A N N UA L R E P O RT 2 016
A N N UA L R E P O RT 2 016
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Committed to
Committed to
unlocking value
unlocking value
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ABB
the pioneering technology leader
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What
Offering
Pioneering technology
Products
Systems
Services &
Software
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For whom
Customers
Utilities
Industry
Transport &
Infrastructure
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Where
Geographies
Globally
Asia, Middle
East and Africa
Americas
Europe
Revenue
~ $34 bn
Countries
~ 100
Employees
~ 132,000
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ABB at a glance
Committed to unlocking value
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ABB is a pioneering technology leader in
electrification products, robotics and
motion, industrial automation and power
grids, serving customers in utilities, industry
and transport & infrastructure globally.
Continuing more than a 125-year history of
innovation, ABB today is writing the future
of industrial digitalization and driving the
Energy and Fourth Industrial Revolutions.
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ABB operates in more than 100 countries
with about 132,000 employees.
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abb.com
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Annual Report 2016
Contents
001 – 013
Introduction
014 – 033
Strategy
034 – 057
Corporate Governance Report
058– 083
Compensation Report
084 – 205
Financial Review of ABB Group
206 – 225
ABB Ltd Statutory Financial Statements
226 – 231
Supplemental Information
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01
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02
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03
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04
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05
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06
4
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C H A I R M A N A N D C E O L E T T E R
Dear Shareholders, Customers,
Partners and Employees:
As we compose this letter, we realize that 2016
has been a historic year – both for ABB as well as
the world at large. ABB delivered solid perfor-
mance in 2016, and we made steady progress in
transforming the company into a leaner, more
customer-focused, digital technology leader.
There were many rewarding moments, and ABB
earned its share of success.
On the macroeconomic front, extraordinary geopo-
litical forces emerged, challenging established
orders and throwing the world’s post-World War II
economic architecture into turmoil. In the aftermath
of this turbulence we recognize that the journey
forward for a large, multinational organization such
as ABB demands deliberate, thoughtful navigation.
At the same time, we can clearly see the value of
a bold vision as we invest in new ways to do more
for our customers, partners and employees – and
continue to support the growth of economies and
ABB’s communities around the world.
To maintain leadership, technology companies
must pay constant attention to the changes
in the technological landscape and adapt to take
advantage of the latest trends – it is often said
they must see the future first. As a company with
a heritage of more than 125 years, ABB has
successfully learned to stay abreast of the latest
technologies. Today ABB sees two simultaneous
developments that will guide our strategy
going forward – the Energy Revolution and the
Fourth Industrial Revolution.
The Energy Revolution
The economics of electricity generation, trans-
mission, distribution and consumption have
changed dramatically in the past two decades,
primarily due to the rise of economically viable
renewable energy sources, such as solar and wind
power. What used to be a simple, linear process of
electricity generation-transmission-consumption
has become an exponentially more complicated
system. In the old framework, electricity in
the form of alternating current was generated by
a turbine using fossil fuels or hydropower.
That electricity was typically transmitted over
a distance of a few dozen kilometers through
power lines, usually after having been stepped up
to a higher voltage to avoid losses. Finally, near
the point of consumption, the electricity was
stepped down through transformers for use in
homes and industry.
Today the situation is much more complex.
Electricity is generated not only by large conven-
tional power plants but also by distributed solar
panels and windmills. Many houses have solar
panels with battery storage and have become, in
effect, mini-power plants. On sunny days, they
generate more than enough electricity for their
own use, and feed energy back into the local
grid. In countries like Germany, we see on some
days negative pricing when the sun is shining –
a development few could have predicted five
years ago.
The other issue with electricity from renewables
is that it is often generated in large fields far from
where it is consumed. For instance, wind farms
in the North Sea and solar panels in the Atacama
Desert send power to European and South
American cities, respectively. High-voltage direct
current (HVDC), pioneered by ABB, can transmit
this distributed energy at scale with low rates of
loss. With its software and digital technology, the
company is now a leader in HVDC, enabling and
optimizing national grids in the Americas, Europe
and Asia.
A few ABB Energy Revolution highlights from 2016:
• We are working with our customers to bring the
benefits of electricity to everyone on the planet,
as more than 1.2 billion people remain in the
dark today, according to the World Bank. During
the last month of 2016 alone, ABB received
orders worth more than $840 million to bring
HVDC power to hundreds of millions of people
in India and Brazil. Our microgrid technology –
which can provide standalone power in remote
areas or integrate such renewables as solar,
wind, and hydropower into existing power grids
– is accelerating human progress in sub-Saharan
Africa and Asia, among other regions.
• The high-efficiency ventilation and electrifica-
tion systems that ABB supplied for the new
Gotthard Base Tunnel under the Alps, the world’s
longest railway tunnel, defined the current state
of the art for major infrastructure projects.
• ABB’s partnership with Solar Impulse 2, which
INTRODUCTIONABB ANNUAL REPORT 2016 5
P E T E R VO S E R
C H A I R M A N O F T H E B O A R D
U L R I C H S P I E S S H O F E R
C H I E F E X E C U T I V E O F F I C E R
INTRODUCTIONABB ANNUAL REPORT 2016 6
•
completed the first round-the-world, solar-
powered aircraft flight last July, symbolizes our
commitment to stretching the limits when it
comes to providing enough reliable, efficient
energy to run the world without consuming
the earth.
In another small example, our flash-charging
technology is allowing zero-pollution electric
buses connecting Geneva’s airport to the city’s
suburbs to recharge their batteries in just
15 – 20 seconds.
With our strong heritage in power technologies
and global market penetration, it is accurate
to say that anywhere there is electricity, ABB has
likely been at work. Today, ABB is making smarter,
greener grids possible for the world as a whole,
and is a key player in major energy infrastructure
buildouts globally. We will continue to invest in
this market and related technologies.
The Fourth Industrial Revolution
Digital technology and connectivity has changed
the world. Manufacturing is being transformed
as digitalization and connectivity transform
machines and factories worldwide. This meshing
of the digital world with machines as the Internet
meets production is what we call the Fourth
Industrial Revolution.
The mindset and business model that manufac-
turers will need to succeed in the future will be
different. For one thing, there will be a greater
need for the type of industrial digital services ABB
is building today. By the end of this decade, more
than 20 billion devices will be connected to the
Internet – and this number does not include com-
puters or smartphones. The stream of data these
connected devices will generate will be a rich
source of business intelligence. There is enormous
opportunity in analyzing that data and then
feeding the resulting digital insights back into
machines and systems to make them more
efficient, powerful and reliable.
Automation, robotics, artificial intelligence and
machine learning have resurrected fears of job
losses. We see a significant need for responsible
leadership today from the private sector, politi-
cians and academics – and at ABB, we are working
to do our part. Our viewpoint is that the world
of jobs will fundamentally change due to digital
technologies – but we will never be short of
work. In the future, in particular, there will be an
increased need for software-differentiated
services.
ABB started moving its business focus from
selling pure hardware to providing digital services
and software a number of years ago. A good
example of successful transformation is our
robotics business. In the past we simply sold
individual robots – robots by the kilogram, if
you will. Today, our robots are designed to solve
business problems. It is a solution-oriented
approach, delivering what customers need. Each
robot a customer buys can be networked, and
send data to a central monitoring system. Pooling
data from thousands of robots allows us to develop
best practices for such things as the most effi-
cient and productive arm movement, for instance.
We can then share the learning with all connected
robots through networked software.
A few Fourth Industrial Revolution highlights
from 2016:
•
In 2016, ABB launched its smart sensor, which
can be attached to the hundreds of millions of
electric motors now in use globally, connecting
the motors to the Internet of Things through
cloud-based software to enable transcontinental
industrial digitalization. ABB’s new sensor cuts
motor downtime by 70 percent, extends life-
spans by 30 percent, and reduces energy con-
sumption by up to 10 percent – potentially
saving energy equivalent to the output of 100
large power plants.
• We are leading the industry in “co-bots,” colla-
borative robots that work with – rather than
replace – humans, to improve safety, boost pro-
ductivity and free people from dirty, dangerous
work in mines and factories while allowing
them to do more valuable, rewarding jobs. Our
—
Our accelerating
transformation
through 2016 and into
the new year makes
us confident that ABB
has the portfolio of
businesses and the
leadership team to
create superior value
for our customers,
shareholders
and employees.
INTRODUCTIONABB ANNUAL REPORT 2016 7
robots use machine learning and artificial intel-
ligence and can perform tasks, such as solving
Rubik’s cube in seconds. In 2016, ABB’s YuMi
collaborative robot won the Invention and
Entrepreneurship in Robotics and Automation
Award at Automatica, the leading tradeshow
for robotics and automation.
To take advantage of the latest developments
in the market and to better serve its customers,
ABB has changed its divisional structure into
four market-leading divisions: Electrification
Products, Robotics and Motion, Industrial
Automation and Power Grids. The divisions are
being empowered as entrepreneurial units
within ABB, and benefit from sales collaboration
orchestrated by regions and countries as well
as from the group-wide digital offering; ABB’s
leading G&A structure; common supply chain
management; and corporate research. ABB will
continue to strengthen its divisions through
active portfolio management. This includes
pursuing strategic additions, transforming
business models and pruning non-core businesses
as well as business partnerships.
Financial highlights
ABB performed satisfactorily in 2016. The
company finished the year in a solid financial
position, having delivered consistent margin
improvements and further strengthened its ability
to generate cash.
Financial highlights for the full year 2016:
• Orders were down at $33.4 billion
• Revenues on a comparable basis were stable at
$33.8 billion
• Operational EBITA margin increased by 50 basis
points
• Basic earnings per share increased 2 percent
and operational earnings per share was 4 per-
cent higher (constant currency)
• Free cash flow increased to $3.1 billion,
161 percent of net income
INTRODUCTIONABB ANNUAL REPORT 2016 8
The management has focused on running the
company with discipline and has maintained its
commitment to generating shareholder value.
Sustained geopolitical and macroeconomic uncer-
tainty in the U.S. and E.U. through 2016 prompted
customers to adopt a wait-and-see approach to
investing in large-scale infrastructure projects.
While working to sharpen and focus our offerings
across industries, ABB used this period of global
uncertainty to strengthen operational excellence.
Our white-collar productivity program outper-
formed expectations, allowing the company to
increase its cost-reduction target by 30 percent,
saving $1.3 billion.
ABB’s regular efficiency programs continued to
achieve savings equivalent to 3-5 percent of the
cost of sales each year, and its 1,000-day working
capital program is on course to free up approxi-
mately $2 billion by the end of 2017. The company’s
focus on operational excellence will continue in
2017. Our ambition is to move from initiative-
driven optimization, which was necessary over
the past two years, to an industry-leading
operating model.
During 2016, we completed an extensive strategic
portfolio review for the Power Grids division.
We listened carefully to all stakeholders and con-
sidered all views on how to create maximum value
for ABB shareholders. In October we announced
the Power Grids division would continue its trans-
formation under ABB’s ownership and, through
that, this business can unlock the most value for
shareholders, customers and employees. The
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The mindset and
business model that
manufacturers will
need to succeed
in the future will be
different. For one
thing, there will be
a greater need for
the type of industrial
digital services ABB
is building today.
outlook for the utilities industry is improving.
India and China are making big investments in
energy infrastructure and Power Grids will benefit
from that spending. In addition, the changes
brought about by the Energy and Fourth Industrial
Revolutions are good for Power Grids as there
is more demand created for HVDC and other ABB
products, such as the software-enabled system
for utilities that monitors the health of their
assets digitally.
We have raised ABB’s operational EBITA target
margin corridor for Power Grids by 200 basis
points to 10 to 14 percent, effective 2018, reflect-
ing management’s confidence in the future of the
division. For ABB as a whole, we reaffirmed our
2015-2020 financial targets.
Given ABB’s strong financial position, the compa-
ny plans to return more cash to you with a new
share buyback program of up to $3 billion from
2017 through 2019.
In addition, the Board of Directors is proposing
to raise the dividend to CHF 0.76 a share at
the 2017 annual general meeting. This is in line
with the dividend policy of a steadily rising
dividend that ABB’s management has outlined as
part of its Next Level Strategy for the company.
Over the last three years, ABB has returned
$8.7 billion to its shareholders in the form of
dividends and share buybacks.
One very unfortunate development was that
ABB uncovered a sophisticated criminal
scheme involving significant embezzlement and
misappropriation of funds in its South Korean
subsidiary. The company immediately launched
a thorough investigation, involving internal
and external parties, which is progressing well.
The company has checked and reconfirmed
the balances of its global bank accounts and
can confirm that this situation is limited to
South Korea. ABB has a zero-tolerance approach
to unethical behavior and maintains the highest
standards regarding integrity and ethical
business practices. We have started implementing
disciplinary consequences and will continue to
do so as appropriate. Due to the investigation,
ABB had to postpone the publication of its 2016
annual report.
ABB’s digital focus
Both the Energy Revolution and the Fourth
Industrial Revolution are creating new business
opportunities, and with them, new business
models. These parallel revolutions are a good
platform for the company to strengthen its lead
in a competitive global marketplace through
INTRODUCTIONABB ANNUAL REPORT 2016 9
the company will address customer needs in the
Energy and Fourth Industrial Revolutions in
a focused and agile way, with digital solutions,
services and products that truly solve customer
problems.
Summary
The worldwide marketplace is demanding, but at
the same time rich with promise and opportunity
as the Energy Revolution and Fourth Industrial
Revolution continue to accelerate global change.
Our accelerating transformation through 2016
and into the new year makes us confident that
ABB has the portfolio of businesses and the
leadership team to create superior value for our
customers, shareholders and employees. ABB
would not exist without its dedicated and tire-
less employees, and their commitment and hard
work remain instrumental to its success. We
would like to thank them for their commitment
and many accomplishments in the past year.
Similarly, the ongoing support of ABB’s customers
and partners makes all the company’s achieve-
ments possible. Finally, the continued trust that
you, ABB’s shareholders, have bestowed on
the company is the foundation upon which this
enterprise has been built.
We are honored to lead this company, and know
there is continued exciting and hard work to do to
realize ABB’s full potential. Today’s ABB is ener-
gized and focused on the opportunities that lie
ahead for its customers and partners. Let’s write
the future. Together.
Sincerely,
Peter Voser
Chairman of the Board
of Directors
Ulrich Spiesshofer
Chief Executive Officer
March 10, 2017
software and services for our customers in ener-
gy, utilities, transport and infrastructure.
The company is taking a quantum leap in digital
solutions with the launch of ABB Ability. ABB
Ability brings together our entire portfolio of
digital solutions and services, making them fully
accessible and adaptable to all our customers.
Interconnecting things, services and people digi-
tally – the so-called Internet of Things, Services
and People – is the basis for data analysis, boosts
productivity and safety, enhances reliability, and
saves energy and costs. Given the size of ABB’s
installed base in the Internet of Things, Services
and People – 70 million connected devices
and 70,000 control systems across a range of
industries – we see the potential to strengthen
our position as a trusted partner to our
customers as the Energy and Fourth Industrial
Revolutions progress further, because they
already know us and trust us to deliver the right
technological solutions.
We have appointed an experienced Chief Digital
Officer and created a centralized, dedicated
digital organization to develop and deliver digital
solutions to all our marketplaces on a global
basis together with our businesses. The company
is in the process of integrating digital solutions
and technology into all of ABB’s future products,
systems, services and business models (see
page 22).
Strengthening leadership
ABB strengthened its management team in 2016
to drive and support its ongoing transformation.
In addition to new leadership within the Discrete
Automation and Motion (DM) division and the
appointment of a new Chief Financial Officer, ABB’s
Board of Directors added four new members
elected at the company’s last annual general
meeting. These new members bring valuable
expertise in digitalization, software, finance,
R&D, technology and manufacturing. With these
additions, ABB’s board is now comprised of
members from ten countries representing a broad
range of industries.
Outlook for the year ahead
Geopolitical uncertainties persist and the market
outlook for 2017 remains challenging. It is im-
portant to note that when ABB identifies a market
opportunity by industry or geography, we commit
for the long term. The uncertainty of 2016 did not
deter us from continuing our company-wide
transformation or from initiating a vital new focus
on digital and customer-centricity. We are con-
tinuing to invest heavily in research and develop-
ment and innovation to maintain our technological
leadership. With growing momentum across
ABB’s four streamlined entrepreneurial businesses
INTRODUCTIONABB ANNUAL REPORT 2016 10
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Highlights 2016
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Increased operational EBITA
margin by 50 basis points to
12.4 percent in a continued
challenging market environment
—
Basic earnings per share
increased 2 percent (1) and
operational earnings per
share (2) was 4 percent (3) higher
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Accelerating momentum in
operational excellence through
successful savings programs
and strong net working capital
management
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Delivered strong cash
performance, with free cash
flow demonstrating ABB’s
consistent cash generation
throughout the year
Key Figures 2016
$ in millions unless otherwise indicated
Orders
Revenues
Operational EBITA(2)
as % of operational revenues
Net income
Basic EPS ($)
Operational EPS(2) ($)
Cash flow from operating activities
Free cash flow
Cash return on invested capital (CROI)
—
Returned $2.9 billion in cash to
shareholders through dividend
payment and share repurchase.
Board proposes eighth
consecutive dividend increase
—
Launched stage 3 of Next
Level strategy to build on
successful transformation as
well as strengthening position
as pioneering technology leader
and digital champion
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Successful launch of ABB
Ability™ combining ABB’s
portfolio of digital solutions
across all customer segments
FY 2016
33,379
33,828
4,191
12.4%
1,899
0.88
1.29
3,843
3,065
13.8%
FY 2015
36,429
35,481
4,209
11.9%
1,933
0.87
1.26
3,818
3,019
13.4%
(1) Earnings per share growth rates are computed using unrounded amounts.
(2) For definitions of non-GAAP measures, see “Supplemental information” on page 230.
(3) In constant currency using 2014 exchange rates.
INTRODUCTIONABB ANNUAL REPORT 2016 11
26% Electrification Products
24% Discrete Motion and Automation
19% Process Automation
31% Power Grids
33,828 Total
82% Product and system revenues
18% Service and software revenues
2016
Revenues by division
($ mn)
Service and software
revenues as %
of total revenues 2016
46% Europe
22% Americas
32% AMEA(1)
2016
Employees by region
Europe, 34%
Americas, 28%
AMEA(1), 38%
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2016
Orders by region
(1) Asia, Middle East and Africa
200%
175%
150%
125%
100%
4 bn
3 bn
2 bn
1 bn
0 bn
1.00
0.75
0.50
0.25
0.00
2014
2015
2016
2009 2010 2011 2012 2013 2014 2015 2016*
—
2014-2016
Free cash flow and conversion rate
($ bn and %)
—
2009-2016
Dividend payout (CHF per share)
* proposed
INTRODUCTIONABB ANNUAL REPORT 2016
1 2
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The future starts today
Take a look around. Wherever you see modern technology, reliable
power supplies, efficient road transport, and remarkable rail
solutions, you're likely to be looking at ABB technology. Not that
it is always visible. Most of it is at work inside buildings and
vehicles, where it drives progress. The future we envisage is already
reality in many projects and places. It makes our cities more
livable and our transport more attractive, and it strikes a better
balance between what people want and the needs of a sustainably
developed environment.
THE GOTTHARD BASE TUNNEL is the world’s
longest railway tunnel. The latest energy-efficient
technologies from ABB provide the tunnel with
ventilation and power supply for its infrastructure
and for over 10,000 orientation lights. Our company
helps in many other ways to ensure that Switzer-
land, a country famous for its railways, keeps set-
ting international standards. That includes
locomotives as well as infrastructure, and encom-
passes maintenance, upgrades and retrofitting.
The EC250 high-speed train, which is due to launch
in 2019, will be yet another railway pioneer, and will
incorporate ABB converters.
INTRODUCTIONABB ANNUAL REPORT 2016 13
FIFTEEN SECONDS is all the TOSA fully
electric bus needs to replenish its batteries.
It can recharge using pivoting contacts
on its roof during a regular stop. It drives
without emissions and without noise.
The TOSA can carry 133 passengers; it
connected Geneva Airport to the Palexpo
exhibition center from May 2013 to the
end of 2014 – to the delight of passengers
and operators. Geneva’s Line 23 is now
being equipped with TOSA buses.
LIKE A JULES VERNE STORY
That was how Bertrand Piccard’s idea sounded:
to fly around the world in a solar-powered plane
without a drop of fuel. He spent 12 years together
with a 60-man team of partners to prepare for
the 17-stage flight. To circle the globe he alternated
with André Borschberg as the pilot of Solar Impulse 2,
landing 505 days later in Abu Dhabi where he had
set out on the record flight. Four twin-bladed tractor
propellers were driven by solar power, which was
collected during the day by 11,628 photovoltaic
cells affixed mainly to the 63.4-meter-long wings.
This high-flying dream provides very real evidence
of what renewable energies can achieve when
used intelligently – by courageous people, it should
be added.
ABB AND THE INTERNET OF THINGS, SERVICES
AND PEOPLE
German Chancellor Angela Merkel and former
US President Barack Obama were the first to
experience ABB's groundbreaking new sensor
during their visit to the Hannover Fair in early 2016.
As guests of honor at the world's largest industrial
trade show, they were shown how ABB's smart
sensor allows electric motors for the first time to
report their condition and can reduce downtime by
up to 70 percent.
INTRODUCTIONABB ANNUAL REPORT 2016 —
01
Strategy
016 – 018
Attractive markets
019– 021
Next Level strategy
022 – 027
ABB Ability ™
028– 029
Shareholder Return and Capital Allocation
030 – 031
Living our values
032– 033
Executive Committee
16
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Attractive markets
Driving today’s technological
revolutions
ABB’s customer markets are undergoing a paradigm shift as internet-
based technologies take hold in the industrial sector, revolutionizing
the production and supply of energy as well as of goods and services.
Our markets
As a pioneering technology leader serving the
utilities, industry, and transport & infrastructure
markets, ABB is at the heart of the energy and
fourth industrial revolutions. The rise of renew-
able energy is dramatically increasing the com-
plexity of the grid, as the number of feed-in
points from solar and wind sources multiply and
transmission distances lengthen thus driving the
energy revolution. As the contribution of renew-
ables in the energy mix increases, supply becomes
less predictable, driving the need for more equip-
ment and technology to balance demand and sup-
ply in the grid. At the same time, the shift from
industrial to service-based economies is changing
consumption patterns, making them more prone
to peaks, and new consumer types, including
prosumers, and electric vehicles are already having
an impact on grid performance in some parts
of the world. These changes are increasing
complexity in the grid. At the same time, demand
for electricity is rising, driven by significant
increases in the volume of data and the accelerat-
ing take-up of electric vehicles. The impact of
digitalization is accelerating as more and more
devices and systems are equipped with sensors
and connectors. With the substantial increase
in processing power, it is now possible to remotely
monitor the health of equipment, machines and
robots, and through state-of-the-art performance
modelling, to diagnose potential problems and to
intervene before an interruption of service.
Utilities Market
ABB focuses on the changing needs of utility
customers with its complete offering for
transmission and distribution. The ongoing shift
in the electricity value chain such as the growth
in renewable power generation creates opportu-
nities for companies that are able to deliver
intelligent solutions to the challenges customers
face with regard to increased grid complexity and
stability. 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 intermittent
supply, but innovations in power storage tech-
nology promise to dramatically expand the
application of these micro-grids, which are another
key focus for ABB.
With the significant shift in the electricity value
chain, integration of renewables, micro-grids
and automation solutions to control the flow are
key growth drivers for the future. The grid of
tomorrow will increase in complexity as there will
be numerous feed-in points and a shift from uni-
directional to bi-directional electricity flow.
At the same time, market de-regulation and re-
regulation continues. Generation, transmission
and distribution are being unbundled, long-
standing monopolies now have competitors and
new entrants (e.g. pension funds, insurance
funds, project developers) are investing in the
sector. Many traditional utilities are being forced
to reinvent themselves; some are refocusing on
renewables while others on providing additional
services to the consumers they serve. These new
grid challenges provide numerous opportunities.
More than 30 percent of the market we operate
in are in these high-growth segments, such
as grid automation, high-voltage direct current
(HVDC), software and micro-grids. Our solutions
help utilities, which generally are public or
government-owned entities and tend to be more
consolidated in nature, address these challenges.
Utilities remained cautious in 2016 but continued
to make selective investments in infrastructure-
critical power transmission projects. For example,
ABB has teamed up with India’s national electricity
grid operator Power Grid Corporation of India
01 STRATEGYABB ANNUAL REPORT 2016 17
—
Attractive customer dynamics
—
Utilities
—
Industry
—
~$7 trillion renewables
investment next 25
years
—
300 HVDC projects
planned
—
$5 bn microgrid
market 2025
—
~50% CAGR stationary
energy storage (GWh)
—
26 bn things connected
by 2020
—
18% annual growth
machine-to-machine
industry by 2020
—
2.6 mn industrial
robots by 2019 from
1.2 mn today
—
~30% CAGR cloud
computing infrastruc-
ture and platforms
—
Transport &
Infrastructure
—
>63% urban popula-
tion by 2050
—
Smart home market
to triple to ~$36 bn
in 2020
—
Energy management
market to more than
double to $44 bn by
2020
—
>50% of cars sold in
2030 will be electric
01 STRATEGYABB ANNUAL REPORT 2016 18
Limited in a project with an order value over $640
million for ABB to deliver a transmission link that
will have the capacity to bring reliable electricity to
more than 80 million people. Furthermore, ABB
won $300 million of orders in China to supply
advanced converter transformers for two long-
distance ultra-high-voltage direct current (UHVDC)
transmission links setting a new world record by
enabling 10 gigawatts (GW) of power to be trans-
mitted at 800 kilovolts (kV). Additionally, in China
ABB won orders of more than $300 million to
deliver key equipment for a 1,100 kV UHVDC power
link. ABB also won a $250 million order to deliver
a 220 kV high-voltage submarine cable system to
Danish utility DONG Energy.
Industry Market
On the industry side, we serve factories all around
the world from discrete to process industries.
Energy efficiency and productivity improvements
are the hallmarks of ABB’s offerings in this cus-
tomer segment. Industry customers are diverse
in nature and may be publicly traded or privately
held companies. Our energy efficient products,
systems and services reduce consumption and
therefore electricity cost and carbon emissions,
while our automation systems increase productiv-
ity, quality and efficiency, and keep workplaces
safe. Since industrial customers have increasingly
been focusing on enhancing energy efficiency
and asset productivity, our offering is a key value
proposition for them. Demand from industrial
customers in 2016 varied by sector and region.
However, low oil prices resulted in a continued
constraint in spending by oil and gas customers.
The need for cutting-edge solutions to increase
efficiency and to use renewable power generation
to lower the environmental impact continued to
be important demand drivers. In this context, we
launched ABB’s smart sensor solution for electric
motors which can deliver downtime reductions
of up to 70 percent, extend the lifetime of the mo-
tors by up to 30 percent, and reduce energy con-
sumption by 10 percent. In addition, demand for
robotics solutions in general industry is growing
as there is an increased need for automated pro-
cesses and productivity. YuMi, ABB’s collaborative
robot, helps meet this need.
Transport & Infrastructure Market
Alongside ABB’s offering for utilities and industry,
we provide solutions for transport & infrastructure
customers. As transport customers focus on
energy efficiency and reduced operating costs,
our offerings are key. Another key growth driver
for this customer segment is the move to increased
electric transportation as well as urbanization
and growth in data centers. Our expertise has
given us the edge when it comes to providing
clean and reliable power solutions for transport
networks and infrastructure.
Demand from the transport & infrastructure market
in 2016 was mixed, with continued demand for
energy efficient solutions, particularly in data
centers, rail and electric mobility. For example,
ABB continued its collaboration with Stadler Rail
to deliver its newest traction equipment for
reliable and energy-efficient trains and has
received an order to provide additional fast
chargers for hybrid electric buses in the city of
Luxembourg. Demand for specialty vessel
solutions remained strong and ABB won orders
to supply the complete power, propulsion
and automation package for a series of new
cruise vessels being built by MV WERFTEN.
ABB’s proven Azipod propulsion solutions will
improve the safety and efficiency of the new
generation of ships.
01 STRATEGYABB ANNUAL REPORT 2016 19
—
Delivered
Next Level strategy – stages 1 and 2
In 2014, ABB launched its Next Level strategy aimed at accelerating
sustainable value creation and laying the foundations for future
growth. At the time, the company was facing pressing operational
issues, and needed to develop a new growth mindset, simplify its
organization and strengthen its customer focus.
Three focus areas were defined to address these
challenges: profitable growth, relentless execu-
tion and business-led collaboration, and for each
focus area, clear action plans were put in place.
Profitable growth
To drive a growth mindset, ABB adopted its “PIE”
formula of penetration, innovation and expansion,
with a focus on greater competitiveness, organic
growth, and reducing risks by aligning business
models more closely with ABB’s core competencies.
Organic growth was complemented with strategic
acquisitions and partnerships with other leading
global companies, such as Philips, Hitachi and
most recently Microsoft. Today, ABB is well posi-
tioned for growth, with four market-leading divi-
sions and a world-class portfolio of solutions
and services.
Relentless execution
A key objective of the Next Level strategy is to
achieve world-class operational excellence at all
levels of the company. In stages 1 and 2, the focus
was on turning around underperforming units,
improving white-collar productivity and cash
performance, and improving accountability and
performance of both teams and individuals.
By 2016, Power Grids delivered and continued its
journey of transformation; the white-collar pro-
ductivity savings program had outperformed
expectations, allowing its cost reduction target
to be increased by 30 percent to $1.3 billion; and
the working capital program was on course to
free up approximately $2 billion by the end of
2017. On top of that, ABB’s regular cost-savings
programs continued to achieve savings equivalent
of 3-5 percent of cost of sales each year, and
a new performance-based compensation model
had been implemented for 70,000 of the company’s
132,000 employees.
Business-led collaboration
Finally, over the past two years, ABB has dramati-
cally simplified its organizational setup, reducing
the number of global regions from eight to three,
and the divisions from five to four. In addition,
many business units have been relocated closer to
their key markets and customers, leading to a far
more responsive, customer-focused organization.
The work is not over, but today ABB is a simpler,
faster and more agile company, positioned at the
heart of the energy and fourth industrial revolu-
tions, and ready to take advantage of the exciting
growth opportunities that are emerging across
its markets.
01 STRATEGYABB ANNUAL REPORT 2016 20
—
Committed to unlocking value
Next Level strategy – stage 3
On October 4, 2016, ABB launched stage 3 of its Next Level strategy
to unlock additional value for shareholders and customers.
Building on the focus areas of profitable growth,
relentless execution and business-led collabora-
tion, stage 3 consists of four actions:
1. Driving growth in four market-leading entre-
division now includes the solar inverters, electric
vehicle chargers and power protection activities,
which were transferred from the former Discrete
Automation and Motion division.
preneurial divisions
2. Quantum leap in digital
3. Accelerating momentum in operational
excellence
4. Strengthening the global ABB brand
Driving growth in four market-leading
entrepreneurial divisions
A key objective of ABB’s Next Level strategy is to
be #1 or #2 in all businesses, something the
company achieved with the focusing of its divisional
structure into four market-leading divisions
effective January 1, 2017: Electrification Products,
Robotics and Motion, Industrial Automation
and Power Grids. With this structure, ABB’s divisions
are positioned as partners of choice in their
respective markets.
In stage 3 of the Next Level strategy, the divi-
sions will drive growth as entrepreneurial units
within ABB, in line with the company’s values
of “ownership and performance” (see page 30).
This is reflected in an enhanced performance
and com pensation model, which focuses on indi-
vidual accountability and responsibility.
The divisions benefit from sales collaboration or-
chestrated by ABB’s regions and countries, as well
as from the group-wide digital offering; ABB’s
leading G&A structure; common supply chain
management; and corporate research centers.
ABB will continue to strengthen its divisions
through active portfolio management. This includes
pursuing strategic additions, transforming
business models and pruning non-core businesses.
Electrification Products
As #2 in the market for the electrification of
consumption points, the Electrification Products
division brings together all electrification compo-
nents in a one-stop shop for customers. The
Demand for electricity consumption is growing
faster than overall energy demand, as more
people gain access to electricity and the take-up
of electric vehicles accelerates. This presents
significant opportunities to digitalize and innovate
around our current offerings.
Robotics and Motion
The newly shaped Robotics and Motion division,
based on ABB’s Discrete Automation and Motion
portfolio, is focused on the fast-growing robotics
segment, and on industrial motors and drives
where ABB is #1 globally.
ABB’s robotics business, currently #2, has the
clear aim of becoming the market leader, while the
motors and drives businesses will focus on fast-
growing segments and moving into light industry
and emerging growth areas such as Asia.
Intelligent services and a leading digital offering
are already a strong pillar of the division’s perfor-
mance and open significant growth opportunities.
ABB will strengthen divisional profitability
through continued focus on operational excel-
lence and value chain optimization.
Industrial Automation
Formerly the Process Automation division,
Industrial Automation builds on ABB’s #1 position
in control solutions for industry, and will drive
digitalization across industry sectors through
ABB’s unique combination of domain expertise,
and software and services.
By focusing on growing segments and bringing
together maintenance, operation and control in
industries as diverse as pharmaceuticals, mining,
shipping and oil and gas, ABB will drive penetra-
tion of strongholds and create differentiation
for customers.
01 STRATEGYABB ANNUAL REPORT 2016 21
Power Grids
Finally, the transformation of the Power Grids divi-
sion continues within ABB, with the focus on high-
growth segments and digitally enabled services and
software. As part of the ongoing transformation,
Power Grids will continue to de-risk the business
model while tapping growth opportunities through
strategic partnerships, such as those with leading
EPC (engineering, procurement and construction)
companies, Fluor and Aibel, announced last year. In
addition, ABB will continue portfolio pruning, as
with the sale of the high-voltage cables business to
NKT Cables. As a consequence of the transforma-
tion, ABB is raising the operational EBITA margin
target corridor for the Power Grids division from
8 – 12 percent to 10 – 14 percent effective 2018.
Quantum leap in digital
As the world leader in control systems for indus-
try, ABB has more than 70,000 installed systems
connecting over 70 million devices, making it
a “hidden” digital champion. In addition, more
than half of its sales come from software and
digitally enabled devices.
In stage 3 of its Next Level strategy, ABB will use
its profound knowledge of its customers’ domains
to plan, build and operate a unique digital offer-
ing to deliver true operational differentiation for
customers. The newly launched “ABB Ability”
offering combines ABB’s portfolio of digital solu-
tions and services across all customer segments
to deliver unprecedented improvements in up-
time, speed and yield. With this digital offering,
ABB will cement its leading position in the fourth
industrial revolution and support the competi-
tiveness of ABB’s four entrepreneurial divisions.
To drive its quantum leap in digital, ABB has
entered a far-reaching strategic partnership with
Microsoft, the world’s largest software company,
to develop next-generation digital solutions on an
integrated cloud platform. Customers will benefit
from the unique combination of ABB’s deep domain
knowledge and extensive portfolio of industrial
solutions and Microsoft’s Azure intelligent cloud
as well as B2B engineering competence. Together,
the partners will drive digital transformation in
customer segments across ABB’s businesses such
as robotics, marine and e-mobility.
ABB’s digital transformation will be led by its
Chief Digital Officer, Guido Jouret, a pioneer in
the Internet of Things, who joined the company
on October 1, 2016, reporting to CEO Ulrich
Spiesshofer (see page 27).
Accelerating momentum in operational excellence
ABB continues to build on its existing momentum
and is further accelerating its operational excellence
by raising the cost reduction target of its 1,000 day
white-collar productivity program by 30 percent
to $1.3 billion. This will be achieved as planned by the
end 2017, with lower total restructuring and
implementation costs. The 1,000-day working
capital program, focused on improving inventory
manage ment and optimizing other net working
capital measures, remains on course to free up
approximately $2 billion by the end of 2017.
Strengthening the global ABB brand
To communicate its quantum leap forward in digi-
tal and to ensure it is perceived as a pioneering
technology leader at the forefront of the digital
revolution, ABB is transforming its global brand.
Over the next two years, all corporate brands will
be brought under the single master ABB brand.
This will make it easier for customers to under-
stand what ABB does and to navigate its portfolio,
and to increase customer loyalty and purchase
probability as well as price premiums. In addition,
one master brand allows ABB to better present its
strategy to relevant stakeholders and emphasizes
its customer-first, digital-first thinking.
The unified ABB brand will have a new visual identi-
ty that clearly communicates the company’s digital
capabilities as well as its direction and unique
market position to customers, shareholders, em-
ployees and all other stakeholders. ABB’s heritage
as a pioneering technology leader and the three
focus areas of its Next Level strategy are reflected
in its new brand promise: “Let’s write the future.”
Let’s write the future.
Profitable Growth
Relentless Execution
Business-led Collaboration
01 STRATEGYABB ANNUAL REPORT 2016 22
—
ABB Ability ™
Creating Value through Digitalization
—
The digitized application of that
expertise differs with each
project – we apply combinations
of our technology, services, and
the data know-how address our
clients’ unique mission-critical
needs, and then innovate over
time – but our value proposition
is consistent: Let’s write the
future.
—
ABB Ability ™ uses digitalization
to close the loop between tech-
nology, services, and people,
and thereby unlock value while
building the framework for the
future.
—
We’ve been writing this future
with our clients for years, with
an installed base of 70 million
connected devices and 70,000
control systems. ABB Ability ™
unifies our expertise and in-
sights across multiple industry
sectors and technology
platforms.
01 STRATEGYABB ANNUAL REPORT 2016 23
—
Enabling Transformative Change
Today’s global economy demands that businesses find new, faster
ways to deliver productivity within the constraints of resources and
regulation, and ABB’s digital solutions weave together the elements to
deliver it: Robotics. Remote monitoring and management. Predictive
maintenance. Collaborative operations. Next generation hardware.
Cloud-based software. Here are two examples of how we’ve partnered
with our clients to meet their needs, and then innovate solutions to
deliver future opportunities.
N O R S K E S H E L L
G A S F I E L D I N T H E N O R T H S E A
01 STRATEGYABB ANNUAL REPORT 2016 24
T HE NE ED FO R SP EED
ABB & Norske Shell
When Norske Shell’s Ormen Lange gas field
neared the start of operations in the summer of
2007, it was already the largest single development
project in Norwegian industrial history. Production
from its facilities in the North Sea could reach
70 million standard cubic meters per day, enough
to supply up to 20 percent of the UK’s demand
for gas.
Getting the project running quickly and reliably
was a textbook case in the benefits of speed.
Every additional day of uptime could mean millions,
literally, in gas pumped or revenues earned and
costs saved.
So that’s when Shell turned to ABB.
We were already its trusted partner, having worked
with Aker Solutions, the engineering contractor for
the facility, to supply automation, electrification,
telecommunications and operator training systems.
The size and complexity of the system cannot be
overstated: The distributed control system is an
ABB 800xA with six operator workplaces and
eight engineering stations, requiring 42 servers in
six cabinets for the process automation and infor-
mation management system. The 15,000 I/Os are
mainly on HART and Profibus.
“Although Norske Shell was involved throughout
the design phase, we did not feel we had sufficiently
detailed expertise to optimize the system,” says
Arne Røsdal, Norske Shell’s operations support
supervisor of Ormen Lange.
—
Commissioning & Tuning
When Shell asked ABB to speed up commissioning
of the control logic, as well as to increase the up-
time and efficiency of the equipment, we assem-
bled a team with specialized expertise in process
and production optimization from a department
within ABB called Integrated Operations.
would require close integration between Shell’s
and ABB’s teams.
Digital solutions would make that collaboration
possible.
ABB’s services combined our deep industry sector
expertise with tailor-made tools and applications
to single out and identify a problem, adapt the
software or control strategy, as well as pinpoint
issues with the mechanical equipment or the
operational procedures.
“The first objective was to get the plant and
sub-systems up and running as quickly as possible.
We started by tackling any obvious problems and
then gradually moved on to loop tuning, control
logic improvement and operational support,” says
Arne Røsdal.
—
Operational Excellence
The speed of operational insights that ABB provid-
ed not only made it easier to identify problems
earlier and solve them permanently during the
startup phase, but also enabled ongoing perfor-
mance improvements.
“For instance, condensate production has
increased, which helps increase revenues. The
ABB team has also helped reduce the amount of
heat transfer medium in the cooling processes,”
says Røsdal.
Additionally, the ABB team has identified oppor-
tunities for energy savings of more than 3 MW.
Significant energy savings have been achieved by
optimizing control of the export compressor by
reducing the cooler temperature.
Improved plant up-time, less wear of equipment,
increased condensate production and reduced
energy use all mean maximized profit with safe
and robust operation, while maintaining quality
constraints and export requirements. The result
has been increased up-time by four to five days
per year.
A founding project insight was to develop the
process control services simultaneously with
commissioning the automation system. This
Again, time means money.
01 STRATEGYABB ANNUAL REPORT 2016 25
PREV ENTIVE M AINTENANCE ON ROB OTS
ABB & Pioneer Foods
Group
Pioneer Foods Group is a leading South African
food and beverage producer which exports its
products all over the world. Its Shakaskraal bakery
near Durban is its largest, and mainly serves
a Portugal-sized province of KwaZulu-Natal.
Its cutting edge technology ensures the highest
product quality, while also supporting sustainable
operations. Reflective white roof sheets reduce
the need for electrical lighting and internal cool-
ing, while harvesting rain water for truck washing
and irrigation. It relies on renewable resource-
fired boilers and heat recovery on refrigeration
equipment for the pre-heating of water.
Ultimately, its performance depends on the
productivity of its workforce. So Pioneer Foods
turned to ABB in 2016 to help ensure that its
robots show up for work on time.
ABB supplied the company’s first robots in 2008
to the Olifantsfontein bakery in South Africa, and
more robots were ordered on a steady basis
during the following years. With the latest four
ABB robots being commissioned last year, there
were 27 robots doing everything from pan handling,
bread de-panning, lidding, de-lidding and lid
storage.
This existing relationship served as the foundation
for an expanded relationship with ABB.
“They make sure we stay informed on current
technology, new updates and upgrades and help
us with critical spare parts onsite. We have high
expectations on ABB’s service professionalism
and ABB always delivers,” says Ivan Padayachee,
Engineering Manager at Pioneer Foods’
Shakaskraal bakery.
P I O N E E R F O O D S G R O U P
S H A K A S K R A A L B A K E R Y, S O U T H A F R I C A
01 STRATEGYABB ANNUAL REPORT 2016 With integrating each service come further
improvements in facility productivity, delivering
fewer incidents and reducing time, while increas-
ing efficiency and extending equipment lifetime.
The digitalization of vital processes also yields
a learning relationship that makes system manage-
ment more effective while informing it with new
issues and opportunities that need to be addressed.
“Pioneer Foods believe in being proactive, not
reactive,” says Trevin Chetty, Service Engineer,
ABB Robotics, South Africa.
So does ABB.
26
—
Condition Monitoring &
Diagnostics
Keeping Pioneer Foods’ robot systems running
at optimal performance relies on ensuring faster
reaction time, higher efficiency, and better and
quicker service and support.
Doing so means utilizing the connectivity capability
built into every ABB robot, which allows for linking
them via wireless or hardwire and leveraging
actionable data. We implemented our Condition
Monitoring & Diagnostics digital solution, which
not only closes the loop between robots and
operators, but operates securely and 24/7.
“ABB works closely with the Shakaskraal team to
make sure preventive maintenance is done on the
right robots and at the right times,” explained
Padayachee.
The results can all be measured in time savings:
More efficient service prep, faster incident notifi-
cation and reaction, and an iterative improvement
anticipating the most frequent failures.
This success is also a demonstration of the benefits
of ABB’s digital solutions.
—
Digital Solution Opportunities
Condition Monitoring & Diagnostics is one of five
services that our Connected Services can tailor to
meet a client’s unique needs; the others are Backup
Management, Remote Access, Fleet Assessment,
and Asset Optimization.
We also enable this connectivity not only via our
robots. Our smart sensor solution can connect
any low-voltage motor with the cloud, gather and
analyze multiple parameters and call for action
whenever needed.
01 STRATEGYABB ANNUAL REPORT 2016 27
—
GUIDO JOURET
Unlocking value for
industrial customers
Guido Jouret, ABB’s Chief
Digital Officer since October 2016,
explains how ABB can help cus-
tomers realize the efficiency and
performance improvements that
digitalization delivers today.
ABB is a leader in digital systems and software.
What has been lacking is a common platform for
its digital assets; traditionally, these have been
locked up in its individual businesses rather than
shared across the entire group. With “ABB Ability”,
we will bring together ABB’s entire portfolio of
digital solutions and services, making them acces-
sible to all our businesses and customers.
ABB How does ABB’s partnership with Microsoft
fit into “ABB Ability”?
GJ As part of ABB’s quantum leap in digital, we
formed a strategic partnership with Microsoft to
develop next-generation digital solutions on an
integrated cloud platform. Microsoft was the
natural choice because of its unrivalled ecosystem
of software developers. For ABB, this means we
can build our applications on Microsoft’s Azure
platform, taking advantage of all of its capabili-
ties, and add value with our domain-specific solu-
tions. In effect, we are turning our decades of
industrial expertise into software offerings that
can be accessed through the world’s largest and
most advanced digital platform.
ABB How “digital” is the industry at the moment?
GJ The digital transformation of the industry is
just beginning, in the grid, in factory automation
and in building automation – all of the markets
in which ABB is present. ABB is well positioned
because we are very early in that transformation
journey, we are respected by our customers,
we have world-class products and, in the future,
we will have a world-class digital environment.
ABB What does a Chief Digital Officer do?
GJ The CDO position is relatively new; not many
companies have one. It was created to help enter-
prises digitalize their products and services. My
role at ABB is to see how the latest technologies,
such as sensors, data analytics and cloud-based
services, can be applied to the entire ABB portfolio
to unlock greater value for our customers, in terms
of uptime, speed and yield.
ABB How is ABB positioned in digital?
GJ To create value for industrial customers, you
need a large installed base. This is essential because
it is not enough simply to attach a sensor to a ma-
chine or robot and transmit the data to the cloud
– plenty of companies can do that. The value lies
in what you do with the data – how you turn it into
actionable information to help customers derive
maximum value from digitalizing their assets.
ABB is very well positioned because it has some of
the largest installed bases in power grids, industrial
robotics, and control systems for industry. This
means we have the domain expertise – knowledge
of our customers’ industries – to understand how
digital technologies can best be used.
ABB Tell us about “ABB Ability”
GJ With its installed base of more than 70 million
connected devices and 70,000 control systems,
01 STRATEGYABB ANNUAL REPORT 2016 28
—
Shareholder Return and
Capital Allocation
—
ABB’s capital allocation priorities remain un-
changed: 1) funding organic growth, R&D and
capital expenditures at attractive cash returns;
2) paying a steadily rising, sustainable dividend;
3) investing in value-creating acquisitions;
and 4) returning additional cash to shareholders.
—
ABB’s strong cash generation continued in 2016.
Free cash flow grew 2 percent compared to the
previous year and the return on invested capital
increased further to around 14 percent. The
strong cash generation allows for significant
deployment of capital. From 2014 to 2016, ABB has
returned around $8.7 bn to shareholders in the
form of dividends and share buy backs. Capital
allocation including acquisitions as well as
investments for organic growth through capital
expenditures, Research & Develop ment as well as
sales expense totaled around 27 bn from 2014 to
2016.
Cash Return to Shareholder 1
0.76
0.74
0.72
0.70
0.68
0.66
0.64
0.62
0.60
—
ABB announced in October 2016 its plans for
a new share buyback program of up to $3 bn from
2017 through 2019. This reflects the company’s
confidence and the continued strength of ABB’s
cash generation and financial position. On
September 30, 2016, ABB announced the comple-
tion of its recent share buyback program in which
it returned $3.5bn to its shareholders. Active
portfolio management remains a key aspect of
ABB’s operating pattern as demonstrated in the
recent portfolio pruning and bolt on acquisitions
as well as the announced cable business divesti-
ture and business model changes in Power Grids.
85%
80%
75%
70%
65%
60%
55%
50%
45%
2012
2013
2014
2015
2016
2017*
Dividend per share CHF (year paid)
Pay out %
* proposed
01 STRATEGYABB ANNUAL REPORT 2016 Cash Return to Shareholder 2
$ B N
5
4
3
2
1
0
2012
2013
2014
2015
2016
Dividend USD (year paid)
Share buy back (USD)
Total
Cash Return on Invested Capital
Capital Allocation
C R O I %
T O TA L C A P I TA L A L L O C AT I O N 2 0 1 4 – 1 6 I N %
Sales Expense
Dividend USD (year paid)
R&D
Share buy back
Capex
Acquisitions
2014 – 2016
~$27bn
14.5
14
13.5
13
12.5
12
11.5
2014
2015
2016
Free Cash Flow
$ B N
3.5
3
2.5
2
1.5
1
0.5
0
2012
2013
2014
2015
2016
Free Cash Flow
% of net income
29
160%
150%
140%
130%
120%
110%
100%
90%
01 STRATEGYABB ANNUAL REPORT 2016 30
—
Living our values
to deliver on our Next Level
strategy
At ABB, how we execute our Next Level strategy is just as important as
delivering on our targets. To drive sustainable value creation for all our
stakeholders, we have five value pairs, which all of our employees are
expected to live every day.
Values drive our behavior
In today’s competitive and fast-changing world,
the command and control structures of the past
are no longer effective. Instead, our behavior,
working relationships and the way we do business
must be based on values that leave no room for
compromise when it comes to safety and integrity,
and that encourage a passion for customer focus
and quality, while driving high performance,
accountability and collaboration.
Five value pairs
1. Safety and integrity
ABB strives every day to live these core values.
Though training, internal values campaigns, and
continuously communicating the need to uphold
high standards of safety and integrity, we seek
to instill a culture in which employees practice
safe and ethical behavior in all aspects of their
lives. Through our “Don’t look the other way!”
approach, we encourage everyone to draw atten-
tion to behavior and actions that might compro-
mise others’ health and wellbeing, or jeopardize
their careers or the reputation of the company.
2. Customer focus and quality
To prosper as a company, the customer has to be at
the center of all our activities, and we need to deliver
the highest quality in everything we do. Knowing
our customers better, being perceived as having
a clear focus on them, and providing high-quality
offerings and services is what make us the partner
of choice in highly competitive markets.
3. Innovation and speed
Innovation is not only the job of R&D, it is at the
core of our value proposition and is therefore
everyone’s job at ABB. Digitalization is opening
a world of new possibilities and transforming
industry at the same time, and we need to drive
that transformation, otherwise we will be left
trying to catch up. In today’s fast-paced world,
speed is essential – we must be fast without
being hasty in order to master new technologies
and stay ahead of the competition.
4. Ownership and performance
Strengthening lines of responsibility and account-
ability across our organization is a key part of
our Next Level strategy. Focused, well- articulated
responsibilities for our businesses, country
organizations and functions are paramount to
drive performance to the next level. Our new
organization reflects these principles and is
built around them. Institutional and individual
performance are key to continue to succeed
in a demanding world. Performance is what is
expected from all of us every day – not only
continuing what we are doing, but also taking
a step forward.
5. Collaboration and trust
With our Next Level strategy, we have defined
actions to unlock further value for our stake-
holders. But knowing what we have to do is not
enough, we need to drive a culture of collabora-
tion at all levels across the company and build
trust. In stage 3 of our Next Level strategy, our
four market- leading divisions are empowered
as entrepreneurial units to drive sustainable
value creation, supported by our regions and
the group’s digital offering and leading G&A
cost level. Successful collaboration builds trust,
which in turn strengthens collaboration,
enabling us to write the future with all of our
stakeholders.
01 STRATEGYABB ANNUAL REPORT 2016 31
—
CE O U LRICH SPIE SS HO F E R
At ABB, we seek to instill
a culture in which everyone
practices safe and ethical
behavior in all aspects of
their lives.
01 STRATEGYABB ANNUAL REPORT 2016 3 2
—
Executive Committee
Together, we drive progress
S A M I AT I YA
R O B OT I C S
A N D M OT I O N
D I V I S I O N
D I A N E D E
S A I N T V I C T O R
G E N E R A L
C O U N S E L
F R A N K D U G G A N
A S I A ,
M I D D L E E A S T
A N D A F R I C A ( A M E A )
R E G I O N
P E T E R T E R W I E S C H
I N D U S T R I A L
A U TO M AT I O N
D I V I S I O N
G R E G S C H E U
A M E R I C A S
R E G I O N
J E A N - C H R I S T O P H E
D E S L A R Z E S
C H I E F
H U M A N R E S O U R C E S
O F F I C E R
01 STRATEGYABB ANNUAL REPORT 2016 33
C L A U D I O FA C C H I N
P O W E R G R I D S
D I V I S I O N
E R I C E L Z V I K
C H I E F
F I N A N C I A L
O F F I C E R
U L R I C H S P I E S S H O F E R
C H I E F
E X E C U T I V E
O F F I C E R
TA R A K M E H TA
E L E C T R I F I C AT I O N
P R O D U C T S
D I V I S I O N
B E R N H A R D J U C K E R
E U R O P E
R E G I O N
01 STRATEGYABB ANNUAL REPORT 2016 —
02
Corporate governance report
038 – 039
Chairman’s letter
040
Summary of corporate governance approach
040 – 044
Board of Directors
045 – 047
Executive Committee
047 – 050
Shares
051 – 053
Shareholders
053
Independent External Auditors
054– 057
Other governance information
—TA M A R A , D E S I G N & E N G I N E E R I N G , T U R G I , S W I T Z E R L A N D
I was part of one of
the most exciting
projects ever –
Solar Impulse.
38
—
Chairman’s letter
Dear shareholder,
On behalf of the Board of Directors, I am pleased
to present ABB’s corporate governance report.
In 2016, we strengthened the Board with four
new members, worked closely with the CEO and
Executive Committee on Stage 3 of ABB’s Next
Level strategy, and took a close and critical look at
ABB’s portfolio to ensure it is optimized to create
sustainable value.
2016 was a special year for ABB. The company cele-
brated 125 years of serving the world with pioneering
technology from Switzerland, a heritage we are all
tremendously proud of. It brings home the weight
of responsibility on the Board and the manage-
ment to continue steering ABB successfully now
and for future generations.
Mandate
In common with other publicly listed companies in
Switzerland, the ABB Board of Directors is respon-
sible for reviewing and approving the company
strategy. The Board is also responsible for ensuring
that ABB has the best leadership team in place to
execute the strategy, optimize performance and
maintain our high ethical standards.
Two factors are key to the Board’s ability to perform
these duties successfully. First, it is crucial that,
collectively, the directors have a diverse and deep
range of complementary skills and experience
that match the needs of ABB’s strategy. In today’s
rapidly changing world, where technology is
advancing at an even faster pace, this is more
important than ever. Second, it is essential to
ensure that the directors develop an excellent
understanding of ABB’s operations and markets,
so that they are fully equipped to take informed
decisions about the company’s future.
In 2016, we strengthened the board with four new
members. Robyn Denholm and David Meline bring
expertise in digitalization and software, as well as
extensive leadership experience in financial roles
at large and successful companies. And Frederico
Fleury Curado and Satish Pai have experience
leading flagship companies in important emerging
markets, bringing vast and valuable knowledge in
research and development, technology and manu-
facturing to ABB. Unfortunately, Robyn will not be
standing for re-election, as she has taken on a new
executive role.
Our new directors undertook an intensive “on-
boarding” program in 2016, during which they had
the opportunity to see ABB operations in different
parts of the world, and to meet with members of
the EC and other senior managers.
With our new members, all of whom were elected
with overwhelming support at the annual general
meeting, the ABB Board is more diverse than
ever. It comprises directors of ten nationalities
from a wide variety of industries. Furthermore,
almost two-thirds of the directors have joined
the Board within the past three years, ensuring
a balance between new members who bring fresh
perspectives and longer-serving ones whose
experience ensures continuity and stability.
Priorities in 2016
Part of the Board’s strategic oversight responsibili-
ty is active portfolio management to ensure that
ABB focuses on the right markets and that its core
businesses are properly positioned in its target
markets. In 2016, an important focus of our work
was the Power Grids division, which we put through
a comprehensive strategic portfolio review to
determine the maximum value creation potential
for ABB shareholders.
The review included an internal analysis as well as
independent assessments performed by external
advisors and experts. Every aspect of the division’s
portfolio was closely examined, including its
market attractiveness today and in the future, the
offering as well as the business models of its
various units and the best ownership structure to
fulfil its potential.
Following a careful assessment of all the options
together with the EC, the Board concluded that
shareholders’ best interests were served by the
continued transformation of Power Grids under
ABB’s ownership. The unanimous decision was
announced in October 2016.
Alongside the strategic portfolio review of Power
Grids, the Board in 2016 evaluated the company’s
strategic direction and approved changes to
further enhance sustainable value creation. Further,
the Board conducted regular financial and business
reviews, set Group performance targets and the
personal objectives of the CEO, and reviewed
capital allocation including investments and trans-
actions, as well as the approval and progress of
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 3939
major projects. The Board also approved the annual
report and the general meeting agenda.
The Board held 5 private meetings, meetings with-
out ABB executives and experts, during which we
conducted a Board self-evaluation, a performance
assessment of senior management and a review
of succession planning.
Chairman’s role
As an independent, non-executive chairman, my
role is to provide direction to the Board and en sure
that we have an efficient, collaborative relationship
with the CEO and the members of the EC, who have
full and undi luted responsibility for the execution
of the strategy and the operational management
of the company.
As chairman, I see my role as ensuring that our
committees work effectively, providing expert
advice and guidance for important decisions and
leading by example.
I have a strong and open relationship with the CEO,
characterized by mutual respect, and I seek to pro-
vide support and offer a different perspective as a
sounding board and a source of advice.
Dialogue with shareholders
Ultimately, my priority as chairman is you, the
shareholders of our company. It is your interests
that the Board represents and it is imperative that
we have a collaborative and open dialogue. I was
honored by the warmth with which I was received
at the AGM in 2016, and at the level of support for
our Board members.
It is a privilege to serve your interests in such a
great company as ABB and to represent so many
shareholders who obviously care deeply about its
long-term success.
Sincerely yours,
Peter R. Voser
Chairman of the Board
March 10, 2017
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 40
—
Summary of corporate
governance approach
General Meeting of Shareholders
Board of Directors
Executive Committee
External
Auditor
Corporate Governance –
General principles
ABB is committed to the highest international
standards of corporate governance and this is
reinforced in its structure, processes and rules as
outlined in this corporate governance report. In
line with this, ABB complies with the general
principles as set forth in the Swiss Code of Best
Practice for Corporate Governance, as well as those
of the capital markets where its shares are listed
and traded. In addition to the provisions of the
Swiss Code of Obligations, ABB’s key principles and
rules on corporate governance are laid down in
ABB’s Articles of Incorporation, the ABB Ltd Board
Regulations & Corporate Governance Guidelines
(which includes the regulations of ABB’s Board
committees and the ABB Ltd Related Party
Transaction Policy), 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 docu-
ments from time to time to reflect the most
recent developments and practices, as well as to
ensure compliance with applicable laws and
regulations.
Compensation Governance and
Board and EC compensation
Information about ABB’s Compensation Gover-
nance as well as Board and EC compensation and
shareholdings can be found in the Compensation
report contained in this Annual Report.
—
Board of Directors
Board and Board Committees (2016 – 2017 Board Term)
Chairman: Peter R. Voser
Vice Chairman: Jacob Wallenberg
Matti Alahuhta
David Constable
Frederico Fleury Curado
Robyn Denholm
Louis R. Hughes
David Meline
Satish Pai
Michel de Rosen
Ying Yeh
Board of Directors
Finance, Audit and Compliance
Committee
Governance and Nomination
Committee
Louis R. Hughes (chairman)
Robyn Denholm
David Meline
Satish Pai
Peter R. Voser (chairman)
Matti Alahuhta
Jacob Wallenberg
Compensation Committee
Michel de Rosen (chairman)
David Constable
Frederico Fleury Curado
Ying Yeh
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016
4141
Board governance
The Board
The Board defines the ultimate direction of the
business of ABB and issues the necessary instruc-
tions. It determines the organization of the ABB
Group and appoints, removes and supervises the
persons entrusted with the executive management
and representation of ABB. The internal organiza-
tional structure and the definition of the areas of
responsibility of the Board, as well as the informa-
tion and control instruments vis -à -vis the Executive
Committee, are set forth in the ABB Ltd Board Reg-
ulations & Corporate Governance Guidelines.
The Board takes decisions as a whole, support-
ed by its three committees: the Finance, Audit and
Compliance Committee (FACC), the Governance and
Nomination Committee (GNC), and the Compensa-
tion Committee (CC). These committees assist the
Board in its tasks and report regularly to the Board.
The members of the Board committees either are
required to be independent or are elected directly
by the shareholders. The Board and its committees
meet regularly throughout the year. Any Board Mem-
ber may request a Board or committee meeting and
the inclusion of an agenda item. Before meetings,
Board Members receive materials to help them pre-
pare for the discussions and decision making.
The directors and officers of a Swiss corporation
are bound, as specified in the Swiss Code of Obli-
gations, to perform their duties with all due care, to
safeguard the interests of the corporation in good
faith and to extend equal treatment to sharehold-
ers in like circumstances.
The Swiss Code of Obligations does not specify
what standard of due care is required of the direc-
tors 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 tak-
en 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.
Chairman of the Board
The Chairman is elected by the shareholders to
represent their interests in creating sustainable
value through effective governance. In addition,
the Chairman (1) takes provisional decisions on
behalf of the Board on urgent matters where a reg-
ular Board decision cannot be obtained (2) calls for
Board meetings and sets the related agendas, (3)
interacts with the CEO and other EC members on
a more frequent basis outside of Board meetings
and (4) represents the Board internally and in the
public sphere.
Vice-Chairman of the Board
The Vice-Chairman is elected by the Board and
handles the responsibilities of the Chairman to the
extent the Chairman is unable to do so or would
have a conflict of interest in doing so. He also acts
as counselor/advisor to the Chairman on any
matters that are Company or Board relevant and as
appropriate or as the Chairman may require and
with a particular focus on strategic aspects related
to the Company and its business in general. In
addition, the Vice-Chairman takes such other
actions as may be decided by the Board or request-
ed by the Chairman.
Finance, Audit and Compliance Committee
The FACC is responsible for overseeing (1) the in-
tegrity of ABB’s financial statements, (2) ABB’s
compliance with legal, tax and regulatory require-
ments, (3) the independent auditors’ qualifications
and independence, (4) the performance of ABB’s
internal audit function and external auditors, and
(5) ABB’s capital structure, funding requirements
and financial risk and policies.
The FACC must comprise three or more indepen-
dent directors who have a thorough understand-
ing of finance and accounting. The Chairman of
the Board and, upon invitation by the committee’s
chairman, the CEO or other members of the Exec-
utive Committee may participate in the committee
meetings, provided that any potential conflict of in-
terest is avoided and confidentiality of the discus-
sions 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 determined that each member of the FACC
is an audit committee financial expert.
Governance and Nomination Committee
The GNC is responsible for (1) overseeing corporate
governance practices within ABB, (2) nominating
candidates for the Board, the role of CEO and other
positions on the Executive Committee, and (3) suc-
cession planning and employment matters relating
to the Board and the Executive Committee. The GNC
is also responsible for maintaining an orientation
program for new Board members and an ongoing
education program for existing Board members.
