower than 2012, while China recorded moderate growth. ABB Annual Report 2014 | Financial review of ABB Group 99 In 2013, income from operations was stable compared to Income from operations Low Voltage Products The financial results of our Low Voltage Products division were as follows: ($ in millions) Orders 2014 7,550 % Change 2013 2012 2014 2013 7,696 6,720 (2)% Order backlog at Dec. 31, 891 1,057 1,117 (16)% Revenues Operational EBITDA 7,532 1,475 1,429 7,729 6,638 1,092 856 1,468 1,219 (3)% 35% (3)% 15% (5)% 16% 28% 20% Orders In 2014, orders decreased 2 percent (flat in local currencies) as order growth in most businesses was offset by the impact of the divestments of HVAC and Steel Structures. Order growth was highest in the Wiring Accessories business and orders also grew in the Breakers and Switches, Enclosures, and Control Products businesses while orders in the Low Voltage Systems business were steady. Product businesses grew despite a challenging macroeconomic envi ronment in Europe, lower investments in the construction market in China and political instability in certain Eastern European countries. Orders increased 15 percent (14 percent in local curren - cies) in 2013, driven primarily by the impact of including Thomas & Betts for the full year in 2013. In addition, orders grew moderately in most product businesses, while in the systems business orders decreased. The geographic distribution of orders for our Low Voltage Products division was as follows: 33 8 (in %) 2014 2013 2012 (12) 1,783 Europe (1) The Americas 1,735 Asia Middle East and Africa Total 39 30 24 7 39 32 22 7 43 26 24 7 100 100 100 In 2014, the share of orders from the Americas decreased primarily due to the impact of the divestments in the year, which were mainly based in the U.S. and Canada. The share of orders in Asia increased, partially driven by systems orders in China. 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. Order backlog In 2014, order backlog decreased 16 percent (9 percent in local currencies), driven mainly by the impacts of business divestments in the year. In 2013, order backlog decreased 5 percent (4 percent in local currencies), driven mainly by certain product businesses. Income from operations In 2014, income from operations was lower than 2013, despite higher revenues, due to price pressures affecting gross margin and higher depreciation costs. Lower revenues in the Drives and Controls, and Motors and Generators busi- nesses also led to reduced income from operations. Robot- ics had a higher contribution to income from operations due to increased revenues and improved gross margins while margins were lower in the Power Conversion business due to the dilutive effects of Power-One. 2012. The benefit of higher revenues was offset by a reduc- tion 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 operations in 2013. Depreciation and amortization increased to $285 million in 2013, mainly due to the acquisition of Power-One. Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Discrete Automation and Motion division was as follows: ($ in millions) Income from operations Depreciation and amortization Restructuring and restructuring- 2014 1,422 309 2013 1,458 285 2012 1,469 263 related expenses 25 19 (4) Gains and losses on sale of businesses, acquisition-related expenses and certain non- operational items FX/commodity timing differences in income from operations – 4 Operational EBITDA 1,760 In 2014, Operational EBITDA declined 1 percent compared to 2013, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. In 2013, Operational EBITDA increased 3 percent com- pared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Fiscal year 2015 outlook The speed and direction of global economic development is currently uncertain. There continue to be some positive indi- cators in the U.S., and China is expected to continue to grow. Many economies in Europe, however, are expected to remain weak. Despite this mixed outlook, we expect custom- ers to continue to invest in safe, efficient and flexible auto- mation, and in sustainable transport and infrastructure, which will support the performance of the Discrete Automation and Motion division in 2015. 100 Financial review of ABB Group | ABB Annual Report 2014 Revenues In 2014, revenues decreased 3 percent (flat in local curren- cies) as steady to higher revenues in most businesses were offset by the impacts of divested businesses. Revenues grew slightly in the Breakers and Switches and Low Voltage Systems businesses while revenues were flat in the Enclo- sures and Control Products businesses. 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. 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 Restructuring and restructuring- 2014 1,475 301 2013 1,092 323 2012 856 250 related expenses 45 31 23 Gains and losses on sale of businesses, acquisition-related expenses and certain non- The geographic distribution of revenues for our Low operational items Voltage Products division was as follows: FX/commodity timing differences in income from operations 2014 2013 2012 Operational EBITDA (407) 15 1,429 16 6 1,468 106 (16) 1,219 (in %) Europe The Americas Asia Middle East and Africa Total 40 30 23 7 39 33 22 6 43 26 24 7 100 100 100 In 2014, the share of revenues from the Americas decreased primarily due to the impact of divestments in the year. The share of revenues from Asia and MEA increased slightly, par- tially attributable to increased systems revenues in China and Saudi Arabia respectively. In 2013, the share of revenues from the Americas increased and the share of revenues from both Europe and Asia decreased, due primarily to the impact of including Thomas & Betts for the full year in 2013. Income from operations In 2014, income from operations increased 35 percent, primarily due to gains from the sales of businesses divested in the year. Depreciation and amortization of $301 million was lower than 2013, due to the impacts of business divest- ments in 2014. However, income from operations was impacted by a negative product mix. 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 $323 million was higher than in 2012, due primarily to including Thomas & Betts for a full year. In addition, the change in geographic distribution of revenues in 2013, as well as a different revenue mix between products and systems, increased profitability. In 2014, Operational EBITDA decreased 3 percent compared to 2013, primarily due to the reasons described under “In- come from operations”, excluding the explanations related to the reconciling items in the table above. In 2013, Operational EBITDA increased 20 percent com- pared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Fiscal year 2015 outlook The global demand outlook for 2015 in our key industry and transport and infrastructure markets varies by region and sector. There are some positive indicators in North America and slow growth in Europe is expected to remain. Economic growth in China is forecasted to continue. Customer spending to improve industrial and building efficiency is expected to support the business in 2015, along with further investments in electrical marine propulsion and rail transport. Process Automation The financial results of our Process Automation division were as follows: ($ in millions) Orders Order backlog at Dec. 31, Revenues Income from operations Operational EBITDA % Change 2014 8,577 5,661 7,948 1,003 1,029 2013 2012 2014 2013 8,000 8,704 7% (8)% 5,772 6,416 (2)% (10)% 8,497 8,156 (6)% 990 912 1% 1,096 1,003 (6)% 4% 9% 9% Orders Orders in 2014 increased 7 percent (10 percent in local cur- rencies), mainly due to high demand from the marine sector, especially for LNG vessels. Orders in the oil and gas busi- nesses also increased while orders in the mining businesses remained at low levels as most mining customers delayed or postponed capital investments. Orders in the metals busi- nesses also remained at low levels due to overcapacity issues affecting our customers. Other customers such as steel companies are focusing their spending on operating expenses and not on capital investment due to profitability ABB Annual Report 2014 | Financial review of ABB Group 101 pressures affecting their industry. The paper industry in North America, South America and parts of Asia, however, has improved and has started to increase its level of capital investment. Orders in 2013 declined 8 percent (8 percent in local cur- rencies), 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. The geographic distribution of orders for our Process Automation division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2014 2013 2012 33 23 35 9 37 23 31 9 37 25 27 11 Revenues In 2014, revenues were down 6 percent (4 percent in local currencies) reflecting the impacts of lower order intake in the previous year. Revenue decreases were more significant in the systems businesses, especially in mining systems, due to the weak opening order backlog while revenues in the oil and gas businesses increased. Product revenues were flat. Revenues in the Measurement Products business grew slightly but were offset by a decline in revenues in the Con- trol Technologies business. Product revenues in the Turbo- charging business increased slightly compared to the low levels last year. Revenues were also impacted by the exit in 2013 from a large service contract. Although orders decreased in 2013, revenues were 4 percent higher than 2012 (5 percent in local currencies) as we executed on projects in the order backlog from 2012. Revenue growth resulted primarily from the systems busi- nesses, particularly in the marine and mining sectors. Revenues in our product businesses grew moderately, par- ticularly in Measurement Products and Control Technologies. Lifecycle services also showed modest growth. The geographic distribution of revenues for our Process 100 100 100 Automation division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 2014 2013 2012 35 23 33 9 36 24 32 8 37 23 30 10 100 100 100 The regional distribution of revenues in 2014 did not change significantly compared to 2013. Revenue share declines were realized in Europe and the Americas, while Asia and MEA increased. In Europe, revenues declined as result of an exit in 2013 from a large service contract in Finland and lower revenues in Sweden. In the Americas, lower opening order backlog in the mining business led to lower revenues in Chile and Peru, which more than offset growth in the U.S. The revenue share from Asia increased slightly while the reve- nue increase in MEA was mainly from Algeria and the United Arab Emirates. 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 sectors. 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 rev- enues from Europe decreased, revenues from Europe increased, mainly from higher revenues in the oil and gas sec- tor in Northern 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 2014, the share of orders from Asia increased primarily due to the impacts of large orders received in South Korea from the LNG marine sector and strong order growth in China. Orders grew in MEA, allowing it to maintain its share of orders, and included the impact of the award of a gas treatment plant contract in Tunisia. The share of orders from the Americas remained steady. Growth in Brazil was offset by the effects of lower mining investments in Chile while North America grew slightly. Orders decreased in Europe which resulted in a reduction in the share of orders from Europe compared to 2013. Marine orders in Finland were offset by lower order intake in Germany and Southern Europe. 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 high oil prices and improving reservoir assessment technology. The European shipbuilding sector also saw renewed activity, although economic constraints such as overcapacity and the lack of financing 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. Order backlog Order backlog at December 31, 2014, was 2 percent lower compared to 2013. In local currencies, order backlog was 9 percent higher, reflecting the higher order intake during the year, especially large orders. 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. 102 Financial review of ABB Group | ABB Annual Report 2014 Income from operations In 2014, income from operations increased compared to 2013, mainly due to the gain on sale of the Full Service business partially offset by the impact of lower revenues. 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. Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Process Automation division was as follows: ($ in millions) Income from operations Depreciation and amortization Restructuring and restructuring- related expenses Gains and losses on sale of businesses, acquisition-related expenses and certain non- operational items FX/commodity timing differences in income from operations 2014 1,003 88 43 (113) 8 2013 990 87 2012 912 82 31 28 (6) (6) 2 (21) Power Products The financial results of our Power Products division were as follows: ($ in millions) Orders 2014 2013 2012 2014 2013 % Change 10,764 10,459 11,040 Order backlog at Dec. 31, 7,791 7,946 8,493 Revenues 10,333 11,032 10,717 Income from operations Operational EBITDA 1,204 1,519 1,331 1,328 (10)% 1,637 1,585 (7)% 3% (2)% (6)% (5)% (6)% 3% – 3% Orders In 2014, orders increased 3 percent (5 percent in local curren - cies), supported by the industry sector and continued selec- tive investments in large transmission projects. In 2013, orders decreased 5 percent (5 percent in local currencies), 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. The geographic distribution of orders for our Power Products division was as follows: Operational EBITDA 1,029 1,096 1,003 (in %) 2014 2013 2012 In 2014, Operational EBITDA decreased 6 percent compared to 2013, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. In 2013, Operational EBITDA increased 9 percent com- pared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Fiscal year 2015 outlook The outlook for 2015 is mixed and varies by industry. While the oil and gas sector has recently been a key growth driver, the decrease in oil prices is expected to lead to lower and/or delayed capital expenditures by our upstream oil and gas customers. However, mid- and downstream activities such as refining, chemicals and petrochemicals may see increased investment. The marine market is expected to continue to be strong, while demand from the mining segment is forecast to remain at low levels. The metals industry still suffers from overcapacity, while the pulp and paper industry is expected to grow moderately, especially in the emerging markets. Europe The Americas Asia Middle East and Africa Total 28 29 29 14 31 28 29 12 33 27 29 11 100 100 100 In 2014, the share of orders from the Americas increased, mainly driven by the transmission sector. The continued development of power infrastructure investments led to a higher share of orders in MEA. Asia maintained its share of total orders with India showing growth and China remain- ing stable. Europe’s share of orders declined, reflecting the difficult market conditions throughout the year. 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. Order backlog In 2014, order backlog decreased 2 percent (increased 6 percent in local currencies) compared to 2013. In local currencies, the order backlog increased in all businesses resulting from higher orders during the year. 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 executed from the 2012 backlog. ABB Annual Report 2014 | Financial review of ABB Group 103 Revenues In 2014, revenues in the Power Products division decreased 6 percent (4 percent in local currencies), mainly reflecting the impact of the lower opening order backlog. Service revenues continued to grow and represented a higher share of the total division revenues compared to 2013. 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. 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 Restructuring and restructuring- 2014 1,204 217 2013 1,331 223 2012 1,328 209 related expenses 51 66 65 Gains and losses on sale of businesses, acquisition-related expenses and certain non- operational items FX/commodity timing differences The geographic distribution of revenues for our Power in income from operations Products division was as follows: Operational EBITDA 1,519 1,637 16 31 19 (2) 1 (18) 1,585 (in %) Europe The Americas Asia Middle East and Africa Total 2014 2013 2012 32 26 31 11 32 27 30 11 32 27 32 9 100 100 100 In 2014, the shares of revenues from both Europe and MEA remained unchanged, reflecting the current economic envi- ronment. The share of revenues from the Americas was lower as revenues in certain key markets decreased slightly com- pared to 2013. The increase in the share of revenues from Asia was primarily driven by revenue increases in India. 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 com- pared to 2012. The increase in the share of revenues from MEA was primarily driven by revenue increases in Saudi Arabia. Income from operations In 2014, income from operations was lower compared to 2013 primarily reflecting lower revenues, higher charges relating to FX/commodity timing differences and higher selling expenses resulting from investments made in the sales function. 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 timing differences were lower than in 2012. Restructuring-related expenses were at the same level as 2012. 104 Financial review of ABB Group | ABB Annual Report 2014 In 2014, Operational EBITDA decreased 7 percent compared to 2013, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. In 2013, Operational EBITDA increased 3 percent com- pared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. Fiscal year 2015 outlook Utility investments continue to be restrained based on the overall macroeconomic environment. The power transmission sector is still seeing selective project investments, driven by new infrastructure demand in emerging markets and the need for grid upgrades, improved power reliability and environmental concerns in the mature markets. Power dis- tribution demand is expected to be stable. Investments by industrial customers vary across geographies and sec- tors and remain largely focused on sectors such as heavy industries. The overall market remains competitive. Power Systems The financial results of our Power Systems division were as follows: ($ in millions) Orders Order backlog at Dec. 31, Revenues Income from operations Operational EBITDA 2014 6,871 8,246 7,020 (360) 5 % Change 2013 2012 2014 2013 5,949 7,973 15% (25)% 9,435 12,107 (13)% (22)% 8,375 7,852 (16)% 171 419 7 n.a. 290 (99)% 44% 7% n.a. Orders In 2014, orders increased 15 percent (20 percent in local currencies) compared with 2013, mainly due to a higher level of large orders in the Grid Systems business following the $800 million award in the United Kingdom for a HVDC subsea power connection in northern Scotland and a $400 million HVDC project in Canada to provide the first electricity link between the island of Newfoundland and the North American power grid. In addition, large orders in 2014 included a $110 million substation order in Saudi Arabia which will support grid interconnection and boost electricity transmission capacity. Initiatives to drive base order growth, combined with early signs of stabilization in the utility sector, contributed to modest growth in base orders. The overall market remains highly competitive, especially in certain higher- growth regions such as the Middle East. The Power Systems division continues to be selective, focus- ing on higher-margin projects and those with higher pull- through of other ABB products. Order intake in 2013 was 25 percent lower (25 percent 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. Power infra- structure spending was restrained due to economic uncertain- ties in most regions, while transmission utilities continued to invest selectively, focusing on additional capacity in emerg- ing 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 substa- tion orders of $160 million in Kuwait to help strengthen the country’s power grid and support its growing infrastructure. Price pressure, resulting from ongoing macroeconomic weakness in certain key geographical markets, also nega- tively impacted our order levels in 2013. The geographic distribution of orders for our Power Sys- tems division was as follows: (in %) Europe The Americas Asia Middle East and Africa Total 42 25 17 16 35 25 17 23 30 31 18 21 100 100 100 In the Power Systems division, the change in the geographic share of orders often reflects changes in the geographical locations of large orders. In 2014, the share of orders from Europe increased due to the award of the HVDC project in Scotland. The share of orders in the Americas and Asia remained stable with growth in both large and base orders. Orders from MEA decreased, mainly due to the timing of large order awards, resulting in a reduction of order share relative to the other regions. In 2013, orders declined across all regions 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. Order backlog Order backlog at December 31, 2014, was $8,246 million, a decrease of 13 percent (4 percent in local currencies) compared with 2013. Although order backlog was supported by the large orders received in 2014, order backlog decreased in 2014 as the division continued to run off the remaining orders in businesses affected by the reposi- tioning of the Power Systems division announced in 2012 and the businesses affected by the exiting of the solar EPC business announced in 2014. 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. Revenues Revenues in 2014 decreased 16 percent (13 percent in local currencies), due mainly to the effects of weak order intake in 2013 and the resulting lower opening order backlog at the beginning of 2014. Revenues decreased in all businesses compared to 2013. In addition, revenues in 2014 were nega- tively impacted by execution delays in selected projects. 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. The geographic distribution of revenues for our Power Systems division was as follows: (in %) Europe The Americas Asia 2014 2013 2012 38 23 19 20 36 23 20 21 40 19 19 22 Total 100 100 100 The regional distribution of revenues reflects the geographical end-user markets of the projects we are executing, and con- sequently varies over time. In 2014, revenues decreased in all regions compared to 2013. Europe remained our largest region in terms of revenues, followed again by the Americas. The largest revenue decrease was recorded in MEA, and partly related to lower revenues in Iraq and Saudi Arabia com- pared to 2013, following a lower opening order backlog. In 2013, Europe was the largest region in terms of reve- nues, despite a decrease in share of revenues compared to previous year. The higher share of revenues from the Americas was due primarily to execution in 2013 of projects from the 2012 order backlog in the U.S. and Brazil. ABB Annual Report 2014 | Financial review of ABB Group 105 2014 2013 2012 Middle East and Africa Income from operations In 2014, the Power Systems division realized a loss from operations of $360 million compared to an income from oper- ations of $171 million in 2013, due primarily to lower reve- nues and project-related charges, mainly for offshore wind projects and solar EPC contracts. Income from operations also included a $115 million negative impact related to FX/ commodity timing differences compared with a $40 million positive impact in 2013. Restructuring-related expenses in 2014 of $63 million were lower than the $101 million in 2013, and included charges to adjust the size and cost structure of certain operations in response to lower order backlog and an increased focus on white collar productivity. Cost savings from supply chain management and operational excellence activities helped mitigate higher research and development spending, and the impact of low margin projects executed from the order backlog. In 2013, income from operations increased to $171 mil- lion, from $7 million in 2012, due partly to the impacts on 2012 from the repositioning of the Power Systems division. Income from operations 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 $52 million in 2012, and included charges to adjust the size of certain operations in response to lower order intake. However, income from operations benefitted from the contribution of higher revenues and lower research and development spending. Additionally, cost savings from supply chain management and operational excellence activi- ties helped mitigate the impact of price pressures in projects executed from the order backlog. Operational EBITDA The reconciliation of income from operations to Operational EBITDA for the Power Systems division was as follows: ($ in millions) Income from operations Depreciation and amortization Restructuring and restructuring- 2014 (360) 175 2013 171 183 2012 7 174 related expenses 63 101 52 Gains and losses on sale of businesses, acquisition-related expenses and certain non- operational items FX/commodity timing differences in income from operations Operational EBITDA 12 115 5 4 (40) 419 70 (13) 290 In 2014, Operational EBITDA decreased compared to 2013, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. In 2013, Operational EBITDA increased 44 percent com- pared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above. 106 Financial review of ABB Group | ABB Annual Report 2014 Fiscal year 2015 outlook Utilities are expected to continue to make selective invest- ments in, for example, power infrastructure to add capacity in emerging markets, and upgrading aging infrastructure in mature markets. Integrating renewable energy sources into existing grids, improving overall grid efficiency and the devel- opment of more reliable, flexible and smarter grids will also support the business. The timing of these investments can vary significantly by region and customer and depends on both short-term macroeconomic conditions, long-term demand forecasts, and regulatory and policy developments, among other factors. Corporate and Other Income from operations for Corporate and Other was as follows: ($ in millions) Corporate headquarters and stewardship Corporate research and development Corporate real estate Other Total Corporate and Other 2014 2013 2012 (369) (372) (341) (174) 44 (70) (569) (187) 49 (140) (650) (192) 50 (41) (524) In 2014, Corporate headquarters and stewardship costs were at the same level as the previous year. In 2013, Corporate headquarters and stewardship costs increased by $31 million, primarily due to increases in personnel expenses and additional investments in information systems infrastructure. In 2014, Corporate research and development costs totaled $174 million, lower than in 2013. In 2013, Cor porate research and development costs totaled $187 million, mar- ginally lower than the costs reported in 2012. Corporate real estate primarily includes the income from property rentals and gains from the sale of real estate prop- erties. In 2014, 2013 and 2012, income from operations in Corporate real estate includes gains of $17 million, $23 million and $26 million, respectively, from the sales of real estate property in various countries. “Other” consists of operational costs of our Global Treasury Operations, operating income or loss in non-core businesses and certain other charges such as costs and penalties associated with legal cases, environmental expenses and impairment charges related to investments. In 2014, “Other” declined primarily due to lower charges in connection with legal compliance cases and lower environmental expenses. In 2013, “Other” included primarily certain legal compliance cases, certain environmental 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 provision for certain pension claims in the U.S. and charges from the impairments of our investments in the shares of a public company. able securities and short-term investments” managed by our Group Treasury Operations amounted to approximately 60 percent and 55 percent, respectively. Throughout 2014 and 2013, the investment strategy for cash (in excess of current business requirements) has ge nerally been to 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 in some cases, govern- ment securities. During 2014, we also placed limited funds in connection with reverse repurchase agreements and invested in floating-rate notes. With ongoing credit risk con- cerns in the eurozone economic area, we restrict our 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 certain 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 manage- ment to identify, measure, monitor and control credit risks. We closely monitor developments 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 2014 (compared to 2013) as follows – a minimum rating of A/A2 for our banking counter- parts, 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 instruments 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 operations, 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 require- ments, as well as meet our debt repayments and other finan- cial commitments for the next 12 months. See “Disclosures about contractual obligations and commitments”. Restructuring Cost savings initiative In 2014, 2013 and 2012, we executed cost saving measures to sustainably reduce our costs and protect our profita bility. Costs associated with these measures amounted to $235 million, $252 million and $180 million in 2014, 2013 and 2012, respectively. Estimated cost savings initiatives amounted to around $1.1 billion in 2014, $1.2 billion in 2013 and $1.1 bil - lion in 2012. 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 manufacturing and engineering footprint. Liquidity and capital resources Principal sources of funding We meet our liquidity needs principally using cash from oper- ations, proceeds from the issuance of debt instruments (bonds and commercial paper), and short-term bank borrow- ings. During 2014, 2013 and 2012, our financial position was strengthened by the positive cash flow from operating activities of $3,845 million, $3,653 million and $3,779 million, respectively. Our net debt is shown in the table below: December 31, ($ in millions) Cash and equivalents Marketable securities and short-term 2014 5,443 2013 6,021 investments 1,325 464 Short-term debt and current maturities of long-term debt Long-term debt Net debt (353) (7,338) (453) (7,570) (defined as the sum of the above lines) (923) (1,538) Net debt at December 31, 2014, decreased $615 million compared to December 31, 2013, as cash flows from operating activities during 2014 of $3,845 million and proceeds from sales of businesses and equity-accounted companies (net of cash disposed and transaction costs) of $1,110 million more than offset the cash outflows for the payment of dividends ($1,973 million), purchases of property, plant and equipment and intangible assets ($1,026 million) and amounts paid to purchase treasury stock ($1,003 million). See “Financial Position”, “Investing activities” and “Financing activities” for further details. Our Group Treasury Operations is responsible for provid- ing a range of treasury management services to our group companies, including investing cash in excess of current busi- ness requirements. At December 31, 2014 and 2013, the pro - portion of our aggregate “Cash and equivalents” and “Market- ABB Annual Report 2014 | Financial review of ABB Group 107 Debt and interest rates Commercial paper Total outstanding debt was as follows: December 31, ($ in millions) 2014 2013 At December 31, 2014, we had in place two commercial paper programs: – a $2 billion commercial paper program for the private Short-term debt and current maturities of long-term debt Long-term debt: Bonds Other long-term debt Total debt 353 453 placement of U.S. dollar-denominated commercial paper in the United States, and – a $2 billion Euro-commercial paper program for the 7,126 212 7,691 7,414 156 8,023 issuance of commercial paper in a variety of currencies (which replaced the previous $1 billion Euro-commercial paper program in February 2014) The decrease in short-term debt in 2014 was primarily due to repayments of borrowings in various countries partially offset by an increase in issued commercial paper ($120 million out- standing at December 31, 2014, compared to $100 million outstanding at December 31, 2013). Our debt has been obtained in a range of currencies and maturities and on various interest rate terms. We use deriva- tives to manage the interest rate exposure 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 $2,318 million and our fixed rate long-term debt (including current maturities) of $5,074 million was 1.1 percent and 3.2 percent, respectively. This compares with an effective rate of 1.2 percent for float- ing rate long-term debt of $2,211 million and 3.1 percent for fixed-rate long-term debt of $5,389 million at December 31, 2013. 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 During 2014, we replaced our $2 billion multicurrency revolving credit facility, maturing in 2015, with a new $2 billion revolv- ing multicurrency credit facility, maturing in 2019. In 2015 and 2016, we have the option to extend the maturity of the new facility to 2020 and 2021, respectively. No amount was drawn under either of the committed credit facilities at December 31, 2014 and 2013. The replace - ment facility is for general corporate purposes. 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 specified threshold. The credit facility does not contain financial covenants that would restrict our ability to pay dividends or raise additional funds in the capital markets. For further details of the credit facility, see “Note 12 Debt” to our Consolidated Financial Statements. At December 31, 2014, $120 million was outstanding under the $2 billion program in the United States, compared to $100 million outstanding at December 31, 2013. No amount was outstanding under the $2 billion Euro- commercial paper program at December 31, 2014. No amounts were outstanding at December 31, 2013 either under our previous $1 billion Euro-commercial paper program or under the 5 billion Swedish krona program that was terminated in 2014. European program for the issuance of debt The European program for the issuance of debt allows the issuance of up to (the equivalent of) $8 billion in certain debt instruments. The terms of the program do not obligate any third party to extend credit to us and the terms and possibility of issuing any debt under the program are deter- mined with respect to, and as of the date of issuance of, each debt instrument. At December 31, 2014, it was more than 12 months since the program had been updated. New bonds could be issued under the program but cannot be listed without us formally updating the program. At December 31, 2014 and 2013, one bond (principal amount of EUR 1,250 million and due in 2019) having a carrying amount of $1,518 million and $1,722 million, respectively, was outstanding under this 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 $819 million, using December 31, 2014 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 de- termined with respect to, and as of the date of issuance of, each debt instrument. At both December 31, 2014 and 2013, one bond, having a principal amount of AUD 400 million and maturing in 2017, was outstanding under the program. The carrying amount of the bond at December 31, 2014 and 2013 was $335 million and $353 million, respectively. 108 Financial review of ABB Group | ABB Annual Report 2014 Credit ratings Financial position Credit ratings are assessments by the rating agencies of the credit risk associated with ABB and are based on information provided by us or other sources that the rating agencies consider reliable. Higher ratings generally result in lower bor- rowing costs and increased access to capital markets. Our ratings are of “investment grade” which is defined as Baa3 (or above) from Moody’s and BBB− (or above) from Standard & Poor’s. At both December 31, 2014 and 2013, our long-term debt was rated A2 by Moody’s and A by Standard & Poor’s. 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, Egypt, India, Indonesia, Kazakhstan, Korea, Malaysia, Peru, Russia, South Africa, Taiwan, Thailand, Turkey and to a certain extent, China. Funds, other than regular dividends, fees or loan repay- ments, cannot be readily transferred offshore from these countries and are therefore deposited and used for working capital needs in those countries. In addition, there are certain countries where, for tax reasons, it is not considered optimal to transfer the cash offshore. As a consequence, these funds are not available within our 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 December 31, 2014 and 2013, the balance of “Cash and equivalents” and “Marketable securi- ties and other short-term investments” under such limitations (either regulatory or sub-optimal from a tax perspective) totaled approximately $1,498 million and $1,785 million, re- spectively. During 2014, we continued to direct our subsidiaries in countries with restrictions to place such cash with our core banks or investment grade banks, in order to minimize credit risk on such cash positions. We continue to closely monitor the situation to ensure bank counterparty risks are minimized. Balance sheets Current assets December 31, ($ 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 2014 5,443 1,325 11,078 5,376 218 902 644 2013 6,021 464 12,146 6,004 252 832 706 24,986 26,425 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 increased in 2014 due to higher amounts invested in available- for-sale securities, increases in time deposits and invest- ments made in reverse repurchase agreements (see “Cash flows-Investing activities” below). Receivables decreased 8.8 percent. In local currencies, Receivables decreased 1.7 percent primarily due to the impacts of divestments. For details on the components of Receivables, see “Note 7 Receivables, net”. Inventories decreased 10.5 percent (increased 1.1 percent in local curren - cies) compared to 2013. Excluding the impacts of divest- ments, Inventories increased 2.9 percent in local currencies. For a summary of the components of deferred tax assets and liabilities, see “Note 16 Taxes” to our Consolidated Financial Statements. The decrease in “Other current assets” is due primarily to a reduction in the fair value of current derivative assets. 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 2014 4,765 1,455 353 1,624 289 1,148 1,689 4,257 2013 5,112 1,714 453 1,726 259 1,362 1,807 4,242 15,580 16,675 ABB Annual Report 2014 | Financial review of ABB Group 109 Accounts payable decreased 6.8 percent. In local currencies, Accounts payable increased 1.8 percent due primarily to an increase in days payables outstanding of approximately 2 days. Billings in excess of sales decreased 15.1 percent compared to 2013. In local currencies, Billings in excess of sales decreased 7.0 percent due to the timing of billings and collections for contracts under the percentage-of-completion or completed-contract methods. Advances from customers declined 5.9 percent. In local currencies, Advances increased 2.3 percent primarily due to the receipt of advances on projects in the Process Automation division. Provisions for warranties decreased 15.7 percent. In local currencies, Provisions for warranties decreased 6.5 percent primarily due to the settlement of warranty claims exceeding the current year warranty expense. Other provisions decreased 6.5 per- cent (increased 0.9 percent in local currencies). Other current liabilities increased 0.4 percent. In local currencies, Other current liabilities increased 9.3 percent primarily due to an increase in the fair value of current derivatives classified as liabilities. abilities, see “Note 13 Other provisions, other current liabilities and other non-current liabilities” to our Consolidated Finan- cial 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: ($ in millions) 2014 2013 2012 Net cash provided by operating activities 3,845 3,653 3,779 Net cash used in investing activities (1,121) (717) (5,575) Net cash provided by (used in) financing activities (3,024) (3,856) 3,762 Effects of exchange rate changes 2013 on cash and equivalents (278) 66 90 6,254 Net change in cash and equiva 10,670 lents – continuing operations (578) (854) 2,056 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 2014 5,652 10,053 2,702 70 177 511 727 3,297 93 197 370 758 Operating activities ($ in millions) 19,892 21,639 Net income 2014 2,718 1,305 2013 2,907 1,318 2012 2,812 1,182 Depreciation and amortization Total adjustments to reconcile net income to net cash provided by operating activities (excluding de- preciation and amortization) (367) (54) 196 Total changes in operating assets and liabilities 189 (518) (411) Net cash provided by operating activities 3,845 3,653 3,779 Operating activities in 2014 provided net cash of $3,845 mil- lion, an increase from 2013 of 5.3 percent. The increase was driven primarily by improvements in net working capital management but offset partially by the cash impacts of the lower net income in 2014. Net income in 2014 also included $543 million of net gains from the sale of businesses which are not considered operating activities and thus are adjusted for in order to reconcile net income to net cash provided by operating activities. Operating activities in 2013 provided net cash of $3,653 million, a decrease from 2012 of 3.3 percent. The decrease was partially due to higher net working capital requirements, particularly for unbilled receivables for long-term projects, but mitigated partly by cash inflows resulting from improved inventory management. Although net income increased during 2013, non-cash reconciling adjustments, primarily relating to deferred income taxes, resulted in a decrease in the cash impacts of net income compared to 2012. Property, plant and equipment decreased 9.6 percent. In local currencies, Property, plant and equipment was flat as the impacts from sales of businesses and the current year depreciation was offset by capital expenditures. Goodwill decreased 5.8 percent. In local currencies Goodwill decreased 2.1 percent primarily due to goodwill allocated to businesses divested during 2014. Other in tangible assets decreased 18.0 percent (14.0 percent in local currencies) primarily due to amortization recorded during 2014 and a reduction of intangibles on sales of busi- nesses. See “Note 11 Goodwill and other intangible assets” to our Consolidated Financial Statements. Noncurrent liabilities December 31, ($ in millions) Long-term debt Pension and other employee benefits Deferred taxes Other non-current liabilities Total noncurrent liabilities 2014 7,338 2,394 1,165 1,586 2013 7,570 1,639 1,265 1,707 12,483 12,181 Pension and other employee benefits increased 46.1 percent (54.9 percent in local currencies) primarily due to actuarial losses resulting from a decrease in the weighted-average dis- count rate used to determine the pension benefit obligation at December 31, 2014 (see “Note 17 Employee benefits” to our Consolidated Financial Statements). See “Liquidity and Capital Resources – Debt and interest rates” for information on long-term debt. For a breakdown of other non-current li- 110 Financial review of ABB Group | ABB Annual Report 2014 Investing activities ($ in millions) 2014 2013 2012 Purchases of marketable securities (available-for-sale) (1,430) (526) (2,288) Net cash used in investing activities in 2013 was $717 mil- lion, compared to $5,575 million in 2012. The decrease 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. (1,465) (30) (67) Cash paid for acquisitions (net of cash acquired) during Purchases of short-term investments Purchases of property, plant and equipment and intangible assets (1,026) (1,106) (1,293) Acquisition of businesses (net of cash acquired) and increases in cost- and equity-accounted companies (70) (914) (3,694) Proceeds from sales of marketable securities (available-for-sale) 361 1,367 1,655 Proceeds from maturity of market- able securities (available-for-sale) 523 118 Proceeds from short-term investments Proceeds from sales of property, plant and equipment Proceeds from sales of businesses (net of cash disposed and trans- action costs) and cost- and equity- accounted companies Other investing activities Net cash used in investing 1,011 33 1,110 (168) 47 80 62 185 – 27 40 16 29 activities (1,121) (717) (5,575) Net cash used in investing activities in 2014 was $1,121 million, compared to $717 million in 2013. Higher proceeds from sales of businesses were offset by net purchases of market- able securities while in 2013, there were net sales of mar- ketable securities. In addition, purchases of property, plant, and equipment was lower in 2014 than 2013. During 2014, we received net pre-tax proceeds from sales of businesses and cost- and equity-accounted companies of $1,110 million, primarily from the divestment of the Full Service business, the Steel Structures business of Thomas & Betts, the HVAC business of Thomas & Betts and the Power Solutions business of Power-One. plant and equipment and intangibles were lower in 2014 compared to 2013, partly due to changes in foreign exchange rates. The total purchases of $1,026 million included $724 million for construction in progress (generally for build- ings and other property facilities), $188 million for the purchase of machinery and equipment, $38 million for the purchase of land and buildings, and $76 million for the purchase of intangible assets. During 2014, we increased the amount of our excess liquidity invested in marketable securities and short-term investments with maturities between 3 months and 1 year. Amounts were invested primarily in commercial paper, reverse repurchase agreements and time deposits. The increase in these investments during 2014 resulted in a net outflow of $1,000 million. 2013 amounted to $914 million, primarily relating to the acquisition of Power-One for $737 million. Total cash disbursements for the purchase of property, plant and equipment and intangibles in 2013 decreased compared to 2012, as we reduced the amount of investment in capacity expansion compared to 2012. The total of $1,106 million included $776 million for construction in prog - ress, $206 million for the purchase of machinery and equip- ment, $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 2013, we reduced our amount invested in marketable securities and short-term investments, resulting in net proceeds of $976 million. 