The GNC must comprise three or more indepen-
dent 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
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 4 2
Members of the Board (2016-2017 Board Term)
Name
Peter R. Voser
Jacob Wallenberg
Matti Alahuhta
David Constable
Frederico Fleury Curado
Robyn Denholm
Louis R. Hughes
David Meline
Satish Pai
Michel de Rosen
Ying Yeh
Nationality
Year
of Birth
First election
at AGM
End of
current term
Non-
Executive
Independent
CH
SE
FI
CA
BR
US/AU
US
CH/US
IN
FR
CN
1958
1956
1952
1961
1961
1963
1949
1957
1961
1951
1948
2015
1999
2014
2015
2016
2016
2003
2016
2016
2002
2011
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
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.
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 Exec-
utive Committee may participate in the committee
meetings, provided that any potential conflict of
interest is avoided and confidentiality of the dis-
cussions is maintained.
Board Membership
Board Composition
In proposing individuals to be elected to the Board,
the Board seeks to align the composition and skills
of the Board with the company’s strategic needs,
business portfolio, geographic reach and culture.
The Board must be diverse in all aspects including
gender, nationalities, geographic/regional experi-
ence and business experience. In addition, the av-
erage tenure of the members of the Board should
be well balanced. The Board also considers the
number of other mandates of each Board member
to ensure that he/she will have sufficient time to
dedicate to his/her role as an ABB board member.
Elections and Term of Office
The members of the Board of Directors and the
Chairman of the Board as well as the members
of the Compensation Committee are elected
by shareholders at the General Meeting of Share-
holders for a term of office extending until
completion of the next Ordinary General Meeting
of Shareholders. Members whose terms of office
have expired shall be immediately eligible for
re-election. Our Articles of Incorporation 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 Regula-
tions & Corporate Governance Guidelines (although
waivers are possible and subject to Board discre-
tion). If the office of the Chairman of the Board of
Directors or any position on the Compensation
Committee becomes vacant during a Board term,
the Board of Directors may appoint (shall appoint
in the case of the Chairman of the Board) another
individual from among its members to that position
for the remainder of that term. The Board of
Directors shall consist of no less than 7 and no
more than 13 members.
Members of the Board (2016-2017 Board Term)
Peter R. Voser has been a member
and chairman of ABB’s Board of
Directors since April 2015. He is
a member of the boards of directors
of Roche Holdings Ltd (Switzerland), IBM Corpora-
tion (U.S.) and Temasek Holdings (Private) Limited
(Singapore). He is also the chairman of the board
of Catalyst (U.S.), a non-profit organization. He was
the chief executive officer of Royal Dutch Shell plc
(The Netherlands) from 2009 until 2013. Mr. Voser
was born in 1958 and is a Swiss citizen.
Jacob Wallenberg has been a mem-
ber of ABB’s Board of Directors since
June 1999 and Vice-Chairman since
April 2015. He is the chairman of the
board of Investor AB (Sweden). He is
vice chairman of the boards of Telefonaktiebolaget
LM Ericsson AB, SAS AB, FAM AB and Patricia
Industries AB (all 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) and vice-chairman
of the Swedish-American Chamber of Commerce
(U.S.). Mr. Wallenberg was born in 1956 and is
a Swedish citizen.
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 4343
Matti Alahuhta has been a mem-
ber of ABB’s Board of Directors
since April 2014. He is the chairman
of the boards of Outotec Corpo-
ration and of DevCo Partners Oy
(both Finland). He is also a member of the boards
of directors of KONE Corporation (Finland) and
Volvo AB (Sweden). He was president and CEO of
KONE Corporation from 2006 until March 2014 and
in addition he served as its president in 2005. He
joined KONE Corporation after 26 years with Nokia
Corporation (Finland). Mr. Alahuhta was born in
1952 and is a Finnish citizen.
David Constable has been a
member of ABB’s Board of Directors
since April 2015. He was the chief
executive officer of Sasol Limited
(South Africa) from 2011 until
June 2016 and in addition he was the president
from 2014 until June 2016. He joined Sasol
after more than 29 years with Fluor Corporation
(U.S.). He is a member of the boards of
directors of Rio Tinto plc (U.K.), Rio Tinto
Limited (Australia) and Anadarko Petroleum
Corporation (U.S.). Mr. Constable was born in
1961 and is a Canadian citizen.
Frederico Fleury Curado has
been a member of ABB’s Board
of Directors since April 2016.
He is a member of the boards of
directors of Iochpe-Maxion S.A.
(Brazil) and Transocean Ltd. (Switzerland). He was
the CEO of Embraer S.A. (Brazil) from 2007 until
June 2016. Mr. Curado was born in 1961 and is
a Brazilian citizen.
Robyn Denholm has been a mem-
ber of ABB’s Board of Directors
since April 2016. As of January 2017,
she is the chief operations offi-
cer of Telstra Corporation Limited
(Australia). Previously, she was the chief finan-
cial officer of Juniper Networks (U.S.) from 2007
to March 2016 and in addition she was the chief
operating officer from 2013 to March 2016. She is
a member of the board of directors of Tesla, Inc.
(U.S.). Ms. Denholm was born in 1963 and is a U.S.
and Australian 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 N.V. (The Netherlands) and a member of the
board of directors of Nokia Corporation (Finland).
Mr. Hughes was born in 1949 and is a U.S. citizen.
David Meline has been a member
of ABB’s Board of Directors since
April 2016. He is the chief finan-
cial officer of Amgen Inc. (U.S.). He
was the chief financial officer of
3M Company (U.S.) from 2008 to 2014. Prior to join-
ing 3M, Mr. Meline worked for more than 20 years
for General Motors Company (U.S.). Mr. Meline was
born in 1957 and is a Swiss and U.S. citizen.
Satish Pai has been a member of
ABB’s Board of Directors since April
2016. He is the managing director
and member of the board of di-
rectors of Hindalco Industries Ltd.
(India). He joined Hindalco in 2013 after 28 years
with Schlumberger Limited (U.S.). Mr. Pai was born
in 1961 and is an Indian citizen.
Michel de Rosen has been a member
of ABB’s Board of Directors since
March 2002. He is the chairman of
the board of Eutelsat Communica-
tions (France) and until March 2016
was also the chief executive officer. He is a mem-
ber of the boards of directors of Pharnext SAS and
Faurecia SARL (both France). Mr. de Rosen was
born in 1951 and is a French citizen.
Ying Yeh has been a member of ABB’s
Board of Directors since April 2011.
She is a member of the board of
directors of Samsonite International
S.A. (Luxembourg). Ms. Yeh was born
in 1948 and is a Chinese citizen.
As of December 31, 2016, all Board members were
non-executive and independent directors and none
of ABB’s Board members held any official functions
or political posts. Further information on ABB’s
Board members can be found by clicking on the
ABB Board of Directors CV link which can be found
at www.abb.com/about/corporate-governance
Board Meetings
The Board meets as frequently as needed but at least
four times per annual Board term. The Board has
meetings with Executive Committee members as
well as private meetings without them. Board meet-
ings are convened by the chairman or upon request
by a director or the CEO. Documentation covering the
various items of the agenda for each Board meeting
is sent out in advance to each Board member in order
to allow each member time to study the covered mat-
ters prior to the meetings. Further, Board members
are entitled to information concerning ABB’s busi-
ness and affairs. Decisions made at the Board meet-
ings are recorded in written minutes of the meetings.
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 4 4
Meetings and attendance
Average duration (hours)
Number of meetings
Meetings attended:
Peter R. Voser
Jacob Wallenberg
Roger Agnelli(1)
Matti Alahuhta
David Constable
Frederico Fleury Curado(2)
Robyn Denholm(2)
Louis R. Hughes
David Meline(2)
Satish Pai(2)
Michel de Rosen
Ying Yeh(3)
2016
Pre Annual General Meeting 2016
Post Annual General Meeting 2016
Board
Mtg.
7.5
Conf.
Call
1.0
2
2
2
1
2
2
—
—
2
—
—
2
2
1
1
1
1
1
1
—
—
1
—
—
1
1
FACC
3.7
3
—
—
2
3
—
—
—
3
—
—
—
1
GNC
1.5
4
4
4
—
4
—
—
—
—
—
—
—
—
Board
Conf.
Call
1.0
Mtg.
8.0
5
5
5
1
1
1
—
—
5
5
5
5
5
5
5
5
5
1
1
1
1
1
1
1
1
1
CC
1.5
3
—
—
—
—
3
—
—
—
—
—
3
3
FACC
GNC
3.5
6
—
—
—
—
—
—
6
6
6
6
—
—
1.0
3
3
3
—
3
—
—
—
—
—
—
—
—
CC
1.5
3
—
—
—
—
3
3
—
—
—
—
3
3
(1) Roger Agnelli died in a tragic accident in March 2016.
(2) Frederico Fleury Curado, Robyn Denholm, David Meline and Satish Pai were first elected to the Board at the April 2016 AGM.
(3) Ying Yeh substituted for Roger Agnelli at the last FACC meeting before the AGM.
Meetings and attendance
The table above shows the number of meetings
held during 2016 by the Board and its committees,
their average duration, as well as the attendance
of the individual Board members. The Board meet-
ings shown include a strategic retreat attended by
the members of the Board and the EC.
Mandates of Board members
outside the ABB Group
No member of the Board may hold more than
ten additional mandates of which no more than
four may be in listed companies. Certain types
of mandates, such as those in our subsidiaries,
those in the same group of companies and those
in non -profit and charitable institutions, are
not subject to those limits. Additional details
can be found in Article 38 of ABB’s Articles
of Incorporation.
Business Relationships between
ABB and its Board members
This section describes important business rela-
tionships between ABB and its Board members, or
companies and organizations represented by them.
This determination has been made based on ABB
Ltd’s Related Party Transaction Policy. This policy is
contained in the ABB Ltd Board Regulations & Cor-
porate Governance Guidelines.
Sasol Ltd (Sasol) is an important customer of ABB.
ABB supplies Sasol primarily with modular systems
through its Electrification Products division.
David Constable was president and chief executive
officer of Sasol and a member of its board of
directors through June 2016.
IBM Corporation (IBM) is an important supplier to
ABB. IBM supplies ABB primarily with IT-related
hardware, software and services. Peter Voser is a
director of IBM.
ABB has an unsecured syndicated $2-billion revolv-
ing credit facility. As of December 31, 2016, SEB
Skandinaviska Enskilda Banken AB (publ) (SEB) had
committed to approximately $74 million out of the
$2-billion total. In addition, ABB has regular bank-
ing business with SEB. Jacob Wallenberg was the
vice chairman of SEB until March 2014.
After reviewing the level of ABB’s business with
Sasol and the level of purchases from IBM, and
after reviewing the banking commitments of SEB,
the Board has determined that ABB’s business
relationships with those companies are not unusual
in their nature or conditions and do not constitute
material business relationships. As a result, the
Board concluded that all members of the Board
are considered to be independent directors. This
determination was made in accordance with ABB
Ltd’s Related Party Transaction Policy which was
prepared based on the Swiss Code of Best Practice
for Corporate Governance and the independence
criteria set forth in the corporate governance rules
of the New York Stock Exchange.
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 —
Executive Committee
Composition of the Executive Committee
CORPORATE OFFICERS
Eric Elzvik
Chief Financial Officer
Jean-Christophe Deslarzes
Chief Human Resources Officer
Diane de Saint Victor
General Counsel
Ulrich Spiesshofer
Chief Executive Officer
DIVISION PRESIDENTS
Tarak Mehta
Electrification Products
Sami Atiya
Robotics and Motion
Peter Terwiesch
Industrial Automation
Claudio Facchin
Power Grids
4545
REGION PRESIDENTS
Bernhard Jucker
Europe
Frank Duggan
Asia, Middle East & Africa
Greg Scheu
Americas
Executive Committee
Responsibilities and
organization
The Board has delegated the executive manage-
ment of ABB to the CEO. The CEO and under
his direction the other members of the Executive
Committee are responsible for ABB’s overall
business and affairs and day -to- day management.
The CEO reports to the Board regularly, and
whenever extraordinary circumstances so require,
on the course of ABB’s business and financial
performance and on all organizational and person-
nel matters, transactions and other issues relevant
to the Group. Each member of the Executive
Committee is appointed and discharged by
the Board.
Members of the
Executive Committee
(at December 31, 2016)
Ulrich Spiesshofer was appointed
Chief Executive Officer in Septem-
ber 2013 and has been a member of
the Executive Committee since
2005. From January 2010 to Septem-
ber 2013, Mr. Spiesshofer was the Executive
Committee member responsible for the Discrete
Automation and Motion division. He joined ABB in
November 2005, as the 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 management positions with A.T.
Kearney Ltd. and its affiliates. Mr. Spiesshofer was
born in 1964 and is a Swiss and German citizen.
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 Switzer-
land, 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 Execu-
tive Committee in November 2013.
In April 2015, he was elected to the
board of directors of the Adecco Group (Switzer-
land). From 2010 through 2013, he was the Chief
Human Resources and Organization Officer of the
Carrefour Group (France). From 2008 to 2010 he
was President and CEO of the Downstream
Aluminum Businesses of Rio Tinto (Canada). He
was Senior Vice President Human Resources of
Alcan Inc. (Canada) from 2006 to 2008 and in
addition he co- led the integration of Rio Tinto and
Alcan from 2007 to 2008. From 1994 to 2006, he
held various human resources and management
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 46
roles with Alcan Inc. Mr. Deslarzes was born in 1963
and is a Swiss citizen.
Diane de Saint Victor was appoint-
ed General Counsel, Company
Secretary and member of the
Executive Committee in January
2007. In March 2013, she was
appointed as a non- executive 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.
Tarak Mehta was appointed
President of the Electrification
Products division effective January
2016 and has been a member
of the Executive Committee since
October 2010. From October 2010 through
December 2015, he was President of the Low
Voltage Products division. From 2007 to 2010,
he was head of ABB’s transformers business.
Between 1998 and 2006, he held several manage-
ment positions with ABB. Mr. Mehta was born in
1966 and is a U.S. citizen.
Sami Atiya was appointed President
of the Robotics and Motion Division
effective January 2017 and has been
a member of the Executive Commit-
tee since June 2016. From June to
December 2016 he was President of the Discrete
Automation and Motion division. Prior to joining
ABB, Mr. Atiya held senior roles at Siemens in
Germany from 1997 to 2015, including CEO of the
Mobility and Logistics division in the Infrastructure
and Cities Sector from 2011. Mr. Atiya was born in
1964 and is a German citizen.
Peter Terwiesch was appointed
President of the Industrial Automa-
tion division effective January 2017
and has been a member of the
Executive Committee since January
2015. He is a member of the board of directors
of Metall Zug AG (Switzerland). He was the
President of the Process Automation division from
2015 to 2016. From 2011 to 2014, 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. Terwiesch was born in 1966 and is a Swiss and
German citizen.
Claudio Facchin was appointed
President of the Power Grids
division effective January 2016 and
has been a member of the Executive
Committee since December 2013.
From December 2013 through December 2015, he
was President of the Power Systems division. From
2010 to 2013, Mr. Facchin was head of ABB’s North
Asia region. From 2004 to 2009, Mr. Facchin was
the head of ABB’s substations global business unit
and from 1995 to 2004, he held various manage-
ment roles with ABB. Mr. Facchin was born in 1965
and is an Italian citizen.
Bernhard Jucker was appointed
President of the Europe region and
Chairman of Divisional Transfor-
mation Team effective January 2016
and has been a member of the
Executive Committee since January 2006. He is a
member of the Board of directors of Rieter Holding
Ltd. (Switzerland). From 2006 through 2015, he was
President of the Power Products division. 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.
Frank Duggan was appointed
President of the Asia, Middle 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. 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 Presi-
dent 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 Head of Business Integration, Group
Service and North America. From 2012 to 2013, he
was Head of Marketing and Customer Solutions.
Mr. Scheu, a former executive of Rockwell Interna-
tional, 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.
In October 2016, it was announced that Mr. Elzvik
will leave ABB in 2017 after facilitating the hando-
ver to his successor Timo Ihamuotila who will be
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 4747
joining ABB from Nokia Corporation as CFO effec-
tive April 1, 2017.
Further information about the members of the
Executive Committee can be found by clicking on
the Executive Committee CV link at www.abb.com/
about/corporate-governance
Mandates of EC members
outside the ABB Group
No member of the EC may hold more than five
additional mandates of which no more than one
may be in a listed company. Certain types of
mandates, such as those in our subsidiaries, those
in the same group of companies and those in
non- profit and charitable institutions, are not
subject to those limits. Additional details can be
found in Article 38 of ABB’s Articles of Incorporation.
Business Relationships between
ABB and its EC members
This section describes important business
relationships between ABB and its EC members, or
companies and organizations represented by
them. This determination has been made based
on ABB Ltd’s Related Party Transaction Policy. This
policy is contained in the ABB Ltd Board Regula-
tions & Corporate Governance Guidelines.
Adecco S.A. (Adecco) is an important supplier to
ABB. Adecco primarily supplies ABB with tempo-
rary personnel services. Jean-Christophe Deslarzes
is a director of Adecco.
ABB has an unsecured syndicated $2-billion
revolving credit facility. As of December 31, 2016,
Barclays Bank plc (Barclays Bank) had committed
to approximately $74 million out of the $2-billion
total. In addition, ABB has regular banking business
with Barclays. Diane de Saint Victor is a director of
Barclays Bank and Barclays plc.
After reviewing the level of purchases from Adecco,
and after reviewing the banking commitments of
Barclays, the Board has determined that ABB’s
business relationships with those companies are
not unusual in their nature or conditions and do
not constitute material business relationships. This
determination was made in accordance with ABB
Ltd’s Related Party Transaction Policy which was
prepared based on the Swiss Code of Best Practice
for Corporate Governance and the independence
criteria set forth in the corporate governance rules
of the New York Stock Exchange.
—
Shares
Share capital of ABB
At December 31, 2016, ABB’s ordinary share cap-
ital (including treasury shares) as registered
with the Commercial Register amounted to
CHF 265,769,191.68, divided into 2,214,743,264
fully paid registered shares with a par value of
CHF 0.12 per share.
ABB Ltd’s shares are listed on the SIX Swiss
Exchange, the NASDAQ OMX Stockholm Exchange
and the New York Stock Exchange (where its
shares are traded in the form of American depos-
itary shares (ADS) – each ADS representing one
registered ABB share). At December 31, 2016, ABB
Ltd had a market capitalization based on outstand-
ing shares (total number of outstanding shares:
2,138,706,835) was approximately CHF 46 billion
($45 billion, SEK 410 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, 2016, ABB Ltd, Switzerland, directly or indirectly
owned 75 percent of ABB India Limited, Bangalore,
India, which at that time had a market capitaliza-
tion of approximately INR 220 billion.
Share repurchases
and cancellation
Under the share buyback program announced
in September 2014, ABB repurchased a total of
146,595,000 shares for cancellation. At ABB’s
General Meeting of Shareholders in 2016, the
shareholders approved the cancellation of
100 million shares. This was completed in July
2016 after the required waiting period. As a result
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 48
Stock exchange listings (At December 31, 2016)
Stock exchange
SIX Swiss Exchange
NASDAQ OMX Stockholm Exchange
New York Stock Exchange
BSE Ltd. (Bombay Stock Exchange)
ABB India Limited, Bangalore, share
National Stock Exchange of India
ABB India Limited, Bangalore, share
* also called Scrip ID
Security
Ticker symbol
ISIN code
ABB Ltd, Zurich, share
ABB Ltd, Zurich, share
ABB Ltd, Zurich, ADS
ABBN
ABB
ABB
ABB*
ABB
CH0012221716
CH0012221716
US0003752047
INE117A01022
INE117A01022
of the cancellation, the total number of ABB
Ltd’s issued shares is 2,214,743,264. ABB intends
to ask the shareholders at the General Meeting
of Shareholders in 2017 to approve the cancellation
of the remaining 46,595,000 shares that were
repurchased. Further information can be found at
www.abb.com/investorrelations
Changes to the ordinary
share capital
In 2016, ABB paid its dividend relating to the year
2015 by way of a nominal value reduction in the
par value of its shares from CHF 0.86 to CHF 0.12.
Corresponding adjustments were made to the par
value of ABB’s contingent and authorized shares.
In 2015, ABB paid a portion of its dividend relating
to the year 2014 by way of a nominal value reduc-
tion in the par value of its shares from CHF 1.03 to
CHF 0.86. Corresponding adjustments were made
to the par value of ABB’s contingent and autho-
rized shares. Except as described above, there
were no changes to ABB’s ordinary share capital
during 2016, 2015 and 2014.
Convertible bonds and options
ABB does not have any bonds outstanding that are
convertible into ABB shares. For information about
options on shares issued by ABB, please refer to
“Note 19 Stockholders’ equity” to ABB’s Consolidated
Financial Statements contained in the “Financial re-
view of the ABB Group” section of this Annual Report.
Contingent share capital
At December 31, 2016, ABB’s share capital
may be increased by an amount not to exceed
CHF 24,000,000 through the issuance of up
to 200,000,000 fully paid registered shares with
a par value of CHF 0.12 per share through
the exercise of conversion rights and/or warrants
granted in connection with the issuance on
national or international capital markets of
newly or already issued bonds or other financial
market instruments.
At December 31, 2016, ABB’s share capital may be
increased by an amount not to exceed CHF 1,200,000
through the issuance of up to 10,000,000 fully paid
registered shares with a par value of CHF 0.12 per
share through the exercise of warrant rights granted
to its shareholders. The Board may grant warrant
rights not taken up by shareholders for other
purposes in the interest of ABB.
The pre -emptive rights of the shareholders are
excluded in connection with the issuance of con-
vertible or warrant-bearing bonds or other finan-
cial market instruments or the grant of warrant
rights. The then current owners of conversion rights
and/or warrants will be entitled to subscribe for
new shares. The conditions of the conversion rights
and/or warrants will be determined by the Board.
The acquisition of shares through the exercise
of warrants and each subsequent transfer of the
shares will be subject to the restrictions of ABB’s
Articles of Incorporation (see “Limitations on
transferability of shares and nominee registration”
in “Shareholders” section below).
In connection with the issuance of convertible
or warrant-bearing bonds or other financial market
instruments, the Board is authorized to restrict
or deny the advance subscription rights of share-
holders if such bonds or other financial market
instruments are for the purpose of financing or
refinancing the acquisition of an enterprise, parts
of an enterprise, participations or new investments
or an issuance on national or international capital
markets. If the Board denies advance subscription
rights, the convertible or warrant- bearing bonds
or other financial market instruments will be issued
at the relevant market conditions and the new
shares will be issued pursuant to the relevant market
conditions taking into account the share price
and/or other comparable instruments having
a market price. Conversion rights may be exercised
during a maximum ten -year period, and warrants
may be exercised during a maximum seven -year
period, in each case from the date of the respective
issuance. The advance subscription rights of the
shareholders may be granted indirectly.
At December 31, 2016, ABB’s share capital may be
increased by an amount not to exceed CHF 11,284,656
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 4949
(1) for the acquisition of an enterprise, parts of an
enterprise, or participations, or for new invest-
ments, or in case of a share placement, for the
financing or refinancing of such transactions; or (2)
for the purpose of broadening the shareholder
constituency in connection with a listing of shares
on domestic or foreign stock exchanges. The
subscription and the acquisition of the new shares,
as well as each subsequent transfer of the shares,
will be subject to the restrictions of ABB’s Articles
of Incorporation.
Share Developments
ABB Ltd share price trend during 2016
During 2016, the price of ABB Ltd shares listed on
the SIX Swiss Exchange increased 20 percent, while
the Swiss Performance Index decreased 1 percent.
The price of ABB Ltd shares on NASDAQ OMX
Stockholm increased 26 percent, compared to the
OMX 30 Index, which increased 5 percent. The price
of ABB Ltd American Depositary Shares traded on
the New York Stock Exchange increased 19 percent
compared to the Dow Jones Industrial Index, which
increased 13 percent.
through the issuance of up to 94,038,800 fully paid
shares with a par value of CHF 0.12 per share to
employees. The pre -emptive and advance subscrip-
tion rights of ABB’s shareholders are excluded. The
shares or rights to subscribe for shares will be is-
sued to employees pursuant to one or more regula-
tions to be issued by the Board, taking into account
performance, functions, level of responsibility and
profitability criteria. ABB may issue shares or sub-
scription rights to employees at a price lower than
that quoted on a stock exchange. The acquisition of
shares within the context of employee share own-
ership and each subsequent transfer of the shares
will be subject to the restrictions of ABB’s Articles of
Incorporation (see “Limitations on transferability of
shares and nominee registration” in “Shareholders”
section below).
Authorized share capital
At December 31, 2016, ABB had an authorized share
capital in the amount of up to CHF 24,000,000
through the issuance of up to 200,000,000 fully
paid registered shares with a par value of CHF 0.12
each, which is valid through April 29, 2017. The
Board is authorized to determine the date of issue
of new shares, the issue price, the type of payment,
the conditions for the exercise of pre- emptive
rights and the beginning date for dividend
entitlement. In this regard, the Board may issue
new shares by means of a firm underwriting
through a banking institution, a syndicate or
another third party with a subsequent offer of
these shares to the shareholders. The Board may
permit pre -emptive rights that have not been
exercised by shareholders to expire or it may place
these rights and/or shares as to which pre-emptive
rights have been granted but not exercised at
market conditions or use them for other purposes
in the interest of the company. Furthermore, the
Board is authorized to restrict or deny the
pre-emptive rights of shareholders and allocate
such rights to third parties if the shares are used
ABBN VX Equity
Swiss Performance Index rebased
Zurich
CHF
24
23
22
21
20
19
18
17
16
15
14
1/16
2/16
3/16
4/16
5/16
6/16
7/16
8/16
9/16
10/16
11/16
12/16
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 ABB SS Equity
OMX 30 Index rebased
1/16
2/16
3/16
4/16
5/16
6/16
7/16
8/16
9/16
10/16
11/16
12/16
ABB US Equity
Dow Jones Index rebased
50
Stockholm
SEK
210
200
190
180
170
160
150
140
130
120
New York
USD
24
23
22
21
20
19
18
17
16
15
1/16
2/16
3/16
4/16
5/16
6/16
7/16
8/16
9/16
10/16
11/16
12/16
Share price (data based on closing prices)
2016
High
Low
Year-end
Average daily traded number of shares, in millions
Source: Bloomberg
SIX Swiss Exchange
(CHF)
NASDAQ OMX
Stockholm
(SEK)
New York
Stock Exchange
(USD)
22.49
16.04
21.48
6.18
199.00
137.10
191.80
1.43
22.88
16.06
21.07
1.98
Dividends
With respect to the year ended December 31, 2016,
ABB Ltd’s Board of Directors has proposed to dis-
tribute a dividend to shareholders in the amount
of CHF 0.76 per share. This is subject to approval
by shareholders at ABB Ltd’s 2017 Annual General
Meeting. The proposal is in line with the company’s
dividend policy to pay a steadily rising, sustainable
dividend over time.
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)
Weighted-average number of shares outstanding (in millions)
2016
0.76(1)
0.12
1
0.88
6.26
1.79
84%
2,151
2015
0.74
0.86
1
0.87
6.61
1.72
85%
2,226
2014
0.72
1.03
1
1.13
7.20
1.68
64%
2,288
(1) Proposed by the Board of Directors and subject to approval by shareholders at the Annual General Meeting on April 13, 2017, in Zurich, Switzerland
(2) Calculation based on weighted-average number of shares outstanding
(3) Calculation based on the number of shares outstanding at December 31, 2016
(4) Dividend per share (converted to U.S. dollars at year-end exchange rates) divided by basic earnings per share
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 5151
—
Shareholders
Shareholder structure
Shareholders’ rights
As of December 31, 2016, the total number of
shareholders directly registered with ABB Ltd
was approximately 142,000 and another 198,000
shareholders held shares indirectly through
nominees. In total as of that date, ABB had approxi-
mately 340,000 shareholders.
Significant shareholders
Investor AB, Sweden, held 232,165,142 ABB shares
as of December 31, 2016. This holding represents
approximately 10.48 percent of ABB’s total share
capital and voting rights as registered in the
Commercial Register on December 31, 2016. The
number of shares held by Investor AB does not
include shares held by Jacob Wallenberg, the
chairman of Investor AB and a director of ABB,
in his individual capacity.
Cevian Capital II GP Limited, Channel Islands, dis-
closed that as per February 23, 2017, on behalf of
its general partners, it held 115,868,333 ABB shares.
This holding represents approximately 5.23 percent
of ABB’s total share capital and voting rights as
registered in the Commercial Register on Decem-
ber 31, 2016.
BlackRock Inc., New York, U.S., disclosed that as
per July 25, 2011, it, together with its direct and
indirect subsidiaries, held 69,702,100 ABB shares.
This holding represents 3.15 percent of ABB’s total
share capital and voting rights as registered in
the Commercial Register on December 31, 2016.
To the best of ABB’s knowledge, no other share-
holder held 3 percent or more of ABB’s total share
capital and voting rights as registered in the Com-
mercial Register on December 31, 2016.
ABB Ltd has no cross shareholdings in excess
of 5 percent of capital, or voting rights with any
other company.
Under ABB’s Articles of Incorporation, each regis-
tered share represents one vote. Significant share-
holders do not have different voting rights. To our
knowledge, we are not directly or indirectly owned
or controlled by any government or by any other
corporation or person.
Shareholders have the right to receive dividends,
to vote and to execute such other rights as granted
under Swiss law and ABB’s Articles of Incorporation.
Right to vote
ABB has one class of shares and each registered
share carries one vote at the general meeting.
Voting rights may be exercised only after a share-
holder 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 the
independent proxy elected by the shareholders
(unabhängiger Stimmrechtsvertreter). If the
Company does not have an independent proxy,
the Board of Directors shall appoint the indepen-
dent proxy for the next General Meeting of Share-
holders. All shares held by one shareholder may
be represented by one representative only.
For practical reasons shareholders must be regis-
tered in the share register no later than 6 busi-
ness days before the general meeting in order to
be entitled to vote. Except for the cases described
under section “Limitations on transferability of
shares and nominee registration” below, there
are no voting rights restrictions limiting ABB’s
shareholders’ rights.
Powers of General Meetings
The Ordinary General Meeting of Shareholders shall
be held each year within six months after the close
of the fiscal year of the Company; the business re-
port, the compensation report and the Auditors’ re-
ports must be made available for inspection by the
shareholders at the place of incorporation of the
Company by no later than twenty days prior to the
meeting. Each shareholder is entitled to request
immediate delivery of a copy of these documents.
The following powers must be vested exclusively in
the General Meeting of Shareholders:
• Adoption and amendment of the Articles of
Incorporation
• Election of the members of the Board of Direc-
tors, the Chairman of the Board of Directors, the
members of the Compensation Committee, the
Auditors and the independent proxy
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 52
• Approval of the annual management report and
consolidated financial statements
• Approval of the annual financial statements and
decision on the allocation of profits shown on
the balance sheet, in particular with regard to
dividends
• Approval of the maximum compensation of
the Board of Directors and of the Executive
Committee pursuant to Article 34 of the Articles
of Incorporation
• Granting discharge to the members of the
Board of Directors and the persons entrusted
with management
• Passing resolutions as to all matters reserved to
the authority of the General Meeting by law or
under the Articles of Incorporation or that are
submitted to the General Meeting by the Board
of Directors, subject to article 716a of the Swiss
Code of Obligations.
Resolutions and elections at General Meetings
Shareholders’ resolutions at general meetings are
approved with an absolute majority of the votes
represented at the meeting, except for those mat-
ters described in article 704 of the Swiss Code of
Obligations and for resolutions with respect to
restrictions on the exercise of the right to vote and
the removal of such restrictions, which all require
the approval of two- thirds of the votes represented
at the meeting.
At December 31, 2016, shareholders representing
shares of a par value totaling at least CHF 48,000
may require items to be included in the agenda
of a general meeting. Any such request must be
made in writing at least 40 days prior to the date
of the general meeting and specify the items and
the motions of such shareholder(s).
ABB’s Articles of Incorporation do not contain pro-
visions on the convocation of the general meeting
of shareholders that differ from the applicable
legal provisions.
Shareholders’ dividend rights
The unconsolidated statutory financial statements
of ABB Ltd are prepared in accordance with Swiss
law. Based on these financial statements, divi-
dends 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 divi-
dend if it has been proposed by a shareholder or
the Board of Directors and approved at a general
meeting of shareholders, and the auditors con-
firm that the dividend conforms to statutory law
and ABB’s Articles of Incorporation. In practice, the
shareholders’ meeting usually approves dividends
as proposed by the Board of Directors, if the Board
of Directors’ proposal is confirmed by the statutory
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’ res-
olution and the ex -date 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
registered with it. Under Swiss law, dividends
not collected within five years after the due date
accrue to ABB Ltd and are allocated to its other
reserves. As ABB Ltd pays cash dividends, if any, in
Swiss francs (subject to the exception for certain
shareholders in Sweden described below), ex-
change rate fluctuations will affect the U.S. dollar
amounts received by holders of ADSs upon conver-
sion of those cash dividends by Citibank, N.A., the
depositary, in accordance with the Amended and
Restated Deposit Agreement dated May 7, 2001.
For shareholders who are residents of Sweden, ABB
has established a dividend access facility (for up
to 600,004,716 shares). With respect to any annual
dividend payment for which this facility is made
available, shareholders who register with Euroclear
may elect to receive the dividend from ABB Norden
Holding AB in Swedish krona (in an amount equiv-
alent to the dividend paid in Swiss francs) without
deduction of Swiss withholding tax. For further
information on the dividend access facility, see ABB
Ltd’s Articles of Incorporation.
Limitations on transferability of shares and
nominee registration
ABB may decline a registration with voting rights if
a shareholder does not declare that it has acquired
the shares in its own name and for its own account.
If the shareholder refuses to make such declara-
tion, it will be registered as a shareholder without
voting rights. A person failing to expressly declare
in its registration/application that it holds the
shares for its own account (a nominee), will be en-
tered in the share register with voting rights, pro-
vided that such nominee has entered into an agree-
ment with ABB concerning its status, and further
provided that the nominee is subject to recognized
bank or financial market supervision. In special
cases the Board may grant exemptions. There were
no exemptions granted in 2016. The limitation on
the transferability of shares may be removed by an
amendment of ABB’s Articles of Incorporation by
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 5353
a shareholders’ resolution requiring two -thirds of
the votes represented at the meeting.
before a General Meeting regardless of the record
date. The record date serves only to determine the
right to vote at a General Meeting.
No restriction on trading of shares
No restrictions are imposed on the transferability
of ABB shares. The registration of shareholders in
the ABB Share register, Euroclear and the ADS reg-
ister kept by Citibank does not affect transferabil-
ity of ABB shares or ADSs. Registered ABB share-
holders or ADR holders may therefore purchase or
sell their ABB shares or ADRs at any time, including
Duty to make a public tender offer
ABB’s Articles of Incorporation do not contain any
provisions raising the threshold (opting up) or
waiving the duty (opting out) to make a public ten-
der offer pursuant to article 32 of the Swiss Stock
Exchange and Securities Trading Act.
—
Independent External Auditors
Duration of the mandate and
term of office of the auditor
Audit and additional fees
paid to the auditor
Ernst & Young are the auditors of ABB’s statuto-
ry and consolidated financial statements. Ernst
& Young assumed the sole auditing mandate of
the consolidated financial statements of the ABB
Group beginning in the year ended December 31,
2001 (having previously been joint auditors since
1994). The auditor in charge and responsible for
the mandate, Leslie Clifford, began serving in this
function in respect of the financial year ended
December 31, 2013. Pursuant to the Articles of In-
corporation, the term of office of ABB’s auditors is
one year.
Information to the
Board and the Audit and
Compliance Committee
Supervisory and control instruments
vis -à- vis the auditors
The FACC prepares proposals to the Board for
the appointment and removal of the auditors. The
FACC is also responsible for supervising the
auditors to ensure their qualifications, indepen-
dence and performance. It meets regularly with
the auditors, at least four times each calendar year,
to obtain reports about the results of their audit
procedures. The FACC reports the material elements
of its supervision of the auditors to the Board.
The audit fees charged by Ernst & Young for the
legally prescribed audit amounted to $24.9 million
in 2016. Audit services are defined as the standard
audit work performed each fiscal year necessary
to allow the auditors to issue an opinion on the
consolidated financial statements of ABB and to
issue an opinion on the local statutory financial
statements.
This classification may also include services that
can be provided only by the auditors, such as
pre- issuance reviews of quarterly financial results
and comfort letters delivered to underwriters in
connection with debt and equity offerings.
In addition, Ernst & Young charged $4.6 million for
non- audit services performed during 2016. Non-
audit services include primarily accounting consul-
tations, audits of pension and benefit plans,
accounting advisory services, other attest services
related to financial reporting that are not required
by statute or regulation, income tax and indirect
tax compliance services and tax advisory services.
In accordance with the requirements of the U.S.
Sarbanes -Oxley Act of 2002 and rules issued by
the SEC, ABB has, on a global basis, a process for
the review and pre- approval of audit and non-
audit services to be performed by Ernst & Young.
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 54
—
Other governance information
ABB Group organizational
structure
ABB Ltd is the ultimate parent company of the ABB
Group. Its sole shareholding is in ABB Asea Brown
Boveri Ltd which directly or indirectly owns the
other companies in the ABB Group. The table in the
appendix to this Corporate governance report
sets forth, as of December 31, 2016, the name,
place of incorporation, ownership interest and
share capital of the significant direct and indirect
subsidiaries of ABB Ltd, Switzerland. ABB’s
operational group structure is described in the
“Financial review of ABB Group” section of this
Annual Report under “Operating and financial
review and prospects – Organizational structure”.
Management contracts
There are no management contracts between ABB
and companies or natural persons not belonging
to the ABB Group.
Change of control clauses
Board members, Executive Committee mem-
bers, and other members of senior management
do not receive any special benefits in the event
of a change of control. However, the conditional
grants under the Long Term Incentive Plan and
the Management Incentive Plan may be subject
to accelerated vesting in the event of a change
of control.
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 Manage-
ment Incentive Plan and the Long Term Incentive
Plan. For a more detailed description of these
incentive plans, please refer to “Note 18 Share -
based payment arrangements” to ABB’s Consoli-
dated Financial Statements contained in the
“Financial review of ABB Group” section of this
Annual Report.
ABB’s policy on tax
ABB acts as a responsible global corporate
tax citizen in compliance with applicable tax law
and regulations. It is ABB’s policy to provide
transparent and comprehensive information to tax
administrations in order to facilitate their under-
standing of the tax-related decisions taken by ABB.
Further information regarding our tax policy can
be accessed at www.abb.com/sustainability
Governance differences
from NYSE Standards
According to the New York Stock Exchange’s cor-
porate 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 compen-
sation plans and material revisions thereto
be approved by the shareholders. Consistent
with Swiss law such matters are decided by our
Board. However, the shareholders decide about
the creation of new share capital that can be
used in connection with equity compensation
plans.
• Swiss law requires that the members of the com-
pensation committee are elected by the share-
holders rather than appointed by our Board.
• Swiss law requires shareholders to approve the
maximum aggregate Board compensation and
the maximum aggregate Executive Committee
compensation.
Information policy
ABB, as a publicly traded company, is committed
to communicating in a timely and consistent way
to shareholders, potential investors, financial
analysts, customers, suppliers, the media and
other interested parties. ABB is required to
disseminate material information pertaining to its
businesses in a manner that complies with its
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 5555
• 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
• Summary of differences of shareholder rights
under Swedish and Swiss Law applicable to ABB
• CVs of the Board members
• CVs of the Executive Committee members
obligations under the rules of the stock exchanges
where its shares are listed and traded.
ABB publishes an annual report that provides
audited financial statements and information
about ABB including our business results, strategy,
products and services, corporate governance and
executive compensation. ABB also submits an
annual report on Form 20 -F to the SEC. In addition,
ABB publishes its results on a quarterly basis as
press releases, distributed pursuant to the rules
and regulations of the stock exchanges on which
its shares are listed and traded. Press releases
relating to financial results and material events
are also filed with the SEC on Form 6 -K. An archive
containing Annual Reports, Form 20 -F reports,
quarterly results releases and related presentations
can be found in the “Financial results and presenta-
tions” section at www.abb.com/investorrelations.
The quarterly results press releases contain
unaudited financial information prepared in accor-
dance 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 registered shareholders by mail.
Inquiries may also be made to ABB Investor
Relations:
Affolternstrasse 44
CH- 8050 Zurich, Switzerland
Telephone: +41 43 317 7111
Fax: +41 44 311 9817
E- mail: investorrelations@ch.abb.com
ABB’s website is: www.abb.com
Further information on
corporate governance
The list below contains references to additional
information 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
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 56
Appendix - ABB Ltd’s significant subsidiaries
Company name/location
SARPI - Société Algérienne pour la réalisation de projets indu-
striels, Alger
ABB S.A., Buenos Aires
ABB Australia Pty Limited, Moorebank, NSW
ABB Group Investment Management Pty. Ltd., Moorebank, NSW
ABB N.V., Zaventem
ABB Ltda., Osasco
ABB Bulgaria EOOD, Sofia
ABB Canada Holding Limited Partnership, Saint-Laurent, Quebec
ABB Inc., Saint -Laurent, Quebec
Thomas & Betts Limited, Saint -Jean- sur- Richelieu, Quebec
ABB Beijing Drive Systems Co. Ltd., Beijing
ABB (China) Ltd., Beijing
ABB Engineering (Shanghai) Ltd., Shanghai
ABB High Voltage Switchgear Co. Ltd., Beijing
ABB Xiamen Low Voltage Equipment Co. Ltd., Xiamen
ABB Xiamen Switchgear Co. Ltd., Xiamen
ABB Xinhui Low Voltage Switchgear Co. Ltd., Xinhui
ABB s.r.o., Prague
ABB A/S, Skovlunde
ABB for Electrical Industries (ABB ARAB) S.A.E., Cairo
Asea Brown Boveri S.A.E., Cairo
ABB AS, Jüri
ABB Oy, Helsinki
ABB France, Cergy Pontoise
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
ABB Holding Ltd., Hong Kong
ABB (Hong Kong) Ltd., Hong Kong
ABB Global Industries and Services Private Limited, Bangalore
ABB India Limited, Bangalore
ABB S.p.A., Milan
Power-One Italy S.p.A., Terranuova Bracciolini (AR)
ABB K.K., Tokyo
ABB Ltd., Seoul
ABB Holdings Sdn. Bhd., Subang Jaya
ABB Malaysia Sdn. Bhd., Subang Jaya
ABB Mexico S.A. de C.V., San Luis Potosi SLP
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 AS, Billingstad
ABB Holding AS, Billingstad
ABB Sp. z o.o., Warsaw
ABB Ltd., Moscow
ABB Contracting Company Ltd., Riyadh
ABB Electrical Industries Ltd., Riyadh
ABB Holdings Pte. Ltd., Singapore
Country
ABB interest
%
Share capital
in thousands Currency
Algeria
Argentina
Australia
Australia
Belgium
Brazil
Bulgaria
Canada
Canada
Canada
China
China
China
China
China
China
China
Czech Republic
Denmark
Egypt
Egypt
Estonia
Finland
France
France
Germany
Germany
Germany
Germany
Germany
Germany
Hong Kong
Hong Kong
India
India
Italy
Italy
50.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
90.00
100.00
100.00
60.00
100.00
64.30
90.00
100.00
100.00
100.00
100.00
100.00
100.00
99.83
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
75.00
100.00
100.00
814,500
278,860
131,218
355,312
13,290
689,793
65,110
—
— (1)
— (1)
5,000
310,000
40,000
11,400
15,800
23,500
6,200
400,000
100,000
353,479
166,000
1,663
10,003
25,778
45,921
167500
15,000
10,620
61,355
7,500
1,535
27,887
20,000
408,930
423,817
110,000
22,000
Japan
100.00
1,000,000
Korea, Republic of
100.00
18,670,000
Malaysia
Malaysia
Mexico
Mexico
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Norway
Norway
Poland
Russian Federation
Saudi Arabia
Saudi Arabia
Singapore
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.92
100.00
65.00
65.00
100.00
4,490
3,500
633,368
667,686
9,200
1,000
20
119
100
250,000
240,000
350,656
5,686
40,000
168,750
32,797
DZD
ARS
AUD
AUD
EUR
BRL
BGN
CAD
CAD
CAD
USD
USD
USD
USD
USD
USD
USD
CZK
DKK
EGP
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
HKD
HKD
INR
INR
EUR
EUR
JPY
KRW
MYR
MYR
MXN
MXN
EUR
USD
EUR
EUR
EUR
NOK
NOK
PLN
RUB
SAR
SAR
SGD
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 5757
ABB interest
%
Share capital
in thousands Currency
Country
Singapore
South Africa
South Africa
Spain
Sweden
Sweden
Switzerland
Switzerland
Switzerland
Switzerland
Switzerland
Switzerland
Thailand
Turkey
100.00
100.00
74.91
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
28,842
4,050
1
33,318
400,000
2,344,783
2,768,000
500
92,054
571
55,000
10,000
100.00
1,034,000
99.95
United Arab Emirates
49.00(2)
United Kingdom
United Kingdom
United States
United States
United States
United States
United States
United States
United States
United States
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
13,410
5,000
226,014
120,000
1
2
1
1
–
10
1
–
SGD
ZAR
ZAR
EUR
SEK
SEK
CHF
CHF
CHF
CHF
CHF
CHF
THB
TRY
AED
GBP
GBP
USD
USD
USD
USD
USD
USD
USD
USD
Company name/location
ABB Pte. Ltd., Singapore
ABB Holdings (Pty) Ltd., Longmeadow
ABB South Africa (Pty) Ltd., Longmeadow
Asea Brown Boveri S.A., Madrid
ABB AB, Västerås
ABB Norden Holding AB, Västerås
ABB Asea Brown Boveri Ltd, Zurich
ABB Information Systems Ltd., Zurich
ABB Investment Holding GmbH, Zurich
ABB Management Services Ltd., Zurich
ABB Schweiz AG, Baden
ABB Turbo Systems AG, Baden
ABB LIMITED, Bangkok
ABB Elektrik Sanayi A.S., Istanbul
ABB Industries (L.L.C.), Dubai
ABB Holdings Limited, Warrington
ABB Limited, Warrington
ABB Finance (USA) Inc., Wilmington, DE
ABB Holdings Inc., Cary, NC
ABB Inc., Cary, NC
ABB Treasury Center (USA), Inc., Wilmington, DE
Baldor Electric Company, Fort Smith, AR
Edison Holding Corporation, Wilmington, DE
Thomas & Betts Corporation, Knoxville, TN
Verdi Holding Corporation, Wilmington, DE
(1) Shares without par value.
(2) Company consolidated as ABB exercises full management control.
02 CORPORATE GOVERNANCE REPORTABB ANNUAL REPORT 2016 —
03
Compensation report
062
Letter from the Chairman of the Compensation
Committee
063 – 082
Compensation report
083
Report of the statutory auditor on the Compensation
report
—C L A I R E , CO R P O R AT E R E S E A R C H , VÄ S T E R A S , S W E D E N ,
WO R K S W I T H H E R T E A M TO D E V E LO P P I O N E E R I N G
E N E R G Y- R E L AT E D M AT E R I A L S
Every member
of the team has a
different way of
thinking and a dif-
ferent personality,
but they are all so
committed.
62
—
Letter from the Chairman of the
Compensation Committee
This Compensation report will be submitted to a
non-binding, consultative vote by shareholders at
the AGM in April 2017. You will also be asked to vote
on the maximum aggregate compensation amount
of the Board for the 2017 – 2018 Board term and on
the maximum aggregate EC compensation for 2018.
Looking ahead, we will continue to assess and re-
view our compensation programs to ensure that
they are still fulfilling their purpose and are aligned
with the interests of our shareholders. We encour-
age and pursue an open and regular dialogue with
our stakeholders. Your feedback is highly valued
and appreciated as we continue to evolve the com-
pensation system. On behalf of ABB and the CC, as
well as the Board, I would like to thank you for your
continued trust in ABB and for your consistently
constructive and supportive feedback regarding
our compensation framework.
Michel de Rosen
Chairman of the Compensation Committee
Zurich, March 10, 2017
Dear shareholder,
On behalf of the Board of Directors (Board) and the
Compensation Committee (CC), I am pleased to
present the Compensation report for 2016.
Following the election of the CC at the 2016 Annual
General Meeting (AGM), we welcomed Frederico
Fleury Curado as a new member of the Board and
the CC, to which he brings his extensive interna-
tional experience and expertise.
In 2016, ABB continued with the implementation of
the Next Level Strategy and the launch of Stage 3.
The successful execution of the Next Level Strategy
has led to significant improvements of the com-
pany’s performance and to a stronger external fo-
cus. The Compensation report explains how these
results impacted the variable incentive payments
made to the Executive Committee (EC) members
under the various compensation components.
For the 2015 – 2016 term of office, aggregate Board
compensation increased by 25 percent compared
with the previous year, due to the expansion of the
Board from 8 to 11 members.
Aggregate EC compensation was lower in 2016
than in 2015, principally due to a reduction in the
number of EC members as part of the organi-
zational realignment under Stage 2 of the Next
Level Strategy.
During the reporting year, the CC continued to
review ABB’s compensation programs in order to
ensure their alignment with Stage 3 of the Next
Level Strategy. In this context, we further improved
the focus on performance in our short-term and
long-term variable compensation plans, effec-
tive for 2017. Furthermore, the CC performed its
regular activities throughout the year such as the
performance goal setting at the beginning of the
year and the performance assessment following
the year-end, the determination of the compensa-
tion of the Board and the EC members, as well as
the preparation of the Compensation report and
of the “say-on-pay” vote at the AGM. You will find
further information on our activities and on ABB’s
compensation system and governance in the fol-
lowing pages.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 6363
—
Compensation report
Exhibit 1: Overview of total compensation (in CHF)
Board of Directors
Number of members
Total compensation
Maximum aggregate compensation amount approved at AGM
Executive Committee
Number of members
Total compensation
Maximum aggregate compensation amount approved at AGM
Board term
2016 – 2017
11 members
4,670,000
4,700,000
Calendar year
2016
11 members
44,200,719
52,000,000
2015 – 2016
8 members
3,730,000
4,500,000
2015
12 members
45,521,908
not subject to
shareholders’ vote
Compensation governance
Shareholders’ engagement
Shareholders have been given a greater say on
compensation matters in recent years. They ap-
prove the Articles of Incorporation that outline the
principles of compensation, including the require-
ment for shareholders each year to approve the
maximum aggregate compensation amounts of
the Board and the EC. The provisions of the Articles
of Incorporation on compensation can be found
on ABB’s Corporate governance website www.abb.
com/about/corporate-governance and are summa-
rized below:
• Compensation Committee (Articles 28 to 31):
The CC is composed of a minimum of three
members who are elected individually by the
shareholders at the AGM for a period of one
year. The CC supports the Board in establishing
and reviewing the compensation strategy, prin-
ciples and programs, in preparing the proposals
to the AGM on compensation matters and in
determining the compensation of the Board
and of the EC. The responsibilities of the CC
are defined in more detail in the ABB Ltd Board
Regulations & Corporate Governance Guidelines,
which are available on ABB’s Corporate gover-
nance website.
• Compensation principles (Article 33): Compen-
sation of the members of the Board consists
of fixed compensation only. Compensation of
the members of the EC consists of fixed and
variable compensation. Variable compensa-
tion may comprise short-term and long-term
elements. Compensation may be paid in cash,
shares or other benefits.
• “Say-on-pay” votes (Article 34): Shareholders
approve the maximum aggregate amount of
compensation of the Board for the following
Board term and of the EC for the following
financial year.
• Supplementary amount for new EC members
(Article 35): If the maximum approved aggre-
gate compensation amount is not sufficient
to also cover the compensation of newly
promoted/ hired EC members, up to 30 percent
of the last approved maximum aggregate
amount shall be available as a supplementary
amount to cover the compensation of such new
EC members.
• Credits (Article 37): Credits may not be granted
to members of the Board or of the EC.
Shareholders also have a consultative vote on the
prior year’s Compensation report at the AGM. The
Compensation report describes the compensation
principles and programs as well as the governance
framework related to the compensation of the
Board and EC. The report also provides details of
the compensation awarded to the members of the
Board and of the EC in the prior calendar year.
The Compensation report is written in accordance
with the Ordinance against Excessive Remunera-
tion in Stock Listed Corporations (Ordinance), the
standard relating to information on Corporate Gov-
ernance of the SIX Swiss Exchange, the rules of the
stock markets of Sweden and the United States
where ABB’s shares are also listed, and the princi-
ples of the Swiss Code of Best Practice for Corpo-
rate Governance of economiesuisse.
Authority levels in compensation matters
The CC acts in an advisory capacity while the Board
retains the decision authority on compensation
matters, except for the maximum aggregate com-
pensation amounts of the Board and of the EC,
which are subject to the approval of shareholders at
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 64
Exhibit 2: Authority levels in compensation matters
Compensation policy including incentive plans
Maximum aggregate compensation amount EC
CEO compensation
Individual compensation EC members
Performance target setting and assessment CEO
Performance target setting and assessment EC
Shareholding requirements CEO and EC
Maximum aggregate compensation amount Board
Individual compensation of Board members
Compensation report
Proposal
Recommendation
Approval
CEO
CC
Board
AGM
Consultative vote
the AGM. The authority levels of the different bodies
on compensation matters are detailed in Exhibit 2.
their own compensation and/or performance are
being discussed.
Activities of the CC in 2016
The CC meets as often as business requires but
at least four times a year. In 2016, the CC held six
meetings and performed the activities described
in Exhibit 3. Details on meeting attendance of the
individual CC members are provided in the Corpo-
rate governance report on page 44.
The Chairman of the CC reports to the full Board
after each CC meeting. The minutes of the
meetings are available to the members of the
Board. As a general rule, the CEO, the Chief
Human Resources Officer (CHRO) and the Head of
Compensation and Benefits attend the CC
meetings in an advisory capacity. The Chairman of
the CC may decide to invite other executives as
appropriate. Executives do not attend the
meetings or the parts of the meetings in which
The CC may decide to consult an external advi-
sor for compensation matters. In 2016, Hostettler
& Company (HCM) and PricewaterhouseCoopers
(PwC) were mandated to provide services related
to executive compensation matters. HCM has no
other mandate with ABB. Apart from its CC advi-
sory role, PwC also provides human resources, tax
and advisory services to ABB. In addition, support
and expertise are provided to the CC by internal
compensation experts such as the CHRO and the
Head of Compensation and Benefits.
Board compensation
Compensation principles
The compensation system for the members
of the Board is designed to attract and retain
Exhibit 3: CC activities during 2016
Performance: items relating to past performance cycle
Individual performance assessment of CEO and EC members
Performance assessment for short-term variable compensation
Look-back assessment of ABB’s performance over past three years
Payout of long-term variable compensation
Performance: items relating to upcoming performance cycle
Setting of performance targets for short-term variable compensation
Setting of performance targets for long-term variable compensation
Quarterly updates on status of various performance plans
EC compensation review and planning
Review of EC compensation (incentive structure, levels and mix) relative to external benchmarks
Recommendation of individual compensation of EC members
Review of pensions and benefits
Review of shareholding level of each EC member
Board compensation
Comparison of compensation levels against external benchmarks
Recommendation of individual compensation of Board members
Compliance and regulatory
Preparation of Compensation report for publication
Preparation of maximum aggregate compensation amount of EC to be submitted to AGM vote
Preparation of maximum aggregate compensation amount of Board to be submitted to AGM vote
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
experienced people on the Board. Compensation
of Board members takes into account the responsi-
bilities, time and effort required to fulfill their roles
on the Board and its committees. From time to
time the levels and mix of compensation of Board
members are compared against the compensa-
tion of non-executive board members of publicly
traded companies in Switzerland that are part of
the Swiss Market Index.
The compensation of Board members is fixed. They
do not receive variable compensation or pension
benefits, underscoring their focus on corporate
strategy, supervision and governance. In accor-
dance with Swiss law, Board members may not re-
ceive golden parachutes or other special benefits
in the event of a change of control. Board members
are paid for their service over a 12-month period
that starts with their election at the AGM. Payment
is made in semi-annual installments in arrears.
In order to further align the interests of Board
members with those of ABB’s shareholders, half
of their total compensation has to be paid in
ABB shares, although Board members may choose
to receive all of their compensation in shares.
The number of shares delivered is calculated prior
to each semi-annual payment by dividing the
monetary amount to which the Board members
are entitled by the average closing price of the
ABB share over a predefined 30-day period.
The shares are subject to a three-year restriction
period during which they cannot be sold,
transferred or pledged. Any restricted shares
are unblocked when the Board member leaves
the Board.
Structure of Board compensation
The structure of Board compensation for the term
of office from AGM to AGM is described in Exhibit 4.
The compensation amounts paid to the Board
members for the calendar year 2016 and for
the term of office from the 2016 AGM to the 2017
Exhibit 4: Structure of Board compensation
Board term fee (CHF)
Chairman of the Board(1)
Vice-chairman of the Board(1)
Member of the Board
Additional committee fees:
Chairman of FACC(2)
Chairman of GNC and CC(2)
Member of FACC(2)
Member of GNC and CC(2)
1,200,000
450,000
290,000
110,000
60,000
40,000
30,000
6565
AGM are disclosed in Exhibits 19 and 20, respec-
tively, in the section “Compensation and share
ownership tables”.
Executive Committee
compensation
Compensation principles
ABB’s compensation system reflects the commit-
ment to attract, motivate and retain people with
the talent necessary to strengthen ABB’s position
as a pioneering technology leader for utility, indus-
try, and transport & infrastructure customers.
The compensation system is designed to pro-
vide competitive compensation and to encourage
executives and employees to deliver outstanding
results and create sustainable shareholder value
without taking excessive risks. The compensation
system balances:
• fixed and variable compensation elements;
• short-term and long-term incentives;
• the recognition of Group and individual
performance.
The compensation system has been refined in recent
years in line with ABB’s Next Level Strategy, so that it
rewards the achievement of financial and operational
objectives and drives the leadership behaviors re-
quired for the long-term and sustainable success of
ABB. The compensation system is based on the fol-
lowing principles (Exhibit 5).
Exhibit 5: Principles of EC compensation
Strategic
alignment
Performance
orientation
Comprehensive
and balanced KPIs
Compensation is directly linked to the
Next Level Strategy through ambitious
performance objectives and robust
performance monitoring.
Ambitious goals are set in ABB’s planning
processes and variable pay is aimed
at the upper quartile level when these
objectives are met.
Performance metrics support the
development of earnings per share and
cash return on invested capital. They
also include measures of operational and
behavioral performance that are critical
in the current change process of the Next
Level Strategy. Performance metrics are
well-balanced as they reflect both Group
and individual performance, as well as
short-term and long-term results.
Compensation mix and levels are re-
viewed annually against benchmarks that
include relevant peer companies in the
markets in which ABB operates. Annual
base salaries of EC members are set
between the market median and upper
quartile in order to attract suitable talent.
(1) The Chairman and Vice-chairman did not receive any additional committee
fees for their roles on the GNC.
(2) CC: Compensation Committee.
FACC: Finance, Audit & Compliance Committee.
GNC: Governance & Nomination Committee.
Competitiveness
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
66
Exhibit 6: Annual review of the business and performance cycle
Review of ABB performance
Annual performance development
appraisal of individuals
AR*
QR*
• Continuous dialogue with
external stakeholders and
evaluation of feedback
• Regular update and
review of external
benchmarks and
compensation trends
QR*
Mid-year performance review
QR*
Annual compensation
planning
Setting of objectives
for short-term variable
compensation for
current year
Short-term variable
compensation payout
for previous year
3 year look-back
assessment and
setting of objectives
for LTIP
Annual grant
of LTIP awards
*AR – annual results; QR – quarterly results
To effectively align strategy, performance and compensation, the target setting and review processes are directly linked to the
financial and budget processes.
Alignment with ABB’s business strategy
The Board defines the strategic direction of the
company and regularly reviews the progress made
on the strategy. Based on these reviews, the Board
sets performance targets and annual budgets, and
ensures that the company’s compensation
programs support the implementation of the
strategy by appropriately rewarding performance
(see Exhibit 6).
The Board designs the overall EC compensation so
that it is aligned with our Next Level Strategy. In
addition, short-term targets are aligned with our
external targets (including revenues, operational
EBITA, cash generation, and earnings growth).
Market competitiveness and benchmarks
All EC and other senior positions at ABB have been
evaluated using the job evaluation methodology
of the Hay Group, which is used by more than
10,000 companies around the world. This approach
provides a meaningful, transparent and consistent
basis for evaluating roles and for comparing com-
pensation levels with those of equivalent jobs at
other companies.
The General Pan-European Market data of Hay’s an-
nual survey Top Executive Compensation in Europe
is primarily used to benchmark EC compensation,
which is targeted to be above the median values
for the market. Other references include Hay’s data
on the Swiss and European industry markets and
on US peers (see Exhibit 7).
Components of EC Compensation
The compensation of EC members consists of
an annual base salary, benefits, a short-term
variable component based on annual perfor-
mance objectives and a long-term variable
Exhibit 7: Compensation benchmarks
R E F E R E N C E
C O M P O S I T I O N
R AT I O N A L E
Main benchmark
General Pan-
European Market
360 largest
European
companies of
the FT Europe
500 listing
Continuity and
stability of data
points
References to stress-test main benchmark
Peer companies
selected based on
business,
geographic
presence and size
Specific peer
group to
benchmark
compensation
design
Global Industry
Group
SMI and SMIM
companies that are
included in Hay’s
General Pan-
European Market
data
Swiss market
US market
US peers of similar
size and industry
Comparison
with other
multinational
Swiss companies
Comparison with
other multinational
US companies
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 6767
component based on long-term performance
(see Exhibit 8).
•
The Board considers several factors when review-
ing and setting the individual target compensation
of each EC member:
• Market value of the role (external benchmark);
Individual profile of the incumbent in terms of
experience and skillset;
Individual performance and potential; and
•
• Affordability for the company.
The compensation that is effectively paid depends
on the performance of the Group and of the
individual members of the EC. Exhibit 9 illustrates
Exhibit 8: Structure of EC compensation
Fixed compensation
Variable compensation
Base salary and benefits
Short-term
Long-term
Compensation
component
Purpose
Performance
measures
affecting amount/
allocation
Performance
measures
affecting payout
Performance
component 1 (P1) 50%
Performance
component 2 (P2) 50%
Compensates EC members for
the role. Based on the scope
of responsibilities, individual
experience and skillset
Rewards annual
performance
Encourages creation of long-term, sustainable
value for the shareholders
When considering changes in
base salary, the executive’s
performance during the preceding
year against individual objectives
is taken into account
n.a.
ABB’s performance
(preceding three years);
Individual performance
(preceding year)*
n.a.
n.a.
Group and individual
objectives in the
relevant financial year
Net income threshold
in the financial year
prior to vesting*
Cumulative EPS target
over the 3-year vesting
period
Payment
Cash and benefits in kind
Cash
Shares (70%) and cash (30%)
Beneficiaries can elect to receive 100% in shares
* Changes are foreseen for 2017 grants, please refer to section “Outlook: changes to compensation system in 2017”.
The main components of EC compensation are directly linked to performance.
Exhibit 9: Compensation components under various scenarios
Minimum Target Maximum
100%
100%
100%
l
e
b
a
i
r
a
v
m
r
e
t
-
t
r
o
h
s
d
n
a
d
e
x
i
F
m
r
e
t
-
g
n
o
L
n
o
i
t
a
s
n
e
p
m
o
c
n
o
i
t
a
s
n
e
p
m
o
c
e
b
a
i
r
a
v
l
Base salary
and benefits
Short-term
variable
compensa-
tion payout
0%
150%
100%
100%
87.5%
P1. 37.5%
P1. 50%
112.5%
P1. 62.5%
P2. 50%
P2. 50%
P2. 50%
Conditional
grant
allocation*
Base salary and benefits are generally stable.
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.
The reference grant size of half of the LTIP
(performance component 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.
*Note: the grant is conditional. At vesting, the payout can vary from zero to 150% of the grant depending on how well the performance criteria
of the LTIP are met
150%
100%
There will be no payout if performance is below the
threshold in both the P1 and P2 components. The
maximum payout is 100% for P1 and 200% for P2.
As the two components are equally weighted, the
maximum total payout for the LTIP is 150% of the
conditional grant allocation.
Payout
of the LTIP
0%
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
68
the relative proportions of the components of EC
compensation under the scenarios of minimum
performance, target (expected) performance and
maximum performance.
Fixed compensation – annual base salary
and benefits
The fixed compensation of EC members includes
the fixed annual base salary and benefits.
Benefits consist mainly of retirement, insurance
and healthcare plans that are designed to provide
a reasonable level of income for the employees
and their dependents in case of retirement,
disability or death. Benefits plans vary in line with
the local competitive and legal environment and
are, at a minimum, in accordance with the legal
requirements of the respective country.
EC members are also provided with certain fringe
benefits such as a company car according to
competitive local market practice. Tax equalization
is provided for EC members resident outside
Switzerland to the extent that they are not able
to claim a tax credit in their country of residence
for income taxes they paid in Switzerland. The
monetary value of these benefits is disclosed in
Exhibits 21 and 22.
Short-term variable compensation
The short-term variable compensation is designed
to reward EC members for the Group’s results and
their individual performance over a time horizon of
one year. It allows the EC members to participate
in the company’s success while being rewarded for
their individual contributions.
Group objectives are aligned with the strategic tar-
gets of ABB’s Next Level Strategy that have been
communicated to shareholders and have a weight-
ing of 80 percent for the CEO and 65 percent for
the other EC members. For 2016, the Group objec-
tives included revenues, operational EBITA margin,
operational net income, operating cash flow, cost
savings and Net Promoter Score (NPS).
Individual objectives are set as part of the annual
performance management process and support
the implementation of the Next Level Strategy in
the respective area of responsibility of each EC
member. They include metrics that help the
management to assess whether the results are
achieved in a sustainable way in four different
categories: financial performance, operational
performance, strategic initiatives and leadership
performance. Individual objectives have a weight-
ing of 20 percent for the CEO and 35 percent for
other EC members (see Exhibit 10).
For each performance objective, a target is set
corresponding to the expected level of perfor-
mance that will generate a 100 percent payout.
In order to strengthen the company’s market
position and to continuously strive for superior
performance, stretch targets are determined
in line with the company’s ambitious financial
plan and with the Next Level Strategy. Further,
a minimum level of performance, below which
there is no payout (threshold) and a maximum
level of performance, above which the payout is
capped at 150 percent of target (cap), are also
defined. The payout percentages for achievements
between the threshold, the target and the cap are
determined by linear interpolations.
Fully achieving all the objectives (target perfor-
mance) results in a payout equivalent to 150 per-
cent of the annual base salary for the CEO and
100 percent of the annual base salary for other
EC members.
Long-term variable compensation
The long-term variable compensation for EC
members consists of an annual conditional share
grant under the Long Term Incentive Plan (LTIP),
which is aimed at driving long-term shareholder
value creation in a sustainable manner. It rewards
the achievement of predefined performance goals
over a three-year vesting period.
The LTIP is split in two performance components:
• a P1 component which is tied to ABB’s achieve-
ment of a threshold net income in the financial
year prior to the end of the vesting period, and
• a P2 component which is tied to the achieved
weighted cumulative earnings-per-share (EPS)
over the vesting period.
Exhibit 10: Short-term variable compensation objectives and weighting in 2016
Explanation
Group objectives
Six financial and non-financial parameters: revenues,
operational EBITA margin, operational net income, operating
cash flow, cost savings and Net Promoter Score
Individual objectives
(tailored to function and
area of responsibilities)
Include:
– Additional financial objectives
– Operational execution metrics
– Strategic goals
– Leadership objectives
(1) Changes are foreseen for 2017, please refer to section “Outlook: changes to compensation system in 2017”.
Weighting
CEO Other EC members(1)
80%
65%
20%
35%
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 The P1 and P2 components are equally weighted in
terms of the target fair value at grant.
Determination of grant size
The number of shares conditionally granted under
the LTIP is determined as follows:
• A reference value for the LTIP is first established
as a multiple of the annual base salary. In 2016,
the multiples were 200 percent for the CEO and
107 percent for the other EC members. As the
P1 and P2 components are equally weighted,
the reference value of these components for
the CEO and the other EC members for the 2016
LTIP were as follows:
P1 component
P2 component
CEO
EC
100%
53.5%
100%
53.5%
Total
200%
107%
• The reference value for the grant size of the P1
component for the CEO as an individual and the
other EC members as a pool may be increased
or decreased by the Board by up to 25 percent.
The increase or decrease is based on the
Board’s assessment of ABB’s performance over
the three financial years preceding the grant,
both in absolute terms and relative to a peer
group comprising Alstom, Eaton, Emerson, GE,
Honeywell, Legrand, Schneider and Siemens.
The allocation from the pool to each individual
EC member is determined by the Board
based on an assessment of the individual’s
performance.
• The reference value of the P2 component is not
subject to any adjustment.
• The number of shares conditionally granted un-
der P1 and P2 to each EC member is determined
by dividing the respective grant value by the
average closing prices of ABB shares over the 20
trading days following the Board’s decision to
launch an LTIP grant.
Determination of payout at vesting
To vest at the end of the three-year vesting period,
the following performance conditions must be met:
• For the P1 component, ABB has to achieve
the threshold net income level set by the Board
at the beginning of the vesting period. The
component will not vest if this threshold is not
achieved and will vest at 100 percent if this
threshold is met or exceeded. Therefore there
is either no payout or 100 percent payout.
• For the P2 component, the percentage of shares
that may vest (the payout percentage) is based
on ABB’s EPS performance against an EPS
objective set by the Board at the beginning of
the vesting period. This EPS objective is based
on an outside-in view, taking into account the
growth expectations, risk profile, investment
levels and profitability levels that are typical for
6969
the industry. This outside-in approach in setting
EPS objectives for the LTIP 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 the addition of the EPS in
the first financial year (weighted at 33 percent)
plus the EPS in the second financial year
(weighted at 67 percent) plus the EPS in the
third financial year (weighted at 100 percent).
This formula gives more weight to the EPS
achieved in the later years of the vesting period.
There is no payout if the lower EPS threshold is
not reached and the payout is capped at 200
percent if EPS performance exceeds the
pre-defined payout cap. The payout formula
is shown in Exhibit 11.
Exhibit 11: Payout formula for P2 (EPS performance)
Payout % of reference number of shares
under the P2 performance component
200%
100%
0% Lower
threshold
(no payout)
On-target
(100%
payout)
Cap
(200%
payout)
Weighted
cumulative
earnings
per share
The LTIP rewards participants for increasing EPS over a
three-year period. The payout of the P2 component is based
on ABB’s weighted cumulative EPS performance against
predefined objectives.
To further strengthen the alignment of EC mem-
bers’ interests with those of shareholders, both P1
and P2 components are settled in shares (70 per-
cent) and cash (30 percent), although participants
can elect to receive 100 percent in shares.
Key contractual provisions
Share ownership requirements
The Board aims to align EC members’ interests
with those of shareholders. To maintain focus on
the long-term success of the company, EC mem-
bers are required to build up a holding of ABB
shares that is equivalent to a multiple of their
annual base salary (see Exhibit 12).
Exhibit 12: Share ownership requirements for EC members
Chief Executive Officer
Other EC members
5 x annual base salary
4 x annual base salary
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 70
Only shares owned by an EC member and the mem-
ber’s spouse are included in the share ownership
calculation. Vested and unvested stock options are
not considered for this purpose.
The CC reviews the status of EC share ownership on
an annual basis. It also reviews the required share-
holding amounts annually, based on salary and ex-
pected share price developments. As the level of the
shareholding requirement is high relative to market
practice, the Board has determined that members
of the EC should generally aim to reach these multi-
ples within five years of their appointment.
Notice period, severance provisions
and non-competition clauses
Employment contracts for EC members include a
notice period of 12 months, during which they are
entitled to their base salary, benefits and short-
term variable compensation. In accordance with
Swiss law and ABB’s Articles of Incorporation, the
contracts for EC members do not allow for any
severance payment.
Non-compete agreements have been agreed with
EC members for a period of 12 months after their
employment. Compensation for such agreements,
if any, may not exceed the EC member’s last total
annual compensation.
Malus and clawback
Any long-term incentive compensation awarded
to members of the EC is subject to malus and
clawback rules if a plan participant has been
involved in any illegal activity. This means that
the Board of Directors may decide not to pay any
unpaid or unvested incentive compensation
(malus), or may seek to recover incentive compen-
sation that has been paid in the past (clawback).
Compensation awarded to
Board and EC in 2016
Compensation of the Board in 2016
Board members received a total compensation of
CHF 4.2 million in 2016 compared with CHF 3.68
million in 2015, as presented in Exhibit 19 on page 75.
The change in compensation is primarily due to
the increase in the number of Board members from
8 to 11.
At the 2015 AGM, the shareholders approved a
maximum aggregate compensation amount of
CHF 4.5 million for the Board for the term of office
2015-2016. The compensation paid for that period
amounts to CHF 3.73 million as presented in
Exhibit 20 on page 76 and is therefore within the
approved amount.
At the 2016 AGM, the shareholders approved a
maximum aggregate compensation amount of
CHF 4.7 million for the Board for the term of office
2016–2017. The compensation for that period
amounts to CHF 4.67 million as presented in
Exhibit 20 on page 76 and is therefore within the
approved amount.
Compensation of the EC in 2016
As described on page 65, the compensation of the
EC is aligned with the strategic targets of ABB's
Next Level strategy set as performance objectives.
The ratio of fixed to variable compensation com-
ponents in any given year depends on the per-
formance of the company and of the individuals
against these predefined performance objectives.
In 2016, as shown in Exhibit 13, the variable com-
pensation represented 67 percent of the CEO’s
compensation (previous year: 69 percent) and an
average of 53 percent for the other EC members
(previous year: 55 percent). This again illustrates
the significant emphasis placed on perfor-
mance-related compensation.
EC members received total compensation of
CHF 44.2 million in 2016 compared with
CHF 45.5 million in 2015, as presented in Exhibit 14.
The lower total compensation in 2016 is principal-
ly due to a reduction in the number of EC mem-
bers from 12 to 11, partially offset by an increase in
costs due to pension arrangements and an overlap
period between Pekka Tiitinen and Sami Atiya.
Pension benefits increased as a result of adjust-
ments that were decided in 2015 based on the
benchmarking analysis conducted by Towers
Watson. This review highlighted that the retire-
ment benefits of EC members were below the
median of 50 peer companies (part of Hay Group
General Pan-European Market). As a result, the
pension benefits of certain EC members were
increased during 2016.
Exhibit 13: Ratios of fixed and variable compensation compo-
nents of EC members in 2016
Fixed
Variable
CEO
33%
28% 39%
Other EC
members
Fixed
Variable
47%
25% 28%
Fixed compensation
Short-term variable compensation (actual payout)
Long-term variable compensation (fair value at
grant)
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
7171
Exhibit 14: Total compensation of EC members
(in CHF million)
Exhibit 15: Group-wide 2016 objectives, weighting
and performance for short-term variable compensation
Base salaries
Pension benefits
Other benefits
Total fixed compensation
Short-term variable compensation
Long-term variable compensation
Total variable compensation
Total compensation
2016
10.2
4.1
5.2
19.5
11.4
13.3
24.7
44.2
2015
10.5
3.5
5.3
19.3
11.8
14.4
26.2
45.5
For an overview of compensation by individual and
component, please refer to Exhibit 21 on page 76 and
Exhibit 22 on page 77.
At the 2015 AGM, the shareholders approved
a maximum aggregate compensation amount
of CHF 52 million for the EC for the year 2016.
The EC compensation for 2016 amounts to
CHF 44.2 million and is therefore within the
approved amount.
Short-term variable compensation
2016 has been a strong year for ABB as highlighted
in Exhibit 15. The company exceeded the Group-
wide objectives for cost savings and customer
satisfaction (as measured by the use of the Net
Promoter Score). On the other objectives (reve-
nues, operational EBITA margin, operational net
income and operating cash flow), the Group’s per-
formance, while not achieving the set targets, was
considerably above threshold. This resulted in an
overall achievement of 101.8 percent for the Group
component of the short-term variable compensa-
tion (previous year: 101.3 percent).
For 2016, there is an 11 percentage point difference
between the highest and lowest payout of the
short-term variable compensation of the EC mem-
bers (previous year: 16 percentage points). This re-
flects the performance of each EC member against
their individual objectives.
Long-term variable compensation
In 2016, the estimated value of the share-based
grants to EC members under the LTIP was
CHF 13.3 million compared with CHF 14.4 million
in 2015. This difference was mainly due to the
decrease in the number of EC members from
12 to 11.
To determine the size of the P1 component granted
in 2016, the Board assessed ABB’s 2013 – 2015 per-
formance based on: revenue growth, cash return on
invested capital, operational EBITDA margin, share
price development, share price to earnings ratio,
NPS development, integrity and safety performance.
This resulted in an aggregate increase of 3 percent
in the reference grant size of the P1 component for
Objective(1)
Revenues
Operational EBITA margin(2)
Operational net income(3)
Operating cash flow(4)
Cost savings
Net Promoter Score(5)
Weighting
Performance
20%
15%
10%
30%
15%
10%
On or above target
Above threshold and below target
Below threshold
(1) The financial objectives exclude the impact of currency fluctuation,
major acquisitions and divestments, and impact of discontinued
operations where appropriate.
(2) Operational EBITA margin is Operational EBITA (as defined in Note
23 to the Consolidated Financial Statements) as a percentage of
Operational revenues, which is total revenues adjusted for foreign
exchange/commodity timing differences in total revenues.
(3) Operational net income is calculated as Net income attributable
to ABB adjusted for the after-tax effect of acquisition-related
amortization, restructuring and restructuring-related expenses,
non-operational pension cost, changes in pre-acquisition estimates,
gains and losses from sale of businesses, acquisition-related
expenses and certain non-operational items, foreign exchange/
commodity timing differences in income from operations.
(4) Operating cash flow is defined as the net cash provided by
operating activities, reversing the cash impact of interest, taxes,
restructuring- related activities and one-time pension contributions.
(5) 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 2016, ABB had a target
for countries and business to improve their NPS compared to the
previous year.
EC members as a pool. This compares to the 6 per-
cent increase in 2015 versus 2014.
The payout for the performance component of the
2013 LTIP that vested in 2016 was 43 percent (previ-
ous year: 51 percent for the 2012 LTIP). The payout
was based on the EPS achieved during the plan’s
three-year vesting period.
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 em-
ployees around the world. Seven members of the
EC participated in the 13th annual launch of the plan
in 2016. EC members who participated will, upon
vesting, each be entitled to acquire up to 500 ABB
shares at CHF 20.12 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 arrange-
ments” to ABB’s Consolidated Financial State-
ments contained in the Financial review of ABB
Group section of this Annual Report.
In 2016, ABB did not pay any fees or compensation
to the members of the Board or the EC for ser-
vices rendered to ABB other than those disclosed
in this report. Except as disclosed in the sections
“Business relationships between ABB and its Board
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
72
members” and “Business relations between ABB
and its EC members” of the Corporate governance
report, ABB did not pay any additional fees or com-
pensation in 2016 to persons closely linked to a
member of the Board or a member of the EC for
services rendered to ABB.
Compensation of former Board and EC members
In 2016, no payment was made to any former
Board member. One former EC member received
contractual compensation for the period after
leaving the EC, as shown in Exhibit 21 on page 76.
Shareholdings of Board
and EC members as of
December 31, 2016
The members of the Board and EC owned less than
1 percent of ABB’s total shares outstanding as of
December 31, 2016.
Exhibit 25 on page 79 shows the number of ABB
shares held by each Board member as of Decem-
ber 31, 2016 and 2015. Except as described in this
exhibit, no member of the Board and no person
closely linked to a member of the Board held any
shares of ABB or options in ABB shares.
As of December 31, 2016, members of the EC held
ABB shares, 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 Exhibit
26 on page 80. Their holdings as of December 31,
2015, are shown in Exhibit 27 on page 81.
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 they held at ABB. For
a more detailed description of MIP, please refer to
“Note 18 Share-based payment arrangements” to
ABB’s Consolidated Financial Statements con-
tained in the Financial review of ABB Group section
of this Annual Report.
Furthermore, as of December 31, 2016, members of
the EC held conditionally granted ABB shares un-
der the performance component of the LTIP 2014,
which at the time of vesting will be settled in cash,
as shown in Exhibit 28 on page 81. Their equiva-
lent holdings as of December 31, 2015, are shown in
Exhibit 29 on page 82.
of the EC held any shares of ABB or options on ABB
shares as of December 31, 2016 and 2015.
Outlook: changes to
compensation system for 2017
In reviewing the EC compensation system and
taking into account the feedback received by
shareholders and other stakeholders, the Board
decided to make a number of changes that will be
implemented for 2017.
The successful implementation of Stage 3 of
the Next Level Strategy will depend to a large
extent on the leadership capabilities of our
executives. Driving the culture of ownership and
entrepreneurship throughout the organization
is critical, and to support this goal the Board has
decided to strengthen the link between individual
performance and variable compensation. A
stronger emphasis will be put on the individual
performance in the short-term variable compen-
sation as of 2017, while the LTIP will continue to
depend fully on Group performance. The combina-
tion of Group objectives in the LTIP and of
individual and Group objectives in the short-term
variable compensation provides a balance
designed to generate and reward optimal perfor-
mance of both the Group and the individual
EC members.
Short-term variable compensation
The short-term variable compensation will reward
Group performance (between 35 and 50 percent
weight) and individual performance (between 50
and 65 percent weight) as described in Exhibit 16.
The individual performance includes regional
objectives for the Region Presidents, divisional ob-
jectives for the Division Presidents and functional
objectives for the Corporate Officers, i.e. the CFO,
CHRO and General Counsel.
Exhibit 16: Weight of Group and individual objectives
for EC members
CEO
(no change)
Division
and region
presidents
Corporate Officers
(CFO, CHRO,
General Counsel)
Group
objectives
80%
35%
50%
Individual
objectives
20%
65% (divisional/
regional and
personal
objectives)
50% (functional
and personal
objectives)
Except as described in Exhibits 26 – 29, no member
of the EC and no person closely linked to a member
The other parameters of the short-term variable
compensation, such as the target setting and the
maximum payout factor, remain unchanged.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 7 37 3
half on the achievement of the net income target
measured over the three-year vesting period.
Votes on compensation
at the 2017 AGM
As illustrated in Exhibit 17, the Board’s proposals to
shareholders at the 2017 AGM will relate to maxi-
mum aggregate Board compensation for the 2017-
2018 term of office and maximum aggregate EC
compensation for the calendar year 2018. There will
also be a non-binding vote on the 2016 Compensa-
tion report.
Long-term variable compensation
The LTIP will continue to be built around two per-
formance components. While P2 (cumulated EPS)
remains unchanged, P1 will be modified as follows:
• The net income threshold will be replaced by
a payout curve in order to remove the binary
character of the payout. A net income target will
be determined, corresponding to a 100 percent
payout, as well as a threshold amount below
which there is no payout, and an amount above
which the payout is capped at 150 percent.
Achievement levels between the threshold, the
target and the cap will be calculated by linear
interpolations. Net income performance will be
measured as an average of each year’s perfor-
mance over the three-year vesting period.
• To further reinforce the forward looking
performance nature of the above modification,
the Board will no longer conduct an assessment
of ABB’s past performance (over the three
financial years preceding the grant) in order to
determine an adjustment to the grant size pool.
The Board, however, based on the recommenda-
tions of the CEO for the EC members and its
own assessment of the CEO, may still vary the
grant size of individual EC members to reflect
their individual performance and contributions
to the company.
In summary, half of the fair value at grant of the LTIP
will be based on the achievement of the cumulative
EPS target over the three-year vesting period and
Exhibit 17: Shareholders will have three separate votes on compensation at the 2017 AGM
2016
2017
2018
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Binding vote on
maximum aggregate
Board compensation in
2017− 2018 term of office
Binding vote on
maximum aggregate
EC compensation
for 2018
Non-binding vote on
2016 Compensation
report
April AGM
April AGM
April AGM
Compensation period
Date of vote
At the 2017 AGM there will be separate binding votes on maximum aggregate Board and EC compensation, and a non-binding
vote on the 2016 Compensation report.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
74
Exhibit 18: Overview of key factors affecting the determination of maximum aggregate EC compensation
Aggregate EC compensation
in CHF (millions)
2016
44
43
52
2017
50
2018(1)
xx
Assumptions
Actual
Target
Maximum
(approved at
2015 AGM)
Maximum
(approved at
2016 AGM)
Maximum
(to be requested
at 2017 AGM)
Short-term variable compensation
payout percentage(2)
Adjustment of LTIP performance
component 1 (P1)(2)
Number of EC members
100%
150%
0%
11
+25%
12
150%
+25%
11
150%
+25%
11
(1) Numbers will be provided in the AGM invitation.
(2) For full description, see section “Executive Committee compensation” and section “Outlook: changes to compensation system for 2017”.
The Board’s proposal for maximum aggregate EC compensation for 2018 will incorporate assumptions for a normal increase.
In determining the proposed maximum aggregate
EC compensation, the Board takes into consider-
ation the criteria mentioned in Exhibit 18. Given
the variable nature of some of the compensation
components, the proposed maximum aggregate
EC compensation will almost always be higher
than the actual payout, as it must cover the
potential maximum value of each component
of compensation.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
7575
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Compensation and share ownership tables
Exhibit 19: Board compensation in 2016 and 2015 (audited)
Paid in 2016
Paid in 2015
November
Board term
2016 – 2017
)
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Name
Peter Voser,
Chairman 2015 – 2017(4)
Hubertus
von Grünberg,
Chairman 2014 – 2015(5)
CHF
CHF
CHF
CHF
CHF
CHF
— 25,960
— 30,618 1,200,000
— 32,559
—
— 600,000
—
—
—
—
—
—
—
—
18,686
600,000
Jacob Wallenberg(6)
112,500
3,915
112,500
4,616
450,000
112,500
4,911
82,500
3,040
390,000
Roger Agnelli(7)
—
— 80,834
2,804
161,667
82,500
3,333
82,500
2,816
330,000
Matti Alahuhta(8)
80,000
2,784
90,000
3,693
340,000
90,000
3,929
80,000
2,947
340,000
David Constable(9)
80,000
2,784
80,000
3,282
320,000
80,000
3,229
Frederico Curado(10)
80,000
Robyn Denholm(11)
82,500
2,573
2,871
—
—
— 160,000
—
165,000
—
—
—
—
—
—
—
— 160,000
—
—
—
—
Louis R. Hughes(12)
100,000
3,480 100,000
4,103
400,000 100,000
4,365 100,000
3,455
400,000
David Meline(13)
Satish Pai(14)
82,500
82,500
2,871
2,871
—
—
—
—
165,000
165,000
—
—
—
—
—
—
—
—
—
—
Michel de Rosen(15)
87,500
3,045
87,500
3,590
350,000
87,500
3,820
87,500
3,224
350,000
Michael Treschow(16)
—
—
—
—
—
—
— 95,000
3,336
190,000
Ying Yeh(17)
80,000
2,616
81,666
3,145
323,333
80,000
3,281
80,000
2,765
320,000
Total
867,500
55,770 632,500
55,851 4,200,000 632,500
59,427 607,500
40,269 3,680,000
(1) Represents gross amounts paid, prior to deductions for social security, withholding tax etc.
(2) Number of shares per Board member is calculated based on net amount due after deductions for social security, withholding tax etc.
(3) In addition to the Board remuneration stated in the above table, the Company paid in 2015 and 2016 CHF 461,208 and CHF 103,006 respectively, in
related social security payments.
(4) Elected as new Board member and Chairman of the Board at the ABB Ltd 2015 AGM; Chairman of the Governance & Nomination Committee for the
2015 – 2016 and 2016 – 2017 board terms; elected to receive 100 percent of his gross compensation in the form of ABB shares.
(5) Chairman of ABB Ltd Board for the 2014 – 2015 board term; Member of the Governance & Nomination Committee for the 2014 – 2015 board term;
did not stand for re-election at the ABB Ltd 2015 AGM; elected to receive 100 percent of his gross compensation in the form of ABB shares for the
2014 – 2015 board term.
(6) Vice-Chairman of the ABB Ltd Board and member of the Governance & Nomination Committee for the 2015 – 2016 and 2016 – 2017 board terms;
elected to receive 50 percent of his gross compensation in the form of ABB shares.
(7) Member of the Finance, Audit & Compliance Committee; elected to receive 50 percent of his gross compensation in the form of ABB shares; died in
a tragic accident in March 2016.
(8) Member of the Governance & Nomination Committee for the 2015 – 2016 and 2016 – 2017 board terms; Member of the Finance, Audit & Compliance
Committee for the 2015 – 2016 board term; elected to receive 50 percent of his gross compensation in the form of ABB shares.
(9) Elected as new Board member at the ABB Ltd 2015 AGM; Member of the Compensation Committee for the 2015 – 2016 and 2016 – 2017 board terms;
elected to receive 50 percent of his gross compensation in the form of ABB shares.
(10) Elected as new Board member at the ABB Ltd 2016 AGM; Member of the Compensation Committee; elected to receive 50 percent of his gross
compensation in the form of ABB shares.
(11) Elected as new Board member at the ABB Ltd 2016 AGM; Member of the Finance, Audit & Compliance Committee; elected to receive 50 percent of
her gross compensation in the form of ABB shares.
(12) Chairman of the Finance, Audit & Compliance Committee; elected to receive 50 percent of his gross compensation in the form of ABB shares.
(13) Elected as new Board member at the ABB Ltd 2016 AGM; Member of the Finance, Audit & Compliance Committee; elected to receive 50 percent of
his gross compensation in the form of ABB shares.
(14) Elected as new Board member at the ABB Ltd 2016 AGM; Member of the Finance, Audit & Compliance Committee; elected to receive 50 percent
of his gross compensation in the form of ABB shares.
(15) Chairman of the Compensation Committee; elected to receive 50 percent of his gross compensation in the form of ABB shares.
(16) Chairman of the Governance & Nomination Committee and Member of the Compensation Committee until the ABB Ltd 2015 AGM; did not stand
for re-election at the ABB Ltd 2015 AGM; elected to receive 50 percent of his gross compensation in the form of ABB shares for the 2014 – 2015
board term.
(17) Member of the Compensation Committee; Member of the Finance, Audit & Compliance Committee for the last month of the 2015 – 2016 board
term; elected to receive 50 percent of her gross compensation in the form of ABB shares.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
76
Exhibit 20: Board compensation in the Board terms 2016 – 2017 and 2015 – 2016
Name
Specific Board Roles
Peter Voser
Chairman of the Board and Chairman of GNC
Jacob Wallenberg
Vice-Chairman of the Board and GNC member
Roger Agnelli(1)
Matti Alahuhta
David Constable
FACC member 2015 – 2016
GNC member 2016 – 2017; GNC and FACC member 2015 – 2016
CC member
Frederico Curado(2)
CC member 2016 – 2017
Robyn Denholm(2)
FACC member 2016 – 2017
Louis R. Hughes
David Meline(2)
Satish Pai(2)
Michel de Rosen
Ying Yeh(1)
Total
Chairman of FACC
FACC member 2016 – 2017
FACC member 2016 – 2017
Chairman of CC
CC member
Board term
2016 – 2017
Board term
2015 – 2016
CHF
CHF
1,200,000
1,200,000
450,000
—
320,000
320,000
320,000
330,000
450,000
330,000
360,000
320,000
—
—
400,000
400,000
330,000
330,000
350,000
320,000
—
—
350,000
320,000
4,670,000
3,730,000
(1) Final compensation paid for the 2015 – 2016 Board term varied slightly since Ying Yeh attended the final FACC meeting in place of Roger Agnelli.
(2) Joined the Board at the 2016 ABB Ltd AGM.
Key:
CC: Compensation Committee
FACC: Finance, Audit & Compliance Committee
GNC: Governance & Nomination Committee
Exhibit 21: EC compensation in 2016 (audited)
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CHF
Name
Ulrich Spiesshofer(6)
1,641,669
2,583,900
613,799
791,109
5,630,477
3,654,137
9,284,614
Eric Elzvik
850,007
827,050
274,835
332,831
2,284,723
843,920
3,128,643
Jean-Christophe Deslarzes(7)
911,677
971,520
261,986
572,775
2,717,958
1,169,063
3,887,021
Diane de Saint Victor(8)
1,000,001
1,062,000
295,325
300,410
715,540
342,359
613,772
2,657,736
2,357,713
992,853
997,526
3,650,589
3,355,239
686,042
837,507
387,122
852,672
Frank Duggan(9)
Greg Scheu(10)
Sami Atiya (EC member as of
June 14, 2016)(6)
Tarak Mehta(6)
Bernhard Jucker(6)
Claudio Facchin(6)
Peter Terwiesch
Pekka Tiitinen (EC member until
September 30, 2016)
Total Executive
Committee members
791,840
248,397
128,055
2,005,799
896,680
2,902,479
373,858
213,242
292,415
1,266,637
876,340
461,050
550,482
2,740,544
745,453
948,223
2,012,090
3,688,767
1,015,008
1,099,560
549,075
511,451
3,175,094
1,124,633
4,299,727
770,837
729,175
771,540
442,172
507,909
2,492,458
748,965
243,558
179,954
1,901,652
991,170
933,992
3,483,628
2,835,644
543,759
543,750
179,184
405,585
1,672,278
—
1,672,278
10,225,476
11,365,863 4,124,982
5,186,748
30,903,069
13,297,650
44,200,719
(1) Represents accrued short-term variable compensation for the year 2016 for all EC members, which will be paid in 2017, after the publication of
ABB’s financial results. Short-term variable compensation is linked to the objectives defined in each EC member’s scorecard. Upon full achieve-
ment of these objectives, the short-term variable compensation of the CEO corresponds to 150 percent of his base salary, while for each other
EC member it represents 100 percent of their respective base salary.
(2) Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items.
(3) Prepared on an accruals basis.
(4) On the day of vesting (June 6, 2019), the value of the share-based awards granted under the LTIP may vary from the above amounts due to changes
in ABB’s share price and the outcome of the performance parameters. 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 the Monte Carlo simulation model.
(5) In addition to the total compensation of current EC members, Veli-Matti Reinikkala received CHF 2,055,537 representing contractual obligations of ABB
for the period January – September 2016. Payments totaling CHF 11,535 were made in 2016 on behalf of certain other former EC members for tax advice.
(6) The increase in pension benefits is the result of a review of the EC’s pension arrangements during 2015.
(7) Other benefits of Jean-Christophe Deslarzes in 2016 went up primarily due to payment of social security premiums related to the vesting in
November 2016 of the first tranche of his one-time replacement share grant.
(8) Other benefits of Diane de Saint Victor in 2015 compared to 2016 were significantly higher because they included social security premiums related
to the vesting on December 31, 2015 of her one-time special share grant.
(9) Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The company purchased EUR with AED to meet this obligation.
(10) Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 1.02135 per
USD. Other benefits of Greg Scheu in 2015 were substantially higher compared to 2016, because they also contained social security and pension
premium payments related to 2014.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
Exhibit 22: EC compensation in 2015 (audited)
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CHF
Name
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CHF
Ulrich Spiesshofer(6)
1,600,004
2,544,000
408,448
780,735
5,333,187
3,765,554
9,098,741
Eric Elzvik
Jean-Christophe Deslarzes
850,007
866,669
856,800
995,280
Diane de Saint Victor
1,000,001
1,002,000
270,335
349,021
2,326,163
974,264
3,300,427
257,319
293,177
336,122
360,922
234,266
377,786
2,497,054
1,122,174
3,619,228
674,074
2,969,252
1,005,044
3,974,296
591,990
2,301,634
1,012,539
3,314,173
598,259
2,590,545
1,001,756
3,592,301
218,550
1,894,310
935,163
2,829,473
242,003
446,628
2,333,480
935,304
3,268,784
281,522
295,325
243,266
238,037
338,704
2,190,088
788,953
2,979,041
392,338
2,730,498
1,134,740
3,865,238
336,543
2,084,378
935,163
3,019,541
227,994
1,858,332
802,333
2,660,665
664,632
808,012
720,844
813,345
782,507
708,890
823,352
720,650
831,504
787,355
986,505
1,056,330
720,844
700,001
783,725
692,300
Frank Duggan(7)
Greg Scheu(8)
Pekka Tiitinen
Tarak Mehta
Veli-Matti Reinikkala
Bernhard Jucker
Claudio Facchin
Peter Terwiesch
Total Executive
Comittee members
10,513,371
11,802,186
3,460,742
5,332,622
31,108,921
14,412,987
45,521,908
(1) Represents accrued short-term variable compensation for the year 2015 for all EC members, which will be paid in 2016, after the publication of
ABB’s financial results. Short-term variable compensation is linked to predefined Group-wide and individual performance objectives defined in the
ABB 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.
(2) Other benefits may include payments related to social security, health insurance, children’s education, transportation, tax advice and certain other
items.
(3) Prepared on an accruals basis.
(4) On the day of vesting (June 5, 2018), the value of the share-based awards granted under the LTIP may vary from the above amounts due to changes
in ABB’s share price and the outcome of the performance parameters. 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 P2 of the
LTIP, the Monte Carlo simulation model.
(5) In addition to the total compensation of current EC members, payments totaling CHF 8,169 were made in 2015 on behalf of certain former
EC members for tax advice.
(6) The increase in pension benefits is the result of a review of the CEO’s pension arrangements during the second half of 2015.
(7) Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR. The company purchased EUR with AED to meet this obligation.
The variance in base salary between 2014 and 2015 primarily relates to exchange rate movements between EUR and AED.
(8) Greg Scheu received 100 percent of his base salary in USD. All USD amounts were converted into Swiss francs using a rate of CHF 0.9892 per USD.
The pension benefits in 2015 are higher than 2014 as they represent contributions made in 2015 for both 2015 and 2014. Other benefits include
CHF 269,000 of social security contributions in respect of 2014.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
78
Exhibit 23: LTIP grants in 2016 (audited)
Name
r
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b
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o
1
P
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1
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4
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1
(
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CHF
Ulrich Spiesshofer(5)
94,076
1,945,492
Eric Elzvik
Jean-Christophe Deslarzes(5)
Diane de Saint Victor(5)
Frank Duggan(5)
Greg Scheu
Sami Atiya (EC member
as of June 14, 2016)
Tarak Mehta(5)
Bernhard Jucker(5)
Claudio Facchin
Peter Terwiesch(5)
Total Executive Committee
members as of December 31, 2016
18,037
31,884
21,220
27,206
21,572
19,125
22,812
27,056
27,032
25,473
373,006
659,362
438,830
562,621
446,109
376,380
471,753
559,519
559,022
526,782
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2
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81,805
22,546
24,403
26,525
20,822
21,572
18,568
22,812
27,056
20,690
19,496
6
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4
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CHF
1,708,645
470,914
509,701
554,023
434,905
450,571
369,073
476,470
565,114
432,148
407,210
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1
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4
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3
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2
175,881
40,583
56,287
47,745
48,028
43,144
37,693
45,624
54,112
47,722
44,969
CHF
3,654,137
843,920
1,169,063
992,853
997,526
896,680
745,453
948,223
1,124,633
991,170
933,992
335,493
6,918,876
306,295
6,378,774
641,788
13,297,650
(1) Vesting date June 6, 2019.
(2) The estimated value of the shares of the P1 component represents the fair value of the ABB shares on the grant date of the award multiplied by the
respective number of reference shares.
(3) The reference number of shares of the performance component P2 are valued using the fair value of the ABB shares on the grant date and the
Monte Carlo simulation model.
(4) The LTIP foresees delivering 70 percent of the value of vested performance shares (both performance components P1 and P2), if any, in shares
and the remainder in cash. However, upon vesting participants have the possibility to elect to receive 100 percent of the vested award in shares.
The plan foresees a maximum payout of 200 percent of the number of reference shares granted under the P2 component, based on the weighted
cumulative EPS performance against predefined objectives.
(5) In addition to the above awards, seven members of the EC participated in the 13th launch of the ESAP in 2016, which will allow them to save over a
12-month period and, in November 2017, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be
entitled to acquire up to 500 ABB shares at an exercise price of CHF 20.12 per share.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
7979
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1,739,243
172,465
3,765,554
494,331
505,957
581,567
456,526
451,667
421,649
474,563
456,526
575,755
421,649
407,095
44,562
51,413
974,264
1,122,174
45,873
1,005,044
46,390
45,896
42,845
42,780
36,010
51,902
42,845
36,698
1,012,539
1,001,756
935,163
935,304
788,953
1,134,740
935,163
802,333
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4
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2
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1
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5
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CHF
2,026,311
479,933
616,217
423,477
556,013
550,089
513,514
460,741
332,427
558,985
513,514
395,238
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94,072
22,281
28,608
19,660
25,813
25,538
23,840
21,390
15,433
25,951
23,840
18,349
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b
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2
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78,393
22,281
22,805
26,213
20,577
20,358
19,005
21,390
20,577
25,951
19,005
18,349
Exhibit 24: LTIP grants in 2015 (audited)
Name
Ulrich Spiesshofer(5)
Eric Elzvik(5)
Jean-Christophe Deslarzes(5)
Diane de Saint Victor(5)
Frank Duggan
Greg Scheu
Pekka Tiitinen(5)
Tarak Mehta(5)
Veli-Matti Reinikkala
Bernhard Jucker(5)
Claudio Facchin
Peter Terwiesch
Total Executive Committee
members as of December 31, 2015
344,775
7,426,459
314,904
6,986,528
659,679
14,412,987
(1) Vesting date June 5, 2018.
(2) The estimated value of the shares of the P1 component represents the market value of the ABB share on the grant date of the award multiplied by
the respective number of reference shares.
(3) The shares of the performance component P2 are valued using the market value of the ABB share on the grant date of the award and the Monte
Carlo simulation model.
(4) The LTIP foresees delivering 30 percent of the value of vested shares (both performance components P1 and P2), if any, in cash. However, upon
vesting participants have the possibility to elect to receive 100 percent of the vested award in shares. The plan foresees a maximum payout of
200 percent of the number of reference shares granted under the P2 component, based on the weighted cumulative EPS performance against
predefined objectives.
(5) In addition to the above awards, seven members of the EC participated in the 12th launch of the ESAP in 2015, which will allow them to save over a
12month period and, in November 2016, use their savings to acquire ABB shares under the ESAP. Each EC member who participated in ESAP will be
entitled to acquire up to 530 ABB shares at an exercise price of CHF 18.78 per share.
Exhibit 25: Board ownership of ABB shares (audited)
Total number of shares held
Name
Peter Voser(1)
Jacob Wallenberg(2)
Roger Agnelli
Matti Alahuhta
David Constable
Frederico Curado(3)
Robyn Denholm(3)
Louis R. Hughes
David Meline(3), (4)
Satish Pai(3)
Michel de Rosen
Ying Yeh
Total
December 31, 2016
December 31, 2015
102,137
202,190
—
31,265
9,295
2,573
2,871
53,145
6,021
2,871
79,443
30,518
522,329
45,559
193,659
176,820
24,788
3,229
—
—
80,562
—
—
146,646
25,016
696,279
(1) Includes 2,000 shares held by spouse.
(2) Does not include shares beneficially owned by Investor AB, of which Mr. Wallenberg is Chairman.
(3) First elected to the Board at the ABB Ltd AGM in 2016.
(4) Includes 3,150 shares held by spouse.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
80
Exhibit 26: EC ownership of ABB shares and options as of December 31, 2016 (audited)
Vested at
December 31, 2016
l
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a
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b
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6
1
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1
3
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344,454
71,369
74,767
507,824
158,528
101,250
—
134,449
293,771
63,795
46,312
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408,875
—
—
—
221,375
—
—
—
—
—
Unvested at December 31, 2016
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2
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2
(
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2
P
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P
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3
(
r
e
y
o
p
m
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r
e
m
r
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f
(vesting 2017) (vesting 2018)
(vesting 2019) (vesting 2018)
93,846
30,549
30,549
35,940
27,548
26,159
—
34,677
40,750
31,083
16,457
172,465
44,562
51,413
45,873
46,390
45,896
—
42,780
51,902
42,845
36,698
175,881
40,583
56,287
47,745
48,028
43,144
37,693
45,624
54,112
47,722
44,969
—
—
65,819
—
—
—
—
—
—
—
—
1,796,519
630,250
367,558
580,824
641,788
65,819
Name
Ulrich Spiesshofer
Eric Elzvik
Jean-Christophe Deslarzes
Diane de Saint Victor
Frank Duggan
Greg Scheu
Sami Atiya (EC member
as of June 14, 2016)
Tarak Mehta
Bernhard Jucker
Claudio Facchin
Peter Terwiesch
Total Executive
Committee members
as of December 31, 2016
(1) Options may be sold or exercised/converted into shares at the ratio of 5 options for 1 share.
(2) Upon vesting, the LTIP foresees delivering 70 percent of the value of the vested shares under the retention component (LTIP 2014) and performance
components (P1 and P2 of LTIP 2015 and 2016) in shares and the remainder in cash. However, participants have the possibility to elect to receive
100 percent of the vested award in shares.
(3) The Replacement share grant foresees delivering 30 percent of the value of the vested shares in cash. However, the participant has the possibility
to elect to receive 100 percent of the vested award in shares.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
8181
Exhibit 27: EC ownership of ABB shares and options as of December 31, 2015 (audited)
Vested at
December 31, 2015
Unvested at December 31, 2015
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s
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a
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5
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1
3
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289,048
23,768
—
475,446
132,896
83,901
21,000
115,977
202,175
267,848
41,501
30,393
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(vesting 2016)
(vesting 2017)
(vesting 2018)
78,395
27,071
27,071
31,848
25,632
24,830
22,294
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9,810
37,033
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15,919
93,846
30,549
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40,750
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1,683,953
1,402,875
347,829
420,390
659,679
144,802
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
Peter Terwiesch
Total Executive
Committee members
as of December 31, 2015
(1) Options may be sold or exercised/converted into shares at the ratio of 5 options for 1 share.
(2) Upon vesting, the LTIP foresees delivering 30 percent of the value of the vested shares under the retention component (LTIP 2013 and 2014) and
performance components (P1 and P2 of LTIP 2015) in cash. However, participants have the possibility to elect to receive 100 percent of the vested
award in shares.
(3) The Replacement share grant foresees delivering 30 percent of the value of the vested shares in cash. However, the participant has the possibility
to elect to receive 100 percent of the vested award in shares.
Exhibit 28: EC ownership of WARs and conditionally granted ABB shares (all cash-settled) as of December 31, 2016 (audited)
Name
Ulrich Spiesshofer
Eric Elzvik
Jean-Christophe Deslarzes
Diane de Saint Victor
Frank Duggan
Greg Scheu
Sami Atiya (EC member as of June 14, 2016)
Tarak Mehta
Bernhard Jucker
Claudio Facchin
Peter Terwiesch
Total Executive Committee
members as of December 31, 2016
Vested at December 31, 2016
Unvested at December 31, 2016
Number of fully vested
WARs held under the MIP
Reference number of shares under the
performance component of the 2014
launch of the LTIP
(vesting 2017)
—
—
—
—
—
—
—
—
—
—
—
—
51,489
17,147
17,147
20,173
15,463
14,684
—
16,139
19,548
14,122
10,292
196,204
03 COMPENSATION REPORTABB ANNUAL REPORT 2016
82
Exhibit 29: EC ownership of WARs and conditionally granted ABB shares (all cash-settled) as of December 31, 2015 (audited)
Vested at
December 31, 2015
Name
Number of fully vested WARs
held under the MIP
Unvested at December 31, 2015
Reference number
of shares under
the performance
component of the 2013
launch of the LTIP
Reference number
of shares under
the performance
component of the 2014
launch of the LTIP
(vesting 2016)
(vesting 2017)
Ulrich Spiesshofer
Eric Elzvik
Jeane-Christophe Deslarzes
Diane de Saint Victor
Frank Duggan
Greg Scheu
Pekka Tiitinen
Tarak Mehta
Veli-Matti Reinikkalla
Bernhard Jucker
Claudio Facchin
Peter Terwiesch
Total Executive Committee
members as of December 31, 2015
—
—
—
—
—
—
—
—
—
—
287,500
—
287,500
50,024
16,659
16,659
19,599
15,023
14,553
13,720
15,023
15,091
18,992
13,720
10,007
51,489
17,147
17,147
20,173
15,463
14,684
14,122
16,139
15,534
19,548
14,122
10,292
219,070
225,860
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 8383
—
Report of the statutory auditor
on the Compensation report
Opinion
In our opinion, the Compensation report for the
year ended December 31, 2016 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 10, 2017
Robin Errico
Licensed audit expert
To the General Meeting
of ABB Ltd, Zurich
We have audited the accompanying Compensation
report of ABB Ltd for the year ended December 31,
2016. The audit was limited to the information
according to articles 14 – 16 of the Ordinance against
Excessive Compensation in Stock Exchange
Listed Companies (Ordinance) contained in the
tables labeled “audited” on pages 75 to 82 of
the Compensation report.
Board of Directors’ responsibility
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. The Board of Directors is
also responsible for designing the compensation
system and defining individual compensation
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
reasonableness of the methods applied to value
components of compensation, as well as assessing
the overall presentation of the Compensation report.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for
our opinion.
03 COMPENSATION REPORTABB ANNUAL REPORT 2016 —
04
Financial Review of ABB Group
088– 134
2016 Operating and financial review and prospects
135 – 205
Consolidated Financial Statements of ABB Group
—H A N S O N , M A R K E T I N G & S A L E S , S H A N G H A I , C H I N A
We have to look ahead and
do things differently.
Because one thing is clear:
Moving our product sales
into the digital world is a
radical step in our sector.
88
—
2016
Operating and
financial review
and prospects
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 8989
—
About ABB
ABB is a pioneering technology leader in electrifi-
cation products, robotics and motion, industrial
automation and power grids serving customers in
utilities, industry and transport & infrastructure
globally. For more than four decades, ABB has been
part of the industrial digitalization. With more than
70 million devices connected through its installed
base of more than 70,000 control systems across
all customer segments it serves, ABB is well-
positioned to benefit from the Energy and Fourth
Industrial Revolution. With a heritage of more
than 130 years, ABB operates in more than 100
countries with about 132,000 employees.
—
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 February 1999, the ABB
Group announced a group reconfiguration de-
signed to establish a single parent holding company
and a single class of shares. ABB Ltd was incorpo-
rated 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).
—
Organizational structure
Our business is international in scope and we
generate revenues in numerous currencies. We are
headquartered in Zurich, Switzerland.
our consolidated revenues (i) by operating division
and (ii) derived from each geographic region in
which we operate, see “Analysis of Results of
Operations – Revenues”.
We manage our business based on a divisional
structure, which until December 31, 2016, com-
prised of four divisions: Electrification Products,
Discrete Automation and Motion, Process
Automation and Power Grids. For a breakdown of
Effective January 1, 2017, ABB operates in a
streamlined set-up of four divisions: Electrification
Products, Robotics and Motion, Industrial
Automation and Power Grids. The divisions will be
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 90
empowered as entrepreneurial units within ABB,
reflected in an enhancement of their performance
and compensation model focusing on individual
accountability and responsibility. The divisions
benefit from sales collaboration orchestrated by
regions and countries as well as from the group-
wide digital offering, ABB’s low-cost centralized
administrative structure, common supply chain
management and corporate research centers. ABB
intends to continue to strengthen its divisions
through active portfolio management. This
includes pursuing strategic additions, transform-
ing business models and pruning non-core
businesses. Electrification Products strives to be
the partner of choice for electrification across
numerous consumption points, Robotics and
Motion strives to be the partner of choice for
robotics and intelligent motion solutions,
Industrial Automation strives to be the partner of
choice for industrial automation and Power Grids
strives to be the partner of choice for stronger,
smarter and greener grids. See “Business Divisions
– Division realignment” for additional information
related to the realignment of certain business
divisions.
Except where the context otherwise requires or
where otherwise indicated, the information below
is presented to reflect our business prior to this
realignment to be consistent with the basis used in
preparing our Consolidated Financial Statements.
We operate in approximately 100 countries across
three regions: Europe, the Americas, and Asia,
Middle East and Africa (AMEA). A breakdown of our
employees by geographic region is as follows:
Europe
The Americas
Asia, Middle East and
Africa
December 31,
2016
2015
2014
61,400
29,000
61,600
63,000
30,900
32,200
41,900
43,300
45,200
Total
132,300
135,800
140,400
The proportion of our employees that are repre-
sented by labor unions or are the subject of
collective bargaining agreements varies based
on the labor practices of each country in which
we operate.
—
Business Divisions
Electrification Products Division
Overview
The Electrification Products division provides
solutions across the full electrical value chain
from the substation to the point of consumption.
The innovations from this business enable
a safer and more reliable electrical flow, with
a full range of low- and medium-voltage products
and solutions for intelligent protection and
connection as well as pre-engineered packaged
solutions and services tailored to customers’
needs. The portfolio – within increasingly digital
and connected solutions – includes modular
substation packages, distribution automation
products, switchgear, circuit breakers, measuring
and sensing devices, control products, wiring
accessories, and enclosures and cabling systems,
including KNX systems (global standard
for home and building control) designed to
integrate and automate a building’s lighting,
heating and ventilation, and security and data
communication networks.
Most of the division’s revenue is derived from
sales through distributors, wholesalers, original
equipment manufacturers (OEMs), system
integrators, utilities and panel builders, with
some direct sales to end-users, utilities and other
ABB divisions.
The Electrification Products division had approxi-
mately 40,600 employees as of December 31, 2016,
and generated $9.3 billion of revenues in 2016.
Customers
The Electrification Products division serves
a wide range of customers who are connecting,
protecting and controlling electricity from
a number of industry segments including buildings,
data centers, rail, wind and solar, food and
beverage, marine and oil and gas.
Products and Services
The businesses of the Electrification Products
division are more fully described below.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 9191
The Protection and Connection business offers
products that protect, control and connect
people, plants and systems. ABB offers solutions
to restore power rapidly in case of a fault and
helps provide optimum protection for people
and electrical installations. The product offering
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,
switchgear systems for short circuit and overload
protection as well as cabling and connection
components. In addition, the business offers
terminal blocks, a range of contactors, soft
starters, starters, proximity sensors, safety
products for industrial protection, limit switches
and manual motor starters, along with electronic
relays and overload relays.
The Building Products business provides smart
home and intelligent building control systems, also
known as KNX protocol, to optimize efficiency,
safety and comfort through the automated
management of lighting, shutters and security. In
addition, the business supplies conventional wiring
accessories, industrial plugs and sockets, and
enclosures ideal for single family homes, multiple
dwellings, commercial buildings, infrastructure and
industrial applications.
The Installation Products business offers products
for low-voltage wire and cable management,
making the task of fastening, protecting, insulating
and connecting wires easier and quicker for
industrial applications, construction, communica-
tions, utility and OEM professionals, as well
as do-it-yourself specialists. The business offers
emergency lighting and lighting for explosive
environments, as well as lightning protection and
earth grounding apparatus.
The Medium Voltage Products business helps
utility, industry and transport & infrastructure
customers to improve power quality and control,
reduce outage time and enhance operational
reliability and efficiency. The business offers
products and services that largely serve the power
distribution sector, often providing the link
between high-voltage transmission systems and
low-voltage users. Its comprehensive 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 secondary distribution,
as well as a range of air- and gas-insulated
switchgear. It also produces indoor and outdoor
modular systems and other solutions to facilitate
efficient and reliable power distribution.
The Electrification Solutions business offers systems
solutions to customers across low- and medium-
voltage applications, integrating the entire offering
from the division into complete solutions for
customers, adding value through design, engineering,
project management and service.
In addition, the service offerings of the
Electrification Products division span the entire
value chain, from the moment a customer makes
the first inquiry to disposal and recycling of the
product. Throughout the value chain, ABB provides
training, technical support and customized
contracts. All of this is supported by an extensive
global sales and service network.
Sales and Marketing
Sales are primarily made through indirect sales
channels such as distributors and wholesalers to
end customers including installers and system
integrators. Direct customers include utilities, panel
builders and machine builders, as well as other ABB
divisions. The proportion of direct sales compared
to channel partner sales varies among the different
industries, product technologies and geographic
markets. The business is focused on creating
demand to support its channel sales, with a range
of promotional activities and support services
including configuration and other digital solutions.
Competition
The Electrification Products division’s principal
competitors vary by product line, but they include
Eaton Corporation, Legrand, Schneider, Siemens,
Hubbell, Leviton, Rittal and Chint Electrical.
Capital Expenditures
The Electrification Products division’s capital
expenditures for property, plant and equipment
totaled $200 million in 2016, compared to
$210 million and $248 million in 2015 and 2014,
respectively. Investments in 2016 were primarily
related to footprint changes, equipment replace-
ment and upgrades. Geographically, in 2016,
Europe represented 52 percent of the capital
expenditures, followed by the Americas (32 percent)
and AMEA (16 percent).
Discrete Automation and
Motion Division
Overview
The Discrete Automation and Motion division
provides products, solutions and related services
that increase industrial productivity and energy
efficiency. Our key products such as motors,
generators, drives, power electronics and robotics
provide power, motion and control for a wide
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 92
range of automation applications. The leading
position in wind generators and a growing
offering in solar complement the industrial focus,
leveraging joint technology, channels and opera-
tions platforms.
motors that monitors and provides vital motor
performance intelligence to help improve uptime,
extend motor lifetimes, and increase machine
performance and productivity. It connects motors
with the Internet of Things (IoT).
Revenues are generated both from direct sales to
end-users as well as from indirect sales through
distributors, machine builders, system integrators,
and panel builders.
The Discrete Automation and Motion division had
approximately 29,100 employees as of December 31,
2016, and generated $8.7 billion of revenues in 2016.
Products and Services
The businesses of the Discrete Automation and
Motion division are more fully described below.
The Robotics business offers robots, controllers,
software systems, as well as complete robot
automation solutions and a comprehensive range
of advanced services for automotive and Tier
One OEMs as well as for the general industry.
These improve flexibility, quality, productivity and
connectivity, as part of the factory of the future.
Robots are also used in activities or environments
which may be hazardous to employee health
and safety, such as repetitive or strenuous lifting,
dusty, hot or cold rooms, or painting booths.
In the automotive industry, robot products and
systems are used in 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,
and electronics. Typical robotic applications in
general industry include welding, material handling,
machine tending, painting, picking, packing,
palletizing and small parts assembly automation.
The Motors and Generators business supplies
a comprehensive range of electrical motors,
generators, and mechanical power transmission
products. The range of electrical motors includes
high efficiency motors that conform to leading
environmental and Minimum Energy Performance
Standards (MEPS). Efficiency is an important
selection criterion for customers, because electric
motors account for nearly two-thirds of the
electricity consumed by industrial plants. The
business unit manufactures synchronous motors
for the most demanding applications and a full
range of low- and high-voltage induction motors,
for both IEC (International Electrotechnical
Commission) and NEMA (National Electrical
Manufacturers Association) standards. The
business unit has recently launched a new condi-
tion monitoring solution for low voltage (LV)
The Drives and Controls business provides
low-voltage and medium-voltage drives and
systems for industrial, commercial and residential
applications. Drives provide speed, torque and
motion control for equipment such as fans,
pumps, compressors, conveyors, centrifuges,
mixers, hoists, cranes, extruders, printing
and textile machines. They are used in industries
such as building automation, marine, power,
transportation, food and beverage, metals, mining,
oil and gas.
The Power Conversion business produces exci-
tation and synchronizing systems that provide
stability for power stations and high power
rectifiers that convert alternating current (AC) to
direct current (DC) for high-current applications
such as electric arc furnaces and aluminum
smelters. It also manufactures solar inverters, wind
turbine converters, uninterruptible power supply
systems and converters for power protection, as
well as rail traction converters, DC wayside power
solutions and a range of solutions for charging of
electric vehicles.
The division also offers services that complement
its products, including design and project manage-
ment, 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 manufacturers, 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 equip-
ment manufacturers, discrete manufacturing
companies such as ‘3C’ (computer, communication
and consumer electronic), 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.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 Competition
The Discrete Automation and Motion division’s
principal competitors vary by product line but
include Fanuc Robotics, Kuka Robot Group, Rockwell
Automation, Schneider, Siemens, Yaskawa, SMA
and WEG Industries.
Capital Expenditures
The Discrete Automation and Motion division’s
capital expenditures for property, plant and
equipment totaled $128 million in 2016, compared
to $145 million and $192 million in 2015 and in 2014,
respectively. Principal investments in 2016 were
primarily related to equipment replacement and
upgrades. Geographically, in 2016, Europe repre-
sented 47 percent of the capital expenditures,
followed by the Americas (30 percent) and AMEA
(23 percent).
Process Automation Division
Overview
The Process Automation division offers customers
solutions that are designed to optimize the
productivity, energy efficiency and safety of their
industrial processes by combining the division’s
integrated control products, systems and service
offerings with deep domain and process expertise
of each end market. Solutions include turnkey
engineering, control systems, measurement
products, life cycle services, outsourced mainte-
nance and industry-specific products such as
electric propulsion for ships, Azipods, mine hoists,
turbochargers and pulp and paper quality control
equipment. The systems can link various processes
and information flows which allows customers to
manage their entire manufacturing and business
process based on real-time access to plant informa-
tion. Additionally, the systems allow customers to
increase production efficiency, optimize their
assets and reduce environmental waste. Some of
the products from the Discrete Automation and
Motion, Power Grids and Electrification Products
divisions are integrated into the process control
and electrification solutions offered by the Process
Automation division.
The Process Automation division offerings are
available as separately sold products or as part of
a total automation, electrification and/or instru-
mentation system. The division’s technologies are
sold primarily through direct sales forces as well as
third-party channels.
The division had approximately 23,600 employees
as of December 31, 2016, and generated revenues
of $6.6 billion in 2016.
9393
Customers
The Process Automation division’s end customers
are primarily companies in the oil and gas, minerals
and mining, metals, pulp and paper, chemicals and
pharmaceuticals, food and beverage, power
generation and marine industries. These custom-
ers are looking for complete automation, instru-
mentation, and electrification solutions that
deliver value mainly through lower capital costs,
increased plant availability, lower life cycle costs
and reduced project costs.
Products and Services
The businesses of the Process Automation division
are described in more detail below; solutions by
end market as well as the stand alone products and
solutions offerings.
The Oil, Gas and Chemicals business provides
solutions across the entire hydrocarbon value
chain, from exploration and production to supply,
transport and distribution, as well as refining,
chemicals and petrochemicals. ABB specializes in
mastering the control loop and transforming client
operations through actionable insights that
optimize performance in real time. From the well
head to the refinery, ABB technologies connect
people with data to optimize performance,
improve reliability, enhance efficiency and mini-
mize environmental impact from project start-up
throughout the entire plant life cycle.
Other Process Industry markets served include
mining, minerals processing, metals, pharmaceuti-
cals and pulp and paper as well as their associated
service industries. The business’ added value is
deep industry expertise coupled with the ability to
integrate both automation and electronics,
resulting in faster start-up times, increased plant
productivity and reduced overall capital and
operating costs for customers. For mining, metals
and cement industries, solutions include special-
ized products and services, as well as total
production systems. The business designs, plans,
engineers, supplies, erects and commissions
electric equipment, drives, motors and equipment
for automation and supervisory control within
a variety of areas including mineral handling,
mining operations, aluminum smelting, hot and
cold steel applications and cement production. In
the pharmaceuticals and fine chemicals areas, the
business offers applications to support manufac-
turing, packaging, quality control and compliance
with regulatory agencies. The offering for the pulp
and paper industries includes quality control
systems, control systems, drive systems, on-line
sensors, actuators and field instruments.
ABB serves the Power Generation market with
leading automation solutions for all types of power
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 94
generation such as coal, gas, combined-cycle,
waste-to-energy as well as renewable sources such
as hydro, solar, wind and biomass. With an offering
that includes instrumentation 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 applications such as pumping
stations and desalination plants.
ABB services the Marine and Ports business
through its leading solutions for specialty vessels,
container and bulk cargo handling. For the
shipping industry, ABB offers an extensive
portfolio of integrated marine systems and
solutions that improve the flexibility, reliability
and energy efficiency of vessels. By coupling
power, automation and marine software, proven
fuel-efficient technologies and services that
ensure maximum vessel uptime, ABB is in the
position to improve the profitability of a custom-
er’s business throughout the entire life cycle of
a fleet. ABB designs, engineers, builds, supplies
and commissions automation and electrical
systems for marine power generation, power
distribution and electric propulsion, as well as
turbochargers to improve efficiency. With ABB’s
integrated operations centers around the world
and marine software solutions, owners and
operators can run their fleets at lower fuel and
maintenance cost, while improving crew, passen-
ger, and cargo safety and overall productivity of
their operations. In addition, ABB delivers auto-
mation and electrical systems for container and
bulk cargo handling – from ship to gate. The
systems and services help terminal operators
meet the challenge of larger ships, taller cranes
and bigger volumes per call, and make terminal
operations safer, greener and more productive.
ABB offers an extensive portfolio of products and
software from stand-alone basic control to
integrated collaborative systems for complex or
critical processes. One of the solutions, System
800xA, provides a scalable extended automation
system for process and production control, safety,
and production monitoring. Freelance, another
solution, is a full-fledged, easy-to-use distributed
control system for small to medium size applica-
tions. The PLC Automation portfolio offers
a scalable range for small, middle and high-end
applications. Components for basic automation
solutions, process and safety controllers, field
interfaces, panels, process recorders and Human
Machine Interfaces are available through our
Compact Product Suite offering. The product
portfolio is complemented by Automation Sentinel,
a subscription-based life cycle management
program that provides services to maintain and
continually advance and enhance ABB control
systems (e.g. cyber security patches) and thus
allows it to manage a customer’s life cycle costs.
The Advanced Services offering provides individual
software-based services to continuously improve
automation and processes. ABB also offers
Manufacturing Execution Systems that create
agility and transparency for production processes
by synchronizing and orchestrating a flow across
individual automation islands. An interactive
software platform, Decathlon Software, combines
plant operations data from control systems,
enterprise resource planning (ERP) and other data
sources into actionable information for decision-
makers creates additional customer value. ABB
focuses strongly on the human factor and thus
offers operator interfaces from panels to holistic
control room solutions with ergonomic furniture
and control centers to drive productivity, quality
and safety to new levels.
The offerings of the Measurement and Analytics
business are designed to measure product proper-
ties, such as weight, thickness, color, brightness,
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 tempera-
ture. The business also offers a full line of instru-
mentation and analytical products to analyze,
measure and record industrial and power processes.
ABB manufactures and maintains turbochargers
for diesel and gas engines having power levels
ranging from 500 kilowatts to over 80 megawatts.
The business provides engine builders and
application operators with advanced turbocharging
solutions for efficient and flexible application
operations and in compliance with the most
stringent environmental requirements.
In addition, ABB offers a complete range of life
cycle services across all customer segments to help
customers optimize their assets. Demand for
process automation services is driven by custom-
ers seeking to increase productivity by improving
the performance of existing equipment.
Sales and Marketing
The Process Automation division primarily uses its
direct sales force as well as third-party channel
partners, such as distributors, system integrators
and OEMs. The majority of revenues are derived
through the division’s own direct sales channels.