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. Net cash used in investing activities in 2012 included $3,694 million for acquisitions of businesses, primarily Thomas & Betts. During 2012, we increased the amount invested in marketable securities and short-term investments resulting in a net outflow of $673 million. Financing activities ($ in millions) 2014 2013 2012 Net changes in debt with maturities of 90 days or less Increase in debt Repayment of debt Purchases of treasury stock Dividends paid Dividends paid to noncontrolling shareholders Other financing activities Net cash provided by (used in) (103) 150 (90) 38 (1,003) (1,841) (132) (43) (697) 492 (1,893) 74 – 570 5,986 (1,104) 90 – (1,667) (1,626) (149) (16) (121) (33) financing activities (3,024) (3,856) 3,762 ABB Annual Report 2014 | Financial review of ABB Group 111 Total cash disbursements for the purchase of property, Delivery of shares Our financing activities primarily include debt transactions (both from the issuance of debt securities and borrowings directly from banks), dividends paid and share transactions. In 2014, the net cash outflow for debt with maturities of 90 days or less was primarily related to repayments made of borrowings in various countries offset by a small increase in the amount outstanding under our commercial paper pro- gram in the United States. In 2013, the net cash outflow from changes in debt with maturities of 90 days or less prin- cipally reflects a reduction in commercial paper outstand- ing while the 2012 net cash inflow primarily reflects a net issuance of commercial paper. In 2014, increases in other debt included cash flows from additional borrowings in various countries. In 2013, the increase in debt primarily related to borrowings under borrow- ing facilities in various countries and issuances of commer- cial 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 aggregate principal, $1,250 million aggregate principal, $750 million aggregate principal, $500 million aggregate principal, AUD 400 million aggregate principal and CHF 350 million aggre- gate principal. In 2014 repayment of debt reflects repayments of borrowings in various countries. During 2013, $1,893 million of debt was repaid, partially reflecting the repayment at maturity of the 700 million euro bonds (equivalent to $918 mil - lion 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 repayment of part of the debt assumed from the acquisition of Thomas & Betts (approximately $320 million) and of other debt (primarily short-term bank borrowings). In 2014, “Purchases of treasury stock” reflects the cash paid to purchase approximately 45 million of our own shares of which 33 million shares were purchased in connection with the share buyback program announced in September 2014. Disclosures about contractual obligations and commitments The contractual obligations presented in the table below represent our estimates of future payments under fixed con- tractual obligations and commitments. The amounts in the table may differ from those reported in our Consolidated Bal- ance Sheet at December 31, 2014. Changes in our business needs, cancellation provisions and changes in interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Therefore, our actual pay- ments in future periods may vary from those presented in the table. The following table summarizes certain of our con- tractual obligations and principal and interest payments under our debt instruments, leases and purchase obligations at December 31, 2014. Less than 1–3 3–5 More than Payments due by period Total 1 year years years 5 years ($ in millions) Long-term debt obligations 7,184 25 2,009 1,877 3,273 Interest payments related to long-term debt obligations Operating lease obligations Capital lease obligations(1) 1,832 1,703 234 213 432 41 Purchase obligations 4,970 4,018 387 661 59 569 320 380 35 138 912 230 99 245 Total 15,923 4,729 3,685 2,750 4,759 (1) Capital lease obligations represent the total cash payments to be made in the future and include interest expense of $88 million and executory costs 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. In addition, capital lease obliga- tions are shown separately in the table above while they are combined with Long-term debt amounts in our Consoli- dated Balance Sheets. We have determined the interest payments related to long-term debt obligations by reference to the payments due under the terms of our debt obligations at the time such obligations were incurred. However, we use interest rate swaps to modify the interest characteristics of certain of our debt obligations. The net effect of these swaps may be to increase or decrease the actual amount of our cash interest payment obligations, which may differ from those stated in the above table. For further details on our debt obligations and the related hedges, see “Note 12 Debt” to our Consoli- dated Financial Statements. Of the total of $829 million unrecognized tax benefits (net of deferred tax assets) at December 31, 2014, it is expected that $69 million will be paid within less than a year. However, we cannot make a reasonably reliable estimate as to the related future payments for the remaining amount. 112 Financial review of ABB Group | ABB Annual Report 2014 Off balance sheet arrangements Commercial commitments We disclose the maximum potential exposure of certain guar- antees, as well as possible recourse provisions that may allow us to recover from third parties amounts paid out under such guarantees. The maximum potential exposure does not allow any discounting of our assessment of actual exposure under the guarantees. The information below reflects our maximum potential exposure under the guarantees, which is higher than our assessment of the expected exposure. Guarantees The following table provides quantitative data regarding our third-party guarantees. The maximum potential payments represent a worst-case scenario, and do not reflect our expected outcomes. December 31, ($ in millions) Performance guarantees Financial guarantees Indemnification guarantees Total Maximum potential payments 2014 232 72 50 354 2013 149 77 50 276 The carrying amounts of liabilities recorded in the Consolidated Balance Sheets in respect of the above guarantees were not significant at December 31, 2014 and 2013, and reflect our best estimate of future payments, which we may incur as part of fulfilling our guarantee obligations. In addition, in the normal course of bidding for and 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 2014, 2013 and 2012. For additional descriptions of our performance, financial and indemnification guarantees see “Note 15 Commitments and contingencies” to our Consolidated Financial Statements. ABB Annual Report 2014 | Financial review of ABB Group 113 Consolidated Financial Statements of ABB Group 2014 2013 33,279 35,282 6,551 6,566 39,830 41,848 2012 32,979 6,357 39,336 (24,506) (25,728) (23,838) (4,109) (4,128) (4,120) (28,615) (29,856) (27,958) 11,215 (6,067) (1,499) 529 4,178 80 (362) 3,896 (1,202) 2,694 24 2,718 (124) 2,594 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 2,570 2,594 2,824 2,787 2,700 2,704 1.12 1.13 1.12 1.13 1.23 1.21 1.23 1.21 1.18 1.18 1.18 1.18 2,288 2,295 2,297 2,305 2,293 2,295 Consolidated Income Statements Year ended December 31 ($ in millions, except per share data in $) Sales of products Sales of services Total revenues Cost of products Cost of services Total cost of sales Gross profit Selling, general and administrative expenses Non-order related research and development expenses Other income (expense), net Income from operations Interest and dividend income Interest and other finance expense Income from continuing operations before taxes Provision for taxes Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Net income attributable to noncontrolling interests Net income attributable to ABB Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Net income Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Net income Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Net income Weighted-average number of shares outstanding (in millions) used to compute: Basic earnings per share attributable to ABB shareholders Diluted earnings per share attributable to ABB shareholders See accompanying Notes to the Consolidated Financial Statements 114 Financial review of ABB Group | ABB Annual Report 2014 Consolidated Statements of Comprehensive Income Year ended December 31 ($ 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 Pension and other postretirement plan adjustments Cash flow hedge derivatives: Net unrealized gains (losses) arising during the year Reclassification adjustments for net (gains) losses 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 2014 2,718 2013 2,907 2012 2,812 (1,680) 141 383 (9) 15 6 (3) (614) 17 79 (521) (52) 9 (43) (2,238) 480 (115) 365 (4) (13) (17) (16) 291 23 99 397 28 (43) (15) 506 3,413 (115) 3,298 3 1 4 (36) (601) 30 70 (537) 53 (28) 25 (125) 2,687 (98) 2,589 ABB Annual Report 2014 | Financial review of ABB Group 115 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, 2014 and 2013) Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (55,843,639 and 14,093,960 shares at December 31, 2014 and 2013, respectively) Total ABB stockholders’ equity Noncontrolling interests Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying Notes to the Consolidated Financial Statements 116 Financial review of ABB Group | ABB Annual Report 2014 2014 5,443 1,325 11,078 5,376 218 902 644 2013 6,021 464 12,146 6,004 252 832 706 24,986 26,425 5,652 10,053 2,702 70 177 511 727 6,254 10,670 3,297 93 197 370 758 44,878 48,064 4,765 1,455 353 1,624 289 1,148 1,689 4,257 5,112 1,714 453 1,726 259 1,362 1,807 4,242 15,580 16,675 7,338 2,394 1,165 1,586 7,570 1,639 1,265 1,707 28,063 28,856 1,777 19,939 (4,241) (1,206) 16,269 546 16,815 44,878 1,750 19,186 (2,012) (246) 18,678 530 19,208 48,064 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: Depreciation and amortization Pension and other employee benefits Deferred taxes Net gain from sale of property, plant and equipment Net (gain) loss from sale of businesses Other Changes in operating assets and liabilities: Trade receivables, net Inventories, net Trade payables Accrued liabilities Billings in excess of sales Provisions, net Advances from customers Income taxes payable and receivable 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 increases in cost- and equity-accounted companies 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 (net of transaction costs and cash disposed) and cost- and equity-accounted companies 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 Purchases of treasury stock Dividends paid 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 2014 2013 2012 2,718 2,907 2,812 1,305 16 65 (17) (543) 112 (12) (176) 257 9 (118) (127) 39 (13) 330 1,318 6 (137) (18) 16 79 (571) 324 (43) 71 (168) 199 (145) (18) (167) 1,182 (13) 64 (26) 2 169 (310) 61 (57) 162 152 (109) 181 (261) (230) 3,845 3,653 3,779 (1,430) (1,465) (1,026) (70) 361 523 1,011 33 1,110 (168) (1,121) (103) 150 (90) 38 (1,003) (1,841) (132) (43) (526) (30) (1,106) (914) 1,367 118 47 80 62 185 (2,288) (67) (1,293) (3,694) 1,655 – 27 40 16 29 (717) (5,575) (697) 492 (1,893) 74 – 570 5,986 (1,104) 90 – (1,667) (1,626) (149) (16) (121) (33) 3,762 90 2,056 4,819 6,875 (3,024) (3,856) (278) (578) 6,021 5,443 66 (854) 6,875 6,021 259 1,155 287 1,278 189 1,211 ABB Annual Report 2014 | Financial review of ABB Group 117 Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2014, 2013 and 2012 ($ in millions) Balance at January 1, 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, 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 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 Purchases of treasury stock Delivery of shares Call options Balance at December 31, 2014 See accompanying Notes to the Consolidated Financial Statements 118 Financial review of ABB Group | ABB Annual Report 2014 Retained earnings 16,988 2,704 (1,626) Capital stock and additional paid-in capital 1,621 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 (1,610) 22 (2,012) (246) 18,678 2,594 (1,841) (34) 73 (17) 5 1,777 19,939 (2,102) 13 (2,131) (21) (4,241) (1,206) 16,269 546 16,815 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 (968) 20 (1,472) 12 (2,408) stock (424) Non- interests 4 (532) 388 4 (532) 25 25 388 149 (17) 394 149 (17) 394 (15) (15) (431) (1,671) 7 6 (521) (43) (1,671) 6 (521) (43) Total ABB equity 15,777 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) 2,594 (1,671) 6 (521) (43) 365 (34) – (1,841) (1,015) 73 38 5 559 108 (5) (5) 98 6 (123) 540 120 (8) 3 115 25 (150) 530 124 (9) 115 33 (132) Total stock- equity 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) 19,208 2,718 (1,680) 6 (521) (43) 480 (1) (132) (1,841) (1,015) 73 38 5 96 82 (1,015) 55 Years ended December 31, 2014, 2013 and 2012 ($ in millions) Balance at January 1, 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 Capital stock and additional paid-in capital 1,621 Retained earnings 16,988 2,704 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 (968) 20 (1,472) 12 (2,408) stock (424) 388 4 (532) 388 4 (532) 25 25 96 equity 15,777 2,704 388 4 (532) 25 2,589 – – (1,626) 60 90 10 5 1 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 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 1,750 19,186 2,594 (431) (1,671) 7 6 (1,610) 22 (2,012) (246) 18,678 (521) (43) (1,671) 6 (521) (43) 2,594 (1,671) 6 (521) (43) 365 (34) – (1,841) 73 (1,015) 38 5 (1,015) 55 (1,626) 2,787 (1,667) (1,841) 60 (6) 10 5 1 (17) 71 (8) 13 2 (2) (34) 73 (17) 5 interests 559 108 (5) (5) 98 6 (123) 540 120 (8) 3 115 25 (150) 530 124 (9) 115 33 (132) equity 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) 19,208 2,718 (1,680) 6 (521) (43) 480 (1) (132) (1,841) 73 (1,015) 38 5 1,777 19,939 (2,102) 13 (2,131) (21) (4,241) (1,206) 16,269 546 16,815 ABB Annual Report 2014 | Financial review of ABB Group 119 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 Comprehensive income: Net income Total comprehensive income Changes in noncontrolling interests Dividends paid to noncontrolling shareholders Dividends paid Share-based payment arrangements Purchases of treasury stock Delivery of shares Call options Balance at December 31, 2014 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. 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 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 (CHF). 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. 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. Marketable securities and shortterm investments Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries where the Company operates. Funds, other than regular dividends, fees or loan repayments, cannot be readily transferred abroad from these countries and are therefore deposited and used for working capital needs locally. These funds are included in cash and equivalents as they are not considered restricted. Management determines the appropriate classification of heldtomaturity and availableforsale securities at the time of purchase. At each reporting date, the appropriateness of the classification of the Company’s investments in debt and equity securities is reassessed. 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 included in “Interest and dividend income”. Marketable debt securities not classified as held tomaturity and equity securities that have readily determinable fair values are classified as availableforsale and reported at fair value. 120 Financial review of ABB Group | ABB Annual Report 2014 Note 2 Significant accounting policies, continued 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 short term 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 dif ference is recognized if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost base or (iii) a credit loss exists insofar as the Company does not expect to recover the entire recognized amortized cost of the security. Such impairment charges are generally recognized in “Interest and other finance expense”. If the impairment is due to factors other than credit losses, and the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of the security’s amortized cost, such impairment charges are recorded in “Accumulated other comprehensive loss”. In addition, 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 otherthan temporary impairment is identified, the security is written down to its fair value and the related losses are recognized in “Interest and other finance expense”, unless the impairment relates to equity securities classified as “Other noncur rent 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 classified as operating activities in the Consolidated Statements of Cash Flows. Costs associated with the sale of receiv ables, 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 necessary; collateral is not generally required. The Company maintains reserves for potential credit losses as dis cussed 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 rat ings and in high quality, low risk, liquid investments. The Company actively manages its credit risk by routinely reviewing the creditworthiness of the banks and the investments held. The Company has not incurred significant credit losses related to such investments. ABB Annual Report 2014 | Financial review of ABB Group 121 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 agree ments 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 pre defined 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 customer has taken title to the products and assumed the risks and rewards of ownership of the products specified in the purchase order or sales agreement. Generally, the transfer of title and risks and rewards of ownership are governed by the con tractuallydefined 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 Com pany’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 com pletedcontract 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 arrange ments 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 objec tive 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, mainte nance (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 separately, 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. 122 Financial review of ABB Group | ABB Annual Report 2014 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 rec ognition 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 disposition of the asset, if any, the carrying amount of the asset is reduced to its estimated fair value. The estimated fair value is determined using a market, income and/or cost approach. Property, plant and equipment is stated at cost, less accumulated depreciation and is depreciated using the 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 2014, 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. ABB Annual Report 2014 | Financial review of ABB Group 123 Note 2 Significant accounting policies, continued Leases Translation of foreign currencies and foreign exchange transactions Income taxes If the derivatives are designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged item attributable to the risk being hedged through earnings (in the case of a fair value hedge) or recognized in “Accumulated other comprehensive loss” until the hedged item is recognized in earnings (in the case of a cash flow hedge). The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings consistent with the classification of the hedged item. Where derivative financial instruments have been designated as cash flow hedges of forecasted transactions and such forecasted trans actions are no longer probable of occurring, hedge accounting is discontinued and any derivative gain or loss previ ously included in “Accumulated other comprehensive loss” is reclassified into earnings consistent with the nature of the original forecasted transaction. Gains or losses from derivatives designated as hedging instruments in a fair value hedge are reported through earnings and classified consistent with the nature of the underlying hedged transaction. Certain commercial contracts may grant rights to the Company or the counterparties, or contain other provisions that are considered to be derivatives. Such embedded derivatives are assessed at inception of the contract and depending on their characteristics, accounted for as separate derivative instruments and shown at their fair value in the 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 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 underlying item. The Company uses the asset and liability method to account for deferred taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a deferred tax asset when it deter mines that it is more likely than not that the deduction will be sustained based upon the deduction’s technical merit. Deferred tax assets and liabilities that can be offset against each other are reported on a net basis. A valuation allow ance 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 Organisation 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. 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. Uncertain tax positions that could be settled against existing loss carryforwards or income tax credits are reported net. The 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 Research and development costs not related to specific customer orders are generally expensed as incurred. 124 Financial review of ABB Group | ABB Annual Report 2014 Note 2 Significant accounting policies, continued 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 out standing 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 condi tions 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. Sharebased payment arrangements Fair value measures Contingencies 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 determine fair value disclosures for certain financial instruments carried at amortized cost in the financial statements. Financial assets and liabilities recorded at fair value on a recurring basis include foreign currency, commodity and inter est 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 technique are observable or unobservable. An observable input is based on market data obtained from inde pendent 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 simi lar assets, quoted prices in inactive markets and inputs other than quoted prices such as interest rate yield curves, credit spreads, or inputs derived from other observable data by interpolation, correlation, regression or other means. The adjustments applied to quoted prices or the inputs used in valuation models may be both observable and unobservable. In these cases, the fair value measurement is classified as Level 2 unless the unobservable portion of the adjustment or the unobservable input to the valuation model is significant, in which case the fair value measurement would be classified as Level 3. Assets and liabilities valued or disclosed using Level 2 inputs include investments in certain funds, reverse repurchase agreements, certain debt securities that are not actively traded, interest rate swaps, commodity swaps, 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 transac tion 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. 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. ABB Annual Report 2014 | Financial review of ABB Group 125 Note 2 Significant accounting policies, continued The Company provides for anticipated costs for warranties when it recognizes revenues on the related products or con tracts. 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 orderspecific 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. 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 circum stances that existed at the acquisition date. These estimates are subject to change within the measurement period (a period of up to 12 months after the acquisition date during which the acquirer may adjust the provisional acquisition amounts) with any adjustments to the preliminary estimates being recorded to goodwill. Changes in deferred taxes, uncertain tax positions and valuation allowances on acquired deferred tax assets that occur after the measurement period are recognized in income. Applicable in current period 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 As of January 2014, the Company adopted an accounting standard update regarding the release of cumulative transla tion 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 is required to release into net income the entire amount of a cumu lative translation adjustment 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 is required to be recognized in net income upon a partial sale of the equity accounted company. This update did not have a material impact on the 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 As of January 2014, the Company adopted an accounting standard update 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 is required to 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 carryfor ward, except in certain defined circumstances. This update did not have a material impact on the consolidated financial statements. 