Competition
The Process Automation division’s principal
competitors vary by industry or product line.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 9595
Competitors include Emerson, Honeywell, Metso
Automation, Rockwell Automation, Schneider,
Siemens, Voith, and Yokogawa Electric Corporation.
Capital Expenditures
The Process Automation division’s capital expendi-
tures for property, plant and equipment totaled
$51 million in 2016, compared to $56 million and
$47 million in 2015 and 2014, respectively. Principal
investments in 2016 were in turbocharging and the
measurement products businesses. Geographically,
in 2016, Europe represented 57 percent of the
capital expenditures, followed by AMEA (23 per-
cent) and Americas (20 percent).
Power Grids Division
Overview
The Power Grids division is a global leader in power
and automation technologies that help balance
the growing need for electricity with minimum
environmental impact, by enabling a stronger,
smarter and greener grid. The Power Grids division
provides electrical and automation product, system,
software and service solutions across the power
value chain. These solutions support utility, industry
and transport & infrastructure customers to plan,
build, operate and maintain their power infrastruc-
ture. They are designed to facilitate the safe, reliable
and efficient integration, transmission and distribu-
tion of bulk and distributed energy generated from
conventional and renewable sources.
Around three quarters of the division’s revenues
come from utility customers but a significant
portion is generated from industrial and transport &
infrastructure customers. Power Grids has a world-
wide customer base, with a wide spread of revenues
from a regional perspective across the Americas,
Europe and AMEA. The division also has a globally
diversified and well balanced manufacturing and
engineering footprint. Direct sales account for
a significant part of the division’s total revenues
and external channel partners such as wholesalers,
distributors and OEMs account for the rest.
The division had approximately 37,000 employees
as of December 31, 2016, and generated $11.0 bil-
lion of revenues in 2016.
The Grid Systems business is the world’s largest
provider of HVDC systems. These systems use
Line Commutated Converter (HVDC Classic)
technology or Voltage Sourced Converter (HVDC
Light) technology. The portfolio also encompassed
high-voltage AC and DC cables, mainly used for
subsea or underground applications and HVDC
links. It also includes a range of high power semi-
conductors, a core technology for power electronics
deployed in HVDC, Flexible Alternating Current
Transmission Systems (FACTS) and rail applications.
The Grid Integration business is one of the world’s
leading providers of transmission and distribution
substations and associated life-cycle services.
The substations are provided either as engineered
solutions (system integration) or on a turnkey,
engineering, procurement, construction (EPC)
basis, for utility and non-utility applications
in cluding renewables, rail, data-centers, industry,
battery energy storage and shore-to-ship power
supply. This business is also the leading global
provider of FACTS, which includes Static Var
Compensation (SVC) and static compensator
(STATCOM) technology. These systems stabilize
voltages, minimize losses, and keep power
quality in accordance with grid codes.
The Transformers business supplies transformers
that are an integral component found across the
power value chain, enabling the efficient and safe
conversion of electricity to different voltages. ABB
is the world’s largest maker of transformers. The
product range is designed for reliability, durability
and efficiency with a portfolio that includes power
transformers, dry- and liquid-distribution trans-
formers, traction transformers for rail applications,
and special application transformers and related
components such as insulation kits, bushings and
other transformer accessories. In addition, ABB’s
power transformers are pushing the voltage
barrier to unprecedented levels of 1100 kV DC and
1200 kV AC, facilitating more power to be trans-
ported longer distances with minimum losses.
Other technology developments include grid-
resilient transformers designed to withstand
physical attack, eco-efficient transformers using
biodegradable oil and innovative sensor-based as
well as software-leveraging solutions for remote
maintenance and asset optimization.
Customers
The Power Grids division’s principal customers
include utilities, transmission and distribution
owners and operators as well as industrial,
transportation and infrastructure customers.
Products and Services
The businesses of the Power Grids division are
more fully described below.
The High Voltage products business is a global
leader in high-voltage switchgear with a portfolio
spanning air-insulated, gas-insulated and hybrid
technologies. It also manufactures generator
circuit breakers, a key product for integrating large
power plants into the grid. The portfolio also
includes a broad range of capacitors and filters
that facilitate power quality as well as instrument
transformers and other substation components.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 96
The Grid Automation business is at the forefront
of grid automation and digitalization. It supplies
substation automation products, systems and
services. It also provides Supervisory Control and
Data Acquisition (SCADA) systems for transmission
and distribution networks as well as a range of
wireless, fiber optic and power line carrier based
telecommunication technologies for mission critical
applications. This business also offers microgrid
solutions that are being increasingly deployed for
remote and partially grid connected applications.
Also included in this business is the enterprise
software portfolio – a provider of an industry-leading
suite of software solutions that help utilities and
other asset- intensive industries (e.g. rail, mining)
manage, maintain and optimize their assets.
The division also provides services which represent
an increasing part of each business and which are
a growing focus area for the division with its
significant installed product base. The portfolio of
services offered includes spare parts, installation,
commissioning, condition monitoring and mainte-
nance services, on- and off-site repairs as well as
retrofits and upgrades. Increasingly more advanced
software-based monitoring and advisory services
are being added to the portfolio to support the
development of the digitalization of the grids.
Competition
On a global basis, the Power Grids division faces
worldwide competition across its portfolio mainly
from Siemens and General Electric (GE Alstom). It
also competes in specific geographies and in parts
of the business with companies such as Hyundai,
Hyosung, Crompton Greaves, TBEA and NARI. 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 Grids division’s capital expenditures for
property, plant and equipment totaled $203 million
in 2016, compared to $191 million and $242 million
in 2015 and 2014, respectively. Principal investments
in 2016 were related to capacity expansion as well as
the replacement of existing equipment, particularly
in Sweden, the U.S. and Switzerland. Geographically,
in 2016, Europe represented 68 percent of the
capital expenditures, followed by the Americas
(19 percent) and AMEA (13 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. In addition, we have classified
the historical business activities of significant
divested businesses in Corporate and Other.
Corporate headquarters and stewardship activities
include the operations of our corporate headquar-
ters in Zurich, Switzerland, as well as corporate-
related activities in various countries. These
activities cover staff functions with group-wide
responsibilities, such as accounting and financial
reporting, corporate finance and taxes, planning
and controlling, internal audit, legal and integrity,
compliance, risk management and insurance,
corporate communications, information systems,
investor relations and human resources.
Corporate research and development primarily
covers our research activities, as our development
activities are organized under the four business
divisions. We have two global research laboratories,
one focused on power technologies and the other
focused on automation technologies, which both
work on technologies relevant to the future of our
four business divisions. Each laboratory works on
new and emerging technologies and collaborates
with universities and other external partners to
support our divisions in advancing relevant technol-
ogies and in developing cross-divisional technology
platforms. We have corporate research centers in
seven countries (China, India, Germany, Poland,
Sweden, Switzerland and the U.S.).
Corporate and Other had approximately 2,000
employees at December 31, 2016.
Division realignment
On October 4, 2016, we announced a planned
change in the composition of the business
portfolio of our four divisions. Effective January 1,
2017, the scope of the Electrification Products
division has been expanded to include the electric
vehicle charging, solar, and power quality
businesses from the Discrete Automation and
Motion division.
In addition, the Discrete Automation and Motion
division has been renamed the Robotics and
Motion division while the Process Automation
division has been renamed the Industrial
Automation division.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 9797
—
Capital expenditures
Total capital expenditures for property, plant and
equipment and intangible assets (excluding
intangibles acquired through business combina-
tions) amounted to $831 million, $876 million,
$1,026 million in 2016, 2015 and 2014, respectively.
In 2016, 2015 and 2014, capital expenditures were
27 percent, 24 percent and 21 percent lower,
respectively, than depreciation and amortization
(excluding acquisition-related amortization, capital
expenditures were 3 percent lower and 3 percent
and 11 percent higher, respectively, than deprecia-
tion and amortization).
Capital expenditures in 2016 remained at a signifi-
cant level in mature markets, reflecting the
geographic distribution of our existing production
facilities. Capital expenditures in Europe and
North America in 2016 were driven primarily by
upgrades and maintenance of existing production
facilities, mainly in the U.S., Sweden, Switzerland
and Germany. Capital expenditures in emerging
markets were highest in China, Poland, India, and
Turkey. Capital expenditures in emerging markets
were made primarily to increase production
capacity by investment in new or expanded
facilities. The share of emerging markets capital
expenditures as a percentage of total capital
expenditures in 2016, 2015 and 2014 was 35 per-
cent, 31 percent and 29 percent, respectively.
At December 31, 2016, construction in progress for
property, plant and equipment was $515 million,
mainly in the U.S., China, Sweden, Switzerland
and Germany. At December 31, 2015, construction
in progress for property, plant and equipment
was $559 million, mainly in Sweden, the U.S.,
China, Switzerland and Germany, while 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.
Our capital expenditures relate primarily to
property, plant and equipment. For 2017, we
estimate the expenditures for property, plant and
equipment will be higher than our annual depreci-
ation and amortization charge (excluding acquisi-
tion-related amortization).
—
Supplies and raw materials
We purchase a variety of raw materials and
products which contain raw materials for use in our
production and project execution processes. The
primary materials used in our products, by weight,
are copper, aluminum, carbon steel, mineral oil and
various plastics. We also purchase a wide variety of
fabricated products and electronic components.
We operate a worldwide supply chain management
network with employees dedicated to this function
in our businesses and key countries. Our supply
chain management network consists of a number
of teams, each focusing on different product
categories. These category teams, on global,
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 our 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
sustainability, 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 economies, coupled with the
volatility in foreign currency exchange rates, has
led to significant fluctuations in these raw material
costs over the last few years. While we expect
global commodity prices to remain highly volatile,
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 98
we expect to offset some market volatility through
the use of long-term contracts and global sourcing.
We seek to mitigate the majority of our exposure
to commodity price risk by entering into hedges.
For example, we manage copper and aluminum
price risk using principally swap contracts based on
prices for these commodities quoted on leading
exchanges. ABB’s hedging policy is designed to
safeguard margins by minimizing price volatility and
providing a stable cost base during order execution.
In addition to using hedging to reduce our exposure
to fluctuations in raw materials prices, in some
cases we can reduce this risk by incorporating
changes in raw materials prices into the prices of
our products (through price escalation clauses).
Overall, during 2016 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 optimiza-
tion 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 have continuously
improved and tailored the processes to our value
chain. We continue to work with our suppliers and
customers, to enable us to comply with the rules
and disclosure obligations. Further information on
ABB’s Conflict Minerals policy and supplier require-
ments can be found under “Material Compliance”
at new.abb.com/about/supplying
—
Management overview
In 2016, we continued our Next Level transforma-
tion aimed at accelerating sustainable value
creation and achieved significant results in our
three focus areas: profitable growth, relentless
execution and business-led collaboration.
Profitable growth
To drive a growth mindset, we adopted our “PIE”
formula of penetration, innovation and expansion,
with a focus on greater competitiveness, organic
growth, and reducing risks by aligning business
models more closely with our core competencies.
In 2016, the PIE initiatives helped mitigate market
headwinds resulting in a stable revenue develop-
ment in local currencies (however, in U.S. dollars
revenues declined 5 percent). There was positive
demand in strategic growth areas such as food
and beverage and robotics, while demand from
other areas such as process markets remained
subdued. Improving growth momentum resulted
in order growth in the fourth quarter of 2016,
supported by strong growth in key markets such
as the U.S. and China.
At our Capital Markets Day in October 2016, we
announced our decision related to the strategic
portfolio review of our Power Grids division. We
intend to continue the Power Grids transformation
under ABB’s ownership, with the focus on
high-growth segments and digitally enabled
services and software. As part of the ongoing
transformation, we intend to continue to de-risk
the Power Grids business model while tapping
growth opportunities through strategic partner-
ships, such as those with two leading EPC compa-
nies, Fluor and Aibel, announced in 2016. The Power
Grids division won large orders in the fourth
quarter of 2016 reflecting customer trust in ABB’s
portfolio. These large orders included a $640 mil-
lion UHVDC systems order for Raigarh-Pugalur in
India and a $100 million order for the upgrade of
the Sylmar converter station of the Pacific Intertie
high- voltage direct current power link in the U.S.
We laid the groundwork for future growth with
our quantum leap in digital – around ABB Ability™
– which we launched at our Capital Markets Day
in October 2016. ABB Ability™ combines ABB’s
portfolio of digital solutions and services across
all customer segments, cementing our leading
position in the Fourth Industrial Revolution and
support the competiveness of our four entrepre-
neurial divisions. We entered into a far-reaching
strategic partnership with Microsoft to develop
next-generation digital solutions on an integrated
cloud platform. We believe that our customers
will benefit from the unique combination of our
deep domain knowledge and extensive portfolio of
industrial solutions and Microsoft’s Azure intelli-
gent cloud, as well as B2B engineering
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 9999
competence. Together, we believe the partners
will drive digital transformation in customer
segments across ABB’s businesses such as robotics,
marine and e-mobility. Our digital transformation
will be led by our Chief Digital Officer, Guido
Jouret, a pioneer in the Internet of Things, who
joined ABB on October 1, 2016, reporting to our
CEO, Ulrich Spiesshofer.
As of 2017, ABB is driving growth in four market-
leading entrepreneurial divisions: Electrification
Products, Robotics and Motion, Industrial
Automation and Power Grids. The new division
structure was effective January 1, 2017, and is now
fully operational. The divisions are expected to
drive growth as entrepreneurial units within ABB,
in line with one of our core values – “ownership
and performance”. This is reflected in an enhanced
performance and compensation model, which
focuses on individual accountability and responsi-
bility. The divisions benefit from sales collabora-
tion orchestrated by ABB’s regions and countries
as well as from the group-wide digital offering,
a low-cost centralized administrative structure,
common supply chain management and corporate
research centers. We plan to continue to strength-
en our divisions through active portfolio manage-
ment. This includes pursuing strategic additions,
transforming business models and pruning
non-core businesses.
Relentless execution
The transformation of Power Grids continues. In
2016, the division increased Operational EBITA
by 16 percent, mainly driven by improved productivity,
solid project execution and continued cost savings.
These results reflect the success of the previously
announced “step change” program to date. Going
forward, the division is expected to continue to drive
further transformation and value creation through
its previously announced “Power Up” program. In
light of this strong operational excellence perfor-
mance, ABB increased the profitability targets for
this division effective January 1, 2018.
A key objective of the Next Level strategy is to
achieve world-class operational excellence at all
levels of the company. The White Collar Productivity
savings program has outperformed expectations
since its launch in 2015. As a result we increased
the program’s cost reduction target by 30 percent
to $1.3 billion. In 2016, the White Collar Productivity
savings program amounted to $0.6 billion. We
also continued to deliver on our regular cost-savings
program of achieving savings equivalent to an
expected 3 – 5 percent of cost of sales each year.
We continued to execute our Net Working Capital
program, which aims to free-up approximately
$2 billion from 2015 – 2017. In 2016, we reduced
working capital by around $550 million bringing
the total reduction to $900 million for the first
two years of the program.
In addition, we continued to align and drive our
new performance-based compensation model,
which has been implemented for 70,000 of our
132,000 employees.
Business-led collaboration
We are adopting a single corporate brand,
consolidating all our brands around the world
under one umbrella. Our portfolio of companies
is being unified, showcasing the full breadth
and depth of ABB’s global offering under one
master brand. The unified brand plays a key part
in realizing the value potential of our digital
offering, as we expect it will increase brand
loyalty, price premiums and purchase probability.
The brand features design elements intended to
clearly articulate ABB’s vision, direction and
unique market position to customers, sharehold-
ers, employees and all other stakeholders. Our
heritage as a pioneering technology leader and
the three focus areas of our Next Level strategy
are reflected in our new brand promise: “Let’s
write the future.”™
Over the past two years, we have simplified
our organizational setup, reducing the number
of global regions from eight to three, and the
divisions from five to four. In addition, many
business units have been relocated closer to their
key markets and customers, leading to a more
responsive, customer-focused organization. The
work is not over, but today ABB is a simpler,
faster and more agile company, positioned at
the heart of the Energy and Fourth Industrial
Revolutions, and ready to take advantage of the
exciting growth opportunities that are emerging
across its markets.
Next Level strategy – stage 3
On October 4, 2016, we launched stage 3 of our
Next Level strategy to unlock additional value
for shareholders and customers. Building on the
focus areas of profitable growth, relentless
execution and business-led collaboration, stage 3
consists of four actions:
• Driving growth in four market-leading entrepre-
neurial divisions,
• Quantum leap in digital,
• Accelerating momentum in operational
excellence, and
• Strengthening the global ABB brand.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 100
Driving growth in four market-leading,
entrepreneurial units
We are driving growth in four market leading
entrepreneurial divisions: Electrification Products,
Robotics and Motion, Industrial Automation and
Power Grids. The new division structure was effective
January 1, 2017, and is now fully operational.
ABB’s capital allocation priorities remain
unchanged:
• funding organic growth, research and develop-
ment, and capital expenditures at attractive
cash returns,
• paying a steadily rising, sustainable dividend,
•
investing in value-creating acquisitions, and
• returning additional cash to shareholders.
As a pioneering technology leader, committed to
unlocking value, we believe we are well positioned
to capture growth opportunities as the Energy
and Fourth Industrial Revolutions unfold. We have
a clear transformation plan to drive earnings per
share and cash return on invested capital, as well
as an efficient balance sheet to generate attractive
returns for shareholders.
Outlook
Macroeconomic and geopolitical developments
are signaling a mixed picture with continued
uncertainty. Some macroeconomic signs in the
U.S. remain positive and growth in China is
expected to continue. The overall global market
remains impacted by modest growth and increased
uncertainties, such as the United Kingdom’s
potential withdrawal from the European Union and
geopolitical tensions in various parts of the world.
Oil prices and foreign exchange translation effects
are expected to continue to influence our results.
With this and the ongoing transformation of ABB,
we expect 2017 to be a transitional year.
The attractive long-term demand outlook in our
three major customer sectors – utilities, industry
and transport & infrastructure – is driven by the
Energy and Fourth Industrial Revolutions.
We believe we are well positioned to tap into these
opportunities for long-term profitable growth with
our strong market presence, broad geographic and
business scope, technology leadership and
financial strength.
A quantum leap in digital with ABB Ability™
The ABB Ability™ offering combines our portfolio
of digital solutions and services across all customer
segments, cementing our leading position in
the Fourth Industrial Revolution and supporting
the competitiveness of our four entrepreneurial
divisions. With ABB Ability™, we see an annual
addressable market of up to $20 billion.
Accelerating momentum in operational excellence
The White Collar Productivity savings program
is on track to deliver the increased cost reduction
target of $1.3 billion (run rate end of 2017). We
intend to achieve these additional savings within
the initially announced timeframe and for approxi-
mately $200 million lower of total combined
restructuring program costs and implementation
costs than initially announced in 2015. We are
continuing our regular cost-savings programs
to achieve savings equivalent to an expected
3 – 5 percent of cost of sales each year.
We continue to deliver on our Net Working Capital
program which plans to free-up a total of $2 billion
by the end of 2017. In the first two years of the
program, we have freed up approximately
$900 million.
Strengthening ABB’s brand
We are adopting a single corporate brand, consoli-
dating all our brands around the world under one
umbrella. Our portfolio of companies is being
unified, showcasing the full breadth and depth of
our global offering under one master brand. The
unified brand plays a key part in realizing the value
potential of our digital offering, as we expect it
will increase brand loyalty, price premiums and
purchase probability.
Capital allocation
Our shareholders are expected to benefit from our
expected strong cash generation and financial
position through a new share buyback program of
up to $3 billion from 2017 through 2019. In addition,
the Board of Directors is proposing an eighth
consecutive increase in the dividend to 0.76 Swiss
francs per share at the 2017 AGM.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 101101
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Application of critical accounting
policies
General
Revenue recognition
We prepare our Consolidated Financial Statements
in accordance with U.S. GAAP and present these in
U.S. dollars unless otherwise stated.
The preparation of our financial statements
requires us to make assumptions and estimates
that affect the reported amounts of assets,
liabilities, revenues and expenses and the related
disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis,
including, but not limited to, those related to:
gross profit margins on long-term construction-
type contracts; costs of product guarantees and
warranties; provisions for bad debts; recoverabili-
ty 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 circumstances, the results of which
form the basis for making judgments about
the carrying values of assets and liabilities that
are not readily apparent from other sources.
Actual results may differ from our estimates
and assumptions.
We deem an accounting policy to be critical
if it requires an accounting estimate to be made
based on assumptions about matters that
are highly uncertain at the time the estimate
is made and if different estimates that reasonably
could have been used, or if changes in the
accounting estimates that are reasonably likely
to occur periodically, could materially impact
our Consolidated Financial Statements. We also
deem an accounting policy to be critical
when the application of such policy is essential
to our ongoing operations. We believe the
following critical accounting policies require us
to make difficult and subjective judgments,
often as a result of the need to make estimates
regarding matters that are inherently uncertain.
These policies should be considered when
reading our Consolidated Financial Statements.
We generally recognize revenues for the sale of
goods when persuasive evidence of an arrange-
ment exists, delivery has occurred, the price is
fixed or determinable, and collectability is reason-
ably assured. With regard 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 contractually-defined shipping terms. We use
various International Commercial shipping terms
(as promulgated by the International Chamber of
Commerce) such as Ex Works (EXW), Free Carrier
(FCA) and Delivered Duty Paid (DDP). Subsequent
to delivery of the products, we generally have no
further contractual 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 unprofit-
able. 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:
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 102
• unanticipated technical problems with equip-
ment 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 recognizing changes
in estimates cumulatively, recorded revenue and
costs to date reflect the current estimates of the
stage of completion of each project. Additionally,
losses on 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 esti-
mates difficult, are accounted for under the
completed- contract method. Revenues under
the completed- contract method are recognized
upon substantial completion – that is: acceptance
by the customer, compliance with performance
specifications demonstrated in a factory accep-
tance test or similar event.
For non construction-type contracts that contain
customer acceptance provisions, revenue is
deferred until customer acceptance occurs or we
have demonstrated the customer-specified
objective criteria have been met or the contractual
acceptance period has lapsed.
Revenues from service transactions are recognized
as services are performed. For long-term service
contracts, revenues are recognized on a straight-line
basis over the term of the contract or, if the
performance pattern is other than straight-line, as
the services are provided. Service revenues reflect
revenues earned from our activities in providing
services to customers primarily subsequent to the
sale and delivery of a product or complete system.
Such revenues consist of maintenance-type
contracts, field service activities that include
personnel and accompanying spare parts,
and installation 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 determinable, and
collection is probable. In software arrangements
that include rights to multiple software products
and/or services, the total arrangement fee is
allocated using the residual method, under 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 estab-
lished 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 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, we allocate revenues to each unit
of accounting based on its relative selling price.
A hierarchy of selling prices is used to determine
the selling price of each specific deliverable that
includes VSOE (if available), third-party evidence
(if VSOE is not available), or estimated selling
price if neither of the first two is available. The
estimated selling price reflects our best estimate
of what the selling prices of elements would be if
the elements were sold on a stand-alone basis.
Revenue is allocated between the elements of an
arrangement consideration at the inception of
the arrangement. Such arrangements generally
include industry-specific performance and
termination provisions, such as in the event of
substantial delays or non-delivery.
Revenues are reported net of customer rebates
and similar incentives. Taxes assessed by a govern-
mental authority that are directly imposed on
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 103103
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
collectability of the revenues recognized to be
reasonably assured. When recording the respec-
tive accounts receivable, allowances are calculated
to estimate those receivables that will not be
collected. These reserves assume a level of
default based on historical information, as well
as knowledge about specific invoices and
customers. The risk remains that actual defaults
will vary in number and amount from those
originally estimated. As such, the amount of
revenues recognized might exceed or fall below
the amount which will be collected, resulting in
a change in earnings in the future. The risk of
deterioration is likely to increase during periods
of significant negative industry, economic or
political trends.
As a result of the above policies, judgment in the
selection and application of revenue recognition
methods must be made.
Contingencies
As more fully described in “Note 15 Commitments
and contingencies” to our Consolidated Financial
Statements, we are subject to proceedings,
litigation or threatened litigation and other claims
and inquiries related to environmental, labor,
product, regulatory, tax (other than income tax)
and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes
to these matters, as well as potential ranges of
probable losses. A determination of the provision
required, if any, for these contingencies is made
after analysis of each individual issue, often with
assistance from both internal and external legal
counsel and technical experts. The required
amount of a provision for a contingency of any
type may change in the future due to new develop-
ments in the particular matter, including changes
in the approach to its resolution.
We record provisions for our contingent obliga-
tions when it is probable that a loss will be incurred
and the amount can be reasonably estimated. Any
such provision is generally recognized on an
undiscounted basis using our best estimate of the
amount of loss or at the lower end of an estimated
range when a single best estimate is not determin-
able. In some cases, we may be able to recover
a portion of the costs relating to these obligations
from insurers or other third parties; however, we
record such amounts only when it is probable that
they will be collected.
We provide for anticipated costs for warranties
when we recognize revenues on the related
products or contracts. Warranty costs include
calculated costs arising from imperfections in
design, material and workmanship in our products.
We generally make individual assessments on
contracts with risks resulting from order-specific
conditions or guarantees and assessments on an
overall, statistical basis for similar products sold
in larger quantities. 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.
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 assump-
tions are included in net actuarial loss within
“Accumulated other comprehensive loss”.
We recognize actuarial gains and losses gradually
over time. Any cumulative unrecognized actuarial
gain or loss that exceeds 10 percent of the greater
of the present value of the projected benefit
obligation (PBO) and the fair value of plan assets
is recognized in earnings over the expected
average remaining working lives of the employees
participating in the plan, or the expected average
remaining lifetime of the inactive plan partici-
pants if the plan is comprised of all or almost all
inactive participants. Otherwise, the actuarial
gain or loss is not recognized in the Consolidated
Income Statements.
We use actuarial valuations to determine our
pension and postretirement benefit costs and
credits. The amounts calculated depend on
a variety of key assumptions, including discount
rates, mortality rates and expected return on
plan assets. Under U.S. GAAP, we are required to
consider current market conditions in making
these assumptions. In particular, the discount rates
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 104
are reviewed annually based on changes in
long-term, highly-rated corporate bond yields.
Decreases in the discount rates result in
an increase in the PBO and in pension costs.
Conversely, an increase in the discount rates
results in a decrease in the PBO and in pension
costs. The mortality assumptions are reviewed
annually by management. Decreases in mortality
rates result in an increase in the PBO and in
pension costs. Conversely, an increase in mortality
rates results in a decrease in the PBO and in
pension costs.
Holding all other assumptions constant, a
0.25-percentage point decrease in the discount
rate would have increased the PBO related to our
defined benefit pension plans by $394 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 $362 million.
The expected return on plan assets is reviewed
regularly and considered for adjustment annually
based upon the target asset allocations and
represents the long-term return expected to be
achieved. Decreases in the expected return on
plan assets result in an increase to pension costs.
Holding all other assumptions constant, an
increase or decrease of 0.25 percentage points in
the expected long-term rate of asset return would
have decreased or increased, respectively, the net
periodic benefit cost in 2016 by $24 million.
The funded status, which can increase or decrease
based on the performance of the financial markets
or changes in our assumptions, does not represent
a mandatory short-term cash obligation. Instead,
the funded status of a defined benefit pension plan
is the difference between the PBO and the fair
value of the plan assets. At December 31, 2016, our
defined benefit pension plans were $1,403 million
underfunded compared to an underfunding of
$1,481 million at December 31, 2015. Our other
postretirement plans were underfunded by
$147 million and $178 million at December 31, 2016
and 2015, 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 7.33 percent per annum for
2017, gradually declining to 5.00 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 jurisdictions outside of Switzerland
(hereafter “foreign jurisdictions”) and has already
been subject to corporate income tax in those
foreign jurisdictions is, to a large extent, tax
exempt in Switzerland. Therefore, generally no or
only limited Swiss income tax has to be provided
for on the repatriated earnings of foreign subsid-
iaries. 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 liabili-
ties. 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 valua-
tion allowance based upon historical losses,
projected future taxable income and the expected
timing of the reversals of existing temporary
differences. To the extent we increase or decrease
this allowance in a period, we recognize the change
in the allowance within “Provision for taxes” in
the Consolidated Income Statements unless the
change relates to discontinued operations,
in which case the change is recorded in “Income
(loss) from discontinued operations, net of tax”.
Unforeseen changes in tax rates and tax laws, as
well as differences in the projected taxable income
as compared to the actual taxable income, may
affect these estimates.
Certain countries levy withholding taxes, dividend
distribution taxes or additional corporate income
taxes (hereafter “withholding taxes”) on dividend
distributions. Such taxes cannot always be fully
reclaimed by the shareholder, although they have
to be declared and withheld by the subsidiary.
Switzerland has concluded double taxation
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 105105
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 dis-
tributing them. No deferred tax liability is set up,
if retained earnings are considered as permanent-
ly reinvested, and used for financing current
operations as well as business growth through
working capital and capital expenditure in those
countries.
We operate in numerous tax jurisdictions and,
as a result, are regularly subject to audit by tax
authorities. We provide for tax contingencies
whenever it is deemed more likely than not that
a tax asset has been impaired or a tax liability has
been incurred for events such as tax claims or
changes in tax laws. Contingency provisions are
recorded based on the technical merits of our filing
position, considering the applicable tax laws and
OECD guidelines and are based on our evaluations
of the facts and circumstances as of the end of
each reporting period. Changes in the facts and
circumstances could result in a material change to
the tax accruals. Although we believe that our tax
estimates are reasonable and that appropriate tax
reserves have been made, the final determination
of tax audits and any related litigation could be
different than that which is reflected in our income
tax provisions and accruals.
An estimated loss from a tax contingency must be
accrued as a charge to income if it is more likely
than not that a tax asset has been impaired or
a tax liability has been incurred and the amount of
the loss can be reasonably estimated. We apply
a two-step approach to recognize and measure
uncertainty in income taxes. The first step is to
evaluate the tax position for recognition by
determining if the weight of available evidence
indicates that it is more likely than not that the
position will be sustained on audit, including
resolution of related appeals or litigation process-
es, 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.
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 qualitative or
quantitative assessment method for each report-
ing 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 Electrification Products, Discrete
Automation and Motion, and Power Grids. For the
Process Automation 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.
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 operations, the weighted-average cost
of capital, the income tax rate and the terminal
growth rate.
If, after performing the qualitative assessment, we
conclude that events or circumstances have
occurred which would indicate that it is more likely
than not that the fair value of the reporting unit is
less than its carrying value, or if we have elected not
to perform a qualitative assessment, the two-step
quantitative impairment test is performed. In the
first step, we calculate the fair value of the reporting
unit (using an income approach whereby the fair
value is calculated based on the present value of
future cash flows applying a discount rate that
represents our weighted -average cost of capital)
and compare it to the 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 106
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 discon-
tinued operation, in which case the losses would be
recorded in “Income (loss) from discontinued
operations, net of tax”.
In 2016, we performed the two-step quantitative
impairment test for all of our reporting units to
reflect new assumptions and forecasts resulting
from our newly-developed strategic plan for
the period 2017 to 2020. The quantitative test
concluded that the estimated fair values for each
of our reporting units exceeded their respective
carrying values by more than 100 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.
The projected future cash flows used in the 2016
fair value calculation were based on approved
business plans for the reporting units which
covered a period of four years plus a calculated
terminal value. The projected future cash flows
required significant judgments and estimates
involving variables such as future sales volumes,
sales prices, awards of large orders, production
and other operating costs, capital expenditures,
net working capital requirements and other
economic factors. The after-tax weighted-average
cost of capital of 8 percent was based on variables
such as the risk free rate derived from the yield
of 10-year U.S. treasury bonds as well as an
ABB-specific risk premium. The terminal value
growth rate was assumed to be 1 percent. The
mid-term tax rate used in the test was 27 percent.
We based our fair value estimates on assumptions
we believed to be reasonable, but which were
inherently uncertain. Consequently, actual future
results may differ from those estimates.
We assessed the reasonableness of the fair value
calculations of our reporting units by reconciling
the sum of the fair values for all our reporting units
to our total market capitalization. The assumptions
used in the fair value calculation were 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 2016
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 12.9 percent, while
a 1-percentage point decrease in the terminal value
growth rate would have reduced the calculated fair
value by approximately 9.7 percent.
For 2015, our reporting units were the same as our
former business divisions (Discrete Automation
and Motion, Low Voltage Products, Power Products
and Power Systems) with the exception of Process
Automation, where they were determined to be
one level below. In 2015, we performed a qualitative
assessment and determined that it was not more
likely than not that the fair value for each of these
reporting units was below the carrying value. As
a result, we concluded that it was not necessary to
perform the two-step quantitative impairment test.
Intangible assets are reviewed for recoverability
upon the occurrence of certain triggering events
(such as a decision to divest a business or project-
ed losses of an entity) or whenever events or
changes in circumstances indicate that the
carrying amount may not be recoverable. We record
impairment charges in “Other income (expense),
net”, in our Consolidated Income Statements,
unless they relate to a discontinued operation, in
which case the charges are recorded in “Income
(loss) from discontinued operations, net of tax”.
—
New accounting pronouncements
For a description of accounting changes and recent
accounting pronouncements, including the
expected dates of adoption and estimated effects,
if any, on our Consolidated Financial Statements,
see “Note 2 Significant accounting policies” to our
Consolidated Financial Statements.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 107107
—
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 2016,
2015, and 2014, we invested $1,300 million,
$1,406 million and $1,499 million, respectively, or
approximately 3.8 percent, 4.0 percent and
3.8 percent, respectively, of our annual consolidated
revenues on research and development activities.
We also had expenditures of $155 million,
$271 million and $310 million, respectively, or
approximately 0.5 percent, 0.8 percent and
0.8 percent, respectively, of our annual consolidated
revenues in 2016, 2015 and 2014, 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 recognized in
accordance with our accounting policies.
In addition to continuous product development,
and order-related engineering work, we develop
platforms for technology applications in our
automation and power businesses in our research
and development laboratories, which operate
on a global basis. Through active management of
our investment in research and development,
we seek to maintain a balance between short-term
and long-term research and development
programs and optimize our return on investment.
Universities are incubators of future technology,
and a central task of our research and development
team is to transform university research into
industry-ready technology platforms. We collaborate
with a number of universities and research institu-
tions to build research networks and foster new
technologies. We believe these collaborations
shorten the amount of time required to turn basic
ideas into viable products, and they additionally
help us recruit and train new personnel. We have
built numerous university collaborations 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, Royal Institute of Technology (KTH)
Stockholm, Cambridge University, Imperial
College London, Huazhong University of Science
and Technology (HUST) and Xi’an Jiaotong
University (XJTU). Our collaborative projects include
research on materials, sensors, micro- engineered
mechanical systems, robotics, controls, manufac-
turing, distributed power and communication.
Common platforms for power and automation
technologies are developed around advanced
materials, efficient manufacturing, information
technology and data communication, as well as
sensor and actuator technology.
Common applications of basic power and
automation technologies can also be found in
power electronics, electrical insulation, and
control and optimization. Our power technologies,
including our insulation technologies, current
interruption and limitation devices, power elec-
tronics, flow control and power protection
processes, apply as much to large, reliable,
blackout-free transmission systems as they do
to everyday household needs. Our automation
technologies, including our control and optimiza-
tion 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
Divestments and Assets held for sale
There were no significant divestments in 2016
and 2015.
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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 108
(HVAC) business of Thomas & Betts and the Power
Solutions business of Power-One. Total cash
proceeds from all business divestments during
2014 amounted to $1,090 million, net of transac-
tion costs and cash disposed.
In September 2016, ABB announced an agreement
to divest its high-voltage cable system business
(Cables business). The assets and liabilities of this
business are shown as assets and liabilities held
for sale in our Consolidated Balance Sheet as at
December 31, 2016. The divestment was completed
on March 1, 2017.
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 conse-
quence, 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.
The exchange rates between the USD and the EUR
and the USD and the CHF at December 31, 2016,
2015 and 2014, were as follows:
Exchange rates into $
EUR 1.00
CHF 1.00
2016
2015
2014
1.05
0.98
1.09
1.01
1.22
1.01
The average exchange rates between the USD and
the EUR and the USD and the CHF for the years
ended December 31, 2016, 2015 and 2014, were as
follows:
Exchange rates into $
2016
2015
2014
EUR 1.00
CHF 1.00
1.10
1.01
1.11
1.04
1.33
1.09
Increases and decreases in the value of the USD
against other currencies will affect the reported
results of operations in our Consolidated Income
Statements and the value of certain of our assets
and liabilities in our Consolidated Balance Sheets,
even if our results of operations or the value of
those assets and liabilities have not changed in
their original currency. As foreign exchange rates
impact our reported results of operations and
the reported value of our assets and liabilities,
changes in foreign exchange rates could signifi-
cantly affect the comparability of our reported
results of operations between periods and result in
significant changes to the reported value of our
assets, liabilities and stockholders’ equity.
While we operate globally and report our financial
results in USD, exchange rate movements between
the USD and both the EUR and the CHF are of
particular importance to us due to (i) the location
of our significant operations and (ii) our corporate
headquarters being in Switzerland.
When we incur expenses that are not denominated
in the same currency as the related revenues,
foreign exchange rate fluctuations could affect our
profitability. To mitigate the impact of exchange
rate movements on our profitability, it is our policy
to enter into forward foreign exchange contracts
to manage the foreign exchange transaction risk of
our operations.
In 2016, approximately 80 percent of our consoli-
dated 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 13 percent, and
• Swedish krona, approximately 5 percent.
In 2016, 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 109109
cost of sales and selling, general and administrative
expenses were reported in the following currencies:
• Euro, approximately 19 percent,
• Chinese renminbi, approximately 11 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 currencies”.
Local currency financial information is then
translated into USD at applicable exchange rates
for inclusion in our Consolidated Financial
Statements.
The discussion of our results of operations below
provides certain information with respect to
orders, revenues, income from operations and
other measures as reported in USD (as well as in
local currencies). We measure period-to-period
variations in local currency results by using
a constant foreign exchange rate for all periods
under comparison. Differences in our results of
operations in local currencies as compared to our
results of operations in USD are caused exclusively
by changes in currency exchange rates.
While we consider our results of operations as
measured in local currencies to be a significant
indicator of business performance, local currency
information should not be relied upon to the
exclusion of U.S. GAAP financial measures. Instead,
local currencies reflect an additional measure
of comparability and provide a means of viewing
aspects of our operations that, when viewed
together with the U.S. GAAP results, provide
a more complete understanding of factors and
trends affecting the business. As local currency
information is not standardized, it may not be
possible to compare our local currency information
to other companies’ financial measures that have
the same or a similar title. We encourage investors
to review our financial statements and publicly-filed
reports in their entirety and not to rely on any
single financial measure.
—
Transactions with affiliates
and associates
In the normal course of our business, we purchase
products from, sell products to and engage in
other transactions with entities in which we hold
an equity interest. The amounts involved in these
transactions are not material to ABB Ltd. Also, in
the normal course of our business, we engage in
transactions with businesses that we have
divested. We believe that the terms of the transac-
tions we conduct with these companies are
negotiated on an arm’s length basis.
—
Orders
Our policy is to book and report an order when
a binding contractual agreement has been
concluded with a customer covering, at a mini-
mum, 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 110
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
generate from our orders at any point in time is
represented by our order backlog. Approximately
13 percent of the value of total orders we recorded
in 2016 were “large orders”, which we define as
orders from third parties involving a value of at
least $15 million for products or services.
Approximately 78 percent of the total value of large
orders in 2016 were recorded by our Power Grids
division and approximately 14 percent in our
Process Automation division. The other divisions
accounted for the remainder of the total large
orders recorded during 2016. The remaining
portion of total orders recorded in 2016 was “base
orders”, which we define as orders from third
parties with a value of less than $15 million for
products or services.
The level of orders fluctuates from year to year.
Portions of our business involve orders for long-
term projects that can take months or years to
complete and many large orders result in revenues
in periods after the order is booked. Consequently,
the level of large orders and orders generally
cannot be used to accurately predict future
revenues or operating performance. Orders that
have been placed can be cancelled, delayed or
modified by the customer. These actions can
reduce or delay any future revenues from the order
or may result in the elimination of the order.
—
Performance measures
We evaluate the performance of our divisions
based on orders received, revenues and
Operational EBITA.
a reconciliation of the total consolidated
Operational EBITA to income from continuing
operations before taxes.
In 2016, the Company modified the definition of
Operational EBITA to also exclude non-operational
pension cost and changes in estimates relating to
opening balance sheets of acquired businesses
(changes in pre-acquisition estimates). After these
revisions, Operational EBITA represents income
from operations excluding (i) amortization expense
on intangibles arising upon acquisitions (acquisition-
related amortization), (ii) restructuring and
restructuring-related expenses, (iii) non-operational
pension cost, (iv) changes in pre-acquisition
estimates, (v) gains and losses from sale of
businesses, acquisition-related expenses and
certain other non-operational items, as well as
(vi) foreign exchange (FX)/commodity timing
differences in income from operations consisting
of: (a) unrealized gains and losses on derivatives
(foreign exchange, commodities, embedded
derivatives), (b) realized gains and losses on
derivatives where the underlying hedged transac-
tion has not yet been realized, and (c) 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 111111
—
Analysis of results of operations
Our consolidated results from operations were as
follows:
Orders
($ in millions, except per share
data in $)
Orders
2016
2015
2014
33,379
36,429 41,515
Order backlog at December 31,
22,981
24,121 24,900
Revenues
Cost of sales
Gross profit
Selling, general and
administrative expenses
Non-order related research
and development expenses
33,828
35,481 39,830
(24,081)
(25,347) (28,615)
9,747
10,134 11,215
(5,349)
(5,574)
(6,067)
(1,300)
(1,406)
(1,499)
Other income (expense), net
(111)
(105)
529
($ in millions)
2016
2015
2014
2016
2015
% Change
Electrification
Products
Discrete
Automation
and Motion
Process
Automation
9,158
9,833 10,861
(7) %
(9) %
8,654
9,222 10,559
(6) % (13) %
5,866
7,347
9,213
(20) % (20) %
Power Grids
11,232
12,205 12,768
(8) %
(4) %
Operating
divisions
Corporate
and Other(1)
34,910
38,607 43,401
(10) % (11) %
(1,531)
(2,178) (1,886)
n.a.
n.a.
Income from operations
2,987
3,049
4,178
Total
33,379
36,429 41,515
(8) % (12) %
Net interest and other
finance expense
Provision for taxes
Income from continuing
operations, net of tax
Income from discontinued
operations, net of tax
Net income
Net income attributable to
noncontrolling interests
(188)
(781)
(209)
(282)
(788)
(1,202)
2,018
2,052
2,694
16
3
24
2,034
2,055
2,718
(135)
(122)
(124)
Net income attributable to ABB
1,899
1,933
2,594
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
1,883
1,899
1,930
2,570
1,933
2,594
0.88
0.88
0.87
0.87
1.12
1.13
0.87
0.88
0.87
0.87
1.12
1.13
A more detailed discussion of the orders, revenues,
Operational EBITA and income from operations for
our divisions follows in the sections of “Divisional
analysis” below entitled “Electrification Products”,
“Discrete Automation and Motion”, “Process
Automation”, “Power Grids” and “Corporate and
Other”. Orders and revenues of our divisions
include interdivisional transactions which are
eliminated in the “Corporate and Other” line
in the tables below.
(1) Includes interdivisional eliminations
In 2016, total orders declined 8 percent (5 percent
in local currencies) with orders decreasing in all
divisions. The decline reflects ongoing macro-
economic and geopolitical uncertainties and
challenges in many markets. The low demand from
both the onshore and offshore oil segments
negatively impacted many businesses, particularly
the Process Automation division. This also contrib-
uted to the negative order development in the
Discrete Automation and Motion division, despite
the strong demand from various industries for
robotics. Weak market conditions impacted the
orders in Electrification Products and in Power Grids.
In 2016, base orders declined 5 percent (2 percent
in local currencies) with negative impacts across
all divisions. The decline of base orders reflects the
uncertain global economic conditions across our
key markets. Large orders decreased 27 percent
(25 percent in local currencies), impacted by
considerable investment delays. For additional
information about divisional order performance,
please refer to the relevant sections of “Divisional
analysis” below.
In 2015, total orders declined 12 percent (2 percent
in local currencies) and decreased in all divisions.
The decline in reported orders was driven both by
lower base orders and lower large orders. The
order development reflected ongoing macro-
economic uncertainties and challenges in many
markets as well as negative impacts from foreign
exchange rate movements.
In 2015, orders decreased 9 percent in the
Electrification Products division (steady in local
currencies) as order growth in the Protection
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 11 2
and Connection business was offset by decreases
in orders in the Building Products and the
Electrification Solutions businesses. Orders in
the Discrete Automation and Motion division
declined 13 percent (5 percent in local currencies)
on lower orders in all businesses, except Robotics,
where orders increased in local currencies. Orders
in the Process Automation division declined
20 percent (9 percent in local currencies) mainly
due to lower capital and operating expenditures
in the oil and gas sectors compared to the previous
year. Orders declined 4 percent (increased 8 percent
in local currencies) in the Power Grids division.
The increase in local currencies was driven primarily
by the receipt of several large orders in the Grid
Systems business.
During 2015, base orders declined 14 percent
(5 percent in local currencies) reflecting the global
economic conditions which remained mixed across
our key markets. Large orders decreased 5 percent
(increased 10 percent in local currencies) but were
higher in local currencies than the strong large
order intake in 2014. Large orders increased in the
Power Grids division where several large projects
were awarded in 2015.
We determine the geographic distribution of our
orders based on the location of the ultimate destina-
tion of the products’ end use, if known, or the
location of the customer. The geographic distribu-
tion of our consolidated orders was as follows:
increased in Mexico. In Asia, Middle East and Africa,
orders decreased 4 percent (flat in local currencies)
as lower base orders were offset by strong
demand for our power offering and higher large
orders. Orders in China and India increased mainly
due to investment activities in the HVDC power
transmission technology while orders declined in
Saudi Arabia, South Korea, the United Arab
Emirates, Australia, Japan, South Africa and Qatar.
Orders in 2015 declined in all regions on lower
orders in all divisions. Orders in Europe decreased
12 percent (increased 5 percent in local currencies).
Orders in Europe were higher in local currencies
due to the receipt of large orders for HVDC
interconnections. In local currencies, orders were
lower in the United Kingdom, Sweden, Finland,
Switzerland, France, Spain and Russia, offset by
higher orders in Germany, Norway, Italy, Turkey and
the Netherlands. Orders declined 12 percent
(6 percent in local currencies) in the Americas on
lower base and large orders. In local currencies,
orders decreased in the U.S., Canada and Brazil but
were higher in Mexico, Chile and Argentina. In Asia,
Middle East and Africa, orders decreased 12 per-
cent (7 percent in local currencies) on lower base
and large orders. In local currencies, orders
declined in China, Saudi Arabia, South Korea,
Australia and Japan while orders were higher in
India, the United Arab Emirates, South Africa
and Qatar.
% Change
Order backlog
($ in millions)
2016
2015
2014
2016
2015
Europe
11,213
12,568 14,319
(11) % (12) %
The Americas
9,351
10,505 11,966
(11) % (12) %
Asia, Middle East
and Africa
12,815
13,356 15,230
(4) % (12) %
Total
33,379
36,429 41,515
(8) % (12) %
Orders in 2016 declined in all regions, although we
achieved growth within some divisions in Europe
and Asia, Middle East and Africa. Orders in Europe
decreased 11 percent (9 percent in local currencies)
due primarily to lower large orders compared to
2015. Orders in Europe for the Electrification
Products and the Discrete Automation and Motion
divisions grew in local currencies but were offset
by decreases in the other divisions. In local
currencies, orders were lower in Germany, the
United Kingdom, Norway, Switzerland, Russia,
France, Finland, Turkey and the Netherlands
while orders increased in Italy, Sweden and Spain.
In the Americas orders declined 11 percent
(9 percent in local currencies) on lower base and
large orders. In local currencies, orders decreased
in the U.S. (mainly due to lower large orders),
Canada, Brazil, Chile and Argentina while orders
($ in millions)
2016
2015
2014
2016
2015
December 31,
% Change
Electrification
Products
Discrete
Automation
and Motion
Process
Automation
2,612
2,872
2,798
(9) %
3 %
4,078
4,232 4,385
(4) %
(3) %
5,258
6,036
6,515
(13) %
(7) %
(1) %
Power Grids
12,437
12,502 12,619
(1) %
Operating
divisions
Corporate
and Other(1)
24,385
25,642 26,317
(5) %
(3) %
(1,404)
(1,521) (1,417)
n.a.
n.a.
Total
22,981
24,121 24,900
(5) %
(3) %
(1) Includes interdivisional eliminations
As at December 31, 2016, the consolidated order
backlog declined 5 percent (2 percent in local
currencies) and was lower in all divisions. The
decline in the Electrification Products division was
driven by the Medium Voltage Products and
Building Products businesses. In the Discrete
Automation and Motion division, the backlog was
flat in local currencies as the increase in the
Robotics and Power Conversion businesses were
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 113113
offset by declines in the other businesses. In
the Process Automation division, order backlog
declined and was lower across all businesses,
except for in the Measurement and Analytics
business. In the Power Grids division, local currency
order backlog increased, driven by the Transformers
and Grid System businesses.
As at December 31, 2015, the consolidated order
backlog decreased 3 percent (increased 5 percent
in local currencies). Order backlog in all divisions
was impacted by the effects of changes in foreign
currency rates as the U.S. dollar strengthened
against all major currencies during 2015. In local
currencies, order backlog increased in all divisions.
The increase in the Electrification Products division
was driven by the Medium Voltage Products
business. In the Discrete Automation and Motion
division, the increase was driven by the Robotics
and Power Conversion businesses. In the Process
Automation division, orders were lower but order
backlog increased due to the receipt of higher
large orders near the end of 2015. In the Power
Grids division, order backlog increased in the High
Voltage and Transformers businesses and also
benefitted from higher large orders received in the
Grid Systems business during the year.
Revenues
($ in millions)
2016
2015
2014
2016
2015
% Change
Electrification
Products
Discrete
Automation
and Motion
Process
Automation
9,292
9,547 10,572
(3) % (10) %
8,714
9,127 10,142
(5) % (10) %
6,598
7,224 8,618
(9) % (16) %
Power Grids
10,975
11,621 12,518
(6) %
(7) %
Operating
divisions
Corporate
and Other(1)
35,579
37,519 41,850
(5) % (10) %
(1,751)
(2,038) (2,020)
n.a.
n.a.
Total
33,828
35,481 39,830
(5) % (11) %
(1) Includes interdivisional eliminations
Revenues in 2016, decreased 5 percent (2 percent
in local currencies) and declined in all divisions.
Revenues were lower due to declining orders
during the year and a lower opening order backlog
compared to the beginning of 2015. In the Process
Automation division, a continued low level of
orders from the oil and gas industry, as well as
from mining and metals, negatively impacted
revenues. Revenues in the Power Grids division
were impacted by weaker order intake, the exit
from certain businesses as well as lower pull-
through revenues from other divisions. Revenues
were positively impacted by growth in the
Robotics business, despite market challenges
while revenues in the Electrification Products
division slightly increased in local currencies. For
additional information about the divisional
revenues performance, please refer to “Divisional
analysis” below.
In 2015, revenues decreased 11 percent (1 percent in
local currencies) and declined in all divisions. The
decrease was due primarily to the impacts of the
lower orders and lower opening order backlog in
the Power Grids and Process Automation divisions
compared to the beginning of 2014. In addition,
the decrease was also due to the impacts of
divestments made in 2014 and negative impacts
from foreign exchange rate movements.
On a divisional basis, revenues in the Electrification
Products division decreased 10 percent (steady in
local currencies) and were lower in most business-
es. Revenues declined 10 percent (2 percent in local
currencies) in the Discrete Automation and Motion
division on lower order intake in the short-cycle
businesses such as low voltage motors and drives
offset partly by local currency revenue increases in
the Robotics and Power Conversion businesses. In
the Process Automation division revenues de-
creased 16 percent (5 percent in local currencies)
and were lower in local currencies in most busi-
nesses. Revenues were impacted primarily by
decreases in the systems businesses such as the
Marine and Ports and the Oil, Gas and Chemicals
businesses but also by the divestment of the Full
Service business at the end of 2014. Revenues in
the Power Grids division decreased 7 percent
(increased 3 percent in local currencies). In local
currencies revenues grew, driven by service
revenues and by steady execution of the order
backlog.
We determine the geographic distribution of our
revenues based on the location of the ultimate
destination of the products’ end use, if known, or the
location of the customer. The geographic distribu-
tion of our consolidated revenues was as follows:
% Change
($ in millions)
2016
2015
2014
2016
2015
Europe
11,315
11,602 13,745
(2) % (16) %
The Americas
9,741
10,554 11,490
(8) %
(8) %
Asia, Middle East
and Africa
12,772
13,325 14,595
(4) %
(9) %
Total
33,828
35,481 39,830
(5) % (11) %
In 2016, revenues decreased across all regions,
although we achieved regional growth within some
divisions. In Europe, revenues declined 2 percent
(flat in local currencies) due to growth in the Electri-
fication Products division and steady revenues
in the Process Automation division. In local
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 114
currencies, revenues declined in Sweden, Norway,
Switzerland, Germany and France, while revenues
increased in Russia, the United Kingdom, Italy and
Spain. Revenues from the Americas decreased
8 percent (5 percent in local currencies). In local
currencies, revenues decreased in the U.S. and
Brazil while revenues were higher in Canada,
Mexico, Argentina and Chile. In Asia, Middle East
and Africa, revenues decreased by 4 percent
(1 percent in local currencies), supported by strong
demand for our power offering. In local currencies,
revenues declined in South Africa, Australia, Japan,
Saudi Arabia and Singapore while revenues
increased in China, India and Egypt.
In 2015, revenues declined in all regions. In Europe,
revenues decreased 16 percent (increased 1 percent
in local currencies). In local currencies, revenues
declined in Norway, France, Switzerland, Spain and
Russia. Revenues were flat in Italy, while revenues
increased in Germany, the United Kingdom,
Sweden and Finland. Revenues from the Americas
declined 8 percent (2 percent in local currencies).
In local currencies, revenues decreased in the
U.S., Canada and Brazil but were higher in Mexico,
Chile and Peru. In Asia, Middle East and Africa
revenues decreased 9 percent (2 percent in local
currencies). In local currencies, revenues declined in
China, South Korea, Australia and Singapore while
revenues increased in Saudi Arabia, India, the
United Arab Emirates, Japan and South Africa.
Cost of sales
Cost of sales consists primarily of labor, raw
materials and component costs but also includes
indirect production costs, expenses for warran-
ties, contract and project charges, as well as
order-related development expenses incurred in
connection with projects for which corresponding
revenues have been recognized.
In 2016, cost of sales decreased 5 percent (2 per-
cent in local currencies) to $24,081 million. As
a percentage of revenues, cost of sales decreased
from 71.4 percent in 2015 to 71.2 percent in 2016. In
particular, the Process Automation and Power
Grids divisions had a reduction in cost of sales as
a percentage of revenues, resulting from improve-
ment in project margins and savings from supply
chain and operational excellence cost take-out
programs. In 2016, cost of sales was negatively
impacted by approximately 0.5 percent due to the
charges recorded for a change in previously
estimated warranty liabilities for certain solar
inverters sold by Power-One in the Discrete
Automation and Motion division.
In 2015, cost of sales decreased 11 percent (2 per-
cent in local currencies) to $25,347 million. As
a percentage of revenues, cost of sales decreased
from 71.8 percent in 2014 to 71.4 percent in 2015.
Cost of sales as a percentage of revenues de-
creased as benefits from higher cost savings and
benefits from ongoing measures taken in the
former Power Systems division’s ‘step change’
program more than offset the impact from price
erosion in the market and impacts from restructur-
ing and related costs for the White Collar
Productivity program.
Selling, general and
administrative expenses
The components of selling, general and adminis-
trative expenses were as follows:
($ in millions)
Selling expenses
2016
2015
2014
3,480
3,729
4,054
Selling expenses
as a percentage of orders received
10.4 % 10.2 % 9.8 %
General and
administrative expenses
General and administrative
expenses as a percentage
of revenues
Total selling, general
and administrative expenses
Total selling, general
and administrative expenses
as a percentage of revenues
Total selling, general
and administrative expenses as
a percentage of the average
of orders received and revenues
1,869
1,845
2,013
5.5 %
5.2 % 5.1 %
5,349
5,574
6,067
15.8 % 15.7 % 15.2 %
15.9 % 15.5 % 14.9 %
In 2016, general and administrative expenses
increased 1 percent compared to 2015 (4 percent in
local currencies). As a percentage of revenues,
general and administrative expenses increased from
5.2 percent to 5.5 percent. General and administra-
tive expenses were impacted by approximately
$183 million of restructuring and restructuring-related
expenses for the White Collar Productivity program.
Restructuring-related expenses include the addi-
tional costs of running parallel operations during
the relocation and transition phase, advisory costs
for external consultants, expenses associated with
our internal restructuring program implementation
teams and costs for hiring and training personnel
at new locations.
In 2015, general and administrative expenses
decreased 8 percent (increased 4 percent in local
currencies) compared to 2014. As a percentage of
revenues, general and administrative expenses
increased from 5.1 percent to 5.2 percent. General
and administrative expenses included
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 115115
Other income (expense), net
($ in millions)
2016
2015
2014
Restructuring and
restructuring-related expenses(1)
Net gain from sale of property,
plant and equipment
Asset impairments
Net gain (loss) from sale of
businesses
Misappropriation loss, net
Income from equity-accounted
companies and other income
(expense)
Total
(1) Excluding asset impairments
(49)
(67)
(37)
38
(61)
(10)
(73)
26
(33)
(20)
—
44
(11)
(111)
(105)
17
(34)
543
—
40
529
“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, recog-
nized asset impairments, as well as our share of
income or loss from equity-accounted companies.
In 2016, “Other income (expense), net” was an
expense of $111 million compared to an expense of
$105 million in 2015. In 2016, we recorded lower
restructuring costs (see ‘‘Note 22 Restructuring
and related expenses’’), higher gains on sale of
property, plant and equipment, and lower losses
from sale of businesses. Higher asset impairments
also negatively impacted Other income (expense),
net. We also recorded a loss of $73 million, net of
expected insurance recoveries, for the misappro-
priation of cash by the treasurer of our subsidiary
in South Korea. In addition, in 2016, other income
included gains on certain foreign currency deriva-
tives entered into in connection with the planned
sale of the Cables business.
In 2015, “Other income (expense), net” was an
expense of $105 million, compared with an income
of $529 million in 2014, and changed primarily due
to higher restructuring costs and lower gains from
sale of businesses.
approximately $121 million from costs for the
White Collar Productivity program and restructur-
ing-related expenses of approximately $18 million.
In 2016, selling expenses decreased 7 percent
compared to 2015 (decreased 4 percent in local
currencies) primarily driven by lower restructuring
expenses related to the White Collar Productivity
program. Selling expenses as a percentage of
orders received increased from 10.2 percent to
10.4 percent on lower orders. Selling expenses were
impacted by approximately $34 million from costs
for the White Collar Productivity program.
In 2015, selling expenses have decreased 8 percent
(increased 3 percent in local currencies) compared
to 2014. Selling expenses as a percentage of orders
have increased from 9.8 percent to 10.2 percent.
Selling expenses were impacted by approximately
$89 million from costs for the White Collar
Productivity program.
In 2016, selling, general and administrative
expenses decreased 4 percent compared to 2015
(2 percent in local currencies) and as a percentage
of the average of orders and revenues, selling,
general and administrative expenses increased
from 15.5 percent to 15.9 percent mainly impacted
by lower orders and revenues.
In 2015, selling, general and administrative
expenses decreased 8 percent (increased 3 percent
in local currencies) compared to 2014 and as
a percentage of the average orders and revenues,
selling, general and administrative expenses
increased from 14.9 percent to 15.5 percent on
both lower revenues and orders and higher costs.
Non-order related research
and development expenses
In 2016, non-order related research and develop-
ment expenses decreased 8 percent (6 percent in
local currencies) compared to 2015 and reflects the
savings realized by reducing the number of
employees. In 2015, non-order related research and
development expenses decreased 6 percent
(increased 6 percent in local currencies) compared
to 2014. Non-order related research and develop-
ment expenses as a percentage of revenues
decreased in 2016 to 3.8 percent, after increasing
to 4.0 percent in 2015 from 3.8 percent in 2014.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 116
Income from operations
($ in millions)
2016
2015
2014
2016
2015
% Change(1)
and lower foreign currency exchange rates. In
addition, interest charges for uncertain tax
positions were lower in 2015 compared to 2014.
1,335
1,356
1,562
(2) % (13) %
Provision for taxes
Electrification
Products
Discrete
Automation
and Motion
Process
Automation
Power Grids
Operating
divisions
Corporate
and Other
Intersegment
elimination
831
991
1,422
(16) % (30) %
696
888
685
613
931
257
2 % (26) %
45 % 139 %
3,750
3,645
4,172
3 % (13) %
(767)
(609)
(5)
n.a.
n.a.
4
13
11
n.a.
n.a.
Total
2,987
3,049 4,178
(2) % (27) %
(1) Certain percentages are stated as n.a. as the computed change would
not be meaningful.
In 2016 and 2015, changes in income from opera-
tions 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, commit-
ment fees on credit facilities, foreign exchange
gains and losses on financial items and gains and
losses on marketable securities.
($ in millions)
2016
2015
2014
Interest and dividend income
73
77
80
Interest and other finance expense
(261)
(286)
(362)
Net interest and other
finance expense
(188)
(209)
(282)
In 2016, “Interest and other finance expense”
decreased compared to 2015. Interest expense on
bonds and other debt was lower and interest
charges for uncertain tax positions were lower in
2016 compared to 2015. This was partially offset by
higher foreign exchange losses.
In 2015, “Interest and other finance expense”
decreased compared to 2014, mainly due to
a reduction in foreign exchange losses and lower
interest expense on debt. Interest expense on
debt was lower due to lower effective interest rates
($ in millions)
2016
2015
2014
Income from continuing operations
before taxes
Provision for taxes
2,799
(781)
2,840
3,896
(788)
(1,202)
Effective tax rate for the year
27.9 % 27.7 % 30.9 %
In 2016, the effective tax rate increased to 27.9
percent from 27.7 percent. The distribution of
income within the group resulted in a lower
weighted-average global tax rate. Changes in the
valuation allowance in 2016 compared to 2015
lowered the effective tax rate, as did the impact of
the interpretation of tax law and double tax treaty
agreements by competent tax authorities.
However, these were offset by the negative
impacts of changes in enacted tax rates and lower
benefits arising from research and development
activities.
In 2015, the effective tax rate of 27.7 percent
included a net increase in valuation allowance of
deferred taxes of $57 million, as we determined
it was not more likely than not that such deferred
tax assets would be realized. In addition, we
recorded a benefit of $50 million relating to tax
credits arising from research and development
activities and a charge of $74 million relating to the
interpretation of tax law and double tax treaty
agreements by competent tax authorities.
In 2014, the effective tax rate of 30.9 percent
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 divestment transactions increased the
effective tax rate as gains were realized primarily in
higher-tax jurisdictions and the goodwill 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 percent.
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.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 117117
The provision for taxes in 2014 also included tax
credits, arising in foreign jurisdictions, for which the
technical merits did not allow a benefit to be taken.
to 2015, and decreased $661 million to $1,933
million in 2015 compared to 2014.
Income from continuing
operations, net of tax
As a result of the factors discussed above, income
from continuing operations, net of tax, decreased
by $34 million to $2,018 million in 2016 compared
to 2015, and decreased $642 million to $2,052
million in 2015 compared to 2014.
Income from discontinued
operations, net of tax
The income from discontinued operations, net of
tax, for 2016, 2015 and 2014, was not significant.
Net income attributable to ABB
As a result of the factors discussed above, net
income attributable to ABB decreased by
$34 million to $1,899 million in 2016 compared
Earnings per share attributable
to ABB shareholders
(in $)
2016
2015
2014
Income from continuing
operations, net of tax:
Basic
Diluted
Net income attributable to ABB:
Basic
Diluted
0.88
0.87
0.88
0.88
0.87
0.87
0.87
0.87
1.12
1.12
1.13
1.13
Basic earnings per share is calculated by dividing
income by the weighted-average number of shares
outstanding during the year. Diluted earnings per
share is calculated by dividing income by the
weighted-average number of shares outstanding
during the year, assuming that all potentially
dilutive securities were exercised, if dilutive.
Potentially dilutive securities comprise: outstanding
written call options and outstanding options and
shares granted subject to certain conditions under
our share-based payment arrangements. See
“Note 20 Earnings per share” to our Consolidated
Financial Statements.
—
Divisional analysis
Electrification Products
The financial results of our Electrification Products
division were as follows:
% Change
($ in millions)
2016
2015
2014
2016
2015
Orders
9,158
9,833 10,861
(7) %
(9) %
Order backlog at
December 31,
Revenues
Income from
operations
2,612
9,292
2,872
2,798
(9) %
3 %
9,547 10,572
(3) % (10) %
1,335
1,356
1,562
(2) % (13) %
Operational EBITA
1,528
1,561
1,739
(2) % (10) %
Orders
In 2016, orders decreased 7 percent (4 percent in
local currencies). In the Medium Voltage Products
and the Electrification Solutions businesses
demand was lower due to weak market conditions
and lower orders from EPC projects. Orders also
decreased in the Installation Products business
on weaker orders from the distributor and end-
customer channels. Orders were higher in the
Building Products business largely due to higher
orders from distributors, but partially offset by
lower demand from our direct end-customers.
Orders were stable in the Protection and
Connection business with growth in OEM orders
offset by weaker order intake from the distributor
and end-customers channels.
In 2015, orders decreased 9 percent (steady in
local currencies). Local currency order growth
in the Protection and Connection business was
offset by decreases in orders in the Building
Products and the Electrification Solutions
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 118
businesses while orders in local currencies were
steady in the Medium Voltage Products business.
although this was partly offset by increases in
the panel builder channel.
The geographic distribution of orders for our
Electrification Products division was as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
37
27
36
35
26
39
36
24
40
100
100
100
In 2016, the share of orders in Europe increased
driven by growth in several countries, especially
Germany. In the Americas, while orders declined in
local currencies, the region was able to slightly
increase its share of orders relative to the larger
decrease in the Asia, Middle East and Africa region.
In Asia, Middle East and Africa the share of orders
decreased primarily due to lower orders in China
and Saudi Arabia compared to 2015.
In 2015, the share of orders in Europe decreased
primarily due to the strong U.S. dollar. The order
development in the Americas was steady, resulting
in an increase in the share of orders compared to
the other two geographies. The share of orders in
Asia, Middle East and Africa decreased due to
a slowdown of markets in China, the Middle East
and Australia. The share of orders in that region
compared to 2014 was also partially affected by
the strong U.S. dollar.
Order backlog
In 2016, order backlog decreased by 9 percent
(decrease of 5 percent in local currencies), primari-
ly on decreased backlog in the Medium Voltage
Products business on higher order execution for
modular systems and primary switchgear.
In 2015, order backlog increased by 3 percent
(increased by 11 percent in local currencies), driven
mainly by higher backlog in the Medium Voltage
Products business.
Revenues
In 2016, revenues decreased by 3 percent compared
to 2015 (increased 1 percent in local currencies). In
local currencies, revenues increased in the Medium
Voltage Products business unit, which was
primarily driven by sales for modular systems and
which was partly offset by lower revenues from
primary switchgear. Our Building Products
business also showed an increase in revenues with
growth driven through the distribution and panel
builder channels, which was slightly offset by lower
revenues from direct end-customers. Revenues
were lower in all other business units on lower
demand from the distribution and OEM channels,
In 2015, revenues decreased by 10 percent
(steady in local currencies). In local currencies,
revenues were higher in the Medium Voltage
Products, Protection and Connection and
Installation Products businesses and were lower
in the Building Products and Electrification
Solutions businesses.
The geographic distribution of revenues for our
Electrification Products division was as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
37
26
37
34
26
40
37
25
38
100
100
100
In 2016, the share of revenues in Europe increased
due to growth across several European countries,
especially Germany. Revenues in the Americas
decreased slightly, maintaining a steady overall
share of revenues. The share of revenues in Asia,
Middle East and Africa decreased primarily due to
lower revenues in China and the Middle East.
In 2015, the share of revenues in Europe decreased
primarily due to the strong U.S. dollar, as the
region otherwise showed solid local currency
growth. The revenues development in the Americas
was steady, resulting in an increase in the share of
revenues compared to the other two geographies.
The share of revenues in Asia, Middle East and
Africa increased slightly, however in local curren-
cies the region revenues were lower compared to
2014 due to a slowdown of markets in China, the
Middle East and Australia.
Income from operations
In 2016, income from operations decreased
2 percent primarily due to lower revenues and
lower gross margins compared to 2015. Reductions
in selling, general and administrative expenses
resulting from ongoing restructuring and cost
savings programs, as well as lower restructuring
and restructuring-related expenses partly offset
the impact of lower gross margins. In addition
changes in foreign currencies, including the
impacts from FX/commodity timing differences
summarized in the table below, negatively impact-
ed income from operations by 4 percent.
In 2015, income from operations decreased
13 percent. The decrease is primarily due to lower
revenues as well as higher restructuring charges in
connection with the company-wide White Collar
Productivity program which negatively impacted
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 119119
income from operations. In addition changes in
foreign currencies, including the impacts from
FX/commodity timing differences summarized in
the table below, negatively impacted income from
operations by 8 percent.
Operational EBITA
The reconciliation of income from operations to
Operational EBITA for the Electrification Products
division was as follows:
($ in millions)
2016
2015
2014
Income from operations
1,335
1,356
1,562
Acquisition-related amortization
Restructuring and
restructuring-related expenses(1)
Non-operational pension cost
Gains and losses on sale of
businesses, acquisition-related
expenses and certain
non-operational items
FX/commodity timing differences
in income from operations
95
73
3
8
14
100
113
124
(3)
4
(20)
49
(2)
(7)
24
Operational EBITA
1,528
1,561
1,739
(1) Amounts also include the incremental implementation costs in
relation to the White Collar Productivity program.
In 2016, Operational EBITA decreased 2 percent
(steady when excluding the impacts from changes
in foreign currencies) compared to 2015, as
declines in Installation Products and Protection
and Connection businesses were offset by im-
provements across all other businesses.
In 2015, Operational EBITA decreased 10 percent
(steady when excluding the impacts from changes
in foreign currencies) compared to 2014, as
declines in Installation Products business were
offset by other businesses.
Discrete Automation and Motion
The financial results of our Discrete Automation
and Motion division were as follows:
% Change
($ in millions)
2016
2015
2014
2016
2015
Orders
8,654
9,222 10,559
(6) % (13) %
Order backlog at
December 31,
Revenues
Income from
operations
4,078
4,232 4,385
(4) %
(3) %
8,714
9,127 10,142
(5) % (10) %
831
991
1,422
(16) % (30) %
Operational EBITA
1,195
1,295
1,595
(8) % (19) %
Orders
Orders in 2016 were 6 percent lower (4 percent in
local currencies). Strong order intake in the Robotics
business and higher orders from light industries,
such as the food and beverage industry, were more
than offset by lower orders in the Motors and
Generators and the Drives and Controls businesses,
primarily due to declining orders from the oil and
gas sector. Orders in the Power Conversion business
were also lower due to a decrease in orders from
customers in the solar industry.
Orders in 2015 decreased 13 percent (5 percent in
local currencies) due to weaker markets in most of
our businesses. Declining oil prices and slower
growth in China affected the order intake nega-
tively, especially in the Motors and Generators and
the Drives and Controls businesses. Orders in the
Robotics business increased in local currencies,
supported by strong demand for services. Orders
in the Power Conversion business were lower and
were impacted by lower large orders from the
rail segment.
The geographic distribution of orders for our
Discrete Automation and Motion division was
as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
36
33
31
34
35
31
39
32
29
100
100
100
In 2016, the share of orders in Europe increased
mainly due to strong demand in Germany and
Finland, respectively driven by the Robotics
business and the Drives and Controls business. The
share of orders from the Americas decreased
mainly due to lower orders in the Motors and
Generators business and lower orders in the Drives
and Controls business.
In 2015, the geographical distribution of our
orders changed primarily due to the impact of the
large rail orders from Europe in 2014. In addition,
orders from the Americas and Asia, Middle East
and Africa benefitted from strong orders in the
Robotics business.
Order backlog
Order backlog in 2016 decreased 4 percent. In local
currencies, order backlog was flat as lower order
backlog in the Drives and Controls business and
Motors and Generators business was offset by
increases in the backlog for the Robotics and
Power Conversion businesses.
Order backlog in 2015 decreased 3 percent (in-
creased 3 percent in local currencies) compared to
2014. In local currencies, order backlog increased
as lower order backlog in the Motors and Generators
business was offset by increases in the backlog for
the Robotics and Power Conversion businesses.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 20
Revenues
In 2016, revenues decreased 5 percent (2 percent in
local currencies) due to lower revenues in the
Motors and Generators, the Drives and Controls
and the Power Conversion businesses. Revenues
were higher in the Robotics business as we
executed on the strong orders received and the
strong order backlog.
In 2015, revenues were 10 percent lower (2 percent
in local currencies). Revenues were weaker, as
growth in the Robotics and Power Conversion
businesses, supported by strong order backlog,
was offset by weaker revenues resulting from
the lower order intake in the short-cycle businesses
such as low voltage motors and drives.
The geographic distribution of revenues for our
Discrete Automation and Motion division was
as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
36
34
30
35
35
30
37
33
30
100
100
100
In 2016, the geographical distribution of revenues
was similar to 2015. The share of revenues in
Europe slightly increased due to the execution of
a strong order backlog, while the share of revenues
in the Americas decreased due to lower volume in
the solar market. The share of revenues from Asia,
Middle East and Africa remained flat as higher
revenues in the Robotics business offset the
decline in the Drives and Controls and the Motors
and Generators businesses.
In 2015, revenues declined in all regions. The share
of revenue from Europe was lower than in 2014 due
to the weak markets for motors and drives. The
share of revenues from the Americas increased,
especially due to the revenue development in the
Robotics business. As a result the share of reve-
nues from Asia, Middle East and Africa remained
flat as higher revenues in the Robotics business
somewhat compensated the decline in the Drives
and Controls business.
Income from operations
In 2016, income from operations was 16 percent
lower compared to 2015 mainly due to the impact
of costs recorded for a change in estimated
warranty liabilities for certain solar inverters
designed and sold by Power-One. During 2016,
we recorded $151 million as a charge to cost of
sales to recognize a change in the estimated
warranty liability for these products, the majority of
which were delivered to customers by Power-One
prior to the acquisition date in 2013. Of this charge,
$131 million related to the products sold by
Power-One prior to the acquisition and has been
included as an adjustment, in the table below,
to determine the segment profit for the division.
Additionally, lower revenues and low capacity
utilization further reduced the income from
operations. Restructuring and restructuring-
related expenses in 2016 were lower than 2015.
Income from operations benefitted from a strong
performance of the Robotics business but was
offset by declines in the other businesses. Changes
in foreign currencies, including the impacts from
FX/commodity timing differences summarized
in the table below, negatively impacted income
from operations by 2 percent.
In 2015, income from operations decreased
30 percent compared to 2014 due to lower revenues
and lower capacity utilization. Steady income in the
Robotics business could not compensate for the
profit deterioration realized in other businesses.
The Drives and Controls business was negatively
affected by the weaker business climate in China
while the Motors and Generators business suffered
from low oil prices and weak demand leading to
lower factory utilization. Income from operations in
the Power Conversion business was flat despite
both continued price erosion and higher warranty
costs in the solar business. The division’s income
from operations was also negatively affected by the
impact of the higher restructuring charges incurred
in connection with capacity adjustments and the
company-wide White Collar Productivity program.
Changes in foreign currencies, including the
impacts from FX/commodity timing differences
summarized in the table below, negatively impacted
income from operations by 7 percent.
Operational EBITA
The reconciliation of income from operations to
Operational EBITA for the Discrete Automation and
Motion division was as follows:
($ in millions)
2016
2015
2014
Income from operations
Acquisition-related amortization
Restructuring and
restructuring-related expenses(1)
Non-operational pension cost
Changes in pre-acquisition
estimates
Gains and losses on sale of
businesses, acquisition-related
expenses and certain
non-operational items
FX/commodity timing differences
in income from operations
831
120
88
2
991
128
125
3
131
21
18
5
26
1
1,422
138
25
6
—
—
4
Operational EBITA
1,195
1,295
1,595
(1) Amounts also include the incremental implementation costs in
relation to the White Collar Productivity program.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 211 21
In 2016, Operational EBITA decreased 8 percent
(6 percent excluding the impacts from changes in
foreign currencies) primarily due to the reasons
described under “Income from operations”,
excluding the explanations related to the reconcil-
ing items in the table above.
In 2015, Operational EBITA decreased 20 percent
(11 percent excluding the impacts from changes in
foreign currencies) compared to 2014, primarily
due to the reasons described under “Income from
operations”, excluding the explanations related to
the reconciling items in the table above.
Process Automation
The financial results of our Process Automation
division were as follows:
% Change
($ in millions)
2016
2015
2014
2016
2015
Orders
5,866
7,347
9,213 (20) % (20) %
Order backlog at
December 31,
Revenues
Income from
operations
Operational EBITA
5,258
6,036
6,515
(13) %
(7) %
6,598
7,224 8,618
(9) % (16) %
696
824
685
931
2 % (26) %
863
1,045
(5) % (17) %
Orders
Orders in 2016 declined 20 percent (18 percent
in local currencies) compared with the previous
year, mainly due to continued low or decreased
levels of capital expenditure in both the onshore
and offshore oil segments. Orders were lower in
most Process Automation businesses, but mainly
in the Oil, Gas and Chemicals business, Marine
and Ports and Process Industries. The Process
Industries business continued to be affected by
low commodity prices leading to weak demand
from the mining and metals industries, where
spending overall, both capital expenditure and
operational expenditure, was cut.
Orders in 2015 declined 20 percent (9 percent in
local currencies), mainly due to the impacts of
a reduction in capital and operating expenditures
in the oil and gas sector resulting from continued
low oil prices. This negatively impacted the Oil,
Gas and Chemicals business. The continued low
oil prices adversely impacted the marine sector
and in particular the offshore drilling vessels
segment. This development negatively impacted
the Marine and Ports business. The Process
Industries business was also adversely affected
as the mining sector remained at a low level as
customers in this segment either continued to
delay or postpone investments due to low
commodity prices.
The geographic distribution of orders for our
Process Automation division was as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
42
21
37
38
22
40
34
22
44
100
100
100
In 2016, orders declined in all regions. Orders in
Europe declined less than other regions, thus
increasing the geographic share of orders from
Europe. The volume in Europe was supported by
orders from marine industries, specifically for
specialty vessels like cruise ships and ice-going
vessels. The share of orders from the Americas fell
slightly with order declines especially in Canada,
the U.S. and Chile, where the Process Industries
business was affected by low capital expenditure
in mining due to low demand from China for raw
materials. In the Asia, Middle East and Africa
region, orders were lower especially in the Marine
and Ports business due to weak demand for oil and
gas related vessels and the lack of infrastructure
projects from the ports business. In addition, the
Oil, Gas and Chemical business as well as the
Process Industries business suffered from the lack
of large orders in this geographic area.
In 2015, orders declined in all regions. The share
of orders from Asia, Middle East and Africa
declined due to large orders received from the
Marine and Ports business in 2014. In addition,
the region was impacted by weak domestic
demand in China. Orders in the Americas declined
by a lower percentage than the division as a whole,
resulting in a steady share of the orders from the
Americas. Declines included the impacts of lower
mining investments in South America, as well as
slowing demand in the U.S. from the upstream oil
and gas sector. As most major industrial econo-
mies in Europe were either steady or contracting
only slightly, the geographic share of orders from
Europe increased.
Order backlog
Order backlog at December 31, 2016 was 13 percent
lower (10 percent in local currencies) than at
December 31, 2015. The lower backlog was a result
of the lower order intake during the year and the
continued execution from the existing backlog.
Order backlog at December 31, 2015, was 7 percent
lower (3 percent higher in local currencies) than
at December 31, 2014. Order backlog in most
businesses was lower due to the impacts of lower
orders during the year. The increase in order
backlog in local currencies was due to the receipt
of higher large orders near the end of 2015.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 The regional distribution of revenues in 2015
remained steady compared to 2014 as a downturn
in the oil and gas and commodities sectors
affected all of the geographies. The share of
revenues from Europe declined, reflecting lower oil
and gas and marine activities in Norway. Revenues
in the Americas decreased proportionally. The
larger proportional revenue decrease in Europe
and a steady share of revenues in the Americas
resulted in a redistribution of the share to Asia,
Middle East and Africa.
Income from operations
In 2016, income from operations increased
2 percent compared with 2015, despite
decreasing revenues as restructuring charges
relating to the ongoing White Collar Productivity
program and other restructuring activities were
lower. Operating margins were maintained
as we reduced overhead costs by removing
organizational costs at the local division level
and downsizing operations in areas with low order
backlog and low market demand. Key actions
included closing warehouses and consolidating
operations to fewer locations, but mainly included
reducing the number of personnel. Restructuring
programs were implemented in all businesses due
to a continued weak market outlook. Overall, the
number of employees in the Process Automation
division was reduced by approximately 1,200
during 2016. In addition, changes in foreign curren-
cies, including the impacts from FX/commodity
timing differences summarized in the table below,
negatively impacted income from operations by
4 percent.
In 2015, income from operations declined 26 per-
cent compared to 2014, mainly from higher
restructuring charges due to the implementation
of the company-wide White Collar Productivity
program as well as the decrease in revenues
explained above. Changes in foreign currencies,
including the impacts from FX/commodity timing
differences summarized in the table below,
negatively impacted income from operations by
8 percent.
1 22
Revenues
In 2016, revenues declined 9 percent (6 percent in
local currencies) compared with the previous year.
The largest decline was in the Process Industries
business due to the lower opening order backlog
and the continued low level of order activity from
the mining and metals sector. A continued lack of
orders from the oil and gas industry negatively
impacted revenues in the Oil, Gas and Chemicals
business. The overall decrease in revenues was
mitigated by steady revenues in the Marine and
Ports business which was supported by the strong
opening order backlog for ice-going and cruise
vessels. Revenues were also steady in the Power
Generation business due to solid execution from
the order backlog. Of the product businesses,
Control Technologies had revenue levels similar to
the previous year, but the Measurement and
Analytics and the Turbocharging businesses were
slightly lower due to lower order intake.
In 2015, revenues decreased 16 percent (5 percent
in local currencies). Revenues in the Oil, Gas
and Chemicals business declined, reflecting
the lower opening order backlog as well as
reduced opportunities from slower customer
order tendering, especially in the service busi-
ness. The Marine and Ports business also re-
corded lower revenues, reflecting lower activity
in the offshore oil and gas industry and large
project delays. The Process Industries business,
which includes mining and metals, also declined.
Revenues in the Measurement and Analytics
business declined, largely due to lower demand
in the upstream oil and gas segment. In local
currencies, the Turbocharging and the Power
Generation businesses were flat while the Control
Technologies business had higher revenues.
The geographic distribution of revenues for our
Process Automation division was as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
37
21
42
34
23
43
36
23
41
100
100
100
In 2016, revenues continued to decline in the
Americas and in Asia, Middle East and Africa, while
Europe was stable. This resulted in an increase
in the share of revenues from Europe. Except for
the Marine and Ports business, revenues in the
Americas declined in all businesses, especially the
Oil, Gas and Chemicals, Process Industries and
the product businesses. Revenues in Asia, Middle
East and Africa were especially impacted by the
weak demand from the Process Industries busi-
ness, particularly mining.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 231 23
Operational EBITA
The reconciliation of income from operations to
Operational EBITA for the Process Automation
division was as follows:
($ in millions)
2016
2015
2014
Income from operations
Acquisition-related amortization
Restructuring and
restructuring-related expenses(1)
Non-operational pension cost
Gains and losses on sale of
businesses, acquisition-related
expenses and certain
non-operational items
FX/commodity timing differences
in income from operations
Operational EBITA
696
11
79
2
9
27
824
685
12
130
6
14
16
931
18
36
17
32
11
863
1,045
(1) Amounts also include the incremental implementation costs in
relation to the White Collar Productivity program.
In 2016, Operational EBITA decreased by 5 percent
(2 percent excluding the impacts from changes in
foreign currencies) compared to 2015, primarily
due to the reasons described under “Income from
operations”, excluding the explanations related to
the reconciling items in the table above.
In 2015, Operational EBITA decreased 17 percent
(9 percent excluding the impacts from changes in
foreign currencies) compared to 2014, primarily
due to the reasons described under “Income from
operations”, excluding the explanations related to
the reconciling items in the table above.
Power Grids
The financial results of our Power Grids division
were as follows:
% Change
($ in millions)
2016
2015
2014
2016
2015
Orders
11,232
12,205 12,768
(8) %
(4) %
Order backlog at
December 31,
12,437
12,502 12,619
(1) %
Revenues
10,975
11,621 12,518
(6) %
(1) %
(7) %
Income from
operations
888
Operational EBITA
1,021
613
877
257
607
45 % 139 %
16 %
44 %
Orders
In 2016, orders decreased 8 percent (5 percent in
local currencies) compared with 2015. The decrease
partly reflected a lower level of large orders, which
was primarily caused by the timing of order
awards. Base orders were also lower, reflecting
general macroeconomic uncertainty and sluggish-
ness in some geographic markets such as Saudi
Arabia and the U.S. The lower pull-through of
orders from other ABB divisions, primarily the
Process Automation division, reduced orders by
3 percent. Third-party base orders decreased
3 percent (steady in local currencies) with order
growth in the Grid Systems, High Voltage Products
and Grid Automation businesses offset by
market-driven base order weakness in the Trans-
formers business. Large orders in 2016 included
a $640 million UHVDC transmission link in India,
two UHVDC orders for China (each worth more
than $300 million), and a $250 million high-voltage
cable system to connect the Hornsea offshore
wind farm in the North Sea to the United Kingdom
mainland grid. The general market remains
competitive with macroeconomic and geopolitical
challenges.
In 2015, orders decreased 4 percent (increased
8 percent in local currencies) compared with 2014.
The growth in local currencies mainly resulted from
a higher level of large orders. Large orders in the
Grid Systems business included an HVDC order
awarded to connect the Norwegian and German
power grids and a $450 million HVDC order for an
interconnection between Norway and the United
Kingdom. Large orders were also supported by the
continued selective investments in large transmis-
sion projects in the U.S. and China. In local curren-
cies, base orders were lower, mainly due to the
challenging macroeconomic conditions. The
markets remained competitive with continued
pricing pressure.
The geographic distribution of orders for our
Power Grids division was as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
27
27
46
37
27
36
34
31
35
100
100
100
In the Power Grids division, the change in the
geographic share of orders often reflects changes
in the geographical location of large orders. In
2016, the share of orders from Asia, Middle East
and Africa increased from 36 percent to 46 percent,
helped by strong order intake in China and India.
Although the share of orders from the Americas
was steady, orders from the Americas were lower,
resulting from market challenges particularly in the
U.S. and Brazil. The share of orders from Europe
decreased to 27 percent, compared with 37 percent
in 2015, mainly due to the high amount of large
orders received from Europe in 2015.
In 2015, Europe benefited from a higher level of
large orders compared with 2014, supported by the
large HVDC awards. The share of orders from Asia,
Middle East and Africa increased to 36 percent,
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 24
supported by large orders. Orders in the Americas
were significantly lower, partly due to a significant
large HVDC order received in Canada in 2014.
Order backlog
Order backlog at December 31, 2016, decreased
1 percent (increased 3 percent in local currencies).
The local currency increase in order backlog was
mainly driven by the Transformers business,
resulting from a significantly higher share of large
orders with long leadtimes.
Order backlog at December 31, 2015, decreased
1 percent (increased 7 percent in local currencies)
compared with December 31, 2014. The local
currency increase in order backlog reflects the
impact of the high levels of large orders, which
typically have execution times stretching over
several years.
Revenues
Revenues in 2016 decreased 6 percent (3 percent
in local currencies) compared with 2015. The
revenue volume in 2016 mainly reflected the
scheduled execution of the order backlog. The
revenue decrease was mainly attributable to
the Grid Systems business as the offshore wind
projects which contributed strongly to the
revenues in 2015 were either finalized or nearing
completion. A lower level of revenues in the
Transformers business primarily resulted from
order weakness in the U.S. whereas revenues in
the Grid Integration business were negatively
impacted by the exit from the EPC Solar business
and the wind-down of the plant electrification
business.
Revenues in 2015 decreased 7 percent (increased
3 percent in local currencies) compared with
2014. The increase in local currencies was mainly
driven by steady execution of the order backlog,
led by growth in the Grid Systems business,
supported by the execution of offshore wind
projects. In local currencies, revenues were also
higher in the business units Grid Automation,
Transformers and High Voltage Products. These
positives more than offset a lower level of
revenues in the Grid Integration business, which
was partly caused by our exit from the EPC Solar
business in 2014.
The geographic distribution of revenues for our
Power Grids division was as follows:
(in %)
Europe
The Americas
Asia, Middle East and Africa
Total
2016
2015
2014
30
29
41
32
30
38
34
28
38
100
100
100
The regional distribution of revenues partly reflects
the geographical end-user markets of the projects
executed during the year, and consequently varies
over time. In 2016, the share of revenues from Asia,
Middle East and Africa increased to 41 percent,
supported by significantly higher revenues from
the Transformer business in China. The share of
revenues from Europe decreased to 30 percent,
mainly due to a lower level of revenues from the
Grid Systems business, related to lower revenues in
the offshore wind projects described above. The
share of revenues from the Americas was lower,
mainly driven by lower revenue volumes from the
U.S. and Brazil.
In 2015, revenues decreased in all regions. In Europe
the share of revenues decreased due mainly to lower
revenues in the Transformers and High Voltage
businesses. The steady execution in the Americas
resulted in a proportional increase of revenues from
that region, while the revenues in Asia, Middle East
and Africa decreased proportionally, mainly due to
the Grid Integration business.
Income from operations
In 2016, income from operations increased by
$275 million to $888 million compared with $613 mil-
lion in 2015. The impact from lower revenues was
more than offset by a higher gross margin, driven by
solid project execution, improved productivity and
continued cost savings. Restructuring and restruc-
turing-related expenses in 2016 of $101 million were
$59 million lower than in 2015 and included addition-
al charges for the White Collar Productivity program,
as well as initiatives to align the cost structure and
footprint of certain operations to reflect changing
market conditions. We had lower research and
development expenses and lower acquisition-related
amortization in 2016 compared to 2015. In addition,
changes in foreign currencies, including the changes
in FX/commodity timing differences in income from
operations decreased the division’s income from
operations by 2 percent compared to 2015.
In 2015, income from operations increased by
$356 million to $613 million compared with
$257 million in 2014, mainly due to benefits from the
ongoing measures taken in the ‘step change’
program (implemented in the former Power Systems
division) and continued cost reduction initiatives.
Restructuring-related expenses in 2015 of $160 mil-
lion were higher than in 2014 and included charges
for the new company-wide White Collar Productivity
program and ongoing costs for the previously-
announced initiatives to align the cost structure of
certain operations to reflect changing market
conditions. Continued cost savings, primarily related
to supply chain management and operational
excellence, helped to mitigate higher research and
development spending as well as the negative
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 251 25
effects from price pressures. Acquisition-related
amortization also decreased in 2015 compared to
2014. In addition, changes in the amount of FX/
commodity timing differences in income from
operations increased the division’s income from
operations by $124 million compared to 2014.
In 2016, Corporate headquarters and stewardship
costs increased due to the launch of the new ABB
brand and other costs related to the implementa-
tion of the Next Level Strategy program. In 2015,
Corporate headquarters and stewardship costs
were effectively at the same level of the prior year.
Operational EBITA
The reconciliation of income from operations to
Operational EBITA for the Power Grids division was
as follows:
($ in millions)
2016
2015
2014
Income from operations
Acquisition-related amortization
Restructuring and
restructuring-related expenses(1)
Non-operational pension cost
Gains and losses on sale of
businesses, acquisition-related
expenses
and certain non-operational items
FX/commodity timing differences
in income from operations
Operational EBITA
888
35
101
(2)
(2)
1
1,021
613
52
160
3
257
89
106
12
39
9
10
877
134
607
(1) Amounts also include the incremental implementation costs in
relation to the White Collar Productivity program.
Corporate real estate primarily includes the
income from property rentals and gains from the
sale of real estate properties. In 2016, 2015 and
2014, income from operations in Corporate real
estate included gains of $33 million, $26 million
and $17 million, respectively, from the sales of real
estate property in various countries.
In 2016, ABB recorded a total of $199 million in
“Corporate and Other” for both restructuring
and related expenses as well as program imple-
mentation costs for the White Collar Productivity
program. These costs relate mainly to employee
severance costs and both external and internal
costs relating to the execution of the program.
In 2015, costs incurred in connection to the
White Collar Productivity program amounted to
$130 million. For further information on the White
Collar Productivity program see “Restructuring
and other cost savings initiatives” below.
In 2016, Operational EBITA increased by 16 percent
(19 percent excluding the impacts from changes in
foreign currencies) compared to 2015, primarily
due to the reasons described under “Income from
operations”, excluding the explanations related to
the reconciling items in the table above.
The historical results of operations for certain
divested businesses have been presented in
“Corporate and Other”. In 2014, the amount
primarily represents gains recorded on the
divestments of these businesses of $543 million.
In 2015, Operational EBITA increased by $270 million.
This was primarily driven by the reasons described
under “Income from operations”, excluding the
explanations related to the reconciling items in the
table above.
In 2016, we recorded a loss of $73 million, net of
expected insurance recoveries, for the misappro-
priation of cash by the treasurer of our subsidiary
in South Korea.
Corporate and Other
Income (loss) from operations for Corporate and
Other was as follows:
($ in millions)
2016
2015
2014
Corporate headquarters
and stewardship
Corporate research
and development
Corporate real estate
White Collar Productivity
program costs
Divested businesses
Misappropriation loss
Other
(380)
(355)
(343)
(133)
(144)
(174)
47
50
44
(199)
(130)
—
(73)
(29)
2
—
(32)
—
547
—
(79)
(5)
Total Corporate and Other
(767)
(609)
“Other” consists of operational costs of our Global
Treasury Operations, operating income or loss in
other 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 2016, “Other” included the impact of a reduction
in certain insurance-related provisions for
self- insured risks offset by amounts recorded for
certain pension curtailment costs. In 2015, “Other”
declined primarily due to a reduction of insurance-
related provisions for self-insured risks. In 2014,
“Other” included primarily lower charges in
connection with legal compliance cases and lower
environmental expenses compared to 2013.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 26
—
Restructuring and other cost
savings initiatives
White Collar Productivity
program
In September 2015, we announced a two-year
program aimed at making ABB leaner, faster and
more customer-focused. Productivity improve-
ments include the rapid expansion and use of
regional shared service centers as well as the
streamlining of global operations and head office
functions, with business units moving closer to
their respective key markets. In the course of this
program, we are implementing and executing
various restructuring initiatives across all operating
segments and regions.
The program was originally expected to generate
cost savings of approximately $1.0 billion and
be realized from 2016 and increasing through the
end of 2017. During 2016, we re-assessed the
expected amount of cost savings and increased
the expected total annual rate of cost savings
from the program by 30 percent to approximately
$1.3 billion. During 2016, cost savings of approxi-
mately $0.6 billion were realized. These savings are
primarily being realized as reductions in cost of
sales, selling, general and administrative expenses
and non-order related research and development
expenses.
The following table outlines the costs incurred in
2016, the cumulative amount of costs incurred
to date and the total amount of costs expected to
be incurred under the program.
Costs incurred in
($ in millions)
2016
2015
Electrification
Products
Discrete
Automation
and Motion
Process
Automation
Power Grids
Corporate
and Other
Total
14
73
27
36
33
30
140
45
96
70
86
370
Cumulative
costs
incurred up to
December 31,
2016
Total
expected
costs(1)
87
72
132
103
116
510
89
74
134
105
118
520
(1) Total expected costs have been recast to reflect the reorganization of
the Company’s operating segments as outlined in Note 23.
Total expected program costs were originally
estimated to be $852 million. During 2016, the total
expected program restructuring costs were
reduced by $332 million. This was primarily due
to the realization of significantly higher than
originally expected attrition and internal
re-deployment rates. The reductions were made
across all operating divisions as well as for
corporate functions. In addition, we reduced the
expected average severance costs per person as
more precise cost estimates were available after
determining the specific country locations of
affected employees.
In 2016 and 2015, restructuring costs of
$140 million and $370 million, respectively, were
recorded based on the anticipated number of
personnel to be impacted by the program and
a country-specific average severance cost per
person. Various functions including marketing and
sales, supply chain management, research and
development, engineering, service, and certain
other support functions were impacted in various
phases commencing in 2015 and continuing in 2016.
In 2016, we experienced a significantly higher
than expected rate of attrition and re-deployment
and a lower than expected severance cost per
employee for the employee groups affected by the
restructuring programs initiated in 2015 and 2016.
As a result, in 2016, we adjusted the amount of
our estimated liability for restructuring which
was recorded in 2015. This change in estimate
of $103 million for the twelve months ended
December 31, 2016 resulted in a reduction primarily
in cost of sales of $49 million and in selling, general
and administrative expenses of $38 million for
the twelve months ended December 31, 2016. The
expense recorded for the restructuring initiated
in 2016 includes the impacts of the attrition and
re-deployments realized in 2016. Due to the signifi-
cant subjectivity of our estimate of future attrition
and internal re-deployment rates, the amount
reported for restructuring liabilities at December
31, 2016 will change based on actual attrition and
re-deployment rates realized in 2017.
To complete the remaining planned restructuring
activities, we estimate that additional restructuring
costs of approximately $10 million will be recorded
in 2017.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 271 27
The majority of the remaining cash outlays, primarily
for employee severance benefits, are expected to
occur in 2017. We expect that our cash flow from
operating activities will be sufficient to cover any
obligations under this restructuring program.
Other restructuring-
related activities and cost
savings initiatives
For details of the nature of the costs incurred
and their impact on the Consolidated Financial
Statements, see ‘‘Note 22 Restructuring and
related expenses’’ to our Consolidated Financial
Statements.
In 2016, 2015 and 2014, we also executed other
restructuring-related and cost saving measures to
sustainably reduce our costs and protect our
profitability. Costs associated with these other
measures amounted to $171 million, $256 million
and $235 million in 2016, 2015 and 2014,
respectively.
—
Liquidity and capital resources
Principal sources of funding
We meet our liquidity needs principally using cash
from operations, proceeds from the issuance of
debt instruments (bonds and commercial paper),
and short-term bank borrowings.
During 2016, 2015 and 2014, our financial position
was strengthened by the positive cash flow from
operating activities of $3,843 million, $3,818 mil-
lion and $3,845 million, respectively.
Our net debt is shown in the table below:
($ in millions)
Short-term debt and current
maturities of long-term debt
Long-term debt
Cash and equivalents
Marketable securities
and short-term investments
Net debt
(defined as the sum of the above lines)
December 31,
2016
2015
1,003
1,454
5,800
5,985
(3,644)
(4,565)
(1,953)
(1,633)
1,206
1,241
Net debt at December 31, 2016, decreased
$35 million compared to December 31, 2015, as
cash flows from operating activities during
2016 of $3,843 million exceeded cash outflows for
the payment to our shareholders of the nominal
value reduction ($1,610 million), net purchases of
property, plant and equipment and intangible
assets ($770 million) and amounts paid to purchase
treasury stock ($1,299 million). Other significant
transactions affecting our liquidity included the
issuance of treasury shares for $192 million and
payments of dividends to noncontrolling
shareholders of $122 million. Movements in foreign
exchange rates increased net debt by approximate-
ly $50 million. See “Financial Position”, “Investing
activities” and “Financing activities” for further
details.
Our Group Treasury Operations is responsible
for providing a range of treasury management
services to our group companies, including
investing cash in excess of current business
requirements. At December 31, 2016 and 2015,
the proportion of our aggregate “Cash and
equivalents” and “Marketable securities and
short-term investments” managed by our Group
Treasury Operations amounted to approximately
57 percent and 55 percent, respectively.
Throughout 2016 and 2015, the investment strategy
for cash (in excess of current business require-
ments) has generally been to invest in short-term
time deposits with maturities of less than 3 months,
supplemented at times by investments in corporate
commercial paper, money market funds, and in
some cases, government securities. During 2016
and 2015, we also continued to place limited
funds in connection with reverse repurchase
agreements. We actively monitor credit risk in our
investment portfolio and hedging activities. Credit
risk exposures are controlled in accordance with
policies approved by our senior management to
identify, measure, monitor and control credit risks.
We closely monitor 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 2016 (compared to
2015) as follows: a minimum rating of A/A2 for our
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 28
banking counterparts, while the minimum required
rating for investments in short-term corporate
commercial paper is A-1/P-1. In addition to rating
criteria, we have specific investment parameters
and approved instruments as well as restrictions on
the types of investments we make. These parame-
ters are closely monitored on an ongoing basis and
amended as we consider necessary.
Our cash is held in various currencies around the
world. Approximately 28 percent of our cash and
cash equivalents held at December 31, 2016, was in
U.S. dollars, while other significant amounts were
held in the Chinese renminbi (22 percent), the euro
(approximately 12 percent), the Canadian dollar
(approximately 8 percent), the Norwegian krone
(7 percent) and the Indian rupee (5 percent).
We believe the cash flows generated from our
business, supplemented, when necessary, through
access to the capital markets (including short-term
commercial paper) and our credit facilities are
sufficient to support business operations, capital
expenditures, business acquisitions, the payment
of dividends to shareholders and contributions
to pension plans. Consequently, we believe that our
ability to obtain funding from these sources will
continue to provide the cash flows necessary to
satisfy our working capital and capital expenditure
requirements, as well as meet our debt repayments
and other financial commitments for the next
12 months. See “Disclosures about contractual
obligations and commitments”.
Due to the nature of our operations, 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.
Debt and interest rates
Total outstanding debt was as follows:
($ in millions)
Short-term debt and current
maturities of long-term debt
Long-term debt:
Bonds
Other long-term debt
Total debt
December 31,
2016
2015
1,003
1,454
5,653
5,811
147
174
6,803
7,439
due in 2017, from long-term to short-term. In
addition, we decreased the amount of issued
commercial paper ($57 million outstanding at
December 31, 2016, compared to $132 million
outstanding at December 31, 2015).
Our debt has been obtained in a range of curren-
cies and maturities and on various interest rate
terms. For certain of our debt obligations, we use
derivatives to manage the fixed interest rate
exposure. For example, we use interest rate swaps
to effectively convert fixed rate debt into floating
rate liabilities. After considering the effects of
interest rate swaps, the effective average interest
rate on our floating rate long-term debt (including
current maturities) of $1,745 million and our
fixed rate long-term debt (including current
maturities) of $4,923 million was 1.3 percent and
2.9 percent, respectively. This compares with
an effective rate of 0.8 percent for floating rate
long-term debt of $2,285 million and 3.2 percent
for fixed rate long-term debt of $4,876 million
at December 31, 2015.
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 2016 we exercised our second and final
option to extend the maturity of our $2 billion
multicurrency revolving credit facility from
2020 to 2021.
No amount was drawn under the credit facility at
December 31, 2016 and 2015. The 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 indebted-
ness, 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.
Commercial paper
The decrease in short-term debt in 2016 was due
to the repayment at maturity of both our USD
600 million 2.5% Notes and our CHF 500 million
1.25% Bonds. This was partially offset by the
reclassification of our USD 500 million 1.625%
Notes and our AUD 400 million 4.25% Notes, both
At December 31, 2016, we had two commercial
paper programs in place:
• a $2 billion commercial paper program for the
private placement of U.S. dollar denominated
commercial paper in the United States, and
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 1 291 29
• a $2 billion Euro-commercial paper program for
the issuance of commercial paper in a variety of
currencies.
December 31, 2016 and 2015, was $291 million and
$297 million, respectively.
At December 31, 2016, $57 million was outstanding
under the $2 billion program in the United States,
compared to $132 million outstanding at
December 31, 2015.
No amount was outstanding under the $2 billion
Euro-commercial paper program at December 31,
2016 and 2015.
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. During 2016, we
issued EUR 700 million 0.625% Notes, due 2023,
under the program. At December 31, 2016, two
bonds (principal amount of EUR 1,250 million, due
in 2019, and principal amount of EUR 700 million,
due in 2023) having a combined carrying amount of
$2,043 million were outstanding under the
program. At December 31, 2015, one bond (princi-
pal amount of EUR 1,250 million and due in 2019)
having a carrying amount of $1,363 million was
outstanding under the program. As of March 1,
2017, it was more than 12 months since the
program had been updated. New bonds could be
issued under the program but could not be listed
without us formally updating the program.
Australian program for the
issuance of debt
During 2012, we set up a program for the issuance
of up to AUD 1 billion (equivalent to $722 million,
using December 31, 2016, exchange rates) of
medium-term notes and other debt instruments.
The terms of the program do not obligate any
third-party to extend credit to us and the terms
and possibility of issuing any debt under the
program are determined with respect to, and as of
the date of issuance of, each debt instrument. At
both December 31, 2016 and 2015, 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
Credit ratings
Credit ratings are assessments by the rating
agencies of the credit risk associated with ABB
and are based on information provided by us or
other sources that the rating agencies consider
reliable. Higher ratings generally result in lower
borrowing costs and increased access to capital
markets. Our ratings are of “investment grade”
which is defined as Baa3 (or above) from Moody’s
and BBB− (or above) from Standard & Poor’s.
At both December 31, 2016 and 2015, 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,
China, Egypt, India, Indonesia, Kazakhstan,
Malaysia, Peru, Russian Federation, South Africa,
Taiwan, Thailand, Turkey and Viet Nam. 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 coun-
tries where the cash is situated, including those
described above. At December 31, 2016 and 2015,
the balance of “Cash and equivalents” and
“Marketable securities and other short-term
investments” under such limitations (either
regulatory or sub-optimal from a tax perspective)
totaled approximately $1,737 million and
$1,402 million, respectively.
During 2016 we continued to direct our
subsidiaries in countries with restrictions to place
such cash with our core banks or investment
grade banks, in order to minimize credit risk on
such cash positions. We continue to closely
monitor the situation to ensure bank counterparty
risks are minimized.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 130
—
Financial position
Balance sheets
($ in millions)
Current assets
December 31,
2016
2015
%
Change
($ in millions)
Current liabilities
December 31,
2016
2015
%
Change
Accounts payable, trade
4,446
4,342
2 %
Billings in excess of sales
1,241
1,375 (10) %
Cash and equivalents
3,644
4,565 (20) %
Short-term debt and current
maturities of long-term debt
Marketable securities and short-
term investments
Receivables, net
Inventories, net
Prepaid expenses
Deferred taxes
Other current assets
Assets held for sale
Total current assets
1,953
1,633
20 %
Advances from customers
9,696
10,061
(4) %
Deferred taxes
4,347
4,757
(9) %
Provisions for warranties
225 (22) %
Other provisions
Other current liabilities
Liabilities held for sale
176
888
688
548
881
638
—
1 %
8 %
n.a.
21,940
22,760
(4) %
1,003
1,398
258
1,142
1,765
1,454 (31) %
1,598 (13) %
249
1,089
4 %
5 %
1,920
(8) %
3,936
3,817
218
—
3 %
n.a.
For a discussion on cash and equivalents, see
sections “Liquidity and Capital Resources –
Principal sources of funding” and “Cash flows”
for further details.
Marketable securities and short-term investments
increased in 2016 due primarily to higher amounts
deposited with banks with fixed deposit terms
over three months partially offset by lower
investments in commercial paper (see “Cash
flows – Investing activities”, below, and “Note 4
Cash and equivalents, marketable securities and
short-term investments”).
Receivables decreased 4 percent (1 percent in local
currencies). The decrease was due partly to lower
revenue levels in 2016 compared to 2015 but was
mostly offset by the impact of a small increase in
days sales outstanding (DSO). The change in DSO
was due primarily to the geographic mix of reve-
nues with a higher proportion of revenues coming
from locations where there are longer customary
payment terms. For details on the components of
Receivables, see “Note 7 Receivables, net”.
Inventories decreased 9 percent (4 percent in local
currencies) primarily due to lower business
volumes. In addition, inventory was lower due to
positive results from the Company’s 1,000-day
program focusing on inventory optimization.
Total current liabilities
15,407
15,844
(3) %
Accounts Payable increased 6 percent in local
currencies due primarily to an increase in the
number of days of payables outstanding which
was achieved through focused efforts to extend
payment terms with suppliers.
Billings in excess of sales decreased 7 percent in
local currencies primarily due to the reclassifica-
tion of amounts to Liabilities held for sale.
The decrease in Short-term debt and current
maturities of long-term debt was primarily due to
the repayment during the year of the USD 600 mil-
lion Notes and the CHF 500 million Bonds offset
partially by the reclassification to short-term debt
of the USD 500 million and AUD 400 million Notes,
both due in 2017.
Advances from customers decreased 10 percent in
local currencies due to the impacts of lower orders,
especially from the larger orders for capital
expenditures from the oil and gas sector. In
addition, market conditions have placed pressure
on contract payment terms, reducing the amount
of advances we have received.
Provisions for warranties increased 9 percent in
local currencies due primarily to an increase in
the warranty liability in the solar business of the
Discrete Automation and Motion division. This
increase was required to cover costs associated
with higher than expected product failure rates of
certain solar inverters manufactured by Power-One
and sold to customers primarily before being
acquired by the Company in 2013.
The decrease in Other provisions (5 percent in local
currencies) was primarily due a reduction in the
liability for self-insurance and lower provisions for
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 contract losses as the large offshore wind projects
are completed.
Cash flows
131131
December 31,
2016
2015
%
Change
In the Consolidated Statements of Cash Flows,
the effects of discontinued operations are not
segregated.
($ in millions)
Non-current assets
Property, plant and equipment, net
4,743
5,276 (10) %
Goodwill
Other intangible assets, net
Prepaid pension and other
employee benefits
Investments
in equity-accounted companies
Deferred taxes
Other non-current assets
9,501
1,996
9,671
(2) %
2,337
(15) %
90
68
32 %
170
527
532
178
423
(4) %
25 %
643
(17) %
Total non-current assets
17,559
18,596
(6) %
In 2016, Property, plant and equipment, net,
decreased 7 percent in local currencies due
primarily to the reclassification of amounts to
Assets held for sale.
Other intangible assets decreased primarily due
to the amortization during the year. For additional
information on intangible assets see “Note 11
Goodwill and other intangible assets” to our
Consolidated Financial Statements.
($ in millions)
Non-current liabilities
Long-term debt
Pension and other employee
benefits
Deferred taxes
December 31,
2016
2015
%
Change
5,800
5,985
(3) %
1,834
1,924
(5) %
957
965
(1) %
Other non-current liabilities
1,604
1,650
(3) %
Total non-current liabilities
10,195
10,524
(3) %
Long-term debt decreased 3 percent of which
2 percentage points were due to movements in
foreign exchange rates. The remaining change was
due primarily to the issue of the EUR 700 million
Notes in May 2016, offset by the reclassification to
current of the USD 500 million Notes and the AUD
400 million Notes. See “Liquidity and Capital
Resources – Debt and interest rates” for informa-
tion on long-term debt.
The decrease in Pension and other employee
benefits was primarily due to foreign exchange
rate movement. For additional information, see
“Note 17 Employee benefits” to our Consolidated
Financial Statements.
For a breakdown of other noncurrent liabilities,
see “Note 13 Other provisions, other current
liabilities and other non-current liabilities” to our
Consolidated Financial Statements.
The Consolidated Statements of Cash Flows can
be summarized as follows:
($ in millions)
2016
2015
2014
Net cash provided by operating
activities
3,843
3,818
3,845
Net cash used in investing activities (1,305)
(974)
(1,121)
Net cash used in financing activities (3,355)
(3,380)
(3,024)
Effects of exchange rate changes on
cash and equivalents
Net change in cash and
equivalents – continuing operations
(104)
(342)
(278)
(921)
(878)
(578)
Operating activities
($ in millions)
Net income
2016
2015
2014
2,034
2,055
2,718
Depreciation and amortization
1,135
1,160
1,305
Total adjustments to reconcile net
income to net cash provided by
operating activities (excluding
depreciation and amortization)
Total changes in operating assets
and liabilities
Net cash provided by operating
activities
1
(55)
(200)
673
658
22
3,843
3,818
3,845
Operating activities in 2016 provided net cash of
$3,843 million, an increase from 2015 of 1 percent
as Net income was steady and net working capital
improvements continued to contribute to positive
cash flows. Net working capital management
improvements included a reduction of inventories
and a significant increase in trade payables,
resulting from focused efforts to extend payment
terms with suppliers. The timing of income tax
payments also improved cash provided by operat-
ing activities. These benefits were offset by
impacts from lower advances from customers. In
addition, cash flows from operating activities
was negatively impacted by the misappropriation
of $103 million in cash by the treasurer of our
subsidiary in South Korea.
Operating activities in 2015 provided net cash of
$3,818 million, a decrease from 2014 of 1 percent.
The decrease was driven by lower net income,
partly offset by improvements in net working
capital. Provisions, net, increased by $330 million
reflecting the timing differences for cash payments
on restructuring programs. Although net income
in 2015 included restructuring and related expens-
es of $370 million in relation to the White Collar
Productivity program, cash payments during 2015
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 13 2
amounted to $35 million. Net working capital
also improved due to stronger collections from
customers as we decreased our trade receivables
but also increased our advances from customers
and billings in excess of sales. Improvements
in inventory were offset by similar reductions in
trade payables.
Investing activities
($ in millions)
2016
2015
2014
Purchases of marketable securities
(available-for-sale)
(1,214)
(1,925)
(1,430)
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
Net cash from settlement of foreign
currency derivatives
Other investing activities
(3,092)
(614)
(1,465)
(831)
(876)
(1,026)
(26)
(56)
(70)
1,057
434
361
539
1,022
523
2,241
653
1,011
61
68
33
(1)
69
1,110
(57)
18
231
20
(179)
11
Net cash used in investing activities (1,305)
(974)
(1,121)
Net cash used in investing activities in 2016 was
$1,305 million, compared to $974 million in 2015.
The change was primarily due to the change in the
cash impacts from derivative cash flows classified
as investing activities as in 2016 we had net
outflows of $57 million, compared to inflows of
$231 million in 2015, on settlement of foreign
currency derivatives relating to investing activities.
These cash flows primarily result from the maturity
and settlement of derivatives in place to hedge
foreign currency exposures on internal subsidiary
funding and the amount of the settlement results
from movements in foreign currency exchange
rates throughout the year.
Net cash used in investing activities in 2015
was $974 million, compared to $1,121 million in
2014. Significantly lower proceeds from sales
of businesses were partially offset by a reduction
in the net amount invested in marketable
securities and other short-term investments as
well as lower purchases of property, plant and
equipment and intangible assets. Net cash used in
investing activities was also lower in 2015
compared to 2014 as we received $231 million in
net cash on settlement of foreign currency
derivatives relating to investing activities com-
pared with net cash outflows in 2014 of
$179 million.
Total cash disbursements for the purchase of
property, plant and equipment and intangibles
were lower in 2016 compared to 2015 and lower in
2015 compared to 2014, primarily due to move-
ments in foreign exchange rates and an increase in
the amount of unpaid purchases. In 2016, total
purchases of $831 million included $595 million for
construction in process (generally for construction
of buildings and other property facilities), $168 million
for the purchase of machinery and equipment,
$28 million for the purchase of land and buildings,
and $40 million for the purchase of intangible
assets. In 2015, total purchases of $876 million
included $568 million for construction in process
(generally for construction of buildings and other
property facilities), $200 million for the purchase
of machinery and equipment, $50 million for the
purchase of land and buildings, and $58 million for
the purchase of intangible assets. In 2014, total
purchases of $1,026 million included $724 million
for construction in progress, $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.
In 2016 and 2015, we continued to increase the
amount of our excess liquidity invested in
marketable securities and short-term investments.
Amounts at December 31, 2016, were placed
primarily in fixed-term deposits with banks and in
short-term money market funds. At December 31,
2015, amounts were placed primarily in short-term
money market funds and corporate commercial
paper. The increase in investments during 2016, 2015
and 2014, resulted in a net outflow of $469 million,
$430 million and $1,000 million, respectively.
In 2016 and 2015, there were no significant
acquisitions or divestments of businesses. During
2014, we received net pre-tax proceeds from sales
of businesses and cost- and equity-accounted
companies of $1,110 million, primarily from the
divestment of the Full Service business, the Steel
Structures business of Thomas & Betts, the HVAC
business of Thomas & Betts and the Power
Solutions business of Power-One.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 133133
Financing activities
program see “Note 19 Stockholders’ equity” to our
Consolidated Financial Statements.
($ in millions)
2016
2015
2014
Net changes in debt with maturities
of 90 days or less
Increase in debt
Repayment of debt
Delivery of shares
(152)
912
3
68
(1,249)
(101)
192
107
(103)
150
(90)
38
Purchase of treasury stock
(1,299)
(1,487)
(1,003)
Dividends paid
— (1,357)
(1,841)
Reduction in nominal value of com-
mon shares paid to shareholders
Dividends paid to noncontrolling
shareholders
Other financing activities
(1,610)
(392)
—
(122)
(27)
(137)
(132)
(84)
(43)
Net cash used in financing activities (3,355)
(3,380) (3,024)
Our financing activities primarily include
debt transactions (both from the issuance of
debt securities and borrowings directly from
banks), share transactions and payments of
distributions to controlling and noncontrolling
shareholders.
In 2016, the net cash outflow for debt with matur-
ities of 90 days or less related primarily to reduc-
tion of $75 million in the amount outstanding
under our commercial paper program in the U.S.
and net repayments of short-term borrowings in
various countries. In 2014, the net cash outflow for
debt with maturities of 90 days or less related
primarily to repayments made of borrowings in
various countries offset by a small increase in the
amount outstanding under our commercial paper
program in the U.S.
In 2016, the increase in debt was due primarily to
the issuance of our EUR 700 million 0.625% Notes
due 2023 (equal to $807 million at date of issu-
ance). In 2015 and 2014, increases in other debt
included cash flows from additional borrowings in
various countries.
During 2016, $1,249 million of debt was repaid,
reflecting primarily the repayment at maturity of
the USD 600 million 2.5% Notes and CHF 500 mil-
lion 1.25% Bonds (in total equivalent to $1,106 mil-
lion at dates of repayment). In 2015 and 2014
repayment of debt reflects repayments of borrow-
ings in various countries.
In 2016 and 2015, “Purchase of treasury stock”
reflects the cash paid to purchase 65 million and
73 million, respectively, of our own shares in
connection with the share buyback program
announced in September 2014. In 2014, the amount
reflects cash paid to acquire 45 million of our own
shares of which 33 million shares were purchased
in connection with the share buyback program. For
additional information on the share buyback
Disclosures about contractual
obligations and commitments
The contractual obligations presented in the table
below represent our estimates of future payments
under fixed contractual obligations and commit-
ments. The amounts in the table may differ from
those reported in our Consolidated Balance Sheet at
December 31, 2016. Changes in our business needs,
cancellation provisions and changes in interest
rates, as well as actions by third parties and other
factors, may cause these estimates to change.
Therefore, our actual payments in future periods
may vary from those presented in the table. The
following table summarizes certain of our contrac-
tual obligations and principal and interest payments
under our debt instruments, leases and purchase
obligations at December 31, 2016.
($ in millions)
Total
Less
than
1 year
1 – 3
years
3 – 5
years
More
than
5 years
Payments due by
period
Long-term debt
obligations
Interest payments
related to
long-term debt
obligations
Operating lease
obligations
Capital lease
obligations(1)
Purchase
obligations
6,534
843
1,700
1,255
2,736
1,446
195
320
231
700
1,548
382
552
371
243
177
30
48
4,553
3,730
710
31
99
68
14
Total
14,258
5,180
3,330
1,987
3,761
(1) Capital lease obligations represent the total cash payments to be
made in the future and include interest expense of $62 million and
executory costs of $1 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 adjust-
ments and premiums or discounts on certain debt.
In addition, capital lease obligations are shown
separately in the table above while they are
combined with Long-term debt amounts in our
Consolidated Balance Sheets.
We have determined the interest payments related
to long-term debt obligations by reference to the
payments due under the terms of our debt
obligations at the time such obligations were
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 13 4
incurred. However, we use interest rate swaps to
modify the interest characteristics of certain of our
debt obligations. The net effect of these swaps
may be to increase or decrease the actual amount
of our cash interest payment obligations, which
may differ from those stated in the above table.
For further details on our debt obligations and the
related hedges, see “Note 12 Debt” to our
Consolidated Financial Statements.
contractual obligations. ABB would then have an
obligation to reimburse the financial institution for
amounts paid under the performance bonds. At
December 31, 2016 and 2015, the total outstanding
performance bonds aggregated to $7.9 billion and
$9.5 billion, respectively. There have been no
significant amounts reimbursed to financial
institutions under these types of arrangements in
2016, 2015 and 2014.
For additional descriptions of our performance,
financial and indemnification guarantees see
“Note 15 Commitments and contingencies” to our
Consolidated Financial Statements.
Of the total of $921 million unrecognized tax
benefits (net of deferred tax assets) at
December 31, 2016, it is expected that $9 million will
be paid within less than a year. However, we cannot
make a reasonably reliable estimate as to the
related future payments for the remaining amount.
Off balance sheet arrangements
Commercial commitments
We disclose the maximum potential exposure of
certain guarantees, as well as possible recourse
provisions that may allow us to recover from
third-parties amounts paid out under such
guarantees.The maximum potential exposure does
not allow any discounting of our assessment of
actual exposure under the guarantees. The
information below reflects our maximum potential
exposure under the guarantees, which is higher
than our assessment of the expected exposure.
Guarantees
The following table provides quantitative data
regarding our third-party guarantees. The maximum
potential payments represent a worst-case scenario,
and do not reflect our expected outcomes.
December 31,
($ in millions)
Performance guarantees
Financial guarantees
Indemnification guarantees
Total
Maximum potential payments
2016
193
69
71
333
2015
209
77
50
336
The carrying amounts of liabilities recorded in the
Consolidated Balance Sheets in respect of the
above guarantees were not significant at
December 31, 2016 and 2015, and reflect our best
estimate of future payments, which we may incur
as part of fulfilling our guarantee obligations.
In addition, in the normal course of bidding for and
executing certain projects, we have entered into
standby letters of credit, bid/performance bonds
and surety bonds (collectively “performance
bonds”) with various financial institutions.
Customers can draw on such performance bonds
in the event that the Company does not fulfill its
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 135135
—
Consolidated
Financial
Statements of
ABB Group
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 136
—
Report of management on internal
control over financial reporting
over financial reporting was not effective as of
December 31, 2016.
Ernst & Young AG, the independent registered
public accounting firm who audited the Company’s
consolidated financial statements, has issued an
opinion on the effectiveness of ABB’s internal
control over financial reporting as of December 31,
2016, which is included on pages 142– 143 of this
Annual Report.
Ulrich Spiesshofer
Chief Executive Officer
Eric Elzvik
Chief Financial Officer
Zurich, March 10, 2017
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.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evalua-
tion 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 pro-
cedures may deteriorate.
Management conducted an assessment of the
effectiveness of internal control over financial
reporting as of December 31, 2016. In making
this assessment, management used the criteria
established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission
(2013 framework).
A material weakness is a deficiency, or a combina-
tion of deficiencies, in internal control over
financial reporting, such that there is a reasonable
possibility that a material misstatement of the
company’s financial statements will not be
prevented or detected on a timely basis. ABB did
not maintain adequate segregation of duties in the
treasury function in its South Korean subsidiary
and failed to identify certain inappropriate access
levels to the local enterprise resource planning
(ERP) system. In addition, ABB failed to safeguard
physical access to the signature seals of the
subsidiary in South Korea and prevent the
Company from being bound to unauthorized
financial contracts, resulting in undetected
financial obligations. ABB also failed to provide
adequate management oversight and review of the
local treasury activities. As a result, ABB did not
maintain effective controls over the safeguarding
of cash and other treasury activities, including
controls relating to entering into financial contracts.
Management has concluded that these deficien-
cies in the operation of ABB’s internal controls
constituted a material weakness.
Based on this evaluation, management has
concluded that, as a result of the material weak-
ness described above, ABB’s internal control
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 137137
—
Report on the Audit of the
Consolidated Financial Statements
To the General Meeting
of ABB Ltd, Zurich
As statutory auditor, we have audited the consoli-
dated financial statements of ABB Ltd, which
comprise the consolidated balance sheets as of
December 31, 2016 and 2015, and the related
consolidated statements of income, comprehensive
income, cash flows and changes in stockholders’
equity, and notes thereto (pages 144 – 205), for each
of the three years in the period ended December 31,
2016.
Board of Directors’ Responsibility
The Board of Directors is responsible for the
preparation of these consolidated financial state-
ments in accordance with U.S. generally accepted
accounting principles and the requirements of
Swiss law. This responsibility includes designing,
implementing and maintaining an internal control
system relevant to the preparation 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 statements 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
consolidated financial statements are free of
material misstatement.
An audit involves performing procedures to obtain
audit evidence about the amounts and disclosures
in the consolidated financial statements. The
procedures selected depend on the auditor’s
judgment, including the assessment of the risks
of material misstatement of the consolidated
financial statements, whether due to fraud or error.
In making those risk assessments, the auditor
considers the internal control system relevant to
the entity’s preparation of the consolidated
financial statements in order to design audit
procedures that are appropriate in the circum-
stances. 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, 2016 and 2015, and
the consolidated results of its operations and its
cash flows for each of the three years in the
period ended December 31, 2016, in accordance
with U.S generally accepted accounting principles
and comply with Swiss law.
Report on Key Audit Matters
based on the circular 1/2015
of the Federal Audit Oversight
Authority
Key audit matters are those matters that, in our
professional judgment, were of most significance
in our audit of the consolidated financial state-
ments of the current period. These matters were
addressed in the context of our audit of the
consolidated financial statements as a whole, and
in forming our opinion thereon, and we do not
provide a separate opinion on these matters. For
each matter below, our description of how our audit
addressed the matter is provided in that context.
We have fulfilled the responsibilities described in
the Auditor’s responsibility section of our report,
including in relation to these matters. Accordingly,
our audit included the performance of procedures
designed to respond to our assessment of the
risks of material misstatement of the consolidated
financial statements. The results of our audit
procedures, including the procedures performed to
address the matters below, provide the basis for
our audit opinion on the accompanying consolidated
financial statements.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 138
Revenue recognition on long-term projects
Risk
The Company derives a significant portion of its
revenues from long-term and fixed price projects.