126 Financial review of ABB Group | ABB Annual Report 2014 Note 2 Significant accounting policies, continued Reporting discontinued operations and disclosures of disposals of components of an entity In April 2014, an accounting standard update was issued which changes the criteria for reporting discontinued opera tions and modifies the related disclosure requirements. Under the update, the Company would report a disposal, or planned disposal, of a component or group of components, as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. A strategic shift could include a disposal of a major geographical area, a major line of business, a major equitymethod investment, or other major parts of the Company. A component may be a reportable segment or an operating segment, a report ing unit, a subsidiary, or an asset group. In addition to expanding the existing disclosures for discontinued operations, the update requires new disclosures relating to (i) individually significant disposals that do not qualify for discontinued operations presentation, (ii) continuing involvement with a discontinued operation following the date of disposal and (iii) retained equitymethod investments in a discontinued operation. The Company elected to early adopt this update in the first quarter of 2014 and this update did not have a material impact on the consolidated financial statements. Applicable for future periods Revenue from contracts with customers In May 2014, an accounting standard update was issued to clarify the principles for recognizing revenues from contracts with customers. The update, which supersedes substantially all existing revenue recognition guidance, provides a single comprehensive model for recognizing revenues on the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Under the standard it is possible that more judgments and estimates would be required than under existing standards, including identifying the separate performance obligations in a contract, estimating any variable consideration elements, and allocating the transaction price to each separate performance obligation. The update also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update is effective for the Company for annual and interim periods beginning January 1, 2017, and is to be applied either (i) retrospectively to each prior reporting period presented, with the option to elect certain defined practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the update recognized at the date of adoption in retained earnings (with additional disclosure as to the impact on individual financial statement lines affected). The Company is currently evaluating the impact of this update on the consolidated financial statements. Note 3 Acquisitions and business divestments 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 2014 58 9 6 2013 897 525 7 2012 3,643 2,895 9 (1) (2) Excluding changes in cost and equityaccounted companies but including $2 million in 2013 and $5 million in 2012, representing the fair value of replacement vested stock options issued to PowerOne and Thomas & Betts employees, respectively, at the corresponding acquisition dates. Recorded as goodwill (see Note 11). Includes adjustments of $42 million in 2014 and $63 million in 2013 arising during the measurement period of acquisitions, primarily reflecting a reduction in certain deferred tax liabilities related to PowerOne and Thomas & Betts, respectively. In the table above, the amount for “Acquisitions” and “Aggregate excess of purchase price over fair value of net assets acquired” in 2013 relates primarily to the acquisition of PowerOne Inc. (PowerOne), while for 2012, the amount relates primarily to the acquisition of Thomas & Betts Corporation (Thomas & Betts). 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 prelimi nary 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 $32 million related to the cash settlement of PowerOne stock options held at the acquisition date. PowerOne is a provider of renewable energy solutions and a designer and manufacturer of photovoltaic inverters. During 2014, the Company disposed of the Power Solutions business of PowerOne, which provided energyefficient power conversion and power management solutions. ABB Annual Report 2014 | Financial review of ABB Group 127 Note 3 Acquisitions and business divestments, continued ($ 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. Goodwill recognized is not deductible for income tax purposes. The final aggregate allocation of the purchase consideration for business acquisitions in 2013 was as follows: Weighted-average useful life 7 years Allocated amounts (1) 208 124 (74) 93 546 897 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 $324 million for the repayment of debt assumed upon acquisition. Thomas & Betts designs, manufactures and markets components used to manage the connection, distribution, transmission and reliability of electrical power in industrial, construction and utility applications. The acquisition of Thomas & Betts supports the Com pany’s strategy of expanding its Low Voltage Products operating segment into new geographies, sectors and products, and consequently the goodwill acquired represents the future benefits associated with the expansion of market access and product scope. The final allocation of the purchase consideration for the Thomas & Betts acquisition in 2012 was as follows: ($ in millions) Customer relationships Technology Trade names Order backlog 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 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 (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 $10 million in respect of Thomas & Betts since the date of acquisition. The unaudited pro forma financial information in the table below summarizes the combined pro forma results of the Company and Thomas & Betts for 2012, as if Thomas & Betts had been acquired on January 1, 2011. ($ in millions) Total revenues Income from continuing operations, net of tax 2012 40,251 2,924 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. 128 Financial review of ABB Group | ABB Annual Report 2014 Note 3 Acquisitions and business divestments, continued ($ 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 (26) 11 31 (12) 5 16 56 13 (5) (7) 82 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 indica tive of the results that would have occurred had the acquisition been completed on the date indicated, nor are they indicative of the future operating results of the combined company. The 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 Business divestments In 2014, the Company received proceeds of $1,090 million (net of transaction costs and cash disposed) relating to divestments of consolidated businesses and recorded net gains of $543 million in “Other income (expense), net”. In 2013 and 2012, there were no significant amounts recognized from divestments of consolidated businesses. Note 4 Cash and equivalents, marketable securities and short-term investments Current assets Cash and equivalents and marketable securities and shortterm investments consisted of the following: December 31, 2014 ($ 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 2,218 3,340 225 135 2 734 98 6,752 2 – 4 12 18 (1) – (1) – (2) 2,218 3,340 225 136 2 737 110 2,218 3,140 – – 85 – 200 225 136 2 652 110 6,768 5,443 1,325 ABB Annual Report 2014 | Financial review of ABB Group 129 Note 4 Cash and equivalents, marketable securities and short-term investments, continued 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 Noncurrent assets 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 Included in “Other shortterm investments” at December 31, 2014, are receivables of $219 million representing reverse repurchase agreements. These collateralized lendings, made to a financial institution, have maturity dates of less than one year. Included in “Other noncurrent assets” are certain heldtomaturity marketable securities. At December 31, 2014, the amortized cost, gross unrecognized gain and fair value (based on quoted market prices) of these securities were $95 million, $14 million and $109 million, respectively. 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. 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 $2 million, $10 million and $3 million in 2014, 2013 and 2012, respectively. Gross realized losses (reclassified from accumulated other comprehensive loss to income) on availableforsale securities totaled $23 million in 2014 and were not significant in 2013 and 2012. Such gains and losses were included in “Interest and other finance expense”. In 2014, 2013 and 2012, otherthantemporary impairments recognized on availableforsale equity securities were not significant. At December 31, 2014, 2013 and 2012, gross unrealized losses on availableforsale securities that have been in a continuous unrealized loss position were not significant and the Company does not intend and does not expect to be required to sell these securities before the recovery of their amortized cost. There were no sales of heldtomaturity securities in 2014, 2013 and 2012. Contractual maturities of debt securities consisted of the following: December 31, 2014 ($ 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 637 178 56 871 637 181 57 875 – 75 20 95 – 85 24 109 At December 31, 2014 and 2013, the Company pledged $95 million and $97 million, respectively, of available forsale marketable securities as collateral for issued letters of credit and other security arrangements. 130 Financial review of ABB Group | ABB Annual Report 2014 Note 5 Derivative financial instruments The Company is exposed to certain currency, commodity, interest rate and equity risks arising from its global operating, financing and investing activities. The Company uses derivative instruments to reduce and manage the economic impact of these exposures. Currency risk Commodity risk Interest rate risk Equity risk 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 bind ing 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). Primarily swap contracts are used to manage the associ ated price risks of commodities. As of 2014, the Company no longer enters into electricity futures contracts to manage the price risk on its forecasted electricity needs in certain locations. 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 busi ness, 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 2014 18,564 3,013 2,242 2013 2012 19,351 19,724 3,049 4,693 3,572 3,983 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 2014 46,520 3,846 – 6,550 200 2013 2012 42,866 45,222 3,525 18 7,100 300 5,495 21 13,025 225 1,996,845 1,936,581 1,415,322 – 279,995 334,445 128,000 113,000 135,471 Equity derivatives At December 31, 2014, 2013 and 2012, the Company held 61 million, 67 million and 67 million cash settled call options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of $33 million, $56 million and $26 million, respectively. ABB Annual Report 2014 | Financial review of ABB Group 131 Note 5 Derivative financial instruments, continued Cash flow hedges As noted above, the Company mainly uses forward foreign exchange contracts to manage the foreign exchange risk of its operations, commodity swaps to manage its commodity risks and cashsettled call options to hedge its WAR liabili ties. 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, 2014, 2013 and 2012, “Accumulated other comprehensive loss” included net unrealized losses of $21 million and net unrealized gains of $22 million and $37 million, respectively, net of tax, on derivatives designated as cash flow hedges. Of the amount at December 31, 2014, net losses of $12 million are expected to be reclassified to earnings in 2015. At December 31, 2014, the longest maturity of a derivative classified as a cash flow hedge was 57 months. In 2014, 2013 and 2012, the amounts of gains or losses, net of tax, reclassified into earnings due to the discontinuance of cash flow hedge accounting and recognized in earnings due to ineffectiveness in cash flow hedge relationships were not significant. The pretax effects of derivative instruments, designated and qualifying as cash flow hedges, on “Accumulated other comprehensive loss” (OCI) and the Consolidated Income Statements were as follows: Gains (losses) recognized in OCI 2014 Gains (losses) recognized in income on derivatives Gains (losses) reclassified from OCI (ineffective portion and amount (effective portion) into income (effective portion) excluded from effectiveness testing) ($ in millions) Location ($ in millions) Location ($ in millions) (42) Total revenues Total cost of sales (7) Total cost of sales (16) SG&A expenses (1) (65) (9) Total revenues 8 Total cost of sales (3) Total cost of sales (6) SG&A expenses (1) (10) – – – – – 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 – – – – – 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 (1) SG&A expenses represent “Selling, general and administrative expenses”. Net derivative losses of $9 million and net derivative gains of $43 million and $28 million, net of tax, were reclassified from “Accumulated other comprehensive loss” to earnings during 2014, 2013 and 2012, respectively. 132 Financial review of ABB Group | ABB Annual Report 2014 Note 5 Derivative financial instruments, continued Fair value hedges To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the fair value of these instruments, as well as the changes in fair value of the risk component of the underlying debt being hedged, are recorded as offset ting gains and losses in “Interest and other finance expense”. Hedge ineffectiveness of instruments designated as fair value hedges in 2014, 2013 and 2012, was not significant. The effect of derivative instruments, designated and qualifying as fair value hedges, on the Consolidated Income Statements was as follows: Gains (losses) recognized in income on derivatives Gains (losses) recognized in income Type of derivative designated designated as fair value hedges on hedged item as a fair value hedge Location ($ in millions) Location Interest rate contracts Interest and other finance expense 84 Interest and other finance expense ($ in millions) (83) 2014 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 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”. 2014 (533) 19 2 (260) 149 (27) (28) 1 (1) (1) (679) 2013 (95) 80 (1) 223 101 (10) (50) 1 (3) – 246 2012 318 (193) (3) 68 (148) 28 10 1 (1) – 80 ABB Annual Report 2014 | Financial review of ABB Group 133 Note 5 Derivative financial instruments, continued The fair values of derivatives included in the Consolidated Balance Sheets were as follows: December 31, 2014 ($ 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 9 – – 21 30 156 4 1 98 259 289 164 9 – 85 11 105 25 – 1 58 84 189 119 20 3 – – 23 369 19 – 27 415 438 399 16 – – – 16 72 3 – 17 92 108 90 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 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, 2014 and 2013, have been presented on a gross basis. 134 Financial review of ABB Group | ABB Annual Report 2014 Note 6 Fair values Recurring fair value measures December 31, 2014 ($ 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 – 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, 2013 ($ 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 – 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 – – 136 – – – – 85 110 – 2 652 289 189 136 1,327 – – – 438 108 546 – – – – – – – – – – – 85 110 136 2 652 289 189 1,463 438 108 546 Level 1 Level 2 Level 3 Total fair value – – 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 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, apply ing 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, appropri ately adjusted, or present value techniques, based on available market data, or option pricing models are used. Cash settled 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. Nonrecurring fair value measures There were no significant nonrecurring fair value measurements during 2014 and 2013. ABB Annual Report 2014 | Financial review of ABB Group 135 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, 2014 ($ 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 Receivables under reverse repurchase agreements Other shortterm investments Other noncurrent assets: Loans granted Heldtomaturity securities Restricted cash and cash deposits Liabilities Shortterm debt and current maturities of longterm debt (excluding capital lease obligations) Longterm debt (excluding capital lease obligations) Noncurrent deposit liabilities in “Other noncurrent liabilities” 2,218 3,140 200 219 6 41 95 198 324 7,224 222 2,218 – – – 6 – – 64 115 6,148 – – 3,140 200 219 – 44 109 161 209 1,404 267 – – – – – – – – – – – 2,218 3,140 200 219 6 44 109 225 324 7,552 267 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 Other noncurrent assets: Loans granted Heldtomaturity securities Restricted cash and cash deposits Liabilities Shortterm debt and current maturities of longterm debt (excluding capital lease obligations) Longterm debt (excluding capital lease obligations) Noncurrent deposit liabilities in “Other noncurrent liabilities” 2,414 3,538 18 9 54 104 276 2,414 – – 9 – – 95 – 3,538 18 – 52 121 219 424 7,475 279 107 6,241 – 317 1,333 338 – – – – – – – – – – 2,414 3,538 18 9 52 121 314 424 7,574 338 In the above table, certain amounts, included in longterm debt, previously disclosed at Level 1 at December 31, 2013, have been presented as Level 2. 136 Financial review of ABB Group | ABB Annual Report 2014 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 securities with original maturities up to 3 months), and Marketable securities and short-term investments (excluding available-for-sale securities): 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 approximate 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 capital lease obligations): Includes commercial paper, bank borrowings and overdrafts. The carrying amounts of shortterm debt and current maturities of longterm debt, excluding capital lease obligations, approximate their fair values. – Long-term debt (excluding capital lease obligations): Fair values of outstanding bonds are determined using quoted market prices (Level 1 inputs), if available. For other bonds and other longterm debt, the fair values are determined using a discounted cash flow methodology based upon borrowing rates of similar debt instruments and reflecting appropriate adjustments for 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 2014 7,715 701 (279) 8,137 4,087 (1,146) 2,941 11,078 2013 8,360 802 (317) 8,845 4,552 (1,251) 3,301 12,146 “Trade receivables” in the table above includes contractual retention amounts billed to customers of $489 million and $552 million at December 31, 2014 and 2013, respectively. Management expects that the substantial majority of related contracts will be completed and the substantial majority of the billed amounts retained by the customer will be collected. Of the retention amounts outstanding at December 31, 2014, 65 percent and 29 percent are expected to be collected in 2015 and 2016, respectively. “Other receivables” in the table above consists of value added tax, claims, rental deposits and other nontrade receivables. “Costs and estimated profits in excess of billings” in the table above represents revenues earned and recognized for contracts under the percentageofcompletion or completedcontract method of accounting. Management expects that the majority of the amounts will be collected within one year of the respective balance sheet date. The reconciliation of changes in the allowance for doubtful accounts is as follows: ($ in millions) Balance at January 1, Additions Deductions Exchange rate differences Balance at December 31, 2014 317 103 (118) (23) 279 2013 271 147 (92) (9) 317 2012 227 155 (113) 2 271 ABB Annual Report 2014 | Financial review of ABB Group 137 “Inventories, net” consisted of the following: 2014 2,105 1,761 1,572 253 5,691 (315) 5,376 2013 2,403 1,893 1,834 246 6,376 (372) 6,004 “Work in process” in the table above contains inventoried costs relating to longterm contracts of $338 million and $358 million at December 31, 2014 and 2013, respectively. “Advance payments consumed” in the table above relates to contractual advances received from customers on work in process. “Other noncurrent assets” consisted of the following: Note 8 Inventories, net December 31, ($ 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 2014 229 189 65 64 41 139 727 2013 285 128 72 95 54 124 758 The Company entered into structured leasing transactions with U.S. investors prior to 1999. Certain amounts were transacted at the inception of the leasing arrangements 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: 2014 4,142 7,762 653 12,557 (6,905) 5,652 2014 192 88 280 (163) 117 2013 4,478 8,258 645 13,381 (7,127) 6,254 2013 112 98 210 (115) 95 In 2014, 2013 and 2012, depreciation, including depreciation of assets under capital leases, was $851 million, $842 million and $733 million, respectively. 138 Financial review of ABB Group | ABB Annual Report 2014 Note 11 Goodwill and other intangible assets Changes in “Goodwill” were as follows: ($ in millions) Cost at January 1, 2013 Accumulated impairment charges Balance at January 1, 2013 Goodwill acquired during the year (1) Goodwill allocated to disposals Exchange rate differences Balance at December 31, 2013 Goodwill acquired during the year (1) Goodwill allocated to disposals Exchange rate differences and other Balance at December 31, 2014 Discrete Low Automation Voltage Process Power Power Corporate and Motion Products Automation Products Systems and Other 3,420 – 3,420 485 (9) 18 3,914 (52) – (92) 3,770 3,147 – 3,147 (45) – (43) 3,059 1 (181) (172) 2,707 1,140 – 1,140 85 (2) 6 1,229 24 (19) (60) 1,174 734 – 734 – – 2 736 9 – (25) 720 1,762 – 1,762 – – (53) 1,709 – (7) (42) 1,660 41 (18) 23 – – – 23 27 (27) (1) 22 Total 10,244 (18) 10,226 525 (11) (70) 10,670 9 (234) (392) 10,053 (1) Amounts include adjustments arising during the twelvemonth measurement period subsequent to the respective acquisition date. In 2014, goodwill allocated to disposals primarily related to the divestments of the Meyer Steel Structures and heating, ventilation and air conditioning (HVAC) businesses of Thomas & Betts included in the Low Voltage Products division. In 2013, goodwill acquired primarily related to PowerOne, acquired in July 2013, which was allocated to the Discrete Automation and Motion operating segment. Intangible assets other than goodwill consisted of the following: 2014 2013 Gross carrying Accumulated Net carrying Gross carrying Accumulated Net carrying amount amortization amount amount amortization amount 719 405 2,618 607 314 72 (599) (354) (623) (304) (120) (33) 120 51 1,995 303 194 39 767 432 2,773 867 400 63 (618) (384) (481) (374) (99) (49) 149 48 2,292 493 301 14 4,735 (2,033) 2,702 5,302 (2,005) 3,297 Additions to intangible assets other than goodwill consisted of the following: 2014 2013 52 28 – – – 16 96 66 26 82 110 16 – 300 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 Other Total ABB Annual Report 2014 | Financial review of ABB Group 139 Note 11 Goodwill and other intangible assets, continued 2013, ($ in millions) Customerrelated (1) Technologyrelated Marketingrelated Total Intangible assets from business combinations in 2014 were not significant. Included in the additions of $300 million in 2013 were the following intangible assets other than goodwill related to business combinations: Amount acquired Weighted-average useful life 82 108 16 206 11 years 4 years 10 years 7 years (1) Includes the fair value of order backlog acquired in business combinations. Amortization expense of intangible assets other than goodwill consisted of the following: ($ in millions) Capitalized software for internal use Capitalized software for sale Intangibles other than software Total ($ in millions) 2015 2016 2017 2018 2019 Thereafter Total Note 12 Debt Shortterm debt and current maturities of longterm debt December 31, ($ in millions) 2014 2013 2012 72 20 362 454 81 34 361 476 79 38 332 449 In 2014, 2013 and 2012, impairment charges on intangible assets other than goodwill were not significant. At December 31, 2014, future amortization expense of intangible assets other than goodwill is estimated to be: 404 362 275 191 165 1,305 2,702 The Company’s total debt at December 31, 2014 and 2013, amounted to $7,691 million and $8,023 million, respectively. The Company’s “Shortterm debt and current maturities of longterm debt” consisted of the following: Shortterm debt (weightedaverage interest rate of 5.8% and 6.9%, respectively) Current maturities of longterm debt (weightedaverage nominal interest rate of 5.9% and 3.6%, respectively) Total 2014 299 54 353 2013 423 30 453 Shortterm debt primarily represented shortterm loans from various banks and issued commercial paper. At December 31, 2014, the Company had in place two commercial paper programs: a $2 billion Euro commercial paper program for the issuance of commercial paper in a variety of currencies (which replaced the previous $1 billion Euro commercial paper program in February 2014), and a $2 billion commercial paper program for the private placement of U.S. dollar denominated commercial paper in the United States. During 2014, the Company terminated its 5 billion Swedish krona commercial paper program which provided for the issuance of Swedish krona and eurodenominated commercial paper. At December 31, 2014 and 2013, $120 million and $100 million, respectively, was outstanding under the $2 billion program in the United States. In addition, during 2014, the Company replaced its $2 billion multicurrency revolving credit facility, maturing 2015, with a new 5year multicurrency credit facility. The new credit facility matures in 2019 but the Company has the option in 2015 and 2016 to extend the maturity to 2020 and 2021, respectively. The facility is for general corporate purposes. Interest costs on drawings under the facility are LIBOR or EURIBOR (depending on the currency of the drawings) plus a margin of 0.20 percent, while commitment fees (payable on the unused portion of the facility) amount to 35 percent of the margin, which represents commitment fees of 0.07 percent per annum. Utilization fees, payable on drawings, amount to 0.075 percent per annum on drawings up to onethird of the facility, 0.15 percent per annum on drawings in excess of one third but less than or equal to twothirds of the facility, or 0.30 percent per annum on drawings over twothirds of the facility. No amount was drawn at December 31, 2014 and 2013, under either of the facilities. The new facility contains crossdefault clauses whereby an event of default would occur if the Company were to default on indebted ness as defined in the facility, at or above a specified threshold. 