Such contracts involve key project milestones and
financial milestones including the bid price, risk con-
tingencies, the execution, post-completion warranty
obligations and ongoing uncertainties around
expected costs to complete. Therefore, the revenue,
cost and gross profit realization can vary substantial-
ly during the execution and reassessment of these
projects against the contracted financial milestones.
The principal risks include:
• the potential manipulation of results to achieve
performance targets through management’s
use of estimates and judgments in relation to
such projects;
inappropriate or incorrect accounting for
percentage of completion, variation orders,
expected costs to complete, estimated project
margin and risk contingencies; and
•
• unrecorded liabilities for warranties, contractual
disputes or claims for liquidated damages.
We consider these the key judgmental areas
impacting the recognition of revenue and margins
in respect of long-term contracts.
See note 2 to these consolidated financial state-
ments for ABB’s description of the accounting
policy for Revenue Recognition.
Our audit response
We obtained an understanding of the process for
how manage ment determines the percentage of
completion, evaluated the design of, and per-
formed tests of controls in this area. We evaluated
the judgments made by management regarding
the expected costs to complete estimate, the
timing and recognition of variation orders, and the
assumptions made in calculating warranty provi-
sions with underlying data.
Corrupt Practices Act of 1977, OECD (Organisation
for Economic Co-operation and Development)
legislation, anti-trust laws and other applicable
laws and regulations may significantly impact
the Company’s reputation, its ability to do business
in certain jurisdictions and/or with certain
counterparties or may result in significant fines or
civil claims.
Determining the impact and likely outcome of
any litigation matter requires significant judgment.
Therefore, estimating litigation reserves and
contingent liabilities can involve highly judgmental
estimates.
The principal risks include:
• the judgments involved in determining the likely
outcome of legal cases, disputes or investiga-
tions results in a risk that those legal provisions
may be incorrect; and
• failure to provide on a timely basis for claims
due to lack of understanding or awareness of
the claim.
See note 15 to these consolidated financial
statements for ABB’s descrition of Contingencies
– Regulatory, Compliance and Legal.
Our audit response
We assessed judgments and accounting
conclusions made by management arising from
violation of legislation, anti-trust laws and other
regulatory risks.
Our procedures included an evaluation of manage-
ment’s calculations and the related underlying
assumptions to verify that the relevant risks are
reflected in the provisions.
Our procedures included discussions with internal
legal counsel, and we also obtained and considered
legal letters from external legal counsel and other
supporting documentation.
We evaluated management’s assessments around
the potential for liquidated damages for projects
behind contracted schedule and the contingency
provisions to mitigate contract-specific financial
risks. For those balances subject to claims, we made
inquiries of external and internal legal counsel.
We also assessed whether management’s policies
and processes for making these estimates continue
to be applied consistently to all contracts of a
similar nature.
Tax contingency reserves
Risk
The Company operates in multiple jurisdictions
and is therefore exposed to numerous tax laws
around the world. Risk provisions are held where it
is probable that a liability will materialize either
in relation to previous planning strategies or a tax
position taken in relation to submitted returns
subject to tax audit. The amount of such a provision
and whether it is probable that it will materialize are
both considered to be significant judgmental areas.
Legal and Compliance
Risk
The illegal behavior by any employee or agent that
has and may in the future violate the US Foreign
Given the volume and complexity of intracompany
transactions, including management fee recharges,
transfer pricing is an area of complexity and
judgment that is closely managed by ABB and
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 139139
• the assumptions to support goodwill values
(e.g. discount rates and growth rates) are
inappropriate such as projected financial
information, which are affected by expected
future market or economic conditions.
See note 11 to these consolidated financial state-
ments for ABB’s description of Goodwill and other
intangible assets.
Our audit response
Our procedures included a review of the valuations
prepared by management and related supporting
third-party evidence for the fair values of each
goodwill reporting unit. We performed audit
procedures on the integrity of the models and the
definition of the goodwill reporting units.
We involved valuation specialists to support our
evaluation of the assumptions used in respect of
the forecast growth rates and discount rates.
Our evaluation included a comparison to economic
and industry forecasts.
We compared the forecasts used in generating
the fair value to current business environment,
and evaluated management’s assumptions
underpinning the forecasts.
We reviewed the forecasts by stress testing key
assumptions, assessing the impact on the sensitiv-
ity analysis, and understanding the degree to which
assumptions would need to move before impair-
ment would be triggered.
Warranty provision
Risk
During 2016, the Company determined that
the provision for warranties in its solar business,
acquired in 2013 as part of the purchase of Power-
One, was no longer sufficient to cover expected
warranty costs over the remaining warranty period.
Due to higher than originally expected product
failure rates for certain solar inverters designed
and manufactured by Power-One, the Company
reassessed its model to determine the expected
costs to cover future warranty claims.
The principal risks include:
• significant judgments involved in determining
the amount of the warranty provision; and
• precision of the inputs and model used to
calculate warranty provisions.
See note 15 to these consolidated financial
statements for ABB’s description of Product and
order-related contingencies.
certain provisions are recorded to reflect areas of
uncertainty. These matters have come under
renewed focus with the current Base Erosion and
Profit Shifting project of the OECD.
The principal risks include:
• significant judgments involved in determining
the provision for tax liabilities that can result in
misstatement of provisions; and
• there are ranges of possible transfer prices,
therefore there is a risk of challenge by
the tax authorities, particularly with the
increased focus on tax and multinational
businesses.
See note 16 to these consolidated financial
statements for ABB’s description of Taxes.
Our audit response
We assessed tax exposures estimated by manage-
ment and the risk analysis associated with these
exposures along with claims or assessments made
by tax authorities to date. We verified the compo-
nents of the tax risk provision to ensure they reflect
the tax risks in the business and evaluated the
provisions.
We also reviewed documentation in relation to tax
audits to ensure that any exposures the tax
authorities are raising have been considered and
provided for where necessary.
We reviewed, with the involvement of transfer
pricing specialists, the significant transfer pricing
policies applied by ABB including the related
supporting documentation, and ensured that the
tax risk provision included such risks.
Goodwill impairment
Risk
The Company reviews the carrying amount of
its reporting units annually or more frequent-
ly if impairment indicators are present. The
impairment assessment involves a comparison of
the estimated fair value of each reporting unit to
its carrying amount. This annual impairment test
was significant to our audit because the balance
of USD 9,501 million as of December 31, 2016 is
significant to the financial statements representing
24% of the total assets. In addition, we note that
management’s assessment process is assumption
based, complex and subject to highly judgmental
estimates.
The principal risks include:
• the incorrect determination of the reporting
units and subsequent allocation of goodwill
used for impairment assessments;
inaccurate models are used to calculate the fair
value of the reporting units; and
•
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 140
Our audit response
We obtained an understanding of the process to
determine the amount of solar inverter warranty
provisions. Our audit procedures included evaluat-
ing management’s methodology by understanding
the basis for the assumptions developed and used
in the calculation of the warranty provisions.
We also evaluated the validity of the data used for
the calculations within the model.
Our procedures further included discussions with
internal and external experts in regards to the
reasonableness of the assumptions used.
White Collar Productivity restructuring provision
Risk
On September 9, 2015, the Company publically
announced a significant restructuring program,
in an effort to reduce costs under the White
Collar Productivity (“WCP”) 1,000-day program. As
part of the WCP program, ABB committed to
reduce headcount globally across all divisions and
in most countries where ABB operates and will
provide postemployment benefits to the impacted
employees. At December 31, 2016 the Company has
an outstanding provision of USD 334 million
related to this program. The restructuring provi-
sions are material to the financial statements and
the recognition criteria and measurement depends
upon local country facts and circumstances.
The principal risks include:
• the judgments involved in the determination of
the assumptions used, such as the number of
individuals affected and the related severance
costs, to determining the required WCP related
restructuring provision; and
• failure to recognize WCP restructuring provision
and reversals timely.
See note 22 to these consolidated financial state-
ments for ABB’s description on Restructuring and
related expenses.
Our audit response
We assessed the process, controls and the result-
ing WCP provisions estimated by management as
part of our year-end audit.
For the locations with material WCP expenses and
accruals, we obtained related supporting docu-
mentation to evaluate the criteria to record the
WCP provision pursuant to ASC 712 or ASC 420,
which ever applicable, were met.
We reviewed the documentation related to the
provision expenses recorded in 2016 and the
completeness and the valuation of the provision
balance as of December 31, 2016. This included an
evaluation of the estimated future severance
payments that will be paid to employees terminat-
ed under the WCP program and the change in
estimate recorded.
We evaluated the presentation of the WCP expenses
and accruals, ensuring these were recorded within
the appropriate balance sheet and income statement
line items, respectively.
We reviewed the restructuring disclosures, which
includes the WCP provision, and ensured all required
disclosures were made.
Illegal act in South Korea
Risk
In February 2017, ABB uncovered criminal activity in
its South Korean subsidiary that is an adjusting
subsequent event for the financial statements as
of December 31, 2016. The Company disclosed
these irregularities and the initial results on
February 22, 2017. The Company immediately
launched an investigation in South Korea led by ABB
and involving independent forensic and legal
specialists. These criminal activities impacted the
Company’s net income by USD 64 million, net of
probable insurance recoveries and income taxes as
of December 31, 2016.
See section “Other income (expense), net” in the
Company’s analysis of results of operations within
the Financial Review of ABB Group in the
Company’s annual report.
Our audit response
Once we become aware of this, we revisited our
audit approach. Our audit procedures included,
amongst others, understanding the nature of the
criminal act, the circumstances in which the acts
occurred, and understanding of other relevant
information to evaluate the impact on the financial
statements. We shadowed the ABB investigation
with the support of EY forensic specialists and
discussed on a number of occasions the investiga-
tion with management and the Finance, Audit and
Compliance Committee (FACC) to evaluate the
approach and the corresponding findings, financial
and disclosure consequences and impact on
internal controls.
We further assessed the impact of these criminal
acts to our overall audit strategy and the
appropriateness of the planned and executed audit
procedures. Based on this re-assessment, we
performed additional control testing around cash
and the treasury function and expanded our cash
confirmation audit procedures, as well as the
procedures for outstanding loans and account
receivables factoring arrangements in South Korea.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 141141
We finally assessed the Company’s financial
statement presentation and disclosures.
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 the course of our audit performed in accordance
with article 728a para. 1 item 3 CO and Swiss
Auditing Standard 890, we noted that an internal
control system for the preparation of the financial
statements was adequately designed and docu-
mented according to the instructions of the Board
of Directors. However, segregation of duties,
inappropriate access to the local ERP system of the
treasury function in the South Korean subsidiary,
safeguarding access to the signature seals to avoid
unauthorized financial contracts, and adequate
management oversight and review of the local
treasury activities, all significant processes for the
South Korean entity, were not performed in all
material respects.
In our opinion, except for the matter described in
the preceding paragraph, an internal control
system for the preparation of consolidated
financial statements, designed in accordance with
the instructions of the Board of Directors, exists.
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,
2016, based on criteria established in Internal
Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework)
(COSO), and our report dated March 10, 2017
expressed an adverse 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 10, 2017
Robin Errico
Licensed audit expert
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 14 2
—
Report of the Independent Auditor
on internal control over financial
reporting
To the Board of Directors and
Stockholders of ABB Ltd
We have audited ABB Ltd’s internal control over
financial reporting as of December 31, 2016, 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 effective-
ness of internal control over financial reporting
included in the accompanying Report of manage-
ment 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 internal control based on the assessed risk, and
performing such other procedures as we considered
necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting
is a process designed to provide reasonable
assurance regarding the reliability of financial
reporting and the preparation of financial
statements for external purposes in accordance
with generally accepted accounting principles.
A company’s internal control over financial reporting
includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in
accordance with generally accepted accounting
principles, and that receipts and expenditures of
the company are being made only in accordance
with authorizations of management and directors
of the company; and (3) provide reasonable
assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of
the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the
risk that controls may become inadequate because
of changes in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or combi-
nation of deficiencies, in internal control over
financial reporting, such that there is a reasonable
possibility that a material misstatement of the
company’s annual financial statements will not
be prevented or detected on a timely basis. The
following material weakness has been identified
and included in management’s assessment.
Management has identified a material weakness
in internal control in the treasury function in the
South Korean subsidiary related to inadequate
segregation of duties and inappropriate access
levels to the local enterprise resource planning
(ERP) system. Further, they failed to safeguard
physical access to the signature seals and prevent
the Company from being bound to unauthorized
financial contracts, resulting in undetected
financial obligations. Management also failed to
provide adequate management oversight and
review of the local treasury activities. We also
have audited, in accordance with the standards of
the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets
of ABB Ltd as of December 31, 2016 and 2015, and
the related consolidated statements of income,
comprehensive income, cash flows and changes in
stockholders’ equity for each of the three years in
the period ended December 31, 2016. This material
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 143143
weakness was considered in determining the
nature, timing and extent of audit tests applied in
our audit of the 2016 financial statements.
In our opinion, because of the effect of the mate-
rial weakness described above on the achievement
of the objectives of the control criteria, ABB Ltd
has not maintained effective internal control over
financial reporting as of December 31, 2016, 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 2016 consolidated financial
statements of ABB Ltd and our report dated March
10, 2017, expressed an unqualified opinion thereon.
Ernst & Young AG
Leslie Clifford
Licensed audit expert
(Auditor in charge)
Zurich, Switzerland
March 10, 2017
Robin Errico
Licensed audit expert
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 14 4
—
Consolidated Income Statements
Year ended December 31 ($ in millions, except per share data in $)
Sales of products
Sales of services and software
Total revenues
Cost of sales of products
Cost of services and software
Total cost of sales
Gross profit
Selling, general and administrative expenses
Non-order related research and development expenses
Other income (expense), net
Income from operations
Interest and dividend income
Interest and other finance expense
Income from continuing operations before taxes
Provision for taxes
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Net income attributable to noncontrolling interests
Net income attributable to ABB
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
Net income
Basic earnings per share attributable to ABB shareholders:
Income from continuing operations, net of tax
Net income
Diluted earnings per share attributable to ABB shareholders:
Income from continuing operations, net of tax
Net income
2016
27,816
6,012
33,828
2015
29,477
6,004
35,481
2014
33,279
6,551
39,830
(20,431)
(21,694)
(24,506)
(3,650)
(3,653)
(4,109)
(24,081)
(25,347)
(28,615)
9,747
(5,349)
(1,300)
10,134
(5,574)
(1,406)
(111)
2,987
73
(261)
2,799
(781)
2,018
16
2,034
(135)
1,899
1,883
1,899
0.88
0.88
0.87
0.88
(105)
3,049
77
(286)
2,840
(788)
2,052
3
2,055
(122)
1,933
1,930
1,933
0.87
0.87
0.87
0.87
11,215
(6,067)
(1,499)
529
4,178
80
(362)
3,896
(1,202)
2,694
24
2,718
(124)
2,594
2,570
2,594
1.12
1.13
1.12
1.13
Weighted-average number of shares outstanding (in millions) used to compute:
Basic earnings per share attributable to ABB shareholders
Diluted earnings per share attributable to ABB shareholders
2,151
2,154
2,226
2,230
2,288
2,295
See accompanying Notes to the Consolidated Financial Statements
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016
145145
—
Consolidated Statements
of Comprehensive Income
Year ended December 31 ($ 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) 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 losses from pension settlements 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
2016
2,034
2015
2,055
2014
2,718
(474)
(1,058)
(1,680)
—
—
—
(40)
44
26
62
26
118
16
(6)
10
(7)
1
(6)
88
210
26
82
9
415
(20)
30
10
(9)
15
6
(3)
(614)
17
81
(2)
(521)
(52)
9
(43)
Total other comprehensive income (loss), net of tax
(346)
(639)
(2,238)
Total comprehensive income, net of tax
Comprehensive income attributable to noncontrolling interests, net of tax
Total comprehensive income, net of tax, attributable to ABB
1,688
(118)
1,570
1,416
(100)
1,316
480
(115)
365
See accompanying Notes to the Consolidated Financial Statements
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 146
—
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
Assets held for sale
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
Liabilities held for sale
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
(2,214,743,264 and 2,314,743,264 issued shares at December 31, 2016 and 2015, respectively)
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost
(76,036,429 and 123,118,123 shares at December 31, 2016 and 2015, respectively)
Total ABB stockholders’ equity
Noncontrolling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to the Consolidated Financial Statements
2016
3,644
1,953
9,696
4,347
176
888
688
548
2015
4,565
1,633
10,061
4,757
225
881
638
—
21,940
22,760
4,743
9,501
1,996
90
170
527
532
5,276
9,671
2,337
68
178
423
643
39,499
41,356
4,446
1,241
1,003
1,398
258
1,142
1,765
3,936
218
4,342
1,375
1,454
1,598
249
1,089
1,920
3,817
—
15,407
15,844
5,800
1,834
957
1,604
5,985
1,924
965
1,650
25,602
26,368
216
19,925
(5,187)
(1,559)
13,395
502
13,897
39,499
1,444
20,476
(4,858)
(2,581)
14,481
507
14,988
41,356
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 147147
—
Consolidated Statements
of Cash Flows
Year ended December 31 ($ in millions)
2016
2015
2014
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2,034
2,055
2,718
Depreciation and amortization
Deferred taxes
Net loss from derivatives and foreign exchange
Net gain from sale of property, plant and equipment
Net loss (gain) from sale of businesses
Share-based payment arrangements
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
Net cash from settlement of foreign currency derivatives
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
Purchase of treasury stock
Dividends paid
Reduction in nominal value of common shares paid to shareholders
Dividends paid to noncontrolling shareholders
Other financing activities
Net cash used in financing activities
Effects of exchange rate changes on cash and equivalents
Net change in cash and equivalents — continuing operations
Cash and equivalents, beginning of period
Cash and equivalents, end of period
Supplementary disclosure of cash flow information:
Interest paid
Taxes paid
See accompanying Notes to the Consolidated Financial Statements
1,135
(147)
10
(38)
10
54
112
10
115
340
80
(25)
14
(163)
125
177
3,843
1,160
(219)
15
(26)
20
61
94
162
105
(112)
(24)
35
330
106
(32)
88
1,305
65
167
(17)
(543)
73
55
(12)
(176)
257
9
(118)
(127)
39
(13)
163
3,818
3,845
(1,214)
(3,092)
(831)
(1,925)
(614)
(876)
(1,430)
(1,465)
(1,026)
(26)
1,057
539
2,241
61
(1)
(57)
18
(56)
434
1,022
653
68
69
231
20
(70)
361
523
1,011
33
1,110
(179)
11
(1,305)
(974)
(1,121)
(152)
912
(1,249)
192
(1,299)
—
(1,610)
(122)
(27)
3
68
(101)
107
(1,487)
(1,357)
(392)
(137)
(84)
(103)
150
(90)
38
(1,003)
(1,841)
—
(132)
(43)
(3,355)
(3,380)
(3,024)
(104)
(921)
4,565
3,644
213
814
(342)
(878)
5,443
4,565
221
1,043
(278)
(578)
6,021
5,443
259
1,155
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 148
—
Consolidated Statements of
Changes in Stockholders’ Equity
Years ended December 31, 2016, 2015 and 2014 ($ in millions)
Balance at January 1, 2014
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
1,750
Retained
earnings
19,186
2,594
Accumulated other comprehensive loss
Foreign
currency
Unrealized
Pension and
Unrealized gains
Total accumu-
gains (losses)
other post-
(losses) of cash
lated other
Total ABB
translation
on available-for-
retirement plan
flow hedge
comprehensive
stockholders’
Noncontrolling
stockholders’
adjustments
sale securities
adjustments
derivatives
loss
Treasury stock
interests
(1,610)
22
(2,012)
(246)
(431)
(1,671)
7
6
(521)
(43)
Total comprehensive income
Changes in noncontrolling interests
Dividends paid to noncontrolling shareholders
Dividends paid
Share-based payment arrangements
Purchase of treasury stock
Delivery of shares
Call options
Balance at December 31, 2014
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
Reduction in nominal value of common shares paid to shareholders
Share-based payment arrangements
Purchase of treasury stock
Delivery of shares
Call options
Balance at December 31, 2015
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
Reduction in nominal value of common shares paid to shareholders
Cancellation of treasury shares
Share-based payment arrangements
Purchase of treasury stock
Delivery of shares
Call options
Balance at December 31, 2016
See accompanying Notes to the Consolidated Financial Statements
(34)
73
(17)
5
1,777
(1,841)
19,939
1,933
(30)
(25)
(349)
61
(19)
4
1,444
(1,224)
(40)
54
(22)
4
216
(1,317)
(54)
20,476
1,899
(402)
(2,007)
(41)
19,925
(2,102)
13
(2,131)
(21)
(4,241)
(1,206)
16,269
(1,015)
(1,015)
55
(1,033)
(6)
412
(3,135)
7
(1,719)
(11)
(4,858)
(2,581)
14,481
(457)
—
118
(1,671)
6
(521)
(43)
(1,033)
(6)
412
10
(457)
—
118
10
10
10
equity
18,678
2,594
(1,671)
6
(521)
(1,841)
(43)
365
(34)
—
73
38
5
1,933
(1,033)
(6)
412
10
1,316
(55)
—
(1,317)
(403)
61
(1,501)
107
4
1,899
(457)
—
118
10
1,570
—
—
—
54
(1,626)
(1,280)
192
4
(1,501)
126
2,047
(1,280)
255
530
124
(9)
115
33
(132)
546
122
(25)
3
100
(2)
(137)
507
135
(17)
118
(1)
(122)
Total
equity
19,208
2,718
(1,680)
6
(521)
(43)
480
(1)
(132)
(1,841)
(1,015)
73
38
5
16,815
2,055
(1,058)
(6)
415
10
1,416
(57)
(137)
(1,317)
(403)
61
(1,501)
107
4
14,988
2,034
(474)
—
118
10
1,688
(1)
(122)
(1,626)
(1,280)
—
54
192
4
(3,592)
7
(1,601)
(1)
(5,187)
(1,559)
13,395
502
13,897
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016
149149
Accumulated other comprehensive loss
Foreign
currency
translation
adjustments
Unrealized
gains (losses)
on available-for-
sale securities
Pension and
other post-
retirement plan
adjustments
Unrealized gains
(losses) of cash
flow hedge
derivatives
Total accumu-
lated other
comprehensive
loss
Total ABB
stockholders’
equity
Noncontrolling
interests
Total
stockholders’
equity
Treasury stock
(1,610)
22
(2,012)
(246)
18,678
530
19,208
(431)
(1,671)
7
6
—
Consolidated Statements of
Changes in Stockholders’ Equity
Years ended December 31, 2016, 2015 and 2014 ($ in millions)
Balance at January 1, 2014
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
1,750
Retained
earnings
19,186
2,594
Total comprehensive income
Changes in noncontrolling interests
Dividends paid to noncontrolling shareholders
Dividends paid
Share-based payment arrangements
Purchase of treasury stock
Delivery of shares
Call options
Balance at December 31, 2014
Comprehensive income:
Net income
Share-based payment arrangements
Purchase of treasury stock
Delivery of shares
Call options
Balance at December 31, 2015
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
Reduction in nominal value of common shares paid to shareholders
Cancellation of treasury shares
Share-based payment arrangements
Purchase of treasury stock
Delivery of shares
Call options
Balance at December 31, 2016
See accompanying Notes to the Consolidated Financial Statements
(34)
73
(17)
5
1,777
(349)
61
(19)
4
1,444
(1,224)
(40)
54
(22)
4
216
(1,841)
19,939
1,933
(1,317)
(54)
20,476
1,899
(402)
(2,007)
(41)
19,925
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
Reduction in nominal value of common shares paid to shareholders
(30)
(25)
(1,033)
(6)
412
(1,033)
(6)
412
10
10
1,933
(1,033)
(6)
412
10
1,316
(55)
—
(1,317)
(403)
61
(1,501)
107
4
(1,501)
126
(2,102)
13
(2,131)
(21)
(4,241)
(1,206)
16,269
(3,135)
7
(1,719)
(11)
(4,858)
(2,581)
14,481
(457)
—
118
(457)
—
118
10
10
1,899
(457)
—
118
10
1,570
—
—
(1,626)
—
54
(1,280)
192
4
2,047
(1,280)
255
(521)
(43)
(1,671)
6
(521)
(43)
2,594
(1,671)
6
(521)
(43)
365
(34)
—
(1,841)
73
(1,015)
(1,015)
55
38
5
124
(9)
115
33
(132)
546
122
(25)
3
100
(2)
(137)
507
135
(17)
118
(1)
(122)
2,718
(1,680)
6
(521)
(43)
480
(1)
(132)
(1,841)
73
(1,015)
38
5
16,815
2,055
(1,058)
(6)
415
10
1,416
(57)
(137)
(1,317)
(403)
61
(1,501)
107
4
14,988
2,034
(474)
—
118
10
1,688
(1)
(122)
(1,626)
—
54
(1,280)
192
4
(3,592)
7
(1,601)
(1)
(5,187)
(1,559)
13,395
502
13,897
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016
150
—
Notes to the Consolidated
Financial Statements
—
Note 1
The Company
ABB Ltd and its subsidiaries (collectively, the Company) together form a pioneering technology leader in
electrification products, robotics and motion, industrial automation and power grids, serving customers
in utilities, industry and transport & infrastructure globally.
—
Note 2
Significant accounting policies
The following is a summary of significant accoun ting policies followed in the preparation of these
Consolidated Financial Statements.
Basis of presentation
The Consolidated Financial Statements are prepared in accordance with United States of America (United
States or U.S.) generally accepted accoun ting 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.
Reclassifications
Certain amounts reported for prior years in the Consolidated Financial Statements and the accompanying
Notes have been reclassified to conform to the current year’s presentation. These changes primarily relate
to the change in the definition of segment profit and the reorganization of the Company’s operating
segments (see Note 23).
Scope of consolidation
The Consolidated Financial Statements include the accounts of ABB Ltd and companies which are directly
or indirectly controlled by ABB Ltd. Additionally, the Company consolidates variable interest entities if it
has determined that it is the primary beneficiary. Intercompany accounts and transactions are eliminated.
Investments in joint ventures and affiliated companies in which the Company has the ability to exercise
significant influence over operating and financial policies (generally through direct or indirect ownership
of 20 percent to 50 percent of the voting rights), are recorded in the Consolidated Financial Statements
using the equity method of accounting.
Operating cycle
A portion of the Company’s activities (primarily long-term 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.
Use of estimates
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 accoun ting
assumptions and estimates include:
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 151151
• estimates used to record expected costs for employee severance in connection with restructuring
programs,
• estimates used to record warranty obligations,
• assumptions and projections, principally related to future material, labor and project-related overhead
costs, used in determining the percentage-of-completion on projects,
• estimates of loss contingencies associated with litigation or threatened litigation and other claims and
inquiries, environmental damages, product warranties, self-insurance reserves, regulatory and other
proceedings,
• assumptions used in the calculation of pension and postretirement benefits and the fair value of
pension plan assets,
• estimates to determine valuation allowances for deferred tax assets and amounts recorded for
uncertain tax positions,
• growth rates, discount rates and other assumptions used to determine impairment of long-lived assets
and 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, and
• assessment of the allowance for doubtful accounts.
The actual results and outcomes may differ from the Company’s estimates and assumptions.
Cash and equivalents
Cash and equivalents include highly liquid investments with maturities of three months or less at the date
of acquisition.
Currency and other local regulatory limitations related to the transfer of funds exist in a number of countries
where the Company operates. Funds, other than regular dividends, fees or loan repayments, cannot be
readily transferred abroad from these countries and are therefore deposited and used for working capital
needs locally. These funds are included in cash and equivalents as they are not considered restricted.
Marketable securities and short-term investments
Management determines the appropriate classification of held-to-maturity and available-for-sale 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 held-to-maturity
when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity
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-to-maturity and equity
securities that have readily determinable fair values are classified as available-for-sale and reported at
fair value.
Unrealized gains and losses on available-for-sale securities are excluded from the determination of
earnings and are instead recognized in the “Accumulated other comprehensive loss” component of
stockholders’ equity, net of tax, until realized. Realized gains and losses on available-for-sale 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 short-term investments”,
however any marketable securities held as a long-term investment rather than as an investment of excess
liquidity, are classified as “Other non-current assets”.
The Company performs a periodic review of its debt and equity securities to determine whether an
other-than-temporary impairment has occurred. Generally, when an individual security has been in an
unrealized loss position for an extended period of time, the Company evaluates whether an impairment
has occurred. The evaluation is based on specific facts and circumstances at the time of assessment,
which include general market conditions, and the duration and extent to which the fair value is below cost.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 152
If the fair value of a debt security is less than its amortized cost, then an other-than-temporary impair-
ment for the difference is recognized if (i) the Company has the intent to sell the security, (ii) it is more
likely than not that the Company will be required to sell the security before recovery of its amortized cost
base or (iii) a credit loss exists insofar as the Company does not expect to recover the entire recognized
amortized cost of the security. Such impairment charges are generally recognized in “Interest and other
finance expense”. If the impairment is due to factors other than credit losses, and the Company does not
intend to sell the security and it is not more likely than not that it will be required to sell the security
before recovery of the security’s amortized cost, such impairment charges are recorded in “Accumulated
other comprehensive loss”.
In addition, for equity securities, the Company assesses whether the cost value will recover within the
near-term and whether the Company has the intent and ability to hold that equity security until such
recovery occurs. If an other-than-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 non-current assets”, in which case the
impairment is reported in “Other income (expense), net”.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the invoiced amount. The Company has a group-wide policy on the
management of credit risk. The policy includes a credit assessment methodology to assess the credit-
worthiness of customers and assign to those customers a risk category. Third-party agencies’ ratings are
considered, if available. For customers where agency ratings are not available, the customer’s most recent
financial statements, payment history and other relevant information are considered in the assignment to
a risk category. Customers are assessed at least annually or more frequently when information on significant
changes in the 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 write-off
experience and customer specific data. If an amount has not been settled within its contractual payment
term then it is considered past due. The Company reviews the allowance for doubtful accounts regularly
and past due balances are reviewed for collectability. Account balances are charged off against the related
allowance when the Company believes that the amount will not be recovered.
The Company, in its normal course of business, transfers receivables to third parties, generally without
recourse. The transfer is accounted for as a sale when the Company has surrendered control over the re-
ceivables. Control is deemed to have been surrendered when (i) the transferred receivables have been put
presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership,
(ii) the third-party transferees have the right to pledge or exchange the transferred receivables, and (iii) the
Company has relinquished effective control over the transferred receivables and does not retain the ability
or obligation to repurchase or redeem the transferred receivables. At the time of sale, the sold receivables
are removed from the Consolidated Balance Sheets and the related cash inflows are classified as operating
activities in the Consolidated Statements of Cash Flows. Costs associated with the sale of receivables,
including the related gains and losses from the sales, are included in “Interest and other finance expense”.
Transfers of receivables that do not meet the requirements for treatment as sales are accounted for as
secured borrowings and the related cash flows are classified as financing activities in the Consolidated
Statements of Cash Flows.
Concentrations of credit risk
The Company sells a broad range of products, systems, services and software to a wide range of industrial,
commercial and utility customers as well as various government agencies and quasi-governmental
agencies throughout the world. Concentrations of credit risk with respect to accounts receivable are
limited, as the Company’s customer base is comprised of a large number of individual customers.
Ongoing credit evaluations of customers’ financial positions are performed to determine whether the use
of credit support instruments such as guarantees, letters of credit or credit insurance are necessary;
collateral is not generally required. The Company maintains reserves for potential credit losses as
discussed above in “Accounts receivable and allowance for doubtful accounts”. Such losses, in the
aggregate, are in line with the Company’s expectations.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 153153
It is the Company’s policy to invest cash in deposits with banks throughout the world with certain
minimum credit ratings and in high quality, low risk, liquid investments. The Company actively manages its
credit risk by routinely reviewing the creditworthiness of the banks and the investments held. The
Company has not incurred significant credit losses related to such investments.
The Company’s exposure to credit risk on derivative financial instruments is the risk that the counterparty
will fail to meet its obligations. To reduce this risk, the Company has credit policies that require the
establishment and periodic review of credit limits for individual counterparties. In addition, the Company
has entered into close-out netting agreements with most derivative counterparties. Close-out netting
agreements provide for the termination, valuation and net settlement of some or all outstanding transac-
tions 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 reason-
ably assured. With regards to the sale of products, delivery is not considered to have occurred, and
therefore no revenues are recogni zed, until the customer has taken title to the products and assumed the
risks and rewards of ownership of the products specified in the purchase order or sales agreement.
Generally, the transfer of title and risks and rewards of ownership are governed by the contractually-defined
shipping terms. The Company uses various International Commercial shipping terms (as promulgated by
the International Chamber of Commerce) in its sales of products to third-party customers, such as Ex
Works (EXW), Free Carrier (FCA) and Delivered Duty Paid (DDP). Subsequent to delivery of the products,
the Company generally has no further contractual performance obligations that would preclude revenue
recognition.
Revenues under long-term construction-type contracts are generally recognized using the percen tage-of-
completion method of accounting. The Company principally uses the cost-to-cost method to measure
progress towards completion on contracts. Under this method, progress of contracts is measured by
actual costs incurred in relation to the Company’s best estimate of total 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.
Short-term construction-type contracts, or long-term construction-type contracts for which reasonably
dependable estimates cannot be made or for which inherent hazards make estimates difficult, are
accounted for under the completed-contract method. Revenues under the completed-contract method are
recognized upon substantial completion — that is: acceptance by the customer, compliance with perfor-
mance specifications demonstrated in a factory acceptance test or similar event.
For non construction-type contracts that contain customer acceptance provisions, revenue is deferred un-
til customer acceptance occurs or the Company has demonstrated the customer-specified objective crite-
ria 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 perfor-
mance 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 maintenance-type contracts, field
service activities that include personnel and accompanying spare parts, and installation and commission-
ing 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 determinable, and collection is proba-
ble. In software arrangements that include rights to multiple software products and/or services, the total
arrangement fee is allocated using the residual method. Under this method, revenue is allocated to the
undelivered elements based on vendor-specific objective evidence (VSOE) of the fair value of such
undelivered elements and the residual amounts of revenue are allocated to the delivered elements.
Elements included in multiple element arrangements may consist of software 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 154
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 pe-
riods of time. Deliverables of such multiple element arrangements are evalu ated 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), third-party evidence (if VSOE is not available),
or estimated selling price if neither of the first two is available. The estimated selling price reflects the
Company’s 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 at the inception of the
arrangement. Such arrangements generally include industry-specific performance and termination provi-
sions, such as in the event of substantial delays or non-delivery.
Revenues are reported net of customer rebates and similar incentives. Taxes assessed by a governmental
authority that are directly imposed on revenue-producing transactions between the Company and its
customers, such as sales, use, value-added and some excise taxes, are excluded from revenues.
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.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in,
first-out method, the weighted-average cost method, or in certain circumstances (for example, where the
completed-contract method of revenue recognition is used) the specific identification method. Inventoried
costs are stated at acquisition cost or actual production cost, including direct material and labor and
applicable manufacturing overheads. Adjustments to reduce the cost of inventory to its net realizable value
are made, if required, for decreases in sales prices, obsolescence or similar reductions in value.
Impairment of long-lived assets
Long-lived assets that are held and used are assessed for impairment when events or circumstances
indicate that the carrying amount of the asset may not be recoverable. If the asset’s net carrying value
exceeds the asset’s net undiscounted cash flows expected to be generated over its remaining useful life
including net proceeds expected from disposition of the asset, if any, the carrying amount of the asset is
reduced to its estimated fair value. The estimated fair value is determined using a market, income and/or
cost approach.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated depreciation and is depreciated using
the straight-line method. The estimated useful lives of the assets are generally as follows:
• 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, and
•
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.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 155155
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 2016, the reporting units were
the same as the operating segments for Electrification Products, Discrete Automation and Motion and
Power Grids, 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 two-step 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 two-step quantitative impairment test is performed.
The two-step 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 straight-line method is used. The amortization periods range from 3 to 5 years
for software and from 5 to 20 years for customer-, technology- and marketing-related intangibles. Intangible
assets with a finite life are tested for impairment upon the occurrence of certain triggering events.
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 straight-line 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 avail-
able for general release to the customers are capitalized and amortized on a straight-line basis over the
estimated life of the product. The Company periodically performs an evaluation to determine that the un-
amortized cost of software to be sold does not exceed the net realizable value. If the unamortized cost of
software to be sold exceeds its net realizable value, the Company records an impairment charge equal to
the difference.
Derivative financial instruments and hedging activities
The Company uses derivative financial instruments to manage currency, commodity, interest rate and
equity exposures, arising from its global operating, financing and investing activities (see Note 5).
The Company recognizes all derivatives, other than certain derivatives indexed to the Company’s own
stock, at fair value in the Consolidated Balance Sheets. Derivatives that are not designated as hedging
instruments are reported at fair value with derivative gains and losses reported through earnings and
classified consistent with the nature of the underlying transaction.
If the derivatives are designated as a hedge, depending on the nature of the hedge, changes in the fair
value of the derivatives will either be offset against the change in fair value of the hedged item attribut-
able to the risk being hedged through earnings (in the case of a fair value hedge) or recognized in
“Accumulated other comprehensive loss” until the hedged item is recognized in earnings (in the case of
a cash flow hedge). The ineffective portion of a derivative’s change in fair value is immediately recognized
in earnings consistent with the classification of the hedged item. Where derivative financial instruments
have been designated as cash flow hedges of forecasted transactions and such forecasted transactions
are no longer probable of occurring, hedge accounting is discontinued and any derivative gain or loss
previously included in “Accumulated other comprehensive loss” is reclassified into earnings consistent
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 156
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 consis-
tent 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 activi-
ties”, 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”.
Leases
The Company leases primarily real estate and office equipment. Rental expense for operating leases is
recorded on a straight-line 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.
Translation of foreign currencies and foreign exchange transactions
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 dated 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 intercom-
pany loans that are equity-like in nature with no reasonable expectation of repayment, which are recog-
nized 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.
Income taxes
The Company uses the asset and liability method to account for deferred taxes. Under this method,
deferred tax assets and liabilities are determined based on temporary differences between the financial
reporting and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
The Company records a deferred tax asset when it determines that it is more likely than not that the
deduction will be sustained based upon the deduction’s technical merit. Deferred tax assets and liabilities
that can be offset against each other are reported on a net basis. A valuation allowance is recorded to
reduce deferred tax assets to the amount that is more likely than not to be realized.
Deferred taxes are provided on unredeemed retained earnings of the Company’s subsidiaries. However,
deferred taxes are not provided on such unredeemed retained earnings to the extent it is expected that
the earnings are permanently reinvested. Such earnings may become taxable upon the sale or liquidation
of these subsidiaries or upon the remittance of dividends.
The Company operates in numerous tax jurisdictions and, as a result, is regularly subject to audit by tax
authorities. The Company provides for tax contingencies whenever it is deemed more likely than not that
a tax asset has been impaired or a tax liability has been incurred 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 157157
position, considering the applicable tax laws and Organisation for Economic Co-operation and
Development (OECD) guidelines and are based on its evaluations of the facts and circumstances as of the
end of each reporting period.
The Company applies a two-step approach to recognize and measure uncertainty in income taxes. The
first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50 percent likely of being realized upon ultimate settlement. Uncertain tax
positions that could be settled against existing loss carryforwards or income tax credits are reported net.
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.
Earnings per share
Basic earnings per share is calculated by dividing income by the weighted-average number of shares
outstanding during the year. Diluted earnings per share is calculated by dividing income by the
weighted-average number of shares outstanding during the year, assuming that all potentially dilutive
securities were exercised, if dilutive. Potentially dilutive securities include: outstanding written call options,
outstanding options and shares granted subject to certain conditions under the Company’s share-based
payment arrangements. See further discussion related to earnings per share in Note 20 and of potentially
dilutive securities in Note 18.
Share-based payment arrangements
The Company has various share-based payment arrangements for its employees, which are described
more fully in Note 18. Such arrangements are accounted for under the fair value method. For awards that
are equity-settled, total compensation is measured at grant date, based on the fair value of the award at
that date, and recorded in earnings over the period the employees are required to render service. For
awards that are cash-settled, compensation is initially measured at grant date and subsequently remea-
sured 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.
Fair value measures
The Company uses fair value measurement principles to record certain financial assets and liabilities on
a recurring basis and, when necessary, to record certain non-financial assets at fair value on a non-recurring
basis, as well as to determine fair value disclosures for certain financial instruments carried at amortized
cost in the financial statements. Financial assets and liabilities recorded at fair value on a recurring basis
include foreign currency, commodity and interest rate derivatives, as well as cash-settled call options and
available-for-sale securities. Non-financial assets recorded at fair value on a non-recurring basis include
long-lived assets that are reduced to their estimated fair value due to impairments.
Fair value is the price that would be received when selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. In determining fair value, the
Company uses various valuation techniques including the market approach (using observable market data
for identical or similar assets and liabilities), the income approach (discounted cash flow models) and the
cost approach (using costs a market participant would incur to develop a comparable asset). Inputs used
to determine the fair value of assets and liabilities are defined by a three-level hierarchy, depending on the
reliability of those inputs. The Company has categorized its financial assets and liabilities and non-financial
assets measured at fair value within this hierarchy based on whether the inputs to the valuation technique
are observable or unobservable. An observable input is based on market data obtained from independent
sources, while an unobservable input reflects the Company’s assumptions about market data.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 158
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 exchange-tra ded equity securities,
listed derivatives which are actively traded such as commodity futures, interest rate futures and certain
actively traded debt securities.
Level 2:
Valuation inputs consist of observable inputs (other than Level 1 inputs) such as actively quoted prices for
similar assets, quoted prices in inactive markets and inputs other than quoted prices such as interest rate
yield curves, credit spreads, or inputs derived from other observable data by interpolation, correlation,
regression or other means. The adjustments applied to quoted prices or the inputs used in valuation
models may be both observable and unobservable. In these cases, the fair value measurement is classified
as Level 2 unless the unobservable portion of the adjustment or the unobservable input to the valuation
model is significant, in which case the fair value measurement would be classified as Level 3. Assets and
liabilities valued or disclosed using Level 2 inputs include investments in certain funds, reverse repurchase
agreements, certain debt securities that are not actively traded, interest rate swaps, commodity swaps,
cash-settled call options, forward foreign exchange contracts, foreign exchange swaps and forward rate
agreements, time deposits, as well as financing receivables and debt.
Level 3:
Valuation inputs are based on the Company’s assumptions of relevant market data (unobservable input).
Whenever quoted prices involve bid-ask spreads, the Company ordinarily determines fair values based on
mid-market quotes. However, for the purpose of determining the fair value of cash-settled call options
serving as hedges of the Company’s management incentive plan (MIP), bid prices are used.
When determining fair values based on quoted prices in an active market, the Company considers if the
level of transaction activity for the financial instrument has significantly decreased, or would not be
considered orderly. In such cases, the resulting changes in valuation techniques would be disclosed. If the
market is considered disorderly or if quoted prices are not available, the Company is required to use
another valuation technique, such as an income approach.
Disclosures about the Company’s fair value measurements of assets and liabilities are included in Note 6.
Contingencies
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 contingen-
cies is made after analysis of each individual issue, often with assistance from both internal and external
legal counsel and technical experts. The required amount of a provision for a contingency of any type may
change in the future due to new developments in the particular matter, including changes in the approach
to its resolution.
The Company records a provision for its contingent obligations when it is probable that a loss will be
incurred and the amount can be reasonably estimated. Any such provision is generally recognized on an
undiscounted basis using the Company’s best estimate of the amount of loss incurred or at the lower end
of an estimated range when a single best estimate is not determinable. In some cases, the Company may
be able to recover a portion of the costs relating to these obligations from insurers or other third parties;
however, the Company records such amounts only when it is probable that they will be collected.
The Company provides for anticipated costs for warranties when it recognizes revenues on the related
products or contracts. Warranty costs include calculated costs arising from imperfections in design,
material and workmanship in the Company’s products. The Company makes individual assessments on
contracts with risks resulting from order-specific conditions or guarantees and assessments on an overall,
statistical basis for similar products sold in larger quantities.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 159159
The Company may have legal obligations to perform environmental clean-up activities related to land and
buildings as a result of the normal operations of its business. In some cases, the timing or the method of
settlement, or both, are conditional upon a future event that may or may not be within the control of the
Company, but the underlying obligation itself is unconditional and certain. The Company recognizes a
provision for these obligations when it is probable that a liability for the clean-up activity has been
incurred and a reasonable estimate of its fair value can be made. In some cases, a portion of the costs
expected to be incurred to settle these matters may be recoverable. An asset is recorded when it is
probable that such amounts are recoverable. Provisions for environmental obligations are not discounted
to their present value when the timing of payments cannot be reasonably estimated.
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 obliga-
tions 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 compre-
hensive 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 hierar-
chy in accordance with the valuation principles described in the “Fair value measures” section above.
See Note 17 for further discussion of the Company’s employee benefit plans.
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.
Identifiable intangibles consist of intellectual property such as trademarks and trade names, customer
relationships, patented and unpatented technology, in-process research and development, order backlog
and capitalized software; these are amortized over their estimated useful lives. Such intangibles are
subsequently subject to evaluation for potential impairment if events or circumstances indicate the carrying
amount may not be recoverable. See “Goodwill and other intangible assets” above. Acquisition-related costs
are recognized separately from the acquisition and expensed as incurred. Upon gaining control of an
entity in which an equity method or cost basis investment was held by the Company, the carrying value of
that investment is adjusted to fair value with the related gain or loss recorded in income.
Deferred tax assets and liabilities based on temporary differences between the financial reporting and the
tax base of assets and liabilities as well as uncertain tax positions and valuation allowances on acquired
deferred tax assets assumed in connection with a business combination are initially estimated as of the
acquisition date based on facts and circumstances that existed at the acquisition date. These estimates
are subject to change within the measurement period (a period of up to 12 months after the acquisition
date during which the acquirer may adjust the provisional acquisition amounts) with any adjustments to
the preliminary estimates being recorded to goodwill. Changes in deferred taxes, uncertain tax positions
and valuation allowances on acquired deferred tax assets that occur after the measurement period are
recognized in income.
New accounting pronouncements
Applicable for current period
Disclosures for investments in certain entities that calculate net asset value per share (or its equivalent)
As of January 1, 2016, the Company adopted an accounting standard update regarding fair value disclo-
sures for certain investments. Under the update, the Company is no longer required to categorize within
the fair value hierarchy any investments for which fair value is measured using the net asset value per
share practical expedient. The amendments also removed the requirement to make certain disclosures for
investments that are eligible to be measured at fair value using the net asset value per share practical
expedient. Rather, those disclosures are limited to investments for which the Company has elected to
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 160
measure the fair value using that practical expedient. This update was applied retrospectively and did not
have a significant impact on the consolidated financial statements.
Simplifying the measurement of inventory
As of January 1, 2016, the Company early-adopted an accounting standard update simplifying the subse-
quent measurement of inventories by replacing the current lower of cost or market test with a lower of
cost and net realizable value test. The guidance applies only to inventories for which cost is determined by
methods other than last-in first-out and the retail inventory methods. Net realizable value is the estimated
selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal
and transportation. The update was applied prospectively and did not have a significant 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 recogni-
tion 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 perfor-
mance obligations in a contract, estimating any variable consideration elements, and allocating the
transaction price to each separate performance obligation. The update also requires additional disclo-
sures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. Further updates were issued in 2016 to clarify the guidance on identifying performance
obligations, licensing and contract costs, to enhance the implementation guidance on principal versus
agent considerations and to add other practical expedients.
In August 2015, the effective date for the update was deferred and the update is now effective for the
Company for annual and interim periods beginning January 1, 2018, 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). Early adoption of the standard is permitted for annual
reporting periods beginning after December 15, 2016, including interim reporting periods within that
reporting period.
The Company currently plans to adopt these updates as of January 1, 2018, pursuant to the aforemen-
tioned adoption method (ii) and currently does not anticipate these updates will have a significant impact
on its consolidated financial statements. The Company’s analysis of contracts performed in 2016 resulted
in immaterial differences in the identification of performance obligations compared to the current unit of
accounting determination. Except for a limited number of contracts where the required criteria are not
met, the analysis supports the recognition of revenue over time following the cost-to-cost method under
the new revenue recognition standard for those contracts which are following the cost-to-cost method
under the current revenue recognition model. The Company continues to evaluate the expected impacts of
the adoption of these updates and the expected impacts are subject to change.
Balance sheet classification of deferred taxes
In November 2015, an accounting standard update was issued which removes the requirement to separate
deferred tax liabilities and assets into current and non-current amounts and instead requires all such
amounts, as well as any related valuation allowance, to be classified as non-current in the balance sheet.
This update is effective for the Company for annual and interim periods beginning January 1, 2017, with
early adoption permitted, and is applicable either prospectively to all deferred tax liabilities and assets or
retrospectively to all periods presented. The Company will adopt this update as of January 1, 2017, on a
retrospective basis and expects the balance of deferred tax assets and liabilities to decrease by approxi-
mately $300 million due to additional netting impacts.
Recognition and measurement of financial assets and financial liabilities
In January 2016, an accounting standard update was issued to enhance the reporting model for financial
instruments, which includes amendments to address aspects of recognition, measurement, presentation
and disclosure. For example, the Company would be required to measure equity investments (except
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 161161
those accounted for under the equity method) at fair value with changes in fair value recognized in net
income and to present separately financial assets and financial liabilities by measurement category and
form of financial asset. This update is effective for the Company for annual and interim periods beginning
January 1, 2018, with early adoption permitted for certain provisions. The Company is currently evaluating
the impact of this update on its consolidated financial statements.
Leases
In February 2016, an accounting standard update was issued that requires lessees to recognize lease
assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12
months. The update, which supersedes existing lease guidance, will continue to classify leases as either
finance or operating, with the classification determining the pattern of expense recognition in the income
statement. This update is effective for the Company for annual and interim periods beginning January 1,
2019, with early adoption permitted, and is applicable on a modified retrospective basis with various
optional practical expedients. The Company is currently evaluating the impact of this update on its
consolidated financial statements.
Simplifying the transition to the equity method of accounting
In March 2016, an accounting standard update was issued which eliminates the retroactive adjustments
to an investment upon it qualifying for the equity method of accounting as a result of an increase in the
level of ownership interest or degree of influence by the investor. It requires that the equity method
investor add the cost of acquiring the additional interest in the investee to the current basis of the
investor’s previously held interest and adopt the equity method of accounting as of the date the
investment qualifies for equity method accounting. This update is effective for the Company for annual
and interim periods beginning January 1, 2017, with early adoption permitted, and is applicable
prospectively. The Company does not believe that this update will have a significant impact on its
consolidated financial statements.
Improvements to employee share-based payment accounting
In March 2016, an accounting standard update was issued which changes the accounting for certain
aspects of share-based payment awards to employees, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as the classification in the statement of
cash flows. This update is effective for the Company for annual and interim periods beginning January 1,
2017, with early adoption permitted. The Company does not believe that this update will have a significant
impact on its consolidated financial statements.
Measurement of credit losses on financial instruments
In June 2016, an accounting standard update was issued which replaces the existing incurred loss impair-
ment methodology for most financial assets with a new “current expected credit loss” model. The new
model will result in the immediate recognition of the estimated credit losses expected to occur over the
remaining life of financial assets such as trade and other receivables, held-to-maturity debt securities,
loans and other instruments. Credit losses relating to available-for-sale debt securities will be measured in
a manner similar to current GAAP, except that the losses will be recorded through an allowance for credit
losses rather than as a direct write-down of the security.
This update is effective for the Company for annual and interim periods beginning January 1, 2020, with
early adoption permitted for annual and interim periods beginning January 1, 2019. The Company is
currently evaluating the impact of this update on its consolidated financial statements.
Classification of certain cash receipts and cash payments in the statement of cash flows
In August 2016, an accounting standard update was issued which clarifies how certain cash receipts and
cash payments, including debt prepayment or extinguishment costs, the settlement of zero coupon debt
instruments, contingent consideration paid after a business combination, proceeds from insurance
settlements, distributions from certain equity method investees and beneficial interests obtained in a
financial asset securitization, should be presented and classified in the statement of cash flows. This
update is effective for the Company for annual and interim periods beginning January 1, 2018 on a
retrospective basis, with early adoption permitted. The Company does not believe that this update will
have a significant impact on its consolidated financial statements.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 162
Income taxes – Intra-entity transfers of assets other than inventory
In October 2016, an accounting standard update was issued that requires the Company to recognize the
income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer
occurs instead of when the asset has been sold to an outside party. This update is effective for the
Company for annual and interim periods beginning January 1, 2018, with early adoption permitted, and is
applicable on a modified retrospective basis through a cumulative-effect adjustment directly to retained
earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of
this update on its consolidated financial statements.
Statement of cash flows – Restricted cash
In November 2016, an accounting standard update was issued which clarifies the classification and
presentation of changes in restricted cash on the statement of cash flows. It requires the inclusion of cash
and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the
statement of cash flows. This update is effective for the Company for annual and interim periods begin-
ning January 1, 2018 on a retrospective basis, with early adoption permitted. The Company does not
believe that this update will have a significant impact on its consolidated financial statements.
Clarifying the definition of a business
In January 2017, an accounting standard update was issued which narrows the definition of a business.
It also provides a framework for determining whether a set of transferred assets and activities involves
a business. This update is effective for the Company for annual and interim periods beginning January 1,
2018 on a prospective basis, with early adoption permitted. The Company does not believe that this
update will have a significant impact on its consolidated financial statements.
Simplifying the test for goodwill impairment
In January 2017, an accounting standard update was issued which eliminates the requirement to calculate
the implied fair value of goodwill when measuring a goodwill impairment loss. Instead, the Company is
required to record an impairment loss based on the excess of a reporting unit’s carrying amount over its
fair value provided that the loss recognized does not exceed the total amount of goodwill allocated to that
reporting unit. This update is effective for the Company for annual and interim periods beginning
January 1, 2020 on a prospective basis, with early adoption permitted. The Company plans to early adopt
this update in the first quarter of 2017 and apply it prospectively. The Company does not believe that this
update will have a significant impact on its consolidated financial statements.
Clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets
In February 2017, an accounting standard update was issued which clarifies the scope of asset derecogni-
tion guidance, adds guidance for partial sales of nonfinancial assets and clarifies recognizing gains and
losses from the transfer of nonfinancial assets in contracts with noncustomers. The Company plans to
adopt this update retrospectively as of January 1, 2018, with the cumulative effect of initially applying the
update recognized at the date of adoption in retained earnings. The Company does not believe that this
update will have a significant impact on its consolidated financial statements.
—
Note 3
Acquisitions and business divestments
Acquisitions
Acquisitions were as follows:
($ in millions, except number of acquired businesses)
2016
2015
2014
Acquisitions (net of cash acquired)(1)
Aggregate excess of purchase price over fair value of net assets acquired(2)
Number of acquired businesses
13
12
1
37
34
3
58
9
6
(1) Excluding changes in cost- and equity-accounted companies.
(2) Recorded as goodwill (see Note 11). Includes adjustments of $42 million in 2014 arising during the measurement period of acquisitions, primarily
reflecting a reduction in certain deferred tax liabilities related to Power-One.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 163163
Business divestments
In 2014, the Company received proceeds (net of transaction costs and cash disposed) of $1,090 million,
relating to divestments of consolidated businesses and recorded net gains of $543 million in “Other
income (expense), net” on the sale of such businesses. In 2016 and 2015, there were no significant
amounts recognized from divestments of consolidated businesses.
In September 2016, the Company announced an agreement to divest its high-voltage cable system
business (Cables business). The assets and liabilities of this business are shown as assets and liabilities
held for sale in the Company’s Consolidated Balance Sheet as at December 31, 2016. The transaction
closed on March 1, 2017.
—
Note 4
Cash and equivalents, marketable securities
and short-term investments
Current assets
Cash and equivalents and marketable securities and short-term investments consisted of the following:
December 31, 2016 ($ in millions)
Cost basis
Cash
Time deposits
Other short-term investments
Debt securities available-for-sale:
— U.S. government obligations
— Other government obligations
— Corporate
Equity securities available-for-sale
Total
1,704
2,764
271
221
2
95
530
5,587
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
Cash and
equivalents
Marketable
securities and
short-term
investments
1,704
2,764
271
220
2
95
541
1,704
1,940
—
—
—
—
824
271
220
2
95
541
5,597
3,644
1,953
1
—
1
11
13
(2)
—
(1)
—
(3)
December 31, 2015 ($ in millions)
Cost basis
Cash
Time deposits
Other short-term investments
Debt securities available-for-sale:
— U.S. government obligations
— Other government obligations
— Corporate
Equity securities available-for-sale
Total
1,837
2,821
231
120
2
519
658
6,188
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
Cash and
equivalents
Marketable
securities and
short-term
investments
1,837
2,821
231
121
2
519
667
1,837
2,717
—
—
11
—
104
231
121
2
508
667
6,198
4,565
1,633
2
—
1
9
12
(1)
—
(1)
—
(2)
Included in Other short-term investments at December 31, 2016 and 2015, are receivables of $268 million
and $224 million, respectively, representing reverse repurchase agreements. These collateralized lendings,
made to a financial institution, have maturity dates of less than one year.
Non-current assets
Included in “Other non-current assets” are certain held-to-maturity marketable securities. At December 31,
2016, the amortized cost, gross unrecognized gain and fair value (based on quoted market prices) of these
securities were $80 million, $6 million and $86 million, respectively. At December 31, 2015, the amortized
cost, gross unrecognized gain and fair value (based on quoted market prices) of these securities were
$99 million, $11 million and $110 million, respectively. These securities are pledged as security for certain
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 164
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 available-for-sale
securities totaled $1 million, $1 million and $2 million in 2016, 2015 and 2014, respectively. Gross realized
losses (reclassified from accumulated other comprehensive loss to income) on available-for-sale securities
totaled $1 million, $2 million and $23 million in 2016, 2015 and 2014, respectively. Such gains and losses
were included in “Interest and other finance expense”.
In 2016, 2015 and 2014, other-than-temporary impairments recognized on available-for-sale equity
securities were not significant.
At December 31, 2016, 2015 and 2014, gross unrealized losses on available-for-sale securities that have
been in a continuous unrealized loss position were not significant and the Company does not intend and
does not expect to be required to sell these securities before the recovery of their amortized cost.
Contractual maturities of debt securities consisted of the following:
December 31, 2016 ($ in millions)
Cost basis
Fair value
Cost basis
Fair value
Available-for-sale
Held-to-maturity
Less than one year
One to five years
Six to ten years
Total
100
161
57
318
100
161
56
317
—
80
—
80
—
86
—
86
At December 31, 2016 and 2015, the Company pledged $91 million and $92 million, respectively, of
available-for-sale marketable securities as collateral for issued letters of credit and other security
arrangements.
—
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
Due to the global nature of the Company’s operations, many of its subsidiaries are exposed to currency
risk in their operating activities from entering into transactions in currencies other than their functional
currency. To manage such currency risks, the Company’s policies require the subsidiaries to hedge their
foreign currency exposures from binding sales and purchase contracts denominated in foreign currencies.
For forecasted foreign currency denominated sales of standard products and the related foreign currency
denominated purchases, the Company’s policy is to hedge up to a maximum of 100 percent of the
forecasted foreign currency denominated exposures, depending on the length of the forecasted expo-
sures. 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.
Commodity risk
Various commodity products are used in the Company’s manufacturing activities. Consequently it is
exposed to volatility in future cash flows arising from changes in commodity prices. To manage 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 165165
of 100 percent) of the forecasted commodity exposure over the next 12 months or longer (up to a maximum
of 18 months). Primarily swap contracts are used to manage the associated price risks of commodities.
Interest rate risk
The Company has issued bonds at fixed rates. Interest rate swaps are used to manage the interest rate
risk associated with certain debt and generally such swaps are designated as fair value hedges. In
addition, from time to time, the Company uses instruments such as interest rate swaps, interest rate
futures, bond futures or forward rate agreements to manage interest rate risk arising from the Company’s
balance sheet structure but does not designate such instruments as hedges.
Equity risk
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 cash-settled call
options, indexed to the shares of the Company, which entitle the Company to receive amounts equivalent
to its obligations under the outstanding WARs.
Volume of derivative activity
In general, while the Company’s primary objective in its use of derivatives is to minimize exposures arising
from its business, certain derivatives are designated and qualify for hedge accounting treatment while
others either are not designated or do not qualify for hedge accounting.
Foreign exchange and interest rate derivatives
The gross notional amounts of outstanding foreign exchange and interest rate derivatives (whether
designated as hedges or not) were as follows:
Type of derivative
December 31, ($ in millions)
Foreign exchange contracts
Embedded foreign exchange derivatives
Interest rate contracts
Total notional amounts at
2016
15,353
2,162
3,021
2015
16,467
2,966
4,302
2014
18,564
3,013
2,242
Derivative commodity contracts
The following table shows the notional amounts of outstanding commodity derivatives (whether designa ted
as hedges or not), on a net basis, to reflect the Company’s requirements in the various commodities:
Type of derivative
December 31,
Copper swaps
Aluminum swaps
Nickel swaps
Lead swaps
Zinc swaps
Silver swaps
Crude oil swaps
Unit
Total notional amounts at
metric tonnes
metric tonnes
metric tonnes
metric tonnes
metric tonnes
ounces
barrels
2016
47,425
4,650
—
15,100
150
2015
48,903
5,455
18
14,625
225
2014
46,520
3,846
—
6,550
200
1,586,395
1,727,255
1,996,845
121,000
133,500
128,000
Equity derivatives
At December 31, 2016, 2015 and 2014, the Company held 47 million, 55 million and 61 million cash-settled call
options indexed to ABB Ltd shares (conversion ratio 5:1) with a total fair value of $23 million, $13 million and
$33 million, respectively.
Cash flow hedges
As noted above, the Company mainly uses forward foreign exchange contracts to manage the foreign
exchange risk of its operations, commodity swaps to manage its commodity risks and cash-settled call
options to hedge its WAR liabilities. Where such instruments are designated and qualify as cash flow
hedges, the effective portion of the changes in their fair value is recorded in “Accumulated other compre-
hensive 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.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 166
At December 31, 2016, 2015 and 2014, “Accumulated other comprehensive loss” included net unrealized
losses of $1 million, $11 million and $21 million, respectively, net of tax, on derivatives designated as cash
flow hedges. Of the amount at December 31, 2016, net gains of $2 million are expected to be reclassified
to earnings in 2017. At December 31, 2016, the longest maturity of a derivative classified as a cash flow
hedge was 39 months.
In 2016, 2015 and 2014, the amounts of gains or losses, net of tax, reclassified into earnings due to the
discontinuance of cash flow hedge accounting and the amount of ineffectiveness in cash flow hedge
relationships directly recognized in earnings were not significant.
The pre-tax effects of derivative instruments, designated and qualifying as cash flow hedges, on
“Accumulated other comprehensive loss” (OCI) and the Consolidated Income Statements were as follows:
($ in millions)
Type of derivative
Foreign exchange
contracts
Commodity contracts
Cash-settled call options
Total
Gains (losses) recognized in OCI
on derivatives (effective portion)
2016
2015
2014
Gains (losses) reclassified from OCI
into income (effective portion)
2016
2015
2014
2
4
15
21
(11)
(9)
(6)
(26)
(42)
(7)
(16)
(65)
Location
Total revenues
Total cost of sales
Total cost of sales
SG&A expenses(1)
(11)
10
(2)
10
7
(36)
11
(10)
(4)
(39)
(9)
8
(3)
(6)
(10)
(1) SG&A expenses represent “Selling, general and administrative expenses”.
The amounts in respect of gains (losses) recognized in income for hedge ineffectiveness and amounts
excluded from effectiveness testing were not significant in 2016, 2015 and 2014.