140 Financial review of ABB Group | ABB Annual Report 2014 Note 12 Debt, continued Longterm debt The Company utilizes derivative instruments to modify the interest characteristics of its longterm debt. In particular, the Company uses interest rate swaps to effectively convert certain fixedrate longterm debt into floating rate obligations. The carrying value of debt, designated as being hedged by fair value hedges, is adjusted for changes in the fair value of the risk component of the debt being hedged. The following table summarizes the Company’s longterm debt considering the effect of interest rate swaps. Conse quently, a fixedrate debt subject to a fixedtofloating interest rate swap is included as a floating rate debt in the table below: December 31, ($ in millions, except % data) Balance Nominal rate Effective rate Balance Nominal rate Effective rate 2014 2013 Floating rate Fixed rate Current portion of longterm debt Total 2,318 5,074 7,392 (54) 7,338 2.7% 3.2% 5.9% 1.1% 3.2% 5.9% 2,211 5,389 7,600 (30) 7,570 2.7% 3.1% 3.6% At December 31, 2014, the principal amounts of longterm debt (excluding capital lease obligations) repayable at maturity were as follows: ($ in millions) 2015 2016 2017 2018 2019 Thereafter Total 1.2% 3.1% 3.6% 25 1,140 869 354 1,523 3,273 7,184 Details of the Company’s outstanding bonds were as follows: December 31, (in millions) Bonds: 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 2014 2013 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 $ $ $ $ $ $ $ $ $ $ $ $ 599 512 498 335 354 1,518 643 381 283 1,275 728 7,126 USD CHF USD AUD CHF EUR USD CHF USD USD USD 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 (1) USD carrying values include bond discounts or premiums, as well as adjustments for fair value hedge accounting, where appropriate. ABB Annual Report 2014 | Financial review of ABB Group 141 Note 12 Debt, continued 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 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 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, pay ing 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. During the second quarter of 2014, the Company entered into an additional interest rate swap to hedge a further $200 million of the aggregate principal amount. After consid ering the impact of such swaps, portions of the outstanding principal became floating rate obligations and consequently $1,050 million and $850 million are shown as floating rate debt at December 31, 2014 and 2013, respectively, 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 per cent 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 4.25% AUD Notes, due 2017, were issued in November 2012. Net issuance proceeds (after underwriting fees) totaled AUD 398 million (equivalent to approximately $412 million on date of issuance). The notes, with an aggregate principal of AUD 400 million, pay fixed interest of 4.25 percent semi annually in arrears. The Company entered into interest rate swaps to hedge its interest obligations on these bonds. After considering the impact of such swaps, these bonds effectively became floating rate Australian dollar obligations and consequently have been shown as floating rate debt in the table of longterm debt above. The Company’s bonds contain crossdefault clauses which would allow the bondholders to demand repayment if the Company were to default on any borrowing at or above a specified threshold. Furthermore, all such bonds constitute unsecured obligations of the Company and rank pari passu with other debt obligations. In addition to the bonds described above, included in longterm debt at December 31, 2014 and 2013, are capital lease obligations, bank borrowings of subsidiaries and other longterm debt, none of which is individually significant. 142 Financial review of ABB Group | ABB Annual Report 2014 Note 13 Other provisions, other current liabilities and other non-current liabilities December 31, ($ in millions) Contractrelated provisions “Other provisions” consisted of the following: Provision for insurancerelated reserves Provisions for contractual penalties and compliance and litigation matters Restructuring and restructuringrelated provisions Other Total “Other current liabilities” consisted of the following: December 31, ($ in millions) Employeerelated liabilities Accrued expenses Derivative liabilities (see Note 5) Nontrade payables Income taxes payable Other tax liabilities Deferred income Accrued customer rebates Accrued interest Pension and other employee benefits (see Note 17) 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) Derivative liabilities (see Note 5) Deferred income Employeerelated liabilities Provisions for contractual penalties and compliance and litigation matters 2014 2013 749 239 237 225 239 762 232 327 247 239 1,689 1,807 2014 1,746 2013 1,854 545 438 312 293 271 169 165 76 75 167 694 202 328 357 269 155 162 79 82 60 4,257 4,242 2014 760 222 109 108 89 52 41 205 1,586 2013 830 279 116 52 57 68 71 234 1,707 Other Total Note 14 Leases ($ in millions) 2015 2016 2017 2018 2019 Thereafter Sublease income Total The Company’s lease obligations primarily relate to real estate and office equipment. Rent expense was $558 million, $602 million and $610 million in 2014, 2013 and 2012, respectively. Sublease income received by the Company on leased assets was $17 million, $22 million and $25 million in 2014, 2013 and 2012, respectively. At December 31, 2014, future net minimum lease payments for operating leases, having initial or remaining noncancelable lease terms in excess of one year, consisted of the following: 432 361 300 210 170 230 1,703 (27) 1,676 ABB Annual Report 2014 | Financial review of ABB Group 143 At December 31, 2014, the future net minimum lease payments for capital leases and the present value of the net mini mum lease payments consisted of the following: Note 14 Leases, continued ($ in millions) 2015 2016 2017 2018 2019 Thereafter Total minimum lease payments 41 35 24 19 16 99 234 (2) 232 (88) 144 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 Note 15 Commitments and contingencies Contingencies – Environmental December 31, ($ in millions) Other provisions Other noncurrent liabilities Total 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 environmen tal 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 companies’ 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 2014, 2013 and 2012. The impact on “Income (loss) from discontinued operations, net of tax” was a charge of $41 million in 2013 and was not significant in 2014 and 2012. The effect of environmental obligations on the Company’s Consolidated Statements of Cash Flows was not significant in 2014, 2013 and 2012. Environmental provisions included in the Company’s Consolidated Balance Sheets were as follows: 2014 37 109 146 2013 37 116 153 Provisions for the above estimated losses have not been discounted as the timing of payments cannot be reasonably estimated. Antitrust In April 2014, the European Commission announced its decision regarding its investigation of anticompetitive practices in the cables industry and granted the Company full immunity from fines under the European Commission’s leniency program. In December 2013, the Company agreed with the Brazilian Antitrust Authority (CADE) to settle its ongoing inves tigation into the Company’s involvement in anticompetitive practices in the cables industry and the Company agreed to pay a fine of approximately 1.5 million Brazilian reals (equivalent to approximately $1 million on date of payment). The Company’s cables business remains under investigation for alleged anticompetitive practices in certain other jurisdic tions. An informed judgment about the outcome of these remaining investigations or the amount of potential loss or range of loss for the Company, if any, relating to these remaining investigations cannot be made at this stage. 144 Financial review of ABB Group | ABB Annual Report 2014 Note 15 Commitments and contingencies, continued In Brazil, the Company’s Gas Insulated Switchgear business is under investigation by the CADE for alleged anticompeti tive 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. In July 2014, the Company received the decision of the Italian Antitrust Agency regarding this matter. The agency closed its investigation without imposing a fine and accepted the nonfinancial com mitments offered by the Company. With respect to those aforementioned matters which are still ongoing, management is cooperating fully with the antitrust authorities. General In addition, the Company is aware of proceedings, or the threat of proceedings, against it and others in respect of pri vate 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, 2014 and 2013, the Company had aggregate liabilities of $147 million and $245 million, respectively, included in “Other provisions” and “Other noncurrent liabilities”, for the above regulatory, compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it is not possible to make an informed judgment on the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be material adverse outcomes beyond the amounts accrued. Guarantees General The following table provides quantitative data regarding the Company’s thirdparty guarantees. The maximum potential payments represent a “worstcase scenario”, and do not reflect management’s expected outcomes. December 31, ($ in millions) Performance guarantees Financial guarantees Indemnification guarantees Total Maximum potential payments 2014 232 72 50 354 2013 149 77 50 276 The carrying amount of liabilities recorded in the Consolidated Balance Sheets reflects the Company’s best estimate of future payments, which it may incur as part of fulfilling its guarantee obligations. In respect of the above guarantees, the carrying amounts of liabilities at December 31, 2014 and 2013, were not significant. 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 estimate 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 at both December 31, 2014 and 2013. 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, 2014 and 2013, the maxi mum potential amount payable under these guarantees as a result of thirdparty nonperformance was $156 million and $70 million, respectively. ABB Annual Report 2014 | Financial review of ABB Group 145 Note 15 Commitments and contingencies, continued 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, 2014 and 2013, the Company had a maximum potential amount payable of $72 million and $77 million, respectively, under financial guarantees outstanding. Of these amounts, $12 million and $15 million at December 31, 2014 and 2013, 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 insti tutions. 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 2014, 2013 and 2012. 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, 2014 and 2013, was $50 million. Product and orderrelated contingencies The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts. The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was as follows: ($ in millions) Balance at January 1, Net change in warranties due to acquisitions and divestments 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, Related party transactions 2014 1,362 11 (319) 224 (130) 1,148 2013 1,291 111 (294) 245 9 1,362 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. 146 Financial review of ABB Group | ABB Annual Report 2014 Note 16 Taxes ($ in millions) Current taxes Deferred taxes “Provision for taxes” consisted of the following: Tax expense from continuing operations Tax expense (benefit) from discontinued operations 2014 1,130 72 1,202 1 2013 1,258 (136) 1,122 (8) 2012 967 63 1,030 – 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 weightedaverage global 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 global tax rate Income taxes at weightedaverage tax rate Items taxed at rates other than the weightedaverage tax rate Impact of nondeductible goodwill allocated to divested businesses 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 2014 3,896 23.8% 2013 4,066 2012 3,838 22.7% 23.6% 929 146 77 52 (52) 50 922 110 – 31 1 58 906 60 – 44 (27) 47 1,202 30.9% 1,122 27.6% 1,030 26.8% In 2014, 2013 and 2012, 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 2014, 2013 and 2012, “Changes in 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 2014, the “Changes in valuation allowance, net” included an expense of $31 million related to certain of the Company’s operations in South America. In 2013, the “Changes in valuation allowance, net” included an expense 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 and 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. In 2014, the “Effects of change in tax laws and enacted tax rates” included a benefit of $62 million related to enacted changes in double tax treaties. In 2014, 2013 and 2012, “Other, net” of $50 million, $58 million and $47 million, respectively, included expenses of $45 million, $71 million and $94 million, respectively, in relation to items that were deducted for financial accounting purposes, but were not tax deductible, such as interest expense, local taxes on productive activities, disallowed meals and entertainment expenses and other similar items. In 2014, “Provision for taxes” included $279 million relating to income taxes recorded on $543 million of net gains from sale of businesses. This expense is primarily included in “Weightedaverage global tax rate” and “Impact of non deductible goodwill allocated to divested businesses”. ABB Annual Report 2014 | Financial review of ABB Group 147 Deferred income tax assets and liabilities consisted of the following: Note 16 Taxes, continued December 31, ($ in millions) Deferred tax assets: Unused tax losses and credits Provisions and other accrued liabilities Pension Inventories Property, plant and equipment and other noncurrent assets Other Total gross deferred tax asset Valuation allowance Total gross deferred tax asset, net of valuation allowance Deferred tax liabilities: Property, plant and equipment Intangibles and other noncurrent 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 2014 2013 644 825 671 297 265 112 2,814 (600) 2,214 (343) (766) (191) (118) (149) (612) (76) 1,000 858 477 302 83 140 2,860 (589) 2,271 (323) (1,110) (206) (135) (161) (598) (60) (2,255) (2,593) (41) (322) 902 511 (289) (1,165) (41) 832 370 (259) (1,265) (322) 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 $600 million and $589 million, at December 31, 2014 and 2013, respectively. “Unused tax losses and credits” at December 31, 2014 and 2013, in the table above, included $151 million and $172 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, 2014 and 2013, deferred tax liabilities totaling $612 million and $598 million, respectively, have been provided for primarily in respect of withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on unremitted earnings which will be payable in foreign jurisdictions on the repatriation of earnings to Switzerland. Income which has been generated outside of Switzerland and has already been subject to corporate income tax in such foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. Certain countries levy withholding taxes on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. In 2014 and 2013, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At December 31, 2014 and 2013, foreign subsidiary retained earnings subject to withholding taxes upon distribution of approximately $100 million and $200 million, respectively, 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, conse quently, no deferred tax liability was recorded. At December 31, 2014, net operating loss carryforwards of $2,200 million and tax credits of $67 million were available to reduce future taxes of certain subsidiaries. Of these amounts, $1,232 million of loss carry forwards and $48 million of tax credits will expire in varying amounts through 2034. The largest amount of these carryforwards related to the Company’s Central Europe operations. 148 Financial review of ABB Group | ABB Annual Report 2014 Note 16 Taxes, continued Unrecognized tax benefits consisted of the following: ($ in millions) Classification as unrecognized tax items on January 1, 2012 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 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, 2014, which would, if recognized, affect the effective tax rate Penalties and interest related Unrecognized to unrecognized tax benefits tax benefits 653 10 51 (73) 141 (3) (89) (29) 8 669 17 43 (30) 90 (1) (18) (46) 9 733 (3) 25 (24) 85 (1) (19) (36) (55) 705 169 – 26 (56) 1 – (11) (7) 5 127 2 36 – 4 – (5) (13) 3 154 1 39 (7) – – (10) (19) (12) 146 Total 822 10 77 (129) 142 (3) (100) (36) 13 796 19 79 (30) 94 (1) (23) (59) 12 887 (2) 64 (31) 85 (1) (29) (55) (67) 851 In 2014 and 2013, the “Increase relating to current year tax positions” included a total of $56 million and $62 million, respectively, in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authori ties. In 2012, the “Decrease relating to prior year tax positions” included a total of $87 million relating to the release of provi sions due to favorable resolution of a tax dispute in Northern Europe. In 2012, the “Increase relating to current year tax positions” included a total of $108 million in taxes related to the interpretation of tax law and double tax treaty agree ments 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. At December 31, 2014, the Company expected the resolution, within the next twelve months, of uncertain tax positions related to pending court cases amounting to $69 million for taxes, penalties and interest. Otherwise, the Company had not identified any other significant changes which were considered reasonably possible to occur within the next twelve months. At December 31, 2014, the earliest significant open tax years that remained subject to examination were the following: Region Europe The Americas Asia Middle East and Africa Year 2007 2010 2005 2004 ABB Annual Report 2014 | Financial review of ABB Group 149 Note 17 Employee benefits The Company operates defined benefit and defined contribution pension plans and termination indemnity plans, in accordance with local regulations and practices. These plans cover a large portion of the Company’s employees and provide benefits to employees in the event of death, disability, retirement, or termination of employment. Certain of these plans are multiemployer plans. The Company also operates other postretirement benefit plans including postre tirement health care benefits, and other employeerelated benefits for active employees including longservice award plans. The measurement date used for the Company’s employee benefit plans is December 31. The funding policies of the Company’s plans are consistent with the local government and tax requirements and several of the plans are not required to be funded according to local government and tax requirements. The Company recognizes in its Consolidated Balance Sheets the funded status of its defined benefit pension plans, postretirement plans, and other employeerelated benefits measured as the difference between the fair value of the plan assets and the benefit obligation. Obligations and funded status of the plans The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the Consolidated Balance Sheets were as follows: ($ in millions) Benefit obligation at January 1, Service cost Interest cost Contributions by plan participants Benefit payments Benefit obligations of businesses acquired (divested) 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 (divested) Plan amendments and other Exchange rate differences Fair value of plan assets at December 31, Funded status – underfunded Defined pension Other postretirement benefits benefits 2014 2013 12,063 12,063 2014 236 2013 281 243 409 81 (632) (27) 1,536 (64) (1,254) 12,355 10,930 918 308 81 (632) (25) (68) (1,047) 10,465 1,890 249 373 81 (612) 7 (273) (50) 225 12,063 10,282 621 403 81 (612) – (57) 212 10,930 1,133 1 10 – (14) – 14 – (2) 245 – – 14 – (14) – – – – 1 9 – (15) – (41) 2 (1) 236 – – 15 – (15) – – – – 245 236 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) credit Amount recognized in OCI (1) and NCI (2) 2014 2013 (2,765) (2,050) 2 (21) 2012 (2,574) (32) (2,763) (2,071) (2,606) Taxes associated with amount recognized in OCI (1) and NCI (2) 652 459 631 Amount recognized in OCI (1) and NCI (2), net of tax (3) (2,111) (1,612) (1,975) (1) (2) (3) OCI represents “Accumulated other comprehensive loss”. NCI represents “Noncontrolling interests”. NCI, net of tax, amounted to $(3) million, $(3) million and $(7) million at December 31, 2014, 2013 and 2012, respectively. 2014 (39) 16 (23) – (23) 2013 (25) 24 (1) – (1) 2012 (69) 33 (36) – (36) In addition, the following amounts were recognized in the Company’s Consolidated Balance Sheets: December 31, ($ in millions) Overfunded plans Underfunded plans – current Underfunded plans – noncurrent Funded status – underfunded 150 Financial review of ABB Group | ABB Annual Report 2014 Defined pension Other postretirement benefits benefits 2014 (42) 19 1,913 1,890 2013 (66) 20 1,179 1,133 2014 2013 – 16 229 245 – 18 218 236 Note 17 Employee benefits, continued 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 2014 2013 (42) (28) (70) (66) (27) (93) 2014 2013 19 16 40 75 20 18 44 82 2014 2013 1,913 229 252 2,394 1,179 218 242 1,639 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 (over funded), respectively, was: 2014 2013 PBO Assets Difference PBO Assets Difference 11,576 779 9,644 821 12,355 10,465 1,932 (42) 1,890 11,054 1,009 12,063 9,855 1,075 10,930 1,199 (66) 1,133 The accumulated benefit obligation (ABO) for all defined benefit pension plans was $11,869 million and $11,594 million at December 31, 2014 and 2013, respectively. The funded status, calculated using the ABO and fair value of plan assets for pension plans with ABO in excess of fair value of plan assets (underfunded) or fair value of plan assets in excess of ABO (overfunded), respectively, was: ABO 9,921 1,948 2014 Assets Difference 8,091 2,374 1,830 (426) 1,404 11,869 10,465 All of the Company’s other postretirement benefit plans are unfunded. 2013 Assets Difference ABO 9,112 2,482 8,161 2,769 11,594 10,930 951 (287) 664 Components of net periodic benefit cost Net periodic benefit cost consisted of the following: ($ in millions) Service cost Interest cost Expected return on plan assets 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 2014 243 409 (481) 27 99 4 301 2013 249 373 (479) 34 136 1 314 2012 221 396 (494) 42 98 2 265 2014 2013 2012 1 10 – (9) – – 2 1 9 – (9) 4 2 7 1 11 – (9) 4 – 7 ABB Annual Report 2014 | Financial review of ABB Group 151 Note 17 Employee benefits, continued 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 2015 is $132 million and $37 million, respectively. The net actuarial loss and prior service (credit) for other postretirement benefits estimated to be amortized from “Accu mulated other comprehensive loss” into net periodic benefit cost in 2015 is $2 million and $(8) million, respectively. Assumptions The following weightedaverage assumptions were used to determine benefit obligations: December 31, (in %) Discount rate Rate of compensation increase Rate of pension increase Defined pension Other postretirement benefits benefits 2014 2.61 1.65 1.04 2013 3.58 1.81 1.14 2014 3.49 – – 2013 4.17 – – 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 2014 3.58 4.60 1.81 2013 3.22 4.79 1.71 2012 3.91 5.38 1.62 2014 4.17 – – 2013 3.35 – – 2012 4.07 – – 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 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 2014 8.00% 5.00% 2028 2013 8.15% 5.00% 2028 A onepercentagepoint change in assumed health care cost trend rates would have the following effects at Decem ber 31, 2014: ($ in millions) Effect on total of service and interest cost Effect on postretirement benefit obligation 1-percentage-point Increase Decrease 1 22 (1) (19) 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. The pension plans are typically funded by regular contributions from employees and the Company. These plans are typically administered by boards of trustees (which include Company representatives) whose primary responsibilities include ensuring that the plans meet their liabilities through contributions and investment returns. The boards of trustees have the responsibility for making key investment strategy decisions within a riskcontrolled framework. 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. 152 Financial review of ABB Group | ABB Annual Report 2014 Note 17 Employee benefits, continued 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 management studies. Asset/liability management studies typically take place every three years. However, the risks of the plans are monitored on an ongoing basis. The board of trustees’ investment goal is to maximize the longterm returns of plan assets within specified risk param eters, while considering the future liabilities and liquidity needs of the individual plans. Risk measures taken into account include the funding ratio of the plan, the likelihood of extraordinary cash contributions being required, the risk embed ded in each individual asset class, and the plan asset portfolio as a whole. The Company’s global pension asset allocation is the result of the asset allocations of the individual plans, which are set by the respective boards of trustees. The target asset allocation of the Company’s plans on a weightedaverage basis is as follows: Asset class Equity Fixed income Real estate Other 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 primarily include corporate bonds of companies from diverse industries and government bonds. 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 segregated investment mandates, and include an allocation to emerg ing markets. Real estate consists primarily of direct investments in real estate in Switzerland held in the Swiss plans. The “Other” asset class includes investments in private equity, hedge funds, commodities, and cash and reflects a vari ety of investment strategies. Based on the above global asset allocation and the fair values of the plan assets, the expected longterm return on assets at December 31, 2014, is 4.58 percent. The Company and the local boards of trustees regularly review the investment performance of the asset classes and individual asset managers. Due to the diversified nature of the invest ments, 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 2015. At December 31, 2014 and 2013, plan assets include ABB Ltd’s shares (as well as an insignificant amount of the Com pany’s debt instruments) with a total value of $15 million and $18 million, respectively. The fair values of the Company’s pension plan assets by asset class are presented below. For further information on the fair value hierarchy and an overview of the Company’s valuation techniques applied, see the “Fair value measures” section of Note 2. December 31, 2014 ($ 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 433 – – 638 – – – 274 – – – – – 1,821 487 1,211 3,521 671 126 56 – – 94 62 – – – – – – – – 136 93 842 – 433 1,821 487 1,849 3,521 671 126 330 136 93 936 62 1,345 8,049 1,071 10,465 ABB Annual Report 2014 | Financial review of ABB Group 153 Note 17 Employee benefits, continued December 31, 2013 ($ in millions) 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 Level 1 Level 2 Level 3 Total fair value 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 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, 2013 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 Return on plan assets Assets still held at December 31, 2014 Assets sold during the year Purchases (sales) Transfers into Level 3 Exchange rate differences Balance at December 31, 2014 Private equity Hedge funds Real estate Commodities Total Level 3 164 6 8 (24) – 1 155 21 3 (39) – (4) 136 153 28 (7) (19) – 3 158 (3) 8 (59) – (11) 93 830 10 – 4 8 14 866 43 – 30 – (97) 842 35 (3) – – – – 32 (5) – – (27) – – 1,182 41 1 (39) 8 18 1,211 56 11 (68) (27) (112) 1,071 Real estate properties, which are primarily located in Switzerland, 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 compa rable 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. 154 Financial review of ABB Group | ABB Annual Report 2014 Note 17 Employee benefits, continued Contributions ($ in millions) Employer contributions were as follows: 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 2014 308 75 2013 403 164 2014 14 – 2013 15 – In 2014, the discretionary contributions included noncash contributions totaling $25 million of available forsale debt securities to certain of the Company’s pension plans in the United Kingdom. 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. The Company expects to contribute approximately $233 million, including $23 million of discretionary contributions, to its defined benefit pension plans in 2015. These discretionary contributions are expected to be noncash contribu tions. The Company expects to contribute approximately $17 million to its other postretirement benefit plans in 2015. The Company also contributes to a number of defined contribution plans. The aggregate expense for these plans was $236 million, $243 million and $220 million in 2014, 2013 and 2012, respectively. Contributions to multi employer plans were not significant in 2014, 2013 and 2012. Estimated future benefit payments The expected future cash flows to be paid by the Company’s plans in respect of pension and other postretirement benefit plans (net of Medicare subsidies) at December 31, 2014, are as follows: ($ in millions) 2015 2016 2017 2018 2019 Years 2020–2024 Note 18 Share-based payment arrangements Defined pension benefits Other postretirement benefits 644 668 633 627 627 3,002 17 17 17 17 17 83 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 administra tive expenses” and totaled $73 million, $71 million and $60 million in 2014, 2013 and 2012, respectively. Compensation cost for cashsettled awards is recorded in “Selling, general and administrative expenses” and is disclosed in the “WARs”, “LTIP” and “Other sharebased payments” sections of this note. The total tax benefit recognized in 2014, 2013 and 2012, was not significant. At December 31, 2014, 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, 30 million shares (of the 56 million shares held by the Company in treasury stock at December 31, 2014) could be used to settle sharebased payment arrangements (the remaining shares of treasury stock are held for cancellation – see Note 19). 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 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 war rants, options and WARs expire six years from the date of grant. ABB Annual Report 2014 | Financial review of ABB Group 155 Note 18 Share-based payment arrangements, continued Expected volatility Dividend yield Expected term Riskfree interest rate 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 contractual 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 warrants 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. 2014 18% 2.88% 6 years 0.24% 2013 21% 2.90% 6 years 0.57% 2012 27% 3.60% 6 years 0.30% 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, 2014 Granted Exercised Forfeited Expired Outstanding at December 31, 2014 Vested and expected to vest at December 31, 2014 Exercisable at December 31, 2014 297.9 79.9 (5.5) (4.5) (25.1) 342.7 327.3 121.2 59.6 16.0 (1.1) (0.9) (5.1) 68.5 65.5 24.2 21.76 21.00 15.75 19.34 36.40 20.64 20.68 22.28 (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. 3.6 3.6 2.0 88 83 20 At December 31, 2014, there was $62 million of total unrecognized compensation cost related to non vested 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 2014, 2013 and 2012 was 0.49 Swiss francs, 0.66 Swiss francs and 0.59 Swiss francs, respectively. In 2014 and 2012, the aggregate intrinsic value (on the date of exercise) of instruments exercised was not significant. There were no exercises in 2013. Presented below is a summary, by launch, related to instruments outstanding at December 31, 2014: Exercise price (in Swiss francs)(1) 19.00 22.50 25.50 15.75 17.50 21.50 21.00 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) 22.8 36.7 43.1 60.9 14.5 85.2 79.5 342.7 4.6 7.3 8.6 12.2 2.9 17.0 15.9 68.5 0.4 1.4 2.4 3.4 3.4 4.4 5.7 3.6 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 Company recorded an expense of $26 million in 2013 as a result of changes in both the fair value and vested portion of the out standing WARs. The amount recorded in 2014 and 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 156 Financial review of ABB Group | ABB Annual Report 2014 Note 18 Share-based payment arrangements, continued extent that they offset the change in fair value of the liability for the WARs. In 2014, the Company recorded an expense of $11 million and in 2013 an income of $16 million, in “Selling, general and administrative expenses” related to the cash settled call options. The amount recorded in 2012 was not significant. The aggregate fair value of outstanding WARs was $33 million and $56 million at December 31, 2014 and 2013, 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) Outstanding at January 1, 2014 Granted Exercised Forfeited Expired Outstanding at December 31, 2014 Exercisable at December 31, 2014 ESAP 67.3 10.7 (5.9) (0.7) (10.2) 61.2 18.8 The aggregate fair value at date of grant of WARs granted in 2014, 2013 and 2012, was $6 million, $13 million and $10 million, respectively. In 2013 and 2012, sharebased liabilities of $9 million and $7 million, respectively, were paid upon exercise of WARs by participants. In 2014, the amount paid was not significant. 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 for feitures, the Company has used the data from previous ESAP launches. Expected volatility Dividend yield Expected term Riskfree interest rate 2014 18% 3.10% 1 year 0% 2013 20% 2.84% 1 year 0% 2012 23% 3.45% 1 year 0% 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, 2014 Granted Forfeited Exercised (4) Not exercised (savings returned plus interest) Outstanding at December 31, 2014 Vested and expected to vest at December 31, 2014 Exercisable at December 31, 2014 4.7 3.9 (0.2) (0.6) (3.9) 3.9 3.7 – 20.82 20.97 20.82 20.82 20.82 20.97 20.97 – 0.8 0.8 – 0.7 0.6 – (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 $12 million and the corresponding tax benefit was not significant. The shares were delivered out of treasury stock. ABB Annual Report 2014 | Financial review of ABB Group 157 Note 18 Share-based payment arrangements, continued LTIP Nonvested at January 1, 2014 Granted Vested Expired (3) Forfeited Nonvested at December 31, 2014 The exercise prices per ABB Ltd share and per ADS of 20.97 Swiss francs and $21.81, respectively, for the 2014 grant, 22.90 Swiss francs and $25.21, respectively, for the 2013 grant, and 17.08 Swiss francs and $18.30, respectively, for the 2012 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 was effectively reduced as for every ten shares bought through exercise of the options one additional free share would be delivered; therefore the effective exercise prices per ABB Ltd share and per ADS were 20.82 Swiss francs and $22.92, respectively. The table above reflects the effective exercise price. At December 31, 2014, the total unrecognized compensation cost related to nonvested options granted under the ESAP was not significant. The weightedaverage grantdate fair value (per option) of options granted during 2014, 2013 and 2012, was 1.19 Swiss francs, 2.79 Swiss francs and 1.29 Swiss francs, respectively. The total intrinsic value (on the date of exercise) of options exercised in 2013 was $24 million, while in 2014 and 2012 it was not significant. The Company has a longterm incentive plan (LTIP) for members of its Executive Committee and selected other senior executives (Eligible Participants), as defined in the terms of the LTIP. The LTIP involves annual conditional grants of the Company’s stock to such Eligible Participants that are subject to certain conditions. The 2014, 2013 and 2012 launches under the LTIP are each composed of two components: (i) a performance component (earnings per share performance) 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 2014, 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, begin ning 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). Under the retention component of the 2014, 2013 and 2012 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 2014, 2013 and 2012 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 in cash. Presented below is a summary of activity under the LTIP: 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) 1.7 0.6 (0.5) – (0.1) 1.7 1.1 0.4 (0.1) (0.3) (0.1) 1.0 2.8 1.0 (0.6) (0.3) (0.2) 2.7 17.65 20.35 20.85 8.76 15.71 18.85 (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, 2014, there was $12 million of total unrecognized compensation cost related to equity settled awards under the LTIP. That cost is expected to be recognized over a weightedaverage period of 2.1 years. The compensation cost recorded in 2014, 2013 and 2012, for cashsettled awards was not significant. The aggregate fair value, at the dates of grant, of shares granted in 2014, 2013 and 2012, was approximately $22 million, $22 million and $22 million, respectively. The total grant date fair value of shares that vested during 2014 was $15 mil lion, while in 2013 and 2012 it was not significant. The weightedaverage grantdate fair value (per share) of shares granted during 2014, 2013 and 2012, was 20.35 Swiss francs, 20.92 Swiss francs and 15.21 Swiss francs, respectively. 158 Financial review of ABB Group | ABB Annual Report 2014 Note 18 Share-based payment arrangements, continued For the earnings per share performance component of the 2014, 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. For the retention component under the 2014, 2013 and 2012 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 2014, 2013 and 2012, was not significant. Note 19 Stockholders’ equity At both December 31, 2014 and 2013, 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 2014, at the AGM held in April 2013 and at the AGM held in April 2012, shareholders approved the payment of a dividend of 0.70 Swiss francs per share, 0.68 Swiss francs per share and 0.65 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 2014 (amounting to $1,841 million), May 2013 (amounting to $1,667 million) and May 2012 (amounting to $1,626 million), respectively. In the second quarter of 2014, the Company purchased on the open market an aggregate of 12.0 million of its own shares to be available for delivery under its employee share programs. These transactions resulted in an increase in “Treasury stock” of $282 million. Furthermore, in September 2014, the Company announced a share buyback program for the purchase of up to $4 bil lion of its own shares over a period ending no later than September 2016. The Company intends that approximately three quarters of the shares to be purchased will be held for cancellation (after approval from shareholders) and the remainder will be purchased to be available for its employee share programs. Shares acquired for cancellation are acquired through a separate trading line on the SIX Swiss Exchange (on which only the Company can purchase shares), while shares acquired for delivery under employee share programs are acquired through the ordinary trading line. As of December 31, 2014, under the announced share buyback program, the Company had purchased 26.0 million shares for cancellation and 6.8 million shares to support its employee share programs. These transactions resulted in an increase in “Treasury stock” of $733 million. Subsequent to December 31, 2014, and up to February 28, 2015, the Com pany purchased, under the announced share buyback program, an additional 11.8 million shares, for approximately $250 million. 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 2014 and 2012, the bank exercised certain of the call options it held. As a consequence, in 2014 and 2012, the Company delivered 1.3 million and 2.7 million shares, respectively, out of treasury stock. No call options were exercised by the bank in 2013. At December 31, 2014, such call options representing 9.1 million shares and with strike prices ranging from 15.75 to 21.50 Swiss francs (weightedaverage strike price of 19.34 Swiss francs) were held by the bank. The call options expire in periods ranging from May 2015 to August 2020. However, only 0.5 million of these instruments, with strike prices ranging from 15.75 to 21.50 Swiss francs (weightedaverage strike price of 19.72 Swiss francs), could be exercised at December 31, 2014, under the terms of the agreement with the bank. In addition to the above, at December 31, 2014, the Company had further outstanding obligations to deliver: – 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 8.6 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 15.1 million shares relating to the options granted under the 2012 launches of the MIP, with a weightedaverage strike price of 16.09 Swiss francs, vesting in May 2015 and expiring in May 2018, – up to 17.0 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 15.9 million shares relating to the options granted under the 2014 launch of the MIP, with a strike price of 21.00 Swiss francs, vesting in August 2017 and expiring in August 2020, – up to 3.9 million shares relating to the ESAP, vesting and expiring in November 2015, – up to 1.7 million shares to Eligible Participants under the 2014, 2013 and 2012, launches of the LTIP, vesting and expiring in August 2017, June 2016 and May 2015, respectively, and – up to 1.1 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 2014, 2013 and 2012, the Company delivered 0.6 million, 3.7 million and 2.3 million shares, respectively, from treasury stock, under the ESAP. ABB Annual Report 2014 | Financial review of ABB Group 159 Note 19 Stockholders’ equity, continued Note 20 Earnings per share Amounts available to be distributed as dividends to the stockholders of ABB Ltd are based on the requirements of Swiss law and ABB Ltd’s Articles of Incorporation, and are determined based on amounts presented in the unconsolidated financial statements of ABB Ltd, prepared in accordance with Swiss law. At December 31, 2014, the total unconsolidated stockholders’ equity of ABB Ltd was 9,651 million Swiss francs ($9,752 million), including 2,384 million Swiss francs ($2,409 million) representing share capital, 8,446 million Swiss francs ($8,535 million) representing reserves and 1,179 mil lion Swiss francs ($1,192 million) representing a reduction of equity for own shares (treasury stock). Of the reserves, 1,179 million Swiss francs ($1,192 million) relating to own shares and 477 million Swiss francs ($482 million) representing 20 percent of share capital, are restricted and not available for distribution. In February 2015, the Company announced that a proposal will be put to the 2015 AGM for approval by the share holders to distribute 0.72 Swiss francs per share to shareholders, comprising of a dividend of 0.55 Swiss francs paid out of ABB Ltd’s capital contribution reserves and a distribution of 0.17 Swiss francs by way of a nominal value reduction (reduction in the par value of each share by 0.17 Swiss francs from 1.03 Swiss francs to 0.86 Swiss francs). Basic earnings per share is calculated by dividing income by the weightedaverage number of shares outstanding during the year. Diluted earnings per share is calculated by dividing income by the weightedaverage number of shares out standing during the year, assuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call options and outstanding options and shares granted subject to certain conditions under the Company’s sharebased payment arrangements. In 2014, 2013 and 2012, outstanding securities representing a maximum of 59 million, 47 million and 56 million shares, respectively, were excluded from the calcula tion of diluted earnings per share as their inclusion would have been antidilutive. Basic earnings per share ($ in millions, except per share data in $) Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 2014 2013 2012 2,570 24 2,594 2,824 (37) 2,787 2,700 4 2,704 Weighted-average number of shares outstanding (in millions) 2,288 2,297 2,293 Basic earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income Diluted earnings per share ($ in millions, except per share data in $) Amounts attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 1.12 0.01 1.13 1.23 (0.02) 1.21 1.18 – 1.18 2014 2013 2012 2,570 24 2,594 2,824 (37) 2,787 2,700 4 2,704 Weightedaverage number of shares outstanding (in millions) 2,288 2,297 2,293 Effect of dilutive securities: Call options and shares Dilutive weighted-average number of shares outstanding Diluted earnings per share attributable to ABB shareholders: Income from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income 7 8 2 2,295 2,305 2,295 1.12 0.01 1.13 1.23 (0.02) 1.21 1.18 – 1.18 160 Financial review of ABB Group | ABB Annual Report 2014 Note 21 Other comprehensive income The following table includes amounts recorded within “Total other comprehensive income (loss)” including the related income tax effects. ($ in millions) Foreign currency translation adjustments: 2014 2013 2012 Before Tax Net Before Tax Net Before Tax Net tax effect of tax tax effect of tax tax effect of tax Net change during the year (1,691) 11 (1,680) 133 141 389 (6) 383 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 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 (14) 21 7 (5) (826) 18 99 (714) (65) 10 (55) 5 (6) (1) 2 212 (1) (20) 193 13 (1) 12 8 – 1 1 4 (132) (2) (41) (9) 15 6 (3) (614) 17 79 (521) (4) (14) (18) (20) 423 25 140 568 (4) (13) (17) (16) 291 23 99 5 1 6 (42) (846) 33 102 (2) – (2) 6 245 (3) (32) 216 3 1 4 (36) (601) 30 70 (537) (171) 397 (753) (52) 33 9 (43) (54) (21) (5) 11 6 28 74 (21) 53 (43) (15) (42) 32 14 (7) (28) 25 Total other comprehensive income (loss) (2,453) 215 (2,238) 662 (156) 506 (326) 201 (125) 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 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, 2014 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) (1,680) – (1,680) (9) (2,102) 24 (4) (13) (17) – 7 (9) 15 6 – 13 (2,004) 275 122 397 3 (1,610) (617) 96 (521) – (2,131) 37 28 (43) (15) – 22 (52) 9 (43) – (21) Total OCI (2,523) 440 66 506 (5) (2,012) (2,358) 120 (2,238) (9) (4,241) ABB Annual Report 2014 | Financial review of ABB Group 161 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) Location of (gains) losses reclassified from OCI 2014 2013 Pension and other postretirement plan adjustments: Amortization of prior service cost 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 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 (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”. 