Net derivative gains of $6 million and net derivative losses of $30 million and $9 million, net of tax, were
reclassified from “Accumulated other comprehensive loss” to earnings during 2016, 2015 and 2014,
respectively.
Fair value hedges
To reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses
interest rate swaps. Where such instruments are designated as fair value hedges, the changes in the fair
value of these instruments, as well as the changes in fair value of the risk component of the underlying debt
being hedged, are recorded as offsetting gains and losses in “Interest and other finance expense”. Hedge
ineffectiveness of instruments designated as fair value hedges in 2016, 2015 and 2014, was not significant.
The effect of Interest rate contracts, designated and qualifying as fair value hedges, on the Consolidated
Income Statements was as follows:
($ in millions)
Gains (losses) recognized in Interest and other finance expense:
— on derivatives designated as fair value hedges
— on hedged item
2016
2015
2014
(28)
30
8
(4)
84
(83)
Derivatives not designated in hedge relationships
Derivative instruments that are not designated as hedges or do not qualify as either cash flow or fair value
hedges are economic hedges used for risk management purposes. Gains and losses from changes in the
fair values of such derivatives are recognized in the same line in the income statement as the economically
hedged transaction.
Furthermore, under certain circumstances, the Company is required to split and account separately for
foreign currency derivatives that are embedded within certain binding sales or purchase contracts
denominated in a currency other than the functional currency of the subsidiary and the counterparty.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 167167
The gains (losses) recognized in the Consolidated Income Statements on derivatives not designated in
hedging relationships were as follows:
Type of derivative not designated as a hedge
($ in millions)
Foreign exchange contracts
Location
Total revenues
Total cost of sales
SG&A expenses(1)
Non-order related research
and development
Other income (expense), net
Interest and other finance expense
Embedded foreign exchange contracts
Total revenues
Commodity contracts
Other
Total
Total cost of sales
SG&A expenses(1)
Total cost of sales
Interest and other finance expense
(1) SG&A expenses represent “Selling, general and administrative expenses”.
Gains (losses) recognized in income
2016
(206)
(56)
8
(2)
22
(34)
(5)
(5)
(2)
42
4
(234)
2015
(216)
2014
(533)
16
13
(1)
—
287
127
(25)
(5)
(61)
(1)
134
19
2
—
—
(260)
149
(27)
—
(28)
(1)
(679)
The fair values of derivatives included in the Consolidated Balance Sheets were as follows:
December 31, 2016 ($ in millions)
Derivatives designated as hedging instruments:
Foreign exchange contracts
Commodity contracts
Interest rate contracts
Cash-settled call options
Total
Derivatives not designated as hedging
instruments:
Foreign exchange contracts
Commodity contracts
Cross-currency interest rate swaps
Cash-settled call options
Embedded foreign exchange derivatives
Total
Total fair value
December 31, 2015 ($ in millions)
Derivatives designated as hedging instruments:
Foreign exchange contracts
Commodity contracts
Interest rate contracts
Cash-settled call options
Total
Derivatives not designated as hedging
instruments:
Foreign exchange contracts
Commodity contracts
Cross-currency interest rate swaps
Embedded foreign exchange derivatives
Total
Total fair value
Derivative assets
Derivative liabilities
Current in
“Other current
assets”
Non-current in
“Other non-current
assets”
Current in
“Other current
liabilities”
Non-current in
“Other non-current
liabilities”
5
2
2
13
22
169
29
—
—
58
256
278
—
—
62
9
71
29
2
2
1
21
55
126
6
—
—
—
6
257
6
—
—
35
298
304
5
—
—
—
5
77
1
—
—
18
96
101
Derivative assets
Derivative liabilities
Current in
“Other current
assets”
Non-current in
“Other non-current
assets”
Current in
“Other current
liabilities”
Non-current in
“Other non-current
liabilities”
15
—
6
8
29
172
2
—
94
268
297
10
—
86
5
101
32
—
—
53
85
186
8
3
—
—
11
237
29
—
41
307
318
16
—
—
—
16
81
9
1
27
118
134
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 168
Close-out netting agreements provide for the termination, valuation and net settlement of some or all
outstanding transactions between two counterparties on the occurrence of one or more pre-defined
trigger events.
Although the Company is party to close-out netting agreements with most derivative counterparties, the
fair values in the tables above and in the Consolidated Balance Sheets at December 31, 2016 and 2015, have
been presented on a gross basis.
The Company’s netting agreements and other similar arrangements allow net settlements under certain
conditions. At December 31, 2016 and 2015, information related to these offsetting arrangements was
as follows:
December 31, 2016 ($ in millions)
Type of agreement or
similar arrangement
Derivatives
Reverse repurchase agreements
Total
December 31, 2016 ($ in millions)
Type of agreement or
similar arrangement
Derivatives
Total
December 31, 2015 ($ in millions)
Type of agreement or
similar arrangement
Derivatives
Reverse repurchase agreements
Total
December 31, 2015 ($ in millions)
Type of agreement or
similar arrangement
Derivatives
Total
Gross amount
of recognized
assets
Derivative liabilities
eligible for set-off in
case of default
Cash
collateral
received
Non-cash
collateral
received
325
268
593
(190)
—
(190)
—
—
—
—
(268)
(268)
Net asset
exposure
135
—
135
Gross amount
of recognized
liabilities
Derivative liabilities
eligible for set-off in
case of default
Cash
collateral
pledged
Non-cash
collateral
pledged
352
352
(190)
(190)
—
—
—
—
Net liability
exposure
162
162
Gross amount
of recognized
assets
Derivative liabilities
eligible for set-off in
case of default
Cash
collateral
received
Non-cash
collateral
received
336
224
560
(215)
—
(215)
—
—
—
—
(224)
(224)
Net asset
exposure
121
—
121
Gross amount
of recognized
liabilities
Derivative liabilities
eligible for set-off in
case of default
384
384
(215)
(215)
Cash
collateral
pledged
(3)
(3)
Non-cash
collateral
pledged
—
—
Net liability
exposure
166
166
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 169169
—
Note 6
Fair values
Recurring fair value measures
The fair values of financial assets and liabilities measured at fair value on a recurring basis were as follows:
December 31, 2016 ($ in millions)
Assets
Available-for-sale securities in “Marketable securities and short-term investments”:
Level 1
Level 2
Level 3 Total fair value
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 — non-current in “Other non-current assets”
Total
Liabilities
Derivative liabilities — current in “Other current liabilities”
Derivative liabilities — non-current in “Other non-current liabilities”
Total
December 31, 2015 ($ in millions)
Assets
Available-for-sale securities in “Cash and equivalents”:
—
220
—
—
—
—
541
—
2
95
278
126
220
1,042
—
—
—
304
101
405
—
—
—
—
—
—
—
—
—
—
541
220
2
95
278
126
1,262
304
101
405
Level 1
Level 2
Level 3 Total fair value
Debt securities — Corporate
—
11
Available-for-sale securities in “Marketable securities and short-term 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 — non-current in “Other non-current assets”
Total
Liabilities
Derivative liabilities — current in “Other current liabilities”
Derivative liabilities — non-current in “Other non-current liabilities”
Total
—
121
—
—
1
—
667
—
2
508
296
186
122
1,670
3
—
3
315
134
449
—
—
—
—
—
—
—
—
—
—
—
11
667
121
2
508
297
186
1,792
318
134
452
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” and “Marketable securities and short-term
investments”: If quoted market prices in active markets for identical assets are available, these are
considered Level 1 inputs; however, when markets are not active, these inputs are considered Level 2. If
such quoted market prices are not available, fair value is determined using market prices for similar
assets or present value techniques, applying an appropriate risk-free interest rate adjusted for nonper-
formance 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 inputs). If quoted prices are not available, price
quotes for similar instruments, appropriately 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.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 170
Non-recurring fair value measures
There were no significant non-recurring fair value measurements during 2016 and 2015.
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, 2016 ($ in millions)
Carrying value
Level 1
Level 2
Level 3 Total fair value
Assets
Cash and equivalents (excluding available-for-sale
securities with original maturities up to 3 months):
Cash
Time deposits
Marketable securities and short-term investments
(excluding available-for-sale securities):
Time deposits
Receivables under reverse repurchase agreements
Other short-term investments
Other non-current assets:
Loans granted
Held-to-maturity securities
Restricted cash and cash deposits
Liabilities
Short-term debt and current maturities of long-term debt
(excluding capital lease obligations)
Long-term debt (excluding capital lease obligations)
Non-current deposit liabilities in “Other non-current
liabilities”
1,704
1,940
1,704
—
—
1,940
824
268
3
30
80
91
—
—
3
—
—
59
980
5,709
856
5,208
824
268
—
31
86
42
124
784
106
—
124
—
—
—
—
—
—
—
—
—
—
—
1,704
1,940
824
268
3
31
86
101
980
5,992
124
December 31, 2015 ($ in millions)
Carrying value
Level 1
Level 2
Level 3 Total fair value
Assets
Cash and equivalents (excluding available-for-sale
securities with original maturities up to 3 months):
Cash
Time deposits
Marketable securities and short-term investments
(excluding available-for-sale securities):
Time deposits
Receivables under reverse repurchase agreements
Other short-term investments
Other non-current assets:
Loans granted
Held-to-maturity securities
Restricted cash and cash deposits
Liabilities
Short-term debt and current maturities of long-term debt
(excluding capital lease obligations)
Long-term debt (excluding capital lease obligations)
Non-current deposit liabilities in “Other non-current
liabilities”
1,837
2,717
1,837
—
—
2,717
104
224
7
29
99
176
—
—
7
—
—
55
1,427
5,889
614
5,307
104
224
—
30
110
138
817
751
215
—
244
—
—
—
—
—
—
—
—
—
—
—
1,837
2,717
104
224
7
30
110
193
1,431
6,058
244
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 short-term 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) held-to-maturity securities (see Note 4) whose fair values are
based on quoted market prices in inactive markets (Level 2 inputs), (iii) restricted cash whose fair
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 171171
values approximate the carrying amounts (Level 1 inputs) and restricted cash deposits pledged in
respect of certain non-current 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):
Short-term debt includes commercial paper, bank borrowings and overdrafts. The carrying amounts
of short-term debt and current maturities of long-term debt, excluding capital lease obligations,
approximate their fair values.
• Long-term debt (excluding capital lease obligations): Fair values of bonds are determined using quoted
market prices (Level 1 inputs), if available. For bonds without available quoted market prices and
other long-term debt, the fair values are determined using a discounted cash flow methodology based
upon borrowing rates of similar debt instruments and reflecting appropriate adjustments for
non- performance risk (Level 2 inputs).
• Non-current deposit liabilities in “Other non-current liabilities”: The fair values of non-current deposit
liabilities are determined using a discounted cash flow methodology based on risk-adjusted interest
rates (Level 2 inputs).
—
Note 7
Receivables, net
“Receivables, net” consisted of the following:
December 31, ($ in millions)
Trade receivables
Other receivables
Allowance
Unbilled receivables, net:
Costs and estimated profits in excess of billings
Advance payments consumed
Total
2016
7,293
587
(314)
7,566
3,058
(928)
2,130
9,696
2015
7,197
665
(258)
7,604
3,385
(928)
2,457
10,061
“Trade receivables” in the table above includes contractual retention amounts billed to customers of
$463 million and $545 million at December 31, 2016 and 2015, respectively. Management expects that the
substantial majority of related contracts will be completed and the substantial majority of the billed
amounts retained by the customer will be collected. Of the retention amounts outstanding at December 31,
2016, 65 percent and 21 percent are expected to be collected in 2017 and 2018, respectively.
“Other receivables” in the table above consists of value added tax, claims, rental deposits and other
non-trade receivables.
“Costs and estimated profits in excess of billings” in the table above represents revenues earned and
recognized for contracts under the percentage-of-completion or completed-contract method of accoun-
ting. Management expects that the majority of the amounts will be collected within one year of the
respective balance sheet date.
The reconciliation of changes in the allowance for doubtful accounts is as follows:
($ in millions)
Balance at January 1,
Additions
Deductions
Exchange rate differences
Balance at December 31,
2016
258
163
(96)
(11)
314
2015
279
118
(113)
(26)
258
2014
317
103
(118)
(23)
279
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 172
—
Note 8
Inventories, net
“Inventories, net” consisted of the following:
December 31, ($ in millions)
Raw materials
Work in process
Finished goods
Advances to suppliers
Advance payments consumed
Total
2016
1,692
1,326
1,369
149
4,536
(189)
4,347
2015
1,793
1,574
1,442
188
4,997
(240)
4,757
“Work in process” in the table above contains inventoried costs relating to long-term contracts of
$212 million and $411 million at December 31, 2016 and 2015, respectively. “Advance payments consumed”
in the table above relates to contractual advances received from customers on work in process.
—
Note 9
Other non-current assets
“Other non-current assets” consisted of the following:
December 31, ($ in millions)
Pledged financial assets
Derivatives (including embedded derivatives) (see Note 5)
Investments
Restricted cash
Other
Total
2016
2015
112
126
57
59
178
532
220
186
58
55
124
643
The Company entered into structured leasing transactions with U.S. investors prior to 1999. At the
inception of the leasing arrangements the Company placed certain amounts in restricted cash deposits
and held-to-maturity debt securities. These amounts, included as “Pledged financial assets” in the table
above, are pledged as security for certain outstanding deposit liabilities included in “Other non-current
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.
—
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
2016
3,786
7,368
515
11,669
(6,926)
4,743
2015
4,003
7,554
559
12,116
(6,840)
5,276
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 Assets under capital leases included in “Property, plant and equipment, net” were as follows:
December 31, ($ in millions)
Land and buildings
Machinery and equipment
Accumulated depreciation
Total
2016
120
47
167
(82)
85
17 317 3
2015
149
53
202
(113)
89
In 2016, 2015 and 2014, depreciation, including depreciation of assets under capital leases, was $767 million,
$764 million and $851 million, respectively.
—
Note 11
Goodwill and other intangible assets
Effective January 1, 2016, the Company reorganized its operating segments with the aim of delivering
more customer value in a better, more focused way from its combined power and automation offering.
The new Electrification Products segment includes the business of the former Low Voltage Products
segment and the Medium Voltage Products business from the former Power Products segment. The
Process Automation segment has been expanded to include the Distributed Control Systems business
from the former Power Systems segment, while the remaining businesses of the former Power Products
and Power Systems segments were combined to form the new Power Grids segment. There were no
significant changes to the Discrete Automation and Motion segment. The table below has been reclassi-
fied to reflect this reorganization.
Changes in “Goodwill” were as follows:
($ in millions)
Cost at January 1, 2015
Accumulated impairment charges
Balance at January 1, 2015
Goodwill acquired during the year
Goodwill allocated to disposals
Exchange rate differences and other
Balance at December 31, 2015
Goodwill acquired during the year
Goodwill allocated to assets held for sale
Exchange rate differences and other
Balance at December 31, 2016
Electrification
Products
Discrete
Automation
and Motion
Process
Automation
2,970
—
2,970
4
—
(203)
2,771
—
—
(4)
2,767
3,766
—
3,766
24
—
(92)
3,698
12
—
(49)
3,661
1,546
—
1,546
6
—
(34)
1,518
—
—
(13)
1,505
Power
Grids
1,748
—
1,748
—
(23)
(62)
1,663
—
(105)
(11)
1,547
Corporate
and Other
41
(18)
23
—
(1)
(1)
21
—
—
—
21
Total
10,071
(18)
10,053
34
(24)
(392)
9,671
12
(105)
(77)
9,501
In 2016, goodwill allocated to the Cables business, within the Power Grids operating segment, was
transferred to “Assets held for sale”, see Note 3 for details.
In 2015, there were no significant acquisitions or divestments.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 174
Intangible assets other than goodwill consisted of the following:
December 31, ($ in millions)
Capitalized software for internal use
Capitalized software for sale
Intangibles other than software:
Customer-related
Technology-related
Marketing-related
Other
Total
Gross
carrying
amount
712
409
2,500
755
291
34
2016
2015
Accumulated
amortization
Net carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net carrying
amount
(596)
(365)
(904)
(660)
(159)
(21)
116
44
1,596
95
132
13
692
401
2,517
790
308
67
(567)
(357)
(767)
(585)
(140)
(22)
125
44
1,750
205
168
45
2,337
4,701
(2,705)
1,996
4,775
(2,438)
Additions to intangible assets other than goodwill consisted of the following:
($ in millions)
Capitalized software for internal use
Capitalized software for sale
Intangibles other than software:
Technology-related
Total
2016
2015
39
18
1
58
63
15
33
111
There were no significant intangible assets acquired in business combinations during 2016 and 2015.
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
2016
2015
2014
57
25
287
369
60
21
315
396
72
20
362
454
In 2016, 2015 and 2014, impairment charges on intangible assets other than goodwill were not significant.
At December 31, 2016, future amortization expense of intangible assets other than goodwill is estimated
to be:
($ in millions)
2017
2018
2019
2020
2021
Thereafter
Total
284
233
189
170
145
975
1,996
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 175175
—
Note 12
Debt
The Company’s total debt at December 31, 2016 and 2015, amounted to $6,803 million and $7,439 million,
respectively.
Short-term debt and current maturities of long-term debt
The Company’s “Short-term debt and current maturities of long-term debt” consisted of the following:
December 31, ($ in millions)
Short-term debt (weighted-average interest rate of 3.3 % and 4.2 %, respectively)
Current maturities of long-term debt
(weighted-average nominal interest rate of 2.8 % and 2.0 %, respectively)
Total
2016
135
868
1,003
2015
278
1,176
1,454
Short-term debt primarily represents short-term loans from various banks and issued commercial paper.
At December 31, 2016, the Company had in place two commercial paper programs: a $2 billion Euro-
commercial paper program for the issuance of commercial paper in a variety of currencies, and a $2 billion
commercial paper program for the private placement of U.S. dollar denominated commercial paper in the
United States. At December 31, 2016 and 2015, $57 million and $132 million, respectively, was outstanding
under the $2 billion program in the United States.
In addition, during 2016, the Company exercised its option to further extend the maturity of its $2 billion
multicurrency revolving credit facility to 2021. The facility is for general corporate purposes. Interest costs on
drawings under the facility are LIBOR or EURIBOR (depending on the currency of the drawings) plus a margin
of 0.20 percent, while commitment fees (payable on the unused portion of the facility) amount to 35 percent
of the margin, which represents commitment fees of 0.07 percent per annum. Utilization fees, payable on
drawings, amount to 0.075 percent per annum on drawings up to one-third of the facility, 0.15 percent per
annum on drawings in excess of one-third but less than or equal to two-thirds of the facility, or 0.30 percent
per annum on drawings over two-thirds of the facility. No amount was drawn at December 31, 2016 and 2015.
The facility contains cross-default clauses whereby an event of default would occur if the Company were to
default on indebtedness as defined in the facility, at or above a specified threshold.
Long-term debt
The Company utilizes derivative instruments to modify the interest characteristics of its long-term debt.
In particular, the Company uses interest rate swaps to effectively convert certain fixed-rate long-term debt
into floating rate obligations. The carrying value of debt, designated as being hedged by fair value hedges,
is adjusted for changes in the fair value of the risk component of the debt being hedged.
The following table summarizes the Company’s long-term debt considering the effect of interest rate
swaps. Consequently, a fixed-rate debt subject to a fixed-to-floating interest rate swap is included as
a floating rate debt in the table below:
2016
2015
December 31, ($ in millions, except % data)
Balance Nominal rate Effective rate
Balance Nominal rate Effective rate
Floating rate
Fixed rate
Current portion of long-term debt
Total
1,745
4,923
6,668
(868)
5,800
2.0 %
2.9 %
1.3 %
2.9 %
2.8 %
2.4 %
2,285
4,876
7,161
(1,176)
5,985
2.7 %
3.2 %
0.8 %
3.2 %
2.0 %
1.4 %
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 176
At December 31, 2016, the principal amounts of long-term debt repayable (excluding capital lease obligations)
at maturity were as follows:
($ in millions)
2017
2018
2019
2020
2021
Thereafter
Total
843
379
1,321
4
1,251
2,736
6,534
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
0.625% EUR Notes, due 2023
4.375% USD Notes, due 2042
Total
2016
Nominal
outstanding
Carrying
value(1)
2015
Nominal
outstanding
Carrying
value(1)
USD
AUD
CHF
EUR
USD
CHF
USD
USD
EUR
USD
500
400
350
1,250
650
350
250
1,250
700
750
—
—
500
291
342
1,311
643
368
274
1,261
732
722
$
$
$
$
$
$
$
$
$
$
$ 6,444
USD
CHF
USD
AUD
CHF
EUR
USD
CHF
USD
USD
600
500
500
400
350
1,250
650
350
250
1,250
USD
750
$
$
$
$
$
$
$
$
$
$
$
$
599
510
499
297
352
1,363
641
383
279
1,275
—
722
6,920
(1) USD carrying values include unamortized debt issuance costs, bond discounts or premiums, as well as adjustments for fair value hedge accounting,
where appropriate.
During 2016, the Company repaid at maturity the 2.5% USD Notes, due 2016, and the 1.25% CHF Bonds,
due 2016. The Company had entered into interest rate swaps to hedge its interest obligation on the 1.25%
CHF Bonds, due 2016. 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 at December
31, 2015, in the table of long-term debt above.
The 4.0% USD Notes, due 2021, pay interest semi-annually in arrears, at a fixed annual rate of 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 2.25% CHF Bonds, due 2021, pay interest annually in arrears, at a fixed annual rate of 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 long-term
debt above.
The 1.50% CHF Bonds, due 2018, 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, pay interest annually in arrears at a fixed rate of 2.625 percent
per annum.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 17 717 7
The 1.625% USD Notes, due 2017, pay interest semi-annually in arrears at a fixed annual rate of 1.625 per-
cent. The 2.875% USD Notes, due 2022, pay interest semi-annually in arrears at a fixed annual rate of
2.875 percent. The 4.375% USD Notes, due 2042, pay interest semi-annually in arrears at a fixed annual rate
of 4.375 percent. The Company may redeem any of 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. These notes, registered with the U.S. Securities and Exchange Commission,
were issued by ABB Finance (USA) Inc., a 100 percent owned finance subsidiary, and were fully and
unconditionally guaranteed by ABB Ltd. There are no significant restrictions on the ability of the parent
company to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 3-10 of
Regulation S-X, the separate financial statements of ABB Finance (USA) Inc. are not provided. The
Company has entered into interest rate swaps for an aggregate nominal amount of $1,050 million to
partially hedge its interest obligations on the 2.875% USD Notes, due 2022. After considering the impact
of such swaps, $1,050 million of the outstanding principal is shown as floating rate debt in the table of
long-term debt above.
The 5.625% USD Notes, due 2021, pay interest semi-annually in arrears at a fixed annual rate of 5.625 per-
cent. The Company has the option to redeem the notes prior to maturity at the greater of (i) 100 percent
of the principal amount of the notes to be redeemed, and (ii) the sum of the present values of remaining
scheduled payments of principal and interest (excluding interest accrued to the redemption date)
discounted to the redemption date at a rate defined in the note terms, plus interest accrued at the
redemption date.
The 4.25% AUD Notes, due 2017, 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 long-term debt above.
In May 2016, the Company issued notes with an aggregate principal of EUR 700 million, due 2023. The
notes pay interest annually in arrears at a fixed rate of 0.625 percent per annum. The Company recorded
net proceeds of EUR 697 million (equivalent to approximately $807 million on date of issuance).
The Company’s bonds contain cross-default clauses which would allow the bondholders to demand
repayment if the Company were to default on any borrowing at or above a specified threshold.
Furthermore, all such bonds constitute unsecured obligations of the Company and rank pari passu with
other debt obligations.
In addition to the bonds described above, included in long-term debt at December 31, 2016 and 2015, are
capital lease obligations, bank borrowings of subsidiaries and other long-term debt, none of which is
individually significant.
—
Note 13
Other provisions, other current liabilities
and other non-current liabilities
“Other Provisions” consisted of the following:
December 31, ($ in millions)
Contract-related provisions
Restructuring and restructuring-related provisions
Provisions for contractual penalties and compliance and litigation matters
Provision for insurance-related reserves
Other
Total
2016
2015
673
577
210
153
152
724
538
220
190
248
1,765
1,920
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 178
“Other current liabilities” consisted of the following:
December 31, ($ in millions)
Employee-related liabilities
Accrued expenses
Non-trade payables
Derivative liabilities (see Note 5)
Other tax liabilities
Income taxes payable
Accrued customer rebates
Deferred income
Accrued interest
Pension and other employee benefits (see Note 17)
Other
Total
“Other non-current liabilities” consisted of the following:
December 31, ($ in millions)
Income tax related liabilities
Non-current deposit liabilities (see Note 9)
Derivative liabilities (see Note 5)
Deferred income
Employee-related liabilities
Environmental provisions
Provisions for contractual penalties and compliance and litigation matters
Other
Total
—
Note 14
Leases
2016
1,670
2015
1,709
413
394
304
301
226
206
147
67
59
149
457
319
318
271
240
161
156
67
66
53
3,936
3,817
2016
2015
923
106
101
80
66
62
27
851
215
134
85
66
86
31
239
1,604
182
1,650
The Company’s lease obligations primarily relate to real estate and office equipment. Rent expense was
$459 million, $497 million and $558 million in 2016, 2015 and 2014, respectively. Sublease income received by
the Company on leased assets was $13 million, $13 million and $17 million in 2016, 2015 and 2014, respectively.
At December 31, 2016, future net minimum lease payments for operating leases, having initial or remaining
non-cancelable lease terms in excess of one year, consisted of the following:
($ in millions)
2017
2018
2019
2020
2021
Thereafter
Sublease income
Total
382
304
248
205
166
243
1,548
(24)
1,524
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 At December 31, 2016, the future net minimum lease payments for capital leases and the present value of
the net minimum lease payments consisted of the following:
179179
($ in millions)
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
Less amount representing estimated executory costs included in total minimum lease payments
Net minimum lease payments
Less amount representing interest
Present value of minimum lease payments
Minimum lease payments have not been reduced by minimum sublease rentals due in the future under
non-cancelable subleases. Such minimum sublease rentals were not significant. The present value of
minimum lease payments is included in “Short-term debt and current maturities of long-term debt” or
“Long-term debt” in the Consolidated Balance Sheets.
30
25
23
18
13
68
177
(1)
176
(62)
114
—
Note 15
Commitments and contingencies
Contingencies — Regulatory, Compliance and Legal
Antitrust
In April 2014, the European Commission announced its decision regarding its investigation of anticompeti tive
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 investigation 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).
In Brazil, the Company’s Gas Insulated Switchgear business is under investigation by the CADE for alleged
anticompetitive practices. In addition, the CADE has opened an investigation into certain other power
businesses of the Company, including flexible alternating current transmission systems (FACTS) and
power transformers. With respect to these matters, management is cooperating fully with the authorities.
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.
Suspect payments
As a result of an internal investigation, the Company self-reported to the Securities and Exchange
Commission (SEC) and the Department of Justice (DoJ) in the United States as well as to the Serious Fraud
Office (SFO) in the United Kingdom concerning certain of its past dealings with Unaoil and its subsidiaries,
including alleged improper payments made by these entities to third parties. The SFO has commenced an
investigation into this matter. The Company is cooperating fully with the authorities. At this time, it is not
possible for the Company to make an informed judgment about the outcome of these matters.
General
In addition, the Company is aware of proceedings, or the threat of proceedings, against it and others in
respect of private claims by customers and other third parties with regard to certain actual or alleged
anticompetitive practices. Also, the Company is subject to other various legal proceedings, investigations,
and claims that have not yet been resolved. With respect to the above-mentioned regulatory matters and
commercial litigation contingencies, the Company will bear the costs of the continuing investigations and
any related legal proceedings.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 180
Liabilities recognized
At December 31, 2016 and 2015, the Company had aggregate liabilities of $150 million and $160 million,
respectively, included in “Other provisions” and “Other non-current liabilities”, for the above regulatory,
compliance and legal contingencies, and none of the individual liabilities recognized was significant. As it
is not possible to make an informed judgment on the outcome of certain matters and as it is not possible,
based on information currently available to management, to estimate the maximum potential liability on
other matters, there could be material adverse outcomes beyond the amounts accrued.
Guarantees
General
The following table provides quantitative data regarding the Company’s third-party guarantees. The
maximum potential payments represent a “worst-case scenario”, and do not reflect management’s
expected outcomes.
December 31, ($ in millions)
Performance guarantees
Financial guarantees
Indemnification guarantees
Total
Maximum potential payments
2016
193
69
71
333
2015
209
77
50
336
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, 2016 and 2015, were
not significant.
The Company is party to various guarantees providing financial or performance assurances to certain
third parties. These guarantees, which have various maturities up to 2020, mainly consist of performance
guarantees whereby (i) the Company guarantees the performance of a third party’s product or service
according to the terms of a contract and (ii) as member of a consortium that includes third parties, the
Company guarantees not only its own performance but also the work of third parties. Such guarantees
may include guarantees that a project will be completed within a specified time. If the third party does not
fulfill the obligation, the Company will compensate the guaranteed party in cash or in kind. The original
maturity dates for the majority of these performance guarantees range from one to six years.
Commercial commitments
In addition, in the normal course of bidding for and executing certain projects, the Company has entered
into standby letters of credit, bid/performance bonds and surety bonds (collectively “performance
bonds”) with various financial institutions. Customers can draw on such performance bonds in the event
that the Company does not fulfill its contractual obligations. The Company would then have an obligation
to reimburse the financial institution for amounts paid under the performance bonds. At December 31,
2016 and 2015, the total outstanding performance bonds aggregated to $7.9 billion and $9.5 billion,
respectively. There have been no significant amounts reimbursed to financial institutions under these
types of arrangements in 2016, 2015 and 2014.
Product and order-related contingencies
The Company calculates its provision for product warranties based on historical claims experience and
specific review of certain contracts.
The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was
as follows:
($ 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,
2016
1,089
—
(329)
424
(42)
1,142
2015
1,148
—
(357)
377
(79)
1,089
2014
1,362
11
(319)
224
(130)
1,148
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 181181
During 2016, the Company determined that the provision for product warranties in its solar business,
acquired in 2013 as part of the purchase of Power-One, was no longer sufficient to cover expected
warranty costs in the remaining warranty period. Due to higher than originally expected product failure
rates for certain solar inverters designed and manufactured by Power-One, a substantial portion of which
relates to products which were delivered to customers prior to the acquisition date, the previously
estimated product warranty provision was increased by a total of $151 million during the year. The
corresponding increases were included in Cost of sales of products and resulted in a decrease in basic and
diluted earnings per share of $0.06 and $0.05, respectively, for 2016. As $131 million relates to products
which were sold prior to the acquisition date these costs have been excluded from the Company’s
measure of segment profit, Operational EBITA (see Note 23). This increase in warranty provision is based
upon the information presently available and therefore is subject to change in the future.
The information for 2015 contained in the table above has been adjusted to correct a classification
difference between Claims paid in cash and kind and Net effect of changes in estimates, warranties
issued and warranties expired.
Related party transactions
The Company conducts business with certain companies where members of the Company’s Board of
Directors or Executive Committee act, or in recent years have acted, as directors or senior executives.
The Company’s Board of Directors has determined that the Company’s business relationships with
those companies do not constitute material business relationships. This determination was made in
accordance with the Company’s related party transaction policy which was prepared based on the Swiss
Code of Best Practice and the independence criteria set forth in the corporate governance rules of the
New York Stock Exchange.
—
Note 16
Taxes
“Provision for taxes” consisted of the following:
($ in millions)
Current taxes
Deferred taxes
Tax expense from continuing operations
2016
925
(144)
781
2015
1,005
(217)
788
2014
1,130
72
1,202
Tax expense (benefit) from discontinued operations
(4)
(2)
1
Tax expense from continuing operations is reconciled below from the Company’s weighted-average global
tax rate (rather than from the Swiss domestic statutory tax rate) as the parent company of the ABB Group,
ABB Ltd, is domiciled in Switzerland and income generated in jurisdictions outside of Switzerland (hereafter
“foreign jurisdictions”) which has already been subject to corporate income tax in those foreign jurisdictions
is, to a large extent, tax exempt in Switzerland. There is no requirement in Switzerland for any parent
company of a group to file a tax return of the consolidated group determining domestic and foreign
pre-tax income. As the Company’s consolidated income from continuing operations is predominantly
earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines the
weighted-average global tax rate of the Company.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 182
The reconciliation of “Tax expense from continuing operations” at the weighted-average tax rate to the
effective tax rate is as follows:
($ in millions, except % data)
Income from continuing operations before taxes
Weighted-average global tax rate
Income taxes at weighted-average tax rate
Items taxed at rates other than the weighted-average tax rate
Impact of non-deductible goodwill allocated to divested businesses
Changes in valuation allowance, net
Effects of changes in tax laws and enacted tax rates
Non-deductible expenses, excluding goodwill
Other, net
Tax expense from continuing operations
2016
2,799
21.2 %
594
27
—
(17)
42
86
49
781
2015
2,840
21.8 %
619
(36)
9
57
—
52
87
2014
3,896
23.8 %
929
146
77
52
(52)
45
5
788
1,202
Effective tax rate for the year
27.9 %
27.7 %
30.9 %
In 2015, the benefit reported in “Items taxed at rates other than the weighted-average tax rate” predomi-
nantly included $50 million related to tax credits arising from research and development activities. In 2014
the expense reported in “Items taxed at rates other than the weighted-average 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 2016, 2015 and 2014, “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 2015, the
“Changes in valuation allowance, net” included an expense of $21 million related to certain of the
Company’s operations in Asia and 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 2016 the “Effects of change in tax laws and enacted tax rates” included an expense of $16 million related
to certain of the Company’s operations in 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 2016, 2015 and 2014, “Non-deductible expenses” of $86 million, of $52 million and $45 million, respectively,
included expenses 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 2016, “Other, net” of $49 million included a net charge of $50 million due to the interpretation of tax law
and double tax treaty agreements by competent tax authorities. In 2015, “Other, net” of $87 million
included a net charge of $74 million due to the interpretation of tax law and double tax treaty agreements
by competent tax authorities.
In 2014, “Provision for taxes” included $279 million relating to income taxes recorded on $543 million of net
gains from sale of businesses. This expense is primarily included in “Income taxes at weighted-average tax
rate” and “Impact of non-deductible goodwill allocated to divested businesses”.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 Deferred income tax assets and liabilities consisted of the following:
December 31, ($ in millions)
Deferred tax assets:
Unused tax losses and credits
Provisions and other accrued liabilities
Pension
Inventories
Property, plant and equipment and other non-current 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 non-current assets
Pension and other accrued liabilities
Inventories
Other current assets
Unremitted earnings
Other
Total gross deferred tax liability
Net deferred tax asset (liability)
Included in:
“Deferred taxes” — current assets
“Deferred taxes” — non-current assets
“Deferred taxes” — current liabilities
“Deferred taxes” — non-current liabilities
Net deferred tax asset (liability)
183183
2016
2015
514
865
507
273
266
93
2,518
(561)
1,957
(234)
(616)
(79)
(91)
(108)
(537)
(92)
623
887
528
267
282
89
2,676
(606)
2,070
(279)
(721)
(143)
(91)
(139)
(523)
(84)
(1,757)
(1,980)
200
90
888
527
(258)
(957)
200
881
423
(249)
(965)
90
Certain entities have deferred tax assets related to net operating loss carry-forwards and other items. As
recognition of these assets in certain entities did not meet the more likely than not criterion, valuation
allowances have been recorded and amount to $561 million and $606 million, at December 31, 2016 and
2015, respectively. “Unused tax losses and credits” at December 31, 2016 and 2015, in the table above,
included $108 million and $127 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, 2016 and 2015, deferred tax liabilities totaling $537 million and $523 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 2016
and 2015, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow
utilization of benefits. At December 31, 2016 and 2015, foreign subsidiary retained earnings subject to
withholding taxes upon distribution of approximately $100 million and $500 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, consequently, no
deferred tax liability was recorded.
At December 31, 2016, net operating loss carry-forwards of $1,622 million and tax credits of $125 million
were available to reduce future taxes of certain subsidiaries. Of these amounts, $846 million of loss
carry-forwards and $101 million of tax credits will expire in varying amounts through 2036. The largest
amount of these carry-forwards related to the Company’s Europe operations.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 184
Unrecognized tax benefits consisted of the following:
($ in millions)
Classification as unrecognized tax items on January 1, 2014
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
Increase relating to prior year tax positions
Decrease relating to prior year tax positions
Increase 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, 2015, which would, if recognized, affect the effective tax rate
Increase relating to prior year tax positions
Decrease relating to prior year tax positions
Increase 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, 2016, which would, if recognized, affect the effective tax rate
Penalties and
interest
related to
unrecognized
tax benefits
Unrecognized
tax benefits
733
(3)
25
(24)
85
(1)
(19)
(36)
(55)
705
52
(33)
155
(38)
(62)
(35)
744
88
(21)
167
(96)
(95)
(27)
760
154
1
39
(7)
—
—
(10)
(19)
(12)
146
38
(3)
—
(13)
(15)
(8)
145
74
(20)
13
(21)
(13)
(6)
172
Total
887
(2)
64
(31)
85
(1)
(29)
(55)
(67)
851
90
(36)
155
(51)
(77)
(43)
889
162
(41)
180
(117)
(108)
(33)
932
In 2016, 2015 and 2014, the “Increase relating to current year tax positions” included a total of $132 million,
$127 million and $56 million, respectively, in taxes related to the interpretation of tax law and double tax
treaty agreements by competent tax authorities.
At December 31, 2016, the Company expected the resolution, within the next twelve months, of uncertain
tax positions related to pending court cases amounting to $9 million for taxes, penalties and interest.
Otherwise, the Company had not identified any other significant changes which were considered reasonably
possible to occur within the next twelve months.
At December 31, 2016, the earliest significant open tax years that remained subject to examination were
the following:
Region
Europe
The Americas
Asia, Middle East & Africa
—
Note 17
Employee benefits
Year
2011
2013
2007
The Company operates defined benefit pension plans, defined contribution pension plans, and termination
indemnity plans, in accordance with local regulations and practices. These plans cover a large portion of
the Company’s employees and provide benefits to employees in the event of death, disability, retirement,
or termination of employment. Certain of these plans are multi-employer plans. The Company also
operates other postretirement benefit plans including postretirement health care benefits and other
employee-related benefits for active employees including long-service award plans. The measurement
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 185185
date used for the Company’s employee benefit plans is December 31. The funding policies of the
Company’s plans are consistent with the local government and tax requirements.
The Company recognizes in its Consolidated Balance Sheets the funded status of its defined benefit
pension plans, postretirement plans, and other employee-related benefits measured as the difference
between the fair value of the plan assets and the benefit obligation.
Obligations and funded status of the plans
The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the
Consolidated Balance Sheets were as follows:
Defined pension benefits
Other postretirement benefits
($ in millions)
Benefit obligations 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 amendments and other
Exchange rate differences
Fair value of plan assets at December 31,
2016
11,224
249
280
74
(596)
(26)
375
(76)
(608)
10,896
9,743
659
270
74
(596)
(133)
(524)
9,493
2015
12,355
267
305
76
(614)
—
(469)
(141)
(555)
11,224
10,465
(8)
243
76
(614)
—
(419)
9,743
2016
178
1
6
—
(11)
—
(17)
(10)
—
147
—
—
11
—
(11)
—
—
—
Funded status — underfunded
(1,403)
(1,481)
(147)
2015
245
1
8
—
(15)
—
(31)
(27)
(3)
178
—
—
15
—
(15)
—
—
—
(178)
The amounts recognized in “Accumulated other comprehensive loss” and “Noncontrolling interests” were:
Defined pension benefits
Other postretirement benefits
2016
2015
2014
2016
2015
December 31, ($ in millions)
Net actuarial (loss) gain
Prior service credit
Amount recognized in OCI(1) and NCI(2)
Taxes associated with amount recognized
in OCI and NCI
(2,237)
(2,383)
(2,765)
108
127
2
(2,129)
(2,256)
(2,763)
487
512
652
10
31
41
—
41
(8)
33
25
—
25
2014
(39)
16
(23)
—
(23)
Amount recognized in OCI and NCI, net of tax(3)
(1,642)
(1,744)
(2,111)
(1) OCI represent “Accumulated other comprehensive loss”.
(2) NCI represents “Noncontrolling interests”.
(3) NCI, net of tax, amounted to $0 million, $0 million and $(3) million at December 31, 2016, 2015 and 2014, respectively.
In addition, the following amounts were recognized in the Company’s Consolidated Balance Sheets:
December 31, ($ in millions)
Overfunded plans
Underfunded plans — current
Underfunded plans — non-current
Funded status — underfunded
Defined pension benefits
Other postretirement benefits
2016
68
(16)
(1,455)
(1,403)
2015
42
(18)
(1,505)
(1,481)
2016
—
(13)
(134)
(147)
2015
—
(14)
(164)
(178)
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 186
December 31, ($ in millions)
Non-current assets
Overfunded pension plans
Other employee-related benefits
Prepaid pension and other employee benefits
December 31, ($ in millions)
Current liabilities
Underfunded pension plans
Underfunded other postretirement benefit plans
Other employee-related 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 employee-related benefits
Pension and other employee benefits
2016
2015
68
22
90
42
26
68
2016
2015
(16)
(13)
(30)
(59)
(18)
(14)
(34)
(66)
2016
2015
(1,455)
(1,505)
(134)
(245)
(164)
(255)
(1,834)
(1,924)
The funded status, calculated using the projected benefit obligation (PBO) and fair value of plan assets,
for pension plans with a PBO in excess of fair value of plan assets (underfunded) or fair value of plan
assets in excess of PBO (overfunded), respectively, was:
December 31, ($ in millions)
PBO exceeds assets
Assets exceed PBO
Total
2016
2015
PBO
9,892
1,004
10,896
Assets Difference
PBO
Assets Difference
8,420
1,073
9,493
(1,472)
69
(1,403)
10,413
811
11,224
8,890
853
9,743
(1,523)
42
(1,481)
The accumulated benefit obligation (ABO) for all defined benefit pension plans was $10,612 million and
$10,924 million at December 31, 2016 and 2015, respectively. The funded status, calculated using the ABO
and fair value of plan assets for pension plans with ABO in excess of fair value of plan assets (underfunded)
or fair value of plan assets in excess of ABO (overfunded), respectively, was:
December 31, ($ in millions)
ABO exceeds assets
Assets exceed ABO
Total
ABO
9,612
1,000
10,612
2016
Assets Difference
8,406
1,087
9,493
(1,206)
87
ABO
8,781
2,143
2015
Assets Difference
7,496
2,247
9,743
(1,285)
104
(1,181)
(1,119)
10,924
All of the Company’s other postretirement benefit plans are unfunded.
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
2016
249
280
(402)
40
85
41
293
2015
267
305
(456)
38
112
20
286
2014
243
409
(481)
27
102
1
301
2016
2015
2014
1
6
—
(12)
—
—
(5)
1
8
—
(9)
1
—
1
1
10
—
(9)
—
—
2
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 187187
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 2017 is $87 million and
$35 million, respectively.
The net prior service credit for other postretirement benefits estimated to be amortized from
“Accumulated other comprehensive loss” into net periodic benefit cost in 2017 is $5 million. There is no
significant actuarial gain or loss to be amortized in 2017.
Assumptions
The following weighted-average assumptions were used to determine benefit obligations:
December 31, (in %)
Discount rate
Rate of compensation increase
Rate of pension increase
Defined pension benefits
Other postretirement benefits
2016
2.3
1.7
1.0
2015
2.6
1.5
0.9
2016
3.3
—
—
2015
3.6
—
—
The discount rate assumptions are based upon AA-rated corporate bonds. In those countries with
sufficient liquidity in corporate bonds, the Company used the current market long-term corporate bond
yields and matched the bond duration with the average duration of the pension liabilities. In those
countries where the liquidity of the AA-rated 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 govern-
ment bond curve or interest rate swap curve.
The following weighted-average assumptions were used to determine the “Net periodic benefit cost”:
(in %)
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
Defined pension benefits
Other postretirement benefits
2016
2015
2014
2016
2015
2014
2.6
4.3
1.5
2.6
4.6
1.7
3.6
4.6
1.8
3.6
—
—
3.5
—
—
4.2
—
—
The “Expected long-term rate of return on plan assets” is derived for each benefit plan by considering
the expected future long-term return assumption for each individual asset class. A single long-term return
assumption is then derived for each plan based upon the plan’s target asset allocation.
The Company maintains other postretirement benefit plans, which are generally contributory with
participants’ contributions adjusted annually. The assumptions used were:
December 31,
Health care cost trend rate assumed for next year
Rate to which the trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2016
7.3 %
5.0 %
2028
2015
7.7 %
5.0 %
2028
A one-percentage-point change in assumed health care cost trend rates would have the following effects
at December 31, 2016:
($ in millions)
Effect on total of service and interest cost
Effect on postretirement benefit obligation
1-percentage-point
Increase
Decrease
1
9
—
(8)
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 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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 188
investment returns. The boards of trustees have the responsibility for making key investment strategy
decisions within a risk-controlled framework.
The pension plan assets are invested in diversified portfolios that are managed by third-party asset
managers, in accordance with local statutory regulations, pension plan rules and the respective plans’
investment guidelines, as approved by the boards of trustees.
Plan assets are generally segregated from those of the Company and invested with the aim of meeting the
respective plans’ projected future pension liabilities. Plan assets are measured at fair value at the balance
sheet date.
The boards of trustees manage the assets of the pension plans in a risk-controlled manner and assess
the risks embedded in the pension plans through asset/liability management studies. Asset/liability
management studies typically take place every three years. However, the risks of the plans are monitored
on an ongoing basis.
The board of trustees’ investment goal is to maximize the long-term returns of plan assets within speci-
fied risk parameters, while considering the future liabilities and liquidity needs of the individual plans.
Risk measures taken into account include the funding ratio of the plan, the likelihood of extraordinary
cash contributions being required, the risk embedded in each individual asset class, and the plan asset
portfolio as a whole.
The Company’s global pension asset allocation is the result of the asset allocations of the individual plans,
which are set by the respective boards of trustees. The target asset allocation of the Company’s plans on
a weighted-average basis is as follows:
(in %)
Asset class
Equity
Fixed income
Real estate
Other
Target
22
59
12
7
100
The actual asset allocations of the plans are in line with the target asset allocations.
Equity assets primarily include investments in large-cap and mid-cap publicly-traded companies. Fixed
income assets primarily include corporate bonds of companies from diverse industries and government
bonds. Both fixed income and equity assets are invested either via funds or directly in segregated investment
mandates, and include an allocation to emerging markets. Real estate consists primarily of 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 variety of investment strategies.
Based on the above global asset allocation and the fair values of the plan assets, the expected long-term
return on assets at December 31, 2016, is 4.2 percent. The Company and the local boards of trustees
regularly review the investment performance of the asset classes and individual asset managers. Due to
the diversified nature of the investments, the Company is of the opinion that no significant concentration
of risks exists in its pension fund assets.
The Company does not expect any plan assets to be returned to the employer during 2017.
At December 31, 2016 and 2015, plan assets include ABB Ltd’s shares (as well as an insignificant amount of
the Company’s debt instruments) with a total value of $8 million and $9 million, respectively.
The fair values of the Company’s pension plan assets by asset class are presented below. For further
information on the fair value hierarchy and an overview of the Company’s valuation techniques applied,
see the “Fair value measures” section of Note 2.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 189189
December 31, 2016 ($ 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
Real estate
Insurance contracts
Cash and short-term investments
Private equity
Hedge funds
Commodities
Total
244
—
—
449
—
—
—
—
260
—
—
—
—
1,610
337
909
3,446
692
33
99
104
—
—
67
—
—
—
—
—
—
1,116
—
—
114
13
—
244
1,610
337
1,358
3,446
692
1,149
99
364
114
13
67
953
7,297
1,243
9,493
December 31, 2015 ($ 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
Real estate
Insurance contracts
Cash and short-term investments
Private equity
Hedge funds
Commodities
Total
364
—
—
587
—
—
—
—
160
—
—
—
—
1,633
328
949
3,257
669
74
121
219
—
—
59
—
—
—
—
—
—
1,106
—
—
123
94
—
364
1,633
328
1,536
3,257
669
1,180
121
379
123
94
59
1,111
7,309
1,323
9,743
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, 2015
Return on plan assets
Assets still held at December 31, 2015
Assets sold during the year
Purchases (sales)
Exchange rate differences
Balance at December 31, 2015
Return on plan assets
Assets still held at December 31, 2016
Assets sold during the year
Purchases (sales)
Transfers into Level 3
Exchange rate differences
Balance at December 31, 2016
Private equity
Hedge funds
Real estate
Total Level 3
136
(9)
20
(24)
—
123
(9)
15
(13)
1
(3)
114
93
1
(1)
—
1
94
—
(4)
(77)
—
—
13
842
54
(1)
215
(4)
1,071
46
18
191
(3)
1,106
1,323
82
—
(1)
(3)
(68)
1,116
73
11
(91)
(2)
(71)
1,243
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
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 190
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 publicly-traded and privately-held securities. Publicly-traded securities that are quoted in
inactive markets are valued using available quotes and adjusted for liquidity restrictions. Privately-held
securities are valued taking into account various factors, such as the most recent financing involving
unrelated new investors, earnings multiple analyses using comparable companies and discounted cash
flow analyses.
Hedge funds are not normally exchange-traded and the shares of the funds cannot be redeemed daily.
Depending on the fund structure, the fair values are derived through modeling techniques based on the
values of the underlying assets adjusted to reflect liquidity and transferability restrictions.
Contributions
Employer contributions were as follows:
($ in millions)
Total contributions to defined benefit pension
and other postretirement benefit plans
Of which, discretionary contributions
to defined benefit pension plans
Defined pension benefits
Other postretirement benefits
2016
2015
2016
2015
270
15
243
31
11
—
15
—
In 2016 and 2015, total contributions included non-cash contributions totaling $52 million and $22 million,
respectively, of available-for-sale debt securities to certain of the Company’s pension plans.
The Company expects to contribute approximately $193 million, including $12 million in discretionary
contributions, to its defined benefit pension plans in 2017. These discretionary contributions are expected to
be non-cash contributions. The Company expects to contribute approximately $13 million to its other
postretirement benefit plans in 2017.
The Company also contributes to a number of defined contribution plans. The aggregate expense for these
plans was $210 million, $218 million and $236 million in 2016, 2015 and 2014, respectively. Contributions to
multi-employer plans were not significant in 2016, 2015 and 2014.
Estimated future benefit payments
The expected future cash flows to be paid by the Company’s plans in respect of pension and other
postretirement benefit plans at December 31, 2016, are as follows:
($ in millions)
Defined pension benefits
Other postretirement benefits
2017
2018
2019
2020
2021
Years 2022-2026
593
598
578
585
563
2,718
13
13
13
12
12
51
—
Note 18
Share-based payment arrangements
The Company has three principal share-based payment plans, as more fully described in the respective
sections below. Compensation cost for equity-settled awards is recorded in “Total cost of sales” and in
“Selling, general and administrative expenses” and totaled $54 million, $61 million and $73 million in 2016,
2015 and 2014, respectively. Compensation cost for cash-settled awards is recorded in “Selling, general and
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 191191
administrative expenses” and is disclosed in the “WARs”, “LTIP” and “Other share-based payments” sections
of this note. The total tax benefit recognized in 2016, 2015 and 2014 was not significant.
At December 31, 2016, the Company had the ability to issue up to 94 million new shares out of contingent
capital in connection with share-based payment arrangements. In addition, 29 million shares (of the 76 million
shares held by the Company as treasury stock at December 31, 2016) could be used to settle share-based
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) and substantially all the share-based payment arrangements with employees are
based on the Swiss franc share or have strike prices set in Swiss francs, certain data disclosed below related
to the instruments granted under share-based payment arrangements are presented in Swiss francs.
MIP
Under the MIP, the Company offers options and cash-settled WARs to key employees for no consideration.
The options granted under the MIP allow participants to purchase shares of ABB Ltd at predetermined
prices. Participants may sell the options rather than exercise the right to purchase shares. Equivalent
warrants are listed by a third-party bank on the SIX Swiss Exchange, which facilitates pricing and trans-
fera bility of instruments granted under this plan. The options entitle the holder to request that the
third-party bank purchase such options at the market price of equivalent listed warrants related to that
MIP launch. If the participant elects to sell the options, the 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. Participants may exercise or sell 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 options and WARs expire six years from the date of grant.
Options
The fair value of each option is estimated on the date of grant using a lattice model that uses the assump-
tions noted in the table below. Expected volatilities are based on implied volatilities from equivalent listed
warrants on ABB Ltd shares. The expected term of the options granted is the contractual six-year life of each
option, based on the fact that after the vesting period, a participant can elect to sell the option rather than
exercise the right to purchase shares, thereby also realizing the time value of the options. The risk-free rate
is based on a six-year Swiss franc interest rate, reflecting the six-year contractual life of the options. In
estimating forfeitures, the Company has used the data from previous comparable MIP launches.
Expected volatility
Dividend yield
Expected term
Risk-free interest rate
2016
19 %
4.9 %
6 years
-0.5 %
2015
17 %
3.2 %
2014
18 %
2.9 %
6 years
6 years
-0.3 %
0.2 %
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 192
Presented below is a summary of the activity related to options under the MIP:
Number of
instruments
(in millions)
Number of
shares
(in millions)(1)
Weighted-
average
exercise
price
(in Swiss
francs)(2)
Weighted-
average
remaining
contractual
term
(in years)
Aggregate
intrinsic value
(in millions of
Swiss francs)(3)
Outstanding at January 1, 2016
Granted
Exercised(4)
Forfeited
Expired
Outstanding at December 31, 2016
Vested and expected to vest at December 31, 2016
Exercisable at December 31, 2016
399.1
79.0
(36.9)
(12.9)
(36.9)
391.4
386.9
186.8
79.8
15.8
(7.4)
(2.6)
(7.3)
78.3
77.4
37.4
20.51
21.50
15.75
20.47
22.52
20.98
20.97
21.32
3.4
3.4
2.0
75
75
41
(1) 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.
(2) Information presented reflects the exercise price per share of ABB Ltd.
(3) 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.
(4) The cash received upon exercise amounted to approximately $120 million. The shares were delivered out of treasury stock.
At December 31, 2016, there was $50 million of total unrecognized compensation cost related to non-vested
options granted under the MIP. That cost is expected to be recognized over a weighted-average period of
2.1 years. The weighted-average grant-date fair value (per instrument) of options granted during 2016,
2015 and 2014 was 0.47 Swiss francs, 0.39 Swiss francs and 0.49 Swiss francs, respectively. In 2016 and
2015 the aggregate intrinsic value (on the date of exercise) of instruments exercised was $27 million and
$10 million, respectively, while in 2014 it was not significant.
Presented below is a summary, by launch, related to instruments outstanding at December 31, 2016:
Exercise price (in Swiss francs)(1)
Number of instruments
(in millions)
Number of shares
(in millions)(2)
Weighted-average remaining
contractual term (in years)
25.50
15.75
17.50
21.50
21.00
19.50
21.50
Total number of instruments and shares
42.8
21.2
14.5
81.2
73.0
80.2
78.5
391.4
8.6
4.2
2.9
16.3
14.6
16.0
15.7
78.3
0.4
1.4
1.4
2.4
3.7
4.6
5.7
3.4
(1) Information presented reflects the exercise price per share of ABB Ltd.
(2) Information presented reflects the number of shares of ABB Ltd that can be received upon exercise.
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 straight-line basis over the three-year vesting period. In “Selling,
general and administrative expenses”, the Company recorded an expense of $14 million in 2016, as a result
of changes in both the fair value and vested portion of the outstanding WARs. The amount recorded in
2015 and 2014 was not significant. To hedge its exposure to fluctuations in the fair value of outstanding
WARs, the Company purchased cash-settled call options, which entitle the Company to receive amounts
equivalent to its obligations under the outstanding WARs. The cash-settled call options are recorded as
derivatives measured at fair value (see Note 5), with subsequent changes in fair value recorded in earnings
to the extent that they offset the change in fair value of the liability for the WARs. In 2016, 2015 and 2014
the amounts recorded in “Selling, general and administrative expenses” related to the cash-settled call
options was not significant.
The aggregate fair value of outstanding WARs was $23 million and $13 million at December 31, 2016 and
2015, respectively. The fair value of WARs was determined based upon the trading price of equivalent
warrants listed on the SIX Swiss Exchange.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 Presented below is a summary of the activity related to WARs:
Outstanding at January 1, 2016
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
193193
Number of WARs (in millions)
55.2
9.3
(13.3)
(0.2)
(3.7)
47.3
19.5
The aggregate fair value at date of grant of WARs granted in 2016, 2015 and 2014 was not significant. In
2016 and 2015, share-based liabilities of $7 million and $9 million, respectively, were paid upon exercise of
WARs by participants. In 2014, the amount paid was not significant.
ESAP
The employee share acquisition plan (ESAP) is an employee stock-option plan with a savings feature.
Employees save over a twelve-month period, by way of regular payroll deductions. At the end of the
savings period, employees choose whether to exercise their stock options using their savings plus
interest, if any, to buy ABB Ltd shares (American Depositary Shares (ADS) in the case of employees in the
United States and Canada — each ADS representing one registered share of the Company) at the exercise
price set at the grant date, or have their savings returned with any interest. The savings are accumulated
in bank accounts held by a third-party trustee on behalf of the participants and earn interest, where
applicable. Employees can withdraw from the ESAP at any time during the savings period and will be
entitled to a refund of their accumulated savings.
The fair value of each option is estimated on the date of grant using the same option valuation model as
described under the MIP, using the assumptions noted in the table below. The expected term of the option
granted has been determined to be the contractual one-year life of each option, at the end of which the
options vest and the participants are required to decide whether to exercise their options or have their
savings returned with interest. The risk-free rate is based on one-year Swiss franc interest rates, reflecting
the one-year contractual life of the options. In estimating forfeitures, the Company has used the data
from previous ESAP launches.
Expected volatility
Dividend yield
Expected term
Risk-free interest rate
2016
20 %
3.7 %
1 year
-0.7 %
2015
20 %
3.9 %
1 year
-0.8 %
2014
18 %
3.1 %
1 year
-0.1 %
Presented below is a summary of activity under the ESAP:
Number of
shares (in
millions)(1)
Weighted-average
exercise price (in
Swiss francs)(2)
Weighted-average
remaining contrac-
tual term (in years)
Aggregate intrinsic
value (in millions of
Swiss francs)(2)(3)
Outstanding at January 1, 2016
Granted
Forfeited
Exercised(4)
Not exercised (savings returned plus interest)
Outstanding at December 31, 2016
Vested and expected to vest at December 31, 2016
Exercisable at December 31, 2016
3.7
3.4
(0.2)
(2.6)
(0.9)
3.4
3.3
—
18.78
20.12
18.84
18.78
18.78
20.12
20.12
—
0.8
0.8
—
4.7
4.5
—
(1) Includes shares represented by ADS.
(2) Information presented for ADS is based on equivalent Swiss franc denominated awards.
(3) Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price of each option in Swiss francs.
(4) The cash received upon exercise was approximately $50 million and the corresponding tax benefit was not significant. The shares were delivered
out of treasury stock.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 194
The exercise prices per ABB Ltd share and per ADS of 20.12 Swiss francs and $20.52, respectively, for the
2016 grant, 18.78 Swiss francs and $19.10, respectively, for the 2015 grant, and 20.97 Swiss francs and
$21.81, respectively, for the 2014 grant were determined using the closing price of the ABB Ltd share on
the SIX Swiss Exchange and ADS on the New York Stock Exchange on the respective grant dates.
At December 31, 2016, the total unrecognized compensation cost related to non-vested options granted
under the ESAP was not significant. The weighted-average grant-date fair value (per option) of options
granted during 2016, 2015 and 2014 was 1.24 Swiss francs, 1.07 Swiss francs and 1.19 Swiss francs,
respectively. The total intrinsic value (on the date of exercise) of options exercised in 2016, 2015 and 2014
was not significant.
LTIP
The Company has a long-term incentive plan (LTIP) for members of its Executive Committee and selected
other senior executives (Eligible Participants), as defined in the terms of the LTIP. The LTIP involves annual
conditional grants of the Company’s stock to such Eligible Participants that are subject to certain
conditions.
The 2016 and 2015 LTIP launches are each composed of two performance components: (i) a component
which is based on the achievement of a consolidated net income threshold and (ii) a component which is
based on the Company’s earnings per share performance. The 2014 launch under the LTIP is composed of
two components: (i) a performance component based on the Company’s earnings per share performance
and (ii) a retention component.
For shares to vest under the threshold net income component of the 2016 and 2015 LTIP launches, the
Company’s consolidated net income has to reach a certain level set by the Board of Directors at the launch
of the LTIP. The shares will not vest if this threshold is not achieved and will vest at 100 percent if this
threshold is equaled or exceeded. In addition, the Eligible Participant has to fulfill the service condition as
defined in the terms and conditions of the LTIP.
For the earnings per share performance component of the 2016, 2015 and 2014 LTIP launches, the actual
number of shares that will vest at a future date is dependent on (i) the Company’s weighted cumulative
earnings per share performance over three financial years, beginning with the year of launch, and (ii) the
fulfillment of the service condition as defined in the terms and conditions of the LTIP. The cumulative
earnings per share performance is weighted as follows: 33 percent of the first year’s result, 67 percent of
the second year’s result and 100 percent of the third year’s result. The actual number of shares that
ultimately vest will vary depending on the weighted cumulative earnings per share outcome, interpolated
between a lower threshold (no shares vest) and an upper threshold (the number of shares vesting is
capped at 200 percent of the conditional grant).
Under the retention component of the 2014 LTIP launch, 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).
Under the threshold net income component of the 2016 and 2015 LTIP launches, an Eligible Participant
receives 70 percent of the shares that have vested in the form of shares and 30 percent of the value of the
shares that have vested in cash, with the possibility to elect to also receive the 30 percent portion in
shares rather than in cash. For the 2016 and 2015 LTIP launches, under the earnings per share performance
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 also
receive the 30 percent portion in shares rather than in cash, while for the 2014 LTIP launch an Eligible
Participant receives, in cash, 100 percent of the value of the shares that have vested. Under the retention
component of the 2014 LTIP launch, an Eligible Participant receives 70 percent of the shares that have
vested in the form of shares and 30 percent of the value of the shares that have vested in cash, with the
possibility to elect to also receive the 30 percent portion in shares rather than in cash.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 195195
Presented below is a summary of activity under the LTIP:
Number of Shares Conditionally Granted
Equity & Cash or
choice of 100 %
Equity Settlement(1)
(in millions)
Only Cash
Settlement(2)
(in millions)
Total
(in millions)
Weighted-average
grant-date fair
value per share
(Swiss francs)
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
2.1
1.0
(0.5)
—
2.6
0.7
—
(0.2)
(0.2)
0.3
2.8
1.0
(0.7)
(0.2)
2.9
(1) Shares that, subject to vesting, the Eligible Participant can elect to receive 100 percent in the form of shares.
(2) Shares that, subject to vesting, the Eligible Participant can only receive in cash.
20.96
20.77
20.93
20.95
20.89
Equity-settled awards are recorded in the “Capital stock and additional paid-in capital” component of
stockholders’ equity, with compensation cost recorded in “Selling, general and administrative expenses”
over the vesting period (which is from grant date to the end of the vesting period) based on the
grant-date fair value of the shares. Cash-settled awards are recorded as a liability, remeasured at fair
value at each reporting date for the percentage vested, with changes in the liability recorded in
“Selling, general and administrative expenses”.
At December 31, 2016, there was $19 million of total unrecognized compensation cost related to equity-settled
awards under the LTIP. That cost is expected to be recognized over a weighted-average period of 2 years.
The compensation cost recorded in 2016, 2015 and 2014 for cash-settled awards was not significant.
The aggregate fair value, at the dates of grant, of shares granted in 2016, 2015 and 2014 was $22 million,
$23 million and $22 million, respectively. The total grant-date fair value of shares that vested during 2016,
2015 and 2014 was $15 million, $12 million and $15 million, respectively. The weighted-average grant-date
fair value (per share) of shares granted during 2016, 2015 and 2014 was 20.77 Swiss francs, 21.54 Swiss
francs and 20.35 Swiss francs, respectively.
For the net income threshold component of the 2016 and 2015 LTIP launches, the fair value of the granted
shares is based on the probability of reaching the threshold as well as on the market price of the ABB Ltd
share at grant date for equity-settled awards and at each reporting date for cash-settled awards. For the
earnings per share component of the LTIP launches, the fair value of granted shares is based on the
market price of the ABB Ltd share at grant date for equity-settled awards and at each reporting date for
cash-settled awards, as well as the probable outcome of the earnings per share achievement 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 external financial analysts’ revenue growth rates
and Operational EBITA margin expectations. For the retention component under the 2014 LTIP launch, the
fair value of granted shares for equity-settled awards is based on the market price of the ABB Ltd share on
grant date and the fair value of granted shares for cash-settled awards is based on the market price of the
ABB Ltd share at each reporting date.
Other share-based payments
The Company has other minor share-based payment arrangements with certain employees. The compen-
sation cost related to these arrangements in 2016, 2015 and 2014 was not significant.
—
Note 19
Stockholders’ equity
At December 31, 2016 and 2015, the Company had 2,719 million and 2,819 million authorized shares,
respectively, of which 2,215 million and 2,315 million, respectively, were registered and issued.
At the Annual General Meeting of Shareholders (AGM) in April 2016, shareholders approved the proposal of
the Board of Directors to distribute a total of 0.74 Swiss francs per share to shareholders by way of
a nominal value reduction (reduction in the par value of each share) from 0.86 Swiss francs to 0.12 Swiss
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 196
francs. In July 2016, the nominal value reduction was registered in the commercial register of the canton of
Zurich, Switzerland, and was paid. The Company recorded a reduction in Capital stock and additional
paid-in capital of $1,224 million and a reduction in Retained earnings of $402 million in relation to the
nominal value reduction. At the AGM in April 2015, shareholders approved the proposals of the Board of
Directors to distribute a total of 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 from 1.03 Swiss francs to 0.86 Swiss francs. The approved dividend
distribution amounted to $1,317 million and was paid in May 2015. The nominal value reduction was
registered in July 2015 in the commercial register of the canton of Zurich, Switzerland, and was paid in the
third quarter of 2015. The approved nominal value reduction was recorded as a reduction to Capital stock
and additional paid-in capital of $349 million and a reduction in Retained earnings of $54 million. At the
AGM in April 2014, shareholders approved the payment of a dividend of 0.70 Swiss francs per share out of
the capital contribution reserve in stockholders’ equity of the unconsolidated statutory financial state-
ments of ABB Ltd, prepared in accordance with Swiss law. The dividends were paid in May 2014 (amounting
to $1,841 million).
Between September 2014 and September 2016, the Company executed a share buyback program for the
purchase of up to $4 billion of its own shares and on September 30, 2016, announced that it had completed
this program. Over the period of the share buyback, the Company purchased a total of 146.6 million shares
(for approximately $3 billion) for cancellation and 24.7 million shares (for approximately $0.5 billion) to
support its employee share programs. The shares acquired for cancellation were purchased through
a separate trading line on the SIX Swiss Exchange (on which only the Company could purchase shares),
while shares acquired for delivery under employee share programs were acquired through the ordinary
trading line. In 2016, under the announced share buyback program, the Company purchased 60.4 million
shares for cancellation and 4.9 million shares to support its employee share programs. These transactions
resulted in an increase in Treasury stock of $1,280 million. In 2015, under the program, the Company
purchased 60.2 million shares for cancellation and 13.1 million shares to support its employee share
programs. These transactions resulted in an increase in Treasury stock of $1,501 million. In 2014, under the
program, the Company 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.
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.
At the AGM in April 2016, shareholders approved the proposal of the Board of Directors to reduce the
share capital of the Company by cancelling 100 million treasury shares which were acquired under the
share buyback program. This cancellation was completed in July 2016, resulting in a decrease in Treasury
stock of $2,047 million and a corresponding combined decrease in Capital stock and additional paid-in
capital and Retained earnings.
Upon and in connection with each launch of the Company’s MIP, the Company sold call options to a bank at
fair value, giving the bank the right to acquire shares equivalent to the number of shares represented by the
MIP WAR awards to participants. Under the terms of the agreement with the bank, the call options can only
be exercised by the bank to the extent that MIP participants have exercised their WARs. At December 31,
2016, such call options representing 11.0 million shares and with strike prices ranging from 15.75 to
21.50 Swiss francs (weighted-average strike price of 20.30 Swiss francs) were held by the bank. The call
options expire in periods ranging from May 2018 to August 2022. However, only 2.3 million of these instru-
ments, with strike prices ranging from 15.75 to 21.50 Swiss francs (weighted-average strike price of 20.23
Swiss francs), could be exercised at December 31, 2016, under the terms of the agreement with the bank.
In addition to the above, at December 31, 2016, the Company had further outstanding obligations to deliver:
• 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, vested in May 2014 and expiring in May 2017,
• up to 7.1 million shares relating to the options granted under the 2012 launches of the MIP, with a
weighted-average strike price of 16.46 Swiss francs, vested in May 2015 and expiring in May 2018,
• up to 16.3 million shares relating to the options granted under the 2013 launch of the MIP, with a strike
price of 21.50 Swiss francs, vested in May 2016 and expiring in May 2019,
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 197197
• up to 14.6 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 16.0 million shares relating to the options granted under the 2015 launch of the MIP, with a strike
price of 19.50 Swiss francs, vesting in August 2018 and expiring in August 2021,
• up to 15.7 million shares relating to the options granted under the 2016 launch of the MIP, with a strike
price of 21.50 Swiss francs, vesting in August 2019 and expiring in August 2022,
• up to 3.4 million shares relating to the ESAP, vesting and expiring in October 2017,
• up to 3.6 million shares to Eligible Participants under the 2016, 2015 and 2014 launches of the LTIP,
•
vesting and expiring in June 2019, June 2018 and August 2017, respectively, and
less than 1 million shares in connection with certain other share-based payment arrangements with
employees.
See Note 18 for a description of the above share-based payment arrangements.
In 2016, 2015 and 2014, the Company delivered 8.9 million, 5.3 million and 1.3 million shares, respectively,
out of treasury stock, for options exercised in relation to the MIP. In addition, in 2016 the Company
delivered 2.6 million shares from treasury stock under the ESAP. In 2015 and 2014 the number of shares
delivered under the ESAP was not significant.
Amounts available to be distributed as dividends to the stockholders of ABB Ltd are based on the require-
ments 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, 2016, the total unconsolidated stockholders’ equity of ABB Ltd was 9,029 million Swiss
francs ($8,840 million), including 266 million Swiss francs ($260 million) representing share capital,
10,283 million Swiss francs ($10,068 million) representing reserves and 1,520 million Swiss francs
($1,488 million) representing a reduction of equity for own shares (treasury stock). Of the reserves,
1,520 million Swiss francs ($1,488 million) relating to own shares and 53 million Swiss francs ($52 million)
representing 20 percent of share capital, are restricted and not available for distribution.
In February 2017, the Company announced that a proposal will be put to the 2017 AGM for approval by the
shareholders to distribute 0.76 Swiss francs per share to shareholders.
—
Note 20
Earnings per share
Basic earnings per share is calculated by dividing income by the weighted-average number of shares
outstanding during the year. Diluted earnings per share is calculated by dividing income by the
weighted-average number of shares outstanding during the year, assuming that all potentially dilutive
securities were exercised, if dilutive. Potentially dilutive securities comprise outstanding written call
options and outstanding options and shares granted subject to certain conditions under the Company’s
share-based payment arrangements. In 2016, 2015 and 2014, outstanding securities representing a
maximum of 87 million, 78 million and 59 million shares, respectively, were excluded from the calculation
of diluted earnings per share as their inclusion would have been anti-dilutive.
Basic earnings per share:
($ in millions, except per share data in $)
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
2016
2015
2014
1,883
16
1,899
1,930
3
1,933
2,570
24
2,594
Weighted-average number of shares outstanding (in millions)
2,151
2,226
2,288
Basic earnings per share attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
0.88
—
0.88
0.87
—
0.87
1.12
0.01
1.13
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 198
Diluted earnings per share:
($ in millions, except per share data in $)
Amounts attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
2016
2015
2014
1,883
16
1,899
1,930
3
1,933
2,570
24
2,594
Weighted-average number of shares outstanding (in millions)
2,151
2,226
2,288
Effect of dilutive securities:
Call options and shares
Adjusted weighted-average number of shares outstanding (in millions)
Diluted earnings per share attributable to ABB shareholders:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
3
2,154
0.87
0.01
0.88
4
7
2,230
2,295
0.87
—
0.87
1.12
0.01
1.13
—
Note 21
Other comprehensive income
The following table includes amounts recorded within “Total other comprehensive income (loss)”
including the related income tax effects.
($ in millions)
Foreign currency translation adjustments:
2016
2015
2014
Before
tax
Tax
effect
Net
of tax
Before
tax
Tax
effect
Net
of tax
Before
tax
Tax
effect
Net
of tax
Net change during the year
(462)
(12)
(474)
(1,105)
47 (1,058)
(1,691)
11
(1,680)
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 losses from pension settlements
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
—
—
—
(46)
38
28
85
37
142
21
(7)
14
—
—
—
6
6
(2)
(23)
(11)
(24)
(5)
1
(4)
44
26
62
26
118
16
(6)
10
—
—
—
(8)
1
(7)
1
—
1
(7)
1
(6)
(14)
5
(9)
21
7
(6)
(1)
15
6
(40)
113
(25)
88
(5)
2
(3)
285
(75)
210
(826)
212
(614)
29
(3)
113
(31)
15
555
(6)
(140)
26
82
9
415
18
(1)
102
(21)
(3)
(714)
(26)
6
(20)
(65)
39
13
(9)
(3)
30
10
10
(55)
17
81
(2)
1
193
(521)
13
(1)
12
(52)
9
(43)
Total other comprehensive income (loss)
(306)
(40)
(346)
(544)
(95)
(639)
(2,453)
215
(2,238)
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 The following table shows changes in “Accumulated other comprehensive loss” (OCI) attributable to ABB,
by component, net of tax:
199199
Foreign currency
translation
adjustments
Unrealized gains
(losses) on
available-for-sale
securities
Pension and
other post-
retirement plan
adjustments
Unrealized gains
(losses) of cash
flow hedge
derivatives
($ in millions)
Balance at January 1, 2014
(431)
(1,680)
—
Other comprehensive (loss) income
before reclassifications
Amounts reclassified from OCI
Total other comprehensive (loss) income
(1,680)
Less:
Amounts attributable to
noncontrolling interests
Balance at December 31, 2014
Other comprehensive (loss) income
before reclassifications
Amounts reclassified from OCI
(9)
(2,102)
(1,058)
—
Total other comprehensive (loss) income
(1,058)
Less:
Amounts attributable to
noncontrolling interests
Balance at December 31, 2015
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, 2016
(25)
(3,135)
(474)
—
(474)
(17)
(3,592)
7
(9)
15
6
—
13
(7)
1
(6)
—
7
—
—
—
—
7
(1,610)
(617)
96
(521)
—
(2,131)
298
117
415
3
(1,719)
4
114
118
—
(1,601)
22
(52)
9
(43)
—
(21)
(20)
30
10
—
(11)
16
(6)
10
—
(1)
Total OCI
(2,012)
(2,358)
120
(2,238)
(9)
(4,241)
(787)
148
(639)
(22)
(4,858)
(454)
108
(346)
(17)
(5,187)
The following table reflects amounts reclassified out of OCI in respect of Pension and other postretire-
ment plan adjustments and Unrealized gains (losses) of cash flow hedge derivatives:
Details about OCI components ($ in millions)
Pension and other postretirement plan adjustments:
Amortization of prior service cost
Amortization of net actuarial losses
Net losses from pension settlements
Total before tax
Tax
Amounts reclassified from OCI
Unrealized gains (losses) of cash flow hedge derivatives:
Foreign exchange contracts
Commodity contracts
Cash-settled call options
Total before tax
Tax
Amounts reclassified from OCI
Location of (gains) losses
reclassified from OCI
Net periodic benefit cost(1)
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) These components are included in the computation of net periodic benefit cost (see Note 17).
(2) SG&A expenses represent “Selling, general and administrative expenses”.
2016
2015
2014
28
85
37
150
(36)
114
11
(10)
2
(10)
(7)
1
(6)
29
113
15
157
(40)
117
36
(11)
10
4
39
(9)
30
18
102
(3)
117
(21)
96
9
(8)
3
6
10
(1)
9
The amounts reclassified out of OCI in respect of Unrealized gains (losses) on available-for-sale securities
were not significant in 2016, 2015 and 2014.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 200
—
Note 22
Restructuring and related expenses
White Collar Productivity program
In September 2015, the Company announced a two-year program aimed at making the Company leaner,
faster and more customer-focused. Productivity improvements include the rapid expansion and use of
regional shared service centers as well as the streamlining of global operations and head office functions,
with business units moving closer to their respective key markets. In the course of this program, the
Company is implementing and executing various restructuring initiatives across all operating segments
and regions.
The following table outlines the cumulative costs incurred to date and the total amount of costs expected
to be incurred under the program per operating segment:
($ in millions)
Electrification Products
Discrete Automation and Motion
Process Automation
Power Grids
Corporate and Other
Total
Costs incurred in
2016
2015
Cumulative costs
incurred up to
December 31, 2016
Total
expected costs(1)
14
27
36
33
30
73
45
96
70
86
140
370
87
72
132
103
116
510
89
74
134
105
118
520
(1) Total expected costs have been recast to reflect the reorganization of the Company’s operating segments as outlined in Note 23.
Total expected program costs were originally estimated to be $852 million. During 2016, the total expected
program costs were reduced by $332 million. This was primarily due to the realization of significantly
higher than originally expected attrition and internal redeployment rates. The reductions were made
across all operating segments as well as for corporate functions.
Of the total expected costs of $520 million the majority is related to employee severance costs.
The Company recorded the following expenses, net of changes in estimates, under this program:
($ in millions)
Employee severance costs
Estimated contract settlement, loss order and other costs
Inventory and long-lived asset impairments
Total
2016
130
2
8
140
2015
364
5
1
370
Cumulative costs
incurred up to
December 31, 2016
494
7
9
510
Expenses, net of changes in estimates, associated with this program are recorded in the following line
items in the Consolidated Income Statements:
($ in millions)
Total cost of sales
Selling, general and administrative expenses
Non-order related research and development expenses
Other income (expense), net
Total
2016
2015
92
38
(5)
15
140
122
187
38
23
370
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 201201
Liabilities associated with the White Collar Productivity program are primarily included in “Other provi-
sions”. The following table shows the activity from the beginning of the program to December 31, 2016,
by expense type:
($ in millions)
Liability at January 1, 2015
Expenses
Cash payments
Liability at December 31, 2015
Expenses
Cash payments
Change in estimates
Exchange rate differences
Liability at December 31, 2016
Employee
severance costs
Contract
settlement, loss
order and other costs
—
364
(34)
330
232
(106)
(102)
(23)
331
—
5
(1)
4
3
(3)
(1)
—
3
Total
—
369
(35)
334
235
(109)
(103)
(23)
334
The change in estimates during 2016 of $103 million is due to significantly higher than expected rates of
attrition and internal redeployment and a lower than expected severance cost per employee for the
employee groups affected by the first phase of restructuring initiated in 2015. The reduction in the liability
was recorded in income from operations, primarily as reductions in Cost of sales of $49 million and in
Selling, general and administrative expenses of $38 million.
Other restructuring-related activities
In 2016, 2015 and 2014, the Company executed various other restructuring-related activities and incurred
charges of $171 million, $256 million and $235 million, respectively, which were primarily recorded in “Total
cost of sales”.
($ in millions)
Employee severance costs
Estimated contract settlement, loss order and other costs
Inventory and long-lived asset impairments
Total
2016
90
40
41
171
2015
207
27
22
256
2014
177
31
27
235
At December 31, 2016 and 2015, the balance of other restructuring-related liabilities is primarily included in
“Other provisions”.
Change in estimates
In addition to the change in estimate of $103 million relating to the White Collar Productivity program, a
further $46 million was recorded as a change in estimate to reduce liabilities associated with the
Company’s other restructuring-related activities mainly due to changes in the planned scope of these
activities. This was recorded in income from operations, primarily as reductions in Cost of sales. The
combined total change in estimates during 2016 of $149 million resulted in an increase in earnings per
share (basic and diluted) of $0.05 for 2016.
—
Note 23
Operating segment and geographic data
The Chief Operating Decision Maker (CODM) is the Chief Executive Officer. The CODM allocates resources
to and assesses the performance of each operating segment using the information outlined below. The
Company’s operating segments consist of Electrification Products, Discrete Automation and Motion,
Process Automation and Power Grids. The remaining operations of the Company are included in Corporate
and Other.
Effective January 1, 2016, the Company reorganized its operating segments with the aim of delivering
more customer value in a better, more focused way from its combined power and automation offering.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 202
The new Electrification Products segment includes the business of the former Low Voltage Products
segment and the Medium Voltage Products business from the former Power Products segment. The
Process Automation segment has been expanded to include the Distributed Control Systems business
from the former Power Systems segment, while the remaining businesses of the former Power Products
and Power Systems segments were combined to form the new Power Grids segment. There were no
significant changes to the Discrete Automation and Motion segment.
In addition, commencing in 2016, the Company changed its method of allocating income taxes to its
operating segments whereby tax assets are primarily accounted for in Corporate and Other. As a result,
certain amounts relating to current and deferred tax assets previously reported within the total segment
assets of each individual operating segment have been allocated to Corporate and Other.
The segment information for 2015 and 2014, and at December 31, 2015 and 2014, has been recast to reflect
these organizational and allocation changes.
A description of the types of products and services provided by each reportable segment is as follows:
• Electrification Products: manufactures and sells products and services including low- and med ium-
voltage switchgear (air and gas insulated), breakers, switches, control products, DIN rail components,
automation and distribution enclosures, wiring accessories and installation material for many kinds of
applications.
• Discrete Automation and Motion: manufactures and sells motors, generators, variable speed drives,
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.
• Process Automation: develops and sells control and plant optimization systems, automation products
and solutions, including instrumentation, as well as industry-specific 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 Grids: supplies power and automation products, systems, and service and software solutions for
power generation, transmission and distribution to utility, industry, transportation and infrastructure
customers. These offerings address evolving grid developments which include the integration of
renewables, network control, digital substations, microgrids and asset management. The segment also
manufactures a wide range of power, distribution and traction transformers, an array of high-voltage
products, including circuit breakers, switchgear, capacitors and power transmission systems.
• Corporate and Other: includes headquarters, central research and development, the Company’s
real estate activities, Group Treasury Operations, historical operating activities of certain divested
businesses, and other minor business activities.
The Company evaluates the profitability of its segments based on Operational EBITA. In 2016, the
Company modified the definition of its measure of segment profit to also exclude changes in estimates
relating to opening balance sheets of acquired businesses (changes in pre-acquisition estimates) and
non-operational pension cost, which comprises: (a) interest cost, (b) expected return on plan assets,
(c) amortization of prior service cost (credit), (d) amortization of net actuarial loss, and (e) curtailments,
settlements and special termination benefits.
After these revisions, Operational EBITA represents Income from operations excluding: (i) amortization
expense on intangibles arising upon acquisitions (acquisition-related amortization), (ii) restructuring and
restructuring-related expenses, (iii) non-operational pension cost, (iv) changes in pre-acquisition estimates,
(v) gains and losses from sale of businesses, acquisition-related expenses and certain non-operational
items, as well as (vi) foreign exchange/commodity timing differences in income from operations consist-
ing of: (a) unrealized gains and losses on derivatives (foreign exchange, commodities, embedded deriva-
tives), (b) realized gains and losses on derivatives where the underlying hedged transaction has not yet
been realized, and (c) unrealized foreign exchange movements on receivables/payables (and related
assets/liabilities).
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 203203
The CODM primarily reviews the results of each segment on a basis that is before the elimination of
profits made on inventory sales between segments. Segment results below are presented before these
eliminations, with a total deduction for intersegment profits to arrive at the Company’s consolidated
Operational EBITA. Intersegment sales and transfers are accounted for as if the sales and transfers were
to third parties, at current market prices.
The following tables present segment revenues, Operational EBITA, the reconciliations of consolidated
Operational EBITA to income from continuing operations before taxes, as well as depreciation and
amortization, and capital expenditures for 2016, 2015 and 2014, as well as total assets at December 31,
2016, 2015 and 2014.
2016 ($ in millions)
Electrification Products
Discrete Automation and Motion
Process Automation
Power Grids
Corporate and Other
Intersegment elimination
Consolidated
2015 ($ in millions)
Electrification Products
Discrete Automation and Motion
Process Automation
Power Grids
Corporate and Other
Intersegment elimination
Consolidated
2014 ($ in millions)
Electrification Products
Discrete Automation and Motion
Process Automation
Power Grids
Corporate and Other
Intersegment elimination
Consolidated
Third-party revenues
Intersegment revenues
Total revenues
8,744
8,169
6,448
10,408
59
—
33,828
548
545
150
567
1,553
(3,363)
—
9,292
8,714
6,598
10,975
1,612
(3,363)
33,828
Third-party revenues
Intersegment revenues
Total revenues
8,932
8,492
7,104
10,876
77
—
35,481
615
635
120
745
1,459
(3,574)
—
9,547
9,127
7,224
11,621
1,536
(3,574)
35,481
Third-party revenues
Intersegment revenues
Total revenues
9,826
9,296
8,490
11,533
685
—
39,830
746
846
128
985
1,652
(4,357)
—
10,572
10,142
8,618
12,518
2,337
(4,357)
39,830
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 204
($ in millions)
Operational EBITA:
Electrification Products
Discrete Automation and Motion
Process Automation
Power Grids
Corporate and Other and Intersegment elimination
Consolidated Operational EBITA
Acquisition-related amortization
Restructuring and restructuring-related expenses(1)
Non-operational pension cost(2)
Changes in pre-acquisition estimates(2)
Gains and losses on sale of businesses,
acquisition-related expenses and certain non-operational items
Foreign exchange/commodity timing differences in income from operations:
Unrealized gains and losses on derivatives
where the underlying hedged transaction has not yet been realized
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
2016
2015
2014
1,528
1,195
824
1,021
(377)
4,191
(279)
(543)
(38)
(131)
1,561
1,295
863
877
(387)
4,209
(310)
(674)
(19)
(21)
(173)
(120)
1,739
1,595
1,045
607
(452)
4,534
(380)
(235)
(59)
—
482
(65)
67
(223)
(5)
30
2,987
73
(261)
2,799
(68)
(42)
(15)
3,049
77
(286)
2,840
101
4,178
80
(362)
3,896
(1) Amounts also include the incremental implementation costs in relation to the White Collar Productivity program.
(2) As described above, in 2016, the Company modified the definition of its measure of segment profit to also exclude changes in pre-acquisition
estimates and non-operational pension cost. Amounts presented for 2015 and 2014 have been adjusted to conform to the new definition.
Depreciation and amortization
Capital expenditure(1)
Total assets(1) at December 31,
($ in millions)
Electrification Products
Discrete Automation and Motion
Process Automation
Power Grids
Corporate and Other
Consolidated
2016
2015
2014
2016
2015
2014
305
292
74
266
198
316
295
79
280
190
341
309
90
336
229
1,135
1,160
1,305
200
128
51
203
249
831
210
145
56
191
274
876
2016
9,523
8,465
4,153
8,980
8,378
2015
9,474
9,223
4,662
9,422
8,575
2014
10,552
10,131
5,200
10,632
8,337
248
192
47
242
297
1,026
39,499
41,356
44,852
(1) Capital expenditure and Total assets are after intersegment eliminations and therefore reflect third-party activities only.
Geographic information
Geographic information for revenues and long-lived assets was as follows:
($ in millions)
Europe
The Americas
Asia, Middle East and Africa
Total
Revenues
Long-lived assets at December 31,
2016
11,315
9,741
12,772
33,828
2015
11,602
10,554
13,325
35,481
2014
13,745
11,490
14,595
39,830
2016
2,768
1,100
875
4,743
2015
3,253
1,113
910
5,276
Revenues by geography reflect the location of the customer. Approximately 19 percent, 20 percent and
19 percent of the Company’s total revenues in 2016, 2015 and 2014, respectively, came from customers in
the United States. Approximately 13 percent of the Company’s total revenues in 2016, 2015 and 2014,
respectively, were generated from customers in China. In 2016, 2015 and 2014, more than 98 percent of the
Company’s total revenues were generated from customers outside Switzerland.
Long-lived assets represent “Property, plant and equipment, net” and are shown by location of the assets.
At December 31, 2016, approximately 17 percent, 17 percent and 10 percent of the Company’s long-lived
assets were located in Switzerland, the U.S. and Sweden respectively. At December 31, 2015, approximately
16 percent were located in each of Switzerland, the U.S. and Sweden.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 205205
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.
Realignment of segments
On October 4, 2016, the Company announced a planned change in the composition of the business
portfolio of its four segments. Effective January 1, 2017, the scope of the Electrification Products segment
has been expanded to include the electric vehicle charging, solar, and power quality businesses from the
Discrete Automation and Motion segment.
In addition, the Discrete Automation and Motion segment has been renamed the Robotics and Motion
segment while the Process Automation segment has been renamed the Industrial Automation segment.
04 FINANCIAL REVIEW OF ABB GROUPABB ANNUAL REPORT 2016 —
05
ABB Ltd Statutory
Financial Statements
210
ABB Ltd Management Report 2016
211 – 212
Financial Statements of ABB Ltd, Zurich
213 – 222
Notes to Financial Statements
223
224
Proposed appropriation of available earnings
Report of the Statutory Auditor on the Financial
Statements
—TO B I A S , R E S E A R C H & D E V E LO P M E N T, T U R G I ,
S W I T Z E R L A N D
Since 2012 I have been
managing the R&D Con-
trol Software unit. What
makes me happy? The
fact that my team and
I are contributing to a
sustainable energy future.
210
—
ABB Ltd Management
Report 2016
ABB Ltd is the holding company of the ABB Group,
owning directly or indirectly all subsidiaries globally.
The major business
activities during 2016 can
be summarized as follows:
Management services
The Company provided management services
to a Group company of CHF 25 million.
Share transactions
• share buyback for employee share programs of
CHF 93 million
• share buyback for reduction of share capital
of CHF 1,162 million
• share deliveries for employee share programs of
CHF 252 million
Dividend payment to external shareholders
•
in form of a par value reduction
of CHF 1,581 million
Share capital
The Company reduced its share capital by
CHF 86 million in form of cancellation of
100 million shares of a par value of CHF 0.86.
In addition, the Company reduced its share
capital by CHF 1,639 million in the form of a par
value reduction from CHF 0.86 to CHF 0.12
per share.
Other information
In 2016, the Company employed on average
21 employees.
Once a year, the Company’s board of directors
performs a risk assessment in accordance with
the Group’s risk management process and discuss-
es appropriate actions if necessary.
The Company does not carry out any research
and development business.
In 2017, the Company will continue to operate
as the holding company of the ABB Group.
No change of business is expected.
March 10, 2017
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016 211211
—
Financial Statements of ABB Ltd,
Zurich
Income Statement
Year ended December 31 (CHF in thousands)
Note
2016
2015
Dividend income
Finance income
Other operating income
Finance expense
Personnel expenses
Other operating expenses
Net income before taxes
Income taxes
Net income
Balance Sheet
December 31 (CHF in thousands)
Cash
8
9
2,000,000
3,000,000
20,719
41,862
(67,035)
(38,039)
(29,344)
1,928,163
(3,352)
1,924,811
16,577
47,550
(26,099)
(32,030)
(29,940)
2,976,058
(2,341)
2,973,717
Note
2016
739
2015
835
Cash deposit with ABB Group Treasury Operations
2
841,331
1,979,217
Non-trade receivables
Non-trade receivables – Group
Accrued income and prepaid expenses – Group
Other short-term assets
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
Interest-bearing liabilities
Total current liabilities
Interest-bearing liabilities
Interest-bearing liabilities – Group
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
105
8,113
1,828
—
82
10,215
3,329
697
852,116
1,994,375
510,675
8,973,229
3,810
—
8,973,229
4,944
9,487,714
8,978,173
10,339,830
10,972,548
7,135
1,763
90,740
495
—
100,133
700,034
510,675
1,210,709
1,310,842
18,909
1,797
64,581
126
499,775
585,188
700,052
—
700,052
1,285,240
265,769
1,990,679
30,430
30,430
1,000,000
1,000,000
—
540,072
7,327,872
1,924,811
5,647,858
2,973,717
(1,519,894)
(2,495,448)
9,028,988
9,687,308
10,339,830
10,972,548
5
3
5
5
5
7
7
7
7
7
7
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
21 2
Cash Flow Statement
Year ended December 31 (CHF in thousands)
Note
2016
2015
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
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:
Loans granted to group companies
Net cash provided by investing activities
Financing activities:
Repayment of Bond 2011 – 2016
New Loan granted by group companies
Purchase of own shares
Delivery of own shares
Dividends paid
thereof from Legal reserves from capital contribution
thereof from nominal value reduction
Net cash used in financing activities
Net change in cash and equivalents
Cash and equivalents, opening balance
Cash and equivalents, closing balance
5
5
5
5
7
7
7
7
7
1,924,811
2,973,717
1,831
207
3,580
14,720
1,840
265
205
48,991
1,945,149
3,025,018
(510,675)
(510,675)
(500,000)
510,675
—
—
—
—
(1,254,379)
(1,441,493)
251,809
114,115
(1,580,561)
(1,610,094)
—
(1,232,575)
(1,580,561)
(377,519)
(2,572,456)
(2,937,472)
(1,137,982)
87,546
1,980,052
842,070
1,892,506
1,980,052
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
213213
—
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
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 significant influence. A Group company is fully consolidated.
—
Note 2
Cash deposit with ABB Group Treasury Operations
The Company deposits available cash in Swiss francs with Group Treasury Operations. The deposits
are stated at the lower of cost or fair value.
—
Note 3
Participation
December 31, 2016 and 2015
Company name
ABB Asea Brown Boveri Ltd
Purpose
Holding
Domicile
Share capital
Ownership and voting rights
CH-Zurich
CHF 2,768,000,000
100%
The participation is valued at the lower of cost or fair value, using generally accepted valuation principles.
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016 214
—
Note 4
Indirect Participations
The following tables set forth the name, country of incorporation, ownership and voting rights, as well
as share capital, of the significant indirect subsidiaries of the Company, as of December 31, 2016 and 2015.
Company name/location
Country
ABB
ownership
and voting
rights %
2016
Share
capital in
thousands
2016
ABB
ownership
and voting
rights %
2015
Share
capital in
thousands
2015 Currency
Algeria
50.00
814,500
50.00
814,500
SARPI – Société Algérienne pour la réalisation
de projets industriels, Alger
ABB S.A., Buenos Aires
ABB Australia Pty Limited, Moorebank, NSW
ABB Group Investment Management Pty. Ltd.,
Moorebank, NSW
ABB N.V., Zaventem
ABB Ltda., Osasco
ABB Bulgaria EOOD, Sofia
ABB Canada Holding Limited Partnership,
Saint-Laurent, Quebec
ABB Inc., Saint-Laurent, Quebec
Thomas & Betts Limited,
Saint-Jean-sur-Richelieu, Quebec
ABB S.A., Santiago
ABB Beijing Drive Systems Co. Ltd., Beijing
ABB (China) Ltd., Beijing
ABB Engineering (Shanghai) Ltd., Shanghai
ABB High Voltage Switchgear Co. Ltd., Beijing
ABB Xiamen Low Voltage Equipment Co. Ltd.,
Xiamen
ABB Xiamen Switchgear Co. Ltd., Xiamen
ABB Xinhui Low Voltage Switchgear Co. Ltd.,
Xinhui
278,860
131,218
355,312
13,290
689,793
65,110
—
— (1)
— (1)
— (3)
5,000
310,000
40,000
11,400
15,800
23,500
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
278,860
131,218
355,312
13,290
994,708
65,110
—
— (1)
100.00
— (1)
100.00
4,741,936
90.00
100.00
100.00
60.00
100.00
64.30
5,000
310,000
40,000
11,400
15,800
23,500
6,200
90.00
6,200
400,000
100,000
100.00
400,000
100.00
100,000
Argentina
Australia
Australia
Belgium
Brazil
Bulgaria
Canada
Canada
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
Canada
100.00
Chile
China
China
China
China
China
China
China
— (3)
90.00
100.00
100.00
60.00
100.00
64.30
90.00
100.00
100.00
100.00
100.00
100.00
100.00
99.83
100.00
ABB s.r.o., Prague
ABB A/S, Skovlunde
Czech Republic
Denmark
ABB for Electrical Industries (ABB ARAB) S.A.E.,
Cairo
Asea Brown Boveri S.A.E., Cairo
ABB AS, Jüri
ABB Oy, Helsinki
ABB France, Cergy Pontoise
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
ABB Holding Ltd., Hong Kong
ABB (Hong Kong) Ltd., Hong Kong
ABB Global Industries and Services Private
Limited, Bangalore
ABB India Limited, Bangalore
ABB S.p.A., Milan
Power-One Italy S.p.A., Terranuova Bracciolini
(AR)
ABB K.K., Tokyo
Egypt
Egypt
Estonia
Finland
France
France
Germany
Germany
Germany
Germany
Germany
Germany
Hong Kong
Hong Kong
India
India
Italy
Italy
Japan
353,479
166,000
1,663
10,003
25,778
45,921
100
167,500
100.00
100.00
100.00
100.00
100.00
100.00
100.00
15,000
10,620
61,355
7,500
1,535
27,887
20,000
100.00
100.00
100.00
100.00
99.83
100.00
— (3)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
353,479
116,000
1,663
10,003
25,778
45,921
— (3)
15,000
10,620
61,355
7,500
1,535
27,887
20,000
100.00
408,930
100.00
608,930
75.00
423,817
75.00
423,817
100.00
110,000
100.00
110,000
100.00
22,000
— (3)
— (3)
100.00
1,000,000
100.00
1,000,000
DZD
ARS
AUD
AUD
EUR
BRL
BGN
CAD
CAD
CAD
CLP
USD
USD
USD
USD
USD
USD
USD
CZK
DKK
EGP
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
HKD
HKD
INR
INR
EUR
EUR
JPY
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016 215215
ABB
ownership
and voting
rights %
2016
Share
capital in
thousands
2016
ABB
ownership
and voting
rights %
2015
Share
capital in
thousands
2015 Currency
100.00 18,670,000
100.00 18,670,000
4,490
3,500
633,368
667,686
9,200
1,000
20
119
100
— (3)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
4,490
3,500
633,368
9,200
1,000
20
119
100
227
667,686
MXN
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
— (3)
100.00
100.00
Company name/location
ABB Ltd., Seoul
ABB Holdings Sdn. Bhd., Subang Jaya
ABB Malaysia Sdn. Bhd., Subang Jaya
ABB Mexico S.A. de C.V., San Luis Potosi SLP
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
Country
Korea,
Republic of
Malaysia
Malaysia
Mexico
Mexico
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Thomas & Betts Netherlands B.V., Barendrecht
Netherlands
ABB AS, Billingstad
ABB Holding AS, Billingstad
ABB Sp. z o.o., Warsaw
ABB Ltd., Moscow
ABB Contracting Company Ltd., Riyadh
ABB Electrical Industries Ltd., Riyadh
ABB Holdings Pte. Ltd., Singapore
ABB Pte. Ltd., Singapore
ABB Holdings (Pty) Ltd., Longmeadow
ABB South Africa (Pty) Ltd., Longmeadow
Asea Brown Boveri S.A., Madrid
ABB AB, Västerås
ABB Norden Holding AB, Västerås
ABB Information Systems Ltd., Zurich
ABB Investment Holding GmbH, Zurich
ABB Management Services Ltd., Zurich
ABB Schweiz AG, Baden
ABB Turbo Systems AG, Baden
ABB LIMITED, Bangkok
Norway
Norway
Poland
Russian
Federation
Saudi Arabia
Saudi Arabia
Singapore
Singapore
South Africa
South Africa
Spain
Sweden
Sweden
Switzerland
Switzerland
Switzerland
Switzerland
Switzerland
250,000
240,000
100.00
250,000
100.00
240,000
99.92
350,656
99.92
350,656
100.00
65.00
65.00
100.00
100.00
100.00
74.91
100.00
100.00
5,686
100.00
40,000
168,750
32,797
28,842
4,050
1
33,318
65.00
65.00
100.00
100.00
100.00
74.91
100.00
5,686
40,000
168,750
32,797
28,842
4,050
1
33,318
400,000
100.00
400,000
100.00
2,344,783
100.00
2,344,783
100.00
100.00
100.00
100.00
100.00
500
92,054
571
55,000
10,000
100.00
100.00
100.00
100.00
100.00
500
92,054
571
55,000
10,000
Thailand
100.00
1,034,000
100.00
1,034,000
ABB Elektrik Sanayi A.Ş., Istanbul
Turkey
99.95
13,410
99.95
13,410
ABB Industries (L.L.C.), Dubai
ABB Holdings Limited, Warrington
ABB Limited, Warrington
ABB Finance (USA) Inc., Wilmington, DE
ABB Holdings Inc., Cary, NC
ABB Inc., Cary, NC
United Arab
Emirates
United Kingdom
United Kingdom
United States
United States
United States
ABB Treasury Center (USA), Inc., Wilmington, DE
United States
Baldor Electric Company, Fort Smith, AR
United States
Edison Holding Corporation, Wilmington, DE
United States
Power-One Renewable Energy Solutions LLC,
Wilimgton, DE
United States
Thomas & Betts Corporation, Knoxville, TN
United States
Verdi Holding Corporation, Wilmington, DE
United States
49.00(2)
5,000
49.00(2)
5,000
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
— (3)
100.00
100.00
226,014
120,000
1
2
1
1
—
10
— (3)
1
—
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
226,014
120,000
1
2
1
1
—
10
—
1
—
(1) Shares without par value.
(2) Company consolidated as ABB exercises full management control.
(3) Based on the internal defined thresholds, these indirect participations are considered not significant, and therefore no details to these
participations are disclosed in the respective year.
KRW
MYR
MYR
MXN
EUR
USD
EUR
EUR
EUR
EUR
NOK
NOK
PLN
RUB
SAR
SAR
SGD
SGD
ZAR
ZAR
EUR
SEK
SEK
CHF
CHF
CHF
CHF
CHF
THB
TRY
AED
GBP
GBP
USD
USD
USD
USD
USD
USD
USD
USD
USD
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016 216
—
Note 5
Interest-bearing liabilities
December 31 (CHF in thousands)
Bonds 2011 – 2016 1.25% coupon
Bonds 2012 – 2018 1.5% coupon
Bonds 2011 – 2021 2.25% coupon
Fixed rate loan, $500 million
Group
Total
thereof current liabilities
thereof non-current liabilities
nominal value
discount on issuance
nominal value
nominal value
premium on issuance
2016
2015
—
—
350,000
350,000
34
510,675
500,000
(225)
350,000
350,000
52
—
1,210,709
1,199,827
—
1,210,709
499,775
700,052
The 1.5% Bonds, due 2018 and the 2.25% Bonds, due 2021, pay interest annually in arrears, at fixed annual
rates of 1.5% and 2.25%, 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. The 1.25% Bonds paid interest in arrears, as fixed annual rate of
1.25% and were repaid in October 2016.
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 an interest rate swap with a bank
to effectively convert the bonds maturing 2021 into floating rate obligations.
In 2016, the Company entered into a fixed loan agreement of USD 500 million with Group Treasury
Operations to hedge the USD 500 million loan granted to a Group company. The average interest in 2016
was 1.65%.
—
Note 6
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 766,013 thousand as of December 31,
2016 and CHF 741,900 thousand as of December 31, 2015.
Furthermore, the Company has keep-well agreements with certain Group companies. A keep-well agree-
ment is a shareholder agreement between the Company and a Group company. These agreements provide
for maintenance of a minimum net worth in the Group company and the maintenance of 100% direct or
indirect ownership by the Company.
The keep-well agreements additionally provide that if at any time the Group company has insufficient
liquid assets to meet any payment obligation on its debt (as defined in the agreements) and has insuffi-
cient unused commitments under its credit facilities with its lenders, the Company will make available
to the Group company sufficient funds to enable it to fulfill such payment obligation as it falls due.
A keep-well agreement is not a guarantee by the Company for payment of the indebtedness, or any other
obligation, of a Group company. No party external to the ABB Group is a party to any keep-well agreement.
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 obligations under such instruments as they fall due. The amount guaranteed under
these instruments was CHF 5,918,680 thousand as of December 31, 2016 and CHF 5,727,720 thousand
as of December 31, 2015.
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
217217
Furthermore, the Company is the guarantor in the Group’s USD 2 billion multicurrency revolving credit
facility, maturing in 2020 but no amounts were outstanding at December 31, 2016 and 2015.
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. As described in the note, 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 7
Stockholders’ equity
(CHF in thousands)
Share capital
Legal reserves
Free reserves
from capital
contribution
from
retained
earnings
Other
reserves
from
retained
earnings Net income
Own shares
Total
1,990,679
30,430 1,000,000
540,072
5,647,858
2,973,717
(2,495,448) 9,687,308
Cancellation of shares
(86,000)
(598,421) (1,293,703)
1,978,124
2,973,717
(2,973,717)
—
—
Par value reduction
(1,638,910)
58,349
(1,580,561)
(1,254,379) (1,254,379)
251,809
251,809
1,924,811
1,924,811
Opening balance
as of January 1, 2016
Allocation to retained
earnings
Purchases of own shares
Delivery of own shares
Net income for the year
Closing balance
as of December 31, 2016
265,769
30,430 1,000,000
— 7,327,872
1,924,811
(1,519,894) 9,028,988
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 (legal reserves from capital contribution) within the legal reserves in order to benefit from
the favorable tax treatment.
Share capital as of December 31, 2016
Issued shares
Contingent shares
Authorized shares
Share capital as of December 31, 2015
Issued shares
Contingent shares
Authorized shares
Number of
registered shares
2,214,743,264
304,038,800
200,000,000
Number of
registered shares
2,314,743,264
304,038,800
200,000,000
Par value (CHF)
Total
(CHF in thousands)
0.12
0.12
0.12
265,769
36,485
24,000
Par value (CHF)
Total
(CHF in thousands)
0.86
0.86
0.86
1,990,679
261,473
172,000
The own shares are valued at acquisition cost. During 2016, a loss from the delivery of own shares
of CHF 38,990 thousand was recorded in the income statement under finance expense. During 2015, a loss
from the delivery of own shares of CHF 11,087 thousand was recorded, in contrast to 2016, in other reserves.
During 2016, 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
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
218
and conditions to enable it to meet its future obligations. As a result of the exercise by the bank, the
Company issued 8,892,770 shares at CHF 15.75 out of own shares.
During 2015, a bank holding call options related to ABB Group’s management incentive plan (MIP) exer-
cised a portion of these options. Such options had been issued in 2009 and 2012 by the Group company
that facilitates the MIP at fair value and had a strike price of CHF 19.00 and CHF 15.75, respectively.
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 exer-
cise by the bank, the Company issued 4,569,100 and 714,450 shares at CHF 19.00 and CHF 15.75, respec-
tively, out of own shares.
The ABB Group has an annual employee share acquisition plan (ESAP) which provides share options
to employees globally. To enable the Group company that facilitates the ESAP to deliver shares to employ-
ees 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 2016 and 2015, respectively, the Company issued, out of own shares,
to the Group company, 2,647,151 and 30,003 shares at CHF 21.01 and CHF 20.76, respectively.
In 2016 and 2015, the Company transferred 851,773 and 706,963 own shares at an average acquisition price
per share of CHF 20.36 and CHF 20.77, respectively, to fulfill its obligations under other share-based
arrangements.
Between September 2014 and September 2016, the Company executed a share buyback program for
the purchase of up to USD 4 billion of its own shares and on September 30, 2016, announced that it had
completed this program. Over the period of the share buyback, the Company purchased a total
of 146.6 million shares (for approximately CHF 2.9 billion) for cancellation and 24.7 million shares (for
approximately CHF 0.5 billion) to support its employee share programs.
At the AGM in April 2016, shareholders approved the proposal of the Board of Directors to reduce the
share capital of the Company by cancelling 100 million treasury shares which were acquired under the
share buyback program. This cancellation was completed in July 2016, resulting in a decrease in Treasury
stock (own shares ) of CHF 1,978 million and a corresponding combined decrease in share capital, other
reserves and retained earnings.
In October 2016, the Company announced a new share buyback program for the purchase of up to
USD 3 billion of its own shares from 2017 to 2019.
The movement in the number of own shares during the year was as follows:
2016
2015
Number of shares
Average acquisition
price per share CHF
Number of shares
Average acquisition
price per share CHF
Opening balance as of January 1
123,118,123
20.27
55,843,639
Purchases for employee share
programs
Purchases for cancellation
Cancellation
Delivery
Closing balance as of December 31
Thereof pledged for MIP
4,940,000
60,370,000
(100,000,000)
(12,391,694)
76,036,429
11,033,117
18.77
19.24
19.78
20.32
19.99
13,050,000
60,245,000
(6,020,516)
123,118,123
10,726,465
21.12
19.78
19.64
20.80
20.27
—
Note 8
Dividend income
The dividend payment from ABB Asea Brown Boveri Ltd was lower in 2016 because the Company needed
less cash for the share buyback program and the dividend payment to the Company’s shareholders.
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
219219
—
Note 9
Other operating income
Other operating income includes mainly outgoing charges for division management services and guaran-
tee compensation fees to Group companies.
—
Note 10
Significant shareholders
Investor AB, Sweden, held 232,165,142 ABB Ltd shares as of December 31, 2016 and 2015, respectively.
This corresponds to 10.48 percent and 10.03 percent of ABB Ltd’s total share capital and voting rights
as registered in the Commercial Register on December 31, 2016 and 2015, respectively.
Pursuant to its disclosure notices, Cevian Capital II GP Limited, Channel Islands, announced that, on behalf
of its general partners it held 115,868,333 and 132,196,131 ABB Ltd shares as of February 23, 2017 and
September 13, 2016 which corresponds to 5.23 percent and 5.97 percent of ABB Ltd’s total share capital
and voting rights as registered in the Commercial Register on December 31, 2016. As of July 24, 2015, it
announced it held 119,377,120 ABB Ltd shares which corresponds to 5.16 percent of ABB Ltd’s total share
capital and voting rights as registered in the Commercial Register on December 31, 2015.
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. This corresponds to 3.15 percent
and 3.0 percent of ABB Ltd’s total share capital and voting rights as registered in the Commercial Register
on December 31, 2016 and 2015, respectively.
To the best of the Company’s knowledge, no other shareholder holds 3 percent or more of ABB Ltd’s total
share capital and voting rights on December 31, 2016 and 2015, respectively.
—
Note 11
Shareholdings of Board and Executive Committee
At December 31, 2016 and 2015, the members of the Board of directors as of that date, held the following
numbers of shares (or ADSs representing such shares):
Total number of shares held at December 31
Name
Peter Voser(1)
Jacob Wallenberg(2)
Roger Agnelli(3)
Matti Alahuhta
David Constable
Frederico Curado(4)
Robyn Denholm(4)
Louis R. Hughes
David Meline(4)(5)
Satish Pai(4)
Michel de Rosen
Ying Yeh
Total
(1) Includes 2,000 shares held by spouse.
(2) Does not include shares beneficially owned by Investor AB, of which Mr. Wallenberg is Chairman.
(3) Roger Agnelli died in a tragic accident in March 2016.
(4) First elected to the Board at the ABB Ltd AGM in 2016.
(5) Includes 3,150 shares held by spouse.
2016
102,137
202,190
—
31,265
9,295
2,573
2,871
53,145
6,021
2,871
79,443
30,518
522,329
2015
45,559
193,659
176,820
24,788
3,229
—
—
80,562
—
—
146,646
25,016
696,279
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016 220
At December 31, 2016, 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 re-
spect of other compensation arrangements.
Vested at
December 31, 2016
s
n
o
i
t
p
o
d
e
t
s
e
v
f
o
r
e
b
m
u
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I
)
1
(
P
M
e
h
t
r
e
d
n
u
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—
—
—
221,375
—
—
—
—
—
l
d
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r
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344,454
71,369
74,767
507,824
158,528
101,250
—
134,449
293,771
63,795
46,312
Unvested at December 31, 2016
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e
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3
(
r
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y
o
p
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m
r
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f
(vesting 2017)
(vesting 2018)
(vesting 2019) (vesting 2018)
93,846
30,549
30,549
35,940
27,548
26, 159
—
34,677
40,750
31,083
16,457
172,465
44,562
51,413
45,873
46,390
45,896
—
42,780
51,902
42,845
36,698
175,881
40,583
56,287
47,745
48,028
43,144
37,693
45,624
54,112
47,722
44,969
—
—
65,819
—
—
—
—
—
—
—
—
1,796,519
630,250
367,558
580,824
641,788
65,819
Name
Ulrich Spiesshofer
Eric Elzvik
Jean-Christophe Deslarzes
Diane de Saint Victor
Frank Duggan
Greg Scheu
Sami Atiya (EC member
as of June 14, 2016)
Tarak Mehta
Bernhard Jucker
Claudio Facchin
Peter Terwiesch
Total Executive
Committee members
as of December 31, 2016
(1) Options may be sold or exercised/converted into shares at the ratio of 5 options for 1 share.
(2) Upon vesting, the LTIP foresees delivering 70 percent of the value of the vested shares under the retention component (LTIP 2014) and performance
components (P1 and P2 of LTIP 2015 and 2016) in shares and the remainder in cash. However, participants have the possibility to elect to receive 100
percent of the vested award in shares.
(3) The Replacement share grant foresees delivering 30 percent of the value of the vested shares in cash. However, the participant has the possibility
to elect to receive 100 percent of the vested award in shares.
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
221221
At December 31, 2015, 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 (either vested or unvested as indicated) under the MIP and unvested shares in respect
of other compensation arrangements.
Vested at
December 31, 2015
Unvested at December 31, 2015
l
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289,048
23,768
—
475,446
132,896
83,901
21,000
115,977
202,175
267,848
41,501
30,393
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221,375
221,375
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—
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(
(vesting 2016)
(vesting 2017) (vesting 2018)
78,395
27,071
27,071
31,848
25,632
24,830
22,294
25,632
9,810
37,033
22,294
15,919
93,846
30,549
30,549
35,940
27,548
26,159
25,158
34,677
27,674
40,750
31,083
16,457
172,465
44,562
51,413
45,873
46,390
45,896
42,845
42,780
36,010
51,902
42,845
36,698
m
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m
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(vesting 2016
and 2018)
—
—
144,802
—
—
—
—
—
—
—
—
—
1,683,953
1,402,875
347,829
420,390
659,679
144,802
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
Peter Terwiesch
Total Executive
Committee members
as of December 31, 2015
(1) Options may be sold or exercised/converted into shares at the ratio of 5 options for 1 share.
(2) Upon vesting, the LTIP foresees delivering 30 percent of the value of the vested shares under the retention component (LTIP 2013 and 2014)
and performance components (P1 and P2 of LTIP 2015) in cash. However, participants have the possibility to elect to receive 100 percent of the vest-
ed award in shares.
(3) The Replacement share grant foresees delivering 30 percent of the value of the vested shares in cash. However, the participant has the possibility
to elect to receive 100 percent of the vested award in shares.
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
222
At December 31, 2016, the following members of the Executive Committee held vested WARs and condi-
tionally granted ABB shares under the performance component of the LTIP 2014, which at the time of
vesting will be settled in cash.
Name
Ulrich Spiesshofer
Eric Elzvik
Jean-Christophe Deslarzes
Diane de Saint Victor
Frank Duggan
Greg Scheu
Sami Atiya (EC member as of June 14, 2016)
Tarak Mehta
Bernhard Jucker
Claudio Facchin
Peter Terwiesch
Total Executive Committee members
as of December 31, 2016
Vested at
December 31, 2016
Unvested at December 31, 2016
Number of fully
vested WARs held
under the MIP
Reference number
of shares under
the performance
component of the
2014 launch of the LTIP
(vesting 2017)
—
—
—
—
—
—
—
—
—
—
—
—
51,489
17,147
17,147
20,173
15,463
14,684
—
16,139
19,548
14,122
10,292
196,204
At December 31, 2015, the following members of the Executive Committee held vested WARs and condi-
tionally granted ABB shares under the performance component of the LTIP 2014 and 2013, which at the
time of vesting will be settled in cash.
Vested at
December 31, 2015
Number of fully
vested WARs held
under the MIP
Unvested at December 31, 2015
Reference number
of shares under
the performance
component of the
2013 launch of the LTIP
Reference number
of shares under
the performance
component of the
2014 launch of the LTIP
(vesting 2016)
(vesting 2017)
—
—
—
—
—
—
—
—
—
—
287,500
—
287,500
50,024
16,659
16,659
19,599
15,023
14,553
13,720
15,023
15,091
18,992
13,720
10,007
51,489
17,147
17,147
20,173
15,463
14,684
14,122
16,139
15,534
19,548
14,122
10,292
219,070
225,860
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
Peter Terwiesch
Total Executive Committee members
as of December 31, 2015
—
Note 12
Full time employees
During 2016 and 2015, the Company employed on average 21 and 20 employees, respectively.
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016
223223
—
Proposed appropriation of
available earnings
Proposed appropriation of retained earnings (CHF in thousands)
Net income for the year
Carried forward from previous year
Cancellation of shares
Retained earnings
Gross dividend of CHF 0.76 per share on total number of registered shares(1)
Balance to be carried forward
2016
1,924,811
8,621,575
(1,293,703)
9,252,683
(1,683,205)
7,569,478
2015
2,973,717
5,647,858
—
8,621,575
—
8,621,575
(1) Shareholders who are resident in Sweden participating in the established dividend access facility will receive an amount in Swedish kronor from
ABB Norden Holding AB which corresponds to the dividend resolved on a registered share of ABB Ltd without deduction of the Swiss withholding
tax. This amount however is subject to taxation according to Swedish law. However, no dividend will be paid on own shares held by ABB Ltd.
On February 8, 2017, the Company announced that the Board of directors will recommend for approval
at the April 13, 2017, Annual General Meeting that a dividend of CHF 0.76 per share be distributed out of
the retained earnings available, to be paid in April 2017.
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016 224
—
Report of the Statutory Auditor
on the Financial Statements
To the General Meeting
of ABB Ltd, Zurich
As statutory auditor, we have audited the accom-
panying financial statements of ABB Ltd, which
comprise the balance sheet, income statement,
cash flow statement and notes (pages 211– 223), for
the year ended December 31, 2016.
Board of Directors’ responsibility
The Board of Directors is responsible for the prepa-
ration of the financial statements in accordance
with the requirements of Swiss law and the com-
pany’s articles of incorporation. This responsibility
includes designing, implementing and maintaining
an internal control system relevant to the prepa-
ration 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
appropriateness of the accounting policies used
and the reasonableness of accounting estimates
made, as well as evaluating the overall presentation
of the financial statements. We believe that the
audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements for the year
ended December 31, 2016 comply with Swiss law
and the company’s articles of incorporation.
Report on Key Audit Matters based on the circular
1/2015 of the Federal Audit Oversight Authority
Key audit matters are those matters that, in our
professional judgement, were of most significance
in our audit of the financial statements of the
current period. We have determined that there are
no key audit matters to communicate in our report.
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 Code of
Obligations (CO) and article 11 AOA) and that there
are no circumstances incompatible with our
independence.
In accordance with article 728a para. 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 state-
ments according to the instructions of the Board
of Directors.
We further confirm that the proposed appropria-
tion of available earnings complies with Swiss law
and the company’s articles of incorporation. We
recommend that the financial statements submit-
ted to you be approved.
Ernst & Young AG
Leslie Clifford
Licensed audit expert
(Auditor in charge)
Zurich, Switzerland
March 10, 2017
Robin Errico
Licensed audit expert
05 ABB LTD STATUTORY FINANCIAL STATEMENTSABB ANNUAL REPORT 2016 —
06
Supplemental Information
S T. LO U I S , M I S S O U R I , U S A
—C R A I G , B U S I N E S S & T E C H N O L O G Y L E A D E R S H I P,
So much has changed and
is still changing, the methods
we use to analyze the perfor-
mance of transformers, the
development of materials,
and the way electricity is
generated and distributed.
These are things I really get
a lot of pleasure out of.
230
AB B A NN UAL R EP OR T 2 016
—
Supplemental information
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).
certain business activities or customer markets are
adjusted as if the relevant business was divested in
the period when the decision to cease business
activities was taken. We do not adjust for portfolio
changes where the relevant business has annual-
ized revenues of less than $50 million.
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 mea-
sures, please refer to Supplemental Reconciliations
and Definitions, ABB Q4 2016 Financial Information
at new.abb.com/investorrelations/financial-
results-and-presentations/quarterly- results-and-
annual-reports-2016
Comparable growth rates
Growth rates for certain key figures may be
presented and discussed on a “comparable” basis.
The comparable growth rate measures growth on
a constant currency basis. Since we are a global
company, the comparability of our operating
results reported in U.S. dollars is affected by
foreign currency exchange rate fluctuations. We
calculate the impacts from foreign currency
fluctuations by translating the current-year
periods’ reported key figures into U.S. dollar
amounts using the exchange rates in effect for
the comparable periods in the previous year.
Operational EBITA margin
Operational EBITA margin
Operational EBITA margin is Operational EBITA as
a percentage of Operational revenues.
Operational EBITA
Operational earnings before interest, taxes and ac-
quisition-related amortization (Operational EBITA)
represents Income from operations: excluding
(i) acquisition-related amortization (as defined
below), (ii) restructuring and restructuring-related
expenses, (iii) non-operational pension cost (as
defined below), (iv) changes in pre-acquisition
estimates, (v) gains and losses from sale of busi-
nesses, acquisition-related expenses and certain
non-operational items, as well as (vi) foreign
exchange/commodity timing differences in income
from operations consisting of: (a) unrealized gains
and losses on derivatives (foreign exchange,
commodities, embedded derivatives), (b) realized
gains and losses on derivatives where the underly-
ing hedged transaction has not yet been realized,
and (c) unrealized foreign exchange movements on
receivables/payables (and related assets/liabilities).
Operational EBITA is our measure of segment
profit but is also used by management to evaluate
the profitability of the Company as a whole.
Comparable growth rates are also adjusted for
changes in our business portfolio. Adjustments to
our business portfolio occur due to acquisitions,
divestments, or by exiting specific business
activities or customer markets. The adjustment for
portfolio changes is calculated as follows: where
the results of any business acquired or divested
have not been consolidated and reported for the
entire duration of both the current and comparable
periods, the reported key figures of such business
are adjusted to exclude the relevant key figures of
any corresponding quarters which are not compa-
rable when computing the comparable growth
rate. Certain portfolio changes which do not
qualify as divestments under U.S. GAAP have been
treated in a similar manner to divestments.
Changes in our portfolio where we have exited
Acquisition-related amortization
Amortization expense on intangibles arising upon
acquisitions.
Operational revenues
The Company presents Operational revenues solely
for the purpose of allowing the computation of
Operational EBITA margin. Operational revenues
are total revenues adjusted for foreign exchange/
commodity timing differences in total revenues of:
(i) unrealized gains and losses on derivatives,
(ii) realized gains and losses on derivatives where
the underlying hedged transaction has not yet
been realized, and (iii) unrealized foreign exchange
movements on receivables (and related assets).
Operational revenues are not intended to be an
alternative measure to Total Revenues, which
06 SUPPLEMENTAL INFORMATION 231231
(vii) other current liabilities (excluding primarily:
(a) income taxes payable, (b) current derivative
liabilities, (c) pension and other employee benefits,
and (d) payables under the share buyback pro-
gram); and including the amounts related to these
accounts which have been presented as either
assets or liabilities held for sale.
Capital invested
Capital invested is the sum of (i) Adjusted total
fixed assets, (ii) Net working capital and (iii)
Accumulated depreciation and amortization.
represent our revenues measured in accordance
with U.S. GAAP.
Non-operational pension cost
Non-operational pension cost comprises the total
net periodic benefit cost of defined pension
benefits and other postretirement benefits but
excludes the current service cost of both compo-
nents. A breakdown of the components of non-op-
erational pension cost is provided below.
Free cash flow conversion
to net income
Free cash flow conversion to net income
Free cash flow conversion to net income is calculat-
ed as Free cash flow divided by Net income
attributable to ABB.
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).
Cash return on invested
capital (CROI)
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,
(ii) interest paid and (iii) estimate to annualize/
eliminate the net cash provided by operating
activities of certain acquisitions / (divestments).
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) invest-
ments 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
06 SUPPLEMENTAL INFORMATIONABB ANNUAL REPORT 2016 White
—
The Space for Invention
Parts of the ABB Annual Report 2016 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 2016 includes “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We have based these forward-looking
statements largely on current expectations, estimates
and projections about the factors that may affect our future
performance, including global economic conditions as well
as the economic conditions of the regions and the industries
that are major markets for ABB. The words “believe,” “may,”
“will,” “estimate,” “continue,” “target,” “anticipate,” “intend,”
“expect” and similar words and the express or implied
discussion of strategy, plans or intentions are intended
to identify forward-looking statements. These forward-
looking statements are subject to risks, uncertainties and
assumptions, including among other things, the following:
(i) business risks related to the global volatile economic
environment; (ii) costs associated with compliance activities;
(iii) difficulties encountered in operating in emerging
markets; (iv) risks inherent in large, long term projects served
by parts of our business; (v) the timely development of
new products, technologies, and services that are useful for
our customers; (vi) our ability to anticipate and react to
technological change and evolving industry standards in the
markets in which we operate; (vii) changes in interest
rates and fluctuations in currency exchange rates; (viii) changes
in raw materials prices or limitations of supplies of raw
materials; (ix) the weakening or unavailability of our intellectual
property rights; (x) industry consolidation resulting in more
powerful competitors and fewer customers; (xi) effects of
competition and changes in economic and market conditions
in the product markets and geographic areas in which we
operate; (xii) effects of, and changes in, laws, regulations,
governmental policies, taxation, or accounting standards and
practices and (xiii) other factors described in documents
that we may furnish from time to time with the US Securities
and Exchange Commission, including our Annual Reports on
Form 20-F. Although we believe that the expectations
reflected in any such forward-looking statements are based
on reasonable assumptions, we can give no assurance that
they will be achieved. We undertake no obligation to update
publicly or revise any forward-looking statements because of
new information, future events or otherwise. In light of these
risks and uncertainties, the forward-looking information,
events and circumstances might not occur. Our actual results
and performance could differ substantially from those
anticipated in our forward-looking statements.
—
ABB Ltd
Corporate Communications
Affolternstrasse 44
8050 Zurich
Switzerland
Tel: +41 (0)43 317 71 11
Fax: +41 (0)43 317 79 58
www.abb.com
©
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