18 99 117 (21) 96 9 (8) 3 6 10 (1) 9 25 140 165 (43) 122 (52) 1 5 (8) (54) 11 (43) The amounts reclassified out of OCI in respect of Unrealized gains (losses) on availableforsale securities were not significant in 2014 and 2013. In 2014, 2013 and 2012, the Company executed minor restructuringrelated activities and incurred charges of $235 million, $252 million, and $180 million, respectively, which were mainly recorded in “Total cost of sales”. Note 22 Restructuring and related expenses Restructuringrelated activities ($ in millions) Employee severance costs Estimated contract settlement, loss order and other costs Inventory and longlived asset impairments Total 2014 177 31 27 235 2013 154 78 20 252 2012 92 72 16 180 At December 31, 2014 and 2013, 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 and sells products and systems that provide protection, control and measure ment 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 a wide range of products across voltage levels, including circuit breakers, switchgear, capacitors, instrument transformers, power, distribution and traction transformers for electrical and other infrastructure utilities, as well as industrial and commercial customers. 162 Financial review of ABB Group | ABB Annual Report 2014 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 in corporating components manufactured by both the Company and by third parties, for power generation, transmission and distribution utilities, other infrastructure utilities, as well as other industrial and commercial enterprises. – 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, gains and losses on sale of businesses, 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 under lying 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 deduc tion 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 2014, 2013 and 2012, as well as total assets at December 31, 2014, 2013 and 2012. Third-party revenues Intersegment revenues Total revenues 9,296 7,117 7,745 8,782 6,686 204 – 39,830 846 415 203 1,551 334 1,592 (4,941) – 10,142 7,532 7,948 10,333 7,020 1,796 (4,941) 39,830 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 2014 ($ in millions) Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Corporate and Other Intersegment elimination Consolidated 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 ABB Annual Report 2014 | Financial review of ABB Group 163 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 Gains and losses on sale of businesses, 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 2014 2013 2012 1,760 1,429 1,029 1,519 5 (342) 5,400 (1,305) (235) 482 (223) (42) 101 4,178 80 (362) 3,896 1,783 1,468 1,096 1,637 419 (328) 6,075 (1,318) (252) (181) 60 14 (11) 4,387 69 (390) 4,066 1,735 1,219 1,003 1,585 290 (277) 5,555 (1,182) (180) (199) 135 (28) (43) 4,058 73 (293) 3,838 Depreciation and amortization Capital expenditure (1) Total assets (1) at December 31, ($ in millions) 2014 2013 2012 2014 2013 2012 Discrete Automation and Motion Low Voltage Products Process Automation Power Products Power Systems Corporate and Other Consolidated 309 301 88 217 175 215 285 323 87 223 183 217 263 250 82 209 174 204 192 184 49 220 92 289 214 204 68 252 101 267 197 208 91 259 194 344 2014 10,123 7,978 4,268 7,396 6,855 8,258 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 1,305 1,318 1,182 1,026 1,106 1,293 44,878 48,064 49,070 (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, 2014 13,674 11,482 10,874 3,800 39,830 2013 14,385 12,115 11,230 4,118 41,848 2012 14,073 10,699 10,750 3,814 39,336 2014 3,460 1,215 789 188 5,652 2013 3,798 1,450 850 156 6,254 Revenues by geography reflect the location of the customer. Approximately 19 percent, 18 percent and 17 percent of the Company’s total revenues in 2014, 2013 and 2012, respectively, came from customers in the United States. Approxi mately 13 percent, 12 percent and 12 percent of the Company’s total revenues in 2014, 2013 and 2012, respectively, were generated from customers in China. In 2014, 2013 and 2012, 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 Decem ber 31, 2014, approximately 16 percent, 16 percent and 15 percent were located in Switzerland, the U.S. and Sweden, respectively. At December 31, 2013, approximately 17 percent, 17 percent and 15 percent of the Company’s long lived assets 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 the Compensation report in this Annual Report. 164 Financial review of ABB Group | ABB Annual Report 2014 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. Management conducted an assessment of the effectiveness of internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management has concluded that ABB’s internal control over financial reporting was effective as of December 31, 2014. 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. Ernst & Young AG, 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, 2014, which is included on page 167 of this Annual Report. Ulrich Spiesshofer Chief Executive Officer Eric Elzvik Chief Financial Officer Zurich, Switzerland March 5, 2015 ABB Annual Report 2014 | Financial review of ABB Group 165 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, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity, and notes thereto (pages 114−164), for each of the three years in the period ended December 31, 2014. Board of Directors’ Responsibility The Board of Directors is responsible for the preparation of these consoli dated 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 sys tem relevant to the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial state ments based on our audits. We conducted our audits in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consoli dated 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 of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ABB Ltd as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended Decem ber 31, 2014, 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, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsor ing Organizations of the Treadway Commission (2013 framework) (COSO), and our report dated March 5, 2015 expressed an unqualified opinion on the effectiveness of ABB Ltd’s internal control over financial reporting. Ernst & Young AG Leslie Clifford Licensed audit expert (Auditor in charge) Zurich, Switzerland March 5, 2015 Robin Errico Licensed audit expert 166 Financial review of ABB Group | ABB Annual Report 2014 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 compli ance 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, 2014, 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 2014 consolidated financial statements of ABB Ltd and our report dated March 5, 2015, expressed an unqualified opinion thereon. Ernst & Young AG Leslie Clifford Licensed audit expert (Auditor in charge) Zurich, Switzerland March 5, 2015 Robin Errico Licensed audit expert 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, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 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 Company 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 inter nal 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 company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable 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 2014 | Financial review of ABB Group 167 168 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 ABB Ltd Statutory Financial Statements Contents 170 ABB Ltd Management Report 2014 171 Financial Statements of ABB Ltd, Zurich 184 Proposed appropriation of available earnings 185 Report of the Statutory Auditor ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 169 ABB Ltd Management Report 2014 ABB Ltd is the holding company of the ABB Group, owning directly or indirectly all subsidiaries globally. The major business activities during 2014 can be summarized as follows: Share transactions – share buyback for employee share programs of CHF 390 million – share buyback for reduction of share capital of CHF 555 million – share deliveries for employee share programs of CHF 63 million Loans granted – Repayment of a loan granted (CHF 900 million) by ABB Asea Brown Boveri Ltd Dividend payment – Payment of a dividend from capital contribution reserve of CHF 1,379 million to the external shareholders. Other information In 2014, the Company employed on average 18 employees. Once a year, the Company’s Board of directors performs a risk assessment in accordance with the Group’s risk management process and discusses appropri- ate actions if necessary. The Company does not carry out any operational or research and development business. In 2015, the Company will continue to operate as the holding company of the ABB Group. No change of business is expected. March 5, 2015 170 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 Financial Statements of ABB Ltd, Zurich Income Statement Year ended December 31 (CHF in thousands) Dividend income Finance income Other operating income Revaluation gain on own shares Finance expense Personnel expenses Other operating expenses Net income before taxes Income taxes Net income Balance Sheet December 31 (CHF in thousands) Cash Cash deposit with ABB Group Treasury Operations Non-trade receivables Non-trade receivables – Group Accrued income and prepaid expenses Accrued income and prepaid expenses – Group Total current assets Long-term loans – Group Participation Other long-term assets Total non-current assets Total assets Non-trade payables Non-trade payables – Group Deferred income and accrued expenses Deferred income and accrued expenses – Group Total current liabilities Interest-bearing liabilities Total non-current liabilities Total liabilities Share capital Legal reserves Legal reserves from capital contribution Legal reserves from retained earnings Free reserves Other reserves* Retained earnings Net income Own shares* Total stockholders’ equity Total liabilities and stockholders’ equity Note 9 10 2014 600,000 27,216 43,734 – (34,175) (40,479) (25,592) 570,704 (597) 570,107 2013 600,000 35,914 39,660 42,887 (32,062) (50,608) (25,946) 609,845 (2,792) 607,053 Note 2014 1,012 2013 853 2 1,891,494 2,697,167 944 7,687 2,100 3,100 559 7,630 1,600 3,338 1,906,337 2,711,147 – 900,000 8,973,229 8,973,229 7,481 9,474 8,980,710 9,882,703 10,887,047 12,593,850 10,717 738 23,734 1,233 36,422 5,092 1,270 46,460 1,297 54,119 1,199,562 1,199,562 1,235,984 1,199,299 1,199,299 1,253,418 2,384,186 2,384,186 1,263,005 1,000,000 2,641,522 1,000,000 535,171 533,396 5,077,751 4,470,698 570,107 607,053 (1,179,157) (296,423) 9,651,063 11,340,432 10,887,047 12,593,850 3 4 6 8 8 8 8 8 8 Certain prior-year amounts have been reclassified to conform to current year’s presentation and have been marked with an asterisk (*). ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 171 Cash Flow Statement Year ended December 31 (CHF in thousands) Note 2014 2013 Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Reversal of revaluation gain on own shares Reversal of amortization other assets Change in valuation of bonds Changes in operating assets and liabilities Receivables Current liabilities Net cash provided by operating activities Investing activities Repayment of loans granted to group companies Net cash provided by investing activities Financing activities Purchase of own shares Delivery of own shares Dividends paid Net cash used in financing activities Net change in cash and equivalents Cash and equivalents, opening balance Cash and equivalents, closing balance 570,107 607,053 – (42,887) 1,993 263 1,975 259 3 8 8 8 (704) (17,697) 553,962 900,000 900,000 (945,303) 64,344 8,288 3,768 578,456 – – – 98,851 (1,378,517) (1,327,353) (2,259,476) (1,228,502) (805,514) (650,046) 2,698,020 3,348,066 1,892,506 2,698,020 172 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 Notes to Financial Statements Note 1 General ABB Ltd, Zurich, Switzerland (the Company) is the parent company of the ABB Group. Its unconsolidated financial statements are prepared in accordance with Swiss law and serve as complementary information to the consolidated financial statements. The financial statements have been prepared in accordance with Article 957 et seqq. of Title 32 of the new Swiss Code of Obligations, which is effective as of January 1, 2013, with a transition period of 3 years. Certain prior-year amounts have been reclassified to conform to the current year’s presentation and have been marked with an asterisk (*). These primary relate to the changes due to the new Swiss Code of Obligations. Group companies are all companies in which the Company, directly or indirectly, has more than 50% of the voting rights or over which it exerts a decisive influence. A Group company is fully consolidated. The Company deposits available cash in Swiss francs with Group Treasury Operations. The deposits were stated at the lower of cost or fair value. The Company maintained an agreement to provide interest − bearing loans to ABB Asea Brown Boveri Ltd, Zurich, Switzerland. These loans were stated at the lower of cost or fair value and the outstanding amount was repaid in December 2014. 2014 – 2013 900,000 Purpose Holding Domicile CH-Zurich Share capital Ownership and voting rights CHF 2,768,000,000 100% The participation is valued at the lower of cost or fair value, using generally accepted valuation principles. Note 2 Cash deposit with ABB Group Treasury Operations Note 3 Loans – Group December 31 (CHF in thousands) Long-term loans – Group Note 4 Participation December 31, 2014 and 2013 Company name ABB Asea Brown Boveri Ltd ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 173 Note 5 Indirect Participations The following tables set forth, as of December 31, 2014 and 2013, the name, country of incorporation, ownership and voting rights, as well as share capital, of the significant indirect subsidiaries of the Company. December 31, 2014 Company name/location ABB S.A., Buenos Aires ABB Australia Pty Limited, Moorebank, NSW ABB AG, Vienna ABB N.V., Zaventem ABB Ltda., Osasco ABB Bulgaria EOOD, Sofia ABB Inc., Saint-Laurent, Quebec Thomas & Betts Limited, Saint-Jean-sur-Richelieu, Quebec ABB (China) Ltd., Beijing ABB 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., Cergy Pontoise ABB AG, Mannheim ABB Automation GmbH, Mannheim ABB Automation Products GmbH, Ladenburg ABB Beteiligungs- und Verwaltungsges. mbH, Mannheim ABB Stotz-Kontakt GmbH, Heidelberg Busch-Jaeger Elektro GmbH, 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 Limited, Dublin ABB Technologies Ltd., Haifa ABB S.p.A., Milan Power-One Italy S.p.A. Terranuova Bracciolini ABB K.K., Tokyo ABB Ltd., Seoul ABB Holdings Sdn. Bhd., Subang Jaya Asea Brown Boveri S.A. de C.V., San Luis Potosi SLP ABB B.V., Rotterdam ABB Capital B.V., Rotterdam ABB Finance B.V., Rotterdam ABB Holdings B.V., Rotterdam ABB Investments B.V., Rotterdam 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., Oeiras 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 Schweiz AG, Baden 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 Italy Japan Korea, Republic of Malaysia Mexico Netherlands Netherlands Netherlands Netherlands Netherlands New Zealand Norway Peru Philippines Poland Portugal Russian Federation Saudi Arabia Singapore South Africa Spain Sweden Sweden Switzerland 174 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 ABB ownership and voting rights Share capital % in thousands Footnote 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 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 98.18 100.00 99.92 100.00 100.00 65.00 100.00 100.00 100.00 100.00 100.00 100.00 278,860 131,218 15,000 13,290 590,314 65,110 – – (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 22,000 1,000,000 18,670,000 4,490 667,686 9,200 9,080 20 119 100 34,000 240,000 29,116 123,180 350,656 4,117 5,686 40,000 32,797 4,050 33,318 400,000 2,344,783 55,000 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 EUR JPY KRW MYR MXN EUR EUR EUR EUR EUR NZD NOK PEN PHP PLN EUR RUB SAR SGD ZAR EUR SEK SEK CHF Note 5 Indirect Participations, continued December 31, 2014 Company name/location 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., Delaware Thomas & Betts Corporation, Knoxville, TN (1) (2) Shares without par value Company consolidated as ABB exercises full management control December 31, 2013 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, Saint-Jean-sur-Richelieu, 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 Stotz-Kontakt GmbH, Heidelberg Busch-Jaeger 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., Tirat Carmel ABB S.p.A., Milan Power-One Italy S.p.A. Terranuova Bracciolini ABB K.K., Tokyo ABB Ltd., Seoul ABB Holdings Sdn. Bhd., Subang Jaya Country Switzerland Thailand Turkey Ukraine United Arab Emirates United Kingdom United Kingdom United States United States United States United States United States United States ABB ownership and voting rights Share capital % in thousands Footnote Currency 100.00 100.00 99.95 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100 1,034,000 13,410 85,400 5,000 226,014 120,000 2 1 – – – 1 (2) CHF THB TRY UAH AED GBP GBP USD USD USD USD USD USD ABB ownership and voting rights Share capital % in thousands Footnote 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 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 22,000 1,000,000 18,670,000 4,490 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 EUR JPY KRW MYR 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 Italy Japan Korea, Republic of Malaysia ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 175 Note 5 Indirect Participations, continued December 31, 2013 Company name/location Asea Brown Boveri S.A. de C.V., San Luis Potosi S.L.P ABB B.V., Rotterdam ABB Capital 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 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 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., Delaware Thomas & Betts Corporation, Knoxville, TN (1) (2) Shares without par value Company consolidated as ABB exercises full management control Note 6 Interest-bearing liabilities December 31 (CHF in thousands) Bond 2011–2016 1.25% coupon Bond 2012–2018 1.5% coupon Bond 2011–2021 2.25% coupon Total Country Mexico Netherlands Netherlands Netherlands Netherlands Netherlands New Zealand Norway Peru Philippines Poland Portugal Russian Federation Saudi Arabia Singapore South Africa Spain Sweden Sweden Switzerland Switzerland Thailand Turkey Ukraine United Arab Emirates United Kingdom United Kingdom United States United States United States United States United States United States ABB ownership and voting rights Share capital % in thousands Footnote Currency 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 98.18 100.00 99.89 100.00 100.00 65.00 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 99.95 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 667,686 9,200 9,080 20 119 100 34,000 240,000 29,119 123,180 260,644 4,117 941 40,000 32,797 4,050 33,318 400,000 2,344,783 55,000 100 1,034,000 13,410 85,400 5,000 203,014 60,000 2 1 – – – – MXN EUR EUR EUR EUR EUR NZD NOK PEN PHP PLN EUR RUB SAR SGD ZAR EUR SEK SEK CHF CHF THB TRY UAH AED GBP GBP USD USD USD USD USD USD (2) nominal value discount on issuance nominal value nominal value premium on issuance 2014 500,000 (507) 350,000 350,000 69 2013 500,000 (787) 350,000 350,000 86 1,199,562 1,199,299 The 1.25% 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 Company has the option to redeem the bonds prior to maturity, in whole, at par plus accrued interest, if 85% of the aggregate principle amount of the bonds has been redeemed or purchased and cancelled. 176 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 Note 6 Interest-bearing liabilities, continued The bonds, issued prior to January 1, 2013, are stated at their nominal value less any discount or plus any premium on issuance. Bonds are accreted/amortized to par over the period to maturity. 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 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 742,200 thousand as of December 31, 2014 (CHF 667,425 thousand as of December 31, 2013). 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 5,904,174 thousand as of December 31, 2014 (CHF 5,499,517 thousand as of December 31, 2013). Furthermore, the Company is the guarantor in the Group’s $2 billion multicurrency revolving credit facility, maturing in 2019 but no amounts were outstanding at December 31, 2014 and 2013. 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. Note 8 Stockholders’ equity The below table shows the changes to the opening balance of equity as of January 1, 2014, applying the new Swiss Code of Obligations: (CHF in thousands) capital reserves contribution earnings shares reserves earnings income shares Total Share Ordinary capital retained for own Other retained Net Own Legal reserves from from Reserve Free reserves from Closing balance as of December 31, 2013, Swiss Code of Obligations 2,384,186 1,000,000 2,641,522 296,423 236,973 4,470,698 607,053 11,636,855 (1,000,000) 1,000,000 (296,423) 296,423 – – (296,423) (296,423) Reclassification Transfer Reclassification of own shares Opening balance as of January 1, 2014, Article 957 of new Swiss Code of Obligations 2,384,186 – 2,641,522 1,000,000 – 533,396 4,470,698 607,053 (296,423) 11,340,432 ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 177 Note 8 Stockholders’ equity, continued (CHF in thousands) Opening balance as of Legal reserves from from Free reserves from Share capital retained Other retained Net Own capital contribution earnings reserves* earnings income shares* Total January 1, 2014 2,384,186 2,641,522 1,000,000 533,396 4,470,698 607,053 (296,423) 11,340,432 Allocation to retained earnings Release to other reserves Dividend payment Purchases of own shares Delivery of own shares Gain on transfer of own shares Net income for the year Closing balance as of December 31, 2014 (1,378,517) 1,378,517 (1,378,517) 1,775 607,053 (607,053) 570,107 – – (1,378,517) (945,303) (945,303) 62,569 62,569 1,775 570,107 2,384,186 1,263,005 1,000,000 535,171 5,077,751 570,107 (1,179,157) 9,651,063 Certain prior-year amounts have been reclassified to conform to the current year’s presentation and have been marked with an asterisk (*). 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. Accordingly, such contributions have been recorded in a specific account (Capital contribution reserve) within the legal reserves in order to benefit from the favorable tax treatment. Share capital as of December 31, 2014 and 2013 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 The balance for own shares of CHF 296,423 thousand has been reclassified from assets to equity. In addition, the related reserve for own shares has been transferred to, and is included in, the opening balance of other reserves. The own shares are valued at acquisition cost and gains from the delivery of own shares of CHF 1,775 thousand are recorded in other reserves. During 2014, a bank holding call options related to ABB Group’s management incentive plan (MIP) exercised a portion of these options. Such options had been issued in 2012 by the group company that facilitates the MIP at fair value and had a strike price of CHF 15.75. At issuance, the group company had entered into an intercompany option agreement with the Company, having the same terms and conditions to enable it to meet its future obligations. As a result of the exercise by the bank, the Company issued 1,315,400 shares at CHF 15.75 out of own shares. During 2013, no call options related to ABB Group’s MIP, were exercised. The ABB Group has an annual employee share acquisition plan (ESAP) which provides share options to employees globally. To enable the group company that facilitates the ESAP to deliver shares to employees who have exercised their stock options, the group company entered into an agreement with the Company to acquire the required number of shares at their then market value from the Company. Consequently in November 2014 and 2013, the Company issued, out of own shares, to the group company, 555,161 and 3,734,428 shares at CHF 21.52 and CHF 23.10, respectively. In 2014 and 2013, the Company transferred 1,109,760 and 965,601 own shares at an average acquisitions price per share of CHF 20.99 and CHF 21.03 to fulfill its obligations under other share-based arrangements. On September 9, 2014, the Company announced a share buyback program of up to USD 4 billion which commenced on September 16, 2014. The company intends to allocate approximately three-quarters of the buyback program to a reduction of share capital and the remainder to support its employee share programs globally. 178 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 Note 8 Stockholders’ equity, continued The movement in the number of own shares during the year was as follows: Opening balance as of January 1 Purchases for employee share programs Purchases for cancellation Delivery Closing balance as of December 31 Thereof pledged 2014 2013 average acquisition average acquisition number of shares price per share CHF number of shares price per share CHF 14,093,960 18,750,000 25,980,000 (2,980,321) 55,843,639 8,978,986 21.03 20.82 21.36 20.99 21.12 18,793,989 21.03 – – (4,700,029) 14,093,960 7,173,989 21.03 21.03 Note 9 Other operating income This position includes mainly outgoing charges for division management services and guarantee compensation fees to Group companies. Note 10 Revaluation gain on own shares As a consequence of the increase in their fair value, the own shares were revalued at December 31, 2013, according to the previous Swiss Code of Obligations to CHF 21.03 from CHF 18.75 per share, resulting in a write-up of CHF 42,887 thousand in 2013. According to the new Swiss Code of Obligations, the own shares are recorded at cost. Note 11 Significant shareholders Investor AB, Sweden, held 199,965,142 and 186,580,142 ABB Ltd shares as of December 31, 2014 and 2013, respectively. These holdings represent 8.6 percent and 8.1 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register on December 31, 2014 and 2013, 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, 2014 and 2013, 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, 2014 and 2013, respectively. Note 12 Shareholdings of Board and Executive Committee At December 31, 2014 and 2013, the members of the Board of directors as of that date, held the following numbers of shares (or ADSs representing such shares): Name Hubertus von Grünberg Roger Agnelli Matti Alahuhta (1) Louis R. Hughes Hans Ulrich Märki (2) Michel de Rosen Michael Treschow Jacob Wallenberg (3) Ying Yeh Total Total number of shares held at December 31 2014 253,264 170,671 17,912 72,742 – 139,602 108,787 185,708 18,970 967,656 2013 212,725 165,533 – 70,425 428,176 133,870 102,782 180,158 13,843 1,307,512 (1) (2) (3) Matti Alahuhta was elected to the Board at the AGM in April 2014. Hans Ulrich Märki left the Board at the end of the 2013−2014 term of office. Share amounts provided in the section do not include the shares beneficially owned by Investor AB, of which Mr Wallenberg is chairman. ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 179 Note 12 Share-based compensation, continued At December 31, 2014, the members of the Executive Committee, as of that date, held the following number of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP and options (either vested or unvested as indicated) under the MIP and unvested shares in respect of other compensation arrangements. Vested at Dec. 31, 2014 Unvested at December 31, 2014 d l e h s e r a h s f o r e b m u n l a t o T 241,943 23,768 – 286,773 97,607 63,137 8,000 91,275 176,119 235,702 9,903 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 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 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 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 4 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 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 2016 and (vesting 2015) – 2015) 67,293 – 422,625 287,500 – – 212,500 221,375 422,625 – – – – – – – – – – – – – – – 38,673 35,289 29,664 12,041 35,289 37,223 45,924 17,598 2016) 78,395 27,071 27,071 31,848 25,632 24,830 22,294 25,632 9,810 37,033 22,294 2017) 93,846 30,549 30,549 35,940 27,548 26,159 25,158 34,677 27,674 40,750 31,083 2018) 2015) – – 144,802 – – – – – – – – – – – 150,000 – – – – – – – Name Ulrich Spiesshofer Eric Elzvik Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu (4) Pekka Tiitinen Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin Total Executive Committee members as of December 31, 2014 1,234,227 1,279,125 287,500 318,994 331,910 403,933 144,802 150,000 (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 delivering 30 percent of the value of the vested retention shares in cash. However, 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 awards 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. 180 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 Note 12 Share-based compensation, continued At December 31, 2013, 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 – – – – – – – – 26,389 422,215 7,974 201,250 221,375 603,750 221,375 5,500 24,670 137,388 154,050 1,883 – – – – 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 December 1, 2013) 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, while 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 awards 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. ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 181 Note 12 Share-based compensation, continued At December 31, 2014, the following members of the Executive Committee held vested WARs and conditionally granted ABB shares under the performance component of the LTIP 2014, 2013 and 2012, which at the time of vesting will be settled in cash. Vested at Dec. 31, 2014 Unvested at December 31, 2014 I P M e h t r e d n u d l e h s R A W d e t s e v y l l u f f o r e b m u N – 201,250 – – – – – – – – 387,500 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 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 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) 22,588 – – 20,652 18,845 17,425 6,950 18,845 19,878 24,524 10,665 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 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 h c n u a l 3 1 0 2 e h t f o P I T L e h t f o 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 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 h c n u a l 4 1 0 2 e h t f o P I T L e h t f o (vesting (vesting 2016) 50,024 16,659 16,659 19,599 15,023 14,553 13,720 15,023 15,091 18,992 13,720 2017) 51,489 17,147 17,147 20,173 15,463 14,684 14,122 16,139 15,534 19,548 14,122 Name Ulrich Spiesshofer Eric Elzvik Jean-Christophe Deslarzes Diane de Saint Victor Frank Duggan Greg Scheu Pekka Tiitinen Tarak Mehta Veli-Matti Reinikkala Bernhard Jucker Claudio Facchin Total Executive Committee members as of December 31, 2014 588,750 160,372 209,063 215,568 182 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 Note 12 Share-based compensation, continued 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 I P M e h t r e d n u d l e h s R A W d e t s e v y l l u f f o r e b m u N 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) Name Ulrich Spiesshofer (appointed CEO as of September 15, 2013) – 15,460 22,588 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 434,380 – – – – – – – – (joined the EC on December 1, 2013) Total Executive Committee members 675,000 – – 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 Note 13 Full time employees During 2014 and 2013, the Company employed on average 18 and 21 employees, respectively. ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 183 Proposed appropriation of available earnings Proposed appropriation of retained earnings (CHF in thousands) Net income for the year Carried forward from previous year Retained earnings available to the Annual General Meeting Legal reserves from retained earnings Legal reserves from capital contribution Balance to be carried forward 2014 570,107 5,077,751 5,647,858 2013 607,053 4,470,698 5,077,751 – – – – 5,647,858 5,077,751 The Board of directors proposes to carry forward the retained earnings in the amount of CHF 5,647,858 thousand. On February 5, 2015, the Company announced that the Board of directors will recommend for approval at the April 30, 2015, Annual General Meeting that a dividend be distributed in a tax efficient way in two tranches: 1) Distribution of CHF 0.55 per share from Other reserves following a transfer of the same amount from Legal reserves from capital con- tribution to be paid in May 2015 and 2) Distribution in the form of a par value reduction in the amount of CHF 0.17 per share, representing a reduction in par value from CHF 1.03 to CHF 0.86 per share, to be paid in July 2015. 184 ABB Ltd Statutory Financial Statements | ABB Annual Report 2014 Report of the Statutory Auditor To the General Meeting of ABB Ltd, Zurich As statutory auditor, we have audited the accompanying financial statements of ABB Ltd, which comprise the balance sheet, income statement, cash flow statement and notes (pages 171 to 183), for the year ended December 31, 2014. Opinion In our opinion, the financial statements for the year ended December 31, 2014 comply with Swiss law and the company’s articles of incorporation. 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 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 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 appro- priateness of the accounting policies used and the reasonableness of account- ing estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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 independ ence. 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 AG Leslie Clifford Licensed audit expert (Auditor in charge) Zurich, Switzerland March 5, 2015 Robin Errico Licensed audit expert ABB Annual Report 2014 | ABB Ltd Statutory Financial Statements 185 186 Supplemental information | ABB Annual Report 2014 Supplemental information Like-for-like Growth Rates The following are definitions of key financial measures used to evaluate ABB’s operating performance. These financial measures are referred to in this Annual Report and are not defined under United States generally accepted accounting principles (U.S. GAAP). While ABB’s management believes that the financial measures defined below are useful in evaluating ABB’s operating results, these measures should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with U.S. GAAP. For a full reconciliation of ABB’s non-GAAP measures, please refer to ABB Q4 2014 Supplemental financial information at http://new.abb.com/investorrelations/financial-results-and-presentations/quarterly-results-and-annual-reports-2014 The like-for-like growth rates of revenues and orders are calculated by adjusting reported revenues and orders, in both the current and comparable periods, for the effects of currency translation and portfolio changes. The adjustment for portfolio changes is calculated as follows: where the results of any business acquired or divested have not been consolidated and reported for the entire duration of both the current and comparable periods, the reported revenues and orders of such business are adjusted to exclude the revenues and orders of any corresponding quarters which are not comparable when computing the like-for-like growth rate. In addition, certain other adjustments, which affect the business portfolio but do not qualify as a divestment, are treated in a similar manner to a divestment. We do not adjust for portfolio changes where the business acquired or divested has annual revenues of less than $50 million. Operational EBITDA margin Operational EBITDA margin is Operational EBITDA as a percentage of Operational revenues. Operational EBITDA Operational EBITDA represents Income from operations excluding depreciation and amortization, restructuring and restructuring related expenses, gains and losses from sale of businesses, acquisition-related expenses and certain non- operational 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 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). Operational EBITA margin Operational EBITA margin is Operational EBITA as a percentage of Operational revenues. Operational EBITA Operational earnings before interest, taxes and acquisition-related amortization (Operational EBITA) represents Income from operations excluding acquisition-related amortization (as defined below), restructuring and restructuring related expenses, gains and losses from sale of businesses, acquisition-related expenses and certain non-operational 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 deriv- atives where the underlying hedged transaction has not yet been realized, and (iii) unrealized foreign exchange move- ments on receivables/payables (and related assets/liabilities). Acquisition-related amortization Amortization expense on intangibles arising upon acquisitions. Cash return on invested capital (CROI) Cash return on invested capital is calculated as Adjusted cash return divided by Capital invested. Adjusted cash return Adjusted cash return is calculated as the sum of (i) net cash provided by operating activities and ii) interest paid. Capital invested 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 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 equity-accounted companies less (v) deferred tax liabilities recognized in certain acquisitions. Net working capital Net working capital is the sum of (i) receivables, net, (ii) inventories, net, and (iii) prepaid expenses; less (iv) accounts payable, trade, (v) billings in excess of sales, (vi) advances from customers, and (vii) other current liabilities (excluding primarily: (a) income taxes payable, (b) current derivative liabilities, and (c) pension and other employee benefits); and including the amounts related to these accounts which have been presented as either assets or liabilities held for sale. Free Cash Flow (FCF) Free cash flow is calculated as net cash provided by operating activities adjusted for: (i) purchases of property, plant and equipment and intangible assets, (ii) proceeds from sales of property, plant and equipment, and (iii) changes in financing and other non-current receivables, net (included in other investing activities). ABB Annual Report 2014 | Supplemental information 187 Investor information ABB Ltd share price trend during 2014 Share price (data based on closing prices) During 2014, the price of ABB Ltd shares listed on the SIX Swiss Exchange decreased 10 percent, while the Swiss Performance Index increased 13 percent. The price of ABB Ltd shares on NASDAQ OMX Stockholm decreased 2 percent, compared to the OMX 30 Index, which increased 10 percent. The price of ABB Ltd American Depositary Shares traded on the New York Stock Exchange decreased 20 percent compared to the Dow Jones Industrial Index, which increased by 8 percent. Source: Bloomberg 2014 High Low Year-end Average daily traded number of shares, in millions SIX Swiss Exchange Stockholm Stock Exchange NASDAQ OMX New York (CHF) 24.75 19.16 21.14 6.19 (SEK) 175.70 145.70 165.90 1.65 (USD) 27.09 20.37 21.15 1.85 Source: Bloomberg Market capitalization Shareholder structure Major shareholders Dividend proposal and share buyback On December 31, 2014, ABB Ltd’s market capitalization based on outstanding shares (total number of outstanding shares: 2,258,899,625) was approximately CHF 48 billion ($48 billion, SEK 375 billion). As of December 31, 2014, the total number of shareholders directly registered with ABB Ltd was approximately 165,000. In addition, another 225,000 shareholders hold shares indirectly through nominees. In total, ABB has approximately 390,000 shareholders. As of December 31, 2014, Investor AB, Stockholm, Sweden, owned 199,965,142 shares of ABB Ltd, corresponding to 8.6 percent of total capital and votes of ABB Ltd as registered in the Commercial Register on December 31, 2014. As of July 25, 2011, BlackRock Inc., New York, USA, owned 69,702,100 shares of ABB Ltd, corresponding to 3.0 per- cent of total capital and votes of ABB Ltd as registered in the Commercial Register on December 31, 2014. To the best of ABB’s knowledge, no other shareholder held 3 percent or more of the total voting rights as of December 31, 2014. With respect to the year ended December 31, 2014, ABB Ltd’s Board of Directors has proposed to distribute a total of CHF 0.72 per share to shareholders, comprising of a dividend of CHF 0.55 paid out of ABB Ltd’s capital contribution reserves and of CHF 0.17 by way of a nominal value reduction (reduction in the par value of each share by CHF 0.17 from CHF 1.03 to CHF 0.86). These distributions are subject to approval by shareholders at ABB Ltd’s 2015 Annual General Meeting. The proposal is in line with the company’s dividend policy to pay a steadily rising, sustainable dividend over time. Both forms of payment would be exempt from Swiss withholding tax. For the dividend paid from ABB’s capital contribution reserve, the ex-dividend date would be May 4, 2015, for American Depositary Shares traded on the New York Stock Exchange in the U.S., and May 5, 2015, for shares traded on the SIX Swiss Exchange and on the NASDAQ OMX exchange in Sweden. The payout dates would be May 7, 2015, for shares traded on the SIX Swiss Exchange, May 11 for shares traded on the NASDAQ OMX exchange in Sweden, and May 14 for American Depositary Shares traded on the New York Stock Exchange in the U.S. For the dividend from the nominal value reduction, the ex-dividend and payout dates in Switzerland are expected in July 2015, in line with Swiss regulatory processes. Further information will be made available on ABB’s website in due course. In September 2014, ABB announced a $4 billion share buyback program. As of February 28, 2015, ABB has purchased under the program a total of approximately 45 million shares for approximately $980 million. Further information can be found at www.abb.com/investorrelations. 188 Investor information | ABB Annual Report 2014 Key data Dividend per share (CHF) Par value per share (CHF) Votes per share Basic earnings per share (USD)(2) Total ABB stockholders’ equity per share (USD)(3) Cash flow from operations per share (USD)(2) Dividend payout ratio (%)(4) 2014 0.72(1) 1.03 1 1.13 7.20 1.68 64% 2013 0.70 1.03 1 1.21 8.12 1.59 65% 2012 0.68 1.03 1 1.18 7.36 1.65 63% Weighted-average number of shares outstanding (in millions) 2,288 2,297 2,293 (1) (2) (3) (4) Proposed by the Board of Directors and subject to approval by shareholders at the Annual General Meeting on April 30, 2015, in Zurich, Switzerland Calculation based on weighted-average number of shares outstanding Calculation based on the number of shares outstanding as of December 31, 2014 Dividend per share (converted to U.S. dollars at year-end exchange rates) divided by basic earnings per share ABB Ltd Annual General Meeting The 2015 Annual General Meeting of ABB Ltd will be held at 10:00 a.m. on Thursday, April 30, 2015, at the Messe Zurich hall in Zurich-Oerlikon, Switzerland. The Annual General Meeting will be held principally in German and will be simulta- neously translated into English and French. Shareholders entered in the share register, with the right to vote, by April 22, 2015, 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, 2015. 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 around April 1, 2015. For shareholders in Sweden an Information Meeting will be held in Västerås, Sweden, on May 04, 2015, at 4:30 p.m. ABB shareholders’ calendar 2015 First-quarter 2015 results ABB Ltd Annual General Meeting, Zurich ABB Ltd Information Meeting, Västerås Second-quarter 2015 results Third-quarter 2015 results April 29 April 30 May 04 July 23 October 21 ABB Annual Report 2014 | Investor information 189 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, 2015 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 Long-term corporate credit rating Long-term senior unsecured debt Short-term corporate credit rating Outlook: Stable A A A–1 Long-term senior unsecured rating Short-term debt rating Outlook: Stable A2 Prime-1 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 long-term and short-term credit ratings. Bondholder information Outstanding public bonds, as of February 28, 2015, 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 190 Investor information | ABB Annual Report 2014 2014 price trend for ABB Ltd shares Price trend for ABB Ltd shares Swiss Performance Index rebased 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 Price trend for ABB Ltd shares OMX 30 Index rebased 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 Price trend for ABB Ltd shares Dow Jones Index rebased Zurich CHF 28 27 26 25 24 23 22 21 20 19 18 Stockholm SEK 190 185 180 175 170 165 160 155 150 145 140 New York USD 29 28 27 26 25 24 23 22 21 20 19 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 Source: Bloomberg ABB Annual Report 2014 | Investor information 191 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 2014 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 2014 includes “forward- looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have based these forward-looking statements largely on current expectations, estimates and projections about the factors that may affect our future 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 discussion of strategy, plans or intentions are intended to identify forward-looking statements. These forward-look- ing statements are subject to risks, uncertainties and assumptions, including among other things, the following: (i) business risks related to the global volatile economic environment; (ii) costs associ- ated with compliance activities; (iii) difficulties encoun- tered in operating in emerging markets; (iv) risks inherent in large, long-term projects served by parts of our business; (v) the timely development of new products, technologies, and services that are useful for our customers; (vi) our ability to anticipate and react to technological change and evolving industry standards in the markets in which we operate; (vii) changes in interest rates and fluctuations in currency exchange rates; (viii) changes in raw materials prices or limitations of supplies of raw materials; (ix) the weakening or unavailability of our intellectual property rights; (x) industry con- solidation 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 fur- nish from time to time with the US Securities and Exchange Commission, including our Annual Reports on Form 20-F. Although we believe that the expectations reflected in any such forward- looking statements are based on reasonable as- sumptions, we can give no assurance that they will be achieved. We undertake no obligation to up- date publicly or revise any forward-looking state- ments because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circum- stances might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements. ABB Ltd Corporate Communications P.O. Box 8131 8050 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 5 A B B . A l l r i g h t s r e s e r v e d .